2025 (5) TMI 1976 - HC - GST

Rule 36(4) restricts Input Tax Credit when suppliers fail to upload invoices under Section 37(1)

M/s. L & T Geostructure LLP, Represented by its Chief Financial Officer Mr. S. Vaidyanathan Versus The Union of India, The Government of Tamil Nadu, The Commissioner of Commercial Taxes, The Assistant Commissioner (ST), Chennai, Office of the Assistant Commissioner (ST), Chennai

The HC upheld the validity of Rule 36(4) of CGST Rules, 2017 and TNGST Rules, 2017, which restricts Input Tax Credit (ITC) availment when suppliers fail ... Vires of Rule 36(4) of both Central Goods and Services Tax (CGST) Rules, 2017 and Tamil Nadu Goods and Services Tax (TNGST) Rules, 2017 - restriction on availment of Input Tax Credit (ITC) by a registered person in respect of invoices or debit notes not uploaded by suppliers under Section 37(1) of the GST Acts - HELD THAT:- Under the substantive provision for availing Input Tax Credit (ITC) is Section 16 of the GST Act, conditions or restrictions in availing Input Tax Credit (ITC) could be imposed in the manner specified in Section 49 of the GST Acts which gives the power to the Central Government - it is evident that the conditions and restrictions can be prescribed. The expression in Section 16(1) of the respective GST Acts i.e., subject to such conditions and restrictions as may be prescribed in the manner specified in Section 49 of the respective GST Acts must be read conjunctively with Section 37 of the respective GST enactments. Rule 36(4) of the respective GST Rules was incorporated in 2019 vide amendments to the respective GST Rules to ensure that full credit could be availed subject to the supplier also additionally complying with the requirements under Section 37(1) of the respective GST enactments - the experience gained under the initial experiments made under the provisions of the Central Excise Rules, 1944 from the days of implementation of PROFORMA CREDIT to MODVAT CREDIT to CENVAT CREDIT [from mid 1980s to 2004] and under the VAT regime under the various VAT enactments of the States and the experience gained immediately after the implementation and roll out of the GST laws, led the Government to allow restricted credit if there was no compliance by the supplier of the requirement of Section 37(1) of the respective GST enactments. Insertion of Rule 36(4) into the respective GST Rules in the year 2019 was intended to not only protect the interests of the Government but also the dealers / registered tax payers under the respective GST enactments so that they are not later exposed to recovery proceedings if the tax was not indeed paid by the supplier of goods and / or service. In Calcutta Gujarati Education Society Vs. Calcutta Municipal Corporation [2003 (8) TMI 476 - SUPREME COURT], the Hon’ble Supreme Court held that the rule of reading down a provision of law is a rule of harmonious construction in a different name. It is resorted to smoothen the crudities or ironing out the creases found in a statue to make it workable. In the garb of “reading down”, however, it is not open to read the words and expressions not found in it and to venture into a kind of judicial legislation. The rule of reading down is to be used for the limited purpose of making a particular provision workable and to bring it in harmony with other provisions of the statute. It is to be used keeping in view the scheme of the statute and to fulfill its purposes. With the incorporation of Form GSTR 2A, a dealer registered under the provisions of the respective GST enactments is entitled to Input Tax Credit (ITC) on the tax paid / borne on the tax paid by the supplier of goods or service or both. It is auto-populated. It is available on the dashboard. Based on the details of auto drafted inward supplies, the system now enables the recipient of goods or service to avail Input Tax Credit (ITC) based on the stipulations in Section 16 of the respective GST enactments and by drawing the information from the system in FORM GSTR – 1, 5, 6, 7 and 8 - Thus, the system has evolved to allow a recipient to avail Input Tax Credit (ITC) on the tax paid / borne on the tax paid by the supplier of goods or service or both. Prior to that the Input Tax Credit (ITC) was being allowed without the details being furnished at 20%, 10%, 5% as detailed in Table II of this Order has become irrelevant. The amendment to Rule 36(4) starting from Notification No.49/2019-Central Tax (CT) dated 09.10.2019 / 6th Amendment Rules, 2019 as far as CGST Rules and Notification No.SRO A-39(a)/2019, dated 11.10.2019 / 6th Amendment Rules, 2019 as far as TNGST Rules allowing restricted availment of Input Tax Credit (ITC) at 20%, thereafter at 10% and later at 5% was intended to benefit the recipient to ensure that at least a portion of the Input Tax Credit (ITC) was available pending furnishing of the documents with regard to return by the supplier of goods or service. Conclusion - i) Restrictions imposed under Rule 36(4) of the respective GST Rules to avail full credit of Input Tax in absence of the mandatory compliance by the supplier of goods or service as is contemplated under Section 37(1) of the respective GST Acts was a temporary measure to regulate the availing of Input Tax Credit (ITC). Ipso facto, it cannot be held that Rule 36(4) of the respective GST Rules is in violation of Article 14 of the Constitution of India. ii) The challenge to Rule 36(4) of the respective GST Rules as violative of Article 14 of the Constitution of India is not made out. Petition dismissed. The core legal questions considered in these writ petitions pertain to the vires and validity of Rule 36(4) of the Central Goods and Services Tax (CGST) Rules, 2017 and the Tamil Nadu Goods and Services Tax (TNGST) Rules, 2017. Specifically, the issues are:1. Whether Rule 36(4), which restricts the availment of Input Tax Credit (ITC) by a registered person in respect of invoices or debit notes not uploaded by suppliers under Section 37(1) of the GST Acts, is ultra vires the parent GST enactments, particularly Section 16 and related provisions.2. Whether the restriction imposed by Rule 36(4) violates the constitutional principles embodied in Articles 14, 19, and 21 of the Constitution of India, being arbitrary, irrational, and discriminatory.3. Whether the power to introduce Rule 36(4) could be validly exercised under Section 164 of the GST Acts without the recommendation of the GST Council, and in the absence of notification of Section 43A of the GST Acts, which relates to restrictions on ITC.4. The scope and applicability of Section 16(1) and (2) of the GST Acts regarding entitlement to ITC, and the interplay with Section 37(1) concerning furnishing of outward supplies by suppliers.5. Whether the restrictions under Rule 36(4) are justified as a measure to prevent revenue leakage and abuse of the ITC mechanism, given the experience under previous indirect tax regimes.Issue-wise Detailed AnalysisIssue 1: Validity of Rule 36(4) vis-`a-vis the Parent GST ActsThe legal framework involves Sections 16, 37, 41, 43, 43A, and 164 of the CGST Act and corresponding provisions in the TNGST Act. Section 16(1) entitles a registered person to avail ITC subject to conditions and restrictions as prescribed. Section 16(2) specifies conditions such as possession of tax invoice and receipt of goods or services. Section 37(1) mandates furnishing of details of outward supplies by suppliers. Section 43A, though inserted by amendment, was never notified during the relevant period. Section 164 empowers the government to make rules to carry out the provisions of the Act, subject to GST Council recommendation.The Petitioner contended that Rule 36(4), which restricts ITC if suppliers fail to upload invoices, is ultra vires because:There is no restriction under Section 16 on ITC availment based on supplier's compliance with Section 37(1).Section 43A, which could empower such restrictions, was not notified, hence Rule 36(4) cannot be enforced.Rule 36(4) was introduced without GST Council's recommendation, violating Section 164.The Respondents argued that the restrictions are permissible under Section 41(1), which allows conditions and restrictions on ITC. They emphasized that ITC is a concession, not an absolute right, and restrictions to prevent misuse are valid. Rule 36(4) was a temporary, benevolent provision allowing partial ITC pending supplier compliance, evolving from 20% to nil as the IT system matured.The Court noted that Section 16(1) expressly permits conditions and restrictions as may be prescribed. Section 41(1) also empowers the government to impose such conditions. Although Section 43A was not notified, Rule 36(4) can be traced to Sections 16(1), 41, and 164. The GST Council's recommendation is a procedural requirement, but the Court found no evidence that Rule 36(4) was introduced without such recommendation. Further, the restrictions align with the legislative intent to curb fraudulent ITC claims.The Court held that Rule 36(4) is intra vires the parent Acts, being a valid exercise of rule-making power to prescribe conditions for ITC.Issue 2: Constitutional Validity and Alleged Violation of Articles 14, 19, and 21The Petitioner argued that Rule 36(4) is arbitrary and violates Article 14 (equality before law), Article 19 (freedom to carry on business), and Article 21 (right to livelihood). The restriction arbitrarily denies ITC even where tax is paid and goods/services received, solely due to supplier's non-compliance.The Respondents countered that ITC is a concession, not a fundamental right. The restrictions are reasonable, aimed at preventing revenue leakage and abuse. The phased reduction of allowed ITC pending supplier compliance was a rational measure to balance interests.The Court applied the principle of presumption of constitutionality and the doctrine of reading down to uphold legislation unless it is manifestly arbitrary. It referred to precedents emphasizing the need to uphold fiscal laws unless clearly unconstitutional. The Court found the restrictions rational and proportionate to the objective of safeguarding revenue and preventing misuse. It rejected the contention that the rule is arbitrary or discriminatory.The Court held that Rule 36(4) does not violate Articles 14, 19, or 21.Issue 3: Power to Introduce Rule 36(4) under Section 164 without Notification of Section 43A and GST Council RecommendationThe Petitioner stressed that Section 43A, which specifically deals with restrictions on ITC, was never notified, and hence Rule 36(4) could not be validly introduced. Also, Section 164 requires GST Council recommendation for making rules, which was allegedly absent.The Respondents submitted that Rule 36(4) is supported by Sections 16(1) and 41(1), and that the GST Council had recommended the amendments. Moreover, Section 164 empowers rule-making to carry out the Act's provisions.The Court observed that restrictions on ITC can be prescribed under Section 16(1) and Section 41, independent of Section 43A. The absence of notification of Section 43A does not invalidate Rule 36(4). The Court found no material to hold that GST Council recommendation was not obtained. The rule was thus validly promulgated.Issue 4: Interpretation of Sections 16 and 37 and Their InterplaySection 16(1) entitles ITC subject to conditions and restrictions. Section 16(2) prescribes possession of invoice, receipt of goods/services, payment of tax, and furnishing of return. Section 37(1) requires suppliers to furnish details of outward supplies.The Petitioner argued that ITC should not be denied if tax is paid and goods/services received, even if supplier fails to comply with Section 37(1). The Respondents contended that supplier's compliance is integral to the ITC chain to prevent fraudulent claims.The Court noted that Section 16(2) was amended in 2022 to explicitly link ITC entitlement to supplier's furnishing of details under Section 37, reflecting legislative intent. The earlier Rule 36(4) was a transitional measure pending IT system maturity. The Court found the linkage between Sections 16 and 37 reasonable to ensure transparency and prevent misuse.Issue 5: Justification of Restrictions to Prevent Revenue Leakage and AbuseThe Court extensively reviewed the historical background of indirect tax credit mechanisms from MODVAT and CENVAT regimes to VAT and GST, highlighting past abuses such as circular trading and bogus invoices causing revenue loss.The Court recognized the GST Council's role in calibrating ITC restrictions to minimize leakage. The phased reduction of allowed ITC pending supplier compliance was a measured response to technical and procedural challenges in GST implementation.Judicial precedents were cited emphasizing that ITC is a concession subject to conditions, and that denial of ITC is justified where transactions are not genuine or tax is not paid. The Court referred to decisions upholding restrictions and requiring proof of genuine transactions and actual tax payment.The Court concluded that Rule 36(4) serves the legitimate objective of protecting revenue and ensuring genuine ITC claims, and is a reasonable regulatory measure.Conclusions on IssuesThe Court dismissed the Petitioner's challenge to Rule 36(4), holding it to be intra vires the GST Acts, constitutionally valid, and a reasonable regulatory measure. The restrictions imposed by Rule 36(4) were justified to prevent abuse and revenue leakage. The absence of notification of Section 43A and alleged lack of GST Council recommendation did not invalidate the Rule. The linkage of ITC entitlement to supplier compliance with Section 37 is consistent with legislative intent and has been further codified in later amendments.Significant HoldingsThe Court stated verbatim:'Input Tax Credit (ITC) is a concession extended by the legislature. It is subject to conditions, restrictions and prohibitions stipulated in the Act and prescribed in the Rules. An assessee does not have an absolute right to Input Tax Credit, it is circumscribed and contingent upon the satisfaction of the restrictions and conditions imposed by law.''The power to make Rule 36(4) under the CGST Rules can be traced to both Section 16(1) and Section 41 read with Section 164 of the CGST Act.''The restrictions are reasonable and since they are intended to implement the laudable object of allowing legitimate / eligible Input Tax Credit (ITC). Therefore, the challenge to the restrictions imposed under Rule 36(4) of the respective GST Rules on the ground of it being arbitrary and violative of Article 14 of the Constitution of India cannot be countenanced.''Rule 36(4) of the respective GST Rules is intra vires the parent Acts and is a valid exercise of rule-making power to prescribe conditions for availment of Input Tax Credit.''The temporary deprivation of full Input Tax Credit (ITC) has now been resolved with the implementation of Form GSTR 2A vide Notification No. 79 dated 15.10.2020.'The Court ultimately dismissed the writ petitions with no costs, emphasizing that the IT system evolution has addressed the concerns that initially necessitated Rule 36(4).