1. Who would not want to claim the input tax credit (ITC)? ITC reduces the cost of producing/supplying goods/services and thereby reduces the cascading effects. ITC also makes the businesses competitive globally by ensuring that only goods/services are exported and not taxes as part of the cost. Thus there would be a normal urge to claim the ITC wherever the same is permissible under the law. However life is not that simple. Law provides for certain conditions and restrictions concerning the ITC. Therefore in the present article we shall have a look at certain issues that one might have to face while claiming the ITC. Part I would cover the issues related to Sec. 16, Rule 36(4), and Rule 86A. Part II would cover Sec. 17, 18, and other miscellaneous issues.
2. Now before we have a look at the issues it would be worthwhile to contextualize the entire discussion. As stated before and also mentioned in the Statement of Objects and Reasons given while introducing the CGST Bill, 2017 before the Parliament, one of the main reasons for implementing GST is to remove cascading effects by allowing seamless flow of the tax till the eventual destination of consumption. Therefore I would submit that in situations wherein different interpretations are possible the sound interpretation would be the one which advances the eventual purpose of removing the cascading effect by way of allowing the ITC.
3. Let us go now to the issues. Reference to the provisions of the CGST Act, 2017 shall include the parallel reference to the provisions of the SGST Act(s), 2017 as well unless stated otherwise. 16(1) of the CGST Act, 2017 is reproduced below for ready reference before discussing the relevant issues:
“Sec. 16(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”
4. Sec. 16(1) of the CGST Act, 2017 provides that only a registered person shall be entitled to take the ITC. “Registered person” is defined u/s 2(94) of the CGST Act, 2017 to mean a person who is registered u/s 25. Therefore the issue is whether a person who is not registered at the time of receiving the underlying supplies would be able to take the ITC subsequently post obtaining the registration? The language of Sec. 16(1) would suggest that the status of a person (i.e. registered or not) needs to be seen qua the date of supply. The only exception provided under law is under situation wherein a person makes an application for registration within 30 days from the date such person is liable for the same (e.g. crosses the threshold). In such situation, the effective date of registration would the date from which he is liable to obtain the registration and therefore the concerned suppliers to such person can revise the invoices originally issued within 30 days from the date of issuance of such registration certificate as per Sec. 31(3)(a) of the CGST Act, 2017. Hence the newly registered person can avail ITC in respect of such revised invoices. In all other situations the registration is a must to avail the ITC.
CONDITIONS AND RESTRICTIONS
5. Sec. 16(1) further provides that the registered person shall be entitled to take the ITC subject to such conditions and restrictions as may be prescribed. It may be noted that certain conditions for determining the entitlement of ITC are contained in the Act itself (Sec. 16(2)) as well as certain restrictions are also contained in the Act itself (Sec. 17). Sec. 16(1) further provides that even beyond what is contained in the Act certain other conditions and restrictions can be prescribed. The word “prescribed” has been defined u/s 2(87) of the CGST Act, 2017 to mean prescribed by way of rules. This brings us to certain interesting issues which are discussed hereinafter.
6. There are certain entries in the rate notification (e.g. 11/2017 – CT (R)) wherein conditions of not availing the ITC have been stipulated. As an example the entry at Sr. No. 7(ii) of the said rate notification provides for the rate of 5% for the supply of “restaurant service” other than at “specified premises”. It further provides in the said entry as a condition that ITC with respect to goods and services used in supplying the said service has not been taken. One can find similar entries also concerning works contract services. Therefore the issue would arise as to whether it is mandatory for a taxpayer who is supplying such services to pay tax @ 5% only or whether such taxpayer can opt to pay the tax under the residual entry @ 18% ? I would submit that a taxpayer can take a view that he can opt for the entry which is most beneficial to him and need not have to mandatorily opt for 5% entry. This is because the entry of 5% provides for a condition that the taxpayer should not have taken the ITC. It does not stipulate that the taxpayer cannot take the ITC. Therefore the breach of the condition would take out the concerned supply from a given entry and put it into the residual entry. It may also be noted that even the explanation contained in the given rate notification to the effect that supplies covered by such specific entries shall have to mandatorily taxed under the said entries only would not debar the taxpayer from opting for a residual entry given at Sr. No. 35 of the said notification. This is for the reason that the supply would remain within the specified entry only if the attached conditions are fulfilled. Non-fulfillment of attached conditions would take the supply out from such specified entry and therefore once such supply is taken out even the explanation (which only applies if supplies remain within the specified entry) cannot restrict the taxpayer from opting for the residual entry if the same is found to be beneficial. One more aspect of the issue may also be noted that the conditions stipulated in the rate notification are not strictly as per the mandate given by Sec. 16(1). It is because Sec. 16(1) only permits that the conditions and restrictions be prescribed by way of rules and not by way of a rate notification. Therefore even on this ground it can be said that such conditions stipulated in the rate notifications are not prescribed following the law and therefore it would be possible for the taxpayer to opt for the residual entry if found beneficial. One can find support to the above contentions in the cases of H.C.L Limited v/s Collector of Customs, New Delhi (2001) 130 E.L.T. 405 (S.C.) as well as Collector Of Central Excise, Baroda v/s Indian Petro Chemicals (1997) 92 E.L.T. 13 (S.C.) wherein Hon’ble Supreme Court has held that the assessee is entitled to the benefit of that exemption notification which gives him greater relief, regardless of the fact that that notification is general in its terms and the other notification is more specific to the goods.
7. Another issue to also discuss is of Rule 36(4) of the CGST Rules, 2017. Said rule provides for restrictions on taking the ITC in excess of the 10% (before 01.01.2020 it was 20%) of the eligible ITC details of which are uploaded by the suppliers. Said restriction has been introduced vide Notification No. 49/2019 – Central Tax dt. 09.10.2019 by exercising the rule-making powers granted by Sec. 164. Many practical issues are been faced by the taxpayers while implementing the said rule. Before we discuss some practical issues it would be worthwhile to discuss whether the said rule is valid or not ? When one considers the GSTR – 1,2,3 system as enshrined in the Act the law permits taking full ITC with respect to the invoices not uploaded by the vendors by incorporating such missed invoices while filed GSTR – 2 (see Sec. 38). Said missed invoices would then undergo matching and accordingly the final ITC would get determined. Therefore can the suspension of GSTR – 2 and insertion of Rule 36(4) override the scheme of the Act which provides for provisional credit with respect to missed invoices and restrict the taking of the same beyond the limit of 10% ? It is a settled principle that a rule-making power cannot alter the scheme of the Act. Therefore the validity of the said rule will be in question given the background. It may also be noted that Sec. 43A which permits such ad-hoc restrictions with respect to missed invoices is yet to be notified.
8. Now coming to the practical issues one would say that there are many. Due to the paucity of space we would discuss only two issues but that would not mean that other practical issues are not relevant. The first issue is of quarterly filers. In the absence of any identification of the same one cannot make a fair comparison for applying the rule if one has availed ITC related to such filers. The second issue deals with the attribution of the ITC of 10% which is permitted above the ITC with respect to the invoices for which details have been uploaded. This is because the ITC in excess of 10% can be taken only if pro-rate ITC of the missed invoices are eventually reported. Let us say that total ITC in books is INR 120 whereas the ITC of the uploaded invoice details is of INR 100. Thus there are two invoices (A & B) having ITC of INR 10 each which have not been uploaded. Now rule permits taking the ITC of INR 110. Therefore if we attribute INR 10 to the missed invoice A, the concerned taxpayer can take the balance ITC of INR 10 when details of invoice B are uploaded. If we assume that ITC of INR 10 permitted by Rule is of invoice B then the balance ITC can be taken only when details of invoice A are uploaded. The third way to look at it would be that the ITC of INR 10 permitted by the Rule needs to be attributed to invoice A & B both on a pro-rata basis. Then the balance can be claimed only when details of invoice A & B both are uploaded. Therefore without resolving the said issue of attribution the workability of the Rule would become difficult. Hence in a nutshell we can conclude that the manner of bringing the rule and invalidly altering the scheme of the Act as well as not providing solutions to various practical issues results in the questioning of the legitimacy of the said rule. Without addressing both the given issues the eligibility of ITC would continue to be driven by the provisions of the Act only.
9. Rule 86A came to be inserted vide Notf no. 75/2019 – CT dt 26.12.2019. Said Rule in a nutshell grants power to restrict the utilization of the balance lying in the electronic credit ledger in certain circumstances. The first issue therefore would be whether the said rule is valid or not ?
10. Sec. 16(1) of the CGST Act, 2017 grants power to prescribe the conditions and restrictions subject to which ITC can be taken. Therefore we can say that the power granted to prescribe the restrictions regarding the availment of ITC cannot include the power to block the utilization of the validly availed ITC and hence such rule violates Sec. 16(1).
11. Further Sec. 16(1) also provides that the manner of taking the ITC shall be specified in Sec. 49. Therefore here also we can say that the power granted to prescribe the manner of taking the ITC cannot include the power to block the utilization of the validly availed ITC and hence even on this ground such rule violates Sec. 16(1).
12. Now let us see whether any other provisions in the law permits for complete restriction in using the ITC balance.
13. Sec. 49(4) of the CGST Act, 2017 provides that the amount available in the electronic credit ledger may be used for making any payment towards output tax in such manner and subject to such conditions and within such time as may be prescribed. Therefore the power granted by Sec. 49(4) is only to prescribe the procedural conditions enabling the utilization of the balance and cannot be interpreted to restrict the utilization of the ITC duly availed following the law. Therefore the scheme of the Act which does not provide for any restriction with respect to the utilization of valid ITC cannot be altered by way of delegated legislation. Therefore on this ground also it can be contended that Rule 86A is going beyond the provisions of the Act.
14. Without prejudice to the above another issue would be as to whether the proper officer is obliged to communicate the reasons based on which he has exercised the power to block the utilization? Rule 86A provides that the officer exercising the power should have “reasons to believe” that the case in question falls in the specified circumstances and said reasons are to be recorded in writing. Hon’ble Supreme Court in the case of Ajantha Industries and Orsvs Central Board Of Direct Taxes 1976 SCR (2) 884 (SC) has held that the requirement of recording the reasons as a matter of principle of natural justice would also encompass the requirement of communicating such reasons to the taxpayer to enable the taxpayer who is prejudicially affected to challenge the decision. Therefore I submit that the requirement of recording the reasons would also encompass the requirement of communicating such reasons to the taxpayer whose electronic credit ledger is sought to be blocked. An unreasonable exercise of the power can be challenged in the Courts.
15. One of the circumstances stated in Rule 86A(1)(b) which enables the invocation of the restrictions is that the registered person has availed ITC in respect of which the tax has not been paid by the vendor to the Government. The issue, therefore, is whether the restriction can be invoked in a genuine transaction merely on the non-payment of tax by the vendor? I would submit that as per Rule 86A(1) the invocation of the restriction hinges on fact that the ITC available in the electronic credit ledger has been fraudulently availed or is ineligible in all the given specified situations. Therefore as discussed later ITC cannot be denied merely on the failure of the vendor to pay the tax in an otherwise genuine transaction and hence the rule cannot be invoked in such a situation. Based on the above discussions we can conclude that the power granted by Rule 86A needs to be exercised by the department with caution and any undue or unreasonable exercise can be challenged in the Courts for appropriate relief.
INPUT TAX CHARGED
16. Sec. 16(1) provides that a registered person can take the ITC of the “input tax charged” on any supply. The issue, therefore, is whether the registered recipient intending to take the ITC should worry about whether the correct rate of tax has been charged by the supplier or not? Since Sec. 16(1) provides that ITC of the tax “charged” would be available, it would imply that the registered recipient can take the ITC of whatever the tax which has been charged on the invoice and need not worry about whether the same is as per law or not. This would also be fair from the viewpoint that the concerned supplier would have deposited the tax charged on the given invoice and therefore ITC of the same should be allowable to the registered recipient. Another issue would arise in the context of ITC availed on the self-invoice in cases where the tax is payable under reverse charge mechanism on stipulated supplies (e.g. GTA) received from the unregistered suppliers. Here also I would submit that even though the definition of “input tax” u/s 2(62) of the CGST Act, 2017 refers to the tax payable in the context of the reverse charge as Sec. 16(1) provides for ITC for tax charged, therefore even the tax charged on the self-invoice more than the stipulated rate should be admissible for credit.
17. An issue may also arise as to whether the ITC can be taken with respect to the SGST and CGST charged in the State where the concerned taxpayer is not registered (i.e. hotel accommodation service in other State)? The perusal of the definition of “input tax” u/s 2(62) would reveal that it includes the IGST, CGST and SGST. Further definition of “state tax” u/s 2(104) of the CGST Act, 2017 includes tax levied under any SGST Act(s), 2017. This is unlike the definition of “state tax” under the SGST Act(s), 2017 which is limited only to the tax levied under the concerned SGST Act, 2017. Therefore it can be stated that the ITC of other SGST as well as CGST can be taken as ITC under the CGST Act, 2017 and the said amount can be credited in the central electronic credit ledger. One may say that one of the conditions u/s 16(2) for deciding the eligibility of ITC is that the tax should have been actually paid to the Government. Therefore as the Central Government has not received the tax of the concerned SGST the ITC would not be eligible. I would submit that the condition provided u/s 16(2) only provides that the tax should have been actually paid to the Government. It does not imply that the tax should have been paid only to that Government with respect to the electronic credit ledger wherein the ITC sought is to be reflected. Hence I would submit that even the said condition would not be able to restrict such ITC. Also due to suspension of matching (by discarding GSTR – 3), even such ITC cannot be restricted for want of matching.
USED OR INTENDED TO BE USED IN THE COURSE OR FURTHERANCE OF BUSINESS
18. Sec. 16(1) provides that ITC can be taken with respect to those inward supplies of goods or services which are used or intended to be used in the course or furtherance of business. The phrase “in the course of business” has been interpreted to mean the way that business (which may be of a purely private or trivial nature) is conducted (Md. Yusuf v. D. AIR 1968 Bom 112). Further the expression “for the purpose of business” has been given a wider meaning than the expression “for the purpose of earning profits” to imply that the direct nexus between the expenditure and the profits of the business is not warranted (CIT v. Malyalam Plantations 53 ITR 140 (SC)). Therefore I would submit that expenditure on research and development (which may not result in the direct increase in the profits of the taxpayer) as well as CSR would be considered to be incurred in the course or furtherance of business and therefore ITC on such expenditure would be permissible.
19. It may also be noted that ITC can be taken even if there is an intention to use the given supplies in the course or furtherance of business. This is because Sec. 16(1) permits taking the ITC on the use or even intended use. However if it is eventually found that the given supplies have been actually used for some other purpose (non-business), ITC related to such non-business use would get restricted u/s 17(1) of the CGST Act, 2017.
AMOUNT SHALL BE CREDITED TO THE ELECTRONIC CREDIT LEDGER
20. Sec. 16(1) provides that the amount of ITC taken shall be credited in the electronic credit ledger. Therefore the act of “taking the ITC” is clearly different from the act of “crediting” that amount in the electronic credit ledger. We would appreciate this distinction better when we discuss the time limitations contained u/s 16(4) a little later.
CONDITIONS FOR ENTITLEMENT OF ITC
21. Sec. 16(2) provides that notwithstanding anything contained u/s 16, a registered person would not be entitled for ITC unless the given conditions are satisfied. Following four conditions are provided u/s 16(2):
a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
b) he has received the goods or services or both.
c) subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and
d) he has furnished the return under section 39
22. Now many issues would arise on account of the above-referred conditions. Before we go into that we need to address the basic issue of whether the compliance of all the above four conditions is a prerequisite for taking the ITC or not? I would submit that all the four conditions need not be fulfilled before taking the ITC. This is because Sec. 16(2) deals with the entitlement of ITC and not taking of the ITC. Rule 36(1) provides that a registered person can take the ITC based on stipulated documents (e.g. tax invoice, Bill of Entry, etc.). Further Rule 36(2) provides that the ITC can be taken only if all the details of the relevant documents are submitted in GSTR – 2. As GSTR – 2 has been suspended we can say that a registered person can take the ITC on receipt of the documents (i.e. on fulfilling the first condition u/s 16(2)). The other two subsequent conditions are anti-avoidance conditions to determine the eventual eligibility of ITC. Therefore if it is found that the goods or services have not been received at all or the transaction is fraudulent and tax has not been paid, then the ITC would become ineligible and hence the same would be recovered if taken by resorting to Sec. 73 or 74. For the last condition about the filing of the return u/s 39 it can be submitted that it is a condition to ensure that the eligible ITC has been credited in the electronic credit ledger by way of its reflection in the return filed u/s 39. To interpret the above conclusions otherwise would imply that the registered person can take the ITC only after the concerned vendor has paid the tax and the registered person has filed the return. That would then be to do the impossible. The same could not have been intended.
23. Now coming to the specific issues related to each of the conditions. First condition u/s 16(2)(a) deals with the documents based on which ITC can be availed. The issue to discuss here is concerning the ITC of tax payable under RCM on specified supplies received from the unregistered suppliers. As per Sec. 31(3)(f) of the CGST Act, 2017 the registered recipient is required to make a self-invoice for the receipt of goods or services from unregistered suppliers which are liable for payment of tax under RCM. Rule 36(2) therefore provides that it is the said self-invoice which is the base document for availing the ITC. Hence two conclusions would come to our minds. First is that the preparation of the said invoice is a must to discharge the tax under RCM and also avail the ITC. Second, as the ITC can be availed on the self-invoice it can be availed in the same tax period in which the invoice is prepared and the taxpayer need not wait for the payment of tax under RCM to avail the ITC.
24. Second condition u/s 16(2)(b) deals with the receipt of goods or services. The issue is whether such goods or services should be received at the registered place of business? The given condition only provides that the goods or services should have been received. It does not provide that the same should be received only at the registered place of business. Therefore even if the registered person receives goods or services outside the registered place of business ITC would be available. This also brings us to another interesting issue. What would happen where a legal entity has more than one registration (distinct persons) and the goods or services are received at a registered place of business which is different from the registered place of business where the invoice is raised? As an example the services of manpower are supplied at location A (distinct person) but invoicing is done at location B (distinct person). Whether ITC can be taken at location B if services have been actually received at location A ? The definition of “recipient” as provided u/s 2(93) of the CGST Act, 2017 means the person who is liable to pay the consideration. Therefore it can be submitted that as the invoice is raised on a distinct person located at B, such distinct person would be the recipient and therefore even if the services are received at location A, ITC can be availed at location B since the receipt of goods/services at the place of business is not mandatory. This would however imply that the distinct person at location B will have to raise an invoice to a distinct person located at A since the eventual consumption of services has happened at the said location. As far as valuation is concerned the second proviso to Rule 28 can come to the rescue by way of preventing a challenge to the open market value adopted for such invoice provided full ITC is available at location A.
25. Third condition u/s 16(2)(c) deals with the actual payment of tax. As discussed earlier the said condition would have to be considered as an anti-evasion condition and hence needs to be applied only if it appears that the transaction in question is not genuine. Therefore the provision would have to be read down and applied only in the case of non-genuine transactions. In case of genuine transactions the recovery of tax should be made from the supplier only who has charged the tax. Said approach has been upheld in the VAT era by Hon’ble Delhi High Court in the case of Arise India Limited vs Commissioner Of Trade & Taxes (Delhi High Court) (W.P.(C) 2106/2015) as well as Hon’ble Rajasthan High Court in the case of S. Infra Transmission Ltd. vs. State of Raj (CWP No. 12445/2016)(DB). Also SLP against the ruling of Hon’ble Delhi High Court has been dismissed by the Supreme Court. Therefore the presence or absence of a transaction in GSTR – 2A should not determine the eligibility of ITC.
26. Fourth condition u/s 16(2)(d) deals with the aspect of filing of return u/s 39. As discussed earlier the said condition has to do with the reflection of the ITC taken in the electronic credit ledger. Hence once the return is filed the ITC taken would be available for utilization or claiming a refund as per law.
FAILURE TO PAY WITHIN 180 DAYS
27. Second proviso to Sec. 16(2) provides that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within 180 days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon. Third proviso then provides that the recipient shall be entitled to avail of the credit of input tax on the eventual payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon. Rule 37 of the CGST Rules, 2017 provides for the mechanism for implementing the said proviso. Now many issues would arise due to the said provision. Due to the paucity of space I intend to discuss only two issues. The first issue is whether the said provision can actually be complied? The question stems from the fact that the second proviso provides for the addition of the ITC availed earlier, but now to be reversed on account of failure to make the payment of the taxable value as well as the tax within 180 days, to the output tax liability. Therefore the mechanism to add such amount of ITC to the electronic output tax liability ledger is only through the filing of GSTR – 2 as provided under Rule 37. As GSTR – 2 has been suspended there is no mechanism in law to add such amount of ITC to the output tax liability ledger. It is a settled principle that the charge cannot subsist unless the procedural mechanism is in place to recover the charge. Therefore in the absence of mechanism the requirement to undertake such addition in the output tax liability would fail. As a consequence as such addition cannot be done in the output tax liability, the interest on delayed payment of such output tax liability cannot be imposed.
28. Assuming that the provisions are valid as the reversal can be done in GSTR – 3B (although GSTR – 3B provides for no such field wherein such addition to only the output tax liability without corresponding outward supply can be reflected) second issue to discuss is whether the same would have to be complied during the COVID – 19 period? In other words whether the same would apply to the ITC related to the invoices for which the 180 days period ends during the COVID – 19 outbreak? It is a settled principle that law cannot ask the person to do the impossible. Therefore due to the nationwide lockdown (mandated under the law), it would be impossible to run the business and pay the dues in time. Hence a view can be taken that the said requirement of reversal would get suspended during the present outbreak. Recourse can also be made to Notification No. 35/2020 – Central Tax dt. 03.04.2020 to say that the requirement of said reversal if it falls during the COVID – 19 period would automatically get extended to 30.06.2020.
ITC ON CAPITAL GOODS VS. DEPRECIATION
29. Sec. 16(3) provides that ITC with respect to capital goods shall not be allowed of that tax component for which a registered person has claimed depreciation under the Income-tax Act, 1961. An issue that may arise here is that a registered person might have claimed depreciation of the tax component for which he avails ITC subsequently. On such subsequent availment the registered person may reverse the depreciation claimed earlier and offer it to income tax. Whether in such a situation can the ITC be denied? It can be stated that the said provision intends to avoid dual benefits. Therefore once a benefit under the Income Tax is surrendered, it would not tantamount to availment of dual benefit and hence ITC cannot be denied in such a situation. It may also be noted that the restriction u/s 16(3) is only with respect to capital goods.
TIME LIMITATIONS ON TAKING THE ITC
30. Sec. 16(4) provides that the registered person cannot take the ITC in respect of an invoice or a debit note pertaining to an invoice after the due date for furnishing the return u/s 39 for September from the end of the FY to which the invoice pertains or the filing of the annual return, whichever is earlier. However, as an exception for FY 2017-18, being the first year of GST, proviso provides that ITC can be taken even after the normal cut-off date but till the due date for furnishing the return for March 2019 provided the details of invoices related to the said ITC have been uploaded by the concerned suppliers in GSTR – 1 till the due date of filing GSTR – 1 for March 2019. It may also be noted that Sec. 16(4) also stands amended vide Finance Act, 2020 to the effect that the said restriction in respect of a debit note shall be considered from the year in which such debit note is issued and not the year in which the invoice relating to such debit note was issued. However as the said amendment is yet to be notified the same is not discussed in the present article in detail.
31. Ordinarily a prudent registered person is expected to take the ITC within the time restrictions contained u/s 16(4) to avoid any litigation. In other words as an illustration ITC for the invoice pertaining to FY 2019-20 should be taken by the earliest of the two cut-off dates which will be 20.10.2020 (i.e. due date for September GSTR – 3B) as an annual return will be filed only after the said date. However many instances would arise wherein a taxpayer would not have been able to reflect the ITC of the concerned invoice in GSTR – 3B filed till the cut-off date. It can be due to the non-availability of funds to pay the net tax in cash and file GSTR – 3B within the stipulated time. It can be due to inadvertent error of having taken the ITC in the books of accounts but failing to reflect the same in GSTR – 3B within the stipulated time. It can be due to change in perception in terms of initially considering a particular ITC as ineligible and subsequently changing the mind and considering the same ITC as eligible (mind could change on reading a judgment of the court or reconsidering the provisions of law). It can also be since the tax payable under RCM would have been known only after the given stipulated time and hence ITC would become eligible only on the self-invoice raised after the stipulated time. The issue therefore would be whether the taxpayer can still take the ITC even beyond the time frame stipulated u/s 16(4) ?
32. Following contentions would lead one to opine that ITC can be claimed even beyond the time frame stipulated u/s 16(4):
33. It can be contended that Sec. 16(2) of the CGST Act, 2017 starts with a non-obstante clause to the effect that notwithstanding anything contained in the entire Sec. 16, a registered person shall be entitled to ITC if he satisfies the four conditions given therein (viz. possessing requisite documents, receipt of goods/services, tax paid by the supplier to the Government, and filing of the return by the recipient). Therefore I submit that as Sec. 16(2) overrides all other provisions of Sec. 16 including Sec. 16(4) it can be contended that as long as all the conditions u/s 16(2) are satisfied which do not have any time-related restrictions, ITC cannot be restricted.
34. Despite the non-obstante clause in Sec. 16(2) one may contend that as the said provision deals with the entitlement of ITC whereas Sec. 16(4) deals with the taking of the ITC, and as both operate in separate domains they will continue to apply. In other words a registered person may be entitled to ITC u/s 16(2) on the satisfaction of the four conditions but would not be able to take the said ITC if he crosses the time restrictions contained u/s 16(4). Now one of the conditions for a registered person to be entitled to ITC u/s 16(2) is that he must have furnished the return u/s 39. The process of availing the ITC, as we shall see later, happens in the records maintained under the law and the said amount is then credited in the electronic credit ledger by way of the reflection of the same in the return filed u/s 39. Therefore I submit that Sec. 16(2) not only provides for the conditions to become entitled to ITC but also provides for the condition to get the availed ITC reflected in the electronic credit ledger by way of filing of the return. Once the said proposition is found valid, given the non-obstante clause in Sec. 16(2) overriding all other provisions of Sec. 16, Sec. 16(4) cannot curtail the taking of the said already entitled ITC and validly reflected in the electronic credit ledger.
35. Another contention stems from the fact that the cut-off date u/s 16(4) was initially linked with GSTR – 3 (i.e. return u/s 39). This is because under the GSTR – 1,2,3 system the amount of unavailed ITC would have been known due to matching and the same was required to be apportioned between the Center and the State’s as per the report referred in Rule 4(iv) of the GST Settlement of Funds Rules, 2017. Now GSTR – 3B is a summary return and hence despite the amendment in Rule 61 to equate such return with GSTR – 3, the same cannot take place of GSTR – 3 due to the absence of matching. Therefore it is submitted that on this ground the cut-off date u/s 16(4) cannot be linked with GSTR – 3B when the ITC claimed beyond the stipulated date stands reflected in GSTR – 2A.
36. Without prejudice to the above contention, it may be noted that GSTR – 3B was retrospectively notified as a return u/s 39 vide Notification No. 49/2019 – Central Tax dated 09.10.2019 Therefore we submit that the vested right created before the date of the said amendment to avail the ITC (wherein the restrictions were not linked to GSTR–3B but to GSTR -3 which now stands annulled) cannot be taken back. Support for the said proposition can be taken from the Hon’ble Supreme Court decisions in the case of Dai IchiKarkaria Ltd. 1999 (112) E.L.T. 353 (S.C.) and Eicher Motors Ltd. 1999 (106) E.L.T. 3 (S.C.).
37. Hon’ble Supreme Court in the case of Cochin State Power & Light Corporation Ltd. v. The State of Kerala AIR 1965 SC 1688 has held that “the performance of this impossible duty must be excused following the maxim, lexnon cogitate ad impossible (the law does not compel the doing of impossibilities)”. Therefore in cases where GSTR – 3B is filed after the stipulated time limits u/s 16(4) due to paucity of funds to pay the net tax cannot be the ground to deny the ITC when the law permits the filing of the return showing taxes as due which is otherwise not permitted by the GSTN portal.
38. It can also be contended that Article 300A of the Constitution of India provides that no person shall be deprived of his property save by the authority of law. It has been held that the said authority of law needs to be reasonable (see K.T Plantation Pvt. Ltd. Vs. State of Karnataka (2011) 9 SCC 1). ITC is a property of the concerned registered person (as good as advance tax paid) and the said property cannot be denied by way of not allowing the credit merely due to time-related procedural limitations.
39. The above contentions would equally apply when it comes to claiming ITC based on self-invoice prepared u/s 31(3)(f) of the CGST Act, 2017 in case of the tax payable under RCM for supplies received from unregistered suppliers. Further as also stated before, Sec. 16(2) overrides Sec. 16(4) and in the absence of time limits in Sec. 16(2), ITC should be available even if the same is claimed beyond the stipulated time.
40. It is also submitted that the restrictions contained u/s 16(4) is for the invoice “for the supply” of goods/services whereas the self-invoice prepared by the recipient u/s 31(3)(f) for discharging the tax under RCM is an invoice prepared “for the receipt” of goods/services. It must be noted that the recipient while discharging the tax under RCM do not become the deemed supplier. Further the proviso inserted u/s 16(4) for FY 2017-18 permitting the taking of ITC beyond the normal time limits provides for the condition that the details of the relevant invoice should be reported by the vendor in GSTR – 1. Hence invoices the details of which are reportable in GSTR – 1 (invoice for supplies) are only sought to be covered u/s 16(4). Therefore it can be said that the restrictions would not apply to cases where ITC is related to self-invoice details of which are not reportable in GSTR – 1 (only invoice numbers are to be mentioned) but are reportable in GSTR – 2. Without prejudice, it can also be contended as explained later, that the restriction contained u/s 16(4) even if applied would apply only qua the year in which the self-invoice is prepared and not qua the year in which the underlying supplies would have been received.
41. We may also state that the Hon’ble Supreme Court decision in the case of Osram Surya P. Ltd vs Commissioner of Central Excise (2002) 122 TAXMAN 0583 did not rule on the legal validity of the time-related restriction. We also observe that the decision of the Hon’ble Supreme Court in the case of ALD Automotive Pvt. Ltd. v. CTO 2018 (364) ELT 3 (SC) wherein the validity of time-related restrictions contained u/s 19 of the TNVAT Act, 2006 was upheld is clearly distinguishable from the present case based on the language used as well as the context as discussed in the contentions above.
42. Without prejudice to the above as stated earlier u/s 16(1) the stage of “taking the credit” is different from the stage in which the said amount is credited in the electronic credit ledger.
43. Further Rule 36(2) of the CGST Rules, 2017 provides that a registered person can avail the ITC only if the document (e.g. tax invoice) available for claiming such credit contains all the necessary particulars and the said information is furnished by the registered person in GSTR – 2. Sec. 35(1)(d) of the CGST Act, 2017 provides that a registered person shall be required to maintain the record of the ITC availed. Hence it would appear that the act of taking the credit in the records to be maintained by way of ensuring that the documents contain the necessary particulars and the same are submitted in form GSTR – 2 is a precursor to the reflection of the said ITC in the electronic credit ledger on a provisional basis by filing GSTR – 3. Now in the absence of GSTR – 2 we can say that a registered person can avail the credit as soon as the document containing the relevant particulars are made available.
44. Now once the said ITC is availed in the records it was to be provisionally credited in the electronic credit ledger for matching and utilization. Hence we can conclude that the ITC availment first happens in the records maintained by the taxpayer and the return filing process is merely a reflection of the said ITC for credit in the electronic credit ledger to allow for the utilization/refund.
45. Once the above proposition is adopted, Sec. 16(4) provides for the restrictions for the taking of the ITC and not the reflection of the same in GSTR – 3B for getting the said amount credited in the electronic credit ledger. Thus it can be said that as long as the registered person has availed the ITC in the books of accounts (which will be a record u/s 35 as far as ITC availment is concerned) before the cut-off date prescribed u/s 16(4), the same can be said to be in order.
46. For ITC of the tax payable under RCM on the supplies received from unregistered suppliers it can be contended that Sec. 16(4) even if it applies would apply qua the year in which the self-invoice is issued and not qua the year in which the underlying supplies would have been received. A delay in raising the self-invoice may have certain other consequences in terms of penalties for violation of time of supply provisions however the same cannot be inferred to the effect that the delayed self-invoice would relate to the actual date of the receipt of goods/services. This is because the time-related restriction u/s 16(4) has a nexus with the date of the document and not the date of the actual receipt of goods/services. Had it been so the said provision would have linked the restriction with the actual receipt date of goods/services and not the date of the document. Therefore it can be contended that the ITC of the self-invoice even if made in FY 2019-20 for the underlying supply received in FY 2017-18 would remain ITC of FY 2019-20 and accordingly Sec. 16(4), if at all, would apply.