State cannot apply reduced ITC rate to stock before statutory amendment takes effect, Supreme Court holds

A bench of Justices Abhay S. Oka and Ujjal Bhuyan heard appeals by the State of Punjab challenging a Punjab and Haryana High Court order that restrained Rule 21(8) of the Punjab Value Added Tax Rules, 2005 from operating with effect from 25.01.2014. The appeals raised the narrow question whether the State could introduce Rule 21(8) between 25.01.2014 and 01.04.2014 when the enabling amendment to Section 13(1) of the Punjab VAT Act came into force only on 01.04.2014.

The Court dismissed the appeals and upheld the High Court’s conclusion that Rule 21(8) could not be given effect to transactions concluded before the statutory amendment. The Court held that input tax credit (ITC) was a statutory benefit and could not be reduced in relation to stock already purchased unless there was express legislative sanction. The Court, in its reasoning, observed: “The benefit of input tax credit is traceable to the statute. If the same has to be reduced, which will have an adverse civil consequence upon the beneficiary, it must have the requisite statutory sanction. In this case, the statutory sanction came on and from 01.04.2014 with the amendment of the first proviso to Section 13(1) of the Punjab VAT Act. Therefore, the High Court was justified in holding that prior to 01.04.2014, there was no statutory sanction to allow applicability of Rule 21(8) on the stock in trade i.e. on inputs already purchased for which transactions stood concluded at a higher rate of tax.” The Court further quoted the High Court’s formulation that “on the date of introduction of sub-rule (8) of Rule 21 of the Rules, the State did not possess any power, emanating from the Act, to confine the availing of input tax credit to the reduced rate of tax on the stock in trade.”

Background The respondent manufacturers purchased iron and steel inputs both within and outside Punjab and claimed input tax credit under the Punjab VAT Act. On 25.01.2014 the State issued notifications: (i) the Punjab VAT (First Amendment) Rules, 2014 inserting sub-rules (7) and (8) into Rule 21 (to operate from 01.02.2014), and (ii) an amendment in Schedule E reducing rates for iron and steel from 4.5% to 2.5% (declared effective 01.02.2014). Rule 21(8) provided that where goods lay in stock and the rate of tax on those goods was reduced, “from that date, input tax credit shall be admissible ... at the reduced rate” on sale or use as input.

The Punjab Act had earlier defined entitlement to ITC by reference to goods “for sale” or “for use in the manufacture” and, by the Punjab Value Added Tax (Second Amendment) Act, 2013, the first proviso to Section 13(1) was amended to require that input tax credit would be available only when such goods “are sold” or “are used” — an amendment that the legislature made effective from 01.04.2014. The respondent challenged Rule 21(8) in a writ petition, contending that the rule sought to reduce ITC already earned on concluded purchases and thus lacked statutory backing until 01.04.2014. The High Court allowed the writ petitions, holding that Rule 21(8) could not be enforced with effect from 25.01.2014 since the parent statute did not empower the State to link ITC to subsequent sale or use of goods until 01.04.2014.

In the appeals, the State argued Rule 21(8) simply addressed the rate applicable at the time of sale and did not operate retrospectively; the respondent contended the rule attempted to divest a vested right to ITC accrued at the higher rate. The Supreme Court analysed the statutory scheme (Sections 2, 13 and 70 and Rules 18–22), prior precedent on taxation and vested rights, and agreed with the High Court that ITC was a statutory entitlement traceable to Section 13 and could not be curtailed retrospectively by delegated legislation before the statute itself was amended. The Court noted related precedents stressing that clarificatory or retroactive effect could not be assumed where a provision would alter accrued rights. The appeals were dismissed and all connected appeals were disposed of; the Court refused to interfere with the High Court’s timeline and granted no order as to costs.

Case Details: Case No.: Civil Appeal No. 2212 of 2024 Case Title: State of Punjab & Ors. v Trishala Alloys Pvt. Ltd. Appearances: For the Petitioner(s): [Not indicated in the judgment] For the Respondent(s): [Not indicated in the judgment]