INPUT TAX CREDIT AND THE PERCEIVED DEPENDENCE ON THE SUPPLIER TO AVAIL THE BENEFIT OF SUCH CREDIT IN TERMS OF SECTION 16(2)(c) OF THE CGST ACT

[Rupesh Sharma]

In recent times, the government has made a series of amendments to the GST law, and through these amendments, has made the recipient of a supply almost completely dependent on the supplier to avail the benefit of ITC by introducing numerous conditions one after the other that lead to denial of ITC to the recipient of supply for a violation of law by the supplier.

This article focuses on:

• The basic concept of ITC and how it works;

• Section 16(2)(c) of the CGST Act, 2017 that leads to the denial of credit to the recipient of a supply if the supplier has not paid to the government the tax so collected from such recipient of supply;

• The impact of the decision of the Patna High Court in the case of Aastha Enterprises which denied ITC to the recipient of supply in terms of the said section;

• ITC, a mere benefit under the act or a vested right;

• Views, analogies, and decisions contrary to the views expressed in the case of Aastha Enterprises;

• The way forward and precautionary measures to avoid litigation.

1. Understanding the concept of ITC

A. What is Input Tax – As per Section 2(62) of the CGST Act, input tax in relation to a registered person, means the central tax, state tax, integrated tax or union territory tax charged on any supply of goods or services or both made to him excluding tax under composition scheme but including the following:

a. IGST on import of goods;

b. Tax payable under reverse charge mechanism;

c. Tax payable under reverse charge mechanism for a supply received from an unregistered dealer.

B. What is Input Tax Credit : Section 2(63) of the CGST Act defines input tax credit, which reads as under:

“input tax credit means the credit of input tax”

C. To put things in perspective, input tax is the tax paid by the purchasing dealer to the supplying dealer at the time of purchase, and input tax credit is the credit of input tax availed by such purchasing dealer.

D. Input tax does not include tax paid under the composition scheme, and therefore the question of availing credit of tax paid under composition scheme does not arise.

E. What Is The Need For ITC: ITC is a mechanism to avoid cascading effects of taxes. It ensures that a dealer is able to set off the tax paid by him to his supplier at the time of purchase against the tax he is liable to pay to the government as a result of tax collected by him at the time of sale.

Example: I purchase a mobile for Rs.1000, and the rate of GST is 10%. I pay Rs.1100 (Rs.1000 + 10% GST = Rs1100) to my supplier, with Rs.100 being my input GST.

I sell the mobile for Rs.1200, with the rate of GST at 10%. I collect a total of Rs.1320 (Rs.1200 + 10% GST = Rs1320) from the dealer to whom I sell the mobile, with Rs.120 being my output GST that is to be remitted to the Government.

 Now instead of paying Rs.120 in cash to the government, I can make use of Rs.100 reflecting in my credit ledger as input tax (GST paid at the time of purchasing the mobile) and pay Rs.20 in cash.

I therefore set off my input GST against my output GST in order to pay tax to the Government, and this is how ITC works. It is a mechanism to avoid a levy of tax on tax, which in turn leads to reduced cost of supply, thereby enabling businesses to price their goods & services competitively.

F. Section 16 of the CGST Act:

Section 16 of the CGST Act deals with the eligibility and conditions to be satisfied to avail input tax credit. The crucial points in connection with Section 16 of the CGST Act are as follows:

• Section 16(1) allows the purchasing dealer to avail ITC of tax paid on input supplies, used for furtherance of business.
• Section 16(2) begins with a non-obstante clause and outlines the conditions to be fulfilled in clause a to clause d to avail ITC of tax paid on input supplies which are as follows:          

a. Purchasing dealer must be in possession of a valid tax invoice issued by the supplier;

aa. The supplier is required to furnish the output details in Form GSTR 1 and such output details shall reflect in Form GSTR 2B (Form GSTR 2B is an auto-populated statement reflecting the purchasing dealers ITC based on the details provided by suppliers in Form GSTR-1)

b. The purchasing dealer is required to be in receipt of the goods or services

ba. ITC should not be restricted in Form GSTR 2B;

c. The supplier should have remitted to the Government, the tax collected from the purchasing dealer.

d. The purchasing dealer should have filed return in Form GSTR 3B.

2. The Patna High Court Judgment in the case of M/S AASTHA ENTERPRISES VERSUS THE STATE OF BIHAR THROUGH THE COMMISSIONER OF COMMERCIAL STATE TAXES, NEW SECRETARIAT, PATNA, THE JOINT COMMISSIONER, STATE TAXES, SHAHABAD CIRCLE, BHOJPUR AT ARA, BIHAR. - 2023 (8) TMI 1038 - PATNA HIGH COURT

Recently, the Patna High Court has in the case of M/S AASTHA ENTERPRISES VERSUS THE STATE OF BIHAR THROUGH THE COMMISSIONER OF COMMERCIAL STATE TAXES, NEW SECRETARIAT, PATNA, THE JOINT COMMISSIONER, STATE TAXES, SHAHABAD CIRCLE, BHOJPUR AT ARA, BIHAR. - 2023 (8) TMI 1038 - PATNA HIGH COURT held that, the purchasing dealer will not be eligible to avail the input tax credit (ITC) of tax paid to the supplier, if such supplier has not paid to the Government, the tax so collected from the purchasing dealer.

A. Facts Of The Case : M/s. Aastha Enterprises (the petitioner) purchased goods from their supplier, received a tax invoice and paid the consideration along with tax to the supplier. The Petitioner went on to claim ITC of the tax paid to the supplier.

However, the Department passed an assessment order dated 25.05.2022 denying ITC to the petitioner on the ground that the supplier has not paid the tax so collected from the petitioner to the state, and therefore the ITC availed is in contravention of section 16 of the BGST Act.

B. Issue Before The Court :

• Can the Department deny ITC to the Petitioner on the ground that the supplier defaulted payment of tax, after it has been proved beyond doubt that such petitioner is in possession of a tax invoice and has paid the consideration along with tax to the supplier.

• Should the state not initiate proceedings against the supplier, who did not make payment of tax to the state after collecting it from the purchasing dealer?

C. Submissions Of The Petitioner :

• The Petitioner purchased goods from the supplier, received a valid tax invoice, paid consideration along with the requisite tax amount from his bank accounts and these facts are not in dispute.

• The seller has defaulted on payment of tax to the state; as a result, the Department ought to have initiated proceedings against the supplier instead of denying ITC to the petitioner.

• The underlying objective of ITC is to avoid cascading effects of taxes, which would fail and amount to double taxation if the Department denied ITC to the petitioner.

• The petitioner relied on the following cases in support of their contention: SRI VINAYAGA AGENCIES VERSUS THE ASSISTANT COMMISSIONER (CT) - 2013 (4) TMI 215 - MADRAS HIGH COURT and M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI. - 2021 (3) TMI 1020 - MADRAS HIGH COURT.

D. Submissions Of The Department :

• section 16 of the BGST Act provides for certain conditions to avail ITC, and the same can be denied if the conditions are not fulfilled.

• In support of its contention the Department relied on the following cases: ALD AUTOMOTIVE PVT. LTD. VERSUS THE COMMERCIAL TAX OFFICER NOW UPGRADED AS THE ASSISTANT COMMISSIONER (CT) & ORS. - 2018 (10) TMI 814 - SUPREME COURT and GODREJ & BOYCE MFG. CO. PVT. LTD. & OTHERS VERSUS COMMISSIONER OF SALES TAX - 1992 (7) TMI 292 - SUPREME COURT which state that ITC is in the nature of benefit or concession, and not a right extended to dealers under the statutory scheme.

E. Observations & Judgment Of the Court :

The Patna HC made the following observations while dismissing the writ petition and denying ITC to the purchasing dealer for default of payment of tax by the supplying dealer:

• Section 16(1) of the GST Act deals with the eligibility of a dealer to avail ITC and clause (a), (b), (c) & (d) of Section 16(2) of the GST Act deal with the conditions for enabling such benefits.
• Clause (a), (b), (c) & (d) of Section 16(2) of the GST Act should be read and satisfied together and not separately to avail the benefit of ITC.
• Clause (c) of Section 16(2) of the GST Act clearly states that ITC will be available to the purchasing dealer only if the supplier has paid the tax to the Government.
• It is for the purchasing dealer to prove that the tax collected has been remitted to the Government by the supplier.
•  The case that the petitioner relied on i.e. M/s. D.Y. Beathel Enterprises was a dispute under the TNVAT Act in which the power of revocation did not extend to contingencies of non-payment of tax by the selling dealer.
• Relied upon the Hon’ble Supreme Court’s decision in the case of THE STATE OF KARNATAKA VERSUS M/S ECOM GILL COFFEE TRADING PRIVATE LIMITED - 2023 (3) TMI 533 - SUPREME COURT wherein it was held that the dealer who claims Input Tax Credit has to prove beyond doubt, the actual transaction by furnishing the name and address of the selling dealer, details of the vehicle delivering the goods, payment of freight charges, acknowledgment of taking delivery of goods, tax invoices and payment particulars etc and that mere production of tax invoices would not be sufficient to claim ITC.
• ITC is in the nature of benefit or concession as held in the case of ALD. Automotive Pvt. Ltd., and therefore if the conditions prescribed in the statute are not complied with; no benefit flows to the claimant.
• The Input Tax Credit raised by the petitioner cannot be sustained when the supplying/selling dealer has not paid up the amounts to the Government.

3. ITC – A Vested Right or Merely a Benefit - Analysis

A key observation of the Patna High Court while dismissing the writ petition was that ITC is not a right under the statutory scheme of things. It is merely a benefit provided under the act, which can be availed only upon satisfying the terms and conditions if any prescribed under such act.

A. What is a Vested Right : The Hon’ble Supreme Court in the case of J.S. YADAV VERSUS STATE OF U.P. & ANR. - 2011 (4) TMI 1464 - SUPREME COURT made the following observations :

• The word vested is defined in Black's Law Dictionary as vested, fixed, accrued, settled, absolute, or complete. Having the character or given the rights of absolute ownership; not contingent; not subject to be defeated by a condition precedent.

• Rights are vested when the right to enjoyment, present or prospective, has become the property of some particular person or persons as present interest; mere expectancy of future benefits, or contingent interest in property does not constitute vested rights.

• In Webster's Comprehensive Dictionary the word vested is defined as law held by a tenure subject to no contingency; complete; established by law as a permanent right; vested interest.

• The word vest is normally used when an immediate fixed right to present or future enjoyment of a property is created. With the long usage, the word vest has also acquired the meaning of an absolute or indefeasible right. It has a legitimate or settled expectation to obtain right to enjoy the property.

To put it in simple words, the observations made by the Hon’ble Supreme Court in the above mentioned case implies that a vested right is an absolute or complete right. A right that is well established, without any contingencies whatsoever.

B. Is ITC a Vested Right : The following decisions will give clarity on whether ITC is a vested right or merely a benefit provided under the statute:

• Recently the Andhra Pradesh High Court in the case of THIRUMALAKONDA PLYWOODS, VERSUS THE ASSISTANT COMMISSIONER – STATE TAX, ANANTAPUR CIRCLE – 1 - 2023 (7) TMI 1226 - ANDHRA PRADESH HIGH COURT has made the following observation :

25. Though above decisions deal with ITC claim related to the concerned State laws, however since concept of ITC is one and the same, those decisions will equally apply to the case on hand. Thus, it is clear that ITC being a concession/benefit/rebate, the legislature is within its competency to impose certain conditions, including time prescription for availing such right and the same cannot be challenged on the ground of violation of Constitutional provisions.

• The Supreme Court in the Case of JAYAM & CO. VERSUS ASSISTANT COMMISSIONER & ANR. - 2016 (9) TMI 408 - SUPREME COURT has made the following observation:

“11. From the aforesaid scheme of Section 19 following significant aspects emerge:

a. ITC is a form of concession provided by the legislature. It is not admissible to all kinds of sales and certain specified sales are specifically excluded. ……………………..”

• The Supreme Court in the Case of GODREJ & BOYCE MFG. CO. PVT. LTD. & OTHERS VERSUS COMMISSIONER OF SALES TAX - 1992 (7) TMI 292 - SUPREME COURT. has made the following observation:

 “9... In law (apart from Rules 41 and 41A) the appellant has no legal right to claim set­off of the purchase tax paid by him on his purchases within the State from out of the sales tax payable by him on the sale of the goods manufactured by him. It is only by virtue of the said Rules - which, as stated above, are conceived mainly in the interest of public - that he is entitled to such set­off. It is really a concession and an indulgence.

• The Supreme Court in the case of  COMMISSIONER OF MUNICIPAL CORPORATION, SHIMLA VERSUS PREM LATA SOOD AND OTHERS - 2007 (5) TMI 632 - SUPREME COURT observed the following:

“where the statue provides for a right, but enforcement thereof is in several stages, unless and until the conditions precedent laid down therein are specified, no right therein can be said to have vested in the person”

A reading of the above decisions makes it clear that ITC is not really a vested right. As rightly observed by the Patna High Court in the case of Aastha Enterprises, ITC is only a benefit extended under statutory scheme of things.

In other words, ITC is a benefit subject to fulfillment of conditions prescribed in the statute. It can however be said that once the conditions are fulfilled, the tax paid becomes eligible for credit in the form of a vested right. This view was taken by the Gujarat High Court in the case of M/S SIDDHARTH ENTERPRISES THROUGH PARTNER MAHESH LILADHAR TIBDEWAL VERSUS THE NODAL OFFICER  - 2019 (9) TMI 319 - GUJARAT HIGH COURT which stated :

The entitlement of credit of eligible duties on the purchases made in the pre-GST regime as per the then existing CENVAT credit rules is a vested right and, therefore, it cannot be taken away by virtue of Rule 117 of the Central GST Rules, 2017, with retrospective effect for failure to file the form GST Tran-1 within the due date, i.e. 27.12.2017. The provision for the facility of Input Tax Credit is as good as the tax paid till the tax is adjusted, and, therefore, the right to the credit had become absolute under the Central Excise Act; therefore, the credit is indefeasible, and the same cannot be taken away.

4. The Road Ahead : While the courts have time and again held that ITC is not a vested right but only a concession extended to the assesses, and therefore the act can also prescribe conditions to avail the benefit of such concessions, the real questions are:

•  Can the act impose conditions that are beyond the control of the purchasing dealer to avail the benefit of concessions in an Act?

•  Does the Patna High Court decision in the case of Aastha Enterprises imply that hereafter a genuine purchasing dealer will be dependent on the supplier to avail ITC of tax paid by him to such supplier, wherein failure of the supplier to remit tax to the government leads to denial of ITC to the purchasing dealer?

While there is no concrete answer to the above mentioned questions, there are views, analogies and judgments mentioned below, which are in total contrast to the views expressed by the Patna High Court in the case of Aastha Enterprises.

A. SUNCRAFT ENERGY PRIVATE LIMITED AND ANOTHER VERSUS THE ASSISTANT COMMISSIONER, STATE TAX, BALLYGUNGE CHARGE AND OTHERS - 2023 (8) TMI 174 - CALCUTTA HIGH COURT :

This is a case very similar to the case of Aastha Enterprises. The Department issued an order denying ITC to the purchasing dealer (Appellant) on the ground that there was a difference between the amount of ITC in Form GSTR 2A and Form GSTR 3B with respect to the purchase transaction made by the appellant.

The Appellant filed a writ petition before the Single Bench of the Hon’ble Calcutta High Court against the order of the Department, which was disposed off, directing the Appellant to file an appeal before the Appellate Authority.

Against the said order of the Single Bench, the Appellant filed another appeal before the Division Bench

i. Submissions of the Appellant

• They purchased goods from the supplier upon payment of full consideration along with the tax amount.
• They received a valid invoice for the same and availed ITC thereafter.
• If the invoice details are not reflecting in Form GSTR 2A, the Department ought to have conducted an investigation and initiated proceedings against the supplier.
• Placed reliance on the Hon’ble Supreme Court’s decision in the case of UNION OF INDIA VERSUS BHARTI AIRTEL LTD. & ORS. - 2021 (11) TMI 109 - SUPREME COURT. which stated that for the period of dispute in the said case, Form GSTR 2A is only a facilitator for taking a confirmed decision while doing a self-assessment and a mismatch cannot be a reason to deny credit to the purchasing dealer.

ii. Observations of the Calcutta High Court

• The Appellant has paid the consideration along with tax amount to the supplier, and holds a valid invoice in connection with the transactions.
• The Department ought to have initiated an investigation against the defaulting supplier instead of simply denying credit to the purchasing dealer
• There shall not be any automatic reversal of input tax credit from the buyer on non-payment of tax by the seller.
• In the event of default in payment of tax by the seller, recovery shall be made from the seller. However, reversal of credit from the buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets etc.
• The demand raised by the Department is not sustainable on these grounds

iii. Key points from the Calcutta HC Judgment: The Calcutta HC, through this judgment, has taken a more realistic and practical approach insofar as Section 16(2)(c) of the CGST Act is concerned. The Calcutta HC through this judgment, ensured that:

• The Department does not suffer losses in certain exceptional cases where recovery of tax from the supplier becomes impossible.
• If there is a slightest possibility of recovering tax from the defaulting supplier, the Department ought to initiate proceedings against the supplier and not misuse section 16(2)(c) of the CGST Act to deny credit to the purchasing dealer on the ground that supplier has not deposited the tax collected from such purchasing dealer.
• The purchasing dealer is not denied ITC for a default by the supplier when such purchasing dealer has satisfied all the other conditions to avail ITC.

B. Other Judgments :

• Recently, the Madras High Court in the case of TVL. SAHYADRI INDUSTRIES LTD. VERSUS THE STATE OF TAMIL NADU, REPRESENTED BY, THE JOINT COMMISSIONER (CT) , ERODE - 2023 (4) TMI 912 - MADRAS HIGH COURT observed that ITC cannot be denied citing failure of the supplier to remit tax to the government as a reason if the purchasing dealer has all the documents and evidence to show that goods were purchased, consideration along with tax was paid, and input tax credit was allowed to be utilized as a set-off against the tax liability declared in the self-assessed monthly or annual return under the scheme of the act.

• A similar view was taken by the Hon’ble Supreme Court and various High Courts in various cases, viz.

(i) COMMISSIONER OF CENTRAL EXCISE, JALANDHAR VERSUS M/S. KAY KAY INDUSTRIES  -2013 (8) TMI 772 - SUPREME COURT

(ii) ASSISTANT COMMISSIONER (CT) , PRESENTLY THIRUVERKADU ASSESSMENT CIRCLE, KOLATHUR, CHENNAI VERSUS INFINITI WHOLESALE LTD. - 2016 (9) TMI 1431 - MADRAS HIGH COURT.

(iii) M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI  - 2021 (3) TMI 1020 - MADRAS HIGH COURT

(iv) ON QUEST MERCHANDISING INDIA PVT. LTD., SUVASINI CHARITABLE TRUST, ARISE INDIA LIMITED, VINAYAK TREXIM, K.R. ANAND, APARICI CERAMICA, ARUN JAIN (HUF) , DAMSON TECHNOLOGIES PVT. LTD., SOLVOCHEM, M/S. MEENU TRADING CO., & MAHAN POLYMERS VERSUS GOVERNMENT OF NCT OF DELHI & ORS. & COMMISSIONER OF TRADE & TAXES, DELHI AND ORS. - 2017 (10) TMI 1020 - DELHI HIGH COURT

C. Doctrine of Impossibility:

• Lex Non Cogit Ad Impossibilia, which means the law does not demand the impossible, and Impotentia Excusat Legem, which means a disability that makes it impossible to obey the law can be excused. The courts have time and again applied these legal maxims under different scenarios to conclude that an assessee cannot be denied the benefit of a particular provision or held liable for failing to do an act that is impossible for him to do.

•  The Tribunal in the case of COMMISSIONER OF CUSTOMS & CENTRAL EXCISE, KANPUR VERSUS M/S. JUHI ALLOYS LTD. - 2013 (7) TMI 561 - CESTAT NEW DELHI held that a buyer can take steps which are within his control, but he cannot be expected to verify the records of the supplier’s broker to check whether the supplier has paid duty on the goods supplied by him or not. As long as the bona fide nature of the consignee transaction is not doubted, credit should not be denied.

• The Hon’ble Jharkhand High Court in the case of COMMISSIONER OF C. EX., EAST SINGHBHUM VERSUS TATA MOTORS LTD. - 2010 (9) TMI 949 - JHARKHAND HIGH COURT held that 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 duty has actually been paid on the inputs by the supplier. No business can be carried out like this, and the law does not expect the impossible.

• The courts have expressed similar views in connection with doctrine of impossibility other cases viz.

(i) AB TOOLS LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE - 2008 (9) TMI 579 - HIMACHAL PRADESH HIGH COURT

(ii) ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED VERSUS THE COMMISSIONER OF INCOME TAX & ANR. - 2021 (3) TMI 138 - SUPREME COURT

(iii) ARJUN PANDITRAO KHOTKAR VERSUS KAILASH KUSHANRAO GORANTYAL AND ORS.  – 2020 (7) TMI 740 - SUPREME COURT

(iv) COMMISSIONER OF INCOME TAX, CENTRAL III VERSUS M/S. CELLO PLAST, - 2012 (8) TMI 527 - BOMBAY HIGH COURT

5. Section 16(2)(c) Of The CGST Act Challenged : It is also pertinent to note that the constitutionality of Section 16(2)(c) of the CGST Act has been challenged in the following cases:

i. UNIFAB ENGINEERING PROJECT PVT. LTD. AND ANR. VERSUS THE DEPUTY COMMISSIONER CGST AND CEX, CIRCLE-VIII, GROUP-VIII AND ORS. - 2021 (11) TMI 646 - BOMBAY HIGH COURT before the Hon’ble Bombay High Court ;

ii. M/S SURAT MERCANTILE ASSOCIATION VERSUS UNION OF INDIA - 2021 (10) TMI 1415 - GUJARAT HIGH COURTbefore the Hon’ble Gujarat High Court.

6. Not The End Of The Road: A reading of the above judgments indicates that  the Patna High Court’s judgment is not the end of the road and by no means implies that the purchasing dealer will at all times be denied the benefit of ITC if the supplier defaults payment of tax. There are contrasting views taken by the Calcutta and Patna High Courts, and what happens in similar cases will depend upon facts, submissions and other factors forming part of the case.

7. Precautionary Measures: As mentioned above, the Patna High Court judgment is not the end of the road; however, as difficult as it is for a purchasing dealer to ensure payment of tax by the supplier, there are certain precautionary measures that can be taken to avoid litigation and ensure ITC is not denied due to a default by the supplier

• While choosing a supplier depends upon many factors from a business perspective, also check upon and keep a track of the supplier’s return filing patterns. There are apps available for smart phones and other ways to check the same.

• While entering into an agreement, ensure there is a clause that covers the said situation and holds the supplier liable to indemnify the purchaser if the said purchasing dealer suffers a loss due to a default by the supplier to remit to the government the tax collected from the purchaser.

• Existing agreements can be amended, or there can be an addendum to the same to add a clause covering such situations.

• Following up with suppliers and sending timely reminders are good ideas to ensure compliance.

• Stay updated with tax laws and the latest amendments to strategize and implement practices that help avoiding litigation.

• Also, send timely reconciliation statements to ensure that the input data of the purchasing dealer and output data of the supplier match perfectly.

8. Conclusion: The Patna High Court judgment has come as a wake-up call. It requires the purchasing dealer to be vigilant not only in connection with its own compliance but also in connection with compliance by the supplier in order to avail the benefit of ITC. While there are judgments allowing ITC on the ground that the purchasing dealer cannot be held liable for the actions of the supplier, it is also true that any default by the supplier will surely invite litigation. The judgments in favor of the purchasing dealer may be of help if litigation does happen. However, it is advisable to be cautious and proactive in implementing policies that ensure timely compliance at both ends to avoid litigation itself.