Supreme Court Judgement in case of Ecom Gill on ITC & Implications under GST

Explore the Supreme Court’s landmark judgment in the Ecom Gill case on Input Tax Credit (ITC) under GST. Uncover implications, legal analysis, and conditions for availing ITC. Stay informed about the burden of proof, the Karnataka VAT Act, and the comparison with GST laws.

The unique features of Input Tax Credit (ITC) under a Value added tax system has made it possibly one of the most controversial and litigated issue. Issue of proving the genuineness of the transaction to the adjudicating officer especially with regards to the movement and receipt of goods has been subject of debate and discussion in professional circles since long. Interpretation of provisions of section 16 of GST law which lists down the conditions for availment of credit has been at the center of many inquiries/investigations, arrests been made, bank accounts and properties being seized. Crucial issue of eligibility of ITC has been discussed and adjudged albeit under the provisions of Karnataka VAT law by the Supreme Court in its order dated 13.03.2023 in the case of The State of Karnataka Versus Ecom Gill Coffee Trading Private Limited Civil Appeal No. 230 of 2023. Following is an analysis of this judgement and its impact on taxpayers under GST law.

1. Transactional Facts of the Petitioners

There were 4 petitioners who approached the Supreme Court, and the facts and the legal issue involved were identical, hence the court took the petitions together.

Facts of Ecom Gill Coffee Trading Private Limited [Para 4.2]

M/s Ecom Gill Coffee Trading Private Limited (M/s Ecom) purchased green coffee beans from other dealers for the purposes of further sale in exports and domestic markets. Upon finding some irregularities in ITC claimed by the said dealer the Assessing Officer issued a notice under section 39 of Karnataka Value Added Tax Act, 2003, denying the ITC claim for the Assessment Year 2010-11 and seeking to furnish accounts, books, tax invoices, etc. It was found that the purchasing dealer had claimed ITC from mainly 27 sellers and out of aforesaid 27 sellers,

• 6 were found to be de-registered;
• 3 had effected sales to the respondent but did not file taxes and
• 6 have out rightly denied turnover nor paid taxes.

The first Appellate Authority confirmed the findings of the Assessing Officer. However, the Tribunal allowed the second appeal and dropped the demands on the ground that the purchasing dealer purchased the coffee from the registered dealer under genuine tax invoices and consequently allowed the ITC claim. The revision application before the High Court has been dismissed.

2. Legal Text which was referred to by the Supreme Court in this petition.

Section 70 of the Karnataka Value Added Tax Act, 2003 was the only provision referred to by the Supreme Court while dealing with this petition, said provision reads as under:

” 70. The burden of proof.- (1) For the purposes of payment or assessment of tax or any claim to input tax under this Act, the burden of proving that any transaction of a dealer is not liable to tax, or any claim to deduction of input tax is correct, shall lie on such dealer.

(2) Where a dealer knowingly issues or produces a false tax invoice, credit or debit note, declaration, certificate or other documents with a view to support or make any claim that a transaction of sale or purchase effected by him or any other dealer, is not liable to be taxed, or liable to tax at a lower rate, or that a deduction of input tax is available, the prescribed authority shall, on detecting such issue or production, direct the dealer issuing or producing a such document to pay as a penalty:

(a) in the case of first such detection, three times the tax due in respect of such transaction or claim; and

(b) in the case of second or subsequent detection, five times the tax due in respect of such transaction or claim.

(3) Before issuing any direction for the payment of the penalty under this Section, the prescribed authority shall give to the dealer the opportunity of showing cause in writing against the imposition of such penalty.”

3. Question framed by the Supreme Court for its consideration.

Supreme Court after going through the facts and law, the question framed for its consideration was whether the second Appellate Authority, as well as the High Court, basis the interpretation of section 70, were justified in allowing the Input Tax Credit?

4. Legal Provisions under Karnataka VAT Act which were not considered by Supreme Court

Section 10 and 11 of the Karnataka VAT Act prescribes conditions for availment of ITC under VAT regime just like section 16 and 17 of the GST act do for GST regime.

As per these sections 10 and 11, the only conditions required to be fulfilled by a Karnataka Dealer were as follows:

a. Purchase of goods should be in the course and use of his business.

b. Dealer should be in possession of a tax invoice.

c. Dealer has filed a correct return.

Condition as to proving receipt of goods as well as payment of tax by the supplier were not there in the Karnataka VAT law.

5. Discussion on Delhi High Court judgement in case of On Quest Merchandising and its relevance

Before arriving at the judgement, the court discussed an important judgement in case of a On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi 2017 (10) TMI 1020, said discussion and the courts conclusion thereof is discussed hereunder:

In On Quest Merchandising India Pvt. Ltd. case, Delhi High Court read down section 9(2)(g) of the Delhi Value Added Tax,2004, and said that demand cannot be sustained against a purchaser 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.

Section 9(2)(g) of the Delhi Value Added Tax, 2004 reads as under.

“9(2)(g) to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period.”

Above judgement has been affirmed by the Supreme Court in its order in case of COMMISSIONER OF TRADE AND TAXES DELHI VERSUS ARISE INDIA LIMITED 2018 (1) TMI 555 – SC ORDER

However, Supreme Court in this order has brushed aside the judgement in case of On Quest and Arise India by saying that the issue of burden of proof under section 70 was not an issue before the Delhi High Court and therefore that judgement cannot be relied upon.

6. Analysis of the Judgement in case of Ecom Gill

In the present case, Hon. Supreme Court has observed that the provisions of Section 70, quoted hereinabove, in its plain terms clearly stipulate that the burden of proving that the ITC claim is correct lies upon the purchasing dealer claiming such ITC. Merely because the dealer claiming such ITC claims that he is a bona fide purchaser is not enough and sufficient. Such a burden of proof cannot get shifted to the revenue. Mere production of the invoices or the payment made by cheques is not enough and cannot be said to be discharging the burden of proof cast under section 70 of the KVAT Act, 2003.

As per this judgement, any Karnataka dealer claiming ITC will have to prove the following aspects beyond doubt:

a. Name and address of the selling dealer,

b. Details of the vehicle which has delivered the goods,

c. Payment of freight charges,

d. Acknowledgement of taking delivery of goods,

e. Tax invoices and

f. Payment particulars etc.

‘Burden of proof’ means a responsibility, an obligation to prove a fact. The burden lies on the person who asserts the claim of the input tax credit. The first and foremost thing a person must prove is that he has a genuine transaction with his supplier, resulting in the supply of goods or services or both. It should not be a sham, bogus or fake transaction. He has to produce before the authority appropriate and sufficient evidence.

As discussed above, KVAT Act 2003, for availing ITC, does not prescribe any condition of proving the movement of goods and payment of freight for claiming the ITC.  Section 70 does provide that the burden of proof lies on the purchasing dealer but said burden has to be proved only within the conditions prescribed under the law, net of burden cannot be casted beyond the conditions prescribed, accordingly if the law only prescribed that the dealer should have tax invoice and payment particulars, section 70 cannot be interpreted to cast the net wider by including aspects like movement of goods or payment of freight.

What is missing in this judgement is that the Supreme Court has not said that the purchaser has to prove that the seller has paid the tax to the government.

Provision similar to section 70 of the KVAT Act is there under GST law, Section 155 of the CGST Act,2017 is reproduced as under:

Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall be on such person.

7. Input Tax Credit under CGST Act,2017

Chapter V of the CGST ACT 2017 contains the provisions for ITC. The eligibility conditions, apportionment, ineligibility and distribution of ITC, apart from recovery of credit distributed in excess, have been provided in different sections (Sec. 16 to Sec. 21) of this chapter.

Following are the set of facts that a registered person must prove to claim the ITC:

a. It is a genuine transaction, resulting in the supply of goods or services or both. It should not be a sham, bogus or fake transaction.

b. The said supply of goods or services or both are used or intended to be used in the course or furtherance of business.

c. He has received the goods or services or both.

d. Reporting of Tax invoice by the Supplier on the GST Portal

• • From 1.07.2017 to 31.12.2021 – Supplier has reported the invoice in his GSTR 1 and the purchaser has reported the invoice in GSTR 2.
  • From 1.01.2022 onwards, Such tax invoice or debit note is filed by the supplier in its GSTR-1 and it appears in the buyer’s Form GSTR-2B.
  • Payment of tax by the supplier
  • From 1.07.2017 to 31.12.2021 – Subject to counter reporting of invoice in GST returns, both by the supplier as well as the buyer, supplier has paid the tax to the government.
  • From 1.01.2022 onwards, Supplier has paid the tax to the government.

f. The buyer must furnish his GST returns in Form GSTR-3B.

g. Purchaser should not fail to pay the supplier the consideration along with tax payable thereon within a period of 180 days from the date of issue of invoice by the supplier.

h. Does not claim depreciation on the tax component of a capital goods.

i. ITC has been claimed within the timelines prescribed by section 16 (4).

j. ITC on goods or services must be in compliance of section 17.

To elaborate, law from 1.07.2017 to 31.12.2021 provided that ITC would be available to the purchaser only of the supplier paid the tax to the government but this condition was subject to the procedure prescribed where the purchaser was required to report the ITC invoice in his GSTR 2, it would automatically amend suppliers GSTR 1. Once GSTR 1 of supplier was amended, the liability towards that invoice would be automatically reported in GSTR 3 of the supplier whereby he would be forced to pay the same to the government. Said scheme of GSTR 1, 2 and 3 was never implemented even though the law provided for it. Hence the purchaser had no mechanism to prove that the supplier has eventually paid the taxes, therefore he could not be forced to prove the impossible. Hence to overcome the lack of implementation of the prescribed procedure, rule 36(4) of the CGST rule was brought in from October 2019 to provide as that purchaser was eligible to avail 20% over and above the ITC getting reflected in his GSTR 2A, this limit of 20% was reduced from time to time. Ultimately with the advent of GSTR 2B, said limits were completely done away with effective from 1.01.2022 onwards.  Accordingly, effective from 1.01.2022, said law was amended, it has now been provided that the ITC of an invoice must be reflected in GSTR 2B of the purchaser and then only he will be eligible to avail it. Still the leg, whereby the purchaser can 100% prove that the supplier has paid the tax legitimately is not possible because he doesn’t have access to the fact how the supplier has discharged his taxes, hence the question of proving the same without any doubt is not possible in the current law as well.

8. Is Ecom Gill Supreme Court Order the last word on eligibility of ITC in GST

The question that necessitated this article is the fact whether this judgement of Supreme Court can be considered as the last word on eligibility of ITC and whether all the issues listed therein would be required to be proved by the purchaser before availing ITC.

a. Order is solely based on interpretation of Section 70 of KVAT Act – Burden of Proof

As discussed above, K VAT Act provided for only 2 conditions still the Supreme Court said that the dealer must prove aspects concerning movement of goods and payment of freight charges. This judgement is based solely on Section 70 which deals with the concept of  Burden of Proof. It has not considered any other provision of K VAT law.

b. Supreme Court judgement in case of Arise India (On Quest) distinguished solely on basis of section 70 of K VAT Act

Whereas, in case of Delhi VAT act which has a specific provision where the dealer is bound to prove that the supplier has deposited the tax with the government, the Delhi Court in case of On Quest Merchandising, read down the provision and said the purchasing dealer cannot be asked to prove the impossible. This order was affirmed by the Supreme Court in case of Arise India.

c. Conditions of ‘Movement of Goods’ and ‘Payment of Freight Charges’ absent from GST law.

GST Law has many conditions for availment ITC which were absent in K VAT law, but it doesn’t have the conditions to prove ‘movement of goods’ as well as ‘payment of freight charges’. GST law merely provides that the recipient has to prove receipt of goods and/or services. If this can be proved without getting into the factum of movement of goods then that evidence would have to be accepted. In many cases, transporters do not provide for any documentation like Lorry receipts etc, especially in case of local transportation, hence if local trade practice can be established then the department cannot force the recipient otherwise.

d. Burden of Proof under GST Law

Burden of proving  ITC claim, as in KVAT law, lies on the recipient under GST law as well, but this burden cannot be casted devoid of the conditions under section 16. Burden is to prove whether the conditions as prescribed have been fulfilled or not, once the recipient proves the same satisfactorily, in my view, this order will not come in his way of legitimately availing the ITC under GST.

e. Invoices issued by suppliers whose registration are cancelled with retrospective effect popularly known as “Registration cancelled void ab initio”

Most important aspect which the Supreme court has not gone into detail is the credit availed on invoices issued by de-registered suppliers. When the goods were purchased and tax invoice was issued, the supplier was registered and was filing his returns. After some lapse of time, the department upon investigation de-registers that supplier with retrospective effect. Gujarat High Court in case of Mahadev Enterprise which was then followed in many such cases, analysed this issue and held that ITC cannot be denied to a party in the absence of the Department having established that the transactions in question are not genuine or that they are bogus etc. and therefore ITC cannot be denied merely on the fact that registration of the supplier was cancelled retrospectively.

f. Payment of tax by the supplier

Supreme Court while dealing with the petition of Ecom Gill has also not delved on the issue whether the recipient is required to prove that the supplier has paid the tax to the government or not. Whereas this aspect has already been laid to rest by the verdict in case of Arise India read with the Delhi High Court judgement in case of On Quest Merchandising.

9.  Conclusion

Supreme Court in its wisdom has said that under Karnataka VAT law one is required to prove all the aspects listed therein. Basically if a common thread is taken through this judgement, court wanted to say that the recipient is required to prove the genuineness of the transaction before its claim of ITC is approved. It has only listed the means to do the same.

In our humble view, concept of burden of proof cannot override the conditions prescribed in the statute, if the Karnataka legislature did not thought it prudent to provide for a particular condition, same cannot be read into the law based merely on concept of burden of proof.

Law as defined by the Supreme Court in case of Arise India, in our view is still relevant, if one is able to prove the genuineness of the transaction, whether with or without proving movement of goods, courts will rule in their favour.