Rajasthan Sales Tax Amendment Struck Down: Supreme Court Reinforces Uniformity in CST Procedures.


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The Supreme Court of India recently upheld a significant judgment by the High Court of Judicature for Rajasthan, Jaipur, concerning the validity of a state-level amendment to the Central Sales Tax (Rajasthan) Rules, 1957. 

The case, originating from a writ petition filed by Combined Traders, challenged the constitutional validity of sub-rule (20) of rule 17 of the Rajasthan Rules, which empowered state tax authorities to cancel declaration forms or certificates issued under the Central Sales Tax Act, 1956 (CST Act), under specific circumstances.

The contentious sub-rule, introduced via an amendment effective from July 14, 2014, stipulated that if a dealer generated declaration forms or certificates through misrepresentation, fraud, or in contravention of the CST Act and its associated rules, the assessing authority or any authorized entity could, after providing the dealer an opportunity for a hearing, cancel these forms or certificates.

The High Court, in its impugned judgment, ruled against the State of Rajasthan, the first appellant in this Supreme Court appeal. The core of the High Court's decision was that the state government lacked the legislative competence to enact a rule allowing for the cancellation of validly issued declarations or forms under the CST Act. The High Court specifically found sub-rule (20) of Rule 17 of the Rajasthan Rules to be ultra vires Sections 8(4), 13(1)(d), 13(3), and 13(4)(e) of the CST Act.

 
 
 
 

The backdrop to this legal battle involved transactions undertaken by the respondent, Combined Traders, during the fiscal year 2017-18. The respondent had sold goods worth ?4.89 crores and ?7.20 crores to M/s. H.G. International and M/s. Saraswati Enterprises, respectively, against Form C. These sales occurred in the first quarter of the financial year.


Subsequent inspections by revenue authorities at the business premises of M/s. H.G. International and M/s. Saraswati Enterprises revealed a stark absence of any business activity, leading to the conclusion that their registrations were fraudulent. Consequently, notices were issued to Combined Traders for the cancellation of the Form C declarations they had submitted to avail the concessional tax rates under Section 8(1) of the CST Act. Furnishing Form C is a prerequisite under Section 8(4) of the CST Act for claiming these reduced rates on inter-state sales to registered dealers. Notably, the Central Sales Tax (Registration and Turnover) Rules, 1957, mandate the submission of a single Form C for each quarter.

Interestingly, M/s. H.G. International and M/s. Saraswati Enterprises had obtained the Form C online on July 6, 2017. Combined Traders subsequently claimed a refund in their return filed on July 11, 2017, under the Delhi Value Added Tax Act, 2004. The delay in receiving this refund prompted Combined Traders to file a writ petition before the Delhi High Court, which ultimately directed the Delhi authorities to issue the refund along with applicable interest.

Against this backdrop, the third appellant, acting under sub-rule (20) of Rule 17 of the Rajasthan Rules read with Sections 48 and 16(4) of the Rajasthan Value Added Tax Act, 2003, issued separate orders on December 7, 2017, cancelling the declaration forms of M/s. H.G. International and M/s. Saraswati Enterprises due to their non-existence at their declared business addresses. Their registration certificates were also cancelled. Prior to these cancellation orders, the third appellant had communicated the cancellation of the Form C declarations to the VATO Ward-17, New Delhi, through letters dated November 20 and 30, 2017. This led Combined Traders to file the writ petition before the Rajasthan High Court, challenging the validity of sub-rule (20) and seeking consequential relief against the cancellation orders and communications.

During the Supreme Court hearing, the appellants' counsel argued that the rule-making power under Section 13(3) of the CST Act empowered the state government to enact rules, not inconsistent with the CST Act and central rules, to carry out the purposes of the Act, including preventing fraud and evasion. They contended that sub-rule (20) was enacted precisely for this purpose.

Conversely, the respondent's counsel emphasized that Section 13(1)(d) of the CST Act specifically grants the central government the power to prescribe the form and particulars of declarations and certificates. They argued that this provision does not extend to the cancellation of such documents, and the central government had not framed any rules in this regard. Furthermore, they pointed out that Section 13(4), outlining the specific rule-making powers of the state government, does not include the power to cancel declarations. They also drew attention to Section 7(5) of the CST Act, which explicitly grants the authority to cancel registration certificates, a provision absent in Section 8 concerning declarations.

The respondent's counsel cited a Delhi High Court judgment in Jain Manufacturing (India) Pvt Ltd vs. Commissioner of Value Added Tax & Anr, where the court observed the absence of a provision in the CST Act for the cancellation of Form C. They also relied on Supreme Court precedents in Sales Tax Officer, Ponkunnam & Anr. vs. K.I. Abraham and The State of Madras vs. R Nand Lal & Co, to support their contention that the state rule was beyond the legislative competence of the state government.

The Supreme Court, after considering the submissions, concurred with the High Court's view. The apex court meticulously analyzed Section 8 and Section 13 of the CST Act. It highlighted that Section 8(4) mandates the furnishing of a declaration in a prescribed form obtained from the prescribed authority and containing prescribed particulars. The term "prescribed" refers to rules made under the Act. Section 13(1)(d) explicitly grants the central government the power to make rules regarding the form and particulars of such declarations.

The court noted that the Central Registration Rules, framed under Section 13(1)(d), prescribe Form C as the declaration form required under Section 8(4). Crucially, these central rules do not confer any authority to cancel Form C on the grounds cited in the impugned Rajasthan rule. In contrast, the Central Registration Rules do provide for the cancellation of registration certificates under Section 7(5) of the CST Act.

Turning to the state government's rule-making powers under Section 13(3) and (4), the Supreme Court emphasized that while Section 13(3) grants a general power to make rules to carry out the purposes of the Act, this power is explicitly limited by the condition that such rules must not be inconsistent with the provisions of the CST Act and the rules made by the central government under Section 13(1). Section 13(4) enumerates specific areas for state-level rule-making, none of which include the cancellation of declarations in Form C.

Drawing upon its earlier judgment in R. Nand Lal & Co, the Supreme Court reiterated that where the authority to make a rule on a specific matter (such as the form and particulars of declarations) is vested exclusively with the central government under Section 13(1), the state government cannot exercise that authority under its general rule-making power in Section 13(3) or the specific powers under Section 13(4). Allowing the state government to frame rules for the cancellation of Form C, when the central rules prescribing the form do not provide for such cancellation, would create an inconsistency, thus rendering the state rule invalid.

In conclusion, the Supreme Court found no infirmity in the Rajasthan High Court's judgment, holding that sub-rule (20) of Rule 17 of the Rajasthan Rules was indeed inconsistent with the Central Registration Rules framed under Section 13(1)(d) of the CST Act and therefore ultra vires. Consequently, the appeal filed by the State of Rajasthan was dismissed, with no order as to costs.


Central Sales Tax Act, 1956  

Delhi Value Added Tax Act, 2001