2006 (12) TMI 470 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Constitutionality of the imposition of entry tax on the use of property for the execution of works contracts.
2. Classification under Section 5 of the Assam Entry Tax Act, 2001, and its compliance with Article 14 of the Constitution of India.

Issue-wise Detailed Analysis:

1. Constitutionality of the Imposition of Entry Tax:
The petitioners, primarily contractors and importers of cement for works contracts in Assam, challenged the imposition of entry tax under the Assam Entry Tax Act, 2001 (AET Act, 2001), as amended by the Assam Entry Tax Act, 2002. They argued that the levy of entry tax was unconstitutional because it was not compensatory and violated Article 304(b) of the Constitution of India. The petitioners contended that the amendment excluded the benefit of exemption from payment of sales tax for transactions falling under sub-clauses (ii), (iii), and (iv) of Section 2(33) of the Assam General Sales Tax Act, 1993 (AGST Act, 1993).

2. Classification under Section 5 of the Assam Entry Tax Act, 2001:
The petitioners argued that the classification made by Section 5, pursuant to the Assam Entry Tax Act, 2002, was in violation of Article 14 of the Constitution of India. They claimed that the classification was unreasonable, arbitrary, irrational, and unconstitutional, lacking any nexus with the objects sought to be achieved. Specifically, the exclusion of clause (ii) of Section 2(33) of the AGST Act, 1993, resulted in the import of goods used in works contracts not being exempt from local sales tax, despite such use being deemed a sale in law.

Detailed Analysis:

Constitutional Validity and Legislative Competence:
The court examined the legislative competence of the Assam State Legislature to enact the AET Act, 2001, under Article 246(3) read with Entry 52 of the State List. The Act aimed to levy tax on the entry of goods into any local area in Assam for consumption, use, or sale, to curb evasion of local sales tax. The court noted that the AET Act, 2001, was designed to impose entry tax at a single point and exempt goods from further entry tax once it had been paid.

Definition and Scope of 'Sale':
The court discussed the amendment to Article 366 of the Constitution by the Forty-sixth Amendment, which included clause (29A) to define "tax on the sale or purchase of goods" to encompass transactions such as the transfer of property in goods involved in the execution of works contracts. This amendment enabled states to levy sales tax on deemed sales. The AGST Act, 1993, was amended accordingly to include such deemed sales within the definition of "sale."

Section 5 of the AET Act, 2001:
Originally, Section 5 of the AET Act, 2001, provided that the amount of tax payable under the AGST Act, 1993, would be reduced by the amount of entry tax already paid. However, the amendment to Section 5 excluded sub-clauses (ii), (iii), and (iv) of Section 2(33) of the AGST Act, 1993, thereby denying exemption from local sales tax for goods imported for use in works contracts. The petitioners argued that this exclusion was discriminatory and lacked a rational basis.

Rational Basis and Article 14:
The court emphasized that a taxing statute must not be discriminatory and must treat similarly situated persons equally. The classification must be based on an intelligible differentia with a rational nexus to the object sought to be achieved. The court found that the amendment to Section 5 created an unreasonable distinction between actual sales and deemed sales, despite both being treated as sales under the AGST Act, 1993. This distinction was held to be discriminatory and violative of Article 14.

Conclusion and Judgment:
The court concluded that the amendment to Section 5 by the Assam Entry Tax (Second Amendment) Act, 2002, was not sustainable in law. It quashed the amendment and directed the State respondents to exempt the petitioners from paying local sales tax on goods imported for use in works contracts, to the extent that entry tax had been paid. The court also noted that entry tax on goods like cement, which were subject to the President's sanction under Article 304(b), was ultra vires, and entry tax would be payable if cement was imported for use in works contracts, but local sales tax would not be payable if entry tax had been paid.

Disposition:
The writ petitions were disposed of with no order as to costs.