Excessive Delegation rejecting the eligible ITC as ineligible

[Senguttuvan Kuppusamy]

With various professional groups spamming the inbox with Happy GST Day messages, one really gets to thinking whether it is indeed a Happy day.  Even after three years of GST implementation, there are plenteous issues and moot questions awaiting answers from the experts or the judiciary.

One such pertinent question is whether an assessee can avail the CGST component of the ITC pertaining to another state where there is no registration. 

The aim of GST is to improve the seamless credit prevailed in pre-GST laws and not to take away; under pre-GST law, the RTP (Registered TaxPayer) was eligible for credit on CENVAT paid by the supplier in the recipient State. When CENVAT under pre-GST Laws are equated to CGST, then why is that there lies a myth that the recipient is not eligible for ITC on CGST element in the case of Inter-State transactions where PoS the place of supplier?

This question of law was put before the Hon’ble AAR (not exactly the same way; but more or less expecting the same result) West Bengal for clarification in the case of IN RE: M/S. STORM COMMUNICATIONS PRIVATE LIMITED [2019 (1) TMI 1492 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL] and vide order dated 03.12.2008, the said question was answered in negative. This article analyses the legal position and opines on the moot question raised earlier.

In Re: Storm Communications case, the applicant is an Event Management Company registered in West Bengal receiving services from various hotels etc. located across the country. The applicant approached the AAR and sought to clarify whether they can adjust the ITC of one state’s CGST for payment of another state’s CGST and adjust the ITC of Tamil Nadu GST for payment of IGST. The Hon’ble AAR interpreted that the input tax and its credit are always linked with whether the person is registered or not and if the person is not registered in a particular state, the tax paid on the inward supplies in that state is not ‘input tax’ in relation to the said person. Therefore, without any registration in a particular state, the GST amount cannot be attributed as an eligible ITC for availment and further setoff.

To understand this, it is pertinent to refer to few sections which clarify the availment and setoff provisions under the CGST Act and Rules.

Prima facie, Section 16 of the CGST Act, states that a registered person is entitled to the ITC on the supply of goods and services that are used or intended to be used subject to certain conditions and restrictions. The conditions set forth thereafter are

1. He is in possession of the tax invoice/debit note
2. He has received the goods or services
3. The tax charged has been paid to the government
4. He has furnished the returns duly

Secondly, Section 17 of the CGST Act enlists certain circumstances like purchase of motor vehicle, food and beverages etc., under which the ITC is not permissible. The instant moot question is not explicitly listed under the said section.

Further, as per Section 49 of the CGST Act, the amount available in the electronic credit ledger may be used for making any payment towards output tax under the CGST Act or the IGST Act in such manner and subject to such conditions and within such time as may be prescribed.

On a perusal of the provisions of the Act, it is deduced that law per se has no restriction on the availment of the ITC on the CGST paid in the other states. With respect to the CGST Rules amended from time to time, even Rule 36 does not pose any restriction on availment of other states ITC. Under such circumstances, the only available restriction from the Department is through FAQs and tweets, the sanctity of which has to be tested in the court of law.

Assuming a tax payer is registered only in the State of TamilNadu and receives services from a person registered in the State of Kerala wherein the Place of supply is Kerala, as per the clarification or the restriction provided by the Department, it is understood that the registered person cannot use the CGST or SGST of another state (Kerala) in the state where the assessee has obtained a registration (TamilNadu). This deduction is very much contrary to the very objective with which the GST law was implemented. This understanding mandates every assessee to get themselves registered in the states where the services are rendered. Therefore this understanding needs a revisit and has to be tested in a court of law; otherwise the assessee would be flooded with notices from the Department.

As per the plethora of cases that have held that the delegated legislation has to be in conformity with the provisions of the parent statute, framing rules or issuing circulars curtailing the right to avail the ITC is not legal. In the instant case, the only restriction that can possibly be seen is the set off one state’s SGST credit with the other State’s SGST Liability. This is so because the revenue pertaining to one state cannot be set off against the liability pending against the other. However, this cannot be applied to the CGST credit set off against the CGST liability as both ultimately reach the Central Governments reserves. 

It is apposite to refer the case of BRAND EQUITY TREATIES LIMITED, MICROMAX INFORMATICS LTD., DEVELOPER GROUP INDIA PRIVATE LIMITED, RELIANCE ELEKTRIK WORKS VERSUS THE UNION OF INDIA AND ORS. [2020 (5) TMI 171 - DELHI HIGH COURT], wherein the Hon’ble High Court of Delhi held that the CENVAT credit which stood accrued and vested is the property of the assessee, and is a constitutional right under Article 300A of the Constitution. The same cannot be taken away merely by way of delegated legislation by framing rules, without there being any overarching provision in the GST Act. Drawing a parallel to the instant case, when there is no hindrance in the Act, the rules or the Circulars cannot be framed so as to create one.

Also on the technical aspect, as per section 42 of the CGST Act (which is not in force), the details provided by the supplier in his GSTR-01 shall be matched online against the details provided by the recipient in his GSTR-02. In case the assessee wants to avail the CGST, the same can be done in his return but due to the mismatch in the ITC (i.e.  NIL SGST availed), there will be a trigger in the portal. However, since this section is suspended, until its implementation, the same can be availed by the assessee.

At the outset, it is opined that the premise under which the CGST credit of one state is restricted for set off against the CGST liability of another state is not legally valid. However, the same has to be tested in the court of law by proving the excess delegation of powers restricting the accrued right of ITC to the assessee.

Co-authored by my colleague Ms. Arasi Ponmalar – Advocate

Discussions to this article

[Prasanna Kumar]

This is a tricky situation and I completely agree with your views. Even I advised my clients not to avail ITC of the SGST and CGST paid by by them on their lodging and boarding bills while staying in a hotel in the other state where he is not registered. We need to wait till it is tested in the appropriate court of law.