Business

Intractable issues in two-State taxation

Final solution will have to wait for a Central mechanism to be put in place

PROBLEMS RELATED to two different States asserting their right to tax the same sale transaction arose as far back as 1991 and still there is no clear solution despite many legal and legislative attempts to solve them.

In its judgement in the case of Ashok Leyland Ltd., reported in 105 STC 152, in paragraph 22, the Supreme Court observed that the situation of the assessee facing two-State taxation was no doubt real, which might indeed put the assessee in good amount of jeopardy.

However, the Apex Court rejected the assessee's contention that once Form - F declarations were filed, a finality was reached and such assessments could not be reopened.

Finally, the Court gave a suggestion to the Central Government to form an authority to decide such disputes relating to two-State taxation in the interests of inter-State trade and commerce.

The view taken by the two judges bench of the Apex Court in the said case has now been overruled by a three judges bench of the Court in the case of Ashok Leyland Ltd., reported in 134 STC 473.

In the said case, the bench has held that once Form-F declarations are filed and an order is passed under Section 6-A of the Central Sales Tax Act. 1956, it is conclusive for all purposes.

Such assessments can, however, be reopened on a small set of grounds such as fraud, misrepresentation and collusion.

Centre's inaction

It is interesting to note that even though the suggestion was given by the Supreme Court in 1997 to form a Central mechanism in the first case, till the date of the second case on January 7, 2004, no action was taken by the Central Government and the matters were pending before the Apex Court.

In view of the Centre's inaction, the Apex Court, in the second case, directed the assessees to approach the High Court to ventilate their grievances till a regular authority was formed.

In the meantime, the Central Government became aware of the difficulties of assessees and made an amendment to Sec. 6-A of the Central Sales Tax Act.

The amendment prescribes the filing of Form F declaration as mandatory and, in the absence of the declaration form, the movement of such goods shall be deemed, for all purposes of the Act, to have been occasioned as a result of sale.

The amendment was brought into force by the Central Sales Tax (Amendment) Act, 2001 (Central Act 20 of 2002) which was effective from May 11, 2002. Secondly, Sec. 19 to 26 were incorporated under the Central Sales Tax Act, and an authority to settle disputes arising in the course of inter-State trade or commerce was formed. It was gazetted on September 12, 2001, and inserted by the Central Sales Tax (Amendment) Act, 41 of 2001.

However, the Central Government kept quiet and the authority was notified with effect from March 17, 2005. The Advance Ruling Authority created for purposes of the Income-tax Act was designated to act as the Central mechanism till a regular authority was formed.

In view of Notification No.11 of 2005 dated March 17, 2005, against any order of assessment made by disallowing the claim of exemption under Section 6-A, the assessees are required to approach the Central mechanism, and the Appellate Authority created under the local Act has no power to entertain disputes relating to disallowance of the claim under Sec. 6-A.

Consolidated order

But, the difficulty is, a consolidated order of assessment is passed and no separate orders are passed under Sec. 6-A. In the aforesaid circumstances, it is not possible for the assessees to challenge the order of disallowance under Sec. 6-A alone before the Central Sales Tax Appellate Authority which is competent to adjudicate upon the issue as on date.

Once appeals are filed before the Authority, the appeals are numbered, but no hearing date is fixed.

It seems the Authority had some reservations in entertaining appeals directly against the orders of assessments, and requested the Central Government to make necessary amendment by providing appeals to them against the final orders passed by the Appellate Authorities in Tamil Nadu, that is, the Tamil Nadu Sales Tax Appellate Tribunal.

Enabling bill for appeals

It seems that accepting the suggestion of the Authority, a bill to amend the Central Sales Tax Act was introduced by the Finance Minister on December 15, 2005 (and passed subsequently) providing for appeals before the Central Sales Tax Appellate Authority against orders of the "highest Appellate Authority in the State, and not against the orders of the Assessing Authority."

In the peculiar circumstances, as on date, the aggrieved assessee facing disallowance of his claim under Sec. 6-A has no remedy but to approach the High Court again by challenging the order of assessment.

In fact, realising the difficulties of the assessee, the Madras High Court admitted certain writ petitions and granted stay, in view of the payment of the taxes already made by the assessee before the other State.

Parties to litigation

The question is, whether the amendment which takes effect from March 1 is in conformity with the directions of the Apex Court. In the case in 105 STC 152, the Apex Court had considered the issue and clearly held that the other State government, to which the assessee had already paid tax, is a necessary party to the litigation.

The Apex Court had also noted that the other State governments were necessary parties to the litigation and the Appellate Authorities functioning in Tamil Nadu had no power to bring them on record and adjudicate upon the issue.

Moreover, the other State governments which appeared before the Supreme Court contended that the Government of Tamil Nadu was starved of revenue and as on date, there was no law to compel them to go before the Tamil Nadu Authorities, and they could very well refuse to participate in such enquiries.

New authority mooted

By taking note of the above argument, suggestions were given by the Apex Court to the Central Government to create an authority and such an authority would bring all State governments on record and decide the issue regarding entitlement of the State government to tax a particular transaction.

Even though, in the original provision, the intention of the Supreme Court is complied with, the Central Government has gone back upon its stand and passed a bill to the effect that an appeal will lie only against the order of the highest Appellate Authority in the State, viz., to the Central Sales Tax Appellate Authority. In such a situation, the question that now arises is whether the assessee which had already paid the taxes before the other State Government is required to agitate the matter before the Tamil Nadu Authorities by making payment of 25 per cent of the taxes for filing a first appeal and, again, filing a second appeal by paying the full taxes, before the Tribunal.

The necessary party to the litigation, that is, the other State government which had received the revenue on the disputed transaction, will not be heard and the issue will be decided one-sidedly by the Appellate Authorities. Therefore, there is no point in providing an appeal to the Central mechanism against the final orders of the Appellate Authorities in Tamil Nadu.

In such an event, the assessee has to contest the litigation in the absence of the required respondent(s) and this goes against the suggestion given by the Apex Court in paragraph 24 of its judgement in the case of Ashok Leyland Ltd., reported in 105 STC 152.

The present amendment clearly nullifies and defeats the very purpose of the creation of the Central Sales Tax Appellate Authority.

R. L. RAMANI

Advocate, Chennai

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