Transworld Star Manjushree Vs Addl. Commissioner of Commercial Taxes (Karnataka High Court)
The Karnataka High Court considered two appeals filed by a common assessee challenging the revisional authority’s order disallowing Input Tax Credit (ITC) claimed on purchases made from M/s Ashapura Metal Corporation and JAS Modular Systems during the Financial Year 2014-15.
The appellant had purchased goods from the two selling dealers for Rs.1,58,76,115/- and Rs.2,40,03,328/-, respectively, on which VAT at 14.5% was charged. The appellant claimed ITC on these purchases. Following inspection of the books of account, the prescribed authority found that although the selling dealers had raised invoices charging VAT at 14.5%, they had remitted only 5% VAT and there was a mismatch between their turnover and monthly returns. Accordingly, the authority reversed ITC of Rs.10,02,703/- and Rs.16,88,965/-, levied interest of Rs.10,48,501/- and Rs.12,44,059/-, and imposed penalties of Rs.1,20,517/- and Rs.1,68,898/-.
The appellant appealed under Section 62(6) of the Karnataka Value Added Tax Act, 2003. The First Appellate Authority accepted the appellant’s contention that it had conducted its business diligently by paying the invoice value, including VAT, through account payee cheque and held that the appellant could not be made liable for the selling dealers’ failure to remit the tax to the Government.
The Revisional Authority exercised suo motu jurisdiction under Section 64(1) of the Act and reversed the appellate order. It held that ITC could not be granted unless the tax collected by the selling dealer was remitted to the Government, that the transactions were bogus because the selling dealers were allegedly not existing at the time of the transactions, and that the appellant had failed to discharge the burden of proving entitlement to ITC. The Revisional Authority also relied upon E-sugam details, observing that the goods could not have been transported in the vehicles shown, that some vehicles lacked fitness certificates or renewals, and rejected the appellant’s contention that payment through online cheques established the genuineness of the transactions.
Before the High Court, the appellant submitted that it was impossible for a purchasing dealer to verify whether the selling dealer had deposited the tax with the Government. According to the appellant, the required diligence extended only to verifying that the selling dealer was registered under the Act and conducting transactions in accordance with the Act. It was further contended that any failure by the selling dealer to remit VAT had to be addressed by the revenue against the selling dealer. The appellant also relied upon the High Court’s decision in STRP.No.82/2018.
The State contended that ITC could not be granted unless the selling dealer’s liability and payment of VAT to the Government were established and argued that the appellant was required to prove the genuineness of the transactions and the status of the selling dealers. However, the State did not dispute that the High Court had ruled against it in STRP.No.82/2018 on similar facts.
The High Court noted that it was undisputed that M/s Ashapura Metal Corporation and JAS Modular Systems were registered dealers under the Act, that proper invoices had been issued, that VAT at 14.5% had been charged, and that the appellant had paid the invoice value together with VAT through online transfer. The Court also noted that it was not the revenue’s case that the selling dealers were unregistered or untraceable.
The Court observed that the selling dealers had admitted sales attracting VAT at 5% and had deposited that amount. If the selling dealers failed to disclose the invoices charging VAT at 14.5% in their monthly returns, it was for the revenue to pursue recovery of the shortfall from the selling dealers, particularly when they had received the invoice value together with VAT through online transfer. The Court held that the revenue’s contention regarding the vehicles used for transportation was of no consequence because the transactions had already been completed and could not subsequently be examined on that basis. The Court also referred to the provisions of the Act enabling the revenue to recover VAT collected by the selling dealers, including by initiating criminal proceedings.
The High Court held that there was no justification for the Revisional Authority to interfere with the findings of the First Appellate Authority. Referring to STRP No.82/2018, the Court reiterated that the purchasing dealer’s due diligence extends only to verifying that the selling dealer is registered and ensuring that the transactions are carried out in the manner prescribed under the Act.
Accordingly, the appeals were allowed, the revisional authority’s orders dated 25.01.2021 were set aside, and the appellant was held entitled to ITC on the purchases made from M/s Ashapura Metal Corporation and JAS Modular Systems during the Financial Year 2014-15. The revenue was directed to credit the ITC to the appellant’s account within one month from the date of receipt of a certified copy of the judgment.
Cases Discussed
- STRP.No.82/2018 (Karnataka High Court), STRP.No.82/2018
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FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
Though these appeals were listed separately, they are taken up for consideration together.
2. These two appeals are filed by the common assessee challenging the order passed by the Revisional Authority by which, the Input Tax Credit (hereinafter referred to as ‘ITC’ for short) claimed by the appellant in respect of certain purchases made from M/s Ashapura Metal Corporation and JAS Modular Systems in the Financial Year 2014-15 were disallowed.
3. The appellant entered into purchase transactions with M/s Ashapura Metal Corporation and JAS Modular Systems during the Financial Year 2014-15. The purchase invoice was raised by the selling dealer for a sum of Rs.1,58,76,115/- and Rs.2,40,03,328/-, respectively on which, VAT at the rate of 14.5% was charged. The appellant sought ITC in respect of the above purchase. The prescribed authority issued a notice in Form 275 calling upon the appellant to produce the books of accounts for inspection. The prescribed authority after considering the books held that the selling dealer raised an invoice charging 14.5% VAT on the bill but remitted only 5% VAT and that there was a mismatch in the turnover and the monthly return of the selling dealer. The prescribed authority therefore reversed the ITC of Rs.10,02,703/- and Rs.16,88,965/- towards the tax on purchases amounting to 9.5% of the differential tax not remitted by the selling dealers and levied interest of Rs.10,48,501/- and Rs.12,44,059/- and penalty of Rs.1,20,517/- and 1,68,898/-, respectively.
4. Being aggrieved by the order of the prescribed authority, the appellant filed an appeal under Section 62(6) of the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as ‘the Act’ for short) before the Joint Commissioner of Commercial Tax (henceforth referred to as ‘the First Appellate Authority’ for short). The First Appellate Authority after considering the material placed on record and accepting the arguments of the appellant held that the appellant had conducted its business diligently and had discharged its duty and paid the required tax to the selling dealer by crediting it through account payee cheque. Therefore, it held that the appellant cannot be liable for the default of the selling dealers in not crediting the tax to the Government
5. The Revisional Authority exercised jurisdiction under Section 64(1) of the Act and took suo-moto cognizance of the issue. The Revisional Authority held that;
“a) Unless the tax collected on sales by the selling dealer is remitted to the Government, the set off tax paid on purchases from such dealers does not qualify for rebate/ITC under law.
b. The transaction between the appellant and the selling dealer is bogus as they were not existing at the time of transaction and;
c. The appellant had not discharged his burden of proof to claim the input tax.”
6. Feeling aggrieved by the aforesaid order of the Revisional Authority, the present appeal is filed.
7. Learned counsel for the appellant contended that it is impossible for the appellant to verify whether that the selling dealer had deposited the tax with the Government. He further contended that the only diligence expected of the appellant was to ascertain whether the selling dealer was registered in accordance with the provisions of the Act and to effect the transactions in accordance with the Act. He submitted that except this, there was no requirement of ensuring that the selling dealer deposits the tax collected with the Government. He also brought to our notice, the order of the Revisional Authority, wherein, it was held “this only leads to conclusion that the selling dealer is issuing tax invoices in favour of the assessee only with an intention to facilitate the assessee to claim ITC without declaring corresponding sales and making payment of tax to the department”. Learned counsel also invited our attention to the finding recorded by the revisional authority by relying upon the E-sugam details and holding that the commodity which were of high value, was impossible to be transported through a motor goods carrier or three wheeler passenger vehicle etc. He also held that some of the vehicles found in E-sugam did not carry fitness certificate and some of them were not renewed. The revisional authority also refused to accept the contention of the appellant that payment made through online cheques did not render the transaction genuine.
8. Learned counsel therefore contended that the order of the revisional authority is wholly without appreciation of the provisions of the Act. He further contended that if the selling dealer has not deposited the tax with the Government, it is for the State to pursue the same against the selling dealer. Learned counsel also brought to our notice the order passed by this Court in STRP.No.82/2018 under similar circumstances.
9. Per contra, the learned Government Advocate submitted that the State cannot be expected to give ITC unless the selling dealer is not only shown to be existing and also establishing the legitimacy of such sales attracting liability in the hands of the selling dealer and that such VAT is deposited by the selling dealers with the State, in discharge of the obligations under the provisions of the Act. Learned Government Advocate therefore contended that it is for the appellant to prove that the transactions in question was genuine and the selling dealers were registered dealers with whom the transactions in question was brought about. He however did not dispute that in similar facts this Court has ruled against the State in STRP.No.82/2018.
10. We have given our anxious consideration to the arguments canvassed by the learned counsel for the parties.
11. It is not in dispute that the selling dealers namely M/s Ashapura Metal Corporation and JAS Modular Systems are the dealers registered under the provisions of the Act and there is also no dispute that proper invoices were raised by M/s Ashapura Metal Corporation and JAS Modular Systems in respect of the goods that were sold. It is also not in dispute that the goods that were sold carried VAT at the rate of 14.5%. It is also not in dispute that the amount of invoice value along with tax was paid by the appellant to the selling dealers by an online transfer. It is not the case of the revenue that these dealers are not registered and or that they are not traceable.
12. It is in fact their case that selling dealers admitted the sale of goods which carried VAT of 5% and had deposited the same. If the selling dealers had failed to disclose their monthly returns about the sales invoices under which they had charged 14.5% VAT to the appellant, it is for the revenue to pursue the selling dealers to recover the shortfall, more particularly, when the selling dealers had received the invoice value along with VAT through an online transfer from the appellant. The claim of the revenue that the goods purchased by the appellant could not have been transported by the vehicle is of no consequence, since the transaction is completed and a postmortem cannot now be resorted to verify whether the items were in fact transported by the conveyance or not? In that view of the matter, having regard to the various provisions under the Act which permits the revenue to pursue the selling dealers through various mode to recover the VAT collected including and not limited to initiating criminal proceedings against the selling dealers.
13. Hence, we do not find any justification in the revisional authority exercising jurisdiction to upset the findings of the First Appellate Authority. As rightly contended by the learned counsel fro the appellant, a similar question arose for consideration before this Court in STRP No.82/2018 and this Court took a view that due diligence has to be exercised only to the extent of ascertaining whether the selling dealer is registered and to ensure that the transactions are brought about in the manner provided under the Act.
14. In that view of the matter, these appeals are allowed and the impugned order passed by the Revisional Authority dated 25.01.2021 are set aside. Consequently, the appellant is entitled to ITC for the purchases made by it from M/s Ashapura Metal Corporation and JAS Modular Systems during the Financial Year 2014-15. The revenue shall ensure that the same is credited to the account of the appellant within a period of one month from the date of receipt of a certified copy of this judgment.
