ANDHRA STEEL CORPORATION v. COMMISSIONER OF COMMERCIAL TAXES IN KARNATAKA

Citation: [1990] 2 S.C.R. 253

Court: Supreme Court of India

Bench: SABYASACHI MUKHERJI, M.M. PUNCHHI, V. RAMASWAMI

Case summary

This was challenged in this Court by way of petition under Article 32 of the Constitution in A. The respondent Commissioner of Commercial Taxes, Bangalore initiated proceedings under section 22(A) of the Act for revising the order of the Deputy Commissioner on the ground that...

Judgment text

The Judgment of the Court was delivered by V. RAMASWAMI, J. Special leave granted. The appellant is a registered dealer under the Karnataka Sales Tax Act (hereinafter called 'the Act'). The appellaot (hereinafter referred to 'the assessee') purchases iron scrap from dealers inside aod outside the State of Kamataka for the purpose of manufacturing iron ingots, steel rounds and tor-steel. These manufactured goods were ANDHRA STEEL CORPN. v. COMMR. OF TAXESW. RAMASWAMI, J. ] 255 sold mostly within the State. In ~ct of the Assessment Years 1972- 73 to 1974-75, accepting the contentions of the assessee that the goods sold were manufactured out of tax suffered iron scrap, the Commercial Tax Officer exempted the sales tum over of the manufactured goods. The Deputy Commissioner of Commercial Taxes in exercise of his powers under section 21 of the Act restricted the exemptions but otherwise confirmed the assessment order by ·his order dated 11. 5. 1979.

The respondent Commissioner of Commercial Taxes, Bangalore initiated proceedings under section 22(A) of the Act for revising the order of the Deputy Commissioner on the ground that the assessee had been allowed exemption in respect of the tum over of manufactured goods without verifying as to whether the inputs rron scrap naa suffered taxes and that Explanation II to ·Schedule IV of the Act was applicable or not. The appellant filed the writ petition praying for the issue of a writ certiorari to quash the show cause notice issued by the respondent under section 22(A) of the Act challenging the constitutional validity of section 5(4) of the Act in so far as it pertains to item 2 of Schedule IV to the Act read with Explanation II thereof in respect of its application for the period prior to 1. 4. 1978 as violative of Article 304(a) of the Constitution. It may be pointed out at this stage that in Mangalore Metal House v.

State of Karnataka, [1986] 63 STC 482 the High Court upheld the Explanation II to Schedule IV of the Act which is differently worded in its application for the period subsequent to 1. 4. 1978. It may also be mentioned tha. t the High Court had confined itself only to the challenge of the constitutional validity of the provision and left open the other question on merits including the validity of the notices to be agitated after exhausting the appellant's remedy before the Sales Tax authorities.

The High Court was of the view that the provision providing for not levying tax, if at an earlier stage tax has been paid, is only in the nature of exemption and the exemption arises only on proof that the tax has been paid at an earlier stage on the goods out of which the goods in question were manufactured, that there is nexus between the finished goods and the raw material used for manufacturing the same that it is not correct to state that the tax is not payable on the finished goods manufactured out of local raw material but the discrimination if at all would arise only in the quantum of tax payable, for the tax on finished goods will be definitely higher than on the raw material.

The High Court was of the further view that there is no discrimination in the rate of tax between the imported items and the local items of finished goods of iron steel as such and that the variation in the quantum of tax is on account of the scheme of taxation working diffe- rently on different dealers, those who import raw material and manufacture and those who locally purchase and manufacture and hence such an effect is only indirect result and not having direct or immediate impact. In that view the High Court dismissed the writ petition and gave liberty to the appellant to file objections before the Commissioner of Commercial Taxes for dealing with questions on merits. This appeal has been filed against the said judgment of the High Court.

The main point that was urged in this appeal was that section 5(4) of the Act in so far as it pertains to item 2in the IV Schedule read with the Explanation II is violative of Article 304(a) of the Constitution as under that provision the sale of finished goods manufactured out of imported raw material is taxed but the sale of finished goods manufactured out of locally purchased raw material is not taxed and that amounts to hostile discrimination in the rate of tax or quantum of tax.

Section 5(4) of the Act is the charging section in respect of declared goods and the relevant portion reads as follows: "(4) Notwithstanding anything contained in sub-section (1) (or section 5 B or section 5 C) a tax under this Act shall be levied in respect of the sale or purchase of any of the declared goods mentioned in column (2) of the Fourth Schedule at the rate and only at the point specified in the corresponding entries of columns (4) and (3) of the said Schedule on the dealer liable to tax under this Act on his taxable turnover of sales or purchases in each year relating to such goods: - tax cannot be said to be higher in the case of imported goods. It may be that when the rate is applied the resulting tax is somewhat higher but that does not offend against the equality contemplated by Art. 304. That is the consequence of ad valorem tax being levied at a particular rate. So long as the rate is the same Art. 304 is satisfied.

Even in the case of local manufactures if their cost of production ~~, varies, the net tax collected will be more or less in some cases but that does not create any inequality because inequality is not the result of the tax but results from the cost of production of the goods or the cost of their importation. This ground, therefore, has also no substance. >- In Associated Tannerse v. Commercial Tax Officer Vizianagaram & Ors. (supra) the facts were these, The assessee was a tanner who ... . >. · had a tannery at Vizianagaram and was at the material time a dealer under the Andhra Pradesh General Sales Tax Act, 1957 (hereinafter called the 'State Act') as well as the Central Sales Tax Act, 1956 (hereinafter called the 'Central Act'). The assessee purchased raw hides and skins in the State of Andhra Pradesh and tanned the same. He was selling mostly the tanned hides and skins in the course of inter-State trade.

The assessing officer assessed the assessee's inter_- State sales under the Central Act. The assessee filed a writ petition in ...... the High Court questioning the constitutional validity of item 9(b) of Schedule III of the Andhra Pradesh General Sales Tax Act as unconstitutional and void and for a further declaration that no tax could be levied or was leviable under the Central Sales Tax Act on inter-State sales of tanned hides which had already suffered tax at the untanned stage. Thus the question for consideration was whether tanned hides and skins which has already suffered tax at the untanned stage when sold in inter-State sale was liable for levy of tax under the Central Act. This was raised in this fonn because tanned hides and skins which were not subjected to tax as untanned hides and skins alone was liable for the levy under items 9(b)'of Schedule III of the State Act.

The High Court dismissed the writ petition relying on the Nataraja Mudaliar case (supra) and Rattan Lal & Co. case (supra). The assessee preferred an appeal by special leave. This Court was of the view that the point involved in the case was no longer res integra and it is covered by the decision in Nataraja Mudaliar case and held since "the rate of tax was the same, both for the goods brought from outside as well as local goods and it cannot be said that the taxation did directly and immediately restrict or hamper the free flow of trade, commerce, or intercourse and it offended Article 304 (a). " But it is pertinent to point out the further passages appearing in the judgment which actually show the ratio of the judgment. The learned Judges observed: "It further appears to us that there is another aspect. The levy by the State Act is in consonance with the scheme of the Central Act.

By sub-section (2) of section 8 of the Central Act, the tax payable by any dealer on his turnover in so far as the turnover or any part thereof relates to the J... sale of goods in the course of inter-State trade or commerce not falling under sub-section (1), shall be at the rate specified in sub-section (2) of section 8. " and this Court further observed: "The effect of an imposition of tax might work differently upon different dealers, namely, those who use imported · tanned goods andthose who purchase these locally and tan these locally and then sell in the course of inter-State sales. But that effect cannot be said to be arising directly, or as an immediate effect of the imposition of the tax. Therefore there cannot be any question of violation of article 304(a) of the Constitution. There is another aspect of the matter. The imposition in this case was in implementation of the Central Act and it was submitted on behalf of the respondent that there was ANDHRA STEEL CORPN. v. COMMR.

OFTAXES IV. RAMASWAMI, J. ] 271 no prohibition under article 304 of the Constitution on the Parliament for imposition of any law. The embargo that was placed by article 304 of the Constitution was on the Legislature of a State. Sub-article (a) of article 304 of the Constitution reads as follows: "304. Restrictions on trade, commerce and intercourse among States. -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 was subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced. " Therefore the prohibition was not on the Parliament. But in the view we have taken on the first aspect of the matter and in view of the decisions of this Court in the cases of State ofMadras v. N. K. Nataraja Mudaliar, [1968] 22 STC 376 (SC); (1968) 3 SCR 829 and Rattan Lal & Co.

v. Assessing Authority, [1970] 25 STC 136 (SC): (1969) 2 SCR 544, it is not necessary for us to discuss this aspect any further. " It may be seen from these·passages cited that the ratio of the decision as in the case of Nataraja Mudaliar, case (supra) was that in the case of inter-State sale the levy of tax is under the Central Sales Tax onlv though for the purposes of rates of tax that rate which is applicabl~· to local sales is adopted subject to the maximum mentioned\ in section 8(2) of the Central Act and these decisions have no application tO a case where the discrimination pleaded wjth reference to a provision in State law imposing taxes with reference to local as well as in respect of the imported goods. As we have already noticed the States . have no legislative power to tax inter-State sales and it is only the Parliament that could make law. The Central Act is the law relating to tax on inter-State sales made by Parliament.

The State from which the movement of goods commences in the course of inter-State sale collects the tax as agent of the Central Government. On sale of declared goods tax was to be levied and collected at the rate applicable to the sale or purchase of such goods inside the appropriate State subject to the maximum prescribed under section 15 and the restriction relating to taxing it at single point. This is also further subjected to the rates prevailing for local sales. It is with respect to these provisions, in the three decisions in Nataraja Mudaliar case, Rattan Lal & Co. case and ',. -. - Associated Tanner case this Court held that so long the rates applicable are in accordance with section 8 no discrimination would arise . and none of the provisions of part XIII of the Constitution could be said to have been offended. But the case on hand is not one arising out of Central Act. The tax was levied under the State Act in respect of steel semis.

The State Act exempted steel semis which have been manufactured out of iron scrap which have suffered tax but not the. ~. other categories where the scrap had not suffered tax at that stage. This is directly covered by the decision in A. T. B. Mehtab's case (supra) and that decision has not been dissented in Nataraja Muda/iar case (supra) or Rattan Lal & Co's case (supra). The decision in A. T. B. Mehtab's case (supra) is by a Constitution Bench and had not been dissented so far in any case. The ratio of the judgment being fully applicable, the judgment of the High Court under appeal is not acceptable. We accordingly hold that the provision which is impugned in this case is ultra vires and accordingly set aside the judgment of the High Court and allow the writ petition filed by the assessee in the High Court. There will be no order as to costs. T. N. A. Appeals allowed.