In M/s. D.Y. Beathel Enterprises Vs The State Tax Officer(Data Cell), W.P. (MD) NO. 2127/ 2021, the Madras High Court that 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.
The Petitioner is a trader dealing in Raw Rubber Sheets. The Petitioner purchased Raw Rubber Sheets from the seller named Charles and his wife Shanthi. The Petitioner paid the tax to Charles and availed Input Tax Credit (‘ITC’) for same, but Charles and his wife, never paid the tax to the Government.
The Respondent i.e. the State Tax Officer, during the inspection found that no tax was paid to the Government by the supplier, but ITC was availed for the same and therefore, the Respondent passed an Assessment Order (‘the Order’) for reversing Credit of Input Tax that was availed by the Petitioner.
The Petitioner contended that, the Petitioner had already paid the amount to Charles and his Wife and therefore, the Respondent shall question them, but the contention made by the Petitioner was not heard and the Respondent had to reverse the Credit of Input Tax.
Therefore, the Petitioner moved the Madras High Court (‘High Court’) under Article 226 of the Constitution of India, with a prayer to quash the order passed by the Respondent.
Whether the action of the Respondent reversing ITC availed by the Petitioner is justifiable?
Contentions of the Parties
The Petitioner contended that the Order passed by the Respondent is arbitrary, illegal and without any jurisdiction.
The Petitioner further contended that once ITC was availed by the Petitioner, the Respondent has no power to reverse it. The Petitioner relied upon the judgment in the case of Sri Vinayaga Agencies v. The Assistant Commissioner, CT Vadapalani [2013 60 VST page 283] wherein the High Court held a similar view, that the authority does not have the jurisdiction to reverse the input tax credit already availed by the assessees on the ground that the selling dealer has not paid the tax.
The Petitioner also contended that even the Central Board of Goods and Services Tax (‘GST’) Council in its Press Release dated 04.05.2018 stated that there shall not be any automatic reversal of input tax credit from the buyer on nonpayment 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.
The Petitioner contended that, in the Order the Respondent wrongly ignored to examine Charles and Shanthi and therefore, the High Court shall quash the Order passed by the Respondent.
The Respondent contended that the Petitioner had no proof to show that the Petitioner had paid the amount of tax to the Seller but the Seller has not paid the said amount to the Government.
The Respondent further contended that the actions of the Respondent were justifiable as no tax was paid to the Government and the Respondent was right in reversing the ITC.
Decision and Findings
The High Court in the present case, analyzed Section 16(1) and Section 16(2) of the Tamil Nadu Goods and Services Act, 2017 (‘TNGST Act’), to determine whether the action of the Respondent was justifiable or not.
The High Court after reading Section 16 of the TNGST Act held that, it was the duty of the Parties to pay tax to the Government and that if the tax is not paid to the Government, then this liability has to be borne by either the Seller or the Buyer and held that in the present case, even when the Petitioner contended that the Petitioner had paid the amount of tax to the Seller, the Respondent never tried to question or examine the Seller.
The High Court therefore held that the Order passed by the Respondent suffered from fundamental flaws as no action was taken by the Respondent to question the Supplier i.e Charles and Shanthi or to initiate recovery action against them.
The High Court concluded that
11.It can be seen therefrom 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 utilization of input tax credit, admissible in respect of the said supply.
12.Therefore, 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 / Charles and his wife Shanthi, on the present transactions.
The High Court thus quashed the Order passed by the Respondent against the Petitioner and remitted the matter back to the file of the Respondent. The High Court also ordered the Respondent to start inquiry against Supplier.
Payment of tax to the Government is a statutory obligation of the tax payers as a Supplier towards the supplies made at its end. The levy of tax is always on the output but in the manufacturing process, the manufacturer or agent or supplier has to pay tax on the input i.e. the product they purchase. Therefore, under GST Act, 2017, the manufacturer or agent or supplier is entitled to get the credit back on tax paid on such input.
In case, one Party has paid the entire amount of tax and has fulfilled all the conditions to avail ITC but Other Party defaults in paying such tax to the Government then such Other Party shall be liable and responsible to fulfil his tax obligation.
It must be understood that the jurisprudence is very clear that every registered tax payer have to discharge their individual liabilities.
A liability of a tax payer cannot be automatically shifted to other person who is merely the recipient of such supplies since the supplier as a tax payer has failed to deposit the tax even after having collected from the recipient of such supplies.
Where the goods have not been supplied then the scenario is inbuilt in as much as it cannot be shown to have been used in the course or furtherance of business for availing Input Tax Credit of such claimed input supplies. The exchequer can always recover from the tax payer who has not discharged his liability even if Section 16 of CGST Act,2017 has been structured to bring wrath and control in ITC availment at the end of the recipient of the supplies.
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