DY. COMMNR. OF COMMERCIAL TAXES (VIGIL) vs. M/S HINDUSTAN LEVER LTD.

1 REPORTABLE IN THE SUPREME COURT OF INDIA

Deputy Commissioner of ...Appellant(s) Commercial Taxes (Vigilance) Versus M/s Hindustan Lever Limited ...Respondent(s) J U D G M E N T Dipak Misra, J. In the present appeal, by special leave, the appellant has called in question the legal acceptability of the order dated 25.01.2007 passed by the Division Bench of the High Court of JUDGMENT Karnataka at Bangalore in STRP No. 62 of 2004 whereby the Division Bench has dismissed the Special Revision Petition preferred by the appellant-department and affirmed the order dated 27.12.2003 passed by the Special Bench constituting five members of the Karnataka Appellate Tribunal, Bangalore Page 1 2 (for short, “the tribunal”) constituted under the Karnataka Sales Tax Act, 1957 (for short, “KST Act”).

appeal are that Brooke Bond India Limited established its factory at Dharwad in the State of Karnataka and the said factory was engaged in manufacture of blended packet tea. With the passage of time, Brooke Bond India Limited was amalgamated with the respondent-company with effect from 21.03.1997. There is no dispute over the fact that the respondent-company registered under the Companies Act is a dealer under the KST Act. The dealer was granted sales tax exemption benefit for five years from the date of JUDGMENT commencement of production in accordance with exemption eligibility certificate issued by the Government of Karnataka as per the package of incentive granted vide Government Order dated 27.09.1990 and sales tax exemption notification dated 19.06.1991 to which we shall advert to at a later stage. Page 2 3 3. When the matter stood thus, the Assistant Commissioner of Commercial Taxes (Intelligence), Kolar visited the premises

there was contravention of the conditions laid down under Explanation III(e) to the notification dated 19.06.1991. It was noticed by the said authority that sale of tea packets by the respondent-company from the Dharwad unit which had the benefit of exemption and the units manufacturing tea outside Dharwad unit which did not have the benefit of exemption were similarly priced. Two invoices – one from Dharwad unit and one from non-Dharwad unit – were taken note of and found that the ultimate sale price in both cases is Rs. 118 (the JUDGMENT non-Dharwad tea had a sales tax component of Rs. 12.27, whereas the Dharwad tea had no sales tax component). Based on the said material as well as material evincible from the price circulars of the respondent-company found in the office, the intelligence officer arrived at the conclusion that the dealer had added the tax component to the sale price of Dharwad tea Page 3 4 though not under the nomenclature of tax or cess. Hence, it was concluded that the respondent company was not entitled

4. As the facts would further unravel, on the basis of the aforesaid finding of fact of the inspecting authority, a series of assessment orders dated 15.06.1998, 31.01.1999, 22.02.2000 and 01.07.2000 were passed wherein, inter alia, the claim of exemption on the turnovers of Dharwad tea based on notifications dated 27.09.1990 and 19.06.1991 came to be rejected. The assessment orders were assailed before the appellate authority and vide orders dated 25.02.1999, JUDGMENT 07.03.2001 and 23.03.2001 the appellate authority upheld the view of the assessing authority by rejecting the claim of exemption advanced by the assessee on the ground that there was collection of tax by considering the tax component in determination of sale price, though the same was not distinctly shown as tax and collected as such. The orders passed by the appellate authority were challenged before the Page 4 5 tribunal which thought it appropriate to constitute a Special Bench and, accordingly, five members of the tribunal took up

the local tax element in the price fixed, but it cannot be stated that the company has collected the local taxes as such from the consumers in view of the fact that in the invoice against KST and CST, it is specifically left blank in respect of Dharwad tea; and accordingly accepted the stand put forth by the assessee-respondent. The said order was challenged before the High Court in revision petition. 5. The High Court to appreciate the controversy framed the JUDGMENT following three questions of law:- “(1) Whether the consideration of sales tax in fixing the price of the goods and sale of such goods along with identical goods on which taxes are collected along with the price has not resulted in an implied collection of tax in respect of such sales tax exempted goods? (2) Whether the assessee who produces identical products, one which is exempt from sales tax and one which sales tax is payable, both being priced on par and sold off the same shelf, could not lead Page 5 6 to the presumption that there is a deemed collection and inclusion of sales tax in the price fixed?

6. The High Court, after hearing the learned counsel for the parties and analysing the material on record, dissecting the relevant provisions of the KST Act and the notification for exemption came to hold as under:- “30. Learned Advocate General invites our attention with regard to the price being the same with regard to Dharwad tea and non-Dharwad tea. Same is reflected in the books of accounts. The Company is governed by the Standards of Weights and Measures Act, 1976 and Rules. Rule 6 read with Rule 2(r) of the Standards of Weights and Measures (Packaged Commodities) Rules, 1977 requires that the sale price of the package commodity shall be printed on the packages strictly in the following form: JUDGMENT “Maximum (or Max) Retail Price Rs..... ... incl. of all taxes.” or “MRP Rs. ... INCL. OF ALL TAXES” Page 6 7

32. In fact, in Annexure-F there is a clear mention of exemption of tax in terms of the note at the end of the invoice itself. Therefore, the buyer is told in unmistakable terms that what is being paid as sale price and not as sales tax. 33. The Tribunal, in our view, has considered not only the facts of the case but also all the case laws as applicable, and thereafter has come to a right conclusion in holding against the State. We are in agreement with the findings of the Tribunal.” JUDGMENT On the basis of the aforesaid analysis, the High Court concurred with the opinion expressed by the tribunal. 7. We have heard Mr. Basava Prabhu S. Patil, learned senior counsel along with Mr. V.N. Raghupathy for the appellant and Mr. Harish N. Salve and Mr. Arvind P. Datar, learned senior counsel for the respondent. Page 7 8 8. The present litigation has a history. Be it stated, this is the third round of litigation. In the first round, the State of

Notification dated 19.06.1991 was issued, was itself not gazetted. The controversy travelled to this Court in Lipton 1 India Ltd. and another v. State of Karnataka and others . In the said case, the Court has held that:- “7. The administration of the State of Karnataka represented by its Chief Secretary, does not find the said officer guilty of gross negligence. The Chief Secretary does not find it unpardonable that the statement was made on oath on behalf of the State Government in a pending proceeding before the High Court. We cannot agree. Whether the Chief Secretary thinks it necessary to take action against the said officer or not is not our concern. Our concern is that the State Government made a statement on oath before the High Court that was incorrect and the judgment of the High Court accepts and proceeds upon the basis of that statement. The High Court’s judgment must, therefore, be set aside and the matter remanded to the High Court to be heard and decided afresh. JUDGMENT 1 (1996) 10 SCC 710 Page 8 9

9. The learned counsel for the State Government now submits that we should not make this general observation in respect of affidavits filed on behalf of the State Government. As we have already stated, we have done so because the Chief Secretary of the State of Karnataka does not seem particularly troubled by the fact that a statement was made on oath on behalf of the State Government before the High Court which was not correct. He does not even think that the said officer was grossly negligent in making the statement that the said government order was not gazetted only on the basis of going through the Gazettes for the succeeding three months. We must assume that other officers of the State Government will be encouraged to make statements before the courts on oath upon as little or no enquiry, expecting from the Chief Secretary the same unconcern”. JUDGMENT 9. After so holding, the Court has allowed the appeals and directed the State Government to pay costs which was quantified in the sum of Rs. 50,000/-. In the second round of litigation, the State of Karnataka sought to deny the exemption Page 9 10 on the ground that grinding of tea does not amount to manufacture and, therefore, as such the exemption was not

07.09.1998 preferred by the State of Karnataka. 10. The present one is the third round. Mr. Patil, learned senior counsel appearing for the State would urge that the tribunal as well as the High Court is not justified in interfering with the finding of fact recorded by the Assessing Authority and the first appellate authority that the assessee had collected sales tax on the sale of tea manufacture at Dharwad and hence, not entitled for the benefit of sales tax exemption JUDGMENT solely on the ground the company had considered local sales tax element in the sale price fixed. It is also contended by him that the levy of tax on the assessee cannot be found fault with inasmuch as inclusion of sales tax in the sale price would disentitle the assessee from the benefit of exemption stipulated in the Notification dated 19.06.1991 issued under Section 8A of the KST Act. Lastly, it is canvassed by Mr. Patil that the Page 10 11 issue whether the legend “inclusive of taxes” found on both the packed tea produced in the exempted unit, Dharwad,

in the end consumer price sales tax element has been considered, has not been properly considered by the High Court. Learned senior counsel would submit that the High Court has not properly appreciated the authorities in the field and arrived at the erroneous conclusion. Mr. Patil has placed reliance on State of Karnataka v. M/s C. Venkatagiriah 2 and Brothers and T. Stanes & Co. Ltd. v. State of T.N. 3 and another . JUDGMENT 11. Mr. Salve, learned senior counsel appearing for the assessee-respondent would urge that the declaration made by the assessee about MRP is a statutory declaration required as per Rule 2(r) of the Standards of Weights and Measures 2 1994 Supp (2) SCC 572 3 (2005) 9 SCC 308 Page 11 12 (Packaged Commodities) Rules, 1977 framed under erstwhile Standards of Weights and Measures Act, 1976 and the same

that the end consumer does not have to pay amount beyond MRP. It is urged by him that the assessee had taken the stand that it has uniform MRP throughout India irrespective of whether sales tax is payable in certain States or not and despite the fact that the rate of tax is also different in different States because the assessee has felt that it is necessary to have uniform MRP for PAN India to prevent flowing of goods from one State to another. It is his further submission that revenue has erroneously based its conclusion on a comparison JUDGMENT of price between the two units of the same manufacturer either in the same State or in two different States wherein one unit is covered by exemption and the other is not. Incrementing the said argument learned senior counsel would contend that though the two prices are uniform, the revenue on an erroneous comparison has presumed that the assessee Page 12 13 has collected tax without appreciating the fact that the assessee has adopted a singular business model to have a

authorities cited by the revenue are absolutely inapplicable to the facts of the case, for the controversy is totally different therein. According to Mr. Salve, the controversy in the case has been put to rest in Delhi Cloth and General Mills Co. 4 Ltd. v. Commissioner of Sales Tax, Indore . 12. The heart of the matter is whether the respondent has violated clause (e) of Explanation III to the Sales Tax th Exemption notification dated 19 June, 1991. The said clause JUDGMENT is reproduced below:- “ Explanation III . The provisions of this Notification shall not apply: (a) xx xx xx xx (b) xx xx xx xx (c) xx xx xx xx (d) xx xx xx xx 4 (1971) 2 SCC 559 Page 13 14 (e) To the turnovers on which any tax is collected by a new Industrial Unit under the provisions of KST Act, 1957.”

the new industrial unit under the provisions of the KST Act. It is the submission of the appellant that inference should be drawn that the respondent company had collected sales-tax on packaged tea sold by the new industrial unit, and thus, there was violation of clause (e) of Explanation III to the Sales Tax Exemption Notification. Reliance is primarily placed on the observations of this Court in Amrit Banaspati Co. Ltd. and 5 another v. State of Punjab and another and more particularly on paragraph 11, which reads as under:- JUDGMENT “11. Exemption from tax to encourage industrialisation should not be confused with refund of tax. They are two different legal and distinct concepts. An exemption is a concession allowed to a class or individual from general burden for valid and justifiable reason. For instance tax holiday or concession to new or expanding industries is well known to be one of 5 (1992) 2 SCC 411 Page 14 15

13. Reference is also made to the decision of this Court in M/s C. Venkatagiriah and Brothers (supra) wherein it has been observed:- “4. For the said proposition, the Tribunal relied upon a decision of the Mysore High Court in 6 Spencer & Co. Ltd. v. State of Mysore . The proposition enunciated in the said decision is that the dealer can be held to have collected the tax under the Act, if: JUDGMENT “[F]rom the facts and circumstances, it can be inferred that the seller intended to pass on the tax and the buyer had agreed to pay the sales tax in addition to the price and that in the accounts of 6 (1970) 26 STC 283 (Mys) Page 15 16 the dealer he has shown such amounts separately .” (emphasis supplied)

JUDGMENT Page 16 17 endorsement, he must be held to have collected the tax.”

not mean that the assessee had collected any amount by way of tax. The further stand is that the end consumer does not have to pay any amount beyond MRP and that is how the business model of the assessee operates and hence, there is no question of any comparison. In fact, the appellant department is of the view that the respondent assessee ought to have determined lesser price for the exempted unit as compared to other units. It is urged that the absence of any price control the view of the department is neither a legal JUDGMENT requirement nor practically possible. Once this erroneous comparison is obliterated, the entire case of department collapses. 15. First, we shall deal with the applicability of the principle stated in Amrit Banaspati (supra). The issue raised in the case of Amrit Banaspati (supra) was quite distinct and Page 17 18 separate. The question raised was whether the principle of promissory estoppel would apply, for the learned single Judge

refund the sales-tax. The issue involved in the said case relates to refund of tax paid to the State. In this context, this Court observed that refund of tax was made in consequence of excess payment or when it was realized illegally or contrary to law. The refund of tax due and realised in accordance with law cannot be comprehended and no law can be made for refund of tax to a manufacturer realized under the statute for the same would be invalid and ultra vires . A promise or an agreement to refund tax which was due under the law and JUDGMENT realised in accordance with the law would be a fraud on the Constitution and breach of faith of the people. It is in this context, the aforesaid observations were made in paragraph 11 in the case of Amrit Banaspati (supra). 16. In fact, a careful elucidation of the said reasoning would support the stand of the respondent. The assessee, on the Page 18 19 basis of exemption notification had set up a new undertaking incurring expenditure. This was done on the foundation that

encourage investment in the backward districts and enabled the newly established industry to overcome initial financial problems, recoup and ensue reasonable return on the capital expenditure and associated risks. Exemptions are allowed to industrial units to overcome the teething problems. Observations in paragraph 11 in Amrit Banaspati (supra), nowhere stipulate that the sale price as fixed must expressly exclude the tax component. It is obvious when a manufacturer is granted an exemption, the unit would fix the sale price JUDGMENT taking the said exemption into account. In this manner both the manufacturer and the consumer gain. As sales-tax is an indirect tax, the purchaser has to pay the same and when the tax is not levied, the purchaser does not pay the same. 17. The respondent having set up a new industry which was exempted, should not have, in terms of clause (e) of the Page 19 20 Explanation III of the notification, collected any tax and to the extent the tax was collected the turnover was not exempted.

to pay is that of the dealer. It may be charged by the dealer from the purchaser. Sometimes this indirect tax is inbuilt and included in the retail price. This may be mandated by law to protect consumer interest. One frequently comes across products where the maximum sale price is specified and stated on the packaging as in the present case. Rule 2 of the Standards of Weights and Measures (Packaged Commodities) Rules, 1977, framed under the erstwhile Standards of Weights and Measures Act, 1976, stipulated that the maximum sale JUDGMENT price should be inclusive of all taxes. This was the statutory requirement binding on the respondent, who was selling packaged product. The statement on the packaged product inclusive of all taxes, means all taxes which were leviable, were already included in the price mentioned. It should not be constructed as an admission that the respondent had charged Page 20 21 sales tax. The respondent could not have deviated or ignored the statutory requirement by making a declaration contrary to

18. Observations made in M/s C. Venkatagiriah and Brothers (supra) have to be again understood in the context in which they were made. In the said case the dealer was exigible to Central Sales-tax only if he had collected the tax and not otherwise. In the said context, this Court referred to amendment made under the Central Sales-tax Act, putting the burden of proof on the dealer to show that he had not collected the tax. For this reason, it was observed that when JUDGMENT an endorsement was made in the Bill that price charged was inclusive of tax, it was prima facie proof against the dealer’s contention and in such circumstances where burden was on the dealer, he should produce material to displace the presumption. The finding of the tribunal that the Central Sales-tax had not been charged independently in the Bills, it was observed, would not be a conclusive proof or good finding Page 21 22 in law. Importantly, this Court observed that the question whether the dealer had discharged the burden placed upon

case. Significantly, in the present case no such burden has been placed on the assessee. Further the tribunal and the High Court have recorded as a finding of the fact that the assessee respondent had not collected the tax on sales made from the exempted unit. The assessee has relied upon invoices issued by them to the purchaser which have the following declaration:- “Goods sold under this invoice are fully exempted from levy of KST/CST under exemption certificate No. IDF/E3/50-St/92-93 dt. 1-12-1992 by the Director of Industries and Commerce Department, Govt. of Karnataka, Bangalore as applicable to our newly set up tea factory at Dharwad. We are on rolls of Asst. Commissioner, ST Bangalore. Our principal place of business is th at No.2 4 Cross, MM Compound, Mysore Road, Bangalore. JUDGMENT OR “Goods sold under this invoice are fully exempted from levy of KST/CST in terms of Govt. of Page 22 23

19. It has been highlighted that 3,50,000 invoices relating to the said product manufactured and sold from the Dhaward unit were placed on record. Apart from this the assessee-respondent had also placed 1200 price circulars issued, which showed that the assessee respondent had not collected sales tax. The books of account corroborate the trade price circular and invoices. The entire sale proceeds or consideration was shown as receipt and the amount was not JUDGMENT bifurcated into sale price and tax collected. 20. An assessee is entitled to carry on and conduct business, fix the maximum retail price of its products. In the present case in spite of the multiple units both exempted and non-exempted, the respondent had adopted and followed uniform market price throughout India. The respondent is Page 23 24 entitled and can fix a uniform price meant for whole of India. The uniform market price does not differ in spite of differences

exception to. The respondent has also explained that uniform market retail price at all India level ensures that the goods from one State do not flow to the other State, thereby distorting sales. It avoids and prevents shortages of goods in lower tax area. Uniform pricing cannot be a ground to hold that the respondent was charging sales tax on a sale price of the goods manufactured in the exempt unit. Cost of production in different units of the respondent assessee can vary. Cost of production has various components and is JUDGMENT computed with reference to revenue expenditure, rate of return on the capital expenditure, etc. These are complex commercial and business considerations which cannot be decided with reference to a single factor, i.e., the uniform market retail price. A market retail price stating that it is inclusive of all Page 24 25 taxes could be the starting point, but would not prove and establish that the sales-tax has been collected.

interpretation of Section 22 of the Tamil Nadu General Sales-tax Act. The said Section stipulates that no person, who was not a registered dealer would collect any more tax and no registered dealer shall make any such collection, except in accordance with the provisions of the Act and the rules. The proviso stipulated that the sub-section would not apply to collection of an amount by a registered dealer towards an amount of tax already suffered under the Act in respect to the JUDGMENT goods, the sale or purchase price of which was controlled by any law in force. In this background, it was observed that the term ‘collected’ would include any collection in any manner and purported recoupment as projected and pleaded would be nothing but collection. The contention of the assessee that he was only recouping and was not collecting the tax was rejected. Thus, the factual score is totally different. Page 25 26 22. In this context, it would be relevant to refer to the decision of the Court in Delhi Cloth and General Mills Co.

and “sale price” in the context of the charging Section it was observed that the liability to pay tax was on the dealer and the purchaser had no liability to pay tax. If a dealer had to pass the tax burden on to the purchaser, he could only do by adding the tax in question to the price of the goods sold. If that be so, the taxes collected by the dealer from the purchaser became a part of the sale price as fixed. Thus, the amount recovered by the dealer was in reality a part of the entire sale consideration. To appreciate the principle we may JUDGMENT usefully reproduce certain passages from the said authority:- “6. Under Section 4 the liability to pay tax is that of the dealer. The purchaser has no liability to pay tax. There is no provision in the Act from which it can be gathered that the Act imposes any liability on the purchaser to pay the tax imposed on the dealer. If the dealer passes on his tax burden to his purchasers he can only do it by additing the tax in question to the price of the goods sold. In that event the price fixed for the Page 26 27

Section 7-A says: “No dealer shall collect any amount, by way of sales tax or purchase tax, from a person who sells agricultural or horticultural produce grown by himself or grown on any land in which he has an interest, whether as owner, usufructuary mortgagee, tenant or otherwise, when such produce is sold in the form in which it was produced, without being subjected to any physical, chemical or other process for being made fit for consumption save mere dehusking, cleaning, grading or sorting.” JUDGMENT 7. In these appeals, it is not necessary to examine the relevance of that provision. But that provision does any give only statutory power to collect sales tax as such from any class of buyers. There is no other provision in the Act which confers such a power on the dealers. Unless the price of an article is controlled, it is always open to the buyer Page 27 28

x x x x x x x x x x 10. From all these observations, it is clear that when the seller passes on his tax liability to the buyer, the amount recovered by the dealer is really part of the entire consideration paid by the buyer and the distinction between the two amounts, — tax and price — losses all significance.” JUDGMENT The relevance of this decision is that it holds that in a given case the tax component may form a part of the sale price and cannot be treated as a separate component. 23. In the case at hand, when the respondent was not liable to pay tax and had not passed on the tax liability, we do not Page 28 29 think, sale consideration received should be bifurcated and divided on the basis of any assumption that the sale price

nor any precept in law. In any case the finding of fact is to the contrary. 24. In view of the aforesaid premised reasons, the appeal, being sans merit, stands dismissed with costs which is assessed at Rs. 1,00,000 (Rupees One Lac Only). ...........................J. (Dipak Misra) JUDGMENT ..........................J. (N.V. Ramana) New Delhi; June 30, 2016 Page 29