2002 (4) TMI 694 - SC - VAT / Sales Tax

Inter-State electricity supply by generating company to other States' boards-State duty u/s3 held inapplicable; appeal dismissed

The SC considered whether electricity supplied by a generating company from within a State to electricity boards in other States and to another State ... Taxes on the consumption or sale of electricity - tax on the sale or purchase of goods in the course of inter-State trade or commerce - inter-State sale - territorial nexus - constitutional prohibition under Article 286 - harmonisation of List II Entries 53 and 54 - Section 3 of the Central Sales Tax Act - movement occasions movementElectricity as goods - inter-State sale - Section 3 of the Central Sales Tax Act - movement occasions movement - Sales of electrical energy generated by NTPCL and supplied pursuant to contracts to Electricity Boards in other States are sales in the course of inter-State trade or commerce and not subject to State duty under the impugned Acts. - HELD THAT: - The Court reaffirmed that electrical energy is 'goods' for constitutional and statutory purposes and emphasised its characteristic that generation, transmission, delivery and consumption occur virtually simultaneously, so that sale, supply and consumption are inseparable. Applying the test in Section 3 of the Central Sales Tax Act (a sale occasions movement of goods from one State to another), the contracts entered prior to generation and the transmission to other States establish that the movement is occasioned by the sale. Consequently such transactions fall within inter-State sales and lie beyond the competence of State legislatures to tax under Articles 269 and 286 read with the CST Act. The Court held that neither State legislation nor contractual stipulations can be used to artificially fix the situs of sale so as to convert an inter-State sale into an intra-State sale in breach of the constitutional scheme. [Paras 21, 25, 27, 31]The sales by NTPCL to out-of-State purchasers are inter-State sales and are not taxable by the States under the challenged legislation.Taxes on the consumption or sale of electricity - harmonisation of List II Entries 53 and 54 - territorial nexus - Entry 53 (taxes on consumption or sale of electricity) must be read as referring to sale for consumption within the State and therefore cannot be used to justify taxation of inter-State sales of electricity. - HELD THAT: - The Court construed Entry 53 as 'taxes on the consumption or sale for consumption of electricity' and reconciled Entries 53 and 54 by holding that electricity, being goods, falls within Entry 54 subject to Entry 92A of List I where inter-State movement is occasioned. Entry 53 therefore applies to consumption within the State; reading it otherwise would permit extra-territorial operation of State law and allow multiple taxation contrary to the scheme effected by the Sixth Amendment. The constitutional prohibition in Article 286 operates independently of the phrasing of List entries and prevents a State from taxing sales that are in the course of inter-State trade despite any omission to make Entry 53 subject to Entry 92A. [Paras 23, 24, 26, 27, 29]Entry 53 does not permit States to tax inter-State sales of electricity; consumption for the purposes of Entry 53 must occur within the taxing State.Territorial nexus - constitutional prohibition under Article 286 - definition of consumer - read down - The extended definition of 'consumer' in the M.P. Electricity Duty Act, as including persons who merely receive electrical energy without regard to consumption within the State, is impermissible and must be read down to persons receiving electricity for consumption or distribution for consumption within the State. - HELD THAT: - The Court held that the amendment to the definition of 'consumer' which treated receipt of electricity (including bulk receipt for onward distribution) as sufficient to confer taxable nexus would artificially fix the situs of sale and permit taxation of inter-State sales in contravention of Articles 269 and 286 and Section 3 of the CST Act. To save the provision from being ultra vires, the definition must be read down to apply only to recipients who receive electricity for consumption or for distribution for consumption within the State; otherwise the provision would confer extraterritorial taxing power on the State. [Paras 30, 31]The definition must be read down to exclude persons who receive electricity other than for consumption or for distribution for consumption within the State; otherwise it is ultra vires.Quashing of demand - constitutional prohibition under Article 286 - The demand raised by the Madhya Pradesh authorities for electricity duty and cess, calculated on units sold to Electricity Boards of other States, is invalid and liable to be set aside. - HELD THAT: - Having determined that the relevant sales are inter-State sales not taxable by the State and that the statutory definition relied upon to sustain the demand must be read down, the Court concluded that the demand issued by the Chief Engineer (Electricity Duty) and Chief Electrical Inspector, Government of Madhya Pradesh is without authority. The writ petition seeking quashment of the demand was allowed. [Paras 35]The demand of the Government of Madhya Pradesh dated 30.11.1995 is quashed.Final Conclusion: The judgment of the Andhra Pradesh High Court was affirmed and Civil Appeal No.3112 of 1990 dismissed; writ petition T.C. No.3 of 1998 was allowed and the demand raised by Madhya Pradesh was quashed. The Court held that sales of electricity by NTPCL to out-of-State purchasers are inter-State sales not taxable by the States, and the impugned statutory definition of 'consumer' must be read down to preserve constitutional limits on State taxation. Issues: Whether State enactments imposing duty or tax on sales of electrical energy by central generating stations to purchasers in other States (i.e. sales occasioning inter-State movement of electricity) are constitutionally valid, and whether demands raised by State authorities in respect of such sales are maintainable.Analysis: Electricity is held to be 'goods' and, because generation, transmission, delivery and consumption of electrical energy are virtually simultaneous, sale of electricity for delivery and consumption in another State occasions inter-State movement under Section 3 of the Central Sales Tax Act, 1956. Entry 53 (taxes on consumption or sale of electricity) must be read as taxes on consumption or sale for consumption within the State. Entry 54 (taxes on sale or purchase of goods) is made subject to Entry 92A of List I which concerns inter-State sales. The prohibition in Article 286 read with Article 269 and the formulation in Section 3 CST Act operate independently of the language of entries in the Seventh Schedule: if a sale occasions movement from one State to another or is effected by transfer of documents during such movement, it is inter-State and beyond State power to tax. State definitions or contract stipulations that artificially fix situs of sale or expand 'consumer' to include out-of-State recipients so as to create territorial nexus are ultra vires to the extent they seek to tax inter-State sales of electrical energy. Applying these principles, contracts entered into prior to generation, metering/delivery in one State with consumption in another, and transmission via the grid, result in inter-State sales not amenable to State electricity-duty levies.Conclusion: State levies and demands in respect of sales of electrical energy by the Corporation to purchasers in other States are unconstitutional and liable to be quashed; the High Courts declaration that such levies are incompetent is affirmed in the Andhra Pradesh matter and the demand raised by Madhya Pradesh authorities is quashed in T.C. No.3/1998.