Landt Ihi Consortium vs Union Of India And 3 Ors on 14 November, 2024

Outcome

• The Court rejected the petitioner's challenge to the constitutional validity and legality of Sections 7, 12, 13, and 16(2)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act) and Maharashtra Goods and Services Tax Act, 2017 (MGST Act).
• It was declared that, in the peculiar facts of the case, the petitioner was entitled to avail Input Tax Credit (ITC) under Section 16 of the CGST/MGST Act on the basis of the "Receipt Voucher" issued by L&T to the petitioner.
• All contentions related to the utilization of ITC and the challenge to the validity of Section 54(3) of the CGST/MGST Act (regarding refund of unutilized ITC) were kept open, pending the outcome of the petitioner's statutory appeal for refund. The prayer for refund of tax was not adjudicated in this petition.

Core Issue
The core issue was the constitutional validity of specific GST provisions concerning the levy of GST on advance payments for services, the determination of time of supply, and the conditions for availing Input Tax Credit (ITC). Specifically, whether:
a. GST could be levied on "supplies agreed to be made" (Sections 7, 12, 13).
b. ITC could be denied until services were actually received, despite tax being paid on advance receipts (Section 16(2)(b) vs. Section 13(2)).
c. A "Receipt Voucher" issued for advance payments was a valid document for claiming ITC under the GST framework (Section 31(3)(d) vs. Rule 36).
d. The advance payment itself was a "loan" (non-taxable) or a "mobilization advance" (taxable).

Key Facts

• Parties: Landt Ihi Consortium (petitioner), an unincorporated joint venture of Larsen & Toubro Ltd. (L&T) and IHI Infrastructure Systems Co. Ltd., Japan, vs. Union of India, State of Maharashtra, GST Council, and Deputy Commissioner of State Tax (respondents).
• Project: Mumbai Trans Harbour Link Project (MTHL) for Mumbai Metropolitan Region Development Authority (MMRDA).
• Contract: A Contract Agreement dated December 26, 2017, was signed between MMRDA and the petitioner.
• Advance Payments: Clause 14.2 of the General Conditions of Contract stipulated that MMRDA would make an "advance payment as an interest-free loan for mobilization and design," to be repaid through percentage deductions from interim payments.
• Transaction: The petitioner received two tranches of advance payments (approx. Rs. 32.02 crores and Rs. 32.62 crores, totaling Rs. 64.64 crores) along with GST from MMRDA. The petitioner then remitted the amounts, including GST, to its constituent, L&T, on a back-to-back basis.
• Documentation: The petitioner issued "Advance Receipt Vouchers" to MMRDA, and L&T issued "Receipt Vouchers" to the petitioner. These vouchers specified the amount received and the GST component.
• Dispute: The petitioner paid GST on these advances but was denied Input Tax Credit (ITC) for the following reasons by the revenue authorities:
  1. Section 16(2)(b): Services had not yet been "received" at the time of advance payment.
  2. Rule 36 read with Section 16(2)(a): The "Receipt Voucher" was not a prescribed "tax paying document" for availing ITC.
• Consequence: The petitioner had to remit GST in cash, leading to accumulation of unutilized ITC, the refund of which was restricted by the proviso to Section 54(3).
• Petitioner's actions: Filed refund applications (which were rejected and are under appeal) and subsequently filed this writ petition challenging the constitutional validity of the relevant GST provisions.

Arguments

• Taxpayer (Landt Ihi Consortium)

  • Constitutional Validity: Sections 7, 12, 13 of the CGST/MGST Act, insofar as they apply to supplies "agreed to be made" (future supplies) or fix the time of supply based on advance payment, are ultra vires Articles 246A, 366(12A), 14, 19(1)(g), 265, and 300A of the Constitution. GST can only be levied on actual "supply," not on an agreement to supply or receipt of payment before supply.
  • ITC Denial (Section 16(2)(b)): The provision denying ITC until services are "received" is arbitrary and unreasonable, directly conflicting with Section 13(2) which deems payment receipt as time of supply. This creates a situation where tax is paid, but credit is denied, violating Article 14 and 300A.
  • Procedural ITC Denial (Rule 36): Denying ITC because a "receipt voucher" (issued under Section 31(3)(d)) is not specified under Rule 36 as a tax-paying document is procedural and arbitrary, defeating the statutory intent.
  • Refund Restriction (Section 54(3)): The proviso to Section 54(3) which restricts refund of unutilized ITC to only two specific situations (zero-rated supplies, inverted duty structure) is arbitrary, unreasonable, and violative of Articles 14, 19(1)(g), 265, and 300A, especially when ITC accumulates due to the very anomalies in the GST law.
  • Nature of Payment: The advances were "interest-free loans" as per contract, not "consideration" for supply, and thus should not attract GST.
  • Discrimination: Exemption for advances on goods (Notification No. 66/2017-CT) but not services is discriminatory, violating Article 14.

• Revenue (Union of India, State of Maharashtra, GST Council)

  • Maintainability: The writ petition is not maintainable as the petitioner has an alternate remedy of appeal (pending before the Appellate Authority) against the rejection of their refund application.
  • Nature of Payment: The upfront amounts were "mobilization advances," not loans. Even if termed "loan" in the contract, the substance of the transaction is an advance for services, making it taxable under Sections 9 and 13(2)(a). Section 76(1) mandates depositing collected tax irrespective of taxability.
  • Constitutional Validity:
    • Section 7: The phrase "agreed to be made" is a legislative prerogative and does not render the provision ultra vires. Article 366(12A) defines "GST" broadly and does not restrict the meaning of "supply" to only completed supplies.
    • Sections 12 & 13: These sections define the "time of supply," and the tax is levied on the "receipt of payment" in an "agreement to supply," which is constitutionally permissible. There is no lack of authority.
  • ITC as a Concession: ITC is a concession, not a substantive right, and the government can impose conditions. Section 16(2)(b) is valid in requiring services to be "received" for ITC. No arbitrary comparison between Sections 13(2) and 16(2)(b).
  • Receipt Voucher: Non-inclusion of the "Receipt Voucher" in Rule 36 is a government decision and not arbitrary or unconstitutional. (However, the GST Council counsel later conceded that a Receipt Voucher should be recognized).
  • Refund (Section 54(3)): Refund is restricted to specific scenarios (zero-rated supplies, inverted duty structure). The petitioner does not fall under these categories and has no constitutional right to refund.
  • Petitioner's Fault: Any issues arise from the petitioner's own faulty accounting methods or procedural lapses. Legislature enjoys greater latitude in fiscal statutes.

Court’s Reasoning

• "Loan" vs. "Advance for Mobilization": The Court found that despite the contractual mention of "interest-free loan," the actual conduct of the parties (petitioner issuing "mobilization advance" vouchers, seeking adjustment against future bills, and voluntarily paying GST) indicated that it was an advance payment directly related to the contract work. Hence, it was a taxable consideration for supply, not a mere loan.
• Constitutional Validity of Sections 7, 12, 13 (Levy on "agreed to be made"):
  • Applying principles of judicial deference to economic legislation (citing R.K. Garg and Rakesh Kohli), the Court held that the constitutional provisions (Articles 246A, 366(12A)) define the broad legislative competence for GST, not the precise taxable event.
  • Section 7, defining "supply" to include "agreed to be made for a consideration... in the course or furtherance of business," is to be read holistically. The phrase "in the course or furtherance of business" implies a connected or integral relation to business activities. Advance payments clearly fall within this scope for a works contract.
  • Sections 12 and 13, by making the date of receipt of payment as the "time of supply" for goods/services respectively, are a valid exercise of legislative power within the broad constitutional framework, particularly when the payment relates to a works contract.
  • Therefore, the constitutional challenge to Sections 7, 12, and 13 was rejected.
• Entitlement to Input Tax Credit (ITC) under Section 16 (Interplay of Sections 16(2)(b) and 13(2)):
  • The Court acknowledged the anomaly created by Section 16(2)(b) (requiring actual receipt of services for ITC) when Section 13(2) (making advance payment the time of supply for tax levy) means tax is paid earlier.
  • It emphasized a harmonious reading of Section 16(1) and 16(2)(b). Section 16(1) entitles a registered person to ITC on inputs "used or intended to be used" in business.
  • To deny ITC on tax already paid for "intended supply" (mobilization advance, which would certainly fructify into services later) merely because services were not "received" at that exact moment, creates an absurdity and a dichotomy in the GST scheme.
  • The legislative intent is not to deprive a registered person of ITC where tax has already been paid on an intended supply that is integral to the business. Such an interpretation would cause a "deleterious effect and a disharmony."
  • Thus, the petitioner was held entitled to ITC.
• "Receipt Voucher" as a Valid Document for ITC:
  • The Court noted the fair submission by the GST Council that a "Receipt Voucher" should be recognized as a tax-paying document for ITC claims.
  • Section 31(3)(d), explicitly states that a registered person shall, on receipt of advance payment, issue a "receipt voucher or any other document... evidencing receipt of such payment." This sub-section begins with a non-obstante clause, meaning it operates independently of Section 31(1) and (2).
  • Rule 36, being subordinate legislation, cannot override the substantive statutory provision of Section 31.
  • Therefore, denying ITC based on the "Receipt Voucher" not being specifically listed in Rule 36 was held arbitrary and illegal.
• Refund of Unutilized ITC (Section 54(3)): The Court refrained from adjudicating this aspect as it was already subject to a pending statutory appeal. All contentions of the parties in this regard were expressly kept open.

Statutory References

• Constitution of India: Articles 14, 19(1)(g), 226, 246A, 265, 300A, 366(12A)
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Sections 2(31) (Consideration), 2(102) (Services), 2(119) (Works Contract)
  • Chapter III: Levy and Collection of Tax
    • Section 7 (Scope of Supply), including 7(1)(a), 7(1)(aa), 7(1A)
    • Section 9 (Levy and Collection)
  • Chapter IV: Time and Value of Supply
    • Section 12 (Time of Supply of Goods)
    • Section 13 (Time of Supply of Services), including 13(2)(a), 13(2)(b), Explanation
  • Chapter V: Input Tax Credit
    • Section 16 (Eligibility and conditions for taking input tax credit), including 16(1), 16(2)(a), 16(2)(b)
  • Chapter VII: Tax Invoice, Credit and Debit Notes
    • Section 31 (Tax Invoice), including 31(3)(d)
  • Other Sections: 37, 39, 41, 49, 50, 54(3), 76(1)
  • Schedule II (specifically Item 6(a) for Works Contract)
• Maharashtra Goods and Services Tax Act, 2017 (MGST Act): Corresponding provisions to the CGST Act (as challenged in prayers).
• Central Goods and Services Tax Rules, 2017: Rule 36 (Documentary requirements and conditions for claiming input tax credit)

Precedents Cited

1. R. K. Garg Vs. Union of India & Ors. (1981) 4 SCC 675
2. State of M. P. Vs. Rakesh Kohli & Anr. AIR 2012 SC 2351
3. State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. AIR 1958 SC 560
4. Commissioner of Gift Tax, Kerala Vs. P. Gheevarghese, Travancore Timbers and Products, Kottayam AIR 1972 SC 23
5. State of Travancore Cochin V. Shanmugha Vilas Cashew Nut Factory AIR 1953 SC 333
6. Mod. Serajuddin etc. V. The State of Orissa AIR 1975 SC 1564
7. Mahadeo Ram Bali Ram vs The State Of Bihar AIR 1959 PATNA 30
8. Union of India vs. V.K.C. Footsteps India Private Ltd. (2022) 2 SCC 603 / 2021 (52) GSTL 513 (SC)
9. Govind Saran Ganga Saran vs. Commissioner of Sales Tax & Ors. 1985 (Supp) Supreme Court Cases 205
10. Garden Silk Mills Ltd. vs. Union of India 1999(113) E.L.T. 358 (S.C.)
11. K. L. Johar And Company vs Deputy Commercial Tax Officer AIR 1965 SC 1082
12. The Sales Tax Officer, Pilibhit vs Messrs. Budh Prakash Jai Prakash AIR 1954 SC 459
13. Veer Service Station vs. GNCT of Delhi & Ors. 2015 SCC OnLine Del 10812 (DB)
14. Commissioner Of Income Tax vs Coral Electronics (P) Ltd. 2003 SCC OnLine Mad 970 (DB)
15. GKW Ltd. vs. Commissioner of Income Tax, WB-IV 2011 SCC OnLine Cal 2059 (DB)
16. Commissioner of Income Tax-X vs. Smt.Paramjeet Luthra 2014 SCC OnLine Del 4767 (DB)
17. United News of India vs. Union of India 2004(168) E.L.T. 442 (Del.)
18. Commissioner of Central Excise, Goa Vs. Essel Propack Ltd. 2015(39) S.T.R. 363 (Bom.)
19. Union of India vs. Apar Industries Limited 1999 (5) J. T. 160
    (Several other cases were cited within the discussion of R.K. Garg and Rakesh Kohli, which are deemed covered by the primary citation of those cases.)