Writ admitted for examining validity of provisions restricting ITC on construction of building for letting out on rent

Bagmane Developers Vs Union of India (Karnataka High Court)

The Hon’ble HC, Karnataka in Bagmane Developers v. Union of India [W.P. No. 9430/2020 dated October 22, 2020] stayed demand of Rs. 62 crore in a writ petition challenging credit restriction under Section 17(5)(c) and (d) of Central Goods and Services Tax Act, 2017 (CGST Act) on construction of building used for letting out wherein GST is paid on rent.

Facts:

Bagmane Developers (“the Petitioner”) is engaged in taxable services such as commercial/industrial construction service, works contract services, repair services and renting of immovable properties. The Petitioner has filed returns in GSTR – 3B and GSTR – I for the period between July 2017 and April 2019 but without availing input tax credit (“ITC”) on goods and services utilized in construction of commercial complexes which are rented after completion. The Petitioner has filed GSTR – 3B for the month of May 2019 availing substantial ITC prompting the GST department to issue notice dated March 6, 2020 (“Impugned notice”) to show cause as to why ITC availed amounting to Rs. 62 crore (approx.) in GSTR-3B for the month of May, 2019 should not be held as ineligible and demanded and recovered from the Petitioner along with interest and penalty.

Issues:

• Challenged the validity of Section 17(5)(c) and (d), 16(4), 61(5), 50 and 164(3) of the CGST Act.
• Whether Section 17(5)(c) and (d), 16(4) of the CGST Act can be read down to permit the use of ITC on goods and services used in the construction in “business-to-business” cases with the denial for ITC only in “business-to-consumer” cases.

Petitioner’s contentions:

• The Petitioner for the period between July 2017 and April 2019 filed its returns in Form GSTR-3B and GSTR- 1 and availed ITC on the costs incurred for construction of the land owners’ share where the properties are developed under Joint Development Agreement with such land owners, but without reporting availment of ITC on goods and services used in the construction of commercial complexes which are rented out because of lack of clarity.
• Relied on the Hon’ble HC, Orissa in Safari Retreats Private Limited v. Chief Commissioner of CGST [2019 (25) G. S. T. L. 341 (Ori.)] to read down Section 17(5)(c) and (d) of the CGST Act. Further contended that he has filed GSTR – 3B availing the ITC as per the Safari Retreat case.
• Section 17(5)(c) and (d) of the CGST Act are unreasonable and arbitrary inter alia for the reason that these provisions deny the advantage of ITC though there is continuity of transaction without break in chain. Section 16 of GST Act entitles a registered person to the use of ITC on any supply of goods or services to him which are used or intended to be used in the course of the business as part of a transactional chain. Thus, the continuity of transaction without break in chain is the essence of the scheme under GST.
• Section 17(5)(d) of the CGST Act makes an unreasonable discrimination between those assesses who could avail ITC when the goods and services availed are utilized in the course of or in furtherance of their business as contemplated under Section 16(1) of the CGST Act and those who are engaged in the business of construction of immovable property in the course of or in furtherance of their business only because the business of the assessee is construction or works contract. Section 17(5)(c) of the CGST Act are also arbitrary and unreasonable as these provisions create an artificial distinction.
• The Petitioner has a vested and an accrued right to avail ITC once the conditions as contemplated under Section 16(1) of the CGST Act are satisfied with a simultaneous right to claim adjustment of tax on outward supply of goods and services. This right would be an indefeasible right and therefore such right cannot be taken away in any manner that is impermissible in law. The law of limitation can only bar a remedy and cannot negate an accrued or a vested right. Section 16(4) of the CGST Act in imposing a negation of the accrued and vested rights violate this seminal proposition and as such, Section 16(4) of the GST Act is in violation of Article 300A of the Constitution of India.

Departmental Contentions:

• The Petitioner has in effect challenged only Impugned notice under the guise of challenging the constitutional validity of Section 17(5)(c) and (d), 16(4) and other provisions of the CGST Act. The contention that Section 17(5)(c) and (d), 16(4) of the CGST Act and the other provisions thereof are unconstitutional and contrary to the scheme under the CGST Act, when not well grounded, is impermissible.
• The Petitioner cannot rely upon the decision in Safari Retreats supra as the same is challenged by the Department before the Hon’ble Apex Court as admitted by the Petitioner and mentioned in the Impugned notice.
• The ITC, in the scheme of the CGST Act, is only a concession and the same cannot be categorized as a vested right or an accrued right or a substantive right. The constitutional validity of Section 16(4) of the CGST Act has been upheld by HC, Bombay in Nelco Limited v. Union of India [W.P. No. 6998/2018 dated March 20, 2020].

Held:

The Hon’ble HC, Karnataka in W.P. No. 9430/2020 dated October 22, 2020  stated as under:

• The Court shall examine the validity of Section 17(5)(c) and (d), 16(4) of the CGST Act and the other provisions thereof in the light of the decision by the Division Bench of the Orissa High Court in Safari Retreats supra.
• This Court shall also have to examine whether the ITC under the CGST Act is contemplated as a mere concession or as a right that accrues if the conditions stipulated under Section 16 of the CGST Act are satisfied, and if it is a right that accrues, whether such right could be extinguished prescribing the time limit within which such right has to be exercised.
• Granted stay to the Impugned notice on the condition that the Petitioner shall maintain a minimum of the 10% of the disputed availment in its electronic credit ledger subject to the outcome of the writ petition.
• The matter is next listed on November 20, 2020

Relevant provisions:

Section 17(5)(c) and (d) of the CGST Act:

“17. Apportionment of credit and blocked credits- Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property”

Section 16(4) of the CGST Act:

“16. Eligibility and conditions for taking input tax credit.

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.

Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019.

FULL TEXT OF THE HIGH COURT ORDER DATED 22.10.2020

The learned counsel for the petitioner and the learned Standing Counsel for the Respondent Nos.3 to 5 have been heard on the grant of interim order.

1] The petitioner asserts that it is engaged in taxable services such as commercial/industrial construction service, works contract services, repair services and renting of immovable properties. The petitioner has filed returns in GSTR – 3B and GSTR – I for the period between July 2017 and April 2019 but without availing Input Tax credit on goods and services utilized in construction of commercial complexes which are rented after completion. The petitioner has filed GSTR – 3B for the month of May 2019 availing substantial Input Tax Credit prompting the fourth respondent to issue the impugned notice dated 6.3.2020 calling upon the petitioner to show cause as to:

[i] why the amount of input tax credit availed in a sum of Rs.62,83,74,031/- in the returns filed in GSTR-3B for the month of May 2019 should not be held as ineligible;

[ii] why the amount of input tax credit of Rs.16,29,22,227/- should not be held as barred by limitation under Section 16[4] read with Section 39[1] of the CGST Act and Rule 61[5] of CGST Rules, 2017,

[iii] why an amount of input tax credit of Rs.62,83,74,031/- should not be demanded and recovered in terms of the provisions of Section 74[1] or 73[1] of the CGST Act, and

[iv] why interest should not be levied and penalty imposed as contemplated respectively under Section 50 of the CGST Act and Section 122[2][a] of the CGST Act.

2] The petitioner has impugned the notice dated 06.03.2020 challenging the validity of the provisions of Section 17[5][c] & [d], 16[4], 61[5], 50 and 164[3] of the Central Goods & Services Tax Act, 2017 [for short ‘CGST Act’] with the alternative prayer for reading down the provisions of Section 17[5][c] & [d] and 16[4] of the CGST Act permitting the use of input tax credit on goods and services used in the construction in “business-to-business” cases with the denial for input tax credit only in “business-to-consumer” cases.

3] The submissions by the learned Counsel for the petitioner in support of the interim prayer are summarized as follows:

[a] The petitioner for the period between July 2017 and April 2019 filed its returns in Form GSTR-3B and GSTR-1 and availed input tax credit on the costs incurred for construction of the land owners’ share where the properties are developed under Joint Development Agreement with such land owners, but without reporting availment of input tax credit on goods and services used in the construction of commercial complexes which are rented out though the input tax credit in this regard is recorded in its books of account. The petitioner did not report availment of such input tax credit for the commercial complexes which is rented because of lack of clarity.

[b] A Division Bench of the Orissa High Court in ‘Safari Retreats Private Limited v. Chief Commissioner of CGST’ has read down the provisions of Section 17[c] and [d] of the CGST Act opining that the provisions of this section cannot be read narrowly. The Division Bench has clarified that if an assessee is required to pay GST on the rental income arising out of an investment on which the assessee pays GST, the assessee would be entitled to corresponding input credit.

[c] The Department has impugned the decision of the Division Bench before the Hon’ble Apex Court in SLP [C] No.026696/2019 in the month of November 2019, but the Hon’ble Apex Court has not stayed the operation of the decision of the Division Bench. The petitioner has filed GSTR – 3B availing the Input Tax Credit according to the clarification by the Division Bench as that would inure to the petitioner’s advantage;

[d] The provisions of Section 17[5][c] and [d] of the CGST Act are unreasonable and arbitrary inter alia for the reason that these provisions deny the advantage of input tax credit though there is continuity of transaction without break in chain. The provisions of Section 16 of GST Act entitles a registered person to the use of input tax credit on any supply of goods or services to him which are used or intended to be used in the course of the business as part of a transactional chain. Thus, the continuity of transaction without break in chain is the essence of the scheme under GST. Therefore, when an assessee like the petitioner avails goods and services for the purposes of construction of a premises that is rented as part of its business, should be entitled to avail input tax credit as the requisite test of continuing transactional chain is satisfied.

[e] The provisions of Section 17[5] [d] of the CGST Act makes an unreasonable discrimination between those assesses who could avail input tax credit when the goods and services availed are utilized in the course of or in furtherance of their business as contemplated under Section 16[1] of the CGST Act and those who are engaged in the business of construction of immovable property in the course of or in furtherance of their business only because the business of the assessee is construction or works contract. The provisions of section 17 [5] [c] of the CGST Act are also arbitrary and unreasonable as these provisions create an artificial distinction.

[f] An assessee has a vested and an accrued right to avail input tax credit once the conditions as contemplated under Section 16[1] of the CGST Act are satisfied with a simultaneous right to claim adjustment of tax on outward supply of goods and services. This right would be an indefeasible right and therefore such right cannot be taken away in any manner that is impermissible in law. This substantative right cannot be abridged by law of limitation. The law of limitation can only bar a remedy and cannot negate an accrued or a vested right. The provisions of Section 16[4] of the CGST Act in imposing a negation of the accrued and vested rights violate this seminal proposition and as such, Section 16 [4] of the GST Act is in violation of Article 300A of the Constitution of India. The other grounds urged in paragraph-33 are reiterated in support of these submissions.

[4] The submission of the learned Counsel for the Department is summarized thus:

[a] The petitioner has in effect challenged only a show cause notice under the guise of challenging the constitutional validity of the provisions of Section 17[5][c] and [d], 16[4] and other provisions of the CGST Act. The petitioner can always show cause against the intended action. The contention that the provisions of Section 17[5][c] & [d], 16[4] of the CGST Act and the other provisions thereof are unconstitutional and contrary to the scheme under the CGST Act, when not well grounded, is impermissible. The learned Counsel for the department relies upon the decision of the Hon’ble Apex Court in Union of India vs. Coastal Container Transporters Association . However, the learned Counsel submits in the case on hand before the Supreme Court the challenge was only to a show cause notice unlike in the present case.

[b] The petitioner cannot rely upon the decision in Safari Retreats Private Limited supra as the same is challenged by the Department before the Hon’ble Apex Court as admitted by the petitioner and mentioned in the impugned show cause notice. A Division Bench of the Delhi High Court in W.P.(C) 5817/2020 though has issued notice in a similar matter where there is challenge to the provisions of Section 17(5)(d) of GST Act, has not granted any stay. As such, there cannot be stay in the present proceedings.

[c] The input tax credit, in the scheme of the CGST Act, is only a concession and the same cannot be categorized as a vested right or an accrued right or a substantive right. The constitutional validity of the provisions of Section 16[4] of the CGST Act has been upheld by the Division Bench of the Bombay High Court in Nelco Limited vs. Union of India . The Division Bench has negatived the very contention that the time limit prescribed under Section 16[4] of the CGST Act is contrary to the object of the CGST Act.

[5] The rival submissions have received this Court’s anxious consideration. In the light of the rival submissions, this Court will have to examine the validity of the provisions of Section 17[5][c][d], 16[4] of the CGST Act and the other impugned provisions thereof in the light of the decision by the Division Bench of the Orissa High Court in Safari Retreats Private Limited supra. This Court will also have to examine whether the input tax credit under the CGST Act is contemplated as a mere concession or as a right that accrues if the conditions stipulated under Section 16 of the CGST Act are satisfied, and if it is a right that accrues, whether such right could be extinguished prescribing the time limit within which such right has to be exercised.

[6] However, these questions are being examined at the behest of the petitioner who, without reporting availment of the input tax credit for over 24 months, is putting the issue at stake by filing GSTR – 3B availing very substantial input tax credit only in the month of May 2019 resulting in the impugned notice and the present challenge to the provisions under Section 17 [5] [c] and [d] of the GST Act. The challenge to the provisions of Section 16(4) and other related provisions of the GST Act is in aids of its primary challenge. At this stage, the Department’s interest will have to be in the balance while considering the interim prayer for stay of the impugned notice. Further, if the impugned show cause notice had resulted into a demand, and if the petitioner had to avail a statutory remedy and be entitled for an interim protection pending adjudication of remedy, statutorily such protection to the petition could only be conditional. In this context the provisions of Section 107 (6) of the GST Act are noticed: an assessee, when he files an appeal against crystallized demand, will have to deposit in full the undisputed amount and a sum equal to ten percent of the amount in dispute.

For the foregoing, this Court doth order that, subject to further orders of this Court, there shall be stay of the impugned show cause notice dated 6.3.2020 as per Annexure –F on the condition that the Petitioner shall maintain a minimum of the 10% of the disputed availment in its electronic credit ledger subject to the outcome of the writ petition.

The office is directed to list this matter on 20.11.2020 in ‘Preliminary Hearing – B Group’.

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