No liability on Flipkart under KVAT as no clear finding to held sale as Interstate sale which already taxed under CST Act: HC

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Citation of the Case: 

Flipkart Internet (P.) Ltd. vs. State of Kerala (Kerala High Court), Writ Petition (c) nos.5348 & 6916 of 2015, 

Date of Judgment: 13/10/2015

Brief of the Case

Kerala High Court held In the case of Flipkart Internet (P.) Ltd. vs. State of Kerala that It is well settled that show cause notices issued by statutory authorities particularly in case of imposition of penalty on an assessee, cannot pre-determine the guilt of an assessee. The notices issued cannot confront an assessee with definite conclusions as regards the commission of an offence by him as; otherwise, it would make a mockery of the process of quasi-judicial adjudication. Also there is nothing mention 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.

Also WS Retail, the seller responsible for effecting majority of the sales to customers in Kerala, through the online portal , is registered as a dealer under the KVAT Act and, they have filed NIL taxable turnover under the KVAT Act, on the contention that their entire sales turnover pertained to inter-state sales effected by them. No rejection of such returns was made by the authorities. Held that there is no reason left to initiate penalty proceedings to tax the turnover twice which have already taxed under CST provisions.

Facts of the Case

Writ Petition (c) no.5348

The assessee is an online service provider, registered under the Finance Act, 1994 i.e. service tax. In this case the assessee is aggrieved by orders of penalty that have been passed against it by the authorities under the Kerala value Added Tax Act (KVAT Act). The said orders have been passed under section 67 of the KVAT Act on the finding that the petitioner has breached the provisions of sections 20 and 40 of the KVAT Act as he is not getting itself registered as a dealer under the KVAT Act and further, not filing returns and maintaining true and correct accounts as mandated under the said Act.

Writ Petition (c) no.6916

The assessee is a person who actually engages in the business of sale and purchase through an online portal – myntra.com. The assessee, however, maintains that during the relevant period, it was a registered dealer under the KVAT and was paying tax in respect of the local sales and inter-state sales effected from its business premises in the state of Karnataka. It was notice that as all the sales effected to its customers in Kerala are local sales and it is on the said premise that notice of penalty was issued under the penal provisions of the KVAT Act and Rules.

Contention of the Assessee

The ld counsel of the assessee submitted following arguments:

• The petitioner had nothing to do, whatsoever, with the transactions of sale and purchase that took place over its online portal. The petitioner was not, therefore, a dealer for the purposes of the KVAT Act. When the customer in Kerala chose a product on its portal, the product was invoiced. to the said customer by WS Retail, or some other seller that was registered on its portal, and the said seller subsequently raised an invoice on the customer and paid the applicable tax, under the CST Act, in the State where it had its place of business, and from where the movement of the goods originated for delivery to the customer in Kerala.
• Although there was a transaction of sale involved, the said sale was an inter-state sale effected by a seller located outside the State to a buyer located within the state of Kerala. The sale occasioned a movement of goods from outside the state to the customer within the state of Kerala and was therefore an inter-state sale on which tax was payable in the state where the movement of the goods originated.
• The online portal could not be seen as premises within Kerala because the petitioner did not own any premises in Kerala where the sellers stored or stocked their products. The analogy that was sought to be drawn by the authorities with reference to Section 16 (13) was therefore wholly misplaced.
• As the petitioner is not a dealer for the purposes of the KVAT Act, there is no statutory obligation to file returns or maintain records or accounts and hence, the penal provisions under the Act could not have been invoked against the petitioner.

Contention of the Revenue

The ld counsel of the revenue submitted following arguments:

• Through the action of a customer in Kerala choosing a product of his choice on the onli.ne portal of the petitioners herein, an agreement for sale came into existence whereby the petitioners agreed to sell the product in question to the customer in Kerala for a consideration.
• The sale in question was a local sale insofar as the product was delivered to the customer in Kerala and from an online portal whose situs could be traced to Kerala. The contention of the petitioners that the sales in question were inter-state sales could not, therefore, be accepted.
• Even if the petitioner was not the seller of the product in question, the petitioner could nevertheless be held liable to tax in view of the provisions of Section L6 (13) of the KVAT Act, because the online portal could be seen as an intangible shop and the situs of the sale would be in Kerala where the agreement to sell was made.
• As the petitioners were liable to pay tax under the KVAT Act, and they had not complied with the provisions of Sub sections 20 and 40 of the KVAT by filing the necessary returns and maintaining true and correct accounts, they were liable to pay penalty quantified at twice the amount of tax that was payable.

Held by High Court

It is relevant to note that the proposal for imposition of penalty in both the cases was premised on the contention that the petitioners had occasioned a breach of the provisions of Section 20 and Section 40 of the KVAT Act which deals with the filing of necessary returns and maintenance of true and correct accounts.

Legality of the penalty order

It is clear from the notice of penalty 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 notice does not, however, spell out how the said figure could be taken as representing the sales turnover of the petitioner, or how the said sales could be seen as intra-state sales for the purposes of the KVAT Act. The tenor of the notices issued to the petitioner gives ample indication that the authority had, more or less, made up his mind to impose a penalty on the petitioner.

It is by now well settled that show cause notices issued by statutory authorities, more so when they propose the imposition of penalty on an assessee, cannot pre-determine the guilt of an assessee. The notices issued cannot confront an assessee with definite conclusions as regards the commission of an offence by him as, otherwise, it would make a mockery of the process of quasi-judicial adjudication. In Oryx Fisheries Private Ltd. vs. Union of India and Ors – [2010 (13 SCC 427)], the Supreme court held that a show cause notice that was served on the appellant in that case was one that confronted him with definite conclusions of his alleged guilt and in this case the entire proceedings initiated by the show-cause notice gets vitiated by unfairness and bias and the subsequent proceedings become an idle ceremony.

I find that in the impugned orders, the authority concerned does not enter a specific finding, supported by reasons, as to whether there was any sale effected by the petitioner at all. 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. Fur[her, 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.

As regards the finding in the impugned orders, that the situs of the virtual shop can be traced to Kerala on an analogy with the decision of the Karnataka High Court in Antrix Corporation Limited vs. Assistant Commissioner of Commercial Taxes and Ors – (2011) 19 KTR 182 (Kar.). The said finding is legally flawed because, it is well settled that the situs of a sale is wholly irrelevant to a determination of the issue of whether a sale is an inter-state sale or not.

This is important to note 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 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.

Writ Petition (c) no.6916

There is no material relied upon by the revenue to suggest that the petitioner had effected local sales in Kerala for which he was to register himself as a dealer under the KVAT Act and comply with the other provisions under the said Act that were applicable to dealers. Accordingly, on the same basis as per above mentioned appeal, this appeal is allowed.

Advisory to taxing authorities

Taking note of the growing tendency among Intelligence Officers under the KVAT Act to invoke penal proceedings against assessee without first having ascertained whether they would come under the coverage of the Act in respect of the activities carried on by them, it would be relevant to remind the authorities of the dictum laid down in a Division Bench judgment of this Court in U.K.Monu Timbers {M/s.} v. State of Kerala [2O12 (3) KHC 111. It was held in this case that “Section 67 does not confer power make to a reasonable estimate. The suppression or omission must be clearly disclosed from the materials available and there should be evidence of the amounts sought to be suppressed from the turnover. In cases where it is not discernible, the only option is to make an order of imposition of fine not exceeding Rs.10,000/. Any suppression detected or rather any file generated on a crime so detected and penalized necessarily gives the assessing authority to power to make estimations to compensate the state against – probable o*irrro”, and suppressions. Such exercise, as is maintained the Statute, has to be regulated by the best judgment of the individual officer, which definitely is subject to the principles of reasonableness, proportionality and of course natural justice. Such estimation on best judgment would definitely have to be done with due notice and after affording a personal hearing. Such estimation should be reasonable and should have a nexus with the gravity and frequency of the commission of offences as also the quantum of loss suffered by the state. This exercise, in our opinion, cannot be under taken by the officer empowered with me power to impose penalty under, Section 67 of the Act. Section 67 contemplates imposition of penalty on proof of commission of offences as a measure of deterrence; best judgment assessment are made to compensate the loss caused to the State.”

Accordingly, appeal of the assessee allowed.