Disallowance of ITC by invoking Section 16(4) is bad in law

The sole objectives of bringing the GST law were to avoid the cascading effect and to have seamless flow of credit. It wanted to bring all the taxpayers into one system and to reduce error digitalization of the whole process. GST being e System filing, assessment system but a new born baby, everyone including assessee, consultants, and accountants has done some or the other mistake because of various legal pronouncement, technical system glitches. It was said to be simple system but eventually turned out to be complex Taxation system because of notification, circulars, and GST council announcements add to this the growing compliance burdens, technical as well as compliance issues. Indeed Government and CBIC had to rollback various e system or frequent changes thereon. In this dynamic circumstance, no remedy what so ever was provided to the assessee to accept and return back to compliance eco system. However, more than 32 months down the line and after multiple policy updates, it seems that not everything has unfolded as planned and then further disallowance of ITC by invoking Sec 16(4) is bad in law and in the paragraphs here under we would like to put forth the chronological but lawful reasons:

1. The Bill no 192 of 2014, The Constitution (One Hundred and Twenty Second amendment) Bill, 2014 was introduced in December, 2014. Every constitutional amendment is done by the honourable government and passed by both the houses with some objectivity. The Statement of Objects and reasons as quoted in amendment were as

“ The Constitution is proposed to be amended to introduce the goods and services tax for conferring concurrent taxing powers on the Union as well as the States including Union territory with Legislature to make laws for levying goods and services tax on every transaction of supply of goods or services or both. The goods and services tax shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The proposed Central and State goods and services tax will be levied on all transactions involving supply of goods and services, except those which are kept out of the purview of the goods and services tax. “

That even the GST council in their website under brief history of GST quoted as “The introduction of the Goods and Services Tax (GST) is a very significant step in the field of indirect tax reforms in India. By amalgamating a large number of Central and State taxes into a single tax, GST will mitigate ill effects of cascading or double taxation in a major way and pave the way for a common national market. From the consumers point of view, the biggest advantage would be in terms of reduction in the overall tax burden on goods, which is currently estimated to be around 25%-30%. It would also imply that the actual burden of indirect taxes on goods and services would be much more transparent to the consumer. Introduction of GST would also make Indian products competitive in the domestic and international markets owing to the full neutralization of input taxes across the value chain of production and distribution.”

So one of the objects was to remove cascading effect and ensure seamless transfer of input tax credit. But taxing assessee by invoking Sec 16(4) of the CGST Act, are not we deviating from very object for which bill was passed and the statement made by GST council on their website.

2.  GST council had frequently amended the last date of filing of returns, annual returns, a availment of credit for FY 17-18 until March 19 and further the Judgment of Gujarat Highcourt on GSTR3B and then retrospective amendment by the Council to make GSTR3B a valid return and further stay by Supreme Court. All these frequent change of dates and provision lead to confusion amongst the taxpayer. There were lot of technical inadvertent mistakes made by the dealers in the past 31 months, but since the system was new, lot of technical mistakes were done by the dealers though the same did not have any financial effects or any intension to avoid the tax. GSTR-3B which was introduced as a stopgap arrangement initially on account of failure from GSTN but later it was inducted as a return in the Law by making retrospective amendment.

A Press Release was issued on 18.10.2018 by CBIC, declaring extension of the time period up to which ITC can be claimed for financial year 2017-18, stated that the last date for claiming such credit extended to Oct 2018 to March 2019.

This created a huge confusion that whether the GSTR-3B is a Return prescribed under Section 39 of CGST Act 2017 i.e. GSTR3 or GSTR-3B is the substitute of GSTR-3. The Court further held that GSTR-3B is not a return under Section 39. The due date of filing return under Section 39 for the months of July 2017 to March 2019 shall be subsequently notified in Official Gazette. Vide Order No. 02/2018 – Central Tax dated 31 December 2018, the last date for availing was further extended till the due date of furnishing of the return for the month of March 2019,, i.e. April 2019, subject to specified conditions.

On 24th June 2019 the Hon’ble Gujarat High Court has given a landmark ruling in the case of AAP & Company, Chartered Accountants v/s Union of India. A writ petition was filed before the Gujarat high court, wherein it was prayed that the press release dated 18.10.2018 is invalid and the time limit for claiming ITC has not yet expired. It was argued that the return filed under section 39 is GSTR- 3 and not GSTR- 3B and the order came in favour of assessee. But then in the 37th meeting of the GST Council, the Co-convenor of the law committee stated that the aforesaid judgment of the Gujrat High Court led to further challenges such as legality of interest payable as FORM GSTR 3B was not considered as valid return etc. Consequently the council recommended amendment of Rule 61 of the CGST Rules, 2017 to say explicitly that FORM GSTR-3B is a return under sub-section (1) of Section 39 of the CGST Act. Ironically, the lawmakers have retrospectively amended the Rule 61 (5) vide Notification No. 49/2019-Central Tax dated 09.10.2019 to prescribe GSTR 3B as a return in lieu of GSTR 3, but with effect from 01.07.2017 in the interim to address the defects after being lashed by the Hon’ble Court. The late Finance Minister  Arun Jaitley said on the decision to taxing Vodafone Group retrospectively after the supreme court verdict in favour of Vodafone that It was ‘erroneous’ and that the present government will not be going down that path. “I always felt Vodafone tax decision was an erroneous decision… This govt will not be taking any retrospective decision,” But again we felt the contrary stand of GST Council on this. A common prudence was perfectly right even if he had not claimed the credit with due date as claimed in the Notice.

3. If a registered taxable person has proper Invoice of goods/services, has actually made the payment, person has received the goods, has paid tax liability to the Government, then that person is liable to claim ITC on the above invoice even though the same is not reflected in GSTR- 2A or even he failed to claim the credit within due date. This would result in dual taxation which was not the primarily intention of the statute. As regards to the retrospective amendment to validate GSTR3B, we presume that that is repugnant to Articles 14 & 19(1)(g) of the Constitution being arbitrary and confiscatory. That it imposes a new burden retrospectively, which none of the assessee had projected while conducting their affairs. It is further submitted that whenever retrospective legislation imposed a fresh tax or new liability or created unforeseen demands, the same has been held to be unconstitutional. Reliance was placed on Bengal Paper Mill Co. Ltd., vs. Commercial Tax Officer [(1976) 38 STC 163 (Calcutta)]; Mega Trades vs. State of Kerala [ (1991) 83 STC 59 (Kerala)].

Further denial of Input credit sighting entitlement to take input tax credit in respect of the post-GST purchase of goods or services within return to be filed under Section 39 , would amount to violation of Article 14 and 300A of Constitution of India. Unutilized credit has been recognized as vested right and property in terms of Article 300A of the Constitution of India. In our opinion, it is arbitrary, irrational and unreasonable to discriminate in terms of the time-limit to allow the availment of the input tax credit with respect to the purchase of goods and services made in the pre-GST regime and post-GST regime and, therefore, it is violative of Article 14 of the Constitution.

IN THE HIGH COURT OF PUNJAB & HARYANA, While pronouncing the order in the case of Adfert Technologies Pvt. Ltd vs Union Of India And Others on 4 November, 2019 which was upheld in Supreme court further,  it was held that “The doctrine of classification which is evolved by the Courts is not paraphrase of Article 14 nor is it the objective and end of that Article. It is merely a judicial formula for determining whether the legislative or executive action in question is arbitrary and therefore constituting denial of equality. If the classification is not reasonable and does not satisfy the two conditions referred to above, the impugned legislative or executive action would plainly be arbitrary and the guarantee of equality under Article 14 would be breached. Wherever therefore there is arbitrariness in State action whether it be of the legislature or of the executive or of an “authority” under Article 12, Art. 14 immediately springs into action and strikes down such State action. In fact, the concept of reasonableness and non-arbitrariness pervades the entire constitutional scheme and is a golden thread which runs through the whole of the fabric of the Constitution.”

4. Further The Supreme Court, in the case of MRF Ltd. v. Assistant Commissioner (Assessment) Sales Tax, has held that a person may have a ‘legitimate expectation’ of being treated in a certain way by an administrative authority even though he has no legal right in private law to receive such treatment. The expectation may arise either from a representation or promise made by the authority, including an implied representation, or from consistent past practice. The doctrine of legitimate expectation has an important place in developing law of judicial review. Further Supreme court in Bannari Amman Sugars Ltd. v. Commercial Tax Officer, 2005 (1) SCC observed in paras 8 and 9 as:

“ The doctrine of legitimate expectation has an important place in the developing law of judicial review. It is, however, not necessary to explore the doctrine in this case, it is enough merely to note that a legitimate expectation can provide a sufficient interest to enable one who cannot point to the existence of a substantive right to obtain the leave of the court to apply for judicial review. It is generally agreed that ‘legitimate expectation’ gives the applicant sufficient locus standi for judicial review and that the doctrine of legitimate expectation to be confined mostly to right of a fair hearing before a decision which results in negativing a promise or withdrawing an undertaking is taken. The doctrine does not give scope to claim relief straightway from the administrative authorities as no crystallized right as such is involved. The protection of such legitimate expectation does not require the fulfillment of the expectation where an overriding public interest requires otherwise. In other words, where a person’s legitimate expectation is not fulfilled by taking a particular decision then the decision maker should justify the denial of such expectation by showing some overriding public interest.

While the discretion to change the policy in exercise of the executive power, when not trammeled by any statute or rule is wide enough, what is imperative and implicit in terms of Article 14 is that a change in policy must be made fairly and should not give the impression that it was so done arbitrarily or by any ulterior criteria. The wide sweep of Article 14 and the requirement of every State action qualifying for its validity on this touchstone irrespective of the field of activity of the State is an accepted tenet. The basic requirement of Article 14 is fairness in action by the State, and non-arbitrariness in essence and substance is the heartbeat of fair play. Actions are amenable, in the panorama of judicial review only to the extent that the State must act validly for discernible reasons, not whimsically for any ulterior purpose. The meaning and true import and concept of arbitrariness is more easily visualized than precisely defined. A question whether the impugned action is arbitrary or not is to be ultimately answered on the facts and circumstances of a given case. A basic and obvious test to apply in such cases is to see whether there is any discernible principle emerging from the impugned action and if so, does it really satisfy the test of reasonableness.””

Thus by not allowing the right to avail the Input Tax credit for not being able to file the form GST return within the due date may severely dent the assessee working capital and may diminish their ability to continue with the business that too in the stress business sentiments and also lead to dual taxation. Such action violates the mandate of Article 19(1)(g) of the Constitution of India.

5. Further Gujarat High Court, in the case of Indsur Global Ltd. v. Union of India, in 2014 (310) held as under:

“By no stretch of imagination, the restriction imposed under sub-rule (3A) of Rule 8 to the extend it requires a defaulter irrespective of its extent, nature and reason for the default to pay the excise duty without availing Cenvat credit to his account can be stated to be a reasonable restriction. It leads to a situation so harsh and a position so unenviable that it would be virtually impossible for an assessee who is trapped in the whirlpool to get out of his financial difficulties. This is quite apart from being wholly reasonable, being irrational and arbitrary and therefore, violative of Article 14 of the Constitution. It prevents him from availing credit of duty already paid by him. “.

6.  Sec 16(4) of the CGST Act is unlike Sec 16(1). Even Sec 16(2) & 16(4) are non obstante clause. Hon. Supreme Court in the case of Indra Kumar Patodia and Another v/s Reliance Industries Ltd. AIR 2013 SC 426 clarified that that the non obstante clause has to be given restricted meaning and when the section containing the said clause does not refer to any particular provisions which intends to over ride but refers to the provisions of the statute generally, it is not permissible to hold that it excludes the whole Act and stands all alone by itself. In other words, there requires to be a determination as to which provisions answers the description and which does not. While interpreting the non obstante clause, the Court is required to find out the extent to which the legislature intended to do so and the context in which the non obstante clause is used. Even in the case of Synergy Fertichem Pvt.Ltd vs State Of Gujarat, Gujarat High court on 23 December, 2019 pronounced landmark judgment. The court observed and stated that “In this regard, we would like to observe as held by the Supreme Court that it would be important to notice certain well settled canons of interpretation of statutes. The primary and foremost task of a Court in interpreting a statute, is to ascertain the intention of the legislature, actual or imputed. Having ascertained the intention, the Court must then strive to so interpret the statute as to promote and advance the object and purpose of the enactments. If two constructions are possible upon the language of the statute, the Court must choose the one which is consistent with good sense and fairness, and eschew the other which makes its operation unduly oppressive, unjust or unreasonable or which would lead to strange, inconsistent results or otherwise introduce an element of bewildering uncertainty and practical inconvenience in the working of the statute. For this purpose, where necessary, the Court may even depart from the rule that plain words should be interpreted according to their plain meaning. There need not be meek and mute submissions to the plainness of the language. To avoid patent injustice, anomaly or asburdity, the Court would well be justified in departing from the so-called golden rule of construction so as to give effect to the object and purpose of the enactment by supplementing the written word if necessary. Though normally it is not permissible to read words in a statute which are not there, but, “where the alternative lies between either supplying by implication words which appear to have been accidently omitted or adopting a construction which deprives certain existing words of all meaning, it is permissible to supply the words.” Having regard to the context in which a provision appears and the object of statute in which the said provision is enacted, the Court should construe it in a harmonious way to make it meaningful. An attempt must always be made so as to reconcile the relevant provisions as to advance the remedy intended by the statute.”

7. Assessee should not be punished for the System glitches. GST being e System filing, assessment system but a new born baby, everyone including assessee, consultants, and accountants has done some or the other mistake because of various legal pronouncement, technical system glitches. It was said to be simple system but eventually turned out to be complex Taxation system because of notification, circulars, and GST council announcements add to this the growing compliance burdens, technical as well as compliance issues. Indeed Government and CBIC had to rollback various e system or frequent changes thereon. In this dynamic circumstance, no remedy what so ever was provided to the assessee to accept and return back to compliance eco system. However, more than 32 months down the line and after multiple policy updates, it seems that not everything has unfolded as planned. Even GST Council in its 39th meeting accepted the system glitches and had taken stock of the situation and fix accountability of continuous failures in the GST Network system. The council, in its 39th GST Council meeting, summoned Infosys Non-executive Chairman Nandan Nilekani and was asked to made presentation addressing the system-related issues being faced by taxpayers in the GSTN and he also acknowledged the technical issues and had sought time till January 2021 to fix the system but the council asked him to iron out the issues by July 2020. “The GST Council has a few expectations, which will be formally informed to Infosys,” Union Minister of Finance Nirmala Sitharam said in a press meet after the council meeting. Among the major “expectations” is to enhance the load capacity of the system from 1.5 lakh users at the moment to 3 lakh. The council also wants a rollout of the new return system and e-invoicing. So everyone can be granted with time accept the assessee for which no fault of him exist.

But after the 39th GST council, we felt that GST council had acknowledged the technical glitches in big way to streamline the system had set various periodic milestones. We feels that beyond all these challenges lies a great future and possibility provided Government incur short-term losses in exchange for large future gains.

We can use these statement to reply on the notices issued by department by invoking Sec 16(4) of CGST Act.

This writeup is to be further dicussed among the professional and will not take any responsibility for the opinion made herein above.