2018 (12) TMI 484 - HC - VAT and Sales Tax

Compounding Scheme - main contention raised in the first appeal was that the total tax as per the return or accounts of a particular year has to be taken without any segregation of the Head Office and branches - Circular No. 42/2006 - Whether the Tribunal was correct in having found that computation of compounded tax, on the basis of the highest tax conceded in the returns or accounts in the three consecutive preceding years, should be on a consolidated basis without segregation of the Head Office and branches? - Held that - Section 8(f)(i) speaks of the highest tax payable by the assessee in the earlier three years either under the KGST Act or KVAT Act to be taken as the basis for determining the compounded tax payable. Explanation II, however, makes it very clear that a branch has to be treated as an independent place of business for the purpose of computing the tax payable as compounded tax. Sub-clause (iii) is with respect to a branch opened in the subject year, wherein there is prescribed an average of the tax paid or payable by the dealer, in respect of the principal place of business and all branches. Hence, the intention of the legislature is clear in the said year and the tax conceded in the accounts of each of the branch and the Head Office had to be specifically taken for determining the compounded tax payable at 200% as payable for each of such distinct business place. Circular No.42/2006 also is in tandem with the provision. Based on the time in which the new branch was opened, there is a further provision made under sub-clause (iv) of Section 8(f). All these would together indicate that the specific intention of the legislature was to provide for compounded tax, taking the separate tax paid by each of the branches and computing the compounded tax for that particular branch on the basis of the highest tax conceded by it in the returns or accounts in the last three preceding years - decided against assessee. Whether the computation has to be made on the basis of the tax conceded in the returns or accounts or that determined in assessment? - Held that - The words employed in the provision being very clear, we are in perfect agreement with the judgment of the other Division Bench in M/s.Malabar Ornaments (P) Ltd. 2011 (1) TMI 1281 - KERALA HIGH COURT , where it was held that the highest tax has to be taken as conceded in the return or accounts, which is the specific words employed in sub-clause (i) of Section 8(f) - decided in favor of assessee. Non-inclusion of purchase tax under Section 5A and additional sales tax under Section 5D - Held that - The compounding provision having spoken of the highest tax payable, does not draw a distinction between purchase tax or additional sales tax - purchase tax is also includable for determining the highest tax payable that is conceded in the accounts or returns in the years in which the KGST Act was applicable, but not includable in the VAT period, i.e., 2005-06 - decided partly in favor of assessee and partly in favor of Revenue. Includibility of purchase tax component under Section 5D of the KGST Act - Held that - The assessee had filed an application for compounding under the KGST Act and the same was allowed. It was subsequently in the course of the assessment year that Section 5D was brought in the statute book, increasing the tax payable under Section 5 and Section 5A by a percentage. The AOs directed the dealers who applied under the compounding provision, to pay the additional levy under Section 5D. This Court found the levy to be permissible - The dealers who were paying tax under the compounding scheme were not paying tax under Section 5 and 5A and, hence, could not be directed to pay additional tax, was the finding. If the assessees herein were regularly assessed under Section 5 & 5A and paid the additional sales tax under Section 5D for any of the years under the KGST regime, then the same would also be includable for determining the highest tax payable in the preceding three years. However, in the case of the assessees having opted for compounding the tax payable in either of the years under the KGST Act, even if there was additional sales tax levied and paid, the same would not be includable for determining the highest tax payable - decided partly in favour of the assessee and partly in favour of the Revenue. The AO is directed to re-do the assessment - revision disposed off.

Summary

Issues Involved:
1. Computation of compounded tax on a consolidated basis without segregation of the Head Office and branches.
2. Basis for determining the highest tax payable: whether it should be the tax conceded in the returns or accounts or the tax assessed or revised in appeal.
3. Inclusion of purchase tax component under Section 5A of the KGST Act in the tax conceded in the accounts or returns of the three preceding years.
4. Inclusion of purchase tax component under Section 5D of the KGST Act in the tax conceded in the accounts or returns of the three preceding years.

Detailed Analysis:

Issue 1: Computation of Compounded Tax on a Consolidated Basis Without Segregation of the Head Office and Branches

The Tribunal had found that computation of compounded tax should be on a consolidated basis without segregation of the Head Office and branches. However, the High Court noted that Section 8(f)(i) of the Kerala Finance Act, 2006, and Explanation II clearly state that each branch should be treated as an independent place of business for computing compounded tax. The Court emphasized that the intention of the legislature was to compute the compounded tax for each branch separately based on the highest tax conceded by it in the returns or accounts of the last three preceding years. Therefore, the Court answered this issue against the assessee and in favor of the Revenue.

Issue 2: Basis for Determining the Highest Tax Payable

The main question was whether the highest tax payable should be based on the tax conceded in the returns or accounts or the tax assessed or revised in appeal. The Court agreed with the judgment of the Division Bench in M/s. Malabar Ornaments (P) Ltd., which held that the tax conceded in the returns or accounts should be the basis for determining the highest tax payable. Thus, the Court answered this issue in favor of the assessee and against the Revenue.

Issue 3: Inclusion of Purchase Tax Component Under Section 5A of the KGST Act

The Court examined whether the purchase tax component under Section 5A of the KGST Act should be included in the tax conceded in the accounts or returns of the three preceding years. The Court noted that the compounding provision did not distinguish between purchase tax or additional sales tax. However, Circular No. 42/2006 excluded the purchase tax under Section 6(2) of the KVAT Act for the VAT period (2005-06). Therefore, the Court held that the purchase tax under Section 5A should be included for the KGST period but excluded for the KVAT period. The Court answered this issue partly in favor of the assessee and partly in favor of the Revenue.

Issue 4: Inclusion of Additional Sales Tax Under Section 5D of the KGST Act

The Court addressed whether the additional sales tax under Section 5D should be included in the tax conceded in the accounts or returns of the three preceding years. The Court referred to the Supreme Court's decision in Bhima Jewellery, which held that dealers paying tax under the compounding scheme were not liable to pay additional tax under Section 5D. Therefore, if the assessee was paying tax under Sections 5 and 5A, the additional sales tax would be included. However, if the assessee was paying compounded tax, the additional sales tax would not be included. The Court answered this issue partly in favor of the assessee and partly in favor of the Revenue.

Conclusion:

The High Court modified the order of the Tribunal and the first appellate authority with the following directions:

1. The Head Office and each branch should be considered independently for computing the compounded tax payable, based on the highest tax conceded in the returns or accounts.
2. The tax assessed or revised in appeal cannot be the basis for determining the highest tax payable.
3. The purchase tax under Section 5A should be included for the KGST period but excluded for the KVAT period.
4. The additional sales tax under Section 5D should be included only if the assessee was paying tax under Sections 5 and 5A; it should be excluded if the assessee was paying compounded tax.

The AO was directed to re-do the assessment in accordance with these directions, and any cascading effect in subsequent years should be given full effect. The tax revisions were disposed of, with each party bearing their respective costs.