M/S. FABINDIA OVERSEAS (P) LTD.
1. THE ASST.COMMISSIONER (ASSESSMENT), DEPT. OF COMMERCIAL TAXES, SPECIAL CIRCLE II, ERNAKULAM, KOCHI 682 015.
Sub section (1A) of Section 3 of the Kerala Surcharge on Taxes Act, 1957 (‘the Act' for brevity), is challenged as unconstitutional, in this batch of writ petitions.
(1A) The tax payable under sub-sections(1) and (2) of section 6 of the Kerala Value Added Tax Act, 2003 (30 of 2004), other than declared goods as defined in section 14 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) 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 fifty per cent of their stock from outside the State or country and not less than seventy-five per cent of whose sales are retail business and whose total turnover exceeds five crore rupees per annum, but excluding such class of dealers of certain commodities, which may be notified by the Government from time to time, be increased by a surcharge at the rate of ten per cent, and the provisions of the Kerala Value Added Tax Act, 2003(30 of 2004) shall apply in relation to the said surcharge as they apply in relation to the tax payable under the said Act.
In terms of the impugned provision, 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 [1966 KLT 809] and the decisions in which the ratio therein was followed, there cannot be any dispute to the fact that the impugned 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 petitioners, in so far as the impugned 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 impugned 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 impugned provision does not satisfy the requirements of Article 14 as well.
“301. Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free.”
Article 304 confers on the Legislatures of States, notwithstanding anything contained in Article 301, the power to impose restrictions on trade, commerce and intercourse among the States. Article 304 reads thus:
“304. Notwithstanding anything in article 301 or article 303, the Legislature of a State may by law— (a) impose on goods imported from other States or the Union territories any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest:
Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President.”
The scope and amplitude of Articles 301 and 304 of the Constitution have been dealt with in finer details by a Nine Judge Bench of the Apex Court recently in Jindal Stainless Steel Ltd. and another v. State of Hariyana and others [2016 (11) Scale I]. The Apex Court referred to and considered in the said case almost every judgment dealing with the said Articles rendered by the court till then and disapproved the ratio of some of the judgments. Paragraph 72 of the majority judgment in the said case dealing with the conclusion arrived at by the court as regards the scope of Articles 301 to 304 of the Constitution reads thus:
“72. The sum total of what we have said above regarding Articles 301, 302, 303 and 304 may be summarized as under:
1. Freedom of trade, commerce and intercourse in terms of Article 301 is not absolute but is subject to the Provisions of Part XIII.
In the light of the aforesaid conclusions, 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.
“130. That brings us to the second part of question No.4 viz. whether the impugned State enactments violate Article 304(a) of the Constitution. That aspect will necessarily involve a careful reading of the impugned enactments and a proper appreciation of the scheme underlying the same. While we have at some length heard learned counsel for the parties on that aspect, we do not propose to deal with all the dimensions of that challenge based on Article 304(a) except two of them that were argued at great length by learned counsel for the parties. The first of these two dimensions touches upon the State's power to promote industrial development by granting incentives including those in the nature of exemptions or reduced rates of levy on goods locally produced or manufactured. On behalf of the assesses it was contended that grant of exemptions and incentives in favour of locally manufactured/produced goods is also one form of insidious discrimination which was impermissible in terms of Article 304(a) for such exemptions and incentives had the effect of putting goods from another State at a disadvantage. Relying upon a decision of two- Judge Bench of this Court in Shree Mahavir Oil Mills and Anr. v. State of Jammu and Kashmir and Ors. (1996) 11 SCC 39 it was argued that exemptions in favour of locally produced goods from payment of taxes was constitutionally impermissible and offensive to Article 304(a). That was a case where the State Government had totally exempted goods manufactured by small scale industries within the State from payment of sales tax even when the sales tax payable by other industries including manufacturers of goods in adjoining States was in the range of 8%. This exemption was questioned by manufacturers of edible oils from other States on the ground that the same was discriminatory and violative of Articles 301 and 304 of the Constitution.
"7. All legislative differentiation is not necessarily discriminatory. In fact, the word "discrimination" does not occur in Article 14. The expression "discriminate against" is used in Article 15(1) and Article 16(2), and it means, according to the Oxford Dictionary, "to make an adverse distinction with regard to; to distinguish unfavourably from others". Discrimination thus involves an element of unfavourable bias and it is in that sense that the expression has to be understood in this context. If such bias is disclosed and is based on any of the grounds mentioned in Articles 15 and 16, it may well be that the statute will, without more, incur condemnation as violating a specific constitutional prohibition unless it is saved by one or other of the provisos to those articles. But the position under Article 14 is different. Equal protection claims under that article are examined with the presumption that the State action is reasonable and justified. This presumption of constitutionality stems from the wide power of classification which the legislature must, of necessity, possess in making laws operating differently as regards different groups of persons in order to give effect to its policies....."
"19. I think that a distinction should be drawn between "discrimination without reason" and "discrimination with reason". The whole doctrine of classification is based on this distinction and on the well-known fact that the circumstances which govern one set of persons or objects may not necessarily be the same as those governing another set of persons or objects, so that the question of unequal treatment does not really arise as between persons governed by different conditions and different sets of circumstances.
Among the cases referred to earlier, Video Electronics (supra) was a case challenging the notifications issued by the States of Uttar Pradesh and Punjab providing tax exemptions from payment of Sales Tax for industrial units established in certain areas of the said States for a limited period, as discriminatory. As noted, the Apex Court held in the said case that such concessions would not offend clause (a) of Article 304 of the Constitution. Shree Mahavir Oil Mills (supra), on the other hand, was a case where the State of Jammu and Kashmir had totally exempted goods manufactured by small scale industries within the State from payment of Sales Tax, while the Sales Tax payable by other industries including manufactures of goods in adjoining States was in the range of 8%. In Jindal Stainless Steels Limited (supra), the Apex Court approved the ratio in both the said cases. In the light of the propositions laid down by the Apex Court in Jindal Stainless Steels Limited (supra) and the propositions laid down by the Apex Court in earlier cases which are approved in Jindal Stainless Steels Limited (supra), the following conclusions can be arrived at: (1) that taxing statutes do not per se impede free Trade, Commerce and intercourse unless they are discriminatory in nature, (2) in the case of a challenge to a taxing statute, on the touchstone of clause (a) of Article 304, the Court has to see whether the differentiation is intended or inspired by an element of unfavourable bias in favour of the goods produced or manufactured in the State as against those imported from outside and (3) that if the Court were to find that there is no such element of intentional bias favouring the locally produced goods as against those from outside, it may have to go further and see whether the differentiation would be supported by valid reasons, for, differentiation without a valid reason would be unconstitutional.
“94 . Then came Kunnathat Thathunni Moopil Nair v. The State of Kerala and Anr. AIR 1961 SC 552, where again one of the questions that fell for consideration was whether Article 265 of the Constitution was a complete answer to the attack against the Constitutionality of a taxing statute. This Court held that in order that a taxing law may be valid, the tax proposed to be levied must be within the legislative competence of the legislature imposing the tax and authorizing the collection thereof and that the tax must be subject to the condition laid down Under Article 13 of the Constitution. One of such conditions declared by this Court was that the legislature shall not make any law that takes away or abridges the equality Clause in Article 14. The Court declared that the guarantee of equal protection of laws must extend even to taxing statutes. It clarified that every person may not be taxed equally but property of the same character has to be taxed, the taxation must be by the same standard so that the burden of taxation may fall equally on all persons holding that kind and extent of property. If the taxation, generally speaking, imposes similar burden on everyone with reference to that particular kind and extent of property on the basis of such taxation, the law shall not be open to attack on the ground of inequality even though the result of taxation may be that the total burden on different persons may be unequal. The Court summed up that taxing statute is not fully immune from an attack on the ground that it infringes equality Clause Under Article 14, no matter the Courts are not concerned with the policy underlying the taxing statute or whether a particular tax could have been imposed in a different way or a way that the Court might think would have been more equitable in the interest of equity.
(1) A tax will be valid only if it is authorized by a law enacted by a competent legislature. That is Article 265.
138. Reference may also be made to the Constitution bench decision of this Court in Khandige Sham Bhat v. Agrl. ITO AIR 1963 SC 591 where this Court declared that a law may facially appear to be non discrimination and yet its impact on persons and property similarly situate may operate unequally in which event, the law would offend the equity clause. This implies that facial equality is not the only test for determining whether the law is constitutionally valid. What is equally important is the impact of the legislation. This Court held:
7...Though a law ex facie appears to treat all that fall within a class alike, if in effect it operates unevenly on persons or property similarly situated, it may be said that the law offends the equality clause. It will then be the duty of the court to scrutinise the effect of the law carefully to ascertain its real impact on the persons or property similarly situated. Conversely, a law may treat persons who appear to be similarly situate differently; but on investigation they may be found not to be similarly situate. To state it differently, it is not the phraseology of a statute that governs the situation but the effect of the law that is decisive. If there is equality and uniformity within each group, the law will not be condemned as discriminative, though due to some fortuitous circumstance arising out of a peculiar situation some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine vide Purshottam Govindji v. B.M. Desai, and Kunnathat Thathuni Moopil Nair v. State of Kerala. But in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse lements, permit a larger discretion to the legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the legislature to classify is of "wide range and flexibility" so that it can adjust its system of taxation in all proper and reasonable ways”
The impugned levy was introduced in Section 3 of the Act in terms of the Kerala Finance Act, 2008. Paragraphs 191 and 192 of the Budget Speech of the Finance Minister of the State dealing with the proposal to introduce the impugned levy read thus:
“191. Sir, the social security schemes announced in this Budget will create a huge financial commitment. There is every likelihood that this will increase in the next three years. To meet this expenditure it is proposed to impose a 1% cess on sales taxes and value added tax levied by the State Government. It is hoped to raise Rs.100 crore through this measure.
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 impugned 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, I have no doubt in my mind that 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 impugned levy was introduced with the objective of promoting indigenous and local business cannot be accepted as a bonafide one. Further, the stand that the impugned 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 [AIR 1997 SC 2609], 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, according to me, a classification of the dealers based on the criterion viz., whether they import goods into the State is per se unjustifiable and unintelligible. I have, therefore, no hesitation to hold that the impugned levy is discriminatory and violative of Article 301 read with clause (a) of Article 304 as also Article 14 of the Constitution.