FEBRUARY 22, 2020

By Monarch Bhatt, Advocate (Partner at FairLaw Consultancy)

IN last few days, Central Board of Indirect Taxes (CBIC) have issued series of tweets and Instruction dated 10th February, 2020 has been also issued by the Member, CBIC to Principal Chief Commissioners and Chief Commissioners for recovery of interest on gross tax liability. As per the Instruction, contention of the revenue is that interest shall be paid on 100% of the tax payable by assessee before reducing the Input Tax Credit (ITC) available with them. GSTIN wise details of assessee, who have not filed the returns on time and interest has not been paid on the gross tax liability has also been provided to each of the Principal Chief Commissioners and Chief Commissioners for recovery of interest. As per system calculated report, interest due in such cases is amounting of Rs.45,900 crores.

In view of this circular, revenue is asking interest on the gross amount of tax and accordingly, assessees have received notices for payment of interest on the input tax credit which was already available with them even on the due date of filing of GST returns. Example: Company has not filed return for the month of August 2019 on the due date (20.09.2019) and it has been filed on 30.10.2019, where tax liability was of 10,00,000/- and as on 20.09.2019 for the month of August 2019 ITC amounting of 4,00,000/- was already available with company. Hence, company discharged the interest only on 6,00,000/- which was paid by cash while filing GSTR 3B on 30.10.2019. Now revenue, is issuing notices to such assessee for payment of interest on balance 4,00,000/- as interest is payable on the entire 10,00,000/- of the tax liability.

Revenue for their contention to demand the interest on gross tax liability is relying on the decision of Telangana High Court dated 18th April 2019 pronounced in the case of Mega Engineering & Infrastructure Limited Versus Commissioner of C. T., Hyderabad reported in 2019-TIOL-893-HC-TELANGANA-GST whereby it was held that interest is payable on the gross tax liability without reducing the ITC. It is to be noted that during this decision, the recommendation of the 31st GST council for introduction of proviso to subsection (1) of section 50 was already there and under para. 41 and 42 of the judgement it clearly speaks about the proposed amendment to be added by way of proviso to section 50 whereby, court has observed that "But, unfortunately, the recommendations of the GST Council are still on paper. Therefore, we cannot interpret Section 50 in the light of the proposed amendment."

The relevant recommendations of 31 st GST council as per the press release dated 22 nd day of December, 2018 reads as under:

"2. Amendment of section 50 of the CGST Act to provide that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible input tax credit, i.e. interest would be leviable only on the amount payable through the electronic cash ledger."

In view of the above, Telangana High Court in the case of Mega Engineering has not taken into consideration proviso to be added under sub section (1) of section 50. Hence, at that particular time, it was pronounced without considering the proposed amendment under section 50 and it was prior to such amendment.

In another case of Daejung Moparts Pvt. Ltd. reported in 2019-TIOL-1289-HC-MAD-GST revenue attached the bank account of the petitioner for recovery of interest on the gross tax liability, whereby single member bench on 13th day of June, 2019 held that bank shall pay an amount as admitted by the petitioner and interest shall be paid only on the cash component of the demand belatedly paid and interest liability is not payable on the ITC available with the Department.

Against the said order revenue went into appeal and matter came before the division bench whereby, on 23rd day of July, 2019 reported in 2019-TIOL-1802-HC-MAD-GST both the judges were having difference of opinion about the applicability of interest. Whether it is on the gross tax liability or on net tax liability? Therefore, matter was referred to Hon'ble Chief Justice.

As per the order of Hon'ble Chief Justice, the matter was placed before Hon'ble Mr. Justice K Ravichandrabaabu, J as a third judge. In his order dated 19th day of December, 2019 reported in 2020-TIOL-358-HC-MAD-GST it mentions that reference to third Judge has to be made only when two different views are expressed by the Judges in the Division Bench. In this case, except the view on the maintainability of writ appeals, the issue regarding automatic interest liability is not the issue, where two different or contra views are expressed by the Judges. However, specific reference has been made to answer the said two issues and accordingly it was held that though interest liability is automatic, arithmetical exercise needs to be done. The relevant text of para. 29 of the order reads as under:

"…………………….Therefore, in my considered view, though the liability fastened on the assessee to pay interest is an automatic liability, quantification of such liability certainly needs an arithmetic exercise after considering the objections if any, raised by the assessee. It is to be noted that the term "automatic" does not mean or to be construed as excluding "the arithmetic exercise". In other words, though liability to pay interest arises under section 50 of the said Act, it does not mean that fixing the quantum of such liability can be unilateral, especially, when the assessee disputes the quantum as well as the period of liability. Therefore, in my considered view, though the liability of interest under section 50 is automatic, quantification of such liability shall have to be made by doing the arithmetic exercise, after considering the objections of the assessee."

Therefore, specifically whether the interest liability is payable on the gross tax liability or on the net tax liability (after reducing the ITC) was not dealt in the decision of Daejung Moparts Pvt. Ltd.

Recently, in the case of Refex Industries Ltd reported in 2020-TIOL-358-HC-MAD-GST it has been held that decision given by Hon'ble justice in the case of Daejung Moparts Pvt. Ltd. is on factual basis and relates to disputed questions of fact whereas, the issue raised in the present case is purely of legal issue. Under para. 12 it has been held that ITC was always available with the department and therefore payment by way of adjustment can neither be termed as belated nor delayed. The proper application of Section 50 is one where interest is levied on a belated cash payment but not on ITC available all the while with the Department to the credit of the assessee.

Further under para. 15 of the judgement reliance is placed on the proviso to sub section (1) of section 50 stating that it has been inserted with effect from 01.08.2019 and while pronouncing the decision of Mega Engineering & Infrastructure Limited by the Telagana High Court, the same was not available as it was only proposed by the GST council.

It is to be noted that till date proviso to subsection (1) of section 50 has not come into effect. On 01 st day of August, 2019 only The Finance (No. 2) Act, 2019 has been enacted but said proviso has not come into effect. The same is yet to be made effective under the central and states / union GST Act from the date to be notified by issuance of notification.

In the lights of above, even after Hon'ble Madras High Court's decision in the case of Refex Industries Limited, the interest story is not yet over and day by day pronouncements of new decisions making it more interesting. Assessees are not going to make interest payment easily as it is a good case to argue and department is consistently mentioning that amendment to section 50 would be prospective amendment. In near future, it would be a real tug of war between assessees and revenue. Therefore, it would not be easy for the revenue to pocket it Rs.45,900 crores as gross interest liability.

[The views expressed are strictly personal.]