2002 (8) TMI 808 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Inclusion of fertilizer subsidy in taxable turnover.
2. Validity of sub-section (7B) of section 7 of the Kerala General Sales Tax Act, 1963.
3. Validity of rule 22A(2) of the Kerala General Sales Tax Rules, 1963.
4. Deduction of tax at source for inter-State sales, outside sales, and sales in the course of import.

Detailed Analysis:

1. Inclusion of Fertilizer Subsidy in Taxable Turnover:
The original petition challenged the inclusion of the fertilizer subsidy amounting to Rs. 17,52,22,788 at 4 per cent in the taxable turnover. The Tribunal had previously upheld such inclusion in the case of Neyveli Lignite Corporation Ltd. v. Deputy Commercial Tax Officer, Cuddalore [1999] 115 STC 51 (TNTST). Consequently, the original petition and the miscellaneous petition were dismissed.

2. Validity of Sub-section (7B) of Section 7 of the Kerala General Sales Tax Act, 1963:
Sub-section (7B) mandates the deduction of tax at the rate of two per cent for civil contracts and five per cent for other contracts from payments made to contractors liable to tax under section 5. This provision was challenged on the grounds that it required advance tax payment on the entire contract amount, including non-taxable turnover such as inter-State sales and sales in the course of import. The court found this provision unsustainable as it allowed the State to collect tax on transactions outside its jurisdiction, contrary to the principles laid down by the Supreme Court in Steel Authority of India Ltd. v. State of Orissa [2000] 118 STC 297.

3. Validity of Rule 22A(2) of the Kerala General Sales Tax Rules, 1963:
Rule 22A(2) requires the awarder to withhold an amount equal to two per cent of payments for civil contracts and five per cent for other contracts, remitting it to the government. The rule was criticized for not excluding transactions outside the State's taxing jurisdiction, such as inter-State sales and sales in the course of import. The court held that the rule, like sub-section (7B), was ultra vires as it enabled the State to collect tax beyond its legislative competence.

4. Deduction of Tax at Source for Inter-State Sales, Outside Sales, and Sales in the Course of Import:
The court referred to the Supreme Court's decision in Steel Authority of India Ltd. v. State of Orissa, which invalidated provisions allowing tax deduction at source on the entire contract amount, including non-taxable turnover. The Kerala provisions were found to be similar to those struck down in the Orissa and Himachal Pradesh cases. The court reiterated that the State cannot levy tax on transactions outside its jurisdiction, even provisionally.

Judgment:
The court declared that sub-section (7B) of section 7 of the KGST Act and rule 22A(2) of the KGST Rules, as amended, were ultra vires and beyond the legislative competence of the State. These provisions were invalidated to the extent they allowed the State to collect tax on turnover inclusive of inter-State sales, sales in the course of import, and sales outside the State. The writ appeal was allowed, and the revisional authorities were directed to dispose of the revision petitions as per the law declared.