Answering Some burning Questions in GST with analysis of latest Judgements ( Part -1)

[Brijesh Thakar]

Introduction

After four years of implementation of GST, many questions of law are yet unanswered. As Supreme Court of India has noted, “ Laws must evolve with the times if societies are to progress”. There are many issues in GST which either requires judicial intervention or some concrete action from Parliament. In this article, I have selected few such issues on which some interesting judgements are given by Supreme Court and various high courts. As the list is long, this may need to be analysed in more than one part. The issues that I felt appropriate to include are as under-

1. Denial of input tax credit to recipient  and recovery from him if supplier fails to pay tax to Government. ( section 16)
2. Some issues on blocked credit under section 17(5).
3. Is it appropriate to deny renovation of cancellation of registration saying that the taxpayer has wrongly availed ITC under section 30?
4. Can powers given under Rule 86A be exercised in all situations and electronic credit ledger of a taxpayer be blocked for a period exceeding one year?
5. Is it compulsory to provide personal hearing to the taxpayer if adverse order is to be passed?
6. Is there any limitation on exercise of powers of provisional attachment of assets under section 83?
7. If tax is wrongly paid and refund for the same is applied, will time limit given under section 54 be applicable?
8. If taxpayer has made pre deposit under section 107(6), can recovery proceedings be continued against him?
9. In which situations proceedings under section 129 be initiated and in which cases we can say that the use of section 129 is not appropriate.
10. Can assessment of non filers of return be made on any basis deem appropriate by GST officer under section 62?

Let us discuss these issues one by one with the help of latest judgements

1. Denial of Input Tax Credit to buyer in case supplier fails to pay tax to government.

Since implementation of GST, this issue has been a matter of debate. If there is a fault of supplier, how can an innocent recipient be punished? The argument on the part of the recipient is that he has received goods/services, has paid consideration for the same with tax to supplier, has filed all the returns and supplier fails to pay tax to government then what is the fault of the recipient? Argument from the Government, on the other hand is that if government exchequer has not received the amount of tax, how can it be given as input tax credit? if something is not received then how can it be given?

Let us discuss, legal provisions and judicial view on the matter. Conditions for getting  Input tax credit is governed by section 16(2). This section is reproduced below-

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,––

(a) 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;

(b) he has received the goods or services or both.

Explanation.-For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(c) subject to the provisions of section 41, 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

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

Readers can observe that section 16(2)( C ) provides a very stringent condition that the tax charged in respect of the supply has been actually paid to the government. Hence, this section is clear that if tax has not been paid to government, recipient is not eligible for ITC.

 There can also be cases where tax has actually been paid to government but the supplier has wrongly entered details of supplies as B2C instead of B2B or GST number of the recipient is wrongly entered and hence the same is not reflected in GSTR-2A/2B of the recipient. Can recipient take ITC in such situation saying that the tax has already been paid to Government and condition of section 16(2)( C ) is fulfilled? As per opinion of author, ITC cannot be denied in this situation as all the conditions of section 16(2) are fulfilled. The restriction given under Rule 36(4) cannot override provisions of section 16(2).

Hence, as per opinion of the author, the requirement of invoice details being reflected in GSTR 2A/2B and conditions imposed through Rule 36(4) are ultra vires to the main section 16 and cannot stand in a judicial test. However, an amendment is made to section 16(2) by section 100 of  Finance Act, 2021 by which a new clause (aa) has been added to section 16(2). Though this clause is not yet notified, it is relevant to discuss effect of the new clause. This clause is reproduced below-

“aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”.

Now by insertion of additional condition of mentioning of the invoice as per section 37( in GSTR-1) and communication thereof to the recipient, government has made compliance with the condition of reflection of invoice in GSTR-2A/2B a mandatory condition for taking ITC in the law itself. 

The whole debate of delegated legislation cannot override the parent legislation has been put to rest by this amendment. ( Though the clause is yet to be notified). Further, by this amendment, Government has made its stand clear that it does not want to give benefit of ITC to any person if the matching is failed even if he is innocent and has paid tax to his supplier and have received goods and/or services.

Discussion on Judicial view on the matter

Here the main question to answer by the court is whether it can be permitted to deny ITC to recipient for the fault of supplier? The only way in which we can get answer “No” to this question is by way of challenging constitutional validity of section 16(2) (C).  Challenging constitutional validity of a taxation statute is a difficult task but not an impossible one. As I have mentioned in some of my earlier articles, to challenge constitutional validity of a law, two things shall be looked into by the court.

1. Whether parliament is competent to pass the law?
2. Is the law violates any of the fundamental rights guaranteed by part III of the constitution?

This has been done in number of writs filed at various high courts. However, final ruling on the same is still awaited.  In case of 2021 (5) TMI 420 - DELHI HIGH COURT, FEDERATION OF INDIAN SMALL SCALE BATTERY ASSOCIATIONS (REGD.) AND ANR. VERSUS UNION OF INDIA, Constitutional vires of Section 16(2)(c) of CGST Act as also Rule 36(4) and 86A(1)(b) of the CGST Rules, 2017 are challenged. Here Delhi High Court has observed that “Petitioner informed that there are other petitions pending adjudication before this Court, which raise issues, that are similar to the ones, that subsist in the instant writ petition. Issue Notice.”

As far as the vires of Rule 36(4) is concerned, I am of the view that the same is surely ultra vires to main law. Though the answer to main question is still awaited, there are many observations of court which are relevant for our discussion.

In case of M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI. (2021 (3) TMI 1020 - MADRAS HIGH COURT), Court has held as under-

“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 utilization of input tax credit, admissible in respect of the said supply - if the tax had not reached the kitty of the Government, then the liability may have to be eventually borne by one party, either the seller or the buyer. In the case on hand, the respondent does not appear to have taken any recovery action against the seller, on the present transactions.

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.

That apart in the enquiry in question, the Person who supplied / sold the goods, ought to have been examined. They should have been confronted. - This is all the more necessary, because the respondent has taken a stand that the petitioners have not even received the goods and had availed input tax credits on the strength of generated invoices.

The matters are remitted back to the file of the respondent - petition allowed by way of remand.”

In the above case, order of denial of ITC to buyer was quashed for two reasons as observed by Madras High Court-

1. Non- examination of supplier in the enquiry.
2. Non-initiation of recovery from the supplier.

Hence an important ratio we can draw from this judgement is that once GST authority questions the genuineness of a transaction and wants to deny ITC to the recipient, first it has to examine the supplier and recovery proceedings against the supplier must have been initiated. It is wrong to come directly to recipient for recovery of tax by way of denial of ITC by invoking provisions of section 16 (2) ( c ).

In another case of M/S. BHARAT ALUMINIUM COMPANY LIMITED VERSUS UNION OF INDIA AND OTHERS ( 2021 (6) TMI 1052 - CHHATTISGARH HIGH COURT), court has given interim relief to taxpayer and has noted as under-

“Learned counsel for the petitioner would submit that the notice was served on petitioner vide Annexure P-1 dated 01.07.202020 wherein an Input Tax Credit as claimed by the petitioner was 95464.59 lakhs and 2A GST, ITC Form was of 86606.67 in lakhs, which if the seller declares. He would submit that the difference of tax 8857.91 lakhs has been claimed along-with interest. He would submit that as per the Press Release of GST Council dated 04th May 2018, there shall not be any automatic reversal of Input Tax Credit of buyer on nonpayment of tax by the seller. It is submitted that in case the seller has not paid the tax, a recovery has to be made from the seller and here in this case, the petitioner has come out with the purchases made, but it did not tally/match with 2A ITC shown by the seller meaning thereby the seller may not have filed return to remove the same. When the physical verification was offered to be made by petitioner it was not accepted. It is stated that for the recovery of like nature from the buyer, the action can only be available in the exceptional circumstances. He relies on a proposition laid down by Madras High Court in M/s. D.Y. Beathel Enterprises Vs. State Tax Officer [W.P.(MD) No.2127 of 2021] and would submit that in case, it has been held if the default is made by non-payment of tax by the seller, the recovery shall be made from the seller and only in exceptional circumstances, it can be from the recipient, therefore, the Input Tax Credit which was claimed by the petitioner cannot be denied for the reason that the seller has not uploaded their invoices on time.”

Though this is only an interim relief and not a final decision of court, it gives us idea of thought process of the judiciary.

In addition to these recent judgements on GST, it is also relevant to discuss Delhi High Court Judgement in case of ON QUEST MERCHANDISING INDIA PVT. LTD., SUVASINI CHARITABLE TRUST, ARISE INDIA LIMITED, VINAYAK TREXIM, K.R. ANAND, APARICI CERAMICA, ARUN JAIN (HUF) , DAMSON TECHNOLOGIES PVT. LTD., SOLVOCHEM, M/S. MEENU TRADING CO., & MAHAN POLYMERS VERSUS GOVERNMENT OF NCT OF DELHI & ORS. & COMMISSIONER OF TRADE & TAXES, DELHI AND ORS. [2017 (10) TMI 1020 - DELHI HIGH COURT] for the same issue in case of Delhi VAT ACT. Section 9 (2) (g) of the Delhi VAT Act was also denying ITC to purchaser if the seller has not deposited tax to Government. In this case, there was a challenge to constitutional validity of section 9 (2)(g) of Delhi VAT Act. It was prayed that Court should either strike down the provision treating it as violative of Article 14 of the Constitution or give it an interpretation that saves an innocent buyer from denial of ITC. It was argued in this case that such provisions do not make difference between honest tax payer and a tax evader. Hence, it is irrational and arbitrary and liable to be struck down.

Though the Delhi High Court did not strike down the provision but it used “Doctrine of Reading Down” to save an innocent  buyer. Doctrine of reading down is a principle of interpretation of law used by courts when there are two interpretations possible and giving it one selected interpretation can save the provision from being struck down. Delhi High court held that the expression “ Dealer or class of Dealers” occurring in section 9 (2) (g) of the Delhi VAT Act should be interpreted as not including a purchasing dealer who has bona file entered into purchase transactions with validly registered selling dealer.

This decision of delhi high court was challenged before Supreme Court of India and honourable Supreme Court had dismissed this petition filed by Commissioner of Trade & Taxes, Delhi.

It may be useful for readers to understand what is Doctrine of Reading Down and where it is used. In DELHI TRANSPORT CORPN. DTC VERSUS DTC. MAZDOOR CONGRESS - 1990 (9) TMI 334 - SUPREME COURT, a Constitution Bench of the Supreme Court explained in which cases the doctrine of reading down of statutes be used to save their constitutionality. It Held as under-

  “The doctrine of reading down or of recasting the statute can be applied in limited situations. It is essentially used, firstly, for saving a statute from being struck down on account of its unconstitutionality. It is an extension of the principle that when two interpretations are possible--one rendering it constitutional and the other making it unconstitutional, the former should be preferred. The unconstitutionality may spring from either the incompetence of the legislature to enact the statute or from its violation of any of the provisions of the Constitution. The second situation which summons its aid is where the provisions of the statute are vague and ambiguous and it is possible to gather the intention of the legislature from the object of the statute, the context in which the provision occurs and the purpose for which it is made. However, when the provision is cast in a definite and unambiguous language and its intention is clear, it is not permissible either to mend or bend it even if such recasting is in accord with good reason and conscience. In such circumstances, it is not possible for the Court to remake the statute. Its only duty is to strike it down and leave it to the legislature if it so desires, to amend it. If the remaking of the statute by the courts is to lead to its distortion that course is to be scrupulously avoided.

The doctrine can never be called into play where the statute requires extensive additions and deletions.The Courts, though, have no power to amend the law by process of interpretation, but do have power to mend it so as to be in conformity with the intendment of the legislature. Doctrine of reading down is one of the principles of interpretation of statute in that process. But when the offending language used by the legislature is clear, precise and unambiguous, violating the relevant provisions in the constitution, resort cannot be had to the doctrine of reading down to blow life into the void law to save it from unconstitutionality or to confer jurisdiction on the legislature.”

Readers can understand from above noting of constitutional bench of honourable Supreme Court that the doctrine of Reading Down is used by courts to save a provision from being struck down where there is a serious challenge to its constitutionality. Court will prefer giving it such an interpretation that it cannot be interpreted as being violative of constitution. However, where the language of a provision is absolutely clear and there is no room of different interpretation, then court will have no option to give it a different interpretation. In this situation if the clear interpretation of the provision is against the vires of the constitution then court will have only one option left, which is to strike it down.

Hence, a question may also arise as to whether same doctrine can be used by courts to exclude “bonafide purchaser” from the phrase “ registered person” occurring in section 16(2) of the CGST Act by using doctrine of reading down? As per opinion of the author, this possibility cannot be entirely ruled out.

Conclusion and author’s opinion

As per opinion of the author, the provision of section 16(2) ( c ), imposes a condition which is unreasonable if not arbitrary. It is excessive to expect from a recipient that he can exercise any control on action of supplier. The doctrine of “impossibility of performance” can also be applied in this case. It can be argued in court of law that the condition imposed by section 16(2)( C ) is impossible to perform as recipient cannot control the action of the Supplier. It can also be argued that the provision does not differentiate between an  honest taxpayer and tax evaders, making the provision violative of Article 14 and 19(1)(g) of the constitution.

Till the Judiciary comments anything on constitutional validity of section 16(2) ( C ), it is compulsory for taxpayers to follow the same. However, Madras High Court judgement in case of M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI. (2021 (3) TMI 1020) is useful for taxpayers which says that the GST authority should go after the supplier first and only then after it can come to the recipient for recovery of the tax amount.

Analysis of some of the other questions with latest judgements shall be taken  in Part-2….