ITC denied where supplier defaulted on tax payment

The Tribunal, while upholding the denial of ITC under Section 16(2)(c) for failure to prove that the supplier paid the tax to the Government, directed the proper officer to compute interest under Rule 88B(3) with a detailed working before recovery, and observed that the recipient may re-avail credit under Section 41 if the tax is subsequently recovered from the suppliers.

The Goods and Services Tax Appellate Tribunal, Bengaluru Bench, has upheld the denial of input tax credit of ₹1,35,231 to a recipient whose suppliers had not reported sales in their returns and where there was no evidence that the suppliers paid the tax to the Government, while issuing practical directions to protect the recipient's future entitlement [Sri Kariyappa Alahalli Manjappa (Prop. M/s. Vintek Control Systems) v. Superintendent of Central Tax].

The appellant, a proprietor dealing in control systems, had purchased a fire pump worth ₹14,00,000 from M/s Naveen's, Chennai, and availed ITC of ₹1,32,655 on the IGST component. During verification, the Department found that the supplier had not reported the sale in its returns and there was no evidence that the tax charged in the invoice had been paid to the Government. A demand was raised under Section 73 for the ITC along with interest and penalty of ₹33,266. The appellant contended that he had paid the supplier, possessed a valid tax invoice, and should not be penalised for the supplier's default.

The Bench of Prabhakaran PM (Judicial Member) and Ravi Jesuraj S (Technical Member) delivered a detailed 56-paragraph order. The Tribunal noted that the Supreme Court had recently declined to interfere with the Gujarat High Court's judgment upholding the constitutional validity of Section 16(2)(c) in Maruti Enterprise, and held that the condition requiring actual payment of tax to the Government is a prerequisite for ITC eligibility. Under Section 155, the burden of proving that the suppliers paid the tax lies squarely on the claimant, which the appellant had failed to discharge. The Tribunal candidly acknowledged the predicament of an honest purchaser caught between a defaulting supplier and the statutory framework, describing it as a situation that calls for empathy but cannot override the clear legislative mandate.

However, the Tribunal went beyond the immediate dispute to issue several practical directions. First, the proper officer was directed to compute interest under Rule 88B(3) and communicate the detailed working to the appellant before initiating recovery — a procedural safeguard against arbitrary interest computation. Second, the Tribunal observed that the appellant may re-avail credit under Section 41 if the tax is subsequently recovered from the defaulting suppliers, providing a concrete roadmap for affected taxpayers. Third, the Department was directed to pursue the defaulting suppliers in Tamil Nadu with equal diligence and communicate relevant information to the jurisdictional officers — a direction underscoring that the statutory scheme contemplates recovery from the defaulter, not merely denial to the recipient. The decision is among the first detailed GSTAT orders applying the post-Maruti Enterprise position and sets a benchmark for how such cases should be handled at the Tribunal level.