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2015 (8) TMI 1005 - DELHI HIGH COURT

2015 (8) TMI 1005 - DELHI HIGH COURT - [2015] 84 VST 469 (Del) - Reversal of Input Tax Credit on issuance of credit note – Tribunal-VAT vide impugned order held that appellants were required to reverse input tax credits claimed on purchases made by them, on account of credit notes issued by selling dealers, despite selling dealers having confirmed that they have not reduced their output tax liability – Whether it can be said that returns filed by appellants were false, misleading or deceptive, a .....

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t if by virtue of insertion of explanation in taxing statute “a substantive law is introduced, it will have no retrospective effect” – Any reduction in tax payable by selling dealer on account of reduction in sale price would correspondingly result in reassessment of tax credit claimed by buyer in cases where goods have been sold by one registered dealer to another – Same would necessarily involve issuance of credit notes as without issuance of such credit notes, it would not be open for buying .....

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g or deceptive – Impugned judgment of Tribunal unsustainable in law and hereby set aside – Decided in favour of Appellant. - ST.APPL. 76/2014, ST.APPL. 98/2014 , ST.APPL. 80/2014, ST.APPL. 83/2014 , ST.APPL. 86/2014 , ST.APPL. 88/2014 , ST.APPL. 99/2014 , ST.APPL. 16/2015 , ST.APPL. 19/2015 , ST.APPL. 20/2015 , ST.APPL. 22/2015, ST.APPL. 26/2015 - Dated:- 21-8-2015 - S. Muralidhar And Vibhu Bakhru,JJ. For the Petitioner : Mr. Rajesh Mahna, Advocate and Mr. Ruchir Bhatia, Advocate. For the Resp .....

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em, in the course of their activities as dealers, on account of credit notes issued by selling dealers, despite the selling dealers having confirmed that they have not reduced their output tax liability. (ii) Whether in the facts and circumstances of the case, it can be said that the returns filed by the appellants were false, misleading or deceptive, attracting penalty U/S 86(10) of the Act. Background 2. The Appellants are all registered dealers under the Delhi Value Added Tax Act, 2004 (DVAT .....

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nal'). By a common order dated 6th August 2014 the Tribunal dismissed their appeals and therefore the present appeals are before this Court. Although the essential facts concerning the failure by the selling dealers to reverse the ITC is common to all the appeals, for the sake of convenience, the facts in ST Appl. Nos.76 of 2014 and 26 of 2015 are being adverted to illustratively. Facts in ST Appeal No. 76 of 2014 3. The Appellants are engaged in trading of computer hardware and software. Th .....

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ontention of the Department was that in terms of Section 10(1) read with Section 51(a) of the DVAT Act it was incumbent on the purchasing dealer to claim ITC only to the proportionate extent after accounting for the discount received from the selling dealer. Consequently it was insisted by the Department that the purchasing dealer has to adjust the input tax and reverse the ITC claimed by him against the discount/incentives received from the selling dealer. The contention of the purchasing deale .....

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r also issued a certificate to that effect to the purchasing dealer and this was produced before the VATO. Nevertheless, the VATO reduced the purchase value and the corresponding ITC on the ground that the discounts and incentives offered by the selling dealer to the purchasing dealer after the conclusion of the sale would go to reduce the actual selling price and consequently the incidence of tax. Facts in ST Appeal No. 26 of 2015 4. In STA No. 26 of 2015, the Appellant B.P. Gupta and Sons, is .....

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ed to wholesalers, retailers through the re-distribution stockists like the Appellant. Objections before the OHA 5. Objections were filed by the Appellant against the aforementioned default assessments before the OHA i.e. Additional Commissioner - Special Zone and the Joint Commissioner (KCS). 6. By orders dated 7th July, 2011 and 30th January, 2012, the OHA rejected the objections in STA No. 76 of 2015. Similarly, by orders dated 31st August 2009 and 15th February 2010, the OHA rejected the obj .....

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adversely affected in case credit notes are issued after conclusion of the sale transaction without complying with the requirements of Section 51 (a) read with Section 10 (1) of the DVAT Act. The issuance of credit notes subsequent to the sale does go to reduce the sale price. It has an impact of increasing the purchase price shown in the invoice and the ITC claimed on that basis thereon and violates the DVAT scheme. ii. The decision of the Madras High Court in Jayam & Co. v. Assistant Commi .....

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ad not been made retrospective. In any event, since the provision was only clarificatory, it was not necessary to make Section 10(5) of the DVAT Act retrospective. iv. The arrangement whereby the selling dealer issues a credit note is nothing but a plan or understanding in collusion with the partner in transaction which could easily be termed as tax advantage in terms of clause (b) of Section 40A, clause (2), which has in effect reduced the tax liability of the purchasing dealer to pay tax and a .....

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the DVAT Act 9. The Court would first like to discuss the provisions under the DVAT Act relevant to the issues at hand: 2(1)(r) input tax in relation to the purchase of goods, means the proportion of the price paid by the buyer for the goods which represents tax for which the selling dealer is liable under this Act .... .... .... .... 2(zd) sale price means the amount paid or payable as valuable consideration for any sale, including- (i) the amount of tax, if any, for which the dealer is liable .....

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sum charged for anything done by the dealer in respect of goods at the time of, or before, the delivery thereof; (v) [amount of duties levied or leviable on the goods under the Central Excise Act, 1944 (1 of 1944) or the Customs Act, 1962 (52 of 1962), or the Delhi Excise Act, 2009 (Delhi Act 10 of 2010) whether such duties are payable by the seller or any other person; and] (vi) amount received or receivable by the seller by way of deposit (whether refundable or not) which has been received or .....

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is separately charged; and the words purchase price with all their grammatical variations and cognate expressions, shall be construed accordingly; [PROVIDED that where the dealer makes sale of goods imported into the territory of India, the sale price shall be greater of the following: (a) the valuable consideration received or receivable by the dealer; (b) value determined by the Custom authorities for payment of custom duty at the time of the import of such goods.] .... .... .... .... 3 Impos .....

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he was required to be registered under this Act.] [(3) The amount of tax payable under this Act by a dealer, is the dealer s net tax for the tax period calculated under section 11 of this Act.] [(4) The net tax of a dealer shall be paid within twenty one days of the conclusion of each calendar month. Explanation.- The obligation to pay the tax arises by virtue of this provision and is not dependent on furnishing a return, nor on the issue of a notice of assessment to the dealer.] (5) Tax shall .....

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r reason; [(d) the goods or part of the goods sold have been returned to the dealer within six months of the date of sale; or] (e) the whole or part of the price owed by the buyer for the purchase of the goods has been written-off by the dealer as a bad debt; and the dealer has - (i) provided a tax invoice in relation to that sale and the amount shown therein as tax charged on that sale is not the tax properly chargeable on that sale; or (ii) furnished a return in relation to a tax period in res .....

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e purchase arises] in the course of his activities as a dealer and the goods are to be used by him directly or indirectly for the purpose of making - (a) sales which are liable to tax under section 3 of this Act; or (b) sales which are not liable to tax under section 7 of this Act. (2) No tax credit shall be allowed - (a) in the case of the purchase of goods for goods purchased from a person who is not a registered dealer; (b) for the purchase of non-creditable goods; (c) for the purchase of goo .....

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he Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period.] .... ..... .... .... 10 Adjustment to tax credit (1) Where any purchaser has been issued with a credit note or debit note in terms of section 51 of this Act or if he returns or rejects goods purchased, as a consequence of which the tax credit claimed by him in any tax period in respect of which the purchase of goods relates, becomes short or excess, .....

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- The tax credit claimed on a particular purchase shall not exceed the amount of tax payable on its sale.] .... ..... .... .... 11 Net tax (1) The net tax payable by a dealer for a tax period shall be determined by the formula: Net Tax = O - I - C where O = the amount of tax payable by the person at the rates stipulated in section 4 of this Act in respect of the taxable turnover arising in the tax period, adjusted to take into account any adjustments to the tax payable required by section 8 of .....

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this Act the amount may be refunded to the seller or may be applied by the seller under clause (b) of sub-section (3) of this section without the seller being required to refund an amount to the purchaser. .... ..... .... .... 40A Agreement to defeat the intention and application of this Act to be void (1) If the Commissioner is satisfied that an arrangement has been entered into between two or more persons or dealers to defeat the application or purposes of this Act or any provision of this Act .....

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gement. (2) For the purposes of this section - (a) arrangement includes any contract, agreement, plan or understanding, whether enforceable in law or not, and all steps and transactions by which the arrangement is sought to be carried into effect; (b) tax advantage includes, - (i) any reduction in the liability of any dealer to pay tax, (ii) any increase in the entitlement of any dealer to claim input tax credit or refund, (iii) any reduction in the sale price or purchase price receivable or pay .....

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ng such particulars as may be prescribed. 10. The above provisions have to be read along with Rule 45 of the DVAT Rules, which reads as under: 45 Credit and Debit Notes For the purposes of section 51, a credit note and a debit note shall be signed by a person authorised to sign the return to be filed under the Act and shall contain the following particulars, namely:- (a) the name, address and registration certificate number of the selling registered dealer; (b) the name and address of the purcha .....

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e buyer which represents tax which is liable to be paid by the selling dealer. On a sale transaction of ₹ 100/- with rate of VAT @ 10 per cent the Input Tax would be ₹ 10/-. In terms of Section 3(3) of the DVAT Act the amount of tax payable by a dealer is the dealer s net tax for the period calculated under Section 11 of the Act. Section 9 permits a dealer to a tax credit in respect of the turnover of purchases occurring during the tax period where the purchase arises in the course o .....

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its margin of 5% (which makes the taxable value in the invoice as 105) it adds VAT at 12.5% and then gives the post-tax discount at ₹ 5. The net ITC works out to ₹ 12.50 whereas the output tax works out to ₹ 12.98. The net liability of the Appellant is 0.48. 13. In another scenario where the Appellant avails of a pre-tax discount at 10%, the taxable value itself comes down to ₹ 95 (after adding the Appellant s margin of ₹ 5). VAT on 12.5% works out to ₹ 11.74 .....

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en able to produce certificates from the selling dealers who have clarified that they are not claiming any output tax credit or seeking any refund. In other words, the entire amount of VAT collected by the selling dealer from the buying dealer is remitted to the Department. Therefore, there is no question of the selling dealer resorting to the procedure under Section 51(a) of the DVAT Act to raise a credit note in accordance with Rule 45 of the DVAT Rules, or to notify that on account of an arra .....

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rned ASG, merely clarificatory. 15. One of the submissions made by Mr. Sanjay Jain, learned ASG, was that Section 10 (5) was clarificatory of the existing legal position flowing from an interpretation of Section 51 (a) read with Section 10(1) of the Act, which according to him cast a legal obligation on the buying dealer to reverse the input tax credit. He contended that any discount being received after completion of the sale transaction would have the effect of altering the sale price, whether .....

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aning of the provisions of Section 65 (105) of the Finance Act, 1994. One of the incidental questions the Court was considering was whether the explanation appended to the provision which widened the tax net was merely clarificatory. The Court was of the view that by inserting the explanation to Clause (19) of Section 65 of the Finance Act, a new concept of imposition of tax had been brought in. It was not merely clarificatory. It was held: the question as to whether a Subordinate Legislation or .....

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of the Act. The scheme, prior to the insertion of Section 10 (5) appears to be this. Where a selling dealer intends to claim a refund or reduce his output tax qua a transaction for whatever reason including offering a discount, he will have to resort to the procedure set out in Section 51 (a) of the DAVT Act. He will have to raise a credit note and issue a tax invoice in respect of that sale. Rule 45 of the DVAT Rules is consistent to the above legal position. The obligation thereunder is again .....

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or the first time an obligation on the buying dealer to reduce the ITC in proportion to the difference in the price at which the buying dealer had purchased the goods and the price at which the dealer sold the goods if the price at which the goods sold by the buying dealer was lower than the price at which he had purchased the goods. In other words, the ITC claimed by the buying dealer would not exceed the tax payable on sale made by the buying dealer. Section 10(5) of the DVAT Act obliges the b .....

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Further, Section 10 (5) brings about a change which is substantive and not procedural. It is a change that adversely affects the substantive rights of the buying dealer. There cannot, therefore, be a presumption of retrospectivity as far as the said provision is concerned. The settled legal position which was reiterated in Martin Lottery (supra) was that if by virtue of an insertion of an explanation in a taxing statute a substantive law is introduced, it will have no retrospective effect . 20. .....

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t a price less than the price of the goods purchased by him. By notification dated 19th August 2010, the date from which the amendment would take effect was altered to 1st January 2007. 21. In Jayam & Co, a specific challenge was raised to the constitutional validity of Section 19 (20) of the TNVAT Act and in particular to its retrospectivity. The High Court held that a law cannot be held to be unreasonable merely because it operates retrospectively. The unreasonableness must result from som .....

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rt finds the decision in Jayam & Co. distinguishable. Although the wording and purport of Section 10 (5) of the DVAT Act and Section 19(20) of the TNVAT Act are similar, viz., reversal of the ITC by the purchasing dealer where he sells the goods at a price less than for which he purchased them, Section 10 (5) of the DVAT Act has not been made expressly retrospective. 23. On the other hand, it has been made explicit by the Department of Trade and Taxes, GNCTD by Circular No.3 of 2011-12 dated .....

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ctive since the date of notification i.e. 07.05.2010. 2. The other amendments i.e. in Section 9 (2) (g) and Section 10(5) of DVAT Act, 2004 stands implemented from the date of notification i.e. 01.04.2010. This issues with the prior approval of Commissioner (VAT). 24. As already noticed the introduction of Section 10(5) does affect the substantive rights of the purchasing dealers. This is not a mere procedural change. The provision cannot be presumed to be retrospective. Obligation of the sellin .....

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ollowing the mandate of Section 51 of the DVAT Act. 26. Section 51 of the DVAT Act must be read in the context of the scheme of the Act. A purchasing dealer cannot claim any ITC without issuance of a tax invoice under Section 50 of the Act by the selling dealer. Section 50 of the Act also specifies that the tax invoice can only be issued by a registered dealer in cases other than the instances specified under the said section (which are also instances where ITC is not available to the buying dea .....

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adjustment of tax in cases where the goods are sold by the registered dealer and the price charged expressly includes the amount of tax. Section 38(9) of the Act reads as under: "38 Refunds (9) Where - (a) a registered dealer has sold goods to another registered dealer; and (b) the price charged for the goods expressly includes an amount of tax payable under this Act, the amount may be refunded to the seller or may be applied by the seller under clause (b) of sub-section (3) of this sectio .....

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s also clear from the scheme that the same would necessarily involve issuance of credit notes under Section 51(a) of the DVAT Act as without issuance of such credit notes, it would not be open for the buying dealer to adjust the tax credit in terms of Section 10 of the Act. The scheme of the DVAT Act insofar as it relates to reduction in the tax liability of the selling dealer subsequent to the sale which results in corresponding reduction in the input credit available to a buying dealer is trig .....

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the selling price includes the amount of tax payable, the selling dealer would not be entitled to any refund unless the Commissioner is satisfied that the selling dealer has refunded the amount to the purchaser. This also, clearly, indicates that a selling dealer would not be entitled to any refund of tax collected from the purchaser unless (a) the amount is refunded to the purchaser if the purchaser is an unregistered dealer and (b) a credit note is issued to the purchasing dealer where the pu .....

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ces, it would be difficult to accept that the selling dealer is obliged to issue a credit or a debit note under Section 51 of the DVAT Act as it would always be open for the selling dealer not to avail its benefit, which is the only consequence of not following Section 51. 31. In fact many of the selling dealers in these cases have issued certificates stating that they have not claimed any refund of tax from the Department or sought any adjustment in their respective output tax liability. One su .....

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eturned back the tax paid by the dealer, reason being that neither we have claimed refund of tax from the department nor have sought any adjustment in our output tax liability. 32. The introduction of Section 10(5) of the DVAT Act does not alter the aforesaid scheme in any manner. The only effect of Section 10(5) of the DVAT Act is that the tax credit available to a purchasing dealer would not exceed the amount of tax payable on its sale. Section 40-A not attracted 33. Although in the assessment .....

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