Apex Court set principle to establish the burden of proof to avail Credit under Pre GST regime. Will that apply to GST regime?

[Kapil Mahani]

The Apex Court has pronounced the Judgment in case of The state of Karnataka Vs. M/s. Ecom Gill Coffee Trading Pvt. Ltd. (2023 (3) TMI 533 - SUPREME COURT) wherein, the Apex Court has quashed and set aside the order passed by the Hon’ble Karnataka High Court on the grounds that until the purchasing dealer substantiate the burden of proof under Section 70 of the Karnataka Value Added Tax Act, 2003 (“the KVAT Act”), and proves the genuineness of the transaction/purchase and sale by producing the relevant materials. Although the above judgment has been passed under the provisions of KVAT Act, wherein Apex Court held that Section 70 of KVAT provides, the burden to prove correctness of ITC claimed lies on the purchasing dealer, and merely being a bona fide purchaser alone is not sufficient. The Court expounded the law by providing an illustrative list of documents inter-alia including name and address of the selling dealer, details of the delivery vehicle, payment of freight charges, acknowledgment of receipt of goods, tax invoices, and payment details, as evidence of actual movement of goods. Since purchasing dealers failed to produce any documents beyond invoices and payment records, the Court held that they had not discharged the obligation cast under Section 70. The purchasing dealer must prove actual receipt of goods beyond doubt.

In the below article, we have discussed the following aspects

1. Implications of the Apex Court Decision under the GST regime

2. Apex Court decision can be call into question under the GST regime! Points to distinguish the judgment

3. Suggestive SOP’s to be followed by the companies to ensure that robust documentation is being prepared on pro-active basis to establish the genuineness of the transaction

1. Implications of the Apex Court Decision under the GST

Although the judgment has been passed under the provision of the KVAT Act, but such decision has impact on the GST credit which are being availed by the company. Under the GST Act, the burden to proof is defined under section 155 of the CGST Act which is pari materia to section 70 of the KVAT Act. Further, the conditions which are spelled under section 16(2) (b) is already asking for the condition of the delivery of the goods/ service to be satisfied to avail the credit. Hence, the Apex court decision which has defined the suggested documentation to be carried by the assessee to establish the genuineness of the transaction are married to the condition which are already defined in the condition defined under section 16 except the suggested documentation.

However, it is expected that the department will use this judgment as a tool to argue in cases where ITC is being availed on the premise of false / paper transactions. The documents suggested by the Apex Court shall clearly distinguish the genuine transactions from fraudulent ones. This challenge will get more burdensome while dealing with services as establishing receipt of services is much challenging than in the case of goods. The same can be viewed in ongoing investigations against the following sectors

• In the case of the insurance companies wherein department is alleging fraudulent availment of ITC on invoices without any underlying supply of services. In respect of such cases, the GST Investigations agencies are not relying on the copies of the agreement, copy of the invoices and the payment to the vendor but asking the additional documents such as copies of the email exchange between the insurance companies and marketing companies , proof of delivery of the service and how the service was actually delivered including the documentation to establish that price charged by the vendor was discussed between the companies to ensure that the transaction is genuine.
• In the case of investigation of industry dealing in the goods, the department may ask for the copy of the Lorry receipt including the E-way bill copy. Apart from the same, the department may also ask for the details such as who is involved in the procuring the goods from the party against which the investigation is undergoing including checking the confirmation of the truck details from Part B of the E-way bill and ensuring that the truck used in the said movement should be existing or if existing then the truck should have capacity to carry the load of the goods for which the invoice is being issued and credit is being taken.  Also, the copies of the email exchange, goods receipt proof in the warehouse etc. are being generally asked for the said transaction wherein the investigation team has doubt on the genuineness of the transaction on which the credit is being taken.

However, there is no second thought that investigation authorities may relying on the Apex Court Judgment, in challenging the actual receipt of goods/ service by asking the additional documents beyond the conditions which are spelled under section 16 (2) (b) of the CGST Act. Apart from the same, there may be high possibility of revenue to demand the documents / information to ensure that that receipt of goods by seeking impossible documents, the said judgment can be distinguished basis facts of each case.

2. Apex Court decision can be call into question under the GST regime! Points to distinguish the judgment

Having said the above, the said decision of the Apex court can be distinguished in the GST on the following parameters

1. In GST we already have the principles and guidelines to claim ITC while one has to follow such conditions to claim ITC also if the recipient has fulfilled the conditions of Section 16 which overall covers major part to avail the ITC. In KVAT the Apex Court has raised the question on claim of ITC due to the issue of genuineness of the transaction which was due to the dealers who have filed NIL returns and also because of such dealers whose registration have cancelled, while in GST this could not be possible as it is clearly mentioned in the conditions that supplier must furnished the details of outward supplies electronically on the common portal and paid tax on such supplies to the government through the electronic credit or cash ledger.

In GST the decision of Apex court may be differ due to the laws enacted in GST have wider scope which covers most of the transactions and prescribed the documents required to claim ITC.

2. Section 10(2) of the KVAT Act has defined the limited conditions for the availment of the credit as compared to section 16 of the CGST Act.

Basis the said learning, we have given below the suggested SOP’s which the assessee can prepare for the purpose of availing the credit and ensuring that burden of proof is being maintained to establish the genuineness of the transaction .

3. Suggestive SOP’s to be followed by the companies to ensure that robust documentation is being prepared on pro-active basis to establish the genuineness of the transaction

Cretum Advisory has prepared the suggestive documentation to be kept by the company for the purpose of taking GST Credit and ensuring robust documentation is being maintained by the recipient to establish the genuineness of the transaction on which GST Credit has been taken.

1. Copy of the Tax Invoice

2. Copy of the Tax invoice should be matched with GSTR-2B report

3. The company has received the goods/ services.

i. For the Goods, the company should ensure that they maintain the following documentation on regular basis and also do the sample check of the documentation

• Copy of the Lorry receipt of receipt of the goods
• Copy of the E-way bill – Details of the truck which are mentioned on Part B should be verified as existing from the E-vahan Portal
• Copy of the Purchase Order copy
• Copy of the Email exchange which being done with the vendor for taking the quotation for the goods
• Proper SOP for the payment
• An E-way Bill (in case threshold limit has crossed) shall be recorded and maintained. Do special cross check on Part-B of the E-way Bill generated by checking the Vehicle No. (With E-Vahan facility), Transporter Id and receipt of the transporter.    
• Gate passes shall be maintained, acknowledging the goods receipt in the business area with date and time.   

ii. For the Services- Following suggestive Documentation should be maintained, to establish the correctness of the transaction

• Copy of the Email Exchange for procuring the quotation of the service including the copy of the agreement / Email
• Copy of the Email Exchange for delivery of the service – Copy of the document to establish that work is being done – The deliverables which were asked and provided
• Whether the payment terms are matching with the actual payment
• The consistency of the service and billing should be followed. For instance, if the monthly work is being agreed then proper work papers should be existing for the work and billing should be in consistent with the scope of work.   

4. The supplier must be filing the return i.e. GSTR-1 and GSTR-3B

Having said the above, please note that recipient has to ensure that the payment to the vendor should be tracked and should be done within 180 days from the date of the invoice.