ITC would be denied on non-payment of tax by supplier

Hon’ble Patna High Court (‘HC’) 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 petitioner” has upheld the denial of Input Tax Credit (ITC) to petitioner purchaser on account of non-payment of GST by supplier to Government invoking Section 16(2)(c) of GST Act. Captioned judgement has been analyzed in this update.

A. FACTS OF THE CASE

• The petitioner, a registered taxable person claimed credit of input tax against inward supplies.
• The petitioner made payment to supplier through banking channels including GST charged.
• The supplier did not deposit the GST with Government
• That department passed assessment order inter-alia disallowing the ITC claimed by purchaser

B. CONTENTION OF THE APPLICANT

• That they have fulfilled all the conditions as stipulated under Sub-section (2) of Section 16 of CGST Act, 2017 and they have also paid the tax to supplier
• That they have produced tax invoices issued by supplier, bank statement reflecting payment of consideration to supplier and proof of movement of goods
• That the underlying object of scheme of ITC is to avoid cascading effect of tax, which would effectively be frustrated if purchaser has to make double payment of GST, first to supplier and now again to department
• That the department should have proceeded against the defaulting supplier for recovery of tax as has been held by Hon’ble Madras High Court in Sri Vinayaga Agencies v. The Assistant Commissioner (CT) & Anr. - 2013 (4) TMI 215 - MADRAS HIGH COURT and and connected cases; 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 

C. OBSERVATION AND DECISION BY HC

Observations of HC

• HC observed that provisions of section 16(2)(c) were ignored in D.Y. Beathel (supra)
• The conditions provided under sub-clauses (a), (b) and (c) of Section 16(2) pertaining to existence of tax invoice, proof of receipt of goods or services and payment of tax charged to government are to be satisfied together and not separately or in isolation.
• The conditions of availment of credit has to be strictly followed, failing which ITC benefit would not be available.
• In case of subsequent recovery of GST from supplier, the purchaser can seek refund.

Decision of Hon’ble HC

• That the claim of ITC raised by the petitioner cannot be sustained when the supplier has not paid the taxes to Government despite of collecting it from purchaser.

D. Our comments

This is a contrary ruling from Hon’ble Patna High Court on burning issue of reversal of ITC from purchaser on account of default in deposition by supplier invoking Section 16(2)(c) of GST Act. Earlier, we had rulings from Hon’ble Madras HC in D.Y. Beathel (supra) and Hon’ble Calcutta HC 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 it has been ruled that department need to first proceed against erring supplier provided the purchaser & supplier are not in collusion with each other. 

CBIC also in Press release dated 4^th May 2018 has clarified that there shall not be any automatic reversal of input tax credit from buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller, however, reversal of credit from buyer shall also be an option available with revenue authorities to address exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets etc.

It appears that above-mentioned CBIC circular and differentiation in treatment between bona-fide purchaser and cases of collusion between purchaser & supplier as ruled by Hon’ble Delhi HC in Arise India Limited have not been put forward in this particular matter.

(Author can be reached at [email protected] or [email protected]).

CA Dinesh Singhal