1989 (10) TMI 52 - SC - VAT and Sales Tax

State Tax Amendments Invalidated by Supreme Court for Lack of Legislative Competence

The Supreme Court held that the amendments to section 9(1) of the Haryana General Sales Tax Act and section 13AA of the Bombay Sales Tax Act, imposing ... Taxable event - pith and substance - consignment/despatch tax - state legislative competence under entry 54 of List II - exclusive Parliamentary competence under entry 92B of List I and article 269(1)(h) - retrospective validation of subordinate legislation - remedial/charging fiscal provisionTaxable event - consignment/despatch tax - state legislative competence under entry 54 of List II - exclusive Parliamentary competence under entry 92B of List I and article 269(1)(h) - Validity of the latter part of section 9(1)(b) of the Haryana General Sales Tax Act, 1973, which levies purchase tax on despatch/consignment of manufactured goods outside the State - HELD THAT: - The court analysed whether the imposition is in substance a tax on purchases or a tax on despatch/consignment. The taxing event under the amended section was held to be the despatch/consignment of manufactured goods outside the State (not the earlier purchase of raw materials), because liability accrues only after manufacture and subsequent despatch. Having regard to the Forty-sixth Amendment (insertion of entry 92B in List I and article 269(1)(h)), taxation of consignments in the course of inter-State trade falls within the exclusive legislative field of Parliament. Applying the doctrine of pith and substance, the impugned part of section 9(1)(b) was therefore in substance a consignment/despatch tax and not a purchase tax within entry 54 of List II, and so exceeded the State's legislative competence.The latter part of section 9(1)(b) is ultra vires and void; appeals concerning that provision are allowed to that extent.Retrospective validation of subordinate legislation - remedial/charging fiscal provision - pith and substance - Validity of section 24(3) of the Haryana Act insofar as it seeks to validate earlier notifications and judicial decisions by altering legal consequences retrospectively - HELD THAT: - Section 24(3) was examined as an attempt to validate or override judicial decisions and to make the charging provision effective retrospectively. Because the substantive charging provision (section 9(1)(b) as interpreted to levy tax on despatch) was held to be beyond State competence, the retrospective validation that seeks to sustain tax/notifications founded on that provision was likewise beyond competence. The Court applied constitutional limits on retrospective legislative enactments that would alter the pith and substance of the taxing power.Section 24(3), to the extent it seeks to validate or sustain imposition of tax on consignments/despatches outside the State, is invalid.Penalty proceedings - charging section - Consequences for penalty proceedings initiated under section 50 of the Haryana Act which are founded on the invalid charging provision - HELD THAT: - Penalty proceedings that are predicated on breach of the impugned charging provisions fall with the invalidity of those charging provisions. The Court held that where the substantive charging provision fails, penalty proceedings based on that provision cannot stand. The Court did not express any opinion on penalty challenges founded on independent grounds unrelated to the invalidated charging provisions.Penalty proceedings based solely on the invalidated charging provisions fail; no opinion expressed on penalties raised on other independent grounds.Taxable event - pith and substance - consignment/despatch tax - exclusive Parliamentary competence under entry 92B of List I and article 269(1)(h) - Validity of section 13AA of the Bombay Sales Tax Act, 1959 (as inserted by Maharashtra Act No. 28 of 1982) which imposes an additional purchase tax where manufactured goods are despatched to branches outside the State - HELD THAT: - The Court examined whether section 13AA is in substance a tax on purchases or a tax on consignment/despatch. Although the levy is quantified by reference to the purchase price of raw materials, the incidence was found to crystallise only upon manufacture and subsequent despatch of different manufactured goods to places outside the State; hence the taxable event is the consignment/despatch. Given the Forty-sixth Amendment and insertion of entry 92B, taxation of consignments in the course of inter-State trade is within Parliament's exclusive domain. Applying pith and substance analysis, section 13AA was a consignment/despatch tax in substance and therefore beyond the State Legislature's competence. Challenges under article 14 and article 301 were considered and rejected on the facts once the section was characterised and struck down.Section 13AA is, in substance, a tax on despatch/consignment outside the State and is ultra vires; appeals allowing the assessees are allowed and the High Court orders are set aside.Section 9(1)(c) - tax on export/despatch - exclusive Parliamentary competence under entry 92B of List I and article 269(1)(h) - Validity of levy under section 9(1)(c) of the Haryana Act insofar as it purports to tax despatch/export of goods (as raised by Food Corporation of India appeals) - HELD THAT: - The Court held that taxation which is in essence imposed on despatch/consignment or export outside the State is a matter falling within entry 92B and the amending constitutional provisions; consequently, section 9(1)(c) insofar as it purports to tax export/despatch is beyond the State Legislature's competence. The Court expressly left open other contentions of the Food Corporation of India (e.g., immunity or special status) for determination in appropriate proceedings.Appeals by the Food Corporation of India allowed; the High Court's contrary view is set aside insofar as tax on despatch/consignment/export was upheld.Final Conclusion: The Court held that provisions which, in substance, impose a tax on despatch/consignment of manufactured goods outside the State (rather than on the purchase as the immediate taxable event) exceed State legislative competence after the Forty-sixth Amendment; accordingly the impugned portions of the Haryana and Bombay enactments and the retrospective validations founded on them were held invalid, related penalty proceedings based on those charging provisions fail, and the appeals identified in the judgment were allowed or dismissed as stated. Issues Involved:1. Validity of sections 9(1) and 24(3) of the Haryana General Sales Tax Act, 1973.2. Validity of section 13AA of the Bombay Sales Tax Act, 1959.3. Penalty proceedings under section 50 of the Haryana General Sales Tax Act, 1973.4. Competence of State Legislatures to impose taxes on consignment of goods.Detailed Analysis:1. Validity of Sections 9(1) and 24(3) of the Haryana General Sales Tax Act, 1973:The primary issue was whether the Haryana General Sales Tax Act's provisions imposing purchase tax on goods dispatched outside the state were valid. The appellant argued that the imposition of purchase tax on goods dispatched to various depots outside the state was beyond the legislative competence of the State Legislature. The High Court initially ruled in favor of the appellant, stating that mere dispatch of goods to the dealer's own branch did not constitute 'disposal' under section 9(1)(a)(ii) of the Act. The Haryana Legislature amended section 9 to include dispatches outside the state, which was challenged again. The court held that the amendment was beyond the legislative competence of the State Legislature as it sought to tax consignment transfers, which fell under the Union's jurisdiction post the Forty-sixth Amendment to the Constitution. The court concluded that section 9(1)(b) of the Haryana Act, as amended, was ultra vires and void.2. Validity of Section 13AA of the Bombay Sales Tax Act, 1959:Section 13AA imposed an additional purchase tax on goods used in manufacturing if the manufactured goods were dispatched outside Maharashtra. The appellants contended that this section effectively taxed the consignment of goods, which was beyond the State Legislature's competence. The High Court upheld the provision, stating it was a tax on the purchase of raw materials. However, the Supreme Court disagreed, holding that the taxable event was the dispatch of manufactured goods outside the state, not the purchase of raw materials. Therefore, section 13AA was also deemed beyond the legislative competence of the State Legislature and was struck down.3. Penalty Proceedings under Section 50 of the Haryana General Sales Tax Act, 1973:The penalty proceedings under section 50 were contingent on the validity of the charging provisions of section 9(1). Since the court found section 9(1) to be ultra vires, the penalty proceedings based on this provision also failed. The court noted that penalties could not be imposed when the foundational tax provision itself was invalid.4. Competence of State Legislatures to Impose Taxes on Consignment of Goods:The court examined whether the State Legislature could impose taxes on the consignment of goods under the guise of purchase tax. The court emphasized that the Forty-sixth Amendment to the Constitution and the introduction of entry 92B in List I of the Seventh Schedule vested the power to tax consignment of goods exclusively in Parliament. The court held that the State Legislatures could not impose such taxes, and any attempt to do so was unconstitutional.Conclusion:The Supreme Court affirmed the decisions in Goodyear India Ltd. v. State of Haryana and Bata India Ltd. v. State of Haryana, holding that the amendments to section 9(1) of the Haryana Act and section 13AA of the Bombay Act were beyond the legislative competence of the State Legislatures. Consequently, the penalty proceedings under section 50 of the Haryana Act also failed. The court emphasized that the power to tax consignment of goods lay exclusively with Parliament, and any state legislation attempting to do so was invalid.