News Update

Supplier sins and Recipient repents - Part -VI

JANUARY 19, 2022

By Shailesh Sheth, Advocate, M/s. SPS Legal

"Nothing is more destructive of respect for the government and the law of the land than passing laws which cannot be enforced.”
[Albert Einstein]

IN this part, the constitutional validity of clauses (aa) and (c) of S.16(2) of the CGST Act, 2017 is discussed.

Clause (aa) and (c) of S.16(2) - Do they pass the test of the Constitutional Validity?

As explained earlier, clauses (aa) and (c) of S.16 (2) of the CGST Act, 2017 ('the Act') require the recipient of a taxable supply to fulfil the following two conditions in addition to the other conditions prescribed in the provision so as to be eligible to claim Input Tax Credit ('ITC') on such supply viz:

- the details of the invoices or debit notes for the relevant tax period are furnished by the supplier in the Form GSTR-1 and which have been communicated to the recipient of the supply via Common Portal (in Form GSTR-2B); and

- subject to the provisions of S.41 and S. 43A of the Act, the tax charged in respect of such supply has been actually paid by the supplier, either in cash or through the utilisation of the ITC admissible in respect of said supply.

Needless to say, the aforesaid onerous conditions put a bonafide recipient of a taxable supply at the mercy of the supplier and the Portal! A recipient taxpayer may simply lose the ITC for the fault or fraud committed by his supplier though the recipient has no idea about, nor is he involved in such lapse or fraud of the supplier. Similarly, the claim to ITC may come under jeopardy merely because of the technical glitches in the working of the Portal. Can such conditions pass the muster of the Constitutional validity? Let us briefly discuss this issue.

Lex non cogit ad impossibilia

The latin maxim Lex non cogit ad impossibilia means ' law does not compel one to do that which cannot possibly be done.' It is evident that the conditions prescribed by clauses (aa) and (c) of S.16 (2) of the Act cast a burden on a recipient of a taxable supply which is impossible to be discharged by him. How on earth can a bonafide buyer ensure that the supplier will furnish the details of all the invoices/debit notes in Form GSTR-1 for the relevant period? Leave aside any fraud by a supplier, isn't it common, even in normal cases, that the details of the invoices, etc. may not get reflected on the Common Portal (whether in GSTR-2A or GSTR-2B) due to some bona fide clerical errors like mention of a wrong GST registration no. etc. at the supplier's end? And what if the GSTN Portal fails to correctly auto-populate the details of the invoices etc. in Form GSTR-2B and communicate the same to the recipient due to 'minor' technical glitches routinely suffered by the Portal? No safeguards for the recipient are provided in such situations.

Similarly, how can a bonafide buyer ensure the payments of tax on the supply by the supplier? A supplier may not discharge the tax liability either due to some compelling circumstances or by design. Whatever may be the case, how can a bonafide buyer be victimised and denied the benefit of ITC due to the supplier's fault or fraud? There is yet another extremely serious and frightening aspect of the provisions of S. 16(2)(c) which has not yet caught the attention of taxpayers and tax professionals. The provision uses the words 'through utilisation of input tax credit admissible in respect of the said supply'. (Emphasis supplied). Now, it is settled law that the debit in Cenvat/ITC account constitutes a valid discharge of tax liability [See, CCE Vs. Dai Ichi Karkaria Ltd. - 2002-TIOL-79-SC-CX-LB; Eicher Motors Ltd. Vs. UOI - 2002-TIOL-149-SC-CX-LB]. It is immaterial whether credit so utilised by a taxpayer (supplier) for the payment of duty/tax was admissible to him in law or not. Similarly, the requirement of one-to-one co-relation between the input and output, though was prescribed in the early days of MODVAT Scheme, soon became a thing of the past and such co-relation or nexus was never prescribed or considered as a pre-condition for availment of the credit. The legal position on both these counts is not at all different under the GST regime.

Under these circumstances, the innocent-sounding words 'admissible ' and 'said supply' used in S. 16(2)(c) have very sinister undertones. These words may haunt the taxpayers in coming days. How can a buyer ever know whether the ITC utilised by a supplier for the payment of tax on the supply made by him was 'admissible' to him? What if, at a later date, the Department alleges or even establishes that the ITC availed by the supplier was 'inadmissible' to him for any reason? In such a case, will the ITC to the buyer become inadmissible in terms of S. 16(2) (c) on the ground that the tax of which the ITC is being claimed by him was paid by the supplier by utilisation of 'inadmissible ITC'? Can this be the legislative intent? If yes, then the learned readers need not be explained the frightening consequences of this provision.

Similarly, what is the significance and purpose of the words 'said supply' used in S. 16(2)(c)? Do the words provide for the existence of nexus between the admissible ITC and the supply under consideration? If yes, whether any such nexus can be insisted upon in the absence of any prescription in law? Moreover, is it possible for any taxpayer to establish the co-relation between the ITC availed and the taxable supply made by him? Is this a case of bad drafting or is there a diabolical design behind this? When S.16(1) allows the benefit of ITC on any inward supply of goods or services or both used or intended to be used for the purpose of business and thereby effectively and justifiably dispensing with the 'theory of nexus', can such a condition be introduced in a backdoor manner?

It is, therefore, evident that the conditions prescribed by clauses (aa) and (c) of S.16(2) of the Act are not only arbitrary and unjustified, but also impossible to be complied with by a taxpayer. Both the provisions are, therefore, unconstitutional and invalid applying the Latin maxim Lex non cogit ad impossibilia. A writ of mandamus can certainly lie in such circumstances against the provisions.

Provisions violative of Article 14 or 19 of the Constitution of India:

The clauses (aa) and (c) of S. 16(2) of the Act are susceptible to the Constitutional challenge as being violative of Article 14 or 19 of the Constitution of India. In fact, cases in the context of the then existing provisions in the various State VAT Acts providing for the denial and recovery of credit/set off from the buyer on account of the non-payment of tax for any reason by the seller, have come up for judicial scrutiny in number of cases before various High Courts. The issue as to whether a bonafide buyer can be denied credit on account of the failure on part of the supplier to remit tax to the credit of the Government has been extensively dealt with by the Hon'ble Punjab & Haryana High Court in  M/s. Gheru Lal Bal Chand vs. State of Haryana & Anr. [2012 (2) SCC 781 (P&H)],   wherein the Hon'ble Court has finally held as follows:

"Law cannot put such onerous responsibility on the assessee otherwise, it would be difficult to hold the law to be valid on the touchstone of articles 14 or 19 of the Constitution of India. A statute has to be read in such a manner so as to do justice to the parties. If it is held that the person who does not deposit or is required to the tax would be put in an advantageous position and whereas the person who has paid the tax would be worse, the interpretation would give result to an absurdity.

To conclude, no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established."

Other High Courts have also expressed a similar view on this issue.

Even under the GST regime, the constitutional validity of S.16(2)(c) of the Act is already under challenge before various High Courts. Very recently, the Union of India had moved two transfer petitions before the Hon'ble Supreme Court seeking the transfer of two Writ Petitions pending before the Hon'ble High Courts of Madhya Pradesh and Andhra Pradesh involving challenges to the constitutional validity of S.16(2)(c) of the Act. While declining to entertain the transfer petitions, the Hon'ble Supreme Court, by its judgement dated 20.09.2021 delivered in the case of UOI vs. Cummins Technologies India Pvt. Ltd., - 2021-TIOL-245-SC-GST-LB observed and directed as under:

"3. These transfer petitions have been filed by the Union of India under Article 139A read with Article 142 of the Constitution of India seeking transfer of two Writ Petitions to this Court, i.e., (i) Writ Petition No. 9443/2020 titled 'M/s. Cummins Technologies v. Union of India' pending before the High Court of Madhya Pradesh at Indore and (ii) Writ Petition No. 7767/2020 titled 'M/s. SPL Infrastructure Private Limited v. Assistant Commissioner of State Tax, Narasannapeta and Ors.' pending before the High Court of Andhra Pradesh at Amaravati. In both these Writ Petitions, the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 has been challenged.

4. In addition to the aforementioned two Writ Petitions, we are informed that the constitutional validity of Section 16(2)(c) of the CGST Act has been challenged in 34 other writ petitions, which are stated to be pending across nine High Courts in the country.

5. According to Learned Solicitor General, since the issue has implication on a number of matters pending across the country and also ramifications of huge amounts payable under the said Act, it would be appropriate if this Court hears all the matters.

6. Even though Learned Solicitor General insisted for transfer of cases pending before various High Courts to this Court, we are not inclined to entertain these transfer petitions, for the reason that various High Courts are already seized of the matters. In particular, in the matter before the High Court of M.P., Indore Bench, counter affidavit is already stated to have been filed.

7. In view of the above, we request the High Court of Madhya Pradesh, Indore Bench to dispose of the Writ Petition No. 9443/2020, pending adjudication before it, as early as possible and preferably within a period of two months' time from the date of communication of this Order.

8. Parties are at liberty to advance their respective arguments before the High Court of Madhya Pradesh, Indore Bench.

9. So far as other Writ Petitions, which are pending before various High Courts, it is open for the parties to bring this Order to the notice of the concerned High Courts and seek expeditious disposal of their cases.

10. The Transfer Petitions are disposed of in the afore-stated terms.

11. Pending applications, if any, shall also stand disposed of .”

While the present status of the petition pending before the Hon'ble High Court of Madhya Pradesh is not known, what is of significance is the large number of petitions filed before the various High Courts by taxpayers challenging the constitutional validity of S.16(2)(c) of the Act. One will always be at a loss to understand the reason behind the introduction of clauses (aa) and (c) in S.16(2) of the Act when, time and again, various High Courts have frowned upon similar provisions existing in the erstwhile State VAT Acts and declared them unconstitutional. While fake invoice and bogus credit cases were rife under Central Excise, in particular, and were not restricted to VAT, the Board i.e., CBEC (now, CBIC) never felt it necessary to prescribe such conditions in law for an assessee to avail of Modvat/CENVAT Credit.

Undoubtedly, the introduction of the provisions as contained in clause (c) of S.16(2) was entirely driven by the State VAT authorities despite the abject failure of similar experiments attempted under the erstwhile VAT regime by a few States.

It is also evident that the recent introduction of clause (aa) in S.16(2) is nothing but a bureaucratic backlash against the challenge to the ill-conceived sub-rule (4) inserted in Rule 36 w.e.f. 09.10.2019. Both these provisions display a knee-jerk response to the mounting cases of fraudulent ITC. All said and done, the provisions smack of a 'bureaucratic vendetta' and will have a disastrous impact, not only on taxpayers, but also on the smooth implementation and operation of the GST regime as was apprehended by the author when the 'Model GST Law' was released for discussion in 2016.

"If you're going to sin, sin against God, not the bureaucracy; God will forgive you but the bureaucracy won't.”
[Hyman G. Rickover]


See Part V

(DISCLAIMER : The views expressed are strictly of the author and doesn't necessarily subscribe to the same. Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)