2024 (1) TMI 441 - HC - VAT and Sales Tax

Levy of purchase tax and its applicability on dealer who opted for composition scheme - Constitutional Validity of Section 15(5)(e) of the KVAT Act - seeking declaration that Section 4(3)(d) of the Finance Act, 2007 as prospective in nature. Whether Section 15(5)(e) of KVAT Act, inserted by the Finance Act, 2007 is ultra vires Constitution? - HELD THAT - The object sought to be achieved by the Amendment is to encourage purchase from registered dealers. This object will fail and instead encourage purchase from dealers outside the State since goods purchased within the State are only taxable and therefore, the object sought to be achieved will not be fulfilled. It is recorded that State has all the machinery such as, Tax Inspectors, Flying Squads etc. to identify the URDs and to register them as dealers - in view of the admitted discrimination by the State, the Amendment shall not be sustainable - the Amendment is discriminatory in nature and also not in favour of the welfare of the economy of the State as it encourages purchases from outside the State - question answered in the affirmative. If the answer to the above question is in the negative, will it have retrospective effect i.e., from April 1, 2006? - HELD THAT - Since, first question is answered in the affirmative, this question does not require any consideration. Whether the order passed by the Hon ble Single Judge requires any interference? - HELD THAT - This question also answered in the affirmative. Section 15(5)(e) of the KVAT Act is declared ultra vires Constitution of India - Petition allowed.

Summary

Issues involved:
The judgment involves the validity of Section 15(5)(e) of the Karnataka Value Added Tax Act, 2003 (KVAT Act) and its retrospective effect, as well as the interference with the order passed by the Single Judge.

Validity of Section 15(5)(e) of KVAT Act:
The assessees opted for the composition scheme under Section 15(1) of the KVAT Act, where they were liable to pay 4% tax on the total consideration. The Finance Act, 2007 amended Section 15(5) by inserting clause 15(5)(e), making dealers executing works contracts and opting for composition liable to pay tax on purchases from unregistered dealers under Section 3(2) of the KVAT Act. The assessees challenged the amendment, arguing it violated Article 14 of the Constitution as it discriminated between purchases made within and outside the state. The State's justification for the discrimination was to encourage purchases from registered dealers, but the Court found the amendment discriminatory and not in favor of the state's economy as it could encourage purchases from outside the state. The Court held the amendment to be discriminatory and unsustainable, answering point (i) in the affirmative.

Retrospective Effect:
As the Court found the amendment to be discriminatory, the consideration for the retrospective effect of the amendment did not require further deliberation.

Interference with Single Judge's Order:
Based on the discriminatory nature of the amendment, the Court found it necessary to interfere with the Single Judge's order. Therefore, the Court answered this point in the affirmative.

Judgment:
1. Writ Appeals filed by the assessees were allowed, and Section 15(5)(e) of the KVAT Act was declared ultra vires the Constitution.
2. Writ Appeals filed by the State were dismissed.
3. No costs were awarded in this matter.