National Plasto Moulding Vs State of Assam
Date: August 5, 2024
Subject Matter
Bonafide purchasing dealers should not be denied ITC for the non-compliance of selling dealers
Summary
The case involves a batch of writ petitions challenging the validity of specific sections of the Assam and Central Goods and Services Tax Acts, which could penalize purchasing dealers for the tax compliance failures of selling dealers. The petitioners argue that it is unreasonable to impose the burden of tax payment on the purchasing dealers when the selling dealers fail to deposit the tax collected from them. The legal argument is primarily based on a precedent set by the Delhi High Court in the case of On Quest Merchandising India Private Limited, where it was determined that bona fide purchasing dealers should not be penalized for the non-compliance of selling dealers regarding tax collection and submission. The Delhi High Court’s ruling suggested that provisions similar to Section 9(2)(g) of the Delhi Value Added Tax Act were unconstitutional unless they were interpreted to exclude bona fide purchasing dealers. The Court indicated that the law as it stood imposed an unreasonable burden on purchasing dealers who could not foresee or control the actions of the selling dealers regarding tax deposits. The Supreme Court had dismissed a Special Leave Petition against the Delhi High Court’s judgment, asserting that the purchasing dealer's rights should be protected in such transactions unless collusion can be proven. The concluding decision in the writ petitions under review affirmed the position established by the Delhi High Court, thereby setting aside the show-cause notices issued to the petitioners. Nevertheless, the Department retains the right to investigate and act against cases where transactions are found to be non-bona fide.
FULL TEXT OF THE JUDGMENT/ORDER OF GAUHATI HIGH COURT
Dr. A. Saraf, learned senior counsel for the petitioners has submitted that though in this batch writ petitions, the petitioners have challenged the validity of Sections 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017 as well as the validity of Sections 16(2)(c) and 16(2)(d) of the Central Goods and Services Tax Act, 2017 along with the show cause notices issued to the petitioners, however, the controversy involved in these writ petitions is squarely covered by the decision of the Delhi High Court in the case of On
Quest Merchandising India Private Limited -Vs- Government of NCT of Delhi & Ors., reported in 2017 SCC OnLine Del 11286, wherein it was categorically held that a purchasing dealer cannot be punished for the act of the selling dealer in case the selling dealer had failed to deposit the tax collected by it.
It is submitted that the Delhi High Court has observed that the provisions of Section 9(2)(g) of the Delhi Value Added Tax Act, 2004 can be read down and the demand raised against the purchasing dealers, who have entered into bona fide transaction, cannot be sustained. It is also submitted that the Special Leave Appeal against the said judgment of the Delhi High Court has already been dismissed by the Hon’ble Supreme Court on 10.01.2018 vide Petition for Special Leave to Appeal No.36750/2017.
Mr. S.C. Keyal, learned Standing Counsel, CGST and Mr. B. Gogoi, learned counsel for the respondent State are not in position to dispute the fact that the controversy raised in these writ petitions is squarely covered by the decision of the Delhi High Court rendered in On Quest Merchandising India Private Limited (supra).
Before the Delhi High Court, the validity of Section 9(2)(g) of the Delhi Value Added Tax Act, 2004 was under challenge. The said provisions of the Delhi Value Added Tax Act are analogous to the provisions of Sections 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017 as well as Sections 16(2)(c) and 16(2)(d) of the Central Goods and Services Tax Act, 2017.
The Delhi High Court in the said judgment has observed as under:-
“39. Applying the law explained in the above decisions, it can be safely concluded in the present case that there is a singular failure by the Legislature to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers. The latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of article 14 of the Constitution.
40. …………
41. The court respectfully concurs with the above analysis and holds that in the present case, the purchasing dealer is being asked to do the impossible, i.e., to anticipate the selling dealer who will not deposit with the Government the tax collected by him from those purchasing dealer and therefore avoid transacting with such selling dealers. Alternatively, what section 9(2)(g) of the DVAT Act requires the purchasing dealer to do is that after transacting with the selling dealer, somehow ensure that the selling dealer does in fact deposit the tax collected from the purchasing dealer and if the selling dealer fails to do so, undergo the risk of being denied the ITC. Indeed section 9(2)(g) of the DVAT Act places an onerous burden on a bona fide purchasing dealer.
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53. In light of the above legal position, the court hereby holds that the expression “dealer or class of dealers” occurring in section 9(2)(g) of the DVAT Act should be interpreted as not including a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with section 50 of the Act where there is no mismatch of the transactions in Annexures 2A and 2B. Unless the expression “dealer or class of dealers” in section 9(2)(g) is “read down” in the above manner, the entire provision would have to be held to be violative of article 14 of the Constitution.
54. The result of such reading down would be that the Department is precluded from invoking section 9(2)(g) of the DVAT to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered selling dealer who has issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC. Where, however, the Department is able to come across material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under section 40A of the DVAT Act.”
The Hon’ble Supreme Court has dismissed the SLP preferred against the said judgment by passing the following order:-
“On hearing learned Additional Solicitor General appearing for the petitioner, we are not inclined to interfere with the impugned order. The special leave petition is dismissed.
Learned Additional Solicitor General, however, submits that a batch of petitions were decided by the impugned order and there are some of the cases where the purchase transactions are not bonafide like the present case and those cases ought to have been remitted back to the competent authority.
Learned Additional Solicitor General submits that the petitioner would move the High court with necessary particulars for directions in this behalf for which liberty is granted, as prayed for.
Pending application(s), if any, stand disposed of.”
Having gone through the above referred judgments, we are of the view that the controversy raised in this batch of writ petitions is squarely covered by the decision of the Delhi High Court in the case of On Quest Merchandising India Private Limited (supra). Hence, the show cause notices impugned in the present writ petitions and the consequential orders are set aside. However, the Department is free to act in those cases, where the purchase transactions are not bona fide, in accordance with law.
With these observations, these writ petitions are disposed of.