1995 (11) TMI 407 - HC - VAT and Sales Tax

Issues Involved:
1. Constitutional validity of Section 5-C of the Karnataka Sales Tax Act, 1957.
2. Legislative competence of the State Legislature to impose tax on inter-State sales or sales outside the State.
3. Interpretation of "total turnover" and its implications.

Detailed Analysis:

1. Constitutional Validity of Section 5-C of the Karnataka Sales Tax Act, 1957:

The petitions challenge the constitutional validity of Section 5-C of the Karnataka Sales Tax Act, 1957, which levies tax on the transfer of the right to use any goods. The petitioners argue that the State Legislature lacks the competence to impose such a tax on transactions that are in the nature of inter-State trade or commerce, sales outside the State, or in the course of import or export, as these are beyond the legislative power of the State under Entry 54 of List II of the Seventh Schedule to the Constitution.

2. Legislative Competence of the State Legislature to Impose Tax on Inter-State Sales or Sales Outside the State:

The petitioners contend that the legislative power under Entry 54 does not extend to transactions involving inter-State trade or commerce, sales outside the State, or import/export transactions. They argue that the law made by Parliament under Articles 286(2) and 286(3)(b) read with Article 269(3) of the Constitution is a condition precedent for the State to impose such a tax. Since no such law has been enacted by Parliament, the State Legislature cannot exercise this power. The petitioners further argue that the definition of "sale" in the Central Sales Tax Act has not been amended to include the transfer of the right to use any goods, thereby making the levy under Section 5-C impermissible.

The State, on the other hand, argues that there cannot be any "sale or purchase of goods in the course of inter-State trade and commerce" or "outside the State" or "in the course of the import of goods into, or export of the goods out of the territory of India" in respect of the taxable event stated in Section 5-C. They assert that the basis of exigibility of tax under Section 5-C is sub-clause (d) of clause (29-A) of Article 366 of the Constitution. The State also refers to the Supreme Court's decision in Gannon Dunkerley & Co. v. State of Rajasthan, which held that the provisions of the Central Sales Tax Act are applicable to the transfer of property in goods involved in the execution of works contracts covered by Article 366(29-A)(b).

3. Interpretation of "Total Turnover" and Its Implications:

The Court examines the definition of "total turnover" in Section 2(u-2) of the Act and "taxable turnover" in Section 2(u-1). The distinction between these terms is crucial as "total turnover" includes transactions whether or not they are liable to tax, including inter-State trade or commerce and import/export transactions. The Court notes that the Legislature has altered the tax base from "taxable turnover" to "total turnover," thereby including transactions outside the State's taxing competence.

The Court concludes that Section 5-C transgresses the limits of legislative power in contravention of Article 286(1) of the Constitution, as it enables tax on deemed sales that take place in the course of inter-State trade or commerce or in the course of import or export. The Court refers to the Supreme Court's decision in Gannon Dunkerley & Co., which invalidated similar provisions in the Rajasthan Sales Tax Act for not excluding transactions outside the State's taxing competence.

The Court rejects the State's argument that "total turnover" should be interpreted contextually to exclude transactions the State cannot tax. The legislative intent to tax "total turnover" is clear from the amendment, and thus, Section 5-C is declared unconstitutional and void.

Conclusion:

The Court declares Section 5-C of the Karnataka Sales Tax Act, 1957, as unconstitutional and void, as it transgresses the legislative competence of the State Legislature by including transactions that are beyond its taxing power under the Constitution. The petitions are allowed, and the rule is made absolute accordingly.

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