BY TIOL News Service

NEW DELHI, OCT 15, 2018: THE issue before the Supreme Court was whether a provision seeking declaration in Form C as a pre-requisite for availing ITC on inter-State transactions, can be treated as arbitrary, where such provision was created with the justified purpose of stemming loss of revenue or tax evasion due to inter-State transactions with unregistered dealers. NO is the answer. The Bench also clarified that availment of ITC cannot be claimed as an absolute right & that it is a concession only. Nonetheless, it issued a rider stating that where dealers in the State of Tamil Nadu made sales to the Governments of other States, it could avail ITC without having to undergo the mandatory procedure of filing Form C.

Facts of the case

The assessees filed the present writ petitions challenging the constitutional validity of Section 19(5)(c) of the Tamil Nadu Value Added Tax Act 2006 as well as Rule 10(9)(a) of the TNVAT Rules 2007. The assessees challenged such provisions on grounds that they contravened the mandate of several provisions of the Constitution of India, including Articles 14, 19(1)(g), 246 & 301. The present dispute began when the Committee of Finance Ministers released a White Paper in 2005, clarifying that set-off of Input Tax Credit against liability on all intra-State & inter-State sales, would be permitted.

Thereafter, the TNVAT Act was introduced in 2006, seeking to amend the law pertaining to sale or purchase of goods. Section 19(5)(c) of the Act disallowed input tax credit on the purchase of goods sold as such or used as intermediate goods in the course of inter-State trade or commerce. Subsequently, the Rule 10(9)(a) was notified, stating that input tax credit on inter-State sales were permissible only if Form C prescribed in the CST Rules 1957 was submitted.

During assessment for the relevant AYs, the assessees were served SCNs raising duty demand for reversal of input tax credit, on grounds that the requisite Form C had not been filed & so the assessees could not avail benefit of concessional rate of tax. The assessees paid the differential tax arising out of the assessment order for one AY and also reversed the proportionate Input Tax Credit. However, the assessees were then served another notice proposing to deny the ITC credit availed against the transactions for which Form C were not filled & seeking reversal of credit on inter-State sales without Form C. Such demands were later upheld by the jurisdictional High Court. Hence the assessees claimed that the provisions of Section 19(5)(c) ran contrary to the objective of the Act as well as the White Paper that preceeded it.

In writ, the Apex Court was of the view that,

++ 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;

++ thus, wherever the State Government buys, sells, supplies or distribute goods, it shall be deemed to be the dealer for the purposes of TNVAT Act. At the same time, TNVAT Act does not require registration by the State Government inasmuch as Section 38 which deals with registration of dealers explicitly provides, under sub-section (8) thereof, that this provision shall not apply to any State Government or Central Government. A conjoint reading of the two provisions would show that when a sale is made to the State of Karnataka, it is made to a dealer but that dealer is under no obligation to get itself registered under the TNVAT Act. Because of this exemption, no State Government does that and since it is not a registered dealer, it would not be in a position to issue any Form C. But for that, the genuineness of sales made to a State Government cannot be doubted. This situation puts those dealers who are making sales to the State Government in disadvantageous position, even when it is clear that there is no possibility of tax evasion as there cannot be any such apprehension in case of sales to the State Government. We may point out here that benefit of ITC is given whenever sale is made to a dealer outside State of Tamil Nadu and the said dealer is a registered dealer;

++ thereby, the provisions of Section 19(5)(c) are to be read down by construing that those dealers who are making sales exclusively to the other State Governments (i.e. outside the State of Tamil Nadu), the said States would be deemed as registered dealers for the purposes of availing benefits of ITC. Otherwise, in such a situation, it would be difficult to hold that test of reasonable classification is met in this limited context. Hence the judgment of the High Court is upheld with one rider, namely, that in those cases where a dealer makes sales exclusively to the other State Government(s), benefit of ITC would be allowed without insisting on the furnishing of Form ‘C'. However, in order to avail this benefit, a certificate from said the State Government to whom the supplies are made would be obtained by the dealer claiming ITC and submitted to the VAT authorities.

(See 2018-TIOL-386-SC-VAT)