2020 (2) TMI 403 - HC - VAT and Sales Tax

Reversal of excesss input tax credit - capital goods - supplier of goods paid VAT @12.5% instead of 4% - whether the respondent was justified in directing the petitioner to reverse the input tax credit availed on capital goods in excess of 4% vide the impugned order? - Section 2(11) of the TNVAT Act, 2006. HELD THAT - The purpose of allowing input tax credit on capital goods and inputs are to reduce the cascading effect of the tax on the products / goods sold by a dealer under the provisions of the said Act. Under Section 19 (3) of the Act every registered dealer, is allowed into tax credit in the manner prescribed on the purchase of capital goods for use in the manufacture of taxable goods. The only restriction that is contained under the provision of Sub Section (6) of the Act. In this case, it is not the case of the respondent that there was deliberate ploy on the part of the dealer who sold the capital goods to the petitioner by charging tax at 12.5% to liquidate accumulated credit - whether the tax was paid at 4% or 12.5% as the case may irrelevant as far as the respondent is concerned as the issue is revenue neutral. Thus there is no reason why credit availed by the petitioner should be disallowed particularly in the light of the fact that intention of the legislature is to reduce the cascading effect of the tax the final product - impugned order do not sustain - petition allowed - decided in favor of petitioner.

Summary

Issues:
1. Whether the petitioner was justified in reversing the input tax credit availed on capital goods in excess of 4%?
2. Whether the decision of the respondent to direct the petitioner to reverse the excess credit availed was valid?
3. Whether the petitioner had an alternate remedy through an appeal before the Appellate Deputy Commissioner?
4. Whether the input tax credit availed by the petitioner should be disallowed based on the VAT rate paid by the dealer who sold the capital goods?
5. Whether the impugned order directing the petitioner to reverse the excess credit should be sustained?

Analysis:

1. The key issue in this case was whether the respondent was justified in directing the petitioner to reverse the input tax credit availed on capital goods in excess of 4%. The petitioner had purchased capital goods and availed input tax credit, but the dealer charged VAT at 12.5% instead of the applicable 4%. The respondent contended that the excess credit availed should be reversed, leading to a show cause notice and subsequent order directing the petitioner to reverse the credit.

2. The petitioner argued that previous decisions of the court supported their position, emphasizing that the tax paid and reflected in the invoice should be the basis for availing input tax credit. The court noted that the purpose of allowing input tax credit on capital goods was to reduce the cascading effect of tax, and the petitioner had followed the prescribed procedure for availing credit.

3. The respondent suggested that the petitioner had an alternate remedy through an appeal before the Appellate Deputy Commissioner. However, the court examined the relevant provisions of the TNVAT Act and rules governing input tax credit, emphasizing that the intention was to reduce the cascading effect of tax on the final product.

4. The court highlighted that the VAT rate paid by the dealer, whether 4% or 12.5%, should not affect the petitioner's eligibility for input tax credit. Even if the dealer had charged tax in excess, the petitioner should not be denied credit if the tax was paid and reflected in the invoice. The court emphasized that the issue was revenue-neutral and aligned with the legislative intent.

5. Considering the arguments and precedents cited, the court concluded that the impugned order directing the petitioner to reverse the excess credit was not sustainable. The court quashed the order and provided consequential relief to the petitioner, allowing the writ petition and closing the connected Miscellaneous Petition without costs.