2019 (7) TMI 479 - SC - VAT and Sales Tax

Inter-state vs. Intra-state Sales: Legal Fiction Clarified

The Supreme Court allowed the appeals by the State of Madhya Pradesh and the State of Chhattisgarh, dismissing the appeals by private parties/assessees. ... Effect of bifurcation of the State of Madhya Pradesh into the successor State of Madhya Pradesh and the State of Chhattisgarh by the Madhya Pradesh Reorganisation Act, 2000 - exemption or benefit of deferment of sales tax granted under the Madhya Pradesh Commercial Tax Act, 1994 read with the applicable rules - whether the industrial unit in the reorganised State of Madhya Pradesh and under the new State of Chhattisgarh would continue to avail the benefit of such exemption or deferment even after the bifurcation in both the states, irrespective of the location of the industrial unit which would be in one of the two states? HELD THAT:- The law in force before the appointed date, which in the present case is 1st November, 2000, would continue to apply to the successor or reorganised State of Madhya Pradesh as it existed before bifurcation. This is natural and normal as the laws enacted by the legislature and the executive of the State of Madhya Pradesh would obviously apply to the territories forming part of it after its reorganisation/division. As a result of bifurcation some areas that were earlier part of the State of Madhya Pradesh would now form part of the new State of Chhattisgarh, albeit this would not matter and affect application of the laws as they applied prior to the appointed date to the territories that required a part of the reorganised State of Madhya Pradesh. The effect, thereof, is that the laws enacted by the State of Madhya Pradesh before the reorganisation would continue to apply to the areas forming part of the new State of Chhattisgarh and also the reorganised State of Madhya Pradesh, but within their territorial confines. The enactments or the laws in force in the unified State of Madhya Pradesh would continue to apply to the two states, not as one or the same enactment or law, but as two separate enactments or laws as applicable to two different states. Appeal allowed. Issues Involved:1. Legal effect of bifurcation of the State of Madhya Pradesh into Madhya Pradesh and Chhattisgarh on sales tax exemption or deferment.2. Applicability of sales tax exemption or deferment post-bifurcation in both states.3. Territorial extent and adaptation of laws post-bifurcation.4. Interpretation of Sections 78, 79, 80, 85, and 86 of the Madhya Pradesh Reorganisation Act, 2000.5. Legal fiction created by the Reorganisation Act and its implications.6. Continuity of laws and their application in successor states.7. Impact of bifurcation on intra-state and inter-state trade and sales tax.Detailed Analysis:1. Legal Effect of Bifurcation:The Supreme Court dealt with the legal effect of the bifurcation of Madhya Pradesh into Madhya Pradesh and Chhattisgarh by the Madhya Pradesh Reorganisation Act, 2000, on the exemption or deferment of sales tax granted under the Madhya Pradesh Commercial Tax Act, 1994. The core issue was whether industrial units in the reorganized states could continue to avail the benefit of such exemption or deferment post-bifurcation, irrespective of their location.2. Applicability of Sales Tax Exemption Post-Bifurcation:The Court noted that the Madhya Pradesh High Court had ruled that the benefit of the exemption or deferment of sales tax would be restricted to the boundaries of the state in which the unit was located and would not operate beyond state boundaries. The High Court had observed that trade and movement of goods between the two states would be inter-state trade and not intra-state trade.3. Territorial Extent and Adaptation of Laws:Sections 78 and 79 of the Reorganisation Act were pivotal. Section 78 states that the provisions of the Act shall not affect any change in the territories to which any law in force immediately before the appointed day extends or applies. Section 79 allows the appropriate government to adapt and modify laws to facilitate their application in the successor states.4. Interpretation of Relevant Sections:The Court interpreted Sections 78 and 79 of the Reorganisation Act, which are in pari materia to Sections 84 and 85 of the Bihar Reorganisation Act, 2000. It held that the laws enacted by the unified State of Madhya Pradesh would continue to apply to the areas forming part of the new State of Chhattisgarh and the reorganized State of Madhya Pradesh, but within their territorial confines.5. Legal Fiction Created by the Reorganisation Act:The Court emphasized that the legal fiction created by Section 78 does not imply that the territories which were earlier part of Madhya Pradesh but now form part of Chhattisgarh would continue to remain part of Madhya Pradesh. The deeming fiction is limited to the enforcement of laws as they existed in the unified State of Madhya Pradesh to the new State of Chhattisgarh.6. Continuity of Laws:The Court noted that the Reorganisation Act ensures the continuity of laws in the new state after reorganization. The laws applicable to the territories of the reorganized state would continue to apply to the new state until the new state adapts or amends the existing laws.7. Impact on Intra-State and Inter-State Trade:The Court held that any trade between Madhya Pradesh and Chhattisgarh post-bifurcation would be inter-state trade and not intra-state trade. This is consistent with Article 286 of the Constitution, which restricts states from imposing taxes on inter-state sales. The Court overruled the contrary observations in Swarn Rekha Cokes and Coals Pvt. Ltd., which had treated inter-state sales between the two successor states as intra-state sales.Conclusion:The appeals preferred by the State of Madhya Pradesh and the State of Chhattisgarh were allowed, and the appeals preferred by the private parties/assessees were dismissed. The Court clarified that the legal fiction created by the Reorganisation Act does not extend to treating inter-state sales as intra-state sales. The laws enacted by the unified State of Madhya Pradesh would continue to apply within the territorial confines of the new states, and trade between the two states would be considered inter-state trade.