3-D (Analysis of Madhav Steel Corporation)

Lao Tzu said “The key to growth is the introduction of higher dimensions of consciousness into our awareness”. Thinking about an issue only from one-dimension may result in faulty action. This is also true for indirect taxes. One has to think from all points of view to get the best answer. This column attempts to discuss various issues pertaining to indirect taxes from all the three dimensions i.e. Central Excise, Service Tax & VAT.

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Judgment of Hon. Gujarat High Court ([2014] 72 VST 318) affirming the view of Hon. Tribunal (SA No. 451 of 2011) in case of M/s Madhav Steel Corporation has created lots of confusion in the minds of dealers and has also resulted in misapplication of the Judgment by some departmental officers. Present article attempts to distil all the facets (i.e. factual & legal) of the said Judgment and also provide guidelines to make sure that a bona-fide case is not unnecessarily dragged to courts.

FACTS OF THE CASE

M/s Madhav Steel Corporation (hereinafter referred as appellant) is carrying on business of reselling iron and steel and is registered as a dealer under the Gujarat VAT Act, 2003 as well as under the Central Sales Tax Act, 1956. Assessment notice was issued for FY 2006-07. While passing assessment order, Ld. Deputy Commissioner dis-allowed input tax credit on purchases made from M/s. Mangal Enterprise & M/s. Shree Bhavani Ispat on the ground that the registration certificate of the said vendor was cancelled ab initio for billing activity. The assessing officer had observed in the assessment order that the purchases from two different dealers i.e. M/s. Mangal Enterprise and M/s. Shree Bhavani Ispat were not confirmed in cross check and the proof regarding movement of the goods was not produced. Copy of weigh bridge receipt which was submitted neither had the name of the consignor, nor the name of the consignee. Further loading and freight column in the said invoices are Nil. Loading and freight charges are for the purpose of transportation of goods and it indicates physical movement of goods. Appellant had also admitted before Hon. High Court by way of affidavit that it does not possess transport receipt. It was also observed that the spot enquiry was held at the place of the dealer M/s. Shree Bhavani Ispat by the Commercial Tax Officer on 06/09/2007 under Section 67 and 85 of the Act and proof of movement of goods such as delivery challan, weighing slips, lorry receipts were not found nor they were produced during the course of assessment proceedings. It was also found that the dealer was involved in only billing activity and there was no regular business activity.

LEGAL PROVISIONS INVOLVED

Section 11 of GVAT Act deals with provisions related to Tax Credit. Section 11(1)(a) states that the registered dealer who has purchased the taxable goods, shall be entitled to claim tax credit

equal to the amount of tax collected from the purchasing dealer by a registered dealer from whom he has purchased such goods or the tax payable by the purchasing dealer to a registered dealer who has sold such goods to him during the tax period. Sub-section(2) casts an obligation on the registered dealer who intends to claim the tax credit, to maintain the register and the books of accounts as prescribed under the Rules. Section 11(3) lays down certain conditions subject to which input tax credit can be claimed on the purchases made by such purchasing dealer. Sub-section (4) of Section 11 is very material as the claim regarding input tax credit can be made only on the basis of an original tax invoice issued by the selling dealer and such tax invoice must contain certain particulars as prescribed under sub-section(1) of Section 60 evidencing the amount of tax. Section 60(1) states that a registered dealer who sells taxable goods to other registered dealer shall provide him at the time of sale, with a tax invoice containing such particulars as may be prescribed and retain a copy thereof. Rule 42(3) prescribes the particulars which are required to be incorporated in the tax invoice. The tax invoice must contain consecutive serial number of tax invoice and serial number of the invoice book, the date of issue of tax invoice, the name, address and registration number of the seller issuing tax invoice including registration number of CST Act, 1956, if any, name, address and registration number of the purchaser including registration number of CST Act, 1956, full description of goods including HSN code, quantity of goods sold, price of goods excluding tax, rates of tax and additional tax, amount of tax charged in respect of goods and gross value of goods including the amount of tax.

Sub-section (5) of Section 11 is also very important so far as the disallowance of tax credit is concerned. There are various sub-clauses to Section 11(5), however, the relevant sub-clause is 11(5)(mmmm). Sub-section 11(5) (mmmm) says that notwithstanding anything contained in this Act, tax credit shall not be allowed for purchases made from a dealer after the name of such dealer has been published under sub-section (11) of section 27 or Section 97.

Sub-Section (7) of Section 11 is also very important which empowers the authority to deny the tax credit in certain circumstances. It says that where a registered dealer without entering into a transaction of sale, issues to another registered dealer tax invoice, retail invoice, bill or cash memorandum with the intention to defraud the Government revenue or with the intention that the Government may be defrauded of its revenue, the Commissioner may after making such enquiry as he thinks fit and giving a reasonable opportunity of being heard, deny the benefit of tax credit, in respect of such transaction, to such registered dealers issuing or accepting such tax invoice, retail invoice, bill cash memorandum either prospectively or retrospectively from such date as the Commissioner may, having regard to the circumstances of the case, fix. This sub-section directly deals with the denial of tax credit when the transactions are not genuine and bonafide and the only intention of entering into such transaction is to defraud the Government Revenue. This sub-section also empowers the authority to deny tax credit either prospectively or retrospectively.

CONTENTIONS OF APPELLANT

It was contended before the Court that once original copy of Tax Invoice containing all the relevant details is available, input tax credit cannot be dis-allowed. It was also contended that in case of retrospective cancellation of selling dealer’s registration certificate, purchases made during the time when registration was in force cannot be dis-allowed as per provisions of Sec. 11(5)(mmmm). Reliance was also placed on number of decisions holding that mere non-payment of tax by the selling dealer will not result in dis-allowance of input tax credit. On factual aspect it was contended that when copy of weigh-bridge, stock register and copy of account showing that payments were duly made by the account payee cheques is available input tax credit cannot be dis-allowed.

SUBMISSIONS OF REVENUE

On the basis of facts narrated above it was contended by Revenue that all the purchases in dispute were bogus purchases made from gray market. In order to give them legal colour it was routed through the appellant. Modus operandi in this case was explained as under:

“Let us say we are concerned with dealer C. Dealer C Purchases goods from dealer A in the gray market at Rs.80 (Normal price is Rs.100). Since the transaction is in the gray market, it is recorded neither in the books of account of A nor in the books of accounts of C. So as to convert this purchase from gray market into purchase from normal market, C enters into an agreement with B to issue bogus bills on commission basis. Accordingly B issues bills/invoices of sale at Rs.100 to A on commission basis (2%). The transaction is recorded as sale of Rs.100 in the books of account of B. The transaction is recorded in the books of account of C as purchases of Rs.100. Further so as to give a colour of genuine transaction, C will issue cheque, either account payee or otherwise to B. B will deposit the cheque in its Bank account and after deducting its commission (Rs.2), B will withdraw the balance amount (Rs.98) and pay back to C. However if A and B have designed a chain of transactions, then B will pass the money to X, X to Y and so on and someone else in place of B may pay the balance amount to C. The same goods are sold by C to D in normal market at 105 + tax.”

In view of above it was contended that said transaction is squarely covered by Sec. 11(7) which empowers the authority to deny the tax credit where a registered dealer without entering into a transaction of sale, issues to another registered dealer tax invoice, retail invoice, bill or cash memorandum with the intention to defraud the Government revenue.

DECISION OF HON. TRIBUNAL & HIGH COURT

On perusing the facts of the case, Hon. Tribunal as well as Hon. High Court came to the conclusion that the transactions in question are not genuine transactions. It relied on the fact that weigh bridge receipt did not have either the name of the consignor or the consignee and the column for transport charges in the invoices did not contain any value. It also relied on the fact that on making the spot inquiry by the department at the premises of sellers, even sellers

could not prove the genuineness of their purchases. It was also held that all the judgments cited on behalf of the appellant would not support as the genuineness of the transactions involved in all the judgments were not doubted by the department. On the basis of above it was held that input tax credit is rightly not admissible in view of Sec. 11(7) of GVAT Act.

IMPLICATIONS & GUIDELINES TO BE KEPT IN MIND

On the basis of above Judgment there is a view taken by some officials of department that every dis-allowance of input tax credit on cross-check will be covered by said judgment. That view is misplaced. Every judgment has to be read in the context of the facts of the case. At para 32 of the Hon. Tribunal’s order it is clearly stated that once all the statutory requirements of producing tax invoice is complied with, then in case of genuine transactions even if the registration certificate is cancelled retrospectively claim of input tax credit in respect of purchases made when registration is in force cannot be dis-allowed. In is only in case of bogus transactions claim of input tax credit can be dis-allowed.

In view of above author urges that following documents should be preserved to prove genuineness of transactions:

1) Weigh-bridge receipts2) Details of account payee cheques paid to vendors3) Transporter details along with copy of LR’s4) Stock registers under Excise or otherwise

Above list is illustrative and does not vouch that on production of same input tax credit will always be allowed. However it will come to your rescue for proving the genuineness in cases where there is mis-match on cross check. Also in cases where the fact that registration certificate of the selling dealer is still operational will help to distinguish your case from given judgment as it that case department can very well pursue the selling dealer for mis-matched transactions.

REFUND OF CREDIT DIS-ALLOWED EARLIER

Under GVAT Act various powers are bestowed on the assessing officers to carry out assessment (Sec. 34) including best judgment assessment (Sec. 34(4)) of the defaulting selling dealers who has not paid the tax into Government Treasury. Post 01.04.2013 u/s 34(8A) power is given to carry out assessments of such dealers without any time-limit. In such case, a situation may happen when department recovers the tax from defaulting dealers and the purchasing dealer has also paid the tax during the assessment. Thus Government gets double tax for same transaction. In such situation it is the right of the purchasing dealer to claim refund of the tax paid earlier. Hon. Tribunal at Para 38 of the judgment has directed the department to inform

the dealer of any recovery from selling dealer and to refund the tax without any application. Author urges the department to come forward with a transparent system of providing the necessary information from time to time so that dealers can pursue their refund claims.

PRE-DEPOST FOR ADMISSION OF APPEAL

Sec. 73(4) of GVAT Act provides that an appeal may be entertained for reasons to be recorded in writing without payment of tax with penalty (if any) or, as the case may be, of the penalty. Recently Hon. Calcutta High Court in case of Smt. Renuka Prasad (72 VST 481) has held that Tribunal or the Commissioner (Appeals) while considering the case of waiver of pre-deposit must record its satisfaction not only on the existance of a good prima facie case but simultaneously, should take into consideration the interest of the Revenue by maintaining a balance. The discretion must be exercised on sound logic and within the settled parameters of law and not whimsically or capriciously. The Tribunal should also record the reasons well acceptable in the legal parlance which should justify elucidately and/or expressely why such discretion is exercised. The person may not have any financial hardship but if a good prima facie case is made out then directing the person to deposit the duty demanded would cause undue hardship. In this case Hon. Court held that mechanical manner of directing 25% as pre-deposit is wrong and discretion has to be exercised justly. Attention is also invited to internal correspondence of commercial tax department dated 24/06/14 providing guidelines for deciding the stay application.

In cases involving dis-allowance on cross check a strong prima facie case is possible if it can be established that registration certificate of selling dealer is operational & the records listed earlier are produced for the mis-matched transactions proving the genuiness of same. Department is also urged to share the relevant information pertaining to selling dealers assessment (to prove that selling dealer is in existence) so that if the department is pursuing the same, purhasing dealer is not put in undue hardship of paying the predeposit when eventually same will have to be refunded on recovery from selling dealer.

CONCLUSION

In view of above discussion every case needs to be analyzed in its factual background before blindly applying the discussed Judgment.