2016 (9) TMI 462 - HC - VAT and Sales Tax

Denial of notional input tax credit - Rule 20(3)(a) of the Telangana VAT Rules second hand vehicles tax invoice assessment order - pre-assessment show cause notice - Form VAT 305-A Held that - If the words already registered in the State under the Motor Vehicles Act, 1988 in Rule 20(3)(a) is construed to include vehicles initially registered in another State and thereafter, on its being brought within the State of Telangana, were again registered within the State, then that would render Rule 20(3)(a) ultravires the provisions of the Act, and a dealer being extended the benefit of input tax credit on vehicles which have not even suffered tax under the VAT Act, as VAT is imposed only on the sale of new vehicles by registered dealers within the State. The assessment order, to the limited extent the petitioner was denied notional input tax credit on their purchase of used/second hand vehicles on the ground that they had failed to produce a tax invoice, is set aside. The assessing authority shall afford the petitioner an opportunity of a personal hearing, and to produce documentary evidence to show (1) the price actually paid by them on the purchase of used/second hand vehicle, and (2) that the vehicles purchased by them had suffered VAT at the time of their initial registration, under the Motor Vehicles Act, 1988, within the State of Telangana. Matter remanded back - Decided partly in favor of assessee.

Summary

Issues Involved:
1. Denial of Notional Input Tax Credit (ITC) on the purchase price of used/second-hand vehicles.
2. Requirement of documentary evidence versus tax invoice for claiming ITC.
3. Interpretation of Rule 20(3)(a) of the Telangana VAT Rules.
4. Harmonious construction of the Telangana VAT Rules with the VAT Act.
5. Delegated legislation and its limits.

Detailed Analysis:

1. Denial of Notional Input Tax Credit (ITC) on the Purchase Price of Used/Second-Hand Vehicles:
The petitioners, registered VAT dealers, challenged the assessment orders denying them notional ITC on the purchase price of used/second-hand vehicles. They argued that the denial resulted in double taxation with a cascading effect, as these vehicles had already suffered VAT at the time of the original sale within the State of Telangana. The court noted that the petitioners sought adjudication only on this specific issue, choosing to avail statutory remedies for other questions of fact and law.

2. Requirement of Documentary Evidence Versus Tax Invoice for Claiming ITC:
The petitioners contended that under Rule 20(3)(a) of the Telangana VAT Rules, they were only required to provide documentary evidence of the purchase price and not a tax invoice. The court agreed, stating that the rule-making authority used the term "documentary evidence" consciously, knowing that the sellers of used vehicles might not be VAT dealers capable of issuing tax invoices. Thus, the assessing authority erred in insisting on a tax invoice.

3. Interpretation of Rule 20(3)(a) of the Telangana VAT Rules:
Rule 20(3)(a) allows VAT dealers to claim notional ITC at 14.5% on the purchase price of used vehicles, provided they produce documentary evidence. The court clarified that this rule applies only to vehicles initially registered in Telangana and subjected to VAT. The dealers must produce evidence of the purchase price and proof that the vehicle had suffered VAT at the time of its initial registration in Telangana.

4. Harmonious Construction of the Telangana VAT Rules with the VAT Act:
The court emphasized that the Telangana VAT Rules must be harmoniously construed with the VAT Act and its objectives. It ruled that Rule 20(3)(a) should be read to include only vehicles initially registered in Telangana and exclude those registered first in other states and later in Telangana. This interpretation ensures that the rule does not extend beyond the Act's provisions, maintaining the legislative intent to avoid cascading taxation.

5. Delegated Legislation and Its Limits:
The court discussed the limits of delegated legislation, stating that rules made under an enabling Act must not exceed the authority conferred by the Act. The Telangana VAT Rules, as subordinate legislation, should not override or extend beyond the VAT Act. The court highlighted that the rule-making power should be used to fill in details within the legislative framework and not to create new substantive rights or obligations.

Conclusion:
The court set aside the assessment order to the extent that it denied the petitioner notional ITC for failing to produce a tax invoice. It directed the assessing authority to allow the petitioner to produce documentary evidence of the purchase price and VAT payment at the time of initial registration in Telangana. The assessing authority must then pass a fresh order in accordance with the law within four months. The assessment order remains valid in all other aspects, and the petitioner can appeal on other questions of fact and law. All three writ petitions were disposed of accordingly, with no order as to costs.