ITC cannot be Disallowed when Seller pay tax and if purchaser has valid invoice

Last Updated On: Nov. 4, 2020, 4:13 p.m.
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ITC CANNOT BE DISALLOWED WHEN SELLER HAS PAID TAX

 When goods or services is supplied to a taxable person, the charged GST is Input Tax. Basically, Input Tax Credit (ITC) means reducing the taxes paid on inputs from the taxes paid on the output.

As per Section 16(1), of CGST Act, every registered person is subjected to certain conditions and restrictions as prescribed within the time period. As specified in the section 49, every registered person is entitled to take the credit of input tax charged on the goods or services supplied to him which are specifically used for in the course of furtherance of business and such amount shall be credited to the electronic ledger of such concerned person.

 

Circumstances where GST ITC cannot be claimed:

Section 17(5)under CGST Act states the situation where Input Tax Credit cannot be claimed.

  • If the motor Vehicle is used for transportation of people and has a seating capacity of less than or equal to 12+1 person, then a person cannot avail ITC.
  • If he is rendering services of general insurance, repairs and maintenance.
  • If a person has paid tax for Food and beverages, Outdoor Catering, Beauty Treatment he cannot  avail ITC.
  • If a person is registered under Composition Scheme
  • If a person has supplied goods for his personal use.
  • If a person has rented a cab, life Insurance, Health Insurance.
  • If a person renders services for construction of immovable property.

 

Sometimes, Claiming of Input Tax Credit (ITC) can be complicated as the tax authorities generally disallows the eligibility of ITC.

Let us relate this instance with a Case for better understanding’

Case of Sri Ranganathar Valves (P.) Ltd vs Assistant Commissioner (CT) (2020),

where the issue related to restriction of ITC predominantly on the head of

(a) Prior sufferance of Taxes;

 (b) ITC on reversal on wastage; and

(c) Ineligiblility to claim ITC on goods.

 

A.  High Court Restricted Prior Sufferance of Taxes:

In the View that some of the petitioner had purchased goods that had not paid tax to the Governmnet , the Assessing Officer had disallowed the ITC of the Petitioner.

This issue was dealt with in the case of Assistant Commissioner (CT) v. Infiniti Wholesale Ltd. [2017] (Mad),  ITC could not be disallowed for the reason  that the seller had not paid tax to the Government, when the purchaser was able to prove that the seller had collected tax and issued invoices to the purchaser.

The High Court, therefore in this case concluded that, restriction of the amount of ITC on this ground, could not be sustained and required re-consideration.

 

B. ITC ON REVERSAL ON WASTAGE:

With regard to reversal of ITC claim on wastage under section 19(9) of the State Act, under which, there were2 issues namely invisible loss and visible loss, the respondent adopted a percentage of 5% and 1% respectively.

The correctness of adopting uniform percentage came up before this Court in the case of Interfit Techno Products Ltd. v. The Principal Secretary and Commissioner of CT [2015] wherein this Court issued certain directions as to how the AO should proceed to determine the invisible loss/visible loss, where were as follows:

It was not sufficient for a dealer claiming refund under section 18(2) to show that he had paid input tax on the goods purchased and that those goods were used in the manufacture and nothing more.

There was also a duty upon the dealer to satisfy the AO that the claim was not hit by any of the restrictions or conditions contained under section 19 of the VAT Act.

In this regard, it was essential for the AO to embark upon the fact finding exercise to ascertain the quantum of loss of the goods which were purchased on which tax was paid vis-a-vis the goods manufactured from and out of the goods purchased and to examine as to whether they fell within any of the restrictions contained in Section 19 of the VAT Act.

The AO had to conduct an exercise by which it was to be ascertained as to whether the representation made by the dealer was justified and was not hit by any of the restrictions and conditions contained in Section 19 of the VAT Act.

It was held that the assessing authorities were not justified in adopting uniform percentage as invisible loss and calling upon the dealer to reverse the ITC availed of to that extent.

Consequently, all notices issued to the petitioner for reopening and all consequential order passed reversing the ITC to the extent of either 4% or 5% or on ad hoc percentage was set aside.

However, liberty was granted to the AO to issue appropriate show cause notices to the petitioners clearly setting out under what circumstances they proposed to call upon the petitioner to reverse refund sanctioned and after inviting objections proceed in accordance with law.

Therefore, to ascertain as to whether there was quantum of loss of goods, which were purchased, on which, tax was paid, the AO had to conduct an exercise, by which, he had to ascertain as to what would be the loss.

A uniform or ad hoc percentage cannot be adopted for this purpose.

To do so, it would be necessary for the AO to conduct an inspection of the place of business of the petitioner to acquaint himself with the manufacturing process.

However, since the respondent had adopted a uniform percentage, the same was incorrect and called for interference.

 

C. INELIGIBILITY TO CLAIM ITC ON GOODS:

 The restriction was made for the ineligibility to claim  ITC on goods was also dealt with in the aforesaid decision in Shri Ranganathar Valves (P.) Ltd.’s case (supra) in the following manner:

The issue here was that the respondent had rejected the claim for ITC on certain purchases effected on the ground that the commodities were not exported.

The petitioner’s case was that those products were used in the manufacture of other goods, which were exported, as specified under section 8(1) of the State Act and they were entitled to avail the ITC.

However, the petitioner had no opportunity to put forth their objections on the above head.

 

CONCLUSION:

ITC cannot be disallowed on the ground that the seller had not paid tax to the Government, when the purchaser is able to prove that the seller had collected tax and issued invoices to the purchaser.

To determine whether there was quantum of loss of goods for restricting ITC on wastages, which was purchased, on which, tax was paid, the Assessing Authorities have to conduct an exercise, by which, they can determine as to what would be the loss.  It is essentially required for the AO to conduct an inspection of the place of business of the petitioner to acquaint himself with the manufacturing process.

Also, when there is an ineligibility to claim of ITC on goods on the ground that the commodities were not exported, the petitioner should be provided of an opportunity to place their objections.

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