2025 (5) TMI 854 - SC - VAT / Sales Tax

Interpretation and constitutional validity of purchase tax provisions under Section 5A of the Kerala General Sales Tax Act 1963 and Section 7A of the Tamil Nadu General Sales Tax Act 1959 - purchase of goods by the appellants from dealers who were exempted from payment of tax by virtue of notifications or exemptions issued under the Kerala Act or the Tamil Nadu Act - purchase which is liable to tax within the meaning of Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act? - purchase tax as imposed by Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act is a tax in the nature of manufacture or consignment tax or an inter-state levy and therefore ultra vires the Constitution and beyond the legislative powers of the state legislature. HELD THAT - The legal position is that exemption from payment of tax at the time of sale is a pre-condition for attracting Sections 5A and 7A respectively. Further the fact that in case the goods were not exempt from payment of tax at the time of sale and the goods would have attracted tax at the first point of sale is immaterial and inconsequential. Levy of purchase tax is governed by the provisions and stipulations of Sections 5A or 7A. They are independent and in a way constitute charging sections. Purchase tax is leviable on and payable by the purchaser. However the legislations do not levy the purchase tax to tax the transaction of the sale and purchase twice. Instead it levies purchase tax only where no sales tax was payable on the sale. Further purchase tax has not been made leviable in all situations except in three situations namely (a) where the goods on which no tax is paid were used in manufacture; or (b) where the goods were despatched out of the State other than by way of inter- State trade or commerce; or (c) where the goods are disposed of in a manner other than sale within the State. However the need to satisfy the conditions do not change the nature of the charge which is tax on purchase. The challenge to the constitutional validity must be rejected on the basis of the ratio elucidated by this Court in Kandaswami 1975 (7) TMI 123 - SUPREME COURT Hotel Balaji 1992 (10) TMI 240 - SUPREME COURT and Devi Dass 1994 (4) TMI 312 - SUPREME COURT . The contention of the appellant-assessees that the constitutional validity of the impugned provisions was not examined while deciding Kandaswami ought to be rejected even if we would accept that the question of constitutional validity was not directly addressed. Hotel Balaji specifically upholds the constitutionality of the impugned provisions disagreeing with the opinion/ratio expressed in Goodyear 1989 (10) TMI 52 - SUPREME COURT . It is also recorded that purchase tax is levied on the purchase of goods on which no tax has been paid on account of any exemption as a result of which the seller is not required to collect and pay sales tax. The decision whether or not to levy purchase tax is a prerogative and power of the State Legislature. As noticed above the liability to pay is distinct from levy of tax. The contention that purchase tax payable under Section 7A at the rates mentioned under Sections 3 and 4 should be treated as exempt in view of the GO issued under Section 17 is untenable. The GO refers to the tax payable at the time of sale that is the sales tax. The GO does not grant exemption from payment of purchase tax. The grant of exemption being for the purpose of payment of sales tax it does not follow that purchase tax would not be payable when conditions of Section 7A are satisfied. Further it would be contradictory or rather nugatory to argue that the rate of tax specified in the Schedule should be taken as nil as no payment is to be made on the sale amount as sales tax. If this argument is accpeted it would defeat the very purpose and objective of enacting Section 7A of the Tamil Nadu Act. Section 7A is only attracted where the sales tax is not payable which means there should be an exemption notification under Section 17 or exemption under the Third Schedule read with Section 8 of the Tamil Nadu Act. The argument that the rate applicable under Section 7A would be the effective rate and not the rate mentioned in the Schedule must be rejected. The exemption in the present case relates only to payment of sales tax and not purchase tax - It must be remembered that excise duty and customs duty are payable by the importer or the manufacturer. There is no reverse levy in the case of customs duty or the excise duty in terms of the two enactments. Purchase tax can be levied and payable even the sales tax is not payable. Conclusion - i) The purchases from exempt dealers or of exempt goods are liable to purchase tax under Sections 5A and 7A subject to the stipulated conditions regarding use disposal or dispatch of goods. ii) The constitutional validity of Sections 5A and 7A is upheld rejecting the contention that the purchase tax is a consignment or manufacture tax or an inter-State levy beyond State power. Appeal dismissed.

Summary

The core legal questions considered by the Court in this judgment revolve around the interpretation and constitutional validity of purchase tax provisions under Section 5A of the Kerala General Sales Tax Act, 1963 ("Kerala Act") and Section 7A of the Tamil Nadu General Sales Tax Act, 1959 ("Tamil Nadu Act"). Specifically, the issues are:

(i) Whether purchases of goods from dealers exempted from sales tax payment under notifications or exemptions are nevertheless "liable to tax" purchases under Sections 5A or 7A;

(ii) Whether purchasers of goods exempt from sales tax or bought from exempt dealers are liable to pay purchase tax under these provisions;

(iii) Whether the purchase tax imposed under these provisions is ultra vires the Constitution, being in the nature of manufacture or consignment tax or an inter-state levy beyond state legislative competence.

Issue-wise Detailed Analysis:

Issue I & II: Liability to Purchase Tax on Goods Purchased from Exempt Dealers or Exempt Sales

The statutory framework under both Acts imposes sales tax on dealers exceeding prescribed turnover thresholds, with specific schedules enumerating taxable goods and points of levy. Both Acts empower the State Government to grant exemptions or reductions in sales tax via notifications. Section 5A (Kerala) and Section 7A (Tamil Nadu) impose a purchase tax on dealers buying goods "liable to tax" under the Act but where no tax is payable on the sale due to exemptions or other reasons, provided the purchaser either consumes the goods in manufacture, disposes of them otherwise than by sale within the State, or dispatches them outside the State except in inter-State trade.

Precedents establish that these provisions are charging sections creating an independent tax liability on the purchaser's turnover in specified circumstances. The Court in a three-Judge Bench decision in State of Tamil Nadu v. M.K. Kandaswami (1975) delineated cumulative ingredients for levy under Section 7A of the Madras Act (in pari materia with Sections 5A and 7A here), including that the goods purchased must be "liable to tax" under the Act, and that no tax was payable under the normal sales tax provisions on the sale. The Court rejected the argument that exemption of the sale automatically exempts the purchaser from purchase tax liability, holding that such an interpretation would render Section 7A/5A nugatory. The expression "goods the sale or purchase of which is liable to tax under the Act" was held to mean "taxable goods" as listed in the schedules, excluding goods totally exempt from tax at all points under Sections 8 or 17 notifications.

The Court also approved the Kerala High Court decisions in Malabar Fruit Products and Yusuf Shabeer, which upheld the validity of Section 5A and explained that purchase tax applies even when the seller's turnover is below the threshold or when agricultural produce exempted from sales tax is purchased by a dealer who may be liable to purchase tax. The purchase tax is thus a remedial provision to plug revenue leakage when sales tax is not collected on exempted sales.

Contrary views expressed in State of Kerala v. T.S. Govindarajulu Naidu, which extended exemption to purchase tax, were distinguished and not followed.

Issue III: Constitutional Validity and Nature of Purchase Tax

The Court examined whether the purchase tax under Sections 5A and 7A is a tax on manufacture, consignment, or inter-State trade, which would be beyond state legislative competence.

The Court referred extensively to the two-Judge Bench decision in Goodyear India Ltd. v. State of Haryana, which held that purchase tax liability arises only when the purchased goods are consumed in manufacture and the manufactured goods are disposed of otherwise than by sale in the State or dispatched outside the State other than by inter-State sale, and that the tax is not on the purchase per se but on the subsequent use or consignment. Goodyear held that purchase tax is not leviable when goods are sent outside the State in the course of inter-State trade or commerce, thus respecting constitutional limits.

However, the Court noted that Goodyear's ratio was later disapproved by a three-Judge Bench in Hotel Balaji and Others v. State of Andhra Pradesh, which held that purchase tax is a levy on the purchase price of raw materials and not on the consignment of manufactured goods. The tax is levied at the point of last purchase within the State when the manufactured goods are not sold within the State or are consigned to depots outside the State other than by inter-State sale. The Court emphasized that the tax is not a consignment or manufacture tax but a purchase tax designed to prevent revenue loss when sales tax is not collected on finished goods due to their disposal or movement outside the State.

Hotel Balaji also rejected the argument that purchase tax is ultra vires as it is a tax on use or consumption, clarifying that the tax is on the purchase transaction, albeit triggered by subsequent events. The Court further noted the policy rationale that the State foregoes taxing raw materials when the finished goods are sold within the State, but not when the goods leave the State or are disposed of otherwise, to safeguard revenue.

The three-Judge Bench in Devi Dass Gopal Krishan Pvt. Ltd. v. State of Punjab affirmed Hotel Balaji's reasoning and rejected Goodyear's approach, holding that the latter's ratio does not accord with the language and scheme of the relevant statutes.

The Court also examined the distinction between 'levy', 'assessment', and 'collection' of tax, relying on precedents including Peekay Re-Rolling Mills Ltd. v. Assistant Commissioner. It held that 'levy' refers to the imposition or exigibility of tax, distinct from assessment or collection. The liability to pay purchase tax arises upon the occurrence of the taxable event defined in Sections 5A and 7A, regardless of the timing of payment or collection.

Regarding exemptions, the Court emphasized that exemption notifications under Section 10 or Section 17 of the Acts grant exemption from payment of sales tax but do not affect the liability to pay purchase tax under Sections 5A or 7A. The purchase tax provisions are designed to operate where sales tax is exempted, ensuring the State's revenue is protected. Arguments that purchase tax should be nil or not payable when sales tax is exempt were rejected as defeating the legislative purpose.

Further, the Court rejected contentions that purchase tax violates the single-point levy principle under Section 15 of the Central Sales Tax Act, noting that this principle applies only to declared goods under the Central Act, which is not the case here.

Significant Holdings:

"Goods, the sale or purchase of which is liable to tax under the Act" means taxable goods as defined in the schedules, excluding goods totally exempted at all points under Sections 8 or 17 notifications. (Paragraph 8)

Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act are charging provisions creating an independent liability on the purchaser to pay purchase tax where no sales tax is payable on the sale, especially due to exemptions. (Paragraphs 8, 9, 31)

The purchase tax is levied on the purchase price of raw materials consumed in manufacture or disposed of outside the State otherwise than by inter-State sale, not on the consignment or manufacture of goods. The taxable event is the purchase coupled with subsequent use or disposal as specified. (Paragraphs 13, 17, 31)

The distinction between 'levy', 'assessment', and 'collection' of tax is crucial: 'levy' means imposition or exigibility of tax, which is distinct from assessment or collection. Liability arises on the taxable event, not on payment. (Paragraphs 29, 30)

Exemptions under Sections 8 or 17 exempt payment of sales tax but do not affect liability to pay purchase tax under Sections 5A or 7A. Purchase tax provisions are enacted to plug revenue leakage and are constitutionally valid. (Paragraphs 22, 31, 32)

The purchase tax imposed under Sections 5A and 7A is not ultra vires the Constitution; it does not constitute a tax on manufacture, consignment, or inter-State trade beyond State legislative competence. (Paragraph 32)

Where more than one interpretation is possible, the one preserving constitutionality and the legislative purpose of preventing tax evasion and leakage must be preferred. (Paragraph 17)

Exemption notifications granting relief from sales tax do not imply exemption from purchase tax, and the latter remains payable when conditions in Sections 5A or 7A are satisfied. (Paragraphs 35, 36)

Final Determinations:

The Court answered the questions posed affirmatively that purchases from exempt dealers or of exempt goods are liable to purchase tax under Sections 5A and 7A, subject to the stipulated conditions regarding use, disposal, or dispatch of goods.

The constitutional validity of Sections 5A and 7A was upheld, rejecting the contention that the purchase tax is a consignment or manufacture tax or an inter-State levy beyond State power.

All appeals challenging these provisions were dismissed, and the judgments of the High Courts upholding the levy and validity of purchase tax were affirmed.