M/S. TVS MOTOR COMPANY LTD. versus THE STATE OF TAMIL NADU AND OTHERS on 12 October 2018

M/S. TVS MOTOR COMPANY LTD.

v.

THE STATE OF TAMIL NADU AND OTHERS

(Civil Appeal Nos. 10560-10564 of 2018)

OCTOBER 12, 2018

[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]

Tamil Nadu Value Added Tax Act, 2006: s. 19(5)(c) – Inputtax credit, set-off against tax liability on all intra-state and inter-state sales, allowed only if Form C as prescribed is filed – Validityof – On facts, claim of input tax credit by assessee – Issuance ofnotice by Revenue denying input tax credit availed against thetransactions for which Form C were not filled, and reversing crediton inter-State sales – Writ petition by assessee challenging theconstitutional vires of s. 19(5)(c) and r. 10(9)(a) – Held: s. 19(5)(c)is constitutionally valid – Provision was aimed at achieving a specificand justified purpose to protect the Revenue against clandestinetransaction resulting in invasion of tax and could not be treated asdiscriminatory – Sale by a dealer who is registered in the State ofTamil Nadu which is effected outside the State of Tamil Nadu willqualify for ITC only when the said sale is made to a registered dealer– Insofar sales to unregistered dealers, that too situated outside theState of Tamil Nadu, the State would not have any mechanism tofind out the genuineness of these sales – In essence, the State isputting the condition that ITC would be admissible when Form ‘C’is given, which can be given only in those cases where sale is to aregistered dealer – Prescribing such a condition in order to ensurethat there is no evasion, has a rationale purpose and objective –Tamil Nadu Value Added Tax Rules, 2007 – r. 10(9)(a).

Disposing of the appeals, the Court

HELD: 1.1 In ALD Automotive Pvt. Ltd. & Anr. v. TheCommercial Tax Officer & Ors. it was held that Input tax credit-ITC is a form of concession which is provided by the Act; it cannotbe claimed as a matter of right but only in terms of the provisions

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Aof the statute; therefore, the conditions mentioned in Section19(5)(c) of the Tamil Nadu Value Added Tax Act, 2006 had to befulfilled by the dealer; and sub-section (20) of Section 19 wasconstitutionally valid. In the process, that there were valid andcogent reasons for inserting that provision and the main purposewas to protect the Revenue against clandestine transactionBresulting in invasion of tax. The reasoning given while upholdingsub-section (20) of Section 19 shall equally apply while examiningthe validity of Section 19(5)(c) thereof. The High Court notedthat in respect of unregistered dealer in other States, the State ofTamil Nadu has no mechanism to prevent invasion of tax andCloss of revenue cost by trade with such unregistered dealers inthe State of Tamil Nadu. Therefore, the provision was aimed atachieving a specific and justified purpose and could not be treatedas discriminatory. [Para 41, 42][996-C-F]

ALD Automotive Pvt. Ltd. & Anr. v. The Commercial TaxDOfficer & Ors. SLP (Civil) Nos. 36112-36113 of 2013– relied on.

1.2 Section 19 of TNVAT Act deals with ITC. It incorporatesprovision for grant of ITC under certain circumstances and, atthe same time, also lays down the conditions in which such ITC

Ewould be admissible. It is in this context sub-section (5) of Section19 is to be analysed. Sub-section (5) stipulates certaincontingencies where such ITC would not be admissible. Clause(c) of this sub-section which provides that ITC would not beallowed on the purchase of goods sold as such or used in themanufacture of other goods and sold in the course of inter-StateFtrade or commerce falling under sub-section (2) of Section 8 ofthe Central Sales Tax Act. Sale by a dealer who is registered inthe State of Tamil Nadu which is effected outside the State ofTamil Nadu will qualify for ITC only when the said sale is made toa registered dealer. If it is to an unregistered dealer, it would notGbe admissible. This classification is based on intelligible differentiahaving a proper rationale. Insofar sales to unregistered dealersare concerned, that too situated outside the State of Tamil Nadu,the State would not have any mechanism to find out thegenuineness of these sales. In essence, the State is putting thecondition that ITC would be admissible when Form ‘C’ is given,Hwhich can be given only in those cases where sale is to a registered dealer. Prescribing such a condition in order to ensurethat there is no evasion, has a rationale purpose and objective.In the context of the nature of the ITC scheme, which is aconcession and not a right, leads to the conclusion that it wasopen to the Legislature to make such a provision. [Para 43][996-G-H; 997-A-C]

1.3 Wherever the State Government buys, sells, suppliesor distribute goods, it shall be deemed to be the dealer for thepurposes of TNVAT Act. At the same time, TNVAT Act does notrequire registration by the State Government inasmuch as Section38 which deals with registration of dealers explicitly provides,under sub-section (8) thereof, that this provision shall not applyto any State Government or Central Government. A conjointreading of the said two provisions would show that when a sale ismade to the State of Karnataka, it is made to a dealer but thatdealer is under no obligation to get itself registered under theTNVAT Act. Because of this exemption, no State Governmentdoes that and since it is not a registered dealer, it would not be ina position to issue any Form C. But for that, the genuineness ofsales made to a State Government cannot be doubted. Thissituation puts those dealers who are making sales to the StateGovernment in disadvantageous position, even when it is clearthat there is no possibility of tax evasion as there cannot be anysuch apprehension in case of sales to the State Government. Thebenefit of ITC is given whenever sale is made to a dealer outsideState of Tamil Nadu and the said dealer is a registered dealer.The provisions of Section 19(5)(c) are to be read down byconstruing that those dealers who are making sales exclusivelyto the other State Governments (i.e. outside the State of TamilNadu), the said States would be deemed as registered dealersfor the purposes of availing benefits of ITC. Otherwise, in such asituation, it would be difficult to hold that test of reasonableclassification is met in this limited context. [Para 47, 48][997-G-H; 998-A-E]

1.5 The judgment of the High Court is upheld with onerider, that in those cases where a dealer makes sales exclusivelyto the other State Government(s), benefit of ITC would be allowedwithout insisting on the furnishing of Form ‘C’. However, in orderto avail this benefit, a certificate from said the State Government A

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Ato whom the supplies are made would be obtained by the dealerclaiming ITC and submitted to the VAT authorities. [Para 49][998-E-F]

State of Madras v. N. K. Nataraja Mudaliar 1968 SCR(3) 829; State of Tamil Nadu and Another v. SitalakshiBMills Ltd. and Others (1974) 4 SCC 408 : [1974] 3SCR 1; Gwalior Rayon Silk Manufacturing (Wvg.) Co.,Ltd. v. Assistant Commissioner of Sales Tax and others(1974) 4 SCC 98 : [1974] 2 SCR 879; Messrs GovindSaran Ganga Saran v. Commissioner of Sales Tax andOthers 1985 (Supp) SCC 205 : [1985] SCR 985; BolaniCOres Ltd. v. State of Orissa (1974) 2 SCC 777 : [1975]2 SCR 138; Mahindra and Mahindra Ltd. v. Union ofIndia and Another (1979) 2 SCC 529 : [1979] 2 SCR1038; D. S. Nakara and Others v. Union of India (1983)1 SCC 305 : [1983] 2 SCR 165; Union of India andDOthers v. N.S. Rathnam and Sons (2015) 10 SCC 681 :[2015] 8 SCR 751; Jayam and Company v. AssistantCommissioner and Another (2016) 15 SCC 125 : [2016]6 SCR 787 – referred to.

From the Judgment and Order dated 29.10.2014 of the High Courtof Judicature at Madras in Writ Petition Nos. 29017, 29019, 29021, 29023and 29025 of 2013

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WITH

Civil Appeal Nos. 10566, 10567, 10565, 10568, 10576, 10569 of

2018.

Vijay Narayan, AG, Ms. Narmada Sampath, AAG, S. K. Bagaria,V. Giri, Sr. Advs., Aditya Sharma, Kunwar Ajit Singh, Akash Jindal, ManuBajaj, M/s. Parekh & Co., Anil Kaushik, Abhishek Mishra, AkashBhardwaj, Ms. Shilpa Singh, Mrs. T. Archana, K. K. Mani, Ms. M.Mishra, K. V. Ramkumar, K. V. Vijayakumar, Advs. for the appearingparties.

The Judgment of the Court was delivered by

A. K. SIKRI, J. 1. Leave granted.

2. This group of eleven appeals was heard together and is beingdisposed of by this common judgment as identical issues are involved inall these appeals.

3. At the outset, the issues involved in the present appeals are:whether Section 19(5)(c) of the Tamil Nadu Value Added Tax Act, 2006,Act No. 32/2006 (hereinafter referred to as “TNVAT Act”) and Rule10(9)(a) of the Tamil Nadu Value Added Tax Rules, 2007 (hereinafterreferred to as “Rules”) are ultra vires of Articles 14, 19(1)(g), 256 and301 of the Constitution of India as also the Central Sales Tax Act(hereinafter referred to as “CST Act”) and whether Notice dated August16, 2018 of the Revenue is liable to be quashed?

4. The instant appeals have been preferred against the commonimpugned judgment of the High Court of Judicature at Madras datedOctober 29, 2014 (hereinafter referred to as “Impugned Judgment I”) inthe writ petitions which were filed by the appellants and the impugnedjudgment dated 17[th] November, 2017 of the High Court of Judicature atMadras (hereinafter referred to as “Impugned Judgment II”) in W.P.No. 29393 of 2017.

5. The brief facts leading to the cases are as follows:

6. All the appellants herein are the Assessees under the TNVATAct and are duly registered on the file of their respective JurisdictionalCommercial Officers.

7. On January 17, 2005, a White Paper was released by theCommittee of Finance Ministers (hereinafter referred to as “White A

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APaper”), making it clear that Input Tax Credit (hereinafter “ITC”) wouldbe available to set-off against tax liability on all intra-state and inter-state sales. Paragraph 2.3 of the same states as follows:

“Coverage of Set-Off / Input Tax Credit

2.3 This input tax credit will be given for both manufacturers andtraders for purchase of inputs/supplies meant for both sale withinthe State as well as to other States, irrespective of when thesewill be utilised/sold. This also reduces immediate tax liability.

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Even for stock transfer/consignment sale of goods out of the State,input tax paid in excess of 4% will be eligible for tax credit.”C

8. Thereafter, on December 15, 2006, the TNVAT Act wasenacted under List II, Entry 54 of the Constitution of India and notifiedin the Official Gazette after receiving assent of the Governor (onDecember 14, 2006), to consolidate and amend the law relating to thelevy of tax on the sale or purchase of goods in the State of Tamil Nadu.DSection 19(5)(c) of the same read as follows:

“No input tax credit shall be allowed on the purchase of goodssold as such or used in the manufacture of other goods andsold in the course of inter-State trade or commerce fallingunder sub-section (2) of section 8 of the Central Sales TaxEAct, 1956. (Central Act 74 of 1956).”

9. Thereafter, on January 01, 2007, the Government of Tamil Nadu,in exercise of its powers under Section 80(1) of the TNVAT Act, notifiedthe Rules vide Notification No. SROA-(ai1)/2007 G.O.M.S.No. 1. Rule10(9)(a) of the same states as follows:F

“Input tax credit on inter-state sales shall be allowed only if FormCprescribed in the Central Sales Tax (Registration and Turnover)Rules, 1957 is filed.”

10. After the Assessment was completed for the appellants forAssessment Year 2007-08, they received Show Cause Notices from theGRevenue in and around 2013, proposing to reverse the ITC claimed madeby them on the ground that they had not filed the Declaration Form C forthe purpose of availing the concessional rate of tax. The appellants paidthe differential tax arising out of the Assessment order for 2007-08 aswell as the amount relating to proportionate ITC under process.

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11. Consequently, on 16[th] August, 2013, the Revenue issuedImpugned Notice in TIN 33450460109/2007-08 proposing to deny theITC credit availed against the transactions for which Form C were notfilled, and reversing credit on inter-State sales without Forms C in termsof the impugned Section 19(1)(c).

12. Aggrieved by the same, the appellants, who were Assesseesunder the TNVAT Act, preferred writ petitions challenging theconstitutional vires of 19(5)(c) of the TNVAT Act and Rule 10(9)(a) ofthe Rules contending that the same had been enacted in violation ofArticles 14, 19(1)(g), 246 and 301 of the Constitution of India. It wasurged by the appellants that Respondent No. 1 — State had enacted theAct under Entry 54 of List II of the Constitution of India in terms ofconsensus amongst States to bring about a nation-wide uniform taxationstructure/scheme for VAT and for the promotion of inter-State trade,commerce and industrialization, with its primary object to reduce thecascading effect of tax imposed at successive stages, either at the stageof usage as raw material or at the time of reselling of the article soproduced. They further urged that while the White Paper provided forset-off of the ITC even against inter-State sales, Section 19(5)(c) ofthe Tamil Nadu Act sought to negate the object of promoting inter-Statetrade and commerce.

13. It was urged by the appellants that Respondent No. 1 —State, having committed and consented before the Empowered Committeeof State Finance Ministers, vide the aforementioned White Paper,towards administration of VAT allowing ITC set-off against tax liabilityon intra-State sales or inter-State sales, sought to deviate on the issue interms of Section 19(5)(c) of the TNVAT Act, by not entitling a dealerwho effected inter-state sales under Section 8(2) of the Central SalesTax Act to ITC of the tax paid by him on local purchases.

14. The Respondents/Revenue, on the other hand, contended thatthe Taxation Laws (Amendment) Act, 2007 (Act No. 16/2007) hasamended the Central Sales Tax Act with effect from 01.04.2008 andprior to that, in cases of inter-State sales falling under Section 8(2) of thesame in cases of declared goods, the rate of tax was to be calculated attwice the rate applicable to the sale or purchase of such goods inside theappropriate State and in case of non-declared goods, the rate of taxapplicable was to be calculated at 10% or at the rate applicable to thepurchase of goods inside the appropriate State, whichever was higher.

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15. The appellants had also urged that the impugned Section andRule were ‘colourable legislation’, as they seek to override the supremacyof Entry 92A of List I of the Seventh Schedule of the Constitution ofIndia.

16. The Respondents had refuted this argument by contendingBthat as per the impugned provision, ITC was permissible if the inter-State sales were made under Section 8(1) of the CST Act after dulyfiling the Form C declaration. The same was not permissible inaccordance with Rule 10(9)(a) if the inter-State sales were made underSection 8(2) of the CST Act.

C17. It was also the case of the respondents that the impugnedprovisions were in tune with the recommendations of the EmpoweredCommittee of State Finance Ministers. They further threw light uponthe fact that the CST Act provided for multiple rates of tax, being differentfor sales made to registered dealers and sales made to non-registereddealers.D

18. The High Court of Judicature, vide the Impugned Judgment-Idated October 29, 2014, has dismissed the writ petitions thereby upholdingthe constitutional vires of Section 19(5)(c) of the TNVAT Act and Rule10(9)(a) of the Rules. At the same time, it has allowed the assessees/appellants to submit their responses to the Show Cause Notices and/orEchallenge the orders passed negativing their request for ITC, inaccordance with the TNVAT Act and Rules framed thereunder.

19. The Impugned Judgment-II dated November 17, 2017 aroseout of Writ Petition No. 29393 of 2017, challenging the constitutionalvires of Section 19(5)(c) of the TNVAT Act and Rule 10(9)(a) of theFRules, where the High Court of Judicature at Madras, while relying onits previous decision dated 29.10.2014 in Impugned Judgment-I, observedthat the same issue had arisen in the Impugned Judgment-I and the viresof the TNVAT Act and the Rules had been upheld therein and accordingly,dismissed the Writ Petition No. 29393/2017.

G20. Correctness of these judgments is the subject matter of instantappeals.

21. Before adverting to the respective submissions which weremade by the counsel for the appellants as well as learned AdvocateGeneral who appeared on behalf of the respondents, it would be apposite H

to scan through the impugned judgment dated October 29, 2014 tounderstand the rationale and reasoning which is given by the High Courtin arriving at its conclusions on the issues raised.

22. The High Court formulated following two questions whicharose for consideration “(1) Whether Section 19(5)(c) of TNVAT Act, 2006 and Rule10(9)(a) of TNVAT Rules, 2007 are ultra vires the provision ofCST Act, 1956?

(2) Whether the impugned provisions are violation of Articles 14,19(1)(9) and 301 of the Constitution of India?”

23. Thereafter, it took note of the relevant provisions of the CSTAct, TNVAT Act as well as Rules and also Article 301 of the Constitution.We deem it proper to reproduce the relevant portions of these Acts andRules at this stage itself.

“Central Sales Tax Act, 1956

S. 3. When is a sale or purchase of goods said to take place in thecourse of inter-State trade or commerce.-

- A sale or purchase of goods shall be deemed to take place in thecourse of inter-State trade or commerce if the sale or purchase- (a) occasions the movement of goods from one State toanother; or (b)is effected by a transfer of documents of title to thegoods during their movement from one State to another.

Explanation 1.- Where goods are delivered to a carrier or otherbailee for transmission, the movement of the goods shall, for thepurposes of clause (b), be deemed to commence at the time ofsuch delivery and terminate at the time when delivery is takenfrom such carrier or bailee.

Explanation 2.- Where the movement of goods commences andterminates in the same State it shall not be deemed to be amovement of goods from one State to another by reason merelyof the fact that in the course of such movement the goods passthrough the territory of any other State.

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S. 6. Liability to tax on inter-State sales.- (1)Subject to the otherprovisions contained in this Act every dealer shall, with effectfrom such date as the Central Government may, by notification inthe Official Gazette, appoint, not being earlier than thirty daysfrom the date of such notification, be liable to pay tax under thisAct on all sales [of goods other than electrical energy) effected-by him in the course of interState trade or commerce during anyyear on and from the date so notified.

[Provided that a deal shall not be liable to pay tax under this Acton any sale of good which, in accordance with the provisions ofsub-section (3) of Section 5 is a sale in the course of export ofthose goods out of the territory of India]

[(1A) A dealer shall be liable to pay tax under this Act on a sale ofany goods effected by him in the course of inter-State trade orcommerce notwithstanding that no tax would have been leviable(whether on the seller or the purchaser) under the sales tax lawof the appropriate State if that sale had taken place inside thatState.]

(2) Notwithstanding anything contained in sub-section (1) or sub-section (1A), where a sale of any goods in the course of inter-State trade or commerce has either occasioned the movement ofsuch goods from one State to another or has been effected toy atransfer of documents of title to such goods during their movementfrom one State to another, any subsequent sale during suchmovement effected by a transfer of documents of title to suchgoods- (a) to the Government or (b) to a registered dealer otherthan the Government if the goods are of the description referredto in sub-section (3) of section or shall be exempt from tax underthis Act:

Provided that no such subsequent sale shall be exempt from taxunder this subsection unless the dealer effecting the sale furnishesto the prescribed authority in the prescribed manner and withinthe prescribed time or within such further time as that authoritymay, for sufficient cause, permit:—

(a) a certificate duly filled and signed by the registered dealerfrom whom the goods were purchased containing the prescribed particulars in a prescribed form obtained from the prescribedauthority; and (b) if the subsequent sale is made to a registered dealer, adeclaration referred to in clause (a) sub-section (4) of section 8:

Provided further that it shall not be necessary to furnish thedeclaration referred to in clause (b) of the preceding proviso inrespect of a subsequent sale of goods if,—

(a) the sale or purchase of such goods is, under the sales tax lawof the appropriate State exempt from tax generally or is subject totax generally at a rate which is lower than three per cent, or suchreduced rate as may be notified by the Central Government, bynotification in the Official Gazette, under sub-section (1) of section8 (whether called a tax or fee or by any other name); and……….

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S. 8. Rates of tax on sales in the course of inter-State trade orcommerce— (1) Every dealer, who in the course of inter-Statetrade or commence, sells to a registered dealer other than theGovernment goods of the description referred to in sub-section(3), shall be liable to pay tax under this Act, which shall be threeper cent, of his turnover or at the rate applicable to the sale orpurchase of such goods inside the appropriate State under theSales Tax law of that State whichever is lower:

Provided that the Central Government may, by notification in theOfficial Gazette, reduce the rate of tax under this sub-section.

(2) The tax payable by any dealer on his turnover in so far as theturnover or any part thereof relates to the sale of goods in thecourse of inter-State trade or service not falling within sub-section(1), shall be at the rate applicable to the sale or purchase of suchgoods inside the appropriate State under the sales tax law of thatState; Explanation.—For the purposes of this sub-section, a dealer shallbe deemed to be a dealer liable to pay tax under the sales tax lawof the appropriate State, notwithstanding that he, in fact, may notbe so liable under that law.

S.9. Levy and collection of tax and penalties.—

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(2) Subject to the other provisions of this Act and the rules madethereunder, the authorities for the time being empowered to assess,re-assess, collect and enforce payment of any tax under the generalsales tax law of the appropriate State shall, on behalf of theGovernment of India, assess re-assess, collect and enforcepayment of tax, including any[3][interest or penalty, payable by adealer under this Act as if the tax or interest or penalty payable bysuch a dealer under this Act is a tax orinterest or penalty payableunder the general sales tax law of the State; and for this purposethey may exercise all or any of the powers they have under thegeneral sales tax law of the State; and the provisions of such law,including provisions relating to returns, provisional assessment,advance payment of tax, registration of the transferee of anybusiness, imposition of the tax liability of a person carrying onbusiness on the transferee of, or successor to, such business,transfer of liability of any firm of Hindu undivided family to paytax in the event of the dissolution of such firm or partition of suchfamily, recovery of tax from third parties, appeals, reviews,revisions, references,refunds, rebated, penalties,][5][charging orpayment of interest, compounding of offences and treatment ofdocuments furnished by a dealer as confidential, shall applyaccordingly:—

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Provided that if in any State or part thereof there is no generalsales tax law in force, the Central Government may, be rules madein this behalf make necessary provision for all or any of the matterspecified in this sub-section.

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Tamil Nadu Value Added Tax Act, 2006

S. 2 – Definitions:

(23) “input” means any goods including capital goods purchasedby a dealer in the course of his business; G

(32) “reversal of tax credit” means reversal of input tax creditalready claimed and availed under this Act; xx xx xx H

S. 19. Input tax credit.— (1) There shall be input tax credit ofthe amount of[tax paid] under this Act, by the registered dealer tothe seller on his purchases of taxable goods specified in the FirstSchedule :

(2) Input tax credit shall be allowed for the purchase of goodsmade within the State from a registered dealer and which are forthe purpose of —

(i) re-sale by him within the State; or

(ii) use as input in manufacturing or processing of goods in theState; or

(iii) use as containers, labels and other materials for packing ofgoods in the State; or

(iv) use as capital goods in the manufacture of taxable goods.

(v) sale in the course of inter-State trade or commerce fallingunder sub-sections (1) and (2) of section 8 of the Central SalesTax Act, 1956 (Central Act 74 of 1956).

(vi) Agency transactions by the principal within the State in themanner as may be prescribed.

(5) …….

(c) No input tax credit shall be allowed on the purchase of goodssold as such or used in the manufacture of other good and sold inthe course of inter-State trade or commerce failing under sub-section (2) of Section 3 of the Central Rules Act, 1956 (CentralAct 74 of 1956).

Tamil Nadu Value Added Tax Rule, 2007

10. Input tax credit.—(1) The input tax credit that can be deductedfrom the input tax payable month or year shall be calculated byusing the formula (A + B) - (C + D) Where, A = Input tax credit carried forward from the previous month oryear B = Input tax credit accrued during the month or year C = Input tax credit reversed during the month or year A

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AD = Input tax credit refunded during the month or year

(2) Every registered dealer who claims input tax credit under sub-section (1) of section 19 shall, produce the original tax invoice, insupport of his claim of the input tax credit, containing the followingdetails, namely:

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(a) A consecutive serial number;

(b) The date on which the invoice is issued;

(c) The name, address and the Taxpayer Identification Numberof the seller; C

(d) The name, address and the Taxpayer Identification Numberof the buyer; (e) The description of the goods; (f) The quantity or volume of the goods; D(g) The value of the goods; (h) The rate and amount of tax charged; and

(i) The total value of the goods.

(9) (a) Input tax credit on inter-state sales shall be allowed only ifElots ‘C’ prescribed in the Central Sales Tax (Registration andturnover) Rules, 1957 is filed.”

24. After taking note of the aforesaid provisions, the High Courtproceeded to discuss question no. (1). It pointed out that the definitionof “dealer” under Section 2(b) of the CST Act means the assesseeFunder the said Act and he is solely liable to pay tax under the CST Actwhether or not he is allowed by the law or contract to pass on or actuallypasses on the liability of his customers. The onus of proof that a personsought to be treated as a dealer is one who comes within the said definitionis on the assessing authority.

25. The definition of “sale” under Section 2(g) of the CST ActGmeans that a sale inside a State as well as an inter-State sale arising inthat State, has situs in that State in case of sale inside a State, it istaxable under the State law (TNVAT Act) and inter-State sale is liableto tax in the same State under the CST Act. Section 3 of the CSTActspeaks about when a sale or purchase of goods said to have taken place H

in the course of inter-State trade or commerce. Section 6 of the CSTAct speaks about liability to tax on inter-State sales and it is a chargingSection. Section 8 of the CST Act speaks about rates of tax on sales inthe course of inter-State trade or commerce and as per sub-section(1)of Section 8 if sale is effected by a dealer to a registered dealer goods ofthe description referred to in sub-section(3), it shall be liable to pay taxunder this Act which shall be 3% of the turnover or at the rate applicableto the sale or purchase of such goods inside the appropriate State underthe Sales Tax law of that State, whichever is lower. Section 8(2) saysthat if the sale of goods is in the course of inter-State trade or commercenot falling within sub-section(1) the tax payable shall be at the rateapplicable to the sale or purchase of such goods inside the appropriateState under the sales tax law of that State and as per explanation toSection 8(2), for the purpose of this sub-section, a dealer shall be deemedto be a dealer liable to pay tax under the sales tax law of the appropriateState, notwithstanding that he, in fact, may not be so liable under thatlaw.

26. The High Court also noticed that the vires of the aforesaidprovisions was tested by the Constitution Bench of this Court in State ofMadras vs. N.K. Nataraja Mudaliar[1]. The Constitution Bench upheldthe provisions of Section 2(b) of the CST Act and repelled the challengepredicated on Articles 301 and 303(1) of the Constitution of India. Thisposition is reiterated in State of Tamil Nadu and Another vs. SitalakshiMills Ltd. and Others[2].

27. Discussing the provisions of Section 8(1) and (2) of the CSTAct, the High Court pointed out that Section 8(1) gives preferentialtreatment to sale by a dealer to a registered dealer. Vires of this provisionhas also been upheld in Gwalior Rayon Silk Manufacturing (Wvg.)Co., Ltd. vs. Assistant Commissioner of Sales Tax and others[3].

28. Discussing ratio of the aforesaid judgments, the High Courtpointed out that this Court noted the proposition that the aforesaid provisionwas to check the evasion of tax on inter-State sales and to preventdiscrimination between the rates in one State and those in other States,the Parliament thought fit to enact Section 8(2)(b) of the CST Act and 1 AIR 1969 SC 147 (CB) = 1968 SCR (3) 8292 (1974) 33 STC 200 (SC) = 1974 AIR 1505 = (1974) 4 SCC 4083 (1974) 4 SCC 98

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Afurther held that the object of the law apparently is to deter inter-Statesales to unregistered dealers as such inter-State sales would facilitateevasion of tax and the fixation of the rate of local sales tax is essentiallya matter for the State legislatures and the Parliament does not have anycontrol in the matter. It has been further held in the said decision that itis in public interest to see that in the guise of freedom of trade, they doBnot evade the payment of tax and it is an effective safeguard against theevasion of tax.

29. Based on the aforesaid discussion, the High Court hasanswered question No. 1 against the appellants in the following manner:

C“It is the specific stand of the official respondents/StateGovernment in para 14 of the counter affidavit that where salesare made to registered dealers on filing of Form ‘C’ declarationthe entire transaction goes into the mainstream and therebyautomatically comes into the net of taxation in the purchasingState wherever applicable and if sales are made to other thanDregistered dealers, it is option of the purchasing dealer concernedto disclose it or not and there is, therefore, possibility of suchtransactions being wrapped up and disappearing into oblivionwithout even surfacing again for the purpose of levy of taxotherwise legally due on such transactions. Therefore, theEcontention put forward by the respective learned counsel appearingfor the writ petitioners that such provision aggravate the CentralSales Tax rate or liability under Section 8(2) of CST Act by TNVATis unsustainable and therefore, question no. 1 is answered innegative against the writ petitioners.”F30. While entertaining question no. (2), namely, whether theimpugned provisions are violative of Articles 14, 19(1)(g) and 301 of theConstitution, the High Court pointed out that on this aspect, argument ofthe assessees was that the words ‘rate applicable’ employed in Section8(2) of the CST Act has to necessarily take into account the effectiverate after considering the deductions made under Section 3(3) of theGTNVAT Act. It was argued that Section 19(5)(c) of the TNVAT Act,which denied ITC on purchase of goods sold or used in the manufactureof other goods and falls within Section 8(2) of the CST is per sediscriminatory. The High Court took note of the scheme of TNVAT Actand found that though Section 3(2) stipulated many taxable transactions, H

only few such transactions are carved out to give benefit of ITC. Afterdiscussing certain judgments of this Court and other High Courts, theHigh Court has observed that the legal position was that right to claimITC is not a vested right or an indefeasible right. It is a benefit conferredunder the Act in certain contingencies and subject to conditions prescribedin the statutory scheme. Therefore, it is open to the State Legislature toprovide for conditions and restrictions while extending the concession.Likewise, it was also necessary for any assessee to claim input credit tofulfill those conditions. Thus, the provision made in the statute thatunregistered dealers in other States would not be entitled to ITC wasjustified. The High Court noted that specific stand of the StateGovernment was that in respect of such unregistered dealers in otherstates, the State of Tamil Nadu had no mechanism to prevent evasion oftax and loss of revenue caused by trade with such unregistered dealersin the State of Tamil Nadu. This kind of evasion, in the opinion of theHigh Court, was not violative of the constitutional provisions containedin Articles 14, 19(1)(g) and 301.

31. Mr. Giri, learned senior counsel appearing in some of theseappeals pressed into service the same arguments which were advancedbefore the High Court and attempted to find fault with the approach ofthe High Court. His submission was that once the tax was paid at anintermediary stage, the dealers could not be denied benefit of claimingcredit thereof and Section 19(5)(c) of TNVAT Act went contrary to thevisions of CST Act and, therefore, was ultra vires. He referred to thefollowing judgments of this Court in support and, in particular, followingportions in those judgments.

(i) Messrs Govind Saran Ganga Saran vs. Commissioner of SalesTax and Others[4]:

(i) Messrs Govind Saran Ganga Saran vs. Commissioner of SalesTax and Others[4]:

“6.The components which enter into the concept of a tax arewell known. The first is the character of the imposition known byits nature which prescribes the taxable event attracting the levy,the second is a clear indication of the person on whom the levy isimposed and who is obliged to pay the tax, the third is the rate atwhich the tax is imposed, and the fourth is the measure or valueto which the rate will be applied for computing the tax liability. Ifthose components are not clearly and definitely ascertainable, it is 4 1985 (Supp) SCC 205

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Adifficult to say that the levy exists in point of law. Any uncertaintyor vagueness in the legislative scheme defining any of thosecomponents of the levy will be fatal to its validity.

(ii) Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd.:

“70. We think that Parliament fixed the rate of tax on inter-Statesales of the description specified in Section 8(2)(b) of the Act atthe rate fixed by the appropriate State Legislature in respect ofintra-State sales with a purpose, namely, to check evasion of taxon inter-State sales and to prevent discrimination between residentsin one State and those in other States. Parliament thought thatunless the rate fixed by the States from time to time is adopted asthe rate of tax for inter-State sales of the kind specified in thesub-clause, there will be evasion of tax in inter-State sales as wellas discrimination. We have already pointed out in our judgment inCivil Appeals No. 2547-2549 of 1969 and 105-106 of 1970 theobjectives which Parliament wanted to achieve by adopting therate of tax in the appropriate State for taxing the local sales. Andfor attaining these objectives Parliament could not have fixed therate otherwise than by incorporating the rate to be fixed fromtime to time by the appropriate State Legislature in respect oflocal sales. It may be noted that in so far as inter-State sales areconcerned, the Central Sales Tax Act, by Section 9(2) has adoptedthe law of the appropriate State as regards the procedure for levyand collection of the tax as also for imposition of penalties.

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71. There can be no doubt that Parliament can repeal the provisionsof Section 8(2)(b) adopting the higher rate of tax fixed by theappropriate State Legislature in respect of intra-State sales. IfParliament can repeal the provision, there can be no objection onthe score that Parliament has abdicated its legislative function. Itretains its control over the fixation of the rate intact. In otherwords, so long as Parliament can repeal the provisions of Section8(2)(b) adopting the higher rate of tax fixed by the StateLegislatures, it has not abdicated its legislative function. As alreadystated, this point has been expressly decided by the Privy Councilin Cobb & Co. Ltd. v.Kropp.”

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32. Mr. S.K. Bagaria, learned senior counsel appearing in theCivil Appeal arising out of SLP(Civil) No. 9326 of 2015, submitted that H

the appellant/dealer in this case was making supplies only to theGovernment and, therefore, there was no reason to nurture anyapprehension that there would be evasion of tax. He also submitted thatthis dealer had sales in Tamil Nadu and Karnataka wherein it was statedthat the appellant had effected sales to Karnataka State Governmentcovered under Section 8(2) of the CST Act. However, the appellantwas not entitled to ITC as per Section 18(5)(c) of the TNVAT Act buthad not declared reversal of ITC. Hence, the reversal of ITC wasproposed and the appellant was called upon to file objections, if any,thereto. In its reply to the said show cause notice the appellant pointedout that the VAT laws were introduced by different states from the year2005. Tamil Nadu enacted TNVAT Act from January 01, 2007. Whileso, by the Taxation Laws (Amendment) Act, 2007, the sales toGovernment departments against ‘D’ form was abolished and such salesto Government departments fell under Section 8(2) of the CST Act.Therefore, when VAT Act was introduced, sales to Governmentdepartments fell under Section 8(1) of the CST Act and only sales tounregistered dealers or non-dealers fell under Section 8(2) of the Act.Therefore, the effect was that sales to Government departments outsidethe State would fall under Section 8(2) of the CST Act. It was alsosubmitted that retention of provision such as Section 19(5)(c) of theVAT Act to completely deny the ITC in respect of sales to Central andState Government departments outside the State was causing unintendedhardship. Mr. Bagaria also submitted that the two reasons which weregiven by the respondents before the High Court to deny ITC were:

(i) Where sales are made to a registered dealer on filing of Form‘C’ declaration, the entire transaction goes into the mainstreamand thereby automatically comes to the net of the transaction inthe purchasing State, where applicable. On the other hand, ifsales are made to other than the registered dealers, it is the optionof the purchasing dealer concerned to disclose it or not to discloseit. Therefore, there was a possibility of such transaction beingwrapped up and disappearing into oblivion without even surfacingagain for the purpose of levy of tax otherwise legally due.

(ii) As regards unregistered dealers in other States, the State ofTamil Nadu has no mechanism to prevent evasion of tax and lossof revenue caused by trade with such unregistered dealers outsideits territory.

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A33. Submission of Mr. Bagaria was that both these reasons wereinapplicable in the case of the appellant where the sales were to theGovernment of Karnataka. Referring to Section 19(4) of TNVAT Act,Mr. Bagaria argued that situations mentioned therein were those wherethe Tamil Nadu Government was not getting any tax. Likewise, as perSection 4 of the CST Act situs of such sales would be Tamil Nadu, evenBwhen goods go out of the State. In such an eventuality, State gets itsshare of tax by virtue of Article 269 of the Constitution.

34. He also referred to the insertion of sub-clause (v) to sub-section (2) of Section 19 which provision now enables getting of ITC inthose cases also where sale in the course of inter-State trade orCcommerce falls under Section 8(1) and (2) of the CST Act. In thisscenario, according to him, Section 19(5)(c) would apply when therewere inter-State sales at the time of incorporation. In support of thissubmission, he referred to the following two judgments:

(i) Bolani Ores Ltd. vs. State of Orissa[5]D

“29. The question then remains as to whether these vehiclesthough registrable under the Act are motor vehicles for the purposeof the Taxation Act. It has already been pointed out that beforethe amendment vehicles used solely upon the premises of theowner, though they may be mechanically propelled vehicles adaptedEfor use upon roads were excluded from the definition of ‘motorvehicle’. If this definition which excludes them is the one which isincorporated by reference under Section 2(c) of the Taxation Act,then no tax is leviable on these vehicles under the Taxation Act.Shri Tarkunde for the State of Orissa contends that the definitionFof ‘motor vehicle’ in Section 2(c) of the Taxation Act is not adefinition by incorporation but only a definition by reference, andas such the meaning of ‘motor vehicle’ for the purpose of Section2(c) of the Taxation Act would be the same as defined from timeto time under Section 2(18) of the Act. In ascertaining the intentionof the legislature in adopting the method of merely referring to theGdefinition of ‘motor vehicle’ under the Act for the purpose of theTaxation Act, we have to keep in mind its purpose and intendmentas also that of the Motor Vehicles Act. We have already statedwhat these purposes are and having regard to them the registration 5 (1974) 2 SCC 777H

of a motor vehicle does not automatically make it liable for taxationunder the Taxation Act. The Taxation Act is a regulatory measureimposing compensatory taxes for the purpose of raising revenueto meet the expenditure for making roads, maintaining them andfor facilitating the movement and regulation of traffic. The validityof the taxing power under Entry 57 List II of the Seventh Scheduleread with Article 301 of the Constitution depends upon theregulatory and compensatory nature of the taxes. It is not thepurpose of the Taxation Act to levy taxes on vehicles which donot use the roads or in any way form part of flow of traffic on theroads which is required to be regulated. The regulations under theMotor Vehicles Act for registration and prohibition of certaincategories of vehicles being driven by persons who have no drivinglicence, even though those vehicles are not plying on the roads,are designed to ensure the safety of passengers and goods etc.etc. and for that purpose it is enacted to keep control and checkon the vehicles. Legislative power under Entry 35 of List III(Concurrent List) does not bar such a provision. But Entry 57 ofList II is subject to the limitations referred to above, namely, thatthe power of taxation thereunder cannot exceed the compensatorynature which must have some nexus with the vehicles using theroads viz. public roads. If the vehicles do not use the roads,notwithstanding that they are registered under the Act, they cannotbe taxed. This very concept is embodied in the provisions ofSection 7 of the Taxation Act as also the relevant sections in theTaxation Acts of other States, namely, that where a motor vehicleis not using the roads and it is declared that it will not use theroads for any quarter or quarters of a year or for any particularyear or years, no tax is leviable thereon and if any tax has beenpaid for any quarter during which it is not proposed to use themotor vehicle on the road, the tax for that quarter is refundable. Ifthis be the purpose and object of the Taxation Act, when the motorvehicle is defined under Section 2(c) of the Taxation Act as havingthe same meaning as in the Motor Vehicles Act, 1939, then theintention of the Legislature could not have been anything but toincorporate only the definition in the Motor Vehicles Act as thenexisting, namely, in 1943, as if that definition was bodily writteninto Section 2(c) of the Taxation Act. If the subsequent Orissa ABCDEFG

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Motor Vehicles Taxation (Amendment) Act, 1943, incorporatingthe definition of ‘motor vehicle’ referred to the definition of ‘motorvehicle’ under the Act as then existing, the effect of this legislativemethod would, in our view, amount to an incorporation by referenceof the provisions of Section 2(18) of the Act in Section 2(c) of theTaxation Act. Any subsequent amendment in the Act or a totalrepeal of the Act under a fresh legislation on that topic would notaffect the definition of ‘motor vehicle’ in Section 2(c) of theTaxation Act. This is a well-accepted interpretation both in thiscountry as well as in England which has to a large extent influencedour law. This view is further reinforced by the use of the word‘has’ in the expression “has the same meaning as in the MotorVehicles Act, 1939” in Section 2(c) of the Taxation Act, whichwould perhaps further justify the assumption that the Legislaturehad intended to incorporate the definition under the Act as it thenexisted and not as it may exist from time to time. This method ofdrafting which adopts incorporation by reference to another Actwhatever may have been its historical justification in England inthis country does not exhibit an activists draftsmanship whichwould have adopted the method of providing its own definition.Where two Acts are complimentary or interconnected, legislationby reference may be an easier method because a definition givenin the one Act may be made to do as the definition in the other Actboth of which being enacted by the same Legislature. At anyrate, Lord Esher, M.R. dealing with legislation by incorporation,in In re. Wood’s Estate [(1886) 31 Ch D 607] said at p. 615:

“If a subsequent Act brings into itself by reference some ofthe clauses of a former Act, the legal effect of that, as hasoften been held, is to write those sections into the new Act justas if they had been actually written in it with the pen, or printedin it, and, the moment you have these clauses in the later Act,you have no occasion to refer to the former Act at all.”

The observations in Clarke v. Bradlaugh [(1881) 8 QBD 63 607]are also to the same effect. Brett, L.J. in that case had said at p.69:

“… there is a rule of construction that, where a statute isincorporated by reference into a second statute, the repeal ofthe first statute by a third statute does not affect the second.”

30. In Secretary of State for India in Council v. HindusthanCooperative Insurance Society Ltd. [AIR 1931 PC 149 : 132IC 748 : LR 58 IA 259] the Privy Council was considering a casewhere the incorporation effected in the statute viz. the CalcuttaImprovement Trust Act, 1911 — referred to by their Lordships asthe “Local Act” — was in express terms and in the form illustratedby 54 and 55 Vict., Ch. 19. The “Local Act” in dealing with theacquisition of land for the purposes designated by it, made provisionfor the acquisition under the Land Acquisition Act, and theprovisions of the Land Acquisition Act were subjected to numerousmodifications which were set out in the Schedule, so that in effectthe “Local Act” was held to be the enactment of a Special Lawfor the acquisition of land for the special purpose. It was in thecontext of these and several other provisions which pointed to theabsorption of certain of the provisions of the Land AcquisitionAct into the “Local Act” with vital modifications that Privy Councilobserved at p. 266:

“But Their Lordships think that there are other and perhapsmore cogent objections to this contention of the Secretary ofState, and their Lordships are not prepared to hold that thesub-section in question, which was not enacted till 1921, canbe regarded as incorporated in the Local Act of 1911. It wasnot part of the Land Acquisition Act when the Local Act waspassed, nor in adopting the provisions of the Land AcquisitionAct is there anything to suggest that the Bengal Legislatureintended to bind themselves to any future additions which mightbe made to that Act. It is at least conceivable that newprovisions might have been added to the Land Acquisition Actwhich would be wholly unsuitable to the local code. Nor again,does Act 19 of 1921 contain any provision that the amendmentsenacted by it are to be treated as in any way retrospective, orare to be regarded as affecting any other enactment than theLand Acquisition Act itself. Their Lordships regard the LocalAct as doing nothing more than incorporating certain provisionsfrom an existing Act, and for convenience of drafting doing soby reference to that Act, instead of setting out for itself atlength the provisions which it was desired to adopt.”

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It was further observed at p. 267:

“In this country it is accepted that where a statute isincorporated by reference into a second statute, the repeal ofthe first statute does not affect the second: see the casescollected in Craies on Statute Law, 3rd Edn. pp. 349-50. Thisdoctrine finds expression in a common-form section whichregularly appears in the amending and repealing Acts whichare passed from time to time in India …. The independentexistence of the two Acts is therefore recognized; despite thedeath of the parent Act, its off-spring survives in theincorporating Act. Though no such saving clause appears inthe General Clauses Act, their Lordships think that the principleinvolved is as applicable in India as it is in this country.

It seems to be no less logical to hold that where certainprovisions from an existing Act have been incorporated into asubsequent Act, no addition to the former Act, which is notexpressly made applicable to the subsequent Act, can bedeemed to be incorporated in it, at all events if it is possible forthe subsequent Act to function effectually without the addition.”

This Court in the Collector of Customs, Madras v. NathellaSampathu Chetty [AIR 1962 SC 316 : (1962) 3 SCR 786, 830-833 : (1962) 1 Cr LJ 364] considered the Privy Council decision inthe Hindustan Cooperative Insurance Society Ltd. anddistinguished that case and held the principle inapplicable to thefacts of that case.

31. In State of Bihar v. S.K. Roy [AIR 1966 SC 1995 : 1966 SuppSCR 259 : (1966) 2 LLJ 759] this Court was considering thedefinition of “employer” in Section 2(e) of the Coal Mines ProvidentFund and Bonus Schemes Act, 1948, where that expression wasdefined to mean “the owner of a coal mine as defined in clause(g) of Section 3 of the Indian Mines Act, 1923”. The Indian MinesAct, 1923, had been repealed and substituted by the Mines Act,1952 (Act 35 of 1952). In the latter Act the word “owner” hadbeen defined in clause (1) of Section 2. The question was whetherby virtue of Section 8 of the General Clauses Act, the definition ofthe word “employer” in clause (e) of Section 2 of the Coal MinesProvident Fund and Bonus Schemes Act should be construed with

reference to the definition of the word, “owner” in clause (1) ofSection 2 of Act 35 of 1952, which repealed the earlier Act andre-enacted it. It may be mentioned that according to Section 2(1)of Act 35 of 1952 the word “owner”, when used in relation to amine, means “any person who is the immediate proprietor or lesseeor occupier of the mine or of any part thereof and in the case of amine the business whereof is being carried on by a liquidator orreceiver, such liquidator or receiver….” The expression “coalmine” is separately defined in clause (b) of Section 2 of the CoalMines Provident Fund and Bonus Schemes Act, 1948. Ramaswami,J. speaking for the Court observed at p. 261:

“As a matter of construction it must be held that all works,machinery, tramways and sidings, whether above or belowground, in or adjacent to a coal mine will come within the scopeand ambit of the definition only when they belong to the coalmine. In other words, the word or occurring before theexpression ‘belonging to a coal mine’ in the main definition hasto be read to mean ‘and’.”

This case, as well as the decision in New Central Jute Mills Co.Ltd. v. Assistant Collector of Central Excise, Allahabad [(1970)2 SCC 820 : (1971) 2 SCR 92] are distinguishable on the factsand legislation which this Court was considering. In the NewCentral Jute Mills Co. Ltd. case, the Privy Council decision inthe Hindusthan Cooperative Insurance Society Ltd. case wasreferred to and distinguished. It is, however, contended by thelearned Solicitor General that both in Nathella Sampathu Chettycase as well as the New Central Jute Mills Co. Ltd. case thisCourt was considering the effects of the two Acts which weremade by Parliament by Central legislation and it is, therefore, notstrictly a case of incorporation because the Central Legislature isdeemed to have, while making the latter enactment, kept in viewthe provisions of the former Act. In our view this may not beconclusive.

32. In Ram Sarup v. Munshi [AIR 1963 SC 553 : (1963) 3 SCR858] a judgment of the Bench of five Judges of this Court heldthat the repeal of the Punjab Alienation of Land Act, 1900, had noeffect on the continued operation of the Punjab Pre-emption Act, A

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1913, and that the expression “agricultural land” in the later Acthad to be read as if the definition of the Alienation of Land Acthad been bodily transposed into it. After referring to theobservations of Brett, L.J. in Clarke case, Rajagopala Ayyangar,J. speaking for the Court observed at pp. 868-69:

“Where the provisions of an Act are incorporated by referencein a later Act the repeal of the earlier Act has, in general, noeffect upon the construction or effect of the Act in which itsprovisions have been incorporated.

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In the circumstances, therefore, the repeal of the PunjabAlienation of Land Act of 1900 has no effect on the continuedoperation of the Pre-emption Act and the expression‘agricultural land’ in the later Act has to be read as if thedefinition in the Alienation of Land Act had been bodilyDtransposed into it.”

The above decision of this Court is more in point and supports ourconclusion. In our view, the intention of Parliament for modifyingthe Motor Vehicles Act has no relevance in determining theintention of the Orissa Legislature in enacting the Taxation Act.EApart from this aspect of the power of taxation, as we have saidearlier, is not in the Concurrent List III but in List II and construedas a taxation measure we cannot extend the ambit of it by mereimplication. As we said it is possible for both the Acts to co-existeven after the definition of ‘motor vehicle’ in the Act has beenamended. It is, therefore, clear that the definition of ‘motor vehicle’Fas existing prior to 1956 Amendment would alone be applicableas being incorporated in the Taxation Act.”

The principle laid down in Mahindra and Mahindra Ltd. Vs.Union of India and Another[6 ]is to the same effect.

35. His second submission was that Section 19(5)(c) and Rule10(9)(c) were violative of Article 14 of the Constitution as there was norational nexus with the objective sought to be achieved. He reiteratedthat when the purpose behind such a provision is only to check evasion,and there was no such apprehension in the case of sales to State G

6 (1979) 2 SCC 529H

Government, benefit of ITC could not be denied wherever dealers weremaking sales to the Government. He further argued that when benefitof ITC is given even when sales are made outside the State but to aregistered dealer, then why it should not be accorded on sales that aremade to the Government as well as by treating the sales to outside StateGovernment at par with the sales to the registered dealers. It was soughtto be justified on the ground that insofar as the State Government isconcerned, though it is treated as a dealer, no registration is requiredsince the State Governments are not obliged to get themselves registeredunder the TNVAT Act. The only problem was that because of this theState Government is not in a position to give ‘C’ form. ITC to theappellant was denied only for not furnishing ‘C’ form. For this proposition,apart from relying upon the celebrated judgment in the case of D.S.Nakara and Others vs. Union of India[7], Mr. Bagaria also relied uponthe judgment of this Court in Union of India and Others vs. N.S.Rathnam and Sons[8] in the following manner:

“12. The judgment of this Court in Kasinka Trading case [(1995)1 SCC 274] , no doubt, lays down the principle that there is widediscretion available to the Government in the matter of granting,curtailing, withholding, modifying or repealing the exemptionsgranted by earlier notifications. It is also correct that theGovernment is not bound to grant exemption to anyone to which itso desires. When the duty is payable under the provisions of theAct, grant of exemption from payment of the said duty to particularclass of persons or products, etc. is entirely within the discretionof the Government. This discretion rests on various factors whichare to be considered by the Government as these are policydecisions. In the present case, however, the issue is not of grantingor not granting the exemption. When the exemption is granted toa particular class of persons, then the benefit thereof is to beextended to all similarly situated persons. The notification has toapply to the entire class and the Government cannot create sub-classification thereby excluding one sub-category, even when boththe sub-categories are of same genus. If that is done, it would beconsidered as violating the equality clause enshrined in Article 14of the Constitution. Therefore, judicial review of such notifications 7 (1983) 1 SCC 305

8 (2015) 10 SCC 681

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is permissible in order to undertake the scrutiny as to whether thenotification results in invidious discrimination between two personsthough they belong to the same class. In AashirwadFilms v. Union of India [(2007) 6 SCC 624] , this aspect hasbeen articulated in the following manner: (SCC pp. 628-29, paras9-12)

“9. The State undoubtedly enjoys greater latitude in the matterof a taxing statute. It may impose a tax on a class of people,whereas it may not do so in respect of the other class.

10. A taxing statute, however, as is well known, is not beyondthe pale of challenge under Article 14 of the Constitution ofIndia.

11. In Chhotabhai Jethabhai Patel & Co. v. Union ofIndia [AIR 1962 SC 1006], it was stated: (AIR p. 1021, para37)

‘37. But it does not follow that every other article of Part III isinapplicable to tax laws. Leaving aside Article 31(2) that theprovisions of a tax law within legislative competence could beimpugned as offending Article 14 is exemplified by suchdecisions of this Court as Suraj Mall Mohta & Co. v. A.V.Visvanatha Sastri [AIR 1954 SC 545 : (1955) 1 SCR 448]and Shree Meenakshi Mills Ltd. v. A.V. VisvanathaSastri [AIR 1955 SC 13 : (1955) 1 SCR 787] . In K.T. MoopilNair v. State of Kerala [AIR 1961 SC 552] the Kerala LandTax Act was struck down as unconstitutional as violating thefreedom guaranteed by Article 14. It also goes without sayingthat if the imposition of the tax was discriminatory as contraryto Article 15, the levy would be invalid.’

12. A taxing statute, however, enjoys a greater latitude. Aninference in regard to contravention of Article 14 would,however, ordinarily be drawn if it seeks to impose on the sameclass of persons or occupations similarly situated or an instanceof taxation which leads to inequality. The taxing event underthe Andhra Pradesh State Entertainment Tax Act is on theentertainment of a person. Rate of entertainment tax isdetermined on the basis of the amount collected from the visitor of a cinema theatre in terms of the entry fee charged from aviewer by the owner thereof.”

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14. What follows from the above is that in order to pass the testof permissible classification two conditions must be fulfilled, namely,(i) that the classification must be founded on an intelligibledifferential which distinguishes persons or things that are groupedtogether from others left out of the group; and (ii) that, thatdifferential must have a rational relation to the object sought to beachieved by the statute in question. If the Government fails tosupport its action of classification on the touchstone of the principlewhether the classification is reasonable having an intelligibledifferentia and a rational basis germane to the purpose, theclassification has to be held as arbitrary and discriminatory.In Sube Singh v. State of Haryana[(2001) 7 SCC 545] , thisaspect is highlighted by the Court in the following manner: (SCCp. 548, para 10)

“10. In the counter and the note of submission filed on behalfof the appellants it is averred, inter alia, that the Land AcquisitionCollector on considering the objections filed by the appellantshad recommended to the State Government for exclusion ofthe properties of Appellants 1 and 3 to 6 and the StateGovernment had not accepted such recommendations only onthe ground that the constructions made by the appellants wereof ‘B’ or ‘C’ class and could not be easily amalgamated intothe developed colony which was proposed to be built. There isno averment in the pleadings of the respondents stating thebasis of classification of structures as ‘A’, ‘B’ and ‘C’ class,nor is it stated how the amalgamation of all ‘A’ class structureswas feasible and possible while those of ‘B’ and ‘C’ classstructures was not possible. It is not the case of the StateGovernment and also not argued before us that there is nopolicy decision of the Government for excluding the landshaving structures thereon from acquisition under the Act.Indeed, as noted earlier, in these cases the State Governmenthas accepted the request of some landowners for exclusion oftheir properties on this very ground. It remains to be seen A

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Awhether the purported classification of existing structures into‘A’, ‘B’ and ‘C’ class is a reasonable classification having anintelligible differentia and a rational basis germane to thepurpose. If the State Government fails to support its action onthe touchstone of the above principle, then this decision has tobe held as arbitrary and discriminatory. It is relevant to noteBhere that the acquisition of the lands is for the purpose of planneddevelopment of the area which includes both residential andcommercial purposes. That being the purpose of acquisition, itis difficult to accept the case of the State Government thatcertain types of structures which according to its ownCclassification are of ‘A’ class can be allowed to remain whileother structures situated in close vicinity and being used forsame purposes (residential or commercial) should bedemolished. At the cost of repetition, it may be stated here thatno material was placed before us to show the basis ofclassification of the existing structures on the lands proposedDto be acquired. This assumes importance in view of the specificcontention raised on behalf of the appellants that they havepucca structures with RC roofing, mosaic flooring, etc. Noattempt was also made from the side of the State Governmentto place any architectural plan of different types of structuresEproposed to be constructed on the land notified for acquisitionin support of its contention that the structures which exist onthe lands of the appellants could not be amalgamated into theplan.”

36. The learned Advocate General, in reply to the aforesaidFarguments, submitted that the High Court had repelled these contentionsin its well reasoned judgment by referring to the law laid down in variousjudgments of this Court. He also submitted that a recent judgmentpronounced by this Court in the case of Jayam and Company vs.Assistant Commissioner and Another[9] fully covers the case againstthe appellants. Specifically refuting the argument that Section 19(5)(c)Gof the Act will only apply when there were inter-State sales at the timeof incorporation, he submitted that Section 19(5)(c) as well as Section8(2) remain unchanged as there were no amendments therein. OnlySection 8(1) was amended vide Taxation Laws (Amendment) Act, 2007.

9 (2016) 15 SCC 125H

The purpose thereof was reflected in the objects and reasons thereto asfollows:- “2. CST being an origin-based tax is inconsistent with VAT (whichis a destination-based tax). Moreover, CST results in cascadingof tax (i.e. tax on tax), since it is not rebatable against VAT. Inview of these factors, there has been a consensus that the CSTshould be phased out. This is also a pre-requisite for introductionof an integrated Goods and Services Tax (GST), which theGovernment purposes to introduce by 1[st] April, 2010. The issueof phasing out of the CST has been deliberated upon for over adecade. The Empowered Committee of State Finance Ministers(EC), constituted by the Government of India, has been makingefforts in this direction since July, 2000. Finally, after a series ofmeetings, a consensus has been arrived at between the CentralGovernment and the State Governments on the roadmap forphasing out of the CST as also on the package of compensationto the States for revenue loss on this account.

3. Accordingly, it is proposed to phase out the CST in 4 steps, i.e.,reducing the CST rate from 4% to 3% w.e.f. 1[st] April, 2007, from3% to 2% w.e.f. 1[st] April, 2008, from 2% to 1% w.e.f.1st April,2009 and eventually abolishing the tax on 31[st] March, 2010. Anintegrated national Goods and Services Tax (GST) is proposed tobe introduced w.e.f. 1[st] April, 2010. The agreed package forcompensation to the States for revenue loss on account of phasingout of the CST shall consist of non-monetary measures as well asmonetary measured.

4. The implementation of the above proposals requires theamendment of the CST Act as also the Additional Duties of Excise(Goods of Special Importance) Act, 1957…….”

37. Insofar as argument of the appellant predicated on Article 14is concerned, reply of the learned Advocate General was that a readingof Section 8(1) of the CST Act would show that classification is containedin the Central Act itself which treats sale to a registered dealer outsidethe State in one category and sale to an unregistered dealer outside theState in a different category. This provision contained in Section 8(1) ofthe CST Act never underwent any change. Therefore, those sales whichwere made to unregistered dealers outside the State were constituted a A

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Adifferent class and, thus, provisions contained in Section 19(5)(c) to denyITC on such sales was perfectly justified based on reasonableclassification.

38. After considering the respective submissions and going throughthe case law that is presented before this Court, it would be apt to remarkBat the outset that most of the contentions of the appellants stand answeredby the judgment of this Court in Jayam and Company. That case alsopertains to the TNVAT Act. The issue was as to whether sub-section(20) of Section 19 of the TNVAT Act, which was brought into this statuteby Amendment Act 22 of 2013, could be given retrospective effect.Sub-section (20) of Section 19 reads as under:C

“S. 19(20) Notwithstanding anything contained in this section,where any registered dealer has sold goods at a price lesser thanthe price of the goods purchased by him, the amount of the inputtax credit over and above the output tax of those goods shall bereversed.”D

39. Thus, this case also concerned the same provision, namely,Section 19 of the TNVAT Act, though the issue raised was not the samewhich has arisen for consideration in these appeals. However, whileanswering the aforesaid question, the ITC scheme contained in Section19 of the TNVAT Act was gone into and discussed at length. AfterEreproducing Section 19, attributes of this provision were taken note of inthe following manner:

“11. From sub-section (10) onwards, provisions are made to followthe procedure and fulfill the requisite conditions foravailingITC.For the purposes of this particular issue, sub-section (10) is thematerial provision. This provision, which is couched in negativeterms, categorically stipulates that such ITC would be admissibleto the registered dealer and he would not be entitled to claim thiscredit ‘until the dealer receives an original tax invoice duly filled,signed and issued by a registered dealer from wherethe goodsare purchased.......’. Further, such originaltax invoice shouldevidence the amountof input tax. So much so, even if the originaltax invoice is lost, the obligation cast on the registered dealer is toobtain duplicate or carbon copy of such tax invoice from the sellingdealer and only then input tax is allowed.

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From the aforesaid scheme of Section 19 following significantaspects emerge:- (a) ITC is a form of concession provided by the Legislature. It isnot admissible to all kinds of sales and certain specified sales arespecifically excluded.

(b) Concession of ITC is available on certain conditions mentionedin this Section.

(c) One of the most important condition is that in order to enablethe dealer to claim ITC it has to produce original tax invoice,completed in all respect, evidencing the amount of input tax.

12. It is a trite law that whenever concession is given by statuteor notification etc. the conditions thereof are to be strictly compliedwith in order to avail such concession. Thus, it is not the right ofthe ‘dealers’ to get the benefit of ITC but its a concession grantedby virtue of Section 19. As a fortiorari,conditions specified inSection 10 must be fulfilled. In that hue, we find that Section 10makes original tax invoice relevant for the purpose of claimingtax. Therefore, under the scheme of the VAT Act, it is notpermissible for the dealers to argue that the price as indicated inthe tax invoice should not have been taken into consideration butthe net purchase price after discount is to be the basis. If wewere dealing with any other aspect do hors the issue of ITC asper the Section 19 of the VAT Act, possibly the arguments of Mr.Bagaria would have assumed some relevance. But, keeping inview the scope of the issue, such a plea is not admissible havingregard to the plain language of sections of the VAT Act, readalong with other provisions of the said Act as referred to above.

13. For the same reasons given above, challenge to constitutionalvalidity of sub-section (20) of Section 19 of VAT Act has to fail.When a concession is given by a statute, the Legislature has powerto make the provision stating the form and manner in which suchconcession is to be allowed. Sub-section (20) seeks to achievethat. There was no right, inherent or otherwise, vested with dealersto claim the benefit of ITC but for Section 19 of the VAT Act.That apart, we find that there were valid and cogent reasons forinserting Section 19(20). Main purport was to protect the Revenueagainst clandestine transactions resulting in evasion of tax. High A

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Court has discussed this aspect in detail and our task would beaccomplished in reproducing those paras as we are concurringwith the discussion:

“64. Let us now point out the background/reasons for insertingSection 19(20) by Amendment Act 22 of 2010, by referring tothe Chart, the sample instance is detailed in the Chart inparagraph (34). Let us recapitulate the entries in the Chart.Based on the sale price, i.e., Rs. 36,780/- in the tax invoice, anamount of Input Tax Credit, i.e., Input Tax Credit of Rs.4m597.50 was available to the petitioner when he re-sells goods.Based on the Credit Note, the same goods are re-sold withinthe State at a lesser price than what was purchased, i.e., Rs.33,777.78 (taking into account discount price, there is a profitmargin for the dealer) and thereby the output tax payable tothe Government is reduced, leaving excess Input Tax Credit atthe hands of the dealer. The said excess credit in the hands ofthe dealer might be adjusted to their other liabilities or mightclaim refund of the said excess Input Tax Credit. Taking excessInput Tax Credit and later in the guise of credit note givingdiscount and reducing the price of the goods which reducesthe Output tax payable to the Government dwindles Staterevenue.

65. Learned Advocate General contended that seller and buyercoalition is issuing purchase invoice at an escalated pricethereby taking benefit of excess Input Tax Credit and later inthe guise of credit notes giving discount, reduced the price ofthe same goods and thereby reducing the output tax payableto the Government creates a dent of the State revenue.Learned Advocate General further submitted that excess InputTax Credit available in the hands of the dealer is being adjustedto their other liabilities and the dealer might also make a claimof refund of Input Tax Credit as per Section 19(18) of the Actwhich were ultimately resulted in creating dent on the Staterevenue.

66. To contend as to how the so called discount and reductionof sale price caused revenue loss to the Government, the learnedAdvocate General has drawn our attention to the illustrationstated in paragraph (6) of the counter which reads as under:-

“Purchase price of 10AWashing Macines... Rs. 1,00,000/-Tax paid on purchase at 12.5%(ITC allowed) ... Rs. 12,500/-Sale price after discount... Rs. 75,000/-tax payable on sales at 12.5%... Rs. 9,375/-BExcess ITC available(Difference between ITC andOutput Tax)... Rs. 3,125/-Rs. 12,500 - Rs.9,375 Excess ITC Adjusted... Rs.3,125/-”

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67. As rightly contended by the learned Advocate General, the“Input Tax Credit” adjusted in the above illustration comes toRs. 3,125/- in a single transaction and that it would run toseveral lakhs and crores for a year for a single dealer. Theexcess Input Tax Credit earned by the petitioners is beingadjusted against the outstanding tax due or carried forward tonext year or refunded. If this trend is allowed to continue, theconcept of VAT that meant for payment of tax on every valueaddition gets defeated.

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68. In order to protect the revenue and with a vie to curb theclandestine transactions resulting in evasion of tax, in respectof second and subsequent sales, Section 19(20)was introduced,where any dealer has sold goods at a price lesser than theprice of the goods purchased by him, the amount of “Input TaxCredit” over and above the output tax of those goods, shall bereversed.

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69. Constitutional Validity of fiscal legislation:- When there is achallenge to the constitutional validity of the provisions of aStatute, Court exercising power of judicial review must beconscious of the limitation of judicial review must be consciousof the limitation of judicial intervention, particularly, in mattersrelating to the legitimacy of the economic or fiscal legislation.While enacting fiscal legislation, the Legislature is entitled to agreat deal of latitude. The Court would interfere only where aclear infraction of a constitutional provision is established. Theburden is on the person, who attacks the constitutional validityof a statute, to establish clear transgression of constitutional G

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principle. Observing that the law relating to economic activitiesshould be viewed with greater latitude than laws touching civilrights such as freedom of speech, religion, etc., in R.K. Gargvs. Union of India [(1981) 4 SCC 675, this Court held asunder:

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40. In another judgment in ALD Automotive Pvt. Ltd. & Anr. v.The Commercial Tax Officer & Ors. (SLP (Civil) Nos.36112-36113of 2013) pronounced in today’s date, the scheme of this very provision isdiscussed again in detail to the same effect.

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41. It is very clear from the aforesaid discussion that this Courtheld that ITC is a form of concession which is provided by the Act; itcannot be claimed as a matter of right but only in terms of the provisionsof the statute; therefore, the conditions mentioned in the aforesaid Sectionhad to be fulfilled by the dealer; and sub-section (20) of Section 19 wasDconstitutionally valid. It was also noted, in the process, that there werevalid and cogent reasons for inserting that provision and the main purposewas to protect the Revenue against clandestine transaction resulting ininvasion of tax.

42. The reasoning given in that judgment while upholding sub-Esection (20) of Section 19 shall equally apply while examining the validityof Section 19(5)(c) thereof. The High Court has noted the specificstand taken by the State Government to the fact that in respect ofunregistered dealer in other States, the State of Tamil Nadu has nomechanism to prevent invasion of tax and loss of revenue cost by tradewith such unregistered dealers in the State of Tamil Nadu. Therefore,Fthe provision was aimed at achieving a specific and justified purposeand could not be treated as discriminatory.

43. It is stated at the cost of repetition that Section 19 of TNVATAct deals with ITC. It incorporates provision for grant of ITC undercertain circumstances and, at the same time, also lays down the conditionsGin which such ITC would be admissible. It is in this context sub-section(5) of Section 19 is to be analysed. Sub-section (5) stipulates certaincontingencies where such ITC would not be admissible. There is noquarrel about clauses (a) and (b). We are only concerned with clause(c) of this sub-section which provides that ITC would not be allowed onthe purchase of goods sold as such or used in the manufacture of otherH

goods and sold in the course of inter-State trade or commerce fallingunder sub-section (2) of Section 8 of the Central Sales Tax Act. To putit tersely, sale by a dealer who is registered in the State of Tamil Naduwhich is effected outside the State of Tamil Nadu will qualify for ITConly when the said sale is made to a registered dealer. If it is to anunregistered dealer, it would not be admissible. This classification isbased on intelligible differentia having a proper rationale. Insofar salesto unregistered dealers are concerned, that too situated outside the Stateof Tamil Nadu, the State would not have any mechanism to find out thegenuineness of these sales. In essence, the State is putting the conditionthat ITC would be admissible when Form ‘C’ is given, which can begiven only in those cases where sale is to a registered dealer. Prescribingsuch a condition in order to ensure that there is no evasion, has a rationalepurpose and objective. Consideration of this aspect in the context of thevery nature of the ITC scheme, which is a concession and not a right,would lead us to the conclusion that it was open to the Legislature tomake such a provision.

44. In view of the aforesaid discussion, we do not find any meritin the contentions raised by Mr. Giri. The judgments cited by him wouldhave no application either.

45. One argument of Mr. Bagaria, however, needs little deeperconsideration. He has argued that the appellant represented in his caseis making sales only to the State of Karnataka. In such a case, therecannot be any apprehension about evasion of tax.

46. Section 2(15) defines the term ‘dealer’ and includes StateGovernment as well by means of Explanation II which reads as under:

“Explanation II: The Central Government or any State Governmentwhich, whether or not in the course of business, buy, sell, supplyor distribute goods, directly or otherwise, for cash, or for deferredpayment, or for commission, remuneration or other valuableconsideration, shall be deemed to be a dealer for the purposes ofthis Act.”

47. Thus, wherever the State Government buys, sells, supplies ordistribute goods, it shall be deemed to be the dealer for the purposes ofTNVAT Act. At the same time, TNVAT Act does not require registrationby the State Government inasmuch as Section 38 which deals withregistration of dealers explicitly provides, under sub-section (8) thereof, A

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Athat this provision shall not apply to any State Government or CentralGovernment. A conjoint reading of the aforesaid two provisions wouldshow that when a sale is made to the State of Karnataka, it is made to adealer but that dealer is under no obligation to get itself registered underthe TNVAT Act. Because of this exemption, no State Government doesthat and since it is not a registered dealer, it would not be in a position toBissue any Form C. But for that, the genuineness of sales made to aState Government cannot be doubted. This situation puts those dealerswho are making sales to the State Government in disadvantageousposition, even when it is clear that there is no possibility of tax evasion asthere cannot be any such apprehension in case of sales to the StateCGovernment. We may point out here that benefit of ITC is givenwhenever sale is made to a dealer outside State of Tamil Nadu and thesaid dealer is a registered dealer.

48. Having regard to the above, we are of the opinion that theprovisions of Section 19(5)(c) are to be read down by construing thatDthose dealers who are making sales exclusively to the other StateGovernments (i.e. outside the State of Tamil Nadu), the said States wouldbe deemed as registered dealers for the purposes of availing benefits ofITC. Otherwise, in such a situation, it would be difficult to hold that testof reasonable classification is met in this limited context. It becomesunnecessary to deal with other contentions of Mr. Bagaria.E

49. Result of the aforesaid discussion would be to uphold thejudgment of the High Court with one rider, namely, that in those caseswhere a dealer makes sales exclusively to the other State Government(s),benefit of ITC would be allowed without insisting on the furnishing ofForm ‘C’. However, in order to avail this benefit, a certificate from saidFthe State Government to whom the supplies are made would be obtainedby the dealer claiming ITC and submitted to the VAT authorities.

50. As a consequence, we allow Civil Appeal arising out ofSLP(Civil) No. 9326 of 2015 to the extent indicated above and otherappeals are dismissed with cost.

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Appeals disposed of.

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