No GST can be demanded from Buyer for fault of Seller of non-payment of taxes to Govt

The Hon’ble Madras High Court in M/s. D. Y. Beathel Enterprises v. the State Tax Officer [W.P. (MD) Nos. 2127, 2117, 2121, 2152, 2159, 2160, 2168, 2177, 2500, 2530, 2532, 2534, 2538, 2539, 2540, 2503 & 2504 of 2021 & Ors., dated February 24, 2021] quashed the order passed by the officer levying the entire tax liability on the purchasing dealer without involving the seller, where the payment of tax has been made by the purchasing dealer, but the same has not been remitted to the Government by the Seller. Held that, the omission on the part of the Seller to remit the tax should have been viewed very seriously and strict action ought to have been initiated against the seller.

Facts:

M/s. D. Y. Beathel Enterprises (“the Petitioner”) herein are dealers of Raw Rubber Sheets. According to the Petitioner they had purchased goods from Charles and his wife Shanthi (“Sellers”) and the payments were made by the Petitioners to Sellers included the tax component. A substantial portion of the sale consideration was paid through banking channels. Based on the returns filed by the Sellers, the Petitioner availed Input Tax Credit (“ITC”).

During inspection by the State Tax Officer (“the Respondent”), it came to light that Sellers did not pay any tax to the Government, which necessitated initiation of the proceedings and issuance of show cause notices to the Petitioner. The Petitioner submitted their replies specifically taking the stand that all the amounts payable by them had been already paid, therefore, those Sellers will have to be necessarily confronted during enquiry. Subsequently, without involving the Sellers, the Respondent passed an order (“impugned order”) levying the entire liability on the Petitioners.

Being aggrieved, the Petitioner has filed this petition against the impugned order.

Issue:

Whether the Respondent can levy the entire tax liability on the Petitioner, without involving the Sellers, where the tax has not been remitted to the Government by the Sellers?

Held:

The Hon’ble Madras High Court in W.P. (MD) Nos. 2127, 2117, 2121, 2152, 2159, 2160, 2168, 2177, 2500, 2530, 2532, 2534, 2538, 2539, 2540, 2503 & 2504 of 2021 & Ors., dated February 24, 2021 held as under:

• Analyzed the provision of Section 16 of the Central Goods and Services Tax Act, 2017 (“CGST Act”), and noted that the assessee must have received the goods and the tax charged in respect of its supply, must have been actually paid to the Government either in cash or through utilization of ITC, admissible in respect of the said supply. Therefore, if the tax had not reached the kitty of the Government, then the liability may have to be eventually borne by one party, either the seller or the buyer.
• Observed that, the Respondent has not taken any recovery action against the Seller. When it has come out that the Seller has collected tax from the Petitioner, the omission on the part of the Sellers to remit the tax must have been viewed very seriously and strict action ought to have been initiated against the Sellers.
• Noted that the Respondent took a stand that there was no movement of goods. Held that, if there was no movement of the goods, the examination of Sellers became more necessary and imperative. However, the Respondent did not ensure the presence of Sellers in the enquiry even when the Petitioners insisted on the same. Hence, the Impugned order suffers from certain fundamental flaws.
• Quashed the Impugned order due to non-examination of Sellers in the enquiry and non-initiation of recovery action against Sellers in the first place and remitted back the matter to the Respondent.
• Directed Respondent to hold the enquiry afresh where Sellers will have to be examined as witnesses and to initiate recovery action against Sellers.

Our comments:

To know more, kindly watch our video on “No GST can be demanded from Buyer for fault of Supplier of non-payment of taxes” by CA Bimal Jain at: https://www.youtube.com/watch?v=NUMSf_VNgV4

Relevant Provisions:

Section 16(1) and (2) of the CGST Act:

“16. Eligibility and conditions for taking input tax credit.

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

(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,––

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(b) he has received the goods or services or both.

Explanation.-For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.

(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; and

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.”

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