Pranav B Prem

The Gujarat High Court has quashed a penalty of ₹25.53 crore imposed on Hindustan Coca-Cola Beverages Pvt. Ltd., holding that the Revenue authorities cannot assume that the sale price was “tax inclusive” without concrete evidence of tax collection. The Court emphasized that the tax department cannot bifurcate the sale price merely on assumption that the amount included sales tax when no such collection was established.

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The Division Bench comprising Justice Bhargav D. Karia and Justice Pranav Trivedi was hearing a batch of appeals filed by the State of Gujarat under Section 78 of the Gujarat Value Added Tax Act, 2003, challenging the common order of the Gujarat Value Added Tax Tribunal dated 28 June 2007 which had set aside the penalty imposed under Sections 46(1)(i) and 56(1) of the Gujarat Sales Tax Act, 1969.

Background

Hindustan Coca-Cola Beverages Pvt. Ltd., engaged in the manufacture and sale of soft drinks and packaged drinking water, had obtained a sales tax exemption certificate under Section 49(2) of the Gujarat Sales Tax Act for its Goblej plant in Kaira district. The exemption, granted under Entry 69 of the notification, was valid for six years, and the company enjoyed the benefit till 24 November 2003, availing total sales tax exemption worth over ₹49.54 crore on its products. After the expiry of the exemption period, the company began paying sales tax from 25 November 2003. However, the Sales Tax Officer issued a show-cause notice, alleging that the company had collected tax on exempted goods by fixing the sale price inclusive of tax, even though it was not required to pay any sales tax. The authority concluded that the uniformity in pricing before and after the exemption period indicated that the tax component was embedded in the sale price.

Penalty Proceedings

Based on this assumption, the Sales Tax Officer concluded that the assessee had “willfully contravened” Section 56(1) of the Act and imposed a penalty of ₹25.53 crore—double the amount allegedly collected—under Section 46(1)(i). The officer relied on records generated from the company’s internal software systems (“Jaguar” and “Scala”) and the statement of a finance manager to infer that tax had been included in the sale price. On appeal, the Deputy Commissioner of Commercial Tax upheld the penalty, observing that the books of accounts maintained under both the USGAAP and Indian GAAP (IGAAP) reflected entries related to sales tax. The authority reasoned that the reversal of such entries in IGAAP did not establish that tax had not been collected.

Tribunal’s Findings

Aggrieved, the assessee approached the Gujarat VAT Tribunal, which allowed the appeal. The Tribunal found that there was no direct or indirect evidence showing that any amount was collected by way of tax. It noted that the invoices issued by the assessee clearly indicated “Nil” against the tax column and bore endorsements stating that the sales were exempted from payment of sales tax. The Tribunal also relied on affidavits of distributors and retailers affirming that no sales tax had been charged or collected by the company.

The Tribunal held that “simply because the price of the goods during the exemption period and thereafter remained the same, it cannot be inferred that the assessee collected any amount by way of tax.” It further observed that “the appellant is not proved to have collected any amount by way of tax from distributors or retailers,” and therefore, “the penalty imposed under Sections 46 and 56 is illegal and required to be set aside.”

Revenue’s Arguments Before the High Court

Before the High Court, the Revenue contended that the Tribunal had erred in disregarding the evidence indicating tax collection. The Assistant Government Pleader Mr. Utkarsh Sharma argued that the price charged by Coca-Cola during the exemption period being identical to that charged thereafter, and the internal accounting entries under USGAAP, proved that the company had in effect collected tax from consumers. He submitted that the Tribunal wrongly relied on additional evidence such as affidavits and accountant opinions, which were not part of the assessment record. The Revenue further argued that the Tribunal’s interpretation would render Section 56 meaningless, as any dealer could claim not to have collected tax merely because it was not separately shown in the invoice.

Assessee’s Defence

In response, Mr. Kunal Nanavati, counsel for Hindustan Coca-Cola, maintained that the company had not collected any tax on exempted sales and that the uniform pricing was a business policy decision. He pointed out that the entries under USGAAP were notional and required by the parent company for accounting purposes, while under IGAAP—relevant for assessment under the Indian tax law—no tax component was ever shown or collected. The company’s invoices, balance sheets, and affidavits from distributors clearly supported this position. Reliance was also placed on the Supreme Court’s decision in Deputy Commissioner of Commercial Taxes (Vigilance) v. Hindustan Lever Ltd., (2016) 13 SCC 28, wherein the Court held that an MRP statement “inclusive of all taxes” cannot, by itself, prove that tax was collected from consumers unless supported by factual evidence.

High Court’s Analysis and Decision

After examining the records and the Tribunal’s findings, the High Court upheld the Tribunal’s reasoning. The Bench noted that the penalty had been imposed solely on the assumption that the sale price included tax. The Court observed: “There is no evidence on record to show that the assessee had collected any amount by way of tax from its distributors, retailers or customers. The sale invoices show ‘Nil’ in the sales tax column and bear an endorsement that the sales are exempted from payment of tax.”  The Court further held that when no tax was collected, the provisions of Section 56 of the Gujarat Sales Tax Act could not be attracted. It also agreed with the Tribunal that the Assessing Officer and the Appellate Authority had erred in their appreciation of evidence, leading to an incorrect finding that tax had been collected. Accordingly, the Court ruled that the Revenue could not bifurcate or “work back” the sale price to extract a presumed tax component without any supporting evidence. Such assumptions, the Court said, could not form the basis of penal action under the statute.

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Holding that the findings of the Tribunal were based on proper appreciation of facts and evidence, the Gujarat High Court dismissed the appeals filed by the Revenue. The penalty of ₹25.53 crore imposed on Hindustan Coca-Cola was therefore quashed. The Court concluded that without proof of actual collection of tax, the Revenue’s treatment of the sale price as “tax inclusive” was unsustainable in law.

Appearance

Counsel for Appellant/State: Utkarsh Sharma, AGP

Counsel for Respondent/Assessee: Kunal Nanavati

Cause Title: State of Gujarat v. Hindustan Coca-Cola Beverages Pvt. Ltd.

Case No: R/TAX APPEAL NO. 2177 of 2010

Coram: Justice Bhargav D. Karia, Justice Pranav Trivedi