M/S S. S. Industries vs Union Of India on 24 December, 2020

Judgment Summary: M/S S. S. Industries vs Union Of India

1. Outcome

Both writ applications filed by the petitioners were rejected. The Court declined to interfere with the actions of the GST authorities, namely the blocking of Input Tax Credit (ITC) under Rule 86A and the debiting of ITC from the electronic credit ledger, as the investigation into alleged fraudulent transactions was still in progress.

2. Core Issue

The central legal questions before the High Court were:
1. Interpretation of Rule 86A: What is the true scope and interpretation of Rule 86A of the CGST Rules, 2017, which empowers authorities to block ITC in the electronic credit ledger?
2. Legality of Blocking/Debiting ITC: Can the GST authorities block a taxpayer's ITC under Rule 86A or retain amounts/ITC debited during an investigation, purely on the basis of a prima facie belief of fraud, without a formal show-cause notice or final adjudication of liability?
3. Vested Right to ITC: Is the right to avail and utilize ITC an indefeasible or vested right that cannot be curtailed by a procedural rule like 86A?

3. Key Facts

• Petitioners: M/S S. S. Industries and another entity, engaged in manufacturing, who availed Input Tax Credit (ITC) on inputs received from various suppliers.
• Respondents: The Union of India and the Directorate General of Goods & Services Tax Intelligence (DGGI), Jaipur Zonal Unit.
• Investigation: The DGGI initiated an investigation based on intelligence that certain suppliers were issuing fake invoices without the actual supply of goods to facilitate fraudulent ITC claims.
• Allegation: The DGGI alleged that the petitioners were beneficiaries of this scheme, having availed substantial ITC (₹4.95 crore in one case, ₹15.25 crore in the other) based on such bogus invoices.
• Department's Action:
  • In the case of S. S. Industries (SCA No. 8841/2020), the DGGI blocked ITC of ₹84.34 lakhs in its electronic credit ledger under Rule 86A. The petitioner had also deposited ₹25 lakhs, allegedly under coercion.
  • In the connected case (SCA No. 8163/2020), the DGGI procured a debit of ITC worth ₹7.65 crore from the petitioner's electronic credit ledger.
• Petitioner's Stance: The petitioners claimed that the transactions were genuine, supported by tax invoices, RTGS payments, and statutory records. They contended that the ITC was blocked/debited without legal basis, without following principles of natural justice, and that any deposits made were under duress.

4. Arguments

Petitioner's Arguments:
* ITC is a vested and indefeasible right, as established in precedents like Eicher Motors, and cannot be curtailed by Rule 86A.
* The blocking/debiting of ITC without a show-cause notice or a confirmed demand is arbitrary and a violation of Article 265 of the Constitution.
* The power under Rule 86A is drastic and can only be exercised based on concrete evidence, not mere suspicion during an ongoing investigation.
* The mandatory pre-condition of Rule 86A, "reasons to be recorded in writing," was not fulfilled, and no reasons were communicated, which is a violation of the principles of natural justice.
* Any amounts deposited were under coercion and must be refunded in the absence of an adjudicated liability.

Respondent's (GST Department) Arguments:
* The investigation has unearthed a major fraud involving fake invoices, and the petitioners are key beneficiaries.
* Statements recorded from the masterminds and the petitioners' own partners/directors contain admissions of wrongdoing.
* The deposits/debits of ITC were made voluntarily by the petitioners after being confronted with evidence.
* Rule 86A was specifically introduced to combat such fraudulent activities and allows the blocking of ITC when there is "reason to believe" it has been fraudulently availed.
* The petitions are premature as the investigation is ongoing, and a show-cause notice will be issued upon its completion.

5. Court’s Reasoning

• On ITC as a Vested Right: The Court held that the right to avail ITC is not absolute and is subject to conditions and restrictions. It distinguished the Eicher Motors case, stating that while the utilization of credit validly taken is a vested right, Rule 86A acts as a procedural restriction on taking/using credit that is prima facie fraudulent. The Court concluded that the theory of an "indefeasible right" does not prevent the government from imposing such restrictions to protect revenue.
• On the Power under Rule 86A: The Court acknowledged that Rule 86A confers drastic powers. It held that the "reason to believe" required for its invocation must be based on credible and tangible material, not on mere suspicion. The formation of such a belief, though subjective, must have a rational nexus to the evidence on record and is subject to judicial scrutiny for arbitrariness or mala fides.
• On Procedural Requirements: The Court noted that Rule 86A, unlike Section 83 (provisional attachment), is silent on the requirement of passing a formal written order and communicating it. It strongly observed that the Government should issue guidelines and lay down a procedure for invoking Rule 86A to prevent its misuse and ensure transparency.
• Decision on the Merits: Despite the procedural concerns, the Court found that the respondents' reply-affidavits disclosed sufficient prima facie material to justify the formation of a "reason to believe" that the ITC was fraudulent. Therefore, the action of blocking/debiting the ITC could not be termed as arbitrary or without jurisdiction at this stage. The Court decided not to stall a legitimate investigation into serious allegations of tax fraud.
• Direction: For the case involving the debit of ₹7.65 crore, the Court directed the authorities to complete the investigation within a fixed timeframe (four weeks), acknowledging that such proceedings cannot continue indefinitely.

6. Statutory References

• CGST Act, 2017: Sections 16, 49, 74, 83, 122, 132.
• CGST Rules, 2017: Rule 86A (Conditions of use of amount available in electronic credit ledger).
• Constitution of India: Article 226 (Writ Jurisdiction), Article 265 (No tax shall be levied or collected except by authority of law).

7. Precedents Cited

• Eicher Motors Ltd. vs. Union of India (1999): Cited by the petitioner for the argument that ITC is a vested right. The Court distinguished it.
• CCE vs. Dai Ichi Karkaria Ltd. (1999): On credit being "as good as tax paid" and indefeasible once validly taken.
• Osram Surya (P.) Ltd. vs. CCE, Indore (2002): Used by the Court to hold that procedural restrictions on availing credit are permissible and do not take away a vested right.
• Barium Chemicals Ltd. vs. Company Law Board (1967): On the interpretation of "reason to believe" as a subjective satisfaction that must be based on objective, existent circumstances.
• ITO Calcutta vs. Lakhmani Mewal Das (1976): Emphasized that "reason to believe" must have a rational connection and a direct nexus with the material available.