2018 (6) TMI 1334 - HC - VAT and Sales Tax

Levy of Surcharges for promoting indigenous and local business. - Constitutional validity of Sub section (1A) of Section 3 of the Kerala Surcharge on Taxes Act, 1957 - demand of surcharge at the rate of 10 percent on the output tax collected - The case of the petitioners is that dealers who do not import into the State more than 50 percent of their stock, but nevertheless fulfilling all the remaining conditions mentioned in the impugned provision, are not subjected to the levy under the said provision and therefore the said levy is also a levy on the goods imported into the State. Held that - The impugned levy was introduced in Section 3 of the Act in terms of the Kerala Finance Act, 2008 - The object of the legislation as evident from the Budget Speech is that the same was introduced with a view to augment the revenue for the purpose of implementing social security measures. Though in the counter affidavit filed by the State it is contended that the impugned levy was introduced with the specific objective of promoting indigenous and local business as well, such an object is absent in the Budget Speech of the Minister. Had the same been one of the objectives of the legislation, I have no doubt in my mind that the same would have certainly reflected in the Budget Speech of the Minister with supporting empirical data. In the absence of such an objective in the Budget Speech, the stand taken by the State in the counter affidavit that the impugned levy was introduced with the objective of promoting indigenous and local business cannot be accepted as a bonafide one. If the object of the legislation is augmentation of revenue, a classification of the dealers based on the criterion viz., whether they import goods into the State is per se unjustifiable and unintelligible. There is no hesitation to hold that the impugned levy is discriminatory and violative of Article 301 read with clause (a) of Article 304 as also Article 14 of the Constitution. The contention that the impugned levy is only an additional tax on multi national companies falling within the criteria provided therein, and the same, therefore, does not in any way impede trade or business cannot be accepted, for the liability to pay surcharge applies only to multi national companies who import goods into the State from other States. The contention of the learned Government Pleader that Article 301 is not attracted in the instant case as the impugned levy is only a levy based on the turnover of the dealer also cannot be accepted. Petition disposed off.

Issues Involved:
1. Constitutionality of Subsection (1A) of Section 3 of the Kerala Surcharge on Taxes Act, 1957.
2. Violation of Article 301 of the Constitution.
3. Violation of Clause (a) of Article 304 of the Constitution.
4. Violation of Article 14 of the Constitution.

Detailed Analysis:

1. Constitutionality of Subsection (1A) of Section 3 of the Kerala Surcharge on Taxes Act, 1957:
The petitioner challenged the constitutionality of Subsection (1A) of Section 3 of the Kerala Surcharge on Taxes Act, 1957, which mandates a surcharge of 10% on the output tax collected by certain national or multinational companies functioning in the State as retail chains or direct marketing chains. The petitioner argued that this provision is unconstitutional. The State, in its defense, contended that the levy was introduced to increase the State's revenue and promote local business.

2. Violation of Article 301 of the Constitution:
The petitioners argued that the impugned levy violates Article 301 of the Constitution, which ensures that trade, commerce, and intercourse throughout the territory of India shall be free. They contended that the levy discriminates against goods imported from other States, thus creating an inter-state barrier. The State countered that Article 301 is a stand-alone provision and the levy does not impede trade or business, as it is merely an additional tax on multinational companies based on their turnover.

3. Violation of Clause (a) of Article 304 of the Constitution:
The petitioners maintained that the levy does not conform to Clause (a) of Article 304, which allows States to impose taxes on goods imported from other States only if similar goods produced in the State are subject to the same tax and there is no discrimination between the two. The State argued that the levy was within its legislative competence and aimed at economic parity and revenue increase.

4. Violation of Article 14 of the Constitution:
The petitioners also contended that the impugned levy violates Article 14 of the Constitution, which ensures equality before the law. They argued that the provision discriminates against certain dealers based on arbitrary criteria, such as the percentage of stock imported from outside the State and the turnover threshold.

Court's Analysis and Judgment:
The court analyzed the impugned provision in light of the Constitution and relevant case law. It noted that the provision applies only to dealers who cumulatively meet specific conditions, including being a company, functioning as a retail or direct marketing chain, importing at least 50% of their stock from outside the State, having at least 75% of their sales as retail business, and having a turnover exceeding ?5 crores per annum. The court found that this differentiation is not inspired by an element of unfavorable bias against goods imported from outside the State.

However, the court held that the differentiation made among dealers based on whether they import goods into the State is not supported by valid reasons. The primary objective of the legislation, as evident from the Budget Speech, was to augment revenue for social security measures, not to promote local business. The court concluded that the classification based on the importation of goods is unjustifiable and unintelligible, thus violating Article 14 and Article 301 read with Clause (a) of Article 304 of the Constitution.

Conclusion:
The court declared Subsection (1A) of Section 3 of the Kerala Surcharge on Taxes Act, 1957, as discriminatory and violative of Articles 301 and 14 of the Constitution. All proceedings and orders based on this provision were quashed, and any surcharge paid by the petitioners under this provision was ordered to be refunded.

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