Karnataka High Court
M/S. Elite Crumb Industries vs The Deputy Commissioner Of on 11 November, 2013
Author: B.V.Nagarathna
Bench: B.V.Nagarathna
1
IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 11TH DAY OF NOVEMBER, 2013
: BEFORE :
THE HON'BLE MRS. JUSTICE B.V.NAGARATHNA
W.P.Nos.49922-49933/2013 (T-RES)
BETWEEN:
M/S. ELITE CRUMB INDUSTRIES,
A PARTNERSHIP FIRM,
D/NO. 1-154, UNNIKALLINKAL BLDG.,
NELLYADY, POST PUTTUR,
DAKSHINA KANNADA,
REP. BY ITS PARTNER
SRI SHAJI.U.V.,
S/O U.P.VERGHESE,
AGED ABOUT 42 YEARS. ... PETITIONER
(BY SMT: VANI.H, ADV.)
AND:
1. THE DEPUTY COMMISSIONER OF
COMMERCIAL TAXES (AUDIT-1)
DVO, MAIDAN ROAD,
MANGALORE-575 001.
2. STATE OF KARNATAKA,
DEPARTMENT OF FINANCE,
REP. BY ITS SECRETARY,
VIDHANA SOUDHA,
AMBEDKAR VEEDHI,
BANGALORE-560 001. ... RESPONDENTS
(BY SRI: GIRI KUMAR.S.V., AGA)
THESE W.Ps ARE FILED UNDER ARTICLES 226 AND 227
OF THE CONSTITUTION OF INDIA PRAYING TO DECLARE
CLAUSE (7) OF SECTION 11(a) OF KVAT ACT AS
2
DISCRIMINATORY & THUS VIRES ARTICLE 14 & 19 OF THE
CONSTITUTION IN SO FAR AS THE PETITIONER IS CONCERNED.
THESE PETITIONS COMING ON FOR PRELIMINARY
HEARING THIS DAY, THE COURT MADE THE FOLLOWING:
ORDER
The petitioner who is a registered dealer under the provisions of the Karnataka Value Added Tax (hereinafter referred to as "KVAT Act" for short) is engaged in the business of processing and trading of natural rubber. Sale of natural rubber is a taxable event liable to tax under sub- section (1) of Section 3 of the Act.
2. The petitioner purchases natural rubber sheets i.e., latex from the growers, treats the same and thereafter it is packed and delivered to the customers. During the treatment of natural rubber, sheets or latex is heated and hardened by using coconut shells as fuel. It is the case of the petitioner that if a registered dealer purchases coconut shells from another registered dealer by paying tax under sub-section (1) of Section 3 of the Act, input tax is available for set off under sub-section (3) of Section 10 of the Act and no restriction as stated in Section 11 of the Act applies, but if the same fuel is purchased from an 3 unregistered dealer, then a restriction is carved out under sub-section (7) of Section 11 of the Act. Therefore, it is contended that there is an artificial classification between coconut shell as fuel and other products used as fuel, which is in violation of Article 14 of the Constitution of India. It is also contended that there is no justification for making a distinction between purchase made by a registered dealer from another registered dealer under sub-section (1) of Section 3 or from an unregistered dealer under sub-section (2) of Section 3 of the Act. Therefore, while assailing the validity of clause (a) of sub- section (7) of Section 11 of the Act, it is contended that the restriction on the input tax rebate placed by the Legislation is discriminatory, unconstitutional and ultra vires Article 14 of the Constitution of India. The petitioner has also assailed the re-assessment order dated 31/08/2013 at Annexure-C.
3. I have heard the learned counsel for the petitioner and the learned Addl. Government Advocate who appears for respondents and perused the material on record. 4
4. It is contended on behalf of the petitioner that the Act has made an artificial distinction between petroleum products, which are used as fuel and non-petroleum products such as coconut shell, which is used as fuel or an input by a registered dealer. She also contended that when an item of fuel is purchased by a registered dealer from another unregistered dealer, then the restriction under sub-clause (a) of sub-section (7) of Section 11 applies in respect of other inputs other than fuel. Even if the same are purchased from an unregistered dealer, such a restriction would not apply, except when the said goods are exported out of the territory of India. Placing reliance on the two decisions of the Hon'ble Supreme Court in the cases of Ram Krishna Dalmia V/s. Justice Tendolkar (AIR 1958 SC 538) and Kunnathat Thathunni Moopil Nair V/s. State of Kerala & another (AIR 1961 SC
552), she contended that sub-clause (a) of sub-section (7) of Section 11 has to be struck down as unconstitutional.
5. Per contra, learned Addl. Government Advocate appearing for respondents stated that the Legislation has in fact made a distinction between the products as well as 5 the dealers from whom the transactions are made for the purpose of imposing restriction with regard to input tax and that the products as well as the dealers i.e., registered and unregistered dealers and there is no application of the judgments cited by the counsel for the petitioner as they do not assist the petitioner in claiming that there is a discrimination. In order to consider and answer the contention raised by the petitioner's counsel, it is necessary to extract Sections 3, 10 and 11 of the Act and they read as follows:
"3. Levy of tax:-
(1) The tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act. (2) The tax shall also be levied, and paid by every registered dealer or a dealer liable to be registered, on the sale of taxable goods to him, for use in the course of his business, by a person who is not registered under this Act.
10. Output tax, input tax and net tax:-
(1) Output tax in relation to any registered dealer means the tax payable under this Act in respect of any taxable sale of goods made by that dealer in the course of his business, and 6 includes tax payable by a commission agent in respect of taxable sales of goods made on behalf of such dealer subject to issue of a prescribed declaration by such agent.
(2) Subject to input tax restrictions specified in Sections 11, 12, 14, 17 and 18, input tax in relation to any registered dealer means the tax collected or payable under this Act on the sale to him of any goods for use in the course of his business, and includes the tax on the sale of goods to his agent who purchases such goods on his behalf subject to the manner as may be prescribed to claim input tax in such cases.
(3) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, the net tax payable by a registered dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and shall be accounted for in accordance with the provisions of this Act.
(4) For the purpose of calculating the amount of net tax to be paid or refunded, no deduction for input tax shall be made unless a tax invoice, debit note, in relation to a sale, has been issued in accordance with Section 29 or 7 Section 30 and is with the registered dealer taking the deduction at the time any return in respect of the sale is furnished, except such tax paid under sub-section (2) of Section 3.
(5) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, where under sub-section (3) the input tax deductible by a dealer exceeds the output tax payable by him, the excess amount shall be adjusted or refunded together with interest, as may be prescribed.
11. Input tax restrictions:-
(a) Input tax shall not be deducted in calculating the net tax payable, in respect of :-
(1) tax paid on purchases attributable to sale or manufacture or processing or packing or storage or exempted goods exempted under Section 5, except when such goods are sold in the course of export out of the territory of India;
(2) tax paid on goods a specified in the Fifth Schedule subject to such conditions as may be specified, purchased and put to use for purposes other than for.-
(i) resale, or
(ii) manufacture or any other process of other goods for sale, 8 (3) tax paid on purchase of goods as may be notified by the Government or Commissioner subject to such conditions as may be specified. (4) tax paid on purchase of capital goods other than those falling under clauses (2) or (3) except as provided in Section 12. (5) tax paid on purchase of goods, that are dispatched outside the State or used as inputs in the manufacture, processing or packing of other taxable goods dispatched to a place outside the State, other than as a direct result of sale or purchase in the course of inter-State trade or commerce except as provided in Section 14.
(6) tax paid on purchases attributable to naptha, liquefied petroleum gas, furnace oil, superior kerosene and any other petroleum product, when used as fuel in motor vehicles, but when used as fuel in production of any goods for sale in the course of export out of the territory of India or taxable goods or captive power, input tax shall be deducted as provided in Section 14.
(7) tax paid under sub-section (2) of Section 3 on the purchase of fuel;
(8) tax paid under sub-section (2) of Section 3 on the purchase of goods excluding fuel, until output tax is payable on such goods or other goods in which such goods are put to use 9 except when the said goods are exported out of the territory of India;
(9) tax paid on goods purchased by a dealer who is required to be registered under the Act, but has failed to register.
(b) Input tax shall not be deducted by an agent purchasing or selling goods on behalf of any other person other than a non-resident principal.
(c) Input tax shall not be deducted by any dealer executing a works contract,
(i) in respect of the amount paid or payable to any sub-contractor as the consideration for execution of part or whole of such works contract for him, that is claimed as deduction; and
(ii) in respect of the amount actually expended towards labour and other like charges not involving any transfer of property in goods in connection with the execution of works contract, that is claimed as deduction". On a plain reading of Section 3 of the Act, it is noticed that a distinction is made by the Legislation itself between a registered dealer and an unregistered dealer which is a reasonable classification. Section 10 deals with output, input and net tax. In sub-section(2), it is specifically subject to the restrictions contained inter alia, 10 in Section 11 of the Act. Section 11 deals with input tax restrictions. Sub-section (6) states that input tax shall not be deducted in calculating the net tax payable in respect of tax paid on purchases attributable to naptha, liquified petroleum gas, furnace oil, superior kerosene oil, kerosene or any other petroleum product, when used as fuel in motor vehicles, but when used as fuel in the production of any goods for sale in the course of export out of the territory of India or taxable goods or captive power, input tax shall be deducted as provided in Section 14. sub- clause (7) states that restriction shall be imposed in respect of purchase of fuel from an unregistered dealer as per sub-section (2) of Section 3. In Clause (8) it is stated that if any other product is purchased other than fuel, then only the output tax is payable on such goods or other goods in which such goods are put to use, the restriction would apply.
6. The contention in this regard is that insofar as the commodity used as fuel is concerned, namely coconut shell distinction as being made between petroleum products used as fuel and any other fuel, which is discriminatory. It is also contended that the restriction on purchase of fuel in 11 terms of sub-section(2) of Section 3 suffers from discrimination. In other words, the contention is that, as regards fuel products are concerned, the restrictions are not uniform to all the products used as fuel, So also, the restriction applies when certain products such as fuel, which is a non-petroleum product is purchased from an unregistered dealer. Before answering this contention, it would be necessary to place reliance on one of the celebrated decisions of the Hon'ble Supreme Court on Article 14 of the Constitution of India in Ram Krishna Dalmia, wherein the Hon'ble Supreme Court after considering the earlier decisions has stated as follows:
"It is now well established that while Art.14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to pass the test of permissible classification two conditions must be fulfilled, namely, (i) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group and (ii) that, that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded on 12 different bases, namely, geographical, or according to objects or occupations or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration. It is also well established by the decisions of this Court that Art. 14 condemns discrimination not only by a substantive law but also by a law of procedure."
7. Therefore, in the context of Article 14 of the Constitution of India, the Hon'ble Supreme Court has held that a classification founded on a intelligible differentia having rational relation to the object sought to be achieved would not result in any discrimination or violation of the equality clause. What is necessary is that there should be a nexus between the basis of classification and object of the Act under consideration.
8. Having regard to this test, the present case can be considered. As already noted there is a distinction between registered and unregistered dealers. They are treated as a class apart not only with regard to levy of tax by the Act but for other purposes also. In fact, statement of objections and reasons of the Act states, that Act 13 provides for set off of all tax paid at earlier points in respect of goods sold. That would include tax paid defined as input tax on material, raw material, components and other inputs including processing, packing or storing of goods for sale and those for reuse in manufacture of processing of goods sold (against tax payable) defined in output tax. The Act has made a distinction between purchase made by a registered dealer from another registered dealer or purchase from another unregistered dealer. The two categories of dealers namely, registered and unregistered dealers are in fact a class apart and therefore, the legislation has kept in mind the distinction between those two classes of dealers, which cannot be found fault with. It also satisfies the twin-test laid down in Ramakrishna Dalmia.
9. As far as discrimination with regard to the fuel is concerned, the Act has made a distinction between petroleum products used as fuel and non-petroleum products which are used as fuel. In the instant case, the petitioner has been using coconut shells as fuel as an input for the treatment of latex rubber for further sale. Therefore, fuel being comprised of several commodities 14 and being different in nature, the legislature has classified all petroleum fuel as coming under one category and non- petroleum products which are used as fuel in another category. Once again the distinction between the two categories are on the basis of intelligible differentia. It is obvious that when petroleum products are purchased, it is only through a regulated agency, unlike a non-petroleum product such as, coconut shell which is not under a regulated market. Therefore, if a non-petroleum fuel such as coconut shell is purchased from an unregistered dealer, restriction on input rebate would apply under sub-section (4) of Section 11 of the Act.
10. As stated supra, the distinction between registered and unregistered dealers is legal and proper. Insofar as fuel is concerned, the classification made between petroleum and non-petroleum as fuel is also just and proper having regard to the twin-test laid down above. Therefore, constitutional validity of sub-section(7) of clause (a) of Section 11 when considered in the light of the twin test laid down in Ram Krishna Dalmia and also keeping in mind the dictum in the case of Kunnathat Thathunni Moopil Nair etc., V/s. State of Kerala and 15 another (AIR 1961 SC 552), has to be upheld. Thus, there is no merit in the contention that the said clause violates Article 14 of the Constitution of India.
11. Learned counsel for the petitioner has fairly submitted that if the constitutional validity is upheld, then the petitioner has no grievance as against the re-assessment order at Annexure-A. In that view of the matter, the writ petition is dismissed without any order as to costs.
Sd/-
JUDGE S*