The Hon’ble Gujarat High Court in S.S. Industries v. Union of India [R/Special Civil Application No. 8841 of 2020 with R/Special Civil Application No. 8163 of 2020 decided on December 24, 2020] upheld the Directorate General of Goods & Services Tax Intelligence’s (“Respondent No. 4” / “DGGSTI”) action of blocking Input Tax Credit (“ITC”) in the electronic credit ledger of the assessee by invoking Rule 86A of the Central Goods and Service Tax Rules, 2017 (“CGST Rules”) and while refusing to interfere when the investigation is in progress, the Court held that it would be too much for this court at this stage to stall a legitimate investigation into the allegations of fraudulent transactions and permit the writ applicants to avail the ITC of a huge amount in exercise of its writ jurisdiction.
The S.S. Industries (“Writ Applicant No. 1”) is a partnership firm, inter alia, engaged in the business of manufacture of goods like the TMT Bars, Rounds etc. Another Writ Applicant (“Writ Applicant No. 2”) is one of the partners in a partnership firm.
The Writ Applicant No. 1 while paying the GST on the goods manufactured, has been availing ITC on the input transactions upon receiving the tax paid inputs and tax invoices. In two assessment years i.e., A.Y.2017-18 and 2018-19, the Writ Applicant No. 1 received tax paid inputs from 36 registered dealers, located across the Country and registered with the GST Authorities, in charge of their respective divisions & commissionerates.
The Writ Applicant No. 1 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 (“Respondent No. 2”) having jurisdiction over the business place of the Writ Applicant No. 1. The payment of price of the inputs and the GST on such inputs to all the suppliers is made through the RTGS.
The Respondent No. 4 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 No.1 had also received inputs from them involving the ITC to the tune of Rs. 2.40 Crore. Respondent No. 4 through the Additional Commissioner of CGST (Anti Evasion) (“Respondent No. 3”) initiated an inquiry against the Writ Applicant No. 1 by drawing the Panchnama dated April 4, 2019.
It is the case of the Department that the inquiry, so far, prima facie reveals that the concerned suppliers of inputs, 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 No. 1 on such tax invoices of these input suppliers is inadmissible.
The Writ Applicant No. 1 was pressurized, as alleged, to deposit an amount of Rs. 25 Lakh in cash by uploading the Form DRC-03 dated July 23, 2019. Further, the ITC of Rs. 84,34,547/- has been blocked by the Respondent No. 4 under Rule 86A of the CGST Rules on January 14, 2020. 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 No. 1 of Rs. 84,34,547/-, hence, the present application has been filed.
The case of Writ Applicant No. 2 is that the officers of the Respondent No. 4 visited his office premises at Bhavnagar and seized various documents, files etc. by drawing a Panchnama and recorded the statement of one of the Directors of the Company. Under pressure and coercion of the Investigating Officer, the ITC availed by the Writ Applicant No. 2 on the various inputs and input services aggregating to ₹ 7.65 Crore in the electronic credit ledger has been debited.
The Hon’ble Gujarat High Court in R/Special Civil Application No. 8841 of 2020 with R/Special Civil Application No. 8163 of 2020 decided on December 24, 2020 held as under:
Recently, Rule 86A was challenged in the case of Kalpsutra Gujarat v.Union of India [R/Special Civil Application 10562 of 2020 decided on September 4, 2020] in so far as it gives power to block ITC at no fault of registered recipient and to declare it ultra vires of Section 16 of the CGST Act. Similarly, Rule 86A ibid was challenged in the case of Surat Mercantile Association v. Union of India [R/Special Civil Application 15381 of 2020 dated December 4, 2020] for allowing blocking the electronic credit ledger unilaterally without issue of Show Cause Notice and without giving an opportunity of fair hearing. Both the cases were listed for hearing on January 21, 2021.
It is to be noted that though the underlying thought behind introduction of Rule 86A ibid may be to prevent claim of fraudulent ITC, but this process turns out to be detrimental for the innocent recipients, claiming ITC on strength of valid duty paying documents but supplier has defaulted in payment of tax. Even pre-GST legal jurisprudence supports the view that as long as the purchasing dealer has taken all the steps required for being eligible for ITC, he could not be expected to keep track of whether the selling dealer has in fact deposited the tax collected with the government or has lawfully adjusted it against his output tax liability – Arise India Limited and Ors v. Commissioner of Trade & Taxes, Delhi and Ors [W.P.(C) 6093/2017 & connected matters dated October 26, 2017]. Also, SLP filed by the revenue in above case has been dismissed with no discussions on merit by the Hon’ble SC in [Special Leave to Appeal (C) No(s). 36750/2017 dated January 10, 2018].
Similar views have been expressed by Karnataka High Court in case of M/s. Onyx Designs v. Assistant Commissioner of Commercial Taxes [Writ Petition Nos.17989 & 23971/2018 (T – Res) dated June 17, 2019].
Rule 86A of the CGST Rules:
“86A. Conditions of use of amount available in electronic credit ledger.-
(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as
a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36–
i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
ii. without receipt of goods or services or both; or
b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or
c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36,
may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.
(2)The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.
(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.”
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