Proceedings against recipient without prior action against supplier for ITC mismatch impermissible; SCN Quashed
Issue
Whether the Department can initiate proceedings under Section 73 to reverse Input Tax Credit (ITC) from a bona fide purchasing dealer solely because the suppliers failed to upload returns or remit tax, without first invoking the discrepancy-matching mechanism and taking action against the defaulting suppliers.
Facts
The Action: The Department issued a Show Cause Notice (SCN) under Section 73 to the petitioner (recipient), proposing the reversal of ITC.
The Ground: The proposal was based on the fact that the suppliers had failed to upload their returns or remit the tax collected.
Procedural Lapse: The Department did not invoke the specific discrepancy-matching mechanism prescribed under the erstwhile Section 42 of the CGST Act. Crucially, no notices were issued to the selling dealers (suppliers) to rectify the mismatch before targeting the purchaser.
Decision
Mandatory Matching Mechanism: The Kerala High Court held that under the erstwhile Section 42, the assessing authority was legally bound to issue notices to both the supplier and the recipient when a mismatch occurred.
Sequence of Recovery: Referring to Section 42(5), the Court emphasized that liability for reversal can be fastened on the recipient only after the supplier is first called upon to correct the discrepancy and fails to do so. The Revenue completely bypassed this mandatory step.
Protection for Bona Fide Buyers: Relying on settled precedents like Suncraft Energy (Calcutta HC, affirmed by SC), R.T. Infotech, and Shanti Kiran India, the Court reiterated that ITC cannot be denied to a genuine buyer who has paid tax to the supplier, merely because the supplier defaulted.
Ruling: The Section 73 notice issued to the assessee was quashed and set aside. The Court directed that if the Revenue intends to recover the tax, it must first initiate proceedings against the actual defaulters—the selling dealers.
Key Takeaways
Supplier First Principle: The Department cannot jump straight to the recipient to recover tax lost due to a supplier’s default. They must first exhaust all remedies against the supplier (the actual defaulter) before approaching the buyer.
Suncraft Energy Precedent: This judgment reinforces the Suncraft Energy doctrine, which is a powerful defense for taxpayers facing ITC mismatches (GSTR-2A vs 3B) where the supplier has vanished or failed to pay tax.
Section 42 Relevance: Although Section 42 has been omitted/amended, for disputes pertaining to the period when it was on the statute book, its procedural safeguards (matching and communicating discrepancies) remain mandatory.
Would you like me to draft a reply to a Section 73 notice citing the Suncraft Energy and K.V. Joshy judgments to defend your ITC claim?