ITC cannot be availed if supplier has not paid the tax

[Kamal Aggarwal]

No ITC can be availed by the purchaser if supplier has not deposited tax to government

In an interesting decision 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, the Hon’ble Patna High Court held that claim of Input Tax Credit of the purchaser cannot be sustained when the supplier has not paid up the amounts to the Government despite collecting tax from the purchaser.

In this case, the petitioner filed a writ before the Hon’ble Patna High Court against the assessment order wherein the revenue department denied the ITC to the petitioner on the ground that the petitioner has not followed conditions u/s 16(2) of CGST Act, 2017.

The petitioner contended that credit in the hands of purchasing dealer cannot be denied where he has paid the tax and has availed the ITC based on tax invoices issued by the supplier and argued that the proceedings against the petitioner who has already paid tax to the supplier would result in double taxation in the hands of petitioner.

The Hon’ble High Court discussing about the judgement in 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, observed that the decision ignored the provision under sub-clause (c) of Section 16 (2) of the GST Act.

The Hon’ble High Court observed that the conditions for enabling ITC benefit are available in Clauses (a) (b) and (c) which are in seriatim. The said conditions are to be satisfied together and not separately or in isolation. It is an essential prerequisite for enjoying the benefit of ITC.

The Hon’ble High Court also relied upon the Judgement in THE STATE OF KARNATAKA VERSUS M/S ECOM GILL COFFEE TRADING PRIVATE LIMITED - 2023 (3) TMI 533 - SUPREME COURT wherein the Hon’ble Supreme Court held that to sustain a claim of ITC on purchases, the purchasing dealer would have to prove the genuineness of transactions by furnishing the details. Mere production of tax invoices would not be sufficient to claim ITC.

The Hon’ble Patna High Court held that, when the supplier fails to comply with the statutory requirement, the petitioner cannot claim ITC and the remedy available to the petitioner is only to proceed for recovery against the seller.

This decision is in contradiction to the decision of Hon’ble Calcutta High Court in the case of SUNCRAFT ENERGY PRIVATE LIMITED AND ANOTHER VERSUS THE ASSISTANT COMMISSIONER, STATE TAX, BALLYGUNGE CHARGE AND OTHERS - 2023 (8) TMI 174 - CALCUTTA HIGH COURT, wherein the Hon’ble High Court has observed that in case of default in payment of tax by the seller, recovery shall be made from the seller first. Only under exceptional situations like missing supplier, closure of business by supplier or supplier not having adequate assets etc, the revenue can proceed to make recovery of ITC from recipient. A press release dated May 04, 2018, issued by CBIC clarifies on the similar lines.

Further, the Courts have consistently held under VAT regime that where the purchaser is bonafide and there is absence of mala fide intention, connivance or wrongful association of the purchaser with the supplier, the reversal cannot be sought from purchaser. The same view was upheld by the Hon’ble Supreme in the decision of 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”. However, the Hon’ble High Court in this case has not discussed about the same.

Also the Hon’ble High Court in making such observation has not considered the “Doctrine of Impossibility”. It is pertinent to note that “law cannot compel the notice to do the impossible i.e. to ensure that the supplier has paid tax to the Government.

Section 16(2)(c) of CGST Act 2017 in its present form is susceptible to an interpretation that imposes a duty on the recipient to crosscheck whether GST has been remitted by the supplier to the government for the invoice on which ITC has been collected from the recipient.

Currently there is no mechanism under GST to determine whether or not the supplier has paid tax on particular invoices. The government should consider implementing there should be a mechanism set up to track payment by supplier against a particular invoice to avoid any undue hardships on recipients. In absence of the same, judgement like this will result in unjust denial of Input Tax Credit to bonafide purchasers.