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Synopsis

The Supreme Court has said that the benefit of input tax credit is traceable to the statute, and if it has to be reduced, which will have an adverse civil consequence upon the beneficiary, it must have the requisite statutory sanction.

A bench of Justices Abhay S Oka and Ujjal Bhuyan upheld the Punjab and Haryana High Court's judgments, holding that on the date of the 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.

The court also noted that the related amendments in the rules, i.e., Rule 21(8) of the Punjab VAT Rules, were notified on January 25, 2014, to come into effect from April 01, 2014.

"There was, however, 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., the first proviso to Section 13(1) of the Punjab VAT Act, came into force with effect from April 01, 2014," the bench said.

In this case, the statutory sanction came into effect on and from April 01, 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 April 01, 2014, there was no statutory sanction to allow the 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 said.

"If the interpretation sought to be given to Rule 21(8) of the Punjab VAT Rules by the State is accepted, the natural corollary would be that the reversal of input tax credit would be at the lower rate of tax on the goods in question when those goods could not be used for the purposes specified in Section 13(1) or remained as part of the stock in trade at the time of the closure of business. Such an interpretation, besides being fallacious, would also lead to revenue loss for the State exchequer," the bench said.

Upon an appeal by the Punjab government, the court decided to examine whether Rule 21(8) of the Punjab Value Added Tax Rules, 2005 (Punjab VAT Rules), could have been introduced during the period between January 25, 2014, and April 01, 2014, when there was no enabling provision in the parent statute, i.e., the Punjab Value Added Tax Act, 2005 (Punjab VAT Act).

Before the high court, a writ petition was filed seeking a declaration that Rule 21(8) of the Punjab VAT Rules, as inserted by the notification of January 25, 2014, was ultra vires the Constitution and the Punjab VAT Act.

The respondent contended 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.

In the apex court, state counsel submitted that the high court was not justified in allowing the writ petition filed by the respondent, holding that on the date of the introduction of sub-rule (8) in Rule 21 of the Punjab VAT Rules, the State did not possess any power to confine the 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.

The counsel said judicial intervention in such a case was not warranted.

He also argued that ITC is not a privilege but merely a facility to avoid the cascading effect of tax. The State government introduced the scheme of ITC under Section 13 of the Punjab VAT Act to minimize the effect of VAT and reduce the burden of tax on the ultimate consumer. Every dealer (taxable person) calculates the output tax liability and reduces the tax paid on purchases to determine the quantum of tax payable. Therefore, the State government has the power to impose tax at the stage of sale, and in certain cases, no ITC may be available, he contended.

The state counsel also argued that the high court failed to appreciate that the amendment to the Punjab VAT Rules applied only to the rate of tax prevailing on the date of the sale of the stock in trade and, therefore, would not affect the rights of a dealer or the ITC on transactions that had already concluded.

The counsel further stated that the State has a larger affirmative responsibility towards society. Therefore, the impugned provision should be examined from that perspective as well.

On the other hand, the respondent's counsel argued that the State did not have the legislative competence to reduce the input tax credit already earned by inserting sub-rule (8) in Rule 21 before amending the corresponding enactment, i.e., Section 13 of the Punjab VAT Act. Since the amendment to the Punjab VAT Act came into effect from April 01, 2014, the amendment to Rule 21(8) of the Punjab VAT Rules could not have come into force prior thereto.

The court noted that by way of the first amendment to the Punjab VAT Rules, Rule 21(8) was inserted with effect from February 01, 2014, which made it abundantly clear that goods purchased earlier, on which input tax was paid and which were lying in the stock of a taxable person, would be available for input tax credit on further sale of such goods or their use as input for manufacturing taxable goods at the reduced rate if the rate of tax was reduced from a particular date.

The bench pointed out that the high court noted that as of January 25, 2014, there was no provision in the statute empowering the State to enact a rule providing that input tax credit already earned on goods lying in stock could now be availed at the reduced rate, as the rate of tax on the goods in question stood reduced in the interim. Such power was conferred only after the first proviso to Section 13(1) was amended on and from April 01, 2014.

The high court held that in the absence of any provision in the statute enabling the State of Punjab to notify Rule 21(8) with effect from January 25, 2014, the said provision would come into effect only from April 01, 2014, i.e., the date of the coming into force of the amended provision of Section 13(1) along with the first proviso thereto. The high court further observed that the amended first proviso to Section 13(1) was not retrospective.

"According to us, the view taken by the high court is logical and correct," the bench said.

It said a taxable person who had stock in trade as of January 25, 2014, or as of February 01, 2014, had already paid the tax while making the purchase of such goods. In this case, the purchase was made by paying a higher rate of tax on iron and steel goods to be used as input for the manufacture of taxable goods.

"The taxable person who is otherwise entitled to avail input tax credit on the goods already purchased and lying in stock would suffer serious prejudice and loss if his entitlement to input tax credit is reduced by virtue of the lowering of the rate of tax on such goods on a subsequent date," the court said.

It further pointed out that the high court noted that the enabling provision in the statute came into effect on and from April 01, 2014, and, therefore, Rule 21(8) of the Punjab VAT Rules, which permits the application of the reduced rate of tax, cannot be applied to transactions that had already concluded prior thereto. It could only be applied to transactions on and from April 01, 2014.

After discussion and analysis, the bench held, "We are of the unhesitant view that the interpretation given by the high court to the applicability of Rule 21(8) of the Punjab VAT Rules read with the amended first proviso to sub-section (1) of Section 13 of the Punjab VAT Act is legally sound and warrants no interference."

Case Title: State of Punjab & Ors Vs Trishala Alloys Pvt Ltd