GST Daily
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Today’s newsletter analytically summarizes the top GST stories reported at?taxmann.com.
The petitioner was engaged in trading of two-wheeler bikes and its parts which were sold to various customers. The department issued a show cause notice (SCN) along with FORM GST DRC-01 stating that the petitioner had violated provisions. Thereafter, the summary of the order was issued within 5 days without giving any opportunity of hearing. The petitioner filed a writ petition and contended that SCN issued was in a format without striking out irrelevant particulars and the order was passed without hearing opportunity.
The Honorable High Court observed that the summary of SCN should be issued "along with" SCN that provides for contraventions. The word "along with" would indicate that SCN, as well as summary of SCN both, have to be issued. However, in the instant case, the SCN was vague in nature since it didn’t spell out the contraventions against the petitioner.
Further, the Court noted that as SCN issued was vague, the foundation of proceedings would suffer from material irregularity. Moreover, a summary of an order issued within 5 days of issuing a summary of SCN was also in violation of the principles of natural justice. Thus, it was held that the summary of SCN and the summary of the order issued were liable to be set aside and the matter was remanded for fresh consideration.
1.?Rule 32(5) of the CGST Rules, 2017 provides for the valuation of taxable supply by a person dealing in buying and selling of?second-hand goods.
The dictionary meaning of "Second-hand goods" is
i.?Second hand things are?not new and have been owned by someone else?(Collins)
ii.?Having had a previous owner; not new (English Oxford)
Extract of Rule 32 (5) states that-
(1) Notwithstanding anything contained in the provisions of this Chapter, the value in respect of supplies specified below shall, at the option of the supplier, be determined in the manner hereinafter.
(2) ……………
(3) ……………
(4) ……………
(5) Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e.?used goods as such or after such minor processing which does not change the nature of the goods?and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, is shall be ignored.
Provided that the purchase value of goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by five percentage points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession."
As per the paragraph above, this rule provides for the method by which the taxable value of a second-hand goods supply is arrived and is applicable only if the following conditions are satisfied:
(a)?The Supply made by the supplier is a taxable supply,
(b)?The Supplier deals in buying and selling of second-hand goods,
(c)?The Supplier has done minor processing on such goods,
(d)?The Supplier has not claimed Input Tax Credit on the purchase of such goods.
(e)?The Supplier has not changed the nature of the goods,
2.?The supply should be a taxable supply, is fulfilled by the dealers as the supply of second-hand goods is taxable under the GST Act and is covered under Chapter 71 under Tariff Item No. 13. As per Notification No. 01/2017- Central Tax (Rate) dated 28th June 2017, the said item is taxable at 1.5% under the CGST Act and similarly taxable under the KGST Act, 2017 also at 1.5%.
3.?The condition stipulated at point (b), (c), (d) & (e) i.e. the supplier should be dealing in buying and selling of second-hand goods, minor processing should be done, no Input Tax credit should have been claimed on the purchase of such goods and there should not be any change in nature. The dealers should be only dealing in second-hand goods and should not be claiming any GST Input credit on the purchases. On the Old Jewellery which are marketable, they should be only cleaning and polishing them. On the other hand, the jewellery/parts which are non-marketable, the dealer should only be doing minor processing and melting it into gold lump/irregular shapes and selling it as it, without doing any much process on it.
4. Gold and Its Nature:
Gold is a chemical element with the symbol Au (from Latin: aurum) and atomic number 79, making it one of the higher atomic number elements that occur naturally. In a pure form, it is a bright, slightly reddish yellow, dense, soft, malleable, and ductile metal. A relatively rare element, gold is a precious metal that has been used for coinage, jewellery, and other arts throughout recorded history. Gold is a soft, dense, yellow metal that is highly valued for its color, luster, and relative rarity. Gold is a good conductor of electricity and does not corrode or tarnish. These properties make it useful in a wide range of applications, including jewellery, coinage, electronics, and medicine.
Gold bullion refers to bars of pure gold that are typically bought and sold by investors and central banks. They are usually 99.5% pure and come in various weights, such as 1 ounce, 10 ounces, or 1 kilogram. They are often bought as a way to invest in gold or as a hedge against inflation and currency fluctuations.
5. In the case of the dealers, dealing in second hand goods,?they simply aggregates all unusable gold jewellery (all cartages') and consolidates all of the same by melting it. The resultant Caratage of the Gold Lump is usually the average Caratage of all the gold jewellery. In this process, Gold remains as Gold and there is no other process of refining or purification that is undertaken by the dealers. Neither does the dealer gets any extra Gold nor there is any difference in the value of the Gold as Gold is valued according to its Caratage.
There is no any change in nature rather only the form is changed by melting it to a different form i.e. lump / irregular shapes. This lump / irregular shape is further processed by the other party i.e. the buyer and is made into jewellery which is re-sold by them after charging GST. The dealers' work ends at melting and nothing beyond that. The dealer are invoicing these supplies to the other person as "Second hand Ornaments".
6.?The dealer can also rely on the interpretation provided by the Honourable Supreme Court in the case of?State of Madhya Bharat?v.?Hiralal Ji?AIR 1966 SC 1546 wherein the honourable Supreme Court upheld the decision given by the honourable High Court in the favour of assessee and stated that since there is only change in the form, and not in nature, the VAT is not applicable on converting the scrapped iron into bars.
The Extract of The Honourable Supreme Court judgement is produced below:
Learned Counsels for the State contends that the expression "Iron and Steel" means Iron and Steel in the original condition and not iron and steel in the shape of bars, flats and plates. In our view, this contention is not sound. A comparison of the said two Notifications brings out the distinction between raw-materials of iron and steel and the goods prepared from iron and steel: while the former is exempted from tax, the latter is taxed. Therefore, iron and steel used as raw-material for manufacturing other goods are exempted from taxation.?So long as iron and steel continue to be raw-materials, they enjoy the exemption. Scrap iron purchased by the respondent was merely re-rolled into bars, flats and plates. They were processed for convenience of sale. The raw-materials were only re-rolled to give them attractive and acceptable forms. They did not in the process lose their character as iron and steel.?The dealer sold "iron and steel" in the shape of bars, flats and plates and the customer purchased "iron and steel' in that shape.?We, therefore, hold that the bars, flats and plates sold by the assessee are iron and steel exempted under the Notification. The conclusion arrived at by the High Court is correct.
7.?This rule of interpretation is also followed in many judgements and the few of them are as under:
(a)?State of Gujarat?v.?Shah Veljibhai Motichand?[1969] 23 STC 288 (Guj.)
(b)?Pyarelal Malhotra?v.?Jt CTO?[1970] 26 STC 416 (Mad.)
(c)?State of Tamil Nadu?v.?Annai Industries?[1994] 94 STC 393 (Mad.)
(d)?P.J.A. Manoj?v.?State of Kerala?[2007] 10 VST 432 (Ker.)
We are of the view that if the petitioner has purchased scrap sinkers and similar items melted and made into ingots, there cannot be any liability for purchase tax under Section 5A.
8.?The dealers can rely on the fact that GST is destination-based taxation and there should not be any cascading effect.
Goods and Services Tax (GST) is a value-added tax system implemented in many countries, including India, Canada, and Australia, that aims to eliminate the cascading effect by allowing businesses to claim credits for the GST they have paid on inputs (goods and services used in their business) against the GST they collect on outputs (goods and services they sell to customers). This helps to reduce the overall tax burden on businesses and consumers.
The cascading effect refers to the phenomenon of taxes being applied multiple times on the same product or service as it moves through the production and distribution chain. This can lead to higher prices for consumers and can be detrimental to economic growth.
In the words of honourable Finance Minister, Mr Arun Jaitely.
"GST will end the 17 state taxes, 23 cesses and there will be one tax, one return. People will be dealing with only one software interface on a monthly basis.?There will be no tax on the tax and will enable a uniform service flow throughout the country."
9.?The dealers can also state that the Jewellery originally purchased by the individuals who sells the same to the dealer would have already suffered tax at the time of its purchase of the same by the original purchaser. Therefore, it would be imprudent to levy tax on the entire value of the jewellery sold by the dealer, irrespective of the form in which it is sold, so long as the nature of the product does not change i.e. Gold remains Gold. This is also precisely what the Honourable Supreme Court wish to drive to the point as in the case of?Hiralal Ji?(supra)
10.?The dealer can also further state that the purpose of the Margin scheme, stipulated under Rule 32(5) of the CGST Rules, 2017 is to avoid double taxation of the goods. Once the goods have borne the incidence of tax, the tax should not be re-applied on the same component when it re-enters the economic supply chain. The reference to Notification No. 10/2017- Central Tax (Rate) dated 28-06-2017 can also be made wherein the Central Government, on being satisfied that it is necessary in the public interest to do so, exempted intra-state supplies of second-hand goods received by a registered person dealing in second-hand goods and paying GST as per Rule 32(5) from a supplier who is not registered. The very purpose of this notification was to maintain the purpose of GST for which it has been bought i.e. No Cascading effect, Taxing at the destination.
11.?The dealers can draw the attention of the honourable authority to the already heard and decided cases of M/s Safset Agencies Private Limited, heard and decided by the Maharashtra Advance Ruling Authority (Order No. GST-ARA-86/2018-19B Mumbai dated 15.01.2019), M/s Attica Gold Private Limited, heard and decided by the Karnataka Advance Ruling Authority (Order No. KAR ADRG 15/2020 dated 23.03.2020). In the said cases, the dealer dealing in second-hand goods and selling as it is after polishing and cleaning where allowed to avail the benefit of Margin Scheme as per Rule 32(5) of the CGST Rules.
12.?The dealers can also state that it is settled jurisprudence principle that when the words of a statute is clear, plain and unambiguous, i.e. they are reasonable susceptible to have only one meaning, the courts are bound to give effect to that meaning, irrespective of consequences. Moreover, if the words of the statute are in themselves precise and unambiguous, then no more can be necessary then to expound those words in their natural and ordinary sense. This rule of interpretation is followed in many judgements and the few are as under:
i.?Nelso Motis?v.?UOI?AIR 1992 SC 1981
ii.?Gurudevantt VKSS Maryadit?v.?State of Maharashtra?AIR 2001 SC 1980
iii.?Swedish Match AB?v.?Securities and Exchange Board of India?[2004] 54 SCL 549 (SC) AIR 2004 SC 4219
iv.?Government of Andhra Pradesh?v.?Road Rollers Owners Welfare Assocaition?[2004] 6 SCC 210
13.?In view of the above, since the dealer is satisfying all the conditions, the dealers can consider the valuation provided in Rule 32(5) of the Central Goods and Service Tax Rules, 2017 as a basis for arriving at the taxable value at the time of sale of the melted gold.
That’s it from us for today! Stay Tuned for more updates from?Taxmann.com.
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