Sales-Tax Exemption Certificate Has Overriding Effect Over VAT Notification: Karnataka High Court

The Karnataka High Court has held that the sales tax exemption certificate is valid for 7 years and could not have been rescinded before the period of eligibility expired as it is a sovereign assurance.

The bench of Justices P.S. Dinesh Kumar and C.M. Poonacha has observed that the State Government discontinued sales tax-based incentives. However, the incentives already offered and committed were saved. By issuing a subsequent Notification under the Karnataka Sales Act, 1957 (KST Act), it was clarified that the incentives offered earlier would remain unaffected.

The petitioner/assessee is a tourism hotel unit that is a registered dealer under the Karnataka Value Added Tax Act, 2003. It is engaged in providing boarding and lodging services to its customers.

The Government of Karnataka issued a notification dated November 12, 1999, under Section 8-A(1) of the Karnataka Sales Act, 1957, exempting the sale of food articles and beverages by new tourism units.

The Assessee has obtained an Exemption Certificate dated March 25th, 2003, from the Commissioner of Tourism, Govt. of Karnataka, Bengaluru.

The AO issued a proposition notice on the ground that after the enactment of the KVAT Act, the exemption granted under the KST Act would apply only to new industrial units and not tourism units. The AO passed a reassessment order denying the exemption on the payment of tax on the sale of food and beverages on the ground that there was no exemption notification issued under the KVAT Act.

On appeal, the JCCT (A) partly allowed the assessee's appeal. The JCCT (A) confirmed the denial of exemption from payment under the KVAT Act. On further appeal, the KAT allowed the assessee's appeal, holding that the assessee is eligible for exemption from payment of tax in view of the exemption notification issued under the provisions of the KST Act.

The department contended that the Government of Karnataka granted exemption of the tax payable under the provisions of the KST Act in respect of the sale of food and non-alcoholic beverages by new tourism units. The notification having been issued in exercise of powers conferred under the KST Act, the exemption is restricted to transactions only during the KST regime.

The department submitted that no notification has been issued under the KVAT Act extending similar benefits, namely, exemption from payment of tax on the sale of food and non-alcoholic beverages by tourism units or hotels.

The assessee contended that there is no express provision under the KVAT Act to deny the benefits granted to the assessee under the KST Act.

The court, while dismissing the revision petition by the department, held that the State Government issued a Notification on January 7, 2000, discontinuing sales tax-based incentives; the same has been clarified via Notification dated July 17, 2007, to the effect that the notification dated January 7, 2000 shall not affect the dealers who have made investments in establishing new tourism units.

Case Title: State of Karnataka Versus Aishwarya Fort

Case No.: S.T.R.P. NO. 45 Of 2022

Citation: 2023 LiveLaw (Kar) 245

Date: 9/06/2023

Counsel For Petitioner: Jeevan J. Neeralgi

Counsel For Respondent: K. Mallaha Rao

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