Does the 'first proviso' to Section 8 (a) (ii) of the KVAT Act (stipulating compounding rate of tax as '4%' of the whole contract amount in the case of works contract covered by Section 8 (a) (ii) of the Act, if the work contract is awarded by the Government of Kerala, Kerala Water Authority or Local Authorities, drawing a distinction from the main provision i.e. 8 (a) (ii) where the rate of tax to be satisfied by the work contractors doing 'private works' with a taxable rate of only '3 %') is based on any reasonable classification, forms the legal point to be sorted out in these writ petitions. The factual dispute is with regard to the notices issued, proposing to effect fresh assessments under Section 25(1) of the KVAT Act and the orders passed thereunder or the proceedings proposing to impose penalty under Section 67 (1) of the Act or the orders passed in this regard, as raised in some of the cases. The facts and figures are referred to as given in W.P(C) No. 32537 of 2010, treating the same as the lead case for convenience of reference.
2. Case of the petitioner is that, it is a partnership firm engaged in the business of executing civil works and was a registered dealer under the KGST Act from 1993. It is continuing as a registered dealer under the KVAT Act. Most of the works being undertaken are construction of roads and bridges for the State of Kerala, allegedly by way of sub-contract under the principal contractor to whom the work has been awarded by the State of Kerala or the Departments as above.
3. By virtue of the enabling provision, particularly under Section 8 of the KVAT Act, for payment of tax at compounded rate, instead of undergoing the ordeal of normal course and proceedings under Section 6 of the KVAT Act, the petitioner opted to satisfy tax at the compounded rate. Exts. P1 and P2 are the orders passed by the second respondent permitting to pay compounded tax under Section 8 (a) [at 3 % + Cess] and the petitioner satisfied the tax accordingly.
4. The benefit of compounding was originally available only to dealers, who were not having CST registration, and were not importers as envisaged under the Act. The petitioner however had applied for and obtained CST registration. This according to the petitioner was only to bring some essential goods from outside the State, to complete the work on time and the quantum involved was abysmally law. Since the petitioner found that there was a chance to lose the benefit of compounding, branding the petitioner as an importer, necessary application was preferred before the second respondent for cancellation of registration under the CST Act. After considering the same, the CST registration was cancelled with effect from the end of the financial year on 31.03.2011 as per order dated 30.08.2010. It is stated that, no interstate sale or purchase has been effected by the petitioner, after submitting the application in this regard on 13.08.2010.
5. While so, the petitioner was served with Ext. P5 notice dated 15.09.2010 under Section 25(1) of the KVAT Act pointing out that, quarterly return for the quarter ended 31.03.2010 was not acceptable as correct and complete, for the reason that the petitioner was liable to pay tax @ '4 %' for contract receipts, thus calling for objection, if any. Meanwhile, the petitioner was served with Ext. P4 revised permission to compound the tax under Section 8(a) (ii) in respect of the year 2010 - '11, wherein rate of tax was split up, showing '4 %' + Cess in respect of the works awarded by the Government, Water Authority and the Government Local Body and @ '3%' in respect of the other one. Then the petitioner was served with Ext. P6 notice dated 22.09.2010 demanding the balance tax payable, working out the figures, reckoning the rate as 4%, instead of 3%, and the CESS. Since the grievance projected before the concerned Minister by way of Ext. P7 dated 15.10.2010 was not acted upon, the petitioner rushed to this Court apprehending coercive steps, mainly seeking for a declaration that the 'first proviso' to Section 8 (a) (ii) is illegal and ultravires to Article 14 of the Constitution of India; praying for other incidental reliefs as well; including to set aside the impugned notices/orders/proceedings. Almost similar pleadings and prayers have been raised by the petitioners in the other cases as well.
6. The respondents have filed a counter affidavit seeking to sustain the course and proceedings, contending inter alia, that the differential treatment in the case of the contractors like the petitioners, is on the basis of a conscious exercise. It is conceded that the rate of tax was reduced in the case of 'private contractors'
under Section 8 (a) (ii) (other than those in the first proviso), who are required to satisfy only '3 %' of the contract amount, as specified therein. The rate in the case of such contractors was actually much on the higher side, earlier. It was after considering the grievance projected by the Contractors' Association and others concerned, referring to the recession in the field of operation, particularly, in relation to flat construction and the adverse circumstances prevailing, that the Government thought it fit to reduce the rate in their case, bringing it down to '3%'. The factual position/sequence of events in this regard is discernible from the Budget Speech 2008-09 [(2008) 16 KTR]. It is also stated that the contractor who has opted for payment of tax on the compounded rate cannot challenge it thereafter; since there is no compulsion upon the contractor to opt for this method of taxation under Section 8 (a) of the Act, which is only a simplified procedure to meet the tax obligation and not a charging provision by itself. It is further pointed out that, on coming across the mistake in Ext. P2 compounding order, it was sought to be rectified by the second respondent, by issuing notice dated 30.08.2010 under Section 66 of the KVAT Act and accordingly, Ext. P4 rectified order was passed, followed by demand. The mistake came to the notice of the authorities concerned only on verification of records and as such, the respondents are justified in proceeding with further steps for realization of the differential amount.
7. The case of the petitioners was mainly advanced by Mr.
Raju Joseph, the learned senior counsel, who was supported by the learned counsel appearing for the other petitioners as well. The submission on behalf of the respondents were made by Mr.Bobby John Pulickaparambil, the learned Government Pleader.
8. The learned senior counsel appearing for the petitioners points out that, all throughout, persons like the petitioners (hereinafter called as 'Government contractors') were required to satisfy only a lesser rate of tax, on compounding, than the rate payable by the 'private contractors'. This was on the basis of a conscious decision taken by the Legislature, particularly, for the fact that works being assigned/awarded to the persons like the petitioners were more in relation to public good/public interest and the owner/awarder was none other than the Government / Department / Local authority as the case may be. The meagre extent of profit involved, the delay in obtaining the due amount, various procedures to be followed and hurdles to be crossed to have the mission completed, were matters for consideration and it was accordingly, that lesser rate was prescribed for satisfying the tax at compounded rate in the case of the Government contractors. The position continued till amendment was brought about w.e.f. 01.04.09, as per the Finance Act 2009; whereby Section 8 (a) (ii) was amended reducing the tax liability to 3 %, in the case of 'private contractors', as mentioned in the Budget Speech. This step was more on considering the grievance projected by the aggrieved parties, with reference to 'recession' in the field of construction and such other mitigating circumstances. But quite unfortunately, it was omitted to note that the Government contractors were enjoying the benefit of substantially lesser rate of tax till such time and as such, the first proviso to Section 8 (a) (ii) ought not to have been there, which is to the chagrin of the petitioners, who are compelled to satisfy a higher tax @ 4 % as against the actual rate of 3 % tax payable under the main provision. There is absolutely no rhyme or reason for treating the Government contractors with higher tax liability, than the rest as envisaged under Section 8 (a) (ii). This according to the petitioners is only due to an inadvertent omission of the law makers at the time of amendment of the Statute, who forgot to omit the 1st proviso to section 8 (a) (ii). On filing Ext. P7 representation and similar representations, the petitioner was given to understand that the anomaly resulted would be rectified forthwith, but it still remains to be a futile assurance, as several years have passed by and it is yet to be remedied/rectified. The learned senior counsel further contends that there is no intelligible differentia between the two groups and hence there is patent violation of Article 14 of the Constitution of India.
9. Yet another contention raised by the learned senior counsel is that, most of the works awarded to the petitioners are by way of 'sub contract'. The provision stipulates higher rate of tax @ 4 % payable by the Government contractors, only in respect of the works awarded by the 'Government/Department/Local authorities' and in respect of the works awarded by other establishments / individuals / firms, it is only 3 %. Since the petitioners have been given the work by way of sub contracts, the awarder is a 'private person', who bid the contract floated by the Government/Departments/Local Authorities and hence the tax satisfied by the petitioners @ 3% is perfectly in order. The version of the petitioners (that it is by way of 'sub contract') is sought to be denied by the learned Government Pleader, pointing out that the question of 'sub contract' comes only in W.P.(C) No. 32537 of 2010 and W.P.(C) No. 5709 of 2011.
10. The petitioners have got a further contention that Section 25(1) of the Act is not applicable to the case in hand, as the said provision could be pressed into service only in respect of the 'escaped turn over'. In the field of compounding, there cannot be any question of escaped turn over and there is no such case for the respondents as well. However, if the matter has already been compounded, it cannot be reopened by the second respondent, simply by issuing a notice under Section 25(1) of the KVAT Act. If at all the compounding order is to be varied/modified, it could only be by invoking the power of rectification under Section 66 of the Act or by invoking the suo motu power of revision by the Deputy Commissioner under Section 56 of the Act. This is sought to be asserted by the learned counsel, pointing out that Form 20 H certificate issued in terms of Rule 11 (4) of the Rules would reveal that the 'awarder' has not been shown as the 'Government', but somebody else. Therefore, in the case of sub contract, work is not awarded by the Government, though it may be “of the” Government, submits the learned counsel. It is also pointed out that, once the compounding application is accepted and acted upon, granting sanction, there cannot be further assessment, more so, in view of the law declared by this Court on 21.10.2014 in W.P.
(C) No. 36210 of 2010 (paragraphs 14 & 15)
11. Mr. Azeez, the learned counsel for the petitioners in W.P.(C) No. 22919 of 2012 and 25121 of 2012, while adopting the arguments put forth by the learned senior counsel, supplements and supports the case, pointing out that there is absolutely no reason for differentiation, mulcting a higher tax liability upon the Government contractors. Reliance is sought to be placed on the rulings reported in Arya Vaidya Pharmacy and Another V. State of Tamil Nadu [(1989) 73 STC 346 (SC)], Aashirwad Films V. Union of India and others [(2007) 7 VST 714 (SC)], State of U.P. and others V. Deepak Fertilizers & Petrochemical Corporation Ltd. [(2007) 7 VST 535 (SC)] and the Division Bench judgment in W.P.(C) No. 33966 of 2006 of this Court (Asianet's case). 'Reasonable classification' as dealt with by the Apex Court in the decision in State of U.P. and others Vs. Jaiprakash Associates Ltd; [(2013) 65 VST 423 (SC)] is also pressed into service.
12. Mr. Rafeeq, the learned counsel appearing for the petitioners in W.P.(C) No 11564 of 2013, 19704 of 2013 points out that, as per Section 8 (a) (i) of the Act, the contractors are not eligible for lesser rate and the idea is only to have the goods purchased from Kerala i.e. to promote sales in Kerala. Under Section 8 (a) (ii), dealing with other contractors, a differentiation has been drawn, providing to segregate the goods brought from 'outside the State' and to meet tax liability on the actual rate in respect of such case. Once this segregation is done, the resultant position is the same and the balance figure can attract tax liability only @ 3 %. If this be the position, it must be equally applicable to 'Private contractors' as well as the 'Government contractors' and hence there cannot be any further classification between the Private contractors and the Government contractors to satisfy tax at different rates. When the rate of tax payable by the Private contractors under the main provision was scaled down to 3%, the proviso under Section 8 (a) (ii) remained there, which was omitted to be deleted or modified, and hence it involves violation of Article 14.
13. The learned Government Pleader submits that there is absolutely no merit in the contentions raised from the part of the petitioners against the first proviso to Section 8(a)(ii) and that there is no instance of discrimination at all. It is stated that, Government Contractors are treated as a separate class of its own, as they were being treated earlier. In respect of the previous years, the Government Contractors, having grouped as a separate class, were being given several concessions, also with regard to filing of returns and satisfaction of tax under a lesser compounded rate. Reduction of rate of tax for compounding given to the 'private contractors', taking it below the rate for compounding applicable to the Government Contractors, by itself is not enough to declare the 'proviso' which was already in existence, as ultra virus to the Constitution. The differentiation was on the basis of a 'conscious act' pursued by the Legislature, finding it necessary to have had such a course, in order to meet the need of the hour. Application of mind in this regard is very much discernible from the Budget Speech 2009 - '10 paragraph 3, 4, 9 and 219 [(2009) 17 KTR].
It is stated that there is 'intelligible differentia', and that the 'fiscal statutes' are to be interpreted to see, if the same can be sustained, as made clear by a Constitution Bench of the Supreme Court in R.K. Garg Vs. Union of India and Others [(1981) 4 SCC 675)] (paragraphs 7, 8, 16, 31). The 'Budget Speech' can be relied on to understand the scope of the provision, as held by the Hon'ble Supreme Court in Kerala State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax, Thiruvananthapuram (2003 (11) SCC 363) (paragraph 6). Referring to other decisions like those reported in AIR 1990 SC 913 [Kerala Hotel and Restaurant Association Vs State of Kerala], (2006) 14 KTR 313 (SC) [Associated Cement Companies Ltd. Vs. Government of Andhra Pradesh), 2012 (6) SCC 312 (State of Madhya Pradesh Vs. Rakesh Kohli and Anr.) and 2012 (1) SCC 226 (Union of India and Others Vs. NITDIP Textile Processors Private Limited and Another), the Government Pleader asserts that there is proper rationale for the differentiation and points out that, it being a reasonable classification, based on a 'policy decision', it may not be proper for this Court to rewrite the law.
14. With regard to the contention of the petitioner, that once the matter is finalized and compounded rate of tax is satisfied, there cannot be any further assessment, the learned Government Pleader points out that the position has been made clear by a Division Bench of this Court in S.T.Rv. No. 92 of 2011 vide judgment dated 15.12.2011 [relying on earlier judgment by a Division Bench reported in 2010 (1) KHC 884 [M/s Joy Alukkas Traders (I) Pvt. Ltd. Vs. State of Kerala)]. The learned Government Pleader submits that, though the discussion made was with reference to Sections 19 and 35 of the KGST Act, Section 19 of the KGST Act is in 'pari materia' with Section 25(1) of the KVAT Act. With regard to the factual position, it is pointed out from the part of the respondents that the effect of 'recession' across the Globe, and in particular within the Country and more in the State, was a major contributing factor for the standstill, in the construction field. No sufficient money was being pumped in due to various reasons, which quite adversely affected the market conditions and the general economy. This however was not applicable or relevant in so far as the construction of buildings, roads, bridges etc. of the Government/Water Authority/Local bodies was concerned; which work was being undertaken by the Government Contractors. They could rest assured of their payment, once the construction was over, which was not so, in the case of 'Private contractors'. This persuaded the Government to treat the case of 'Private contractors' separately, when the rate of compounded tax was brought down from 8% to 3% with effect from 01.04.2009. The Government Contractors who were enjoying higher extent of benefits earlier, cannot be heard to say that the provision (by virtue of which, they were enjoying better benefits earlier) all of a sudden has become ultra virus to the Constitution, on reducing the rate of compounded tax in respect of 'Private contractors'.
15. With regard to the steps being taken for imposing penalty, it is pointed out that the scope of the provision under Section 67 of the KVAT Act is actually wider and stands on a different footing. 'Mens rea' is not at all required to establish the offence as evident from the ruling rendered by the Apex Court in Gujarat Travancore Agency Vs. C.I.T. Kerala [(1989) 177 ITR 455]. The scope of penalty under the Act has been further explained by a Division Bench of this Court in the decision reported in (2013) 21 KTR 261 (Suresh Lal Vs. State of Kerala), holding that misclassification itself is a ground for imposing penalty.
16. According to the petitioner, the classification should have some nexus to the object to be achieved. Absolutely no reason is discernible to sustain the higher rate of tax to be paid by the Government Contractors in the matter of compounding. The very purpose of compounding, submits the learned Senior counsel, is to see that the assessee should be free from all hazards as pointed out by the Apex Court in (2014) 71 VST 110 [Bhima Jewellery Vs. Assistant Commissioner (Assessment) Kerala and another. This in turn has been followed by another learned Judge of this Court, while passing judgment in WP(C) No.36210 of 2010 and connected cases [paragraphs 8, 9, 10 to 13, 14]. It is also pointed out that, the only reason as pointed out by the learned Government Pleader, with reference to the 'Budget Speech' for giving extensive reduction to the 'Private contractors', is the 'world wide recession', which however is equally applicable to the Government Contractors as well, who have to purchase materials amidst the very same market conditions. If at all any concession is to be given, it might only be to the 'Government Contractors' and not to the 'Private contractors', submits the learned Senior counsel. 'Equals' have been treated 'unequally' and as such, the classification is bad in law. It is also pointed out that, higher rate of tax is sought to be inflicted upon the 'Government Contractors', based on the character of the 'Awarder' (ie. in respect of works awarded by the Government, Kerala Water Authority/ Local bodies) and not based on the 'character of the Dealer', which concept is totally alien to the field of classification.
17. Tracing the history of legislation and the metamorphosis the provision has undergone, it will be worthwhile to extract Section 8(a)(i) and (ii), as it existed earlier, as it remained after the amendment from 01.04.1989 and the position as on date. Earlier, it was as follows:
“S.8 (a)(i) any works contractor not being a dealer registered under the provisions of the Central Sales Tax Act, 1956 (Central Act 74 of 1956), and who is not an importer may, at his option, instead of paying tax in accordance with the provisions of the said section, pay tax at three per cent of the whole contract amount;
(ii) any works contractor not falling under clause (i) above may, at his option, instead of paying tax in accordance with the provisions of the said sections, pay tax at eight per cent of the whole contract amount; Provided that notwithstanding anything contained in sub-clause (ii) above, the compounded tax payable by any works contractor under this clause in respect of works contracts awarded by Government of Kerala, Kerala Water Authority or Local Authorities shall be four per cent of the whole contract amount:”
With effect from the next financial year, the provision has undergone change only with regard to Section 8(a)(ii), while Section 8(a)(i) remained the same. It is extracted below:
“S. 8 (a)(i) any works contractor not being a dealer registered under the provisions of the Central Sales Tax Act, 1956 (Central Act 74 of 1956), and who is not an importer may, at his option, instead of paying tax in accordance with the provisions of the said section, pay tax at three per cent of the whole contract amount;
(ii) any works contractor not falling under clause (i) above may, at his option, instead of paying tax in accordance with the provisions of the said section, shall pay tax at three per cent of the contract amount after deducting the purchase value of goods excluding freight and gross profit element consigned into the State on stock transfer or purchased from outside the State and for the purchase value of goods so deducted shall pay tax at the scheduled rate applicable to such goods.”
The provision has undergone substantial change now, as amended by the Kerala Finance Act, 2014. The position with regard to Section 8(a)(i) and (ii) as on date is as follows:
“S.8 (a)(i) any works contractor who imports any goods into the State from other States or Country for incorporation in the works contracts and/or who is registered under the provisions of the Central Sales Tax Act, 1956 (Central Act 74 of 1956), may, at his option, instead of paying tax in accordance with the provisions of section 6, pay tax at the rate of six per cent of the whole contract amount along with tax under sub-section (2) of section 6:
Provided that the compounded tax payable under this sub-clause by such works contractor in respect of works contract awarded by Government of Kerala, Kerala Water Authority or Local Authorities shall be four per cent of the whole contract amount, along with tax under sub-section (2) of section 6:
(ii) any works contractor not falling under the description in clause (i) above may, at his option, instead of paying tax in accordance with the provisions of the said section, pay tax at three per cent of the whole contract amount along with tax under sub-section (2) of section 6:”
18. The concerned Budget Speeches at the time of introduction of the Bill (at different points of time from 2005) are also relevant, which are extracted below for immediate reference. Paragraph 178 (xi) of the Budget Speech of the year 2005-06 reads as follows:
“States have given compounding facilities to certain segments of trade in cases where normal assessment of tax liability would be cumbersome and rather impractical. In kerala we have been allowing such a facility for works contracts, metal crushing, cooked food, jewellary, video cassette libraries and lotteries. The consensus at the national level is that in view of the wide divergence in local conditions in different States it may not be practical to insist on a uniform rate of tax or an upper limit of turnover in such cases of composition. I therefore propose to include provisions in the VAT Act to continue the composition scheme as it exists in the KGST Act. This will not be applicable to importers and those dealers who are first sellers with in the State. The compounding scheme for jewellery will be withdrawn, as the rate of tax has been reduced to 1%. The compounding provision for lotteries will be discontinued, as they have recently been banned in Kerala.”
Paragraph 171 of the revised Budget Speech of the year 2006-07 is in the following terms:
“Contractors undertaking works for Government/Local Bodies have long been demanding a separate dispensation considering that they are paid their dues only after deduction of tax at source, I agree with them. I propose to exempt contractors who do not have CST registration undertaking works for Government and Local Bodies from producing any certification from Commercial Taxes Department and from their tax liability under section 6(2) in respect of each works contract for Government/Local Bodies if they compound their tax liability at the rate of 3 per cent.”
In the course of simplification of procedures sought to be brought about, paragraph 144 (iii) of the Budget Speech of the year 2007-
08 provides as follows:
“Contractors undertaking only Government works who have opted for compounding need hereafter file returns only once every year.”
Subsequently, with regard to the origin of cause of action providing a lesser rate of tax to the 'Private contractors' from the year 2008- 09, paragraph 168 of the Budget Speech in respect of the year 2008-09 was to the following effect:
“It is proposed to simplify the provisions for compounding for Works Contracts.
• The negative list will be omitted.
• It is proposed to permit contractors with CST registration to compound at 8% and those without such registration to compound at 3%. They will be exempted from paying purchase tax under Section 6 (2). These rates will not be applicable to works awarded by Government of Kerala, KWA and Local Bodies. The existing rates will continue for them. It is estimated that this measure will fetch us an additional Rs.10 crore.”
Under the head 'Rationalisation of tax rates', it was specified under paragraph 351 of the Budget Speech of the year 2014-15 as follows:
“It is noticed that the present compounding structure for works contractors has certain issues relating to inadequacies in the structure and administration of tax. The Accountant General has also observed that these provisions are adversely affected the tax collection of building materials and works contract. To resolve this issue, it is proposed to restructure compounding provisions. Contractors with CST registration will be bound to pay compounded tax at 6% of the whole contract amount. The present rate of 4% to Government contractors having CST registration, will continue as such. Dealers paying compounded tax will have to pay purchase tax for the purchases from unregistered dealer.”
19. From the above, it is quite clear that, depending upon the policy of the Government and the fiscal changes/measures proposed to be brought about as reflected from the Budget Speech, provisions were incorporated in the concerned Finance Act, amending the statutory provisions to the required extent, at different points of time. The petitioners/Government Contractors were treated as a class of their own and were given a separate treatment, with lesser rate of tax for compounding earlier, which was never thought about as an instance of discrimination or unreasonable classification. The 'heart burn' of the petitioners began only when the rate of compounded tax payable by the 'Private contractors' came to be slashed down with effect from 01.04.2009, as provided under Section 8(a)(ii). It was mentioned in the 'Budget Speech', as to the reason why such a reduction was brought about to help the construction field in the 'private sector', simultaneously making it clear that the said benefit will not be applicable to the 'Government Contractors' in whose case, the existing rate will continue (extracted above). This shows that a 'conscious decision' was taken, retaining the 'Government Contractors' as a separate class of themselves.
20. In the course of time, need to enhance the compounded rate of tax in the case of 'Private contractors' was felt extremely necessary and it was accordingly, that necessary proposal was made in the Budget Speech 2014-15 as extracted already and the provision was amended as per the Kerala Finance Act, 2014; by virtue of which, tax payable by the 'Private contractors' even under Section 8(a)(i) was increased to '6%', introducing a proviso for the first time; however stipulating that the Government Contractors falling in the said category are required to satisfy the compounded tax only at the rate of '4%' for whole of the contract amount. Similarly, coming back to Section 8(a)(ii), in respect of any works contractors who are not falling under the description in clause (a)(i) of Section 8, they are required to satisfy compounded tax only at the rate of '3%' of the whole contract amount. The disputed proviso which was in existence under Section 8(a)(ii) has now disappeared and it is taken to be incorporated under 8(a)(i), with appropriate lesser extent of compounded tax for the 'Government Contractors', than the quantum to be satisfied by Private contractors coming under 8(a) (i). This being the position, the petitioners stand benefited as on date and they cannot have any subsisting grievance with effect from 01.04.2014; having been placed on a more advantageous position than the private contractors.
21. The sum and substance of the above discussion is that, retention of the 'proviso' under Section 8(a)(ii) with effect from 01.04.1989 requiring the 'Government Contractors' to satisfy compounded tax at the rate of 4%, even after substantial reduction of the rate of tax in the case of 'Private contractors' (from 8% to 3%) as per the main provision was not an inadvertent omission. The Legislature had its own reasons to treat the 'Private contractors' and the 'Government Contractors' as separate classes and the petitioners/Government Contractors were enjoying the benefit of such separate classification for quite long, based on a conscious decision/exercise. The position has now been reworked, considering the change in scenario and the Legislature has effected further amendment making the 'Private contractors' to satisfy higher compounded rate of tax at 6% from 01.04.2014, at the same time enabling the 'Government Contractors' to satisfy the compounded tax only at a lesser rate; i.e. 4% as it was in existence. In other words, the version of the petitioners that they were to be and are to be treated alike the 'Private contractors' under Section 8(a)(ii) with effect from 01.04.2009, extending the benefit of lesser rate of compounded tax is not at all correct or sustainable, which plea, if accepted, may even be suicidal with reference to the position as it exists today.
22. Among the judicial precedents sought to be relied on from the part of the petitioners, much emphasis is given to the decision of the Apex Court in M/s Koothattukulam Liquors Vs. Deputy Commissioner of Sales Tax [Civil Appeal No. 5000 of 2004] to the effect that, once compounding is permitted and the proceedings are finalized accordingly, it cannot be reopened, having binding force in between, in the nature of a bilateral agreement, to be governed by the provisions of the Contract Act. In the said case, the assessee sought to satisfy tax opting compounded rate, but later, assessee filed an application to have regular course of assessment pointing out that the assessee had closed down the business after a shortwhile. The decision taken by the Sales Tax Appellate Tribunal in favour of the assessee was set aside by the High Court, deciding the issue in favour of the Revenue, which was subjected to challenge before the Apex Court. In was in the said context, that an observation was made by the Apex Court (in paragraphs 22 and 23 of the judgment) that the Scheme was introduced by the legislature for a bilateral settlement between the assessee and the Department, whereby the dealer who had opted for payment under the compounded rate, is not required to file monthly, quarterly or annual returns and when the application in this regard is accepted, it becomes an agreed amount of tax and hence the Department and the Dealer are bound by the said agreement.
23. However, it is worthwhile to note the observation in paragraph 23 of the said judgment, that such contract between the assessee and the assessing authority can be annulled by the parties only under the circumstances which are provided under the provisions of the Contract Act. In the instant case, the application was filed by the assessee seeking to satisfy tax under the compounded rate and permission was given to satisfy tax at the compounded rate of 3 %. But the Statute stipulates that the rate of tax to be satisfied in the case of the assessee like the petitioners herein (Government contractors) was at '4%'. As it stands so, the option exercised by the assessee to satisfy tax at the compounded rate was not in conformity with the Statute. Similarly, the order passed by the assessing authority granting sanction to satisfy tax at compounded rate of '3%' was contrary to the specific provision in the Statute. It is settled law, that there cannot be any valid contract, contrary to any provision of law and as such, the order passed by the assessing authority permitting the petitioner/assesee to pay tax at the compounded rate [@ 3%] cannot have any binding force, being not legally enforceable contract and as such, the said decision does not come to the rescue of the petitioners in any manner.
24. A Division Bench of this Court as per the decision reported in 2010 (1) KHC 844 [M/s Joy Alukkas Traders (l) Pvt. Ltd. Vs. State of Kerala] had considered the specific question whether a wrong order passed on a compounding application, which has resulted in reduced payment of tax at compounded rate in violation of the statutory provision, could be corrected by the higher authority exercising the supervisory jurisdiction over the assessing authority. The Court specifically observed that the option exercised by the assessee under such circumstances and accepted by the officer cannot amount to a binding contract between the assesee and the Department. The Bench also observed that such order passed by the assessing authority does not become final automatically, as it is always subject to supervisory jurisdiction of the Deputy Commissioner, in view of the clear provision under the Statute, making it clear that if the Scheme approved by the officer is in violation of the charging provision, the Deputy Commissioner has power under Section 35 to correct the same, which extends even to correction of assessment wherein the tax was finally determined.
25. The issue came up for consideration before another Division Bench in S.T. Rev. No. 92/2011. Referring to the decision in Joy Alukkas's case [cited supra], it was observed in the opening paragraph of the said judgment dated 15.12.11 as follows :
“Question raised is whether reassessment completed under Section 19 (1) of the Kerala General Sales Tax Act (hereinafter referred to as the Act for short) was rightly held to be invalid by the Tribunal for the reason that the original assessment was based on compounding. The issue stands decided in favour of the Revenue vide the Division Bench judgment of this Court in M/s Joy Alukkas Traders (I) Pvt. Ltd. Vs. State of Kerala, reported in 2010 (1) KHC 844. Even though learned counsel for the respondent assessee submitted that the decision of this Court is rendered in the context of supervisory jurisdiction of the Deputy Commissioner under Section 35, we do not think there is any difference between the powers of the Officer under Section 19 (1) of the Act and the powers of the Deputy Commissioner under Section 35 of the Act. In fact in the judgment, we have held that Section 19 (1) also applies to an assessment completed based on compounding. So much so in principle, we allow the revision by reversing the orders of the Tribunal and by holding that Section 19 (1) is validly initiated.
26. It is relevant to note that the Scheme to satisfy tax at the compounded rate is only an alternative mode and there is absolutely no compulsion upon the assessee in any manner, who is free to pursue regular assessment, if the former course is not satisfactory or it is likely to attract higher tax liability. The observation made by the Apex Court in this regard in State of Kerala and another Vs. Builders Association of India and Others [1997 (104) STC 134] is very relevant, which is extracted below :
“There is no compulsion upon any contractor to opt for the method of taxation provided by sub section (7) or sub section (7A); it is wholly within the choice and pleasure of the contractor. If he thinks it is beneficial for him to so opt. he will opt; otherwise he will be governed by the normal method of taxation provided by section 5 (1) (iv) sub section (8) provides that the option to come under sub-section (7) or (7A) has to be exercised by the contractor, “either by an express provision in the agreement for the contract or by an application to the assessing authority to permit him to pay the tax in accordance with any of the said sub-sections. It is evident that contractor who had not opted for this alternative method of taxation cannot complain for he is in no way effected by them. Having voluntarily and with the full knowledge of the features of the alternate method of taxation, opted to be governed by it, a contractor cannot be heard to question the validity of those sub-sections or rules.
27. With regard to the challenge raised as to the constitutionality of the Statute, Constitution Bench of the Apex Court has categorically pointed out in R.K. Carg Vs. Union of India and Ors. [(1981) 4 SCC 675] that there is always presumption in favour of constitutionality of the Statute and the burden is upon him who attacks it, to show that there has been a clear transgression of the constitutional principles. The Apex Court observed that the Legislature understands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination are based on adequate grounds. It was also alerted, in adjudging constitutionality, the Court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived at the time of existing legislation (paragraph 7). This was followed and the principle was reiterated in the subsequent decision in State of Madhya Pradesh Vs. Rakesh Kohli and another [(2012) 6 SCC 312], also pointing out that, 'hardship' is not a relevant factor for interpreting the fiscal statutes.
28. With regard to the plea of discrimination and reasonable classification, reference to the verdict passed by the Apex Court in Kerala Hotel and Restaurant Association Vs. State of Kerala [AIR 1990 SC 913] will be beneficial. The case considered by the Apex Court involved substantially a common question, arising out of the conflicting decisions of this Court and that of the Madras High Court regarding constitutional validity of similar provisions in similar Statutes enacted by the States, which resulted in imposition of sales tax in the two States on cooked food sold to the affluent in the luxury hotels, while exempting the same from sales tax in the modest eating houses. This Court rejected the challenge and upheld the validity of the Statute [Kerala General Sales Tax Act], whereas the Madras High Court decided in favour of the assessee. After detailed hearing, view taken by this Court was upheld by the Apex Court thus dismissing the appeals filed by the assessee, while intercepting the verdict passed by the Madras High Court. The observations made by the Apex Court in Paragraph 34 are relevant, which is extracted below :
“34. It was urged that eating houses serving cooked food of the same quality but not recognised with the higher star status to bring it within the tax net enjoyed an undue advantage not available to those within the tax net. It was also urged that recognition of a hotel for conferment of the star status was made for a different purpose, namely, promotion of tourism and the other facilities available therein which have no relevance to the quality of food served therein. Admittedly, such recognition entails several benefits and seeking recognition depends on volition. In our opinion, such an enquiry is unwarranted for the purpose of classification in the present context. It is well- known that the tariff in hotels depends on its star status, it being higher for the higher star hotels. The object being to tax cooked food sold at a higher tariff, the status of the hotel where it is sold is certainly relevant. The classification is made in the present case to bring within the tax net hotels or eating houses of the higher status excluding therefrom the more modest ones. A rational nexus exists of this classification with the object for which it is made and the classification is founded on intelligible differentia. This being a relevant basis of classification related to the avowed object, the legislature having chosen an existing classification instead of resorting to a fresh method of classification, it cannot be a ground of invalidity even assuming there are other better modes of permissible classification. That is clearly within the domain of legislative wisdom intrusion into which of judicial review is unwarranted. There is no material placed before us to indicate that with reference to the purpose for which the classification has been made in the present case, there is a grouping together of dissimilar eating houses or that similar eating houses have been excluded from the class subject to the tax burden.”
29. With regard to the decision of the Apex Court in Arya Vaidya Pharmacy and Another Vs. State of Tamil Nadu ([1989] 73 STC 346 (SC)], as to the plea of discrimination, it was a case where the authorities under the Tamil Nadu General Sales Tax sought to impose and realize a higher rate of tax in respect of 'Arishtams and Asavas' (Ayurvedic medicinal preparations), which was sought to be sustained from the part of Revenue, referring to the higher alcoholic contents and contending that it could be used by drink addicts as alcoholic beverage. The Apex Court held that there was absolutely no basis for such rate differentiation, in so far as the items remained to medicinal preparation, irrespective of the percentage of alcohol and that there was no reasonable classification at all.
30. Similarly, in Aashirwad Films Vs. Union of India and Ors. ([2007] 7 VST 714), the Apex Court observed that higher rate of entertainment tax was imposed upon the films of other States, showing discrimination solely on the basis of language, while only lesser duty of tax was prescribed in respect of Telugu films [Telugu films @ 10% and films in other languages 12%]. Constitutional validity of 'the Andhra Pradesh Entertainments Tax Act' was considered meticulously and the challenge was upheld, observing that there was no reasonable classification. But the petitioners' case stands on a different footing. As mentioned already, the petitioners, by virtue of the nature of work awarded to them (the awarder being the Government, Department/Local Authorities); extent of work to be performed; assured payment at the prescribed rate and various other circumstances were given a different status treating a separate class than the other contractors (private contractors). The petitioners were enjoying the lesser rate of compounded tax, than the other lot for several years, till the compounded rate payable by the private contractors was substantially scaled down as per the disputed amendment (because of the adverse consequences resulted by virtue of recession and stalemate in the contract field, particularly in private sector) - which was not the position in respect of Government contractors. This being the position, the decisions sought to be relied on by the petitioners referring to the plea of reasonable classification/discrimination do not come to their rescue at all.
31. Yet another decision rendered by the Division Bench of this Court in W.P.(C) No. 33966 of 2006 (Asianet's case), where the challenge was mainly with regard to the introduction of luxury tax to cable TV operators at Rs.5 per connection to be remitted which was brought into effect on 01.07.2006. The main ground of challenge was that, it did not amount to any luxury within the meaning of Entry 62 of the IInd list under the VIIIth Schedule to the Constitution of India and further that, it was discriminatory and violative of Article 14 in as much as 'Direct to Home' (DTH) operators providing similar service to the consumers were not subjected to any tax. After the initial rounds of litigation, it went up to the Supreme Court, when the matter was remanded for fresh consideration, also considering the subsequent developments. During pendency of the proceedings before the Apex Court, the State amended the Statute again, whereby cable TV operators who were having connections upto 7500 were spared from the tax net. It was also contended before the Division Bench that the assessee was only rendering some service and since service tax was being paid, there could not be any levy under the said Taxing Statute. Referring to the decision in State of West Bengal & Ors. Vs. Purvi Communications Pvt. Ltd [(2005) 140 STC 154], the Court observed that, service rendered by the Cable TV network through which films, serials and various other programs are shown to the consumers amounts to entertainment, on which levy of tax could be authorised by the State legislature under Entry 62, List II of Schedule VII and hence that the issue was squarely covered by the said decision. It was also observed that, service tax payable by the Cable T.V. Operators under the Central Act should not stand in the way of State levying Luxury Tax in view of the verdict in Bharat Sanchar Nigam Ltd. & Another Vs. Union of India & Ors. [(2006) 145 STC 91] holding that the same transaction may attract liability for Service Tax as well as tax under any other head permissible under the law. The Bench made it explicitly clear that constitutional validity of the Statute could have been upheld, but for the retrospective amendment of the Statute in the year 2010, exempting Cable T.V. Operators with less than 7500 connections. Paragraph 6 of the above judgment is relevant, which is extracted below :
“6. We are constrained to observe that going by the above two decisions of the Supreme Court we would have sustained the constitutional validity of the levy of luxury tax on cable TV connections but for the amendment in 2010 exonerating cable TV operators with less than 7500 connections. As already stated, after the amendment of 2011 cable TV operators irrespective of number of connections are completely exonerated from levy of luxury tax and therefore, this case only serves the purpose of collecting arrears from the petitioners and other cable TV operators with connections above 7500 for the period of four to five years from 2006 to 2010. We have already found that retrospective amendment of 2010 exonerating cable TV operators with less than 7500 connections from liability is discriminatory and violative of Article 14 of the Constitution of India because the State could not bring to our notice any distinction between those operators with less than 7500 connections and those with 7500 or above connections with the object of levy of luxury tax at the rate of Rs. 5 per month per person enjoying connection. We therefore, declare the levy of luxury tax on cable TV operators with above 7500 connections as discriminatory and violative of Article 14 of the Constitution of India, and hence unconstitutional.
In the above circumstances, it is clear that intervention made in the Asianet's case is only to a limited extent, in view of the change in scenario, which cannot advance or support the case of the petitioners in any manner.
32. With regard to the “Doctrine of severability” and the ruling rendered in 2013 (65) VST 423 (State of U.P. and Ors. Vs. Jaiprakash Associates Ltd.), it is true that, if objectionable part of the Statute is separable from the remaining provision without adversely affecting the rest, such course can be adopted and it can be separated accordingly. But there is no objectionable part in the instant case, as discussed above.
In the above facts and circumstances, this Court finds that the challenge raised by the petitioners with regard to the constitutional validity of the 'first proviso' to Section 8(a)(ii) of the KVAT Act cannot, but be answered in the negative.
Interference is declined and all the writ petitions are dismissed accordingly.
P. R. RAMACHANDRA MENON, (JUDGE) kmd/Pn