C.T. KOCHOUSEPH versus STATE OF KERALA AND ANOTHER ETC.

Summary

On a reference, a three-Judge Bench held that purchase tax under Section 5A of the Kerala General Sales Tax Act, 1963 and the pari materia Section 7A of the Tamil Nadu General Sales Tax Act, 1959 is attracted when a dealer buys taxable goods from a seller exempted from payment of sales tax by notification and then consumes them in manufacture, disposes of them otherwise than by sale in the State, or despatches them outside the State otherwise than by inter-State sale. Exemption affects only payability, not taxability; Sections 5A and 7A are independent charging provisions whose nature as a tax on purchase is unchanged by the conditions attached, and their constitutional validity was upheld following M.K. Kandaswami, Hotel Balaji and Devi Dass, Goodyear not laying down correct law.

Issues

1. Whether the purchase of goods from dealers exempted from payment of tax by notifications or exemptions under the Kerala Act or the Tamil Nadu Act is a purchase of goods 'the sale or purchase of which is liable to tax' within Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act.
2. Whether an assessee who purchased goods that were exempt from sales tax, or purchased from dealers who were exempt from sales tax, is liable to pay purchase tax under Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act.
3. Whether the purchase tax imposed by Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act is in the nature of a manufacture or consignment tax or an inter-State levy and therefore ultra vires the Constitution and beyond the State legislature's powers.
4. Whether, where an exemption notification under Section 17 of the Tamil Nadu Act exempts the sale, the rate of purchase tax under Section 7A should be the effective or nil rate rather than the Schedule rate.

Provisions considered

• Section 5A, Kerala General Sales Tax Act, 1963Levies purchase tax on a dealer who buys goods liable to tax under the Act in circumstances where no tax is payable under Section 5 and consumes them in manufacture, uses or disposes of them otherwise than by sale in the State, or despatches them outside the State otherwise than by inter-State sale. Held to be an independent charging provision, in pari materia with Section 7A of the Tamil Nadu Act, attracted precisely where the seller is exempt from payment of sales tax; its constitutional validity upheld. (¶¶ 2, 5, 6, 10, 21, 22, 23, 26, 31, 32, 39)
• Section 5, Kerala General Sales Tax Act, 1963The charging section for sales tax, under which tax is payable on taxable turnover at the rates and points specified in the Schedules. Section 5A applies where no tax is payable under Section 5 and adopts the Section 5 rates; 'levy' in Sections 5 and 5A does not include collection or payment. (¶¶ 5, 6, 21, 22)
• Section 10, Kerala General Sales Tax Act, 1963Power to grant exemption by notification. An exemption under Section 10 affects only the payability of sales tax, not the taxability or liability of the goods, so Section 5A remains attracted on the purchaser; the contrary view in T.S. Govindarajulu Naidu was held to rest on a misapplication of Kandaswami. (¶¶ 11, 21, 22)
• Section 7A, Tamil Nadu General Sales Tax Act, 1959Levies purchase tax where a dealer buys goods liable to tax in circumstances in which no tax is payable under Sections 3 or 4 and uses them in manufacture, disposes of them otherwise than by sale in the State, or despatches them outside the State otherwise than by inter-State sale, at the rates in Sections 3 or 4. Following Kandaswami, 'goods liable to tax' means taxable goods; the section is at once a charging and a remedial provision to plug leakage, applicable where the sale is exempt, and the applicable rate is the Schedule rate, not nil. (¶¶ 5, 6, 7, 8, 9, 26, 31, 35, 36, 37, 38, 39)
• Section 3, Tamil Nadu General Sales Tax Act, 1959The charging provision for sales tax on dealers above the turnover threshold, with First Schedule goods taxed at the rate and point specified. Section 7A creates a separate and independent charge not subject to Section 3, and applies where no tax is payable under Sections 3 or 4. (¶¶ 5, 6, 8, 9)
• Sections 8 and 17 (with Section 18), Tamil Nadu General Sales Tax Act, 1959Section 8 exempts Third Schedule goods and Section 17 empowers the Government to notify exemptions or reductions; Section 18 withdraws the exemption on breach of its conditions. Goods totally exempt at all points under Section 8 or 17(1) are not taxable goods and fall outside Section 7A, but a notification exempting the sale only (as in Britannia's case) does not exempt purchase tax; Section 7A is attracted only where such an exemption exists. (¶¶ 5, 6, 8, 11, 35, 36)
• Sections 14 and 15, Central Sales Tax Act, 1956Declared goods may be taxed by a State at not more than one stage. Bhawani Cotton Mills, Shanmuga Traders and Peekay Re-Rolling Mills turned on this single-point restriction for declared goods and were held inapplicable, the present cases not involving declared goods. (¶¶ 24, 25, 27, 30)
• Section 8(2A), Central Sales Tax Act, 1956Britannia argued that the conditional nature of the State exemption order meant the benefit of Section 8(2A) was unavailable, showing the exemption was confined to intra-State sales. The Court held this supported the Revenue, since the order exempted only sales tax and not purchase tax under Section 7A. (¶ 35)
• Article 265 and Entry 54 of List II, Seventh Schedule, Constitution of IndiaArticle 265 distinguishes 'levy' from 'collection'; levy refers to exigibility or imposition, assessment is the second stage and collection the third. The purchase tax is a tax on the sale or purchase of goods within the State's legislative power; taxing inter-State movement of goods that is not an inter-State sale does not exceed that power. (¶¶ 13, 29, 30, 32, 33)

Held

• Following State of Tamil Nadu v. M.K. Kandaswami, the expression 'goods, the sale or purchase of which is liable to tax under this Act' in Section 7A (and Section 5A) refers to the character and class of goods in relation to their exigibility, that is, taxable goods; it excludes only goods totally exempt at all points under Section 8 or Section 17(1). Section 7A creates a separate and independent charge not subject to Section 3, is at once a charging and a remedial provision meant to plug leakage, and a construction rendering it nugatory must be eschewed. The ingredient that the goods are taxable and the ingredient that no tax is payable on the particular sale under Sections 3, 4 or 5 are not mutually exclusive and can co-exist. (¶¶ 7, 8, 9, 10)
• The Kerala High Court in T.S. Govindarajulu Naidu misapplied Kandaswami in holding that an exemption on sales extended to purchase tax as well; this aspect was not addressed in this Court's brief order dismissing the State's appeal in that case. (¶ 11)
• Hotel Balaji v. State of A.P. (three Judges) disagreed with Goodyear India v. State of Haryana and held that a purchase tax on raw material consumed in manufacture, payable when the manufactured goods are disposed of otherwise than by sale in the State or despatched outside the State otherwise than by inter-State sale, is a tax on the purchase price of the raw material and not a consignment, manufacture or use tax; attaching the levy to subsequent events does not change its nature. Devi Dass Gopal Krishan affirmed Hotel Balaji and held that Goodyear does not lay down the correct law; Mukerian Papers merely applied Goodyear without examining its correctness. Hotel Balaji covers the issues here. (¶¶ 12, 13, 14, 16, 17, 18, 19, 20)
• Taxability or leviability and payability are distinct concepts. Where goods ordinarily liable to tax are exempted from payment under Section 10 of the Kerala Act by notification, the liability remains and only payment is excused; Section 5A was enacted to recover tax on such transactions and protect the State's revenue. 'Levy' refers to the exigibility or imposition of tax, assessment to its quantification and collection or recovery to the third stage; Peekay Re-Rolling Mills, read correctly, does not support the assessees, and its observations on 'levy' including 'collection' do not apply to Sections 5 and 5A. (¶¶ 21, 22, 23, 28, 29, 30)
• The reasoning in Bhawani Cotton Mills applies only where the exemption is absolute, covering both sale and purchase; where the legislature exempts sales but taxes purchases, the tax on the purchaser remains valid, an exemption for one leg of the transaction not implying exemption for the other. Shanmuga Traders and Peekay Re-Rolling Mills concerned declared goods subject to the single-point restriction in Section 15 of the Central Sales Tax Act and are inapplicable here. (¶¶ 24, 25, 26, 27, 30)
• Sections 5A and 7A impose purchase tax specifically where the seller is exempt from payment of tax; such exemption is a pre-condition for their application, and it is immaterial that the goods would otherwise have been taxed at the first point of sale. They are independent charging provisions; purchase tax is leviable on and payable by the purchaser, only where no sales tax was payable (so there is no double taxation), and only in the three specified situations; those conditions do not change the nature of the charge, which is a tax on purchase. The constitutional challenge fails on the ratio of Kandaswami, Hotel Balaji and Devi Dass; the levy is not a consignment or inter-State tax, inter-State movement not amounting to inter-State sale lies within the State's legislative domain, and the legislature must be given latitude in tax matters. (¶¶ 31, 32, 33)
• Britannia's arguments were rejected: a Government Order under Section 17 exempting sales of vegetable oil up to a turnover limit exempts only the sales tax payable at the time of sale, not purchase tax; the rate of purchase tax under Section 7A is the Schedule rate, not a nil or 'effective' rate, since treating the rate as nil would defeat the purpose of Section 7A; Kailash Nath, Parle Exports, Casio India, Rajputana Agencies and Thermax are inapplicable, there being no reverse levy in excise or customs law comparable to purchase tax, which can be levied even where sales tax is not payable. (¶¶ 34, 35, 36, 37, 38)

Result

Questions I and II answered in the affirmative in favour of the Revenue; Question III answered in the negative, upholding the constitutional validity of Section 5A of the Kerala General Sales Tax Act, 1963 and Section 7A of the Tamil Nadu General Sales Tax Act, 1959; reference answered accordingly. All appeals by the assessees dismissed and the judgments of the Kerala and Madras High Courts upheld; stay orders vacated; pending applications disposed of; no order as to costs.