State of Kerala & 4 others v. Madras Fertilizers Ltd.

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU TUESDAY, THE 1ST DAY OF AUGUST 2017/10TH SRAVANA, 1939 WA.No.20 of 2016 IN WP(C)13661/2013 ------------------------------------AGAINST THE JUDGMENT IN WP(C) 13661/2013 of HIGH COURT OF KERALA DATED 01-12-2015 APPELLANTS/RESPONDENTS 1 TO 4 IN THE W.P.(C): --------------------------------------------1. STATE OF KERALA, REPRESENTED BY CHIEF SECRETARY TO GOVERNMENT, SECRETARIAT, THIRUVANANTHAPURAM- 695 001. 2. THE SECRETARY, TAXES DEPARTMENT, GOVERNMENT OF KERALA, SECRETARIAT, THIRUVANANTHAPURAM - 695 001. 3. THE COMMISSIONER OF COMMERCIAL TAXES, THIRUVANANTHAPURAM - 695 001. 4. THE ASSISTANT COMMISSIONER (KVAT), COMMERCIAL TAXES, SPECIAL CIRCLE-II, ERNAKULAM, KOCHI - 682 015. BY ADV. GOVERNMENT PLEADER SRI.MUHAMMED RAFIQ STANDING COUNSEL SRI.JOSE JOSEPH RESPONDENT/PETITIONER: ---------------------MADRAS FERTILIZERS LTD., REGIONAL OFFICE, A2 BHASKER APARTMENTS, NARAYANAN ASAN ROAD, PONNURUNNI, VYTTILA, COCHIN - 682 019, REPRESENTED BY ITS CHIEF MANAGER (MARKETING) R BY SRI.JOHN T.PAUL THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON 01-08-2017, ALONG WITH W.A.Nos.43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: **C.R.** ## **ANTONY DOMINIC, J. & DAMA SESHADRI NAIDU, J.** **- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015** **- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 1[st] day of August, 2017** ## **JUDGMENT** ## _**Antony Dominic, J.**_ These writ appeals are filed by the State of Kerala and its officers impugning the judgments of the learned Single Judge. Some of the writ petitions were filed by the companies manufacturing as also importing fertilizers and some of the writ petitions were filed by Petroleum Companies which are supplying Liquefied Petroleum Gas to the domestic consumers and also Kerosene to the Public Distributing System. The question raised was whether the subsidy received by the companies would form part of the turnover for the purpose of levy of tax under the Kerala Value Added Tax Act. In the judgments under appeal, following the judgment in the case of _**Madras Fertilizers Limited v. Asst. Commissioner (Assessment) and Another [1994 (95) STC 134],**_ the learned Single Judge allowed the writ petitions. It is these judgments that are challenged by the State. W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 2 : 2. Insofar as O.T.R.178/15 is concerned, this revision is filed by the State against the order passed by the Tribunal in T.A.(VAT) No.1504/11 filed by the assessee. That appeal was allowed by the Tribunal following the judgment of the Apex Court in _**Neyveli Lignite Corporation Ltd. v. Commercial Tax Officer, Cuddalore (2001) 124 STC 586**_ . It is this order of the Tribunal, which is challenged. 3. We heard the Government Pleader appearing for the State and the respective counsel appearing for the respondent assessees. The short question to be considered is whether the view taken by the learned Single Judge that subsidy received by the respondent assessees from the Government of India on the basis of the Scheme formulated by the Government would form part of the taxable turnover of the assessees. Insofar as this question is concerned, the very same issue was considered by this court in the case of _**Madras Fertilisers**_ , in the context of the provisions contained in W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 3 : the Kerala General Sales Tax Act and it was held that subsidy would not form part of turnover. That judgment of the learned Single Judge was affirmed by a Division Bench of this court in _**Asst. Commissioner of Sales Tax (Assessment), Special Circle II, Ernakulam and others v. Krishak Bharathi Co-op. Ltd. [1995 (99) STC 17]**_ . The Division Bench judgment was affirmed by the Apex Court in its judgment in _**Neyveli Lignite Corporation Ltd. v. Commercial Tax Officer, Cuddalore (2001) 124 STC 586**_ . Therefore, the issue that subsidy received by the assessees, whose selling price is regulated by the provisions of the Fertiliser (Control) Order of the Government of India, cannot be a matter of debate. 4. However, the learned Government Pleader raised a contention that the aforesaid judgments of this court and the Apex Court were rendered in the context of the provisions contained in the Kerala General Sales Tax Act and that having regard to the W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 4 : provisions contained in the Kerala Value Added Tax Act, reexamination of the issue is necessary. According to him, in terms of Section 6(1), every dealer having a total turnover beyond the limit prescribed therein is liable to be levied tax on sale or purchase of goods. It was pointed out that Section 2(I) defines 'taxable turnover' as turnover on which dealer shall be liable to pay tax and that Section 2(Ii) defines 'total turnover' as aggregate turnover in all goods of a dealer at all places of business in the State. 5. Our attention was invited to Section 2(Iii) which defines 'turnover' and particularly, Explanation VII thereof. Section 2(Iii) and Explanation VII of the KVAT Act, 2003 are extracted below for reference: _Section 2(Iii) “turnover” means the aggregate amount for which goods are either bought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or for other valuable consideration, provided that the proceeds of the sale by a person not being a Company or Firm registered under the Companies Act, 1956 (Central Act 1_ W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 5 : _of 1956) and Indian Partnership Act, 1932 (Central Act 9 of 1932 [or society including a co-operative society or association of individuals whether incorporated or not] of agricultural or horticultural produce grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover,_ _Explanation VII - where a dealer sells any goods purchased by him at a price lower than that at which it was purchased and subsequently receives any amount from any person towards reimbursement of the balance of the price, the amount so received shall be deemed to be turnover in respect of such goods._ ## 6. Though the definition of turnover as contained in Section 2 (Iii) is not different from what was contained in Section 2 (XXVII) of the KGST Act, the contention of the learned Government Pleader is that Explanation VII was incorporated by the Legislature in the Kerala Value Added Tax Act to include subsidies and other amounts, such as those received by the assessees, in their turnover. However, having considered the submission made, what we find is Explanation VII is attracted only in a case where a dealer sells goods purchased by him at a price lower than that at which it was W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 6 : purchased and subsequently receives any amount from any person towards reimbursement of the balance of the price. In such a situation the amount received by the dealer shall be also be deemed to be his turnover in respect of such goods. In other words, this provision makes it clear that it will be attracted only in a case where goods are sold at a price lower than at which the goods were purchased and the difference in the price is received by the dealer as reimbursement of balance price. 7. Insofar as the facts of these cases are concerned, admittedly, by Clause 3 of the Fertiliser Control Order, issued under Section 3 of the Essential Commodities Act, 1955 the maximum selling price of the fertiliser concerned is fixed. The sale of fertiliser effected by the dealer is at the price so determined in Clause 3 of the Fertiliser Control Order. The Scheme of Fertiliser Control Order, Retention Price Scheme and the nature of the W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 7 : ## subsidy paid were specifically explained by the Apex Court in its judgment in _**Neyveli Lignite Corporation Ltd. (supra)**_ , thus: _11. In the instant case, as far as the Fertilizer (Control) Order is concerned, the appellant is only required to receive either the fixed price determined or the maximum price which may be fixed. For example, vide notification dated 30th January, 1988, maximum price per tonne of different types of fertilizer specified therein was fixed. In respect of urea, the maximum price per tonne fixed was Rs. 2,350. No manufacturer of urea could sell the same at a price in excess of Rs. 2,350. The Explanation in the said notification provided that the maximum price so fixed was to be inclusive of Central sales tax, State sales tax or other local taxes wherever levied. Neither in the notification nor in the Fertilizer (Control) Order is there any reference to the Retention Price Scheme of the Government._ _12. The Retention Price Scheme first enunciated by letter dated 31st December, 1977 is clearly an administrative decision of the Government of India. It has been issued pursuant to the Ministry's Resolution and it enables a factory, like the appellant, to receive subsidy from the Government in case the retention price is more than the price fixed under Clause 3 of the Fertilizer (Control) Order. It is mentioned in the assessment order that according to the appellant the subsidy which is paid by the Government of India is a nonplan expenditure which is debited to the Budget allocation. This subsidy is payable on the basis of the quantity of fertilizer produced and removed from the factory. The forms on the basis of which subsidy has to be given, do not indicate that the reimbursement of the subsidy is dependent on the sale of fertilizer having been made. The basis for the grant of_ W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 8 : _subsidy is the removal of the fertilizer from the factory, though it has to be certified by the company that the said removal is for sale for agricultural purposes._ _13. It is clear from the aforesaid that whereas in respect of sale of fertilizer the purchaser has to pay the price as fixed under The Fertilizer (Control) Order giving of subsidy is not contemplated by the said Order and the same is given pursuant to an administrative decision taken by the Government of India. The subsidy so given is undoubtedly to see that the ultimate consumer gets fertilizer at a reasonable price and the manufacturer is not unduly burdened by the lower fixation of the price of fertilizer. The payment which is so made by the Government to a manufacturer cannot be regarded as a discharge of any liability or obligation by the Government towards the purchaser of fertilizer. The two payments received by the manufacturer, namely, the subsidy and the price fixed under the Fertilizer (Control) order are independent of each other. Subsidy does not form part of the bargain between the manufacturer and the purchaser of fertilizer._ 8. Subsidy is given to the manufacturer/dealer to make up the difference between the Retention Price and the price fixed by the Government under the Fertiliser Control Order. Though subsidy paid is for the benefit of the consumer public to ensure that the prices are kept at a reasonable level and at the same time, a reasonable return on investment is also ensured to the W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 9 : manufacturers/dealers, the subsidy is not a consideration for the sales effected. It is also not a reimbursement of the difference in the purchase price and sale price, but what is paid as subsidy is the difference between the maximum price specified in the Fertiliser Control Order and the Retention Price Scheme. 9. Insofar as the subsidy distributed under the PDS Kerosene and the Domestic LPG Subsidy Scheme is concerned, on the discontinuance of the Administered Pricing Mechanism for petroleum products, the Government of India made the PDS Kerosene and Domestic LPG Subsidy Scheme, 2002 for payment of subsidy on PDS Kerosene and Domestic LPG. The Scheme came into force with effect from 1.4.2002 and from a copy of the Scheme made available during the course of hearing, it is seen that the subsidy under the Scheme was to be given on the sales made throughout the country by the participating companies of kerosene under the public distribution system and LPG cylinders for W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 10 : domestic use. The Scheme further provided that the quantity of PDS kerosene on which the subsidy will be allowed for each State will be limited to allocations made by the Ministry of Petroleum and Natural Gas subject to actual quantities sold. Clause 5 of the Scheme provided for 'determination of the amount of the subsidy'. It is stated therein that subsidy on PDS Kerosene and domestic LPG will be met from the budgetary grants of the Ministry of Petroleum and Natural Gas and that amount of subsidy per selling unit will be equal to the difference between the cost price and the issue price per selling unit and will be computed ex-depot for PDS kerosene and ex-bottling plant for domestic LPG. Clauses 6 and 7 provide for determination of 'the issue price' and 'the cost price' respectively. Clause 11 provides for 'settlement of subsidy claims of the participating companies' and the participating companies shall raise two types of the claims every month, viz. provisional claims and final claims with the Petroleum Planning and Analysis Cell W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 11 : under the Ministry of Petroleum and Natural Gas. In terms of this provision, the settlement of provisional and final payments will be on monthly basis. 10. The aforesaid provisions of the PDS kerosene and domestic LPG Subsidy Scheme, 2002 shows that the principles which have been explained by the Apex Court in the context of the subsidy paid for fertilisers fully apply to the subsidy paid by the Government of India to petroleum companies for the PDS kerosene and domestic LPG. 11. This, therefore, shows that the dealer sells the products namely, fertiliser, liquefied Petroleum Gas or PDS Kerosene as the case may be, at prices fixed by the Government of India and what is reimbursed by the Government of India is not part of the price or the difference between the purchase price or sale price. Only if what is reimbursed is the balance of the price, then and then alone, Explanation VII would be of relevance. Therefore, even in spite of W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 12 : the incorporation of Explanation VII to Section 2(Iii) of the KVAT Act, the legal position as clarified by this court and the Apex Court that subsidy received by dealers like the respondents herein cannot form part of their turn over remains unaltered. If that be the conclusion, the view taken by the learned Single Judge and the Tribunal has to be upheld. 12. Learned Government Pleader referred us to the order of this court in O.T.R. 98/10. The issue that was considered by this court in that case was whether the discount received by the assessee were to be included in his turnover for the purpose of levy under the KVAT Act. In that case, the question was answered in favour of the Revenue taking note of the fact that subsequent to the sale, assessee had received further amounts from the manufacturer towards reimbursement of the balance price. Since what was reimbursed in that case was balance of price, unlike the facts of W.A.Nos.20, 43, 61, 64, 536, 130, 137, 140, 165, 307, 396, 416, 420, 562 of 2016 & O.T.Rev.No.178 of 2015 : 13 : these cases, the order in O.T.R.98/12 cannot be of any assistance to the learned Government Pleader. Resultantly, appeals and the OTR fail and are, accordingly, dismissed. _sd/-_ **ANTONY DOMINIC JUDGE** _sd/-_ **DAMA SESHADRI NAIDU JUDGE** _jes_