Subsidy received from “Service Provider” cannot be included in the “Sale Price” for the purpose of DVAT Act; Delhi HC [Read Judgment]

The Delhi High Court in a recent decision held that the amount of subsidy granted to the assessee from a service provider, cannot be considered as “other valuable service”, and therefore, the same cannot be included to the sale price for the purpose of the DVAT Act. The Court further noted that the said subsidy was not resulted in generating revenue by increasing the sale.The Court was considering a writ petition filed by the assessee under Art. 226 of the Constitution.

According to the Petitioners, it is engaged in the business of telephone and undertakes purchase and sale of CDMA handsets as a distributor of M/s. Drive India. It also provides CDMA connection as a service provider of Tata Teleservices Limited. The Petitioner filed monthly returns for May 2007 and July 2007 in which it claimed refund of excess tax credit. The refund claim for May 2007 was Rs. 70,87,097 and for July 2007 it was Rs. 11,02,969. It is stated that in terms of Section 38 of the DVAT Act, the refund was required to be issued within one month from the date of filing of the monthly returns. Accordingly, the last date of refund for the aforementioned periods was 27th July 2007 and 28th September 2007 respectively.

The Petitioner stated that no notice of audit under Section 58 of the DVAT Act was issued nor any additional information under Section 59 sought as envisaged under Section 38 (4) of the DVAT Act. Further, no security as a condition for issuance of refund was demanded within 15 days from the date of filing of monthly returns as contemplated under Section 38 (5) of the DVAT Act. In July 2008, the Commissioner, Trade & Taxes issued a circularby which the concerned authority was directed to refund the amount to the petitioner alongwith interest within 15 days of receipt of return.

The Petitioner further stated that a notice under Section 59 (2) of the DVAT Act from VATO, Ward-96 was received and thereafter notices of default assessments of tax, interest and penalty under Sections 32 and 33 of the DVAT Act respectively were issued for the months of May 2007, July 2007 and March 2008. These were challenged by filing objections before the OHA under Section 74 of the DVAT Act. The said objections were allowed by the OHA by an order 9th October 2009.

Before the OHA, the petitioner submitted that the Petitioner was being granted subsidy by TTL in order to attract the customers from whom they could generate revenue from call charges etc. The subsidy was given soon after the purchase to enable to sellers to sell the handsets at prices well below the market price. The subsidy therefore ought to be included in the sale price. The OHA vide its order observed that the Petitioner was liable to pay tax at the rates specified in Section 4 of the DVAT Act on sales effected by it. The Petitioner was also entitled to claim input tax credit on turnover of purchases as provided in Section 9 of the DVAT Act. The ITC to which apurchasing dealer was entitled would be equal to the output tax liability of his selling dealer and it could not be different from the output tax liability of the selling dealer on that transaction. M/s. Drive India was the selling dealer from whom the Petitioner had made the purchases. Consequent upon the grant of subsidy by TTL to the Petitioner the output tax liability of the seller had not reduced. The subsidy given by TTL was not towards the sale of handsets but the service charges to be received from the customers. As far as the Respondent was concerned, it was entitled to levy and collect value added tax at the price at which the end customer buys the handsets.

Consequently, notices of default assessments of tax, interest and penalty were passed against the assessee. When objections were filed against these notices, the OHA held that the levy of tax was appropriate. He held that the selling of handsets below the purchase price would eventually result in the loss to the dealer and thus in order to compensate, TTL was paying subsidy to the dealer. Although the purchase price of the dealer was reduced, he could still claim the entire ITC on the basis of tax invoices issued prior to the release of the subsidy. As a result the Department lost revenue. Despite there being no value addition, it had to allow ITC on the higher purchase price. Therefore, it was concluded that “the levy of tax is appropriate and the default assessment orders are upheld regarding levy of tax is appropriate”. The OHA further held that merely because a claim made by the dealer was not allowed, the return filed cannot be branded as false, misleading or deceptive. Therefore, the notice of assessment of penalty was set aside. A Review Petition was filed by the petitioner against the order of the OHA which is pending before the authority at the time of the proceedings before the High Court.

Thereafter the Respondents issued notices under Section 74A (2) to the petitioners stating that the order of the OHA needs to be revised. Aggrieved by the said order, the petitioners approached the High Court challenging the said notice on the ground that it had been arbitrarily issued by the Respondent only to delay the grant of refund to the Petitioner

The question rose before the Court was whether the subsidy granted to the Petitioner by TTL in respect of the handsets sold by it could be termed as ‘other valuable consideration’ and therefore, could be included in the sale price?

The division bench comprising of Justices S Muralidhar and Justice Najimi Waziri expressed that the term“sale” in Section 20(1)(zc) of the DVAT Act has been widely defined to mean “any transaction of property in goods by one person to another for cash or for deferred payment or for other valuable consideration (not including a grant or subvention payment made by one government agency or department, whether of the Central Government or of any State Government, to another) and includes – …” the Court interpreted that the words in the brackets points to the fact that a “grant or subvention payment’ made by one government department to another is not intended to be included in the sale price. It is not considered part of the other valuable consideration” for which there could be a transfer of property in goods from one person to another.

Citing a number of judicial decisions in favor of the petitioner, the Court held that the subsidy offered by TTL to the Petitioner cannot be included in the sale price for the purposes of VAT.It was in this regard, observed that in the present case M/s. Drive India was the selling dealer from whom the Petitioner, as the purchasing dealer, has made the purchase of the handset. The grant of subsidy by TTL to the Petitioner did not go to reduce the output tax liability of the seller. The subsidy was for the purpose of generating revenue from call charges etc paid by the consumer. It was not towards the sale of handsets. It, therefore, did not affect the sale price of the handsets. Therefore, the order dated 9th October 2009 of the OHA sustaining the objections filed by the Petitioner against the notices of default assessments of tax and penalty for May 2007, July 2007 and August 2008 was upheld.

The Court further quashed the impugned notice dated 4th April 2013 under Section 74A(2) of the DVAT Act was held to be bad in law on ground that it was issued without indicating the specific ground on which the Respondent proposes to revise the order.

Read the full text of the Judgment below.