Rule 36(4) :- An Instrument for Litigation

[Navjot Singh]

RULE 36(4) :- AN INSTRUMENT FOR LITIGATION

1. INCEPTION

Rule 36(4) has been inserted vide Notification No. 49/2019 dated 9th October 2019 to restrict credit taken by any GST registered Person to the amount reflected in his GSTR 2A. The validity of such a restriction will be questioned on The basis of the following issues:

• If the power to make this rule comes from Section 43A, then rule 36(4) is Invalid due to non-operational nature of Section 43A. This is against Article 265 of the Constitution of India and the basic legal principle that “Rules and Circulars cannot override Act”.
• Further, why to blow heat on innocent buyers for non-payment of Tax by their defaulting sellers?

 

2. INTRODUCTION WITH RULE 36(4)

• Rule 36(4) was introduced through Notification No. 49/2019- Central Tax with effect from 09/10/2019 and reads as under:

“Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20* percent of the eligible credit available in respect of invoices or debit notes, the details of which have been uploaded by the suppliers under sub-section (1) of section 37.”

• Example:-

An assessee can claim ₹ 10* (even if his supplier didn't upload the bill in GSTR 1) for every ₹ 100 credit appearing in GSTR 2A. Thus, if GSTR 2A as of 11/03/2020 (due date of return U/s 37) of an assessee shows ₹ 500,000 credit, eligible credit for the assessee would be ₹ 550,000 (500,000+10%) or actual credit whichever is lower, subject to other conditions stipulated in the Act.

3. EXUDE RUCKUS

1. Rule without enabling Section?

• All the rules in CGST Rules 2017 come through the powers conferred by the GST Act. Section 16(1) gives conditions and restrictions which would be prescribed subject to which a taxpayer would be entitled to input credit. Section 16(1) states as under:

“Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

• The board prescribed Rule 36  sub-clauses (1) to (3) under Section 16. Thus it can be argued that when Rule 36(4) was implemented, it derived its power from Section 16(1).
• Though in 36th GST Council meeting, stated objective of putting up such restriction is mentioned  as regularization of filing  of Form GSTR-1 only,  the fundamental proposition of the government by bringing Rule 36(4) can be summarized as follows:

• Carrying out the matching of Input Tax credit to a certain extent and tracking the suppliers and recipients in absence of native return filing procedure.
• Regularizing the filing of Form GSTR 1 as recipients are going to pursue the suppliers to file such a statement for the smooth availability of input tax credit.
• Minimize/eliminate the circular trading from the GST system.

• Thereafter, Section 43A* was inserted by the CGST (Amendment) Act, 2018 which prescribed the procedure for furnishing the return and availing the input tax credit. It is mentioned that the said section has not been made effective to date. Relevant extracts of Section 43A(4) are as under:

“43A. Procedure for furnishing return and availing input tax credit.’

(4) The procedure for availing input tax credit in respect of outward supplies not furnished under sub-section (3) shall be such as may be prescribed and such procedure may include the maximum amount of

the input tax credit which can be so availed, not exceeding twenty percent of the input tax credit available, on the basis of details furnished by the suppliers under the said sub-section.

Now, Sub-section (4) provides that the procedures for availing input tax credit in respect of outward supplies not furnished sub-section (3) would be prescribed.

Said sub-section also seeks to provide that the maximum amount of ITC, that can be availed in relation to supplies not furnished under sub-section (3) shall not exceed 20% of the input tax credit available, based on the outward supplies actually reported by the suppliers.

• Hence, firstly, the procedure for furnishing the details of outward supplies shall be prescribed, thereafter such restriction would be imposed. It is submitted that the aforesaid restriction is a part of the new return mechanism, which was not effective during the impugned period.
• In spite of the above provisions of GST Act, Central Government in the exercise of the powers conferred by Section 164 of the GST Act inserted sub-rule (4) in rule 36 of GST Rules vide Notification No. 49/2019 – Central Tax dated 09.10.2019 stating that credit in respect of invoices or debit notes not uploaded by suppliers in Form GSTR-1 shall not exceed 10% of the eligible credit appearing in Form GSTR-2A or uploaded by suppliers in Form GSTR-1. The bare text of Rule 36(4) is provided hereinbelow,-

“Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 10 percent. Of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37”

• It is also relevant to note that Rule 36(4) has been incorporated by invoking Section 164 instead of Section 43A. Section 164 which is an omnibus section, empowering the Government to make Rules for any matters under the GST Act.
• Rule 36(4) should have been prescribed only under Section 43A.
• Hence Rule 36(4) of CGST Rules 2017 imposing restriction on the availment of the credit of input subject to uploading of the invoices by the supplier is without Legislative Competence.

*This amendment has yet not been notified as required by Section 1(2) of the CGST (Amendment) Act, 2018.

2. Relationship of 36(4) with GSTR-2A

• Rule 36(4) does not give reference to GSTR-2A.  It uses the expression “invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37”.

Thus, the rule is indirectly giving reference to GSTR-1.

• The details so uploaded in GSTR-1 by the supplier are reflected in GSTR-2A of the assessee and therefore, the entire working of rule 36(4) is suggested taking GSTR-2A as a base. 
• However, it’s to be noted that there is no official notification/guidance note issued by the government explaining the co-relation between GSTR-1 and GSTR-2A.
• To give clarity to the confusion in Rule 36(4) the CBIC issued a circular no. 123/42/2019- GST dated 11/11/2019.
• As per the circular we need to refer GSTR 2A as on the due date for filing return by the supplier i.e 11th every month. This has to be checked by the recipient of supply while filing every GSTR 3B from the date this circular comes into effect.
• Now, the nature of the GSTR 2A is very dynamic and changes every day after the 11th of the succeeding month. Another lacuna that was not addressed by the circular was cases when the GSTR 1 of the supplier files the return late i.e after the due date mentioned in 37(1). In this case, there is a natural timing difference for the appearance of credit in GSTR 2A.
• Now in these circumstances, there is no way for the department to verify the accuracy of the GSTR 2A as on the due date of 37(1). The taxpayer will have to take screenshots mentioning the date of the screenshot for scrutiny purposes on every 11th. Now, this issue brings a question, how will the department verify the correctness of Rule 36(4).

 

3. Applicability of Rule 36(4) on RCM Supplies

• As per the Circular no. 123/42/2019- GST dated 11/11/2019 issued, which used the phrase 'documents issued under RCM'.

1. For RCM Supplies from Unregistered Person:-

1. Now as per Section 31(3)(f) of CGST Act, 2017,

a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;

2. Now said Section only mandates the ‘Self Invoicing in RCM supplies from ‘Unregistered Person’. Now as per the Circular, taxpayers may avail full ITC in respect of such invoices.

2. For RCM Supplies from registered Person:-

1. In cases where RCM supplies are from registered persons, supplies are uploaded by the supplier itself in GSTR 1 as per section 37 and hence, such supplies are covered under rule 36(4). This has not been specifically clarified by the Circular.
2. Now, we are not clear about the intention of the government in this respect whether it wants taxpayers to co-relate the GSTR-1 and GSTR-2A or it wish to track the payment of tax and availment of ITC thereon. Hence, the ratio legis of the statue is not clear with respect to such exclusion of RCM supplies from registered persons. In the case of HINDUSTAN LEVER LTD VERSUS ASHOK VISHNU KATE & ORS [1995 (9) TMI 326 - SUPREME COURT], the Supreme Court held that in a case related to the prevention of unfair labor practice, during interpreting social welfare legislation, construction should be placed on the relevant provisions which further the purpose for which such legislation was enacted. Hence, in my view by taking the cover of beneficial construction, the phrase ‘Documents issued under RCM’ should not be construed literally.
3. That’s why the RCM supplies, whether from a Registered person/unregistered person should not be taken for the calculation as per Rule 36(4).

4. Judicial View

1. The Hon’ble Supreme Court in the case of Commissioner of Trade & Taxes, Delhi and others Vs. Arise India Limited and others [2018 (1) TMI 555 - SC ORDER], has dismissed the Special Leave Petition filed by the Revenue against the decision of the Hon’ble High Court of Delhi in the case of Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi, and others [2017 (10) TMI 1020 - DELHI HIGH COURT].

The Hon’ble High Court of Delhi held Section 9(2)(g) of Delhi VAT Act to the extent it disallows Input tax credit to the purchaser due to default of selling dealer in depositing tax, as violative of Articles 14 and 19(1)(g) of the Constitution of India.

2. In value-added taxation, Input Tax Credit is the vested right of the Recipient. Reference can be made to ‘Eicher Motors Ltd. vs. UOI’ 1999 (1) TMI 34 - SUPREME COURT, ‘Coll of CE vs. Dai Chi Karkariya’ 1999 (8) TMI 920 - SUPREME COURT, ‘Siddharth Enterprises vs. The Nodal Officer’ 2019 (9) TMI 319 - GUJARAT HIGH COURT.
3. In Larsen & Toubro vs. CCE 2000 (10) TMI 98 - CEGAT, MUMBAI, it was held that the assessee should not be penalized by denial of Input credit for the mistake of the recipient of goods.
4. Kay Kay Industries (2013 (8) TMI 772 - SUPREME COURT) held that the manufacturer cannot determine whether his supplier has discharged excise duty on the goods which are supplied to the manufacturer by him.
5. In the case of COMMISSIONER OF TRADE AND TAXES DELHI VERSUS ARISE INDIA LIMITED [2018 (1) TMI 555 - SC ORDER] Hon’ble Supreme Court held that of Althaf Shoes (P) Ltd., vs. Assistant Commissioner (CT), Valluvarkottam Assessment Circle, Chennai 6 reported in 2011 (10) TMI 567 - MADRAS HIGH COURT.
6. Hon’ble Supreme Court in the case of Commissioner of Trade & Taxes, Delhi and others Vs. Arise India Limited and others [2018 (1) TMI 555 - SC ORDER].
7. The Punjab & Haryana High court has delivered a landmark judgment namely Gheru Lal Bal Chand Vs. The state of Haryana and another [2011 (9) TMI 492 - PUNJAB AND HARYANA HIGH COURT]
8. Hon’ble Madras High Court in the case of State of Madras Vs. Raman & Co. 1973 (4) TMI 97 - MADRAS HIGH COURT.
1. Sri Vinayaga Agencies vs. Assistant Commissioner (CT), Vadapalani-I Assessment Circle, Chennai, and another reported in 2013 (4) TMI 215 - MADRAS HIGH COURT.
10. Hon’ble Madras High Court In the decision cited on the side of the petitioner in BRITANNIA INDUSTRIES LTD VERSUS THE DEPUTY COMMISSIONER (CT) -III (FAC) LTU [2016 (3) TMI 837 - MADRAS HIGH COURT]
11. In the case of M/s New Dhiraj Industries Vs. The State of Telangana in TA Nos. 161/2011, 162/2011, 248/2015 & 249/2015 dated 20.08.2018.
50. In the aforementioned cases, the courts pronounced that:-

• No liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer are established".
• "ITC should not be denied to the bonafide purchasing dealer merely on the fault of selling dealer. It should not be made the responsibility of the purchasing dealer to ensure that the tax is deposited by the selling dealer to the extent transaction is bonafide."
• "The officers who are passing the orders without following the settled law and the provision of the Act are just creating paper demands which is ultimately creating a mess for the revenue as well as the dealer as in these type of cases the department is not getting any revenue rather the machinery of the department is involved in unnecessary litigation and it has been rightly observed by the Hon’ble Judges of the Madras High Court reported in 92 STC Page No 621 that incompetent officer without knowledge of law are harmful both for the revenue and the state on the one hand and assessee on the other hand, if officers who do not have the knowledge and correct appreciation of the law and the principles upon which power to assess and realize tax is exercised, are appointed and allowed to hold office of responsibility, their such acts bring a bad name to the revenue administration so it is very necessary that while dealing with these situations the assessee should not be denied of his legitimate claim of input tax credit on flimsy grounds".
• "so long as the vendor is found to be a registered dealer on the files of the Revenue, the claim of the assessee for refund could not be rejected nor delayed. As already pointed out, the Revenue does not deny, as a matter of fact, that the assessee’s vendors are all registered appellants on the files of the Revenue and the assessee had also given the TIN number of these vendors."
• The benefit of the input tax credit is denied to a bona fide purchaser. The reason for the default of the selling dealer over whom such a purchasing dealer has no control. It should not be made the responsibility of the purchasing dealer to ensure that the tax is deposited by the selling dealer when the transaction is bona fide.

The intention of the law is very clear, It is to ensure no credit is passed to the assessee unless the invoice does not appear in GSTR 2A. However, the way the rule is being introduced, it will lead to litigation.

CA Navjot Singh

Please write me at canavjotsinghbrar@gmail.com for any queries