2024 (9) TMI 1543 - HC - GST

Interpretation of Rule 86A of the CGST Rules - Blocking of input tax credit - excess of the credit available in their respective ECLs - It is the case of the petitioners that Rule 86A of the Rules does not permit blocking of the ITC, which is unavailable in a taxpayer s ECL - whether Rule 86A of the Rules permits the Commissioner or an officer authorized by him, to block a taxpayer s ECL (Electronic Credit Ledger) by an amount exceeding the credit available at the time of issuance of the said order?. Nature of Input Tax Credit - HELD THAT - A brief purview of the provisions of the CGST Act clearly indicate that a taxpayer is entitled to ITC only to the extent as provided under the CGST Act and subject to the stipulated conditions being satisfied. There is no cavil that if the conditions as set out under the CGST Act are not satisfied, the registered taxpayer would not be entitled to avail and utilize the ITC in respect of supplies received by it. The right to avail and utilize the ITC is thus a statutory right, which accrues by virtue of the provisions of the CGST Act and is subject to the conditions as set out therein. This right to avail and utilize the ITC is a valuable right. It is, undeniably, an asset, which vests with a taxpayer if the taxpayer satisfies all the stipulated conditions for such entitlement. In a scheme for taxation, which provides for credit for taxes on inputs, the taxpayer would be entitled to such credit subject to complying with all the necessary conditions for validly availing the same. If the conditions for validly availing the same are satisfied, it would vest a right with the taxpayer to utilize the same in accordance with the relevant statute. Undeniably, the said right is a valuable right and a taxpayer cannot be deprived of the same except by a validly enacted statute or rules. It is settled law that legislature has wide latitude in laws relating to economic activities. The legislature is required to be allowed sufficient play in the joints as it has to deal with complex problems - Although, the legislature has a wide discretion and the Courts must defer to the legislative wisdom, the fiscal statutes are not immune from the constitutional framework and must necessarily be compliant with the constitutional guarantees. Rule 86A of the CGST Rules - a drastic power - HELD THAT - Rule 86A of the Rules falls within Chapter IX of the Rules, and expressly empowers the Commissioner or any other officer authorized by him, not below the rank of Assistant Commissioner, to not allow debit of an amount from the ECL subject to the conditions specified therein being satisfied - Rule 86A of the Rules, is not a provision for recovery of tax or other dues. It enables the concerned authority to take temporary measures for the protection of the interest of revenue - The same is necessarily to be borne in mind while interpreting the provisions of Rule 86A of the Rules. Rule 86A, not condition of grant of exemption/concession - HELD THAT - An order under Rule 86A of the Rules is premised on the Commissioner or the officer authorized by him, having reason to believe that the available ITC has either been availed fraudulently or is ineligible on account of the circumstances as set out in Clauses (a) and (d) of Sub-rule (1) of Rule 86A of the Rules. An order under Rule 86A of the Rules is not in the nature of a condition to be complied by the taxpayer or a burden to be discharged by it. It is an order passed in exercise of drastic powers that are granted to the concerned authority. Such a power can be exercised only if the conditions set out in Sub-rule (1) of Rule 86A of the Rules are satisfied and the extent of such power is circumscribed by Rule 86A of the Rules. There is some similarity in the language of Section 83 (1) of the CGST Act, which enables the Commissioner to provisionally attach a taxpayer s assets for protecting the interest of the Revenue, with the language of Rule 86A of the Rules. The powers under Sub-section (1) of Section 83 of the CGST Act and under Rule 86A of the Rules, can be exercised only if the concerned authority has reasons to believe that the conditions as stipulated in the respective provisions are satisfied. In M/s S.S. Industries v. Union of India 2020 (12) TMI 1120 - GUJARAT HIGH COURT , the Gujarat High Court had also observed that the provisions of Rule 86A of the Rules are reminiscent to Section 83 of the CGST Act. Principles of interpretation of Rule 86A - HELD THAT - If there is no credit of input tax available in the ECL, one of the necessary conditions for passing an order under Rule 86A (1) of the Rules would not be satisfied. The fact that the Commissioner (or an officer authorized by him) may have reasons to believe that in the past a taxpayer had availed and utilized ITC by debiting its ECL is not the condition precedent for passing an order under Rule 86A (1) of the Rules - The words credit of input tax available in the electronic credit ledger plainly refers to the credit, which is at the given point of time available in the taxpayer s ECL. If the same had already been utilized in payment of tax, penalties or other dues, or has been refunded, the same would not be available in the ECL. There is no cavil that ITC is availed by a registered person when he files a return and the same is credited in his ECL. The credit of input tax as available in the ECL is then available to the taxpayer for discharging his dues under the CGST Act or in given cases, for seeking its refund. When Rule 86A (1) of the Rules refers to the ITC available in the ECL of a taxpayer (which the Commissioner or the officer authorized by him has reason to believe has been fraudulently availed or is ineligible), it clearly refers to the amount that is lying to the credit of the taxpayer in his ECL. It is difficult for us to accept that the expression available in the electronic credit ledger should be read as the ITC that was available in the ECL sometime earlier, prior to the same being used - In a case where the Commissioner or an officer authorized by him has a reason to believe that the tainted ITC is less than the ITC credited in the ECL, then it would necessarily follow that the order under Rule 86A (1) of the Rules would be confined to such amount as equivalent to the ITC, which the Commissioner or an officer authorized by him has reasons to believe has been fraudulently availed or is ineligible. Circular dated 02.11.2021 relied upon by the learned counsel for the Revenue do not support the contentions advanced by them. On the contrary, the same support the literal construct of Rule 86A of the Rules and also clarify that the amount of debit to be disallowed from the ECL should not be more than the amount of the ITC, which is believed to have been fraudulently availed or is ineligible. However, this would necessarily be subject to the conditions referred to in the opening sentence of Rule 86A (1) of the Rules, which is that the same is available in the ECL of an assessee. Thus, if the amount of the ITC available in the ECL exceeds the amount, which the Commissioner or any officer authorized by him, has reason to believe is ineligible or fraudulently availed, the amount which is blocked (not allowed to be debited) is required to be restricted to an amount equivalent to the fraudulent or inadmissible ITC. Since there is no ambiguity in the plain language of Rule 86A (1) of the Rules, it is not necessary to resort to the rule of purposive interpretation. However, it is found that the aforesaid interpretation is also in conformity with the legislative scheme of the CGST Act and the Rules. An order under Rule 86A (1) of the Rules does not require a prior show cause notice to be issued to a taxpayer as it is by its very nature an emergent provision to immediately block the usage of the ITC credited in the ECL, which the Commissioner or an officer authorized by him has reasons to believe has been fraudulently availed or is ineligible. The concerned authorities are required to proceed to determine whether a taxpayer has wrongly availed or utilized the ITC, under Sections 73 or 74 of the CGST Act and if it is found that the taxpayer has wrongly availed of the ITC the proper officer is required to pass an order to determine the amount of tax, interest or penalty payable. The demand as raised are required to be determined under Sections 73 and 74 of the CGST Act. Rule 86A (1) of the Rules does not contemplate an order, the effect of which is to require a taxpayer to replenish his ECL with valid availment of ITC, to the extent of ITC used in the past, which the Commissioner or an officer authorized by him has reasons to believe, was fraudulently availed or was ineligible. Such an interpretation would in effect amount to construe an order under Rule 86A (1) of the Rules as an order for recovery of tax. This is obvious because the taxpayer would now have to incur a larger cash outflow for payment of taxes as he would be denied utilization of validly availed ITC, which he would require to accumulate to compensate for the ITC availed and utilized which the Commissioner or an officer authorized by him, has reasons to believe was fraudulently availed or was ineligible. The orders impugned in the present petitions are set aside to the extent the impugned orders disallow debit from the respective ECL of the petitioners, in excess of the ITC available in the ECL at the time of passing of the impugned orders - Petition allowed.

Summary

Issues Involved:
1. Whether Rule 86A of the CGST Rules permits the Commissioner or an authorized officer to block a taxpayer's Electronic Credit Ledger (ECL) by an amount exceeding the credit available at the time of the order.

Detailed Analysis:

Issue 1: Interpretation of Rule 86A of the CGST Rules

Controversy:
The petitioners, registered taxpayers under the CGST/DGST Acts, challenged the orders blocking their Input Tax Credit (ITC) in their Electronic Credit Ledgers (ECLs) in excess of the credit available, creating an artificial negative balance. The petitioners argued that Rule 86A does not permit blocking ITC unavailable in the ECL, while the Revenue contended that the Commissioner has the power to block ITC, even if it exceeds the credit balance available at the time of the order.

Submissions of the Counsel:
- Petitioners' Argument:
- Referred to the Gujarat High Court decision in Samay Alloys India Pvt. Ltd. v. State of Gujarat and the Telangana High Court decision in Laxmi Fine Chem vs Assistant Commissioner, which support their contention.
- Argued that ITC is a vested right and cannot be blocked except by a specific statutory provision. Rule 86A should be strictly interpreted, allowing blocking only to the extent of ITC available in the ECL.
- Cited the decision of the Delhi High Court in Brand Equity Treaties Ltd. and Ors. v. Union of India and the Bombay High Court in Dee Vee Projects Ltd. v. Government of Maharashtra, asserting that ITC is a taxpayer's property and cannot be deprived without authority of law.

- Revenue's Argument:
- Contended that the Gujarat High Court's view is erroneous and referred to the Calcutta High Court decision in Basanta Kumar Shaw v. Assistant Commissioner of Revenue, which supports a broader interpretation of Rule 86A.
- Argued that Rule 86A should be interpreted purposively to prevent taxpayers from utilizing fraudulently availed or ineligible ITC.
- Referred to the Allahabad High Court decision in R.M. Dairy Products LLP v. State of U.P. & Ors., emphasizing that the operative words "not allow debit" do not restrict the power to the amount available in the ECL at the time of the order.
- Submitted that ITC is a concession, not a vested right, and should be interpreted in favor of the Revenue if multiple interpretations are possible.

Nature of Input Tax Credit:
- ITC is a statutory right subject to conditions under the CGST Act and Rules. It is a valuable asset for taxpayers but can be curtailed by law.
- The Supreme Court in ALD Automotive Pvt. Ltd. v. Commercial Tax Officer recognized ITC as a benefit/concession under the statutory scheme, which can be curtailed by statutory provisions.
- The Gujarat High Court in M/s S.S. Industries v. Union of India acknowledged ITC as a vested right once validly availed and emphasized the need for credible materials for invoking Rule 86A.

Rule 86A of the Rules:
- Rule 86A allows the Commissioner or authorized officer to block ITC in the ECL if there are reasons to believe that the ITC has been fraudulently availed or is ineligible.
- The power under Rule 86A is drastic and should be used sparingly, supported by credible materials.
- Blocking ITC under Rule 86A is a temporary measure for protecting revenue and is not a recovery provision.

Interpretation of Rule 86A:
- The court must interpret Rule 86A literally, as the language is clear and unambiguous.
- The opening sentence of Rule 86A (1) indicates that the power can be exercised only if ITC is available in the ECL.
- The expression "amount equivalent to such credit" refers to the ITC available in the ECL, not past utilized ITC.
- The court rejected the Revenue's broader interpretation, emphasizing that Rule 86A does not allow blocking ITC exceeding the available balance in the ECL.

Conclusion:
- The court set aside the impugned orders to the extent they disallowed debit from the ECL in excess of the ITC available at the time of the order.
- The court concurred with the Gujarat High Court in Samay Alloys India (P) Ltd. v. State of Gujarat and the Telangana High Court in Laxmi Fine Chem v. Assistant Commissioner, confirming that Rule 86A does not permit blocking ITC beyond the available balance in the ECL.