The Madras High Court has held that Input Tax Credit (ITC) dispute over ERP software must be decided on proof of utilisation and not just bogus supplier allegation.
While reiterating that writ jurisdiction ordinarily cannot be invoked when a statutory appellate remedy is available, the Bench of Justice G. Jayachandran and Justice N. Mala exercised its discretion in view of the peculiar facts of the case and directed the appellate authority to entertain the appeal without insisting on any pre-deposit.
The appellant/assessee, engaged in the garments business, had procured ERP software services from M/s Infotech Audit Solution for managing warehouse operations, payroll and other administrative functions during the assessment year 2017-18. The company paid approximately ₹40 lakh for the services, including service tax of ₹2.37 lakh, and claimed Input Tax Credit on the tax component.
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The GST Department, however, disputed the credit after concluding that the software vendor was a non-existent registered entity. According to the Department, investigations revealed that the supplier had no genuine business activity and was merely issuing invoices to facilitate fraudulent availment of ITC without any actual supply. On this basis, the authorities proposed reversal of the credit and initiated proceedings.
Following issuance of Form GST DRC-01A and a subsequent show cause notice in Form GST DRC-01, the authorities rejected the taxpayer’s explanation and confirmed the tax demand. The assessee paid the disputed tax during the proceedings, following which the assessment order confirmed the demand along with interest under Section 50(3) and penalty under Section 74 of the GST enactments.
The Single Judge dismissed the writ petition, holding that the taxpayer had accepted the tax liability by voluntarily paying the amount through Form GST DRC-03. The Court further observed that once tax was found to have been short paid due to alleged wilful misstatement, the levy of interest and penalty followed as a statutory consequence.
The appellant argued that the Department had wrongly suspected the transaction solely because there was no evidence of transportation of goods. It submitted that ERP software constitutes an intangible service where physical movement cannot be expected.
The assessee further contended that it had genuinely utilised the ERP software for payroll management in its garment manufacturing business employing nearly 1,000 workers and having an annual turnover of around ₹65 crore. It argued that the Department could easily verify the actual utilisation of the software through records maintained by the company rather than merely relying upon findings concerning the supplier.
The State defended the assessment by asserting that the assessee had failed to produce any material demonstrating either the existence of the supplier or actual rendition of services. It also maintained that the writ petition itself was not maintainable since an effective statutory appellate remedy was available.
However, the Government Advocate acknowledged that, unlike physical goods, software services are intangible and therefore cannot be tested by evidence relating to transportation. Instead, according to the Department, the actual existence and utilisation of the software could be verified through appropriate evidence.
The Bench noted that neither side had undertaken the fundamental exercise of verifying whether the ERP software actually existed and whether it had in fact been utilised by the assessee. Instead, the Department had focused almost exclusively on establishing that the service provider was non-existent.
The Court observed that the real controversy in a case involving software services lay in examining whether the software had been supplied and used, rather than applying standards appropriate for physical goods. Since this factual aspect had never been properly examined, the Court considered the matter fit for adjudication by the appellate authority.
While affirming the principle that writ jurisdiction should ordinarily not be exercised where a statutory appeal is available, the High Court carved out relief owing to the peculiar facts of the case.
The Bench directed the assessee to file a statutory appeal within 30 days. It further ordered that the appellate authority should entertain the appeal without insisting upon any pre-deposit and decide the matter on its own merits within three months from receipt of the appeal.
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