Failed To Comply With S.23(4) Of MVAT Act Along With Non-Application Of Mind & Legal Malafide: Bombay HC Quashes Assessment, Imposes 50K Cost On Dept
Pankaj Bajpai
18 Oct 2024 12:00 PM IST
While considering a case where the Commercial tax department has flagrantly breached the statutory provisions of Sec 23(4) of the MVAT Act, the Bombay High Court ruled that assessment order passed by Commissioner of Sales tax is vitiated by total non-application of mind. Since a strong prima facie case is made out about manipulating the date of passing the assessment order, the High...
While considering a case where the Commercial tax department has flagrantly breached the statutory provisions of Sec 23(4) of the MVAT Act, the Bombay High Court ruled that assessment order passed by Commissioner of Sales tax is vitiated by total non-application of mind.
Since a strong prima facie case is made out about manipulating the date of passing the assessment order, the High Court found that such manipulation was to create an impression that the order was made within the prescribed statutory period of limitation.
The High Court considered that by supressing the gross circumstances, the Department has passed an order of demand by extending the statutorily prescribed period, and hence, refused the Department's submission to remand the case for adjudication, as same would grant them a premium for their gross illegalities.
At the same time, the High Court clarified that though the interest of revenue is vital, it cannot override considerations of probity and fairness in tax governance, as a fair tax regime where no assessee is harassed is equally crucial.
The Division Bench comprising Justice M.S Sonak and Justice Jitendra Jain observed that “the impugned assessment order is required to be quashed for gross failure to comply with the statutory provisions in Section 23(4) of the MVAT Act and the principles of natural justice and fair play, non-application of mind and legal malafides”. (Para 42)
Facts of the case:
The petitioners/ assesses are group companies, and the first & second petitioners (entity incorporated in Luxemburg) granted the right to use their IPR in India to the third petitioner (entity incorporated in India). Further, by a product license agreement, the right to use such IPR in India was also extended to Imsofer Manufacturing India as well as MPG Multi Production Group India. Later, the petitioners received a notice in Form 301 seeking to levy VAT on the value of 'royalty' payments made by the third petitioner against the license to use IPRs and technical know-how granted by first & second petitioner by treating the same as a 'sale of goods'.
Since the petitioner were incorporated in Luxembourg and considering the short notice, its authorised representative applied for an extension of time to file a detailed response to the notice. Even though Respondent (Dy Commissioner of Sales tax) granted an oral extension as prayed, the petitioners shockingly received assessment order confirming the demand for VAT on royalty payments. Hence, the petitioners approached the High Court challenging the VAT demand.
Observations of the High Court
The Bench referred to Section 23(4) of the MVAT Act which provides for the issue of a notice followed by a reasonable opportunity to be heard before assessing any assessee to the best of his judgment.
Since neither any notice was issued to the petitioners nor that the petitioners granted any opportunity of being heard, the Bench opined that the assessment order levying VAT demand should be set aside for failure of natural justice and breach of the provisions of Section 23(4) of the MVAT Act.
The Bench noted that the assessment order dated Mar 14 referring to allegedly hearing of an employee of third petitioner on May 23, 2023, is not a slip, but prima facie appears to be an attempt at manipulation.
Secondly, the Bench found that the assessment order dated Mar 14, 2022, if indeed made on the said date, was admitted to be communicated to the third petitioner only after fifteen months from the date of its alleged issue.
Referring to decision in case of R S Garg vs State of UP & Ors [2006 6 SCC 430], the Bench reiterated that any action resorted to for an unauthorised purpose would constitute malice in law.
Thus, the Bench clarified that indulgence by way of remand would not only reward the respondents with an enhanced limitation period to complete the assessment proceedings but embolden unscrupulous tax officials to manipulate orders or otherwise mistreat the assessees.
Therefore, the High Court allowed the petition and quashed the assessment order, after imposing a cost on erring officials.
Counsel for Petitioner/ Assessee: Senior Advocate Rohan Shah along with Advocates Sandeep Sachdeva, Surabhi Prabhudesai and Renita Alex
Counsel for Respondent/ Revenue: Advocates S. D. Vyas and P. N. Diwan
Case Title: M/s Soremartec S. A., Luxembourg vs. State of Maharashtra
Case Number: Writ Petition No. 11929 of 2023
