Burden Of Proving Correctness Of ITC Claim Lies Upon The Purchasing Dealer

The State of Karnataka v. Ecom Gill Coffee Trading Private Limited¹ - Supreme Court

The Supreme Court held that mere production of the invoices and proof of payment made to vendors is not enough for discharging the burden of proof cast under the Karnataka Value Added Tax Act, 2003 ('KVAT Act'). The dealer claiming input tax credit ('ITC') must prove the actual transaction beyond doubt by establishing physical movement of goods, furnishing the name and address of the selling dealer, details of the vehicle which delivered the goods, payment of freight charges, and acknowledgement of taking delivery of goods, as well as tax invoices and payment particulars.

Facts of the case:

• M/s Ecom Gill Coffee Trading Private Limited ('the respondent') purchased green coffee beans from dealers and claimed ITC on the same.
• Upon finding irregularities in the ITC claimed, the Assessing Officer ('AO') disallowed the ITC claim, on the basis that sellers were either de-registered or did not pay taxes, or outrightly denied turnover and did not pay taxes.
• The first Appellate Authority confirmed the findings of the AO. However, Karnataka Appellate Tribunal ('the Tribunal') allowed the appeal, on the grounds that the respondent purchased the coffee from the registered dealer under genuine tax invoices, and consequently allowed the ITC claimed.
• The revision application preferred by the revenue before the Karnataka High Court was dismissed leading to an instant appeal before the Supreme

Contention by the Revenue:

• The fact of genuineness of the sales transactions was never considered.
• It was found by AO that the sale transactions were only paper transactions, as in some of the cases the registration of the sellers was cancelled, and in other cases there was nothing on record that any tax was paid by the seller. Hence, the respondent/ purchasing dealers should not be entitled to ITC.
• Mere production of invoices or payment to the seller by cheque cannot be said to be sufficient, and may not be said to discharging the burden to claim ITC, under Section 70 of the KVAT Act.
• It was also submitted that actual movement of goods is required to be established, over and above the other evidence (tax invoice and payment proof).

Contention by the Respondent:

• Burden of proof cast under Section 70 of the KVAT Act has been discharged by producing the genuine invoices and the payment through cheques. If it is found that tax is not paid by a seller, the same needs to be recovered from the seller.
• The KVAT Act and the rules made thereunder do not provide for any other document or any other obligation which are statutorily required for the purposes of establishing the ITC claim.
• The only requirement of law is that the selling dealer is registered and has issued the tax invoice in compliance with the requirement of the KVAT Act and the rules made thereunder.
• ITC cannot be denied only because the selling dealer fails to discharge their obligation under the KVAT Act.

Supreme Court's decision:

• As per Section 70 of the KVAT Act, burden of proving correctness of ITC claim lies on the purchasing dealer claiming such ITC.
• 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 KVAT Act.
• The dealer claiming ITC must prove the actual transaction beyond doubt, by establishing actual physical movement of goods, and 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
• In cases where sellers were not registered or had not paid taxes, the respondent has not produced any further supporting material other than invoices and online payments. Thus, the AO was justified in denying the ITC. The Tribunal as well as the High Court have materially erred, in allowing the ITC despite the concerned respondent's failure to prove the genuineness of the transactions.
• Delhi High Court's ruling in case of Quest Merchandising India Private Limited² was not considered, as burden of proof was not a question before the High Court.
• Accordingly, the appeal was allowed, and the order passed by the AO denying the ITC to the concerned respondent was restored.

Dhruva Comments:

This judgement issued under the KVAT Act specifies the manner in which claim of ITC needs to be established.

Interestingly, Section 155 of the Central Goods and Services Tax Act, 2017 contains a similar provision regarding "burden of proof" towards the claim of ITC.

Applying the Supreme Court ruling, the GST Authorities can require taxpayers to substantiate their claim of ITC with help of additional documents, over and above the ITC matching requirements.

Maintaining repository of documents such as e-way bills, lorry receipts, goods receipts register etc. along with copies of invoices and payment proof would be crucial to establish the burden of proof.

Footnotes

1 TS-99-SC-2023-VAT

2 Writ Petition (Civil) No. 6093/2017, dated 26.10.2017

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