The petitioner is a company engaged in the manufacture and sale of moulded plastic furniture. It had entered into a licence agreement with a sister concern M/s.Nilkamal Crates and Containers, which is a partnership firm and the registered proprietor of the trade mark “Nilkamal”. It would appear that the said Nilkamal Crates and Containers had also entered into an agreement with M/s.Kaveri Pet and Polyforms (P) Ltd. permitting the said company to manufacture plastic moulded furniture with the trade mark “Nilkamal”. Thus, through two separate agreements, entered into with the petitioner as well as Kaveri Pet and Polyforms (P) Ltd., the registered proprietor of the trade mark “Nilkamal”, namely, Nilkamal Crates and Containers had arranged their affairs in such a way that moulded plastic furniture with the brand name “Nilkamal” would be manufactured by Kaveri Pet and Polyforms (P) Ltd and thereafter sold to the petitioner who would then distribute the said furniture by way of sale to others within the State. The aforesaid arrangement between the parties attracted the attention of the Sales Tax Authorities in the State, primarily in view of the provisions of Section 5(2A) and 5(2B) of the Kerala General Sales Tax Act, 1963, hereinafter referred to as the 'KGST Act', whereby, as an exception to the general rule with regard to the liability to tax under the KGST Act at the point of first sale, it was made clear that in respect of manufactured goods other than tea, which are sold under a trade mark or brand name, the sale by the brand name holder or the trade mark holder within the State would be deemed as the first sale for the purposes of the KGST Act. In the case of the petitioner, the arrangement referred to above had the effect of bringing into existence two persons who could claim to be brand name holders for the purposes of the aforecited provisions under the KGST Act. In other words, both Kaveri Pet and Polyforms (P) Ltd., as well as the petitioner, who had entered into independent agreements with Nilkamal Crates and Containers, and had obtained permission for using the brand name “Nilkamal” in connection with their respective activities, could validly be referred to as the brand name holders for the purposes of the KGST Act. The issue then arose as to who would be treated as the brand name holder for the purposes of Section 5(2) of the KGST Act in the event of a sale by Kaveri Pet and Polyforms (P) Ltd. to the petitioner, insofar as both the persons were brand name holders. The issue as to the dealer, on whom the tax liability had to be fastened in terms of Section 5(2) of the KGST Act, came to be resolved only by 13.1.2010 when, through the judgment in State of Kerala v. Nilkamal Plastics Limited - [[2010] 30 VST 510 (Ker)], a Division Bench of this Court found that in the backdrop of the arrangement referred to above, it would be the petitioner who would be treated as the brand name holder for the purposes of Section 5(2) of the KGST Act and on whom the liability to pay tax would be fastened under the KGST Act. In the present writ petition, the petitioner is aggrieved by an order issued by the respondent imposing a penalty on the petitioner for the assessment year 2003-04. The said order has been passed in terms of Section 45A of the KGST Act and is based on a finding that the petitioner had failed to keep and disclose true and correct accounts for the said assessment year and had also tried to evade payment of tax by claiming exemption and failing to keep true and complete accounts. In the writ petition, Ext.P6 order dated 17.5.2010 passed by the respondent is impugned inter alia on the ground that the said order has been passed without considering the specific contention of the petitioners regarding its bona fides in the matter, as also without noticing the fact that the petitioner had actually disclosed the entire turnover relating to sale of moulded plastic furniture in its returns and had not suppressed any part of the said turnover while filing its returns for the said years. 2. A statement has been filed on behalf of the respondent wherein the stand taken is that the petitioner was fully aware of the legal provisions that ensured that the tax liability in respect of the sale of branded moulded plastic furniture would be on it, and had chosen to claim an exemption in respect of second sales by referring to Kaveri Pet and Polyforms (P) Ltd. as the brand name holder for the purposes of Section 5(2) of the KGST Act. It is alleged that the agreements relied upon by the petitioner to substantiate its contentions, that it was not the brand name holder for the purposes of Section 5(2) of the KGST Act, were all prepared to suit the interest of the petitioner and therefore could not be relied upon for the purposes of excluding a tax liability on the petitioner.
3. I have heard Sri.M.Pathros Matthai, the learned senior counsel appearing on behalf of the petitioner as also Smt.Lilly.K.T., the learned Government Pleader appearing on behalf of the respondent.
4. On a consideration of the facts and circumstances of the case as also the submissions made across the Bar, I find that this is a case where it is not in dispute that in the returns filed for the assessment years 2003-04, the petitioner had declared the entire turnover relating to sales of moulded plastic furniture effected by it and had only claimed exemption of the said turnover in the return by stating it to be second sales effected within the State. In other words, this is not a case where the petitioner had chosen to suppress any part of the sales turnover in the returns filed by it for the purposes of attracting the penal provisions under the KGST Act. It is also relevant to note that the issue as to who, among two dealers permitted to use the brand name, is to be the brand name holder for the purposes of Section 5(2) of the KGST Act, and on whom the liability to pay tax on the goods sold under the brand name will rest, has been the subject matter of litigation ever since the introduction of Section 5(2) in the KGST Act with effect from 1998. The judgments of this Court on the issue, span the period from 1998 to 2013 and even against the judgment in the petitioner's case, a Civil Appeal is stated to be pending before the Supreme Court. In the light of this fact what is to be examined is whether the petitioner could be said to have possessed the necessary mens rea for the purposes of attracting the provisions of Section 45A of the KGST Act proposing the penalty for the assessment year 2003-04. On a consideration of the facts in this case, I am of the view that the petitioner was justified in harbouring a bona fide belief that he would not be treated as the brand name holder in a transaction where he had purchased branded goods from another person, who could also have claimed to be a brand name holder for the purposes of Section 5(2) of the KGST Act. That apart, it is not in dispute that in the returns filed by the petitioner for the assessment year in question, he had declared the entire sales turnover in respect of the sales of moulded plastic furniture effected by him and had also claimed exemption by treating the entire sales as second sales for the purposes of the KGST Act. A mere claim for exemption by an assessee, cannot, in my opinion, be treated at par with a suppression of turnover, for the purposes of attracting the penal provisions under the KGST Act. Neither will the mere claim for exemption make the return an incorrect or untrue return for the purposes of attracting the penal provisions under the KGST Act. In an assessment proceedings that has to follow the filing of a return by an assessee, it is always open to the Assessing authority to consider the claim for exemption made by an assessee and either accept it or reject it for valid reasons.
In that exercise, the Assessing authority examines a claim for exemption preferred by an assessee on merits, as part of a procedure that is contemplated in the statutory scheme of assessment. A mere claim for exemption cannot, therefore, be viewed as an event that would attract the penal provisions under the KGST Act. Thus, in the instant case, I find that while the petitioner had disclosed the entire turnover of sales of moulded plastic furniture in its returns, he was also justified in claiming an exemption taking into account the position in law which, at the time of filing of the return, was in a state of flux. The findings of the respondent in Ext.P6 order that, by claiming exemption, the assessee had tried to evade payment of tax and had also failed to keep true and complete accounts, does not appeal to me as reasonable on the facts of the instant case. It is also necessary to observe that in Ext.P6 order, the respondent does not advert to any of the contentions or the decisions relied upon by the petitioner to substantiate his contentions regarding the impropriety of imposing penalty. It will be apposite in this connection to refer to the decision of the Supreme Court in E.I.D. Parry (1) Ltd v. Assistant Commissioner of Commercial Taxes and Another - [(2000) 117 STC 457]. The relevant portion of the said judgment is in paragraph 23 which reads as follows:
“23. But so far as levy of penalty is concerned, we do not think that the sales tax authorities were justified in levying it. Till the judgment of the Madras High Court, on July 15, 1991, in Perambalur Sugar Mills Ltd. v. State of Tamil Nadu [1992] 86 STC 17, the correct position of law within the State of Tamil Nadu was not free from doubt. Even thereafter, the sales Tax Tribunal had in subsequent orders held that transport subsidy was not includible in the taxable turnover. Such a view was held by the Tribunal till March, 19, 1993. It appears that on bona fide belief that planting and transport subsidies were not includible in the taxable turnover, the appellants had not included those amounts in their turnover and for that reason non-inclusion of these two items in the turnover do not seem to be intentional. Though we have now held that the appellants were not right in not including the amounts of planting subsidy and transport subsidy in the taxable turnover, considering the facts and circumstances of the case, it would not be correct to say that they had acted deliberately in defiance of law or that their conduct was dishonest or they had acted in conscious disregard of their obligation under the sales Tax Act. The sales tax authorities were, therefore, wrong in passing the orders of penalty and upholding the same. The High Court also, in our opinion, committed an error in upholding the orders of penalty. In the result, these appeals are partly allowed. The order of the High Court and the orders of the sales tax authorities imposing and upholding levy of penalty are set aside. Only to that extent the appellants succeed and their appeals are allowed. The judgment of the High Court in respect to the planting subsidy and transport subsidy is upheld. In the facts and circumstances of the case, there shall be no order as to costs.”
It would also be relevant to refer to the observations of the Supreme Court in the case of Hindustan Steel Limited v. State of Orissa -
1970 (25) STC 211 , where in the context of imposition of penalty under the Orissa Sales Tax Act, the Supreme Court observed as follows:
“Under the Act penalty may be imposed for failure to register as a dealer : section 9(1) read with section 25(I)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Those in charge of the affairs of the company in failing to register the company as a dealer acted in the honest and genuine belief that the company was not a dealer. Granting that they erred, no case for imposing penalty was made out.”
Thus, in any view of the matter, Ext.P6 order cannot be sustained. Resultantly, I quash Ext.P6 order and hold that the petitioner is not liable to any amount by way of penalty under Section 45A of the KGST Act for the assessment year 2003-04.
The writ petition is disposed as above.
A.K.JAYASANKARAN NAMBIAR JUDGE prp