JUNE 21, 2019

By R Sridhar, Consulting Editor, TIOL

Transfer of Undertakings

TAX neutrality is at the heart, of all restructuring alternatives like sale, demerger, merger etc and in this regard the Direct Tax laws subject to conditions being fulfilled do not make such re-organisational changes taxable. As far GST law is concerned section 18(3) of CGST Act provides that neutrality to the extent of closing balances available in the credit ledgers subject to the machinery provisions being complied with.

From a taxable event analysis, in Schedule II, an exception is carved out for transfer of business as a going concern. The language of the exception is housed in clause c) of Para 4 which essentially deals with treatment of supply of goods forming the part of assets of any business prior to ceasing to be a taxable person. However there are many organizational situations, in which large business houses may exit from a line of business/undertaking but will still be continuing to be in business .The larger issue is therefore exits happen as regards industrial undertakings on a going concern basis (to improve profitability, efficiency, exiting line of products not core to business etc) and a clarification that this would also be covered for exits that happen without ceasing to be in business would make it litigation free.

Secondly if the transfer of an undertaking is not a supply, would it not be helpful to refer to the same transaction also in Section 18 (3) so that a combined reading will also support business restructuring done to improve organizational efficiencies as referred above.

Interpretational Issues in 132 (1) (a) - CGST Act

It is pertinent to point out that clause a) of the above section is very wide and it is prone to different approaches and interpretation .In the erstwhile regime Section 89 (1) of Finance Act 1994 clause a) of the sub section was adequately cushioned in terms of the language and it read as "knowingly evades the payment of service tax under this Chapter". A perusal of the language used in Clause a) of section 132 (1) of the CGST Act would suggest that the rigour as contained in section 89 (1) (a) has been slightly diluted .The language in the clause 132 (1) (a) is suggestive that, even issues prone to different interpretation by the Trade and Industry or issues which lack clarity in law on taxability could be covered under this clause and when read with Section 69 (1) the consequences can be drastic. It would therefore be relevant that for Clause a) of sub section 1, a suitable prefix is added to convey that the assesse has knowingly indulged in supplying goods or services without an Invoice with an intent to evade payment of duty.

Following due process of law - Make my Trip Case-Summary of conclusions of the Delhi High Court approved by Supreme Court

In a landmark judgement the Supreme Court in the case of Make My Trip. Com agreed with the reasoning of the Delhi Court and approved that only after due process of law was followed as mandated in section 73 A (erstwhile law Finance Act 1994) could penalty provisions could be invoked and arrests made thereafter. The High Court has extensively laid out in its summary of conclusions that exceptions can be made only for habitual offenders or persons with history of repeated defaults etc.

While in the last 2 months there are wide debates on account of certain matters pending before the Apex Court and other High Courts on powers of arrest, various dimension around bail applications etc it also pertinent that all should introspect the fact whether the due process of law is being followed

Power of Summons - Copies of Statements made - Right of people rendering statements

Under the GST regime it will also be pertinent to make certain amendments in provisions of section 70, 136 wherein adequate arrangements should be made to provide a copy of the statement made by the concerned person representing the organization or entity and making a statement. While it is true that a copy of the statement is attached to the Show Cause Notice issued to the assesse when the statement is relied upon by the Department, it will adequate justice if a copy is provided then and there after the completion of a statement. This will enable the concerned person being investigated whether they are Partnership Firms or Joint Stock Companies etc and all officers of the entities in rationally preparing for the defense of the actions taken of the entity, as it is a their right to defend themselves. In case statements are rendered over various sessions, because of multiple questions, it would be preferable that once statements are recorded completely, a copy is provided to the assesse irrespective of the fact that it will be annexed to the SCN as relied upon document.

Creation of Appellate Tribunal Benches

It is reported in the Press that the Council meeting in June may also consider and approve Delhi, Orissa and Telangana proposal to set up State Appellate Tribunal Benches. It is pertinent that all States should consider setting up Benches so as to unburden the pressure of High Courts as all assessees have taken resort to approach High Courts for all issues thereby clogging up the existing capacity. The National Benches of Appellate Tribunal were approved for setting up by Union Cabinet in Jan 2019 and considering the pace of GST issues coming up for resolution includes the place of supply, it would be in order for the Council to ensure that the same is created before end 2019 physically so that processes and litigating public can take up matters accordingly.