2011 (3) TMI 1526 - HC - VAT and Sales Tax

Validity of clauses 2(d1), 8(4) and 8(5) of the U.P. Sheera Niyantran Adhiniyam as amended by the U.P. Act No. 10 of 2009 challenged Held that - The State Government in exercise of its legislative powers is free to frame laws in consonance with the basic framework of the Constitution but it cannot travel beyond the power conferred upon it under the Constitution of India. A statutory rule must be made in consonance with the constitutional scheme. A rule must not be arbitrary. It must be reasonable, be it substantive or a subordinate legislation. While defining the word captive consumption the State Government cannot assume to itself the power to levy a tax. Taxing entries are specifically mentioned and enumerated in List III. Unless the tax is in respect of a subject, which stands enumerated in the taxing specific entries , no levy/fees/charges can be imposed in the name of tax by the State Government. In these circumstances, various case laws relied on by the State Counsel are of no avail to them. Needless to say that a taxing statute, must be made in consonance with article 265 of the Constitution. In view of the above, we are of the considered opinion that the provisions of section 2(d1), section 8(4) and 8(5) of the U.P. Sheera Niyantran Adhiniyam amended by U.P. Act No. 10 of 2009, reproduced hereinabove, suffer from callous exercise of power and it can safely be concluded that the State has overstepped its limit of power.Accordingly, all the writ petitions are allowed and the aforesaid provisions are declared invalid.

Summary

Issues Involved:
1. Validity of Clauses 2(d1), 8(4), and 8(5) of the U.P. Sheera Niyantran Adhiniyam, 1964 as amended by U.P. Act No. 10 of 2009
2. Legislative Competence of the State to Levy Administrative Charges on Molasses
3. Constitutional Validity of Levying Administrative Charges on Captive Consumption
4. Impact of Supreme Court Judgments on the Amendments
5. Nature of Administrative Charges: Tax vs. Regulatory Fee

Detailed Analysis:

1. Validity of Clauses 2(d1), 8(4), and 8(5) of the U.P. Sheera Niyantran Adhiniyam, 1964 as amended by U.P. Act No. 10 of 2009:
The petitioners challenged the amendments introduced in the U.P. Sheera Niyantran Adhiniyam, 1964, specifically targeting clauses 2(d1), 8(4), and 8(5). The amendments included the definition of "molasses for captive consumption" and the imposition of administrative charges on molasses transferred for captive consumption. The petitioners argued that these amendments were discriminatory and violative of Article 14 of the Constitution of India. They contended that the definition of "captive consumption" was restrictive and arbitrary, limiting it to molasses transferred within the same premises or contiguous vicinity of the sugar factory without involving vehicular transportation.

2. Legislative Competence of the State to Levy Administrative Charges on Molasses:
The petitioners argued that the State Legislature lacked the competence to impose administrative charges on the transfer of molasses for captive consumption, as it did not constitute a sale. They contended that the State could only impose taxes on the sale or purchase of goods under Entry 54 of List II of the Seventh Schedule to the Constitution of India. The State, on the other hand, argued that the amendments were enacted in public interest for the regulation of molasses and were within the legislative competence under Entry 33 of List III of the Seventh Schedule.

3. Constitutional Validity of Levying Administrative Charges on Captive Consumption:
The petitioners asserted that the imposition of administrative charges on captive consumption was unconstitutional and arbitrary. They argued that the administrative charges were, in essence, a tax and not a regulatory fee, as held by the Supreme Court in Commissioner of Central Excise, Lucknow v. Chhata Sugar Co. Ltd. The petitioners contended that there was no element of quid pro quo in the administrative charges, making it a tax rather than a fee. The State argued that the administrative charges were regulatory fees for services rendered in regulating molasses.

4. Impact of Supreme Court Judgments on the Amendments:
The petitioners argued that the amendments were an attempt to nullify the Supreme Court's judgment in Dhampur Sugar Mills Ltd. v. State of Uttar Pradesh, which held that molasses required for captive consumption by sugar mills could not be reserved for other purposes. They contended that the State's amendments were a colorable exercise of power to override the Supreme Court's decision. The State countered that the amendments were necessary to regulate molasses in public interest and were not intended to negate the Supreme Court's judgment.

5. Nature of Administrative Charges: Tax vs. Regulatory Fee:
The petitioners argued that the administrative charges were a tax and not a regulatory fee, as there was no direct correlation between the charges and the services rendered by the State. They relied on the Supreme Court's judgment in Chhata Sugar Co. Ltd., which held that administrative charges on molasses were a tax. The State contended that the administrative charges were regulatory fees for services such as storage, gradation, and quality control of molasses, benefiting distilleries and industries.

Conclusion:
The court held that the amendments to the U.P. Sheera Niyantran Adhiniyam, 1964, specifically clauses 2(d1), 8(4), and 8(5), were invalid. The court concluded that the State Legislature lacked the competence to impose administrative charges on the transfer of molasses for captive consumption, as it did not constitute a sale. The imposition of administrative charges was deemed unconstitutional, arbitrary, and beyond the legislative competence of the State. The court also held that the administrative charges were a tax and not a regulatory fee, as there was no element of quid pro quo. Consequently, any proceedings undertaken under the amended provisions were declared illegal and set aside.