2016 (6) TMI 945 - HC - VAT and Sales Tax

Challenge to the show cause notice demanding VAT on sale of STB (set-top boxes) - KVAT - providing an opportunity of hearing - It was contended that there was no violation of the provisions contained in the Act, particularly Section 74 and that petitioner never sold any of the set-top boxes as alleged and therefore they were not liable to pay any tax. - Held that - No demand notice nor any coercive steps has been initiated pursuant to the notice issued. The endorsement issued makes it clear that petitioner has been given time to file reply. Therefore, direction issued by the Deputy Commissioner calling upon the petitioner to discharge tax liability has to be read-down as a notice and the endorsement Annexure-D shall be treated as pure show-cause notice calling upon the petitioner to submit its reply. Petitioner is given three weeks time from today to file detailed objection regarding the jurisdiction and competence of the Deputy Commissioner to make such an assessment or to issue such a show-cause notice. - Decided partly in favor of petitioner.

Summary

Issues:
Challenge to notice under Section 74 of the Karnataka Value Added Tax Act, 2003 for tax liability on sale of set-top boxes without proper opportunity for the petitioner to respond.

Analysis:
The writ petition challenged a notice issued under Section 74 of the Karnataka Value Added Tax Act, 2003, by the Deputy Commissioner of Commercial Taxes, notifying the petitioner of a tax liability amounting to ?6,78,21,534 for allegedly selling set-top boxes. The petitioner contended that there was no violation of the Act and that they never sold the set-top boxes as claimed. They argued that the notice violated principles of natural justice as they were not given an opportunity to show cause before being asked to pay the tax. In response, an endorsement was issued by the Deputy Commissioner allowing the petitioner ten days to reply and produce necessary documents. The main argument presented was that the Deputy Commissioner lacked jurisdiction to assess the tax and that Section 74 only pertains to imposing penalties for record-keeping violations.

The Additional Government Advocate argued that the notice and endorsement aimed to provide the petitioner with an opportunity to present their case regarding the sale of set-top boxes and the resulting tax liability. It was contended that as the petitioner had requested an opportunity, which was granted through the endorsement, approaching the Court under Article 226 of the Constitution was premature. The Court acknowledged that the Deputy Commissioner should not have unilaterally concluded the tax liability without giving the petitioner a chance to respond. However, it was suggested that the notice should be read as a show-cause notice, allowing the petitioner to contest the jurisdiction and authority of the Deputy Commissioner to make such assessments under Section 74.

Ultimately, the Court decided that the direction to discharge tax liability should be treated as a show-cause notice, and the petitioner was given three weeks to file detailed objections regarding the Deputy Commissioner's jurisdiction and competence to issue such a notice. The Deputy Commissioner was instructed to provide a personal hearing to the petitioner, first deciding on jurisdiction before addressing other aspects covered in the notice. The writ petition was partly allowed in favor of the petitioner, granting them the opportunity to challenge the jurisdiction of the Deputy Commissioner and respond to the notice appropriately.