TaxTMI 
TaxTMI 
2016 (7) TMI 1157
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....e appellant mainly raised two contentions. One was that there is discrimination in grant of exemption by the State, in as much as, appellant is having C.L.9 licence for vending in City Municipal Corporation area. In his submission, if exemption is available to liquor shop or wine dealer, there is no reason why the restaurant or hotel where liquor is being provided/sold would be deprived of the benefit of exemption. Another contention raised by the learned Counsel for the appellant was that under Karnataka Value Added Tax Act, 2003 (herein after referred to as the Act), there is no power to levy tax on the services provided, or the extra charges levied by the bar and restaurant for the liquor being served together with the refreshments or without refreshments. Therefore, if the State while levying tax considers the matter differently, merely because a different ambience is provided and wine and liquor are served, such can be said to be outside the scope of the power of the State to levy tax because tax can only be levied on goods. In his submission, wine, liquor or any other liquor or wine remains as wine or liquor even if its quantity is sub-divided and served in a peg or more than....
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....er 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 respect of any tax payable under the said Act on the sale or purchase of any specified goods or class of goods or by any specified class of persons or on the sale or purchase of any specified goods by any specified class of dealers. Thus, under both the Acts, the specified goods or class of goods can be exempted from tax and Section 5(1) of the KVAT Act would indicate that such exemption would be subject to such restrictions and conditions as may be specified in the notification. 16. In the background of discussion made herein above, when the impugned notification is perused, it would indicate that it exempts tax payable on "sale of liquor" and it does not exempt the dealer as such. However, where such dealer of certain identified categories sells the liquor, such dealer would not be required to collect the tax as in case of other dealers they are required to do so. 17. A conjoint reading of Section 5(1) of the KVAT Act, Section 8A(1)(c) of KST Act, 1957 and the impugned no....
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....ods 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 goods which are produced or manufactured - (i) In a free trade zone or a special economic zone and brought to any other place in India; or (ii) by a hundred per cent export-oriented undertaking and brought to any other place in India." (emphasis supplied) In exercise of such power conferred, Government of India has exempted excise duty payable by class of persons. 19. The Hon'ble Apex Court in the case of ORIENT WEAVING MILLS PVT LTD & ANOTHER vs UNION OF INDIA AND OTHERS reported in AIR 1963 SC 98 was examining the constitutional validity of Rule 8(1) of Central Excise Rules, 1944 as to whether it suffers from the vice of excessive delegation of power to exempt or not. Rule 8(1) of Central Excise Rules, 1944 reads thus: "8. Power to authorize exemption from duty in special cases: (1) The Central Government may from time to time, by notification in the Official Gazette, exempt subject to such conditions as may b....
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....ld 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, impugned enactment as well as notification is not ultra vires and is within the State's power under Section 5(1) of the Act. RE: DISCRIMINATION: 21. The thrust of the arguments advanced by the learned Advocates appearing for the petitioners has been that impugned notification unreasonably discriminates between the dealers in liquor carrying on business selectively since a person holding licence in Form CL-9 carrying on business in village panchayat areas is exempted but it does not exempt a similar licence holder carrying on similar business in the same area and as such, there is no rationale and it amounts to discrimination and impedes free flow of trade and commerce and such levy is violative of Articles 14, 19 and 304-B of the Constitution of India. 22. There cannot be any dispute to the proposition that a legislation can be challenged on the grounds of:- (i) lack of legislative competence to make subordinate legislation; ....
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.... 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 2,00,000 2,80,000 27. It is not in dispute that dealers holding liquor licence in Form CL-2 and CL-11C sell liquor across the counter to consumers at a sale price not exceeding the MRP indicated on the label of the container or bottle. However, such restriction is not imposed on Bars and Restaurants, Clubs, Star Hotels, Hotel, Boarding Houses and Lodges and this enables them to fix the sale price of the liquor being sold to the customers depending upon the varying degree of facilities provided by them to the customers. 28. The Legislature has inserted Entry 59A in the III Schedule to KVAT Act and has chosen to provide for levy of tax on liquor sold by certain licence holders. Notification - II bearing No.FD 21 CSL 2014 dated 28.02.2014 was issued granting exemption to liquor dealers holding licence to Form CL- 9 operating in Pan....
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....rticular 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 the notifications in question, it is evident that other fertilizers of the NPK category i.e. N.P.K. 12:32:16; N.P.K. 15:15:15; N.P.K. 20:20:0; N.P.K. 14:35:14 are included in the exemption list, whereas it is a matter of fact that the NPK 23:23:0 fertilizer is also a fertilizer of the same category, but it is omitted from the list. According to the notification dated 2-11-1994, the intention of the State was not to tax the sale of "potassium phosphatic fertilizers" but when we go into enquiry of nomenclature of these chemical compounds, we find that the NPK 23:23:0 is a "nitro-phosphate fertilizer" which has no potassium (K) ingredient. The Notifications dated 10-4-1995 and 15-5- 1995 clearly include NPK 20:20:0, which is also a nitro-phosphate fertilizer with zero content of potassium (K). This classification made unde....
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....o 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 not able to strike a rational balance of classification between the items of the same category. As a result of this, NPK 23:23:0 is not given exemption from taxation whereas all other NPK fertilizers of the same category like that of NPK 20:20:0 are provided with the exemption from taxation." 32. It is also well settled law that certain latitude for classification in a taxing statute is extended to the Legislature with a wider note. Classification necessarily implies the making of a distinction or discrimination between the persons so classified and those who are not members of that class. In other words, it is the essence of a classification that upon the class or cast duties or burden different from those resting upon the general public. 33. The State will decide what economic and social policy it requires to purs....
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....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 to solve specific problems or to achieve definite objectives by specific remedies, absolute equality or uniformity of treatment is impossible of achievement. Again tax laws are aimed at dealing with complex problems of infinite variety necessitating adjustment of several disparate elements. The Courts accordingly admit, subject to adherence to the fundamental principles of the doctrine of equality, a larger play to legislative discretion in the matter of classification. The power to classify may be exercised so as to adjust the system of taxation in all proper and reasonable ways the Legislature may select persons, properties, transactions :and objects; and apply different methods and even rates of tax, if the ,Legislature does so reasonably. Protection of the equality clause does not predicate a mathematically precise or log....
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....cretion 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 Family consisting of Hindus and undivided families of Mappillas. By the taxing Acts the Parliament could have treated Mappilla tarwads as units of taxation. But the mere fact that the law could have been extended to another class of persons who have certain characteristics similar to a section of the Hindus but have not been so included is not a ground for striking down the law. In treating a Hindu Undivided Family as a unit of taxation under the Expenditure-tax Act and not a Non-Hindu Undivided Family, the Parliament has not attempted an "obvious inequality"". (ii) In the case of SHASHIKANT LAXMAN KALE AND ANOTHER vs UNION OF INDIA AND ANOTHER reported in (1990)4 SCC 366, Apex Court has held that Court must look beyond ostensible classification and to the purpose of the law and apply the test of 'palpable arbitrariness' i....
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....leges 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 set apart the classes according to the needs and exigencies of the society and as suggested by experience. It can recognise even degree of evil, but the classification should never be arbitrary, artificial or evasive. (7) The classification must not be arbitrary but must be rational, that is to say, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes those that are gr....
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....r 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 negatived and held that while making classification, the Legislature cannot be expected to provide abstract symmetry and if classification rests upon a real and substantial distinction bearing a reasonable and just relation to the thing in respect of which it is made, then it does not amount to discrimination. It has been held by the Apex Court in said judgment as under: "40. This brings us to the second branch of the argument relating to the applicability of Article 14 of the Constitution of India. In this connection, Mr. Krishnamoorthy Iyer submitted in the first place, that the special treatment afforded to the debtors under Section 20 of the Act is wholly discriminatory and is violative of Article 14. Secondly, it was argued o....
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....(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 theory of reasonable classification is implicit and inherent in the concept of equality for there can hardly be any country where all the citizens would be equal in all respects. Equality of opportunity would naturally mean a fair opportunity not only to one section or the other but to all sections by removing the handicaps if a particular section of the society suffers from the same. It has never been disputed in judicial pronouncements by this Court as also of the various High Courts that Article 14 permits reasonable classification. But what Article 14 or Article 16 forbid is hostile discrimination and not reasonable classification. In other words, the idea of classification is implicit in the concept of equality because equality m....
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....hematical 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 were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give "force and life" to the intention of the legislature. That was clearly laid down (3 Co Rep 7b) by the resolution of the judges (Sir Roger Manwood, C.B., and the other barons of the Exchequer) in Heydon's case (1584) 3 Co. Rep. 7a, and it is the sa....
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....r 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 selection of local area, ipso facto, the statute would be unconstitutional as being violative of Article 14, must be negatived. 17. In order to ascertain whether the classification of local areas for the purposes of levy of tax is reasonable or not, a reference may be made to the impugned notification. Table annexed to the notification shows in all 27 local areas selected for levy of tax. They are again divided into three groups, A, B and C for selecting rates to be levied on different scheduled goods. A mere glance at the local areas selected and those according to the petitioner excluded, viz., areas within the jurisdiction of various Gram Panchayats would bring in bold relief that population criterion appears to have been adopted in selectin....
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....mely, 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 licence in CL-4 or CL-6A or CL-7 issued under Karnataka Excise (Sale of Indian and Foreign Liquor) Rules, 1968 and they are exempted. 38. The impugned legislation has been enacted by the State Legislature under Entry 54 of list II of VII Schedule of the Constitution of India which provides for levy of tax on sale or purchase of goods in the State and is subject to Entry 92A of List I and as such, there can be no further curtailment of the State's power of taxation. 39. The classification of dealers for the purpose of levy of tax and granting exemption on the basis of turnover is held to be not hit by Article 14 of the Constitution by the Division Bench of this Court in the case of SHANTILAL & BROTHERS vs STATE OF KARNATAKA A....
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....rtain 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 principles underlying the doctrine of equality and it would not be vulnerable to attack on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others. It has been held by Hon'ble Apex Court in the case of INCOME TAX OFFICER, SHILLONG AND OTHERS vs R.TAKIN ROY RYMBAI AND OTHERS reported in (1976)1 SCC 916 to the following effect: "27. While it is true that a taxation law, cannot claim immunity from the equality clause in Article 14 of the Constitution, and has to pass like any other law, the equality test of that article, it must be remembered that the State has, in view of the intrinsic complexity of fiscal adjustments of diverse elements, a considerably wide discretion in the matter of classification for taxation purposes. Given legislativ....
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....tentially 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 a nominal amount. Moreover, but for the condition provided in sub-clause (a), the exemption granted under Section 10(26) is likely to operate unequally and cause inequality of treatment between individuals similarly situated. A tribal residing in the scheduled areas earning large income from business located outside the specified areas, would be totally exempt while the non-tribal whose source of income is a share in the same business would be taxed although with reference to the source of the income, both were similarly situated 36. We are not persuaded to accept Mr.Lahiri's argument that the making of the exemption conditional upon the classification envisaged by sub-clause (a) would deter the members of the scheduled tribes from joining the mainstream of national life, or, would be in....
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....ty 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 in any way altered by the impugned Act. As already pointed out what has been done by the impugned Act is only to provide for a different mode of computation of the additional sales tax by linking the rate of levy to the taxable turnover instead of to the amount of tax assessed under the Act of 1959. The constitutional validity of the levy of additional tax is not in any manner affected by the said change brought about in the mode of levy and computation as a result of the amendments effected by the impugned Act. It was strongly contended on behalf of the petitioners that the prescription of different rates of additional sales tax depending upon the quantum of turnover of the different assessees is totally repugnant to the concept of levy of tax on sales. Another argument advanced b....
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.... 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 their respective turnovers for the purpose of graded imposition so long as it is based on differential criteria relevant to the legislative object to be achieved is not unconstitutional. A classification, depending upon the quantum of the turnover for the purpose of exemption from tax has been upheld in several decided cases. By parity of reasoning, it can be said that a legislative classification making the burden of the tax heavier in proportion to the increase in turnover would be reasonable. The basis is that just as in tax....
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....x 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 only to raise revenue but also to regulate the economic life of the society". 45. Turning my attention back to the facts on hand, it can be seen from the terms of the licence conditions issued to a dealer in Form No.CL-2, the liquor is sold across the counter to consumers at the sale price not exceeding the MRP indicated on the label of the container or the bottle vide Rule 3(2). Whereas, no such restriction of MRP is imposed on Bars and Restaurants, Clubs, Star Hotels, Hotel, Boarding Houses and Lodges covered under the i....
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.... 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 capturing substantial value addition taking place on liquor consumed in the premises of a Boarding House and Lodge, has brought this class of dealer under the net of tax, but Bar and Restaurants located in rural area which do not have the advantage of catering to the class of customers of economic superiority are exempted. Thus, the impugned notification dated 28.02.2014 which exempts liquor sold by dealers holding licence in Form No.CL-9 operating in rural areas in comparison with liquor sold by a person operating a Boarding Ho....
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....e order dated 30-9-2015 and as the order of the learned Single Judge itself, for the reasoning recorded is reproduced herein above, we need not further burden our order with the aforesaid case laws referred. 12. The first contention raised by the learned Counsel for the petitioner that there is a discrimination in the grant of exemption by the Legislature, if examined, it appears that the person holding C.L. 9 licence is different than a liquor and wine dealer, because the C.L.9 licence, is for vending of the liquor and wine in the bar or bar and restaurant. The basic distinction is that the one who is dealer in liquor and wine is selling the liquor or wine or beer or fenny in the same packing of bottle as being manufactured by the manufacturing company. Whereas, the person holding C.L.9 licence, for vending in bar or bar and restaurant, is providing liquor or wine in pegs and beer in glass/es. It is hardly required to be stated, that if any consumer of the goods is desirous to have only one peg, he will go to a bar or a bar and restaurant, but he will not go to a liquor or wine dealer for buying the whole bottle in the packed form. Therefore, the status of a person who is deale....