2014 (7) TMI 1346 - HC - VAT and Sales Tax

Validity of reassessment order passed by the AA under Section 39(1) of KVAT Act - barred by time limitation or not - Validity of cross appeals of the State. Whether, the FAA is correct in holding that the reassessment of the AA is not barred by time limitation as per Section 40 of the Act? - HELD THAT - The issue is answered in the affirmative. The reading of the new substituted Section 40 clearly proves that the reassessment order dated 25th September, 2010 of the AA is not barred by time-limit. Even otherwise, it is to be noted that the AA has passed order considering the entire turnover for the year 2005-2006 as the turnover for the month of March 2006 and reassessment is done for the tax period of March 2006 alone. Considering this fact and without giving any finding whether it is correct or not, as per Section 40 of the Act as it stood then also, the reassessment order is not barred by time-limit as prescribed therein - the FAA is correct in resolving the first issue against the appellant and thereby the first point is answered in the affirmative. Whether, the cross appeals of the State are justified in view of the detailed findings of the FAA on each of the issues raised in the appeal which is being contested in these cross appeals? - HELD THAT - The issue is answered partly in the affirmative. The tax period is defined under Section 2(33) of the Act and Rule 37 prescribes each calendar month as the tax period other than in the case of dealers who have opted for composition. In the case of the appellant, the tax period is a calendar month whereas, the AA has concluded reassessment order violating Rule 37 of the KVAT Rules, 2005 by determining the total turnover and the taxable turnover under KVAT Act and CST Act for the month of March 2006 only. The FAA is correct in holding that the AA has erred in clubbing the turnovers and passing the order for the month of March 2006 alone. The FAA should have stopped at this stage only without going into the merits of the case as the reassessment order of the AA is improper and not sustainable as the same has been done in violation of statutory provisions - the reassessment order need to be set aside and the case has to be remanded back to the AA with the direction that the reassessment orders are to be passed tax period wise separately under the KVAT Act and so also under the CST Act. Consequently, the impugned appellate order is also liable to be set aside. Therefore, the second point is answered partly in the affirmative. What order regarding the appeals and the cross appeals? - HELD THAT - The matter need to be remitted back to the AA to pass orders afresh keeping in view of the time limitation and computation of time limitation as envisaged under Section 40 of the Act. Appeal disposed off.

Summary

Issues Involved:

1. Time limitation for reassessment under Section 40 of the Karnataka Value Added Tax Act, 2003.
2. Clubbing of turnovers for financial year 2005-2006.
3. Classification of software sales under KVAT and CST.
4. Classification of implementation and consultation charges.
5. Levy of interest and penalty.

Issue-wise Detailed Analysis:

1. Time Limitation for Reassessment:

The appellant contested the reassessment order dated 25th September 2010, served on 12th October 2010, arguing it was barred by the time limitation under Section 40(1)(a) of the KVAT Act, 2003. The FAA concluded that the reassessment was within the time limit as the information used by the AA was obtained within three years from the appellant's records. The FAA's decision was supported by the amended Section 40 of the KVAT Act, 2003, which allows reassessment within five years after the end of the prescribed tax period. The Tribunal affirmed the FAA's finding, noting that even under the previous version of Section 40, the reassessment was timely because the AA treated the entire turnover for 2005-2006 as the turnover for March 2006.

2. Clubbing of Turnovers:

The FAA found that the AA erred in clubbing the turnovers for the entire financial year 2005-2006 and reassessing them as turnover for March 2006, violating Rule 37 of the KVAT Rules, 2005. The Tribunal agreed with the FAA, stating that the reassessment should have been done tax period-wise (monthly) rather than clubbing the entire year's turnover into one month. This procedural error rendered the reassessment order unsustainable.

3. Classification of Software Sales:

The State's cross-appeal argued that the FAA failed to address the AA's finding that software sales were taxable under KVAT and CST due to the existence of unique numbers for each customer. The Tribunal did not delve into the merits of this issue, as the reassessment order itself was procedurally flawed and needed to be set aside.

4. Classification of Implementation and Consultation Charges:

The State contended that the FAA wrongly classified implementation and consultation charges as services rather than goods. The FAA had relied on the titles of agreements to conclude these were service charges. The Tribunal did not address the merits of this issue due to the procedural invalidity of the reassessment order.

5. Levy of Interest and Penalty:

The FAA had set aside the levy of interest and penalty because the issues of software sales and implementation charges were resolved in favor of the appellant. The Tribunal did not examine this issue in detail, as the reassessment order was procedurally invalid.

Final Order:

1. The appeals by the appellant (STA Nos. 768 to 780 of 2011) were dismissed.
2. The State's cross-appeals (Nos. 1433 to 1445 of 2014) were allowed in part.
3. The impugned appellate order and the reassessment order were set aside due to procedural violations.
4. The matter was remanded back to the AA to pass fresh orders in compliance with statutory rules and the observations made.
5. The Registrar was directed to comply with Regulation 53(b) of Chapter IX of Karnataka Appellate Tribunal Regulations, 1979, by communicating this order to the concerned persons.
6. The office was directed to send back the lower authorities' records immediately.