By TIOL News Service

MUMBAI, NOV 03, 2017: IN an interesting case which may have some implications for the invoice-matching rules of the GST law, after the Delhi High Court which ruled in the case of In Quest Merchandising India Pvt Ltd (2017-TIOL-2251-HC-DEL-VAT) against the Revenue, the Maharashtra Sales Tax Tribunal has held that an assessee receiving raw materials from a number of suppliers, could not be denied input tax credit claimed by it, or be penalized for the non-submission of details of such sales by the suppliers and by non-payment of sales tax by some suppliers, where the assessee itself had provided the requisite details proving the genuineness of the transactions.

Facts of the case

The assessee company recieved raw material of cotton from some suppliers. The assessee later claimed a set-off of Input Tax Credit on certain counts. However, although the assessee had filed the requisite documents proving the genuiness of the transactions, the claims for set off were denied by the Sales tax department, on the gound that there was a mismatch between the claimed by the appellant and tax paid by the supplier of the raw materials, the end result of which was that an amount of tax due to the Government, had not been paid by either the suppliers or by the assessee. The department further stated that once the siad mismatch had been noticed by the assessee company, the onus was on it to show that the suppliers had paid tax into Government Treasury & only then was the assessee entitled to claim the set-off. Moreover, of the 29 suppliers who supplied raw materials to the assessee company, some of them had attempted to get their registrations cancelled. The department assumed the same to be an admission of guilt as the taxes for such supply had not been paid. Hence for the AY 2010-11, tax demand of Rs. 1,04,99,969/- was raised, vide an order dated 30.8.2004. Interest u/s 30(2) & 30(3) of the Act was also levied, the amounts demanded being Rs. 3,02,639/- and Rs. 57,74,48/- respectively. On appeal, the first appellate authority reduced the amount disallowed to Rs. 99,49,842/-, and also granted relief u/s 30(3), reducing the penalty imposed to Rs. 3,02,075/-. Thereafter, the assessee company approached the appellate Tribunal, in the present appeal. The assessee company also challenged the constitutional validity of Section 48(5) of the Act, under which the input credit was denied.

The Sales Tax Tribunal held that,

++ these dealers were given registrations under the MVAT Act after due verification by the department and in some cases even advisory visits were paid to the place of business of the dealers. These dealers are mostly dealing in cotton and as per assessee's admission they come from Madhya Pradesh during the cotton season and do business and go away. On subsequent visits to these dealers, they were not found at the place of business and on enquires made from- the premises, the officers ordered cancellation of such registration- in some cases ab-initio i.e. from the date of grant of registration and in some cases from the dates determined by the officer on enquiry as probable date of discontinuance of business. These dealers are mainly from Districts of Dhule, Jalgaon and Nandurbar boarding Madhya Pradesh. The fact remains that most of these dealers had not filed returns after registration nor paid taxes which they are bound to do as per provisions in the MVAT Act. At least in one case of M/s. Sagar Sales Corporation, where the dealer himself applied for cancellation of registration with effect from 1.4.2010, vide application made in August 2010, he had done business from 1.4.2010 to August, 2010 and as per assessee's statement has collected tax of Rs.1,48,497/- from him. If it is true that the supplier had made sales to the appellant or to any other parties and had collected tax, it is clear that the intention in making such an application for cancellation was to knowingly avoid the tax liability.

++ thus, for the AY 10-11, it was only possible to identify the ITC passed on by a dealer to his purchasers somewhere after March 2012 when audit reports were processed. However, this information was not available to the dealers and could be known only at the time of assessment when the match-mismatch reports were generated with respect to his claims.

++ it is pointed out that most of the registrations of supplier are cancelled retrospectively on visit paid to these dealers and not finding the dealer at the business place mentioned and after making enquires. The probable date of closure was arrived at on such enquiry. Here, we may mention that, by the time in 2012 when most of the registration were cancelled, the department had data with them to ascertain the input tax credit passed on by these suppliers to the purchases.The department did not check this data available with them and cancelled the registration from anterior date as arrived at on enquiry. From the record submitted before us, it appears that these suppliers have collected large amount of tax, not only from the appellant but from oither parties. The effect of this retrospective cancellation is that, these suppliers have been absolved of the liability, to pay tax on the transactions which they have entered in after the effective date of cancellation but before the order of cancellation. The department has thus made it impossible to proceed against these dealers for transactions after the effective date of cancellation. There will be no assessments of these suppliers after such date of cancellation nor any demand or recovery. However, here we are not considering those dealers who have merely issued bills and are non-genuine or hawala dealers. Since there is no possibility of any recovery being made from these suppliers after the effective date of cancellation, the burden in permanently shifted to the purchaser and he is left to his own means to recover the amount from these suppliers-which in Present case the appellant has done by filing FIRs against some of suppliers and recovery almost 25% of the amount. In one of the cases pointed out by appellant, even the appeal filed against cancellation order was rejected at which stage it was possible to check the ITC passed on by the dealer. Department in tabular statement filed before us have stated that in some cases they have initiated assessment proceedings against the suppliers. It will be however clear that those assessments will not be pertaining to periods after the effective date of cancellation of registration. Thus, for period after the effective date of cancellation as determined by officer, no assessment is made and no recovery can be initiated. In some cases, department has shown 'undisclosed sales' by the suppliers but at the same time shows no '704' i.e. audit report filed. As already stated, whether supplier has made sales to a particular party can be only be ascertained from annexures to the audit report and not from merely returns. It is not clear how department could make out that these are undisclosed sales to appellant. Some of the registration are cancelled in 2014 and 2015 with retrospective effect from 2010, but here also the department did not check from their system the ITC passed on by suppliers. The assessments, wherever done, are carried out somewhere in 2016 and 2017 which are, though within limitation provided under the Act, from the point of view of effective recovery, late, as the registration are cancelled with effect from 2010.

++ as regards transactions made after the date of order of cancellation, it must be remembered that these were cancelled after visiting the place and no finding the dealer doing business. The transaction shown to be made after such visits are clearly not made by the dealer from the declared business place and no information has been given other business place. Such transactions are therefore not entitled for set-off.

++ as far as non-genuine or hawala dealers are concerned, it is a settled principle of natural justice that the material relied upon by the department which is used against him must be shown to him and he should be given an opportunity to rebut the same though in every case cross-examination of the non-genuine person may not be necessary. The appellant has now been given the material relied on by the department and he is free to contest the same.

++ The order of lower authorities to the extent of hawala transactions is set aside and case is remanded back to appellate authority to give opportunity to the appellant to contest his claim in respect of such transactions.

The matter was thus remanded back to the department for fresh adjudication into the hawala transactions, for which the assessee had wrongly been made to suffer a loss. Needless to say, no set off was given on the transactions found to be not genuine.

(See 2017-TIOL-01-TRIBUNAL-MUM-VAT)