DY Beathel Enterprises vs. State Tax Officer (2021): Madras HC Rules ITC Cannot Be Reversed from Buyer Without Action Against Seller

DY Beathel Enterprises vs. State Tax Officer (2021): DY Beathel Enterprises vs. The State Tax Officer [2021 (3) TMI 1020 (Madras High Court)] examined a critical issue under GST law — whether Revenue authorities can recover GST from the purchaser when the supplier has collected but failed to remit tax to the Government.

The Madras High Court emphasized the importance of fair enforcement and due process, holding that the Revenue must first proceed against the defaulting seller before initiating any recovery action against the purchasing dealer.

📜 Facts of the Case

• DY Beathel Enterprises purchased goods from registered suppliers.
• The assessee duly paid the sale consideration including applicable GST, mostly through banking channels.
• The suppliers, however, failed to remit the collected GST to the Government.
• The assessee availed Input Tax Credit (ITC) based on valid tax invoices issued by the suppliers and filed returns.
• During an inspection, GST authorities found that the suppliers had defaulted in tax payment.
• A Show Cause Notice (SCN) was issued, and the department rejected the assessee’s ITC claim on the ground that tax was not deposited by the suppliers.
• Aggrieved, the assessee filed a writ petition before the Madras High Court challenging the legality of the recovery proceedings.

❓ Point of Dispute

Whether DY Beathel Enterprises vs. State Tax Officer (2021) the GST Department can directly recover tax from the purchaser and reverse ITC availed without first initiating action against the defaulting sellers who collected but failed to remit the tax to the Government.

👨‍💼 Submissions by the Assessee

1. Due Diligence and Bona Fide Conduct
   • The assessee verified the suppliers’ GST registration details and made all payments, including GST, through banking channels.
   • Once the tax amount was paid to the seller, it became the seller’s statutory responsibility to remit the tax to the Government.
2. CBIC Clarification Supports the Assessee
   • The Press Release issued by the GST Council on 04.05.2018 clearly stated that there shall be no automatic reversal of ITC from the buyer on non-payment of tax by the supplier.
   • It further clarified that recovery should first be made from the supplier, except in exceptional cases such as:
     • Missing dealers
     • Closure of business
     • Lack of recoverable assets of the supplier
3. Violation of Natural Justice
   • The Revenue had not taken any steps to recover tax from the defaulting suppliers before penalizing the purchaser.
   • Such unilateral recovery was arbitrary, unjust, and violative of the principles of natural justice.

🧾 Submissions by the Revenue

• The assessee availed ITC assuming the suppliers had paid the corresponding tax to the Government.
• Since the suppliers had not remitted the tax, the ITC claimed became irregular and recoverable.
• As per Section 16(2)(c) of the CGST Act, ITC can be availed only when the tax charged has been actually paid to the Government.
• The Revenue argued it was justified in reversing ITC and recovering the same from the assessee.

⚖️ Legal Principles and Court’s Observations

The Madras High Court comprehensively analyzed the legal position under GST and emphasized that both buyers and sellers have statutory obligations.

1. Sequential Responsibility and Recovery

• The Court held that the Revenue must first proceed against the defaulting sellers who collected the tax from the purchaser but failed to deposit it.
• Only after exhausting remedies against the seller can recovery be initiated against the buyer, and that too only if there is evidence of collusion or negligence by the buyer.

2. Seriousness of Seller’s Omission

• If the seller has collected tax but not remitted it, such omission is a serious violation of law, warranting strict penal action against the seller.

3. No Automatic Reversal of ITC

• Relying on the CBIC Press Release (04.05.2018), the Court held that automatic reversal of ITC from the purchaser merely due to non-payment by the seller is not permissible.
• Only in exceptional cases—such as missing or insolvent suppliers—can the department proceed against the buyer directly.

4. Defective Departmental Action

• In this case, the department had not initiated any action against the defaulting sellers.
• The ITC reversal order was fundamentally flawed and violative of due process.

🧾 Conclusion

The Madras High Court quashed the impugned order and remitted the matter back for fresh consideration. It held that:

• The Revenue cannot directly recover ITC from the buyer without first initiating recovery proceedings against the defaulting sellers.
• The department must conduct a proper enquiry to determine whether recovery from the sellers is possible before shifting the liability to the buyer.
• Only after establishing that recovery from the seller is impossible can the department consider recovery from the buyer.

This case reaffirmed the principle that bona fide purchasers should not be penalized for non-compliance by defaulting sellers.

💡 Practical Implications

• The ruling provides a significant safeguard for genuine taxpayers, ensuring they are not unfairly burdened for supplier defaults.
• It reinforces the doctrine of fairness in tax administration, ensuring authorities pursue the actual defaulters first.
• This judgment is frequently cited in GST disputes involving ITC denial or recovery based on supplier non-compliance.

🔑 Key Takeaways

1. Recovery must first be initiated against defaulting sellers.
2. No automatic reversal of ITC is allowed if the buyer has acted bona fide.
3. The Press Release dated 04.05.2018 provides policy backing for this principle.
4. Strict action should be taken against sellers who collect but do not remit tax.
5. Revenue must ensure procedural fairness before denying ITC to buyers.

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• Meta Description: The Madras High Court in DY Beathel Enterprises (2021) held that GST authorities must first act against defaulting sellers before reversing ITC or recovering tax from buyers. No automatic ITC reversal under Section 16(2)(c) is allowed.
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