2025 (2) TMI 675 - SC - VAT / Sales Tax

Interpretation of statute - New conditions for allowing ITC - Whether Rule 21(8) of the Punjab Value Added Tax Rules 2005 (Punjab VAT Rules) could have been introduced during the period between 25.01.2014 to 01.04.2014 when there was no enabling provision in the parent statute i.e. the Punjab Value Added Tax Act 2005 (Punjab VAT Act)? - HELD THAT - Punjab VAT Act was amended the second time by the Punjab Value Added Tax (Second Amendment) Act 2013 (Punjab Act No. 38 of 2013). Though as per Section 1(2) of the Second Amendment Act the same was to come into force at once the proviso thereto mentioned that amendment of sub-section (1) of Section 13 shall come into force on and with effect from the first day of April 2014 i.e. from 01.04.2014. Section 5 of the Second Amendment Act deals with amendment to Section 13 of the Punjab VAT Act. A taxable person who had stock in trade as on 25.01.2014 or as on 01.02.2014 had already paid the tax while making the purchase of such goods. In this case the purchase was made by paying higher rate of tax on iron and steel goods to be used as input for the purpose of manufacture etc. of taxable goods. The taxable person who is otherwise entitled to avail input tax credit on the goods already purchased and lying in stock would suffer serious prejudice and loss if his entitlement to input tax credit are reduced by virtue of lowering of the rate of tax on such goods on a subsequent date. High Court has noted that the enabling provision in the statute came into effect on and from 01.04.2014 and therefore Rule 21(8) of the Punjab VAT Rules which permits application of the reduced rate of tax cannot be given effect to transactions which already stood concluded prior thereto. It could only be applied to transactions on and from 01.04.2014. In Eicher Motors Limited Vs. Union of India 1999 (1) TMI 34 - SUPREME COURT a three- Judge Bench of this Court examined the challenge to the validity and application of the scheme as modified by way of introduction to Rule 57(F) of the Central Excise Rules 1944 under which credit which was lying unutilised as on 16.03.1995 with the manufacturers stood lapsed in the manner set out therein. While examining the above issue this Court held that if on the inputs the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are sold subsequently. Thus a right accrued to the assessee on the date when he paid the tax on the raw material or the input would continue until the facility available thereto gets worked out or until those goods existed. The impugned rule cannot be applied to the goods manufactured prior to the date it came into force i.e. 16.03.1995 on which duty had been paid and credit facility thereto has been availed of for the purpose of manufacture of further goods. The respondent had earned input tax credit on purchase of iron and steel goods which it kept as its stock in trade to be used as inputs or raw materials in the manufacture etc. of taxable goods. State lowered the rate of tax with effect from 01.02.2014 on those goods. The related amendments in the rules i.e. Rule 21(8) of the Punjab VAT Rules were notified on 25.01.2014 to come into effect from 01.02.2014. There was however no corresponding provision in the parent statute i.e. Punjab VAT Act which permitted availing of input tax credit at the lower rate of tax on the existing stock in trade though the purchase of such input was already made at a higher rate of tax thereby reducing the quantum of credit. The enabling provision in the statute i.e. first proviso to Section 13(1) of the Punjab VAT Act came into force with effect from 01.04.2014. Under sub-section (9) of section 13 a person is under a mandate to reverse input tax credit availed by him on goods which could not be used for the purposes specified in subsection (1) of Section 13 of the Punjab VAT Act or which remained in stock at the time of closure of business. If the interpretation sought to be given to Rule 21(8) of the Punjab VAT Rules by the State is accepted the natural corollary would be that reversal of input tax credit would be at the lower rate of tax on the goods in question when those goods could not be used for the purposes specified in Section 13(1) or which remained as part of the stock in trade at the time of closure of business. Such an interpretation besides being fallacious would also lead to revenue loss for the State exchequer. Conclusion - The interpretation given by the High Court to the applicability of Rule 21(8) of the Punjab VAT Rules read with the amended first proviso to sub-section (1) of Section 13 of the Punjab VAT Act is legally sound and warrants no interference. There are no merit in the appeal which is accordingly dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment was whether Rule 21(8) of the Punjab Value Added Tax Rules, 2005 (Punjab VAT Rules) could have been validly introduced and applied during the period between January 25, 2014, and April 1, 2014, when there was no enabling provision in the parent statute, the Punjab Value Added Tax Act, 2005 (Punjab VAT Act), to support such a rule.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The Punjab VAT Act and its rules govern the entitlement and calculation of input tax credit (ITC) for taxable persons. Section 13 of the Punjab VAT Act outlines the conditions under which ITC can be availed. The rules, including Rule 21, specify circumstances where ITC is inadmissible. The amendment to Rule 21 introduced sub-rule (8), which stipulated that ITC on goods in stock would be available at a reduced rate if the tax rate on those goods was lowered.

Precedents considered include Eicher Motors Limited v. Union of India, Sedco Forex International Drill INC. v. Commissioner of Income Tax, and Jayam and Company v. Assistant Commissioner, which emphasize that tax laws should not have retrospective effects unless explicitly stated and that vested rights should not be adversely affected without statutory sanction.

Court's interpretation and reasoning:

The Court analyzed whether the State of Punjab had the legislative competence to introduce Rule 21(8) without an enabling provision in the Punjab VAT Act. The Court found that, as of January 25, 2014, there was no statutory provision empowering the State to enact a rule that would reduce ITC already earned on goods lying in stock by reference to a reduced tax rate. The enabling provision came into effect only on April 1, 2014, with the amendment to Section 13(1) of the Punjab VAT Act.

Key evidence and findings:

The key evidence was the timeline of amendments: the notification introducing Rule 21(8) was issued on January 25, 2014, to be effective from February 1, 2014, while the statutory amendment to Section 13(1) of the Punjab VAT Act, which could have empowered such a rule, came into force on April 1, 2014. The High Court's analysis showed that the rule was introduced without statutory backing and thus could not be applied retroactively.

Application of law to facts:

The Court applied the principles from precedents to the facts, noting that the respondent had already earned ITC on goods purchased at a higher tax rate. The introduction of Rule 21(8) before the statutory amendment meant that the State could not lawfully reduce the ITC for goods in stock at the time of the rule's introduction.

Treatment of competing arguments:

The appellant argued that the rule was within the State's legislative competence and did not retroactively apply. However, the Court found that the rule effectively reduced the ITC already earned, which amounted to a retrospective application without statutory sanction. The respondent's argument that the rule could not be applied before April 1, 2014, was upheld.

Conclusions:

The Court concluded that Rule 21(8) could not be applied to transactions prior to April 1, 2014, as the enabling statutory provision came into effect only on that date. The rule was thus invalid for the period between January 25, 2014, and April 1, 2014.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

The Court stated, "We, therefore, have no hesitation in holding that on the date of introduction of sub-rule (8) of Rule 21 of the Rules, the State did not possess any power, emanating from the Act, to confine the availing of input tax credit to the reduced rate of tax on the stock in trade i.e. transactions that had concluded with the dealer already earning input tax credit."

Core principles established:

The judgment reinforced the principle that tax laws should not be applied retrospectively unless explicitly provided for, and that vested rights, such as ITC already earned, should not be adversely affected without clear statutory authority.

Final determinations on each issue:

The Court dismissed the appeals, affirming the High Court's decision that Rule 21(8) could not be applied before April 1, 2014, due to the lack of statutory authority in the Punjab VAT Act prior to that date.