Madras High Court upholds VAT provision on input tax

Dealers challenge provision that treat discounts as turnover

The Madras High Court has upheld certain provisions of the Tamil Nadu Value Added Tax (VAT) Act which were challenged by dealers of various products/goods.

The dealers were particularly aggrieved by a provision by which authorities sought to treat the discounts that the dealers had obtained from vendors as turnover and prevent them from claiming excess input tax credit.

In its common order on a large batch of writ petitions, a Division Bench comprising Justices R.Banumathi and T.S.Sivagnanam said the provisions could not be struck down as being unreasonable or discriminatory.

The petitioners sought a declaration that Section 19(20), which came into force on August 19, 2010, and later retrospectively brought into force from January 1, 2007, was unreasonable and arbitrary.

Section 19 deals with Input Tax Credit (ITC) (the tax paid or payable by a registered dealer to another dealer on the purchase of goods) and the conditions/requirements to be complied with for claiming the credit. The sub-section laid down that where any dealer had sold goods at a lesser price than the price it was purchased, the amount of input tax credit over and above the output tax shall be reversed.

Petitioners said they had taken only ITC on the actual tax paid to the vendor on the VAT invoice. Considering the price after discount when the goods were resold, there was resale at a lesser price. The tax paid by the petitioners to the vendor to a certain extent became credit in the hands of petitioners. The State could not appropriate the excess credit input tax lying in the assessee’s account. The tax could not be recovered or reversed with retrospective effect. Enforcement officers took details of the discount received from vendors and recorded the statements of the purchasing dealers. Thereafter, a notice was issued proposing to treat as ‘escaped turnover’ the discounts received. The assessing authority passed assessment orders stating that the discount received was liable to be taxed as turnover. This was illegal.

The Bench said the controversy arose because of the discount given by the vendor/manufacturer after issue of tax invoice and charging VAT at the selling price. For the purpose of revenue, the tax component should be the same as indicated in the tax invoice, until the goods are sold to the ultimate consumer. The VAT shown in the tax invoice, which was available to the petitioner as ITC, should not be altered, when he sold the goods. The tax invoice was a document issued by the dealer, who sold the goods to another dealer. The entire design of VAT with ITC was crucially based on documentation of invoice. Therefore, the petitioners who were the purchasing dealers could never be allowed to amend the tax invoice. The court also upheld Section 19 (11) of the Act which prescribed modalities and time frame as regards availing of or enjoying ITC on purchases before the end of the financial year relating to such purchases or 90 days from the purchase date, whichever was later.