By TIOL News Service

NEW DELHI, OCT 29, 2016: THE Facts:

a) The respondents are engaged in the sale and purchase of Motor Vehicles and are registered dealers under the Orissa Sales Tax Act, 1947 ('the OST Act') as well as under the Central Sales Tax Act. The respondents had been paying entry tax on the goods when they were bought into the State of Orissa under Section 3(3) of the Orissa Entry Tax Act, 1999 (‘the OET Act'). However, they were paying surcharge on the balance amount after deduction of the entry tax paid on the motor vehicles.

b) The Finance Department, Government of Orissa, by letter dated 20.11.2001, stated that the surcharge under the OST Act shall be calculated on the payable amount of tax due on the taxable turnover (Section 5 & 5A) instead of on the reduced Sales Tax amount after setting off of entry tax.

c) On 30.03.2002, the Sales Tax Officer, Sambalpur -I Circle, passed an order under Section 12(4) of the OST Act wherein surcharge was levied under Section 5A of the OST Act on the gross sales tax payable by the respondent -Company.

d) Being aggrieved by the demand notice dated 30.03.2002 as well as the letter dated 20.11.2001 issued by the Finance Department of the Government of Orissa, the respondent -Company filed a writ petition being No. 233 of 2002 along with a set of other writ petitions filed by the respondents before the High Court of Orissa at Cuttack.

e) The Division Bench of the High Court, vide common judgment and order dated 05.01.2007, allowed the appeals filed by the respondents.

(f) Being aggrieved by the judgment and order dated 05.01.2007, the Commissioner of Commercial Taxes has preferred these appeals before the Supreme Court by way of special leave.

The sole question for consideration is whether the ‘Surcharge' under Section 5A of the OST Act is to be computed on the gross amount of sales tax or on the net amount of sales tax after setting of or deducting the amount of entry tax?

The Supreme Court noted the facts as:

Under Section 5 of the OST Act, Sales Tax is payable by a dealer on the taxable turnover at a prescribed rate. Under Section 5A , it is provided inter alia for payment of surcharge. Section 5A of the OST Act (as it stood at the relevant time) reads as under:

"5A Surcharge: (1) Every dealer whose gross turnover during any year exceeds rupees ten lakhs shall, in addition to the tax payable by him under this Act, also pay a surcharge at the rate of ten per centum of the total amount of tax payable by him:… .."

Rule 18 of the Odisha Entry Tax Rule, 1999 is reproduced hereunder:

"18. Set off of Entry Tax against Sales Tax: (1) When the importer of a motor vehicle liable to pay tax under sub-section (2) of section 3 of this Act being a dealer in motor vehicles becomes liable to pay tax under the Sales Tax Act by virtue of sale of such motor vehicle, his tax liability under the Sales Tax Act shall be reduced to the extent of the tax paid under these rules.

Illustration: Assuming Entry Tax Rate and Sales Tax Rate to be 10%

Note: If the sales tax payable on such motor vehicle is less than the entry tax paid, then the sales tax payable will be nil.

(2) When an importer of goods specified in Part III of the Schedule to the Act other than motor vehicle, liable to pay tax under this Act is also a dealer liable to pay tax under the Sales Tax Act, then the Sales Tax payable on the sale of goods shall be reduced to the extent of entry tax paid in the same manner as illustrated under the sub- rule( 1)."

In view of the statutory provision contained in Rule 18 of the Rules, the tax payable under the said Act was to be determined after deduction therefrom the entry tax paid by a dealer importing vehicle into the State of Orissa.

Since the determination of surcharge payable under the OET Act was relatable and/or linked to the tax payable under the OST Act, a clarification was sought for by one of the dealers in motor vehicles, namely, TELCO which is similarly situated as the Respondent No.1 -company from the office of Commercial Tax, in view of the provision contained in Rule 18 of the Rules, which is as under:-

"Surcharge is payable on the amount of tax that becomes payable by a dealer after set off of entry tax paid at the time of purchase of such goods."

In accordance with the clarification issued to TELCO, Bhubaneswar, which was also circulated to other dealers of motor vehicles, including the Respondent No.1 -Company, surcharge was calculated and paid which was quantified after deducting therefrom the amount of entry tax paid by the Respondent No.1 -Company while importing a motor vehicle into the State of Orissa.

On 20.11.2001, the Government of Orissa, in the Finance Department, wrote a letter to the Commissioner of Commercial Taxes, Orissa relating to the computation of tax payable on the motor vehicle for the purpose of levy of surcharge on an interpretation of the provisions of the OET Act, the OST Act and the Rules.

In the said letter, it was inter alia intimated that surcharge shall be calculated on the payable amount of tax due on the taxable turnover (section 5 and 5A ) instead of on the reduced sales tax amount after setting off of Entry Tax.

On 30.03.2002, the Sales Tax Officer, Sambalpur -I Circle, Sambalpur passed an order under section 12(4) of the OST Act wherein surcharge has been levied under Section 5A of the said Act on the gross sales tax payable, without deducting the entry tax as required under Section 4 of the OET Act. As a result of this, excess surcharge to the tune of Rs . 21,25,117.37/- has been levied by the Sales Tax Officer.

The Supreme Court observed:

It is well settled that an illustration given under the Rules does not exhaust the full content of the section which it illustrates but equally it can neither curtail nor expand its ambit. Further, surcharge is nothing but an additional tax and is payable on the sale of goods in the manner laid down for levy of surcharge. In view of the provisions contained in the OET Act, a dealer is not entitled for reduction of the amount of entry tax from the amount of tax payable before the levy of surcharge under Section 5A of the OST Act.

On a plain reading of the provisions of the OST Act as well as the OET Act and the Rules, it can be seen that Section 5A of the OST Act creates a charge and imposes liability on every dealer under the OST Act to pay surcharge @ 10% on the amount of tax payable by him under the OST Act. Section 4(1) of the OET Act, in the same way, prescribes for reduction of the tax amount payable by the dealer to the extent of entry tax already paid for the same article for which sales tax is payable. The Section, does not specifically contemplate anything, which would indicate that the provisions of the OET Act or the Rules have to be taken into consideration while assessing the sales tax or surcharge. In essence, the provisions made in the Rules lay down the modality of ‘set off'. It is important to mention here that OST Act was enacted in the year 1947 whereas OET Act was enacted in 1999. The provision of set off has been made in the OET Act and the Rules framed thereunder and not in the OST Act. The heading of Section 4 of the OET Act gives a broad idea regarding the provision of set off by way of "reduction in tax liability". Sub-Sections 1 and 2 of Section 4 of the OET Act provide for reduction of liability under the OST Act.

Objective of framing rules : It is well settled that the objective of framing rules is to fill up the gaps in a statutory enactment so as to make the statutory provisions operative. Rules also clarify the provisions of an Act under which the same are framed. Section 4 of the OST Act is a charging Section attracting liability to pay Sales Tax "on sales and purchases effected". Section 5 of the OST Act provides for rate of Sales Tax. Section 5A of the OST Act levies surcharge on the dealer which is nothing but an additional tax. Therefore, on a plain reading of the provisions under the OST Act as well as under the OET Act, a dealer is not entitled for reduction of the amount of entry tax from the amount of tax payable before the levy of surcharge under Section 5A of the OST Act. A harmonious reading of Rule 18 of the Rules as well as Sections 4, 5, 5-A of the OST Act reveals no conflict or inconsistency. The Rules are to be construed to have been made for furtherance of the cause for which the Statute is enacted and not for the purpose of bringing inconsistencies.

Section 5A of the OST Act is a self-contained provision and the surcharge, as already seen above, is leviable at the specified per centum of tax payable under the OST Act. Tax payable under the OST Act is independent of the provisions of OET Act. The assessment or quantification or computation of surcharge shall have to be made in accordance with the provisions of the OST Act.

Thus, on a conjoint reading of Section 5 of the OST Act, Section 4 of the OET Act and Rule 18 of the Rules, we are of the considered opinion that the amount of surcharge under Section 5A of the OST Act is to be levied before deducting the amount of entry tax paid by a dealer.

In view of the forgoing discussion, the impugned judgment and order passed by the High Court cannot be sustained and is liable to be set aside. In the result, all the appeals are allowed.

(See 2016-TIOL-183-SC-CT)