2015 (4) TMI 286 - HC - VAT and Sales Tax

Court nullifies assessment orders, directs transfer of VAT to Union of India Service Tax Department

The court allowed the writ petition, declaring the assessment orders null and void. It directed the State of Haryana to transfer the VAT collected to the ... Levy and collection of tax without authority of law - refund of tax collected without statutory authority - writ jurisdiction under Article 226 to set aside illegal tax levies - declaration of law with retrospective effect - assessment order nullity arising from lack of statutory power - prohibition of unjust enrichment - transfer of illegally collected tax to Union for service tax adjudication - Article 265 - tax leviable only by authority of lawLevy and collection of tax without authority of law - Article 265 - tax leviable only by authority of law - assessment order nullity arising from lack of statutory power - Whether the State of Haryana levied and collected VAT on activation of SIM cards without statutory authority - HELD THAT: - The court accepted that the Supreme Court in Bharat Sanchar Nigam Limited held activation of SIM cards to be a 'service' and not a 'sale'. The State did not dispute that VAT collection on SIM activation could not be related to any provision of the Haryana VAT Act. Applying the constitutional principle that taxes must be levied by authority of law under Article 265, the court held that levy and collection of VAT in respect of SIM activation was without statutory authority and therefore a nullity. The court treated the impugned assessment orders as not conferring legitimacy on the unauthorised appropriation of tax.Levy and collection of VAT on activation of SIM cards by Haryana were without authority of law and the assessment orders are nullities.Refund of tax collected without statutory authority - writ jurisdiction under Article 226 to set aside illegal tax levies - declaration of law with retrospective effect - Whether a writ can be issued to quash assessment orders and direct refund or remittance where the statute contains no provision for refund and the assessment orders are final - HELD THAT: - Recognising the general rule that statutory remedies ordinarily preclude exercise of prerogative writs, the court identified the established exception where tax has been levied and collected without authority of law. Relying on Supreme Court authorities, the court held that Article 226 may be exercised to undo collections made without statutory power. The court rejected the submission that finality of assessment or absence of an express refund provision in the VAT Act bars relief, since the levy itself was unconstitutional/ultra vires and the declaration of the Supreme Court as to the legal character of the transaction applies from the inception of the statute rather than prospectively.A writ under Article 226 is maintainable to set aside the illegal assessments and to provide remedial relief despite the absence of an express statutory refund provision and despite finality of the assessment orders.Transfer of illegally collected tax to Union for service tax adjudication - prohibition of unjust enrichment - service tax liability not discharged by transfer - Whether refund would amount to unjust enrichment and whether the State may be directed to transfer the illegally collected VAT to the Union for service tax adjudication - HELD THAT: - The court observed that the Union has raised a demand for service tax for the same period, and that ordering refund to the petitioner could result in double taxation. Rather than ordering an absolute refund to the petitioner, the court found it appropriate in the circumstances to direct the State to remit the amount collected to the Service Tax Department of the Union of India. The court also clarified that such transfer would not be deemed a full and final discharge of the petitioner's liability to service tax, which remains subject to adjudication by the competent authority. The objection of unjust enrichment was rejected in view of the transfer mechanism and the potential double taxation issue.The State shall transfer the VAT collected on SIM activation to the Service Tax Department of the Union of India; such transfer shall not discharge the petitioner's service tax liability.Final Conclusion: The writ petition is allowed: the impugned assessment orders are declared nullities; the State of Haryana is directed to transfer the VAT collected on activation of SIM cards to the Service Tax Department of the Union of India; and the transfer shall not be treated as a full and final discharge of the petitioner's liability to pay service tax, which will be determined by the appropriate authority. Issues Involved:1. Refund of Sales Tax/VAT on Activation of SIM Cards2. Validity of Assessment Orders3. Authority of the State to Retain VAT4. Applicability of Supreme Court Judgments5. Unjust Enrichment and Double TaxationIssue-wise Detailed Analysis:1. Refund of Sales Tax/VAT on Activation of SIM Cards:The petitioner, a telecom service provider, sought a writ of mandamus directing the State of Haryana to refund VAT collected on the activation of SIM cards, asserting that the Supreme Court had determined such activation to be a service, not a sale. The petitioner argued that the VAT collected was without statutory authority and should be refunded or remitted to the Union of India. The State of Haryana collected VAT based on assessment orders, which the petitioner contended were invalid following the Supreme Court's ruling in Bharat Sanchar Nigam Limited and Idea Mobile Communication Ltd. that activation of SIM cards is a service.2. Validity of Assessment Orders:The petitioner challenged the validity of assessment orders dated 22.02.2006, 26.03.2008, and 22.02.2006, arguing that these orders were void ab initio as they were based on an incorrect classification of the activation of SIM cards as a sale. The State of Haryana countered that the assessment orders had attained finality and could not be challenged or quashed at this stage. However, the court held that since the Supreme Court had declared the levy of VAT on SIM card activation as without authority of law, the assessment orders were null and void from their inception.3. Authority of the State to Retain VAT:The court examined whether the State of Haryana had the statutory authority to retain VAT collected on SIM card activation. The State admitted that it had no statutory power to levy VAT on such transactions following the Supreme Court's ruling. The court noted that Article 265 of the Constitution mandates that taxes can only be levied by authority of law, and since the VAT collection was not backed by statutory authority, it was deemed non-est and unconstitutional.4. Applicability of Supreme Court Judgments:The court referred to several judgments, including U.P. Pollution Control Board v. Kanoria Industrial Ltd. and Fizz Drinks P. Ltd. v. State of Haryana, to support the argument that taxes collected without authority of law must be refunded. The court emphasized that the declaration of law by the Supreme Court in Bharat Sanchar Nigam Limited applied retrospectively, invalidating the VAT collection on SIM card activation from the inception of the statute.5. Unjust Enrichment and Double Taxation:The State of Haryana argued that refunding the VAT would result in unjust enrichment of the petitioner. The court rejected this argument, noting that the Union of India had raised a demand for service tax for the same period, leading to potential double taxation. The court held that directing the State to forward the VAT amount to the Union of India would prevent unjust enrichment and ensure compliance with the law.Conclusion:The court allowed the writ petition, declaring the assessment orders null and void. It directed the State of Haryana to transfer the VAT collected to the Service Tax Department of the Union of India, clarifying that this transfer would not constitute a full and final discharge of the petitioner's service tax liability, which would be subject to further adjudication.