M/S Malaya Rub-Tech Industries vs. The Union Of INDIA And Ors.

Held

The Court held that the show cause notice was vague and unsustainable. Regarding the second issue, the Court followed the ratio of its own judgment in M/s Sahil Enterprises v. Union of India & others. It held that Section 16(2)(c) of the CGST Act, 2017, cannot be interpreted to deny ITC to purchasers in a bona fide transaction. The provision should be read down and applied only where the transaction is found to be not bona fide, collusive, or fraudulent. The Court noted that the show cause notice and the subsequent order did not contain any findings that the transaction between the petitioner and respondent No. 7 was not bona fide. Furthermore, the invocation of Section 73 of the CGST Act, which deals with determination of tax for reasons other than fraud, indicated that the transaction was not considered fraudulent. Therefore, the Court concluded that the petitioner, having acted bona fide and paid taxes to the seller, could not be penalized by denying ITC due to the seller's failure to deposit the tax. The order dated February 17, 2022, was set aside, and the respondents were directed to allow the petitioner ITC of Rs. 22,09,964/-.

Facts

The petitioner, M/s Malaya Rub-Tech Industries, a partnership firm engaged in the rubber business, purchased materials from respondent No. 7 between March 8, 2018, and November 30, 2018. The petitioner claimed Input Tax Credit (ITC) for these purchases, believing that the taxes were paid by respondent No. 7. However, the Assistant Commissioner, CGST Tripura Division-I, issued a show cause notice on January 14, 2021, proposing to recover Rs. 22,09,964.04 from the petitioner for alleged non-payment, short payment, or erroneous refund of tax, or wrong availment/utilization of ITC for the period August 2017 to July 2019. The petitioner replied, but an order dated February 17, 2022, directed the petitioner to pay the disputed amount, leading to the present writ petition.

Key Issues

1. Whether the show cause notice dated January 14, 2021, issued by the Assistant Commissioner is vague, evasive, and contradictory, rendering it unsustainable? 2. Whether Section 16(2)(c) of the CGST Act, 2017, was wrongly invoked to deny ITC to the petitioner, given that the transaction with respondent No. 7 was bona fide and the petitioner had no mechanism to compel respondent No. 7 to deposit the collected tax? Petitioner's arguments: The petitioner contended that the show cause notice was vague and unsustainable. They argued that Section 16(2)(c) was wrongly applied as the transaction was bona fide, and the petitioner could not be penalized for the default of respondent No. 7 in depositing the tax. They relied on the High Court's judgment in M/s Sahil Enterprises v. Union of India & others, which held that ITC should not be denied to bona fide purchasing dealers for the selling dealer's failure to deposit tax. Revenue's arguments: The judgment records no specific arguments from the revenue or State respondents regarding the vagueness of the show cause notice or the interpretation of Section 16(2)(c).