The Gauhati High Court in National Plasto Moulding v. State of Assam and Others (WP(C)/2863/2022) and connected matters, decided on August 5, 2024, held that bona fide purchasing dealers cannot be denied Input Tax Credit (ITC) under Sections 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017 and the Central Goods and Services Tax Act, 2017, merely because the selling dealer failed to deposit the collected tax. The Court relied on the Delhi High Court's decision in On Quest Merchandising India Private Limited v. Government of NCT of Delhi & Ors., which had been upheld by the Supreme Court.
Facts of the Case:
This case involves multiple writ petitions filed by various firms and individuals challenging the validity of Sections 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017 and the Central Goods and Services Tax Act, 2017. The petitioners also challenged the show cause notices issued to them under these provisions.
The petitioners are various business entities engaged in different commercial activities across Assam. They had entered into transactions with selling dealers who were registered under the GST regime and had issued valid tax invoices. However, the petitioners received show cause notices from the tax authorities, proposing to deny them Input Tax Credit (ITC) on the grounds that the selling dealers had failed to deposit the tax collected from these transactions with the government.
The key issue before the court was whether a bona fide purchasing dealer could be denied ITC and effectively punished for the default of the selling dealer in not depositing the collected tax with the government.
The petitioners argued that the provisions in question were analogous to Section 9(2)(g) of the Delhi Value Added Tax Act, 2004, which had been challenged and interpreted by the Delhi High Court in the case of On Quest Merchandising India Private Limited v. Government of NCT of Delhi & Ors. In that case, the Delhi High Court had held that bona fide purchasing dealers could not be punished for the defaults of selling dealers.
The petitioners contended that the Delhi High Court's decision, which had been upheld by the Supreme Court, should be applied to their cases as well. They argued that denying ITC to bona fide purchasers for the default of sellers was arbitrary, unreasonable, and violated Article 14 of the Constitution of India.
The respondents, representing the State of Assam and the Central Goods and Services Tax authorities, did not dispute that the controversy raised in these writ petitions was covered by the Delhi High Court's decision in the On Quest Merchandising India Private Limited case.
Issue:
Whether Sections 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017 and the Central Goods and Services Tax Act, 2017 are valid and constitutional insofar as they allow the denial of Input Tax Credit (ITC) to bona fide purchasing dealers when the selling dealers fail to deposit the collected tax with the government.
Held:
The Hon'ble Gauhati High Court in Writ Petition (Civil) No. 2863/2022 and connected matters held that:
1. The Court observed that the controversy raised in this batch of writ petitions is squarely covered by the decision of the Delhi High Court in the case of On Quest Merchandising India Private Limited v. Government of NCT of Delhi & Ors., reported in 2017 SCC OnLine Del 11286.
2. The Court noted that the provisions of Sections 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017 as well as Sections 16(2)(c) and 16(2)(d) of the Central Goods and Services Tax Act, 2017 are analogous to Section 9(2)(g) of the Delhi Value Added Tax Act, 2004, which was under challenge in the On Quest Merchandising India Private Limited case.
3. The Court concurred with the Delhi High Court's analysis that requiring a purchasing dealer to anticipate which selling dealers will not deposit the collected tax with the government, or to somehow ensure that the selling dealer deposits the tax after the transaction, places an onerous burden on bona fide purchasing dealers.
4. The Court agreed with the Delhi High Court's interpretation that the expression "dealer or class of dealers" should not include a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with the law, where there is no mismatch of the transactions in the relevant annexures.
5. The Court held that the tax department is precluded from invoking the provisions to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered selling dealer who has issued a tax invoice reflecting the TIN number.
6. The Court emphasized that in cases where the selling dealer has failed to deposit the tax collected from the purchasing dealer, the remedy for the tax department would be to proceed against the defaulting selling dealer to recover such tax, and not to deny the purchasing dealer the ITC.
7. The Court noted that the Special Leave Petition against the Delhi High Court's judgment had been dismissed by the Supreme Court, further strengthening the precedential value of the decision.
8. Based on these observations, the Court set aside the show cause notices impugned in the present writ petitions and the consequential orders.
9. However, the Court provided a caveat that the tax department is free to act in those cases where the purchase transactions are not bona fide, in accordance with the law.
10. The Court disposed of the writ petitions with these observations and directions.
Relevant Sections:
1. Sections 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017
2. Sections 16(2)(c) and 16(2)(d) of the Central Goods and Services Tax Act, 2017
Pari Materia / Judgements Referred :
1. On Quest Merchandising India Private Limited v. Government of NCT of Delhi & Ors., 2017 SCC OnLine Del 11286
2. Special Leave Petition No. 36750/2017 (Supreme Court order dismissing SLP against On Quest Merchandising India Private Limited case)
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