2023 (4) TMI 163 - HC - VAT and Sales Tax

Assessment Orders Quashed: Court Rules BPCL Agreement Not a Works Contract, Orders Fresh Review on Tax Credits.

Prodair Air Products India Private Limited Versus State of Kerala, Represented By Its Secretary (Taxes), The Deputy Commissioner of State Tax

The HC quashed the assessment orders for 2015-16 to 2017-18, ruling that the agreement with BPCL was not a works contract transferring property, thus ... Validity of assessment order - rejection of claim for input tax credit on the purchase of capital goods - levy of penalty on the appellant under the KVAT Act for the assessment years 2016-17 and 2017-18 - whether the learned Single Judges were justified in relegating the appellant to its alternate remedies under the KVAT Act against the orders impugned in the writ petitions? HELD THAT:- The power of judicial review is traceable to Articles 32 and 226 that confer on the Supreme Court and the High Courts the power to issue prerogative and like writs to protect the citizens from state action that infringes upon their rights. The Constitution being the supreme law of our land, and the rule of law being one of its basic features, the exercise of statutory power has to conform, inter alia, to the requirements of fairness, non-arbitrariness and reasonableness, all of which are integral aspects of the rule of law. Thus, when a litigant approaches a writ court, alleging a breach of his rights – be it a constitutional right, a statutory right or a common law right – by an authority empowered by the State, the court examines the manner in which the decision was arrived at, and in exceptional cases, the decision itself, to see whether it conforms to the requirements mandated by the rule of law. The writ jurisdiction being a discretionary jurisdiction, it is for the constitutional courts to decide whether or not they should exercise their discretion to entertain a writ petition. In that context, it would be apposite to point out that there is a subtle distinction that exists between instances when a court dismisses a writ petition as ‘not maintainable’ and when it exercises its discretion against ‘entertaining’ it. The former is a case where the court finds that the circumstances are such that it is rendered incapable of even receiving the lis for adjudication whereas the latter is a case where the court finds that, while it is competent to adjudicate the lis, the adjudication is better left to other forums that are more suited for the same - Justification refers to the principle that the exercise of public power must be justified, intelligible and transparent, not in the abstract, but to the individuals subject to it. Demonstrated expertise refers to the requirement of the decision maker establishing the reasonableness of his decision by demonstrating therein his experience and expertise. Is the exercise of Judicial Review warranted in these cases? - HELD THAT:- A reading of the assessment orders and penalty orders that are impugned in these cases would reveal that the assessing officer has interpreted the terms of the contract entered into between the appellant assessee and BPCL as requiring the appellant to transfer the property in the plant put up by them on land leased from BPCL and also to sell to BPCL the gases manufactured in that plant - What the assessing officer completely overlooks, however, is the fact that there has been no transfer of the property in the goods involved in the execution of the works contract. The taxable event under the KVAT Act is not the execution of a works contract but the transfer of the property in the goods involved in the execution of the works contract. The latter aspect being absent in the transaction between the appellant and BPCL, as evident from the findings of the Intelligence Officer in the penalty orders, based on which the assessing officer rendered similar findings in the assessment orders, the assessing officer virtually usurped to himself the jurisdiction to tax a ‘works contract’ by erroneously assuming the existence of the jurisdictional fact/taxable event that would have conferred him with such a jurisdiction. It is deemed appropriate to observe that in matters of assessment under a taxing statute, the requirement of fairness, that is an integral aspect of the rule of law in our country, mandates that an assessing authority should apply its mind to the various factors that influence an assessment and give sufficient indication in the assessment order of having done so. This would necessitate his/her giving reasons for the finding regarding the existence of the taxable event that attracts the charge of tax as also other factors that result in a demand from an assessee of more tax than what has been admitted by him/her as payable. The profile of an assessing authority can no longer be that of a stern and unreasonable automaton that is programmed solely to collect the tax that the revenue department feels is due from an assessee. The right of an assessee to seek justification of state action would mandate that this court step in to correct unreasonable orders of assessing authorities so as to uphold the culture of justification that legitimizes state action. Appeal allowed. Issues Involved:1. Validity of assessment orders under the KVAT Act for assessment years 2015-16 to 2017-18 and a show cause notice for the year 2014-15.2. Rejection of the claim for input tax credit on the purchase of capital goods.3. Imposition of penalty under the KVAT Act for assessment years 2016-17 and 2017-18.Summary of the Judgment:Issue 1: Validity of Assessment Orders and Show Cause NoticeThe appellant challenged the assessment orders for the years 2015-16 to 2017-18, which construed the agreement with BPCL as a works contract involving the transfer of property in the plant and gases. The assessing authority applied a tax rate of 14% applicable to works contracts instead of 5% for the supply of gases. The High Court found that the assessing authority erroneously assumed a transfer of property in the goods involved in the execution of the works contract, which was not supported by the agreement. The court held that the taxable event under the KVAT Act is the transfer of property in the goods, which was absent in this case. Thus, the assessment orders were quashed.Issue 2: Rejection of Input Tax CreditThe appellant's claim for input tax credit on capital goods was rejected by the assessing authority on the ground that the property did not belong to the appellant. The High Court found that the rejection was based on an erroneous interpretation of the agreement. The court directed the adjudicating authority to reconsider the issue afresh in light of the observations made in the judgment.Issue 3: Imposition of PenaltyThe penalty orders for the assessment years 2016-17 and 2017-18 were based on the same erroneous assumption of a works contract. The High Court set aside the penalty orders, finding that the assessing authority had wrongly assumed jurisdiction by misinterpreting the nature of the agreement.Conclusion:The High Court allowed the writ appeals, quashing the impugned assessment and penalty orders, and directed the adjudicating authority to reconsider the input tax credit issue afresh. The appellant was also permitted to file a reply to the show cause notice for the assessment year 2014-15.