Court’s decision
The Madras High Court allowed the writ petitions and set aside the Tribunal’s order affirming the levy of purchase tax under Section 7A of the Tamil Nadu General Sales Tax Act, 1959. The Court held that Section 7A can be invoked only where the sale to the purchaser takes place in circumstances in which no tax is payable under the Act and not merely because the seller has failed to remit tax. The High Court emphasized that the Tribunal’s reasoning—treating non-remittance by the seller as equivalent to non-taxable circumstances—was legally misconceived and unsustainable.
The Court relied on the statutory scheme and judicial precedent to hold that Section 7A is a distinct charging provision designed to tax purchases in specific situations, particularly when the seller’s transaction is itself exempt or outside the tax net. It cannot be applied where the sale is taxable in the hands of the seller but the seller has simply failed to pay. The Court noted that the Tribunal overlooked the fact that the vendors had turnovers well above the threshold prescribed under Section 3(2), making their sales taxable irrespective of registration status. The Court also relied upon the Kerala High Court’s interpretation of a pari materia provision to reinforce the principle that the test is whether tax is “payable,” not whether it was “paid.” If tax was payable but unpaid, the Revenue must proceed against the seller, not shift the burden to the purchaser.
Accordingly, the Court quashed the impugned order and restored the earlier appellate finding that purchase tax could not be imposed. The writ petitions were allowed, and connected applications were closed.
Facts
The Appellant was engaged in manufacturing and selling asphalt roofing sheets during the relevant assessment years. The business purchased asphalt from two dealers and used it in manufacturing finished goods, on which output tax was duly paid. Following an inspection by the Enforcement Wing, it was noticed that the two vendors had not remitted sales tax on the transactions. The Assessing Authority invoked Section 7A and levied purchase tax on the Appellant on the premise that since the vendors had not paid tax, the purchases were liable to tax in the hands of the buyer. The Appellant challenged this before the first appellate authority, which remanded the matter for fresh verification. On remand, the Assessing Authority again levied purchase tax, which was set aside by the Appellate Assistant Commissioner. The Tribunal reversed this and affirmed the levy, prompting the present writ petitions.
Issues
The primary issues were whether Section 7A could be invoked merely because the seller failed to pay tax; whether a sale that is otherwise taxable in the hands of the seller can be treated as a sale in circumstances where “no tax is payable”; whether the Tribunal misdirected itself by proceeding on non-payment rather than non-payability; and whether Revenue is required to proceed against the defaulting seller rather than shifting liability to the purchaser.
Petitioner’s arguments
The Petitioner argued that Section 7A applies only when the purchase occurs in a situation where the sale itself is not taxable—for example, a second sale, an exempt sale, or a purchase from an unregistered person outside the tax chain. The Petitioner contended that the vendors’ turnovers were above threshold limits, making them liable to pay tax under Section 3(2), and therefore the non-payment by vendors does not transform the sale into a non-taxable transaction. The Petitioner relied on sale invoices, bank payments, and transport documents to show that the transactions were genuine. It was argued that the Tribunal failed to consider the statutory ingredients and erroneously focused on the vendors’ default rather than their liability. The Petitioner also emphasized that the Revenue’s remedy was against the seller, not the purchaser.
Respondent’s arguments
The Respondent contended that since the vendors had not discharged tax on the sales, the purchases fell under circumstances triggering Section 7A. It was argued that the statutory scheme pre-supposes that tax must be remitted at the first point of sale and failure to do so results in a cascading liability under Section 7A. The Respondent asserted that the Tribunal was justified in concluding that the Appellant used the goods in manufacturing and thereby satisfied the conditions of consumption under Section 7A. It was further argued that the seller’s absence or non-traceability justified invoking purchase tax to protect revenue interests.
Analysis of the law
The Court undertook a detailed analysis of Section 7A, emphasizing that the provision is not a general catch-all for vendor default. It applies only when the purchase is made in circumstances where no tax is payable under Sections 3 or 4. The Court stressed the distinction between “payable” and “paid,” observing that the statute uses the former. Therefore, if tax is payable in the hands of the seller, the circumstances cannot be treated as non-taxable merely because the seller failed to discharge the obligation. The Court found the Tribunal’s reading to be contrary to the charging structure.
The Court highlighted the reasoning in the Kerala judgment relating to a similar purchase-tax provision, which held that tax liability turns on whether the seller was liable to pay, not whether the seller actually paid. The High Court held that the same logic applies to the Tamil Nadu provision. Thus, the statutory language, scheme, and constitutional principles collectively indicate that Section 7A cannot be invoked for mere non-payment by vendors.
Precedent analysis
The Court relied on the Kerala High Court’s decision in Premo Pipe Factory, which interpreted a similar purchase-tax provision. The decision clarified that Section 5A (Kerala) taxes purchases only when the sale is not liable to tax in the hands of the seller. Applying this reasoning, the Court held that the Tribunal erred in treating a taxable sale as non-taxable merely because of default. The Court also referred to the Supreme Court’s interpretation of Section 7A in earlier decisions requiring strict satisfaction of all statutory ingredients. Collectively, these authorities guided the Court to hold that the Tribunal misconstrued the scope of Section 7A.
Court’s reasoning
The Court reasoned that the vendors’ turnovers exceeded the minimum taxable threshold, making their sales liable to tax regardless of registration status. Therefore, the statutory condition of “circumstances in which no tax is payable” was not satisfied. The Court also emphasized that Section 7A is designed to prevent evasion in situations where the purchase escapes tax entirely—not to penalize a purchaser when the seller defaults. The Court found that the Tribunal incorrectly equated “non-payment” with “non-payability” and thereby created jurisdiction where none existed. The Court held that the proper course for the Revenue was to take action against the vendors and not impose an unlawful burden on the purchaser.
Conclusion
The Court held that the levy of purchase tax under Section 7A was unsustainable because the sale to the Petitioner was clearly taxable in the hands of the vendors. The Tribunal’s reasoning was found to be flawed in law and unsupported by statutory interpretation. Consequently, the Court quashed the Tribunal’s order and restored the Appellate Authority’s finding. All connected petitions were allowed, and no costs were awarded.
Implications
The ruling carries significant implications for purchase-tax liability under the TNGST regime. It clarifies that Section 7A cannot be invoked as a compensatory mechanism when vendors default. The burden cannot be shifted to purchasers who have engaged in genuine transactions and where the sale is taxable at the first point. The decision reinforces that the Revenue must proceed against defaulting vendors and cannot bypass statutory design by targeting purchasers. It strengthens legal certainty for manufacturers and traders and provides judicial safeguards against arbitrary levy of purchase tax where the circumstance of “non-payability” is not met.