Seamless Input Tax Credit is basic foundation of GST laws. However, Section 16(2)(c) of the CGST Act makes provision that ITC can be taken only when GST has actually been paid by the supplier. This article is an attempt to examine the provision and understanding the ambit of the provision.
GST is a value-added tax. Tax on value addition is implemented through a seamless process of Input Tax Credit. A registered person receiving a supply from a registered supplier gets the credit of the GST paid by the supplier and charged from the buyer. Many a time, the suppliers commit some fault or can even be outrightly fraudulent. Can innocent buyer be punished through reversal of ITC and resultant interest penalty for fault of the suppliers?
One of the primary and important condition, apart from other as enlisted in Section16 of the CGST Act, is that the “tax charged in respect of such supply has been actually paid to Government, either in cash or through utilisation of input tax credit”. Through this provision, the Section 16 of the Act casts an onus on the purchasing dealer to ensure that selling dealer makes the payment of GST. Law wants purchasing dealer to do impossible without any mechanism available with the purchasing dealer. It is unreasonable to expect it from the purchaser. The authorities have all machinery and legal mandate at its command to effect recovery from the defaulting selling dealer. Such enforcement work cannot and must not be delegated to purchaser.
Section 9 of the Delhi VAT Act had a similar provision. In Shanti Kiran India Private Limited v. Commissioner of Trade and Taxes [(2013) 57 VST 405 (Del)], the Delhi High Court held that Section 9(1) of the Delhi Value Added tax Act, 2004 grants input-tax credit to purchasing dealers with certain restrictions. As a result, the interpretation that there is statutory authority for granting input-tax credit, only to the extent tax is deposited by the selling dealer, is unsound and contrary to the statute. It is also iniquitous because an onerous burden is placed on the purchasing dealer—in the absence of clear words to that effect in the statute—to keep a vigil over the amounts deposited by the selling dealer. There is no provision or methodology by which the purchasing dealer can monitor the selling dealer’s behaviour, vis-a-vis the latter’s value added tax returns. Indeed, section 28 stipulates confidentiality in such matters. Nor is the insertion of clause (g) to section 9(2) to the effect that input-tax credit is admissible to the purchasing dealer only when tax is actually deposited by the selling dealer clarificatory. Section 9(2) is an exception to the general rule granting input-tax credit to dealers who qualify for the benefit. The conditions for operation of the exception are well defined. The absence of any condition such as the one spelt out in clause (g) and its addition in 2010, rules out the legislative intention of its being a mere clarification of the law which always existed. In the absence of any mechanism enabling a purchasing dealer to verify if the selling dealer deposited tax, for the period in question, and in the absence of notification in a manner that can be ascertained by men in business that a dealer’s registration is cancelled the benefit of input-tax credit, under section 9(1) cannot be denied.
Approving the Shanti Kiran (supra), the High Court distinguished bonafide purchaser and fraudulent purchaser and further held in Onquest Merchandising India Private Limited v. Govt. of NCT [(2018) 56 GSTR 177 (Del.)],
“Section 9(2)(g) of the DVAT Act denies to a bona fide purchaser, the benefit of the ITC only because of the default of the selling dealer over whom such purchasing dealer has not control. This measure qua the purchasing dealer is arbitrary, irrational and unduly harsh and, therefore, violative of article 14 of the Constitution. Reliance is placed on the decisions in Commissioner of Customs, Amritsar v. Parker Industries  207 ELT 658 (P&H) and Shanti Kiran India Pvt Ltd. v. Commissioner, Trade & Tax Department  57 VST 405 (Delhi).
In light of the above legal position, the court hereby holds that the expression “dealer or class of dealers” occurring in section 9(2)(g) of the DVAT Act should be interpreted as not including a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with section 50 of the Act where there is no mismatch of the transactions in Annexures 2A and 2B. Unless the expression “dealer or class of dealers” in section 9(2)(g) is “read down” in the above manner, the entire provision would have to be held to be violative of article 14 of the Constitution.”
While examining a similar provision in Delhi VAT Act, Delhi High Court held in Arise India Limited v. Commissioner of Trade & Taxes,
“The result of such reading down would be that the Department is precluded from invoking Section 9 (2) (g) of the DVAT to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered selling dealer who has issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC. Where, however, the Department is able to come across material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under Section 40A of the DVAT Act.”
The need for the law to distinguish between honest and dishonest dealers was acknowledged by the Punjab and Haryana High Court in Gheru Lal Bal Chand v. State of Haryana [(2011) 45 VST 195 (P&H)] where the constitutional validity of a similar section 8 of the Haryana VAT Act, 2003 (“HVAT Act”) was being considered. It was held,
“In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender. However, law nowhere envisages to impose any penalty either directly or vicariously where a person is not connected with any such event or an act. Law cannot envisage an almost impossible eventuality. The onus upon the assessee gets dis charged on production of form VAT C-4 which is required to be genuine and not thereafter to substantiate its truthfulness by running from pillar to post to collect the material for its authenticity. In the absence of any mala fide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier there- to, no liability can be imposed on the principle of vicarious liability. Law cannot put such onerous responsibility on the assessee otherwise, it would be difficult to hold the law to be valid on the touch stone of articles 14 and 19 of the Constitution of India.
The rule of interpretation requires that such meaning should be assigned to the provision which would make the provision of the Act effective and advance the purpose of the Act. This should be done wherever possible without doing any violence to the language of the provision. A statute has to be read in such a manner so as to do justice to the parties. If it is held that the person who does not deposit or is required to deposit the tax would be put in an advantageous position and whereas the person who has paid the tax would be worse, the interpretation would give result to an absurdity. Such a construction has to be avoided.”
It can further be noted that the Supreme Court held in Corporation Bank [(20090 19 VST 84 (SC)] that the selling dealer collects tax as an agent of the Government. Therefore, the bona fide buyer cannot be put in jeopardy when he has done all the law requires him to do so. The purchasing dealer has no means to ascertain and secure compliance by the selling dealer. Earlier also, in Central Wines, Hyderabad [(1987) 65 STC 48 (SC); (1987) 2 SCC 371] the Supreme Court observed that “the seller acts as an agent of the buyer while collecting the tax”. Revenue cannot punish innocent purchasers for fault or fraud committed by its own agents.
It is an established legal principle of any civilised jurisprudence that innocent purchaser cannot be punished. When fraudulent DEPB scrips were issued, and used by the innocent transferee, it was clearly held that innocent transferee cannot be punished. In case of fraudulent DEPB scripts, it was held in East India Commercial Company Limited v. Collector, [1983 (13) E.L.T. 1342 (S.C.)] that,
“Nor there is any legal basis for the contention that licence obtained by misrepresentation makes the licence non-est. With the result that the goods should be deemed to have been imported without licence in contravention of the order issued under S. 3 of the Act so as to bring the case within cl. (8) of s. 167 of the Sea Customs Act. Assuming that the principles of law of contract apply to the issue of a licence under the Act, a licence obtained by fraud is only voidable; it is good till avoided in the manner prescribed by law.”
Similar views were taken by Hon’ble Supreme Court in Collector of Customs, Bombay v. Sneha Sales Corporation, [2000 (121) E.L.T. 577 (S.C.)], wherein it was held that where the licence is obtained by misrepresentation or fraud it is not rendered non-est as a result of its cancellation so as to result in the goods that were imported on the basis of the said licences and being treated as goods imported without a licence in contravention of the order passed under Section 3 of the Import and Export Act that fraud or misrepresentation only renders a licence voidable and it becomes inoperative before it is cancelled. In the present case the licences were cancelled by order dated December 18, 1986 after the goods had been imported and cleared. The Tribunal was, therefore, right in holding that the import of the goods was not in contravention of the provisions of Import and Export Order, 1955 and Import and Export (Control) Act, 1947 and the goods were not liable to be confiscated on that basis under Section 111(d) of the Act.”
Similar issues arose in Central Excise and Service Tax laws also. CBEC clarified vide Circular No. 766/82/2003-CX dated 15.12.2003,
“On the issue of availment of credit by the user-manufacturer, it is clarified that action against the consignee to reverse/recover the CENVAT Credit availed of in such cases need not be resorted to as long as the bona fide nature of the consignee’s transaction is not in dispute.”
The decision of the Tribunal in Kerala State Electronic Corpn. v. CCE, Kochi [1996 (84) E.L.T. 44] can also be referred. The bench in that case held that the recipient of the input was entitled to take Modvat credit of the duty paid on the inputs received by it, and the credit could not be restricted by the authority having jurisdiction over the recipient of the inputs on the ground that the duty paid was in excess of the duty actually payable. The bench said “Even in cases there is any short or excess collection of duty on the inputs, the assessees are entitled to credit as specified in the duty paying documents.
In Commissioner v. Anand Arc Electrodes [2010 (252) ELT 411], it was held by the Tribunal,
“It is well settled that the credit to be taken is the actual duty paid and that the buyers has no responsibility in regard to the ensuring that duty has been correctly paid by the manufacturer of the inputs. The rule permits variation of Modvat credit only on account of a finding in a proceeding against the supplier of the inputs that the duty has not been correctly paid. Thus variation of Modvat credit amount can be consequential only. This is a clear case here. The original assessment of inputs has not been varied. The assessee is not having any responsibility to ensuring that the correct duty paid by the manufacturer of the inputs. The assessee has taken the credit of duty on the duty paid documents and availed, the Cenvat credit on the basis of duty paid documents, which are not disputed. I hold that the assessee is entitled to take the Cenvat credit on the strength of duty paying documents, which was correctly taken by the assessee.”
Even though, the above judgements are pronounced in VAT laws/Custom Laws/ Foreign Trade Laws/ Central Excise laws/Service Tax laws, but the same holds good under the GST laws also. Intention of the legislature is not to punish the honest purchaser but to punish the purchaser who is hand-in-glove with fraudulent seller in entering frivolous transaction.
It may be noted that under GST law, a supplier is entitled to “self-assess” GST liability. The purchaser has no right to challenge the assessment done by the supplier; which may or may not be correct in the views of the department. If the self-assessment done by the supplier is faulty, the department should approach the supplier and gets it corrected, this onus cannot be shifted on the purchaser. It may further be noted that “self-assessment” done by the assessee is a valid and legal assessment, unless changed by the due process of law.
In view of the above, the legal position can be summarised as follows;
(i) Innocent buyers cannot be punished nor onerous impossible conditions can be imposed on innocent buyers.
(ii) Section 16(2)(c) of the CGST Act cannot be read so as to impose impossible condition on the buyer. The section is required to be “read down” as limited to reasonable steps taken by the buyer.
(iii) Once a buyer has taken reasonable steps, the buyer is entitled to the credit of GST paid even if it has been actually paid or not.
[Views expressed are personal views of the author. The author may be contacted on email@example.com]