Recently, the Hon’ble Supreme Court in the case of Commissioner of Trade & Taxes, Delhi and others Vs. Arise India Limited and others [TS-2-SC-2018-VAT], has dismissed the Special Leave Petition filed by the Revenue against the decision of the Hon’ble High Court of Delhi in the case of Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi and others [TS-314-HC-2017(Del)-VAT] (“Arise India case”). The Hon’ble High Court of Delhi held Section 9(2)(g) of Delhi VAT Act to the extent it disallows Input tax credit (ITC) to purchaser due to default of selling dealer in depositing tax, as violative of Articles 14 and 19(1)(g) of the Constitution of India.
We are sharing with you details of this important judgement of the Hon’ble High Court of Delhi in Arise India case for your easy digests:
1. Whether treating both the ‘guilty purchasers’ and the ‘innocent purchasers’ at par under Section 9(2)(g) of the Delhi Value Added Tax Act, 2005 (“the DVAT Act”) is violation of Article 14 of the Constitution of India?
2. Whether input tax credit (“ITC”) can be denied to a bona fide purchaser under Section 9(2)(g) of the DVAT Act because of default of the selling dealer over whom such purchasing dealer has no control?
Facts & Background:
The facts relating to two of the writ petitioners, i.e. Suvasini Charitable Trust in W.P.(C) No. 4086/2013 and Arun Jain (HUF) in W.P. Nos. 4573, 4574, 4704, 4709, 4713, 4714 and 4788/2016 are discussed.
Facts concerning Suvaisni Charitable Trust (SCT)
SCT is a charitable organisation registered under the DVAT Act and engaged in the activity of providing food items in the Akshardham Temple complex. It states that it has paid Value Added Tax (“VAT”) on its purchases and avails ITC of VAT paid on its purchases. SCT states that it has made purchases from selling dealers registered under the DVAT Act on the strength of tax invoices, which prove the collection of tax by the vendor from the seller and is a valid document for availing ITC.
SCT states that on June 1, 2012, a fire broke out in the premises of the one of selling dealers-M/s Vidya Polymers because of which they failed to deposit the VAT collected from its buyer including SCT. On August 17, 2012, the Value Added Tax Officer (“VATO”) issued a default assessment order for the month of May, 2012 invoking provisions of Section 9(2)(g) of the DVAT Act.
SCT states that the above order is passed without affording an opportunity of being heard and solely on the basis that the ITC availed by SCT on the purchases did not match with the sale details of the vendor. The appeal filed by the SCT against the aforementioned default assessment orders were dismissed by the Objection Hearing Authority (“OHA”) on March 25, 2013. This order has been challenged in W.P. (C) No.4086 of 2013.
Facts concerning Arun Jain(HUF)
Arun Jain (HUF) (“AJ”) deals in the sale and purchase of Foreign Trade Licenses (‘FTLs’) issued under Section 5 of Foreign Trade (Developments & Regulation) Act, 1992. It states that the FTL is valid for 18 months from the date of issuance. FTL’s are transferable and are covered under the definition of ‘goods’ and their sales are chargeable to VAT under the DVAT Act. AJ states that during the Assessment Year 2013-14 and 2014-15, it made intra-state purchases from registered selling dealers and paid VAT on such purchases. All the payments made, and receipts are made through banking channels and are duly accounted for.
AJ filed their return in DVAT-16 along with Annexure 2A & 2B. For the purpose of ITC claimed by the AJ for the assessment Year 2013-14 & 2014-15, there was no mismatch reflected on the website of the Department. Despite this, the ITC was disallowed by the VATO in respect of some purchases made on the ground that the selling dealer was ‘suspicious’. This result in double payment of VAT on the same transaction, once at the time of purchase of the goods by paying VAT to the selling dealer and second when the ITC was disallowed and AJ was asked to pay VAT on the full sale price as recovered by it at the time of sale without the ITC. This tantamount to shifting the incidence of tax from the selling dealer to the purchasing dealer which is unconstitutional and against the scheme of the DVAT Act. The challenge in the writ petitions filed by AJ is also to the impugned orders of default assessment of tax and penalty under Section 32& 33 of the DVAT Act.
The Hon’ble High Court of Delhi made detailed deliberation and considered following points:
On the basis of the above points, the Hon’ble High Court held as under:
Therefore, the Hon’ble High Court set aside the default assessment order of tax, interest and penalty issued under Section 32 and 33 of the DVAT Act and the orders of the OHA and Appellate Tribunal insofar as they create and affirm demand against the Petitioners.
This is indeed a game changer judgment for the entire Trade, as they could claim credit if they make sure that the selling dealer is a registered dealer and has issued the tax invoice in compliance with the requirement of the DVAT Act and Rules made thereunder. The Hon’ble Delhi High Court precluded the Department from invoking the provisions of Section 9(2)(g) of the DVAT Act in case of bona fide purchasing dealer.
It is important here to note the relevant provisions made for ITC under the Central Goods and Services Tax Act, 2017(“the CGST Act”) which states that every registered person shall be entitled to take credit of input tax charged on the 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. However, no credit will be allowed unless the tax charged in respect of supply has been paid to the Government, either in cash or through utilisation of ITC.
Therefore, the moot questions which arise for consideration are as follows:
1. Whether the above judgment will be read in harmony with the provisions of the CGST Act or it is just limited to the provisions of the DVAT Act?
2. Whether under the CGST Act also credit would not be denied to the purchasing dealer for non-payment by selling dealer, if the purchasing dealer acted bonafide?
Drawing reference from the above judgment which carves out distinction between the purchasing dealers who have bonafide transacted with the selling dealer by taking all precautions as required under the statue and those that have not taken precautions, ideally, otherwise eligible ITC should not be denied to the bonafide purchasing dealer merely on fault of selling dealer. It should not be made the responsibility of the purchasing dealer to ensure that the tax is deposited by the selling dealer to the extent transaction is bonafide.
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