State of Kerala v Pan Pacific Engineering Services (P) Ltd.

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT:-** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR. JUSTICE ASHOK MENON** **MONDAY, THE 9TH DAY OF JULY 2018 / 18TH ASHADHA, 1940** ## **O.T.Rev.No.188 of 2014** ## **----------------------------------** **AGAINST THE ORDER IN T.A.(VAT) NO.738/2012 DATED 11-04-2014 OF KERALA VALUE ADDED TAX APPELLATE TRIBUNAL, ERNAKULAM (ASSESSMENT YEAR 2008-09]** **---------------------------** ## **REVISION PETITIONER(S)/ RESPONDENT/RESPONDENT/REVENUE:-** **---------------------------------------------------------------------------------------------------** **STATE OF KERALA** **BY SENIOR GOVERNMENT PLEADER MOHAMMED RAFIQ.** ## **RESPONDENT(S)/ APPELLANT/APPELLANT/ASSESSEE:-** **-----------------------------------------------------------------------------------** **M/S. PAN PACIFIC ENGINEERING SERVICES (P) LTD., MERRA 17, 'PRIYA', MENONPARAMBU ROAD, EDAPPALLY, PIN-682024.** **BY ADV. SRI.R.MURALIDHARAN (AROOR)** **THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 09-07-2018, ALONG WITH O.T.REV.200 OF 2014, THE COURT ON THE SAME DAY PASSED THE FOLLOWING:-** ## **O.T.REV.NO.188 OF 2014** ## **APPENDIX** ## **REVISION PETITIONER'S ANNEXURES:-** **----------------------------------------------------------** **ANNEXURE-A TRUE COPY OF THE PENALTY ORDER DATED 28.10.2011 FOR THE YEAR 2008-2009 PASSED BY THE INTELLIGENCE OFFICER (IB), DEPARTMENT OF COMMERCIAL TAXES, MATTANCHERRY.** **ANNEXURE-B TRUE COPY OF THE ORDER DATED 11.06.2012 IN KVAT ACT NO.3267/2011.** **ANNEXURE-C TRUE COPY OF THE COMMON ORDER IN T.A.(VAT) NOS.738/2012 AND 186/2013 DATED 11.04.2014 ON THE FILE OF THE KVAT APPELLATE TRIBUNAL, ERNAKULAM.** **RESPONDENT'S ANNEXURES:-** **---------------------------------------------NIL.** **Vku/-** **[ true copy ]** K. Vinod Chandran & Ashok Menon, JJ. ------------------------------------------------------O.T.Rev.Nos.188 and 200 of 2014 ------------------------------------------------------Dated, this the 09[th] day of July, 2018 ## **ORDER** ## Vinod Chandran, J: The assessee, a works contractor, was proceeded against under Section 67 of the Kerala Value Added Tax Act, 2003 [for brevity “KVAT Act”] with respect to the return filed and tax paid on one of the works contracts executed by the assessee. The assessee, for the subject years, filed a return disclosing local purchases made and consequent sales, on which tax was paid, adding GP to the purchase turnover on the scheduled rates of each of such goods. These goods where supplied by the awarder and actually incorporated in the works contract by the assessee itself, the value of which was deducted from the total contract amount before payment to the awardee/assessee. 2. The Intelligence Officer was of the opinion that under Section 6(1)(f) of the KVAT Act, the entire contract amount had to be disclosed in the turnover and tax paid at 12.5% after eligible deductions as available in Rule 10. There was hence an evasion O.T.Rev.188 of 2014 & - 2 - 200 of 2014 found in so far as the assessee having paid only the scheduled rate of those goods, which were incorporated in a works contract. With respect to the goods supplied by the awarder, the Intelligence Officer relied on _**Cooch-Behar Contractors' Association v. State of W.B., [1996] 103 STC 477 (SC)]**_ to find a sale and resale. When the awarder supplies goods to the awardee; the price of which is deducted from the total contract amount, and then the said goods are subjected to accretion in the works contract, there is a sale from the awardee to the awarder; held the Intelligence Officer. 3. The Tribunal, however, set aside the penalty imposed relying on _**U.K.Monu Timbers v. State of Kerala, 2012 (3) KHC 111 (DB)**_ and _**M/s Supreme Food Industries v. State of Kerala**_ (O.T.R.Nos.100, 104 & 113 of 2012 and 2, 6 & 8 of 2013). The finding of the Tribunal was that in having computed the turnover in the works contract, the Intelligence Officer had resorted to estimation, which power of best judgment is not available in penalty proceedings. It was also alleged that the Intelligence Officer did not look at the actual revenue loss caused for reason of the assessee being entitled to input tax credit and liable to - 3 - O.T.Rev.188 of 2014 & 200 of 2014 pay tax only on the value addition, even on the goods supplied by the awarder. 4. The order of the Tribunal is challenged in the Revisions on the following substantial questions of law as re-framed by us: - i) Whether the Tribunal was correct in having relied upon _**U.K.Monu Timber's case**_ when there was no estimation made by the Intelligence Officer and the computation of tax due was on the basis of the contract receipts as available in the books of accounts ? - ii) Whether in the context of the suppression and the consequential attempt to evade tax; in computing the tax sought to be evaded, is it permissible to take into account the component of input tax credit? 5. The proceedings were initiated by the Intelligence Officer and penalty was imposed as per Annexure A orders produced in both the Revisions. On first appeal there was a modification made in one year to the penalty imposed. The assessee was before the Tribunal wherein the penalty imposed was set aside in its entirety. O.T.Rev.188 of 2014 & - 4 - 200 of 2014 6. The assessee, as already stated, is a works contractor who, according to the learned Counsel, has in the subject year first entered into the field of works contract. The defect in the return occurred only by reason of his inexperience. The learned Government Pleader, however, would contend that the assessee had compounded all the other contracts entered into in the said year, but had not compounded the subject contract, which was the reason for the penalty imposed. The assessee points out that only because of the supply of the goods being taken over by the awarder, as per the agreement itself, that the assessee did not file a compounding application in the said contract. The assessee had entered into a contract with Milma and the cement and steel were supplied by the awarder and later the price deducted from the amounts payable to the awardee. The assessee-awardee, hence, showed the purchase price of the goods in its returns after adding Gross Profit (GP); as the sale price, on which tax was paid. The Intelligence Officer has taken objection to the same, relying on _**Cooch-Behar Contractors' Association**_ . - 5 - O.T.Rev.188 of 2014 & 200 of 2014 7. Admittedly, in the present case the assessee had entered into a works contract with Milma. The awarder had supplied goods for the purpose of incorporation into the works contract, the price of which was deducted from the total contract amounts due to the awardee. While disclosing the contract receipts in the books of accounts and in the return, the assessee deducted this portion and to that portion added GP and paid tax as a mere sale at the hands of the assessee. The assessee ought to have showed the entire contract receipts and paid tax in accordance with the liability under Section 6(1) of the KVAT Act after claiming exemptions under Rule 10. The attempted tax evasion is in so far as the statute providing for a higher rate of tax at a uniform rate on goods involved in execution of a works contract; different from the rates applicable to individual goods, as per the Schedule, on a sale _simplicitor_ which is permissible as held in _**Gannon Dunkerly & Co. Vs. State of Rajasthan (1993) 1 SCC 364.**_ In such circumstance, we find that there is definitely a reason for initiation of penalty proceedings. O.T.Rev.188 of 2014 & 200 of 2014 ## - 6 - 8. _**Cooch-Behar Contractors' Association**_ considered the specific issue of supply by the awarder to the awardee for the purpose of accretion in the works contract awarded to the awardee. The Hon'ble Supreme Court held that the transaction would indicate a sale having taken place. Though there is no payment made by the awardee at the time of supply, the awarder eventually when settling the payment for the entire work, deducts the price for the goods supplied from the total contract dues. Hence there occurs a sale from the awardee to the awarder on incorporation or accretion of such goods to the works contract. Such sale when involved in a works contract, the tax liability would be different from the liability imposed by the Schedule on the separate goods. The works contract is liable to tax at a uniform rate for the transfer of goods by way of accretion in the works contract; on the total contract receipts after exemptions provided under Rule 10 Hence, there is a suppression in the return leading to tax evasion. 9. We do not think that the Tribunal was correct in relying on _**U.K.Monu Timbers**_ which found that the power of best judgment conferred on the Assessing Officer is not available to the O.T.Rev.188 of 2014 & - 7 - 200 of 2014 officer proceeding for imposition of penalty under Section 67 of the KVAT Act. In the present case, there is no best judgment assessment made and the Intelligence Officer has merely taken the total contract receipts including the deduction made by the awarder for supply of goods, which the assessee disclosed in the returns as a mere sale. Hence, there is no best judgment or estimation carried out by the Intelligence Officer and the turnover found to have been suppressed is from the total contract amount received by the awardee-assessee. 10. _**M/s.Supreme Food Industries**_ was a case in which deep freezers were supplied to the dealers by the manufacturer of ice-creams. The agreement of franchise with the dealers specifically indicated that the ownership of the deep freezers will be retained with the manufacturer itself. However, there was also a condition that there could be made purchase of the deep freezers at a later stage for a reduced amount. Penalty proceedings were initiated on the ground that there is actual sale of the deep freezers even at the time of initial handing over of the deep freezers by the manufacturer to the franchisees. The Division Bench considering the issue, found that the entire transactions - 8 - O.T.Rev.188 of 2014 & 200 of 2014 were revealed in the accounts and, hence, there was no attempt to suppress the turnover. Reliance was placed on _**Sree Krishna Electricals v. State of T.N.**_ **[(2009) 23 VST 249 (SC)]** . In this context, we have to notice that _**Sree Krishna Electricals**_ as also _**M/s.Supreme Food Industries**_ were in the context of the General Sales Tax regime, which contemplated a regular assessment by the Assessing Officer after verification of the books of accounts. Under the VAT regime, there is a completion of assessment on the returns being filed under Section 21. The further proceedings contemplated is for re-assessment for reason of escapement of turnover or short levy of tax, short levy of tax and soon and so forth, under Sections 24 and 25. Hence, there can be no application of _**Sree Krishna Electricals**_ in the VAT regime. This Court has already found so in O.T.Rev.No.34 of 2014 by order dated 05.06.2018, paragraphs 9 and 10 of which is extracted hereunder: “9. We notice the decision of the Hon'ble Supreme Court in _**Sree Krishna Electricals**_ **,** wherein the assessee was selling wet grinders. In the return, the assessee did not disclose the sales, since the assessee erroneously held a belief that the exemption available to spare parts of wet grinders would be available to a wet grinder itself. O.T.Rev.188 of 2014 & - 9 - 200 of 2014 The Hon'ble Supreme Court found that the exemption would not be so available especially since the wet grinder sold by the assessee is a different product. However, on the question of penalty it was held that the assessee having disclosed the sale in its books of accounts, the Assessing Officer could have very well ferreted out the liability from the books of accounts and levied tax. We are of the opinion that the said decisions are in the context of a tax regime where there was contemplated a regular assessment after filing of a return; which requires production of books of accounts before the Assessing Officer. Under the VAT regime, Section 21 contemplates a self assessment on the basis of a return filed by the assessee subject only to the provisions of Sections 22, 24 and 25. Hence, there is no regular assessment contemplated as was available under the KGST regime or the tax regime as seen from _**Sree Krishna Electricals.**_ 10 _**.**_ The provision for self assessment creates an obligation on the assessee to file a correct return; more onerous than in a regime which mandates a regular assessment. The submission of the learned Government Pleader that the filing of an untrue or incorrect return as available under sub-clause (d) of Section 67(1) assumes more rigour in the teeth of the onerous obligation, resulting in imposition of penalty without reference to whether there has been disclosure made in the books of accounts, has to be accepted”. O.T.Rev.188 of 2014 & - 10 - 200 of 2014 11. One other question which arises for consideration is as to whether in computing the tax evaded there has to be deduction of the input tax credit which could be claimed by the assessee. To answer the above question, we have to look at the transaction and the manner in which a supply by the awarder to the awardee has been directed to be treated in _**Cooch-Behar Contractors' Association**_ . When the awarder purchases goods and supplies it to the awardee, and then deducts the purchase price from the total contract amounts, the purchase made is on behalf of the awardee. There would hence be 'zero' tax liability on the awarder at the time of supply to the awardee. But, the subsequent sale in the present case is by accretion of goods into the works contract and the value addition insofar as the execution of the works contract is concerned, has to be taxed at the rate of 12.5% after allowing the deductions under Rule 10 of the KVAT Rules. At this point, definitely the awardee would be entitled to claim input tax credit being the tax originally paid by the awarder at the time of purchase. However, the claim can be raised only in assessment proceedings and there could be no deduction made of such probable claim, in computing the tax sought to be evaded. - 11 - O.T.Rev.188 of 2014 & 200 of 2014 No assessee can take a contention on detection of suppression that a claim which would have been allowable on the disclosure of the turnover had to be granted in determining the quantum of the suppressed turnover. We rely on _**Venus Marketing v. State of Kerala**_ , **[(2011) 19 KTR 575 (Ker)]** . 12. On the reasoning above, we are of the opinion that the decisions in _**Sree Krishna Electricals, U.K.Monu Timbers**_ and _**M/s.Supreme Food Industries**_ are not applicable in the case. There is clear suppression detected, on which the tax has been determined and penalty imposed. There could also be no input tax credit claimed for deduction from the suppression determined. We make it clear that this would not inhibit the assessee from claiming such input tax credit in assessment proceedings. We, hence, answer the questions of law against the assessee and in favour of the Revenue; setting aside the order of the Tribunal and affirming that of the Assessing Officer. All the same, we notice the submission made by the respondent-assessee that only on misapprehension the goods supplied by the awarder, was failed to be included in the contract receipt. Giving the benefit of doubt, we hence reduce the penalty - 12 - O.T.Rev.188 of 2014 & 200 of 2014 to the equal amount of suppression detected. We are told that already the input tax credit has been allowed by the Assessing Officer in assessment proceedings. In such circumstance, especially since we have given the benefit of doubt in reducing the penalty, we are of the opinion that there need be no re-opening of the assessment solely on the basis of the instant penalty imposed; especially if there is no allegation of any other contract having not been disclosed. The O.T.Revisions stand allowed with the modifications in the penalty as herein above. Sd/K.Vinod Chandran Judge Sd/Ashok Menon Judge vku/- [ true copy ]