The Kerala High Court (Ernakulam Bench) recently ruled that recent clarifications issued by the Department, overruling its earlier clarifications, cannot have a retrospective effect if the trader’s right to collect tax from its customers is denied under the VAT Act. Referring to Section 30 of the Kerala VAT Act, the Court stated that the trader is entitled to collect the tax payable by him from the purchaser of the commodity, and any clarificatory order rendering it impossible for the trader to collect the differential tax from his customer, with retrospective operation, would seriously prejudice the trader.
The Division Bench comprising Justice A. Muhamed Mustaque and Justice Harisankar V. Menon reiterated that the clarification gives a statutory right to collect the tax at the rate clarified, and if there is a retrospective change, the taxpayer will not be able to collect tax for the product for the period before the new clarification. Reference was made to the decision in the case of Sreedhareeyam Ayurvedic Medicines (P) Ltd. and Ors. v. State of Kerala – (2011) 19 KTR 561 (Ker), to conclude that since the clarification could only apply prospectively, the exercise of revisional jurisdiction under Section 56 of the KVAT Act could not be sustained.
The Bench noted that under Section 56 of the KVAT Act, the Deputy Commissioner is entitled to call for and examine any order passed or proceedings recorded under the Act by any officer subordinate to him, which, in his opinion, is prejudicial to the interest of the revenue, and pass such orders after making the required enquiry. However, when the appellate authority in the present case had only directed a reassessment in the matter, directing the revisionist to produce documents in support of the claim, the consequential order should have addressed the issue afresh as directed by the appellate authority.
Briefly, in this case, the revisionist proprietor (taxpayer), engaged in the trading of ‘thermic fluid heater’, had initially faced an assessment imposing tax at 12.5% based on a clarification dated August 12, 2006, which was later set aside. Following the appellate directions, the AO passed a revised order imposing tax at 4% under Entry 83(1)(f) of Schedule III of the Kerala VAT Act.
However, after the Authority under Section 94 issued a clarificatory order on April 7, 2016, holding that ‘thermic fluid heaters’ were not covered by any Schedule III entries and were taxable at 12.5% as RNR items, the Deputy Commissioner initiated a suo-motu revision under Section 56 of the Kerala VAT Act, cancelling the favourable assessment order. This revision was challenged before the Commissioner of Commercial Taxes and ultimately reached the High Court after multiple rounds of litigation.
Case Relied On:
Sreedhareeyam Ayurvedic Medicines (P) Ltd. and Ors. v. State of Kerala – (2011) 19 KTR 561 (Ker)
Appearances:
Advocates P.S. Soman and T. Radhamony, for the Revisionist/ Taxpayer
Advocate V.K. Shamsudheen, for the Respondent/ Revenue
