ITC when supplier not paid tax – Gujarat HC declines to read down Section 16(2)(c) and advises govt. to implement tracking mechanism

The Gujarat High Court has declined to read down Section 16(2)(c) of the CGST Act and thus not declaring it ultra vires Part III of the Constitution of India, including Article 14 thereof. Not agreeing with the contentions of the assessee that they cannot be subjected to denial of ITC solely on the ground that the supplier had failed to deposit the tax with the State Government, the Court observed the following:

• In case of inter-State sales, if recipient is allowed to take credit even when supplier did not pay tax, the originating State would be forced to transfer funds to the destination State that it never actually received.
• The purchaser is not remediless as Department is empowered to initiate recovery proceedings against the supplier.
• Once the supplier discharges tax liability, the purchasing dealer becomes entitled to re-avail the credit in the immediately succeeding month.
• Mere delay or hardship in availing ITC cannot constitute a valid ground for reading down Section 16(2)(c).
• No double taxation as statute provides for reversal and re-availment.
• Unless tax collected by supplier is deposited with the Government, the purchasing dealer cannot claim ITC as a matter of right.
• Mere absence of a specific statutory mechanism enabling recovery by purchaser from the supplier cannot, by itself, render Section 16(2)(c) ultra vires.
• Section 16(2)(c) cannot be equated with Section 9(2)(g) of the DVAT Act, as examined by the Delhi High Court in On Quest Merchandising India (P) Ltd.
• Tripura HC in Sahil Enterprises did not consider the interplay of Sections 41, 53 and 155 of the CGST Act read with Rule 37A of the CGST Rules, 2017.
• Expression ‘eligible’ in Section 155 has direct nexus with actual payment of tax by supplier.
• Clause (a), (b), (c) & (d) of Section 16(2) should be read and satisfied together and not separately to avail the benefit of ITC.
• Purchaser can have clause in the agreement to hold the supplier liable to indemnify the former suffers loss due to a default by the latter in payment of tax. Maxim Lex Non Cogit Ad Impossibilia is not applicable.

However, it may be noted that the Court in Maruti Enterprise v. Union of India, while stating that a balanced approach needs to be taken, observed that it is high time the Government undertakes a comprehensive re-evaluation of the dicey situation being faced by the purchasers. According to the Court, Government should implement a robust, technology driven tracking mechanism enabling verification of payments made by suppliers and take prompt steps for recovery of tax from the erring suppliers.