2023 (3) TMI 1168 - HC - GST

GST Input Tax Credit Challenge Succeeds as Procedural Fairness Trumps Technical Compliance Under Section 16(2)(c)

HC ruled on GST Input Tax Credit (ITC) dispute involving Section 16(2)(c). Court found procedural irregularities in the tax authority's order, ... Eligibility for input tax credit - continuity of input tax credit - third proviso to Section 16 - opportunity to be heard - rectification under Section 161 - protective reversal of ITC and restorationEligibility for input tax credit - continuity of input tax credit - Whether the assessing authority's conclusion on entitlement to Input Tax Credit was to be interfered with by this Court. - HELD THAT: - The Court expressly declined to interfere with the assessing authority's conclusion on the substantive question of entitlement to ITC. It noted the statutory scheme requires strict observance of conditions in Section 16 for continuity of ITC and recognised the protective role of reversing ITC in the purchaser's hands where suppliers have not remitted tax. The Court observed that substantive liability principally rests on the supplier while reversal in the purchaser's hands is a protective measure which can be restored if the supplier pays, but did not upset the assessing authority's merits conclusion in this petition.Assessing authority's conclusion on entitlement to ITC not interfered with.Third proviso to Section 16 - opportunity to be heard - Whether the impugned order was vitiated by failure to follow the procedural requirement in the third proviso to Section 16 (opportunity before taking an adverse view). - HELD THAT: - The Court found a clear procedural defect: the authority passed an adverse order without granting the petitioner an opportunity to be heard as envisaged by the third proviso to Section 16. This failure of due process was held to be a fatal flaw independently warranting interference. The Court emphasised that where an authority proposes to take a view adverse to an applicant, the procedure in the proviso must be followed, and non-compliance renders the order unsustainable.Impugned order dated 20.01.2023 set aside for failure to afford opportunity to be heard under the third proviso to Section 16.Rectification under Section 161 - protective reversal of ITC and restoration - Remedy to be afforded following setting aside of the impugned order and the status of the petitioner's Section 161 application. - HELD THAT: - The Court did not adjudicate the merits of the Section 161 rectification application but held that the petitioner must be given a hearing and the application decided afresh. The order directs the authority to issue notice to the petitioner, hear him, and dispose of the Section 161 application within four weeks, thereby remitting the matter for fresh consideration in accordance with the required procedural safeguards. The Court observed the proper mechanism is to protect revenue interests while permitting restoration of credit if the supplier meets the liability, but left quantification and merits to the authority.Matter remitted: authority to hear petitioner and decide the Section 161 application within four weeks.Final Conclusion: Writ petition allowed: impugned order dated 20.01.2023 set aside for failure to afford opportunity as required by the third proviso to Section 16; assessing authority's substantive conclusion on ITC left undisturbed; petitioner to be heard and Section 161 application decided afresh within four weeks. Issues involved:The issues involved in this case are related to the invocation of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, concerning the eligibility and conditions for taking Input Tax Credit (ITC).Details of the Judgment:Issue 1 - Invocation of Section 16(2)(c) of the Act:The petitioner, an assessee under the Act, received a pre-assessment notice regarding the invocation of Section 16(2)(c). The respondent's case was based on supplies made to the petitioner by delinquent suppliers whose registrations were cancelled, resulting in non-remittance of tax to the Department.Issue 2 - Compliance with Section 16 for ITC eligibility:Section 16 mandates that tax charged for a supply must be actually paid to the Government for continuity of ITC. The petitioner was required to ensure compliance with this provision to be entitled to ITC.Issue 3 - Reversal of ITC due to non-remittance of tax by suppliers:Three suppliers failed to remit tax despite uploading invoices, leading to the petitioner's reversal of ITC. The petitioner contended that they fulfilled all statutory conditions for ITC eligibility, but the respondent rejected their claim, resulting in a demand confirmed by an order-in-original.Issue 4 - Application for rectification under Section 161:The petitioner sought rectification of errors in the order-in-original, citing relevant decisions not considered by the respondent. The Court acknowledged the strict observance of Section 16 provisions to safeguard revenue interests, emphasizing the supplier's primary liability over the purchaser's protective liability.Issue 5 - Procedural irregularity and remedy:The Court found a fatal flaw in the procedure followed by the assessing authority, as the petitioner was not granted an opportunity before the adverse order was passed. Consequently, the impugned order was set aside, and the petitioner was directed to be heard within four weeks on the Section 161 application.The judgment allowed the Writ Petition, highlighting the importance of due process and adherence to statutory provisions in matters concerning tax liability and ITC eligibility under the Central Goods and Services Tax Act, 2017.