GST Authorities Must First Proceed against Suppliers Before Targeting ITC Recipients: Kerala HC Quashes GST Notice [Read Order]

The Kerala High Court has quashed a show cause notice issued to a taxpayer regarding input tax credit, establishing that tax authorities must first initiate proceedings against suppliers before targeting recipients of input tax credit under the CGST Act.

The bench held that “GST recovery proceedings can be initiated against the supplier, only if the proceedings initiated against the purchaser did not materialise”

The petition was filed by M/S K.V. Joshy & C.K. Paul, a firm from Thrissur district, challenging show cause notice issued under Section 73 of the CGST Act. The notice demanded that the petitioner explain why their input tax credit claimed for assessment year 2019-2020 should not be disallowed and recovered, along with a penalty.

The petitioner had purchased goods from M/S N.C. Associates and M/S Sundha Marketing (respondents 2 and 3) and claimed input tax credit based on proper tax invoices and e-way bills. However, these suppliers had failed to furnish details of supplies to the petitioner and had not paid the tax collected to the government.

The core legal issue was whether tax authorities could initiate proceedings against the recipient of input tax credit without first initiating proceedings against the suppliers who had failed to remit the tax to the government. The petitioner argued that no proceedings had been initiated against the suppliers as mandated under Section 42 of the CGST Act, and that the notice was also issued beyond the limitation period of three years.

The court, comprising Justice Ziyad Rahman A.A., relied on several precedents including the Suncraft Energy case, which was upheld by the Supreme Court. The court noted that Section 42 of the CGST Act requires authorities to first issue notice to both parties when a discrepancy is found, and only if the supplier fails to rectify the discrepancy can liability be imposed on the recipient.

The court also referenced similar principles established in Delhi VAT Act cases that were upheld by the Supreme Court.

The court observed that tax authorities had not initiated any proceedings against the suppliers before issuing the notice to the petitioner, and there was no evidence of collusion between the petitioner and suppliers. The court characterized this as a failure to follow the statutory procedure under Section 42 of the CGST Act.

Consequently, finding that the proceedings against the petitioner were contrary to established legal precedent and statutory requirements, the High Court quashed the show cause notice. The court clarified that its decision would not preclude authorities from initiating proper proceedings against the suppliers (respondents 2 and 3).

The court did not find it necessary to examine the limitation issue since the notice was already unsustainable on procedural grounds.

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