1St Scenario:
In case where a registered person “A” has issued tax invoice to another registered person “B” without any underlying supply of goods or services or both, whether such transaction will be covered as “supply” under section 7 of CGST Act and whether any demand and recovery can be made from ‘A’ in respect of the said transaction under the provisions of section 73 or section 74 of CGST Act. Also, whether any penal action can be taken against registered person ‘A’ in such cases.
- Clarification :
Since there is only been an issuance of tax invoice by the registered person ‘A’ to registered person ‘B’ without the underlying supply of goods or services or both, therefore, such an activity does not satisfy the criteria of “supply”, as defined under section 7 of the CGST Act. As there is no supply by ‘A’ to ‘B’ in respect of such tax invoice in terms of the provisions of section 7 of CGST Act, no tax liability arises against ‘A’ for the said transaction, and accordingly, no demand and recovery is required to be made against ‘A’ under the provisions of section 73 or section 74 of CGST Act in respect of the same. Besides, no penal action under the provisions of section 73 or section 74 is required to be taken against ‘A’ in respect of the said transaction. The registered person ‘A’ shall, however, be liable for penal action under section 122 (1)(ii) of the CGST Act for issuing tax invoices without actual supply of goods or services or both.
- Penalty U/s 122(1)(ii) in respect of wrongful availment of ITC or passed on irregularly.
Ten thousand rupees or an amount equivalent to input tax credit availed of or passed on or distributed irregularly, whichever is higher.
2nd Scenario :
A registered person “A” has issued tax invoice to another registered person “B” without any underlying supply of goods or services or both. ‘B’ avails input tax credit on the basis of the said tax invoice. B further issues invoice along with underlying supply of goods or services or both to his buyers and utilizes ITC availed on the basis of the above mentioned invoices issued by ‘A’, for payment of his tax liability in respect of his said outward supplies. Whether ‘B’ will be liable for the demand and recovery of the said ITC, along with penal action, under the provisions of section 73 or section 74 or any other provisions of the CGST Act.
Clarification :
Since the registered person ‘B’ has availed and utilized fraudulent ITC on the basis of the said tax invoice, without receiving the goods or services or both, in contravention of the provisions of section 16(2)(b) of CGST Act, he shall be liable for the demand and recovery of the said ITC, along with penal action, under the provisions of section 74 of the CGST Act, along with applicable interest under provisions of section 50 of the said Act.
Further, as per provisions of section 75(13) of CGST Act, if penal action for fraudulent availment or utilization of ITC is taken against ‘B’ under section 74 of CGST Act, no penalty for the same act, i.e. for the said fraudulent availment or utilization of ITC, can be imposed on ‘B’ under any other provisions of CGST Act, including under section 122.
under the above scenario CBIC while giving clarification , decided the said transaction is fraudulent and thereby applying Penalty U/s 74. Depending on the facts of the case B can take following grounds while arguing :
1. If it is a manufacturing company, the one to one correlation with the raw material used in manufacturing the goods. Moreover if B is a regular filing of returns and availing ITC as per 2A then there is no question of fraud on the part Of B so to invoke section 74.
2. Both suppliers under notice duly filed its GSTR-1 returns, and the ITC on purchases from them was duly reflected in our GSTR-2A/2B. The availment of ITC on the basis of invoices from a registered, filing supplier whose ITC appears in GSTR- 2A/2B is entirely in accordance with law.
3. A recipient taxpayer is entitled to rely upon the GSTN portal’s own records (GSTR-2A/2B) to verify the credit available to it. Once the system-generated GSTR-2A/2B reflects the ITC, the recipient has fulfilled its due diligence obligation. The Department cannot now hold the recipient liable for deficiencies in the supply chain that are entirely beyond the recipient’s knowledge or control.
4. Reliance can be placed on the following binding and persuasive judicial authorities:
i) State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd. (2023) 7 SCC 331 — The Hon’ble Supreme Court held that the burden of proof to establish fraud or collusion lies squarely on the Department and cannot be presumed against a bonafide purchaser.
ii) Suncraft Energy Pvt. Ltd. v. Asst. Commissioner (2023, Calcutta HC) — ITC cannot be denied to a bonafide recipient merely on account of the default of the supplier or the supplier’s supplier, unless direct collusion or connivance is established by positive evidence.
iii) Metal One Corporation India Pvt. Ltd. v. Union of India (2024, Bombay HC) — A registered taxpayer cannot be expected to independently verify the entire upstream supply chain of its vendor.
iv) D.Y. Beathel Enterprises v. State Tax Officer (2021, Madras HC) — Recovery must be made from the defaulting supplier first; demand cannot be raised on the recipient without exhausting remedies against the supplier.
v) Department is to prove mens rea a deliberate intent to issue invoices without supply.
vi) Many a times department claim that the GST registration of the suppliers of had been ‘cancelled ab initio/ suo moto’ for reasons such as Noticee non-functioning/non-existent, registration obtained by means of fraud and Cancelled suo-moto for not furnishing returns for a continuous period of more than six months etc.
One can argue for this as suppliers registration was active while availing credit or for the period under notice.
3rd Scenario:
A registered person ‘A’ has issued tax invoice to another registered person ‘B’ without any underlying supply of goods or services or both. ‘B’ avails input tax credit on the basis of the said tax invoice and further passes on the said input tax credit to another registered person ‘C’ by issuing invoices without underlying supply of goods or services or both. Whether ‘B’ will be liable for the demand and recovery and penal action, under the provisions of section 73 or section 74 or any other provisions of the CGST Act.
Clarification:
In this case, the input tax credit availed by ‘B’ in his electronic credit ledger on the basis of tax invoice issued by ‘A’, without actual receipt of goods or services or both, has been utilized by ‘B’ for passing on of input tax credit by issuing tax invoice to ‘C’ without any underlying supply of goods or services or both. As there was no supply of goods or services or both by ‘B’ to ‘C’ in respect of the said transaction, no tax was required to be paid by ‘B’ in respect of the same. The input tax credit availed by ‘B’ in his electronic credit ledger on the basis of tax invoice issued by ‘A’, without actual receipt of goods or services or both, is ineligible in terms of section 16 (2)(b) of the CGST Act. In this case, there was no supply of goods or services or both by ‘B’ to ‘C’ in respect of the said transaction and also no tax was required to be paid in respect of the said transaction. Therefore, in these specific cases, no demand and recovery of either input tax credit wrongly/ fraudulently availed by ‘B’ in such case or tax liability in respect of the said outward transaction by ‘B’ to ‘C’ is required to be made from ‘B’ under the provisions of section 73 or section 74 of CGST Act.
However, in such cases, ‘B’ shall be liable for penal action both under section 122(1)((ii) and section 122(1)(vii) of the CGST Act, for issuing invoices without any actual supply of goods and/or services as also for taking/ utilizing input tax credit without actual receipt of goods and/or services.
Any person who has retained the benefit of transactions specified under sub-section (1A) of section 122 of CGST Act, and at whose instance such transactions are conducted, shall also be liable for penal action under the provisions of the said sub-section. It may also be noted that in such cases of wrongful/ fraudulent availment or utilization of input tax credit, or in cases of issuance of invoices without supply of goods or services or both, leading to wrongful availment or utilization of input tax credit or refund of tax, provisions of section 132 of the CGST Act may also be invokable, subject to conditions specified therein, based on facts and circumstances of each case.
Conclusion:
While deciding the case under above transaction, department must keep in mind the ultimate beneficiaries under the said transaction and must also prove with material evidences a fraudulent intent of the buyer as well as supplier.
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