Whether Order can be passed on grounds other than those mentioned in Show Cause Notice?

Case:
M/s Seaward Exports Private Limited (OIA No. 98(DSD)CGST/JDR/2020 dated 20.08.2020

Issue involved:
Whether Order can be passed on grounds other than those mentioned in Show Cause Notice?

Brief Facts:

M/s Seaward Exports Private Limited have claimed refund of accumulated input tax credit on account of export of goods under letter of undertaking in terms of provisions of section 54(3) of the CGST Act, 2017 amounting to Rs. 17, 02,378/-. A show cause notice was issued to them for denying the refund claim for not providing HSN/SAC code in Annexure-B and non-admissibility of refund to the extent of Rs. 9,246.50/- in CGST, Rs. 9,246.50/- in SGST and Rs. 1,440/- in IGST as the invoices pertaining to this credit were not reflected in GSTR-2A.On filing reply to show cause notice, an impugned Order – in – Original was passed wherein refund claim to the extent of Rs. 1,61,020/- under CGST, Rs. 1,61,020/- under SGST was rejected. Furthermore, the ineligible input tax credit to the extent of Rs. 1,61,020/- under CGST, Rs. 1,61,020/- under SGST was confirmed for recovery along with interest and penalty. Aggrieved by the impugned order in original the appellant prefers to file an appeal, the contention of which is being reiterated below.

Applicant’s Contention:
The assesse has contended in the following manner

The impugned order in original rejecting the refund claim of Rs. 3,22,041/- and confirming demand of input tax credit to the extent of Rs. 3,22,041/- along with interest and penalty is wholly and totally erroneous and is liable to be set aside.

The impugned order has placed reliance on the provisions contained in Rule 36(4) to allege that they have wrongly claimed excess input tax credit than that prescribed and so their refund claim is liable to be rejected and the excess input tax credit is liable to be recovered along with interest and penalty from them. In this respect, the appellant submits that they have filed refund claim for the month of October, 2019 and the provision of Rule 36(4) was also introduced w.e.f. 09.10.2019. The appellant were not aware of the restriction imposed in availment of credit and so claimed the entire input tax credit in the month of October, 2019. The appellant further submits that as on date, all the invoices for which input tax credit has been availed by them for the month of October, 2019 have been reflected in their GSTR-2A and so as such, there is no doubt as regards the veracity and eligibility of input tax credit. The appellant submits that although there was inadvertent mistake in complying with the restriction contained in Rule 36(4) of the CGST Rules, 2017, but the mistake has no consequence as on date as all the invoices for the month of October, 2019 are reflected in GSTR-2A, when they have claimed refund. The appellant submits that there is 100% export and rarely, there is any domestic supplies and so they are usually eligible for refund of entire input tax credit claimed by them. The appellant submits that even if they would have followed the restriction imposed under Rule 36(4) of CGST Rules, 2017, they would have claimed the remaining input tax credit in subsequent months and would have claimed refund in the succeeding months. As such, there is no revenue impact of not following the restriction contained in Rule 36(4) of the CGST Rules, 2017. The appellant submits that since the Rule was introduced in October, 2019 and the assessees were not familiar with the compliance, the default in complying with the provision of Rule 36(4) of CGST Rules, 2017 should be condoned and the refund claim should be sanctioned to them.

In continuation to the above, the appellant submits that the impugned order has been passed beyond the scope of the allegations of the show cause notice. The appellant submits that the impugned show cause notice had raised only two points for rejection of their refund claim, i.e., non submission of details relating to HSN/SAC code in Annexure-B and non-admissibility of refund to the extent of Rs. 9,246.50/- in CGST, Rs. 9,246.50/- in SGST and Rs. 1,440/- in IGST as the invoices pertaining to this credit were not reflected in GSTR-2A. However, the impugned order has rejected refund claim to the extent of Rs. 3,22,041/- by referring to provisions of Rule 36(4) of CGST Rules, 2017 which were never alleged in the show cause notice. The appellant submits that even the allegation of recovery of ineligible input tax credit was not made in the show cause notice. In this context, it is pertinent to mention that as per clarification issued vide Circular No. 125/44/2019-GST dated 18.11.2019 in paragraph no. 20, it is clearly stated that in case of rejection of refund claim of unutilised/accumulated input tax credit due to ineligibility of the input tax credit, the proper officer shall have to issue show cause notice in FORM GST RFD-08, under section 54 of the CGST Act, read with section 73 or 74 of the CGST Act, 2017 requiring the applicant to show cause as to why the amount of ineligible input tax credit should not be recovered as wrongly availed input tax credit under section 73 or section 74 of the CGST Act, 2017, as the case may be. It is also stated that the above show cause notice would be adjudicated following the principles of natural justice and order shall be issued in FORM GST RFD-06. However, the present order confirming the demand of ineligible input tax credit has been passed without even issuing show cause notice and so the said order is non-est as it is passed by violating the principles of natural justice. Moreover, the order passed beyond the allegations of show cause notice is not at all tenable in light of the following judicial pronouncements:-

APEX FLUIDOMATICS LIMITED VERSUS ASSISTANT COMMISSIONER OF C. EX., AHMEDABAD [2014 (313) E.L.T. 106 (Tri. - Ahmd.)] wherein it was held that:-

Demand - Order beyond the facts contained in show cause notice not sustainable - Any infirmity in show cause notice cannot be bridged by the adjudication proceedings and order passed by the adjudicating authority and the first appellate authority - Section 11A of Central Excise Act, 1944. [para 6]

ASSISTANT COMMISSIONER OF CUSTOMS, AHMEDABAD VERSUSKRISHNA PETROCHEMICALS [2014 (304) E.L.T. 744 (Tri. - Ahmd.)]wherein it was held that:-

Appeal - New plea at appellate stage - Plea beyond scope of show cause notice - Issue not the subject matter of show cause notice and not agitated before lower authorities, cannot be raised before Appellate Tribunal - Lower authorities cannot be directed to go beyond the scope of show cause notice - Here, palm kernel acid oil was proposed to be classified by show cause notice under either Tariff Item 3823 19 00 or 1513 29 10 of Customs Tariff Act, 1975 - Now, Revenue is agitating for classification of goods under Heading 1515 ibid. [paras 6, 7]

SAURABH ORGANICS PVT. LTD. VERSUS ASSISTANT COMMISSIONER OF CENTRAL EXCISE, THANE [2012 (275) E.L.T. 582 (Tri. – Mumbai)]wherein it was held that:-

Demand - Order beyond SCN - Grounds on which duty liability confirmed, different from those alleged in show cause - Impugned order traversed beyond show cause notice, hence, unsustainable and bad in law- Section 11A of Central Excise Act, 1944. - While in the show cause notice the duty demand is made on the premise that the appellants have not included the cost of material procured and used by them in the manufacture of job-worked product, the original authority has confirmed the duty demand on a totally differentground i.e. the appellants have not included the cost of the raw material supplied by the principal manufacturer. [paras 5.1, 5.3]
In light of the above cited decisions, it is very much clear that the order cannot confirm demands by referring to provisions that were not part of the impugned show cause notice. Therefore, when the provisions of section 73, 50 and 122 were not invoked in the present case, the impugned order cannot confirm the demand by placing reliance on such provisions. As such, the impugned order that has been passed in a callous manner is not at all tenable and deserves to be quashed and the appeal should be allowed.

As regards confirmation of demand of ineligible input tax credit to the extent of Rs. 3,22,041/- by invoking provisions of Rule 36(4) of the CGST Rules, 2017 is concerned, the appellant submits that the constitutional validity of the said Rule itself is challenged before the Hon’ble Delhi High Court and Gujarat High Court in Petition filed by Society of Tax Analysis and Research. Not only this, a PIL has also been filed in the Supreme Court under Article 32 of the Constitution of India praying for a writ of Mandamus or any other appropriate writs seeking issuance of specific guidelines/directions in respect of disallowance of input tax credit on the ground of non-filing of return by supplier of goods under Rule 36(4) of the CGST Rules, 2017. The above petitions indicate that the restriction contained in Rule 36(4) is arbitrary and without statutory backing. The appellant submits that the vires of Rule 36(4) of the CGST Rules, 2017 is sub-judice and pending before Supreme Court and High Court for decision. Therefore, the action of recovery of input tax credit by applying the provisions of Rule 36(4) of CGST Rules, 2017 is not at all tenable and the impugned order deserves to be set aside.

In continuation to the above, the appellant submits that the provisions of Rule 36(4) of CGST Rules, 2017 are arbitrary as the input tax credit pertaining to assessees opting to file their returns quarterly is reflected in GSTR-2A after the end of quarter which adversely effects the working capital requirements of the assessee. Moreover, there is no express provision as regards the course of action to be taken when the said invoices are reflected in subsequent months. The appellant submits that although certain invoices were not being reflected in GSTR-2A during the month of October, 2019 but as there were purchases from quarterly suppliers, the said invoices were reflected later on. The appellant submits that as on date, all the invoices pertaining to input tax credit availed in the month of October, 2019 have been reflected in their GSTR-2A and so as on date, there is no ineligible input tax credit that needs to be recovered from them. Consequently, the present demand for recovering input tax credit which is being reflected in their GSTR-2A as on date is not at all tenable. The appellant submits that there is no provision in GST Law that the input tax credit, if not reflected in the GSTR-2A of the respective month, would stand lapse or would be recovered if availed irrespective of the fact that the said input tax credit has been subsequently appearing in the GSTR-2A in later months. The appellant submits that recovering input tax credit, merely for non-reflection in GSTR-2A is totally unjustifiable as the conditions for availing input tax credit under section 16 do not prescribe so. The provisions of section 16(2) of the CGST Act, regarding eligibility of input tax credit are produced for the sake of convenient reference as follows:-

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(b) he has received the goods or services or both.

Explanation.—For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(c) subject to the provisions of section 41, the tax charged in respect of such
supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:
In view of the above provisions, it is crystal clear that all the conditions for availment of input tax credit has been satisfied by them. Moreover, clause (c) as stated above entails that tax should have been paid to the government but till date there is no mechanism by which it can be verified that the tax has been paid by the supplier to the government exchequer. It is also worth noting that tax is discharged through GSTR-3B whereas reflection of invoices in GSTR-2A is dependent on filing of GSTR-1 by the supplier. As such, filing of GSTR-1 by the supplier and consequent reflection of said invoice in the GSTR-2A of the receiver is not conclusive evidence of tax having being paid to the government. Therefore, the restriction contained in Rule 36(4) of CGST Rules, 2017 is without any statutory backing and deserves to be quashed. As such, confirmation of demand of input tax credit, when all invoices have been reflected in GSTR-2A is not at all proper and the impugned order deserves to be set aside.

The impugned order has also placed reliance on the clarification issued vide CBIC Circular No. 135/05/2020-GST dated 31.03.2020, it is contended that the appellant is eligible for refund of only those invoices, the details of which are uploaded by the supplier in Form GSTR-1 and are reflected in the Form GSTR-2A of the claimant. In this regard, the appellant submits that they have already stated that the provision of Rule 36(4) is being challenged before Apex Court and High Courts and the matter is sub-judice. Consequently, the clarification issued by referring to the provision of Rule 36(4) of the CGST Rules, 2017 is also not binding on them. Moreover, the clarification issued by circular is binding on departmental authorities and is not binding on the assessee. The assessee is at liberty to challenge the circulars. In this context, we wish to place reliance on the decision given in the case of BIRLA JUTE AND INDUSTRIES LTD. VERSUS ASSISTANT COLLECTOR OF C. EX. [1992 (57) E.L.T. 674 (Cal.)]which was further approved by Hon’ble Supreme Court on 2005 (179)ELT 272(Supreme Court). In this case it was held that Board Circulars are not binding on the assessees and they may opt not to follow these Circulars. The verdicts of hon’ble Calcutta High Court are produced as follows:-

“Departmental circulars and trade notices - Binding on departmental officers but not binding on quasi-judicial authorities and assessees -Court can compel Central Excise officers to comply with such instructions as are for benefit of assessee - Section 37B of Central Excises and Salt Act, 1944 - Rule 233 of Central Excise Rules, 1944.”

As such, the circulars are not binding on the assessees. Therefore, even if we accept the contention of the impugned order for the sake of argument also, then too this circular restricting refund claim for invoices which are not reflected in GSTR-2A is not binding on us. Therefore, the impugned order should be set aside and the appeal should be allowed.

The impugned order has also imposed penalty of Rs. 32,204/- under section 122(2)(a) of the CGST Act, 2017, for contravening the provisions of CGST Act, 2017 read with section 6 of RGST Act, 2017. As regards imposition of penalty is concerned, the appellant submits that as all the invoices have been reflected in their GSTR-2A as on date, there is no ineligible input tax credit availed by them. Moreover, merely because the supplier has not timely filed GSTR-1 cannot be reason to tag the input tax credit as wrongly availed by them. Furthermore, the provision regarding restriction in availment of input tax credit as contained in Rule 36(4) of the CGST Rules, 2017 is pending before Apex Court and High Courts. Therefore, there is no wrong availment of input tax credit so as to attract penal provisions. The appellant reiterate that since the proposal for imposition of penalty under section 122(2)(a) of the CGST Act, 2017 was not the subject matter of show cause notice issued to them, the present order has been passed in violation of principles of natural justice and is void-ab-initio. Therefore, the impugned order should be quashed and the appeal should be allowed.

The personal hearing was given in this case as on 13.08.2020. CA. Pradeep Jain appeared on behalf of appellant and submitted the following additional grounds before the learned appellate authority:-

Order passed in violation of provisions contained in section 75(7) of the CGST Act, 2017:-The impugned show cause notice had raised only two points for rejection of their refund claim, i.e., non submission of details relating to HSN/SAC code in Annexure-B and non-admissibility of refund to the extent of Rs. 9,246.50/- in CGST, Rs. 9,246.50/- in SGST and Rs. 1,440/- in IGST as the invoices pertaining to this credit were not reflected in GSTR-2A. However, the impugned order has rejected refund claim to the extent of Rs. 3,22,041/- by referring to provisions of Rule 36(4) of CGST Rules, 2017 which were never alleged in the show cause notice. We also submit that even the allegation of recovery of ineligible input tax credit was not made in the show cause notice. Therefore, the impugned order has been passed in clear violation of the provisions contained in section 75(7) of the CGST Act, 2017 stating general provisions relating to determination of tax which reads as follows:-

(7) The amount of tax, interest and penalty demanded in the order shall not be in excess of the amount specified in the notice and no demand shall be confirmed on the grounds other than the grounds specified in the notice.

Hence, in view of clear cut provision in the CGST Act, 2017, the present order passed on the grounds other than that mentioned in the show cause notice is non-est and deserves to be set aside. We also reiterate that the clarification issued vide Circular No. 125/44/2019-GST dated 18.11.2019 in paragraph no. 20, clearly states that in case of rejection of refund claim of unutilised/accumulated input tax credit due to ineligibility of the input tax credit, the proper officer shall have to issue show cause notice in FORM GST RFD-08, under section 54 of the CGST Act, read with section 73 or 74 of the CGST Act, 2017 requiring the applicant to show cause as to why the amount of ineligible input tax credit should not be recovered as wrongly availed input tax credit under section 73 or section 74 of the CGST Act, 2017, as the case may be. It is also stated that the above show cause notice would be adjudicated following the principles of natural justice and order shall be issued in FORM GST RFD-06. However, no show cause notice was issued to us for recovery of ineligible credit and so on this count, the principles of natural justice have been violated and the impugned order deserves to be set quashed.

All invoices appearing in GSTR-2A:-Refund claim to the extent of Rs. 9,246.50/- in CGST, Rs. 9,246.50/- in SGST and Rs. 1,440/- in IGST was rejected on the grounds that the invoices pertaining to this credit were not reflected in GSTR-2A but the allegation is wrong as all the invoices for which refund claim has been filed by us is appearing in GSTR-2A. The re-conciliation statement of the invoices appearing in GSTR-2A is enclosed herewith for your ready reference in Annexure-1.

The constitutional validity of Rule 36(4) of CGST Rules, 2017 has been challenged in Rajasthan High Court:-It has been recently reported that the constitutional validity of Rule 36(4) of the CGST Rules, 2017 has been challenged before the Hon’ble Rajasthan High Court in the case of M/S G R INFRAPROJECTS LTD. VERSUS UNION OF INDIA in DB Civil Writ Petition No. 6337/2020 which is listed on 16.09.2020. We submit that since the jurisdictional High Court has admitted the writ petition, the benefit should be extended in our case and the impugned order rejecting refund claim by invoking provisions of Rule 36(4) of CGST Rules, 2017 deserves to be set aside. The copy of decision is enclosed herewith in Annexure-2 for your ready reference.

Reasoning of judgement
1. The Additional Commissioner (Appeals) has held that the show cause notice was given only two grounds for rejection of refund claim. The order has travelled beyond allegation in the show cause notice. The impugned order-in –appeal has said that the appellant while referring to the provisions of Sub section 7 of Section 75 of CGST Act 2017 which is given below for reference has stated that it casts statutory obligation on CGST officers that no demand shall be confirmed on the grounds other than the grounds specified in the notice.
“(7) The amount of tax, interest and penalty demanded in the order shall not be in excess of the amount specified in the notice and no demand shall be confirmed on the grounds other than the grounds specified in the notice.”
The learned appellate authority held that the adjuciation authority never issued the show cause notice to the appellant for demand of input tax credit of Rs. 3,22,401/- inadmissible under the provisions of Rule 36(4) of CGST Rules, 2017. As such, I hold that the demand of recovery of ineligible input tax credit of Rs.3,22,041/- does not sustain in view of Section 75(7) of CGST Act, 2017.
2. Moreover reference was also made to Para 20 of circular No. 125/44/2019-GST dated 18.11.2019 which clarifies that the proper officer shall have to issue SCN in Form GST RFD-08 under Section 54 of CGST Act read with Section 73 or 74 of the Act for rejection of refund claim of unutilized/accumulated credit due to ineligibility of ITC. Accordingly, refund claim attributable to such ineligible input tax credit was rejected by adjudication officer without issue of show cause notice in RFD-08 under Section 54 of CGST Act read with Section 73 or 74 of CGST Act, 2017.
He further maintained that discrepancy of non-mentioning of HSN code has been rectified by appellant in reply to SCN. Second discrepancy of non-reflecting of certain invoices in GSTR-2A has also been answered by appellant by providing the reconciliation statement. Only a small amount of Rs. 72/- is not reconciled and I allow the appeal except amount of refund is reduced by Rs. 72/-.

Decision: The case was decided on the basis of merits setting aside the order of the adjudicating authority under Section 75(7) of the Act. The Appeal was allowed rejecting only those invoices which were not reflecting in GSTR-2A.

Conclusion: GSTR-2A is a very volatile return by itself and the insertion of the proviso to Rule 36(4) has made it more difficult for the taxpayers to keep track of the invoices reflecting and those not reflecting in GSTR-2A. So the constitutional validity has been challenged before the High courts. Further, issuing an order for recovery of demand of ineligible credit and interest thereon is to be done by way of issuing a fresh Show cause notice. But deciding the case on the grounds not mentioned in show cause notice is contravention of Section 75(7) of CGST Act and is not maintainable in eyes of law. The order- in-original travelling beyond the allegation in show cause notice is void abintio and non-est.

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PJ/Case Study/2020-21/163
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