One of the boiling issues that has arisen in the GST regime is whether credit can be denied in the hands of the buyer of goods and services for the fault of the supplier for non-payment of taxes even after collecting the tax amount from the buyer.
Section 16 of CGST Act is one of the most important sections for the Input Tax Credit (ITC); it provides the ITC eligibility and conditions for smooth sailing of business. It is the first test for moving further in the direction of GST compliances.
As per Section 16(2)(c) of the CGST Act, provides that tax has been paid to the Government as a condition for claiming ITC by the buyer. ITC can be denied where the Supplier has not paid the tax to the Government.
Recently, the Madras High Court in the case of M/s. D. Y. Beathel Enterprises v. the State Tax Officer wherein the buyer has claimed the ITC depending on the return filed by the supplier, however, the supplier failed to pay the tax to the government even though the supplier has collected the taxes from the buyer. The department initiated the investigation against the buyer and told the buyer that the ITC is not available as tax has not been deposited neither by the supplier nor by the buyer/ recipient. The department denied the ITC in the light of Section 16(2)(c) of the CGST Act. The Department further alleged that there was a lack of movement of goods so the buyer is not eligible to claim the ITC.
The Department passed the order demanding entire tax liability from the Buyer of Goods and Services.
The single judge bench of Justice G.R. Swamynathan quashed the order demanding entire tax liability from the buyer and remanded back to the authority for fresh adjudication.
Firstly, the Court asked that if the supplier had not paid the tax then has the department initiated any investigation or inquiry against the supplier.
Secondly, if the supplier had not paid the tax then has the department initiated any recovery proceedings against the supplier.
The Court said that since there was no examination and no recovery proceedings initiated against the supplier, hence the order demanding entire tax liability from the buyer is in contravention of the principle of natural justice.
In the case of Bharti Telemedia Ltd. Vs. Union Of India & Ors. the Delhi High Court while issuing the notices to the Centre ruled that Input Tax credit (GST) can not be denied to the recipient for default on part of the supplier.
The Madras High Court in the case of M/s. Shri Ranganathar Valves Private Limited v. Assistant Commissioner (CT), (FAC), Velandipalayam Assessment Circle, Coimbatore has held that Input Tax Credit restriction in the hands of buyer, on the ground of tax collected but remaining unpaid to the Government by the seller “cannot be sustained” and “requires re-consideration” while disposing the writ in respect of restriction of the amount of ITC claimed.
During the VAT regime various High Courts and Apex courts have held that if the seller has not paid the tax, credit cannot be denied to the buyer especially in cases where the transaction is genuine i.e. without intention to deceive.
The Delhi High Court in the case of Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi and others held that Section 9(2)(g) of Delhi VAT Act to the extent it disallowed Input tax credit (ITC) to purchaser due to default of selling dealer in depositing tax, as violative of Articles 14 and 19(1)(g) of the Constitution of India.
Therefore, it may be concluded that the department can not demand any kind of tax liability from the buyer of goods and service for fault of the supplier unless a proper investigation and recovery proceedings is initiated against the defaulting supplier.
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