Rajasthan High Court Says Supplier's Tax Payment Mandatory For ITC, Upholds Recovery From Buyer

The Rajasthan High Court on 17 August held that actual payment of tax by the supplier to the Government is a mandatory condition for availing Input Tax Credit (ITC) under Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act, 2017, and that the credit can be recovered from the purchaser if the supplier fails to pay the corresponding tax.

A Division Bench comprising Justices Dr. Pushpendra Singh Bhati and Praveer Bhatnagar dismissed a writ petition filed by Shree Karni Electrovision, challenging the constitutional validity of Section 16(2)(c) and an order dated 24 November 2022 directing recovery of ITC. It observed:

“The purchaser, without ascertaining whether the supplier has paid such tax, should not have availed the Input Tax Credit and, once he has availed the same without the supplier having paid the liability arising out of Section 16(2)(c) of the Act of 2017, recovery of the same becomes permissible in accordance with law.”

The petitioner had purchased electronic goods worth Rs. 59.42 lakh from Techno Kart India Ltd. between December 2017 and January 2018, on which tax of Rs. 13 lakh was payable. It availed ITC of the corresponding amount on the premise that the supplier was responsible for depositing the tax with the Government.

The supplier subsequently became insolvent and insolvency proceedings were initiated against it. The petitioner argued that the Revenue had failed to lodge its tax claim against the supplier during those proceedings and therefore could not recover the amount from the purchaser. It also challenged Section 16(2)(c), arguing that a purchaser cannot practically ascertain whether the supplier has actually deposited the tax with the Government.

It relied on the Supreme Court's judgment in Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., contending that claims not forming part of an approved resolution plan stand extinguished.

The Revenue, however, argued that Section 16(2)(c) expressly makes payment of the tax charged on a supply to the Government a condition for availing ITC. It also relied on the Gujarat High Court's decision in Maruti Enterprise v. Union of India, which upheld the provision and held that the conditions under Section 16(2) must be satisfied together.

The Rajasthan High Court agreed with the Revenue. It held that Section 16(2)(c) is a mandatory condition for availing ITC, subject to Section 41 of the CGST Act and the Rajasthan Goods and Services Tax (RGST) Act. The Court observed that a purchaser cannot claim ITC without establishing that the supplier has paid the corresponding tax to the Government.

The Bench further held that the conditions under Section 16(2)(a) to (d) must be read together and not independently. It noted that Section 155 of the CGST Act places the burden of proving eligibility for ITC on the person claiming the credit.

It also rejected the petitioner's reliance on Ghanashyam Mishra, holding that the judgment concerns the effect of an approved resolution plan under the Insolvency and Bankruptcy Code, 2016 and does not override the statutory conditions governing entitlement to ITC under Section 16(2)(c).

Accordingly, the High Court dismissed the writ petition and disposed of the pending applications.

For Petitioner: Pankaj Arora and Ranjan Mehta, Advocates

For Respondent: Harshvardhan Singh for Mahaveer Bishnoi, AAG, Rajat Arora and Mudit Vaishnav