* THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN + WRIT PETITION Nos.3259, 4728, 4880, 4881, 5071, 5080, 5160, 5310, 5573, 11833, 13314, 20691, 21315, 21712, 21846, 22145, 22768, 22769, 22770, 22773, 22774, 22882, 25283, 26326, 27037 of 2006; WRIT PETITION Nos.6409, 8988, 9302, 9305, 9311, 9396, 9524, 11075, 13081, 16049, 17320, 17330, 17412, 20694, 20789, 20802, 21255, 21665, 22332, 24376, 25949 of 2007; WRIT PETITION Nos.475, 1271, 1649, 4401 and 18633 of 2008; WRIT PETITION No.4658 of 2009 and WRIT PETITION No.5740 of 2010 % 30.12.2010 # M/s.Asian Peroxide Limited, Nellore And others … Petitioners Vs. $ Government of Andhra Pradesh, represented by Its Principal Secretary, Revenue (CT II) Department, Hyderabad And others … Respondents ! Counsel for the petitioners: Mr.S.Ravi, the Senior Counsel and M/s.A.K.Jaiswal, S.Dwarakanath, Bhaskar Reddy Vemireddy, M.V.J. Kumar, Shaik Jeelani Basha, B.Srinivas, Tejprakash Toshniwal & Ms.Anjali Agarwal Counsel for the Respondents: Mr.A.V. Krishna Koundinya, Special Counsel for Commercial Taxes < Gist : > Head Note: ? Cases referred 1) (2005) 41 APSTJ 45 2) (2006) 3 SCC 1 : AIR 2006 SC 1383 3) AIR 1940 PC 124 4) (1981) 4 SCC 578 : AIR 1981 SC 1887 : (1981) 48 STC 466 (SC) 5) (1999) 3 SCC 346 : AIR 1999 SC 1275 6) (2004) 10 SCC 201 (para 106) 7) AIR 1967 SC 1066 : (1967) 19 STC 1 8) (1975) 4 SCC 22 : AIR 1975 SC 1039 : (1975) 35 STC 513 9) (2003) 8 SCC 413 (para 44) : AIR 2003 SC 3397 10) (2004) 11 SCC 497 (para 19) : AIR 2004 SC 5080 11) (2003) 11 SCC 699 : AIR 2003 SC 4156 12) AIR 1961 SC 751 13) (1981) 2 SCC 205 : AIR 1981 SC 711 14) AIR 1958 SC 909 : (1958) 9 STC 388 (SC) 15) (1925) 10 AC 282 16) (1928) 276 US 394; 72 L. Ed. 624 17) AIR 1968 SC 1232 18) (1972) 4 SCC 485 : AIR 1972 SC 1168 : (1972) 29 STC 206 19) (1973) 1 SCC 216 : AIR 1973 SC 1034 : (1973) 31 STC 178 20) (1985) 2 SCC 197 : AIR 1985 SC 421 : (1985) 152 ITR 308 (SC) 21) (2007) 13 SCC 673 : (2008) 297 ITR 176 22) AIR 1959 SC 512 23) 467 US 837 24) (1984) 4 SCC 27 : AIR 1984 SC 1543 25) (1985) 1 SCC 641 : AIR 1986 SC 515 26) (2000) 3 SCC 40 : AIR 2000 SC 1069 27) (2006) 4 SCC 327 : AIR 2006 SC 3480 28) (2009) 15 SCC 570 : AIR 2009 SC 3194 29) (2002) 5 SCC 466 : AIR 2002 SC 2405 30) (1981) 4 SCC 173 : AIR 1981 SC 1922 (para 17) 31) (1991) 1 SCC 212 : AIR 1991 SC 537 32) AIR 1967 SC 1427 33) (1969) 2 SCC 55 : AIR 1970 SC 169 34) AIR 1963 SC 1667 35) (1990) 2 SCC 502 : AIR 1990 SC 913 36) (1983) 53 STC 42 (AP) 37) AIR 1955 SC 166 : (1955) 1 SCR 1004, 38) (2001) 7 SCC 231 : AIR 2001 SC 3435 39) AIR 1962 SC 1733 : (1962) 13 STC 529 40) (1999) 8 SCC 69 : AIR 1999 SC 3496 : (1999) 115 STC 427 41) (1999) 2 SCC 361: AIR 1999 SC 892 42) (2004) 5 SCC 783 : AIR 2004 SC 3618 : (2004) 136 STC 1 THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.3259, 4728, 4880, 4881, 5071, 5080, 5160, 5310, 5573, 11833, 13314, 20691, 21315, 21712, 21846, 22145, 22768, 22769, 22770, 22773, 22774, 22882, 25283, 26326, 27037 of 2006; WRIT PETITION Nos.6409, 8988, 9302, 9305, 9311, 9396, 9524, 11075, 13081, 16049, 17320, 17330, 17412, 20694, 20789, 20802, 21255, 21665, 22332 24376, 25949 of 2007; WRIT PETITION Nos.475, 1271, 1649, 4401 and 18633 of 2008; WRIT PETITION No.4658 of 2009 and WRIT PETITION No.5740 of 2010 December 30, 2010 Between: M/s.Asian Peroxide Limited, Nellore … Petitioner And Government of Andhra Pradesh, represented by Its Principal Secretary, Revenue (CT II) Department Hyderabad And others … Respondents THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.3259, 4728, 4880, 4881, 5071, 5080, 5160, 5310, 5573, 11833, 13314, 20691, 21315, 21712, 21846, 22145, 22768, 22769, 22770, 22773, 22774, 22882, 25283, 26326, 27037 of 2006; WRIT PETITION Nos.6409, 8988, 9302, 9305, 9311, 9396, 9524, 11075, 13081, 16049, 17320, 17330, 17412, 20694, 20789, 20802, 21255, 21665, 22332 24376, 25949 of 2007; WRIT PETITION Nos.475, 1271, 1649, 4401 and 18633 of 2008; WRIT PETITION No.4658 of 2009 and WRIT PETITION No.5740 of 2010 COMMON ORDER: (Per Hon’ble Sri Justice V.V.S.Rao) Introduction The challenge in these cases is to Section 13(4) of the Andhra Pradesh Value Added Tax Act, 2005 (the VAT Act) and Rule 20(2)(h) of the Andhra Pradesh Value Added Tax Rules, 2005 (VAT Rules). The impugned rule was introduced by an amendment issued under Section 78(1) of the VAT Act by a Government notification vide G.O.Ms.No.2201, Revenue (CT-II), dated 29.12.2005. The effect of this rule is that all the petitioners, who are VAT dealers and availing Input Tax Credit (i.t.c.) in respect of coal, naphtha or natural gas under Section 13(1) of the VAT Act, have now been denied i.t.c. retrospectively with effect from 01.4.2005. This is the grievance and grudge that forced the petitioners to approach this Court. Background facts We may notice the relevant facts and allegations from writ petition No.5080 of 2006. M/s.Vishnu Cement Limited a manufacturer of cement, is a registered dealer under the VAT Act. Limestone, coal, iron ore and gypsum are their main raw materials. In quantitative terms, coal constitutes 13% of the raw material and on clinker production 19%. Under the provisions of the VAT Act, the tax paid on intrastate purchase of raw materials is given credit against the output tax payable on cement. The rate of VAT on coal is 4% and 12.5% on cement on which i.t.c. is allowed in respect of purchases of coal and other raw materials. The rate of sales tax under the Andhra Pradesh General Sales Tax Act, 1957 (APGST Act) on cement was 4% (with Form G). But the rate of VAT is higher at 12.5%. Due to i.t.c. allowance the company could withstand and absorb the increase in the tax rate. Under Section 13(1) of the VAT Act, i.t.c. was allowed to VAT dealers except in respect of the goods specified in Schedule VI. No i.t.c. is allowed even on certain deemed sales enumerated in Clauses (a) to (h) of Section 13(5) of the VAT Act. Section 13(4) of the VAT Act empowers the Government to prescribe purchases in respect of which i.t.c. shall not be allowed. In exercise of the powers under Section 78 of the VAT Act, VAT Rules were promulgated. Rule 20(2) of the VAT Rules prescribes, in clauses (a) to (q), various items/goods which are not eligible for i.t.c. Rule 20(2)(h) has been substituted by the impugned amended Rule. Now, natural gas, naphtha and coal are also included in the negative list, unless the dealer is in the business of these goods. Thus the petitioner was not allowed to claim i.t.c. on the coal used as raw material. After the impugned amendment of Rule 20(2)(h) of the VAT Rules, the second respondent, namely, the Assistant Commissioner, issued notice dated 27.1.2006 proposing to disallow i.t.c. already claimed on the tax paid on coal purchases for the tax periods from April, 2005 to December, 2005. Ignoring petitioners’ objections, the Assistant Commissioner, by an order dated 28.2.2006, confirmed the VAT proposals. Defence of the State The Government of Andhra Pradesh, through an authorised officer on special duty, filed a counter affidavit in W.P.No.5740 of 2010. The assessing officer also filed counter in majority of the cases. The sum and substance of the counter is as follows. After repeal of the APGST Act the general indirect taxation system has been enforced by the VAT Act. The dealers thereunder are given set off on the tax paid on the sale of goods by another VAT dealer or used in the manufacture of goods. Though the output tax was assessed after giving i.t.c., the legislature conferred power on the Government under Section 13(4) of the VAT Act to prescribe certain purchases of goods on which i.t.c. is not allowed. In exercise of such power, the Government identified goods under Rule 20(2) of the VAT Rules. The petitioner was claiming set off while paying output tax on manufactured cement, but the Government amended Rule 20(2)(h) of the VAT Rules with effect from 01.4.2005. The same is sustainable and does not suffer from any constitutional vice. The legislature has widest discretion to pick and choose any commodity for the purpose of taxation. If the power is now granted to the Rule making body, the same is sustainable. Section 5- B(1)(b) of the APGST Act, which is similar to Section 13(4) of the VAT Act, was upheld by this Court in Chatla Narsaiah Ramaiah v State of A.P.[1]. When the legislature specifically conferred retrospective Rule making power, it is of no consequence even if the tax is passed on to the customer as the primary liability to pay VAT is on the dealer. But for the i.t.c. allowed earlier, the petitioner would have paid the entire output tax due. The assessment was taken up, and after issuing the notice and considering the explanation, the impugned demand was raised. Issues for consideration The Senior Counsel, Mr.S.Ravi, and M/s.A.K.Jaiswal, S.Dwarakanath, Bhaskar Reddy Vemireddy, M.V.J. Kumar, Shaik Jeelani Basha, B.Srinivas, Tejprakash Toshniwal and Ms.Anjali Agarwal for the petitioners and Mr.A.V. Krishna Koundinya, Special Counsel for the Commercial Taxes Department, made their submissions. They also referred to precedents. A reference will be made to these submissions and relevant precedents at an appropriate place. From the submissions, the following issues arise which are taken up for consideration one after the other. I. Constitutional Validity of Section 13(4) of the VAT Act, II. Constitutional Validity of Rule 20(2)(h) of the VAT Rules, and III. Validity of the impugned assessment orders. CONSTITUTIONAL VALIDITY OF SECTION 13(4) OF VAT ACT This issue can be examined under four sub-headings, namely, (i) Enacting History; (ii) Analysis of the VAT Act & the Rules; (iii) Scope and extent of Section 13(4); and (iv) Constitutional vires of Section 13(4). (i) Enacting History The pre-enacting history of legislation under challenge is relevant to deal with the interpretative issues that arise before the Court (BSNL v Union of India[2]). Brief history of legislation in Andhra Pradesh referable to the power under Entry 54 of List II of Schedule VII to the Constitution of India is as follows. Under the Government of India Act, 1935 (1935 Act) by reason of Entry 48 in List II of Schedule VII thereto, the State had legislative power to levy and collect tax on “all materials, commodities and articles, compendiously referred to as the goods”. All the provincial states had Sales Tax laws imposing tax on the sale and purchase. It was a major source of income. After the inauguration of the Constitution of India, the Legislative entry in the 1935 Act became Entry 54 in List II of Schedule VII. Many States either continued the legislation that existed prior to the Constitution, or made new legislation to consolidate and amend the sales tax law. The Madras General Sales Tax Act, 1939, and the Hyderabad General Sales Tax Act, 1950, applied to Andhra and Telangana regions respectively. After formation of the State of Andhra Pradesh, these were repealed and replaced by the Andhra Pradesh General Sales Tax Act, 1957 (APGST Act). The object of retaining sales tax as a major source of revenue, however, remained elusive for many reasons. The levy was either at the point of first purchase/sale or at the point of last purchase/sale or at every point of sale. The tax paid at the point of first sale, or every point of purchase, became part of the purchase price determining the subsequent sale price. This left a cascading effect. Due to unplugged holes in the tax collection mechanism, if once there is a tax evasion, it had a negative impact on the collection as the tax once escaped caused permanent loss to the State. Thirdly, with as many as 16 to 20 rate categories introduced to fulfill a variety of objectives, the sales tax became complicated. Fourthly, many tax rate categories and multi point levy lead to unsatisfactory tax compliance. Lastly, sales taxes which accounted for 60% of the State revenue over the years remained stagnated. Initiatives for tax reforms began between 1980s and 1990s. Tax Review Committee (TRC) 1991 of Government of India recommended reform of direct taxes (income tax) and indirect taxes (excise and customs). The State level tax reforms, however, took off only in late 1990s necessitated by increasing budget pressures and demands for social welfare. An empowered committee of State Finance Ministers under the Chairmanship of Dr.Asim Das Gupta (empowered committee) was formed to study the tax reforms. On being assured by the Central Government to compensate the State for any loss over a period of three years, a consensus was reached by the States to migrate from sales tax to VAT with the sole object of simplification and rationalization of the taxes on ‘sale or purchase of goods’. This move to replace sales tax is a major landmark. Besides extending the tax base and strengthening the information base for better tax administration, VAT also attempts rationalizing the consumption tax to ensure better tax compliance. As a sequel to the consensus reached by the empowered committee in regard to implementation of VAT in the country, A.P. VAT Act, 2003 (A.P. Act No.9 of 2004) was enacted. But it was not brought into force. The time frame set by the empowered committee was to have VAT in place by April, 2005. Therefore to begin with the A.P. VAT Ordinance, 2005 (A.P. Ordinance No.1 of 2005) was promulgated by the Governor, which became the A.P. VAT Act that came into force from 01.4.2005. In “Trends and Issues in Tax Policy and Reform in India” the learned Authors[3] in “India Policy Forum[4]” summarized the salient features of the VAT regime thus. · The tax is levied at two rates (except for bullion, and precious metals, which are taxed at 1 percent). Basic necessities (about 75 items) are exempted. Most items of common consumption, inputs, and capital goods (about 275 items) are taxed at 4 percent, and all other items are taxed at 12.5 percent. Gasoline and diesel fuel (which contribute about 40 percent of the sales tax) are kept outside the VAT regime, and a floor rate of 20 percent is to be levied on them. · The tax credit facility covers inputs and purchases as well as capital goods for both manufacturers and dealers. Credit for taxes paid on capital goods can be used over three years of sales. · The tax credit mechanism operates fully only for intrastate sales. In interstate transactions, the exporting state is supposed to give an input tax credit for purchases made locally, against the collection of the central sales tax. The central sales tax credit in the importing state, or other mechanisms of zero-rating of interstate sales, will be introduced in two years, when the central sales tax in its present form will be phased out. In the meantime, an information system on interstate trade will be built up. · The central government has agreed to compensate the states for any loss of revenue at rates of 100 percent in the first year, 75 percent in the second year, and 50 percent in the third year. The loss will be calculated by estimating the difference between the projected sales tax revenue using 2004–05 as the base and the actual revenue collected. The projected revenues will be estimated by applying the average of the best three years’ growth rates during the last five years. · Tax incentives given to new industries by different states could be continued so long as it does not break the VAT chain. Many states propose to convert tax holidays into deferment of the tax. · All dealers with annual turnover above Rs.500,000 are required to register for the VAT. However, the states may levy a simple turnover tax not exceeding 2 percent on those dealers with turnover up to Rs.5 million. Such dealers, paying the turnover tax, do not have to keep detailed accounts of their transactions. But these small dealers will not be a part of the VAT chain, and no credit will be available for the taxes paid on purchases from these dealers. They may therefore voluntarily register as regular VAT dealers. VAT is levied and collected at every point of sale although it works out to be tax on the last sale, but collected in instalments at every point. As the tax paid by the dealer at the point of purchase is given “set off” or credit, ordinarily the same shall not form part of the purchase price and may have minimum objections. By and large this is the norm. But the literature on this aspect does not accept the “set off” or “credit” of tax paid at the earlier stage (i.t.c.) as being universal legislative norm. Most items of common consumption, inputs and capital goods are allowed the i.t.c.; but on certain items like petrol, diesel, liquor, i.t.c. is not permitted. Similarly select goods and transactions are kept outside and no i.t.c. can be claimed. (ii) Analysis of VAT Act and the Rules We may take up a brief analysis of the VAT Act. ‘There are three stages in imposing of tax’: (i) there is the declaration of liability. It is the part of the statute which determines what persons in respect of what property are liable to tax (commonly described as 'charging provisions’); (ii) there is the assessment which particularizes the exact sum which a person liable has to pay (commonly described as ‘taxable quantity’; and (iii) the methods of recovery if the person does not voluntarily pay the determined tax (Commissioner of Income Tax v Mahaliram Ramji Das[5] quoted with approval in Associated Cement Company Limited v Commercial Tax Officer, Kota[6]). VAT Act has dictionary clause (Section 2) defining as many as 46 terms and expressions used in the Act. These are however not exclusive and rigid in that if the “context otherwise so requires” can take different meaning and purport. “Tax” (Section 2(34)), which means tax on the sale or purchase of goods payable under the Act and includes tax on deemed sales. VAT means, ‘value added tax on sales levied under the provisions of the Act’ (Section 2(42)). Chapter III contains charging provisions. Chapter V, VI and VII deal with tax administration which includes assessment and collection of tax. Chapter VIII speaks of offences and penalties under the Act. Section 78 of the VAT Act empowers the Government to make Rules and Section 79 of the VAT Act enables the Government to alter, add to or cancel any of the six Schedules appended to the Act. As per Section 2(10) of the VAT Act, “dealer” means any person who carries on the business of buying, selling, supplying or distributing goods or delivering goods on hire purchase or in any system of payment. Every such dealer other than a casual dealer, as defined in Section 2(7) of the VAT Act, shall be liable to be registered as a VAT dealer if his estimated taxable turnover is more than Rs.40.00 lakhs. Every dealer whose turnover exceeds Rs.5.00 lakhs, but is not registered as a VAT dealer, shall be registered as a Turnover Tax dealer (ToT). The charging Section 4 of the VAT Act obliges a VAT dealer to pay tax on every sale of goods at the rates specified in the Schedules. The liability under Section 4 of VAT Act is subject to Section 13, and the rates specified in the Schedules. VAT payable shall be calculated in accordance with the formula prescribed[7] (Section 12). Wherever it is permissible a VAT dealer will get i.t.c. in respect of purchases of taxable goods if such goods are used in his business. The Act also contains an effective appeal/revision system (Sections 31 to 36). While expressing their choice as to essential features of VAT, the legislature left it to the Government (delegated agency or authority) to make Rules to cover many other aspects. In exercise of such power under Section 78 of the VAT Act, the Governor of Andhra Pradesh promulgated the VAT Rules to which a reference is made infra wherever necessary. After referring to the enacting history, and the above brief analysis, it cannot be denied that replacement of sales tax by VAT is mainly intended to improve revenue collections and to prevent cascading effect on sale price, besides plugging the gaps in tax collection. It also becomes clear that though the legislature permits the dealers to avail i.t.c. in respect of most items of common consumption, it was never intended that all taxable goods and businesses should invariably be allowed i.t.c. (iii) Scope and extent of Section 13(4) In designing a tax system, to minimize the excess burden of raising highest revenue, optimal rate of tax on commodities should be related to the direct demand for the goods. That is one school of thought. Another way is to adopt the system that will minimize the tax induced distortions and at the same time, the system remains administratively feasible and, politically acceptable. So the policy planners evolved a tax system with uniform tariffs and broad based VAT. In India, to start with rationalization of indirect taxes commenced in 1977, by converting specific duties into ad volarem taxes and introducing i.t.c. to convert the cascading sales tax into manufacturing stage VAT. This was replaced by a major reform in 2000-01 when Central VAT (CenVAT) was introduced in the Central Indirect Tax system. Then came a stage when all the States adopted the VAT system by April, 2005 generally with the facility of set off of the tax on inputs. But certain commodities were left out of VAT system, which necessarily means that i.t.c. was not allowed on the purchase of those items. As per Section 2(19) of the VAT Act, “input tax” means tax paid or payable under the Act by a VAT dealer to another VAT dealer on the purchase of goods in the course of business. As per Sections 4, 11 and 12 of the VAT Act, the VAT payable shall be calculated by applying the rate of tax specified in the applicable Schedule, and shall be calculated in accordance with the formula prescribed. Rule 19 of the VAT Rules contains the formula. In simpler terms, the tax payable b y the VAT dealer shall be X – Y where X is the total of the VAT payable in respect of all taxable sales made by a VAT dealer and Y is the total i.t.c. which the VAT dealer is eligible to claim as set off. The relevant dual provisions, namely, Sections 9 and 13 of VAT Act read as under. 9. Input tax credit for dealers for goods in Schedule VI.- Every dealer, who is liable to pay tax on the sale of goods specified in Schedule VI, shall be eligible for input tax credit subject to the conditions in Section 13 of the Act and in the manner prescribed. 13. Credit for input tax.- (1) Subject to the conditions if any, prescribed, an input tax credit shall be allowed to the VAT dealer for the tax charged in respect of all purchases of taxable goods, made by that dealer during the tax period, if such goods are for use in the business of the VAT dealer. No input tax credit shall be allowed in respect of the tax paid on the purchase of goods specified in