Calcutta High Court

ITC Can be Denied if Delay in Filing Returns: Cal HC

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The Calcutta High Court recently decided the question whether an assessee filing its tax returns after the stipulated time – prescribed under Section 16(4), CGST Act, 2017 – is entitled to claim ITC. The High Court answered in the negative and upheld the GST Department’s order denying ITC to the assessee on the ground of belated filing of returns.  

Facts and Arguments 

Assessee in the impugned case submitted the returns in GSTR-3B for the period from November 2018 to March 2019 on 20.10.2019 which was beyond the due date of submission, i.e., September 2019. The assessee was asked to show cause as to why its claim for ITC should not be denied since the returns were filed after the due date. On assessee’s failure to respond, the GST Department initiated recovery proceedings and debited the requisite amount from the cash ledger balances of the assessee. The assessee challenged the recovery actions before the Calcutta High Court. 

To begin with, it is important to briefly note that Section 16, CGST Act, 2017 prescribes the eligibility and conditions for an assessee to claim ITC. Section 16(2) requires fulfilment of certain conditions such as possession of tax invoices, receipt of goods or services or both while Section 16(4) prescribes the time within which an assessee is required to file returns to be eligible to claim ITC. And, another aspect that would become relevat in the subsequent discussion, Section 16(2) begins with  non-obstante clause, ‘Notwithstanding anything contained in this section’ while a similar clause is absent in Section 16(4). 

The assessee’s argument was that once the conditions stipulated in Section 16(2), CGST Act, 2017 have been fulfilled by the assessee, it is entitled to the right to claim ITC. And that availing or utilizing the ITC through procedural formalities of filing returns is a matter of choice for the assessee. The assessee further argued that ITC is not claimed through returns but through books of account under Section 16(2). And that the non-obstante clause used in Section 16(2) cannot be negated by stipulating an outer time for filing returns as an additional condition for claiming ITC under Section 16(4). If an assessee is denied the right to claim ITC for failure to file returns within the time stated under Section 16(4), it would negate the non-obstante clause of Section 16(2). 

The Revenue Department, on the other hand, argued that the non-obstante clause used in Section 16(2) cannot be interpreted in isolation. And that Section 16(2) and Section 16(4) were complementary provisions and not contradictory provisions. Section 16(2) prescribed the conditions necessary to avail ITC and Section 16(4) added the condition of time. Only by relying on the non-obstante clause, Section 16(2) cannot be interpreted in a manner to render Section 16(4) otiose. 

Calcutta High Court Decides 

The Calcutta High Court referred to various precedents decisions pronounced under GST and under VAT laws to emphasise three things: 

First, in matters of taxation the legislature deserves greater latitude and courts should be circumspect before intervening in tax disputes. While the doctrine of deference to taxation statutes has a long standing and questionable traction in Indian jurisprudence, it served no immediate purpose in deciding the issue at hand.  

Second, the High Court noted that a provision in a statute cannot be interpreted in isolation and there is a need to read it along with other provisions in the statute especially if the subject matter in the different provisions or different parts of the statute is similar. 

Third, the High Court cited a slew of precedents to express its agreement with the view that ITC is a concession and can only be claimed as a matter of right by an assessee on fulfilling the conditions prescribed in the statute. Relying on the same, the High Court observed that:

Section 16(2) does not appear to be a provision which allows Input Tax Credit, rather Section 16(1) is the enabling provision and Section 16(2) restricts the credit which is otherwise allowed to the dealers who satisfied the condition prescribed the interpretation given by the court that the stipulation in Section 16(2) is the restrictive provision is the correct interpretation given to the said provision. (para 12)

The Calcutta High Court also relied on the Patna High Court’s recent judgment to observe that Section 16(4) did not suffer from ambiguity and an assessee’s right to claim ITC can only materialise on fulfilling the conditions prescribed under Section 16(2) as well the condition prescribed under Section 16(4), i.e., filing of returns within a stipulated time. 

Conclusion 

There are, in my view, two important takeaways from the impugned judgment: first, the Calcutta High Court’s view that ITC is a concession/benefit granted by the State to an assessee and it can be claimed only if the conditions prescribed in the statute are strictly followed, though the nature of ITC is not as straightforward and may require a deeper look; second, all the conditions prescribed in Section 16 need to be fulfilled to claim ITC successfully and the condition to file returns within a prescribed time cannot be understood to be as optional. Failure to adhere to the time of filing returns will rightly result in denial of ITC.  

Adjudicating Officer Bound to Consider Assessee’s Defence: Calcutta High Court

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In a recent decision[1], a Division Bench of the Calcutta High Court has held that the adjudicating officer should consider the assessee’s explanation or defence before passing the adjudicating order that imposes penalty under Section 129, CGST Act, 2019. If an adjudicating order is passed in complete ignorance of such explanation, then it would amount to violation of principles of natural justice and the order is liable to be set aside.   

Facts 

The assessee was transporting electrical switches manufactured as per the requirements of the Government of Arunachal Pradesh. The assessee generated e-way bill for the vehicle on which the electrical switches were originally transported. However, the vehicle in question developed a mechanical failure and the goods were shifted to another vehicle. The latter vehicle was detained, and the proper officer levied a penalty on the assessee for violation of Section 129 since the e-way bill in question specified the former vehicle while the goods were found in the latter vehicle bearing a different registration number. The assessee contended before the Calcutta High Court that the breakdown of the vehicle was unanticipated and there was sufficient cause for non-compliance with the statutory provisions. The assessee further argued that the e-way bill issued with the registration number of the first vehicle was valid when the second vehicle was intercepted. And that there was no intention to evade tax.  

The Revenue Department, on the other hand, contended that under Section 129, it is not required to determine the existence of mens rea. And correctly so. The Revenue Department further argued that any of the three parties: consignor, consignee or the transporter should have re-validated the e-way bill after the first vehicle broke down. And in the absence of revalidation of e-way bill after change in vehicle, the imposition of penalty under Section 129 was justifiable.  

Calcutta High Court Decides 

The Calcutta High Court focused on one factual aspect: it noted that the assessee was issued a notice under Section 129, CGST Act, 2017 and the assessee had responded to the said notice. However, the adjudicating authority did not allude to the response of the assessee, did not apply its mind, and proceeded to mechanically levy a penalty on the assessee. The High Court observed that Section 129(3) prescribed the requirement of issuance of notice while Section 129(4) mandated that an adjudication order cannot be passed without providing the assessee an opportunity of being heard. However, the High Court stressed that complying with principles of natural justice cannot be an empty formality and that the adjudicating officer needs to evaluate the defence and its merits offered by the assessee. 

The Calcutta High Court observed that: 

However, absence of requirement to establish mens rea by the department cannot be equated with an automatic imposition of penalty under the scheme of Section 129 of the Act of 2017 in view of the provisions of Section 129 (3) and (4) thereof. A delinquent alleged to have violated a tax regime inviting imposition of penalty, nonetheless may have potential defences which would require consideration by the Adjudicating Authority. (para 37)

Accordingly, the Calcutta High Court set aside the impugned order imposing a penalty under Section 129, CGST Act, 2017 on the ground that it violated the principles of natural justice since it did not speak on the defence offered by the assessee.

Conclusion 

The Calcutta High Court’s decision in the impugned case is a welcome development since it clarifies, in no uncertain terms, the obligation on the officers is to comply with principles of natural justice in a substantive manner and not merely as a formality. The defence or explanation offered by the assessee in response to issuance of notice needs to be engaged with in a more substantive manner and the adjudicating order under Section 129 needs to reflect that the explanation was considered. The imposition of penalties under Section 129 should not be automatic. Further, it is important to bear in mind that the order can still result in imposition of penalty, the High Court has only mandated that the explanation be considered and the penalty not be levied in a mechanical or a pre-determined manner.    

[1] Asian Switchgear Private Limited v State Tax Officer, Bureau of Investigation, North Bengal TS-668-HCCAL-2023-GST. 

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.  

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. 

Calcutta High Court Decides a Case ‘Not of the Ordinary Kind’

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In a recent case[1], the Calcutta High Court pronounced a decision which it described as ‘not of the ordinary kind’. The High Court declared, in the opening sentence of the judgment, that most interesting points were involved in the case. In non-dramatic terms, the case involved determination of whether GST could be levied on a loan obtained by a credit card holder from a bank. The High Court decided in the negative. 

Facts 

The appellant possessed a credit card provided by Citi Bank. The bank provided a loan to the appellant of Rs 6,50,000/- with interest @13% per annum payable in 12 equal monthly instalments. It was in the monthly statements of the appellant’s credit card where the loan and EMI payable were indicated. The appellant challenged the levy of IGST on the transaction in question, i.e., the appellant obtaining loan from the bank. Via a writ petition before the Calcutta High Court, the appellant sought a declaration that IGST on the impugned transaction should not have been charged, and if charged should be refunded. 

Arguments 

The Calcutta High Court referred to Notification No. 9/2017 – Integrated Tax (Rate) wherein a list of services were exempted from IGST except tax levied on interest in credit card services. The appellant argued that possession of credit card entitled him to a loan, but the advancement of loan had nothing to do with the credit card or service which bank was offering in relation to it. The loan agreement was a separate and standalone agreement between the appellant and the bank unrelated to the credit card. He further argued that only for purpose of payment was EMI reflected in the credit card statement, otherwise the bank was not charging the same interest it charged for a credit card loan. Appellant’s case was that only the services provided in relation to use of a credit card with a merchant or online constitute credit card services and not a loan advanced through cheque without use of the card.

The bank, on the other hand, simply argued that since the loan was granted to the appellant because he possessed a credit card, the loan should be regarded as a credit card service. 

Analysis by the Calcutta High Court 

The Calcutta High Court noted that terms and conditions on which loan was granted to the appellant stated that it was only available to holders of Citi bank credit cards. And the appellant was granted a loan as per those terms and conditions.

The High Court observed that to be a credit card service, the service should be between the issuer of card and holder of card, and there should be some relationship or nexus with holding, operation, or use of such card of transactions relating to it. The Calcutta High Court concluded that the advancement of loan did not constitute a credit card service by reasoning as follows: 

If the loan was advanced to the appellant through use of the card, then one could have understood that the service was related to the card. In this case, the bank declared the appellant card holder to be eligible to receive loan. His loan amount was advanced by a cheque or draft issued by the bank. That is to say, the loan amount was not generated by charging the appellant’s card. (page 8) 

The High Court acknowledged that the loan amount appeared in the statement relating to use of the credit card, but it noted that it was more of a statement of account. And that the loan transaction should be taken as an altogether separate transaction which had no relation to the issue, holding or operation of the card. Thus, sending the loan statement with credit card statement did not create a sufficient nexus with the credit card, especially since the loan was not secured through use of the credit card per se.  

Conclusion 

The decision hinged on the fact whether the condition of prior possession of the credit card to avail the loan could be interpreted to mean the loan was an extension of credit card services. The fact that the loan was advanced through a separate cheque and not through use of the credit card was, in my opinion, decisive in Calcutta High Court’s conclusion and rightfully so. 

While the facts are certainly ‘interesting’ it is important to note that exemption from GST was due to the specific facts in the impugned case. It would be unwise to deduce that any service relating to a credit card but not involving the actual use of the credit card would be exempt from GST. The term ‘credit card services’ has been infused with some meaning by the Calcutta High Court in the impugned case, but it is a fact specific determination and is likely to be tested in similar cases in the future.    

[1] Ramesh Kumar Patodia v City Bank N.A. and Ors, available at https://taxguru.in/wp-content/uploads/2023/07/Ramesh-Kumar-Patodia-Vs-City-Bank-N.A.-and-Ors.-Calcutta-High-Court.pdf

Uncertain Purchaser Obligations under GST: ITC Claims Hit a Roadblock

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On 12.06.2023, the Calcutta High Court pronounced a judgment[1] urging the Revenue to thoroughly review the petitioner’s supporting documents before rejecting its ITC claim. In the impugned case, the Revenue disallowed the petitioner’s ITC claim because the supplier’s registration had been cancelled with retrospective effect. The case is an example of how, in certain situations, the Revenue unjustifiably burdens the purchaser for the supplier’s lack of bona fide, even though it is the Revenue that belatedly discovers the supplier’s deficient credentials. I examine the High Court’s judgment and suggest that the Courts need to take a sterner view of the Revenue’s approach when it disallows an ITC claim based on inadequate examination of relevant documents.   

Introduction

The petitioner filed ITC claim against supplies purchased from its various suppliers including a certain Global Bitumen (‘supplier’). Petitioner’s ITC claim for purchases from the supplier was rejected by the Revenue. The Revenue’s reasons for rejection were as follows: the supplier was fake, non-existent, and opened its bank account based on fake documents. The Revenue alleged that the petitioner did not verify the credentials of supplier, claimed ITC without the support of any relevant documents and further asked the petitioner to pay penalty and interest under the relevant provisions of GST laws.

There are two specific claims of the Revenue that are worth noting: first, that the petitioner did not ascertain and verify genuineness of the supplier; second, that the supplier’s registration has been cancelled with retrospective effect covering the period of petitioner’s ITC claim. 

The petitioner, on the other hand, argued that the Revenue did not consider the documents which proved that it had purchased goods from the supplier, evidenced the transport of goods and proved that it had made payment to the supplier. The petitioner argued that the failure of supplier to pay the GST to the State cannot be attributed to it since at the time of transaction, the supplier had a valid registration and its status as a GST-registered supplier was reflected on the Revenue’s portal.       

High Court Dismisses Revenue’s Claims 

The Calcutta High Court observed that foundation of the petitioner’s case was that its transaction with the supplier was a genuine transaction. The High Court observed that it was not possible to determine whether the petitioner had failed to meet any of its statutory obligation unless all the petitioner’s documents relating to the purchase were examined by the Revenue. The High Court noted that the Revenue only took into consideration the retrospective cancellation of the supplier’s registration to disallow ITC claim; but did not consider other documents presented by the petitioner. Accordingly, the Revenue’s orders were set aside, and the High Court directed the Revenue to take up petitioner’s case afresh by taking into consideration other documents relating to the transaction in question.

Purchaser Obligations under GST 

The Calcutta High Court, in its judgment, relied on a precedent, i.e., M/s Lgw Industries case[2], where the Calcutta High Court adjudicated a similar set of facts and ordered the Revenue to consider the petitioner’s ITC claim afresh by scrutinizing its documents to verify if the transactions in question were genuine or not. The Revenue was also directed to ascertain if the transactions in question took place before or after the cancellation of registration and whether the purchaser fulfilled its statutory obligation to verify the identity of the supplier.

It is important to note that the purchaser’s obligation extends to establishing the genuineness of the supplier’s identity which includes checking the supplier’s registration status at the time of entering the transaction. If subsequently, the Revenue finds that the supplier lacks bona fide and cancels the registration retrospectively, why should the purchaser’s ITC be blocked for transactions entered before the cancellation of registration? Blocking purchaser’s ITC is especially unfair if the Revenue is not alleging and proving collusion between the purchaser and supplier.

If the purchaser transacts with the supplier after cancellation of latter’s registration, the Revenue has a good reason to deny the purchaser’s ITC claim. However, if the Revenue cancels the supplier’s registration retrospectively, it should not invalidate the purchaser’s ITC claim if the purchaser is able to prove genuineness of the transaction. And if purchaser can establish that at the time of transaction it inquired into and verified that the supplier was validly registered. 

While the Calcutta High Court in both the above-mentioned cases has taken a favorable approach towards petitioners, I suggest that the Revenue needs to be made accountable in a more meaningful manner for treating ITC claims in a casual manner. In both the above cases, the Revenue dismissed ITC claims without taking into consideration the documents presented by the purchaser. Not considering relevant documents is a cavalier way of judging ITC eligibility and gives the impression of pre-judging purchaser’s claims. The High Court directing the Revenue to consider the case afresh is a necessary but not sufficient reprimand to prevent occurrence of similar instances in the future. Courts need to consider if, in certain cases, erring officials should pay damages for not performing their statutory duties.          

[1] M/s Gargo Traders v The Joint Commissioner, Commercial Taxes WPA 1009 of 2022, available at https://www.livelaw.in/pdf_upload/ms-gargo-traders-476282.pdf

[2] M/S Lgw Industries Ltd & Ors v Union of India & Ors, Available at https://indiankanoon.org/doc/109803748/

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