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TMI Blog2012 (5) TMI 152X X X X Extracts X X X X X X X X Extracts X X X X ..... tax has not been paid actually would be to defeat the legitimate interests of the Revenue. The constitutionality of the provision of Section 48(5) upheld. Similarly Section 51(7) which requires an application for refund and specifies the period within which an application can be made, cannot be assailed as being invalid. Regulating the process of refunds is as much within the province of a legitimate tax enactment and the legislature is within its power in requiring a refund to be applied for within a reasonable period. The right to obtain a set off is a right conferred by statute and the legislature while recognizing an entitlement to a set off in certain circumstances is lawfully entitled to prescribe the conditions subject to which a set off can be obtained. If the legislature, as in the present case, prescribes that a set off should be granted only to the extent to which tax has been deposited in the treasury on the purchase of goods, it is within a reasonable exercise of its legislative power in so mandating. This does not offend Article 14. A plea of hardship cannot result in the invalidation of a statutory provision in a fiscal enactment which is otherwise lawful. - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by his letter dated 16 September 2011 communicated the quantum of ITC which was allowable in accordance with a 'matched list' and that which was not allowable according to an 'unmatched list'. The Petitioner was also informed that the assessment would be taken up under Section 23. The Deputy Commissioner of Sales Tax passed an order of assessment on 20 October 2011. The Assessing Officer allowed a set off to the Petitioner to the extent of Rs.48.95 lakhs and reduced the claim of refund from Rs.21.08 lakhs to Rs.2.17 lakhs. MVAT Act 4. The MVAT Act, 2002 was brought into force with effect from 1 April 2005. The Act replaced a single point levy under the erstwhile Bombay Sales Tax Act, 1959 with a multi point levy. The Act was legislated upon by the State Legislature in pursuance of a decision taken by the Empowered Committee of Finance Ministers of the States to bring in a value added tax system. The White Paper circulated by the Empowered Committee of State Finance Ministers on 17 January 2005 furnished the following rationale for the introduction of VAT: In the existing sales tax structure, there are problems of double taxation of commodities and multiplicity of taxes, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y dealer or, as the case may be, every person, who is liable to pay tax under the Act, the tax or taxes leviable in accordance with the Act and rules. Under Section 6 tax is levied on the turnover of sales of goods specified in Schedules B, C, D or E at the rates set out therein. The expression sale price is defined in Section 2(25) as follows: (25) sale price means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged. Explanation II inter alia stipulates that the sale price shall not include tax paid or payable to a seller in respect of such sale. Section 16 contains a prohibition to the effect that a dealer while being liable to pay tax under the Act, shall not be engaged in the business as a dealer, unless he possesses a valid certificate of registration. Moreover, a person or dealer who is registered is liable to pay tax during the period in which the registration certificate is effective, notwithstanding the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h. of 2002) be granted to the dealer; (b) for the purpose of the levy of tax under any of the provisions of this Act, the sale price may in the case of any class of sales be reduced to such extent, and in such manner, as may be specified in the rules. (2) No setoff or refund as provided by any rules made under this Act shall be granted to any dealer in respect of any purchase made from a registered dealer after the appointed day, unless the claimant dealer produces a tax invoice, containing a certificate that the registration certificate of the selling dealer was in force on the date of sale by him and the due tax, if any, payable on the sale has been paid or shall be paid and unless such certificate is signed by the selling dealer or a person duly authorised by him. (3) Subject to the provisions contained in subsection (4), where no tax has been charged separately under any earlier law, the rate of tax applicable for the purposes of calculating the amounts of setoff, or refund in respect of any earlier sale or purchase of goods, or for the purposes of reduction of sale or purchase price for levy of tax, shall be the rate setout against the goods in the relevant Schedule unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Treasury and denying to the purchasing dealer the benefit of a set off on account of a failure on the part of the selling dealer to deposit tax collected, would result in imposing a condition which is impossible of compliance; (iv) The Sales tax authorities have statutory powers to assess the dealers and to recover tax including interest and penalty. The vendor can be prosecuted for nonpayment of dues collected; (v) Under Rule 55 read with Section 48(2), the claimant dealer in order to claim a set off, is required to produce the original tax invoice before the Sales Tax Authority. The dealer is required to maintain accounts reflecting the date of purchase, the name of the selling dealer and his registration certificate, number of the tax invoice, purchase price of goods and the tax, if any, recovered by the selling dealer. Once these conditions are fulfilled, it is asserted that the dealer would be entitled to the benefit of a set off irrespective of whether the selling dealer has deposited the tax collected in the Treasury. Submissions of the Petitioner 9. The challenge to the constitutional validity of the provisions of Section 48(5) is on the ground that it violates Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vits in reply pointing out that investigation revealed the existence of Havala transactions where there was no sale of goods and the selling dealer had merely issued tax invoices to the purchasing dealer in order to defraud the Revenue and to allow the benefit of a set off. In several of those cases, this Court declined to exercise its writ jurisdiction under Article 226 of the Constitution, keeping the issue of constitutional validity of Section 48(5) open since the assessment was still to take place, during the course of which a full enquiry of facts would result. In the present proceedings as well as in the companion Petitions, it has not been the contention of the Petitioners that a claim to a set off under Section 48 should be allowed even in those cases where the transaction of sale is sham or in cases involving fraud, collusion or connivance between selling and purchasing dealers. In the present case though thre is no allegation in the reply of a havala transaction, it has been stated on affidavit by the State that a number of dealers from whom the Petitioner purchased goods are untraceable. Since we have been called upon to decide in these proceedings, the constitutional va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easury. Section 48(2), however, does not expand the scope of a set off; iv)Set off is a concession which has been granted by the State legislature in order to prevent a cascading effect. While granting the concession the legislature is entitled to prescribe a condition of the nature provided in Section 48(5) to the effect that in no case shall the amount of the set off exceed the amount of tax in respect of the same goods actually paid into the Government Treasury; v) But for Section 48, there would have been no right to claim a set off. Moreover, under Section 48(1)(a) a set off can be availed of only where tax is paid and hence Section 48(5) is only clarificatory; vi)The liability to pay sales tax on the sale consideration arises at every point where a sale takes place and the liability would be on the full amount of the sale consideration. The liability need not be passed on by the selling dealer to the purchasing dealer. The tax when collected forms a part of the sale price in view of the law laid down by the Constitution Benches of the Supreme Court. The selling dealer is not an agent of the government when he collects the tax from the purchasing dealer. The sequitur is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional manual processes but is made possible with the introduction of efiling. Nearly 35000 notices have been issued to Hawala beneficiaries involving a quantum of nearly Rs.1,000 Crores. Nearly 3500 notices have been issued involving cases of mismatch involving a revenue of nearly Rs.700 Crores. The State has explained that it does not at an administrative level reject claims for set off merely on the ground of a mismatch. Where investigations reveal Hawala transactions or acts of fraud, collusion or connivance, steps are taken to issue summons to the selling dealers and to proceed against them by recourse to due process of law. Also, in those cases, where no element of fraud, collusion or connivance on the part of the purchasing dealer is shown the authorities would take steps to pursue the selling dealer. If the steps adopted against the selling dealer result in a recovery of the tax, a set off or refund, as the case may be, would be granted to the purchasing dealer. In other words, it has been submitted that while the provisions of Section 48(5) are constitutional and valid, the sales tax authorities would at the same time pursue cases where selling dealers have not deposited t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effects of indirect taxation. Moreover, VAT was to replace existing systems of inspection by a system of built in self assessment by dealers and auditing, which would make the system simple and transparent. Improved tax compliance and the augmentation of revenue were important policy objectives of the system of value added taxation. 16. As an economic concept, translated into State legislation VAT subserves two important fiscal goals. First a system of taxation based on VAT obviates a cascading effect of tax burdens. This is achieved inter alia by the grant of a set off for input taxation and in respect of taxes paid on previous purchases. Second the VAT regime is also, and no less important, an instrument in promoting compliance and for broad basing the tax base. Both aspects of the regime have to be harmonized. This aspect merits importance because while interpreting the provisions of legislation, it is necessary to bring about a harmony that would preserve the balance between the need on the one hand of ensuring against a cascading tax burden and on the other hand of promoting regulatory compliance. The first element is preserved by a multi point levy and collection of tax whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislation under entry 54 of List II it is not incompetent to the legislature to make the tax paid by the purchaser to the dealer together with the sale price in consideration of the goods sold a part of the turnover of the dealer; nor does it mean that in law the tax as imposed by government is a tax on the buyer making the dealer a mere collecting agency so that the tax must always remain outside the sale price . The judgment of the Supreme Court in Khazan Chand vs. State of Jammu and Kashmir, AIR 1984 SC 762 enunciates that the liability to pay sales tax is that of the dealer and not of the persons who purchase goods from him and for the purpose of sales tax, it is immaterial whether the price of goods has been paid to the dealer or is payable to him. The liability of the dealer to pay sales tax is irrespective of whether he has made a profit or loss in his business and whether he has received the sale price or not. The purchaser is not bound to pay sales tax payable by the vendor unless he had agreed to do so and where the purchaser agrees to pay that amount, it forms part of the sale price. 19. Thereafter, in a judgment of the Supreme Court in Central Wines v. Special C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 21. Section 48 empowers the State Government to frame rules to provide the circumstances in which and the conditions and restrictions subject to which a set off or refund can be granted of the tax paid in respect of any earlier sale or purchase of goods under the Act to a purchasing dealer. Sub section (2) of Section 48 stipulates that no set off or refund shall be granted to a dealer in respect of any purchase made from a registered dealer unless the claimant dealer produces a tax invoice. Sub section (2) further stipulates that the tax invoice must contain a certificate that the registration certificate of the selling dealer was in force on the date of sale by him and that the due tax if any payable on the sale has been paid or shall be paid and such certificate is to be signed by the selling dealer or a person duly authorized by him. Sub section (2) therefore prohibits the grant of a set off unless a tax invoice is produced by the claimant dealer containing a certificate. The three requirements of a valid certificate are firstly a certification that the registration certificate of the selling dealer was valid on the date of the sale; secondly, that the tax due has been paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are also of significance. The words actually paid into the government treasury signify that a claim for set off cannot be in excess of the tax in respect of which the set off is claimed that has been deposited into the treasury. The plain and natural meaning of the expression actually paid into the treasury is that the tax on purchases of which a set off is claimed must actually and physically have been deposited into the treasury. A constructive or notional deposit would not fulfill the mandate of the provision. The State Legislature has used language of a mandatory nature that leaves its intent beyond any doubt. The exception which is carved out in the substantive part of subsection (5) is where a claimant dealer is liable to pay purchase tax on the purchase of the said goods effected by him. The proviso creates an exception where tax is deferred or deferrable under any Package Scheme of Incentives implemented by the State Government. In that event a deeming fiction is created by the proviso under which the tax is deemed to have been received in the Government treasury for the purposes of the subsection. In all other cases, an actual deposit of taxes is mandated before a se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 42 with retrospective effect, and also to make necessary validating and saving provisions. 7 The Bombay Sales Tax (Amendment and Validation) Act, 1991 (Maharashtra Act 10 of 1991) 8 S.A. 464 of 1990 decided on 21 September 1990 The legislative intent underlying the previous provision was to give effect to the legislative mandate that a set off should be granted out of tax received. 27. The legislature did not contemplate the grant of a set off without any tax being received into the Government Treasury. The grant of a set off without the receipt of tax into the treasury would result in a loss of revenue, a consequence which the provision for set off does not contemplate. 28. The purpose of a set off is to obviate a cascading effect of the tax burden on the ultimate consumer. This element of legislative policy is to be balanced with the need for securing tax compliance and ensuring against a loss of legitimate revenue owing to Government. The balance between the two considerations is drawn by ensuring that while a set off is available in respect of the purchase tax paid on the same goods at an earlier stage, the set off is based on the actual payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t off is in the nature of a concession; and (iv) It is open to the legislature while granting the concession to restrict or curtail the extent of the entitlement as a condition attaching to the concession. The Supreme Court observed as follows : In law (apart from Rules 41 and 41A) the appellant has no legal right to claim set off of the purchase tax paid by him on his purchases within the State from out of the sales tax payable by him on the sale of the goods manufactured by him. It is only by virtue of the said Rules which, as stated above, are conceived mainly in the interest of public that he is entitled to such set off. It is really a concession and an indulgence. More particularly, where the manufactured goods are not sold within the State of Maharashtra but are despatched to out State branches and agents and sold there, no sales tax can be or is levied by the State of Maharashtra. The State of Maharashtra gets nothing in respect of such sales effected outside the State. In respect of such sales, the rulemaking authority could well have denied the benefit of set off. But it chose to be generous and has extended the said benefit to such outState sales as well, subject, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tand may conceivably cause hardship to an honest dealer. He may have lost the declaration forms by pure accident and yet he will be penalised for something for which he is not responsible but it is for the legislature or for the rulemaking authority to intervene to soften the rigour of the provisions and it is not for this Court to do so where the provisions are clear, categoric and unambiguous. Constitutionality of fiscal legislation : 33. While dealing with a challenge to the constitutional validity of the provisions of Section 48(5) on the ground that it violates Article 14 of the Constitution, the Court which exercises the power of judicial review must be conscious of the limitations of judicial intervention, particularly in matters relating to the legitimacy of economic or fiscal legislation. While enacting fiscal legislation, the legislature is entitled to a great deal of latitude. The Court would interfere only where a clear infraction of a constitutional provision is established. 34. There are several reasons for the doctrine of judicial deference which has emerged in the area. Firstly, the doctrine of deference is an emanation of the presumption of constitutionali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia, (1981) 4 SCC 675 a Constitution Bench of the Supreme Court while adverting to the judicially recognized and accepted presumption of constitutionality observed that the burden is on the person who attacks the constitutionality of a statute to establish a clear transgression of constitutional principle. On the power of judicial review in regard to economic and fiscal issues, the Supreme Court observed as follows : Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or straitjacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purposes of taxation are wide. The legislatures possess the greatest freedom in classification and the burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it. More recently, in Government of Andhra Pradesh vs. P.Laxmi Devi, (2008) 4 SCC 720 the Supreme Court observed as follows : The court must, therefore, make every effort to uphold the constitutional validity of a statute, even if that requires giving the statutory provision a strained meaning, or narrower or wider meaning, than what appears on the face of it. It is only when all efforts to do so fail should the court declare a statute to be unconstitutional. 37. Legislative entries in the Seventh Schedule to the Constitution have to be read in a broad and comprehensive sense to include all subsidiary and ancillary matters. An entry which authorises the imposition of a tax, such as Entry 54 of List II, also authorises an enactment which prevents the tax imposed being evaded. As a Constitution Bench of the Supreme Court observed in Baldeo Singh vs. Commissioner of Income Tax, AIR 1961 SC 736 para 20 page 742 If it were not to be so read, then the admitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n State of Madhya Pradesh vs. Indore Iron and Steel Mills Pvt. Ltd., AIR 1998 SC 3050 the Supreme Court considered the provisions of a notification issued under the Madhya Pradesh General Sales Tax Act, 1958 which contained a condition that the goods had suffered entry tax under a particular enactment before they were purchased by the registered dealer. Interpreting the words suffered entry tax , the Supreme Court held that it is only where the entry tax had actually been paid that the exemption would arise: In our view, the words of the said notification under the State Sales Tax Act are so clear that they leave no doubt whatsoever and cannot be subjected to any construction but one, namely, that only goods upon which entry tax under the Entry Tax Act has been paid are entitled to the exemption thereunder. There has to be actual payment. The impact of the entry tax upon the goods for which the exemption is sought has to be felt; only then is the exemption available. The use of the word suffered makes this plain. There is no reason for the Court to depart from the plain and ordinary meaning of the words actually paid , when used in the context of Section 48(5). 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rior stage. This judgment of the Delhi High Court was affirmed by the Supreme Court in Collector of Central Excise vs. Decent Dyeing Co. 1990(45) E.L.T. 201 (SC) 42. In the context in which the words actually paid are used in the MVAT Act, actually paid means what has been as a matter of fact deposited in the treasury. Hence, in the context of the provisions of Section 48(5), we cannot accept the contention of the Petitioner that actually paid .. in the government treasury means or should be read to mean what tax ought to have been deposited but has not actually been deposited in the treasury. To accept the submission would be to rewrite the legislative provision. Moreover, the concept of a set off presupposes that tax has been paid in respect of the goods in respect of which a set off is claimed. To allow a set off though the tax has not been paid actually would be to defeat the legitimate interests of the Revenue. Hence, in the overall statutory scheme of Section 48; subsection (5) has a rational basis and foundation. The liability to pay tax is that of the selling dealer. As the Constitution Bench held in TISCO and in George Oakes, whether the tax is passed on by the sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at provision are fulfilled. The particulars which are to be certified in the tax invoice, bill or cash memorandum are further elaborated upon in Rule 77. The provisions of Section 48(2) have to be harmoniously construed with the provisions of Section 48(5). Entitlement to a set off, subject to compliance with the provisions of subsection (2), is defeasible in the event that purchase tax on the goods has not been actually paid into the Government treasury. All the provisions form part of one composite scheme. All the provisions of Section 48 have to be construed harmoniously. One part of Section 48 cannot be read disjointed from the rest. The legislature would not have intended to allow one part of its scheme for set off without the rest. To obliterate one part would do violence to the entirety. 44. In State of Madras vs. Radio and Electricals Ltd. 1966(18) STC 222 (SC) the Supreme Court considered the provisions of Section 8(1) of the Central Sales Tax Act, 1956 and the Registration and Turnover Rules, 1957. The issue was whether, upon a purchasing dealer in one State furnishing a FormC declaration to the selling dealer in another State, certifying that the goods purchased were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration was whether the dealer could be declared as nontaxable on sales of yarn which he made against IIIA forms issued under the U.P. Sales Tax Act, 1948 though the purchaser instead of selling yarn in the same condition had consumed the same. The Supreme Court held as follows : An interpretation which will make the provisions of the Act effective and implement the purpose of the Act should be preferred when possible without doing violence to the language. The genuineness of the certificate and declaration may be examined by the taxing authority but not the correctness or the truthfulness of the statements. The sales tax authorities can examine whether certificate is farzi or not, or if there was any collusion on the part of selling dealer but not beyond i.e., how the purchasing dealer has dealt with the goods. If in an appropriate case it could be established that the certificates were farzi or that there was collusion between the purchasing dealer and the selling dealer, different considerations would arise. 46. These decisions deal with the use of the goods by the purchasing dealer subsequent to the sale and hold that the selling dealer could not be held liable for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n itself. 48. The decision of the Punjab and Haryana High Court in Gheru Lal Bal Chand vs. State of Haryana, (2011) 45 VST 195 (P H) arose on a challenge to the provisions of Section 8(3) of the Haryana Value Added Tax Act, 2003. Section 8(3) was to the following effect : S.8 Determination of input tax. ( 1) and (2) . (3) Where any claim of input tax in respect of any goods sold to a dealer is called into question in any proceeding under this Act, the authority conducting such proceeding may require such dealer to produce before it in addition to the tax invoice issued to him by the selling dealer in respect of the sale of the goods, a certificate furnished to him in the prescribed form and manner by the selling dealer; and such authority shall allow the claim only if it is satisfied after making such inquiry as it may deem necessary that the particulars contained in the certificate produced before it are true and correct. The Punjab and Haryana High Court held that while the genuineness of a certificate and a declaration may be examined by the taxing authority, the onus cannot be placed on the assessee to establish the correctness or the truthfulness of the statements reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortance as under the VAT regime assessment is by way of exception. The State of Maharashtra was one of the first States in the country to introduce efiling in 2008. Registration, filing of returns, making of payments and the submission of audited statements (in Form e704) is in the electronic form. For that purpose a new software has been developed and deployed since 201011. As a result of electronic filing the system can generate (i) A list of short filing; and (ii) A list of nonfiling of returns. The electronic system generates a mismatch list for the purpose of ascertaining the claim of input tax credit. The mismatch list in turn, consists of: (i) A negative list where the vendor has not deposited the tax; (ii) A positive list where the input credit is allowable to the claimant dealer; and (iii)Cases where returns are not filed, where input credit is not allowed to a claimant dealer unless the default is made good by the vendor. Both in the case of the negative list where there has been a short filing of taxes and in a situation where returns have not been filed by the vendor, the State Sales Tax Department conducts an enquiry in regard to the vendor. In cases of Haval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uously evolved, the following steps are being taken to promote greater transparency and efficient handling of claims for input tax credit: (a) At the end of each financial year, the Sales Tax Department will reconcile the data on its system and inform the dealer about the input tax credit which may have become available on reconciliation, allowing the claimant dealer to seek an additional claim of refund to the extent of his input tax credit so matched in such cases; and (b) The Department shall, during the course of the current year set up a Dealer Information System (DAS) and Dealer Ledger account showing the status of the taxes collected and paid on the web portal of the Maharashtra State Sales Tax Department (www.mahavat.gov.in) in order to facilitate the process of the grant of additional claim of input credit to claimant dealers. 51. The Learned Advocate General appearing on behalf of the State has tendered a statement of the steps that would be pursued against defaulting selling dealers : 1) The Sales Tax Department will identify the Defaulters namely, registered selling dealers who have not paid the full amount of tax due in the Government Treasury either by not fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable to them in law against the Defaulters. 52. This case highlights the complexity of the issue with which both the legislature and tax administrators must grapple in devising a tax regime governed by the Value Added Tax. The legislature has performed a balancing exercise between the need on the one hand of ensuring the interests of the ultimate consumer by obviating a cascading tax burden and on the other hand, securing governance under rule of law principles which promote transparency and certainty while at the same time protecting the legitimate revenues of the State. The Value Added Tax regime has replaced a single point levy with a multiple point levy in which every dealer is a vital link in the levy and collection of tax. As the number of dealers has increased manifold, conventional systems of tax administration have to be replaced by web based electronic systems. The system which the administrator must devise must continuously evolve both with a view to simplify procedures and to make the process including that relating to beneficial provisions such as set off and refund objective and transparent. The judgments of the Supreme Court, including in R.K.Garg, recognise th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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