Past few months have seen various overreach of the GST Department. One such overreach relates to retrospective/ab initio cancellation of GST Registration. Such cancellation may adversely affect the ITC (Input Tax Credit) claim of Bonafide Recipients. In this article, our main objective is to thoroughly examine the issue at hand, which pertains to the ab initio cancellation of GST Registration and its impact on the ITC eligibility of the Recipient.
Legislative Provisions for Retrospective Cancellation
Section 29(2) of the CGST/State GST Act empowers the Proper Officer to cancel the registration of the taxpayer from such date (including any retrospective date), as he may deem fit in any of the following circumstances:
a. A registered person has contravened such provisions of the Act, or the rules made thereunder as may be prescribed;
b. Composition taxable person has not furnished the return for a financial year beyond three months from the due date of furnishing the said return;
c. Any registered person, other than a Composition taxable person [clause (b) above] has not furnished returns for such continuous tax period as may be prescribed;
d. Any person who has taken voluntary registration under section 25(3) of the Act but has not commenced business within six months from the date of registration; or
e. Registration has been obtained by means of fraud, wilful misstatement, or suppression of facts.
However, an Opportunity of being heard shall be granted to the concerned registered person before the cancellation of GST registration. Further during the pendency of cancellation proceedings GST Registration of such taxable person may be suspended temporarily.
Drawing power from Section 29(2) above, Rule 21 of CGST/State GST Rules prescribes that Registration granted to a person is liable to be cancelled in the following circumstances:
a. Registered Person does not conduct any business from the declared place of business; or
b. Registered person issues invoice or bill without supply of goods or services or both in violation of the provisions of the Act, or the rules made thereunder; or
c. Registered Person violates the provisions of section 171 of the Act or the rules made thereunder (ie violation of Anti Profiteering Provisions)
d. Registered Person violates the provision of rule 10A (ie non-furnishing of bank account details after grant of certificate of registration)
e. Registered Person avails ITC in violation of the provisions of section 16 of the Act or the rules made thereunder; or
f. Registered Person under-report outward supply in GSTR-3B as compared to GSTR-1
g. Registered Person violates the provision of rule 86B (ie utilize ITC ignoring restrictions on such utilization)
h. Registered person liable to file monthly Returns has not furnished returns for a continuous period of six months
i. Registered person liable to file quarterly Returns has not furnished returns for a continuous period of two tax periods
A bare reading of the above provisions suggests that wide powers are bestowed upon GST authorities for the Cancellation of GST Registration. However, it is expected that such powers must be used judiciously and shall not ordinarily affect the fundamental right to carry on Business/Profession as guaranteed by Article 19(1)(g) of the Constitution of India. Off late it is observed that post retrospective cancellation of GST Registration of a supplier, recipients who have availed ITC on the strength of Invoices issued by such suppliers are coerced to pay back such ITC along with Interest and a minimum 15% Penalty. Fortunately, a good number of high court judgments are now available to safeguard the interest of bonafide recipients who have relied upon GST Registration granted by the GST authorities and in good faith entered into business activities with such suppliers. Let’s briefly discuss important jurisprudence available on this issue.
Arbitrary Ab initio Cancellation of GST Registration without putting Taxpayer on specific notice of retrospective cancellation
This interesting issue came up for consideration before Hon’ble Delhi High Court in the Aditya Polymers v. Commissioner of Delhi Goods and Services Tax –  150 taxmann.com 223 (Delhi). Revenue had issued a show Cause Notice (SCN) asking to show cause why the GST registration should not be cancelled for the reason that the taxpayer had not filed returns for a continuous period of six months. Petitioner didn’t respond to the SCN and consequently, its registration was cancelled with effect from the date on which it was granted i.e. 1st July 2017. Petitioner didn’t file any application seeking revocation of cancellation but preferred an appeal against the order cancelling its registration before the Appellate Authority. However, such an appeal was rejected on the ground that it was filed beyond the period as stipulated u/s 107(1) of the CGST/Relevant SGST Act. Before High Court, the Petitioner submitted that it had stopped carrying on business from its principal place of business in Delhi and therefore, had not filed any returns. Petitioner further argued that it was not aggrieved by the cancellation of its GST registration, as in any event the GST registration was required to be cancelled on account of discontinuance of its business owing to shifting to Kanpur. However, the petitioner was aggrieved on account of the cancellation of its registration with retrospective effect.
HC explained that the exercise of powers to cancel the registration ab initio, must be based on material on record and some rationale moreover, the taxable person must be put to notice of the proposed action to cancel the registration from a retrospective date so as to provide an opportunity to the said person to show cause why such cancellation should not be from a retrospective date.
HC observed that in the instant case, the SCN issued to the Petitioner did not mention that the proper officer proposed to cancel the registration with retrospective effect, thus the Petitioner had no opportunity to address any proposed action of cancellation of registration ab initio.
High Court, therefore, acceded to Petitioner’s request that the order cancelling registration be sustained only w.e.f. 11th December 2020, i.e. the date of issuance of SCN instead of from 1st July 2017, and directed Revenue accordingly. [Aditya Polymers v. Commissioner of Delhi Goods and Services Tax (2023) 150 taxmann.com 223 (Delhi) 2023]
Ab initio cancellation of GST Registration for violations of other provisions of the law
In the present case, Petitioner was a proprietorship firm registered in Delhi, subsequently transferred its sole proprietorship business, and continued it under the same name in partnership with another individual with effect from 31-7-2021. Pursuant to shifting it had obtained fresh registration with a new principal place of business in Haryana. Petitioner had not filed any application for surrendering his GST registration in Delhi on account of the closure of the business from the registered place of business, as his application for an Inverted duty refund of ITC was yet to be processed.
GST officials visited the Delhi premise of the petitioner on 03-01-2022 and it was ascertained during the said visit that the Petitioner had ceased its business from the said premises. SCN was issued seeking the petitioner’s reply as to why his Delhi GST registration should not be cancelled. Ground cited for cancellation interalia includes non-existence of the Petitioner at his place of business and non-declaration of transfer of goods and capital assets from the sole proprietorship concern (Delhi) to the firm (Haryana). Thereafter, Revenue cancelled GST registration retrospectively. The Petitioner’sapplication seeking revocation of the cancellation of his GST registration and Appeal thereon were rejected.
High Court stated that in terms of Section 29(2) of the CGST/ Respective State GST Act, the proper officer has the discretion to cancel the registration of a taxpayer from such date as he may deem fit if any of the reasons as set out are established, however, in the present case, there was no allegation that the Petitioner had obtained its registration by means of fraud, wilful misstatement or suppression of facts. Further, there is no dispute that the petitioner had filed his returns and paid the tax as disclosed by it. High Court further explained that there was no dispute that the Petitioner was required to file the returns/declaration for the transfer of stock and capital goods to the newly constituted firm and failure to file such return may invite the necessary consequences under the CGST/ Respective State GST Act but the Petitioner’s claim for accumulated ITC on account of inverted tax structure cannot be withheld on that ground.
High Court thus quashed the impugned order cancelling the Petitioner’s registration retrospectively and directed Revenue to determine the amount of tax, interest, and penalty that may be payable by the Petitioner for not reflecting the transfer of stock and capital goods to the firm. [Ajay Kumar Jindal v. Superintendent, Central Goods and Services Tax –  149 taxmann.com 140 (Delhi)]
Jurisprudence on Retrospective Cancellation of GST Registration of Supplier and ITC claim of Recipient
Let’s now touch base few landmark High Court Rulings on the issue of whether retrospective Cancellation of GST Registration of supplier per se disentitle recipient from claiming ITC on the strength of invoices issued by such supplier.
A. In M/S LGW INDUSTRIES LIMITED & ORS. VERSUS UNION OF INDIA & ORS., 2021 (12) TMI 834 [Calcutta High Court]
Petitioners received a notice demanding reversal of ITC along with Interest and Penalty. The Revenue took a view that the Petitioner claimed an inward supply of goods from several Registered Taxable Persons (RTPs) and availed the ITC thereon. It was further alleged that the above-mentioned RTPs had obtained registration under GST using bank accounts which were opened by using different combinations of the names of five persons with fake identity proofs.
The main crux of the arguments of the Petitioner is that ITC cannot be denied to a bona fide purchaser, only because of the default of the supplier, over whom it has no control whatsoever. It was argued that the transactions in question are genuine and valid, and the petitioner is in possession of all the supporting/ documents required under the law. It was contended that petitioners have verified the genuineness and identity of the suppliers in question and more particularly the names of those suppliers as registered taxable persons were available at the Government portal showing their registrations as valid and existing at the time of transactions in question. It was informed that Petitioners have limitations on their part in ascertaining the validity and genuineness of the suppliers in question and they have done whatever possible in this regard and more so when the names of the suppliers as registered taxable persons were already available with the Government record and in Government portal at the relevant period of transaction petitioners could not be faulted if they appeared to be fake later on. Petitioners further submit that they have paid the Purchase consideration as well as tax on the same through the banking channel and petitioners are helpless if at some point in time after the transactions were over GST department finds on enquiries that the RTPs were fake and bogus and on this basis, petitioners could not be penalized unless the department establishes with concrete materials that the transactions in question were the outcome of any collusion between the petitioners/purchasers and the suppliers in question. Petitioners further submit that all the purchases in question were available on the GST portal in form GSTR-2A. The Petitioner further states that registration certificates of all the RTPs were valid at the time of purchase and Petitioner does not have the wherewithal to verify whether registration by the vendor has been obtained by falsification of documents.
High Court directed Department to consider afresh the cases of the petitioners on the issue of their entitlement to benefit of ITC in question by considering the documents which the petitioners want to rely upon to support their claim of the genuineness of the transactions in question and shall also consider as to whether payments on purchases in question along with GST were actually paid or not to RTPs and also to consider as to whether the transactions and purchases were made before or after the cancellation of registration of the suppliers and also consider as to the compliance of statutory obligation by the petitioners in the verification of the identity of the RTPs.
If it is found upon considering the relevant documents that all the purchases and transactions in question are genuine and supported by valid documents and transactions in question were made before the cancellation of registration of those suppliers and after taking into consideration the judgments of the Supreme Court and various High Courts which have been referred in this order and in that event the petitioners shall be given the benefit of ITC in question.
B. In SANCHITA KUNDU & ANR. VERSUS THE ASSISTANT COMMISSIONER OF STATE TAX, BUREAU OF INVESTIGATION, SOUTH BENGAL & ORS – 2022 (5) TMI 786 – CALCUTTA HIGH COURT
Revenue has denied ITC claim on the purchase of the goods in question from the suppliers on the ground that the registration of the suppliers in question has already been cancelled with a retrospective effect covering the transaction period in question. Further Petitioner was asked to pay back ITC with Interest and applicable Penalty.
Contentions of the Petitioner were almost similar to LGW Industries (supra). Following the judgement of LGW Industries (supra) High Court set aside orders denying ITC to the petitioner and remand back to the Department to consider afresh the issue of their entitlement to benefit of ITC in question by considering the documents which the petitioners intend to rely upon the support of their claim of the genuineness of the transactions in question.
C. In M/S. GARGO TRADERS VERSUS THE JOINT COMMISSIONER, COMMERCIAL TAXES (STATE TAX) & ORS – 2023 (6) TMI 533 – CALCUTTA HIGH COURT
Petitioner had claimed credit of input tax against supply made from a supplier. The transaction was supported by Tax Invoices, Debit Notes, E-way bills, and Transportation documents. Payment for said supply was made from Bank Account. It was the case of Revenue that the supplier from whom the Petitioner claimed to have purchased the goods in question were all fake and non-existing and the bank accounts opened by the supplier were on the basis of the fake documents and the claim of Petitioner of ITC was not supported by any relevant documents. It was the further case of the Revenue that the Petitioner had not verified the genuineness and identity of the supplier whether it is a registered taxable person before entering into any transaction with the supplier. It was argued by the Revenue that registration of the supplier in question had already been cancelled with retrospective effect covering the transaction period of the Petitioner.
Petitioner’s contentions were almost similar to LGW Industries (supra). HC apprised that without proper verification, it cannot be said that there was any failure on the part of the Petitioner in compliance with any obligation required under the statute before entering into the transactions in question.
Relying on LGW Industries (supra) High Court opined that Revenue authorities taking into consideration the cancellation of registration of the supplier with retrospective effect had rejected the claim of the Petitioner without considering the documents relied on by the Petitioner.
High Court thus set aside the impugned orders and directed Revenue to consider the grievance of the Petitioner afresh taking into consideration the documents which the Petitioner intended to rely on in support of his claim and dispose of the claim by passing a reasoned and speaking order after giving an opportunity of hearing.
D. In M/S. BALAJI EXIM VERSUS COMMISSIONER, CGST AND ORS. REPORTED IN 2023 (3) TMI 529 – Delhi High Court
Petitioner’s Refund applications were not processed as the supplier from whom the Petitioner had purchased the goods had allegedly received fake invoices from its suppliers. A search was conducted at Petitioner’s premises, and it was summoned to tender certain documents. Despite several requests to Revenue requesting for early disposal of refund applications, the same wasn’t acceded to. SCN was issued proposing to reject the refund applications which also indicated that Revenue had sought legitimacy and genuineness of the export of goods which were purchased by the Petitioner from One of the Vendors M/s Shruti Exports who was accused of issuing fake invoices and was being investigated by Directorate General of Goods and Services Tax Intelligence (DGGI).
Petitioner submitted that it was not concerned with any allegation against its supplier M/s Shruti Exports as the purchases made by it were genuine and against genuine invoices. However, refund applications were rejected on the ground that it appeared that they are to be part of a supply chain involving fake ITC.
Delhi High Court considering the factual matrix of the case has observed that there is merit in the petitioner’s contention that it is not required to examine the affairs of its supplying dealers. High Court observed that Petitioner’s refund applications were rejected on a mere apprehension that its supplier had issued fake invoices and there was no conclusive finding on the basis of any cogent material that the invoices issued by M/s Shruti Exports to the Petitioner were fake invoices.
High Court noted that the invoices issued by M/s Shruti Exports are reflected in the GST Portal and there was no dispute that the invoices were actually issued moreover, there was no allegation that applicable GST was not paid by the Petitioner. Also, there was no allegation that the goods in question were not exported overseas.
High Court thus opined that the Petitioner had established not only the fact that the goods have been exported but that it had paid for the same including applicable IGST and Cess. High Court further observed that an allegation of fake credit cannot be a ground for rejecting the Petitioner’s refund applications unless it is established that the Petitioner had not received the goods or paid for them.
In view of the above judgments, it would suffice to state that there is a potential for significant litigation on this issue. More so as Section 155 of the CGST/ Relevant SGST Act has shifted the burden of proving the claim of ITC on the Recipient. Though the above judgments highlight one fundamental principle of law that the genuine recipients can’t be made to suffer on account of violation of the suppliers, however, the burden of proving the genuineness of the transaction still lies on the recipients.
A word of Caution
Attention is invited to the Recent Supreme Court Judgement in State Of Karnataka vs M/S Ecom Gill Coffee Trading Private Limited reported in 2023 (3) TMI 533 – SUPREME COURT. It was observed by Supreme Court that a mere claim by the taxpayer availing such ITC that he is a bona fide purchaser is not enough and sufficient. Mere production of the invoices or claims that the payments are made by cheques is also not enough and cannot be said a sufficient discharge of the burden of proof. It was observed that in cases where the registration of the supplier has been cancelled or even the supply by the concerned supplier has been disputed and/or denied by the concerned supplier then the onus lies on the recipient to produce further evidence like the name and address of the supplier, details of the vehicle which has delivered the goods, proof of payment of freight charges, acknowledgment of taking delivery of goods, evidence of physical movement of the goods (E.g. E-way bill, Toll Receipts), etc to prove beyond doubt the actual transaction has taken place.
Section 16(2)(c) of the CGST/Relevant SGST Act mandates payment of taxes by the supplier as a sine qua non for availment of ITC. However, the validity of GST Registration of Vendor is not an essential criteria for allowance of ITC. Even otherwise there is no foolproof mechanism available to ascertain whether the supplier has paid his applicable GST into the Government exchequer. At the same time, one should also note that taxpayers have their own limitations while carrying out due diligence of suppliers. Therefore unless it is the case of the department that there is a collusion between the recipient and supplier with regard to the transaction, ITC claimed by the recipient cannot be faulted due to the retrospective cancellation of the supplier’s registration. Having accepted this legal proposition one has to also keep in mind that the burden of proving an ITC claim still lies upon the recipient claiming such ITC. In situations where the GST department doubts the genuineness of the transactions only correct and complete documentation may come to the rescue of the bonafide recipients.
The views expressed herein are strictly personal to the author and should not be construed as advice/ legal opinion. The contents of this article are based on the interpretation of the facts, relevant legislation, rules, notifications, circulars, judgments/rulings, etc. on the date of publishing of this article. One should not act upon the information in this article without obtaining specific professional advice. Author of this blog is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission pertaining to this article. Further, the said article is only for information and guidance purposes and should not be construed as any kind of advertisement or solicitation of work.
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