The Real Controversy Behind E-Way Bill-Based ITC Disputes
Disputes involving invalid E-Way Bills have become a recurring feature of GST audits and adjudication proceedings. In many such cases, Input Tax Credit is proposed to be denied solely because the E-Way Bill- often due to the non-generation of Part-B- is deemed defective or invalid. At first glance, the controversy appears to be one of procedural non-compliance. However, a closer examination reveals that the real issue lies elsewhere and is far more fundamental.
In substance, these disputes concern the entitlement to Input Tax Credit under Section 16 of the CGST Act, 2017. The E-Way Bill system has been introduced as a regulatory and monitoring mechanism to control the movement of goods and to prevent tax evasion. It was never intended to serve as a test of the existence of a supply or of the factual receipt of goods by the recipient. Yet, in actual enforcement practice, failure of the E-Way Bill mechanism- particularly the absence of Part-B- is frequently treated as decisive against the taxpayer, shifting the enquiry away from substantive commercial facts to procedural lapses.
This article, therefore, examines a central question: whether a failure in a compliance mechanism can, by itself, defeat a statutory right founded on actual receipt of goods, genuine transactions, and tax duly paid to the exchequer. Addressing this question requires moving beyond procedural mechanics and returning to the fundamental principles governing Input Tax Credit under GST.
Section 16 as the Anchor of Input Tax Credit - Why Entitlement Cannot Be Diluted by Procedural Deviations
Any analysis of Input Tax Credit disputes must commence and conclude with Section 16 of the CGST Act, 2017, which constitutes the statutory charter for credit entitlement under GST. Section 16 does not regard Input Tax Credit as a concession contingent upon impeccable procedural conduct; rather, it recognises ITC as an integral element of the value-added tax framework, subject solely to the specific conditions explicitly detailed therein. These conditions, as set out in Section 16(2)- possession of a valid tax invoice, actual receipt of goods or services, or both, payment of tax to the Government, and submission of the prescribed return- define the statutory requirements for availing Input Tax Credit. Taken together, they constitute a comprehensive and exhaustive code governing eligibility under the GST law. Notably, compliance with the E-Way Bill mechanism, though significant for regulatory oversight, is not addressed within this provision of Section 16(2). The legislative omission is intentional, reflecting a conscious aim to safeguard credit entitlement from procedural lapses that do not compromise the authenticity of the transaction, the receipt of goods or services, or both. Consequently, any attempt to deny Input Tax Credit by incorporating deficiencies related to the E-Way Bill into Section 16 effectively amends the statute, shifting emphasis from substantive compliance to technical formalism. Such an interpretation contravenes not only the literal language of the law but also the fundamental philosophy of GST, which aims to maintain neutrality by permitting credit where genuine value addition occurs, and tax revenue has been collected by the exchequer.
Receipt of Goods as a Question of Fact - The Evidentiary Core of Section 16(2)(b)
Among the statutory conditions mandated under Section 16(2) of the CGST Act, 2017, the criterion that the registered person must have "received the goods or services or both" holds a pivotal and definitive role, especially in disputes emanating from E-Way Bill irregularities. The legislature has deliberately articulated this condition in factual terms, refraining from prescribing any rigid or exclusive mode of proof. Receipt, within the context of Section 16(2)(b), therefore, is not a procedural formality but a question of commercial reality , to be substantiated by tangible and contemporaneous evidence. In practical terms, receipt of goods is evidenced by entries in stock registers, goods receipt notes, inventory reconciliations, accounting records, payments to suppliers, and the eventual use or sale of the goods. These records, which businesses commonly maintain in the course of regular operations, collectively document the physical and financial entry of goods into the business. Once this evidence is produced and aligned, the receipt condition is considered met, regardless of any transit documentation issues.
It is essential to recognise that Section 16(2)(b) of the CGST Act, 2017 does not obligate the taxpayer to demonstrate the mode or means of transportation of goods, the specific vehicle used, or flawless adherence to every procedural requirement prescribed under Rule 138. This legislative design is neither inadvertent nor incomplete. Goods may, in many commercial situations, be received through modes of conveyance that fall outside the ambit of the E-Way Bill mechanism altogether- such as transportation through non-motorised conveyances or other exclusions expressly recognised under Rule 138(14) of the CGST Rules, 2017.
These considerations clearly pertain to the enforcement of movement controls, not to the determination of Input Tax Credit eligibility. To equate receipt of goods with impeccable compliance with E-Way Bill requirements would be to substitute a factual enquiry with a purely technical one, thereby misrepresenting the statutory framework. The correct enquiry under Section 16(2)(b) is whether the goods, as a matter of fact, reached the recipient and were integrated into its business operations, rather than whether the E-Way Bill, where applicable at all, was entirely free from procedural deficiencies.
The E-Way Bill as a Regulatory Control Mechanism - Not a Determinant of Input Tax Credit
The E-Way Bill mechanism, introduced through Rule 138 of the CGST Rules, 2017, must be comprehended within its appropriate statutory context. It operates as a regulatory and enforcement instrument designed to oversee and control the movement of goods, facilitate interception during transit, and deter tax evasion. Neither its terminology nor legislative intent suggests that it constitutes a substantive condition for the imposition of tax or the entitlement to Input Tax Credit. Therefore, the E-Way Bill is regarded as a means to an administrative objective, rather than an end in itself.
Structurally, the E-Way Bill comprises Part A, which captures the particulars of supply, and Part B, which details conveyance information. While Part B is unquestionably mandatory for lawful movement, its non-generation renders the E-Way Bill invalid solely for transit control purposes. It does not invalidate the tax invoice, negate the existence of the supply, nor extinguish the factual receipt of goods at the recipient's premises. Any interpretation that regards Part B as a criterion for Input Tax Credit (ITC) eligibility effectively elevates a procedural compliance requirement into a substantive statutory condition - an approach deliberately avoided by the legislature.
It is also crucial to acknowledge that GST legislation already stipulates specific consequences for breaches of E-Way Bill regulations, including penalties, detention, and confiscation. These enforcement measures align with legislative intent, emphasising that procedural violations related to movement should be addressed within the enforcement framework itself, rather than through the indirect denial of Input Tax Credit. Employing the denial of Input Tax Credit as a surrogate penalty for deficiencies related to E-Way Bill provisions not only lacks statutory support but also disrupts the delicate balance between enforcement and entitlement meticulously established under the GST regime.
In this context, the E-Way Bill should not be regarded as a decisive factor for credit eligibility. While it may prompt examination, necessitate verification, or provide grounds for enforcement measures, it does not, in isolation, determine the viability of the Input Tax Credit. Such a decision must fundamentally rely on Section 16 and the factual circumstances concerning the receipt and utilisation of goods.
Procedural Lapse Versus Substantive Violation - Where GST Law Draws the Legal Boundary
The distinction between a procedural lapse and a substantive violation is a fundamental principle of tax jurisprudence, and its proper application is essential to resolving disputes concerning E-Way Bill irregularities. Procedural provisions are enacted to facilitate the administration, regulation, and enforcement of the law, whereas substantive provisions delineate rights, obligations, and liabilities. The conflation of these provisions typically results in outcomes in which technical imperfections undermine genuine commercial transactions, a scenario that is uniformly disapproved of in fiscal law.
Under the GST framework, Section 16 of the Central Goods and Services Tax (CGST) Act delineates the substantive entitlement to Input Tax Credit. It specifies the exact circumstances under which such a right is granted and the particular conditions that may lead to its denial. Rule 138, which introduces the Electronic Way Bill system, operates within a distinct statutory framework. It governs the transportation of goods and provides the authorities with mechanisms to prevent evasion. A violation of Rule 138 may warrant enforcement actions; however, it does not, by statutory design, nullify the rights conferred by Section 16.
The non-generation of Part-B of an E-Way Bill constitutes a procedural lapse. It signifies non-compliance with a regulatory requirement governing the mode of movement, rather than questioning the existence or authenticity of the underlying supply. Considering such a lapse as a substantive violation that potentially nullifies the Input Tax Credit effectively introduces a disqualification under Section 16 that the legislature did not prescribe. Furthermore, this approach risks imposing disproportionate penalties, whereby minor or technical infractions result in the most severe civil penalty- denial of credit - without any demonstration of revenue loss or malicious intent.
Why the ITC Cannot Be Denied on Presumption
Disputes concerning ITC frequently revolve not solely around statutory interpretation but also involve the allocation of the burden of proof and the standard of evidence necessary to substantiate a denial. Under the GST regime, although the registered person claiming ITC unquestionably bears the initial burden of demonstrating compliance with the conditions outlined in Section 16(2) of the CGST Act, 2017, this burden is neither absolute nor perpetual. It is considered discharged once the taxpayer presents primary and contemporaneous evidence demonstrating possession of a valid tax invoice, accounting for inward supplies, reflecting such supplies in stock records, making payment to the supplier, and establishing a connection between the goods and their use or further supply in the ordinary course of business.
Once prima facie compliance is shown, the burden of proof shifts to the Department. At this point, denial of ITC cannot be based on guesswork, suspicion, or procedural errors. The Department must present concrete, corroborative evidence that the essential condition for receiving the goods was not met or that the transaction was a sham. This could include physical inspections showing no goods, discrepancies in quantity reconciliation, proof of non-existent suppliers, transporter statements denying transport, or financial cycles lacking commercial substance. Without such evidence, the claim of non-receipt remains unproven.
The invalidity of an E-Way Bill arising from the non-generation of Part a does not automatically meet the evidentiary threshold. It merely indicates a failure to comply with the regulation governing movement. Using this lapse as definitive proof of non-receipt would invert the burden of proof and replace actual evidence with assumptions. The CGST Act, 2017, does not allow such an inversion. Fiscal decisions must rely on evidence that withstands scrutiny, not on conclusions based on technical errors.
It is also noteworthy that the denial of ITC has serious repercussions, effectively treating tax as an expense. Such consequences can arise only from definitive findings of a substantive breach, supported by evidence proportionate to the severity of the outcome. When the Department relies exclusively on deficiencies in the E-Way Bill without disproving receipt of the goods, the evidentiary standard is not met, and therefore, the denial of credit cannot be upheld.
Illustrative Case Studies - When E-Way Bill Defects Defeat ITC and When They Do Not
Case Study A- Procedural Lapse, Substantive Compliance
In this case, Harpreet Ltd. , the recipient, acquires goods under valid tax invoices issued by a registered supplier. The supplier generates an E-Way Bill but fails to update Part B, thereby rendering the E-Way Bill technically invalid. During an audit of Harpreet Ltd., the Department proposes denial of the ITC solely on this basis. However, Harpreet Ltd. can produce inward registers reflecting receipt of goods, quantitative stock records demonstrating reconciliation between opening stock, purchases, consumption, and closing stock, production or utilisation data establishing that the goods were used in business operations, and banking records evidencing payment to the supplier. No discrepancies are identified during the physical verification of stock, nor is there any allegation that the supplier does not exist or that tax has not been paid to the Government.
In this case, the defect in the E-Way Bill remains detached from the substantive reality of the transaction. The deficiency resides in the documentation of movement rather than in the existence or receipt of goods. Denial of ITC under these circumstances would penalise the taxpayer for a procedural lapse unrelated to revenue loss or fictitious supply and would therefore lack legal validity.
Case Study B - Procedural Lapse Coupled with Sham Transaction
In a distinct category of cases involving Kirti Ltd., ITC is claimed on invoices accompanied by invalid or missing E-Way Bills, and further investigation uncovers more profound irregularities. It is established that the supplier is not present at the declared place of business; the purportedly received goods are not reflected in physical stock; transporters deny having transported the goods; and accounting records reveal fabricated entries that lack supporting commercial activity.
In this case of Kirti Ltd., the defect pertaining to the E-Way Bill does not operate independently; rather, it constitutes part of a broader evidentiary framework demonstrating that the transaction itself is a sham. Under these circumstances, the denial of ITC is justified- not due to the non-generation of Part-B, but because the substantive criterion of receipt under Section 16(2)(b) has been convincingly disproved.
These contrasting case studies of Harpreet Ltd. and Kirti Ltd., emphasise a fundamental adjudicatory principle: E-Way Bill defects attain legal significance solely when substantiated by independent evidence that challenges the authenticity of the supply. In isolation, such defects do not negate the entitlement to ITC. Their function is primarily evidentiary and contextual, rather than dispositive.
Substance as the Touchstone of ITC under GST
The discussion in Part I demonstrates that the entitlement to ITC under GST is anchored firmly in substantive compliance rather than procedural perfection. While Rule 138 of the CGST Rules, 2017 undoubtedly plays a significant role in regulating and monitoring the movement of goods, it does not define the existence of a supply, the factual receipt of goods, or the statutory right to credit . That right flows exclusively from Section 16 of the CGST Act, 2017, which expressly grounds eligibility on commercial reality- possession of a valid tax invoice, actual receipt of goods, payment of tax to the Government, and furnishing of a return under Section 39.
Procedural lapses in the E-Way Bill mechanism, including non-generation of Part-B, may legitimately invite scrutiny, verification, and enforcement action within the framework provided by law. However, they cannot, by themselves, negate a statutory entitlement where the substantive conditions are demonstrably fulfilled. To allow otherwise would be to elevate procedure above substance and to convert a regulatory control mechanism into an unintended instrument of denial. GST, by design, seeks to tax real economic activity while preserving the continuity and neutrality of the credit system. Where goods are real, receipt is genuine, and tax has reached the exchequer, ITC must not be denied merely because a procedural mechanism did not function with technical precision.
Part I, therefore, reaffirms a foundational principle of GST jurisprudence: compliance mechanisms are meant to support the tax system, not to supplant or distort the rights it confers . Yet, while this doctrinal clarity is essential, it is only the first step. The true challenge arises when these principles are applied in practice- particularly in the context of audits, investigations, and adjudication proceedings, where procedural irregularities are often converted into substantive allegations.
From Statutory Principle to Adjudicatory Practice
In real-world GST administration, disputes seldom remain confined to abstract questions of statutory interpretation. They crystallise in the form of Show Cause Notices, in which the failure of an E-Way Bill is frequently presented not merely as a procedural lapse but as presumptive proof of non-movement of goods, non-receipt, collusion, or fictitious transactions. It is at this adjudicatory stage that the balance between enforcement and entitlement is most severely tested, and where the distinction between procedure and substance is most vulnerable to erosion. The analysis must therefore now shift from principle to application- from what the law requires in theory to how it is invoked and enforced in practice. Part II undertakes this examination by analysing the typical allegations raised in such proceedings and by testing them against the statutory text, evidentiary standards, and the underlying philosophy of GST.
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