The delegated legislation does not go beyond the reach of the judicial review of the Supreme Court and of the High Courts. Part I of the article is dealt with the manner in which delegated legislation is conceptualized under tax laws. This Article being an extension is aimed to analyse the issues populated under GST with regard to application of a delegated legislation and the legal position that is settled through the recent pronouncements.

Power to make rule that prescribes for time limit and takes away the vested right to avail credit provided under the statute – The free flow of credit of taxes incurred at the input stage forms the prima donna of GST regime and with this objective, the law allows transition of credit of input stage taxes accrued under the erstwhile regime to the GST regime through section 140(1) and 140(3) of the Act subject to the condition of filing TRAN-1. However, in the absence of a robust IT platform, the first set of litigation under GST began with non-filing of transitional forms due to technical glitches. Section 140(5) allows transition of credit as a substantive right that is not conditioned to any time limit and thereby credit can be claimed as per the application of Limitation Act 1963 as held in Brand Equity Treaties Ltd. Vs. UOI 2020-TIOL-900-HC-DEL-GST. The vires of Rule 117 have been tested in the case of M/s Siddharth Enterprises Vs. Nodal Officer TS-684-HC-2019 (GUJ)-NT wherein the court held that Section 140(3) of the Act is a complete Code in itself and the substantive right conferred by the Act cannot be curtailed by way of rules. However, Rule 117 is lately amended retrospectively through the Finance Act, 2020 to prescribe for a time limit for availing transitional credit.

Section 164 of the CGST Act is abundantly clear that the Central Government was never vested with powers to frame Rule 117 to carry out the purpose of Section 140(5) of the Act. Secondly, power under section 164 cannot be so exercised as to bring into existence obligations not contemplated by the provisions of the Act itself. The retrospective amendment has opened Pandora ’s Box on whether the legislature is well contained with the power to legislate retrospectively? Whether amendment to the Rules to deny credit is constitutionally valid?

Though the parliament has the power to legislate retrospectively, however the amendment should not create any unreasonable restriction upon the fundamental or existing statutory rights of the taxpayer. If it creates untoward fiscal impacts on the taxpayers to deprive him of his rightful claim. In considering the question as to whether the legislative power to amend a provision with retrospective operation has been reasonably exercised or not, it becomes relevant to enquire as to how the retrospective effect of the amendment operates. In R.C. Tobacco Pvt. Ltd. v. Union of India 2005 (188) E.L.T. 129 (S.C.), the Supreme Court held that The retrospective operation of a fiscal statute has to be tested on multiple parameters primarily the period of retrospectivity and degree of the unforeseen or unforeseeable financial burden imposed for the past period. Thus, the amendment would have to be found to be unduly oppressive and confiscatory before it can be held to be unreasonable as to violate constitutional norms.

Notification to not restrict availment of credit and subsequent refund of transitional credit Notification No.20/2018 dated 26.07.2018 and Circular No.56/30/2018-GST dated 24.08.2018 extends the restriction on the utilization of unutilized ITC after payment of tax for and upto the month of July, 2018, on the inward supplies received up to the 31st day of July, 2018, shall lapse. The issue was dealt in the case of Shabnam Petrofils Pvt. Ltd. Vs. UOI SCA No. 16231 of 2018 wherein The Hon’ble High Court of Gujarat observed and held that Notification is a form of delegated legislation and by prescribing for lapsing of ITC the Notification has exceeded the power delegated under section54(3)(ii) of the CGST Act (that restricts refund of accumulated ITC on inverted duty structure). Hence, they are hereby quashed and set aside and are hereby declared as ultra vires and beyond the scope of section which does not empower to issue such notifications in guise of Section 164 for lapsing ITC.

Notification to not impose tax on a person who is neither the supplier nor the recipient of service – Deciding the issue of whether tax can be levied on reverse charge basis on a transaction which is neither an inter-state supply and nor is the person classified as the recipient of service, Hon’ble Gujarat High Court in the case of Mohit Minerals Pvt. Ltd. Vs. Union of India SCA No. 726 of 2018 rightly opined that There is no doubt that in the taxing legislation, the legislature deserves the greater latitude and the greater play in joints. This principle, however, cannot be extended so as to validate a levy by a subordinate legislation which has no sanction of law, however, laudable may have been the object to introduce it. While enacting the IGST Act, the legislature consciously curtailed the power of the Government to collect tax under the reverse charge basis from any person and restricted it only to the recipient of the supply.” Thus, on this basis Notification 8/2017-Integrated Tax (Rate) and entry no. 10 of Notification No. 10/2017-Integrated Tax (Rate) were held to be declared as “Ultra vires”.

Rule 89(5) ultra vires the Parent Statute – Rule 89(5) of the CGST Rules was retrospectively amended to restrict the refund of unutilized ITC in respect of suppliers falling under inverted duty structure to the extent of inputs. Gujarat High Court in the case of VKC Footsteps India Pvt. Ltd. Vs. State of Gujarat SCA/4610/2020 delivered a landmark judgment stating that the formula prescribed under Rule 89(5) of the CGST Rules (a delegated legislation) is contrary to the provisions of Section 54(3) of the CGST Act. It was analysed that the intent of the government by framing the rule restricting the statutory provision cannot be the intent of law as interpreted in Circular 79/53/2018-GST dated 31.12.2018 to deny the registered person refund of tax paid on ‘input services’ as part of a refund of any unutilized input tax credit.  In State of Mysore and Ors. vs Mallick Hashim & Co. (SC) (1974) 3 SCC 251 it was held that no rules can be framed under the guise of such power which curtails the right of the taxpayer which is otherwise absolute in the Code.

Prospective areas to challenge validity of delegated legislation under GST

Legislative Competence of Rule 86A wrt. Blocking Credit Ledger – Rule 86A of CGST Rules inserted vide Notification No- 75/2019- Central Tax dated 26.12.2019 gives the power to block the Electronic Credit Ledger inserted by the exercise of power u/s 164 of the Act. Though the Rule is formulated to protect the interest of the Revenue, there may be possibility that the same is exercised against the bonafide assessee where he is refrained from making payment of the output tax from credit of input. In M/s Alfa Enterprises Vs. State of Gujarat 2019-TIOL-2335-HC-AHM-GST the issue was dealt by Hon’ble Gujrat High Court wherein blocking of credit ledger was held to be patently illegal as it lacked the legislative competence and is not backed by any statutory provision. Considering that the amendment inserting Rule 86A was made effective after the ruling of Gujarat High Court, the legislative competence of Notification 75/2019- Central Tax dated 26.12.2019 inserting Rule 86A can be challenged on ground that there is no enabling provision in the CGST Act that gives effect to the said Rule, thus the action to block credit would be declared as ultra vires.

Constitutional Validity of Rule 36(4) – Rule 36(4) inserted through Notification No. 49-2019-Central Tax dated 09.10.2019 restricts ITC up to 10% of value of invoices in respect of invoices/debit notes whose details have not been uploaded by the suppliers. The constitutional validity of Rule 36(4) is challenged before the Rajasthan High Court in the case of M/s. Ravi Infrabuild vs. UOI & Ors. D.B.C.W.P.No.3559/2020 as being ultra vires the constitutional principles and beyond the purview of the parent Act on the ground that –

1. The provisions of Rule 36(4) are ultra vires the provisions of Section 16 of the act that governs the availment of ITC subject to conditions and restrictions as may be prescribed. Subsection (2) contains conditions for availing ITC that starts with a non-obstante clause. The above condition of matching of credit and restriction is found specifically covered under Section 43 or Section 43A and therefore, the source of the power of Rule 36(4) cannot be found in Section 16(1).

2. The provisions of Rule 36(4), restricting the credit is contrary to the provisions of Sections 37 and 42 of the CGST Act, 2017.

3. The restrictions as contained in provisions of Section 43A, which is yet to be notified, cannot be introduced through Rules.

4. Rule 36(4) denies the benefit of ITC only because of the default of the selling dealer to upload the return, on which the recipient has no control. This measure qua the recipient is arbitrary, irrational and unduly harsh and, therefore, violative of Article 14, 19, 21 and 300A of the Constitution of India.

Conclusion The very objective to mechanize delegated legislation is to curb down the exploitation of power by the administrative authority. Reason being laws are drafted by draftsman with liberated understanding that allows benefits to the taxpayer which are later realized to be functioning against the revenue. Thus, to overcome this widened scope of application or the view taken by the Higher Courts that interpret these provisions within the constitutional spheres as seen above, the laws are amended retrospectively to compensate the wrong previously done and fetter the rights already accrued with the taxpayer. Thus, even if the higher forums take a view and set boundaries for functioning of these delegated legislations, these are all expected to be appealed and challenged by Revenue before the Hon’ble Apex Court where the good done to the Assessee is again questioned and objected. Thus, to affirm that the delegated authority does not travel beyond the restrictions stipulated, their action must be strictly within the parameters of the authority delegated to it under the Act and it will not be proper to bring the theory of implied intent or the concept of incidental and ancillary power in the matter of exercise of fiscal power.

Special mention to CA Spudarjunan for deeper insight on the subject. Please share your valuable feedback at [email protected]

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October 2021