2006 (9) TMI 279 - SC - VAT and Sales Tax

Commission agents in timber deemed manufacturers for tax purposes under U.P. Trade Tax Act. Upheld constitutional validity.

The court upheld the constitutional validity of clause (ii) of section 2(ee) of the U.P. Trade Tax Act, 1948, and the circular dated December 13, 2000. ... Whether the appellants be treated as manufacturers? Held that:- Whether an activity amounts to manufacture has to be factually determined. There cannot be a direction to treat a particular type of transaction to be a manufacturing activity without examining the factual scenario. There cannot be a generalisation in such matters. Learned counsel for the State submission that even purchases from a person who is not a registered dealer is also liable to tax in terms of section 3-AAAA of the Act and the circular is, therefore, in order is not acceptable for the simple reason that in section 3-AAAA the sine qua non for liability is that the goods must be liable to tax under the Act. That aspect has to be factually determined. The Commissioner's circular is not and cannot be a substitute for such determination. The assessments in these cases appear to have been done solely on the basis of the view expressed in the circular. Therefore, set aside the assessments/appellate orders under challenge and direct the assessing officer to consider the case of the appellants with out treating them to be manufacturers for the purpose of levy of tax, solely on the basis of the circular. Issues Involved:1. Constitutional validity of clause (ii) of section 2(ee) of the U.P. Trade Tax Act, 1948.2. Validity of the circular dated December 13, 2000, issued by the Commissioner, Trade Tax, U.P.3. Liability of commission agents dealing in timber to pay tax under the U.P. Trade Tax Act, 1948.4. Interpretation and application of section 2(ee) and section 3-AAAA of the U.P. Trade Tax Act, 1948.Detailed Analysis:1. Constitutional Validity of Clause (ii) of Section 2(ee) of the U.P. Trade Tax Act, 1948:The petitioner challenged the constitutional validity of clause (ii) of section 2(ee) of the U.P. Trade Tax Act, 1948, arguing that it unfairly included certain dealers under the definition of 'manufacturer' who do not actually manufacture goods. The court held that the amendment to section 2(ee) was intended to prevent tax evasion by large dealers who purchased goods from small dealers or manufacturers not liable to tax. The court found no constitutional invalidity in the impugned amendment, stating that the Legislature has the authority under entry 54, List II of the Seventh Schedule to the Constitution to make such amendments.2. Validity of the Circular Dated December 13, 2000:The petitioner also challenged the circular dated December 13, 2000, issued by the Commissioner, Trade Tax, U.P., which stated that dealers purchasing timber from agriculturists would be liable to tax as manufacturers under the amended section 2(ee). The court upheld the validity of the circular, noting that it merely implemented the amended section 2(ee) of the Act. The circular was found to be consistent with the legislative intent to prevent tax evasion and ensure that taxable transactions are subjected to tax.3. Liability of Commission Agents Dealing in Timber to Pay Tax:The petitioners, who were commission agents dealing in timber, argued that they should not be liable to pay tax as they were not manufacturers. The court noted that the definition of 'dealer' under section 2(c) of the Act includes commission agents. The court further held that the petitioners, by purchasing timber from agriculturists and selling it, fell under the definition of 'manufacturer' as per the amended section 2(ee). Therefore, the petitioners were liable to pay tax on their transactions.4. Interpretation and Application of Section 2(ee) and Section 3-AAAA:The court examined the definitions and provisions under sections 2(ee) and 3-AAAA of the U.P. Trade Tax Act, 1948. Section 2(ee) defines 'manufacturer' to include dealers making the first sale of goods in the state after their manufacture. Section 3-AAAA imposes tax liability on purchases from registered dealers under certain circumstances. The court held that the object of the amendment to section 2(ee) was to prevent tax evasion by ensuring that all taxable transactions are subjected to tax once. The court found that the legislative intent was clear and the provisions were constitutional and valid.Conclusion:The court dismissed the petition, upholding the constitutional validity of clause (ii) of section 2(ee) and the circular dated December 13, 2000. The petitioners, as commission agents dealing in timber, were held liable to pay tax under the U.P. Trade Tax Act, 1948. The court emphasized the Legislature's authority to amend tax laws to prevent evasion and ensure that taxable transactions are subjected to tax.