Introduction
Recent court judgments and the increasing stringency of GST compliances have raised a red flag for buyers all over India. Input Tax Credit (ITC) is a vital component of the GST system, enabling businesses to offset the GST they pay on inputs against their GST liability on sales. However, recent court decisions have sent a warning to legitimate buyers regarding ITC eligibility. This article explores the implications of these judgments and offers practical suggestions for buyers to navigate this evolving landscape.
Understanding GST Act Provisions
Section 16 of the Central Goods and Services Tax (CGST) Act lays down the eligibility criteria and conditions for claiming Input Tax Credit. Key provisions include:
1. Section 16(1) – Business Usage: Buyers must use input supplies for business purposes to claim ITC.
2. Section 16(2) – Which in itself is a not-withstanding Clause – Which means it by-passes all the conditions mentioned under this Section on mere satisfaction of conditions mentioned under Clause (a) to (d) of this sub-section states that :
3. Buyer must be in Possession of a Valid Tax Invoice,
4. Supplier must have reported the said supply in his GSTR 1 and the same should get reflected in GSTR 2B of the Buyer,
5. Buyer must have received the Goods/Services in respect of which he’s claiming Input Tax Credit,
6. Said Input Tax Credit must not be a restricted Credit
7. Supplier should have remitted Tax to the Government in respect of the said supplies,
8. Buyer must file his return (Form GSTR 3B).
Recent Contradictory Court Judgments
Recent High Court judgments have created confusion and concern for buyers:
A. Aastha Enterprises Vs. State of Bihar 2023 – Judgement by Hon’ble Patna High Court : Claim of Input Tax Credit cannot be sustained where the Supplier has not paid the Tax to the Government
Facts of the Case :
1. M/s Aastha Enterprises have purchased goods from their Supplier with the requisite payment along with GST applicable on the same and also claimed the Input tax Credit in Respect of the said supplies in his GSTR 3B.
2. However, the supplier failed to remit the Tax in respect of the said supplies to the Government.
3. Due to which Department passed Assessment Order denying the claim of Input Tax Credit.
4. M/s Aastha Enterprises filed Writ Application before Hon’ble Patna High Court contenting that Department should initiate action against the defaulting supplier rather than denying Input Tax Credit to the Genuine Buyer.
Observations & Judgement ruled out by the Court :
1. Hon’ble Patna HC ruled out that until the Supplier discharges Tax in respect of the said supplies, M/s Aastha Enterprises will not be eligible to take the Input Tax Credit in respect of the said supplies as stated in Section 16(2)(c).
2. Therefore, reversing of the Input Tax Credit is the only option available with the buyer until supplier discharges Tax with respect to the said supplies to the Government. (Though he can claim refund of the same once supplier remits the requisite Tax to the Government)
3. Relied upon the Hon’ble Supreme Court’s decision in the case of The State of Karnataka v. M/s Ecom Gill Coffee Trading Private Limited; Civil Appeal No. 230 of 2023 wherein it was held that the dealer who claims Input Tax Credit has to prove beyond doubt, the actual transaction by furnishing the name and address of the selling dealer, details of the vehicle delivering the goods, payment of freight charges, acknowledgment of taking delivery of goods, tax invoices and payment particulars etc and that mere production of tax invoices would not be sufficient to claim ITC.
4. ITC is in the nature of benefit or concession as held in the case of ALD. Automotive Pvt. Ltd., and therefore if the conditions prescribed in the statute are not complied with; no benefit flows to the claimant.
B. Contradictory Judgement by Hon’ble Calcutta High Court: Issuance of notices for recovery of the input tax credit availed by the recipient is not justified without conducting any enquiry on the supplier.
A very similar case of M/s Suncraft Energy Pvt. Ltd was filed before Hon’ble Calcutta HC
Facts of the Case :
1. Department issued an Assessment Order denying Input Tax Credit on account of difference between ITC as appearing in GSTR 2A and claim made in GSTR 3B,
2. M/s Suncraft Energy Pvt. Ltd filed a writ application before Hon’ble Calcutta High Court stating that he has made purchase of goods on requisite payment along with the Tax involved in the same to the supplier,
3. Department must have firstly investigated the Supplier and initiated proceedings against the supplier.
Observations & Judgement ruled out by the Court :
Replying on the Hon’ble Supreme Court’s Judgement in case of Union of India Vs. Bharti Airtel Ltd. & Ors, High court ruled out that:
1. Since M/s Suncraft Energy Pvt. Ltd holds valid Tax Invoice and also made requisite payment to the supplier along with the Tax involved in the said supplies,
2. The Department ought to have initiated an investigation against the defaulting supplier instead of simply denying credit to the purchasing dealer.
3. There shall not be any automatic reversal of input tax credit from the buyer on non-payment of tax by the seller.
4. In the event of default in payment of tax by the seller, recovery shall be made from the seller. However, reversal of credit from the buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets etc.
5. The demand raised by the Department is not sustainable on these grounds
Key Differences in Judgments
The fundamental difference between these judgments lies in the interpretation of GST statutes:
- Patna HC: Adopts a literal interpretation, insisting on strict compliance before granting ITC.
- Calcutta HC: Takes a more practical approach, emphasizing the need for investigations and actions against defaulting suppliers.
The View of Other Courts and Authorities
Several courts and authorities, including the Supreme Court, have adopted a stance similar to that of the Calcutta High Court. They emphasize that buyers should not bear the burden of supplier defaults like :
1. Tvl. Sahyadri Industries Ltd. Vs. The State of Tamil Nadu 2023 (4) TMI 912
2. CCE Jalandhar Vs. Kay Kay Industries 295 ELT 177 (SC)
3. Asst. Commissioner (CT) Chennai Vs. Infinti Wholesale Ltd (2017) 99 VST 341.
4. M/s. D.Y. Beathel Enterprises Vs. The State Tax Officer 2021 (2) TR 4008
5. Arise India Ltd. Vs. Comm. Of Service Tax 2017 (10) TMI 1020
Further Many of such cases are pending before various Forums of Appellate Authorities and at Various Courts.
The Way Forward
Though a person may feel by reading the Judgement of Hon’ble Patna High Court that it is an Dead End, however in my view it is just a starting of the way ahead in GST Regime and many more such Judgements will be delivered in the near future which may be favorable or unfavorable to the Genuine Buyers.
The GST regime is still evolving. Buyers need to take proactive steps to mitigate risks and ensure compliance:
1. Supplier Due Diligence: Monitor supplier compliance, including their GST return filing patterns.
2. Contractual Safeguards: Include clauses in agreements that hold suppliers liable for any losses resulting from their failure to remit tax.
3. Amend Existing Agreements: Modify existing agreements or addendums to cover such scenarios.
4. Timely Reminders: Follow up with suppliers and send reminders to ensure compliance.
5. Stay Informed: Keep abreast of tax laws and amendments to adapt strategies and practices accordingly.
Conclusion:The recent Patna High Court judgment serves as an alarm bell for buyers, highlighting the need for rigorous compliance at both ends. Buyers must exercise caution and due diligence, especially given the evolving nature of the GST system.
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Disclaimer : The observations made above are based on my understanding of the law. The adjudicating authorities and courts may have a completely different view on the same. The information provided in this article does not, and is not intended to constitute legal advice. Instead, all information and content herein are for general informational purposes only.
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