2020 (3) TMI 142 - HC - VAT / Sales Tax

State Government cannot reduce input tax credit on declared goods in inter-state trade under Section 15(b) CST Act

The Gujarat HC held that the State Government cannot reduce input tax credit on declared goods purchased and sold in inter-state trade, as this violates ... Reimbursement under section 15(b) of the Central Sales Tax Act, 1956 - input tax credit under section 11 of the Gujarat Value Added Tax Act, 2003 - article 286(3) of the Constitution of India - declared goods (hides and skins) as goods of special importance in inter State trade and commerce - subordinate legislation must yield to plenary central enactment - doctrine of sub silentioReimbursement under section 15(b) of the Central Sales Tax Act, 1956 - input tax credit under section 11 of the Gujarat Value Added Tax Act, 2003 - article 286(3) of the Constitution of India - declared goods (hides and skins) as goods of special importance in inter State trade and commerce - Validity of the State notification reducing input tax credit insofar as it applies to purchases of declared goods (hides and skins) resold in the course of inter State trade and commerce and its compatibility with article 286(3) read with section 15(b) of the CST Act. - HELD THAT: - Clause (3) of article 286 subjects any State law imposing tax on goods declared by Parliament to restrictions and conditions specified by Parliament. Section 15(b) of the CST Act, enacted pursuant to that power, provides that where State tax has been levied on declared goods which are subsequently sold in the course of inter State trade and commerce and tax is paid under the Central Act, the tax levied under the State law shall be reimbursed to the person making such inter State sale in the manner and subject to such conditions as may be provided by State law. Historically, the Gujarat Sales Tax Rules expressly provided full refund for declared goods; under the GVAT regime reimbursement has been effected by input tax credit under section 11. While section 11(6) of the GVAT Act permits the State to specify goods or classes of dealers not entitled to whole or partial tax credit, that power cannot be read so as to curtail the quantum of reimbursement mandated by section 15(b) of the CST Act. The State may determine the mode of reimbursement and may prescribe conditions, but it may not reduce the amount of tax required to be reimbursed for declared goods. The Division Bench decision in Kadwani Forge Ltd. was examined and held not to have decided the specific question whether the notification could curtail reimbursement where both purchase and sale are of declared goods; that aspect passed sub silentio and does not foreclose this challenge. Consequently, the impugned notification, insofar as it reduces entitlement to input tax credit in respect of goods which are both purchased and resold as declared goods (here, hides and skins), is inconsistent with article 286(3) read with section 15(b) of the CST Act and must be read down to exclude such transactions. [Paras 30, 31, 32, 33, 38]The notification reducing input tax credit shall not apply to goods which are both purchased and sold as declared goods; respondents must grant input tax credit (i.e. full reimbursement) for hides and skins purchased in the State and resold in the course of inter State trade or commerce.Final Conclusion: The petition is allowed to the extent that Notification No. (GHN 14) VAT 2010 S.11(6)(2) TH dated 29.6.2010 as amended (and its subsequent amendment dated 23.9.2014) shall not operate to curtail the reimbursement required by section 15(b) of the CST Act in respect of goods both purchased and sold as declared goods (including hides and skins); the respondents are directed to grant input tax credit for the whole of the State tax paid on such declared goods resold in the course of inter State trade and commerce. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:(a) Whether the impugned Notification No. (GHN-14) VAT-2010-S.11(6)(2)-TH dated 29th June, 2010, issued under sub-section (6) of section 11 of the Gujarat Value Added Tax Act, 2003 (GVAT Act), which mandates reduction of input tax credit on purchases of hides and skins resold in the course of inter-State trade and commerce, is violative of article 286(3) of the Constitution of India read with section 15(b) of the Central Sales Tax Act, 1956 (CST Act).(b) Whether section 15(b) of the CST Act mandates full reimbursement of State tax paid on declared goods sold in the course of inter-State trade and commerce, thereby prohibiting any reduction of input tax credit by the State Government.(c) Whether the State Government's power under section 11(6) of the GVAT Act to specify goods or classes of dealers not entitled to whole or partial tax credit can be exercised so as to curtail reimbursement under section 15(b) of the CST Act.(d) Whether the decision of this Court in Kadwani Forge Ltd. v. State of Gujarat, which upheld the impugned notification, conclusively settles the controversy regarding declared goods.(e) The extent and scope of the doctrine of sub silentio in the context of precedents relied upon by the parties.2. ISSUE-WISE DETAILED ANALYSIS(a) Validity of the Impugned Notification under Article 286(3) and Section 15(b) of CST ActLegal Framework and Precedents: Article 286(3) of the Constitution restricts State laws imposing tax on declared goods, making them subject to restrictions and conditions specified by Parliament. Section 14 of the CST Act declares certain goods, including hides and skins, as goods of special importance in inter-State trade. Section 15(b) of the CST Act mandates that where tax has been levied under State law on declared goods and such goods are sold in the course of inter-State trade on which tax is paid under the CST Act, the State tax so levied shall be reimbursed to the person making such sale, 'in such manner and subject to such conditions as may be provided in any law in force in that State.'Historically, under the Gujarat Sales Tax Act, 1969, rule 45 of the Gujarat Sales Tax Rules, 1970 provided for refund of the whole of the tax paid on declared goods sold inter-State, reflecting compliance with section 15(b) of the CST Act.Court's Interpretation and Reasoning: The Court held that section 15(b) of the CST Act clearly mandates reimbursement of the entire State tax levied on declared goods sold in the course of inter-State trade and commerce. The phrase 'in such manner and subject to such conditions as may be provided in any law in force in that State' permits the State to prescribe the mode and conditions of reimbursement but does not authorize reduction or curtailment of the amount reimbursed. The Court reasoned that the State law may regulate the procedure but cannot override or diminish the quantum of reimbursement which is mandated by the Central Act.Application of Law to Facts: The impugned notification reduces input tax credit on hides and skins, which are declared goods, thereby effectively reducing reimbursement of State tax paid on such goods. This curtailment conflicts with the unambiguous mandate of section 15(b) of the CST Act and article 286(3) of the Constitution.Treatment of Competing Arguments: The State contended that the notification was issued under section 11(6) of the GVAT Act, which empowers the State Government to specify goods or classes of dealers not entitled to whole or partial tax credit, and that section 15(b) permits reimbursement subject to conditions imposed by State law, including reduction. The Court rejected this, holding that conditions cannot include reduction of the quantum of reimbursement, only the mode and procedural conditions. The Court also distinguished the prior rule 45 under the Sales Tax Rules which mandated full refund, underscoring that the impugned notification's reduction is inconsistent with the statutory scheme.Conclusion: The impugned notification, insofar as it requires reduction of input tax credit on declared goods resold in inter-State trade, is violative of article 286(3) and section 15(b) of the CST Act.(b) Scope of State Government's Power under Section 11(6) of the GVAT ActLegal Framework: Section 11(6) of the GVAT Act authorizes the State Government to specify goods or classes of dealers not entitled to whole or partial tax credit. Input tax credit under the GVAT Act substitutes the refund mechanism under the earlier Sales Tax regime.Court's Reasoning: The Court acknowledged the State's power to regulate input tax credit but held that this power cannot be exercised in a manner that conflicts with the Central Act's mandate under section 15(b) of the CST Act. The reduction of input tax credit effectively reduces reimbursement, which is impermissible.Conclusion: The State's power under section 11(6) of the GVAT Act cannot override or curtail the reimbursement mandated under section 15(b) of the CST Act.(c) Applicability of Kadwani Forge Ltd. DecisionContext: The State relied upon the Division Bench decision in Kadwani Forge Ltd. which upheld the impugned notification.Court's Analysis: The Court examined the Kadwani Forge Ltd. judgment and found that the issue of reimbursement under section 15(b) of the CST Act in respect of declared goods was not specifically dealt with. The decision was rendered in cases involving manufacture and sale of goods different from those purchased, and the critical condition that both purchased and sold goods be declared goods was not satisfied. The Court applied the doctrine of sub silentio, relying on Supreme Court precedents, to hold that the Kadwani Forge Ltd. decision does not constitute binding precedent on the present issue.Conclusion: Kadwani Forge Ltd. does not conclusively decide the issue of reimbursement under section 15(b) of the CST Act for declared goods purchased and sold in the course of inter-State trade.(d) Doctrine of Sub Silentio and Precedential ValueLegal Principles: The Court extensively discussed the doctrine of sub silentio, citing Supreme Court decisions which hold that a decision is not binding on a point of law that was not consciously considered or argued before the Court. The Court emphasized that only the ratio decidendi is binding, and obiter dicta or unconsidered conclusions do not have precedential value.Application: The Court found that the Kadwani Forge Ltd. decision did not consciously consider the issue of section 15(b) reimbursement for declared goods, and therefore, the decision is not binding on that point.(e) Treatment of Other Reliances and ArgumentsThe Court considered and distinguished various Supreme Court decisions cited by the parties, including those concerning the validity of discretionary powers in rules, classification under Article 14, and taxation of specific commodities such as tendu leaves. It held that these decisions were factually and legally distinguishable and did not support the State's contention that the impugned notification could curtail reimbursement under section 15(b) of the CST Act.3. SIGNIFICANT HOLDINGS'The words of clause (b) of section 15 of the CST Act are clear and unambiguous, namely that the tax levied under the State law shall be reimbursed to the person making such sale in the course of inter-State trade or commerce.''While sub-section (6) of section 11 of the GVAT Act permits the State Government to specify any goods or class of goods that shall not be entitled to whole or partial tax credit, the said provision cannot be read to mean that it empowers the State Government to override the provisions of section 15(b) of the CST Act and curtail the extent of reimbursement that has to be granted thereunder.''The impugned notification, to the extent it curtails the entitlement to input tax credit on sales or purchases of declared goods made during the course of inter-State trade or commerce, therefore falls foul of the above provisions of the Constitution and the CST Act which is the Central Act.''The decision of this court in Kadwani Forge Ltd. cannot be said to be a decision on the aspect of section 15(b) of the CST Act and to the applicability of the impugned notification to cases where the goods purchased and sold are both declared goods. The contention that the controversy involved in this case stands concluded by the above decision, therefore, does not merit acceptance.''The impugned Notification No. (GHN-14) VAT-2010-S.11(6)(2)-TH dated 29th June, 2010, as amended by Notification No. (GHN-14) VAT-2014-S.11(6)(4)-TH dated 23rd September, 2014, shall not be applicable to goods which are both purchased and sold as declared goods.''The respondents are directed to grant input tax credit for the whole of the tax paid by the petitioners on declared goods purchased and resold in the course of inter-State trade or commerce.'