Holding

Section 8‑E of the Uttar Pradesh Trade Tax Act, 1948 cannot be applied to inter‑state transactions and the High Court’s reading‑down of the provision was erroneous.

Summary

The appellant, an agent purchasing mentha oil in Uttar Pradesh for principals outside the state, was detained by the State Revenue for not deducting tax under Section 8‑E of the Uttar Pradesh Trade Tax Act, 1948. The agent filed a writ petition challenging the constitutional validity of Section 8‑E, arguing that the transaction was inter‑state, the sellers were not ‘dealers’, and the State lacked legislative competence to levy tax on such transactions. The Allahabad High Court upheld the provision by reading it down to apply only to intra‑state sales and held the agent liable for purchase tax under Section 3(1). On appeal, the Supreme Court held that the High Court erred in reading down the provision, that the validity of Section 8‑E cannot be decided by statutory authorities, and that the provision cannot be applied to inter‑state transactions. The Court directed the trade tax authority to determine the factual nature of the transaction and apply the principles laid down in Steel Authority of India and Nathpa Jhakri cases. The appeal was allowed with directions.

Issues considered

The constitutional validity of Section 8‑E of the Uttar Pradesh Trade Tax Act, 1948 with respect to inter‑state transactions.
Whether the High Court could validly read down Section 8‑E to limit its application to intra‑state sales.
The applicability of the alternative‑remedy doctrine to the writ petition.
The liability of the agent to pay purchase tax under Section 3(1) when Section 8‑E is inapplicable.

Legislation cited

Central Sales Tax Act, 1956s. 3, s. 4, s. 5
Uttar Pradesh Trade Tax Act, 1948s. 2(c), s. 3(1), s. 8-E

Subjects

constitutional validityinter‑state transactionstate legislative competencereading downtrade taxUttar Pradesh Trade Tax Actdeduction at sourcepurchase taxalternative remedy

Judgment

A M/S RAPT! COMMISSION AGENCY
v.
STATE OF U.P. AND ORS.

AUGUST 2, 2006

B [ARIJIT PASA VAT AND S.H. KAPADIA, JJ.]

U.P. Trade Tax Act, 1948-Section 8-E-Agent purchases and consigns
goods to its principal siluated outside the State-Revenue detained one of the
C consignments for not deducting tax from payments made to sellers and
depositing tax-Writ Petition before High Court by the agent challenging
constitutional validity vf section 8-E of the Act for levying tax on an inter-
state transaction---High Court upheld the constitutional validity of the Section
by reading down the provision to make it applicable only to intra-State sales!
purchases-Correctness of-Held, Section 8-E of the Act cannot be made
D applicable to inter-State transactions--High Court was in error by reading
down the provision without going intu the facts-Directions issued to Revenue
to deal with the case in accordance with law.

Appellant-agent purchases Mentha Oil from sellers/agriculturists and
consigns them to its principal situated in another State. Respondent-State
E Revenue detained one of the consignments and issued a notice to the
appellant stating that the detention was made for not deducting tax from
the payment made to the seller/agriculturists and depositing the same as
0

required under section 8-E of the Uttar Pradesh Trade Tax Act, 1948. The
appellant replied to the notice stating it is not liable to deduct and deposit
F tax under the Act as it merely purchases and consigns them for and on
behalf of its principal situated outside the State. When the Revenue insisted
on the deposit of the tax, the appellant, by a Writ Petition before High
Court, challenged the constitutional validity of section 8-E of the Act
contending that the sellers/agriculturists cannot be treated as a 'dealer'
under the proviso to section 2(c) of the Act; and that, the State does not
G have legislative competence to levy tax on inter-State transactions. The
High Court dismissed the Writ petition holding that the language of a
statutory provision can bee narrowed down to sustain its constitutional

-
validity and accordingly held that Section 8-E of the Act is valid and is
applicable only to intra-State sales/purchases; and that the appellant,

H 250
RAPT! COMMISSION AGENCY v. STATE OF U.P. 251

though not liable under section 8-E of the Act, is otherwise liable to pay A
purchases tax on the purchases made from them under section 3(1) of the
Act.

In appeal to the Court, the appellant contended that the State has
no competence to collect tax under the Act as the transactions are inter-
state in nature; and that, when it is not liable to pay tax under the Act, it B
cannot be compelled to go through the procedure under the Act for the
purpose of assessment and determination of tax, if any.

The State, supporting the High Court judgment, raised a preliminary
objection contending that the Writ Petition will not lie since there is an
alternative remedy available under the Act. c
Allowing the appeal with directions, the Court

HELD: 1.1. The plea of alternative remedy has not been raised by
the State before High Court as there is no discussion in its judgment in
this regard. Further, the constitutional validity of Section 8-E of the Uttar D
Pradesh Trade Tax Act, 1948 cannot be decided by the statutory
authorities under the Act. 1254-BJ

1.2. The High Court observed that the language of Section 8-E of
the Act can be narrowed down so as to make it applicable only to intra-
state sales/purchases. The appellant raised the dispute on the factual E
aspects contending that the transaction was one of inter-state character.
Its emphasis was on the validity of the provision vis-a-vis inter-state
transactions. There was no necessity of any reading down as there was
no dispute in the case at hand relating to intra-states. The question of the
appellant having liability to pay purchases tax was also not a relevant
factor for determination of the basic question regarding validity of section · F
8-E of the Act. The nature of a transaction cannot be decided on the basis
of the provisions of a taxation statute. It has to be factually examined. The
High Court, instead of focussing on the factual aspects, dealt with issues
not relevant, and that too giving clearly indefensible interpretations. The
factual aspects should have been asked to be dealt with by the authorities. G
By directing the authorities to do it after laying down the law, which was
not the correct position in law, would really serve no purpose. Section 8-
E of the Act cann~t be held to be applicable to inter-State transactions.
1257-D-E-F-G-H; 258-BJ

Steel Authority of India v. State of Orissa and Ors., 1200013 SCC 200 H
252 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A and Nathpa Jhakri Joint Venture v. State af H.P. and Urs., 120001 3 sec
319, relied on.

Minerva Mills ltd and Ors. v. Union of India and Urs., [ 19801 3 SCC
625; Mis Bhawani Cotton Mills ltd. v. State of Punjab and Anr., AIR (1967)
SC 1616 and M.P. Cement Manufacturers· Association v. State of M.P. and
B Ors., 120041 2 sec 249 referrea to.

Northern Securities Company v. United States, 193 US 197, referred

c
to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 9687 of2003.

From the Judgment and Order dated 8.7.2003 of the High Court of
-
Allahabad, in Civil Misc. Writ Petition No. 865 of 2001.

Dhruv Agarwal and Praveen Kumar for the Appellant.

D R.G. Padia, S. Wasim A. Qadri, Kamlendra Mishra, R.K. Dubey and
Rashmi Singh for the Respondents.

The Judgment of the Court was delivered by

ARIJIT PASA YAT, J. Challenge in this Appeal is to the judgment
E rendered by a Division Bench of the Allahabad High Court repelling the
challenge to constitutional validity of Section 8-E of the Uttar Pradesh Trade
Tax Act, 1948 (in short the 'Act'). By the impugned judgment several writ
petitions involving identical challenge were disposed of. Aforesaid Section 8-
E of the Act was inserted by Section 7 of the U.P. Act No. 11 of 2001.

F A brief reference to the factual aspects would suffice.

Appellant filed the writ petition, inter a/ia, with following stands:-

Appellant is an agent of principals situated outside the State of Uttar
Pradesh, who for the sake of convenience are described as 'Ex-U.P. Principals'.
G Appellant purchased Mentha Oil for and on behalf of Ex-U.P. Principals and
dispatched them to the said principals on the basis of agreements entered
into. One consignment of Mentha Oil was detained by the Trade Tax officer,
Mobile Squad, Jhansi and the driver was informed by a notice that the detention
was made because the appellant had not deducted the tax from the sellers/
H agriculturists and had not deposited the same in terms of Section 8-E of the
RAPT! COMMISSION AGENCY v. STATE OF U.P. (PASA YAT, J.] 253
Act. Appellant sent a reply on 11.7.2001 stating that the purchase of Mentha A
Oil was for and on behalf of Ex-U.P. Principals from the agriculturists and
all the documents accompanying the consignment clearly established this
fact. When the authority insisted on deposit of the tax in terms of Section 8-
E of the Act the Writ Petition was filed. Because similar detentions were
made in case of others, writ petitions were filed challenging constitutional B
validity of Section 8-E of the Act. The primary challenge was that the seller
was not a "dealer" as defined in the Act i.e. Section 2( c). Reference was
made to proviso to the provision in this regard. Further the transactions in
question being inter-state in character the State Government did not have
' legislative competence to provide for deduction of tax in respect of such
transactions. The respondents-State and its functionaries who were respondents C
in the writ petition supported the constitutional validity of the impugned
provision.

The High Court basically came to the conclusion that the language of
a statutory provision can be narrowed down if that is necessary to sustain the
constitutional validity. Accordingly it was held that the language of Section D
8-E of the Act shall be narrowed down so as to make it applicable only the
intra-State sales/purchases and held the provision to be valid. It was further
held that even though the agriculturists/farmers who sell their produces to the
appellant cannot be treated as "dealer" in view of proviso to Section 2( c), yet
appellant had a liability to pay purchase tax on the purchases made in view E
of Section 3(1) of the Act. Though the High Court held that the trade tax
authority concerned may decide in respect of each transaction on the facts of
each case whether it is an intra-State sale or purchase or not, that according
to the High Court did not affect validity of Section 8-E.

Questioning correctness of the judgment of the High Court learned p
counsel for the appellant submitted the High Court clearly missed to notice
the basic issues involved. The transactions being undisputedly inter-State
transactions, the State legislature had no competence to provide for deduction
of tax at the time of making purchase. Strong reliance was placed on the
decisions of this Court in Steel Authority of India Ltd. v. State of Orissa and
Ors., [2000] 3 sec 200 and Nathpa Jhakri Joint Venture v. State of H.P. and G
Ors., [2000] 3 SCC 319 with reference to the decisions of this Court in
Mis Bhawani Cotton Mills Ltd. v. State of Punjab and Anr., AIR (1967) SC
1616. It was submitted that when a person has ultimately no liability to pay
tax, he cannot be compelled to go through the procedure provided under the
statute for the purpose of assessment and determination of tax liability, if H
254 SUPREME COURT REPORTS [2006[ SUPP. 4 S.C.R.

A any. It was pointed out that the notice issued itself accepted the position that
the transaction was an inter-State one.

In response. learned counsel for the respondent-State submitted that the
High Court has rightly upheld the constitutional validity of Section 8-E of the
Act. According to him, the High Court should have dismissed the writ petition
B on the preliminary ground that alternative remedy was available.

Cuming to the plea of alternative remedy, we find that such a plea does
not appear to have been raised by the respondent as there is no discussion in
the High Court's judgment in this regard. Further, the constitutional validity
C of Section 8-E issue could not have been decided by the statutory authorities.
Be that as it may, we find that the High Court has thoroughly confused the
issues. The decisions of this Court in Steel Authority of India's case (supra)
and Mis Nathpa Jhakri 's case (;upra) related to legislative competence in the
matter uf deduction of tax under a state statute in respect of an inter-state
transaction. The High Court commented upon the correctness of the judgments
D observing that several larger Benches decisions were not considered. To say
the least the High Court·s appruach is inappropriate. The decisions in Steel
Authuril)'s case (supra) and Mis Nathpa Jhakri's case (supra) related to
issues on which there appears to be no contrary view taken by any larger
Bench. The High Court could not have sat in judgment over the correctness
E of the judgments of this Court. The High Court appears to have proceeded
on the basis that this Court should have read down the provisions under
consideration to uphold them. What is the basic fallacy in this approach is
illiiminatingly analysed in Afinerva Mills Ltd. and Ors. v. Union of India and
Ors., [ 1980] 3 SCC 625. In paragraphs 64 and 65, the concept of reading
down was succinctly stated as follows:
F "64. xxx xxx xxx

The principle of reading down the provisions of a law for the purpose
of saving it from a constitutional challenge is well-known. But we
find it impossible to accept the contention of the learned Counsel in
this behalf because. to do so will involve a gross distortion of the
G principle of reading down, depriving that doctrine of its only or true
rationale when words of width are used inadvertently. The device of
reading down is not to be resorted to in order to save the susceptibilities
of the !aw makers, nor indeed to imagine a law of one's liking to
have been passed. One must at least take the Parliament at its word
H
RAPT! COMMISSION AGENCYv. STATE OF U.P. [PASAYAT. J.] 255

when, especially, it undertakes a constitutional amendment. A
65. xxx xxx xxx

If the Parliament has manifested a clear intention to exercise an
unlimited power, it is impermissible to read down the amplitude of
that power so as to make it limited. The principle of reading clown B
cannot be invoked or applied in opposition to the clear intention of
the legislature. We suppose that in the history of the constitutional
law, no constitutional amendment has ever been read down to mean
the exact opposite of what it says and intends. In fact, to accept the
argument that we should read down Article 31 C, so as to make it
conform to the ratio of the majority decision in Kesavananda Bharati C
is to destroy the avowed purpose of Article 31 C as indicated by th~
very heading "Saving of certain laws" under which Articles 31 A,
31 B and 31 C are grouped. Since the amendment to Article 31 C was
unquestionably made with a view to empowering the legislatures to
pass laws of a particular description even if those laws violate the D
discipline of Articles 14 and 19, it seems to us Impossible to hold that
we should still save Article 31 C from the challenge of
unconstitutionality by reading into that Article words which destroy
the rationale-of that Article and an intendment which is plainly contrary
to its proclaimed purpose."
E
There is no, and can be none, quarrel to the proposition that if on one
construction a given statute will become ultra vires the powers of the
Legislature whereas on another construction, which may be open, the statute
remains effective and operative, the Court will prefer the latter, on the ground
that the Legislature is presumed not to have intended an excess of its.
jurisdiction. But as observed by Holmes J. in Northern Securities Company F
v. United States 193 US 197, the rule requires that "the statute must be
·construed in such a way as not merely to save its constitutionality but so far
as it is consistent with fair interpretation, not to raise grave doubts on that
score".

The rule does not apply when the offending words have only one G
meaning e.g. when the restricted meaning makes them useless or redundant
(See M.P. Cement Manufacturers' Association v. State of M.P. and Ors.,
[20041 2 sec 249).

In other words, the rule applies only where two views are possible as H
256 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A to the meaning of the statutory language. In neither Steel Authority's case
(supra) nor Mis Nathpa Jhukri 's case (supra) that was the position. The basic
issue related to power to provide for any deduction of tax in respect of inter-
state transactions. There was no issue relating to intra-state transactions.
Therefore, the question of any reading down was of no relevance.

B In Steel Authority of India ·s case (supra) it was inter alia observed as
foilows:

8. By virtue of Entry 54 of List II of the Seventh Schedule read with
Article 246 of the Constitution of India, the States are empowered to
levy taxes on the sale or ·purchase of goods, other than newspapers.
c The Forty-sixth Amendment to the Constitution introduced, inter alia,
Clause (29A)(b) in Article 366 of the Constitution; as a result, tax on
the purchase or sale of goods included a tax "on the transfer of
property in goods (whether as goods or in some other form) involved
in the execution ofa works contract". Article 286(1) of the Constitution
D states that no law of a State shall impose, or authorise the imposition
of a tax on the sale or purchase of goods where such sale or purchase
takes place outside the State or in the course of the import of goods
into, or export of goods out of the territory of India. Article 286(2)
authorises Parliament by law to formulate principles for determining
when a sale or purchase of goods takes place in any of the ways
E mentioned in sub-Article (I). Acting upon this power, Parliament has
set out in Sections 3, 4 and 5 of the Central Sales Tax Act, ! 956
principles for determining when a sale or purchase of goods can be
said to take place in the course of inter-State, trade or commerce,
when a sale or purchase of goods can be said to take place outside
the State and when a sale or purchase of goods can be said to take
F
place in the course of import or export. In Gannon Dunkerley and
Co. and Ors. v. State of Rajusthan and Ors .. [1993] I SCC 364, this
Court has held that it is necessary to exclude from the value of a
works contract the value of goods which are not taxable by a State
in view of Sections 3, 4 and 5 of the Central Sales Tax Act, 1956.
G The value of goods involved in the execution of a works contract has
to be determined after making these exclusions from the value of the
works contract.

13. There can be n-> doubt, upon a plain interpretation of Section
13AA, that it is enacted for the purposes of deduction at source of the
H State sales tax that is payable by a contractor on the value of a works
RAPTI COMMISSION AGENCYv. STATE OF U.P. [PASAYAT, J.] 257
... contract. For the purposes of the deduction neither the owner nor the A
Commissioner who issues to the contractor a certificate under Section
13AA(5) is entitled to take into account the fact that the works contract
involves transfer of property in goods consequent upon of an inter-
State sale, an outside sale or a sale in the course of import. The owner
is required by Section 13AA(l) to deposit towards the contractor's B
liability to State sales tax four per cent of such amount as he credits
or pays to the contractor, regardless of the fact that the value of the
works contract includes the value of inter-State sales, outside sales or
sales in the course of import. There is, in our view, therefore, no
doubt that the provisions of Section 13AA are beyond the powers of
the State legislature for the State legislature may make no law levying C
sales tax on inter-State sales, outside sales or sales in the course of

- import."

In Mis Nathpa Jhakri 's case (supra) the view expressed in Steel Authority
of India's case (supra) was reiterated.
D
The High Court also observed that it was reading down and narrowing
down the language of the provision to sustain the constitutional validity of
the same. It was observed that the language of Section 8-E can be narrowed
down so as to make it applicable only to intra-state sales/purchases. The
appellant in fact raised the dispute on the factual aspects contending that the
transaction was one of inter-state character. Its emphasis was on the validity E
of the provision vis-a-vis inter-state transactions. There was no necessity of
any reading down as there was no dispute in the case at hand relating to intra-
state sales. The question of appellant having liability to pay purchase tax was
also not a relevant factor for determination of the basic question regarding
validity of Section 8-E. The nature of a transaction cannot be decided on the p
basis of the provisions of a taxation statute. It has to be factually examined.
The High Court instead of focussing on the factual aspects dealt with issues
not relevant, and that too giving clearly indefensible interpretations. The
factual aspects should have been asked to be dealt with by the authorities. By
directing the authorities to do it after laying down the law, which as noted
down was not the correct position in law, would really serve no purpose. On G
the facts of the case, there is no need to decide the question relating to
validity of Section 8-E of the Act except stating that the provision is subject
·to what has been stated in Steel Authority's case (supra) and Mis Nathpa
Jhakri's case (supra), for which the factual determination has to be done by
the authorities. Therefore, we allow the appeal subject to the following H
258 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A directions:

(I) The reply filed by the appellant on 11. 7.200 I shall be dealt with by
the respondent no. 3 in accordance with law. The said authority shall decide
as to the nature of the transaction i.e. whether it is of intra- state or inter-state
character. If it is of inter-State character, the decisions in Steel Authority's
B case (supra) and Nathpa Jhakri case (supra) shall apply. Section 8-E, therefore,
cannot be held applicable to inter-State transactions.

(2) The question whether the appellant has any liability to pay purchase
tax shall not be dealt with in the proceedings relating to which the notice was
C issued on 8. 7.200 I and the reply was filed on 11.7 .200 I.

(3) It will be for the appellant to establish that the transaction in question
was of inter-State character.

(4) The appellants shall be given opportunity to file further reply and
D place such materials as according to it are relevant before the concerned
authority within four weeks from today.

(5) Considering the reply and further reply and materials to be placed
for consideration by the appellant, the concerned trade tax authority shall
decide the issue in accordance with law.
E Before we part with the case, it would be appropriate to remind the
legislatures of what was stated in Bhawani Cotton Mill's case (supra) that if
a person is not liable for payment of tax at all, at any time, the collection of
a tax from him, with a possible contingency of refund at a later stage, will
not make the original levy valid, because if sales or purchases are exempt
F from taxation altogether, they can never be taken into account, at any stage,
for the purpose of calculating or arriving at the taxable turnover and for
levying tax. The view was reiterated in Steel Authority's case (supra) and
Nathpa .Jhakri case (supra). In the latter case, it was noted, echoing the view
in Bhawani Cotton Mill's case (supra) that it is no solace to say that such a
person can get refund after completion of assessment. If the principles indicated
G in these cases are followed, large number of unnecessary litigations can be
avoided.

The appeal is allowed to the aforesaid extent without any order as to
costs.

B.S. Appeal allowed with directions.