2015 (11) TMI 159 - HC - VAT and Sales Tax

Demand of VAT and levy of Penalty u/s 67 of KVAT - E-commerce transactions - virtual shop - facility for providing online sale or purchase of goods - breach of the provisions of Sections 20 and 40 of the KVAT Act - Registeration not obtained under KVAT - Non filing of returns and non maintenance of true and correct accounts - The petitioner contends that it has absolutely no role to play in the transaction of sale and purchase and hence it could not have been proceeded against under the penal provisions of the KVAT Act. Held that - Rather than stating the reasons that prompted the revenue authorities to suspect an evasion of tax, and calling for the explanation of the assessee to those reasons, the notice proceeds to draw definite conclusions as regards the commission of an offence by the assessee. There is no indication in the notice as to why the revenue authorities considered the petitioner a dealer, or why the transactions in question had to be treated as local sales as against inter-state sales. The notice adopts the figure furnished by the petitioner, representing the total turnover in respect of sale transactions completed through its online portal to customers in Kerala during the relevant period, as the total sales turnover of the petitioner for the purposes of quantifying the tax liability and penalty against the petitioner. The impugned orders only find that there were transactions of sale that resulted in goods being delivered to customers in Kerala, but do not go further and find that it was the petitioner who effected those sales. Further, there is no consideration of the specific contention of the petitioner that the sales in question were effected by sellers who were registered on its online portal, and that all the said sales were inter-state sales on which the respective sellers had paid applicable tax under the CST Act. A specific finding on the above issues, in my view, was necessary to clothe the authority concerned with the jurisdiction to proceed against the petitioner under the penal provisions of the KVAT Act, and the absence of a finding on these issues, denudes the authority concerned of such a jurisdiction. The most perplexing aspect of the instant case, however, is that WS Retail, the seller responsible for effecting majority of the sales to customers in Kerala, through the online portal of the petitioner, is registered as a dealer under the KVAT Act and, in the returns submitted by the said dealer for the relevant period, they had conceded NIL taxable turnover under the KVAT Act, on the contention that their entire sales turnover pertained to inter-state sales effected by them. Under the said circumstances and, in the absence of any material to suggest that the returns filed by the said seller were rejected by the revenue authorities, one fails to understand how the revenue authorities could proceed to levy tax, or impose penalty, on the petitioner in respect of the same turnover. The findings in the impugned orders reflect a patent non-application of mind by the authority concerned and also smack of arbitrariness. - Demand and penalty set aside.

Issues Involved:
1. Whether the petitioners were liable to register as dealers under the KVAT Act.
2. Whether the petitioners were liable to file returns and maintain true and correct accounts under the KVAT Act.
3. Whether the transactions in question were local sales or inter-state sales.
4. Legality of the penalty orders imposed on the petitioners under Section 67 of the KVAT Act.

Issue-wise Analysis:

1. Liability to Register as Dealers under the KVAT Act:
The petitioners contended that they were not engaged in the business of sale or purchase of goods but merely facilitated transactions through their online portals. The petitioner in W.P.(C).No.5348/2015 argued that it was not a dealer under the KVAT Act as it did not own any premises in Kerala where sellers stored or stocked their products. The petitioner in W.P.(C).No.6916/2015, who engaged in the business of sale and purchase through an online portal, was a registered dealer under the Karnataka Value Added Tax Act and paid taxes accordingly. The court found that the notices issued to the petitioners did not provide reasons for considering them as dealers under the KVAT Act, leading to a conclusion that the authorities had pre-determined the petitioners' guilt.

2. Liability to File Returns and Maintain True and Correct Accounts:
The petitioners argued that they were not liable to file returns or maintain accounts under the KVAT Act as they were not dealers. The court observed that the notices and penalty orders did not provide specific findings or reasons to support the claim that the petitioners were required to file returns and maintain accounts under the KVAT Act. The court emphasized that show-cause notices must not pre-determine the guilt of an assessee and must provide an opportunity for the assessee to rebut the allegations.

3. Nature of Transactions - Local Sales or Inter-state Sales:
The petitioners contended that the transactions were inter-state sales, as the goods moved from outside Kerala to customers within Kerala. The court noted that the impugned orders did not provide specific findings on whether the sales were effected by the petitioners or by sellers registered on their portals. The court highlighted that the situs of a sale is irrelevant in determining whether a sale is inter-state. The court also pointed out that WS Retail, responsible for most sales, was registered under the KVAT Act and had declared nil taxable turnover, indicating inter-state sales.

4. Legality of Penalty Orders under Section 67 of the KVAT Act:
The court found that the penalty orders were based on pre-determined conclusions and lacked specific findings supported by reasons. The orders were more or less verbatim reproductions of the notices, indicating non-application of mind and arbitrariness. The court emphasized that penalty proceedings should be based on clear evidence of suppression or omission and should not involve estimation of turnover, which is within the realm of assessment proceedings. The court quashed the penalty orders, demand notices, and show-cause notices issued to the petitioners.

Conclusion:
The court allowed both writ petitions, quashing the penalty orders, demand notices, and show-cause notices. The court reminded the revenue authorities to ascertain whether entities come under the coverage of the KVAT Act before invoking penal provisions and to follow the proper procedure for determining tax liability. The court stressed the importance of fairness, reasonableness, and adherence to natural justice in tax administration.

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