NOVEMBER 19, 2018

By Dr G Gokul Kishore

ADVANCE rulings do not constitute binding precedent and they are binding only on the applicant and the department. Because the forum of Authority for Advance Rulings affords opportunity to the department to present its side of the story, one gets the opportunity to read its mind which may eventually find place in show cause notices at a later date. We look at two rulings in this twelfth part which tend to point to need for amendments in CGST Act.

Can investigations deprive remedy of advance ruling?

Section 98(2) of CGST Act empowers the Authority for Advance Rulings to examine an application filed seeking advance ruling and after granting opportunity of hearing, either admit or reject the application, by way of an order. Proviso to this sub-section states that AAR shall not admit an application where the question raised is already pending or decided in any proceedings in case of the applicant. AAR can reject an application if the question on which ruling is sought is either (a) pending in any proceedings in respect of the applicant or (2) decided in any proceedings.

The word ‘proceedings' is not defined in CGST Act. It is not defined in Customs Act or Central Excise Act either. Plain dictionary meaning would point to initiation of court's powers through a process which is filing of a plaint in case of civil suit. Under tax laws, administrators act in dual capacity viz., while performing the role of tax collectors, they perform executive functions and when they don the attire of adjudicator, they exercise quasi-judicial powers. An anti-evasion section in a Commissionerate conducts inquiry and investigation based on certain intelligence as to possible evasion of tax. This may involve visiting the premises of the taxpayer, summoning the taxpayer to tax office, recording of statement or going through the records. When the tax officer has reasonable belief that there is a possibility of offence being or having been committed by the taxpayer by adopting evasionary practices, show cause notice is issued.

Investigation, summoning of persons or documents, recording statements, etc., are part of police powers given to tax department ostensibly to protect the economic interest of the nation. By exercising such powers, tax administration does not perform any quasi-judicial function. Proceedings contemplated in Section 98(2) are quasi-judicial in nature and not in the realm of administrative functions of the departmental officers performed in their executive capacity. Till the time a show cause notice is issued, strictly speaking, it cannot be said that proceedings against the taxpayer have commenced.

Proceedings can be said to have commenced if goods are detained or seized which is the cause of action. When merely statement is recorded, there is no cause of action against which the person can be said to be aggrieved and therefore, no proceedings have commenced at such stage. In respect of remedy of settlement available only to ‘case' as defined under Section 127A of Customs Act, the provision expressly uses the words ‘ proceeding…..pending before the adjudicating authority'.

The above discussion on ‘proceedings' has been necessitated by a recent ruling by Maharashtra AAR [In Re: Sterlite Technologies , Ruling dated 12-9-2018 - 2018-TIOL-144-AAR-GST whereby application for advance ruling has been rejected on the ground that the anti-evasion section of the department has been investigating the issue and statement has been recorded from the applicant though no notice has been issued. The applicant raised the argument that SCN has not been issued and therefore, no proceedings were pending against them. But without any convincing reasoning and merely stating that SCN is culmination of investigation, the application has been rejected.

The CGST Act provides that an application for advance ruling may not be entertained if the question raised is pending or has been decided in any proceeding. It would thus seem that the intention behind this section is to discourage the taxpayer from pursuing multiple remedies simultaneously – one before the departmental authorities as part of proceedings which have commenced and another before the AAR, to avoid pre-empting the determination by the departmental authority or avoid causing interruption in the ‘proceedings' under the CGST Act. The intention certainly cannot be that the AAR will refuse examination of any question which may be examined by the department at a later date after issuing SCN. Rather, the purpose of seeking advance ruling is to enable the taxpayer to act in accordance with the position as adopted by the AAR and avoid conflict in assessment or other proceedings.Let second year of GST be used to clarify the meaning of ‘proceeding' used in the CGST Act and if necessary, to make an amendment to benefit the taxpayer.

Discounts – Reluctant drafting eroding margins of business

Discounts not only attract the buyers but also the taxman. In the Central Excise regime, this issue was one of the most litigated though it was settled by the Supreme Court in the landmark case of UOI v. Bombay Tyres International - 2002-TIOL-33-SC-CX-LB [followed in another celebrated judgment of GOI v. Madras Rubber Factory – 2002-TIOL-49-SC-CX-LB that discounts allowed in the trade (by whatever name such discount is described) should be allowed to be deducted from the sale price having regard to the nature of the goods, if established under agreements or under terms of sale or by established practice, the allowance and the nature of the discount being known at or prior to the removal of the goods. Post-sale discounts are excluded from transaction value as per Section 15(3) of CGST Act subject to the condition that there exists an agreement containing terms relating to such discount. Therefore, lawmakers have chosen to follow the dictum of Supreme Court laid down three decades ago, while enacting CGST Act as well.

The Maharashtra Advance Ruling Authority had held that post-sale discount will not be eligible for exclusion when the same is not based on fixed parameter or criterion and when the same is open-ended [In Re: Ultratech Cement Ltd. , Ruling dated 27-6-2018, - 2018-TIOL-110-AAR-GST.Section 15(3) does not prescribe such conditions but adding words to the Parliament enacted law by the executive while exercising quasi-judicial powers is not something new. Placing stifling conditions on the industry to allow even statutorily conferred benefit defeats the objective of GST being business-friendly.

Post-sale discounts are part of normal trade practices for decades. When the market conditions are extremely rough, the supply chain adopts various methods to liquidate the stock in hand which includes a steep discount. Such practice undoubtedly erodes profit margin. If the administration seeks tax on top of it, businesses can hardly breathe.Reluctance of tax administration is patently obvious when the law is drafted in such a restrictive manner as to place conditions like criteria for discount should be spelt out and all such transactions should be specifically linked to relevant invoices issued at the time of initial sale. Section 15 of CGST Act should be amended to at least provide methodology based on which post-sale discounts in all cases will be allowed as abatement. Limitation for such abatement can be included in the law if the administration is of the view that it cannot be left open forever.

(To be continued…)

See Part XI

[The author is an Advocate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are strictly personal.]