GST made its entry in July, 2017. To facilitate trade on issues relating to liability or credit or classification or valuation, mechanism of advance rulings has been provided in CGST Act and SGST Act. While the statute provided a remedy on questions relating to proposed activities, the ambitious procedural machinery of filing everything online including applications for advance rulings, rendered the term ‘advance’ irrelevant. Taxpayers were compelled to stretch their resources by invoking writ remedy and High Courts had to intervene to allow for manual filing of applications. After such long hiccups, it appears, the system is stabilising as evidenced by rulings issued by Authority for Advance Rulings in various States. As advance rulings mark the commencement of judicial (or quasi-judicial) interpretation of GST law, let us look at some of the rulings vis-à-vis application of law.
Advance ruling not available on product not in existence?
One of the first rulings to be available in public domain is by AAR, West Bengal in respect of classification of certain products as medicaments [M/s Akansha Hair & Skin Care - Ruling dated 9-4-2018]. The applicant sought ruling in its favour that the 33 products listed in the application are medicaments or rather covered by entry relating to medicaments attracting GST at the rate of 12%. As the issue related to classification, the ruling profusely quotes from Supreme Court’s judgment in the case of Puma Ayurvedic Herbal Care [2006 (196) E.L.T. 3 (S.C.)]. This judgment laid the basis for the famous test of ‘cure’ or ‘care’ for classification of a product as medicament or cosmetic. Leaving such classification issues or precedents aside, an important point of law that attracts our attention pertains to the AAR’s non-consideration of classification of three products which according to it, have not come into existence and therefore excluded from the ambit of examination for the purpose of advance ruling.
Section 95(a) of CGST Act defines ‘advance ruling’ as decision provided by AAR on specified matters or on specified questions in relation to supply being undertaken or proposed to be undertaken by the applicant. One of the specified matters is classification of any goods. An application for advance ruling is moved to obtain clarity in advance on a statutory basis in respect of a proposed activity vis-à-vis tax implications. In the earlier laws, advance ruling mechanism itself was confined to proposed activities and GST law has been more benign in covering both proposed and running activities. Normally, for a manufacturer, getting to know the judicial mind in respect of classification of a product which he is already manufacturing (which means he is already clearing and paying tax) arises only when the same is disputed by the department by way of notice. When a manufacturer knocks the doors of AAR, his requirement is certainty in so far as tax implications of his proposed business is concerned. By holding that examination of classification of products not yet manufactured by the applicant is excluded from the ambit of advance ruling, it appears that this ruling has not appreciated the relevant provisions in proper context. May be, if the applicant moves the Appellate Authority for Advance Rulings this may get clarified.
AAR whether can re-phrase general questions and issue ruling?
Compared to the application filed before AAR, West Bengal, the application filed or rather the questions taken up before Maharashtra AAR was not couched in legal language and had to be content with negative ruling [M/s Acrymold, Ruling dated 23-3-2018]. The applicant sought ruling on classification of trophies imported by them and which were either made of one or more of materials like base metal, glass and plastic. One of the questions raised was with respect to classification of trophies made out of combination of materials and in particular, if a particular material constitutes 75% (in value terms). This question was termed as general and in the absence of information as to constituent materials of trophies, this was not answered by AAR. As per para 2 of the ruling, the applicant has provided a table containing various types of trophies imported by them, description as per HSN, HSN code and GST rate with the only question at the end of the table mentioning trophies made with combination of materials stated in the previous entries in the table. The applicant could have been queried during hearing as to percentage of constituent materials in respect of trophies made out of combination of materials or given an opportunity to file additional submissions in support of the same. Despite quoting interpretative rules for classification, test of essential character, etc., the question was ultimately not answered in the ruling.
Section 98(4) of CGST Act provides that where an application has been admitted, the authority shall, after examining such further material as may be placed before it by the applicant or obtained by the authority and after providing an opportunity of being heard pronounce its advance ruling. Therefore, AAR is empowered to obtain ‘further material’ as may be required to answer the question raised and the question raised is not cast on stone as it can always be re-phrased for better clarity and for the purpose of answering the same. Section 105 provides sufficient powers to both AAR and Appellate AAR for issuing commissions and compelling production of records. Even if the applicant does not provide a particular document or information which the authority may consider material to examine the issue, it is empowered to issue commissions to compel production of such required document / information. If another opportunity of hearing is required to answer the question raised, then the same could have been provided as there is no mention in the GST law as to number of adjournments or hearings that can be offered. While the letter of law provides sufficient backing in terms of powers, the spirit of law of advance ruling demands that the applicant coming before the authority may not be trained in law and the question raised may have to be modified so as to provide relief by way of express ruling.
Ruling not available in back-to-back contracts?
It is quite common that in the EPC industry or in major infrastructure projects, back-to-back contracts are entered into whereby there are sub-contractors providing portion of service to main contractor(s). When the main contractor requires clarity in respect of tax implications on his business activities, the same may cover within its ambit the services provided by sub-contractors to him. In fact, it is based on the tax cost incurred vis-à-vis various sub-contractors and the extent of credit admissibility, the main contractor can and will arrive at his costing and participate in any bid or accept any work order. If such main contractor or the EPC agency is before AAR and seeks answers to various questions including that of sub-contractors, can the authority refuse to answer on the ground that the supplier in respect of that particular question being sub-contractor, the same will not be answered when raised in the application filed by main contractor? The answer is yes according to Maharashtra AAR’s ruling dated 3-3-2018 [M/s Fermi Solar Farms].
As per CGST Act, ‘applicant’ means any person registered or desirous of obtaining registration under the CGST Act. The questions or matters which can be raised before AAR are specified in Section 97 and the same includes both existing and proposed activities. There is no condition in the provisions to the effect that the applicant should be a supplier of particular goods or service on which ruling is sought. If this is the case, then the definition of ‘advance ruling’ in Section 95(a) as including proposed activities will be rendered meaningless. The ruling is given in respect of the matters raised in the application and the same is not contingent on the status of the applicant as to whether he executes a particular work or proposed to execute the same in the capacity of a main supplier or sub-contractor. The applicant may be executing the work as main contractor and in respect of certain other work, he may act in the capacity of sub-contractor. The ruling in the above said case has also referred to absence of documents as a reason for refusal to answer which also appears to be not statutorily fool-proof in view of the discussions elsewhere in this article on powers of the authority.
Evolving law, processes and institutions
Substantial number of advance rulings have been issued and many of them involve important issues including the ones like recovery from employee for canteen services, outdoor catering service provided to factory owner, supply of goods with brand name or otherwise, supplies being composite or mixed, etc. Given the nascent stage of GST law itself, the questions brought before AAR and the rulings, for the first time, provide some insight into divergent practices, perspective of the department and the judicial (or quasi-judicial) interpretation of various provisions of the youngest tax law. The institution of AAR itself is a federal experiment at the bureaucratic level with both Central and State GST officials sharing the responsibility. Therefore, we shall wait for the law, institutions and processes to evolve and mature, reserving our right to deliberate on issues affecting the trade and industry.
[The author is a Joint Partner, GST Practice, Lakshmikumaran & Sridharan, New Delhi]