By TIOL News Service

CHENNAI, OCT 22, 2016: THE Issue is - Whether it is permissible for the Legislature to introduce an Explanation to a provision of a fiscal Statute, which has the feature of expanding the scope of the charging section. NO IS THE VERDICT.

Facts of the case

The assessee is in the field of manufacturing, laying, joining, testing and commissioning of PSC pipes, for water supply scheme on contract basis and it is a registered dealer under the TNGST Act. According to the assessee, the nature of work carried on by them falls under the category of 'Works Contract' and was paying taxes at the compounded rate as per Section 7-C of TNGST @ 2% as the work done by assessee was a civil construction work and is paying the taxes on the total value of the contract as per the provisions of the TNGST Act. The assessee stated that as per Section 2(1)(aa) of the Tamil Nadu Additional Sales Tax Act, if the taxable turnover of a dealer exceeds Ten Crores of Rupees, then an additional sales tax calculated at the rates mentioned in the above provisions had to be paid. However, the AO sought to impose additional sales tax in respect of the works contract in relation to which it had opted to pay tax at compounded rate under Section 7-C of the TNGST Act and it was objected to on the ground that insofar as the additional sales tax under the 1970 Act was concerned, it could be levied only on the taxable turnover when there was no determination of taxable turnover in the case of an assessee who opted to pay tax at the compounded rate u/s 7-C of TNGST Act. The assessee in respect of his stand also placed reliance upon the judgment of the Division Bench of this Court in South India Corporation Ltd. v. Commercial Tax Officer, Coimbatore and others, wherein the assessee who opted to pay tax u/s 7-C of TNGST Act, challenged the levy of additional sales tax and it was allowed and as per the said judgment, there could not be any additional sales tax in respect of a contract in relation to which, the assessee had opted to pay u/s 7-C of TNGST Act. The State of Tamil Nadu, in order get over the effect of the said judgment, introduced an amendment to the Tamil Nadu Sales Tax Act, by introducing Explanations III, IV and V to Section 2(1)(aa) of the said Act by Amendment Act 23 of 2002 and Explanation V was applicable to the assessees. Thus, in respect of the assessees covered by Section 7-C, who had opted to pay taxes therein, the total value of contracts entered into during the year formed the basis for levy of additional tax and it was introduced with retrospective effect.

The CTO, as a consequence of the said amendment, sought to levy tax on the total value of the contract entered into during the year in the case of an assessee, who had opted for payment of tax under the compounded rate u/s 7-C of the Act and accordingly, issued a notice proposing to treat the total value of the contracts executed by the assessee as the taxable turnover and levy not only additional tax, but also penalty at the rate of 150% of the additional tax so levied. On appeal, the Single Judge of this Court, after considering the rival submissions and taking note of the decisions rendered by the Supreme Court, observed that the imposition of sales tax on the total contract value, therefore, was not within the competence of the State Legislature, as it was only the transfer of goods, on which tax could be imposed and the impugned Explanation V to Section 2(1)(aa) of the Act, thus, expands, the scope of charging Section, which was not permissible. Therefore, it was held that the impugned Explanation V to Section 2(1)(aa) was contrary to the provisions of the Act.

The High Court held that,

1. In the case on hand, in the form of Explanation, in order to get over the effect of the judgment in South India Corporation Ltd. v. Commercial Tax Officer, Coimbatore and others, the scope of Charging Sections has been expanded. The Single Judge has considered the scope of Charging Sections, viz., amended Section 2(1)(aa) of the Act, and by placing reliance on the judgment of the Supreme Court in S.Sundaram v. V.R.Pattabhiraman, has held that it is contrary to the provisions of the Act. It is a settled position of law that the Explanation normally should be read so as to harmonise with and clear up any ambiguity in the main section and it should not be so construed as to widen the ambit of the section and also to clarify the doubtful point in law and to serve as a proviso to main section. The dealer need to pay tax based on his taxable turnover determined after allowing various deductions admissible under law and without amending the said provision, merely the Explanation V is added to get over the effect of the judgment in South India Corporation Ltd. v. Commercial Tax Officer, Coimbatore and others.

2. In the light of the judgment of the Supreme Court in S.Sundaram v. V.R.Pattabhiraman, this Court is of the considered view that the impugned Explanation sought to widen the scope of taxable turnover as defined u/s 2(p) of the TNGST Act. In the judgment of South India Corporation Ltd. v. Commercial Tax Officer, the Division Bench of this Court also held that the claim for additional sales tax by treating the contract value as the taxable turnover is not permissible under the provisions of either the TNGST Act or the Additional Sales Tax Act. The said judgment has also reached finality as no further challenge has been made and therefore, on that ground also, the impugned Explanation is to be declared as ultra vires.

(See 2016-TIOL-2556-HC-MAD-CT)