The Goods and Services Tax Appellate Tribunal (GSTAT), Agra State Bench, has held that input tax credit (ITC) cannot be denied to a bona fide purchasing dealer merely because the supplier is subsequently found to be non-existent, where the buyer establishes the genuineness of the transaction through invoices, transport documents, banking records and evidence of the use of goods in manufacturing.
The Bench comprising Ajeet Singh (Judicial Member) and Vivek Kumar (Technical Member) dismissed the Uttar Pradesh State Tax Department’s appeal against an order granting relief to assessee. It upheld the setting aside of a demand comprising ₹1,53,282 in tax, ₹37,554 in interest and ₹1,53,282 in penalty, aggregating to ₹3,44,118.
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The dispute concerned the purchase of GP sheets worth ₹8,51,570 by assessee from M/s Adil Enterprises, Lucknow, under an invoice dated June 14, 2021. The purchasing firm used GP sheets as raw material for manufacturing padlocks and other metal goods.
Following information from the Central GST authorities that the supplier was non-existent, the State Tax Department alleged that the assessee had claimed ITC without actually receiving the goods.
The purchasing dealer disputed the allegation and furnished documents supporting the transaction. However, the proper officer rejected its explanation and passed an order dated February 10, 2023, imposing tax, interest and penalty.
The first appellate authority allowed the dealer’s appeal on March 25, 2023, and set aside the demand. Devendra Singh, Assistant Commissioner, State Tax, Uttar Pradesh, subsequently challenged that decision before the Tribunal on behalf of the State.
The Tribunal framed two principal questions: whether ITC could be denied under Section 16(2) of the CGST/UPGST Acts to a purchasing taxpayer possessing valid invoices, e-way bills, transport records and banking proof merely because the supplier was subsequently found to be non-existent; and whether a penalty under Section 74 could be sustained without proving the purchaser’s collusion or active participation in fraud.
The department argued that the supplier had issued fictitious invoices and generated GSTR-1 without supplying goods. It maintained that the assessee had wrongly claimed ITC on the alleged inward supply during June 2021.
The dealer, however, submitted that it had physically received the GP sheets and used them in manufacturing. It relied on the tax invoice, e-way bill, bilty and payment through verifiable banking channels to establish that the purchase was genuine.
The Tribunal found that the purchasing dealer had produced complete and verifiable documents supporting the transaction, including the e-way bill, consignment note and payment details.
It also attached significance to the use of GP sheets in manufacturing finished padlocks and metal goods. The department had neither questioned nor disputed the manufacture or sale of those finished products.
The Tribunal reasoned that manufacturing GP-sheet-based products required the underlying raw material. In the circumstances of this case, the production activity supported the dealer’s claim that it had physically received the goods for the purposes of Section 16(2)(b).
It further noted that payment for the inward supply had been established through verifiable banking channels before the dealer received the show-cause notice.
The Tribunal found that Adil Enterprises was a registered entity with a valid GSTIN displayed on the GST common portal when the transaction took place in June 2021.
It held that a subsequent investigation declaring a supplier non-existent, or retrospective cancellation of its registration, could not automatically deprive a bona fide purchaser of ITC where the purchase had been made on the strength of the supplier’s valid registration status at the relevant time.
The finding was based on the combined evidence of registration status, transport records, payment and consumption of the raw material in manufacturing.
On the invocation of Section 74, the Tribunal observed that the provision applies where non-payment, short payment or wrongful availment of ITC arises from fraud, wilful misstatement or suppression of facts to evade tax.
It held that the department was required to establish deliberate fraud or collusion involving the purchasing dealer. In this case, the proper officer had produced no direct evidence, statement or other material showing that the buyer knew of, or participated in, a bogus invoicing arrangement operated by the supplier.
The Tribunal observed that the purchasing dealer could not be made a guarantor of the supplier’s statutory compliance or post-transaction conduct.
Consequently, the supplier’s subsequent non-existence, without evidence connecting the purchasing dealer to the alleged fraud, did not justify the proceedings against the buyer on the facts before it.
The Tribunal acknowledged that Section 155 places the burden of proving eligibility for ITC on the person claiming it.
However, it found that assessee had discharged that burden by furnishing the tax invoice, e-way bill, bilty, bank transaction statement and evidence showing consumption of the raw material in finished goods.
Once those records supported the genuineness of the purchase, the department was required to rebut the evidence. The Tribunal found that the revenue had failed to do so or demonstrate the purchasing dealer’s complicity with the supplier.
It accordingly treated assessee as a bona fide taxpayer that had entered into the transaction in good faith with a registered supplier.
In its reasoning, the Tribunal referred to LGW Industries Ltd. v. Union of India, concerning ITC claims where the supplier’s registration was subsequently cancelled or its existence questioned.
It also referred to Shaurya Alloys Pvt. Ltd. and Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi in support of its reasoning concerning evidence of collusion and the treatment of a purchasing dealer that had complied with the applicable requirements.
The Tribunal held that the first appellate authority had rightly set aside the ITC reversal order.
It dismissed the departmental appeal as devoid of merit and upheld the order dated March 25, 2023. The decision preserves the relief granted to assessee against the ₹3.44 lakh tax, interest and penalty demand.
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