2015 (10) TMI 291 - HC - VAT and Sales Tax

Input tax credit - whether the Appellant Assessees are entitled to input tax credit on purchase of duty entitlement pass book scrips - DEPB Credit - Held that - The resultant position was that input tax credit can be claimed in respect of the turnover of purchases made for all of the aforementioned periods except the period 1st April 2010 to 30th September 2011 in respect of the purchases arising in the course of the Assessee s activities as a dealer. As already noticed hereinbefore the periods with which these two appeals are concerned are prior to 1st April, 2010. Therefore, during that relevant period the change brought about by the DVAT Amendment Act 2009, was not operational. - The case of the DTT is that unless the DEPB scrips are used in the imported goods which are then sold, no such input tax credit can be availed of. According to Mr. Satyakam, the mere using of DEPB scrips as cash to reduce the incidence of customs duty cannot constitute usage for the purposes of Section 9(4) of the Act. There can be no doubt that the price of the goods imported has an element of customs duty paid on such goods. The component of customs duty is reduced to the extent of the usage by the Assessee of the DEPB scrips. The reduced customs duty is embedded in the resale price of the imported goods. Thus, the use of the DEPB scrips is for the purpose of the Assessee selling the imported goods. Usage in this context has to be seen as a use that affects the price of the goods although it may not be used tangibly in the goods themselves. There is no warrant to limit the understanding of the word use to an actual direct tangible or physical use in the imported goods. The usage by the Assessees, who are registered dealers, of the DEPB scrips purchased by them from another registered dealer after paying the input tax for reducing the incidence of customs duty should be held to constitute use of such DEPB scrip for the purposes of sale of the imported commodity. The DEPB scrip has contributed, if not directly then indirectly, to the price of the imported commodity sold by the Assessees in the market. There could be any number of intangibles that have an impact on the value of the final product like advertisement costs in respect of which input service tax credit may have been availed of, as was in the case of Coca Cola India Pvt. Ltd. (2009 (8) TMI 50 - BOMBAY HIGH COURT). All that is to be shown is that such input tax paid goods have contributed to the sale of the final product in some way directly or indirectly. In order to avail of the input tax credit in the present case it is not necessary that the Assessees have to be dealers in the same commodity, i.e. the DEPB scrips which were used in payment of customs duty on the imported goods in which they were dealing. Such an interpretation will negate the object of introducing the system of value added taxes, i.e. to reduce the cascading effect of multiple taxes at various stages. As long as it is shown that use of the DEPB scrip has impacted the cost of the product that is sold, either directly or indirectly, the credit of the input tax paid on the DEPB scrip cannot be denied to the Assessees. - demands created on the Appellant Assessees, forming the subject matter of these appeals, are held unsustainable in law. Consequently, the question of payment of penalty does not arise and the orders levying penalty on each of the Appellants are also set asid - Decided in favour of assessee.

Summary

Issues Involved:
1. Entitlement to input tax credit on purchase of DEPB scrips.
2. Liability to pay penalty under the Delhi Value Added Tax Act, 2004 (DVAT Act).

Detailed Analysis:

1. Entitlement to Input Tax Credit on Purchase of DEPB Scrips:

Both the Appellants, registered dealers under the DVAT Act, purchased DEPB scrips from registered dealers and paid VAT. They used these scrips to pay customs duty on imports and later sold the imported goods locally, adjusting the input tax paid on DEPB scrips against their output tax liability. The Department of Trade and Taxes (DTT) disallowed this input tax credit, arguing that DEPB scrips were not used directly or indirectly in the sale of imported goods but only for paying customs duty.

The central controversy revolves around the interpretation of Section 9 of the DVAT Act. Up to 31st March 2010, Section 9(1) allowed a dealer to claim tax credit on purchases used directly or indirectly for making taxable sales. The Court noted that the periods in question (2007-08 and 2008-09) were before the amendment effective from 1st April 2010, which temporarily changed the wording of Section 9(1).

The Court analyzed whether DEPB scrips, on which input tax was paid, could be adjusted against output tax. It was argued that DEPB scrips reduced customs duty, which affected the resale price of imported goods. The Court held that 'usage' should include any use that impacts the price of goods, not just tangible use.

The Court drew analogies with CENVAT and MODVAT credit systems, citing cases like ONGC Ltd. v. Commissioner of Central Excise, Sales Tax & Custom, Raigad, and Coca Cola India Pvt. Ltd. v. Commissioner of Central Excise Pune-III, where indirect use of inputs or services was accepted for credit. The Court concluded that DEPB scrips, by reducing customs duty, indirectly contributed to the price of imported goods sold, thus qualifying for input tax credit under Section 9(1) read with Section 9(4) of the DVAT Act.

The Court rejected the DTT's argument that input tax credit could only be claimed if the Assessees dealt in DEPB scrips themselves. It emphasized that the objective of VAT is to mitigate the cascading effect of taxes, and as long as DEPB scrips impacted the cost of the final product, credit should be allowed.

2. Liability to Pay Penalty under the DVAT Act:

The ATVAT had initially imposed penalties on the Appellants but reduced them to 10% of the amount fixed by the VAT Officer, acknowledging no deliberate defiance in paying the requisite tax and interest. However, given the Court's decision that the demands for tax were unsustainable, the penalties were also deemed unjustified.

Consequently, the Court set aside the penalties imposed on the Appellants.

Conclusion:

The Court answered the question in favor of the Assessees, holding that they were entitled to input tax credit on DEPB scrips. The demands for tax, interest, and penalties were deemed unsustainable and were set aside. The appeals were allowed without any order as to costs.