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Judgment
Rama Jois, J.-In all these writ petitions, the petitioners have questioned the constitutional validity of Section 3(2) of and Item 16-B of the Schedule to the Karnataka Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1979 (''the Act'' for short).
Brief "facts of the case, are these: The Act was enacted by the Legislature to provide for the levy of tax on entry of goods into local areas for consumption, use or sale therein. Section 3 is the charging section. The said section provides that there shall be levied and collected a tax on entry of the scheduled goods into a local area for consumption, use or sale therein at such rate not exceeding 2% ad valorem. Sub-section (2) of Section 3 provides that the tax levied under the Act in respect of entry of any scheduled goods into a local area shall be payable by the registered dealer or the dealer liable to get himself registered who brings or causes to be brought into the local area such goods, whether on his own account or on the account of his principal or takes delivery or is entitled to take delivery of such goods on such entry. Sub-section (7) of Section 2 defines ''scheduled goods'' as goods specified in the Schedule to the Act. By Act No. 38 of 1984, Item 18 had been introduced into the Act. That was replaced by Item 16-B by Amending Act No. 41/1986 with retrospective effect from 1st April, 1983. Item 18 (sic) which replaced it with effect from 1-4-1983 reads:
Entry 18 of the Schedule to the Act as inserted by Act No. 38 of 1984.18. All raw materials, component parts and any other inputs (e.g., processing or any other chemicals, solvents used in the solvent extraction or process, catalysts of and the like), which go into or may be used in the manufacture of an intermediate or finished product, which brought into local area by an industrial unit or any other dealer.Explanations I.-The expression ''Industrial Unit'' means a manufacturing unit, which falls within the definition of a ''factory'' under the Factories Act, 1948 (Central Act LXIII of 1948), but excludes,-(i) Handicrafts manufacturing units, (ii) Handloom weaving units and (iii) any other group or class of industries, which may with reference to their nature, competitiveness, employment potential or such other factors, be notified by the State Government.Explanations II.-"Raw materials, component parts and any other inputs" do not include sugar cane, cereals, oil seeds, pulses, timber or wood of any species, silk cocoons, raw, thrown or twisted silk or such other inputs as may be notified by the State Government for purposes of exemption from tax under Entry 18 from time to time, but include aluminium ingots and ores of all kinds."
Entry 16-B of the Schedule to the Act as inserted by Act No. 41 of 1986 with retrospective effect from 1st day of April, 1983."16-B. All raw materials, component parts and inputs which are used in the manufacture of an intermediate or finished product,-(i) When brought into local areas by an industrial unit; or(ii) When brought into local area by any dealer who, after having so brought, sells or supplies the same to an industrial unit located either within the same local area or outside it.Explanation I: The words ''Industrial Unit'' mean a manufacturing unit which falls within the definition of a ''factory'' under the Factories Act, 1948 (Central Act No. LXIII of 1948), but excludes,-(i) Handicrafts manufacturing units (ii) Handloom weaving units and (iii) any other group or class of industries which may with reference to their nature, competitiveness, employment potential or such other factors, be notified by the State Government.Explanation II: The words ''raw materials, component parts and inputs'' do not include agricultural produce, horticultural produce, timber or wood of any species, silk cocoons, raw, thrown or twisted silk, tobacco (whether raw or cured), cement, paper, electrical goods or such other inputs as may be notified by the State Government for purposes of exemption from tax under Item 16-B from time to time, but include aluminium ingots and ores of all kinds."
In all these writ petitions, the petitioners are the dealers of goods which are capable of being used as raw materials or as component parts or inputs, in the manufacture of an intermediate or finished product. In view of Section 3 read with Item 16-B they are liable to pay tax at the prescribed rate if they are brought into any local area and they are sold to an industrial unit located within the same local area or outside it, to such of the industrial units which fall within the Explanation-I to the Item 16-B. Only such of the raw materials, components and inputs which are excluded by Explanation-II below Item 16-B are not liable to tax.
As common questions of law arise for consideration in all these writ petitions, they were heard together and are being disposed of by a common order.
Sriyuths K. Srinivasan, G. Sarangan, B.P. Gandhi, Indra Kumar and R.V. Prasad, learned counsel, addressed arguments on behalf of the petitioners. Sri. M.R. Achar, learned Government Advocate addressed arguments on behalf of the State.
The contentions urged by the petitioners are as follow:
(1) Item 16-B of the Schedule to the Act is liable to be struck down on the ground of vagueness.
(2) Item 16-B is violative of Article 14 of the Constitution and therefore void.
(3) Item 16-B in so far it gives retrospective effect to the levy is violative of Article 14 of the Constitution.
(4) Item 16-B in so far it levies tax even in respect of sales to industrial units located outside the local area is ultra vires the power of the Legislature under Article 246 read with Entry 52 of List II of the Seventh Schedule to the Constitution of India.
In support of the first contention, the learned counsel for the petitioners submitted as follow: Several goods are specified vide Items 1 to 16 of the Schedule to the Act. For instance Item 3 is sugar and it is difficult to say whether sugar falls under Item 3 or Item 16-B, for the reason the sugar is capable of being consumed directly as sugar and it is also capable of being used as a raw material in the manufacture of confectionary items. Therefore, Item 16-B is vague and is therefore liable to be struck down on the ground of vagueness. In support of this contention, the learned counsel relied on the Judgment of the Supreme Court in M/s. Govind Saran Ganga Saran v Commissioner of Sales Tax. The relevant portion of the Judgment in which the Supreme Court held unless the point or levy of tax was specified by the Legislature or its delegate compliance to the law was not possible, reads:
"5. In the instant case, we are concerned with the taxation of goods which under Section 14 of the Central Sales Tax Act have been declared to be of special importance in inter-State trade or commerce. Where the turnover of such goods is subjected to tax under the Sales Tax Law of a State, Section 15 prescribes the maximum rate at which such tax may be imposed and requires that such tax shall not be levied at more than one point. The two conditions have been imposed in order to ensure that inter-State trade or commerce in such goods is not hampered by heavy taxation within the State occasioned by an excessive rate of tax or by multi point taxation. Section 15 enacts restrictions and conditions which are essential to the validity of an impost by the State on such goods. If either of the two conditions are not satisfied, the impost will be invalid. Now in order that tax should not be levied at more than one stage it is imperative that the Sales Tax Law of the State should specify either expressly or by necessary implication the single point at which the tax may be levied. Alternatively, it may empower a statutory authority to prescribe such single point for the purpose. Where such point is not prescribed, either by the statute or by the statutory delegate, no compliance is possible with Section 15. The single point at which the tax may be imposed must be a definite ascertainable point so that both the dealer and the sales tax authorities may know clearly the point at which the tax is to be levied."
The learned counsel for the petitioners also relied on the Judgment of the Calcutta High Court in Netai Mohan Saha v State of West Bengal in which the Calcutta High Court held that an entry like "spices" for levy of tax without specifying the commodities falling under that entry was liable to be struck down as vague. Relying on these decisions, the learned counsel submitted that Item 16-B was liable to be struck down on the ground of vagueness.
As against this, learned Government Advocate submitted that there was no substance in the contention of the petitioners that Item 16-B was vague. He submitted that only such of the goods which do not fall under any specific entry would fall under Item 16-B. He maintained that if a particular item of goods falls under specific entry, notwithstanding the fact that the same might be used as a raw material in the manufacture of another goods, the said goods is liable to be taxed under specific entry and not under Item No. 16-B. It is not the case of the petitioner that goods falling under specific entry are being taxed under Item 16-B. If it is done in any given case, it would be contrary to the Act, as submitted by the learned Government Advocate. Therefore, we are unable to agree that there is vagueness in the levy, as was the position in the case of M/s. Govind Saran Ganga Saran or as in the Calcutta case. The point at which the tax should be levied is specified. The words raw materials, component parts and inputs which go into the manufacture of intermediate or finished products is also intelligible and well understood terms under Sales Tax Laws. Therefore, we find no substance in the contention. We reject it.
The second contention urged for the petitioners was that Item 16-B was violative of Article 14 of the Constitution, for the reason that in view of its wording, when any goods which happens to be a raw material or component part or an input used in the manufacture of an intermediate or finished product, is sold to an industrial unit directly, it becomes liable to tax; whereas if the same item is sold to another dealer in the same locality and he in turn sells it to an industrial unit, there will be no liability to tax and therefore the levy was violative of Article 14 of the Constitution.
The learned Government Advocate also submitted that in the matter of fiscal policy, the Legislature has got very wide discretion and therefore it was competent for the Legislature to select the point of levy as well as the persons on whom tax should be levied. In support of this contention, the learned counsel relied on the Judgment of the Supreme Court in Twyford Tea Co. Ltd. v Kerala State. The relevant portion of the Judgment reads:
"15. We may now state that principles on which the present case must be decided. These principles have been stated earlier but they often ignored when the question of the application of Article 14 arises. One principle on which our Courts (as indeed the Supreme Court in the United States) have always acted, is nowhere better stated than by willis in his"Constitutional Law"page 587. This is how he put it;
"A State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably... The Supreme Court has been practical and has permitted a very wide latitude in classification for taxation."
This principle was approved by this Court in East India Tobacco Co. v State of Andhra Pradesh, (1963) 1 SCR 404 at p. 410: AIR 1962 SC 1733 at p. 1735. Applying it, the Court observed:
"If a State can validly pick and choose one commodity for taxation and that is not open to attack under Article 14, the same result must follow when the State picks out one category of goods and subjects it to taxation."
This indicates a wide range of selection and freedom in appraisal not only in the objects of taxation and the manner of taxation but also in the determination of the rate or rates applicable. If production must always be taken into account there will have to be a settlement for every year and the tax would become a kind of income-tax."
Relying on the above decision, the learned counsel submitted that when the Legislature has in exercise of its wide discretion enacted the provision providing for levy of tax on raw materials sold to factories for manufacture of goods, it cannot be said that the provision was violative of Article 14 of the Constitution.
The learned counsel for the petitioners submitted that in a given case a dealer who brings any raw material or component parts or inputs into a local area which attracts levy under Item 16-B could successfully avoid the entry tax by selling those goods to another dealer, who in turn would sell the goods to an industrial unit and thereby avoid payment of tax under the Act, whereas a dealer who directly sells such goods to an industrialist and therefore the provision was violative of Article 14. The learned counsel for the State submitted that the submission made by the learned counsel for the petitioners was based upon a circumstance which is not at all likely to occur for the reason no dealer would resort to sell a raw material or a component part or an input through another dealer to an industrial unit just to avoid the entry tax which is only 11/2%, for the reason such transaction would incur the liability to pay sales tax which was much higher.
As held by the Supreme Court in Twyford Tea Co. Ltd. in matters of fiscal policy the Legislature enjoys very wide discretion and the fact that specified transactions or points are chosen by the Legislature for levy of the tax is no ground to hold that the law is violative of Article 14. Further, there is also considerable force in the submission of the learned Government Advocate that it is very unlikely that a dealer would resort to the selling of a raw material to an industrial unit within the local area through another dealer so as to avoid entry tax as he would be incurring a higher liability of payment of sales tax under the Sales Tax Act. The learned counsel for the petitioners were also not in a position to furnish satisfactory answer to the above submission made by the learned Government Advocate. In the circumstances, we find no substance in the second contention also.
The third contention of the petitioner is that having regard to the wordings of Item 16-B past transactions for nearly 3 years prior to the enacting of the Amendment Act 41/1986 had been brought to tax and as the petitioners are not in a position to pass on the liability of tax to the buyers of the goods, the burden of tax falls on them and throwing of such burden was arbitrary and also unreasonable, and therefore violative of Articles 14 and 19(1)(g) of the Constitution of India.
The learned Government Advocate in reply submitted that actually there was Item 18 which had been inserted by Act No. 38/1984 itself under which entry tax was levied on raw materials, component parts and other inputs as can be seen from Item 18, the contents of which are extracted earlier. The learned Government Advocate submitted that all that was done by Act 41/1986 was that the same Entry 18 was re-numbered as Item 16-B with slight modification. The learned Government Advocate pointed out that Item 18 which itself had been in force from 1-4-1983 and which was replaced by Item 16-B with effect from the same day, had been the subject matter of challenge in the case reported in Jyothi Home Industries v State of Karnataka and it was held by this Court at page 219 that Item 16-B which came into force during the pendency of that case was more beneficial to dealers. Relevant portion of the Judgment reads:
"Amending Act 38 of 1984 introduces two new items in the Schedule. They are Items 17 and 18, bringing, under Item 17,"all industrial packaging materials"and under Item 18"all raw materials, component parts and any other inputs (e.g., processing or any other chemical solvents used in the solvent extraction or process, catalysts of and the like), which go into or may be used in the manufacture of an intermediate or finished product, when brought into local areas by an industrial unit or any other dealer", to tax. Some contentions are raised with respect to the permissibility of such omnibus-not merely generic-description of goods in the Schedule. However, there is one development in regard to this contention. Amending Act 32 of 1986, by which Items 16-A and 16-B were substituted in place of the said Items 17 and 18, has been passed by both Houses of Legislature and has received the assent of the President on 20th January, 1986. The amended provisions are substantially beneficial to the dealers and also take away the grievances urged against Entries 17 and 18. The contentions of the petitioners in this behalf do hot, therefore, survive."
As can be seen from the above decision, that Entry 16-B substituted an already existing Entry 18, and further the Division Bench held the amended provisions were substantially beneficial. In view of the above decision, we find no substance in the third contention also.
Elaborating the last contention, the learned counsel for the petitioners submitted as follows: Entry 52 of List III of the Seventh Schedule to the Constitution of India reads:
"52. Taxes on the entry of goods into a local area for consumption, use or sale therein."
It is under the said entry, under the various laws providing for the establishment of local authorities such as Municipal Councils and Corporations by the respective State Legislatures, the concerned local authorities had been empowered to levy octroi on entry of goods into a local area for consumption, use or sale therein. The scope of the said entry has been the subject matter of interpretation by the Supreme Court in various decisions. In those decisions, the Supreme Court has clearly held that the octroi could be collected only in respect of goods brought into a local area for use, consumption or sale. The question as to whether under those laws octroi could be collected even in respect of sale of goods brought within a local area and sold within the local area though not for use or consumption therein but for re-transport outside that local area for sale or use or consumption in such other local area had been the subject matter of consideration and the Supreme Court held that such a levy was outside the scope of Entry 52. Therefore, as the Entry Tax Act is also a Legislation falling under Entry 52 of State List no entry tax could be levied in respect of goods brought within the local area but sold or being transported outside that local area for use or consumption in such areas.
The learned counsel for the petitioners in particular relied on the latest Judgment of the Supreme Court in Municipal Council, Jodhpur v Parekh Automobiles, (1990)32 STL 26. In the said decision the Supreme Court, interpreting Entry 52 of List III held that in respect of the goods brought within a local area even if sale takes place within the local area, unless such sale of goods is for use or consumption within the local area there can be no levy of octroi or tax under that Entry. That being the scope of Entry 52 itself as expounded by the Supreme Court, the petitioners contended that it was not competent for the Legislature to levy entry tax even in respect of raw materials brought within a local area and sold to an industrial unit outside the local area as the Act is also a law falling under Entry 52 of State List.
Sri M.R. Achar, learned Government Advocate, however, tried to maintain that in view of the ratio of the decision of the Supreme Court in Burmah Shell Oil Storage and Distributing Co. of India Ltd., Belgaum v Belgaum Borough Municipality, Belgaum, AIR 1963 SC 906, even if the goods were sold for re-exporting the same outside the local area, so long as the sale takes place within the local area, octroi could be levied and consequently entry tax being a tax similar to octroi, it could also be levied and it was within the Legislative competence. If the ratio of the decision in Burmah Shell Company''s case supports any such proposition, the contention of the learned Government Advocate would have been unexceptionable. But in the latest case of Jodhpur Municipality on which the petitioners rely, the Supreme Court explaining the ratio in Bunnah Shell Co., has clearly held that a tax falling under Entry 52 of List III of the Seventh Schedule to the Constitution cannot be levied in respect of goods brought within a local area though sold within the same local area, if such sale happens to be for the purpose of re-export of the goods outside such local area. That principle has been applied by us in relation to levy of tax under this very Act in W.P. No. 1886 of 1986 and connected matters (M/s. Siddhagiri and Others v The Entry Tax Officer, decided on 31-10-1990) and the similar contention urged for the State was rejected. The relevant portion of that Judgment reads:
"8. The learned counsel for the petitioners, however, relied on a subsequent Judgment of the Supreme Court in Municipal Council, Jodhpur v Parekh Automobiles Ltd., (1990) 32 STL 26 (SC). The learned counsel pointed out that in this Judgment, the Supreme Court has enunciated the law on the precise question arising for consideration in this case in clear terms. They pointed out that in the said case also the contention of the respondents was similar to the petitioners in these cases, in that they contended that the goods brought by them within Jodhpur City and sold within Jodhpur City did not attract the levy of octroi by the Jodhpur Municipality, for the reason that the sale was not intended for the use or consumption of the goods but was intended for being transported outside the Jodhpur Municipal area for resale and therefore the tax was not leviable, and that the said contention was upheld by the Supreme Court. The relevant portion of the Judgment reads:
"The High Court, however, rested on the view that even if the sale took place within the octroi limits of Jodhpur Municipal Council for the use or consumption of the ultimate consumer outside the octroi limits of Jodhpur then the taxable event did not take place in the octroi limits of Jodhpur. In those circumstances, the High Court held that the Municipal Council had no jurisdiction to levy octroi on the goods so exported. In view of the facts and circumstances of the case, the High Court was right. The High Court issued an order of restraint. It directed that the Municipal Council be restrained by way of mandamus not to levy octroi on the goods exported by the respondent No. 2 for the use of the ultimate user outside the octroi limits of Municipal Council even if the sale took place within the octroi limits of Municipal Council, Jodhpur."
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"The sine quo non for levy of octroi is consumption, according to this Court. Therefore, no octroi be levied in respect of goods which were re-exported for consumption or use outside the Municipal limits, the Division Bench held. In that view of the matter, the Division Bench of the High Court held that in view of the decisions of this Court, no octroi was leviable on petroleum products re-exported to the retail outlets situated outside the municipal limits for consumption and use outside the limits. In our opinion, the Division Bench is right in so far as it held as aforesaid."
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"The learned Single Judge in the High Court did not permit the petitioners to raise the question that the sale took place only outside the municipal limits of Jodhpur since that involved an investigation into facts which could not be undertaken in a writ petition and proceeded on the footing that the sale of the products in question took place within the limits of Jodhpur. He, however, accepted the contention of IOC and the dealer that even if the sale is taken to have been effected within Jodhpur, no octroi was leviable as admittedly the goods had been sold in Jodhpur only for their onward transmission for use and consumption in Dangia was outside the Municipal limits. The Division Bench of the High Court has also approved of this conclusion and, in our opinion, rightly. As pointed out by my learned brother in his detailed discussion on this aspect, this issue is covered by the two decisions of the Supreme Court which have already been referred to. I have nothing to add, so far as this part of the case is concerned."
"9. In our opinion, the ratio of the Judgment in Municipal Council, Jodhpur''s case fully covers the question arising for consideration in these cases."
This decision is a complete answer to the contention of the learned Government Advocate.
The learned Government Advocate submitted that if in view of the decision of the Supreme Court in Jodhpur Municipality''s case and also the recent decision of this Court in W. P. No. 1886 of 1986 if we were to take the view that entry tax being a law enacted under Entry 58 of List III of the Seventh Schedule to the Constitution, it was not competent for the Legislature to levy tax even in respect of the sale of raw material brought within an area even when it is sold resulting in re-export of the goods outside the local area, only that part of Item 16-B which provides for levy of entry tax even when the raw materials, component parts and inputs are sold or supplied to an industrial unit located outside the local area alone is liable to be struck down and that part of the item was clearly severable from the rest of the Entry. The learned counsel for the petitioners agree that the offending portion of Item 16-B is severable and therefore only that portion alone is liable to be struck down. We accept the submission made by the learned counsel on both sides and hold that only the offending portion alone should be declared invalid. Entry 16-B as it stands reads:
"16-B. All raw materials, component parts and inputs which are used in the manufacture of an intermediate or finished product,- (i) when brought into local areas by an industrial unit; or (ii) when brought into local areas by any dealer who, after having so brought, sells or supplies the same to an industrial unit located either within the same local area or outside it."
Only the last Italic words ''or outside it'' are beyond the Legislative competence and as a result of our holding that these words make Entry 16-B unconstitutional, the word ''either'' becomes redundant and therefore has to go along with the offending portion.
In the result, we make the following order:
(i) The writ petitions are partly allowed.
(ii) Entry 16-B of the Act to the extent indicated in paragraph 18 of this order is struck down. The Entry as a result of striking down the offending portion reads:
"16-B. All raw materials, component parts and inputs which are used in the manufacture of an intermediate or finished product,- (i) when brought into local areas by an industrial unit; or (ii) when brought into local area by any dealer who, after having so brought, sells or supplies the same to an industrial unit located within the same local area."
iii) In all other respects the writ petitions are dismissed.