State GST reimbursement scheme's Clause 8 restricting input tax credit (ITC) challenged; tax show-cause notices stayed pending hearing.

The dominant issue was whether Clause 8 of a State tax reimbursement scheme, which effectively disentitled or curtailed availment of ITC, was ultra vires Article 246A and Article 279A of the Constitution and Sections 16 and 164 of the CGST Act (read with the definitional provision invoked) governing entitlement to ITC and rule-making power. The HC prima facie accepted the challenge, holding that Clause 8 appeared inconsistent with the constitutional allocation of GST powers and the statutory scheme for ITC. Consequently, the HC stayed operation of the impugned GST show cause notices pending further hearing and directed filing of a counter affidavit by the State authorities.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether, pending adjudication of the writ challenge (including the challenge to Clause 8 of the Assam Industries (Tax Reimbursement for Eligible Units) Scheme, 2017), the Court should grant interim protection by suspending the operation of the impugned show cause notices proposing denial/reversal of input tax credit.

(ii) Whether, for purposes of interim relief, Clause 8 of the Reimbursement Scheme prima facie appeared inconsistent with the constitutional and statutory provisions governing input tax credit and rule-making power relied upon by the petitioner.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Interim suspension of operation of show cause notices

Legal framework: The Court considered the writ jurisdiction under Article 226 of the Constitution of India in the context of proposed proceedings initiated by show cause notices under the SGST Act provisions referred to in the notices, and the respondents' submission that the petitioner should reply to the notices and, if aggrieved by an adverse decision, pursue the statutory appellate remedy.

Interpretation and reasoning: While the respondents objected to writ interference at the show cause notice stage on the ground of alternate remedy, the Court proceeded to examine the interim prayer in light of the petitioner's challenge to the legal basis of the notices, namely Clause 8 of the Reimbursement Scheme.

Conclusion: Pending further consideration on the returnable date, the Court ordered that the operation of the impugned show cause notices shall remain suspended till the returnable date.

Issue (ii): Prima facie validity/consistency of Clause 8 forming the basis of denial of ITC

Legal framework: For interim purposes, the Court examined Article 246A and Article 279A of the Constitution of India and Sections 16 and 164 of the CGST Act read with Section 2(87), vis-à-vis Clause 8 of the Reimbursement Scheme, 2017, which purported to block/deny input tax credit on specified inter-State supplies and provide for proportionate lapse of input tax credit.

Interpretation and reasoning: Upon such examination, the Court recorded a prima facie view that there was force in the petitioner's contention that framing a provision like Clause 8 in the Reimbursement Scheme runs against the aforementioned constitutional and statutory provisions governing GST/ITC and the relevant definitional and rule-making provisions relied upon.

Conclusion: The Court did not finally decide the vires of Clause 8 at this stage, but treated the prima facie inconsistency as sufficient to justify interim relief, resulting in suspension of the show cause notices until the returnable date and calling for the respondents' counter affidavit within the fixed timeline.

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