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

GOODYEAR INDIA LTD. and Hindustan Lever Limited And Another Versus STATE OF HARYANA and State Of Maharashtra And Another

GOODYEAR INDIA LTD. and Hindustan Lever Limited And Another Versus STATE OF HARYANA and State Of Maharashtra And Another - [1991] 188 ITR 402, [1990] 76 ... 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.