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DVAT: ITC cannot be denied to genuine purchaser if guilty seller do not deposit the tax

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Brief summary of the case

Court: IN THE HIGH COURT OF DELHI AT NEW DELHI.
Number: W.P.(c) 6093/2017
Petitioners: QUEST MERCHANDISING INDIA PVT. LTD.
          [Suvasini Charitable Trust and Arun Jain (HUF)]
Respondents: GOVERNMENT OF NCT OF DELHI & ORS
Date of decision:26.10.2017
Judges: Honourable Dr. S. Muralidhar

Facts
Facts concerning Suvasini Charitable Trust

  1. Suvasini Charitable Trust (SCT) is a charitable trust organization registered under the Delhi Value Added Tax (DVAT) Act. It is engaged in the activity of providing food items in the Akshardham Temple complex.
  2. It states that it has paid Value Added Tax (VAT) on its purchases. It avails Input Tax Credit (ITC) on the VAT paid on its sales.
  3. 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 purchasing dealer and is a valid document for availing ITC.
  4. A fire broke out in the premises of the one-off selling dealers – M/s. Vidya Polymers. Due to fire M/s. Vidya Polymers failed to deposit the VAT collected from its buyers.
  5. Subsequently the Value Added Tax Officer (VATO) issued a default assessment order by invoking Section 9 (2) (g) of the DVAT Act denying ITC.
  6. SCT states that the above orders were passed without affording it 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 filed by the vendor.
  7. The appeals filed by SCT against the aforementioned default assessment orders were dismissed by the Objection Hearing Authority (“OHA‟).

Facts concerning Arun Jain (HUF)

  1. Similarly, the ITC was disallowed by the VATO on the ground that the selling dealer was suspicious. This was done by purportedly invoking Section 9 (2) (g) of the DVAT Act.
  2. He points out that as a result, it has had to pay VAT twice 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 he was asked to pay VAT on the full sale price as recovered by it at the time of sale without the ITC.

Petitioners’ argument

  1. Irrespective of whether the purchasing dealer is innocent, on account of subsequent conduct of the selling dealer, who has collected the VAT from the purchasing dealer and has failed to deposit it with the government or has failed to lawfully adjust it against his output tax liability, the purchasing dealer is made to suffer. This is violative of Article 14 of the Constitution inasmuch as it treats both the innocent purchasers and the guilty purchasers alike.
  2. Section 9 (2) (g) of the DVAT Act denies to a bona fide purchaser, the benefit of the ITC only because of the default of the selling dealer over whom such purchasing dealer has not control. This is arbitrary, irrational and unduly harsh and, therefore, violative of Article 14 of the Constitution.
    Reliance is placed on the decisions in Commissioner of Customs, Amritsar v. Parker Industries 2007 and Shanti Kiran India Pvt. Ltd. v. Commissioner, Trade and Tax Deptt. (2013).
  3. There are other statutory avenues available to the State to collect tax from the defaulting dealer. This includes recovery of the tax in case the dealer fails to deposit the same under Section 43 of the DVAT Act; forfeiture of security deposited under section 19 of DVAT Act read with Rule 22 of the DVAT Rules; recovery of tax as arrears of land revenue whereby the Commissioner prepares and issues to the defaulting selling dealer a recovery certificate and thereafter recovers the amount specified in the certificate by attaching the movable and immovable property of or even the arrest of the certificate-debtor; or appointing a receiver for the management of the movable and immovable properties of such certificate-debtor.
  4. The purchasing dealer wanting to avail the benefit of ITC, has to 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 the Rules made thereunder.
  5. 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 his obligation under the DVAT Act.
  6. All the Petitioners in the present case, all of them as purchasing dealers have complied with the requirement of DVAT Act and all of them have ensured that the purchases made by them are in compliance with the requirements of the DVAT Act for claiming ITC. Reliance is placed on the decisions in Corporation Bank v. Saraswati Abharansala (2009) 19 VST 84 (SC); State of Punjab v. AtuI Fasteners Ltd. and Gheru Lal Bal Chand v. State of Haryana.
  7. Even if it is assumed that 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.
  8. There is no mismatch of Annexures 2A and 2B (matching of invoices), ITC cannot be denied.

Respondents’ argument

  1. Respondent relies on decisions in Rajbala v. State of Haryana (2016) and Municipal Committee v State of Punjab (1969) to urge that arbitrariness cannot be a ground for challenging the statute as being violative of Article 14 of the Constitution.
  2. Mere hardship caused by the impossibility of compliance of the provisions cannot be a ground for striking down a statute.
  3. Reliance was also placed on the decisions in State of Madhya Pradesh v. Kohli Brothers (2012) and R.K. Garg v. Union of India (1981) to urge that where a fiscal statute 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, therefore, that the Court is not to question legislative wisdom in such matters.
  4. He placed extensive reliance on the decision of the Bombay High Court in Mahalaxmi Cotton Ginning Pressing and Oil Industries v. State of Maharashtra (2012) where a similar provision under the Maharashtra Value Added Tax Act (“MVAT Act‟) was upheld. He also referred to the fact that the Special Leave Petition filed against the aforesaid decision of the Bombay High Court was dismissed by the Supreme Court.
    He pointed out that the said decision was upheld by the Supreme Court in Jayam & Co. v. Assistant Commissioner (2016) respondent also similarly relied on similar provisions of the Rajasthan VAT Act and the Gujarat VAT Act.

Court Observation

  1. It requires to be understood that Section 2 (1) (r) of the DVAT Act implicitly recognizes that when the buyer pays the seller the price for the purchase of goods, such price is inclusive of the DVAT for which the seller is “liable‟ to pay to the Government. Which is why it talks of payment by the buyer of the liability that is essentially that of the seller. VAT is an indirect tax, the incidence of which can be passed on and is in fact passed on by the seller to the purchaser.
  2. The purchasing dealer would face difficulty is that he would have no access to the return filed by the selling dealer particularly since under Section 98 (1) of the DVAT Act those particulars are meant to be confidential.
  3. Under Section 98 (3) (j) of the DVAT Act, it is possible for the Commissioner, where he considers it desirable in the public interest, to publish such information.
  4. If the Commissioner has not placed such information in the public domain, then it is next to impossible for the purchasing dealer to ascertain the failure of the selling dealer to make a correct disclosure of the sales made in his return.
  5. For all these defaults committed by the selling dealer, the purchasing dealer is expected to bear the consequence of being denied the ITC. It is this that is being questioned as violative of Article 14 of the Constitution.
  6. The need for the law to distinguish between honest and dishonest dealers was acknowledged by the Punjab and Haryana High Court in Gheru Lal Bal Chand v. State of Haryana where the constitutional validity of a similar Section 8 of the Haryana DVAT Act, 2003 („HVAT Act’) was being considered. It was held that:
    • 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 imposing 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.
    • 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.
    • If it is held that the person who does not deposit or is required to deposit the tax would be put in an advantageous position and whereas the person who has paid the tax would be worse, the interpretation would give result to an absurdity. Such a construction has to be avoided.
  7. 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 dealer and therefore avoid transacting with such selling dealers.
  8. The Petitioners have argued that Section 9 (2) (g) also suffers from the vice of arbitrariness and is, on that ground, hit by Article 14 of the Constitution. There is some uncertainty as of today on whether a law can be struck down only on the ground of arbitrariness thereby attracting Article 14 of the Constitution. This doubt has been created by the decision of the Supreme Court in Rajbala v. State of Haryana (supra) and Binoy Viswam v. Union of India (2017).
  9. Rajbala v. State of Haryana and Binoy Viswam v. Union of India which held that a legislation cannot be challenged on the ground of arbitrariness are no longer good law.
  10. The reference, in Khazan Chand v. State of Jammu and Kashmir and Central Wines v. Special Commercial Tax Officer, was in the context of the liability to pay tax being essentially on the selling dealer. It was held there that a selling dealer cannot obviate his liability to pay tax on his “sale transaction‟ by claiming set off and placing the responsibility to recover tax on an earlier link in the chain on the Revenue. It proceeds on the basis that the State Legislature is not “bound to grant a set off”. It further states that the Legislature cannot be “compelled to grant a set-off, ignoring the conditions which it imposes”.
  11. The decision of the Supreme Court in Corporation Bank applies to the present case on all fronts. The Court explained there that the selling dealer collects tax as an agent of the Government. Therefore, the bona fide buyer cannot be put in jeopardy when he has done all the law requires him to do so. The purchasing dealer has no means to ascertain and secure compliance by the selling dealer. Again, in Central Wines, Hyderabad the Supreme Court inter alia observed that “the Seller acts as an agent of the buyer while collecting the tax”.
  12. In Delhi Transport Corporation v. DTC Mazdoor Congress AIR 1991 SC 101, a Constitution Bench of the Supreme Court explained in what cases the doctrine of „reading down‟ of statutes to save their constitutionality could be deployed:
  13. In Delhi Transport Corporation v. DTC Mazdoor Congress, a Constitution Bench of the Supreme Court explained in what cases the doctrine of “reading down of statutes”

“The Courts, though, have no power to amend the law by process of interpretation, but do have power to mend it so as to be in conformity with the intendment of the legislature. Doctrine of reading down is one of the principles of interpretation of statute in that process. But when the offending language used by the legislature is clear, precise and unambiguous, violating the relevant provisions in the constitution, resort cannot be had to the doctrine of reading down to blow life into the void law to save it from unconstitutionality or to confer jurisdiction on the legislature.”

Judgement

  1. 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 Act where there is no mismatch of the transactions in Annexures 2A and 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.
  2. Applying the law explained in the above decisions, it can be safely concluded in the present case that there is a singular failure by the legislature to make a distinction between purchasing dealers who have bona fide 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 dealers. The latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution.

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