Availability of Cenvat Credit in Case of Non Payment by Service Provider

The decision of Apex Court in the case of Kay Kay Industries

[Civil Appeal No. 7031 of 2009] dated August 26, 2013 is a path breaking judgement as it brings the much sought after relief and belief in the free Tax Credit mechanism, whereby, a genuine assesse cannot be penalized for the fault of his seller manufacturer for non deposit of Excise Duty.  The issue in the present matter was that during MODVAT verification it was found that the supplier of inputs had not discharged full duty liability for the period covered by the invoices.  however, allowing such Credit to the purchaser, Hon’ble Supreme Court observed as follows:


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 have 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.”

The judgement has thus, restored the Credit availability to a genuine assesse.  Prior to this also, similar stand was taken by courts in making available Credits of Tax to bonafide purchasers of goods or services.  In the case of Gheru Lal Bal Chand Vs State of Haryana and Another, the issue involved was again with regard to the denial of Input Tax Credit by the Assessing Authority on the ground that the dealers from whom the petitioners have purchased goods, have not deposited full tax in the State Treasury.  The hon’ble Court held that  no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established.  The Court further held that in the absence of any malafide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier thereto, no liability can be imposed on the principle of vicarious liability. It was observed that such erroneous responsibility cannot be fastened on the assessee to verify payment of tax into government treasury by selling dealer, else, it would be difficult to hold the law to be valid on the touchstone of Articles 14 and 19 of the Constitution of India.  It is pertinent to mention that in the case, that in present matter another important mention was made whereby It was contended that no liability could be fastened on the petitioner on account of non-deposit of input tax received by the selling dealer from the purchasing dealer as the term “paid” is to be interpreted to mean “ought to have been paid” as held by the Supreme Court in Sanjana, Assistant Collector of Central Excise, Bombay and others v. The Elphinstone Spinning and Weaving Mills Co. Ltd., AIR 1971 Supreme Court 2039.

Interestingly, a trade Circular [Circular No. 8T of 2012] has been issued by Maharashtra VAT on the same subject wherein they have referred to decision of Hon’ble Bombay High Court in the case of Mahalakshmi ginning and Oil Industries [W.P. No. 33 of 2012], wherein decision in the case of Gheru Lal (supra) has been distinguished.  The Circular ahs clarified the position of department in relation to Input Tax Credit as under:

  • No Input Tax Credit Claim shall be allowed unless the corresponding tax is paid by the selling dealer in to the government treasury.
  • In the case of mismatch in the sales and purchases in electronic formmatching of Annexure J1 and J2 of Form 704, then to the extent of unmatched amount of tax, the ITC of the claimant dealer shall be denied.
  • ITC claim shall not be allowed if the purchases are effected from hawala dealer and even though such hawala dealer has paid the taxes partially or fully as these are not genuine transactions.

Thus, while the other two points seems logical and within the four corners of practicality, the first denial still requires the purchaser to transgress into the books of accounts of the seller to determine the payment of tax into government treasury which is almost impossible in normal business transactions.  However, government has listed a number of provisions which the government shall be undertaking to surface the defaulter dealers so that transactions with them are not undertaken by any dealer and should be verified cautiously even if undertaken with such dealers.

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