The Rajasthan High Court has upheld the constitutional validity of Rule 36(4) of the Central Goods and Services Tax (CGST) Rules, 2017, which restricts the availment of Input Tax Credit (ITC) on invoices or debit notes not uploaded by suppliers.
A Division Bench of Justice Arun Monga and Justice Yogendra Kumar Purohit held that there was no reason to take a different view from those adopted by the Gauhati, Madras, and Kerala High Courts, which had also upheld the provision.
"We are in respectful agreement with the view taken therein and see no reason to take a contrary view," the Bench observed.
The Court was hearing a batch of writ petitions challenging Rule 36(4) and consequential proceedings initiated by the GST authorities.
Rule 36(4) was introduced in October 2019 and restricted the availment of ITC in respect of invoices or debit notes not uploaded by suppliers to 20% of the eligible credit reflected in the uploaded invoices or debit notes. The limit was subsequently reduced to 10% with effect from January 1, 2020.
The GST authorities issued a notice in Form GST DRC-01A dated February 6, 2020, seeking reversal of ITC amounting to approximately ₹1.22 crore due to a mismatch between the credit availed by the taxpayer and the amount reflected in GSTR-2A.
The petitioners argued that Rule 36(4) imposed a restriction beyond the scope of the parent legislation, particularly Section 16 of the CGST Act. They contended that once the conditions prescribed under Section 16(2) were fulfilled, ITC could not be restricted merely because the supplier had failed to upload the relevant invoice details.
They further argued that Sections 37 and 42 of the CGST Act already provided a statutory mechanism for uploading, matching and rectifying discrepancies in returns. According to them, the restriction was unreasonable, particularly when the statutory matching mechanism had not been effectively implemented.
The petitioners also contended that the provision penalised bona fide recipients for defaults attributable to their suppliers, over whom they had no control, and therefore violated Articles 14, 19 and 300A of the Constitution.
The Revenue, on the other hand, defended the provision, submitting that it had been introduced under the rule-making powers conferred by Sections 16 and 164 of the CGST Act to regulate ITC availment and curb fraudulent claims. It further argued that ITC was a statutory concession subject to conditions and restrictions prescribed under the law.
Agreeing with the Revenue, the High Court noted that three other High Courts had already upheld the validity of Rule 36(4) of the CGST Rules.
The Bench referred to the Gauhati High Court's decision in M/s High Tech Ecogreen Contractors LLP v. The Joint Director & Ors., which held that the provision derived authority from Section 16 read with the general rule-making powers under Section 164 of the CGST Act.
It also took note of the decisions of the Madras High Court in M/s L. & T. Geostructure LLP v. Union of India and the Kerala High Court in Nahasshukoor v. Assistant Commissioner & Ors which upheld the sub-rule (4) of Rule 36 of the CGST Rules.
Agreeing with these decisions, the Rajasthan High Court held that there was no merit in the challenge to the constitutional validity of Rule 36(4).
As regards the challenge to the show cause notices, the Court observed that it was primarily founded on the challenge to the validity of the Rule. Since that challenge had failed, the Court was not persuaded to quash the notices.
The Bench also relied on the Supreme Court's decision in M/s Trillion Lead Factory Private Limited v. Superintendent of Central Tax, reiterating that a writ petition ordinarily does not lie against the mere issuance of a show cause notice.
The Court clarified that if proceedings pursuant to the notices had not been concluded, the petitioners would be at liberty to appear before the competent authorities and place their material on record.
It further observed that if assessment orders had already been passed, the petitioners could challenge them in accordance with law. If favourable orders had been passed, nothing further would survive for consideration.
Accordingly, the High Court disposed of the batch of writ petitions, declining to interfere with either the validity of Rule 36(4) or the impugned show cause notices.
For Petitioner: Advocates Ayush Goyal, Vinay Kothari, and Pranjul Mehta
For Respondent: Bharat Vyas, Additional Solicitor General, through video conferencing, along with Advocates Vaibhav Bhansali, Rajvendra Saraswat, Jitesh Kumar Suthar, and Mr. Rishabh Dadhich