2011 (2) TMI 1328 - HC - VAT and Sales Tax

Court Cancels Tax Penalty, Clarifies Import as Capital Goods, Not Evasion

The Court set aside the Tribunal's decision and canceled the penalty imposed on the petitioner for alleged tax evasion on the inter-State purchase of ... Importer defined as person who brings taxable goods from outside the State for purpose of business - presumptive tax for registered dealers with turnover below fifty lakh - capital goods imported for use in production/packing are not imports for trading purposes - penalty for attempted evasion of tax under section 47(6) - use of transit document Form 16 under rule 58(18) - technical violation distinguished from evasion of taxImporter defined as person who brings taxable goods from outside the State for purpose of business - capital goods imported for use in production/packing are not imports for trading purposes - presumptive tax for registered dealers with turnover below fifty lakh - Whether inter State purchase of cylinders for repeated use as packing/production equipment makes the petitioner an 'importer' thereby disentitling him from paying presumptive tax under the scheme for small turnover dealers. - HELD THAT: - The Tribunal's conclusion that the cylinders' inter State purchase rendered the petitioner an 'importer' within the exclusion to the presumptive tax scheme is unsustainable. 'Importer' in the Act denotes one who obtains or brings taxable goods from outside the State for the purpose of business, and the definition must be read with the wide definition of 'business.' However, the court held that the term 'business' as used in the definition of 'importer' must be read as referring to trading in the imported goods (resale), not acquisition of capital goods for use in the course of the dealer's trade. The imported cylinders were capital goods used repeatedly for packing and sale of medical oxygen and not goods imported for resale. Consequently, the inter State purchase of cylinders as capital goods does not make the petitioner an 'importer' within the meaning of the definition that excludes entitlement to presumptive tax, and the transaction by itself does not constitute an attempt to evade tax.Inter State purchase of cylinders as capital goods does not make the petitioner an 'importer' for the purpose of excluding him from the presumptive tax under the small turnover scheme; no attempt to evade tax is made by such purchase.Use of transit document Form 16 under rule 58(18) - technical violation distinguished from evasion of tax - penalty for attempted evasion of tax under section 47(6) - Whether transport of the capital goods (cylinders) under cover of Form 16 by a registered dealer, in alleged breach of rule 58(18), justified levying penalty under section 47(6) for attempted evasion of tax. - HELD THAT: - The court recognised that rule 58(18) does not authorise a registered dealer to use Form 16 for transporting such goods, thereby rendering the use of Form 16 a breach of the Rules. However, having regard to the nature of the goods as capital goods and the existence of a Commissioner's circular permitting registered dealers to transport goods for their own use under Form 16, the violation - if any - is technical and not indicative of an attempt to evade tax. The court declined to equate the procedural irregularity in use of the transit form with substantive tax evasion and held that penalty under section 47(6) was not justified on the facts.Although use of Form 16 by a registered dealer for transporting the cylinders was not authorised by rule 58(18), the breach was technical and did not amount to attempted evasion of tax; penalty under section 47(6) set aside.Penalty for attempted evasion of tax under section 47(6) - technical violation distinguished from evasion of tax - Whether penalty levied under section 47(6) should be upheld. - HELD THAT: - Because the inter State acquisition of cylinders constituted import of capital goods for use in the petitioner's business and not import for resale, and because any breach in use of Form 16 was technical (with administrative guidance from the Commissioner acknowledged), the court concluded that there was no attempt to evade tax warranting penalty. The Tribunal's confirmation of the penalty was therefore set aside.Tribunal's order confirming penalty under section 47(6) is quashed and the penalty cancelled.Presumptive tax for registered dealers with turnover below fifty lakh - Matters left open for assessment by the assessing officer: entitlement to pay presumptive tax (including whether turnover exceeds fifty lakh) and taxability of any rental/charge for use of cylinders. - HELD THAT: - The court expressly declined to determine the petitioner's entitlement to pay presumptive tax under section 6(5) in substance, noting that such entitlement depends on factual determinations (for example, whether annual turnover exceeds fifty lakh) and on assessment of transactions that may attract tax (such as rental charges for use of cylinders). Those questions were left open for adjudication in the course of assessment by the assessing officer.Entitlement to presumptive tax and taxability of any rental charges are left to be considered and decided by the assessing officer in the assessment proceedings.Final Conclusion: Revision allowed; Tribunal's orders confirming penalty under section 47(6) set aside and penalty cancelled. The inter State purchase of cylinders as capital goods does not, by itself, constitute import for trading purposes nor an attempt to evade tax; procedural irregularity in use of Form 16 is technical. Questions of entitlement to presumptive tax (including turnover threshold) and assessment of any rental receipts are left open for the assessing officer. Issues:Challenge to penalty for alleged tax evasion on inter-State purchase of steel cylinders used in the packing and sale of medical oxygen.Detailed Analysis:1. Interpretation of Section 6(5) of the Act:The petitioner, engaged in the business of medical oxygen, purchased cylinders from outside Kerala. The Tribunal confirmed the penalty for alleged tax evasion on this purchase. The Tribunal concluded that the import of cylinders by the petitioner violated Section 6(5) of the Act and Rule 58(18) of the Rules. The definition of 'importer' and 'business' under Sections 2(xxii) and 2(ix) were crucial. The term 'importer' excludes those entitled to pay presumptive tax under Section 6(5). The Court clarified that the term 'business' in the definition of 'importer' refers to trading only. Therefore, importing goods for use as capital goods does not disqualify one from paying presumptive tax under Section 6(5).2. Capital Goods and Importer Status:The petitioner imported cylinders for packing medical oxygen, not for trading. As per the Act, 'capital goods' include equipment used in the course of business. Since the petitioner's business involved repeated packing of medical oxygen, the imported cylinders were considered capital goods. Hence, the petitioner was not an 'importer' disentitling him from paying presumptive tax under Section 6(5). The Court differentiated between trading goods and capital goods, emphasizing that the petitioner's activity did not amount to trading in cylinders.3. Liability for Tax on Rental Charges:The Court addressed the liability for tax on rental charges collected by the petitioner for cylinders supplied with medical oxygen. It was noted that such charges would not render the petitioner liable for penalty under Section 47(6) of the Act concerning the purchase of cylinders. The Court emphasized that the purchase of cylinders as capital goods for business use did not indicate tax evasion, especially when the goods continued to be used in the trade of medical oxygen.4. Technical Violation and Penalty:While the petitioner's use of form 16 for transporting capital goods violated Rule 58(18) of the Rules, the Court considered it a technical violation. The petitioner's counsel highlighted a circular permitting registered dealers to transport goods purchased for own use under form 16. The Court deemed this violation as technical and not involving tax evasion, leading to the conclusion that no penalty should be imposed on the petitioner.5. Decision and Outcome:The Court allowed the revision case by setting aside the Tribunal's orders and canceling the penalty levied under Section 47(6) of the Act. The judgment clarified the petitioner's entitlement to pay presumptive tax under Section 6(5) despite the inter-State purchase of cylinders as capital goods for the business of medical oxygen, emphasizing the distinction between trading and capital goods transactions.