REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO(S)._10560-10564_OF 2018

[ARISING OUT OF S.L.P. (C) NOS. 9320-9324 OF 2015]

M/S. TVS MOTOR COMPANY LTD. .....APPELLANT(S)

VERSUS

THE STATE OF TAMIL NADU AND

OTHERS

.....RESPONDENT(S)

WITH

CIVIL APPEAL NO. _10566__OF 2018

[ARISING OUT OF SLP(C) NO. 9325 OF 2015]

CIVIL APPEAL NO. _10567_OF 2018

[ARISING OUT OF SLP(C) NO. 10579 OF 2015]

CIVIL APPEAL NO. _10565_OF 2018

[ARISING OUT OF SLP(C) NO. 9326 OF 2015]

CIVIL APPEAL NO. 10568_OF 2018

[ARISING OUT OF SLP(C) NO. 25434 OF 2015]

CIVIL APPEAL NO. 10576__OF 2018

[@ SLP(C) NO. 28105 OF 2018]

[@SLP(C)…..CC NO. 14354 OF 2016]

AND

CIVIL APPEAL NO. _10569_OF 2018

[@SLP(C) NO. 2905 OF 2018]

J U D G M E N T

Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 1 of 46

A.K.SIKRI, J.

Leave granted.

2.This group of eleven appeals was heard together and is being

disposed of by this common judgment as identical issues are

involved in all these appeals.

3.At the outset, the issues involved in the present appeals are:

whether Section 19(5)(c) of the Tamil Nadu Value Added Tax Act,

2006, Act No. 32/2006 (hereinafter referred to as “TNVAT Act”)

and Rule 10(9)(a) of the Tamil Nadu Value Added Tax Rules,

2007 (hereinafter referred to as “Rules”) are ultra vires of Articles

14, 19(1)(g), 256 and 301 of the Constitution of India as also the

Central Sales Tax Act (hereinafter referred to as “CST Act”) and

whether Notice dated August 16, 2018 of the Revenue is liable to

be quashed?

4.The instant appeals have been preferred against the common

impugned judgment of the High Court of Judicature at Madras

dated October 29, 2014 (hereinafter referred to as “Impugned

Judgment I”) in the writ petitions which were filed by the

appellants and the impugned judgment dated 17

th

November,

2017 of the High Court of Judicature at Madras (hereinafter

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referred to as “Impugned Judgment II”) in W.P. No. 29393 of

2017.

5.The brief facts leading to the cases are as follows:

6.All the appellants herein are the Assessees under the TNVAT Act

and are duly registered on the file of their respective Jurisdictional

Commercial Officers.

7.On January 17, 2005, a White Paper was released by the

Committee of Finance Ministers (hereinafter referred to as “White

Paper”), making it clear that Input Tax Credit (hereinafter “ITC”)

would be available to set-off against tax liability on all intra-state

and inter-state sales. Paragraph 2.3 of the same states as

follows:

“Coverage of Set-Off / Input Tax Credit

2.3 This input tax credit will be given for both

manufacturers and traders for purchase of inputs/supplies

meant for both sale within the State as well as to other

States, irrespective of when these will be utilised/sold. This

also reduces immediate tax liability.

Even for stock transfer/consignment sale of goods out of

the State, input tax paid in excess of 4% will be eligible for

tax credit.”

8.Thereafter, on December 15, 2006, the TNVAT Act was enacted

under List II, Entry 54 of the Constitution of India and notified in

the Official Gazette after receiving assent of the Governor (on

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December 14, 2006), to consolidate and amend the law relating

to the levy of tax on the sale or purchase of goods in the State of

Tamil Nadu. Section 19(5)(c) of the same read as follows:

“No input tax credit shall be allowed on the purchase of

goods sold as such or used in the manufacture of other

goods and sold in the course of inter-State trade or

commerce falling under sub-section (2) of section 8 of the

Central Sales Tax Act, 1956. (Central Act 74 of 1956).”

9.Thereafter, on January 01, 2007, the Government of Tamil Nadu,

in exercise of its powers under Section 80(1) of the TNVAT Act,

notified the Rules vide Notification No. SROA-(ai1)/2007

G.O.M.S.No. 1. Rule 10(9)(a) of the same states as follows:

“Input tax credit on inter-state sales shall be allowed only if

Form C prescribed in the Central Sales Tax (Registration

and Turnover) Rules, 1957 is filed.”

10.After the Assessment was completed for the appellants for

Assessment Year 2007-08, they received Show Cause Notices

from the Revenue in and around 2013, proposing to reverse the

ITC claimed made by them on the ground that they had not filed

the Declaration Form C for the purpose of availing the

concessional rate of tax. The appellants paid the differential tax

arising out of the Assessment order for 2007-08 as well as the

amount relating to proportionate ITC under process.

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11.Consequently, on 16

th

August, 2013, the Revenue issued

Impugned Notice in TIN 33450460109/2007-08 proposing to deny

the ITC credit availed against the transactions for which Form C

were not filled, and reversing credit on inter-State sales without

Forms C in terms of the impugned Section 19(1)(c).

12.Aggrieved by the same, the appellants, who were Assessees

under the TNVAT Act, preferred writ petitions challenging the

constitutional vires of 19(5)(c) of the TNVAT Act and Rule 10(9)(a)

of the Rules contending that the same had been enacted in

violation of Articles 14, 19(1)(g), 246 and 301 of the Constitution

of India. It was urged by the appellants that Respondent No. 1 —

State had enacted the Act under Entry 54 of List II of the

Constitution of India in terms of consensus amongst States to

bring about a nation-wide uniform taxation structure/scheme for

VAT and for the promotion of inter-State trade, commerce and

industrialization, with its primary object to reduce the cascading

effect of tax imposed at successive stages, either at the stage of

usage as raw material or at the time of reselling of the article so

produced. They further urged that while the White Paper provided

for set-off of the ITC even against inter-State sales, Section

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19(5)(c) of the Tamil Nadu Act sought to negate the object of

promoting inter-State trade and commerce.

13.It was urged by the appellants that Respondent No. 1 — State,

having committed and consented before the Empowered

Committee of State Finance Ministers, vide the aforementioned

White Paper, towards administration of VAT allowing ITC set-off

against tax liability on intra-State sales or inter-State sales,

sought to deviate on the issue in terms of Section 19(5)(c) of the

TNVAT Act, by not entitling a dealer who effected inter-state sales

under Section 8(2) of the Central Sales Tax Act to ITC of the tax

paid by him on local purchases.

14.The Respondents/Revenue, on the other hand, contended that

the Taxation Laws (Amendment) Act, 2007 (Act No. 16/2007) has

amended the Central Sales Tax Act with effect from 01.04.2008

and prior to that, in cases of inter-State sales falling under

Section 8(2) of the same in cases of declared goods, the rate of

tax was to be calculated at twice the rate applicable to the sale or

purchase of such goods inside the appropriate State and in case

of non-declared goods, the rate of tax applicable was to be

calculated at 10% or at the rate applicable to the purchase of

goods inside the appropriate State, whichever was higher.

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15.The appellants had also urged that the impugned Section and

Rule were ‘colourable legislation’, as they seek to override the

supremacy of Entry 92A of List I of the Seventh Schedule of the

Constitution of India.

16.The Respondents had refuted this argument by contending that

as per the impugned provision, ITC was permissible if the inter-

State sales were made under Section 8(1) of the CST Act after

duly filing the Form C declaration. The same was not permissible

in accordance with Rule 10(9)(a) if the inter-State sales were

made under Section 8(2) of the CST Act.

17.It was also the case of the respondents that the impugned

provisions were in tune with the recommendations of the

Empowered Committee of State Finance Ministers. They further

threw light upon the fact that the CST Act provided for multiple

rates of tax, being different for sales made to registered dealers

and sales made to non-registered dealers.

18.The High Court of Judicature, vide the Impugned Judgment-I

dated October 29, 2014, has dismissed the writ petitions thereby

upholding the constitutional vires of Section 19(5)(c) of the

TNVAT Act and Rule 10(9)(a) of the Rules. At the same time, it

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has allowed the assessees/appellants to submit their responses

to the Show Cause Notices and/or challenge the orders passed

negativing their request for ITC, in accordance with the TNVAT

Act and Rules framed thereunder.

19.The Impugned Judgment-II dated November 17, 2017 arose out

of Writ Petition No. 29393 of 2017, challenging the constitutional

vires of Section 19(5)(c) of the TNVAT Act and Rule 10(9)(a) of

the Rules, where the High Court of Judicature at Madras, while

relying on its previous decision dated 29.10.2014 in Impugned

Judgment-I, observed that the same issue had arisen in the

Impugned Judgment-I and the vires of the TNVAT Act and the

Rules had been upheld therein and accordingly, dismissed the

Writ Petition No. 29393/2017.

20.Correctness of these judgments is the subject matter of instant

appeals.

21.Before adverting to the respective submissions which were made

by the counsel for the appellants as well as learned Advocate

General who appeared on behalf of the respondents, it would be

apposite to scan through the impugned judgment dated October

29, 2014 to understand the rationale and reasoning which is

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given by the High Court in arriving at its conclusions on the issues

raised.

22.The High Court formulated following two questions which arose

for consideration

“(1)Whether Section 19(5)(c) of TNVAT Act, 2006 and

Rule 10(9)(a) of TNVAT Rules, 2007 are ultra vires the

provision of CST Act, 1956?

(2)Whether the impugned provisions are violation of

Articles 14, 19(1)(9) and 301 of the Constitution of India?”

23.Thereafter, it took note of the relevant provisions of the CST Act,

TNVAT Act as well as Rules and also Article 301 of the

Constitution. We deem it proper to reproduce the relevant

portions of these Acts and Rules at this stage itself.

“Central Sales Tax Act, 1956

S. 3. When is a sale or purchase of goods said to take

place in the course of inter-State trade or commerce.-

- A sale or purchase of goods shall be deemed to take

place in the course of inter-State trade or commerce if the

sale or purchase-

(a) occasions the movement of goods from one

State to another; or

(b) is effected by a transfer of documents of title to

the goods during their movement from one

State to another.

Explanation 1.- Where goods are delivered to a carrier or

other bailee for transmission, the movement of the goods

shall, for the purposes of clause (b), be deemed to

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commence at the time of such delivery and terminate at the

time when delivery is taken from such carrier or bailee.

Explanation 2.- Where the movement of goods commences

and terminates in the same State it shall not be deemed to

be a movement of goods from one State to another by

reason merely of the fact that in the course of such

movement the goods pass through the territory of any other

State.

xx xx xx

S. 6.Liability to tax on inter-State sales.- (1) Subject to the

other provisions contained in this Act every dealer shall,

with effect from such date as the Central Government may,

by notification in the Official Gazette, appoint, not being

earlier than thirty days from the date of such notification, be

liable to pay tax under this Act on all sales [of goods other

than electrical energy) effected by him in the course of

inter-State trade or commerce during any year on and from

the date so notified.

[Provided that a deal shall not be liable to pay tax under

this Act on any sale of good which, in accordance with the

provisions of sub-section (3) of Section 5 is a sale in the

course of export of those goods out of the territory of India]

[(1A) A dealer shall be liable to pay tax under this Act on a

sale of any goods effected by him in the course of inter-

State trade or commerce notwithstanding that no tax would

have been leviable (whether on the seller or the purchaser)

under the sales tax law of the appropriate State if that sale

had taken place inside that State.]

(2) Notwithstanding anything contained in sub-section (1)

or sub-section (1A), where a sale of any goods in the

course of inter-State trade or commerce has either

occasioned the movement of such goods from one State to

another or has been effected toy a transfer of documents of

title to such goods during their movement from one State to

another, any subsequent sale during such movement

effected by a transfer of documents of title to such goods-

(a) to the Government or (b) to a registered dealer other

than the Government if the goods are of the description

referred to in sub-section (3) of section or shall be exempt

from tax under this Act:

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46

Provided that no such subsequent sale shall be exempt

from tax under this subsection unless the dealer effecting

the sale furnishes to the prescribed authority in the

prescribed manner and within the prescribed time or within

such further time as that authority may, for sufficient cause,

permit:--

(a) a certificate duly filled and signed by the registered

dealer from whom the goods were purchased containing

the prescribed particulars in a prescribed form obtained

from the prescribed authority; and

(b) if the subsequent sale is made to a registered dealer, a

declaration referred to in clause (a) sub-section (4) of

section 8:

Provided further that it shall not be necessary to furnish the

declaration referred to in clause (b) of the preceding

proviso in respect of a subsequent sale of goods if,--

(a) the sale or purchase of such goods is, under the sales

tax law of the appropriate State exempt from tax generally

or is subject to tax generally at a rate which is lower than

three per cent, or such reduced rate as may be notified by

the Central Government, by notification in the Official

Gazette, under sub-section (1) of section 8 (whether called

a tax or fee or by any other name); and……….

xx xx xx

S. 8. Rates of tax on sales in the course of inter-State

trade or commerce— (1) Every dealer, who in the course

of inter-State trade or commence, sells to a registered

dealer other than the Government goods of the description

referred to in sub-section (3), shall be liable to pay tax

under this Act, which shall be three per cent, of his

turnover or at the rate applicable to the sale or purchase of

such goods inside the appropriate State under the Sales

Tax law of that State whichever is lower:

Provided that the Central Government may, by notification

in the Official Gazette, reduce the rate of tax under this

sub-section.

(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 service not

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46

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 tax law of that State;

Explanation.--For the purposes of this sub-section, a

dealer shall be deemed to be a dealer liable to pay tax

under the sales tax law of the appropriate State,

notwithstanding that he, in fact, may not be so liable under

that law.

S.9. Levy and collection of tax and penalties.—

xx xx xx

(2) Subject to the other provisions of this Act and the rules

made thereunder, the authorities for the time being

empowered to assess, re-assess, collect and enforce

payment of any tax under the general sales tax law of the

appropriate State shall, on behalf of the Government of

India, assess re-assess, collect and enforce payment of

tax, including any

3

[interest or penalty, payable by a dealer

under this Act as if the tax or interest or penalty payable by

such a dealer under this Act is a tax or

interest or penalty

payable under the general sales tax law of the State; and

for this purpose they may exercise all or any of the powers

they have under the general sales tax law of the State; and

the provisions of such law, including provisions relating to

returns, provisional assessment, advance payment of tax,

registration of the transferee of any business, imposition of

the tax liability of a person carrying on business on the

transferee of, or successor to, such business, transfer of

liability of any firm of Hindu undivided family to pay tax in

the event of the dissolution of such firm or partition of such

family, recovery of tax from third parties, appeals, reviews,

revisions, references,refunds, rebated,

penalties,]

5

[charging or payment of interest, compounding

of offences and treatment of documents furnished by a

dealer as confidential, shall apply accordingly:—

Provided that if in any State or part thereof there is no

general sales tax law in force, the Central Government

may, be rules made in this behalf make necessary

provision for all or any of the matter specified in this sub-

section.

xx xx xx

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Tamil Nadu Value Added Tax Act, 2006

S. 2 – Definitions:

(23)"input" means any goods including capital goods

purchased by a dealer in the course of his business;

(32)"reversal of tax credit" means reversal of input tax

credit already claimed and availed under this Act;

xx xx xx

S. 19. Input tax credit.— (1) There shall be input tax

credit of the amount of

[tax paid] under this Act, by the

registered dealer to the seller on his purchases of taxable

goods specified in the First Schedule :

(2)Input tax credit shall be allowed for the purchase of

goods made within the State from a registered dealer and

which are for the purpose of —

(i) re-sale by him within the State; or

(ii) use as input in manufacturing or processing of goods in

the State; or

(iii) use as containers, labels and other materials for

packing of goods in the State; or

(iv) use as capital goods in the manufacture of taxable

goods.

(v) sale in the course of inter-State trade or commerce

falling under sub-sections (1) and (2) of section 8 of the

Central Sales Tax Act, 1956 (Central Act 74 of 1956).

(vi) Agency transactions by the principal within the State in

the manner as may be prescribed.

(5)…….

(c) No input tax credit shall be allowed on the purchase of

goods sold as such or used in the manufacture of other

good and sold in the course of inter-State trade or

commerce failing under sub-section (2) of Section 3 of the

Central Rules Act, 1956 (Central Act 74 of 1956).

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46

Tamil Nadu Value Added Tax Rule, 2007

10. Input tax credit.—(1) The input tax credit that can be

deducted from the input tax payable month or year shall

be calculated by using the formula (A + B) - (C + D)

Where,

A = Input tax credit carried forward from the previous

month or year

B = Input tax credit accrued during the month or year

C = Input tax credit reversed during the month or year

D = Input tax credit refunded during the month or year

(2)Every registered dealer who claims input tax credit

under sub-section (1) of section 19 shall, produce the

original tax invoice, in support of his claim of the input tax

credit, containing the following details, namely:

(a) A consecutive serial number;

(b) The date on which the invoice is issued;

(c) The name, address and the Taxpayer Identification

Number of the seller;

(d) The name, address and the Taxpayer Identification

Number of the buyer;

(e) The description of the goods;

(f) The quantity or volume of the goods;

(g) The value of the goods;

(h) The rate and amount of tax charged; and

(i) The total value of the goods.

(9)(a) Input tax credit on inter-state sales shall be allowed

only if lots ‘C’ prescribed in the Central Sales Tax

(Registration and turnover) Rules, 1957 is filed.”

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24.After taking note of the aforesaid provisions, the High Court

proceeded to discuss question no. (1). It pointed out that the

definition of “dealer” under Section 2(b) of the CST Act means the

assessee under the said Act and he is solely liable to pay tax

under the CST Act whether or not he is allowed by the law or

contract to pass on or actually passes on the liability of his

customers. The onus of proof that a person sought to be treated

as a dealer is one who comes within the said definition is on the

assessing authority.

25.The definition of “sale” under Section 2(g) of the CST Act means

that a sale inside a State as well as an inter-State sale arising in

that State, has situs in that State in case of sale inside a State, it

is taxable under the State law (TNVAT Act) and inter-State sale is

liable to tax in the same State under the CST Act. Section 3 of

the CST Act speaks about when a sale or purchase of goods said

to have taken place in the course of inter-State trade or

commerce. Section 6 of the CST Act speaks about liability to tax

on inter-State sales and it is a charging Section. Section 8 of the

CST Act speaks about rates of tax on sales in the course of inter-

State trade or commerce and as per sub-section(1) of Section 8 if

sale is effected by a dealer to a registered dealer goods of the

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46

description referred to in sub-section(3), it shall be liable to pay

tax under this Act which shall be 3% of the turnover or at the rate

applicable to the sale or purchase of such goods inside the

appropriate State under the Sales Tax law of that State,

whichever is lower. Section 8(2) says that if the sale of goods is in

the course of inter-State trade or commerce not falling within sub-

section(1) the tax payable shall be at the rate applicable to the

sale or purchase of such goods inside the appropriate State

under the sales tax law of that State and as per explanation to

Section 8(2), for the purpose of this sub-section, a dealer shall be

deemed to be a dealer liable to pay tax under the sales tax law of

the appropriate State, notwithstanding that he, in fact, may not be

so liable under that law.

26.The High Court also noticed that the vires of the aforesaid

provisions was tested by the Constitution Bench of this Court in

State of Madras vs. N.K. Nataraja Mudaliar

1

. The Constitution

Bench upheld the provisions of Section 2(b) of the CST Act and

repelled the challenge predicated on Articles 301 and 303(1) of

the Constitution of India. This position is reiterated in State of

Tamil Nadu and Another vs. Sitalakshi Mills Ltd. and Others

2

.

1AIR 1969 SC 147 (CB) = 1968 SCR (3) 829

2(1974) 33 STC 200 (SC) = 1974 AIR 1505 = (1974) 4 SCC 408

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27.Discussing the provisions of Section 8(1) and (2) of the CST Act,

the High Court pointed out that Section 8(1) gives preferential

treatment to sale by a dealer to a registered dealer. Vires of this

provision has also been upheld in Gwalior Rayon Silk

Manufacturing (Wvg.) Co., Ltd. vs. Assistant Commissioner

of Sales Tax and others

3

.

28.Discussing ratio of the aforesaid judgments, the High Court

pointed out that this Court noted the proposition that the aforesaid

provision was to check the evasion of tax on inter-State sales and

to prevent discrimination between the rates in one State and

those in other States, the Parliament thought fit to enact Section

8(2)(b) of the CST Act and further held that the object of the law

apparently is to deter inter-State sales to unregistered dealers as

such inter-State sales would facilitate evasion of tax and the

fixation of the rate of local sales tax is essentially a matter for the

State legislatures and the Parliament does not have any control

in the matter. It has been further held in the said decision that it is

in public interest to see that in the guise of freedom of trade, they

do not evade the payment of tax and it is an effective safeguard

against the evasion of tax.

3(1974) 4 SCC 98

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29.Based on the aforesaid discussion, the High Court has answered

question No. 1 against the appellants in the following manner:

“It is the specific stand of the official respondents/State

Government in para 14 of the counter affidavit that

where sales are made to registered dealers on filing of

Form ‘C’ declaration the entire transaction goes into

the mainstream and thereby automatically comes into

the net of taxation in the purchasing State wherever

applicable and if sales are made to other than

registered dealers, it is option of the purchasing dealer

concerned to disclose it or not and there is, therefore,

possibility of such transactions being wrapped up and

disappearing into oblivion without even surfacing again

for the purpose of levy of tax otherwise legally due on

such transactions. Therefore, the contention put

forward by the respective learned counsel appearing

for the writ petitioners that such provision aggravate

the Central Sales Tax rate or liability under Section

8(2) of CST Act by TNVAT is unsustainable and

therefore, question no. 1 is answered in negative

against the writ petitioners.”

30.While entertaining question no. (2), namely, whether the

impugned provisions are violative of Articles 14, 19(1)(g) and 301

of the Constitution, the High Court pointed out that on this aspect,

argument of the assessees was that the words ‘rate applicable’

employed in Section 8(2) of the CST Act has to necessarily take

into account the effective rate after considering the deductions

made under Section 3(3) of the TNVAT Act. It was argued that

Section 19(5)(c) of the TNVAT Act, which denied ITC on purchase

of goods sold or used in the manufacture of other goods and falls

within Section 8(2) of the CST is per se discriminatory. The High

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46

Court took note of the scheme of TNVAT Act and found that

though Section 3(2) stipulated many taxable transactions, only

few such transactions are carved out to give benefit of ITC. After

discussing certain judgments of this Court and other High Courts,

the High Court has observed that the legal position was that right

to claim ITC is not a vested right or an indefeasible right. It is a

benefit conferred under the Act in certain contingencies and

subject to conditions prescribed in the statutory scheme.

Therefore, it is open to the State Legislature to provide for

conditions and restrictions while extending the concession.

Likewise, it was also necessary for any assessee to claim input

credit to fulfill those conditions. Thus, the provision made in the

statute that unregistered dealers in other States would not be

entitled to ITC was justified. The High Court noted that specific

stand of the State Government was that in respect of such

unregistered dealers in other states, the State of Tamil Nadu had

no mechanism to prevent evasion of tax and loss of revenue

caused by trade with such unregistered dealers in the State of

Tamil Nadu. This kind of evasion, in the opinion of the High

Court, was not violative of the constitutional provisions contained

in Articles 14, 19(1)(g) and 301.

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31.Mr. Giri, learned senior counsel appearing in some of these

appeals pressed into service the same arguments which were

advanced before the High Court and attempted to find fault with

the approach of the High Court. His submission was that once

the tax was paid at an intermediary stage, the dealers could not

be denied benefit of claiming credit thereof and Section 19(5)(c)

of TNVAT Act went contrary to the visions of CST Act and,

therefore, was ultra vires. He referred to the following judgments

of this Court in support and, in particular, following portions in

those judgments.

(i)Messrs Govind Saran Ganga Saran vs. Commissioner

of Sales Tax and Others

4

:

“6. The components which enter into the concept of a

tax are well known. The first is the character of the

imposition known by its nature which prescribes the

taxable event attracting the levy, the second is a clear

indication of the person on whom the levy is imposed

and who is obliged to pay the tax, the third is the rate at

which the tax is imposed, and the fourth is the measure

or value to which the rate will be applied for computing

the tax liability. If those components are not clearly and

definitely ascertainable, it is difficult to say that the levy

exists in point of law. Any uncertainty or vagueness in

the legislative scheme defining any of those

components of the levy will be fatal to its validity.

(ii)Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd.:

“70. We think that Parliament fixed the rate of tax on inter-

State sales of the description specified in Section 8(2)(b) of

41985 (Supp) SCC 205

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the Act at the rate fixed by the appropriate State

Legislature in respect of intra-State sales with a purpose,

namely, to check evasion of tax on inter-State sales and to

prevent discrimination between residents in one State and

those in other States. Parliament thought that unless the

rate fixed by the States from time to time is adopted as the

rate of tax for inter-State sales of the kind specified in the

sub-clause, there will be evasion of tax in inter-State sales

as well as discrimination. We have already pointed out in

our judgment in Civil Appeals No. 2547-2549 of 1969 and

105-106 of 1970 the objectives which Parliament wanted to

achieve by adopting the rate of tax in the appropriate State

for taxing the local sales. And for attaining these objectives

Parliament could not have fixed the rate otherwise than by

incorporating the rate to be fixed from time to time by the

appropriate State Legislature in respect of local sales. It

may be noted that in so far as inter-State sales are

concerned, the Central Sales Tax Act, by Section 9(2) has

adopted the law of the appropriate State as regards the

procedure for levy and collection of the tax as also for

imposition of penalties.

71. There can be no doubt that Parliament can repeal the

provisions of Section 8(2)(b) adopting the higher rate of tax

fixed by the appropriate State Legislature in respect of

intra-State sales. If Parliament can repeal the provision,

there can be no objection on the score that Parliament has

abdicated its legislative function. It retains its control over

the fixation of the rate intact. In other words, so long as

Parliament can repeal the provisions of Section 8(2)(b)

adopting the higher rate of tax fixed by the State

Legislatures, it has not abdicated its legislative function. As

already stated, this point has been expressly decided by

the Privy Council in Cobb & Co. Ltd. v.Kropp.”

32.Mr. S.K. Bagaria, learned senior counsel appearing in the Civil

Appeal arising out of SLP(Civil) No. 9326 of 2015, submitted that

the appellant/dealer in this case was making supplies only to the

Government and, therefore, there was no reason to nurture any

apprehension that there would be evasion of tax. He also

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submitted that this dealer had sales in Tamil Nadu and Karnataka

wherein it was stated that the appellant had effected sales to

Karnataka State Government covered under Section 8(2) of the

CST Act. However, the appellant was not entitled to ITC as per

Section 18(5)(c) of the TNVAT Act but had not declared reversal

of ITC. Hence, the reversal of ITC was proposed and the

appellant was called upon to file objections, if any, thereto. In its

reply to the said show cause notice the appellant pointed out that

the VAT laws were introduced by different states from the year

2005. Tamil Nadu enacted TNVAT Act from January 01, 2007.

While so, by the Taxation Laws (Amendment) Act, 2007, the sales

to Government departments against ‘D’ form was abolished and

such sales to Government departments fell under Section 8(2) of

the CST Act. Therefore, when VAT Act was introduced, sales to

Government departments fell under Section 8(1) of the CST Act

and only sales to unregistered dealers or non-dealers fell under

Section 8(2) of the Act. Therefore, the effect was that sales to

Government departments outside the State would fall under

Section 8(2) of the CST Act. It was also submitted that retention

of provision such as Section 19(5)(c) of the VAT Act to completely

deny the ITC in respect of sales to Central and State Government

departments outside the State was causing unintended hardship.

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Mr. Bagaria also submitted that the two reasons which were given

by the respondents before the High Court to deny ITC were:

(i)Where sales are made to a registered dealer on filing of

Form ‘C’ declaration, the entire transaction goes into the

mainstream and thereby automatically comes to the net of the

transaction in the purchasing State, where applicable. On the

other hand, if sales are made to other than the registered dealers,

it is the option of the purchasing dealer concerned to disclose it or

not to disclose it. Therefore, there was a possibility of such

transaction being wrapped up and disappearing into oblivion

without even surfacing again for the purpose of levy of tax

otherwise legally due.

(ii)As regards unregistered dealers in other States, the State of

Tamil Nadu has no mechanism to prevent evasion of tax and loss

of revenue caused by trade with such unregistered dealers

outside its territory.

33.Submission of Mr. Bagaria was that both these reasons were

inapplicable in the case of the appellant where the sales were to

the Government of Karnataka. Referring to Section 19(4) of

TNVAT Act, Mr. Bagaria argued that situations mentioned therein

were those where the Tamil Nadu Government was not getting

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any tax. Likewise, as per Section 4 of the CST Act situs of such

sales would be Tamil Nadu, even when goods go out of the State.

In such an eventuality, State gets its share of tax by virtue of

Article 269 of the Constitution.

34.He also referred to the insertion of sub-clause (v) to sub-section

(2) of Section 19 which provision now enables getting of ITC in

those cases also where sale in the course of inter-State trade or

commerce falls under Section 8(1) and (2) of the CST Act. In this

scenario, according to him, Section 19(5)(c) would apply when

there were inter-State sales at the time of incorporation. In

support of this submission, he referred to the following two

judgments:

(i)Bolani Ores Ltd. vs. State of Orissa

5

“29. The question then remains as to whether these

vehicles though registrable under the Act are motor

vehicles for the purpose of the Taxation Act. It has already

been pointed out that before the amendment vehicles used

solely upon the premises of the owner, though they may be

mechanically propelled vehicles adapted for use upon

roads were excluded from the definition of ‘motor vehicle’.

If this definition which excludes them is the one which is

incorporated by reference under Section 2(c) of the

Taxation Act, then no tax is leviable on these vehicles

under the Taxation Act. Shri Tarkunde for the State of

Orissa contends that the definition of ‘motor vehicle’ in

Section 2(c) of the Taxation Act is not a definition by

incorporation but only a definition by reference, and as

such the meaning of ‘motor vehicle’ for the purpose of

Section 2(c) of the Taxation Act would be the same as

defined from time to time under Section 2(18) of the Act. In

5(1974) 2 SCC 777

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ascertaining the intention of the legislature in adopting the

method of merely referring to the definition of ‘motor

vehicle’ under the Act for the purpose of the Taxation Act,

we have to keep in mind its purpose and intendment as

also that of the Motor Vehicles Act. We have already stated

what these purposes are and having regard to them the

registration of a motor vehicle does not automatically make

it liable for taxation under the Taxation Act. The Taxation

Act is a regulatory measure imposing compensatory taxes

for the purpose of raising revenue to meet the expenditure

for making roads, maintaining them and for facilitating the

movement and regulation of traffic. The validity of the

taxing power under Entry 57 List II of the Seventh

Schedule read with Article 301 of the Constitution depends

upon the regulatory and compensatory nature of the taxes.

It is not the purpose of the Taxation Act to levy taxes on

vehicles which do not use the roads or in any way form part

of flow of traffic on the roads which is required to be

regulated. The regulations under the Motor Vehicles Act for

registration and prohibition of certain categories of vehicles

being driven by persons who have no driving licence, even

though those vehicles are not plying on the roads, are

designed to ensure the safety of passengers and goods

etc. etc. and for that purpose it is enacted to keep control

and check on the vehicles. Legislative power under Entry

35 of List III (Concurrent List) does not bar such a

provision. But Entry 57 of List II is subject to the limitations

referred to above, namely, that the power of taxation

thereunder cannot exceed the compensatory nature which

must have some nexus with the vehicles using the roads

viz. public roads. If the vehicles do not use the roads,

notwithstanding that they are registered under the Act, they

cannot be taxed. This very concept is embodied in the

provisions of Section 7 of the Taxation Act as also the

relevant sections in the Taxation Acts of other States,

namely, that where a motor vehicle is not using the roads

and it is declared that it will not use the roads for any

quarter or quarters of a year or for any particular year or

years, no tax is leviable thereon and if any tax has been

paid for any quarter during which it is not proposed to use

the motor vehicle on the road, the tax for that quarter is

refundable. If this be the purpose and object of the Taxation

Act, when the motor vehicle is defined under Section 2(c)

of the Taxation Act as having the same meaning as in the

Motor Vehicles Act, 1939, then the intention of the

Legislature could not have been anything but to

incorporate only the definition in the Motor Vehicles Act as

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then existing, namely, in 1943, as if that definition was

bodily written into Section 2(c) of the Taxation Act. If the

subsequent Orissa Motor Vehicles Taxation (Amendment)

Act, 1943, incorporating the definition of ‘motor vehicle’

referred to the definition of ‘motor vehicle’ under the Act as

then existing, the effect of this legislative method would, in

our view, amount to an incorporation by reference of the

provisions of Section 2(18) of the Act in Section 2(c) of the

Taxation Act. Any subsequent amendment in the Act or a

total repeal of the Act under a fresh legislation on that topic

would not affect the definition of ‘motor vehicle’ in Section

2(c) of the Taxation Act. This is a well-accepted

interpretation both in this country as well as in England

which has to a large extent influenced our law. This view is

further reinforced by the use of the word ‘has’ in the

expression “has the same meaning as in the Motor

Vehicles Act, 1939” in Section 2(c) of the Taxation Act,

which would perhaps further justify the assumption that the

Legislature had intended to incorporate the definition under

the Act as it then existed and not as it may exist from time

to time. This method of drafting which adopts incorporation

by reference to another Act whatever may have been its

historical justification in England in this country does not

exhibit an activists draftsmanship which would have

adopted the method of providing its own definition. Where

two Acts are complimentary or interconnected, legislation

by reference may be an easier method because a

definition given in the one Act may be made to do as the

definition in the other Act both of which being enacted by

the same Legislature. At any rate, Lord Esher, M.R. dealing

with legislation by incorporation, in In re. Wood's

Estate [(1886) 31 Ch D 607] said at p. 615:

“If a subsequent Act brings into itself by reference

some of the clauses of a former Act, the legal effect of

that, as has often been held, is to write those sections

into the new Act just as if they had been actually

written in it with the pen, or printed in it, and, the

moment you have these clauses in the later Act, you

have no occasion to refer to the former Act at all.”

The observations in Clarke v. Bradlaugh [(1881) 8 QBD 63

607] are also to the same effect. Brett, L.J. in that case had

said at p. 69:

“… there is a rule of construction that, where a statute

is incorporated by reference into a second statute, the

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repeal of the first statute by a third statute does not

affect the second.”

30. In Secretary of State for India in Council v. Hindusthan

Cooperative Insurance Society Ltd. [AIR 1931 PC 149 :

132 IC 748 : LR 58 IA 259] the Privy Council was

considering a case where the incorporation effected in the

statute viz. the Calcutta Improvement Trust Act, 1911 —

referred to by their Lordships as the “Local Act” — was in

express terms and in the form illustrated by 54 and 55

Vict., Ch. 19. The “Local Act” in dealing with the acquisition

of land for the purposes designated by it, made provision

for the acquisition under the Land Acquisition Act, and the

provisions of the Land Acquisition Act were subjected to

numerous modifications which were set out in the

Schedule, so that in effect the “Local Act” was held to be

the enactment of a Special Law for the acquisition of land

for the special purpose. It was in the context of these and

several other provisions which pointed to the absorption of

certain of the provisions of the Land Acquisition Act into the

“Local Act” with vital modifications that Privy Council

observed at p. 266:

“But Their Lordships think that there are other and

perhaps more cogent objections to this contention of

the Secretary of State, and their Lordships are not

prepared to hold that the sub-section in question,

which was not enacted till 1921, can be regarded as

incorporated in the Local Act of 1911. It was not part

of the Land Acquisition Act when the Local Act was

passed, nor in adopting the provisions of the Land

Acquisition Act is there anything to suggest that the

Bengal Legislature intended to bind themselves to

any future additions which might be made to that Act.

It is at least conceivable that new provisions might

have been added to the Land Acquisition Act which

would be wholly unsuitable to the local code. Nor

again, does Act 19 of 1921 contain any provision that

the amendments enacted by it are to be treated as in

any way retrospective, or are to be regarded as

affecting any other enactment than the Land

Acquisition Act itself. Their Lordships regard the Local

Act as doing nothing more than incorporating certain

provisions from an existing Act, and for convenience

of drafting doing so by reference to that Act, instead

of setting out for itself at length the provisions which it

was desired to adopt.”

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It was further observed at p. 267:

“In this country it is accepted that where a statute is

incorporated by reference into a second statute, the

repeal of the first statute does not affect the second: see

the cases collected in Craies on Statute Law, 3rd Edn. pp.

349-50. This doctrine finds expression in a common-form

section which regularly appears in the amending and

repealing Acts which are passed from time to time in India

…. The independent existence of the two Acts is therefore

recognized; despite the death of the parent Act, its off-

spring survives in the incorporating Act. Though no such

saving clause appears in the General Clauses Act, their

Lordships think that the principle involved is as applicable

in India as it is in this country.

It seems to be no less logical to hold that where certain

provisions from an existing Act have been incorporated

into a subsequent Act, no addition to the former Act, which

is not expressly made applicable to the subsequent Act,

can be deemed to be incorporated in it, at all events if it is

possible for the subsequent Act to function effectually

without the addition.”

This Court in the Collector of Customs, Madras v. Nathella

Sampathu Chetty [AIR 1962 SC 316 : (1962) 3 SCR 786,

830-833 : (1962) 1 Cr LJ 364] considered the Privy Council

decision in the Hindustan Cooperative Insurance Society

Ltd. and distinguished that case and held the principle

inapplicable to the facts of that case.

31. In State of Bihar v. S.K. Roy [AIR 1966 SC 1995 : 1966

Supp SCR 259 : (1966) 2 LLJ 759] this Court was

considering the definition of “employer” in Section 2(e) of

the Coal Mines Provident Fund and Bonus Schemes Act,

1948, where that expression was defined to mean “the

owner of a coal mine as defined in clause (g) of Section 3

of the Indian Mines Act, 1923”. The Indian Mines Act, 1923,

had been repealed and substituted by the Mines Act, 1952

(Act 35 of 1952). In the latter Act the word “owner” had

been defined in clause (1) of Section 2. The question was

whether by virtue of Section 8 of the General Clauses Act,

the definition of the word “employer” in clause (e) of

Section 2 of the Coal Mines Provident Fund and Bonus

Schemes Act should be construed with reference to the

definition of the word, “owner” in clause (1) of Section 2 of

Act 35 of 1952, which repealed the earlier Act and re-

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enacted it. It may be mentioned that according to Section

2(1) of Act 35 of 1952 the word “owner”, when used in

relation to a mine, means “any person who is the

immediate proprietor or lessee or occupier of the mine or of

any part thereof and in the case of a mine the business

whereof is being carried on by a liquidator or receiver, such

liquidator or receiver….” The expression “coal mine” is

separately defined in clause (b) of Section 2 of the Coal

Mines Provident Fund and Bonus Schemes Act, 1948.

Ramaswami, J. speaking for the Court observed at p. 261:

“As a matter of construction it must be held that all works,

machinery, tramways and sidings, whether above or below

ground, in or adjacent to a coal mine will come within the

scope and ambit of the definition only when they belong to

the coal mine. In other words, the word or occurring

before the expression ‘belonging to a coal mine’ in the

main definition has to be read to mean ‘and’.”

This case, as well as the decision in New Central Jute Mills

Co. Ltd. v. Assistant Collector of Central Excise, Allahabad

[(1970) 2 SCC 820 : (1971) 2 SCR 92] are distinguishable

on the facts and legislation which this Court was

considering. In the New Central Jute Mills Co. Ltd. case,

the Privy Council decision in the Hindusthan Cooperative

Insurance Society Ltd. case was referred to and

distinguished. It is, however, contended by the learned

Solicitor General that both in Nathella Sampathu Chetty

case as well as the New Central Jute Mills Co. Ltd. case

this Court was considering the effects of the two Acts which

were made by Parliament by Central legislation and it is,

therefore, not strictly a case of incorporation because the

Central Legislature is deemed to have, while making the

latter enactment, kept in view the provisions of the former

Act. In our view this may not be conclusive.

32. In Ram Sarup v. Munshi [AIR 1963 SC 553 : (1963) 3

SCR 858] a judgment of the Bench of five Judges of this

Court held that the repeal of the Punjab Alienation of Land

Act, 1900, had no effect on the continued operation of the

Punjab Pre-emption Act, 1913, and that the expression

“agricultural land” in the later Act had to be read as if the

definition of the Alienation of Land Act had been bodily

transposed into it. After referring to the observations of

Brett, L.J. in Clarke case, Rajagopala Ayyangar, J.

speaking for the Court observed at pp. 868-69:

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“Where the provisions of an Act are incorporated by

reference in a later Act the repeal of the earlier Act

has, in general, no effect upon the construction or

effect of the Act in which its provisions have been

incorporated.

* * *

In the circumstances, therefore, the repeal of the

Punjab Alienation of Land Act of 1900 has no effect

on the continued operation of the Pre-emption Act

and the expression ‘agricultural land’ in the later Act

has to be read as if the definition in the Alienation of

Land Act had been bodily transposed into it.”

The above decision of this Court is more in point and

supports our conclusion. In our view, the intention of

Parliament for modifying the Motor Vehicles Act has no

relevance in determining the intention of the Orissa

Legislature in enacting the Taxation Act. Apart from this

aspect of the power of taxation, as we have said earlier, is

not in the Concurrent List III but in List II and construed as

a taxation measure we cannot extend the ambit of it by

mere implication. As we said it is possible for both the Acts

to co-exist even after the definition of ‘motor vehicle’ in the

Act has been amended. It is, therefore, clear that the

definition of ‘motor vehicle’ as existing prior to 1956

Amendment would alone be applicable as being

incorporated in the Taxation Act.”

The principle laid down in Mahindra and Mahindra Ltd.

Vs. Union of India and Another

6

is to the same effect.

35.His second submission was that Section 19(5)(c) and Rule 10(9)

(c) were violative of Article 14 of the Constitution as there was no

rational nexus with the objective sought to be achieved. He

reiterated that when the purpose behind such a provision is only

6(1979) 2 SCC 529

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to check evasion, and there was no such apprehension in the

case of sales to State Government, benefit of ITC could not be

denied wherever dealers were making sales to the Government.

He further argued that when benefit of ITC is given even when

sales are made outside the State but to a registered dealer, then

why it should not be accorded on sales that are made to the

Government as well as by treating the sales to outside State

Government at par with the sales to the registered dealers. It

was sought to be justified on the ground that insofar as the State

Government is concerned, though it is treated as a dealer, no

registration is required since the State Governments are not

obliged to get themselves registered under the TNVAT Act. The

only problem was that because of this the State Government is

not in a position to give ‘C’ form. ITC to the appellant was denied

only for not furnishing ‘C’ form. For this proposition, apart from

relying upon the celebrated judgment in the case of D.S. Nakara

and Others vs. Union of India

7

, Mr. Bagaria also relied upon the

judgment of this Court in Union of India and Others vs. N.S.

Rathnam and Sons

8

in the following manner:

“12. The judgment of this Court in Kasinka Trading case

[(1995) 1 SCC 274] , no doubt, lays down the principle that

there is wide discretion available to the Government in the

matter of granting, curtailing, withholding, modifying or

7(1983) 1 SCC 305

8(2015) 10 SCC 681

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repealing the exemptions granted by earlier notifications. It

is also correct that the Government is not bound to grant

exemption to anyone to which it so desires. When the duty

is payable under the provisions of the Act, grant of

exemption from payment of the said duty to particular class

of persons or products, etc. is entirely within the discretion

of the Government. This discretion rests on various factors

which are to be considered by the Government as these

are policy decisions. In the present case, however, the

issue is not of granting or not granting the exemption.

When the exemption is granted to a particular class of

persons, then the benefit thereof is to be extended to all

similarly situated persons. The notification has to apply to

the entire class and the Government cannot create sub-

classification thereby excluding one sub-category, even

when both the sub-categories are of same genus. If that is

done, it would be considered as violating the equality

clause enshrined in Article 14 of the Constitution.

Therefore, judicial review of such notifications is

permissible in order to undertake the scrutiny as to whether

the notification results in invidious discrimination between

two persons though they belong to the same class.

In Aashirwad Films v. Union of India [(2007) 6 SCC 624] ,

this aspect has been articulated in the following manner:

(SCC pp. 628-29, paras 9-12)

“9. The State undoubtedly enjoys greater latitude in

the matter of a taxing statute. It may impose a tax on

a class of people, whereas it may not do so in respect

of the other class.

10. A taxing statute, however, as is well known, is not

beyond the pale of challenge under Article 14 of the

Constitution of India.

11. In Chhotabhai Jethabhai Patel & Co. v. Union of

India [AIR 1962 SC 1006], it was stated: (AIR p.

1021, para 37)

‘37. But it does not follow that every other article of

Part III is inapplicable to tax laws. Leaving aside

Article 31(2) that the provisions of a tax law within

legislative competence could be impugned as

offending Article 14 is exemplified by such decisions

of this Court as Suraj Mall Mohta & Co. v. A.V.

Visvanatha Sastri [AIR 1954 SC 545 : (1955) 1 SCR

448] and Shree Meenakshi Mills Ltd. v. A.V.

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Visvanatha Sastri [AIR 1955 SC 13 : (1955) 1 SCR

787] . In K.T. Moopil Nair v. State of Kerala [AIR 1961

SC 552] the Kerala Land Tax Act was struck down as

unconstitutional as violating the freedom guaranteed

by Article 14. It also goes without saying that if the

imposition of the tax was discriminatory as contrary to

Article 15, the levy would be invalid.’

12. A taxing statute, however, enjoys a greater

latitude. An inference in regard to contravention of

Article 14 would, however, ordinarily be drawn if it

seeks to impose on the same class of persons or

occupations similarly situated or an instance of

taxation which leads to inequality. The taxing event

under the Andhra Pradesh State Entertainment Tax

Act is on the entertainment of a person. Rate of

entertainment tax is determined on the basis of the

amount collected from the visitor of a cinema theatre

in terms of the entry fee charged from a viewer by the

owner thereof.”

xx xx xx

14. What follows from the above is that in order to pass the

test of permissible classification two conditions must be

fulfilled, namely, (i) that the classification must be founded

on an intelligible differential which distinguishes persons or

things that are grouped together from others left out of the

group; and (ii) that, that differential must have a rational

relation to the object sought to be achieved by the statute

in question. If the Government fails to support its action of

classification on the touchstone of the principle whether the

classification is reasonable having an intelligible differentia

and a rational basis germane to the purpose, the

classification has to be held as arbitrary and discriminatory.

In Sube Singh v. State of Haryana[(2001) 7 SCC 545] , this

aspect is highlighted by the Court in the following manner:

(SCC p. 548, para 10)

“10. In the counter and the note of submission filed on

behalf of the appellants it is averred, inter alia, that

the Land Acquisition Collector on considering the

objections filed by the appellants had recommended

to the State Government for exclusion of the

properties of Appellants 1 and 3 to 6 and the State

Government had not accepted such

recommendations only on the ground that the

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constructions made by the appellants were of ‘B’ or

‘C’ class and could not be easily amalgamated into

the developed colony which was proposed to be built.

There is no averment in the pleadings of the

respondents stating the basis of classification of

structures as ‘A’, ‘B’ and ‘C’ class, nor is it stated how

the amalgamation of all ‘A’ class structures was

feasible and possible while those of ‘B’ and ‘C’ class

structures was not possible. It is not the case of the

State Government and also not argued before us that

there is no policy decision of the Government for

excluding the lands having structures thereon from

acquisition under the Act. Indeed, as noted earlier, in

these cases the State Government has accepted the

request of some landowners for exclusion of their

properties on this very ground. It remains to be seen

whether the purported classification of existing

structures into ‘A’, ‘B’ and ‘C’ class is a reasonable

classification having an intelligible differentia and a

rational basis germane to the purpose. If the State

Government fails to support its action on the

touchstone of the above principle, then this decision

has to be held as arbitrary and discriminatory. It is

relevant to note here that the acquisition of the lands

is for the purpose of planned development of the area

which includes both residential and commercial

purposes. That being the purpose of acquisition, it is

difficult to accept the case of the State Government

that certain types of structures which according to its

own classification are of ‘A’ class can be allowed to

remain while other structures situated in close vicinity

and being used for same purposes (residential or

commercial) should be demolished. At the cost of

repetition, it may be stated here that no material was

placed before us to show the basis of classification of

the existing structures on the lands proposed to be

acquired. This assumes importance in view of the

specific contention raised on behalf of the appellants

that they have pucca structures with RC roofing,

mosaic flooring, etc. No attempt was also made from

the side of the State Government to place any

architectural plan of different types of structures

proposed to be constructed on the land notified for

acquisition in support of its contention that the

structures which exist on the lands of the appellants

could not be amalgamated into the plan.”

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36.The learned Advocate General, in reply to the aforesaid

arguments, submitted that the High Court had repelled these

contentions in its well reasoned judgment by referring to the law

laid down in various judgments of this Court. He also submitted

that a recent judgment pronounced by this Court in the case of

Jayam and Company vs. Assistant Commissioner and

Another

9

fully covers the case against the appellants. Specifically

refuting the argument that Section 19(5)(c) of the Act will only

apply when there were inter-State sales at the time of

incorporation, he submitted that Section 19(5)(c) as well as

Section 8(2) remain unchanged as there were no amendments

therein. Only Section 8(1) was amended vide Taxation Laws

(Amendment) Act, 2007. The purpose thereof was reflected in the

objects and reasons thereto as follows:-

“2. CST being an origin-based tax is inconsistent with VAT

(which is a destination-based tax). Moreover, CST results

in cascading of tax (i.e. tax on tax), since it is not rebatable

against VAT. In view of these factors, there has been a

consensus that the CST should be phased out. This is

also a pre-requisite for introduction of an integrated Goods

and Services Tax (GST), which the Government purposes

to introduce by 1

st

April, 2010. The issue of phasing out of

the CST has been deliberated upon for over a decade.

The Empowered Committee of State Finance Ministers

(EC), constituted by the Government of India, has been

making efforts in this direction since July, 2000. Finally,

after a series of meetings, a consensus has been arrived at

between the Central Government and the State

9(2016) 15 SCC 125

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Governments on the roadmap for phasing out of the CST

as also on the package of compensation to the States for

revenue loss on this account.

3.Accordingly, it is proposed to phase out the CST in 4

steps, i.e., reducing the CST rate from 4% to 3% w.e.f. 1

st

April, 2007, from 3% to 2% w.e.f. 1

st

April, 2008, from 2% to

1% w.e.f.1st April, 2009 and eventually abolishing the tax

on 31

st

March, 2010. An integrated national Goods and

Services Tax (GST) is proposed to be introduced w.e.f. 1

st

April, 2010. The agreed package for compensation to the

States for revenue loss on account of phasing out of the

CST shall consist of non-monetary measures as well as

monetary measured.

4.The implementation of the above proposals requires

the amendment of the CST Act as also the Additional

Duties of Excise (Goods of Special Importance) Act,

1957…….”

37.Insofar as argument of the appellant predicated on Article 14 is

concerned, reply of the learned Advocate General was that a

reading of Section 8(1) of the CST Act would show that

classification is contained in the Central Act itself which treats

sale to a registered dealer outside the State in one category and

sale to an unregistered dealer outside the State in a different

category. This provision contained in Section 8(1) of the CST Act

never underwent any change. Therefore, those sales which were

made to unregistered dealers outside the State were constituted

a different class and, thus, provisions contained in Section 19(5)

(c) to deny ITC on such sales was perfectly justified based on

reasonable classification.

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38.After considering the respective submissions and going through

the case law that is presented before this Court, it would be apt to

remark at the outset that most of the contentions of the appellants

stand answered by the judgment of this Court in Jayam and

Company. That case also pertains to the TNVAT Act. The issue

was as to whether sub-section (20) of Section 19 of the TNVAT

Act, which was brought into this statute by Amendment Act 22 of

2013, could be given retrospective effect. Sub-section (20) of

Section 19 reads as under:

“S. 19(20) Notwithstanding anything contained in this

section, where any registered dealer has sold goods at a

price lesser than the price of the goods purchased by him,

the amount of the input tax credit over and above the

output tax of those goods shall be reversed.”

39.Thus, this case also concerned the same provision, namely,

Section 19 of the TNVAT Act, though the issue raised was not the

same which has arisen for consideration in these appeals.

However, while answering the aforesaid question, the ITC

scheme contained in Section 19 of the TNVAT Act was gone into

and discussed at length. After reproducing Section 19, attributes

of this provision were taken note of in the following manner:

“11. From sub-section (10) onwards, provisions are made

to follow the procedure and fulfill the requisite conditions for

availing ITC. For the purposes of this particular issue, sub-

section (10) is the material provision. This provision, which

is couched in negative terms, categorically stipulates that

such ITC would be admissible to the registered dealer and

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he would not be entitled to claim this credit 'until the dealer

receives an original tax invoice duly filled, signed and

issued by a registered dealer from where the goods are

purchased.......'. Further, such original tax invoice should

evidence the amount of input tax. So much so, even if the

original tax invoice is lost, the obligation cast on the

registered dealer is to obtain duplicate or carbon copy of

such tax invoice from the selling dealer and only then input

tax is allowed.

From the aforesaid scheme of Section 19 following

significant aspects emerge:-

(a) ITC is a form of concession provided by the

Legislature. It is not admissible to all kinds of sales and

certain specified sales are specifically excluded.

(b) Concession of ITC is available on certain conditions

mentioned in this Section.

(c) One of the most important condition is that in order to

enable the dealer to claim ITC it has to produce original tax

invoice, completed in all respect, evidencing the amount of

input tax.

12. It is a trite law that whenever concession is given by

statute or notification etc. the conditions thereof are to be

strictly complied with in order to avail such concession.

Thus, it is not the right of the 'dealers' to get the benefit of

ITC but its a concession granted by virtue of Section 19.

As a fortiorari, conditions specified in Section 10 must be

fulfilled. In that hue, we find that Section 10 makes original

tax invoice relevant for the purpose of claiming tax.

Therefore, under the scheme of the VAT Act, it is not

permissible for the dealers to argue that the price as

indicated in the tax invoice should not have been taken into

consideration but the net purchase price after discount is to

be the basis. If we were dealing with any other aspect do

hors the issue of ITC as per the Section 19 of the VAT Act,

possibly the arguments of Mr. Bagaria would have

assumed some relevance. But, keeping in view the scope

of the issue, such a plea is not admissible having regard to

the plain language of sections of the VAT Act, read along

with other provisions of the said Act as referred to above.

13. For the same reasons given above, challenge to

constitutional validity of sub-section (20) of Section 19 of

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VAT Act has to fail. When a concession is given by a

statute, the Legislature has power to make the provision

stating the form and manner in which such concession is to

be allowed. Sub-section (20) seeks to achieve that. There

was no right, inherent or otherwise, vested with dealers to

claim the benefit of ITC but for Section 19 of the VAT Act.

That apart, we find that there were valid and cogent

reasons for inserting Section 19(20). Main purport was to

protect the Revenue against clandestine transactions

resulting in evasion of tax. High Court has discussed this

aspect in detail and our task would be accomplished in

reproducing those paras as we are concurring with the

discussion:

“64. Let us now point out the background/reasons

for inserting Section 19(20) by Amendment Act 22

of 2010, by referring to the Chart, the sample

instance is detailed in the Chart in paragraph (34).

Let us recapitulate the entries in the Chart. Based

on the sale price, i.e., Rs. 36,780/- in the tax

invoice, an amount of Input Tax Credit, i.e., Input

Tax Credit of Rs. 4m597.50 was available to the

petitioner when he re-sells goods. Based on the

Credit Note, the same goods are re-sold within the

State at a lesser price than what was purchased,

i.e., Rs. 33,777.78 (taking into account discount

price, there is a profit margin for the dealer) and

thereby the output tax payable to the Government

is reduced, leaving excess Input Tax Credit at the

hands of the dealer. The said excess credit in the

hands of the dealer might be adjusted to their other

liabilities or might claim refund of the said excess

Input Tax Credit. Taking excess Input Tax Credit

and later in the guise of credit note giving discount

and reducing the price of the goods which reduces

the Output tax payable to the Government dwindles

State revenue.

65.Learned Advocate General contended that

seller and buyer coalition is issuing purchase

invoice at an escalated price thereby taking benefit

of excess Input Tax Credit and later in the guise of

credit notes giving discount, reduced the price of

the same goods and thereby reducing the output

tax payable to the Government creates a dent of

the State revenue. Learned Advocate General

further submitted that excess Input Tax Credit

available in the hands of the dealer is being

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adjusted to their other liabilities and the dealer

might also make a claim of refund of Input Tax

Credit as per Section 19(18) of the Act which were

ultimately resulted in creating dent on the State

revenue.

66.To contend as to how the so called discount

and reduction of sale price caused revenue loss to

the Government, the learned Advocate General

has drawn our attention to the illustration stated in

paragraph (6) of the counter which reads as

under:-

“Purchase price of 10

Washing Macines ... Rs. 1,00,000/-

Tax paid on purchase at 12.5%

(ITC allowed) ... Rs. 12,500/-

Sale price after discount ... Rs. 75,000/-

tax payable on sales at 12.5%... Rs. 9,375/-

Excess ITC available

(Difference between ITC and

Output Tax) ... Rs. 3,125/-

Rs. 12,500 - Rs.9,375

Excess ITC Adjusted ... Rs. 3,125/-”

67.As rightly contended by the learned

Advocate General, the "Input Tax Credit" adjusted

in the above illustration comes to Rs. 3,125/- in a

single transaction and that it would run to several

lakhs and crores for a year for a single dealer. The

excess Input Tax Credit earned by the petitioners is

being adjusted against the outstanding tax due or

carried forward to next year or refunded. If this

trend is allowed to continue, the concept of VAT that

meant for payment of tax on every value addition

gets defeated.

68.In order to protect the revenue and with a

vie to curb the clandestine transactions resulting in

evasion of tax, in respect of second and

subsequent sales, Section 19(20)was introduced,

where any dealer has sold goods at a price lesser

than the price of the goods purchased by him, the

amount of "Input Tax Credit" over and above the

output tax of those goods, shall be reversed.

69.Constitutional Validity of fiscal legislation:-

When there is a challenge to the constitutional

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validity of the provisions of a Statute, Court

exercising power of judicial review must be

conscious of the limitation of judicial review must

be conscious of the limitation of judicial

intervention, particularly, in matters relating to the

legitimacy of the economic or fiscal legislation.

While enacting fiscal legislation, the Legislature is

entitled to a great deal of latitude. The Court would

interfere only where a clear infraction of a

constitutional provision is established. The burden

is on the person, who attacks the constitutional

validity of a statute, to establish clear

transgression of constitutional principle. Observing

that the law relating to economic activities should

be viewed with greater latitude than laws touching

civil rights such as freedom of speech, religion,

etc., in R.K. Garg vs. Union of India [(1981) 4 SCC

675, this Court held as under:

xx xx xx"

40.In another judgment in ALD Automotive Pvt. Ltd. & Anr. v. The

Commercial Tax Officer & Ors. (SLP (Civil) Nos.36112-36113

of 2013) pronounced in today’s date, the scheme of this very

provision is discussed again in detail to the same effect.

41.It is very clear from the aforesaid discussion that this Court held

that ITC is a form of concession which is provided by the Act; it

cannot be claimed as a matter of right but only in terms of the

provisions of the statute; therefore, the conditions mentioned in

the aforesaid Section had to be fulfilled by the dealer; and sub-

section (20) of Section 19 was constitutionally valid. It was also

noted, in the process, that there were valid and cogent reasons

for inserting that provision and the main purpose was to protect

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the Revenue against clandestine transaction resulting in invasion

of tax.

42.The reasoning given in that judgment while upholding sub-section

(20) of Section 19 shall equally apply while examining the validity

of Section 19(5)(c) thereof. The High Court has noted the

specific stand taken by the State Government to the fact that in

respect of unregistered dealer in other States, the State of Tamil

Nadu has no mechanism to prevent invasion of tax and loss of

revenue cost by trade with such unregistered dealers in the State

of Tamil Nadu. Therefore, the provision was aimed at achieving a

specific and justified purpose and could not be treated as

discriminatory.

43.It is stated at the cost of repetition that Section 19 of TNVAT Act

deals with ITC. It incorporates provision for grant of ITC under

certain circumstances and, at the same time, also lays down the

conditions in which such ITC would be admissible. It is in this

context sub-section (5) of Section 19 is to be analysed. Sub-

section (5) stipulates certain contingencies where such ITC would

not be admissible. There is no quarrel about clauses (a) and (b).

We are only concerned with clause (c) of this sub-section which

provides that ITC would not be allowed on the purchase of goods

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sold as such or used in the manufacture of other goods and sold

in the course of inter-State trade or commerce falling under sub-

section (2) of Section 8 of the Central Sales Tax Act. To put it

tersely, sale by a dealer who is registered in the State of Tamil

Nadu which is effected outside the State of Tamil Nadu will qualify

for ITC only when the said sale is made to a registered dealer. If

it is to an unregistered dealer, it would not be admissible. This

classification is based on intelligible differentia having a proper

rationale. Insofar sales to unregistered dealers are concerned,

that too situated outside the State of Tamil Nadu, the State would

not have any mechanism to find out the genuineness of these

sales. In essence, the State is putting the condition that ITC

would be admissible when Form ‘C’ is given, which can be given

only in those cases where sale is to a registered dealer.

Prescribing such a condition in order to ensure that there is no

evasion, has a rationale purpose and objective. Consideration of

this aspect in the context of the very nature of the ITC scheme,

which is a concession and not a right, would lead us to the

conclusion that it was open to the Legislature to make such a

provision.

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44.In view of the aforesaid discussion, we do not find any merit in the

contentions raised by Mr. Giri. The judgments cited by him would

have no application either.

45.One argument of Mr. Bagaria, however, needs little deeper

consideration. He has argued that the appellant represented in

his case is making sales only to the State of Karnataka. In such

a case, there cannot be any apprehension about evasion of tax.

46.Section 2(15) defines the term ‘dealer’ and includes State

Government as well by means of Explanation II which reads as

under:

“Explanation II: The Central Government or any State

Government which, whether or not in the course of

business, buy, sell, supply or distribute goods, directly or

otherwise, for cash, or for deferred payment, or for

commission, remuneration or other valuable consideration,

shall be deemed to be a dealer for the purposes of this

Act.”

47.Thus, wherever the State Government buys, sells, supplies or

distribute goods, it shall be deemed to be the dealer for the

purposes of TNVAT Act. At the same time, TNVAT Act does not

require registration by the State Government inasmuch as

Section 38 which deals with registration of dealers explicitly

provides, under sub-section (8) thereof, that this provision shall

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not apply to any State Government or Central Government. A

conjoint reading of the aforesaid two provisions would show that

when a sale is made to the State of Karnataka, it is made to a

dealer but that dealer is under no obligation to get itself registered

under the TNVAT Act. Because of this exemption, no State

Government does that and since it is not a registered dealer, it

would not be in a position to issue any Form C. But for that, the

genuineness of sales made to a State Government cannot be

doubted. This situation puts those dealers who are making sales

to the State Government in disadvantageous position, even when

it is clear that there is no possibility of tax evasion as there cannot

be any such apprehension in case of sales to the State

Government. We may point out here that benefit of ITC is given

whenever sale is made to a dealer outside State of Tamil Nadu

and the said dealer is a registered dealer.

48.Having regard to the above, we are of the opinion that the

provisions of Section 19(5)(c) are to be read down by construing

that those dealers who are making sales exclusively to the other

State Governments (i.e. outside the State of Tamil Nadu), the

said States would be deemed as registered dealers for the

purposes of availing benefits of ITC. Otherwise, in such a

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situation, it would be difficult to hold that test of reasonable

classification is met in this limited context. It becomes

unnecessary to deal with other contentions of Mr. Bagaria.

49.Result of the aforesaid discussion would be to uphold the

judgment of the High Court with one rider, namely, that in those

cases where a dealer makes sales exclusively to the other State

Government(s), benefit of ITC would be allowed without insisting

on the furnishing of Form ‘C’. However, in order to avail this

benefit, a certificate from said the State Government to whom the

supplies are made would be obtained by the dealer claiming ITC

and submitted to the VAT authorities.

50.As a consequence, we allow Civil Appeal arising out of SLP(Civil)

No. 9326 of 2015 to the extent indicated above and other appeals

are dismissed with cost.

.............................................J.

(A.K. SIKRI)

.............................................J.

(ASHOK BHUSHAN)

NEW DELHI;

OCTOBER 12, 2018

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