2007 (12) TMI 425 - HC - VAT and Sales Tax

Evasion of tax - penalty levied - sale by brand name holder - Held that - Since goods manufactured by the petitioner were for sale only to the brand name holder, inter-State movement of goods by the petitioner to Kerala is under contract of sale and therefore sale though subsequently made is actually an inter-State sale under section 3(a) of the Central Sales Tax Act, 1956 taxable in Tamil Nadu. The petitioner escaped CST assessment in Tamil Nadu because Tamil Nadu sales tax authorities would not have seen the contract under which goods are manufactured and sold by the petitioner. However, this is clearly a scheme of evasion of tax practised by the petitioner and the brand name holder. This is a fit case for considering penalty on the petitioner as well as on the brand name holder for attempting evasion of tax. However, on account of the officer s diligence, evasion has not taken place because he made assessment by invoking section 19B. In the circumstances, probably, the assessing officer did not consciously invoke penalty provisions against the petitioner and the third respondent. In view of the above findings, the impugned order is upheld and the original petition is dismissed as devoid of any merit.

Summary

Issues:
Challenging assessment orders under section 19B of the Kerala General Sales Tax Act, 1963 for undervaluation leading to tax evasion.

Analysis:
The petitioner, a manufacturer of "Cuticura" talcum powder, challenged assessment orders P15 and P16 issued by the first respondent under section 19B of the KGST Act. The petitioner's factory in Madras stock transferred the product to Kerala for sale to the brand name holder, M/s. Mullar & Phipps (India) Limited, at a margin of 15%. However, the brand name holder resold the product at a gross profit of 55.05%, leading to the rejection of the petitioner's sales consideration by the first respondent. The turnover adopted for the first sale was based on the brand name holder's sales turnover, triggering the assessment under section 19B.

The petitioner contended that section 19B requires assessment based on actual sale proceeds received without adding another dealer's margin to their turnover. Citing relevant case law, the petitioner argued against the addition of the brand name holder's margin. The Government Pleader relied on a Division Bench judgment allowing assessment under section 19B in cases of tax evasion. The court noted that the petitioner's actions facilitated tax evasion by the brand name holder, as the petitioner, not entitled to market the product, transferred goods to Kerala for the first sale within the State, enabling tax evasion.

The court highlighted the evasion scheme involving the petitioner and the brand name holder, emphasizing that the entire production was in the brand name holder's name. The court referenced Supreme Court decisions prohibiting dubious tax evasion methods and considered imposing penalties on the petitioner and the brand name holder. However, due to the assessing officer's diligence in invoking section 19B, evasion did not occur. Consequently, the court upheld the impugned order, dismissing the petition for lack of merit. The court did not invoke penalty provisions against the petitioner and the brand name holder due to the assessing officer's actions, concluding that the petitioner's actions constituted a clear case of tax evasion.