2015 (9) TMI 1274 - HC - VAT and Sales Tax

Court invalidates future price-based taxation under Bihar VAT Act, upholding petitioners' challenge.

The court declared Section 15(5) of the Bihar VAT Act unconstitutional, ruling that taxing based on future prices exceeded legislative competence. The ... Compounding of tax liability - maximum retail price as measure of tax - option to pay tax on MRP - legislative competence under Entry 54, List II - taxable event as sale of goods (price/consideration nexus) - revisional powers and finality of assessmentCompounding of tax liability - maximum retail price as measure of tax - taxable event as sale of goods (price/consideration nexus) - legislative competence under Entry 54, List II - Validity of Section 15(5) of the Bihar Value Added Tax Act, 2005 and the Notification permitting levy of tax on maximum retail price (MRP) in lieu of tax on sale price - HELD THAT: - The Court held that the State cannot, by statute or notification, convert the measure of tax for a completed sale into a notional value (such as MRP) that relates to a subsequent or hypothetical transaction. The taxable event under the constitutional scheme and the Act is a 'sale of goods' and, if price or consideration is chosen as the basis for tax, it must relate to the actual transaction which is subject to tax. Adopting MRP as a notional measure divorced from the real sale price of the transaction would effect a levy beyond the competence of the State under Entry 54, List II. The fact that Section 15(5) provides an option to dealers to pay tax on MRP does not cure the constitutional defect, because permitting such an option would still result in a levy founded on a notional value unrelated to the completed sale. Applying the ratio of the Supreme Court decision in State of Rajasthan v. Rajasthan Chemist Association, the Court held Sub-section (5) of Section 15 ultra vires the legislative competence of the State to tax sales.Sub-section (5) of Section 15 of the Bihar Value Added Tax Act, 2005 and the Notification to the extent they permit levy of tax on MRP are declared ultra vires and cannot be sustained.Revisional powers and finality of assessment - Effect of striking down Section 15(5) on assessments which have attained finality and on orders passed in revision - HELD THAT: - The Court recognised that petitioners challenged not only assessments made under Section 15(5) but specifically the exercise of revisional powers by the Commissioner to reopen earlier assessments. While Section 15(5) is declared unconstitutional, the Court limited relief by protecting assessments which have attained finality; such final orders shall not be reopened merely because the provision has been struck down. Thus, exercise of revisional powers that has already resulted in orders which have become final will not be reopened on the sole ground of the statutory provision being struck down.Impugned revisional and assessing orders made under the invalid provision are quashed, but assessments that have attained finality shall not be reopened on the basis of this declaration.Final Conclusion: Section 15(5) of the Bihar Value Added Tax Act, 2005 (and the attendant notification) insofar as they permit compounding of tax liability by levying tax on MRP are ultra vires and set aside; consequential orders made under those provisions are quashed, subject to protection of any assessment orders that have become final. Issues:Validity of provisions in Section 15(5) of Bihar Value Added Tax Act, 2005 and Notification S.O. 47 dated 05.04.2006 disallowing trade discounts in assessments.Analysis:The judgment addressed multiple writ petitions challenging the validity of Section 15(5) of the Bihar Value Added Tax Act, 2005 and a related Notification. The petitioners contested disallowance of trade discounts by the Competent Authority due to opting to pay tax at the rate specified in Section 14 on the maximum retail price (M.R.P.) of goods. The case involved a petitioner engaged in medicine manufacture and sale, providing free medicines to dealers under a discount scheme. The Tax Authorities initially accepted this practice but revised their stance following an audit objection. The Commissioner of Commercial Taxes ruled that free medicine supplies were taxable under Section 15(5)(b) of the Act, leading to assessment disputes.The judgment delved into the legal framework of the Bihar VAT Act, emphasizing Section 3 as the charging provision and Section 15(5) as an exception allowing dealers to pay tax on M.R.P. of goods. The petitioners argued that tax should only apply to actual sale transactions, not future prices, citing constitutional provisions and definitions under the Act. They referenced a Supreme Court case (State of Rajasthan vs. Rajasthan Chemist Association) where a similar provision was deemed ultra vires due to taxing future prices unrelated to the sale event.The State contended that the Bihar Act's optional nature distinguished it from the Rajasthan case, but the Court rejected this argument. It upheld the Supreme Court's position that taxing based on future prices is beyond legislative competence, irrespective of dealer choice. Consequently, Section 15(5) of the Bihar VAT Act was declared ultra vires, rendering related orders invalid. However, finalized assessments under Section 15(5) were not to be reopened due to the judgment's retroactive effect.In conclusion, the judgment declared Section 15(5) of the Bihar VAT Act unconstitutional, emphasizing the need for tax measures to align with actual sale events. It highlighted the limits of legislative competence in imposing taxes based on future prices and upheld the petitioners' challenge against the disputed assessments.