If Supplier defaults in payment of taxes then primary liability lies with supplier and ITC is not reversible by the recipient

Held by Hon’ble Madras High Court in the matter of 

M/s. D. Y. Beathel Enterprises v. The State Tax Officer (W.P.(MD)No.2127 of 2021 dated 24 February 2021)

The petitioner purchased the goods from one of the supplier and made the entire payment of sales consideration through the banking channel. The petitioner availed ITC on such purchase on the basis of return filed by the supplier. The supplier and the petitioner fall under the same jurisdiction. During investigation, it was found that the supplier did not pay such taxes to the government. The respondent did not include the supplier in the enquiry and passed an order against the petitioner creating entire liability for payment of taxes. 

The petitioner challenged the impugned order before Hon’ble High Court contending that as per Press release dated 04.05.2018, ITC is not reversible by the recipient in case of non-payment of taxes by the supplier. The petitioner also added that he wanted to confront the supplier during enquiry. However, the respondent passed the order without involving the supplier. The respondent argued that ITC was claimed on generated invoice, i.e., without actual movement of goods.

Hon’ble High Court held that if tax payment is not made then liability should be borne by either of the party, i.e., the supplier or the recipient. In the given case, the supplier has collected the tax and did not pay the same to the government and this is a serious offence and strict action should be taken against him. 

Impugned order passed without investigating the supplier and therefore, it has fundamental flaws. Therefore, order is liable to he set aside and the respondent should carry out fresh enquiry.

1. Facts of the case

1. M/s. D. Y. Beathel Enterprises (“The petitioner”) is registered under GST and is engaged in trading of Raw Rubber Sheets. 
2. The petitioner purchased goods from one of the suppliers, who is also registered under GST and a substantial portion of the sales consideration was paid by the petitioner to the supplier through the banking channel including GST component.
3. The petitioner availed ITC paid on such purchases on the basis of return filed by the supplier.
4. On the other hand, during investigation proceedings, the respondent found that such suppliers did not pay taxes to the government.
5. The Respondent has issued show cause notice to the petitioner on the grounds that the tax amount has not been received in the account of Government.
6. However, the respondent issued the impugned order and levied entire liability on the petitioner. 
7. The petitioner filed petitioner before Hon’ble High Court challenging validity of inpugned order.

2. Extraction of the relevant section

Relevant extract of Section 16 of CGST Act 2017 (Eligibility and conditions for taking input tax credit) is reiterated below:

“ Section 16: Eligibility and conditions for taking input tax credit

…

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

1. he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
2. He has received the goods or services or both.
3. subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply and
4. he has furnished the return under section 39:

…………”

3. Submission of the petitioner

The petitioner contented following points:

1. The petitioner has paid a substantial amount of the sales consideration to the supplier including tax component.
2. The petitioner also placed reliance on order of Hon’ble Madras High Court in the matter of Sri Vinayaga Agencies Vs. The Assistant Commissioner (2013 60 VST page 283) where Hon’ble court held that authority cannot reverse the ITC already availed by the buyer on the ground where the seller has not paid the tax.
3. The petitioner also mentioned that as per press release dated 4th May, 2018 about “Return Simplification”:
   1. There shall not be automatic reversal of ITC from the buyer in case of non-payment of taxes by the supplier.
   2. In case of non-payment of taxes, recovery shall be made from the supplier.
   3. However, in exceptional circumstances buyers may be asked to reverse ITC such as missing dealer, closure of business of supplier or supplier is not having adequate assets etc.
4. The petitioner contended since entire sales consideration has been paid to the supplier therefore, he would like to confront the supplier during enquiry. However, the respondent passed the impugned order without involving supplier.

4. Contention of the Respondent

In defence, the respondent argued that:

1. The petitioner has availed ITC on grounds that the corresponding supplier has paid tax to the government. However, there was no tax payment made by the supplier.
2. Therefore, the respondent was correct to recover such tax amount from the petitioner.
3. ITC so availed by the petitioner should be reversed.
4. The petitioner has not actually received the goods and ITC has been availed on the basis of generated invoice, i.e., bogus invoices.

5. Analysis made by Hon’ble Madras High Court 

After considering submissions made by both parties, Hon’ble Madras High Court made following analysis:

1. As per section 16 of CGST Act 2017,  for availing ITC, the assessee must have received the goods and the tax charged on such goods must have been actually paid to the government either in cash or through Input tax Credit Available.
2. If the tax has not been paid to the Government then the liability will be borne by either of the party, i.e, the supplier or the recipient.
3. In the given case, the respondent did not take any action against the seller who has defaulted in payment of taxes and this approach of the respondent is not appreciable.
4. When the supplier has collected the tax from the purchasing dealer then omission on the part of supplier in deposition of GST liability should be a serious offence and strict action should be taken against him.
5. Further, since the respondent has submitted that invoice was generated without any invoice, therefore, examination of the supplier becomes imperative. Whereas, the respondents did not include the supplier in the inquiry.
6. Therefore, the impugned order was having fundamental flaws and the same is liable to be quashed on grounds of non-examination of supplier and non-initiation of recovery against the supplier.

6. Decision

Hon’ble High Court quashed the impugned order on the ground of non-examination of the supplier and referred the matter back to the respondent for fresh enquiry.