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NEWS ROUND UP 

BILL FOR GST ROLLOUT UNLIKELY IN BUDGET SESSION 

The constitutional amendment Bill to facilitate rollout of Goods and Services Tax 

(GST) is unlikely to be introduced in the upcoming Budget Session of Parliament. 

“It is most likely that we will take another seven-eight months for building consensus,” 

official sources said. This is a clear pointer that a full-fledged GST rollout will not happen 

from April 1, which was the target date. India is looking to introduce a dual GST system- 

Central and State. A constitutional amendment is required as the Centre wants to levy 

Central GST up to the retail stage. Currently, Cenvat duty is levied only at the point of 

manufacture for most items - THE HINDU BUSINESS LINE, NEW DELHI, JANUARY 10, 2010. 

NEW DATE FOR GST ROLLOUT LIKELY BY MONTH END 

The rollout of the proposed Goods and Services Tax (GST) is set to be delayed further 

with the Centre and the States still undecided over the tax rates as well as the 

compensation for Central Sales Tax (CST). A fresh date for introduction of GST and its 

final structure and rates is now expected to be announced later this month when the 

Empowered Committee (EC) of State Finance Ministers holds fresh discussions with 

Finance Minister, Pranab Mukherjee - THE FINANCIAL EXPRESS, NEW DELHI, JANUARY 

9, 2010. 

LOWER VAT/GST ON PROCESSED FOOD, SAYS SAHAI 

Food Processing Minister, Subodh Kant Sahai on 8-1-2010 said value-added tax rates 

or goods and services tax rates (when it will be in place) on processed food should 

be between zero and 4%. Speaking at the North-East Summit organized by the Indian 

Chamber of Commerce, he said that if processed food were taxed at higher rates, then 

the Food Processing Industry would not be viable for investors. Once the production 

level of processed food increases to 50% from the present level of 10%, tax rates could 

then be increased. Sahai said that the Ministry had set an investment target of Rs. 1 lakh 

crore in the food processing sector by 2015 - THE ECONOMIC TIMES, NEW DELHI, 

JANUARY 9, 2010. 

CENTRAL SALES TAX MAY CONTINUE FOR NON-GST ITEMS 

The Central Sales Tax (CST) levy is likely to continue for non-GST items even after 

the introduction of the Goods and Services Tax (GST) system in the country. As an 

origin-based tax, India Inc is keen that CST be abolished at the earliest, especially when 

a destination-based Value Added Tax (VAT) regime is in place. Earlier, the Government 

had indicated that CST will be abolished along with the introduction of GST. The CST 

rate was last reduced to 2 per cent in June, 2008. It is likely that the CST levy will continue 

for non-GST items, official sources said. This implies that CST may go only for those 

items that will come under the proposed GST system. The Centre and the States have 

agreed that crude, ATF, motor spirit and high speed diesel will continue to be outside 

GST net - THE HINDU BUSINESS LINE, NEW DELHI, JANUARY 20, 2010. 

GOODS & SERVICES TAX CASES ❑ JANUARY 20 - FEBRUARY 4, 2010 ◆ 1

ii NEWS ROUND UP 

CENTRE, STATES WEIGH NEW GST PANEL 

The centre and states are mulling setting up a special penal, headed by the Finance 

Minister and State Finance Ministers as its members, that will decide on any 

changes in the proposed goods and service tax rate or giving exemptions in proposed 

new indirect tax regime. “There is a view that a committee be formed to clear any 

deviation in the tax rates or exemption list from the agreed rate system”, S. Dutt 

Majumdar, Member, Central Board of Excise and Customs, said at seminar on GST 

organised by the American Chamber of Commerce. However, he said final decision was 

yet to be taken. The current value added tax regime is fraught with deviation in rates 

despite all States agreeing to keep deviation in rates at 1 per cent of the total items. 

Deviation in rates negatively impact revenues of states as also trade and industry. The 

GST, is a consumption tax that seeks to replace all indirect taxes both at central and State 

level such as excise duty, service tax, countervailing duty and special additional duty on 

customs, value added tax, luxury tax, entertainment tax, entry tax, taxes on lottery and 

gambling as also all cesses and surcharges - THE ECONOMIC TIMES, NEW DELHI, 

JANUARY 19, 2010. 

12 PER CENT SERVICE TAX LIKELY TO RETURN 

The Government may take the first step towards fiscal consolidation in Budget 2010- 

11 by partially rolling back tax cuts given to the industry last year. The service tax 

rate may be restored to 12 per cent, while excise duty could be increased marginally. The 

Finance Ministry is considering a phased exit of the stimulus measures as the economy 

posted a robust 7.9 per cent growth in July-August quarter of 2009-10. To begin with, it 

wants to withdraw measures that are not likely to impact the industry significantly, such 

as the 2 per cent service tax cut. In the case of excise duty, the increase may not be 

equivalent to 6 per cent reduction that the industry got from the Government as part of 

the stimulus measures. The Budget changes would also be used as an opportunity to 

rationalise indirect taxes ahead of introduction of the Goods and Services Tax (GST) - 

BUSINESS STANDARD, NEW DELHI, JANUARY 19, 2010. 

�� 


COntents 

STATUTES 

❑ Comments of the Department of Revenue (DOR) on the First Discussion Paper on 

GST 129 

MAGAZINE 

❑ Goods and services tax - The scenario in some other countries//T.N. Pandey 113 

❑ Constitutional amendment - A prerequisite for GST//Geeta Das 122 

❑ GST-2010 - The single rate GST Structure - Is it viable?//Sudhir Halakhandi 126 

❑ An analysis on prospects of implementation of Goods and Services Tax in India// 

Vivek Kohli, Ashwani Sharma and Sudeep Vijayan 129 

❑ What is GST?//Pritam Mahure 135 

REPORTS 

TABLE OF CASES 

Cheerans Auto Agencies v. State of Kerala (Ker.) 217 

Commissioner of Sales Tax, Uttar Pradesh, Lucknow v. Ashish Automobiles (All.) 240 

Commissioner, Trade Tax, Lucknow v. K.S. Trading Co. (All.) 193 

Commissioner, Trade Tax, U.P. v. Ramco Coke Industries (All.) 196 

Commissioner, Trade Tax, U.P., Lucknow v. Alok Trading Co. (All.) 253 

G.D. Pharma v. Commissioner, Trade Tax, U.P. (All.) 255 

Krilax Impex Private Ltd. v. Commissioner of Commercial Taxes (Ker.) 247 

Maruthi Estate v. Appellate Dy. Commissioner of Commercial Taxes (Mad.) 235 

New Model Industries (P.) Ltd. v. State of Punjab (Punj. & Har.) 222 

Rajesh Electricals v. Registrar (MP) 244 

Sasi Road Finishers & Engineering Contractors v. State of Kerala (Ker.) 242 

Shanthi Poultry Farm (P.) Ltd. v. Commercial Tax Inspector (Ker.) 182 

Skyline Constructions & Housing (P.) Ltd. v. Authority for Clarification and Advance 

Rulings, Bangalore (Kar.) 173 

State of Kerala v. Thrimathy Contracting Co. (Ker.) 205 

Tropical Flavours (P.) Ltd. v. State of Karnataka (Kar.) 210 

Vardhman Industries Ltd. v. State of Punjab (Punj. & Har.) 227 

Vysya Bank Ltd. v. Commissioner of Trade Tax, UP (All.) 257 


ii Contents 

SUBJECT INDEX 

APPEAL 

- PERIOD OF LIMITATION - In case of assessee, assessment order was passed on 27-10- 

2004 - Assessee’s case was that said order was served on it only on 18-11-2004 - 

Thereupon, assessee filed appeal on 17-1-2005 - Since there was delay of 27 days in 

filing appeal, an application for condonation of delay was filed - Said application was 

kept pending for around 3½ years and thereafter it was rejected on ground that 

assessment order was served on 27-10-2004 itself and, thus, there was a delay of 52 

days which was beyond condonable period - On instant petition, it was seen from 

records that in acknowledgement, dated 27-10-2004, name and designation of 

person receiving copy of assessment order were not available and, further said 

acknowledgement did not bear seal of assessee-company - It was also noticed that 

there was no endorsement by person who delivered notice of order as required by 

Explanation to rule 52(1) - Whether, in aforesaid circumstances, it could be concluded 

that order of assessment was served upon assessee only on 18-11-2004 - Held, 

yes - Whether, further, in view of fact that appeal papers were already pending before 

first respondent for more than 3½ years, it was to be held that it was a fit case where 

delay was to be condoned and matter was to be directed to be heard on merits - Held, 

yes [Section 31 of the Tamil Nadu General Sales-tax Act, 1959, read with Rule 52 of 

the Tamil Nadu General Sales-tax Rules, 1952] - Maruthi Estate v. Appellate Dy. 

Commissioner of Commercial Taxes (Mad.) 235 

CLASSIFICATION OF GOODS 

- CHILLIES - Assessee was engaged in extraction of chilly oleoresin from dry chillies - 

Whether cut chillies, spent chillies, crushed chillies and chilly seeds remaining after 

extraction of chilly oleoresin from dry chillies is a spice by itself, which can be sold 

and traded in common parlance - Held, yes - Whether, therefore, above goods would 

fall under entry No. 61 of Third Schedule to Act under definition of ‘dry chillies’ - Held, 

yes [Section 4 of the Karnataka Value Added Tax Act, 2003] - Tropical Flavours (P.) 

Ltd. v. State of Karnataka (Kar.) 210 

DEEMED SALE 

- Assessment year 2000-01 - Assessee entered into an agreement with a sugar mill for 

providing plant and machinery on rent - It claimed that since stamp paper for 

agreement was purchased from Delhi and agreement was also executed at Delhi on 

29-9-1995, right to use had been transferred at Delhi and, therefore, trade tax 

authorities of State of U.P. had no jurisdiction to levy tax on amount of rent received 

during previous year in pursuance of aforesaid agreement under section 3F - Lower 

authorities disallowed assessee’s claim - Whether in terms of definition of sale as 

indicated in section 2(h); notwithstanding agreement being executed at Delhi, since 

plant and machinery had been admittedly used within State of U.P., there was 

deemed sale in State of U.P. - Held, yes - Whether, therefore, trade tax authorities had 

jurisdiction to levy tax on amount of rent received under section 3F - Held, yes 

[Section 2(h), read with section 3F of the U.P. Trade Tax Act, 1948] - Vysya Bank Ltd. 

v. Commissioner of Trade Tax, UP (All.) 257 

INTER-STATE PURCHASE 

- CHARGE OF TAX - Assessment year 1998-99 - Assessee claimed to be a commission 

agent for inter-State purchase and sale of agricultural produce - Revenue authorities 

did not accept said claim because there was neither any written contract or 

appointment agreement between parties nor were there addresses of farmers - 


Contents iii 

However, in gate pass of Mandi Samiti, quantity of goods was mentioned - Assessee 

also maintained builty and dispatch numbers evidencing transport, wherein address 

of recipient was also available - Whether, in age of electronic era, no formal contract 

is required and a telephonic contract is sufficient and, therefore, on facts of instant 

case, it was to be held that assessee was a commission agent making purchases for 

ex-U.P. principals - Held, yes [Section 3 of the Uttar Pradesh Trade Tax Act, 1948] - 

Commissioner, Trade Tax, Lucknow v. K.S. Trading Co. (All.) 193 

MANUFACTURE 

- Assessment year 1989-90 - Assessee was engaged in business of manufacture and 

sale of hard coke - It claimed that manufactured hard coke was not liable to tax 

because it was manufactured out of tax paid coal and both coal and hard coke were 

same commodities - Hard coke was manufactured by assessee after processing of 

coal breeze and it was commercially known as a different commodity than coal/coal 

breeze - Whether since process involved in converting coal into hard coke was 

process of ‘manufacturing’ within ambit of section 2(ee), assessee was liable to pay 

tax on sale of hard coke being manufacturer of same - Held, yes [Section 2(e-1) read 

with section 2(ee) of U.P. Trade Tax Act, 1948] - Commissioner, Trade Tax, U.P. v. 

Ramco Coke Industries (All.) 196 

- Assessment year 1981-82 - Assessee carried on business of purchasing and selling of 

scooters, their parts, etc. - It had purchased chassis of scooters against Form 3A and 

later put body fabricated over it and sold same as tempo to customers - Assessing 

Officer opined that tempo was a different commodity liable to purchase tax under 

section 3AAAA - Whether mounting of body over chassis did not amount to 

manufacturing activity but it facilitated chassis for purpose of usable item and, thus, 

no different commercial item had emerged - Held, yes - Whether, consequently, 

impugned order passed by Assessing Officer was to be set aside - Held, yes [Section 

3AAAA of the U.P. Sales Tax Act, 1948] - Commissioner of Sales Tax, Uttar Pradesh, 

Lucknow v. Ashish Automobiles (All.) 240 

PENALTY 

- IN CASE OF NON-DISCLOSURE OF SALES TURNOVER OF OLD VEHICLES - Assessment 

years 2005-06 and 2006-07 - Assessee, a registered dealer, was engaged in sale of twowheelers 

- It conducted exchange mela wherein owners of old two-wheelers were 

provided with facility to exchange their old vehicles with new ones - As per terms of 

agreement, if value of old vehicle fixed by assessee’s broker was accepted by 

customer then he could purchase new vehicle from assessee by remitting balance 

sale price - Subsequently, broker sold old vehicles delivered by customers and 

remitted value earlier fixed to assessee with which entire price of new vehicles sold 

to customers, got paid - Even though old two wheelers were purchased from 

customers and resold later by assessee and broker, neither assessee nor broker 

conceded any purchase and sale of old vehicles - In view of non-payment of tax on 

sale of old vehicles, Intelligence Officer levied penalty under section 67 - Whether 

having regard to fact that purchase and sale of old vehicles were either by or on 

behalf of assessee, impugned penalty order passed by Intelligence Officer was to be 

confirmed - Held, yes [Section 67 of the Kerala Value Added Tax Act, 2003] - Cheerans 

Auto Agencies v. State of Kerala (Ker.) 217 

- Assessee was engaged in manufacturing and sale of iron and steel goods - It was 

entitled to tax exemption under Act for a period of seven years with effect from 

27-3-2000 to 26-3-2007 - Assessee sold certain goods to consignee ‘M’ vide invoice 

dated 26-3-2007 and earmarked for loading in truck which was reported at ICC 

center on 30-3-2007 - Required documents as envisaged under sub-section (2) of 


iv Contents 

section 51 were presented at ICC center, however, goods were detained by officerin-charge 

under sub-section (6)(a) of section 51 by doubting genuineness of transaction/documents 

as arrival and reporting of vehicles at ICC center had been after four 

days of date of invoice - It was, therefore, found that invoices were ante dated to 

evade tax - Matter was, thereafter, reported to designated officer, who after conducting 

an enquiry, held that there was an attempt to evade tax and, accordingly, 

exercising power under clause (b) of sub-section (7) of section 51 imposed penalty 

vide order dated 13-4-2007 - Whether since sale invoice/bills had been issued on 26- 

3-2007 and goods were earmarked and goods receipts were issued to vehicles for 

their onward transmission to consignee on same date, mere delayed movement of 

goods would not be sufficient to conclude that there was an attempt to evade 

payment of tax - Held, yes - Whether therefore, penalty levied on assessee was to be 

deleted - Held, yes [Section 51(7)(b) of the Punjab Value Added Tax Act, 2005] - 

Vardhman Industries Ltd. v. State of Punjab (Punj. & Har.) 227 

- FOR AN ATTEMPT OF EVASION OF TAX - Lower authorities levied penalty under 

section 47(6) upon assessee on ground that at time of transport of goods, which were 

machinery for road work, from Kerala to outside State, assessee did not have 

registration under Act - Whether since transaction did not involve any sale, no 

penalty could be levied upon assessee for attempted evasion of tax under section 

47(6) - Held, yes [Section 47(6) of the Kerala Value Added Tax Act, 2003] - Sasi Road 

Finishers & Engineering Contractors v. State of Kerala (Ker.) 242 

- IMPOSITION OF PENALTY IN CERTAIN CIRCUMSTANCES - Assessing Officer held that 

tax on sale of starters and switches was payable at rate of 12 per cent and not at rate 

of 3 per cent as paid by assessee - He, accordingly, held return filed by assessee to be 

a false return and directed recovery of tax at rate of 12 per cent and also imposed 

penalty upon assessee - Board held that tax on impugned sale was payable at rate of 

3 per cent - Whether once tax rate was held by Board to be 3 per cent, then return 

filed by assessee could not be held to be false, wrong or bad - Held, yes - Whether, 

therefore, penalty imposed upon assessee was liable to be set aside - Held, yes 

[Section 69 of the Madhya Pradesh Vanijyik Kar Adhiniyam, 1994] - Rajesh Electricals 

v. Registrar (MP) 244 

- IN CASE OF SUBMISSION OF FABRICATED ‘C’ FORMS - Assessee was engaged in 

business of importing and selling of toiletries and fancy items - It imported some 

goods through Cochin port and sold same with help of a consignee situated at 

Mangalore - In course of assessment, assessee was directed to produce ‘C’ forms in 

support of aforesaid sale - Assessee produced original ‘C’ forms as required by 

departmental authorities - It was seen from records that consignee from whom 

assessee had allegedly obtained ‘C’ forms was not a registered dealer at all and that 

department had not issued any ‘C’ forms to said party - Whether since assessee 

produced bogus and fabricated ‘C’ forms with intent to avail concessional rate of tax, 

it was liable to pay penalty - Held, yes [Section 45A of the Kerala General Sales Tax 

Act, 1963] - Krilax Impex Private Ltd. v. Commissioner of Commercial Taxes (Ker.) 

247 

- FOR FAILURE TO FURNISH RETURN OR TO DEPOSIT TAX DUE - Assessment year 2000- 

01 - Assessee had not disclosed amount of rent arising on leasehold plant and 

machinery in return of fourth quarter ending on 31-3-2001 on ground that rent was 

not received by it and, accordingly, did not pay due tax also - Assessing authority, for 

such default, levied penalty under section 15A(1)(a) upon assessee and appellate 

authorities confirmed penalty order - Whether merely because rent had not been 

received, assessee could not be absolved from liability to disclose such rent in return 

- Held, yes - Whether, therefore, levy of penalty upon assessee was justified - Held, yes 


Contents v 

[Section 15A of the U.P. Trade Tax Act, 1948] - Vysya Bank Ltd. v. Commissioner of 

Trade Tax, UP (All.) 257 

REGISTRATION 

- Period 3-8-2000 to 3-9-2000 - Petitioner was a registered dealer dealing in live 

chicken, hatching chicks, equipments, poultry feeds and poultry medicines, etc. - Dy. 

Commissioner found that bank instruments furnished by dealer towards advance 

tax between period from 3-8-2000 to 3-9-2000 worth Rs. 50,000, had been dishonoured 

for insufficiency of funds in bank account - On basis of said report Commissioner of 

Commercial Taxes, held that tendering of invalid bank instruments and dishonouring 

of same when presented for encashment was a ‘good and sufficient reason’ 

provided under section 16(10), for cancelling registration - It further held that 

instruments tendered by dealer were accepted by officials of check post, on 

presumption that, those were ‘Pay orders’ issued by bank, and description of 

signature in instruments was printed in order to mislead check post authorities that 

those were ‘Pay orders’, but, in fact those instruments were cheques issued by 

‘Farmers Development Society’ in favour of Commercial Tax Inspector; therefore, 

nature of offence committed by dealer was grave and was liable to be dealt with 

under provisions of section 16(10), read with rule 17(18)(vii) and, accordingly, he 

cancelled registration of petitioner - It was found from records that (i) no action as 

enumerated in rule 28 which provided for specific procedure with respect to 

dishonour of cheques, was resorted to in instant case, (ii) before taking any action on 

basis of abovesaid allegations, principles of natural justice demanded that dealers 

should be put on with specific notices raising such allegations and they should be 

given adequate opportunity to defend such allegations, however, proposed notices 

issued in instant case did not reveal any such instances or did not contain any of 

narrations of fraud committed by petition - Whether in view of above said facts, 

Commissioner of Commercial Taxes was not justified in cancelling registration of 

petitioner - Held, yes [Section 16 of the Kerala Value Added Tax Act, 2003, read with 

rule 17 and rule 28 of the Kerala Value Added Tax Rules, 2005] - Shanthi Poultry 

Farm (P.) Ltd. v. Commercial Tax Inspector (Ker.) 182 

SALE 

- Assessment year 1993-94 - Whether manufacturing of bus bodies on chassis as per 

design, specifications and seating capacity supplied by customers, amounted to sale 

of motor vehicle bodies, and is liable to tax under provisions of Act - Held, yes [Section 

68 of Punjab Value Added Tax Act, 2005] - New Model Industries (P.) Ltd. v. State of 

Punjab (Punj. & Har.) 222 

- Assessee, trading company, provided tankers to Indian Oil Corporation - Tribunal 

found that it was for oil company to use or not to use tankers and assessee was having 

no control over movement of tankers - Whether since transfer of right of property 

is not transfer of property, no tax was leviable on assessee - Held, yes [Section 2(h), 

read with section 3 of the Uttar Pradesh Trade Tax Act, 1948] - Commissioner, Trade 

Tax, U.P., Lucknow v. Alok Trading Co. (All.) 253 

- Assessee-agency wanted to terminate agency and, hence, returned old goods to 

principal-medicine manufacturer - Manufacturer received old stock of medicines 

which might have expired by time of return - Whether return of old goods, unfit for 

sale, to principal by agent cannot be considered as sale and, hence, tax could not be 

levied on same - Held, yes [Section 2(h), read with section 3 of the U.P. Trade Tax Act, 

1948] - G.D. Pharma v. Commissioner, Trade Tax, U.P. (All.) 255 


vi Contents 

WORKS CONTRACT 

- TAXABILITY OF - Whether once a work is assigned by contractor to its sub-contractor, 

contractor ceases to execute work because property passes by accretion and there 

is no property in goods left with contractor which is capable of retransfer either as 

goods or in any other form - Held, yes - Whether, therefore, transfer of property is 

from sub-contractor to contracting party that is contractee, namely, recipient - Held, 

yes - Whether, in such a situation, payments made by contractor to sub-contractors 

cannot be brought within total turnover of contractor as such an interpretation 

would lead to double taxation - Held, yes [Section 4 of the Karnataka Value Added 

Tax Act, 2003] - Skyline Constructions & Housing (P.) Ltd. v. Authority for Clarification 

and Advance Rulings, Bangalore (Kar.) 173 

- PAYMENT OF TAX AT COMPOUNDED RATES - Assessee-firm was awarded work for 

marking of National Highway with hot white and yellow thermoplastic road marking 

paint - Assessee claimed that work for paint marking constituted civil works within 

meaning of section 7(7) entitling it for payment of tax at compounded rate of 2 per 

cent - Whether since under section 7(7), payment of tax at compounded rate of 2 per 

cent is provided only if work awarded is a civil work, which includes construction 

also, and further since marking of road is not a part of construction of road and it is 

a post-construction work done for safe vehicular movement and purpose is to guide 

drivers and pedestrians using road, work for marking of roads with paint did not 

constitute civil work within meaning of section 7(7) - Held, yes - Whether, therefore, 

assessee was not entitled for payment of tax at compounded rate of 2 per cent - Held, 

yes [Section 7 of the Kerala General Sales Tax Act, 1963] - State of Kerala v. 

Thrimathy Contracting Co. (Ker.) 205 

SECTION-WISE INDEX 

KARNATAKA VALUE ADDED TAX ACT, 2003 

- Section 4 173, 210 

KERALA GENERAL SALES TAX ACT, 1963 

- Section 7 205 

- Section 45A 247 

KERALA VALUE ADDED TAX ACT, 2003 


- Section 47(6) 243 


MADHYA PRADESH VANIJYIK KAR ADHINIYAM, 1994 


PUNJAB VALUE ADDED TAX ACT, 2005 

- Section 51(7)(b) 227 


TAMIL NADU GENERAL SALES-TAX ACT, 1959 



UTTAR PRADESH SALES TAX ACT, 1948 

- Section 3AAAA 240 

UTTAR PRADESH TRADE TAX ACT, 1948 

- Section 2(e-1) 197 

- Section 2(h) 253, 255, 258 


- Section 15A 258 

Contents vii 

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MODE OF CITATION [2010] 1 GST. . . (. . .) 

TOTAL PAGES INCLUDING COVER 140 


2010] Comments of DoR on First Discussion Paper on GST 129 

COMMENTS OF THE 

DEPARTMENT OF REVENUE (DoR) 

ON 

THE FIRST DISCUSSION PAPER ON GST 

Sr. Para No. Issues Comments of the 

No. of the DoR 

Discussion 

Paper 

1 2 3 4 

1. 3.1 It is important to take note of the significant 

administrative issues involved in designing an 

effective GST model in a federal system with 

the objective of having an overall harmonious 

structure of rates. Together with this, there is 

a need for upholding the powers of Central 

and State Governments in their taxation matters. 

Further, there is also the need to propose 

a model that would be easily implementable, 

while being generally acceptable to stakeholders. 

Agreed. 

2. 3.2 Keeping in view the report of the Joint Working 

Group on Goods and Services Tax, the 

views received from the States and Government 

of India, a dual GST with defined functions 

and responsibilities of the Centre and 

the States is recommended. An appropriate 

mechanism that will be binding on both the 

Centre and the States should be worked out 

whereby the harmonious rate structure along 

with the need for further modification could 

be upheld, if necessary with a collectively 

agreed Constitutional Amendment. 

3. 3.2(i) The GST shall have two components: one 

levied by the Centre (hereinafter referred to 

as Central GST), and the other levied by the 

States [hereinafter referred to as State GST]. 

Rates for Central GST and State GST should 

be prescribed appropriately, reflecting revenue 

considerations and acceptability. This 

dual GST model would be implemented 

through multiple statutes (one for CGST and 

a SGST statute for every State). However, the 

basic features of law such as chargeability, 

definition of taxable event and taxable person, 

measure of levy including valuation provisions, 

basis of classification etc. should be 

uniform across these statutes as far as practicable. 

Dual GST model with 

appropriate binding 

mechanism to 

harmonise the various 

important aspects 

of the GST like 

rate structure, taxation 

base, exemption 

etc. between Centre 

and States is agreed. 

Agreed. In addition, 

IGST on inter-State 

transactions should 

be levied by the Centre. 

SGST on imports 

should also be levied 

and collected by the 

Centre. Centre should 

pass on SGST collection 

on imports to 

concerned States on 

the destination principle. 


130 Goods & Services Tax - Statutes [Vol. 1 

1 2 3 4 

4. 3.2(ii) The Central GST and the State GST should be 

applicable to all transactions of goods and 

services made for a consideration except the 

exempted goods and services, goods are outside 

the purview of GST and the transactions 

which are below the prescribed threshold 

limits. 

5. 3.2(iii) The Central GST and State GST are to be paid 

to the accounts of the Centre and the States 

separately. It would have to be ensured that 

account-heads for all services and goods would 

have indication whether it relates to Central 

GST or State GST (with identification of the 

State to whom the tax is to be credited). 

6. 3.2(iv) Since the Central GST and State GST are to be 

treated separately, taxes paid against the Central 

GST shall be allowed to be taken as input 

tax credit (ITC) for the Central GST and could 

be utilized only against the payment of Central 

GST. The same principle will be applicable 

for the State GST. A taxpayer or exporter 

would have to maintain separate details 

in books of account for utilization or 

refund of credit. Further, the rules for taking 

and utilization of Credit for the Central GST 

and the State GST would be aligned. 

7. 3.2(v) Cross utilization of ITC between the Central 

GST and the State GST should not be allowed 

except in the case of inter-State supply of 

goods and services under the IGST model 

which is explained later. 

8. 3.2(vi) Ideally, the problem related to credit accumulation 

on account of refund of GST should be 

avoided both by the Centre and the States 

except in the cases such as of exports, purchase 

of capital goods, input tax at higher rate 

than output tax etc. where, again refund/ 

adjustment should be completed in a time 

bound manner. 

9. 3.2(vii) To the extent feasible, uniform procedure for 

collection of both Central GST and State GST 

may be prescribed in the respective legislation 

for Central GST and State GST. 

10. 3.2(viii) The administration of the Central GST to the 

Centre and for State GST to the States would 

be given. This would imply that the Centre 

and the States would have concurrent jurisdiction 

for the entire value chain and for all 

GOODS & SERVICES TAX CASES ❑ JANUARY 20 - FEBRUARY 4, 2010 ◆ 12 

Agreed. There should 

be a common base 

for taxation between 

Centre and States. 

Agreed. In addition, 

IGST should be paid 

to the accounts of the 

Centre. 

Agreed. 

Agreed. 

Agreed. 

Agreed. 

Agreed. The threshold 

for goods and services 

should be common 

between Centre 

and State on one


1 2 3 4 

taxpayers on the basis of thresholds for goods 

and services prescribed for the States and the 

Centre. 

11. 3.2(ix) The present thresholds prescribed in different 

State VAT Acts below which VAT is not 

applicable varies from State to State. A uniform 

State GST threshold across States is 

desirable and, therefore, it is recommended 

that a threshold of gross annual turnover of 

Rs.10 lakh both for goods and services for all 

the States and Union Territories may be 

adopted with adequate compensation for the 

States (particularly, the States in North-Eastern 

Region and Special Category States) where 

lower threshold had prevailed in the VAT 

regime. Keeping in view the interest of small 

traders and small scale industries and to avoid 

dual control, the States also considered that 

the threshold for Central GST for goods may 

be kept Rs.1.5 crore and the threshold for 

Central GST for services may also be appropriately 

high. It may be mentioned that even 

now there is a separate threshold of services 

(Rs. 10 lakh) and goods (Rs. 1.5 crore) in the 

Service Tax and CENVAT. 

hand and between 

goods and services on 

the other. 

There should be a 

uniform threshold 

for goods and services 

for both SGST 

and CGST. This annual 

turnover threshold 

could be Rs.10 

lakh or even more 

than that. The threshold 

exemption should 

not apply to dealers 

and service providers 

who undertake inter- 

State supplies. The 

problem of dual control 

is better addressed 

through a compounding 

scheme 

as well as administrative 

simplification 

for small dealers 

through measures 

such as : 

� Registration by 

single agency for 

both SGST and 

CGST without 

manual interface 

� No physical verification 

of premises 

and no predeposit 

of security 

� Simplified return 

format 

� Longer frequency 

for return filing 

� Electronic Return 

filing through certified 

service centres/CAs 

etc. 

� Audit in 1-2% 

cases based on 

risk parameters 

� Lenient penal provisions 



1 2 3 4 

12. 3.2(x) The States are also of the view that Composition/Compounding 

Scheme for the purpose 

of GST should have an upper ceiling on gross 

annual turnover and a floor tax rate with 

respect to gross annual turnover. In particular 

there will be a compounding cut-off at 

Rs.50 lakh of gross annual turnover and a 

floor rate of 0.5% across the States. The scheme 

should also allow option for GST registration 

for dealers with turnover below the compounding 

cut-off. 

13. 3.2(xi) The taxpayer would need to submit periodical 

returns, in common format as far as possible, 

to both the Central GST authority and to 

the concerned State GST authorities. 

14. 3.2(xii) Each taxpayer would be allotted a PAN-linked 

taxpayer identification number with a total of 

13/15 digits. This would bring the GST PANlinked 

system in line with the prevailing PANbased 

system for income-tax facilitating data 

exchange and taxpayer compliance. 

15. 3.2(xiii) Keeping in mind the need of taxpayers convenience, 

functions such as assessment, enforcement, 

scrutiny and audit would be undertaken 

by the authority which is collecting the 


There may not be any 

need to have direct 

link between 

compensation package, 

if decided for, 

and the threshold for 

registration for 

North-Eastern and 

special category 

States. 

Agreed. Centre may 

also have a Composition 

Scheme up to 

gross turnover limit 

of Rs. 50 lakh, if 

threshold for registration 

is kept as 

Rs.10 lakh. The floor 

rate of 0.5% will be 

for SGST alone, in 

case Centre also 

brings a Composition 

Scheme for small 

assessees. The Centre 

may consider leaving 

the administration 

of Compounding 

Scheme, both for 

CGST and SGST to 

the States. 

In addition, taxpayers 

having inter-State 

transactions will require 

submission of 

returns to related 

Central IGST authority. 


uniform registration 

system throughout 

the country and this 

registration system 

should enable easy 

linkage with incometax 

database through 

use of PAN. 

Since the tax base is 

to be identical for the 

two components, viz., 

CGST and SGST, it is


1 2 3 4 

tax, with information sharing between the 

Centre and the States. 

16. 3.4 On application of the principle, it is recommended 

that the following Central Taxes 

should be, to begin with, subsumed under the 

Goods and Services Tax : 

(i) Central Excise Duty 

(ii) Additional Excise Duties 

(iii) The Excise Duty levied under the Medicinal 

and Toiletries Preparation Act 

(iv) Service Tax 

(v) Additional customs duty, commonly 

known as countervailing duty (CVD) 

(vi) Special Additional Duty of Customs - 

4% (SAD) 

(vii) Surcharges, and 

(viii) Cesses. 

Following State taxes and levies should be, to 

begin with, subsumed under GST : 

(i) VAT/Sales tax. 

(ii) Entertainment tax (unless it is levied by 

the local bodies). 

(iii) Luxury tax. 

(iv) Taxes on lottery, betting and gambling. 

(v) State Cesses and Surcharges insofar 

as they relate to supply of goods and 

services. 

(vi) Entry tax not in lieu of octroi. 

Purchase tax : Some of the States felt that they 

are getting substantial revenue from Purchase 

Tax and, therefore, it should not be 

subsumed under GST while majority of the 

States were of the view that no such exemptions 

should be given. The difficulties of the 

food grain producing States and certain other 

desirable that any dispute 

between a taxpayer 

and either of 

the tax administrations 

is settled in a 

uniform manner. The 

possibility of setting 

up a harmonised system 

for scrutiny, audit 

and dispute settlement 

may be developed. 

Agreed. 

Electricity duty, 

Octroi, purchase tax 

and taxes levied by 

local bodies should 

also be subsumed 

under GST. 

Purchase tax is nothing 

but sales tax 

where the responsibility 

for collection of 

tax is with the purchaser 

(and not with 

the seller as in the 



1 2 3 4 

States were appreciated as substantial revenue 

is being earned by them from Purchase 

Tax and it was, therefore, felt that in case 

Purchase Tax has to be subsumed then adequate 

and continuing compensation has to 

be provided to such States. This issue is being 

discussed in consultation with the Government 

of India. 

Tax on items containing Alcohol : Alcoholic 

beverages may be kept out of the purview of 

GST. Sales Tax/VAT can be continued to be 

levied on alcoholic beverages as per the existing 

practice. In case it has been made Vatable 

by some States, there is no objection to that. 

Excise Duty, which is presently being levied 

by the States may not be also affected. 

Tax on Tobacco products : Tobacco products 

should be subjected to GST with ITC. Centre 

may be allowed to levy excise duty on tobacco 

products over and above GST without ITC. 

Tax on Petroleum Products : As far as petroleum 

products are concerned, it was decided 

that the basket of petroleum products, i.e., 

crude, motor spirit (including ATF) and HSD 

should be kept outside GST as is the prevail- 


case of sales tax). 

Keeping ‘purchase 

tax’ outside will give 

the loophole to the 

States to impose ‘purchase 

tax’ on any 

commodity (foodgrains, 

agricultural / 

forest produce, minerals, 

industrial inputs 

etc.) over and 

above GST. Hence, 

purchase tax must be 

subsumed. The compensation 

package, if 

agreed, need not have 

any link to any particular 

tax being subsumed. 

Alcoholic beverages 

should be brought 

under the purview of 

GST in order to remove 

the cascading 

effect on GST paid 

on inputs such as raw 

material and packaging 

material. Sales 

tax/VAT and State 

excise duty can be 

charged over and 

above GST. Similar 

dispensation should 

apply to opium, Indian 

hemp and other 

narcotic drugs and 

narcotics but medicines 

or toilet preparations 

containing 

these substances 

should attract only 

GST. 

Agreed. 

Keeping crude petroleum 

and natural gas 

out of the GST net 

would imply that the 

credit on capital


1 2 3 4 

ing practice in India. Sales Tax could continue 

to be levied by the States on these products 

with prevailing floor rate. Similarly, Centre 

could also continue its levies. A final view 

whether Natural Gas should be kept outside 

the GST will be taken after further deliberations. 

Taxation of Services : As indicated earlier, 

both the Centre and the States will have concurrent 

power to levy tax on all goods and 

services. In the case of States, the principle for 

taxation of intra-State and inter-State has 

already been formulated by the Working 

Group of Principal Secretaries/Secretaries of 

Finance/Taxation and Commissioners of 

Trade Taxes with senior representatives of 

Department of Revenue, Government of India. 

For inter-State transactions an innovative 

model of Integrated GST will be adopted 

by appropriately aligning and integrating 

CGST and SGST. 

goods and input services 

going into exploration 

and extraction 

would not be 

available resulting in 

cascading. Diesel, 

ATF and motor spirit 

are derived from a 

common input, viz., 

crude petroleum 

along with other refined 

products such 

as naphtha, lubricating 

oil base stock, etc. 

Leaving diesel, ATF 

and motor spirit out 

of the purview of GST 

would make it extremely 

difficult for 

refineries to apportion 

the credit on 

capital goods, input 

services and inputs. 

These products are 

principal inputs for 

many services such 

as aviation, road 

transport, railways, 

cab operators etc. As 

such, these may be 

levied to GST and in 

select cases credit of 

GST paid on these 

items may be disallowed 

in order to 

minimize the possibility 

of misuse. 

The sub-working 

group of the Empowered 

Committee in its 

report has suggested 

two options each for 

B to B and B to C 

transactions. A decision 

is required to be 

taken by the Empowered 

Committee with 

respect to the option 

to be adopted. Such a 

decision may be 

taken and communicated 

to DoR. 



1 2 3 4 

17. 3.5 Inter-State Transactions of goods & services : 

The Empowered Committee has accepted the 

recommendations of the Working Group of 

concerned officials of Central and State 

Governments for adoption of IGST model for 

taxation of inter-State transaction of Goods 

and Services. The scope of IGST Model is that 

Centre would levy IGST which would be CGST 

plus SGST on all inter-State transactions of 

taxable goods and services with appropriate 

provision for consignment or stock transfer 

of goods and services. The inter-State seller 

will pay IGST on value addition after adjusting 

available credit of IGST, CGST, and SGST 

on his purchases. The Exporting State will 

transfer to the Centre the credit of SGST used 

in payment of IGST. The Importing dealer will 

claim credit of IGST while discharging his 

output tax liability in his own State. The Centre 

will transfer to the importing State the 

credit of IGST used in payment of SGST. The 

relevant information is also submitted to the 

Central Agency which will act as a clearing 

house mechanism, verify the claims and inform 

the respective Governments to transfer 

the funds. 

The major advantages of IGST Model are : 

(a) Maintenance of uninterrupted ITC chain 

on inter-State transactions. 

(b) No upfront payment of tax or substantial 

blockage of funds for the inter-State seller 

or buyer. 

(c) No refund claim in exporting State, as 

ITC is used up while paying the tax. 

(d) Self monitoring model. 

(e) Level of computerization is limited to 

inter-State dealers and Central and State 

Governments should be able to computerize 

their processes expeditiously. 

(f) As all inter-State dealers will be e-registered 

and correspondence with them will 

be by e-mail, the compliance level will 

improve substantially. 

(g) Model can take ‘Business to Business’ as 

well as ‘Business to Consumer’ transactions 

into account. 

18. 3.6 GST Rate Structure : The Empowered Committee 

has decided to adopt a two-rate structure 

- a lower rate for necessary items and 


Agreed. It may however 

be noted that 

IGST model will work 

smoothly only when 

there is a common 

threshold for goods 

and services and for 

Centre and States. 

Having more than 

one rate either for 

CGST or SGST will 

complicate the working 

of IGST model. 


single rate of SGST 

both for goods and


1 2 3 4 

goods of basic importance and a standard 

rate for goods in general. There will also be a 

special rate for precious metals and a list of 

exempted items. For upholding of special needs 

of each State as well as a balanced approach 

to federal flexibility, and also for facilitating 

the introduction of GST, it is being discussed 

whether the exempted list under VAT regime 

including Goods of Local Importance may be 

retained in the exempted list under State GST 

in the initial years. It is also being discussed 

whether the Government of India may adopt, 

to begin with, a similar approach towards 

exempted list under the CGST. 

services. A two rate 

structure for goods 

would pose the following 

problems : 

(a) Likelihood of inversions 

in duty 

structure with 

raw materials and 

intermediates being 

at a higher rate 

and finished 

goods being at a 

lower rate, especially 

as the intention 

is to apply the 

lower rate to necessities. 

(b) Inversions would 

result in input 

credit accumulation 

and demand 

for refunding the 

same from time to 

time. 

(c) The general rate 

(RNR) would 

have to be higher 

than under a 

single rate structure. 

(d) Currently, services 

are chargeable 

to tax at a 

single rate. Adopting 

a dual rate for 

goods would generate 

a similar demand 

for services 

too. 

(e) Having different 

rates for goods 

and services 

would imply that 

the distinction between 

goods and 

services should 

continue. 

Around 99 items presently 

exempted under 

VAT may continue 

to remain exempted 

in GST regime. 

There should 



1 2 3 4 

The States are of the view that for CGST 

relating to goods, the Government of India 

may also have a two-rate structure, with conformity 

in the levels of rate under the SGST. 

For taxation of services, there may be a single 

rate for both CGST and SGST. 

The exact value of the SGST and CGST rates, 

including the rate for services, will be made 

known duly in course of appropriate legislative 

actions. 

19. 3.7 Zero Rating of Exports : Exports should be 

zero-rated. Similar benefits may be given to 

Special Economic Zones (SEZs). However, 

such benefits should only be allowed to the 

processing zones of the SEZs. No benefit to 

the sales from an SEZ to Domestic Tariff Area 

(DTA) will be allowed. 

20. 3.8 GST on Imports : The GST is proposed to be 

levied on imports with necessary Constitutional 

Amendments. Both CGST and SGST 

will be levied on import of goods and services 

into the country. The incidence of tax will 

follow the destination principle and the SGST 

amount will accrue to the State where the 

imported goods and services are consumed. 

Full and complete set-off will be available on 

the GST paid on import of goods and services. 


be no scope, with individual 

States, for 

expansion of this list 

even for goods of local 

importance. Efforts 

will be made by 

Centre to substantially 

reduce the 

number of items 

presently exempted 

under CENVAT regime. 

At the end, 

there must be a common 

list of exemptions 

for CGST and 

SGST. 

There should be one 

CGST rate both for 

goods as well as services. 

SGST and CGST 

rates are required to 

be put in public domain 

much before 

initiation of legislative 

action. 

Agreed. 

Levy of GST on imports 

may be handled 

by Centre through a 

Central legislation either 

as a customs 

duty (as is being done 

now) or along the 

lines of IGST. SGST 

collected by Centre 

may be passed on to 

concerned State following 

the destination 

principle. Taxation 

of import of services 

may be on the 

basis of reverse 

charge model, as is 

being done at present.


1 2 3 4 

21. 3.9 Special Industrial Area Scheme : After the 

introduction of GST, the tax exemptions, remissions 

etc. related to industrial incentives 

and special industrial area schemes should be 

converted, if at all needed, into cash refund or 

subsidy schemes after collection of tax, so 

that the GST scheme on the basis of a continuous 

chain of set-offs is not disturbed. Regarding 

Special Industrial Area Schemes, it is 

clarified that the benefits of such exemptions, 

remissions etc. would continue up to legitimate 

expiry time both for the Centre and the 

States. Any new exemption, remission etc. or 

continuation of earlier exemption, remission 

etc. would not be allowed. In such cases, the 

Central and the State Governments could 

provide reimbursement after collecting GST. 

22. 3.10 IT Infrastructure : After acceptance of IGST 

Model for Inter-State transactions, the major 

responsibilities of IT infrastructural requirement 

will be shared by the Central Government 

through the use of its own IT infrastructure 

facility. The issues of tying up the State 

Infrastructure facilities with the Central facilities 

as well as further improvement of the 

States’ own IT infrastructure, including 

TINXSYS, is now to be addressed expeditiously 

and in a time bound manner. 

23. 3.11 Constitutional amendments, legislations and 

rules for administration of CGST and SGST : 

It is essential to have Constitutional Amendments 

for empowering the States for levy of 

service tax, GST on imports and consequential 

issues as well as corresponding Central 

and State legislations with associated rules 

and procedures. With these specific tasks in 

view, a Joint Working Group has recently 

been constituted (September 30, 2009) 

comprising of the officials of the Central and 

State Governments to prepare, in a time bound 

manner a draft legislation for Constitutional 

Amendment, draft legislation for CGST, a 

suitable Model Legislation for SGST and rules 

and procedures for CGST and SGST. Simultaneous 

steps have also been initiated for drafting 

of a legislation for IGST and rules and 

procedures. As a part of this exercise, the 

Working Group may also address the issues 

of dispute resolution and advance ruling. 

Agreed. 

Agreed. 

The Joint Working 

Group (JWG) has 

held several meetings 

by now. Department 

of Revenue is closely 

working with Ministry 

of Law, Government 

of India, for 

finalisation of draft 

Constitutional amendment. 

The issue of 

empowering States 

to levy GST on imports 

has been deliberated 

by the JWG 

and the view which 

has emerged out of 

discussion is that the 

Centre shall collect 

GST on imports and 

pass on the SGST 

component of it to 

concerned State on 

destination principle. 



1 2 3 4 

24. 3.12 Harmonious structure of GST and the States’ 

autonomy in federal framework : As a part of 

the exercise on Constitutional Amendment, 

there would be, as mentioned earlier, in para 

3.2, a special attention to the formulation of a 

mechanism for upholding the need for a harmonious 

structure for GST along with the 

concern for the States’ autonomy in a federal 

structure. 

25. 3.13 Dispute Resolution & Advance Rulings : As a 

part of the exercise on drafting of legislation, 

rules and procedures for the administration 

of CGST and SGST, specific provisions will 

also be made to the issues of dispute resolution 

and advance ruling. 

26. 3.14 Need for compensation during implementation 

of GST : Despite the sincere attempts 

being made by the Empowered Committee on 

the determination of GST rate structure, revenue 

neutral rates, it is difficult to estimate 

accurately as to how much the States will gain 

from service taxes and how much they will 

lose on account of removal of cascading effect, 

payment of input tax credit and phasing 

out of CST. In view of this, it would be essential 

to provide adequately for compensation 

for loss that may emerge during the process 

of implementation of GST for the next five 

years. This issue may be comprehensively 

taken care of in the recommendations of the 

Thirteenth Finance Commission. The payment 

of this compensation will need to be ensured 

in terms of special grants to be released to the 

States duly in every month on the basis of 

neutrally monitored mechanism. 

27. 3.15 With this First Discussion Paper and the 

Annexure on frequently asked Questions and 

Answers on GST, interaction with the representatives 

of industry, trade and agriculture 

would begin immediately at the national level, 

and then also simultaneously at the State 

levels. Similarly awareness campaign for common 

consumers would also be initiated at the 

same time. As a part of the discussion and 

campaign the views of the industry, trade and 

agriculture as well as consumer may be sought 

to be obtained in a structured and time bound 

manner. 


Agreed in principle. 

The provisions related 

to dispute resolution, 

advance rulings 

and other business 

processes need 

to be harmonised between 

Centre and 

States. 

Empowered Committee 

has already referred 

the issue to the 

Thirteenth Finance 

Commission (TFC). 

TFC is likely to submit 

its report shortly. 

A view on the subject 

will be taken after 

more clarity on the 

subject is available. 

Empowered Committee 

may prepare a 

plan with clear timeliness 

for orientation 

of stakeholders so 

that required steps 

may be taken by all 

the States in time. 

��

2010] GST - THE SCENARIO IN SOME OTHER COUNTRIES 113 

GOODS AND SERVICES TAX - THE 

SCENARIO IN SOME OTHER COUNTRIES 

The author, in this article, has given a bird’s 

eye view of GST legislation in six countries 

mentioning about the salient aspects of 

such tax in these countries giving various details 

about law and procedures. He feels that before 

taking up the work relating to legislation concerning 

GST, the Government should get a study of the 

legislation and implementational aspects concerning 

such a tax in these countries studied. 

T.N. PANDEY 

EX-CHAIRMAN, 

CBDT 

Introduction 

1. The country is agog with discussion concerning the futuristic indirect 

taxes regime for the country - The Goods and Services Tax (GST). Already 

two reports on GST have been published - one of the Empowered Group 

of the States Finance Ministers headed by Shri Asim Dass Gupta, Finance 

Minister of West Bengal and the other by a Task Force of the 13th Finance 

Commission headed by Shri Arbind Modi, Joint Secretary in the Ministry 

of Finance. Shri Vijay Kelkar, Chairman, Finance Commission had earlier 

given a roadmap concerning this tax for India. 

Briefly, GST is a common tax for both goods and services which is leviable 

at each time of sales and provision of services and for which the seller or 

service provider can claim the input credit of tax which he has paid while 

purchasing the goods or procuring the services. This is very similar to VAT 

which is applicable in most States and could be, broadly, described as 

National level VAT on both goods and services. In South Africa GST is also 

called VAT - Value Added Tax. In September 1999, South Africa replaced, 

its General Sales Tax (GST) with a comprehensive type value added tax 

(VAT) which is akin to GST. 

The GST is conceived of as a single rate tax system (though a practice of 

having two/three level taxes is also found in some jurisdictions). Its basic 

advantages are :— 

� Elimination of cascading effect of taxes; 

� Tax is to be borne by consumers instead of by businesses; 

� Removal of dual taxation in certain situations; 

� Avoidance of multiplicity of taxes; 

� Reduction in cost of production consequent to elimination of cascading 

effect. 


114 GOODS & SERVICES TAX - MAGAZINE [Vol. 1 

GST in other countries 

2. GST was, for the first time, adopted in France in the year 1954. Earlier, 

France was having a VAT system. Now GST is levied in nearly 140 

countries. In the discussion to follow, the salient aspects of the tax as 

prevalent in some countries are being mentioned for comparative study : 

2.1 AUSTRALIAN GST - Australian GST has been evolved after consideration 

of models of other countries. It is broadly structured on the New Zealand 

GST though Australia has taken benefit of the experiences and laws of 

other countries also. It was introduced by the Australian Federal Government 

in the year 1999 effective from July 1, 2000. The basic objective of 

this tax was to broaden the tax base for goods and services. 

In Australia, the GST is a broad based tax at 10 per cent on most goods and 

services and is included in the price paid. Registered business units are 

entitled for tax credit and the burden of the tax ultimately falls on the 

consumers for goods purchased and services availed of. Most food items 

like meat, fruits and vegetables are exempt from GST barring items like 

prepared food, take away food, restaurant meals, confectionery, icecream, 

snack foods, alcoholic beverages and soft drinks. Educational and 

health services, eligible child care, exports of goods and services, religious 

services, non-commercial activities of charitable institutions, cars for use 

of disabled people and few other goods and services are also not subjected 

to GST. 

Some other aspects of Australian GST are :— 

� The concept of Time of Supply is dealt with through a series of 

attribution rules that dictate when a GST liability arises. The concept 

of Place of Supply is achieved through a series of rules that connect 

various supplies with Australia, thereby making them potentially 

taxable. 

� Another unique feature of the Australian legislation is the introduction 

of the concept of reduced input tax credits. Those that make 

financial supplies are able to claim reduced credits for certain inputs 

used to make those supplies. Primarily it is for those services purchased 

externally that could have been provided in-house. 

� In drafting the law, the Australian approach was to use language that 

was as descriptive as possible. For example, instead of labelling 

supplies of things such as financial supplies as exempt, they are called 

input taxed supplies. It helped to understand law easily. 

2.2 NEW ZEALAND’S GST - New Zealand imposes GST on almost all goods 

and services at the rate of 12.5 per cent. Taxable goods and services 

include all types of real and personal properties other than money. 

Services cover everything other than goods like repair services, doctor’s 

services, accountant’s services, etc. However, these have to be part of 

taxable business activity. Such goods and services do not include :— 



� Goods and services supplied by businesses that aren’t registered for 

GST, and 

� Exempt supplies such as :— 

� Letting or renting a dwelling for use as a private home, 

� Interest received, 

� Donated goods and services sold by a non-profit body, 

� Certain financial services. 

GST is collected on behalf of the Government on goods and services and 

claimed back for tax paid on purchases and services procured. The 

difference in GST paid and payable is to be given to the Government. If 

more is paid than payable, refund can be claimed. Registration for GST is 

required to be made by entities having turnover exceeding the prescribed 

limit. It is optional if the turnover is less than the prescribed limit. 

Salient aspects of New Zealand’s GST could be summarized thus :— 

(a) End users pay this tax on all taxable goods and services directly, in 

that it is included in the purchase price of goods and services. 

(b) GST is charged on virtually all goods and services supplied in New 

Zealand, except for rental of residential property, financial services 

such as mortgages, loans and investments, and the sale of a business 

that is capable of being a going concern. 

(c) Businesses exporting goods and services from New Zealand are 

entitled to ‘zero-rate’ their products - effectively, they charge GST at 

zero per cent. This permits the business to claim back the input GST 

but the eventual, non-New Zealand based consumers do not pay the 

tax (businesses that produce GST- exempt supplies are not able to 

claim back input GST). 

(d) GST registered organizations only pay GST on the difference between 

GST-liable sales and GST-liable services (i.e., pay GST on the 

difference between what they sell and what they buy; income less 

expenditure). 

(e) The headline price must always be GST-inclusive in advertising and 

stores. The only exceptions are for businesses which claim a mainly 

wholesale client-base. Otherwise, displaying a prominent GST-exclusive 

price (i.e., larger and more obvious than the GST-inclusive price), 

is illegal. 

(f) The New Zealand GST is 20 years old. In its first official review in 

1999, the Treasurer and the Minister of Finance characterized it as 

having ‘proven to be an efficient and relatively problem-free tax to 

administer’. It is also a key contributor to the Government revenue. 

In many respects, the design and implementation of this tax is still 

regarded as international best practice. Its basic design features have 

remained unchanged, with the major exception being yet another 



New Zealand innovation, the zero rating of business-to-business 

financial services in 2003. In comparison to the much older and far 

more often amended income-tax, this young tax appears to be static 

and local - even parochial, at times - as well as being less litigated, 

researched and taught. 

Considerable time was spent in developing the initial framework for GST 

in New Zealand. Hence, there have not been many amendments since the 

initial enactment. Amendments have been made to remedy in unforeseen 

circumstances or to clarify policy issues. 

GST in New Zealand has proved to be efficient and, by and large, a 

problem-free tax to administer. It contributes substantial revenue to the 

Government. India needs to take lessons from New Zealand to ensure that 

a robust GST is enacted taking care to avoid ambiguities in drafting the 

law so that the Act may not get involved in litigation from the very 

beginning. 

2.3 CANADIAN GST - The Canadian Goods and Services Tax (GST) is a multilevel 

value-added tax introduced in Canada on January 1, 1991. The GST 

replaced a hidden 13.5 per cent Manufacturers’ Sales Tax (MST). The GST 

was implemented because the MST hurt the manufacturing sector’s 

ability to export. The introduction of the GST was very controversial. As 

of January 1, 2008, the GST currently stands at 5 per cent. There is a 5 per 

cent tax on all products, except certain essentials such as groceries, 

residential rent, and medical services, and services such as financial 

services. The tax is levied on each sale. Businesses that purchase goods and 

services as inputs can claim ‘input tax credits’ (i.e., they deduct the amount 

of GST they have collected from the amount of GST that they have paid). 

This avoids ‘cascading’ (i.e., the application of the GST on the same goods 

or service several times as it passes from business to business on its way 

to the final consumer). In this way, the tax is effectively borne by the final 

consumer. Unfortunately, this system is not completely effective, as 

shown by criminals who defrauded the system by claiming GST input 

credits for non-existent sales by a fictional company. Exported goods are 

exempt (‘zero-rated’), while individuals with low incomes can receive a 

GST rebate calculated in conjunction with their income-tax. 

In 1997, the provinces of Nova Scotia, New Brunswick and Newfoundland 

and Labrador and the Government of Canada merged their respective 

sales taxes into the Harmonized Sales Tax (HST). In those provinces, the 

current HST rate is 13 per cent. HST is administered by the federal 

Government, with revenues divided among participating Governments 

according to a formula. All other provinces continue to impose a separate 

sales tax at the retail level only, with the exception of Alberta, which does 

not have a provincial sales tax. In PEI and Quebee, the provincial taxes 

include the GST in their base. The three territories of Canada (Yukon, 

Northwest Territories and Nunavut) do not have territorial sales taxes. 

The Government of Quebee administers both the federal GST and the 



provincial Quebee Sales Tax (QST). It is the only province to administer the 

federal tax. 

Certain services have the tax added in such a way that the total cost is 

rounded to the nearest multiple of cents. 

Almost everyone has to pay GST/HST on purchase of taxable supplies of 

goods and services (other than zero-rates supplies). Some sales or supplies 

are exempt from GST/HST. Although the consumer pays the tax, businesses 

are generally responsible for collecting and remitting it to the 

Government. Businesses that are required to have a GST/HST registration 

number are called registrants. Taxable supplies refer to supplies of 

goods and services that are provided in the course of a commercial activity 

and are subject to GST/HST, or are 0 per cent (zero-rated). 

Zero-rated supplies refer to a limited number of goods and services that 

are taxable at the rate of 0 per cent. This means that there is no GST/HST 

charged on the supply of these goods and services, but GST/HST registrants 

can claim an ITC for the GST/HST they pay or owe on purchases 

and expenses made to provide them. 

Exempt supplies are goods and services that are not subject to GST/HST. 

Registrants cannot claim input tax credits to recover the GST/HST they 

pay or owe on expenses related to such supplies. 

Effective from January 1, 2008, the GST rate is reduced from 6 per cent 

to 5 per cent, and the HST rate from 14 per cent to 13 per cent. 

In Canada, GST is a multilevel VAT implemented because the Manufacturers 

Sales Tax (MST) was hurting this sector’s ability to export. GST 

helped the Canadian economy, became more efficient and competitive 

with lower priced goods for the international market. It accounts for 

approximately 15 per cent to 17 per cent of total federal revenues. 

2.4 SINGAPORE GST - GST was first introduced in Singapore on April 1, 1994 

at 3 per cent. The GST rate was increased to 4 per cent in 2003 and 5 per 

cent in 2004. The GST rate was raised to 7 per cent in 2007. It is levied on :— 

� Goods and services supplied in Singapore by any taxable person in 

the course or furtherance of a business; and 

� Goods imported into Singapore by any person. 

In general, a supply is either taxable or exempt. A taxable supply is that one 

which is taxable at standard rate or zero rate. Only a standard rated supply 

is liable to 7 per cent. 

Zero-rating a supply means applying GST at 0 per cent for the transaction. 

A GST registered trader need not charge GST on his zero-rated supplies, 

but he is, nevertheless, allowed a credit of the tax he has paid on his inputs. 

In Singapore, only ‘export’ of goods and ‘international’ services are zerorated. 

If a supply is exempt from GST, no tax is chargeable on it. A GST 

registered trader does not charge his customer any GST on his exempt 

supplies. At the same time, he is not entitled to claim input tax credits for 



any GST paid on goods and services supplied to him for the purpose of his 

business. The ‘sale and lease of residential properties and financial services’ 

are exempt from GST in Singapore. 

In short, in Singapore, GST is a tax on domestic consumption. The tax is 

paid when money is spent on goods or services, including imports. It is 

multi-stage tax which is collected at every stage of the production and 

distribution claim. 

2.5 HONG KONG GST - GST is also known as value added taxes (VAT) and 

sometimes sales taxes. GST and VAT are the same tax under different 

banners. They are taxes charged on the consumption (or spending) and 

not on income earned. Because of their underlying natures, they ultimately 

impact only on private consumption. Businesses are entitled to a 

refund (usually by way of a credit against GST collected on sales) for any 

GST paid in respect of goods and services consumed by the business. 

The two principal features of a broadly-based GST are that the tax applies 

to virtually all domestic consumption of goods and services and that it is 

a tax paid by the final consumer. GST is collected at each stage of the chain 

of production and distribution. Each party accounts for the tax on the 

value that has been added to the goods and services. Every party charges 

GST on its outputs (output tax), but can claim credits for all tax paid on the 

goods and services when received (input tax). Although intermediate 

purchasers of goods and services pay GST, because of the credit-offset 

mechanism, the final and total burden of the GST is paid for only by the 

final consumer. There is no cascading of the tax. GST is based on the 

concept of ‘taxable supplies’. Every person making taxable supplies exceeding 

a legislatively specified sum or engaged in certain business must 

be registered for GST. For those suppliers whose taxable supplies do not 

exceed the registration threshold, registration is not mandatory but GST 

input credits can only be claimed if a business is registered. Many 

jurisdictions allow a system of voluntary registrations for businesses 

below the statutory thresholds. 

Where goods or services are exempt from GST, no tax is charged by the 

vendor on the consumption but the vendor cannot claim credits for GST 

paid at the input stage. Internationally, the treatment of financial services, 

e.g., normal bank dealings that are not zero-rated, is not yet settled. In 

many cases, financial services are exempted from GST because of competition 

in the international market place. The GST is levied at a flat rate 

of 5 per cent. The Government undertakes to decrease or eliminate other 

taxes to make it revenue neutral. 

GST in Hong Kong is a self-assessment tax. 

Key aspects of Hong Kong’s GST could be summarized thus :— 

� Export of goods, international supplies, and financial supplies would 

not be subject to GST; 

� Residential property sales and rentals would not be subject to GST; 



� GST postponement schemes would be provided to ease importers’ 

cash-flow issues arising from GST. 

� The Government would be GST-registered to provide a level-playing 

field with the private sector. 

� A Tourist Refund Scheme would be included to allow visitors to 

obtain a refund of GST on goods they had purchased in Hong Kong 

and were taking home with them. 

� Charities would be treated as ‘taxable persons’ to allow them to 

reclaim input GST. 

An important aspect of Hong Kong’s GST had been that the Government 

proposed that, for the first five years after the GST’s introduction, all 

revenue it would generate after deducting administrative costs would be 

returned to the community as tax relief and other compensation measures. 

However, the GST was withdrawn in Hong Kong in a surprise 

announcement made on December 5, 2006. Henry Tang Ying-yen withdrew 

the plan citing lack of public support, ‘it’s clear .........that we have not 

been able to convince the majority to accept a GST as the main option to 

address the tax base problem’. The withdrawal was linked to the comments, 

three days earlier, of Chinese State leader Wu Bangguo to senior 

Hong Kong officials ‘to keep their fingers on the pulse of the people’ and 

to foster ‘social economy’, and to the impending sub-sector polls for the 

Election Committee which will pick the new Chief Executive in March 

2007. However, after the announcement, Henry Tang insisted that the 

decision to withdraw the proposal was ‘entirely my own’ and free of any 

political consideration. 

2.6 JAPAN’S GST - In Japan, the equivalent of VAT or GST is known as 

Consumption Tax (‘CT’), and was introduced in January 1989. It is similar 

to the European Union’s VAT system, requiring re-calculation and payments 

to the tax authorities at each transaction point in the onward sales 

chain. The Japanese CT rate is currently 5 per cent : 4 per cent national 

levy; 1 per cent regional levy. 

There is no requirement for companies to formally register with the 

Japanese tax authorities for CT. The tax authorities regards the first tax 

filing as the application for registration, and a tax office will be allocated 

to the company. 

For foreign companies providing goods or services in Japan, there may be 

a statutory obligation to charge CT. This includes the ongoing compliance 

requirements to file periodic tax returns, and pay over any CT due to the 

Japanese tax office. Typical situations requiring Japanese CT compliance 

include :— 

� Where goods are delivered within Japan; 

� If the foreign trader imports goods in Japan; and 



� In case of supplies of services, e.g., consulting services, sport and 

entertainment events. 

A foreign non-resident trader is required to appoint a Japanese resident 

tax agent. The agent is responsible for all communications between the 

company and the Japanese tax authorities. 

Once a company becomes a taxable business, it is required to file periodic 

CT returns. The frequency of these depends on the trader’s turnover. The 

tax filing lists all of the company’s transactions related to the supply of the 

relevant goods or services. Any CT due should be paid simultaneously with 

the filing of the tax return. The tax authorities will require payments of CT 

liabilities to be made in Japan at an authorized bank or post office. In the 

case of a tax credit (where the CT incurred by the company exceeds the 

CT charged on its sales in the reporting period), documentary proof 

related to the transactions is often requested by the tax office. 

Summing up 

3. The foregoing account regarding the functioning of GST in six countries 

shows that the conceptual framework of the tax is the same as is being 

thought of in India. It would facilitate a streamlined law for India, if the 

New Zealand’s practice of studying the other countries laws is adopted 

and based on their experience, a robust well drafted GST legislation is 

introduced leaving little room for ambiguities and misinterpretations 

which generate litigation. However, multiple legislations, one for the 

Central Government and others for the States seems to have become fate 

accompli for India in view of the recommendations of the Empowered 

Group of State Finance Ministers (EG) and Task Force for GST of the 

Finance Commission. Even Finance Minister in his budget speech for the 

year 2009-10, in para 85 has said :— 

“. . . The broad contour of the GST model is that it will be a dual GST 

comprising of the Central GST and the State GST. The Centre and the States 

will each legislate, levy and administer the Central GST and State GST 

respectively. . . .” 

Duality in GST is bound to bring complexities in designing such a tax and 

in its implementation. 

Most countries have unified GST regime. But some countries like Brazil 

and Canada follow the dual system of taxation. Because of the system 

being dual, Canada had to face many problems in implementing such a 

system. India need to benefit from the Canadian experience so that similar 

problems may not crop up here. 

Even after the report of the EG, there is no clarity in certain matters. For 

example, it is found that it is a common practice to have single composite 

contracts for various works, jobs, services, etc., such as in case of engineering 

projects, construction contracts, EPC projects, installation and erection 

projects, software and information technology, etc. The issue that can 



arise in GST regime is whether such works contracts be treated as goods 

or services or as a special class of goods or services arrangements for the 

purpose of levy of GST as these comprise of both the elements of goods 

and services. The practice followed in other countries can be studied to 

find solution for such a problem. 

Due to the dual structure of the GST, the assessees will be required to 

maintain separate accounts for Central GST and State GST. This could be 

cumbersome for the taxpayers. 

The EG’s report leaves many issues unresolved. For example, there is no 

mention/clarity in the report in regard to :— 

� What constitutional amendments would be needed to usher in dual 

regime of GST. 

� What would be the rate of tax for the CGST and SGST and for 

services. 

� The Taskforce of the Finance Commission has suggested 5 per cent 

and 7 per cent rates for the Centre and State. Media reports show that 

these could be 14 per cent and 16 per cent, respectively. Obviously, 

such rates would be too high. 

� The EG has yet to take a decision whether purchase tax levied by 

some States would be subsumed in SGST. 

� Decision have to be taken concerning administrative set up and 

assessment procedures for two categories of taxes. 

� Work for CGST and SGST integrated GST model has yet to start. 

Considering the fact that many issues concerning GST are yet to be 

resolved, the proposed date for its commencement i.e., April 1, 2010 seems 

to be impossible. There should be no hurry to implement this tax without 

full preparations. Hence, the Government should fix April 1, 2011 as the 

date for introducing the GST regime in the country and start working from 

now to achieve this target. There seems to be no need for a hurried 

approach. 

9-GST 



CONSTITUTIONAL AMENDMENT - A 

PREREQUISITE FOR GST 

The Empowered Committee of State Finance 

Ministers on November 10, 2009 unveiled 

the contours of the proposed GST in its 

‘First Discussion Paper on Goods and Services 

Tax in India’. The launch of the new system 

requires preparation and constitutional amendment 

is one of the few important and emergent 

needs for smooth rollout. It is considered necessary 

because with GST in place, there would be 

unified tax-‘tax on goods and services’ and the 

discrete jurisdiction of the Centre and States to 

levy tax would ipso facto merge, which the Constitution 

does not provide for. As the Constitution 

does not vest express power either in the Central 

Government or State Governments to levy tax on 

the ‘supply of goods and services’ and also does 

not empower the States to impose tax on imports, 

it becomes essential to have constitutional 

amendments for empowering the Centre to 

levy tax on sale of goods and States for levy of 

service tax and tax on imports and other consequential 

issues. 

CA. GEETA DAS 

Our Constitution and Levy 

1. India has a three-tier federal structure comprising of the Union Government, 

the State Governments and the Urban/Rural Local Bodies. The 

Constitution of India elaborately lays down the framework, defines the 

fundamental rights, directive principles, the structure, powers and duties 

of the Government including the power to levy taxes distributed among 

the three tiers of the Governments of the Constitution, article 246 of the 

Constitution of India enlists three different lists, namely, the List I (Union 

List), List II (State List) and List III (the Concurrent List). In accordance 

with the provisions of the article, the Parliament enjoys the exclusive 

powers to make laws with respect to any of the matters enumerated in the 

Union List; the Legislature of any State has the exclusive power to make 

law for the respective State or any part thereof with respect to the matters 

enumerated in the State List. And insofar as the Concurrent List is 

concerned, the Parliament and the State Legislatures both have the power 

to make laws with respect to any of the matters enumerated in List III. 


2010] CONSTITUTIONAL AMENDMENT - A PREREQUISITE FOR GST 123 

The relevant entries from the Lists with regard to imposition of tax are 

mentioned below :— 

- Entry 83 of List I empowers the Central Government to put duty of 

customs including export duties. 

- Entry 84 of List I empowers the Central Government to charge duty 

of excise on tobacco and other goods manufactured or produced in 

India. 

- Entry 92 of List I empowers the Central Government to charge taxes 

on service within India, outside India or from outside India or import. 

- Entry 92A of List I empowers the Central Government to charge tax 

on sale or purchase of goods other than newspaper, where such sale 

or purchase takes place in the course of inter-State trade or commerce. 

- Entry 92C of List I empowers the Central Government to tax services 

under the Finance Act, 1994. 

- Entry 54 of List II empowers the State Government to charge tax on 

the sale or purchase or goods other than newspaper, subject to the 

provisions of Entry 92A of Union List. 

Article 286 of the Constitution of India states that no law of a State shall 

impose, or authorize the imposition of, a tax on the sale or purchase of 

goods where such sale or purchase takes place outside the State or in 

course of the import of goods into, or export of goods out of the territory 

of India. 

The Constitution, thus, gives majority power to the Central Government 

to collect revenue and fewer powers have been vested in the State 

Government. As per the present allocation of jurisdiction in the Constitution, 

it is estimated that the Central Government collects 62 per cent of the 

revenue in the country while the States collects only 38 per cent of it. 

Power to levy at present 

2. In accordance with the power vested with the Centre and State under 

the Constitution, the Centre and States are levying tax as below :— 

� Central Excise, Customs Duty, Central Sales Tax and Service Tax by 

the Centre, and 

� VAT/Sales tax, Entertainment tax, Luxury tax, by the States. 

Since the introduction of service tax in 1994, it is imposed under Entry 97 

of List I. It is residuary in nature. Entry 92C was introduced by 88th 

Constitution Amendment in 2003 and the Central Government has exclusive 

jurisdiction over the same. 

Thus, presently the Centre has the power to impose a broad spectrum of 

excise duties on manufacture, customs duty, tax on services, inter-State 



sale or purchase of goods whereas the States can levy tax on sale of goods 

only. 

The present system has grown into a complex tax structure involving 

multiple authorities. And in order to provide a transparent system for 

operational ease, the reform process that has been initiated long back has 

emerged for the introduction of a new system. 

Proposed GST 

3. The Empowered Committee of State Finance Ministers on November 

10, 2009 unveiled the contours of the proposed GST in its ‘First Discussion 

Paper on Goods and Services Tax in India’. The paper elaborates the 

system of dual GST, the manner of its application, its coverage besides 

containing details on several aspects of the tax. 

The GST to be introduced would have dual GST system as decided by the 

Government with two components Central GST (CGST) and a State 

GST(SGST) simultaneously levied by Centre and State, respectively, on all 

transactions of ‘goods and services’ with exception to those provided for 

by law. 

The paper also mentions that GST would subsume 

(a) the Central taxes - Central excise duty, additional excise duties, the 

excise duty levied under the Medicinal and Toiletries Preparation 

Act, service tax, additional customs duty or countervailing duty, 

special additional duty of customs on imports, surcharges, and cess, 

Central sales tax and service tax. 

(b) the States taxes - VAT/Sales tax, entertainment tax (unless it is levied 

by the local bodies), luxury tax, Taxes on lottery, betting and gambling, 

State cess and surcharges, entry tax/octroi. 

Constitutional Amendment - A necessity 

4. The launch of the new system requires preparation and constitutional 

amendment is one of the few important and emergent needs for smooth 

rollout. It is considered necessary because with GST in place, there would 

be an unified tax-‘tax on goods and services’ and the discrete jurisdiction 

of the Centre and States to levy tax would ipso facto merge, which the 

Constitution does not provide for. 

To explain, the Constitution provides for delineation of power to tax 

between the Centre and States. While the Centre is empowered to tax 

services and goods up to the production stage, the States have the power 

to tax sale of goods. The States do not have the powers to levy a tax on 

supply of services while the Centre does not have power to levy tax on the 

sale of goods. Thus, the Constitution does not vest express power either in 

the Central or State Government to levy a tax on the ‘supply of goods and 

services’. Moreover, the Constitution also does not empower the States to 

impose tax on imports. Therefore, it is essential to have constitutional 


2010] CONSTITUTIONAL AMENDMENT - A PREREQUISITE FOR GST 125 

amendments for empowering the Centre to levy tax on sale of goods and 

States for levy of service tax and tax on imports and other consequential 

issues. It is essential to have constitutional amendments for empowering 

the States for levy of service tax, GST on imports and consequential issues 

as well as corresponding Central and State legislations with associated 

rules and procedures. 

Article 368 of the Constitution provides that amendments to the provisions 

of Constitution can take place :— 

� By special majority of the Parliament: Amendments can be made in 

this category by a two-thirds majority of the total number of members 

present and voting, which should not be less than half of the total 

membership of the house. 

� Approval by special majority of the Parliament and ratification by at 

least half of the State Legislatures by special majority. 

� After this, it is sent to the President for his assent. 

Conclusion 

5. A joint working group has already been constituted on September 30, 

2009 to prepare, in a time-bound manner, a suitable legislation for 

constitutional amendment for levying CGST and SGST including model 

rules and procedures for CGST and SGST. The Government proposes to 

introduce the GST Bill in the present winter session of the Parliament and 

the industry, trade and business look forward to the new GST regime in 

operation. 

13-GST 



GST-2010 - THE SINGLE RATE GST 

STRUCTURE - IS IT VIABLE ? 

This article discusses about the viability of 

single rate GST structure as suggested by 

13th Finance Commission. 

Multiple and single rate structure - Analysis of 

1. The 13th Finance Commission has suggested a single rate structure for 

goods and services tax and as per the news reports, the suggestion got the 

favour from the PMO because PMEAC (Prime Minister’s Economic Advisory 

Council) has welcomed this suggestion. Practically this is against the 

wishes of Empowered Committee of the State Finance Ministers which 

has suggested the multiple rate structure for the goods and services tax. 

Now it is clear that the Centre has some reservations about the plan of 

States with respect to goods and services tax to be introduced in India 

though both the sides are in agreement about the format of goods and 

services tax and it is ‘Dual GST’. The points of differences are :— 

(a) The threshold limit for Central GST- The State wants Rs. 1.50 crores 

but the Centre has shown it’s intention about Rs. 10 lakhs. 

(b) The taxes on alcohol. 

(c) The rate structure - The States have recommended the ‘multiple 

rates’ structure but now Centre is favouring the single rate structure. 

Why single rate tax structure is more viable - A comparison 

CA. SUDHIR 

HALAKHANDI 

2. Now let us understand this concept of ‘multiple and single rate’. First of 

all this single rate concept when used in news headlines gave the impression 

to the readers that somebody is advocating the ‘Single rate national 

GST’ but it is only a very distant reality here single rate structure means 

single rate for SGST and CGST, that means, if a rate of 7 per cent is agreed 

for SGST, then all the goods will be taxable at the rate of 7 per cent under 

State goods and services tax and if 5 per cent rate of CGST is finalised, then 

all the goods will be taxable at the rate of 5 per cent under the Central 

goods and services tax. This is the makeshift concept of single rate of GST 

and it is recommended by the 13th Finance Commission also. 

At present we have multiple rate structure under existing ‘Value added 

sales tax system’ in which basic necessities are taxed at lower rate and 


2010] GST-2010 - THE SINGLE RATE GST STRUCTURE - IS IT VIABLE ? 127 

luxuries are taxed at higher rate. The rate of tax is 4 per cent and 12.5 per 

cent in general and - the food grains, oil seeds, iron and steel, coal, cotton, 

etc., are taxed at 4 per cent. Further, the list of 4 per cent taxability included 

the minerals and most of the industrial inputs including machinery and 

their spares and this system is working very well. The goods which are not 

included in the list of 4 per cent (and further not in special list of exemption 

or 1 per cent taxability) are taxed at 12.5 per cent. The general rate of 12.5 

per cent was recommended by the white paper issued by the Empowered 

Committee of States’ Finance Ministers on VAT but later some of the 

States violated it by making it 14 per cent. 

While advocating the single rate system, some of the facts considered are 

administrative convenience and the better collection of tax in comparison 

to multiple tax rate system but some of the facts have not been taken into 

account while discussing and recommending the single rate system and 

these are very vital and will go to the root of basic viability of the single rate 

system in the ‘dual GST’ format. Some of the goods are not subject to any 

Central indirect taxation due to the fact that Central excise is not payable 

on these goods but since we are going for dual taxation system ‘CGST’ will 

be applicable on them also unless specific exemption is provided and more 

the exemptions will be provided more it will distort the basic system of 

taxation. 

Take the example of food grains which are at present taxable at the rate 

of 4 per cent. When these goods are sent from one State to another State, 

the effective rate is only 2 per cent CST and VAT paid within the State is 

eligible for set off if the goods are sole inter-State. No Central excise duty 

is payable on food grains and if the exemption is given to these goods on 

this account, even then the rate of tax under SGST (as suggested single 

rate) will be 7 per cent and if no exemption is given under CGST, then the 

rate will 12 per cent (7 per cent SGST and 5 per cent CGST) and this will 

increase the rate of tax to manifold as compared to the existing rate. Note 

that the States still do not agree to this rate of 12 per cent and advocating 

for the rate of 15 per cent. This is applicable to all the goods which are 

subject to lower rate and further not covered by the Central excise. 

Introducing the new taxation system in a big country like India is not a 

theoretical exercise and tax system cannot be modified to that extent only 

for the sake of administrative convenience and increase in the revenue 

without knowing and discussing the basics of the requirement of tax 

paying public including the trade and industry. 

The multiple rate system will certainly distort the administrative set up of 

the GST but the lawmakers are not giving us the ‘standard National GST’ 

and dual GST is only a compromise even without asking the trade and 

industry which was waiting for the Single national GST as promised to 

them in 2006 by our lawmakers. If there is a compromise on the basics of 

GST, then we will receive the more complicated and complex indirect tax 



system than existing one and, thus, for the sake of practical viability, 

multiple rate system should be introduced. 

The single rate system has been advocated by the PMEAC (Prime Minister’s 

Economic Advisory Council) also but at present ‘Single rate’ system is not 

a practical reality. There should be a single rate system and there should 

also be a National GST and lawmakers should understand that by giving 

the ‘worst’ to the tax paying public, they should not try to retain the best 

for themselves to make the things more complicated for the taxpayers. 

The empowered committee of State’s Finance Ministers has also suggested 

that multiple rate structure will be suitable because of the ground 

level realities; hence, while introducing the GST in country, the lawmakers, 

specially working for the Central Government, should reconsider their 

suggestion in this respect. 

11-GST 


2010] ANALYSIS ON PROSPECTS OF IMPLEMENTATION OF GST IN INDIA 129 

AN ANALYSIS ON PROSPECTS OF IMPLEMENTATION OF 

GOODS AND SERVICES TAX IN INDIA 

VIVEK KOHLI, ASHWANI SHARMA & SUDEEP VIJAYAN* 

The proposed introduction of Goods and Services Tax in India is 

an attempt by the Government of India to rationalize the current 

indirect tax regime and to bring a more transparent and 

efficient tax system. This article provides a selective analysis on a few 

broad areas of the proposed GST model, in order to encourage a 

widespread public debate to bring into light more issues and 

concerns prior to finalization of the Goods and Service Tax regime for 

India. The author opines that the introduction of the GST regime 

would definitely go a long way in improving and rationalizing the quality 

of the indirect tax regime as it incorporates all the desirable features 

of an efficient tax system. 

Introduction 

1. The proposed introduction of goods and services tax in India is an 

attempt by the Government of India with an objective to rationalize the 

current indirect tax regime in India, to bring about a more transparent and 

efficient tax regime in place. At present any assessee, in order to pursue its 

business activity, is required to pass through various levels of taxation, 

namely, at the National level, State level and in certain cases even at the 

sub-State level. The tax liability at all of the above stages is influenced by 

various factors, namely - multiple tax rates, cascading nature of taxes, tax 

administration complexities (separate authorities for most of the taxes), 

high compliance costs, cross-adjustment of tax credit (only allowed 

among certain taxes), adjustment/refund of tax, etc. Therefore, in order 

to ensure uniformity and boost efficiency, and rightfully to make India a 

competitive trading destination among the committee of nations, the 

Government of India has initiated its transition towards the Goods and 

Service Tax (GST) regime. The indirect taxation system in India has 

evolved over the years and has been witness to a series of structural as well 

as systemic changes within it - the more significant among all of them 

being the value-added taxation or the VAT regime. The implementation of 

VAT regime benefited the Government of India as well as the trade/ 

industry in a large way by bringing in a more visible tax structure which 

enhanced compliance through a degree of self-assessment, ultimately 

leading to reduction in pilferage of taxes. The VAT regime, though 

substantial in nature still suffered from various anomalies in the nature of 

multiple taxation, adverse cascading effect of taxes, etc., which have, 

*The authors are Senior Partner, Managing Associate, Associate, respectively at ZEUS 

Law Associates, New Delhi. 



subsequently, paved way for a more sound and comprehensive GST 

regime, expected to come into operation from April 1, 2010. 

GST - A broad-based single comprehensive tax 

2. The idea of GST is basically to create a broad-based and single 

comprehensive tax leviable on goods and services provided and/or consumed 

in an economy. In simple terms, it may be defined as a tax on goods 

and services which is leviable at each point of sale or rendering of service, 

in which at the time of sale of goods or rendering of services, the seller or 

service provider, may claim the input credit of tax which he has paid while 

purchasing the goods or procuring the services. The GST regime has 

already been implemented by more than 150 nations worldwide (comprising 

of both developing as well as developed economies) and has been well 

received across various Governments as well as the industry/trade, 

thereby resulting in major revenue augmentation, and simultaneous 

increase in credibility, transparency and efficiency, etc., in their respective 

tax systems. Traditionally speaking, until now all of the Central levies come 

into play only at the manufacturing level and do not extend below it. But, 

in accordance to the proposed model of GST in India1 , it is pitted to capture 

the value-added chain in the distribution trade below the manufacturing 

chain as well, while simultaneously also extending the scope of the State 

levy which is presently restricted to sale/purchase of goods, by enlarging 

its scope of taxation by allowing taxation at the manufacturing level as 

well as rendering of services. With this primary objective in mind, it is 

important now to discuss the proposed model of GST. 

3. GST Model in India 

(i) Taxes to be subsumed under the GST - GST is implemented across the 

globe in various models tailored to suit the specific requirements 

with respect to the individual fiscal policy of nation States. In India, 

considering the current federal set-up where there exists distribution 

of taxing powers between the Centre and the States, administered 

through appropriate legislations, it is more suitable to develop 

and adopt a dual system of GST. The design of the proposed GST 

scheme ideally should have been in such a way that, both the Central 

GST (or CGST) and State GST (or SGST) operates in a parallel 

fashion, thereby removing the existing distinction between the goods 

and services leading to subsuming of a number of Central as well as 

State levies into a consolidated levy. This particular aspect has been 

well considered and has also received due attention in the said paper, 

wherein it is being prescribed that, the taxes or levies to be subsumed 

1. First discussion paper on Goods and Services Tax in India, November 10, 2009. 



should primarily be of a nature of indirect taxes, either on supply of 

goods or on supply of services. On the contrary, the taxes or levies not 

specifically related to supply of goods or services should not form 

part of the consolidated levy. Also, those taxes should be part of the 

transaction chain which commences with the import/manufacture/ 

production of goods or provision of services at one end and the 

consumption of goods and services at the other. This subsumation 

should result in free flow of credit at the Central as well as the State 

levels. 

The paper also prescribes a concept of ‘revenue fairness’, which 

needs to be adopted and followed among all States of the Indian 

federal polity, in order to promote and establish a healthy and 

competitive environment for all stakeholders. At present and to 

begin with, 8 major taxes are being proposed to be subsumed into the 

CGST, while 6 taxes are being proposed to be subsumed within the 

SGST. In regard to which, it is stated that the said paper does not 

prescribe or indicate any specific criteria or guiding principle for 

subsumation of taxes; however, it is felt that this being the launch of 

the GST regime, in future various other taxes not presently included 

would be included within the consolidated levy. The fundamental 

challenge or difficulty posed through integration of taxes would be 

to effectuate a constitutional amendment in order to settle the taxing 

power of the States vis-a-vis the Centre. However, it is felt in-principle 

that subsuming of taxing levies into a consolidated levy seems to be 

a suitable option as per the basic tenets of fiscal federalism. 

(ii) GST rate structure - India is presently following a dual rate structure, 

wherein excise duty is being levied at a typical 8/16 per cent while the 

State VAT is being levied at 4/12.5 per cent. This model of dual rate 

structure has proved successful within our fiscal framework; hence, 

it is imperative to carry forward the same within the GST framework 

as well. In fact, the paper has indicated a dual rate structure, which 

would have three further variants, namely, a basic rate (for necessary 

items and items of basic importance), a standard rate (for goods 

in general) and a special rate (for precious metals and exempted 

items). 

Currently, the cumulative tax incidence of the element of excise duty 

and State VAT works out to be between 22 per cent - 24 per cent of 

the retail sale price. Hence, it is expected that the aggregate rate of 

duty for GST would be worked out in such a fashion that it brings 

down the element of tax from the present rate of 24 per cent 

(maximum) to a much lower rate, thereby assisting in bringing down 

the tax burden. Such step would also lead to an additional benefit; 

apart from reduction in rate, determination of base rate would 



ensure uniformity in charging of CGST and SGST, thereby ensuring 

no cascading effect of taxes. As per the said paper, it is being proposed 

that the tax base for the SGST as well as the CGST would be common, 

thereby safeguarding itself from any possibility of double taxation 

and cascading effect of taxes. It is felt that this initiative would be a 

major move which would apart from taking into account the aspects 

of practical and administrative feasibility would also go a long way 

in addressing the problem of double taxation as well as cascading 

effect of taxes. 

(iii) Input tax credit - As per the proposed GST model, the chain for CGST 

as well as the SGST has been completely keep independent of each 

other implying that a dealer/manufacturer would not be able to 

utilise the credit on either of the above taxes for payment of GST on 

each other except for their respective chain. Each individual chain 

e.g., SGST would be a consolidated levy integrating all the State level 

levies, thereby allowing availment as well as utilisation of input tax 

credit within the same chain. However, the option of cross-credit has 

been kept open under the Integrated Goods and Service Tax (IGST), 

which is applicable on Inter-State sale of goods. This concept of input 

tax credit is also projected to have a considerable impact in the cases 

of zero-rated exports/special economic zones and it still remains 

unclear as to whether the GST regime would convert the existing 

system of allowing excise rebate or removal under the UTI/bond, as 

in the above cases, to a completely new system. 

(iv) Inter-State Trade of goods and services - An integrated GST model 

(IGST) for taxation of inter-State sale of goods and services has been 

proposed in the said paper. This system of taxation is being adopted 

on the behest of the Central Sales Tax (CST) which would be 

completely phased out before adopting this new system. As per this 

model, the Centre would levy IGST (which is determinable as the 

sum total of CGST and SGST separately) in the following manner— 

(a) at the outset the inter-State seller would make the payment of 

IGST either through payment or adjustment of available credit 

of IGST. 

(b) the exporting State will transfer the IGST to the Centre out of 

which the SGST component would be further transferred to 

the importing State. 

(c) meanwhile, the relevant information would be submitted to the 

Central agency which would act as a clearing house mechanism, 

verify claims and inform the respective Governments to 

transfer the funds. 

(d) there would be appropriate mechanism put in place for consignment/stock 

transfer of goods and services. 



As the determination of the ‘exporting State’ is an essential requirement, 

it would determine the future course of the supply chain for 

supply of goods and services. Thus, the ‘place of supply rules’ has to 

be put in place. 

(v) Threshold Limit - A threshold limit of gross annual turnover of Rs. 10 

lakhs (rupees ten lakhs) has been proposed for both the goods as well 

as the services across the board in all States, with special compensation 

facilities for States in North-Eastern Region and Special Category 

States (where lower threshold had been prevalent). The said 

Paper has continued with the existing threshold limit of Rs. 1.5 crores 

(one crore fifty lakhs) for Central GST on Goods, and the threshold 

limit for the Central GST on services is undecided but most likely the 

threshold would also be kept comparatively high. 

(vi) Selective Concessions/Exemptions/Area based exemptions - Interestingly, 

the proposed GST structure has come out with a separate 

framework for two sets of goods/services, namely, - (i) exempted 

goods; and (ii) zero-rated goods. The input tax credit is allowable for 

the first category while same remains aloof for the second category. 

In case of units availing area based exemptions, the discussion paper 

has brought into picture a new regime, i.e., the refund regime, which 

is proposed to replace the current regime by allowing such units to 

avail input tax credit. But in a significant shift from the present 

regime, such units would be required to collect the applicable taxes 

during the final stage of sale, which would subsequently stand 

transferred to the revenue account of the State. And, in case the 

differential total between the tax credit (on inputs) and the final duty 

(final products) becomes negative, then the respective units would 

need to pay the differential amount in cash and claim refund later. 

The discussion paper does not provide any details regarding the 

structure or implementation of this scheme. 

(vii) Composition/Compounding Scheme - Under the proposed GST 

model, a composition/compounding scheme for the purposes of 

GST would be leviable which would have an upper ceiling limit on 

gross annual turnover and a floor tax rate would be leviable with 

respect to the gross annual turnover. In particular, the compounding 

cut-off would be available to an unit at Rs. 50 lakhs of gross annual 

turnover and a floor rate of 0.5 per cent would be applicable across 

the States. This scheme would keep the option for registration open 

for dealers/manufacturers with a turnover below the compounding 

cut-off limit. 



Conclusion 

4. The introduction of the GST regime would definitely go a long way in 

improving and rationalizing the quality of the indirect tax regime as it 

incorporates all the desirable features of an efficient tax system. It is for 

the first time that the system of a continuous set of relief for taxes paid 

either on inputs or in the previous stage of distributive trade has been 

proposed. The ultimate process of integration of taxes and equalization of 

rates is positive step which proves to be the hallmark in the proposed GST 

regime. Apparently, the proposed regime has given much emphasis to the 

system of refunds and also fails to provide any justifiable explanation for 

the reduction in the overall tax burden on the manufacturers/traders and 

more importantly the final consumers! It is felt that apart from the above 

issues the biggest of challenges for implementation of the GST model 

would come in the form of having a sound IT infrastructure to manage the 

impact as well as the transition towards the GST regime in a more effective 

and sound manner. 


12-GST

2010] WHAT IS GST ? 

135 

CA. PRITAM MAHURE 

WHAT IS GST ? 

The proposed date for implementation of GST, i.e., April 2010, is 

approaching fast; if the news reports are to be believed, we may 

have GST around October 2010. Hence, its just matter of few 

months before GST becomes a reality. In this article, the author 

attempts to demystify the concept and scope of GST in question and 

answer format. 

What is GST? 

GST is abbreviation for Goods and Services Tax. It would be levied on all 

the transactions of goods and services made for a consideration. This new 

levy would replace almost all of the indirect taxes. In particular, it would 

replace the following indirect taxes :— 

� At Central level 

� Central excise duty 

� Service tax 

� Additional excise duties 

� CVD (levied on imports in lieu of excise duty) 

� SAD (levied on imports in lieu of VAT) 

� Excise duty levied on medicinal and toiletries preparations 

� Surcharges and cesses 

� At State level 

� VAT/Sales tax 

� Entertainment tax (unless it is levied by the local bodies) 

� Luxury tax 

� Taxes on lottery, betting and gambling 

� Entry tax not in lieu of octroi 

� Cesses and surcharges 

How GST would be levied? 

India is implementing ‘dual GST’. In ‘dual GST’ regime, all the transactions 

of goods and services made for a consideration would attract two levies, 

i.e., Central GST (CGST) and State GST (SGST). 

Why GST is being introduced? 

A product or service passes through many stages till it reaches the final 

consumer. The Governments at Central and State level have, as and when 

the need arose, introduced many indirect taxes on various taxable events 



in this value chain (such as excise duty on manufacture, VAT on sale, etc.). 

As these taxes are levied on different taxable events they have their 

limitations. To illustrate further, let’s take an example of excise duty. 

Excise duty is levied on ‘manufacture’ and it fails to tax the value addition 

at distribution level. Additionally, at present, ‘goods’ suffer two levies 

(Excise and VAT) whereas ‘taxable services’ suffer only one levy, i.e., 

service tax. This leads to distortion: distortion arises because the relative 

prices of services would be lower as compared to goods. Even, as current 

tax system treats goods and services differently, in certain cases there is 

double taxation (software being one of such case where the industry has 

taken conservative stand and both VAT and service tax is being currently 

levied). Also, there are restrictions on availment of credit such as a service 

provider cannot avail credit of VAT and a trader cannot avail credit of 

service tax. 

The above lacunas affect free flow of goods and services. Additionally, it 

brings uncertainty in the trade which is not good for the economy as a 

whole. GST is now being projected as a solution to all these problems. 

Whether GST will cure all the problems prevalent in the current tax 

structure? 

Though not all, but surely, most of the current issues will be resolved such 

as the classification, valuation, double taxation disputes, etc. On a positive 

note, most of the credit which is not available will be available in GST 

regime such as the service provider will be eligible to avail credit of VAT, 

luxury tax, entertainment tax, etc. The compliances are also expected to 

reduce drastically. 

How GST is different from the current taxes? 

GST is different from the current tax structure in many ways. Currently, 

taxes treat goods and services differently. As mentioned above, ‘goods’ 

attract excise at manufacturing level and VAT at the time of sale. In 

contrast, services attract only one levy, i.e., service tax on provision of 

taxable services. 

This distinction, in GST regime, would lose its importance as both goods 

and services would be treated at par for taxing purposes. A transaction in 

goods and services for a consideration would attract CGST and SGST. 

Also, the State Government now gets the power to tax services and Central 

Government gets the power to levy tax at the distribution and retail level. 

When would GST be introduced? 

As the news are unfolding, the proposed date, i.e., April 2010 for implementing 

GST seems unlikely. However, any date near October 2010 or 

April 2011 seems likely. 

What about the legislations and the rules? 

GST would be implemented with single CGST statute which would be 

applicable across India. However, for SGST, each State will have its own 


2010] WHAT IS GST ? 

137 

statute. At present, the Government is working on the draft legislation and 

the rules. 

What would be the rate? 

The Government is yet to freeze on the rates. As per the various news 

reports, the rate would be around 8 per cent for CGST and 8 per cent for 

SGST. However, the 13th Finance Commission has suggested a rate of 5 

per cent for CGST and 7 per cent for SGST. There would be multiple rates 

for goods whereas services would attract single rate. 

Whether credit of CGST and SGST can be set off against each other? 

No. Input tax credit of CGST would be available for payment of CGST and 

input tax credit of SGST would be available for payment of SGST. 

However, cross-utilization of tax credit between the Central GST and the 

State GST would be allowed in the case of inter-State supply of goods and 

services under the IGST model. 

What about the input tax credit balance? 

From the past experience, we had on VAT introduction, it appears that the 

input credit balances would be allowed to be carried forward and set off 

against CGST and SGST. 

Whether there would be any basic exemption limit? 

A dual basic exemption threshold limit is being proposed for CGST and 

SGST. For CGST, the basic exemption for goods would remain at Rs. 1.5 

crores and for services, a similar exemption would be provided later. For 

SGST, the basic exemption for goods and services would be Rs. 10 lakhs. 

How inter-State transactions will be taxed? 

All the inter-State transactions of goods and services would attract IGST 

(which would be CGST plus SGST). Also, there would be appropriate 

provision for consignment or stock transfers. 

The inter-State seller will pay IGST on value addition after adjusting 

available credit of IGST, CGST, and SGST on his purchases. The Exporting 

State will transfer to the Centre the credit of SGST used in payment of 

IGST. The importing dealer will claim credit of IGST while discharging his 

output tax liability in his own State. The Centre will transfer to the 

importing State the credit of IGST used in payment of SGST. 

Whether there would be any special provisions for small taxpayers? 

Taxpayers having turnover less than Rs. 50 lakhs can opt for Composition 

scheme wherein they need to discharge tax at a floor rate of 0.50 per cent. 

Whether exports would benefit? 

Exports would be zero rated, as currently they are. 



How imports would be taxed? 

Currently, import of goods suffer CVD (in lieu of excise duty) and SAD (in 

lieu of VAT). On import of taxable services, service tax is attracted. In GST 

regime, both CGST and SGST would be levied on import of goods and 

services. GST paid on goods and services would be eligible for input tax 

credit. 

How SEZ will be taxed? 

If the supply of goods or services is for consumption in processing zone 

then it would be zero rated. Supply of goods and services from SEZ to 

domestic area would be treated as domestic transaction and taxed. 

What about special schemes which are prevalent today? 

The exemptions available under Special Industrial Area Schemes would 

continue up to legitimate expiry time both for the Centre and the States. 

Later, after the introduction of GST, the tax exemptions, remissions, etc., 

related to industrial incentives would be converted, if at all needed, into 

cash refund schemes. 

Whether all the products would be under the GST regime? 

No. Items containing alcohol and petroleum products would be outside 

the GST regime. Inclusion/exclusion of ‘purchase tax’ is being discussed. 

How GST would be administered? 

CGST will be administered by the ‘Central Government’ and SGST will be 

administered by the respective State Governments. 

10-GST 


2010] Skyline Constructions & Housing (P.) Ltd. v. AC&AR (Kar.) 173 

A 

B 

C 

D 

E 

F 

G 

[2010] 1 GST 173 (KAR.) 

HIGH COURT OF KARNATAKA 

Skyline Constructions & Housing (P.) Ltd.* 

v. 

Authority for Clarification and Advance Rulings, Bangalore 

K.L. MANJUNATH AND ARAVIND KUMAR, JJ. 

ST APPEAL NO. 24 OF 2006 

NOVEMBER 17, 2009 

WORKS CONTRACT - Taxability of - Whether once a work is assigned by 

contractor to its sub-contractor, contractor ceases to execute work 

because property passes by accretion and there is no property in goods 

left with contractor which is capable of retransfer either as goods or in 

any other form - Held, yes - Whether, therefore, transfer of property is 

from sub-contractor to contracting party that is contractee, namely, 

recipient - Held, yes - Whether, in such a situation, payments made by 

contractor to sub-contractors cannot be brought within total turnover 

of contractor as such an interpretation would lead to double taxation - 

Held, yes [Section 4 of the Karnataka Value Added Tax Act, 2003] 

FACTS 

The assessee was a registered dealer under the Act. It was engaged in the 

execution of the works contract for construction of residential apartments. 

It was paying tax at 4 per cent in terms of Notification No. FD 54 CSL 

2005(7), dated 23-3-2005. In course of the execution of the works contract, 

it claimed to employ sub-contractors who were also said to be registered 

under the KVAT and were paying taxes as per the provisions of the Act and 

the rules made thereunder. The assessee sought for an advance ruling 

under section 60 read with rules 163 to 165 of the KVAT Rules, 2005 as to 

whether the works entrusted to sub-contractors would also come within 

the total turnover of the assessee. 

The AAR held as follows : (a) In the absence of specific provisions for 

deduction on the turnover of the sub-contractors up to 31-3-2006, the 

activity of the works contract was exigible to tax at the rate applicable for 

goods involved in the transfer of property under the Act and section 4(c) 

with effect from 1-4-2006; (b) the payments made to the sub-contractors 

were not eligible for deduction up to 31-3-2006; and (c) the sub-contractors’ 

turnover was eligible for deduction with effect from 1-4-2006 by 

virtue of notification, dated 27-5-2006. 

*In favour of assessee. 


174 Goods & Services Tax Cases - Reports [Vol. 1 

On appeal : 

HELD 

As per section 3(1), every sale of goods in the State by registered dealer or 

any other dealer is leviable to tax in accordance with the provisions of the 

Act. The works contract having defined under section 2(37) is also leviable 

to tax where there is transfer of property involved. [Para 8] 

Section 4 is the charging section insofar as transfer of property of goods is 

involved in the execution of the works contract. [Para 9] 

The assessee had elected for composition in terms of the provision under 

section 15, read with Notification No. FD 54 CSL 5(7), dated 23-3-2005 and 

paid tax at the rate of 4 per cent. [Para 10] 

In respect of the sub-contract entrusted by the assessee, the said sub-contractors 

executed the part of the contract and the goods involved in that part 

of the work executed by them, were transferred to the customer directly 

and, thus, there was no sale between contractor and the sub-contractor. It 

was the claim of the assessee that the sub-contractors were also registered 

under the Act and the Rules made thereunder and they would also be liable 

to tax and were in fact paying the tax. If this contention of the assessee was 

to be accepted then as rightly contended by the assessee, it would amount 

to double taxation. [Para 11] 

A contract for work, i.e., works contract involves transfer of property and 

also element of service or work rendered and, thus, called as composite 

contract. The contract in question was a works contract for construction. 

The taxable event in a works contract is transfer of property in goods and 

the said transfer of property in such goods takes place when the goods are 

incorporated in the work. The value of the goods which constitutes the 

measure in the levy of tax is the value of the goods at the time of 

incorporation of the goods in the work. Thus, the said contractor to whom 

the work has been entrusted to is required to maintain an account and issue 

tax invoice as required under section 2(32). The tax charged in the tax 

invoice issued by the sub-contractor has to be accounted in his returns. 

Thus, it indicates there is ‘deemed sale’ by the dealer executing the work, i.e., 

sub-contractor. In effect, it is the sub-contractor who effects transfer of 

property in goods as no goods vest in the contractor so as to be subject 

matter of a retransfer. Hence, by virtue of article 366(29A)(b) of the 

Constitution, once the work is assigned by the contractor, the only transfer 

of property in goods is by the sub-contractor who claims to have paid tax 

under the Act on the goods involved in the execution of the works. Once the 

work is assigned by the contractor to its sub-contractor, the contractor 

ceases to execute the work because the property passes by accretion and 

there is no property in goods left with the contractor which is capable of 

retransfer either as goods or in any other form. Thus, the transfer of 

property is from sub-contractor to the contracting party that is contractee, 


A 

B 

C 

D 

E 

F 

G


A 

B 

C 

D 

E 

F 

G 

namely, the recipient. Hence, the work executed by the sub-contractor 

results in single transaction and not in multiple transactions. [Para 13] 

Hence, it would be erroneous to hold that the payments made by the 

contractor to the sub-contractor would require to be brought within the 

total turnover of the assessee or contractor and if such an interpretation 

was to be given, it would lead to double taxation and, hence, it was to be 

concluded that :— 

(i) The consideration for execution of works contract executed referred 

to consideration received by the principal contractor and did not 

include the consideration received and paid to sub-contractor. 

(ii) Under section 15 of the Act, for the period up to 1-3-2006, the principal 

contractor was entitled to deduction of payment made by sub-contractors 

only if they were registered dealers and the said sub-contractors 

had accounted for it and paid tax thereon. [Para 14] 

Hence, for the aforesaid reasons, it was for the Assessing Officer to examine 

the claim of the assessee by seeking it to produce such particulars as may 

be required to ascertain as to whether the work involved in the subcontract 

had resulted in tax yielding so as to find out whether it had come 

within the scope of clause (c) of sub-section (1) of section 4 and it was for 

this precise reason that it was opined that the same being a fact finding 

exercise, the Assessing Officer was to be directed to call for such particulars 

either from the contractors or sub-contractors to find out whether the 

work entrusted to sub-contractors had come within the turnover of the 

sub-contractors examining the issue and giving a finding thereon. In the 

event the assessee or the sub-contractors as the case may be were unable 

to demonstrate that the works contract entrusted to the sub-contractors 

had not been levied with the tax, it would be open to the authorities to add 

the same to the turnover of the contractor and not otherwise since it would 

amount to double taxation. [Para 15] 

CASE REFERRED TO 

State of Andhra Pradesh v. Larsen & Toubro Ltd. [2008] 9 SCC 191 (SC) (para 5). 

V. Srinivasa Raghavan for the Appellant. Smt. Geetha Menon for the 

Respondent. 

JUDGMENT 

Aravind Kumar, J. - The appellant is a registered dealer under the 

Karnataka Value Added Tax Act, 2003 (hereinafter referred to as ‘the 

KVAT’) and is engaged in the execution of the works contract for construction 

of the residential apartments. The appellant is said to be paying 

tax at 4 per cent in terms of Notification No. FD 54 CSL 2005(7), dated 

23-3-2005 and in the course of the execution of the works contract the 

appellant claims to employ sub-contractors who are also said to be 

registered under KVAT and pay taxes as per the provisions of the Act and 

the Rules made thereunder. The appellant sought for an advance ruling 



under section 60 of the KVAT Act read with rules 163 to 165 of KVAT 

Rules, 2005 as to whether the works entrusted to sub-contractors would 

also come within the total turnover of the appellant. 

2. The abovesaid authority after hearing the appellant herein held as 

follows :— 

(a) In the absence of specific provisions for deduction on the turnover 

of the sub-contractor, up to 31-3-2006 the activity of the works 

contract is exigible to tax at the rate applicable to goods involved in 

the transfer of property under KVAT Act, 2003 and section 4(c) of the 

KVAT Act with effect from 1-4-2006; 

(b) The payments made to the sub-contractors are not eligible for 

deduction up to 31-3-2006, and 

(c) The sub-contractor turnover is eligible for deduction with effect 

from 1-4-2006 by virtue of Notification dated 27-5-2006. 

3. We have heard Sri V. Srinivasa Raghavan appearing for the appellant 

and Smt. Geetha Menon, learned Government Advocate appearing for the 

respondents and perused the order dated 29-7-2006 passed by the Authority 

for Clarification & Advance Rulings. 

4. It is the contention of the learned counsel for the appellant that the 

activity of works contract up to 31-3-2006 is exigible to the KVAT Act, 2003 

as ruled by the Authority is erroneous for the following reasons :— 

(i) Works executed by sub-contractor in the Course of execution of 

Works Contract awarded to the appellant cannot be treated as 

consideration received by the appellant and it is to be treated as 

consideration received by the sub-contractors. 

(ii) There would be double taxation on the transaction since the subcontractors 

are also registered under the KVAT Act and that portion 

of the sub-contract the sale takes place in respect of those portions 

directly in favour of the owner of the land or the person and hence 

there is no sale in favour of the principal contractor and contends 

that the said payments made to sub-contractor in a work executed 

by them cannot be included in the total consideration received by the 

principal contractor. 

(iii) There is only one deemed sale involving the transfer of property in 

the goods which are employed in the works as it constitutes the single 

deemed sale and those in respect of part works awarded to the subcontractor 

by the main contractor does not exclude those parts, 

therefore there is no deemed sale at the hands of the main contractor 

i.e., appellant herein. 

5. In support of the above raised contentions, the learned counsel for the 

appellant would rely upon the decision of the Hon’ble Supreme Court in 

the case of State of Andhra Pradesh v. Larsen & Toubro Ltd. [2008] 9 SCC 

191. 


A 

B 

C 

D 

E 

F 

G


A 

B 

C 

D 

E 

F 

G 

6. Per contra the learned Government Advocate would submit that the 

issue which was under consideration before the Hon’ble Supreme Court 

was prior to the amendment of rule 17 of APVA Rules, 2005 and as such 

the amendment brought to the Karnataka Value Added Tax subsequently 

which is in pari materia with rule 17 of the Andhra Pradesh Value Added 

Tax Act, 2005 is applicable only from 1-4-2006 including and the Rules 

made thereunder and hence said judgment would not be applicable to the 

facts of the present case. 

7. At the time of admission of this appeal the following substantial 

questions of law were formulated :— 

1. Whether under Karnataka Value Added Taxes Act, 2003 for the 

period from 1-4-2005 to 31-3-2006, in respect of principal contractors 

involved in the business of carrying out works contract of construction 

of buildings for the purpose of computing liability to pay taxes on 

composition basis under section 15, whether the consideration for 

execution of works contract, executed refers to consideration received 

for execution of works contract by the principal contractor by 

himself or includes any consideration received but paid to subcontractors 

as consideration for portions of work executed by subcontractors. 

2. Whether under section 15 of the KVAT Act, 2003 for the period prior 

to 1-3-2006 the principal contractors involved in the business of 

carrying out work contract of constructing buildings is entitled for 

deduction of payment made by them to sub-contractors who are 

registered dealers to whom portions of the work has been subcontracted, 

as consideration to them for the portions of the work 

executed by such contractors, from the total consideration received 

by the principal contractor. 

8. As per section 3(1) of the KVAT Act on every sale of goods in the State 

by registered dealer or a dealer is leviable to tax in accordance with the 

provisions of the Act. The works contract having defined under section 

2(37) is also leviable to tax where there is transfer of property involved. 

9. The Karnataka Value Added Tax Act, 2003 came to be amended by Act 

No. 4/2006 where in clause (c) to sub-section (1) of section 4 was amended 

which reads as follows :— 

“In respect of transfer of property in goods (where as goods or in some other 

form) involved in the execution of works contract specified in column (2) of 

the Sixth Schedule, subject to sections 14 and 15 of the Central Sales Tax Act, 

1956 (Central Act 74 of 1956), at the rates specified in the corresponding 

entries in column (3) of the said Schedule.” 

Thus, section 4 is the charging section insofar as transfer of property of 

goods involved in the execution of the works contract. 

10. The appellant has elected for composition in terms of provision under 

section 15 of the KVAT Act, 2003 read with Notification No. FD 54 CSL 5(7), 



dated 23-3-2005 paid tax at the rate of 4 per cent. Section 15 of the KVAT 

Act, 2003 reads as follows :— 

“Composition of tax.— (1) Subject to such conditions and in such circumstances 

as may be prescribed, any dealer other than a dealer who purchases or obtains 

goods from outside the State or from outside the territory of India, liable to 

pay tax as specified in section 4 and,— 

(a) whose total turnover in a period of four consecutive quarters does not 

exceed an amount as may be notified by the State Government which 

shall not exceed fifty lakh rupees, and who is not a dealer falling under 

clauses (b) or (c) or (d) below; 

(b) who is a dealer executing works contracts; or 

(c) who is a hotelier, restaurateur, caterer or bakery or any other class of 

dealers as may be notified by the Government; or 

(d) who is a mechanised crushing unit producing granite or any other 

metals; 

may elect to pay in lieu of the net amount of tax payable by him under this Act 

by way of composition, an amount at such rate not exceeding five per cent on 

his total turnover or on the total consideration for the works contracts 

executed or not exceeding two lakh rupees for each crushing machine per 

annum as may be notified by the Government. 

(2) For the purposes of sub-section (1), a quarter shall mean any period ending 

on final day of the months of March, June, September and December. 

(3) Any dealer eligible for composition of tax under sub-section (1) may report, 

to the prescribed authority, the exercise of his option and he shall pay such 

amount due and furnish a return in such manner as may be prescribed. 

(4) Any dealer opting for composition of tax under sub-section (1) shall not be 

permitted to claim any input tax on any purchases made by him. 

(5) Notwithstanding anything contained in sub-sections (1) and (4),— 

(a) a dealer executing works contracts and who purchases or obtains 

goods from outside the State or from outside the territory of India shall 

be eligible to opt for composition under sub-section (1) and if the 

property in such goods (whether as goods or in some other form) is 

transferred in any works contract executed by him, the dealer shall be 

liable to pay tax on the value of such goods at the rate specified in 

section 4, and such value shall be deducted from the total consideration 

of the works contracts executed on which an amount as notified is 

payable under sub-section (1) by way of composition in lieu of the tax 

payable under the Act; 

(b) in the case of a dealer executing works contracts and opting for 

composition of tax under sub-section (1), no tax by way of composition 

shall be payable on the amounts paid to a sub-contractor as 

consideration for execution of works contract whether wholly or 

partly and such amounts shall be deducted from the total consideration 

of the works contracts executed on which an amount as notified is 

payable under sub-section (1) by way of composition in lieu of the tax 

payable under the Act subject to production of proof that such sub- 


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contractor is a registered dealer liable to tax under the Act and that 

such amounts are included in the return filed by such sub-contractor; 

(c) in the case of a dealer executing works contracts, after opting for 

composition of tax under sub-section (1), effects sale of any goods 

liable to tax under the Act other than by transfer of the property in such 

goods (whether as goods or in some other form) in any works contract 

executed by him, the dealer shall be liable to pay tax on the value of 

such goods at the rate specified in section 4, without any deduction for 

input tax on purchase of such goods made by him; 

(d) in the case of a dealer opting for composition of tax under clause (a) or 

(c) of sub-section (1), the turnover on which tax is leviable under subsection 

(2) of section 3 shall be deducted from the total turnover on 

which an amount as notified is payable under sub-section (1) by way 

of composition in lieu of the tax payable under the Act.” 

11. In respect of the sub-contract entrusted by the appellant, the said subcontractor 

executes the part of the contract and transfer of property as 

the goods involved in that part of the work executed by them goods are 

transferred to the customer directly and thus there is no sale between 

contractor and the sub-contractor. It is the claim of the appellant that the 

sub-contractors are also registered under the KVAT Act and the Rules 

made thereunder and they would also be liable to tax and are in fact paying 

the tax. If this contention of the appellant is to be accepted then as rightly 

contended by the learned counsel for the appellant it would amount to 

double taxation. 

12. In this regard the decision of Larsen & Toubro Ltd.’s case (supra) would 

be required to be extracted the relevant paragraph namely paragraph 15 

reads as follows :— 

“15. In this case we are concerned with the Andhra Pradesh Value Added Tax 

Act, 2005. Section 4 is the charging section. It comes in Chapter III which deals 

with ‘incident, levy and calculation of lax’. In this case, we are concerned with 

the taxability of a works contract. That subject is dealt with by section 4(7) of 

the said 2005 Act. In our view, section 4(7) is a Code by itself. It begins with a 

non obstante clause. It, inter alia, states that every dealer executing a works 

contract shall pay tax on the value of goods at the time of incorporation of such 

goods in the works executed at the rates applicable to the goods under the Act. 

The point to be noted is that section 4(7)(a) of the 2005 Act indicates that the 

taxable event is the transfer of property in goods involved in the execution of 

a works contract and the said transfer of property in such goods takes place 

when the goods are incorporated in the works, the value of the goods which 

constitutes the measure for the levy of the tax is the value of the goods at the 

time of the incorporation of the goods in the works. What is stated hereinabove 

also finds place in rule 17(1)(a) of the APVAT Rules, 2005, quoted hereinabove. 

It is important to note that each of the sub-contractors of L&T is a registered 

dealer. None of them are unregistered. Under section 4(7)(a) read with rule 

17(1)(c), quoted above, where a VAT dealer awards any part of the contract 

to a sub-contractor, such sub-contractor shall issue a tax invoice to the 

contractor for the value of the goods at the time of incorporation in such subcontract. 

The tax charged in the tax invoice issued by the sub-contractor shall 



be accounted by him in his returns. Therefore, the scheme indicates that there 

is a ‘deemed sale’ by the dealer executing the work, i.e., the sub-contractor. It 

is only the sub-contractor who effects transfer of property in goods as no 

goods vests in the respondent-company (contractor) so as to be the subjectmatter 

of a retransfer. By virtue of article 366(29A)(b) of the Constitution once 

the work is assigned by the contractor (L & T), the only transfer of property 

in goods is by the sub-contractor(s), who is a registered dealer in this case and 

who claims to have paid taxes under the Act on the goods involved in the 

execution of the works. Once the work is assigned by L & T to its subcontractor(s), 

L & T ceases to execute the works contract in the sense 

contemplated by article 366(29A)(b) because property passes by accretion and 

there is no property in goods with the contractor which is capable of a 

retransfer, whether as goods or in some other form.” (p. 201) 

13. A contract for work i.e., works contract involves transfer of property 

and also element of service or work rendered and thus called as composite 

contract. The contract in question is a works contract for construction. 

The taxable event in a works contract is a transfer of property in goods and 

the said transfer of property in such goods takes place when the goods are 

incorporated in the work. The value of the goods which constitute the 

measure in the levy of tax is the value of the goods at the time of 

incorporation of the goods in the works. Thus, the said contractor to whom 

the work has been entrusted to is required to maintain an account and 

issue tax invoice as required under section 2(32). The tax charged in the 

tax invoice issued by the sub-contractor has to be accounted to in his 

returns. Thus, it indicates there is “deemed sale” by the dealer executing 

the work i.e., sub-contractor. In effect it is the sub-contractor who effects 

transfer of property in goods as to goods vest in the contractor so as to be 

subject-matter of a transfer. Hence by virtue of Article 366 (29A)(b) of the 

Constitution once the work is assigned by the contractor the only transfer 

of property in goods is by the sub-contractor and who claims to have paid 

tax under the Act on the goods involved in the execution of the works. 

Once the work is assigned by the contractor to its sub-contractor, the 

contractor ceases to execute the work because the property passes by 

accretion and there is no property in goods left with the contractor which 

is capable of retransfer either as goods or in any other form. Thus, the 

transfer of property is from sub-contractor to the contracting party that 

is contractee namely the recipient. Hence the work executed by the subcontractor 

results in single transaction and not as multiple transaction. 

14. Hence, it would be erroneous to hold that the payments made by the 

contractor to the sub-contractor would require to be brought within the 

total turnover of the appellant or contractor and if such an interpretation 

is to be given it would lead to double taxation, and hence we are of the 

opinion that the question of law formulated herein above is to be held as 

follows :— 

(i) The consideration for execution of works contract executed refers 

to consideration received by the principal contractor and does not 

include the consideration received and paid to sub-contractor. 


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(ii) Under section 15 of the KVAT Act, 2003 for the period up to 1-3-2006 

the principal contractor is entitled for deduction of payment made 

by sub-contractors only if they are registered dealers and the said 

sub-contractor has accounted for it and paid tax thereon. 

15. Hence for the aforesaid reasons, we find in the facts and circumstances 

of the case that it is for the Assessing Officer to examine the claim 

of the appellant by seeking for the appellant to produce such particulars 

as may be required to ascertain as to whether the work involved in the subcontract 

has resulted in tax yielding so as to find out whether it has come 

within the scope of clause (c) of sub-section (1) of section 4 and it is for this 

precise reason we are of the opinion that the same being a fact finding 

exercise the Assessing Officer is hereby directed to call for such particulars 

either from the contractor or sub-contractors to find out whether the 

work entrusted to sub-contractors has come within the turnover of the 

sub-contractors after examining the issue and giving a finding thereon. In 

the event the appellant or the sub-contractors as the case may be are 

unable to demonstrate that the works contract entrusted to the subcontractor 

has not been levied with the tax it would be open to the 

authorities to add the same to the turnover of the contractor and not 

otherwise since it would amount to double taxation. 

16. Accordingly the following order is passed :— 

ORDER 

(i) The order dated 29-7-2006 passed by the Authority for Clarification and Advance 

Rulings bearing No. AR.CLR.CR.480/06-07 is hereby set aside and the appeal is 

allowed subject to the observations made hereinabove. 

(ii) The substantial questions of law are answered in favour of the assessee and 

against the revenue as answered supra. 

(iii) No costs. 

■■ 



[2010] 1 GST 182 (KER.) 

HIGH COURT OF KERALA 

Shanthi Poultry Farm (P.) Ltd.* 

v. 

Commercial Tax Inspector 

C.K. ABDUL REHIM, J. 

WP(C) NOS. 29206, 29600 AND 29900 OF 2009 

OCTOBER 27, 2009 

REGISTRATION - Period 3-8-2000 to 3-9-2000 - Petitioner was a registered 

dealer dealing in live chicken, hatching chicks, equipments, 

poultry feeds and poultry medicines, etc. - Dy. Commissioner found that 

bank instruments furnished by dealer towards advance tax between 

period from 3-8-2000 to 3-9-2000 worth Rs. 50,000, had been 

dishonoured for insufficiency of funds in bank account - On basis of said 

report Commissioner of Commercial Taxes, held that tendering of 

invalid bank instruments and dishonouring of same when presented for 

encashment was a ‘good and sufficient reason’ provided under section 

16(10), for cancelling registration - It further held that instruments 

tendered by dealer were accepted by officials of check post, on presumption 

that, those were ‘Pay orders’ issued by bank, and description of 

signature in instruments was printed in order to mislead check post 

authorities that those were ‘Pay orders’, but, in fact those instruments 

were cheques issued by ‘Farmers Development Society’ in favour of 

Commercial Tax Inspector; therefore, nature of offence committed by 

dealer was grave and was liable to be dealt with under provisions of 

section 16(10), read with rule 17(18)(vii) and, accordingly, he cancelled 

registration of petitioner - It was found from records that (i) no action as 

enumerated in rule 28 which provided for specific procedure with 

respect to dishonour of cheques, was resorted to in instant case, (ii) 

before taking any action on basis of abovesaid allegations, principles of 

natural justice demanded that dealers should be put on with specific 

notices raising such allegations and they should be given adequate 

opportunity to defend such allegations, however, proposed notices 

issued in instant case did not reveal any such instances or did not contain 

any of narrations of fraud committed by petition - Whether in view of 

above said facts, Commissioner of Commercial Taxes was not justified in 



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2010] Shanthi Poultry Farm (P.) Ltd. v. Commercial Tax Inspector (Ker.) 183 

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cancelling registration of petitioner - Held, yes [Section 16 of the Kerala 

Value Added Tax Act, 2003, read with rule 17 and rule 28 of the Kerala 

Value Added Tax Rules, 2005] 

FACTS 

The petitioner was a registered dealer dealing in live chicken, hatching 

chicks, equipments, poultry feeds and poultry medicines, etc. The 

Dy. Commissioner found that the bank instruments furnished by the 

dealer towards advance tax, between the period from 3-8-2000 to 3-9- 

2000, worth Rs. 50,000 had been dishonoured for insufficiency of funds in 

the bank account. On the basis of said report, the Commissioner of 

Commercial Taxes had instructed to invoke provisions of the Act to cancel 

registration of the dealer. It was further alleged that tendering of invalid 

bank instruments and dishonouring of same when presented for 

encashment was a ‘good and sufficient reason’ provided under section 

16(10). The proceedings further said that the instruments tendered by the 

dealer were accepted by the officials of the check post, on the presumption 

that those were ‘Pay order’ issued by the bank, and the description of the 

signature in the instrument was printed in order to mislead the check post 

authorities that those were ‘Pay orders’, but, in fact, those instruments 

were cheques issued by ‘Farmers Development Society’ in favour of 

Commercial Tax Inspector, therefore, the nature of offence committed by 

the dealer was grave and was liable to be dealt with under the provisions 

of section 16(10), read with rule 17(18)(vii) and section 7(4)(b). The 

proceedings further said that the dealer had failed in filing reply and only 

sought 7 days time on the ground of pendency of the writ petition. But 

since the matter related to proposal for cancellation of registration in a 

case of fraud perpetrated on the State revenue and forgery committed, 

the request could not be acceded to, because sustaining the registration 

alive was against interest of revenue. Therefore, the registration was 

cancelled. 

On writ : 

HELD 

The prime question to be considered in the instant case was as to whether 

the ingredients of section 16(10), read with rule 17(18)(vii) were established, 

justifying cancellation of registration. The crux of the allegation was 

about dishonour of the cheques issued towards payment of advance tax. 

But dishonour of cheques as such could not be considered as ‘good and 

sufficient reason’ contemplated under section 16(10) or as an ‘act or 

omission of a like nature’ enumerated in rule 17(18)(vii). This was especially 

because of the specific procedure provided with respect to dishonour 

of cheques in rule 28. When consequential actions are specified in the said 

rule, mere dishonour of cheque cannot be taken as reason under section 

16(10) or as an ‘act or omission’ coming under rule 17(18)(vii), and such a 



reason alone would not constitute the ingredients necessary to invoke 

action for cancellation of registration. [Para 13] 

The respondent raised a contention that the procedure in rule 28 is 

contemplated only with respect to dishonour of ‘a cheque’ and when there 

are repeated dishonours, it will amount to evasion of tax committed on 

more than one occasion, which is coming within the purview of section 

16(9) and which will warrant cancellation of registration. But the contention 

was liable to be repelled, since no action as enumerated in rule 28 was 

resorted to in any of these cases on the dishonour of any one of the cheques, 

on any earlier occasion, and also because of the fact that the action was 

initiated specifically on the basis of reasons contemplated under section 

16(10), and not under section 16(9). [Para 14] 

The next question arising for consideration was as to whether there existed 

any other ‘good and sufficient reason’ warranting cancellation of registration, 

apart from the mere dishonour of the cheques. It was brought out on 

record that the cheques in question were presented as if those were pay 

orders. From Circular No. 25/2007, it was evident that the check post 

authorities were restrained from accepting advance tax other than by way 

of demand drafts. Whether the advance tax could be accepted through pay 

orders or as to whether there was any misrepresentation made to the effect 

that the cheques produced were pay orders, etc., need examination. In the 

impugned order, it was observed that since the matter involved was a case 

of forgery and fraud, sustaining registration alive was against the interest 

of revenue. Of course, if forgery or fraud was committed and if there was 

involvement of the petitioner in committing such forgery or fraud, it might 

be a ‘good and sufficient reason’ coming within the purview of section 

16(10) or may be an ‘act or omission’ contemplated under rule 17(18)(vii). 

But before taking an action on the basis of such an allegation, principles of 

natural justice demand that the dealers should be put on with specific 

notices raising such allegations and they should be given adequate opportunity 

to defend such allegations. Further, even though the statement filed 

on behalf of the respondents enumerate unearthing of a large scale fraud 

committed and a massive action initiated against authorities who were 

suspected to have connived, the proposal notices issued in the instant case 

did not reveal any such instances or did not contain any such narrations. 

The question as to whether there was any direct involvement of the dealers 

in perpetrating such a fraud was yet to be enquired and no such specific 

allegation was raised. [Para 15] 

Considering the haste at which the matter was dealt with and considering 

the contents of the proposals issued as well as contents of the orders 

impugned, it was to be held that there was no independent application of 

mind rendered by the competent authority while issuing the proposals and 

while finalizing the proceedings. It was evident that the entire proceedings 

were pursued with an attempt to give effect to the instructions issued by the 

Commissioner of Commercial Taxes. The cryptic nature of the conclusions 


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narrated in the impugned order itself revealed non-application of mind 

and non-advertence to the objections. Therefore, the impugned order could 

not be sustained while tested on the touchstone of the mandatory requirements 

of quasi-judicial proceedings, and, therefore, those orders were 

liable to be quashed. [Para 16] 

But it was made clear that quashing of the impugned proceedings would 

not, in any way, prevent the competent authority in initiating fresh 

proceedings for cancellation of registration on issuing fresh notices, 

enumerating valid grounds either under section 16(9) or under section 

16(10) read with rule 17(18) and in finalizing such proceedings after 

affording reasonable opportunity to the petitioner to object such proposal, 

and after affording opportunity of personal hearing. [Para 17] 

K. Ramkumar, S. Anil Kumar, K.S. Hariharan Nair, M. Ramesh 

Chander, Smt. K.A. Sanjeetha and Aneesh Joseph for the Petitioner. 

K. Vinod Chandran for the Respondent. 

JUDGMENT 

1. WP(C) 29206/2009 was originally filed seeking direction for permitting 

inter-State consignment of dressed chicken, poultry feeds, etc., which are 

supported by documents prescribed under section 46 of the Kerala Value 

Added Tax Act, 2003 (KVAT Act), on payment of Advance Tax in accordance 

with the directions contained in Circular No. 50/06. After filing the 

writ petition the petitioner was issued with Ext. P10 notice under section 

16(10) of the KVAT Act read with rule 17(18)(vii) of the KVAT Rules, 2005. 

By the said notice the petitioner was required to submit reply if any against 

proposal for cancellation of the registrations under the KVAT Act and the 

Central Sales Tax Act (CST Act), within 24 hours. Further the petitioner 

was also required to furnish additional security under section 17(1) of the 

KVAT Act to the tune of Rs. 89,33,177. On receipt of Ext. P10 notice, the 

petitioner submitted Ext. P11 reply contending that the time of 24 hours 

granted is unreasonable and insufficient. Further it is pointed out that the 

writ petition is posted for consideration on 20-10-2009. In spite of the 

request to keep the proceedings in abeyance, Ext. P12 is issued by the 3rd 

respondent cancelling registration of the petitioner granted under the 

KVAT Act and CST Act Through amendments brought into the writ 

petition, Ext. P12 proceedings is now under challenge. 

2. The petitioner in WP(C) No. 29600/09 had approached this Court 

challenging Ext. P9 notice issued proposing cancellation of registration. 

But after filing the writ petition the registration is cancelled as evidenced 

by Ext. P10 and by amendment brought into the writ petition the cancellation 

of registration is under challenge. WP(C) No. 29900/09 is filed 

challenging Ext. P9 order wherein registration of the petitioner is cancelled. 

Since the cancellation of registration in all the three cases are based 

on the same set of facts and allegations, they were considered together and 

disposed of by a common judgment. 



3. The petitioner in WP(C) No. 29206/09, which is a private limited 

company, is a registered dealer having its place of business in West 

Yakkara, Palakkad and is dealing with live chicken, hatching chicks, 

equipments, poultry feeds and poultry medicines, etc. The allegations in 

Ext. P12 order cancelling registration is that, the Deputy Commissioner of 

Commercial Taxes, Palakkad in his report submitted to the Commissioner 

of Commercial Taxes, Thiruvananthapuram had informed that the Bank 

instruments furnished by the dealer towards Advance tax, between the 

period from 3-8-2000 to 3-9-2000, worth Rs. 50,000 have been dishonoured 

for insufficiency of funds in the bank account and that the Commissioner 

of Commercial Taxes had instructed to invoke provisions of the KVAT Act 

to cancel registration of the dealer. It is further alleged that tendering of 

invalid bank instrument and dishonouring of the same when presented for 

encashment is a “good and sufficient reason” provided under section 

16(10) of the KVAT Act. The proceedings further says that the instruments 

tendered by the dealer was accepted by the officials of the Check Post, on 

the presumption that it is ‘Pay Order’ issued by Axis Bank, Palakkad and 

the description of the signature in the instrument was printed in order to 

mislead the Check Post authorities that, those are ‘Pay Orders’. But, in fact 

those instruments were cheques issued by “Peroorkkadavu Farmers 

Development Society” in favour of Commercial Tax Inspector, Naduppuni. 

Therefore the nature of offence committed by the dealer is grave and is 

liable to be dealt with under the provisions of section 16(10) read with rule 

17(18)(vii) of the KVAT Act and section 7(4)(b) of the CST Act. The 

proceedings further says that the dealer had failed in filing reply and only 

sought 7 days time on the ground of pendency of the writ petition. But 

since the matter relates to proposal for cancellation of registration in a 

case of fraud perpetrated on the State revenue and forgery committed, 

the request cannot be acceded to, because sustaining the registration alive 

is against interest of revenue. Therefore the objection is overruled and the 

registration is cancelled. 

4. Similarly, in WP(C) No. 29600/09 the allegation is that the report of the 

Deputy Commissioner, Palakkad is to the effect that the petitioner had 

presented the cheques issued by the Axis Bank, Palakkad to the Check Post 

at Naduppuni making to believe the instrument as ‘Demand Drafts’ and 5 

cheques thus issued were dishonoured. Therefore there was a deliberate 

attempt of evasion of tax by cheating and misleading Government 

authorities and the petitioner have conspired with unscrupulous persons 

for submitting the cheques issued by ‘Peroorkadavu Farmers Development 

Society, Palakkad’. In this case the petitioner has submitted detailed 

reply wherein it is stated that the chicken are generally transported during 

night hours in order to avoid hot sunlight and the vehicles may be arriving 

the Check Post after 5 O’clock in the evening. Since it is not practical to 

obtain Demand Drafts during that time the petitioner was compelled to 

avail service of certain persons at Palakkad to obtain and submit pay 

orders. Huge amounts of Advance Tax was paid with respect to all other 


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consignments effected during the period from April 2009 to July 2009, 

which were properly credited to the Government account and the Pay 

Orders which are said to be bogus are submitted only by the agents namely 

Manoj and Geevarghese, who were entrusted by the dealer to remit 

Advance Tax. In fact those agents were cheating the petitioner by submitting 

bogus pay orders and therefore, the petitioner had requested to 

permit remittance of tax due with interest and penalty. Further the 

petitioner had submitted that he is ready and willing to furnish additional 

security if needed, and hence requested to refrain from cancelling the 

registration. But the Assessing Authority found that since there is an 

admission from the part of the dealer that the cheques submitted were 

bogus, it became convinced that they are conniving in defrauding the 

Government along with some other persons and therefore, the petitioner 

had violated section 47(16A) of the KVAT Act. Therefore, the registration 

is cancelled. 

5. In the case of WP(C) No. 29900/09 the allegation is that the petitioner 

had produced various cheques amounting to Rs. 1,17,000 which are found 

to be fake and unrealisable and thereby he had cheated the Government. 

In this case also the petitioner had filed reply to the notice wherein 

identical contention as in the above case was taken, that the cheques are 

issued only by the agents and the petitioner was not in the knowledge that 

those instruments are bogus. The mistake was apologised and the petitioner 

had offered to pay the whole amount. It is submitted in the objection 

that the petitioner is not a practitioner of any malpractice mentioned and 

he was made a victim by some culprits for their wrong doings and in the 

history of transactions he never defaulted any payments due to the 

Government. But the Assessing Authority after considering the objections 

held that there is a duty cast upon the dealer to see that the tax due to the 

State exchequer is settled then and there and the advance tax payments 

reaches the Government timely without fail. Since the petitioner received 

illegal gains and thereby cheated the Government exchequer, and since 

the investigation is in progress, continuance of registration is prejudicial 

to the revenue. 

6. It is noticed that in WP(C) No. 29600/09 the petitioner had produced 

Demand Drafts for an amount of Rs. 2,05,100 being the amount covered 

by dishonoured cheques with interest under section 31(5) and penalty, as 

evidenced by Ext. P8 series. In that case the 1st respondent had issued 

notice under section 67 of the KVAT Act demanding penalty of Rs. 4 lakhs 

plus Rs. 2 lakhs as tax. The notice proposing to impose penalty is produced 

as Ext. P9. So also in the case of WP(C) No. 29900/09 the petitioner was 

imposed with penalty to the tune of Rs. 4 lakhs and the petitioner had 

remitted the said amount by way of Demand Draft as evidenced by Ext P8. 

7. One of the main grounds of challenge against the impugned orders is 

that, there is absolutely no ingredients brought out to establish any valid 



reason coming within the purview of section 16(10) of the KVAT Act. 

Section 16(10) reads as follows :— 

“16(10) Notwithstanding anything contained in sub-section (9), the registering 

authority shall have power, for good and sufficient reasons, to cancel, modify 

or amend any registration certificate issued by it.” 

What amount to “good and sufficient reasons” for the purpose of section 

16(10) is enumerated in rule 17(18) of the KVAT Rules, which reads as 

follows :— 

“17(18) No registration shall be cancelled under sub-section (9) or sub-section 

(10) of section 16 without giving an opportunity to the dealer of being heard. 

For the purposes of [sub-section (10) of section 16], the following shall 

constitute good and sufficient reasons, namely :— 

(i) Where the registration has been obtained in the name of a fictitious 

persons or where the place of business shown in the application is nonexistent 

or the owner of such places has not given his consent in writing 

to the applicant for running the business; or 

(ii) Where the applicant has obtained the registration by the exercise of 

fraud or misrepresentation of facts; or 

(iii) Where the dealer is found to have claimed input tax credit or refund 

of input tax on the strength of any forged or bogus document; or 

(iv) Where the dealer has not been paying the tax collected by him to 

Government as required by the Act or these rules consecutively for a 

period of three returns periods and/or has failed to furnish any 

security or addl. security demanded by the registering authority; or 

(v) Where the dealer is found to have obstructed the officers conducting 

audit visit or inspection or search at his business place or residence in 

accordance with the provisions of the Act or these rules, or 

(vi) Where the registration is continued without any business being 

transacted for a continuous period of two years, or 

(vii) Where there is any other act or omission of a like nature on the part of 

the dealer.” 

Contention of the petitioners is that dishonour of cheque cannot be 

considered as “any other act or omission of a like nature” mentioned in 

clause (vii) of sub-rule (18) of Rule 17. In support it is contended that 

procedure to be followed in case of dishonour of cheque is enumerated in 

rule 28 of the KVAT Rules, which reads as follows :— 

“28. Procedure where a cheque is dishonoured.— If a cheque presented by a 

dealer towards payment of tax or other amount due under the Act is 

dishonoured the assessing authority shall issue a notice to the dealer in [Form 

No. 10H. On receipt of the notice, the dealer shall make the payment of the 

amount within the time specified therein, but not later than ten days from the 

date of receipt of the notice, along with interest under sub-section (5) of 

section 31. The dealer shall not be permitted to make payment by means of 

cheque for a period of six months as specified in the notice,] which may be 

extended by the assessing authority, with due notice to the dealer, for good 

and sufficient reasons to be recorded in writing. However, if the dealer pays 


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the amount covered by the cheque and makes prompt payment of tax or other 

amount due under the Act for a period of six months, the assessing authority 

shall restore the facility of payment by means of cheque.” 

In the cases at hand the authority had not followed the procedure 

prescribed under rule 28. But at the very first moment when it is intimated 

that the cheques were dishonoured, the petitioners have paid or tendered 

the full amount covered under such dishonoured cheques. Therefore it is 

contended that the dishonour of cheque by itself could have been dealt 

with by imposition of the consequences as provided in rule 28, and it is not 

a ‘good and sufficient reason’ for cancellation of registration. 

8. Another foremost contention against the impugned action is that, it is 

specifically mentioned that the Commissioner of Commercial Taxes had 

issued instructions to invoke provisions of KVAT Act to cancel registration 

of the dealers. Hence it is clear that the authority who issued the impugned 

proceedings has not acted on the basis of any materials brought on to his 

satisfaction or after he became convinced that there is circumstances 

warranting such cancellation. It is contended that there was no independent 

application of mind by the authority who exercised the jurisdiction 

and the order is passed without any advertence to the facts and circumstances 

of the case, in order to arrive at any conclusion that the registrations 

are liable to be cancelled. 

9. The petitioner in WP(C) No. 29206/09 contended that there is denial of 

opportunity to the petitioner for objecting the proposal, and thereby 

violation of principles of natural justice writ at large on the face of the 

order impugned. It is contended that no reasonable opportunity as 

mandated in section 16(11) was afforded. There was no exigency warranting 

cancellation of registration within 24 hours, because there existed no 

imminent prejudice to the interest of the State, is the contention. It is 

pointed out that the authority had already issued demand for payment of 

additional security as contemplated under section 17 (1) of KVAT Act and 

also initiated action for imposing penalty as per section 67 of KVAT Act, 

and, therefore, the imminent cancellation of registration was not at all 

warranted. In WP(C) Nos. 29600/09 and 29900/09, contentions are raised 

to the effect that there is clear failure on the part of the authority 

concerned to advert to the explanations/objections submitted to the 

proposal. In spite of specific denial of any role in the perpetration of the 

alleged forgery or fraud, and in spite of the specific contention that 

presentation of the cheques was made without any involvement or 

connivance of the dealers, such contentions were not at all adverted to by 

the authority nor any conclusion was arrived on the merits of such 

contentions. Therefore, the impugned orders are not sustainable, is the 

submissions. 

10. The respondents have filed statements in WP(C) Nos. 29206/09 and 

29600/09. It is stated therein that, investigations conducted subsequent to 

dishonour of cheques revealed massive fraud being committed in pay- 



ment of Advance Tax causing huge loss to the State coming to crores of 

rupees. It is further stated that suspecting connivance of officers, 

7 Commercial Tax Inspectors at the Check Post and Deputy Commissioner, 

Palakkad and Inspecting Assistant Commissioner, Chittoor, were 

already placed under suspension. The acceptance of cheque was against 

specific directions contained in Circular No. 25/2007, dated 3-7-2007 and 

the petitioner had played an active role in the commission of the fraud. It 

is further submitted that investigation is going on, based on a crime 

registered by the police. It is also contended that impugned orders are 

appealable under KVAT Act, and hence the writ petition is not maintainable. 

11. Heard, M/s. K. Ramkumar, Senior Counsel, S. Anil Kumar and 

M. Ramesh Chander appearing on behalf of petitioners and Shri K. Vinod 

Chandran, Special Government Pleader (Taxes) on behalf of respondents. 

Arguments were advanced on behalf of the petitioners based on the above 

narrated grounds for interference with the orders impugned. On the other 

hand the learned Special Government Pleader vehemently opposed such 

contentions on more than one ground. 

12. At the outset, maintainability of the writ petitions are questioned on the 

basis of effective alternate remedy of appeal available under the statute. 

Learned counsel for the petitioners pointed out that there is no appeal 

provided against an order issued under section 16(9) of the KVAT Act, as 

per section 55(1) of the said Act. But it is specific that the impugned orders 

are not issued under sub-section (9) of section 16. The learned Special 

Government Pleader pointed out that even if in a case where appeal is not 

maintainable, there is effective remedy of Revision provided under 

section 57 of the Act. But the learned Senior Counsel pointed out that the 

alternate remedy provided in the statute is not a bar in these cases for 

various reasons. It is contended that since there is lack of proper ingredients 

to invoke section 16(10) or rule 17(18)(vii), the question to be decided 

is purely legal in nature concerned with jurisdiction of the authority, and 

hence there is no impropriety in entertaining the writ petition. It is further 

contended that on cancellation of registration, the petitioners are put to 

imminent prejudices of irreparable nature, because the goods dealt with 

by them are perishable. Therefore inordinate delay which may be caused 

in resorting to the appellate remedy will defeat the purpose. Further it is 

contended that since it is clear and evident that the action of cancellation 

of registration is based on instructions issued by the Commissioner of 

Commercial Taxes, any appeal, to an authority subordinate to him, will not 

be dealt with independently. On an evaluation of the rival contentions on 

this point, I am of the opinion that considering the special circumstances 

of the case and nature of the grounds raised, there is no impediment for 

this Court to examine sustainability of the impugned orders, notwithstanding 

availability of the alternate remedy. Hence I am proceeding to 

deal with the contentions with respect to sustainability of the orders in the 

eye of law. 


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13. The prime question to be considered in these cases is as to whether the 

ingredients of section 16(10) read with rule 17(18)(vii) was established, 

justifying cancellation of registration. The crux of the allegation is about 

dishonour of the cheques issued towards payment of Advance Tax. But 

dishonour of cheques as such cannot be considered as “good and sufficient 

reason” contemplated under section 16(10) or as an “act or omission 

of a like nature” enumerated in rule 17(18)(vii). This is especially because 

of the specific procedure provided with respect to dishonour of cheques 

in rule 28 of KVAT Rules. When consequential actions are specified in the 

said rule, mere dishonour of cheque cannot be taken as reason under 

section 16(10) or as an ‘act or omission’ coming under rule 17(18)(vii), and 

such a reason alone will not constitute the ingredients necessary to invoke 

action for cancellation of registration. 

14. Learned Special Government Pleader raised a contention that the 

procedure in rule 28 is contemplated only with respect to dishonour of “a 

cheque” and when there is repeated dishonours it will amount to evasion 

of tax committed on more than one occasion, which is coming within the 

purview of section 16(9) of KVAT Act, and which will warrant cancellation 

of registration. But the contention is liable to be repelled, since no action 

as enumerated in rule 28 was resorted to in any of these cases on the 

dishonour of any one of the cheques, on any earlier occasion, and also 

because of the fact that the action is initiated specifically on the basis of 

reasons contemplated under section 16(10), and not under section 16(9). 

15. The next question arising for consideration is as to whether there exists 

any other ‘good and sufficient reason’ warranting cancellation of registration, 

apart from the mere dishonour of the cheques. It is brought out on 

record that the cheques in question were presented as if it were pay orders. 

From Circular No. 25/2007 it is evident that the Check Post authorities are 

restrained from accepting Advance Tax other than by way of demand 

drafts. Whether the Advance Tax can be accepted through pay orders or 

as to whether there was any misrepresentation made to the effect that the 

cheques produced were pay orders etc., need examination. In the impugned 

order in WP(C) No. 29206/09 there is an observation, “Beyond all, 

since the matter involved is a case of forgery and fraud, sustaining 

registration alive is against the interest of revenue”. Of course, if forgery 

or fraud is committed and if there is involvement of the petitioners in 

committing such forgery or fraud, it may be a ‘good and sufficient reason’ 

coming within the purview of section 16(10) or may be an “act or omission” 

contemplated under rule 17(18)(vii). But before taking an action on the 

basis of such an allegation, principles of natural justice demand that, the 

dealers should be put on with specific notices raising such allegations and 

they should be given adequate opportunity to defend such allegations. 

Even though the statement filed on behalf of the respondents enumerate 

unearthing of a large scale fraud committed and a massive action initiated 

against the authorities who were suspected to have connived, the proposal 

notices issued in these cases does not reveal any such instances or it does 



not contain any such narrations. The question as to whether there is any 

directs involvement of the dealers in perpetrating such a fraud is yet to be 

enquired and no such specific allegation is raised. On the other hand in 

spite of specific contention raised by two of the petitioners that they are 

innocent and the malpractices were committed by some third person 

without their knowledge or connivance, no advertence to such contentions 

is seen made, nor any conclusion was seen arrived repelling such 

contentions. 

16. Considering the haste at which the matter was dealt with and considering 

the contents of the proposals issued as well as contents of the orders 

impugned, I am of the opinion that there was no independent application 

of mind rendered by the competent authority while issuing the proposals 

and while finalizing the proceedings. It is evident that the entire proceedings 

were pursued in an attempt to give effect to the instructions issued 

by the Commissioner of Commercial Taxes. The cryptic nature of the 

conclusions narrated in the impugned orders, itself reveals non-application 

of mind and non-advertence to the objections. Therefore I am of the 

opinion that the impugned orders cannot be sustained while tested on the 

touchstone of the mandatory requirements of a quasi-judicial proceedings, 

and therefore, those orders are liable to be quashed. 

17. But it is made clear that quashing of the impugned proceedings will not 

in any way prevent the competent authority in initiating fresh proceedings 

for cancellation of registration on issuing fresh notices, enumerating valid 

grounds either under section 16(9) or under section 16(10) of the KVAT 

Act read with rule 17(18) of the KVAT Rules, and in finalizing such 

proceedings after affording reasonable opportunity to the petitioners to 

object such proposal, and after affording opportunity of personal hearing. 

It is also made clear that quashing of the impugned proceedings is without 

prejudice to any other proceedings already initiated or which may be 

initiated against the petitioners for imposition of penalty, demand for 

additional security deposit, demand for payment of tax amounts due with 

interest, and such other proceedings. 

18. In the result the writ petitions are allowed quashing the impugned 

orders in all the three cases, wherein registration of the petitioners under 

KVAT Act and CST Act are cancelled. But it is made clear that the quashing 

of the impugned orders is without prejudice to any fresh proceedings 

which may be initiated against the petitioners under section 16(9) or/and 

section 16(10) of the KVAT Act, read with rule 17(18) of the KVAT Rules, 

based on the same cause of incidents, facts and circumstances, and the 

authority concerned shall take note of the observations made hereinabove, 

before taking any fresh proceedings. 

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2010] Commissioner, Trade Tax v. K.S. Trading Co. (All.) 193 

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[2010] 1 GST 193 (ALL.) 

HIGH COURT OF ALLAHABAD 

Commissioner, Trade Tax, Lucknow 

v. 

K.S. Trading Co.* 

DR. SATISH CHANDRA, J. 

TRADE TAX REVISION NO. 146 OF 2008 

AUGUST 21, 2009 

INTER-STATE PURCHASE - Charge of tax - Assessment year 1998-99 - 

Assessee claimed to be a commission agent for inter-State purchase and 

sale of agricultural produce - Revenue authorities did not accept said 

claim because there was neither any written contract or appointment 

agreement between parties nor were there addresses of farmers - 

However, in gate pass of Mandi Samiti, quantity of goods was mentioned 

- Assessee also maintained builty and dispatch numbers evidencing 

transport, wherein address of recipient was also available - Whether, in 

age of electronic era, no formal contract is required and a telephonic 

contract is sufficient and, therefore, on facts of instant case, it was to be 

held that assessee was a commission agent making purchases for ex-U.P. 

principals - Held, yes [Section 3 of the Uttar Pradesh Trade Tax Act, 

1948] 

FACTS 

The assessee was a commission agent for the purchase and sales of 

different agricultural produce. The assessee made the purchases for ex- 

U.P. principals on commission basis. The Assessing Officer found that no 

contract whatsoever had been entered into with the ex-U.P. principals and 

they never appointed the assessee as their agent and supply orders were 

made only on the basis of the alleged telephonic calls which could not be 

ascertained. The Assessing Officer also observed that the purchases from 

the farmers were not verifiable as the full addresses of the farmers were 

not given. The Assessing Officer refused to treat the said transactions as 

inter-State purchases. The Assessing Officer observed that the purchases 

were made for self so he levied the tax which was restricted by the first 

appellate authority. On second appeal, the Tribunal accepted the plea of 

the assessee by observing that it had sent its goods outside U.P. 

On revision : 




HELD 

The goods were issued after the gate-pass of Mandi Samiti where the 

quantity of the goods was mentioned. Regarding the dispatch of the goods, 

there was no delay and before sending the goods outside the U.P., the gatepass, 

builty number and permit number were also maintained by the 

assessee. When the goods were dispatched to ex-U.P. principals, certainly 

the goods might have been purchased. The goods were generally agricultural 

produce. They could not be manufactured and, hence, they were 

purchased from the agriculturists. The proof for trade transaction of the 

goods outside U.P., builty number, dispatch number, etc., were already 

maintained by the assessee. In the instant case, it appeared that there was 

implied contract which may be a telephonic contract. The goods were sent 

through transportation and the address of the recipient was mentioned. 

When the goods were sent to ex-U.P. principals, certainly they were 

purchased from the agriculturists as the fee was already paid to the Mandi 

Samiti before having the gate-pass. However, mentioning the full address 

of the agriculturists was not possible. Sometimes, the sellers were small 

farmers who changed their residence or came from the remote areas. 

Further, no advance money was required for the contract. In some cases, 

the goodwill was sufficient to have a transaction with the ex-U.P. principals. 

No former contract is mandatory in the age of electronic era. Therefore, the 

assessee being a commission agent had made the purchases of the goods for 

ex-U.P. principals. The grounds taken by the department were questions of 

facts; no question of law emerged from the impugned order of the Tribunal. 

Hence, the revision filed by the department was dismissed. 

CASES REFERRED TO 

English Electric Co. of India Ltd. v. Dy. CTO 1976 (4) SCC 460 (para 6) and CIT v. 

Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 (SC) (para 7). 

Sanjeev Shankdhar for the Revisionist. Abhishek Misra for the Opposite 

Party. 

ORDER 

1. This revision has been filed by the department under section 11 of the 

U.P. Trade Tax Act, 1948 against the judgment and order dated 21-12-2005 

passed by the U.P. Trade Tax Tribunal, Lucknow for the assessment year 

mentioned above. 

2. I have heard Sri Sanjeev Shankdhar, learned counsel for the department 

and Sri Abhishek Misra, learned counsel for the assessee. 

3. The brief facts of the cases are that the assessee is a commission agent 

for the purchase and sales of Galla, Paddy, Khali, vegetable oil, tilhan etc. 

The assessee makes the purchases for ex-U.P. principals on commission 

basis. At the time of assessment, the Assessing Officer found that no 

contract whatsoever has been entered into with the ex-U.P. principals and 

the ex-U.P. principals never appointed the opposite-party as his agent and 

supply orders are made only on the basis of the alleged telephonic calls and 


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2010] Commissioner, Trade Tax v. K.S. Trading Co. (All.) 195 

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as such their verification and also their status could not be ascertained. 

The Assessing Officer also observed that the purchases from the farmers 

were not verified as the full address of the farmers were not given. The 

Assessing Officer refused to treat the said transaction as inter-State 

purchases during the assessment year under consideration. The Assessing 

Officer observed that the purchases were made for self, so he levied the 

tax which was restricted by the first appellate authority. Not being 

satisfied, the assessee has filed the second appeal before the Tribunal. The 

Tribunal vide its impugned order accepted the plea of the assessee by 

observing that the assessee has sent its goods outside the U.P. Not being 

satisfied, the department is before this Court. 

4. With this background, I have heard the learned counsel for the 

department and the learned counsel for the assessee and gone through the 

material available on record. 

5. From the record, it appears that the goods were issued after the gatepass 

of Mandi Samiti where the quantity of the goods were mentioned. 

Regarding the despatch of the goods, there was no delay and before 

sending the goods outside the U.P., the gate-pass, builty number, permit 

number were also maintained by the assessee. When the goods despatched 

to ex-U.P. principals, certainly the goods might have purchased. 

The goods are generally agriculture produce, it cannot be manufactured, 

hence the goods were purchased from the agriculturists. The proof for 

trade transaction of the goods outside the U.P., builty number, despatch 

number etc. were already maintained by the assessee. 

6. It may be mentioned that in the case of English Electric Co. of India Ltd. 

v. Dy. CTO 1976 (4) SCC 460, it was observed that when the movement of 

the goods from one State to another is an incident of the contract, it is a 

sale in the course of inter-State sale and it does not matter which is the 

State in which the property passes. For inter-State trade, three essential 

ingredients are required:— 

(I) there must be a contract to sale, incorporating a stipulation, express 

or implied, regarding inter-State movement of goods; 

(II) the goods must actually move from one State to another, pursuant 

to such contract of sale, the sale being the proximate cause of 

movement; and 

(III) such movement of goods must be necessary corollary of these 

principles that a movement of goods which takes place independently 

of a contract of sale would not fall within the meaning of inter-State 

sale. 

7. In the instant case, it appears that there was implied contract which may 

be a telephonic contract. The goods were sent through transportation 

where the address of the recipient was mentioned. No attempt was made 

by the department to verify these facts from the recipient. When the goods 

were sent to ex-U.P. principals, certainly these goods were purchased from 



the agriculturists. The fee was already paid to the Mandi Samiti before 

having the gate-pass. However, the full address of the agriculturists were 

not possible. Sometimes, the sellers are small farmers who change their 

residence or came from the remote areas. No advance money is required 

for the contract. In some cases, the goodwill is sufficient to have a 

transaction with the ex-U.P. principals. No former contract is mandatory 

in the age of electronic era. In this regard, yardstick will have to be from 

businessman’s viewpoint as per the ratio laid down by the Hon’ble 

Supreme Court in CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381. 

8. In the light of above discussions, I agree with the order of the Tribunal 

where it was observed that the assessee being a commission agent has 

made the purchases of the goods for ex-U.P. principals. The grounds taken 

by the department are question of facts. No question of law is emerging 

from the impugned order of the Tribunal. Hence, the revision filed by the 

department is liable to be dismissed. 

9. The revision is dismissed. 

[2010] 1 GST 196 (ALL.) 


Commissioner, Trade Tax*, U.P. 

v. 

Ramco Coke Industries 

RAJES KUMAR, J. 

TRADE TAX REVISION NO. (1970) OF 1998 


MANUFACTURE - Assessment year 1989-90 - Assessee was engaged in 

business of manufacture and sale of hard coke - It claimed that manufactured 

hard coke was not liable to tax because it was manufactured out 

of tax paid coal and both coal and hard coke were same commodities - 

Hard coke was manufactured by assessee after processing of coal breeze 

and it was commercially known as a different commodity than coal/coal 

breeze - Whether since process involved in converting coal into hard 

coke was process of ‘manufacturing’ within ambit of section 2(ee), 

assessee was liable to pay tax on sale of hard coke being manufacturer 

*In favour of revenue. 


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of same - Held, yes [Section 2(e-1) read with section 2(ee) of U.P. Trade 

Tax Act, 1948] 

FACTS 

The assessee was engaged in the business of manufacture and sale of hard 

coke. It claimed that the manufactured hard coke was not liable to tax 

because it was manufactured out of the tax paid coal and both coal and 

hard coke were the same commodities. The assessing authority having 

found that the hard coke was manufactured by the assessee after the 

processing of coal breeze held that both coal and hard coke were two 

different commodities and the assessee being manufacturer of hard coke 

was liable to pay tax on the sale of hard coke. On appeal, the Deputy 

Commissioner (Appeals) upheld the action of the assessing authority. 

On second appeal, the Tribunal held that the coal and hard coke were not 

two different commodities but were the same commodity and that since 

hard coke was made out of the tax paid coal, it was not further liable to tax. 

It, therefore, allowed the claim of the assessee. 

On revision : 

HELD 

It is clear that the coal breezes are being burnt at a specific temperature to 

remove the impurities from the coal and as a result of such burning process 

hard coke is obtained. Hard coke is a highly combustible item. Though 

breezes and hard coke both are used as fuel but hard coke is used for specific 

purposes being highly combustible. [Para 7] 

The definition of ‘manufacture’ as indicated in section 2(e-1) includes 

‘processing, treating or adapting any goods’. Thus, the meaning of “manufacture” 

in the U.P. Trade Tax Act is wider. A dealer will be liable to pay tax 

on sale of any goods which he makes by processing, treating or adapting the 

goods he purchased. [Para 9] 

In the instant case, admittedly the coal breeze was being burnt at a specific 

temperature to remove the impurities from the coal. It involved some 

process. By process of burning, the coal ceased its original character. Hard 

coke which was obtained out of the aforesaid process was highly combustible 

and was commercially known as a different commodity than the coal. 

Therefore, the process involved in converting coal into hard coke was the 

process of ‘manufacturing’ within the ambit of section 2(ee). [Para 21] 

Therefore, the assessee was liable to pay tax on the sale of hard coke being 

the manufacturer of hard coke. [Para 22] 

Hence, the order of the Tribunal was erroneous and was liable to be set 

aside. [Para 23] 



CASE REVIEW 

Khanna Coke Industries Ltd. v. Assistant Commissioner, Sales Tax 1978 UPTC 473 

(para 22), Ashoka Industries v. Commissioner of Sales Tax 1989 UPTC 562 (para 

22) distinguished. 


B.P. Oil Mills Ltd. v. Sales Tax Tribunal AIR 1998 SC 3055 (para 9), Chowgule & Co. 

(P.) Ltd. v. Union of India AIR 1981 SC 1014 (para 10), Devi Das Gopal Krishnan v. 

State of Punjab AIR 1967 SC 1895 (para 13), Ashirwad Ispat Udyog v. State of Level 

Committee AIR 1999 SC 111 (para 14), Dy. Commissioner of Sales Tax (Law), Board 

of Revenue (Taxes) v. Coco Fibres AIR 1991 SC 378 (para 15), Saraswati Sugar Mills 

v. Haryana State Board AIR 1992 SC 224 (para 16), Union of India v. Delhi Cloth & 

General Mills AIR 1963 SC 791 (para 17), Rajasthan State Electricity Board v. 

Associated Stone Industries AIR 2000 SC 2382 (para 18), State of Maharashtra v. 

Mahalaxmi Stores [2003] 1 SCC 70 (para 19), Sonebhadra Fuels v. Commissioner 

of Trade Tax 2007 UPTC 628 (para 20), Khanna Coke Industries Ltd. v. Assistant 

Commissioner, Sales Tax 1978 UPTC 473 (para 22) and Ashoka Industries v. 

Commissioner of Sales Tax 1989 UPTC 562 (para 22). 

B.K. Pandey for the Applicant. Piyush Agrawal for the Respondent. 

JUDGMENT 

1. The revenue has filed the present revision under section 11 of the U.P. 

Trade Tax Act (hereinafter referred to as “the Act”) against the order of the 

Tribunal dated 25-5-1998 for the assessment year 1989-90. 

2. The applicant was engaged in the business of manufacture and sale of 

Hard Coke. It is claimed that the manufactured Hard Coke was not liable 

to tax because it was manufactured out of the tax paid coal and both coal 

and Hard Coke are the same commodities. The claim of the applicant has 

been denied on the ground that both coal and Hard Coke are two different 

commodities and the applicant being manufacturer of Hard Coke is liable 

to tax. 

3. Being aggrieved by the assessment order, the dealer/opposite party 

filed the appeal before the Deputy Commissioner (Appeals), Trade Tax, 

Varanasi which has been rejected vide order dated 15-11-1995. The dealer 

filed second appeal before the Tribunal. The Tribunal by the impugned 

order allowed the appeal and declared the turnover of Hard Coke as nontaxable. 

The Tribunal held that the coal and Hard Coke are not a different 

commodity but are the same commodity and since it is made out of the tax 

paid coal the Hard Coke is not further liable to tax. 

4. Heard Sri B.K. Pandey, learned Standing Counsel for the applicant and 

Sri Piyush Agrawal, learned counsel appearing on behalf of the opposite 

party. 

5. Sri B.K. Pandey, learned Standing Counsel submitted that the assessing 

authority found that the Hard Coke was manufactured after the processing 

of coal breeze. He submitted that as against 12058 tons of coal, 8938 

ton Hard Coke was manufactured. The difference has been shown as 


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burning loss. He submitted that the Tribunal in its order has also observed 

that in the manufacturing of Hard Coke from coal a manufacturing 

process is involved in which its nature changes but there is no difference 

in fundamental nature, therefore, it has been admitted by the Tribunal 

also that in the manufacturing of Hard Coke from coal a manufacturing 

process is involved and the nature of the commodity changes. Therefore, 

treating both the items as one and the same is wholly unjustified. He 

submitted that coal and Hard Coke are two different commodities by its 

composition, nature and use. Though it is true that both coal and Hard 

Coke are used as a fuel but two commodities being different to each other 

and Hard Coke is manufactured and obtained as a manufactured product 

from the coal by a burning process. 

6. Having heard learned counsel for the parties, I have perused the order 

of the Tribunal and authorities below. 

7. It appears that the coal breezes are being burnt at a specific temperature 

to remove the impurities from the coal and as a result of such burning 

process Hard Coke is obtained. Hard Coke is a highly combustible item. 

Though breezes and Hard Coke both are used as fuel but Hard Coke is 

used for specific purposes being highly combustible. 

8. The manufacture is defined under section 2(e-1) of the Act reads as 

follows : 

“‘Manufacture’ means producing, making, mining, collecting, extracting, 

altering, ornamenting, finishing or otherwise processing, treating or adapting 

any goods but does not include such manufacture or manufacturing process 

as may be prescribed.” 

9. The above definition is very wide as held by this Court in B.P. Oil Mills 

Ltd. v. Sales Tax Tribunal AIR 1998 SC 3055. The definition of ‘manufacture’ 

in section 2(e-1) of the Act includes “processing, treating or adapting 

any goods”. Thus, the meaning of “manufacture” in the U.P. Trade Tax Act 

is wider. A dealer will be liable to pay tax on sale of any goods he makes 

by processing, treating or adapting the goods he purchased. In B.P. Oil Mills 

Ltd.’s case (supra), the Supreme Court held that refining crude oil amounts 

to a “manufacture”. 

10. In the case of Chowgule & Co. (P.) Ltd. v. Union of India AIR 1981 SC 

1014 the Apex Court observed that where any commodity is subjected to 

a process or treatment with a view to its development or preparation for 

the market it would amount to processing. The nature and extent of 

processing may vary from case to case, in one case the processing may be 

slight and in another it may be extensive; but in each process suffered the 

commodity would experience a change. The Court further observed that 

whatever be the means employed for carrying out of processing operation. 

It is the effect of the operation on the commodity that is material for 

the purpose of determining whether the operation constitutes processing. 



11. In the case of Chowgule & Co. (P.) Ltd. (supra) the Apex Court has held 

as follows : 

“7. The revenue however relied on the decision of the Bombay High Court in 

Nilgiri Ceylon Tea Supplying Co. v. State of Bombay [1959] 10 STC 500 (Bom.). 

The assessees in this case were registered dealers in tea under the Bombay 

Sales Tax Act, 1953 and they purchased in bulk diverse brands of tea and 

without the application of any mechanical or chemical process, blended these 

brands of different qualities according to a certain formula evolved by them 

and sold the tea mixture in the market. The question arose before the Sales 

Tax Authorities whether the different brands of tea purchased and blended 

by the assessees for the purpose of producing the tea mixture could be said 

to have been ‘processed’ after the purchase within the meaning of the proviso 

to section 8(a), so as to preclude the assessee from being entitled to deduct 

from their turnover under section 8(a) the value of the tea purchased by them. 

The High Court of Bombay held that the different brands of tea purchased by 

the assessee could not be regarded as ‘processed’ within the meaning of the 

proviso to clause (a) of section 8, because there was “not even application of 

mechanical force so as to subject the commodity to a process, manufacture, 

development or preparation”, and the commodity remained in the same 

condition. The argument of the Revenue before us was that this decision of 

the Bombay High Court was on all fours with the present case and if the 

blending of different brands of tea for the purpose of producing a tea mixture 

in accordance with a formula evolved by the assessees could not be regarded 

as ‘processing’ of tea, equally on a parity of reasoning, blending of ore of 

different chemical and physical compositions could not be held to constitute 

‘processing’ of the ore. Now undoubtedly there is a close analogy between the 

facts of Nilgiri Tea Company’s case and the facts of the present case, but we 

do not think we can accept the decision of the Bombay High Court in the 

Nilgiri Tea Company’s case as laying down the correct law. When different 

brands of tea were mixed by the assessees in Nilgiri Tea Company’s case for 

the purpose of producing a tea mixture of a different kind and quality 

according to a formula evolved by them, there was plainly and indubitably 

processing of the different brands of tea, because these brands of tea 

experienced, as a result of mixing, qualitative change, in that the tea mixture 

which came into existence was of different quality and flavour than the 

different brands of tea which went into the mixture. There are, it is true, some 

observations in the judgment of the Bombay High Court which seem to 

suggest that if instead of manual application of energy in mixing the different 

brands of tea, there had been application of mechanical force in producing the 

tea mixture, the court might have come to a different conclusion and these 

observations were relied upon by the assessee, since in the present case the 

blending was done by application of mechanical force, but we do not think 

that that is the correct test to be applied for the purpose of determining 

whether there is ‘processing’. The question is not whether there is manual 

application of energy or there is application of mechanical force. Whatever be 

the means employed for the purpose of carrying out the operation, it is the 

effect of the operation on the commodity that is material for the purpose of 

determining whether the operation constitutes ‘processing’. We are clearly of 

the view that the blending of ore in the course of loading through the 

mechanical ore handling plant amounted to ‘processing’ of ore within the 

meaning of section 8(3)(b) and rule 13 and the mechanical ore handling plant 


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fell within the description of “machinery, plant, equipment” used in the 

processing of ore for sale. It must therefore follow as a necessary corollary 

that if any items of goods were purchased by the assessee as being intended 

for use as “machinery, plant, equipment, tools, spare parts, stores, accessories, 

fuel or lubricants” for the mechanical ore handling plant, they would be 

eligible for inclusion in the Certificate of Registration of the assessee.” (p. 1019) 

12. A perusal of the decision of the Apex Court in the case of Chowgule & 

Co. (P.) Ltd. (supra) it is apparent that the three Judges’ Bench has not 

approved the decision of the Bombay High Court and has held that “Now 

undoubtedly there is a close analogy between the facts of Nilgiri Tea 

Company’s case and the facts of the present case, but we do not think we 

can accept the decision of the Bombay High Court in the Nilgiri Tea 

Company’s case as laying down the correct law.” It further held that “When 

different brands of tea were mixed by the assessees for the purpose of 

producing a tea mixture of a different kind and quality according to a 

formula evolved by them, there was plainly and indubitably processing of 

the different brands of tea, because these brands of tea experienced, as a 

result of mixing, qualitative change, in that the tea mixture which came 

into existence was of different quality and flavour then the different 

brands of tea which went into the mixture.” It has been further held that 

“We are clearly of the view that the blending of ore in the course of loading 

through the mechanical ore handling plant amounted to ‘processing’ of 

ore within the meaning of section 8(3)(b) and rule 13 . . .”. 

13. A Constitution Bench in Devi Dass Gopal Krishnan v. State of Punjab 

AIR 1967 SC 1895, while considering the case of extracting the oil from oilseeds, 

held that the edible oils produced were different from the oil seeds, 

and hence the edible oil produced is taxable though tax has already been 

paid on the oil seeds. Apex Court referred to the dictionary meaning of the 

“manufacture” as “to transform or fashion raw materials into a changed 

form for use” and held that oil is produced out of the seeds. The process 

certainly transforms the raw materials into different articles for use, and 

therefore is taxable as a new commercial commodity. This Court further 

explained that in a case where the scrap iron ingots undergo a vital change 

in the process of manufacture and are converted into different commodities, 

i.e., rolled steel sections, during the process the scrap iron loses its 

identity and becomes a new marketable commodity and, therefore, the 

process is certainly one of manufacture. 

14. In Ashirwad Ispat Udyog v. State Level Committee AIR 1999 SC 111 : 

Apex Court considered the scope of the definition of the term “manufacture” 

under the provisions of section 2(j) of the Madhya Pradesh General 

Sales Tax Act, 1953, which is in pari materia with section 2(e-1) of the Act, 

and held that manufacture is not confined to a new marketable commodity 

but also includes old articles made saleable. The Court held as under: 

“8. Decisions construing the meaning of the word ‘manufacture’ as used in 

other statutes do not apply unless the definition of that word in the particular 

statute under consideration is similar to that construed in the decisions. The 



plain construction of the special definition of the word in a particular Act must 

prevail. In the special definition given in section 2(j) of the said Act ‘manufacture’ 

has been defined as including a process or manner of producting, collecting, 

extracting, preparing or making any goods. There can be no doubt whatsoever 

that ‘collecting’ goods does not result in the production of a new article. There 

is therefore, inherent evidence in the definition itself that the narrow meaning 

of the word ‘manufacture’ was not intended to be applied in said Act. Again 

the definition speaks of ‘the process of lopping of branches (of trees), cutting 

the trunks’. The lopping of branches and the cutting of trunks of trees also, 

self-evidently, does not produce a new article. The clear words of the 

definition, therefore, must be given due weight and cannot be overlooked 

merely because in other contexts the word ‘manufacture’ has been judicially 

held to refer to the process of manufacture of new articles.” (p. 113) 

15. In Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes) 

v. Coco Fibres AIR 1991 SC 378, Apex Court considered the provisions of 

the Kerala General Sales Tax Act, 1963 wherein the term “manufacturing 

process” was considered and held that conversion of coconut husk into a 

coconut fibre was a manufacturing process. This Court held that by the 

process of manufacture, something is produced and brought into existence 

which is different from that out of which it is made, in the sense that 

the thing produced is by itself a commercial commodity capable of being 

sold or supplied. The material from which the thing or product is manufactured, 

may necessarily lose its identity or may become transformed 

into the basic or essential properties. The article that would emerge as a 

result of the process of manufacture must be a distinct and new article 

recognized or known as such in the commercial parlance for sale or 

supply. 

16. In Saraswati Sugar Mills v. Haryana State Board AIR 1992 SC 224, Apex 

Court explained the distinction between manufacture and processing 

observing that the construction of words and the meaning to be given for 

such words shall normally depend on the nature, scope and purpose of the 

statute in which it is occurring and to the fitness of the matter to the 

statute. Apex Court held that if a matter is processed, the product may not 

lose its original character. For example, the vegetables may be processed 

which even after processing, retain its character as vegetable while in 

manufacturing, something is necessarily to be brought into existence 

which is different from that which originally existed in the sense that the 

thing produced is a commercially different article. Thus, a statute is 

required to be interpreted strictly and the definition clause must be 

examined in a correct perspective giving the meaning of each word 

contained therein. The Court held as under : 

“Manufacture implies a change but every change is not manufacture, and 

yet every change of an article is the result of treatment, labour and manipulation. 

. . 

The essential point thus is that in manufacture, something is brought into 

existence which is different from that which originally existed in the sense that 

the thing produced is by itself a commercially different commodity whereas 


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in the case of processing it is not necessary to produce a commercially 

different article. 

Processing essentially effectuates a change in the form, contour, physical 

appearance or chemical combination or otherwise by artificial or natural 

means and in its more complicated form involves progressive action in 

performing, producing or making something. (Vide Corn Products Refining 

Co. v. Federal Trade Commission [1944] CCA 7; 144 F 2d 211).” (p. 229) 

17. In Union of India v. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 

791, Apex Court explained the word “manufacture” used as a verb which 

is generally understood to mean bringing into existence of a new substance 

and does not mean merely to being some change in a substance, 

however, minor in consequence the change may be. In a manufacture, 

there must be transformation and a different article must emerge having 

a distinctive name, character or use. 

18. A similar view has been reiterated in Rajasthan State Electricity Board 

v. Associated Stone Industries AIR 2000 SC 2382. 

19. State of Maharashtra v. Mahalaxmi Stores [2003] 1 SCC 70, Apex Court 

held that processing or variation of the goods or finishing of goods would 

not amount to manufacture unless it results in emergence of a new 

commercial commodity. 

20. In the case of Sonebhadra Fuels v. Commissioner of Trade Tax 2007 

UPTC 628, the question for consideration was whether the conversion of 

coal breeze into coal briquettes amounts to manufacturing. The crushed 

coal below 2 mm. size are mixed with suitable binders and by a centrifugal 

process and such briquette obtained is given shape of 30-100 mm. which 

is called as coal briquettes. Such coal briquette is used as fuel and treated 

as coal. The Apex Court held as follows : 

“We may mention that, as noted above, decisions construing the word 

“manufacture” in other statutes are not necessarily applicable when interpreting 

section 2(e-1) of the U.P. Trade Tax Act. As stated above, the definition of 

“manufacture” in section 2 (e-1) of the U.P. Trade Tax Act is very wide, which 

includes processing, treating or adapting any goods. Hence, in our opinion, the 

expression “manufacture” covers within its sweep not only such activities 

which bring into existence a new commercial commodity different from the 

articles on which that activity was carried on, but also such activities which do 

not necessarily result in bringing into existence an article different from the 

articles on which such activity was carried on. For example, the activity of 

ornamenting of goods does not result in manufacturing any goods which are 

commercially different from the goods which had been subjected to 

ornamentation, but yet it will amount to manufacture within the meaning of 

section 2(e-1) of the U.P. Trade Tax Act since an artificial meaning of 

“manufacture” is given in section 2(e-1). Hence, whether the commercial 

identity of the goods subjected to the processing, treating or adapting changes 

or not, is not very material. 

Learned counsel for the appellant Shri Rakesh Dwivedi submitted that coal 

briquettes are produced merely by using a binding material such as clay or 

molasses along with the coal, and hence he submitted that the identity does 



not change. We regret, we cannot agree with his submission. Firstly, we do not 

agree that the coal briquettes are the same commercial commodity as coal. In 

our opinion, coal is a raw material for making coal briquettes. The method of 

manufacturing coal briquettes has been stated above, and this certainly is a 

processing, treating or adapting the coal. The appellant manufactures coal 

briquettes by compiling the hard coke breeze mechanically with the help of 

cinders which is usually 5 per cent of the total hard coke breeze. In the 

compilation of the hard coke breeze, 95 per cent of the hard coke breeze, 

which is known as coal-dust or breeze coke is taken which is compiled with 

the help of clay and molasses. Hence, in our opinion, coal briquettes is a 

different commercial commodity from coal. Moreover, even if it is not a 

different commercial commodity, the process of making coal briquettes will 

amount to a “manufacture” as it is processing, treating or adapting coal. In our 

opinion, by the processing of coal to make coal briquette, the coal-dust loses 

its identity. Coal briquettes and coal-dust are two different commodities in 

substance as well as in characteristics. The coal briquettes are altogether in 

different shape, form and moisture as well as characteristics, as compared to 

coal-dust.” 

21. Admittedly coal breeze is being burnt at a specific temparature to 

remove the impurities from the coal. It involves some process. By process 

of burning, the coal ceases its original character. Hard coke which is 

obtained out of the aforesaid process is highly combustible and is commercially 

known as a different commodity. Therefore, the process involved 

in converting the coal into hard coke is the process of manufacturing 

within the ambit of section 2(ee) of the Act and, therefore, sales made 

by the applicant of such hard coke is liable to tax. The Tribunal has erred 

in granting exemption on the turnover of hard coke. The order of the 

Tribunal is erroneous and is liable to be set aside. 

22. Learned counsel for the applicant has relied upon two decisions of this 

Court; one in the case of Khanna Coke Industries Ltd. v. Assistant Commissioner, 

Sales Tax 1978 UPTC 473 and another in the case of Ashoka 

Industries v. Commissioner of Sales Tax 1989 UPTC 562, wherein this 

Court has held that coal briquettes fall within the entry of all kinds of coal. 

Relying upon the aforesaid decisions, learned counsel for the applicant 

submitted that hard coke is also one of the forms of the coal and, therefore, 

once the tax has been paid on the coal, the applicant is not liable for further 

tax on hard coke. In my view, the aforesaid two decisions are not relevant 

to the issue involved in the present case. Hard coke for the purposes of rate 

of tax may fall within the entry of “coal of all kinds” being one of the forms 

of coal but the question involved in the present case is whether the 

applicant is liable to tax on the sale of hard coke as a manufacturer and the 

process of converting the coal into hard coke amounts to manufacturing. 

If the process of conversion of coal into hard coke amounts to manufacturing 

and the hard coke is a different commercial commodity than the 

coal, the applicant is liable to tax on the sale of hard coke being the 

manufacturer. In view of above, in my view, the process of conversion of 

coal into hard coke amounts to manufacturing within the ambit of section 


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2010] State of Kerala v. Thrimathy Contracting Co. (Ker.) 205 

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2(ee) of the Act. The applicant is liable to tax on the sale of hard coke being 

the manufacturer. 

23. For the reasons stated above, the revision is allowed. The order of the 

Tribunal is set aside and the order of the assessing authority is restored. 

■■ 

[2010] 1 GST 205 (KER.) 


State of Kerala 

v. 

Thrimathy Contracting Co.* 

C.N. RAMACHANDRAN NAIR AND V.K. MOHANAN, JJ. 

ST REV. NO. 303 OF 2008 (C.R.) 

SEPTEMBER 8, 2009 

WORKS CONTRACT - Payment of tax at compounded rates - Assesseefirm 

was awarded work for marking of National Highway with hot white 

and yellow thermoplastic road marking paint - Assessee claimed that 

work for paint marking constituted civil works within meaning of section 

7(7) entitling it for payment of tax at compounded rate of 2 per cent - 

Whether since under section 7(7), payment of tax at compounded rate 

of 2 per cent is provided only if work awarded is a civil work, which 

includes construction also, and further since marking of road is not a part 

of construction of road and it is a post-construction work done for safe 

vehicular movement and purpose is to guide drivers and pedestrians 

using road, work for marking of roads with paint did not constitute civil 

work within meaning of section 7(7) - Held, yes - Whether, therefore, 

assessee was not entitled for payment of tax at compounded rate of 2 per 

cent - Held, yes [Section 7 of the Kerala General Sales Tax Act, 1963] 

FACTS 

The assessee-firm was awarded work for marking of National Highway 

with hot white and yellow thermoplastic road marking paint. Under the 

work schedule, payment was for every square feet of painting work done 

on road in terms of the instructions of the PWD. Further, paint marking on 




road was through the middle and at pedestrian crossings with zebra 

marking and also arrow indications on the road. The assessee claimed that 

the work for construction of the road was done by the managing partners 

of the firm and even though the aforesaid work of paint marking was 

separately awarded to the assessee-firm, it constituted an integral part of 

the road construction work. Therefore, the work executed by it, viz., 

supplying and applying hot white thermoplastic road marking paint, 

marking of pedestrian crossing, zebra crossing, etc., with white and yellow 

paints on road constituted civil works within the meaning of section 7(7) 

entitling it for payment of tax at compounded rate of 2 per cent. The 

assessing authority held that the road marking through thermoplastic 

paint was a painting work done after construction of the road and an 

independent contract, awarded to and executed by the assessee. The 

assessing authority, therefore, disallowed the claim of the assessee that it 

was entitled for payment of tax at compounded rate of 2 per cent. 

On appeal, the first appellate authority upheld the action of the assessing 

authority. 

On second appeal, the Tribunal accepting the contention of the assessee 

to the effect that marking with paint was a requirement for the National 

Highway and so much so, the construction of the road could be said to be 

complete only when markings were done on the road, held that the 

assessee was entitled for payment of tax at compounded rate of 2 per cent. 

On revision : 

HELD 

It is clear from the provisions of section 7(7) that payment of tax at 

compounded rate of 2 per cent is provided only if the work awarded is a civil 

work. Under the Explanation given below section 7(7), civil work includes 

not only construction, but repair or maintenance of buildings, bridges and 

roads, runways, dams, canals, wells, ponds, swimming pools and similar 

works notified by the Government. It is to be noted that the Explanation 

provides for exclusion of certain items from the scope of civil work which 

includes painting. However, it is very clear from the Explanation that 

exclusion of certain items of work are those carried out to the existing 

structures. Therefore, the exclusion clause obviously does not cover construction 

work, but only covers such work which falls within the description 

of repair or maintenance. In other words, even though the items of 

work like replacement of floor tiles, painting, polishing, etc., could be rightly 

called maintenance work, those are excluded from the scope of civil work 

by virtue of the specific provision contained in the Explanation. However, 

flooring, painting, polishing, etc., forming a part of the construction 

contract will still be regarded as civil work, if such work is an integral part 

of the original contract awarded for construction. In other words, if a 

contract is awarded for construction of the building where the work 

involves laying of floor tiles, painting and polishing the building, then the 


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B 

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entire work including these items will be treated as a civil work, entitling 

for payment of tax at compounded rate under section 7(7). [Para 2] 

Now the question for consideration would arise as to whether the work 

executed by the assessee was a part of the construction of the road, which 

alone would entitle it for concessional rate of tax under the scheme of 

compounding provided under section 7(7), because the work done was not 

in the nature of repair or maintenance of the road. Even though the 

contention of the assessee was to be accepted that paint marking on the 

highway was a requirement for opening the highway for traffic under the 

instruction issued by the Ministry of Surface Transport, it would have to be 

held that such marking did not constitute a part of the construction of the 

road. In the first place, marking is done after completion of the construction 

of the road and it is awarded under separate contract. In fact, existing roads 

are also marked with paints and it is invariably done when the road is 

declared as National Highway or State Highway. Therefore, paint marking 

is essentially a regulation introduced for smooth and safe vehicular 

movement and it is not a part of road as a structure. In fact, ever so many 

roads are constructed and maintained in the State without any paint 

marking, whatsoever. It cannot be said that such roads are maintained 

without completion of the construction. Therefore, marking of the road is 

not a part of the construction of the road and it is a post-construction work 

done for safe vehicular movement and the purpose is to guide the drivers 

and pedestrians using the road. [Para 3] 

Therefore, the revision was to be allowed by confirming the assessment 

sustained in the first appeal. [Para 4] 

Mohammed Raffiq for the Revision Petitioner. R. Ramadas for the 

Respondent. 

JUDGMENT 

C.N. Ramachandran Nair, J. - The question raised in the Sales Tax 

Revision filed by the State is whether the Tribunal was justified in holding 

that the work executed by the respondent, viz., supplying and applying hot 

white thermoplastic road marking paint, marking of pedestrian crossing, 

zebra crossing etc. with white and yellow paints on road constitute civil 

works within the meaning of section 7(7) of the Kerala General Sales Tax 

Act, 1963 (for short ‘the K.G.S.T. Act’), entitling the respondent for payment 

of tax at compounded rate at 2 per cent. We have heard learned Government 

Pleader appearing for the petitioner and Sri Ramadas, appearing for 

the respondent. 

2. The work involved is awarded to the respondent by the Kerala Public 

Works Department for marking of National Highway with hot white and 

yellow thermoplastic road marking paint. Under the work schedule, 

payment is for every square feet of painting work done on road in terms 

of the instructions of the PWD. Admittedly, paint marking on road is 

through the middle and at pedestrian crossings with zebra marking and 



also arrow indications on the road. While the case of the State is that the 

road marking through thermoplastic paint is a painting work done after 

construction of the road and an independent contract, awarded to and 

executed by the respondent, the case of the respondent is that the road 

work was done by the Managing Partner of the respondent-firm and even 

though the work is separately awarded, it constitutes an integral part of 

the road construction work. The Tribunal accepted the contention of the 

respondent that marking with paint is a requirement for the National 

Highway and so much so, the construction of the road is said to be 

complete only when markings are done on the road and accordingly, 

declared the respondent’s entitlement for payment of tax at compounded 

rate, at 2 per cent. Since the question pertains to respondent’s entitlement 

for compounding under section 7(7) of the K.G.S.T. Act, we extract 

hereunder the said section with Explanation thereto. 

“7. Payment of tax at compounded rates— 

** ** ** 

(7) Notwithstanding anything contained in sub-section (1) of section 5, every 

contractor in civil works may, at his option, instead of paying tax in accordance 

with clause (iv) of that sub-section, pay tax at the rate of two per cent on the 

whole amount of contract. 

Explanation:- For the purpose of this section “civil works” means construction 

or repair or maintenance of buildings, bridges, roads, runways, dams, canals, 

wells, ponds, swimming pools, water tanks or culvert including any masonry 

work or any other work of the like nature as may be notified by Government 

in this behalf, from time to time, but shall not include any improvement or 

upgradation of such civil work by means of fixing or laying of all kinds of floor 

tiles, mosaic tiles, slabs, stones, marbles, glazed tiles, painting, polishing, 

partitioning, wall panelling, interior decoration, false ceiling, carpeting, 

electrification, air conditioning or any other improvement on an existing 

structure.” [Emphasis supplied] 

It is clear from the above provision that payment of tax at compounded 

rate at 2 per cent is provided only if the work awarded is a civil work. Under 

the Explanation in the above definition clause, civil work includes not only 

construction, but repair or maintenance of buildings, bridges and roads, 

runways, dams, canals, wells, ponds, swimming pools and similar works 

notified by the Government. It is to be noted that the Explanation provides 

for exclusion of certain items from the scope of civil work which includes 

painting. However, it is very clear from the Explanation that exclusion of 

certain items of work are those carried out to the existing structures. 

Therefore, the exclusion clause obviously does not cover construction 

work, but only covers such work which falls within the description of 

repair or maintenance. In other words, even though the items of work like 

replacement of floor tiles, painting, polishing etc. could be rightly called 

maintenance work, those are excluded from the scope of civil work by 

virtue of the specific provision contained in the Explanation. However, 

flooring, painting, polishing etc. forming part of the construction contract 


A 

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B 

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G 

will still be regarded as civil work, if such work is an integral part of the 

original contract awarded for construction. In other words, if a contract 

is awarded for construction of the building where the work involves laying 

of floor tiles, painting and polishing the building, then the entire work 

including these items will be treated as a civil work, entitling for payment 

of tax at compounded rate under section 7(7) of the K.G.S.T. Act. 

3. The next question to be considered in this case is whether the work 

executed by the respondent is part of the construction of the road, which 

alone will entitle the respondent for concessional rate of tax under the 

scheme of compounding provided under section 7(7) of the K.G.S.T. Act, 

because the work done is not in the nature of repair or maintenance of the 

road. Government Pleader submits that construction of the road is 

complete in all respects prior to the road marking work done by the 

respondent with the application of special type of paints under a separate 

contract. Counsel for the respondent, on the other hand, contended that 

without marking with paint the construction in the National Highway will 

not be complete and only after making the markings on the Highway, it is 

open for traffic. Even though we agree with the contention of counsel for 

the respondent that paint marking on the Highway is a requirement for 

opening the Highway for traffic under the instruction issued by the 

Ministry of Surface Transport, we are of the view that such marking does 

not constitute part of the construction of the road. In the first place, 

marking is done after completion of the construction of the road and it is 

awarded under separate contract. In fact, existing roads are also marked 

with paints and it is invariably done when the road is declared as National 

Highway or State Highway, Therefore, paint marking is essentially a 

regulation introduced for smooth and safe vehicular traffic and it is not a 

part of road as a structure. In fact, ever so many roads are constructed and 

maintained in the State without any paint marking, whatsoever. It cannot 

be said that such roads are maintained without completion of the construction. 

In our view, marking of the road is not part of the construction 

of the road and it is a post-construction work done for safe vehicular 

movement and the purpose is to guide the drivers and pedestrians using 

the road. 

4. We, therefore, allow the Sales Tax Revision by reversing the order of the 

Tribunal and by confirming the assessment sustained in the first appeal. 

■■ 



[2010] 1 GST 210 (KAR.) 

HIGH COURT OF KARNATAKA 

Tropical Flavours (P.) Ltd. 

v. 

State of Karnataka* 

K.L. MANJUNATH AND ARAVIND KUMAR, JJ. 

STA NO. 20 OF 2006 

DECEMBER 10, 2009 

CLASSIFICATION OF GOODS - Chillies - Assessee was engaged in extraction 

of chilly oleoresin from dry chillies - Whether cut chillies, spent 

chillies, crushed chillies and chilly seeds remaining after extraction of 

chilly oleoresin from dry chillies is a spice by itself, which can be sold and 

traded in common parlance - Held, yes - Whether, therefore, above 

goods would fall under entry No. 61 of Third Schedule to Act under 

definition of ‘dry chillies’ - Held, yes [Section 4 of the Karnataka Value 

Added Tax Act, 2003] 

FACTS 

The assessee was engaged in extraction of chilly oleoresin from dry 

chillies. It submitted an application before the advance ruling authority 

for clarification on the rate of tax applicable to the cut chillies, spent 

chillies, crushed chillies and chilly seeds remaining after extraction of 

chilly oleoresin from dry chillies. The said authority held that the above 

goods having not been included in entry No. 61 of the Third Schedule to 

the Act, which reads as : ‘Spices in all forms including jeera, ...... and dry 

chillies’, the said goods would attract tax at the rate of 12.5 per cent under 

section 4(1)(b) for the period from 1-4-2005 to 31-3-2006 inasmuch as the 

residuary clause was applicable to the goods in question and with effect 

from 1-4-2006, the above goods were eligible to be taxed at the rate of 4 per 

cent in view of entry No. 89 of the Third Schedule to the Act, which reads 

as : ‘Spices in all forms including jeera, ......... tamarind and dry chillies 

including cut chillies, spent chillies and chilly seeds, but excluding ....’. The 

Third Schedule to the Act was substituted by the new Schedule with effect 

from 1-4-2006 and the spices were specified at serial No. 89. 

On appeal to the High Court : 

HELD 

In entry No. 61 of the Third Schedule to the Act, spices in all forms including 

the dry chillies find a place. The Legislature in its wisdom having intro- 



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2010] Tropical Flavours (P.) Ltd. v. State of Karnataka (Kar.) 211 

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duced by incorporating serial No. 89 by the Amendment Act, 2006, enlarged 

the scope of the dry chillies by bringing within the ambit of said dry chillies, 

the cut chillies, spent chillies and chilly seeds. [Para 10] 

The process carried out for extraction of oleoresin results in the parts of dry 

chilly and in trade parlance, it is called as skinned/cut chilly or crushed 

chilly or spent chilly. The crushed chilly consists of stem, a part of the skin 

and the chilly seeds. This extracted chilly can be used as a product, was not 

disputed by the revenue. The only ground on which the revenue was 

attempting to contend, that the reminiscence of the extracted chilly would 

attract the residuary clause, was by virtue of non-inclusion of these 

products, viz., cut chilly, crushed chilly, and spent chilly in entry No. 61 for 

the relevant period. When the said product can be sold as such in the 

market and it is accepted as such in common trade parlance, only by virtue 

of its non-inclusion in the entry at serial No. 61, it cannot be held that 

residuary clause gets attracted. [Para 11] 

Admittedly, the process carried out in extraction of oleoresin, the reminiscence 

that would follow are, cut chilly, crushed chilly and spent chilly and 

it is sold as a separate commodity and accepted both in trade and common 

parlance and it does not lose its identity by virtue of such extraction process. 

Hence, the originality of such commodity remains as such. [Para 12] 

Further, by the subsequent amendment brought about to entry No. 89, the 

Legislature in its wisdom has included crushed chilly, cut chilly and spent 

chilly by adding the same after the words ‘dry chillies’. Hence, the advance 

ruling authority was in error in holding that the residuary clause, viz., 

section 4(1)(b) was applicable to the instant case, viz., the commodity in 

question was liable to tax at 12.5 per cent for the period 1-4-2005 to 31-3- 

2006. [Para 13] 

Therefore, the crushed chillies, cut chillies, spent chillies and chilly seeds 

is a spice by itself, which can be sold and traded in common parlance and, 

accordingly, tax leviable would be at the rate of 4 per cent and it would come 

within entry No. 61 of the Third Schedule to the Act under the definition 

of ‘dry chillies’. Therefore, the advance ruling authority was not justified in 

its view. [Para 14] 

CASE REVIEW 

Habeeb Proteins & Fats Extracts v. CCT 2005 (58) Kar. L.J. 155 (para 7) followed. 


Habeeb Proteins & Fats Extracts v. CCT 2005 (58) Kar. L.J. 155 (para 7). 

G. Rabinathan for the Applicant. Vedamurthy for the Respondent. 

JUDGMENT 

1. The assessee is questioning the correctness and legality of the order 

passed by the Authority for clarifications and Advance Ruling in order 

No. AR.CLR. 436/2005-06, dated 18-4-2006 under section 16 of the 



Karnataka Value Added Tax Act, 2003 (hereinafter referred to as ‘the Tax’ 

for brevity). 

2. The facts leading to the filing of this appeal are that the appellant is 

having an industrial unit at Kodigehalli village, Doddaballapur Taluk 

engaged in extraction of chilly oleoresin from dry chillies. It was contended 

by the appellant before the Advance Ruling Authority that, by 

virtue of the process carried out for the extraction of oleoresin, parts of the 

dry chilly that remains thereafter is termed or called in common parlance 

as dry chillies, skinned/cut chilly and crushed chilly or spent chilly. 

3. It was the contention of the appellant that under section 3 of the Act, is 

the charging section, sub-section (1) prescribes that tax is to be levied on 

every sale of goods in the State by registered dealer or dealer liable to be 

registered in accordance with the provisions of the Act and section 4 of the 

Act prescribes, the liability to tax as also the rate of tax. It was contended 

that as per section 4(1)(a)(ii) of the Act, the rate of tax applicable to the 

goods specified in the IIIrd Schedule is 4 per cent and goods which are not 

specified in the Schedule or in respect of which no notifications are issued 

either granting exemption attracts tax at 12.5 per cent. It was contended 

that, IIIrd Schedule as it stood originally incorporated in the Act with 

effect from 1-4-2005 specifying categories of goods at Sl. Nos. 1 to 81 and 

with reference to the product in question, the entry is at Sl. No. 61 which 

reads as under :— 

“61. Spices in all forms including jeera (cumin seeds), methi, poppy seeds 

(kaskas), Corriander (dhaniya), Shajeera, somph, katha, azwan, kabab chini, 

bhojur phool, tejpatha, japatri, nutmeg (marathamoggu), kalhoovu, anised, 

turmeric, cardamom, pepper, cinnamom, dal chinny, cloves, tamarind and 

dry chillies”. 

4. It was submitted that IIIrd Schedule was substituted by new Schedule 

with effect from 1-4-2006 and the spices are specified at Sl. No. 89 which 

is the enlarged version of Sl. No. 61 as extracted above and the said entry 

at Sl. No. 89 reads as under :— 

“89. Spices in all forms including jeera (cumin seeds), methi, poppy seeds 

(kaskas), coriander (dhaniya), Shajeera, somph, katha, azwan, kabab chini, 

bhojur phool, tejpatha, japtri, nutmeg (marathamoggu), kalhoovu, aniseed, 

turmeric, cardamom, peppar, cinnamon, dal chinny, cloves, tamarind and dry 

chillies including cut chillies, spent chillies and chilly seed, but excluding 

spices in the form of masala powder, instant mixes or other mixtures 

containing more than one spice or a spice with any other material, wet dates, 

hing (asafoetida).” 

5. The appellant herein submitted an application on 21-4-2006 before the 

Authority for clarification on the rate of tax applicable and said authority 

held cut chillies, spent chillies and chilly seeds attracts 12.5 per cent tax 

under section 4(1)(b) of the Act for the period 1-4-2005 to 31-4-2006 and 

with effect from 1-4-2006, the above goods are eligible to be taxed at the 

rate of 4 per cent in view of Entry No. 89 of the Act. It is this order which 

is assailed in appeal by the appellant contending as follows :— 


A 

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G 

(a) the opening words in Sl. No. 61 of the old IIIrd Schedule as it existed 

up to 31-3-2006 under which spices were specified, were ‘spices in all 

forms’ followed by enumeration of different types of spices such as 

jeera (cumin seeds), methi, poppy seeds (kaskas), etc. and dry chilles. 

Thus, dry chillies having not been included in Sl. No. 61, takes 

different froms like cut chillies, spent chillies and chilly seeds and 

accordingly, it is contended that the Advance Ruling Authority was 

in error in holding that the residuary cause is applicable to the 

product in question for the period 1-4-2005 to 31-3-2006. It is also 

contended that in dry chillies, the outer skin alone is processed to 

extract chilly oleoresin or chilly oil and the reminiscence thereafter 

which remains after crushing is to be termed as ‘crushed chilly/spent 

chilly’ as it consists of the stem, part of the skin and chilly seeds. Thus, 

it takes a different form of chilly and which can be sold as such in the 

market. It is also contended that with effect from 1-4-2006, the earlier 

Entry No. 61 has been amended by insertion of the words “including 

cut chillies, spent chillies and chilly seeds” in Entry No. 89 but 

“excluding spices in the form of masala powder, instant mixes and 

other mixtures containing more than one spice or a spice with other 

material” by Amendment Act, 2006 with effect from 1-4-2006 which 

in fact includes the present product and thus, the same is also 

applicable to the period from 1-4-2005 to 31-3-2006 as the product 

which comes out after extraction is an independent product and sold 

as such in the market and accepted in common parlance. 

6. We have heard Sri Rabinathan, learned counsel appearing for the 

assessee and Sri Vedamurthy, learned Government Advocate appearing 

for the respondent. 

7. Sri Rabinathan, learned counsel for the appellant, in support of his 

submissions would press into service the Division Bench decision of this 

Court in Habeeb Proteins & Fats Extracts v. CCT 2005 (58) Kar. L.J. 155 

particularly drawing our attention to para 26 of the judgment. 

7A. Refuting the contentions of the appellant’s counsel, Sri Vedamurthy, 

learned Government pleader would submit that order of the Advance 

Ruling Authority is in consonance with the relevant entry which was 

in existence as on the said date and for the relevant period i.e. 1-4-2005 to 

31-3-2006, the cut chillies, spent chillies and chilly seeds not having been 

included in Sl. No. 61, the assessee could not claim that the rate of tax 

would be at 4 per cent and the authority was justified in holding that it 

comes within the ambit of residuary clause as it does not find a place in 

Entry No. 61 and accordingly, prays that the appeal be dismissed. 

8. Having considered the submissions made at the bar, we find that the 

following substantial questions of law arises for consideration in view of 

the appeal having been admitted :— 

(1) On the facts and in the circumstances of the case of the appellant, 

where the opening words of Sl. No. 61 in the Third Schedule as it 



existed up to 31-3-2006 under which spices were specified were 

‘spices in all forms’ the Authority for Clarification and Advance 

Rulings was right in having held that crushed chilly/spent chilly 

which are different forms of dry chillies were not within the meaning 

of ‘dry chilles’ in Sl. No. 61 and therefore, in respect of the period prior 

to 1-4-2006, the goods were liable to tax under section 4(1)(b) at 12.5 

per cent ? 


whereby an amendment made with effect from 1-4-2006 the 

expression ‘dry chillies’ in Sl. No. 89 of Third Schedule to KVAT Act, 

2003 was expanded to include ‘cut chillies’, spent chillies and chilly 

seeds’ and the amendment being clarificatory was applicable for 

construing the expression ‘dry chillies’ in the old Sl. No. 61 of Third 

Schedule as existed up to 31-3-2006 to include cut chillies, spent 

chillies and chilly seeds for the said goods to be eligible for levy of tax 

at 4 per cent, the Authority for Clarification and Advance Rulings was 

right in having held otherwise and issued the clarification that for the 

period prior to 1-4-2006 ‘cut chillies, spent chillies and chilly seeds’ 

were liable to tax under section 4(1)(b) at 12.5 per cent ? 


where according to common parlance understanding cut chillies, 

spent chillies and chilly seeds are also regarded as dry chillies and 

therefore, were within the scope and ambit of the expression ‘dry 

chillies’ in the old Sl. No. 61 of Third Schedule to KVAT Act, 2003 as 

it existed up to 31-3-2006 to be eligible for levy of tax at 4 per cent, the 

Authority for Clarification and Advance Ruling was right in having 

held otherwise and issued the clarification that for the period prior 

to 1-4-2006, cut chillies, spent chillies and chilly seeds were liable to 

tax under section 4(1)(b) at 12.5 per cent ? 

9. In order to consider the contentions raised by the respective counsel, it 

would be of necessary to extract the relevant provisions of the Act viz. 

section 4(1)(b) and Schedule III of the Act which came to be amended with 

effect from 1-4-2006. Insofar as Sl. Nos. 61 and 89 as it stood for the period 

1-4-2005 to 6-6-2005 and 1-4-2005 to 31-3-2006 has already been extracted 

herein supra. 

S.4 : Liability to tax and taxes thereof 

(a) Every dealer who is or is required to be registered as specified in 

sections 22 to 24, shall be liable to pay tax, on his taxable turnover. 

(b) in respect of other goods, at the rate of 12.5 (twelve and one half) per 

cent. 

10. It is seen that in Entry No. 61, spices in all forms including the dry 

chillies finds a place. The Legislature in its wisdom having introduced by 

incorporating Sl. No. 89 by Amendment Act, 2006 enlarged the scope of the 


A 

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E 

F 

G


A 

B 

C 

D 

E 

F 

G 

dry chillies by bringing within the ambit of said dry chillies, the cut chillies, 

spent chillies and chilly seeds within the fold of dry chillies. 

11. The question that requires to be examined in the instant case is : 

“by virtue of the extraction process, whether the reminiscence of the dry chilly 

can be sold as a product or commodity independently and is accepted in 

common parlance as such?” 

The process carried out for extraction of oleoresin results in the parts of 

dry chilly and in trade parlance it is called as skinned/cut chilly or crushed 

chilly or spent chilly. The crushed chilly consists of stem, a part of the skin 

and the chilly seeds. This extracted chilly can be used as a product is not 

disputed by the Revenue. The only ground on which the Revenue is 

attempting to contend is that, the reminiscence of the extracted chilly 

would attract the residuary clause is by virtue of non-inclusion of these 

products viz., cut chilly, crushed chilly, and spent chilly in Entry No. 61 for 

the relevant period. When the said product can be sold as such in the 

market and it is accepted as such in common trade parlance, we are 

unable to accept the contention of the Revenue that though it partakes the 

character of different commodity, only by virtue of its non-inclusion in the 

entry at Sl.No. 61, it cannot be held that residuary clause gets attracted. In 

this regard, the judgment of this Court in the case of Habeeb Proteins & Fats 

Extracts (supra) requires to be extracted which reads as follows :— 

“26. Secondly, the learned counsels for the parties have not placed any 

material before us to demonstrate how the sunflower oil cake and groundnut 

oil cake are in any way different from de-oiled sunflower cake and groundnut 

oil cake. Therefore, the only way we need to understand these commodities 

is the way in which they are understood in common parlance and in trade 

circles. The oil cake contains a certain percentage of oil and several other 

ingredients. When these commodities are subjected to processing of extraction 

of oil, some quantum of oil is removed, but they continue to remain as oil cakes 

with lesser content of oil, and the original commodity is not used in the 

manner as to cease to exist or cease to be available in that form for sale or 

purchase to attract levy of tax under section 6 of the Act. An article which is 

commonly and generally known as oil cake would not lose its identity merely 

because the purchasing dealer utilises the same for extraction of oil and 

therefore, the essential ingredients required to attract the levy of purchase tax 

under section 6 of the Act are not satisfied and accordingly it requires to be 

held that there is no consumption of oiled sunflower cake and oiled groundnut 

oil cake in the manufacture of other goods for sale nor there is any consumption 

otherwise, since even after extraction of oil, the oiled sunflower cake and oiled 

groundnut oil cake continue to remain as oil cake with lesser quantity of oil 

and therefore, they continue to remain the same commodity.” 

13. This Court while considering as to character of de-oiled cakes remaining 

after extraction from oil cake held that, it does not lose its identity as 

whole cake nor it ceases to exist as an oil cake. Applying the proposition laid 

down in the said judgment which is pressed into service by the appellant 

to the facts of this case, the only way to understand the commodities which 

ultimately comes out on crushing of the chilly in common parlance and in 



trade circles is also required to be examined with reference to the instant 

case and examine whether they are understood in common parlance and 

in trade circles. Admittedly, the process carried out in extraction of 

oleoresin, the reminiscence that would follow are, cut chilly, crushed 

chilly and spent chilly and it is sold as a separate commodity and accepted 

both in trade and common parlance and it does not lose its identity by 

virtue of such extraction process. The originality of such commodity 

remains as such. Hence, in view of the same, we are of the view that the 

judgment of this Court in Habeeb Proteins would be squarely applicable 

to the facts of the present case. 

14. Yet another factor which requires to be considered in favour of the 

assessee is the subsequent amendment brought about to the Entry No. 89 

where under the Legislature in its wisdom has included crushed chilly, cut 

chilly and spent chilly by adding the same after the words “dry chillies”. 

Hence, we find that the Advance Ruling Authority was in error in holding 

that the residuary clause viz. section 4(1)(b) of the Act was applicable to the 

facts of this case viz. the commodity in question and the ruling that 

the assessee is liable to pay tax at 12.5 per cent for the period 1-4-2005 to 

31-3-2006. 

15. In view of our discussion made herein above, we hold that crushed 

chilly, spent chilly is a spice by itself which can be sold and traded in 

common parlance and accordingly, tax leviable would be at the rate of 4 

per cent and it comes within Entry No. 61 under the definition of “dry 

chillies” and accordingly, we answer the questions of law formulated 

herein above in favour of the assessee, against the revenue by holding that 

the Advance Ruling Authority was in error. 

Accordingly, the appeal filed by the assessee is allowed without any order 

as to costs. 

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2010] Cheerans Auto Agencies v. State of Kerala (Ker.) 217 

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[2010] 1 GST 217 (KER.) 


Cheerans Auto Agencies 

v. 

State of Kerala* 


O.T. REV. NOS. 29 AND 35 OF 2009 (C.R.) 


PENALTY - In case of non-disclosure of sales turnover of old vehicles - 

Assessment years 2005-06 and 2006-07 - Assessee, a registered dealer, 

was engaged in sale of two-wheelers - It conducted exchange mela 

wherein owners of old two-wheelers were provided with facility to 

exchange their old vehicles with new ones - As per terms of agreement, 

if value of old vehicle fixed by assessee’s broker was accepted by 

customer then he could purchase new vehicle from assessee by remitting 

balance sale price - Subsequently, broker sold old vehicles delivered by 

customers and remitted value earlier fixed to assessee with which entire 

price of new vehicles sold to customers, got paid - Even though old two 

wheelers were purchased from customers and resold later by assessee 

and broker, neither assessee nor broker conceded any purchase and sale 

of old vehicles - In view of non-payment of tax on sale of old vehicles, 

Intelligence Officer levied penalty under section 67 - Whether having 

regard to fact that purchase and sale of old vehicles were either by or on 

behalf of assessee, impugned penalty order passed by Intelligence 

Officer was to be confirmed - Held, yes [Section 67 of the Kerala Value 

Added Tax Act, 2003] 

FACTS 

The assessee, engaged in the sale of two wheelers, was a registered dealer 

under the Act. During the relevant assessment years, the assessee conducted 

exchange melas wherein old two wheeler owners were provided 

with facility to exchange their old vehicles with new ones. The assessee 

arranged a broker for purchase of old vehicles from the customers at the 

value fixed by the broker. If the value fixed by the broker was accepted by 

the customer, then he could purchase the new vehicle from the assessee 

by remitting the balance sale price. The assessee sold new vehicle at the 

original cost to the customer but by collecting only the price of the new 




vehicle reduced by the value of the customer’s old vehicle fixed by the 

broker. The old vehicle was delivered by the customer then and there and 

the broker took over the possession of the same with the documents. 

According to the assessee, the broker later sold the old vehicles delivered 

by the customers and remitted the value earlier fixed to the assessee with 

which the entire price of the new vehicles sold to the customers got paid. 

Even though, old two wheelers were purchased from customers and 

resold later by the assessee and the broker in tantum, neither the assessee 

nor the broker conceded any purchase and sale of old vehicles. In view of 

the non-payment of tax on the sale of old vehicles, the Intelligence Officer 

levied penalty for evasion of tax under section 67(1). The first appeal 

having failed, the assessee approached the Tribunal with second appeal 

and the Tribunal, though confirmed the penalty yet reduced the quantum 

to equal amount of tax as against double the amount levied and sustained 

in the first appeal. 

On appeal : 

HELD 

The first question to be considered was whether the exchange mela 

involving taking of old vehicle from the customer and replacement of the 

same with a new one involved purchase of the old vehicle from the 

customer. It was the admitted position that on the customer’s bringing the 

old vehicle, its value was fixed by the broker and it was up to the customer 

to accept the value or reject the same. If the customer accepted the value 

offered by the broker, then he surrendered the old vehicle along with 

papers and purchased a new one from the assessee by remitting the value 

of the new two wheeler, reduced by the value fixed for the old one by the 

broker. Once this transaction or exchange was finalised, then the assessee 

had no right to claim the balance sale consideration of the new vehicle sold 

to the customer irrespective of whether the value of the old vehicle fixed by 

the broker was realised by sale of the old vehicle surrendered by the 

customer or not. In other words, there was clear sale of the old vehicle by 

the customer by delivering the possession of the same along with its 

registration certificate and transfer documents in terms of the Motor 

Vehicles Rules. The consideration paid to him was by way of adjustment of 

the purchase value of the old vehicle, towards the sale price of the new 

vehicle. It was the conceded position that the assessee treated the sale of the 

new vehicle under the exchange scheme as full and complete with no debit 

balance of price in the customer’s account. Therefore, purchase of old 

vehicle from the customer was complete when new vehicle was sold to him 

by recovering its value reduced by the cost of the old vehicle taken over from 

the customer. [Para 3] 

The next question to be considered was as to whether the assessee 

purchased old vehicle or whether it was the broker who had purchased the 

old vehicle. The terms of arrangement between the assessee and the broker 

for purchase and sale of the old vehicle were not disclosed to the depart- 


A 

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G


A 

B 

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D 

E 

F 

G 

ment. In other words, it was not known as to who made the profit or 

suffered the loss in the resale of the old vehicles purchased from the 

customers. However, there was no need to go into the question because the 

transaction of purchase of old vehicle from the customer and the sale of 

new vehicle to him was between the assessee and the customer. There was 

no privity of contract between the broker and the customer because the 

broker took over possession of the old vehicle only after sale of new vehicle 

by the assessee to customer by adjusting consideration of old vehicle, that 

was the value fixed by the broker, in the sale price of the new vehicle. In 

other words, consideration for the purchase of the old vehicle passed from 

the assessee to the customer by way of credit given against sale price of the 

new vehicle. It was not known whether the broker took the profit or 

suffered the loss on resale of the old vehicle, above or below the value for 

which it was purchased. If the assessee allowed the broker to take profit or 

loss, then the position was that after purchase, the assessee sold the old 

vehicle at the same value of its purchase to the broker on credit sale basis 

and broker later paid the value to the assessee whether before or after sale. 

On the other hand, if the broker was only paid commission or share of profit 

on resale of old vehicle then he only acted as an agent of the assessee. In 

other words, the purchase and sale of the old vehicle were either by or on 

behalf of the assessee. The Intelligence Officer, thus, rightly found that the 

assessee evaded payment of tax on purchase and sale of old vehicles by not 

disclosing the sales turnover in the return filed and, therefore, the penalty 

was rightly levied under section 67(1). [Para 4] 

The next question to be considered was with regard to the reduction of 

penalty claimed by the assessee. It was found that the Tribunal had reduced 

the penalty to equal amount of tax as against the double amount sustained 

by the First Appellate Authority. The assessee could be granted further 

reduction of penalty provided the tax on the sale of old vehicle was later paid 

by it and it had remitted the tax along with interest. If the assessee had 

remitted the tax on sale of old vehicles, either voluntarily by revising the 

returns, or after the assessment, after detection of suppression by the 

Intelligence Officer and paid the tax along with interest for the belated 

period, which was also payable in terms of section 31(6) then the penalty 

would stand reduced to 25 per cent of the tax payable on the sale of the old 

vehicle. The assessee was to be directed to produce certificate from the 

Assessing Officer about payment of tax and interest on the sale of old 

vehicles for the above two years and if such certificate was produced, the 

Intelligence Officer would after rechecking the correctness of the same, 

reduce the penalty to 25 per cent of the tax liability and excess penalty, if any 

paid, should be refunded to the assessee. However, if the assessee did not 

produce proof of payment of tax and interest as above, then the penalty 

fixed by the Tribunal at equal amount of tax would stand confirmed. 

[Para 5] 

Smt. S.K. Devi for the Appellant. Mohammed Raffiq for the Respondent. 



JUDGMENT 

C.N. Ramachandran Nair, J. - The revision petitioner, engaged in the sale 

of Yamaha two wheelers at Thrissur, is a registered dealer under the 

Kerala Value Added Tax Act, 2003 (for short ‘the KVAT Act’). During 2005- 

06 and 2006-07, the petitioner conducted exchange melas wherein old two 

wheeler owners were provided with facility to exchange their old vehicles 

with new ones. The petitioner arranged a broker for purchase of old 

vehicles from the customers at the value fixed by the broker. If the value 

fixed by the broker is accepted by the customer, then he can purchase the 

new vehicle from the petitioner by remitting the balance sale price. The 

petitioner sold new vehicles at the original cost to the customer, but by 

collecting only the price of the new vehicle reduced by the value of the 

customer’s old vehicle fixed by the broker. The old vehicle is delivered by 

the customer then and there and the broker takes over possession of the 

same with the documents. According to the petitioner, the broker later 

sells the old vehicles delivered by the customers and remits the value 

earlier fixed to the petitioner with which the entire price of the new 

vehicles sold to the customers get paid. Even though old two wheelers 

were purchased from customers and resold later by the petitioner and the 

broker in tantum, neither the petitioner nor the broker conceded any 

purchase and sale of old vehicles. During the relevant years, tax on sale of 

old vehicle under section 6(1) of the KVAT Act was 4 per cent, which was 

later reduced to 0.5 per cent of the sale value by introducing 10th Proviso 

to section 6(1) of the KVAT Act. In view of the non-payment of tax on the 

sale of old vehicles purchased under Exchange Mela, the Intelligence 

Officer proposed to levy penalty for evasion of tax under section 67(1) of 

the KVAT Act. Even though the petitioner contended that he has not 

purchased and sold the old vehicles, the Intelligence Officer overruled the 

objections and levied penalty. The first appeals having failed, the petitioner 

approached the Tribunal with second appeals and the Tribunal, though 

confirmed the penalty, reduced the quantum to equal amount of tax as 

against double the amount levied and sustained in the first appeal. It is 

against these orders of the Tribunal, these connected revisions are filed. 

2. We have heard counsel appearing for the petitioner and the Government 

Pleader appearing for the respondents. 

3. The first question to be considered is whether the exchange mela 

involving taking of old vehicle from the customer and replacement of the 

same with a new one involves purchase of the old vehicle from the 

customer. It is the admitted position that on the customer bringing the old 

vehicle, its value is fixed by the broker and it is up to the customer to accept 

the value or reject the same. If the customer accepts the value offered by 

the broker, then he surrenders the old vehicle along with papers and 

purchases a new one from the petitioner by remitting the value of the new 

two wheeler, reduced by the value fixed for the old one by the broker 

arranged by the petitioner. Once this transaction or exchange is finalised, 


A 

B 

C 

D 

E 

F 

G


A 

B 

C 

D 

E 

F 

G 

then the petitioner has no right to claim the balance sale consideration of 

the new vehicle sold to the customer irrespective of whether the value of 

the old vehicle fixed by the broker is realised by sale of the old vehicle 

surrendered by the customer or not. In other words, there is clear sale of 

the old vehicle by the customer by delivering the possession of the same 

along with its registration certificate and transfer documents in terms of 

the Motor Vehicles Rules. The consideration paid to him is by way of 

adjustment of the purchase value of the old vehicle, towards the sale price 

of the new vehicle. It is the conceded position that the petitioner treats the 

sale of the new vehicle under the exchange scheme as full and complete 

with no debit balance of price in the customer’s account. Therefore, 

purchase of old vehicle from the customer is complete when new vehicle 

is sold to him by recovering its value reduced by the cost of the old vehicle 

taken over from the customer. 

4. The next question to be considered is as to whether petitioner purchased 

old vehicle or whether it is the broker who has purchased the old 

vehicle. The terms of arrangement between the petitioner and the broker 

for purchase and sale of the old vehicle are not disclosed to the Department. 

In other words, it is not known as to who makes the profit or suffers 

the loss in the resale of the old vehicle purchased from the customer. 

However, we do not think, there is any need to go into the question because 

the transaction of purchase of old vehicle from the customer and the sale 

of new vehicle to him is between the petitioner and the customer. There 

is no privity of contract between the broker and the customer because the 

broker takes over possession of the old vehicle only after sale of new 

vehicle by the petitioner to customer by adjusting consideration of old 

vehicle, that is the value fixed by the broker, in the sale price of the new 

vehicle. In other words, consideration for the purchase of the old vehicle 

passes from the petitioner to the customer by way of credit given against 

sale price of the new vehicle. It is not known whether the broker takes the 

profit or suffers the loss on resale of the old vehicle above or below the 

value for which it was purchased. If the petitioner allows the broker to take 

profit or loss, then the position is that after purchase, the petitioner sells the 

old vehicle at the same value of its purchase to the broker on credit sale 

basis and broker later pays the value to the petitioner whether before or 

after sale. On the other hand, if the broker is only paid commission or share 

of profit on resale of old vehicle, then the broker only acts as an agent of 

the petitioner. In other words, the purchase and sale of the old vehicle is 

either by or on behalf of the petitioner. In our view, the Intelligence Officer, 

rightly found that the petitioner evaded payment of tax on purchase and 

sale of old vehicle by not disclosing the sales turnover in the return filed 

and therefore, the penalty was rightly levied under section 67(1) of the 

KVAT Act. 

5. The next question to be considered is with regard to the reduction of 

penalty claimed by the petitioner. We find that the Tribunal has reduced 

the penalty to equal amount of tax as against the double amount sustained 



by the First Appellate Authority. However, we feel, the petitioner can be 

granted further reduction of penalty provided the tax on the sale of old 

vehicle is later paid by the petitioner and the petitioner has remitted the 

tax along with interest. If the petitioner has remitted the tax on sale of old 

vehicles, either voluntarily by revising the returns, or after assessment, 

after detection of suppression by the Intelligence Officer and the tax along 

with interest for the belated period, which is also payable in terms of 

section 31(6) of the KVAT Act is paid, then the penalty will stand reduced 

to 25 per cent of the tax payable on the sale of the old vehicle. The petitioner 

is directed to produce certificate from the Assessing Officer about payment 

of tax and interest on the sale of old vehicles as above for the above 

two years and if such certificate is produced, the Intelligence Officer will 

after rechecking the correctness of the same, reduce the penalty to 25 per 

cent of the tax liability and excess penalty if any paid should be refunded 

to the petitioner. However, if the petitioner does not produce proof of 

payment of tax and interest as above, then the penalty fixed by the 

Tribunal at equal amount of tax will stand confirmed. 

The Tax Revisions are disposed of as above. 

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[2010] 1 GST 222 (PUNJ. & HAR.) 

HIGH COURT OF PUNJAB AND HARYANA 

New Model Industries (P.) Ltd. 

v. 

State of Punjab* 

M.M. KUMAR AND JASWANT SINGH, JJ. 

VATAP NO. 26 OF 2009 

NOVEMBER 11, 2009 

SALE - Assessment year 1993-94 - Whether manufacturing of bus bodies 

on chassis as per design, specifications and seating capacity supplied by 

customers, amounted to sale of motor vehicle bodies, and is liable to tax 

under provisions of Act - Held, yes [Section 68 of Punjab Value Added 

Tax Act, 2005] 

FACTS 

The assessee was engaged in the manufacturing of bus bodies on the 



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chassis as per design, specifications and seating capacity supplied by its 

customers. It also undertook repair work and resale of iron and steel. In 

the course of assessment, the assessing authority came to the conclusion 

that there was sale of motor vehicle bodies and the transactions were not 

of work contract as claimed by the assessee. It was further held that the 

sales were carried out within the State and, thus, liable to sales tax. 

Accordingly, demand towards tax was raised and penalty under section 

10(7) was also imposed. The appeal preferred by the assessee was dismissed 

by the appellate authority. On second appeal, the Tribunal held that 

the assessee was liable to pay tax, however, it set aside the penalty order. 

On appeal : 

HELD 

In view of the decision of the Supreme Court in the case of CCT v. M.G. Bros. 

[1975] 35 STC 24, it was to be held that the Tribunal was justified in holding 

that the erection of body on the chassis would amount to sale. [Para 8] 

Further, there were categorical findings recorded by the Tribunal that the 

agreement stipulated fabrication of bus bodies on the chassis which were 

supplied by the Haryana Roadways to the assessee. A fixed price was to be 

realized for each of the bus body to be fabricated on the chassis and no 

material for fabrication of bus body was to be supplied by the Haryana 

Roadways. Accordingly, the Tribunal on the basis of facts had concluded 

that there was no other possible construction except to infer that there was 

sale within the State of Punjab, which was liable to tax especially when the 

assessee had obtained ‘D’ Forms from Haryana Roadways as was mandatory 

in case of sale made to the Government Department which was 

chargeable to tax at lower rate. [Para 10] 

On the issue of inter-State sale, the Tribunal had opined that even if the 

contention raised by the assessee was accepted and it was treated as an 

inter-State sale on account of movement of goods from Punjab to Haryana 

still the fact remained that the tax was assessable at the rate of 4 per cent 

which had been charged by the respondent State. Accordingly, the Tribunal 

had concluded that no useful purpose would be served by remanding 

the matter for fresh assessment, especially when the assessee did not show 

the transaction to be an inter-State sale. Therefore, it was opined that there 

would be no tax effect on the assessee in the facts and circumstances of the 

case. Accordingly, while leaving the question of law open, instant appeal 

was to be dismissed. [Para 11] 

CASE REVIEW 

CIT v. M.G. Bros. [1975] 35 STC 24 (SC) (para 8) followed. 


State of Gujarat v. Variety Body Builders [1976] 38 STC 176 (SC) (para 7), CCT v. 

M.G. Bros. [1975] 35 STC 24 (SC) (para 8) and State of Punjab v. Himachal 

Government Timber Depot [1985] 58 STC 265 (Punj. & Har.) (para 9). 



Kashmiri Lal Goyal and Sandeep Goyal for the Appellant. Piyush Kant 

Jain for the Respondent. 

JUDGMENT 

M.M. Kumar, J. - This appeal filed under section 68 of the Punjab Value 

Added Tax Act, 2005 (for brevity, ‘the VAT Act’) challenges order dated 

17-11-2008 passed by the Value Added Tax Tribunal, Punjab, Chandigarh 

(for brevity, ‘the Tribunal’) in Appeal No. 511 of 2005-06, in respect of 

assessment year 1993-94. 

2. Brief facts necessary for disposal of the controversy raised in the instant 

appeal are that the dealer-appellant is engaged in the manufacturing of 

bus bodies on the chassis as per design, specifications and seating capacity 

supplied by its customers. It has been claimed that the dealer-appellant 

neither making bodies for sale nor keeps the same in stock. It also 

undertook the repair work and resale of iron and steel. 

3. On 16-9-1998, a surprise checking was conducted by the officers of the 

revenue on the premises of the dealer-appellant. A detailed show-cause 

notice, dated 8-10-1998, was issued by the Assessing Authority directing 

the dealer-appellant to produce requisite documents such as cash book, 

ledger, purchase vouchers, balance sheet with profit and loss account, bill 

books, trading account etc. and purchase orders for the years 1993-94 to 

1997-98. These proceedings eventually culminated into passing of an 

assessment order dated 27-7-1999 (A-2) in respect of assessment year 

1993-94. The Assessing Authority raised an additional demand of 

Rs. 25,13,809 under the provisions of the Punjab General Sales Tax Act, 

1948 (for brevity, ‘PGST Act’). Against the order dated 27-7-1999, the 

dealer-appellant preferred an appeal under section 20(5) of the PGST Act. 

The Deputy Excise and Taxation Commissioner (Appeals), Jalandhar 

Division, Jalandhar (DETC), vide order dated 21-9-1999 directed the 

dealer-appellant to deposit Rs. 17 lakhs by 14-10-1999 and to produce the 

Treasury receipt on 15-10-1999 before him. Against the said order, the 

dealer-appellant filed an appeal before the Tribunal, which directed him 

to deposit Rs. 1 lakh by 15-5-2000 and to appear before the DETC. The 

dealer-appellant could not deposit the requisite amount and filed an 

application for extension of time for deposit of the amount. The Tribunal 

extended the time up to 1-1-2001 and directed the dealer-appellant to 

appear before the Appellate Authority on 8-10-2001. The amount was 

deposited and the Appellate Authority remanded the matter to the Assessing 

Authority to afford an opportunity to the dealer-appellant to produce 

evidence and to pass fresh assessment order, vide order dated 28-1-2002 

(A-3). 

4. On 18-9-2002, the Assessing Authority again passed an assessment 

order. This time no demand under the PGST Act was raised but a demand 

of Rs. 5,70,080 under the Central Sales Tax Act, 1956 (for brevity, ‘CST Act’) 

was raised (A-4). A sum of Rs. 4,68,458 as penalty and interest under 

sections 10(6) and 11D read with section 9 of the CST Act, was also 


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imposed. The dealer-appellant filed two appeals one under section 20(10)(a) 

of the PGST and the other under section 9(2) of the CST Act read with 

section 20(1)(a) of the PGST Act. On 11-1-2005 (A-4/A), the Appellate 

Authority again remanded the matter back to the Assessing Authority for 

passing a speaking order after verifying the facts as per the directions 

given in the earlier remand order dated 28-1-2002. 

5. On 28-3-2005, the Assessing Authority again passed fresh assessment 

orders under the PGST Act and determined the gross sales of the dealerappellant 

at Rs. 2,16,66,610. After placing reliance on ‘D’ Forms, the 

Assessing Authority came to the conclusion that there was sale of motor 

vehicle bodies and the transactions were not of work contract as claimed 

by the dealer-appellant. It was further held that the sales were completed 

within the State and, thus, liable to sales tax under PGST Act. Accordingly, 

demand of Rs. 6,92,988 towards tax was raised and penalty of Rs. 5 lakhs 

under section 10(7) of the Act was imposed (A-5). The appeal preferred by 

the dealer-appellant against order dated 28-3-2005, was dismissed by the 

Appellate Authority vide order dated 27-12-2005 (A-6). 

6. Against the order dated 27-12-2005 (A-6), the dealer-appellant preferred 

further appeal before the Tribunal along with an application for entertaining 

the appeal without prior payment of demand. The Tribunal vide order 

dated 17-11-2008 disposed of the appeal holding the dealer-appellant 

liable to pay the tax due as shown in the order dated 28-3-2005 passed by 

the Assessing Authority. However, it has set aside the penalty of Rs. 5 lakhs 

under section 10(7) of the Act (A-9). 

7. At the hearing, Mr. K.L. Goyal, learned senior counsel for the dealerappellant 

has raised the following two questions of law for determination 

of this Court :— 

1. Whether on the facts and in the circumstances of the case, the 

Tribunal was justified in holding that the erection of body on the 

chassis would amount to sale, contrary to the judgment of Hon’ble 

the Supreme Court in State of Gujarat v. Variety Body Builders [1976] 

38 STC 176? 

2. Whether on the facts and in the circumstances of the case, the 

Tribunal was justified in holding that there would be no effect with 

regard to tax liability of the dealer even if the transaction is held to 

be inter-State sale? 

8. The first question of law does not survive as it has already been 

answered against the dealer-appellant by Hon’ble the Supreme Court in 

the case of CCT v. M.G. Bros. [1975] 35 STC 24. Confronted with the 

aforesaid situation, Mr. K.L. Goyal, learned senior counsel could not point 

out any distinguishing feature in the case in hand. Accordingly, the first 

question is answered against the dealer-appellant. 

9. In respect of the second question, Mr. Goyal has argued that once it is 

certain that the goods were to move outside the State of Punjab then the 



transaction is required to be considered as inter-State sale, which would 

not be assessable to sales tax. In support of his submission he has placed 

reliance on a Division Bench judgment of this Court in the case of State of 

Punjab v. Himachal Government Timber Depot [1985] 58 STC 265 and 

argued that according to clause 3 of the agreement dated 1-12-1994 (A-1), 

the Haryana Roadways has undertaken to pay CST in addition to fabrication 

charges. The submission appears to be that once it is clear between the 

parties that the transaction is inter-State, no tax under the PGST would be 

leviable. On a query by the Court, learned counsel has not disputed that as 

far as the dealer-appellant is concerned, it has to pay 4 per cent tax either 

under the PGST or under the CST. 

10. We have thoughtfully considered the submissions of the learned 

counsel. There are categorical findings recorded by the Tribunal that the 

agreement dated 1-12-1994 (A-1) stipulated fabrication of bus bodies on 

the chassis which were supplied by the Haryana Roadways to the dealerappellant. 

A fixed amount of price was to be realised for each of the bus 

body to be fabricated on the chassis and no material for fabrication of bus 

body was to be supplied by the Haryana Roadways. Accordingly, the 

Tribunal on facts has concluded that there is no other possible construction 

except to infer that there was sale within the State of Punjab, which 

was liable to tax especially when the dealer-appellant had obtained ‘D’ 

Forms from Haryana Roadways as is mandatory in case of sale made to 

Government department which is chargeable to tax at lower rate. 

11. On the issue of inter-State sale, the Tribunal has opined that even if the 

contention raised by the dealer-appellant is accepted and it was treated as 

an inter-State sale on account of movement of goods from Punjab to 

Haryana, still the fact remains that the tax was assessable at the rate of 4 

per cent, which has been charged by the respondent State. Accordingly, 

the Tribunal has concluded that no useful purpose would be served by 

remanding the matter for fresh assessment, especially when the dealerappellant 

did not show the transaction to be inter-State sale. Therefore, we 

are of the view that there would be no tax effect on the dealer-appellant 

in the facts and circumstances of the present case. Accordingly, while 

leaving the question of law open, we dismiss the appeal. 

12. No other issue has been raised. 

13. As a sequel to the aforesaid discussion, the appeal fails and the same 

is dismissed. 

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[2010] 1 GST 227 (PUNJ. & HAR.) 

HIGH COURT OF PUNJAB AND HARYANA 

Vardhman Industries Ltd.* 

v. 

State of Punjab 

M.M. KUMAR AND JASWANT SINGH, JJ. 

VATAP NO. 12 OF 2009 

DECEMBER 7, 2009 

PENALTY - Assessee was engaged in manufacturing and sale of iron and 

steel goods - It was entitled to tax exemption under Act for a period of 

seven years with effect from 27-3-2000 to 26-3-2007 - Assessee sold 

certain goods to consignee ‘M’ vide invoice dated 26-3-2007 and 

earmarked for loading in truck which was reported at ICC center on 

30-3-2007 - Required documents as envisaged under sub-section (2) of 

section 51 were presented at ICC center, however, goods were detained 

by officer-in-charge under sub-section (6)(a) of section 51 by doubting 

genuineness of transaction/documents as arrival and reporting of vehicles 

at ICC center had been after four days of date of invoice - It was, 

therefore, found that invoices were ante dated to evade tax - Matter was, 

thereafter, reported to designated officer, who after conducting an 

enquiry, held that there was an attempt to evade tax and, accordingly, 

exercising power under clause (b) of sub-section (7) of section 51 

imposed penalty vide order dated 13-4-2007 - Whether since sale 

invoice/bills had been issued on 26-3-2007 and goods were earmarked 

and goods receipts were issued to vehicles for their onward transmission 

to consignee on same date, mere delayed movement of goods would not 

be sufficient to conclude that there was an attempt to evade payment of 

tax - Held, yes - Whether therefore, penalty levied on assessee was to be 

deleted - Held, yes [Section 51(7)(b) of the Punjab Value Added Tax Act, 

2005] 

FACTS 

The assessee was engaged in the manufacturing and sale of iron and steel 

goods. It was registered under the Punjab General Sales Tax Act, 1948 and 

Central Sales Tax Act, 1956. It had been granted exemption from payment 

of tax for a period of seven years with effect from 27-3-2000 to 26-3-2007 

under the Act. The assessee sold goods to consignee ‘M’ vide invoice dated 




26-3-2007 and earmarked for loading in truck. The truck was reported at 

ICC center on 30-3-2007. The required documents as envisaged under subsection 

(2) of section 51 were presented at the ICC center, however, the 

goods were detained by the officer-in-charge under sub-section (6)(a) of 

section 51 by doubting the genuineness of the transaction/documents as 

the arrival and reporting of the vehicles at the ICC center had been after 

four days of the date of invoice. Similarly, other trucks containing goods 

were also detained since those vehicles had also taken four to ten days 

from the date of invoice, i.e., 26-3-1997 in covering a distance of about 250 

kilometers. It was, therefore, found that the invoices were ante dated to 

evade tax. Matter was reported to the designated officer/AETC, who 

issued notices in all the cases and conducted an enquiry. AETC found that 

there was an attempt to evade tax and accordingly, exercising, power 

under clause (b) of sub-section (7) of section 51 imposed penalty vide order 

dated 13-4-2007. The appeal filed before the DETC-cum-Joint Director 

Investigation, was also dismissed vide order dated 9-8-2007. On further 

appeal, the Tribunal confirmed the order of penalty. 

On appeal : 

HELD 

A plain reading of clause (b) of sub-section (7) of section 51 makes it clear 

that the designated officer can impose a penalty equal to 30 per cent of the 

value of the goods either on the consignor or consignee of the goods if he, 

after enquiry, finds that there is an attempt to avoid or evade tax due or 

likely to be due under the Act. However, before conducting the enquiry, the 

officer is required to serve a notice on the consignor or consignee of the 

goods detained under section 51(6)(a) and give him an opportunity of being 

heard. [Para 10] 

It was not disputed that the assessee-company was entitled to tax exemption 

for a period of seven years with effect from 27-3-2000 to 26-3-2007 for an 

amount of Rs. 28,50,58,500, whichever was earlier. It was also not in dispute 

that on 26-3-2007, the assessee even after the sale of goods worth the value 

stated in 136 sale invoices dated 26-3-2007 had an amount of unavailed/ 

unutlised exemption limit of tax to its credit. It was also not disputed that 

truck had on its own reported at the ICC center on 30-3-2007 and had 

submitted all the statutory documents to the officer-in-charge of the center 

as required under sub-section (2) of section 51. The officer-in-charge of ICC 

center by exercising the powers under sub-section (6)(a) of section 51 

detained the goods since he had reasons to suspect that there was an 

attempt to evade payment of tax on the ground that there was movement 

of goods after a delay of four days. It was also apparent that the detaining 

officer had submitted the proceedings along with the concerned record to 

the designated officer/AETC for conducting necessary enquiry and passing 

of an appropriate order under clause (b) of sub-section (7) of section 51. 

The assessee, in response to the notice issued took the stand that the goods 

had been sold on 26-3-2007 in pursuance of purchase orders and, accord- 


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ingly, sale invoices had been issued, goods were earmarked for clearance 

and goods receipts were issued in the name of two local truck unions on the 

same day for onward transmission of goods. Since the assessee enjoyed the 

exemption on the date of the sale, therefore, no tax was payable and, hence, 

there was no question of any attempt to evade tax. The assessee also 

produced an inspection report, dated 27-3-2007 of the Excise Authorities 

indicating the clearance of certain goods and issue of last bill bearing 

No. 3886, dated 26-3-2007. It could not be disputed that the goods detained 

were sold vide invoices dated 26-3-2007. Therefore, this inspection report, 

dated 27-3-2007 from the Excise record completely demolishes the stand of 

the revenue that the bills/sale invoices had been ante dated with a view to 

avoid payment of tax. [Para 11] 

It was further apparent that the assessee had, after 26-3-2007, sold and 

dispatched goods and had paid tax on the same. It was a different matter 

that number of such transactions, was quite small in comparison to the sale 

transactions entered upon on 26-3-2007. No evidence had been led by the 

revenue to show that the consignees or purchase orders or the goods 

receipts relating to transaction on 26-3-2007 were fictitious. It had also not 

been shown that there was any statutory requirement laying down that the 

goods have to be moved and reported within a particular time frame before 

any ICC center after the issue of sale invoices or goods receipts. It was also 

not disputed that movement of goods in pursuance of 136 sale invoices 

dated 26-3-2007 except seven were cleared by the ICC center where also the 

movement of goods was delayed. The explanation put forth by the assessee 

for delayed movement was that there was non-availability of the trucks at 

the time the goods were earmarked to them by the truck union while 

issuing the goods receipts. There was nothing which prevented the assessee 

from maximizing the exhaustion of its exemption limit to pay tax by 26-3- 

2007 provided there were genuine purchase orders and goods available for 

sale. The authorities, merely on account of delayed movement of goods, in 

the face of the explanation put forth by the assessee, and in the absence of 

any material on record, could not draw the only irresistible inference that 

there was an attempt to evade payment of tax. The assessing authority had 

based its finding of attempt to evade tax simply on the basis of its 

presumption and suspicion. It is well-settled that strong suspicion, strange 

coincidences and grave doubts cannot take place of legal proof to sustain 

a finding of fact. Therefore, the delayed movement of goods by itself was not 

sufficient to conclude that there was an attempt to evade payment of tax or 

the bills/sale invoices were ante dated. Hence, the findings recorded by the 

Tribunal/authorities were based on no evidence and were liable to be set 

aside. Accordingly, it could not be said that there was an attempt to evade 

or avoid payment of tax by mere delayed movement of goods when the sale 

invoices/bills had been issued on 26-3-2007, goods were earmarked and 

goods receipts issued to the vehicles for their onward transmission to the 

consignees on the same date. [Para 12] 



CASE REVIEW 

State of Kerala v. M.M. Mathew [1978] 4 SCC 65 (para 12). 


State of Kerala v. M.M. Mathew [1978] 4 SCC 65 (para 12). 

K.L. Goyal and Manoj Rohilla for the Appellant. Piyush Kant Jain for the 

Respondent. 

ORDER 

Jaswant Singh, J. - This order shall dispose of seven VAT Appeals bearing 

Nos. VATAP 12, 13, 14, 15, 16, 17 and 19 of 2009, involving common 

question of law and similar facts, filed by the appellant-assessee under 

section 68(2) of the Punjab Value Added Tax Act, 2005 (‘VAT Act’) against 

the common order dated 3-10-2008 (Annexure A/8) passed by the Tribunal 

whereby seven Appeal Nos. (VAT) 186-192 of 2007-08 filed by the 

appellant-assessee were dismissed. Facts are being noticed from VATAP 

No. 12 of 2009. 

2. The appellant-assessee is engaged in the manufacturing and sale of iron 

and steel goods with its manufacturing unit at Beopar (Rajpura), District 

Patiala and its registered office at G.T. Road, Sahnewal, District Ludhiana. 

Appellant-assessee is registered under the Punjab General Sales Tax Act, 

1948 (PGST Act) and Central Sales Tax Act, 1956 (CST Act) and subsequently 

under the VAT Act. It has also been granted exemption from 

payment of tax for a period of seven years with effect from 27-3-2000 to 

26-3-2007 for an amount of Rs. 28,50,58,500 vide its exemption certificate 

dated 27-7-2001 (Annexure A/1). Subsequent to the enforcement of VAT 

Act with effect from 1-4-2004 it was granted an entitlement certificate for 

tax exemption subject to the unutilised maximum of Rs. 19,57,82,271 for 

the remaining period with effect from 1-4-2005 to 26-3-2007 vide entitlement 

certificate dated 13-6-2005 (Annexure A/2). 

3. It is claimed that goods were sold by the appellant-assessee (consignor) 

to consignee - M/s. Misbah Fabrication, Hari Singh Street, Srinagar vide 

invoice No. 3858, dated 26-3-2007 and earmarked for loading in truck 

No. JK03A 1334 vide GR No. 2075, dated 26-3-2007 in the name of Kaka 

Transport. The truck bearing No. JK03A 1334 reported at ICC Madhopur 

on 30-3-2007. It is not disputed that the required documents as envisaged 

under sub-section (2) of section 51 of the VAT Act were presented at the 

ICC center, however, the goods were detained by the officer-in-charge 

under sub-section (6)(a) of section 51 of the VAT Act by doubting the 

genuineness of the transaction/documents as the arrival and reporting of 

the vehicles at the ICC center had been after four days of the date of 

invoice. Similarly, in the connected six appeals six other trucks containing 

goods were also detained since those vehicles had also taken four to ten 

days from the date of invoice i.e., 26-3-1997 in covering a distance of about 

250 kilometers from Rajpura to Madhopur. It was, therefore, found that 

the invoices were ante dated to evade tax. Matter was reported to the 


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designated officer/AETC, who issued notices in all the cases and conducted 

an enquiry. AETC found that there was an attempt to evade tax and 

accordingly exercising power under clause (b) of sub-section (7) of section 

51 of the VAT Act imposed penalty vide order dated 13-4-2007 (Annexure 

A/5). The appeal filed before the DETC-cum-Joint Director, Investigation, 

Jalandhar Division, was also dismissed vide order dated 9-8-2007 (Annexure 

A/6). Similar penalties were imposed in the connected appeals vide 

identical order dated 13-4-2007 and the separate appeals filed were also 

dismissed vide order dated 9-8-2007. All the appeals arising out of the 

orders dated 13-4-2007 and 9-8-2007 were dismissed by the Tribunal vide 

impugned common order dated 3-10-2008 (Annexure A/8). 

4. The appellant-assessee has filed the present appeals proposing to raise 

the following substantial questions of law :— 

“(i) Whether the Designated Officer at ICC can impose any penalty under 

section 51(7)(b) of the Punjab Vat Act, 2005 for an offence committed 

(if any) under the Central Sales Tax Act, 1956? 

(ii) Whether, after the goods are voluntarily reported at the ICC, before 

exit of the goods from Punjab State, the ICC authorities are authorised 

to make an enquiry regarding alleged evasion of tax, which is in the 

domain of the Assessing Authority where penalty under section 56 can 

be imposed, if any offence is committed? 

(iii) Whether the sale of goods where bills have been issued on 26-3-2007 is 

complete when the goods are earmarked or delivered to the vehicles 

for its onward transmission, even if the movement of the goods has 

taken place on a later date?” 

5. At the time of hearing issue No. (iii) was re-phrased as. ‘Whether it could 

be said that there was an attempt to evade or avoid payment of tax by mere 

delayed movement of goods when the sale invoices/bills had been issued 

on 26-3-2007, goods were earmarked and goods receipts issued to the 

vehicles for their onward transmission to the consignees on the same 

date’. 

6. Learned counsel for the appellant-company has argued that the goods 

were voluntarily reported at ICC center and all the statutory documents 

required under sub-section (2) of section 51 of the VAT Act were produced 

there and, therefore, the designated officer/AETC could not legally 

exercise jurisdiction under clause (b) of sub-section (7) of section 51 and 

impose penalty for alleged attempt to evade tax which otherwise falls 

within the exclusive domain of the assessing authority under section 56 of 

the VAT Act, if any such alleged offence is committed. He further argued 

that when the sale of goods had taken place and sale invoices had been 

issued on 26-3-2007 and the goods had been earmarked and delivered to 

the transporter vide valid goods receipt for their onward transmission to 

the consignee, then in such a situation merely because the movement of 

the goods had taken place at a later date could not give rise to a 

presumption that there was an attempt to evade tax incurring any penalty 

under section 51(7)(b) of the VAT Act. Learned counsel further argued 



that the transactions in dispute were inter-State sales and assuming for 

the sake of arguments that there was any attempt to evade Central sales 

tax, even then keeping in view the provisions of section 51(7)(b) of the VAT 

Act, the designated officer/AETC could not exercise jurisdiction under 

said provision as no tax was due under the VAT Act. 

7. Per contra learned Additional Advocate General appearing for the 

respondent State has argued that the Tribunal being the final authority 

regarding determination of questions of facts and the Tribunal having 

determined that there was an attempt to evade tax by ante dating the bills/ 

sale invoices, there was no occasion for this Court to interfere under 

section 68(2) of the VAT Act. Learned counsel in support of the findings 

argued that the fact of issue of 136 bills on 26-3-2007 i.e., the last date 

before the expiry of exemption certificate coupled with late movement of 

goods raises an unimpeachable presumption that there was an attempt to 

evade tax. Learned counsel by referring to section 9 of CST Act further 

argued that the power and authority to administer and realise Central 

sales tax has been vested in the State authorities and, therefore, in view of 

the attempt to evade Central sales tax by the assessee-company, the 

designated officer/AETC had the jurisdiction under section 51(7)(b) of the 

VAT Act to impose penalty. 

8. Having heard learned counsel for the parties and giving our thoughtful 

considerations to the rival submissions we are of the considered opinion 

that these appeals deserve to be allowed in favour of the appellantassessee 

and against the revenue. 

9. Before embarking upon to decide the issues, it would be relevant to 

refer to provisions of section 51(7)(b) of the VAT Act, which are reproduced 

hereunder :— 

“51(7)(b) The designated officer shall, before conducting the enquiry, serve a 

notice on the consignor or consignee of the goods detained under clause (a) 

of sub-section (6), and give him an opportunity of being heard and if, after the 

enquiry, such officer finds that there has been an attempt to avoid or evade 

the tax due or likely to be due under this Act, he shall, by order impose on the 

consignor or consignee of the goods, a penalty, which shall be equal to thirty 

per cent of the value of the goods. In case he finds otherwise, he shall order 

release of the goods and the vehicle, if not already released, after recording 

reasons in writing and shall decide the matter finally within a period of 

fourteen days from the commencement of the enquiry proceedings.” 

10. A plain reading of clause (b) of sub-section (7) of section 51 of the VAT 

Act makes it clear that the designated officer can impose a penalty equal 

to 30 per cent of the value of the goods either on the consignor or consignee 

of the goods if he, after enquiry, finds that there is an attempt to avoid or 

evade tax due or likely to be due under the Act (the Act is defined under 

sub-section (1) of section 1 to mean the Punjab Value Added Tax Act, 

2005). However, before conducting the enquiry the officer is required to 

serve a notice on the consignor or consignee of the goods detained under 

section 51(6)(a) of the VAT Act and give him opportunity of being heard. 


A 

B 

C 

D 

E 

F 

G


A 

B 

C 

D 

E 

F 

G 

11. It is not disputed that the appellant-company was entitled to tax 

exemption for a period of seven years with effect from 27-3-2000 to 26-3- 

2007 for an amount of Rs. 28,50,58,500, whichever was earlier. It is also not 

in dispute that on 26-3-2007 the appellant-company even after the sale of 

goods worth the value stated in 136 sale invoices dated 26-3-2007 had an 

amount of unavailed/unutilised exemption limit of tax to its credit. It is 

also not disputed that truck bearing No. JK03A 1334 had on its own 

reported at the ICC center on 30-3-2007 and had submitted all the 

statutory documents to the officer-in-charge of the center as required 

under sub-section (2) of section 51 of the VAT Act (likewise all the trucks 

involved in the connected appeals had also reported at the ICC center and 

submitted the required documents). The officer-in-charge of ICC center 

by exercising the powers under sub-section (6)(a) of section 51 of the VAT 

Act detained the goods since he had reasons to suspect that there was an 

attempt to evade payment of tax on the ground that there was movement 

of goods after a delay of four days. It is also apparent that the detaining 

officer had submitted the proceedings along with the concerned record to 

the designated officer/AETC for conducting necessary enquiry and passing 

of an appropriate order under clause (b) of sub-section (7) of section 

51 of the VAT Act. The appellant-assessee to the notice issued took the 

stand that the goods had been sold on 26-3-2007 in pursuance of purchase 

orders and accordingly sale invoices had been issued, goods earmarked 

for clearance and goods receipt issued in the name of two local truck 

unions on the same day for onward transmission of goods. Since the 

assessee-company enjoyed the exemption on the date of the sale, therefore, 

no tax was payable and hence there was no question of any attempt 

to evade tax. The assessee-company also produced an inspection report 

dated 27-3-2007 of the Excise Authorities indicating the clearance of 

certain goods and issue of last bill bearing No. 3886, dated 26-3-2007. It 

cannot be disputed that the goods detained in all the connected appeals 

were sold vide invoices bearing numbers prior to bill No. 3886, dated 26- 

3-2007. Therefore, this inspection report dated 27-3-2007 from the Excise 

record completely demolishes the stand of the revenue that the bills/sale 

invoices had been ante dated with a view to avoid payment of tax. 

12. It is further apparent that the assessee-company has after 26-3-2007 

sold and dispatched goods and has paid tax on the same. It is a different 

matter that number of such transactions is quite small in comparison to 

the sale transactions entered upon on 26-3-2007. No evidence has been led 

by the revenue to show that the consignees or purchase orders or the 

goods receipts relating to transaction on 26-3-2007 are fictitious. It has also 

not been shown that there is any statutory requirement laying down that 

the goods have to be moved and reported within a particular time frame 

before any ICC center after the issue of sale invoice or goods receipt. It is 

also not disputed that movement of goods in pursuance of 136 sale 

invoices dated 26-3-2007 except the seven involved in the present appeals 

were cleared by the ICC center where also the movement of goods was 



delayed. The explanation put forth by the assessee for delayed movement 

is that there was non-availability of the trucks at the time the goods were 

earmarked to them by the truck union while issuing the goods receipts. 

There is nothing which prevented the assessee-company from maximizing 

the exhaustion of its exemption limit to pay tax by 26-3-2007 provided 

there were genuine purchase orders and goods available for sale. The 

authorities, merely on account of delayed movement of goods, in the face 

of the explanation put forth by the assessee, and in the absence of any 

material on record, in our considered opinion, cannot draw the only 

irresistible inference that there was an attempt to evade payment of tax. 

The assessing authority has based its finding of attempt to evade tax 

simply on the basis of its presumption and suspicion. It is well-settled that 

strong suspicion, strange coincidences and grave doubts cannot take 

place of legal proof to sustain a finding of fact (State of Kerala v. M.M. 

Mathew [1978] 4 SCC 65). Therefore, the delayed movement of goods by 

itself is not sufficient to conclude that there was an attempt to evade 

payment of tax or the bills/sale invoices were ante dated. Hence, the 

findings recorded by the Tribunal/authorities under the VAT Act are 

based on no evidence and are liable to be set aside. Accordingly, the rephrased 

question of law No. (iii) is answered in favour of the appellantassessee 

and against the revenue. In view of the fact that question of law 

No. (iii) has been answered in favour of the assessee, we do not consider 

it necessary to decide the remaining proposed questions of law. Accordingly, 

the appeal(s) are allowed and the impugned order dated 3-10-2008 

(Annexure A/8) passed by the Tribunal is set aside and the appellantassessee 

is held entitled to the refund of amount of penalty deposited, if 

any. 

■■ 


A 

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C 

D 

E 

F 

G

2010] Maruthi Estate v. Appellate Dy. CCT (Mad.) 

235 

A 

B 

C 

D 

E 

F 

G 

[2010] 1 GST 235 (MAD.) 

HIGH COURT OF MADRAS 

Maruthi Estate* 

v. 

Appellate Deputy Commissioner of Commercial Taxes 

T.S. SIVAGNANAM, J. 

W.P. (MD) NO. 2678 OF 2009 


APPEAL - Period of limitation - In case of assessee, assessment order was 

passed on 27-10-2004 - Assessee’s case was that said order was served 

on it only on 18-11-2004 - Thereupon, assessee filed appeal on 17-1- 

2005 - Since there was delay of 27 days in filing appeal, an application 

for condonation of delay was filed - Said application was kept pending 

for around 3½ years and thereafter it was rejected on ground that 

assessment order was served on 27-10-2004 itself and, thus, there was 

a delay of 52 days which was beyond condonable period - On instant 

petition, it was seen from records that in acknowledgement, dated 27- 

10-2004, name and designation of person receiving copy of assessment 

order were not available and, further said acknowledgement did not 

bear seal of assessee-company - It was also noticed that there was no 

endorsement by person who delivered notice of order as required by 

Explanation to rule 52(1) - Whether, in aforesaid circumstances, it could 

be concluded that order of assessment was served upon assessee only on 

18-11-2004 - Held, yes - Whether, further, in view of fact that appeal 

papers were already pending before first respondent for more than 3½ 

years, it was to be held that it was a fit case where delay was to be 

condoned and matter was to be directed to be heard on merits - Held, 

yes [Section 31 of the Tamil Nadu General Sales-tax Act, 1959, read with 

rule 52 of the Tamil Nadu General Sales-tax Rules, 1952] 

FACTS 

The case of the assessee was that the order of the assessment, dated 

27-10-2004, had been served on it only on 18-11-2004 at its estate office. 

The assessee filed an appeal on 17-1-2005 disputing the tax liability. Since 

there was a delay of 27 days in filing the appeal, an application for 

condonation of delay was filed. The said application was kept pending for 

around 3½ years and thereafter it was rejected on ground that the order 




passed by the second respondent, dated 27-10-2004, was served on the 

same date upon the assessee and, hence, there was a delay of 52 days 

which was beyond the condonable period of 30 days. On appeal, the 

assessee contended that there was proof of service on some unknown 

person having signed the acknowledgement on 27-10-2004. The name of 

the person and his designations had not been stated and the seal of the 

establishment was not affixed. It was further contended that there was no 

endorsement by the person who delivered the notice of order. On the basis 

of the aforesaid contentions, the assessee’s case was that there was no 

valid service of notice of order on 27-10-2004 and, therefore, rejection of 

its appeal on the ground of delay of 52 days was illegal. The Appellate 

Deputy Commissioner, however, set aside the assessee’s contentions and 

confirmed the order passed by the Commercial Tax Officer. 

On writ: 

HELD 

The issue which arose for consideration was regarding the service of the 

order of the assessment upon the assessee. This issue had cropped up 

because the assessee had filed an appeal before the first respondent and it 

had been rejected by the impugned order as being filed beyond the 

condonable period of 30 days of filing an appeal. As stated earlier, the appeal 

has to be presented within 30 days and further 30 days’ time is granted to 

present the appeal and the appellate authority can entertain such appeal, 

if it is satisfied that sufficient cause has been made out for condonation of 

delay. Therefore, what was required to be seen was whether there had been 

proper service of the order of the assessment upon the assessee. [Para 7] 

It was seen from records that in the acknowledgement, there was a 

signature with date 27-10-2004. The name of the person or the designation 

was not found and there was no seal of the assessee company. [Para 8] 

A perusal of the Explanation to rule 52(1) shows that there should be an 

endorsement by the person who delivers the notice or order of having 

tendered or given it and such endorsement will be proof for the purpose of 

the abovesaid rule. It was noted in the instant case that there was no such 

endorsement by the person who delivered the notice. One fact which had 

to be borne in mind was that the order of the assessment was passed on 

27-10-2004 and was said to have been delivered to the office of the assessee 

on the same day and according to the assessee the distance between the 

respondent’s office and its estate office was more than 25 kms. [Para 9] 

In view of the above finding to the effect that there was no endorsement by 

the person from the respondent department, it had to be noted that there 

was no proper service of the order of the assessment upon the assessee in 

terms of rule 52(1) of the TNGST Rules. In that view, it had to be taken into 

account that the order of the assessment was served upon the assessee only 

on 18-11-2004. In such circumstances, the impugned order had to be held 

as bad in law and was to be accordingly set aside. [Para 10] 


A 

B 

C 

D 

E 

F 

G


237 

A 

B 

C 

D 

E 

F 

G 

Under normal circumstances, the instant court would have remanded the 

matter for fresh consideration to the first respondent for the purpose of 

seeing whether sufficient cause had been made out for condonation of 

delay. However, in the instant case, it was to be noted that the appeal papers 

were pending before the first respondent for more than 3½ years after a 

number was assigned and then the papers were returned on the ground 

that there was delay of 52 days. The said appeal papers had been once again 

represented and thereafter, the impugned order had been passed. [Para 11] 

In such circumstances, it was to be held that it was a fit case where the delay 

had to be condoned and the matter was to be directed to be heard on merits. 

In view of the above finding, the impugned order was to be set aside, the 

delay in filing the appeal before the first respondent stood condoned and 

the first respondent was to be directed to issue notice to the assessee and 

hear the appeal and decide the same on merits and in accordance with law. 

[Para 12] 

S. Karunakar for the Petitioner. Pala Ramasamy for the Respondent. 

ORDER 

1. The petitioner is an assessee under the provision of the Tamil 

Nadu General Sales-tax Rules. The second respondent by order dated 

27-10-2004 passed a final assessment order for the year 2003-04. 

2. According to the petitioner, there is no arrears. It is submitted by the 

learned counsel for the petitioner that the order of assessment dated 

27-10-2004 has been served on the petitioner only on 18-11-2004 at their 

estate office at Alancholai. The limitation for filing an appeal in terms of 

section 31 of the Act is 30 days from the date of receipt of the copy of the 

order. The Appellate Assistant Commissioner is empowered to admit an 

appeal filed beyond the period of 30 days, up to maximum further period 

of 30 days, if the appellant shows sufficient cause for not filing the appeal 

within the said period of 30 days. According to the petitioner, they filed an 

appeal petition on 17-1-2005 disputing the tax liability. Since there was a 

delay of 27 days in filing the appeal, an application for condonation of 

delay was filed. The application for condonation of delay was numbered, 

but no notice of hearing was received and final hearing was fixed on 

8-2-2008 fixing the date of hearing is 25-2-2008. The petitioner appeared 

for hearing but the matter was not taken up and the appeal petition was 

kept pending before the first respondent for more than 3½ years after 

assigning M.P. No. 2 of 2005, as the number for the condone delay petition. 

Thereafter, by order dated 19-6-2008, the appeal papers were returned as 

rejected stating that on perusal of assessment records, it was seen that the 

order passed by the second respondent dated 27-10-2004 was served on 

the same date on the petitioner and hence, there was a delay of 52 days, 

which is beyond the condonable period of 30 days. 

3. It is the further case of the petitioner that the first respondent failed to 

post the condone delay petition for hearing and failed to give any oppor- 



tunity of being heard to the petitioner and therefore, the petitioner 

submitted a representation dated 1-8-2008 requesting for re-submission 

of the appeal papers. Accordingly, the petitioner re-submitted the appeal 

papers on 12-9-2008 before the first respondent with a request for 

permission to peruse the assessment file to ascertain the date of the order. 

The matter was posted for hearing on 20-11-2008 and the petitioners’ 

counsel appeared before the first respondent on 20-11-2008 and perused 

the assessment file and requested time till 25-11-2008 to submit his 

explanation as regard the date of service of the order of assessment. 

Accordingly, a written submission was also made on 25-11-2008. However, 

the first respondent has passed the impugned order dated 25-11-2008 

stating that the appeal submitted on 17-1-2005 is after the expiration of 30 

days and the appeal petition cannot be entertained. Assailing the correctness 

of this order, the above Writ Petition has been filed on the ground that 

the order of assessment was served only on 18-11-2004 at the estate office 

at Alancholai, which above 25 kms. away from the office of the second 

respondent. Therefore, it was contended that the rejection on the ground 

of delay of 52 days is illegal and arbitrary. 

4. It is further submitted that on perusal of the assessment file, it shown 

that there is proof of service by some unknown persons having signed the 

acknowledgement on 27-10-2004. The name of the persons or their 

designations have not been stated and the seal of the establishment is not 

affixed. Therefore, the petitioner would contend that there is no valid 

service. 

5. It is further stated that all along the written statements were submitted 

and acknowledgements were made and received by the Manager of the 

petitioner, Mr. A.L. Subramaniam, their Auditor Mr. Krishnan and the 

office staff with the seal of the petitioner company. It is further stated that 

terms of the Explanation of the rule 52(1) of the TNGST Rules, the 

endorsement by the person, who delivers the notice of having tendered or 

given it will proof for the purpose of service of the order. On this ground, 

the learned counsel for the petitioner would contend that the writ petition 

is liable to be allowed. 

6. Heard Mr. S. Karunakar, learned counsel appearing for the petitioner 

and Mr. Pala Ramasamy, learned Special Government Pleader appearing 

for the respondents. 

7. The issue which arise for consideration in the present writ petition is 

regarding the service of the order of assessment on the assessee. This issue 

has cropped up because the assessee has filed an appeal before the first 

respondent and the appeal has been rejected by the impugned order as 

being filed beyond the condonable period of 30 days for filing an appeal. 

As stated earlier, the appeal has to be presented within 30 days and further 

30 days time is granted to present the appeal and the appellate authority 

can entertain such appeal, if he is satisfied that sufficient cause has been 

made out for condonation of delay. Therefore, what is required to be seen 


A 

B 

C 

D 

E 

F 

G


239 

A 

B 

C 

D 

E 

F 

G 

is whether there has been proper service of the order of assessment on the 

petitioner. 

8. The files relating to the assessment were produced in court. It is to be 

noted that in the acknowledgement, there is a signature with date 27-10- 

2004. The name of the person or the designation is not found and there is 

no seal of the petitioner company. On this ground, the learned counsel for 

the petitioner would contend that they have not been served with the 

order. However, this issue is not a disputed question of fact and this court 

will not go into the said aspect. The manner of service of notice under the 

Act is in terms of rule 52(1) of the TNGST Rules, 1959. For the purpose of 

this case, the Explanation of rule 52(1) reads as follows :— 

“Service of notices.— The service on a dealer of any notice, summons or order 

under the Act or these rules may be effected in any of the following ways, 

namely:— 

(a) by giving or tendering it to such dealer or his manager or agent or the 

legal practitioner appointed to represent him or to his authorised 

representative; 

Explanation.— Endorsement by person who delivers the notice, etc., of having 

tendered or given it will be proof for the purpose of this sub-rule.” 

9. A perusal of the Explanation shows that there should be an endorsement 

by a person, who delivers the notice or order of having tendered or 

given it and such endorsement will be proof for the purpose of the abovesaid 

rule. It is to be noted in the present case that there is no such 

endorsement by person, who delivered the notice. One fact which has to 

be borne in mind is that the order of assessment was passed on 27-10-2004 

and said to have been delivered in the office of the petitioner in their 

Alancholai estate on the same day and according to the writ petitioner, the 

distance between the respondent office and the estate office is more than 

25 kms. 

10. In view of the above finding to the effect that there is no endorsement 

by the person from the respondent Department, it has to be noted that 

there is no proper service of the order of assessment on the petitionercompany 

in terms of rule 52(1) of the TNGST Rules. In that view, it has to 

be taken that the order of assessment was served on the petitionercompany 

only on 18-11-2004. In such circumstances, the impugned order 

has to be held as bad in law and is accordingly set aside. 

11. Under normal circumstances, this court would remand the matter for 

fresh consideration of the first respondent for the purpose of seeing 

whether sufficient cause has been made out for condonation of delay. 

However, in the instant case, it is to be noted that the appeal papers itself 

were pending before the first respondent for more than 3½ years after a 

number was assigned to the condone delay petition and after the period 

of 3½ years, the papers were returned on 19-6-2008 on the ground that 

there is delay of 52 days. The said appeal papers has been once again represented 

and thereafter, the impugned order has been passed. 



12. In such circumstances, I am of the view that it is a fit case where the 

delay has to be condoned and the matter should be directed to be heard 

on merits. In view of the above finding, the impugned order is set aside, the 

delay in filing the appeal before the first respondent stand condoned and 

the first respondent is directed to issue notice to the petitioner and hear 

the appeal and decide the same on merits and in accordance with law. 

The Writ Petition is allowed. No costs. 

■■ 

[2010] 1 GST 240 (ALL.) 


Commissioner of Sales Tax, Uttar Pradesh, Lucknow 

v. 

Ashish Automobiles* 

DR. SATISH CHANDRA, JJ. 

SALES TAX REVISION NO. 32 OF 1990 

AUGUST 27, 2009 

MANUFACTURE - Assessment year 1981-82 - Assessee carried on business 

of purchasing and selling of scooters, their parts, etc. - It had 

purchased chassis of scooters against Form 3A and later put body 

fabricated over it and sold same as tempo to customers - Assessing 

Officer opined that tempo was a different commodity liable to purchase 

tax under section 3AAAA - Whether mounting of body over chassis did 

not amount to manufacturing activity but it facilitated chassis for 

purpose of usable item and, thus, no different commercial item had 

emerged - Held, yes - Whether, consequently, impugned order passed by 

Assessing Officer was to be set aside - Held, yes [Section 3AAAA of the 

U.P. Sales Tax Act, 1948] 

FACTS 

The assessee carried on the business of purchasing and selling scooters, 

their parts, etc. It had purchased the chassis of the scooters against Form 

3A and later put the body fabricated over it and sold same as tempo to the 

customers. The Assessing Officer opined that the tempo was a different 

commodity liable to purchase tax under section 3AAAA. On second appeal, 



A 

B 

C 

D 

E 

F 

G

2010] CST v. Ashish Automobiles (All.) 

241 

A 

B 

C 

D 

E 

F 

G 

the Tribunal held that the fabricated body over the chassis constituted no 

new item. The fabrication of body over chassis did not amount to 

manufacture. In fabricating the body over chassis, no change of form or 

condition took place, and in these circumstances, no tax was liable to be 

imposed under section 3AAAA. 

On revision : 

HELD 

The chassis alone had no meaning to the customers who could not use the 

chassis alone without having the fabricated body over it. After fabricating 

the body, the tempo was saleable item in the market. The purchase of the 

chassis against Form 3A was not in dispute. In these circumstances, the 

Tribunal rightly held that mounting of the body over the chassis did not 

amount to manufacturing activity but it facilitated the chassis for the 

purpose of usable item and thus, no different commercial item, had 

emerged. Therefore, the impugned order of the Tribunal did not require 

any interference. [Paras 4 and 5] 

In the result, the instant revision filed by the department was to be 

dismissed. [Para 6] 


Jain Industries & Trading Corpn. v. Commissioner of Sales Tax 1989 ATJ 17 (All.) 

(para 4). 

Sanjieva Shankdhar for the Revisionist. H.N. Mishra for the Opposite 

Party. 

ORDER 

1. Heard Sri Sanjieva Shankdhar, learned counsel for the revisionist and 

Sri H.N. Mishra, learned counsel for the opposite party. 

This revision has been filed by the department under section 11 of the U.P. 

Sales Tax Act, 1948 against the judgment/order dated 1-2-1990 passed by 

U.P. Sales Tax Tribunal, Lucknow for the assessment year 1981-82. 

2. The brief facts of the case are that the assessee carries on the business 

of the purchasing and selling of the Scooter, its parts etc. It has purchased 

the chassis of the scooters against Form 3A and later put the body 

fabricated over it and sold as tempo to the customers. The assessee has not 

sold the chassis but sold the tempo. The Assessing Officer opined that the 

tempo is a different commodity and is liable to purchase tax under section 

3AAAA of the U.P. Sales Tax. So, he levied the tax. The first appellate 

authority vide its order dated 16-8-2008 has remanded the matter back to 

the Assessing Officer. 

3. Being aggrieved, the assessee has filed an appeal before the Tribunal 

who vide its impugned order dated 1-2-1990 observed that the fabricated 

body over the chassis constitutes no new item. The fabrication of body 

over chassis does not amount to manufacture. In fabricating the body 



over chassis, no change of form or condition took place, and in these 

circumstances, no tax was liable to be imposed under section 3AAAA of the 

U.P. Sales Tax Act. For this purpose, the Tribunal relied on a number of 

case laws in its order. 

4. By considering the totality of the facts and circumstances of the case, 

I am of the view that chassis alone has no meaning to the customers who 

cannot use the chassis alone without having the fabricated body over it. 

After fabricating the body, the tempo is saleable item in the market. The 

purchase of the chassis against Form 3A is not in dispute. In the case of Jain 

Industries & Trading Corpn. v. Commissioner of Sales Tax 1989 ATJ 17 

(All.), it was observed that the building or mounting do not change the 

complexion, original form; and conditions of the goods. 

5. In the circumstances, I agree with the observations made by the 

Tribunal that mounting of the body over the chassis does not amount as 

manufacturing activity but it felicitate the chassis for the purpose of 

usable item and no different commercial item is emerged. When it is so 

then I declined to interfere with the order of the Tribunal, which is hereby 

sustained along with the reasons mentioned therein. 

6. In the result, the revision filed by the department is dismissed. 

[2010] 1 GST 242 (KER.) 


Sasi Road Finishers & Engineering Contractors* 

v. 

State of Kerala 


OT. REV. NO. 34 OF 2009 


PENALTY - For an attempt of evasion of tax - Lower authorities levied 

penalty under section 47(6) upon assessee on ground that at time of 

transport of goods, which were machinery for road work, from Kerala to 

outside State, assessee did not have registration under Act - Whether 

since transaction did not involve any sale, no penalty could be levied 



■■ 

A 

B 

C 

D 

E 

F 

G

2010] Sasi Road Finishers & Engg. Contractors v. State of Kerala (Ker.) 243 

A 

B 

C 

D 

E 

F 

G 

upon assessee for attempted evasion of tax under section 47(6) - Held, 

yes [Section 47(6) of the Kerala Value Added Tax Act, 2003] 

FACTS 

The lower authorities levied penalty under section 47(6) upon the assessee 

for the reason that at the time of transport of goods, the assessee did not 

have registration under the Act. 

On revision : 

HELD 

It was evident from the records that the assessee maintained the registration 

earlier which was cancelled on account of closure of business in 

Kerala. In any case, the transaction which led to levy of penalty under 

section 47(6) was transport of capital goods, which were machinery for 

road work, from Kerala to outside State. Since the transaction did not 

involve any sale, no penalty could be levied for attempted evasion of tax 

under section 47(6). Therefore, the penalty levied upon the assessee 

deserved to be cancelled. [Para 2] 

C.K. Sreejith for the Appellant. Mohammed Rafiq for the Respondent. 

ORDER 

C.N. Ramachandran Nair, J. - Special Government Pleader appearing for 

the respondent took notice on admission. We have heard counsel for the 

petitioner and Special Government Pleader. 

2. After hearing both sides and after going through orders of the lower 

authorities including that of the Tribunal, we find penalty is levied for the 

reason that at the time of transport of the goods the petitioner did not have 

registration under the KVAT Act. However, it is seen from records that 

petitioner maintained the registration earlier, which according to the 

petitioner was cancelled on account of closure of business in Kerala. In 

any case the transaction which led to levy of penalty under section 47(6) 

is transport of capital goods which are machinery for road work from 

Kerala to outside State. Three other consignments were also detained and 

released after collecting security. However, in all these three cases proposal 

for penalty was dropped finding that there was no attempt of evasion 

of tax. On the face of it, there is no sale of goods involved and it is only 

transfer of capital goods from one State to another by the dealer who has 

business in more than one State. Since transaction does not involve any 

sale, no penalty can be levied for attempted evasion of tax under section 

47(6) of the KVAT Act. We, therefore, allow the revision case by cancelling 

the order of the Tribunal sustaining the penalty. The Bank Guarantee 

should be released to the petitioner on production of copy of this judgment. 

■■ 



[2010] 1 GST 244 (MP) 

HIGH COURT OF MADHYA PRADESH 

Rajesh Electricals* 

v. 

Registrar 

MS. S.R. WAGHMARE AND R.S. GARG, JJ. 

WRIT PETITION NO. 7570 OF 2008 


PENALTY - Imposition of penalty in certain circumstances - Assessing 

Officer held that tax on sale of starters and switches was payable at rate 

of 12 per cent and not at rate of 3 per cent as paid by assessee - He, 

accordingly, held return filed by assessee to be a false return and directed 

recovery of tax at rate of 12 per cent and also imposed penalty upon 

assessee - Board held that tax on impugned sale was payable at rate of 

3 per cent - Whether once tax rate was held by Board to be 3 per cent, 

then return filed by assessee could not be held to be false, wrong or bad 

- Held, yes - Whether, therefore, penalty imposed upon assessee was 

liable to be set aside - Held, yes [Section 69 of the Madhya Pradesh 

Vanijyik Kar Adhiniyam, 1994] 

FACTS 

The assessee was dealing in electrical goods and pumping sets. It deposited 

tax on the sale of starters and switches at the rate of 3 per cent. The 

Assessing Officer held that tax on the impugned sale was payable at the 

rate of 12 per cent and not at the rate of 3 per cent. He, accordingly, held 

the return filed by the assessee to be a false return and directed recovery 

of tax at the rate of 12 per cent and also imposed penalty upon the assessee. 

However, the Appellate Board agreeing with the assessee held that the 

order passed by the Assessing Officer was bad; and that tax on the 

impugned sale was payable at the rate of 3 per cent only. The assessee 

thereafter made an application under section 71 with a submission that 

the question relating to penalty had not been decided though was raised, 

therefore, the same be also decided. The Board rejected the said application 

holding that the question was not raised before it, therefore, the 

application under section 71 was not maintainable. 

On writ : 



A 

B 

C 

D 

E 

F 

G

2010] Rajesh Electricals v. Registrar (MP) 

245 

A 

B 

C 

D 

E 

F 

G 

HELD 

From the assessment order, it would clearly appear that the Assessing 

Officer was of the opinion that the sales tax return was bad, as the tax was 

paid at the rate of 3 per cent only, while in fact the starter would attract the 

rate of 12 per cent. After holding so, the Assessing Officer imposed the 

penalty. Once the tax rate was held to be 3 per cent and it was further held 

by the Board that imposition of tax at the rate of 12 per cent was bad, then 

the return filed by the assessee could not be held to be false, wrong or bad. 

[Para 6] 

Once the return was held to be properly filed and that the tax was paid in 

accordance with law, then the Assessing Officer could not assume jurisdiction 

to impose the penalty. [Para 7] 

Therefore, the penalty imposed upon the assessee was liable to be set aside. 

[Para 8] 

Anand Soni for the Petitioner. A.S. Kutumble and Smt. Anjali Jamkhedkar 

for the Respondent. 

ORDER 

1. Shri Anand Soni, learned counsel for the petitioner. 

2. Shri A.S. Kutumble, learned Additional Advocate General with 

Smt. Anjali Jamkhedkar, learned Panel Lawyer for the respondent - State. 

3. Though the matter is listed on the question of admission, but with the 

consent of the parties and as the reply has been received, the matter is 

finally heard. 

4. The petitioner, who is dealing in certain electrical goods and in the 

Pumping Sets had filed his sales tax return showing that on the starters 

and switches only 3 per cent tax was payable. He accordingly, deposited 

the said tax. When the matter came before the Assessing Officer, he held 

that the tax was payable at the rate of 12 per cent and not at the rate of 3 

per cent, he accordingly, held the return to be a false return, directed 

recovery of the tax at the rate of 12 per cent and also imposed penalty. The 

orders were challenged up to Commercial Tax Appellate Board, Bhopal. 

The Board agreed with the submissions made by the present petitioner 

and held that the order passed by the Assessing Officer was bad. It further 

held that the tax was payable at the rate of 3 per cent only. The petitioner 

thereafter made an application under section 71 of the M.P. Commercial 

Tax Act, 1994 with a submission that the question relating to penalty had 

not been decided though was raised, therefore, the same be also decided. 

The said application came to be dismissed on 28-6-2008 in Rectification 

Case No. 8/CTAB/08 (for the period between 1-4-1988 to 31-3-1989). The 

Board held that the question was not raised before them, therefore, the 

application under section 71 was not maintainable, the Board accordingly, 

rejected the application. Learned counsel for the petitioner in support of 

the petition had submitted that the Board had observed that the tax was 



payable at the rate of 3 per cent only, then the penalty imposed on the 

ground that the tax return was wrong would fall to ground. It is submitted 

by him that tax return was held to be false, bad or wrong by the Assessing 

Officer, because he was of the opinion that the tax was payable at the rate 

of 12 per cent. 

5. Learned counsel for the State on the other hand submitted that nongrant 

of application under section 71 is based on justifiable grounds. 

6. We have heard the parties and have perused the record. From the 

assessment order dated 7-12-1991 it would clearly appear that the Assessing 

Officer was of the opinion that the sales tax return was bad as the tax 

was paid at the rate of 3 per cent only, while in fact the starter would attract 

the rate of 12 per cent. After holding so, the Assessing Officer imposed the 

penalty. Once the tax rate is held to be 3 per cent and it is further held that 

imposition of the tax at the rate of 12 per cent is bad, then the return filed 

by the present petitioner cannot be held to be false, wrong or bad. 

7. Once the return is held to be properly filed and that the tax was paid in 

accordance with law, then the Assessing Officer could not assume jurisdiction 

to impose the penalty. 

8. In the present matter in view of the findings recorded by the Appellate 

Board, we have no hesitation in holding that penalty should also stand 

nullified. 

9. We, accordingly, quash the order pertaining to penalty. The petition is 

allowed. 

10. No costs. 


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Krilax Impex Private Ltd. 

v. 

Commissioner of Commercial Taxes* 

P.R. RAMACHANDRA MENON, J. 

W.P.(C) NO. 39779 OF 2003 

JULY 3, 2009 

PENALTY - In case of submission of fabricated ‘C’ forms - Assessee was 

engaged in business of importing and selling of toiletries and fancy items 

- It imported some goods through Cochin port and sold same with help 

of a consignee situated at Mangalore - In course of assessment, assessee 

was directed to produce ‘C’ forms in support of aforesaid sale - Assessee 

produced original ‘C’ forms as required by departmental authorities - It 

was seen from records that consignee from whom assessee had allegedly 

obtained ‘C’ forms was not a registered dealer at all and that department 

had not issued any ‘C’ forms to said party - Whether since assessee 

produced bogus and fabricated ‘C’ forms with intent to avail concessional 

rate of tax, it was liable to pay penalty - Held, yes [Section 45A of the 

Kerala General Sales Tax Act, 1963] 

FACTS 

The assessee was engaged in the business of importing and selling of 

toiletries and fancy items. It imported some goods through the Cochin Port 

and they were sent to the consignee, namely ‘S’ Trades, Mangalore. The 

said ‘inter-State sale’ was to the tune of Rs. 39,84,469 and the goods were 

supported with all the necessary documents including the import details. 

The lorry containing the goods crossed the State, and obtained necessary 

endorsement on the documents from the check post at Mangalore, which 

conclusively proved that the goods were never sold within the State. 

Subsequently, based on the return submitted by the assessee, a letter was 

written by the departmental authorities to the consignee in Mangalore 

which, however, was returned stating that there was no such consignee. 

In the said circumstances, the respondents initiated the proceedings to 

impose penalty upon the assessee under section 45A. In the course of the 

above proceedings, the assessee was directed to produce ‘C’ forms as well 

as the other documents. Even though the assessee produced the books of 

account, yet the ‘C’ forms were not produced and request was made to 




extend the time which was granted enabling the assessee to obtain the 

same from the alleged consignee. On 15-7-2002, the assessee produced 

photocopies of the ‘C’ forms and subsequently, the originals were also 

produced. The Deputy Commissioner of Sales Tax, Mangalore, vide his 

letter, dated 22-8-2002, informed the department that, the alleged consignee 

was not a registered dealer at all and that the department had not 

issued any ‘C’ forms to the said party. This clearly showed that the ‘C’ forms 

produced by the assessee were quite bogus and fabricated with intent to 

avail the concessional rate of tax. In the abovesaid circumstances, the 

departmental authorities issued notice imposing penalty upon the assessee 

under section 45A. After considering the points raised by the assessee, the 

3rd respondent passed order holding that there was a conscious attempt 

to evade the payment of tax due to the Government by producing bogus 

‘C’ forms; that too stated as obtained from the consignee at Mangalore, 

who was never in existence. Considering the magnitude of the default 

committed and the offence involved, the 3rd respondent chose to impose 

the maximum penalty. On appeal, the second respondent as well as the 

first respondent upheld the levy of penalty. 

On writ : 

HELD 

It was seen from records that after obtaining time from the departmental 

authorities for producing the ‘C’ forms, the assessee produced photocopies 

of the ‘C’ forms on 15-7-2002 and thereafter produced the originals as well. 

The ‘C’ forms were actually dated 9-7-2002 which showed that at the time 

of procurement of the said ‘C’ forms, the assessee was admittedly having a 

copy of the letter dated 26-6-2001 sent by the Assistant Commissioner of 

Commercial Taxes, Mangalore stating that there was no consignee at the 

given address and that it was only a fictitious person. It was without any 

regard to the intimation given by the authorities that the assessee chose to 

produce the above ‘C’ forms, without conducting further enquiry or 

investigation as to its credibility, thus, seeking to sustain the concession 

availed of, having remitted the reduced tax at the rate of 4 per cent. It was 

pursuant to this that the genuineness of the ‘C’ forms got verified by the 

department by sending them to its ‘counterpart’ in Mangalore, whereupon 

it was categorically revealed that the departmental authorities in Mangalore 

had not issued any such ‘C’ forms. Accordingly, the third respondent 

arrived at a finding that the course pursued by the assessee deserved 

maximum penalty and, thus, passed the penalty order. It was after considering 

all the relevant aspects covered by the penalty order, that the 

revisional authorities upheld said order. There was no upholding of tenable 

ground to interfere with the findings and reasoning of the departmental 

authorities which was perfectly within the four walls of the law. [Para 10] 

In the course of hearing, another aspect brought to the notice of the instant 

Court was that according to the assessee, the ‘C’ forms were obtained from 

the alleged consignee at Mangalore by post. This meant, after confronting 


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with the situation, the assessee had contacted the concerned consignee and 

pursuant to this, the assessee was supplied with the ‘C’ forms by post. When 

such ‘C’ forms reached the hands of the assessee, the incriminating 

circumstances had already been communicated to the assessee by the 

departmental authorities, despite which the assessee simply chose to 

produce those bogus documents in support of the claim for concessional 

rate of tax. Absolutely no material such as postal cover or any other 

document had been produced by the assessee, even to show that the alleged 

‘C’ forms were received by post and, hence, no reliance could be placed upon 

the stand of the assessee that after sending the bogus ‘C’ forms, the 

concerned consignee disappeared from the arena. [Para 11] 

In the abovesaid facts and circumstances, there was no tenable ground to 

call for interference. The writ petition failed and it was to be dismissed, 

accordingly. [Para 12] 


State of Madras v. Radio & Electricals Ltd. [1966] 18 STC 222 (SC) (para 7), Chunni 

Lal Parshadi Lal v. CST [1986] 62 STC 112 (SC) (para 7), Agfa Gavert India Ltd. v. 

State of Tamil Nadu [2001] 123 STC 108 (SC) (para 7), Hindustan Steel Ltd. v. State 

of Orissa [1970] 25 STC 211 (SC) (para 7), Paisons v. Intelligence Officer [1992] 1 

KTR 143 (Ker.) (para 7) and Karthik Electric Control v. CTO [2008] 15 VST 450 

(Mad.) (para 7). 

N.D. Premachandran and D. Ajithkumar for the Appellant. V.K. 

Shamsudheen for the Respondent. 

JUDGMENT 

1. The petitioner has approached this Court challenging the penalty 

imposed as per Ext. P3 order, passed under section 45A of the KGST Act, 

which in turn has been upheld and affirmed by the second respondent in 

First Revision vide Ext. P4 Revision and by the first respondent, in the 

Second Revision, vide Ext. P5. 

2. The crux of the contentions taken by the petitioner is that, there is 

absolutely no justification for the finding arrived at by the departmental 

authorities, while imposing the penalty on the petitioner, especially in view 

of the fact that, the petitioner/consignor/seller was not in a position to 

ascertain the deeds and misdeeds of the consignee/buyer situated outside 

the State. It is contended that, when the goods sold by the petitioner had 

admittedly crossed the border (inter-State sale) and when the petitioner, 

who originally remitted the tax at the rate of 4 per cent also cleared the 

differential tax as well (when the departmental authorities arrived at a 

finding that the ‘C’ forms submitted by the petitioner, procured from the 

consignee, were not genuine), there is absolutely no foundation for having 

imposed the punishment. 

3. The sequence of events is as follows : The petitioner, who is engaged in 

the business of importing and selling of toiletries and fancy items, had 

imported some goods through the Cochin Port and they were sent to the 



consignee, namely M/s. Sree Mukambika Trades and Agencies, Mangalore. 

The said ‘inter-State sale’ was to the tune of Rs. 39, 84,469 and the goods 

were supported with all the necessary documents including the import 

details. The lorry containing the goods had crossed the State, and obtained 

necessary endorsement on the documents from the Check Post at Mangalore, 

which conclusively proved that the goods were never sold within the 

State. Subsequently, based on the return submitted by the petitioner, a 

letter was written by the departmental authorities to the consignee in 

Mangalore, which however was returned stating that, there was no such 

consignee. In the said circumstances, the respondents initiated the proceedings 

to impose penalty upon the petitioner under section 45A of the 

Act. 

4. In the course of the above proceedings, the petitioner was directed to 

produce ‘C’ forms as well as the other documents. Even though the 

petitioner produced the books of account, the ‘C’ forms were not produced 

and requested to extend the time, which was granted enabling the 

petitioner to obtain the same from the alleged consignee. On 15-7-2002, the 

petitioner produced photocopies of the ‘C’ forms and subsequently, the 

originals were also produced. While so, the Deputy Commissioner of Sales 

Tax, Mangalore, vide his letter dated 22-8-2002 informed the department 

that, the alleged consignee was not a registered dealer at all and that the 

department had not issued any ‘C’ forms to the said party. This clearly 

showed that the ‘C’ forms produced by the petitioner were quite bogus and 

fabricated, with intent to avail the concessional rate of tax. In the abovesaid 

circumstances, the departmental authorities issued Ext. P1 notice 

imposing penalty upon the petitioner under section 45A of the Act, which 

was replied as per Ext. P2 statement of objections. After considering the 

points raised by the petitioner, the 3rd respondent passed Ext. P3 order 

holding that, there was a conscious attempt to evade the payment of tax 

due to the Government, by producing bogus ‘C’ forms; that too, stated as 

obtained from the consignee at Mangalore, who was never in existence. 

Considering the magnitude of the default committed and the offence 

involved, the third respondent chose to impose the maximum penalty, 

which is equal to double the amount of tax payable and accordingly, issued 

Ext. P3 order. 

5. Met with the said circumstances, the petitioner filed a revision petition 

before the second respondent pointing out that, the petitioner is only an 

innocent seller and that he was not at all in a position to ascertain the 

status, extent and such other particulars of the consignee in Mangalore. It 

was also pointed out that, the consignee had come over to Ernakulam, 

stayed in a hotel, entered into an agreement with the petitioner, there was 

no reason for the petitioner to doubt the credibility of the consignee and 

hence that there was absolutely no attempt to defraud the revenue under 

any circumstances. It was also contended that, the petitioner having 

effected the differential tax (since ‘C’ forms submitted were stated as not 


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acceptable), the petitioner might be spared with respect to the imposition 

of penalty. 

6. After considering the pleadings and the materials on record, the second 

respondent found that there was absolutely no merit in the contentions 

raised by the petitioner and that the conscious role played by the petitioner 

in causing the bogus ‘C’ forms to be filed for claiming the tax benefit, is very 

much discernible from the materials on record. In the said circumstance, 

interference was declined as per Ext. P4; which in turn was subjected to 

challenge by filing second revision before the first respondent. The second 

revisional authority considered the entire facts and circumstances and 

found that absolutely no ground was made out to have a deviation to the 

course pursued by the authorities below. Accordingly, the impugned 

order was confirmed as per Ext. P5, imposing the maximum penalty, 

which in turn has been subjected to challenge in this writ petition. 

7. The learned counsel for the petitioner, referring to the various decisions 

rendered by the Apex Court as well as different High Courts in State of 

Madras v. Radio & Electricals Ltd. [1966] 18 STC 222, Chunni Lal Parshadi 

Lal v. Commissioner of Sales Tax [1986] 62 STC 112, Agfa Gavert India Ltd. 

v. State of Tamil Nadu [2001] 123 STC 108, Hindustan Steel Ltd. v. State of 

Orissa [1970] 25 STC 211, Paisons v. Intelligence Officer [1992] 1 KTR 143 

(Ker.) and Karthik Electric Control v. CTO [2008] 15 VST 450 (Mad.), 

submits that, the departmental authorities have not approached the issue 

in the proper perspective while considering the question of penalty. The 

learned counsel submits that, penalty is not automatic and that, it will be 

attracted only if there is a conscious attempt on the part of the defaulter 

to have defrauded the revenue. It is further pointed out that, the imposition 

of penalty will not be justified unless and until the offence in this 

regard is established beyond reasonable doubt. 

8. The learned Government Pleader appearing on behalf of the 

respondents submits that, there is no dispute with regard to the law 

declared by the Courts as above and that in almost all the above cases, the 

issue involved was, whether the seller was liable for the subsequent course 

and conduct pursued by the buyer; which was answered in the negative. 

Unlike this, in the instant case, the question involved is, whether the 

petitioner had pursued any act to defeat or defraud the revenue by 

submitting bogus ‘C’ forms. This question has been considered by the 

original authority i.e., 3rd respondent while passing Ext. P3 order, particularly 

at running pages 5 to 9, wherein the ‘statement of objection’ submitted 

by the petitioner has been extracted. In sub-paragraph 4 of the above 

extract, the petitioner has virtually conceded that, the Assistant Commissioner 

of Commercial Taxes, Check Post, Mangalore by his letter dated 

26-12-2001 had informed the petitioner that the concerned consignee was 

not available at Mangalore and that the Sales Tax registration number in 

the invoices was fictitious. 



9. In the above circumstances, the petitioner was requested to furnish 

details of the sales and also other necessary particulars. Accordingly, the 

petitioner forwarded the documents as given at serial Nos. 1 to 5 mentioned 

therein. Referring to the said admission made by the petitioner, it 

has been observed by the 3rd respondent at running page 12 of Ext. P3 

order that, the departmental authorities had contradicted the petitioner 

with regard to the infirmities and discrepancies borne out by the records 

and explanation was sought for. It is also pointed out that, as per the notice 

dated 30-4-2002 issued by departmental authorities, it was informed that 

the consignee was a fictitious person. It was also referred to therein that 

the assessee himself had admitted that the Assistant Commissioner of 

Commercial Taxes, Check Post, Mangalore had intimated the fictitious 

character of the consignee, as per letter dated 26-12-2001. 

10. The next sequence of events is as follows: After obtaining time from the 

departmental authorities for producing the ‘C’ forms, the petitioner 

produced photocopies of the ‘C’ forms on 15-7-2002 and thereafter 

produced the originals as well. The ‘C’ forms were actually dated 9-7-2002, 

which shows that, at the time of procurement of the said ‘C’ forms, the 

petitioner was admittedly having a copy of the letter dated 26-6-2001 sent 

by the Assistant Commissioner of Commercial Taxes, Check Post, 

Mangalore, stating that there was no consignee in the address and that it 

was only a fictitious person. It was without any regard to the intimation 

given by the authorities, that the petitioner chose to produce the above ‘C’ 

forms, without conducting further enquiry or investigation as to its 

credibility, thus seeking to sustain the concession availed of, having 

remitted the reduced tax at the rate of 4 per cent. It was pursuant to this, 

that the genuineness of the ‘C’ forms was got verified by the department 

by sending them to their ‘counterpart’ in Mangalore, whereupon it was 

categorically revealed that the Departmental authorities in Mangalore 

had not issued any such ‘C’ forms. Accordingly, the third respondent 

arrived at a finding that the course pursued by the petitioner deserved 

maximum penalty and thus passed Ext. P3 order. It was after considering 

all the relevant aspects covered by Ext. P3, that the revisional authorities 

passed Ext. P4 and Ext. P5, upholding and confirming Ext. P3 order. This 

Court does not find any tenable ground to interfere with the findings and 

reasoning of the departmental authorities, which is perfectly within the 

four walls of the law. 

11. In the course of hearing, the learned counsel for the petitioner invited 

the attention of this Court to the fact that the petitioner had already filed 

a private complaint against the misdeeds of the consignee, invoking the 

provisions under sections 190 and 200 of Cr. P.C, as borne by Ext. P6 before 

the Judicial First Class Magistrate’s Court, Aluva, which was forwarded for 

investigation by the Police under section 156(3) of the Cr. P.C. It is also 

conceded that, the petitioner did not file any protest complaint when the 

police, after investigation chose to refer the matter; nor did choose to file 

appropriate proceedings before the concerned Courts in Mangalore. Yet 


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another aspect brought to the notice of this Court is that, according to the 

petitioner, the ‘C’ forms were obtained from the alleged consignee at 

Mangalore by post. This means, after confronting with the situation, 

petitioner had contacted the concerned consignee and pursuant to this, 

petitioner is stated as supplied with the ‘C’ forms by post. When such ‘C’ 

forms were reached the hands of the petitioner, as mentioned already, the 

incriminating circumstances had already been communicated to the 

petitioner by the departmental authorities, despite which the petitioner 

simply chose to produce those bogus documents in support of the claim 

for concessional rate of tax. Absolutely no material, such as postal cover 

or any other document has been produced by the petitioner, even to show 

that the alleged ‘C’ forms were received by post and hence no reliance can 

be placed on the stand of the petitioner that, after sending the bogus ‘C’ 

forms, the concerned consignee disappeared from the arena. 

12. In the abovesaid facts and circumstances, there is no tenable ground 

to call for interference. The Writ Petition fails and it is dismissed accordingly. 

[2010] 1 GST 253 (ALL.) 


Commissioner, Trade Tax, U.P., Lucknow 

v. 

Alok Trading Co.* 


TRADE TAX REVISION NOS. 267 TO 270 OF 2008 

AUGUST 25, 2009 

SALE - Assessee, trading company, provided tankers to Indian Oil 

Corporation - Tribunal found that it was for oil company to use or not to 

use tankers and assessee was having no control over movement of 

tankers - Whether since transfer of right of property is not transfer of 

property, no tax was leviable on assessee - Held, yes [Section 2(h), read 

with section 3 of the Uttar Pradesh Trade Tax Act, 1948] 


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FACTS 

The assessee was a trading company and through an agreement with 

Indian Oil Corporation, it agreed to provide transport facility to the oil 

company. The Assessing Officer was of the view that the assessee had 

earned money by carrying on the business with oil company and levied 

tax. On appeal, the first appellate authority deleted such addition. On 

further appeal, the Tribunal dismissed the appeal observing that as per the 

contract, it was for the oil company to use or not to use the tankers and the 

assessee was having no control over the movement of the tankers. 

On revision : 

HELD 

The Tribunal had followed the decision of the jurisdictional High Court in 

Indian Oil Corpn. v. Commissioner, Trade Tax where it was observed that 

there was no ‘sale’ of tankers by the assessee to the oil company. So, no tax 

was to be levied. Thus, the impugned order of the Tribunal was to be 

sustained. [Para 3] 


Commissioner, Trade Tax v. Sharma Tourist Transport [2005] 42 STR 927 (All.) 

(para 3). 

Sanjay Sarin for the Revisionist. 

ORDER 

1. All the revisions have been filed by the department under section 11 of 

the U.P. Trade Tax Act, 1948 against the consolidated judgment and order 

dated 19-6-2006 passed by the Trade Tax Tribunal, Lucknow for the 

assessment years mentioned above. 

2. I have heard Shri Sanjay Sarin, learned counsel for the department. 

None appeared for the assessee. 

3. The brief facts of the case are that the assessee has entered into an 

agreement with Indian Oil Corporation for transportation of the goods/ 

products manufactured by the Indian Oil Corporation. The assessee has 

provided the tankers for this purpose. The Assessing Officer opined that 

the assessee had earned money by carrying on business with the Indian Oil 

Corporation by giving the rights to use its tankers to the Indian Oil 

Corporation for transportation of its products, so the money earned by the 

tankers is leviable. The Assessing Officer has levied the tax by the 

assessment order. Being aggrieved, the assessee has filed appeals before 

the First Appellate Authority who has deleted the addition. Not being 

satisfied the department has filed appeal before the Tribunal who has 

dismissed the appeal filed by the department by observing that as per the 

contract, it is for the Indian Oil Corporation to use or not to use the tankers. 

The assessee has no control over the movement of the tankers. In the case 

of Indian Oil Corpn. v. Commissioner, Trade Tax, it was observed that this 


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is not the property of the Indian Oil Corporation. The jurisdictional High 

Court in the case of Commissioner, Trade Tax v. Sharma Tourist Transport 

[2005] 42 STR 927 (All.) has observed that the transfer of the right of the 

property is not the transfer of the property. The Tribunal finally in its order 

observed that there was no transfer or sale of the tankers to the Indian Oil 

Corporation. The assessee was having a right to change its driver at any 

time. 

4. By considering the totality of the facts and circumstances of the case, 

I find no reason to interfere with the order of the Tribunal who has 

followed the decision of jurisdictional High Court where it was observed 

that there was no ‘sale’ of tankers by the assessee to the oil company. So 

no tax is leviable. When it is so, the impugned order of the Tribunal is 

hereby sustained along with the reasons mentioned therein. 

5. In the result, all the revisions filed by the department are dismissed. 

[2010] 1 GST 255 (ALL.) 


G.D. Pharma 

v. 

Commissioner, Trade Tax, U.P.* 


TRADE TAX REVISION NO. 108 OF 2002 


SALE - Assessee-agency wanted to terminate agency and, hence, returned 

old goods to principal-medicine manufacturer - Manufacturer 

received old stock of medicines which might have expired by time of 

return - Whether return of old goods, unfit for sale, to principal by agent 

cannot be considered as sale and, hence, tax could not be levied on same 

- Held, yes [Section 2(h), read with section 3 of the U.P. Trade Tax Act, 

1948] 

FACTS 

The assessee-revisionist with a view to give up the agency of the principalmedicine 

manufacturer, returned the old goods to the manufacturer 


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through consignment which was duly received and confirmed by the 

consignee. The Assessing Officer levied trade tax holding said return/ 

consignment of the goods to be a ‘sale’. On appeal, the Assessing Officer’s 

view was reiterated by the Tribunal stating that the assessee failed to 

present copies of bilty, credit note etc., before the lower authorities for 

pressing its claim and, instead, the same were directly produced before the 

Tribunal. 

HELD 

The documents of bilty, credit note, etc., produced by the assessee-revisionist 

prima facie appeared to be genuine. Further, every medicine has an 

expiry date and, hence, the stock held by the assessee being too old, certainly 

might have expired and not remained fit for sale. Thus, it was to be held that 

no sale was made by the assessee and the goods were not subjected to tax. 

[Paras 7 & 8] 

Pradeep Agarwal for the Revisionist. Sanjai Sarin for the Respondent. 

JUDGMENT 

1. The present revision has been filed by assessee under section 11 of the 

U.P. Trade Tax Act, 1948 against the judgment/order dated 2-2-2002 

passed by Trade Tax Tribunal, Camp Lucknow for the assessment year 

1993-94. 

2. The brief facts of the case are that the assessee was having the agency 

of Biological E. Ltd., Hyderabad who was the manufacturer of medicines. 

During the assessment year under consideration, the assessee-revisionist 

has returned the goods to the manufacturer as they were no longer 

interested to have the agency. The Assessing Officer has opined that this 

was the sale so he levied the tax which was upheld not only by the First 

Appellate Authority but also by the Tribunal. Being aggrieved, the assessee 

is before this Court. 

3. With this background, Sri Pradeep Agarwal, learned counsel for the 

revisionist submits that goods were too old and the same were despatched 

to Hyderabad vide G.R. No. 2610, dated 26-2-1994 by M/s. Suman Roadways 

and the cartage was to be paid by the consignee. The confirmation 

was also received from the recipient-manufacturer of the medicines. So, 

he said that this was not the sale, therefore, the tax cannot be levied. Lastly, 

he made a request that the tax may kindly be deleted. 

4. On the other hand, Sri Sanjai Sarin, learned counsel for the department 

has justified the impugned order by stating that credit note, bilty etc. were 

never produced before the lower authorities. First time, it was produced 

before the Tribunal as appears from the order of the Tribunal. 

5. I heard both the parties at length and gone through the material 

available on record. 

6. From the record, it appears that the assessee has returned the medicines 

to its manufacturer at Hyderabad. For this purpose, the learned counsel 


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for the revisionist has drawn my attention to the photocopy of the bilty, 

confirmation, credit note etc. The Tribunal has taken no cognizance of 

these documents by stating that it were never produced before the lower 

authorities for verification. Prima facie, these documents appears genuine. 

Matters is too old and the same cannot be verified when the said firm 

has already been closed. 

7. Further, it may be mentioned that lower authorities has accepted in 

their orders that goods were too old and it was not known in which year 

the same were purchased. I agree with the observation. It may be 

mentioned that every medicine has a expiry date. If the stock was too old, 

certainly it might have expired and was not fit for sale. No sale was made 

by the assessee as appears from the facts and circumstances of the case. 

8. Hence, I opined that the goods were not subject to tax. Therefore, I set 

aside impugned order of the Tribunal including the orders of the lower 

authorities and delete the addition. The assessee will get relief accordingly. 

9. In the result, the revision filed by the revisionist is hereby allowed. 

[2010] 1 GST 257 (ALL.) 


Vysya Bank Ltd. 

v. 

Commissioner of Trade Tax*, UP 

RAJES KUMAR, J. 

TRADE TAX REVISION NOS. 842 AND 843 OF 2006 


DEEMED SALE - Assessment year 2000-01 - Assessee entered into an 

agreement with a sugar mill for providing plant and machinery on rent 

- It claimed that since stamp paper for agreement was purchased from 

Delhi and agreement was also executed at Delhi on 29-9-1995, right to 

use had been transferred at Delhi and, therefore, trade tax authorities of 

State of U.P. had no jurisdiction to levy tax on amount of rent received 

during previous year in pursuance of aforesaid agreement under section 

3F - Lower authorities disallowed assessee’s claim - Whether in terms of 


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definition of sale as indicated in section 2(h); notwithstanding agreement 

being executed at Delhi, since plant and machinery had been admittedly 

used within State of U.P., there was deemed sale in State of U.P. - Held, 

yes - Whether, therefore, trade tax authorities had jurisdiction to levy tax 

on amount of rent received under section 3F - Held, yes [Section 2(h), 

read with section 3F of the U.P. Trade Tax Act, 1948] 

PENALTY - For failure to furnish return or to deposit tax due - Assessment 

year 2000-01 - Assessee had not disclosed amount of rent arising on 

leasehold plant and machinery in return of fourth quarter ending on 

31-3-2001 on ground that rent was not received by it and, accordingly, 

did not pay due tax also - Assessing authority, for such default, levied 

penalty under section 15A(1)(a) upon assessee and appellate authorities 

confirmed penalty order - Whether merely because rent had not been 

received, assessee could not be absolved from liability to disclose such 

rent in return - Held, yes - Whether, therefore, levy of penalty upon 

assessee was justified - Held, yes [Section 15A of the U.P. Trade Tax Act, 

1948] 

FACTS 

The assessee had entered into an agreement with a sugar mill for providing 

plant and machinery on rent. It claimed that since the stamp paper for 

the agreement was purchased from Delhi and the agreement was also 

executed at Delhi on 29-9-1995, the right to use had been transferred at 

Delhi and, therefore, the trade tax authorities of the State of U.P. had no 

jurisdiction to levy tax on the amount of rent received during the previous 

year in pursuance of the aforesaid agreement under section 3F. The 

assessing authority disallowed the claim of the assessee and levied the tax 

on the amount of rent received under section 3F. Both the first appellate 

authority and the Tribunal upheld the order of the assessing authority. 

Further, the assessee had not disclosed the amount of rent arising on the 

leasehold plant and machinery in the return of the fourth quarter ending 

on 31-3-2001 on the ground that the rent was not received by it and, 

accordingly, did not pay the due tax also. The assessing authority for such 

default levied the penalty under section 15A(1)(a) upon the assessee. Both 

the first appellate authority and the Tribunal confirmed the penalty order. 

On revision : 

HELD 

In the instant case, the Tribunal had recorded a categorical finding that, 

from the perusal of the lease deed, it did not appear that the agreement had 

been executed at Delhi. The finding of the Tribunal was finding of fact. The 

copy of the lease deed had not been annexed along with the revision petition 

and the assessee was not able to show that the lease deed had been executed 


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2010] Vysya Bank Ltd. v. Commissioner of Trade Tax (All.) 259 

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at Delhi. Merely because the stamp paper was purchased at Delhi, it could 

not be presumed that the lease deed was also executed at Delhi on 29-9- 

1995. Moreover, even assuming that the lease deed was executed at Delhi, 

it did not make any difference. Clause (ii) of Explanation I to section 2(h) 

says that sale is deemed to have taken place within the State of U.P., if the 

goods are used by the lessee within the State during any period, notwithstanding 

that the agreement for the lease has been entered into outside 

the State or that the goods have been delivered to lessee outside the State. 

Therefore, notwithstanding the agreement being executed at Delhi, since 

the plant and machinery had been admittedly used within the State of U.P., 

there was deemed sale in the State of U.P. Therefore, the trade tax 

authorities had jurisdiction to levy the tax on the amount of rent received 

under section 3F. 

So far as the penalty levied under section 15A(1)(a) was concerned, there 

was no error in the order of the Tribunal. Merely because the rent had not 

been received, the assessee could not be absolved from the liability to 

disclose such rent in the return. Sales with deferred payment are also 

included within the ambit of definition of sale under section 2(h). Therefore, 

such receipts were liable to be disclosed. [Para 8] 

Therefore, the revision was liable to be dismissed. [Para 9] 


20th Century Finance Corpn. Ltd. v. State of Maharashtra AIR 2000 SC 2436 (para 

2), Swarup Vegetable Products Industries Ltd. 1998 UPTC 336 (para 5) and 

Commissioner of Trade Tax v. Gulshan Sugar & Chemicals Ltd. 2008 UPTC 1231 

(para 5). 

Ashok Kumar for the Appellant. 

JUDGMENT 

Rajes Kumar, J. - The present revisions under section 11 of the U.P. Trade 

Tax Act (hereinafter referred to as ‘the Act’) are directed against the order 

of the Tribunal dated 17-3-2004 for the assessment year 2000-01. Revision 

No. 843 of 2006 relates to the assessment and Revision No. 842 of 2006 

relates to the penalty under section 15A(1)(a) of the Act. 

2. The brief facts of the case are that the applicant had entered into a 

contract with M/s. Dhampur Sugar Mills, Dhampur for providing plant 

and machinery on rent and during the year under consideration received 

total rent of Rs. 1,16,77,320. The claim of the applicant was that stamp 

paper for the agreement was purchased from Delhi and on 29-9-1995 the 

agreement was executed at Delhi and, therefore, the right to use has been 

transferred at Delhi and the Trade Tax Authorities of State had no 

jurisdiction to levy the tax on the rent received in pursuance of the 

aforesaid agreement under section 3F of the Act. In support of his 

contention reliance has been placed on the Supreme Court decision in the 

case of 20th Century Finance Corpn. Ltd. v. State of Maharashtra AIR 2000 

SC 2436. The assessing authority had not accepted the plea of the applicant 



and has levied the tax on the entire amount of rent received during the 

year under consideration under section 3F of the Act. The order of the 

assessing authority has been upheld in first appeal and by the Tribunal. 

3. The applicant had not disclosed the rent of Rs. 38,92,440 in the fourth 

quarter return on the ground that the rent was not received and the due 

tax had also not been paid. Therefore, the assessing authority has levied 

the penalty under section 15A(1)(a) of the Act which has been confirmed 

in first appeal and by the Tribunal. 

4. Heard Sri Ashok Kumar, learned counsel appearing on behalf of 

applicant and learned Standing Counsel. 

5. Learned Counsel for the applicant submitted that since stamp paper 

was purchased at Delhi and the agreement was executed at Delhi, 

therefore, the right to use had been transferred at Delhi and the Trade Tax 

Officer of U.P. had no jurisdiction to levy the tax. Reliance has been placed 

on the decision of the Apex Court in the case of 20th Century Finance 

Corpn. Ltd. (supra). He further submitted that plant and machinery were 

immovable, therefore, rent received cannot be taxed. Reliance has been 

placed on the decisions of this Court in the case of Swarup Vegetable 

Products Industries Ltd., Mansoorpur, District Muzaffar Nagar 1998 UPTC 

336 and in the case of Commissioner of Trade Tax v. Gulshan Sugar & 

Chemicals Ltd. 2008 UPTC 1231. 

6. Learned Standing Counsel submitted that the Tribunal has recorded a 

categorical finding that lease rent did not indicate that lease deed was 

executed at Delhi and merely because stamp paper was purchased at 

Delhi, it cannot be presumed that the lease deed was executed at Delhi 

while admittedly the plant and machinery were given on lease in the State 

of U.P. He further submitted that Explanation I clause (ii) of section 2(h) 

of the Act provides that if the goods are used by the lessee within the State 

during any period, notwithstanding that the agreement for the lease has 

been entered into outside the State or that the goods have been delivered 

to lessee outside the State the sale or purchase shall be deemed to have 

taken place in the State of U.P. He submitted that so far as the argument 

of learned counsel for the applicant, that the plant and machinery were 

immovable cannot be entertained at this stage as this pleading was not 

taken before any of the authorities below and not arising from the order 

of the Tribunal. So far as the penalty is concerned, he submitted that 

merely because the amount has not been received, the applicant cannot 

be absolved from the responsibility to disclose such turnover in the return 

and to pay the tax. He submitted that definition of sale in section 2(h) 

includes the sale wherein there is deferred payment. 

7. Having heard learned counsel for the parties, I have perused the 

impugned order of the Tribunal and the orders of the authorites below : 

The sale is defined under section 2(h) of the Act which reads as follows :— 


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