2018 (11) TMI 1439 - HC - VAT and Sales Tax

Forfeiture of tax paid u/s 46A of KGST Act - Sale of SIM Cards - levy of service tax under the Finance Act, 1994 and sales tax under the KGST Act - inclusion of activation charges in levy of sales tax - whether there could be forfeiture of the collected tax under Section 46A of the KGST Act, when the collection was validly made? Held that - Section 46A of the KGST Act has two limbs; one imposing penalty and the other a clause of forfeiture, which, later limb, does not bring with it the essential requirement of mens rea though penal in nature. Any collection by way of tax or purporting to be by way of tax in contravention of the provisions noticed therein, shall be liable to penalty not exceeding rupees five thousand which requires mens rea. The second limb speaks of such collection, either by way of tax or purporting to be by way of tax in contravention of the specified provisions, being liable for forfeiture to the Government. The measure of forfeiture though penal is also an enabling provision, the direct consequence of which is the consumer's right to seek refund by making an application in the prescribed form with the prescribed documents. The distinction in the two limbs of Section 46A of the KGST Act is further accentuated by the fact that the provision speaks of an order issued by the Assessing Authority after giving the person from whom such forfeiture is made, an opportunity to show cause why penalty or forfeiture shall not be ordered. If forfeiture necessarily resulted in penalty, then the words employed would have been penalty and forfeiture, in conjunction. The legislature contemplated situations in which forfeiture would be a necessity, but the act of collection being not contumacious or in direct defiance of the provisions of law, in which event the registered dealer being absolved of such consequence of penalty. The collection made by the dealer becomes one purporting to be by way of tax on the sale of SIM Cards in respect of which he is not liable to pay tax. This again brings the act of collection within the framework of forfeiture as contemplated in Section 46A of the KGST Act, a necessary consequence by reason of the declaration of the Hon'ble Supreme Court. The claim for refund, if any, would subsist only in the consumer and it is the State who is competent to make such refund as per the procedure prescribed - There can be no refund to the assessee who admittedly has collected the amounts paid to the State as tax from its consumer on sale of SIM Cards. In the facts and circumstances, however, the first limb dealing with imposition of penalty, cannot apply and there could be no penalty levied. An order of forfeiture without an order of penalty, as seen from the words employed in the provision, is eminently permissible. The forfeiture is perfectly valid as per Section 46A of the KGST Act, which is in pari materia with Section 72 of the KVAT Act. The matters shall stand remanded to the Division Bench to consider the revisions.

Summary

Issues Involved:

1. Forfeiture of tax under Section 72 of the Kerala Value Added Tax Act, 2003 (KVAT Act) and Section 46A of the Kerala General Sales Tax Act, 1963 (KGST Act).
2. Legality of the levy of service tax under the Finance Act, 1994, and sales tax under the KGST Act on the sale of SIM Cards.
3. Validity of tax collection and the concept of unjust enrichment.
4. Applicability of the aspect theory in taxation.
5. Retrospective application of judicial decisions and their impact on tax collection.

Detailed Analysis:

1. Forfeiture of Tax under Section 72 of the KVAT Act and Section 46A of the KGST Act:
The court examined whether the forfeiture of tax collected on SIM cards under the KVAT Act and the KGST Act was appropriate. The issue arose because a Division Bench had previously directed the forfeiture of such taxes under Section 72 of the KVAT Act. The court found that Section 46A of the KGST Act, which deals with the penalty and forfeiture of illegally collected taxes, is in pari materia (similar in substance) with Section 72 of the KVAT Act. Therefore, the forfeiture of tax collected under the KGST Act was deemed valid. The court emphasized that forfeiture is a penal provision and does not necessarily require mens rea (guilty mind).

2. Legality of Levy of Service Tax and Sales Tax on SIM Cards:
The court addressed the legality of levying both service tax under the Finance Act, 1994, and sales tax under the KGST Act on the sale of SIM cards. Initially, a Division Bench had upheld the dual taxation based on the aspect theory, which allows different aspects of a transaction to be taxed under different laws. However, the Supreme Court later ruled that activation charges for SIM cards could not be included for sales tax purposes as there was no transfer of property in goods. Consequently, the court found that the levy of sales tax on SIM cards was not permissible.

3. Validity of Tax Collection and Unjust Enrichment:
The court examined whether the tax collected from consumers by telecom companies should be forfeited to prevent unjust enrichment. It was argued that the tax collected was based on a valid declaration by a Division Bench at the time. However, following the Supreme Court's decision, the collection was rendered illegal. The court held that the amounts collected as tax should be forfeited to the government to prevent telecom companies from being unjustly enriched. The consumers who paid the tax have the right to seek a refund from the government.

4. Applicability of the Aspect Theory:
The aspect theory was initially used to justify the dual levy of service tax and sales tax on SIM cards. The court noted that while the aspect theory allows for different aspects of a transaction to be taxed separately, the Supreme Court's ruling in BSNL v. Union of India clarified that activation charges could not be treated as consideration for the sale of goods. Therefore, the aspect theory could not be applied to justify the inclusion of activation charges in the taxable turnover for sales tax purposes.

5. Retrospective Application of Judicial Decisions:
The court considered the retrospective effect of the Supreme Court's decision in BSNL v. Union of India, which invalidated the levy of sales tax on SIM cards. The court concluded that the decision applied retrospectively, rendering the previous tax collection illegal. As a result, the amounts collected as tax must be forfeited to the government, and any claims for refunds must be made by the consumers who paid the tax.

Conclusion:
The court upheld the forfeiture of tax collected on SIM cards under the KGST Act, in line with the provisions of Section 46A, which is similar to Section 72 of the KVAT Act. The court emphasized that the forfeiture is necessary to prevent unjust enrichment and ensure that the amounts collected as tax are returned to the government. The court also clarified that the aspect theory does not apply to the inclusion of activation charges in the taxable turnover for sales tax purposes, following the Supreme Court's decision. The retrospective application of the Supreme Court's ruling rendered the previous tax collection illegal, necessitating the forfeiture of the amounts collected.