Demand of Rs. 231 Crore stayed on SCN issued for multiple years where Constitutionality and fairness of ISD provisions is under challenge

The Hon’ble Orissa High Court in Vedanta Limited Versus Union of India & others - 2025 (9) TMI 859 - ORISSA HIGH COURT held that there is a prima facie case concerning the challenge to GST Input Service Distributor (ISD) provisions, and, citing Karnataka High Court precedent, stayed the operation of a show cause notice for GST demand issued for multiple financial years until further orders.

Facts:

Vedanta Limited (“the Petitioner”) is engaged in manufacturing with a centralized Input Service Distributor (ISD) mechanism for allocating input service credits to its units. The Petitioner challenged a GST demand of Rs. 231 crores arising out of ISD credit distribution, issued via show cause notice dated June 20, 2025, for multiple financial years.

The Union of India and GST authorities (“the Respondents”) raised the demand based on Section 21 of the CGST Act and relevant ISD rules, holding Vedanta liable as a recipient for alleged inaccuracies in ISD credit distribution. The Respondents maintained that recovery against recipients is legally valid under the scheme.

The Petitioner contended that Section 21 violates constitutional rights by allowing recovery from ISD credit recipients who have no control over the ISD's processes, thereby treating passive recipients as wrongdoers. The Petitioner also argued that Section 21 conflicts with Sections 73 and 74 (which pertain only to wrongful availment/utilization of credit),  and challenged the lack of guidelines on attribution under Section 20 and relevant rules, asserted the show cause notice is non-est for lumping multiple years, and highlighted the absence of savings enabling action for periods before April 1, 2025, when ISD provisions were substituted.

The Respondent countered that the statutory framework permits such proceedings and that appropriate opportunities for representation and adjudication exist.

Aggrieved by the demand and notice, Vedanta Limited approached the Orissa High Court under Article 226, seeking a declaration that the ISD provisions are unconstitutional and for quashing of the notice.

Issue:

Whether the vires of Section 21 and related ISD provisions of the CGST Act, and the legality of issuing a composite show cause notice for multiple years, violate constitutional rights and settled GST recovery principles?

Held:

The Hon’ble Orissa High Court in Vedanta Limited Versus Union of India & others - 2025 (9) TMI 859 - ORISSA HIGH COURTheld as under:

• Observed that, the petitioner has challenged the vires of GST ISD provisions and the legality of a composite notice covering multiple financial years, raising constitutional and procedural issues.
• Noted that, the Karnataka High Court in Veremax Technologie Services Ltd. held that a single show cause notice covering multiple years is impermissible, lending prima facie support to the Petitioner’s position.
• Held that, a prima facie case is made out by the Petitioner, in light of similar pending writs in the Orissa High Court and the Karnataka High Court’s precedent.
• Directed that, the operation of the impugned show cause notice No.29/2025-26 dated June 20, 2025, be stayed until the next hearing, and tagged the matter with other petitions raising the same legal issue.
• Ordered consolidated pleadings and scheduled the matter for further hearing on September 22, 2025.

Our Comments:

This matter raises critical constitutional and procedural questions regarding ISD liability under the GST framework. The challenge to Section 21 as imposing vicarious liability on recipients, who lack agency or control, highlights the principle that only those who avail or utilize credit wrongfully should be subject to demand under Sections 73 and 74 - a distinction lost in blanket ISD recovery provisions. The Petitioners’ challenge also targets statutory uncertainty in “attributability” of credit, exposing arbitrariness and potential for undue hardship.

The High Court’s reliance on Karnataka High Court’s M/s. Veremax Technologie Services Limited Versus The Assistant Commissioner Of Central Tax Bengaluru. - 2024 (9) TMI 1347 - KARNATAKA HIGH COURT judgment illustrates judicial consensus that a single show cause notice for several years violates procedural fairness and confounds the assessees’ ability to respond. In Veremax, the Karnataka HC quashed such a composite notice on due process grounds, emphasizing natural justice in fiscal proceedings.

On the Constitutional side, the lack of a “savings clause” for pre–April 1, 2025 periods, post substitution of ISD provisions, may result in abatement of earlier causes, unless otherwise protected by law. The challenge to the legislative vires, particularly in the absence of guidelines to ensure fair attribution of credits, is in line with Article 14 (equality), Article 19(1)(g) (right to trade), and Article 265 (no tax except by authority of law) of the Constitution.

Relevant Provisions:

Section 21 of the Central Goods and Services Tax Act, 2017

21. Manner of Recovery of Credit Distributed in Excess

“Where the Input Service Distributor distributes the credit in contravention of the provisions contained in Section 20 resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipients along with interest, and the provisions of Section 73 or Section 74 or Section 74A,as the case may be, shall, mutatis mutandis, apply for determination of amount to be recovered.”

 (Author can be reached at [email protected])