A Division Bench of the Supreme Court on 13 March 2023, decided a group of appeals under the Karnataka Value Added Tax Act, 2003 (‘KVAT Act, 2003’) and denied Input Tax Credit (‘ITC’) to purchasers.[1] While the dispute was under KVAT Act, 2003, the interpretive approach adopted by the Supreme Court could have some repercussions for taxpayers under GST. The aim of this post is to understand the Supreme Court’s interpretive approach and examine its relevance to GST.
Introduction
The Supreme Court decided a group of appeals involving purchasers who were claiming ITC under the KVAT Act, 2003. The State denied purchasers ITC on the ground the sellers fell in either one of the following categories: they had filed ‘Nil’ returns, or were de-registered, or did not file returns or denied their turnover and refused to file taxes. The Karnataka High Court allowed purchasers to claim ITC on the ground that they had made payments to the sellers through account payee cheques and had produced relevant invoices to prove genuineness of the sale transactions. (para 4.1) The State filed appeal against the High Court’s decision in the Supreme Court.
Conditions to Claim ITC
The central provision in the dispute was Section 70(1), KVAT Act, 2003 which provides that:
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.
The State argued that purchasers cannot claim to have successfully discharged the burden under Section 70, KVAT Act, 2003 by merely proving financial transfers/transactions through invoices and cheques. To discharge their burden, the State argued, the purchasers are also required to establish actual movement of goods. The State further argued that the High Court had not appreciated the fact that the State cannot recover taxes from a seller who files ‘Nil’ returns. The purchasers, on the other hand, argued that once they produce genuine invoices and evidence of payments through cheques, it should be considered sufficient discharge of their burden under Section 70, KVAT Act, 2003. And that the statute and the relevant Rules under KVAT Rules, 2005 – Rules 27 and 29 – did not require a purchaser to submit any additional documents to claim ITC. The purchasers further argued that if the seller had not paid the tax, then the State needs to recover the tax from the seller and not block their ITC.
Interpreting Burden of Proof under Section 70 of KVAT Act, 2003
The narrow issue that the Supreme Court was required to decide was if proving movement of goods was necessary for a purchaser to discharge the burden under Section 70, KVAT Act, 2003. The Supreme Court answered in the affirmative and held that proving genuineness of the transaction and physical movement of goods is sine qua non to claim ITC and the same can only be proved through name and address of the selling dealer, details of the vehicle, acknowledgement of the delivery of goods, etc. The Supreme Court held that:
If the purchasing dealer/s fails/fail to establish and prove the said important aspect of physical movement of the goods alleged to have been purchased by it/them from the concerned dealers and on which the ITC have been claimed, the Assessing Officer is absolutely justified in rejecting such ITC claim. (para 10)
Supreme Court repeated the same observation thrice in its judgment to emphasise that unless the purchaser proves movement of goods, the genuineness of the transaction could not be established and in its absence the burden of proof under Section 70, KVAT Act, 2003 was not discharged by the purchasers. In my view, the Supreme Court repeatedly states its conclusion in the judgment to disguise it as reasoning. There is no explanation by the Supreme Court as to why proving movement of goods should be read as an essential condition under Section 70, KVAT Act, 2003. If the relevant statutory provisions and Rules did not impose an express condition on the purchaser to prove movement of goods and the same was being read into the provisions, there was an additional need for the Supreme Court to provide its reasons. Merely repeating the same conclusions do not reinforce an interpretation or make it more defensible.
In this case, the relevant provision(s) were silent if the purchaser needs to prove the movement of goods. The facts elaborated in the judgment do not clearly establish if interpreting the additional condition of movement of goods was necessary. The State argued that the additional condition was necessary to prove genuineness of the transaction and the Supreme Court certainly went beyond the text of the statutory provisions and relevant Rules to accept the State’s argument. Perhaps the Supreme Court in trying to prevent tax evasion and fraudulent ITC claims did not give sufficient thought about the need to protect taxpayer rights. Or maybe the Supreme Court was trying to compensate for an oversight in legislative drafting. Irrespective, the deficient reasoning is palpable in the judgment.
Attributing Fault, Denying ITC, and Position under GST
The Karnataka High Court by allowing ITC claims had agreed with the purchaser’s argument – also repeated before the Supreme Court – that they cannot be held liable for seller’s failure to deposit the tax. While the State argued that a purchaser can only claim ITC on the tax paid by the seller, and if the seller does not deposit tax, it is logical to block ITC of the purchaser. GST seeks to address the same issue, i.e., who should be liable for the seller’s failure to deposit tax with the State? Can the State block or reverse ITC of a purchaser because of the seller’s fault? If so, under what circumstances? We do not have clear answers for now.
One of the conditions to claim ITC is provided under Section 16(2)(c), CGST Act, 2017 which states that no person shall be entitled to ITC in respect of supply of any goods or services or both unless the tax charged in respect of such supply ‘has actually been paid to the Government’ either through cash or utilization of ITC. Thus, seller must deposit the tax for a purchaser to successfully claim ITC.
Further, after a series of amendments, it is not possible for a purchaser to claim ITC unless the seller has filed their GST returns indicating the supplies on which the purchaser can claim ITC.[2] Linking the ITC claims to seller’s returns certainly seems to make the co-operation of purchaser and seller necessary to claim ITC. However, in my view, the statutory provisions do not decisively attribute liability in case of seller’s inability or failure to deposit the tax.
In M/s D.Y. Beathel Enterprises[3], a case decided under Tamil Nadu Goods and Services Tax Act, 2017 (pari materia with CGST Act, 2017), the Madras High Court ‘did not appreciate’, the approach of the Revenue whereby they reversed ITC of the purchaser while not initiating any recovery action against the seller for not depositing the tax. The High Court observed that inquiry against the seller was necessary since the State made claim that there was no movement of goods. The High Court held that if the State does not receive the tax, liability has to be borne by one party – seller or buyer, but it did not specifically state which party must bear the burden. And it remanded the matter back to the Revenue Department directing initiation of fresh inquiry against both the purchaser and seller.
The Madras High Court’s decision cannot be treated as precedent under GST for all kinds of fact situations and the final word on the issue is yet to be spoken. Also, the High Court did not conclusively attribute liability to one party but directed action against both – purchaser and seller. And if the Supreme Court’s interpretive approach under KVAT, 2003 is any indication, the purchasers are unlikely to find it easy to claim ITC under GST or are likely to get their ITC reversed if the seller defaults or delays filing of their returns or otherwise does not deposit tax with the State. If and when the liability will be attached to purchaser due to the conduct of the seller is currently an open question.
[1] State of Karnataka v M/s Ecom Gill Coffee Trading Private Limited 2023 SCC OnLine SC 248.
[2] Section 16(2) and Section 38 of CGST Act, 2017 were amended via the Finance Act, 2022 with the result that the purchasing dealer is dependent on the supplier furnishing its GSTR-1.
[3] M/s D.Y. Beathel Enterprises v State Tax Officer 2021-VIL-308-MAD.