Case Studies

AAR - Purchaser Not Entitled To ITC If Seller Has Not Discharged GST

Background:

In a recent decision, the Punjab Authority of Advance Ruling (AAR) ruled that a Purchaser would not be entitled to Input Tax Credit (ITC) unless the Seller has deposited the requisite tax with the Government.

Issues:

The Applicant, a furnace owner, submitted a few questions before the AAR for an advance ruling, which has been summarized briefly below:

  • Whether a Purchaser can claim ITC in a case where the Seller has discharged his tax liability but the preceding Seller failed to do so?
  • If the previous question is answered in the negative, then how the Purchaser is to ensure that the tax liability has been discharged by all sellers in a particular transaction?
  • Whether the Purchaser was entitled to claim ITC in the event of such non-payment of tax, even if the Purchaser possesses an invoice and other relevant documents and had no mischievous or fraudulent intentions?

The Applicant argued that a bonafide Purchaser could not be made liable on part of the Seller if the same had not paid tax to the Government, particularly when he did not have any mechanism/method to verify if the tax was paid. Reference was made to several rulings by High Courts which stated that liability could not be fastened on the Purchaser unless and until there was evidence of collusion and connivance between the Parties.

Reasoning:

The two-member bench analysed Section 16(2) of the CGST Act, 2017 which lays down a strict condition for the grant of CGST to the Purchaser: The tax charged in respect of the supply must have actually been paid to the credit of the appropriate Government. Consequently, the bench concluded that a Purchaser who had fulfilled its part of the tax obligations, would still not be entitled to claim ITC if either the Seller or the preceding Seller had failed to fulfill its tax liability. The bench declined to answer the other questions as they were outside their adjudicatory authority.

Analysis:

Courts and Tax Authorities across the country have adopted a similar line of reasoning, which has led to Purchasers receiving show-cause notices or assessment letters to either justify their claim for Input Tax Credit or reverse it along with penalties. This has caused unrest among stakeholders. Purchasers argue that they should not be penalized for the mistakes of non-compliant sellers and should be given the benefit, particularly if they have fulfilled their tax obligations and completed all other formalities. On the other hand, the Government exchequer questions how they can grant Input Tax Credit for taxes that have not been received.

Conclusion:

Considering this situation, Companies are advised to conduct thorough due diligence and verify the validity of the GSTIN of all vendors they deal with. As a precautionary measure, Companies may also obtain their GSTR Form 1 and 3B from their immediate vendors to confirm that they have fulfilled their tax obligations. In the event of any inconsistencies or irregularities, Companies must pursue legal recourse against the Seller and safeguard themselves against any potential liability arising from the Seller's errors.