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TMI Blog1998 (6) TMI 547X X X X Extracts X X X X X X X X Extracts X X X X ..... idity of this Act was challenged and ultimately upheld in S. Kodar v. State of Kerala reported in [1974] 34 STC 73 (SC). It was held that the Additional Sales Tax Act is really a tax on sales and not on the income of the dealer. Secondly, it was held that on the mere fact the dealer was disabled from passing on the incidence of tax to the purchaser, it cannot be held that the Act was in violation of article 19(1)(g) or 19(1)(f) of the Constitution of India. 3.. Lastly, the contention of different rates of tax were being imposed on different dealers depending upon their turnover and there is violation of article 14 was also rejected. It is in this back ground that the impugned amendment Act 31 of 1996 came into force on August 1, 1996. Section 2 of the impugned Act is as follows: In section 2 of the Tamil Nadu Additional Sales Tax Act, 1970 (hereinafter referred to as the principal Act), in sub-section (1),- (i) in clause (a), for the word dealer , the words casual trader or agent of a non-resident dealer or a local branch of a firm or company situate outside the State shall be substituted; (ii) after clause (a) and before the proviso thereto, the following shall be inse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mil Nadu were as under: "Assessment year Turnover (All India) Additional TNGST Sales Tax Rs. Rs. Rs. 1994-95 (31-3-95) 1491 lakhs 5,88,33,398 10,58,321 1995-96 (31-3-96) 1901 lakhs 8,04,42,947 13,74,033." 6.. The petitioners are called upon to pay additional sales tax, which according to the petitioners is arbitrary and discriminatory. They complain that the companies whose principal place of business or head office is in Tamil Nadu do not pay any additional sales tax up to an extent of Rs. 100 crores. It is pointed out that the impugned Act operates against the assessee whose all India turnover may be less than rupees one hundred crores whereas the company in Tamil Nadu having a higher turnover is exempt from additional sales tax. For example, an assessee, having an all India turnover of just Rs. 1 crore with turnover in Tamil Nadu of more than Rs. 10 lakhs will have to pay additional sales tax because of merely being situated outside Tamil Nadu. Whereas a company situated in Tamil Nadu having an all India turnover in excess of Rs. 100 crores than Rs. 10 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whose head office was outside the State of Tamil Nadu. 8.. The objects of the amendment, according to the counter-affidavit are as follows: (a) To grant relief to certain classes of dealers who have taxable turnover less than Rs. 100 crores per annum. (b) To have even playing field both for manufacturers in the State with a taxable turnover exceeding Rs. 100 crores and with a manufacturer in other States selling through agents/branches, the existing rate of additional sales tax is kept unchanged. (c) To levy additional sales tax on principal whose taxable turnover in respect of sale of his goods through agent when combined, exceeds Rs. 100 crores. This provision has been inserted so as to avoid the tendency of a dealer with a taxable turnover exceeding Rs. 100 crores per annum, to create agent within the State and thereby avoid additional sales tax. 9.. It is also pointed out that a casual trader or agent of a non-resident dealer is a separate class by himself. Under section 3(1) of the TNGST Act, 1959 the casual trader or agent of a non-resident dealer is excluded while fixing the minimum turnover limit. They are made liable to pay tax on the entire turnover, irresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sam. The validity of the Act was challenged because the tax on carriage of tea through the State of Assam had the effect of interfering with the freedom of trade and commerce and intercourse, apart from certain other grounds. It was also challenged on the ground of violation of article 14. The Assam High Court dismissed the writ petition and upheld the validity of the enactment. Sinha, C.J., in a minority judgment upheld the validity of the Act. In doing so, the learned Chief Justice was of the opinion that taxation per se did not have the effect of abridging or curtailing the freedom of trade contemplated by articles 301, 302, etc. At the same time, the learned Judge was careful enough to observe as follows: That conclusion leads to a discussion of the other extreme position that taxation is wholly out of the purview of article 301. That extreme position is equally untenable in view of the fact that article 304 contains, and article 306, before it was repealed in 1956, contained reference to taxation for certain purposes mentioned in those articles. But article 306, which now stands repealed, contained references to tax or duty on the import of goods into one State from another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the country. After considering section 297 of the Constitution Act, 1935, the majority judgment gave a finding as under: That is why we are inclined to hold that the broad and unambiguous words used in article 301 are intended to emphasise that the freedom of trade, commerce and intercourse guaranteed was richer and wider in content than was the case under section 297; how much wider and how much richer can be determined only on a fair and reasonable construction of article 301 read along with the rest of the articles in Part XIII. In our opinion, therefore, the argument that tax laws are outside Part XIII cannot be accepted. Again the majority judgment posed the following question: Thus the intrinsic evidence furnished by some of the articles of Part XIII shows that taxing laws are not excluded from the operation of article 301; which means that tax laws can and do amount to restrictions freedom from which is guaranteed to trade under the said part. Does that mean that all tax laws attract the provisions of Part XIII whether their impact on trade or its movement is direct and immediate or indirect and remote? Ultimately they came to a conclusion as follows: We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Legislatures in the fields allocated to them would be meaningless. In our view the concept of freedom of trade, commerce and intercourse postulated by article 301 must be understood in the context of an orderly society as a part of a Constitution which envisages a distribution of powers between the States and the Union, and if so understood, the concept must recognise the need and the legitimacy of some degree of regulatory control, whether by the Union or the States; this is irrespective of the restrictions imposed by the other articles in Part XIII of the Constitution. We are, therefore, unable to accept the widest view as the correct interpretation of the relevant articles in Part XIII of the Constitution. The ultimate opinion of the apex Court is rendered in the following lines: We have, therefore, come to the conclusion that neither the widest interpretation nor the narrow interpretations canvassed before us are acceptable. The interpretation which was accepted by the majority in the Atiabari Tea Co. Ltd. v. State of Assam [1961] 1 SCR 809; AIR 1961 SC 232 is correct, but subject to this clarification. Regulatory measures or measures imposing compensatory taxes for the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mportance is Shree Mahavir Oil Mills v. State of Jammu and Kashmir reported in [1997] 104 STC 148 (SC). In that case the Government of Jammu and Kashmir issued a notification with a view to protect the local edible oil industries. The goods manufactured by a dealer operating as a small-scale industrial unit in the State were exempted from payment of tax to the extent and for the period mentioned in the schedule to the notification. All the units manufacturing edible oil in the State were small-scale industrial units. The result of the said notification was that manufacturers of an edible oil in other States were obliged to pay sales tax on the sales effected by them in the State of Jammu and Kashmir at the rate of 4 per cent while the local manufacturers were totally exempt from tax. One other important factor is that when the rate of tax was 4 per cent there was no challenge and it was only when the rate was increased to 8 per cent that the validity was challenged. The ramifications of articles 301, 303 and 304 were considered in detail. Observed the apex Court: The clause, though worded in positive language has a negative aspect. It is, in truth, a provision prohibiting discrimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranteed by article 301, viz., power of taxation by the States. (We need not refer to the other articles in Part XIII for the purposes of this case). 16.. The learned Additional Advocate-General no doubt relied on certain passages in this judgment to suggest that only if the Act imposes any direct restriction on the free movement of such goods it attracts the provisions of article 301. It was also pointed out that restrictions can be imposed on the free movement of trade after satisfying the requirements of article 304(b). Again it is only if they hamper the flow of trade that the restrictions can be invalidated. For instance, compensatory taxes or regulatory measures can be undertaken. A passage in State of Madras v. N.K. Nataraja Mudaliar reported in [1968] 22 STC 376 (SC) was relied upon by the Revenue. That passage is as follows: The flow of trade does not necessarily depend upon the rates of sales tax: it depends upon a variety of factors, such as the source of supply, place of consumption, existence of trade channels, the rates of freight, trading facilities, availability of efficient transport and other facilities for carrying on trade. Instances can easily be imagined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de to a judgment of Supreme Court of USA, in West Lynn Creamery Inc. v. Jonathan Healey, a judgment rendered on June 17, 1994 in case No. 93-141. In that case a levy was imposed only for the purpose of protecting producers of milk in the State of Massachusetts. The levy was invalidated on the ground that the fund, distributed among milk producers of Massachusetts State alone, created principally from taxes on the sale of milk produced in other States. After considering all the above questions the Supreme Court has clearly laid down the following propositions of law. They are as follows: The States are certainly free to exercise the power to levy taxes on goods imported from other States/Union territories but this freedom, or power, shall not be so exercised as to bring about a discrimination between the imported goods and the similar goods manufactured or produced in that State. The clause deals only with discrimination by means of taxation; it prohibits it. The prohibition cannot be extended beyond the power of taxation. It means in the immediate context that States are free to encourage and promote the establishment and growth of industries within their States by all such mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover tax . On facts, we have already referred to the fact that the petitioners have shown on facts that they have been prejudiced and they find it impossible to compete with other dealers who have been granted exemption up to rupees one hundred crores. This itself is sufficient to hold that the discriminatory treatment offends Chapter XIII of the Constitution of India. The attempt of the learned Advocate-General who suggests that the impugned Act does not by itself affect the free-flow of trade and commerce cannot be accepted. We have already indicated at the time referring to the decision, the passages relied on by the learned Additional Advocate-General. The proposition is not new and it is already considered and on the facts of the case there is no room for upholding the impugned enactment. It was argued for the respondent that a non-resident dealer may have several agents in the State of Tamil Nadu and since all the agents turnover cannot be clubbed together and assessed in the hands of the non-resident dealers the exemption up to rupees one hundred crores was denied in favour of the non-resident dealers. This argument is not based on any fact, nor did the revenue furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1963] 48 ITR 21 (SC); AIR 1963 SC 591 this proposition was brought out by the Supreme Court. While upholding the classification into two areas like Madras area and T.C. area for imposition of agricultural income-tax, the apex Court observed as follows: But in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the Legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the Legislature to classify is of wide range and flexibility so that it can adjust its system of taxation in all proper and reasonable ways. Again the Supreme Court observed: [Khandige Sham Bhat v. Agricultural Income-tax Officer [1963] 48 ITR 21 (SC); AIR 1963 SC 591]: In such a situation it cannot be said that the Legislature has arbitrarily, with an evil eye, selected the most advantageous period for the purpose of fixing the rate of taxation. The said discussion leads to the only conclusion that the Legislature in its sincere attempt to meet a difficult situation made a law adopting one of the diverse methods open to it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 25.. Lastly, in Loharn Steel Industries Ltd. v. State of Andhra Pradesh reported in [1997] 105 STC 30 (SC), after holding that the notification offended article 304(a) of the Constitution of India, the apex Court molded the relief by relying on an earlier judgment in State of Bombay v. United Motors (India) Ltd. reported in [1953] 4 STC 133 (SC). Observed the Supreme Court: There is no need, therefore, to strike down the entire tax exemption which is granted to all re-rolled steel products sold in the State of Andhra Pradesh and manufactured out of tax-paid raw material purchased in the State of Andhra Pradesh. The discriminatory provision is clearly severable and can be struck down. 26.. Coming to the facts of the present case, Mr. C. Natarajan, the learned counsel for the petitioner, argues that having regard to the budget speech made by the honourable Chief Minister and the intention to give exemption up to rupees one hundred crores because of the loaded sales tax and having regard to the fact that the discrimination made against the casual trader or agent of a non-resident or a local branch of a firm or company situated outside the State is to be held as ultra vires, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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