STATE OF U.P. & ORS. v. DEEPAK FERTILIZERS & PETROCHEMICAL CORPORATION LTD

Citation: [2007] 6 S.C.R. 525

Court: Supreme Court of India

Bench: TARUN CHATTERJEE, V.S. SIRPURKAR

Case summary

STATE OF U.P. & ORS. v. DEEPAK FERTILIZERS & PETROCHEMICAL CORPORATION LTD.pdf

Judgment text

STATEOFU. P. &ORS. v. DEEPAK FERTILIZERS &PETROCHEMICAL CORPORATION LTD. MAY 14, 2007 [TARUN CHATTERJEE AND V. S. SIRPURKAR, JJ. ] U. P. Trade Tax Act 1948-s. 25, proviso-Tax on sale of chemical fertilizers-Exemption granted by Notification in regard to fertilizer sold by Respondent-Held: Could not be withdrawn with retrospective effect by issuance ofsubsequent notification superseding the earlier notification since it amounted to increasing the tax liability of Respondent with retrospective effect, which could not be done in view of proviso to s. 25-Subsequent notification also discriminatory being not able to strike a rational balance of classification between items of the same category since fertilizer sold by Respondent was not given exemption though all other fertilizers ofthe same category were exempted-No reasonable nexus of classification among chemical fertilizers of the same class by the State-Notification-Tax Exemption Notification-Constitution of India, 1950-Article 14.

Respondent-company is engaged in the manufacture and sale of chemical fertilizer NPK 23:23:0. In terms ofNotification dated 2nd November, 1994 issued by Appellant-State in exercise of its powers under the U. P. Trade Tax Act, NPK 23:23:0 was exempted from payment ofsales tax for the period 1st November 1994 to 31st March 1995. Superseding the said Notification, a set of two notifications, one dated 10th April, 1995 followed by another dated 15th May, 1995 were issued in terms ofwhich tax exemption to NPK 23:23:0 as allowed by the Notification dated 2nd November, 1994 was withdrawn with retrospective effect. In terms of the said two subsequent notifications all fertilizers of the NPK category except NPK 23:23:0 were exempted from payment oftax.

In appeal to this Court the questions which arose for consideration are 1) Whether exemption granted to NPK 23:23:0 by Notification dated 2nd November, 1994 could not be withdrawn by subsequent notifications with retrospective effect and 2) Whether the subsequent two notifications were also discriminatory as they exempted all kinds of fertilizers ofNPK category except NPK 23:23:0. Dismissing the appeal, the Court HELD: 1. A bare perusal of the proviso to Section 25 of the U. P Trade Tax Act would clearly show that no notification having the effect of increasing the tax liability shall be issued with retrospective effect under the aforesaid section. The High Court was justified in holding that exemption could not be withdrawn with retrospective effect by issuance of subsequent notification dated I0th Apri~ 1995, superseding the notification dated 2nd November, 1994.

C' Restricting the exemption of tax to certain fertilizers in the same class of chemical fertilizers certainly amounted to increasing the liability to tax of the dealer with retrospective effect, which cannot be issued in view of the proviso to Section 25 of the Act. Accordingly, it is held that the notification dated 10th April, 1995, denying exemption to NPK 23:23:0 retrospectively is illegal and invalid. [Para 10) [53'0-E-G) Ganesh International &Anr. v. Assistant Commissioner and Ors. , (2001) 124 STC 600 (All), referred to. 2. 1. From a perusal of the notifications in question, it is evident that other fertilizers of the NPK category i. e. N. P. K. 12:32:16; N. P. K. 15:15:15; N. P. K. 20:20:0; N. P. K. 14:35:14 are included in the exemption list, whereas it is a matter of fact that the NPK 23:23:0 fertilizer is also a fertilizer of the same category, but it is omitted from the list. [Para 13) (531-E] 2. 2.

Every law has to pass through the test of constitutionality, which is nothing but a formal name of the test of rationality. Whenever there is to be made any type oflaw for the purpose oflevying taxes on a particular commodity or exempting some other commodity from taxation, a sought ofclassification is to be made. Certainly, this classification cannot be a product of a blind approach by the administrative authorities on which the responsibility of delegated legislations is vested by the constitution. In a nutshell, the notifications issued by the Trade Tax Department of the State ofU. P. , dated 10th April, 1995 and 15th May, 1995 lack the sense of reasonability because it is not able to strike a rational balance of classification between the items of the same category. As a result of this, NPK 23:23:0 is not given exemption from taxation where as all other NPK fertilizers of the same category like that ofNPK 20:20:0 are provided with the exemption from taxation.

There is no reasonable nexus ofsuch classification among various chemical fertilizers STATEOFU. P. •. DEEPAKFERTILIZERS&PETROCHEMICALCORPORATIONLTD(TARUNCHATTERJEE,J. ) 527 of the same class by the State. [Paras 15 and 16) [532-F-H; 533-A, C) State ofAssam & Ors. v. Naresh Chandra Ghosh (D) by Lrs. , (2001) I SCC 265 and AssociatedCement Company v. Government ofAndhra Pradesh and Anr. , (2006) I SCC 597, distinguished. Ayurveda Pharmacy & Anr. v. State ofTamilnadu, (198912sec285; Tata Motors Ltd. v. State ofMaharashtra and Ors. , (2004) 5 SCC 783 and Kera/a Hotel and Restaurant Association & Ors. v. State ofKera/a & Ors. , AIR (1990) SC 913, referred to. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3511 of2001. From the Final Judgment and Order dated 09. 08. 2000 ofthe High Court ofJudicature at Allahabad in Civil Misc. Writ Petition No. I120 of I995. Kavin Gulati and Rajiv Dubey (for Kamlendra Mishra) for the Appellants. Dhruv Agarwal and Praveen Kumar for the Respondent.

The Judgment of the Court was delivered by ,, I TARUN CHATTERJEE. J, 1. Challenge in this appeal is to the judgment passed by the Division Bench of the High Court of Judicature at Allahabad. 2. Deepak Fertilizers and Petrochemical Corporation Ltd. (respondent herein) is a Company registered under the Indian Companies Act, 1956 which is engaged in the business of manufacture and sale of phosphatic fertilizers and allied chemicals the composition of which is 23:23:0 i. e. (Nitrogen, Prosperous and Potassium) in the State of U. P. and is registered under the UP Trade Tax Act (hereinafter called the 'Act') and the Central Sales Tax Act. The State ofUP (the appellants herein) issued notification dated 2nd November, 1994, which provided for exemption from payment of tax on the sale of potassium phosphatic fertilizers for a specified period. This Notification reads as under: "Jn the exercise ofthe powers under Clause A ofSection 4 read that Section 25 ofthe U. P. Trade Tax Act ( U. '"P.

Act No. 15of1948), the Governor is pleased to direct that from 1. 11. 1994 to 31. 3. 1995 no tax would be payable under the aforesaid Act on the sale of Potassium Phosphatic fertilizers. " 3. A reading of this notification indicates that no tax would be payable for the period from 1st November 1994 to 31st March 1995 under the Act on the sale of Potassium Phosphatic Fertilizers. 4. Subsequently a notification-dated I0th April, 1995 was issued which superceded the notification dated 2nd November, 1994. This notification runs ,as under: "In exercise ofpowers under Section 25 read with Clause 21 of sub-section A ofSection 4 ofU. P. Trade Tax Act, 1948 (U. P. Act No. XV of1948) and Section 21 ofU. P. General Clauses Act, 1904 (U. P. Act No. I of 1904 superceding the Government Notification No. T. T. - 2 - 3714/IJ-9( 856)192-U. P. Act -15 -480rder - 94 dated 2nd November 1994 (S. No. 235), the Governor is pleased to direct that during the period !

st November 1994 ending with 31st March 1995 no tax will be payable under the aforesaid U. P. Act No. XV of1948 of the following chemical fertilizers:i. DA. P. ii. MO. P. y iii. Super Phosphate 4 iv. N. P. K. 12:32:16 v. N. P. K. 15:15:15 vi. N. P. K. 20:20:0 vii. N. P. K. 14:35:14" 5. This notification was foll. owed by another notification dated 15th May, 1995, which provided for exc! mption to the same category offertilizers as mentioned in the previous notification dated 10th April, 1995. From a perusal ofthe aforesaid two notifications, we find that the exemption to NPK 23:23:0 (product of the respondent) was withdrawn. 6. Finding that the exemption to NPK 23:23:0 was not allowed by the ~foresaid two notifications, the respondent had written a letter to the ¢;ommissioner, Trade Tax of the State of UP requesting him to include NPK 23:23:0 in the exemption list issued! under the aforesaid two notifications.

On 23rd November, 1995 the Trade Tax Department ofUP asked by a letter to the respondent company, "why their product be included in the aforesaid two STATEOF U. P. v. DEEPAKFERTILIZERS& PETROCHEMICALCORPORATIONLTD. [TARUNCHATTERJEE. J. ] 529 notifications? " as the exemption to the product of the respondent was not allowed and aggrieved by the issuance of these notifications withdrawing such exemption allowed by the 1994 notification, the respondent filed a writ petition in the High Court of Judicature at Allahabad challenging the validity ofthe aforesaid two notifications and prayed for a direction upon the appellants not to discriminate NPK 23:23:0 and to include the same in the list ofexempted items of the aforesaid two notifications. 7. In the writ petition, the first grievance of the respondent was that the notification dated I0th April, 1995 could not have been issued with - bi< to mik• • rati=I b'1'"" of"'"'""tioo b'""" th• I STATEOF U. P.

'· DEEPAKFERTILIZERS8' PETROCHEMICAL CORPORATIONLTD. (TARUNCHATTERJEE. J. ] 533 .. items of the same category. As a result of this, NPK 23:23:0 is not given exemption from taxation where as all other NPK fertilizers ofthe same. category like that of NPK 20:20:0 are provided with the exemption frorn taxation. 16. The reasonableness of this classification must be examined on the basis, that when the object of the taxing provision is not to tax the sale of certain chemical fertilizers included in the list, which clearly points out that all the fertilizers with the similar compositions must be included without excluding any other chemical fertilizer which has the same elements and -.. compositions. Thus, there is no reasonable nexus of such classification among ~ various chemical fertilizers of the same class by the state.

This court in the case of Ayurveda Pharmacy (supra) held that two items of the same category cannot be discriminated and where such a distinction is made between items falling in the same category it should be done on a reasonable basis, in order to save such a classification being in contravention of Article 14 of the Constitution of India. 17. Before finally deciding this aspect ofthe matter, we need to consider a decision cited by learned counsel for the appellant in the case ofAssociated Cement Company v. Government ofAndhra Pradesh and Anr. , (2006] 1 SCC ~ ,. 597.

Learned counsel for the appellant, drawing inspiration from this judgment, submitted that no reliance could be placed on the decision of this Court in the case of Ayurveda Pharmacy wherein it was held that two items of the same category could not be discriminated and where such distension was made between such items, it should be done in order to save such a classification being in contravention ofArticle 14 of the Constitution. While examining the case of Ayurveda Pharmacy this Court in Associated cement observed: "Jn Ayurveda Pharmacy v. State ofTN. which is the sheet anchor of the appellants' submission the facts were : that the appellants were manufacturers ofAyurvedic drugs and medicines, including arishtams and asavas. Arishtams and asavas contain alcohol, which according to the assessee was essential for the effective and easy absorption of the medicine by the human system and also because it acted as preservative.

While all other patent or proprietary medicinal preparations belonging to the different systems of medicines were taxed at the rate of 7% only, arishtams prepared under the Ayurvedic system were made subject to a levey of 30%. The appellants filed the --.... , writ petitions in the High Court of Madras challenging the levy at 3C% on arishtams and asavas, being violative of Article 14 as well as Article 19(1)(g) ofthe Constitution. The High Court dismissed the writ petition by observing that the imposition of the rate of 30% on the sale ofarishtams and asavas must be regarded principally as a measure for raising revenue, and repelled the argument that the rate of tax was discriminatory or that Artide 19(I)(g) was infringed. " 18.

In Associated Cement case this Court noted the aforesaid facts and principle laid down in Ayurveda Pharmacy and after noting the same at page 611 of the decision in Associated Cement, this Court observed as under: "Referring the decision, it was held by this court that the two preparations- Arishtams and Asava- were medicinal preparations and even though they containe:d high alcoholic content, so long as they continued to be identified as medicinal preparations they must be treated for the purposes of sales tax law in like manner as medicinal preparations generally, including those containing lower percentage of alcohol. " 19. This court in Associated Cement case thus noted that in Ayurveda Pharmacy case (supra) the charge of discrimination was upheld because of the inherent nature of the commodity and its similarity with others falling within the same category.

However, while the distinguishing the facts of the Ayurveda Pharmacy, this court in Associated Cement case made the following observations: "but in the present case, the rate oftax on cement is made dependent on whether the sale price of cement includes the cost of packing materials. " 20. From the above, we find that in Associated Cement case, it was held by this court that the rate of tax cin cement was dependent on the question whether the price included the cost of packing materials whereas in the present case we are concerned with the exemption granted to the dealer of NPK 23:23:0. In view of our discussion made herein above, we are, therefore, of the view that the decision in the case of Associated Cement stand on different factual situation. Therefore, we are unable to accept the contention of the learned counsel for the appellants that the decision in Ayurveda Pharmacy and the principles laid dlown in that case cannot be applied in the present case. 21.

This being the position and in view of our discussion made herein STATEOfUP. ,.. DEEPAK FERTILIZERS& PETROCHEMICALCORPORATIONLTD. [TARUN CHATTERJEE,J. ] 535 tr earlier that the products of the respondent and the exemption granted in the notification in question which are similar in nature, we hold that the product ofNPK 23:23:0 is also a similar commodity within the meaning ofthe notification of exemption dated I0th April, 1995. Therefore, it would not be open for the appellants, as held by the High Court, to realise tax retrospectively on sale ofNPK 23:23:0 from 10th April, 1994 to 3lst March, 1995. 22. Before parting with this judgment, it would be necessary for us to take into consideration another decision of this Court in the case of State of .... Assam & Ors. v. Naresh Chandra Ghosh (D) by Lrs. , (2001] I SCC 265. The -. ~ learned counsel for the appellants relied on this decision in order to distinguish the decision ofthis Court in the case ofAyurveda Pharmacy.

In our view, this decision is factually distinguishable. In paragraph 9, this Court observed that so far as the Assam Act is concerned, unlike the Tamil Nadu General Sales Tax Act, 1959, it identified the medicinal preparations containing more than 12% alcohol as a separate class vis-a-vis such preparations either not containing alcohol or containing less than 12% alcohol. The difference, according to this decision, distinguishes the basis of the judgment of this Court in Ayurveda Pharmacy case in as much as the Assam Act did not identify the medicinal I preparations containing more than 12% alcohol as being the same as other medicinal preparations not containing alcohol. It was also noted in that • decision that on the other hand these types of spirituous medicinal preparations, which contained 12% alcohol, have been separately classified for the levy of tax under Item 67 of the Schedule to the Act.

In that view of the matter, the classification founded in the said decision with regard to the medicinal preparations based on the strength of alcohol contents in the same, cannot be said to be arbitrary and violative ofArticle 14, as held by the High Court. This decision, as already noted, is of no help to the app~llants and the reasons that this decision will not help the appellants have already been discussed above. Accordingly, we are not in a position to rely on the decision as cited by the learned counsel for the appellants. 23. For the reasons aforesaid, we do not find any merit in the appeal and the same is dismissed with no order as to costs. B. B. B. Appeal dismissed. -""'