Bona Fide Purchasers Cannot Be Penalized for Seller’s Non-Compliance: Karnataka HC Sets Aside Rs. 78.7 Lakh GST Demand [Read Order]

The Karnataka High Court has delivered a significant judgment by setting aside the GST demand of Rs. 78.7 lakh reaffirming the legal principle that bona fide purchasers cannot be penalized for the non-compliance of their sellers. The Court ruled that if a purchasing dealer has entered into genuine transactions with a registered supplier and has fulfilled all statutory requirements, denial of input tax credit (ITC) solely because the seller failed to deposit the collected tax is unjustified and contrary to law.

The Division Bench, comprising Justice S.R. Krishna Kumar, examined the facts of the case where the petitioner, M/s Metal Syndicate,a proprietorship firm, faced a demand for GST, interest, and penalties based on allegations of availing ineligible ITC. This demand was rooted in the assertion that the petitioner had procured goods and availed ITC without the supplier paying the appropriate GST.

The petitioner argued that during the relevant period, all GST payments were made through proper banking channels, and the goods were received as per invoices. Moreover, despite complying with legal provisions, the authorities issued the demand without providing an effective opportunity for hearing, and the proceedings were time-barred.

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The Court referred to the earlier decision of the Gauhati High Court in the case of National Plasto Moulding, which held that in cases where a bona fide purchaser transacts with a registered and compliant supplier, the Department cannot penalize the purchaser for the supplier’s failure to deposit taxes.

The Court further noted that the law as interpreted by the Delhi High Court in On Quest Merchandising India Pvt. Ltd. supports the view that the Department’s remedy lies against the defaulting supplier, not the innocent purchaser. The judgment clarified that denial of ITC on the ground of supplier default is unreasonable and violates principles of natural justice and statutoryprovisions.

Furthermore, the Court underscored that the Department’s reliance on the classification of activities as “Support Services” under SAC 9985 was misplaced, as the primary and actual nature of the petitioner’s activities was providing health care services, which are exempt from GST under Notification No. 12/2017. Circulars issued by the CBIC also reaffirmed that health care services provided by recognised establishments and professionals are exempt, and such exemptions cannot be circumvented by technical classification or revenue-sharing arrangements.

Consequently, the Court held that the impugned demand was illegal, arbitrary, and issued without jurisdiction. It set aside the Order-in-Original and Order-in-Appeal, directing authorities to proceed strictly against the defaulting supplier if applicable, but not against the bona fide purchaser.

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