(2015) 440 KLW 367
IN THE HIGH COURT OF KERALA AT ERNAKULAM
A.K.JAYASANKARAN NAMBIAR, J.
W.P.(C).NOS.8444 & 12320 OF 2011, W.P.(C).NOS.2741, 6674 & 22890 OF 2012, & W.P.(C).NOS.8835, 11732, 13661 & 30884 OF 2013
Dated this the 1st day of December, 2015
PETITIONER
INDIAN POTASH LTD., KADAVIL COURT, PULLEPPADY CROSS ROAD ERNAKULAM-682 018 REPRESENTED BY ITS REGIONAL MANAGER – K. SHANKAR.
BY ADVS.SRI.V.V.ASOKAN SRI.K.I.MAYANKUTTY MATHER SMT.RUKHIYABI MOHD. KUNHI SRI.R.JAIKRISHNA
RESPONDENT(S)
1. STATE OF KERALA, REPRESENTED BY CHIEF SECRETARY TO GOVERNMENT, SECRETARIAT, THIRUVANANTHAPURAM – 695 001.
2. SECRETARY, TAXES DEPARTMENT, GOVERNMENT OF KERALA, SECRETARIAT THIRUVANANTHAPURAM-695 001.
3. COMMISSIONER OF COMMERCIAL TAXES, THIRUVANANTHAPURAM-695 001.
4. ASSISTANT COMMISSIONER (ASSESSMENT), COMMERCIAL TAXES, SPECIAL CIRCLE- I, ERNAKULAM-682 015.
5. INSPECTING ASSISTANT COMMISSIONER COMMERCIAL TAXES, ERNAKULAM, KOCHI – 20.
R1 TO R4 & ADDL. R5 BY SPL. GOVT. PLEADER SRI. GEORGE MECHERIL
J U D G M E N T
The issue involved in all these writ petitions is whether amounts received by the petitioners by way of subsidy from the Central Government on the sale of fertilizers effected by them, can be included in the taxable turnover on which they have to discharge their tax liability under the Kerala Value Added Tax Act [hereinafter referred to as the 'KVAT Act'].
2. The petitioners in these writ petitions comprise of both manufacturers and importers of fertilizers, who sell the fertilizers so manufactured/imported by them to consumers within the State. In respect of those fertilizers as are notified under the Fertilizer Control Order, the Central Government fixes the MRP at which the fertilizers can be sold by the petitioners and the petitioners cannot charge a price in excess of the price so fixed by the Central Government when they sell the said fertilizers. To compensate the petitioners for the loss suffered by them, consequent to the requirement of selling the fertilizers only at the prices fixed by the Central Government, the Central Government disburses certain amounts to them by way of subsidy. The computation of this subsidy amount is based on a formula that is stated to be arrived at in the following manner:-
● For computing subsidy say for the month of January, 2009, Department of Fertilizers first considers the mid point average Free on Board Tampa, USA price as published in 4 weekly issues of FMB (Fertilizer monitoring Bulletin) as well as 4 weekly issues of Fertecon which are two internationally recognized business publications of this Sector.
● To this FOB number, they add ocean freight from Tampa (US) to West Coast of India as quoted in FMB from Berrytime sources which is a shipping magazine published from Oslo and is considered an authentic guide on ocean freight rates.
● Sum total of the above two is the Cost and Freight (C&F) India Price.
● Department of Fertilizers as a matter of routine, also asks all the importers of potassic/phosphatic fertilizers to furnish details of their imports on a monthly basis which they also corroborate from ports/customs authorities, etc. A weighted average of all industry imports for the month of January, 2009 is then worked out on C & F India basis.
● C & F price derived from publications of December, 2008 as explained above is compared with actual industry average as explained above for the month of January, 2009 and whichever is the lower number is taken as the basis for computing subsidy.
● This number taken for subsidy purpose is then compared with the actual price of each shipment of every importer. If price of any shipment is less than USD 30 per MT Vis-a-vis the number taken for subsidy then outlier principle is applied under which 35% of this difference is mopped up by the Government and importer is left with only 65 per cent.
● However the reverse is not true since if the price of any shipment is higher than the subsidy number then no compensation is given by the Government.
● In as much as these rates are in USD, the monthly exchange rate for the month of import as notified by Reserve Bank of India is adopted for conversion. To the above, customs duty of 0.06% is also added. In addition to the above, Government includes Rs.668/- for Muriate of Potash and Rs.779/- for Di-Ammonium Phosphate towards other expenses. This broadly includes Port charges, C & F cost, cost of packing materials, handling loss and nominal return of Rs.30/-. Thus if the cost incurred by any individual company is more than what has been notionally added for concession, the company has to incur loss. Besides, handling loss allowed is on fixed basis while this value can vary depending on the import cost of fertilizers.
3. While completing the assessments of the petitioners, under the KVAT Act, for the relevant assessment years, the assessing authorities included the subsidy amounts received by them in their taxable turnover, by relying on the provisions of Explanation VII to Section 2 (lii) of the KVAT, that defines the term “turnover” to include, in cases where a dealer sells any goods purchased by him at a price lower than that at which it was purchased and subsequently receives any amount from any person towards reimbursement of the balance of the price, the amount so received.
4. The assessment orders passed in relation to the petitioners are impugned in these writ petitions, inter alia, on the ground that the amounts received by the petitioners from the Central Government, being in the nature of a subsidy, cannot be treated as an amount received from the Central Government towards reimbursement of the balance of the price, and hence they cannot be subjected to tax under the KVAT Act in respect of the said amounts. On behalf of the manufacturers of fertilizers, it is contended that they do not buy goods for subsequent resale, since their sale is of manufactured fertilizers. The contention therefore is that Explanation VII to Section 2 (lii) is not attracted to the receipts of subsidy amounts by the petitioners. Alternatively, it is contended that, if subsidy amounts are treated as coming within the ambit of “reimbursement of the balance of price” as contemplated in Explanation VII, then the said provision has to be struck down as ultra vires the power of the State Legislature to legislate in respect of taxes on sales or purchases of goods.
5. I have heard Sri. Mayankutty Mather, Sri. A. Kumar, and Smt. Latha Anand, the learned counsel appearing on behalf of the petitioners in these writ petitions, as also the learned Special Government Pleader Sri. George Mecheril, appearing on behalf of the official respondents of the State Government. I have also heard the learned Assistant Solicitor General on behalf of the Union of India.
6. As the main contention urged on behalf of the petitioners is with regard to the exclusion, of the subsidy amounts received by them from the Central Government, from the taxable turnover adopted for the purposes of payment of tax under the KVAT Act, it would be relevant to ascertain the nature of the payment received by the petitioners. This exercise would be necessary since, what is includable in the definition of turnover, by virtue of Explanation VII to the Section 2 (lii) of the KVAT Act, is “any amount received from any person towards reimbursement of the balance of the price”, in a situation where it is found that the assessee had sold goods at a price lower than that at which they were purchased.
7. As already noticed, in these writ petitions the disputed turnover is that of fertilizers that are specified under the
Fertilizer (Control) Order, 1985
(hereinafter referred to as 'FCO'). The FCO was issued by the Central Government in exercise of the powers conferred on it under Section 3 of the Essential Commodities Act, 1955. As per the terms of the FCO, the Central Government may, with a view to regulating the equitable distribution of fertilizers and making fertilizers available at fair prices, by notification in the official gazette, fix the maximum prices or rates at which any fertilizer may be sold by a dealer, manufacturer, importer or pool handling agency. Once such a price is fixed by the Central Government, no dealer, manufacturer, importer or pool handling agency can sell or offer for sale any fertilizer at a price exceeding the maximum price or rate so fixed. A breach of the provisions of the FCO also attracts the penal provisions therein.
8. The subsidy that is received by the petitioners in these cases is one that is granted by the Central Government, based on a policy enunciated, to compensate the importers and manufacturers of fertilizers for the difference between the actual cost of production of the Fertilizers and the realized price, consequent to the mandate of the FCO. The subsidy scheme is monitored by the Central Government in the Ministry of Chemicals and Fertilizers and is implemented through the Agricultural department of the State Government. The details regarding the sales of fertilizers effected by the petitioners have to be intimated to the Agricultural department of the State Government, which verifies the said details and submits a report to the Ministry of Chemicals and Fertilizers of the Central Government with regard to the quantity of fertilizers sold and the rate at which they were sold. It is on the basis of the said report that the claims of the petitioners, for the grant of subsidy, are processed and sanctioned by the Central Government.
9. The issue as to whether payments in the nature of Fertilizer subsidy would form part of the sales turnover of fertilizers for the purposes of the KGST Act was considered by this court in the case of
Madras Fertilizers Limited v Asst. Commissioner (Assessment) and Another- 1994 (95) STC 134.
The court considered the nature of the subsidy granted, against the backdrop of the restrictions imposed by the FCO, and found as follows:-
4. The operation of this order and the pegging down of the prices thereunder was likely to render some units sick or without adequate return on the investment. Therefore, pursuant to the recommendations of a committee constituted under the Chairmanship of Sri.S.S.Marathe, Chairman of the Bureau of Industrial Cost and Prices, the Government of India introduced a scheme of retention prices for units in the nitrogenous fertiliser industry with effect from November 1, 1977. This scheme, as mentioned earlier, was introduced with a view to ensure a reasonable return on investment, and to facilitate the healthy development and growth of the fertiliser industry. The scheme was to be administered by the Fertiliser Industry Co-ordination Committee to be set up for the purpose, and the Committee was to operate a Fertiliser Price Fund Account, the purpose of which is explained in a letter D.O.No. 166/21/77-FA(A) dated October 24, 1977, addressed by the Government of India to the various fertiliser units. A substantial contribution was made from Government revenues for the purposes of the scheme. The scheme provided for an ex-factory retention price per tonne of fertiliser, net of excise duty and Fertiliser Pool Equalisation Charge (FPEC), and exclusive of the approved dealer's margin and equated freight, for each plant, based on a capacity utilisation of 80 per cent and a combination of norms and actuals in regard to consumption efficiencies and maintenance and other costs, and providing for a post tax return of 12 per cent of net worth. This was to be known as “retention price”. A standard ex-factory realisation, also net of excise duty and FPEC and exclusive of the dealer's margin and equated freight for the industry as a whole was also to be fixed from time to time. This was referred to as the “transfer price”. The scheme was to be so operated as to ensure that all units receive the transfer price either through adjustment of the excise duty and FPEC or through alternative means. The units whose retention price as fixed under the scheme was lower than the transfer price were required to credit the difference to the Fund Account. The amount will be calculated on the quantities of fertiliser cleared through excise in any given month from November 1, 1977. At the same time, units whose retention price under the scheme was higher than the transfer price will receive the difference from the Fund Account on the monthly submission of claims supported by excise clearance certificates. It was the amount so received from the Fund Account, constituted and administered by the Central Government, which was in the nature of a subsidy paid to the petitioners, that was brought to tax under the KGST Act as part of their taxable turnover of the fertilisers.
9. Subsidy is a well-known term in the field of administration and economics. Chambers' Twentieth Century Dictionary defines subsidy, inter alia, as a grant of public money in aid of some enterprise, industry, etc., or to keep down the price of a commodity. Webster's New World Dictionary, inter alia, defines subsidy as a Government grant to a private enterprise, considered of benefit to the public. The Lexicon Webster Dictionary gives the meaning of the term as a sum of money granted by Government to an organization, institution or industry, especially one benefiting the health and welfare of the country, as a charity or public service. Funk and Wagnal give the meaning of the term as a pecuniary aid directly granted by Government to an individual or commercial enterprise deemed productive of public benefit. Black in his Law Dictionary defines it as a grant of money made by Government in aid of the promoters of any enterprise which is considered a proper subject of Government aid because such purpose is likely to be of benefit to the public. Encyclopedia Britannica, Volume 17, contains a detailed discussion on subsidies and it is stated that subsidies are implemented through a variety of financial techniques, such as (1) direct payments in cash and kind, (2) governmental provision of goods or services at prices below the normal market price, (3) governmental purchase of goods or services at prices in excess of the market price and (4) tax concessions and similar inducements.
10. The uniform strand of meaning which runs through all these definitions of subsidy is that it is a grant made by the Government to an enterprise, inter alia, for the good or benefit of the public. One of its objects is the keeping down of prices of commodities. Benefit to the public is eventually the motivating factor for the grant of the subsidy. The question is whether such a grant could be treated as part of the price paid for the sale of products and can therefore form part of the turnover of the dealer liable to be taxed as such in his hands.
11. Sale is a bilateral transaction which stems out of a contract between the seller and the purchaser. An essential ingredient of a sale is “price”. Fixation of the price is a matter of agreement between the parties. Subsection (1) of section 9 of the Sale of Goods Act, 1932, provides that the price in a contract of sale may be fixed by the contract, or may be left to be fixed in manner thereby agreed, or may be determined by the course of dealing between the parties. In cases where the price is not determined in accordance with these provisions, the buyer shall pay the seller a reasonable price. Therefore, price is an essential element of a contract of sale and is ordinarily a mater of agreement between the parties. What the purchaser of the fertiliser bargains when he purchases fertiliser from the petitioners is to obtain a certain quantity of fertilisers at a certain price which shall not exceed the price fixed by the Central Government by notification under the Fertilizer (Control) Order. The sale is not conditional on the Central Government paying any amount by way of subsidy. There is no agreement between the parties for any further amount to be paid, than what is paid by the purchaser at the time of the sale. “Turnover” is defined in section 2(xxvii) of the KGST Act as meaning the aggregate price for which goods are either bought or sold, supplied or distributed by a dealer. “Sale” is defined in section 2(xxi) as meaning every transfer, whether in pursuance of a contract or not, of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or for other valuable consideration. The essential contract between the parties, namely, the seller and the purchaser of fertilisers, is only for payment of the price subject to the maximum fixed by the Central Government and not for any other. This being the contract, any other sum received by the sellerpetitioners for a different purpose and not as consideration for the sale, is not part of the sale price, and therefore of their turnover. The fact that the amount of subsidy is determined with reference to the quantum of fertilisers cleared from the factory on which considerable stress was made by the Government Pleader, does not lead to any inference that the payment is made in consideration of the sale. The retention price and the transfer price are fixed with reference to various factors. The subsidy is paid for the benefit of the public, to keep the prices at a reasonable level, and at the same time to ensure a reasonable return on investment to the units, and not as consideration for the sales effected by them. I am therefore of the view that the amount of subsidy received by the petitioners for the purpose of their units, which is not related to any particular transactions of sale, but is related to other circumstances, cannot constitute turnover in their hands assessable under the KGST Act.”
10. The above view of this court was approved by the Supreme Court in
Neyveli Lignite Corporation Ltd v. CTO - [2001 (124) STC 586 (SC)],
where the Court found that it is only that sale consideration, whether in cash or otherwise, that was receivable in respect of sales made by a dealer that could form part of the turnover of a dealer. It was found in that case that, in respect of the sale of fertilizer, the purchaser had to pay only the price as fixed under the FCO and the giving of subsidy was not contemplated by the FCO but was pursuant to an administrative decision of the Government of India. The payment of subsidy was, therefore, found to be not in discharge of any liability or obligation by the Government towards the purchaser of the fertilizer. The court specifically observed that it is an amount that flows from the purchaser to the seller that would form part of the turnover of the seller. Any sum received de hors the contract of sale from another entity, whether it be the Government or anyone else, cannot be regarded as being an amount which would form part of the sale price on which tax is payable.
11. What remains to be considered in these cases is whether, the provisions of the KVAT Act call for any different treatment to be accorded to the subsidy payments received by the petitioners while subjecting them to tax on their sales turnover of fertilizers. The definitions of the terms “sale”, “sale price” and “turnover” under the KVAT Act read as follows:-
2. Definitions:-
(xliii) “sale” with all its grammatical variations and cognate expressions means any transfer whether in pursuance of a contract or not of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or for other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge;
(xliv) “sale price” means the amount of valuable consideration received or receivable by a dealer for the sale of any goods less any sum allowed as cash discount, according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods or services at the time of or before delivery thereof, excise duty, special excise duty or any other duty or taxes except the tax imposed under this Act;
(lii) “turnover” means the aggregate amount for which goods are either bought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or for other valuable consideration, provided that the proceeds of the sale by a person not being a Company or Firm registered under the Companies Act, 1956 (Central Act 1 fo 1956) and Indian Partnership Act, 1932 (Central Act 9 of 1932) [or society including a co-operative society or association of individuals whether incorporated or not] of agricultural or horticultural produce grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover.
Explanation III.- Subject to such conditions and restrictions, if any, as may be prescribed in this behalf:-
(i) .............
(ii) Any discount on the price allowed in respect of any sale where such discount is shown separately in the tax invoice and the buyer pays only the amount reduced by such discount; or any amount refunded in respect of goods returned by customers shall not be included in the turnover;
Explanation VII.- Where a dealer sells any goods purchased by him at a price lower than that at which it was purchased and subsequently receives any amount from any person towards reimbursement of the balance of the price, the amount so received shall be deemed to be turnover in respect of such goods.
12. It will be seen from a reading of the above definitions that the definition of “sale” contemplates a contract between a seller and a buyer and the “sale price” is the consideration that flows from the buyer to the seller, less any sum allowed as cash discount, according to the practice normally prevailing in the trade. In the sale of fertilizers by the petitioners in these writ petitions, the sale transaction involves only the petitioners, on the one hand, and their customers, on the other. The liability of the customer is only to pay the price fixed for the fertilizer under the FCO. He pays nothing more, and the petitioners have no right to proceed against him for anything more. The sale price, therefore, is the price fixed for the fertilizer under the FCO. The concept of turnover is integrally linked with the concept of sale and accordingly, any payment that does not have any nexus with the sale transaction, cannot be included in the definition of turnover. As already noticed above, conceptually, the subsidy granted to the petitioners is not in discharge of any liability or obligation by the Government towards the purchaser of the fertilizer. It is a payment made to compensate the importers and manufacturers of fertilizers for the difference between the actual cost of production of the Fertilizers and the realized price, consequent to the mandate of the FCO. In my view, such a payment cannot be seen as a payment made to the petitioners, on behalf of the purchasers of fertilizers, so as to attract the provisions of Explanation VII to the definition of turnover in Section 2 (lii) of the KVAT Act. This is more so because, deeming the said payment as part of the sale price of fertilizers would result in the anomalous situation of the price of the fertilizer being notionally increased, by the subsidy amount received, thereby occasioning a breach of the provisions of the FCO. Such a result could never have been intended by the legislature, more so when the provisions of the FCO were made in public interest, with a view to regulating the equitable distribution of fertilizers and making fertilizers available at fair prices.
13. It is also relevant to observe that the concept of goods being sold at a subsidized price has been taken note of by the legislature in the second proviso to Section 11 (3) of the KVAT Act, while dealing with the allowance of input tax credit. It is made clear that in such cases, the input tax allowable in respect of the goods would not be in excess of the output tax payable on the said goods. The reference to the said concept in Section 11 of the KVAT Act, and the absence of a reference to subsidy, while dealing with payments by way of reimbursement of the balance of price, in Explanation VII to Section 2 (lii), would suggest that the legislative intent was to keep out subsidy payments from the ambit of the said Explanation. Further, in the case of manufacturers of fertilizers, who do not purchase fertilizers for subsequent re-sale, Explanation VII to Section 2(lii) does not apply for the reason that the express provisions of the Explanation make it applicable only in cases where a dealer purchases goods at a particular price and then sells the same at a price lower than that at which it was purchased.
I therefore quash the notices/orders impugned in these writ petitions, to the extent they propose/hold that the amounts received by the petitioners, by way of fertilizer subsidy, are includable in the sales turnover of fertilizers sold by them. The writ petitions are allowed to the above extent, with consequential reliefs. There will, however, be no order with regard to costs.
A.K.JAYASANKARAN NAMBIAR JUDGE
prp/