IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE THE CHIEF JUSTICE MR.H.L.DATTU & THE HONOURABLE MR. JUSTICE A.K.BASHEER TUESDAY, THE 26TH AUGUST 2008 / 4TH BHADRA 1930 S.T.Rev..No. 363 of 2006 ----------------------------------------- ORDER DATED 30.3.2006 IN TA.10/2006 OF THE KERALA SALES TAX APPELLATE TRIBUNAL, ADDITIONAL BENCH, PALAKKAD .................... REVISION PETITIONER/RESPONDENT/REVENUE: ---------------------------------------------------------------------- STATE OF KERALA, REP. BY JOINT COMMISSIONER (LAW) IN-CHARGE, COMMERCIAL TAXES, ERNAKULAM. BY SPECIAL GOVERNMENT PLEADER SRI.VINOD CHANDRAN RESPONDENT/APPELLANT/ASSESSEE: -------------------------------- M/S. MALABAR CEMENTS LTD., WALAYAR, PALAKKAD. BY ADV. SRI.T.M.SREEDHARAN SRI.V.P.NARAYANAN THIS SALES TAX REVISION HAVING BEEN FINALLY HEARD ON 26/08/2008, THE COURT ON THE SAME DAY PASSED THE FOLLOWING: H.L.DATTU, C.J. & A.K.BASHEER, J. ------------------------------------------- S.T.Rev. No. 363 of 2006 ------------------------------------------ Dated, this the 26th day of August, 2008 ORDER H.L.Dattu, C.J. The Revenue is before us in this revision petition filed under Section 41 of Kerala General Sales Tax Act, being aggrieved by the orders passed by the Sales Tax Appellate Tribunal, Additional Bench, Palakkad in T.A.No.10 of 2006 dated 30th March, 2006. By the impugned order, the Tribunal has cancelled the orders passed by of the first appellate authority in S.T.A No.6469 of 2005 dated 24.11.2005. (2) The respondent in this revision petition is a Government Company and is engaged in the manufacture and sale of cement. The assessee company has several cement manufacturing units including one at Cherthala. It is only in their unit cement is manufactured using “fly ash” as basic raw material. The unit had started its commercial production with effect from 7.5.2003 and marketed the cement so produced under the label “Portland Pozzoloria” Cement. The unit had charged sales tax in the invoices raised and had collected the same from its consumers and remitted the tax so collected along with the monthly returns submitted till the end of July 2004. S.T.Rev.No.363 of 2006 2 (3) The assessee Company, in so far as its Cherthala unit is concerned, it had applied for grant of exemption from payment of sales tax under the Kerala General Sales Tax Act, 1963 ('the Act' for short). The competent authority had issued the exemption certificate on 9.8.2004, granting exemption from payment of sales tax with effect from 7.8.2003. Till then and thereafter the assessee for a further period of 21 days had collected sales tax on its sales of cement from its Cherthala unit. (4) The respondent Company was filing its monthly returns and annual returns before the assessing authority and was including the turnover of its Cherthala unit in the said returns filed. (5) The assessee Company had filed its monthly returns for the month of August, 2004 on 9.9.2004, along with a covering letter dated 10.9.2004, inter alia, stating that its Cherthala unit is exempted from payment of sales tax in view of the exemption certificate issued by the competent authority. In spite of this letter, it is relevant to notice that the respondent Company, in so far as its sales made by the Cherthala unit is concerned, has continued to collect tax for the month of August, 2004. (6) The assessing authority had issued notice dated 15.9.2004 to the assessee, inter alia directing them to deposit the tax collected on the sales turnover of cement by its Cherthala unit and it was also brought to their notice, that, failing to comply with the directions contained in the notice, the authority would proceed to pass appropriate S.T.Rev.No.363 of 2006 3 orders under Section 46 of the Act. (7) The notice issued by the assessing authority dated 15.9.2004 is relevant for the purpose of the case and, therefore, it is extracted: “No.3101 0400/2004-05. Office of the Asst. Commissioner (Assmt.), Commercial Taxes, Special Circle, Palakkad. Dated 15/9/04 NOTICE Please take notice that you have also got a registered Branch grinding unit of grey cement at Cherthalai and its sales turnover and collected tax been conceded along with the sales turnover of your head quarter at Walayar upto the month of July, 2004. But to my surprise the sales turnover of cement and its collected tax due from your grinding unit at Cherthalai is not seen furnished along with your sales turnover of your head quarter at Walayar in the month of August, 2004. Thus you have intentionally conceded a portion of your sales turnover and its collected tax due in the return filed for the month of August, 2004. This is a clear violation punishable under section 45A(d) of KGST Act, 1963. In the above circumstances you are requested to file a revised return including the sales turnover of your branch unit at Cherthalai and the collected tax due on S.T.Rev.No.363 of 2006 4 the above sales turnover with proof of payment of tax, failing which you will be proceeded U/s 46 of the KGST Act to recover the collected tax kept by you with interest and the tax already paid will be appropriated first towards interest accrued on such tax due and the balance available shall be appropriated towards principal outstanding under Section 55 C and also provisional assessment will be initiated under Rule 21(13) of KGST Rules. You are also given an opportunity to be heard in person or through authorised representative in the office during the office hours of the undersigned within three days of the receipt of this notice. Sd/- Asst. Commissioner (Assmt.)-II” (8) After receipt of the notice, a reply came to be filed by the assessee and in that, it had only stated, that, the assessee was exempted from payment of sales tax in view of the exemption certificate issued by the competent authority dated 9.8.2004 with effect from 7.8.2003, and it was further stated that they intend to make use of the tax collected by them for expansion of its industrial unit. The explanation offered by the assessee to the notice dated 15.9.2004 is as under: “In reply to your Notice cited (4) above we may submit the following. We have furnished the turnover and tax collected for Walayar Unit. As regards CGU (Cherthala Grinding Unit), we have been exempted from payment of Sales Tax for nine S.T.Rev.No.363 of 2006 5 years from the date of commencement of production vide Kerala Gazette Notification S.R.O. No.859/2004 and G.O.(P) No.129/2004/TD dated 9/08/04. This was informed to you vide our letter cited 4th above enclosing a copy of the Gazette Notification (For ready reference, the above letter with Gazette Notification is once again forwarded). It was in this context the particulars pertaining to CGU were not furnished and there was no intention of concealing the facts. However, we furnish below the details of turnover and tax collected at our Cherthala Grinding Unit (CGU) during the month of August 2004 for reference. Rate Turnover KGST AST Sales to stockist 15% 10777129.32 1616585.87 242486.32 Sales depot 15% 836723.41 125508.57 18826.34 Sales to Govt. 4% 721808.32 28873.00 4331.64 Total 12335661.05 1770967.44 265644.30 The very purpose of granting the exemption is for putting up another 600 TPD Grinding Unit at Panakkad in Malappuram District and Govt. have granted administrative sanction for the project vide GO(MS) No.83/2004/ID dated 20.7.04. Also as per the notification dated 9.8.04 cited above, the tax exemption is applicable from the date of commencement of commercial production i.e. 7.8.03 and as such an amount of Rs.44059643/- ie. sales tax remittance from 7/08/03 to 31/07/04 is to be refunded to us. As we require funds to purchase land and for other preliminary activities of the project we have retained the collected tax for the month of August, 2004 with us. Viewing the situation in totality and considering the intention of the Government in allowing the relief to this PSU, kindly allow us S.T.Rev.No.363 of 2006 6 to retain the amount of tax with us and to continue the project activities and no penal action may kindly not be initiated. We are moving separately for the refund of the amount already remitted for the period from 07/08/03 to 31/07/04.” (9) Not being satisfied with the reply so filed, the assessing authority had issued yet another demand notice dated 30.9.2004 which is produced along with the revision petition papers. In the said notice, the assessing authority had directed the assessee to deposit a sum of Rs.20,36,612/- towards the tax collected by its Cherthala unit for month of August, 2004 and also had levied a penal interest in a sum of Rs.20,366/- . After receipt of the demand notice, the assessee had filed its reply dated 13.10.2004. In the said reply, for the first time the assessee had stated that after receipt of the exemption certificate issued by the competent authority, they have issued credit notes to its purchasers/customers. The reply filed by the assessee dated 13.10.2004 is as under: “Kindly refer our letter No.FIN/SALES TAX/2004- 05/8570 dt.10.9.04 and No. FIN/SALES TAX/2004- 05/9050 DT.22.9.04. (Copy enclosed for ready reference). The reason for retaining the above amount was explained to you in the above cited letters. Credit notes have been raised towards tax collected during the month of August 2004. We may once again explain the background of our action. The sales tax exemption has been granted to Malabar Cements Ltd., for utilising it as a source of fund for implementing another 600 TPD cement grinding unit at S.T.Rev.No.363 of 2006 7 Panakkad, Malappuram District. It would be seen that the Cherthala Grinding Unit (CGU) is the only industrial unit at the moment owned by public sector undertaking and MCL is the only public sector undertaking manufacturing grey cement using fly ash as a raw material. CGU has been in operation since 7.8.03. So the intention of the Govt. Order is explicitly clear and we are to get the exemption benefit from 7.8.03. The modality of claiming refund of the sales tax already remitted is being finalized. It was in this context the above referred amount of tax ie. Rs.20,36,612/- was retained by us. However since the intention of the Govt. in issuing order has already been explained to you, as already requested no penal action may kindly be initiated against MCL for the time being on this issue and also not penal interest may be reversed.” (10) After all this correspondence, a revised return came to be filed by the assessee of all its cement manufacturing units including Cherthala unit on 3.12.2004. In the said return, the assessee had only shown the sales turnover of its Cherthala unit and not even whispered anything with regard to the tax collected by them for the month of August, 2004. (11) Once again, a demand notice came to be issued by the assessing authority dated 17.1.2005, directing the assessee to deposit the tax collected for the month of August, 2004 and also to pay penal interest S.T.Rev.No.363 of 2006 8 for the belated payment of the tax collected. After receipt of the said notice, a reply came to be filed by the assessee dated 20.1.2005. In that except stating that they have issued credit notes to its purchasers of cement, they had not whispered anything with regard to the debit notes that was issued by the assessee to its customers. The reply filed by the petitioner dated 20.1.2005 is as under: “Kindly refer your Notice cited above directing to remit the collected Sales Tax with interest due on cement sales made by our CGU during the month of August 2004. As you are please aware, the Cherthala CGU has been exempted from payment of Sales Tax for 9 years from the date of commencement of commercial production vide Govt. Gazette Notification S.R.O.No.859/2004 and G.O.(P) No.129/2004/TD dated 9/08/04. We furnish the following facts for your kind perusal. The exemption was effective from the date of commencement of commercial production which is 07/08/2003. However, the above referred exemption order was received by the company by the middle of August and the company have implemented the order w.e.f.1st September 2004. Sales tax collected during the month of August as mentioned in your notice was subsequently refunded by the company by issuing credit notes numbering from 612 to 678 dated 01/09/04. This was duly informed to you vide our letter No.FIN/ST/2004-05/10010 dated 13/10/04. MCL is one of the PSUs under the Industries S.T.Rev.No.363 of 2006 9 Department, Government of Kerala. Therefore the company cannot conceal the facts as mentioned in your notice. In this connection, it may be mentioned that Asst. Commissioner (Intelligence), Commercial Taxes, Trivandrum had issued the notice under Section 45(a) and 46 of the KGST Act 1963 and we have furnished the facts on the notice. Subsequently there was a personal hearing also by the Asst. Commissioner. Considering the above facts and the collected tax has been refunded by issuing credit notes, we request you to drop the proposed penalty proceedings by the department vide Notice No.3101 0400/04-05 dated 17.1.2005 against the company. We confirm that we would be attending the personal hearing as proposed without fail.” (12) Since the Revenue was taking steps to recover the amounts due to them from the assessee, the assessee had preferred an appeal in No.6469/05 against the demand notice issued by the assessing authority. For the first time, in the memorandum of appeal, the assessee had stated, that apart from issuing credit notes to its purchasers of cement, had also issued debit notes and thereby the sales price of the cement that was sold by the Cherthala unit includes the tax that was collected for the month of August, 2004. The ground raised by the assessee in its memorandum of appeal requires to be noticed. Therefore, it is extracted. “Though the exemption notification was issued in the middle of August 2004, the appellant continued to charge S.T.Rev.No.363 of 2006 10 sales tax upto the end of the month as any change in the price structure in the middle of the month will adversely affect sales. It was decided by the appellant to retain the customer price at the same amount as fixed earlier. Therefore the appellant issued credit notes for the sales tax collected and merged the same into the basic price by issue of debit notes.” (13) The first appellate authority, in our opinion, rightly understanding the colourable device that was adopted by the assessee to deprive the Revenue from payment of the sales tax due to it, in its well considered order has stated as under: “The appellant company ought to have remitted the tax collected upto 12.8.2004 to Govt. invariably and thereafter the company would either return the tax collected to persons from whom the amount was collected or to pay over the same to Govt. If the amount is not returned to the persons from whom it is collected, the amount so collected is liable to be forfeited to govt. In any event, the company is not entitled to retain the amount collected by way of tax. In view of sec.22 and sec.46A and the scheme of tax exemption granted in SRO 854/04 the appellant cannot retain the amount collected by way of tax. Any later arrangement by the company does not alter the very nature of tax collected from customers on its sales during August 2004. The Appellant did not give effect to the govt. S.T.Rev.No.363 of 2006 11 Notification in SRO No.859/04 till 31.8.04 in respect of transaction made during August 2004 despite it received copy on 12.8.2004. The company collected an amount calculated at 15% of basic price purporting to be by way of tax and further levied AST on Tax and the customers paid the amount so calculated as tax under KGST Act 1963 till 31.8.2004. Both the seller and buyer treated the amount as tax due under KGST Act 1963. Buyers, in turn claimed exemption on their subsequent resale on the strength of these tax suffered bills. On this context, the company had to pay over the collected tax to govt. on the due date as it had done previously or return the tax to the persons from whom it was collected. As on 20.9.2004 the company had no intention to return the tax to its customers as is evident from the letter dt.22.9.2004 wherein it is stated that the company had retained the tax with them. On a later date the company decided to increase the basic price for the completed past sales in such a way that the composite price remains to be the same. The company has no authority to convert an amount collected purporting to be by way of tax to its basic price to its own benefit. So the action of the company to convert tax amount as its basic price is a fraudulent act. This action of the company results in excessive enrichment which is not the intention of the govt. while issuing Notification in SRO 859/2004. The company had not only paid over the amount collected by way of tax during the month of August 2004 to govt. but had S.T.Rev.No.363 of 2006 12 appropriated it for their own benefit. Non-inclusion of sales turnover relating to Cherthala Unit and failure to report the details of tax collection in the return of August 2004 is not a mere technical or venial defect. ” (14) The assessee had questioned the correctness or otherwise of the orders passed by the first appellate authority in second appeal before the Sales Tax Appellate Tribunal in T.A.No.10 of 2006. The Tribunal while disposing of the appeal has granted relief to the assessee,. primarily being of the opinion that the assessee had not only issued credit notes but also issued debit notes to the customers and, secondly, that the assessee is entitled to fix its sales price for the sale of the commodity in question. (15) Being aggrieved by the orders passed by the Appellate Tribunal, the Revenue has approached this Court by filing this revision petition. (16) The Revenue has framed three questions of law for our consideration and decision. They are as under: “A. Whether the appellate Tribunal is right in law in annulling the well considered order of the appellate authority which has sustained the demand of the Assessing Authority to collect and forfeit the admitted tax collections of the assessee for the month of August 2004, especially when the assessee has admittedly not reimbursed the amount to the buyers from whom they have collected tax? S.T.Rev.No.363 of 2006 13 B. Is not the Tribunal in error in its understanding on Section 22 and Section 46A of the KGST Act while disposing of the TA? C. Whether under the facts and circumstances of this case the very appeal filed by the assessee before the First Appellate Authority maintainable?” (17) We have heard Sri.Vinod Chandran, learned Special Government Pleader (Taxes) appearing for the Revenue and Sri.V.P.Narayanan, learned counsel appearing for the assessee. (18) Sri.Vinod Chandran, learned Special Government Advocate, would submit, that, it was expected of the assessee Company to have remitted the tax collected by them for the month of August, 2004 within the due date to the Sales Tax Department and since that has not been done the notices were issued by the assessing authority to the assessee. It is further contended that it was the case of the assessee before the assessing authority that the assessee had issued credit notes to the purchasers, but there was not even a whisper to the debit notes that was issued to its customers. He would further submit that by way of the so-called Tax planning, the assessee has tried to defeat the lawful claim of the Revenue. In support of his contention, learned Government Advocate has brought to our notice the comments made by the Apex Court on the S.T.Rev.No.363 of 2006 14 observations made by Justice Chinnapa Reddy, J. in McDowell and Co. Ltd. vs. Commercial Tax Officer [1985] 154 ITR 148, in Union of India and another v. Azadi Bachao Andolan and another (2003) 263 ITR 706. Lastly the learned counsel would submit that the principles for levy of penalty under Section 45A of the Act are totally different and those principles cannot be applied when it comes to the question of demanding the tax due under the Act. (19) In Azadi Bachao Andolan's case the Apex Court has observed: “If the court finds that notwithstanding a series of legal steps taken by the assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but would not be permissible for the court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the 'real motive' of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o-the wisp”. Further, the court has also noticed the majority view of the learned Judges in the Mc.Dowell's case, wherein it is stated: “Tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is S.T.Rev.No.363 of 2006 15 wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.”. (20) Sri.V.P.Narayanan, learned counsel appearing for the assessee, would submit that on the very same set of facts the Commissioner of Commercial Taxes has set aside the orders passed by the assessing authority in levying penalty, in exercise of his powers under Section 45A of the Act and, therefore, the first appellate authority was not justified in sustaining the demand notices issued by the assessing authority, wherein he had directed the assessee to deposit the tax collected by them for the month of August, 2004 in so far as its Cherthala unit is concerned. The learned counsel would further submit that the assessee is a Government Company and it did not have any intention to defeat the lawful claim of the Revenue. Lastly, the learned counsel would submit that since the assessee had issued credit and debit notes to its customers, it cannot be said that a colourable device is adopted by the assessee to retain the tax collected from its customers. (21) One and the only question that arises for our consideration and decision is, whether the assessing authority was justified in issuing demand notices to the assessee to remit the tax collected by its Cherthala unit for the month of August, 2004. S.T.Rev.No.363 of 2006 16 (22) The assessee is a Government Company. It has several manufacturing units at different places, for manufacture of cement. It has a unit at Cherthala also. At Cherthala unit, it manufactures cement using “fly ash” as basic raw material. The assessee Company had filed an application for grant of exemption from payment of sales tax on 7.8.2003. The application was considered by the competent authority and has issued a certificate of exemption on 9.8.2004, granting exemption to the assessee's Cherthala unit from payment of sales tax with effect from 7.8.2003. The order so passed by the competent authority was communicated to the assessee on 12.8.2004. (23) The assessee had filed its monthly returns for all its units before the assessing authority on 9.9.2004. In the monthly return so filed, the assessee had not included the turnover of its Cherthala unit solely on the ground that it has obtained an exemption certificate from the competent authority. Even after receipt of the exemption certificate from payment of sales tax, the assessee had collected sales tax on the sales of cement made by its Cherthala unit. (24) The assessing authority coming to know that in spite of the grant of exemption from payment of sales tax, the assessee Company had collected tax on sale of cement from its Cherthala unit, had issued a demand notice asking the assessee to remit the tax due to the State. The assessee in the reply filed had only stated that it is exempted from payment S.T.Rev.No.363 of 2006 17 of sales tax and secondly that whatever amount they have collected by way of tax from its customers, they intend