DECEMBER 10, 2019

By Dr G Gokul Kishore

A welcome change in the behaviour of tax administration in GST regime is responsiveness to issues faced by taxpayers. Amendments to rules are frequent and most of them are necessitated by either return or other procedural issues. Exceptions are those relating to measures intended to safeguard revenue as in the case of lapsing of credit to fabric manufacturers opting for refund due to inverted tax structure and restriction on availment of input tax credit to the extent of 20% in case of non-uploading of invoices by suppliers. Not only amendment to rules, clarifications by way of circulars are also provided by CBIC almost on real-time basis. The swiftness in issuance is matched by withdrawal also when the trade and industry express apprehension over the ambiguity in clarifications contained in circulars. In this 65th part, we focus on two circulars which created panic in the industry and were withdrawn but the issues intended to be addressed remain unaddressed now.

IT industry caught in intermediary quagmire

In Part-V of this series, the plight of intermediaries was highlighted and we strongly urged that those who earn foreign exchange for the country by providing services to foreign parties should not be taxed only because they are located in India. Place of supply provision has been incorrectly drafted for intermediary service. Location of intermediary has been reckoned as place of supply, may be, for the reason that such persons facilitate supply of goods or services from India and, therefore, situs of service is in India. However, when such services are provided to a foreign party, ideally it should be treated as export. This means that in respect of export of services, an exception is required to be carved out for intermediary service. When services are provided to overseas entities, it should not be the place where such intermediary is located but it should be the location of service recipient.

Controversy erupted when advance rulings went against companies mostly BPOs engaged in provision of IT-enabled services. They were treated as intermediaries by AARs and, therefore, all their receipts went out of the ambit of export of service. Considering the fact that India, as a destination for IT and ITES, is losing out to countries like Philippines and Indonesia, the tax administration reacted by issuing Circular No. 107 dated 18-7-2019 clarifying various issues. The circular considered various scenarios and arrived at certain conclusion which, apparently, did not categorically settle the ambiguity surrounding the issue of treatment of BPOs engaged in providing cross-border ITES as entitled to benefit of export of service.

Scenario-I dealt in the circular is of no consequence as it simply stated that when services are supplied on own account to client or to customers of client, it would not be an intermediary service. Scenario-II widened the scope of services of the service provider in India by including order placement, delivery and logistics support, transportation of goods, etc., and classified the same as intermediary service. By clubbing different types of activities, the circular, it appears, sought to clarify that ITES service provider providing support services will be caught in the web of intermediary. Case to case analysis is the solution in third scenario which meant there was no clarification. The industry was concerned as the circular did not clarify effectively anything and was capable of being used against them by the department in certain situations.

CBIC, to prove its responsiveness, withdrew the Circular No. 107 by way of Circular No. 127 dated 4-12-2019. Such withdrawal is being welcomed by many and the industry appears to be feeling relieved. Circulars are binding on departmental officers as per landmark judgments and the discipline exhibited by the rank and file in following departmental circulars when they are against the taxpayers or capable of being interpreted against the taxpayers is common knowledge. Therefore, withdrawal of such circular capable of causing more harm to taxpayers rather than clarifying vexed issues is welcome. However, we are back to square one with such withdrawal. The issues for which Circular No. 107 was issued remain without any clarification now. It is expected and necessary that a fresh circular is issued containing positive and unambiguous clarification on the issues faced by different types of entities providing various services to overseas parties (not only BPOs) and getting paid in foreign exchange.

Sales promotion and discounts - Hesitation palpable

From Central Excise days, the tax administration is very hesitant about discounts. They are viewed with suspicion and as a device to exclude certain portion of the value from tax. From landmark cases of yesteryears, the department has been struggling to find its feet insofar as tax treatment of discounts is concerned. Admissibility of post-sale discount has been codified as Section 15 of CGST Act itself provides for the same subject to specified conditions.

Circular No. 105, intended to clarify issues relating to post-sale discount, was issued by CBIC and subsequently withdrawn by Circular 112. We noted in Part-44 that the circular attempts to resurrect the legacy disputes as raised in service tax such as dealers extending special discounts for sales promotion treated as service providers vis-a-vis manufacturers. The emphasis in the withdrawn circular was on 'obligation of the dealer' i.e. if the dealer is required to perform some act like special sales drive, advertisement campaign, exhibition, etc., then it would be considered as separate supply and the additional discount would be the consideration on which GST would have to be paid. The avarice for revenue was sought to be masked by stating that the recipient-manufacturer will be entitled to avail ITC of such GST charged by the dealer. Withdrawal of the circular on this issue is welcome.

If the discount is extended by supplier to dealer for offering special reduced price to customer, then such amount will get added in the taxable value at the hands of dealer. The benevolence extended in the circular was ITC availability to the customer, if registered under GST. The positive clarification in this circular was retention of ITC by the dealer when commercial credit notes are issued by the manufacturer for post-sale discounts. By withdrawal of the circular in toto, this beneficial clarification contained in the same circular has been lost. Withdrawal of clarification which does not address the issue of taxpayers but seeks to arm the department to proceed against taxpayers is commendable. But, the issues, positively clarified and negatively clarified, remain unaddressed with no circular holding the field now. Receiving show cause notices based on circulars is better than receiving them based on officer's interpretation of the provisions as in the former case, taxpayer can have remedies of both contesting the demand notice as well as filing writ petition seeking to quash the circular. In the latter, one of these options does not exist.

We expect the CBIC to come out with fresh circulars on the issues contained in withdrawn circulars - this time with taxpayer friendly clarification.

[To be continued…]

[The author is an Advocate. The views expressed are strictly personal.]

See Part 64.