2009 (11) TMI 835 - HC - VAT and Sales Tax

Amendment brought about to section 6(1)(f) of the Kerala Value Added Tax Act, 2003 as amended by the Kerala Finance Act, 2006 (Act 22 of 2006) challenged as for unconstitutional in so far as it imposes levy of tax at 12.5 per cent in the execution of works contract and transfer is not in the form of goods though goods are not separately assessable and for further consequential reliefs Held that - Section 6(1)(f) as introduced by Act 22 of 2006 is well within the legislative competency of the State and that the retrospective operation given from July 1, 2006 to October 24, 2006 does not impose any unreasonable restriction in the matter of freedom of trade or impose any undue hardship Merely because section 6(1)(f) was introduced without a previous Bill being introduced with the recommendation of the Governor, the infirmity, if any, stands cured once the assent is obtained under article 200 of the Constitution of India in the light of the specific provision contained in article 255 of the Constitution, also that in so far as the rate of tax in respect of declared goods in excess of the rate as provided under section 15 of the Central Sales Tax Act will be unconstitutional, we hold that the ninth proviso added to section 6(1)(f) being clarificatory in nature and in that context it will be effective from the date on which section 6(1)(f) was brought into force and thus save the provision from being ultra vires of the Constitution and consequently we declare the rate of tax applicable to declared goods shall always be at the same rate as provided under the CST Act and that prescription of uniform rate of tax in the transfer of goods and execution of works contract where transfer is not in the form of goods but in some other form at the rate of 12.5 per cent and when the transfer is in the form of goods at the rate prescribed for the respective Schedules, is legal and valid.

Issues Involved:
1. Constitutionality of the amendment to Section 6(1)(f) of the Kerala Value Added Tax Act, 2003.
2. Legality of prescribing a uniform tax rate of 12.5% on works contracts.
3. Retrospective effect of the amendment and its compliance with Article 19(1)(g) of the Constitution.
4. Hardship caused by retrospective application of the amendment.
5. Levy of tax on declared goods at a rate higher than 4% as per the Central Sales Tax Act.
6. Classification and discrimination in taxing sales simplicitor versus execution of works contracts.

Detailed Analysis:

1. Constitutionality of the Amendment:
The amendment to Section 6(1)(f) of the KVAT Act was challenged on the grounds that it was not proposed in a Bill prior to its enactment, thus contravening Article 207 of the Constitution. The court held that although the Bill was not initially proposed, the subsequent assent by the Governor under Article 200 cured any infirmity as per Article 255 of the Constitution. Therefore, the amendment was deemed constitutionally valid.

2. Uniform Tax Rate of 12.5%:
The petitioners contended that prescribing a uniform tax rate of 12.5% on works contracts was illegal. The court referred to the Supreme Court's decision in Gannon Dunkerley & Co. v. State of Rajasthan, which allowed the Legislature to classify goods involved in works contracts separately and impose a uniform tax rate. Thus, the court upheld the legality of the uniform tax rate of 12.5% for works contracts.

3. Retrospective Effect and Article 19(1)(g):
The retrospective application of the amendment from July 1, 2006, was challenged as being violative of Article 19(1)(g) of the Constitution, which guarantees the freedom to carry on trade. The court held that the Legislature has the power to enact laws with retrospective effect, including tax laws. The court found that the retrospective period of three months (July 1, 2006, to October 24, 2006) did not impose any unreasonable restriction or undue hardship on the petitioners.

4. Hardship Due to Retrospective Application:
The petitioners argued that the retrospective application caused undue hardship as they could not pass on the increased tax liability to their customers. The court noted that the primary liability to pay tax is on the seller, not the buyer. The court also observed that the period of retrospectivity was only three months, which was not excessively long to cause significant hardship. Therefore, the court dismissed the argument of undue hardship.

5. Levy on Declared Goods:
The court addressed the issue of taxing declared goods at a rate higher than 4%, as prescribed under the Central Sales Tax Act. The court declared that the ninth proviso to Section 6(1)(f), which was added in 2008, clarified that declared goods should be taxed at the rates prescribed under the respective Schedules. The court held that for the period prior to this amendment, the tax on declared goods should be read down to 4%, thus aligning with the Central Sales Tax Act.

6. Classification and Discrimination:
The petitioners contended that the classification of sales simplicitor and execution of works contracts for different tax rates was discriminatory. The court relied on the Supreme Court's decision in Builders Association of India v. Union of India, which upheld the classification of goods involved in works contracts as a separate category for taxation purposes. Therefore, the court found no merit in the argument of discrimination.

Conclusion:
1. Section 6(1)(f) as introduced by Act 22 of 2006 is within the legislative competency of the State.
2. The retrospective operation from July 1, 2006, to October 24, 2006, does not impose unreasonable restrictions or undue hardship.
3. The absence of a prior Bill does not invalidate the amendment once the Governor's assent is obtained.
4. The tax rate on declared goods should be 4% as per the Central Sales Tax Act.
5. The uniform tax rate of 12.5% on works contracts is legal and valid.

Relief Granted:
The court allowed W.P. (C) No. 30027 of 2007, declaring the imposition of a higher tax rate on declared goods invalid. Other writ petitions were partly allowed, affirming that the tax rate on declared goods should be 4%. The court directed that no interest shall be payable on tax arrears for the period between July 2006 to October 2006.

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