The Delhi High Court is all set to examine if the GST department can do indirectly what the insolvency law prevents it from doing directly. Simply put, if the Goods and Services Tax department can deny input tax credit to customers of an insolvent entity on grounds of unpaid dues of the latter. ADVERTISEMENT The case relates to Trimax IT Infrastructure and Services Ltd., which was admitted to to insolvency in 2018. Subsequently, a resolution plan, submitted by EbixCash Ltd., for Trimax was approved by the National Company Law Tribunal in May 2020. According to the plan, all GST claims and indirect taxes were settled for Rs 1. This was sanctioned by the insolvency tribunal, which meant that the GST authorities could not proceed against the insolvent company for any tax dues.

Soon after, the GST department sent a notice to one of Trimax's customers—National Informatic Centre—denying it input tax credit to the tune of Rs 3.4 crore on the supplies made by the insolvent company. The credit was denied on the ground that Trimax had collected GST from NIC, but failed to deposit it with the government. Since the department denied it credit, NIC withheld payments to Trimax on future invoices. 

This prompted Trimax—now EbixCash Mobility Software India Ltd.—to approach the high court. The GST authorities are trying to meet their claim indirectly by initiating actions against its customers as no direct action can lie against it, EbixCash Mobility told the court.

The insolvency law and GST experts BQ Prime spoke with have different views on the matter.

Anoop Rawat, partner at Shardul Amarchand Mangaldas and Co., said the department's action is a clear violation of clean state doctrine under the insolvency law. 

Clean slate doctrine provides that once a resolution plan is approved by the tribunal, no claim satisfied or otherwise would survive. Once a claim submitted by the tax authorities has been settled under the resolution plan, no claim can exist against the company. This should be extended to the customers of the company as well. They should rightly be granted input tax credit for the goods received.

Anoop Rawat, Partner, Shardul Amarchand Mangaldas and Co.

But Asish Philip, partner at Lakshmikumaran and Sridharan Attorneys, said it's not as black-and-white. 

According to him, several conditions need to be fulfilled under GST law for availing credit, namely possession of a tax invoice, proof of goods or services received, filing of returns, and tax payment to the government. Unless all these conditions are met, the recipient of service—in this case, NIC—is not really entitled to credit, Philip highlighted. 

If we go by the literal interpretation of GST provisions, authorities are not liable to grant credit for unpaid tax. In the present case, although no proceedings can lie against the insolvent company for recovering tax, there is no bar in moving against the recipient of such services as the supplier and recipient have a joint and several liability under the Act.

Asish Philip, Partner, Lakshmikumaran and Sridharan Attorneys

The question is whether a bona fide person can be denied credit on non-payment of tax by the supplier. 

The Bombay High Court has taken a stand against allowing credit whereas the Madras and Calcutta High Courts have allowed tax credit in bona fide transactions, Philip said. 

The high court has issued a notice in Ebix's case, acknowledging the issue requires further consideration. The court will next hear the matter on Jan. 24.