TNGST Act | Purchase Tax Cannot Be Levied on Buyer for Seller's Tax Default: Madras High Court

"Having found that the sale to petitioner is liable to tax in the hands of the petitioner's vendor, levy of purchase tax only on the premise that petitioner's vendor had not remitted tax cannot be sustained. 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", it said. 

The case involved a company engaged in the manufacture and sale of asphalt roofing sheets, which was registered under the TNGST Act for the assessment years 1993-94 to 1996-97. During an inspection, the tax authorities found that the company had purchased asphalt from certain vendors who had not paid the applicable sales tax. The company used this asphalt in the manufacture of roofing sheets, which it then sold after paying the required tax on the manufactured goods, a point that was not disputed.

Despite this, the assessing authorities levied purchase tax under Section 7A of the TNGST Act, on the ground that the two vendors had neither paid the tax nor claimed exemption as a second or subsequent sale in Tamil Nadu. The company appealed, and the Appellate Authority remanded the matter back to the assessing authorities, noting that the enquiries conducted by them were inconclusive.

On remand, the Assessing Authority again confirmed the purchase tax, alleging that the vendors were non-existent dealers. The assessee then appealed to the Appellate Assistant Commissioner, who allowed the appeal. The State challenged this before the Sales Tax Appellate Tribunal (STAT), which overturned the order and confirmed the levy of purchase tax.

The core question before the High Court was whether purchase tax under Section 7A can be levied on the purchaser merely because the vendor failed to remit sales tax. The company argued that Section 7A applies only when a purchase is made in circumstances where no tax is payable, and a vendor's failure to pay tax on a transaction that is otherwise taxable does not create liability for the purchaser.

The Revenue contended that provision presupposes that tax is payable at the time the liability arises, and non-payment by the vendor should trigger purchase tax on the buyer.

The bench after analysing Section 7A of the TNGST Act noted that for levy of purchase tax to get attracted, purchase must be made “in circumstance which no tax is payable”. 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 stated that since the turnover of the petitioner's vendor exceeded the threshold specified under Section 3(2) of the TNGST Act, the levy of purchase tax was impermissible. 

"...that turnover of petitioner's vendor being in excess of the threshold under Section 3(2) of TNGST Act, levy of purchase tax is impermissible. We say so, inasmuch as purchase tax under Section 7A of TNGST Act, gets attracted only if sale is made in circumstances in which no tax is payable, however, as seen supra sale by petitioner's vendor is liable to tax. Thus, levy of purchase tax under Section 7A of TNGST Act, cannot be sustained"

The bench further held that if the seller fails to remit the appropriate tax, the Revenue should proceed against the seller directly, and any attempt to levy purchase tax on the buyer would be without jurisdiction and therefore unsustainable

Case Title: Light Roofings Ltd. v. The Tamil Nadu Sales Tax Appellate Tribunal

Citation: 2025 LiveLaw (Mad) 400

Case Number: W.P. Nos.19625

Counsel for Petitioner: Advocate P Rajkumar for the assesse company

Counsel for Respondent: Advocate V Prashanth for the department

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