Delhi High Court has in a landmark judgment dated October 26, 2017 in the case of On Quest Merchandising India Pvt. Ltd. And others v Government of NCT of Delhi & Others [W.P.(C) 6093/2017 & CM No.25293/2017] has quashed the demands created against the Petitioner purchasing dealers by reading down Section 9 (2) (g) of the Delhi Value Added Tax Act, 2004 (“DVAT Act”) when held against them for the default of the selling dealer. The order has reversed the decision of Hon’ble Tribunal upholding such demands. The Court observed as under:
“To be eligible for ITC, the purchasing dealer who, apart from being registered under the DVAT Act, has to take care to verify that the selling dealer is also a registered dealer and has a valid registration under the DVAT Act. The second condition is that such registered selling dealer has to issue to the purchasing dealer a „tax invoice‟ in terms of Section 50 of the DVAT Act. Such tax invoice would obviously set out the TIN number of the selling dealer. The purchasing dealer can check on the web portal of the Department if the selling dealer is a fictitious person or a person whose registration stands cancelled. As long as the purchasing dealer has taken all these steps, he cannot be expected to keep track of whether the selling dealer has in fact deposited the tax collected with the Government or has lawfully adjusted it against his output tax liability. The purchasing dealer can, of course, ascertain if there is any mismatch of Annexures 2A and 2B but, assuming it is on account of the seller‟s default, there is little he can do about it.”
The Court further noticed the provisions granting power to the department against the defaulting dealer and also against the purchasing dealers who act in connivance with a defaulting selling dealer. The Court also stressed on the bonafide of the purchasing dealer and observed that while denial of ITC could be justified where the purchasing dealer has acted without due diligence, i.e. by proceeding with the transaction without first ascertaining if the selling dealer is a registered dealer having a valid registration, denial of ITC to a purchasing dealer who has taken all the necessary precautions fails to distinguish such a diligent purchasing dealer from the one that has not acted bonafide.
The Court observed that failure to distinguish bona fide purchasing dealers from those that are not results in Section 9 (2) (g) applying equally to both the classes of purchasing dealers would certainly be hit by Article 14 of the Constitution as explained in several decisions which will be discussed hereinafter.
The Court has concluded that the failure of Section 9 (2) (g) of the DVAT Act to make a rational classification between purchasing dealers who are bona fide and those that are not renders it vulnerable to invalidation under Article 14 of the Constitution. The Court discussed battery of cases produced before it by both Appellants and Defendants and thus, this judgement certainly can be called as one of the landmark judgement which has comprehensively covered the concept of Input tax credit and its availability to the purchaser. The Court also relied on the decision of the Supreme Court in Corporation Bank wherein Apex Court had held that the selling dealer collects tax as an agent of the Government and therefore, the bona fide buyer cannot be put in jeopardy when he has done all the law requires him to do so.
In its finality, Hon’ble Court held that provisions of Section 9(2)(g) should not be read down in a manner which goes against a bonafide buyer. Input tax credit should be available to a bonafide buyer when he has in possession a tax invoice reflecting the TIN number of seller and even when the selling dealer has not paid the tax. Thus, Hon’ble Court while saving the bonafide assessee from denial of Input tax credit to them under Section 9(2)(g) of DVAT Act, has also not struck the said provision unconstitutional under Article 14 of the Constitution. Thus, the provision still lives to deter the credit availed by malafide purchasers. However, Court has also advised the Department to proceed against such defrauding purchaser under Section 40A of the said Act.