SCOPE OF POWERS UNDER RULE 86A OF CGST RULES, 2017

[Mr. M. GOVINDARAJAN]

Rule 86A

Rule 86A has been inserted in Central Goods and Services Tax Rules, 2017 (‘Rules’ for short) vide Notification No. 75/2019-Central Tax, dated 26.12.2019.  This Rule prescribes the conditions for the use of the amount available in electronic credit ledger.  

Powers of Commissioner

Rule 86A(1) provides that the Commissioner or an officer authorized by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as-

• the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-

• issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
• without receipt of goods or services or both; or

• the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or
• the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
• the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36,

may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilized amount.

Rule 86A(2) provides that the Commissioner, or the officer authorized by him may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.

Expiry of restriction

Rule 86A (3) provides that such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.

Scope

The scope of Rule 86A is clearly discussed in the case law -  ‘S.S. Industries v. Union of India’ – 2020 (12) TMI 1120 – Gujarat High Court.  In this case the writ applicant is registered with the GST Department.  While paying the GST on the goods manufactured, it has been availing the input tax credit on the input transactions upon receiving the tax paid inputs and tax invoices.    The writ applicant received the tax invoices from its suppliers and the transactions of inputs received and the input tax credit availed have been recorded in the electronic credit ledger maintained by the writ applicant.   The Directorate General of Goods & Services Tax Intelligence, Jaipur Zonal Unit received information that some registered dealers have been supplying only the tax invoices to the various manufacturers of steel products located across the country, and in the course of such inquiry against such registered dealers/supplies, it was revealed that the writ applicant had also received inputs from them involving the input tax credit to the tune of ₹ 2.40 crore.   The Investigating Agency thought fit to initiate an inquiry against the writ applicant herein by drawing the Panchnama dated 4^th April, 2019.    The inquiry, so far, prima facie reveals that the concerned suppliers of inputs, referred to above, had issued only the tax invoices without supplying any tax paid inputs and the transactions of these input suppliers/registered dealers are only on paper and, therefore, the input tax credit availed by all the buyers including the writ applicant herein on such tax invoices of these input suppliers is inadmissible.  The writ applicant was directed to deposit ₹ 25 lakhs with the Department.  The Department further blocked the input tax credit of ₹ 84,34,547/- under Rule 86A of the CGST Rules on 14th January, 2020.  The Department declined to refund the amount of ₹ 25 Lakh deposited by the writ applicant in cash as well as declined to unblock the ITC in the credit ledger of the writ applicant of ₹ 84,34,547/-.  Therefore the present writ petition was filed against the decisions taken by the Department.

In the writ petition, the petitioner prayed for the following-

•  to quash and set aside blocking of Input Tax Credit aggregating to ₹ 84,34,547/- in the Petitioner's Electronic Credit Ledger;
• to direct Respondent No.2 to allow the Petitioner to utilize such input tax credit of ₹ 84,34,547/-
• to allow the Petitioner to take credit of ₹ 25 Lakhs in electronic credit ledger for paying GST/IGST on the goods manufactured and supplied by the Petitioner.

The High Court framed two issues involved in this case which are-

• the true interpretation of Rule 86A of the CGST Rules inserted vide the Notification No.75/2019-CT dated 26th December, 2019 in the CGST Rules.
• the scope of exercise of power under Rule 86A of the Rules. In other words whether the authority concerned is empowered to retain any amount deposited by a registered person during any inquiry or investigation in the absence of any confirmed liability against the assessee and, more particularly, without issuance of a show-cause notice and assessment/adjudication order imposing any tax liability on the assessee.

The dispute in the present litigation is pertaining to the A.Y.2017-18 and 2018-19 respectively.

The writ petitioner submitted the following before the High Court-

• The firm has been receiving the tax paid inputs from the 36 input suppliers, are registered with the GST Department. 
• The same pattern and method of receiving the inputs and tax invoices including the paying price and tax by the RTGS has been followed in case of all the input suppliers who have submitted their returns before the jurisdictional GST Officers. 
• Despite the same pattern and method being adopted, referred to above, the dispute has arisen only with respect to the supplies received from six out of the 36 registered dealers. 
• It is something which is not palatable or sufficient enough to block the input tax credit of a huge amount.
• The petitioner paid an amount of ₹ 13,36,23,413/- to the input suppliers through the RTGS .
• All the inputs received by his client from these suppliers have been recorded in the credit ledger maintained by the writ applicant along with the details of input tax credit and the final products like the TMT Bars, Rounds etc
• Approximately 3,821 MTs of the inputs received from these suppliers has also been recorded in the statutory production register maintained by the firm and such final products were supplied to the customers on payment of the appropriate GST by the firm. 
• If transactions involving 3,821 MTs of inputs were only on paper, as alleged by the Department, then the firm could not have manufactured the final products cleared on payment of the GST.
• The GSTR-3B Returns of the firm regarding the availment of the input tax credit on all such input transactions and utilization thereof were assessed finally by the jurisdictional Bhavnagar GST Officers without any objection and the same signifies the actual receipt of the tax paid inputs and utilization thereof by the firm.
• There is no final order of assessment and in the absence of any confirmed liability towards duty, the amount voluntarily deposited by the assessee during such inquiry cannot be retained by the Revenue.
• Unless there is assessment and demand, the amount deposited by the assessee under coercion/threat of arrest, cannot be appropriated.
• The Revenue cannot justify retaining the amount deposited by merely saying that the same was voluntarily deposited.
• The unilateral action of blocking the input tax credit thereby preventing the writ applicants from utilizing such credit is illegal and unjustified, more particularly, when there is no assessment of any tax liability against the writ applicant firm.
• The input tax credit related transactions were not only recorded in the statutory registers but were also reported to the jurisdictional GST Officers on monthly basis all throughout the period of two years in question.
•  Nothing on record to even prima facie indicate that the petitioner had availed the input tax credit wrongly.
• Rule 86A could not have been invoked by the respondents during the investigation or inquiry.
• Rule 86A has prescribed a mandatory procedure to be followed for the purpose of invoking the same.
• Rule 86A of the rules requires two conditions to be satisfied, namely,

• recording of the reasons in writing by the officer ordering blocking of the input tax credit; and
•  communication of such reasons to the affected person.

•  It is a settled principle of law that the credit of tax paid on inputs, in different services, and capital goods is an indefeasible right of the assessee. 
• Since credit is a vested right of the assessee, the same cannot be extinguished or curtailed in any manner without the proper authority of law.
• With the introduction of Rule 86A, the aforesaid right to such credit is sought to be curtailed on flimsy grounds though temporarily.
• It is only when his clients attempted to use the input tax credit lying in the credit ledger for discharging their GST liability, it was reported on the GST Network Portal that the credit of ₹ 84,34,547/- had been blocked. 
• The petitioners are seriously prejudiced by blocking of the input tax credit.
• The communication of the reasons with respect to blocking of the input tax credit is a must.
•  Such drastic powers as conferred under Rule 86A could not have been exercised merely on the ground that an inquiry has been initiated as there is a suspicion that the transactions were sham.

The petitioner, therefore, prayed the court to grant relief on his prayers.

The Revenue submitted the following before the High Court-

• The investigation in this case is in progress and there is more than a prima facie case to invoke Rule 86A of the Rules for the purpose of blocking of the unutilized input tax credit. 
•  The investigation undertaken so far has prima facie revealed that the cases on hand are one of fraudulent transactions.
•  In the course of the investigation, the statements of various persons have been recorded including one of the partners of the partnership firm, i.e. the writ applicant 
• No sooner the investigation is over, then a show-cause notice shall be issued under Section 74 of the CGST Act, and along with the show cause notice, the materials relied upon, more particularly, the documentary evidence would also be made available to the writ applicant 
• The formalities like recording the transactions in the statutory returns and forms, and payment through the RTGS against the goods in accordance with the invoice and payment for the transportation etc. was all just a show so as to give a color of genuineness to such transactions.
• The petitioner voluntarily paid ₹ 25 lakhs.  such voluntary payment cannot be refunded at this stage
• The allegations of coercion or pressure are reckless and without any foundation for the same.
• Rule 86A confers power upon the authority concerned to block the input tax credit  if it is prima facie found that the transactions are fraudulent.
• The object behind the introduction of Rule 86A of the Rules is to curb such fraudulent activities.
• Statement of master mind behind creation of all such firms has been recorded, wherein they admitted their wrongdoings of providing invoices, without actual supply of goods to the recipients of such GST invoices.
• They also admitted to have flouted all the above firms on papers only and that no physical movement of goods has taken place under such invoices. 
• It is used to withdraw the amount received through RTGS from the recipients of GST invoices in cash and the same is returned back to the recipients of GST invoices after deduction of certain amount as their commission for providing such GST invoice only without supply of goods. 
• The Petitioner have availed ineligible input tax credit to the tune of ₹ 4,95,69,048/- based on fake/bogus invoices without actual receipt of goods. 
• This petition is premature as the same has been filed before issuance of Show Cause Notice and, thus, also before adjudication of the same. 
•  The petitioner has made general allegations without any basis with intent to delay the investigation from escaping their legitimate tax liability.
• Instead of using the efficacious alternative remedy available with them, petitioner has chosen to file this petition under Article 226 of the Constitution.
• Input tax credit  amounting to ₹ 84,34,547/ -, which was available in their credit ledger was blocked for wrongly availed input tax credit by them merely on the strength of invoices supplied by the aforementioned seven firms.
•  There is no such requirement that a specific order should be passed assigning, prima facie, reasons to block the input tax credit and communicate the same to the person concerned. 
•  There being no merit in both the applications, the application shall be rejected.

The High Court considered the submissions put forth by the parties to the present writ petition.  The High Court also analyzed Rule 86A and Section 16 of the Central Goods and Services Tax Act, 2017.

The High Court observed that Rule 86A undoubtedly could be said to have conferred drastic powers upon the proper officers if they have reason to believe that the activities or invoices are suspicious.  The Rule 86A is based on “reason to believe”. “Reason to believe” must have a rational connection with or relevant bearing on the formation of the belief.   It is a subjective term and can be interpreted differently by different individuals. Prima facie, it appears that the Rule 86A does not even contemplate for issue of any show-cause notice or intimation notice. In such circumstances, the person affected may be taken by surprise when he would go to the portal to pay taxes and finds that his input tax credit is not usable.

The High Court relied on various judgments.  The said judgments revealed that the accumulated credit could be utilized only subject to the conditions of the Notification and thus even in the case of accumulated credit, no vested right accrued.  The Supreme Court ruled that once the credit has been taken validly the right is indefeasible. In the instant case, the writ applicants have not been able to avail the input tax credit and, in such circumstances, it cannot be said that they have an indefeasible right.   Therefore the submissions made by the petitioner as regards the indefeasible right to avail the input tax credit vis-a-vis Rule 86A of the Rules should fail.  

The High Court further observed that there must be material, based on which alone the authority could form its opinion that it has become necessary to block the input tax credit pending an inquiry or investigation into the fraudulent transactions of fake/bogus invoices. The existence of relevant material is a pre-condition to the formation of the opinion.  The formation of the opinion by the authority undoubtedly should reflect intense application of mind with reference to the materials available on record that it had become necessary to order blocking of the input tax credit pending the inquiry.

In the absence of any cogent or credible material, if the subjective satisfaction is arrived at by the authority concerned for the purpose of blocking the input tax credit in exercise of power under Rule 86A of the Rules, then such action would definitely amount to malice in law.   Any use of discretionary power exercised for an unauthorized purpose amounts to malice in law. It is immaterial whether the authority acted in good faith or bad faith. 

The High Court observed that it cannot be said that the inquiry or investigation initiated as regards the fake/bogus invoices for the purpose of input tax credit is mala fide or based on absolutely no materials. 

The next question considered by the High court is whether Rule 86A of the Rules contemplates any passing of a specific order with an obligation to communicate the same to the affected person so that such person can take recourse to any legal remedy available to him.

The High Court held as follows-

• The invocation of Rule 86A of the Rules for the purpose of blocking the input tax credit may be justified if the concerned authority or any other authority, empowered in law, is of the prima facie opinion based on some cogent materials that the input tax credit is sought to be availed based on fraudulent transactions like fake/bogus invoices etc. However, the subjective satisfaction should be based on some credible materials or information and also should be supported by supervening factor. It is not any and every material, howsoever vague and indefinite or distant remote or far-fetching, which would warrant the formation of the belief.
• The power conferred upon the authority under Rule 86A of the Rules for blocking the ITC could be termed as a very drastic and far-reaching power. Such power should be used sparingly and only on subjective weighty grounds and reasons.
• The power under Rule 86A of the Rules should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.
• The aspect of availing the credit and utilization of credit are two different stages. The utilization of credit is a vested right. No vested right accrues before taking credit.
• The Government needs to apply its mind for the purpose of laying down some guidelines or procedure for the purpose of invoking Rule 86A of the Rules. In the absence of the same, Rule 86A could be misused and may have an irreversible and detrimental effect on the business of the person concerned. In this regard, the Government needs to act promptly.

However the High Court was convinced that there should not be interfere at this stage more particularly, when the investigation is in progress.  Therefore the High Court rejected the application of the writ petitioner.