2014 (7) TMI 533 - HC - VAT and Sales Tax

Levy of tax and interest - incentives to mega projects - assessee instead of depositing tax adjusted the same with refund entitlement - conditions of the notification mandatory or not - whether the petitioner is liable to pay interest on delayed payment or non-payment of tax collected under the KVAT Act in terms of the notification - Held that - petitioner-industrial unit is entitled to tax exemption limited to unavailed portion of the period and extent of tax exempted, but is required to collect the tax applicable under the KVAT Act on the sale of goods manufactured by it and pay the net tax along with the return prescribed under the said Act to the jurisdictional authority, while, the State Government is obliged to refund the said amount within the time specified under section 35 of the KVAT Act or within 15 days from the date of filing of the return and failure to do so, would entail the State Government to pay interest for the period of delay. Even if payment of the tax collected by the petitioner is made to the State in terms of condition No. 4, it is more of a formality of accounting that amount as against the total amount of exemption from payment of tax during the relevant period and nothing more. If that is so, there cannot be a failure of the object or purpose of the notification if the petitioner did not make payment of tax collected in order to account for the amounts to be adjusted as against the entitlement. Though the petitioner filed its monthly returns, nevertheless is inconsequential in the light of the clause 5 of the notification, annexure A, the compliance of which would sequentially enable the Revenue to adjust the amounts as against the entitlement. The law laid down in Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal 2010 (11) TMI 13 - SUPREME COURT OF INDIA supports the case of the petitioner in the matter of whether the conditions imposed in annexure A notification are to be construed strictly or otherwise. The apex court, having observed that mandatory requirements of conditions while seeking exemption must be obeyed or fulfilled exactly, nevertheless stated that at times, some latitude can be shown if there is failure to comply with some requirements, which are directory in nature and non-compliance of which would not affect the essence or substance of the notification granting exemption . A reading of the statement of objections filed by the Revenue does not indicate that the non-compliance of the payment of tax collected by the petitioner under the KVAT Act, apparently would not affect the essence or substance of the notification, annexure A, granting exemption from payment of tax. Petitioner though did not make payment of the tax collected under the KVAT Act along with some of the monthly returns submitted and for some months having made delayed payments, the Revenue could not have imposed interest by exercising a jurisdiction under section 36 of the KVAT Act - Decided in favour of assessee.

Issues Involved:
1. Tax Exemption and Refund for Mega Projects
2. Compliance with Notification Conditions
3. Liability for Interest and Penalty on Delayed Tax Payment
4. Assessment and Adjustment of Refunds

Issue-wise Detailed Analysis:

1. Tax Exemption and Refund for Mega Projects:
The petitioner, a company registered under the KST Act, KVAT Act, and CST Act, claimed that the Government of Karnataka issued an industrial policy (1996-2001) offering tax exemptions for mega projects with investments exceeding Rs. 100 crore. The petitioner invested Rs. 351 crore and commenced production in April 2001. The Finance Department issued notifications in 2000 granting tax exemptions for ten years from the commencement of production. An eligibility certificate was issued in 2001, certifying the petitioner's eligibility for tax exemptions on local and inter-State sales up to Rs. 351.26 crore from April 1, 2001, to March 31, 2011.

2. Compliance with Notification Conditions:
The State Government issued a notification on April 18, 2005, continuing the tax exemption and deferral for industrial units under the KST Act for the remaining eligibility period. The petitioner was required to pay net tax along with monthly returns, and the Revenue was obliged to refund the net tax within 15 days. The petitioner faced financial difficulties and did not pay net tax for 22 tax periods but filed monthly returns. The petitioner believed that the procedural requirement of paying net tax and getting a refund could be bypassed due to the exemption.

3. Liability for Interest and Penalty on Delayed Tax Payment:
The third respondent issued a demand notice for Rs. 32,02,92,610 as arrears of net tax and Rs. 22,33,10,886 as interest, without prior notice. The petitioner paid part of the demanded tax and sought a refund, which was denied. The petitioner contended that the notification did not mandate interest on delayed tax payment. The Revenue argued that the petitioner was required to collect and pay tax, and non-compliance led to interest and penalty under sections 36 and 72 of the KVAT Act. The court found that the notification did not impose interest on delayed payment by the petitioner, only on delayed refunds by the State.

4. Assessment and Adjustment of Refunds:
The petitioner sought to quash the order demanding interest and penalties and requested a refund of amounts paid. The Revenue adjusted the amounts towards interest due for delayed tax payment. The court noted that the notification aimed to encourage new industries and the conditions should not be strictly construed. The petitioner's failure to pay tax did not affect the essence of the exemption. The court held that the petitioner was not liable for interest under section 36 of the KVAT Act and quashed the demand for interest and penalties.

Conclusion:
The court allowed the petition, quashing the orders demanding interest and penalties. The respondents were directed to refund the amounts deposited by the petitioner if not already refunded. The court emphasized that the exemption notification aimed to support new industries and should not impose undue burdens on the petitioner.

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