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REVERSING INPUT TAX CREDIT- BUYER NOT LIABLE FOR SELLER’S DEFAULT

December 3, 2021

By Vikrant Rana and Rima Majumdar

Under the GST regime, tax on value addition is implemented through a seamless process of Input Tax Credit (ITC). When a buyer who is registered under the GST Act, purchases goods from a registered seller, the buyer is entitled to have  the  GST paid by the supplier and charged from the buyer, credited back to the buyer. However, in many instances, the supplier defaults in paying the tax on time, or for reasons best known to him, may even   fail to pay it entirely to the Department.

Recently, the Madurai Bench of the Madras High Court passed an order in the case titled M/s D.Y. Beathel Enterprises vs. State Tax Officer (Data Cell), W.P.(MD) No. 2127/2021 wherein the Petitioner had filed a Writ, inter alia praying that the records of the Respondent in GSTIN 33AUMPG3862A1ZZ/2017-18, dated October 29, 2020 be quashed and directions be issued to the Respondent to pass fresh assessment orders after allowing the Petitioner to cross examine the seller in the said case concerning input tax credit.     

BRIEF FACTS OF THE CASE

The Petitioners are traders in Raw Rubber Sheets. According to them, they had purchased goods from one Mr. Charles and his wife Mrs. Shanthi, and a major portion of the sale consideration was paid only through banking channels. These payments also included the tax component, and the seller had claimed to be registered under the GST Act.

Based on the returns filed by the sellers, the Petitioners availed input tax credit. However, later during inspection by the Respondent i.e. the tax authorities, it came to light that Charles and his wife i.e. the sellers, in fact did not pay any tax to the Government. Therefore, the Respondent initiated proceedings against the Petitioners.

Show cause notices were issued by the Department and in response to the same, it was submitted by the Petitioners that all the amounts payable by them had been paid to the sellers and that therefore, those they will have to be necessarily confronted during enquiry.

However, the Department passed the impugned orders without involving the actual sellers, i.e. Mr. Charles and his wife Mrs. Shanthi, and levied the entire GST liability of the seller on to the Petitioners.

ARGUMENTS OF THE PETITIONERS

The Petitioners, relied on the case of Sri Vinayaga Agencies Vs. The Assistant Commissioner, CT Vadapalani, 2013 60 VST wherein it was held that “the authority does not have the jurisdiction to reverse the input tax credit already availed by the assesses on the ground that the selling dealer has not paid the tax”. Although this judgment cited by the Petitioners was spot on, the Hon’ble Court was of the view that this proposition laid down in the context of the previous tax regime may not be straight-away applicable to the current tax regime.   

The Petitioners thereafter brought the attention of the Ld. Single Judge to a press release issued by the Central Board of GST council on May 04, 2018.[1] In the said press release, it had been mentioned that there shall not be any automatic reversal of input tax credit from the buyer on non-payment 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.

ARGUMENTS OF THE RESPONDENT

The Petitioners had availed input tax credit on the premise that tax had already been remitted to the Government by the sellers. When it turned out that the sellers have not paid any tax and the Petitioners could not furnish any proof for the same, the department was entirely justified in proceeding to recover the same from the Petitioners.

WHAT WAS HELD BY THE COURT

The Court was of the view that the position on no automatic reversal of input tax credit, was made clear by Section 16(1) & (2) of Tamil Nadu Goods and Services Tax Act, 2017.

As per Section 16(1) “Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Section 16(2) further provides that 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,—

  • 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;
  • he has received the goods or services or both.

Therefore, it can be seen that the assesse 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.

Therefore, if the tax had not reached the Government coffers, then the liability may have to be eventually borne by one party, either the seller or the buyer. In the instant case, the Respondent does not appear to have taken any recovery action against the seller i.e. Mr. Charles and his wife Mrs. Shanthi, on the present transactions.

The Court held that “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.”

The Court further held that if according to the Respondent the Petitioners have not even received the goods and had availed input tax credits on the strength of generated invoices, then it was all the more important that the request of the Petitioners to cross examine the sellers, Charles and Shanthi, be fulfilled by the Respondent in order to get to the bottom of the story.

Therefore, the order passed by the Tax Department reversing the input tax credit given to the Petitioners was quashed since the same suffered from fundamental flaws. Additionally, the Court also held that the impugned order of the Department be quashed since:

  1. The department did not examine the sellers during the stage of enquiry;
  2. The department did not initiate recovery action against the sellers in the first place.

The Court remitted the matter back to the Department for fresh enquiry, and directed that both the sellers, Charles and Shanti, be summoned as witnesses for cross-examination during enquiry and recovery action be initiated against the sellers by the Department.

HOW SELLERS USE IP TO GET TAX EXEMPTION

In the case discussed above, the seller had fraudulently not paid his share of the GST to the Department, but depicted to the buyer that the same has been paid. However, it is noteworthy to mention that there are certain goods that are exempted from GST based on whether its brand name is registered or un-registered.

To explain this further, take the example of rice. Vide Notification No. 1/2017- central tax (rate) dated June 28, 2017, rice put up in unit container and bearing a registered brand name attracts CGST at the rate of 2.5%.[2]

Thereafter, on July 05 2017, the Finance Ministry issued a press release clarifying that “registered brand name” would mean brand name or trade name which is registered under the Trade Marks Act, 1999.[3] A registered trade mark means a trade mark which is recorded in the Trade Marks Register, and whose registration has not expired. Thus, unless the brand name or trade name is actually on the Register of Trade Marks and is in force under the Trade Marks Act, 1999, GST rate of 5% (2.5% CGST and 2.5% SGST) will not be applicable on the supply of such goods.

The Notification No. 1/2017 was further amended vide Notification No. 27/2017- Central Tax (Rate) dated September 22, 2017. This amendment states that rice put up in unit containers bearing a brand name, where any actionable claim or enforceable right in respect of such brand name has been foregone voluntarily, is exempted from GST, subject to the conditions that the person undertaking packing of such goods in unit containers which bears a brand name shall file an affidavit to that effect with the jurisdictional Commissioner of Central tax that he is voluntarily foregoing his actionable claim or enforceable right on such brand name.[4] The amendment further states  that those who are selling the rice in the unit container, bearing a registered brand name or bearing a brand name on which an actionable claim or enforceable right in a court of law is available, is liable to GST @5%.

Therefore, branded rice is costlier than unbranded rice due to imposition of GST at the rate of 5%, whereas unbranded rice (like the one that your local grocery store packs into individual bags from a large sack) is exempted from GST. Furthermore, a dealer/ manufacturer of rice with an un-register brand name can avail the exemption from GST, provided he voluntarily surrenders the actionable claim or enforceable right of the brand name.

However, in the long run, saving some money in taxes by relinquishing one’s IP rights, does not seem like a very business savvy approach. It is pertinent to note that great businesses more often than not, have an added advantage over their competitors due to their intellectual property registrations, be it trademarks, designs, patents, copyrights etc. Therefore, although the above mentioned Notifications of the Government helps reduce the cost of various items in the market, making it affordable for all kinds of consumers, obtaining these tax exemptions as a business entity, may not be a viable option for the long term growth of one’s business, goodwill and reputation.

CONCLUSION

When buyers are dealing with orders pertaining to large quantities of product, wherein a considerable amount of tax will be credited back to the buyer, it is useful to have a basic background check or due-diligence conducted of the seller, especially when the buyer does not have a history of doing business with the seller in question. Furthermore, like the Petitioners did in the case discussed above, it is also equally important that the buyers diligently take action against the Revenue Department if any assessment order is passed by them arbitrarily reversing the input tax credited to the buyer’s account.

[1] https://www.cbic.gov.in/resources//htdocs-cbec/press-release/CBIC%20Press%20Release%20dt%2004.05.2018%20on%20Return%20Simplification.pdf

[2] https://taxguru.in/goods-and-service-tax/cgst-rate-schedule-notified-section-91.html

[3] http://gstcouncil.gov.in/sites/default/files/Press-Dynamic/brand-name-meaning-gstrates.pdf

[4] https://taxguru.in/goods-and-service-tax/cbec-amends-gst-rate-schedule.html

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