Author: Anukriti Mathur 

Edited By: Aneel Meghani

ABSTRACT

British Economist, Hugh Dalton defines tax as a compulsory contribution imposed by public authority, irrespective of services rendered to the taxpayer1. Thus, we can see that the tax can only be levied by Public authority and such levy of tax should have backing by authority of Law.2

Chapter I of Part XI of the Indian Constitution discusses the division of taxing power between the central government and State Government through three lists of the Seventh Schedule of the Indian Constitution. The First List (Union List) empowers the Central Government to levy tax on Income, Customs, Central Excise, and other incomes except from the agricultural sector. The Second List (State List) deauthorizes the taxation on agricultural income, lands, sales, State excise, Stamp duties, and other State level sources. The Concurrent List (Third List) allows both the Central and State Governments to enact laws levying taxes on subjects such as the entry of local goods for consumption, use, or sale. Thus, to avoid overlapping of taxes and proper distribution of taxing power, various Doctrines like Pith and Substance and Territorial nexus comes to play.

Additionally, the Central Government through Constitutional framework controls and restrict State’s taxing power and any action of State where tax is a measure to control entry in market or freedom to trade.

Keywords: Tax, Central Government, Constitution of India, Inter-state Trade, Pith and Substance, Territorial Nexus, Fiscal distribution, Bihar Sales Tax

CASE DETAILS

 INTRODUCTION AND BACKGROUND OF JUDGEMENT

• Post independence, the India opted for Fiscal Federalism wherein Central Government and the State Government were provided with autonomy in levying and collection of taxes. The State Government were authorized by Constitutional framework to levy and collect tax including Sales Tax. Excise duties and stamp duties.  This distribution of taxing power paved way for concerns like double taxation, hindering free flow of trade commerce and uneven State’s economic growth.4

• The Second half of 20th Century witness rampant industrialization and economic integration. India too witness, rise of corporations like Tata. Such large Corporation operates across various States and so subjected to multiple taxation by various States.

• The Indian Constitution provides the safeguard against use of State Taxing power to hinder  entry in market and to restrict free trade and commerce.

• The following case is landmark in deciding the validity of State Sales tax where the Goods are manufactured in State other than where it is otherwise available for use or consumption.5

 FACTS OF THE CASE

• The Petitioners, Tata Engineering & Locomotive Co. Ltd. (TELCO) was engaged in manufacturing and sale  of Diesel Truck, Bus chassis along with their spare parts and accessories.

• The petitioner had its Regional Office in Bombay and in order to explore Jamshedpur market, it entered into Dealership Agreements which was subjected to Sales tax imposed by State of Bihar.

• The petitioner, citing inter-state trade resist to pay Sales Tax imposed by State of Bihar while the State of Bihar, claimed the tax as trade occurred in Bihar thus, subjected to Sales tax.

• The Petitioner, thus Under Article 32 of India, file a writ in name of the Corporation and members of the company on the ground that the said tax violate the provision of Article 286 of the Indian Constitution, imposing a restrictive on the imposition of taxes on the sale or purchase of goods.

 LEGAL ISSUES RAISED

1. Whether TELCO is considered as citizen of India and eligible to file a writ under Article 32, for its rights violated under Article 19(1)(g) of Constitution of India? 
2. Whether the Sales Tax imposed by the State of Bihar on goods manufactured by TELCO  falls within the scope of Article 286 of the Indian Constitution or not?

 PETITIONER ARGUMENTS

1. The counsels for Petitioner submitted that Tata Engineering & Locomotive Co. Ltd. (TELCO) was incorporated and registered under Indian Companies Act, 1913, making it a citizen of India. Being a citizen of India, they are eligible to claim Fundamental Rights under Article 19.6
2. The Petitioners also submitted that Situs of Sale was not within State of Bihar and the transactions involved inter-state sale where said Sales Tax would not be applicable.
3. The Sales Tax imposed by Bihar Government is merely a restrictive tax and violative under Article 286
4. Relying on Ujjam Bai Case,7the petitioner drew attention towards the Doctrine of Pith and Substance. The Petitioner highlighted that Article 286 is a safeguard against State Taxes imposed merely to restrict freedom of inter-state trade and Freedom to trade guaranteed under Article 19(1)(g)

 RESPONDENT’S ARGUMENTS

1. The counsels for Respondent submitted that the Corporations do not enjoy Fundamental rights as provided to individual and thus not eligible to file writ under Article 32.8
2. The Respondents submitted that the merely having the registered office in Bombay does not make the sales as inter-state transaction. The Situs of sale is important as it determine the taxability of such sale.
3. The State shall exercise its taxing power on all purchases and sales held in its territory and such taxation is not a restriction under Article 286

RELATED LEGAL PROVISIONS

1. Article 19(1)(g): – “All citizens shall have the right to practice any profession, or to carry on any occupation, trade or business.”
2. Article 32(1): – “The right to move the Supreme Court by appropriate proceedings for the enforcement of the rights conferred by this Part is guaranteed.”
3. Article 286: – “No law of a State shall impose, or authorize the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place (a) outside the State; or (b) in the course of the import of the goods into, or export of the goods out of, the territory of India.”

JUDGEMENT

(A)RATIO DECIDENDI

1. The Apex Court, while disposing the Writ, emphasis on the separate legal entity of the Corporation from that of its members. The corporations are formed for commercial nature and are not eligible to enjoy Fundamental rights under Part III of Indian Constitution.
2. The Hon’ble Supreme Court, after hearing both sides, considered that the Bihar Sales Tax imposed on the goods manufactured by TELCO were in within the purview of Article 286. This created a restriction on imposing  taxes on sale or purchase of goods.
3. The Court included the term Manufacture as well as sale or purchase of goods for assessment of tax.  Additionally, Court while explaining term Purchase and Sale, in light of  Article 286, considered tax effective on purchase of goods by TELCO’s customers.
4. While explaining the Situs of sale, the court considered that it is paramount to see the place of dispatch rather than delivery to determine site to assess taxability and restrictions under Article 286.

(B) OBITER DICTA

1. The Court ruled that the State of Bihar was misusing it’s taxing power and under Doctrine of Pith and Substance, the said taxation stand in violation of restriction on inter-state trade and commerce.
2. The Court while interpreting the Principles of Constitutional Interpretation relied on harmoniums construction and balancing the fiscal federalism among central and State Governments.

CONCLUSION & COMMENTS

1. TELCO case was landmark in establishing the State powers in taxation and it’s limitations.
2. The case laid down the principle of Situs of Sale while assessment of Tax. The territorial nexus as a constrain to State’s tax levying powers. The Article 286 aims at avoidance of double taxation on business entities operating inter-states ensuring trading in Indian Market irrespective of State borders.
3. The Court also ensured that the Central Government fiscal power to collect tax in inter-state and power to regulate such activities under Article 286 is not undermined.
4. The case also provided for operational efficiency and profitability for entities operating inter-state by avoiding taxes on multiple level this paved way for landmark cases of Cement Marketing Company of India v. State of Rajasthan9 and Whirlpool Corporation v. Registrar of Trade Marks10.

 REFERENCES

Important Cases Referred

1. The State Trading Corporation of India v. The Commercial Tax Officer AIR 1963 SC 1811
2. Ujjam Bai v. State of Uttar Pradesh AIR 1962 SC 1621
3. Indo-China Steam Navigation Co. Ltd. v. The Additional Collector of Customs and Others AIR 1964 SC 1140
4. Cement Marketing Company of India v. State of Rajasthan AIR 1980 SC 346 
5. Whirlpool Corporation v. Registrar of Trade Marks AIR 1999 SC 22

Important Statutes Referred

1. Constitution of India
2. The Central Sales Tax Act, 1956
3. The Bihar Sales Tax Act 1947
4. Indian Companies Act, 1913