TaxTMI 
TaxTMI 
2015 (11) TMI 1635
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 'KVAT Act'], with effect from 01.04.2014 and continued in the statute book till 01.04.2015, with effect from which date, it was omitted therefrom. The provision was introduced through the Kerala Finance Bill of 2014 and, by virtue of a notification under the Kerala Provisional Collection of Taxes Act, came into force with effect from 01.04.2014. Thereafter, it assumed a modified form when the Kerala Finance Act, 2014 was enacted on 23.07.2014, with effect from 01.04.2014. With effect from 01.04.2015, the levy of turnover tax on textile articles was omitted and the goods were made taxable under the KVAT Act @ 1% under II Schedule to the KVAT Act. Before dealing with the grounds of challenge raised in the writ petitions, therefore, I feel it would be apposite to notice the provisions as they stood, when introduced through the Finance Bill and thereafter, when they were amended and enacted through the Finance Act. The Kerala Finance Bill, 2014 "6A. Payment of turnover tax on textile articles:- Notwithstanding anything contained in section 6, every dealer whose total turnover of the previous year is above rupees one crore shall pay turnover tax at the rate of two percent, o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ics of Flax 5309 (4) Woven fabrics of jute or of other textile base fibres 5310 (5) Woven fabrics of other vegetable textile fibres; woven fabrics of paper yarn 5311 (6) Man-made filaments (a) Woven fabrics of synthetic filament yarn, including woven fabrics obtained from materials of HSN heading 5404 5407 (b) Woven fabrics of artificial filament yarn, including woven fabrics obtained from material of HSN heading 5405 5408 (7) Man-made Staple Fibres (a) Woven fabrics of synthetic staple fibres, contained 85% or more by weight of synthetic staple fibres 5512 (b) Woven fabrics of synthetic staple fibres, containing less than 85% by weight of such fibres, mixed mainly or solely with cotton, of a weight not exceeding 170m2 5513 (c) Woven fabrics of synthetic staple fibres, containing less than 85% by weight of such fibres, mixed mainly or solely with cotton, of a weight exceeding 170m2 5514 (d) Other woven fabrics of synthetic staple fibres 5515 (e) Woven fabrics of artificial staple fibres 5516 (8) Special Woven fabrics; Tufted textile fabrics; Lace, Tapestries, Trimmings; Embroidery (a) Woven pile fabrics and chennile fabrics other than HSN heading....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llon knitting machines), other than those of HSN heading Nos.6001 to 6004 6005 (f) Other knitted or chrocheted fabrics 6006 3. The petitioners challenge the levy of turnover tax under Section 6A of the KVAT Act on various grounds. The grounds of challenge against the levy, as discernible from the pleadings in the writ petitions and the submissions made by counsel for the petitioners at the time of hearing can be summarised as follows: (i) The levy of turnover tax on textile articles, which levy is attracted to the turnover of sale of specified textile articles of those dealers whose total turnover for the previous year was more than Rupees one crore, is ultra vires the provisions of the KVAT Act of which it forms a part. The levy militates against the concept of a value added tax, which is a tax on value addition, more so when there is no provision enabling the dealer in question to avail input tax credit and further, there is a prohibition against collecting the tax so paid from the purchaser. (ii) The levy is essentially a tax on income since the statutory provisions do not permit a passing on of the tax to the purchaser and the tax is to be borne by the sel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n India having been implemented to give effect to the obligations of the Central Government pursuant to the GATT agreement to which India was a signatory, the Central Government directive, as discernible from the white paper referred to above, was binding on the State Government and the State Legislature could not have enacted a law contrary to the said directions of the Central Government. [See: Maganbhai Ishwarbhai Patel v. Union of India and Another [AIR 1969 SC 783]; etc.] (vii) Even if the provision was constitutionally valid, there could not have been a collection of tax as per the provisions of the Finance Bill 2014 since, Section 5 of the Kerala Provisional Collection of Taxes Act would be attracted to the facts of the instant writ petitions. (viii) The State Legislature had, recognizing the difficulties faced by the trading community, and with a view to streamlining the levy so as to make it compatible with the concept of value added tax, omitted the provisions of Section 6A of the KVAT Act with effect from 01.04.2015 and made the goods taxable under the KVAT Act @ 1% under Schedule II to the KVAT Act. As the amendment was curative in nature, the amended provisions shou....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... exercise of power is our own sense of self-restraint. For the removal of unwise laws from the statute books appeal lies not to the courts but to the ballot and to the process of democratic Government." 6. The said observations were quoted with approval by our Supreme Court in Murthy Match Works v. Assistant Collector of Central Excise - [(1974) 4 SCC 428]. It is, therefore, with the above caveat in mind that I now proceed to consider the arguments advanced on behalf of the petitioners. The argument that the impugned levy is not a tax on sale of goods but on the income of the petitioners and is, therefore, beyond the legislative competence of the state legislature. 7. The petitioners would firstly contend that the levy is essentially a tax on the income of the petitioners and therefore, cannot be justified as a levy of a tax on the sale or purchase of goods as enumerated in Entry 54 of List II of the Seventh Schedule to the Constitution. It is pointed out that while a sales tax is recognised as an indirect tax, where the incidence of tax is on the dealer but the impact of the tax on the customer, to whom the dealer is entitled to pass on the tax, the present levy of turnover ta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t between entries in List I and List II, what has first to be decided is whether there is any conflict. If there is none, the question of application of the non-obstante clause "subject to" does not arise. And, if there be conflict, the correct approach to the question is to see whether it was possible to effect a reconciliation between the two entries so as to avoid a conflict and overlapping. Illustration If it is possible to construe entry 42 in List I as not including tax on inter-state sales it should be so construed and the power to levy such tax must be held to be included in entry 54 in List II (entries as they existed pre-Forty Second Amendment, 1976) (see Governor General in Council v. Province of Madras, AIR 1945 PC 98, and Province of Madras v. Boddu Paidanna and sons, AIR 1942 PC 33; [1938- 50] 1 STC 104]. 6. In the event of a dispute arising it should be determined by applying the doctrine of pith and substance to find out whether between two entries assigned to two different legislatures the particular subject of the legislation falls within the ambit of the one or the other. Where there is a clear and irreconcilable conflict of jurisdiction between the Centre an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sm by which the tax is to be assessed is not decisive of the essential characteristic of the particular tax charged, though it may throw light on the general character of the tax. When deciding an issue of legislative competence in relation to a taxing statute, the court is required to determine whether the nature of the tax is such that it does not fall within the fields of legislation that are earmarked for the legislature concerned. In Ralla Ram v. Province of East Punjab - [AIR 1949 FC 81], the Federal Court held that a tax on buildings under section 3 of the Punjab Urban Immovable Property Tax Act, 1940, measured by a percentage of the annual value of such buildings, remained a tax on buildings even though the measure of annual value of a building was also adopted as a standard for determining income from property under the Income-tax Act. The same standard was adopted as a measure for the two levies, yet the levies remained separate imposts by virtue of their distinctive nature. The measure adopted, it was held, could not be identified with the nature of the tax levied. In Sainik Motors v. State of Rajasthan [[1962] 1 SCR 517], a tax on passengers and goods was assessed as a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sive that it blurs the distinction between a tax on sale and a tax on income. In such cases, the measure of the levy would be a relevant factor in deciding the true nature of the levy. 12. In the context of levy of turnover tax, a division bench of this Court in Das Agencies and Another v. State of Kerala - [1988 (69) STC 44 (Ker)] went into the issue of legislative competence of the State legislature to levy a tax on turnover. The court upheld the levy by finding that the nature of the levy was such that it was a tax on the sale of goods that could be traced to Entry 54 of List II. While reaching the said conclusion, this court relied on the decisions of the Supreme Court in S. Kodar v. State of Kerala - [1974 (34) STC 73 (SC)] and Hoechst Pharmaceuticals Ltd. v. State of Bihar - [(1983) 4 SCC 45]. While the decision of the Supreme Court in the case of S. Kodar (Supra) has since been referred to a seven member bench for a consideration of the issue of whether the State Legislatures have the legislative competence to impose a surcharge on the total amount of sales tax payable by a dealer, this court has necessarily to follow the above decisions in compliance with the principles of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nge in the writ petitions, to the validity of the levy on this ground, as also on the ground of alleged violation of the rights of the petitioners under Article 19 of the Constitution therefore fails, and is accordingly rejected. The argument that the impugned levy is not in consonance with the scheme of Value Added Tax that is contemplated under the KVAT Act, and against the understanding arrived at between the Centre and the States in the White Paper on State Level Value Added Tax drawn up by the Empowered Committee of State Finance Ministers 14. It is the contention of the petitioners that the impugned levy is one that goes against the very concept of a value added tax as envisaged under the KVAT Act. It is pointed out that an empowered committee of State Finance Ministers was constituted by the Ministry of Finance, Government of India, on the basis of a resolution adopted in the conference of Chief Ministers on November 16,1999, for the purpose of arriving at a consensus with regard to the basic design of the State Level Value Added Tax that was to be introduced in the various states. It is stated that the States, through discussions in the empowered committee had found it in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l Committee in Attorney General for Canada v. Attorney General for Ontario and others - [LR (1892) AC 491]. At paragraphs 80 and 81 of the judgment, it is stated as follows; "80. The Judicial Committee in Attorney-General for Canada v. Attorney-General for Ontario and Others (supra), made some observations in the context of a rule applicable within the British Empire, which are pertinent: "It will be essential to keep in mind the distinction between (1) the formation, & (2) the performance, of the obligations constituted by a treaty, using that word as comprising any agreement between two or more sovereign States. Within the British Empire there is a well-established rule that the making of a treaty is an executive act, while the performance of its obligations if they entail alteration of the existing domestic law, requires legislative action. Unlike some other countries, the stipulations of a treaty duly ratified do not within the Empire, by virtue of the treaty alone, have the force of law. If the national Executive, the Government of the day, decide to incur the obligations of a treaty which involve alteration of law they have to run the risk of obtaining the assent of Parliam....
X X X X Extracts X X X X
X X X X Extracts X X X X
....exceptions to the rule contained in Article 246. The effect of Article 253 is that if a treaty, agreement or convention with a foreign State deals with a subject within the competence of the State Legislature, the Parliament alone has, notwithstanding Article 246(3), the power to make laws to implement the treaty, agreement or convention or any decision made at any international conference, association or other body. In terms, the Article deals with legislative power : thereby power is conferred upon the Parliament which it may not otherwise possess. But it does not seek to circumscribe the extent of the power conferred by Article 73. If, in consequence of the exercise of executive power, rights of the citizens or others are restricted or infringed, or laws are modified, the exercise of power must be supported by legislation; where there is not such restriction, infringement of the right or modification of the laws, the Executive is competent to exercise the power." 16. The aforesaid legal position has been recognised and consistently followed in subsequent case law. The argument that the levy is discriminatory in that no other State in the Country has imposed a similar levy and,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is contended by the petitioners that there is no machinery provision under the KVAT Act that was simultaneously introduced along with the levy under Section 6A and hence, the levy itself must fail on this ground. Reliance is placed on the decisions in [See: Municipal Council, Khurai and Another v. Kamal Kumar and Another [AIR 1965 SC 1321]; M/s.Govind Saran Ganga Saran v. Commissioner of Sales Tax and others [AIR 1985 SC 1041]; Cochin Cadalas (P) Ltd. v. State of Kerala [[2008] 16 VST 319 (Ker)]; Heinz India Pvt. Ltd. and Another v. State of U.P. and Others [[2012] 50 VST 13 (SC)]. 20. Chapter V of the KVAT Act, which deals with Assessment and recovery of tax and penalty, provides for the filing of returns by every registered dealer and every dealer liable to be registered under the Act. Read with the provisions of the KVAT Rules, the statutory provisions provide for the filing of returns in the prescribed form (Form 10 for those dealers required to file returns on a monthly basis and Form 10A for those dealers dealing in exempted goods and required to file returns on quarterly basis). There is no distinction made in these forms between goods liable to pay tax in terms of Section....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the petitioners. The principles of statutory interpretation mandate that a substantive amendment in a taxing statute be construed as prospective in its operation unless otherwise stated [See: Commissioner of Income Tax (Central)-1, New Delhi v. Vatika Township Private Limited - [JT (2014) 10 SC 390]. Merely because, in the speech of the Finance Minister, while presenting the Budget proposals for the year, it was stated that the difficulties faced by the trade were taken into account for deciding to scrap the levy, it does not follow that the amendment that followed was curative in nature. The legislative intent in an amending statute is to be gathered from the express words used by the legislature. Going by the express provisions of the Finance Act, 2015, I find that the omission of Section 6A of the KVAT Act was to take effect only from 01.04.2015. The levy is therefore to be treated as valid till that date. 23. I thus hold that the State Legislature has the legislative competence to levy turnover tax on specified textile articles through the enacted provisions of Section 6A of the KVAT Act. 24. I must now turn to another contention urged on behalf of the petitioners namely, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any of the ways mentioned in clause (1). (3)Any law of a State shall, in so far as it imposes, or authorises the imposition of, - (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of Article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify." CST Act: 14. Certain goods to be of special importance in Inter-State Trade or Commerce:- (i) .................... (ii) cotton, that is to say, all kinds of cotton (indigenous or imported) in its unmanufactured state, whether ginned or unginned, baled, pressed or otherwise, but not including cotton waste; (ii-a) Cotton fabrics covered under heading Nos.52.05, 52.06, 52.07, 52.08, 52.09, 52.10, 52.11, 52.12, 58.01, 58.03, 58.04, 58.05, 58.06, 59.01, 59.03, 59.05, 59.06 and 60.01 of the schedule to the Central Excise Tariff Act, 1985 (5 of 1986). (ii-b) Cotton yarn, but not including cotton....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al [See Indra Das v. State of Assam - [(2011) 3 SCC 380] and Subramanian Swamy and Others v. Raju through Member, Juvenile Justice Board and Another - [(2014) 8 SCC 390]. It is the latter course that I choose to adopt in this case. I must clarify, however, that the restriction aforementioned applies only in respect of the turnover of sale of specified textile articles as is reckoned for the purposes of the levy, and not to the turnover of the said articles as is taken for determining the threshold turnover, of Rs.One Crore in the previous year, of those dealers on whom the levy is contemplated. Similarly, in the case of those textile articles as are declared to be goods of special importance in interstate trade or commerce under Section 14 of the CST Act, the mandate of Section 15 of the CST Act has necessarily to be followed and the State Legislation has to ensure that the tax payable under the KVAT Act in respect of the sale or purchase of such goods inside the State shall not exceed 5% of the sale price thereof. Section 6A of the KVAT Act is thus read down to the above extent. 27. I now turn to the challenge in the writ petitions against the assessments made under Section 6A of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s sub-section shall not exceed the difference between the rate of such tax, duty, cess, fee or other revenue proposed in the declared provision and the rate of such tax, duty, cess, fee or other revenue in force immediately before the 1st day of April following the date of introduction of the Bill. (2) Where a declared provision ceases to have the force of law under clause (b) or clause (c) or subsection (2) of section 4, refunds shall be made of all taxes, duties, cesses, fees and other revenues collected which would not have been collected if the declaration in respect of it had not been made. (3) Notwithstanding anything contained in sub-section (1) or sub-section (2), the amount to be refunded under this section may at the option of the person entitled to the refund, be adjusted against any tax, duty, cess, fee or other revenue which is, or may become, recoverable from such person." 28. The above provisions would mandate that the State Government would have to refund such taxes or other revenues as have been collected by them in terms of Section 6A, in respect of textile articles other than those specified in Entries 17A, 46A and 51 of the I Schedule to the KVAT Act. The ....