Mkhk Techstream Private Limited vs Infinite Technology Solutions on 4 June, 2024

udgment Title:** Mkhk Techstream Private Limited vs Infinite Technology Solutions on 4 June, 2024

1. Outcome
The High Court of Kerala rejected the constitutional challenge to Sections 16(2)(c) and 16(4) of the Central Goods and Services Tax (CGST) Act and State Goods and Services Tax (SGST) Act, 2017. However, the Court granted the following reliefs:
* Petitioners who can claim the benefit of Circular No. 183/15/2022-GST dated 27.12.2022 and Circular No. 193/05/2023-GST dated 17.07.2023 are granted one month to approach the appropriate authority, who shall examine and process their claims.
* The amendment to Section 16(4) of the CGST/SGST Act, which extended the due date for furnishing the return for the month of September from September 30th to November 30th of the succeeding financial year, is to be applied retrospectively from 01.07.2017. Accordingly, claims for Input Tax Credit (ITC) made by petitioners who filed their September returns by November 30th (during the period 01.07.2017 to 30.11.2022) are to be processed if they are otherwise eligible for ITC.

2. Core Issue
The core issues addressed by the Court were:
* The grounds on which a taxing statute can be declared unconstitutional.
* The nature of the claim to Input Tax Credit (ITC) under the scheme of the GST Act and its Rules.
* Whether Sections 16(2)(c) and 16(4) of the CGST/SGST Act infringe constitutional provisions (specifically Articles 14, 19(1)(g), and 300A) and are therefore unsustainable.

3. Key Facts
* The Goods and Services Tax (GST) regime was introduced in India on 01.07.2017, aiming for "One India, One Market, One Tax" by subsuming previous indirect taxes and avoiding cascading effects through a continuous chain of Input Tax Credit (ITC).
* The constitutional basis for GST legislation is Article 246A, inserted by the Constitution (101st Amendment) Act, 2016.
* Section 16 of the CGST/SGST Act outlines the eligibility and conditions for taking ITC, including: (a) possession of a tax invoice, (b) receipt of goods/services, (c) actual payment of tax to the Government by the supplier, and (d) furnishing of returns.
* Section 16(4) imposes a time limit for availing ITC, initially the due date for furnishing the return under Section 39 for the month of September (which was later amended to November 30th).
* Section 155 places the burden of proving an ITC claim on the claimant.
* Petitioners included registered dealers who were denied ITC despite having valid tax invoices, proof of payment of value along with GST to their suppliers, and receipt of goods. Their claims were denied for various reasons, including technical issues (tax not reflected in GSTR-2A/GSTR-3B) or supplier default (supplier collected tax but did not remit to the Government).
* GSTR-2A is an auto-populated, read-only document meant to facilitate matching of inward and outward supplies.
* The government issued Circular No. 183/15/2022-GST and Circular No. 193/05/2023-GST to address difficulties and bona fide claims, particularly for the initial period of GST implementation when GSTR-2A functionality was not fully operational or mandatory.

4. Arguments (Taxpayer vs Revenue)

Taxpayer (Petitioners):
* Constitutional Validity: Sections 16(2)(c) and 16(4) violate Article 14 (equality), Article 19(1)(g) (freedom of trade/profession), and Article 300A (right to property).
* Article 14: Discriminates between bona fide purchasers who have paid tax and colluding purchasers, treating them equally.
* Article 19(1)(g): Imposes unreasonable and onerous conditions, denying eligible ITC and shifting the burden of the supplier's default onto the recipient, which affects business operations.
* Article 300A: ITC is a vested right/property of the recipient, and its denial without the supplier's fault amounts to deprivation of property without authority of law.
* ITC as a Right: ITC is an absolute right or a vested right under Section 16(1), and conditions in Section 16(2) and (4) cannot abridge it.
* "Lex non cogit ad impossibilia": It is impossible for a recipient to ensure that a supplier pays the tax to the Government after collection. The Government should recover from the defaulting supplier.
* Unjust Enrichment & Double Taxation: Denying ITC when the recipient has paid tax and the Government eventually recovers from the supplier leads to double taxation and unjust enrichment for the Government.
* Procedural vs. Substantive Right: Section 16(4) is procedural; a substantive right to ITC should not be defeated by procedural lapses (e.g., late filing of GSTR-3B, especially when late fees are paid).
* GSTR-2A Nature: GSTR-2A is merely a facilitator, and non-reflection of tax in it due to supplier's default or technical glitches should not deny ITC if the recipient possesses valid documents.
* Retrospective Effect: The amendment to Section 16(4) changing the due date for September returns to November 30th should be given retrospective effect from 01.07.2017 to address initial implementation difficulties.

Revenue (Respondents):
* ITC as a Concession: ITC is not an absolute right but a concession or entitlement granted by statute, subject to strict conditions, restrictions, and time limits as provided in the Act and Rules.
* Integrity of GST Scheme: Sections 16(2)(c) and 16(4) are crucial for maintaining the integrity and workability of the GST regime, particularly for inter-state supplies (IGST mechanism), ensuring tax collection, and facilitating budgetary planning for both Central and State Governments. Without 16(2)(c), originating states would have to transfer tax amounts to destination states that they never received.
* Reasonableness of Conditions: The conditions and time limits are reasonable, universally applicable, and existed in prior tax regimes (VAT, CENVAT). They are designed to promote compliance and self-monitoring within the value chain.
* Burden of Proof: Section 155 clearly places the burden on the recipient to prove their ITC claim, including that the tax has actually been paid to the Government.
* No Double Taxation/Unjust Enrichment: Denial of ITC due to supplier default is not double taxation. The recipient has a legal remedy against the defaulting supplier, and the Government retains the right to recover tax from the supplier.
* Legislative Wisdom: Prescribing cut-off dates for availing benefits is a matter of legislative policy and wisdom, which courts should not interfere with unless manifestly arbitrary or unconstitutional.
* Circulars: The issued Circulars (183/15/2022-GST and 193/05/2023-GST) already address bona fide cases for the initial period of GST implementation.

5. Court’s Reasoning
* Constitutional Validity of Taxing Statutes: The Court affirmed that taxing statutes can be challenged if they lack legislative competence, serve no public purpose, or violate fundamental rights. However, legislatures have wide discretion in fiscal matters, and classifications are permissible if reasonable and non-discriminatory. The CGST/SGST Act is within the legislative competence granted by Article 246A and serves a public purpose.
* Nature of ITC: The Court unequivocally held that ITC is a "benefit or concession" or an "entitlement" extended under the statutory scheme, not an absolute or fundamental right. This entitlement is strictly subject to the conditions and restrictions laid down in the GST Act (Sections 16(2) to 16(4), 43) and Rules. The phrase "shall be entitled" in Section 16(1) implies an entitlement subject to other statutory conditions, not an absolute right that overrides restrictions.
* Validity of Sections 16(2)(c) and 16(4):
* Section 16(2)(c): This provision is essential for the workability of the GST scheme, particularly the IGST mechanism. If a supplier defaults in remitting tax, allowing ITC to the recipient would force the originating state to transfer funds to the destination state that it never received, leading to substantial revenue losses and making the system unsustainable. The condition that tax must be "actually paid to the Government" is not onerous but fundamental to the GST credit chain. The Court rejected the "lex non cogit ad impossibilia" and double taxation arguments, stating the recipient's recourse is against the defaulting supplier.
* Section 16(4): The time limit for availing ITC is a reasonable mechanism for maintaining financial discipline, ensuring timely tax collection, and enabling budgetary allocations by both Central and State Governments. Tax credits cannot be allowed to linger indefinitely. This is not a new concept and has existed in previous tax laws (VAT, CENVAT). The Court agreed with prior High Court judgments that Section 16(4) is a valid restriction and does not contradict Section 16(2).
* Article 14, 19(1)(g), 300A: The Court found no violation of these articles. The conditions are universally applicable to all registered dealers, ensuring equality. Since ITC is a statutory concession, the legislature is competent to impose reasonable restrictions, and these restrictions are not arbitrary or unreasonable.
* GSTR-2A and Compliance: While acknowledging the initial difficulties and technical glitches in the GST system, the Court emphasized that the registered person is primarily responsible for self-assessing ITC based on their records. The introduction of GSTR-2A/GSTR-2B and amendments to Section 38 were to facilitate matching and ensure compliance.
* Retrospective Application: Recognizing the difficulties faced during the initial implementation of GST, the Court granted retrospective effect to the amendment in Section 16(4) which shifted the due date for September returns to November 30th, treating it as a procedural amendment intended to ease compliance. This means if a dealer filed their September return by November 30th (for periods from 01.07.2017 to 30.11.2022), their ITC claim should be processed.
* Circulars: The Court noted that the government itself issued circulars (183/15/2022-GST and 193/05/2023-GST) to address bona fide claims arising from initial GST implementation issues, allowing relief where proof of tax payment by the supplier can be furnished.

6. Statutory References
* Constitution of India: Articles 14, 19(1)(g), 300A, 246A, 265.
* Central Goods and Services Tax Act, 2017 (CGST Act): Sections 2(46), 2(59), 16, 16(1), 16(2), 16(2)(aa), 16(2)(c), 16(2)(d), 16(3), 16(4), 31, 34, 37, 37(1), 38, 39, 39(6), 41, 41(1), 41(2), 43, 43A, 44, 47, 49, 49(2), 49(4), 49(5), 50, 53, 54, 54(3), 59, 73, 74, 155.
* State Goods and Services Tax Act, 2017 (SGST Act): Parallel provisions to CGST Act.
* Integrated Goods and Services Tax Act.
* Customs Act, 1962.
* Income Tax Act, 1961.
* CGST Rules, 2017: Rules 36, 59, 60, 61, 61(5), 117, 117(1).
* Finance Act, 2022 (Act 6 of 2022): Section 100 (amending Section 16(4)).
* Circulars issued by CBIC: No. 183/15/2022-GST dated 27.12.2022; No. 193/05/2023-GST dated 17.07.2023.

7. Precedents Cited
* Godrej & Boyce Mfg. Co.(P) Ltd. & others V. CST & others [(1992) 3 SCC 624]
* Mahalaxmi Cotton Ginning Pressing & Oil Industries v. State of Maharashtra [2012 SCC OnLine Bom 733]
* Union of India & others V. VKC Footsteps (India) (P) Ltd. [(2022) 2 SCC 603]
* Astha Enterprises v. The State of Bihar [MANU/BH/1034/2023]
* State of Karnataka v. Ecom Gill Coffee Trading (P) Ltd. [2023 SCC OnLine SC 248]
* Nahasshukoor v. Assistant Commissioner [WA. No.1853 of 2023]
* State of Himachal Pradesh v. Goel Bus Service [2023 SCC OnLine SC 46]
* Sharaya Bano & others v. Union of India [(2017) 9 SCC 1]
* Gobinda Construction & others v. Union of India & others [MANU/BH/1260/2023]
* Thirumalakonda Plywoods v. Assistant Commissioner of State tax [2023 SCC OnLine AP 1476]
* Khandige Sham Bhat v. AITO [AIR 1963 SC 591]
* State of Bihar and others v. Bihar Pensioners Samaj [(2006) 5 SCC 65]
* Vivian Joseph Ferreira v. Municipal Corporation of Greater Bombay [AIR 1972 SC 845]
* State of Karnataka v.M/s. M K Agro Tech Private Limited [(2017) 16 SCC 210]
* India Agencies (Regd.) v. Additional Commissioner of Commercial Taxes [(2005) 2 SCC 129]
* Jayam & Co. v. Assistant Commissioner & Another [(2016) 15 SCC 125]
* ALD Automotive (P) Limited v. Commercial Tax Officer [(2019) 13 SCC 225]
* Willowood Chemicals v Union of India [2018 (58) GSTR 310 (Guj)]
* Reserve Bank of India v. Peerless General Finance and Investments Co. Ltd & Others [(1987) 1 SCC 424]
* Union of India v. Bharti Airtel and others [(2022) 4 SCC 328]