The Madras High Court has ruled that the time limit for availing Transitional Input Tax Credit (ITC) is mandatory in nature, not directory. The Court also observed that the ITC is a form of concession not a property, in which right can be vested. The time limit prescribed to avail such a concession under Rule 117 must be followed in a mandatory nature.
The petitioner P.R.Mani Electronics, a retail merchant of electronic appliances, challenged the constitutional validity of Rule 117 of the Central Goods and Service tax Rules, 2017 (CGST Rules) as ultra vires to Section 140 of Central Goods and Service Tax Act, 2017 (CGST Act) and Articles 14 and 300 A of the Constitution.
The Petitioner was a proprietary concern engaged in the retail trade of electronic goods including mobile phones. The petitioner stated that it was entitled to avail Transitional ITC of an amount Rs 4,62,496/- under CGST and Rs 7,512/- under SGST. Section 140 of the CGST Act prescribes that, the registered person is required to submit a return, within such time, and in such manner as may be prescribed for purposes of availing Transitional ITC. The procedure relating to availing of Transitional ITC was prescribed by Rule 117 of the CGST Rules.
Petitioner alleges that,on the prescribed time as per the rule, the Petitioner's consultant could not enter the common portal and upload the required form. Subsequently the Petitioner had approached the Sales Tax Collection Inspector, in person and submitted a hard copy of Form GST TRAN-1 and also received an acknowledgment.
In spite of repeated follow up with the Respondents, there was no response with regard to the entitlement of the Petitioner to Transitional ITC, as alleged by the petitioner.
As per the petitioner, ITC is in the nature of the Petitioner's property and, therefore, the Petitioner cannot be deprived of its property merely because the requisite form could not be submitted within the prescribed time limit. The prescription of such time limit in Rule 117 is ultra vires to Section 140 and violates Article 14 and 300-A of the Constitution., alleged by the petitioner.
Input Tax Credit (ITC)
Input Tax Credit system grants an opportunity to the tax payer to reduce the tax amount that he had already paid.For example at the time of paying tax for the sales, the tax payer can reduce the amount of tax that he already paid at the time of purchases.
The GST implementation had widened the scope of ITC. The basic norm of ITC is to cut short the tax paid on inputs from the amount of taxes paid on output. Section 140 of the CGST Act is dealing with Transitional ITC under the CGST Act and it stipulates that a registered person is required to submit a return , within such time , and in such a manner may be prescribed for purposes of availing Transitional ITC. The procedure related to the availing of Transitional ITC is prescribed under Rule 117 of the CGST Rules.
As per the rules, a registered person is required to submit a declaration, electronically, in Form GST TRAN-1 on the common portal within 90 days or, if applicable, the extended period not exceeding 180 days from the appointed date in order to make a claim for Transitional ITC.
ITC : A form of Concession.
The court observed that ,ITC is a form of concession granted to a registered person under the CGST Act , not a property in which a person can establish any rights. The time limits prescribed under the CGST rules are valid and strict in nature. The Court had declined the argument raised by the petitioner that, ITC is a form of property and rights can be vested upon the same.
"Thus, the object and purpose of Section 140 clearly warrants the necessity to be finite. ITC has been held to be a concession and not a vested right. In effect, it is a time limit relating to the availing of a concession or benefit. If construed as mandatory, the substantive rights of the assesses would be impacted; equally, if construed as directory, it would adversely impact the Government's revenue interest, including the predictability thereof. On weighing all the relevant factors, which may be not be conclusive in isolation, in the balance, we conclude that the time limit is mandatory and not directory.", the court observed.
In Jayam and Company v. Assistant Commissioner and another, (2016) 15 SCC 125 ,the apex court had observed the nature of Rule 117. The Court albeit in the context of the TNVAT Act, categorically concluded that ITC is a form of concession provided by the legislature and it can only be availed by satisfying the prescribed conditions.
" It is a trite law that whenever concession is given by statute or notification, etc. the conditions thereof are to be strictly complied with in order to avail such concession. Thus, it is not the right of the "dealers" to get the benefit of ITC but it is a concession granted by virtue of Section 19. As a fortiori, conditions specified in Section 10 must be fulfilled. In that hue, we find that Section 10 makes original tax invoice relevant for the purpose of claiming tax. Therefore, under the scheme of the VAT Act, it is not permissible for the dealers to argue that the price as indicated in the tax invoice should not have been taken into consideration but the net purchase price after discount is to be the basis. If we were dealing with any other aspect dehors the issue of ITC as per Section 19 of the VAT Act, possibly the arguments of Mr Bagaria would have assumed some relevance. But, keeping in view the scope of the issue, such a plea is not admissible having regard to the plain language of sections of the VAT Act, read along with other provisions of the said Act as referred to above.", the Apex Court observed in Jayam (Supra)
Rule 117 is Intra Vires
The court observed that the impugned Rule 117 is in no way stand ultra vires to Section 140 of the CGST Act. Under Section 164 of the CGST Act the government enjoys the power to make rules to give effect to the provisions of the Act
"As regards the contention that Rule 117 is ultra vires Section 140 of the CGST Act, on examining Rule 117 of the CGST Rules and Section 140 of the CGST Act, we find that Section 140 stipulates that a registered person making a claim for input tax credit should furnish a return, within such time, and in such manner as may be prescribed. As stated earlier, the rule making power is contained in Section 164, which is couched in wide terms, and enables the Government to frame rules to give effect to the provisions of the Act and, in particular, to make rules for In this statutory context, we find ample reason to conclude that Rule 117 of the CGST Rules is intra vires Section 140 of the CGST Act but none to conclude otherwise.", asserted by the Court.
The High court had dismissed the petition with out any cost and the issue constitutional validity was not decided since it was not pressed by the petitioner.
"We also note that Rule 117 specifies that the return in Form GST TRAN – 1 is required to be filed electronically on the common portal. This requirement is not satisfied by handing over the form in person to the Sales Tax Collection Inspector, Tiruvannamalai. Consequently, in our view, the Petitioner has completely failed to make out a case to direct the Respondents to permit the Petitioner to file Form GST TRAN -1 and claim the Transitional ITC of Rs.4,70,008/-. Needless to say, if any dispensations are granted by the tax authorities with regard to availing of Transitional ITC, whether by filing Form GST TRAN-1 or otherwise, and to which the Petitioner may be entitled, this order will not preclude the Petitioner from making a claim for Transitional ITC.", observed the court.
Opposite View by Delhi HC
In Blue Bird Pune Pvt. Ltd. v. Union of India [2019 SC Online Del 9250], a Division Bench of the Delhi High Court directed the tax authorities to open the on line portal so as to enable the electronic filing of Form GST TRAN-1 or accept the manually filed form. The Court has observed the GST system as a "trial and error phase".
In SKH Sheet Metals Components v. Union of India [2020 SCC online Del 650] the Delhi High Court has observed that "ITC is the heart and soul of GST legislations in as much as such legislations are designed to prevent the cascading of taxes." The court considered the mandatory or directory nature of Rule 117 and concluded that ,"it is directory both on the basis that the CGST Act does not specify the consequences of not complying with the time limit and because construing it as mandatory would prejudice the assessee".
Case Title : M/s PR Mani Electronics vs Union of India