Input tax credit cannot be denied to recipient on default of payment by supplier

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:

Issue:

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. 

Petitioners' contentions:

• Treating both the 'guilty purchaser' and the 'innocent purchaser' at par under Section 9(2)(g) of the DVAT Act is violative of Article 14 of the Constitution;
• Section 9(2)(g) of the DVAT Act denies to a bona fide purchaser, the benefit of ITC only because of the default of the selling dealer over whom such purchasing dealer has not control. This measure qua the purchasing dealer is arbitrary, irrational and duly harsh and, therefore violative of Article 14 of the Constitution;
• There are other statutory avenues available to the state to collect tax from the defaulting dealer whereby the Commissioner prepare and issue to the defaulting selling dealer a recovery certificate and thereafter recovers the amount specified in the certificate by attaching the movable and immovable property;
• The only requirement for availing the benefit of ITC is that he must ensure that the selling dealer is registered and the compliances are made with the requirement of the DVAT Act and the Rules made thereunder. Once the purchasing dealer demonstrates that he has complied with such requirement, he cannot be denied the ITC only because the selling dealer fails to discharge obligation under the DVAT Act;
• The condition under Section 9(2)(g) of the DVAT Act that the selling dealer has 'actually deposited' should be read as selling dealer 'ought to have deposited' tax. Alternatively, the expression 'dealer' occurring therein should be read down to exclude a purchasing dealer who, on his part, has duly complied with the requirement under the DVAT Act;
• If subsequent to the purchases made by the purchasing dealer, the registration of the selling dealer is cancelled, such cancellation cannot be given retrospective effect so as to deny the purchasing dealer the ITC in respect of the VAT paid by him;
• If there is no mismatch of the Annexure 2A and 2B, ITC cannot be denied;
• Penalty under Section 86(10) of the DVAT Act cannot be imposed unless it is shown that the return filed is misleading or deceptive;
• Penalty under Section 86(10) of the DVAT Act is not automatic and has to be preceded by the proper notice being served on the assessee and an effective opportunity of being heard given.

Revenue's contention:

• Department urge that arbitrariness cannot be a ground for challenging the statute as being violative of Article 14 of the Constitution. Further, mere hardship caused by the impossibility of compliance of the provisions cannot be a ground for striking down a statue;
• Where a fiscal statue was being challenged, a greater leeway had to be given to the legislature and there had to be a presumption of soundness of the legislative policy. It was argued, the court is not to question legislative wisdom in such matters. The Department referred to the note prepared for consideration of the cabinet prior to the insertion of Section 9(2)(g) of the DVAT Act.

Held:

The Hon'ble High Court of Delhi made detailed deliberation and considered following points:

• There is a failure by the legislature to make a distinction between the purchasing dealer who have bonafide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealer.
• In the present case, the purchasing dealer is being asked to do the impossible, i.e. to anticipate the selling dealer who will not deposit with the government the tax collected by him from those purchasing dealers and therefore avoid transaction with such selling dealers. Alternatively, Section 9(2)(g) of the DVAT Act requires the purchasing dealer, after transacting with the selling dealer, to somehow ensure that the selling dealer does in fact deposit the tax collected from the purchasing dealer and if the selling dealer fails to do so, undergo the risk of being denied the ITC.
• The conditions imposed for the grant of ITC are spelt out in Section 9(1) and (2) of the DVAT Act. The petitioners' positive case is that each of them, as a purchasing dealer, has complied the conditions as stipulated in Section 9 and therefore, cannot be denied ITC merely because  selling dealer had failed to fulfil the conditions thereunder.

On the basis of the above points, the Hon'ble High Court held as under:

• The expression 'dealer or class of dealers' occurring in Section 9(2)(g) of the DVAT Act should be interpreted as not including a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with Section 50 of the DVAT Act where there is no mismatch of transactions in Annexure 2A & 2B.
• Unless the expression 'dealer or class of dealers' in Section 9(2)(g) is read down in the above manner, the entire provision would have to be held to be violative of Article 14 of the Constitution.
• The Department is precluded from invoking the provisions of Section 9(2)(g) of the DVAT Act to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered selling dealer who has issued a tax invoice reflecting the TIN number.
• In the event that selling dealer fails to deposit the tax collected by him from the purchasing dealer, the remedy for the department would be to proceed against the selling dealer for recovery of such tax. Further, in cases where the department is satisfied that there is collusion of purchasing and selling dealer then proceeding under Section 40A of the DVAT Act can be initiated.

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.

Our Comments:

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.