K.M.FATHIMA vs. COMMISSIONER OF INCOME TAX

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR. JUSTICE A.K.JAYASANKARAN NAMBIAR & THE HONOURABLE MR.JUSTICE MOHAMMED NIAS C.P. TUESDAY, THE 28TH DAY OF FEBRUARY 2023 / 9TH PHALGUNA, 1944 OT.REV NO. 70 OF 2018 AGAINST THE ORDER/JUDGMENT IN TA 204/2014 OF KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM REVISION PETITIONER/S: M/S JOHNSON LIFTS PRIVATE LIMITED KARITHALA ROAD, NEAR CHOICE TOWERS, MANORAMA JUNCTION, COCHIN ADVS. M/S. PAUL JACOB (P), RONY JOSE ENOCH DAVID SIMON JOEL, S.SREEDEV, LEO LUKOSE KAROL MATHEWS SEBASTIAN ALENCHERRY& DERICK MATHAI SAJI RESPONDENT/S: STATE OF KERALA, REPRESENTED BY GOVERNMENT PLEADER SMT. M.M. JASMINE PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 28.02.2023, ALONG WITH OT.Rev.67/2018, 74/2018 AND OTHER CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

:2: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR. JUSTICE A.K.JAYASANKARAN NAMBIAR & THE HONOURABLE MR.JUSTICE MOHAMMED NIAS C.P. TUESDAY, THE 28TH DAY OF FEBRUARY 2023 / 9TH PHALGUNA, 1944 OT.REV NO. 67 OF 2018 AGAINST THE ORDER/JUDGMENT IN TAVAT 203/2014 OF KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM REVISION PETITIONER/S: M/S. JOHNSON LIFTS PRIVATE LIMITED 38/352, KARITHALA ROAD, NEAR CHOICE TOWERS, MANORAMA JUNCTION, COCHIN ERNAKULAM, PIN - 682016 ADV. SRI. RONY JOSE ENOCH DAVID SIMON JOEL(K/925/2009) S.SREEDEV(K/1219/2006) LEO LUKOSE(K/001131/2016) KAROL MATHEWS SEBASTIAN ALENCHERRY(K/126/2010) DERICK MATHAI SAJI(K/1901/2021) RESPONDENT/S: STATE OF KERALA BY GOVERNMENT PLEADER SMT. JASMINE THIS OTHER TAX REVISION (VAT) HAVING COME UP FOR ADMISSION ON 28.02.2023, ALONG WITH OT.Rev.70/2018 AND OTHER CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

:3: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR. JUSTICE A.K.JAYASANKARAN NAMBIAR & THE HONOURABLE MR.JUSTICE MOHAMMED NIAS C.P. TUESDAY, THE 28TH DAY OF FEBRUARY 2023 / 9TH PHALGUNA, 1944 OT.REV NO. 74 OF 2018 AGAINST THE ORDER/JUDGMENTTAVAT 205/2014 OF KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM REVISION PETITIONER/S: M/S. JOHNSON LIFTS PRIVATE LIMITED 38/352, KARITHALA ROAD, NEAR CHOICE TOWERS, MANORAMA JUNCTION, COCHIN-682016. ERNAKULAM BY ADVS. M/S.RONY JOSE ENOCH DAVID SIMON JOEL(K/925/2009) S.SREEDEV(K/1219/2006) LEO LUKOSE(K/001131/2016) KAROL MATHEWS SEBASTIAN ALENCHERRY(K/126/2010) DERICK MATHAI SAJI(K/1901/2021) RESPONDENT/S: STATE OF KERALA REPRESENTED BY SECRETARY TO GOVERNMENT, TAXES DEPARTMENT, THIRUVANANTHAPURAM BY GOVERNMENT PLEADER SMT. M.M. JASMINE THIS OTHER TAX REVISION (VAT) HAVING COME UP FOR ADMISSION ON 28.02.2023, ALONG WITH OT.Rev.70/2018 AND OTHER CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

:4: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR. JUSTICE A.K.JAYASANKARAN NAMBIAR & THE HONOURABLE MR.JUSTICE MOHAMMED NIAS C.P. TUESDAY, THE 28TH DAY OF FEBRUARY 2023 / 9TH PHALGUNA, 1944 WP(C) NO. 37043 OF 2018 PETITIONER/S: JOHNSON LIFTS PRIVATE LIMITED, 38/352, KARITHALA ROAD, NEAR CHOICE TOWERS, MANORAMA JUNCTION,COCHIN- 682 016 NOW ITS OFFICE AT X 132, SEAPORT AIRPORT ROAD, IRUMPANAM, TRIPUNITHURA, COCHIN-682309 REPRESENTED BY ITS AUTHORIZED SIGNATORY SHRI. JOS P.GEO. BY ADVS.PAUL JACOB (P), SRI.RONY JOSE, S.SREEDEV ENOCH DAVID SIMON JOEL,LEO LUKOSE KAROL MATHEWS SEBASTIAN ALENCHERRY DERICK MATHAI SAJI RESPONDENT/S: 1 STATE OF KERALA, REPRESENTED BY SECRETARY TO GOVERNMENT, COMMERCIAL TAXES, SECRETARIAT, TRIVANDRUM-1. 2 DEPUTY COMMISSIONER-II, OFFICE OF THE DEPUTY COMMISSIONER, COMMERCIAL TAXES DEPARTMENT, ERNAKULAM-682 015. 3 ASSISTANT COMMISSIONER 2(WC), OFFICE OF THE DEPUTY COMMISSIONER, COMMERCIAL TAXES DEPARTMENT, ERNAKULAM-682 015. GOVT. PLEADER SMT. M.M. JASMINE THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 28.02.2023, ALONG WITH OT.Rev.70/2018 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

:5: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 A.K.JAYASANKARAN NAMBIAR & MOHAMMED NIAS C. P., JJ ............................................................ OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 ................................................................. Dated this the 28th day of February, 2023 O R D E R Mohammed Nias.C.P. J. The common petitioner in all these cases is a dealer registered under the Kerala Value Added Tax Act, engaged in manufacturing, assembling, supplying, erection, and commissioning lifts of various types. It is stated that the lifts are manufactured in Chennai and installed in various locations in India, including in the State of Kerala, as required and contracted by consumers for supply and erection. After installation, Annual Maintenance Contracts (“AMC” for short) are entered into to maintain those lifts. The contracts of supply, erection, and commissioning of lifts as well as the AMC, were treated as works

:6: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 contracts and were subjected to tax as such. The amounts out of the turnover representing “labour and other charges” were excluded in computing the taxable turnover. 2. The nature of the above activities of the petitioner came up for consideration before the Supreme Court in the case of State of Andhra Pradesh v. M/s. Kone Elevators (India) Ltd. [(2005) 3 SCC 389] wherein it was held that a contract of supply, erection, testing, and commissioning of lifts is only a contract of sale and not a works contract. Later, the issue was referred to a larger Bench. By the decision reported in Kone Elevators India Ltd. v. State of Tamil Nadu [(2014) 7 SCC 1], it was held that the activity of installation of a lift in a building is not a transfer of chattel or goods but a composite contract. Accordingly, the same was held to be a works contract overruling the decision in 2005 (3) SCC 389 (supra). 3. The common issue arising in all these cases pertains to the assessment of the AMC with respect to three assessment years, including 2005-2006, where an amount of Rs. 9, 10, 55, 140 was assessed towards AMC. The assessment order for the year 2005-2006 is

:7: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 dated 28-3-2008 which was confirmed in appeal by the appellate order dated 16-12-2013. The petitioner had also challenged the appellate order before the Tribunal, which also affirmed the views of the appellate authority and the Original Authority, by Order dated 28-09-2017, whereby the common issue raised regarding the limiting of exemption under the AMC with respect to the assessment years 2005- 2006, 2007-2008 and 2008-2009 were considered together. The said common order of the Tribunal is impugned before us. 4. Learned counsel for the petitioner Sri. Rony Jose argued that for the assessment for the year 2005-2006, only 50% of the AMC receipts was allowed as a deduction and the balance was added for assessment. He argues that the accounts clearly show that against each AMC, there are separate invoices, and all of them are accounted for. It is the further contention that there are two types of AMCs viz. with supply of spares and without supply of spares. Against the service of AMC with spares, the petitioner had paid VAT in the comprehensive service maintenance, “CSM.” The sale of the spares was also clear from the statement. The Assessing Officer did not accept the contention of the assessee that the spares used in the AMC are negligible and,

:8: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 therefore, requested the entire receipts under the AMC be exempted from tax. 5. Learned Counsel also argued that they had shown the value of the spares involved in the maintenance as the first sale and had also paid VAT at 12.5% and, therefore, the remaining amount shown for service and maintenance is purely a labour component with no sale component involved in it and thus requested for accepting the entire amount. These contentions were rejected by the Assessing Authority, holding that the specific contract-wise details were not available. For the assessment year 2005-2006, the assessing authority rejected the books of accounts and proceeded to make a best judgment assessment by treating 50% of the total receipts of the AMC as assessable to tax. 6. For the year 2005-2006, the value of spares declared by the assessee in the AMC contract was only 1.12% of the total AMC receipt. The disallowance, thus, made by the Assessing Authority in terms of Rule 9(2)(c) of the KVAT Rules was upheld by the appellate authority as well as by the Tribunal mainly on the ground of non-maintenance of books containing details of the material transferred in AMC. With

:9: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 respect to the assessment year 2007-2008 and 2008-2009 also the Assessing officer proceeded to make a best judgment on the same ground, that no books of accounts or details as to the materials were supplied, and thus 50% of the total receipts would be taken as cost of materials transferred in the AMC. The appeals filed against these orders of assessment were dismissed by the appellate authority. On a further appeal to the Tribunal, the orders pertaining to 2005-06 were upheld. Regarding 2007-08 and 2008-09, Tribunal found that there was a total non-appreciation of facts and non-application of mind to the issues and, therefore, the finding of the appellate authority was set aside and remitted back to the assessing authority for fresh disposal on the issue regarding AMC. The assessee was directed to produce books of accounts, invoices, and other details within one month from the receipt of the order, failing which it was directed that the orders of the assessing authority will be restored. The petitioner chose not to do so, and thus, the order of the assessing authority stood restored for the assessment years 2007-2008 and 2008-2009 as well. 7. The learned counsel for the Revenue Smt. Jasmine submits that since the petitioner failed to produce the books of accounts that

:10: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 showed the actual material value and other details, 50% of the service and maintenance charges was treated as a taxable turnover assessable at 12.5%.In such a situation, there was no option for the Assessing Authority but to reject the accounts and proceed to make the best judgment assessment. It was also argued that the orders impugned are justified and call for no interference. 8. The chart showing the year of assessment, the receipts under the head AMC, the spares used in the AMC and the percentage of spares used in total AMC receipts are reproduced below: Sl.No. Case No. Assessment Year AMC Receipt AMC Spares Percentage 1 OTR 67/2018 2005-2006 74,16,834/- 83,192/- 1.12% 2006-2007 92,97,230/- 9,14,234/- 9.83% 2 OTR 70/2018 2007-2008 1,63,36,434/- 99,848/- 6.11% 3 OTR 74/2018 2008-2009 1,98,27,961/- 25,10,847/- 2,85,039/- (labour charges) 22,25,808/- 11.22% 4 WP(C)37043/2018 2009-2010 3,09,00,390/- 1,22,411/- .396%

:11: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 9. A look at the chart would show that even for the assessment year 2006-2007, where the accounts of the petitioner were accepted and the assessment order passed was accepted by the assessee, the percentage of spares used was 9.83%. Thus it is clear that for the assessment year 2005-2006, the spares sold represented only 1.12% of the AMC contract value and for the assessment year 2006-2007 for which there is no dispute, 9.83% of the AMC receipts represented the value of spares sold. For the year 2007-2008, the corresponding figure was 6.11%, and for year 2008-2009 it was 11.22%. For the assessment year 2009-2010, the spares sold represented only 0.396% of the AMC value. Thus, it is clear that the order of the Assessing Authority treating 50% towards the sale of spares in the AMC contract is without any basis and way off the mark. The use of spares in the proximate assessment years was a relevant material even if the Assessing Authority had to take recourse to a best judgment assessment. Thus, the order of the Assessing Authority limiting the deduction to 50% is without any basis. 10. It is trite that even when the Assessing Authorities reject the accounts and proceed to make best judgment the estimate should be

:12: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 based on material that should have reasonable nexus with the materials on record. Though there is an element of guesswork in making the best judgment assessment, the conclusion cannot be without any rational basis. As held by the Privy Council in Income Tax Commissioner v. Badridas Ramrai Shop [AIR 1937 PC 133]. “The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances and his own knowledge of previous returns by, and assessments of, the assessee, and all other matters which he thinks will assist him in arriving at a fair proper estimate: and though there must necessarily be guess-work in the matter, it must be honest guess-work”.

:13: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 Again relying on the above in Dhakeswari Cotton Mills Limited v. Commissioner of Income Tax, West Bengal [MANU/SC/0073/1954] : (AIR 1955 SC 65), it is stated as follows: “ No doubt it is true that when the returns and the books of account are rejected, the assessing officer must make an estimate, and to that extent, he must make a guess; but the estimate must be related to some evidence or material, and it must be something more than mere suspicion. To use the words of Lord Russell of Killowen again, “he must make what he honestly believes to be a fair estimate of the proper figure of assessment,” and for this purpose, he must take into consideration such materials as the assessing officer has before him, including the assessee's circumstances, knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and proper estimate”. 11. These decisions have been followed in most of the subsequent judgments. Judgments have also held that the limits of the

:14: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 power are implicit in the expression “best of the judgment”. Judgment is a faculty to decide matters with wisdom truly and legally. Judgment does not depend upon the arbitrary caprice of a judge but on settled, invariable principles of justice. Though there is an element of guesswork in a best judgment assessment, it shall not be a wild one but shall have a reasonable nexus to the available material and the circumstances of each case. In the instant case, the proximate assessment years, as reflected in the chart extracted above, clearly shows that the assessing officer has gone off the mark while allowing for deductions from the taxable turnover for the assessment year 2005-2006. 12. For the year 2007-2008, the assessing authority did not accept the contention of the assessee that the use of the spares in the AMC was only 1.12% out of the total receipt of AMC. For the years 2007- 2008 and 2008-2009 also, the Assessing Authority limited the deduction claimed to 50% of the AMC receipts. 13. On a consideration of the material before us, we are of the view that the Assessing Authority was not right in treating 50% of the AMC receipts as attributable to supply of spares. We also find that

:15: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 though for the assessment years 2007-08 and 2008-09, the matter was remitted with a direction to the assessee to produce the books of account within a period of one month with the order that in case of non-production by the assessee the earlier order would be restored, and the assessee did not comply with the order. The restoration of the earlier order would be intiated by the same illegality as found in relation to the assessment orders for 2005-2006, that was followed while completing the assessments for 2007-2008 and 2008-2009. 14.The appellate authority, having found that the assessment order was bad, could not have restored. The said order merely because the assessee did not produce the books as directed by it. In such cases, the assessing authority should have passed a fresh order taking into account the consequence of the assessee not producing the accounts directed in the order of remand for otherwise it would be the order that was held to be one passed mechanically and without any application of mind that would stand restored. In the instant case, at this distance of time, we feel that the interests of justice would require us to fix 6% of the AMC receipts for the assessment years 2005-2006, 2007-2008 and 2008-2009 as representing the value of spares sold to the customers taking note

:16: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 of the figure that was accepted by the department for the assessment year 2006-2007 and against which the assessee also had no quarrel. The assessing authority is directed to pass revised orders in the light of our finding above within a period of two months from the date of receipt of a copy of the judgment. W.P.(C) 37043 of 2018 15. In the above Writ Petition dealing with the same contention, the assessment for the year 2009-10 was completed by only allowing 50% as deduction for service and maintenance. The said order was challenged before the appellate authority, which by Ext. P2 order found that the assessee had disclosed turnover for spares consumed for AMC at Rs. 122,411.00, which had to be verified, and that if the material related to AMC are billed separately and accounts thereon are separately kept and maintained, and the goods transferred in the execution of works contract are ascertainable from the accounts of the dealer, then the turnover of Rs. 122, 411.00 with reasonable gross profit need only be assessed to tax. If the goods transferred are not so ascertainable, then 50% of the amount of the contract was treated as taxable turnover as done by the assessing authority as per clause (c) of sub-rule (2) of Rule 9

:17: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 of KVAT Rules, 2005. There is a specific direction to verify the duplication of the turnover under the AMC, and if found genuine, the assessing authority was required to rectify the duplication. Pursuant to Ext. P2 order Ext.P3 order was passed without considering any aspects specifically directed in Ext. P2 order. In such circumstances, there is no other option but to set aside Ext. P3 and to direct the Assessing Authority to re-assess on the basis of the specific directions in Ext. P2, within a period of two months from the date of receipt of a copy of this judgment. This Writ Petition stands allowed. SD/- A.K.JAYASANKARAN NAMBIAR, JUDGE SD/- MOHAMMED NIAS C.P., JUDGE ani/

:18: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 APPENDIX OF OT.REV 70/2018 PETITIONER ANNEXURES ANNEXURE-A1 A TRUE COPY OF THE APPELLATE ORDER DAED 16.12.2013 IN KVATA 2972 OF 2010 FOR THE YEAR 2007-08 ANNEXURE-A2 A TRUE COPY OF THE ASSESSMENT ORDER DATED 16.02.2010 FOR THE YEAR 2007-08

:19: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 APPENDIX OF OT.REV 67/2018 PETITIONER ANNEXURES ANNEXURE A1 A TRUE COPY OF THE APPELLATE ORDER DATED 16.12.2013 IN KVATA 1040 OF 2008 FOR THE YEAR 2005-06. ANNEXURE A2 TRUE COPY OF THE ASSESSMENT ORDER DATED 28.03.2008 WITH RESPECT TO ASSESSMENT PERIOD 2005-2006.

:20: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 APPENDIX OF OT.REV 74/2018 PETITIONER ANNEXURES ANNEXURE -A1 A TRUE COPY OF THE APPELLATE ORDER DATED 16.12.2013 IN KVATA 2222 OF 2010 FOR THE YEAR 2008-09. ANNEXURE -A2 TRUE COPY OF THE ASSESSMENT ORDER DATED 16-02-2010 WITH RESPECT TO ASSESSMENT PERIOD 2008-2009.

:21: OT Revisions 67, 70 and 74 of 2018 & Writ Petition (C) No. 37043 of 2018 APPENDIX OF WP(C) 37043/2018 PETITIONER EXHIBITS EXHIBIT P1 A TRUE COPY OF THE ASSESSMENT ORDER FOR THE YEAR 2009-2010 DATED 23.02.2012. EXHIBIT P2 A TRUE COPY OF THE APPELLATE ORDER IN KVATA 1510/2012 DATED 16.09.2014. CORRECTED