CGST Act | Gauhati High Court Reads Down S.16(2)(aa); Says ITC Can't Be Denied To Bona Fide Buyer For Supplier's Default

A Division Bench comprising Chief Justice Ashutosh Kumar and Justice Arun Dev Choudhury disposed of a writ petition filed by the assessee, M/s McLeod Russel India Limited, holding that while the provision itself is not unconstitutional, ITC cannot be denied without giving the purchaser an opportunity to prove the genuineness of the transaction through invoices and supporting documents.

The Bench observed that in our estimation, the restriction is quite iniquitous because an onerous burden is placed on purchasing dealer. However, since the object and purpose of the amendment in the Act is to prevent fraudulent ITC claims and to promote supplier compliance, we are not inclined to hold the amendment in Section 16 to be unconstitutional but for the present, we only read it down to the extent that in case of the supplier acting truant, before denying the ITC benefits to a bona fide purchaser, he ought to be given an opportunity to prove his bona fides, which can be verified by the tax invoices and other documents.

Section 16(2)(aa) of the CGST Act, 2017 is a statutory condition for claiming Input Tax Credit (ITC) under GST. The provision says that a registered buyer can claim ITC only if the supplier has uploaded the invoice or debit note details in Form GSTR-1, and those details are communicated to the buyer (and reflected in GSTR-2A / GSTR-2B).

In the case in hand, the assessee, engaged in the production and supply of tea, had challenged the constitutional validity of Section 16(2)(aa), which makes ITC dependent on the supplier uploading invoice details in Form GSTR-1 and their reflection in the recipient's GSTR-2A/2B.

The assessee argued that this condition unfairly penalises a genuine purchaser for the supplier's default, even where taxes have already been paid, and imposes an impossible burden on the purchaser, who has no control over the supplier's GST compliance.

The assessee argued that there is no statutory mechanism under Section 37 for the purchaser to ensure that the supplier uploads invoice details correctly, and therefore, the denial of ITC for supplier default leads to double taxation, defeating the core objective of GST.

The Revenue argued that ITC is a concession and not an absolute right, and conditions can lawfully be imposed.

The High Court noted that GST is a consumption-based tax, and the supplier merely acts as a collecting agency. The Court observed that although exemptions and concessions can carry conditions, those conditions cannot defeat the very object of GST.

The Bench held that denying ITC to a bona fide purchaser solely because of a supplier's lapse is inequitable and places an unreasonable burden on the buyer, acknowledging the legislative intent behind the amendment.

The Bench instead of declaring the provision unconstitutional, read it down, holding that before denying ITC to a genuine purchaser due to supplier default, the buyer must be given an opportunity to establish bona fides through invoices and other documents.

The Bench clarified that this reading-down will continue until the CBIC provides a practical mechanism that does not make ITC dependent entirely on factors beyond the buyer's control.

In view of the above, the Bench disposed of the petition, protecting the ITC entitlement of bona fide purchasers and reading down Section 16(2)(aa) to prevent denial of credit solely due to supplier non-compliance.

Case Title: M/s McLeod Russel India Ltd. v. Union of India & Ors.

Case No.: WP(C) No. 5725 of 2022

Appearance for Petitioner: Mr. A. Kanodia

Appearance for Respondent: Mr. S.C. Keyal, Standing Counsel, CGST, Ms. R. Hussain