2007 (3) TMI 680 - HC - VAT and Sales Tax

Liability for payment of tax created in terms of the charging section - Validity Of section 3 of the Karnataka Special Tax on Entry of Certain Goods Act, 2004 ( the Act ) - Contravention of sub-articles (a) and (b) of article 304 of the Constitution of India - HELD THAT - The test for determining as to whether the provision is discriminatory or not and the combined effect on the present law and the KST Act cannot be called in aid as a defence to show that they achieve parity in the matter of levy of tax by the State Legislature on similar goods and therefore the further question as to whether it is actually achieved or not recedes to the background. The attack of discrimination, which is sought to be dispelled by operation of the provisions of the very enactment, as noticed earlier on the first contention, remains and therefore it will have to be held that the provision is inevitably one in violation of the requirement of article 304(a) of the Constitution of India and has to be declared as unconstitutional. Insofar as the argument of the learned Advocate-General placing reliance on the judgment of the Supreme Court in Shaktikumar M. Sancheti's case 1994 (11) TMI 341 - SUPREME COURT is concerned, the argument of the provisions of the Maharashtra Act being in violation of the provisions of article 304(a) of the Constitution of India was not even canvassed by the appellant before the Supreme Court and the Supreme Court did not examine this question. While it is a fact that the High Court had dispelled the argument of the Act being violative of article 304(a) at the best, the law as laid down by the Division Bench of the Bombay High Court can be accepted as a persuasive precedent. So also the position in respect of the judgment of the Gujarat High Court in Eagle Corporation's case 2006 (10) TMI 395 - GUJARAT HIGH COURT . But, in the light of the discussion above with reference to the judgment of a Division Bench of this court in Avinyl Polymers' case 1998 109 STC 26, I cannot agree with the view expressed by either the Gujarat High Court or the Bombay High Court, but only follow the view of the Division Bench of our court and therefore I reject the contention urged on behalf of the State. This question being covered by the ratio in Avinyl Polymers' case 1997 (8) TMI 471 - KARNATAKA HIGH COURT , it is not possible to examine the argument of liberal construction to be employed in testing the validity of taxing statute when challenged on the ground of discrimination. In this view of the development, I am not inclined to examine the contentions urged on behalf of the petitioners by Sri Navroz H. Seervai, learned Senior Counsel, that the defence of valid classification available for defending the allegation of discrimination under article 14 cannot be called in aid to test the existence or otherwise of the discrimination under the provisions of article 304(a) of the Constitution of India, as it has become unnecessary to answer this question. Though the examination could have been stopped at this stage, as very serious arguments have been addressed on the question as to whether the provisions of article 304(b) are still attracted even after answering the question in the light of the provisions of article 304(a) and lengthy submissions have been made at the bar on this question and for the sake of completion of examination, I take up this contention next. While one argument is that the very fact that if such a levy is not discriminatory, then that by itself takes care of the requirements of article 304 of the Constitution of India, as contended by the learned AdvocateGeneral, I am unable to accept this proposition, for the reason that the taxing statute which has the effect of impeding movement but still found to be a non-discriminatory tax, at the best can be passing the test of article 304(a) and not as one answering the requirements of article 304(b) also. In the present case, while no independent argument is advanced to contend that the restriction is a reasonable restriction imposed in public interest, it is not even in dispute that the Bill had not received the previous sanction of the President nor the defect cured by the Act having been reserved for the assent of the President and the assent having been given in terms of the provisions of article 255 of the Constitution of India. For this reason also, the Act becomes unconstitutional, being violative of sub-article (b) of article 304 of the Constitution of India. In the result, these petitions are allowed, the provisions of the Act, particularly section 3 of the Act are declared to be in contravention of subarticles (a) and (b) of article 304 of the Constitution of India and therefore violates article 301 and accordingly declared to be unconstitutional. The impugned assessment orders, demand notices, etc., issued for giving effect to the provisions of the Act and the charging section and all proceedings initiated under the Act stand quashed, by issue of writs of certiorari in all these petitions. As a consequence, the taxes collected by the State under the impugned provisions of the Act are required to be refunded to the persons who have paid them. Rule made absolute. Parties to bear their respective costs.

Summary

Issues Involved:
1. Constitutionality of the Karnataka Special Tax on Entry of Certain Goods Act, 2004.
2. Allegation of discrimination under Article 304(a) of the Constitution of India.
3. Requirement of compliance with Article 304(b) of the Constitution of India.
4. Nature of the levy as compensatory tax.
5. Validity of assessment orders, demand notices, and other proceedings under the Act.

Detailed Analysis:

Constitutionality of the Karnataka Special Tax on Entry of Certain Goods Act, 2004:
The writ petitioners challenged the constitutionality of the Karnataka Special Tax on Entry of Certain Goods Act, 2004, arguing that the levy imposed by Section 3 of the Act violated Part XIII of the Constitution of India. They contended that the tax on goods brought from outside the state restricted inter-State movement of goods, contravening Article 301.

Allegation of Discrimination under Article 304(a):
The petitioners argued that the levy was discriminatory as it applied only to goods brought from outside the state, violating Article 304(a). They asserted that this levy created an unfair tax burden on importers compared to local goods. The court noted that the discriminatory aspect was evident since the tax was only on goods entering a local area from outside the state, while similar local goods were not taxed under the same enactment.

Requirement of Compliance with Article 304(b):
The petitioners also contended that even if the levy was not discriminatory, it still needed to comply with Article 304(b), which necessitates the levy to be a reasonable restriction in the public interest and requires the previous sanction of the President. The court found that the Act did not meet these requirements, as it failed to demonstrate that the levy was a regulatory measure in the public interest and lacked the President's prior sanction.

Nature of the Levy as Compensatory Tax:
The State defended the levy as a compensatory tax, arguing that the revenue generated was equivalent to the value of facilities provided to importers, such as roads and lighting. However, the court rejected this defense, stating that the concept of a compensatory levy requires an exclusive service or benefit to the taxpayers, which was not demonstrated in this case. The State failed to show a direct correlation between the tax revenue and the specific services provided to the importers.

Validity of Assessment Orders, Demand Notices, and Other Proceedings:
Given the court's findings on the unconstitutionality of the Act under Articles 304(a) and 304(b), it declared the assessment orders, demand notices, and all proceedings under the Act invalid. The court issued writs of certiorari to quash these actions and ordered the refund of taxes collected under the impugned provisions.

Conclusion:
The Karnataka High Court declared the Karnataka Special Tax on Entry of Certain Goods Act, 2004, unconstitutional as it violated Articles 304(a) and 304(b) of the Constitution of India. The court quashed the assessment orders, demand notices, and other proceedings under the Act and directed the refund of taxes collected. The ruling emphasized the need for non-discriminatory levies and compliance with constitutional provisions when imposing taxes on inter-State trade.