Judgments and provisions for when our supplier indulged in malpractice but we have invoices for genuine transactions

[Gautam Godhwani]

All the judgments seem to be either towards retrospective cancellation of supplier (Section 16(2)(a)) or when the supplier has not deposited tax to the government - in Section 16(2)(c). But none are for when the supplier has indulged in fake invoicing with other recipients and us the main recipient is suffering even after having done genuine transactions.

[KASTURI SETHI]

Sh.Gautam Godhwani Ji,

Pl. elaborate your query with full facts.

Is it related to Issue ID 118644 dated 13.7.23 ?

Pl. reply.

[Gautam Godhwani]

Respected Sir,

What I meant was that recipient R has received a notice for reversal of ITC claimed on the strength of transactions done with S the supplier.

It is being contended by the authorities that S, our supplier, claimed fake ITC on strength of fake invoices issued by SS, our supplier's supplier.

Thus we are being asked to reverse ITC because of fault of supplier. The supplier might have issued fake invoices to others or even might have claimed fake ITC on invoices issued by party SS, but at least the invoices between S and recipient R are genuine.

There are judgments where tax not deposited by supplier or supplier getting his registration cancelled retrospectively were held to be no bar for claiming ITC.

But there seems to be no judgment where supplier's malpractice was held to be no bar for claiming ITC.

If such a specific judgment could be found, it would be of great help.

Regards

[KASTURI SETHI]

On 13.6.23 The Madhya Pradesh High Court judgment In the case of Agrawal And Brothers vs Union of India - 2023 (6) TMI 940 - MADHYA PRADESH HIGH COURT has ruled that taxpayers should not bear the consequences of a supplier's mistake in GST reporting. (WRIT PETITION No. 14297 of 2020). Available on google.

[Gautam Godhwani]

Respected Sir, thanks for the prompt reply.

While this judgment is certainly helplful as it gives the general proposition that recipient cannot be made to suffer on errors committed by supplier but it isn't based on fake invoicing indulged by the supplier.

Here the case, to the best of which I remember is of the Railway Department filing the GSTR-1, reflecting the supplies under the wrong GSTIN due to which it wasn't auto populated in the petitioners GSTR-2A.

Is there any judgment where credit was allowed despite allegations of fake invoicing committed by the supplier to other recipients (not us, whose transactions were genuine) and allegations of supplier having availed bogus credit on fake invoices from supplier's supplier ?

[Padmanathan KV]

Gautam Ji,

Amoung other grounds, kindly seek for cross-examination of Supplier, supplier's supplier etc.

Also, you must emphasise the fact that there is no mechanism currently available where by recipient can check the genuineness of supplier's credit.

I think Finance Act, 2022 has proposed such mechanisms by way of insertion of cluase (ba) and amending section 38, but these changes are not yet operational as on date. Thus, in the absense of such mechanism, it is impossible for the recipient to verify genuineness of supplier's credit.

Most decisions relating to fake invoicing etc are highly fact specific and in personam, and cannot be directly applied to other cases.

[KASTURI SETHI]

Sh.Gautam Godhwani Ji,

You can take cue from the following case law.

2021 (10) TMI 256 - ORISSA HIGH COURT - BRIGHT STAR PLASTIC INDUSTRIES Versus ADDL. COMMR. OF SALES TAX (APPEAL)

[KASTURI SETHI]

I also agree with Sh.Padmanathan Kollengode Ji.

Further, In this case the department is legally right because the burden of proof is to be discharged by the assessee under Section 155 of CGST Act. The SCN is certain. The assessee has to fight the case on merits. The department has nabbed the supplier's supplier. The party will be eligible only after the due tax is paid by the supplier's supplier. Relief is possible only through Appellate Authorities/Courts. By the time SCN is issued and the case is adjudicated, you may come across some case laws in favour of the party and also by that time the supplier's supplier may deposit tax not paid so far.

Your client will have to keep track. Relief at the Adjudication Stage is possible only if proof of tax paid by the supplier's supplier is produced otherwise it will be a long battle.

[Shilpi Jain]

It is very unfortunate that genuine and innocent recipients are suffering due to the mischiefs of the suppliers

[KASTURI SETHI]

Sh.Gautam Godhwani Ji,

Here is a case law in your favour.

2019 (6) TMI 941 - KARNATAKA HIGH COURT - M/S. ONYX DESIGNS VERSUS THE ASSISTANT COMMISSIONER OF COMMERCIAL TAXES BANGALORE

[Gautam Godhwani]

Thank you Sir for your response, and all other respected contributors.

AI Summary

Input tax credit protection for genuine recipients challenged where supplier engaged in fake invoicing, affecting reversal notices.
Issue concerns whether a recipient may retain input tax credit for genuine transactions when the supplier has engaged in fake invoicing or availed bogus credit upstream. Contributors stress that the evidential burden rests on the assessee in show-cause proceedings, relief at adjudication requires proof of tax payment by upstream parties or demonstration of transaction genuineness, and that fake-invoicing disputes are highly fact-specific with limited directly comparable precedents. Practical steps recommended include cross-examination of supplier parties, tracking upstream tax payments, and pursuing appellate remedies.