Calcutta High Court: ITC Cannot Be Denied to Recipient Without Due Investigation of Supplier

Calcutta High Court: ITC Cannot Be Denied to Recipient Without Due Investigation of Supplier

The Calcutta High Court has clarified that there shall not be any automatic reversal of Input Tax Credit (ITC) from buyer on non-payment of tax by the seller can be made without investigating the seller.

The bench of Chief Justice T.S. Sivagnanam and Justice Hiranmay Bhattacharyya has observed that before directing the recipient to reverse the input tax credit and remit the amount to the government, the tax authorities must investigate the actions of the supplier.

The appellant/buyer had challenged the order passed by the Assistant Commissioner of State Tax. The department reversed the input tax credit availed by the appellant under the provisions of the West Bengal Goods and Services Tax Act, 2017.

It was the case of the appellant that they had fulfilled all the conditions as stipulated under Section 16(2) and they had also paid the tax to the fourth respondent, the supplier and a valid tax invoice had been issued by the fourth respondent for installation and commission services and the appellant had made payment to the fourth respondent within the time stipulated under the provisions of the Act.

Thus, grievance of the appellant was that despite having fulfilled all the conditions as has been enumerated under Section 16(2) of the Act, the first respondent erred in reversing the credit availed and directing the appellant to deposit the tax which has already been paid to the fourth respondent at the time of availing the goods/ services.

In support of his contention, the learned Counsel for the appellant had placed reliance on the decision of the Supreme Court in Union of India vs. Bharti Airtel Ltd. and Ors.

The learned Advocate for the appellant also placed reliance on the press release dated 18 October, 2018 issued by the Central Board of Indirect Tax and Customs and also the press release dated 4 May, 2018 to substantiate their argument that the ground on which the first respondent had passed the impugned order of recovery of tax is wholly unsustainable.

The grievance of the appellant was that without conducting any inquiry on the supplier and without affecting any recovery from the supplier, the department was not justified in proceeding against the appellant.

The question that arose for consideration before the Court was whether for the default committed by the selling dealer can the purchasing dealer be made to bear the consequences of the denying the ITC and whether it is the violation of Article 14 of the Constitution.

The Court after taking note of the language used in Section 9(2)(g) of the DVAT Act where the expression ‘dealer or class of dealers’ occurring in Section 9(2)(g) of the DVAT Act held, that the provision must be interpreted as not including a purchasing dealer who has bona fide entered into purchase transaction with validly registered selling dealer who have issued tax invoices in accordance with Section 15 of the said Act where there is no mismatch of transactions in Annexures 2A and 2B and unless the expression ‘dealer or class of dealers’ in Section 9(2)(g) is read down in the said manner, the entire provision would have to be held to be violative of Article 14 of the Constitution.

The Court from the facts noted that the first respondent had not conducted any enquiry on the fourth respondent supplier more particularly when clarification had been issued where furnishing of outward details in Form GSTR 1 by a corresponding supplier and the facility to view the same in Form GSTR 2A by the recipient is in the nature of tax payer facilitation and does not impact the ability of the tax payers to avail input tax credit on self-assessment basis in consonance with the provisions of Section 16 of the Act.

The Court clarified, “that there shall not be any automatic reversal of input tax credit from buyer on non-payment of tax by seller. Further it is clarified that in case of default in payment of tax by the seller recovery shall be made from the seller however, reversal of credit from the buyer shall also be an option available with the revenue authorities to address the exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets etc.”

Therefore, the Court held that before directing the appellant to reverse the input tax credit and remit the same to the government, the first respondent ought to have taken action against the fourth respondent the selling dealer and unless and until the first respondent is able to bring out the exceptional case where there has been collusion between the appellant and the fourth respondent.

The Court remated that straight away the first respondent was not justified in directing the appellant to reverse the input tax credit availed by them.

Therefore, the bench was of the view that the demand raised on the appellant dated 20 February, 2023 was not sustainable.