2022 (8) TMI 57 - HC - VAT and Sales Tax

Assessment of sales shown in accounts at low prices - Benefit of exemption under Entry-30/Part B/Schedule-IV of the Tamil Nadu Value Added Taxes Act, 2006 - sale of footwear - Since the petitioner has priced the pairs at less than Rs.200/-, this has triggered a suspicion in the minds of the revenue that the prices have been tampered so as to bring them within the cover of the exemption - HELD THAT - While Section 24 provides for a limitation of six years from the expiry of the year to which the tax relates, Section 27 provides for limitation of six years from the date of original assessment. Some of the assessments are seen to be barred by limitation whether one reckons limitation in terms of Section 24 or 27, as the case may be. There is no reference in the order as to what the specific materials are that lead to the conclusion that the price of the products are undervalued. Though reference is made to the visit of officials from Enforcement, there is no detail in regard to what those officials found to have led to a suspicion of undervaluation either - In the discussion, the authority states that the pricing arrived at by a manufacturer should take into account expenses on advertisement, promotion and transport, royalty and other expenses that would have an impact upon the cost of production. The petitioner has admittedly received royalty from the use of the brand 'VKC' and according to it, the royalty as well as the expenses enumerated by the officer have been taken into account by it, in arriving at the pricing. The petitioner is right in stating that apart from general observation on how proper is to be arrived at, there is nothing brought on record by the officer to support a conclusion that such factors have not been taken into account in arriving at the pricing. There is no scientific assessment of the pricing itself set out in support of the conclusion that relevant parameters to determine fix/pricing have been omitted, thus, leading to a conscious undervaluation. There is an apprehension in the minds of the authorities that the fixation of the prices is abnormal, perhaps for the reason that all the footwear have been priced at sums less than Rs.200/- per pair, and taking note of the variation of the prices at every stage of sale, manufacturer/wholesaler/retailer. Such differences however, may well arise on account of the costs incurred at each stage and the profit margin of each of the entities. Section 24 of the Act has been enacted in pari materia with Section 12A of the Tamil Nadu General Sales Tax Act to address transactions that are not bonafide and have been consciously and willfully undervalued and understated with a view to evade payment of tax. In the present case, the argument of the revenue is that the petitioner has undervalued the transactions merely to obtain the benefit of exemption under Entry-30/Part-B/Schedule-IV of the Act - Section 24 specifically requires undervaluation to be established qua other identically placed manufacturers / dealers. The language of the section is specific insofar as it states that the pricing should be 'abnormally low' when compared to the 'prevailing market price of such goods'. The prevailing market price must be taken into account which means that comparison must have been arrived at as between the prices of the manufacturer/petitioner and other identically placed manufacturers. This has admittedly not been done. In fact, nowhere in the Show Cause Notice nor the impugned order, does the officer enter into such a discussion at all. Thus, though the provision has been referred to in passing, the ingredients of Section 24 have not been referred to, much less satisfied in the impugned order. Petition allowed.

Issues Involved:
1. Inspection and Pricing Mechanism
2. Limitation under Sections 24 and 27 of the Tamil Nadu Value Added Taxes Act, 2006
3. Alleged Undervaluation for Tax Exemption
4. Assessment and Show Cause Notice Validity
5. Revenue Neutrality

Detailed Analysis:

1. Inspection and Pricing Mechanism:
The petitioners, manufacturers of footwear, were inspected by the officials of the enforcement section of the Commercial Taxes Department. The inspection revealed alleged flaws in the pricing mechanism, suggesting that the petitioners had undervalued their products to avail statutory exemptions under Entry-30/Part B/Schedule-IV of the Tamil Nadu Value Added Taxes Act, 2006, which exempts turnover from the sale of footwear priced at less than Rs.200/- per pair.

2. Limitation under Sections 24 and 27 of the Tamil Nadu Value Added Taxes Act, 2006:
The court noted that the notices issued under Section 27(1)(a) of the Act were beyond the limitation period provided under Sections 24 and 27. Section 24 provides a limitation of six years from the expiry of the year to which the tax relates, while Section 27 provides a limitation of six years from the date of original assessment. The revision notices were issued after the expiry of these periods, making the impugned orders of assessment barred by limitation and thus, they were set aside.

3. Alleged Undervaluation for Tax Exemption:
The respondents suspected that the petitioners had tampered with prices to bring them within the exemption limit. However, the court found no specific materials or detailed findings in the order to support the conclusion of undervaluation. The court emphasized that the provisions of Section 24 require a comparison with the prevailing market price of similar goods by other identically placed manufacturers, which was not done in this case.

4. Assessment and Show Cause Notice Validity:
The court observed that the Show Cause Notices and assessment orders were based on suspicions and surmises without concrete evidence. The petitioner had responded with details of their pricing mechanism, including expenses on advertisement, promotion, transport, and royalty, which were not adequately countered by the respondents. The assessment order lacked a scientific assessment of the pricing and failed to establish that the relevant parameters were omitted, leading to a conscious undervaluation.

5. Revenue Neutrality:
The court noted that the wholesaler had remitted VAT on the entirety of the turnover, making the exercise revenue neutral. For instance, for the article '1021 gents', the company price was Rs.195/- and the wholesaler price was Rs.215/-, with tax remitted on Rs.215/-. This further weakened the case of the respondents.

Conclusion:
In light of the above discussions, the court set aside the impugned orders and allowed the Writ Petitions. The court emphasized that the ingredients of Section 24 were not satisfied, and the assessment orders were barred by limitation. Consequently, the connected Miscellaneous Petitions were also closed.

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