TaxTMI 
TaxTMI 
2015 (9) TMI 1438
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.... and Prof.Ravivarma Kumar, Advocate General along with Sri T.K.Vedamurthy, HCGP for respondent - State. 3. It is the contention of petitioners that they are licencees under the Karnataka Excise Act, 1967 and have been vending liquor from the long number of years and the Excise Act provides for issuance of various kinds of licences in respect of dealers dealing in liquor and all the dealers in the trade are issued with the licence to trade in goods namely, liquor, beer, wine or Fenny. Petitioners have contended that Karnataka Sales Tax Act, 1957 (for short 'KST Act') provided for levy of sales tax for almost 50 years and empowered the State to confer exemption by issue of notification either with reference to goods or class of goods or dealers or class of dealers. With effect from February, 2001 the Sales Tax levied on liquor was merged with State Excise Duty by introducing amendment to Karnataka Sales Tax Rules and even after KVAT Act coming into force, all the dealers in various categories through out the State enjoyed exemption from levy of VAT and in order to merge Sales Tax with duty, amendment to Karnataka Excise (Excise Duties and Fees) Rules, 1968 was brought whereunde....
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....chayat. It is also contended that there is no rational nexus between rural Bars and the Bars located either in panchayat areas or city areas and distinction sought to be placed by the State amounts to classification or distinction without any basis. It is further contended that by the impugned notification it exempts the licence holder of Form No.9 in village panchayat area though licence holder having licence in Form No.7 and carrying on similar business in village panchayat area, is liable to pay tax has resulted in discrimination and violative of Article 14 of the Constitution of India. On these grounds, petitioners have sought for declaring clause 8 and 9 of the Karnataka Value Added Tax (Amendment) Act, 2014 (Karnataka Act No.15/2014) being declared as ultravires and opposed to State Policy of merging sales tax with excise duty and consequently, for quashing the notification dated 28.02.2014. In support of their submission, they have relied upon the following judgments: (1) AIR 1963 SC 98 ORIENT WEAVING MILLS (P) LTD. AND ANOTHER vs UNION OF INDIA AND OTHERS (2) ILR 1999 KAR 1814 BASAVARAJ NAGOOR vs STATE OF KARNATAKA AND ANOTHER (3) ILR 2000 KAR 870 STATE OF....
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....operating or conducting business in urban areas and rural areas cannot be placed on the same pedestal. He submits that it is liquor as a product which is taxed and not the dealer and the liability is on the person who vends such liquor to recover and pay and tax is not levied on the person. On this ground, he sustains the validity of the impugned legislation as well as the consequential exemption notification issued. He would further contend that Section 5 is in parimateria with Rule 8 of the Central Excise Rules and as such, he seeks for dismissal of the writ petitions. In support of his submissions, he has relied upon the following judgments: (1) (1995)1 SCC 574 KHODAY DISTILLERIES LTD. AND OTHERS vs STATE OF KARNATAKA AND OTHERS (2) (1985)59 STC 178 SHANTILAL & BROTHERS vs STATE OF KARNATAKA AND ANOTHER (3) (1985)58 STC 12 K.M.MOHAMED ABDUL KHADER FIRM vs THE STATE OF TAMIL NADU AND OTHERS (4) (1983)4 SCC 45 M/S.HOECHST PHARMACEUTICALS LTD AND OTHERS vs STATE OF BIHAR AND OTHERS (5) (1976)1 SCC 916 INCOME TAX OFFICER, SHILLONG AND OTHERS vs R.TAKIN ROY RYMBAI AND OTHERS (6) (1969)1 SCC 681 N.VENUGOPALA RAVI VARMA RAJAH vs UNION OF INDIA AND ANOTHER (7)....
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....nal Resource Mobilisation ('ARM') and the said State policy envisaged under the Budget of 2014-15 reads as under: "472. The current system of Excise Tax on liquor is unable to capture substantial value addition that takes place in retail sale of liquor by clubs, lodging houses, star hotels, bar and restaurants. I therefore propose to levy lower VAT of 5.5% on liquor sold by bar and restaurants operating in urban areas and by clubs, lodging houses and star hotels." In the background of the above stated State policy and in order to levy tax on liquor, the Legislature has inserted Entry No.59-A in the III Schedule to the KVAT Act by way of Karnataka Value Added Tax (Amendment) Act, 2014 (Karnataka Act No. 15/2014) and it would be apt to note the statement of objects and reasons in introducing the amendment Bill, 2014 to insert the said Entry, which reads as under: STATEMENT OF OBJECTS AND REASONS "It is considered necessary to amend the Karnataka Value Added Tax Act, 2003 to give effect to the proposals made in the Budget particularly to provide for levy of tax on sale of liquor including beer, fenny, liqueur and wine by bar and restaurants operating in urban areas and by ....
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....sition, the judgment of Apex Court in KEDAR NATH vs STATE OF BIHAR reported in AIR 1962 SC 955 can be looked up. Although tax laws are subject to Article 14 of the Constitution, a larger discretion in classification is given to the legislature in tax matters than in other spheres. This is, in view of the inherent complexity of fiscal adjustment of diverse elements. A taxing statute is not open to attack on the ground that it taxes some persons or objects and not others. The State has a wide discretion in selecting the objects or persons that it will tax and in order to tax something, it is not bound to tax everything. It is well settled that whenever a statute makes a distinction, it has to satisfy two tests in order to conform to Article 14 of the Constitution namely, (1) it must make a classification and (2) classification should have a rational nexus to the objects sought to be achieved. In this regard, judgments of Apex Court in the case of ITO, SHILLONG vs NTR RYMBAI reported in AIR (1976)1 SCC 916 and NVR VARMA RAJAH vs UNION OF INDIA reported in AIR (1969)1 SCC 681 can be looked up. 13. A fiscal statute has to be strictly construed and nothing can be read into the provisi....
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....ny tax payable under this Act.--- (a) on the sale or purchase of any specified goods or class of goods, at all points in the series of sales by successive dealers; or (b) by any specified class of persons, in regard to the whole or any part of their turnover; or (c) on the sale or purchase of any specified class of goods by any specified class of dealers in regard to the whole or part of their turnover. (2) to (6) xxx 15. A bare reading of Section 5(1) of the KVAT Act would indicate that goods specified in the I Schedule and any other goods that may be specified by a notification by the State Government would be exempt from the tax payable under the Act, subject to such condition and restriction, as may be specified in the notification. Reading of Section 8-A of erstwhile KST Act would indicate that State Government was empowered to grant exemption or reduction in rate in respect of any tax payable under the said Act under the eventualities referred to clause (a) to (c) of sub-section (1). The said clauses would indicate that State Government may by notification make an exemption or reduction in rate in resp....
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....striction and condition as may be specified in the notification" and the impugned notification would indicate that exemption is granted in respect of "liquor" sold by dealer who is not a person holding licence in the Forms indicated under the said notification. Hence, it cannot be contended that impugned notification has been issued without power under Section 5(1) of the KVAT Act. 18. In fact, under the Central Excise Act, 1944 a provision which is in parimateria with Section 5 of the KVAT Act can be found. Section 5A(1) of Central Excise Act, 1944 which is similar to Section 5 of the KVAT Act reads as under: "Power to grant exemption from duty of excise 5A. (1) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally either absolutely or subject to such conditions (to be fulfilled before or after removal) as may be specified in the notification, excisable goods of any specified description from the whole or any part of the duty of excise leviable thereon; Provided that, unless specifically provided in such notification, no exemption therein shall apply to excisable go....
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.... meant primarily for the protection of petty producers of "cotton fabrics" not owning more than four Power Looms, from unreasonable competition by big producers. Hence, it was held that it made a valid classification between the goods produced by big establishments and similar goods produced by small Power Loom weavers who suffer from handicaps to which big establishments are not subject to. Hence, it was held that there has been no excessive delegation of power to exempt under Rule 8(1) nor are the notifications bad insofar as they exempt certain "classes of person" and not "classes of goods" from the excise duty. The impugned notification on hand exempts liquor sold by retail sellers in sealed bottles under the specified condition of MRP and liquor sold by Bar and Restaurants operating in rural areas without scope for much value addition unlike liquor along with food and refreshments sold by Bar and Restaurants of urban areas and liquor sold in similar manner by Boarding House and Lodges in rural areas by following the specific conditions attached to the licence for such sale and thereby they would have relative economic edge and there is scope of value addition and as such, impu....
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....bove referred category of dealers is dependent on the area and population and said criteria has nexus with the volume of business in the area. 26. Under the Karnataka Excise Act, 1967 the quantum of licence fee prescribed is based on classification of areas on population criterion. They are classified as under: (i) Area based: (a) City Municipal Corporations (b) City Municipal Council (c) Town Municipal Council (d) Other areas (ii) Population based: (a) population more than 20 lakhs in respect of City Municipal Corporation. Even the licence fee prescribed for grant of CL-2, CL-9 and CL-7 licences is dependent on the area/population as could be seen from the following tabular column: Sl.No. Area in operation or Population CL-2 CL-9 CL-7 (a) City Municipal Corporation having population of more than 20 lakhs 4,46,000 6,00,000 6,60,000 (b) Other City Municipal Corporation areas 3,64,000 4,62,000 5,80,000 (c) City Municipal Council areas 3,30,000 3,64,000 4,30,000 (d) Town Municipal Council areas/Town Panchayat areas 2,50,000 2,60,000 3,64,000 (e) Other areas 2,00,000 2,00,0....
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....the inhibition of Article 14. It has been held that classification must not be arbitrary but must also be rational and it must not only be based on some qualities or characteristics which are to be found in all persons grouped together and which is not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of legislation. 31. Apex Court in the case of STATE OF UTTAR PRADESH AND OTHERS vs DEEPAK FERTILIZERS & PETROCHEMICAL CORPORTION LTD reported in (2007)10 SCC 342 was examining as to whether the exemption of Urea NPK 23:23:0 (product of the assessee) - petitioner which was exempted from tax being withdrawn was discriminatory or otherwise and in this background, it has been held that whenever any type of law is to be made for the purposes of levying tax on a particular commodity or exempting some other commodity from taxation, a sort of classification is to be made and in the facts obtained in the said case, it was held that the impugned notifications therein does not strike rational balance of classification between the items of the same category. It has been held by Hon'ble Apex Court as under: "13. From a perusal of ....
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....t the State has widest latitude where measures of economic and fiscal regulation are concerned. There is no dispute on this principle of law as enumerated in the aforesaid decision of this Court. However, this same law must not be repugnant to the Article 14 of the Constitution, i.e., it must not violate the right to equality of the people of India, and if such repugnancy prevails then, it shall stand void up to the level of such repugnancy under Article 13(2) of the Constitution of India. Therefore, every law has to pass through the test of constitutionality, which is nothing but a formal name of the test of rationality. We understand that whenever there is to be made any type of law for the purpose of levying taxes on a particular commodity or exempting some other commodity from taxation, a sort of classification is to be made. Certainly, this classification cannot be a product of a blind approach by the administrative authorities on which the responsibility of delegated legislations is vested by the Constitution. In a nutshell, the notifications issued by the Trade Tax Department of the State of U.P., dated 10- 4-1995 and 15-5-1995 lack the sense of reasonability because it is n....
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....of his business. It has been held by the Apex Court in the case of K.M.MOHAMMED ABDUL KHADER FIRM vs THE STATE OF TAMIL NADU AND OTHERS reported in 1985(58) STC 12 while dealing with the contentious issue of levy of additional tax at different rates on different dealers depending upon their turnover would be permissible and repelling the contention of levy being non collectable from the persons being not violative of Article 14 of the Constitution, and such classification being permissible. In the following judgments, similar view has been expressed. (i) It has been held by the Apex Court in N.VENUGOPALA RAVI VARMA RAJAH vs UNION OF INDIA AND ANOTHER reported in (1969)1 SCC 681 that a taxing statute is not exposed to attack on the ground of discrimination merely because different rates of taxation are prescribed for different categories of persons, transactions, occupations are objects and if classification is rationale, Legislature is free to choose objects of taxation. It has been held as under: "14. Equal protection clause of the Constitution does not enjoin equal protection of the laws as abstract propositions. Laws being the expression of legislative will intended ....
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....perty for purposes of taxation or the imposition of different rates upon different classes." Weaver again says at p. 397: "Class legislation is that which makes an improper discrimination by conferring particular privileges upon a class of persons, arbitrarily selected from a large number of persons, all of whom stand in the same relation to the privilege granted and between whom and the persons not so favoured no reasonable distinction or substantial difference can be found justifying the inclusion of one and the exclusion of the other from such privilege...... A classification must not be arbitrary, artificial or evasive and there must be a reasonable, natural and substantial distinction in the nature of the class or classes upon which the law operates. In respect to such distinction, a legislative body has a wide discretion and an Act will not be held invalid unless the classification is clearly unreasonable and arbitrary." 18. The Mappilla families governed by the Marumakkattayam Law reside in a small part of the country and form numerically a small community. The Parliament has again been accustomed in enacting tax laws to make a distinction between a Hindu Undivided ....
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....t attainable by the invention and application of a precise formula. Therefore, classification need not be constituted by an exact or scientific exclusion or inclusion of persons or things. The Courts should not insist on delusive exactness or apply doctrinaire tests for determining the validity of classification in any given case. Classification is justified if it is not palpably arbitrary. (4) The principle underlying the guarantee of Article 14 is not that the same rules of law should be applicable to all persons within the Indian territory or that the same remedies should be made available to them irrespective of differences of circumstances. It only means that all persons similarly circumstanced shall be treated alike both in privileges conferred and liabilities imposed. Equal laws would have to be applied to all in the same situation, and there should be no discrimination between one person and another if as regards the subject-matter of the legislation their position is substantially the same. * * * (6) The law can make and s....
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....s of the classification. It is clear that the role of public sector in the sphere of promoting the national economy and the context of felt needs of the times and societal exigencies informed by experience gained from its functioning till the enactment are of significance. There is no dispute that the impugned provision includes all employees of the public sector and none not in the public sector. The question is whether those left out are similarly situated for the purpose of the enactment to render the classification palpably arbitrary. It is only if this test of palpable arbitrariness applied in this manner is satisfied, that the provision can be faulted as discriminatory but not otherwise. Unless such a defect can be found, the further question of construing the provision in such a manner as to include all employees and not merely employees of public sector companies, does not arise. (iii) When constitutional validity of Section 20 of Kerala Agriculturists' Debt Relief Act, 1970 came up for consideration before Apex Court in the case of PATHUMMA AND OTHERS vs STATE OF KERALA AND OTHERS reported in (1978)2 SCC Page 1 on the ground of discrimination also, said contention was n....
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.... fulfilled, namely, (i) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group; and (ii) that that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded on different bases, namely, geographical, or according to objects or occupations or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration". This case has been relied upon in a large number of cases right from 1959 upto this date. In the case of State of Kerala & Anr. v. N. M. Thomas (supra) one of us (Fazal Ali, J.) while delivering the concurring judgment observed as follows regarding the various aspects of the concept of equality : (SCC p.376, para 158) "It is also equally well-settled by several authorities of this Court that Article 16 is merely an incident of Article 14. Article 14 being the genus is of universal application whereas - Article 16 is the species and seeks to obtain equality of opportunity in the services under the State. The ....
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.... statute. In such a situation the Court should be guided by a creative approach to ascertain what was intended to be done by the legislature in enacting the legislation and so construe it as to give force and life to the intention of the legislature. This is not charting any hazardous course but is amply borne out by an observation worth reproducing in extenso in Seaford Court Estates Ltd. v. Asher (1949) 2 All ER 155. It reads as under: "Whenever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise, and, even if it were, it is not possible to provide for them in terms free from all ambiguity. The English language is not an instrument of mathematical precision. Our literature would be much the poorer if it were. This is where the draftsmen of Acts of Parliament have often been unfairly criticised. A judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the judges trouble if Acts of Parliament we....
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....essary attribute of sovereignty and in that sense it is a power of paramount character". It was also observed that legislature which is competent to levy a tax must inevitably be given full freedom to determine which articles should be taxed, in what manner and at what rate. It would, therefore, be idle to contend that a State must tax everything in order to tax something. In tax matters, "the State is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably" (see Willis on 'Constitutional Law', p.587). This statement of law has been approved by this Court in the case of East India Tobacco Co. v. State of Andhra Pradesh (AIR 1962 SC 1753. The question, therefore, is, whether a tax of a certain kind can be levied on entry of goods in certain local areas, the classification of local areas, if found to be reasonable, the levy of tax would not be invalid on the ground that choosing certain areas only excluding some others would violate Article 14. Whether in this case the classification is reasonable would be presently examined but the contention that if the State Government is granted a choice in the matter of sele....
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....Section 3 in all local areas within Karnataka State was a minimum condition for exercise of the power under Section 3. The contention must, accordingly be negatived." 37. In the background of catena of decisions above referred to, the impugned legislation and notification is being examined. Under Section 9 of the KVAT Act, the levy is passable to consumer and it specifically enables the dealer to charge and collect tax from the customers or in other words, tax can be passed on to customers. Under Entry 59A of III Schedule of KVAT Act, tax is levied on sale of liquor including Beer, Fenny, Liqueur, Wine which are goods or commodities. Under the impugned notification exemption is on sale of such liquor, etc. by a dealer in rural area namely, the tax payable under Entry 59A of III Schedule on sale of liquor including Beer, Fenny, liqueur and Wine by a dealer who is not a person holding licence in Form No.CL-9 for vending in Bruhat Bangalore Mahanagara Palike area, City Municipal Corporation areas, City Municipal Council areas and Town Municipal Council or Town Panchayat areas issued under Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968 or dealer who is not holding....
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....cise (Excise Duty and Fee) Rules, 1968 . 41. However, with effect from 01.03.2014 the State inserted Entry 59A to Third Schedule of KVAT Act for levy of tax on liquor and correspondingly notification dated 28.02.2014 (impugned in these writ petitions) was also issued granting exemption in respect of certain categories of dealers . 42. A perusal of the above referred impugned notification would indicate that the State Government has exempted tax payable on the liquor sold by a dealer who is not a person holding licence in Form No.CL-9 for vending liquor in Bruhat Bangalore Mahanagara Palike area, City Municipal Corporation areas, City Municipal Council areas and Town Municipal Council or Town Panchayat areas. The said notification also exempts tax payable on liquor when it is sold by certain categories of dealers. 43. In the matters of tax laws, larger discretion is extended to the State Legislature and ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax and which it would not tax, so long as the classification made within this wide and flexible range, by a taxing statute does not transgress the fundamental prin....
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....ntion has not been canvassed before us. Thus the classification made by the aforesaid sub- clause (a) for purposes of exemption is not unreal or unknown. It conforms to a well recognized pattern. It is based on intelligible differentia. The object of this differentiation between income accruing or received from a source in the specified areas and the income accruing or received from a source outside such areas is to benefit not only the members of the schedule tribes residing in the specified areas but also to benefit economically such areas. If the contention advanced by Mr.Lahiri is accepted and a member of the scheduled tribe residing in a specified area is held entitled to the exemption irrespective of whether the source of his income lies within or outside such areas, it will lead to potentially mischievous results and evasion of tax by assessees who do not belong to the scheduled tribes. All that a non-tribal assessee in India need do would be to enter into a sham partnership with a member of the scheduled tribe residing in the specified area and ostensibly give him under the partnership a substantial share of the profits of the business while, in reality, pay the tribal only....
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....s is that since the State Legislature had already provided for the levy of a tax on sales by the Act of 1959 and had also enacted a further statute authorising the levy and collection of a surcharge which is in truth and substance the imposition of an additional sales tax, it could not legally go on legislating further enactments providing again for levy of additional sales tax. On this basis it is contended that the provisions of the impugned Act, 1976 are ultra vires and devoid of legislative competence. We see no substance in this contention. The impugned enactment has merely amended the 1970 Act. It has not introduced a new tax; what it has done is only to amend the 1970 Act by providing for a different method of computation of the additional tax leviable under that Act. The validity of the 1970 Act has been upheld by a Constitution Bench of this Court in the case of S. Kodar v. State of Kerala (1974) 34 STC 73 (SC) :1975)1 SCR 121. Hence there is no longer any scope for the petitioners to contend that the State Legislature had no competence to provide for the levy of additional sales tax. The nature and identity of the additional sales tax imposed by the 1970 Act have not been....
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.... Buchirajalingam vs.State of Hyderabad (1958)9 STC 397 (SC) this Court said: "It is then said xxx from another party.' As we said, the additional tax is a tax upon sales of goods and not upon the income of a dealer and so long as it is not made out that the tax is confiscatory, it is not possible to accept the contention that because the dealer is disabled from passing on the incidence of tax to the purchaser, the provisions of the Act impose an unreasonable restriction upon the fundamental rights of the appellants under article 19 (1) (g) or 19 (1) (f)". Dealing with the contention that since the provisions of the Act imposed different rates of tax on different dealers depending upon their turnover there was a violation of Article 14 of the Constitution, Mathew J., who spoke for the Court observed: "The last contention, namely, that the provisions of the Act impose different rates of tax upon different dealers depending upon their turnover which in effect means that the rate of tax on the sale of goods would vary with the volume of the turnover of a dealer and are, therefore, violative of article 14 is also without any basis. Classification of dealers on the basis of t....
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....ore in consonance with social justice in an egalitarian state than that of the majority. As we said, large dealer occupies a position of economic superiority by reason of his volume of business and to make the tax heavier on him both absolutely and relatively, is not arbitrary discrimination but an attempt to proportion the payment to capacity to pay and thus arrive in the end at a more genuine equality. The capacity of a dealer, in particular circumstances, to pay tax is not an irrelevant factor in fixing the rate of tax and one index of capacity is the quantum of turnover. The argument that while a dealer beyond certain limit is obliged to pay higher tax, when others bear a less tax, and it is consequently discriminatory, really misses the point, namely, that the former kind of dealers are in a position of economic superiority by reason of their volume of business and form a class by themselves. They cannot be treated as on a par with comparatively small dealers. An attempt to proportion the payment to capacity to pay and thus bring about a real and factual equality cannot be ruled out as irrelevant in levy of tax on the sale or purchase of goods. The object of a tax is not on....
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.... would not cater to the elite class of customers or customers of economic superiority have been exempted by virtue of notification dated 28.02.2014. 47. At this juncture, it would be appropriate to note that licence fee fixed for a dealer holding licence in Form No.9 and operating in urban areas is ` 6.00 lakhs, whereas, licence fee prescribed for a similar licence holder who is running Bar and Restaurant business in rural area is ` 2.00 lakhs though both the class of licence holders run the same business. This exemption is extended to Bar and Restaurants operating in rural areas considering the fact of no value addition between the price at which liquor is purchased and sold to customers in rural areas. However, a Hotel, Boarding House and Lodge holding licence in Form CL-7 though located in rural area, liquor is served only to the residents of the Hotel and their guests who obviously would come from far off places. The customers of this category are affordable class who are willing to pay more for the comfort with varying degree of facilities. Hence, it enables the dealer to fix the rates of liquor without any restriction. Thus, the Legislature with the sole intention of captu....