Buyer Not Liable For Purchase Tax Under S.7A TNGST Act Due To Seller's Default In Paying Sales Tax: Madras High Court - 2025-11-05

Madras High Court Clarifies Scope of Purchase Tax: Buyer Not Liable for Seller's Tax Evasion

CHENNAI: In a significant ruling clarifying the scope of purchase tax liability, the Madras High Court has held that a buyer cannot be saddled with purchase tax under Section 7A of the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act) merely because their seller failed to remit the due sales tax to the government.

The Division Bench of Justice S.M. Subramaniam and Justice Mohammed Shaffiq , while allowing a batch of writ petitions filed by M/s. Light Roofings Ltd., set aside the order of the Tamil Nadu Sales Tax Appellate Tribunal (STAT) which had confirmed the levy of purchase tax on the company. The court ruled that the remedy for the Revenue lies in pursuing the defaulting seller, not in shifting the tax burden onto the purchasing dealer.

Background of the Case

The case pertains to the assessment years 1993-94 to 1996-97. M/s. Light Roofings Ltd., a manufacturer of Asphalt Roofing Sheets, had purchased Asphalt from two vendors, Sri Vinayaga Agencies and Sri Mahalakshmi Agencies. While Light Roofings Ltd. paid the appropriate taxes on the sale of its manufactured goods, an inspection by the Enforcement Wing revealed that its two suppliers had not discharged their sales tax liability on the sale of Asphalt to the petitioner.

Consequently, the assessing authority levied purchase tax on Light Roofings Ltd. under Section 7A of the TNGST Act, on the grounds that tax was not paid on the initial transaction. The matter went through several rounds of litigation, with the Appellate Assistant Commissioner initially allowing the company's appeal, before the State appealed to the Sales Tax Appellate Tribunal (STAT), which reversed the decision and confirmed the tax levy, leading to the present writ petitions before the High Court.

Arguments Presented

M/s. Light Roofings Ltd. (Petitioner) argued that Section 7A is attracted only when a purchase is made "in circumstances in which no tax is payable," and not in a situation where tax is payable but simply not paid by the seller. They contended that their purchases were legitimate, supported by bills and cheque payments, and the liability to pay tax rested solely with their vendors.

The State (Respondent) countered that the non-payment of tax by the vendors automatically triggered the purchase tax liability for the buyer under Section 7A, as the tax was due to the state at the point of the transaction.

Court's Analysis and Legal Precedent

The High Court meticulously analyzed the language of Section 7A of the TNGST Act. The core of the judgment hinged on the interpretation of the phrase "in circumstances in which no tax is payable." The bench observed that for Section 7A to be invoked, this is a critical condition that must be satisfied.

The court heavily relied on the landmark Supreme Court decision in State of Tamil Nadu vs. M.K.Kandaswami , which laid down the cumulative conditions for invoking Section 7A. Highlighting the fifth condition from that judgment, the bench emphasized that the purchase must be made in a situation where no tax is payable in the first place.

The court explicitly distinguished between a transaction where "no tax is payable" and one where tax is payable but has "not been paid."

"The expression no tax is payable would not take with in its fold a transaction of sale on which tax is payable but not paid by the vendor."

The bench found the Tribunal's reasoning to be "misconceived" for failing to make this crucial distinction. It noted that the petitioner's vendors had turnovers exceeding the taxable threshold, making their sales unequivocally "liable to tax."

Further strengthening its position, the court cited a judgment from the Kerala High Court in The Kerala Premo Pipe Factory Ltd., v. State of Kerala , which dealt with a pari materia provision and arrived at the same conclusion: if the seller was liable to pay tax, the buyer cannot be taxed under the purchase tax provision.

Final Decision and Implications

In its final verdict, the High Court concluded that the levy of purchase tax on Light Roofings Ltd. was impermissible and bad for want of jurisdiction. The court directed that the proper course of action for the Revenue is to proceed against the defaulting sellers.

"If petitioner's vendor fails to remit appropriate tax, Revenue ought to proceed against the petitioner's vendor, instead any levy of purchase tax by the respondent would be bad for want of jurisdiction and cannot be sustained."

The court allowed the writ petitions and set aside the impugned order of the Sales Tax Appellate Tribunal. This judgment serves as a crucial clarification for businesses, reinforcing the principle that a purchasing dealer, having made a bona fide purchase, cannot be penalized for the tax default of their supplier under the provisions of Section 7A of the TNGST Act.