M/S. HINDUSTAN COCA COLA vs. STATE OF KARNATAKA

1 ® IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 29TH DAY OF MARCH 2016

BEFORE:

THE HON’BLE MR. JUSTICE ANAND BYRAREDDY

WRIT PETITION Nos.22483-22494 OF 2015 (T-RES) CONNECTED WITH

WRIT PETITION Nos.38509 AND 38987-38997 OF 2015 (T-RES)

WRIT PETITITION Nos.38510 AND 38973-38983 OF 2015 (T-RES) WRIT PETITION Nos.23533-23568 OF 2015 (T-RES) WRIT PETITION Nos.56067-56074 OF 2015 (T-RES) WRIT PETITION Nos.57835-57843 OF 2015 (T-RES) WRIT PETITION Nos.2925 AND 4218-4228 OF 2016 (T-RES) WRIT PETITION Nos.3104-3115 OF 2016 (T-RES) WRIT PETITION Nos.6061-6072 OF 2016 (T-RES) WRIT PETITION Nos.11249-11272 OF 2016 (T-RES) IN W.P.Nos.22483-22494 OF 2015

BETWEEN:

Sonal Apparel Private Limited, No.12-B, 6th Main,

2 3rd Phase, Peenya Industrial Area, Bangalore 560 058. Represented herein by its Director/General Manager, Mr. Mohandas.

…PETITIONER

(By Shri K.P.Kumar, Senior Advocate for Shri T. Suryanarayana, Advocate)

AND:

Represented herein by the

Principal Secretary – Finance Department,

Government of Karnataka,

Vidhana Soudha,

Bangalore 560 001.

Commercial Taxes, (Audit) – 6.5,

DVO-06, KIADB, 3rd Block,

14th Cross, Peenya Industrial Area,

4th Phase, Bangalore 560 058.

…RESPONDENTS

(By Shri A.S.Ponnanna, Additional Advocate General –II, for Shri S.V.Giri Kumar, Additional Government Advocate for Respondents)

These Writ Petitions filed under Article 226 of the Constitution of India, praying to a) issue a writ, order or direction, reading down provisions of Sections 10[3] of the KVAT Act prior to its amendment vide the Karnataka Value Added Tax [Amendment] Act, 2015 in such a manner that the petitioner is

3 permitted to calculate its net tax liability by deducting the input tax paid on its purchases from its output tax liability, irrespective of the month in which the purchases were effected or in the alternative and etc;

IN W.P.Nos.38509 AND 38987-38997 OF 2015

BETWEEN:

M/s. Hindustan Coca Cola Beverages Private Limited, 18, KIADB Industrial Area, Bidadi Hobli, Ram Nagar Taluk, Ram Nagar District 562 109. (Represented by Shri M.V.Nagesh Podiyar, 43 years)

…PETITIONER

(By Shri G. Shivadass, Advocate)

AND:

Through its Principal Secretary,

Finance Department,

Vidhana Soudha,

Bangalore 560 001.

Audit-2.1, VAT Division (DVO)-2,

Department of Commercial Taxes,

5th Floor, ‘A’ Block,

Vanijya Terige Karyalaya-2,

80 Feet Road, Rajendra Nagar,

Koramangala, 2nd Stage,

Bangalore 560 047.

… RESPONDENTS

(By Shri A.S.Ponnanna, Additional Advocate General-II, for Shri S.V.Girikumar, Additional Government Advocate for Respondents)

*****

These Writ Petitions filed under Article 226 of the Constitution of India, praying to issue a writ, order or direction, interpreting or reading down provisions of Sections 10[3] of the KVAT Act prior to its amendment vide the Karnataka Value Added Tax [Amendment] Act, 2015 in such as manner as to permit availment of input tax credit irrespective of the month in which the purchase is effected and etc;

IN W.P.Nos.38510 AND 38973-38983 OF 2015

BETWEEN:

M/s. Hindustan Coca Cola Beverages Private Limited, 18, KIADB Industrial Area, Bidadi Hobli, Ram Nagar Taluk, Ram Nagar District 562 109. (Represented by Shri M.V.Nagesh Podiyar, 43 years)

…PETITIONER

(By Shri G. Shivadass, Advocate)

AND:

5 1. State of Karnataka,

Through its Principal Secretary,

Finance Department,

Vidhana Soudha,

Bangalore 560 001.

Audit-2.1, VAT Division (DVO)-2,

Department of Commercial Taxes,

5th Floor, ‘A’ Block,

Vanijya Terige Karyalaya-2,

80 Feet Road, Rajendra Nagar,

Koramangala, 2nd Stage,

Bangalore 560 047.

… RESPONDENTS

(By Shri A.S.Ponnanna, Additional Advocate General-II, for Shri S.V.Girikumar, Additional Government Advocate for Respondents) *****

These Writ Petitions filed under Article 226 of the Constitution of India, praying to issue a writ, order or direction, interpreting or reading down provisions of Sections 10[3] of the KVAT Act prior to its amendment vide the Karnataka Value Added Tax [Amendment] Act, 2015 in such as manner as to permit availment of input tax credit irrespective of the month in which the purchase is effected and etc;

IN W.P.Nos.23533-23568 OF 2015

BETWEEN:

DEPA India Private Limited, No.16, St. Marks Road, Bangalore 560 001,

6 Now at No.601, Sagar Tech Plaza, 6th Floor A Wing, Andheri Kurla Road, Sakinaka Junction, Andheri East, Mumbai 400 072, Represented herein by its Finance Manager, Mr. Surendran K Nair.

…PETITIONER

(By Shri K.P.Kumar, Senior Advocate for Shri T. Suryanarayana, Advocate)

AND:

Represented herein by the

Principal Secretary – Finance Department,

Government of Karnataka,

Vidhana Soudha,

Bangalore 560 001.

Commercial Taxes, (Audit) – 3.6,

DVO-03, Shantinagar,

K.H.Road,

Bangalore 560 027.

…RESPONDENTS

(By Shri A.S.Ponnanna, Additional Advocate General –II, for Shri S.V.Giri Kumar, Additional Government Advocate for Respondents)

These Writ Petitions filed under Article 226 of the Constitution of India, praying to i) reading down the provisions of Section 10[3] of the KVAT Act, prior to its amendment vide the

7 Karnataka Value Added Tax [Amendment] Act 2015 in such a manner that the petitioner is permitted to calculate its net tax liability by deducting the input tax paid on its purchases form its output tax liability, irrespective of the month in which the purchases were effected and etc;

IN W.P.Nos.56067-56074 OF 2015

BETWEEN:

Ingram Micro India Private Limited, No.12 SG Business Center, New Hosur Road, Wilson Garden, Bangalore 560 027, Represented herein by its Deputy General Manager, Mr. Manikath Nandakumar, Aged about 46 years.

…PETITIONER

(By Shri K.P.Kumar, Senior Advocate for Shri T. Suryanarayana, Advocate)

AND:

Represented herein by the

Principal Secretary – Finance Department,

Government of Karnataka,

Vidhana Soudha,

Bangalore 560 001.

Commercial Taxes, (Audit – 4.1),

Vanijya Therige Karyalaya -2, Koramangala,

Bangalore 560 047.

…RESPONDENTS

(By Shri A.S.Ponnanna, Additional Advocate General –II, for Shri S.V.Giri Kumar, Additional Government Advocate for Respondents)

These Writ Petitions filed under Article 226 of the Constitution of India, praying to a) issue a writ, order or direction reading down the provisions of Section 10[3] of the KVAT Act, prior to its amendment vide the Karnataka Value Added Tax [Amendment] Act 2015 [Annexure-A] in such a manner that the petitioner is permitted to calculate its net tax liability by deducting the input tax paid on its purchases form its output tax liability, irrespective of the month in which the selling dealer raises invoices or in the alternative and etc;

IN W.P.Nos.57835-57843 OF 2015

Ace Designers Limited, Plot No.7 and 8, II Phase, Peenya Industrial Area, Bangalore 560 058, Represented herein by its Senior Manager – Finance and Taxation Mr. Baban G Dhayarkar, Aged 52 years.

…PETITIONER

(By Shri K.P.Kumar, Senior Advocate for Shri Suryanarayana .T, Advocate)

AND:

Represented herein by the

Principal Secretary – Finance Department,

Government of Karnataka,

Vidhana Soudha,

Bangalore 560 001.

Commercial Taxes,

LVO-75, DVO-6,

KIADB Complex, Peenya Industrial Estate,

Bangalore 560 058.

…RESPONDENTS

(By Shri A.S.Ponnanna, Additional Advocate General –II, for Shri S.V.Giri Kumar, Additional Government Advocate for Respondents)

These Writ Petitions filed under Article 226 of the Constitution of India, praying to read down the provisions of Section 10[3] of the KVAT Act, prior to its amendment vide the Karnataka Value Added Tax [Amendment] Act 2015 in such a manner that the petitioner is permitted to calculate its net tax liability by deducting the input tax paid on its purchases from its output tax liability, irrespective of the month in which the selling dealer raises invoices, or in the alternative and etc;

IN W.P.Nos.2925 AND 4218-4228 OF 2016

BETWEEN:

M/s. India Motor Parts and Accessories Limited, No.175, Khader Sheriff Garden,

10 4th Cross, Lalbagh Road, Bengaluru 560 027, Represented by its Senior Vice-President (Finance and Accounts), S. Ramasubramanian, Aged about 55 years, Son of S. Sankaranarayanan, Residing at A-6/5, Green Acres, Perungudi, Chennai 600 096.

…PETITIONER (By Shri Balachandran B.S., Advocate)

AND:

Commercial Taxes (Audit) – 3.4,

DVO-3, 2nd Floor,

BMTC, Shantinagar,

Bengaluru 560 027.

Commercial Taxes in Karnataka,

Vanijya Therige Karyalaya,

1st Main, Gandhinagar,

Bengaluru 560 009.

Represented by its

Finance Secretary,

Vidhana Soudha,

Bengaluru 560 001.

…RESPONDENTS

11 (By Shri A.S.Ponnanna, Additional Advocate General-II for Shri S.V.Giri Kumar, Additional Government Advocate for Respondents)

These Writ Petitions filed under Articles 226 and 227 of the Constitution of India praying to quash the impugned order dated 30.12.2015 CAS No.292669009 vide Annexure-C issued under Section 39(1) read with Section 72(2) and 36(1) of the Act, 2003 and etc;

IN W.P.Nos.3104-3115 OF 2016

BETWEEN:

Ingram Micro India Private Limited, No.12, SG Business Center, New Hosur Road, Wilson Garden, Bangalore 560 027, Represented herein by its Director Tax, Mr. Vikash Khannah.

…PETITIONER

(By Shri K.P.Kumar, Senior Advocate for Shri Suryanarayana .T, Advocate)

AND:

Represented herein by the

Principal Secretary – Finance Department,

Government of Karnataka,

Vidhana Soudha,

Bangalore 560 001.

Commercial Taxes, (Audit – 4.1),

Vanijya Therige Karyalaya -2, Koramangala,

Bangalore 560 047.

…RESPONDENTS

(By Shri A.S.Ponnanna, Additional Advocate General –II, for Shri S.V.Giri Kumar, Additional Government Advocate for Respondents)

These Writ Petitions filed under Article 226 of the Constitution of India, praying to a) read down the provisions of Section 10[3] of the KVAT Act, prior to its amendment vide the Karnataka Value Added Tax [Amendment] Act, 2015 vide Annexure-A in such a manner that the petitioner is permitted to calculate its net tax liability by deducting the input tax paid on its purchases from its output tax liability, irrespective of the month in which the selling dealer raises invoices, or in the alternative and etc;

IN W.P.Nos.6061-6072 OF 2016

BETWEEN:

Ingram Micro India Private Limited, No.12 SG Business Center, New Hosur Road, Wilson Garden, Bangalore 560 027, Represented herein by its Deputy General Manager, Mr. Manikath Nandakumar, Aged about 46 years.

…PETITIONER

(By Shri K.P.Kumar, Senior Advocate for Shri T. Suryanarayana, Advocate)

AND:

Represented herein by the

Principal Secretary – Finance Department,

Government of Karnataka,

Vidhana Soudha,

Bangalore 560 001.

Commercial Taxes, (Audit – 4.1),

Vanijya Therige Karyalaya -2, Koramangala,

Bangalore 560 047.

…RESPONDENTS

(By Shri A.S.Ponnanna, Additional Advocate General –II, for Shri S.V.Giri Kumar, Additional Government Advocate for Respondents)

These Writ Petitions filed under Article 226 of the Constitution of India, praying to a) issue a writ, order or direction reading down the provisions of Section 10[3] of the KVAT Act, prior to its amendment vide the Karnataka Value Added Tax [Amendment] Act 2015 [Annexure-A] in such a manner that the petitioner is permitted to calculate its net tax liability by deducting the input tax paid on its purchases form its output tax liability, irrespective of the month in which the selling dealer raises invoices or in the alternative and etc;

14 IN W.P.Nos.11249-11272 OF 2016

BETWEEN:

Kaveri Plasto Containers Private Limited, No.19-G, KIADB Industrial Area, Sector -1, 2nd Phase, Bidadi, Ramanagara 562 109, Represented herein by its Director, Mr. Sushil Sonegara, Age 36 years.

…PETITIONER

(By Shri T. Suryanarayana, Advocate)

AND:

Represented herein by the

Principal Secretary – Finance Department,

Government of Karnataka,

Vidhana Soudha,

Bangalore 560 001.

Commercial Taxes (Audit) 2.1,

DVO, 2, Koramangala,

Bangalore 560 047.

…RESPONDENTS

(By Shri S.V.Girikumar, Additional Government Advocate for Respondents)

These Writ Petitions filed under Article 226 of the Constitution of India praying to read down the provisions of

15 Section 10(3) of the KVAT Act, prior to its amendment vide the Karnataka Value Added Tax (Amendment) Act, 2015 at Annexure-A in such a manner that the petitioner is permitted to calculate its net tax liability by deducting the input tax paid on its purchases from its output tax liability irrespective of the month in which the selling dealer raises invoices or in the alternative and etc;

These Writ Petitions having been heard and reserved on 24.02.2016 and W.P.Nos.11249-11272/2016 reserved on 2.3.2016 and coming on for pronouncement of Orders this day, the Court delivered the following:-

ORDER

These petitions are heard and disposed of by this common order, as the petitioners claim to be similarly aggrieved.

16 manner that would render it ultra vires the Constitution of India as well as the object and Scheme of the KVAT Act.

It is recounted that the Karnataka Sales Tax Act, 1957 (Hereinafter referred to as the “KST Act”, for brevity) which was the predecessor to the KVAT Act, provided for the levy of tax on sales of goods in the State of Karnataka. The provisions of the KST Act provided for a single point levy of tax on the sale or purchase of goods, and therefore, if the same commodity was sold more than once, tax could only be levied on the first sale or purchase, as the case may be and not on subsequent sales or purchases. However, due to the fact that goods often underwent a change in their form during various stages of manufacture and processing, the provisions of the KST Act result in tax being levied on the first sale of each new commodity that came into existence during the manufacturing process. Therefore, tax was levied at multiple stages before the final commodity was sold to the end consumer. The said multiple taxes were eventually passed

17 on to and borne by the end consumer and this so-called cascading effect of taxes resulted in the escalation of prices of goods, which eventually affected consumers across the State. In order to rectify the problem caused by the cascading effect of taxes, the KVAT Act was brought into force with effect from April 1, 2005. The primary intention behind the legislation of the KVAT Act was to ensure that tax is paid only on the value addition at each sale of goods thereby reducing the quantum of taxes embedded in the price of goods, and passed on to the end consumer. The same was achieved by permitting an assessee to deduct the tax paid on his purchases from the tax payable on his sales in order to calculate his net tax liability. More specifically, as per the provisions of the KVAT Act, the net tax payable by a dealer is the tax payable on his sales less the tax paid by him on his purchases. The scheme and object of the KVAT Act is amply evident on a reading of clauses (ii) and (iv) of the Statement of Object and Reasons to the Act. The said clauses state that the KVAT Act provides for the “removing of cascading effect” by

18 allowing “set off of all tax paid at earlier points in respect of goods sold against the tax payable, defined as “output tax”, at any point, the set off scheme being called as input rebating. The petitioners claim that they purchase various taxable goods to be used as inputs and consumables in the manufacture of finished products. In respect of such purchases, the petitioners pay taxes applicable to its selling dealers, and as the said tax paid qualifies as "input tax" under Section 10(2) of the KVAT Act, the petitioners had deducted the same while calculating the net tax liability as per Section 10(3) of the KVAT Act. The petitioners claim to have consistently availed credit of input tax paid by them in the month in which they accounted for the purchases in their books. However, due to practical constraints, the month in which the purchases were accounted for were often not the same month in which the purchase invoices were raised. The reasons as to why the petitioners had to account for their purchases in a month different from the month in which the invoices were raised on their suppliers were stated to be as follows :

19 (a) Audit checks: When the petitioner receives goods from its suppliers, they are accounted for only after an independent auditor checks the quantities and prices of the goods supplied and ensures that they match with the purchase orders that had been raised earlier. Therefore, it is often the case that the invoices are raised by the suppliers in one month but the purchases are accounted for in another month only after the audit is conducted. (b) Quality and quantity controls : In respect of certain supplies, due to quality and quantity mismatches the goods have to be returned to the suppliers in order to be replaced. In such cases, the goods are sent back and are accounted for only when the goods are replaced. Therefore, in these cases, too the month in which the purchases are accounted for may vary from month in which the invoices were raised. (c) Month of receipt of goods different from the month in which invoices are raised: In certain cases, goods are despatched and invoiced by the sellers on the 30th or 31st of a particular month and the goods will be received by the petitioners only on 1st or 2nd

20 of the next month or even later depending upon the location of the supplier in the State of Karnataka and or actual despatch of goods by its supplier. In such cases, the petitioners will account for the purchases only in the next month after conducting the quantity and quality checks. Therefore, the month in which the goods are accounted for will be different from the one in which the invoices are raised. In view of the above, apart from other practical reasons, it is claimed that the petitioners were often constrained to account for their purchases in a month that was different from the month in which the invoices were raised on their suppliers. It is however, claimed that the petitioners had consistently availed credit of input tax paid by them in the month in which they accounted for the purchases in their books. It is pointed out that on July 31, 2014, in State of Karnataka vs. Centum Industries Limited, (2014)80 KLJ 65, a Division Bench of this court interpreted section 10(3) of the KVAT Act to mean that a dealer must claim credit of input tax in its returns filed

21 for the month in which input tax is paid by it. More specifically, this court held that it is clear the words ‘in that period’ specifies the period during which input tax is paid”. This court further clarified that if a dealer does not claim credit of input tax in its return filed for the month in which the input tax is paid, he may file revised returns for the same month within the time period prescribed under Section 35(4) of the KVAT Act, that is 6 months from the end of the relevant tax period. Thereafter, on April 1, 2015, the Karnataka Value Added Tax (Amendment) Act, 2015 (“the 2015 KVAT Amendment Act” for short) was brought into force. As proposed in the Karnataka State Budget for the years 2015-16 Section 5 of the 2015 KVAT Amendment Act substituted Section 10(3) of the KVAT Act. Section 10(3) as substituted by the 2015 KVAT Amendment Act now reads as follows: “Subject to input tax restrictions specified in sections 11,12,14,17,18 and 19, the net tax payable by a registered dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and relatable to goods purchased during the period

22 immediately preceding five tax periods of such tax period, if input tax of such goods is not claimed in any of such five preceding tax period and shall be accounted for in accordance with the provisions of the Act.,”

As a result of the amendment to section 10(3), an assessee is now permitted to avail credit of tax paid on inputs purchased five months prior to the tax period in which the credit is being availed. For instance, as per the amended provision, a dealer is permitted to take credit of goods purchased in the months of November, December, January, February and March in his returns filed for the month of April. Under Section 35(4) a dealer will also have an additional six months from the end of the relevant tax period to file revised returns for the month of April and claim any unavailed credit. On September 30, 2015, while dismissing the State’s revision petition in State of Karnataka vs. Manyata Promoters Private Limited (STRP No.329/2014), a division bench of this court held that “nowhere in the Act has it been stated that the input tax credit should be claimed in the month in which the date

23 of the invoice of the supplier/vendor falls or the purchasing dealer has to claim input tax credit in the same period in which the bills have been raised by the selling dealer.” In the said case, this court therefore confirmed the petitioner’s understanding that there was no time limit prescribed under the provisions of the KVAT Act for availment of input tax credit and that the Act did not make it mandatory for an assessee to avail credit only in its returns filed for the month in which the purchase invoices were raised.

24 object of the Act is achieved by allowing dealers to deduct the input tax paid by him on purchases from their output tax liability on sales effected by them, thereby ensuring that tax is levied only on the incremental monetary value addition on each sale of goods. Section 10(3) of the KVAT Act states that “the net tax payable by a registered dealer shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and shall be accounted for in accordance with the provisions of the Act. Therefore the availment of input tax credit under Section 10(3) is a right vested in every registered dealer under the Act, and the same furthers the underlying object of the Act. Pertinently, Section 10(3) does not indicate any time period when or within which a dealer is required to avail input tax credit. Therefore, the consistent business practice of dealers across the State is to avail credit of input tax in the month in which they account for their purchases, which is generally done after the

25 goods are received and an audit is conducted in order to ensure that the goods received are in conformity with the specifications contained in the purchase order. Since the physical movement of the goods and their verification after receipt takes some time, it is likely that the accounting of the purchases is done a month or two (occasionally, in cases where goods are returned and replaced, it may take a little longer than one or two months) after the month in which the purchase invoice is raised by the selling dealer. Accordingly, ever since the inception of the KVAT Act, in April 2005, dealers, consistently availed input tax credit in the month in which they accounted for the purchases, and since the same was in accordance with the provisions of Section 10(3), the Revenue never objected to the same. However, in the latter half, of 2014, drawing inspiration from the judgment of this court in State of Karnataka vs. Centum Industries Limited, (2014)80 KLJ 65, the revenue took the position that input tax credit must be taken in the month in which the purchase invoice was raised by the selling dealer. The Revenue’s reliance on the said judgment,

26 is however, wholly misplaced as that was a case where the dealer, having apparently accounted for his purchases in June 2006, claimed credit of the tax paid on the purchases in the month of February 2007. Noting that credit ought to have been claimed in the month of June 2006 an error that could have been rectified by filing a revised return within six months, that is by December 2006, the Court disapproved the dealer’s action in claiming credit in the month of February 2007. Therefore, the facts of the said case are entirely different from the case of the petitioners, wherein they have consistently claimed credit in the month in which they have accounted for the purchases. Moreover there is nothing sacrosanct about the date of the seller’s invoice as section 10(3) does not, in any way, suggest that input tax credit must be availed in the return filed for the month in which the selling dealer raises his invoice. Despite the same, relying on the judgment in Centum Industries, the Revenue started passing reassessment orders from the end of 2014 denying input tax claimed by dealers to the extent it was availed

27 in a month other than the month in which the purchase invoices were raised. Thereafter, apparently, realising the Revenue’s folly, the Legislature substituted Section 10(3) vide the Karnataka Value Added Tax (Amendment) Act, 2015, (“the 2015 KVAT Amendment Act” for short). The new provision, which was inserted by way of a substitution, provided that input tax credit could be claimed in returns filed for a month with reference to purchases effected within the preceding five months. It is a settled position of law that a provision inserted by way of a substitution would relate back to and apply with effect from the date the original provision was introduced, which in the case of section 10(3) is 1.4.2005. In this regard, reliance is placed on the following judgments: (a) Government of India vs. Indian Tobacco Association, 2005 (187) ELT 162 (b) Hassan Co-operative Milk Producers Societies Union Limited vs. State of Karnataka, AIR 2014 Kar. 120

28 It is further pertinent to note that the underlying basis for the substitution, as stated in the Statement of Objects and Reasons for the 2015 KVAT Amendment Act, is as follows; “It is considered necessary to amend the Karnataka Value Added Tax Act, 2003 to give effect to the proposals made in the Budget and matters connected therewith and specifically to, (iii) provide for claim of input tax rebate of preceding tax periods in the return filed for the subsequent tax period, if input tax rebate was not claimed in the relevant tax period. This is to facilitate the dealer to claim input tax credit at a later date as per their business practices of accounting.”

Therefore, Section 10(3) was substituted in order to facilitate dealers to claim input tax credit in accordance with the business practices of accounting, and the same is a beneficial amendment that was effected in order to clarify the confusion (imaginary) prevailing among the trade as well as the Revenue on account of this court’s judgment in Centum Industries. The Supreme Court in Commissioner of Income-tax vs. Vatika Township, (2015)1 SCC 1 page 22 para 30 held that if a

29 legislation confers a benefit on some persons, without inflicting a corresponding detriment on some other person and where to confer such benefit appears to have been the legislator’s object, then the provision would have to be given retrospective effect. Therefore, since Section 10(3) as amended in 2015, is a beneficial provision, the said provision must be given retrospective effect with effect from the date of insertion of the original provision that is 1.4.2005. The Revenue contended that if for any reason, input tax credit could not be availed in the month in which the purchase invoice was raised, the dealer could have filed a revised return within a period of 6 months under the provisions of Section 35(4) with reference to the month in which the seller’s invoice was raised. This is wholly impermissible, impractical and opposed to all canons of accounting, business and commercial practices. Virtually every dealer is liable to a tax audit, and revising a return for the month in which the seller raises his invoice would be incompatible with the dealer’s accounts, as the purchases are

30 accounted for in a later month. Any such action by the dealers would result in the rejection of the dealer’s books of accounts, leading to best judgment assessments being passed besides severe penal action. In the light of the foregoing, it is contended that the petitioner’s case can be summarised as follows: (a) Section 10(3) prior to its substitution, enabled a dealer to take input tax credit in the month in which the purchases were accounted and if the same was not done, the same could be rectified by filing a revised return under Section 35(4) within 6 months. Fiscal discipline dictated that input tax had to be taken in the month in which the purchases were accounted and not in the month in which the seller raised his invoices. (b) alternatively, section 10(3) having been substituted by the 2015 KVAT Amendment Act, would relate back to the day the original provision was introduced and

31 (c) The substituted provision, being a beneficial amendment and being procedural in nature would have retrospective and retroactive operation.

32 manner in which such input tax is to be claimed. It prescribes that the net tax payable by the registered dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and shall be accounted for in accordance with the provisions of this Act. Therefore, it is clear the words “in that period” specifies the period during which input tax is paid and output tax is payable and the same has to be accounted in accordance with the provisions the Act. The same is further clarified by this court in the case of State of Karnataka vs. M/s. Centum Industries, (2015) 77 VST 117 (Kar) and held as under:-

“When in the statute a specific period is prescribed for filing of the return under Section 35(1) of the Act and when a provision is made under Section 35(4) of the Act for filing of a revised return again prescribing a time limit, when in sub-Section (3) of Section 10 it is categorically stated that the input tax shall be accounted in accordance with the provisions of this Act, the assessee would not be entitled to the benefit conferred on him

33 under Sub-Section (4) of Section 10, if it is not accounted for.”

It is contended that in the case of M/s. Infinite Builders and Developers, Bangalore Vs. The Additional Commissioner of Commercial Taxes, (STA 59 of 2009 and 75-83 of 2013), this court has categorically held that: “the benefit of input tax cannot be extended by overlooking the statutory requirements under Section 10(4) of the Act read with Sub- Section (1) and (4) of Section 35 of the Act. Where a statutory provision mandates compliance in a particular manner in examining as to whether the compliance is secured or otherwise, abroad based approach is not called for, more so in tax matters, where the liability is strictly as per the sections and compliance, both on the part of the assessee, also should be strictly in terms of the statutory provisions. An assessee pays penalty if it violates the statutory provision and likewise revenue also loses revenue unless it adherers to the requirements of the statutory provision.”

34 Attention is drawn to Section 2 of the KVAT ( Amendment) Act, 2015, wherein it is indicated that "It shall come into force with effect from the 1st day of April, 2015" and hence the intention of the legislature is that the substitution of Section 10(3) made by the Amendment is prospective in effect and not retrospective. It is further contended that a combined reading of Sections 7(1), 7(2), 10(2), 10(3) and 10(4); and of the Rule 37 gives the following meanings:

a) To support the claim of input tax, there must be a valid tax-invoice. As the tax-invoice is at the base of the input tax claim, the month in which the tax-invoice is issued is the ‘period’ in which the input tax is deductible.

b) Sale happens:

i. When the tax-invoice is issued, as

ii. When the transfer of title to the goods happens;

c) Issuance of tax-invoice is an indication of transfer of title to the goods;

d) When a dealer sells, the other dealer purchases. Every sale must have a corresponding purchase;

e) After the tax-invoice is issued, either the tax is paid immediately or becomes payable. This ‘paid’ tax or ‘payable’ tax is the ‘input tax’ deductible by a registered dealer subject to the restrictions specified; and

f) Section 10(3), as it was in the Financial Year 2012- 2013 and Financial Year 2013-2014, is clear that the input tax deductible is the input tax deductible ‘in that period’, and the ‘period’ is the ‘tax period’ in which the tax-invoice is issued because as soon as the tax-invoice is issued, the tax is paid/payable by the buyer and it is this that is the ‘input tax’ deductible by the buyer according to Section 10(2). Also, the tax- invoice is a document that supports the input tax. So, the period in which the tax-invoice is issued is the period in which the input tax has to be deducted to arrive at the net tax payable.

That Section 10(3) as it stood originally provided for the assessee to claim credit for the input tax paid, subject to making a

36 claim for the same within the tax period. If the assessee failed to make such a claim within the period, he would. The right to claim input tax credits subject to the right to file corrected returns under Section 35(4) of the Act. Therefore the provisions of Section 10(3) of the Act is a Substantive provision vesting in the assessee a right to get input tax credit subject to the claim be made within the time frame and creating a liability on the assessee to forfeit the right to input tax credit if fails to make the claim on time and the rights on the revenue to demand payment of the input tax claim that is disallowed.

The provision is therefore very clearly a substantive one in nature.

That the legislature by way of amendment of Section 10(3) has retained the tenor of the earlier provision, with only a rider that a claim for input tax being extended by five preceding months.

Apart from this change, there is nothing else that is different in the new Section 10(3), therefore the claim of the petitioners that

37 the amendment to Section 10(3) is merely explanatory does not hold any water and is untenable.

It is contended that in the case on hand, admittedly the provision of Section 10(3) as it stood provided for the claim for input tax credit to be made within one tax period and by way of the impugned amendment, the same is enlarged to five preceding tax periods or five months; That being the case, the amendment cannot be said to be explanatory in nature. The amendment although termed as a substitution is therefore neither procedural nor explanatory, hence cannot be retrospective in operation.

It is further contended that it is well settled law that every amendment whether by way of substation or insertion or by any other mode is presumed to be prospective. The principle behind this is that commercial laws must govern the current situation. The only exception to the presumption of prospectivity is amendments to procedural law and amendments that are clarificatory in nature. The current amendment being to substantive law and is not explanatory in nature ought to have

38 prospective operation. The mere use of the term “substitution” will not make the law retrospective in operation.

In the present case, the claim of the petitioners is not merely for retrospective operation but it is retroactive, thereby making the amended provision inapplicable to assessments or the years 2010-2011 to 2011-2012. That could never have been the intention of the legislature. Even if the amendment is to be held as retrospective, it could only be for the five preceding tax periods from the date of the amendment coming in to force which is on 1.4.2015. Reliance is placed on Bhagat Ram Vs. Union of India, 1988 (Supp) SCC 626; Shyam Sunder and others vs. Ram Kumar and another, (2001) 8 SCC 24; K.M.Sharma vs. I.T.O., (2002) 4 SCC 339 and Zile Singh vs. State of Haryana and others, (2004) 8 SCC 1.

39 Statement of Objects and Reasons to the Act, is to avoid the cascading effect of taxes and consequently to reduce the quantum of taxes embedded in the price of goods. This is obviously achieved by allowing the purchasing dealer to deduct the tax paid by him on his purchases, that is the input tax from the tax payable on his sales, that is the output tax, while calculating the net tax liability. It may be quite possible that if Section 10(3) of the KVAT Act is to be interpreted to mean that a dealer is permitted to take credit of tax paid on purchases only in the in which the selling dealer raises invoices, it would result in possible situations where credit cannot be availed of by dealers, for practical reasons as cited by the petitioners. The Scheme of the KVAT Act being to provide for set off of all tax paid at the earliest points of purchase against the tax payable by him on his sales, by compelling a dealer to avail credit of tax paid on purchases only in the month in which the selling dealer raises invoices, the Scheme would be defeated and it may result in double taxation.

40 Under the provisions of the erstwhile Karnataka Sales Tax Act, 1957, tax was leviable only at the stage of first sale of goods. Under the KVAT Act, tax is leviable on every sale of goods, irrespective of whether it is the first, second or third sale. However, in order to ensure that the Act does not fall foul of the prohibition placed by the Constitution of India on double taxation, the provisions of the Act permit a dealer to deduct the amount of tax paid by him on his purchases while calculating his net tax liability. If the interpretation afforded by the Revenue to the meaning of Section 10(3) were to be accepted, the petitioners would be deprived of the benefit of availing credit of tax paid on their purchases, it would result in tax being levied under the provisions of the same Act on the same commodity at multiple stages. In Centum Industries Case, this court has interpreted Section 10(3) to mean that a dealer is required to avail credit of input tax in the month in which the 'input tax' is paid by the purchasing dealer. The said decision does not however, support

41 the proposition that input tax must be availed of in the month in which the selling dealer raises his invoices. The Revenue is hence not justified in seeking to apply the said decision in support of its reasoning. On the other hand, in Manyata Promoters case, a Division bench of this court has categorically held that the provisions of the Act do not require a dealer to avail credit only in its returns filed for the month in which the purchase invoices are raised by the selling dealer. A contention on behalf of the Revenue that a dealer is permitted to avail credit belatedly upto six months by revising the return under Section 35(4) of the KVAT Act, apparently drawing inspiration from the decision in Centum Industries case, is not relevant. It would not be possible to hold that Section 10(3) first restricts availment of credit to the same month as the month of purchase and then Section 35(4) goes on to permit the same by way of revision of return would be an absurd construction. Such an interpretation would lead to the conclusion that the KVAT Act

42 encourages availment of credit by the dealer without ensuring the eligibility for the same, as delay in availment would result in denial of credit altogether and thereafter rectifying any incorrect credit available by revising the return. Such a view could not have been the intention of the legislature as that would lead to a situation where filing of a revised return under Section 35(4) would become a rule, rather than an exception. In other words, every dealer may be necessarily required to file two returns for the same tax period, firstly an original return reflecting incorrect credit and then a revised return availing the eligible credit. A case can be found in favour of the petitioners in the alternative as well. In that, it is not in dispute that from the inception of the KVAT Act, Section 10(3) was consistently interpreted by the Revenue to mean that a dealer is permitted to deduct the input tax paid on his purchases irrespective of the month in which the purchases were effected. Based on the understanding that Section 10(3) did not require dealers to avail credit only in the month in which the purchases were effected.

43 They were held entitled to avail such credit, as long as the claim of input tax credit was supported by the prescribed documents. The ambiguity as to the purport of Section 10(3) arose as a result of the Department's clouded interpretation of the Centum Industries case. The newly substituted provision clears the air and puts to rest the ambiguity, it may hence be said that the amendment to Section 10(3) is clarificatory and therefore could be given retrospective effect. The apex court has held that a clarificatory or declaratory amendment is generally passed in order to rectify what the legislature deems to have been a judicial error. In the case on hand the judgment in Centum Industries case was rendered on 31.7.2014 and in less than a year, the Legislature amended Section 10(3) declaring that the dealers are permitted to avail credit of tax paid on goods purchased in the preceding five months. The petitions are accordingly allowed. Section 10(3) of the KVAT Act, prior to its amendment vide the Karnataka Value Added Tax (Amendment) Act, 2015, shall be read down to enable

44 the petitioners to calculate the net tax liability by deducting the input tax paid on its purchases from its out put tax liability, irrespective of the month in which the selling dealer raises invoices. The impugned orders and notices of demand, challenged in the respective petitions, are quashed. In some of these petitions, there are other incidental issues raised, in respect of which the petitioners shall independently work out their remedies. Since the assessment orders would also cover such other issues, a fresh order shall be passed, enabling the petitioners to question those independently, after affording an opportunity to the petitioners.

Sd/-

JUDGE nv*