Permissible Ambit of Delegated Legislation

[Surabhi Parihar]

I. Concept of delegated legislation

P. Ramanatha Aiyar’s, The Law Lexicon, defines delegation as an act of making or commissioning a delegate. Subordinate/delegated legislation is a process by which the executive is given powers by primary legislation to make laws in order to implement and administer the requirements of that primary legislation. Thus, the phrase “to implement and administer the requirements of that primary legislation” defines the boundaries or the scope for implementing a subordinate legislation. In GWALIOR RAYON SILK MANUFACTURING (WEAVING) COMPANY LIMITED VERSUS ASSISTANT COMMISSIONER OF SALES TAX AND OTHERS [1973 (12) TMI 38 - SUPREME COURT] observed that delegation often involves the granting of discretionary authority to another, but such authority is purely derivative. The ultimate power always remains in the delegator and is never renounced. The type of delegation legislation can comprise of law made by a person or body, may include order, rules, regulation, notification etc. The term Rule and Regulation are used as interchangeable words. However, is the power to make delegated legislation is conferred on different authorities under the same act, the two words may be used to distinguish the source. Circulars issued under the act can also be referred to as delegated legislation however, circulars with no statutory backing cannot override or dilute the effect of a constitutional or statutory provision.

The power to make subordinate laws is provided under Article 13(3) of the Indian Constitution which is entitled in the words that law includes any Ordinance, order, bye law, rule, regulation, notification, custom or usages having in the territory of India the force of law;. Similarly, the essence of delegated legislation is conveyed through section 164 of the CGST Act that gives the power to the Government on recommendations of the council to make rules or regulations. Provided such rules are notified through a Notification, which is not necessary for an order or direction issued from the GST council, which is a constitutional body.

II. Judicial Control over Delegated Legislation

When the permissible delegation is delegated excessively the doctrine of ultra vires is invoked, which envisages that an authority can exercise only so much power as is conferred on it by law. Thus, when the piece of delegated legislation becomes ultra vires, it cannot effect the rights of a person and is declared void. A void rule cannot be the basis of any administrative action. However, until a rule is declared invalid, it is presumed to be valid. Provided, if the valid and invalid part of the rule can be severed then the invalid portion is quashed and the valid portion remains to be operative. If the subordinate or delegated legislation goes beyond the scope of authority conferred on the delegate or it is in conflict with the parent or enabling act, it is called substantive ultra vires.

Grounds under which the subordinate legislation can be challenged –

1. If Parent Act (i.e the act providing for the delegation) is void then the subordinate legislation made under the act will also be declared to be unconstitutional and therefore void.
2. Where the Parent Act is not violative of the Constitution, but the subordinate legislation made under it violates the provisions of the Constitution. Such subordinate legislation will be unconstitutional and void though the Parent Act would be valid.
3. Subordinate legislation can be ultra vires the Enabling or Parent Act i.e. made in excess of the powers conferred by the Parent Act or is in conflict with the provisions of the Parent Act 

Briefly stated, the principle is that the delegate cannot make a rule which is not authorized by the parent statute. If the subordinate legislative authority keeps within the bounds of the power delegated, the delegated legislation is valid, however, if the authority exceeds the power delegated, then the courts will certainly declare it to be ultra vires. Supreme Court has emphasized in STATE OF UP. VERSUS RENUSAGAR POWER CO. [1988 (7) TMI 367 - SUPREME COURT], “if the exercise of power is in the nature of subordinate legislation, the exercise must conform to the provisions of the statute.”

How to test the validity of Rules - A rule cannot enlarge the meaning of a statutory provision. If a rule goes beyond what the section in the Act contemplates, the rule has to go away with. The delegated legislation can be struck down through the essential function test. The Courts have consistently held that an essential legislative function cannot be delegated to the executive and has to be exercised by the legislature. Thus, levy of tax is an essential legislative function and cannot be delegated. However, when a statutory provision is in the form of ‘’except as may eb otherwise prescribed by the rules’ or when it ‘subject to the rules’, the rules may prevail over the statute.

Constitutional Limitation of Delegated Legislation - Supreme court, in Kishan Prakash Sharma & Ors. Vs. Union of India 2001 (3) TMI 1018 held that the Legislature must set the limits of the power delegated by declaring the policy of the law and by laying down standards for the guidance of those on whom the power to execute the law is conferred. Supreme Court in Delhi Race Club Ltd. Vs. Union of India 2012 (7) TMI 498 - SUPREME COURT laid down two broad principles of delegated legislation to pass through the test of constitutionality i.e. (i) that delegation of the non-essential legislative function (Eg. Fixing rates) and (ii) while delegating the power of fixation of rate of tax, there must be in existence, inter-alia, some guidance, control, safeguards and checks in the concerned Act. In Indian Association of Tour Operators v. Union of India and others, reported in 2017 (9) TMI 98 - DELHI HIGH COURT it was held that through the delegated legislation there cannot be a deeming fiction to ascertain the value on which the tax is payable as it is an essential legislative function.

III. Standard Principles for application of a delegated legislation – Erstwhile laws

It is a settled principle of law that levy and collection of tax must be in conformity with the authority conferred by the law as held by Supreme Court in the case of DISTRICT MINING OFFICER & ORS. VERSUS TATA IRON & STEEL CO. & ANR. 2001 (7) TMI 1277 - SUPREME COURT Thus, the expression “authority of law” would refer to existence of a lawful enactment, which authorizes the levy or collection of a tax. Article 265 mandates every tax to be imposed by “law” it is to follow that it could only be imposed by a valid law, otherwise would be declared unconstitutional as held in CHHOTABHAI JETHABHAI PATEL AND CO. VERSUS UNION OF INDIA [1961 (12) TMI 1 - SUPREME COURT].

Subordinate Legislation to not override the statute –It is a settled general principle of law that if a delegated legislation goes beyond the power conferred by the statute, it has to be declared as ultra vires. The essence of this principle is laid on the foundation that a delegated legislation derives its power from the parent statute and not without it. Thus, the delegated legislation is to supplant the statute and not to supplement it.

In case of any conflict between the primary and the subordinate legislation, there is no reasoning required to conclude that the statute shall prevail over the subordinate legislation and bye-laws if not in conformity with the statute should be ignored as held in BABAJI KONDAJI GARAD ETC. VERSUS THE NASIK MERCHANTS CO-OPERATIVE BANK LTD., NASIK & ORS. ETC. - 1983 (10) TMI 270 - SUPREME COURT. It is also relevant to note that rules are made and meant only for the purpose of running the machinery provision of the act and cannot take away the right vested under the Act as held in COMMISSIONER OF INCOME-TAX, AP VERSUS TAJ MAHAL HOTEL - 1971 (8) TMI 2 - SUPREME COURT

No tax to be levied on articles outside the scope of the taxing statute – Supreme Court in BIMAL CHANDRA BANERJEE VERSUS STATE OF MADHYA PRADESH AND OTHERS - 1970 (8) TMI 30 - SUPREME COURT held that – “No tax can be imposed by any bye-law or rule or regulation unless the statute under which the subordinate legislation is made specially authorises the imposition even if it is assumed that the power to tax can be delegated to the executive. The basis of the statutory power conferred by the statute cannot be transgressed by the rule making authority. A rule making authority has no plenary power. It has to act within the limits of the power granted to it.”. Similarly, under GST, alleged supply cannot survive until the exact “form” of supply is established. The term “such as” used in Section 7 of the CGST Act, 2017 has expanded the forms of supply however, it is permissible only to the extent it indicates a transaction pattern listed in ‘eight’ forms of supply mentioned as “Form” used in the section as it is sine qua non for “charge”. 

Substantive right cannot be denied through a procedural handbook – In IFGL REFRACTORIES LTD. VERSUS JOINT DIRECTOR GENERAL OF FOREIGN TRADE - 2001 (5) TMI 56 - CALCUTTA HIGH COURT held that - There is no expressed procedure for granting benefit in the Handbook of Procedures but this cannot take away petitioner’s right granted under Exim Policy. The Handbook of Procedures is nothing but Rules provide for procedure and manner for granting benefit as provided in the Exim Policy has been made the provision of the procedural law and rule cannot be overridden or whittle down the substantive law.

Executive Instruction / Department Order to not override rules/statute - Executive instructions can supplement a statute or cover areas which statute does not extend but cannot run contrary to statutory provisions or whittle down their effect. Thus, executive instructions cannot amend or supersede the statutory rules, nor can an orders be issued in contravention to the statutory rules for the reason that an administrative instruction is not a statutory Rule nor does it have any force of law;. In Punit Rai v. Dinesh Chaudhary, 2003 (8) TMI 561 - SUPREME COURT; UNION OF INDIA VERSUS NAVEEN JINDAL & ANR. [2004 (1) TMI 685 - SUPREME COURT]; and STATE OF KERALA AND ORS VERSUS CHANDRAMOHANAN 2004 (1) TMI 722 - SUPREME COURT, the Apex Court held that executive instructions cannot be termed as law within the meaning of Article 13(3)(a) of the Constitution. Since the very objective of Article 265 is to guarantee that there shall be no taxation without representation, if there is any conflict between an executive instruction and rules framed under law, the rules shall prevail over the other. A mere Departmental communication does not amount to notification and an earlier notification cannot be said to have withdrawn by such communication. However, if an order can be referred to a statutory provision and held to have been passed under the said statutory provision, it would not be merely an executive fiat but an order under the Statute having statutory force. 

IV. Judicial Control under GST

Power to make rule that prescribes for time limit and takes away the vested right to avail credit provided under the statute – The free flow of credit of taxes incurred at the input stage forms the prima donna of GST regime and with this objective, the law allows transition of credit of input stage taxes accrued under the erstwhile regime to the GST regime through section 140(1) and 140(3) of the Act subject to the condition of filing TRAN-1. However, in the absence of a robust IT platform, the first set of litigation under GST began with non-filing of transitional forms due to technical glitches. Section 140(5) allows transition of credit as a substantive right that is not conditioned to any time limit and thereby credit can be claimed as per the application of Limitation Act 1963 as held in 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 The vires of Rule 117 have been tested in the case of M/S SIDDHARTH ENTERPRISES THROUGH PARTNER MAHESH LILADHAR TIBDEWAL VERSUS THE NODAL OFFICER 2019 (9) TMI 319 - GUJARAT HIGH COURT wherein the court held that Section 140(3) of the Act is a complete Code in itself and the substantive right conferred by the Act cannot be curtailed by way of rules. However, Rule 117 is lately amended retrospectively through the Finance Act, 2020 to prescribe for a time limit for availing transitional credit.

Section 164 of the CGST Act is abundantly clear that the Central Government was never vested with powers to frame Rule 117 to carry out the purpose of Section 140(5) of the Act. Secondly, power under section 164 cannot be so exercised as to bring into existence obligations not contemplated by the provisions of the Act itself. The retrospective amendment has opened Pandora ’s Box on whether the legislature is well contained with the power to legislate retrospectively? Whether amendment to the Rules to deny credit is constitutionally valid?

Though the parliament has the power to legislate retrospectively, however the amendment should not create any unreasonable restriction upon the fundamental or existing statutory rights of the taxpayer. If it creates untoward fiscal impacts on the taxpayers to deprive him of his rightful claim. In considering the question as to whether the legislative power to amend a provision with retrospective operation has been reasonably exercised or not, it becomes relevant to enquire as to how the retrospective effect of the amendment operates. In RC. TOBACCO PVT. LTD. VERSUS UNION OF INDIA 2005 (9) TMI 80 - SUPREME COURT , the Supreme Court held that The retrospective operation of a fiscal statute has to be tested on multiple parameters primarily the period of retrospectivity and degree of the unforeseen or unforeseeable financial burden imposed for the past period. Thus, the amendment would have to be found to be unduly oppressive and confiscatory before it can be held to be unreasonable as to violate constitutional norms.

Notification to not restrict availment of credit and subsequent refund of transitional credit - Notification No.20/2018 dated 26.07.2018 and Circular No.56/30/2018-GST dated 24.08.2018 extends the restriction on the utilization of unutilized ITC after payment of tax for and upto the month of July, 2018, on the inward supplies received up to the 31st day of July, 2018, shall lapse. The issue was dealt in the case of SHABNAM PETROFILS PVT. LTD. VERSUS UNION OF INDIA AND 1 OTHER (S) 2019 (8) TMI 159 - GUJARAT HIGH COURT wherein The Hon’ble High Court of Gujarat observed and held that Notification is a form of delegated legislation and by prescribing for lapsing of ITC the Notification has exceeded the power delegated under section 54(3)(ii) of the CGST Act (that restricts refund of accumulated ITC on inverted duty structure). Hence, they are hereby quashed and set aside and are hereby declared as ultra vires and beyond the scope of section which does not empower to issue such notifications in guise of Section 164 for lapsing ITC.

Notification to not impose tax on a person who is neither the supplier nor the recipient of service – Deciding the issue of whether tax can be levied on reverse charge basis on a transaction which is neither an inter-state supply and nor is the person classified as the recipient of service, Hon’ble Gujarat High Court in the case of MOHIT MINERALS PVT LTD VERSUS UNION OF INDIA & 1 OTHER - 2020 (1) TMI 974 - GUJARAT HIGH COURT rightly opined that There is no doubt that in the taxing legislation, the legislature deserves the greater latitude and the greater play in joints. This principle, however, cannot be extended so as to validate a levy by a subordinate legislation which has no sanction of law, however, laudable may have been the object to introduce it. While enacting the IGST Act, the legislature consciously curtailed the power of the Government to collect tax under the reverse charge basis from any person and restricted it only to the recipient of the supply.” Thus, on this basis Notification 8/2017-Integrated Tax (Rate) and entry no. 10 of Notification No. 10/2017-Integrated Tax (Rate) were held to be declared as “Ultra vires”.

Rule 89(5) ultra vires the Parent Statute - Rule 89(5) of the CGST Rules was retrospectively amended to restrict the refund of unutilized ITC in respect of suppliers falling under inverted duty structure to the extent of inputs. Gujarat High Court in the case of VKC FOOTSTEPS INDIA PVT. LTD. VERSUS UNION OF INDIA & 2 OTHER (S) - 2020 (7) TMI 726 - GUJARAT HIGH COURT delivered a landmark judgment stating that the formula prescribed under Rule 89(5) of the CGST Rules (a delegated legislation) is contrary to the provisions of Section 54(3) of the CGST Act. It was analysed that the intent of the government by framing the rule restricting the statutory provision cannot be the intent of law as interpreted in Circular 79/53/2018-GST dated 31.12.2018 to deny the registered person refund of tax paid on ‘input services’ as part of a refund of any unutilized input tax credit.  In State of Mysore and Ors. vs Mallick Hashim & Co. (SC) 1972 (10) TMI 94 - SUPREME COURT
it was held that no rules can be framed under the guise of such power which curtails the right of the taxpayer which is otherwise absolute in the Code.

V. Prospective areas to challenge validity of delegated legislation under GST

Legislative Competence of Rule 86A wrt. Blocking Credit Ledger - Rule 86A of CGST Rules inserted vide Notification No- 75/2019- Central Tax dated 26.12.2019 gives the power to block the Electronic Credit Ledger inserted by the exercise of power u/s 164 of the Act. Though the Rule is formulated to protect the interest of the Revenue, there may be possibility that the same is exercised against the bonafide assessee where he is refrained from making payment of the output tax from credit of input. In M/s Alfa Enterprises Vs. State of Gujarat 2019 (10) TMI 156 - GUJARAT HIGH COURT  the issue was dealt by Hon’ble Gujrat High Court wherein blocking of credit ledger was held to be patently illegal as it lacked the legislative competence and is not backed by any statutory provision. Considering that the amendment inserting Rule 86A was made effective after the ruling of Gujarat High Court, the legislative competence of Notification 75/2019- Central Tax dated 26.12.2019 inserting Rule 86A can be challenged on ground that there is no enabling provision in the CGST Act that gives effect to the said Rule, thus the action to block credit would be declared as ultra vires. 

Constitutional Validity of Rule 36(4) - Rule 36(4) inserted through Notification No. 49-2019-Central Tax dated 09.10.2019 restricts ITC up to 10% of value of invoices in respect of invoices/debit notes whose details have not been uploaded by the suppliers. The constitutional validity of Rule 36(4) is challenged before the Rajasthan High Court in the case of M/s. Ravi Infrabuild vs. UOI & Ors. D.B.C.W.P.No.3559/2020 as being ultra vires the constitutional principles and beyond the purview of the parent Act on the ground that –

1. The provisions of Rule 36(4) are ultra vires the provisions of Section 16 of the act that governs the availment of ITC subject to conditions and restrictions as may be prescribed. Subsection (2) contains conditions for availing ITC that starts with a non-obstante clause. The above condition of matching of credit and restriction is found specifically covered under Section 43 or Section 43A and therefore, the source of the power of Rule 36(4) cannot be found in Section 16(1).
2. The provisions of Rule 36(4), restricting the credit is contrary to the provisions of Sections 37 and 42 of the CGST Act, 2017.
3. The restrictions as contained in provisions of Section 43A, which is yet to be notified, cannot be introduced through Rules.
4. Rule 36(4) denies the benefit of ITC only because of the default of the selling dealer to upload the return, on which the recipient has no control This measure qua the recipient is arbitrary, irrational and unduly harsh and, therefore, violative of Article 14, 19, 21 and 300A of the Constitution of India.

VI. Conclusion

The very objective to mechanize delegated legislation is to curb down the exploitation of power by the administrative authority. Reason being laws are drafted by draftsman with liberated understanding that allows benefits to the taxpayer which are later realized to be functioning against the revenue. Thus, to overcome this widened scope of application or the view taken by the Higher Courts that interpret these provisions within the constitutional spheres as seen above, the laws are amended retrospectively to compensate the wrong previously done and fetter the rights already accrued with the taxpayer. Thus, even if the higher forums take a view and set boundaries for functioning of these delegated legislations, these are all expected to be appealed and challenged by Revenue before the Hon’ble Apex Court where the good done to the Assessee is again questioned and objected. Thus, to affirm that the delegated authority does not travel beyond the restrictions stipulated, their action must be strictly within the parameters of the authority delegated to it under the Act and it will not be proper to bring the theory of implied intent or the concept of incidental and ancillary power in the matter of exercise of fiscal power.