2017 (9) TMI 6 - HC - VAT and Sales Tax

Validity of State Tax Law Confirmed; Transferee Company Liable for Pre-amalgamation Tax

Indus Towers Limited & 1 Versus State of Gujarat & 2

The court upheld the validity of Section 52 of the Gujarat Value Added Tax Act, 2003, within the State's legislative competence. The petition challenging ... Ultra vires of Section 52 of the Gujarat Value Added Tax Act, 2003 - Company is deemed to be in existence for the purpose of taxation under the VAT Act - merger / demerger - levy of VAT - consideration received by the Merging Entities/Transferor Companies with respect to the transactions undertaken under the Indefeasible Right to Use Agreements with the Transferee Company - It is the case on behalf of the petitioners that having received the aforesaid show causes notices, the petitioner-Transferee Company filed a letter before the respondent no. 2 duly informing that the Merging Entities/Transferor Companies to whom the said show cause notices have been issued have ceased to exist from 1st April 2009 by virtue of High Court orders - scope of SCN - it is also case of petitioner that Section 52 of the VAT Act cannot be given effect beyond the competence of State as it stands in that case, it would be beyond the powers conferred under Entry 54 of List II of the Constitution of India. Held that: - the pith and substance of enactment of Section 52 of the GVAT Act is to bring within the net of tax in case sale has taken place within definition of Section 2 [23](d) of the GVAT Act. While considering the doctrine of pith and substance with reference to the State Legislation viz., Section 52 of the Act, one is to ascertain the true nature and character thereof by examining its object, scope and effect of its provisions and the legislation as a whole. If, on doing so, it appears that the State Legislation substantially falls within any Entry under List II of the Seventh Schedule to the Constitution, then in that case, such a State Legislation cannot be invalidated merely because it has incidentally dealt with some aspect already covered by a Central Legislation, relateable to any Entry under List I. As observed hereinabove, Entry 54 of List-II of Seventh Schedule authorizes and/or permits the State to legislate the law in respect of tax on sale or purchase of goods. Under the circumstances, in respect of anything with respect to tax on sale or purchase of goods, the State would have a legislative competence under Entry 54 of List II to Seventh Schedule. Such an “incidental encroachment” by the State Legislation into the exclusive field of the Central Legislation is permissible. While considering the constitutional validity of a particular statute, the true nature and character of the Statute enacted by the State shall have to be considered and borne in mind, more particularly, when it is alleged that the State Act is encroaching upon field/authority of the Parliament to enact the law, as per List I to Seventh Schedule tot he Constitution of India. There is no need for any amendment in the Constitution by the Parliament for certain non sales transactions as “sale” by amending Article 366 [29A] cannot be accepted more particularly when, as observed hereinabove, the State legislation/Act is not repugnant to the Central legislation and both operate in different fields. Article 366 [29A] of the Constitution is with respect to extending definition of “Sale” and is with respect to “deemed sale” - In the present case, Section 52 of the GVAT Act cannot be said to be with respect to “deemed sale”. It can be said to be with respect to recovery of the tax on the eventuality of sale, as contained in Section 2 [29] of the GVAT Act for which the tax eventuality had already occurred and/or taken place. Section 52 of the Gujarat Value Added Tax Act cannot be said to be beyond legislative competence, and therefore, the same cannot be said to be ultra vires to Articles 246 & 252 of the Constitution of India. It is held that Section 52 of the GVAT Act is within the State legislative competence under Entry 52 of List II of Seventh Schedule and the same cannot be said to be encroaching upon the powers of the Union legislation. Therefore, challenge to the constitutional validity of Sections 2 [23] (d) and 52 of the to the GVAT Act fails. Petition dismissed - decided against petitioner. Issues Involved:1. Validity of Section 52 of the Gujarat Value Added Tax Act, 2003.2. Liability of Transferee Company for taxes on transactions of Transferor Companies post-amalgamation.3. Jurisdiction of State Legislature under Article 246 and Article 252 of the Constitution of India.4. Impact of High Court-sanctioned amalgamation on tax liabilities.5. Competence of State Legislature to enact laws affecting Union Legislation.Detailed Analysis:1. Validity of Section 52 of the Gujarat Value Added Tax Act, 2003:The petitioners challenged Section 52 of the GVAT Act, claiming it was ultra vires Articles 246 and 252 of the Constitution of India. They argued that the State Legislature encroached upon the exclusive domain of the Parliament under Entry 43 of List I by treating merged companies as distinct entities for tax purposes. The court held that Section 52 was enacted to prevent tax evasion and pilferage, and it operates within the legislative competence of the State under Entry 54 of List II. The court emphasized that the deeming provision in Section 52 is for the purpose of GVAT Act only and does not affect the Companies Act.2. Liability of Transferee Company for taxes on transactions of Transferor Companies post-amalgamation:The petitioners contended that post-amalgamation, the transactions between the Transferor and Transferee Companies should be considered inter-branch transfers and not subject to VAT. The court rejected this argument, stating that the tax liability accrued before the High Court's order of amalgamation remains enforceable. The court noted that the amalgamation order does not nullify the tax liabilities that arose prior to the order.3. Jurisdiction of State Legislature under Article 246 and Article 252 of the Constitution of India:The petitioners argued that Section 52 of the GVAT Act encroaches upon the field covered by the Union Legislature under Entry 43 of List I. The court applied the doctrine of pith and substance, determining that the primary objective of Section 52 is to levy tax on sales and prevent tax evasion, which falls under the State's jurisdiction as per Entry 54 of List II. The court concluded that incidental encroachment into the Union's domain does not invalidate the State legislation.4. Impact of High Court-sanctioned amalgamation on tax liabilities:The petitioners claimed that the High Court's order sanctioning the amalgamation, effective from an earlier date, nullified the existence of the Transferor Companies, thereby invalidating the tax liabilities. The court held that the High Court's order does not affect the tax liabilities that accrued before the order. The court emphasized that the deeming provision in Section 52 of the GVAT Act ensures that tax liabilities are enforceable despite the amalgamation.5. Competence of State Legislature to enact laws affecting Union Legislation:The petitioners contended that the State Legislature lacked the competence to enact laws that alter the effect of the Companies Act, a Union legislation. The court disagreed, stating that the State Legislature has the authority to enact laws related to tax on sales and purchases under Entry 54 of List II. The court reiterated that Section 52 of the GVAT Act is within the legislative competence of the State and does not encroach upon the Union's domain.Conclusion:The court upheld the validity of Section 52 of the GVAT Act, stating that it is within the legislative competence of the State under Entry 54 of List II. The court dismissed the petition, affirming that the Transferee Company is liable for the tax liabilities of the Transferor Companies that accrued before the High Court's order of amalgamation. The court concluded that Section 52 does not encroach upon the Union's legislative domain and operates within the State's jurisdiction to levy taxes on sales and purchases.