2006 (10) TMI 418 - HC - VAT and Sales Tax

State's Authority Upheld to Tax Silk Items under Kerala VAT Act

Kerala Textile & Garments Dealers Welfare Association and another Versus State of Kerala (and other cases)

Kerala Textile & Garments Dealers Welfare Association and another Versus State of Kerala (and other cases) - [2009] 24 VST 104 (Ker) ISSUES PRESENTED AND CONSIDERED 1. Whether the inclusion of silk fabrics and sarees made of natural silk in the taxable schedule of the State Value Added Tax statute is constitutionally impermissible because those goods are listed in the First Schedule to the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (ADE Act). 2. Whether the ADE Act and Article 286(3) of the Constitution operate to deprive a State Legislature of the competence to impose sales tax or VAT on goods declared in the First Schedule to the ADE Act, or whether the only consequence of such inclusion is a restriction on the State's share in distribution of additional duty proceeds under the ADE Act. ISSUE-WISE DETAILED ANALYSIS Issue 1: Constitutionality of including silk fabrics and natural silk sarees as taxable items in the State VAT schedule Legal framework: Entry 54, List II, Seventh Schedule grants States power to levy tax on sale of goods. Article 286(3) restricts State laws imposing taxes on goods declared by Parliament by law to be of special importance in inter-State trade or commerce, subject to conditions Parliament may specify. The ADE Act levies additional duties on goods in its First Schedule and prescribes distribution of net proceeds to States under the Second Schedule; relevant statutory provisions include sections 3 and 4 of the ADE Act. Precedent treatment: Decisions of the apex court were relied upon by both sides. Key precedents discussed are Godfrey Phillips India Ltd. and Reliance Trading Company; a State-court decision (Khataisons) was also cited for the proposition that State taxation power remains. Interpretation and reasoning: The Court examined the ADE Act and Article 286(3) and concluded that inclusion of an item in the First Schedule to the ADE Act does not, by itself, strip the State Legislature of the competence to levy sales tax or VAT on that item. The ADE Act's mechanism contemplates that where a State levies a tax on goods subject to the ADE Act, the State may forfeit its share of the additional duty proceeds under the Second Schedule; it does not expressly prohibit the State from imposing its own tax. The Court distinguished the petitioners' reliance on Godfrey Phillips and Reliance Trading Company: Godfrey Phillips was interpreted as saying that a State that seeks to participate in the ADE Act's distribution should not impose a tax on the same goods (thus losing entitlement to distribution), not as an absolute bar on State taxation; Reliance Trading Company concerned the survival of an exemption under a State sales-tax statute after amendment and therefore addressed a different question and does not advance the absolute-invalidity contention. Ratio vs. Obiter: Ratio - inclusion of goods in the ADE Act's First Schedule does not constitutionally prohibit State-imposed VAT/sales tax on those goods; the statutory consequence under the ADE Act is loss of share in distribution under the Second Schedule, not abrogation of State taxing power. Observations in precedents indicating that a State cannot both tax and claim ADE proceeds are applied as ratio to the present statutory scheme. Distinguishing remarks about the different factual matrix of Reliance Trading Company are treated as reasoned distinction (not binding to the contrary). Conclusion: The inclusion of silk fabrics and natural silk sarees as taxable items in the State VAT schedule is not unconstitutional on the ground that those goods appear in the ADE Act First Schedule; the State may impose VAT, subject to the ADE Act's financial consequence (forfeiture of distribution share). Issue 2: Effect of Article 286(3) and the ADE Act - restriction on levy versus forfeiture of ADE distribution share Legal framework: Article 286(3) conditions State laws imposing taxes on goods declared of special importance on restrictions and conditions Parliament may specify; the ADE Act prescribes additional duties and distribution of proceeds, with explicit provisions linking State taxation and entitlement to share under the Second Schedule. Precedent treatment: Godfrey Phillips was invoked for the proposition that the ADE Act was intended to replace State sales tax on certain goods and to prevent States from levying sales tax if they wished to share in ADE proceeds. The Court read those passages as confirming the ADE Act's intent to condition participation in distribution on refraining from imposing sales tax, rather than as an absolute constitutional bar on State taxing power. Interpretation and reasoning: The Court reasoned that the ADE Act's textual scheme and Article 286(3) together mean that Parliament can specify conditions (including distribution consequences) but does not, by operation of Article 286(3) alone, extinguish the State's constitutional power under Entry 54. The ADE Act implements a policy choice: if a State imposes a sales tax on goods subject to the ADE Act, the State will not participate in distribution of the additional duty proceeds for that financial year. Thus the practical consequence is financial (loss of share), not a constitutional incapacity to levy tax. The authorities relied upon by petitioners were read consistently with this construction rather than as supporting an absolute prohibition. Ratio vs. Obiter: Ratio - Article 286(3) and the ADE Act impose statutory consequences (restriction on participation in proceeds distribution) but do not oust the State's underlying constitutional competence to tax sales of goods listed in the ADE Act; statements in prior decisions that a State cannot both tax and claim ADE proceeds are applied as binding in that specific statutory-context sense. Distinguishing observations in other cases are treated as non-applicable obiter when facts differ. Conclusion: Article 286(3) and the ADE Act do not render a State incompetent to levy sales tax or VAT on goods included in the ADE Act First Schedule; the statutory effect is forfeiture of the State's share in distribution of ADE proceeds rather than abrogation of taxing power. Disposition The writ petition challenging the inclusion of silk fabrics and sarees made of natural silk as taxable items was dismissed. The Court held that the State's levy of VAT on those items is not unconstitutional; the ADE Act's consequence of non-participation in distribution of additional duties is the financial outcome of such State taxation.