GST ITC could not be disallowed when Seller had not paid tax to Government if Purchaser have valid Invoice

Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Section 17(5) pertains to blocked credit under CGST Act which states the situations where input tax credit shall not be available.

Certain situations when GST ITC cannot be claimed:

• A person cannot avail ITC wherein the given motor vehicle is used to transport people and has a seating capacity of less than or equal to 12 +1 (driver)
• A person cannot claim ITC for the tax paid for the following:
  1. Food and beverages
  2. Outdoor catering
  3. Beauty treatment
  4. Health services
  5. Cosmetic and plastic surgery
• Services of general insurance, servicing, repair and maintenance
• Sale of membership in a club, health, fitness centre
• Rent-a-cab services, life insurance, health insurance
• Travel, benefits extended to employees on vacation such as leave or home travel concession.
• Works contract services for construction of immovable property
• Construction of immovable property on own account
• Composition scheme
• Non residents
• Supply for personal use
• Free samples and goods destroyed
• Restaurant services

Claiming ITC can sometimes be complex as the tax authorities generally disallow eligible ITC. Let us refer to the case of Sri Ranganathar Valves (P.) Ltd vs Assistant Commissioner (CT) (2020), where the issue under consideration related to restriction of ITC predominantly on the head of (a) Prior sufferance of Taxes; (b) ITC on reversal on wastage; and (c) Ineligible claim of ITC on goods.

Observation of the HC on the restriction of GST ITC for prior sufferance of taxes

• The Assessing Officer (AO) was of the view that some of the sellers from whom the petitioner had purchased the goods had not paid tax to the Government and therefore had disallowed the ITC of the petitioner.
• This issue was dealt with in the case of Assistant Commissioner (CT) v. Infiniti Wholesale Ltd. [2017] (Mad), wherein it was held that ITC could not be disallowed on the ground that the seller had not paid tax to the Government, when the purchaser was able to prove that the seller had collected tax and issued invoices to the purchaser.
• The HC, therefore in this case concluded that, restriction of the amount of ITC on this ground, could not be sustained and required re-consideration.

Observation of the HC on the GST ITC reversal on wastages

The HC observed the ruling of an earlier judgement passed by it on this regard. This Court in the case of Shri Ranganathar Valves (P) Ltd. v. Assistant Commissioner (CT) [2016] had held as follows:

• With regard to reversal of ITC claim on wastage under section 19(9) of the State Act, under which, there were2 issues namely invisible loss and visible loss, the respondent adopted a percentage of 5% and 1% respectively.
• The correctness of adopting uniform percentage came up before this Court in the case of Interfit Techno Products Ltd. v. The Principal Secretary and Commissioner of CT [2015] wherein this Court issued certain directions as to how the AO should proceed to determine the invisible loss/visible loss, where were as follows:
  1. It was not sufficient for a dealer claiming refund under section 18(2) to show that he had paid input tax on the goods purchased and that those goods were used in the manufacture and nothing more.
  2. There was also a duty upon the dealer to satisfy the AO that the claim was not hit by any of the restrictions or conditions contained under section 19 of the VAT Act.
  3. In this regard, it was essential for the AO to embark upon the fact finding exercise to ascertain the quantum of loss of the goods which were purchased on which tax was paid vis-a-vis the goods manufactured from and out of the goods purchased and to examine as to whether they fell within any of the restrictions contained in Section 19 of the VAT Act.
  4. The AO had to conduct an exercise by which it was to be ascertained as to whether the representation made by the dealer was justified and was not hit by any of the restrictions and conditions contained in Section 19 of the VAT Act.
  5. It was held that the assessing authorities were not justified in adopting uniform percentage as invisible loss and calling upon the dealer to reverse the ITC availed of to that extent.
  6. Consequently, all notices issued to the petitioner for reopening and all consequential order passed reversing the ITC to the extent of either 4% or 5% or on ad hoc percentage was set aside.
  7. However, liberty was granted to the AO to issue appropriate show cause notices to the petitioners clearly setting out under what circumstances they proposed to call upon the petitioner to reverse refund sanctioned and after inviting objections proceed in accordance with law.
• Therefore, to ascertain as to whether there was quantum of loss of goods, which were purchased, on which, tax was paid, the AO had to conduct an exercise, by which, he had to ascertain as to what would be the loss.
• A uniform or ad hoc percentage cannot be adopted for this purpose.
• To do so, it would be necessary for the AO to conduct an inspection of the place of business of the petitioner to acquaint himself with the manufacturing process.
• However, since the respondent had adopted a uniform percentage, the same was incorrect and called for interference.

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Observation of the HC on the Ineligible claim of GST ITC on goods

Likewise, the restriction of the amount of ITC for ineligible claim of ITC on goods was also dealt with in the aforesaid decision in Shri Ranganathar Valves (P.) Ltd.’s case (supra) in the following manner:

• The issue here was that the respondent had rejected the claim for ITC on certain purchases effected on the ground that the commodities were not exported.
• The petitioner’s case was that those products were used in the manufacture of other goods, which were exported, as specified under section 8(1) of the State Act and they were entitled to avail the ITC.
• However, the petitioner had no opportunity to put forth their objections on the above head.

In view of the decisions in Shri Ranganathar Valves (P.) Ltd.’s case (supra), the HC considered it appropriate to call for objections of the petitioners in this regard.

Conclusion by Madras HC

• In the light of the above findings, the impugned orders were set aside.
• The issue with regard to restriction of the amount of ITC for prior sufferance of taxes was remanded back to the AO for fresh consideration.
• The AOwas directed to, before taking a final decision, extend due opportunity of personal hearing to the petitioner and endeavour to complete the proceedings, atleast within 12 weeks from the date of receipt of a copy of this order.
• In view of the judgment of the HC in Shri Ranganathar Valves (P.) Ltd.’s case (supra), it was open to the AO to issue a show cause notice to the petitioner calling for his objections with regard to “Input Tax Credit on reversal on wastage” and “Ineligible claim of ITC on goods” are concerned.

In simple words,

ITC could not be disallowed on the ground that the seller had not paid tax to the Government, when the purchaser was able to prove that the seller had collected tax and issued invoices to the purchaser.

To ascertain as to whether there was quantum of loss of goods (for restricting ITC on wastages), which were purchased, on which, tax was paid, the Assessing Authorities have to conduct an exercise, by which, they have to ascertain as to what would be the loss.A uniform or ad hoc percentage cannot be adopted for this purpose.To do so, it is necessary for the AO to conduct an inspection of the place of business of the petitioner to acquaint himself with the manufacturing process.

Also, when there is an ineligible claim of ITC on goods on the ground that the commodities were not exported, the petitioner should be provided of an opportunity to put forth their objections.

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