GST on SPV

 GST applicability on SPVs in Works Contracts -

These days there is a conflict going on between the GST department (Majorly DGGI) & the Works contractor.

Conflict is the taxable value of service provided by SPV to Government or Government authority.

Before going into depth, we have to understand a few terms here.

SPV- In works contract for a particular project a separate organization formed & that entity has a sole purpose of that project only.

Works contract- The Works Contracts has been defined in Section 2(119) of the CGST Act, 2017 as “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.”

Contractor- Main organisation which generally does all construction related activities.

Contractee -The organisation which gives construction work of construction to Contractor. Generally, this is government or government authorities.

 

Point of Taxation- The period in which a particular supply is taxed. Point of taxation rules are very clear & helps to ascertain the period in which a particular supply will be taxable. Important points of taxation provisions for works contracts are under Section 13(2), Section 31 & section 2(33).

Value of supply- value of supply means taxable value of a particular supply on which tax will be calculated with applicable rates. The important section for value of supply is section 15(1).

 

Facts of the case- Whenever a contractor gets any project, they incorporate an SPV for that particular project & contractor itself done all works contract related activity. Here two types of agreement are made.

1.Concession Agreement- Between Contractee & SPV

2.EPC Agreement- Between SPV & Contractor

 

As per the agreement SPV will get 40% (5 inst*8% each) payment from the contractee during the construction period on completion of certain milestones balance will be in form of either bank financing or private equity, which will later repay in form of annuity. On every payment made to SPV contractee deducts TDS of 2% under GST law , deposit & file there GST TDS return           (GSTR-7).

Since Contractor & SPV both are different entities hence they prepare their own financials. Interesting point here is that IND AS-115 is applicable & both recognise the same income in their books.

Here the Contractor pays taxes on full amount but SPV discharges their liability only on 40%, also SPV records ITC in full.

For e.g. A contract of 100 Crore is awarded to XYZ Ltd. They Form SPV Ltd. On the first milestone (20% completion) SPV gets 8 crores from contractee & loan amount 12 crores. Total 20 crore paid to XYZ & contractor raises a bill of 20 crores on SPV Ltd & discharge tax liability on the same and SPV Ltd book ITC on 20 crores.

Department’s View- Since SPV has achieved the milestone & recognise the income hence SPV need to discharge tax on full not on amount received. Here for value of the supply department is following IND - AS.

Further department says either

v pay tax on full (20 crores) or

v recognise ITC on part (8 crores).

department states since SPV have sufficient ITC they don’t need to pay extra tax so pay tax by using ITC.

 

Here both parties don’t have any objection over the point of taxation, both have issues over the value of supplies.

Value if supply as per section 15(1)- The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where

·        the supplier and the recipient of the supply are not related and

·       The price is the sole consideration for the supply.

 

Author’s View -

1.  The Department's View of having extra ITC so pay tax is not acceptable at all, because there is no such provision in act.

2.  Department’s other view of 40% ITC is not acceptable because if we go with this logic after completion of all milestones, most of ITC will lapse due to the time barrier.

3.  Here we come to the final department’s view over payment of tax by following IND AS 115. There is no such provision in law for payment of tax by following any accounting standard. Section 15(1) is very clear on the value of supply- Received or Receivable. Received can be verified from GSTR 7A and receivable can be verified from work order. Hence my point of view is SPV should discharge tax liability on 40%.

 

Important Points-

1.Here tax payer is going through a genuine hardship as there is no such point exist for payment of tax.

2. My expectation is that in future the Court will pass an order in favor of Tax payers.

 

 

Personal request- Please ignore grammar mistakes.

MORE THAN ONE SHOW CAUSE NOTICE FOR SAME PERIOD IN GST

Question-whether more than one show-cause notice can be issued in respect of the same assessee for the same period ?

Ans-As per section 73/74 of the CGST Act'2017, where any GST has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason,, the Proper (GST) Officer may serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.

Section 73 is for normal genuine cases of mistake whereas cases of fraud etc are covered in Section 74.

There is no restriction in the above said provisions regarding the number of short show-cause notices which can be issued. The object behind issuing show levied or short paid. If after issuing one show-cause notice, the cause notice is to recover tax not levied or short levied the assessee, it can issue another show-cause notice for recovery of the department comes across further incriminating facts and material against tax not/short paid.

Of course, there is restriction of the time period for issuing show-cause notice which is 3 months prior to three years in normal case and 6 months prior to five years in cases involving fraud, or any wilful-misstatement or suppression of facts to evade tax. But there is no restriction on the number of show cause notices that can be issued by the department.

 

RELEVANT CASE LAWS :

In Garibdasji Distributors vs Commissioner of Central Excise, Coimbatore, (2008) 11STR 145 (CESTAT-Chennai), by a second show-cause notice, department raised a demand of differential tax by adding to taxable value certain amount of expenses reimbursed to assessee by their principal (manufacturer). Assessees contended that it was not open to the department to reopen assessment already approved by way of issue of show-cause notice.

The Tribunal held that assessees had filed service tax returns, albeit belatedly, but those returns had returned only the amounts received as commission from principal. The reimbursed expenses were not returned. The department was, therefore, very much within their right to demand tax which escaped assessment and this was precisely what they did by issue of show-cause notice.

 

In the case of India Tourism Development Corportion Ltd vs Delhi Administration (2017) 52 STR 229 (HC – Del.) / 2017 TaxPub(ST) 1065 (Del-HC), Delhi High Court has held that quasi- judicial authority cannot review its earlier decision unless power of review is conferred by statute. The Collector of Central Excise while adjudicating upon the first show cause notice was clearly performing quasi-judicial function Second SCN after gap of five years cannot be issued once first SCN is adjudicated, became final and accepted by both parties.

 

In the case CCE vs Prince Gutka Ltd. (2017 ) 52 STR 83 (SC) / 2017 TaxPub(ST) 1023 (SC) , CESTAT has held that there could not have been second show cause notice on the same cause of action on which adjudicating authority had dropped the earlier demand . Supreme court has held that issue of second SCN on same cause of action is not permissible and that there was no error on Tribunal 's order setting aside demand under second SCN.

 

CONCLUSION:

 

In view of provisions of section 73 or 74 of the act it appears that issue of second SCN by the proper officer on the same ground amount to review of its earlier order. The proper officer is not authorised to review its own order or decision. Hence, the proper officer cannot issue second notice for same period on same issue. Similarly, no SCN can be issued for subsequent period, when notice and adjudication order for previous period quashed by Court or Tribunal. But if something has been missed then second Show Cause Notice could be issued and Department has right to demand tax which has escaped assessment.