S. S. Industries Vs Union of India (Guajrat High Court)
I) The invocation of Rule 86A of the Rules for the purpose of blocking the input tax credit may be justified if the concerned authority or any other authority, empowered in law, is of the prima facie opinion based on some cogent materials that the ITC is sought to be availed based on fraudulent transactions like fake/bogus invoices etc. However, the subjective satisfaction should be based on some credible materials or information and also should be supported by supervening factor. It is not any and every material, howsoever vague and indefinite or distant remote or far-fetching, which would warrant the formation of the belief.
(II) The power conferred upon the authority under Rule 86A of the Rules for blocking the ITC could be termed as a very drastic and far-reaching power. Such power should be used sparingly and only on subjective weighty grounds and reasons.
(III) The power under Rule 86A of the Rules should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.
(IV) The aspect of availing the credit and utilization of credit are two different stages. The utilization of credit is a vested right. No vested right accrues before taking credit.
(V) The Government needs to apply its mind for the purpose of laying down some guidelines or procedure for the purpose of invoking Rule 86A of the Rules. In the absence of the same, Rule 86A could be misused and may have an irreversible and detrimental effect on the business of the person concerned. In this regard, the Government needs to act promptly.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
1. Since the issues involved in both the captioned writ applications are by and large the same, those were heard analogously and are being disposed of by this common judgment and order.
2. So far as the Special Civil Application No.8841 of 2020 is concerned, two issues are involved therein. The first issue relates to the true interpretation of Rule 86A of the CGST Rules inserted vide the Notification No.75/2019-CT dated 26th December, 2019 in the CGST Rules. The Rule 86A is in respect of the power and procedure for blocking the input tax credit (ITC) in the electronic credit ledger of a registered person. The second issue involved is with respect to the scope of exercise of power under Rule 86A of the Rules. In other words, the issue is whether the authority concerned is empowered to retain any amount deposited by a registered person during any inquiry or investigation in the absence of any confirmed liability against the assessee and, more particularly, without issuance of a show-cause notice and assessment/adjudication order imposing any tax liability on the assessee.
3. So far as the connected writ application, i. e., the Special Civil Application No.8163 of 2020 is concerned, the question arising therein is whether the authorities could have debited a sum of Rs.7.65 Crore from the credit ledger thereby debiting the ITC availed by the writ applicant on various inputs and input services without there being any demand or any final assessment order.
4. We first take up the Special Civil Application No.8841 of 2020.
5. The facts giving rise to the Special Civil Application No.8841 of 2020 may be summarized as under:-
5.1 By this writ application under Article 226 of the Constitution of India, the writ applicants have prayed for the following reliefs;
“(A) That Your Lordships may be pleased to issue a Writ of Mandamus or any other appropriate writ, direction or order, thereby quashing and setting aside blocking of Input Tax Credit (ITC) aggregating to Rs.84,34,547/- in the Petitioner’s Electronic Credit Ledger and also directing Respondent No.2 to allow the Petitioner to utilize such ITC of Rs.84,34,547/- and also allow the Petitioner to take credit of Rs.25 Lakhs in electronic credit ledger for paying GST/IGST on the goods manufactured and supplied by the Petitioner.
(B) That Your Lordships may be pleased to issue a Writ of Mandamus or any other appropriate writ, direction or order, quashing and setting aside DRC-03 Form dated 21.12.2019 (Annexure-‘G’) thereby ordering cancellation of debit entries of Rs.25,00,000/- in the Petitioner’s Electronic Credit Ledger maintained under the CGST Act;
(C) Pending hearing and final disposal of the present petition, Your Lordships may be pleased to stay the blocking of ITC of Rs.84,34,547/- by the Respondents and direct Respondent No.2 herein to allow the Petitioner to utilize such ITC of Rs.84,34,547/- as well as Rs. 25 Lakhs for paying GST on supplied of the final products on the terms and conditions that may be deemed fit by this Hon’ble Court.
(D) An ex-parte ad-interim relief in terms of Para-17(C) above may kindly be granted.
(E) Any other further relief that may be deemed fit in the facts and circumstances of the case may also please be granted.”
5.2 The writ applicant No.1 is a partnership firm, inter alia, engaged in the business of manufacture of goods like the TMT Bars etc. The writ applicant No.2 is one of the partners of the partnership firm. The factory premises and manufacturing activities of the writ applicant is located within the jurisdiction of the Bhavnagar GST Commissionerate. The respondent No.2-Deputy Commissioner of CGST has the jurisdiction to initiate appropriate inquiry in respect of the writ applicants under the laws of the GST. The third respondent- Additional Commissioner of CGST (Anti Evasion) is a proper officer of the GST Department, in charge of the Bhavnagar Commissionerate for carrying out inquiries and investigation under the GST laws. The respondent No.4-Joint Director, Directorate General of Goods and Services Tax, Jaipur (Rajasthan) is an Investigating Agency called the Directorate General of Goods & Service Tax Intelligence, and this agency is the Investigating Agency for the Jaipur Zone. It appears from the materials on record that the respondent No.4 has been conducting the investigation against the writ applicant through the respondent No.3.
5.3 It is not in dispute that the writ applicant is registered with the GST Department, and while paying the GST on the goods manufactured, it has been availing the ITC on the input transactions upon receiving the tax paid inputs and tax invoices. The dispute in the present litigation is pertaining to the A.Y.2017-18 and 2018-19 respectively. During this period of two assessment years, referred to above, the writ applicant received tax paid inputs from 36 registered dealers, the details of those has been furnished at Annexure-A to the writ application. It appears that the suppliers of inputs are located across the Country and registered with the GST Authorities, in charge of their respective divisions and commissionerates.
5.4 The writ applicant received the tax invoices from its suppliers and the transactions of inputs received and the ITC availed have been recorded in the electronic credit ledger maintained by the writ applicant. The monthly returns in the Form GSTR-3B are being submitted by the writ applicant before the Deputy Commissioner of CGST, Bhavnagar Division having jurisdiction over the business place of the writ applicant. The payment of price of the inputs and the GST on such inputs to all the suppliers is made through the RTGS.
5.5 It appears from the materials on record that the Directorate General of Goods & Services Tax Intelligence, Jaipur Zonal Unit received information that some registered dealers have been supplying only the tax invoices to the various manufacturers of steel products located across the Country, and in the course of such inquiry against such registered dealers/supplies, it was revealed that the writ applicant herein had also received inputs from them involving the ITC to the tune of Rs.2.40 Crore. In such circumstances, the Investigating Agency thought fit to initiate an inquiry against the writ applicant herein by drawing the Panchnama dated 4th April, 2019. It is the case of the Department that the inquiry, so far, prima facie reveals that the concerned suppliers of inputs, referred to above, had issued only the tax invoices without supplying any tax paid inputs and the transactions of these input suppliers/registered dealers are only on paper and, therefore, the ITC availed by all the buyers including the writ applicant herein on such tax invoices of these input suppliers is inadmissible. It further appears from the materials on record that in the course of the inquiry, various statements of the representative of the writ applicant were recorded at Jaipur. The writ applicant was pressurized, as alleged, to deposit an amount of Rs.25 Lakh in cash by uploading the Form DRC-03 dated 23rd July, 2019. Over and above the same, the ITC of Rs.84,34,547/- came to be blocked by the Jaipur based agency under Rule 86A of the CGST Rules on 14th January, 2020.
5.6 As the Revenue Authorities declined to refund the amount of Rs. 25 Lakh deposited by the writ applicant in cash as well as declined to unblock the ITC in the credit ledger of the writ applicant of Rs.84,34,547/-, the writ applicants are here before this Court with the present application.
Submissions on behalf of the writ applicants:-
6. Mr. Paresh M. Dave, the learned counsel assisted by Mr. A.S. Tripathi, the learned counsel appearing for the writ applicants submitted that the firm has been receiving the tax paid inputs from the 36 input suppliers, referred to above. It is pointed out that all the 36 input suppliers are registered with the GST Department. The same pattern and method of receiving the inputs and tax invoices including the paying price and tax by the RTGS has been followed in case of all the input suppliers who have submitted their returns before the jurisdictional GST Officers. It is argued that despite the same pattern and method being adopted, referred to above, the dispute has arisen only with respect to the supplies received from six out of the 36 registered dealers. This, according to Mr. Dave, is something which is not palatable or sufficient enough to block the ITC of a huge amount.
7. Mr. Dave would argue that his client has paid an amount of Rs.13,36,23,413/- to the input suppliers through the RTGS and it is not the case of the Department that such payment made towards the price inclusive of the tax to this input suppliers through the normal banking channel was received back by the writ applicant in any manner. In other words, the argument of Mr. Dave is that the payment of a substantial amount, as referred to above, to the input suppliers would go to show that the transactions were not sham or merely on paper but those were genuine. Mr. Dave further pointed out that all the inputs received by his client from these suppliers have been recorded in the credit ledger maintained by the writ applicant along with the details of ITC and the final products like the TMT Bars, Rounds etc. Mr. Dave pointed out that approximately 3,821 MTs of the inputs received from these suppliers has also been recorded in the statutory production register maintained by the firm and such final products were supplied to the customers on payment of the appropriate GST by the firm. It is argued by Mr. Dave that if transactions involving 3,821 MTs of inputs were only on paper, as alleged by the Department, then the firm could not have manufactured the final products cleared on payment of the GST.
8. Mr. Dave further argued that the GSTR-3B Returns of the firm regarding the availment of the ITC on all such input transactions and utilization thereof were assessed finally by the jurisdictional Bhavnagar GST Officers without any objection and the same signifies the actual receipt of the tax paid inputs and utilization thereof by the firm. In this context, Mr. Dave pointed out that even in the reply affidavits of the respondents, such facts are not disputed.
9. Mr. Dave would argue that the respondents have not been able to furnish an iota of material before this Court in the form of statements, if any, of the input suppliers or the statements of the transporters etc. to suggest that the transactions were sham. It is vociferously argued that in the case on hand, there is no final order of assessment and in the absence of any confirmed liability towards duty, the amount voluntarily deposited by the assessee during such inquiry cannot be retained by the Revenue. In other words, the argument of Mr. Dave is that in the case on hand, there is no assessment by following the mandatory procedure as prescribed under Section 74(1) of the CGST Act by issuing the show-cause notice and there is no order under Section 74(9) of the Act, determining the short payment of tax as a result of the alleged wrong availment of ITC.
10. In the aforesaid context, Mr. Dave, with a view to fortify his submissions, noted above, has placed strong reliance on the following decisions;
(i) Century Metal Recycling Pvt. Ltd. vs. Union of India, (2009) 234 ELT 234 (P & H);
(ii) Concepts Global Impex vs. Union of India, 2019 (365) ELT 32 (P & H);
(i) Abhishek Fashions Pvt. Ltd. vs. Union of India, 2006 (202) ELT 762 (Guj.)
11. The ratio of the three judgments, referred to above, is that unless there is assessment and demand, the amount deposited by the assessee under coercion/threat of arrest, cannot be appropriated. The Revenue cannot justify retaining the amount deposited by merely saying that the same was voluntarily deposited. The Revenue should bear in mind that they are creatures of statute and are bound by statutory law; the powers that they exercise are conferred upon them by the statute and there are no powers de hors the statute. In such circumstances, the Revenue is duty bound to act as provided by the provisions under which it can exercise such powers. The Revenue is not an organization which is entitled to retain money without any sanction of law.
12. Mr. Dave vociferously argued that the unilateral action of blocking the ITC thereby preventing the writ applicants from utilizing such credit is illegal and unjustified, more particularly, when there is no assessment of any tax liability against the writ applicant firm. He would argue that the documentary evidence in the form of statutory returns and records indicates that the transactions were genuine. The ITC related transactions were not only recorded in the statutory registers but were also reported to the jurisdictional GST Officers on monthly basis all throughout the period of two years in question.
13. Mr. Dave has a very serious grievance to redress while pointing out that all the input suppliers under cloud have been allowed to scott free of the GST Net by accepting their respective applications for de-registration. Mr. Dave pointed out that the GST Officers in charge of their divisions and Commissionerates allowed such applications and permitted de-registration. According to Mr. Dave, the orders for cancellation of registration passed by the jurisdictional GST Officers would indicate that no tax was found to be outstanding or payable from any of the concerned input suppliers. If the Department had a slightest of the doubt in this regard, then it would have initiated proceedings under Section 76(2) of the CGST Act against all such input suppliers. Mr. Dave further argued that when the registered input suppliers alleged to have issued the tax invoices without supplying the tax paid inputs to the writ applicants, were allowed to surrender their registrations without any liability, then no proceedings for the very same transactions against the recipients like the writ applicants would be justifiable nor permissible in view of Section 76 of the CGST Act.
14. Mr. Dave argued that there is nothing on record to even prima facie indicate that his clients had availed the ITC wrongly. Mr. Dave pointed out that no show-cause notice has been issued though more than one year has passed. It is argued that Rule 86A could not have been invoked by the respondents during the investigation or inquiry. Mr. Dave vehemently argued that Rule 86A has prescribed a mandatory procedure to be followed for the purpose of invoking the same. The Rule provides for “reasons to be recorded in writing” for blocking or not allowing the utilization of the ITC. It is argued that the procedure, as prescribed under Rule 86A of the rules requires two conditions to be satisfied; namely, recording of the reasons in writing by the officer ordering blocking of the ITC and secondly communication of such reasons to the affected person. It is argued that the bare minimal requirement of the principles of natural justice is recording of reasons and communicating such reasons to the affected party.
15. In the aforesaid context, Mr. Dave seeks to rely on the following judgments;
(i) M/s. Ajantha Industries & Ors. vs. Central Board & Direct Taxes, New Delhi & Ors., (1976) 1 SCC 1001
(ii) CIT, West Bengal vs. Oriental Rubber Works, (1984) 1 SCC 700.
16. Mr. Dave vehemently argued that it is a settled principle of law that the credit of tax paid on inputs, in different services, and capital goods is an indefeasible right of the assessee. Since credit is a vested right of the assessee, the same cannot be extinguished or curtailed in any manner without the proper authority of law. Mr. Dave argued that with the introduction of Rule 86A of the CGST Rules, the aforesaid right to such credit is sought to be curtailed on flimsy grounds though temporarily. In the context of being an indefeasible right of the assessee, Mr. Dave, seeks to rely significantly on the decision of the Supreme Court in the case of Eicher Motors Ltd. vs. Union of India, reported in 1999 (106) ELT 3 (SC ).
17. Mr. Dave submitted that indisputably, no reasons have been recorded by the Joint Director, Jaipur Zonal Unit (respondent No.4) on file of this case or even independently for blocking a substantial amount of ITC in the firm’s credit ledger. It is pointed out that even in the reply affidavit as also in the course of the hearing of this writ application, it was not argued by the learned Assistant Solicitor General of India appearing on behalf of the respondents that the reasons have been recorded by the respondent No.4 in the form of notings in the file. Mr. Dave would submit that assuming for the moment that some reasons have been recorded in the form of notings in the file, such reasons, at no point of time, were communicated to his clients. It is only when his clients attempted to use the ITC lying in the credit ledger for discharging their GST liability, it was reported on the GST Network (GSTN) Portal that the credit of Rs.84,34,547/- had been blocked. Mr. Dave would argue that his clients are seriously prejudiced by blocking of the ITC.
18. Mr. Dave further pointed out that Sub-Rule (3) of Rule 86A provides that the restriction on utilization of the credit shall cease to have effect after the expiry of period of one year from the date of imposing such restriction. The argument of Mr. Dave in this regard is that if the decision of blocking credit is not communicated to the person affected by it, then how would such affected person come to know that the restriction has ceased to have effect with efflux of time. Therefore, according to Mr. Dave, keeping this aspect in mind also, the communication of the reasons with respect to blocking of the ITC is a must.
19. Mr. Dave pointed out that such drastic powers as conferred under Rule 86A could not have been exercised merely on the ground that an inquiry has been initiated as there is a suspicion that the transactions were sham. The jurisdictional officers of the Bhavnagar Commissionerate have not filed any affidavit in this case, supporting the allegations of the Jaipur based Investigating Agency.
20. In such circumstances, referred to above, Mr. Dave prays that there being merit in both the writ applications, those be allowed and the reliefs prayed for in the respective writ applications may be granted.
21. Mr. Dave prays that the DRC-03 Form dated 21st December, 2019, Annexure-G in the Special Civil Application No.8841 of 2020 may be quashed and the order of the fourth respondent herein, blocking the ITC of Rs.84,34,547/- may also be quashed and set aside. Mr. Dave prays that so far as the Special Civil Application No.8163 of 2020 is concerned, the two DRC-03 Forms both dated 9th April, 2019 (Annexure-F to the petition) may be quashed and the respondents may be directed to permit the writ applicants to avail the credit entry of Rs.7.65 Crore in the credit ledger for utilizing such credit in accordance with law.
Submissions on behalf of the respondents:-
22. Mr. Devang Vyas, the learned Asst. Solicitor General of India assisted by Mr. P.Y. Divyeshwar, the learned Addl. Standing Counsel for Union of India appearing for the respondents has vehemently opposed both the writ applications. Mr. Vyas would submit that both the litigations on hand are very serious as there are allegations of availing the ITC by the writ applicants on the strength of fake/bogus invoices. Mr. Vyas would submit that the investigation inboth the cases is in progress and there is more than a prima facie case to invoke Rule 86A of the Rules for the purpose of blocking of the unutilized ITC. Mr. Vyas would submit that the investigation undertaken so far has prima facie revealed that the cases on hand are one of fraudulent transactions. Mr. Vyas pointed out that in the course of the investigation, the statements of various persons have been recorded including one of the partners of the partnership firm, i.e,. the writ applicant No.1 herein and, in such statements, there is a clear cut admission of fraud. Mr. Vyas submitted that no sooner the investigation is over, then a show-cause notice shall be issued under Section 74 of the CGST Act, and along with the show-cause notice, the materials relied upon, more particularly, the documentary evidence would also be made available to the writ applicant herein. Mr. Vyas argued that the formalities like recording the transactions in the statutory returns and forms, and payment through the RTGS against the goods in accordance with the invoice and payment for the transportation etc. was all just a show so as to give a color of genuineness to such transactions. Mr. Vyas argued that the amount of Rs.25 Lakh was paid by the writ applicant of the Special Civil Application No.8841 of 2020 voluntarily by using the Login ID and password and, in such circumstances, such voluntary payment cannot be refunded at this stage. It is argued that the allegations of coercion or pressure are reckless and without any foundation for the same.
23. Mr. Vyas argued that the newly inserted Rule 86A (w.e.f. 26.12.2019) confers power upon the authority concerned to block the ITC if it is prima facie found that the transactions are fraudulent. Mr. Vyas would submit that over a period of time the Government has unearthed many cases of fake input tax credit due to issuance of fake invoices, issuance of invoices without supply and other fraudulent activities which has led to decline in the revenue’s exchequer. According to Mr. Vyas, to meet with such situations, the Government introduced the concept of blocking of input tax credit by way of Rule 86A of the CGST Rules, 2017. In other words, according to Mr. Vyas, the object behind the introduction of Rule 86A of the Rules is to curb such fraudulent activities. Mr. Vyas invited the attention of this Court to the affidavit-in-reply filed on behalf of the respondents, duly affirmed by one Shri Rajendra Kumar Jeet Ram, Addl. Director General, Directorate General of Goods & Services Tax intelligence, Jaipur Zonal Unit, Jaipur. Mr. Vyas seeks to rely on the following averments;
“5 With reference to Para 1 to 5.1 of the petition, it is true that the dispute involved in the case in hand is about inputs, purportedly sold and supplied by various registered taxpayers including (i) M/s Anjani Metals and Steels, Chhattisgarh (GSTIN-22AWNPS2137D1ZP); (ii) M/s Kanchan Alloys and Steels, Jharkhand (GSTIN-20BVTPP5808C1ZL); (iii) M/s Om Shiv Jharkhand (GSTIN-20AALHM5998L1ZJ); (iv) Alloys and Steels, Chhattisgarh 22AALHM5998L1ZF); (v) M/s Shakambari Jharkhand (GSTIN-20AJMPP3256C1ZJ) and Vishkarma Industries, Jharkhand Metalicks, M/s Shiv (GSTIN- Metalicks, (vi) M/s (GSTIN- 20FJWPS4147A1Z5), as mentioned in this para, who have supplied invoices to the Petitioner, on the basis of which they have availed Input Tax Credit (ITC) during F.Y. 2017-18 and F.Y. 2018-19. Apart from above said six suppliers, M/s Sumeg Steels Pvt. Ltd., Rajasthan (08AAGCK3978G2Z4) have also supplied invoices to the Petitioner, without actual supply of goods on the basis of which Petitioner has availed Input Tax Credit (ITC) during 2017-18. However, it is pertinent to submit that acting upon specific information that M/ s Vishkarma Industries, Jaipur, a trading firm (GST Number 08FJWPS4147A1ZR), have indulged themselves in facilitation of fraudulent ITC by issuing merely GST invoices, without actual supply of goods, coordinated simultaneous search operation was planned and executed on 13.09.2018 at 19 premises spread over in three states viz. Rajasthan, Jharkhand and Chhattisgarh which included various trading firms, recipients of such GST invoices and residences of suspected persons. During the course of search operations various records/documents in the form of purchase invoices, sale invoices, LRs of fake transportation firms, gadgets, mobile phones, blank signed cheque books, private records containing incriminating details have been seized under Panchnama proceedings from all over the places. Evidences recovered from all over the searched places conclusively established that all such transactions are only on papers and no physical movement of goods has taken place. By this way, recipients of invoices have availed ITC involved in such invoices merely on the strength of such invoices, without actual receipt of goods. Subsequently, cases were booked by this office against the trading firms, who have supplied invoices, recipients of such invoices who have availed ITC, merely on the strength of such invoices, without actually receipt of goods and other persons involved in facilitation of such ITC, wrongly and thereby defrauded the Government Exchequer of its legitimate dues.
Statement of master mind behind creation of all such firms have been recorded, wherein they admitted their wrongdoings of providing invoices, without actual supply of goods to the recipients of such GST invoices. They also admitted to have flouted all the above firms on papers only and that no physical movement of goods has taken place under such invoices. He further revealed that he used to withdraw the amount received through RTGS from the recipients of GST invoices in cash and the same is returned back to the recipients of GST invoices after deduction of certain amount as their commission for providing such GST invoice only without supply of goods. Indulging in such an act is against the basic tenets of the GST law.
