ITC Benefit cannot be Reduced without Statutory Sanction: Supreme Court [Read Judgment]
There was no corresponding provision in Punjab VAT Act which permitted availing of ITC at the lower rate of tax on the existing stock in trade though the purchase of such input was already made at a higher rate of tax thereby reducing the quantum of credit
Supreme Court – ITC – ITC Benefit – Supreme Court on ITC benefit – TAXSCAN
Supreme Court – ITC – ITC Benefit – Supreme Court on ITC benefit – TAXSCAN
The Supreme Court in an important judgement held that the benefit of input tax credit (ITC) is traceable to the statute and the same cannot be reduced without the statutory sanction. It was viewed that there was no corresponding provision in Punjab VAT Act which permitted availing of ITC at the lower rate of tax on the existing stock in trade though the purchase of such input was already made at a higher rate of tax thereby reducing the quantum of credit.
This appeal by special leave is filed by state of Punjab against the order dated 20.05.2015 passed by the High Court of Punjab and Haryana which was in favour of Trishala Alloys Private Ltd, the respondent. The question for consideration is whether Rule 21(8) of the Punjab Value Added Tax Rules, 2005 (Punjab VAT Rules) could have been introduced during the period between 25.01.2014 to 01.04.2014 when there was no enabling provision in the parent statute i.e. the Punjab Value Added Tax Act, 2005 (Punjab VAT Act)?
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Respondent is a manufacturer of iron and steel goods. For manufacturing such goods, it purchases raw material of iron and steel from within the State of Punjab as well as from outside the State of Punjab. Punjab VAT Act came into force from 01.04.2005. As per the scheme of Punjab VAT Act, value added tax (VAT) paid or payable under the said Act by a taxable person on the purchase of taxable goods for resale or for use by him in the manufacture or processing or packing of taxable goods in the State of Punjab would be termed as input tax.
The credit of input tax available to a taxable person under the Punjab VAT Act is referred to as input tax credit (ITC). There is a concept called reverse input tax credit which means the amount of input tax credit which is required to be reversed by a taxable person on account of credit note for output tax received from the previous seller of goods on purchase in respect of which input tax credit (ITC) is claimed etc. Output tax in relation to a taxable person means the tax charged or chargeable or payable in respect of sale and/or purchase of goods, as the case may be, under the Punjab VAT Act.
A taxable person shall be entitled to input tax credit in such manner and subject to such conditions as may be
prescribed in respect of input tax on taxable goods including on capital goods purchased by him from a taxable person within the State during the tax period. However, such goods must be for sale in the State of Punjab or in the course of inter-state trade, commerce or in the course of export or for use in the manufacture, processing or packing of taxable goods for sale within the State of Punjab or in the course of inter-state trade or commerce or in the course of export.
After amendment with effect from 01.04.2014, the mandate of the provision undergoes a change in that input tax credit would be available only if the goods are sold or are used in manufacture etc. Rule 21 is relevant. It provides for inadmissibility of input tax credit in certain cases, such as, no input tax credit shall be admissible to a person for tax paid on purchase of goods if such goods are lost or destroyed or damaged beyond repair etc. Calculation of input tax credit is dealt with in Rule 22.
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Respondent filed CWP No. 7951 of 2014 before the High Court for a declaration that Rule 21 (8) of the Punjab VAT Rules as inserted vide the notification dated 25.01.2014 was ultra vires the Constitution and the Punjab VAT Act. Contention of the respondent was that credit for the tax already paid by the taxable person on goods kept as stock in trade would be reduced by virtue of Rule 21 (8) which is illegal and unconstitutional.
The High Court allowed the writ petition holding that on the date of introduction of sub-rule (8) in Rule 21 of the Punjab VAT Rules, the State did not possess any power traceable to the Punjab VAT Act to confine the rate of input tax credit to the reduced rate of tax on the stock in trade i.e. on those concluded transactions where the taxable person had already earned input tax credit at the previous higher rate of tax.
Counsel for the appellant submitted that the High Court was not at all justified in allowing the writ petition filed by the respondent holding that on the date of introduction of sub-rule (8) in Rule 21 of the Punjab VAT Rules, the State did not possess any power to confine availing of input tax credit (ITC) to the reduced rate of tax on the stock in trade i.e. in respect of transactions that stood concluded with the taxable person already earning input tax credit at the previous higher rate of tax. Judicial intervention in such a case was not warranted.
Per contra, counsel for the respondent submitted that the High Court had rightly observed that on the date of introduction of sub-rule (8) in Rule 21, the State did not possess any power emanating from the Punjab VAT Act to confine the availing of input tax credit (ITC) to the reduced rate of tax on the stock in trade i.e. on the transaction which stood concluded with the dealer already earning input tax credit at the previous higher rate of tax. He submits that a perusal of the amendment in the first proviso to Section 13(1) of the Punjab VAT Act would reveal that the said provision is not retrospective but applies to transactions after 01.04.2014. The amendment in the said Rule which came into effect prior to the amendment in the Punjab VAT Act could therefore not be enforced by the appellant before 01.04.2014 to take away a vested right already determined and accrued to the respondent without any statutory sanction.
The two judge bench of Justice Abhay S.Oka and Justice Ujjal Bhuyan observed that on the date of introduction of sub-rule (8) of Rule 21 of the Rules, the State did not possess any power, emanating from the Act, to confine the availing of input tax credit to the reduced rate of tax on the stock in trade i.e. transactions that had concluded with the dealer already earning input tax credit. A further perusal of the amendment in the first proviso to Section 13 of the Act reveals that it is not retrospective but applies to transactions after 25.01.2014.
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The amendment in the rule, which came into effect prior to the amendment of the Act could, therefore, not be enforced by the respondents before 01.04.2014 to take away a vested right already determined without statutory sanction.
We, therefore, allow the writ petitions and hold that in the absence of any provision in the statute enabling the State of Punjab to notify Rule 21(8) of the Rules w.e.f. 25.01.2014, the said provision would come into effect from 01.04.2014.
The court found that the respondent had earned input tax credit on purchase of iron and steel goods which it kept as its stock in trade to be used as inputs or raw materials in the manufacture etc. of taxable goods. State lowered the rate of tax with effect from 01.02.2014 on those goods. The related amendments in the rules i.e. Rule 21(8) of the Punjab VAT Rules were notified on 25.01.2014 to come into effect from 01.02.2014.
However there was no corresponding provision in the parent statute i.e. Punjab VAT Act which permitted availing of input tax credit at the lower rate of tax on the existing stock in trade though the purchase of such input was already made at a higher rate of tax thereby reducing the quantum of credit. The enabling provision in the statute i.e. first proviso to Section 13(1) of the Punjab VAT Act came into force with effect from 01.04.2014.
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“The benefit of input tax credit is traceable to the statute. If the same has to be reduced, which will have an adverse civil consequence upon the beneficiary, it must have the requisite statutory sanction. In this case, the statutory sanction came on and from 01.04.2014 with the amendment of the first proviso to Section 13(1) of the Punjab VAT Act. Therefore, the High Court was justified in holding that prior to 01.04.2014, there was no statutory sanction to allow applicability of Rule 21(8) on the stock in trade i.e. on inputs already purchased for which transactions stood concluded at a higher rate of tax.”, the bench ruled while upholding the ruling of High Court.
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