1.1 Brief of the Case [Original Order]

1.2 Background of the case

• The petitioner purchased goods from a supplier named M/S Steel House.
• They paid the full value of the goods including GST to the supplier via bank transactions.
• However, the supplier did not deposit the GST collected from the petitioner to the government treasury.

1.3 Action taken by Departments

• The GST department conducted an inspection and discovered that the supplier hadn't paid the collected tax.
• The petitioner was denied Input Tax Credit (ITC) under GST due to the seller’s (supplier’s) failure to remit tax to the government.
• Action taken: The tax department initiated recovery proceedings against the buyer (petitioner), not the defaulting seller.

1.4 Petitioner’s Arguments

• They had properly paid the supplier, including GST.
• They had valid invoices and bank payment proofs.
• The failure to pay tax was on the supplier’s part, not theirs.
• No opportunity was given to cross-examine the supplier or present their defense before denying ITC.

1.6 Court’s Findings and Analysis

a. Principles of Natural Justice were Violated

• Before denying ITC or initiating recovery, the buyer must be given a fair opportunity to be heard.
• In this case, the department did not allow the petitioner to present their case or challenge the supplier.

b. Primary Responsibility Lies with the Supplier

• The supplier collected GST from the petitioner.
• It is the supplier’s duty to remit that tax to the government.
• The department should have first proceeded against the supplier, not the buyer.

c. When Can the Buyer Be Held Liable?

• Only if the supplier is untraceable or has no assets to recover from, the department may proceed against the buyer.
• Even then, the buyer should be given notice and a fair hearing.

d. No Evidence of Fraud or Collusion

• The court noted that there was no allegation that the petitioner was involved in any fraud or collusion with the supplier.
• All payments were through banking channels, and invoices were in order.

e. CBIC Press Release:

The Court acknowledged the CBIC Press Release of May 4, 2018, which clearly stated that ITC should not be automatically reversed from the buyer on non-payment of tax by the seller. It indicated that reversal of credit from the buyer should only be an option in "exceptional situations" like a missing dealer, closure of business by the supplier, or the supplier not having adequate assets.

1.7 Court’s Decision

• The court quashed the demand notice issued to the petitioner.
• It directed the tax department to:
• Initiate proper action against the defaulting supplier (M/S Steel House).
• Only consider recovery from the petitioner if it's proven that recovery from the supplier is not possible.
• Ensure that the petitioner is given due opportunity of hearing before any such action.

1.8 Importance of the Judgment

This judgment is important because it:

• Protects genuine buyers under GST from being unfairly penalized.
• Reinforces the idea that the supplier is responsible for remitting collected taxes.
• Emphasizes the need for fair procedure before denying ITC.
• Prevents misuse of power by tax authorities in cases where buyers act in good faith.

1.9 Conclusion

The Madras High Court made it clear that a buyer, who has:

• Proper documentation,
• Paid tax through valid means, and
• Has not engaged in fraud or collusion,

should not be punished for a supplier's failure to deposit tax. Authorities must follow due process and first attempt to recover tax from the defaulting supplier.