Input Tax Credit in India

Navigating the Labyrinth of Input Tax Credit in India: Judicial Interpretation and Statutory Imperatives

Introduction

Input Tax Credit (ITC) is a cornerstone of modern indirect tax systems, designed to mitigate the cascading effect of taxes. In India, the concept of ITC has been integral to both the pre-Goods and Services Tax (GST) regime, primarily under State Value Added Tax (VAT) laws and the Central CENVAT Credit Rules, and the current GST framework. ITC allows businesses to claim credit for taxes paid on inputs (goods and services) used in the course of their business, which can then be utilized to offset their output tax liability. While the objective is straightforward, the law governing the allowance of ITC is replete with conditions, restrictions, and procedural requirements, leading to extensive litigation. This article analyzes the legal principles governing the allowance of input tax credit in India, drawing upon statutory provisions and key judicial pronouncements that have shaped its contours.

The Conceptual Underpinnings of Input Tax Credit: Vested Right v. Statutory Concession

A fundamental question that has consistently engaged judicial scrutiny is the nature of ITC: Is it a vested right accruing to a taxpayer, or a mere concession granted by statute, subject to strict adherence to prescribed conditions? The Supreme Court of India in Eicher Motors Ltd. And Another v. Union Of India And Others (1999 SCC 2 361, Supreme Court Of India, 1999), in the context of the MODVAT scheme, held that credit once validly availed becomes a vested right that cannot be retrospectively taken away. The Court opined that applying Rule 57-F(4-A) of the Central Excise Rules, 1944, to lapse unutilized MODVAT credits for goods manufactured prior to a specified date infringed upon such vested rights.

However, a more dominant view, particularly under the VAT and GST regimes, has emerged from subsequent Supreme Court decisions. In Jayam And Company v. Assistant Commissioner And Another (Supreme Court Of India, 2016), the Apex Court clarified that ITC is a form of concession offered by the State Government and can be availed only as per the conditions stipulated in the statute. This principle has been reiterated in numerous judgments. For instance, the Patna High Court in Gobinda Construction and others v. Union of India and others (MANU/BH/1260/2023), relying on Jayam and Company and ALD Automotive Pvt. Ltd. v. Commercial Tax Officer (2019 1 SCC 449), upheld the constitutional validity of Section 16(4) of the Central Goods and Services Tax Act, 2017 (CGST Act), emphasizing that the claim to ITC is not an absolute legal right. This view has been consistently followed by various High Courts, including the Kerala High Court in cases like M/S. MALL OF JOY PVT LIMITED, v. UNION OF INDIA (Kerala High Court, 2024), SALAHUDHEEN v. STATE TAX OFFICER (Kerala High Court, 2024), and M TRADE LINKS v. UNION OF INDIA (Kerala High Court, 2024), which affirmed that ITC entitlement is subject to conditions and restrictions prescribed by law.

The Gujarat High Court in Filco Trade Centre Pvt. Ltd. v. Union Of India (2018 SCC ONLINE GUJ 1419, Gujarat High Court, 2018), while striking down clause (iv) of subsection (3) of section 140 of the CGST Act concerning transitional credit, observed that the provision was arbitrary and discriminatory, taking away vested rights with retrospective effect. This suggests that while ITC may be a concession, arbitrary or retrospective denial of accrued benefits can be challenged. Similarly, the Delhi High Court in brand equity treaties limited v. the union of india & ors (Delhi High Court, 2020) dealt with arguments that accrued CENVAT credit is a vested right that cannot be denied due to procedural conditions for transition to GST, ultimately allowing petitioners to file Form TRAN-1.

Input Tax Credit Regime Prior to GST: Key Principles and Judicial Precedents

Under the pre-GST VAT laws, the allowance of ITC was governed by respective State enactments. The Madras High Court in M/S. Interfit Techno Products Ltd. (Madras High Court, 2014) outlined typical conditions for ITC availment, such as purchases from a registered dealer within the State for resale, use as input in manufacturing, use as packing materials, or use as capital goods in manufacturing taxable goods. It also noted provisions for allowing ITC on tax paid in excess of a certain percentage for stock transfers or use in manufacture for stock transfers, subject to reversal if already availed.

The Supreme Court in Jayam And Company v. Assistant Commissioner And Another (Supreme Court Of India, 2016) and Jayam & Co. (S) v. Assistant Comnmissioner & Anr. (S) (Supreme Court Of India, 2016) detailed several restrictions on ITC, including:

  • No ITC on goods purchased and used for providing facilities to proprietors, partners, directors, or employees in residential accommodation.
  • No ITC in respect of sales of goods exempted under Section 15 of the relevant VAT Act.
  • No ITC on tax paid in other States or Union Territories on goods brought into the State.
  • No ITC on the purchase of goods sold as such or used in the manufacture of other goods and sold in the course of inter-State trade or commerce falling under sub-section (2) of Section 8 of the Central Sales Tax Act, 1956 (CST Act).
  • No ITC on purchase of capital goods used exclusively in the manufacture of exempted goods, with proportionate credit allowed if used for both taxable and exempted goods.

The Supreme Court in Tvs Motor Company Ltd. (S) v. State Of Tamil Nadu (S) (Supreme Court Of India, 2018) also elaborated on the conditions under Section 19 of the Tamil Nadu VAT Act, 2006, reinforcing these principles. Further, in Jayam And Company v. Assistant Commissioner And Another (2016 SCC 15 125, Supreme Court Of India, 2016), the Apex Court upheld the reversal of ITC under Section 19(20) of the Tamil Nadu VAT Act where a registered dealer sold goods at a price lower than the purchase price (due to post-sale discounts from the vendor), limiting the ITC to the output tax payable.

The issue of ITC on declared goods was addressed in Food Corporation Of India v. State Of Punjab And Ors. (2006 STC P&H 148 312, Punjab & Haryana High Court, 2006), where the court considered the mandate of Section 15(c) of the CST Act, requiring that tax on rice be reduced by the tax paid on paddy. The Patna High Court also dealt with a similar issue in Food Corporation Of India... v. The State Of Bihar... (Patna High Court, 2016).

The Madras High Court in Simpsons & Company Ltd. v. The Deputy Commissioner (CT) - IV, Large Taxpayers Unit, Chennai & Others (Madras High Court, 2020) clarified that ITC could not be denied on inputs used in goods sold to Special Economic Zones (SEZs) under Section 8(6) of the CST Act, as such sales were not covered by the restrictions in Section 19(5)(c) of the TNVAT Act, 2006, which applied to sales falling under Section 8(2) of the CST Act.

The burden of proof for claiming ITC lay on the dealer, as highlighted in M/S. Jkm Graphics Solutions Private Limited... v. The Commercial Tax Officer... (2017 SCC ONLINE MAD 669, Madras High Court, 2017). The eligibility of ITC on capital goods, such as 'silos', and whether they constituted 'civil structures' (often in a negative list for ITC), was examined in State Of Kerala Revision Petitioner//Revenue v. Ambuja Cements Ltd . //Assessee. (2019 SCC ONLINE KER 7773, Kerala High Court, 2019), where the Tribunal's decision to allow ITC on items forming an integral part of plant and machinery was under review.

Revisional powers of tax authorities could also impact ITC claims, as seen in M/S. Kotak Mahindra Prime Limited v. The State Of Karnataka (Karnataka High Court, 2016) and M/S MFAR CONSTRUCTIONS PVT LTD v. The Additional Commissioner of commercial taxes zone-ii (Karnataka High Court, 2021), where reassessment orders allowing ITC were sought to be revised.

Input Tax Credit under the Goods and Services Tax (GST) Regime

The GST regime, introduced in 2017, consolidated various indirect taxes and brought a more unified ITC mechanism. However, it too is governed by stringent conditions and has been a subject of significant judicial review.

Statutory Provisions (Sections 16, 17, 140 of CGST Act)

Section 16 of the CGST Act, 2017, governs the eligibility and conditions for taking ITC.

  • Section 16(1) entitles every registered person to ITC on goods or services used or intended to be used in the course or furtherance of business, subject to prescribed conditions and restrictions.
  • Section 16(2) lays down mandatory conditions, such as possession of a tax invoice, receipt of goods/services, payment of tax by the supplier, and furnishing of returns.
  • Section 16(3) disallows ITC if depreciation has been claimed on the tax component of capital goods.
  • Section 16(4) prescribes a time limit for availing ITC, generally the due date of furnishing the return for September following the end of the financial year or furnishing of the relevant annual return, whichever is earlier.
The Kerala High Court in M/S. MALL OF JOY PVT LIMITED, v. UNION OF INDIA (Kerala High Court, 2024) and other similar pronouncements, extensively quoted the Patna High Court's decision in Gobinda Construction, upholding the constitutional validity of Section 16(4) and reiterating that ITC is a concession subject to statutory conditions, including time limits.

Section 17 of the CGST Act deals with the apportionment of credit and blocked credits. Section 17(5) lists specific supplies where ITC is not available (blocked credits). For instance, Section 17(5)(d) restricts ITC on goods or services received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account, even if used in the course or furtherance of business. The constitutional validity and interpretation of this provision were challenged in Safari Retreats Private Limited v. Chief Commissioner of Central Goods & Service tax (Orissa High Court, 2019), where the petitioner constructed a shopping mall for letting out and was denied ITC. The High Court observed that if the petitioner's interpretation (that there is no break in the tax chain) is not accepted, the provision might be deemed unconstitutional.

Section 140 of the CGST Act pertains to transitional arrangements for ITC. The Gujarat High Court in Filco Trade Centre Pvt. Ltd. v. Union Of India (2018) found clause (iv) of Section 140(3) to be unconstitutional, deeming it arbitrary and discriminatory for taking away vested rights retrospectively concerning transitional credit for first-stage dealers.

Judicial Scrutiny of GST Provisions

Constitutional Challenges

Apart from the cases mentioned above (Filco Trade Centre regarding Section 140(3), Safari Retreats regarding Section 17(5)(d), and the Kerala High Court cases upholding Section 16(4)), the fundamental structure and conditions of ITC under GST have faced constitutional scrutiny. The courts have generally upheld the legislative competence to impose conditions for availing ITC, viewing it as a benefit conferred by the statute (Jayam and Company principle).

Procedural Aspects and Rectification

The transition to GST and its reliance on an online portal led to numerous procedural challenges. In Tara Exports v. Union Of India (2018 SCC ONLINE MAD 3387, Madras High Court, 2018) and brand equity treaties limited v. the union of india & ors (Delhi High Court, 2020), petitioners faced difficulties in filing Form TRAN-1 to claim transitional CENVAT/VAT credit due to technical glitches in the GSTN portal. The High Courts, recognizing the genuine efforts of the taxpayers and the legitimacy of the accrued credits, directed the authorities to allow manual filing or reopen the portal, emphasizing that accrued rights cannot be defeated by procedural hurdles, especially those attributable to systemic issues. However, the courts often clarified that such orders were passed in the unique circumstances of the cases and might not serve as general precedents (Tara Exports).

Conversely, regarding rectification of regular returns, the Supreme Court in Union Of India (S) v. Bharti Airtel Ltd. And Others (S) (2021 SCC ONLINE SC 1006, Supreme Court Of India, 2021) took a stricter stance. It overturned a Delhi High Court decision that had allowed Bharti Airtel to rectify Form GSTR-3B beyond the prescribed period. The Supreme Court upheld Circular No. 26/26/2017-GST, emphasizing that rectification must adhere to Section 39(9) of the CGST Act and Rule 61(5) of the CGST Rules. The Court stressed that taxpayers have a primary duty of self-assessment and cannot solely rely on the portal or its technical deficiencies to deviate from statutory timelines.

Interpretation of Specific ITC Claims

In Mohit Minerals Pvt. Ltd. v. Union Of India And Others (2020 SCC ONLINE GUJ 49, Gujarat High Court, 2020), the Gujarat High Court quashed Notifications imposing IGST on ocean freight for imported goods under a reverse charge mechanism on the importer. The Court held that the importer was not the "recipient" of the ocean freight service in CIF contracts and that such a levy amounted to double taxation, as IGST was already paid on the CIF value of goods which included freight. This decision highlighted the importance of correct identification of the "recipient" for levy of tax and availment of ITC.

The Supreme Court in Union Of India And Others v. Vkc Footsteps India Pvt. Ltd. (2021 SCC ONLINE SC 706, Supreme Court Of India, 2021) addressed a significant issue concerning the refund of unutilized ITC in cases of an inverted duty structure (where the tax rate on inputs is higher than on output supplies) under Section 54(3)(ii) of the CGST Act. The Court resolved the divergence between the Gujarat High Court (which had read down Rule 89(5) of the CGST Rules to include input services for refund calculation) and the Madras High Court (which had upheld the exclusion of input services). The Supreme Court upheld the formula prescribed in Rule 89(5) which excluded input services from the scope of "input tax credit" for the purpose of refund in inverted duty structures, thereby limiting the refund to unutilised credit accumulated on account of inputs (goods) only.

Overarching Conditions and Restrictions on Availing Input Tax Credit

Across both pre-GST and GST regimes, certain common themes emerge regarding conditions and restrictions for allowing ITC:

  1. Registered Dealer/Person: ITC is generally available only to registered dealers/persons.
  2. Taxable Supplies: Inputs must be used or intended to be used for making taxable outward supplies. ITC is typically not allowed on inputs used for exempted supplies (Jayam And Company (Supreme Court Of India, 2016); Section 17(2) CGST Act).
  3. Possession of Valid Documents: A valid tax invoice or other prescribed document is a prerequisite (Section 16(2)(a) CGST Act).
  4. Receipt of Goods/Services: The claimant must have actually received the goods or services (Section 16(2)(b) CGST Act).
  5. Payment of Tax by Supplier: Under GST, the supplier must have paid the tax to the government for the recipient to avail ITC (Section 16(2)(c) CGST Act), a condition that has generated considerable debate and practical challenges.
  6. Furnishing of Returns: The recipient must furnish the prescribed returns (Section 16(2)(d) CGST Act).
  7. Specific Exclusions/Blocked Credits: Certain goods and services are specifically excluded from ITC eligibility, such as those for personal consumption, certain construction activities (Safari Retreats), motor vehicles (with exceptions), etc. (Section 17(5) CGST Act; similar restrictions existed in VAT laws).
  8. Time Limits: Statutes often prescribe time limits for availing ITC (Section 16(4) CGST Act; similar provisions in some VAT laws).

Conclusion

The jurisprudence surrounding the allowance of input tax credit in India reflects a continuous effort by the legislature and the judiciary to balance the objective of preventing tax cascading with the need to safeguard revenue and ensure compliance. While ITC is a critical component of the value-added taxation system, it is consistently treated by courts, particularly the Supreme Court, as a statutory concession rather than an absolute vested right (Jayam and Company (2016); M/S. MALL OF JOY PVT LIMITED (2024)). This characterization underpins the judiciary's general inclination to uphold the conditions and restrictions imposed by statutes for its availment, including time limits (Union Of India (S) v. Bharti Airtel Ltd. (2021); Kerala HC on Sec 16(4)).

However, courts have intervened where provisions were found to be arbitrary, discriminatory, or resulted in the retrospective denial of genuinely accrued benefits (Filco Trade Centre (2018)), or where procedural impediments attributable to the system hindered taxpayers' ability to claim legitimate credits (Tara Exports (2018); brand equity treaties limited (2020)). The interpretation of specific scenarios, such as ITC on construction for letting out (Safari Retreats (2019)), IGST on ocean freight (Mohit Minerals (2020)), and the scope of refund in inverted duty structures (Vkc Footsteps (2021)), continues to evolve. As the GST regime matures, the legal landscape of input tax credit will undoubtedly see further refinements through legislative amendments and judicial pronouncements, aiming for greater clarity, fairness, and efficiency in this vital aspect of India's indirect tax system.