M/S. TVS MOTOR COMPANY LTD v. THE STATE OF TAMIL NADU

15. The appellants had also urged that the impugned Section and Rule were ‘colourable legislation’, as they seek to override the supremacy of Entry 92A of List I of the Seventh Schedule of the Constitution of India.

16. The Respondents had refuted this argument by contending that as per the impugned provision, ITC was permissible if the inter- State sales were made under Section 8(1) of the CST Act after duly filing the Form C declaration. The same was not permissible in accordance with Rule 10(9)(a) if the inter-State sales were made under Section 8(2) of the CST Act.

17. It was also the case of the respondents that the impugned provisions were in tune with the recommendations of the Empowered Committee of State Finance Ministers. They further threw light upon the fact that the CST Act provided for multiple rates of tax, being different for sales made to registered dealers and sales made to non-registered dealers.

18. The High Court of Judicature, vide the Impugned Judgment-I dated October 29, 2014, has dismissed the writ petitions thereby upholding the constitutional vires of Section 19(5)(c) of the TNVAT Act and Rule 10(9)(a) of the Rules. At the same time, it has allowed the assessees/appellants to submit their responses to the Show Cause Notices and/or challenge the orders passed negativing their request for ITC, in accordance with the TNVAT Act and Rules framed thereunder.

19. The Impugned Judgment-II dated November 17, 2017 arose out of Writ Petition No. 29393 of 2017, challenging the constitutional vires of Section 19(5)(c) of the TNVAT Act and Rule 10(9)(a) of the Rules, where the High Court of Judicature at Madras, while relying on its previous decision dated 29.10.2014 in Impugned Judgment-I, observed that the same issue had arisen in the Impugned Judgment-I and the vires of the TNVAT Act and the Rules had been upheld therein and accordingly, dismissed the Writ Petition No. 29393/2017.

20. Correctness of these judgments is the subject matter of instant appeals.

21. Before adverting to the respective submissions which were made by the counsel for the appellants as well as learned Advocate General who appeared on behalf of the respondents, it would be apposite to scan through the impugned judgment dated October 29, 2014 to understand the rationale and reasoning which is given by the High Court in arriving at its conclusions on the issues raised.

22. The High Court formulated following two questions which arose for consideration “(1) Whether Section 19(5)(c) of TNVAT Act, 2006 and Rule 10(9)(a) of TNVAT Rules, 2007 are ultra vires the provision of CST Act, 1956? (2) Whether the impugned provisions are violation of Articles 14, 19(1)(9) and 301 of the Constitution of India?”

23. Thereafter, it took note of the relevant provisions of the CST Act, TNVAT Act as well as Rules and also Article 301 of the Constitution. We deem it proper to reproduce the relevant portions of these Acts and Rules at this stage itself. “Central Sales Tax Act, 1956

(i) re-sale by him within the State; or

(ii) use as input in manufacturing or processing of goods in the State; or

(iii) use as containers, labels and other materials for packing of goods in the State; or

(iv) use as capital goods in the manufacture of taxable goods.

(v) sale in the course of inter-State trade or commerce falling under sub-sections (1) and (2) of section 8 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956).

(vi) Agency transactions by the principal within the State in the manner as may be prescribed. (5) …….

(c) No input tax credit shall be allowed on the purchase of goods sold as such or used in the manufacture of other good and sold in the course of inter-State trade or commerce failing under sub-section (2) of Section 3 of the Central Rules Act, 1956 (Central Act 74 of 1956). Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 13 of Tamil Nadu Value Added Tax Rule, 2007

10. Input tax credit.—(1) The input tax credit that can be deducted from the input tax payable month or year shall be calculated by using the formula (A + B) - (C + D) Where, A = Input tax credit carried forward from the previous month or year B = Input tax credit accrued during the month or year C = Input tax credit reversed during the month or year D = Input tax credit refunded during the month or year (2) Every registered dealer who claims input tax credit under sub-section (1) of section 19 shall, produce the original tax invoice, in support of his claim of the input tax credit, containing the following details, namely: (a) A consecutive serial number; (b) The date on which the invoice is issued;

(c) The name, address and the Taxpayer Identification

(d) The name, address and the Taxpayer Identification

Number of the buyer; (e) The description of the goods; (f) The quantity or volume of the goods; (g) The value of the goods; (h) The rate and amount of tax charged; and

(i) The total value of the goods.

(9)(a) Input tax credit on inter-state sales shall be allowed only if lots ‘C’ prescribed in the Central Sales Tax (Registration and turnover) Rules, 1957 is filed.” Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters. After taking note of the aforesaid provisions, the High Court proceeded to discuss question no. (1). It pointed out that the definition of “dealer” under Section 2(b) of the CST Act means the assessee under the said Act and he is solely liable to pay tax under the CST Act whether or not he is allowed by the law or contract to pass on or actually passes on the liability of his customers. The onus of proof that a person sought to be treated as a dealer is one who comes within the said definition is on the assessing authority.

25. The definition of “sale” under Section 2(g) of the CST Act means that a sale inside a State as well as an inter-State sale arising in that State, has situs in that State in case of sale inside a State, it is taxable under the State law (TNVAT Act) and inter-State sale is liable to tax in the same State under the CST Act. Section 3 of the CST Act speaks about when a sale or purchase of goods said to have taken place in the course of inter-State trade or commerce. Section 6 of the CST Act speaks about liability to tax on inter-State sales and it is a charging Section. Section 8 of the CST Act speaks about rates of tax on sales in the course of inter- State trade or commerce and as per sub-section(1) of Section 8 if sale is effected by a dealer to a registered dealer goods of the Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 15 of description referred to in sub-section(3), it shall be liable to pay tax under this Act which shall be 3% of the turnover or at the rate applicable to the sale or purchase of such goods inside the appropriate State under the Sales Tax law of that State, whichever is lower. Section 8(2) says that if the sale of goods is in the course of inter-State trade or commerce not falling within subsection(1) the tax payable shall be at the rate applicable to the sale or purchase of such goods inside the appropriate State under the sales tax law of that State and as per explanation to Section 8(2), for the purpose of this sub-section, a dealer shall be deemed to be a dealer liable to pay tax under the sales tax law of the appropriate State, notwithstanding that he, in fact, may not be so liable under that law.

26. The High Court also noticed that the vires of the aforesaid provisions was tested by the Constitution Bench of this Court in State of Madras vs. N.K. Nataraja Mudaliar[1]. The Constitution Bench upheld the provisions of Section 2(b) of the CST Act and repelled the challenge predicated on Articles 301 and 303(1) of the Constitution of India. This position is reiterated in State of Tamil Nadu and Another vs. Sitalakshi Mills Ltd. and Others[2]. 1 AIR 1969 SC 147 (CB) = 1968 SCR (3) 829 2 (1974) 33 STC 200 (SC) = 1974 AIR 1505 = (1974) 4 SCC 408 Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters. Discussing the provisions of Section 8(1) and (2) of the CST Act, the High Court pointed out that Section 8(1) gives preferential treatment to sale by a dealer to a registered dealer. Vires of this provision has also been upheld in Gwalior Rayon Silk Manufacturing (Wvg.) Co., Ltd. vs. Assistant Commissioner of Sales Tax and others[3].

28. Discussing ratio of the aforesaid judgments, the High Court pointed out that this Court noted the proposition that the aforesaid provision was to check the evasion of tax on inter-State sales and to prevent discrimination between the rates in one State and those in other States, the Parliament thought fit to enact Section 8(2)(b) of the CST Act and further held that the object of the law apparently is to deter inter-State sales to unregistered dealers as such inter-State sales would facilitate evasion of tax and the fixation of the rate of local sales tax is essentially a matter for the State legislatures and the Parliament does not have any control in the matter. It has been further held in the said decision that it is in public interest to see that in the guise of freedom of trade, they do not evade the payment of tax and it is an effective safeguard against the evasion of tax.

Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters. Based on the aforesaid discussion, the High Court has answered question No. 1 against the appellants in the following manner: “It is the specific stand of the official respondents/State Government in para 14 of the counter affidavit that where sales are made to registered dealers on filing of Form ‘C’ declaration the entire transaction goes into the mainstream and thereby automatically comes into the net of taxation in the purchasing State wherever applicable and if sales are made to other than registered dealers, it is option of the purchasing dealer concerned to disclose it or not and there is, therefore, possibility of such transactions being wrapped up and disappearing into oblivion without even surfacing again for the purpose of levy of tax otherwise legally due on such transactions. Therefore, the contention put forward by the respective learned counsel appearing for the writ petitioners that such provision aggravate the Central Sales Tax rate or liability under Section 8(2) of CST Act by TNVAT is unsustainable and therefore, question no. 1 is answered in negative against the writ petitioners.”

30. While entertaining question no. (2), namely, whether the impugned provisions are violative of Articles 14, 19(1)(g) and 301 of the Constitution, the High Court pointed out that on this aspect, argument of the assessees was that the words ‘rate applicable’ employed in Section 8(2) of the CST Act has to necessarily take into account the effective rate after considering the deductions made under Section 3(3) of the TNVAT Act. It was argued that Section 19(5)(c) of the TNVAT Act, which denied ITC on purchase of goods sold or used in the manufacture of other goods and falls within Section 8(2) of the CST is per se discriminatory. The High Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 18 of Court took note of the scheme of TNVAT Act and found that though Section 3(2) stipulated many taxable transactions, only few such transactions are carved out to give benefit of ITC. After discussing certain judgments of this Court and other High Courts, the High Court has observed that the legal position was that right to claim ITC is not a vested right or an indefeasible right. It is a benefit conferred under the Act in certain contingencies and subject to conditions prescribed in the statutory scheme. Therefore, it is open to the State Legislature to provide for conditions and restrictions while extending the concession. Likewise, it was also necessary for any assessee to claim input credit to fulfill those conditions. Thus, the provision made in the statute that unregistered dealers in other States would not be entitled to ITC was justified. The High Court noted that specific stand of the State Government was that in respect of such unregistered dealers in other states, the State of Tamil Nadu had no mechanism to prevent evasion of tax and loss of revenue caused by trade with such unregistered dealers in the State of Tamil Nadu. This kind of evasion, in the opinion of the High Court, was not violative of the constitutional provisions contained in Articles 14, 19(1)(g) and 301. Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters. Mr. Giri, learned senior counsel appearing in some of these appeals pressed into service the same arguments which were advanced before the High Court and attempted to find fault with the approach of the High Court. His submission was that once the tax was paid at an intermediary stage, the dealers could not be denied benefit of claiming credit thereof and Section 19(5)(c) of TNVAT Act went contrary to the visions of CST Act and, therefore, was ultra vires. He referred to the following judgments of this Court in support and, in particular, following portions in those judgments.

(i) Messrs Govind Saran Ganga Saran vs. Commissioner of Sales Tax and Others[4]:

32. Mr. S.K. Bagaria, learned senior counsel appearing in the Civil Appeal arising out of SLP(Civil) No. 9326 of 2015, submitted that the appellant/dealer in this case was making supplies only to the Government and, therefore, there was no reason to nurture any apprehension that there would be evasion of tax. He also Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 21 of submitted that this dealer had sales in Tamil Nadu and Karnataka wherein it was stated that the appellant had effected sales to Karnataka State Government covered under Section 8(2) of the CST Act. However, the appellant was not entitled to ITC as per Section 18(5)(c) of the TNVAT Act but had not declared reversal of ITC. Hence, the reversal of ITC was proposed and the appellant was called upon to file objections, if any, thereto. In its reply to the said show cause notice the appellant pointed out that the VAT laws were introduced by different states from the year

2005. Tamil Nadu enacted TNVAT Act from January 01, 2007. While so, by the Taxation Laws (Amendment) Act, 2007, the sales to Government departments against ‘D’ form was abolished and such sales to Government departments fell under Section 8(2) of the CST Act. Therefore, when VAT Act was introduced, sales to Government departments fell under Section 8(1) of the CST Act and only sales to unregistered dealers or non-dealers fell under Section 8(2) of the Act. Therefore, the effect was that sales to Government departments outside the State would fall under Section 8(2) of the CST Act. It was also submitted that retention of provision such as Section 19(5)(c) of the VAT Act to completely deny the ITC in respect of sales to Central and State Government departments outside the State was causing unintended hardship. Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 22 of Mr. Bagaria also submitted that the two reasons which were given by the respondents before the High Court to deny ITC were:

(i) Where sales are made to a registered dealer on filing of

Form ‘C’ declaration, the entire transaction goes into the mainstream and thereby automatically comes to the net of the transaction in the purchasing State, where applicable. On the other hand, if sales are made to other than the registered dealers, it is the option of the purchasing dealer concerned to disclose it or not to disclose it. Therefore, there was a possibility of such transaction being wrapped up and disappearing into oblivion without even surfacing again for the purpose of levy of tax otherwise legally due.

(ii) As regards unregistered dealers in other States, the State of

Tamil Nadu has no mechanism to prevent evasion of tax and loss of revenue caused by trade with such unregistered dealers outside its territory.

33. Submission of Mr. Bagaria was that both these reasons were inapplicable in the case of the appellant where the sales were to the Government of Karnataka. Referring to Section 19(4) of TNVAT Act, Mr. Bagaria argued that situations mentioned therein were those where the Tamil Nadu Government was not getting Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 23 of any tax. Likewise, as per Section 4 of the CST Act situs of such sales would be Tamil Nadu, even when goods go out of the State. In such an eventuality, State gets its share of tax by virtue of Article 269 of the Constitution.

34. He also referred to the insertion of sub-clause (v) to sub-section (2) of Section 19 which provision now enables getting of ITC in those cases also where sale in the course of inter-State trade or commerce falls under Section 8(1) and (2) of the CST Act. In this scenario, according to him, Section 19(5)(c) would apply when there were inter-State sales at the time of incorporation. In support of this submission, he referred to the following two judgments:

(i) Bolani Ores Ltd. vs. State of Orissa[5]

30. In Secretary of State for India in Council v. Hindusthan Cooperative Insurance Society Ltd. [AIR 1931 PC 149: 132 IC 748: LR 58 IA 259] the Privy Council was considering a case where the incorporation effected in the statute viz. the Calcutta Improvement Trust Act, 1911 — referred to by their Lordships as the “Local Act” — was in express terms and in the form illustrated by 54 and 55 Vict., Ch. 19. The “Local Act” in dealing with the acquisition of land for the purposes designated by it, made provision for the acquisition under the Land Acquisition Act, and the provisions of the Land Acquisition Act were subjected to numerous modifications which were set out in the Schedule, so that in effect the “Local Act” was held to be the enactment of a Special Law for the acquisition of land for the special purpose. It was in the context of these and several other provisions which pointed to the absorption of certain of the provisions of the Land Acquisition Act into the “Local Act” with vital modifications that Privy Council observed at p. 266: “But Their Lordships think that there are other and perhaps more cogent objections to this contention of the Secretary of State, and their Lordships are not prepared to hold that the sub-section in question, which was not enacted till 1921, can be regarded as incorporated in the Local Act of 1911. It was not part of the Land Acquisition Act when the Local Act was passed, nor in adopting the provisions of the Land Acquisition Act is there anything to suggest that the Bengal Legislature intended to bind themselves to any future additions which might be made to that Act. It is at least conceivable that new provisions might have been added to the Land Acquisition Act which would be wholly unsuitable to the local code. Nor again, does Act 19 of 1921 contain any provision that the amendments enacted by it are to be treated as in any way retrospective, or are to be regarded as affecting any other enactment than the Land Acquisition Act itself. Their Lordships regard the Local Act as doing nothing more than incorporating certain provisions from an existing Act, and for convenience of drafting doing so by reference to that Act, instead of setting out for itself at length the provisions which it was desired to adopt.” Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 27 of It was further observed at p. 267: “In this country it is accepted that where a statute is incorporated by reference into a second statute, the repeal of the first statute does not affect the second: see the cases collected in Craies on Statute Law, 3rd Edn. pp. 349-50. This doctrine finds expression in a common-form section which regularly appears in the amending and repealing Acts which are passed from time to time in India …. The independent existence of the two Acts is therefore recognized; despite the death of the parent Act, its offspring survives in the incorporating Act. Though no such saving clause appears in the General Clauses Act, their Lordships think that the principle involved is as applicable in India as it is in this country. It seems to be no less logical to hold that where certain provisions from an existing Act have been incorporated into a subsequent Act, no addition to the former Act, which is not expressly made applicable to the subsequent Act, can be deemed to be incorporated in it, at all events if it is possible for the subsequent Act to function effectually without the addition.” This Court in the Collector of Customs, Madras v. Nathella Sampathu Chetty [AIR 1962 SC 316: (1962) 3 SCR 786, 830-833: (1962) 1 Cr LJ 364] considered the Privy Council decision in the Hindustan Cooperative Insurance Society Ltd. and distinguished that case and held the principle inapplicable to the facts of that case.

31. In State of Bihar v. S.K. Roy [AIR 1966 SC 1995: 1966 Supp SCR 259: (1966) 2 LLJ 759] this Court was considering the definition of “employer” in Section 2(e) of the Coal Mines Provident Fund and Bonus Schemes Act, 1948, where that expression was defined to mean “the owner of a coal mine as defined in clause (g) of Section 3 of the Indian Mines Act, 1923”. The Indian Mines Act, 1923, had been repealed and substituted by the Mines Act, 1952 (Act 35 of 1952). In the latter Act the word “owner” had been defined in clause (1) of Section 2. The question was whether by virtue of Section 8 of the General Clauses Act, the definition of the word “employer” in clause (e) of Section 2 of the Coal Mines Provident Fund and Bonus Schemes Act should be construed with reference to the definition of the word, “owner” in clause (1) of Section 2 of Act 35 of 1952, which repealed the earlier Act and re- Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 28 of enacted it. It may be mentioned that according to Section 2(1) of Act 35 of 1952 the word “owner”, when used in relation to a mine, means “any person who is the immediate proprietor or lessee or occupier of the mine or of any part thereof and in the case of a mine the business whereof is being carried on by a liquidator or receiver, such liquidator or receiver….” The expression “coal mine” is separately defined in clause (b) of Section 2 of the Coal Mines Provident Fund and Bonus Schemes Act, 1948. Ramaswami, J. speaking for the Court observed at p. 261: “As a matter of construction it must be held that all works, machinery, tramways and sidings, whether above or below ground, in or adjacent to a coal mine will come within the scope and ambit of the definition only when they belong to the coal mine. In other words, the word or occurring before the expression ‘belonging to a coal mine’ in the main definition has to be read to mean ‘and’.” This case, as well as the decision in New Central Jute Mills Co. Ltd. v. Assistant Collector of Central Excise, Allahabad [(1970) 2 SCC 820: (1971) 2 SCR 92] are distinguishable on the facts and legislation which this Court was considering. In the New Central Jute Mills Co. Ltd. case, the Privy Council decision in the Hindusthan Cooperative Insurance Society Ltd. case was referred to and distinguished. It is, however, contended by the learned Solicitor General that both in Nathella Sampathu Chetty case as well as the New Central Jute Mills Co. Ltd. case this Court was considering the effects of the two Acts which were made by Parliament by Central legislation and it is, therefore, not strictly a case of incorporation because the Central Legislature is deemed to have, while making the latter enactment, kept in view the provisions of the former Act. In our view this may not be conclusive.

32. In Ram Sarup v. Munshi [AIR 1963 SC 553: (1963) 3 SCR 858] a judgment of the Bench of five Judges of this Court held that the repeal of the Punjab Alienation of Land Act, 1900, had no effect on the continued operation of the Punjab Pre-emption Act, 1913, and that the expression “agricultural land” in the later Act had to be read as if the definition of the Alienation of Land Act had been bodily transposed into it. After referring to the observations of Brett, L.J. in Clarke case, Rajagopala Ayyangar, J. speaking for the Court observed at pp. 868-69: Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 29 of “Where the provisions of an Act are incorporated by reference in a later Act the repeal of the earlier Act has, in general, no effect upon the construction or effect of the Act in which its provisions have been incorporated. * * * In the circumstances, therefore, the repeal of the Punjab Alienation of Land Act of 1900 has no effect on the continued operation of the Pre-emption Act and the expression ‘agricultural land’ in the later Act has to be read as if the definition in the Alienation of Land Act had been bodily transposed into it.” The above decision of this Court is more in point and supports our conclusion. In our view, the intention of Parliament for modifying the Motor Vehicles Act has no relevance in determining the intention of the Orissa Legislature in enacting the Taxation Act. Apart from this aspect of the power of taxation, as we have said earlier, is not in the Concurrent List III but in List II and construed as a taxation measure we cannot extend the ambit of it by mere implication. As we said it is possible for both the Acts to co-exist even after the definition of ‘motor vehicle’ in the Act has been amended. It is, therefore, clear that the definition of ‘motor vehicle’ as existing prior to 1956 Amendment would alone be applicable as being incorporated in the Taxation Act.” The principle laid down in Mahindra and Mahindra Ltd. Vs. Union of India and Another[6] is to the same effect.

35. His second submission was that Section 19(5)(c) and Rule 10(9)

(c) were violative of Article 14 of the Constitution as there was no rational nexus with the objective sought to be achieved. He reiterated that when the purpose behind such a provision is only

Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 30 of to check evasion, and there was no such apprehension in the case of sales to State Government, benefit of ITC could not be denied wherever dealers were making sales to the Government. He further argued that when benefit of ITC is given even when sales are made outside the State but to a registered dealer, then why it should not be accorded on sales that are made to the Government as well as by treating the sales to outside State Government at par with the sales to the registered dealers. It was sought to be justified on the ground that insofar as the State Government is concerned, though it is treated as a dealer, no registration is required since the State Governments are not obliged to get themselves registered under the TNVAT Act. The only problem was that because of this the State Government is not in a position to give ‘C’ form. ITC to the appellant was denied only for not furnishing ‘C’ form. For this proposition, apart from relying upon the celebrated judgment in the case of D.S. Nakara and Others vs. Union of India[7], Mr. Bagaria also relied upon the judgment of this Court in Union of India and Others vs. N.S. Rathnam and Sons[8] in the following manner:

Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 31 of repealing the exemptions granted by earlier notifications. It is also correct that the Government is not bound to grant exemption to anyone to which it so desires. When the duty is payable under the provisions of the Act, grant of exemption from payment of the said duty to particular class of persons or products, etc. is entirely within the discretion of the Government. This discretion rests on various factors which are to be considered by the Government as these are policy decisions. In the present case, however, the issue is not of granting or not granting the exemption. When the exemption is granted to a particular class of persons, then the benefit thereof is to be extended to all similarly situated persons. The notification has to apply to the entire class and the Government cannot create subclassification thereby excluding one sub-category, even when both the sub-categories are of same genus. If that is done, it would be considered as violating the equality clause enshrined in Article 14 of the Constitution. Therefore, judicial review of such notifications is permissible in order to undertake the scrutiny as to whether the notification results in invidious discrimination between two persons though they belong to the same class. In Aashirwad Films v. Union of India [(2007) 6 SCC 624], this aspect has been articulated in the following manner: (SCC pp. 628-29, paras 9-12)

Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 32 of Visvanatha Sastri [AIR 1955 SC 13: (1955) 1 SCR 787]. In K.T. Moopil Nair v. State of Kerala [AIR 1961 SC 552] the Kerala Land Tax Act was struck down as unconstitutional as violating the freedom guaranteed by Article 14. It also goes without saying that if the imposition of the tax was discriminatory as contrary to Article 15, the levy would be invalid.’

12. A taxing statute, however, enjoys a greater latitude. An inference in regard to contravention of Article 14 would, however, ordinarily be drawn if it seeks to impose on the same class of persons or occupations similarly situated or an instance of taxation which leads to inequality. The taxing event under the Andhra Pradesh State Entertainment Tax Act is on the entertainment of a person. Rate of entertainment tax is determined on the basis of the amount collected from the visitor of a cinema theatre in terms of the entry fee charged from a viewer by the owner thereof.” xx xx xx

14. What follows from the above is that in order to pass the test of permissible classification two conditions must be fulfilled, namely, (i) that the classification must be founded on an intelligible differential which distinguishes persons or things that are grouped together from others left out of the group; and (ii) that, that differential must have a rational relation to the object sought to be achieved by the statute in question. If the Government fails to support its action of classification on the touchstone of the principle whether the classification is reasonable having an intelligible differentia and a rational basis germane to the purpose, the classification has to be held as arbitrary and discriminatory. In Sube Singh v. State of Haryana[(2001) 7 SCC 545], this aspect is highlighted by the Court in the following manner: (SCC p. 548, para 10)

37. Insofar as argument of the appellant predicated on Article 14 is concerned, reply of the learned Advocate General was that a reading of Section 8(1) of the CST Act would show that classification is contained in the Central Act itself which treats sale to a registered dealer outside the State in one category and sale to an unregistered dealer outside the State in a different category. This provision contained in Section 8(1) of the CST Act never underwent any change. Therefore, those sales which were made to unregistered dealers outside the State were constituted a different class and, thus, provisions contained in Section 19(5)

(c) to deny ITC on such sales was perfectly justified based on reasonable classification. Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters. After considering the respective submissions and going through the case law that is presented before this Court, it would be apt to remark at the outset that most of the contentions of the appellants stand answered by the judgment of this Court in Jayam and Company. That case also pertains to the TNVAT Act. The issue was as to whether sub-section (20) of Section 19 of the TNVAT Act, which was brought into this statute by Amendment Act 22 of 2013, could be given retrospective effect. Sub-section (20) of Section 19 reads as under:

39. Thus, this case also concerned the same provision, namely, Section 19 of the TNVAT Act, though the issue raised was not the same which has arisen for consideration in these appeals. However, while answering the aforesaid question, the ITC scheme contained in Section 19 of the TNVAT Act was gone into and discussed at length. After reproducing Section 19, attributes of this provision were taken note of in the following manner:

67. As rightly contended by the learned Advocate General, the "Input Tax Credit" adjusted in the above illustration comes to Rs. 3,125/- in a single transaction and that it would run to several lakhs and crores for a year for a single dealer. The excess Input Tax Credit earned by the petitioners is being adjusted against the outstanding tax due or carried forward to next year or refunded. If this trend is allowed to continue, the concept of VAT that meant for payment of tax on every value addition gets defeated.

68. In order to protect the revenue and with a vie to curb the clandestine transactions resulting in evasion of tax, in respect of second and subsequent sales, Section 19(20)was introduced, where any dealer has sold goods at a price lesser than the price of the goods purchased by him, the amount of "Input Tax Credit" over and above the output tax of those goods, shall be reversed.

69. Constitutional Validity of fiscal legislation:- When there is a challenge to the constitutional Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 40 of validity of the provisions of a Statute, Court exercising power of judicial review must be conscious of the limitation of judicial review must be conscious of the limitation of judicial intervention, particularly, in matters relating to the legitimacy of the economic or fiscal legislation. While enacting fiscal legislation, the Legislature is entitled to a great deal of latitude. The Court would interfere only where a clear infraction of a constitutional provision is established. The burden is on the person, who attacks the constitutional validity of a statute, to establish clear transgression of constitutional principle. Observing that the law relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc., in R.K. Garg vs. Union of India [(1981) 4 SCC 675, this Court held as under: xx xx xx"

40. In another judgment in ALD Automotive Pvt. Ltd. & Anr. v. The Commercial Tax Officer & Ors. (SLP (Civil) Nos.36112-36113 of 2013) pronounced in today’s date, the scheme of this very provision is discussed again in detail to the same effect.

41. It is very clear from the aforesaid discussion that this Court held that ITC is a form of concession which is provided by the Act; it cannot be claimed as a matter of right but only in terms of the provisions of the statute; therefore, the conditions mentioned in the aforesaid Section had to be fulfilled by the dealer; and subsection (20) of Section 19 was constitutionally valid. It was also noted, in the process, that there were valid and cogent reasons for inserting that provision and the main purpose was to protect Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 41 of the Revenue against clandestine transaction resulting in invasion of tax.

42. The reasoning given in that judgment while upholding sub-section (20) of Section 19 shall equally apply while examining the validity of Section 19(5)(c) thereof. The High Court has noted the specific stand taken by the State Government to the fact that in respect of unregistered dealer in other States, the State of Tamil Nadu has no mechanism to prevent invasion of tax and loss of revenue cost by trade with such unregistered dealers in the State of Tamil Nadu. Therefore, the provision was aimed at achieving a specific and justified purpose and could not be treated as discriminatory.

43. It is stated at the cost of repetition that Section 19 of TNVAT Act deals with ITC. It incorporates provision for grant of ITC under certain circumstances and, at the same time, also lays down the conditions in which such ITC would be admissible. It is in this context sub-section (5) of Section 19 is to be analysed. Subsection (5) stipulates certain contingencies where such ITC would not be admissible. There is no quarrel about clauses (a) and (b). We are only concerned with clause (c) of this sub-section which provides that ITC would not be allowed on the purchase of goods Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 42 of sold as such or used in the manufacture of other goods and sold in the course of inter-State trade or commerce falling under subsection (2) of Section 8 of the Central Sales Tax Act. To put it tersely, sale by a dealer who is registered in the State of Tamil Nadu which is effected outside the State of Tamil Nadu will qualify for ITC only when the said sale is made to a registered dealer. If it is to an unregistered dealer, it would not be admissible. This classification is based on intelligible differentia having a proper rationale. Insofar sales to unregistered dealers are concerned, that too situated outside the State of Tamil Nadu, the State would not have any mechanism to find out the genuineness of these sales. In essence, the State is putting the condition that ITC would be admissible when Form ‘C’ is given, which can be given only in those cases where sale is to a registered dealer. Prescribing such a condition in order to ensure that there is no evasion, has a rationale purpose and objective. Consideration of this aspect in the context of the very nature of the ITC scheme, which is a concession and not a right, would lead us to the conclusion that it was open to the Legislature to make such a provision. Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters. In view of the aforesaid discussion, we do not find any merit in the contentions raised by Mr. Giri. The judgments cited by him would have no application either.

45. One argument of Mr. Bagaria, however, needs little deeper consideration. He has argued that the appellant represented in his case is making sales only to the State of Karnataka. In such a case, there cannot be any apprehension about evasion of tax.

46. Section 2(15) defines the term ‘dealer’ and includes State Government as well by means of Explanation II which reads as under: “Explanation II: The Central Government or any State Government which, whether or not in the course of business, buy, sell, supply or distribute goods, directly or otherwise, for cash, or for deferred payment, or for commission, remuneration or other valuable consideration, shall be deemed to be a dealer for the purposes of this Act.”

47. Thus, wherever the State Government buys, sells, supplies or distribute goods, it shall be deemed to be the dealer for the purposes of TNVAT Act. At the same time, TNVAT Act does not require registration by the State Government inasmuch as Section 38 which deals with registration of dealers explicitly provides, under sub-section (8) thereof, that this provision shall Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 44 of not apply to any State Government or Central Government. A conjoint reading of the aforesaid two provisions would show that when a sale is made to the State of Karnataka, it is made to a dealer but that dealer is under no obligation to get itself registered under the TNVAT Act. Because of this exemption, no State Government does that and since it is not a registered dealer, it would not be in a position to issue any Form C. But for that, the genuineness of sales made to a State Government cannot be doubted. This situation puts those dealers who are making sales to the State Government in disadvantageous position, even when it is clear that there is no possibility of tax evasion as there cannot be any such apprehension in case of sales to the State Government. We may point out here that benefit of ITC is given whenever sale is made to a dealer outside State of Tamil Nadu and the said dealer is a registered dealer.

48. Having regard to the above, we are of the opinion that the provisions of Section 19(5)(c) are to be read down by construing that those dealers who are making sales exclusively to the other State Governments (i.e. outside the State of Tamil Nadu), the said States would be deemed as registered dealers for the purposes of availing benefits of ITC. Otherwise, in such a Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 45 of situation, it would be difficult to hold that test of reasonable classification is met in this limited context. It becomes unnecessary to deal with other contentions of Mr. Bagaria.

49. Result of the aforesaid discussion would be to uphold the judgment of the High Court with one rider, namely, that in those cases where a dealer makes sales exclusively to the other State Government(s), benefit of ITC would be allowed without insisting on the furnishing of Form ‘C’. However, in order to avail this benefit, a certificate from said the State Government to whom the supplies are made would be obtained by the dealer claiming ITC and submitted to the VAT authorities.

50. As a consequence, we allow Civil Appeal arising out of SLP(Civil) No. 9326 of 2015 to the extent indicated above and other appeals are dismissed with cost .............................................. J. (A.K. SIKRI) ............................................. J. (ASHOK BHUSHAN) NEW DELHI; OCTOBER 12, 2018 Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015] a/w connected matters Page 46 of