IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT:- THE HONOURABLE THE CHIEF JUSTICE MR.J.CHELAMESWAR & THE HONOURABLE MR. JUSTICE P.N.RAVINDRAN MONDAY, THE 4TH OCTOBER 2010 / 12H ASWINA 1932 W.A.No.1946 of 2009(E) --------------------------------------- AGAINST THE JUDGEMENT IN W.P.(C).5702/2008-D, DATED 19/08/2009 .................... APPELLANT/PETITIONER:- ---------------------------------------- M/S ESSAR OIL LIMITED, REPRESENTED BY ITS DIVISIONAL MANAGER- TOMY VARGHESE, KOSSERIL BUILDINGS, 33/316 -B, AMBEDKAR ROAD, VENNALA, ERNAKULAM. BY ADV.SRI.ARAVIND P.DATAR (SENIOR ADVOCATE), SRI.K.SRIKUMAR SRI.R.RAGHAVAN SRI.N.MURALI. RESPONDENTS/RESPONDENTS:- ------------------------------------------------ 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. W.A.NO.1946 OF 2009-E. - 2 - 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. 7. THE ADMINISTRATOR, LAKSHADWEEP ISLANDS, KAVARATHI-682 555. R1 TO R4 BY SPECIAL GOVERNMENT PLEADER FOR TAXES SRI.VINOD CHANDRAN. R7 BY STANDING COUNSELSRI.S.RADHAKRISHNAN. THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON 06/08/2010, ALONG WITH W.P.(C). NO.5893 OF 2010-J, THE COURT ON 04/10/2010 DELIVERED THE FOLLOWING:- vku/- J.CHELAMESWAR, C.J. & P.N. RAVINDRAN, J. --------------------------------------------------------------------- W.A.No.1946 of 2009-E & W.P.(C).No.5893 of 2010-J --------------------------------------------------------------------- Dated, this the 4th day of October, 2010 JUDGMENT J.Chelameswar,C.J. W.P.(C).No.5893 of 2009 and W.A.No.1946 of 2009 are filed by the same petitioner - Essar Oil Limited - a public limited Company, hereinafter in the judgment referred to as “the Company”, which is a registered dealer on the files of the Assistant Commissioner (Assessment), Special Circle-II, Kochi, under the Kerala General Sales Tax Act, 1963 (hereinafter referred to as “the Act”), dealing in petroleum products. 2. W.P.(C).No.5893 of 2010 is filed challenging the legality of an assessment order dated 21.01.2010 relating to the assessment year 2004-05 under the Act passed against the petitioner. W.A.No.1946 of 2009 is filed aggrieved by the judgment in W.P.(C). No.5702 of 2008 dated 19.08.2009, wherein an order imposing a penalty under Section 45A of the Act to the tune of `5,05,79,164/- passed against the Company on 28.12.2006, which was subsequently confirmed by the two revisionary authorities successively on 21.06.2007 and 25.01.2008 respectively was challenged unsuccessfully. WA.No.1946 of 2009 & - 2 - WP(C).No.5893 of 2010 3. The Company, as a part of its business, deals in High Speed Diesel (HSD). During the assessment year 2004-05, the Company effected sales of HSD to two purchasers, called “Shebna Enterprises” and “Ifan Enterprises”, hereinafter referred to as “purchasing dealers 1 and 2” respectively. The quantity of the HSD sold is 3924 KL and 1980 KL respectively and the value of the goods is `8,07,45,486/- and `4,54,52,424/- respectively. While making the above mentioned sales, the Company also collected sales tax at the rate of 4% ad valorem under the provisions of the KGST Act. Admittedly, the sale of HSD is liable for 24% ad valorem tax under the provisions of the Act, but the Company collected a reduced rate of tax claiming the benefit of a notification issued by the State of Kerala in S.R.O.No.1091/99 dated 31.12.1999 (hereinafter referred to as “the exemption notification”), which was issued by the State of Kerala in exercise of the powers vested in it under Section 10 of the Act. 4. A show cause notice dated 26.06.2006 was issued by the Intelligence Officer (Investigation Branch) of the Department of Commercial Taxes, Palarivattom to the Company, proposing to impose a penalty, amounting to `5,04,79,164/- being twice the amount of tax alleged to have been evaded by the Company “by virtue of irregular WA.No.1946 of 2009 & - 3 - WP(C).No.5893 of 2010 availment of concessional rate” and called upon the Company to offer its explanation, if any, against the said allegation. The specific case of the Revenue is that though the exemption notification provides for the concessional rate of tax under the provisions of the Act on certain transactions of sale, the sales in question made by the Company are not eligible for the benefit of the above mentioned exemption notification. The reason being that under the relevant clauses of the exemption notification, relied upon by the Company for claiming the concessional rate of tax, only sale of goods used in the Union Territory of Lakshadweep are eligible for the concessional rate of tax subject to the fulfilment of other conditions of the said notification and as it was found by the Revenue that the goods covered by the transactions in question did not eventually reach Lakshadweep. The relevant portion of the show cause notice reads as follows: “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 evidence to prove movement of goods from Kerala to Lakshadweep, you had furnished copies of “Export Bills” filed at Beypore Port, Kozhikode and Mangalore Port. In order to verify WA.No.1946 of 2009 & - 4 - WP(C).No.5893 of 2010 bona fides 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.126197911.20 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 recognized by the administrator Union Territory of Lakshadweep utilizes the WA.No.1946 of 2009 & - 5 - WP(C).No.5893 of 2010 concession only in respect of goods used in the Union Territory of Lakshadweep (emphasis ours). The condition contemplated under the government notification has not been fulfill or violated wherefore the certificates in Annexure-I filed lose their significance and become infructuous.” 5. The Company gave a reply to the above mentioned show cause notice. Thereafter, a hearing followed. Eventually by an order dated 28.12.2006, penalty was imposed. Aggrieved by the same, the Company carried the matter in a statutory revision to the Deputy Commissioner of Commercial Taxes. The said revision was dismissed on 21.06.2007. Aggrieved by the same, the Company carried the matter in a further revision before the Commissioner of Commercial Taxes, which was also dismissed on 25.1.2009. Therefore, the Company approached this Court by way of W.P.(C). No.5702 of 2008, which was dismissed by the judgment under appeal dated 19.08.2009. Hence the Writ Appeal. 6. In the meanwhile, an assessment order pertaining to the assessment year 2004-05 under the provisions of the KGST Act came to be passed against the Company on 21.01.2010. By the said assessment order, the assessing authority, inter alia, rejected the claim of the Company that the Company was liable to pay sales tax only at WA.No.1946 of 2009 & - 6 - WP(C).No.5893 of 2010 4% on the sales made in favour of the two purchasing agents referred to earlier and held that the Company is liable to pay tax on the above mentioned transactions at the rate of 24% ad valorem. Therefore, the Company directly approached this Court by way of W.P.(C).No.5893 of 2010, as by then the Company's W.P.(C).No.5702 of 2008 was dismissed and some of the observations and findings recorded in the said writ petition are relied upon by the assessing authority in the impugned assessment order and, therefore, the Company rightly believed that no useful purpose would be served by availing the statutory appeal/revisional remedies against the assessment order. 7. While the show cause notice simply alleges a violation of one of the conditions of the exemption notification for proposing to impose penalty, the final order dated 28.12.2006, imposing the penalty, records a finding that the appellant colluded with the purchasers. By the stage the matter reached the Deputy Commissioner (the first revisional authority), a new ground was found to establish the liability of the appellant, i.e., “the petitioner should have confirmed that the purchasing dealer may not misuse the concession they availed ...................... the petitioner should have taken all precautions to see that by WA.No.1946 of 2009 & - 7 - WP(C).No.5893 of 2010 availing the concessional rate of 4%, the purchasers are not defrauding both seller as well as the Government”. (The order dated 21.06.2007 of the Deputy Commissioner, Commercial Taxes, Ernakulam). By the stage the matter reached the second revisional authority, i.e. the Commissioner of Commercial Taxes, Thiruvananthapuram, the matter took a different dimension. The Commissioner observed as follows: “The revision petitioner here has sold 5,904 KL to two dealers, viz. M/s.Ifan Enterprises and Shebna Enterprises, in 2004-05 valued at Rs.12.62 crores at a concessional rate of 4% for use in Lakshadweep. Considering that this represented more than 70% of the islands' requirements, a diligent trader would not have stopped making enquiries regarding the purchasers just because demand drafts for the entire amount were tendered in advance; they admittedly failed to do any due diligence on the purchasing parties and the large quantity of indented by them, and predictably enough, the payment was made by a stranger to the transaction, and forged documents like Export Bills, complete with fake seals and signature of the Port authorities of Beypore emerged to support the faked movement of the goods from Kerala to the islands, evidencing misutilisation of the goods sold”, and consequently it came to the conclusion as follows:- “The aura of collusion in the transaction only strengthened by the reluctance of the revision petitioner to part with details of the payments made to the investigating authorities”. WA.No.1946 of 2009 & - 8 - WP(C).No.5893 of 2010 8. We have already noticed the contents of the show cause notice. The final order imposing penalty was passed under Ext.P13 dated 28.12.2006. The brief content of the said order as noted by the judgment under appeal in paragraphs 10, 11 and 12 is as follows: “In this order, although the 1st respondent, accepted that the petitioner had obtained necessary licences, permits etc., authorising respondents 5 and 6 to deal with petroleum products, he has found fault with the petitioner for 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, Ernakulam. 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 WA.No.1946 of 2009 & - 9 - WP(C).No.5893 of 2010 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, 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 purchasers are liable, was rejected on the reasoning that such undertaking is applicable only when WA.No.1946 of 2009 & - 10 - WP(C).No.5893 of 2010 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.” The first respondent found that the company had verified the existence of all necessary licences and permits in favour of the purchasing dealers (Respondents 5 and 6 herein). The first respondent found fault with the company in not alerting the Administrator of the Union Territory of Lakshadweep and also the port authorities at Mangalore and Beypore regarding the huge quantity of HSD purchased and drew an inference from such failure that the company colluded with the purchasing dealers to defraud the Government. The first respondent also found fault with the company for accepting the payment due towards the sales which are the subject matter of dispute in this litigation from a third party to the transaction, i.e., is somebody other than the purchasing dealers. The company accepted demand drafts from a third party and not cheques towards the consideration of the sales in issue in contrast to the practice of the company in accepting WA.No.1946 of 2009 & - 11 - WP(C).No.5893 of 2010 cheque payment in all those cases of sales made in favour of regular customers. Further the first respondent also opined that some of the materials produced by the company in its bid to establish the fact that the HSD sold by the company was infact sought to be transported to the Union Territory of Lakshadweep through Mangalore and Beypore ports pertained to commodities other than HSD. In view of the above mentioned factors the first respondent opined that the company colluded with the 5th and 6th respondents to defraud the State of Kerala of its revenue. 9. By the judgment under appeal the learned Judge of this Court proceeded to examine the genuineness of the sales in issue. He took into consideration as many as eight factors to come to the conclusion that the transactions in question are not genuine. “These circumstances, are not explained by the petitioner and inspite of all this petitioner wants everyone to believe that they did not feel anything amiss in the transaction and that everything was genuine. The aforesaid facts only leads to the irresistible conclusion that the transactions in question are not genuine. If that be so, I cannot accept the contention of the counsel for the petitioner that the seller cannot be held liable and that if at all anybody is liable, it is the buyer alone.” WA.No.1946 of 2009 & - 12 - WP(C).No.5893 of 2010 The various factors which weighed with the learned Judge in coming to such a conclusion are summarised at paragraph 26 of the judgment as follows: “26. While considering the genuineness of sale, it is to be noticed; 1. that the sale of 5904 Kilo litres of HSD sold by the petitioner, out of 8316 Kilo lires supplied to Lakshadweep during 2004-05, was the business canvassed by its BDA who was appointed as per Ext.P4, 2. First of all, appointment of the BDA was for a period of 3 months from 15.06.2004 and unless extended, it automatically expires. Petitioner has no case that the period of appointment was extended and if that be so, it is for the petitioner to explain under what authority the BDA canvassed the business during the period subsequent to the expiry of their appointment. In fact Ext.P5 intend placed by the BDA itself is after the expiry of the period specified in Ext.P4. 3. Further there is absolutely no explanation forthcoming as to how the BDA could canvass orders from Lakshadweep, while its area of operation was confined to States of Andhra Pradesh, Karnataka, Tamil Nadu and Kerala. 4. Further, Ext.P4 itself says that one of the places of product availability is MRPL Mangalore. While so, it is surprising WA.No.1946 of 2009 & - 13 - WP(C).No.5893 of 2010 that the buyers have taken delivery from Cochin, transported the same by trucks to Mangalore and then shipped the HSD to Lakshadweep, when HSD was very much available in Mangalore itself. 5. Even going by the documents produced by the petitioner, respondents 5 and 6 are dealers of petroleum products and the huge quantity allegedly purchased by them was admittedly in that capacity only. While the petitioner was thus entering into such huge transactions canvassed by its BDA, Ext.P4 appointment order itself provided that the BDA shall canvass business from customers for their consumption only. 6. Further while Ext.P4 requires customers to place their intends, even going by the pleadings in this writ petition, intends were placed by the BDA only. This read with the averments in the counter affidavit filed by the 6th respondent, speaks volumes about the bonafides of the petitioner and the genuineness of the sales. 7. The corresponding 137 export bills verified with the ports showed that the goods shipped were actually rice, provisions etc. which means the goods sold by the petitioner were not shipped at all. 8. Further no payments were received from the purchasers and the entire payments were made by Sri.P.V.Babu, operating a fictitious account in the IndusInd Bank”. Hence the appeal. To examine the correctness of the judgment, a brief survey of the Act is necessary. WA.No.1946 of 2009 & - 14 - WP(C).No.5893 of 2010 10. The Kerala General Sales Tax Act, 1963 authorizes the levy and collection of taxes on sales and purchases of goods made in the State of Kerala. Section 5 of the Act, in so far as it is relevant for our purpose, reads as follows: “5. Levy of tax on sale or purchase of goods:- (1) Every dealer, ..........., shall pay tax on his taxable turnover for that year,- (i) in the case of goods specified in the First or Second Schedule, at the rates and only at the points specified against such goods in the said Schedules; xx xx xx” Such levy of tax is subject to certain statutory exemptions, the details of which are not necessary for the purpose of the present case. Entry 108 of the First Schedule to the Act deals with the Petroleum products. The Entry in so far as it is relevant for the present purpose, read at the relevant point of time, as follows:- “Sl. Description Point of levy Rate of No. of Goods tax - % -------------------------------------------------------------------------------- 108. Petroleum At the point of sale in the State 24 products, by any oil company liable to tax namely:- under Section 5 except where the sale is by an oil company to another oil company and at the point of first sale in the State by a dealer who is liable to tax under Section 5 when the sale is not by an oil company”. WA.No.1946 of 2009 & - 15 - WP(C).No.5893 of 2010 The net result of the declaration under Section 5 and the above mentioned Entry is that the sales of HSD were liable for tax at 24% by an oil company like the Company herein. 11. However, the State of Kerala issued the exemption notification in the purported exercise of power under Section 10 of the Act. The said notification is that the said notification purports to reduce the rate of tax against the sales and purchases of various items specified in the said notification, subject to the terms and conditions specified in the notification. Clause I of the notification, in so far as it is relevant for our purpose, reads as follows: “xx xx xx (3) on the turnover of sale to the persons or organisations mentioned in column (2) of Schedule III of goods specified in column (3) thereof to the rate mentioned in column (4) on the seller producing a certificate in duplicate in the form in the Annexure I obtained from the purchaser; xx xx xx” Schedule III referred to above, in so far as it is relevant for us, reads as follows:- “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 WA.No.1946 of 2009 & - 16 - WP(C).No.5893 of 2010 ----------------------------------------------------------------------------------- Sl. Description of person/ Description Reduced No. organisation of goods rate of tax (per cent) ------------------------------------------------------------------------------------ (1) (2) (3) (4) ------------------------------------------------------------------------------------ 1. Administrator, Union Any goods, the 4 Territory of Lakshadweep, rate of tax in Laccadive Co-operative respect of which Marketing Federation, exceeds 4 per cent. Kozhikode and the Lakshadweep Harbour Works and any dealer recognized 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 (emphasis ours). xx xx xx”. It is the emphasized portion of Column (2) of the above extracted table which determines the fate of these two cases before us. The true import of the said clause is required to be examined, as the Company and the Revenue are not able to agree upon its interpretation. 12. The Company claims that the sales in question are organized through a proprietary concern, known as “Nizy Enterprises” which, according to the Company, is a “Business Development WA.No.1946 of 2009 & - 17 - WP(C).No.5893 of 2010 Associate” (BDA). According to the Company, the said BDA and the Company had a business promotion agreement by which the BDA identifies the prospective purchasers and facilitates the sales of various petroleum products by the Company. The further details of the agreement will be referred to, if necessary, at the appropriate place in the judgment. 13. As already noticed from the show cause notice dated 26.06.2006 and also the content of the impugned assessment order dated 21.01.2010 that the concessional rate of tax contemplated under the exemption notification is available only in those cases where not only the sales were made in favour of such persons as are specified