IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE ANTONY DOMINIC WEDNESDAY, THE 19TH AUGUST 2009 / 28TH SRAVANA 1931 WP(C).No. 5702 of 2008(D) --------------------------------------- PETITIONER(S): ------------------------- M/S.ESSAR OIL LIMITED, REPRESENTED BY ITS DIVISIONAL MANAGER - TOMY VARGHESE, 44/1334 PUTHIYA ROAD, OFF LFC ROAD, KALOOR, KOCHI - 682 017. BY ADVS.MR.K.I.MAYANKUTTY MATHER SMT.S.AMINA MR.ARVIND DATTAR(SR.ADV.) RESPONDENT(S): ------------------------- 1. INTELLIGENCE OFFICER, (INVESTIGATION BRANCH) THE DEPARTMENT OF COMMERCIAL TAXES, PALARIVATTOM, KOCHI - 682 025. 2. THE DEPUTY COMMISSIONER, DEPARTMENT OF COMMERCIAL TAXES, THEVARA, KOCHI - 682 015. 3. THE COMMISSIONER, COMMERCIAL TAXES, THIRUVANANTHAPURAM - 695 001. 4. THE ASSISTANT COMMISSIONER, ASSESSMENT I, SPECIAL CIRCLE - II, ERNAKULAM - 682 015. 5. SHEBNA ENTERPRISES, ANDROTH ISLAND, LAKSHADWEEP - 682 551. 6. IFAN ENTERPRISES, AGATHY, LAKSHADWEEP - 682 553. W.P.(C) NO.5702/2008 7. THE ADMINISTRATOR, LAKSHADWEEP ISLANDS, KAVARATHI - 682 555. BY SPL.GOVT. PLEADER MR.VINOD CHANDRAN R5 BY ADVS.MR.C.K.THANU PILLAI, MR.S.S.HUSSAIN . R6 BY MR.ANTONY V. PAUL R7 BY MR.S.RADHAKRISHNAN,SC,LAKSHADWEEP ADMN THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 06/08/2009, THE COURT ON 19/08/2009 DELIVERED THE FOLLOWING: W.P.(C) NO.5702/2008 APPENDIX PETITIONER'S EXHIBITS P1:- COPY OF THE NOTIFICATION SRO 1091/99 ISSUED BY THE GOVERNMENT OF KERALA UNDER SECTION 10 OF THE ACT. DT. 31.12.99. P2:- COPY OF THE CERTIFICATE ISSUED BY THE ADMINISTRATOR , UNION TERRITORY OF LAKSHADWEEP IN RESPECT OF SHEBNA ENTERPRISES DT. 23.10.99. P2(a):- COPY OF THE CERTIFICATE ISSUED BY THE ADMINISTRATOR, UNION TERRITORY OF LAKSHADWEEP IN RESPECT OF IFAN ENTERPRISES DTD. 12.10.2004. P3:- COPY OF THE INVOICE NO.11027 RAISED BY PETITIONER IN THE NAME M/S. IFAN ENTERPRISES DTD. 18.11.2004. P3(a):- COPY OF THE INVOICE NO.006146 RAISED BY PETITIONER IN THE NAME M/S. SHEBNA ENTERPRISES DTD. 29.9.04. P4:- COPY OF THE LETTER APPOINTING NIZI ENTERPRISES, FEROKE AS THE BUSINESS DEVELOPMENT ASSOCIATE OF THE PETITIONER 21.6.04. P5:- COPY OF THE INTENT SUBMITTED BY NIZI ENTERPRISES DTD. 1.10.04. P6:- COPY OF THE PERMIT ISSUED IN THE NAME OF M/S.IFAN ENTERPRISES DTD. 18.5.04. P7:- COPY OF THE PERMITES ISSUED IN THE NAME OF M/S. IFAN ENTERPRISES DTD,18.5.04. P8:- COPY OF THE PERMISSION FOR TRANSPORTATION ISSUED BY THE DEPARTMENT OF EXPLOSIVES IN THE NAME OF M/S. IFAN ENTERPRISES DTD. 5.11.04. P8(a):- COPY OF THE PERMISSION FOR TRANSPORTAION ISSUED BY THE DEPARTMENT OF EXPLOSIVES IN THE NAME OF M/S. SHEBNA ENTERPRISES DTD. 13.3.01. P9:- COPY OF THE ANNEXURE I DECLARATION UNDER SRO 1091/99 ISSUED BY M/S. IFAN ENTERPRISES DTD. 31.1.05. P9(a):- COPY OF THE ANNEXURE I DECLARATION UNDER SRO 1091/99 ISSUED BY M/S.SHEBNA ENTERPRISES DTD. 30.10.04. P10:- COPY OF THE NOTICE ISSUED BY THE IST RESPONDENT TO THE PETITIONER UNDER SECTION 45A OF THE ACT 26.6.06. P11:- COPY OF THE OBJECTION FILED BY THE PETITION DTD. 21.7.06. P12:- COPY OF THE DETAILED OBJECTION SUBMITTED BEFORE THE INTELLIGENCE OFFICER DTD. 31.7.06. P13:- COPY OF THE DETAILED OBJECTION SUBMITTED BEFORE THE INTELLIGENCE OFFICER DTD. 31.7.06. W.P.(C) NO.5702/2008 P13:- COPY OF THE ORDER ISSUED UNDER SECTION 45A OF THE ACT BY THE IST RESPONDENT DTD. 28.12.06. P14:- COPY OF THE ORDER IN STRP NO.7/07 ISSUED BY 2ND RESPONDENT DTD. 21.6.07. P15:- COPY OF THE ORDER OF THE 3RD RESPONDENT DTD. 25.1.08. P16:- COPY OF THE LETTER ISSUED BY BPCL DT. 15.5.98. P17:- COPY OF THE JUDGMENT IN WPC. 23098/07 23.7.07. P18:- COPY OF THE COMPLAINT FILED BY THE PETITIONER BEFORE THE POLICE (WITHOUT ANNEXURES) DTD. 24.3.08. P19:- COPY OF THE PLAINT IN OS. NO.138/08 FILED BEFORE THE SUB COURT, KOCHI. P19(a):- COPY OF THE PLAINT IN OS. NO.139/08 FILED BEFORE THE SUB COURT, KOCHI . 21.5.08. P20:- COPY OF THE INVOICE OBTAINED BY 6TH RESPONDENT FROM BPCL. RESPONDENT'S EXHIBITS COPY OF THE ORDER BEARING F NO.35/1/08 GENL. (1) DTD. 20.2.08. R7(b):- COPY OF THE ORDER BEARING F NO.35/1/08 GENL. (2) DTD. 20.2.08. TRUE COPY P.S. TO JUDGE tss ANTONY DOMINIC, J. ================ W.P.(C) NO. 5702 OF 2008 (V) ===================== Dated this the 19th day of August, 2009 J U D G M E N T The prayer in this writ petition is to quash Ext.P13 order levying penalty on the petitioner under Section 45A of the KGST Act, as confirmed by Exts.P14 and P15 orders. 2. Facts of the case are that the petitioner is a company incorporated under the Companies Act, 1956 and is a registered dealer under the provisions of the Kerala Government Sales Tax Act (hereinafter referred to as the 'Act' for short), dealing in petroleum products including high speed diesel. In so far as this writ petition is concerned, it is relevant to note that by Ext.P1, SRO 1091/1999, issued under Section 10 of the Act, the Government of Kerala, ordered to; “I. make a reduction in the rate of tax payable under the said Act,-- (1) on the turnover of sale or purchase, as the case may be, of goods specified in columns (2) of Schedule I from the rate specified in column (3) to the rate specified in column (4) thereof, against each; (2) by persons specified in column (2) of Schedule II on the turnover of goods specified in columns (3) to the rate specified in column (4) subject to the conditions specified in column (5) against each; (3) on the turnover of sale to the persons or organisations mentioned in column (2) of Schedule III of goods specified in : 2 : W.P.(C) No.5702/08 (V) column (3) thereof to the rate mentioned in column (4) on the seller producing a certificate in duplicate in the form in the Annexure 1 obtained from the purchaser.” Schedule III, to the extent it is relevant, is extracted below for reference: SCHEDULE III Persons or Organisations, the rate of tax on the sale of goods to whom is reduced under sub-clause (3) of clause I Sl. Description of person/ Description of Reduced rate No. Organisation goods of tax (per cent) (1) (2) (3) (4) 1 Administrator, Union Territory of Lakshadweep, Laccadive Co- operative Marketing Federation, Kozhikode and the Lakshadweep Harbour Works and any dealer recognised by the Administrator, Union Territory of Lakshadweep subject to the condition that such dealer shall utilise the concessions only for such goods intended for the use in the Union Territory of Lakshadweep Any goods, the rate of tax in respect of which exceeds 4 per cent 4 Format of the certificate at Annexure 1 to the notification reads as under: Annexure I CERTIFICATE [To be issued by the purchaser vide sub clause (2) and sub-clause (3) of clause 1 (in duplicate)]. 1. I/We have purchased the goods described herein below from Shri/Messrs .............. (here enter the name and complete address of the seller). He/They/is/are not Registered dealer(s) : 3 : W.P.(C) No.5702/08 (V) His/their Registration Certificate Number is 2. The said goods are intended for – (i) Use in the Union Territory of Lakshadweep. (ii) For the use of the ............... (here enter the name of the Government Department or Organisation) (iii) Use in the manufacture of ............... (here enter the name of goods) 3. I/We undertake to pay over to the Government the amount of tax concession. I/We received if I/We fail to make use of the said goods for the manufacture of ............................... (here enter the name of goods intended to be manufactured), within the State. 4. I/We are Registered dealer on the rolls of the Sales Tax Office .........../ My/ our Registration Certificate No. is ............................................ (Strike out whichever is not applicable). 5. I/We claim the reduction in rate of tax under item ....................... of schedule ............................. to notification S.R.O. No.1091/99. Description of Goods Sl. No. and date of the Sale No. Name of goods Bill/ Invoice/ Voucher Quantity Value (1) (2) (3) (4) (5) Date : Signature Place: (1) Name of the person authorised to sign: (1) Name and address of the purchaser: (Seal) 3. In the writ petition, it is averred that the petitioner appointed M/s. Nizy Enterprises, Feroke, Calicut as its Business Development Associate (‘BDA’ for short) to procure business from the Union Territory of Lakshadweep for commission. Ext.P4 dated 21.06.2004 is the letter appointing the BDA and the following clauses of Ext.P4 needs to be noticed. : 4 : W.P.(C) No.5702/08 (V) (i) that the appointment shall be initially valid for 3 months w.e.f. 15.06.2004 which may be extended by the company. (clause 1) (ii) the area of operation of the BDA will be the State of Andhra Pradesh, Karnataka, Tamil Nadu and Kerala. (clause 2) (iii) the company shall be at liberty to terminate the appointment at any time without notice if the services are found to be unsatisfactory. (clause 7) (iv) the appointment shall be deemed to have been terminated in case the BDA do not receive any letter from the petitioner extending the appointment for a further period. (clause 8) (v) that the product availability of the company, in so far as it is relevant are at MRPL, Mangalore, and Cochin and supplies will be effected at ex-storage points and transportation arrangements shall be made by the customers. (clause 1 & 3 of General Information) (vi) all supplies will be on cash and carrying basis. (clause 6) (vii) the BDA shall canvass the business from customers for their own consumption only. (clause 15 of Role of BDA) (viii) that certain customers may be entitled to exemption from certain levies and the BDA shall in such cases furnish necessary supporting documents to the company. (clause 23 of Role of BDA). (ix) that BDA should advice the customers to forward their indents to supply locations to effect delivery. (clause 25 of role of BDA) 4. Petitioner submits that the BDA canvassed orders from respondents 5 and 6, dealers of petroleum products in Lakshadweep, which admittedly is outside the area of operation of the BDA as per clause (2) of Ext.P4. Though in terms of Ext.P4 letter of appointment, customers are to place indents, petitioner states that indents were placed by the BDA for supply of HSD in favour of purchasing dealers and a copy of one such indent is Ext.P5 dated 1st day of October 2004. Here I should also notice that as on the date of Ext.P5, the period of Ext.P4 appointment of : 5 : W.P.(C) No.5702/08 (V) the BDA had expired and it is not the case of the petitioner that the period of appointment was extended as provided in clause 8 of Ext.P4. 5. According to the petitioner before effecting sales, to confirm the genuineness of the dealers, they had obtained the following documents. 1. Exts.P2 and P2(a) certificates dated 23.10.1999 and 12.10.2004 issued by the 7th respondent that respondents 5 and 6 are considered as recognised dealers. (It is to be noticed that Ext.P2 issued in favour of the 5th respondent is not with reference to Ext.P1, SRO 1091/1999 while the validity period of Ext.P2 (a) is only 6 months from 12.10.2004.) 2. Exts.P6 and P7 dated 18.06.2004 and 15.10.1999 respectively and which were renewed periodically, are the permits issued by the 7th respondent authorising respondents 5 and 6, to do business as dealers of the articles mentioned therein which includes petroleum products also. 3. Exts.P8 and P8(a) dated 05.11.2004 and 13.03.2001, : 6 : W.P.(C) No.5702/08 (V) permissions issued by the Department of Explosives for transportation of HSD, subject to the conditions mentioned therein. (It is to be noticed that one of the conditions required that the dealer shall make adequate arrangement for storage of the product in a godown duly licensed and shall obtain licence in form XVI of Petroleum Rules 2002 for storage.) 4. Exts.P9 and P9(a), the certificates as per Annexure 1 to Ext.P1 SRO 1091/1999. (These certificates are dated 31.01.2005 and 30.10.2004 respectively and are issued subsequent to the sale of the huge quantities of HSD mentioned therein.) 5. It is also stated that on the strength of the aforesaid documents, payments by demand drafts and cheques were received and HSD was sold to respondents 5 and 6, availing of the concessional rate of tax 4% as provided under Ext.P1. 6. According to the petitioner, delivery of HSD was given from HHA Tank Terminal and Konkan Storage System, Cochin and purchasing dealers arranged tankers for its transportation. Exts.P3 and P3(a) are the specimen invoices produced by the petitioner to : 7 : W.P.(C) No.5702/08 (V) prove sale to the dealers and that receipt has been acknowledged by the representatives of the customers. It is stated that accordingly returns under the Act were filed and tax at 4% was paid. 7. Subsequently, petitioner was called upon to produce evidence to prove movement of goods from Kerala to Lakshadweep, and thereupon, copies of export bills filed by respondents 5 and 6 at the Ports at Beypore Port, Kozhikode and Mangalore were obtained and were furnished to the Department. It is stated that 1st respondent conducted certain investigation and finally issued Ext.P10 show cause notice dated 20.06.2006 with the following allegations: “It has come to the notice of the undersigned that you have effected sales of High speed diesel to the following dealers during 2004-05 and claimed concessional rate of 4% KGST on the strength of certificate filed by them as per Government Notification No.SRO 1091/99 upon declaration that such diesel is for use in Union Territory of Lakshadweep. Sl. No. Name of Dealer Quantity Amount (Rs.) KGST @4% 1. Ifan Enterprises 1980 45452424.60 1818096.98 2 Shebna Enterprises 3924 80745486.60 3229819.46 Total 5904 126197911.20 5047916.44 You are borne on the files of Assistant Commissioner (Assmt.) Commercial Taxes, Special Circle II, Ernakulam where you had filed certificates stipulated under SRO 1091/99 in Annexure-I in support of the claim of concessional rate of 4%. As further evid+ence to prove movement of goods from Kerala to Lakshadweep, you had : 8 : W.P.(C) No.5702/08 (V) furnished copies of “Export Bills” filed at Beypore Port, Kozhikode and Mangalore Port. In order to verify bonafides of the export of goods to Lakshadweep and the authenticity of the export documents filed the Investigation Branch attached to the office of the Deputy Commissioner (Intelligence) Ernakulam visited the ports of Beypore and Mangalore, perused the copies of export bills filed with the port authorities and obtained copies of export bills. On cross verification of the Export documents filed with the Port authorities and that filed at the office of the Assistant Commissioner (Assmt.) Commercial Taxes Special Circle II, Ernakulam it was noticed that the export bills filed with the Asst. Commissioner are fabricated and fake. The commodities transported through Ports of Beypore and Mangalore are totally different and do not match with the goods declared in the certificates as per SRO 1091/99 filed together with related export bills. The seal and signature of the port officer appearing in the export bills are manifestly bogus. When such fake export bills were shown to the port authorities they endorsed the fact of fabricated nature of such documents. The consequential situation is nothing but the irrefutable fact that the concessional rate of 4% KGST is not admissible on the sales of HSD aggregating to Rs.12,61,97,911.20 effected to M/s. Ifan Enterprises, Agathi and Shebna Enterprises, Agathi during 2004-05. In other words you have wrongly availed of the Concessional rate of 4% KGST. As per the stipulation under entry 1 of schedule III to SRO 1091/99 the concessional rate of 4% would only apply subject to the condition that a dealer recognised by the administrator union territory of Lakshadweep utilises the concession only in respect of goods used in the union territory of Lakshadweep. The condition contemplated under the government notification has not been fulfil or violated wherefore the certificates in Annexure I filed those their significance and become infructuous. Undisputedly H.S.D carried rate of 24% KGST under section 5 of the KGST Act read with Schedule I. As such the concessional rate irregularly availed by you resulted in evasion of tax to the tune of Rs.2,52,39,582.22 as shown below. Total KGST due Rs.3,02,87,499.00 Less concessional rate availed Rs. 50,47,916.00 Balance tax due Rs.2,52,39,583.00” 8. On the above allegations, it has proposed to impose penalty amounting to Rs.5,04,79,164/-, being twice the amount of : 9 : W.P.(C) No.5702/08 (V) tax evaded and the petitioner was called upon to file objection to the proposal. On receipt of the show cause notice, petitioner filed Ext.P11, its preliminary objections, in which contentions raised are; (1) that only when tax evasion is proved by way of either assessment or adjudication, the question imposing penalty arises and therefore without determining the tax liability, it is premature to initiate penalty proceedings; (2) that the petitioner wanted to be furnished copies of the documents relied upon, to scrutinize the documents and file its reply; (3) that before effecting sale, all precautions were taken by obtaining Exts.P2, P6 and P8 referred to above and that they were satisfied themselves about the genuineness and eligibility of the dealers. (4) that the purchase indents and orders were placed by the dealers and the dealers have undertaken that goods so purchased shall not be diverted to any other party. (5) it is stated that sales were effected at their terminals at Cochin and dealers arranged tankers for transportation and took delivery which was duly acknowledged by the drivers. : 10 : W.P.(C) No.5702/08 (V) (6) that certificates as per Annexure 1 to Ext.P1 have been obtained and the dealers have undertaken to pay to the government amount of tax concession received, if they fail to use the product in Lakshadweep. (7) to prove that transactions have been carried out and that materials have been sold and physically delivered, copy of the Party Ledger where the demand drafts issued by the dealers have been accounted and stock registers, were also relied on. (8) that once product is delivered from the Terminal to the transporters authorised by the dealers and delivery has been acknowledged and Annexure I certificates have been obtained, the responsibility of the seller, availing of concession, is fully discharged and that the petitioner cannot be made liable either for tax or penalty for any subsequent misdeed of the dealer. (9) that the seller is discharged of the liability is also evident from clause (3) of Annexure 1 certificate where the purchaser has undertaken to pay out to the government the amount of tax concession availed of, if they fail to make use of the goods. : 11 : W.P.(C) No.5702/08 (V) (10) that notice should have been issued to the dealers instead of the petitioner. 9. In Ext.P12, the additional reply filed, it is stated that when enquiry was set in motion by the 4th respondent, as required by him, copies of the export bills were obtained from the purchasers during January and February 2006 and that the petitioner had no reason to believe that anything was amiss. It is also stated that the petitioner had not received copies of the so called fake export bills and that when they tried to contact the purchasers, they were not able to secure their co-operation. On this basis the petitioner requested that the penalty proceedings against them be dropped. 10. Considering Ext.P11 and P12 replies and after hearing the petitioner, the 1st respondent passed Ext.P13 order dated 28.12.2006, imposing penalty of Rs.5,04,79,164/- on the petitioner, for the Assessment Year 2004-05 for evasion of tax to the tune of Rs.2,52,39,583/-. In this order, although the 1st respondent, accepted that the petitioner had obtained necessary licenses, permits etc., authorising respondents 5 and 6 to deal with petroleum products, he has found fault with the petitioner for : 12 : W.P.(C) No.5702/08 (V) not informing the 7th respondent about the supply of HSD to respondents 5 and 6 and requesting them to monitor its actual utilisation. Further, petitioner is also faulted for not alerting the port authorities at Beypore and Mangalore for monitoring the actual movement of the goods sold. It is stated that if these steps were taken, the company could have ensured the bonafides of the concessional sales and safe-guarded the government revenue. It has been held that, he had reason to believe that the petitioner colluded with respondents 5 and 6 to defraud the government revenue. 11. In Ext.P13, it is also found that the company was accepting payment by demand drafts from one Sri.P.V. Babu, S/o.P.K. Velayudhan, operating a bank account at IndusInd Bank, with fictitious business address at BNV Trade Links, Tharakkandom Estate, Ravipuram, Erankulam. This order contains details of five demand drafts and it is stated that Sri.P.V. Babu had no authority to pay for the HSD purchased and that local enquiry at his business premises revealed that the business was bogus. Yet another factor pointed out in Ext.P13 order is that the entire payment were made by demand drafts and that despite the running accounts maintained in respect of regular customers, : 13 : W.P.(C) No.5702/08 (V) the oil company did not accept cheque payments and that by adopting this process, the company was only ruling out the risk of the purchaser dishonouring the cheques. It is stated that there was no evidence at all to show that the petitioner received any consideration from respondents 5 and 6 in respect of HSD allegedly sold to them and that all payments were made by strangers who are not parties to the contract of sale. 12. It is stated in Ext.P13 order that the applications for export filed by respondents 5 and 6 at the ports and authenticated by the port officer, when compared with the copies filed by the petitioner with the 4th respondent showed that the documents produced by the petitioner contained forged signature of the port officer and as a specimen testifying the fraud, details of 6 forged documents and the corresponding genuine documents have been given in the order. On this basis, the 1st respondent concluded that local sales of HSD was effected in Kerala and the differential tax of 20% was irregularly availed of on the basis of forged export bills, the original of which related to supply of vegetables, provisions etc. The argument of the company that in view of the undertaking contained in Annexure 1 to Ext.P1 the : 14 : W.P.(C) No.5702/08 (V) purchasers are liable, was rejected on the reasoning that such undertaking is applicable only when goods intended for manufacture were not actually utilised for that purpose. Further it is also held that the liability to pay tax in respect of HSD is on the first seller in Kerala and that it is an undisputed fact that the petitioner has effected the first sale of HSD and therefore the statute does not empower anybody to shift the point of levy. On this basis, overruling the contentions raised, penalty as proposed in Ext.P10 notice was levied. 13. The petitioner filed revision under Section 45A(3) of the Act before the 2nd respondent, who by Ext.P14 order, dismissed the revision. Further revision under Section 45A(5) was filed before the 3rd respondent which was also dismissed by Ext.P15 order. It is in these circumstances, the writ petition is filed. 14. Counter affidavit has been filed by respondents 1 to 4. It is stated that the materials disclosed in the investigation showed that the HSD allegedly sold to respondents 5 and 6 have not been taken to Lakshadweep and that the differential tax benefit has been swindled by tax evaders. It is stated that the : 15 : W.P.(C) No.5702/08 (V) statutory liability to pay tax is on the seller and that the petitioner being the dealer liable for tax, should have taken all precautions to ensure that the goods sold have actually moved to Lakshadweep, so as to entitle them for the concessional rate of tax. It is also the case of the respondents that under the Petroleum Act, it is the duty of the petitioner to deliver the goods at destination point and that admittedly the goods were delivered at the delivery point. It is also the case of the respondents that the undertaking in the notification is intended to apply only to manufacturers who fail to make use of the goods for the declared purpose. 15. There is no appearance on behalf of the 5th respondent, however