A.S.K.Sweets Pvt. Ltd. & Empire Distributors v. Additional Sales Tax Officer, Sales Tax Office, Ernakulam; Secretary (Taxes), Board of Revenue; State of Kerala

IN THE HIGH COURT OF KERALA AT ERNAKULAM THE HONOURABLE MR. JUSTICE P.R.RAMAN WEDNESDAY, THE 19TH MARCH 2008 / 29TH PHALGUNA 1929 ## OP.No. 5994 of 2003(L) ## PETITIONER: 1. A.S.K.SWEETS PVT. LTD., 14/16, BIG BAZAAR STREET, ANANTHANGI, PUDUKOTTAI DISTRICT TAMIL NADU 614616, REPRESENTED BY ITS MANAGING DIRECTOR, SRI. R.RAMADURAI. 2. EMPIRE DISTRIBUTORS, NARAYANAN ASAN ROAD KOCHI, REPRESENTED BY ITS MANAGING PARTNER, SRI. RONY.A.PALLAN. BY ADV. SRI.E.K.NANDAKUMAR A.K.JAYASANKAR NAMBIAR SRI.ANIL D. NAIR SMT.PRIYA MAHESH SMT.PRIYA MANJOORAN RESPONDENTS: 1. THE ADDITIONAL SALES TAX OFFICER, SALES TAX OFFICE, 1 CIRCLE, ERNAKULAM. 2. SECRETARY (TAXES), BOARD OF REVENUE, TRIVANDRUM. 3. STATE OF KERALA, REPRESENTED BY CHIEF SECRETARY TO GOVERNMENT, SECRETARIAT, TRIVANDRUM. BY GOVERNMENT PLEADER SRI,. R. LAKSHMINARAYANAN. THIS ORIGINAL PETITION HAVING BEEN FINALLY HEARD ON 17903/2008, THE COURT ON THE SAME DAY, DELIVERED THE FOLLOWING: ## **O.P. NO. 5994/2003** ## **APPENDIX** ORDER ON I.A. NOS. 4435 & 16234/2003, C.M.P. NO. 10494/2003, I.A. NO. 6137/2004, I.A. NO. 2952/2007 & I.A. NO. 2951/2007 ## // DISMISSED // 19.3.2008. P.R. RAMAN, JUDGE. PETITIONERS' EXHIBITS: EXT.P1 TRUE COPY OF CERTIFICATE OF REGISTRATION DATED 9.7.2001 OF THE DIRECTOR OF INDUSTRIES, PUDUKKOTTAI. EXT.P2 TRUE COPY OF NOTIFICATION NO. 1728 OF 1993 AS AMENDED IN O.P. NO. 435 OF 1998. EXT.P3 TRUE COPY OF JUDGMENT DATED 13.11.1998 OF THE KERALA HIGH COURT IN O.P. NO. 435/1998. EXT.P4 TRUE COPY OF NOTIFICATION NO. 1091/1999 AS AMENDED. EXT.P5 TRUE COPY OF NOTIICE DATED 6.1.2003 RECEIVED BY THE 2ND PETITIONER FROM THE 1ST RESPONDENT. EXT.P6 A TRUE COPY OF THE ASSESSMENT ORDER DATED 31.3.2003 RECEIVED BY THE 2ND PETITIONER ON 2.6.2003 ISSUED BY THE 1ST RESPONDENT. EXT.P7 TRUE COPY OF THE ASSESSMENT ORDER DATED 28.2.2004. // TRUE COPY // P.S. TO JUDGE. knc/- P.R. RAMAN, J. = = = = = = = = = = O.P. NO. 5994 OF 2003 = = = = = = = = = = = = = ## DATED THIS, THE 19TH DAY OF MARCH, 2008. ## J U D G M E N T First petitioner is a private limited company who is also registered as a small scale industrial unit in Tamilnadu. They are manufacturing confectionery items in their factory at Pudukkotai Road, Alainilai, Tamil Nadu. The second petitioner is a registered partnership firm through whom the confectionery items manufactured by the first petitioner is sold within the State as consignment agent. It is the first sale effected by the first petitioner within the State of Kerala. The item manufactured by the first petitioner and sold through the second petitioner is an item covered by Entry 45 of the First Schedule to the Kerala General Sales Tax Act and the rate of tax is 12% at the point of first sale in the State by a dealer liable to tax. Petitioner seeks to challenge Ext. P4 notification issued by the Government of Kerala under Section 10 of the Kerala General Sales Tax Act to the limited extent of the discrimination said to have been meted out to the Small Scale Industrial Units registered outside Kerala in the matter of levy of tax on confectioneries. As per Ext.P4 notification, Government _**O.P. 5994/2003**_ :2: granted concessional rate of tax of 8% in respect of such goods by dealers who are Small Scale Industrial Units and which are registered in State of Kerala. In other words, in the case of the first petitioner, they being a manufacturer and Small Scale Industrial Unit registered in Tamil Nadu, are denied the benefit of levy of tax at 8% from the normal rate of 12% only for the reason that they are not small scale industrial unit registered with the State of Kerala, though the manufacturing items are sold within the State of Kerala as in the case of any other unit in the State. Petitioner had been paying tax at 8% and when demands were made for differential rate of tax of 4% he approached this Court by filing this writ petition and the demands have been stayed by this Court by passing interim orders. 2. The State had earlier issued Ext.P2 by which it granted concessional rate of duties to confectionery items manufactured by small scale industrial units with the State. That was the subject matter of challenge in O.P. 435/1998 and by Ext.P3 judgment, a learned Judge of this Court, following the decision in **Sree Mahavir Oil Mills v. State of J&K** ((1996) 11 SCC 39) declared that all the small scale industrial units, irrespective of place of manufacturing, are entitled for the same treatment and denial of the same rate of tax to small scale industrial units having factories outside Kerala is a discrimination and violative of Article 301 & _**O.P. 5994/2003**_ :3: 304(a) of the Constitution. The notification impugned therein was accordingly quashed to the extent of granting concessional rate of sales tax at 4% on biscuits manufactured by the small scale industrial units in Kerala alone and it was declared that the concessional rate is available to all small scale industrial units manufacturing biscuits outside Kerala also. The said judgment has become final since no appeal was filed by the State therefrom. 3. According to the petitioner, the notification Ext.P4 which is impugned in this writ petition is similar to the notification earlier issued - Ext.P2 and hence the same interpretation and declaration as was done by Ext.P3 judgment is applicable. Placing reliance on the decision in _**Sree Mahavir Oil Mills** '_ case ((1996) 11 SCC 39) it is contended that the State cannot discriminate the units based on place of manufacturing and can not differentiate in the matter of levy of tax on the ground that the dealer is a manufacturer outside the State, as it will violate Article 301 and 304(a) of the Constitution of India. 4. The State, on the other hand, would support the notification placing reliance on the decision reported in _**Video Electronics Pvt. LTD. v. State of Punjab**_ (1990 (3) SCC 87). It was also contended by the State that normally, the rate of tax in respect of goods in question is the same at 12% irrespective of whether the goods are manufactured within the State or _**O.P. 5994/2003**_ :4: elsewhere. But an exemption was granted in favour of the small scale industrial manufacturing units within the State of Kerala by giving reduction in the rate of tax to 8% from the normal rate of 12% which exemption was not extended to the manufacturing units outside the State. According to them, the object sought to be achieved by the notification is to promote manufacturing units within the State of Kerala. It is also contended that in the matter of exemption wide discretion is vested with the authority and unless the differentiation sought to be made is irrational it cannot be said to be arbitrary and discriminatory. 5. I have heard both sides. By Ext.P2, the earlier notification issued by the State under Section 10 of the Kerala General Sales tax Act, the Government of Kerala made a reduction in the rate of tax payable under the Kerala General Sales Tax Act on the sale or purchase as the case may be of the goods specified thereunder from the original rate to the reduced rate as specified therein and for the period mentioned. On a reading of Ext.P2, item (6) it could be seen that for biscuits manufactured by small scale industrial units within the State for a specified period as also confectionery manufactured by them within the State, the rate of tax was reduced to 4%. Therefore, the notification in para materia is the same in the matter of reduction of tax in the case of small scale industrial units and the _**O.P. 5994/2003**_ :5: differentiation brought out by the notification is based on the place of manufacture, since only small scale industrial units which are manufacturing the commodities within the State are entitled for concessional rate of tax as provided in the notification. This was challenged before this Court and while considering the matter, the learned Single Judge made reference to the decision of the apex court in Vedio _'_ Electronics' case ((1990) 3 SC 87) and _**Sree Mahavir Oil Mills**_ case ((1996) 11 SCC 39) and declared that the exemption granted to the local manufacturers of products of Village Industries is violative of Articles 301 and 304(a) of the Constitution of India. Though the stand of the Government was that the restriction is only for a specified period, that too, for a class of small scale industrial units, this Court did not accept the same. 6. The apex court, in _**Video Electronics Pvt. Ltd's**_ case was considering a situation where, by notification issued by the State of Punjab under the Punjab General Sales Tax Act, reduced the sales tax payable by the electronic manufacturing unit existing in Punjab in cases of electronic goods specified therein within the State. As per the notification so issued by the State of Punjab, the rate of sales tax payable by an electronic manufacturing unit existing in Punjab in case of electronic goods specified within the State will be 1%. Thus the rate of sales tax was brought down _**O.P. 5994/2003**_ :6: from 10% to 1% while for similar goods manufactured outside the State and sold within the State, the rate of sales tax remained 10% , of course subject to additional surcharge. Though it may appear that the case on hand is similar to one decided in that case, on a consideration of the dictum laid down by the apex court in the said decision, it could be seen that a distinction was made on facts to justify the notification therein. It is stated in para 38 as follows: "In the instant writ petition in view of the terms of the notification impugned and the facts and the circumstances stated in the affidavit of the State Government as well as the intervenors, Goa and Pondicherry, being comparatively underdeveloped in electronic industry, in our opinion, it cannot be said that there was violation of either Part XIII of the Constitution or Art. 14 of the Constitution. . . . . . . . . . . . . ." 7. Thus, it could be seen that it was a specified item of goods in respect of which a differentiation was sought to be made out by notification impugned therein and considering the fact that the States referred to therein were underdeveloped in electronic industry, the notification was upheld. 8. The situation is however not parallel herein. It is not any specified goods in respect of which any differentiation is sought to be made out. Petitioner is indisputably a small scale industry though registered _**O.P. 5994/2003**_ **==> picture [14 x 9] intentionally omitted <==** outside the State. The notification seeks to differentiate between a small scale industrial unit manufacturing goods within the State, whichever be the goods. Therefore, it is not confined to any particular item of goods nor is it confined to any specific period. The apex court, while considering a similar notification had adverted to this aspect of the matter in the subsequent decision in _**Sree Mahavir Oil Mills v. State of J & K**_ ((1996) 11 SCC 39). In that case, the apex court was considering a similar situation where the manufacturers in edible oil within the State of Jammu & Kashmir were all treated as small scale industrial unit except one. But by the subsequent notification enhancing the exemption limit, that unit also fall within the ambit of the exemption notification, thereby there was no other industry manufacturing edible oil within Jammu & Kashmir. By notification issued, it is stated that the manufacturers of edible oil in other States were obliged to pay sales tax on the sale effected by them in the State of Jammu & Kashmir at the rate of 8% while the local manufacturers were exempted fully from payment of such tax. Therefore, virtually, the discrimination meted out was based on the place of manufacture. The apex court referred to the earlier decisions on the point including the one in **M/s. Video Electronics Pvt. Ltd.** 's case (supra) on which strong reliance was _**O.P. 5994/2003**_ :8: placed by the State of Jammu & Kashmir to justify the notification. But the apex court held that all the observations made in the said judgment were made to justify the grant of incentives, subsidies and exemption granted to new industries of a specified type and for a short period. They were not meant to nor can they be read as justifying a blanket exemption to all small scale industries in the State irrespective of their date of establishment. The limited exception created in _**Video Electronic**_ s' case does not help the State therein for the reason that exemption concerned therein is neither confined to "new industries", nor is circumscribed by other conditions of the nature stipulated in the Uttar Pradesh notification. Ultimately, it was held as follows: "The ratio of the decisions of the Supreme Court on Article 304(a) is that the States are certainly free to exercise the power to levy taxes on goods imported from other States/Union Territories but this freedom, or power, shall not be so exercised as to bring about a discrimination between the imported goods and the similar goods manufactured or produced in that State. The clause deals only with discrimination by means of taxation; it prohibits it. The prohibition cannot be extended beyond the power of taxation. It means in the immediate context that States are free to encourage and promote the establishment and growth of industries within their States by all such means as they think proper but they cannot, in that process, subject the goods imported from other States to a discriminatory rate of taxation. ie., a higher rate of sales tax vis-a-vis similar goods manufactured/produced within that State _**O.P. 5994/2003**_ :9: ## and sold within that State. Prohibition is against discriminatory taxation by the States. It matters not how this discrimination is brought about. Therefore, it must be held that by exempting unconditionally the edible oil produced within the State of Jammu and Kashmir altogether from sales tax, even if it is for a period of ten years, while subjecting the edible oil produced in other States to sales tax at eight per cent, the State of Jammu and Kashmir has brought about discrimination by taxation prohibited by Article 304 (a) of the Constitution." 9. Accordingly, the apex court declared that the exemption notification is violative of the provisions contained in Articles 301 and 304 (a) of the Constitution. 10. In an unreported decision of this Court in _**Tamil Nadu Khadi & Village Industries Board, Kuralagam v. State of Kerala & Others**_ (O.P. 5050/1992) a learned Judge of this Court, after following the decision in _**Sree Mahavir Oil Mill's**_ case (supra) and after referring to the various other decisions of the apex court, declared that the exemption granted by notification of a similar nature to local manufacturers of products of village industries or the said products sold by the only institutions recognized by the Kerala Khadi & Village Industries Board constituted under the said Act is violative of the provisions contained in Articles 301 and 304(a) of the Constitution of India. _**O.P. 5994/2003**_ **==> picture [20 x 9] intentionally omitted <==** 10. In the aforesaid circumstances, I declare that Entry 6 of Schedule II of Ext.P4 Notification (No. 1091/1999) in so far as it denies the concessional rate of tax to goods manufactured by Small Scale Industrial Units outside the State of Kerala is unconstitutional and that the concessional rate of tax at 8% provided under Entry 6 of Schedule II to Ext.P4 Notification is available to all small scale industrial units selling their goods in the State of Kerala irrespective of registration and/or manufacture in the State of Kerala. The original petition is allowed as above. P.R. RAMAN, (JUDGE) knc/- _**O.P. 5994/2003**_ :11: P.R. RAMAN, J. = = = = = = = = O.P. NO. 5994/2003 = = = = = = = = = = J U D G M E N T 19.3.2008.