TVS Motors Company Limited vs State of Karnataka

B. Manohar, J.—The appellant-assessee filed these appeals challenging the order dated 20th August, 2011 passed by the Additional Commissioner of Commercial Taxes in exercise of its revisional power u/s 64(1) of the Karnataka Value Added Tax Act, 2003 (for short the ''KVAT Act''), whereby the Revisional Authority had set aside the order passed by the Joint Commissioner of Commercial Taxes (Appeals-II), Bangalore (hereinafter referred to as ''the First Appellate Authority'' for short) dated 28-8-2010 while confirming the order passed by the Assessing Authority for the assessment period 1-4-2005 to 31-3-2009. The appellant is a Limited Company incorporated under the Companies Act 1956 and registered both under the KVAT Act, 2003 and Central Sales Tax Act, 1956, engaged in the manufacture and sale of two wheeler vehicles and its spare parts having its manufacturing unit at Mysore. For the purpose of assessment under the KVAT Act, 2003, the returns was filed in Form VAT 100 and also under the CST Act. The Assistant Commissioner of Commercial Taxes visited the business premises on 21-1-2010 and conducted audit of accounts for the tax period 1-4-2005 to. 31-3-2009. During the time of audit of accounts, the Auditing Officer noticed certain discrepancies. The assessee-company has supplied food and non-alcoholic beverages to its employees and guests on subsidized rates for a valuable consideration through the canteen run by the company. The amount so received for the supply of food and drink amounts to sale of goods and taxable at the rate of 12.5%. However, the assessee-company failed to declare the above taxable sale turnover of food and drinks and also failed to discharge the tax liability with Form VAT 100 for the period from 1-4-2005 to 31-3-2009. Accordingly, a proposition notice was issued u/s 39(1) of the KVAT Act on 6-4-2010 and 12-4-2010 calling upon the assessee to file their written objections along with documentary evidence. The assessee-company filed written objection to the proposed reassessment notice and contended that as per the Factories Act, 1948 the assessee-company has to provide canteen facility to its employees. In the canteen operated in the factory premises at Mysore, the food is prepared for supplying to their own employees making use of rice, vegetables, snacks, milk etc. The expenditure on this account is fully borne by the assessee-company. The employees are not charged the "sale price" of the food supplied to them. In view of the judgment of The State of Madras Vs. Gannon Dunkerley and Co., (Madras) Ltd., , supply of food and beverages cannot be treated as sale. The Assessing Officer after considering the objections held that there is a sale of goods and transfer of goods from one legal person to another legal person, it may be for cash or deferred payment or other valuable consideration which includes sale. Hence, the assessee is liable to pay tax. Accordingly re-assessed the tax for the period from 1-4-2005 to 31-3-2009 and issued demand notice by its reassessment order dated 29-4-2010.

The assessee being aggrieved by the reassessment order dated 29-4-2010 preferred an appeal before the First Appellate Authority contending that the order passed by the Assessing Authority is contrary to law. The canteen in a factory is a welfare measure that was required under the Factories Act. The canteen is an amenity provided to the employees and it can, by no stretch of imagination, be considered as a business or sale under the Act. The food supplied at the canteen did not constitute sale u/s 2(29) of the KVAT Act as there was no absolute transfer of property in the form of food items. The First Appellate Authority after considering the matter in detail and relying upon the judgment of the Hon''ble Supreme Court in the case of Vishnu Agencies (Pvt.) Ltd. Vs. Commercial Tax Officer and Others, ; Commissioner of Sales Tax Vs. Hukumchand Mills, , by its order dated 28-8-2010, allowed the appeal and set aside the order passed by the Assistant Commissioner of Commercial Taxes and further held that the supply of food and beverages by the assessee to its employees was essentially amenities and an incident of contract of service entered into between the parties does not constitute the taxable turnover and issued a direction to the Assessing Authority to revise the demand notice. On scrutiny of the order passed by the First Appellate Authority, the Additional Commissioner of Commercial Taxes found that the decision of the First Appellate Authority is erroneous and prejudicial to the interest of the Government revenue for the period of 1-4-2005 to 31-3-2009. Accordingly, issued notice u/s 64(1) of the KVAT Act for suo motu revision of the order passed by the First Appellate Authority on 20th June, 2011.

In pursuance of the notice issued by the Revisional Authority, the assessee filed detailed statement of objections contending that the notice issued u/s 64(1) of the KVAT Act is erroneous in law. Any person aggrieved by the order passed by the First Appellate Authority has to prefer an appeal before the Appellate Tribunal having regard to the well-settled principles of interpretation of taxing statute and the Revisional Authority is bound to accept the interpretation which was in favour of the assessee when two views are possible. The Revisional Authority cannot invoke suo motu revisional jurisdiction vested in it when there is an appeal provision. The assessee''s main activities of business is the production and sale of two wheeler motor vehicles. The provision of Factories Act mandates for providing canteen to its employees. In the subsidized rates, the food and beverages are to be supplied to the employees and nominal price is collected at 9% to 15.14%. Running of a canteen is not the dominant purpose of the business. The canteen facility is only an amenity provided to the employees and guests and it is not a trade or adventure, ancillary or incidental or connected with the manufacturing of two wheeler vehicle which is primary trade of the appellant and sought for dropping of the revisional proceedings.

The Revisional Authority after examining the matter in detail and taking into consideration Section 2(6) and 2(29) held that the assessee-company is not supplying the food and beverages free of cost and the company is collecting certain amount from the employees and guests at the subsidized rates. There is a sale of goods u/s 2(29) of the Act and the assessee is carrying on the business. Hence, the assessee is liable to pay tax. Further, the Revisional Authority found that if the order passed by the First Appellate Authority is erroneous and prejudicial to the interest of the Revenue, he can exercise the revisional power. Accordingly by its order dated 20th August, 2011, set aside the order passed by the First Appellate Authority and restored the order passed by the Assessing Authority insofar as sale of food and beverages in the canteen of the assessee is concerned. Being aggrieved by the order passed by the Revisional Authority, the appellant has preferred these appeals.

Sri Sriranga, learned Counsel appearing for the appellant contended that the order passed by the Revisional Authority is contrary to law. The appellant is running a factory at Mysore, manufacturing and sale of two wheelers. More than 1000 workers are working in the factory situated at Mysore. The appellant is statutorily obliged to establish and run the canteen as a welfare measure under the Factories Act. The canteen is situated within the factory campus. The statute further provides that food in the canteen shall be sold on a non-profit basis. Accordingly, the appellant is supplying food and beverages at a very very subsidised rate collecting 9% to 15.14% from its employees and guests. There is no sale or business of food and beverages. The establishment of the canteen is not in furtherance of gain or profit nor it is a transaction incidental to the business. The canteen facility is only amenity provided to the employees and guests. Running of the canteen is not ancillary or incidental or connected with the manufacturing of two wheeler business of the appellant. There is no profit motive in running the canteen. Hence, running of the canteen will not fall u/s 2(29) of the KVAT Act. In support of his contention, he relied upon the judgments in Motor Industries Co. Ltd. Vs. The State of Mysore and Others, ; Canara Bank Vs. Commercial Tax Officer and another, ; Northern India Caterers (India) Ltd. Vs. Lt. Governor of Delhi, ; Davanagere Cotton Mills Ltd. Vs. State of Mysore and Another, ; Northern India Caterers (India) Ltd. Vs. Lt. Governor of Delhi, ; Commissioner of Sales Tax Vs. Hukumchand Mills Ltd., and contended that where assessee-Factory maintain a canteen on a ''no profit no loss'' basis for the benefit of their employees in conformity with the requirement of the Factories Act, the turnover relating to the sale effected in the said canteen was not liable to be taxed either under the Sales Tax Act or under KVAT Act. The welfare activity of running a canteen by the appellant not being a commercial activity, the sale effected in the course of performing statutory obligation would not amount to carrying on business of buying and selling goods. Hence, he sought for allowing the appeal by setting aside the order passed by the Revisional Authority.

On the other hand, Sri T.K. Vedamurthy, learned Government Pleader appearing for the Revenue contended that there is a systematic activities of sale for consideration. Every-transfer of property in goods by one person to another in the course of trade or business for cash or deferred payment or other valuable consideration amounts to sale. Any trade, commerce, manufacture or any other adventure or concern, in the nature of the trade, commerce or manufacture in furtherance of gain or profit or whether or not any gain or profit is a business. Further, any transaction in connection with or incidental or ancillary to such trade or commerce, manufacture or adventure are concerned is also business. In the instant case, the appellant is running a factory manufacturing two wheeler motor vehicle and parts thereof. It is also running the canteen and selling food and beverages at subsidized rates. There is a sale of goods for cash. Even though they are not earning any income from the said business, it is a business, the turnover has to be assessed for the tax. In support of his contention, he relied upon the following judgments: State of Tamil Nadu Vs. Binny Ltd., Madras, ; Nuclear Atomic Power Supply Canteen Vs. Commissioner, Trade Tax ; Tata Iron and Steel Co. Ltd. Vs. State of Orissa, ; The Union of India (UOI) Vs. The State of Bihar and Others ; and State of Tamil Nadu Vs. Burmah Shell Oil Storage and Distributing Co. of India Ltd. and Another, . Hence, sought for dismissal of the appeal.

We have carefully considered the arguments addressed by the learned Counsel for the parties and perused the orders impugned.

These appeals were admitted to consider the following substantial questions of law:

(i) Whether the supply of food and non-alcoholic beverages in the canteen of the appellant constitutes sale u/s 2(29) of the Act read with Section 2(6) of the Act which defines "business"?

(ii) Whether a welfare measure adopted by the appellant and obliged under any Statute, specially under the Factories Act constitutes sale u/s 2(29) of the Act read with Section 2(6) of the Act which defines "business"?

(iii) Whether the appellant is exempted from payment of taxes on supply of food and non-alcoholic beverages by virtue of Notification No. FD 55 CSL 2005(5) issued by the Commercial Tax Department of Finance, Karnataka?

The assessee-Company is engaged in the manufacture and sale of two wheeler vehicles and their spare parts having its manufacturing unit at Mysore. The assessee is registered both under the KVAT Act, 2003 and CST Act, 1956. In the returns filed by them, they have not disclosed sale of food and non-alcoholic beverages to the employees. During the time of audit of the books of accounts, it was noticed that they are supplying food and non-alcoholic beverages to their employees and guests at subsidized rates for a valuable consideration through the canteen run by the Company. The amount so received for supply of food and drink amounts to sale of goods and taxable at the rate of 12.5%. The assessee-Company has failed to declare the above taxable sale turnover of sale of the food and non-alcoholic beverages. Accordingly, a provisional notice has been issued for reassessment. In the objection, the assessee contended that as per the provisions of Karnataka Factories Rules, 1969, the assessee is obliged to provide canteen in the factory-Company premises to the employees since the assessee-Company is having more than 1000 workers. The statute further provides that the food in the canteen shall be sold on a ''non-profit'' basis. The employees are not charged "sale price" for the food supplied to them i.e. the actual cost + profit margin, but are charged a nominal amount which is less than 9% to 15.14% of the actual cost. The employees should consume food inside the canteen itself and it is not permissible for them to take the food for consumption or for disposal in any other way, elsewhere. There are fixed timings, where food is supplied in the canteen. The Assessing Authority after considering the objections filed by the assessee held that activities of the assessee fall under the definition of "Sale" in Section 2(29) of the KVAT Act. Section 2(29) of the KVAT defines sale which reads as under:

"2. (29) "Sale" with all its grammatical variation and cognate expressions means every transfer of the property in goods (other than by way of a mortgage, hypothecation, charge or pledge) by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration and includes.-

(a) a transfer otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration;

(b) to (d).....................

Explanations.-(1) A transfer of property involved in the sale or distribution of goods by a society (including a co-operative society), club, firm, or any association to its members, for cash, or for deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act.

(2) Every transaction of sale by way of or as a part of any service or in any other manner whatsoever, of goods, being food or any other article of human consumption or any drink (whether or not intoxicating) where such sale or service is for cash, deferred payment or other valuable consideration, shall be deemed to be a sale of those goods by the person making the sale and purchase of those goods by the person to whom such sale is made.

(3) Notwithstanding anything to the contrary contained in this Act or any other law for the time being in force, two independent sales or purchases shall, for the purposes of this Act, be deemed to have taken place. --

(a) when the goods are transferred from a principal to his selling agent and from the selling agent to the purchaser, or

(b) when the goods are transferred from the seller to a buying agent and from the buying agent to his principal, if the agent is found in either of the cases aforesaid.--

(i) to have sold the goods at one rate and to have passed on the sale proceeds to his principal at another rate; or

(ii) to have purchased the goods at one rate and to have passed them on to his principal at another rate; or

(iii) not to have accounted to his principal for the entire collections or deductions made by him in the sales or purchases effected by him on behalf of his principal; or

(iv) to have acted for a fictitious or non-existent principal.

(4) Every transfer of property in goods by the Central Government, any State Government, a statutory body or a local authority for cash or for deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act".

In the instant case, the assessee-Company had supplied food and drinks to the employees and guests and collected 9% to 15.14% of the cost of food and drink items supplied to them which is for a valuable consideration. The amount received for the supply of food and drink amounts to sale of goods and taxable at the rate of 12.5%. If the assessee-Company had not received sale consideration for the food and drink supplied, it would not amount to sale and the authority cannot levy tax. In the instant case, admittedly the assessee-Company has collected certain amount from its employees and guests at subsidized rates for supply of the goods like food and drinks. The amount received by the assessee from the employees and guest falls under the definition of ''Sale'' of articles of food and drink, for which, the assessee has to pay the tax at the rate of 12.5%. The assessee''s main business activity is the manufacturing and selling of two wheeler motor vehicles and its parts. Whether the transaction of supply of articles of food and drink to the employees and guests in their canteen falls under the definition of ''Business'' is required to be examined.

Section 2(6) of the KVAT Act defines ''Business'', which reads as under:

(6) "Business" includes.-

(a) any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on in furtherance of gain or profit and whether or not any gain or profit accrues therefrom; and

(b) any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern".

The reading of sub-clause (b) of Section 2(6) makes it very clear that the transaction effected by the assessee as per Section 2(6)(b) of the Act falls under the definition of ''Business'', since the supply of articles of food and drink to the employees is connected with the main business of the assessee. Any transaction in connection, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern is a business. The Hon''ble Supreme Court in Burmah Shell''s case had examined the question whether the supply of food and drinks to the workers at the canteen could be charged to sales tax under the Andhra Pradesh General Sales Tax Act, 1957 and held that the proof of profit-motive is unnecessary to constitute a business and that the transaction of supply of food and drink to the workers in the canteen maintained by the assessee in pursuance of the Factories Act and Rules, were sales and constitute business for the purpose of the Act. The relevant paragraph of the judgment reads thus:

A similar question came up for consideration before the Andhra Pradesh High Court on the analogous provisions of the Andhra Pradesh General Sales Tax Act, 1957 in The Hyderabad Asbestos Cement Products Limited and Another Vs. The State of Andhra Pradesh and Others, . In that case the assessee-company maintained a canteen for the use of workers in compliance with the provisions of the Factories Act, 1948 and the rules made thereunder. The question was whether the turnover relating to the supplies of food and drink to the workers at the canteen could be charged to sales tax under the Andhra Pradesh General Sales Tax Act, 1957. The assessee contended that it was compelled by statute to provide and maintain a canteen for use of workers, that the canteen was not run with a profit motive, as such it could not be said that there were any sales when food and drink were supplied to the workers at the canteen and that even if profit motive was not an ingredient of ''business'' it must be established that the assessee intended to do business in food and drink before it could be subjected to the levy of sales tax. The Court held that in view of the definition of "business" as amended ''by the Amendment Act of 1966, proof of profit motive is unnecessary to constitute business and that the transaction of supply of food and drink to the workmen in the canteen maintained by the assessee, in pursuance of the Factories Act and the Rules, were sales and constituted business for the purpose of the Act. Dealing with the case of Deputy Commissioner of Commercial Taxes, Coimbatore Division Vs. Sri Thirumagal Mills Limited, , the learned Judges said that they were unable to agree with that case as the Madras High Court had not paid sufficient attention to the word "such" occurring in the second part of the definition which according to them obviously referred to the "trade, commerce, manufacture, adventure or concern" mentioned in the first part of the definition, that is to say, "trade, commerce, manufacture, adventure or concern" of which a motive to make gain or profit is not an essential requisite, nor was it permissible to hold that there was no "business" in the commercial sense of ''business'' with a motive to make profit, when such motive has been expressly declared unnecessary by the Legislature. In their view under both parts of the definition profit-motive is now immaterial and the concept of business in respect of matters falling u/s 2(d)(ii) in the commercial sense put forward and accepted in the earlier cases must be abandoned. We think the view adopted by the Andhra Pradesh High Court is in consonance with our own reading of the section which we have indicated earlier.

In the instant case, as per the requirement of the Factories Act, the assessee established a canteen and is supplying food and beverages to its employees and guests at subsidized rates and there is an ingredient of sale. The judgment relied upon by the assessee in M/s. Vishnu Agencies Private Limited''s case is not applicable to the facts of the present case in view of the amendment of the Act. Relying upon the judgment in Hukumchand Mills Limited''s case, learned Counsel for the assessee further contended that supply of food and drinks to the employees was essentially an amenity and incident of contract of service entered into between the parties. However, the same is not applicable to the present case. In the instant case, there is a transaction of sale of goods and the assessee is collecting sale consideration from its employees. When once there is a transaction of sale, irrespective of profit or loss, the said transaction has to be shown in the returns. In the instant case, while filing the returns, running of the canteen by the assessee is not shown in the returns filed by them. The Assessing Officer after considering the matter in detail, relying upon the various judgments, found that there is a transaction of sale of goods and hence held the assessee liable to pay the tax. The said order was set aside by the First Appellate Authority. However, the Revisional Authority after re-examining the matter, held that the assessee is liable to pay the tax for sale of food and drinks supplied to their employees. We find no infirmity or irregularity in the said order. Running of the canteen falls under the definition of ''business'' and also ''sale'' for the consideration received. Hence, the assessee is liable to pay the tax. We find no infirmity or irregularity in the judgment passed by the Revisional Authority. The various judgments relied upon by the assessee are not applicable to the facts of the present case in view of amendment of definition of the word ''Business''. The appellant has not made out a case to interfere with the same. Accordingly, we pass the following:

ORDER

The appeals are dismissed. No order as to costs.