Gauhati High Court Reads Down GST Provision to Protect Bona Fide Purchasers

ITC Benefits Cannot Be Denied Due to Supplier's Default, Court Mandates Opportunity to Prove Bona Fides

In a significant judgment, the Gauhati High Court has read down a provision under the Central Goods and Services Tax (CGST) Act, 2017, and the Assam Goods and Services Tax (AGST) Act, 2017, which linked the eligibility for Input Tax Credit (ITC) to the compliance of suppliers in filing necessary returns. The court recognized that this provision placed an onerous burden on bona fide purchasers, who were unfairly penalized due to non-compliance by suppliers.

The case, M/s MCLEOD Russel India Limited v. Union of India, was presided over by Chief Justice Ashutosh Kumar and Justice Arun Dev Choudhury. The petitioner, M/s MCLEOD Russel India Limited, challenged the validity of Section 16(2)(aa) of the CGST and AGST Acts, which mandates that ITC can only be availed if the supplier furnishes the details of invoices in Form GSTR-1.

The court noted that the provision, as it stood, denied ITC benefits to bona fide purchasers due to the supplier's failure to file returns or furnish invoice details. This was deemed arbitrary as it imposed an unjust burden on purchasers, who have no control over the supplier’s compliance.

Highlighting the objective of the GST framework to avoid cascading taxes, the court emphasized that denying ITC to purchasers for the supplier's default goes against the intent of the law. The judgment referenced similar cases, including Supreme Court affirmations, where ITC was allowed to purchasers who had paid taxes in good faith.

The bench decided not to declare the provision unconstitutional but opted to read it down. They ruled that before denying ITC benefits, bona fide purchasers should be given an opportunity to prove their bona fides through tax invoices and other documents. This interim measure will stand until the Central Board of Indirect Taxes and Customs (CBIC) devises a practical solution to the issue.

The decision has been hailed as a victory for businesses, ensuring they are not penalized for factors beyond their control. It underscores the need for a balanced approach in tax law, protecting genuine taxpayers while ensuring compliance.

Bottom Line:

Section 16(2)(aa) of the CGST Act and AGST Act, which mandates compliance by suppliers for availing Input Tax Credit (ITC), has been read down to avoid placing an onerous burden on bona fide purchasers and to allow them an opportunity to prove their bona fides before denying ITC.

Statutory provision(s): Central Goods and Services Tax Act, 2017 - Section 16(2)(aa), Assam Goods and Services Tax Act, 2017 - Section 16(2)(aa)

M/s MCLEOD Russel India Limited v. Union of India, (Gauhati)(DB) : Law Finder Doc Id # 2819923