Whether Denial of ITC to a Bonafide Purchaser who has paid tax to the supplier is justified?

By Advocate Vineet Bhatia & CA Shradha Agarwal

GST was introduced on 1st July, 2017 thereby subsuming a host of indirect taxes. One of the reasons for introduction of GST was to create uniform system of indirect taxation across the country and to ensure that there is seamless flow of credit in the entire supply chain to avoid the cascading effect. Thus, seamless flow of credit is the backbone of GST and any restriction placed on availment or utilization of input tax credit should be backed by strong cogent reasons.

Section 16(2) of the CGST Act imposes certain pre-conditions for availment of input tax credit and Section 17(5) of the CGST Act places certain restriction on availability of input tax credit. The conditions imposed in Section 16(2) of the CGST Act are:

(a) The registered person must be in possession of tax invoice or debit note issued by a supplier.

(b) The registered person has received the goods or services.

(c) 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.

(d) The registered person has furnished the return under section 39.

In the present article we shall be examining the validity of Section 16(2)(c) of the CGST Act and whether the condition that no ITC would be allowed to purchaser if supplier has collected tax but not paid to Government is legal or not?

Section 16(2)(c) of the CGST Act puts a condition for claiming input tax credit in respect of any supply of goods or services unless 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. Section 16(2)(c) of the CGST Act reads as under:

Section 16(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,—

(c) subject to the provisions of [section 41 or section 43A], 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;

Recently in the case of 1Sri Ranganathar Valves (P) Ltd. V. Assistant Commissioner (CT) (FAC), W.P. NOS.38488 to 38493 of 2015, the Petitioner has challenged the restriction for claiming input tax credit due to:-

(a) Prior sufferance of Taxes (restriction of ITC in case where the supplier has not deposited the tax to the Government)

(b) ITC on reversal on wastage

(c) Ineligible claim of ITC on goods.

In the above stated judgment, in so far as the restriction of ITC in case where the supplier has not deposited the tax to the Government, the Hon’ble High Court of Madras relied upon the Judgment in the case of 2Infiniti Wholesale Ltd., Vs. The Assistant Commissioner (CT) and held as follows:

7. In the light of the above findings, the impugned orders are set aside and the issue with regard to restriction of the amount of Input Tax Credit for prior sufferance of taxes is remanded back to the Assessing Officer for fresh consideration. The Assessing Officer shall, before taking a final decision, extend due opportunity of personal hearing to the petitioner and endeavour to complete the proceedings, at least within a period of twelve weeks from the date of receipt of a copy of this order.

In the case of Infiniti Wholesale Ltd., Vs. The Assistant Commissioner (CT) the court was of the view that the ITC availed by the Petitioner could not have been proposed to be reversed or reversed on the ground that selling dealer has not filed return or not paid taxes.

In pre-GST regime, the same issue was dealt by Delhi High Court in the case of ³Arise India Limited and Ors. Vs. Commissioner of Trade & Taxes, Delhi and Ors. In this case the Petitioner challenged the validity of Section 9(2)(g) of the DVAT Act. Section 9(2) of the DVAT Act also stated the conditions under which ITC would not be allowed. Sub-clauses (a) to (f) specified certain kind of purchases on which the registered persons would not be allowed to claim ITC. Section 9(2)(g) of the DVAT Act specified category of purchases on which ITC was not allowed. Section 9(2)(g) of the DVAT Act read as follows:

Section 9(2) No tax credit shall be allowed-

[(g) to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period.]

The Petitioner contended that distinction between those categories specified in Section 9 (2) (a) to (f) of the DVAT Act which disentitle to the grant of ITC and the one under Section 9 (2) (g). Whereas the conditions specified in Section 9 (2) (a) to (f) are those which are within the control of and can be vouched for by the purchasing dealer, the condition under Section 9 (2) (g) is not. It requires the purchasing dealer to ensure, for the purposes of claiming ITC that the selling dealer has deposited VAT with the Government or has lawfully adjusted it against such selling dealer’s output tax liability.

In this case the Hon’ble High Court of Delhi held as follows:

53. In light of the above legal position, the Court hereby holds that the expression ‘dealer or class of dealers’ occurring in Section 9 (2) (g) of the DVAT Act should be interpreted as not including a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with Section 50 of the Act where there is no mismatch of the transactions in Annexures 2A and 2B. Unless the expression ‘dealer or class of dealers’ in Section 9 (2) (g) is ‘read down’ in the above manner, the entire provision would have to be held to be violative of Article 14 of the Constitution.

54. The result of such reading down would be that the Department is precluded from invoking Section 9 (2) (g) of the DVAT to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered selling dealer who has issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC. Where, however, the Department is able to come across material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under Section 40A of the DVAT Act.

The above stated judgment of the Hon’ble High Court of Delhi was challenged before the Supreme Court in the case of ⁴Commissioner of Trade & Taxes, Delhi and Ors. Vs Arise India Limited and Ors. The Hon’ble Supreme Court of India dismissed the SLP filed by the department.

Even otherwise the law on this issue is well settled and has been very clearly enunciated by Punjab & Haryana High Court in the case of ⁵Gheru Lal Bal Chand v. State of Haryana. In this case the Petitioner challenged the validity of Section 8(3) of Haryana Value Added Tax Act 2003(hereinafter referred to as HVAT Act). The Assessing Officer denied the ITC claimed of the Petitioner as per provisions of Section 8(3) of the HVAT Act as the VAT dealer from whom the Petitioner had purchased certain goods had not deposited the full tax in the Government Treasury. Section 8(3) of the HVAT Act reads as under:

8(3) Where any claim of input tax in respect of any goods sold to a dealer is called into question in any proceeding under this Act, the authority conducting such proceeding may require such dealer to produce before it in addition to the tax invoice issued to him by the selling dealer in respect of the sale of the goods, a certificate furnished to him in the prescribed form and manner by the selling dealer and such authority shall allow the claim only if it is satisfied after making such inquiry, as it may deem necessary that the particulars contained in the certificate produced before it are true and correct and in no case the amount of input tax on purchase of any goods in the State shall exceed the amount of tax in respect of the same goods, actually paid under this Act into the Government treasury.

In this case the Hon’ble Punjab & Haryana High Court observed that liability can be fastened on a person who either acts fraudulently or has been party to the collusion or connivance with the offender and no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer unless any fraudulent intention, collusion or connivance is established between the purchasing registered dealers and the registered selling dealer. The relevant paras of the said judgment reads as under:

26. In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender. However, law nowhere envisages to impose any penalty either directly or vicariously where a person is not connected with any such event or an act. Law cannot envisage an almost impossible eventuality. The onus upon the assessee gets discharged on production of form VAT C4 which is required to be genuine and not thereafter to substantiate its truthfulness by running from pillar to post to collect the material for its authenticity. In the absence of any mala fide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier thereto, no liability can be imposed on the principle of vicarious liability. Law cannot put such onerous responsibility on the assessee otherwise, it would be difficult to hold the law to be valid on the touchstone of articles 14 and 19 of the Constitution of India.

28. In other words, the genuineness of the certificate and declaration may be examined by the taxing authority, but onus cannot be put on the assessee to establish the correctness or the truthfulness of the statements recorded therein. The authorities can examine whether the form VAT C4 was bogus and was procured by the dealer in collusion with the selling dealer. The Department is required to allow the claim once proper declaration is furnished and in the event of its falsity, the Department can proceed against the defaulter when the genuineness of the declaration is not in question. However, an exception is carved out in the event where fraud, collusion or connivance is established between the registered purchasing dealer or the immediate preceding selling registered dealer or any of the predecessors selling registered dealer, the benefit contained in form VAT C4 would not be available to the registered purchasing dealer. The aforesaid interpretation would result in achieving the purpose of the rule which is to make the object of the provisions of the Act workable, i.e., realization of tax by the Revenue by legitimate methods.

34. To conclude, 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 is established. 35. In view of the above, it cannot be held that the provisions of section 8(3) of the Act and the sub-rules (1) and (4) of rule 20 of the Rules are ultra vires but the same shall be operative in the manner indicated above. Consequently, the writ petitions are partly allowed and assessment orders are set aside and cases are remanded to the assessing authority to pass fresh assessment order in accordance with law.

Even otherwise no mechanism has been made available to a purchasing dealer to check whether the supplier has deposited the tax to the Government. Merely reflecting of the purchases in GSTR-2A of the recipient is also not conclusive proof of the fact that the supplier has actually paid the taxes. It is a settled position of the law that a complete machinery and mechanism has to be provided to enable a person to follow the law. In this regard reliance can be placed on the following judgements:

• ⁶Commissioner, Central Excise and Customs, Kerala and Ors. vs. Larsen and Toubro Ltd. and Ors. (20.08.2015 – SC)
• ⁷Commissioner of Income Tax, Bangalore vs. B.C. Srinivasa Setty (19.02.1981 – SC)
• ⁸National Mineral Development Corpn. Ltd. vs. State of M.P. and Ors. (05.05.2004 – SC)