The Goods and Services Tax, the government’s most ambitious project and tax reform, is largely dependent on deployment of right technology and infrastructure for successful implementation. The introduction of the e-way bill system is a major gamechanger in this aspect. It is aimed at aiding seamless movement of goods across states, reduction in transportation costs and lead time by replacing physical check posts by mobile squads and giving a major boost to India’s logistic ecosystem resulting in lesser traffic on major transportation routes.
After a few months of implementation, we find in a number of cases that the e-way bill is being used as tool for harassment where goods are seized, vehicles impounded, and penalty imposed by the field officers for minor procedural infractions in the e-way bill although there are no major lapses and taxes have also been paid. Recently, the departmental officers have devised another mechanism to penalise honest taxpayers by denying input tax credit (ITC) for non-possession of the physical copy of an e-way bill. Let us look at the nitty-gritty of such cases.
The CGST Act requires accompaniment of an e-way bill with the goods when being transported from the supplier’s premises to the recipient’s premises. Further, in certain special circumstances such as the bill-to-ship-to transactions, the supply is billed to the buyer but the actual delivery of goods are made to a third person on the direction of the buyer. Keeping in mind the mandate of the statute, the physical copy of the e-way bill is received by the third party as the goods are delivered to the third party.
Section 16(2)(b) of the CGST Act, 2017 provides every registered person who has received the goods/services shall be allowed to claim credit of input tax provided he has complied with the other conditions of Section 16. Following is the relevant excerpt from the abovementioned provision:
“(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless, —
(b) he has received the goods or services or both.
Explanation.—For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way.”
On an analysis of clause (2)(b) of Section 16 read with the Explanation appended thereto, it is evident that the CGST Act provides for actual as well as constructive possession in cases when the goods have been delivered to a third person on the instruction of the buyer. Constructive possession is when the title in goods is transferred (through tax invoice or delivery challan) but the person is not in physical possession of the goods. In all such transactions, the buyer is considered to have received the goods as provided by the above provision even though he has not received the physical possession of such goods.
The departmental officer while examining the eligibility of ITC to a registered person checks if the taxpayer has actually received the goods to be eligible for the credit as per the condition laid down in Section 16(2)(b). The easiest way for the officer to verify the receipt is to check the e-way bill against the invoices issued as the e-way bill is generated for the movement for the goods from the premises of the supplier to the premises of the recipient. The department seeks to restrict ITC in cases where the taxpayer is unable to provide the officer with the physical copy of the e-way bill including in cases such as bill-to-ship-to transactions. The deeming provision has been created in the Act by way of insertion of explanation to Section 16(2)(b) wherein the receipt of goods by ship-to party will also be considered as receipt of goods by bill-to party hence making them eligible for credit. But this provision is not considered by the department.
At this juncture, it is also pertinent to note that Section 16(2)(a) of the CGST Act read with Rule 36 of the CGST Rules provides the documents to be possessed by a taxpayer for availment of credit. The said provisions do not include an e-way bill as a document on the basis of which ITC can be availed. Thus, eligibility to avail ITC is not dependent on e-way bill (which is only a document to track movement of goods). Therefore, even Section 16(2)(1) cannot be invoked for denial of ITC to a taxpayer who does not have physical possession of the e-way bill.
While the intention of the government is to ensure seamless flow of credit across the supply chain, the department, it appears, is placing undue restrictions which do not have statutory backing. Such departmental action is against the very spirit of GST. It is the need of the hour that the field formations are instructed by the CBIC to protect the assessees from unsustainable demands when the government revenue is not impacted.
[The authors are Joint Partner & Senior Associate respectively in GST Practice in Lakshmikumaran & Sridharan, Mumbai]