HDFC Bank Ltd. vs Intelligence Officer (IB), Department of Commercial Taxes and Another

C.K. Abdul Rahim, J.—In W.P. (C) No. 4635 of 2009 the petitioner-bank is challenging exhibit P5 order of assessment finalised against them for the year 2007-08, under the Kerala Value Added Tax Act, 2003 ("the KVAT Act"). Bank is also challenging exhibit P6 series monthly assessments made with respect to various months in the assessment year 2008-09. In W. P (C) Nos. 16478 of 2009 and 16479 of 2009, the petitioner-bank is challenging exhibit P4 orders imposing penalty u/s 67(1) of the KVAT Act, with respect to assessment years 2006-07 and 2007-08. Since the issue involved in all these writ petitions pertains to the rate of tax applicable on the sale of gold bars imported and sold by the banks within the State of Kerala, these cases are considered together and disposed of through a common judgment. The petitioner-banks have conceded turnover on the sale of gold bars during the relevant period and paid tax at one per cent, on the premise that the commodity sold will fall within the relevant entry of gold bullions. But the returns were rejected and the turnover was assessed at four per cent treating the commodity as one falling within entry 4(4) of the Third Schedule to the KVAT Act. In this regard, the Commissioner of Commercial Taxes had issued a clarification in exercise of power vested u/s 94 of the KVAT Act (exhibit P7 produced in W. P (C) No. 4635 of 2009). In the said clarification, issued on September 29, 2008, it is held that 10 grams of rectangular gold bars, being semi-manufactured gold would fall within entry 4(4) of the Third Schedule with HSN Code 7108.13.00. The assessing authorities found that the rectangular gold bars dealt with by the petitioner-banks cannot be regarded as bullion since they are not raw or unwrought gold or gold in mass. According to the petitioner such an interpretation given by the assessing authority relying on the clarification issued by the Commissioner is totally erroneous and opposed to settled legal principles enumerated in the decision of the honourable Supreme Court in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. G.S. Pai and Co., .

An identical question has been dealt with by a Division Bench of this court in HDFC Bank Limited Vs. Assistant Commissioner (Assmt.) and Another, . It is held therein that small sizes of minted gold cannot be treated as gold in unwrought form coming under HSN code 7108.12.00, because the website of the manufacturer describes the process of manufacturing which is by further processing of gold obtained in unwrought form through melting and casting. The Division Bench observed that so far as KVAT Act is concerned, up to March 31, 2009 gold was treated under three descriptions. One as bullion described under Schedule II and others are semi-finished forms of gold and the third category is under gold Jewellery the latter to falling under two separate entries contained in the Third Schedule taxable at four per cent. After April 1, 2009, semi-manufactured gold items covered under entry 4 of the Third Schedule were brought along with bullion in the Second Schedule and made at taxable at one per cent. The relevant period in this cases and also in the cases dealt with by the Division Bench falls within the pre-amended period, i.e., before April 1, 2009. The Division Bench observed that, the minted rectangular form of gold bars made with fine finish and markings with sizes of 5 gms. 8 gms. and 10 gms. etc., are purchased only to be worn or to be gifted or purchased and retained only for its finish and beauty and not for use as a raw material in the manufacture of gold ornaments. Hence it cannot be treated as gold in unwrought form used as raw material for manufacture of other products, covered under entry 1 of the Second Schedule until the amendment came into effect on April 1, 2009. It was held that, the clarification issued by the Commissioner is applicable in such case and it applies to gold bars and gold coins of 5 gms. 8 gms. and 10 gms. etc., marketed by the hanks. It is submitted that the decision rendered by the Division Bench in HDFC Bank Limited Vs. Assistant Commissioner (Assmt.) and Another, has attained finality, not being challenged before the honourable Supreme Court. Hence prima facie the abovesaid decision is binding on this court since the issue involved is one and the same.

But Sri. M. Pathrose Mathai, learned Senior Counsel appearing for the petitioner in W.P. (C) Nos. 4635 of 2009 contended that the clarification issued as well as the assessment made are against the law declared by the honourable Supreme Court in the case reported in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. G.S. Pai and Co., . According to him, it is ignoring the binding force of law laid by the honourable apex court that the decision is taken to assess the gold bars classifying the same as commodity not corning within description of bullion. In the said decision the honourable Supreme Court held that, in its plain ordinary meaning bullion means gold or silver in the mass. It connotes gold or silver regarded as raw material and it may either in the form of raw gold or silver or ingots or bars of gold or silver. Ornaments and other articles cannot be regarded as bullion because even if Old and antiquated they are not raw or unwrought gold or gold in the mass, but they represent manufactured or finished product of gold. On the facts of the said case, the honourable apex court held that ornaments and other articles of gold purchased by the assessee with a view to melt them and making of new ornaments or other articles out of the melted gold, fall within entry 56 of the Kerala General Sales Tax Act ("the KGST Act"). Therefore it is held that such gold are liable to be taxed not at the lesser rate of one per cent applicable to bullion included in entry 56, but at the general rate of three per cent u/s 5A of the said Act. The contention of the senior counsel is that, since the honourable Supreme Court held that the term "bullion" means gold and silver in the mass and it connotes raw gold or bar of gold, the gold bar which is the commodity in the present case, cannot be treated as a commodity other than bullion.

While evaluating the above contentions, it is necessary to consider relevant provisions in the statutes under which the assessments were made. Case dealt with by the honourable Supreme Court pertains to liability of tax under pre-VAT scenario. The KGST Act which was prevalent at that time contained entry 56 in the First Schedule which is, "bullion and specie". The rate of tax fixed was one per cent. The honourable Supreme Court held that ornaments and other articles of gold will not fall within the said category and rate of three per cent is applicable u/s 5A of the KGST Act. Under the KVAT Act, till the amendment which came into effect on April 1, 2009, there contained different entries under the Second Schedule as well as in the Third Schedule. Entry No. 1 of Schedule II is bullions, which was sub-divided into (1) silver and (2) gold, with different HSN Codes noted as 7106.91.00 and 7108.12,00, respectively. Under the Third Schedule entry No. 4 deals with "articles of gold, silver and platinum group of metals other than Jewellery falling under Second Schedule". Sub-entry (4) of entry 4 in Schedule III is "gold, semi-manufactured" with HSN Code 7108.13.00. While interpreting applicability of the rate of tax in relation to commodities included in the VAT Act, the Division Bench in HDFC Bank Limited Vs. Assistant Commissioner (Assmt.) and Another, held that the rule of interpretation specified in the Schedules appended to the KVAT Act is to be considered. It provides that commodities included in the Schedules are allotted with code numbers which are developed by the International Customs Organisation as "Harmonised System of Nomenclature (HSN)" and adopted by the Customs Tariff Act, 1975. Those commodities which are given with HSN code numbers in the Schedules to the KVAT Act should be given the same meaning as given in the Customs Tariff Act, 1975. With respect to those commodities which are not given HSN code numbers should be interpreted in common parlance or commercial parlance as the case may be.

In the case at hand, entry No. 1 in the Second. Schedule with respect to gold bullion the HSN Code is 7108.12.00. Whereas, with respect to entry 4(4) in the Third Schedule the commodity "gold, semi-manufactured" is described by HSN Code 7108.13.00. The Division Bench while interpreting nature of the commodity had referred to the Customs Tariff Act with respect to description of various items with HSN Codes and found that rectangular bars of gold sold by the petitioner-banks is "gold in semi manufactured forms", falling under HSN Code 7108.13.00. Learned judges observed that similar size of minted gold cannot be treated as gold in unwrought form, because it has undergone a manufacturing process from gold obtained in unwrought form through casting. Therefore it is held that only bullion which is gold in unwrought form used as raw material for other products is covered under entry 1 of the Second Schedule to the Act. On the other hand minted rectangular form of gold made with fine finish and markings with sizes of 5 gms., 8 gms., and 10 gms., etc., are purchased only to be worn or to be gifted or purchased and retained for the finish and beauty and for use as gold ornament. Hence it will come under entry 4(4) of the Third Schedule. Contention raised before the Division Bench that the clarification issued by the Commissioner had only prospective effect and hence an assessment cannot be made for any period prior to the clarification, has also been repelled pointing out that the proviso to section 94 which had provided only prospective effect for determination by the Commissioner, was already deleted with effect from April 1, 2008 by virtue of the Finance Act, 2008. Under the above-mentioned circumstances, the Division Bench ruling in HDFC Bank Limited Vs. Assistant Commissioner (Assmt.) and Another, will squarely apply on the issue pertaining to the rate of tax applicable with respect to commodities covered under these cases.

The contention that the assessments are contrary to law laid by the honourable apex court in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. G.S. Pai and Co., cannot be accepted; Entries contained in the KGST Act dealt with in that decision is totally different from entries contained in the Schedules of the KVAT Act, with specific codes mentioned therein. The honourable apex court has not laid any law that gold bars can only be classified as bullion nor had prevented the State Governments from legislating law including gold bars under any other category specified in the Schedule of the VAT Act. Therefore I am of the view that the interpretation given to the meaning to the entry "bullion" contained in the KGST Act, in which an observation is made that it will include gold bar, cannot be construed in any manner as a dictum laid by the honourable Supreme Court curtailing legislative competence of the State Governments to include gold bar in any other specific entry for the purpose of levying VAT.

The learned senior counsel further contended that in the Customs Tariff Act there is no HSN classification with respect to bullion, but the HSN Code of 7108.12.00 is allotted only to "other unwrought forms". But as held by the Division Bench, the gold bar dealt with by the petitioner-banks cannot be treated as gold bullion coming within entry 1(2) of the Second Schedule to the KVAT Act with HSN Code 7108.12.00. But it can only be considered as "semi-manufactured" form of gold corning within HSN Code 7108.13.00 as described in the Customs Tariff Act. Hence I am inclined to follow the decision in HDFC Bank Limited Vs. Assistant Commissioner (Assmt.) and Another, which is binding on me. Accordingly the challenge in W.P. (C) No. 4635 of 2009 against exhibits P5 and P6 series assessments deserves no merit.

With respect to W.P. (C) Nos. 16478 of 2009 and 16479 of 2009, the petitioner is the HDFC Bank Ltd., who suffered the decision rendered by the Division Bench, reported in HDFC Bank Limited Vs. Assistant Commissioner (Assmt.) and Another, . It is stated that, pursuant to the judgment of the Division Bench, tax amount due with respect to years 2006-07 and 2007-08 has already been paid. But penalty was imposed under exhibit P4 order invoking section 67(1) of the KVAT Act on the premise that there was deliberate attempt on the part of the bank in misclassifying with view to evade payment of tax. Therefore penalty was imposed at double the amount of the differential tax, for the respective years. The contention of the petitioners is that there existed a doubt regarding the rate of tax applicable. The petitioner-banks bona fidely collected only one per cent tax on all the sales concerned, under a bona fide belief that the commodity dealt with will fall under entry 1 in the Second Schedule to the KVAT Act. They have filed returns conceding tax liability as above. Those returns were accepted by the assessing authority concerned, without raising any objection till the clarification issued by the Commissioner of Commercial Tax u/s 94 of the KVAT Act, on September 29, 2008. Thereafter the issue on the question of relevant entry was subjected to litigation before this court. The petitioners were bona fidely prosecuting challenges against the assessment on the basis of interpretation of the relevant entry. It is also pointed out that after verdict of this court the tax due for the respective years has been paid in full. Therefore it is contended that there was no wilful or contumacious or blame worthy conduct on the part the bank in evading payment of differential rate of three per cent tax. Hence the allegation of mis-classification with deliberate intention to evade payment of tax is not sustainable. But the above contentions were discarded by the intelligence officer while imposing penalty, holding that there was no ambiguity with respect to the rate of tax applicable. It is mentioned in the impugned orders that, clarification issued by the Commissioner was not in the nature of a law making. But it only clarified the law as existing, on the basis of request made by affected parties. According to the first respondent there was no ambiguity existed in the rate of tax and hence there is deliberate mis-classification which is liable to be penalised.

The learned counsel for the petitioners, Sri Joseph Jerard Samson Rodrigues contended that the legal position stands covered though the decision in E.I.D. Parry (I) Ltd. Vs. Asstt. Commr. of Commercial Taxes and Another, , wherein the honourable Supreme Court held that, when the assessee had not included any taxable turnover on a bona fide belief that the turnover is exempted, the reason for non-inclusion of the turnover cannot be termed as intentional. Even if it is held by any court of law that the turnover in question is taxable, it would not be correct to say that the assessee had acted deliberately in defiance of law that their conduct was dishonest or that they have acted in conscious disregard to its application. On the facts of the said case it is evident that the petitioner-company had Omitted inclusion of turnover with respect to planting and transport subsidies on the bona fide belief that such items are excluded. Even though the court decided against the assessee and held that such turnover is taxable, the findings rendered upholding imposition of penalty was reversed by the honourable Supreme Court.

In Hindustan Steel Ltd. Vs. State of Orissa, , the honourable. Supreme Court held that liability to pay penalty does not arise merely upon the proof of default. 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. 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 consideration of all relevant circumstances. Where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute the authority competent to impose penalty will be justified in refusing to impose penalty.

Analysing the issue on the basis of settled legal positions as mentioned above, I am of the opinion that the authority which imposed penalty u/s 67(1) has failed in arriving at a reasonable conclusion that the omission was deliberate or that there was any contumacious or conscious act on the part of the petitioner bank in mis-classifying the goods and in attempting evasion of tax at a higher rate. Therefore I am of the view that the impugned order imposing penalty cannot be sustained under the test of legality.

The learned Government Pleader pointed out that the impugned orders of penalty were issued during pendency of the challenge against the assessment before this court and that the payment of tax was made only after this court rendered the judgments reported in HDFC Bank Limited Vs. Assistant Commissioner (Assmt.) and Another, ; [2011] 19 KTR 242 (Ker). It is not relevant as to when the assessee had actually paid the tax amount due. But the relevant aspect to be considered is as to whether the assessee had failed in making payment of the tax by mis-classification of the commodity by acting deliberately in a contumacious manner with an attempt to evade payment of tax. The fact that the assessing authority had finalised a best judgment assessment only after the Commissioner of Commercial Tax had clarified the matter, will indicate that the assessee was right in stating that they were under a bona fide belief that appropriate entry under which the commodity is to be included was entry within the Second Schedule. Therefore I am inclined to quash the impugned orders of penalty. In the result:

(i) W. P (C) No. 4635 of 2009 is hereby dismissed.

(ii) W. P (C) Nos. 16478 of 2009 and 16479 of 2009 are allowed. Exhibit P4 orders of penalty impugned therein are hereby quashed.