A FORTNIGHTLY VAT/GST LAW REPORTER 2003 NTN 22)-7 [ALLAHABAD HIGH COURT]

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1 2003 (Vol. 22)-7 [ALLAHABAD HIGH COURT] Hon'ble Shyamal Kumar Sen, C.J. & Hon'ble R.K. Agrawal, J. Civil Misc. Writ Petition No OF 1991 M/s Mukund Lal Banarasi Lal vs. Commissioner of Sales Tax, U.P. Lucknow and others Date of Decision : 15th November, 2002 For the Revisionist : Sri Rajes Kumar, Advocate For the Respondent : Sri S.P. Kesarwani, S.C. Purchase tax - Inter-State sales - Presumption - U. P. Trade Tax Act, 1948 Section 3-D, 12-A(2)(a) - The dealer purchased rice for Ex-U. P. principal - The Assessing Authority accepted the fact that purchases were for Ex-U. P. principal but imposed tax on the basis of issue of Form 3-C by the dealer - In appeal the tax imposed was set aside - However in second appeal the levy of tax was confirmed on the basis of insertion of Section 12-A(2)(a) in the Act which provides that the dealer shall be presumed first purchaser if it issue Form III-C(1) - The dealer has claimed that transaction is inter-state one and is beyond legislative competence of State Legislature - Whether a dealer becomes liable to tax due to issue of Form III-C(1) in respect of transaction effected for Ex-U. P. principal on the basis of provision of Section 12- A(2)(a) of the Act? - Held - No - The transaction is beyond competence of State Legislature and mere issue of Form can not alter the nature of transaction - The presumption of Section 12-A(2)(a) is not applicable in respect of inter-state transactions. From a reading the above section, it is absolutely clear that the provision of Section 12-A(2) of the Act would be applicable only where the dealer claims that he has no liability to pay tax under Section 3-D in respect of any transaction of purchases. The purchases in question have been held to be purchases in the course of inter-state, trade or commerce, thus in view of the decision of the Apex Court in Commissioner of Sale Tax & others vs. M/s Baktawar Lal Kailash chand Arthi & others (Supra) the State Legislature was not competent to levy any tax. The question of issuing Form 3C (1) also considered by Apex Court which had held that Section 3-B applies where tax leviable under the Act i.e. State Act is evaded. It may be mentioned here that Section 3-B of the Act which deals with liability on issuing false certificates etc. provides for fixing the liability of tax such rate which ceases to be leviable or becomes leviable at a concessional rate on such transaction, purchase or sale by the person who issues wrong certificate or declaration under the Act. (Para 8) Cases referred : C.S.T. vs. M/s Hanuman Trading Company 1979 UPTC 809 C.S.T. & ors vs. Baktawar Lal Kailash Chand Arthi & ors 1992 (Vol. 1) 376 Gannon Dunkerley & Co. vs. State of Rajasthan & 0rs 1992 (Vol. 1) 417 Steel Authority of India Ltd. vs. State of Orissa 2000 (Vol. 16) 367 Nathpa Jhakri Jt. Venture vs. State of Himachal Pradesh 2000 (Vol.16) 420 C.S.T. vs. Radhey Shyam Ram Autar, Hathras 1997 UPTC 472

2 Bishambhar Sahai Surendra Kumar vs. C.S.T UPTC 12 Mc. Dowell and Co. Ltd. vs. Commercial Tax Officer 1985 UPTC 747 Himatsingka Timber Co. Ltd. vs. State of Orissa 1966 (18) STC 235 Endupuri Narasimhan and son vs. The State of Orissa STC 282 C.S.T. vs. Jai Shiv Trading Co. STR No of 1987 JUDGMENT 1. By means of the present petition under Article 226 of the Constitution of India the petitioner M/s Mukund Lal Banarasi Lal seeks a writ, order or direction in the nature of certiorari quashing the order dated 27 th may, 1991 passed by the Sales Tax Tribunal, Bench III, Agra, respondent No. 5, filed as Annexure 6 to the writ petition. It further seeks a writ in the nature of mandamus declaring Section 12-A(2) of the U.P. Sales Tax Act, 1948 as introduced by the U.P. Sales Tax (Amendment and Validation) Act, 1991 to be ultra vires. The brief facts giving rise to the present writ petition are as follows: The Petitioner is a partnership firm, which is registered under the provisions of the U.P. Sales Tax Act (hereinafter referred to as the Act) as also Central Sales Tax Act, and is engaged in the business of wholesale trade and also acts as a commission agent. It deals in food grains, rice etc.. For the Assessment year , under the U.P. Sales Tax Act, the petitioner disclosed purchases of rice amounting to Rs. 11,03, in the capacity of commission agent acting for and on behalf of Ex. U.P. Principal. The goods so purchased were despatched outside the State of Uttar Pradesh on the instruction of the Ex.U.P. Principals. However, at the time of making the purchases in question, the petitioner had issued declaration Form 3-C(1) to the selling dealer from whom it had made the purchases. According to the petitioner rice being a declared commodity under Section 14 of the Central Sales Tax Act has been notified for being 4% at the point of first purchase by the State Government. The petitioner claimed exemption on the purchases of rice in question, on the ground that it had made purchase for and on behalf of it's Ex. U.P. Principals and, therefore, the purchases having been made during the course of inter-state trade or commerce is not liable to tax under Section 3-D of the Act. The petitioner relied upon a decision of this Court in Commissioner of Sales Tax vs. M/s Hanuman Trading Company (1979 UPTC 809). The Assessing Authority did not accept the claim of exemption put forward by the petitioner on the ground that it had issued declaration Form 3C(1) and imposed tax under Section 3-D of the Act. However, the Assessing Authority had accepted the claim of the petitioner that the purchases in question, was made for and on behalf of the Ex. U.P. Principal. Feeling aggrieved, the petitioner preferred an appeal under Section 9 of the Act before the Assistant Commissioner (Judicial) Trade Tax, Mainpuri. The appeal was allowed vide order dated 24 th September, 1982 holding that the petitioner was not liable to pay tax on the purchase of rice in question. The Commissioner of Sales Tax preferred an appeal before the Sales Tax Tribunal, Agra. During the pendency of appeal Section 12-A(2)(a) was introduced by an Ordinance promulgated in the year The Ordinance was subsequently replaced by an Act, namely, U.P. Sales Tax (Amendment and Validation) Act, 1991 (U.P. Act No. 28 of 1991). When the appeal came up for hearing before the Tribunal, it allowed the appeal of the Commissioner of Sales Tax and upheld the levy of tax on the purchases of rice in question, on the ground that in view of Section 12-A(2)(a) of the Act since the petitioner had issued declaration Form 3C(1), he would be deemed to be the

3 first purchaser and liable to tax. The order dated 27 th may, 1991 passed by the Sales Tax Tribunal is under challenge in present petition. 2. We have heard Sri Rajes Kumar, learned counsel for the petitioner and Sri S.P. Kesarwani, learned Standing Counsel appearing for the respondent. 3. Learned Counsel for the petitioner submitted that it is not in dispute that the petitioner had made the purchases of rice in question, for and on behalf of Ex. U.P. Principals. The purchases were made during the course of inter-state trade or commerce and, as such, tax cannot be levied under the Act. He relied upon a decision of the Supreme Court in Commissioner of Sales Tax & others vs. M/s Baktawar Lal Kailash Chand Arthi & others (1992 (Vol. 1) 376J;1992 UPTC 971). He submitted that the nature of the transactions will not change merely because the petitioner had issued declaration Form 3C(1) to its selling dealers. He further submitted that if a transaction under the provisions of Section 12-A(2)(a) of Act as introduced by the Amending Act, 1991 is applied to the transaction in the course of inter-state trade or commerce as liable to tax in the State of U.P. under the provision of Section 3-D of the Act, in that event, the provisions of Section 12- A(2)(a) would be violative of Articles 286(1), 269, 301 and 304 of the Constitution of India. He next submitted that under Article 269(1)(g) of the Constitution of India, on a sale and purchase which took place in the course of inter-state trade or commerce, Government of India alone can levy and collect taxes and in view of provisions of Article 246(1) of the Constitution of India, the Parliament has exclusive power to make laws with respect to any of the matters enumerated in List-I in the Seventh Schedule, i.e. Union List. He referred to the provisions of Entry 92 A of the Union List which provides for levying tax on the sale or purchase of goods other than newspapers where such sale and purchase took place in the course of inter-state trade or commerce. According to him, the Parliament has already enacted Central Sales Tax Act 1956 (hereinafter referred to as 'Central Act') for levy of tax on the sale or purchase of goods in the course of inter-state trade or commerce and the State of U.P. has no jurisdiction or legislative powers to enact any law levying tax on such sales and purchase. He further referred to Article 286 of the Constitution of India which prohibits the State from imposing or levying tax on the sale purchase of goods where such sale or purchase takes place outside the State. In support of his submission, he relied upon a decision of the Supreme Court in Gannon Dunkerley & Company and others vs. State of Rajasthan and others (1992 (Vol. 1) 417J;1993 UPTC 414) wherein the Hon'ble Supreme Court has held that the provisions which enable tax being imposed on deemed sales resulting from transfer of property in goods whether as goods or in some other form involved in the execution of work contract which takes place in the course of inter-state trade or commerce transgresses the limits of the legislative power conferred on the State Legislature under Entry 54 of the State List. He also relied upon a decision of the Supreme Court in Steel Authority of India Ltd. vs. State of Orissa and others etc. (2000 (Vol. 16) 367;2000 UPTC 374) wherein the Hon'ble Supreme Court has held that the provisions of Section 13-AA of the Orissa Sales Tax Act which provides for deduction of tax at source of the State Sales Tax that is payable by a contractor on the value of a work contract are ultra vires as it has not provided for taking into account the fact that the work contract involves transfer of property in goods consequent upon of an inter-state sale, an outside sale or a sale in the course of import. Such provisions are beyond the powers of the State Legislature and the State Legislature can make no law levying Sales Tax on inter-state

4 sales, outside sales or sales in the course of import. Similar view was taken by the Hon'ble Supreme Court in M/s Nathpa Jhakri Jt. Venture vs. State of Himachal Pradesh and others (2000 (Vol.16) 420; 2000 UPTC 459) wherein it has been held that Section 12-A of the Himachal Sales Tax Act to be beyond the legislative competence of the State Legislature. He thus, submitted that Section 12-A(2) of the Act which provides to levy tax and create liability to pay trade tax on the purchases in question, which are in the nature of inter-state purchases is unconstitutional and ultra vires. In the alternative, he submitted that this Court in Commissioner of Sales Tax, U.P. Lucknow vs. S/s Radhey Shyam Ram Autar, Hathras (1997 UPTC 472) has held that the provisions of Section 12-A cannot be applied to a transaction covered by Section 3 of the Central Sales Tax Act and it will be applied only where exemption is being claimed under Section 3-D of the Act. The aforesaid decision has been followed by this Court in M/s Bishambhar Sahai Surendra Kumar vs. Commissioner of Sales Tax, Lucknow (2000 UPTC 12). 4. Sri S.P. Kesarwani, learned Standing Counsel, however, submitted that since the petitioner had purchased the rice in question, by issuing declaration Form 3C(1), the presumption raised under Section 12-A of the Act would be attracted and he would be liable to pay tax by treating them to be first purchases made by the petitioner. He next submitted that rice is liable to tax at the point of first purchase and by virtue of issuing declaration Form 3C(1) to the selling dealer the petitioner has owned up the liability of payment of tax Section 3-D of the Act. He relied upon a decision of the Supreme Court in Mc. Dowell and Co. Ltd. vs. Commercial Tax Officer (1985 UPTC 747). He also relied upon another decision of the Supreme Court in Himatsingka Timber Co. Ltd. vs. State of Orissa (1966 (18) STC 235) wherein the Hon'ble Supreme Court has held that a registered dealer who makes purchases to carry out his obligations to constituents outside the State does not make such purchases in the course of inter-state trade or commerce because those purchases are at a stage when the course of inter-state trade does not really commence. Such a sale can be taxed under the Orissa Sales Tax Act, 1947 and the imposition of tax is not repugnant to Article 286(2) of the Constitution. The Hon'ble Supreme Court further held that the tax was always leviable on the first sale and it would have been so levied but for the certificate which was furnished by the appellant when making purchases from local dealers. The certificate was that the sleepers and timbers were for resale in Orissa and when that condition was not fulfilled, the tax became payable. He also relied upon another decision of the Supreme Court in Endupuri Narasimhan and son vs. The State of Orissa and others (1961) 12 STC 282 wherein Hon'ble the Supreme Court has held that in order that a sale or purchase might be said to take in the course of inter-state trade within the meaning of Article 286(2) of the Constitution, as it stood prior to the sixth amendment, it is essential that there must be transport of goods from one State to another under the contract of sale or purchase. A purchase made inside the State for sale outside the State cannot itself be said to be in the course of inter-state trade and the imposition of tax thereon is not repugnant to Article 286(2). In the aforesaid case certain sales to the petitioner were not included in the taxable turnover of the sellers by reason to the registration certificate which the petitioner had obtained on a declaration that the goods were to be resold in Orissa. In violation of this declaration, the petitioner sold the goods to dealers outside the State and he was taxed. The petitioner contended that these purchases were made in the course of inter-state trade and that the imposition of Sales Tax thereon was in consequence, was not accepted and it was

5 held by the Supreme Court that the imposition of tax was not on the sales by the petitioner to persons outside the State, but on the purchases by him inside the State. The Hon'ble Supreme Court held that the former sales were in the course of inter-state trade, and were not taxable under Article 286(2), but the latter were purely intra-state sales and a tax imposed thereon did not offend Article 286(2) of the Constitution of India. 5. Learned Standing Counsel submits that no tax is being imposed under Section 12- A(2) of the Act. It only provides for drawing a presumption that if transaction, purchase or sale has been made by issuing declaration form then in that event the person issuing declaration form would be treated as the first purchaser. Thus, he submitted that the decisions cited by the learned counsel for the petitioner would not be applicable. 6. Having heard the learned counsel for the parties we find that the Hon'ble Supreme Court in Commissioner of Sales Tax & others vs. M/s Baktawar Lal kailash Chand Arthi & others (supra) has held that where sale or purchase, though effected within the State of Uttar Pradesh occasions the movement of goods sold purchased thereunder from the State of Uttar Pradesh to other State, it becomes an inter-state sale. Such a sale cannot be taxed by the legislature of Uttar Pradesh. It is taxable only under the Central Sales Tax Act, Dealing with the question of issuing Form 3C(1) in respect of such purchases, the Hon'ble Supreme Court in paragraph 19 of the report held and observed as follows: "19. A further question arises in this appeal. The respondent-dealer, who is situated similarly to the respondent-dealer in Civil Appeal No of 1982, issued Form III C-1 and paid tax on the purchases made by him under the U.P. Sales Tax Act. However, after the decision of the Allahabad High Court in Hanuman Trading Company, he claimed refund of the tax paid by him and probably got it, contending that the purchases effected by him were not assessable to tax under the U.P. Sales Tax Act. He was then proceeded against under Section 3-B of the U.P. Sales Tax Act which provides that if a person issues a false or wrong certificate or declaration prescribed under the provisions of the said Act and the rules thereunder to another person by reason of which "a tax leviable under this Act" on the transaction is not collected (or collected at a lesser rate), then the person issuing such wrong or false certificate/declaration becomes himself liable to pay such tax. The case of the authorities was that the respondent-dealer represented to the authorities by issuing Form III C-1 that the purchases effected by him are intra-state purchases liable to be taxed under the State enactment and thereby prevented the authorities from taxing the transactions under the Central Sales Tax Act; he must, therefore, make good that tax amount. Assuming that what the authorities say is true, even so the respondent-dealer cannot be proceeded against under Section 3-B for the reason that the said Section applies to a situation where the tax "leviable under this Act" i.e. State Act, is evaded. It does not apply where the tax payable under the central enactment is evaded. This appeal has to be dismissed on this short ground alone, and is accordingly dismissed". 7. Thus, it cannot be disputed that there is no liability for payment of tax under the Act on purchases made by the petitioner which is in course of inter-state purchases. Now the question is as to whether by issuing Form 3 C(1) the presumption as raised under Section 12-A(2) of the Act the petitioner would be deemed to be first purchaser within the

6 legislative competence of the State Legislature or not. Section 12-A(2) of Act is reproduced below: "12-A(2) Where any dealer claims that he is not liable to tax under Section 3-D in respect of any transaction of purchases: (a)any declaration made or certificate issued by him admitting to be the first purchaser and accepting the liability to pay trade tax on purchase of goods, shall be conclusive evidence of his liability to pay the trade tax on purchase of goods, in respect of the transaction specified in such declaration or certificate; (b)the burden of proving the existence of facts and circumstances on the basis of which he claims such exception from liability shall lie upon him, and in particular, the dealer shall also be liable to disclose full particulars of the person from whom he has purchased the goods in such transaction of purchase; and (c)no such claim shall be accepted unless reasonable opportunity of being heard has been given to the person whose particulars are disclosed by such dealer". 8. From a reading the above section, it is absolutely clear that the provision of Section 12-A(2) of the Act would be applicable only where the dealer claims that he has no liability to pay tax under Section 3-D in respect of any transaction of purchases. The purchases in question have been held to be purchases in the course of inter-state, trade or commerce, thus in view of the decision of the Apex Court in Commissioner of Sale Tax & others vs. M/s Baktawar Lal Kailash chand Arthi & others (Supra) the State Legislature was not competent to levy any tax. The question of issuing Form 3C (1) also considered by Apex Court which had held that Section 3-B applies where tax leviable under the Act i.e. State Act is evaded. It may be mentioned here that Section 3-B of the Act which deals with liability on issuing false certificates etc. provides for fixing the liability of tax such rate which ceases to be leviable or becomes leviable at a concessional rate on such transaction, purchase or sale by the person who issues wrong certificate or declaration under the Act. Section 3-B of the Act reproduced below: ''Section 3-B. Liability on issuing false certificates, etc. Notwithstanding anything to the contrary contained elsewhere in this Act and without prejudice to the provisions of Section 14 and 15-A, a person, who issues a false or wrong certificate or declaration, prescribed under any provision of this Act or the rules framed thereunder, to another person by reason which a tax leviable under this Act on the transaction of purchase or sale made with or by such other person ceases to leviable or becomes leviable at a concessional rate, shall be liable to pay on such transaction an amount which would have been payable as tax on such transaction had such certificate or declaration not been issued: Provided that before taking any action under this section the person concerned shall be given an opportunity of being heard. Explanation: Where a person issuing a certificate or declaration discloses therein his intention to use the goods purchases by him for such purposes as will make the tax not leviable or

7 leviable at a concessional rate but uses the same for purpose other than such purpose, the certificate or declaration shall or the purpose of this section, be deemed to be wrong". Thus the deeming provision under Section 12-A(2)(a) of the Act shall come into play only where a dealer claims that he is not liable to tax under Section 3-D of the Act and not when he claims that purchases are in the course of inter-state trade or commerce which falls exclusively under the Central Act. The decision relied upon by the learned Standing Counsel in the case of Mc. Dowell and Co. (supra) deals with avoidance and evasion of tax and it has been held that even avoidance of tax is not permissible. There is no question of avoidance of such tax liability in the present case. The learned Standing Counsel relied upon a decision of this Court in Commissioner of Sales Tax U.P. Lucknow vs. Jai Shiv Trading Co. (STR No of 1987) decided on 6th May, 1999 wherein this Court has held that the fact that the dealer realized purchase tax and paid the same in the Government Treasury and even admitted his liability in the sales tax returns amounts to a declaration by a dealer within the meaning of sub-clause (a) of Section 12-A(2) and, therefore, it must be held that the purchases were intra-state purchases and were liable to purchase tax. In the said decision, this Court had held that the authorities have found that it was not established that the movement of goods outside the State of U.P. was occasioned by the purchases. In the present case, the Assessing Authority himself had found that the purchases, in question, were made for and on behalf of Ex. U.P. Principal and, therefore, the ratio laid down by this Court in case of Commissioner of Sales Tax, U.P. Lucknow vs. Jai Shiv Trading Co. (Supra) would not be applicable. In the case of Himatsicgka Timber Co. Ltd. (supra) the Hon'ble Supreme Court was considering a case where there were two transactions one where the dealer had made the purchases from local dealers and the other where after purchase he had affected sale outside the State of Orissa. It was not a case of one integrated transaction. Similar is the position in the case of Endupuri Narasimhan and sons (supra). This Court has already held in Commissioner of Sales Tax vs. Radhey Shyam Ram Avtar (supra) and Bishambhar Sahai Surendra Kumar vs. Commissioner of Sales Tax, (supra) that provision of Section 12-A(2) of the Act does not apply where exemption is not claimed under Section 3-D of the Act. We are in respectful agreement with the aforesaid decisions. There cannot be any dispute that a State Legislature has no competence to levy any tax on transactions which are in the course of inter-state, trade or commerce. It is not necessary to go into the validity/vires of Section 12-A(2) of the Act in view of the conclusion arrived at that it is not applicable to a case where exemption under Section 3-D of the Act is not being claimed as in the present case. In view of the above discussion, we allow the writ petition and set aside the order dated 27th May, 1991 of the Sales Tax Tribunal. However, parties shall bear their own costs