NOVEMBER 04, 2024

By Abhijit Saha

GENERALLY, Board Circulars are issued to clarify legal confusion. Also, it has been consistently noticed that the Board Circulars are issued in conformity with the direction of the Hon'ble Supreme Court. I have not come across any instances where a Board Circular has been issued to give exemption from taxation when the Supreme Court has ostensibly held against such exemption.

In the case of Norther Operation Systems Pvt Ltd case [2022-TIOL-48-SC-ST-LB], although the Revenue Neutrality point was argued by the Counsel, it was ignored as irrelevant. It was argued by the Counsel in para 29 of the order that even if the demand of service tax is paid, the entire amount is available as input credit. So, effectively it is revenue neutral situation. However, the Hon'ble Supreme Court negated that argument in para 59, which is reproduced below for ease of reference:

59. As regards the question of revenue neutrality is concerned, the assessee's principal contention was that assuming it is liable, on reverse charge basis, nevertheless, it would be entitled to refund; it is noticeable that the two orders relied on by it (in SRF and Coca Cola) by this court, merely affirmed the rulings of the CESTAT, without any independent reasoning. Their precedential value is of a limited nature. This court has been, in the present case, called upon to adjudicate about the nature of the transaction, and whether the incidence of service tax arises by virtue of provision of secondment services. That a particular rate of tax- or no tax, is payable, or that if and when liability arises, the assessee, can through a certain existing arrangement, claim the whole or part of the duty as refund, is an irrelevant detail. The incidence of taxation, is entirely removed from whether, when and to what extent, Parliament chooses to recover the amount.

In view of the above, it is submitted that the SC has narrowed down the scope of adjudication themselves voluntarily and has not extended the scope of its judgment to include the revenue neutrality point which is required to give holistic view of the revenue implication from a macro perspective.

In a very rare case, like this situation, the Board has realized that the essence of law was not properly applied by the Hon'ble Supreme Court in its above decision rendered in May 2022. Hence, they came out with a Circular No. 210/4/2024-GST dated 26 June, 2024, (after the SC decision in May 2022) wherein they have clarified that by interpreting the second proviso to Rule 28(1) of CGST Rules, 2017, it can be stated that in case of import of service from a related party/distinct party, wherein reverse charge applies and the recipient of service who is liable to pay GST did not raise any self-invoice, then the value for GST under reverse charge should be taken as NIL. This means, in simple terms, that no GST is payable upon such import of service.

The relevant portion of the said Circular is reproduced below for ease of reference:

3.7 In view of the above, it is clarified that in cases where the foreign affiliate is providing certain services to the related domestic entity, and where full input tax credit is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to rule 28(1)of CGST Rules. Further, in cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil, and may be deemed as open market value in terms of second proviso to rule 28(1)of CGST Rules.

In fact, inspite of the above SC decision in May 2022, Board has consciously clarified in Circular no. 199/11/2023-GST dated 17 July 2023, that in case of domestic transaction, in cases where full input tax credit is available to the recipient, if HO has not issued a tax invoice to the BO in respect of any particular service being rendered by HO to the said BO, the value of such services may be deemed to be declared as Nil by HO to BO, and may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules.

It is evident from above, that not only the domestic transaction between distinct persons, but also the import transaction between distinct / related person would be exempted from GST by implicitly approving that such transaction is Revenue Neutral. So, it is a unique situation where the Supreme Court is not waiving the tax on the basis of revenue neutrality point, but the Board has done it by implicitly defying the decision of Supreme Court in the NOS case as above.

As per author's view, Hon'ble Supreme Court should settle the law by endorsing the clarification given by the Board from the Revenue Neutrality point of view instead of taking a narrow interpretation of law. In fact, the Hon'ble Supreme Court had, in several cases, approved that there should not be any tax exposure, in case of revenue neutrality.

In the following cases, Court of Law has given legal sanction to the Revenue Neutrality point.

1. V.E. Commercial Vehicles Ltd Vs. CCE & ST - 2018-TIOL-1208-CESTAT-DEL affirmed by the Supreme Court in [2019 (31) G.S.T.L. J96 (S.C.)]: The demand of short-payment of duty along with interest and penalties was set aside as revenue neutral since such duty paid would inevitably be available as rebate since goods are exported.

2. Mahindra & Mahindra Ltd Vs CCE - 2019-TIOL-2769-HC-MUM-CX affirmed by the Supreme Court in [2019 (368) E.L.T. A41 (S.C.)]: In this case, for clearances to sister unit, admin expenses, R&D expenses and royalty was demanded to be included for discharge of duty. The Supreme Court accepted the contention of revenue neutrality and set aside the demand since the receiving sister entity would be anyhow eligible for CENVAT Credit.

3. Jet Airways (I) Ltd Vs Commissioner of Service Tax-2017-TIOL-515-CESTAT-MUM affirmed by the Supreme Court in 2017 (7) G.S.T.L. J35 (S.C.): The case was with respect to demand of service tax under RCM on online information and database access or retrieval services. It was observed that service tax payable under RCM, being available as credit for discharging tax on its output service, the entire issue is revenue neutral and the demand, interest and penalty is not sustainable.

4. Jay Yuhshin Ltd Vs CCE - 2002-TIOL-126-CESTAT-DEL-LB: Wherein extended period of limitation was held invalid due to revenue neutrality. It further observed: "(a) Revenue neutrality being a question of fact, the same is to be established in the facts of each case and not merely by showing the availability of an alternate scheme;......(c) With particular reference to Modvat scheme (which has occasioned this reference) it has to be shown that the Revenue neutral situation comes about in relation to the credit available to the assessee himself and not by way of availability of credit to the buyer of the assessee's manufactured goods;"

It is evident from above that although Supreme Court in the case of NOS has ignored the Revenue Neutrality Point, in many cases as explained above, the Supreme Court has given approval to the Revenue Neutrality point. In fact, in the case of Commissioner Vs M/s CITIBANK N A [2024-TIOL-109-SC-ST-LB], the Larger Bench of the Supreme Court, (on the issue as to whether issuing bank is required to pay tax separately on interchange fee, where the acquiring bank is already paying tax on MDR which includes the interchange fee), held that issuing bank need not pay again where acquiring bank has already paid on MDR which includes interchange fee. Legislative intent aims to facilitate tax collection and payment, suggesting that principles should guide the interpretation of tax provisions, especially when there is no loss of revenue.

In view of the above, it is humbly submitted that Supreme Court by exercising its power under Article 141 and 142 of the Constitution of India should declare that in case of Revenue Neutral situation, there should not be any tax exposure on the plea of technicalities, as it only multiplies the complexities of the issue without any revenue loss or gain, which is the essence of taxation.

[The views expressed are strictly personal.]