Solvochem Vs Commissioner of Trade & Taxes (Delhi High Court)
In a significant ruling, the Delhi High Court addressed the contentious issue of Input Tax Credit (ITC) denials to purchasers due to the failure of selling dealers to remit Value Added Tax (VAT) to the government. The case, Solvochem Vs Commissioner of Trade & Taxes, scrutinized Section 9(2)(g) of the Delhi Value Added Tax (DVAT) Act, which allowed authorities to proceed against both buyers and sellers for unpaid tax. The Court’s decision primarily protects bona fide purchasers who have diligently followed tax procedures.
The DVAT Act frames VAT as an indirect tax, meaning the seller collects it from the buyer and is legally obligated to deposit it with the government. For a purchaser to claim ITC, they must verify the seller’s registration and obtain a valid tax invoice under Section 50 of the DVAT Act. However, the Court acknowledged the practical limitations faced by purchasers: they cannot control whether a seller deposits the collected tax, nor can they easily resolve mismatches in Annexures 2A/2B (statements detailing sales and purchases) due to the confidentiality of sellers’ VAT returns under Section 98.
Challenging Section 9(2)(g)
Section 9(2)(g) of the DVAT Act came under sharp criticism for its broad application, which effectively penalized purchasers for seller defaults despite the purchasers’ limited control over the seller’s actions. The Court noted that the Cabinet note introducing this section overlooked Section 40A, which already empowers the Department to recover tax directly from defaulting sellers and allows action against purchasers only in cases of collusion. This omission highlighted a major flaw in considering the impact on bona fide purchasers’ ITC claims.
