IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.K.ABDUL REHIM TUESDAY, THE 25TH MAY 2010 / 4TH JYAISHTA 1932 WP(C).No. 3687 of 2006(L) ------------------------- PETITIONER(S): --------------- M/S.N.K.PODUVAL AND CO., SOUTH OF THIRUNAKKARA MAIDAN, KOTTAYAM-686 001, REPRESENTED BY THE MANAGING PARTNER, K.RAMESH. BY ADV. SRI.C.K.THANU PILLAI RESPONDENT(S): --------------- 1. THE COMMISSIONER OF COMMERCIAL TAXES, PUBLIC OFFICE BUILDINGS, THIRUVANANTHAPURAM. 2. THE DEPUTY COMMISSIONER, COMMERCIAL TAXES, KOTTAYAM. 3. THE INTELLIGENCE OFFICER, IB., COMMERCIAL TAXES, KOTTAYAM. GOVERNMENT PLEADER SRI.V.K.SHAMSUDHEEN THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 17/09/2009, THE COURT ON 25/05/2010 DELIVERED THE FOLLOWING: WP(C).3687/06 APPENDIX PETITIONER'S EXHIBITS:- EXT.P1:- TRUE COPY OF ORDER OF ACCEPTANCE DT.20.6.97 ISSUED BY M/S JEEVAN DIESELS & ELECTRICALS LTD. PODICHERY EXT.P2:- TRUE COPY OF INVOICE NO.00504 DT.21.6.97 OF DO- DO- EXT.P3:- TRUE COPY OF RECEIPT NO.0806/119 DT.4.7.97 OF DO-DO- EXT.P4:- TRUE COPY OF NOTICE NO.IB-II-109/2000 DT.24.1.01 ISSUED BY R3 EXT.P5:- TRUE COPY OF REPLY DT.5.3.01 PRESENTED TO R3 EXT.P6:- TRUE COPY OF ORDER NO.IB(K)18/2001/97-98 DT.29.8.01 ISSUED BY R3 EXT.P7:- TRUE COPY OF REVN.APPLICATION DT.5.11.01 PRESENTED TO R2 EXT.P8:- TRUE COPY OF ORDER NO.R.P.91/01 DT.14.1.02 ISSUED BY R2 EXT.P9:- TRUE COPY OF NOTICE NO.R2-5525/02/CT DT.23.12.04 ISSUED BY R1 EXT.P10:- TRUE COPY OF REPLY DT.8.12.05 PRESENTED BEFORE R1 EXT.P11:- TRUE COPY OF ORDER NO.R2-5525/02/CT DT.22.12.05 ISSUED BY R1 RESPONDENT'S EXHIBITS:- OKB //TRUE COPY// P.A. TO JUDGE C.K.ABDUL REHIM, J. ---------------------------------- W.P.(C).No.3687 OF 2006 ---------------------------------- Dated this the 25th day of May, 2010 J U D G M E N T ---------------------- 1. Challenge in this writ petition is against Ext.P11 order of the 1st respondent, Commissioner of Commercial Taxes, through which Ext.P8 revisional order of the 2nd respondent was revised suo moto, exercising power under Section 37 of the Kerala General Sales Tax Act, 1963 (KGST Act). (According to the petitioner such power can be exercised only under Section 45A (5) and not under Section 37). Penalty to the tune of Rs.4,11,000/- was imposed on the petitioner on the basis of the allegation that the petitioner had suppressed turnover of Rs.20,55,000/- through non- maintenance of true and correct accounts with respect to the assessment year 1997-98. It is alleged that on the basis of details collected by the investigation branch of the Department it is revealed that inter-State movements of Diesel Generator Sets from M/s.Jeevan Diesel and Electricals Ltd., Pondicherry to 10 various customers within the state of Kerala were effected on the basis of orders placed by the petitioner and payments made by the petitioner. W.P.(C).3687/2006 -2- Eventhough the Pondicherry supplier had billed the goods in the name of the 10 distinct parties on the basis of instruction of the petitioner and the Generator Sets were despatched directly to each of such parties, the purchase and corresponding sale were effected only by the petitioner on the capacity as a registered dealer. It is evidently proved that the transaction in question is the sale by the Pondicherry dealer to the petitioner and there are subsequent sales of the goods by the petitioner to various buyers in Kerala, attracting levy of tax under the KGST Act, is the allegation. 2. It is specifically found that the petitioner had issued quotations to the buyers in the capacity as dealer and obtained orders. On confirmation of orders from the buyers the petitioner had placed orders to the Pondicherry supplier with instructions to send the goods directly to distinct buyers within the State of Kerala. It is also evident that the petitioner had received payments from the buyers and credited the same in their accounts and further debited such amounts to the Pondicherry dealer, after deducting commission. Under such circumstances merely because direct billing of the goods by the Pondicherry dealer, as per instructions of the petitioner, will not make the transactions a direct sale. Hence the purchase W.P.(C).3687/2006 -3- and corresponding sale were found to have been effected by the petitioner on the capacity as registered dealer under the KGST Act. Under such circumstances penalty was imposed discarding contentions of the petitioner that they were only acting as an agent for canvassing orders and that sale of the goods were effected by the Pondicherry dealer directly to the buyers in Kerala and that there was direct despatch of goods to the purchasers who took delivery of the goods, and that it is a concluded inter-State sale from Pondicherry to the distinct dealers in Kerala, and that at no point of time the goods have passed through the petitioner either directly or by way of transfer of document of title to the goods. 3. Aggrieved by the order imposing penalty the petitioner had preferred revision before the 2nd respondent. In Ext.P8 order the 2nd respondent found that, facts of the case would reveal that the orders were placed by the petitioner on behalf of the purchasers and the purchasers themselves have also placed separate orders. The consideration collected from the purchasers by the petitioner has been credited in favour of the Pondicherry dealer. The consideration shown in the quotations and the sale invoices are one and the same. The consideration has actually moved to the Pondicherry dealer and W.P.(C).3687/2006 -4- the payment of such consideration was made by the purchasers. The role of the petitioner is that an agent of the Pondicherry dealer and the petitioner has acted only as a conduit through whom the consideration moved. There was no purchase by the petitioner from the Pondicherry dealer and the petitioner has not sold the Diesel Generator sets to any of the purchasers within the State. There is no transfer of any goods from the petitioner to the purchasers. Hence the findings that there were two independent transactions in supply of the goods, has no basis. It is found by the 2nd respondent that, there is no suppression of either purchase or sales with respect to the disputed transactions. Hence there is no evasion of tax which attracts imposition of penalty. Therefore the order imposing penalty was found to be unsustainable, and it was set aside. 4. But the 1st respondent issued Ext.P9 notice proposing to cancel Ext.P8 order and to restore the penalty, invoking suo moto power of revision. It is alleged that the despatch of goods by the Pondicherry dealer and its delivery to the buyers as per instructions given by the petitioner need be treated as a local sale effected by the petitioner. Since the Pondicherry dealer was required to deliver goods under W.P.(C).3687/2006 -5- instructions from the petitioner the transactions really part- took with characteristics of local sale and it will be governed by the provisions of the KGST Act as taxable within the State. Inspite of detailed reply submitted by the petitioner as per Ext.P10, the 1st respondent issued Ext.P11 with the findings that there is no privity of contract between the Pondicherry dealer and the different buyers. It is found that the offer and acceptance in the deal was between the local purchasers and the petitioner and the delivery of goods effected directly to the buyers in Kerala were only on the basis of instructions given by the petitioner. Therefore the despatch of goods by the Pondicherry dealer and consequent delivery took by the buyers could only be considered as local sales effected between the petitioner and the buyers and that such transactions will not fall within the ambit of inter-State sale of goods. It is observed that the requirement to satisfy inter-State sale such as contract between the seller and buyer and movement of goods pursuant to such contract from the selling dealer to the buying dealer is not established in the present case. The selling dealer has not received any specific orders directly from the purchasers. The payments were also received by the petitioner from the buyers. Hence the despatch of goods as well as its delivery to local W.P.(C).3687/2006 -6- buyers would amount to a local sale between the purchasers and the petitioner. Therefore, order of the first revisional authority was set aside and the order imposing penalty was restored. In this writ petition the petitioner is challenging Ext.P11 issued in exercise of the power suo moto revision. 5. On the factual matrix of the case there is evidence to the effect that the quotations for supply of the Generator Sets were issued to the buyers by the petitioner. Those quotations contain statement to the effect that the petitioner is authorised distributor/dealer of Gensets and that they are fully equipped with after sales service. In the quotations the petitioner had never mentioned about supply of goods directly by the Pondicherry dealer. Going by the quotations it can only be presumed that it is a case of proposed sale of Generator Sets by the petitioner to the buyers within the State. The purchase orders relating to the transaction revealed that such orders are issued by the petitioner to the Pondicherry dealer. The petitioner directed the Pondicherry dealer to bill the consignment directly to the buyers in Kerala at prices agreed by them. Form 27A declarations, on the basis of which the consignments were despatched, were seen collected and forwarded by the petitioner to the Pondicherry dealer. Further W.P.(C).3687/2006 -7- it is revealed that on billing of the goods by the Pondicherry dealer the petitioner had obtained copies of invoices and credited amounts as per the invoice in favour of the Pondicherry dealer. From the facts it is evident that the petitioner booked orders on behalf of the buyers and that their accounts reflected respective credits and debits of the value of the goods. The petitioner was maintaining only a single Ledger Account with respect to both sales effected by them directly and also with respect to sales effected by outside dealers. Some of the buyers out of the 10 transactions concerned, had given statements and filed affidavits before the officer to the effect that they had placed orders only to the petitioner and that they had no transaction with the Pondicherry dealer. Some of them have placed purchase orders only in the name of the petitioner. Further, it is clear that despatch of the goods directly to the buyers was only under the directions issued by the petitioner, and such despatches were made on the strength of Form 27A declarations obtained and forwarded by the petitioner. 6. Under the above mentioned circumstances the authority had not accepted contention of the petitioner that they were merely acting as a commission agent and they had W.P.(C).3687/2006 -8- only canvassed orders for supply of the Generator sets. It is found that all transactions effected by the Pondicherry dealer were only purchases made by the petitioner and there was no inter-State sale effected by the Pondicherry dealer directly to the buyers in Kerala. Hence it is presumed that there is purchase of goods by the dealer and corresponding sale within the State. Since the petitioner had failed in accounting such purchase and sales and suppressed the turnover in this regard, penalty was imposed. 7. Mr. C.K. Thanu Pillai, learned counsel appearing for the petitioner had raised vehement contentions against imposition of penalty. It is contended that the transactions in question are pure inter-State sale made between the Pondicherry dealer and the buyers at Kerala. He drew my attention to the definition of inter-State sale enumerated in Section 3 of the Central Sales Tax Act, which says that, a sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if there is occasion for movement of goods from one State to another or if the inter- State sale is effected by transfer of documents of title to the goods during their movement from one State to another. It is contended that with respect to inter-State trade or commerce W.P.(C).3687/2006 -9- the State Governments are prohibited by Article 286 of the Constitution of India from levying sales tax under any law. Article 286(1) prohibits States from imposing tax on sale or purchase of goods where such sale or purchase takes place outside the State or in the course of import of goods into, or export of goods out of the territory of India. Learned counsel had relied on the decisions of the Hon'ble Supreme Court in State of Andhra Pradesh Vs. National Thermal Power Corporation Ltd. (127(2002) STC 280) wherein it is held that the power of a State Legislature to enact any law to levy tax by reference to List II of the Seventh Schedule has two limitations, one arising out of the entry itself: and the other, flowing from the restriction embodied in the Constitution. The field of taxation on sale or purchase taking place in the course of inter-State trade or commerce has been excluded from the competence of the State Legislature, is the dictum laid therein. 8. Learned counsel for the petitioner also pointed out another decision of the Hon'ble Supreme Court in Union of India and another Vs. K.G.Khosla and Co. Ltd., (43 STC 457). It is held therein that a sale would be an inter-State sale even if the contract does not itself provide for movement of W.P.(C).3687/2006 -10- goods from one State to another, provided such movement was the result of a covenant in the contract of sale or was an incident of the contract. In that case the assessee was having an office at New Delhi and factory at Faridabad in the State of Haryana. The Delhi office obtained purchase orders from Delhi dealers and advised factory at Faridabad to manufacture goods and to send the goods to Delhi from where delivery was made. Invoices were raised by the Delhi office and payments were also received by the Delhi office. It was held that the sales are only inter-State sales from the State of Haryana and such inter- State sales were made in response to existing contract with the Delhi office and the goods were manufactured and moved from one State to another as a result of such contracts concluded in Delhi. According to the petitioner an analogous factual position exists in this case wherein the petitioner had canvassed orders on behalf of the manufacturer who had manufactured the goods according to the specifications of the buyers as per the orders and directly despatched the goods to the purchasers who took delivery of the goods. Therefore the sale cannot but be concluded as an inter-State sale from the Pondicherry dealer to the dealers in Kerala. Since it is having all characteristics of an inter-State trade the State Government W.P.(C).3687/2006 -11- is not competent to impose any levy of tax. Therefore it is not at all justified in imposing penalty presuming that there occurred an intermediate purchase and sale within the State. 9. Learned counsel for the petitioner had further relied on the decision in Sahney Steel and Press Works Ltd. and another Vs. Commercial Tax Officer And others ((1985) 60 STC 301). The Hon'ble Supreme Court observed therein that, the place of receiving orders, raising invoice, and receiving value of goods are immaterial and if the goods, as a result of the covenant in the contract of sale or as an incident of the sale, had moved from one State to another, the sale is an inter-State sale. Similar view has been taken by the Hon'ble Supreme Court in Bharat Heavy Electricals Ltd. Vs. Union of India and others ((1996) 102 STC 373). Based on the above legal precedents Mr. Thanu Pillai argued that even assuming that the orders are placed by the petitioner and payments are collected and transmitted by the petitioner, the transaction in question will not loose its characteristics of an inter-State sale. The dealer being an intermediator, could not be presumed to have purchased the goods and sold the same within the State without there being any clear evidence W.P.(C).3687/2006 -12- regarding such purchase or sale effected, is the contention. There is clear evidence that the dealer outside had despatched the goods directly to the buyers and movement of goods directly to the buyers have taken place as part of inter-State trade or commerce. There is absolutely no evidence to prove that there occurred a sale by the Pondicherry dealer to the petitioner and a re-sale by the petitioner to the persons within the State. Inter-State sale by the Pondicherry dealer to the buyers cannot be presumed or assumed, as has been done for imposition of the penalty, even going by the factual position admitted by the petitioner, is the contention. 10. The definition of “sale” in Section 2(xxi) of the KGST Act and in Section 2(g) of the CST Act was brought to my notice to emphasize that the transfer of property in goods by one person to another, whether in pursuance of a contract or not, in the course of trade or business for cash or other valuable consideration alone will constitute a sale. In the case at hand there is clear evidence to the effect that there is transfer of property in goods effected by the Pondicherry dealer to the buyers in Kerala and at the same time there is absolutely no evidence to the effect that there was transfer of property in goods from the Pondicherry dealer to the petitioner or from the W.P.(C).3687/2006 -13- petitioner to the respective buyers within the State. Therefore the respondents cannot assume sale of goods by the Pondicherry manufacturer to the petitioner and a re-sale of goods by the petitioner to the purchasers in order to impose penalty under Section 45A, is the contention. 11. Sri. V.K. Shamsudheen, learned Senior Government Pleader appearing on behalf of the respondents had resisted the arguments mainly contending that the essential ingredient to constitute an inter-State sale is lacking in the case at hand. Relying on the decision, State of Andhra Pradesh Vs. National Thermal Power Corporation (cited supra) it is contended that in order to constitute a sale in the course of inter-State trade, there should be three essential ingredients; (i) there must be a contract of sale incorporating stipulation, expressed or implied, regarding inter-State movement of goods; (ii) the goods must be actually moved from one State to another, pursuant to such contract of sale; the sale being a proximate course of movement; and (iii) such movement of goods must be from one State to another State. Based on the factual aspects it is contended that there was no contract of sale between the buyers in Kerala and the dealer at Pondicherry and the movement of goods has not occasioned by virtue of any such W.P.(C).3687/2006 -14- contract. Therefore the transaction in question does not have characteristics of an inter-State sale. Learned Government Pleader has placed much reliance on the decision of the Hon'ble Supreme Court in A & G Projects and Technologies Ltd. Vs. State of Karnataka ((2009) 17 KTR 411 (SC)) in order to support the contention that unless and until it is proved that the transfer of goods inter-State takes place by virtue of contract of sale, such transaction cannot be construed as part of inter-State trade or commerce. It is argued that there is absolutely no privity of contract between the buyers within the State and the dealer in Pondicherry, and therefore it is to be construed that the delivery was effected to the petitioner by virtue of contract placed by the petitioner. Hence it is contended that the alleged suppression of turnover and imposition of penalty is sustainable. 12. Contentions of the Government Pleader was met by Mr.Thanu Pillai based on the argument that the essentiality of a contract in sale of goods for the purpose of levy of sales tax was done away with through amendment of the Constitution, introducing Clause 29A(a) in Article 366 of the Constitution of India. But the learned Government Pleader contended that W.P.(C).3687/2006 -15- merely because the transfer of goods was effected there cannot be a direct sale, unless there is an agreement between the parties for the purpose of transferring such goods which pre- supposes capacity to contract supported by money consideration. Mr. Thanu Pillai had relied on the dictum laid down by the Hon'ble Supreme Court in State of Madras Vs. Gannon Dunkerley & Co. ((1958) 9 STC 363). It is argued that passing of title of goods from the seller to the buyer is an essential condition for sale. In case of building contract there was no delivery of goods and hence the Hon'ble Supreme Court held that there was no sale at all liable to levy sales tax. It is contended that mere agreement for sale will not liable for tax and tax can be imposed only on completed sale for which delivery of goods by the seller to the purchaser is a necessary element. In the case at hand, there is evidence that the goods were delivered to the purchasers and the goods had reached the purchasers by virtue of inter-State movement. Therefore the transaction can only be considered as an inter-State trade, is the contention. 13. From the facts and circumstances of the transactions, evaluated on the basis of dictum laid by the W.P.(C).3687/2006 -16- Hon'ble Supreme Court, I am not hesitant to hold that the transactions in question has got characteristics of inter-State sale. But while appreciating the rival contentions I am of the view that, apart from considering as to whether the transaction in question had characteristics of inter-State sale, a further aspect to be considered is as to whether the imposition of penalty on the assumption that there occurred a purchase and sale at the hands of the petitioner is justified or not. Even going by the factual evidences collected by the respondents, there is no materials to point out that in fact any purchase was made by the petitioner from the Pondicherry dealer or any sale was effected by the petitioner to the buyers within the State of Kerala. It is evident that the invoices are raised with the very same price quoted in the purchase orders. Even going by the accounts maintained by the petitioner it is evident that the commission amount alone was retained while transferring the consideration. On the other hand there is clear evidence that the despatch of goods by the Pondicherry dealer was directly in the names of the buyers and the goods in question had reached the individual buyers and that they have taken delivery of such goods. On a specific question put to the Government Pleader regarding assessment if any made against the petitioner with W.P.(C).3687/2006 -17- respect to the transactions, no positive reply is forthcoming to the effect that the turnover was assessed against the petitioner, treating it as purchase and sale effected by them. With respect to imposition of penalty under Section 45A of the KGST Act there should be clear evidence of suppression of turnover and evasion of payment of legitimate tax amount due. I am of the opinion that the respondents were not successful in proving with any material that there occurred any inter-State purchase of goods by the petitioner and consequent sale effected by them within the State. An action, which is in the nature of penal in consequence, could not be imposed against an assessee without there being any conclusive materials of suppression of turnover or evasion of payment of tax. When the liability for levy of tax under the KGST Act, with respect to the transaction itself is in doubt, the respondents are not at all justified in imposing penalty alleging suppression of turnover on the basis of a presumption that the transaction can be construed as a purchase and subsequent sale effected by the petitioner. Therefore I am of the considered opinion that imposition of penalty in the case at hand was not at all sustainable under law and it was not justified on the facts and circumstances of the case. The findings of the 2nd respondent W.P.(C).3687/2006 -18- while setting aside the order imposing penalty are convincing and justified. The power of suo moto revision exercised by the 1st respondent for restoring the order of penalty cannot be construed