2007 (5) TMI 323 - SC - VAT and Sales Tax

Supreme Court: No retroactive tax changes; NPK 23:23:0 exemption valid; May 15 notification discriminatory.

The Supreme Court held that the notification dated April 10, 1995, denying tax exemption to NPK 23:23:0 could not be applied retrospectively. It found ... Whether the notification dated April 10, 1995, which denied exemption to NPK 23:23:0 retrospectively can be held to be invalid? Whether by the notification dated April 10, 1995 retrospectively, the exemption granted to the product of the respondent, namely, NPK 23:23:0 could be withdrawn? Held that:- Appeal dismissed. The products of the respondent and the exemption granted in the notification in question which are similar in nature, thus hold that the product of NPK 23:23:0 is also a similar commodity within the meaning of the notification of exemption dated April 10, 1995. Therefore, it would not be open for the appellants, as held by the High Court, to realise tax retrospectively on sale of NPK 23:23:0 from April 10, 1994 to March 31, 1995. Issues Involved:1. Retrospective effect of the notification dated April 10, 1995.2. Discrimination against NPK 23:23:0 in the notification dated May 15, 1995.Comprehensive Issue-wise Analysis:Retrospective Effect of the Notification Dated April 10, 1995:The first issue concerns whether the notification dated April 10, 1995, which denied tax exemption to NPK 23:23:0, could be applied retrospectively. The High Court held that the notification dated April 10, 1995, shall apply prospectively and not retrospectively, relying on the decision in Ganesh International v. Assistant Commissioner [2001] 124 STC 600. The appellants did not seriously challenge this part of the High Court's order. The Supreme Court examined whether the retrospective withdrawal of the exemption granted by the notification dated November 2, 1994, was valid.The court reiterated that the notification dated November 2, 1994, permitted exemption from taxes on the sale of potassium phosphatic fertilizers from November 1, 1994, to March 31, 1995. This exemption was withdrawn for NPK 23:23:0 by the notification dated April 10, 1995. The court held that such exemption could not be withdrawn retrospectively, citing Section 25 of the U.P. Trade Tax Act, which states that no notification increasing the liability to tax of a dealer shall be issued with retrospective effect. The court concluded that the notification dated April 10, 1995, denying exemption to NPK 23:23:0 retrospectively, was illegal and invalid.Discrimination Against NPK 23:23:0 in the Notification Dated May 15, 1995:The second issue involves the alleged discrimination against NPK 23:23:0 in the notification dated May 15, 1995, which exempted other NPK fertilizers but not NPK 23:23:0. The respondent argued that all fertilizers of the NPK category are treated as phosphatic fertilizers by various authorities and common parlance. The High Court, relying on Arya Vaidya Pharmacy v. State of Tamil Nadu [1989] 2 SCC 285, held that two items of the same category could not be discriminated against.The court observed that the notification dated November 2, 1994, intended not to tax the sale of 'potassium phosphatic fertilizers.' However, NPK 23:23:0 is a 'nitro-phosphate fertilizer' with no potassium, similar to NPK 20:20:0, which was included in the exemption list. The court found that the classification under the notifications dated April 10, 1995, and May 15, 1995, lacked a rational basis, as both NPK 23:23:0 and NPK 20:20:0 are nitro-phosphate fertilizers. The court held that the State had not classified the two commodities on a rational basis for imposing tax, making the classification arbitrary and discriminatory.The court emphasized that any law for levying taxes must pass the test of constitutionality, ensuring rational classification. The notifications lacked reasonableness as they excluded NPK 23:23:0 from the exemption despite it being similar to other exempted fertilizers. The court concluded that the discrimination against NPK 23:23:0 violated Article 14 of the Constitution, which guarantees equality before the law.The court distinguished the present case from Associated Cement Companies Ltd. v. Government of Andhra Pradesh [2006] 1 SCC 597, where the tax rate on cement depended on whether the sale price included packing materials. The court found that the principles from Arya Vaidya Pharmacy were applicable, as the products in question were similar in nature.In conclusion, the Supreme Court upheld the High Court's decision that the notifications dated April 10, 1995, and May 15, 1995, were discriminatory and invalid. The appeal was dismissed with no order as to costs.