2025 (2) TMI 1006 - HC - GST

Constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act 2017 - ultra vires of Articles 14 19(1)(g) and 20 of the Constitution of India - availment of fraudulent Input Tax Credit (ITC) on the invoices issued by respondent No.3 - HELD THAT - As per the contents of the show-cause notice a specific intelligence was gathered by the officers of the CGST and Central Excise Indore Commissionerate that as many as 12 noticees are indulged in issuance of fake invoices to various manufacturers without actual supply of goods. The investigation further revealed that the noticees had shown supply of various commodities to their recipients despite the fact that their supply pertains to FMCG goods. A detailed show-cause notice which runs into 82 pages has been issued to the petitioner and 11 other purchasers as well as respondent No. 3/supplier. Therefore only on the instance of the petitioner the entire show-cause notice cannot be quashed. Petitioner is required to establish its defence by producing documents before the competent authority who shall examine the invoices and bills generated by all the noticees during the enquiry. It appears that in order to avoid the participation in the enquiry petitioner is challenging the constitutional validity by placing reliance on the judgment passed by the Delhi High Court in case of On Quest Merchandising India Pvt. 2017 (10) TMI 1020 - DELHI HIGH COURT in respect of Delhi Value Added Tax Act 2004 in which the pari materia provision was read down . Conclusion - The non-obstante clause in the negative sentence in Section 16(2) restricts the eligibility under Section 16(1) for entitlement to claim ITC. There are no good ground for entertaining this petition - petition dismissed.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

The constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act) and whether it is ultra vires Articles 14, 19(1)(g), and 20 of the Constitution of India.
The legality of the show-cause notice issued to the petitioner under the CGST Act for availing fraudulent Input Tax Credit (ITC).
The obligations imposed on purchasers to ensure tax compliance by suppliers.

ISSUE-WISE DETAILED ANALYSIS

1. Constitutional Validity of Section 16(2)(c) of the CGST Act

Relevant legal framework and precedents: Section 16(2)(c) of the CGST Act restricts the eligibility of claiming ITC unless certain conditions are met. The petitioner challenged this provision, arguing it imposes unreasonable obligations on purchasers. The petitioner cited a Delhi High Court judgment that read down a similar provision in the Delhi Value Added Tax Act, 2004.
Court's interpretation and reasoning: The Court noted that various High Courts, including the Patna and Kerala High Courts, have upheld the validity of Section 16(2)(c). The Court emphasized that the provision is a restriction on eligibility for ITC and is not arbitrary or unconstitutional.
Key evidence and findings: The Court referred to judgments from other High Courts that have upheld the provision's constitutionality and emphasized the structured framework within the CGST Act for availing ITC.
Application of law to facts: The Court found that the petitioner's reliance on the Delhi High Court judgment was misplaced, as the provision in question had been upheld by other High Courts.
Treatment of competing arguments: The Court considered the petitioner's argument that the provision imposes undue burdens on purchasers but found that the legislative framework and judicial precedents supported the provision's validity.
Conclusions: The Court concluded that Section 16(2)(c) is constitutionally valid and does not violate the petitioner's rights under Articles 14, 19(1)(g), or 20.

2. Legality of the Show-Cause Notice

Relevant legal framework and precedents: The show-cause notice was issued under the CGST Act, alleging fraudulent ITC claims by the petitioner. The petitioner challenged the notice, arguing it was based on the supplier's non-compliance.
Court's interpretation and reasoning: The Court held that the show-cause notice was part of a legitimate inquiry into fraudulent activities and that the petitioner must participate in the proceedings to establish its defense.
Key evidence and findings: The investigation revealed that the petitioner and others were involved in issuing fake invoices without actual supply of goods. The Court noted that the petitioner had the opportunity to present evidence during the inquiry.
Application of law to facts: The Court applied the legal framework of the CGST Act, which allows for inquiries and show-cause notices in cases of suspected fraud.
Treatment of competing arguments: The petitioner's argument that the notice should be quashed was rejected, as the Court found that the notice was part of a valid legal process.
Conclusions: The Court concluded that the show-cause notice was legally valid and that the petitioner must participate in the inquiry.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: The Court cited the Kerala High Court's judgment, emphasizing that "the non-obstante clause in the negative sentence in Section 16(2) restricts the eligibility under Section 16(1) for entitlement to claim ITC."
Core principles established: The Court affirmed that ITC is not an unconditional right and is subject to compliance with statutory conditions, including those in Section 16(2)(c).
Final determinations on each issue: The Court dismissed the petition, upholding the constitutional validity of Section 16(2)(c) and the legality of the show-cause notice.