Rajasthan High Court Refuses to Quash VAT Proceedings Against JK Lakshmi Cement Over Diesel Supplied To Contractors

The Rajasthan High Court has recently refused to quash proceedings initiated against JK Lakshmi Cement Limited over alleged VAT liability arising from diesel supplied to transport and mining contractors, holding that the company must respond to the tax authorities and raise its objections during the ongoing assessment inquiry.

The dispute arose after the Commercial Taxes Department conducted a survey and investigation into the operations of the cement manufacturer.

According to the department, the company had supplied diesel to contractors engaged in internal handling work, mining operations, and transportation of clinker to grinding units.

The authorities alleged that such supply of diesel formed part of the consideration for transportation services and therefore constituted a “sale” within the meaning of Section 2(35) of the Rajasthan Value Added Tax Act, 2003, read with the Indian Contract Act, 1872.

The department formed a prima facie view that the supply of diesel amounted to taxable turnover under Section 4 of the Rajasthan Value Added Tax Act, 2003, attracting VAT at the first point of sale within the State.

It further stated that cess was payable under Section 3 of the Rajasthan State Road Development Fund Act, 2004.

According to the department, for the financial year 2015–16, taxable turnover relating to diesel supply was assessed at approximately Rs 11.35 crore, leading to a calculated VAT liability of around Rs 2.49 crore at the applicable rate, along with a cess of about Rs 50.87 lakh on diesel consumption.

The authorities also indicated that consequential interest under Section 55 and penalty under Section 61 of the Rajasthan Value Added Tax Act, 2003, could be imposed on the alleged unpaid tax.

JK Lakshmi Cement challenged the proceedings before the High Court, seeking to quash the notices and related action taken by the tax authorities.

A Division Bench comprising Justice Arun Monga and Justice Yogendra Kumar Purohit declined to grant relief at the writ stage, observing that the proceedings involved examination of facts and contractual arrangements between the company and transport contractors.

The bench opined that 

"at this stage the subject matter is under a lawful inquiry by the competent authority; that the competent authority has not yet taken any decision in the matter; that it is only for and during the course of the inquiry that the impugned notices have been issued to the petitioner calling for his explanation, in order to complete the inquiry and arrive at a decision and that no decision has yet been taken in the matter by the competent authority."

The Court held that the competent tax authorities best determine such issues during assessment proceedings after considering the material and explanations placed on record.

The bench further stated that,

"the petitioner should not be penalized or deprived of justice merely because instead joining the inquiry and presenting his explanation, he filed the instant premature writ petition, obviously under some misunderstanding, challenging the issue of show cause notices for the inquiry."

The High Court therefore refused to interfere with the ongoing proceedings, leaving it open to the authorities to complete the assessment process in accordance with the law while permitting the petitioner to raise all available objections before the concerned department.

Appearances:

For Petitioner: Advocates, Ramit Mehta, Tarun Dudia and Mohd. Amaan

For Respondent: AAG, Mahaveer Bishnoi and Advocate, Anirudh Singh Shekhawat