* THE HON'BLE SRI JUSTICE GODA RAGHURAM AND * THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN + WRIT PETITION Nos. 12804, 12439, 12595, 13223, 13353, 13259, 13661, 14083, 14398, 14558, 14636, 14945, 14955, 15304, 15286, 15296, 15315, 15491, 15499, 15523, 15754, 16041, 16414, 16552, 17227, 17366, 17732, 18059, 18819, 18820, 18823, 18828, 18839, 18902, 19261, 19302, 19312, 19378, 19465, 19535, 19615, 19976, 20142, 20143, 20175, 20352, 20444, 20514 20520, 21241, 21289, 21684, 22990, 23665, 27364, OF 2009 AND 28, 2300, 2313, 2314, 2322, 2324, 2342, 2343, 2345, OF 2010 W.P. No.12804 OF 2009: % Dated -09-2010 # M/s. MAKS Casting Private Limited. …. Petitioner Vs. $ Govt. of A.P. rep., by its Principal Secretary, Revenue (CT II) Department, Secretariat, Hyderabad and four others. …. Respondents ! Counsel for the Petitioner: Mr. D. Hanumanth Rao ^ Counsel for the Respondents: G.P. for Commercial Taxes <GIST: > HEAD NOTE: ? Cases referred 1. (1974) 4 SCC 428 2. (2002) 4 SCC 539 3. (2004) 3 SCC 609 4. (1975)1 SCC 375 5. 411 US 1 6. (1964) 5 SCR 975 7. (2007) 5 SCC 447 8. (2000) 1 SCC 557 9. (1980) 1 SCC 223 10. (1974)4 SCC 656 11. 1989 Supp (1) SCC 696 12. (1990) 2 SCC 502 13. AIR 1996 SC 869 14. (1989) 3 SCC 634 15. (1993) 3 SCC 677 16. (1970)1 SCC 189 17. (1976) 1 SCC 834 18. AIR 1971 SC 2145 19. (1985) 4 SCC 237 20. (1992) 2 SCC 515 21. Vol.18 (1994) APSTJ 139 22. (2005) 7 SCC 348 23. (2005) 1 SCC 625 24. AIR 1984 SC 1415 25. AIR 1953 SC 394 26. AIR 1954 SC 158 27. AIR 1961 SC 307 28. AIR 1964 SC 464 29. AIR 1965 SC 1491 30. 2002(2) ALD 96 (DB) 31. AIR 1968 SC 1489 32. (1990) 4 SCC 594 33. (1985) 3 SCC 398 34. (1990) 3 SCC 223 35. 1981(2) SCR 866 36. (2006) 4 SCC 517 37. (1989) 3 SCC 396 38. (2007) 13 SCC 673 39. (1979) 2 SCC 409 40. 1985 (4) SCC 369 41. 2010 (28) VST 1 (SC) 42. 986 (Supp) SCC 728 43. AIR 1991 SC 14 44. Vol. 16 (1993) APSTJ 227 45. (1995) 1 SCC 274 46. AIR 1968 SC 718 47. (1992) 2 SCC 683 48. (2005)6 SCC 292 49. (2006) 3 SCC 620 50. (1996) 8 SCC 702 51. (2008) 2 SCC 777 52. 2002(2) SCC 188 53. Vol. 29 (1972) STC 169 (SC) 54. (1962)2 SCR 169 55. (2006) 12 SCC 753 56. (2004) 6 SCC 465 THE HON'BLE SRI JUSTICE GODA RAGHURAM AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos. 12804, 12439, 12595, 13223, 13353, 13259, 13661, 14083, 14398, 14558, 14636, 14945, 14955, 15304, 15286, 15296, 15315, 15491, 15499, 15523, 15754, 16041, 16414, 16552, 17227, 17366, 17732, 18059, 18819, 18820, 18823, 18828, 18839, 18902, 19261, 19302, 19312, 19378, 19465, 19535, 19615, 19976, 20142, 20143, 20175, 20352, 20444, 20514 20520, 21241, 21289, 21684, 22990, 23665, 27364, OF 2009 AND 28, 2300, 2313, 2314, 2322, 2324, 2342, 2343, 2345, OF 2010 ORDER: (Per Hon’ble Sri Justice Ramesh Ranganathan) The validity of G.O.Ms. No.503 Revenue (CT-II) Department dated 8.5.2009, whereby Rule 67 of the A.P. VAT Rules, 2005 was amended, is under challenge in this batch of writ petitions as being illegal, arbitrary, in violation of Articles 14, 19(1)(g) and 265 of the Constitution of India, contrary to the industrial policy of the State Government in G.O.Ms. No.108 dated 20.05.1996, and the final eligibility certificate issued to the petitioners. The consequential demand notices, whereby the petitioners were called upon to pay the deferred sales tax immediately, are also under challenge. 2. It would suffice, for the disposal of this batch of writ petitions, if the facts in W.P. No.2324 of 2010 are noted. The petitioner, a partnership firm, is also a small scale industry engaged in the business of purchasing bengal gram and manufacturing fried gram known as ‘putnalu’. It is a dealer registered under the APGST Act, 1957 and the A.P VAT Act, 2005 (hereinafter referred to as the “Act”). 3. In order to accelerate industrial development in the State, the State Government introduced a new industrial policy called “Target- 2000” which was notified in G.O.Ms. No.108, Industries & Commerce (I.P) Department, dated 20.05.1996. Under “Target – 2000” all new industrial units, whether large, medium or small, which had commenced production on or after 15.11.1995 were eligible for certain incentives including sales tax concessions. Under para 6.03 of “Target – 2000” each industry was given two options. The first option was that they were entitled for sales tax deferment, limited to 135% of the fixed capital investment, for a period of 14 years. The deferred amount was to be treated as a deemed loan on the security of the fixed assets of the industry pari-passu with the financial institutions, and on finalization of assessment by the commercial tax authorities each year. The second option was sales tax exemption for a period of seven years, limited to a ceiling of 135% of the fixed capital investment during the entire holiday period, effective from the date of commencement of commercial production. All industrial units, in this batch of Writ Petitions, opted for sales tax exemption. The petitioner in W.P. No.2324 of 2010 was issued a final eligibility certificate by the 4th respondent on 28.04.2000 for Rs.16,55,175/- to be availed over a period of seven years commencing from 04.10.1999 and ending on 03.10.2006. The petitioner availed Rs.11,68,625/- as tax exemption upto 31.03.2005 and the balance sales tax deferment to be availed, as on 01.04.2005, stood at Rs.4,86,550/-. 4. The APGST Act, 1957 was repealed and the A.P. VAT Act, 2005 came into force with effect from 01.04.2005. Section 69(1) of the Act required an industrial unit, availing tax exemption on the date of commencement of the Act, to be treated as a unit availing tax deferment. Consequently, the petitioner was also treated as a unit availing tax deferment. Rule 67 of the A.P. Value Added Tax Rules, 2005 (for brevity “Rules”) prescribes the manner in which tax incentives are required to be treated. The petitioner had availed tax exemption for a period of 4 years 5 months 27 days upto 31.03.2005 from out of the original period of 7 years of tax exemption. The remaining period, under the earlier scheme of tax exemption, stood at 2 years 6 months and 3 days as on 01.04.2005. After doubling the remaining period, as stipulated by Rule 67, the remaining period available to the petitioner for availing tax deferment was 5 years and 6 days i.e., the petitioner could avail tax deferment upto 07.04.2010. It is the petitioner’s case that, in accordance with G.O.Ms. No.108 dated 20.05.1996, they were required to repay the deferred tax over a period of 14 years without interest, and that repayment of the monthly tax would start only from the year 2019 onwards. On being assessed to tax for the years 2005-06 and 2006-07 on 17.10.2008, the petitioner claims to have been informed that repayment should start from April, 2019 onwards. 5. The illustration appended to Rule 67 was substituted, and Sub- Rule (5) inserted to Rule 67, by G.O.Ms. No.503 Revenue (CT-II) Department dated 08.05.2009. Pursuant thereto the 5th respondent, by proceedings dated 16.06.2009, called upon the petitioner to pay Rs.2,05,271/- immediately as the said amount had become due in terms of the amended Rules. A demand notice was issued on 19.01.2010. 6. Oral submissions were made, and written arguments filed, by Sri P.S. Rajasekhar, Sri S. Dwarakanath and Sri V. Bhaskar Reddy, learned counsel for the petitioners and Sri A.V. Krishna Koundinya, learned special standing counsel for commercial taxes. The rival contentions can conveniently be classified under the following heads: I. CLASSIFICATION IS ARBITRARY AND IN VIOLATION OF ARTICLE 14 OF THE CONSTITUTION OF INDIA: 7. It is contended on behalf of the petitioners that, under G.O.Ms. No.108 dated 20.05.1996, the sales tax deferred during the first year had to be repaid in a lumpsum at the end of 14 years without interest; as the petitioners had opted for sales tax holiday they were not required to pay sales tax till they had exhausted the sales tax incentives fixed in their eligibility certificate; the sales tax incentives offered to tax holiday units was dual in nature; one was with a view to pass on the benefit to the ultimate consumers, and the other was to enable these units to sell their products at a competitive price thereby increasing their sales turnover compared to the units which did not have the incentive of sales tax holiday; the tax holiday units were prohibited from collecting sales tax during the tax holiday period; the amendment, by G.O.Ms. No.503 dated 08.05.2009, puts those who had not completely availed the benefit of tax exemption before 31.03.2005 at a disadvantage compared to those who had completely availed the benefit before 31.03.2005; the “Act” required the tax holiday units, on their conversion into the tax deferment scheme, to be treated on par with the original tax deferment units from 01.04.2005; the amendment, by G.O.Ms. No.503 dated 08.05.2009, differentiates them; and, as persons similarly situated are treated differently, the impugned G.O. is arbitrary and in violation of Article 14 of the Constitution of India. 8. Sri A.V. Krishna Koundinya, learned special standing counsel for commercial taxes, would submit that on conversion, into the tax deferment scheme from the tax holiday scheme with effect from 01.04.2005, the petitioners were permitted to collect tax from their customers and utilize the amounts; the tax so collected was to be repaid only after completion of the deferment period as contemplated under the amended Rule; the petitioners have not been asked to pay any tax for the period prior to their conversion as tax deferment units; they enjoyed tax exemption till 01.04.2005; industrial units, which were originally under the tax deferment scheme, were required to pay the year-wise deferred tax after expiry of 14 years; the unamended illustration conferred an undue advantage on the petitioners as, apart from enjoying the benefits of tax holiday, they were also getting an extended time of 14 years from the date of conversion for repayment of the tax collected by them; and under these circumstances, as the petitioners were better placed than the units which were originally under the tax deferment scheme, amendment of Rule 67 was considered necessary. The learned standing counsel would submit that Courts would not interfere with the fiscal policies of the government which ought to be left free to determine its priorities in the matter of utilization of finances, and to act in the public interest, while issuing or modifying or withdrawing an exemption notification; it is open to the legislature to classify dealers for raising revenues and granting exemptions; it is open to the legislature to leave it to the executive to determine details relating to the working of tax laws; the scheme of repayment has been amended, taking away the undue advantage which the petitioners had in comparison with the original tax deferment units; and the amendment only regulates repayment and would apply till the entire amount is repaid. 9. The tax holiday units, which before 31.03.2005 were exempted from payment of sales tax, were statutorily required by Section 69(1) of the Act to be converted as tax deferment units. Prior to 1.4.2005 (when the Act came into force) the tax holiday units and the tax deferment units formed two distinct and different classes whose period of entitlement, repayment period etc, were at variance from one another. Treating the erstwhile tax holiday units and the original tax deferment units as one class after 01.04.2005 would require the benefits which the tax holiday units were extended prior to 1.4.2005, and which the tax deferment units were disentitled, to be ignored. These two classes continue to retain their distinctive birth marks even after the Act came into force. Section 69(1) of the Act has neither erased these birthmarks nor has it brought about fusion of these two distinct classes into a single homogenous class. Section 69(1) merely requires a high degree of parity to be maintained, between these two classes, after the Act came into force. 10. Classification, in law, is the grouping of persons/things because they agree with one another in certain particulars, and differ from other persons/things in those particulars. The modern State, while exercising its sovereign power of taxation, has to deal with complex factors. The machinery of the Government would not work if it were not allowed a little play in its joints. A large latitude is allowed to the State for classification upon any reasonable basis, and what is reasonable is a question of practical details into which fiction cannot enter. The Court cannot strike down a law because the classification does not commend to it as proper. ((Murthy Match Works v. CCE[1]; American Jurisprudence 2nd Edition Vo.16 para 504). Classification, for the purpose of legislation, cannot be done with mathematical precision. If the classification withstands the test of Article 14 of the Constitution, its validity cannot be questioned on the ground that one was given more benefit than the other. (Ombalik Das v. Hulisa Shaw[2]). As long as the extent is marginal, the constitutional vice of infringement of Article 14 would not infect the legislation. (Basheer v. State of Kerala[3]). 11. The lack of perfection in a legislative measure does not necessarily imply its unconstitutionality. In such a complex arena, in which no perfect alternatives exist, the Court does well not to impose too rigorous a standard of criticism, under the equal protection clause, reviewing fiscal provisions. (G.K. Krishnan v. State of Tamil Nadu[4]; San Antonio Independent School District v. Rodriguez[5];). The law of taxation is, in the ultimate analysis, the result of the balancing of several complex considerations, and it would be unreasonable to insist upon the application of a general rule. (Khyerbari Tea Co. v. State of Assam[6]; Southern Petrochemical Industries Co. Ltd. v. Electricity Inspector & ETIO[7]). In the field of taxation, if the test of Article 14 is satisfied by generality of the provisions, Courts would not substitute judicial wisdom for that of the legislature. (State of U.P. v. Kamla Palace[8]). Classification for taxation, and the application of Article 14 in that context, must be viewed liberally, not meticulously. (Ganga Sugar Corpn. Ltd. v. State of U.P.,[9]). In tax cases, there are good reasons for judicial self-restraint if not official deference to legislative judgment. The complexity of economic regulation, the uncertainty, and the bewildering conflict of expert opinion, would show that self-limitation is the path to judicial wisdom. (State of Gujarat v. Ambica Mills Ltd[10]; P.M. Ashwathanarayana Setty v. State of Karnataka[11]). In view of the inherent complexity of fiscal adjustments, Courts give a larger discretion to the legislature in these matters and effectuate the chosen system in all possible and reasonable ways. If two or more methods of adjustment are available, the legislative preference in favour of one of them cannot be questioned on the ground of lack of legislative wisdom or that the method adopted is not the best or that there are better ways of adjusting the competing interests and claims. The legislature possesses the greatest freedom in such areas. (P.M. Ashwathanarayana Setty11). The test applicable for striking down a taxing provision is one of “palpable arbitrariness” applied in the context of the felt needs of the times and societal exigencies informed by experience’. (Kerala Hotel and Restaurant Assn. v. State of Kerala[12]). 12. The power of the State Government to issue G.O.Ms. No.108 dated 20.5.1996, whereby the benefit of tax exemption and tax deferment was extended to new industrial units in the State, is referable to Section 9 of the APGST Act, 1957. Unlike Section 9 of the APGST Act, the VAT Act does not confer power on the State Government either to exempt a unit from payment of sales tax or extend to them the benefit of tax deferment. However Section 69 (1) of the Act provides that, notwithstanding anything contained in the Act, any industrial unit availing tax holiday or tax exemption on the date of commencement of the Act (i.e., 1.4.2005) shall be treated as a unit availing tax deferment. Under Section 69(3), the period of eligibility, the method of debiting the eligibility amount, the repayment and any other benefits for units availing tax deferment shall be in the manner prescribed. Section 2 (24) of the Act defines “prescribed” to mean prescribed by Rules made under the Act. Section 78 of the Act confers power on the State Government to make Rules and, under sub-section (1) thereof, the Government may, by notification, make rules to carry out the purposes of the Act. Section 78(2)(a) stipulates that such a rule may provide for all matters expressly required or allowed by the Act to be prescribed. As such the period of eligibility, the method of debiting the eligibility amount, the repayment and other benefits for units availing tax deferment is required, under Section 69(3) of the Act, to be prescribed by Rules made by the State Government in exercise of its powers under Section 78(2)(a) of the Act. 13. It is in exercise of the powers under Section 78 of the Act that the A.P. Value Added Tax Rules, 2005 (hereinafter called the “Rules”) were made and notified in G.O.Ms. No. 394, Revenue (CT-II), Department dated 31.03.2005. Rule 67of the Rules relates to tax deferment and sub-rules (1) to (3) and sub-rule (4) thereof read as under: “1)Where any unit is availing a tax holiday on the date of commencement of the Act, it shall be treated as converted as the unit availing tax deferment. The balance period available as on 31st day of March 2005 to such units shall be doubled. The eligibility amount shall be the balance available to such unit as on that date. Balance period means the difference of period between date of completion of eligibility shown in the certificate of eligibility and the 1st day of April 2005. 2) The units already availing tax deferment, prior to commencement of the Act, shall continue to be eligible to avail the balance amount available as on the 31st day of March, 2005 and for the period as mentioned in the eligibility certificate. 3) The tax payable and the tax to be claimed as deferment for each period shall be the net tax (i.e., output tax less input tax) which shall be debited to the eligibility amount. Where the input tax exceeds output tax for the period and the deferment unit made any export sales or sales in the course of exports in the same tax period, the unit shall carry forward such excess input tax upto the month of March every year and shall be eligible to claim refund in the tax return for the month of March every year. 4) Where any VAT dealer is availing deferment, a declaration in Form VAT 502 shall be filed for every tax period in addition to the return in Form VAT 200. 14. The illustration to Rule 67 was substituted and sub-rule (5) was inserted by G.O.Ms. No.503 dated 08.05.2009. Sub-rule (5), as inserted, reads: “(5) The amount availed in the first year, in which the unit is converted from tax holiday scheme to deferment scheme, shall be paid in the months succeeding the month in which the period for which the unit is eligible for availment of incentive is completed and the amount availed in the second year, shall be paid in the year, subsequent to the year in which the amount, availed in the first year is paid or payable and so on” 15. As the dispute revolves mainly around the amended illustration and its scope, it is necessary to refer to the illustration to Rule 67 as it stood prior to, and after its substitution by, G.O.Ms. No.503 dated 08.05.2009 in juxta- position with each other. Prior to substitution by G.O.Ms. No.503 dated 08.05.2009 After substitution by G.O.Ms. No.503 dated 08.05.2009 Illustration: CDL Industries was granted tax holiday for a period of 7 years from 10.0.1999 to 09.10.2006 for an amount of Rs.65,22,000/-. As on 31.3.2005, the dealer has availed an amount of Rs.45,10,000/-. The period originally available as on 1.4.2005 is 18 months & 9 days. As per the above sub-rule the dealer now is eligible to avail tax deferment for the balance amount of Rs.20,12,000/- for a period of 36 months and 18 days i.e., 1.4.2005 to 18.4.2008. The amount of deferment availed for each month shall be paid at the end of fourteenth year i.e., the amount of tax deferred for the month of April 2005 shall be paid on or before 30th April 2019. Illustration: CDL industries was granted tax holiday for a period of 7 years from 10.10.1999 for an amount of Rs.65,22,000/-. As on 31.3.2005, the dealer has availed an amount of Rs.45,10,000/-. The period originally availed is 5(five) years, 5(five) months and 21 days. The period of availment prior to 1.4.2005, when worked out on doubling the same, is 10(ten) years (11) months and 12 days. Deduct this period from total period of 14 (fourteen) years, as availed to the units under Deferment Scheme originally. The balance period to be availed after 1.4.2005 is 36 months and 18 days. As per the above sub-rule (1) of this Rule, the dealer now is eligible to avail Tax Deferment for the balance amount of Rs.20,12,000/- for a period of 36 months and 18 days i.e., 1.4.2005 to 18.4.2008. The amount of deferment, availed for each year, shall be paid after the end of the period of availment, available to the dealer after conversion from Tax holiday Scheme to Deferment Scheme. The Calculation is as follows: 1. Actual period of availment under Tax Holiday Scheme: 10.10.1999 to 9.10.2006 2. Period left as on 1.4.2005: 1.4.2005 to 9.10.2006 3. Period left 1 year 6 months 9 days 4. Period doubled as per rule: 3 years and 18 months 5. Period upto which the unit is eligible for incentive: 18.4.2008 6. The month and year in which the tax availed in the year 2005-06 is payable: May 2008 7. The month & year in which the Tax Deferment availed in subsequent year is payable: May 2009 and so on. 16. Rule 67(2) stipulates that units which were already availing tax deferment, prior to commencement of the Act (i.e., prior to 01.04.2005), would continue to be eligible to avail the balance amount, available as on 31.03.2005, for the period mentioned in the eligibility certificate. It is only those tax holiday/tax exempted units, under G.O.Ms. No.108 dated 20.5.1996, which are treated as units availing tax deferment, and a degree of parity is sought to be brought between tax holiday/tax exempted units (now converted as tax deferment units) on the one hand and the original tax deferment units on the other. Under G.O.Ms. No.108 dated 20.5.1996, while the tax holiday/tax exempted units were given the benefit of tax exemption for a period of seven years, and were required not to collect tax for the said period, the tax deferment units were extended the benefit of tax deferment for 14 years, (i.e., double the period for which exemption was granted to the tax holiday units), and were permitted to collect tax. The tax so collected by them each year was required to be repaid at the end of the availment period of 14 years. These tax holiday/tax exempted units had already availed the benefit of tax exemption for a certain period prior to 01.04.2005. It is for this reason that Rule 67(1) provides that the balance period available to such units as on 31.03.2005 shall be doubled, and the amount eligible as tax deferment would be the balance available to such units as on 31.03.2005. Rule 67 (1) defines “balance period” to mean the difference of the period between the date of completion of eligibility, shown in the certificate of eligibility, and the 1st