2024 (8) TMI 836 - HC - GST

Purchasing dealer liability for seller's unpaid GST u/ss 16(2)(c)-(d) held impermissible; notices set aside, exception for non-bona fide purchases

Whether Sections 16(2)(c) and 16(2)(d) (Assam GST and CGST) permit creation of tax liability against a purchasing dealer for a selling dealer's failure to ... Reading down of statutory provision to avoid constitutional infirmity - denial of input tax credit to bona fide purchasing dealer - remedy against defaulting selling dealer rather than punishment of purchasing dealer - onus on purchaser to verify seller's tax deposit not permissible where transaction is bona fide - violation of Article 14 by disproportionate consequences Denial of input tax credit to bona fide purchasing dealer - reading down of statutory provision to avoid constitutional infirmity - violation of Article 14 by disproportionate consequences - Whether Sections 16(2)(c) and 16(2)(d) of the Assam GST Act, 2017 and corresponding provisions of the CGST Act can be applied to deny ITC to a purchasing dealer who has entered into bona fide transactions with a registered selling dealer - HELD THAT: - The court applied the reasoning of the Delhi High Court in On Quest Merchandising India Private Limited, holding that the statutory language must be read down so as not to include a purchasing dealer who has bona fide transacted with a validly registered selling dealer issuing tax invoices and where there is no mismatch in returns. The provisions, if read to visit disproportionate adverse consequences on a bona fide purchasing dealer for the selling dealer's failure to deposit tax, would be vulnerable to challenge under Article 14. Consequently, the proper course is to restrict denial of ITC to culpable selling dealers; bona fide purchasers who took requisite precautions cannot be expected to ensure the seller's deposit of tax and therefore cannot be penalised by denial of ITC. [Paras 3, 5] The provisions must be read down to exclude bona fide purchasing dealers from denial of ITC; such purchasers are protected and cannot be denied ITC on the basis of the selling dealer's failure to deposit tax. Remedy against defaulting selling dealer rather than punishment of purchasing dealer - onus on purchaser to verify seller's tax deposit not permissible where transaction is bona fide - Whether the show cause notices and consequential orders issued to the petitioners (purchasing dealers) could be sustained - HELD THAT: - Relying on the accepted principle that where the selling dealer has collected tax but failed to deposit it, the appropriate remedy lies against the defaulting selling dealer, the court set aside the impugned show cause notices and consequential orders issued to purchasing dealers in this batch who have bona fide transactions. The State remains at liberty to proceed in matters where material shows purchases were not bona fide or where collusion exists, and to pursue recovery from defaulting selling dealers. [Paras 6, 7] The impugned show cause notices and consequential orders against bona fide purchasing dealers are set aside; the Department may act against non bona fide transactions or the defaulting selling dealers as permissible by law. Final Conclusion: The writ petitions are allowed insofar as purchasing dealers who bona fide transacted with registered selling dealers cannot be denied ITC under the impugned provisions; the show cause notices and consequential orders against such purchasers are set aside, while the Department remains free to act where transactions are not bona fide or where collusion is shown. Issues:Challenge to the validity of Sections 16(2)(c) and 16(2)(d) of Assam Goods and Services Tax Act, 2017 and Central Goods and Services Tax Act, 2017 along with show cause notices issued to petitioners.Analysis:1. The petitioners challenged the validity of certain sections of the tax acts and show cause notices issued to them. The counsel argued that the controversy is similar to a Delhi High Court case where it was held that purchasing dealers cannot be penalized for the selling dealer's failure to deposit tax collected.2. The Delhi High Court had observed that demands against purchasing dealers in bona fide transactions cannot be sustained. The Supreme Court dismissed the Special Leave Appeal against this judgment, affirming the principle.3. The Standing Counsel for CGST and counsel for the respondent State did not dispute that the issue in these petitions aligns with the Delhi High Court decision.4. The provisions in question under Assam and Central GST Acts are akin to the challenged provision in the Delhi Value Added Tax Act, as highlighted in the Delhi High Court judgment.5. The Delhi High Court emphasized that laws must not burden bona fide purchasing dealers disproportionately and should target defaulting selling dealers. It held that the provisions should not be applied to genuine transactions with registered dealers.6. The Supreme Court upheld the Delhi High Court judgment and dismissed the Special Leave Petition, allowing the Department to proceed against non-bona fide cases.7. The High Court, after reviewing the Delhi High Court judgment and Supreme Court decision, set aside the show cause notices in the present case, following the Delhi High Court's reasoning. The Department was allowed to act in cases of non-bona fide transactions.8. The writ petitions were disposed of based on the alignment of the issues with the Delhi High Court decision, providing relief to petitioners with bona fide transactions while allowing action in other cases.This detailed analysis outlines the legal arguments, court decisions, and implications of the judgment concerning the challenge to specific provisions of the tax acts and show cause notices.