Indirect Tax Alert: Andhra Pradesh High Court upholds the validity of Section 16(4) of the CGST Act

Facts of the case:

• Mr. Kondalaiah Sunduru is a sole proprietor doing business in hardware and plywood with the trade name ‘Tirumalakonda Plywoods’ (Taxpayer).
• The Taxpayer had commenced the aforesaid business during the COVID-19 pandemic and had duly obtained registration under the GST law.
• In the wake of the COVID-19 pandemic, the due date for filing Form GSTR-3B return for March 2020 was extended till 30 June 2020. However, the Taxpayer was able to file the said return only on 27 November 2020.
• In this regard, the Taxpayer received a show cause notice (SCN) from the Tax Authorities under Section 74 of the Central Goods and Services Tax Act, 2017 (CGST Act)¹ stipulating that
  • The Taxpayer has furnished Form GSTR-3B for March 2020 after the due date prescribed under Section 39 of the CGST Act for September 2020 (i.e., 20 October 2020);
  • Accordingly, the input tax credit (ITC) availed by the Taxpayer in Form GSTR-3B for March 2020 would not be available as the same is availed in contravention of the time limit prescribed under Section 16(4) of the CGST Act (being 20 October 2020) (incorrect claim of ITC).
• The Taxpayer filed its response to the aforesaid SCN inter alia seeking an opportunity of being heard. Despite this, the Tax Authorities issued a personal hearing notice through private email-ID inter alia stipulating that the Taxpayer has neither filed a reply to the SCN nor had opted for a personal hearing.
• Pursuant to the above, the Tax Authorities confirmed the SCN and sought reversal of such incorrect claim of ITC along with interest and penalty (equivalent to the incorrect claim of ITC) (Impugned Order).
• Aggrieved by the above, the Taxpayer filed a Writ Petition before the Hon’ble Andhra Pradesh High Court inter alia challenging the constitutional validity of Section 16(4) of the CGST Act (restricting availment of ITC after the prescribed due date).

Contentions by the Taxpayer:

• The Taxpayer could not file Form GSTR-3B for March 2020 on account of the COVID-19 pandemic and the same could only be filed on 27 November 2020 on payment of late fees amounting to INR 10,000 which was accepted by the Tax Authorities.
• Given that the belated return was accepted by the Tax Authorities, it shall be deemed that the Tax Authorities have exonerated the delay, if any, for claiming ITC beyond the period prescribed under Section 16(4) of the CGST Act. Accordingly, the ITC availed by the Taxpayer ought to be allowed.
• ITC is a statutory right, which an assessee is entitled to claim, and placing stumbling blocks by way of restriction (by imposing time limit under Section 16(4) of the CGST Act) from claiming such right amounts to violation of Article 14, 19(1)(g) and 300A of the Constitution of India (Constitution).
• Section 16(2) of the CGST Act commences with a ‘non-obstante’ clause which will override Section 16(4) of the CGST Act. Thus, as long as the conditions prescribed under Section 16(2) of the CGST Act are complied with by an assessee, the claim of ITC cannot be restricted by referring to the time limit prescribed under Section 16(4) of the CGST Act.
• In view of the above, the Taxpayer cannot be deprived of the right to claim ITC solely on the ground that the said claim was made beyond the period prescribed under Section 16(4) of the CGST Act.
• In the present case, imposition of interest and penalty (equivalent to the incorrect claim of ITC), without giving an opportunity of hearing is atrocious and hence, liable to be set aside.

Contention by the Tax Authorities:

• ITC is only a concession or rebate, and the legislature, in its wisdom has imposed certain conditions (including the prescription of time limits) under Sections 16(2) and 16(4) of the CGST Act which must be fulfilled by the Taxpayer before claiming ITC. Accordingly, neither the conditions mentioned under Section 16(2) nor the time limit in Section 16(4) of the CGST Act can be attributed to be illegal or unconstitutional.
• Even if it is assumed that ITC is a legal right, the legislature still has a right to impose time limit for claiming such right as has been done through Indian Limitation Act, 1863.
• The operative sphere of Article 14, 19(1)(g) and 300A of the Constitution is quite distinct from that of Section 16(4) of the CGST Act. Accordingly, one cannot authoritatively claim that Section 16(4) of the CGST Act has infringed the aforesaid provisions of the Constitution.
• In order to strike down a provision as being violative of Article 14 of the Constitution, it must be established that the said provision is arbitrary and negated equality. The said arbitrariness must be manifested from the impugned provision.
• As regards imposition of interest and penalty, the Taxpayer alone was not the sufferer of COVID-19 pandemic and the other assesses who were under similar circumstances have duly filed their GST returns. Accordingly, the Taxpayer cannot be given a special treatment.

Observations and Ruling by the Hon’ble High Court:

• On perusal of the Impugned Order, it was observed that all the 10 factual and legal objections made by the Taxpayer were discussed and rejected by the Tax Authorities.
• ITC owed its genesis to the legislative measure of introducing the GST law to eradicate cascading effect of taxes which existed under the pre-GST regime (under the Excise, VAT and Service tax laws).
• Section 16 of the CGST Act prescribes the eligibility and conditions for an assessee to claim ITC on goods or services or both used or intended to be used in the course or furtherance of business. While Section 16(2) of the CGST Act prescribes the eligibility criteria which is sine qua non for claiming ITC, Sections 16(3) and 16(4) of the CGST Act imposes additional conditions or limitations for claiming ITC. Thus, even if an assessee passes the basic eligibility criteria imposed under Section 16(2) of the CGST Act, he will not be entitled to claim ITC if his case falls within the limitations prescribed under Sections 16(3) and / or 16(4) of the CGST Act.
• As per Section 16(4) of the CGST Act, if an assessee fails to furnish returns within the time limit prescribed in the said provision, he will not be entitled to claim ITC.
• As regards the Taxpayer’s contention that in view of the ‘non-obstante’ clause, Section 16(2) would override Section 16(4) of the CGST Act, it was observed that –
  • A ‘non-obstante’ clause is a legislative device usually employed in a statute to give overriding effect to certain provisions over other contradictory provisions in the same or other statute.
  • The provision enabling the claim of ITC is Section 16(1) of the CGST Act. Section 16(2) of the CGST Act restricts the claim of ITC which is otherwise allowed. Sections 16(3) and 16(4) of the CGST Act further restrict the entitlement provided under Section 16(1) of the CGST Act.
  • Section 16(2) of the CGST Act only overrides the provision which enables the claim of ITC viz., Section 16(1) of the CGST Act. This is evident from the use of negative sentence in Section 16(2) of the CGST Act suggesting that unless the conditions mentioned under Section 16(2) of the CGST Act are satisfied, ITC will not be available.
  • While a ‘non-obstante’ clause is a mere restricting provision, an interpretation that the other restricting provisions will not have effect or that the restricting provision will restrict other restricting provisions cannot be accepted because there is no contradiction between the restricting clause followed by a ‘non-obstante’ clause and the other restricting provisions.
  • In the present case, both Sections 16(2) and 16(4) of the CGST Act are two different restricting provisions, the former providing eligibility conditions and the latter imposing time limit. However, both these provisions have no inconsistency between them.
  • In view of the above, Section 16(4) of the CGST Act, being a non-contradictory provision and capable of clear interpretation, will not be overridden by the ‘non-obstante’ provision of Section 16(2) of the CGST Act.
• Mere filing of the return with a delay fee cannot act as a springboard for claiming ITC. Collection of late fees is only for the purpose of admitting the returns for verification of the same and not for consideration of ITC. The statutory limitation cannot be stifled by collecting late fees.
• ITC is a mere concession / rebate / benefit and not a statutory or constitutional right and the legislature is within its competency to impose conditions (including time limit for availing such concession). Further, since the operative spheres of Section 16 of the CGST Act and Articles 14, 19(1)(g) and 300A of the Constitution are different, the question of infringement would not arise.
• In view of the foregoing, the Writ Petition filed by the Taxpayer was rejected holding that –
  • Section 16(4) of the CGST Act is not violative of Articles 14, 19(1)(g) and 300A of the Constitution.
  • Section 16(2) of the CGST Act will not override Section 16(4) of the CGST Act.
  • Mere acceptance of Form GSTR-3B with late fees will not exonerate the delay in claiming ITC beyond the time limit prescribed under Section 16(4) of the CGST Act.

BDO India Comments:

Section 16 (4) of the CGST Act, providing a time limit to claim ITC has been a subject matter of challenge in multiple High Courts and this is one of the initial High Court rulings on this issue. The industry would now await for the other High Courts to hear and decide the issue.

[Thirumalakonda Plywoods Vs. The Assistant Commissioner, State Tax [2023-VIL-472-AP], dated 18 July 2023]