There is a peculiar anxiety that haunts every tax professional advising a mid-sized business in the GST era, a question that sounds almost philosophical until the notice lands on your desk: Can you be penalised for someone else’s failure? Specifically, what happens to your Input Tax Credit when the government goes back in time and cancels your supplier’s registration, effectively erasing the very legal basis on which you had claimed credit?
This question, long simmering in the corridors of VAT and GST litigation, was brought to a head by the Supreme Court of India in State of Karnataka v. M/s Ecom Gill Coffee Trading Pvt. Ltd. (Civil Appeal No. 230 of 2023, decided on 13th March 2023). The judgment, delivered under the provisions of the Karnataka Value Added Tax Act, 2003 (KVAT Act), carries implications that ripple well beyond Karnataka’s borders and cut deep into the fabric of how Input Tax Credit is claimed across the entire GST regime.
The Problem at Its Core: Retrospective Cancellation
Before we get into the case itself, it is worth pausing to understand why retrospective cancellation of a supplier’s GST registration is such a damaging event for the buyer.
Under the GST framework, Section 29 of the CGST Act, 2017 empowers the Proper Officer to cancel a dealer’s registration from any date, including a retrospective date, as he may deem fit , particularly in cases involving contravention of specified provisions or where the dealer is found to be non-existent or fraudulent. The language of the provision , “as he may deem fit” , confers powers of extraordinarily wide amplitude on the adjudicating authority.
So what happens in practice? A supplier registers on, say, 1st July 2017. A buyer transacts with this supplier in good faith throughout 2018-2019, pays GST on those purchases, receives valid tax invoices, and claims ITC accordingly. A few years later, the department investigates the supplier, finds irregularities, and cancels the registration with effect from the original date of registration , July 2017. Overnight, every transaction conducted with that supplier becomes a transaction with an “unregistered” dealer. The buyer’s ITC, already availed and perhaps even utilised, suddenly becomes a live target for recovery.
The buyer had no warning. The buyer had done nothing wrong. And yet, here comes the demand notice.
Background of the Ecom Gill Case
M/s Ecom Gill Coffee Trading Pvt. Ltd. was a registered dealer engaged in purchasing green coffee beans from various other dealers for the purpose of export and domestic sale. During the assessment year 2010-2011, the Assessing Officer initiated proceedings under Section 39 of the KVAT Act, 2003 after finding irregularities in the Input Tax Rebate (ITR) claimed by the company.
The Assessing Officer issued notice seeking accounts, books, and tax invoices. A re-assessment order was subsequently passed. The investigation revealed that Ecom Gill had claimed ITC from 27 sellers. Of these:
- Six sellers were found to be de-registered;
- Three sellers had effected sales to Ecom Gill but had not filed or paid taxes;
- Six sellers outrightly denied having made any sales or paid any taxes.
On this basis, the ITC was disallowed.
Ecom Gill appealed, and the matter went through multiple rounds of litigation. The Karnataka Appellate Tribunal reversed the Assessing Officer’s order, primarily on the ground that the purchasing dealer should not suffer for the default of the seller. The High Court of Karnataka dismissed the Revenue’s revision application, upholding the Tribunal’s reasoning. The Revenue then approached the Supreme Court.
What Ecom Gill Argued
Ecom Gill’s argument was, on the surface, entirely reasonable. It contended that at the time of every transaction, the suppliers were registered dealers. It had obtained valid tax invoices. It had paid the purchase price through account payee cheques , traceable, documented, verifiable. The company argued that under the KVAT Act, particularly Rules 27 and 29, no additional documentation was required to claim ITC beyond the invoice and proof of payment. Once those conditions were met, the burden under Section 70 of the KVAT Act was discharged.
The argument echoed a widely-held view in commercial circles: that a bona fide buyer who does his due diligence cannot be penalised for the sins of his supplier. Reliance was placed on judgments like Corporation Bank v. Saraswati Abharansala and on the Delhi High Court’s ruling in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, which had held that ITC cannot be denied to a party that acted in good faith and exercised due diligence.
What the Supreme Court Held
The Supreme Court disagreed , and in doing so, raised the bar for ITC claims considerably.
Justice M.R. Shah, writing for the court, examined Section 70 of the KVAT Act, which places the burden of proving that an input tax claim is correct squarely on the dealer making the claim , i.e., the purchasing dealer. The Court held that this burden is substantial and cannot be discharged merely by producing tax invoices or showing that payment was made by cheque.
The Court held that to validly claim ITC, the purchasing dealer must establish genuineness of the transaction by furnishing, among other things:
1. Name and address of the selling dealer
2. Details of the vehicle which delivered the goods
3. Proof of payment of freight charges
4. Acknowledgement of taking delivery of goods
5. Tax invoices and payment particulars
6. Proof of actual payment of tax by the seller
7. Evidence of actual physical movement of goods
Mere paper documentation , invoices and cheque payments , was held to be insufficient. The Court found that Ecom Gill had failed to discharge this burden and restored the Assessing Officer’s order disallowing the ITC.
The Revenue’s appeals were accordingly allowed.
The Retrospective Cancellation Angle: What the Court Left Open
Here is where the judgment gets interesting , and arguably incomplete , from the perspective of a GST practitioner.
The Ecom Gill case did not, in explicit terms, settle the specific question of whether ITC can be denied solely on the ground that a supplier’s registration was retrospectively cancelled. The Supreme Court’s ruling was broader: it placed a heavy evidentiary burden on the purchasing dealer to prove the genuineness of every transaction. The retrospective cancellation was one of the circumstances that contributed to the doubt around the genuineness of those transactions, but the ruling did not draw a categorical line saying that retrospective cancellation alone is sufficient ground to deny ITC.
This distinction is important. There is a body of judicial opinion , including the Gujarat High Court’s ruling in Mahadev Enterprise , that holds ITC cannot be denied merely on the ground that the supplier’s registration was retrospectively cancelled, in the absence of the Department establishing that the transactions were bogus or non-genuine. The Court in Mahadev Enterprise drew a sensible line: the buyer is entitled by law to rely upon the certificate of registration of the selling dealer when the registration was current and active. Whatever the consequence of a retrospective cancellation may be for the supplier, it cannot, as a matter of fairness and legal logic, be visited upon a third party who transacted with the supplier in good faith.
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