MAY 13, 2019

By Dr G Gokul Kishore

IN the last part, certain questions were raised as to whether interest paid as per commercial terms can be considered as a consideration for supply when law seeks inclusion of the same in taxable value. This part concluded with a mention that the related issue of whether interest is liable to be paid on differential duty paid at the time of price escalation was pending before Larger Bench of Supreme Court - 2015-TIOL-292-SC-CX. Last week the Larger Bench has answered the reference. Our simple interest on this subject has become compound now. We shall try to analyse the implications of such excise judgment under GST regime in this 37th part.

Larger Bench judgment

In CCE v. SKF India Ltd. - 2009-TIOL-82-SC-CX, the Supreme Court had held that interest was payable on the differential duty paid at a later date when price was increased by the seller with retrospective effect. The Court expressed the view that the assessee was able to demand from its customers the balance of the higher prices by virtue of retrospective revision of prices and therefore, at the time of sale the goods carried a higher value and those were cleared on short payment of duty though the same was completely unintended and without any element of deceit. While following this ratio in CCE v. International Auto Ltd.- 2010-TIOL-05-SC-CX, the Supreme Court further noted that differential price signified that value on the date of clearance was understated and there was short payment on the date of removal of goods. It also held that interest being for loss of revenue, was payable in such cases.

In Steel Authority of India case - 2015-TIOL-292-SC-CX, the Supreme Court did not agree with the above view. It held that it would be impossible to expect the assessee to pay the excise duty, at the time of clearance of the goods, on the basis of price escalation that took place at a later date in future and therefore, as on the date of clearance when excise duty was paid, it could not be treated as 'short-paid' on the said date. Owing to disagreement with earlier judgments, the matter was referred to Larger Bench.

The Larger Bench delivered the judgment on 8-5-2019 [Civil Appeal Nos 2150/2012 and Others] - 2019-TIOL-204-SC-CX-LB. It answered the reference in favour of the department by holding that differential duty crystallised only after escalation was finalized under the escalation clause in the contract but such escalation was having retrospective effect and therefore, value of the goods was provisional at the time of clearance. It relied on Rule 7 of the Central Excise Rules relating to provisional assessment, according to which interest is payable from the first date of the month succeeding the month for which the amount is determined. Invoking principles of fairness and equal treatment, the Court noted that a person who opted for provisional assessment would be bound to pay interest from the date of removal of goods as against the appellant not paying interest in such situation. According to the Court, price was variable under the escalation clause in the case before it and the same was very much within the knowledge of the appellant.

Provisions under CGST Act

Largely, the statutory scheme on provisional assessment, finalization of such assessment, execution of bond, time-bound finalization and interest liability on differential tax are similar in GST law except for the difference that parent statute itself contains such provisions in CGST Act [Section 60] as compared to such provisions [Rule 7] being part of Central Excise Rules. Notable difference is with respect to Section 11AB of Central Excise Act (during relevant period) which casts the obligation to pay interest on delayed payment of duty where the words used like 'ought to have been paid' do not find a place in Section 50 of CGST Act.

Differential duty paid at a later date on differential price consequent to price revision and supplementary invoice has been held as short payment of duty as on the date of removal in the Supreme Court judgments in SKF (supra) and International Auto (supra) including that of the present Larger Bench. While the situations of non-levy or short-levy as used in Section 11A of Central Excise Act are not present in Section 73 of CGST Act, short-payment of tax is covered in both. As this is a key term interpreted and relied on the above judgments, ratio of the same will have implications under GST law as well.

Implications in GST regime

Businesses run based on contracts whereby price increase is common. As far as tax liability is concerned, generally, when value is increased at a later date, differential tax is paid. However, applying the above ratio, department may demand interest from the due date for payment of tax at the time of initial supply. The department may adopt the ground that the taxpayer ought to have opted for provisional assessment when the price is not final and subject to variation at a later date. In such cases, interest is payable from the date of payment of tax when the supply was effected as per Section 60(4) of CGST Act. The taxpayer might not have opted for provisional assessment on the ground that the price at the time of supply was final but was later disputed and, therefore, revised.

The Larger Bench judgment appears to indicate that when contractually price is agreed to be revised at a later date on the happening of certain events, the consideration and transaction value are not final and the taxpayer should opt for provisional assessment. Based on this judgment, all supplies under GST law involving price revision are likely to be subjected to greater scrutiny by the department. This may entail considerable compliance burden in terms of execution of bond, getting the assessment finalised besides implementation challenges in respect of price revision throughout the supply chain.

The price escalation clause is not an agreement on consideration or value but an agreement between parties to the contract to resolve differences or issues. By applying the clause, the value or consideration may change. However, such change is crystallised on the date of revision. GST is payable on supply made for a consideration. The enhanced consideration may be taxable but it cannot date back to the date of first transaction since no consideration (revised) was paid nor agreed on the date of supply. The revised consideration emerges after supply and is appropriated to the transaction. It cannot be said that differential tax was due on the date of the original transaction itself and stood unpaid. However, such argument may be termed as academic considering the Larger Bench judgment.

Without getting into sophisticated or highly technical arguments as to whether interest is compensatory and whether the government suffered any revenue loss requiring payment of interest by the taxpayer, it can be said that the time is ripe for the GST Council to recommend appropriate amendment to CGST Act. Such amendment should expressly exclude interest liability when price is increased at a later date based on price escalation clause between the parties and differential tax is nevertheless paid on the incremental value. This is not unrealistic considering the fact that the Council has already recommended, in its 31 st meeting, amendment to Section 50 of CGST Act to provide for interest only on net tax liability after taking admissible ITC into account even when credit amount lies in taxpayer's ledger without being paid into government account.

(…To be continued)

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

See Part 36.