Section 16(2)(c) & 16(4) Validity, ITC availment deadline Shifted to November

Constitutional validity of Section 16(2)(c) and 16(4) upheld and due date for availment of ITC has been changed retrospectively from September to 30th November from FY 2017-18 onwards

The Hon’ble Kerala High Court in M/s. M. Trade Links v. Union of India [W.P. (C) NO. 31559 of 2019 dated June 4, 2024] has upheld the constitutional validity of Section 16(2)(c) and Section 16(4) of the CGST/SGST Act. After acknowledging the difficulties during the initial implementation years of GST, this Court has relieved the Petitioners by retrospectively extending the time limit to avail input tax credit (“ITC”) to November 30 from the FY 2017-18 onwards.

Facts:

M/s. M. Trade Links (“the Petitioner”), along with other petitioners, have challenged the vires of Section 16(2)(c) and Section 16(4) of the CGST/SGST Act citing the fact that the Petitioners are being denied the claim of ITC despite fulfilling all the conditions as prescribed under Section 16 of the CGST/SGST Act.

It has been stated by the Petitioners that ITC claims are being denied for the reasons as stated below –

• Respective suppliers had remitted the tax, but it was not reflected in their GST return due to some technical reasons;
• Respective suppliers had not remitted the GST on the supply made by them to the Petitioners; and
• Few Petitioners are in possession of an invoice but have no clear proof of payment of consideration or tax towards the inward supply and might not have received goods in their possession.

The first of the three categories of Petitioners, who are recipients of the goods supplied to them by the supplier dealers, is covered in Circular No. 183/15/2022-GST, dated December 27, 2022, issued by the Central Board of Indirect Taxes and Customs (“the CBIC”).

The Petitioner’s submissions:

• GSTR-2A is an auto-populated, dynamic, read-only document containing details of inward supplies based on details of outward supplies filed by the purchasing dealer. FORM GSTR-2A is only a facilitator for making a confirmed decision while doing self-assessment.
• Non-performance or non-operability of FORM GSTR-2A or, the other forms should be of no avail because a registered person is obliged to submit a return on the basis of such self-assessment in the Form prescribed manually on an electronic platform. Non-availability of the payment of tax in GSTR-2A cannot impact the entitlement of the taxpayers to avail of the input tax credit on the self-assessment basis in consonance with the provisions of Section 16 of the CGST Act.
• The maxim ‘lex non–cogit ad impossibilia’ means that law does not compel a man to do anything in vain or impossible or do something which he cannot possibly perform. It is within the power of the State to collect and recover taxes, and this duty cannot be passed on to the recipient dealer if the supplier dealer does not pay the tax though collected from the recipient dealer.
• Denying of ITC to the bona fide purchaser dealer for default of supplier dealer over whom the purchaser dealer has no control is an arbitrary and irrational exercise of powers, and such a provision is an infarction of the equality clause enshrined under Article 14 of the Constitution of India.
• Section 16(2)(c) is in violation of Article 19(1)(g) of the Constitution of India, inasmuch as the denial of eligible input tax credit affects the business operation of the recipient dealer. It is submitted that Section 16(2)(c) of the GST imposes an unreasonable and onerous condition and gives unequal treatment to the bona fide recipient of the goods and services. The assessee cannot be made to suffer by disallowing ITC on account of the failure on the part of the Department to notify the FORM GSTR-2 and GSTR-3, respectively.
• That the retrospective amendment to Rule 61 of the CGST Rules is also unconstitutional, being violative of Article 14 of the Constitution. Similarly, retrospective amendment to Rule 61(5) of the CGST Rules is also unconstitutional, being violative of Article 279A of the Constitution of India.
• Furthermore, by way of Section 100 of the Finance Act, 2022 (Act 6 of 2022), the due date for furnishing of return under Section 39 of the CGST Act, in the month of September has been substituted with the 30th day of November in Section 16(4) of the CGST Act. It was further submitted that the said substitution should apply retrospectively from July 01, 2017 to November 30, 2022, as it is only a procedural aspect. The amendment has been introduced to ease the difficulties pointed out. In several cases, the claim was made before 30th November, but in the relevant period, it was 20th October, which was the due date for furnishing the return under Section 39 for the month of September. If retroactivity is given to the amended provision, the registered person can overcome the present difficulties. The court may read down Section 16(4) to give effect to the amended provision of providing the 30th day of November for the due date for furnishing the return under Section 39 for the month of September with effect from July 01, 2017, considering the peculiar nature of difficulties in initial period of implementation of the GST regime.

The Respondents Submission:

• The Respondents relied on various judgments, such as the case of Godrej & Boyce Mfg. Co.(P) Ltd. & others v. CST & others [(1992) 3 SCC 624] and Division Bench judgement of the Bombay High Court in Mahalaxmi Cotton Ginning Pressing & Oil Industries v. State of Maharashtra [2012 SCC OnLine Bom 733]. An entitlement to set off is the creation of the statute under the terms and conditions provided by the legislation, which are required to be strictly observed. A registered person cannot claim an entitlement to set off as an absolute right. A dealer would not be entitled to claim set off unless the conditions precedents are met, which are prescribed in the statute.
• Legislation or provisions in the statute can be challenged only by establishing manifest arbitrariness or unreasonableness besides legislative incompetence and in violation of rights guaranteed under Part III of the Constitution of India. There is no manifest arbitrariness or unreasonableness in providing the conditions for availing the concession of ITC by a registered person on supplies of goods or services or both received by him from another registered dealer.

Issue:

Whether the provisions contained in Section 16(2)(c) and Section 16(4) of the CGST/SGST Act are violative of the various articles and fundamental rights as enshrined in the Constitution of India?

Held:

The Hon’ble Kerala High Court in W.P. (C) NO. 31559 of 2019, held as under:

• That the nature of the claim for ITC by the dealer is in the nature of concession or entitlement, which is not an absolute right and is subject to the conditions and restrictions as per the scheme of the GST legislation.
• That, in the GST regime, the tax collected has to be assigned to the jurisdiction where the consumption takes place. The ITC, therefore, crosses a State during inter-State supplies. Without Section 16(2)(c) of the CGST Act, where the inter-state supplier in the originating State defaults payment of tax (SGST+CGST collected) and the inter-state supplier is allowed to take credit based on their invoice, the originating State Government will have to transfer the amounts it never received in the tax period in a financial year to the destination States, causing loss to the tune of several crores in each tax period. This renders the whole GST laws and schemes unworkable. Therefore, as contended, the conditions cannot be said to be onerous or in violation of the Constitution. Section 16(2)(c) of the CGST Act is neither unconstitutional nor onerous on the taxpayer.
• That the non-obstante clause in the negative sentence in Section 16(2) of the CGST Act restricts the eligibility under Section 16(1) of the CGST Act for entitlement to claim ITC. Section 16(2) of the CGST Act is the restriction on eligibility and Section 16(4) of the CGST Act is the restriction on the time for availing of ITC. These provisions cannot be read to restrict other restrictive provisions, i.e., Section 16(3) and 16(4) of the CGST Act. If Section 16(2) is read in the manner as contended by the learned counsel for the Petitioners, i.e., once the conditions under Section 16(2) of the CGST Act are met, the timeline provided for availing the ITC under Section 16(4) of the CGST Act is arbitrary and unsustainable and cannot be accepted.
• That, considering the difficulties in the initial stage of the implementation of the GST regime, its understanding, and compliance, the Legislature effected the amendment and extended the time for filing the return for September to 30th November in each succeeding Financial Year. The amendment is only procedural to ease the difficulties initially faced by the dealers / Taxpayers and hence must be given retrospective effect therefore – the time limit for furnishing the return for the month of September is to be treated as 30th November retrospectively i.e. in each financial year with effect from July 01, 2017, in respect of the petitioners who had filed their returns for the month of September on or before 30th November, and their claim for ITC should be processed, if they are otherwise eligible for ITC.
• Additionally, Liberty has been granted to the Petitioners who can claim the benefit of the two Circulars, namely, Circular No. 183/15/2022-GST, dated December 27, 2022, and Circular No. 193/05/2023-GST dated July 17, 2023, to make their claim within one month before the appropriate authority who shall examine the claim of the individual dealer and process the claim.

Our Comments:

It must be noted that the vires of Section 16(4) of the CGST Act is currently under challenge in the Hon’ble Supreme Court of India in the case of Shanti Motors v. Union of India [SLP(C) No. 4410 of 2024] alongside other SLPs.

Also, it must be noted that in the case of Thirumalakonda Plywoods v. Assistant Commissioner [W.P. No. 24235 of 2022 dated July 18, 2023], the return in FORM GSTR 3B for the period March 2020 was filed on November 27, 2020, and no relief was provided by the Hon’ble Andhra Pradesh High Court.

The relief given in the present writ petition would be infructuous for the purpose of ITC availment for FY 2017-18 wherein the time limit to avail ITC for the FY 2017-18 had been extended vide Order No. 2/2018 dated December 31, 2018, till March 31, 2019, instead of the November 30 of the next FY that has been prescribed in the present ruling at hand.

Conclusion: The Kerala High Court’s decision underscores the balance between ensuring compliance and addressing practical difficulties faced by taxpayers. By upholding the constitutional validity of Sections 16(2)(c) and 16(4) and extending the ITC deadline retrospectively, the court aims to facilitate smoother GST compliance while maintaining the integrity of the tax system. This ruling provides crucial clarity and relief to GST registrants, ensuring that procedural hurdles do not impede their legitimate ITC claims.

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