2025 (5) TMI 569 - HC - VAT / Sales Tax

Challenge to assessment order - addition of 40% to the Contractual Transfer Price (CTP) and making an assessment on the same and levying tax - HELD THAT - In the assessment order after setting out the stand taken by the writ petitioner in their written submission dated 19th June 2018 the Assessing Officer has pointed out that the petitioner/dealer has deviated from the practise which they had followed in the earlier years without any explanation if a dealer is undoubtedly entitled to resort to tax planning but not tax avoidance. One more aspect which is conspicuously missing in the assessment order is to the basis of addition of 40%. No explanation is forthcoming as could be seen from the assessment order. Therefore we are of the view that the matter should be re-examined by the Assessing Officer after affording an opportunity to the petitioner to produce documents and particulars and after affording an opportunity of personal hearing to the authorised representative either virtually or in person the fresh assessment order be passed on merits and in accordance with law. Considering the fact that the Assessing Officer has made certain observations in the assessment order dated 27th June 2018 on which the petitioner/dealer had no opportunity to put forth the case those observations shall be treated as a show-cause notice and the petitioner is directed to submit his reply alongwith supportive documents within a period of three weeks from the date of receipt of server copy of this order after which an opportunity of personal hearing shall be afforded to the authorised representative of the writ petitioner/dealer either virtually or in person and a fresh assessment order be passed on merits and in accordance with law. Conclusion - The addition of 40% to the Contractual Transfer Price is not adequately explained or justified and reassessment is directed on merits after affording the petitioner a fair opportunity to be heard and produce relevant documents. Petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the amendment to Section 84 of the West Bengal Value Added Tax Act, 2003, read with Rule 138(2)(b)(ia) of the VAT Rules, 2005, is constitutionally valid, or whether it is unconstitutional, unreasonable, and arbitrary.

(b) Whether the addition of 40% to the Contractual Transfer Price (CTP) by the Assessing Officer in the assessment order dated 27th June 2018 was justified and lawful, or whether it was arbitrary, unjust, and without basis.

(c) Whether the petitioner was required to exhaust statutory appellate remedies before approaching the Court and whether any concession to that effect was validly made and binding.

(d) Whether the assessment order was passed on a "best of judgment" basis or on merits, and whether the petitioner was afforded a fair opportunity to present its case including production of relevant documents such as VAT audit reports and Profit & Loss accounts specific to West Bengal operations.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Constitutional Validity of the Amendment to Section 84 and Rule 138(2)(b)(ia)

The Court referred to the earlier decision of the Division Bench of the same High Court, which had already upheld the constitutional validity of the amendment to Section 84 of the Act. Accordingly, the Court held that the petitioner could not reopen this issue in the present writ petition, thereby affirming the principle that once a constitutional validity of a statutory provision is upheld by a competent Division Bench, the same cannot be challenged again in subsequent proceedings.

This reflects the settled legal position that constitutional questions once decided by a Division Bench are binding on subsequent benches unless overturned by a larger bench or the Supreme Court.

(b) Legality and Justification of Addition of 40% to Contractual Transfer Price

The principal grievance of the petitioner was the arbitrary addition of 40% to the Contractual Transfer Price by the Assessing Officer without any basis or explanation in the assessment order. The petitioner contended that it maintained separate VAT audit reports for works executed in West Bengal, duly certified by its Chartered Accountant, and produced the same along with consolidated Profit & Loss accounts before the Assessing Officer. However, the Assessing Officer insisted on a separate Profit & Loss account for West Bengal, which was not produced.

The petitioner argued that the VAT audit report for West Bengal gave a complete picture of the works executed in the State and that the addition of 40% was unjustified and amounted to double taxation, especially since the price variation of materials was already accounted for in the invoices raised by the petitioner during the contract period.

The Court noted that the assessment order repeatedly referred to the "best of judgment" basis, which was inappropriate given that a draft assessment order was issued, submissions were made by the petitioner, and these were recorded in the final order. The Court emphasized that the Assessing Officer was required to consider the submissions and decide on merits based on the Profit & Loss account and other relevant documents, rather than resorting to a "best of judgment" assessment.

The Court further observed that the assessment order lacked any explanation or basis for the 40% addition, which was a significant omission. The Assessing Officer had also remarked that the petitioner deviated from earlier practices without explanation and failed to provide a separate Profit & Loss account for West Bengal, but the Court recognized that each assessment year is an individual unit and the assessee is entitled to avail provisions of the Act to ensure appropriate tax assessment.

In view of these factors, the Court held that the matter required re-examination by the Assessing Officer, with an opportunity afforded to the petitioner to produce documents and particulars, and to be heard personally or virtually before a fresh assessment order is passed on merits and in accordance with law.

(c) Requirement to Exhaust Statutory Appellate Remedies

The Tribunal had held that the petitioner should exhaust statutory appellate remedies before approaching the Court. The petitioner's then counsel had agreed to this, which was recorded by the Tribunal. However, the Court noted that there was no written concession by the petitioner to this effect and that an oral or implied concession, unless unequivocal, does not bind the party.

Therefore, while the Court acknowledged the Tribunal's position, it did not consider the absence of a written concession as a bar to entertaining the present petition on merits, especially given the procedural and substantive irregularities in the assessment order.

(d) Procedural Fairness and Merits-Based Assessment

The Court scrutinized the procedural aspects of the assessment. It found that the petitioner was given an opportunity to submit written representations, which were recorded, but the final order did not address these submissions adequately. The use of "best of judgment" language was inconsistent with the procedural steps taken.

The Court underscored that the petitioner should have been allowed to produce a separate Profit & Loss account or other relevant documents specific to West Bengal operations, and the VAT audit report alone should have been considered in context.

Moreover, the Court highlighted that the assessment order did not provide any rationale or basis for the 40% addition, which is a serious defect. The Court directed that the observations made by the Assessing Officer in the assessment order be treated as a show-cause notice, and the petitioner be given three weeks to respond with supporting documents, followed by a personal hearing.

This approach ensures compliance with principles of natural justice and fair play, requiring the taxing authority to pass a reasoned order based on evidence and submissions rather than arbitrary additions.

3. SIGNIFICANT HOLDINGS

"The validity of the amended Section 84 has been upheld by the Division Bench of this Court and, therefore, the writ petitioner cannot canvass such a ground."

"The assessment order dated 27th June, 2018 is undoubtedly a high-pitched assessment. In more than one place, the Assessing Officer used the expression 'best of judgment'. This, obviously could not have been a best of judgment assessment since a draft assessment order dated 11th June, 2018 was drawn, the petitioner was granted opportunity to place his submission, which was placed and the submissions have been recorded in the assessment order dated 27th June, 2018 and if that be so, the Assessing Officer is required to reject the submission and then take a decision on the merits based on the Profit & Loss account and other documents and credentials of the assessment could not have been on best of judgment basis."

"No explanation is forthcoming, as could be seen from the assessment order. Therefore, we are of the view that the matter should be re-examined by the Assessing Officer after affording an opportunity to the petitioner to produce documents and particulars and after affording an opportunity of personal hearing to the authorised representative either virtually or in person, the fresh assessment order be passed on merits and in accordance with law."

"Under normal circumstances, we would have set aside the assessment order in its entirety, but, however, considering the fact that the Assessing Officer has made certain observations in the assessment order dated 27th June, 2018 on which the petitioner/dealer had no opportunity to put forth the case, those observations shall be treated as a show-cause notice and the petitioner is directed to submit his reply alongwith supportive documents within a period of three weeks from the date of receipt of server copy of this order, after which an opportunity of personal hearing shall be afforded to the authorised representative of the writ petitioner/dealer either virtually or in person and a fresh assessment order be passed on merits and in accordance with law."

Core principles established include:

- The constitutional validity of a statutory amendment upheld by a Division Bench cannot be re-agitated in subsequent proceedings.

- An assessment order must be passed on merits with due consideration of submissions and evidence, not on "best of judgment" basis when procedural steps have been followed.

- Arbitrary additions to taxable value without explanation or basis violate principles of fairness and require reassessment after hearing the assessee.

- Procedural fairness mandates that observations amounting to adverse findings be treated as show-cause notices, with an opportunity to respond before final orders.

- Concessions to exhaust statutory remedies must be unequivocal and in writing to bind the party.

Final determinations:

The Court dismissed the challenge to the constitutional validity of the amendment to Section 84.

The Court found the addition of 40% to the Contractual Transfer Price was not adequately explained or justified and directed reassessment on merits after affording the petitioner a fair opportunity to be heard and produce relevant documents.

The Court treated the observations in the impugned assessment order as a show-cause notice and mandated a fresh assessment order in accordance with law.

The writ petition was disposed of with directions for reassessment and no costs were imposed.