M Trade Links vs Union Of India on 4 June, 2024

Outcome**
The Kerala High Court:
* Rejected the challenge to the constitutional validity of Sections 16(2)(c) and 16(4) of the Central Goods and Services Tax Act, 2017 (CGST Act) and State Goods and Services Tax Act, 2017 (SGST Act).
* Granted liberty to petitioners who can claim benefits under Circular No. 183/15/2022-GST dated 27.12.2022 and Circular No. 193/05/2023-GST dated 17.07.2023 to make their claims before the appropriate authority within one month. The authorities are directed to examine and process such claims.
* Held that the amendment to Section 16(4) (extending the due date for furnishing the return for the month of September to 30th November) is procedural and should be given retrospective effect from 01.07.2017. Accordingly, claims for Input Tax Credit (ITC) for the period from 01.07.2017 onwards, where the return for the month of September was filed on or before 30th November of the succeeding financial year, should be processed if the dealer is otherwise eligible.
* The writ petitions were disposed of with these directions.

2. Core Issue
The core issue was the constitutional validity of Sections 16(2)(c) and 16(4) of the CGST/SGST Act, 2017. Specifically:
* Whether the condition in Section 16(2)(c) requiring the actual payment of tax by the supplier to the Government for the recipient to claim ITC is constitutional.
* Whether the time limit prescribed under Section 16(4) for claiming ITC is constitutional.
* The broader question of whether ITC is an absolute right or a concession/entitlement subject to statutory conditions.

3. Key Facts
* The Goods and Services Tax (GST) regime was implemented in India on 01.07.2017, aiming for "One India, One Market, One Tax" and the avoidance of cascading tax effects through ITC.
* The GST framework, including the power to legislate, was established by Article 246A (Constitution (101st Amendment) Act, 2016).
* Petitioners are registered dealers challenging the denial of ITC due to various reasons, falling into three main categories:
* Supplier remitted tax, but it wasn't reflected in GSTR-2A due to technical reasons.
* Supplier did not remit GST, despite collecting it from the petitioner.
* Lack of clear proof of payment or receipt of goods.
* GSTR-2A is an auto-populated, read-only document.
* The initial years of GST (2017-2019) experienced implementation difficulties, technical glitches, and frequent amendments.
* The Finance Act, 2022, amended Section 16(4) to extend the due date for claiming ITC related to September returns from the earlier due date (often 20th October) to 30th November of the succeeding financial year.
* The Central Board of Indirect Taxes and Customs (CBIC) issued Circular Nos. 183/15/2022-GST and 193/05/2023-GST to address bona fide ITC claims during the initial period of GST (up to 01.01.2022) when GSTR-2A matching was problematic.

4. Arguments (Taxpayer vs Revenue)

Taxpayer Arguments:
* ITC as a Vested Right/Property: Section 16(1) stating "shall be entitled" implies ITC is a right, not a concession, and its denial violates Article 300A (right to property) and Article 19(1)(g) (right to carry on trade).
* Impossibility and Unreasonableness: Placing the burden on the recipient to ensure the supplier pays tax (Section 16(2)(c)) is an impossible and onerous condition (lex non cogit ad impossibilia), as the recipient has no control over the supplier's actions.
* Double Taxation/Unjust Enrichment: If the recipient has paid tax to the supplier, denying ITC means the recipient pays tax twice, leading to unjust enrichment for the Government if it also recovers from the defaulting supplier.
* Violation of Article 14: Treating bona fide purchasers (who paid tax to suppliers) and collusive/guilty purchasers equally by denying ITC is arbitrary and discriminatory.
* GSTR-2A as Facilitator: GSTR-2A is merely a facilitator, and non-reflection of tax payment there should not lead to denial of ITC if other documentary evidence (valid invoice, proof of payment, receipt of goods) is available.
* Procedural Nature of Section 16(4): The time limit in Section 16(4) is procedural, and a substantive right to ITC should not be defeated by late filing, especially when late fees regularize such delays.
* Retrospective Application of Amendment: The amendment to Section 16(4) (extending the September return deadline to 30th November) is procedural and should apply retrospectively from 01.07.2017 to mitigate initial implementation difficulties.

Revenue Arguments:
* ITC as a Concession, not a Right: ITC is a statutory concession, not an absolute right, and is subject to strict conditions and restrictions prescribed by the Act and Rules, as affirmed by various Supreme Court judgments.
* Necessity of Conditions for GST Structure: Section 16(2)(c) is fundamental for the GST scheme, especially for inter-state supplies. Without actual tax payment by the supplier to the government, the originating state cannot transfer the tax component to the IGST account (under Section 53), leading to revenue loss and rendering the entire system unworkable.
* Time Limits for Fiscal Discipline: The time limits under Section 16(4) are necessary for budgetary allocations, revenue estimation, and overall fiscal discipline of both Central and State Governments. Such limits are not new and existed in prior tax regimes.
* Self-Monitoring Mechanism: Section 16 and related rules create a self-monitoring and self-policing mechanism, incentivizing recipients to ensure compliance by their suppliers.
* Constitutional Validity: The conditions and time limits are universally applicable to all registered persons, not discriminatory, and fall within the wide legislative discretion for fiscal statutes, thus not violating Articles 14 or 19(1)(g).
* Remedy Against Supplier: If a supplier defaults, the recipient's remedy is to recover the amount from the supplier, not to claim ITC when the tax has not reached the government treasury. There is no double taxation as the government has not received the tax once.
* Burden of Proof: Section 155 explicitly places the burden of proving ITC claims on the registered person.
* Precedents Upholding Validity: Cited various High Court and Supreme Court judgments that have upheld the constitutional validity of similar restrictive provisions on ITC.
* Circulars Provide Relief: Existing CBIC circulars (183/15/2022-GST and 193/05/2023-GST) already provide mechanisms for addressing bona fide cases of ITC mismatches due to system issues during the initial GST period.

5. Court’s Reasoning
The Court addressed the issues as follows:

• Constitutional Validity of Taxing Statutes (Issue I): The Court affirmed that a taxing statute is constitutional if it's within legislative competence, serves a public purpose, and does not violate fundamental rights. It held that the CGST/SGST Act is competent under Article 246A and serves a public purpose. In matters of fiscal legislation, the legislature enjoys wide discretion for classification, and mere disparities or choices in taxation do not automatically render a provision unconstitutional under Article 14.

• Nature of Input Tax Credit (Issue II): The Court unequivocally held that ITC is not an absolute right but a benefit or concession extended under the statutory scheme. 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. It cited several Supreme Court precedents (e.g., Godrej & Boyce, India Agencies (Regd.), Jayam & Co., ALD Automotive, VKC Footsteps (India) (P) Ltd.) to support that concessions are to be strictly construed and conditions scrupulously followed. Therefore, the petitioners' argument of an absolute right under Section 16(1) being superior to other conditions was rejected.

• Constitutional Validity of Sections 16(2)(c) and 16(4) (Issue III):

  • Section 16(2)(c) (Actual Payment by Supplier): The Court found Section 16(2)(c) to be essential for the workability of the dual GST system, especially for inter-state supplies and the IGST mechanism. If the supplier does not actually pay the tax collected to the Government, the originating state cannot fulfill its obligation under Section 53 to transfer the CGST/SGST component to the IGST account, leading to significant revenue loss for the destination state. This would render the entire GST scheme unworkable. Thus, the condition is not onerous or unconstitutional. The Court reiterated that the remedy for a recipient, if a supplier defaults, is against the supplier, as the government has not received the tax, precluding any claim of double taxation or unjust enrichment.
  • Section 16(4) (Time Limit for Claiming ITC): The Court held that the time limits in Section 16(4) are reasonable and necessary for proper revenue collection, budgetary allocation, and fiscal planning by the governments. It noted that time limits for claiming ITC are not a new phenomenon and existed in prior tax regimes. The non-obstante clause and negative phrasing in Section 16(2) explicitly introduce restrictions on eligibility, and Section 16(4) imposes a valid time restriction, both operating independently without contradiction. The Court relied on recent High Court judgments (Thirumalakonda Plywoods and Gobinda Construction) that had upheld the constitutional validity of Section 16(4) on similar grounds.
  • Self-Assessment and Matching Mechanism: The Court acknowledged the self-assessment nature of GST returns and the evolution of the ITC matching mechanism, referring to Union of India v. Bharti Airtel and others on how eligible credit was determined by taxpayers. The subsequent introduction of Sections 16(2)(aa) and the substitution of Section 38 (GSTR-2B) and Section 41 further refined this process.

• Reliefs/Directions:

  • Recognizing the practical difficulties faced by taxpayers during the initial phase of GST, especially concerning GSTR-2A availability and complexities, the Court directed that petitioners who qualify for relief under CBIC Circular Nos. 183/15/2022-GST and 193/05/2023-GST could approach the authorities within one month for processing their claims.
  • Crucially, the Court interpreted the amendment to Section 16(4) (changing the September return deadline to 30th November) as procedural. To ease the difficulties, it directed that this amendment should be applied retrospectively from 01.07.2017. This means any ITC claim for a financial year made in the September return, if filed by 30th November of the succeeding financial year, should be processed.

6. Statutory References
* Constitution of India: Articles 13, 14, 19(1)(f), 19(1)(g), 31(1), 246, 246A, 254, 265, 279A, 286, 300A, 302, 366(12A), 366(26A).
* Central Goods and Services Tax Act, 2017 (CGST Act): Sections 2(46), 2(59), 12, 12(1), 13, 15, 16, 16(1), 16(2), 16(2)(a), 16(2)(aa), 16(2)(b), 16(2)(ba), 16(2)(c), 16(2)(d), 16(3), 16(4), 31, 34, 37, 37(1), 38, 39, 39(1), 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 Sections 16(2)(c), 16(4), 53 etc.)
* Integrated Goods and Services Tax Act (IGST Act): Section 49(5).
* Goods and Services Tax (Compensation to States) Act.
* Customs Act, 1962.
* Income Tax Act, 1961.
* Finance Act, 2022: Section 100.
* CGST Rules, 2017: Rules 36, 36(1)(a)-(e), 36(2), 36(3), 36(4), 59, 60(7), 61, 61(5).
* Bombay Sales Tax Rules, 1959: Rules 41, 41A.
* Central Sales Tax Act, 1956: Sections 8(1), 8(4), 13, 13(1), 13(3), 13(4), 13(5).
* Central Sales Tax (Karnataka) Rules, 1957: Rule 6(b)(ii).
* Central Sales Tax (Registration and Turnover) Rules, 1957: Rules 12(1), 12(2), 12(3).
* Tamil Nadu Value Added Tax Act, 2006: Sections 3(2), 3(3), 19, 19(11), 19(20).
* Maharashtra Value Added Tax Act, 2002: Section 48, 48(1)-(6), 48(5).
* Cenvat Credit Rules, 2004: Rule 4.

7. Precedents Cited
1. Godrej & Boyce Mfg. Co.(P) Ltd. & others V. CST & others [(1992) 3 SCC 624]
2. Mahalaxmi Cotton Ginning Pressing & Oil Industries v. State of Maharashtra [2012 SCC OnLine Bom 733]
3. Union of India & others V. VKC Footsteps (India) (P) Ltd. [(2022) 2 SCC 603]
4. Astha Enterprises v. The State of Bihar [CWC No. 10395 of 2023] (Patna High Court) / Aastha Enterprises v. State of Bihar & others [MANU/BH/1034/2023]
5. State of Karnataka v. Ecom Gill Coffee Trading (P) Ltd. [2023 SCC OnLine SC 248]
6. Nahasshukoor v. Assistant Commissioner [WA. No.1853 of 2023:2023: KER: 69725]
7. State of Himachal Pradesh v. Goel Bus Service [2023 SCC OnLine SC 46]
8. Sharaya Bano & others v. Union of India [(2017) 9 SCC 1]
9. Gobinda Construction & others v. Union of India & others [CWC No. 9108 of 2021] (Patna High Court)
10. Thirumalakonda plywoods v. Assistant Commissioner of State tax [2023 SCC OnLine AP 1476] (Andhra Pradesh High Court)
11. Khandige Sham Bhat v. Agricultural Income Tax Officer [AIR 1963 SC 591]
12. State of Bihar and others v. Bihar Pensioners Samaj [(2006) 5 SCC 65]
13. Vivian Joseph Ferreira v. Municipal Corporation of Greater Bombay [AIR 1972 SC 845]
14. Raja Jagannath v. U. P. [1963 (1) SCR 220: AIR 1962 SC 1563]
15. East India Tobacco Co. v. Andhra Pradesh [1963 (1) SCR 404: AIR 1962 SC 1733]
16. State of Andhra Pradesh v. Nalla Raja Reddy [1967 (3) SCR 28: AIR 1967 SC 1458]
17. Ravi Varma v. Union of India [1969 (3) SCR 827: AIR 1969 SC 1094]
18. Twyford Tea Co. Ltd. v. State of Kerala [1970 (3) SCR 383: AIR 1970 SC 1133]
19. State of West Bengal v. Kesoram Industries Limited & others [(2000) 1 SCC 710]
20. Yadlapati Venkateswarlu v. State of Andhra Pradesh & another [1992 Supp (1) SCC 74]
21. Smt Ujjam Bai v. State of Uttar Pradesh [1962 AIR 1621]
22. State of Karnataka v. M/s. M K Agro Tech Private Limited [(2017) 16 SCC 210]
23. India Agencies (Regd.) v. Additional Commissioner of Commercial Taxes [(2005) 2 SCC 129]
24. Jayam & Co. v.Assistant Commissioner & Another [(2016) 15 SCC 125]
25. ALD Automotive (P) Limited v. Commercial Tax Officer [(2019) 13 SCC 225]
26. Willowood Chemicals v. Union of India [2018 (58) GSTR 310 (Guj)]
27. Reserve Bank of India v. Peerless General Finance and Investments Co. Ltd & Others [(1987) 1 SCC 424]
28. Union of India v. Bharti Airtel and others [(2022) 4 SCC 328]
29. R.S. Raghunath v. State of Karnataka [(1992) 1 SCC 335] (Implicitly referenced in paragraph 91)
30. Jilubhai Nanbhai Khachar v. State of Gujarat [1995 Supp (1) SCC 596] (Referenced in paragraph 93)
31. Dwarkadas Shrinivas v. The Sholapur Spinning & Weaving Co. Ltd. [1950 SCR 869: AIR 1951 SC 41] (Referenced in paragraph 93)
32. State of Madhya Pradesh vs. Indore Iron and Steel Mills Pvt. Ltd. [AIR 1998 SC 3050] (Referenced in paragraph 97)