Judgement Update | No need to reverse VAT ITC in case of inter-state sales to Government

This is to update you regarding the recent Supreme Court decision in the case of TVS Motor Company Limited v. The State of Tamil Nadu, S.L.P.(C) No. 9320-9324 of 2015. In this case, the Court was dealing with the availability of Input Tax Credit (‘ITC’) on goods purchased within the State for inter-state sale (as such or after being used in the manufacture of goods) to an unregistered person.

The department contended that Section 19(5)(c) of the Tamil Nadu Value Added Tax Act, 2006 (‘TNVAT Act’) read with Rule 10(9)(a) of the Tamil Nadu Value Added Tax Rules, 2007 (‘TNVAT Rules’) provides that ITC shall be allowed only if the Form-C prescribed under the Central Sales Tax Act, 1956 (‘CST Act’) is furnished. In this case, since the taxpayer did not furnish Form-C, ITC shall not be available.

The department further contended that inter-state sales made by the taxpayer to the Government (Government of Karnataka) falls under Section 8(2) of the CST Act being a sale to an unregistered dealer and hence, ITC cannot be allowed on such sales.

The taxpayer rebutted department’s contention and argued that Section 8(2) of the CST Act or Section 19(5)(c) of the TNVAT Act read with Rule 10(9)(a) of the TNVAT Rules deny credit to check the evasion of tax on inter-state sales made to unregistered persons. The taxpayer referred to clause 2.3 of the White Paper released by the Committee of Finance Ministers as per which ITC would be available to set-off against tax lability on all intra-state as well as inter-state sales.        

The taxpayer further contended that buyer (Government of Karnataka) is also a ‘dealer’ under their VAT law but it is exempted from obtaining registration. In such a case, there cannot be any apprehension of evasion of tax and hence, denial of ITC is not reasonable.

The Court agreed with the taxpayer’s contention and held that Section 19(5)(c) of the TNVAT Act is to be read down by construing that for sales made to State Governments (outside Tamil Nadu), the said State Governments would be deemed as registered dealer for the purpose of availing benefit of ITC.

NITYA Comments:

The Supreme Court has allowed the taxpayer’s prayer on the basis of fairness, considering the intention of the legislature. Notably, the decision has been rendered for taxpayers making sales to State Governments of other States.

In our view, considering the above white paper and principle of fairness, the decision should also apply to all taxpayers making sales to other unregistered persons located in other States. This is because in such cases as well, full tax is paid by the dealer to the Government of Tamil Nadu and there is no tax evasion in such cases. To this extent, the taxpayers can argue that the above restriction is unconstitutional and violative of Article 14 of the Constitution.