It is incorrect to deny ITC to recipient/buyer for genuine purchase , for default in compliance to show sales in GSTR 1 by supplier
In the case of M/s McLeod Russel India Limited vs. The Union of India & Ors., the Hon’ble Gauhati High Court addressed the constitutional validity of Section 16(2)(aa) of the CGST Act, 2017. This provision makes a recipient’s eligibility for Input Tax Credit (ITC) conditional upon the supplier furnishing the details of the relevant invoice in their GSTR-1.
The High Court, while acknowledging the provision’s objective to curb fraudulent ITC claims, declined to declare it unconstitutional. However, recognizing the “iniquitous” and “onerous burden” placed on a bona fide purchaser who has no control over the supplier’s compliance, the Court read down the provision. The Court ruled that before denying ITC to a recipient due to the supplier’s default, the tax authorities must provide the recipient with an opportunity to prove the genuineness of the transaction. The recipient can establish their bona fides by producing documentary evidence such as tax invoices and proof of payment.
Detailed Explanation
Here is a detailed breakdown of the judgment for your clients:
1. Case Background and Core Issue
Case: M/s McLeod Russel India Limited vs. The Union of India & Ors.
Court: The Gauhati High Court
Issue: The petitioner challenged the constitutional validity of Section 16(2)(aa) of the CGST/AGST Act, 2017. This section denies ITC to a recipient if the supplier has not furnished the details of the corresponding invoice in their statement of outward supplies (FORM GSTR-1), which is then communicated to the recipient (in FORM GSTR-2A/2B).
2. Petitioner’s (Taxpayer’s) Key Arguments
Arbitrary Condition: The condition is arbitrary as the recipient has no control over the supplier’s actions regarding the filing of their GSTR-1.
Impossible Burden: It imposes an impossible burden on a genuine buyer to ensure the supplier’s compliance.
Violation of GST Principles: Denying ITC to a bona fide recipient for the supplier’s fault is against the core principle of GST, which is to avoid the cascading effect of taxes. It effectively amounts to double taxation for the recipient.
Shifting of Tax Incidence: It unconstitutionally shifts the incidence of tax from the defaulting supplier to the compliant recipient.
3. Revenue’s (Department’s) Key Arguments
ITC is a Concession: ITC is not a vested right but a concession or benefit that is subject to the conditions prescribed in the law.
Legislative Intent: Section 16(2)(aa) was introduced with the specific legislative intent to prevent fraudulent ITC claims, curb tax evasion, and enhance the integrity of the GST system.
Supplier Compliance: The provision is a valid measure to promote supplier compliance, which is essential for a transparent tax regime.
4. High Court’s Ruling and Rationale
The Gauhati High Court delivered a balanced judgment, taking into account the perspectives of both the taxpayer and the revenue.
Provision Not Held Unconstitutional: The Court did not strike down Section 16(2)(aa) as unconstitutional. It acknowledged that the provision’s objective—to prevent fraud and promote compliance—is valid.
Recognition of Hardship to Buyer: The Court recognized that the provision places an “iniquitous” and “onerous burden” on the purchasing dealer. Denying ITC to a bona fide buyer who has fulfilled all their obligations goes against the object and purpose of the GST Act.
Provision “Read Down”: The Court chose to “read down” the provision to protect genuine taxpayers. This means the provision remains in the statute book but its application is interpreted in a specific, limited manner.
Opportunity to Prove Bona Fides: The Court ruled that if a supplier fails to comply with Section 16(2)(aa), the tax authorities cannot summarily deny ITC to the recipient. Instead, the recipient must be given an opportunity to prove the genuineness of their claim.
Acceptable Evidence: A recipient can prove their bona fides and the legitimacy of the transaction by furnishing documents such as:
Tax invoices
Proof of payment to the supplier
Documents evidencing the receipt of goods or services.
Interim Measure: The Court clarified that this reading down of the provision is an interim measure until the Central Board of Indirect Taxes and Customs (CBIC) formulates a practical solution to address the hardship faced by genuine purchasers due to supplier defaults.
The copy of the order is as under:
