Vodafone tax case few suggestions

Sub:Vodafone case-few suggestions to implement in future tax laws

The Supreme Court set aside a Bombay High Court verdict directing Vodafone International Holdings to pay Rs.11, 000 Crores to the Income Tax Department by way of capital gains tax -after the telecom major acquired a majority stake in Hutch Essar in the country as it held that a transaction of transfer of shares of a foreign company between two non-residents is not taxable in India.

It is feared that the government shall make necessary and clear amendment in Income Tax Act whereby such transactions for companies operating in India shall be liable to income tax. If such an amendment is made it shall not be in the interest of country as a whole –for its economic development as than it shall have a check on economic activities of foreign companies in India which is generating much employment opportunities in India with highest pay packets too. Further, its financial resources available for ploughing back profits in Indian operations shall be badly affected too. But if government wish to tax it in future by an amendment in Income Tax Act it is better that an exemption may be given with certain conditions like such saved funds –untaxed may be put to use in future within a specified time only –say within three to five years -in India and a separate audit may be compulsory for such a use of funds in India only.

Sometime government makes retrospective amendments to overrule Court decisions which is a bad law and is never justified from any angle /logic. Any amendment must be prospective only. Even such serious type of amendments if any if is to be made than sufficient time gap –few years –must be given to taxpayers to plan their future financial transactions well in advance. Overnight or short span of time can never be justified. Though it is well said that there is no logic in tax laws!

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Appeals under HVAT Act, 2003

The term “appeal” is defined to mean “ An application for the judicial examination or review by a higher Court of the decision of any inferior court or authority. Appeal is a proceeding taken before a superior Court or Authority for reversing or modifying decision of an inferior Court or authority on ground of error, a call for help. The appeal is the judicial examination and memorandum of appeal contains the grounds on which judicial examination is invited or sought. (See 21-STC-154, 161 (SC) )

It amounts in essence to a complaint to a higher forum that the decision of the subordinate officer or tribunal is erroneous and liable to be set aside. In the case of Chiranji Lal & Bros vs. State of Delhi (1966) 18-STC-240 (Punjab), the High Court held that It (appeal) embraces all proceedings whereby a superior court is called upon to review, revise, affirm, reverse or modify the decision of an inferior court.

The essential criterion of appellate jurisdiction is, that it revises and correct the proceedings in a cause already instituted and does not create that cause. In reference to judicial tribunals, an appellate jurisdiction, therefore, necessarily implies that the subject matter has been already instituted and acted upon by some other court, whose judgement or proceedings are to be revised.

Contd..2…

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Where a particular statute confers two jurisdictions – one under an appeal and the other under revision, the two cannot be said to be one and the same but are distinct and different in the ambit and scope. While an appeal is a continuation of a suit or proceedings wherein the entire proceedings are again left open for consideration by the appellate authorities which has the power to review the entire evidence subject, of course, to the prescribed statutory limitations. But in the case of revision whatever powers the revisional authority may have, it has no power to reassess and reappreciate the evidence unless the statute expressly confers on it that power. That limitation is implicit in the concept of revision. (Lachhman Dass Vs. Santokh Singh (1995) 4 SCC 201, 205.

It is now a well settled that the right of appeal is not an inherent right. It is a creation of the statute and accordingly is subject to conditions and restrictions imposed on it. It is open to the Legislature to give or not to give right of appeal against decisions made by the authoritieis under the Act and enactment on that account.

The absence of corrective machinery by way of appeal or revision, per se will not make a provision unreasonable. It will depend upon the scheme of the Act, the nature of powers vested in the authorities, the effect and consequences of the orders passed under the Act on the person concerned. If it is found that very serious consequences might flow in the absence of adequate and effective correct machinery by way of appeal or revision, the law can be held to be harsh, oppressive and unjust and violative of Article 14 of the Constitution.

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In fact, it is not the phraseology of statute that governs the situation but it is the effect of the law i.e. decisive. If the effect is to render it arbitrary and oppressive, Article 14 will be attracted. ( 81-STC – 291, page 300 relying upon Babubhai & Co. Vs. State of Gujarat –AIR 1985 SC 613, Express Hotels (P) Ltd. Vs. State of Gujarat – 178 ITR-151, 167 SC. The deprivation of an appellate remedy against an imposition of tax  may render such  provision unconstitutional and also open to challenge as arbitrary and unreasonable and, therefore, violative of Art.14. (B.Ganesha  Krishna Bhatt Vs. State of  Karnatka – 73-STC-267, page 275 ( Karn.) .

Under section 33 of the HVAT Act, 2003, any assessee considering himself aggrieved by an original order may prefer an appeal. The opening words of sub-section (1) of S.33 start from the word “any assessee” and not the term “registered or unregistered dealer” as one normally could assume. Again the term “assessee” has been defined in clause (d) of sub-section (1) of S. 2 of the HVAT Act. The term “assessee” has been defined to mean “ any person who is required to pay any tax, interest, penalty, fee or any other sum under this Act or the rules made thereunder.

From the above what emanates is that an appeal under the HVAT Act can be filed any person on whom a liability to any tax, interest, penalty, fee or any other sum under the HVAT Act and such person not necessary to be the registered dealer under the HVAT or CST Act in the State.

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The person who can be made to pay any tax, interest, penalty, fee or any other sum under the HVAT Act can enter into the shoes of the term “any assessee” and if they are aggrieved by an original order passed by any taxing authority under the HVAT Act can file an appeal under section 33 of the HVAT Act. Such a person could be dealer himself, his successor, his surety, owner of the goods not being a registered dealer, owner-incharge of  the goods, members of HUF in case Karta dies, or any person on whom a liability to pay any tax, interest, penalty, fee or any sum is created.

Second part of sub-section (1) is that the assessee considering himself aggrieved by the an original order may prefer an appeal and appeal shall lie –  if the order is passed by any authority or officer lower in rank to the Jt.ETC, to the JETC and if not lower to the JETC, to the ETC. If the order is made by the ETC, the appeal shall lie to the Tribunal.

Through a Note, it has been explained that an original order means an order passed under this Act except an order passed on appeal or on revision.

By virtue of sub- section ( 2) of S. 33, an appeal can be filed by either side against the orders passed by the Revising or Appellant Authority. Similar provision did not exist under the Haryana General Sales Tax Act. As a result of this the assessing authority or the taxing authority can file appeal against the orders of  JETC Appeal or the Revising authority.

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The limitation period for filing of an appeal under HVAT Act is 60 days from the date of order appealed against. The time spent in obtaining copy of the order is to be excluded from this limitation period. Further the aggrieved person will have to pay the amount of admitted tax and interest thereon. Besides a Bank Guarantee or Adequate Security is to be furnished to the satisfaction of assessing authority in respect of amount in dispute. This requirement is applicable on and from 20th March, 2009. The limitation period for filing of the Departmental Appeal before the Tribunal is 180 days from the date of the order appealed against.

Fee for filing appeals has been prescribed as follows:

a) On a memorandum of first appeal : Rs. One hundred only

b) On a memorandum of appeal before: Rs. Five hundred only

the Tribunal

The Appellant Authority is not obliged to entertain any additional evidence on behalf of either side in appeal, such as any account, register, record or document unless for reasons to be recorded in writing it considers that such account, register, record or document is genuine and the same could not be produced before the authority below for reasons beyond the control of the party producing the same. The effect of this provision is that no assessee is allowed to produce additional evidence except prevented by sufficient cause to produce the same at the first instance in appeal.

Contd…6…

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As per section 33 of the HVAT Act, the order passed by the Tribunal is final subject to the provision of section 35 & 36 of the HVAT Act. While section 35 is in respect of review power of the Tribunal, section 36 has been with regard to the reference to be made to the High Court.

Section 36 of the HVAT Act has been substituted by an amended section effective from 20thSeptember, 2011. The provisions of “Reference” as contained in the earlier section have been done away with and in accordance with the substituted section, provisons for Appeal have been incorporated. Instead of Reference, now the aggrieved party – whether the dealer or department can file an appeal against any order of the Tribunal including any order passed under sub-section (5) of S. 56 of the Act can file an appeal before the High Court.

The new section, however, makes a restriction with regard to appeal. The appeal can be filed against the order of the Tribunal, if a “substantial” question of law is involved. The satisfaction of the High Court that the case involves a substantial question of law is a pre-requisite for an appeal before the High Court.

The Commissioner or an aggrieved person may file an appeal within a period of sixty days from the date on which the order appealed against is received by the aggrieved party or the Commissioner.

Contd…7….

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If the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question. The respondent in appeal would be competent to argue to that the case does not involve such question.

The High Court would be vested with the  powers to decide whether a substantial question of law is involved or not.

Filing of appeal to the High Court would not result into automatic stay of recovery in respect of any tax which has been determined to be due from any person by the Tribunal’s order. High Court has not been vested with the powers of staying the recovery of any tax for which Tribunal has passed the order.

Filing of appeal from the orders of the Tribunal is a welcome step because earlier mode of reference resulted in delay and also put extra financial burden on the dealer and the result achieved was the same what has now been granted by way of substituted section 36 of the HVAT Act.

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Steps To Surrendering PAN CARD

Step 1:- If you have been allotted an additional Permanent Account Number (PAN) which you wish to voluntarily surrender, you need to visit the Income Tax (I-T) departments website -incometaxindia.gov.in. Click on the icon surrender Duplicate PAN.

Step 2 :- To be doubly sure that your request for surrender has been registered, also write a letter to this effect to the assessing officer under whose jurisdiction you have been filing your returns. The letter must contain details such as your name, contact details, details of the PAN card to be retained, details of the duplicate PAN card(s) which you need to surrender, etc.

Step 3 :- Maintain the acknowledgement copy of the letter that you have filed with the I-T department, stating that you are surrendering your additional PAN. That is sufficient as proof of surrender and no additional confirmation from the I-T authorities is required.

Step 4 :- On receipt of the acknowledgement, there is no need for you to wait for intimation from the income tax department considering that the PAN submitted has now been cancelled by them. The acknowledgment copy of the letter submitted will more than solve the purpose.

Step 5 :- Make sure that you surrender your additional PAN card before December 31, 2006 as there will be a penalty of Rs 10,000 levied per instance for quoting the wrong PAN.

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Direct tax Code – Income from House Property

As we are expecting the DTC be implemented from 1st April 2012, we have to be familiar with the DTC provisions. In general the DTC looks and be simple but it is complicated unless otherwise if we have studied the entire provisions of the act because, things are spread out here and there and which are disconnected with relevant provisions. One must search the entire DTC to find solution. Hence it is sure that we should have consolidated view about the DTC provision before we conclude any issue with respect to this Code. Let us go through the DTC provisions for Income from house property.

Only income from letting of house property shall be taxable under this head of income as per the DTC, even if the letting in the nature of trade, commerce or business.

What is mean by “House Property”?

“house property” mean (a) any building or land appurtenant thereto; along with facilities and  services whether in-built or provided separately; or (b) any building along with any machinery, plant, furniture or any other facility or services whether inbuilt or provided separately; [Section 314(119).]

Based on the definition we can conclude that even factories are taxable under the head house property. Certain companies may have the business of letting their factory premises for rent which are now taxable under the head Income from house property and not under business income; hence they cannot claim deduction beyond 20% of rent receivable or received (Gross rent). Letting means Property that is leased or rented out or let. It is not defined in the code but in general it has this meaning.

Certain property owners are receiving lump sum amount in the name of the lease of property instead of collecting rent, and this lump sum will be repaid after the period of tenure mentioned in the agreement if any entered. How this can be considered for income from house property? On what basis and how rent shall be computed for direct tax code? Still this is remains unsolved.

When a property which is taxable under this head owned by two or more persons then if their shares are definite and ascertainable shall be computed separately for each of such person in respect of his share. When there is a dispute then it shall be computed as AOP

The following are the properties which are not taxable under the head Income from house property:

1. To the house property, or any portion of the house property , which is used by the person as ahospital, hotel, convention centre or cold storage; and forms part of SEZ, the income from which is computed under the head “Income from Other Sources”

1. b. To a property which is not ready for use during the financial year. What is mean by “not ready for use”? It is up to the tax payer to prove that whether the property was ready to use during the financial year or not. More over the gross rent in respect of a house property or any part of the property shall be the amount of rent received or receivable, directly or indirectly, for the financial year or part thereof, for which such property is let out. Hence if not let out we can say that it is not subject to tax. This benefit is not there in existing Income-tax Act, 1961.

How to compute taxable income under this head?

	Particulars	Amount (Rs)
A	Rent received or receivable, directly or indirectly, for the financial year or part thereof, for which such property is let out.	XXXX
	LESS:
B	The amount of taxes levied by a local authority in respect of such property, to the extent the amount is actually paid by him during the financial year.	XX
C	A sum equal to twenty per cent(20%)  of the gross rent (A)	XXX
D	Any Interest on loan taken for the purposes of Acquisition, Construction, repair or renovation of the property or loan taken to repayment of first loan.	XXX
E	Income/(Loss) from House Property	XXXX

Interest on loan which pertains to the period prior to the financial year in which the house property has been acquired or constructed shall be allowed as deduction in five equal installments beginning from such financial year

The amount of rent received in advance shall be included in the gross rent of the financial year to which the rent relates. The amount of rent received in arrears shall be deemed to be the income from house property of the financial year in which such rent is received. This arrears of rent shall be included in the total income of the person under the head income from house property, whether the person is the owner of the property in that year or not. A sum equal to twenty per cent of the arrears of rent shall be allowed as deduction towards repair and maintenance of the property.

Self Occupied or Property which is/are not let out:

If any property owned by the taxpayer had not let out during the financial year then he has to claim the interest on loan take for the house under section 74 (Tax incentives) and not under income from house property. The following conditions to be fulfilled to claim the same: -

1. Only Individual or HUF can claim under this section 74.

1. The house property is owned by the person and not let out during the financial year

1. The acquisition or construction of the house property is completed within a period of three years from the end of the financial year in which the loan was taken; and

1. The person obtains a certificate from the financial institution to which the interest is paid or payable on the loan. (Only loan taken from financial institutions are eligible to be claimed under this section)

1. The amount of deduction under this section shall not exceed Rs.1,50,000/-

Exhibit- 1:

Mr.Vimaal has the following six house properties out of which one of them are not ready for use as at 31.03.2013. The following are the details for the financial year 2012-13. The taxable income under the head Income from house property and /or deduction can be claimed shall be as follows:-

Name of the Property	Nature	Gross Rent p.a.	Interest on loan **	Taxes paid for the property	Income/(Loss) From House Property	Deduction U/s 74
Property # 1	Self Occupied	Nil	Rs.2,50,000	Rs.2,500	Nil	Rs.1,50,000
Property # 2	Let out	Rs.1,20,000	Rs.1,75,000	Rs.1,500	(Rs.80,500)	Nil
Property # 3	Let out	Free of Rent	Rs.1,85,000	Rs.3,500	Nil	Nil
Property # 4	Let out	Rs.2,40,000*	Rs.1,55,000	Rs.5,000	Rs.32,000	Nil
Property # 5	Not Let out	Nil	Rs.1,86,000	Rs.2,000	Nil	Rs.1,50,000
Property # 6	Not ready to use	Nil	Rs.1,98,000	Nil	Nil	Nil
Total					(Rs.48,500)	Rs.3,00,000

*this tenant is not willing to pay the rent and the case is pending in court.

** From Financial Institutions.

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Taxation of works contract services under Service Tax

Definition of works contract service: Service tax under works contract services has been imposed on the service element involved in the works contracts. It should be noted that unlike VAT laws in various States service tax is applicable only on a fewer kinds of works contract as defined in section 65(105)(zzzza). Works contracts relating to Roads, Airports, railways, transport terminals, bridges, tunnels and dams are outside the purview of service tax.

Definition of Works Contract under section 65(105)(zzzza) runs as under:

Any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Explanation. – For the purposes of this sub-clause, “works contract” means a contract wherein, -

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out, -

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects

It appears from the definition above that if a contract is treated as works contract for the purpose of levy of VAT/Sales tax, such contract shall also be treated as works contract for the purpose of levy of service tax.

However only fewer kinds of works contracts are leviable to service tax like works contract for carrying out erection, commissioning or installations; works contract for commercial or industrial constructions; works contract for the construction of residential complex, works contract for turnkey projects including EPC contracts i.e Engineering Procurement and Construction contracts etc.

Value of Taxable services: Since service tax is applicable only on the service element involved in works contract. Now the question is how service element is to be calculated in a works contract. Section 67 of the Finance Act, 1994 provides that value of taxable services involved in the execution of works contract provided or to be provided by any person shall be the gross amount charged for providing such services.

Thus it means that works contract will be vivisected into material part and service part and the service tax will be payable on such service element vivisected. The procedure of determining such service element in a works contract has been provided in Rule 2A of Service Tax (Determination of Value) Rules, 2006.

Schemes available: It should be noted hereby that there are two schemes for payment of service tax in a works contract service, one is paying service tax on actual value of services after determining the same as per section 67 read with Rule 2A of Service Tax (determination of values) Rules, 2006 and second is paying under Composite scheme under Works contract (Composition scheme for payment of Service Tax) Rules, 2007.

Payment of service Tax on actual value: Rule 2A of Service Tax (Determination of Value) Rules, 2006.provides that  Value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.

Rule 2A(1)(ii) provides that Where Value Added Tax or sales tax, as the case may be, has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax or sales tax, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service under clause (i).

Thus where the service provider is paying VAT/sales tax under the respective State VAT/sales tax  law on the actual value of goods in such works contract then such actual value of goods shall be deducted from the gross amount charged for such works contract to arrive at the service element on which service tax is payable.

However there may be a case that the service provider is paying VAT/Sales tax not on the actual value of goods involved in the execution of works contract but under a composite scheme then service element will consist of following(as per explanation (b) of the Rule 2A of said Rules):

(i) labour charges for execution of the works;

(ii) amount paid to a sub-contractor for labour and services;

(iii) charges for planning, designing and architect’s fees;

(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

(v) cost of consumables such as water, electricity, fuel, used in the execution of the works contract;

(vi) cost of establishment of the contractor relatable to supply of labour and services;

(vii) other similar expenses relatable to supply of labour and services; and

(viii) profit earned by the service provider relatable to supply of labour and services;

Comments: In State VAT laws usually a lump scheme for payment of VAT on works contract is also provided wherein a fixed percentage for deduction of labour charges from the gross value of works contract is provided, for those assesses who do not maintain proper books of account so as to determine the correct value of goods incorporated in such works contract. It is to be noted that no such scheme is being made available under service tax. If a person has not maintained proper books of accounts he has only option to go for composition scheme.

If the service provider wants to pay service tax on the actual value of service element involved in a works contract then he will have to maintain books of accounts so as to arrive at the service element liable for service tax as enumerated in explanation(b) above.

VAT/sales tax to be excluded from gross value: Explanation (a) to Rule 2A of the Service Tax (Determination of Value) Rules, 2006 specifically provides that VAT/sales tax paid on the transfer of property  in goods involved in the execution of the said contract shall not be included in the gross amount so charged.

It means that if gross value of a works contract is Rs. 1000 and the material value involved in it is Rs. 600 and the VAT paid is Rs. 100 then service tax will be payable on Rs. 300 only.

It should also be noted hereby that the word used is “paid” thus no deduction will be allowed for VAT/sales tax payable and only the deduction for actual tax paid will be allowed.

Composition scheme: Calculating service element by vivisecting the works contract may not be an easy task especially in cases where proper books of accounts are not maintained and it may give rise to litigation. To avoid such litigation and be on a safer side a composition scheme for works contract services is also available.

Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 have been legislated to introduce such scheme. The said Rules contain only 3 rules and Rule 3 of the said Rules primarily deal with such composition scheme. Rule 3 of the said rules starts with non-abstante clause i.e :

”Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to 1[four per cent]. of the gross amount charged for the works contract.”

Thus Rule 3 of the said Rules overrides the provisions of section 67 and rule 2A of Service Tax (Determination of Value) Rules, 2006. Under the composition scheme the service provider in a works contract services has the option to pay service tax on the gross amount charged for the works contract @ 4% instead of paying at the normal rate on the actual service element.

In compostition scheme the gross amount charged for works contract includes: 

(i) the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; and

(ii) the value of all the services that are required to be provided for the execution of the works contract;

But excluding-

(i) the value added tax or sales tax as the case may be paid on transfer of property in goods involved; and

(ii) the cost of machinery and tools used in the execution of the said works contract except for the charges for obtaining them on hire:

No CENVAT credit of Inputs in composition scheme: Rule 3(2) provides that the assessee who opts for composition scheme shall not be eligible to take the CENVAT credit of excise duties and cess paid on “inputs” used in or in relation to the execution of such works contract under the CENVAT Credit Rules, 2004.

The Government in its Master Circular 96/7/2007-ST, dated 23-08-2007 in para 097.01 has clarified that” there is no restriction under notification No. 32/2007, Service Tax, dated 22-05-2007 to take CENVAT credit of duty paid on capital goods and service tax paid on input services”.

Thus CENVAT credit of inputs used in the execution of works contract is being debarred but credit of service tax paid on input services and that of excise duty and cess paid on capital goods will be available.

Sub-rule 2A of rule 3 of the said Composition scheme rules further limits the CENVAT credit of service tax paid on three taxable services namely Erection, commissioning, or installation service, Commercial or Industrial construction services and Construction of Residential Complex Services to the extent of 40% of the service tax paid on such services when service tax has been paid on the full value of the services after availing Cenvat credit on inputs..

Option once exercised cannot be changed/withdrawn afterwards: Rule 3(3) of the said Composition scheme rules further provides that the person who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract.

It means that option to pay under Composition scheme in respect of a works contract once exercised cannot be changed/withdrawn afterwards. 

The word used in rule 3(3) is “a works contract” which implies that one person may choose composition scheme for one works contract and may not choose for the other works contract.

To opt composition scheme declared value of contract should not be less than gross amount charged: Rule 3(4) of said rules provides that the option to pay composition scheme shall be permissible only where the declared value of the works contract is not less than the gross amount charged for such works contract. The said rule has been inserted to plugin the loophole wherein a contractor may bifurcate a single contract into contract for supply of material and contract for supply of material and labour and thereby reducing the gross amount of works contract for paying service tax under composition scheme.

For example: if a works contract of total value of Rs. 100 is bifurcated in such way that supply of value of goods in execution of such contract worth Rs. 30 is treated as seperate contract and remaining part of contract of value of Rs. 70 (including labour and some material also) is treated as works contract. In such case Rule 3(4) will come in picture and the service provider will have to pay service tax @ 4% on Rs. 100 and such bifurcation will not be allowed so as to pay service tax on Rs. 70/-.

Note at the end: The taxation of  works contract in service tax involves a lot of issues which might not have  been touched hereinabove. In this article an attempt has been made only to make understand the provisions relating to taxation of works contract services.

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Innocent purchaser cannot be disallowed ITC for non payment of tax by seller-Landmark Judgement

The Punjab & Haryana High court has delivered a landmark judgement namely Gheru Lal Bal Chand Vs. State of Haryana and another on 23/09/2011 disposing off 26 writ petitions challenging the constitutional vires of section 8(3) of Haryana Value Added Tax Act, 2003 and Rule 20(1) and 20(4) of Haryana VAT Rules and the consequent assessment orders.

The Common issue involved in these writ petitions was with regard to denial of Input Tax Credit by the Assessing Authority on the ground that the dealers from whom the petitioners have purchased goods, have not deposited full tax in the State Treasury. The purchasers-petitioners have not been held entitled for deduction of Input Tax Credit in terms of the provisions of Section 8(3) of the Haryana Value Added Tax Act, 2003.

The Hon’ble High Court has held that no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established.

Statutory Provisions: Section 8(3) of Haryana VAT Act, 2003 and Rule 20(1) and 20(4) of Haryana VAT Rules are being produced herebelow:

Section 8. (Determination of input tax)

(1) … … …

(2) … … …

(3) Where any claim of input tax in respect of any goods sold to a dealer is called into question in any proceeding under this Act, the authority conducting such proceeding may require such dealer to produce before it in addition to the tax invoice issued to him by the selling dealer in respect of the sale of the goods, a certificate furnished to him in the prescribed form and manner by the selling dealer; and such authority shall allow the claim only if it is satisfied after making such inquiry as it may deem necessary that the particulars contained in the certificate produced before it are true and correct.”

Rule 20 [Form of certificate by a selling VAT dealer. Section 8(3)] :

(1)The certificate referred to in sub-section (3) of section 8 shall be in Form VAT-C4 and shall be furnished by the selling vat dealer to the purchasing VAT dealer in respect of sale of taxable goods made by him to the purchasing dealer on tax invoice when the tax payable under the Act on such sale has been paid by him in full.

(2) xxxxxxxx

(3) xxxxxxxx

(4) The liability of a selling VAT dealer to pay tax on sale of goods by him to other VAT dealer on tax invoice shall not abate if he fails to furnish or furnishes a false certificate referred to in the foregoing sub-rule to the purchasing VAT dealer and tax for this reason has been realized from the latter but if the selling VAT dealer later pays the tax due from him, the liability of the purchasing VAT dealer shall accordingly abate and he may, within three years of finalization of his assessment, claim refund of tax paid by him.

In nut shell Section 8 of the Haryana VAT Act, 2003 read with Rule 20(1) and 20(4) of Haryana VAT Rules makes the purchasing dealer liable if the selling dealer has not paid tax with the Government treasury after collecting the same from the purchasing dealer.

Brief Facts of the case: The petitioner is a partnership firm under the name and style of M/s Gheru Lal Bal Chand, engaged in the business of sale and purchase of cotton. The petitioner procures material from different persons and sells the same in terms of the provisions of the relevant Act and the Rules and the tax which is paid by the dealer after deduction of Input Tax Credit is paid in the treasury. The firm is registered under the provisions of Act as well as the Central Sales Tax Act, 1956 (in short, the ‘Sales Tax Act’).

As per the petitioner, the scheme under the Act is that on the sale of goods, tax calculated would be treated as “output tax”. But if the purchases are made from within the State of Haryana, the tax paid on such purchases is to be set off from the out-put liability and resultant tax liability is paid by the selling dealer. The assessing authority observed that the petitioner was not entitled for deducting input tax credit as per provisions of Section 8 of the Act, because the Value Added Tax (VAT) dealers from whom the petitioner had purchased certain goods had not deposited the full tax in the State Treasury. The stand of the dealer, however, is that it made bona fide purchases from the selling dealers who were duly registered by the Assessing Authority under the Act and irrespective of the fact, whether they paid full tax or not, he should be allowed the necessary input Tax Credit. The said selling dealers discharged their tax liability and deposited the tax payable by them by deducting the input tax credit available to them.

Contention of the Petitioners: On behalf of the petitioners not only the assessment oders but also the conbstitutional validity of Section 8 of the Act read with Rule 20 of the Haryana VAT Rules have been challenged.

It was contended on behalf of the petitioners that Section 8(3) of the Act read with Rules 20(1) and 20(4) of the Rules are arbitrary and inequitable. It was argued that the registered selling dealer who collects tax from the purchasing dealer acts as an agent of the Government and, therefore, no liability could be fastened on the purchasing dealer for any default committed by the registered selling dealer in not depositing the tax so collected. To support this submission  the following observations of the Apex Court in Corporation Bank v. Saraswati Abharansala and another, (2009) 19 VST 84 (SC) were relied upon:-

“Sales tax is leviable on sale of goods. It must be collected by the dealer as an agent of the State at such rate as may be specified. Neither the State nor the agent is entitled to collect tax at a rate higher than specified.”

The above contention was also supported with the observation of Supreme Court in State of Punjab and Others V Atul Fastners Ltd., (2007) 4 SCC 471.

Another contention raised on behalf of the petitioners was that no liability could be fastened on the petitioner on account of non-deposit of input tax received by the selling dealer from the purchasing dealer as the term “paid”[under Rule 20(1)] is to be interpreted to mean “ought to have been paid” as held by the Supreme Court in Sanjana, Assistant Collector of Central Excise, Bombay and others v. The Elphinstone Spinning and Weaving Mills Co. Ltd., AIR 1971 Supreme Court 2039.

Thus it was contended on behalf of petitioners that sub-rules (1) and (4) of Rule 20 of the Rules and Form VAT C-4 are arbitrary prescribing thereunder requiring the purchasing dealer to establish that the contents thereof are true. Meaning thereby, for the assessee to establish that the registered selling dealer has deposited the tax collected from the purchasing dealer is an onerous condition which is not capable of performance as the purchasing dealer has no control over the registered selling dealer or its predecessors. It was next urged that the State has all the machinery at its command to effect recovery from the real defaulter and no person other than the defaulting person can be penalized for some body else’s lapses.

State can be held entitled to enforce recovery from the purchasing dealer in an eventuality when transaction is actuated with fraud or any connivance is established between the purchasing dealer and the registered selling dealer.

Contentions of the State Government: Section 8(3) of the Act was perfectly valid and did not violate Articles 14 and 19(1)(g) of the Constitution of India. It was specifically denied that the said provisions conferred any excessive power upon the State Government to frame the Rules. It further states that vires of the provisions of the above Section 8(3) of the Act and Rules 20(1) and 20(4) of the Rules framed under the Act have been challenged by the petitioner to bye-pass statutory remedies available to it which could legally be done by availing the remedy of appeal against the order of assessment as provided under Section 33 of the Act. It was further asserted that where a statute provided remedies against the orders of the assessment, the Court should refrain from entertaining writ petition against such orders.

The respondents further demonstrated that sub-section (3) of Section 8 of the Act did not declare certificate in Form VAT C-4 as a conclusive evidence for input tax and the said provision, however, permits the authority to allow the claim only if the authority was satisfied after making enquiry that the particulars contained in the certificate were true and correct.

 It was further contended on behalf of the State that once the petitioner has come to know about the fact that the tax has not been paid by the selling dealers to the State, the petitioner could claim refund of tax from its selling dealers. As regards the averments of the petitioner that the scheme framed under the Act neither violated Section 19(1)(g) nor Article 14 of the Constitution of India and the allegation of the petitioner that Section 8(3) of the Act conferred excessive power upon the State Government to frame Rules was fallacious and misconceived as the Legislature in its wisdom had conferred under Section 60 of the Act, the power to make Rules for carrying out the purpose of the Act. Similarly, the power conferred under Rule 20 of the Rules by the State Government under Section 60 of the Act was also not excessive as it laid down the procedure for computation of input tax which the legislature defined under Section 2(w) and for reduction under Section 3 (5) of the Act which was the integral part of the scheme for carrying out the purpose of the Act.

Verdict: After considering the contentions of both the petitioners and respondent and various judgments it has been held by the Hon’ble High Court :

“In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender. However, law nowhere envisages to impose any penalty either directly or vicariously where a person is not connected with any such event or an act. Law cannot envisage an almost impossible eventuality. The onus upon the assessee gets discharged on production of Form VAT C-4 which is required to be genuine and not thereafter to substantiate its truthfulness by running from pillar to post to collect the material for its authenticity. In the absence of any malafide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier thereto, no liability can be imposed on the principle of vicarious liability. Law cannot put such onerous responsibility on the assessee otherwise, it would be difficult to hold the law to be valid on the touchstone of articles 14 and 19 of the Constitution of India.”

“The selling-registered dealer who had collected tax from the purchasing-registered dealer acts as an agent for the Government as held in Atul Fasteners Ltd.’s case (supra). Still further, paid would mean and embrace within it ought to have been paid as enunciated in Elphinstone Spinning and Weaving Mills Co.Ltd.’s case (supra). Moreover, the apex Court in B. R. Enterprises v. State of U.P., (1999)9 SCC 700, Calcutta Gujarathi Education Society v. Calcutta Municipal Corporation (2003) 10 SCC 533 and M.Nagraj v. Union of India (2006) 8 SCC 212 has interpreted the rule of reading down statutory provisions to mean that a statutory provision is generally read down so as to save the provision from being pronounced to be unconstitutional or ultra vires. The rule of reading down is to construe a provision harmoniously and to straighten crudities or ironing out creases to make a statute workable.

To conclude,no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established.

In view of the above, it cannot be held that the provisions of Section 8(3) of the Act and the sub-rules (1) and (4) of Rule 20 of the Rules are ultra-vires but the same shall be operative in the manner indicated above. Consequently, the writ petitions are partly allowed and assessment orders are set aside and cases are remanded to the assessing authority to pass fresh assessment order in accordance with law.”

Thus the High Court instead of declaring the statutory provisions in question as ultra vires of constitution held that the said provisions be interpreted in such manner that no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established.

Effects of this Judgement in Punjab and other States: The Judgment delivered has far reaching effects in settling down the issues relating to cases where purchasing dealers are disallowed ITC on the ground that the seller has not paid the tax collected by him from the purchaser. The Judgement makes it clear that the selling dealer collects tax as an agent of the Government and if he makes any default to deposit the same with the treasury then innocent purchasing dealer cannot be disallowed the claim of such tax as ITC. However, if the collusion between the purchasing dealer and selling dealer is being proved then the Purchaser can certainly be held liable.

There is no such provision as equivalent to Section 8(3) of Haryana VAT Act read with rule 20 of Haryana VAT Rules in Punjab, but according to section 13(15) of Punjab VAT Act, 2005 the onus to prove that the VAT invoice on the basis of which, ITC is claimed, is bonafide and is issued by a taxable person, shall lie on the claimant.

The ratio descidendi  of this judgment  that innocent purchasing dealer cannot be disallowed ITC  for the default of the selling dealer for non-deposit of tax shall also apply to the cases covered under Punjab VAT Act, 2005 and the provisions of section 13(15) of Punjab VAT Act should be interpreted in the light of the decision of Hon’ble High Court in this case.

This judgment will also act as guiding force for the other States as well where such issues has arisen but not been settled as yet.

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