2016 (9) TMI 408 - SC - VAT and Sales Tax

Supreme Court: VAT Act amendment valid but not retrospective. Input Tax Credit based on invoice price.

The Supreme Court upheld the constitutional validity of sub-section (20) of Section 19 of the VAT Act but struck down its retrospective application from ... Retrospective operation of fiscal legislation - input tax credit - interpretation of tax invoice for calculation of input tax credit - sub-section (20) of Section 19 - reversal of input tax credit where sale price is less than purchase price - concessionary nature of tax benefits and conditions for grant - constitutional validity of fiscal legislation under Article 14 and Article 19(1)(g)Input tax credit - interpretation of tax invoice for calculation of input tax credit - sub-section (20) of Section 19 - reversal of input tax credit where sale price is less than purchase price - Price to be taken for the purpose of Section 19(20) is the purchase price as shown in the original tax invoice and not a subsequent net price adjusted by credit note/discount. - HELD THAT: - Section 19 must be read in the context of the VAT Act's scheme governing entitlement to input tax credit (ITC). Sub-section (10) requires that ITC shall not be claimed until the dealer receives an original tax invoice evidencing the amount of input tax. ITC is a statutory concession available only on compliance with the conditions specified in Section 19. Given this specific statutory scheme, the price appearing in the original tax invoice is the relevant benchmark for determining whether sub-section (20) is attracted; general principles from the Sale of Goods Act regarding net purchase price after discounts are inapplicable where the VAT statute prescribes the tax invoice as the operative document for ITC. The High Court's interpretation accepting the Revenue's construction was upheld as consonant with the statutory language and scheme. [Paras 8, 10, 11, 12]The Court upheld the construction that the purchase price for computing ITC under Section 19 is the price shown in the original tax invoice.Constitutional validity of fiscal legislation - concessionary nature of tax benefits and conditions for grant - Article 14 and Article 19(1)(g) - Sub-section (20) of Section 19 is not violative of Article 14 or Article 19(1)(g) and is not confiscatory or arbitrary insofar as its substantive validity is concerned. - HELD THAT: - ITC is a statutory concession and the Legislature is entitled to prescribe the form and manner of its grant. The impugned provision was introduced to protect State revenue from clandestine transactions by denying excess ITC where goods are re-sold at a price lower than the purchase price, thereby preventing erosion of the VAT concept of taxation on value addition. The Court adopted and concurred with the High Court's detailed reasoning that the provision is a valid fiscal measure enacted to curb tax evasion and does not amount to confiscation or arbitrary discrimination warranting invalidation. [Paras 12, 13, 64, 68, 69]The constitutional challenge to the substantive validity of sub-section (20) was rejected.Retrospective operation of fiscal legislation - vested rights and retrospective amendment - The retrospective application of the amendment inserting sub-section (20) of Section 19 from January 01, 2007 is unconstitutional and is struck down for that period. - HELD THAT: - Although retrospective operation of fiscal statutes is not per se impermissible, such retrospective operation must withstand established tests: it should not be unduly oppressive or confiscatory, nor should it impair vested rights without justification. Section 19(20) introduced a new mode of calculation detrimental to dealers by reducing ITC where previously dealers had acquired ITC under the pre-amendment regime. Dealers had acquired vested expectations in respect of purchases and sales made between January 01, 2007 and August 19, 2010. The amendment, being a novel provision adverse to dealers, cannot be given retrospective effect over that period; applying it retrospectively would impose unforeseen burdens and impair vested rights without adequate justification. Consequently, while the provision itself is valid prospectively, its retrospective operation from January 01, 2007 is invalid. [Paras 14, 15, 16, 17, 18]Amendment Act 22 of 2010 insofar as it gave retrospective effect to sub-section (20) from January 01, 2007 is struck down; the appeals are allowed to that limited extent.Final Conclusion: The Court upheld the High Court's interpretation of Section 19(20) that the purchase price for ITC purposes is the price in the original tax invoice and rejected the constitutional challenge to the provision's substantive validity, but struck down the Amendment Act insofar as it made sub-section (20) retrospective from January 01, 2007 to August 19, 2010; appeals are partially allowed on that limited ground. Issues Involved:1. Whether sub-section (20) of Section 19 of the Tamil Nadu Value Added Tax Act, 2006 (VAT Act) could be given retrospective effect.2. The constitutional validity of sub-section (20) of Section 19 of the VAT Act.3. Proper interpretation of sub-section (20) of Section 19 of the VAT Act.Detailed Analysis:1. Retrospective Effect of Sub-section (20) of Section 19 of the VAT Act:The Supreme Court examined whether sub-section (20) of Section 19 of the VAT Act could be given retrospective effect. The amendment, introduced by Amendment Act 22 of 2010, was given retrospective effect from January 01, 2007. The Court noted that while the Legislature has the power to make fiscal legislation retrospectively, such retrospective operation must not be unduly oppressive or confiscatory. The Court found that sub-section (20) of Section 19 was a new provision that altered the manner of calculating Input Tax Credit (ITC). It was detrimental to the dealers and imposed a new liability. The Court held that such a provision could not have retrospective effect, especially when vested rights had accrued in favor of the dealers for the period between January 01, 2007, and August 19, 2010. Therefore, the retrospective effect of the amendment was struck down.2. Constitutional Validity of Sub-section (20) of Section 19 of the VAT Act:The dealers challenged the constitutional validity of sub-section (20) of Section 19, arguing that it was confiscatory, unreasonable, arbitrary, and violative of Articles 14 and 19(1)(g) of the Constitution. The High Court had rejected these contentions. The Supreme Court concurred with the High Court's reasoning, noting that ITC is a concession provided by the Legislature, not a right. The Legislature has the power to stipulate the conditions under which this concession is granted. Sub-section (20) was introduced to protect the revenue against clandestine transactions and tax evasion. The Court found that the provision was reasonable and served a valid purpose, thus upholding its constitutional validity.3. Proper Interpretation of Sub-section (20) of Section 19 of the VAT Act:The dealers argued that the price for calculating ITC should be the net purchase price after discounts, not the price mentioned in the tax invoice. The Revenue contended that the purchase price should be the price mentioned in the original tax invoice. The High Court had accepted the Revenue's contention. The Supreme Court agreed with the High Court, stating that under the VAT Act's scheme, the price as per the tax invoice is relevant for claiming ITC. The Court emphasized that ITC is a concession subject to strict compliance with statutory conditions, including the requirement to produce the original tax invoice. The Court found no merit in the dealers' argument that the net purchase price should be considered.Conclusion:The Supreme Court upheld the constitutional validity of sub-section (20) of Section 19 of the VAT Act but struck down its retrospective application from January 01, 2007. The Court also affirmed the interpretation that the purchase price for ITC purposes is the price mentioned in the tax invoice, not the net price after discounts. The appeals were partially allowed to the extent of setting aside the retrospective effect of the amendment.