Relevant Case Laws

1. Manufacturer of goods chargeable to nil duty, is eligible to avail ITC paid on inputs, which were used in manufacture of goods exported and claim refund

SUPREME COURT OF INDIA in the matter of Commissioner of Central Excise, Chandigarh v. Drish Shoes Ltd referred in 90 taxmann.com 393 (SC) held that a manufacturer who exported final products which were exempt from duty, could claim refund of CENVAT credit of duty paid on inputs and inputs services used in manufacture and export of said wholly exempted final products.

2. if it is not within power and control of importer and depends upon acts of other public functionaries, non-compliance of such condition cannot be held to be condition precedent for obtaining benefit

Fact: Exemption is subject to the production of essential certificate from Director General of Hydro carbons at time of importation of goods as per notification no. 121/99-Cus

ONGC had applied for grant of exemption certificate before the Directorate General of Hydrocarbons in the month of April, 1999. The said essentiality certificate, however, could not be produced before the appropriate authority when importation took place as the same had not thence been granted as a result whereof a provisional clearance of the said tapes was made on 6th September, 1999

SUPREME COURT OF INDIA in the matter of Commissioner of Custom (Import), Mumbai v. Tullow India Operation Ltd referred in [2005] 2005 taxmann.com 250 (SC) has find out in para 30 that “the conditions referred to in Sub-section (1) of Section 25 as regard time when such certificate is to be produced would, thus, mean those which were within the control and power of the importer. If it is not within the power and control of the importer and depends upon the acts of other public functionaries, non-compliance of such condition, subject to just exception cannot be held to be a condition precedent which would disable it from obtaining the benefit therefrom for all times to come”.

3. Buyer can avail credit even it is not payable or wrongly tax is charged on supply. However, no credit allowed if supplier pay duty on unconditionally exempted goods

High Court of Punjab in the matter of V.G. Steel Industry v. Commissioner of Central Excise reported in [2012] 26 taxman.com 340 (Punjab and Haryana), held that if the duty has been paid in excess of the amount finally held to be payable, unless the excess duty paid has been refunded, the assessee could claim CENVAT credit as the department could not get the duty twice.

High Court of Allahabad in the matter of Commissioner of Central Excise v. Camphor Allied Products reported in [2015] 57 taxman.com 154 (Allahabad) held that amount available as credit is duty actually paid as indicated in removal/sales documents and invoice, even if Central Excise duty has not been passed on fully to buyer of goods and is partly absorbed by seller in some other account.

4. Input credit is not allowed where the good are not received

SUPREME COURT OF INDIA in the matter of Excide Industries Ltd. v. Commissioner of Central Goods and Service Tax, Raigad referred in [2019] 105 taxmann.com 192 (SC) held that where the Excise Authorities and the Tribunal have concurrently come to the conclusion that the goods in question were never received by the assessee in its factory and therefore, the assesses claim of having consumed the same was not genuine.

In the matter of HIGH COURT OF GUJARAT in the matter of Mangalam Alloys Ltd. v. Commissioner of Central Excise Ahmedabad-III referred in [2018] 98 taxmann.com 60 (Gujarat) decide where assessee claimed CEVAT credit of duty paid on inputs received under various invoices and Adjudicating Authority denied CENVAT credit for inputs covered under 12 invoices on plea that goods were not physically received by assessee and Tribunal upheld it, since assessee was not able to establish actual movement of goods, order of Tribunal was justified and CENVAT credit, therefore, could not have been claimed

5. No credit of shortage receipt of input but shortage due to dryage in transit is allowable/ shortage of stock within tolerance limit

As per Section 16(1) Every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business. Also, as per Section 16(2) of CGST Act the mandatory condition of availment of input tax credit is that the registered person availing the input tax credit must receive the goods.

There are many reasons for short receipt of inputs like natural cases, difference in weighing, different observing nature of product. In Pre GST many times department has issued the SCN to various assessee for reversal of ITC in case of short receipt of goods. Many petitioners have filed the appeals to the higher authorities against such orders. Court and appellants authorities has taken the view that credit would be availed in case of short receipt of inputs due to natural caused during transits. The ratio of these judgement is very useful to decide that up to what limit of short receipt of input credit is allowed in full. These are discussed below:

Tolerances in respect of hydroscopic, volatile and such other cargo has also to be allowed as per industry norms excluding, however, unreasonable and exorbitant claims. Similarly, minor variations arising due to weighment by different machines will also have to be ignored if such variations are within tolerance limits- CESTAT Chennai, in the matter of Commissioner of Central Excise v. Bhuwalka Steel Industries reported in (2010) 24 STT 436 CHENNAI – CESTAT)(FB) “after considering the argument and case law , considered the view that different types of shortages cannot be dealt with according to any one inflexible and fixed standard for the purpose of allowing credit under rule 3(1) of the CENVAT Credit Rules. Decision to allow or not to allow credit in any particular case will depend on various factors such as the following:—

• • Whether the inputs/capital goods have been diverted en-route or the entire quantity with the packing intact has been received and put to the intended use at the recipient factory.
  • Whether the impugned goods are hydroscopic in nature or are amenable to transit loss by way of evaporation etc.
  • Whether the impugned goods comprise countable number of pieces or packages and whether all such packages and pieces have been received and accounted for at the receiving end.
  • Whether the difference in weight in any particular case is on account of weighment on different scales at the dispatch and receiving ends and whether the same is within the tolerance limits with reference to the Standards of Weights and Measures Act, 1976.
  • Whether the recipient assessee has claimed compensation for the shortage of goods either from the supplier or from the transporter or the insurer of the cargo.

All these factors listed above, and any other relevant factor has to be kept in view in deciding any particular case as to whether the entire consignment has been received at the end of the recipient assessee without any diversion. Tolerances in respect of hydroscopic, volatile and such other cargo has also to be allowed as per industry norms excluding, however, unreasonable and exorbitant claims. Similarly, minor variations arising due to weighment by different machines will also have to be ignored if such variations are within tolerance limits.”

6. In the matter of CCE Bhuwalka Steel Industries (2010) 24 STT 436 = 249 ELT 218 (CESTAT 3-member bench), it has been held that tolerances in respect of hygroscopic, volatile and such other cargo have to be allowed as per industry norms, excluding unreasonable and exorbitant claims. This was followed in CCE v. Somaiya Organo Chemicals (2012) 275 ELT 83 (CESTAT), where it was held that loss of molasses upto 2% in transit and storage is permissible and CENVAT credit is not required to be reversed.
7. Assessee cannot be penalized for default of supplier/ Buyer can avail credit even if the supplier has not deposited service tax with Government

As per Section 16(2)(c) the registered person shall be entitled to the credit only when the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply. In other words, in case supplier fails to make the payment of tax the credit would be denied to the recipient even he has paid the tax to the supplier. This condition is subject to Section 41 of CGST Act which provider that the recipient can take the self-assessed ITC on provisional basis. Section 42 and 43 of CGST Act read with Rule 36(2) of CGST Rules, provides for the matching the outward tax declared by the supplier in the GSTR 1 with ITC taken by the recipient in its GSTR 2/GSTR 3B for validating the provisional ITC.

Further, as per clause 109, a new clause (aa) to sub-section (2) of the section 16 of the CGST Act has been inserted to provide that input tax credit on invoice or debit note may be availed only when the details of such invoice or debit note have been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note. The impact of the same would be that no ITC of inward supply would be allowed, if input supply received from the vendor is not appearing in GSTR 2A/2B. However, the effective date for this amendment is yet to be notified.

In pre-GST period, CENVAT credit rules do not contain such conditions. Further, there are many judgements in which it has been held that credit of the recipient of goods or services cannot be denied even in the case where the duty has not been paid by the supplier of output services. It was many times held by the courts or appellate authorities that buyer cannot be penalized for the default of supplier. These judgements are discussed below:

In a recent judgment, the similar view was taken by the Hon’ble Madras High Court in case of “D.Y. Beathel vs State Tax Officer [(2021) 127 taxmann.com 80 (Madras) [24-02-2021]” wherein it was held that the recipient of supplies has made the payment to the supplier of goods along with the tax amount through banking channels and ITC has been availed based on the returns filed by the supplier. Therefore, the recipient cannot be questioned in case the supplier does any default in the payment of tax to the government exchequer instead the supplier needs to be confronted during the enquiry initiated on the recipient.

In CCE v. Kay Kay Industries (2013) 42 GST 50 = 38 taxmann.com 336 = 295 ELT 177 (SC), assessee had taken Cenvat credit on basis of proper invoices issued by supplier. It was found that supplier had not paid excise duty collected by him, to Government. Therefore, Department sought to deny Cenvat credit to assessee (user-manufacturer). It was held that when there is a prescribed procedure and that has been duly followed by the manufacturer of final products, we do not perceive any justifiable reason to hold that the assessee-appellant had not taken reasonable care as prescribed in the notification. Due care and caution were taken by the respondent. It is not stated what further care and caution could have been taken. The proviso postulates and requires “reasonable care” and not verification from the department whether the duty stands paid by the manufacturer-seller. When all the conditions precedent has been satisfied, to require the assessee to find out from the departmental authorities about the payment of excise duty on the inputs used in the final product which have been made allowable by the notification would be travelling beyond the notification, and in a way, transgressing the same. This would be practically impossible and would lead to transactions getting delayed. Thus, Cenvat credit cannot be denied to the recipient.

In the matter of Memories Photocopy Studio v. Commissioner of Central Excise, Vadodara-I [2014] 45 taxman.com 237 (Ahmedabad- CESTAT) held that if an assessee makes the payment of the invoices which indicate service tax payable and avails the Cenvat credit, the activity or the action of service provider or not depositing the same in the Government Treasury will not bar the service recipient from taking Cenvat credit on the service tax paid, if eligible.

Delhi High Court delivered a very good judgment in the case of On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi (W.P.(C) 6093/2017 & CM No. 25293/2017) along with other petitions on the admissibility of ITC on bona fide purchases where the sellers have not deposited the tax with the Government. Delhi High Court 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. The result of such reading down would be that the Department is precluded from invoking Section 9 (2) (g) of the DVAT to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered selling dealer who has issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC. Where, however, the Department is able to come across material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under Section 40A of the DVAT Act.

Arise India Ltd. v. CTT [WP(C) 6093 of 2017, dated 26-10-2017], the Delhi High Court – “It can be safely concluded in the present case that there is a singular failure by the legislature to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers. The latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution”.

After this, Special Leave Petition filed by the Revenue against the above decision. However, the Hon’ble Supreme Court in the case of Commissioner of Trade & Taxes, Delhi and others Vs. Arise India Limited and others [TS-2-SC-2018- VAT], has dismissed the Special Leave Petition filed by the Revenue against the decision of the Hon’ble High Court of Delhi in the case of Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi and others [TS- 314-HC-2017(Del)-VAT] (“Arise India case”). The Hon’ble High Court of Delhi held Section 9(2)(g) of Delhi VAT Act to the extent it disallows Input tax credit(“ITC”) to purchaser due to default of selling dealer in depositing tax, as violative of Articles 14 and 19(1)(g) of the Constitution of India.

8. Payment of Supplier can be made through book adjustment

In the matter of Senco Gold Ltd., In re [2019] 105 taxmann.com 143 (AAR-West Bengal), it is held that input credit is admissible to the applicant, on debt created on inward supplies from Franchisee, when he settles through book adjustment

In another matter of Arvind Ltd. CCE, Ahmedabad-II, [2015] 54 taxman.com 206 (Ahmedabad-CESTAT) it is decided that the transfer of the amount of their sister unit by book adjustment would be treated as amount charged to the other unit

9. Payment is still required to be made within 180 days when there is supply is made to its own branch in different state

In the matter of Sanghvi Movers Ltd. In re (2020) 113 taxmann.com 24 (AAAR – TN), the case is covered by Schedule I of the CGST Act. The transaction is between distinct persons. The appellant in the tax invoice raised on their customers mentions that the payment to be made either by Cheque/DD in the name of ‘SANGHVI MOVERS LIMITED’ or directly to the account of SML HO at Pune. The appellant has represented that the receipts and payables are accounted at the entity level only. The HO being distinct person in the eyes of law and the transaction is in the course of furtherance of business, the supply is taxable supply for which SML HO has adopted a value agreed under the Tracing clause of the MoU and paid the tax on the value declared in the Invoice. The proviso to rule 37, provides for deemed payment of value in such transactions. Even considering that the said proviso does not have application in the case at hand as there is a value stated in the Tax Invoice as held by the Lower Authority, we find no reason to restrict the Input Tax Credit of the tax paid by the SML HO, in the hands of the appellant as it has been substantially brought out that the ‘consideration’ stands paid to the SML HO either by the customer of the Appellant or by setting off against the payables of the appellant to SML HO, in respect of lease/hire of Cranes, etc. which is as per the established accounting principles. Therefore, we do not find any reason to restrict the eligibility of ITC credit under section 16 (2) of the Act, in the case it was held that branch office is entitled to avail full ITC where payments are netted off against receivables.

10. Either seller gave trade discount or price reduction after clearance, full credit is available, so long as duty paid at supplier’s end is not changed.

Where discount was availed by applicant-recipient post supply of goods/services and post issue of invoices, it can avail Input Tax Credit only to extent of invoice value raised by suppliers less discounts i.e. discounted price paid by him to suppliers-Authority of Advance ruling, Tamandu in the matter of MRF Ltd., In re reported in [2019] 103 taxman.com 278 (AAR- Tamil Nadu)-

Para 4.3. “Section 16(1) states that a registered recipient is eligible to take credit on the input tax charged on any supply of goods or services. As per section 9(1), CGST tax is leviable on the value of supply as determined by section 15. Section 15 (3) states that value of supply does not include any discount which is given before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply and those discounts given after the supply has been effected, if such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices and input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply. Time of supply of goods as per section 12 is the earlier of the following dates, namely the date of issue of invoice by the supplier or the last date on which he is required, under sub-section (1) of section 31, to issue the invoice with respect to the supply or the date on which the supplier receives the payment with respect to the supply”

SUPREME COURT OF INDIA, in the matter of Commissioner of Trade Taxes, Delhi v. Challenger Computer Ltd referred in [2017] 77 taxmann.com 199 (SC) held that Where assessee purchased goods after payment of VAT and received discount from selling dealer subsequent to sales and further claimed ITC on such purchases and entire amount of VAT collected by selling dealer from assessee was deposited to department and HC setting aside orders of lower authorities allowed assessee’s claim for ITC, SLP filed against judgment of HC was liable to be dismissed

CESTAT, Ahmedabad bench in the matter of Commissioner of Central Excise & Custom, Surat-I v. Tirumala Fine Texturiser (P.) Ltd. referred in [2007] 2007 taxman.com 586 (Ahmedabad -CESTAT) held that Credit cannot be denied in case the Credit note issued by the suppliers of the appellant towards trade discount and which did not have any effect on the duty originally paid on such inputs by supplier.

CESTAT, Mumbai bench in the matter of Commissioner of Bajaj Auto Ltd. v. Central Excise & Custom, Aurangabad. referred in [2010] 2 taxman.com 540 (Mumbai -CESTAT) held that Credit cannot be denied in case the Credit of duty actually paid on input invoice and subsequently the price of input is reduced without of being reassessed by the department at manufactured end.

11. If assessee wrongly take depreciation on credit portion but on later return revised on realizing mistake, assessee can avail credit.

In the matter of Abhishek Synthetics v. CCE 2005 taxman.com 1462 (Allahabad) High Court of Allahabad, it was decided that the appellant has an option of either taking modvat credit or claiming depreciation. Once an option is exercised, it is not irreversible. The benefit of modvat credit under the Central Excise Rules cannot be denied merely on the ground that depreciation was claimed under the Income Tax in the Income Tax Return of the applicant even when he files the revised income tax return. In case depreciation was claimed on capital goods under Income Tax by mistake, but later revised return was filed on realising the mistake. Once the income tax return is revised, then CENVAT credit become regularized. It was held that CENVAT credit cannot be denied.

However, in another matter of Philips India Ltd. v. CCE, Vadodara [2010] 3 taxman.com 240 (Allahabad-CESTAT) held in case appellant claimed depreciation is claimed in the income tax return 1996-1997 & 1997-1998 and the Income Tax Returns were filed, assessed and finalized by allowing depreciation. No revised return filed in income tax for above period. In subsequent returns of FY 1999-2000 assessee reversed the depreciation claimed during the years 1996-1997 & 1997-1998. Therefore, the appellants were barred from taking Modvat credit and the fact that they have reversed depreciation is of no use or help to them. Thus, credit not admissible in 1999-2000.

12. No right of assessee for seeking directions to GST Authorities to disclose as to whether tenant had taken credit of GST

Assessee let-out its property to a tenant on a monthly rent of Rs. 81,000 and charging GST at rate of 18 per cent on monthly rent in rent bills raised against tenant and depositing same with department. However, tenant had not been paying said tax to assessee. Assessee filed writ petition seeking directions to GST Authorities to disclose as to whether tenant had taken credit of GST amount charged in rent bills. HIGH COURT OF DELHI in the matter of Allied Engineers & Builders (P.) Ltd. v. Muthoot Finance Ltd. referred in [2020] 122 taxmann.com 142 (Delhi) held that the Petitioner is also unable to show any provision of law that puts an obligation on the tax department to furnish the information for which the mandamus is being sought. In case the petitioner has no such legal right, the prayer cannot be granted.