CoramThe Honourable Mr v. The Registrar Tamil Nadu Taxation Special Tribunal Singaravelar Maligai Chennai-2.2. The Sales

IN THE HIGH COURT OF JUDICATURE AT MADRASDated : 04...09..2007CoramThe Honourable Mr.Justice K.RAVIRAJA PANDIANandThe Honourable Mrs.Justice CHITRA VENKATARAMANW.P.No. 21339 of 2004 M/s.Fedders Lloyd Corp. Limitedrep. By Mr.P.K.EappenAuthorised Signatory andNodal Accountant .. Petitionerversus1. The Registrar Tamil Nadu Taxation Special Tribunal Singaravelar Maligai Chennai-2.2. The Sales Tax Appellate Tribunal (Main Bench) City Civil Court Buildings Chennai-104.3. The Commercial Tax Officer Nungambakkam Assessment Circle Chennai-31.4. The Deputy Commissioner of Commercial Taxes, Madras (Central) Division Commercial Taxes Building Greams Road Madras –6. .. RespondentsPetition under Article 226 of the Constitution of India praying toissue a writ of certiorari to call for the records on the file of thefirst respondent in T.C(R) No. 2144/97 dated 3.10.2001 and quash thesame as being invalid and illegal. For Petitioner : Mr.V.SrikanthFor Respondents: Mr.Tholgappian, Govt. Advocate for Taxes https://hcservices.ecourts.gov.in/hcservices/ ORDER(The order of the Court was delivered by CHITRA VENKATARAMAN,J)The writ petition is against the order of the Tamil Nadu TaxationSpecial Tribunal, Chennai, confirming the order of the Sales TaxAppellate Tribunal on the assessment made under Section 12-A of theTamil Nadu General Sales Tax Act,1959. 2. This writ petition relates to the assessment year 1979-80. Thepetitioner herein is a dealer in Air-Conditioners and Refrigerators. Thepetitioner was assessed on the total and taxable turnover ofRs.1,06,57,485/- and Rs.60,94,121/- respectively by the thirdrespondent, Commercial Tax Officer, Nungambakkam, by invoking theprovisions of section 12-A of the Act in respect of the sales effectedby the petitioner to a wholesale dealer viz., Lloyds Sales Corporation.Comparing the price on the sales to the Lloyds Sales corporation withthat of one charged for the Defence Canteen Stores Department, the thirdrespondent came to the conclusion that there was sufficient evidence toprove that there was under-invoicing of the price on the sale to LloydSales Corporation. Thus, the statutory best of judgment assessment underSection 12-A was adopted to fix the taxable turnover at Rs.63,60,380/-. 3. It is stated that the place of business was inspected byEnforcement Wing officials on 15.11.1984 which revealed different pricerates in the sales of Air Conditioners and Refrigerators. The sales toLloyd Sales Corporation were on the cost price, whereas, in respect ofsales to the Defence Canteen Stores Department, the price chargedincluded transit insurance, freight charges etc. In the circumstances,the third respondent held that the price charged as regards the sales toLloyd Sales Corporation was low when compared to the market priceprevailed at that time and the said rate was adopted to evade payment oftax.4. The petitioner preferred an appeal before the AppellateAssistant Commissioner (CT) III, questioning the assessment underSection 12-A. He however rejected the appeal on merits and therebyconfirmed the assessment. The petitioner preferred a further appeal tothe Sales Tax Appellate Tribunal, Chennai. By order dated 28.5.1990, theSales Tax Appellate Tribunal allowed the appeal on the ground that thesales to Lloyd Sales Corporation could not be compared with that of theDefence Canteen Stores Department. It also pointed out that the pricecharged for by the petitioner was uniform throughout India. Hence, therewas no motive for the petitioner to evade tax. The Tribunal held thatthe conditions necessary for making an assessment under Section 12-Awere not shown to exist and hence, cancelled the assessment. 5. The Revenue preferred a revision before the Tamil Nadu TaxationSpecial Tribunal, Chennai. By order dated 3.10.2001, the Tamil NaduTaxation Special Tribunal allowed the appeal preferred by the State. https://hcservices.ecourts.gov.in/hcservices/

6. Aggrieved by the order of the Tamil Nadu Taxation SpecialTribunal, the assessee has now preferred this writ petition challengingthe said order on the ground that the Tamil Nadu Taxation SpecialTribunal erred in not following the decision of this Court reported in105 STC 337 (JAYALAKSHMI TRADERS v. GOVERNMENT OF TAMILNADU) whileconsidering the merits of the case. The writ petitioner further statesthat the Tribunal erred in placing reliance on Rule 18-C of the TamilNadu General Sales Tax Rules, which was not in force during the relevantyear viz., 1979-80, but introduced only from July, 1982. Further, theassessee pointed out that in the absence of any determination of themarket price and comparing the same with the price charged for by thepetitioner on its sales to Lloyds Sales Corporation and in the absenceof any finding on the aspect of mala fide intention to evade tax, therespondents cannot fix the liability by invoking Section 12-A of theAct. 7. Learned counsel appearing for the petitioner, referring toSection 12-A of the Act submitted that the assessment under Section 12-Aitself would arise only when the Assessing Officer has definitematerials to raise a presumption as to the conduct of the assessee thatthe charging of the price below the present market price was to evadethe tax liability.8. He also placed reliance on the decision reported in 105 STC 337(JAYALAKSHMI TRADERS v. GOVERNMENT OF TAMILNADU), AIR 1974 SC 1358 (I.T.COMMR., W. B v. CAL DISCOUNT CO.)and 263 ITR 706 (UNION OF INDIA v.AZADI BACHAO ANDOLAN) in support of his case that the AssessingAuthority went wrong in invoking Section 12-A of the Act as a matter ofcourse without observing the conditions stated in the provision. Hepointed out that the assessment lacked material particulars which arenecessary to frame the assessment under Section 12-A of the Act.Referring to the order of the Tamil Nadu Sales Tax Appellate Tribunal,learned counsel pointed out that on the face of the findings of theTribunal, the Special Tribunal ought to have rejected the revision. Hepointed out that there were no materials for the Tamil Nadu TaxationSpecial Tribunal to have a view different from that of the Sales TaxAppellate Tribunal. 9. Per contra, learned Special Government Pleader appearing for therespondent, submitted that when the price charged for by the petitioneron its sales to Lloyds Sales Corporation is much lower in comparisonwith the one charged for at the hands of the Defence Canteen StoresDepartment, the criteria specified for invoking Section 12-A are fullysatisfied; that applying the decision of this court only, the Tamil NaduTaxation Special Tribunal had come to the right conclusion and hence,in the absence of any material to counter the facts found, the order ofthe Tamil Nadu Taxation Special Tribunal could not be faulted with.Hence, he prayed for dismissal of the writ petition.10. Heard the learned counsel for both sides and perused therecords. https://hcservices.ecourts.gov.in/hcservices/

11. Before adverting to the rival contentions, we may have to lookat Section 12-A of the Act and the interpretation placed by this Courton the scope of this provision. 12. Section 12 A(1) of the Act reads as follows:- "If the assessing authority is satisfied that a dealer has,with a view to evade the payment of tax, shown in hisaccounts, sales or purchases of any goods, at prices whichare abnormally low, compared to the prevailing market priceof such goods, it may, at any time within a period of fiveyears from the expiry of the year to which the tax relates,assess or reassess the dealer to the best of its judgment onthe turnover of such sales or purchases after making suchenquiry as it may consider necessary and after giving thedealer a reasonable opportunity to show cause against suchassessment. "13. This is a machinery provision intended to determine thestatutory best of judgment assessment in cases, where, on comparisonwith the prevailing market price, the consensual price of goods soldwere found as abnormally low. The said Section was inserted in this Actfrom 3rd December 1979 with the object of assessing or reassessing caseswhere the dealer had shown in his accounts sales or purchases of goodsat abnormally low prices with a view to evade payment of tax. 14. Section 12-A came up for consideration before this Court in adecision reported in 105 STC 337 (JAYALAKSHMI TRADERS v. GOVERNMENT OFTAMILNADU). Upholding the validity of this provision, this Court heldthat," A reading of the provision contained in Section 12-A of the Act will clearly show that it is only a machineryprovision intended to determine whether the returnssubmitted by a dealer are true and correct and theyrepresent the consensual price of the transactions. Asalready pointed out, it is intended to prevent the evasionof payment of tax and for that purpose it empowers theassessing authorities to compare the price mentioned inthe accounts relating to sale or purchase of goods asstated in the return submitted with the prevailing marketprice of such goods, and to make best of judgmentassessment on the turnover, after such enquiry as theassessing authority may consider necessary, that too,after giving a reasonable opportunity to the dealer toshow cause against such assessment....."This Court, at page 347, further held that, "......In effect the entire exercise under Section12-A of the Act is to determine whether there is anattempt on the part of the dealer to evade the payment ofsales tax. This exercise is undertaken when a doubt isentertained about the bona fide and true nature of thesales shown in the accounts at low price. ........"This Court, at paragraph 28, further held that, https://hcservices.ecourts.gov.in/hcservices/ "While determining the real consensual price, whencompared with the prevailing market price, the price atwhich similar goods are sold by the retailers and theprice at which the goods are sold by wholesalers, cannotbe the comparable price for the purpose of determining thereal consensual price of the wholesaler. Similarly theprice at which the wholesaler has sold the goods shall notalso be the prevailing market price for the purpose ofdetermining the real consensual price of the retailseller."15. On the interpretation of the similar provision contained inSection 52 of the Income Tax Act, 1961, which was referred to by theDivision Bench, in the decision reported in [1981] 138 ITR 597(K.P.VARGHESE v. INCOME TAX OFFICER, ERNAKULAM), the Apex Court heldthat Section 52(2) could not be invoked by the Revenue unless there wasunder-statement of the consideration in respect of transfer and that theburden of showing that there was an under-statement was on the Revenueto establish that the consideration actually received by the assesseewas much more than what was disclosed in the document. In the face ofthe clear-cut pronouncement of this Court on the scope of Section 12-Aof the Act and the interpretation placed by the Apex Court on asimilar provision under the Income Tax Act, 1961, it is clear that theinvoking of Section 12-A necessarily rests on a presumption that theprice charged for by the assessee as shown in the accounts is abnormallylow when compared to the prevailing market price. Such a presumption hasto be drawn from the materials available with the Revenue enabling adetermination of the market price and the comparison of the same withthe price charged for by the assessee in terms of the guidelines givenby this Court in the decision reported in 105 STC 337 (JAYALAKSHMITRADERS v. GOVERNMENT OF TAMILNADU). Further, the Apex Court held thatevery difference in price on comparison as abnormally low, per se, doesnot point out to a tax evasion. Factors must exist there to point outthat the charging of abnormally a low price compared to the prevailingmarket price was with a view to evade payment of tax. 16. Learned counsel for the petitioner drew our attention to thedecision reported in AIR 1974 SC 1358 (I.T. COMMR., W. B v. CAL DISCOUNTCO.), particularly at page 1361, to impress on the fact that the lawdoes not prohibit avoidance of tax liability by so arranging thecommercial affairs that charge of tax is distributed. The law does notoblige a trader to make maximum profit out of his trading transactions.In the circumstances, even if there be any difference, no exceptioncould be taken unless there are materials to point out the mala fideintention to evade payment of tax. 17. Learned counsel also referred to the decision reported in 263ITR 706 (UNION OF INDIA v. AZADI BACHAO ANDOLAN),wherein, referring tothe first McDowell case reported in [1985] 154 ITR 148, the Apex Courtheld that an underlying motive cannot be attributed on a supposedlyresulting in some prejudice to the Revenue by reason of comparison ofprices on transactions. He submitted that incomparables cannot becompared for the purpose of invoking Section 12-A of the Act. https://hcservices.ecourts.gov.in/hcservices/

18. We agree with the contention raised by the learned counsel forthe petitioner. 19. A perusal of the order passed by the Assessing Authority showsthat on 15.11.1994, the business premises was inspected by theEnforcement Wing Officials. The assessee has its Head Office at NewDelhi. They received Air-Conditioners and Refrigerators for sales atMadras on Southern Zone. The charges are prepaid by the Head Office. Thecharges are recovered by the assessee by raising debit notes. The Madrasoffice sells its units to one of the sister concerns viz., Lloyd SalesCorporation and some units to the Defence Canteen Stores Department,Madras. Learned counsel for the petitioner objected to the reference ofLloyd Sales Corporation as a sister concern of the petitioner. TheAssessing Authority pointed out that the petitioner charged cost pricealone in respect of the sales effected to Lloyd Sales Corporation. Inrespect of sales to the Defence Canteen Stores Department, the pre-salecharges are however included along with the profit margin. Comparingthis price, the Revenue drew the inference that the price charged for bythe petitioner was very low when compared to the market price prevailingat that time and that Lloyd Sales Corporation had sold the units at ahigh profit margin as second sales of single point goods. 20. Incidentally, it may be pointed out that except for comparingthe price on the sales to Lloyd Sales Corporation with the one to theDefence Canteen Stores Department, we do not find any exercise by theAssessing Officer in fixing the market price as required under theSection. It is pertinent to note that the Assessing Officer remarkedthat, "....... In so far as this commodity isconcerned, this question of comparing like productsin the market does not arise because pricing ofcommodities of this nature would vary from company tocompany according to overheads. Therefore, comparisonof price structure with reference to market price isthe only reasonable way to establish under-invoicing......"21. The fact remains that except for comparing the sales of thepetitioner, one to the Lloyd Sales Corporation and other to the DefenceCanteen Stores Department, there is admittedly no exercise undertaken asrequired under Section 12-A of the Act to determine the market price forthe purpose of comparison. The order of the Appellate AssistantCommissioner is no better. 22. A perusal of the order of the Tribunal in the appeal preferredby the assessee shows that as per the agreement between the petitionerand Lloyd Sales Corporation as a wholesale dealer, the said Lloyd SalesCorporation would deal with the goods all over the country at the pricementioned in the price list published by the manufacturer viz.,petitioner as applicable from time to time. https://hcservices.ecourts.gov.in/hcservices/

23. The sales effected to the said Lloyd Sales Corporation was outof the bulk transfers effected to branches from the Head Office at NewDelhi. As regards the sales to the Defence Canteen Stores Department andthe Government Department, the petitioner sold at the prices fixed bythe Head Office and added thereon freight, transit insurance charges,handling charges, sales tax and surcharge at the appropriate rates. Onthe contention of the Revenue that the petitioner had sold at abnormallylow price, the Tribunal pointed out that the Assessing Officer had nottaken any efforts to compare the price offered by other competitors;instead, the Assessing Authority opined that the prices for goodsoffered by other companies varied according to their overheads. Hence,the assessing authority concluded that the only way to establish under-invoicing was with reference to the comparison of the price structurewith the price offered to others. A perusal of the orders of theauthorities below show that the Assessing Officer had not had materialsto substantiate the assessment under Section 12-A of the Act. TheTribunal rightly came to the conclusion that the Assessing Officerfailed to let in evidence to substantiate the allegation as well as tofix the market price. As to the allegation that the assessee had soldthe goods at a low rate, the Tribunal perused the comparative statementof price and found that the price charged by the petitioner is anuniform one throughout the country and not low. Thus, on a finding offact that the Assessing Authority had not complied with the requirementsof Section 12-A of the Act in determining the market price in makingcomparison of the price charged by the petitioner with that of thesimilarly placed dealer and that there was no finding as to the lack ofbona fide as to the conduct of the assessee, the Tribunal rightly heldthat the assessment could not be sustained. 24. A reading of the order of the Tamil Nadu Taxation SpecialTribunal shows that it misdirected itself in not adverting to therequirements under Section 12-A of the Act that the statutory best ofjudgment assessment itself rests on the comparison of the price chargedby the assessee with the market price determined on the basis ofmaterials available with the assessing authority. There was no materialto suggest lack of bona fides and that the transactions were aimed attax evasion. The Tamil Nadu Taxation Special Tribunal totally erred inits approach when it held that the comparison of rates charged by otherswith that of the petitioner would not be a safe guide to determine themarket price. It must be noted that although the Rules relating toSection 12-A of the Act were introduced only with effect from 1.10.1984,yet, the Revenue is bound to determine the market price for a comparisonto ultimately arrive at a finding on the bona fides of the transactions.25. As already seen, a mere difference in prices charged by thepetitioner from the market price does not automatically lead to invokingof Section 12-A of the Act. There is hardly any finding recorded by theTamil Nadu Taxation Special Tribunal as regards this aspect. It totallymisdirected its attention to make the comparison of the price chargedfor Defence Canteen Stores Department for Zenith-165 litre capacityrefrigerator with that of the price charged by the petitioner. Learnedcounsel for the petitioner rightly pointed out that the petitioner is a https://hcservices.ecourts.gov.in/hcservices/ wholesale dealer and the price charged for by the petitioner as regardsits sales to Lloyd Sales Corporation must be compared with the sales tosimilarly placed persons in terms of the guidelines as held by theDivision Bench in the decision reported in 105 STC 337 (JAYALAKSHMITRADERS v. GOVERNMENT OF TAMILNADU). The price charged by the retailerscannot be compared with the price charged by the wholesalers. 26. In the above circumstances, we do not agree with the view ofthe Tamil Nadu Taxation Special Tribunal. Consequently, we set aside theorder of the Tamil Nadu Taxation Special Tribunal dated 3.10.2001 passedin T.C.(R) No. 2144 of 1997. In the circumstances, we allow the writpetition. No costs. Connected W.P.M.P.Nos.25781 and 42868 of 2004 areclosed.Sd/Asst.Registrar/true copy/Sub Asst.RegistrarbgTo1. THE REGISTRAR, TAMILNADUTAXATION SPECIAL TRIBUNAL,SINGARAVELAR MALIGAI,CHENNAI 22. THE SALES TAX APPELLATETRIBGUNAL, (MAIN BENCH) CITY CIVIL COURT BUILDINGSCHENNAI 1043. THE COMMERCIAL TAX OFFICER,NUNGAMBAKKAM ASSESSMENT CIRCLECHENNAI 314. THE DEPUTY COMMR. OF COMMERCIATAXES, MADRAS CENTRAL DIVN., GREAMS ROAD, CHENNAI 61 CC To Mr.C.Venkatraman, Advocate, SR NO.54861.1 CC to the Spl. Government Pleader(Taxes), SR NO.55153.W.P.No. 21339 of 2004 JSK(CO)RVL 12.09.2007