The proviso to Sec 16(2) of CGSTA denies ITC where the recipient ‘fails to pay’ to the suppler the amount towards the value of supply along with tax payable thereon within 180 days from the invoice date.
There is an exception to above u/r 37 wherein activities covered in Schedule I and the addition in the value of supply u/s 15(2) have been deemed as paid so that the ITC cannot be denied.
Before discussing the above exception, let’s discuss the clear application of the proviso to Sec. 16(2) which entails mandatory payment in 180 days for the ITC to sustain. However, said proviso comes into play only where a recipient ‘fails to pay’.
An argument is being made that a mere non-payment is excluded from the ambit of ‘fails to pay’, hence, should not fall under the denial category. The pint being canvassed here is that only when the non-payment travels beyond the contractual terms among the parties, it would be a case of failure to pay.
It is therefore imperative to construe the true meaning of the expression ‘fails to pay’. Reliance may be placed on the Bombay HC ruling (2552/2006) wherein it held;
“Let us find out the meaning of the concept ‘failure to pay’. The said concept has not been defined under the Act or Rules. ‘Failure to pay’ means nonpayment. There meaning of nonpayment, as given in the Black’s Law Dictionary, is ‘Failure to deliver money or other valuables, esp. when due in discharge of an obligation. The concept of failure to pay can be quoted with nonpayment. Nonpayment is nothing but failure to pay when due.”
It seems clear from the above that the nonpayment when an objection is due would be a case of failure to pay and not prior.
However, there is a counter that the proviso, since it provides for payment within 180 days, the nonpayment within that period would still be a ‘failure to pay’ even if the contract states otherwise.
Although, the proviso specifies a timeline of 180 days, it should not override the obligations set out by the parties as there is no such stipulation either in the definition of ‘consideration’ or in the supply or time of supply provisions. On the contrary, the 2nd limb of the definition of consideration assumes its presence basis the conduct of the parties. Hence, a liberal interpretation must follow.
It’s also imperative to discuss the exception u/r 37 referred above. It must be noted that the exception has been brought to give effect to the deeming provisions wherein a value has been ascribed to a transaction even when the same may not be an agreed consideration between the parties. For ex – where ‘open market value’ is adopted instead of a ‘transaction value’ Hence, this is well within the principles of legal fiction which entails that a statutory fiction created under a law must be given its full effect and should be carried to its logical conclusion and it would be proper and necessary to assume the facts on which such fiction operates.
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