2005 (2) TMI 155 - HC - VAT and Sales Tax

Validity Of Circular issued by the Central Board of Direct Taxes - circular expanded the scope or Section 194C - Challenged the correctness of the clarification - Commercial taxes - chain of fast food restaurants under the name and style Pizza Hut - HELD THAT - In our opinion, though the circular issued by the Commissioner u/s 28-A is not binding on the assessing authority or appellate authority, yet we cannot overlook the fact that since Commissioner is a superior authority to the assessing officer or appellate authority, it would be impracticable to expect the subordinate authority to take a view contrary to the view expressed by the Commissioner. Hence, in our opinion, the plea of alternative remedy cannot be accepted in such a case, and if the petitioner contends that the clarification has been issued contrary to the provisions of the Act or rules made thereunder, it will always be open to question the same under Article 226 of the Constitution of India. The petitioner was served with a pre-revision notice on the basis of a circular issued on 18-3-2002, which stipulated that branded pizza could be taxed at 16%. Accordingly the assessments which had been initially completed and which levied a tax of 2% u/s 3D of the Act were sought to be revised and tax at 16% was proposed to be levied. A plain reading of Section 3D, as it existed prior to 1-4-2002, indicates that it levies a tax on all foods and drinks sold in hotels and restaurants having a total turnover of not less than Rs. 25 lakhs at a flat rate of 2%. The section made no distinction as to whether the food and drink that was sold was branded or unbranded. Section 3D introduced the concept of sale of unbranded good and drink only in the amended provisions, which came into effect on 1-4-2002. Hence, in our opinion, it was clearly not permissible for the Commissioner of Commercial Taxes to issue a clarification that branded pizza would be taxed at 16%. As pointed out by the Supreme Court in the Kerala Financial Corporation Ltd. case 1994 (5) TMI 2 - SUPREME COURT this would really tantamount to amending the TNGST Act itself by a clarification issued under Section 28-A. A direction to levy tax at 16% when the charging section prescribes a flat rate of 2% is, in our opinion, not permissible. The impugned clarification is clearly contrary to the provisions of Section 3D as it stood prior to 1-4-2002. Therefore, the impugned clarification no. 156/2003, dated 26-6-2003 is liable to be quashed. It has been pointed out therein that once a clarification or circular is issued by a superior authority, it would be an exercise in futility to ask the assessee to raise an objection to the circular before an inferior authority, vide the Constitution Bench decision of the Supreme Court in Filterco v. CST 1986 (2) TMI 58 - SUPREME COURT . Subsequently, it was also held by the Supreme Court that clarifications or circulars could be challenged before the High Court under Article 226 of the Constitution, since the remedies of appeal or revision would be futile or not efficacious. In view of these decisions of the Supreme Court, the views taken by the Full Bench of the Tribunal and by the Division Bench of this Court do not lay down the correct law. It has already been observed by us that once circular/clarifications are issued by a superior authority, an appellate remedy to a lower authority would be futile, and not efficacious. Hence, we cannot agree with the learned single Judge in this respect. It may be mentioned that the dispute in the present case is only in respect of the tax liability prior to 1-4-2002. As regards the tax liability subsequent to 1-4-2002, the matter is pending before the statutory appellate authorities, and hence, we are not expressing any opinion about the same, except to say that the impugned circular should not be treated as binding on the said authorities as they are exercising judicial function. Thus, we quash the circular no. 156/2003, dated 26-6-2003 insofar as it relates to the tax liability for the period prior to 1-4-2002 to pay sales tax at 16%, and the assessment order, dated 10-12-2003. The order of the Tribunal dated 24-11-2003 is set aside. The writ appeal and the writ petitions are allowed. No costs. Consequently, W.P.M.Ps are closed.

Issues Involved:
1. Legality of the impugned clarifications issued by the Commissioner of Commercial Taxes.
2. Applicability of Section 3D of the Tamil Nadu General Sales Tax Act, 1959 before and after its amendment on 1-4-2002.
3. Binding nature of clarifications issued by the Commissioner under Section 28-A of the Act on the assessing and appellate authorities.
4. Availability and efficacy of alternative remedies under the Act.

Detailed Analysis:

1. Legality of the Impugned Clarifications:
The petitioner challenged the clarifications issued by the Commissioner of Commercial Taxes, which directed that branded pizza be taxed at 16% instead of the flat 2% rate applicable to food and drinks sold in hotels and restaurants. The Tribunal dismissed the petitions, stating that clarifications issued under Section 28-A could be challenged before the assessing authority and appellate authorities. The petitioner argued that the clarifications were contrary to the statutory provisions of Section 3D of the Act as it stood before 1-4-2002, which did not distinguish between branded and unbranded food and drinks.

2. Applicability of Section 3D Before and After Amendment:
Before 1-4-2002, Section 3D levied a flat rate of 2% sales tax on all food and drinks sold in hotels and restaurants with a turnover of more than Rs. 25 lakhs, without distinguishing between branded and unbranded items. After the amendment on 1-4-2002, Section 3D introduced a distinction, applying a 2% tax rate specifically to unbranded foods and drinks. The petitioner contended that the amended section's distinction between branded and unbranded foods became applicable only after 1-4-2002, and therefore, the pre-2002 clarification taxing branded pizza at 16% was invalid.

3. Binding Nature of Clarifications Under Section 28-A:
The court examined whether clarifications issued by the Commissioner under Section 28-A were binding on assessing and appellate authorities. It was held that while such clarifications are binding on authorities in their administrative capacity, they do not bind authorities acting in a judicial or quasi-judicial capacity. The court cited several Supreme Court decisions, including *Filterco v. CST* and *Union of India v. Ahmedabad Electricity Company Ltd.*, which held that clarifications or circulars issued by superior authorities could be challenged under Article 226 of the Constitution if they contradicted statutory provisions.

4. Availability and Efficacy of Alternative Remedies:
The court rejected the Tribunal's and the single judge's view that the petitioner should have pursued alternative remedies under the Act. It was observed that since the Commissioner is a superior authority, it would be impractical to expect subordinate authorities to take a view contrary to the Commissioner's clarification. The court held that the plea of alternative remedy could not be accepted when the clarification issued was contrary to the Act's provisions.

Conclusion:
The court quashed the impugned clarifications and the assessment order based on them, holding that the clarifications issued by the Commissioner of Commercial Taxes, which directed a 16% tax on branded pizza, were contrary to Section 3D of the Tamil Nadu General Sales Tax Act, 1959, as it stood before 1-4-2002. The court emphasized that clarifications under Section 28-A do not bind authorities acting in a judicial or quasi-judicial capacity and can be challenged under Article 226 of the Constitution. The writ appeal and writ petitions were allowed, and the Tribunal's order was set aside.

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