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10 May 2021
Madras High Court: Liability cannot be imposed on the recipient for
non-payment of GST by the supplier
 
The Hon’ble Madras High Court in M/S. D.Y. Beathel Enterprises versus The State Tax Officer (Data Cell), (Investigation wing) Commercial Tax Buildings, Tirunelvelihas quashed the order imposing GST liability on the recipient on account of non-payment of tax by the supplier of goods.

Facts
  • The petitioners, being traders, had purchased goods from two suppliers.
  • A substantial portion of the sale consideration was paid through banking channels. The payments made by the petitioners to the supplier included the GST component as well.
  • Based on the GST returns filed by the suppliers, the petitioners had availed input tax credit (ITC) of the GST paid by them.
  • Later, during an inspection by the GST Department (respondent), it came to light that the suppliers had not paid GST to the government. 
  • Based on the inspection, a Show Cause Notice (SCN) was issued to the petitioners and an order was passed imposing the entire liability on the petitioners. Their stand that the two suppliers will have to be necessarily confronted during the inquiry was rejected.
  • The petitioners, thus, preferred the present writ petition against the said order.


Issue

Whether the action taken by the Department of imposing the GST liability on the petitioners viz. recipients of goods, due to the failure on the part of the suppliers to discharge their GST liability, was correct? 


Petitioners’ Contentions

  • The petitioners relied on the decision of the Hon’ble Madras High Court in Sri Vinayaga Agencies vs. The Assistant Commissioner, CT Vadapalani2, wherein it was held that the authority does not have the jurisdiction to reverse the ITC already availed by the assessees on the ground that the seller had not paid the tax.
  • They also relied on the press release issued by the GST Council on 4 May 2018, wherein it had been mentioned that there shall not be any automatic reversal of ITC from the buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller. However, reversal of credit from buyer shall also be an option available with the Revenue Authorities to address exceptional situations like missing dealer, closure of business by the supplier or the supplier not having adequate assets, etc.


Judgment

  • On perusing the provisions of Section 16(1) and 16(2) of CGST Act, 2017, it is clear that the assessee must have received the goods and the tax charged in respect of its supply must have been actually paid to the government either in cash or through the utilization of ITC, admissible in respect of the said supply.
  • Therefore, if the tax had not reached the government’s kitty, then the liability may have to be eventually borne by one party, either the seller or the buyer.
  • In the case on hand, the GST Department (respondent) does not appear to have taken any recovery action against the sellers in respect of the present transactions.
  • In fact, the petitioners had brought to the notice of the Hon’ble Bench an order finalizing the seller's assessment, excluding the subject transactions alone. Expressing its discontent with the authorities’ approach, the Hon’ble Court observed, “When it has come out that the seller has collected tax from the purchasing dealers, the omission on the part of the seller to remit the tax in question must have been viewed very seriously and strict action ought to have been initiated against him.”
  • As per the Hon’ble Court, since the GST Department (respondent) had taken a stand that there was no movement of goods and ITC had been availed on the strength of invoices, the examination of the suppliers is all the more necessary and imperative.  
  • Therefore, as the impugned order suffers from certain fundamental flaws, it has to be quashed for more reasons than one, viz:
  • Non-examination of suppliers in the inquiry;
  • Non-initiation of recovery action against the suppliers in the first place.
  • Accordingly, the matters are remitted back for fresh inquiry in which the suppliers would also have to be examined as witnesses, and parallelly, the GST Department (respondent) will also initiate recovery action against them.

 


1. [2021 (3) TMI 1020 - MADRAS HIGH COURT]
2. [2013 60 VST page 283]
Our Comments

This is the first judgment in the GST law that delves into the question of recovery of tax from the recipient of supply upon default to pay tax to the government on the part of the supplier.
 
Under the erstwhile regime, in the context of ITC under VAT law, the Apex Court had affirmed the Hon’ble Delhi High Court’s view in the case of Arise India Limited3 that failure to distinguish between bona fide and non-bona fide purchasing dealer would certainly be hit by Article 14 of the Constitution. Also, as long as the purchasing dealer has taken all the steps to verify that the selling dealer has a valid registration and tax invoice has been issued in accordance with the law, he cannot be expected to keep track of whether the selling dealer has in fact deposited the tax so collected or has been lawfully adjusted.
 
In the present case, the Hon’ble High Court has acknowledged the provisions of Section 16(2) of CGST Act, 2017, which specifically state that one of the criteria for the recipient to avail ITC is that the supplier has actually paid the tax charged to the government. However, given the facts of the present case, the Hon’ble Court held that the Department could not demand GST from the recipient without first initiating recovery action against the supplier for his default.
 
While this judgment can provide some relief to the taxpayers facing similar Departmental action concerning ITC availed based on bona fide inward supplies, the bigger question persists viz., how can a recipient of goods/services ensure that the supplier has actually paid the applicable GST? The aforesaid condition was made a part of the GST law with the understanding that the ITC of the recipient will be intrinsically linked to the discharge of tax by the supplier through GSTR-1, GSTR-2 and GSTR-3 return filing mechanism. However, due to the suspension of GSTR-2 and GSTR-3 and the introduction of GSTR-3B, the recipients have no mechanism to confirm if their suppliers are discharging the correct GST.
 
While the GST portal has been ramped up over the past few months to show the GSTR-3B return filing status of the supplier through GSTR-2A/2B, it is not full-proof evidence of whether the supplier has indeed paid GST on the supplies in question. The expectation that taxpayers should monitor the actual payment of GST by each of their vendors is an onerous and quite impossible task. In times to come, it would be a subject where bona fide taxpayers (recipient of goods or service) could be dragged into litigation to protect their ITC.
 
Considering the above, businesses would be well advised to look into the possibility of acquiring an undertaking/indemnity from high-risk vendors (i.e., vendors filing GST returns irregularly) to ensure their interests are protected in case of any future demand from the GST authorities.
 
3. [TS-2-SC-2018-VAT]
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