2017 (8) TMI 299 - HC - VAT and Sales Tax

Sale of capital goods - car used as a demo car - exemption from tax - Section 6 (3) of the DVAT Act - Held that - It makes no distinction whether the main business of the Assessee is dealing in cars or some other business in order for goods purchased in the Assessee s own name and used for the purposes of the Assessee s business to be treated as capital goods. The Assessee being a dealer selling new cars, it is but natural that the Assessee purchases some cars in its own name for use as demo cars. Prospective customers might like to test drive or inspect‟ the demo car before making an informed choice of purchasing the new car. The fact that these cars are purchased by the Assessee in its own name clearly indicates that the Assessee intends to use these cars as demo cars and therefore, would be entitled to treat them as Assessee‟s capital goods. Such demo cars are used for the purchase of Assessee s business. It must be noticed at this stage that VATO gave no reasons whatsoever for denying the benefit of exemption except saying that the case of the Appellant cannot be accepted. It is only a conclusion without any reasons. The Department has expressed an apprehension that the Appellant may be dressing up regular sales transactions as sale of capital goods for avalining the benefit under Section 6 (3) of the DVAT Act. The denial of benefit of that provision cannot be based on mere apprehensions and suspicions. The fact remains that the Department has been unable to produce any credible material to show that in selling any of the demo cars in either 2009-10 or 2010-11, the Appellant was seeking to camouflage regular sale transactions as sale of capital goods in order to claim the benefit under Section 6 (3) of the DVAT Act. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Entitlement to VAT exemption under Section 6(3) of the DVAT Act for demo cars.
2. Classification of demo cars as 'capital goods' under Section 2(f) of the DVAT Act.
3. Compliance with conditions for exemption under Section 6(3) of the DVAT Act.
4. Impact of non-disclosure in tax returns on exemption eligibility.
5. Validity of the orders passed by the Objection Hearing Authority (OHA) and Appellate Tribunal (AT).

Issue-wise Detailed Analysis:

1. Entitlement to VAT exemption under Section 6(3) of the DVAT Act for demo cars:
The core issue was whether the Appellant was entitled to claim VAT exemption for demo cars under Section 6(3) of the DVAT Act. The Tribunal had dismissed the appeal, holding that the demo cars used by the Appellant were not exclusively for non-taxable sales and thus did not qualify for exemption. The High Court, however, found that the demo cars were used for business purposes and met the conditions for exemption under Section 6(3).

2. Classification of demo cars as 'capital goods' under Section 2(f) of the DVAT Act:
The Appellant argued that demo cars should be classified as 'capital goods' under Section 2(f) of the DVAT Act, which includes plant, machinery, and equipment used directly or indirectly in the business. The High Court agreed, noting that the cars were used for business purposes (as demo cars) and thus qualified as capital goods. This classification was crucial for determining eligibility for VAT exemption.

3. Compliance with conditions for exemption under Section 6(3) of the DVAT Act:
The High Court examined whether the Appellant met the four conditions for exemption under Section 6(3):
- Sale of capital goods.
- Use of capital goods from purchase till sale.
- Use of capital goods for taxable or mixed sales, not exclusively for non-taxable sales.
- No claim of input tax credit (ITC) on the capital goods.
The Court found that the Appellant satisfied all these conditions. The demo cars were used for business purposes, not exclusively for non-taxable sales, and no ITC was claimed at the time of purchase.

4. Impact of non-disclosure in tax returns on exemption eligibility:
The Department argued that the Appellant's failure to disclose capital goods in the tax returns should disqualify it from exemption. The High Court dismissed this argument, stating that the non-disclosure did not affect the taxable turnover or the eligibility for exemption under Section 6(3). The Court emphasized that the returns' disclosure did not alter the substantive compliance with the conditions for exemption.

5. Validity of the orders passed by the Objection Hearing Authority (OHA) and Appellate Tribunal (AT):
The High Court found the orders of the OHA and AT unsustainable in law. The OHA and AT had denied the exemption without providing adequate reasons, relying on mere conclusions and apprehensions. The High Court set aside these orders, highlighting the lack of credible evidence from the Department to show any misuse of the exemption provision by the Appellant.

Conclusion:
The High Court allowed the appeal, holding that the Appellant was entitled to VAT exemption for demo cars under Section 6(3) of the DVAT Act. The Court found that the demo cars qualified as capital goods, the Appellant met all conditions for exemption, and the non-disclosure in tax returns did not affect the eligibility. The orders of the OHA and AT were set aside, and the appeal was allowed with no orders as to costs.