2020 (8) TMI 108 - HC - VAT and Sales Tax

Constitutional validity of Section 3(1A) of the Kerala Surcharge on Taxes Act, 1957 - Levy of surcharge on sales and purchase taxes - additional levies on the big chains coming into the retail sector - HELD THAT - It is by now a settled law that the surcharge is in the nature of tax and that being so, levy of surcharge is not only violative of Article 301, but unconstitutional, unless similar levy of surcharge is also imposed on goods manufactured or produced in the State of Kerala. Section 3(1A) does not satisfy the first limitation prescribed under Article 304(a), i.e., similar levy on dealers engaged in sale of local goods and the second limitation permitting the State to levy a tax under Article 304(a) to be not discriminatory - The levy should not create any discrimination between the goods so imported or manufactured and produced. State Government in the matter of levy of taxes cannot discriminate between the goods imported from other States and manufactured or produced within the State levying such tax. The whole doctrine of classification is based upon the distinction and on a well known fact that the circumstances which govern one set of the persons and objects may not necessarily be the same governing the other set of persons - there is no illegality or perversity in the order of the learned single Judge to form a different opinion than the one held. Appeal dismissed.

Issues Involved:
1. Constitutional validity of Section 3(1A) of the Kerala Surcharge on Taxes Act, 1957.
2. Discrimination in levy of surcharge on national/multinational companies.
3. Violation of Articles 301 and 304(a) of the Constitution of India.
4. Justification and rationality of the legislative classification.

Detailed Analysis:

1. Constitutional Validity of Section 3(1A) of the Kerala Surcharge on Taxes Act, 1957:
The writ petitions challenged the constitutional validity of Section 3(1A) of the Kerala Surcharge on Taxes Act, 1957, which imposed a surcharge on national or multinational companies functioning as retail chains or direct marketing chains. The Single Judge allowed the petitions, declaring the provision discriminatory and unconstitutional. The provision required the following conditions to be met cumulatively for the surcharge to apply:
- The dealer must be a national or multinational company.
- It must function as a retail chain or direct marketing chain in Kerala.
- It must import at least 50% of its stock from outside Kerala or the country.
- 75% of its sales must be retail business.
- Its total turnover must exceed five crore rupees per annum.

2. Discrimination in Levy of Surcharge on National/Multinational Companies:
The appellant-State argued that the levy was not discriminatory as it targeted big retail chains based on demand from various sections of society. However, the respondents contended that the surcharge discriminated against dealers importing more than 50% of their goods, as opposed to those procuring locally, thus violating Article 304(a) of the Constitution. The court noted that the differentiation intended to benefit a distinct class of industries for revenue purposes, not for the welfare of a disadvantaged section, making the levy discriminatory.

3. Violation of Articles 301 and 304(a) of the Constitution of India:
The appellant-State cited various Supreme Court judgments to argue that the levy did not violate Articles 301 and 304(a), which ensure free trade and non-discriminatory taxation. The court referred to the majority view in Jindal Stainless Steel Ltd. v. State of Haryana, emphasizing that only discriminatory taxes are prohibited under Article 304(a). The court found that the surcharge created an unfavourable bias against imported goods, failing the test of non-discrimination and reasonable classification.

4. Justification and Rationality of the Legislative Classification:
The appellant-State argued that the levy was based on "intelligible differentia" and aimed to promote small businesses and indigenous manufacturers. The court, however, held that the classification was not rational or reasonable, as it favoured local retailers over big retail chains without any empirical data or time limitation. The court emphasized that any legislative differentiation must be supported by valid reasons and should not create an unfavourable bias.

Conclusion:
The court upheld the Single Judge's decision, declaring Section 3(1A) of the Kerala Surcharge on Taxes Act, 1957, unconstitutional. The appeals were dismissed, reaffirming that the impugned levy violated Articles 301 and 304(a) of the Constitution by creating discriminatory treatment against dealers importing goods from outside Kerala. The legislative classification was deemed unreasonable and not based on intelligible differentia.

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