By TIOL News Service

ERNAKULAM, JUNE 12, 2018: THE issue before the Bench is - Whether discriminatory levy of additional surcharge u/s 3(1A), among the dealers registered under Kerala VAT Act, on the basis of goods manufactured in the State as against outside State, can be said to be constitutionally valid by virtue of Article 14 & 301 of the Constitution. Verdict is NO.

Facts of the case

The assessee-company is a dealer under the Kerala VAT Act and is engaged in the retail sale of branded apparels, imitation jewellery, hand bags, wallets and belts through its retail outlets spread across the State. The goods are stock transferred by the assessee into the State from other States and sold in the State upon payment of taxes under the Kerala VAT Act. However, by placing reliance on section 3 (1A) of the Act, the assessing authority issued a notice to the assessee demanding surcharge at the rate of 10 % on the output tax collected by them for the year 2015-16, amounting to Rs.14,82,716/-. The assessee objected the demand on the ground that sub section (1A) of Section 3 of the Act is unconstitutional. However, the assessing authority rejected the the objection raised by the assessee. Therefore, the notice issued by the assessing authority is straight away challenged in the writ petition on the ground that sub section (1A) of Section 3 of the Act is unconstitutional.

Sub-section (1A) of Section 3 of the Act provides that the tax payable under sub-sections (1) and (2) of Section 6 of the Kerala VAT Act shall, in the case of national or multinational companies functioning in the State as retail chains or direct marketing chains, who import not less than 50 % of their stock from outside the State or country, and not less than 75 % of whose sales are retail business, and whose turnover exceeds Rs.5 crores per annum, be increased by a surcharge at the rate of 10 percent. Explanation I to the said provision clarifies that retail chains and direct marketing chains mentioned therein mean retail sales outlets or part of retail sales outlets of companies which share a registered business name or commercial name by way of franchise agreements or otherwise with standardized sales, purchase and promotional activities. Explanation II to the said provision clarifies that retail business mentioned therein shall mean, sales to persons other than registered dealers.

The case of the assessee was that dealers who do not import into the State more than 50 percent of their stock, but nevertheless fulfilling all the remaining conditions mentioned in the provision, were not subjected to the levy under the said provision and therefore the said levy was also a levy on the goods imported into the State. According to the assessee, such a levy should conform to clause (a) of Article 304 of the Constitution and in so far as the levy does not conform to clause (a) of Article 304 of the Constitution, the same was in violation of Article 301 of the Constitution and hence liable to be struck down.

On hearing the matter, the High Court held that,

++ the tax payable by a class of dealers registered under the Kerala Value Added Tax Act is increased by a surcharge at the rate of ten percent. As explicit from the provision, the same would apply only to dealers satisfying cumulatively the conditions namely, (i) that they shall be a company incorporated in India or abroad (ii) that they shall be functioning in the State as retail chains or direct marketing chains, (iii) that they shall import not less than 50 percent of their stock from outside the State or country, (iv) that not less than 75 percent of their sales shall be to persons other than registered dealers and (v) that their turnover shall be more than five crore rupees per annum. In the light of the decision of this Court in Ernakulam Radio Company v. State of Kerala and the decisions in which the ratio therein was followed, there cannot be any dispute to the fact that the levy is nothing but an additional tax on the goods sold by the dealers to whom the provision would apply. As noted, according to the assessee, in so far as the provision imposes an additional tax on dealers importing goods into the State from other States and fulfilling the remaining criteria mentioned in the provision, the same has to conform to the provisions of Part XIII of the Constitution. It is their specific case that the provision does not conform to clause (a) of Article 304 and hence violative of Article 301 of the Constitution. It is the further case of the petitioners that taxing statutes also have to conform to the principles of equality enshrined in Article 14 of the Constitution and the provision does not satisfy the requirements of Article 14 as well;

++ part XIII of the Constitution, consisting of Articles 301 to 307, is intended to ensure that inter-state barriers, both economic and political, are minimised, to protect the freedom of trade, commerce and intercourse for the economic unity of the nation. The said part of the Constitution also discourages growth of sectional and local interests of the States which would compromise the development of the nation as a whole. Among the Articles in Part XIII, Article 301 declares that subject to the other provisions of Part XIII, trade, commerce and intercourse throughout the territory shall be free. The power of the State to impose taxes on goods imported from other States cannot be doubted. Of course, the said power is subject to the limitation that such taxes shall not discriminate against the goods imported from other States. In other words, the proposition that levy of non-discriminatory tax would not infringe clause (a) of Article 304 and therefore, such levy would not violate Article 301 of the Constitution is affirmed;

++ the provision would apply only to dealers satisfying cumulatively the conditions namely, (i) that they shall be a company incorporated in India or abroad (ii) that they shall be functioning in the State as retail chains or direct marketing chains, (iii) that they shall import not less than 50 percent of their stock from outside the State or country, (iv) that not less than 75 percent of their sales shall be to persons other than registered dealers and (v) that their turnover shall be more than five crore rupees per annum. In other words, a dealer other than a company is not liable to pay surcharge under the provision even if they fulfil conditions (ii) to (v). Likewise, a dealer who fulfils condition No.(i), but not functioning in the State as a retail chain or direct marketing chain is also not liable to pay surcharge under the provision even if they fulfil conditions (iii) to (v) referred to above. Again a dealer, who effects more than 25 percent of the sales to registered dealers, but satisfies conditions (i) to (iii) and (v) is not liable to pay surcharge under the provision. Likewise, a dealer who satisfies conditions (i) to (iv), but does not satisfy condition No.(v) as regards the turnover is also not liable to pay surcharge under the provision. As far as the first three instances mentioned above are concerned, the dealers are absolved from the liability to pay surcharge irrespective of the value of the goods imported by them into the State. As such, the case of the assessee that the differentiation made among the dealers registered under the Kerala Value Added Tax Act in terms of the provision is intended or inspired by an element of unfavourable bias in favour of the goods produced and manufactured in the State as against those imported from outside, cannot be accepted;

++ the fact that the provision differentiates between dealers who do not import goods into the State from other States, but fulfils the remaining conditions made mention of in the provision and dealers, who fulfil all the conditions made mention of in the impugned provision, is not disputed. Now, the question to be examined is whether the differentiation made among the dealers registered under the Kerala Value Added Tax Act in terms of the provision is supported by valid reasons. This question is relevant also for the reason that though the legislature is given a greater latitude in tax matters and empowered even to pick and choose the subject matter of tax, it is trite that any classification that is effected by the legislature must conform to the mandate of Article 14 of the Constitution;

++ the object of the legislation as evident from the Budget Speech is that the same was introduced with a view to augment the revenue for the purpose of implementing social security measures. Though in the counter affidavit filed by the State it is contended that the levy was introduced with the specific objective of promoting indigenous and local business as well, such an object is absent in the Budget Speech of the Minister. Had the same been one of the objectives of the legislation, the same would have certainly reflected in the Budget Speech of the Minister with supporting empirical data. In the absence of such an objective in the Budget Speech, the stand taken by the State in the counter affidavit that the levy was introduced with the objective of promoting indigenous and local business cannot be accepted as a bonafide one. Further, the stand that the levy is intended to promote indigenous and local business is too vague as the State has not divulged in the counter affidavit as to what they propose to do with the revenue generated for the promotion of indigenous and local business. If the objective of the legislation is augmentation of revenue, the question is whether there can be a differentiation between dealers who are importing goods into the State from other States and who are not, for the said purpose;

++ in Digvijay Cement Co. v. State of Rajasthan, the Apex Court held that prescription of different rates of tax for interstate and intrastate sales of cement on the basis that the same would lead to increase in sales and consequent increase in the revenue earnings of the State, cannot be accepted as sufficient justification for making such a differentiation. Even otherwise, it is trite that a classification can only be based on an intelligible differentia that bears a rational nexus with the object sought to be achieved by the legislation. Such classifications shall be founded on pertinent and real differences as distinguished from irrelevant and artificial ones. It must be based on some qualities or characteristics which are to be found in all the persons put together and not in others who are left out and those qualities or characteristics must have a reasonable relation to the object of the legislation. Article 14 forbids class discrimination in the matter of imposing liabilities upon persons arbitrarily selected out of a large number of persons similarly placed. In the instant case, as noted, the object sought to be achieved is augmentation of revenue. If the object of the legislation is augmentation of revenue, a classification of the dealers based on the criterion viz., whether they import goods into the State is per se unjustifiable and unintelligible. Therefore, the levy is discriminatory and violative of Article 301 r/w clause (a) of Article 304 as also Article 14 of the Constitution;

++ the contention that the levy is only an additional tax on multi national companies falling within the criteria provided therein, and the same, therefore, does not in any way impede trade or business cannot be accepted, for the liability to pay surcharge applies only to multi national companies who import goods into the State from other States. The contention of the Government Pleader that Article 301 is not attracted in the instant case as the levy is only a levy based on the turnover of the dealer also cannot be accepted. The turnover of the dealer is not the sole criterion for the levy. The dealers who have more turnover than what is mentioned in the provision are not liable to the levy if they do not import into the State goods from other States. True, for the purpose of achieving economic parity, the States are empowered to enact legislations imposing surcharge. But, the same shall not go against the provisions of the Constitution. Economic parity and increase in revenue are certainly legitimate objects for a legislation providing for surcharge as in the instant case and an intelligible differentia can certainly be created in such a legislation by confining surcharge only to large business houses. Had it been the situation, whether this Court would have interfered with the legislation is a totally different matter. As noted, in the instant case, the legislation classifies dealers on the criterion as to whether they import goods into the State from other States. The arguments of the Government Pleader, therefore, hold good in a case of this nature.

(See 2018-TIOL-1111-HC-KERALA-CT)