2010 (2) TMI 1064 - HC - VAT and Sales Tax

Vires of the words and the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as discount in the proviso to rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005 (for short, the Rules ), inserted by Notification No. FD.124.CSL.2006 dated May 27, 2006, retrospectively with effect from April 1, 2006 questioned Held that - Keeping in mind the fact that the petitioner would suffer untold hardship and inconvenience, more appropriately since the petitioner cannot go back on its contractual terms with its customers for the period April and May 2006, and revoke the transaction, prepare fresh invoices showing the discounts, so as to comply with the amended provision of rule 3(2)(c) is illegal, unworkable, and a cause of serious concern for the petitioner. In the circumstances, the contentions supra advanced by the petitioner, are worthy of acceptance. Keeping in mind the fact that the petitioner would suffer untold hardship and inconvenience, more appropriately since the petitioner cannot go back on its contractual terms with its customers for the period April and May 2006, and revoke the transaction, prepare fresh invoices showing the discounts, so as to comply with the amended provision of rule 3(2)(c) is illegal, unworkable, and a cause of serious concern for the petitioner. In the circumstances, the contentions supra advanced by the petitioner, are worthy of acceptance.

Issues Involved:
1. Constitutionality of the retrospective amendment to rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005.
2. Legality of the reassessment order and consequent demand notice based on the amended rule.
3. Compliance with procedural requirements under the Karnataka Value Added Tax Act, 2003.

Issue-wise Detailed Analysis:

1. Constitutionality of the Retrospective Amendment to Rule 3(2)(c):
The petitioner, a registered dealer under the Karnataka Value Added Tax Act, 2003, challenged the vires of the words "and the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as discount" in the proviso to rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005. The amendment was introduced by Notification No. FD.124.CSL.2006 dated May 27, 2006, with retrospective effect from April 1, 2006. The petitioner argued that the amendment was unreasonable, unworkable, arbitrary, and impossible to implement, leading to a fresh levy of tax along with a penalty for no fault of the petitioner, thus violating articles 14 and 19(1)(g) of the Constitution of India. The court agreed with the petitioner, stating that the retrospective application of the amendment created an additional tax liability that was irrational, oppressive, and unworkable, thereby declaring it unconstitutional.

2. Legality of the Reassessment Order and Consequent Demand Notice:
The petitioner also sought to quash the reassessment order dated April 6, 2009, under section 39(1) of the Act, which was based on the amended rule. The reassessment order disallowed the discount for the months of April and May 2006, as the discount was not shown in the invoices, contrary to the amended rule. Despite the petitioner's reply pointing out the impracticality and arbitrariness of the retrospective amendment, the reassessment order was confirmed, leading to a demand notice for recovery of Rs. 20,92,887, including interest. The court found that the reassessment order and the consequent demand notice were unsustainable and quashed them, as the amended rule was declared unconstitutional.

3. Compliance with Procedural Requirements:
The petitioner contended that section 29 of the Act and corresponding rules required the issuance of tax invoices and bills of sale at the time of sale, containing prescribed particulars. The amended rule mandated showing the discount in the invoice, which was impractical for the petitioner, who issued credit notes after the completion of sale transactions. The petitioner argued that the amendment created an unexpected liability for past transactions, which was impermissible. The court noted that the retrospective amendment did not consider the adverse impact on concluded transactions and the petitioner's business practices. The court also observed that the notification did not provide objects and reasons or disclose that it was laid before the State Legislature, as required by section 88 and 89 of the Act, making the notification illegal.

Conclusion:
The court declared the phrase inserted in the proviso to rule 3(2)(c) "and the tax invoice or bill of sale issued in respect of sales relating to such discount shows the amount allowed as discount" by Notification No. FD.124.CSL.126 dated May 27, 2006, as unconstitutional in so far as it was made retroactive from April 1, 2006. Consequently, the reassessment order and the demand notice for the period of April and May 2006 were quashed. The writ petition was ordered accordingly.

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