2025 (12) TMI 756 - HC - GST

Section 16(2)(aa) CGST upheld, ITC denial curbed where buyer proves bona fides despite supplier return default

HC upheld the constitutional validity of Section 16(2)(aa) of the CGST Act and corresponding AGST provision, holding that stricter conditions for availing ... Validity of the provisions contained in Section 16(2)(aa) of the Central Goods and Services Tax Act, 2017 - Eligibility and conditions for taking input tax credit - restriction of vested right of claiming ITC of a bona fide tax payer by section 16(2)(aa) of the CGST Act and AGST Act - applicability of Central Board of Indirect Taxes and Customs (CBIC) vide Circular No. 183/15/2022-GST dated 27.12.2022 and Circular No. 193/05/ 2023-GST dated 17.07.2023 to the period on or after 01.01.2022 - HELD THAT:- The purpose of inserting Section 16(2)(aa) into the CGST Act is to mandate a stricter condition for availing ICT. It actually ties the recipient’s ability to claim ITC directly to the supplier’s compliance with their GST filing obligations. This amendment was introduced to address tax evasion and improve the transparency and integrity of the GST system. Thus, the purpose and rationale is to prevent fraudulent ITC claims, to promote supplier compliance and eliminate provisional ITC, which has proved to be effective in curbing fraudulent claims. There is no reason why it should be declared unconstitutional or should be read down in any manner whatsoever. A tax imposed by the Government is a tax on the buyer; making the seller a mere collecting agency, so that the tax must always remain outside the sale price - The law is well settled that a person, who claims exemption or concession, has to establish that he is entitled to that exemption or concession. In the present case, the conditions are that the GSTR-2 Form should reflect the payment of tax/invoice, which may or may not have been paid or correctly uploaded. Merely because of this, the ITC benefit to a bona fide buyer cannot be avoided as that would be against the object and purpose of the Act itself - the restriction is quite iniquitous because an onerous burden is placed on purchasing dealer. However, since the object and purpose of the amendment in the Act is to prevent fraudulent ITC claims and to promote supplier compliance, it is not inclined to hold the amendment in Section 16 to be unconstitutional but for the present, it is only read down to the extent that in case of the supplier acting truant, before denying the ITC benefits to a bona fide purchaser, he ought to be given an opportunity to prove his bona fides, which can be verified by the tax invoices and other documents. Petition disposed off. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether the condition inserted by Section 16(2)(aa) of the Central Goods and Services Tax Act, 2017 and the corresponding State enactment, making entitlement to input tax credit contingent on the supplier furnishing invoice/debit note details in the prescribed return, is arbitrary, irrational or unconstitutional. (2) Whether, and to what extent, Section 16(2)(aa) should be read down to protect a bona fide purchasing dealer from denial of input tax credit due to default or non-compliance by the supplying dealer. (3) Whether relief analogous to that granted by specified circulars of the Central Board of Indirect Taxes and Customs, permitting input tax credit where supplier-side reporting defects existed up to a particular cut-off date, should be extended to periods on or after 01.01.2022. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Validity of Section 16(2)(aa) conditioning ITC on supplier compliance Interpretation and reasoning (a) The Court noted that tax under the goods and services tax regime is, in substance, a tax on the buyer, with the seller acting as a collecting agency, and the tax component must remain outside the sale price. (b) Entitlement to input tax credit is in the nature of an exemption or concession and, as a matter of settled law, a person claiming such exemption or concession must establish compliance with the statutory conditions. (c) Section 16(2)(aa) imposes a condition that availability of input tax credit to the buyer (recipient) depends on compliance by the supplier in duly furnishing invoice/debit note details in the prescribed outward supply return, which is beyond the buyer's actual control. (d) The insertion of Section 16(2)(aa) was justified by the revenue as a measure to mandate stricter conditions for availing input tax credit, directly tying the recipient's claim to the supplier's return-filing compliance, with the stated objectives of preventing fraudulent input tax credit claims, promoting supplier compliance, eliminating provisional input tax credit and improving transparency and integrity of the system. (e) The Court recognised that the object and purpose of the goods and services tax legislation is to avoid a cascading effect of taxation and to levy tax only on value addition. Denial of input tax credit to a bona fide purchaser solely due to the supplier's default would, in effect, shift the incidence of tax from the supplier to the buyer and defeat this object. (f) The Court considered that making input tax credit of a bona fide buyer wholly contingent upon the supplier's uploading and return-filing conduct, over which the buyer has limited or no effective control, places an onerous and inequitable burden on the purchaser, particularly when tax has been paid by the purchaser to the supplier. Conclusions (g) The Court held that, notwithstanding the iniquitous impact on bona fide purchasers, the amendment introducing Section 16(2)(aa) cannot, in itself, be struck down as unconstitutional, having regard to its stated object of curbing fraud and promoting compliance. (h) However, the Court found that a literal and unqualified application of Section 16(2)(aa) leading to automatic denial of input tax credit to bona fide purchasers, solely because of supplier default in return filing or invoice reporting, would run contrary to the object and purpose of the Act to prevent cascading taxation. Issue (2): Reading down of Section 16(2)(aa) to protect bona fide purchasers Interpretation and reasoning (a) The Court accepted that conditions can validly be placed on exemptions and concessions, but emphasised that in the present context the condition is dependent on an act of a third party (the supplier), not within the effective control of the purchaser. (b) The Court observed that Section 16(2)(aa), read with the requirement that GSTR-2 or equivalent auto-populated forms should reflect the tax invoice and payment, could result in denial of input tax credit even where the tax has in fact been paid by the purchaser to the supplier and the purchase is genuine. (c) The Court held that, merely because GSTR-2 or corresponding forms do not reflect the tax or invoice-whether due to non-uploading or incorrect uploading by the supplier-input tax credit benefit to a bona fide buyer cannot be denied, since such denial would defeat the central object of the statute and produce an inequitable outcome. (d) At the same time, the Court acknowledged the legislative aim of preventing fraudulent input tax credit claims and promoting supplier compliance, and therefore declined to invalidate the provision, opting instead for a reading down that balances both objectives. Conclusions (e) The Court read down Section 16(2)(aa) to the limited extent that, where the supplier has defaulted or acted truant, input tax credit cannot be denied to a bona fide purchaser without first affording such purchaser an opportunity to establish bona fides. (f) The bona fide nature of the purchaser's claim is to be verified through tax invoices and other relevant documents; where such verification supports genuineness and payment of tax, input tax credit should not be refused merely due to supplier non-compliance in return filing or invoice reporting. (g) This reading down is expressly stated to operate until such time as the competent authorities, including the Central Board of Indirect Taxes and Customs, evolve and implement a practical solution to the problem of making the purchaser's input tax credit contingent upon factors entirely within the control of the supplier. Issue (3): Extension of CBIC circular-based relief beyond 01.01.2022 Interpretation and reasoning (a) The petitioner sought, in the alternative, that the relief mechanism contemplated in specified circulars of the Central Board of Indirect Taxes and Customs-allowing input tax credit where supplier's invoice details were not uploaded or correctly reported in Form GSTR-1 up to 31.12.2021-be extended to periods on or after 01.01.2022. (b) The Court took note of the existence of these circulars and the rationale that similar mismatches or errors could also occur after 01.01.2022, but did not separately direct extension of the circulars by judicial fiat. (c) Instead, the Court addressed the underlying problem by reading down Section 16(2)(aa), rather than by enlarging the temporal ambit of the circular-based administrative relief. Conclusions (d) The Court did not grant the specific prayer to extend CBIC circular-based relief for periods after 01.01.2022; instead, it provided substantive relief by requiring that bona fide purchasers must be given an opportunity to prove their bona fides and claim input tax credit despite supplier default, pursuant to the reading down of Section 16(2)(aa). (e) The matter was disposed of on the basis of the said reading down, leaving it to the competent authorities to evolve a practical systemic solution for the post-01.01.2022 period and beyond.