Input Tax Credit Denied Over Doubts About Transaction Authenticity

Ecom Gill Coffee Trading Pvt Ltd vs Karnataka VAT Authorities: Supreme Court Decision

Key Takeaways from Supreme Court Judgment

The case involves a dispute between the State and several purchasing dealers who claimed input tax credit (ITC) on purchases made from certain dealers. Assessing Officer denied Input Tax Credit (ITC) to certain purchasing dealers due to their failure to prove the genuineness of their transactions and to discharge their burden of proof as per section 70 of the KVAT Act, 2003. The first Appellate Authority confirmed this denial of ITC, but the second Appellate Authority and the High Court allowed the ITC despite the lack of cogent material and proof from the purchasing dealers. The State is appealing against this decision, and the question before the court is whether the decision to allow the ITC was justified.

The Supreme Court of India issued a judgement and order for a group of appeals (There were 4 petitioners) related to the interpretation of Section 70 of the Karnataka Value Added Tax Act, 2003.The Supreme Court, in this judgment, quashes and sets aside the orders of the second Appellate Authority and the High Court, and restores the orders of the Assessing Officer denying the ITC to the concerned purchasing dealers.

FACTS OF THE TWO APPLICANTS

1. M/s Ecom Gill Coffee Trading Private Limited (Civil Appeal No. 230 of 2023)

The Assessing Officer had disallowed ITC to the extent of Rs. 10.52 lacs as six out of 27 sellers were de-registered, three did not file taxes, and six denied turnover and did not pay taxes. However, the Tribunal allowed the ITC claim as the purchasing dealer had bought coffee from registered dealers under genuine tax invoices. The High Court dismissed the revision application, relying on its earlier decision in the case of M/s Tallam Apparels.

2. M/s Tallam Apparels (Civil Appeal No. 231 of 2023)

The Assessing Officer had disallowed the ITC claim as the dealers from whom the purchasing dealer had bought readymade garments had either got their registration cancelled or filed ‘NIL’ returns. However, the Karnataka Appellate Tribunal and the High Court allowed the ITC claim, stating that the purchasing dealer should not suffer due to the default of the seller. In other cases, the Tribunal and High Court allowed the ITC claim solely on the ground that the sale price was paid to the seller through an account payee cheque and that copies of invoices were produced.

Arguments by Authorities on behalf of State

• The case involves an appeal against the orders of the Appellate Authorities allowing Input Tax Credit (ITC) in Favour of the respective purchasing dealers.
• The High Court erred in dismissing the revision applications and confirming the orders of the Appellate Authorities.
• The State has contended that the purchasing dealers failed to discharge their burden of proving the actual movement of goods, and therefore, they are not entitled to ITC.

Arguments by Authorities on Behalf of Dealer

• The counsel appearing on behalf of the respective dealers have submitted that they have discharged their burden under Section 70 of the KVAT Act, 2003, and produced genuine invoices and payment made through cheques. They contend that once the burden is discharged, the purchasing dealers are entitled to ITC, and any tax not paid by the seller can be recovered from them.
• They submitted that the only statutory requirement to claim ITC was to produce valid invoices and make online payments to the supplier, and that the law did not provide for any other document or obligation for establishing a claim for refund towards ITC.
• The dealer’s obligation to issue a tax invoice and the particulars of the tax invoices are provided for in Section 70 of the Karnataka Value Added Tax Act, 2003, as well as Rules 27 and 29 of the Karnataka Value Added Tax Rules, 2005. The dealers must ensure that the selling dealer is a registered dealer and has issued a tax invoice in compliance with the requirements of the Act and Rules for claiming ITC. Once the purchasing dealer has complied with these requirements, they cannot be denied ITC solely because the selling dealer fails to discharge their obligation under the Act.

Analysis by Supreme court in its decision

• The court observed that Section 70 of the KVAT Act placed the burden of proving that any transaction is not liable to tax or that any claim to deduction of input tax is correct, on the dealer.
• The court noted that while the purchasing dealers had produced valid invoices, the Assessing Officer had found evidence that the transactions and purchases were not genuine. The court observed that in such cases, it was necessary for the purchasing dealers to exercise due diligence and ascertain if the selling dealer was a registered dealer having a valid registration.
• The court further noted that the burden of proving the genuineness of the transactions was on the purchasing dealers, and that the mere production of invoices and payment through cheques was not sufficient to establish the genuineness of the transactions.
• The purchasing dealer must furnish details of the selling dealer, vehicle details, freight charges, and payment particulars, among other things. Failure to establish the physical movement of the goods would result in the Assessing Officer rejecting the ITC claim.
• The High Court erred in its judgment, which upheld the ITC claims of the purchasing dealers based only on invoices or payment by cheque. High Court overlooked the requirement for the actual physical movement of the goods and the other materials that the purchasing dealer must produce to prove the genuineness of the transaction.
• Court also dismisses the purchasing dealers’ reliance on Rules 27 and 29 of the Karnataka Value Added Tax Rules, 2005, arguing that these rules only require the issuance and production of a tax invoice and do not relieve the purchasing dealer of the burden to prove the actual physical movement of the goods.
• Based on these observations, the court held that the second Appellate Authority and the High Court were not justified in allowing the ITC. The court allowed the appeal of the State and set aside the orders of the second Appellate Authority and the High Court and restored the orders of the Assessing Officer and the first Appellate Authority.

RMPSCO COMMENT

Our view and Impact of this decision in GST Law Based on the provisions of Section 155 of the GST Act, the burden of proving the eligibility for input tax credit (ITC) under the Act lies with the person making the claim. Therefore, any person claiming ITC must provide sufficient evidence to prove their claim.

Furthermore, as per Section 16 of the Act, to avail ITC, the recipient must satisfy the conditions prescribed under the Act. Once the recipient has provided satisfactory evidence to prove that the conditions have been fulfilled, they are eligible to avail ITC under GST.

In conclusion, it is important for any person claiming ITC under the GST Act to bear the burden of proof and provide sufficient evidence to support their claim. In addition to that in GST Law there is no requirement of proving movement of the goods. However, it is essential to ensure that all the conditions prescribed under Section 16 have been fulfilled to avail ITC. If all the conditions are fulfilled court can not restrict to avail ITC.

Disclaimer:  This Article is only a knowledge sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update etc. if any.

Please follow and like us: