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Representation prepared on behalf of Jalandhar Sales Tax Bar on the issue of retention of ITC on closing stock
October, 06th 2014

I have prepared and written a representation on behalf of Jalandhar Taxation Bar submitted to AETC, Jalandhar II, DETC, Jalandhar Division, ETC, Punjab and Additional ETC, Punjab. This representation is mainly on the issue of retention of ITC on closing stock in case of exporters by the Designated Officers at Jalandhar relying upon section 18(2) of Punjab VAT Act, 2005.

The representation is as follows:

In continuation of the earlier meetings many issues were put forth and discussed but except ,one issue to some extent, neither can be solved nor any effort was made to solve the same by your good self. Now the Taxation Bar, Jalandhar is facing a new problem i.e. retention of ITC on closing stock mentioned in subject matter which may give birth and also lead to an illegal litigation. In this regard it is hereby also submitted that prior to it the same illegal practice was not adopted even in the own tenure of yourgoodself. That is why the bar raised this issue and now submits a written representation before your goodself with a request to reconsider at large and direct the officers under your supervision and kind control who are playing with and ignoring the crystal clear provisions in an arbitrarily and illegal manner laid down in the Act, Ibid at their own whim. This act of the officers cause to create unnecessary litigation which is likely to be faced by the department and public at large.

It has come to the notice of Taxation Bar through its members that your officers have been retaining input tax credit of the taxable persons especially those who are exporters and making interstate sales on the ground that certain stock of goods purchased by them lays in their closing stock at the end of the year. (In this regard this practice has not been adopted prior to it even in yourgoodself own tenure also.)

On the above issue we already had a meeting with your goodself along with Excise and Taxation Officer Mr. Sandeep Gupta who has been dealing with the refund cases and the said issue has been discussed at length.

Whereas Mr. Sandeep Gupta ETO as well as your goodself on the day of meeting, stated that as per the provisions of section 18(2) of Punjab VAT Act, 2005 refund in case of exporters, is to be granted only to the extent of goods exported outside India and the ITC on goods which remained in closing stock, cannot be refunded.

Whereas your goodself was also thereby explained in detail by President Sh. Paramjit Singh Advocate, Seceratry Sh. Anil Chadha Advocate and Executive member Amit Bajaj Advocate, the other provisions of the Act in this regard and also how the provisions of the Act were misinterpreted.

Now, it has been decided to file a written representation before your goodself in this regard so as to clarify the above issue in the interest of minimizing the litigation which is likely to affect the ‘public at large and the department as well which is as under:-

Statutory Provisions:

Entitlement of input tax credit-section 13(1): The entitlement of input tax credit is governed by the provisions of section 13 of Punjab VAT Act, 2005. The first proviso to Section 13(1) clearly provides that Input tax shall not be available as input tax credit unless such goods are for sale within the State or in the course of inter-state trade or commerce or in the course of export or……..”. As per the provisions of section 13(1) input tax credit is available if goods are meant for export or otherwise even if the same are not actually exported till date.

Refund of excess ITC at the option of taxable person-section 15(4):The provisions of section 15(4) of Punjab VAT Act, 2005 further provides that Excess amount of input tax credit, if any, after adjustment under sub-section (2) and (3), may be carried over to subsequent tax period or at the option of taxable person, on application being made in the prescribed manner, be refunded in accordance with the provisions of this Act. Thus the excess ITC which remains after adjusting output tax, CST, penalty, interest, if any, has to be refunded if so desired by the taxable person.

Refund mandatory in case of export-Section 18(2): The provisions of section 18(2) of Punjab VAT Act, 2005 provides that a taxable person shall be entitled to claim refund in respect of input tax paid on goods exported out of the territory of India, subject to the conditions and manner, as may be prescribed. Now, the above provisions only makes it mandatory on the part of the State Government to refund the tax paid on goods which are exported outside India. However, it nowhere debars a taxable person to claim refund on the goods which remained in closing stock at the end of the year.

Refund of excess ITC u/s 39: Section 39 which deals with the refund proceedings, the relevant provisions of the said section runs as under:

“Subject to the provisions of this Act and the rules made thereunder, the Commissioner or the designated officer shall, in such manner and within such period, as may be prescribed, refund to a person, the amount of tax, penalty or interest, if any, paid by such person in excess of the amount due from him and also the excess of input tax credit over output tax payable under this Act. The refund may either be by refund voucher or at the option of the person, by refund adjustment order as may be specified:

Provided that, the Commissioner or the designated officer shall first apply such excess amount towards the recovery of any amount due in respect of which a notice under section 29 has been issued or any amount, which is due, but not paid, as the case may be, and shall refund the balance, if any……….”.

Section 39 is not an independent section as it starts with the words ”subject to the provisions of this Act”. Section 39(1) clearly provides for the refund of excess of input tax credit over output tax payable under the Act.

Bar’s Representation on retention of ITC on closing stock

From the above provisions it is clear that ITC on the closing stock cannot be retained on any ground. Section 18(2) relied upon by the Ld. Excise and Taxation Officer, only substantiate the Constitutional mandate of Article 286 which provides for the non levy of tax on export of goods by the State Government. It only states that tax paid on the goods exported has to be refunded. Section 18(2) nowhere says of retaining ITC on closing stock of goods meant for export.

The tax paid on the goods which remained in the closing stock at the end of tax period but which are meant for export, is available as Input Tax Credit as per the provisions of section 13(1) as stated above and such available ITC can be refunded to the taxable person if he so desires as per the provisions of section 15(4) after making an application u/s 39 of the Act.

Mr. Sandeep Gupta ETO on the day of our meeting when was confronted with the above settled position of law, further went on to say that the word “Excess ITC” written in section 15(4) represents the excess of ITC of tax paid on goods actually sold over the output tax liability on the sale of such goods.

The above contention of the Ld. ETO is totally misconceived and is without any legal basis. The Ld. ETO is trying to define excess input tax credit of his own without there being any such corresponding legal provision under the Act.

Once it is clear that tax paid on goods lying in the Closing stock at the end of tax period is available as ITC, such ITC can be adjusted against output tax liability, if any, and if there is no output tax liability then such ITC on closing stock is an excess amount of ITC lying with the revenue, which must be refunded if so desired by the taxable person.

If the hypothetical plea of the Ld. ETO is believed that would mean the tax paid on goods lying in closing stock although is available as ITC u/s 13(1), but the same is not to be treated as an excess ITC, if it exceeds the output tax. It needs to be understand that if the ITC on closing stock can be adjusted against output tax liability,why it cannot be refunded if there is no output tax liability.

Excess ITC has nowhere been defined under the Act, in such a case excess ITC would mean surplus available ITC lying with the revenue after adjustment of output liabilities. Since ITC on closing stock is an available ITC as per the provisions of section 13(1), therefore the same would be considered as excess ITC, if the same remains surplus after adjustment of output tax liabilities. Therefore such a plea of the LD. ETO to retain ITC on closing stock is not tenable and is an irrational interpretation of the provisions of law without any legal footing.

That the Bar is always ready and always available to stand with the department so as to find out how the revenue is to be increased. But it doesn’t means that the revenue be increased at the cost of rejection of genuine claims.

It is further prayed that the any amount of refund which was rejected /deducted by your goodself on the abovestated ground, must be restored to the aggrieved persons as in this regard it was also directed By the worthy Additional Excise and Taxation Commissioner, Punjab on the joint meeting with the Bar.

Now it is known to all of us that how some bogus persons claimed and received a huge amount by way of refunds. That is why the genuine taxable persons are being harassed. No action is being taken against the person receiving the bogus refunds who deceive, cheat the department and play with the government revenue.

It is a general rule of natural justice where there is some ambiguity in some provision the benefit of doubts go to the aggrieved person.

Concluding remarks: What is manifest does not require proof. When there is no statutory provision which directs for holding refund of ITC available on closing stock, the contrary conduct of the revenue is illegal and unjustified. The willful ignorance of the clear cut statutory provisions results in only undermining the authority of law. It must be remembered those who subvert the law, themselves lose the benefit of law. Interpretation of law should be such that it carries out the intention, and does not defeat it. Ignorance of a judge is a clamity for the innocent.

Therefore it is represented before your goodself to abide by the clear cut statutory provisions as stated above and the quasi judicial authorities must interpret the law in a correct manner and should act not as merely an agent of the revenue but in such a manner so as to uphold the utmost interest of justice.

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