2025 (4) TMI 1180 - HC - VAT / Sales Tax

Refund of excess tax credit - applicability of provisions of Rule 18(3)(b) of the Andhra Pradesh VAT Rules 2005 read with Section 22 of the A.P. Value Added Tax Act 2005 (the VAT Act) - HELD THAT - While Section 22 (3) would be applicable to the Central Government the State Government and the organizations mentioned in Section 22 (3) the provisions of Section 22 (3-A) would be applicable only to the Government of A.P. or any local authority. It would not be applicable to the Central Government - The State is relying upon the provisions of Rule 18 (3) (b) to contend that any payments made in excess of tax liability of the dealer by a Government authority can be forfeited under Rule 18 (3) (b). A closer look at Rule 18 would show that the said Rule specifically stipulates that it would be applicable for payments made under Section 22 (3-A). As the Central Government is not covered under Section 22 (3-A) the provisions of Rule 18 (3) would not be applicable. Consequently the State cannot refuse refund of amounts to the credit of the petitioner on the ground of Rule 18 (3) of the VAT Rules. Concluson - Excess tax credits arising from contracts executed for the Central Government are refundable and cannot be forfeited under the provisions invoked by the Revenue in this case. This writ petition is allowed setting aside the assessment order dated 30.10.2023 passed by the 3rd respondent with a consequential direction to the 3rd respondent to refund the amount of Rs. 20, 19, 710/- along with interest under the provisions of the APVAT Act and the Rules made thereunder.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

- Whether the provisions of Rule 18(3)(b) of the Andhra Pradesh VAT Rules, 2005, read with Section 22 of the A.P. Value Added Tax Act, 2005 (the VAT Act), apply to a dealer executing works contracts exclusively for the Central Government (specifically Indian Railways), as opposed to the State Government or local authorities.

- Whether the excess tax credit amounting to Rs. 20,19,710/- claimed by the petitioner is refundable, or whether it is liable to forfeiture under the said provisions invoked by the Revenue.

- The interpretation of Section 22(3) and Section 22(3-A) of the VAT Act, particularly the scope of the term "Government" as defined under Section 2(18) of the VAT Act, and its impact on the applicability of tax deduction at source (TDS) provisions and tax collection mechanisms for works contracts executed for government entities.

- Whether the order of rejection of the refund application by the 3rd respondent is legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of Rule 18(3)(b) and Section 22 provisions to works contracts executed for the Central Government

Relevant legal framework and precedents: Section 22(3) of the VAT Act mandates that the Central Government, State Government, and certain specified bodies deduct tax at source from payments made to dealers executing works contracts for them and remit the amount to the Commercial Tax Department. Section 22(3-A) provides that in cases where tax at 4% is added separately to the estimated contract value, such tax shall be collected by the contractee and remitted as prescribed.

Rule 18(3) of the VAT Rules elaborates the procedure for tax collection at source under Section 22(3-A), including a provision under Rule 18(3)(b) that excess tax collected at source beyond the contractor's liability shall be forfeited.

Court's interpretation and reasoning: The Court examined the language of Sections 22(3) and 22(3-A) and noted a crucial distinction. Section 22(3) explicitly includes the Central Government, State Government, and other bodies. In contrast, Section 22(3-A) refers only to "Government or Local Authority," which the Court interpreted in light of the statutory definition of "Government" under Section 2(18) of the VAT Act as meaning the State Government of Andhra Pradesh.

Therefore, Section 22(3-A) applies solely to the State Government or local authorities, not the Central Government. Since Rule 18(3) applies to tax collected under Section 22(3-A), its provisions, including the forfeiture clause in Rule 18(3)(b), are not applicable to contracts executed for the Central Government.

Key evidence and findings: The petitioner was engaged exclusively in works contracts for the Indian Railways, a Central Government entity. The 3rd respondent admitted this fact in the counter affidavit. The tax credit claimed arose from payments related to these contracts.

Application of law to facts: Since the petitioner's contracts were with the Central Government, the provisions of Section 22(3-A) and Rule 18(3) of the VAT Rules do not apply. The Revenue's reliance on Rule 18(3)(b) to forfeit the excess tax credit was therefore misplaced.

Treatment of competing arguments: The Revenue argued that Section 22(3-A) and Rule 18(3)(b) mandate forfeiture of excess tax credit for works contracts executed for government entities, including the petitioner. The Court rejected this, emphasizing the statutory definition of "Government" and the express inclusion of the Central Government only in Section 22(3), not in Section 22(3-A).

Conclusions: The provisions invoked by the Revenue for forfeiture are not applicable to the petitioner's case, as the petitioner's contracts were with the Central Government and not the State Government or local authorities.

Issue 2: Entitlement to refund of excess tax credit

Relevant legal framework and precedents: The VAT Act and Rules provide for refund of excess tax credits after assessment. The petitioner's claim for refund was based on the excess tax credit of Rs. 20,19,710/- identified in the assessment order.

Court's interpretation and reasoning: Since the forfeiture provisions under Rule 18(3)(b) do not apply, the petitioner's excess tax credit cannot be forfeited. The rejection of the refund application by the 3rd respondent was therefore contrary to the applicable legal provisions.

Key evidence and findings: The assessment order acknowledged the excess tax credit. The petitioner's refund application was rejected by an endorsement without detailed reasoning. The Revenue admitted the petitioner's exclusive dealings with the Indian Railways.

Application of law to facts: The petitioner is entitled to a refund of the excess tax credit along with interest as per the provisions of the VAT Act and Rules, since there is no legal basis for forfeiture.

Treatment of competing arguments: The Revenue's contention that the excess tax credit should be forfeited was based on a misapplication of Rule 18(3)(b). The Court found this argument untenable and gave precedence to the statutory definitions and the specific applicability of the provisions.

Conclusions: The petitioner's refund claim is valid and must be allowed.

3. SIGNIFICANT HOLDINGS

The Court held:

"Section 22 (3) would be applicable to the Central Government, the State Government and the organizations mentioned therein, the provisions of Section 22 (3-A) would be applicable only to the Government of A.P., or any local authority. It would not be applicable to the Central Government."

"A closer look at Rule 18 would show that the said Rule specifically stipulates that it would be applicable for payments made under Section 22 (3-A). As the Central Government is not covered under Section 22 (3-A), the provisions of Rule 18 (3) would not be applicable."

"Consequently, the State cannot refuse refund of amounts to the credit of the petitioner on the ground of Rule 18 (3) of the VAT Rules."

Core principles established include:

- The statutory definition of "Government" under the VAT Act limits the applicability of certain tax provisions to the State Government and local authorities, excluding the Central Government unless expressly included.

- Provisions for tax collection at source and forfeiture of excess tax credit under Rule 18(3)(b) apply only to contracts executed for the State Government or local authorities under Section 22(3-A), not to contracts executed for the Central Government under Section 22(3).

- Excess tax credits arising from contracts executed for the Central Government are refundable and cannot be forfeited under the provisions invoked by the Revenue in this case.

Final determinations:

- The assessment order rejecting the refund application was set aside.

- The 3rd respondent was directed to refund the excess tax credit of Rs. 20,19,710/- along with interest under the VAT Act and Rules within four months.

- No order as to costs was made.