M/S R V Enterprises vs State Of Gujarat on 19 June, 2025

Outcome
The Gujarat High Court confirmed the demand for reversal of Input Tax Credit (ITC) along with interest against M/S R V Enterprises but quashed and set aside the penalty imposed. The petition was allowed to the extent of setting aside the penalty, and rule was made absolute accordingly.

Core Issue
The core issue was whether the petitioner, M/S R V Enterprises, was entitled to avail Input Tax Credit (ITC) on purchases from a supplier (M/s. Parshvi Tradelink) whose registration was subsequently cancelled ab-initio due to non-payment of outward tax liability and being deemed a non-genuine supplier, as per the conditions of Section 16(2)(c) of the GST Act, especially when the petitioner claimed to be a bona fide recipient who had paid the tax to the supplier. Ancillary issues included the necessity of issuing Form GST DRC-01A and the validity of passing an adverse order without a proper opportunity of hearing.

Key Facts

• M/S R V Enterprises (petitioner) is a registered partnership firm under GST.
• For FY 2017-18, the petitioner availed ITC of Rs. 6,98,648/- (SGST + CGST) on purchases of plastic items from M/s. Parshvi Tradelink and other suppliers.
• The petitioner claims that suppliers were registered, issued valid invoices, e-way bills, and goods were supplied.
• The petitioner filed GSTR-1, GSTR-2A auto-populated, and GSTR-9 annual return reflecting the ITC.
• A Show Cause Notice (SCN) in Form GST DRC-01 was issued on 28.09.2023 under Section 73 of the GST Act, proposing to disallow ITC on the ground that the supplier's registration was cancelled due to non-payment of outward tax liability. No prior intimation in Form GST DRC-01A was issued.
• The petitioner challenged the SCN before the High Court.
• During the pendency of the petition, the respondent passed an order-in-original in Form GST DRC-07 on 31.12.2023, raising a demand of Rs. 15,48,204/- tax, Rs. 3,89,846/- interest (each under SGST/CGST), and Rs. 34,932/- penalty (each under SGST/CGST).
• The petitioner subsequently amended the petition to challenge the order-in-original.
• Investigation by the Revenue revealed M/s. Parshvi Tradelink was a non-genuine supplier:
  • Its purchases were Rs. 8,15,184/- against supplies of Rs. 37,72,696/- in FY 2017-18.
  • In FY 2018-19, purchases were Nil against supplies of Rs. 1,13,63,616/-.
  • Spot verification showed no business activity at the registered place, the phone number was not working, and the proprietor's mother-in-law was unaware of the business.
  • The supplier's registration was cancelled ab-initio on 12.04.2022 (Form REG-19), and no revocation application was filed.

Arguments (Taxpayer vs Revenue)

• Taxpayer (M/S R V Enterprises):
  • The SCN and order-in-original were without jurisdiction due to the non-issuance of Form GST DRC-01A, which deprived the petitioner of the opportunity to reply.
  • The petitioner was a bona fide purchaser, having received goods and paid tax to the supplier, and should not be made to pay double tax.
  • Section 16(2)(c) should be "read down" to apply only to unscrupulous persons who colluded, not to bona fide recipients.
  • The Revenue should pursue the defaulting supplier for non-payment of tax, not the recipient.
  • No allegations were made against the genuineness of the petitioner's transactions.
  • The order-in-original was passed without providing a fair opportunity of hearing, violating Section 75(4).
  • The SCN and order-in-original were based on different grounds, and documents relied upon in the OIO were not disclosed in the SCN.
• Revenue (State of Gujarat):
  • M/s. Parshvi Tradelink (supplier) was found to be a non-genuine entity as evidenced by significant discrepancies between purchases and supplies, lack of business activity at the registered address, and non-responsiveness.
  • The burden of proof to demonstrate the validity of ITC lies on the petitioner under Section 155 of the GST Act, which they failed to discharge given the supplier's non-genuineness and non-payment of outward tax.
  • Section 16(2)(c) unequivocally requires the tax charged on the supply to be actually paid to the Government. Since the supplier did not remit the tax, the ITC availed by the petitioner is liable to be reversed.
  • Non-issuance of Form GST DRC-01A is not mandatory for initiating proceedings; it's an intimation primarily for voluntary payment to save penalty, and Section 142(1A) is clarificatory in nature. Thus, the SCN/OIO are not without jurisdiction.
  • If aggrieved, the petitioner can recover the tax from its supplier, but the State cannot be denied its due revenue.

Court’s Reasoning

• The Court examined the facts presented in the affidavit-in-reply and the order-in-original, which detailed the non-genuineness of M/s. Parshvi Tradelink (supplier), including the huge disparity between its purchases and supplies, lack of physical presence/activity, non-functional phone number, and subsequent ab-initio cancellation of registration.
• The Court found that the petitioner failed to provide material evidence (like invoices, e-way bills, transport receipts) to support the genuineness of the supplies once the supplier was found to be non-genuine and not to have paid tax.
• The Court held that once it is established that the supplier failed to discharge the tax liability as per Section 16(2)(c) of the GST Act, the ITC availed by the recipient (petitioner) is liable to be reversed. Section 16(2)(c) explicitly states that no registered person shall be entitled to ITC unless "the tax charged in respect of such supply has been actually paid to the Government".
• The Court distinguished the precedents cited by the petitioner (Suncraft Energy Pvt. Ltd., Lokenath Construction Pvt Ltd., and On Quest Merchandising India Pvt. Ltd./Arise India Ltd.). In Suncraft, the Revenue failed to inquire with the supplier, whereas in the present case, the respondent had inquired and found the supplier to be non-genuine and non-compliant. The "reading down" of Section 16(2)(c) was not accepted in these facts where the supplier was demonstrably non-genuine and had not remitted tax, differentiating it from cases where bona fide transactions were hampered by a defaulting supplier whom the Revenue chose not to pursue.
• Regarding the non-issuance of Form GST DRC-01A, the Court agreed with the Revenue that it is not mandatory for the validity of SCN/OIO. However, it found merit in the petitioner's argument that its absence deprived the opportunity to save penalty.
• Consequently, while upholding the reversal of ITC and the demand for tax and interest, the Court quashed the penalty imposed, citing the lack of intimation in Form GST DRC-01A.

Statutory References

• Article 227 of the Constitution of India
• Central Goods and Service Tax Act, 2017 (CGST Act, 2017)
• State Goods and Service Tax Act, 2017 (SGST Act, 2017)
• Section 16(2)(c) - Eligibility and conditions for taking input tax credit
• Section 41 - Provisional acceptance of input tax credit
• Section 43A - Procedure for furnishing return and availing input tax credit
• Section 73 - Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or willful misstatement or suppression of facts
• Section 74 - Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or willful misstatement or suppression of facts
• Section 75(4) - General procedures for determination of tax
• Section 155 - Burden of proof
• Section 142(1A) - Miscellaneous provisions (Amendment related to clarification)
• Form GST DRC-01 (Show Cause Notice)
• Form GST DRC-01A (Intimation of ascertainment of tax payable under section 73 or section 74)
• Form GST DRC-07 (Summary of the Order)
• Form GSTR-1 (Details of outward supplies)
• Form GSTR-2A (Details of inward supplies auto-drafted)
• Form GSTR-9 (Annual Return)
• Form REG 17 (Show Cause Notice for Cancellation of Registration)
• Form REG-19 (Order for Cancellation of Registration)
• Section 9(2)(g) of Delhi Value Added Tax, 2004 (referred in a cited precedent)

Precedents Cited

• Agrometal Vendibles Pvt. Ltd. v. State of Gujarat (2022) 63 G.S.T.L. 212 (Guj.) (cited by petitioner)
• Suncraft Energy Pvt. Ltd. v. Assistant Commissioner, State Tax, Ballgunge Charge 2023(77) G.S.T.L. 55 (Cal.) (cited by petitioner, SLP dismissed by Hon'ble Apex Court)
• Lokenath Construction Pvt Ltd. v. Tax/Revenue Government of West Bengal 2024 (86) G.S.T.L. 130 (Cal.) (cited by petitioner)
• New Nalbandh Traders v. State of Gujarat 2022 (66) G.S.T.L. 334 (Guj.) (cited by petitioner)
• On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi 2018(10) G.S.T.L. 182 (Del.) (cited by petitioner)
• Commissioner of Trade & Taxes, Delhi v. Arise India Ltd. (2022) 60 G.S.T.L. 215 (SC) (confirming On Quest Merchandising India Pvt. Ltd., cited by petitioner)