Puthanangadi Industries vs The State Of Kerala on 4 June, 2024

Outcome
The Kerala High Court rejected the constitutional challenge to 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). However, the Court granted the following reliefs to the petitioners:
* Petitioners are granted liberty to claim the benefits of Circular No. 183/15/2022-GST dated 27.12.2022 and Circular No. 193/05/2023-GST dated 17.07.2023 within one month, where applicable to their bona fide claims. The appropriate authorities shall examine and process these claims.
* The time limit for furnishing the return under Section 39 for the month of September is to be treated as 30th November in each financial year, with retrospective effect from 01.07.2017**. This means if a dealer filed their September return and claimed Input Tax Credit (ITC) on or before 30th November (even if the previous due date was 20th October or 30th September), their claim for ITC should be processed if they are otherwise eligible.

2. Core Issue
The core issue before the Kerala High Court was the constitutional validity of Sections 16(2)(c) and 16(4) of the CGST/SGST Act, 2017. Specifically, the Court addressed:
* The grounds upon which a taxing statute can be declared unconstitutional.
* The fundamental nature of the claim to Input Tax Credit (ITC) under the GST regime.
* Whether the conditions and time limits imposed by Sections 16(2)(c) and 16(4) infringe upon constitutional provisions, particularly Articles 14, 19(1)(g), and 300A of the Constitution of India, and are thus unsustainable.

3. Key Facts
* The petitioners are registered dealers under the CGST/KSGST Act, 2017, who were denied ITC claims.
* Their grievances stemmed from:
* Cases where the supplier remitted the GST but it was not reflected in the GSTR-2A due to technical reasons.
* Cases where the supplier failed to remit the GST collected from the petitioners, despite the petitioners possessing valid tax invoices, proof of payment of goods value along with GST, and actual receipt of goods.
* A third category mentioned, but not specifically addressed for relief, involved petitioners with invoices but no clear proof of payment or receipt of goods.
* The petitioners contended that GSTR-2A is merely a facilitator, and its non-operability or non-reflection of tax payment should not deny ITC.
* The challenge also included the retrospective amendment to Rule 61 of the CGST Rules, 2017, and the strict time limit for claiming ITC under Section 16(4).
* The GST regime was introduced as a destination-based consumption tax to eliminate cascading effects and establish "One India, One market, One tax."

4. Arguments

Taxpayer (Petitioners):
* Constitutional Violation: Sections 16(2)(c) and 16(4) violate Article 14 (equality), Article 19(1)(g) (right to trade and profession), and Article 300A (right to property) of the Constitution.
* Article 14: Treating bona fide purchasers (who paid tax to suppliers) and colluding/guilty purchasers (who claim false credit) alike is arbitrary and discriminatory.
* Article 19(1)(g): Denying eligible ITC on account of the supplier's default imposes an unreasonable and onerous condition, affecting the recipient's business operations. The "lex non cogit ad impossibilia" maxim applies, as recipients cannot compel suppliers to remit tax.
* Article 300A: ITC is a vested right and property of the recipient, and its denial without the authority of law (for the supplier's default) is unconstitutional.
* Double Taxation & Unjust Enrichment: Denial of ITC due to supplier default leads to double taxation (recipient pays tax, then denied credit, while the government may also recover from the defaulting supplier) and unjust enrichment for the government.
* Nature of ITC: ITC is an absolute right under Section 16(1), and conditions/restrictions in Section 16(2) and 16(4) cannot override this substantive right.
* Procedural vs. Substantive: Section 16(4) is a procedural provision; a substantive right to ITC should not be defeated by procedural lapses like late filing, especially when late fees cure the delay (Section 47).
* GSTR-2A/3B Discrepancy: GSTR-2A is a facilitative, read-only document; discrepancies should not be a basis for denial if the recipient has other documentary proof. The CBIC's own press releases clarify this.
* Retrospective Application: The amendment to Section 16(4) (extending the September return due date to 30th November) should be applied retrospectively from 01.07.2017, considering the initial complexities and technical glitches in GST implementation.
* Legislative Intent: The core objective of GST is to avoid cascading effects, which is undermined by stringent conditions and time limits that deny legitimate ITC.

Revenue (Respondents):
* Nature of ITC: ITC is a concession or entitlement granted by statute, not an absolute or fundamental right. It is subject to strict conditions and restrictions prescribed in the Act and Rules.
* Necessity of Conditions: Sections 16(2)(c) (actual payment of tax to government) and 16(4) (time limit) are crucial for the integrity and workability of the GST framework.
* Inter-state Supplies (IGST Mechanism): Without Section 16(2)(c), the originating state would be forced to transfer CGST/SGST components to the IGST account (under Section 53) without actually receiving the tax from the defaulting supplier, leading to significant revenue loss and disrupting budgetary allocations.
* Self-Policing Mechanism: These conditions encourage registered persons to ensure their suppliers are compliant, thereby maintaining the tax chain.
* Reasonableness of Time Limit: The prescribed time limits for availing ITC (initially 6-18 months, now 8-20 months) are reasonable and not unprecedented in Indian tax laws (e.g., VAT, CENVAT). They are essential for tax collection certainty and budgetary estimation.
* No Constitutional Violation:
* Article 14: The conditions and time limits apply uniformly to all registered dealers; any incidental disadvantage to some due to specific circumstances does not render the provision discriminatory.
* Articles 19(1)(g) & 300A: Since ITC is a concession, the legislature has wide discretion to define its terms and conditions. These restrictions are reasonable and do not violate fundamental rights or property rights.
* Burden of Proof: Section 155 places the burden of proving ITC claims on the registered person, requiring them to satisfy all statutory conditions.
* No Double Taxation: If a supplier defaults, the recipient has a right to recover the tax paid from the supplier. The government's recovery action against the supplier is separate. ITC can only be claimed if the tax is actually paid to the government treasury.
* Circulars: Recent Circulars (No. 183/15/2022-GST and 193/05/2023-GST) have been issued to address bona fide claims and initial difficulties during GST implementation.
* Judicial Precedents: Several High Courts (Patna, Andhra Pradesh) have already upheld the constitutional validity of Section 16(4).

5. Court’s Reasoning
The Court considered the issues in three parts:

I) Grounds for Constitutional Challenge of a Taxing Statute:
* A taxing statute is valid if it falls within the legislature's competence, serves a public purpose, and does not violate fundamental rights.
* Article 246A grants both Central and State legislatures concurrent power to enact GST laws, confirming legislative competence. Public purpose of tax is also recognized.
* The Court affirmed that legislatures have wide discretion in fiscal matters, including classification and imposing taxes, and such laws are generally not invalid merely because they could have taxed other objects or if the tax impacts some more heavily.

II) Nature of Input Tax Credit (ITC):
* The Court held that ITC is not an absolute right but a benefit or concession extended to dealers under the statutory scheme. This entitlement is subject to the conditions and restrictions explicitly envisaged in Sections 16(2) to 16(4), Section 43, and related rules.
* It relied on Supreme Court precedents (Godrej & Boyce Manufacturing Company Pvt. Ltd., India Agencies (Regd.), Jayam & Co., ALD Automotive (P) Limited, Union of India v. VKC Footsteps (India) (P) Limited) which consistently held that concessions like ITC must strictly comply with statutory conditions.

III) Constitutional Validity of Sections 16(2)(c) and 16(4):
* Context of GST: The Court emphasized that GST's structure, particularly the IGST mechanism (Section 53), necessitates that tax collected from the supplier is actually paid to the government. If ITC were allowed without the supplier remitting the tax, the originating state would suffer immense revenue loss as it would be obligated to transfer funds it never received to the destination state. This would render the entire GST scheme unworkable.
* Section 16(2)(c) - "Actually Paid to Government": This condition is essential for the legal fulcrum that balances granting ITC, enabling self-assessment, and ensuring inter-state tax transfer. It is a self-monitoring and self-policing mechanism. The non-obstante clause and negative phrasing ("no registered person shall be entitled...") in Section 16(2) make it a restrictive condition, not merely an eligibility clause.
* Section 16(4) - Time Limit: The time limit for availing ITC is crucial for maintaining certainty in tax collection, budgetary allocations, and preventing indefinite claims, as affirmed in Willowood Chemicals v. Union of India. This is a reasonable restriction and not a new phenomenon in tax legislation. The Court cited other High Court judgments (Thirumalakonda Plywoods, Gobinda Construction, Aastha Enterprises) upholding the validity of Section 16(4).
* No Constitutional Infringement:
* Article 14: The Court found no violation of equality, as the conditions apply universally to all registered dealers. Any discrimination arising from fortuitous circumstances (supplier default) is incidental and inherent in taxing statutes.
* Articles 19(1)(g) & 300A: Since ITC is a statutory concession, the legislature is within its powers to impose conditions. These conditions are not arbitrary or unreasonable to the extent of violating fundamental rights or the right to property.
* Double Taxation: The Court reiterated that the recipient has a right to recover the unremitted tax from the defaulting supplier. The denial of ITC, when the tax has not actually reached the treasury, does not amount to double taxation.
* Specific Reliefs:
* Circulars: Recognizing genuine difficulties faced by taxpayers, especially in the initial years of GST due to system evolution, the Court directed authorities to process claims under specified CBIC Circulars (No. 183/15/2022-GST and 193/05/2023-GST) for the period before 01.01.2022.
* Retrospective Amendment to Section 16(4): Considering the initial difficulties and the subsequent amendment in Finance Act 2022 (changing the September return due date to 30th November), the Court declared this procedural amendment to have retrospective effect from 01.07.2017. This allows dealers who filed their September returns (claiming ITC) by 30th November to have their claims processed, even if the earlier statutory due date was earlier.

6. Statutory References
* Constitution of India: Articles 14, 19(1)(g), 31(1), 246, 246A, 254, 265, 279A (5) & (6), 286, 300A, 302, 366(12A) & (26A).
* Central Goods and Services Tax Act, 2017 (CGST Act) / State Goods and Services Tax Act, 2017 (SGST Act): Sections 2(46), 2(59), 12, 12(1), 13, 15, 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(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.
* CGST Rules, 2017: Rules 36, 36(1)(a)-(e), 36(2) & Proviso, 36(3), 36(4), 59 (FORM GSTR-1), 60(7) (FORM GSTR-2B), 61, 61(5), 117(1).
* Other Acts: Constitution (101st Amendment) Act 2016, Finance Act, 2022 (Section 100, Act 6 of 2022), Income Tax Act, 1961, Customs Act, 1962, Integrated Goods and Services Tax Act, Maharashtra Value Added Tax Act, 2002, Central Sales Tax Act, 1956, Central Sales Tax (Karnataka) Rules, 1957, Tamil Nadu Value Added Tax Act, 2006, CENVAT Credit Rules, 2004, Bombay Sales Tax Rules, 1959, Madhya Pradesh General Sales Tax Act, 1958.
* Circulars/Press Releases: CBIC Press Release dated 18.10.2018; Circular No. 183/15/2022-GST dated 27.12.2022; Circular No. 193/05/2023-GST dated 17.07.2023; Circular No. F&C 49/21/2016-GST; Circular No. 59/33/2018-GST dated 04.09.2018.

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 HC); also 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 decided on 3rd November 2003]
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, decided on 8th September 2023 (Patna HC)]
10. Thirumalakonda plywoods v. Assistant Commissioner of State tax [2023 SCC OnLine AP 1476 (Andhra Pradesh HC)]
11. Khandige Sham Bhat v. AITO [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's case (cited in Thirumalakonda Plywoods)
30. Jilubhai Nanbhai Khachar (cited in Gobinda Construction)
31. State of Madhya Pradesh vs. Indore Iron and Steel Mills Pvt. Ltd. [MANU/SC/0637/1998: AIR 1998 SC 3050]