LEARNING FOR REVENUE FROM RECENT RULING - RECEIVER NOT TO ESTABLISH PAYMENT BY SUPPLIER OR SERVICE PROVIDER SO FINAL COLLECTION OF TAX IS PREFERABLE

[CA DEV KUMAR KOTHARI]

Suggestion – collect tax finally instead of provisionally giving rights of credit or refund – avoid provisional collections by way of tax deductions, tax collections, tax on inputs etc. as much as possible.

Recent judgment about CENVAT credit:

Commissioner of Central Excise, Jalandhar Versus M/s. Kay Kay Industries 2013 (8) TMI 772 - SUPREME COURT

General discussion about tax deduction / collection and refund policies:

A person who receives a payment after levy of a tax or after deduction of a tax cannot be supposed to check that the person who has raised bill with levy of tax or who has made payment after deducting tax at source(TDS) has in fact deposited the tax levied or tax deducted in the treasury.

In case of such credits, the person who has suffered tax by way of deduction at source or by way of payment of tax or duty cannot be expected to verify whether the other party (tax deductor or tax collector) has deposited the tax or not. Therefore, he will be eligible for credit of tax deducted or collected if he has followed prescribed procedure and has obtained proper documents like TDS certificates or TAX Invoice from the concerned party.

It will be impossible for him to verify whether the other party has deposited tax deducted from him or collected from him. Therefore, even under law responsibility cannot be cast upon him to ensure that the tax deductor or tax collector deposit the tax. That responsibility is cast upon the person who deduct or collect tax by the legislation. Under law duty cannot be cast upon two parties for doing one work- deposit of tax deducted or collected.

It is the duty of revenue authorities to ensure that the person who has deducted or collected tax deposit the same. For non deposit of such sums the tax deducting party or tax collecting party can be asked to deposit the same and also pay interest and penalty as may be applicable. However, the party from whom tax has been deducted or collected cannot be penalized for default of other party.

Any Rule or notification which cast such responsibility on the person from whom tax has been deducted or collected will be invalid because an impossible work, or the work which is not in control of one cannot be cast upon him.

Earlier articles:

Author had written several articles on concept that the policy of first collect then refund is not always proper and it is amenable of misuse causing revenue leakage. Some cases of leakage of revenue on account of Income-tax Deducted at source (TDS), income-tax collected (TCS) and credit for excise duty, service tax, popularly called CENVAT credit and tax credit for input credit under VAT laws have come across from time to time. The cases pertains to category that one party has deducted or collected tax and issued proper certificate or document for the same. The other party was held eligible for credit, even if the deductor/ collector have not deposited the same.

Continuing policies for first collect and then refund:

However, over a period of time government has kept such policies and also widened scope of provisional collections in which un-necessary procedures for collection, recording, allowing credit or refund are involved.

Final collection is preferable:

Large size of organizations e.g. and other organizations who are larger and more organized (like companies, banking companies, insurance companies, telecom companies, electricity companies) who have substantial amount of tax or duty payable (even after CENVAT credit) can be exempted from payment of tax or duty on input goods and services and instead can pay full amount of tax or duty. For example, if a manufacturer say M has duty payable of say Rs.500 crore, and he get CENVAT credit of say Rs.150 crore and then pay net Rs.350 crore per month. An exemption can be granted to effect that all supplies and services to M will be exempt and THEN M  will have to pay full duty(Rs.500 crore) because there will be no CENVAT since suppliers and service providers had not charged excise or service tax to M.

This will simplify work of M, his thousands of suppliers and , service providers and excise and service tax department from monitoring levy of tax by suppliers and service providers.

Suppose out of Rs.150 crore of tax on inputs of M, there is default of say Rs.15 crore by some of suppliers and service providers who have not deposited tax or duty. How M can be held responsible for such default. M has paid amount including tax and duty of Rs.15 crore to suppliers and service providers, he cannot be held responsible for default of his suppliers and service providers.

In this case if exemption, as suggested is allowed to M, then M will be responsible to pay entire amount of tax and duty on his taxable goods manufactured and / or taxable services rendered.

However, unfortunately it appears that government only want to increase work and keep its bureaucracy , including teams of inspectors and clerk un-necessarily busy and powerful at several unnecessary point of tax administration where even petty functionaries can be a reason of harassment and corruption.

CENVAT CREDIT CANNOT BE DENIED- says Supreme Court:

In case of Kay Kay Industries (supra.) the respondent availed MODVAT credit of Rs.77,546/- during the quarter of March, 2000 on the strength of invoices issued by M/s. Sawan Mal Shibhu Mal Steel Re-Rolling Mills, Mandi Govindgarh.

The tax department during MODVAT verification noticed that the supplier of inputs goods had not discharged full duty liability for the period covered by the invoices. The Competent Authority was of the view that appropriate duty of excise had not been paid by the manufacturer of inputs under the invoices on the strength of which the respondent took the benefit of deemed MODVAT credit and it was obligatory on the part of the respondent to take all reasonable steps to ensure that the appropriate duty of excise had been paid on the inputs used in the manufacture of their final product as required under Rule 57A(6) of the Central Excise Rules, 1944 (for short “the Rules”) read with notification No. 44/97-CE(NT) dated 30.8.1997 and the aforesaid opinion of the Competent Authority persuaded him to issue a show-cause notice on 19.1.2001 proposing recovery of deemed MODVAT credit of Rs.77,546/- and imposition of penalty.

The adjudicating authority, after receipt of the reply to the show-cause notice, by order dated 22.3.2002, disallowed the deemed MODVAT benefit earlier availed and ordered for recovery of the said sum along with interest, and, further imposed penalty of Rs.40,000/-.

Undisputed facts:

There was no dispute that a declaration was given by the manufacturer of the inputs indicating that the excise duty had been paid on the said inputs under the Act.

It is also not in dispute that the said inputs were directly received from the manufacturer and were not purchased from the market.

The manufacturer of the inputs had declared the invoice price of the inputs correctly in the documents.

In view of above facts it is perceivable that the only allegation is that at the time of MODVAT verification it was found that the supplier of the inputs had not discharged full duty liable for the period covered under the invoices. 

The purchaser of input cannot either assure payment or its verification because duty to pay is on the manufacturer of input goods. This   lapse of the seller is different and not a condition or rather a pre-condition postulated in the notification.

Arguments on behalf of revenue:

It was requisite and, in a way imperative, on the part of the assessee to verify from the concerned authority of the department whether the excise duty had actually been paid or not.

Their Lordships observed that the aforesaid submission leaves us unimpressed. As we notice Rule 57A (6) requires the manufacturer of final products to take reasonable care that the inputs acquired by him are goods on which the appropriate duty of excise as indicated in the documents accompanying the goods, has been paid. The notification has been issued in exercise of the power under the said Rule. The notification clearly states to which of those inputs it shall apply and to which of the inputs it shall not apply and what is the duty of the manufacturer of final inputs. Thus, when there is a prescribed procedure and that has been duly followed by the manufacturer of final products, we do not perceive any justifiable reason to hold that the assessee-appellant had not taken reasonable care as prescribed in the notification. Due care and caution was taken by the respondent.

It is not stated what further care and caution could have been taken. The proviso postulates and requires “reasonable care” and not verification from the department whether the duty stands paid by the manufacturer-seller. When all the conditions precedent have been satisfied, to require the assessee to find out from the departmental authorities about the payment of excise duty on the inputs used in the final product which have been made allowable by the notification would be travelling beyond the notification, and in a way, transgressing the same. This would be practically impossible and would lead to transactions getting delayed. We may hasten to explicate that we have expressed our opinion as required in the present case pertaining to clauses 4 and 5 of the notification.

Conclusion:

In view of the judgment of the Supreme Court, it is clear that it is not possible for buyer of goods or service receiver to ensure that the manufacturer- supplier/ service provider has paid tax or duty to the exchequer. So if the tax invoice is as per Rules, the buyer cannot be denied CENVAT credit for inputs. We find that for a small sum mater went up to the Supreme Court. Who knows, there can be larger such defaults which may or may not come in light.

If the suggestion put forth by author be implemented such situations will not take place. So author reiterate – it is better to collect tax finally instead of provisionally.