Goods & Services Tax (GST) in IndiaWill genuineness of ITC under GST be the Ecom-KVAT Way?

Recently, the Hon’ble Supreme Court in The State of Karnataka v. M/s. Ecom Gill Coffee Trading Private Limted [Civil Appeal No. 230 of 2023 decided on 13.03.2023] has set aside the order of Karnataka High Court allowing the ITC to the dealers.

Factum

This issue cropped up due to a doubt on account of the dealers from whom the readymade garments were purchased have either got their registration cancelled or have filed ‘NIL’ returns.

Thus, the Assessing Officer doubted the sale and the payment of tax on such sale of which the ITC was claimed.

Observation of Court

The Court held that on failure of production of any cogent material regarding the seller or the actual physical movement of goods or genuineness of transaction, the Input Tax Credit(ITC) under Section 70 of the Karnataka Value Added Tax,2003(KVAT) cannot be allowed.

What is Section 70 of KVAT?

This provision has a heading as “burden of proof” and sub-section(1) of Section 70 has an inbuilt expression as “the burden of proving”. This provision casts a responsibility on the tax payer to discharge the burden of proving that the claimed input tax credit is correct.

The relevant portion is referred as under;

Section 70

(1)For the purposes of payment or assessment of tax or any claim to input tax under this Act, the burden of proving that any transaction of a dealer is not liable to tax, or any claim to deduction of input tax is correct, shall lie on such dealer.

How burden of Proof is to be discharged?

In terms of the facts of the case, it was observed by the Court that mere production of the invoices or the payment made by cheques as provided under Rule 27 and 29 of the Karnataka Value Added Tax Rules, 2005  are not sufficient to claim that the availed input tax credit is correct.

Rather, the Court held that in addition to the cheques, invoices, particulars of payments etc., the Purchaser/Dealer has to establish the actual physical movement of goods and the genuineness of the transaction for claiming ITC.

Furthermore, it was emphasised that for claiming ITC, genuineness of transactions and actual physical movement of the goods are a sine qua non and it can only be proved by furnishing the following:

1. name of and address of the selling dealer,
2. details of vehicle which has delivered the goods,
3. payment of freight charges, and
4. acknowledgement of taking of delivery goods,

The Court thereby concluded that the burden of proof can be only discharged by establishing the aforesaid trite requirements. This decision, as per the facts of the issue, has further widened the requirement which was actually provided under Section 70 of KVAT and Rule 27 & 29 made thereunder.

How GST deals with the burden of proof?

Since, the aforesaid order of the Supreme Court deals with goods alone, so the focus in the present write up would be goods only. 

The GST scheme itself emphasises that the recipient should receive the goods or services to claim input tax credit.

It also provides that where the goods are delivered in instalments, input tax credit can be claimed only when the last instalment is received.

Section 16

The emphasis on the expression “receive the goods” and “delivered in instalments” reflects the mechanism of physical delivery of goods as a sine qua non for availing ITC.

This is evident from the limbs of Section 16 (2) of CGST,2017. However, it also comes with deeming provision of acceptance of goods in certain transactions.

The intent of Section 16 is furthered by Rule 36 of CGST Rules,2017 which also lays down the documentary requirements and conditions for claiming ITC.

Section 155

Likewise, KVAT, Section 155 of CGST Act,2017 also speaks for burden of proof as below;

Section 155 – Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.

Even though the burden of proving any claim of ITC shall be on the recipient i.e a tax payer, but the decision in Ecom supra shall not be a major hurdle in every case in as much as there can be many facets to differentiate the ratio when it comes to the availment of ITC under the ecosystem of GST.

What are three Tests for availing ITC?  

Above all, when it comes to the availment of ITC in existing GST era or Modvat or Cenvat under pre GST era, the three tests cum requirements were always existing in the past and shall be also existing in the future, and they can be summarised as below;

Test One – eligibility to avail ITC,

Test Two – supporting documents, and

Test Three – proving the genuineness of a transaction.

Somehow, the first and third test is prima facie interconnected and has a strong interplay with each other.

What makes GST stand apart from KVAT?

The scheme of GST runs through GSTN portal. The tax paid at the suppliers end and ITC availed at the receivers end gets corroborated by an inbuilt mechanism already.

Further, the movement of goods are well accounted for under E-way bill, wherever it is applicable.

Hence, the apparent differentiating factor for GST will be its working under GSTN Portal.

Conclusion

The precedent of Ecom supra can have momentary ripple effect but cannot be applied in a blanket fashion manner. The jurisprudence and the concept of setting off of taxes or duty, be it by ITC in GST era or Modvat or Cenvat in pre GST era have had many settled propositions in both the directions.

The facts in Ecom supra is peculiar in nature and hence raised grave doubt about the eligibility and genuineness of transaction at the first place. Hence, on the facts alone other matters can be differentiated with its ratio at ease.

Further, it is trite law that one cannot be expected to perform what is itself not expected by the legislative intent at the first place. The impossibility cannot be also expected to be complied with by a tax payer when it comes to sustaining the genuineness of ITC.

Therefore, this decision should be considered to be another decision under the given set of facts and conditions alone and not as a ratio decidendi to be applied in each and every case.

Authored by

Adv. Anandaday Misshra,
Tax Counsel & Author of “GST- Law & Procedure”
Founder & Managing Partner | AMLEGALS