Distinct purchase and supply transactions under a licence arrangement were taxable locally, but maximum penalty had to match tax sought to be evaded.

A purchase of machinery from an outside supplier, followed by supply to a Kerala concern under a licence arrangement, was treated as two distinct transactions: an inter-State purchase and a separate local supply. The local supply was held exigible to tax under the Kerala General Sales Tax Act, and the arrangement justified an inference of possible tax evasion where the petitioner was unregistered and the goods were intercepted at the check-post. However, penalty could not be fixed mechanically at the maximum under section 29A; it had to be reworked to correspond to the tax sought to be evaded, after notice and verification of any prior assessment.

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Issues: (i) whether the transaction of purchase of machinery from an outside supplier followed by supply to the Kerala concern under the licence arrangement was exigible to tax under the Kerala General Sales Tax Act, 1963 and supported an inference of attempt to evade tax; (ii) whether the maximum penalty imposed under section 29A was justified.

Issue (i): Whether the transaction of purchase of machinery from an outside supplier followed by supply to the Kerala concern under the licence arrangement was exigible to tax under the Kerala General Sales Tax Act, 1963 and supported an inference of attempt to evade tax.

Analysis: The agreement with the outside supplier and the agreement with the Kerala concern showed two distinct transactions: an inter-State purchase by the petitioner from the outside supplier, and a separate supply of machinery by the petitioner to the Kerala concern for use on payment of licence fee. The delivery documents and invoice showed that the goods reached the Kerala premises as the petitioner's goods, and there was no privity of contract between the outside supplier and the Kerala concern. The transaction therefore did not fall within the principle governing a direct inter-State sale to the customer, but attracted tax as a taxable local transaction under the Act. Since the petitioner was not a registered dealer and the movement was intercepted only at the check-post, the authorities were justified in treating the arrangement as one that could result in escape from assessment.

Conclusion: The transaction was exigible to tax under the Act and the finding of attempted evasion was upheld, against the assessee.

Issue (ii): Whether the maximum penalty imposed under section 29A was justified.

Analysis: Although liability to penalty was sustained, the quantum could not automatically be fixed at the maximum. The record did not clearly show whether the transaction had already suffered tax, and the extent of penalty had to correspond to the tax sought to be evaded. The proper course was to rework the penalty after notice and opportunity to the petitioner and the consignee, and after verification of any prior assessment on the same transaction.

Conclusion: The maximum penalty was not sustained, and the penalty was directed to be modified in accordance with the tax sought to be evaded, in favour of the assessee on quantum.

Final Conclusion: The taxability finding and the inference of evasion were affirmed, but the penalty was sent back for fresh determination on the proper statutory basis.

Ratio Decidendi: Where a petitioner purchases goods from outside the State and separately supplies them in Kerala under a licence or hire-like arrangement, the latter transaction is a distinct taxable local transaction, and penalty under the check-post provisions must be confined to the tax sought to be evaded rather than imposed mechanically at the maximum rate.

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