Presumption Of Undervaluation Can't Be Drawn Just Because Of Higher MRP Rate On Product: Punjab & Haryana HC

The Bench consists of Justices Sanjeev Prakash Sharma and Sanjay Vashisth observed that “it is also not a case of the State authorities that the invoices were different for the assessee in comparison to other distributors. Once there is no finding in this regard, a presumption cannot be drawn that the invoices were undervalued merely because MRP rate mentioned on the product was on a much higher side.”

Section 51(6)(a) of Punjab VAT Act 2005 provides that if an officer suspects that goods being transported are for trade but are not covered by proper documents, or there is an attempt to evade tax, they may order the detention of the goods and vehicle for up to 72 hours after recording reasons and hearing the concerned party. The goods can be released if the consignor or consignee, if registered, provides security or a bond with sureties. If they are not registered, security in the form of cash, bank guarantee, or a bank draft equal to the penalty amount is required.

Section 51(7)(a) of the Punjab VAT Act 2005 provides that when goods are detained, the officer must record any statements made by the consignor, consignee, or other responsible parties, and require proof of the transaction's authenticity within 72 hours.

Section 51(7)(b) of the Punjab VAT Act 2005 provides that before conducting the inquiry, the designated officer will serve notice to the relevant parties and provide an opportunity for a hearing. If the inquiry reveals an attempt to evade tax, a penalty of 30% of the goods' value is imposed. Otherwise, the goods and vehicle will be released, and the matter decided within 14 days.

Facts of the case:

The assessee, registered under the Punjab VAT Act 2005, was engaged in purchasing and distributing medicines. It purchased two types of medicines to sell to distributors in Chandigarh. During transit from Himachal Pradesh to Chandigarh, the goods were inspected by the authorities. The driver presented an invoice amounting to Rs. 1,83,214/- (including GST). However, the Checking Officer found that the MRP on the medicines QMOL was Rs. 189/-, as printed, while on the invoice the price was shown to be Rs. 19/- Similarly, MRP for the medicine MG was printed as Rs. 140/-, while the price mentioned on the invoice was Rs.18/-. The goods were detained under Section 51(6)(a) of Punjab VAT Act 2005 for verification, and a show cause notice was issued to explain the difference in purchase prices noted on the invoice, not the sale price.

The AETC/assessing authority found the assessee's explanation unsatisfactory and imposed a penalty under Section 51(7)(b), alleging an attempt to evade tax payable to UT Chandigarh by undervaluing the goods. The under valuation of goods amounting to Rs. 3,66,986/- was assumed and a penalty of Rs. 1,10,096/- was imposed. The assessee filed an appeal to the First Appellate Authority which upheld the penalty. Further, an appeal was filed to VAT Tribunal which was also dismissed. The assessee has filed an appeal before Punjab and Haryana High Court, challenging the decision of VAT Tribunal.

The assessee submitted that the sales tax can be imposed only when the sale is made in future and the price is the basis for measuring tax and not on the basis of presumptions. The actual determination of value of goods is in the domain of the assessing officer and the checking officer could not have done the valuation of the goods on the road side. The price mentioned in the invoices was the price as fixed by the manufacturer and was the cost/ purchase price for the assessee at his level. Therefore, there could not be any occasion for evasion of tax. No sale has been made at Chandigarh.

The Department submitted that the Assistant Commissioner of Excise & Taxation had calculated the value of the goods in the manner as rational as possible for him by relating it to the percentage of MRP discounted by the Central Excise Department for payment of excise duty. The purchase price was disproportionately low as compared to MRP and the action of the respondents, therefore, was in accordance with the law.

Observations of the High Court:

The bench found that the invoices have been issued by the manufacturer, who is placed in Himachal Pradesh where the excise duty is exempted. In the circumstances, the valuation of goods i.e. purchase price for any person would be comparatively much lower than that of other places where excise duty is payable.

Further, the bench opined out that it is also not a case of the State authorities that the invoices were different for the assessee in comparison to other distributors. Once there is no finding in this regard, a presumption cannot be drawn that the invoices were undervalued merely because MRP rate mentioned on the product was on a much higher side.

“The price of a medicine is not necessary on the basis of the MRP as purchased by the retailer which is on two stages ahead as the dealer would sell the product to a distributor, who would further sell it to a wholeseller and subsequently from whole seller the product will be further transferred to the retailer. Each stakeholder would keep their own margin of profit. Thus, to presume that there is an evasion of tax at the level of the person who is a dealer going to further sell the goods to a distributor, is a farfetched presumption. The action of the respondents imposing penalty on such a presumption would be an exercise of arbitrary power,” added the bench.

The Court opined that the power of imposing penalty under Section 51(7) (a) and (b) of the Punjab VAT Act 2005 was not required to be invoked at the stage of road side checking and the power can only be exercised by the assessing authority who shall reach to the conclusion that there has been an attempt to evade tax after actual valuation of the goods.

In view of the above, the bench allowed the appeal.

Counsel for Appellant/ Assessee: Sandeep Goyal and Rishab Singla

Counsel for Respondents/ Department: Mr. Ajay Jagga, Additional Standing counsel with Mr. Daljeet Singh, Advocate, for the respondent- UT Chandigarh (in VATAP-61-2014)

Mr. Sumit Jain, Senior Standing Counsel with Mr. Rohit Kaushik, Panel Counsel for respondent No.1- UT Chandigarh (in VATAP-89-2014)

Mr. Sourabh Goel, Senior Standing Counsel with Ms. Geetika Sharma, Advocate and Ms. Anju Bansal, Advocate, for respondent No.2 (in VATAP-89-2014)

Case Title: M/s Simran Medical Agencies v. The Union Territory of Chandigarh and another

Case Number: VATAP No. 61 of 2014 (O&M)