Citation Codes

Equivalent Citations

citation codes

Case Number

W.Ps 10360/1986, 26485/1993, 2824-2827/1987, 19152/1991, 10675/90 & WP 8185/1988

Attorney(S)

Sri Mohandas N. Hegde, E.R Indra Kumar, M/s Hegde Associates, Sri B.P Gandhi, K.S Ramabhadran & R.V Prasad, Advocates for petitioners
Sri R.I.D'Sa, Government Advocate for Respondent

Judges

S. Rajendra Babu
S. Venkataraman, JJ.

Acts

provisions of Sections 3, 4, 5 and Sections 14 and 15 of the Central Sales Tax Act, 1956
Section 5-C read with clause(d) of Explanation 3 of Section 2(t) of the K.S.T Act, 1957.
Section 5-C of the Karnataka Sales-Tax Act, 1957 (hereinafter referred to as the Act),
Article 286 amongst other provisions of the Constitution. Article 286(1)
Section 2(g) of the C.S.T Act. Hence the provisions of the CST Act
Sections 14 and 15 of the Central Sales Tax Act.
Section 4 of the CST Act, levy under Section 5-C
sub-section (1) or sub-section (3) of Section 5,
Act by Act 4/1992, provisions of Section 5-C
Constitution (Fortysixth) (Amendment) Act, 1982
ARTICLE 286 CONSTITUTION OF INDIA
Act and the provisions of Section 2(u-1)
Act No. 27 of 1985, Section 5-C
Section 15 of the C.S.T Act
CENTRAL SALES TAX ACT 1956
Section 2(g) of the CST Act.
Rajasthan Sales Tax Act
Section 5-C

See more information ...

Smart Summary

Structured Summary of the Opinion (S. Rajendra Babu, J.)

Factual and Procedural Background

These petitions challenge the constitutional validity of Section 5-C of the Karnataka Sales-Tax Act, 1957, under which the State levies tax on the transfer of the right to use any goods. The petitions contend that the State lacks legislative competence to impose such a tax in certain transactions (notably those that are in the nature of inter-State sales, sales outside the State, or in the course of import/export), and that the provision conflicts with provisions of the Constitution and central legislation.

The legislation's history as described in the opinion: Section 5-C was originally amended by Act No. 27 of 1985 to levy tax on the taxable turnover in respect of transfers of the right to use certain goods (those in column (2) of the Seventh Schedule). By Act 4 of 1992 (with retrospective effect) the amendment sought to levy tax on total turnover in respect of transfer of the right to use goods.

At the conclusion of the opinion the Court allowed the petitions and declared Section 5-C invalid; the rule was made absolute.

Legal Issues Presented

Whether Section 5-C of the Karnataka Sales-Tax Act, 1957 (levying tax on transfer of the right to use goods) is constitutionally valid.
Whether the State Legislature has competence under Entry 54 of List II (Schedule VII) to impose tax on transfers of the right to use goods that are in the nature of inter-State sales, sales outside the State, or sales in the course of import/export, in light of Article 286 and the Union's powers under Article 269(3) and Article 286(2).
Whether absence of a law made by Parliament under Article 286(2) and Article 269(3) prevents the State from levying tax on the taxable event in Section 5-C.
Whether the amendment replacing “taxable turnover” by “total turnover” (thereby including inter-State, import/export transactions) transgresses the limits of State legislative power under the Constitution.
Whether Section 5-C is arbitrary or discriminatory and thus violative of Article 14 of the Constitution.
Whether decisions (notably the Supreme Court's decision in Gannon Dunkerley & Co. v. State of Rajasthan) which treated parts of works contracts as “sale” for application of the Central Sales Tax Act can be extended to the taxable event in Section 5-C.

Arguments of the Parties

Petitioners' Arguments

The State's legislative power under Entry 54 does not include power to levy tax on transactions that are effectively inter-State sales, sales outside the State, or in the course of import/export; such matters fall outside State competence.
Parliamentary legislation under Article 286(2) and 286(3)(b) read with Article 269(3) is a condition precedent to a State's power to tax transfers of the right to use goods; no such parliamentary law exists for this taxable event.
The definition of “sale” in the Central Sales Tax Act was not amended post-46th Constitutional Amendment to include transfers of the right to use goods; therefore the CST Act cannot be treated as law made under Article 269(3) / 286(2) for these transactions.
The State cannot redefine “sale” (or the situs) via Explanation 3(d) so as to include transactions beyond the State's competence; Explanation 3(d) is asserted to be violative of Article 286.
Section 5-C, by its effect and history (shift from “taxable turnover” to “total turnover”), shows legislative intent to levy tax on transactions excluded by Article 286 and Entry 92A of List I, and so is not traceable to Entry 54 of List II.

State's Arguments

The taxable event in Section 5-C cannot constitute “sale or purchase of goods in the course of inter-State trade and commerce” or similar categories because the Central Sales Tax Act has not been made applicable to that taxable event and no law under Articles 269(3) and 286(2) has been enacted by Parliament for it.
The basis of exigibility under Section 5-C is sub-clause (d) of clause (29A) of Article 366 (a constitutional definition).
Reliance on the Supreme Court decision in Gannon Dunkerley & Co. v. State of Rajasthan (88 STC 204) which held CST provisions applicable to the transfer of property in goods in execution of certain works contracts covered by Article 366(29-A)(b); the argument was that a similar interpretive approach could support applicability in other contexts.
However, the State contended that the Gannon reasoning applies because the 46th Amendment permits dividing an indivisible works contract into a sale of goods portion, which is “sale” within Section 2(g) of the CST Act; but the State also argued that such reasoning (applying to works contracts) cannot be illegitimately extended to the taxable event in Section 5-C if that event is not a “sale” under the CST Act.
The expression “total turnover” in Section 5-C should be interpreted in context to mean the total consideration for the specific taxable event and not necessarily to include transactions on which the State cannot levy tax.
Section 5-C is not arbitrary or discriminatory; the Article 14 challenge is not tenable according to the State.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gannon Dunkerley & Co. v. State of Rajasthan (88 STC 204)	The Supreme Court held that provisions of Sections 3, 4, 5 and Sections 14 and 15 of the Central Sales Tax Act, 1956 are applicable to the transfer of property in goods involved in the execution of works contracts covered by Article 366(29-A)(b). The decision rests on the effect of the 46th Constitutional Amendment allowing division of a works contract into sale of goods and labour/services and treating the sale part as a “sale” under Section 2(g) of the CST Act.	The Court distinguished the present taxable event from the works-contract context in Gannon. It observed that the reasoning in Gannon (applying CST provisions to a divisible works contract) cannot be extended to the taxable event in Section 5-C because that event does not fall within the definition of “sale” in Section 2(g) of the CST Act. The opinion also relied on Gannon as an analogous situation where taxing turnover including outside transactions led to invalidation of the State provision; thus the Court used Gannon to support the conclusion that a provision taxing “total turnover” that includes inter-State or import/export transactions is invalid.
Collector of Customs v. Nathella Sampathu Chetty (1962 3 SCR 786)	Principle that the constitutional validity of a provision must be determined on the basis of its provisions and the ambit of its operation; a provision cannot be held valid merely because its administration might avoid conflict with constitutional requirements.	The Court applied this principle to hold that Section 5-C must be judged on its text and scheme (not on hypothetical or selective administration). Because Section 5-C, as drafted and construed in context, extends to transactions beyond State competence, it must be declared invalid despite potential modes of administration that might avoid constitutional conflict.

Court's Reasoning and Analysis

The Court's analysis proceeds in a sequence grounded in constitutional division of taxing powers and the statutory language:

Source of State Power: The power to levy tax arises from Entry 54 of List II (Schedule VII) which authorises tax on sale or purchase of goods as defined in Article 366(29-A), subject to limitations in Article 286. Article 286(1) prohibits a State from imposing tax on sale or purchase which takes place (a) outside the State or (b) in the course of import into or export out of India. The Union has particular power (Articles 269(3), 286(2), 286(3) and related List I entries) to legislate in these fields.
Statutory Definitions and Distinctions: The Karnataka Act contains two relevant definitions: “Taxable turnover” (Section 2(u-1)) — which expressly excludes turnover on purchase or sale in the course of inter-State trade/commerce or import/export — and “Total turnover” (Section 2(u-2)) — which is defined as the aggregate of turnover including transactions whether or not the whole or any portion is liable to tax or are in the course of inter-State trade or import/export. The 1985 amendment taxed only “taxable turnover”; the 1992 amendment shifted to taxing “total turnover”.
Effect of the Amendment to “Total Turnover”: By altering the tax base from “taxable turnover” to “total turnover”, the legislature widened the ambit of taxable transactions to include transactions over which the State lacks competence (inter-State, import/export). The Court placed particular weight on this legislative history and change of tax base as evidence of legislative intent to tax broadly.
Constitutional Limitation under Article 286: Given that Article 286(1) bars State taxation of sales outside the State and in the course of import/export, a statutory provision that effectively taxes deemed sales occurring in the course of inter-State trade or import/export transgresses constitutional limits. The Court concluded that Section 5-C, construed as taxing “total turnover”, enables imposition of tax on such deemed sales and therefore contravenes Article 286(1).
Distinguishing Gannon Dunkerley: The Court examined Gannon Dunkerley (works-contract context) and accepted that the 46th Amendment made it possible to treat the sale component of certain works contracts as ‘sale’ under Section 2(g) of the CST Act; thus CST provisions could apply to that component. However, the Court reasoned that the reasoning in Gannon cannot be extended to the taxable event in Section 5-C because that event is not a “sale” within Section 2(g) of the CST Act and it is impermissible to expand the statutory definition of “sale” by relying on Article 366(29-A) so as to alter the CST Act by judicial or State-legislative construction.
Rejection of Contextual Narrowing: The State's contention that “total turnover” should be contextually interpreted so as to exclude transactions on which the State cannot levy tax was rejected. The Court relied on the legislative history which showed the deliberate change from taxing “taxable turnover” to taxing “total turnover”, making the broader meaning clear and intentional.
Article 14 Challenge: The Court found no arbitrariness or discrimination in Section 5-C; the Article 14 challenge was not sustained. This did not save the provision however because the primary defect was lack of legislative competence.
Conclusion of Invalidity: Because Section 5-C’s reach includes transactions that are outside the competence of the State (inter-State, import/export and other categories barred by Article 286), and because the change to “total turnover” evidences an intent to include such transactions, the provision transgresses Article 286(1) and is void. The Court declared Section 5-C invalid and allowed the petitions.

Holding and Implications

Holding: The Court declared Section 5-C of the Karnataka Sales-Tax Act, 1957 to be unconstitutional and void. The petitions were allowed and the rule was made absolute.

Implications:

Direct effect on the parties: The specific taxing provision (Section 5-C) under challenge cannot be lawfully enforced as it stood (i.e., as taxing “total turnover” in respect of transfer of the right to use any goods) because it transgresses the limits of State legislative competence under Article 286(1).
Broader legal consequence as discussed in the opinion: The decision identifies that a State cannot, by statutory definition or tax-base amendment, extend its sales-tax to cover deemed sales arising in the course of inter-State trade, sales outside the State or import/export transactions which fall under Union competence; where a State law does so it will be vulnerable to invalidation for contravening Article 286. The Court relied on earlier authorities (including Gannon Dunkerley and Collector of Customs v. Nathella Sampathu Chetty) in arriving at this conclusion.
The opinion does not purport to create a novel rule of law beyond applying existing constitutional principles and precedents; its immediate effect is to invalidate Section 5-C as formulated and applied.

Show full summary ...

M/S Shetty Leasing (India) Ltd. v. Union Of India & Others

S. Rajendra Babu, J.:—

These petitions are filed challenging the constitutional validity of Section 5-C of the Karnataka Sales-Tax Act, 1957 (hereinafter referred to as the Act), by which the State levies tax on transfer of right to use any goods.

2. On behalf of the petitioners, it is urged that in exercise of the legislative power under Entry 54 of List II of the VII schedule to the Constitution to impose a tax on the transfer of any right to use any goods would not include the power to levy such tax in respect of transactions which are in the nature of sales in the course of interstate trade or commerce or in the course of sales outside the State or levying such tax in the course of import or export in as much as it is beyond the legislative competence of the State Legislature to impose sales-tax on inter-State Sales or sales outside the State and also in the course of import or export. It is urged that the law made by the Parliament under Article 286(2) and 286(3)(b) r/w Article 269(3) of the Constitution is a condition precedent for exercise of the legislative power of the State to impose tax on transactions involving transfer of right to use any goods for any purpose and since no law has been enacted by Parliament in that regard, it is not open to the State Legislature to exercise power to impose such tax. The definition of ‘sale’ in the Central Sales Tax Act has not been amended after the 46th Amendment to include within its ambit a transfer of the right to use any goods for any purpose and it cannot be treated to be a law made under Article 269(3) and 286(2) of the Constitution in relation to sales arising out of such transfers. In the absence of a common situs being evolved in application of such legislations as in Section 4 of the CST Act, levy under Section 5-C is impermissible. It is submitted that it is not permissible for the State Legislature to define the expression ‘sale’ so as to include within its ambit the sale or purchase of goods other than in the course of inter-State trade or commerce or in the course of import or export and thereby assume power to impose taxes on the same and the definition of situs as contemplated in Explanation 3(d) is itself invalid being violative of Article 286 of the Constitution of India.

3. We may now advert to the history of this legislation. Originally, by Act No. 27 of 1985, Section 5-C was amended to levy tax on the taxable turnover in respect of the transfer of the right to use any goods mentioned in column (2) of the Seventh Schedule. Now, tax is sought to be levied on total turnover in respect of transfer of right to use goods by amending the Act by Act 4 of 1992 with retrospective effect.

4. Bearing this history in mind, it is submitted that the legislature did intend to levy tax on all transactions which have been excluded in terms of Article 286(1) and (2) under Entry 92A of List I of the Seventh Schedule. Thus, it is contended that Section 5C is not traceable to Entry 54 since it includes transactions covered by Article 286 and Entry 92 of the VII schedule. It is also urged that the provision itself is opposed to the scheme of the Act and therefore deserves to be quashed. In understanding the concept of an interstate Sale, it is urged that, it must be borne in mind that the movement of goods from one State to another State whether occasioned by the sale and the movement of goods is an incident as a necessary consequence and was inseparably connected with sale or purchase; that the purchase and transport being part of one transaction could not be dissociated; that there was no break between the purchase and movement of goods to another State; that it is immaterial whether she sale or purchase takes place within the State so long as the movement of goods is an incident of the sale or purchase, it amounts to inter-State sale or purchase.

5. On behalf of the State following submissions are made:

There cannot be any ‘sale or purchase of goods in the course of Inter-State trade and commerce’ or ‘outside the State’ or in the course of the import of goods into, or export of the goods out of the territory of India', in respect of the taxable event stated in Section 5-C read with clause(d) of Explanation 3 of Section 2(t) of the K.S.T Act, 1957. The reason is that the Central Sales Tax Act, 1956 has not been made applicable to the taxable event stated in Section 5C of the Act and no law as envisaged under Article 269(3) and Article 286(2) has been enacted by the Parliament relating to the taxable event in question.

It is submitted that the basis of exigibility of tax under Section 5C of the Act is sub-clause (d) of clause (29A) of Article 366 of the Constitution.

The Supreme Court in the case of Gannon Dunkerley & Co. v. State of Rajasthan . 88 STC 204. held that the provisions of Sections 3, 4, 5 and Sections 14 and 15 of the Central Sales Tax Act, 1956 are applicable to the transfer of property in goods involved in the execution of works contract covered by Article 366(29-A)(b).

The aforesaid conclusion of the Supreme Court is based on the reasoning (as could be inferred from the discussion in the Judgment) that the Constitution (Fortysixth) (Amendment) Act, 1982 has made it possible to divide single and indivisible works contract into one for sale of goods and other for supply of labour and services and the contract so far as it relates to sale of goods is a ‘sale’ as defined in Section 2(g) of the C.S.T Act. Hence the provisions of the CST Act are held to be applicable to that part of the works contract. This reasoning adopted in respect of works contract cannot be made applicable to the taxable event stated in Section 5C of the Act as it is no ‘sale’ within the definition of Section 2(g) of the CST Act. It is not permissible in law to expand the definition of sale in Section 2(g) of the CST Act to include the taxable event stated in Section 5C of the Act by relying on Article 366(29-A) of the Constitution. Such interpretation would result in amending Section 2(g) of the CST Act which is impermissible in our Constitutional scheme. The definitions given in Article 366 of the Constitution would apply only to interpret the expressions used in the Constitution. This is made dear by the opening words in Article 366. It is submitted that the fiction created in the later part of Article 366(29A) applies only to the interpretation of the expression ‘sale or purchase of goods’ used in Article 269(3) and Article 286(2) of the Constitution. The object is to enable the Parliament-to make law under Article 269(3) and 286(2) of the Constitution in respect of the transactions referred to in sub-clauses (a) to (f) of Article 366(29A).

The expression ‘total turnover’ in the context it is used in Section 5C of the Act will have to be interpreted to mean the total consideration in respect of the taxable event stated in Section 5C of the Act. The latter part of Section 5C immediately after the expression ‘total turnover’ would clearly suggest that it is to be interpreted differently from the definition given to it in Section 2(u-2) of the Act. The scope of taxable event (as explained in para 1 above) will be another compelling reason to interpret the expression total turnover to be different from the definition given to it in Section 2(u-2) of the Act.

There is nothing arbitrary or discriminatory in Section 5C of the Act and hence the contention that it is violative of Article 14 of the Constitution is not tenable.

6. In order to correctly appreciate the contentions urged on behalf of the parties and to consider the same, it is necessary to, set out Section 5C of the Act as amended. Section 5C reads as follows;

“5-C Levy of tax on the transfer of the right to use any goods:—

Notwithstanding anything contained in sub-section (1) or sub-section (3) of Section 5, but subject to sub-sections (5) and (6) of the said Section, every dealer shall pay for each year a tax under this Act on his total turnover in respect of the transfer of the rights to use any goods mentioned in column (2) of the Seventh Schedule for any purpose (whether or not for a specified period) at the rates specified in the corresponding entries in column (3) of the said schedule.”

7. The power to levy tax by the State arises from Entry 54 of List II of Schedule VII of the Constitution. What this entry authorises is tax on sale or purchase of goods as defined under Article 366(29-A) of the Constitution subject to the limitations contained in Article 286 amongst other provisions of the Constitution. Article 286(1) clearly mandates that no tax shall be imposed on sale or purchase which takes place — (a) outside the State or (b) in the course of import into or export out of India. Power is conferred on the Union particularly to legislate in respect of levy of tax on sale or purchase of goods by the following provisions:— Article 269(3), Article 286(2); Article 286(3)(a); Article 286(3)(b) read with Article 366(29-A)(b)(c)(d) and Entries 92, 92-A, 92-B of List I. In respect of these transactions covered by Article 286(1) and where power is conferred upon the Union particularly to levy Tax, State Legislature has no competence to bring to tax on sale.

8. The tax levied under Section 5-C of the Act is with reference to the definition of ‘Total turnover’ contained in Section 2(u-2) of the Act. In this context, reference should also be made to the definition of ‘Taxable turnover’ contained in Section 2(u-1) of the Act wherein a provision is made to exclude turnover on purchase or sale in the course of inter-State trade or commerce or in the course of export or import of goods outside or inside the territory of India, while ‘Total turnover’ is the aggregate of turnover including the transactions whether or not the whole or any portion of turnover is liable to tax or in the course of inter-State trade or commerce or in the course of import or export of goods into the country. The Legislature has made a distinction between turnover of the sale of goods on which tax is not leviable and sale of goods on which tax is leviable. Necessarily Section 5-C of the Act must be construed such that the sales on which no tax is leviable have been included in Section 5-C of the Act. We must attach necessary importance to the use of the words ‘Taxable turnover’ in contra distinction to ‘Total turnover’ used in Section 5-C as a result of which the ambit of incidence of tax had been widened so as to include transactions outside the sphere of tax within the competence of the State. Thus Section 5C transgresses the limits of legislative power in contravention of Article 286(1) of the Constitution in as much as it enables tax being imposed on deemed sales that take place in the course of inter-State trade or commerce or in the course of import or export. Since the invalidity of Section 5-C goes to the root of imposition of tax, Section 5-C has got to be declared as invalid.

9. In view of the Legislative history we should hold that the intention of the legislature is clear to levy tax on all transactions covered by a definition to ‘Total turnover’ and not ‘Taxable turnover’ in as much as the legislature altered the tax base from ‘taxable turnover’ to ‘total turnover’. The taxing scheme of the Act and the provisions of Section 2(u-1) and (u-2) will together mean the inference drawn by us. As the tax base is indicated to be total turnover including inter-State transactions or import/export transactions, it obviously means that the scheme of taxation itself includes such levy, which is impermissible in law. In an identical situation in Gannon Dunkerley & Co. tax was levied on turnover which included the amount of sale price received or receivable for sale, transfer, delivery or supply of goods referred to in clause (o) wherein sale is referred. No part of the definition of ‘turnover’ excluded any outside transactions. Considering the effect of these provisions, the Supreme Court held that the Legislature has not made any explicit provision for exclusion of transactions constituting deemed sales which take place in the course of interstate trade or commerce or outside the State or in the course of import and export in relation to which the State Legislature lacks the competence to impose a tax under Entry 54 of the State List: Nor has any provision been made with regard to sale of goods which are declared to be of special importance in inter-State trade or commerce and are governed by Sections 14 and 15 of the Central Sales Tax Act. Hence, it was held that the said provision is invalid.

10. The expression ‘total turnover’ is identical with the expression ‘turnover’ in the Rajasthan Sales Tax Act which came up for consideration before the Supreme Court in Gannon Dunkerley & Co.'s case. The said expression meant the aggregate amount of the sale prices received or receivable for a sale, transfer, delivery or supply by a dealer in any of the ways referred to in clause (o) wherein the expression ‘sale’ is defined. In that case, it was noticed by the Supreme Court that the Legislature had not made any express provision for exclusion of transactions constituting deemed sales which take place in the course of inter-State trade or commerce or outside the State or in the being in ??? export in relation to which State Legislature ??? to impose a tax under Entry 54 of the State List. Notice ??? provision been made with regard to sales of goods which are declared to be of special importance in the inter-State trade or commerce and are governed by Sections 14 and 15 of the C.S.T Act.

11. A comparison of the provisions in our Act with the Rajasthan Act would indicate that the expression ‘Total turnover’ would include tax being levied on sales in the course of inter-State trade or Commerce or sales outside the State and sales in the course of import and export and to ignore the restrictions placed by Section 15 of the C.S.T Act in relation to imposition of tax on goods which are declared to be of special importance. It is also noticed in the said decision that constitutional validity of the provision has to be determined on the basis of its provisions and on the ambit of its operation. As reasonably construed and if, so judged, it does not pass the test of constitutionality. It cannot be pronounced valid merely because it is administered in a manner which might not conflict with the constitutional requirements. For that proposition, reliance can be placed on the decision in Collector of Customs v. Nathella Sampathu Chetty . 1962 3 SCR 786.

12. However, the learned Government Advocate sought to contend that the expression ‘Total Turnover’ in the present case will have to be understood with reference to the context and must be taken to mean that it excludes transactions in relation to which State would not be in a position to levy tax. But this argument does not stand close scrutiny. Prior to the amendment of the K.S.T Act by Act 4/1992, provisions of Section 5-C which was inserted by Act No. 27/1985 brought to tax only ‘taxable turnover’ and not ‘total turnover’. Therefore, the legislative intent is very clear that what is sought to be taxed is as defined thereon. Therefore the argument that with reference to context the different meaning will have to be given would not arise. Hence, we have no hesitation to accept the contention advanced on behalf of the petitioners that Section 5-C is invalid and we declare the same as unconstitutional and void Petitions shall stand allowed. Rule made absolute accordingly.

M/S Shetty Leasing (India) Ltd. v. Union Of India & Others

Structured Summary of the Opinion (S. Rajendra Babu, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioners' Arguments

State's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

M/S Shetty Leasing (India) Ltd. v. Union Of India & Others

Comments