Putting an end to the debate over the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, the High Court of Tripura (Agartala Bench) clarified that Section 16(2)(c) of the GST Act ought not to be interpreted to deny ITC to purchasers in a bona fide transaction, and the petitioner being a bona fide purchaser cannot be penalised for the mistake of another person, i.e., the seller.
The Court emphasised that the fact that there is no mechanism with the recipient of goods to verify whether the supplier has discharged its liability to the Government, or not, is not disputed. In view of this, it is impossible for the purchaser to check whether the supplier has deposited the tax paid by him to the Government and then avail Input Tax Credit (ITC).
Also, the Court pointed out that the supplier is not normally under the control of the purchaser, and it is not possible for a purchaser to keep a check on the activities of its supplier or ensure that the latter makes over to the Government. Thus, by denying the purchaser the availment of ITC and making the purchaser pay the tax to the Government again amounts to double collection when he has already paid to the supplier, and it violates Article 265 of the Constitution of India.
The Court opined that there is a failure by the Parliament, while enacting Section 16 (2)(c) of the Act, to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the Act and those that have not. Therefore, there is a need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers.
Alternatively, what Section 16(2)(c) requires the purchasing dealer to do is that, after transacting with the selling dealer, somehow ensure that the selling dealer does in fact deposit the tax collected from the purchasing dealer; and if the selling dealer fails to do so, undergo the risk of being denied the ITC. Hence, Section 16(2) (c) cannot be interpreted to place an onerous burden on a bona fide purchasing dealer, clarified the Court.
The Division Bench comprising Justice M S Ramachandra Rao and Justice S Datta Purkayastha observed that if the law seeks to visit disproportionate consequences on a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution. The Bench said that reading down a provision is undoubtedly an accepted method to save it from the vice of unconstitutionality, and it would be appropriate in the instant case too to adopt the said principle.
The Bench did not find anything in the language of the GST Act which expressly enables the respondents to tax a purchaser, who has already paid tax to the seller, a second time, by denying him ITC, in all situations. If that were to be so, there would be no concept of giving ITC at all in the GST Act.
The Bench found that there is no allegation by the respondents that the petitioner had failed to discharge its liability towards tax on the purchases made by it. Rather, it is their case that the respondent no.4 has fraudulently retained the GST paid by petitioner to it. Consequently, it has to be held that the transaction between the petitioner and the respondent no.4 is a bona fide transaction and not a collusive transaction tainted by fraud, etc., and that the conduct of respondent no.4 is blameworthy.
Accordingly, the Bench concluded that the petitioner cannot be penalised by invoking Section 16(2)(c) of the GST Act to deny the ITC. Section 16(2)(c) is held not violative of Art.14, 19(1)(g) or 265 or 300-A of the Constitution of India; but Section 16(2)(c) ought not to be interpreted to deny ITC to purchasers in a bona fide transaction like the petitioner and it should be read down and applied only where the transaction is found to be not bona fide or is a collusive transaction or fraudulent transaction to defraud the revenue.
The Bench, therefore, directed the respondents to forthwith allow the petitioner ITC to the extent of Rs.1.11 Crores denied to it.
Briefly, when the petitioner sent an email enquiring about the blocking of the ITC in its Electronic Credit ledger, the respondent No.3 informed the petitioner that Respondent no.4 had not discharged its tax liabilities to the Government, and as the petitioner had made purchases from Respondent no.4, it is not entitled to the ITC of the tax paid by it to Respondent no.4.
Later, the respondent issued a Demand-cum-Show cause notice to the petitioner, invoking Section 73 of the GST Act, asking the petitioner to show cause why Rs. 1.11 Crores wrongly availed by the petitioner as ITC should not be reversed along with interest and penalty. Thereafter, the respondent No.3 passed orders confirming the demand raised in the show cause notice.
Appearances:
Advocates Naveen Bindal, Mukul Singla, and Prabal Kumar Ghosh, for the Petitioner/ Taxpayer
Deputy SGI Bidyut Majumder, Senior Advocate Bibhal Nandi Majumder, along with Advocates Biplabendu Roy and Elembrok Debbarma, for the Respondent/ Revenue
