In this article, we will discuss about the scenario where Input Tax Credit denied to the bona-fide purchasing dealer owing to the default on the part of the selling dealer.

Nowadays, the GST officers has started issuing notice demanding reversal of Input Tax Credit availed on purchase made from Registered Tax payers (RTPs) whose registration has been cancelled ab-initio i.e., with retrospective effect. It would tantamount to undue hardship on the part of the purchaser to accept the position of reversal of Input Tax Credit.

Extract of the Relevant Provision

  • Section 16 (1) of CGST Act 2017 – Every registered person shall, subject to such conditions and restrictions may be prescribed andin 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.
  • Section 16(2) of CGST Act 2017, sets out few conditions for availing input tax credit;

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;

c. subject to the provisions of section 41, 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 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 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

Moreover, the government has provided the mechanisms of matching Input Tax Credit with GSTR-2A. If the invoice is reflected in GSTR-2A backed by possession of valid tax invoice document evidencing payment made, nothing can deny the eligibility of Input Tax credit. As the charge of GST is on the supplier, the authorities need to proceed against the supplier for recovery of GST before seeking credit reversal at the recipient’s end.

Article 14 of the Constitution of India

Article 14 of the Constitution of India provides for equality before the law or equal protection of the laws within the territory of India. It states:

“The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

It is fairly settled position in law that if the GST Registration of the vendor was valid at the time of purchase and the all the conditions stipulated in the act has been complied with, then nothing can deny the right of availment of Input Tax Credit upon retrospective cancellation of GST Registration of the supplier. The Purchaser on the on the strength of legitimate tax invoice and after fulfilling the eligibility criteria of section 16(2) of the CGST Act, 2017 including payment of consideration through proper banking channels has claimed input tax credit in relation to purchase of goods. Therefore, they should be eligible to get input tax credit.

Followings points needs to be pondered at the availing Input Tax Credit:

  • GST Registration of the Supplier was Active at that time;
  • Fulfilment of Eligibility criteria of Section 16(2);
  • Payment of Consideration (within 180 days);
  • Input tax credit reflected in auto-populated figure of GSTR-2A;
  • Genuineness of the transaction was not disputed; and
  • Used or intended to be used in the course or furtherance of business

No disallowance of input tax credit can be made where purchases were made during the period when seller’s registration certificate was active, and moreover for the irregularities committed by the seller, purchaser should not be placed in a dis-advantageous position. It is further submitted that even for sake of argument; it is considered that as supplier is allegedly involved in fraudulent activities, still for that a recipient of supply should not be responsible for the fault of the vendor of not discharging tax or being involved in fraudulent activities. It means it has not been appreciated that denial of ITC for some alleged post facto cancellation of the selling dealer’s registration is not and cannot be warranted under the law. Any post facto cancellation of vendor registration cannot affect any previous transaction.

There is not a speak in the entire CGST Act and Rules made thereunder that on ab-initio cancellation of the registration of the selling dealer, the corresponding purchasing dealer would not be liable to avail Input Tax Credit. Further, inclusion of any such provision in the CGST Act would have made the Act violative of the Article 14 of the Constitution of India.

Reversal of Input Tax Credit on the ground of cancellation of registration of the selling dealers further leads to payment of taxes for transactions for which taxes have already been paid and this amounts to double taxation on the same incident. Each and every regd. Dealer is an agent of the govt. to collect tax and to deposits the same to the appropriate govt treasury and a regd. Dealer is liable to pay to its seller at the time of purchase and collect tax from its purchaser when he sells the goods to purchaser, and if a dealer is made liable for reversal of the ITC which has already accrued to him by subsequent cancellation of the selling dealer, it is against all canons of justice.

It is the fact that, at a particular time of sale and purchase transactions, the purchasing dealer had no knowledge that the registration certificate of the selling dealer may be cancelled long after such transaction of purchase. It is quite impossible on the part of the purchasing dealer to verify the validity of the registration certificate of the selling dealer; submission of return by them or the amount credited in favour of the revenue by them. Such impossibility cast upon the purchasing dealer is unreasonableness and therefore is unconstitutional.

Similar issues were raised in erstwhile WB VAT Act, 2003, wherein ITC were disallowed owing to cancellation of registration of the vendors. The matter went up till West Bengal Taxation Tribunal. The Hon’ble Tribunal in the case of Alok Kundu vs. Joint Commissioner of Commercial Taxes, Howrah Charges & Ors [ Case No. RN 1089/2018] held that impugned provision i.e. reversal of credit due to the default of Seller suffers from arbitrariness and unreasonable and does not meet the constitutional principle of equality. A purchasing dealer is entitled by law to rely upon the certificate of registration of the selling dealer and to act upon it. Whatever may be the effect of a retrospective cancellation upon the selling dealer, it can have no effect upon any person who has acted upon the strength of a registration certificate when the registration was current.

Reliance has placed on the following judicial precedents of erstwhile regime holding that it would be unreasonable and unrealistic to expect the buyer of service to go and verify the accounts of the supplier to ensure proper payment of tax –

  • Arise India Limited vs Commissioner of Trade & Taxes [2012-TIOL-370-HC-MUM-VAT] : The Delhi High Court held that VAT officer cannot invoke Section 9(2)(g) of the DVAT Act to penalize a bona fide purchasing dealer for the failure of a selling dealer to submit the requisite records proving the genuineness of the transaction and thus allow purchaser to take credit even if selling dealer had not discharged VAT on sale of goods. Supreme Court also upholds the decision of high court on the right of the buyer to claim ITC in spite of non-payment of tax by the selling dealer.
  • Commissioner of C. Ex., East Singhbhum vs Tata Motors Ltd. [2013 (294) E.L.T. 394 (Jhar.)] – It was held by the Hon’ble Jharkhand High Court that once a buyer of inputs receives invoices of excisable items, unless factually it is established to the contrary, it will be presumed that when payments have been made in respect of those inputs on the basis of invoices, the buyer is entitled to assume that the excise duty has been/will be paid by the supplier on the excisable inputs. The buyer will be therefore entitled to claim Modvat credit on the said assumption. It would be most unreasonable and unrealistic to expect the buyer of such inputs to go and verify the accounts of the supplier or to find out from the department of Central Excise whether actually duty has been paid on the inputs by the supplier. No business can be carried out like this, and the law does not expect the impossible.
  • Commissioner of C. Ex., Cus. & Service Tax vs JUHI ALLOYS LTD. [2014 (302) E.L.T. 487 (All.)] – It is held by Allahabad High Court that once it is demonstrated that reasonable steps had been taken by buyer to ensure that the inputs in respect of which credit being taken, appropriate excise duty was paid, which is a question of fact in each case, it would be contrary to the Rules to cast an impossible or impractical burden on the assessee.
  • SMI Electrowire Pvt. Ltd. vs Commissioner of C. Ex., Delhi-II[ 2015 (322) E.L.T. 447 (P & H)] : The Appellant purchased CC copper rods from Ms. R.K Enterprise whose premises were raided and owner of R.K Enterprise made a statement that he only involves in facilitating parties to obtain fraudulent modvat/cenvat credit and not selling any goods. Based on the statement, showcase notice is issued on the Appellant for wrongly availed modvat/cenvat credit. It is held by High Court of Punjab & Haryana that mere fact Appellant purchase goods from seller who engaged in fraudulent activities, would not by itself raise an interference of culpable or wrong doing of Appellant.
  • Commissioner v. Prakash Industrial Corporation – 2013 (295) E.L.T. A141 (Bom.)]: The Hon’ble Bombay High Court held that since the dealer has taken care to find out the identity and reliability of the supplier of the goods after examining the proper documents and duty paid invoice and the payment was also made by cheque and the Revenue failed to bring the evidence on record that respondent has contravened the provisions of law, the charge against dealer needs to be set aside.
  • Assistant Commissioner of Commercial Taxes vs M/s Onyx Designs [Writ Petition 17989 & 23971/2018 dated 17-06-2019]: The Hon’ble Karnataka High Court held in absence of any other allegations made against the purchasing dealer in the assessment orders, merely for the reason that selling dealers had not deposited the collected tax amount or some of the selling dealers had been subsequently deregistered could not be a ground to deny the input tax credit.

Others Judgements:

To sum up, it is a settled position of law the fraudulent activities of the seller itself cannot raise an interference of culpable or wrong doing of Purchasing Party. Further, Once the purchaser dealer satisfactorily demonstrates that while purchasing goods, he has paid the amount of GST to the selling dealer, the matter should end so far as his entitlement to claim input tax credit is concerned. If the selling dealer has not deposited the amount in full or a part thereof, it would be for the Revenue to proceed against the selling dealer. Purchaser dealer could not be deprived from the benefit of input tax credit. It should not be made the responsibility of the purchasing dealer to ensure that the tax is deposited by the selling dealer to the extent transaction is bona-fide.

Note: Also, the constitutional validity of Section 16(2)(c) of CGST Act 2017 has been challenged in various High Courts and recently same is challenged in Gujarat High Court in the case of M/s Surat Mechantile Association vs Union of India [ Special Civil Application No 15329 of 2020], where Hon’ble Gujarat High Court has issued notice on plea challenging validity of GST charged in respect of supply has been actually paid to Government

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