Facts

The GST department has issued the SCN raising a demand to the tune of INR 50,00,000/- on
account of excess claim of ITC by the Company for the FY 2017-18. The contentions of the
Department are based on the premise that the GST so paid to the Supplier was not deposited
by him to the Government treasury.

About the Provision

(a) About Section 16

The GST Law provides for the eligibility and conditions for taking input tax credit. One of
such condition for availing the ITC, as given in Section 16(2)(c) of CGST Act, 2017,
provides that 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 if subject to the provisions of section 41, the
tax charged in respect of such supply has not been actually paid to the Government, either in
cash or through utilization of input tax credit admissible in respect of the said supply.

(b) About Section 73

Where it appears to the proper officer that where ITC has been wrongly availed or utilised by
any reason other than the reason of fraud, or any wilful-misstatement or suppression of facts
to evade tax, he shall serve notice on the person chargeable with tax who has wrongly availed
or utilised ITC, requiring him to show cause as to why he should not pay the amount
specified in the notice along with interest payable thereon under Section 50 and a penalty
equivalent to the tax specified in the notice.

(c) About Section 74

Where it appears to the proper officer that where ITC has been wrongly availed or utilised by
reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall
serve notice on the person chargeable with tax who has wrongly availed or utilised ITC,
requiring him to show cause as to why he should not pay the amount specified in the notice
along with interest payable thereon under Section 50 and a penalty equivalent to the tax
specified in the notice.

(d) Replying to SCN

Reply to SCN is to be made under Section 73 or Section 74 of the CGST Act, 2017 read with
Rule 121 or Rule 142 of the CGST Rules, 2017 as the case may be. The said reply is required
to be made in Form GST DRC-06.
Specimen

Date: <DD/MM/YYYY>

To,

The Jurisdictional GST officer

<PLACE>

Dear Sir/Madam,

Re.: Mr./ Ms./ Mrs./ M/s. <NAME OF INDIVIDUAL/FIRM/COMPANY> -

GSTIN: <……….>

Sub.: Reply to the Show Cause Notice No….. dated….for the Financial Year <20XX-
XX>

We are in the receipt of the above-mentioned show cause notice No……... dated <DD-MM-
YY> for excess ITC claimed by the company in GSTR-3B return as one of its Supplier's
failed to deposit the tax so collected from the company to the Government treasury.

In regard to the said Notice, we submit as under:

1. The SCN has alleged that the Company has taken the ITC in contravention to the
provisions of Section 16(2)(c) of the CGST Act, 2017.

2. Section 16 of the CGST Act, which contains the relevant provisions regarding availing
the ITC, is reproduced hereunder:

Eligibility and conditions for taking input tax credit. -

1) Every registered person shall, subject to such conditions and restrictions

as may be prescribed and, in the manner, specified in section 49, be
entitled to take credit of input tax charged on any supply of goods or
services or both to him which are used or intended to be used in the
course or furtherance of his business and the said amount shall be
credited to the electronic credit ledger of such person.

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:

a. he is in possession of a tax invoice or debit note issued by a supplier

registered under this Act, or such other tax paying documents as may
be prescribed
 b. he has received the goods or services or both.

c. subject to the provisions of section 41, the tax charged in respect of

such supply has been actually paid to the Government, either in cash
or through utilization of input tax credit admissible in respect of the
said supply; and

d. he has furnished the return under section 39:

…….

Emphasis supplied

3. That, from the perusal of the aforesaid provision it emerges that a registered person is
eligible to claim ITC charged on any supply of goods or services or both which are
used or intended to be used in the course or furtherance of his business. This point has
not been alleged in the SCN and accordingly the Company submits that this point is not
in dispute in the present case.

4. That in the facts of the present case, the eligibility of ITC has been disputed on account
of failure done at Supplier's part to deposit the tax so collected from the Company to
the Government treasury.

5. The Company submits that the condition stipulated under clause (c) of section 16(2) of
the CGST Act was introduced under the model GST framework when initially the
Government envisaged bringing the matching concept for taking the ITC by the
registered person by introducing Form GSTR-2. However, for technical reasons such
mechanism was deferred indefinitely by the Government. Therefore, during the above-
mentioned period it is practically impossible for a recipient to ensure whether the tax
collected from him has been deposited or not to the Government treasury by the
Supplier.
6. Therefore, the contention of the Department that the Company has taken ITC in
contravention to section 16(2)(c) is totally invalid.

7. The Company submits that to put the onerous condition on the recipient to compel its
supplier to file GSTR-3B is asking the recipient to do the impossible. There is no power
given to the recipient in the statute to enforce compliance by the supplier regarding
filing of statement under Section 37 of the Act. These powers lies with the proper
officer and the enforcement wing having jurisdiction over the supplier.

8. At this stage, the Company submits that it is the fundamental legal principle embedded in
legal maxim "LEX NON COGIT AD IMPOSSIBILIA" which basically means:

that the law does not compel a man to do that which he cannot possibly perform

9. The Company places reliance on the judgement of Hon'ble Apex Court in the matter of
Cochin State Power And Light vs State Of Kerala [(1965) AIR 1688 (SC)], wherein it
was held that:
 The performance of this impossible duty must be excused in accordance with the
maxim, lex non cogitate ad impossible (the law does not compel the doing of
impossibilities), and sub-s(4) of s.6 must be construed as not being applicable to
a case where compliance with it is impossible.

10. Likewise, the Hon'ble Apex Court in the matter of State Of Rajasthan & Anr vs
Shamsher Singh [(1985) AIR 1082 (SC)] has observed that however mandatory the
provision may be, where it is impossible of compliance that would be a sufficient
excuse for non-compliance, particularly when it is a question of the time factor.

11. Also, the Punjab and Haryana High Court in the matter of M/S Shiv Enterprises vs.
State Of Punjab And Others [CWP-18392-2021] in a similar matter under erstwhile tax
regime has held as under:

Learned counsel for the State agreed that even if a trader wants to be prudent,
there is no system in place from where he can check as to whether his
predecessors in supply chain have paid input tax credit or not. Meaning
thereby, it is virtually impossible for a trader to ascertain as to whether input
tax has been paid by his predecessors or not and it is for this reason also that
the claim to input tax credit has been made subject to scrutiny and assessment.
It is the fundamental legal principle embedded in legal maxim "LEX NON
COGIT AD IMPOSSIBILIA"-That the law does not compel a man to do that
which he cannot possibly perform.

12. The Company further submits that denial of ITC to a bona-fide purchaser merely for a
default of the Supplier on whom it has no control whatsoever, is arbitrary and irrational.

13. At this juncture, it is needless to mention here that it is now a well settled law that, any-
thing including any legislation, delegated legislation, proceedings, etc., if suffered from
vice of manifest arbitrariness then the same shall be liable for struck down as violative
of Article 14 of the Constitution of India. The test to determine "manifest arbitrariness"
is to decide whether the enactment is drastically unreasonable and/or capricious,
irrational or without adequate determining principles. Reliance is placed on Hon'ble
Supreme Court decisions in the case of Joseph Shine vs. Union of India [(2018) AIR
SC 4898] and Navtej Singh Johar vs. Union of India [(2018) 1 SCC 791].

14. The Company further submits that a similar provision existed under the erstwhile Delhi
VAT laws which was declared as unconstitutional by the Hon'ble Supreme Court in the
case of Commissioner of Trade & Taxes, Delhi and others Vs. Arise India Limited and
others[Special Leave to Appeal (C) No.36750/2017]. In this case, the Court observed
that in the event the selling dealer has failed to deposit the tax collected by him from
the purchasing dealer, the remedy for the Department would be to proceed against the
defaulting selling dealer to recover such tax and not deny the purchasing dealer the
ITC.

15. Given the above jurisprudence, the Company submits that denying ITC to a genuine
recipient, who has acted in a bona-fide belief, for default of the supplier would
 tantamount to shifting the incidence of tax from the supplier to the recipient which is
unconstitutional and against the scheme of the GST law.

16. In light of the above discussions, the Company submits that it has rightfully claimed the
ITC and therefore the proceedings initiated under the impugned SCN should be
dropped.

Prayer

In view of the above submissions, the Company most respectfully prays that:

1. It may be pleased to set aside the Impugned SCN and allow the Company with all
consequential relief in full.

2. Allow the Company to add, alter, amend and/or rescind any of the above submissions
before or at the time of hearing and to refer and rely upon any case laws as and when
produced.

3. Grant a personal hearing; and

4. Pass such other Order as may be deemed fit and proper in the facts and circumstances of
the case.

Thanking you,

Yours faithfully

For M/s <NAME OF THE NOTICEE>

<NAME OF THE AUTHORISED SIGNATORY>

(DESIGNATION)