Facts of the Case
- M/s. D.Y. Beathel Enterprises (Taxpayer) is a trader in raw rubber sheets. They had purchased goods from Charles and his wife Shanthi (Suppliers);
- A substantial portion of the sale consideration for the supplies was paid only through banking channels. The payments made by the taxpayer to the suppliers, includes the GST (tax) component also;
- Based on the returns filed by the suppliers, the taxpayer has availed ITC in GST returns. Later during inspection by the tax authority, it came to light that the suppliers, did not pay any tax to the Government;
- The tax authority issued notices to the taxpayer and started proceedings against the taxpayer;
- The taxpayer took a stand that all the amounts payable by them had been paid to the suppliers and therefore, those suppliers will have to be necessarily confronted during enquiry;
- The tax authority didn’t consider the taxpayers stand and passed an order without involving the suppliers, hence the taxpayer preferred this Writ.
Contention of the Taxpayer
- The taxpayer relied on the ruling of the Madras High Court made in Sri Vinayaga Agencies Vs. The Assistant Commissioner, CT Vadapalani, [2013 60 VST page 283], wherein It was held that the tax authority does not have the jurisdiction to reverse the ITC already availed by the taxpayer on the ground that the selling dealer has not paid the tax.
- The taxpayer added that the proposition laid down in the context of the previous tax regime may not be straight-away applicable to the current tax regime.
- The taxpayer submitted a press release issued by the Central Board of GST council dated 4 May 2018, where in it is mentioned that there shall not be any automatic reversal of ITC from the buyer on non-payment of tax by the suppliers.
- In case of default in payment of tax by the supplier, recovery shall be made from the supplier. However, reversal of credit from the buyer shall also be an option available with the tax authorities to address exceptional situations like missing dealer, closure of business by the supplier or the supplier not having adequate assets etc.
Contention of the Tax authority
- The tax authority pointed-out that the taxpayer had availed ITC on the premise that tax had already been remitted to the Government, by their suppliers.
- When it turned out that the suppliers had not paid any tax and the taxpayer could not furnish any proof for the same, the tax authority was entirely justified in proceeding to recover the same from the taxpayers.
Observation and ruling by the Court
- The Hon’ble High Court detailed the section 16(1) & (2) of Tamil Nadu GST Act, 2017 and noted that the taxpayer must have received the goods and the tax charged in respect of its supply, must have been actually paid to the Government either in cash or through utilization of ITC, admissible in respect of the said supply.
- Therefore, if the tax had not reached the kitty of the Government, then the liability may have to be eventually borne by one party, either the seller or the buyer. However, the tax authority has not taken any recovery action against the supplier, on the present transactions.
- The Court refused to appreciate the act of tax authority, that finalised the assessment of the supplier by excluding the subject transactions alone.
- The Court observed that where the supplier has collected tax from the purchasing dealers, the omission on the part of the supplier to remit the tax in question must have been viewed very seriously and strict action ought to have been initiated against him. The supplier ought to have been examined and should have been confronted.
- The Court noted that the tax authority took a stand that the taxpayer has not even received the goods and had availed ITC on the strength of generated invoices. According to them there was no movement of the goods. Hence, examination of suppliers has become all the more necessary and imperative. When the taxpayer insisted on this, the tax authority did not ensure their presence in the enquiry.
- The Court held that the impugned orders suffer from certain fundamental flaws and quashed it due to the non-examination of supplier in the enquiry and non-initiation of recovery action against supplier in the first place.
- The Court added that enquiry alone will have to be held afresh. In the said enquiry, the supplier will have to be examined as witnesses. Parallelly, the tax authority will also initiate recovery action against the suppliers.
BDO Comments
There were similar decisions in the pre-GST era in the cases of Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi and others [TS-314-HC-2017 (Del)-VAT; Quest Merchandising India Pvt. Ltd. Vs. Govt. of Delhi [2018(10) G.S.T.L.182 (Del.)], Larsen & Toubro vs. CCE [(2001 (127) ELT (807)], where in the following principles were quoted:
- Disallowing ITC to the purchaser due to default of selling dealer in deposing tax, as violative of Articles 14 and 19 (1)(g) of the Constitution of India under the Value Added Tax regime.
- Indexing the buyer’s right to avail ITC, on the seller’s obligation to remit tax, is prima facie invalid, as it is impossible for a buyer to judge as to which seller will evade remitting taxes to Government and avoid transactions with fraudulent sellers.
- For the default of a seller, a buyer cannot be made to bear consequence of denial of ITC. Hence the said condition, was read down to apply only to non bona fide buyers. ITC can only be denied if the buyer is not bonafide.
- Customers/purchasing dealers should not be penalised by denying ITC for the mistake of seller of goods/services.
Though the above said decisions under pre-GST regime would be a legal precedent, which can be applied under the GST regime too, the present ruling under GST law offers a fair treatment to the honest taxpayers and protects them from the initiation of tax proceedings for the default of the suppliers. It is interesting to note that the Court has made a ruling that the loss to the Government kitty shall be borne by either seller or buyer and insisted upon the requirement of enquiry against the non-complaint suppliers in the first place and recovery of defaulted tax from them. It may be possible that the ruling would be further appealed, as it has a potential revenue impact to the Government exchequer.
[Madras High Court, M/s.D.Y.Beathel Enterprises, W.P.(MD)No.2127 of 2021 dated 24 February 2021]
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