ITC

Legislative Intent or Error: Puzzle of Indian Tax Policy

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Introductory Questions 

Let me start with a question: how does one discover legislative intent in a provision of tax statute? Through a plain reading of the provision or through a subsequent statement by the State’s legal counsel stating its intent? Positivist thinking would point us to the former, and rightly so. A statement, even a sworn statement in a court shouldn’t override what is contained in the statute. Deference to the legislature cannot extend to a point where despite what the statute contains, court interprets the provision based on legislature’s statement explaining its intent. 

The question in your mind may be: why am I asking this question? Well, for those who follow tax developments, you may already know. For others, I’m asking the question in the context of Safari Retreats case and the latest amendment to CGST Act, 2017 via the Finance Act, 2025. 

One key question that the Supreme Court had to answer in Safari Retreats case was: Did the legislature intentionally use the conjunction ‘or’ instead of ‘and’? Or did the legislature commit a mistake? A simple question that acquires tremendous urgency if a taxpayer needs the answer to assess its tax liability which in this was a few crores. 

During the hearing, the State’s counsel argued that use of the conjunction ‘or’ was a legislative error and further pressed that ‘or’ should be read as ‘and’. What should have been the ideal response of the Supreme Court? One view – subscribed by the State – is that Supreme Court should have declared ‘or’ means ‘and’ and interpreted the provision accordingly even if it meant throwing all grammar and interpretive rules out of the court complex. Or was there more justification in the Supreme Court responding the way it did: legislative intent can only be revealed by the legislative text and not by the State counsel’s statement about the text. And in doing so, restrict the amount of deference that courts accord to the legislature in tax laws.   

And equally importantly, how should we respond? Resign to yet another retrospective amendment to a tax statute and raise our hands in exasperation while letting out a huge sigh. Or do we try to understand this entire episode like a puzzle and use it as an example of how Indian State approaches tax policy. I prefer to do the latter, and hence this article.  

‘Or’ Means ‘And’

I’ve commented on the case in detail here and here. In this article, I intend to provide a limited overview of the controversy with an aim to highlight Indian State’s tax policy choices. 

In 2019, the Orissa High Court allowed taxpayer to claim Input Tax Credit (‘ITC’) on construction of a shopping mall. In 2024-25, one of State’s arguments before the Supreme Court was that use of ‘or’ instead of ‘and’ was a legislative error. The reason for the argument, from a revenue perspective, was straightforward: it would ostensibly allow the State to block the taxpayer’s ITC claim. But the State was aware of the ‘legislative error’ since 2019, why not correct the error via a legislative amendment and bury the issue instead of making elaborate arguments before the Supreme Court? Commenting on the same the Supreme Court in its judgment observed the following: 

The writ petition in which the impugned decision was rendered is a six-year-old writ petition. If it was a drafting mistake, as suggested by learned ASG, the legislature could have stepped in to correct it. However, that was not done. In such circumstances, it must be inferred that the legislature has intentionally used the expression “plant or machinery” in clause (d) as distinguished from the expression “plant and machinery”, which has been used in several places. (emphasis added) (para 43)

As is evident, the Supreme Court rejected the State’s claim of an error. If use of ‘or’ was indeed an error, there was ample time for the State to step in and rectify it. And its failure to do so, in my books, counts as lack of bona fide. For the Supreme Court it was sufficient to dismiss the entire argument and proceed solely on the basis of what was written in the statute.  

What did the State achieve by not amending the law and correcting what it claimed was a ‘legislative error’? For one, if the Supreme Court had actually ruled that ‘or’ should be read as ‘and’, it would have armed the State with a decision that could have been conveniently used by it to block ITC in the future as well. 

Second, if the Supreme Court refused to interpret ‘or’ to mean ‘and’, the State could have claimed that the decision did not reflect ‘legislative intent’. Both things did happen. The latter is no longer a surprise. Each time the State loses a major tax case, its response is that the judicial decision does not reflect legislative intent. And subsequently, it leads to an amendment of the provision in question. And even more often, the amendment is given retrospective effect.   

Legislative Intent – Legislative Error 

The Supreme Court in its above cited paragraph makes it sufficiently apparent that legislative intent must be reflected through the statute itself. If the State claims that a legislative error crept into the statute, it should have rectified it in the intervening 6 years it had to act on it. 

Legislative intent thus cannot be superimposed on a statute by the State on discovering its error or mistake. That would upset the balance of power in State’s favor and would violate a cardinal rule of tax law interpretation, i.e., strict interpretation of tax statutes is necessary to determine the taxpayer’s liability. 

But does that mean that legislative error can never be acknowledged by courts? Apparently so.

One, there is no telling if an error is truly an error. In Safari Retreats case, the petitioners pointed out that:

In the model GST law, which the GST Council Secretariat circulated in November 2016 for inviting suggestions and comments, the expression “plant and machinery” was used both in clauses (c) and (d) of Section 17(5). However, while enacting the law, the legislature has advisedly used the expression “plant and machinery” in clause (c) and “plant or machinery” in clause (d) of Section 17(5). Therefore, the intention of the legislature cannot be brushed aside by contending that the use of the word “or” in Section 17(5)(d) is a mistake of the legislature. (para 9)

In such circumstances, who is to know if the legislature intentionally replaced ‘and’ with ‘or’ when finalising the text of the bill or an error crept in while editing the Model law. Presumably only the State can reveal the mystery through detailed document history and accompanying notes on the provisions. But do we want to go down that rabbit hole. Forget us, I doubt the State would like that like that level of transparency in law making. 

Second, it would defeat a core tenet of not just tax law but also law in general. Tax liability is as per the law that exists and not what the law was intended to be. A taxpayer has no way of knowing what the legislature ‘intended’ to enact except by interpreting the provisions as they exist. And if one argues that the legislative debates, and other pre-legislative reports would provide a clue, it is a heavy burden to impose on the taxpayer. Then not only must the taxpayer know the law but also whether the law contains an error or not. Hardly just or fair. And one would argue such a stance is also devoid of common sense.

Puzzle of Indian Tax Policy

Hidden in the steps of Safari Retreats case and its aftermath is the puzzle of Indian tax policy decisions. 

One, why wait for the Supreme Court’s decision and then amend the provision retrospectively? Because beyond the immediate urgency of losing or wining a case, was a question of policy. Do we allow taxpayers to claim ITC on construction of shopping malls when they further rent it for business? While a timely amendment of ‘or’ to ‘and’ may not have answered the question with certainty, it would have provided a clear signal of proactive policy making including correcting errors. Instead, the post-decision amendment reveals a policy of amending laws as per convenience.   

Two, where were the States? Since the entire dispute centred around CGST Act, 2017 we expect response from the Union, but GST is a federal levy. Why didn’t any State openly and persuasively argue for an amendment and perhaps end a long winding litigation? It was only after the Supreme Court’s judgment, that States were visible. But just about. States were on board for the GST Council’s recommendation for amendment. Or at least no State objected to the amendment. So, my impression is that either ALL States were either clueless about the litigation or all of them unanimously approve retrospective amendments to GST laws instead of proactive amendments to thwart resource consuming litigation. Maybe, this is the kind of uniformity that was aimed through GST. 

Third, why file a review after deciding to introduce the amendment? Again, it seems the Court’s stamp of approval or its views on the amendment will prevent sprouting of similar issues from the provision. In this case, though the litigation may not end because even the amendment may not prove enough as courts will still need to interpret the phrase ‘plant and machinery’. But a review seems like a circuitous way of making tax policy when there can be direct and straightforward ways. Only we prefer to be clever by half and like to prevent transparency on fundamental tax policy issues. Else, the State may be held to its word and that is not something it will enjoy. 

Way Forward 

The promise of no retrospective amendments to GST laws was buried long ago. And now it is dead. We can only hope for a more sane approach to tax disputes and a saner reaction to court decisions that are not in the State’s favor. Else, the familiar cycle of dispute, decision, amendment will continue till perpetuity until one fine day we feel the need to ‘simplify’ GST by removing all the Provisos and Explanations which were added via numerous reactive amendments.    

Telecommunication Towers are Movable Property under GST: Delhi HC

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The Delhi High Court in a recent decision held that telecommunication towers are best characterized as movable property under Section 17(5), CGST Act, 2017 and are eligible for input tax credit (‘ITC’). 

Facts 

Indus Towers filed a writ petition impugning the showcause notice issued under Section 74, CGST Act, 2017. The notice issued a demand for tax along with interest and penalty. Indus Towers was engaged in the business of providing passive infrastructure services to telecommunication service providers. And the notices denied it ITC on inputs and input services used for setting up passive infrastructure on the ground. The Revenue’s argument was that the inputs were used in construction of telecommunication towers and fell in the ambit of Section 17(5)(d), CGST Act, 2017. The relevant portions of the provision are below to help us understand the issue better: 

17. Apportionment of credit and blocked credits. 

xxxxx

(5) Notwithstanding anything contained in sub-section (1) of Section 16 and sub-section (1) of Section 18, input tax credit shall not be available in respect of the following, namely:-  

xxx

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. 

Xxx

Explanation.- For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes – 

  • land, building or any other civil structures; 
  • telecommunication towers; and 
  • pipelines laid outside the factory premises. 

Revenue’s reading of the above extracted provisions was: plant and machinery is not immovable property and is eligible for ITC, but clause (ii) of the Explanation expressly excludes telecommunication towers from the scope of plant and machinery. Thus, telecommunication towers should be considered as immovable property on which ITC is blocked. 

Petitioner’s Arguments 

Petitioner’s assertion was that telecommunication towers more appropriately classified as movable and not immovable property. Petitioner argued that telecommunication towers are movable items of essential equipment used in telecommunications. The towers can be dismantled at site and are capable of being moved. The concrete structure on which the towers are placed could be treated as the immovable element of the equipment, but all other parts can be easily moved and shifted to other locations. And since the underlying concrete structure is essentially for the purpose of providing stability to the towers, it would not detract from the basic characteristic of towers as being a movable property. 

Precedents and Generic Principles of Immovable Property 

The Delhi High Court cited two major precedents: Bharti Airtel and Vodafone Mobile Services cases. The Supreme Court in the former and the Delhi High Court in the latter had opined that telecom towers are intrinsically movable items and liable to be treated as inputs under the CENVAT Credit Rules, 2004. The Revenue’s contention was that both decisions should be distinguished. Under GST, the Explanation appended to Section 17, CGST Act, 2017 specifically excludes telecommunication towers from the ambit of plant and machinery, and thereby they should be treated as immovable property. The Delhi High Court relied on the above two precedents to disagree with the Revenue’s contentions.   

Additionally, the Delhi High Court cited a host of other principles enunciated in the context of TPA, 1882 where courts have tried to distinguish movable property from immovable property. Some of the principles to determine the nature of a property include: nature of annexation, object of annexation, intention of parties, functionality, permanency, and marketability test. 

The Delhi High Court cited Supreme Court’s observations in the Airtel case and how after applying the said tests, the Court had concluded that towers were not permanently annexed to the earth, but could be removed or relocated without causing any damage to them. And that the annexation of telecommunication towers to the earth was only to make them stable and wobble free. 

Expressing its complete agreement with Supreme Court’s observations, the Delhi High Court noted that the telecommunication towers were never erected with an intent of conferring permanency and their placement on concrete bases was only to help them overcome the vagaries of nature. The Revenue’s argument that telecommunication towers were immovable property, was as per the Delhi High Court, completely untenable.      

High Court Interprets Section 17(5) & the Explanation in a Curious Manner  

The Delhi High Court noted that telecommunication towers are not an immovable property in the first place and do not fall within the ambit of Section 17(5)(d). While the Explanation specifically excludes telecommunication towers from the ambit of the expression ‘plant and machinery’, the High Court observed that: 

… the specific exclusion of telecommunication towers from the scope of the phrase “plant and machinery” would not lead one to conclude that the statute contemplates or envisages telecommunication towers to be immovable property. Telecommunication towers would in any event have to quality as immovable property as a pre-condition to fall within the ambit of clause (d) of Section 17(5). Their exclusion from the expression “plant and machinery” would not result in it being concomitantly held that they constitute articles which are immoveable. (para 18) 

The High Court interpretation is a curious one. The legislative scheme under CGST Act, 2017 is: plant and machinery are not to be treated as immovable property, but telecommunication towers are specifically excluded from ambit of plant and machinery. Does mean that telecommunication towers move back into the category of immovable property since they are excluded from the exception? Prima facie, yes. But the Delhi High Court answered in negative. The High Court’s reasoning is that telecommunication towers are not an immovable property in the first place. The High Court’s opinion is not entirely convincing. Explanation to Section 17(5) excludes three specific things from the ambit of plant and machinery, i.e., 

  • land, building or any other civil structures; 
  • telecommunication towers; and 
  • pipelines laid outside the factory premises. 

Category (i) and (ii), are prima facie immovable property. Applying the principle of ejusdem generis, one can argue that telecommunication towers also fall in the same category. Even if the generic principles of the concept of immovable property suggest that telecommunication towers are a movable property that is an answer in abstract. In the context of Explanation to Section 17(5), a case can be made that telecommunication towers are treated as immovable property by a deeming fiction. Section 17(5) read with the Explanation clearly suggests that telecommunication towers are to be treated as immovable property. The Delhi High Court’s opinion that telecommunication towers are not an immovable property in the first place does not adequately examine the interplay of the Explanation with the text of Section 17(5) and that the predecents cited were in the context of CENVAT Credit Rules and not GST law. This issue of telecommunication towers and their appropriate classification under GST may need a revisit in the future.   

Yin-Yang Nature of ITC and Supplier-Purchaser Obligations

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In a recent decision, the Kerala High Court upheld constitutionality of Section 16, CGST, 2017, specifically Section 16(2)(c) which restricts the ITC of a purchasing dealer (‘purchaser’) if the supplier has not remitted tax collected from the purchaser to the Government. The decision examines validity of the conditions to claim ITC under Section 16(2)(c) and Section 16(4). In this article, I examine the only the former by headlining two under-examined aspects of ITC: first, nature of ITC as a right/concession; second, the reliance of purchaser on supplier to claim ITC. Both aspects influence each other and in turn the success or otherwise of claims related to ITC. The issue relating to time limit for claiming ITC under Section 16(4) – though an influential part of the judgment – will be subject of a separate post.   

ITC: Right or a Concession? 

One of petitioner’s contention before the Kerala High Court was that ITC is a right of the purchaser and not a concession given by the Government. And since ITC is a property of the purchaser, denying the same for supplier’s default to remit tax is violative of purchaser’s right to property under Article 300A of the Constitution. The State countered the purchaser’s argument and argued that ITC is a concession granted by the State to avoid cascading effect of taxes, and the State can impose such restrictions as it deems fit to restrict taxpayer’s claim for ITC.

In deciding the true nature of ITC, and whether it is a right or a concession, the Kerala High Court gave an unambiguous conclusion that: 

The Input Tax Credit is in the nature of a benefit or concession extended to the dealer under the statutory scheme. Even if it is held to be an entitlement, this entitlement is subject to the restrictions as provided under the Scheme or the Statute. The claim to Input Tax Credit is not an absolute right, but it can be said that it is an entitlement subject to the conditions and restrictions as envisaged in Sections 16(2) to 16(4), Section 43, and Rules made thereunder. (para 71) (emphasis added)

The Kerala High Court cited a slew of precedents that aligned with its conclusion. The language here is noteworthy: the High Court is clearly leaning in favor of ITC being a concession and not a right, though it says it is not an ‘absolute right’. What does it mean? It can imply that either ITC is a limited right and can be subject to certain conditions by the State. Or that ITC is not a right but a concession. The latter seems more likely, but it is not clear. But does the distinction matter? If ITC is a taxpayer’s right, then it imposes a greater burden on the State before curtailing it. While conceptualizing ITC as a concession provides the State a comparatively wide leeway to impose conditions before allowing a taxpayer to claim ITC. If the policy decision of providing taxpayers of claiming ITC is a concession from inception, then even onerous restrictions on such claims are within the State’s remit. And a taxpayer needs to fulfil the conditions – onerous or otherwise – to successfully claim ITC since there is no vested right to claim ITC. The State has extended a concession on certain conditions and to avail the concession, the taxpayer needs to fulfil the prescribed conditions.  

In abstract, there are no easy answers if ITC is a concession or a right, though I’ve suggested elsewhere that if we bifurcate the stages of ITC: first stage involving claim of ITC and then the latter stage of utilizing ITC, there is room to suggest that ITC should be understood as one or the other depending on which stage is relevant to the case at hand. But a broad approach that ITC is a concession, irrespective of whether it is the stage of claiming of ITC or its utilization may not be the best way to answer this dilemma. The Kerala High Court does mention that GST laws contemplate four stages vis-à-vis ITC but didn’t co-relate it to the issue of nature of ITC. (para 11)  

Finally, it never was the purchaser’s claim that ITC is an absolute right. The purchaser’s claim was that if the conditions prescribed under the statutory provisions and rules have been fulfilled by the purchaser, then ITC transforms into its right, and denial of the same amounts to violation of right to property. By dismissing the argument by characterizing it as a claim for an absolute right, the Kerala High Court did not to do justice to the petitioner’s claim. Also, the core question before the High Court was whether the onerous conditions such as those prescribed under Section 16(2)(c) and Section 16(4), place all purchasers – bona fide and those colluding with suppliers – in a similar category and thereby violate Article 14 of the Constitution. The High Court’s analysis of the arguments relating to Article 14 was bereft of a comprehensive analysis as I elaborate in the section below.      

Purchaser’s Reliance on Supplier 

Section 16(2)(c) states that no person shall be entitled to claim ITC unless the tax charged in respect of such supply has been actually paid to the Government either in cash or utilization of ITC admissible in respect of such supply. This condition translates into the supplier filing their monthly return – GSTR-1 – indicating its outward supplies for the month. The information in the said return will auto-populate a return of the purchaser – GSTR-2A – which will indicate the inward supplies of the purchaser. The latter informs the purchaser’s claim for ITC. As is understandable, the purchaser is dependent on the supplier filing GSTR-1 accurately and in a timely fashion to enable it to claim ITC.

The purchaser’s argument was that GSTR-2A is a dynamic, read-only document, and is merely a facilitation document. And if certain purchases are not reflected in GSTR-2A, then it cannot be the basis of denial of ITC. The purchaser argued that if it possesses all the documents listed in Rule 36, CGST Rules, 2017, i.e., tax invoice, proof payment, actual receipt of goods then it should be presumed to have discharged the burden of genuineness of its ITC claim. Also, the purchaser cannot be burdened to ensure that the supplier has remitted the tax as it an impossible condition to fulfil for the purchaser. In the absence of purchaser lacking the resources to force a supplier to remit the tax, the doctrine of impossibility should be applicable. And since Section 16(2)(c) prescribes an impossible condition, it should be held as unconstitutional.  

The purchaser’s final argument vis-à-vis Section 16(2)(c) was that the provision treats bona fide purchasers similarly as purchasers that collude with suppliers to fraudulently claim ITC thereby being violative of Art 14. The purchaser’s claim was that denial of ITC to bona fide purchaser for supplier’s default in tax payment was arbitrary and irrational exercise of power. The purchaser also made an alternative argument that Section 16(2)(c) should restrict its ITC only if mala fide on its part was established. And that purchaser’s ITC should not be blocked if it has all the documentary evidence and by extension a prima facie proof of its bona fide intent and transaction.   

State’s defence of making the purchaser’s claim of ITC dependent on supplier’s payment of tax was as follows: the State argued that ITC ‘crosses State borders’. The supplier in originating State USES SGST/CGST credits of IGST collected from the purchaser and the latter will discharge output liability by claiming SGST/CGST credits of the IGST paid to the supplier. The originating State and the Union are under an obligation under Section 53, CGST Act, 2017 to transfer the CGST/SGST component utilized by the supplier and make it available to the destination State, since GST is a destination-based tax. The State’s claim was that if the supplier defaults in remitting the tax, but purchaser it allowed to claim ITC based on invoice, the originating State would have transferred tax to destination State without the former having received the tax. 

The purchaser raised some important and vital Constitutional arguments, but the Kerala High Court’s summary analysis was a complete endorsement and replication of the State’s argument and it concluded that: 

Considering the aforesaid scenario, without Section 16(2)(c) where the inter-state supplier’s supplier in the originating State defaults payment of tax (SGST+CGST collected) and the inter-state supplier is allowed to take credit based on their invoice, the originating State Government will have to transfer the amounts it never received in the tax period in a financial year to the destination States, causing loss to the tune of several crores in each tax period. (para 83)

The Kerala High Court added that: 

… this renders the whole GST laws and schemes unworkable. Therefore, as contended, the conditions cannot be said to be onerous or in violation of the Constitution, and Section 16(2)(c) is neither unconstitutional nor onerous on the taxpayer. (para 84)

The Kerala High Court dismissed the Constitution and fundamental rights-based arguments by agreeing to the State’s argument about administrative workability of the GST. But the High Court never seriously engaged with the argument if Section 16(2)(c) places a bona fide purchaser in the same category as a purchaser who colludes with a supplier to claim ITC fraudulently. The two categories of purchasers, prima facie, constitute two different categories. Neither was the ‘doctrine of impossibility’ squarely addressed by the High Court. How can a purchaser ensure that the supplier remits GST to the State? The purchaser can, ordinarily speaking, pay the tax to the supplier and ensure it has adequate proof of the payment. Persuading or forcing the supplier to remit the tax to the State in a timely and proper fashion isn’t or shouldn’t be the purchaser’ task. 

There is precedent – in pre-GST laws – that mandates payment of tax by the supplier before the purchaser can claim ITC. Legality apart, what is the policy driving enactment of such provisions? State wants to be secure about its revenue. State’s objective is to obtain tax from the supplier before it provides purchaser ITC on tax paid to the supplier. Documentary evidence of the supply of goods/services and payment of tax is insufficient to provide ITC. The reason is that, at times, the purchaser and supplier collude to make bogus transactions and claim ITC fraudulently. The fear or perhaps experience of allowing bogus ITC claims has resulted in making a statutory provision that places an onerous burden on the bona fide purchasers too. But the Courts have – until now – not engaged in a serious analysis if this similar treatment of all kinds of taxpayers violates Article 14 and whether it amounts to reasonable restriction under Article 19(6).    

Conclusion The Kerala High Court’s decision follows a burgeoning body of judicial precedents that have termed ITC as a concession and subject to statutory conditions. And yet Courts have not been able to cogently analyze as to why ITC cannot, under certain conditions, be termed as a right and not a concession. Neither have the Constitutional arguments based on Fundamental Rights been examined in any methodological fashion. While one may – and it seems to be increasingly the case – may become familiar with provisions imposing onerous demands on taxpayers to successfully claim ITC, it not a certificate of their constitutionality. Neither do the legality of such provisions provide them a stamp of good tax policy. Securing revenues for itself is certainly one of the goals of the State, but tax laws cannot and should not be so designed that they impose increasingly burdensome conditions on the taxpayers before they can claim ITC or similar such benefits under a tax statute.    

Gujarat AAAR Disallows ITC on Mandatory CSR: Provides Superfluous Reasoning

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Gujarat Appellate Authority for Advance Ruling (‘Gujarat AAAR’) in a recent ruling[1] has concluded that the applicant was not allowed to claim ITC on inputs and input services for mandatory expenditure made in pursuance of Section 135, Companies Act, 2013. The answer to this question should have been obvious after the amendment to CGST Act, 2017 via the Finance Act, 2023. However, the Gujarat AAAR referred to GST Council meetings, IT Act, 1961 in an unnecessary exercise of providing superfluous reasons for its conclusion. 

Introduction 

The applicant, in the first instance, approached Gujarat Authority for Advance Ruling (‘Gujarat AAR’) to seek answer to the following question: whether the inputs and input services procured by the applicant to undertake mandatory CSR activities as required under Section 135 of the Companies Act, 2013 qualify as being in the course and furtherance of business and are eligible for ITC under Section 16, CGST Act, 2017. The Gujarat AAR answered in the negative and primarily relied on the definition of CSR under Company (CSR Policy) Rules, 2014 to hold that as CSR activities are excluded from the normal course of business activities of the applicant, ITC cannot be claimed for such activities. 

The applicant appealed to Gujarat AAAR and assailed the Gujarat AAR’s interpretation on various grounds. The applicant, for example, correctly challenged the Gujarat AAR’s decision on the ground that there was no nexus between the definition of CSR under Company (CSR Policy) Rules, 2014 and eligibility to claim ITC under Section 16, CGST Act, 2017. The applicant also alternatively argued that Section 16, CGST Act, 2017 uses the phrase ‘in course and furtherance of business’ while Company (CSR Policy) Rules, 2014 use the phrase ‘normal course of business’ and that Gujarat AAR erred in interpreting both the phrases to mean the same thing. 

Gujarat AAAR’s Reasoning and Conclusion

As stated above, the answer to the applicant’s question should have been straightforward with the Gujarat AAAR relying on Section 139, Finance Act, 2023 which introduced the following clause to Section 17(5), CGST Act, 2017:

“fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013;

Section 17(5), CGST Act, 2017 enumerates the situations in which ITC is blocked, and the insertion of above clause in Section 17(5), CGST Act, 2017 means that goods or services or both used to fulfil mandatory CSR obligations will not be eligible for ITC. And as a result of this deeming fiction, mandatory CSR activities will not be considered as activities ‘in the course of business’.

Instead, the Gujarat AAAR chose to arrive at this conclusion via a circuitous route: it referred to the decision of the 48th GST Council to disallow ITC on mandatory CSR activities, cited a paragraph of the relevance of GST Council recommendations under the GST regime. (para 17) It then unnecessarily referred to the fact that IT Act, 1961 disallowed expenditure to an assessee for mandatory CSR activities. (para 16) Reference to all the above sources was and is perhaps necessary to resolve an ambiguity or an uncertainty in a statutory provision. In such cases, it is incumbent on adjudicating body to refer to additional sources in order to decide the case and/or answer specific queries. 

In the impugned case, the question was straightforward and the legal position amply clear after the amendment made to Section 17, CGST Act, 2017 via the Finance Act, 2023. Gujarat AAAR could have simply referred to the amended provision and answered the applicant’s query instead of stating multiple reasons and making unnecessary references to IT Act, 1961. Gujarat AAAR’s ruling in the impugned case is an example of arriving at the right conclusion by using superfluous reasoning. 

Conclusion 

It is hoped that the relevant authorities – AAR/AAAR – will adopt more precise reasoning and arrive at proper conclusions instead of referring to sources that have no relevance in interpreting a statutory provision that contains no ambiguity. It would prevent unnecessary confusion that may arise in the mind of taxpayers who are similarly situated or otherwise.   

[1] Re: M/s. Adama India Private Limited, GUJ/GAAR/APPEAL/2023/04, dated 26.09.2023. Available at https://taxguru.in/wp-content/uploads/2023/10/In-re-Adama-India-Private-Limited-GST-AAR-Gujrat.pdf (Last accessed on 10.10.2023).  

Calcutta High Court Sets Aside Order Denying ITC

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In a recent judgment[1], the Calcutta High Court set aside the order of the Revenue Department wherein the ITC of assessee was disallowed on the ground of mismatch in GSTR-2A and GSTR-3B. While Courts have, of late, been consistent in their stance that the mismatch in details between GSTR-2A and GSTR-3B cannot be a ground to deny ITC. In the impugned case, the High Court made similar observations suited to the facts of the case. 

Facts

In the impugned case, the assessee was registered under the Central Goods and Services Act, 2017 and the West Bengal Goods and Services Act, 2017. The assessee purchased several bidi leaves from various suppliers. In January 2021, physical inspection of the business premises was assessee was carried on and thereafter proceedings against the assessee were initiated under Section 73, CGST Act, 2017. Eventually, an order was passed against the assessee which was confirmed on appeal. The order rejected ITC claim of the assessee on the ground that the there was mismatch of ITC claimed in GSTR-3B and the same was not reflected in GSTR-2A.

Arguments and Decision 

The assessee claimed that ITC was denied and order passed against it without considering the documents, without providing the assessee an opportunity of being and also alleged violation of principles of natural justice. The assessee claimed that the transactions relating to purchase of bidi leaves were genuine and ITC cannot be denied on the ground that one of the suppliers errenously mentioned the wrong GSTIN number of the petitioner in the invoice. The assessee further argued that one of its suppliers had erroneously mentioned a B2B supply as a B2C supply and these errors could have been easily rectified by the State. 

The State countered the assessee’s assertion of violation of principles of natural justice enthusiastically. It argued that the assessee was served multiple notices to appear before it and present its case, but it either failed to appear or adopted delaying tactics and did not produce the relevant invoices. The Calcutta High Court with the State on this count and noted that fairness cannot be ‘a one way street’ and that the assessee cannot adopt an implacable approach and refuse to appear before adjudicatory authorities only to later complain of violation of principles of natural justice. 

Nonetheless, the Calcutta High Court observed that even in an ex-parte order, an adjudicating authority should proceed on the basis of records available and deal with the appeal on merits in accordance with the law. It observed that: 

Any mismatch ought to have been attempted to be ascertained from the records of the respondent authorities and their online portal. (page 6)      

The Calcutta High Court then referred to a Circular issued by CBIC on 27 December which inter alia provided for the approach to be followed by the Revenue Department where the supplier reports a supply as B2C instead of B2B in their GSTR-1. Since the steps prescribed in the said Circular were not followed, the High Court set aside the order denying the assessee’s claim of ITC. 

Conclusion 

While the Calcutta High Court’s order in the impugned case cryptic and is unlikely to be considered as ‘landmark’, there are three important issues that need to be underlined here: first, that the High Court’s observation that authorities should not deny ITC to assessee on cavalier grounds such as basic errors in GSTR-2A and should verify the claims of assessee by relying on their records and verifying from the online portal; second, the High Court’s emphasis on considering the relevant law and procedure even when passing an ex-parte order; third, the need for the Department of Revenue to follow the procedure and steps prescribed in its own Circulars and not act in violation or at least in defiance of those steps. It is important that other Courts note the aforesaid aspects in the impugned judgment and build on them to create a body of jurisprudence that holds that State account for denying ITC on flimsy grounds.      

[1] M/S Makhan Lal Sarkar and Anr v The Assistant Commissioner of Revenue, State Tax B.I. and Ors WPA/2146/2023, decided on 18.09.2023.  

Kerala HC Holds ITC Cannot be Denied Due to Difference in GSTR-2A and GSTR-3B

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In a recent judgment[1], the Kerala High Court has aligned with an emerging jurisprudence wherein the High Courts have held that under the GST regime a taxpayer’s ITC cannot be denied merely on ground of difference between GSTR-2A and GSTR-3B. 

In the impugned case, the Kerala High Court expressly noted the ratio of Supreme Court in M/s ECom Gill Coffee Trading Private Limited case[2] and the Calcutta High Court’s judgment in Suncraft Energy Private Limited case[3] to conclude that ITC of an assessee under the GST regime cannot be denied merely on the ground of discrepancy in GSTR-2A and GSTR-3B. It then cited a recent judgment of the Kerala High Court itself in Diya Agencies case[4] where the Kerala High Court had held that: 

In view thereof, I find that the impugned Exhibit P-1 assessment order so far denial of the input tax credit to the petitioner is not sustainable, and the matter is remanded back to the Assessing Officer to give opportunity to the petitioner for his claim for input tax credit. If on examination of the evidence submitted by the petitioner, the assessing officer is satisfied that the claim is bonafide and genuine, the petitioner should be given input tax credit. Merely on the ground that in Form GSTR-2A the said tax is not reflected should not be a sufficient ground to deny the assessee the claim of the input tax credit. The assessing authority is therefore, directed to give an opportunity to the petitioner to give evidence in respect of his claim for input tax credit. The petitioner is directed to appear before the assessing authority within fifteen days with all evidence in his possession to prove his claim for higher claim of input tax credit. After examination of the evidence placed by the petitioner/assessee, the assessing authority will pass a fresh order in accordance with law. (para 8) (emphasis added)

While the Kerala High Court’s 4-page order in the impugned case does not offer much scope for analysis, the primary aim of this blog post is two-fold: first, to record that Courts are increasingly taking the view that a taxpayer’s claim for ITC under GST regime cannot and should not be denied on grounds of discrepancy between GSTR-2A and GSTR-3B. This line of reasoning, if continued, will likely further underline the procedural nature of the former return and that it is only for information purposes and not the only basis of substantive claims. Courts are, until now, taking a reasonable view that ITC cannot be denied or affirmed merely based on information recorded and contained in GSTR-2A. Second, I wish to highlight that while in the impugned case the Kerala High Court relied heavily on the ratio in Diya Agencies case, it is important to highlight that in the latter case the Kerala High Court was expressly dealing with a situation where the taxpayer claimed that it was in possession of genuine invoices and bills that proved that transactions in question were genuine. Accordingly, in Diya Agencies case, the taxpayer was directed to appear before the concerned officer to prove the claim of ITC. While in the impugned case, no such fact was recorded by the Kerala High Court though it is not possible to know for sure if such claim was made by the taxpayer. Going forward, these factual distinctions may prove vital in reinforcing or diluting what is an emerging body of case law as regards the relevance of GSTR-2A in claiming ITC.     

[1] M/S Henna Medicals v State Tax Officer, Second Circle, SGST Department 2023: KER: 55979. 

[2] State of Karnataka v M/S Ecom Gill Coffee Trading Private Limited 2023 SCC OnLine SC 248. 

[3] Suncraft Energy Private Limited v The Assistant Commissioner, State Tax, Ballygunge (2023) 8 TMI 174. 

[4] Diya Agencies v State Tax Officer 2023 (9) TMI 955. 

Understanding Orissa High Court’s Judgment in Safari Retreats Case

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This post is an attempt to understand the Orissa High Court’s judgment in Safari Retreats case.[1] While the judgment was pronounced by the High Court in April 2019, its current relevance stems from the appeal against the judgment being currently heard by the Supreme Court. This post is an attempt to understand the petitioner’s case as presented before the Orissa High Court and the nature of issues that the Supreme Court may have to engage with to decide the issue satisfactorily.  

Introduction 

The facts of the case were straightforward: petitioners were in the business of construction of shopping malls for the purpose of letting out the same to numerous tenants and lessees. Petitioners purchased huge quantities of materials and inputs for the purpose of construction, i.e., cement, plywood, wires, lifts, electrical equipment, etc. and paid GST on the said purchases. The petitioner completed construction of one of the shopping malls in Bhubaneshwar and decided to let out different units to various persons on a rental basis. The activity of letting out units amounts to a supply of service and is taxable under the relevant GST legislations, i.e., Central Goods and Services Act, 2017 and the Odisha Goods and Services Act, 2017 (‘GST laws’). 

The petitioner claimed that it had accumulated Input Tax Credit (‘ITC’) of Rs 34,40,18,028/- on purchase of inputs for construction of the shopping mall. However, the Revenue Department advised it to deposit the entire sum instead of claiming ITC on the same in view of the restriction placed under Section 17(5)(d) of GST laws. Section 17(1), CGST Act, 2017 states that where the goods or services or both are used by a registered person partly for the purpose of business and partly for other purpose, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business. Section 17(5) provides that notwithstanding anything contained in sub-section (1), ITC shall not be available for certain supplies. Section 17(5)(d) provides that ITC shall not be available in respect of the following: 

            Goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. 

Explanation.- For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property. 

The Revenue Department cited the aforesaid provision and stated that the petitioner cannot claim ITC of of Rs 34,40,18,028/- against the supply of service, i.e., renting of units in the shopping mall. The petitioner challenged the vires of Section 17(5)(d), CGST Act, 2017 arguing that in its case there was no break in the tax chain. The petitioner argued that it had paid GST on purchase of its inputs and collected tax from the tenants while letting out units in the shopping mall. And while blocking ITC if an immovable property is sold made sense, because sale of immovable property after issuance of completion certificate did not attract GST. However, blocking ITC in the petitioner’s case was devoid of reason since there was no break in the tax chain, i.e., its input and output were both subject to GST. 

Orissa High Court’s Decision 

The Orissa High Court’s judgment in the impugned case is a unique case of devoting a substantial part of the judgment to arguments of the parties and earmarking only a miniscule portion to the conclusion without articulating detailed reasons for its conclusion. The High Court stated that the very purpose of GST laws is to ensure uniform collection of tax on supply of goods and services and prevent multi taxation. And by stating the aforesaid objective of GST laws, it concluded that: 

            While considering the provisions of Section 17(5)(d), the narrow construction of interpretation put forward by the Department is frustrating the very objective of the Act, in as much as the petitioner in that case has to pay huge amount without any basis. Further, the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case the property is sold prior to completion certificate, he would not be required to pay GST. But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is covered under GST, but still he has to pay huge amount of GST, to which he is not liable. (para 19) (emphasis added)      

Thus, the Orissa High Court concluded that Section 17(5)(d) should be read down and the narrow reading adopted by the Revenue Department should not be accepted since ‘the very purpose of the credit is to give benefit to the assessee.’ (para 20) In stating the latter, the High Court relied on the observation made by the Supreme Court in Eicher Motors case[2] where in the context of excise duty, it had held that the right to claim ITC vests when the tax on inputs is paid and right to ITC becomes absolute when input is used in the manufacture of the final product. 

There are two pillars on which the High Court’s conclusion is standing: GST’s avowed purpose of preventing multi taxation, which in the context can be reasonably interpreted to mean prevention of tax on tax; second, is the High Court’s understanding of ITC as a benefit that the State provides to an assessee. 

The first reason has credence and relevance in every case involving blocking of ITC. Since it is a vital objective of GST to prevent cascading effect of taxes, the burden should be on the State to justify why in certain circumstances there is deviation from it and articulate the underlying rationale or policy objective. So High Court’s reliance on GST’s purpose of ensuring uniformity and preventing tax on tax was justifiable. Prevention of tax on tax and uniformity of GST, both are relevant and valid purposes of GST, on the touchstone of which cases can be adjudicated, but the High Court seems to have relied on them excessively in the impugned case. Equally, the High Court did not bother to seek an explanation from the State as to the reason for incorporating Section 17(5)(d). Second, Supreme Court’s observation in Eicher Motors case about ITC being a benefit provided to the taxpayer was in a different context: rules to claim ITC were changed after several taxpayers had utilized the input in the final product. It was in that context that the Supreme Court observed that ITC had vested in the taxpayer. In the impugned case, there was no change in the relevant provisions after the petitioner had initiated the transaction. Section 17(5)(d), CGST Act, 2017 clearly stated that ITC in petitioner’s case was blocked and there was no change while the transaction was ongoing. While the differing fact situations not detract from the larger debate on whether ITC is a State’s concession or taxpayers’ right; the issue did receive a rather cursory treatment from the High Court in the impugned case.  

Petitioner’s Arguments before the Orissa High Court 

I’m discussing the arguments adopted before the High Court at the end because they are likely to be repeated before the Supreme Court in a similar manner or edited suitably. I’m mentioning some of the arguments below to better illustrate how the petitioners’ in the impugned case viewed their position wherein they were unable to claim ITC and their view of the provision in question, i.e., Section 17(5), CGST Act, 2017. 

First argument of note that the petitioner adopted was that by allowing ITC to taxpayers who construct a building with the intent of sale under Schedule II, para 5(b) of CGST Act, 2017, but denying it to petitioners who let out such property on rent is violative of Article 14 of the Constitution. The petitioners alleged discriminatory treatment and argued that Section 17(5)(d) was arbitrary in nature. The petitioners laboured on the fact that under Schedule II, para 5(b) of CGST Act, 2017 ITC is only blocked if the entire consideration for the building in question is received after issuance of completion certificate. As per petitioners in such instances blocking of ITC made sense since no GST is charged in such scenarios, leading to disruption of tax chain. But in the petitioner’s case they were paying GST on their inputs and collecting GST on their output, i.e., renting property to their tenants leading to an unbroken tax chain and thereby not creating any rationale for blocking ITC in their situation. 

Second, the petitioner touched upon the fact that blocking their ITC is an unreasonable restriction under Article 19(1)(g) of the Constitution but did not elaborate on the unreasonableness.

Third, they repeatedly mentioned how the blocking of their ITC constitutes a detraction or at the very least a dilution of GST’s objective of preventing multiple taxation. And that by ensuring that the petitioner bear the additional burden of tax by denying them ITC the objective of GST was being frustrated. 

Fourth, the petitioner pointed out that one of the ingredients in Section 17(5)(d) was that the construction should have been done by the taxpayer ‘on their own account.’ The petitioners distinguished their case from the scenarios contemplated under Schedule II, para 5(b) of CGST Act, 2017 as well as under Section 17(5)(d). They argued that the former contemplated situations where construction was ‘intended for sale’ while the latter contemplated construction by a taxpayer ‘on his account’. And that the petitioner constructed the shopping mall with an intention ‘for letting out’ to tenants and thus their cannot be covered by Section 17(5)(d). 

Except for the third argument, which the Orissa High Court reproduced in its conclusion, it did not engage with any of the petitioner’s argument in any significant manner. Thus, one is unsure of what is the exact meaning of the phrase ‘on their own account’ used in Section 17(5)(d) and its resultant scope. Neither is applicability of Article 14 to the impugned set of facts clear even though the petitioner made elaborate arguments on both counts.  

Finally, it is worth noting that the Orissa High Court hardly provides any space to the State’s arguments and only cites relevant judgments relied on by the State. As a result, one can only gather that the State was arguing that ITC can only be claimed if the statutory conditions are met and the relevant conditions cannot be assailed as unconstitutional only because the tax set off is denied to the taxpayers. 

Way Forward 

The Revenue has filed an appeal against the Orissa High Court’s judgment and the approach that the Supreme Court will adopt is of course difficult to predict. But it is safe to say that a conservative approach wherein the legislature is provided a wide leeway in enacting tax laws is unlikely to lead to a conclusion that aligns with the Orissa High Court. Though such an interpretive approach would not be novel, but in line with well-entrenched jurisprudence. On the other hand, if the Supreme Court’s bench adjudicating the case is persuaded by the advocates in question that the provision in question infringes on a Fundamental Right, e.g., Article 19(1)(g) of the Constitution or falls foul of Article 14 then there is a possibility of the Supreme Court reading down the provision akin to the Orissa High Court’s opinion. Irrespective, I will update the latest developments on this case via another blog post.  

[1] Safari Retreats Pvt Ltd v Chief Commissioner of GST [2019] 105 taxmann.com 324. 

[2] Eicher Motors Ltd v Union of India (1999) 2 SCC 361. 

Kerala HC Accepts Taxpayer’s Plea Against Denial of ITC

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In a crisp judgment[1], the Kerala High Court has held that Input Tax Credit (‘ITC’) cannot be denied to a taxpayer merely because the tax paid is not reflected in GSTR-2A. The Kerala High Court’s conclusion aligns with a recent judgment pronounced by the Calcutta High Court where the taxpayer was provided a similar relief. 

Facts and Arguments 

The issue in this case was that the taxpayer was denied ITC by the Revenue Department on the ground that the amount of ITC claimed did not match the amount mentioned in GSTR-2A. The taxpayer relied on Section 16, CGST Act, 2017 and stated that the provision contained a non obstante clause implying that if the conditions prescribed under the provision were fulfilled by the taxpayer, ITC cannot be denied. 

The taxpayer, as in Suncraft Energy Pvt Ltd case, stated that GSTR-2A is for the purpose of taxpayer facilitation and does not/should not impact the ability of a taxpayer to claim ITC. Taxpayer in this case too stated that CBIC’s press release dated 18.10.2018 clarified that GSTR-2A does not impact a taxpayer’s ability to claim ITC on self-assessment basis under Section 16, CGST Act, 2017. Reliance was placed on Bharti Airtel case[2] for similar purposes.

High Court Provides Relief to Taxpayer 

The Kerala High Court essentially accepted all the arguments of the taxpayer, and interestingly, placed reliance on M/S Ecom Gill Trading Pvt Co Ltd case[3] to state that if the taxpayer has paid the tax amount to the dealer and said tax has not been remitted by the dealer, then the burden of proof as regards remittance of tax is on the taxpayer. However, while in M/S Ecom Gill Trading Pvt Co Ltd case the Supreme Court had held that the taxpayer needs ‘to prove beyond doubt’ the genuineness of the transaction, but, in the impugned judgment the Kerala High Court did not use a similar phrase and instead remanded back the matter to Assessing Officer to examine the taxpayer’s claim of ITC and concluded that: 

If on examination of the evidence submitted by the petitioner, the assessing officer is satisfied that the claim is bonafide and genuine, the petitioner should be given input tax credit. Merely on the ground that in Form GSTR-2A the said tax is not reflected should not be a sufficient ground to deny the assessee the claim of the input tax credit. (para 8)

The Kerala High Court’s judgment is a welcome development on the heels of the Calcutta High Court’s judgment in the Suncraft Energy Pvt Ltd case and ensures that the ITC claims of the taxpayers are not denied on whimsical grounds. Instead, the nature of GST returns are respected to facilitate taxpayer claims. Hopefully, this will provide momentum to a more coherent jurisprudence on this issue in the near future. 

[1] Diya Agencies v State Tax Officer 2023 (9) TMI 955. 

[2] Union of India v Bharti Airtel Ltd and Ors 2021 SCC OnLine 1006. 

[3] State of Karnataka v M/s Ecom Gill Trading Pvt Co Ltd 2023 SCC OnLine SC 248. 

Patna High Court Opines on ITC Claims: Interprets Section 16 of CGST Act, 2017 Strictly

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In a recent judgment[1], the Patna High Court engaged with the issue of whether a claim for Input Tax Credit (‘ITC’) is sustainable when the purchasing dealer has made the tax payment to the seller, but the latter does not pay tax to the State. The issue of non-payment of tax by the seller and its impact on purchaser’s ITC claims has arisen frequently under pre-GST and GST regime, with no clear resolution. Recently, the Calcutta High Court – where issue of GST returns was central – opined that the Revenue should first proceed against the seller instead of reversing the ITC of purchaser. In the impugned case, the Patna High Court adopted a different approach where the ingredients of Section 16, CGST Act, 2017[2] were central in deciding the impugned case. 

Introduction 

The purchasing dealer claimed that the seller has not paid tax to the State despite the former making the payment to the latter. As per the purchaser, the liability of purchaser stood satisfied on payment of tax to the seller and the State seeking to recover the said tax from the purchaser would amount to double taxation and diluting the rationale of ITC, i.e., prevention of cascading effect of taxes. The State, on the other hand, argued that the conditions prescribed in Section 16, CGST Act, 2017 need to be satisfied for a taxpayer to claim ITC successfully.

The purchasing dealer tried to argue that the Supreme Court’s observations in ECom Gill Coffee case[3] that the purchaser had to prove ‘prove beyond doubt’ the genuineness of transaction in question to claim ITC was inapplicable in the impugned case since the said case was decided under the KVAT Act. The Patna High Court agreed with the argument but noted that the inapplicability of the ECom Gill Coffee case would still not absolve the dealer of the requirement under Section 16(2)(c) which requires payment of tax as a pre-condition for successfully claiming ITC.

Patna High Court Mandates Compliance with Section 16 

The Patna High Court while emphasizing that unless the purchaser satisfies the conditions prescribed under Section 16, cannot successfully claim ITC made two observations that are important to highlight as to how Courts struggle to categorise ITC. For example, the High Court first observed that the condition under Section 16(2)(c) requiring payment of tax via cash or ITC is a burden:

This in effect is a burden of proof cast on the purchasing dealer who claims Input Tax Credit, which is a right created under statute; sustained only under the specific terms of the statute. (para 10) (emphasis added)   

In the following paragraph, the Patna High Court observed that ITC was a benefit conferred by the statute: 

Necessarily, the conditions for such availment of credit has to be scrupulously followed failing which there can be no benefit conferred on the assessee. The benefit is one conferred by the statute and if the conditions prescribed in the statute are not complied; no benefit flows to the claimant. (para 11) (emphasis added) 

 The prima facie effect of observations in the above paragraphs is that ITC is both a right created under the statute and a benefit conferred by the statute. In my opinion, it is important to categorise it one and unambiguously so; it would determine the extent and nature of conditions can be imposed on taxpayers before they can successfully claim ITC. Courts through casual remarks on the nature of ITC, such as in the impugned case, only add confusion instead of conceptual clarity. 

Conclusion 

Nonetheless, the Patna High Court was categorical in conclusion that ITC postulates that there should be credit in ledger of the purchasing dealer and the said credit can only arise once the seller has paid the tax to the State. Mere production of invoices by the purchaser is not sufficient to claim ITC. Strangely, though the High Court noted that purchaser and seller have an ‘independent contract’ without junction of the Government. But it nonetheless noted that the purchaser’s claim of ITC is dependent on seller paying the tax, a statutory condition under Section 16(2)(c). In other words, the purchaser must either ensure that the seller fulfils its statutory obligation of paying tax to the State or be at the mercy of seller. Because the purchaser cannot successfully claim ITC until the seller pays the tax. Thus, it can also be said that Section 16 is an in-built condition in the purchaser-seller ‘independent contract’ for the purchaser to claim ITC. 

While the State claiming that conditions of Section 16 need to be strictly fulfilled for a purchaser to claim ITC is valid, what is unsettling and legally indeterminate are two things: first, if the State can impose such a statutory condition? The answer to this question would be partially supplied once we have judicial clarity on whether ITC is a right or a concession, for in the latter case such onerous conditions could be justified; second, it is unclear if the seller acts an agent of the State or purchaser once it collects the tax? In my opinion, only in the latter case is it defensible to make the purchaser’s claim of ITC dependent on seller paying the tax. Otherwise, it is not far-fetched to say that conditions under Section 16 are aligned to the State’s interest rather than a coherent conceptual approach towards transactions and the parties that generate GST.      

[1] M/s Aastha Enterprises v The State of Bihar 2023 LiveLaw (Pat) 96. 

[2] This provision is pari materia with Section 16, Bihar Goods and Services Tax Act, 2017, the impugned provision in this case.

[3] State of Karnataka v M/s Ecom Gill Coffee Trading Private Limited 2023 SCC OnLine SC 248. 

Reversal of ITC: Calcutta High Court Opines on Liability of Buyer-Seller & GST Returns

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In a recent judgment[1], the Calcutta High Court gave a detailed opinion on the nature and role of some of the tax returns, specifically, GSTR-2A, that taxpayers are required to file under GST. And in the process provided some clarity on who bears the burden – buyer or supplier – for paying taxes to the State in case of errors in the relevant tax returns.  

Introduction 

The appellant purchased certain goods and services from its supplier and paid GST on the supplies. However, some of the invoices of the supplier were not reflected in GSTR-2A of the appellant for the Financial Year 2017-18. It is important to state here that GSTR-2A is an auto-drafted statement that is generated for each taxpayer based on their supplier’s data and provides the taxpayer ITC-related information. When a taxpayer files their monthly summary under GSTR-3B, it is important for them to reconcile ITC and other data with their GSTR-2A. Thus, any error/mistake in the GSTR-2A generated by a taxpayer’s supplier could affect the ITC claims of a taxpayer.   

In the impugned case, the appellant was served notice for recovery of input tax credit (‘ITC’) availed and was eventually the ITC of the appellant was reversed. The ground for reversal of ITC was mismatch in the taxpayer’s GSTR-2A and GSTR-3B. The appellant defended the mismatch under GSTR-2A with GSTR-3B by arguing that its transactions with the supplier were genuine and were not reflected in GSTR-2A due to the supplier’s error. However, the notice was adjudicated and penalty along with interest were determined under Section 73(10), CGST Act, 2017. The appellant approached the Calcutta High Court against the order with its main grievance being that proceedings cannot be initiated against it without conducting any enquiry or effecting any recovery from the supplier.

In other words, if the supplier had not paid GST to the State – erroneously or otherwise – then the Revenue should proceed against the supplier and not reverse the appellant’s ITC. The issue was of attributing responsibility for the GST on the transactions in question. The Calcutta High Court adjudicated on the issue by inter alia stating the importance and role of the relevant tax returns under GST.    

High Court Adjudicates in Favor of Taxpayer 

The appellant’s arguments were reliant on Section 16, CGST Act, 2017 and CBIC Press Releases dated 4.05.2018 and 18.10.2018. The appellant argued that they had fulfilled all the statutory conditions to avail ITC as prescribed under Section 16(2) and they cited CBIC’s Press Releases to emphasise that GSTR-2A was for the purpose of taxpayer facilitation/information and did not impact the ability of a taxpayer to claim ITC on a self-assessment basis. In other words, as long as the taxpayer was fulfilling the statutory conditions prescribed under Sec 16, CGST Act, 2017 discrepancies in GSTR-2A should not affect its ability to claim ITC.  

The appellant further placed emphasis on Bharti Airtel judgment[2] of the Supreme Court to underline the nature of GSTR-2A and that it was de-linked with GSTR-3B. The Supreme Court in the Bharti Airtel judgment has held that GSTR-2A and the common electronic portal acts as enablers and facilitators for claiming ITC on self-assessment basis and the conditions to claim ITC under Section 16, CGST Act, 2017 were termed as crucial and substantive. Equally crucially, the appellant relied on Arise Limited case[3] where the issue for consideration was whether the purchasing dealer should be made liable for the default committed by selling dealer and the Delhi High Court had held that bona fide purchaser under a transaction with a registered seller should not be made responsible for seller’s default unless collusion between purchaser and seller is established by the Revenue. 

The Calcutta High Court accepted all the arguments of the appellant including the fact that the appellant possessed the invoice and the bank statement to prove that they had bought the goods from the supplier and the transactions in question were genuine transactions. 

Conclusion 

The Calcutta High Court’s judgment wherein it directed the Revenue to first proceed against the supplier and only in exceptional circumstance proceed against the appellant is a welcome development. It only reiterates what should be the default position under GST laws as far tax defaults are concerned. Unless collusion or fraud is established or a prima facie case for the same is made, the Revenue should not deny ITC or reverse ITC of the purchaser in case of tax default by the supplier. This is the desirable position of law and should be the law as followed in practice.     

[1] Suncraft Energy Pvt Ltd v The Assistant Commissioner, State Tax, Ballygunge (2023) 8 TMI 174. 

[2] Union of India v Bharti Airtel Ltd and Ors 2021 SCC OnLine SC 1006. 

[3] Arise India Ltd v Commissioner of Trade and Taxes, Delhi and Ors MANU/DE/3361/2017. 

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