Karnataka High Court on ITC Denial for VAT Default by Selling Dealers: Key Takeaways for Buying Dealers
Background and Context
The Karnataka High Court in Transworld Star Manjushree Vs Addl. Commissioner of Commercial Taxes (Karnataka High Court) examined whether a bona fide purchasing dealer can be denied Input Tax Credit (ITC) under the Karnataka Value Added Tax Act, 2003 solely because the selling dealers did not correctly remit VAT to the Government.
Two connected appeals were decided together. The common assessee had procured goods from:
- M/s Ashapura Metal Corporation, and
- JAS Modular Systems
during Financial Year 2014-15. These selling dealers were admittedly registered under the Karnataka Value Added Tax Act, 2003 (the Act). The dispute arose when ITC availed on such purchases was later reversed in revision proceedings on the allegation that the selling dealers had not fully discharged their VAT liability at 14.5%.
The judgment provides important guidance on:
- The extent of due diligence expected from a purchasing dealer,
- Whether ITC can be disallowed merely because the selling dealer defaults in remitting tax, and
- The limits of revisional powers under
Section 64(1)of the Act.
Facts in Brief
Purchase Transactions and ITC Claim
The assessee purchased goods from the two registered selling dealers in FY 2014-15. The invoices raised were for:
Rs.1,58,76,115/-from M/s Ashapura Metal Corporation, andRs.2,40,03,328/-from JAS Modular Systems
On both sets of invoices, VAT was charged at 14.5%. The assessee:
- Treated these transactions as genuine purchases,
- Paid the full invoice value including VAT to the selling dealers through online bank transfers/account payee cheques, and
- Duly claimed Input Tax Credit (ITC) on the VAT component as permitted under the Act.
Action by Prescribed Authority
Following scrutiny, the prescribed authority issued a notice in Form 275 requiring production of books of account. On verification, the authority recorded that:
- The selling dealers had indeed charged 14.5% VAT in the invoices issued to the assessee,
- However, in their returns, the selling dealers had admitted sales attracting only 5% VAT, and
- They had remitted VAT to the Government only at 5%, resulting in a mismatch between actual transactions and declared returns.
On this basis, the prescribed authority:
- Reversed ITC claimed by the assessee to the extent of the differential 9.5% VAT, quantified as:
Rs.10,02,703/-(for purchases from M/s Ashapura Metal Corporation), andRs.16,88,965/-(for purchases from JAS Modular Systems);
- Levied interest of:
Rs.10,48,501/-, andRs.12,44,059/-;
- Imposed penalties of:
Rs.1,20,517/-, andRs.1,68,898/-respectively.
The entire burden was effectively shifted onto the purchasing dealer on account of the selling dealers’ partial remittance of VAT.
First Appeal: Relief Granted to the Assessee
Appeal under Section 62(6) of the Karnataka Value Added Tax Act, 2003
Challenging the reversal, the assessee preferred an appeal before the Joint Commissioner of Commercial Taxes functioning as the First Appellate Authority under Section 62(6) of the Act.
Findings of the First Appellate Authority
After appreciating the records, the First Appellate Authority held:
- The assessee had acted diligently and in good faith in conducting its business;
- The assessee had fully discharged its obligation by:
- Dealing with registered selling dealers under the Act;
- Paying the entire invoice value along with VAT through account payee cheques/online transfer;
- Once the assessee paid the tax component to the selling dealers in this manner, any subsequent failure by the selling dealers to remit VAT to the Government could not be fastened on the purchasing dealer.
Accordingly, the First Appellate Authority allowed the appeal and restored the ITC originally claimed by the assessee.