The Madras High Court, in M/s D.Y. Beathel Enterprises v. State Tax Officer, examined whether input tax credit availed by the purchasing dealers could be denied solely on the ground that the suppliers had failed to remit the tax collected to the Government. The petitioners were dealers in raw rubber sheets who had purchased goods from registered suppliers and had paid the sale consideration, including the tax component, substantially through banking channels. Based on the tax invoices and returns filed by the suppliers, the petitioners availed input tax credit in accordance with the provisions of the Central Goods and Services Tax Act, 2017.

During inspection, the department found that the suppliers had not remitted the tax collected from the petitioners to the Government, leading to initiation of proceedings and issuance of show cause notices to the petitioners. The petitioners, in their replies, asserted that they had discharged their contractual and statutory obligations by paying the invoice value along with tax and contended that the suppliers ought to be confronted during the enquiry. However, without involving or examining the suppliers, the department passed orders fastening the entire tax liability on the petitioners.

The High Court analysed Section 16 of the CGST Act and observed that, while the provision contemplates that tax charged on the supply must be paid to the Government, the statute does not envisage penalising a bona fide recipient who has made payment to the supplier, including tax, through recognised banking channels. The Court noted that the department had not initiated any recovery proceedings against the defaulting suppliers, despite the fact that they had admittedly collected tax from the petitioners.

The Court further held that principles of natural justice require that the suppliers be examined and confronted during the enquiry, particularly when the department alleged that the petitioners had not even received the goods or had availed credit on the basis of fictitious invoices. In the absence of such examination, fastening liability solely on the recipients was held to be arbitrary and unsustainable.

Accordingly, the Madras High Court held that where the recipient of goods has paid the consideration along with tax to the supplier and has availed input tax credit based on valid tax invoices and returns, the recipient cannot be questioned or penalised for the supplier’s default in remitting tax to the Government. The Court emphasised that recovery action must first be taken against the defaulting suppliers and that the impugned proceedings against the petitioners were liable to be set aside.


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