Supreme Court Upholds State's Power to Levy Purchase Tax Amidst Sales Tax Exemptions.


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The Supreme Court of India, in a recent judgment of C.T. Kochouseph v/s State of Kerala & Others, has affirmed the constitutional validity of Section 5A of the Kerala General Sales Tax Act, 1963, and Section 7A of the Tamil Nadu General Sales Tax Act, 1959. The ruling clarifies that purchase tax can be levied even when sales tax is exempted, reinforcing the states' legislative power to tax transactions and prevent revenue loss. This decision, delivered on May 9, 2025, by a bench led by Chief Justice Sanjiv Khanna, alongside Justice Sanjay Kumar and Justice R. Mahadevan, addressed a long-standing "legacy dispute" that no longer arises under the current GST framework.

The core issue revolved around whether the purchase of goods by appellants from tax-exempt dealers, or goods that were themselves exempt from sales tax, would still be subject to purchase tax under the respective state acts. Another critical question was whether such purchase tax constituted a manufacturing, consignment, or inter-state levy, potentially rendering it unconstitutional.

 
 

The Court's decision hinges on distinguishing between "taxability" or "leviability" and "payability" of tax. While goods may be inherently liable to tax due to their nature or transaction, an exemption notification might only relieve the obligation to pay, without negating the underlying liability.

Key Statutory Provisions and Their Interpretation:

Tamil Nadu General Sales Tax Act, 1959:

Section 2(g) "dealer": Defines a dealer broadly, including individuals, companies, and associations carrying on business of buying, selling, or distributing goods.

Section 2(j) "goods": Encompasses all movable property, including materials involved in works contracts and growing crops to be severed before sale.

Section 2(n) "sale": Covers various forms of property transfer in goods for consideration, including works contracts, hire-purchase, and supply of food or drink. A sale is deemed to have occurred in the state if the goods are within the state at the time of contract or appropriation.

Section 2(q) "total turnover": Refers to the aggregate turnover of a dealer across all places of business in the State, regardless of whether it's liable to tax.

Section 2(r) "turnover": Includes the total amount for which goods are bought or sold, but generally excludes agricultural or horticultural produce (with exceptions like tea and natural rubber latex grown by the dealer). It also excludes separately charged tax amounts, and certain discounts or refunds.

Section 3. Levy of taxes on sales or purchases of goods: This is the charging provision, imposing tax liability on dealers whose total turnover exceeds a specified threshold. For goods in the First Schedule, tax is payable at the specified rate and point.

Section 7A. Levy of purchase Tax: This section applies when a dealer purchases goods (the sale or purchase of which is liable to tax) in circumstances where no tax is payable under Sections 3 or 4. This includes situations where the goods are consumed in manufacturing other goods for sale, disposed of in the state in a way other than sale, or dispatched outside the state except as a direct result of inter-state trade. In such cases, the purchasing dealer pays tax on the purchase turnover.

Section 8. Exemption from tax: Specifies that dealers of goods in the Third Schedule are exempt from tax, subject to prescribed conditions.

Section 17. Power of Government to notify exemptions and reductions of tax: Empowers the Government to grant prospective or retrospective tax exemptions or rate reductions for specific goods or classes of persons.

Kerala General Sales Tax Act, 1963:

Section 5. Levy of tax on sale or purchase of goods: This is the charging section, similar to Tamil Nadu's Section 3, imposing tax on taxable turnover for dealers exceeding a certain turnover threshold. Goods in the First or Second Schedule are taxed at specific rates and points. It also includes provisions for turnover tax on specific goods and by certain types of dealers. Certain deductions are allowed from turnover tax, such as inter-state trade, export/import, and notified exemptions.

Section 5A. Levy of purchase tax: This provision is pari materia to Section 7A of the Tamil Nadu Act. It levies purchase tax when a dealer purchases goods liable to tax, but no tax is payable under Section 5, and the goods are consumed in manufacturing, disposed of outside the state (except inter-state sale), or disposed of within the state in a non-sale manner. The tax rate is as mentioned in Section 5.

Judicial Precedent and Analysis:

The Court extensively relied on the 1975 three-judge bench decision in State of Tamil Nadu v. M.K. Kandaswami and Others. This case interpreted Section 7A of the Madras General Sales Tax Act, 1959 (similar to the current Tamil Nadu Act), outlining six cumulative ingredients for purchase tax levy. Crucially, M.K. Kandaswami rejected the idea that a sales exemption would automatically benefit the purchaser, asserting that Section 7A is a separate charging provision aimed at preventing tax leakage. The Court clarified that "goods, the sale or purchase of which is liable to tax" refers to the inherent character of the goods as "taxable goods," not whether tax was actually paid on a particular transaction.

The judgment also addressed the conflicting views presented in subsequent cases:

Goodyear India Ltd. and Others v. State of Haryana and Another (1990): This case, in the context of the Haryana General Sales Tax Act, held that purchase tax was levied when goods lost their identity through manufacturing or were dispatched outside the state, not merely upon purchase.

Hotel Balaji and Others v. State of A.P. and Others (1993): This three-judge bench case expressly disagreed with Goodyear, reaffirming the M.K. Kandaswami principle. It stated that purchase tax becomes leviable when goods are used as raw materials in manufacturing taxable goods, regardless of whether the manufactured goods are sold within the state or consigned elsewhere. The Court emphasized that the tax is on the purchase price of raw materials, not on the value of manufactured products or consignment.

Devi Dass Gopal Krishan Pvt. Ltd. and Others v. State of Punjab and Others (1994): This three-judge bench further affirmed Hotel Balaji, explicitly stating that Goodyear did not lay down the correct law.

The Supreme Court in the present case firmly endorsed the reasoning in M.K. Kandaswami, Hotel Balaji, and Devi Dass, stating that Section 5A/7A imposes purchase tax precisely in situations where the seller benefits from a sales tax exemption. The Court highlighted that the legislations do not aim to tax the same transaction twice but rather to levy purchase tax only when sales tax is not payable.

Furthermore, the Court dismissed arguments that purchase tax is leviable only with cross-border or inter-state movement of goods, or that it is a consignment tax. It reiterated that the state legislature has the power to impose such tax, as it does not impinge on the power to tax inter-state sales. The Court also rejected the argument that the applicable purchase tax rate should be "nil" simply because the sales tax was exempted, emphasizing that such an interpretation would defeat the very purpose of Section 7A.

In conclusion, the Supreme Court upheld the constitutional validity of Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act, ruling in favor of the Revenue and dismissing the appeals by the assessees.

Central Sales Tax Act, 1956