Case Name: State of Punjab & Ors Vs Trishala Alloys Pvt.Ltd
Case Number: CIVIL APPEAL NO. 2212 OF 2024
Date: February 17, 2025.
Quorum: Justice Ujjal Bhuyan.
FACTS OF THE CASE
Punjab Government issued a new public notice/clarification lowering tax on iron and steel items from 4.5% to 2.5% w.e.f. 01.02.2014. The notice stipulated that Input Tax Credit (ITC) on stock on hand as on 31.01.2014 would be limited to the new rate of tax with surcharge.
ITC, as per Section 13 of the Punjab VAT Act, is a device to avoid the cascading effect of tax and lower the tax incidence on the consumer. Dealers compute their output tax liability after deducting tax paid on purchases. But ITC is not a right but a facility extended by the government. Thus, those traders who have stock as of 31.01.2014 shall claim ITC at the new rate of 2.5% only, whereas before, ITC was being claimed at the initial rate of 4.5%. They shall not enjoy the tax credit on procurement and shall claim ITC proportionately based on the new tax framework.
ISSUES:
- The State of Punjab has brought Special Leave Petition (Civil) No. 35263/2016, against the order dated 20.05.2015.
- Taxable person means a person or entity enrolled for payment of Value Added Tax (VAT) under the Punjab VAT Act, and tax period means a period for which an individual or an entity is subject to tax in terms of the Act or the rules made thereunder.
- This special leave appeal counters the 20.05.2015 dated order of the High Court of Punjab and Haryana at Chandigarh in CWP No. 7951/2014 (Trishala Alloys Pvt. Ltd. Vs. State of Punjab). The High Court rejected the appeal in favor of the respondent on the basis of its own order of the same date in CWP No. 5625/2014 (Jalandhar Iron and Steel Merchants Association Vs. State of Punjab).
LEGAL PROVISIONS:
- Section 2 of Punjab VAT Act, 2005: Definition.
- Section 13 of Punjab VAT Act, 2005: Input Tax Credit.
- Section 8 of Punjab VAT Act, 2005: Rate of VAT.
- Section 70 of Punjab VAT Act, 2005: Power to make rules.
- Section 14 of the Central Sales Tax Act, 1956: Certain goods to be special importance in inter-state trade or commerce.
ARGUMENTS
Arguments of the Appellant:
The learned attorney cited Section 70 of the Punjab VAT Act, which is meant for rule-making. He encouraged that pursuant to sub-section (2) of Section 70, rules can be made with either prospective or retrospective effect. But he also admitted that as per the proviso to Section 70(2), rules may have retrospective effect only where necessary in the public interest. Lastly, he argued that the State has a broader positive obligation
Arguments of the Respondent
The argument of the Respondent was that the High Court rightly held that at the time when sub-rule (8) of Rule 21 of the Punjab VAT Rules was framed, the State had no legislative powers under the Punjab VAT Act to limit input tax credit (ITC) to a lower rate of tax. As the transactions were already settled, the dealers had already accumulated ITC at the higher rate.
He stated that Section 13(1) of the Punjab VAT Act was not retrospective and came into force only after 01.04.2014. Hence, Rule 21(8), which had been brought into force previously, was not available to be invoked before that date to take away vested rights without legislative approval.
The primary issue on appeal was whether Rule 21(8) was in force from 25.01.2014 to 01.04.2014. The 25.01.2014 State notification asked the respondent to pay extra tax on raw materials but could not recover the same because of a subsequent tax relief.
The respondent presented the argument that the State did not have the legislative authority to bring effect to Rule 21(8) prior to the amendment of Section 13 of the Act. As the amendment was effective from 01.04.2014 only, Rule 21(8) cannot be enforced till then.
ANALYSIS:
The main argument is against the application of Rule 21(8) of the Punjab VAT Rules, introduced with effect from State notification dated 25.01.2014. The rule limited Input Tax Credit (ITC on stock as of 31.01.2014) at the lower tax rate of 2.5% and previously the ITC was at 4.5%.
The State of Punjab (Appellant) has argued that it was empowered under Section 70(2) of the Punjab VAT Act to make rules with a retrospectivity, if in the public interest. This argument cannot hold water because the proviso to Section 70(2) clearly provides that the rule-making with retrospectivity is to be made on reasons of public interest, which was not established by the State.
JUDGMENT:
After due consideration of the submissions made by the learned counsel for both parties, the Court has observed that by a notification dated 25.01.2014, Schedule E to the Punjab VAT Act was modified by inserting serial No. 21, which reduced the tax rate on iron and steel goods. In the absence of any such provision in the Act to empower the State of Punjab to bring into force Rule 21(8) of the Punjab VAT Rules with effect from 25.01.2014, the Court is of the opinion that the said provision will be effective only from 01.04.2014. The Court is in agreement with the view taken by the High Court, to the extent that a taxable person with stock in trade as of 25.01.2014 or 01.02.2014 had already paid tax at the higher rate on acquiring such goods.
Conversely, the Respondent (Trishala Alloys Pvt. Ltd.) succeeded in the case under the reasoning that Section 13(1) of the Punjab VAT Act, which prescribes ITC, was not retrospective and was enforceable only from 01.04.2014. As Rule 21(8) had been notified prior to the amendment to Section 13, it did not have statutory support and could not be applied prior to 01.04.2014. The High Court of Punjab and Haryana, in CWP No. 7951/2014, held in the favor of the respondent, holding that Rule 21(8) was not substituting the provisions of the Act. Second, retroapplication of Rule 21(8) adversely affected the taxpayers who already purchased raw material and paid duty at higher rate but were required to claim ITC at the lower rate of 2.5% and thereby suffer financial loss. This contradicted the rule that tax provisions that affect vested rights must possess plain legislative power, which in this instance did not exist.
CONCLUSION:
The High Court judgment was legally correct since the State had no jurisdiction to retrospectively change ITC rates in the absence of a law. Since Section 13(1) of the Punjab VAT Act was not retrospective and was made effective only from 01.04.2014, Rule 21(8) could not be applied prior to this date.
Therefore, the appeal of the State of Punjab is frivolous and must be dismissed, affirming the High Court decision that ITC cannot be cut down retrospectively by an institution without legislative authority.
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WRITTEN BY SHIVRANJNI
