2021 (9) TMI 826 - HC - GST

Withholding the Input Tax Credit - vires of Section 16(2)(c) of CGST Act, 2017 - Seller has not deposited the tax (GST) with the Government revenue - One year has passed since the order of attachment - HELD THAT - Chapter IX of the said Rules pertains to payment of tax. Rule 86 refers to electronic credit ledger which shall be maintained in relation to the registered dealer where his eligible input tax credit would be accumulated for the purpose of discharging his tax liability to the Government. Rule 86A however provides conditions of use of amount available in such electronic credit ledger - the restrictions that can be imposed on use of amount available in electronic credit ledger of a person can be by way of a temporary measure for a period not exceeding one year. The decision to impose such restriction would be taken by the Commissioner or a person authorised by him upon being satisfied that the input tax credit has been fraudulently availed or is ineligible. In such a case, after recording reasons in writing restriction on use therefore of would be imposed. This is an interim measure and, therefore, cannot take shape of a permanent arrangement. This is an interim measure and, therefore, cannot take shape of a permanent arrangement. If the department wants to permanently disallow credit of accumulated amount in the ledger of a dealer, it must adjudicate the issue and pass an order after bi-parte hearing. Sub-rule (3) of Rule 86A clearly brings about this legislative intent while it provides that such restrictions shall cease to have effect after the expiry of a period of one year. The department cannot continue to subject the petitioner s electronic credit ledger to the restrictions imposed by the Commissioner, on 21st May 2020. The same shall be released. In other words, it would be open for the petitioner to utilise the amount credited in the said ledger for the purpose of payment of its taxes in accordance with law. Interim order passed - Writ petition be listed on 16th November 2021.

Summary

Issues:
1. Challenge to the vires of Section 16(2)(c) of Central Goods and Services Tax Act, 2017.
2. Provisional attachment under Rule 86A of Central Goods and Service Tax Rules, 2017.
3. Interpretation of Rule 86A and its implications on the petitioner's case.

Analysis:
1. The petitioner challenged the vires of Section 16(2)(c) of the CGST Act, 2017, which pertains to claiming input tax credit. The petitioner argued that denying input tax credit on purchases where tax has already been paid would result in double taxation. Various High Courts had dealt with similar provisions in other tax statutes, either reading them down or striking them down as unconstitutional. The petitioner's input tax credit account was attached due to the selling dealer's failure to deposit tax, and the petitioner sought relief. The Court issued a rule for consideration and notice to the Attorney General was directed.

2. The petitioner filed an interlocutory application challenging the provisional attachment of their ledger account under Rule 86A of the CGST Rules. The petitioner contended that the attachment, ordered by the Commissioner, had exceeded the permissible one-year period. The petitioner, a trader, had paid GST on purchases, but the tax was not deposited by the purchaser. The respondents opposed the application, citing the need to safeguard revenue. Rule 86A allows restrictions on the use of the electronic credit ledger for a maximum of one year, with specific conditions for imposing and lifting such restrictions. The Court held that the restrictions must cease after one year automatically, and the department cannot continue the restrictions beyond the stipulated period.

3. The Court interpreted Rule 86A, emphasizing that restrictions on the use of the electronic credit ledger are temporary and must be lifted after one year. The decision to impose restrictions must be based on specific reasons recorded in writing, and any permanent disallowance requires adjudication and a formal order. The Court directed the release of the petitioner's electronic credit ledger from the imposed restrictions, allowing them to utilize the credited amount for tax payments. No further relief was granted at that stage, and the respondents were directed to file a full reply to the main petition for further proceedings. The interlocutory application was disposed of, and the writ petition was scheduled for a later date.