V.RAMASWAMI - (1.) SPECIAL leave granted.
(2.) THE appellant is a registered dealer under the Karnataka Sales Tax Act (hereinafter called 'the Act'). THE appellant (hereinafter referred to 'the assessee') purchases iron scrap from dealers inside and outside the State of Karnataka for the purpose of manufacturing iron ingots, steel rounds and torsteel. THEse manufactured goods were sold mostly within the State. In respect of the Assessment Years 1972-73 to 1974-75, accepting the contentions of the assessee that the goods sold were manufactured out of tax suffered iron scrap, the Commercial Tax Officer exempted the sales turn-over of the manufactured goods. THE Deputy Commissioner of Commercial Taxes in exercise of his powers under section 21 of the Act restricted the exemptions but otherwise confirmed the assessment order by his order dated 11-5-1979. THE respondent Commissioner of Taxes, Bangalore initiated proceedings under section 22 (A) of the Act for revising the order of the Deputy Commissioner on the ground that the assessee had been allowed exemption in respect of the turn-over of manufactured goods without verifying as to whether the inputs iron scrap had suffered taxes and that Explanation II to Schedule IV of the Act was applicable or not. THE appellant filed the writpetition praying for the issue of a writ certiorari to quash the show cause notice issued by the respondent under Section 22 (A) of the Act challenging the constitutional validity of Section 5(4) of the Act in so far as it pertains to item 2 of Schedule IV to the Act read with Explanation II thereof in respect of its application for the period prior to 1-4-1978 as violative of Article 304 (a) of the Constitution. It may be pointed out at this stage that in Mangalore Metal House v. State of Karnataka (1986) 63 STC 482 the High Court upheld the Explanation II to Schedule IV of the Act which is differently worded in its application for the period subsequent to 1-4-1978. It may also be mentioned that the High Court had confined itself only to the challenge of the constitutionil validity of the provision and left open the other question on merits including the validity of' the notices to be agitated after exhausting the appellant's remedy before the Sales Tax authorities. The High Court was of the view that the provision providing for not levying tax, if at an earlier stage tax has been paid, is only in the nature of exemption and the exemption arises only on proof that the tax has been paid at an earlier stage on the goods out of which the goods in question were manufactured, that there is nexus between the finished goods and the raw material used for manufacturing the same that it is not correct to state that the tax is not payable on the finished goods manufactured out of local raw material but the discrimination if at all would arise only in the quantum of tax payable, for the tax on finished goods will be definitely higher than on the raw material. The High Court was of the further view that there is no discrimination in the rate of tax between the imported items and the local items of finished goods of iron steel as such and that the variation in the quantum of tax is on account of the scheme of taxation working differently on different dealers, those who import raw material and manufacture and those who locally purchase and manufacture and hence such an effect is only indirect result and not having direct or immediate impact. In that view the High Court dismissed the writ petition and gave liberty to the appellant to file objections before the Commissioner of Commerical Taxes for dealing with questions on merits. This appeal has been filed against the said judgment of the High Court. The main point that was urged in this appeal was that Section 5(4) of the Act in so far as it pertains to item 2 in the IV Schedule read with the Explanation II is violative of Art. 304(a) of the Constitution as under that provision the sale of finished goods manufactured out of imported raw material is taxed but the sale of finished goods manufactured out of locally purchased raw material is not taxed and that amounts to hostile discrimination in the rate of tax or quantum of tax.
(3.) SECTION 5 (4) of the Act is the charging SECTION in respect of declared goods and the relevant, portion reads as follows: "(4) Notwithstanding anything contained in sub-section (1) (or section 5B or section 5C) a tax under this Act shall be levied in respect of the sale or purchase of any of the declared goods mentioned in column (2) of the Fourth Schedule at the rate and only at the point specified in the corresponding entries of columns (4) and (3) of the said Schedule on the dealer liable to tax under this Act on this taxable turnover of sales or purchases in each year relating to such goods: Provided that where tax has been paid in respect of the sale or purchase of any of the declared goods under this sub-section and such goods are subsequently sold in the course of inter-State trade or commerce, and tax has been paid under the Central Sales Tax Act, 1956 (Central Act 74 of 1956) in respect of the sale of such goods in the Course of inter-State trade or commerce, the tax paid under this Act shall be reimbursed to the person making such sale in the course of inter-State trade or commerce in such manner and subject to such condition as may he prescribed. Provided further that in respect of the sale of cereals mentioned in serial number 9 of the Fourth Schedule, made by any person to a procurement agent appointed by the Government of Karnataka or to any subagent of such procurement agent in pursuance of the Karnataka Rice Procurement (Levy) Order, 1981 or any other foodgrains procurement (Levy) Order of the Government of Karnataka for the time being in force, such sale shall not be deemed to be, but the subsequent sale by the said procurement agent or sub-agent shall be and shall be deemed to be the point at which the tax under this Act shall be levied. Provided also that where tax has been paid under this sub-section on the purchase of paddy and such paddy is either subsequently sold to or is hulled and the resultant rice is sold to a procurement agent appointed by the Government of Karnataka or to any subagent of such procurement agent in pursuance of the Karnataka Rice Procurement (Levy) Order, 1984 or any other Foodgrains Procurement (Levy) Order of the Government of Karnataka for the time being in force, the tax paid under this Act on the purchase of such paddy shall be reimbursed to the person making such sale to such procurement agent or his sub-agent, as the case may be, in such manner and subject to such conditions as may be prescribed." The IV Schedule to the Act contains a list of declared goods specifying the point of levy and the rate of tax. Item 2 of this Schedule relates to iron steel since the interpretation of this item is in question the relevant portion of item 2 may be extracted and the reads as follows: "FOURTH SCHEDULE JUDGEMENT_617_SUPP1_1990Html1.htm By Karnataka Act 13 of 1982 Explanation II was added to item 2 of the IV Schedule with retrospective effect from 1-10-1957 and to be effective till 31-3-1978 and that Explanation .reads as follows: "Explanation II:- Where tax has been paid in respect of the sale or purchase of: (i) iron scrap, cast iron scrap, runner scrap and iron skull scrap referred to in entry (i) of serial number 2 or in respect of steel melting scrap in all forms including steel skull turnings and borings referred to in entry (x) of serial number 2 and out of the said scrap, steel semis (ingots, slabs, blooms and billets of all qualities, shapes and sizes) referred to in entry (ii) of serial number 2 are manufactured and sold: or (ii) steel semis (ingots, slabs, blooms and billets of all qualities, shapes and sizes) referred to in entry (ii) of serial number 2 and out of the said steel semis any re-rolled products of iron and steel referred to in anyone or more of the entries at (iii), (v), (vii) and (xv) serial No. 2 are manufactured and sold, no tax shall be leviable on the sale of the said steel semis or the re-rolled products as the case may be. Provided that the dealer claiming exemption of tax under this explanation furnished before the assessing authority concerned proof of levy and payment of tax by the previous or earliest of successive dealers on the said scrap or steel semis used in the manufacture of the steel semis re-rolled products, as the case may be. Provided further that in respect of the said steel semis or the said re-rolled products of iron and steel, no amount was collected by the dealer from his customers by way of tax or purporting to be by way of tax." As already stated the appellant purchases iron scrap both from local registered dealers and also from the dealers outsider the State of Karnataka and manufactures ingots and sells the same mostly within the State of Karnataka. The constitutional validity of the above said provision is challenged on the ground that while the appellant's sale of ingots manufactured out of locally purchased scrap will not be subjected to tax, the appellant's sale of ingots manufactured out of scrap purchased from outside the State of Karnataka would be subjected to tax.;