2021 (3) TMI 1020 - HC - GST

Court quashes tax recovery orders, directs fresh enquiry against sellers, restores Input Tax Credit

The court quashed the orders for recovery of tax liability against the petitioners due to sellers' non-payment of tax. The court directed a fresh enquiry, ... Input tax credit entitlement - Reversal of input tax credit on non-payment by supplier - Requirements for availing input tax credit under section 16(2) - Obligation to examine supplier as witness in departmental enquiry - Revenue's duty to initiate recovery from defaulting supplierInput tax credit entitlement - Reversal of input tax credit on non-payment by supplier - Requirements for availing input tax credit under section 16(2) - Validity of impugned orders that reversed input tax credit and fixed tax liability on the purchasers without confronting or taking recovery action against the sellers. - HELD THAT: - The court examined the statutory scheme governing entitlement to input tax credit, including the condition that tax charged in respect of the supply must have been actually paid to the Government (the proviso in the statutory regime). It found that where tax has not reached the Government, liability may ultimately rest on either seller or buyer, but the departmental action must be consistent with that principle and the facts. In the present cases the authorities reversed ITC and fixed liability on the petitioners although they did not examine the sellers (Charles and his wife Shanthi) nor initiate recovery action against them; the assessment of the sellers had excluded the subject transactions and no recovery proceedings appear to have been taken against the sellers. The court held that omission to confront and examine the sellers and failure to initiate recovery against them rendered the impugned orders fundamentally flawed and unsustainable. [Paras 11, 12, 13, 14, 15]Impugned orders quashed insofar as they fixed liability on the petitioners without confronting the sellers or initiating recovery against them.Obligation to examine supplier as witness in departmental enquiry - Revenue's duty to initiate recovery from defaulting supplier - Whether the matters should be remitted for fresh enquiry and what procedural steps the respondent must take on remand. - HELD THAT: - The court directed that the matters be remitted to the respondent for fresh enquiry. The stage reached up to receipt of the petitioners' replies is to be preserved. On remand the respondent must hold a fresh enquiry in which Charles and his wife Shanthi are to be examined as witnesses, and simultaneously initiate recovery action against them in respect of the disputed transactions. These directions follow from the court's finding that the earlier enquiries were defective for not confronting or prosecuting action against the sellers and that examination of the sellers is necessary given disputes about receipt and movement of goods and the genuineness of invoices. [Paras 16]Matters remitted for fresh enquiry; petitioners' stage up to receipt of their replies to be preserved; sellers to be examined as witnesses and recovery action to be initiated against them.Final Conclusion: Writ petitions allowed; impugned orders quashed and remitted for fresh enquiry preserving the stage up to petitioners' replies, with directions to examine the sellers Charles and Shanthi as witnesses and to initiate parallel recovery action against them; no costs. Issues:Petitioners challenging orders for recovery of tax liability due to sellers' non-payment of tax, Input Tax Credit availed by petitioners, Jurisdiction to reverse input tax credit, Examination of sellers during enquiry.Analysis:Issue 1: Recovery of Tax LiabilityThe petitioners, registered dealers, purchased goods from sellers who did not remit tax to the government, leading to the initiation of recovery proceedings against the petitioners. The petitioners argued that they had paid the sellers, including the tax component, through banking channels. The respondent contended that since the sellers did not pay tax and the petitioners could not provide proof, recovery from the petitioners was justified. The respondent reversed the Input Tax Credit (ITC) availed by the petitioners based on this non-payment by the sellers.Issue 2: Jurisdiction to Reverse Input Tax CreditThe counsel for the petitioners cited a previous decision of the Madras High Court regarding the jurisdiction to reverse availed input tax credit due to non-payment by the selling dealer. However, it was noted that this previous ruling might not directly apply to the current tax regime. Reference was made to a press release by the Central Board of GST council, which stated that reversal of credit from the buyer could be an option in exceptional situations, along with the provisions of section 16(1) & (2) of the Tamil Nadu Goods and Services Tax Act, 2017.Issue 3: Examination of Sellers During EnquiryThe petitioners highlighted the necessity of examining the sellers, Charles and his wife, during the enquiry. The court emphasized that the sellers should have been confronted and examined, especially since the respondent claimed that the petitioners did not receive the goods and availed ITC based on generated invoices. The failure to examine the sellers and initiate recovery action against them were identified as fundamental flaws in the impugned orders.Judgment:The court quashed the impugned orders and remitted the matters back to the respondent for a fresh enquiry. It was directed that the sellers, Charles and his wife, must be examined as witnesses during the enquiry, and recovery action should be initiated against them. The court emphasized the importance of examining the sellers and addressing the flaws in the previous proceedings. The writ petitions were allowed with no costs, and connected miscellaneous petitions were closed.