TaxTMI 
TaxTMI 
2015 (11) TMI 1635
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....e KVAT Act [hereinafter referred to as the '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 p....
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....ss than 85% by weight of cotton, mixed mainly or solely with man made fibres, weighing more than 200 gm/m2 5211 (e) Other woven fabrics of cotton 5212 (3) Woven fabrics 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 ....
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....eeding 30 cm, other than those of HSN heading Nos.6001 or 6002 6003 (d) Knitted of chrocheted fabrics of a width exceeding 30cm, containing by weight 5% or more of elasto meric yarn or rubber thread, other than those of HSN heading No.6001 6004 (e) Wrap knitt fabrics (including those made on gallon 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....
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....tates in India having been rationalized so as to ensure a uniform system of VAT in all states, it was not open to the State legislature to make a departure from the understanding arrived at between the various states, as disclosed in the white paper drawn up at the meeting of empowered chief ministers of the various states. Further, the VAT Laws in 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 ....
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....g principles of decision which ought never to be absent from judicial consciousness. One is that courts are concerned only with the power to enact statutes, not with their wisdom. The other is that while unconstitutional exercise of power by the executive and legislative branches of the Government is subject to judicial restraint, the only check upon our own 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 ....
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....Constitution. Under the scheme of the entries in the Lists, taxation is regarded as a distinct matter and is separately set out. 4. The entries in the Legislative Lists must be construed broadly and not narrowly or in a pedantic manner. 5. The entries in the two Lists-List I and II must be construed, if possible, so as to avoid conflict. Faced with a suggested conflict 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]....
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....e tax, and (ii) the amount, or measure, of the tax. The amount may be measured in many ways but the distinction between the subject matter of the tax and the standard by which the amount of tax is measured cannot be lost sight of. The standard adopted as a measure of the levy may be indicative of the nature of the tax but it does not necessarily determine it. The nature of the mechanism 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 inc....
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....engal v. Kesoram Industries Limited - [2004 (266) ITR 721 (SC)] to hold that the mechanism and method chosen by the Legislature for quantification of a tax is not decisive of the nature of the tax though it may constitute one relevant factor out of many for throwing light on the general nature of the tax. It may happen sometimes that a levy, purportedly on the sale of goods, is so excessive 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....
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....he sale of specified goods by specified dealers and, therefore, well within the legislative competence of the State Legislature. Further, the tax is one that is imposed only in relation to a specified category of dealers whose turnover exceeds the threshold limit of Rupees one crore, and by that yardstick, in relation to those persons who enjoy a position of economic superiority. The challenge 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 constitute....
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....it has the effect of changing the domestic law of the country, to be by way of legislation and not by way of executive orders. A constitution bench of the Supreme Court in Maganbhai Ishwarbhai Patel etc. v. Union of India and Another - [(1970) 3 SCC 400] has stated the legal position succinctly after referring to well settled principles of International Law, as well as the decision of the Judicial 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 alteratio....
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....s in Chapter I of Part XI of the Constitution which deals with legislative relations- Distribution of Legislative Powers. By Article 245 the territorial operation of legislative power of the Parliament and the State Legislatures is delimited, and Article 246 distributes legislative power subject wise between the Parliament and the State Legislatures. Articles 247, 249, 250, 252 and 253 enact some of the 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 exercis....
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....out discrimination in the matter of taxation to any specified class of dealers. I therefore see no reason to strike down the levy on this ground. The argument that there is no machinery provision dealing with the filing of returns and payment of the turnover tax under Section 6A of the KVAT Act and further, that there is no clarity regarding the manner in which the taxable turnover is to be determined. 19. It 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 regis....
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....f has to be seen as curative in nature and retrospective in its operation from the date of introduction of the levy namely, 01.04.2014. Reliance is placed on the decisions in Allied Motors P. Ltd. v. CIT [[1997] 224 ITR 677 (SC)]; Tata Motors Ltd. v. State of Maharashtra & Others [2004 (136) STC 1] and Commissioner of Income Tax v. Alom Extrusions Ltd. [[2009] 319 ITR 306 (SC)]. 22. I cannot accept the said contention of 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....
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....of tax on the sale or purchase of goods. - (1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place- (a) outside the State; or (b) in the course of the import of the goods into, or export of the gods out of, the territory of India. (2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in 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) ......................
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....ver as is attributable to export sales of such goods or sales in the course of inter-state trade as defined under the CST Act. This principle of reading down a statutory provision so as to render it in conformity with the provisions of the Constitution is well settled. The Constitution is the highest law of the land and no statutory provision can violate it. If a statutory provision appears to violate the provisions of the Constitution, the court has two options - either to declare the provision as unconstitutional or to read it down to make it constitutional [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 tex....
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....ich the Bill containing it was introduced. 5. Certain refunds to be made when declaration ceases to have effect:- (1) Where a declared provision comes into operation as an enactment in an amended form before the expiry of the period referred to in clause (c) of sub-section (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 provision adopted in the enactment had been the declared provision: Provided that the rate at which refunds of any tax, duty, cess, fee or other revenue may be made under this 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 respe....