2010 (9) TMI 980 - HC - VAT and Sales Tax

Validity of G.O. Ms. No. 503, Revenue (CT-II) Department, dated May 8, 2009, whereby rule 67 of the Andhra Pradesh Value Added Tax Rules, 2005 was amended challenged as being illegal, arbitrary, in violation of articles 14, 19(1)(g) and 265 of the Constitution of India, contrary to the industrial policy of the State Government in G.O. Ms. No. 108 dated May 20, 1996, and the final eligibility certificate issued to the petitioners. Held that - Section 69(1) of the VAT Act has no application to those tax holiday units whose period of availment expired by March 31, 2005. As the converted units and the original tax deferment units constitute two distinct and separate classes, the contention that the persons similarly situated are treated differently does not merit acceptance.The challenge to the validity of the amendment, by G.O. Ms. No. 503 dated May 8, 2009, on the ground of arbitrariness and violation of article 14 of the Constitution of India must, therefore, fail. The Legislature, in its wisdom, has left it to the rule-making authority to decide the manner in which this degree of parity should be brought about and, since the amended rule does bring about a high degree of parity between the converted and the original tax deferment units, it cannot be said to fall foul of section 69(1) of the Act. Rule 67(5) makes it clear that the amount of tax deferment availed of in the first year of conversion shall be repaid in the succeeding month in which the period for which the unit is eligible for availment of incentives is completed. Since rule 67(5) stipulates that repayment of the deferred tax would commence on completion of the balance period of availment, the mode of repayment is prescribed by the Rules and not merely by the amended illustration. This contention also necessitates rejection Since the VAT Act has itself delegated the power to the rulemaking authority, the contention that the right of deferment can only be taken away by plenary legislation does not merit acceptance. Since the converted and the original tax deferment units constitute two different and distinct classes, the question of similarly situated persons being treated differently, or equals being treated unequally, resulting in discrimination does not arise. The contention that the Rules have been applied with retrospective effect must, therefore, fail. The contention, that the Government is not entitled to resile from its promise, by substituting the illustration to rule 67, is not tenable and necessitates rejection. It is only after G.O. Ms. No. 503 dated May 8, 2009 came into force was the notice issued on June 16, 2009 calling upon the petitioners to pay the tax deferred for the assessment years 2005-06 and 2006-07 which was payable by the petitioner in May, 2008 and May, 2009, respectively. The demand notice dated June 16, 2009 accords with the substituted illustration and rule 67(5) as notified in G.O. Ms. No. 503 dated May 8, 2009. The contention that the demand is contrary to rule 67, and suffers from the vice of arbitrariness, necessitates rejection. APGST Act was repealed in its entirety, and the A.P. Value Added Tax Act, 2005 came into force on April 1, 2005. The mere fact that G.O. Ms. No. 108 dated May 20, 1996 has not been amended, or the final eligibility certificate issued thereunder was not cancelled or varied, would not enable the petitioners to either claim tax exemption or that the period for repayment of the deferred tax should be 14 years.The writ petitions are, accordingly, dismissed.

Summary

Issues Involved:
1. Classification is arbitrary and in violation of Article 14 of the Constitution of India.
2. The amended rule is contrary to the parent Act.
3. The "illustration" is itself contrary to Rule 67.
4. Right of tax deferment for 14 years can be taken away only by plenary legislation.
5. The illustration to Rule 67, as substituted by G.O. Ms. No. 503 dated May 8, 2009, is discriminatory.
6. The amended rule, notified in G.O. Ms. No. 503 dated May 8, 2009, has been applied retrospectively.
7. No reasons are assigned for amending Rule 67.
8. Promissory estoppel.
9. Notice of demand is arbitrary.
10. Other contentions.

Detailed Analysis:

I. Classification is arbitrary and in violation of Article 14 of the Constitution of India:
The petitioners contended that the amendment by G.O. Ms. No. 503 dated May 8, 2009, differentiates between tax holiday units converted to tax deferment units and original tax deferment units, treating similarly situated persons differently, thus violating Article 14. The court held that the classification is reasonable and justified due to the inherent differences between the two classes. The court emphasized that in taxation matters, the Legislature has broad discretion, and courts should not interfere unless there is palpable arbitrariness.

II. The amended rule is contrary to the parent Act:
Petitioners argued that the amended rule prescribing a different mode of repayment for converted tax deferment units is beyond the powers conferred by Section 69(3) of the Act. The court rejected this contention, stating that the Legislature has delegated the power to prescribe the manner of repayment to the rule-making authority, which has been exercised appropriately to maintain parity between the two classes.

III. The "illustration" is itself contrary to Rule 67:
The petitioners claimed that the illustration appended to Rule 67, inserted by the impugned G.O., prescribes repayment not provided for under the Rules. The court clarified that illustrations elucidate the principle of the rule and are part of the rule itself. Rule 67(5) explicitly provides for the mode of repayment, making this contention invalid.

IV. Right of tax deferment for 14 years can be taken away only by plenary legislation:
The petitioners contended that the right of deferment for 14 years is a substantive right and cannot be altered by delegated legislation. The court held that since the VAT Act delegates the power to prescribe the mode of repayment to the rule-making authority, the contention lacks merit.

V. The illustration to Rule 67, as substituted by G.O. Ms. No. 503 dated May 8, 2009, is discriminatory:
The petitioners argued that the amended rule treats converted units differently from original tax deferment units, amounting to discrimination. The court found that the two classes are distinct and separate, and thus, the question of discrimination does not arise.

VI. The amended rule, notified in G.O. Ms. No. 503 dated May 8, 2009, has been applied retrospectively:
The petitioners argued that the amendment should not apply retrospectively. The court held that the rule operates prospectively, governing future repayment of deferred tax and does not recall the tax exemption granted earlier. Thus, the contention of retrospective application fails.

VII. No reasons are assigned for amending Rule 67:
The petitioners claimed that the amended rule suffers from non-application of mind as no reasons were recorded for its introduction. The court clarified that the making of a rule is a legislative act, and the rules of natural justice do not apply to legislative actions. Therefore, the rule cannot be struck down for failure to record reasons.

VIII. Promissory estoppel:
The petitioners contended that the State had gone back on its promise, invoking the doctrine of promissory estoppel. The court held that there can be no promissory estoppel against legislative functions, and the doctrine cannot be used to enforce a promise contrary to law. The court also noted the lack of specific details in the petitioners' affidavits to support the application of promissory estoppel.

IX. Notice of demand is arbitrary:
The petitioners argued that the demand notice is arbitrary as it applies the substituted illustration retrospectively. The court found that the demand notice was issued after the amendment came into force and accords with the substituted illustration and Rule 67(5). Thus, the contention of arbitrariness is rejected.

X. Other contentions:
The petitioners argued that benefits granted under G.O. Ms. No. 108 dated May 20, 1996, and the final eligibility certificates cannot be withdrawn without amending or canceling them. The court held that the APGST Act was repealed, and the VAT Act does not provide for such exemptions. Therefore, the petitioners cannot claim benefits contrary to the provisions of the VAT Act.

Conclusion:
The court dismissed the writ petitions, upholding the validity of the illustration and sub-rule (5) of Rule 67 of the A.P. Value Added Tax Rules, 2005, and the demand notices issued pursuant thereto. The court found no merit in the contentions raised by the petitioners, emphasizing the broad discretion of the Legislature in taxation matters and the prospective application of the amended rule.