Supreme Court draws distinction between exempted goods and exempted units for allowing input tax credit

Commercial Taxes Officer v. A Infrastructure Ltd. [2015] 63 taxmann.com 307 (Supreme Court)

CST & VAT: Rajasthan VAT- Assessee could claim input tax credit of raw material used in manufacturing of Asbestos Cement Sheets when assessee was specifically exempted from paying VAT due to exemption notification.

Facts:

• Assessee was manufacturing Asbestos Cement Pressure Pipes and Asbestos Cement Sheets (A.C. Sheets). It had availed input tax credit (ITC) on purchase of raw material used in manufacturing of A.C. Sheets.
• Revenue disallowed such ITC on the ground that no tax was required to be paid by assessee due to exemption notification. However, the assessee was of the view that it was only exempted to pay duty by virtue of notification and goods manufactured by it were not exempted goods. Therefore, it was correct in claiming ITC.
• The High Court held in favour of assessee.Aggrieved-department filed the instant appeal.

The Apex Court held in favour of assessee as under:

• It was perceivable that the High Court had proceeded on foundation that there was distinction between the exempted units and exempted sales. If said distinction would be overlooked, it might lead to serious error in construction and application of taxing provisions.
• There is no doubt that distinction has to be drawn between exempted goods, which means complete exemption for the specified goods, and when the goods are taxable goods, but a transaction or a person is granted exemption.
• When goods are exempt, there would be no taxable transactions or exemption to a taxable person. In other cases, goods might be taxable, but exemption could be given in respect of a taxable event, i.e., exemption to specified transactions from liability of tax or exemption to a taxable person, though the goods are taxable. Exemption with reference to taxable events or taxable persons would not exempt the goods as such, for a subsequent transaction or when the goods are sold or purchased by a non-specified person, the subsequent transaction or the taxable person would be liable to pay tax.
• Therefore, the appellant though exempted from payment of tax, subsequent transactions of sale of asbestos cement sheets would be taxable. As a logical corollary it follows that the VAT would have to be paid on the taxable goods in a subsequent transaction by the purchasing dealer.
• The denial of credit to assessee would lead assessee to a disadvantageous position as if subsequent sale is made by non-exempted dealer then it would suffer tax on entire sale consideration. It would make its products uncompetitive in spite of exemption notification. Thus, assessee had correctly claimed ITC.

Levy of VAT on Indian liquor sold by hotels in Tamil Nadu is constitutionally valid

Hotel & Bar (FL.3) Association of Tamil Nadu (HOBAT) v. Secretary to Government, Commissioner Taxes Department [2015] 60 taxmann.com 75 (Madras High Court)

Levy of VAT on Indian-made liquor sold by hotels/clubs is constitutionally valid, irrespective of the fact that VAT has been imposed without giving benefit of set-off of tax-suffered turnover at the time of purchase. It is so since liquor is non-vatable goods and provisions imposing non-vatable tax on goods has not been challenged.

Background of the case:

• Hotels and clubs were paying Tamil Nadu VAT on foreign liquor sold by them to their customers. However, no tax was payable on sale of Indian-made-liquor by them to their customers.
• A tax had been levied in 2012 on sale of Indian-made-liquor by hotels and clubs to their customers.
• This tax had to be paid upon total turnover arising on sale of such liquor without any set-off of tax-suffered turnover at the time of purchase.
• Hotels and clubs purchase Indian-made-liquor from Tamil Nadu State Marketing Corporation Limited (“TASMAC”, a State’s instrumentality) after payment of tax. TASMAC has the benefit of paying tax on turnover after setting off tax-suffered turnover at the time of purchase. However, hotels and clubs have no such benefit.
• It was argued by the hotels and clubs that there could not be taxation of entire turnover. It placed fetters on the right of the petitioners to carry on their own business. Therefore, there was violation of Article 19(1)(g).

The High Court held that:

• The rights protected by Article 19(1) are not absolute but qualified. The qualifications are stated in clauses (2) to (6) of Article 19. The fundamental rights guaranteed in Article 19(1)(a) to (g) are,therefore, to be read along with the said qualifications.
• Potable liquor as a beverage is an intoxicating and depressant drink which is dangerous and injurious to health and is, therefore, an article which is res extra commercium, being inherently harmful. A citizen has, therefore, no fundamental right to do trade or business in liquor. Hence, the trade or business in liquor can be completely prohibited.
• The State can create a monopoly either in itself or in the agency created by it for the manufacture, possession, sale and distribution of the liquor as a beverage and also sell the licences to the citizens for the said purpose by charging fees. This can be done under Article 19(6) or even otherwise.
• The petitioners made considerable profit by the escalation of sale price. The petitioners were making considerable value additions to their sales in favour of their customers.When the petitioners were selling liquor at a higher price than the TASMAC, they could not seek parity.
• Liquor is specified as non-vatable item. Provisions as to tax certain goods treating them as non-vatable have not been challenged [Section 3(5) and Second Schedule].
• The petitioners, who are clubs and hotels, cannot be compared with the retail outlets of TASMAC. The customers of the TASMAC and the petitioners form two distinct and different categories based upon their respective socio-economic status. The petitioners are not prevented from doing their business. Thus, there is no violation of Article 19(1)(g). 

High Court sets aside penalty on ‘Flipkart’ for effecting sales without registering under Kerala VAT Act

Flipkart Internet (P.) Ltd. vs. State of Kerala [2015] 62 taxmann.com 387  

CST & VAT: Kerala VAT- ‘Flipkart’ is merely facilitating sales, purchase and delivery of goods, it can’t be considered as dealer of goods under Kerala VAT Act.

Facts

•   ‘Flipkart’ (assessee), being an online service provider facilitating sales or purchases, was registered under service tax law. Notice was issued to ‘Flipkart’ under Kerala VAT Act (KVAT) for neither registering as a dealer nor filing returns. Accordingly, penalty was levied on it for such default.
• 'Flipkart’ argued that it was only a service provider which was not engaged in business of sale or purchase of goods. It merely facilitated transactions of sale or purchase through its online portal and made arrangements for the delivery of goods. Therefore, the provisions of KVAT Act were not applicable to it.

The High Court held as under:

• The tenor of notice gave ample implication that the department had made up its mind to impose penalty on assessee without any supported reasons. It did not consider the contentions of assessee that the said transactions were inter-State sales. These sales transactions were effected by sellers who were registered on online portal of ‘Flipkart’ and all sales were inter-State sales on which tax had been paid by seller under the CST Act.
• The contention of department that the online portal could be seen as an intangible shop was legally flawed because it is well settled that the situs of a sale is wholly irrelevant to a determination of the issue of whether a sale is inter-State sale or not.
• The department had imposed penalty on ‘Flipkart’ due to non-filing of returns and due to its failure to maintain true and correct accounts. However, there was no indication in notice as to why the ‘Flipkart’ was to be considered as a dealer and why said transaction was to be treated as local sales against inter-State sales.
• The department has proceeded against the assessee without first having ascertained whether these transactions would come under the coverage of Act. The matter must be first referred to the concerned Assessing Officers before invoking penal provisions since no tax can be levied except by authority of law.

Assessing Officer to transfer VAT collected on activation of SIM cards to Service Tax Department – such transaction is a service and not sales

Idea Cellular Ltd. v. Union of India (2015) 57 taxmann.com 293 (Punjab & Haryana High Court)

Haryana VAT - Where collection of VAT from assessee was without authority of law and Service Tax department had raised service tax demand upon assessee for period for which Assessing Authority had levied and collected VAT, Assessing Authority was to be directed to transfer amount of VAT to Service Tax department.

• Assessing Authority collected VAT from assessee pursuant to assessment orders on premise that activation of SIM cards was a sale.
• Assessee approached State of Haryana for refund of amount of VAT on ground that activation of SIM card was a service and not a sale.
• The Assessing Authority dismissed the assessee's representation for refund of the amount of VAT on the grounds that the assessee did not challenge its liability before the Assessing Authority, it did not file any appeal against the assessment orders, and as the assessee had charged VAT from its customers, the amount could not be refunded.

High Court held in favour of assessee as under:

• Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India (2006) 3 STT 245 held that activation of SIM cards is a 'service' and not a 'sale'. The assessee is, therefore, liable to pay service tax on the activation of SIM cards and not VAT.
• Since Supreme Court had clearly held that VAT could not be collected on activation of SIM cards, levy and collection of VAT was without authority of law and violative of article 265 of Constitution.
• The Union of India has raised a demand for service tax for the period for which the State of Haryana has levied and collected VAT. If the assessee is called upon to pay VAT and service tax, it would be the case of double taxation.
• In view of the aforesaid, the revenue was to be directed to transfer the amount of VAT collected from the assessee to the Service Tax department of the Union of India.

Discount allowed by ONGC to Oil Marketing Companies for sale of petroleum products would not form part of sale price

ONGC Ltd. v. State of Gujarat - (2015) 55 taxmann.com 297 (Gujarat High Court)

Gujarat VAT - Where assessee for first quarter of April, 2014 to June, 2014 had given discount to Oil Marketing Companies on sale of its petroleum products by way of credit note, amount of discount would not form part of sale price as directed by Government of India

• The assessee was engaged in exploration, development and production of the petroleum products. It was obliged to act as an instrument to implement the policy of the Central Government subject to such directives as might have been issued by the President from time-to-time with a view to exercise control over strategic areas of economy and to serve public interest.
• For the first quarter of April, 2004 to June, 2004, the assessee had given discount to the Oil Marketing Companies (OMCs) on the sale of its petroleum products as directed by the Government of India in its letter dated 27-8-2004 by way of a credit note dated 13-9-2004. It claimed that the amount of such discount would not form part of taxable turnover.
• The assessing authority held that the discount given by the assessee to the OMCs on the sale of petroleum products was not an admissible deduction. The assessee was required to pay the tax inclusive of such discount.
• Both, the First Appellate Authority and the Tribunal upheld the order of the Assessing Authority.

High Court held in favour of assessee as under: 

• The assessee could charge only such rate from the OMCs as Government of India directed.The broad formula adopted for such purpose was the crude price in international market minus the last discount which would prevail for a quarter. At the end of the quarter after, taking into consideration all the relevant factors, the Government of India would declare the final price.
• Since for the petroleum products already supplied by the assessee to the OMCs during such quarter the invoices would have been raised on the basis of provisional discount, the adjustment would have to be done on the basis of final discount declared by the Government of India. Though in most of the cases, the final discount might have been higher than the provisional discount earlier declared, it was entirely possible that in some cases such final discount might have been lower than the provisional price. The assessee would eventually adjust its accounts with the OMCs by raising either the debit note or credit note, as might be required.
• Perhaps it is a misnomer, though consistently so referred to by the Government of India as well as by the assessee, to term this component as discount. A discount is reduction in catalogue price for any reason recognised by the trade. In the instant case, there was no prefixed price which as per the trade practice was reduced by a discount given by the seller to the purchaser. It was a case where under a price control regime under the directives of Government of India, the assessee was obliged to sell its products at lesser than the market price. These terms were determined even before the sale. Initial invoices at the time of actual supply of petroleum products by the assessee were merely provisional. They were based on provisional price fixation by the Government. They were never meant to reflect final sale consideration for the goods sold. They were always subject to adjustment once the Government of India finally declared the reduced rate of specified petroleum products. Comparing the invoiced price with the finalised price after adjustment was a complete fallacy. Even invoiced price whenever based on provisional price fixed by the Government was always below the market price which the assessee could have fetched. 
• Therefore, the amount of discount given by the assessee to the OMCs on sale of its products would not form part of sale price. The assessee was not required to pay tax on such discount.

Activation of SIM cards is a service and not sales

Idea Cellular Ltd. v. Union of India (2015) 57 taxmann.com 293 (Punjab & Haryana High Court)
 

Haryana VAT - Where collection of VAT from assessee was without authority of law and Service Tax department had raised service tax demand upon assessee for period for which Assessing Authority had levied and collected VAT, Assessing Authority was to be directed to transfer amount of VAT to Service Tax department.

• Assessing Authority collected VAT from assessee pursuant to assessment orders on premise that activation of SIM cards was a sale.

• Assessee approached State of Haryana for refund of amount of VAT on ground that activation of SIM card was a service and not a sale.

• The Assessing Authority dismissed the assessee's representation for refund of the amount of VAT on the grounds that the assessee did not challenge its liability before the Assessing Authority, it did not file any appeal against the assessment orders, and as the assessee had charged VAT from its customers, the amount could not be refunded.

High Court held in favour of assessee as under:

• Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India (2006) 3 STT 245 held that activation of SIM cards is a 'service' and not a 'sale'. The assessee is, therefore, liable to pay service tax on the activation of SIM cards and not VAT.

• Since Supreme Court had clearly held that VAT could not be collected on activation of SIM cards, levy and collection of VAT was without authority of law and violative of article 265 of Constitution.

• The Union of India has raised a demand for service tax for the period for which the State of Haryana has levied and collected VAT. If the assessee is called upon to pay VAT and service tax, it would be the case of double taxation.

• In view of the aforesaid, the revenue was to be directed to transfer the amount of VAT collected from the assessee to the Service Tax department of the Union of India.

Harayana VAT must incorporate provisions to exclude value of land from works contract

CHD Developers Ltd. v. State of Haryana (2015) 57 taxmann.com 315 (Punjab & Haryana High Court)

Where assessee, a builder/developer, entered into agreements with prospective buyers to construct flats, etc. and thereafter sell same with some portion of land against valuable consideration, activity of assessee would be covered under term 'works contract' but Assessing Authority was to be directed to pass fresh assessment order

Facts :

• Assessee, a builder/developer, entered into agreements with prospective buyers to construct flats, etc., and thereafter sell same with some portion of land against valuable consideration.
• Assessing Authority in terms of circulars dated 7-5-2013, 4-6-2013 and 10-2-2014 providing for levy of VAT on builders, etc., levied VAT on transaction of sale of flats, floors and villas effected by assessee. 
• Assessee filed writ petition for declaring provisions which include value of land for charging VAT on developers to be ultra vires the Constitution.

High Court held partly in favour of assessee as under :

• From a consideration of various decisions of the Supreme Court arising under article 366(29A) of the Constitution, it follows that the agreement between the promoter/builder/developer and the flat purchaser to construct a flat and thereafter sell the flat with some portion of land does involve construction which would be covered under the term 'works contract'.
• Rule 25 provides for exclusions in respect of labour, services and other like charges and does not provide for any mechanism for exclusion of the value of land. Wherever developer/builder/promoter or the sub-contractor who carries on construction work in a works contract maintains proper accounts, it shall be on the basis of actual value addition on account of goods utilized in the property. Rule 25(2) provides for deduction of charges towards labour, services and like charges and where they are not ascertainable from the books of account maintained by a developer, etc., the percentage rates are prescribed in the table provided in the said rule. 
• It is necessarily required to provide mechanism to tax only the value addition made to the goods transferred after the agreement is entered into with the flat purchaser. The 'deductive method' thereunder does not provide for any deduction which relates to the value of the immovable property. The legislature has not made any express provision in rule 25 for exclusion of value of immovable property from the works contract and its method of valuation has been left to the discretion of the rule making authority. 
• Essentially the value of immovable property and any other thing done prior to the date of entering into the agreement of sale is to be excluded from the agreement value. The value of goods in a works contract in the case of a developer, etc., on the basis of which VAT is levied would be the value of the goods at the time of incorporation in the works even where property in goods passes later on. 
• Further, VAT is to be directed on the value of the goods at the time of incorporation and it should not purport to tax the transfer of immovable property. Consequently, rule 25(2) is held to be valid, but State Government shall bring necessary changes in the said rule inconsonance with the above observations.