Denial of input tax credit on account of limitation under Section 16(4)
The latest writ petition was accepted by Karnataka High Court on the matter of denial of ITC in case of violation of provision of Section 16(4) of the CGST Act 2017.
Facts of the case:-
Petitioner is engaged in taxable services such as commercial/industrial construction service, works contract services, repair services and renting of immovable properties. The petitioner had filed returns in form GSTR - 3B and GSTR -1 for the period between July 2017 and April 2019 without availing Input Tax credit on goods and services utilized in construction of commercial complexes which are rented after completion. However input tax credit was claimed in GSTR-3B during the month of May 2019 subsequent to which notice was issued by the respondent.
A SCN was issued on petitioner denying input tax credit and recovery of the same along with interest.
The respondent stated that the input claimed was barred by limitation u/s 16(4) read with section 39(1) of the Act and Rule 61(5) of the Rules, 2017.
Section 16(4) of CGST Act 2017 is reproduced below:-
(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.
Submission on behalf of the Petitioner
It was contended by petitioner that ITC was allowed to be availed on goods and services used in the construction services if it was used in 'business-to-business' cases and denial of ITC was only subject to 'business-to-consumer' case.
Further input tax credit for the commercial complexes which were rented were not availed by petitioner due to lack of clarity.
Further petitioner relied on the judgment passed by Orissa High Court in a similar casewherein it was held that if the asseessee is paying GST on the rental income arising out of an investment then he shall be entitled to corresponding input credit.
It was submitted that the provisions of Section 17(5)(c) and (d) of the CGST Act are unreasonable and arbitrary for the reason that these provisions deny the advantage of input tax credit though there is continuity of transaction without break in chain.
Section 17(5) & (d) of CGST Act 2017 is reproduced below:-
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
The provisions of Section 16 of GST Act entitles a registered person to the use of input tax credit on any supply of goods or services to him which are used or intended to be used in the course of the business as part of a transactional chain.
Thus, the continuity of transaction without break in chain is the essence of the scheme under GST. Therefore, when an assessee like the petitioner avails goods and services for the purposes of construction of a premises that is rented as part of its business, should be entitled to avail input tax credit as the requisite test of continuing transactional chain is satisfied.
Hence petitioner has a vested and an accrued right to avail input tax credit once the conditions as contemplated under Section 16 of the CGST Act are satisfied with a simultaneous right to claim adjustment of tax on outward supply of goods andservices. This right would be an indefeasible right and therefore such right cannot be taken away in any manner that isimpermissible in law. This substantative right cannot be abridged by law of limitation.
Submission on behalf of the Respondent
The respondent relied on the decision of the Hon'ble Apex Courtin the given case and submitted that the petitioner cannot rely upon the decision in Safari Retreats Private since the same is challenged by the Department before the Hon'ble Supreme Court, therefore notice issued in a similar matter where there is challenge to the provisions of Section 17(5)(d) of GST Act, has not granted any stay. There cannot be stay in the present proceedings.
Hence the input tax credit, in the scheme of the CGST Act, is only a concession and the same cannot be categorized as a vested right or an accrued right or a substantive right. The constitutional validity of the provisions of Section 16 of the CGST Act has been upheld.
Stay order by Honorable Karnataka High Court
It was mentioned that in the light of the submissions, the validity of the provisions of Section 17[c][d], 16 of the CGST Act and the other impugned provisions needs to be analyzed. It needs to be examined whether the input tax credit under the CGST Act is contemplated as a mere concession or as a right that accrues if the conditions stipulated under Section 16 of the CGST Act are satisfied and if it is a right that accrues, whether such right could be extinguished prescribing the time limit within which such right has to be exercised.
Since the petitioner has availed input tax credit during the month of May 2019. Therefore provision of Section 16(4) and other related provisions of the GST Act need to be analyzed.
It was observed that department's interest will have to be taken care of while considering the interim prayer for stay of the impugned notice. Further if the impugned SCN had resulted into a demand then petitioner shall have right to avail a statutory remedy and be entitled for an interim protection pending adjudication of remedy. Hence statutorily such protection to the petitioner could only be conditional in view of the provisions of Section 107(6) of the Act.
From the above discussion it was ordered that the petitioner shall maintain a minimum of the 10% of the disputed availment in its electronic credit ledger during the course of stay granted by the court so that the government revenue can be protected.
Bagmane Developers Pvt Ltd Vs UnionOf India (2020-TIOL-1792-HC-KAR-GST)
 Safari Retreats Private Limited v. Chief Commissioner of CGST = 2019-TIOL-1088-HC-ORISSA-GST
 Union of India vs. Coastal Container Transporters Association (2019-TIOL-82-SC)