Supreme Court Upholds Tax on Vehicle Possession for Manufacturers and Dealers: Tata Motors vs. State of Jharkhand (2018)

Introduction

Date of the Judgment: 14 December 2018

Citation: (2018) INSC 1087

Judges: A.K. Sikri, J., M.R. Shah, J.

Can a state government levy taxes on motor vehicle manufacturers and dealers for the vehicles they possess before the vehicles are sold to the end consumers? This was the core question before the Supreme Court. The Court examined whether the State of Jharkhand could impose a tax under the Bihar Motor Vehicles Taxation Act, 1994, on the chassis of vehicles held by manufacturers before sale. The judgment was delivered by a two-judge bench of Justices A.K. Sikri and M.R. Shah.

Case Background

The case revolves around the interpretation of the Bihar Motor Vehicles Taxation Act, 1994, and its application to motor vehicle manufacturers and dealers. The appellants, primarily Tata Motors and other dealers, were contesting the levy of tax under Section 6 of the Act. This section imposes a tax on vehicles held under trade certificates by manufacturers or dealers in the course of their business.

The dispute arose because manufacturers and dealers often possess vehicles from the time they are manufactured until they are sold to the end consumer. During this period, the vehicles are sometimes driven for testing or transportation. The State of Jharkhand sought to tax these vehicles under Section 6 of the Bihar Act, in addition to taxes paid under Section 7(4) for temporary registration and Section 5 for final registration by the end consumer.

Timeline

Course of Proceedings

The appellants initially challenged the levy of tax under Section 6 of the Bihar Act in the Patna High Court. The High Court, in the case of Tata Engineering and Locomotive Company Ltd. vs. State of Jharkhand (TELCO case), upheld the validity of Section 6, stating that the State Legislature was competent to impose such a tax.

Following this, the District Transport Office, Jamshedpur, confirmed the tax demand under Section 6. This order was upheld by the Appellate and Revisional Authorities. The appellants then filed writ petitions in the High Court, which were dismissed. Subsequently, the matter reached the Supreme Court.

Additionally, some dealers challenged the imposition of penalty and interest for delayed payment of tax under Section 6. The High Court dismissed their case, following its earlier judgment in the TELCO case.

Legal Framework

The core of the dispute lies in the interpretation of Sections 5, 6, and 7 of the Bihar Motor Vehicles Taxation Act, 1994.

• Section 5: This section mandates that “every owner of a registered motor vehicle shall pay tax on such vehicle at the rate specified in Schedule I.” This tax is paid by the ultimate buyer upon registration of the vehicle.
• Section 6: This section stipulates that “a tax at the annual rate specified in Schedule III in lieu of the rates specified in Schedule I shall be paid by a manufacturer or a dealer in motor vehicles in respect of the motor vehicles in his possession in the course of his business as such manufacturer or dealer under the authorisation of trade certificate granted under the Central Motor Vehicles Rules, 1989.” This is the section under dispute, concerning tax on vehicles held by manufacturers and dealers.
• Section 7(4): This section deals with temporary registration of vehicles under Section 43 of the Motor Vehicles Act, 1988, stating that “the tax for vehicles other than personalised vehicles shall be levied at the rate of 1/12th of the tax payable for the year for such vehicles.”

The Bihar Act was enacted under Entry 57 of List II (State List) of the VIIth Schedule to the Constitution, which allows the State Legislature to impose taxes on vehicles suitable for use on roads.

Arguments

The appellants, primarily manufacturers and dealers, argued that they should not be liable to pay tax under Section 6 of the Bihar Act. Their main submissions were:

• The State Legislature lacks the competence to levy tax merely on the ‘possession’ of vehicles. They argued that Entry 57 of List II of the VIIth Schedule to the Constitution does not empower the State to tax vehicles based solely on possession.
• Section 6 of the Bihar Act is not applicable to manufacturers after the 1994 amendment to the Motor Vehicles Act, 1988, which removed manufacturers from the definition of ‘dealer’. They contended that the tax under Section 6 was intended for vehicles held under trade certificates, which are primarily for dealers, not manufacturers.
• The phrase ‘in lieu of’ in Section 6 implies that the tax should be an alternative to the tax under Section 5, not an additional tax.
• The imposition of penalty was not justified as their actions were bona fide, and they had challenged the tax demand in court.

The respondents, the State of Jharkhand, countered these arguments by stating:

• The State Legislature is competent to impose tax on vehicles suitable for use on roads, as per Entry 57 of List II of the VIIth Schedule to the Constitution. The fact that the vehicles are in the possession of the manufacturer or dealer is not relevant.
• The amendment to the Motor Vehicles Act, 1988, is irrelevant to the provisions of the Bihar Act. Section 6 of the Bihar Act applies to both manufacturers and dealers, regardless of the definition of ‘dealer’ under the Central Act.
• The phrase ‘in lieu of’ means that the tax under Section 6 is in place of the tax under Schedule I, not in addition to it.
• The penalty was rightly imposed as per Section 23 of the Bihar Act for non-payment of tax within the prescribed period.

The High Court had earlier rejected the challenge to the vires of Section 6 in the TELCO case, which was upheld by the Supreme Court. The High Court had also held that the amendment to the Motor Vehicles Act, 1988, would have no relevance to the provisions contained in the Bihar Act.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the manufacturers or dealers of motor vehicles are liable to pay tax under Section 6 of the Bihar Motor Vehicles Taxation Act, 1994, on the vehicles in their possession before they are sold to the ultimate consumer.
2. If the tax under Section 6 is upheld, whether the imposition of penalty and interest for delayed payment was justified.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

The Supreme Court dismissed all the appeals, upholding the tax liability under Section 6 of the Bihar Act and the imposition of penalty.

The Court held that the State Legislature was competent to impose tax on vehicles suitable for use on roads under Entry 57 of List II of the VIIth Schedule to the Constitution. The tax under Section 6 is on vehicles in possession of the manufacturer or dealer in the course of their business, and the amendment to the Motor Vehicles Act, 1988, does not affect the provisions of the Bihar Act.

The Court also held that the tax under Section 6 is in place of the tax under Schedule I, not in addition to it. The penalty was rightly imposed for non-payment of tax within the prescribed period.

The Court distinguished the case of Hindustan Steel Ltd. v. State of Orissa, stating that the specific provisions of the Bihar Act regarding penalty were applicable.

Treatment of Submissions

Treatment of Authorities

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the interpretation of Entry 57 of List II of the VIIth Schedule to the Constitution, which allows the State to tax vehicles suitable for use on roads. The Court emphasized that the tax under Section 6 of the Bihar Act was on the event of the vehicle being possessed by the manufacturer or dealer in the course of their business.

The Court also highlighted that the amendment to the Motor Vehicles Act, 1988, was irrelevant to the provisions of the Bihar Act. The tax was not solely based on the definition of ‘dealer’ but on the possession of vehicles suitable for road use.

The Court also considered the legislative intent behind Section 6, which was to tax vehicles in the possession of manufacturers and dealers before they are sold to the end consumer. The Court also considered the fact that the High Court had already upheld the validity of Section 6 in the TELCO case, which was not challenged by the appellants.

The Court also considered the fact that the penalty was imposed as per Section 23 of the Bihar Act for non-payment of tax within the prescribed period.

Sentiment Analysis of Reasons

Fact:Law Ratio

Logical Reasoning

Issue 1: Liability of Manufacturers/Dealers under Section 6

Issue 2: Imposition of Penalty and Interest

Key Takeaways

• State governments have the power to tax vehicles suitable for use on roads, even if they are in the possession of manufacturers or dealers before sale.
• The tax under Section 6 of the Bihar Act is applicable to both manufacturers and dealers who possess vehicles in the course of their business.
• The amendment to the Motor Vehicles Act, 1988, which removed manufacturers from the definition of ‘dealer,’ does not affect the tax liability under the Bihar Act.
• Manufacturers and dealers must pay tax under Section 6 of the Bihar Act in addition to any other taxes applicable to them.
• Penalties can be imposed for non-payment of tax within the prescribed period.

Directions

No specific directions were given by the Supreme Court other than dismissing the appeals. The tax authorities were allowed to continue with the tax demand and penalty imposition.

Specific Amendments Analysis

The judgment discusses the amendment to the Motor Vehicles Act, 1988, in November 1994, which removed manufacturers from the definition of ‘dealer’. However, the Court held that this amendment does not affect the provisions of the Bihar Motor Vehicles Taxation Act, 1994. The Court clarified that the Bihar Act is a separate piece of legislation enacted by the State Legislature under Entry 57 of List II of the VIIth Schedule to the Constitution, while the Motor Vehicles Act, 1988, is a Central Act enacted by the Union Parliament.

Development of Law

The ratio decidendi of this case is that the State Legislature has the competence to impose tax on vehicles suitable for use on roads, even if they are in the possession of manufacturers or dealers before sale. The tax under Section 6 of the Bihar Act is applicable to both manufacturers and dealers who possess vehicles in the course of their business. This judgment clarifies that the tax is not solely based on the definition of ‘dealer’ under the Central Act but on the possession of vehicles suitable for road use. This reinforces the State’s power to tax vehicles within its jurisdiction.

Conclusion

The Supreme Court upheld the tax liability of motor vehicle manufacturers and dealers under Section 6 of the Bihar Motor Vehicles Taxation Act, 1994, for vehicles in their possession before sale. The Court held that the State Legislature has the competence to impose such a tax and that the amendment to the Motor Vehicles Act, 1988, does not affect the provisions of the Bihar Act. The Court also upheld the imposition of penalty for non-payment of tax within the prescribed period.