For claiming ITC, genuineness of the transaction and actual physical movement of the goods is necessary – Supreme Court [pronounced under Karnataka VAT Law]

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Name of the case – State of Karnataka v. M/s. Ecom Gill Coffee Trading Pvt. Ltd. [Civil Appeal No. 230 of 2023 dated March 13, 2023]

Background:

This case is related to disallowance of Input Tax Credit (‘ITC’) under VAT law on the ground of inability by the Purchaser to provide the genuineness of the ITC claimed on purchases and actual movement of the goods.

Facts of the case:

  • The purchaser of the goods claimed ITC on the basis of the Tax Invoice provided by the Supplier. The ITC was disallowed by the jurisdictional officer and the appellate authority on account of non-payment of tax by the sellers as well as doubts about the genuineness of the transaction when it was found that the transactions were only paper transactions;
  • The purchasing dealer had claimed ITC from mainly 27 sellers and out of aforesaid 27 sellers
  • 6 were found to be de-registered;
  • 3 had effected sales to the respondent, but did not file taxes and
  • 6 have outrightly denied turnover nor paid taxes

View taken by the Tribunal:

The purchaser challenged the order before Tribunal, which passed a judgment in favour of the assessee on the ground that Tax invoice was available and the proof of payment to the supplier was available. The Tribunal emphasized that the purchasing dealer should not suffer due to default of seller.

View taken by the High Court:

ITC should be allowed to the purchaser since

  • the sale price was paid to the seller by an account payee cheque and
  • copies of invoices were produced

Contention of the Learned Counsel of the Government (VAT Department) before Hon. Supreme Court:

  1. The burden on the claimant of ITC is higher than merely showing financial transfers and should also show actual movement of goods;
  2. Mere production of invoices or even payment evidences to the seller by cheque cannot be said to be sufficient;
  3. Actual payment of tax by the seller is also required to be established;
  4. Section 70 of the Karnataka VAT Act, 2003 deals with “Burden of proof”, as per which the burden of proof of genuineness of ITC claim will be on the person who has claimed it;

Judgments relied upon by Revenue (VAT Department):

  1. M/s. Bhagadia Brothers Vs. Additional Commissioner of Commercial Taxes [Karnataka HC], STA No. 4 of 2018 dated 29.01.2020
  2. Madhav Steel Corporation Vs. State of Gujarat, Tax Appeal No. 742 of 2013 [Gujarat HC]
  3. Shreeji Impex Vs. State of Gujarat, Tax Appeal No. 330 of 2014, 2014 SCC OnLine Guj 8074 [Gujarat HC]

Observation of Hon. Supreme Court:

  1. The burden of proof remains on the person who claims ITC and cannot be shifted to the revenue;
  2. Mere production of the invoices or the payment made by cheques is not enough and cannot be said to be discharging the burden of proof;
  3. The dealer claiming ITC has to prove beyond doubt the actual transaction which can be proved by furnishing
  • the name and address of the selling dealer;
  • actual physical movement of goods;
  • details of the vehicle which has delivered the goods;
  • payment of freight charges;
  • acknowledgement of taking delivery of goods;
  • acknowledgement of tax invoices and
  • acknowledgement of payment etc.
  1. Differentiation between Delhi HC judgment in Quest Merchandising India Pvt. Ltd. vs. Government of NCT of Delhi (Writ Petition (Civil) No. 6093/2017, decided on 26.10.2017) and the present case:
  • In the said case, the prime emphasise was on section 9(2)(g) of the Delhi VAT Act, which provides that “No tax credit shall be allowed to the dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period”
  • There was no question of burden of proof in that case. Hence, the ratio applied by the Delhi HC while giving the judgment in favour of the assessee in that case, cannot be applied over here.

Relevance of Hon. Supreme Count judgement under GST Law:

  1. Section 155 of the CGST Act, 2017 also deals with “Burden of proof”, which provides that where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person;
  2. What exactly forms “Burden of Proof” has nowhere been defined in the GST law or any other law. In the present context, it deals with proving of genuineness of the claim being made by the recipient of goods or service;
 

VAT Law

GST Law  

Burden of Proof

Section 70 (Karnatak VAT Law) – on the person who claims ITC


Section 155 – on the person who claims ITC

Conditions for availment of ITC
  • Possession of Tax invoice;
  • Receipt of goods;
  • Filing of returns

[Note – Since VAT was state legislation, the conditions were slightly different from state to state. However, generally all VAT laws emphasized on the above conditions]

Section 16(2)

  • Possession of Tax Invoice;
  • Supplier has uploaded the Tax invoice / debit note in his GSTR-1;
  • Receipt of goods / service;
  • In respect of such supply of goods / service, the tax has actually been paid to the Government;
  • Supplier has filed GSTR-3B

From above, it can be inferred that since the GST law also contains similar provision as regards the burden of proof and vey much identical conditions for the availment of the ITC on the part of recipient, the judgement of Hon. Supreme Court in the present case can be considered as precedence by various forums including GST department, GST Appellate Authorities, Tribunal (to be formed) and High Court/ Supreme Court. Hence, the deciding criteria as considered by the Hon. Supreme Court in the present case as regards proving the genuineness and authenticity of ITC claim by the purchaser should be considered especially where the supplier defaulted in filling of returns, payment of tax or complying with other provisions of the law. Under the circumstances where the supplier is under the scrutiny about the authenticity of sales transactions, the purchaser will be expected to provide all the evidences as highlighted in the present case by Hon. Supreme Court.

Limitation: The purpose of this article is for knowledge sharing purpose. Views expressed in this note are personal views of the author. The same should not be construed as professional advise

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