GST Audit by Authorities - Legal Manual For GST Authorities - 1 November 2019 - CA Pritam Mahure and Associates

GST Audit by Authorities -
Legal Manual for GST

Authorities!
CA Pritam Mahure
Legal Guide on GST Audit for GST Authorities!
1 November 2019 1st Edition GST

Index | Review of Income | ITC | DG Audit Letter
GST Audit by Authorities - Legal Manual for Authorities!
Contents
GST Audit - Legal Manual for Authorities! ..................................... 2
About the Author .......................................................................... 6
1. GST Audits – Policy................................................................... 7
1.1 Which provisions enable Authorities to carry out Audit? ...................7
1.2 What DG GST Audit’s Letter states?...............................................8
1.3 Is GST Audit Manual available? ................................................... 10
1.4 Audit of issues of earlier taxes like Service Tax/ Excise? ................ 10
1.5 Whether introduction of GST has taken away power of VAT asst.? ... 12
1.6 Whether after introduction of GST, Govt. has no power for Cess? .... 12
1.7 Is erstwhile Service Tax Audit ultra-virus the Act? ......................... 13
2. Process of Audit...................................................................... 15
2.1 Outline of Audit process ............................................................. 15
2.2 How much is expected duration of Audit? ..................................... 15
2.3 Is Auditor expected to review legal position adopted by taxpayers? . 16
2.4 Which legal provisions GST Auditor should refer for audit? ............. 17
2.5 Step plan for audit .................................................................... 19
2.5.1 Profiling of taxpayer .......................................................... 19
2.5.2 Business specific legal provisions ........................................ 20
2.5.3 Review of compliances ....................................................... 21
3. Review of Financial Statements .............................................. 22
3.1 Directors report ................................................................... 22
4. Review of Income ................................................................... 25
2
4.1 Income vis-à-vis GST ................................................................ 25
4.2 Supply ‘for’ consideration ........................................................... 27
4.3 Whether compensation for illegal occupation is liable to GST? ......... 29
4.4 Reimbursements ....................................................................... 30
4.5 Damages/ penalty ..................................................................... 31
4.6 Income not liable to GST ............................................................ 33
4.7 Employee recoveries ................................................................. 34
4.8 Grants vs consideration ............................................................. 35
4.9 Supply between ‘distinct persons’ ................................................ 36
4.9.1 Supply of ‘goods’ between ‘distinct persons’ ......................... 37
4.9.2 Supply of ‘services’ between ‘distinct persons’ ...................... 38
4.9.3 Is GST leviable on Liaison office services? ............................ 44
4.10 RCM ...................................................................................... 45
4.11 Delayed filing of 3B – Interest on gross or net? ........................... 46
5. Classification .......................................................................... 49
5.1 Composite Supply or Mixed supply? ............................................. 51
5.2 Circulars on composite or mixed supply ....................................... 55
5.3 In case of Works contract can the value be split? .......................... 57
5.4 Implication of classification on rate ............................................. 58
5.5 Implication of Classification on Place of Supply ............................. 60
6. Valuation ................................................................................ 62
6.1 Incidental recoveries ................................................................. 62
6.1 Free of cost supplies .................................................................. 63
6.2 Discounts ................................................................................. 64
3
6.3 Supply of moulds/ dies .............................................................. 68
7. Input Tax Credit (ITC) ............................................................ 71
7.1 Two key sections ...................................................................... 72
7.2 ITC – In the course or furtherance of his business ......................... 73
7.3 Receipt of goods/services mandatory? ......................................... 77
7.4 What is meant by ITC of GST on ‘works contract’ is available? ........ 77
7.5 ITC of GST paid on renting of land .............................................. 79
7.6 Personal consumption – What it means? ...................................... 79
7.7 ITC on goods lost ...................................................................... 80
7.8 ITC on CSR (Corporate Social Responsibility) ................................ 81
7.9 ITC on sales promotion schemes ................................................. 81
7.10 ITC reversal and Interest ......................................................... 82
7.11 Is interest payable on availment? .............................................. 82
7.12 Match and mismatch! .............................................................. 84
8. Ratio analysis ......................................................................... 85
9. Time of Supply ........................................................................ 87
10. Anti-profiteering provisions .................................................. 89
10.1 Anti-Profiteering provisions ....................................................... 89
10.2 Anti-Profiteering in news .......................................................... 92
10.3 Analysis of key Anti-Profiteering Orders ..................................... 92
10.3.1 Anti-profiteering is concession given by Government ........... 93
10.3.2 Anti-profiteering benefit to be passed to each customer ....... 93
10.3.3 Computation at product/SKU level and not entity level ......... 94
10.3.4 Computation to be done based on facts of each case ........... 95
4
10.3.5 If rate reduced but ITC denied then net-effect .................... 97
10.3.6 If rate increased with ITC then net benefit be considered ..... 97
10.3.7 If base price not increased then no anti-profiteering ............ 98
10.3.8 Comparison of ITC ratio ................................................... 98
10.3.9 Benefit to be passed even on imported goods ..................... 99
10.3.10 Can subsequent credit note help in negating allegations ..... 99
10.3.11 Earlier price reduction cannot help ................................. 100
10.3.12 Distributor to pass on the benefit .................................. 101
10.3.13 Even TRAN-2 credit to be passed on .............................. 101
10.3.14 Methodology is mathematical calculation ........................ 102
10.3.15 Project completed prior to GST are outside ..................... 102
10.3.16 New project (launched after 1st July 2017) are outside ..... 103
10.3.17 Reduction in discount is not profiteering ......................... 103
10.3.18 APB to be passed on to landowner as well ...................... 104
10.3.19 Repay amount of anti-profiteering plus the GST thereon... 104
10.3.20 Deposit to CWF (Centre and State) ................................ 104
11. Place of supply and its challenges ...................................... 105
11.1 Challenges in determining Place of Supply ................................ 105
11.2 Export of services between holding and subsidiary .................... 110
12. DG Audit Letter ................................................................... 111
5
About the Author
▪ Pritam Mahure is Leader of CA Pritam Mahure
and Associates, a boutique firm working in the
field of indirect taxes including GST and Global
VAT.
▪ Pritam has authored more than ten books and
numerous articles for leading international
media houses.
▪ Pritam has been invited as a Keynote Speaker
in conferences/ fintech events in Kuwait, UAE,
Bahrain, Oman and India. Pritam has actively
contributed on Tax Policy matters and training
more than 20,000 Government officials and
professionals on GST/VAT.
Feedback
- Author was supported by CA Vaishali Kharde (Sr. Manager, PMA)

during the writing of the book.
- Author would like to ack. support of team members Sajana
Kumawat, Pooja Bora, Pooja Sharma, Sourabh Kankaria, Amit
Gundecha, Sahil Tharani, Lavesh Solanki, Bhargav Amuru, M.
Raju, Poorva Jadhav, Shivani Agrawal and Nitu Mishra.
- Feedback/ suggestions are welcome: CA Pritam Mahure and
Associates (PMA), Fortune House, Baner, Pune - 411021 /
info@lawgical.in / +91 9920644648
6
1. GST Audits – Policy
1.1 Which provisions enable Authorities to carry out Audit?
Section 65 of CGST Act read with Rule 101 of CGST Rules enable the
Authorities to carry out GST Audit. The said provisions are:
Provisions Provision
Section 2 (13) Audit
Section 35 Maintenance of records
Section 65 Audit by tax authorities
Section 71 Access to premises and records
Section 122, 123 Penal provision for non-compliance
and 125
Rule 56 Maintenance of records
Rule 101 Audit
Manual DG GST Manual
The term ‘Audit’ is defined at section 2 (13) of CGST Act to mean:
“(13) “audit” means the examination of records, returns and other
documents maintained or furnished by the registered person
under this Act or the rules made thereunder or under any other
law for the time being in force to verify the correctness of
turnover declared, taxes paid, refund claimed and input
7
tax credit availed, and to assess his compliance with the
provisions of this Act or the rules made thereunder”
It can be observed that the meaning of the term can be split in two
baskets:
What is Audit? What is Audit objective?
Examination of: To verify the correctness of:
a. Records a. Turnover declared
b. Returns and b. Taxes paid
c. Other documents maintained c. Refund claimed
d. Input tax credit availed
e. To assess compliances
1.2 What DG GST Audit’s Letter states?
Directorate General of Audit (DG-Audit) has issued Guidelines/ Audit
Plan (dated 25th June 2019) wherein key aspects of audit are
highlighted as under:
Provisions Provision Para of
Audit Plan
Criteria for Based on Risk Assessment and 4
selection for annual turnover, GST payers will be
Audit selected for audits
8
Jurisdiction Central Authorities will carry out audit 4
for GST payers under Central
jurisdiction
Period July 2017 to March 2018 (9 months) 4
covered?
From when? After submission of GSTR 9/9A by 11
respective GST payers
Process to Before initiation of Audit, an 10
initiate audit intimation through ADT-01 will be
sent
Location of For large and medium taxpayers, the 12
audit audits will be carried out on the
premises of GST payers whereas for
small taxpayers, mostly, desk-based
audits will be done
Timelines Audits are expected to be completed 13
within a period of 3 months [refer
section 65 (4) of CGST Act]
ST and In case any Excise/ Service Tax issues 14
Excise issues are identified, the same will be dealt
in accordance with respective
9
provisions of the Excise/ Service Tax
legislation
Audit Manual GST Audit manual will be shared with 15
the GST Authorities by CBIC (on
ANTARANG)
For GST payers, it will be preferable to carry out a GST Audit recce
before the GST Authorities approach them for GST Audits.
1.3 Is GST Audit Manual available?
The GST Audit Manual is made available by DG GST and can be
accessed at GST Audit Manual 2019.
1.4 Audit of issues of earlier taxes like Service Tax/ Excise?
Audit cases pertaining to the period upto 30th June 2017 are expected
to completed in accordance with Service Tax provisions. In this
regard, section 174 provides as under (relevant extracts):
“SECTION 174. Repeal and saving. —
(2) The repeal of the said Acts and the amendment of the Finance
Act, 1994 (32 of 1994) (hereafter referred to as “such
10
amendment” or “amended Act”, as the case may be) to the
extent mentioned in the sub-section (1) or section 173 shall not
(e) affect any investigation, inquiry, verification (including
scrutiny and audit), assessment proceedings,
adjudication and any other legal proceedings or recovery
of arrears or remedy in respect of any such duty, tax,
surcharge, penalty, fine, interest, right, privilege,
obligation, liability, forfeiture or punishment, as aforesaid,
and any such investigation, inquiry, verification (including
scrutiny and audit), assessment proceedings, adjudication
and other legal proceedings or recovery of arrears or
remedy may be instituted, continued or enforced, and
any such tax, surcharge, penalty, fine, interest, forfeiture
or punishment may be levied or imposed as if these Acts
had not been so amended or repealed;”
Even, at Para 14 of the DG Audit letter (dated 25 th June 2019) its
clarified that:
“14. Further, it is mentioned that while conducting audit under GST if
any non-compliance of law is observed which has repercussion in
11
erstwhile Central Excise or Service Tax period as well then the
Commissioners of Audit may be directed to take suitable actions
under the respective law for the legally prescribed time period.”
1.5 Whether introduction of GST has taken away State’s

power to initiate VAT assessment?
In this regard, in the case of Sheen Golden Jewels [2019-TIOL-37-
HC-KERALA-GST] the Kerala High Court observed that:
“180. First, the State's legislative powers have not been taken
away; they have been, on the contrary, constitutionally
permitted to be shared with the Union Government. What is
gone is the State's exclusivity. To the legislative fields of exclusivity
and concurrency, what has been added is the simultaneity-novel as it
may sound.”
1.6 Whether after introduction of GST, Government has any

power to levy Cess?
In this regard, in the case of Mohit Minerals [2018-TIOL-462-SC-GST]
the Apex Court observed that:
“47. After Constitution (One Hundred and First Amendment) Act,
2016, as per Article 270, Parliament can levy cess for a specific
purpose under a law made by it. Article 270, thus, specifically
empowers Parliament to levy any cess by law.
12
… Lastly, Section 18 of the Constitution (One Hundred and First
Amendment) Act, 2016 expressly empowers Parliament shall, "by
law" on the recommendation of the Goods and Services Tax Council,
provide for compensation to the states for loss of revenue arising on
account of implementation of the goods and services tax….
… When Constitution provision empowers the Parliament to provide
for Compensation to the States for loss of revenue by law, the
expression "law" used therein is of wide import which includes levy of
any cess for the above purpose…
55. … True, that Constitution (One Hundred and First Amendment)
Act, 2016 was passed to subsume various taxes, surcharges and
cesses into one tax but the constitutional provision does not
indicate that henceforth no surcharge or cess shall be levied.”
1.7 Is erstwhile Service Tax Audit ultra-virus the Act?
It may be recalled that the Audit under Service Tax provisions has
been subject matter of intensive dispute. In this regard, the Delhi
High Court in the case of Mega Cabs Pvt Ltd1 held as under:
“45. Resultantly, the Court:
1
2016 (43) STR 67 (Del)
13
(i) declares Rule 5A(2) as amended in terms of Notification No.
23/2014-Service Tax, dated 5th December, 2014 of the Central
Government, to the extent that it authorises the officers of the
Service Tax Department, the audit party deputed by a
Commissioner or the CAG to seek production of the documents
mentioned therein on demand is ultra vires the FA and,
therefore, strikes it down to that extent;
(ii) holds that the expression ‘verify’ in Section 94(2)(k) of the FA
cannot be construed as audit of the accounts of an assessee
and, therefore, Rule 5A(2) cannot be sustained with reference to
Section 94(2)(k) of the FA.”
At present, the aforesaid case is pending before the Apex Court 2.
Similarly, in case of Travelite (India), the provisions of Rule 5A of
Service Tax Rules, 1994 were held as ultra-virus and the case is
pending before Apex Court3.
2
Union of India v. Mega Cabs Pvt. Ltd. - 2016 (44) S.T.R. J277 (S.C.)
3
Union of India v. Travelite (India) - 2016 (45) S.T.R. J317 (S.C.)
14
2. Process of Audit
2.1 Outline of Audit process
Following chart outlines the audit process by the Authorities:
GST Authorities Intimation sent to Desk Review - First

receives list of taxpayers stage of GST audit
taxpayers for audit (GST ADT-01) exercise
Visit for review of

documents - To find out vulnerable Authoruities to get
areas before initial familiar with business
Mostly for large visit of assessee
taxpayers
Share audit Audit objections -

objections Discussion with GST
payer • Accepted and Paid
(GST ADT-02) • Litigated
The units listed to be audited are expected to be intimated at-least
15 days before commencement of audit (Para 5.4 of GST Audit
Manual 2019).
2.2 How much is expected duration of Audit?
As per GST Audit Manual 2019, the indicative duration are as under:
Taxpayer Duration (in days)
Large Taxpayers4 6 to 8 working days
4
It may be noted that the audit threshold may vary from one Audit
15
Medium Taxpayers 4 to 6 working days
Small Taxpayers 2 to 4 working days
2.3 Is Auditor expected to review legal position adopted by
taxpayers?
Para 5.7.1 of GST Audit Manual 2019 states as under:
“…It is important that in an audit, the objections that are raised are
technically correct and stand up against scrutiny or challenge.
Law being open to interpretation, it may be difficult to test the
technical correctness of all objections. However, it should be
correct to the extent that any professional auditor, working with and
having access to the same research material would likely to come to
the same conclusion. It also means that the auditor must
demonstrate, in writing, the research and reasoning used to
base his/her application of legislation, policies and
jurisprudence.”
Similarly, Para 5.8.1 provides that “Audit objections raised must be
fully supported by documentary and legal evidences. This will greatly
Commissionerate to another [Para 4.3.1 (iii) of GST Audit Manual 2019]
16
help in explaining and discussing the objections with the registered
person and other follow up action.”
2.4 Which legal provisions GST Auditor should refer for audit?
GST Auditor is expected to refer following:
SR Provisions Remarks
1. CGST Act, Most of the key provisions of the Act were
SGST/ amended from 1.2.2019 and 1.08.2019. In
UTGST Act, certain cases the amendment is given
IGST Act retrospective effect (such as amendment to
and Cess Act Schedule II of CGST Act, the amendment is
effective from 1.7.2019).
Given this, the GST Auditor is expected to refer
to the original or amended provision as
applicable during the relevant period
2. CGST Rules Rules were amended more than 30 times.
Amended latest Rules are available at - Part A
(Rules) and Part B (Forms)
3. Notifications Notifications can be broadly split into Rate
related and other notifications. CGST Rate
17
related Notifications are available at Rate and
CGST others are available at Others.
It may be noted that in few cases Corrigendum
have been issued and thus care should be taken
to refer the amended/ corrected notification.
4. Circulars CGST Circulars are available at Circulars
5. Orders CGST Orders are available at Orders
6. ROD Orders CGST Removal of Difficulty Orders (ROD) are
available at ROD
7. Advance Although Advance Rulings is binding only on
Rulings applicant (section 103) still it may have
persuasive value for interpretation (if it contains
appropriate legal analysis). Thus, reference be
made to the Advance Rulings.
8. Apex Court More than thousand judgments have been
and High pronounced by the Apex Court and High Court.
Court In some of the cases such as Mohit Minerals
judgments [2018-TIOL-05-SC-GST] even the validity of the
Cess is discussed by the Apex Court and thus
such cases are certainly worth referring to.
18
To get access to cases, one may refer to
Taxindiaonline.com, Taxsutra.com,
Taxmann.com, EXCUS etc
9. FAQs Various FAQs issued by the CBIC can be
accessed at FAQs
10. NAPA National Anti-Profiteering Authority has issued
orders and the same can be accessed at NAPA
Orders.
It can be observed that the GST Authorities have substantial task of
updating themselves before approaching the taxpayers for GST
audits!
2.5 Step plan for audit
GST Authorities, typically, follow following methodology:
2.5.1 Profiling of taxpayer
An auditor needs to prepare GST audit plan. Few of the points, which
need GST Auditor’s attention, are discussed below:
a. What is constitution of GST payer (Individual, firm, Company etc)?
b. Is GST payer small, medium or large enterprise?
19
c. Whether GST payer was subjected to review/ audit? If yes,
whether any Letter/ Show cause notices (SCN) was issued and its
status?
d. Whether GST payer has presence in one State or more than one
State?
e. Whether GST payer is engaged in export of goods/ services?
f. What is the accounting / ERP system (SAP or Oracle or Tally etc)
and method of accounting of GST payer (accrual or cash)?
The aforesaid questions will actually help the Auditor outline the
process to be followed.
2.5.2 Business specific legal provisions
It is critical to understand the industry to which the GST payer
belongs to (say automobile, construction, telecom, pharma etc).
This is critical since few of the GST provisions and issues could be
industry specific. For eg. if the GST payer belongs to construction
sector then reversal under Rule 42 / 43 of CGST Rules could be a
critical issue to check whereas if GST payer belongs to pharma
industry, GST on discounts, expired goods etc could be critical to
check.
20
Additionally, though, the audit process/ steps could be same for all
GST payers, however, based on certain parameters (such as presence
in multiple States, turnover etc) few of the audit steps could differ.
For eg. if GST payer has presence in multiple States then levy of GST
on supply between ‘distinct person’ could become essential.
2.5.3 Review of compliances
At present, GST payer is required to upload various details in GSTR-
1 (monthly), GSTR-3B (monthly), ITC-04 (quarterly), Annual return
(annual), GST Audit (annual), E-way Bill (real-time) etc. These
retrurns, invoices, agreements etc could be reviewed on sample
basis.
21
3. Review of Financial Statements
Typically, following documents could be requested for GST audit/
review:
1. Annual report and Director’s report
2. Profit and Loss Account
3. Balance Sheet
4. Notes to the Accounts
5. Trial Balance
6. Cost Audit Report
7. Tax Audit Report
8. TDS reports
3.1 Directors report
It may be noted that aforesaid each document is critical to review as
each document contains specific aspects. For eg. Director Report
could contain critical major new initiatives of the Company and may
also help in finding the nature of business provided by the GST payer.
Importance of Director’s Report can be gauged from the Apex Courts
following observation in the case of Usha Rectifier Corpn. (I) Ltd
[2011 (263) E.L.T. 655 (SC)] as under:
22
“8. The aforesaid position is further corroborated by the Director’s
report appearing at page No. 2 of the Annual Report for the year
ending December, 1988, wherein it was mentioned that during
the year the company developed a large number of testing
equipments on its own for using the same for the testing of semi-
conductors. Once the appellant has themselves made admission
in their own balance sheet, which was not rebutted and was
further substantiated in the Director’s report, the appellant now
cannot turn around and make submissions which are contrary to
their own admissions.”
Similarly, Financial Statements contain the details of payment in
foreign exchange [which could be relevant for reverse charge
mechanism (RCM)].
Further, disputed liabilities of indirect taxes are reported in CARO
report, which will assist GST Authorities to identify already litigated
transactions, which could also be carried out during the period
subjected to audit.
23
For more analysis of Annual / Director Report and other key points,
reference can be had to Annexure GSTAM – III of GST Audit Manual
2019.
24
4. Review of Income
All forms of ‘supply’ such as sale, transfer, barter, lease, import of
services etc. of goods and/ or services made or agreed to be made
for a consideration attracts CGST (levied by Centre) and SGST
(levied by State).
Further, certain supplies (specified in Schedule I), even if made
without consideration, such as permanent transfer of business
assets on which credit is availed, transaction with related or distinct
persons, transactions with agent etc. attracts GST.
In Schedule I of the CGST Act, it is provided that gifts5 not exceeding
INR 50,000/- in value in a Financial Year by an employer to an
employee are not be treated as supply of goods or services or both.
4.1 Income vis-à-vis GST
Profit and Loss Account indicates the income (including miscellaneous
income) generated by the GST payer. It may be noted that as GST
5
Given the terminology used, its debatable whether free canteen facilities, travel
arrangements for employees, will qualify as ‘gifts’.
25
was introduced on 1st July 2017, however, the Financial Statements
are prepared for the entire Financial Year (FY 2017-18). Thus, GST
Authorities may request the GST payer to provide bifurcation and
reconciliation of details for the period pre-GST (1st April 2017 to 30th
June 2017) and post-GST (1st July 2017 to 31st March 2018).
To understand nature of income generated by the assessee, GST
Auditor may request for sample income invoices and agreements for
review. This will enable GST auditor to gauge the nature of income as
well as GST applicability (including value and rate) thereon.
For FY 2017-18, assessees could have filed:
a. GSTR-1 (outward sale return)
b. GSTR-3B
c. Annual Return (Form 9)
d. GST Audit (Form 9C)
Thus, in case where 9C is filed by the GST payer, the reconciliation,
between Financial Statement and GST returns, will already be
available. GST Auditor may go through the same.
26
4.2 Supply ‘for’ consideration
Supply includes all forms of supply made ‘for’ a consideration. The
word “for” used with the active participate of a verb means “for the
purpose of6”. ‘For’ used with the active participle of the verb means
`for the purpose of’. ’For’ has many shades of meaning. It connotes
the end with reference to which anything is done7.
However, from interpretation perspective, question is how a GST
payer is expected to decode this term. For example:
a. Will all transactions which involve monetary consideration will
qualify as ‘supply’ (such as partial recovery of insurance premium
from employees by the employer) or
b. Transaction should involve some activity by provider then only it
will qualify as ‘supply’ even though money is involved in the
transaction (i.e. every supply will necessarily mean activity for
consideration but every activity for consideration is not supply 8)
6
See Judgment of Westbury, C., 1127
7
Seshasayee Paper & Boards Ltd. [1997 (93) ELT 75 (Tribunal)]
8
In erstwhile Excise regime, in the context of levy of Excise, it was held that every
marketable goods is saleable but every saleable goods (like waste) is not
marketable. Thus, to curtail further exchequer loss, an Explanation was added
27
It appears that the interpretation of term ‘supply’ is moving towards
sr. no. (b) aforesaid as evident from AAR in the case of Habufa
Meubelen B V [2018-TIOL-97-AAR-GST] wherein it was held that if
the liason office in India did not render any consultancy or other
services directly or indirectly, and the reimbursement of expenses
and salary paid by the company based abroad to the liaison office
established in India will not attract GST. Similarly, was held in the
Advance Ruling of Takko Holding Gmbh9.
Similarly, in the Advance Ruling of Posco India Pune Processing
Center (2019-TIOL-25-AAR-GST) it was held that recovery of parents
health insurance expenses from employee may not qualify as ‘supply’
and thus, will not be subject to GST.
Thus, it appears that to qualify two separate conditions should be
satisfied cumulatively i.e. there should be a ‘supply’ and it should be
for a ‘consideration’.
9
2018-TIOL-216-AAR-GST
28
4.3 Whether compensation for illegal occupation is liable to

GST?
In the case of Bai Mamubai Trust Vs Suchitra [2019-TIOL-2158-HC-
MUM-GST] the High Court of Bombay observed that “…it cannot be
said that the Defendant's occupation pursuant to an Order of the
Court is a contract involving a 'supply' for consideration. In the
absence of reciprocal enforceable obligations, it would not be
correct to characterise the Defendant's occupation of the Suit
Premises against payment of royalty as a 'supply' for 'consideration'
on which GST is payable by the Court Receiver.
77. The width of the inclusive definitions of 'business' and 'supply' do
not further the submission of the State of Maharashtra or the Union
of India. The definition of 'business' includes, inter alia, any trade,
commerce, manufacture, profession, vocation, adventure, wager or
any other similar activity, whether or not it is for a pecuniary benefit.
This is irrespective of whether or not there is volume, frequency,
continuity or regularity of such transaction. "Business" also includes
the admission, for a consideration, of persons to any premises. But
as discussed above, no positive act of admission into premises for a
consideration can be said to have taken place where the plaintiff's
allegation is that of illegal occupation.
29
88. In light of the preceding discussion, Issue No. (iii) i.e. Specifically,
in the facts of the present Suit, where the plaintiff alleges that the
Defendant is in illegal occupation of the Suit Premises: Whether
there is any 'supply' of services within the meaning of the CGST Act?
Whether payment of royalty for remaining in possession of the Suit
Premises, either during the pendency of the Suit, or at the time of
passing of the decree, falls within the definition of 'consideration'
for a 'supply' chargeable to payment of GST under Section 9 of the
CGST Act is answered in the negative.”
4.4 Reimbursements
It may be noted that Rule 33 of CGST Rules provides that the
expenditure or costs incurred by a supplier as a pure agent of the
recipient of supply should be excluded from the value of supply,
subject to fulfilment of prescribed conditions.
Given this, GST payer may have adopted position of non-payment of
GST on such ‘reimbursements’.
Further, from accounting perspective, such reimbursements may not
be reflected in Financial Statements.
30
Further, certain expenses could be netted off with income.
Given this, the GST Auditor may scrutinise the ledgers / accounts
from these perspectives as well.
4.5 Damages/ penalty
It may be noted that in Maharashtra State Power Generation [2018-
TIOL-33-AAR-GST] the Advance Ruling Authority stated that GST is
leviable on liquidated damages10.
Similarly, following Advance Rulings could be relevant:
SR Particulars Reference
1 Liquidated damages are liable to GST North American
Coal [2018-TIOL-
229-AAR-GST]
2 Liquidated damages levied in case of delay Maharashtra
on the part of the contractor to provide State Power
materials services are liable to GST Generation
[Question of availability of GST credit Company [2018-
was left un-answered]
10
Similarly held in North American Coal Corporation India [2018-TIOL-229-AAR-
GST]
31
TIOL-14-AAAR-
GST]
3 Compensation for alternate Zaver Shankarlal
accommodation and damages for delayed [2018-TIOL-84-
handover is liable to GST AAR-GST]
4 Delayed payment surcharge/Late Payment Madhya Pradesh
Surcharge/Surcharge on outstanding Poorv Kshetra
amount (by whatever name called) cannot Vidyut [2018-
be treated as separate service and TIOL-234-AAR-
same shall be included in the value of GST]
initial supply to which such charges
relate, and the portion of Delayed payment
surcharge attributable to exempted
supply will be exempted and the portion
of Delayed payment surcharge attributable
to taxable supply is taxable at the rate on
which the corresponding supply is taxed
Given this, Auditor may review whether any liquidated damages are
received by the GST payer.
32
4.6 Income not liable to GST
In the Advance Ruling of Posco India Pune Processing Center11 it was
held that “There is no way that the 50% amount recovered can be
treated as amounts received for services rendered, since this entire
amount is paid to the insurance company which is providing this
Mediclaim facility to the employees and their parents. Such recovery
of 50% premium amounts by the applicant from their employees
cannot be supply of service under GST laws.”.
In the Advance Rulings related to liaison office established in India, it
was held that the activities of liaison office will not qualify as supply12.
Recently, in the advance ruling of BASF India Ltd (2018-TIOL-82-
AAR-GST) the advance ruling authority stated that these kind of
transaction will not attract IGST, however, it was also stated that no
credit of GST paid will be available as these transactions will qualify
as ‘exempt supplies’.
11
12
Habufa Meubelen B V [2018-TIOL-97-AAR-GST], Takko Holding Gmbh [2018-
TIOL-216-AAR-GST]
33
Now, ‘out of scope’ supply (i.e. supply from non-taxable territory to
another non-taxable territory) is sought to be excluded from the GST
net (by including it in Schedule III of CGST Act)13. Further, it is
provided to allow availment of ITC in case of out of scope supplies 14.
However, as the amendment in Section 17 (3) of CGST Act, is not
made retrospective in nature, questions are being raised on credit
pertaining period prior to 1.02.2019.
4.7 Employee recoveries
At present, six pieces of legislation specifically discuss about
employee related transactions in GST law as under:
a. Explanation to Section 15 (related persons)
b. Section 17 (denial of credit)
c. Sr. no. 2 of Schedule I
d. Sr. no. 1 of Schedule III15
e. Press Note dated July 2017
13
It is a cardinal principle of law that to exempt something, first there has to be
a levy. As per Section 1 of CGST Act, it extends to ‘whole of India’ and thus,
transaction taking place outside India may not be covered under the ambit of
GST levy.
14
Refer Explanation inserted from 1.02.2019 in the Section 17 (3) of CGST Act
15
Schedule III Sr. no. 1 reads as ‘Services by an employee to the employer in the
course of or in relation to his employment’
34
f. Various Advance Rulings
As per the Press Release (dated 10th July 2017) on Gifts and
Perquisites it was clarified that ‘It follows therefrom that supply by
the employer to the employee in terms of contractual agreement
entered into between the employer and the employee, will not be
subjected to GST’.
In the Advance Ruling of Posco India Pune Processing Center (2019-
TIOL-25-AAR-GST) it was held that recovery of parents health
insurance expenses from employee may not qualify as ‘supply’ of
service and thus, will not be subject to GST.
However, in the ruling of Caltech Polymers (2018-TIOL-01-AAR-GST)
the ARA held that recovery from employee towards canteen food is
subject to GST16.
4.8 Grants vs consideration
Sometimes income of an institution may comprise of grants and in
such cases it will be important to check whether the same is grant or
consideration for supply. In the Advance Ruling of Indian institute of
16
It may be noted that this ruling did not delve deep in the aspect of ‘value’ of
supply if the organization recovers only subsidized amount from the employees
(as employees are covered under the ambit of ‘related persons’).
35
corporate affairs [2019-TIOL-242-AAR-GST] it was observed that the
amount received from the other signatory to the MoU is not grant-in-
aid and is in fact, consideration for supply of goods or services under
such agreement and thus, GST is payable thereon (also exemption
was not said to be available under sr. no. 76 of Not. No. 12/2017).
Similarly in the Advance Ruling of National Institute Of Bank
Management (NIBM) [2019-TIOL-234-AAR-GST] it was observed that
the consideration paid as subscription or contribution towards
recurring or capital expenses or reimbursement or by whatever
name called, to applicant NIBM, a society registered under the
Societies Registration Act, 1860 by its members (being Banks) for its
recurring and non-recurring expenses is leviable to GST.
4.9 Supply between ‘distinct persons’
Supply of goods or services or both between related persons or
between distinct persons, when made in the course or furtherance
of business, even without consideration is liable to GST17.
17
Refer Entry no. 2 of Schedule I of CGST Act
36
Given this provision, the supply between distinct persons (i.e.
separate GST registrations either in multiple States or in one State)
are subject to GST18.
4.9.1 Supply of ‘goods’ between ‘distinct persons’
In this regard following Advance Rulings can be relevant:
1 Transfer of equipment's between 'distinct persons' Akshaya Patra
is covered under 'supply' [2019-TIOL-42-AAR-
GST]
2 Transfer of glasses, contact lenses etc from HO in GKB Lens
WB to BO on other States is liable (Value as per Rule [2018-TIOL-42-AAR-
28) GST]
18
In the case of Columbia Asia Hospital [2018-TIOL-113-AAR-GST] it was ruled
that the activities performed by the employees at the corporate office such as
accounting, other administrative and IT system maintenance services for the
units located in the other States [which qualify as distinct persons as per
Section 25(4) of the CGST Act] shall be treated as ‘supply’ as per Entry 2 of
Schedule I of the CGST Act and thus, liable to GST.
37
4.9.2 Supply of ‘services’ between ‘distinct persons’
Recently, the Advance Ruling Authority (ARA) in the case of Columbia
Asia Hospital [2018-TIOL-113-AAR-GST] provided clarification with
respect to applicability of GST on the transaction/ services provided
by Head Office (HO) to its Branch Office (BO) located in other States.
The issue under consideration before the ARA was regarding
applicability of GST on the activities performed by the employees at
the corporate office such as accounting, other administrative and IT
system maintenance services etc. for the units located in the other
States.
In this regard, the ARA held that the activities performed by the
employees at the corporate office such as accounting, other
administrative and IT system maintenance services for the units
located in the other States [which qualify as distinct persons as per
Section 25(4) of the CGST Act] shall be treated as ‘supply’ as per
Entry 2 of Schedule I of the CGST Act and thus, liable to GST.
In the erstwhile regime, whether these transactions were
liable to?
38
In the erstwhile Service Tax regime, before 30th June 2017, the
taxpayer had option of obtaining either separate premises-wise
registrations or centralized registration. However, irrespective of the
registration (i.e. whether the separate premises-wise registrations or
centralized registration), Service Tax was not applicable on intra-
entity services as charging section (i.e. section 66B) stated that levy
will trigger only when services are provided ‘by one person to
another’. This aspect was also upheld in various judgments of the
Tribunal (notably in the case of Precot Mills Ltd v. CCE (2006) 2 STR
495 (Tri – Bang)].
It may be noted that in Excise regime, supply of excisable goods
between say two factories of the manufacturer was liable to excise
and valuation of such supplies was one of the mostly litigated issue.
In GST regime, can a ‘person’ having multi-State presence be
treated as ‘distinct’ persons?
In GST regime, Section 25 of CGST Act prescribes that ‘Every person
who is liable to be registered under section 22 or section 24 shall
apply for registration in every such State or Union territory’. Thus,
effectively if a person has multi-State presence then its required to
obtain separate State-wise registrations.
39
As per section 25 (4) of CGST Act ‘A person who has obtained or is
required to obtain more than one registration, whether in one State
or Union territory or more than one State or Union territory
shall, in respect of each such registration, be treated as
distinct persons for the purposes of this Act. Similar, clarification is
provided in section 25 (5) of CGST Act. Thus, GST law prescribes that
each registration will be considered as ‘distinct persons’.
Whether GST be applicable on the transactions between
‘distinct persons’ even without consideration?
Section 7 (1) (c) of CGST Act specifies that ‘the activities specified in
Schedule I, made or agreed to be made without a consideration’ will
qualify as ‘supply’.
As per Entry 2 of Schedule I of CGST Act ‘Supply of goods or services
or both between related persons or between distinct persons as
specified in section 25, when made in the course or furtherance of
business’. Given this provision, the supply between distinct persons
(i.e. separate GST registrations either in multiple States or in one
State) could be subject to GST.
40
On what value GST is payable?
As per Rule 28 of CGST Rules, the value of the supply of goods or
services or both between distinct persons (as specified in sub-
section (4) and (5) of section 25) is, typically, open market value
or value of supply of like kind and quality. Practically, its not possible
to determine the ‘open market value’ and thus, mostly the GST
payers, may consider the 110% cost of provision of such services for
valuation purposes (as per Rule 30 of CGST Rules).
Another important issue which crops up while determining the value
is should the value be determined based on overall basis or on specific
basis. For eg. while the cost of providing accounting, IT support
services can be identified (say by apportioning total cost by turnover
– though whether its open market value is questionable), however,
how to determine value of specific support given such as printing of
few marketing material at head office? Should all such specific
instances be identified? If yes, it casts an onerous responsibility on
the GST payer to micro manage such transactions.
The Rule 28 of CGST Rules, through a Proviso, states that where the
recipient is eligible for full input tax credit, the value declared in
the invoice shall be deemed to be the open market value of the goods
41
or services. This Proviso, to some extent, addresses concerns of
over/under-valuation. However, concerns of over/under-valuation, in
cases where recipient is not eligible for full input tax credit (such as
rent-a-cab services or recipient engaged in provision of both taxable
and exempt supplies), remain unanswered.
Who is supplier?
The dilemma in transactions between distinct persons is:
a. Whether HO is providing services to BO/ Sales offices?
b. Whether BO/ Sales offices is providing services to HO?
c. Both are providing services to each other?
The aforesaid AR, as per the facts of the case, clarifies that the HO
should raise invoice on BO for supply of support services. However, it
may be stated that of the presence of Sales offices in other State is
for marketing/ business development purposes and thus, Sales office
is providing services to HO and accordingly, raise invoice on HO for
all the cost (including cost debited, if any, by HO for support services).
If this aspect is considered then this will effectively, nullify the invoice
raised by HO (as BO will raise invoice for cost including amount
charged by HO).
42
What is the compliance plan for the GST payer?
Given the above, business entities, having multi-State presence,
would be required to:
1. Identify who is providing services (HO to BO or BO to HO)
2. Identify the value of services
3. Identify the time of supply (i.e. monthly, quarterly or annually?)
4. Raise invoice for the services
5. Pay applicable GST
6. Reflect the same in the GST returns (GSTR-1 and GSTR-3B)
7. Credit, if eligible, to be claimed by the recipient unit
8. Substantiate the determined value of service, during audit/
assessment, if any
Globally, B2B business transactions within a legal entity as well as
between separate legal entities within ‘Tax Group’ (refer earlier TIOL
article Tax Groups) are dis-regarded for VAT / GST purposes.
However, in India, the rational for introduction of Entry 2 of Schedule
I of CGST Act seems to be to transfer the SGST to respective
consuming States. There are few other provisions as well which
seems to transfer taxes to consuming State (such as section 77 of
CGST Act and place of supply provisions dealing with immovable-
43
property based services etc). While the intentions of these provisions
are to ensure transfer of funds to appropriate States, its apparent
that the GST payer is getting repeatedly caught between the cross
fire of these GST provisions.
As a way forward, the GST Council should provide a detailed
clarification of aforesaid provisions, including their rational, and
ensure that if GST revenue is paid (though in other States) by the
GST payer then can there be any alternate mechanism to transfer
funds to rightful States without penal / interest consequences on GST
payer.
4.9.3 Is GST leviable on Liaison office services?
In this regard, following Advance Ruling Authority (ARA) are
relevant:
1 Liaison office (LO) activities being Takko Holding Gmbh
undertaken by the applicant when [2018-TIOL-216-
strictly in line with the conditions AAR-GST]
specified by RBI permission letter do
not amount to "supply"
44
2 If the LO in India did not render any Habufa Meubelen B
consultancy or other services directly V [2018-TIOL-97-
or indirectly, with or without any AAR-GST]
consideration and LO does not have
significant commitment powers, except
those which are required for normal
functioning of the office on behalf of
the head office, then the
reimbursement of expenses and salary
paid by the company based abroad to
LO established in India will not
attract GST
4.10 RCM
Typically, the GST liability is to be discharged by the supplier of
goods/ service or both. However, in specific cases, the liability to pay
tax is cast on the recipient of the supply instead of the supplier. This
is known as Reverse Charge Mechanism (RCM).
As per RCM provisions, GST payer, as receiver, has to pay GST under
RCM, reflect the same in returns, prepare invoice as well as payment
voucher.
45
There are two types of RCM in GST law:
a. Section 9 (3) of the CGST Act - RCM is applicable in respect of
specified services (12 services including transportation of goods by
road (GTA), advocate services, sponsorship, director, import of
services etc)
b. Section 9 (4) of the CGST Act – Amendment is made in section 9
(4) of CGST Act to restrict the applicability of the provision to a
notified class of registered persons and not to all registered
persons.
Notifications for RCM
GST Law prescribes RCM on specified goods (such as tobacco leaves,
silk yarn etc vide Not. No. 4/2017), on services (Vide Not. No.
13/2017-CGST) and on import of services (vide Not. No. 10/2017-
IGST).
Aforesaid notifications have been amended constantly and thus,
reference need to be made to applicable provisions during the audit
period.
4.11 Delayed filing of 3B – Interest on gross or net?
There are two judgments on the issue as under:
46
Interest on gross liability Interest on net liability
Megha Engineering And Octagon Communications
Infrastructures [2019-TIOL-909-HC-AHM-GST]
[2019-TIOL-893-HC-TEL.-
GST]
Since ownership of such money If the petitioner is not able to file
is with the dealer till the time of return in Form GSTR-3B by 20th
actual payment, the April, 2019 the petitioner would be
Government becomes entitled deprived of input tax credit – thus,
to interest up to the date of manual return permissible and
their entitlement to appropriate interest on net liability.
it
Further to aforesaid cases, Section 50 of CGST Act was amended to
include proviso as under:
“Provided that the interest on tax payable in respect of supplies made
during a tax period and declared in the return for the said period
furnished after the due date in accordance with the provisions of
section 39, except where such return is furnished after
commencement of any proceedings under section 73 or section 74 in
respect of the said period, shall be levied on that portion of the tax
that is paid by debiting the electronic cash ledger.”
47
At present, whether the proviso will have retrospective effect or
prospective is pending before Telangana High Court in the case of
Raghava Constructions 2019-TIOL-1803-HC-TELANGANA-GST].
48
5. Classification
It seems that ‘classification’ has gained prominence in GST regime as
critical to classify whether a transaction is a supply of goods or
services for determining applicability of GST rate, place of supply and
time of supply.
The GST payer has to cross following hurdles to classify a transaction:
a. Is it only a goods19 supply?
b. Is it only a service20 supply?
19
As per Section 2 (52) of CGST Act, “goods” means every kind of movable
property other than money and securities but includes actionable claim,
growing crops, grass and things attached to or forming part of the land which
are agreed to be severed before supply or under a contract of supply;
20
As per Section 2 (102) of CGST Act, “services” means anything other than
goods, money and securities but includes activities relating to the use of money
or its conversion by cash or by any other mode, from one form, currency or
denomination, to another form, currency or denomination for which a separate
consideration is charged
49
c. Is it supply of both – If yes, is it a composite supply21 or mixed
supply22?
d. Is it a works contract23 or is it a job work24 activity?
e. What is the classification of goods (HSN) or services (SAC)?
f. Is it an intra-State supply or inter-State supply?
g. Whether Compensation Cess is applicable?
21
As per Section 2 (30) of CGST Act, “composite supply” means a supply made
by a taxable person to a recipient consisting of two or more taxable supplies
of goods or services or both, or any combination thereof, which are naturally
bundled and supplied in conjunction with each other in the ordinary course of
business, one of which is a principal supply;
22
As per Section 2 (74) of CGST Act, “mixed supply” means two or more individual
supplies of goods or services, or any combination thereof, made in conjunction
with each other by a taxable person for a single price where such supply does
not constitute a composite supply;
23
As per Section 2 (119) of CGST Act, “works contract” means a contract for
building, construction, fabrication, completion, erection, installation, fitting
out, improvement, modification, repair, maintenance, renovation, alteration or
commissioning of any immovable property wherein transfer of property in
goods (whether as goods or in some other form) is involved in the execution
of such contract;
24
As per Section 2 (68) of CGST Act, ‘job work’ means any treatment or process
undertaken by a person on goods belonging to another registered person and
the expression “job worker” shall be construed accordingly;
50
Its apparent that the aforesaid challenges owe its origin mainly to
multiplicity of GST rates and separate Time of Supply and Place of
Supply provisions for goods and services.
The issue of classification gets aggravated further, as, the rate of GST
of various products/ services have undergone changes on multiple
occasions.
5.1 Composite Supply or Mixed supply?
In cases where two goods and / or services are supplied together, the
question that needs to be answered is whether the same is composite
or mixed supply.
In this regard, to qualify as ‘composite supply’ it is essential that the
combination of goods or services is:
a. Naturally bundled
b. Supplied in conjunction with each other
c. In the ordinary course of business
d. One of which is a principal supply
51
However, the term ‘naturally bundled’ is not defined. In the erstwhile
Service Tax Education Guide illustration of ‘naturally bundled’ service
was provided (Para 9.2.1 of Service Tax Education Guide) as below:
“A hotel provides a 4-D/3-N package with the facility of breakfast.
This is a natural bundling of services in the ordinary course of
business. The service of hotel accommodation gives the bundle the
essential character and would, therefore, be treated as service of
providing hotel accommodation.”
Similarly, another illustration was provided25.
Examples of scenario wherein the issue of ‘naturally bundled’ can crop
up is:
25
Para 9.2.1 of Service Tax Education Guide - A 5-Star hotel is booked for a
conference of 100 delegates on a lump sum package with the following
facilities: Accommodation for the delegates Breakfast for the delegates, Tea
and coffee during conference, Access to fitness room for the delegates,
Availability of conference room, Business centre. As is evident a bouquet of
services is being provided, many of them chargeable to different effective rates
of tax. None of the individual constituents are able to provide the essential
character of the service. However, if the service is described as convention
service it is able to capture the entire essence of the package. Thus the service
may be judged as convention service and chargeable to full rate. However it
will be fully justifiable for the hotel to charge individually for the services
as long as there is no attempt to offload the value of one service on to
another service that is chargeable at a concessional rate.
52
a. Whether supplies of medicine (taxable supply) when provided to
to ‘in-patients’ in a hospital during medical treatment (exempt
supply), will be exempt26?
b. Whether installation service provided alongwith supply of
equipment will qualify as one supply or separate supply27?
c. Whether supply of UPS (liable @ 18%) and a battery (liable @
28%) will qualify as supply of principle component (i.e. UPS) 28?
Its apparent that there are numerous scenarios like aforesaid,
wherein the GST payer will be required to determine whether a
transaction is a ‘naturally bundled’ or not.
Other illustrative indicators, not determinative but indicative of
bundling of services in ordinary course of business are29 -
a. There is a single price or the customer pays the same amount, no
matter how much of the package they actually receive or use.
26
Columbia Asia Hospitals Pvt Ltd [2018-TIOL-293-AAR-GST], Rajagiri Health
Care And Education Trust [2018-TIOL-238-AAR-GST], Kims Health Care
Management Ltd [2018-TIOL-236-AAR-GST]
27
Toshniwal Brothers (SR) Pvt Ltd [2019-TIOL-01-AAAR-GST], Giriraj Renewables
Pvt Ltd [2018-TIOL-16-AAAR-GST]
28
Switching Avo Electro Power Ltd [2018-TIOL-04-AAAR-GST]
29
Para 9.2.4 of Service Tax Education Guide
53
b. The elements are normally advertised as a package.
c. The different elements are not available separately.
d. The different elements are integral to one overall supply – if one
or more is removed, the nature of the supply would be affected
Recently, in the case of Alcon Resorts [2019-TIOL-209-AAR-GST] it
was held that since the Applicant provides healthcare services by way
of appropriate diagnosis, appropriate medicines as well as relevant
consumables or implants as part of treatment under supervision of
qualified doctors till discharge, they are undoubtedly naturally
bundled in the ordinary course of business and are to be considered
as ‘Composite Supply' and entitled for exemption under the category
of ‘Healthcare services'.
It may be noted that no straight jacket formula can be laid down to
determine whether a service is naturally bundled in the ordinary
course of business.
Each case has to be individually examined in the backdrop of several
factors30.
30
Para 9.2.4 of Service Tax Education Guide
54
Given the aforesaid, it will be essential to review the transactions with
multiple supplies to decode the implications from the perspective of
‘composite supply’ or ‘mixed supply’.
5.2 Circulars on composite or mixed supply
There are, inter-alia, two key Circulars which deal with
classification31.
Circular 34/8/2018 states that the its essential to refer to ‘pre-
dominant’ element to qualify a transaction as transaction of goods
or services32. However, Circular no. 47/21/2018-GST states that if
value of goods and services supplied are shown separately, the
goods and services would be liable to tax at the rates as applicable to
such goods and services separately. Both the Circulars extracts are
reproduced below:
31
Circular no. 34/8/2018-GST dated 01.03.2018 and Circular no. 47/21/2018-
GST 08.06.2018
32
It may be recalled that ‘dominant intention’ theory was propounded by Apex
Court in the case of BSNL [(2006) 145 STC 91 (SC)].
55
Circular No. 34/8/2018 Circular No. 47/21/2018-
dated 1st March 2018 GST dated 08.06.2018
Whether retreading of tyres is a How is servicing of cars
supply of goods or services? involving both supply of goods
The pre-dominant element is the (spare parts) and services
process of retreading which is a (labour), where the value of
supply of service… Rubber used goods and services are
for retreading is an ancillary shown separately, to be
supply. treated under GST?
2.1 The taxability of supply
The primary question that should would have to be
be asked is what is the essential determined on a case to
nature of the composite supply case basis looking at the
and which element of the supply facts and circumstances of
imparts that essential nature to each case.
the composite supply 2.2 Where a supply involves
supply of both goods and
services and the value of
such goods and services
supplied are shown
separately, the goods and
services would be liable
56
to tax at the rates as
applicable to such goods
and services separately.
It may be noted that aforesaid questions of classification (goods vs.
services) becomes relevant also from rate perspective and from the
perspective of place of supply (i.e. whether the transaction is intra-
State or inter-State).
However, given two contrary Circulars, the interpretation of multiple
supplies is at crossroads (i.e. should a reference be made to
predominant intention or a transaction can be split for GST purposes).
Given the aforesaid, it will be preferable to review the tax position
adopted by the GST payer in this regard.
5.3 In case of Works contract can the value be split in goods
and services?
In the Advance Ruling of Skipper Ltd 2019 (20) G.S.T.L. 110 (A.A.R.
- GST) it was observed that “…GST being a tax on the supply of both
goods and services, it is no longer necessary to segregate the
supply of goods in an indivisible composite contract for the purpose
57
of taxation. GST can be levied on the entire value chain, which is the
bundled supply of goods and services for execution of an indivisible
composite contract for construction, erection, commissioning, etc., of
an immovable property.”
Further, in the Advance Ruling of Siemens Ltd [2019-TIOL-136-AAR-
GST] it was observed that the composite nature of the contract is
clear from the fact that the first contract cannot be performed
satisfactorily unless the goods have been transported and delivered
to the contractor's site and thus, inasmuch as the two contracts are
not separately enforceable, therefore, the supply is in the nature of
'Composite supply of Works Contract' which is a service and would be
taxable @18%.
5.4 Implication of classification on rate
It may be noted that the classification also has implications from rate
perspective. For eg. in case a car servicing centre is servicing a car
and supplies few small parts in the process, then question can arise
whether on the entire invoice GST should be levied:
a. As a service (@ 18% on entire value) or
b. As supply of car parts (@ 28% on entire value) or
58
c. As two separate transaction33 i.e. service value liable @ 18% and
supply of car parts liable @ 28%
In the aforesaid cases, the GST payer, needs to classify the
transaction and pay GST accordingly.
In case a hospital supplies medicines to an in-patient (i.e. admitted
patient) then as the principal activity of hospital is to treat the patient,
the entire value is said to be exempted34.
However, it seems that the GST Council is worried about aforesaid
exemption being claimed by health care providers (i.e. exemption to
health care services as well as medicines, implants etc). Give this, in
days to come, GST law may prescribe separate indication of value of
service and goods (i.e. medicines, implants etc)35. Meanwhile the GST
Authorities may follow the Advance Rulings on this subject.
33
As per Circular no. 47/21/2018-GST states if value of goods and services
supplied are shown separately, the goods and services would be liable to tax
at the rates as applicable to such goods and services separately
34
Advance Ruling in the case of Columbia Asia Hospital [2018-TIOL-293-AAR]
35
Economictimes.indiatimes.com
59
In case of ‘buy one get one free’ schemes (say buy one package of
biscuit and get chocolate free), for rate of GST, reference need to be
made to the provisions of ‘composite supply’ and ‘mixed supply’
[Refer Para B (ii) of Circular No. 92/11/2019-GST].
5.5 Implication of Classification on Place of Supply
It may be noted that the classification also has implications from place
of supply perspective. For e.g. whether a job work activity of painting
(say paint value is more than 80%) will be treated as supply of goods
(as per principle of composite supply) or supply of service (as per
Entry no. 3 of Schedule II).
In the case of job work for a principal outside the State, if the
transaction is treated as supply of ‘goods’ then place of supply could
be location where goods are delivered (say goods are delivered to the
recipient in the job workers premises within the State) and thus,
CGST and SGST will be applicable which principal (who is outside the
State) may not be able to avail the credit.
However, if the transaction is treated as supply of ‘services’ then
place of supply will be location of principal and IGST will be applicable
(enabling principle avail the input tax credit).
60
Similarly, whether a supply of electric wires (say value of wire is more
than 70%) along with activity of laying wires (including civil work) for
a housing project will be treated as ‘works contract’ or supply of wires
(as the principle supply is of wires).
Additionally, in case of annual comprehensive maintenance contract
are also entangled in the question of goods or service contract.
In the Advance Ruling of Sandvik Asia Pvt Ltd36 it was stated that the
activities of 'Comprehensive Maintenance Contract' are to be treated
as a composite supply of ‘service’.
In the Advance Ruling of Cummins India Ltd37 it was held that since
the supply of maintenance service is for a single price with supply of
spare parts/ goods as and when required, the contracts will be
considered as a composite supply of ‘service’.
Given the aforesaid advance ruling applications, it can be observed
that classification is a critical issue being faced and thus, this aspect
could be considered during the audit/ review.
36
37
61
6. Valuation
GST is payable on the ‘transaction value’. Transaction value is the
price actually paid or payable for the said supply of goods and/or
services between un-related parties and price is the sole
consideration.
The transaction value is also said to include all expenses in relation
to sale such as packing, commission etc. Even subsidies linked to
supply, excluding Government subsidies is includable.
However, discounts/ incentives given before or at the time of
supply are permissible as deduction from transaction value. As
regards discounts given after supply is made, the same is permissible
as deduction subject to fulfilment of prescribed conditions.
It is pertinent to note that Rule 27 to 35 of CGST Rules deal with
Valuation.
6.1 Incidental recoveries
As regards rate of GST applicable on incidental expenses, as per
section 15 (2) of CGST Act, even incidental expenses (such as
62
transportation etc) are expected to suffer GST at the same rate as
applicable to supply of product/ services.
In the Advance Ruling of Premier Vigilance & Security Pvt Ltd [2018-
TIOL-243-AAR-GST] it was held that GST is payable at the applicable
rate on the entire value of the supply including toll charges paid.
Given this, whether GST is discharged on the entire value of the
consideration, could be verified.
6.1 Free of cost supplies
As regards rate of GST applicable on free of cost material supplied by
contractee, in the Advance Ruling of Tejas Constructions &
Infrastructure Pvt Ltd [2019-TIOL-292-AAR-GST] it was observed
that as per Section 15 of the Act, tax is payable on the entire contract
value as per certificate issued by the architect, without deducting the
value of Cement, Mild Steel and Structural Steel provided by the
contractee.
Similarly, in the Advance Ruling of Nivodit Agrwal [2019-TIOL-132-
AAR-GST] it was held that the diesel provided by the service recipient
for use in trucks/vehicles of the applicant forms an important and
63
integral component of the business process without which the process
of supply of cement can never get materialized. As any amount that
the supplier is liable to pay in relation to such supply but which has
been incurred by the recipient of the supply and not included in the
price actually paid or payable is includible in value and thus, Applicant
is required to charge GST on the total amount including the cost of
diesel (which was supplied free of cost by the recipient).
6.2 Discounts
As regards, value, the Auditor may review the deduction, if any
claimed, from value of supply and whether the same is in accordance
with section 15 of CGST Act.
One of example of deduction is discount (say trade discount, cash
discount etc). For discounts, reference can be had to section 15 (3)
of CGST Act.
In this regard, it may be noted that there were two important
Circulars:
a. Circular No. 92/11/2019 dated 7th March 2019
b. Circular No. 105/24/2019 dated 28th June 2019
64
It may be noted that Circular No. 105/24/2019 is withdrawn, ab-
initio, vide Circular No. 112/31/2019-GST dated 3rd October 2019.
However, withdrawal may not be equated with non-applicability of
GST on post-sale discounts passed on to the distributors.
GST is payable on value after discount. Discount can be offered before
or at the time of supply or after the supply. As far as discount given
after the supply is concerned, it is a cause of grave to the industry.
The underlying reason for this is fact that the GST law restricts post
supply discounts after September of next Financial Year. Thus, as per
GST law, discounts for FY1819 can be allowed as deduction from
value only if it is offered till September 2019. This effectively means,
if discount is pertaining to supply of say March 2018 then taxpayer
has only six months to offer post supply discounts.
However, practically, this is far from reality, as discounts may be
offered by supplier to the distributor after, say October/ November
(i.e. once Diwali/ Eid) is over.
Also, discounts have become a much common practice (particularly
after advent of digital economy and online marketplace). Even the
65
post supply discounts are required to be ‘established’ in terms of
agreement which itself could be challenging38.
To address the few of the aforesaid challenges pertaining to
discounts, CBIC, on 7th March 2019, issued a Circular (No.
92/11/2019-GST). This Circular throws light on various critical issues
such as:
a. Quantity discounts such as 'buy one, get one free' can be treated
as supplying two goods for the price of one (and effectively ITC
reversal will not trigger39). As regards rate of GST for such
supplies, reference need to be made to the provisions of
‘composite supply’ and ‘mixed supply’.
38
Refer Section 15 (3) (b) of CGST Act. In the Advance Ruling of Ultratech Cement
[2018-TIOL-110-AAR-GST] it was held that bare word 'discount' mentioned in
the agreement without being any parameter or criteria mentioned with it would
not fulfill the requirements of section 15(3)(b)(i) of the CGST Act as there is
no fixed criteria, basis or rationale for arriving at the quantum of these
discounts' and thus, post-sale discount (like rate difference) cannot qualify as
for deduction from value.
39
In the Advance Ruling of Golden Tobacco Ltd [2019-TIOL-192-AAR-GST] it was
observed that the in view of the CBIC Circular 92/11/2019-GST dated
07.03.2019, the extra packs of cigarettes would not be again leviable to GST;
extra packs will not be considered as exempt supplies or free supplies and hence
the provisions of s.17(2) r/w rule 42 or clause (h) of s.17(5) will not be
applicable.
66
b. Credit note(s) can be issued by the supplier even if the conditions
mentioned in clause (b) of sub-section (3) of section 15 of the said
Act are not satisfied. Further, such secondary discounts shall not
be excluded while determining the value of supply as such
discounts are not known at the time of supply.
c. Samples which are supplied free of cost, without any
consideration, do not qualify as ‘supply’ under GST, except where
the activity falls within the ambit of Schedule I of the said Act. ITC
shall not be available to the supplier on the inputs, input services
and capital goods to the extent they are used in relation to the
gifts or free samples distributed without any consideration.
However, where the activity of distribution of gifts or free samples
falls within the scope of ‘supply’ on account of the provisions
contained in Schedule I of the said Act, the supplier would be
eligible to avail of the ITC40.
40
In the Advance Ruling of Sanofi India Ltd [2019-TIOL-182-AAR-GST] the
Authority stated that the applicants is not entitled to ITC of GST paid on expenses
incurred towards promotional schemes of Shubh Labh Loyalty programme and
goods given as brand reminders
67
It can be observed that the aforesaid Circular succeeds in providing
much needed clarity, however, the Circular does not provide clarity
on two critical aspects:
a. Whether in view of Second Proviso to Section 16 (2) of CGST Act,
the credit reversal will trigger if the recipient, does not make
payment of say 10% value due to the financial credit note?
b. Is it an option available to the supplier to make payment of GST
on free samples (under Sr. No. 1 of Schedule I of CGST Act) or the
credit needs to be reversed compulsorily as per Section 17 (5) (h)
of CGST Act?
The GST payer eagerly awaits a suitable clarification from CBIC on
aforesaid aspects.
6.3 Supply of moulds/ dies
In GST regime, the GST law provides for levy of GST on 'transaction
value'.
As per Para 1.2 of Circular 47/21/2018-GST dated 8th June 2018 “It
is further clarified that while calculating the value of the supply made
by the component manufacturer, the value of moulds and dies
provided by the OEM to the component manufacturer on FOC basis
68
shall not be added to the value of such supply because the cost of
moulds/dies was not to be incurred by the component manufacturer
and thus, does not merit inclusion in the value of supply in terms of
section 15(2)(b) of the Central Goods and Services Tax Act, 2017
(CGST Act for short).”
As per Para 1.3 of Circular 47/21/2018-GST dated 8th June 2018
“However, if the contract between OEM and component manufacturer
was for supply of components made by using the moulds/dies
belonging to the component manufacturer, but the same have been
supplied by the OEM to the component manufacturer on FOC basis,
the amortised cost of such moulds/dies shall be added to the value
of the components. In such cases, the OEM will be required to reverse
the credit availed on such moulds/ dies, as the same will not be
considered to be provided by OEM to the component manufacturer in
the course or furtherance of the former’s business.”
It is pertinent to note that though the aforesaid Circular specifies that
amortised cost of moulds/dies should be added, there is no specific
69
provision in Valuation Rules (Rule 27 to 35 of CGST Rules) to provide
for inclusion of ammortised value of moulds, like in Excise Law 41.
In the Advance Ruling of Lear Automotive42 it was held that the
amortized value of tool received on FOC basis from the customer is
not required to be included in the value of finished goods
manufactured and supplied by applicant to customer. However, In the
Advance Ruling of Nash Industries43 it was held that amortised cost
of tools which are re-supplied back to the applicant free of cost shall
be added.
In the Advance Ruling of Toolcomp Systems Pvt Ltd [2019-TIOL-248-
AAR-GST] it was observed that the cost of tools supplied by OEM on
FOC basis is not required to be added to the value of parts supplied
by applicant and the said value is not liable for GST as per CBIC
clarification 47/21/2018-GST.
41
It may be noted that the rationale for inclusion of ammortised value of moulds
[as per Rule 6 of Central Excise (Determination of Value) Rules, 2006] was that
Excise was a levy on intrinsic value of goods and limited upto the stage of
manufacture
42
43
70
7. Input Tax Credit (ITC)
Section 16 and 17 of CGST Act and Rule 36 to 45 of CGST Rules deal
with Input Tax Credit. Typically, credit of input tax charged to
registered person.
Section 16 (2) of the Act, prescribes following four conditions to claim
credit:
(a) he is in possession of a tax invoice or debit note issued by a
supplier registered under this Act, or such other tax paying
documents as may be prescribed
(b) he has received the goods or services or both
(c) subject to the provisions of section 41 or [section 43A], the tax
charged in respect of such supply has been actually paid to the
Government, either in cash or through utilisation of input tax
credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
Out of the four aforesaid conditions, due to two conditions i.e. (c) and
(d) the recipient gets burdened with the responsibility of ensuring
whether GST has been paid to the Government or not.
71
Further, to continue to claim the input tax credit the buyer needs to
ensure that he pays the supplier within 180 days from date of
invoice44. If payment to vendor is not made within 180 days, then
proportionate input tax credit will have to be reversed and availed
again on payment to vendor.
Section 17 (5) provides that input tax credit will not be available on
following:
Works contract
Employee related
Motor vehicle (below unless for further
(such as beauty Composition supplies
13 passengers) supply of works
treament etc)
contract services
Goods lost, stolen,

Any tax paid in
destroyed, written
Goods / services accordance with
off or disposed of by
used for personal use provisions of sections
way of gift or free
74, 129 and 130
samples
7.1 Two key sections
Input Tax Credit provisions are governed by two key sections i.e.
section 16 and section 17 of CGST Act.
44
As per Proviso to Rule 37 (1) of CGST Rules the condition of 180 days is not
applicable for supplies made without consideration as specified in Schedule I
as well as amounts added in accordance with section 15 (2) (b) of CGST Act
72
Section 16 and 17 use three different terminologies in the context of
entitlement to claim credit as highlighted below:
Sr Terminology used Section
a. Used or intended to be used in the ‘course or Section 16 (1)
furtherance of his business’
b. Goods or services or both are used ‘for the Section 17 (1)
purposes of any business’
c. Goods or services or both are used by the Section 17 (2)
registered person partly ‘for effecting
taxable supplies... and partly for effecting
exempt supplies’
The aforesaid different terminology creates a challenge for GST payer
while determining eligibility of credit i.e. whether the aforesaid three
clauses signify same meaning or intended to convey separate
meaning.
7.2 ITC – In the course or furtherance of his business
As per Section 16 (1) of CGST Act, a registered GST payer can take
credit of input tax charged on any supply of goods or services or both
to him which are used or intended to be used in the course or
furtherance of his business.
73
Given the terminology used, one wonders whether:
a. It is necessary that the expenditure should have a direct nexus
with the carrying on of the GST payer’s business and whether GST
payer us required to substantiate the nexus of expenses with
business or
b. On the expenses incurred by the GST payer, there is a presumption
in that the expense are incurred for business (unless GST
Authorities proves anything to the contrary)
It is pertinent to note that the Apex Court in the Income Tax case of
Travancore Titanium Products Ltd45 held that "to be a permissible
deduction there must be a direct and intimate connection between
the expenditure and the business’.
In the Income Tax case of Rajasthan Spinning and Weaving Mills [274
ITR 465] it was held that “Ordinarily, it is for the assessee to decide
whether any expenditure should be incurred in the course of its or his
business. Such expenses can be incurred voluntarily and without
necessity… It is also not necessary to show that expenses were not
profitable or no benefit was actually derived. The receipt of
45
(1966) 60 ITR 277 (SC)
74
actual benefit is also not necessary. Any contribution made by an
assessee to a public welfare fund which is directly connected or
related with the carrying on of the assessee’s business or which
results in benefit to the assessee’s business has to be regarded as an
allowable deduction under this section.
Further, in case GST is paid on expenses incurred by a GST payer for
a completely new line of business, will qualify for input tax credit as
‘in the course or furtherance of his business’ as its not his
business yet (say business is yet to be acquired).
Similarly, question about availability of input tax credit can arise
whether input tax credit of GST paid on liquidated damages
(assuming it’s paid for a deliberate or dishonest breach of a contract)?
Can a GST payer say that it’s an expense incurred to enable business
to continue its same course before and only to remove a difficulty in
carrying the business on the same lines as before46.
46
Reference can be made to the Income Tax case of Western India Oil v CIT [77
ITR 140]
75
Also, will GST paid for fighting case of harassment against an
employee can be considered as it is in the interest of business to fight
the case.
Even question can arise whether GST payer can claim credit of GST
paid on legal fees to defend a case of pollution control (lets assume
the Company is held guilty)? Similarly, should credit on expenses for
a purpose which is prohibited by law, will be permissible?
Thus, should one go into the legality of the issue before determining
eligibility to claim credit?
Similarly, if a Company incurs expenses to build toilets near its factory
(to avoid open defecation), will it qualify as ‘in the course or
furtherance of business’ or an act of social welfare?
In view of the aforesaid discussion, its apparent that detailed analysis
needs to be done for ITC as ‘in the course or furtherance of business’
is expected to be one of the heavily debated topic.
76
7.3 Receipt of goods/services mandatory?
As per Section 16 (2) (b) of CGST Act, inter-alia, states that the
registered person can claim ITC provided ‘he has received the goods
or services or both’.
In the Advance Ruling of Pasco Motor LLP47 it was held that input tax
credit on goods is only available when goods are received.
7.4 What is meant by ITC of GST on ‘works contract’ is
available?
As per Section 17 (5) (c) of CGST Act input tax credit shall not be
available in respect of ‘Works contract services when supplied for
construction of an immovable property (other than plant and
machinery) except where it is an input service for further supply of
works contract service’.
The aforesaid terminology suggests that credit of ITC on ‘Works
contract services for construction of an immovable property’ is not
available unless its input service for providing works contract service.
47
77
Given the aforesaid restriction, the GST payers will need to decipher:
a. Whether the service received is ‘works contract’ service?
b. Is it ‘for’ construction of immovable property?48
The first stumbling block is how the recipient is required to determine
classification i.e. whether based on nature of contract with supplier
(say there is one supplier doing painting work and he classifies
services under ‘Works Contract service’)? What if recipient of supply
appoints two separate suppliers, one providing paint and another
applying the paint then will it have any impact?
Similarly, ‘for’ construction could be subject to diverse interpretation
as one can debate whether painting work qualifies as works contract
and then whether painting is ‘for’ construction?
Additionally, Explanation to Section 17 (5) of CGST Act states that
‘For the purposes of clauses (c) and (d), the expression “construction”
includes re-construction, renovation, additions or alterations or
repairs, to the extent of capitalisation, to the said immovable
property’.
48
For more discussion refer section ‘What is meant by ‘for’ construction of an
immovable property’
78
Thus, it can be observed that the legislative intent is to deny credit
of expenses which are capital in nature than revenue in nature.
However, surprisingly, in the Advance Ruling of Jabalpur
Entertainment Complexes Pvt Ltd49 it was observed that ‘Be that as
it may, the eligibility does not depend on the treatment given to the
expenditure’.
7.5 ITC of GST paid on renting of land
In the Advance Ruling of GGL Hotel [2019-TIOL-07-AAR-GST] it was
held that the prohibition from availing input tax credit, as provided
under section 17(5)(d) of the GST Act, is not limited to the civil
structure being constructed and such supplies essential for
construction of the civil structure including the lease rental paid will
not be available as ITC to the recipient.
7.6 Personal consumption – What it means?
Input tax credit is denied on ‘goods or services or both used for
personal consumption’ [refer Section 17 (5) (g) of CGST Act].
49
79
Though the term ‘personal’ is not defined, it may be stated that the
intention of the Legislators appears to deny input tax credit on
domestic or private expenses.
However, a doubt can arise whether the intention is to deny the credit
of goods or services consumed by a person (i.e. employee) or the
term ‘personal’ is used juxtaposition to ‘official’ purposes.
In the Advance Ruling of Posco India Pune Processing Center (2019-
TIOL-25-AAR-GST) it was held that providing residential
accommodation in a hotel is not in furtherance of the applicant's
business and since the accommodation is being used for personal
comfort, in view of the provisions of s.17(5)(g) of the CGST Act,
applicant is not eligible to claim the ITC for the same.
7.7 ITC on goods lost
Input tax credit is denied on ‘goods lost, stolen, destroyed, written
off or disposed of by way of gift or free samples’ [refer Section 17 (5)
(h) of CGST Act].
Typically, any manufacturing process will entail normal loss and, in
some cases, abnormal loss.
80
As credit is not available on goods lost or destroyed, a question can
arise about eligibility of credit of GST paid on loss / wastage of inputs
during manufacturing process. Whether input tax credit will be
available as goods were ‘intended to be used’.
Will the credit be available if the goods are short received or leaked
after receipt or damaged while storing or became unusable due to
over storage or during trial/testing process.
7.8 ITC on CSR (Corporate Social Responsibility)
In the Advance Ruling of Polycab Wires Pvt Ltd [2019-TIOL-107-AAR-
GST] it was held that the applicant will not be eligible to claim ITC of
items distributed to flood-striken people under CSR basis and without
charging any money, as per Section 17(5)(h) of CGST Act.
7.9 ITC on sales promotion schemes
In the Advance Ruling of Biostadt India Ltd [2019-TIOL-59-AAR-GST]
it was held that the applicant will not be eligible to claim ITC of sales
promotion items distributed as per Section 17(5)(h) of CGST Act.
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7.10 ITC reversal and Interest
In case a taxpayer avails input tax credit but fails to pay to the
supplier within a period of 180 days from the date of issue of invoice
then taxpayer is required to reverse the credit alongwith interest.
Typically, in the case of supply of certain products such as farm
nutrients etc, the credit period extended by manufacturer to the
retailer is more than a year. The reason for the credit period is that
farmers pay to the retailer after a year so the retailer pays to
manufacture after a year.
However, due to aforesaid provision in GST Law, retailers are
expected to reverse the credit though retailer will pay GST on supply
of goods to farmers!
Given this provision, this provision requiring reversal at recipient end
with interest is an compliance and cost for GST payer.
7.11 Is interest payable on availment?
In the case of Commercial Steel Engineering Corporation [Civil Writ
Jurisdiction Case No.2125 of 2019] it was observed that:
82
“The legislative intent present in these provisions is eloquent and I
am in no confusion to hold that be it a charge of wrong availment or
utilization, each is a positive act and it is only when such act is
substantiated that it makes the dealer concerned, liable for recovery
of such amount of tax as availed from the input tax credit or utilized
by him but in each of the two circumstances, the tax available at
the credit of the dealer concerned must have been brought into use
by him thus, reducing the credit balance… In fact the position is
made even more clear by reading the said provision alongside sub-
section (5), (7), (8), (9) to (11).
Had it been a case where the credit shown in electronic ledger, was
availed or utilized for meeting any tax liability for any year, there
would be no error found in the action complained but it would be
stretching the term ‘availment’ beyond prudence to treat the mere
reflection of the transitional credit in the electronic credit ledger as
an act of availment, for drawing a proceeding under section 73(1) of
‘the BGST Act’. The provisions underlying Section 73 is self eloquent
and it is only if such availment is for reducing a tax liability that it
vests jurisdiction in the assessing authority to recover such tax
together with levy of interest and penalty under section 50 but until
such time that the statutory authority is able to demonstrate that
83
any tax was recoverable from the petitioner, a reflection in the
electronic credit ledger cannot be treated as an ‘availment’.”
7.12 Match and mismatch!
Section 16 of CGST Act, inter-alia, states that the buyer can claim
ITC provided the vendor deposits GST as well as files GST return
under section 39 (one can contend that return referred in section 16
is GSTR-3 – which is yet to be made operational yet and not GSTR-
3B!).
Effectively, through this provision, the GST payer is burdened with
the responsibility of ensuring that all their vendors pay GST and file
returns. Casting such onerous condition on GST payer (and for that
matter on every GST payer) leads to un-manageable burden.
At present, as a procedural relief, for FY 1718, the GST payers are
allowed to claim credit upto March 2019 (subject to filing of return by
supplier).
84
8. Ratio analysis
For detailed analysis, the GST Authorities may use various ratios such
as GST Liability payment in Cash to payment through ITC ratio, GST
output liability to ITC ratio, inputs to output ratio etc.
In regard to ratio/ trend analysis, the GST Audit Manual 2019
provides as under:
“5.5.8 Revenue Risk Analysis:
Risk Analysis is a method of identifying potential revenue risk areas
by employing modern techniques. It can be carried out by (i)
reconciling various specific financial data, comparing it with different
business accounts/documents, (ii) deriving certain data and
comparing with the actual figures of the financial documents & (iii)
comparing the key data figures of the unit with the average of all
industry figure of similar kind (if available) or past figures of the same
registered person. The result of Revenue Risk Analysis should be filled
in the relevant column of working papers.
5.5.9 Trend Analysis:
Trend analysis is a type of computational support needed for the
analysis preparatory to planning, by analysing historical data and
85
working out future projections. Historical data is analysed to discover
patterns or relations that would be useful in projecting the future
production, clearances and values etc.
5.5.10 For audit purposes, either absolute values or certain ratios are
studied over a period of time to see the trend and the extent of
deviation from the average values during any particular period. The
analysis of trends as mentioned in the relevant table of working
papers may be carried out. (refer III (9) of Annexure –GSTAM-VIII
Part A & III C of Part B of GSTAM-VIII).
5.5.11 For audit of Traders, a check list is provided in Annexure XIII.
For audit of Composite Dealers, a check list is provided in Annexure
XIV.”
For more analysis of Annual / Director Report and other key points,
reference can be had to Annexure GSTAM –IV of GST Audit Manual
2019.
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9. Time of Supply
The liability to pay CGST / SGST arises at the time of supply as
determined for goods and services. In this regard, separate provisions
prescribe what is time of supply for goods and services.
The provisions prescribe payment of GST on supply of goods or
services at the earliest of date of issuance of invoice or prescribed
last day by which invoice is required to be issued or date of receipt of
payment.
Given that there could be multiple parameters in determining ‘time’
of supply, maintaining reconciliation between revenue as per
financials and as per GST is a major challenge to meet for businesses.
By way of Notification No. 66/2017-CT, all supplier of goods (and not
services) can pay GST on raising of invoices50. Hence, from 15th
November 2017, GST is not payable at the time of receipt of advance
50
Earlier, relief was only provided to small suppliers vide Notification No.
40/2017-CT.
87
on supply of goods. However, in case of advance received for supply
of services, GST is payable.
88
10. Anti-profiteering provisions
10.1 Anti-Profiteering provisions
Anti-profiteering provision was introduced with the intent that it
should benefit the consumer, however, the question is whether the
intent is materialised? Lets decode.
Section 171 of CGST Act mandates manufacturers and others in the
supply chain to pass on the benefits, due to rate reduction and more
credits being available in GST regime, to the consumer by way of
commensurate reduction in prices. It is pertinent to note that Section
171 is just 10 lines long!
Clause (1) of Section 171 is most critical clause as it lays down the
basis for anti-profiteering. However, this clause just has 34 words
and most of the critical words used there is un-defined such as:
a. ‘Reduction’ in ‘rate’ of ‘tax’
b. ‘The benefit’ of ‘input tax credit’
c. ‘Commensurate’ ‘reduction’ in ‘prices’
‘Reduction’ in ‘rate’ of ‘tax’
89
Herein the meaning of the term ‘reduction in tax’ is not very clear.
For example, what if rate of tax is reduced but input tax credit is
denied? Whether in such cases only net benefit, if any to be passed
on? Apparently, based on the NAA Orders it appears that the
reference here is to net benefit51.
Similarly, does the term ‘tax’ here means GST or even pre-GST taxes
(such as Excise, VAT/CST and Service Tax, Entertainment Tax etc? It
may be noted that section 9 of CGST Act refer ‘tax’ as Central GST
only.
‘The benefit’ of ‘input tax credit’
While discussing rates, Section 171 mentions 'reduction' but when it
comes to ITC, it only mentions 'the benefit' rather than qualifying it
by:
- Increased benefit
- Incremental benefit
- Additional benefit
- New benefit etc
51
Refer Jubilant Food Work Ltd 2019-TIOL-04-NAA-GST and KRBM Ltd [2018 (13)
GSTL 412 (NAPA)]
90
When in preceding line of the section there is mention of 'any
reduction', then conspicuous absence of antonym (such as
increased, incremental etc) in the subsequent part of the section 171,
could dangerously lead to interpretation that the Legislators wanted
that 'the benefit’ of ITC (i.e. entire ITC and not incremental ITC)
should be passed on to recipient.
However, by referring to few of the NAPA orders one can say that
only incremental credit is to be passed on52. Also, one can contend
that the intention of Anti-profiteering is only to ensure that prices
should not be increased in cases where there is additional credit
available to the supplier (i.e. based on the intent of the law).
‘Commensurate’ ‘reduction’ in ‘prices’
Again the terms ‘commensurate’ ‘reduction’ and ‘price’ is un-defined.
Thus, question that often debated is whether, instead of reducing the
price, the GST payer can increase the quantity of goods? However,
the approach of giving more quantity of goods (instead of reducing
prices) does not seem to have acceptance of NAA53.
52
Refer Pyramid Infratech [2019-TIOL-34-NAA-GST], S3 Infra Reality [2019-
TIOL-12-NAA-GST]
53
https://economictimes.indiatimes.com/
91
10.2 Anti-Profiteering in news
In the last more than two years, anti-profiteering provisions have
hogged the limelight, though not for compliance but non-compliance
by the industry players. Few of the prominent news54 are
reproduced below:
Industry Anti-profiteering amount Status
INR 383 crore (HUL) Writ in HC55
INR 250 crore (P&G) -
FMCG INR 150 crore (Patanjali) -
INR 100 crore (Nestle) -
Restaurant INR 41 crore (Jubilant) Writ in HC56
INR 8 crore (Macdonald) -
Real Estate INR 8 crore (Pyramid) Writ in HC57
10.3 Analysis of key Anti-Profiteering Orders
Few of the critical and key observations of the NAPA are provided
below:
54
https://economictimes.indiatimes.com/industry/cons-products/fmcg/pg-india-
charged-with-rs-250-crore-of-gst-
profiteering/articleshow/69017307.cms?from=mdr
55
https://economictimes.indiatimes.com/
56
Jubilant Foodworks Ltd [2019-TIOL-1017-HC-DEL-GST]
57
Business-standard.com
92
10.3.1 Anti-profiteering is concession given by Government
It has been consistently held by NAA that the supplier is not being
asked to extend this benefit out of his own account and he is only
liable to pass on the benefit of ITC to which he has become entitled
and benefit is a concession given by the Government from its own tax
revenue to reduce the prices being charged from the customers 58.
Even Mr B. N Sharma (Chairman, National Anti-Profiteering Authority
National Anti-Profiteering) stated that ‘By reduction of rates,
Government sacrifices revenue but commensurate reduction
should be passed on to the end consumers.’59
10.3.2 Anti-profiteering benefit to be passed to each

customer
In the case of Jubilant Food Work Ltd60 the NAA observed that the
tax reduction benefit cannot be denied to a customer on the
ground that he, as an entity, has passed on the benefits to the entire
group of customers and the benefit cannot be denied to a customer
58
Pyramid Infratech Pvt. Ltd. 2018 (19) GSTL 65 (NAPA)
59
Refer NAA is not price regulator
60
2019-TIOL-04-NAA-GST
93
claiming the same has been passed on to another customer on
another product.
In Kunj Lub Marketing Pvt. Ltd61 it was that the supplier has no liberty
to arbitrarily decide in respect of which products he would pass on
the benefit and in respect of which products he would not pass such
benefit and as per the provisions of Section 171 of the Act the benefit
has to be passed on to each recipient and the same cannot be
selectively granted or denied.
10.3.3 Computation at product/SKU level and not entity level
In the case of Jubilant Food Work Ltd62 the NAA observed that the
denial of the benefit to the customer on the ground that the
respondent had passed it on a particular product in place of another
product which he may not buy, would be hit by Article 14 of the
Constitution of India. Each and every customer is entitled to receive
the tax reduction benefit without any discrimination. Therefore, the
provisions of anti-profiteering have to be applied at each and every
product and the respondent has no unfettered discretion to allow
them selectively or as per his own whims and fancies. The contention
61
2018 (19) GSTL 84 (NAPA)
62
94
of the respondent that the profiteered amount should be calculated
by considering him as an entity and not on each product/SKU,
was also found to be not acceptable in view of the provisions of
Section 171 of CGST Act, 2017 which requires that the benefit of tax
reduction should be passed on each and every recipient on every
supply.
10.3.4 Computation to be done based on facts of each case
In the case of Jubilant Food Work Ltd63 the NAA observed that no
fixed method can be prescribed as various parameters are required
to be taken into account while making such computation and the
same varies from industry to industry and from one product to
another.
Similarly, NAA in the case of Hardcastle Restaurants Pvt. Ltd64
observed that:
“It would also be appropriate to mention here that the computation
of the profiteered amount under Section 171 has to be done on the
basis of the facts of each case and hence no general methodology and
procedure can be prescribed for the same. Moreover, the word used
63
64
2018 (19) GSTL 511 (NAPA)
95
in Rule 126 is to ‘determine’ and not to ‘prescribe’ the methodology
and procedure. The basic aim is to ensure that both the benefits of
reduction in the rate of tax and the ITC are passed on to the
consumers by commensurate reduction in the prices.”
In the aforesaid case, NAA also observed “The law settled in the cases
of CIT v. B.C. Srinivasa Shetty - (1981) 2 SCC 460 and
Commissioner of Central Excise v. Larsen & Toubro Ltd. - (2016) 1
SCC 170 is not applicable as specific and adequate anti-
profiteering machinery has been provided under the above Act
and the Rules to enforce the above provisions. The averment of the
Respondent regarding excessive delegation to the Authority for
framing methodology is also not tenable as the delegation has been
done in exercise of the powers conferred under Section 164 of the Act
on the recommendation of the GST Council which is a body
established under the Constitution. It is humbly submitted that the
judgment passed in the case of Indian Aluminium Co. Ltd. and Anr.
v. The State of Bihar and Ors. - 1994 (1) PLJR is not being followed
as the delegation has been made in accordance with the provisions of
the CGST Act, 2017.”
96
10.3.5 If rate reduced but ITC denied then net-effect
In the case of Jubilant Food Work Ltd65 the NAA observed that it
was the duty of the Respondent to ascertain on which of his products
the rate of tax had been reduced and after taking into account the
impact of denial of ITC to what extent the prices should have been
increased
10.3.6 If rate increased with ITC then net benefit be

considered
In KRBM Ltd66 it was observed that the “ITC available to him as a
percentage of the total value of taxable supplies was between 2.69%
to 3% whereas the GST on the outward supply of his product was 5%
which was not sufficient to discharge his tax liability. Moreover in this
case the rate of tax has been increased from 0% to 5% instead of
reduction in the same. … It is further revealed from the record that
the Respondent had increased the MRP of his product from Rs. 540/-
65
66
2018 (13) GSTL 412 (NAPA). This case was distinguished in Hardcastle
Restaurants [2018 (19) GSTL 511] wherein it was observed that ‘The order
passed in the Case of Kumar Gandharv v. KRBL Ltd. on 4-5-2018 [2018 (13)
GSTL 412 (NAPA)] by this Authority pertains to Basmati in the case of which
the GST was increased from 0% to 5% and hence there has been no reduction
in the rate of tax and therefore, the provisions of Section 171 were not
attracted as is the case in respect of the Respondent’.
97
to Rs. 585/- which constituted increase of 8.33% keeping in view the
increase in the purchase price. Therefore, due to the imposition of the
GST on the above product as well as the increase in the purchase
price of the paddy there does not appear to be denial of benefit of ITC
as has been alleged by the applicant as there has been no net
benefit of ITC available to the respondent which could be passed on
to the consumers”
10.3.7 If base price not increased then no anti-profiteering
In case of reduction in GST rates, it has been held by NAA that non
increase of the base price (on which GST is levied) could be an
indication of compliance with anti-profiteering provisions67. Similarly,
has been held that if the reduction in the base prices of the product
is more than the additional ITC eligible thereon, the allegation of
profiteering is said to be not established68.
10.3.8 Comparison of ITC ratio
From perusal of the NAA orders it appears that in most of the cases
the pre-GST ITC ratio to Turnover is compared with post-GST ITC
67
Fabindia Overseas Pvt. Ltd. 2018 (19) GSTL 533 (NAPA)
68
Fabindia Overseas Pvt. Ltd. 2018 (19) GSTL 533 (NAPA)
98
ratio to Turnover to arrive at the additional credit (refer Pyramid
Infratech69, KBRL Ltd70, S3 Infra Reality71 etc).
10.3.9 Benefit to be passed even on imported goods
In JP And Sons72 the NAA observed that the price offered prior to
implementation of GST has to be reduced by the amount of CVD paid
in order to neutralise the impact of ITC available to the importer and
thus, importer ought to have reduced the base price to the extent of
CVD that was no longer required to be paid as well as to the extent
of IGST whose credit was now available to him. Similarly, has been
held in Theco India Pvt Ltd73.
10.3.10 Can subsequent credit note help in negating

allegations
In the case of Sharma Trading Company74 the NAA observed that “As
soon as the Respondent had issued the tax invoice on 15-11-2017
69
70
2018 (13) GSTL 412 (NAPA)
71
72
73
74
2018 (19) GSTL 497 (NAPA)
99
after increasing the base price he had violated the provisions of
Section 171.” and thus, issuance of credit note may not help.
10.3.11 Earlier price reduction cannot help
In the case of Excel Rasayan Pvt Ltd75 the NAA observed that plea
that base prices were drastically lowered when GST came into effect
cannot absolve supplier from not passing on the benefit.
Similarly, in the case of TTK Prestige Ltd76 the NAA observed that
submission of the respondent that the price of the product was not
increased at the time of introduction of GST when the rate of tax was
increased to 28% (from earlier VAT liability of 14.5% plus CVD @3%)
and hence the question of reducing the prices when the rate of tax
was decreased from 28% to 18% does not arise, is legally
unsustainable since section 171 clearly specifies that the benefit of
reduction in tax has to be necessarily passed on to the recipient by
commensurately reducing the prices.
75
76
100
10.3.12 Distributor to pass on the benefit
In the case of Satya Enterprises77 the NAA observed that the best
course for the supplier/ distributor would have been to pass on the
benefit of reduced rate of GST to his customers and claim
compensation from the manufacturer and respondent cannot be
absolved of his legal obligation on the plea that he had no control on
the fixing of the MRPs.
In Cloudtail Pvt Ltd78 it was observed that the GST envisages every
registered supplier is bound by section 171 of the Act to pass on the
benefit of reduction in tax and supplier and passing of the benefit by
the distributor or retailer does not rest on the fact that the
manufacturer or his supplier should have first passed on the same
benefit to him.
10.3.13 Even TRAN-2 credit to be passed on
In Hindustan Unilever Limited79 the issue before NAA was whether the
amount of transitional credit of 76.06 crores [claimed by the
respondent through TRAN-2 on inputs held in stock as on 30-6-2017],
77
78
79
2019 (21) GSTL J74 (NAPA)
101
would be available as deduction from the amount of profiteering? In
this regard, the NAA held that the legal definition of ITC is
inclusive of TRAN-2 credit as per Section 140(3) of CGST Act, 2017
read with Rules 117(4)(a)(i) and 117(4)(a)(ii)of CGST Rules, 2017
which make it very clear that the transitional credit availed through
TRAN-2 statements was nothing but ITC as defined under Section
2(63) read with Section 2(62) of the said Act for all intents and
purposes of the above Act.
10.3.14 Methodology is mathematical calculation
In the case of Sharma Trading Company80 the NAA held that “The
argument advanced by the Respondent appears to be frivolous as it
involves only mathematical calculation of the amount by which the
tax had been reduced…”.
10.3.15 Project completed prior to GST are outside
The NAA in the case of Bestech India Ltd81 observed that since the
project has been completed before coming into force of GST w.e.f
01.07.2017, anti-profiteering provisions contained in s.171(1) of the
Act are not attracted.
80
2018 (19) GSTL 497 (NAPA)
81
102
10.3.16 New project (launched after 1st July 2017) are

outside
The NAA in the case of Conscient Infrastructure82 observed that
“10. … The DGAP's Report also stated that the Respondent must
have taken into consideration the benefit of ITC available to him
post implementation of GST, while fixing the base price. …
15. From the above payment schedule it is clear that the project was
launched only after the implementation of GST. As there was no
comparative pre GST ITC that was accumulated or utilized by the
Respondent the question of profiteering does not arise.”
10.3.17 Reduction in discount is not profiteering
The NAA in the case of Asian Paints Ltd83 observed that “The increase
in the base price is on account of the reduction in the discount. It is
also revealed that the reduction in discount doesn’t amount to
profiteering as the same was offered from his profit margin by the
Respondent and doesn’t not form part of the base price and
therefore, the Respondent cannot be held guilty under Section 171 of
the Act”
82
83
2019 (20) GSTL 391 (NAPA)
103
10.3.18 APB to be passed on to landowner as well
The NAA in the case of Sattva Developers Pvt Ltd84 observed that the
Developer has to pass on the benefit of profiteered amount to the
land owner who will in turn pass on the benefit to his buyers.
10.3.19 Repay amount of anti-profiteering plus the GST

thereon
In cases where the anti-profiteering by the supplier was established,
the NAA has consistently asked the supplier to repay the ‘base
profiteered’ amount plus the ‘applicable GST’ collected thereon by
supplier85.
10.3.20 Deposit to CWF (Centre and State)
In case amount is to be credit to consumer welfare fund then NAA
has asked the suppliers to deposit the anti-profiteering amounts
alongwith interest within 3 months. This amount is to be deposited
in the ratio of 50%:50% to Central and State Consumer Funds.
84
85
Salarpuria Real Estate 2019-TIOL-35-NAA-GST
104
11. Place of supply and its challenges
11.1 Challenges in determining Place of Supply
GST Act casts the onus of determining whether a transaction is an
‘intra-State’ or ‘inter-State’ on the assessee. Every GST payer needs
to determine whether a transaction is ‘intra-State’ or ‘inter-State’ to
enable him/her decide whether to pay Central GST (CGST) plus State
GST (SGST) or Integrated GST (IGST).
In this regard, GST payer is required to refer to IGST Act (particularly
section 7 to 13 of IGST Act).
Section 7 and 8 of IGST Act provides for separate provision for goods
and services and specific provisions are provided for import of goods,
import of services, supplies to / by SEZ developer or unit.
As per section 7 and 8, there are two key factors which help the GST
payer determine the transaction as ‘intra-State’ or ‘inter-State’:
a. Location of supplier and
b. Place of supply
105
Challenges in determining location of supplier
As far as ‘location of supplier’ is concerned, surprisingly, its not
defined in CGST Act or IGST Act. Rather, CGST Act or IGST Act defines
‘location of supplier of service’ [section 2 (71) of CGST Act] and
‘location of recipient of service’ [section 2 (70) of CGST Act] and
‘supplier’ [section 2 (105) of CGST Act].
In case of definition of ‘location of supplier of service’ challenges could
arise as the clause leads to multiple interpretation. For eg. say ABC,
a consultancy firm has offices in Mumbai and Goa. ABC, Mumbai
enters into agreement to provide services to its client say PQR in
Ahmedabad. However, ABC, Goa provides support in execution of the
assignment (say either by way of co-ordination or executing partly or
executing fully). Now, herein what is the ‘location of the supplier’?
Further, there is no specific definition there is open-endedness in
understanding the meaning of the term ‘location’ of ‘supplier of
goods’.
Challenges in determining ‘place of supply’
The term ‘place of supply’ is defined at section 2 (86) of CGST Act
to mean place of supply as defined in Chapter V of IGST Act. Chapter
106
V of IGST Act covers section 10 to 14 of IGST Act and provides of
place of supply provisions for different scenarios of supply of goods
and services. To determine place of supply, Section 10 of IGST Act
provides for 5 scenarios, section 11 provides for 1 scenario, section
12 provides for 14 scenarios and section 13 provides for 12 scenarios.
Thus, effectively in the three section there are 32 provisions/ sub-
clauses to determine ‘place of supply’ (based on nature of
transaction).
The aforesaid multiple scenarios considerably increase the possibility
of wrong determination of the case as to whether a transaction is an
‘intra-State’ or ‘inter-State’.
Few issues in determining place of supply
One of the question often debated is in the case of 'intermediary'
service to non-resident customer, whether to pay CGST and SGST or
IGST. Similarly, another issue is whether to pay CGST and SGST or
IGST in case of supply of accommodation services to SEZ unit.
Challenges for GST payer in case of wrong determination
As per section 77 of GST Act if an assessee wrongly determines an
intra-State transaction as inter-State transaction and in-turn pays
107
IGST, then taxpayer will have to pay the correct applicable tax
i.e. CGST plus SGST again and claim refund of wrongly paid
CGST plus SGST.
Can GST payer request for advance ruling for ‘place of supply’?
Advance Ruling can be sought on the on the specific issues covered
under section 97 (2) of CGST Act, However, determination of ‘place
of supply’ is not covered under the ambit of Advance Ruling.
Recently, in the Advance Ruling of Utility Powertech Ltd (2018-TIOL-
124-AAR-GST) the Advance Ruling Authority (ARA) stated that
advance ruling can’t be sought on the question of ‘place of supply’ as
its specifically kept out of the purview of AAR. Similarly, was held in
the case of Fichtner Consulting Engineers India Pvt Ltd (2018-TIOL-
129-AAR-GST).
It may be noted that from GST payer perspective, the effective GST
amount will not change and thus, the situation is GST neutral for
him (whether he deposits CGST and SGST or IGST).
In this regard, in the FAQ 86 of Banking, Insurer and Stock Broker
Sector it is stated “Therefore, in case a registered person has paid
108
Integrated tax instead of Central tax and State tax or Union territory
tax, then he shall be granted refund of the amount paid as Integrated
tax and he will have to pay Central tax and State tax or Union territory
tax. Further, no interest will be payable on the Central tax and State
tax or Union territory tax so paid. Further, in case a registered person
has paid Central tax and State tax or Union territory tax instead of
Integrated tax, then he shall be granted refund of the amount paid
as Central tax and State tax or Union territory tax and he will have to
pay Integrated tax. However, no interest shall be payable on the
Integrated tax amount so paid.”
It may be noted that Rule 92 of the CGST Rules speaks of ‘adjustment’
of outstanding liability against the refund due. Given this, the High
Court in the case of Saji S [2018-TIOL-162-HC-KERALA-GST] held
that the officials should allow the petitioner's request and get the
amount transferred from the head 'SGST' to 'IGST'.
Given this, while the intentions of these provisions are to ensure
transfer of funds to appropriate consuming States, GST payer
should not be requested to apply for refund but the amount paid
wrongly should rather adjusted.
109
11.2 Export of services between holding and subsidiary
Certain provisions of GST Act have been at the forefront of service
exporter’s worry. One of such issue is whether services provided by
say a subsidiary in India to its parent entity located outside India will
qualify as ‘export of services’.
In this regard, recently, the Advance Ruling Authority, in the case of
Segoma Imaging Technologies India Pvt. Ltd. [2019 (20) G.S.T.L.
611 (A.A.R. - GST), observed that “Applicant’s submission in this
regard is that they are established under the Indian Companies Act
having separate PAN number and therefore it is not a branch, agency
or representational office of Segoma Israel. However, the statutory
compliances made by an applicant in a country, in this case India,
would in no way alter the status or relationship between parties as
discussed above”.
This ruling has provided another rational for denial of refund to the
eligible exporter of services. It is expected that this issue and the
issue of ‘intermediary’ could be clarified soon through Circular (refer
Press Release of 37th GST Council Meeting).
110
12. DG Audit Letter
DIRECTORATE GENERAL OF AUDIT
INDIRECT TAXES
C.R. BUILDING, I.P. ESTATE
NEW DELHI -110109
Ph. 011-23370075
Email: dg.audit-cbec@nic.in
F. No. 381/49/2019
Dated: 25/06/2019
To
The Principal Chief Commissioners/Chief Commissioners of GST and
Central Excise (All).
Madam/Sir,
Subject: Audit Plan for the year 2019 – 20 – reg
***********
Kind attention is invited to this Directorate General’s letter dated
29.05.2019.
2. In continuation to the Audit Plan 2019 -20, the strategy pertaining
GST audits is as under:-
3. The audit of GST Taxpayers were to commence from 1st July 2019,
in respect of those taxpayers who have filed their Annual Return in
GSTR Form 9 / 9A. However, in the recent GST Council Meeting held
111
on 21/06/2019, the last date of filing of the Annual Return has been
extended by two months, i.e. upto 31st August 2019.
4. This Directorate General in association with DGARM has developed
a Risk Assessment programme, wherein list of taxpayers with risk
scores will be generated and made available to each Audit
Commissionerate through DDM Portal. The said list of taxpayers in
three categories Large, Medium and Small alongwith their Risk Scores
has been made available to the field formations by DGARM. The
categorization of taxpayers is based on the annual turnover. By and
large the categorization is uniform across the Audit Commissionerates
subject to the availability of more risky taxpayers in a particular
category which is as under,-
ii) Medium – taxpayers with turnover between Rs.10/7.5 to 40/30
crores.
iii) Small – taxpayers with turnover below Rs. 7.5/10 crores.
The turnover includes total taxable, exempt and zero rated clearances
of goods and services but excludes non-GST supplies during a
financial year. The list of taxpayers with category of risk flags like
Flag A, B, C and so on has been shared by DGARM showing total
turnover based on the GSTR 3B returns filed for 9 months period
from July 2017 to March 2018 and the above categorisation has been
calculated on the basis of turnover for 12 GSTR 3B returns by
112
extrapolating the 9 months’ turnover to that of 12 months. The said
list contains only those taxpayers who are under Centre
administration and have filed more than 3 GSTR 3B returns in the
said 9 months period. However, for some Audit Commissionerate the
categories have been suitably tweaked to ensure adequate
representation of risky taxpayers in each category. This tweaking was
necessary since in the jurisdiction of some of the Audit
Commissionerates sufficient number of taxpayers were not available
as per risk profile.
5. The list that has been shared includes Risk Flag indicators. A
separate document in PDF format shows list of Risk Flags and the
action points for decision support to facilitate the auditors in
identifying the areas to focus during audit. Further, the Audit
Commissioners are required to check all other aspects as well which
are found necessary at their local level. The decision support as
provided with the list for each registered Taxpayer is based on the
risk analysis undertaken on defined parameters the data for which
was available. However, the audit teams have to be advised by the
concerned Audit Commissionerate to verify all aspects to ensure that
all issues are duly examined having revenue implication.
6. DGARM has also prepared a feedback mechanism to evaluate the
efficacy of risk parameters so that over the years the risk parameters
113
will be suitably modified. Feedback on the local risk parameters used
for selection of taxpayers needs to be necessarily shared with
Directorate General of Audit.
7. This Directorate General has worked out the approximate number
of audits in each category that can be conducted by each Audit
Commissionerates. This calculation is based on the number of audit
parties available and the working strength of officers as provided by
the Audit Commissionerates and it contains following parameters:-
(i) Audit Groups for large units, medium units and small units should
be in such numbers that the following distribution of manpower
deployment in audit groups is achieved.
a. 40% of manpower for large units
b. 30% of manpower for medium units
c. 20% of manpower for small units
d. 10% of manpower for planning, coordination & follow up and
administration etc.
(ii) The calculation is also based on the following number of days
required for conduct of audit
a. For large units – 7 working days
b. For Medium units – 5 working days
c. For small units – 3 working days.
114
Details of jurisdiction – wise capacity are as mentioned in
enclosed Annexure A.
8. It has been decided that the list of taxpayers provided by DGARM
to each Audit Commissionerate contains about 80% of the taxpayers
out of which 7/8th (i.e. 70 % of the total available taxpayers)
taxpayers have to be audited in each category in the order of
sequence. The extra 10% has been given so that if audit of any
taxpayer cannot be undertaken due to various genuine reasons then
the taxpayer from this additional number can be selected. Further 10
% of the total taxpayers have to be selected randomly by the
DGARM’s system and given to the Audit Commissionerates. The
above list of taxpayers with risk scores under different categories is
divided as per the CGST Commissionerates in the jurisdiction of each
Audit Commissionerate. Care has been taken to select taxpayer from
each CGST Commissionerate so as to ensure equitable selection of
taxpayers across the CGST Commissionerates. The remaining 20% of
the taxpayers to be audited have to be selected by the Audit
Commissionerates based on local risk factors, after obtaining
approval from the jurisdictional Chief Commissioner. The indicative
list of Local Risk Parameters is attached as Annexure B. Any other
local risk parameter used for selection should be communicated to
the zonal units of this Directorate General. The taxpayers that are left
115
out of the 80% selected by DGARM, mentioned above can be used for
selection by the Audit Commissionerates under the category of local
list factors, if found necessary. The list of taxpayers selected by using
local risk parameters alongwith details of local risk parameters used
for such selection should be sent to the respective zonal units of this
Directorate General and to DGARM. DGARM has shared the said lists
on DDM portal under the head Report 100 A to 100 D. The Audit
Commissioners should be informed that the list of taxpayers
alongwith risk scores as provided by DGARM contains sensitive
information pertaining to a taxpayer and as far as possible the said
list should be kept confidential and should be shared with the auditors
as and when the audit is scheduled for a particular taxpayer.
9. The list of all the remaining taxpayers along with their risk
categories will be uploaded on ANTARANG, Zone-wise. The said list
can be accessed by the Nodal Officer of each Chief Commissionerate
Zone and the same should be forwarded to the respective Audit
Commissionerates in the zone.
10. Legal authority to conduct audit in GST:
(i) Sec. 65(1) of CGST Act, 2017 provides that the Commissioner or
any officer authorized by him, by way of a general or a specific order,
may undertake audit of any registered person for such period, at such
frequency and in such manner as may be prescribed.
116
(ii) Rule 101 of The Central Goods and Service Tax Rules,
2017 provides.
I. The period of audit to be conducted under sub-section (1) of section
65 shall be a financial year or part there of or multiples thereof.
II. where it is decided to undertake the audit of a registered person
in accordance with the provisions of section 65, the proper officer
shall issue a notice in FORM GST ADT-01 in accordance with the
provisions of sub-Section(3) of the said Section.
III. The proper officer authorized to conduct audit of the records and
the books of account of the registered person shall, with the
assistance of the team of officers and officials accompanying him,
verify the documents on the basis of which the books of account are
maintained and the returns and statements furnished under the
provisions of the Act and the rules made thereunder, the correctness
of the turnover, exemptions and deductions claimed, the rate of tax
applied in respect of the supply of goods or services or both, the input
tax credit availed and utilized, refund claimed, and other relevant
issues and record the observations in his audit notes.
11. It is also advised that initially only those taxpayers should be
selected for audit who have filed their Annual Return in GSTR Form
9/9A. Therefore, the selection of taxpayers as mentioned in para 8
above should be carried out only of those taxpayers who have filed
117
their Annual Return. If sufficient number of taxpayers who have
filed annual return are not available then Audit Commissionerates
should continue conducting legacy audits under Central Excise
and Service Tax, upto 31st August 2019, in case assessees are
available for such audits and also efforts should be made to liquidate
the pendency related to audits of erstwhile Central Excise and
Service Tax including action to close the pending audit paras.
12. In view of lot of emphasis on trade facilitation, intelligent
enforcement and providing non-intrusive environment to taxpayers,
it has been decided to move from the present system of premises
based audit to desk-based (office) audit in case of small category of
taxpayers. Such desk based audit may be carried out on the basis of
information / data made available to them. However in case of non-
cooperation by the taxpayers, premises based audit may be carried
out after approval by the Commissioner. Further in cases where it is
felt at any stage of audit that there are inherent weaknesses in the
internal control system of the taxpayers, the officers may switch to
premises based audit with the approval of the Commissioner.
However, in respect of Large and Medium Category of taxpayers, the
premises based audit has to be conducted.
13. The mandatory intimation in the form of notice in Form GST ADT
01 and ADT 02 to convey the findings of audit may be sent manually,
118
till the Audit Module in CBIC – GST System becomes operational. Also
it is prescribed in Rule 101(4) of the CGST Rules 2017, that the
proper officer may inform the registered person of the discrepancies
noticed, if any, as observed in the audit and the said person may file
his reply and the proper officer shall finalise the findings of the audit
after due consideration of the reply furnished. These guidelines
should be followed. The officers should take care to complete the
audit within a period of three months of its commencement as
provided in Section 65 (4) of the CGST Act, 2017.
14. Further, it is mentioned that while conducting audit under GST if
any non-compliance of law is observed which has repercussion in
erstwhile Central Excise or Service Tax period as well then the
Commissioners of Audit may be directed to take suitable actions
under the respective law for the legally prescribed time period.
15. The GST Audit Manual 2019, prepared by this Directorate General
will be shared separately on ANTARANG. However, it is mentioned
that the audit process in GST is similar to the audit process in the
erstwhile Central Excise and Service Tax Audit Manual, 2015.
16. The Audit Commissionerates should also be advised that the
audits should be conducted in such a manner so as to cause least
inconvenience to the taxpayer. There should not be any disruption in
the conduct of business by the taxpayers. In view of the fact that
119
some of the taxpayers may be new to the concept of audit by this
department for the reason that they were earlier registered with State
authorities, special care should be taken of such taxpayers and to
minimize the litigations in case of any bonafide mistake noticed during
audit. The officers should also be sensitised to educate the taxpayers
with respect to the provisions under GST, should such requests arise
during audit and encourage voluntary compliance.
Yours faithfully
(Archana Pandey Tiwari)
Pr. Director General
120
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GST Audit by Authorities - Legal Manual For GST Authorities - 1 November 2019 - CA Pritam Mahure and Associates

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GST Audit by Authorities -

Legal Manual for GST

1 November 2019 1st Edition GST

GST Audit by Authorities - Legal Manual for Authorities!

GST Audit - Legal Manual for Authorities! ..................................... 2

About the Author .......................................................................... 6

1. GST Audits – Policy................................................................... 7

1.1 Which provisions enable Authorities to carry out Audit? ...................7

1.2 What DG GST Audit’s Letter states?...............................................8

1.3 Is GST Audit Manual available? ................................................... 10

1.7 Is erstwhile Service Tax Audit ultra-virus the Act? ......................... 13

2.1 Outline of Audit process ............................................................. 15

2.2 How much is expected duration of Audit? ..................................... 15

2.3 Is Auditor expected to review legal position adopted by taxpayers? . 16

2.5 Step plan for audit .................................................................... 19

2.5.1 Profiling of taxpayer .......................................................... 19

2.5.2 Business specific legal provisions ........................................ 20

2.5.3 Review of compliances ....................................................... 21

3. Review of Financial Statements .............................................. 22

3.1 Directors report ................................................................... 22

4. Review of Income ................................................................... 25

4.1 Income vis-à-vis GST ................................................................ 25

4.2 Supply ‘for’ consideration ........................................................... 27

4.3 Whether compensation for illegal occupation is liable to GST? ......... 29

4.4 Reimbursements ....................................................................... 30

4.5 Damages/ penalty ..................................................................... 31

4.6 Income not liable to GST ............................................................ 33

4.7 Employee recoveries ................................................................. 34

4.8 Grants vs consideration ............................................................. 35

4.9 Supply between ‘distinct persons’ ................................................ 36

4.9.1 Supply of ‘goods’ between ‘distinct persons’ ......................... 37

4.9.2 Supply of ‘services’ between ‘distinct persons’ ...................... 38

4.9.3 Is GST leviable on Liaison office services? ............................ 44

4.10 RCM ...................................................................................... 45

4.11 Delayed filing of 3B – Interest on gross or net? ........................... 46

5.1 Composite Supply or Mixed supply? ............................................. 51

5.2 Circulars on composite or mixed supply ....................................... 55

5.3 In case of Works contract can the value be split? .......................... 57

5.4 Implication of classification on rate ............................................. 58

5.5 Implication of Classification on Place of Supply ............................. 60

6.1 Incidental recoveries ................................................................. 62

6.1 Free of cost supplies .................................................................. 63

6.2 Discounts ................................................................................. 64

6.3 Supply of moulds/ dies .............................................................. 68

7. Input Tax Credit (ITC) ............................................................ 71

7.1 Two key sections ...................................................................... 72

7.2 ITC – In the course or furtherance of his business ......................... 73

7.3 Receipt of goods/services mandatory? ......................................... 77

7.4 What is meant by ITC of GST on ‘works contract’ is available? ........ 77

7.5 ITC of GST paid on renting of land .............................................. 79

7.6 Personal consumption – What it means? ...................................... 79

7.7 ITC on goods lost ...................................................................... 80

7.8 ITC on CSR (Corporate Social Responsibility) ................................ 81

7.9 ITC on sales promotion schemes ................................................. 81

7.10 ITC reversal and Interest ......................................................... 82

7.11 Is interest payable on availment? .............................................. 82

7.12 Match and mismatch! .............................................................. 84

8. Ratio analysis ......................................................................... 85

9. Time of Supply ........................................................................ 87

10. Anti-profiteering provisions .................................................. 89

10.1 Anti-Profiteering provisions ....................................................... 89

10.2 Anti-Profiteering in news .......................................................... 92

10.3 Analysis of key Anti-Profiteering Orders ..................................... 92