The Supreme Court clarifies on the burden of proof for availing credit - Woe or Joy to taxpayers?

The Supreme Court in The State of Karnataka v. Ecom Gill Coffee Trading Private Limited(“Ecom Gill”) has clarified the scope of Section 70 of the Karnataka Value Added Tax Act, 2003 (“KVAT Act”), a provision pertaining to the burden of proof for availing credit. This Article will delve deep into the nuances of the judgement and its possible impact on present and future litigations on credit eligibility.

The Supreme Court in Ecom Gill was deciding a batch of revenue appeals against various judgements holding a dealer to be eligible to credit on the ground that the purchasing dealer should not suffer due to default of seller.

In the cases under appeal, the respondents were all purchasing dealers who had claimed credit on alleged purchases made from the respective dealers. The Assessing Officer in the matters under appeal, on appreciation of evidence, doubted the genuineness of the alleged purchases and denied the credit. The findings of fact recorded by the Assessing Officer came to be confirmed by the first Appellate Authority. However, the second Appellate Authority and the High Court allowed the credit, by observing that as the purchasing dealers produced the invoices issued by the respective dealers and that in some of the cases, they also made the payment through cheques, the Assessing Officer was not justified in denying the credit. Against the grant of credit, the Revenue appealed before the Supreme Court.

In this factual matrix, the question before the Supreme Court was whether the second Appellate Authority as well as the High Court were justified in allowing the credit. To decide said question, the Supreme Court was required to analyse the scope of Section 70 of the KVAT Act which provides that the burden of proving that the claim to credit is correct lies upon the purchasing dealer claiming such credit.

The Supreme Court, on analysing the text and intent of Section 70 of the KVAT Act observed as under:

• Mere claim by dealer that he is a bona fide purchaser is not enough and sufficient to claim credit. The burden of proving the correctness of credit remains upon the dealer claiming such credit. Such a burden of proof cannot get shifted on the revenue.

• Mere production of the invoices or the payment made by cheques is not enough and cannot be said to be discharging the burden of proof cast under section 70 of the KVAT Act.

• The dealer claiming credit has to prove beyond doubt the actual transaction which can be proved by furnishing the name and address of the selling dealer, details of the vehicle which has delivered the goods, payment of freight charges, acknowledgement of taking delivery of goods, tax invoices and payment particulars, etc.

• For claiming credit, genuineness of the transaction and actual physical movement of the goods are the sine qua non and the aforesaid can be proved only by furnishing the details referred above.

• If the purchasing dealers fail to establish and prove the important aspect of physical movement of the goods alleged to have been purchased by them from the concerned dealers and on which the credit have been claimed, the Assessing Officer is absolutely justified in rejecting such claim.

In Ecom Gill, the assessees had only furnished invoices and payment proof to satisfy the burden of proof cast under Section 70 of the KVAT Act. Having elucidated on the scope of Section 70 and the documents required to satisfy the burden of proof, the Supreme Court allowed the Revenue appeals and restored the orders of the Assessing Officer denying credit to the assesses for not satisfying the burden of proof required under Section 70 of the KVAT Act.

It is pertinent to note that the counsel for the assessees placed reliance on the Delhi High Court’s decision in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, wherein Section 9(2)(g) of the Delhi VAT Act, which blocked credit to the recipient when the supplier failed to pay the tax to the Government, was read down as violative of Article 14 of the Constitution. However, the Supreme Court distinguished On Quest (supra) on the reasoning that the burden of proof as per Section 70 of the KVAT Act was not under issue in the said case.

Section 155 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) provides that where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person. This provision is very similar to Section 70 of the KVAT Act. Thus, the Supreme Court’s decision in Ecom Gill is likely to become a seminal case in deciding the trend of future credit eligibility litigations in the erstwhile regime and GST regime.

Following Ecom Gill, assessees would now be required to furnish details /documents required to prove genuineness of the transaction and actual physical movement of the goods (viz., the name and address of the selling dealer, details of the vehicle which has delivered the goods, payment of freight charges, acknowledgement of taking delivery of goods, tax invoices and payment particulars, etc.) for proving credit eligibility. It remains to be seen whether Assessing Officers would insist on producing each of the aforementioned documents or allow credit even if some of the aforementioned documents (say acknowledgement of taking delivery of goods) are not available with the assessees.

It is important to note that Ecom Gill is helpful to assessees to justify their credit eligibility insofar as the documents required to prove genuineness of the transaction and actual physical movement of the goods are available and furnished to the Assessing Officer. Ecom Gill is not a precedent for credit to be denied if supplier has not paid tax. This is amply evident from the fact that the Supreme Court distinguished On Quest while deciding the case. Thus, Ecom Gill can only operate as a precedent on the documents required for proving the burden of proof for credit eligibility.

The burning question of the hour is whether an assessee who discharges the burden of proof for availing credit by producing the documents/details noted in Ecom Gill would still be eligible to credit if the supplier has indeed not paid tax to the Government. One thought process is that once the burden of proof as required to be proved in Ecom Gill is discharged by an assessee, the credit becomes eligible to said assessee notwithstanding the fact that the supplier has not paid tax to the Government.

In this regard, it is important to note that On Quest (supra) has attained finality after a Special Leave Petition against the same was dismissed by the Hon’ble Supreme Court as reported in 2018-VIL-01-SC. Since Ecom Gill is on the limited point on how and when burden of proof for claiming credit stands satisfied, assessees may continue to rely on On Quest (supra) and similar line of cases noted below whenever credit is being disputed on the ground that supplier has not paid the tax.

• CCE v. Kay Kay Industries - The Apex Court held that it would be practically impossible for the recipient to verify whether the duty has been paid by the supplier. As a result, the CENVAT credit cannot be disallowed to the recipient even if the supplier has not paid the duty collected to the exchequer.

• Shri Ranganathar Valves (P.) Ltd. v. Asst Commissioner (CT), Coimbatore– The Madras High Court upheld the position that input tax cannot be restricted in the hands of the buyer on failure of seller to pay tax to the government, if the seller has collected the tax and issued invoices to the buyer.

• Tarapore & Co. v. State of Jharkhand - The  Jharkhand High Court observed that non-payment of VAT amount by the seller to the government cannot be attributable to the bona fide buyer. It was because of the laches on part of the seller that the seller has not filed the return and not deposited the tax with the government. Further, the law does not provide a mechanism to the buyer to compel the seller to file the return on time and deposit the tax to the exchequer. As a result, any action taken by the tax authorities against the buyer is unwarranted and cannot be sustained in the eyes of law.

While at first glance, Ecom Gill gives the impression that credit is not eligible to procuring dealers if supplier fails to pay tax to the Government, a thorough reading of the judgement clarifies to the contrary. Taxpayers who properly maintain an archive of the details/documents relating to their procurements would rejoice with the clarity which Ecom Gill has brought to the law. At the same time, there is no doubt that the Department can rely on this decision to impress upon the extent of the burden required to be discharged by assesses for any claim of credit. It also remains to be seen how this judgement would be applied to credits availed in respect of services procured.

Raghavan Ramabadran is a Executive Partner, Sahana Rajkumar is a Principal Associate and Derlene Joshna is an Associate at LakshmiKumaran and Sridharan Attorneys.