Dilip Pawar vs. State Of Kerala

Dilip Pawar, Proprietor of M/s. Bhairavanath Bullions, Kottayam is a registered dealer under the KVAT Act, 2003. The dealer is engaged in the business of purchasing gold ornaments pledged by individuals with financial institutions like Muthoot Finance Ltd. The gold ornaments are purchased in an auction conducted by the financial institutions.

The dealer’s case is that he, depending on the commercial utility, disposes of a few auction-purchased gold ornaments/jewellery as ornaments. The substantial portion of auction purchased jewellery is melted and finally converted into standard gold of 99.9% and the gold bars are sold to registered jewellers such as Bhima Jewellers.

1 Now the area of dispute is with regard to the “standard gold -4- 99.9%” sold to the Bhima Jewellers. The dealer admits that the dealer is paying 5% tax on the gold ornaments/jewellery purchased in the auction held by the financial institutions. The dealer resells the ornament/jewellery is under obligation to collect 5% tax from its buyers. The applicable rate of tax is 1% for standard gold of 99.9%. The substantial portion of the gold purchased in the auction was claimed to have been sold as standard gold and tax at the rate of 1% collected and paid to the Department. In these two revisions, we are concerned with returns filed for the assessment years 2012-13 and 2013-14. 3.2 On 14.10.2014 the Department inspected the premises of the dealer. By referring to the alleged information gathered in the inspection dated 14.10.2014, proceedings under Section 67 of the Act were taken up by the Intelligence Officer (IB), Kottayam. The Intelligence Officer calculated the output tax liability at 5% on the volume of sales made as standard gold at 99.9% and served the penalty order dated 18.12.2014. The dealer filed appeal before the Deputy Commissioner, Kottayam and the Deputy Commissioner allowed the appeal by order dated 29.06.2015 and held that no case for imposition of penalty under Section 67 of the Act was made out. The Commissioner of -5- Commercial Taxes, Thiruvananthapuram on 29.08.2016 and 01.11.2017 issued notices under Section 58 of the KVAT Act, proposing to set aside the order of the Deputy Commissioner in Annexure-B dated 29.06.2015. The grounds are several for invoking the suo-moto revision power and the substance of the allegation is that the claim of dealer to pay output tax at 1% on standard gold of 99.9% purity sale in favour of Bhima Jewellers is accepted by Deputy Commissioner (Appeals) without material and contrary to law. The dealer among other replies, had put forward the process of converting ornamental gold/jewellery into standard bullion and that the sale is evidenced by valid documents; what was sold by the dealer would be discerned from the books of accounts of both the dealer and the buyer. The books, invoices etc. constitute primary evidence to decide the exigibility whether at 5% or at 1%. The conversion process we wish to state in the same way as stated in the memorandum of appeal which reads thus: “The gold jewellery is first brought to appellant's place of business at Mundakkayam in Kottayam District. Thereafter the same is melted in the place of business using the furnace installed there. On account of such melting the impurities like sludge, dirt etc. in the ornaments are removed. Thereafter appellant is adding some quantity of silver to this melted gold and this mixture of gold and silver is melted together and the -6- outcome is poured into normal water collected in steel pots. Thereupon the melted steel and gold mixed solidifies to some extent and the same can be taken from the water as a lump. This lump is thereafter collected and placed in a steel vessel to which concentrated nitric acid is added. Upon such addition of nitric acid, the impurities left out, if any, are removed and the gold and silver are separately left over. The gold in sand form is collected and cleaned using water to remove the acidic content if any. Thereafter the gold is again melted and the melted gold is poured into a block to obtain the shape gold bullion bars. The silver which is also left over as above is separately collected and kept aside. The gold bar so obtained in bullion form is traded by appellant as above. In the invoices raised by appellant, he is describing the above commodity as "standard gold (purity 999)". The purity of the above standard gold is 99.9% and the said bullion is purchased by jewelleries like Bhima and used to manufacture gold ornaments thereafter.”

The other defence set up by the dealer against the imposition of output tax at 5% is that the sale can be evidenced from the perspective of the seller and the buyer, receipts and payments in this behalf, and commodities and quantities sold on various occasions. The dealer filed written submissions before the Commissioner of Commercial Taxes, Thiruvananthapuram on 14.11.2017. The Commissioner through the order dated 25.04.2018 in Annexure-E overruled the objections and sustained the order of the Intelligence Officer in Annexure-A. On the conversion process undertaken by the dealer, the following findings are recorded:

1 On the said finding, Mr Harishankar V Menon argues that the -8- conversion process is to be examined by inspecting the place where the actual conversion of gold jewellery into gold bullion was happening. The findings are recorded by referring to the inspection report of the Intelligence Officer which is subsequent point of time to the date of conversion of gold jewellery into bullion by the dealer. The petitioner can establish, as a matter of fact, that the disputed turnover attracts only output tax at 1% and findings have been recorded only from the perspective of Revenue but not by examining the record. The next contention is that the dealer was prepared to establish, by way of evidence from the buyers including Bhima Jewels, that the output against which the tax is being levied and collected at 1% was in respect of standard gold of 99.9% purity. The residue is accounted for and none of these aspects was examined by the Commissioner.

2 Adv. Harishanker V Menon argues with considerable force that the order of the Commissioner in Annexure -E is liable to be set aside even on merits and the order of the Deputy Commissioner in Annexure- B is restored.

Mr V.K. Shamsudheen contends that, unless and until a detailed enquiry into all the facets involved in the conversion of gold -9- ornaments/jewellery into bullion are re-examined by this Court as if it is discharging the functions of either the primary or revisional authorities entertaining the case on merits ought to be avoided. In other words, it is argued that assuming without admitting that an opportunity is not given to the dealer or that material is not considered by the Commissioner in the perspective, it is presented, the appropriate course open to this Court is to remit the matter to the revisional authority but not discharge the function of a revisional authority while exercising juri iction of the appeal under Section 62 of the KVAT Act.

Though a strenuous attempt has been made by Mr Harishankar V Menon, we desist from examining the issue on merit. However, after taking note of consideration by the Commissioner, we are convinced that the order dated 25.04.2018 (Annexure -E) is liable to be set aside on two grounds viz. in the process of hearing before the Commissioner the dealer was not afforded a fair opportunity to establish its case. The fair opportunity, in this context it is stated, as a reasonable opportunity leading to examination of material which has bearing on the controversy. Therefore, the dealer could be afforded an opportunity to establish both the principal objections the dealer wishes to take firstly, -10- the conversion of gold jewellery into gold bullion and that the commodity sold was only standard gold of 99.9% purity from the perspective of buyer and seller, output tax is at 1%. The exigibility is dependent on the commodity sold and the entry by which the commodity attracts. The finding of the Commissioner that the facilities found in the inspection are not compatible for conversion of gold into standard bullion is also ipse dixit.

Therefore, the important points which have bearing on determining the alleged output tax liability of the dealer are not considered in Annexure-E order. Hence Annexure-E order is alone set aside. The case is remitted to the Commissioner for disposal afresh. The dealer is given four weeks’ time from the date of receipt of copy of the judgment to file relevant additional material as he is advised in this behalf, by enclosing a copy of this judgment.