Supreme Court Upholds Constitutional Validity Of S.5A, Kerala General Sales Tax Act and S.7A, Tamil Nadu General Sales Tax Act

The Supreme Court recently upheld the constitutional validity of Section 5A of the Kerala General Sales Tax Act, 1963 and Section 7A of the Tamil Nadu General Sales Tax Act, 1959."The challenge to the constitutional validity must be rejected on the basis of the ratio elucidated by this Court in Kandaswami (supra), Hotel Balaji (supra) and Devi Dass (supra)...Hotel Balaji (supra) specifically upholds the constitutionality of the impugned provisions, disagreeing with the opinion/ratio expressed in Goodyear (supra)", said a bench of CJI Sanjiv Khanna and Justices Sanjay Kumar, R Mahadevan.BackgroundSections 5A of the Kerala Act (and pari materia Section 7A of the Tamil Nadu Act) imposes purchase tax in situations where a seller is granted exemption from payment of tax. As per a notification issued under Section 10 of the Act, there is exemption available for transactions involving S.S.I. Units/Charitable Institutions.During the relevant assessment years, the appellant-assessee(s) (in the lead matter) purchased voltage stabilizers from exempted registered dealers (S.S.I. Units/Charitable Institutions) within Kerala and thereafter dispatched the goods outside the state by way of stock transfer. A question arose as to whether the appellant-assessee was liable to tax under Section 5A of the Act.The appellant-assessee's case was that once a transaction was exempted under Section 10 of the Act, the purchase of the said items was not taxable under Section 5A as exemption under Section 10 excluded operation of Section 5A also, i.e., the entire Act did not apply.In 2009, a Division Bench of the top Court, distinguishing between the concepts of "leviability/taxability" and "payability", held that the goods in question were liable to tax but, since exemption notification under Section 10 of the Act came into field, they were exempted from payment of tax. However, considering an alternative view taken by a coordinate bench in Peekay Re-rolling Mills (P) Ltd. v. Assistant Commissioner & Anr. (that the expression "levy" would include 'collection' or 'payment' as well and not merely authorization of the levy), the matter was referred to a larger bench.IssuesPursuant to the reference, the abovementioned 3-judge bench Court was called on to decide the following issues:(i) Whether the purchase of goods by the appellants from dealers who were exempted from payment of tax by virtue of notifications or exemptions issued under the Kerala Act or the Tamil Nadu Act, was a purchase "liable to tax" within the meaning of Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act?(ii) Whether the appellant-assessee who had purchased goods, that were exempt from payment of sales tax or from the dealers who were exempt from payment of sales tax, were liable to pay purchase tax under Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act?(iii) Whether the purchase tax, as imposed by Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act, was a tax in the nature of manufacture or consignment tax or an inter-state levy, and therefore ultra vires the Constitution and beyond the legislative powers of the state legislature?Decision and ObservationsWhile the first two issues were answered in the affirmative (in favor of the Revenue), the third was answered in the negative, thereby upholding the constitutional validity of the provisions. The appeals preferred by appellant-assessees were dismissed and the views taken by the Kerala and Madras High Courts upheld.Considering the reference order and judicial precedents dealing with the issues, the 3-judge bench led by CJI Khanna held,"Levy of purchase tax is governed by the provisions and stipulations of Sections 5A or 7A. They are independent and in a way constitute charging sections. Purchase tax is leviable on and payable by the purchaser. However, the legislations do not levy the purchase tax to tax the transaction of the sale and purchase twice. Instead, it levies purchase tax only where no sales tax was payable on the sale."It further noted that purchase tax was made leviable by the subject provisions in 3 situations, namely, (a) where the goods on which no tax is paid were used in manufacture; or (b) where the goods were dispatched out of the State other than by way of inter-State trade or commerce; or (c) where the goods were disposed of in a manner other than sale within the State. However, the need to satisfy the conditions did not change the nature of the charge, "which is, tax on purchase".It was also observed that the decision whether to levy purchase tax or not is a prerogative and power of the State Legislature."As noticed above, the liability to pay is distinct from levy of tax. This being so, the argument that purchase tax is leviable when there is crossborder or inter-State movement of the goods or is a consignment tax must be rejected. Even otherwise, the event, that is inter-State movement of the goods, which does not amount to inter-State sale, falls...

Supreme Court Upholds Constitutional Validity Of S.5A, Kerala General Sales Tax Act and S.7A, Tamil Nadu General Sales Tax Act

Debby Jain

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