2015 (2) TMI 472 - HC - VAT and Sales Tax

Court dismisses writ petition, orders KPCL to pay exemplary costs for false TDS exemption claims.

The court dismissed the writ petition, ordering KPCL to pay exemplary costs of Rs. 75,000 to the Commissioner of Commercial Taxes within three weeks. KPCL ... Statutory obligation to deduct tax at source - obligation to remit deducted tax to the Government - change in law and its effect on contractual fiscal concessions - refund under Section 15(1) of the A.P. VAT Act versus exemption - interpretation of concession agreement in the light of subsequent legislation - unjust enrichment by retention of deducted tax - doctrine of promissory estoppel and legitimate expectation against the State - false statements, suppression of facts and abuse of court processStatutory obligation to deduct tax at source - interpretation of concession agreement in the light of subsequent legislation - change in law and its effect on contractual fiscal concessions - KPCL was statutorily obliged under Section 22(3) and (4) of the A.P. VAT Act to deduct works contract tax at source from amounts payable to its contractor and to remit the same to the Government despite the earlier concession agreement. - HELD THAT: - The court held that the concession agreement was executed before the AP VAT Act, 2005, and contained a change-in-law clause which contemplated amendment upon enactment of new law. The APGST Act power to grant exemptions was repealed and replaced by the AP VAT Act which does not permit exemptions but provides for refunds under Section 15(1). Clause 2.3 of the concession agreement enabled amendment on change of law and did not entitle KPCL to continue to enjoy an exemption inconsistent with the AP VAT Act; clauses obliging compliance with future laws (Clause 13.2 and 13.3) required KPCL to comply with the AP VAT Act. Consequently, KPCL remained bound by the statutory requirements to deduct and remit TDS under Sections 22(3) and 22(4) notwithstanding the prior contractual provision.KPCL was obliged to deduct TDS from the contractor's running account bills and remit the deducted amounts to the Government in accordance with Sections 22(3) and 22(4) of the A.P. VAT Act.Obligation to remit deducted tax to the Government - unjust enrichment by retention of deducted tax - refund under Section 15(1) of the A.P. VAT Act versus exemption - The ledger entries and auditors' reports establish that KPCL had in fact deducted works contract tax from NECL's running account bills and had not remitted the entirety of those deductions to the Government; hence the respondents were justified in seeking recovery rather than permitting retention pending refund. - HELD THAT: - The court relied on KPCL's own ledger extracts and the auditors' qualifications in the annual reports for 2009-10 to 2011-12 which showed crystallised and undisputed arrears. The accounting entries credited NECL only with net amounts, and entries to TDS/WCT accounts demonstrate deduction. The statutory scheme requires deduction and prompt remittance; retention of sums deducted makes KPCL liable for unjust enrichment and interest. While GO Ms.No.609 provided a mechanism for refund for the period it was in force (to March 2010/April 2010 as stipulated), that mechanism does not absolve KPCL of the duty to remit deducted tax to the Government; refunds are a separate process available to the contractor on compliance with the notification, but do not permit KPCL to retain deducted amounts.The records show KPCL deducted TDS and failed to remit the full amounts; the recovery demand for the specified period is justified and aimed at preventing unjust enrichment.Refund under Section 15(1) of the A.P. VAT Act versus exemption - statutory obligation to deduct tax at source - Payment of tax to the Government must precede any claim for refund; the contractee cannot lawfully retain deducted tax on the premise that a refund may later be obtained by the contractor. - HELD THAT: - The court explained that the AP VAT Act does not confer a power to exempt dealers akin to the repealed APGST Act but only empowers the Government to grant refunds by notification under Section 15(1). Consequently, where tax is deductible under Section 22, the contractee must deduct and remit the tax; the contractor may subsequently claim refund if a notification and conditions permit. The fact that NECL obtained refunds for some periods underscores that the proper sequence is remittance followed by refund proceedings and does not relieve KPCL of the remittance obligation.Tax must be remitted first to the Government; refunds, if any, are to be sought by the contractor under the statutory scheme and do not authorize KPCL to retain deducted amounts.Doctrine of promissory estoppel and legitimate expectation against the State - change in law and its effect on contractual fiscal concessions - The doctrines of promissory estoppel and legitimate expectation do not entitle KPCL to continue to claim exemption from payment of sales tax contrary to the AP VAT Act or to avoid statutory obligations under the changed law. - HELD THAT: - The court observed that promissory estoppel cannot be invoked to compel the State to perform a promise that is contrary to law or beyond the authority of the government, and legitimate expectation cannot override clear statutory obligations. The concession agreement itself anticipated change in law and provided mechanisms (including seeking amendment) which KPCL did not pursue; therefore equitable doctrines cannot be used to sustain an exemption inconsistent with the AP VAT Act.Promissory estoppel and legitimate expectation do not operate to preserve contractual fiscal exemptions that conflict with the subsequent statutory regime; KPCL's reliance on those doctrines fails.False statements, suppression of facts and abuse of court process - KPCL made false or misleading statements by denying deductions in its affidavits despite accounting entries and auditor reports showing deductions and undisputed arrears; this amounted to suppression of facts and abuse of the court process warranting exemplary costs. - HELD THAT: - The court found that KPCL's pleadings asserted no deduction was made and that only provisions were shown, whereas ledger extracts and auditors' reports disclosed actual deductions and undisputed arrears. The misrepresentation procured interim relief and delayed remittance; given the gravity of making false averments and the need to deter abuse of process, the court ordered exemplary costs to the Commissioner, Commercial Taxes. The court emphasised the duty of truthfulness in pleadings and the consequences of dishonest litigation.Findings made against KPCL for suppression and false statements; exemplary costs were imposed and the writ petition dismissed.Final Conclusion: Writ petition dismissed. The court held that KPCL was statutorily obliged to deduct and remit works contract tax under Sections 22(3) and 22(4) of the A.P. VAT Act despite earlier contractual concessions; ledger entries and auditors' reports established deductions and non-remittance for the period September 2007 to March 2013; refund mechanisms under GO Ms.No.609 do not permit retention of deducted tax and do not negate the remittance obligation; equitable doctrines cannot override the changed statutory regime; KPCL was found to have suppressed facts and made false statements and was directed to pay exemplary costs to the Commissioner, Commercial Taxes. Issues Involved:1. Statutory obligation to deduct TDS.2. Deduction of tax at source by KPCL.3. Payment of tax and claiming refund.4. Application of promissory estoppel and legitimate expectation.5. False statements by KPCL.Detailed Analysis:I. Statutory Obligation to Deduct TDS:The court examined whether KPCL was under a statutory obligation to deduct TDS from the running account bills of NECL, despite the concession agreement exempting them from sales tax. The court noted that the Andhra Pradesh Value Added Tax Act, 2005 (AP VAT Act) did not provide for exemptions but only for refunds under Section 15. The concession agreement, which was made under the APGST Act, became unenforceable after the AP VAT Act came into force. Clause 2.3 of the agreement provided for amendments in case of a change in law, which KPCL did not pursue. Consequently, KPCL was obligated to comply with the AP VAT Act, including Section 22(3) which mandates deduction of TDS.II. Deduction of Tax at Source by KPCL:The court scrutinized the books of accounts of KPCL to determine if they had deducted tax at source from NECL's bills. The records and auditors' reports for the years 2009-10 to 2011-12 indicated that KPCL had indeed deducted TDS but had not remitted the full amount to the government. The court found that KPCL's claim of not deducting TDS was false, as evidenced by their own ledger entries and annual reports.III. Payment of Tax and Claiming Refund:KPCL argued that they should not be required to pay TDS first and claim a refund later if there was no tax liability. However, the court held that under the AP VAT Act, KPCL was statutorily obligated to deduct and remit TDS, irrespective of any subsequent refund claims. The court noted that G.O.Ms. No.609, which allowed for refunds, was in force until April 2010. For periods after April 2010, KPCL was required to remit TDS without any guarantee of refunds, as no new notification had been issued under Section 15(1) of the AP VAT Act.IV. Application of Promissory Estoppel and Legitimate Expectation:KPCL invoked the doctrines of promissory estoppel and legitimate expectation, arguing that the state had promised them exemption from sales tax. The court rejected this argument, stating that these doctrines could not be used to compel the government to act contrary to the law. The AP VAT Act did not allow for exemptions, and the revised concession agreement itself provided for amendments in case of a change in law. Therefore, KPCL could not claim an expectation of continued exemption.V. False Statements by KPCL:The court found that KPCL had made false statements on oath, claiming that they had not deducted tax at source. The evidence from their own records and auditors' reports contradicted these claims. The court emphasized the seriousness of making false statements and abusing the judicial process, and imposed exemplary costs on KPCL for their dishonest conduct.Conclusion:The writ petition was dismissed, and KPCL was ordered to pay exemplary costs of Rs. 75,000 to the Commissioner of Commercial Taxes within three weeks. The court held that KPCL was obligated to deduct and remit TDS under the AP VAT Act, and that their claims of exemption were unfounded and contrary to the law.