Sec 16(2)c is constitutionally Valid but cannot applied mechanically, without due verification of Supply trasanction-Punjab and Haryana High Court.
Summary: Punjab and Haryana High Court in Shaurya Alloys Pvt Ltd Vs State of Punjab And Another dealt with a batch of 424 writ petitions concerning Section 16(2)(c) of the GST Act, 2017 and the denial or reversal of input tax credit where the supplier failed to deposit tax with the Government. The Court upheld the validity of Section 16(2)(c) but held that it cannot be treated as a standalone provision and mechanically applied against a purchasing dealer merely because the supplier’s registration was subsequently or retrospectively cancelled, the supplier reported nil or short tax liability, or an adverse alert was received. The proper officer must examine the genuineness of the transaction, invoices, receipt and movement of goods or services, the nature of the supplier’s default, recovery proceedings against the supplier and the statutory framework applicable to the relevant tax period. Where fraud, wilful misstatement or suppression is alleged, the foundational facts must appear in the show cause notice itself. The Court also prescribed detailed safeguards relating to disclosure of relied-upon material, burden of proof under Section 155, Rule 37A, retrospective cancellation, personal hearing, cross-examination and reasoned orders, and directed pending proceedings and adjudication orders to be dealt with afresh in accordance with these guidelines.
Background:-
The bunch of 424 writ petitions revolves around the scope of Section 16(2)(c) of the GST Act, 2017, more precisely, the obligation cast upon a purchasing dealer who has already paid tax to the supplier, to ensure deposit of such tax by the supplier with the Government, notwithstanding the fact that purchasing dealer has no means to access or ascertain that the supplier has deposited the tax collected from it with the Government, under the Act of 2017
Court observation:-
The statutory scheme contained in the Act of 2017, of which Section 16(2)(c) was a part, and which made the actual payment of tax by the selling dealer a condition for the purchasing dealer to claim the benefit of ITC and the scheme originally conceived of in the Act of 2017 containing elaborate provisions for matching and verification of returns by the purchasing dealer and selling dealer. The returns to be submitted by them had to match with the deposit of tax, and any failure in this regard alerted the purchasing dealer to the discrepancy, and thus enabled them to take the action to approach the selling dealer in order to secure the deposit of tax.
If the provisions conceptualized in the Act of 2017 were implemented in its entirety there was hardly any scope for a purchasing dealer to complain about the obligation imposed on it by virtue of Section 16(2)(c) of the Act of 2017. However, the provisions contained in the Act of 2017 were not implemented in its entirety and only part of it was pressed into service for various reasons, which are not of significance.
Section 16(2)(c) was actually a part of the GST scheme contained in the Act of 2017 with provisions incorporated therein containing mechanism of verification and matching etc., such that Section 16(2)(c) of the Act of 2017 was capable of being given effect to. It, i.e., Section 16(2)(c) of the Act of 2017, cannot be construed as standalone provision bereft of other provisions which contained the mechanism for its implementation.
If it is treated to be a standalone provision without any mechanism put in place in the statute to ascertain whether the selling dealer has deposited tax or to secure its deposit with the Government then impossible obligation would clearly get attracted exposing the provision to a possible challenge on the ground of violating Articles 14 and 19 of the Constitution of India.
Section 76 of the Act of 2017 specifically deals with a situation where a selling dealer has not deposited tax even after collecting it from the purchasing dealer. The statute empowers the proper officer to serve notice on the person liable to pay such amount and after considering reply, if any, determine the amount payable along with interest in terms of Section 50 of the Act of 2017. Moreover, prior to introduction of Rule 37A of the CGST Rules, there existed no statutory provision for the purchasing dealer to re-avail the reversed ITC even if the selling dealer subsequently deposited the tax payable by it.
The issue needs to be examined from another angle of incidence of tax. Imposition of tax is a compulsory levy under a statute. The liability to pay tax can be imposed upon a person who is liable to pay tax.
The incidence of tax must remain on the taxable person (supplier) and ought not to be imposed on a person not liable to pay tax i.e., the purchasing dealer where it has already paid tax to the selling dealer. Where ITC is reversed in case of purchasing dealer, despite the tax having already been paid by such dealer to the selling dealer, then the purchasing dealer is exposed to a further tax burden in respect of the same transaction.
The position however would stand on a different footing, in cases where the material on record indicates collusion, fraud, non-existent selling dealer, where the goods or services have not in fact been received, or where other circumstances are established which otherwise render the claim to ITC inadmissible. In such circumstances, the issue is not only one of the subsequent non-payment of tax by the selling dealer, but of the underlying entitlement of the purchasing dealer to the ITC itself.
Proper application of mind on part of the proper officer is required, particularly in instances where the purchasing dealer is able to satisfy other conditions specified in Section 16(2) of the Act of 2017 by producing tax invoice, actual movement of goods/services and other relevant material. In such cases, the mere fact that the selling dealer has subsequently failed to deposit the tax with the Government cannot, by itself and without examination of the surrounding circumstances, result in mechanical reversal of the ITC. The aforesaid requirement would, however, have to be applied with reference to the statutory mechanism applicable to the period in question and the material available before the proper officer.
As per the initial mechanism contemplated in the Act of 2017, any default on the part of the seller in depositing the tax could be known by the buyer in a time-bound manner. This enabled the purchaser to claim ITC. The purchasing dealer was provided with a statutory means of verifying the corresponding information. However, since the original scheme was not implemented and had to be diluted due to technical glitches or the issuance of various notifications, no mechanism was accessible for matching the data, nor did the GST mechanism enable the purchasing dealer to know whether Form GSTR-3B furnished by the supplier was correct or whether the tax admissible had been paid by the selling dealer. So Rule 37A was inserted where the tax itself had not been paid by the supplier on such ITC, the ITC availed, along with interest, was to be reversed. It also provide for re-availment of reversed ITC due to non-payment of tax by the supplier once the supplier paid such tax along with interest in terms of Section 50 of the Act of 2017 but It was with effect from 26.12.2022.
Further Section 16(2)(c) of the Act of 2017 does not suffer from any constitutional infirmity warranting its invalidation, same time Upholding the validity of the provision, does not conclude the matter. Section 16(2)(c) read with Section 155 of the Act of 2017 cannot be construed as a standalone provision, so as to mechanically saddle liability on the purchasing dealer to reverse ITC on the failure of the selling dealer to deposit tax with the Government, without the proper officer first examining, after affording due opportunity of hearing to the purchasing dealer, the circumstances in which the selling dealer has failed to deposit the tax, the genuineness of the transaction, and the statutory mechanism available for recovery of such tax in the relevant period. Also, if the Department seeks to invoke Section 74 of the Act of 2017 against a purchasing dealer, the foundational facts leading to the inference of fraud, willful misstatement or suppression of facts on the part of the noticee must emanate from the notice itself.
Guidelines issued by court while invoking the Section 16(2)(c) of the Act of 2017.
(i) Section 16(2)(c) shall not be invoked against a purchasing dealer in a routine or mechanical manner. The subsequent cancellation, including retrospective cancellation, of the registration of the selling dealer; the reflection of ‘nil’ or short tax liability in the return of the selling dealer; or the receipt of an alert or intimation from some source or complaint etc., may furnish a legitimate starting point for an inquiry, but shall not, by themselves, constitute the basis for denial or reversal of ITC availed by the purchasing dealer.
(ii) Before issuing a show cause notice to a purchasing dealer founded upon Section 16(2)(c), the proper officer shall apply his mind to the material available and record his satisfaction as to factors such as: (a) the particulars of the selling dealer, the invoices, the tax periods and the amount of ITC involved; (b) the precise nature of the default, i.e., whether the tax charged has not been paid at all, has been short paid, or has been discharged through utilisation of ITC which is itself inadmissible; (c) the circumstances in which the selling dealer has failed to deposit the tax; and (d) the proceedings, if any, initiated against the selling dealer for recovery of such tax, including under Sections 73, 74, 75(12) read with Section 79, or Section 76 of the Act of 2017, and the status thereof.
(iii) Investigation leading to issuance of Show Cause Notice should be carried out in order to establish some direct link of the petitioner with the suppliers in order to satisfy the violation of conditions mentioned in Section 16 (2).
(iv) The show cause notice shall disclose the aforesaid particulars, the material on which the proposed denial or reversal of ITC is founded, the details of the supplier(s) from whom ITC is alleged to have been wrongly availed, and the manner in which it is alleged to have been wrongly availed. The documents relied upon, such as alert notices, inspection reports, panchnamas, statements recorded during investigation, and e-way bill, vehicle registration, toll and banking data, shall be supplied to the noticee, subject to any privilege lawfully claimed.
(v) Where Section 74 of the Act of 2017 (or, for the period to which it applies, Section 74A on the ground of fraud, wilful misstatement or suppression of facts) is invoked, the notice shall itself contain the foundational facts from which the inference of fraud, wilful misstatement or suppression of facts on the part of the noticee is drawn. A bald or mechanical recital of these expressions shall not suffice, and the deficiency cannot be supplied by a counter affidavit or by subsequent explanation. The burden under Section 155 of the Act of 2017 lies upon the purchasing dealer to establish its eligibility to ITC. The purchasing dealer may discharge the burden by producing material such as the tax invoice; proof of receipt of goods or services, including e-way bills, transport receipts, weighbridge slips and stock and consumption records etc.. The proper officer shall consider such material and deal with it in the order.
(vi) Where the denial of ITC is premised upon the retrospective cancellation of the registration of the selling dealer, the proper officer shall examine the grounds on which, and the date from which, the registration has been cancelled, and whether such grounds have any bearing on the genuineness of the particular supply made to the purchasing dealer.
(vii) The existence of the statutory remedy against the selling dealer is a relevant consideration which cannot be rendered toothless. The proper officer shall ascertain and record the status of the proceedings against the selling dealer and, where the selling dealer falls within the jurisdiction of another authority, whether Central or State, shall communicate with the jurisdictional officer concerned. Where tax in respect of the same supply has been recovered from, or deposited by, the selling dealer, that fact shall be taken into account so that the same tax is not realised twice, and the purchasing dealer shall be entitled to avail or re-avail the credit to the extent permissible under the proviso to Section 41(2) of the Act of 2017 and Rule 37A of the CGST Rules, subject to Section 17(5)(i) of the Act of 2017, the applicability of which shall be examined on the facts of each case.
(viii) The proper officer shall apply the statutory framework as it stood during the tax period in question, bearing in mind the distinct phases of the scheme, namely, (a) the period prior to 01.10.2022, when the original Section 41 was in force and Sections 42 and 43, though on the staute book, were never operationalised, and when no mechanism for re-availment of reversed credit existed; (b) the period from 01.10.2022, when Section 41 was substituted, Sections 42 and 43 were omitted and clause (ba) was inserted in Section 16(2); and (c) the period from 26.12.2022, when Rule 37A was inserted in the CGST Rules. A condition or mechanism introduced by a later amendment, including clause (aa) of Section 16(2) with effect from 01.01.2022, shall not be applied to a period prior to its coming into force. In respect of the period prior to 26.12.2022, the absence of a re-availment mechanism shall be borne in mind while determining the consequence of the default of the selling dealer. The registration of a purchasing dealer shall not be cancelled, much less with retrospective effect, merely because ITC has been availed on purchases made from a selling dealer whose registration has subsequently been cancelled, without independent satisfaction as to the existence of a ground under Section 29(2) of the Act of 2017 and compliance with the procedure prescribed therefor.
(ix) An opportunity of personal hearing shall be afforded in terms of Section 75(4) of the Act of 2017. Where the statements of third persons are relied upon and the noticee seeks their cross-examination, the request shall be considered and decided by a reasoned order, having regard to whether such statements form the basis of the proposed action.
(x) The order shall set out the relevant facts and the basis of the decision, as mandated by Section 75(6) of the Act of 2017, deal with the reply and the documents produced by the noticee, and record a specific finding on each of the conditions of Section 16(2) which is in dispute. Where Section 74 has been invoked, the order shall also record a specific finding as to the fraud, willful misstatement or suppression of facts attributable to the noticee.
(xi) The fact that the purchasing dealer has deposited an amount during the course of investigation, whether through Form GST DRC-03 or otherwise, shall not, by itself, dispense with the requirement of the show cause notice disclosing the foundational facts. The character of such deposit and its effect shall be determined by the proper officer on the facts of each case.
(xii) The aforesaid guidelines shall govern all proceedings pending before the proper officers as well as proceedings initiated hereafter.
Conclusion by the court,
(i) Where the proceedings are at the stage of show cause notice, the Petitioners shall be at liberty to file a reply or supplementary reply, along with supporting materials, within a period of eight weeks. The proper officer shall thereafter decide the matter by passing a reasoned and speaking order, after granting an opportunity of hearing, keeping in view the guidelines laid down hereinabove.
(ii) Where the show cause notice does not disclose the particulars or the material contemplated by the aforementioned guidelines, the proper officer shall supply the same to the noticee.
(iii) Where any supplementary notice or corrigendum is issued introducing a new ground or provision other than the one originally invoked, the noticee shall be at liberty to raise any objection in that regard, which shall be decided in the fresh order.
(iv) In cases where orders have been passed by the adjudicating authority, the proper officer shall re-visit the matter in the light of the guidelines set out in this judgment, after affording an opportunity of personal hearing, and shall pass a fresh reasoned order in accordance with law. While undertaking such an exercise, the proper officer may issue a supplementary notice or corrigendum along with the particulars or the material contemplated by the aforementioned guidelines and shall provide a proper opportunity to the petitioner(s) to file their Reply.
(v) It is clarified that the orders impugned in the present petitions are not being interfered with. However, they shall abide by the fresh orders that shall be passed in pursuance to this judgment.
(vi) Any amount deposited by or recovered from the petitioners, including by way of reversal of ITC or debit to the electronic credit or cash ledger, shall also abide by the fresh decision of the proper officer and shall be adjusted or refunded, along with interest as admissible, in accordance with law, wherever warranted.
(vii) No fresh coercive action regarding recovery etc., shall be taken against the petitioners pursuant to the impugned show cause notices or orders till the decision of the proper officer, in light of the above observations.
