Madras HC upholds the Constitutional Validity of s. 2(11)of the Tamil Nadu Value Added Tax Act, 2006 [Read Judgment]

The High Court of Madras recently, in a writ petition filed by various dealers in the State, upheld the constitutional validity of section 2(11) of the Tamil Nadu Value Added Tax Act, 2006. The relevant parts of the judgments are given below. 

The petitioners in this case were dealers within the meaning of the said expression in Section 2(b) of the Central Sales Tax Act, 1956. The petitioners claim to be selling goods of the description referred to in Sub-Section (3) of Section 8 of the Central Sales Tax Act, 1956. The petitioners are also selling those goods in the course of inter-State trade or commerce. All the petitioners in the writ petitions are selling the aforesaid goods in the course of inter-State trade or commerce, either to unregistered dealers or to Government Departments of other States or Government Corporations or undertakings in other States. As a consequence, the petitioners herein do not enjoy the concessional rate of tax under Section 8(1) of the Central Sales Tax Act, 1956.

Under Part-B of the First Schedule of the Tamil Nadu Value Added Tax Act, 2006, capital goods as described in Section 2(11) of the Act, are included in serial number 25 and as a consequence, they attract tax at the rate of 5%. Since serial number 25 of Part-B is specifically confined to capital goods as described in Section 2(11) of the Act, other capital goods which may not satisfy the description contained in Section 2(11), despite really being capital goods, may fall under serial number 69 of Part-C of the First Schedule, attracting tax at the rate of 14.5%.

As per s.2(11) of the Act, "capital goods" means plant, machinery, equipment, apparatus, tools, appliances or electrical installation for producing, making, extracting or processing of any goods or for extracting or for bringing about any change in any substance for the manufacture of final product. (b) pollution control, quality control, laboratory and cold storage equipment;

(c) components, spare parts and accessories of the goods specified in (a) and (b) above; (d) moulds, dies, jigs and fixtures; (e) refractors and refractory materials (f) storage tanks; and

(g) tubes, pipes and fittings thereof used in the State for the purpose of manufacture, processing, packing or storing of goods in the course of business excluding civil structures and such goods as may be notified by the Government;" 

In the instant case, two categories of persons have come up with the above writ petitions. One set of persons are those who admittedly manufacture the goods of the description contained in Clauses (a) to (g), but whose goods are used not "in the State" but outside the State, as a consequence of which their goods are not treated as falling within Section 2(11). Another set of persons are those whose goods, even if used "in the State", are not treated as satisfying the description contained in Clauses (a) to (g), resulting in their goods not at all being treated as capital goods, even if sold within the State. Therefore, the cases filed by these two categories of dealers were considered separately.

The petitioners challenged Section 2(11) on the ground that the nature of the goods cannot change, merely on the basis of the location in which they are used. to the petitioners, if certain goods are admittedly capital goods, their nature will not change merely because they were sold in the course of inter-state trade or commerce, to persons outside the State.

The arguments raised by the respondents were that the entire thrust of Sales Tax Law, is to encourage transactions between two registered dealers. The dealers who have come up with a challenge to Section 2(11) are only those who sell goods in the course of inter-State trade or commerce, to unregistered dealers.

Regarding the constitutionality of s.2(11), the court took a view that Section 2(11) cannot be read in isolation. It is no doubt an exhaustive definition and it contains two distinctive parts. Clause (a) of Section 2(11) is one part. Clauses (b) to (g) comprise the other part. If the good in question falls under any one of the categories mentioned in Clause (a), such as plant, machinery, equipment, apparatus, tools, appliances or electrical installation, it would be treated as capital good, provided it is used for producing, making, extracting or processing of any goods or for extracting or for bringing about any change in any substance for the manufacture of final products. If the good in question falls under any one of the categories mentioned in Clauses (b) to (g), it should be used for the purpose of manufacture, processing, packing or storing of goods in the course of business. But, civil structures and such goods as may be notified by the Government are excluded.

The section shall be read with s.2(27) which defines the term “manufacture”. Therefore, any equipment, appliance, or apparatus, which is used for producing, making, altering, assembling, or processing of any goods, will be a capital good, as it would satisfy the definition under Section 2(27). Any process of goods which brings into existence, a commercially different and distinct commodity, is also manufacture and hence any equipment that is used to process goods, so as to bring into existence a commercially distinct and different commodity, would be a capital good. That such a good should also be used in the State, so as to satisfy the requirements of Section 2(11), is altogether different.

In the light of the above view, the Court rejected the plea of the petitioners that s. 2(11) must be held as ultra vires to the Constitution. The claim of the second category of petitioners was also rejected by the Court.

Read the full text of the Judgment below.

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