JUSTICE CEMENTED: SUPREME COURT STRENGTHENS TAX CREDIT INTERPRETATION IN LANDMARK GUJARAT VAT RULING.
Case Title: STATE OF GUJARAT VS. M/S AMBUJA CEMENT LTD.
Case Number: Civil Appeal No. 7874 of 2024
Dated: August 2, 2024
Quorum: Justice Abhay S.Oka and Justice Augustine George Masih
Issue: -
Whether the VAT and purchases which on which tax credit was not claimed can be included in the purchase amount or taxable turnover for claiming the reduction of tax credit under section 11(3)(b) of the Gujarat Value Added Tax Act, 2003.
Legal Issue:
- An evaluation of the meaning of Section 2(18) of the GVAT Act on the technicality of the purchase price.
- The aim of this paper would be to undertake an analysis of Section 11(3)(b) of the GVAT Act relating to tax credit.
Facts of the Case:
The crux of the case exposes the involvement of the tax in the context of the newly implemented Gujarat Value Added Tax Act of 2003 or the GVAT Act, to be precise. The Respondent, M/s Ambuja Cement Ltd, assessed the taxable turnover of its purchases made within Gujarat by deducting the Value Added Tax (VAT) accompanied by the value of purchases on which no tax credit was claimed. This calculation was effected according to the provision of the section 11(3)(b) of the GVAT Act. However, it is stated that the Deputy Commissioner, in the course of the audit assessment, includes the amount of VAT and the value of purchases for which tax credit has not been claimed in the total taxable turnover.
Not happy with this, M/s Ambuja Cement Ltd sued the Gujarat Value Added Tax Tribunal; which delivered the appellant’s desired verdict with effect from the revenue assessment year 2006-07 by excluding the amount of VAT and unclaimed tax credit from the taxable turnover. The State of Gujarat moved against this decision before the High Court since it dismissed the appeal by the Tribunal. Later on; the State of Gujarat filed a civil appeal before the Supreme Court of India.
Contentions of the Appellant (State of Gujarat):
The lower court which comprised both the Tribunal and the High Court misinterpreted sec 2(32) of the GVAT Act and supported the case of the Respondent M/s Ambuja Cement Ltd The assertion of the Appellant was that the ‘turnover of purchases’ must bring within it all sorts of consideration paid or payable by the dealer and this necessarily includes the VAT paid on purchase. In the Appellant’s view, at least as far as the HVAT is concerned, it is wrong to exclude VAT from the purchase price used in the calculation of taxable turnover as this defeats the legislative purpose of the GVAT Act. The Appellant stressed that the fact that VAT is included in the purchase price equally hurts the principle of the maintenance of the tax system. The respondents submitted that VAT is already incorporated within the purchase price and therefore seeking to expunge it is inimical to the realization of the right revenue the state is entitled to.
Additionally, the Appellant focused on the fact that according to the specified Section 2(18) of the GVAT Act the ‘purchase price’ means the price actually paid or payable for the goods and hence emphasized that this concept should be further extended to embrace all aspects of consideration including the VAT. Another ground advanced by the Appellant was the dissatisfaction with the Respondent’s legal analysis of the statutory provisions pointing out that had the legislature intended to leaving out VAT in the computation of the taxable turnover, it would have done so clearly. Their rationale was that since the agreement did not contain such exclusion, VAT has to form part of the taxable turnover. They argued that the interpretation that was given by the Tribunal and the High Court was too narrow and did not take account of the legislative aim of having a wide and proper base for the taxation.
Contentions of the Respondent (M/s Ambuja Cement Ltd):
M/s Ambuja Cement Ltd, the Respondent in the case, supported the actions of the Tribunal and the High Court contending that the two had made the right call in their interpretation of the provisions of the aforementioned GVAT Act. The Respondent argued that the definition of ‘Purchase Price’ under Section 2(18) of the GVAT Act is specific and hence it does not include VAT. They noted that it lists some of the duties and taxes, for example those under the Central Excise Tariff Act, 1985 and the Customs Act, 1962 but does not include VAT. The Respondent pointed out that this was done intentionally and evidences the fact that the legislature was negative and pendix towards the inclusion of VAT in calculation of Turnover Tax.
The Respondent further provided case-law support for excluding VAT from the purchase price as this conforms to the general principles of taxation law that the taxing-point or the base to be taxed has to be the value of the goods or services that are being supplied excluding value added tax that is recovered in relation to the supply. The Respondent also claimed that such inclusion would amount to charging VAT on the purchase price again since, to the knowledge of the Respondent, VAT is already a tax that is levied on sale of goods and services. Therefore, if it is included in the taxable turnover the tax liability will apparently be much higher than it should be.
Furthermore, the Respondent affirmed that they never declared or took any tax credit on certain purchases, and thus including the value of those purchases to the taxable turnover will demean the GVAT Act since it is structured to exclude cascading tax effects. The Respondent claimed that the mechanism of tax credit under the provisions of the VAT legislation is aimed at enabling enterprises to set off the amount of tax that has been paid on the purchase of supplies against the amount of tax credit on the sales. By adjusting the amount of subtractions that resulted in the use of other types of credits, including the value of purchases as to which no credit was taken, the state would be unfairly taxing the same value twice.
The Respondent also pointed out that the Tribunal and the High Court’s interpretation of the statutory provisions was consistent with the overall objective of the VAT system, which is to ensure that taxes are levied only on the value added at each stage of the supply chain, not on the entire turnover. They maintained that the Tribunal and the High Court had correct
Judgment:
The apex court taking into purview all the laws that govern contradictory procedure of civil suits after giving due consideration to facts of the case endorsed the judgment delivered by the Tribunal and the High Court. The Court then observed that definition of ‘Purchase Price’ as given under Section 2(18) of the GVAT Act is a chapaterized list and does not include VAT. The Court added that being aware of the importance of accounting VAT, the legislature purposely excluded it from the purchase price; and regarding the definition of accounting VAT, it cannot be given other meanings. Hence, to ascertain the purchases for the purpose of the taxable turnover, the latter should be established by subtracting VAT with an addition of the excluded value of the credit note.
Conclusion:
The Judiciary also supported the minority component by dismissing the appeal filed by the State of Gujarat affirming the ruling of the Tribunal and the High Court. The judgment ruled out that when calculating the taxable turnover under the GVAT Act, the VAT and unclaimed tax credits should not be included; this confirms the legal saying that one should look at the law and only the law to interpret a taxation statute. This decision helps to explain how the taxable turnover is computed in accordance with the GVAT Act with regards to the exclusion of VAT and unclaimed tax credits.
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WRITTEN BY: Abhishek Aiyappa.
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