Tripura High Court reads down Section 16(2)(c) of the CGST Act
The Tripura High Court on Tuesday 6th of January, 2025 delivered a significant judgement in the ongoing tussle around the constitutionality of Section 16(2)(c) of the CGST Act. The following is a brief discussion on the decision, a comparative look at how the Tripura HC's decision is a novel contribution to the existing debate.
M/s Sahil Enterprises v. Union of India - WP (C) No. 688/2022
Facts
- The Petitioner was engaged in the trading of rubber products and had purchased various products from Sentu Dey (Supplier) and paid GST on it. It was later discovered that the Respondent-Supplier was supplying rubber products but was not depositing the GST paid by the purchasers with the Government.
- The Respondent had shown a return of outward supply (Section 37) but did not pay the tax collected while filing GSTR-3B returns. It had filed a Nil return in respect of the same.
- Because of this, the whole ITC balance of the Petitioner was blocked under 2(c).
- A SCN was made to the Petitioner invoking Section 73 of the Act asking to show case wrt to wrongly availed ITC. The ITC was reversed with a penalty in due course.
The WP was filed by the Petitioner challenging the vires of Section 16(2)© as violating Art. 14, 19, and 300A.
Observations of the Court
- That there is no mechanism with the recipient of goods to verify whether the supplier has discharged his liability to the Government or not.
- In view of this, it is impossible for the purchaser to check whether the supplier has deposited the tax paid by him to.the Government and then avail ITC
- The Court finds considerable force in the argument that mistake on the part of the supplier to make over the tax collected form the purchaser to the Government cannot be used to in turn penalise the purchaser himself.
- By denying the purchaser an availment of ITC and making them pay the tax, the Government again amounts to double taxation violating Art. 265 of the Constitution.
- The Parliament has failed to rightly distinguish between purchasing dealers who have entered into a bona fide transaction with the dealer and those that have not. The denial of ITC must be restricted to the latter only.
- It places an onerous burden on the purchaser to ensure the compliance of the purchasing dealer.
'Reading Down'
Through a reading of various precedents, the Court has opined that in cases where a provision could be made workable by reading it down, it should be down, unless the literal reading is manifestly in 'defiance of the Constitution'.
The position in CST v. Radhakrishnan (which is approvingly cited by the Court) is also interesting. It states that the concept of reading down arises out of the 'presumption of constitutionality'. In that it is presumed that the Legislature understands and correctly appriciates the need of its own people and discrimination is on adequate grounds. Thus declaring the statute to be invalid is discouraged in favour of 'reading down', which helps maintain the delicate balance.
The Delhi Court in Quest Merchandising v. GNCTD was also required to decide the vires of Section 9(2)(g) of the DVAT Act which had a similar provision to 16(2)(c). This provision was also read down by the Court on similar grounds, opining that the Legislature has failed to make a nuanced distinction between a bona fide purchaser and a mala fide purchaser. By mandating ITC to be contingent on the payment of tax by the supplier, and to leave no option in case of a defaulting supplier is arbitrary. The Department was precluded from invoking the given section in respect of a bona-fide transaction with a registered seller who has issued a tax invoice with a TIN Number. The SLP against the decision was dismissed.
The Kerala High Court before this, in 2022 upheld the constitutionality of the said clause, claiming that ITC was a "concession and not a vested right.". Later the Patna, MP, Madras and AP High Courts also upheld the vires of the clause. The position that resonated with these Courts was that the Legislature must enjoy a wide power to enable it to adjust the system of taxation in a reasonable manner. Because ITC can only be claimed when there corresponding tax paid to the Government, the sum and substance of the prescription is not wholly incorrect. Some also take the position that the Court's powers are substantially limited in dealing with the interpretation and interference with tax provisions. Cue the argument on Economic Policy!
The Gauhati High Court in 2024 read down the provision and held that the issue is squarely covered by the DHC's decision in Quest Merchandising. The view that swayed both the Tripura HC and the Gauhati High Court remains the practical impossibility of a purchaser to ensure that the seller pays GST. Further the Court observes that none of the aforementioned HC's have taken cognisance of the decision in Quest Merchandising which has been continuously upheld by the Court both in Arise India and Shanti Kiran.
This makes for an interesting argument. If the Kerala High Court and others base their position off the SC's decision in Jayam & Co. v. Assistant Commissioner where the Court held that ITC was a 'concession' and not an absolute right, the Tripura HC also bases its decision off Arise India. Even in the VAT regime, ITC was not a vested right but the Court was assuaged by the argument that it could not force the purchasing dealer to do the impossible - lex non cogit ad impossibilia.
The Court also finds force in the argument that denial of ITC on tax paid bona fide to the supplier constitutes double taxation. It requires the supplier to repay with interest the tax which has already been paid once to the supplier which (by his default) he was unable to deposit.
Decision
The Court finally held that while the said clause was not violative of Art. 14 19 or 300A it ought to be read down, such that it is not interpreted to deny ITC to purchasers in a bona fide transaction only to be applied when the transaction is found to be not bona fide or collusive.