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2016 (5) TMI 912 - MADRAS HIGH COURT

2016 (5) TMI 912 - MADRAS HIGH COURT - TMI - Validity of law - rate of tax - interstate movement of goods - Change in nature of goods merely on the basis of the location in which they are used - Section 2(11) - Petitioner contended that if certain goods are admittedly capital goods, their nature will not change merely because they were sold in the course of inter-state trade or commerce, to persons outside the State - Held that:- argument of the petitioners is based merely upon logic and common .....

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elevant legislature, due to the distribution of powers, (c) contravention of any of the mandatory provisions of the Constitution that impose certain limitations upon the powers of the State legislature, (d) the operation of the impugned law beyond the borders of the State, and (e) the abdication of the essential legislative function. The petitioners in these writ petitions could not establish the existence of any of these grounds, for holding the phrase "in the State" appearing in Section 2(11) .....

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312,10313, 10983, 10984 and 29139 of 2011 - Dated:- 5-4-2016 - V. Ramasubramanian And N. Kirubakaran, JJ. For the Petitioners : Mr. R. L. Ramani, S.C. For Mr.K.J.Chandran, Mr.B.Raveendran For the Respondents : Dr.Anita Sumanth, Spl.G.P. (T) ,Mr.Manoharan Sundaram, AGP, Mr.Cibi Vishnu, AGP ORDER V. Ramasubramanian, J. The petitioners in these writ petitions, have come up with a prayer either for the issue of a writ of declaration to declare a particular phrase in Section 2(11) of the Tamil Nadu V .....

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hnan, Ms.Aparna Nandakumar, C.Baktha Sironmani, S.Ramanathan, K.Soundararajan, V.Sundareswaran and S.Raveekumar, learned counsel appearing for the writ petitioners and Dr.Anita Sumanth, learned Special Government Pleader(Tax), assisted by Mr.Manoharan Sundaram, Additional Government Pleader(Tax), and Mr.Cibi Vishnu, Additional Government Pleader (Tax), appearing for the State. 3. Under Section 8(1) of the Central Sales Tax Act, a dealer who sells goods of the description referred to in Sub-Secti .....

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ds of the description referred to in Sub-Section (3) of Section 8 of the Central Sales Tax Act, 1956. The petitioners are also selling those goods in the course of inter-State trade or commerce. 5. Unfortunately, all the petitioners in these writ petitions are selling the aforesaid goods in the course of inter-State trade or commerce, either to unregistered dealers or to Government Departments of other States or Government Corporations or undertakings in other States. As a consequence, the petit .....

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the description contained in Section 2(11), despite really being capital goods, may fall under serial number 69 of Part-C of the First Schedule, attracting tax at the rate of 14.5%. 7. At this stage, it will be appropriate and useful to extract Section 2(11) of the Act. It reads as follows:- "capital goods" means- (a) plant, machinery, equipment, apparatus, tools, appliances or electrical installation for producing, making, extracting or processing of any goods or for extracting or for .....

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iness excluding civil structures and such goods as may be notified by the Government;" 8. As can be seen from the above definition, only such of those goods which satisfy the following criteria, will fall within the definition of Section 2(11):- (i) the goods must be of the description contained in Clauses (a) to (g); (ii) the goods must be used in the State; (iii) they must be used for the purpose of manufacture, processing, packing or storing of goods; (iv) such an activity should take pl .....

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ontained in Clauses (a) to (g) have come up with a set of writ petitions contending that what they sell are also capital goods that will fall within the description contained in Clauses (a) to (g). 10. In other words, two categories of persons have come up with the above writ petitions. One set of persons are those who admittedly manufacture the goods of the description contained in Clauses (a) to (g), but whose goods are used not "in the State" but outside the State, as a consequence .....

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te" appearing in Section 2(11): 11. The objections to the employment of the phrase "in the State" in Section 2(11), are as follows:- (i) goods which are treated as capital goods, when used in the State, cannot become other goods, when used outside the State; (ii) treating the dealers of one and the same goods differently, depending upon their place of use, offends Article 14; (iii) a sale in the course of inter-State trade or commerce, to a person other than a registered dealer, i .....

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ction 2(11), as projected by Dr.Anita Sumanth, learned Special Government Pleader (Taxes), is that the entire thrust of Sales Tax Law, is to encourage transactions between two registered dealers. The dealers who have come up with a challenge to Section 2(11) are only those who sell goods in the course of inter-State trade or commerce, to unregistered dealers. If the first category of writ petitioners, who object to the language employed in Section 2(11), happen to sell goods only to registered d .....

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he challenge to a particular expression contained in Section 2(11), especially after the deletion of Section 8(2-A) of the CST Act, 1956, simultaneously with the introduction of the TNVAT Act, 2006, has no substance. 13. We have carefully considered the rival contentions. We shall take up the grounds of challenge one by one. First ground of challenge: 14. The first ground of challenge to Section 2(11) is that the nature of the goods cannot change, merely on the basis of the location in which the .....

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validly enacted by a State Legislature, cannot be challenged on the ground that it defies logic and common sense. In Namit Sharma v. Union of India [(2013) 1 SCC 745], the Supreme Court, after referring to D.D.Basu in the " Shorter Constitution of India" indicated that a law may be challenged as unconstitutional on the following grounds namely: (1) contravention of any of the fundamental rights (2) Legislating on a subject not assigned to the relevant Legislature by the distribution o .....

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ed out in para 11 of the Judgment in Namita Sharma. It is pointed out therein that a law cannot be invalidated on the ground that the law making body did not apply its mind or that it was prompted by improper motive. A law cannot even be challenged on the ground that it contravened any of the directives contained in Part-IV of the Constitution. Even the wisdom of the Legislature in making such a law, cannot be a matter of consideration. The manner in which such a law is administered or capable o .....

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of all other States except Delhi does not contain a similar expression as contained in Section 2(11) of the Tamil Nadu enactment; and (iv) that the State will not lose any revenue, even if the contention of the petitioners are upheld, since there is no input credit on these items. 18. We do not know how the availability of a power of exemption under Section 30 can take away the power of the State legislature to define a particular expression used in the statute. The power to examine is generally .....

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ry State legislature is entitled to adopt its own definition, depending upon the exigencies. What are capital goods for those who use them in the production of other products, may not be capital goods for the person who manufactures those very goods. 20. The fact that all other States except Delhi have adopted a particular definition for the expression capital goods, is an argument to be advanced on the floor of the Assembly or in the public domain. The vires of a provision of law cannot be test .....

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ch the vires could be tested. 22. Relying upon the circulars issued by the Department, to the effect that even without a 'C' Form, the benefit of reduced rate of tax can be claimed upon the sale of capital goods in the course of inter-state trade or commerce, it is contended by Mr.N.Prasad, learned counsel for some of the petitioners that these circulars will have a binding effect upon the Department. In this connection, he placed heavy reliance upon the decision of the Supreme Court in .....

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hat the circulars do not decide what are capital goods that are entitled to a reduced rate of tax. Hence, the above contention is liable to be rejected. 24. A similar contention was advanced by Mr.C.Baktha Sironmoni, learned counsel for one of the petitioners, on the basis of a letter dated 25.9.2007 issued by the Commissioner of Commercial Taxes in favour of one company. The said letter merely clarifies in respect of that company that the capital goods sold to other States without declaration a .....

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tack, it can be seen easily that the same cannot be sustained. The State Legislature is entitled to treat a particular item or good as a capital good, when used within the State. It may not even be a capital good in common parlance. Similarly, a particular good which is treated as capital good in all other States, may be treated differently by one State, provided the law making it so, passes the tests indicated above. 27. As rightly pointed out by Dr.Anita Sumanth, learned Special Government Ple .....

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of sale of any goods including consumables, packing materials and labels, but excluding plant and machinery, to another dealer for use by the latter in the manufacture, and assembling, packing or labeling in connection with such manufacture inside the State, for sale by him of any goods other than ethyl alcohol, absolute alcohol, methyl alcohol, rectified spirit, neutral spirit and denatured spirit, goods falling under Part A of the Third Schedule, goods falling under item 1 of the Sixth Schedul .....

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uch sale; 28. As rightly pointed out by Dr.Anita Sumanth, learned Special Government Pleader (Taxes), it is not open to this Court to treat any word or expression used in any statute as redundant or superfluous. The reliance placed by the learned Special Government Pleader in this regard on the decision of the Supreme Court in Grasim Industries Ltd. v. Collector of Customs [128 STC 350], is well founded. Paragraph 9 of the said decision which clinches the issue in this regard, may be usefully ex .....

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principle of interpreting any word while considering a statute is to gather the mens or sententia legis of the Legislature. Where the words are clear and there is no obscurity, and there is no ambiguity and the intention of the Legislature is clearly conveyed, there is no scope for the Court to take upon itself the task of amending or alternating the statutory provisions. Wherever the language is clear the intention of the Legislature is to be gathered from the language used. While doing so wha .....

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be no attempt to substitute or paraphrase of general application. Attention should be confined to what is necessary for deciding the particular case. This principle is too well-settled and reference to few decisions of this Court would suffice. [See: Gwalior Rayons Silk Mfg. (Wvg.) Co. Ltd. v. Custodian of Vested Forests, Palghat and Anr. (AIR 1990 SC 1747), Union of India and Anr. v. Deoki Nandan Aggarwal (AIR 1992 SC 96), Institute of Chartered Accountants of India v. Price Waterhouse and Anr. .....

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rned counsel for one of the petitioners that the expression "capital goods" has to be given a very wide connotation and that there cannot be an artificial restriction. But, we are unable to accept the said submission. In Bashir Mills, the Supreme Court was concerned with Rule 57-Q of the Central Excise Rules, 1944, which contain the definition of the expression "capital goods" under the Explanation to the Rule. It was made clear therein that the said definition was for the pu .....

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f determining the incidence of tax. This is not prohibited by law and hence, the first ground of challenge has to fail. Second ground of challenge: 31. The second ground of challenge is that the treatment of dealers of one and the same goods differently, depending upon the place of use of the goods, offends Article 14. 32. But this ground of challenge cannot be sustained at least for two reasons. The first is that even the Central Sales Tax Act, 1956, treats the dealers of one and the same goods .....

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reats the same goods of the same dealer differently, liable to be taxed at different rates, depending upon whether the sale is to a registered dealer or not. When such a discrimination is inherent in the scheme of Section 8 of the Central Sales Act, 1956, the adoption of the same or similar principle to the definition of the expression "capital goods" under the State Act, cannot be assailed as discriminatory, offending Article 14 of the Constitution. 33. For assailing the impugned prov .....

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ication, and (b) that the impugned legislation permits excessive delegation of powers and conferment of uncanalised and unguided powers on the executive. But, both these requirements are not satisfied in the case on hand. Section 8 of the Central Sales Tax Act, 1956, itself creates a classification based upon the registration of the dealers. Such classification is permissible in view of the object sought to be achieved, namely to encourage transactions between two registered dealers, as propound .....

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on of the goods that will be treated as capital goods for the purposes of TNVAT Act, 2006. What are capital goods for one person may not be capital goods for another person. A huge plant and machinery may be capital goods for some one who manufactures certain items by employing the plant and machinery. But for a person who manufactures such plant and machinery, the same may not be capital goods. Therefore, the Legislature is entitled to treat different items differently and it is also entitled t .....

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order to understand the scope of this contention, it is necessary to take note of the provisions of Section 8(2) of the Central Sales Act, 1956, which reads as follows:- "8(2) The tax payable by any dealer on his turnover in so far as the turnover or any part thereof relates to the sale of goods in the course of inter-State trade or commerce not falling within sub-section (1), shall be at the rate applicable to the sale or purchase of such goods inside the appropriate State under the sales .....

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him or subject to any Rules made by the Central Government in this behalf, for use by him in the manufacture of processing of goods for sale or 3 [in the telecommunications network or] in mining or in the generation or distribution of electricity or any other form of power." 38. A careful look at Section 8(2) would show that the Rule contained therein would apply to the sale of goods in the course of inter-State trade or commerce, not falling within sub-Section (1). In other words, if two .....

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), the tax payable would be as per the local Sales Tax Law of that State. 40. For driving home the contention regarding repugnancy, Mr.S.Ravee Kumar, learned counsel placed strong reliance upon the decision of a Constitution Bench of the Supreme Court in State of Kerala v. Mar Appraem Kuri Co. Ltd. wherein the Constitution Bench crystallised the principles of law emerging from Part 11 of the Constitution in detail. Briefly stated the principles that could be culled out from paragraph 16 of the d .....

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principles, the Supreme Court made it very clear that the principle of federal supremacy in Article 246(1) cannot be resorted to unless there is an irreconcilable conflict between the entries in Union and State Lists and that the said conflict has also to be a real conflict (not an imaginary one). 42. In this case, we do not see any irreconcilable conflict between Section 2(11) of the TNVAT 2006 and Section 8(2) of the Central Sales Tax Act, 1956. Section 2(11) merely makes certain capital goods .....

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e of Bihar v. Shree Baidyanath Ayurved Bhawan Pvt. Ltd. [(2005) 2 SCC 762]. In paragraph 25 of the said decision, the Supreme Court held that any incidental trenching does not amount to encroaching upon the field reserved for Parliament, though the extent of trenching beyond the competence of the legislating body may be an element in determining whether the legislation is colourable or not. 44. Drawing our attention to the decision of the Bombay High Court in Bashir Oil Mills v. Maharashtra Sale .....

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tion 41 of the Bombay Sales Tax Act. The notification exempted all sales of oil cakes, including oil cakes for the purpose of cattle feed within the State of Maharashtra. The controversy arose about the use of the words "within the State of Maharashtra". The Bombay High Court construed the exemption notification to be an exemption from tax generally made within the purview of Section 8(2A). As a consequence, the Bombay High Court held that the expression "within the State of Mahar .....

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en the decision of the Supreme Court in Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. v. Assistant Commissioner of Sales Tax [33 STC 219 (SC)], relied upon by Ms.Aparna Nandakumar, learned counsel is not of any assistance to the case of the petitioners. As seen from paragraph 4 of the said decision, the question that arose in that case was whether the action of the parliamentary language not fixing the rate of tax by itself under Section 8(2) of the CST Act, 1956, but in adopting the rate .....

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. 48. In other words, Section 8 deals with the Sales Tax payable on the sale of goods in the course of inter-State trade or commerce. The Central Sales Tax Act, 1956, itself is a law that deals with sale of goods in the course of inter-State trade or commerce. No law of a State is entitled to impose or authorise the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place outside the State. Therefore, what is prohibited is the imposition of a tax on the sale o .....

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y of the argument of the petitioners lies in treating the definition clause as a charging provision. Therefore the third ground of challenge is fallacious and is rejected. Fourth ground of challenge: 50. The fourth ground of challenge is that the prescription contained in Section 2(11) is violative of Article 286(1)(a) of the Constitution. Article 286(1)(a) reads as follows:- "286. Restrictions as to imposition of tax on the sale or purchase of goods.- (1) No law of a State shall impose, or .....

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charged to a particular rate of tax under Entry 25 of Part-B of the First Schedule. Therefore all that Section 2(11) seeks to do is to impose a tax at the rate of 5%, upon certain types of goods that are used in the State for the purpose of manufacture, processing, packing or storing of goods. The goods which do not satisfy the definition under Section 2(11), consequently fall under another Entry 69 in Part-C of the First Schedule. Merely because the goods that fall outside the definition of Se .....

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6. This rate is lesser than the rate prescribed for the goods falling within the definition of Section 2(11) read with Entry 25 of Part-B of the First Schedule. Therefore, as a matter of fact, it is possible for persons whose goods fall within the definition of Section 2(11) to contend that despite their goods being capital goods, they are paying tax at 5% while dealers of the very same goods sold in the course of inter-State trade and commerce satisfying the prescription contained in Section 8( .....

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ature of a State shall have power to make any law giving, or authorising the giving of, any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another, by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule. (2) Nothing in clause (1) shall prevent Parliament from making any law giving, or authorising the giving of, any preference or making, or authorising the making of, any discriminat .....

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he other or from discriminating one State from another. As far as we understand the purport of the said Article, what is prohibited by the same is only the making of a law that would treat the goods purchased from or sold to a dealer in one State, more or less favourable than the goods purchased from or sold to a dealer in other States. Even the provisions of this Article do not prevent a State from making a law that would provide a special treatment to certain types of goods or certain types of .....

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cle 301, as the tax on carriage of tea through the State of Assam had the effect of interfering with the freedom of trade, commerce and intercourse and that it was also discriminatory offending Article 14. 57. While considering the challenge made on the basis of Article 301, the Supreme Court recalled in para 33 of its decision, the political and Constitutional background as follows:- "33. Let us first recall the political and constitutional background of Part XIII. It is a matter of common .....

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de and commerce which inevitably led to the erection of customs barriers between themselves and the rest of India. In the matter of such barriers British India was governed by the provisions of s. 297 of the Constitution Act, 1935. To the provisions of this section we will have occasion later to refer during the course of this judgment. Thus, prior to 1950 the flow of trade an commerce was impeded at several points which constituted the boundaries of Indian States. After India attained political .....

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he merger and consolidation of some of the States interests between themselves. It is with the knowledge of the trade barriers which had been raised by the Indian States in exercise of their legislative powers that the Constitution-makers framed the Articles in Part XIII. The main object of Art. 301 obviously was to allow the free flow of the stream of trade, commerce and intercourse throughout the territory of India." 58. Thereafter, the Supreme Court pointed out that the provision contain .....

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ictions, freedom from which is guaranteed by Article 301 would be such restrictions as directly and immediately restrict or impede the very flow or movement of trade. The Court also pointed out that taxes may amount to restrictions, but it is only such taxes as directly and immediately restrict trade that would fall within the purview of Article 301. The Court also clarified that despite Article 301, the State Legislatures can impose restrictions, after satisfying the requirements of Article 304 .....

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in nature, and (b) whether Presidential assent had been obtained or not. 60. The question that arose in that case was whether the West Bengal law was violative of Article 301 of the Constitution or not. We do not think that the said decision is of any assistance to the petitioners. 61. On the challenge of the petitioners to the impugned provision as being violative of Articles 301 and 303(1) of the Constitution, the answer lies in the decision of the Constitution Bench of the Supreme Court in t .....

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e Constitution they may be regarded as void. (ii) It must be regarded as settled law that a tax may in certain cases directly and immediately restrict or hamper the flow of trade, but every imposition of tax does not do so. .... (v) An Act which is merely enacted for the purpose of imposing tax which is to be collected and to be retained by the State does not amount to a law giving or authorising the giving of, any preference to one State over another, or making, or authorising the making of, an .....

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nt upon natural or business factors which operate with more or less force in different localities that Parliament is prohibited from making a discrimination. Prevalence of differential rates of tax on sales of the same commodity cannot be regarded in isolation as determinative of the object to discriminate between one State and another." 62. Relying upon the decision in Weston Electronics v. State of Gujarat [(1988) 70 STC 52 (SC)], it is contended by Mrs.R.Hemalatha, learned counsel appear .....

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ate trade or commerce to unregistered dealers, are made to pay higher rate of tax, it cannot be said that there is an infringement of Article 301. As a matter of fact, if the sale is of capital goods in the course of inter-state trade of commerce to a registered dealer, the rate is actually lesser that what is stipulated for goods covered by Section 2(11). It is only those who sell goods in the course of inter-state trade or commerce to unregistered dealers, who are made to pay a higher rate of .....

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attract tax at the rate of 5%. (ii) If such a sale falls within the purview of Section 8(1) of the Central Sales Tax Act, 1956, it will attract tax only at the rate of 2%. (iii) Goods, which are otherwise capital goods, but which do not satisfy the definition contained in Section 2(11), will also attract tax only at the rate of 2% under Section 8(1) of the CST Act, 1956, if the sale of such goods takes place in the course of inter-State trade or commerce in favour of a registered dealer. (iv) I .....

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y are (i) those who sell them to a registered dealer, attracting Section 8(1) of the CST Act and (ii) those who sell them to any other person attracting Section 8(2) of the CST Act. 65. The requirement of Section 2(11), does not affect the first category of persons. It only affects the second category of persons. As rightly pointed out by Dr.Anita Sumanth, the very thrust of the Sales Tax Law is to encourage transactions between two registered dealers. Therefore, the decisions cited do not advan .....

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argued that the Supreme Court had already indicated in The State of Mysore vs. Yaddalam Lakshminarasimhiah [16 STC 231], as to how to read Section 8(2) of the Central Sales Tax Act, 1956. 67. In Yaddalam Lakshminarasimhiah, the Supreme Court was concerned with a case where an assessee claimed that its turnover consisting of sales of textiles manufactured by means of power looms in the course of inter-State trade is liable to be taxed at the same rate and exactly in the same manner as they would .....

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8, as it stood at that time merely stipulated the manner in which the tax payable by a dealer in a case not falling under Section 8(1) has to be calculated. But the present Section 8(2) not just deals with the method of calculation of tax, but constitutes a charging section, in so far as inter-State sales that do not fall within Section 8(1) are concerned. The Explanation under Sub-Section (2) of Section 8, steered clear of any confusion that the dealers may entertain on the basis of Yaddalam L .....

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ntral Sales Tax where the sale or purchase of such goods is exempt generally under the State Sales Tax Law. Due to the use of expression "generally" in Sub-Section (2-A), the Court held that unless the exemption is a general exemption and not an exemption operative in specified circumstances or specified conditions, Sub-section (2-A) will not operate. 71. But neither the decision in Yaddalam Narasimhiah nor the decision in Pine Chemicals, will be of any assistance to the petitioners. W .....

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o the court either to go by the general perception of what an animal is or by a forensic examination of whether the prescription of four legs etc., are conditions precedent or mere general indicators. Therefore, the last ground of challenge is also liable to be rejected. 72. As pointed out in paragraph 15 above, a statutory provision can be challenged only on very limited grounds, namely (a) the infringement of any of the fundamental rights, (b) the lack of competence on the part of the relevant .....

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1) of the Tamil Nadu VAT Act, 2006. Therefore, the challenge to the statutory prescription made in these writ petitions has to be failed. Individual grievances 73. Apart from the challenge to the validity of Section 2(11), some of the petitioners have also projected certain individual grievances. These individual grievances can be grouped together under the following categories: (i) those whose products are not treated as capital goods at all, despite the fact that they are used in the manufactu .....

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n 2(11) is one part. Clauses (b) to (g) comprise the other part. If the good in question falls under any one of the categories mentioned in Clause (a), such as plant, machinery, equipment, apparatus, tools, appliances or electrical installation, it would be treated as capital good, provided it is used for producing, making, extracting or processing of any goods or for extracting or for bringing about any change in any substance for the manufacture of final products. If the good in question falls .....

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ions and cognate expressions means producing, making, extracting, altering, ornamenting, finishing, assembling or otherwise processing, treating or adapting any goods and includes any process of goods which brings into existence a commercially different and distinct commodity but does not include any activity as may be notified by the Government." 76. Therefore, any equipment, appliance, or apparatus, which is used for producing, making, altering, assembling, or processing of any goods, wil .....

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e tests are applied, it would be clear that concrete mixtures, fermenters, paper cup machinery, coir and curling machine, welding machinery parts, printing machinery parts, cold storage equipment etc., which the petitioners in some of the writ petitions are dealing in, would certainly be capital goods, provided they also satisfy the requirement of 'used in the State' found in Section 2(11). The assessing authorities shall take note of this and apply their mind while passing orders of ass .....

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of the CST Act. They are also not able to get a concessional rate as prescribed in Entry 25 of Part B of the First Schedule to the TNVAT Act, 2006, since the goods are not used "in the State" so as to satisfy the requirement of Section 2(11). Therefore, the grievance of those belonging to the second category is that they are made to lose on both ends. 79. But, we do not think that we can lend our helping hand to the second category of persons. The problem that they have about the inabi .....

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cal sales tax, any sale made to the local Government. Therefore, we do not know how far the petitioners belonging to the second category of cases are correct in their submission. We think the difficulty expressed by the second category of persons is perhaps projected theoretically for the purpose of attacking Section 2(11). 80. One last issue that remains to be dealt with, is the reliance placed by some of the petitioners on an order passed by the Authority for Advance Ruling and clarification i .....

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