GST | Circular Does Not Override Statutory Provisions: Allahabad High Court Quashes Demand Of Rs. 235 Crores Against Vivo Mobile

The Allahabad High Court has quashed demand of Rs. 235.52 Crores raised against Vivo Mobile India Private Limited by GST Authorities vide order under Section 74(9) of the Goods and Service Tax Act 2017.

The bench comprising of Justices Saumitra Dayal Singh and Vinod Diwakar while granting relief to Vivo Mobile held that Input Tax Credit is a substantive right granted to the assesee under Section 16 of the GST Act. Further, it was held that a circular though in force cannot be enforced contrary to the provisions of the statute.

The Court held that legislature through the word "cumulatively" in proviso to Rule 36(4) of the Goods and Service Tax Rules, 2017 created a deeming fiction in law to relax the condition of month-to-month reconciliation of the eligible ITC availed to a much longer period such that it allowed that period of one month to be practically enlarged to eight months. The intent of the legislature was to facilitate the taxpayers as well as the revenue during the period of COIVD-19.

Factual Background:

Petitioner, Vivo Mobile, had computed Input Tax Credit cumulatively for the months of February 2020 to August 2020 as on the date of filing their GSTR-3B returns for the month of September 2020. However, a demand was raised by the GST Authorities alleging that petitioner had claimed excess Input Tax Credit of Rs. 110 Crores. Authority placed reliance on Circular No. 113 dated 11.11.2019 issued by the Central Board of Indirect Taxes and Customs to contend that cumulative adjustment could have only been made upto the date of filing of GSTR-1 declaration by their suppliers. Based on the Circular, tax demand along with penalty and interest totaling to Rs. 235.52 Crores was raised under Section 74(9) of the GST Act.

Petitioner had deposited around Rs. 11 Crores while filing the writ petition before the High Court. However, since no stay was granted to the petitioner in the writ petition, the GST Authorities proceeded to recover Rs. 220.15 Crores from the bank accounts of Vivo Mobile during the pendency of the writ petition before the High Court.

During the final hearing, counsel for petitioner argued that the monthly computation made by revenue was due to misreading of Circular dated 11.11.2019 issued by the Central Board of Indirect Taxes and Customs. Petitioner challenged the Circular, specifically Clause 3(3), as being violative of Rule 36(4) (Documentary Requirements And Conditions For Claiming Input Tax Credit) of the CGST Rules, 2017 read with its first proviso on the ground that the Rule prescribes cumulative period for computation for the period from February 2020 to August 2020. However, the Circular provided for monthly computation. It was also argued that the Circular being prior to Rule, cannot be enforced after the Rule came into force.

It was argued that ITC is a statutory right, under Section 16 (Eligibility And Conditions For Taking Input Tax Credit) of the GST Act which cannot be taken away by a circular. Further, it was contended that it is an integral part of the scheme of GST that no substantive right is created by Form GSTR-2A. GSTR-1 and GSTR-2A only facilitate assesee to take an informed decision for self- assessment. Right to claim ITC is governed by Section 16. Accordingly, the Circular and the consequential recovery are bad in law, it was argued.

Per Contra, counsel for respondent urged requirement to file GSTR-3B by 20th March 2020 was not waived or relaxed, to any extent. Accordingly, ITC was available to petitioner for each month including the months of February 2020 to August 2020 based on the details fed by suppliers on GSTR-1. Claiming cumulative ITC for the disputed period in September 2020 goes against the scheme of the GST Act and Circular dated 11.11.2019.

Reliance was also placed on Circular No. 136 dated 03.04.2020 which sought to clarify various measures announced by the Government to provide relief to taxpayers in view of the spread of COVID- 19 to state that in absence of any challenge to that Circular, claim of the petitioner was wholly unfounded.

High Court Verdict:

The Court observed that intention of the legislature to make claim of Input Tax Credit as a substantive right is clear from the conjoint reading of Sections 16, 41, 49(2) and 2(46) of the GST Act.

Though the return is to be filed prior to the 20^th day of the following month, the Court held that “it cannot escape judicial recognition that the second proviso to Section 16(2) the Act itself creates a provisional right to the recipient to avail ITC (even after lapse of that shorter time period), up to the expiry of the larger period of 180 days. In case of non-payment within 180 days, provisions exist to reverse the ITC granted/availed. At the same time, there is no negative prescription under the Act or the Rules that ITC claim may never arise unless the tax is first paid by the recipient, and/or is deposited by the supplier with the State Government.”

The Court held that prior payment and deposit of tax is not sine qua non for provisional grant of or utilization of ITC by the recipient even though authorities may be at liberty to reverse the provisional benefit granted upon default and impose penalties. Accordingly, the Court held that wherever the transacting parties agree, six-month credit may be allowed to the recipient as common business practice.

The Court opined that “the scheme of the Act is to let ITC arise and be availed provisionally, in a continuously moving value addition chain, subject to other conditions including actual payment of tax being eventually proven and remaining undoubted. That provisional allowance would become absolute upon tax being paid not later than 180 days. There can be no lis as to the wisdom of the Parliament in incorporating that period of 180 days. If the law were to be read otherwise, i.e., that the ITC claim may never arise unless the tax is first paid then, the second proviso to section 16(2) itself would be rendered otiose.”

Further, placing reliance on Union of India v. Bharti Airtel Ltd. and Others, wherein the Supreme Court held that GSTR-2A is merely a facilitator and on the decision of the Calcutta High Court in Suncraft Energy Private Limited and Anr. v. The Assistant Commissioner, State Tax, the Court held that GSTR-1 acts a facilitator only.

Noting that no adverse remarks had been made against tax invoices of the petitioner in the impugned order, the Court narrowed the dispute to interpretation of the first proviso to Rule 36(4) of the Rules.

The Court observed that the proviso introduced in Rule 36(4) by Notification No. 30 of 2020 must be read in consonance with sub-Rule 4 which originally provided benefit to taxpayers in addition to what was available otherwise. Originally, a purchaser was provisionally entitled to 20% ITC which was reduced to 10% for the disputed period.

Looking at the definition of the word ‘cumulative’ appearing in Rule 36(4), the Court observed that the condition contained in sub-Rule 4 of Rule 36 that eligible ITC would not exceed 10% of the eligible credit as per Tax Invoice or Debit Note etc., filed on GSTR-1 would have to be seen cumulatively i.e., with all additions made, taken together from February 2020 to August 2020, as provided by the proviso.

The Court held that the proviso so introduced creates a deeming fiction to treat the entire period from February 2020 to August 2020 as one. “The only purpose for which the proviso to the Rule appears to have been incorporated is to grant benefit of ITC late accrued, to transactions completed in the past, by treating the entire period during which transactions may have been completed to be one i.e., beginning 01.02.2020 and ending 31.08.2020 against which all ITC that may have stood accumulated as on the date of filing of return for the period September 2020.”

The Court held that the first proviso to Rule 36(4) of the CGST Rules was introduced at the time of COVID-19 pandemic to treat the specific period from February 2020 to August 2020 as one for cumulative adjustment of ITC. Accordingly, for the tax period September 2020, the petitioner and all registered persons were permitted to file their monthly return on Form GSTR-3B, with cumulative adjustment of ITC for the disputed period February 2020 to August 2020, by preserving to them the benefit arising under Rule 36(4) on the increased figure of eligible ITC, as it stood at the time of filing of return for the month of September 2020, on a cumulative basis.

Since, circular is merely an administrative instruction issued to give effect to the statutory law, it cannot override a pre-existing statutory law whether enacted by the primary legislature or by its delegate. Accordingly, the Court held that though Circular dated 11.11.2019 was valid and enacted before the proviso was added, it cannot be enforced contrary to the said proviso. Since the proviso was for a limited period from February 2020 to August 2020, for that period the Circular lost its efficacy and force and to that extent its relevance.

“For the period to which the said proviso applies, the administrative instruction dated 11.11.2019 must survive in complete hibernation. Else, it may lose life to the higher statutory law.”

Accordingly, the Court held that for the disputed period, conditions of Rule 36(4) had been relaxed by the legislature itself. The revenue authorities erred in relying on the Circular dated 11.11.2019 for the disputed period to read the condition - "as on date of filing the return in GSTR-I, all the suppliers for the said tax period".

Consequentially, the Court allowed the writ petition and directed the respondents to return the entire amount to the petitioner. The Court further directed that the petitioner is entitled to interest that @ 6% on the amount of excess recovery of Rs. 11,00,69,010/-, from the date of that excess recovery to the date of its actual refund.

Case Title: M/S Vivo Mobile India Private Ltd. vs. Union Of India And 4 Others [WRIT TAX No. - 433 of 2021]

Case Citation: 2023 LiveLaw (AB) 386

Appearances: Sri Tarun Gulati, Senior Counsel assisted by Sri Nishant Mishra, Sri Kishore Kunal, and Ms. Vedika Nath, counsel for the petitioner, Sri Gaurav Mahajan, counsel for Central Board of Indirect Taxes, Sri Manish Goyal, Additional Advocate General assisted by Sri Nimai Dass, Additional Chief Standing Counsel and Sri Ankur Agarwal, Standing Counsel for the State of Uttar Pradesh.

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