2005 (11) TMI 451 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Legislative competence of the State Legislature to levy sales tax on rectified spirit.
2. Discrimination in subjecting rectified spirit and ethyl alcohol to different rates of sales tax.
3. Refund of excess tax collected and interest thereon.

Detailed Analysis:

Legislative Competence:
The primary contention was whether the State Legislature had the competence to levy sales tax on rectified spirit, a product of the alcohol industry regulated by the Central Government under the Industries (Development and Regulation) Act, 1951. The petitioners argued that the State lacked legislative competence based on the Supreme Court's decision in Synthetics & Chemicals Ltd. v. State of U.P. [1991] 80 STC 270. However, the court referred to a subsequent Supreme Court decision in State of U.P. v. Synthetics and Chemicals Ltd. [1992] 87 STC 289, which clarified that the State Legislature is competent to levy sales tax on alcohol under entry 54 of List II of the Seventh Schedule to the Constitution. The court held that the latter decision is binding and the State Legislature has the competence to levy such tax.

Discrimination:
The petitioners contended that rectified spirit and ethyl alcohol, being chemically identical, should not be subjected to different rates of sales tax. They argued that this differentiation was discriminatory and violated Article 14 of the Constitution. The court noted that the Legislature has the authority to classify and fix different rates of tax for different products. The classification between rectified spirit and ethyl alcohol was justified based on their commercial usage and end-users. Rectified spirit is used in the manufacture of potable liquor, whereas ethyl alcohol is used as an industrial solvent and in pharmaceuticals. The court emphasized that commercial parlance and market understanding are crucial in taxation matters, not just the chemical composition. Therefore, the differentiation in tax rates did not amount to discrimination.

Refund of Excess Tax and Interest:
The petitioners sought a refund of the excess tax collected on rectified spirit, arguing that it should have been taxed at the same rate as ethyl alcohol. They also sought interest on the refunded amount. Given the court's findings that the State Legislature had the competence to levy sales tax on rectified spirit and that the differentiation in tax rates was not discriminatory, the claims for refund and interest were dismissed.

Conclusion:
The court dismissed the writ petitions, upholding the legislative competence of the State to levy sales tax on rectified spirit and rejecting the claim of discrimination between rectified spirit and ethyl alcohol. The court also denied the request for a refund of excess tax and interest.