Tax Clarifications cannot be Applied Retrospectively: Kerala HC Sets aside Deputy Commissioner's Order in VAT Case [Read Order]

The petitioner, K.G. Rejimon, proprietor of M/S Thermal Tech Engineers, challenged the Deputy Commissioner's suo motu revisional steps that cancelled an assessment completed in his favor for the assessment year 2009-10. The assessee was engaged in trading "thermic fluid heater" products, which he contended attracted tax at 4% under Entry 83(1)(f) of Schedule III to the Act.

Initially, an assessment order dated 11.11.2013 imposed tax at 12.5% on the products. This was challenged before the first appellate authority, which noted that the clarification relied upon for the assessment had been set aside by the High Court and directed the Commissioner to revisit the issue. Consequently, a fresh order dated 16.10.2015 was passed, imposing tax at 4%.

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Later, the authority under Section 94 issued an order dated 07.04.2016, holding that "thermic fluid heaters" were not specifically covered by any entry in Schedule III and would attract tax at 12.5% as an RNR item. Based on this, the Deputy Commissioner initiated suo motu revisional steps, cancelling the assessment order dated 16.10.2015.

The petitioner, represented by advocates Sri.P.S. Soman and Smt.T. Radhamony, contended that: (i) the exercise of revisional power under Section 56(1) was erroneous since the assessment was subject to an appeal; (ii) the commodity was assessable only at 4%; and (iii) the clarificatory order dated 07.04.2016 could only have prospective operation.

The Revenue, represented by Senior Government Pleader Sri.V.K. Shamsudheen, argued that the Deputy Commissioner was within his powers to exercise suo motu revision as the assessment order was against the clarificatory order issued under Section 94.

The Division Bench of Justice A. Muhammed Mustaque and Justice Harisankar V. Menon framed three key questions for consideration: (i) whether the exercise of revisional power under Section 56 was justified; (ii) whether reliance on the clarificatory order dated 07.04.2016 was justified; and (iii) whether the clarificatory order had only prospective application.

Regarding the first question, the Court held that the DeputyCommissioner was justified in exercising suo motu powers under Section 56 of the Act. The Court noted that the appellate order had not issued any positive directions but had only directed a revisit at the hands of the assessing authority, and the consequential order dated 16.10.2015 did not appear to have addressed the issue afresh as directed.

On the second question concerning the classification of the product, the Court held against the assessee, noting that he had not provided details of the product with specific reference to the HSN Code to support his contention that it fell under Entry 83(1)(f) of Schedule III. The Court observed that the entries in the Schedules to the Act are geared to the HSN Code, and it was for the assessee to have pointed out the HSN Code of the product to support the classification.

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However, on the crucial third question regarding the prospective operation of the clarificatory order, the Court held in favor of the assessee. The Court observed that under Section 94(2) of the Act, the Commissioner has been empowered to hold that clarificatory orders would only have prospective operation. Relying on its earlier decision in Sreedhareeyam Ayurvedic Medicines (P) Ltd. and Ors. v. State of Kerala and Anr. and the Supreme Court's decision in Reckitt Benckiser (India) Ltd. v. Commissioner, Commercial Taxes and Others, the Court held that clarifications can only apply prospectively.

The Court viewed that if the clarificatory order dated 07.04.2016 was given retrospective operation, an assessee would be seriously prejudiced, as it would not be possible to collect the differential tax from customers. The Court noted that under Section 30 of the Act, an assessee is entitled to collect the tax payable from the purchaser of the commodity.

Accordingly, while answering the first two questions in favor of the revenue, the Court answered the third question in favor of the assessee. Since the third question was answered in favor of the assessee, the Court held that the exercise of revisional jurisdiction under Section 56 of the Act could not be sustained. Consequently, the Court set aside the Deputy Commissioner's order, as confirmed by the Commissioner of State Tax, and disposed of the Other Tax Revision Petition.

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