Purchaser Not Liable for Supplier’s Failure to Deposit GST: Tripura HC allows ITC, should Apply Reads Down Principle [Read Order]

A purchaser cannot be denied Input Tax Credit ( ITC ) merely because the supplier failed to deposit GST ( Goods and Services Tax ) with the Government, ruled the Tripura High Court. It has read down Section 16(2)(c) of the CGST Act to protect bona fide buyers.

M/s Malaya Rub-Tech Industries, a partnership firm who is engaged in rubber manufacturing and registered under GST, challenged an order denying ITC of about ₹22 lakh on purchases made from a supplier.

The GST department invoked Section 16(2)(c) on the ground that although the purchaser paid GST to the supplier, the supplier failed to remit the tax to the Government. Therefore the buyer’s ITC claim was inadmissible.

According to the petitioner’s side, it had made genuine purchases, paid the full value including GST to the supplier, and utilized the inputs in manufacture of finished goods.

It also argued that there is no statutory mechanism under GST by which a purchaser can compel a supplier to deposit the collected tax with the Government. Thus, the denial of ITC for the supplier’s default would unjustly penalize a bona fide buyer.

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The department had issued proceedings under Section 73 (non-fraud cases), not Section 74 (fraud/suppression), indicating absence of any allegation of collusion or fraudulent conduct by the purchaser. The same were also challenged as vague and contradictory.

The Division Bench depending on its judgment in Sahil Enterprises v. Union of India, held that Section 16(2)(c) which conditions ITC on actual tax payment by the supplier cannot be applied mechanically to deny credit in every case of supplier default.

The Bench, observing the Sahil Enterprises case and observed that “It therefore upheld the constitutional validity of Section 16(2)(c) of the Act, but held that the said provision cannot be interpreted to deny ITC to purchasers in a bona fide transaction, and it should be read down and applied only where the transaction is found to be not bona fide, or is a collusive transaction or fraudulent transaction to defraud the revenue.”

Justice Biswajit Palit and Chief Justice Ramchandra Rao found that the transactions between the petitioner and the supplier were genuine. It accordingly set aside the demand order and directed the GST authorities to allow ITC to the petitioner to the extent claimed.

The writ petition was allowed, deciding that the failure of the supplier to remit tax to the government cannot penalise the genuine purchaser who paid the tax.

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