Held by Hon’ble Delhi High Court
In the matter of
M/S BALAJI EXIM Vs COMMISSIONER, CGST AND ORS (W.P.(C) 10407/2022)
The Petitioner was engaged in export of goods and it filed a refund application for refund of Input IGST & Cess. However, the department rejected the same on the ground that one of the suppliers of the petitioner was alleged for taking fake ITC. The refund was rejected despite the fact that the purchase made by the petitioner was appearing on AIO System, corresponding payments are made and export invoices are also appearing on AIO System.
The Hon’ble High Court held that purchasing dealers can’t be expected to ensure that the supplying dealer is depositing the tax collected to the government. It places an onerous burden on a bona fide purchasing dealer. ITC can’t be denied to the bona fide purchasing dealer. Therefore, The petitioner is entitled to claim refund on account of export.
However, if the respondents are able to establish the allegations regarding the non-supply of any goods by the supplier to the petitioner then it would be open for the respondents to initiate such action as may be warranted in accordance with law.
1. Brief Facts of the case
- M/s Bharat Exim (“The Petitioner”) filed refund applications in Form GST RFD-01 seeking refund of unutilized Input Tax Credit, consisting of IGST and Cess, on account of export of goods.
- GST Department issued acknowledgment in form GST RFD-02.
- The petitioner’s applications were not processed as the supplier from whom the petitioner had purchased the goods had allegedly received fake invoices from its suppliers.
- Search was also conducted at the premises of the petitioner by the Anti Evasion Branch and Summons was also issued to the petitioner to furnish certain documents.
- Meanwhile, The petitioner requested the respondent for early disposal of refund application. However, the respondent ignored the same.
- In the meantime, the supplier of the petitioner alleged that it has issued fake invoices to the petitioner and its ITC was blocked. Such supplier moved the High Court of Calcutta by filing a writ petition seeking unblocking of its Electronic Credit Ledger (hereafter ‘ECL’).
- Department issued a Show cause notice to the petitioner proposing to reject refund application on the ground that on the basis of information sought from Custom station that its supplier M/s Shruti Exports was investigated by DGGI and it has availed a huge amount of fake ITC.
- The petitioner responded to the Show Cause Notice and also submitted additional documents in support of its refund claim.
- The petitioner submitted that he was not concerned with any allegation against its supplier M/s Shruti Exports. Purchase made by the petitioner were genuine and against genuine invoices.
- Further, ITC of M/s Shruti Exports was unblocked on order of the Calcutta High Court.
- The respondent rejected the refund application on the ground the petitioner has procured from the supplier against whom an investigation has been intiated. Accordingly, it appeared that they are to be part of a supply chain involving fake Input Tax Credit
- Refund was rejected despite the fact that export invoices were appearing on Department All-In-One (AIO) system.
2. Appeal to First Appellate Authority
- Aggrieved by the order of Adjudicating authority, the petitioner filed an appeal against such order to the appellate authority.
- The Appellate Authority held that the petitioner was in possession of the tax invoices. However, it could not be said that the petitioner had received the goods.
- Therefore, one of the conditions of Section 16(2) of CGST Act that the taxpayer has received the goods or services or both – was not satisfied.
- The Appellate Authority concluded that the present case was one of “goodless supply on the strength of fake invoices”
3. Contention of the Petitioner before Hon’ble Delhi High Court
Aggrieved by the order of First appellate authority, the petitioner filed an appeal before Hon’ble Delhi High Court wherein The petitioner contended:
- Refund application of the petitioner was rejected on mere apprehension that its supplier had issued fake invoices.
- There is no conclusive finding that the invoices issued by M/s Shruti Exports to the petitioner are fake invoices.
- Further, the invoices issued by M/s Shruti Exports are reflected in the AIO System and the issuance of invoice by M/s Shruti Exports is not in question.
- Further, M/s Shruti Exports is a valid dealer registered under GST and the petitioner has made payment against invoices issued by such supplier including IGST and Cess.
- Further, there is no allegation that the goods in question were not exported overseas.
- Therefore, the petitioner has exported the goods and also paid for the same including IGST & Cess.
- The respondent also confirmed that the supplier, M/s Shruti Exports, is an existing dealer at the registered address. Such supplier availed ITC from the 6 taxpayers against whom cases were booked of fake invoices.
- Only one of such supplier supplies items which attracts Cess, i.e., which is dealt by the Petitioner. On the basis of facts presented, fake ITC availed by M/s Shruti Exports could not possibly cover supplies made to the petitioner.
- Therefore, Refund application of the petitioner was rejected merely on suspicion without any cogent material.
- There is no dispute on following points:
- Goods, for which refund is claimed,have been exported;
- the invoices in respect of which the petitioner claims the ITC were raised by a registered dealer; and,
- There is no allegation that the petitioner has not paid the invoices, which include taxes.
- Accordingly, application for refund must not be rejected.
4. Analysis by Hon’ble Delhi High Court
Hon’ble High Court analyzed following points:
- There is merit in the petitioner’s contention that it is not required to examine the affairs of its supplying dealers.
- Refund application of the petitioner can’t be rejected unless it is established that the petitioner has not received the goods or paid for them. In the present case, there is little material to support any such allegations.
- Hon’ble High Court relied on the precedence of “On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi & Ors.: 2017 SCC OnLine Del 11286” wherein following points are decided:
- There is a failure by the legislature to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not.
- Therefore, ITC should be restricted to only those selling dealers who had failed to deposit the tax collected by them.
- Bonafide purchasing dealers must not be punished as they cannot be expected to do the impossible, i.e, to anticipate the selling dealer who will not deposit with the Government the tax collected by him from those purchasing dealers and therefore avoid transacting with such selling dealers
- It is trite that a law that is not capable of honest compliance will fail in achieving its objective.
- If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution.
- Section 9(2)(g) of the DVAT Act requires the purchasing dealer to somehow ensure that the selling dealer does in fact deposit the tax collected from the purchasing dealer and if the selling dealer fails to do so, undergo the risk of being denied the ITC.
- Therefore, Section 9(2)(g) of the DVAT Act places an onerous burden on a bonafide purchasing dealer
5. Decision of Hon’ble High Court
The Hon’ble Delhi High Court decided the following:
- In view of the above, the petitioner is entitled to a refund of the ITC on goods that have been exported by it.
- The respondents are directed to forthwith process the petitioner’s applications for refund of the ITC including Cess.
- However, if the respondents are able to find material to establish the allegations regarding non-supply of any goods by M/s Shruti Exports to the petitioner, it would be open for the respondents to initiate such action as may be warranted in accordance with law.