Issue involved:
Validity of Section 16(2)(c) of the CGST Act which provides that ITC will be eligible to the buyer only if the Supplier deposits the tax so charged by him
1. On Doctrine of Impossibility – Lex Non Cogit Ad Impossibilia
From the judgment:
Para 76 – Which means a disability that makes it impossible to obey the law can be excused. However, the scheme of the GST regime does not strictly attract the intent of the maxim. As previously held by us, the provisions of Section 41 of the CGST Act read with Rule 37A of the CGST Rules, 2017 recognizes that purchaser are not unfairly penalized for a supplier’s default. It is true that the purchasers cannot compel the supplier to deposit tax with the government, thereby seek strict compliance of the provisions of Section 16(2)(c) of the CGST Act, but simultaneously they can avoid the circumstances by due care and caution. The GST regime operates on the contract/agreement between two parties. While entering into an agreement, a purchaser can ensure there is a clause that takes care of the lacuna and holds the supplier liable to indemnify the purchaser if the said purchasing dealer suffers a loss due to a default by the supplier to remit to the government the tax collected from the purchaser. Such clauses can be made part of the agreements covering such situations.
Analysis:
Court says that it is not impossible for the buyer to comply with this condition by taking “due care and caution”. They can have relevant clauses in their agreements with the supplier and enforce the payment of taxes by them. It is another thing that 90% or more of transactions happening in the commercial world do not have any written agreements, and those which do, enforcing those agreements in the court of law in case of breach takes decades.
2.On the question of reading down Section 16(2)(c) of the CGST Act
From the judgment:
Para 60. Therefore, considering the overall scheme of the Act, any “reading down” (narrow interpretation) of Section 16(2)(c) would trigger cascading fiscal consequences. The legal position under the former VAT regime was materially different, as input tax credit was confined within the originating state. In contrast, the GST regime is destination-based; therefore, input tax credit must operate seamlessly across state lines for inter-State supplies, requiring strict compliance to maintain fiscal balance.
Para 82. Thus, doctrine of reading down is a judicial tool used to salvage the constitutionality of a statute by giving a provision a narrowed or limited interpretation, thereby mitigating potential conflicts with constitutional or legal principles. We do not find that the provision of Section 16(2)(c) if read with the scheme of GST regime as discussed, conflicts with constitutional or legal principles. The provision of Section 16(2) (c) cannot be read in isolation, but has to read with attendant provisions as discussed hereinabove, which enables the government to secure its interest in revenue, by keeping a check on fraudulent transactions while maintaining the interest of genuine purchasers. It is settled legal principle of statutory interpretation that a provision in the statute is not to be read in isolation rather it has to read along with other related provisions itself, more particularly when the subject matter interconnects within different sections or parts of the same statute.
Analysis:
Court has delved into section 41 wherein matching of ITC and reversal of tax is not paid by the supplier and then section 53 which provides for settlement of IGST ITC between center and states and concluded that reading down section 16(2)(c) would have a cascading effect on settlement of funds.
Section 9(2)(g) of the Delhi VAT Act reads as under:
9(2) No tax credit shall be allowed —
(g) to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period.
Section 16(2)(c) of CGST Act reads as follows:
16 (2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,—
(c) subject to the provisions of [section 41], the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
It can be seen that both the provisions are pari materia in all respects. Delhi High Court On Quest Marketing read down the section 9(2)(g) of Delhi VAT Act in para 39 and 41 of the judgement said that if the transaction is otherwise genuine the buyer cannot be asked to do the impossible. This judgement was upheld by the Supreme Court in case of Arise India – para 53 of this judgment is crystal clear but still the Gujarat High Court didn’t see merit in reading down the provision.
Conclusions
53. In light of the above legal position, the Court hereby holds that the expression „dealer or class of dealers‟ occurring in Section 9 (2) (g) of the DVAT Act should be interpreted as not including a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with Section 50 of the Act where there is no mismatch of the transactions in Annexures 2A and 2B. Unless the expression „dealer or class of dealers‟ in Section 9 (2) (g) is „read down‟ in the above manner, the entire provision would have to be held to be violative of Article 14 of the Constitution.
3. Distinguishing earlier judgements
Judgement of Tripura High Court in case of Sahil Enterprise has been distinguished on the grounds that they did not adequately consider the interplay of section 41 and 53 of the CGST Act read with rule 37A. Further Tripura High Court has also not examined the impact of section 155 of the CGST Act.
On Quest Marketing judgement of Delhi High Court has been distinguished on the grounds that Section 16(2)(c) of the CGST Act cannot be equated with the VAT regime, particularly with Section 9(2)(g) of the DVAT Act
Delhi High Court judgement in case of On Quest as well as Supreme Court Judgement in Arise India are referred to but unfortunately the court has distinguished them by merely saying that VAT law and GST law cannot be equated, which in my view is not correct.
4. Suggestions to the Government from the High Court
From the judgment:
Para 88 – the Government undertakes a comprehensive re-evaluation of the dicey situation which purchasers are facing. There is a pressing need for legislative amendments or clarifications to be issued within the GST framework to alleviate the disproportionate financial and administrative burdens currently placed upon purchasers who have an honest claim of ITC. Beyond mere policy changes, the Government should implement a robust, technology-driven tracking mechanism enabling verification of payments made by suppliers against specific invoices in real time, thereby insulating bona fide recipients from the defaults of their vendors. Simultaneously, the Government has to take prompt and immediate steps for recovery of tax from the erring suppliers, instead of compelling the purchasers to avail themselves of alternate cumbersome remedies. In the absence of stringent oversight, unscrupulous sellers could potentially enrich themselves at the expense of both the public exchequer and honest buyers.
Analysis:
Suggestions given by the High Court to the Government for bringing in technology driven tracking mechanism for verification of payments made by the suppliers is a testament to the fact that the law and procedures currently available are inadequate for genuine buyers, these suggestions if accepted by the government will take time to see the light of the day and till then the taxpayers should not be left remediless. An act of ensuring payment of tax by the supplier which is impossible as stated in the judgement and which it suggests to take care by having a good written agreement / contract between the supplier and buyer is not how majority of India transacts, hence the remedy suggested by the judgement is not just difficult but impossible for the taxpayers.
5. Conclusion
This judgement is bound to be challenged in the Supreme Court and I sincerely hope the impossible which is made possible by this judgement is again placed where it belongs, hope we once again get an Arise India and a Shanti Kiran.
Nitesh Jain
Chartered Accountant
N J Jain & Associates
Member of JPP Network