A two-judge bench of the Supreme Court last week upheld the constitutionality of section 19(5)(c) of the Tamilnadu Value Added Tax Act and Rule 10(9)(a) of the VAT Rules.
The appellant was aggrieved by the order of the department proposing to deny the ITC credit availed against the transactions for which Form C were not filled, and reversing credit on inter-State sales without Forms C in terms of the impugned Section 19(1)(c).
The appellants, therefore, approached the High Court challenging the constitutional vires of 19(5)(c) of the TNVAT Act and Rule 10(9)(a) of the Rules contending that the same had been enacted in violation of Articles 14, 19(1)(g), 246 and 301 of the Constitution of India. It was urged by the appellants that Respondent No. 1 — State had enacted the Act under Entry 54 of List II of the Constitution of India in terms of consensus amongst States to bring about a nation-wide uniform taxation structure/scheme for VAT and for the promotion of inter-State trade, commerce and industrialization, with its primary object to reduce the cascading effect of tax imposed at successive stages, either at the stage of usage as raw material or at the time of reselling of the article so produced.
The bench comprising Justice A K Sikri and Justice Ashok Bhushan observed that the reasoning given in that judgment while upholding sub-section (20) of Section 19 shall equally apply while examining the validity of Section 19(5)(c) thereof. “The High Court has noted the specific stand taken by the State Government to the fact that in respect of unregistered dealer in other States, the State of Tamil Nadu has no mechanism to prevent invasion of tax and loss of revenue cost by trade with such unregistered dealers in the State of Tamil Nadu. Therefore, the provision was aimed at achieving a specific and justified purpose and could not be treated as discriminatory,” the bench said.
“We are only concerned with clause (c) of this sub-section which provides that ITC would not be allowed on the purchase of goods sold as such or used in the manufacture of other goods and sold in the course of inter-State trade or commerce falling under subsection (2) of Section 8 of the Central Sales Tax Act. To put it tersely, sale by a dealer who is registered in the State of Tamil Nadu which is effected outside the State of Tamil Nadu will qualify for ITC only when the said sale is made to a registered dealer. If it is to an unregistered dealer, it would not be admissible. This classification is based on intelligible differentia having a proper rationale. Insofar sales to unregistered dealers are concerned, that too situated outside the State of Tamil Nadu, the State would not have any mechanism to find out the genuineness of these sales. In essence, the State is putting the condition that ITC would be admissible when Form ‘C’ is given, which can be given only in those cases where sale is to a registered dealer. Prescribing such a condition in order to ensure that there is no evasion, has a rationale purpose and objective. Consideration of this aspect in the context of the very nature of the ITC scheme, which is a concession and not a right, would lead us to the conclusion that it was open to the Legislature to make such a provision,” the bench added.
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