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#GSTCase-187- Rule 142(1)(a) of CGST Rules, 2017 is valid and is no manner conflict with any of the provisions of the Act; Powers of Central Government under Section 164

Mahavir Enterprise v. Assistant Commissioner of State Tax [2020] 117 471 (Gujarat)

1. Question before the Court for Consideration-

Question 1: Whether the impugned show cause notice deserves to be quashed and set aside as prayed for by the writ applicant?

Question 2: Whether Rule 142(1)(a) of the Rules 2017 is in any manner ultra vires the provisions of the parent Act i.e. the GST Act, 2017?

2. Facts: Petitioner has challenged legality and validity of show cause notice dated 30th November 2019 issued under section 122(1) of CGST Act calling upon the writ applicant to show cause why an amount of Rs. 6,87,68,821/- (Rupees Six Crore Eighty Seven Lac Sixty Eight Thousand Eight Hundred Twenty One only) should not be recovered for the alleged contravention of the provisions of the Act and the Rules. Show Cause Notice was issued to the writ applicant as department has sought to make out the case that applicant is involved in bogus billing transactions without any physical movement of the goods.

3. Contention by Petitioner-

Section 122 does not provides for issuance of Show Cause Notice and Rule 142 travels beyond the law by providing issuance of Show Cause Notice for levy of Penalty under Section 122-

The impugned show cause is invalid as Section 122 of the Act, 2017 does not contemplate issue of any show cause notice. According to the learned counsel, if it is the case of the department that the writ applicant is guilty of fraud or suppression, then a show cause notice under section 74 of the Act, 2017 is contemplated for the purpose of determination of the tax liability.

Rule 142(1)(a) of CGST Rules contemplates for issuance of summary notice electronically along with the notice issued under section 52 or Section 73 or Section 74 or Section 76 or Section 122 or Section 123 or Section 124 or Section 125 or Section 127 or Section 129 or Section 130 of the GST Act, 2017. Section 122 of the Act, 2017 does not contemplate issue of any show cause notice, Rule 142(1)(a) travels beyond the provisions of the Act. In such circumstances, according to the learned counsel, Rule 142(1)(a) deserves to be declared as ultra vires being in excessive delegation of the powers.

4. Contention by Respondent-

Challenge to constitutional validity of Rule 142(1)(a) of the Rules is without any foundation. Section 164 confers powers upon Government on recommendations of the council by a notification to make rules for carrying out the provisions of the Act, 2017. Rule 142(1)(a) of the Rules is valid and does not travel beyond the provisions of the Act, 2017.

5. Observation by the Court

Ordinarily Courts should be reluctant to interfere with Show Cause Notice unless Show Cause Notice issued without any authority of Law:

Case-1: Standard Chartered Bank and others v. Directorate of Enforcement and others reported in AIR 2006 SC 1301- “As indicated by this Court in State of Uttar Pradesh v. Brahm Datt Sharma [(1987) 2 SCC 179] when a show cause notice is issued under statutory provision calling upon the person concerned to show cause, ordinarily that person must place his case before the Authority concerned by showing cause and the courts should be reluctant to interfere with the notice at that stage unless the notice is shown to have been issued palpably without any authority of law. On the facts of this case, it cannot be said that these notices are palpably without authority of law. In that situation, the appellants cannot successfully challenge the refusal by the High Court of the writs of prohibition prayed for by them.”

Case-2- Commissioner of Customs And Central Excise, Madurai v. Charminar Nonwovens Limited reported in 2004 (167) E.L.T. 372- Dispute involved was a classification dispute and challenge was made to a show cause notice wherein it was held that High Court should remit the matter to the concerned authority for adjudication.

Case-3- State of Uttar Pradesh and another v. Anil Kumar Ramesh Kumar Chandra Glass Works and another reported in (2005) SCC 451- Apex Court carved out an exception that if the facts, narrated in the show cause notice, are not accepted to be correct; if it can be demonstrated that offence is not disclosed; or the show cause notice is without jurisdiction, the Court should not entertain the writ petition under Article 226 of the Constitution of India in the following words:

“6. In our view, the High Court proceeded on an incorrect basis. Hence, the decision cannot stand. In any event, this Court had repeatedly held that Article 226 should not be permitted to be invoked in order to challenge show-cause notices unless accepting the fact in the show-cause notices to be correct, either no offence is disclosed or the show-cause notices are ex facie without jurisdiction. That could not be said as far as the eight show-cause notices in question are concerned. The High court, therefore, should not have interfered and should have left the respondents to pursue their remedy by way of an appeal under section 9 of the Act from the order of assessment which, according to the High Court, had admittedly been passed before the writ petition had been filed by the respondent.”

Case-4- Indian Cardboard Industries Limited v. Collector of Central Excise reported in 1992 (58) E.L.T. 508(Cal.)-On the basis of the decisions cited it appears that the court in exercise of its jurisdiction under Art. 226 of the Constitution will interfere with a show cause notice in the following circumstances:

  1. When the show cause notice ex facie or on the basis of admitted facts does not disclose the offence alleged to be to be committed;
  2. When the show cause notice is otherwise without jurisdiction;
  3. When the show cause notice suffers from an incurable infirmity;
  4. When the show cause notice is contrary to judicial decisions or decisions of the Tribunal;
  5. When there is no material justifying the issuance of the show cause notice.”

Case-5- Union of India v. Vicco Laboratories, reported in 2007 (13) S.C.C. 270- “Normally, the writ court should not interfere at the stage of issuance of show-cause notice by the authorities. In such a case, the parties get ample opportunity to put forth their contentions before the authorities concerned and to satisfy the authorities concerned about the absence of case for proceeding against the person against whom the show-cause notices have been issued. Abstinence from interference at the stage of issuance of show-cause notice in order to relegate the parties to the proceedings before the authorities concerned is the normal rule. However, the said rule is not without exceptions. Where a show-cause notice is issued either without jurisdiction or in an abuse of process of law, certainly in that case, the writ court would not hesitate to interfere even at the stage of issuance of show-cause notice. The interference at the show-cause notice stage should be rare and not in a routine manner. Mere assertion by the writ petitioner that notice was without jurisdiction and/or abuse of process of law would not suffice. It should be prima facie established to be so. Where factual adjudication would be necessary, interference is ruled out.”

6. Concluding Observation by Court following above decisions- High Court can interfere under Article 226 of the Constitution of India against a show cause notice where the same is issued by an authority in exercise of the power which is absent; the facts does not lead to commission of any offence; the show cause notice is otherwise without jurisdiction; it suffers from incurable infirmity; against the settled judicial decisions or the decisions of the Tribunal and bereft of material particulars justifying commission of offence.

  • When does a legislation suffers from Excessive delegation- A rule under delegated legislation can be held to be ultra vires the statutory provisions of the Act if it is shown :
  • that it is beyond the scope of or in excess of the rule-making power of the delegate conferred under the Act, or
  • that it is in conflict with or repugnant to any enactment in the Act.

7. Cases Referred-

Case-1-Registrar, Co-operative Societies v. K. Kunjabmu, AIR 1980 SC 350 and State of Nagaland v. Ratan Singh, AIR 1967 SC 212-The question whether any particular legislation suffers from excessive delegation has to be decided having regard to the subject matter, the scheme, the provisions of the Statutes including its preamble and the facts and circumstances in the background of which the Statute is enacted.

Case-2-St. Johns Teachers Training Institute v. Regional Director, National Council for Teacher Education reported in AIR 2003 SC 1522-It is also well settled that in considering the vires of subordinate legislation one should start with the presumption that it is intra vires and if it is open to two constructions, one of which would make it valid and other invalid, the Courts must adopt that construction which makes it valid and the legislation can also be read down to avoid its being declared ultra vires

Case-3-Ajay Canu v. Union of India, AIR 1988 SC 2027- Supreme Court has held that it was well established proposition of law that where a specific power is conferred without prejudice to the generality of the power already specified, the particular power is only illustrative and it did not in any way restrict the general power.

Section 164 confers wide power to make rules to the Government- The Court referred Section 164 of CGST Act which confers power on Central Government to frame the rules. Under Section 164 of the Act, the Central Government has the power to make rules generally to carry out all or any of the purposes of the Act.

8. Held: 

Therefore in the opinion of the Court, Rule 142(1)(a) of the Rules, 2017 is valid and is no manner conflict with any of the provisions of the Act.

9. Comment

Section 164 of CGST Act, 2017 is now being referred in decisions wherein validity of a particular rule is challenged under excessive delegation. Other decisions wherein Section 164 has been referred to upholding the power of the Government to make Rules are as follows:

M/s. P.R.Mani Electronics Vs Union of India (Madras HC) Decision dated 13th July 2020-Section 164 is widely worded and provides rule making powers for Rule 117 prior to retrospective amendment to Section 140.

Nelco Limited v. Union of India [2020 SCC Online Bom 437] (Nelco)- The case was decided before Section 140 was amended. Even so, Court concluded that Section 164 of the CGST Act is wide enough to enable the framing of rules fixing a time limit to claim Transitional ITC.

Section 164 has been held to be widely worded and imposes no fetters on rule making powers except that such rules should be for the purpose of giving effect to the provisions of the CGST Act.