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Judgment
N. Kumar, J.—This revision petition is preferred by the dealer/assessee challenging the order (Xerox Modi Corporation Limited, Bangalore v. State of Karnataka 2013(75) Kar. L.J. 329 (Tri.) (DB)) imposing the penalty for non-payment of sales tax pertaining to the parts used in the execution of the annual performance of maintenance contract. The assessee is a company registered under the provisions of the Companies Act, 1956, which is engaged in the business of trading in multi-functional devices used for printing, copying and scanning. In addition, it is also engaged in the business of execution of service maintenance and repair agreements. The petitioner filed his monthly returns and discharging the liability to tax in terms of the determined taxable turnover for each month. On the bona fide belief that the Full Service and Maintenance Agreements (hereinafter referred to as ''FSMA'' for short) and the Spares and Service Maintenance Agreements (hereinafter referred to as ''SSMA'' for short) were essentially service contracts and that the materials supplied to its customers during the execution of these contracts were only incidental and ancillary to the principal objective of the contracts of service, the petitioner had been declaring the turnover in respect of the said maintenance agreements in its monthly returns by deducting the same while calculating its taxable turnover under the provisions of the Karnataka Sales Tax Act, 1957 (hereinafter referred to as ''the Act'').
For the assessment years 1992-1993 to 1999-2000, the petitioner had been calculating the taxable turnover in accordance with the aforementioned method and duly discharging the liability to tax under the Act. However, the Assessing Authorities passed assessment orders demanding taxes on the turnover representing FSMA and SSMA from the year 1992-1993 onwards. The petitioner contested the matter right upto the Hon''ble Supreme Court. The Supreme Court finally by its order dated 24-8-2005, in the case of Xerox Modicorp Limited Vs. State of Karnataka, , after considering several judgments of the Apex Court on the point which gave raise to conflicting views has held as under:
We have considered the rival submissions. As set out hereinabove the word consumable in Explanation I to Rule 6(4) of Karnataka Sales Tax Rules, 1957 refers to such items which get consumed before the property in the goods can pass. We are informed that toners and developers are liquids which are put in the Xerox machine. They perform, to put it simply, the same function as ink in printers. Under the Sale of Goods Act, 1930 if specified goods in a deliverable state are delivered the property in the goods passes. It could not be disputed that the toner and developer will be delivered in bottles/containers. In the FSMA supplies are left with the customer. Thus clause (9) of the Section dealing with the customers obligation provides as follows:
The customer
.........................
Shall be accountable to MX for xerographic supplies stock left in trust with the customer who shall ensure that such stock is used only in the equipment under this agreement. MX reserves the right to charge the customer for any stocks which are unaccounted for, to MX''s satisfaction, at the then prevailing MX prices.
Thus for the extra stock there is a provision which provides that it is left in trust. However, once the toner and developer are put into the machine they are no longer in trust. This is because the property in the toner and developer passed the moment they are put into the Xerox machine. Now they belonged to the customer. At this stage they are tangible movables in which property can pass. This is clear from the provision that appellants will charge for unaccounted stock at prevailing prices. That they are goods in which property can pass is also clear from the fact that in the SSMA the customer has to buy the toner and developer. If as now claimed they are consumables in which property cannot be transferred how are the appellants charging for toners and developers. In our view Mr. Iyer is right. The sale i.e., transfer of property takes place before the goods are consumed. The transfer takes place in respect of tangible goods. Just like petrol is consumed after sale or ink is consumed after sale in this case also the toners and developers get consumed after sale. The property passes the moment they are put in the machine. At that stage they are not consumed but are tangible goods in which property can pass.
In fact the Apex Court had passed an interim order earlier which has held as under:
There will be ad interim stay of encashment of bank guarantees on condition that these bank guarantees are kept alive pending further orders. In the meanwhile, the existing interim arrangement for furnishing the bank guarantees in respect of demands raised will continue.
Accordingly, assessee had furnished bank guarantees, whenever the assessment orders has been passed.
The present proceedings relate to the assessment year 2000-2001. Because of the pendency of the matter before the Apex Court the authorities did not proceed to issue any assessment order for the said year. It is only after the Apex Court declaring law on dated 24-8-2005, on the point, the assessment order came to be passed on 21-3-2006, holding that the sales tax is payable. Accepting the said order and in view of the law declared by the Apex Court in their own case, the assessee paid the tax immediately after the assessment order. However, the department initiated proceedings u/s 12A of the Act and the order came to be passed on 20-2-2007. The said amount was also paid immediately on 20-3-2007. However, the authorities passed an order u/s 12B(4) of the Act on 16-3-2007 levying penalty in a sum of Rs. 1,66,63,516/-. Aggrieved by the said order, the assessee preferred an appeal which came to be dismissed on 15-5-2008. Aggrieved by the said order, the assessee preferred an appeal before the Appellate Tribunal, which also came to be dismissed by its impugned order. It is against these orders, the assessee is before this Court.
Learned Senior Counsel appearing for the assessee assailing the impugned orders, contends that as there was a bona fide doubt regarding the liability to pay tax under the aforesaid two agreements, for the years 1991-1992 and 1992-1993, though in the return filed the turnover is declared, exemption was claimed from payment of tax, relying on several judgments of the Supreme Court rendered earlier. It is only on 24-8-2005, the law on the point is settled. Thereafter, applying the settled law, when the department passed an assessment order on 21-3-2006, promptly the assessee has paid not only the tax but also the interest. Under these circumstances, the imposition of penalty is unjustified and therefore, it requires to be set aside.
Per contra, learned Government Advocate submits that even if it is held that the assessee had bona fide doubt regarding the liability to pay the tax, once the Supreme Court in the assessee''s case laid down the law on 24-8-2005, immediately thereafter, the assessee could have volunteered to pay the tax. The assessee having not paid the tax voluntarily and waited till the order of the assessment was passed, though he has paid immediately after the assessment order, he is liable to pay the penalty as is clear from Section 21(4) of the proviso and Section 12B(4) and its proviso of the Act. Therefore, he submits that no case for interference is made out.
From the aforesaid facts and the rival contentions, it is clear that the assessee is disputing the liability to pay tax based on the judgment of the Apex Court rendered earlier. He has contested the matter upto the Supreme Court. It is only on 24-8-2005, the Apex Court pronounced its judgment and held, tax is payable. As the said matter was pending before the Supreme Court, even the department did not pass the assessment order in respect of the returns filed by the assessee for the subsequent period 2000-2001. Subsequent to the Apex Court judgment i.e. on 24-8-2005, they processed the returns of the assessee and passed the order on 21-3-2006, demanding the tax and interest payable thereon. In view of the judgment of the Apex Court, the assessee promptly paid the tax and the interest. It shows the intention on the part of the assessee that he had doubt whether to pay the tax or not to pay tax in accordance with law. On the earlier occasions also, the assessment order were passed in pursuance of the interim order passed by the Apex Court, the assessee has furnished bank guarantees also. The Apex Court in the case of Hindustan Steel Ltd. Vs. State of Orissa, dealing with the cases in, which penalty to be levied has held as under:
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.
The Division Bench of this Court in the case of State of Karnataka and Another Vs. H. Dasappa and Sons (P) Ltd., has held as under:
The word ''may'' used in the sub-section gives discretion to the Assessing Authority to levy penalty or not to levy penalty, but if he decides to levy penalty it should not exceed the limit prescribed in the provisions itself. Whether a penalty should be levied or not and if so, what should be the quantum of penalty will depend on facts and circumstances of each case which will primarily depend on whether the default was willful, deliberate or merely accidental. In order to justify the imposition of penalty, the Assessing Authority should not only find that there is default but also consider the question whether there was good and sufficient reason for the default and when he finds the reason assigned by the assessee not satisfactory or the assessee has failed to furnish reasons, he can impose penalty u/s 12B(3) of the KST Act.
The Division Bench of this Court in the case of Shanthi Industries Vs. Commissioner of Commercial Taxes in Karnataka, has held as under:
9.....It was not possible to lay down all tests for all cases but it was always possible to lay down some tests, which would be applied to all cases. Therefore, when an authority is required to exercise a discretionary power coupled with a duty, certainly he should have due regard to the facts of the case with which he is dealing. One cannot simply brush aside all explanations offered in regard to the alleged breach of law inviting the penalty merely because the authority has the power to impose such penalty. There must be implicit evidence in the process of imposition of penalty that all materials relevant to the exercise of discretion which was before the authority was indeed considered by it before penalty came to be imposed.
In the instant case, the penalty provision reads as under:
12-B. (4) If at the end of the year it is found that the amount of tax paid in advance by any dealer for any month or quarter or for the whole year in the aggregate was less than the tax payable for that month or quarter or the tax for the whole year as finally assessed, as the case may be, by more than fifteen per cent, the Assessing Authority may direct such dealer to pay, in addition to the tax, a penalty which shall not be less than one half of the tax so paid in short, but not exceeding one and half times the amount by which the tax so paid fall short of the tax payable for the month or quarter or for the whole year as the case may be:
Provided that no penalty under this sub-section shall be imposed unless the dealer affected has had a reasonable opportunity of showing cause against such imposition.
A perusal of the aforesaid provision makes it clear that when the amount of tax is paid by the assessee in advance for the whole year in the aggregate is less than the tax payable for the year or month as finally assessed being more than 15% is the difference in tax, a penalty which shall not be less than one and half of the tax so paid in short but not exceeding one and half times the amount by which the tax so paid falls short of the tax payable for the month or quarter or for the whole year, as the case may be, could be imposed after hearing the assessee. It is not a case of payment of less tax. It is a case of non-payment of tax in respect of the contract of FSMA and SSMA. The reason for non-payment is, it forms part of the service to be rendered and tax is service tax and not the sales tax, for the value of the parts which are used in the services are declared and exemption is sought. The assessee is claiming exemption from 1992-1993. However, the department is refusing to grant the exemption. The assessee has gone upto the Supreme Court and it is only on 24-8-2005, the Supreme Court pronounced judgment holding the assessee liable to pay tax and clarifying the conflicts of it''s own earlier judgments, which was the cause for bona fide doubts in the mind of the assessee in not paying the tax. Though the returns were filed for the year 2000-2001, within the prescribed time, no assessment orders has been passed, till the passing of the judgment of the Supreme Court. Probably authorities were also waiting for the judgment. The assessment order was passed on 21-3-2006, immediately the payment is made. Therefore, this non-payment of tax along with the returns or at the end of the financial year cannot be said to be willful, deliberate or contumacious and that the assessee was acting deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. This aspect has been completely missed by the authorities while exercising the powers of imposing the penalty. It is settled law that penalty cannot be imposed merely because it is lawful to do so. A discretion is conferred on the authority while imposing penalty. It is a judicious discretion. The law on the point is also well-settled. The authorities as well as the Appellate Tribunal did not keep in mind the settled legal position while imposing the penalty or upholding the penalty which is imposed. In that view of the matter, the order passed by the Tribunal cannot be sustained. The Tribunal proceeded on the basis that the assessee himself has taken a decision not to pay the amount of tax without any judicial support for non-payment of tax. Assessee was relying on the earlier decisions of the Apex Court for denying the liability to pay tax and therefore, the Tribunal was not justified in the aforesaid observations. The Tribunal was of the view that once the judgment was delivered on 24-8-2005, the assessee should have paid the money immediately thereafter. The same having not been done, it amounts to deliberate non-compliance of the law. We find it difficult to accept this reasoning. On 24-8-2005, the Supreme Court passed the order; on 21-3-2006, the assessment order has been passed and immediately thereafter, the payment has been made. In that view of the matter, in our view, both the authorities committed a serious error in not taking into consideration the facts of this case, the conduct of the assessee prior to the Supreme Court judgment, after the Supreme Court judgment and after the assessment orders in levying penalty which cannot be sustained. Hence, the following order is passed:
ORDER
(a) The appeal is allowed.
(b) The impugned orders are hereby set aside.