Full Judgment Text
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CASE NO.:
Appeal (civil) 3552 of 2005
PETITIONER:
State of Rajasthan and Anr
RESPONDENT:
Rajasthan Chemist Association
DATE OF JUDGMENT: 24/07/2006
BENCH:
ARIJIT PASAYAT & TARUN CHATTERJEE
JUDGMENT:
J U D G M E N T
ARIJIT PASAYAT, J.
Challenge in this appeal is to the legality of the judgment
rendered by a Division Bench of the Rajasthan High Court,
Jodhpur holding that 4A of the Rajasthan Sales Tax Act, 1994
(in short the ’Act’) as introduced by the State Finance Act,
2004 was not legally sustainable to the extent that tax on first
point sale of drugs, medicines or any formulation or for that
matter any other commodity by a
manufacturer/wholesaler/distributor to retailer where
"Minimum Retail Price" (in short ’MRP’) is published on
package, measure to which rate of tax is to be applied cannot
be with reference to such published MRP which is neither
charged nor chargeable by the wholesaler from the retailer
whether the tax is charged on sales or on purchase by the
parties to sale under Section 4A and the concerned
Notification in this regard. Writ application filed by the
respondent-Association was allowed to that extent.
The controversy arose in the following background:
By the Finance Act, 2004 Section 4A was introduced
which reads as follows:
"4A. Levy of tax on retail sale price:- (1)
Notwithstanding anything contained in any
other provision of this Act or the rules made
thereunder, tax on sale of such goods, as may
be specified by the State Government by
notification in the official Gazette, shall be
levied and collected on the retail sale price of
such goods abated by the rate specified in the
said notification.
(2) The goods to be specified under Sub-
Section (1) shall be those in relation to which it
is required under the provisions of the
Standards of Weights and Measures Act, 1976
or the rules made thereunder or under any
other law for the time being in force, to declare
on the package hereof the retail sale price of
such goods.
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(3) The State Government may, for the
purpose of fixing the rate of abatement under
sub-section (1), take into account the amount
of sales tax and other local taxes, if any,
payable on such goods.
Explanation: (i) Where on the package of any
goods different retail sale prices are declared
with reference to different areas, the retail sale
price declared with reference to the area with
the State in which, it is sold shall be deemed
to be the retail sale price for the purpose of
this Section.
(ii) Where on the package of any goods
different retail sale prices are declared with
reference to different areas and none of the
areas fall within the State, the maximum of
such retail sale prices shall be deemed to be
the retail price for the purpose of this Section."
Writ Petition was filed by the present respondent
questioning constitutional validity of the aforesaid provision.
Section 4A in terms envisaged levy of sales tax on any
transaction of sale of notified goods not on the actual price of
consideration which is paid or becomes payable by the buyer
to seller on such sales as have taken place, but on the MRP of
the goods declared on the package as per the provisions of the
Standards of weights and Measures Act, 1976 (in short
’Weight and Measures Act’) or the Rules framed thereunder or
any other law for the time being in force which is chargeable
only at the last point sale by the retailer. The provision is not
extended generally to all commodities sold in package and in
relation to which it is required to print retail price thereon, but
only to such goods as may be specified by the State
Government by the Notification in the official Gazette as may
be abated by the rates specified in the said Notification.
Primary challenge before the High Court was on the
ground that it takes into account an artificial amount as
turnover for the purpose of tax on "sales of goods". The tax on
sale must be leviable with reference to something related to
taxing event, the sale or purchase of goods which becomes
subject of charge and not de hors it. With reference to Entry
54 of the Second List of Seventh Schedule to the Constitution
of India, 1950 (in short the ’Constitution’) it was submitted
that expression "tax on sale of goods" used in said Entry
means tax on the sale of goods as defined under the Sales of
Goods Act, 1930 (in short the ’Sales Act’) as
modified/extended by Clause 29-A of Article 366 of the
Constitution, inserted by 42nd Amendment Act, 1982. Single
point tax is leviable on sale of medicines as per Notification
issued under the Act.
Factually, the first point of sale in the State of Rajasthan
in most cases which attracts levy of sales tax is by the
wholesale distributors to the retailers and not by retailers to
end consumers when alone MRP can be charged. Under the
Weights and Measures Act and the provisions of Drug Price
Control Order, 1995 (in short ’Control Order), issued by the
Central Government under Section 3 of the Essential
Commodities Act, 1955 (in short the ’Essential Commodities
Act’), the maximum retail price is determined in the case of
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Scheduled Formulations only. On the other hand, MRP is
required to be displayed on the label of container as well as
package in respect of all drugs whether scheduled or non
scheduled formulations. Mention of price on the package
under the concerned provisions is the MRP and not the price
necessarily or actually charged at the end sale for any
transaction of sale of medicines in the State. The first sale
within the State which alone is taxable is in reality at much
lesser price than the MRP printed and the same is paid or
payable on contractual basis. Under the Control Order the
margin at which the medicines are to be sold to retailer has
been fixed at a minimum level, that is to say, unless otherwise
permitted, a formulation has to be sold to a retailer keeping at
least 16% margin in the case of scheduled drugs. Thus by
devising aforesaid legal fiction for deeming an artificial sale
price for levy of tax having no nexus to the taxable event i.e.
transactions of sale of goods at a money consideration paid or
payable as defined under the Sales Act, is beyond the
legislative competence of the legislature in the State, and
therefore the provision is ultra-vires.
The State on the other hand took the stand that what is
to be the measure of tax on a sale is within the domain of the
State Legislature. Under the impugned provision, tax is levied
on a completed sale within the meaning of Section 4 of the
Sales Act. However, in what manner the charge is to be levied
is a matter of details which can be worked out by Legislation.
The fact that maximum retail price is to be determined
statutorily and the State Legislature has taken into account
the fact that the actual consideration at the first point tax may
be lesser than the maximum retail price that may be charged
ultimately from the consumer at the last point sale as provided
for abatement of MRP by reducing therefrom the sum at
prescribed rates of abatement for the purpose of levy of tax, it
provides sound basis for uniform liability in the State on such
transaction. The levy of tax cannot be said to be wanting in
nexus with the taxing event. Therefore, the impugned
provisions and the Notifications cannot be said to be ultra
vires any provision of the Constitution. It was however not
disputed that but for taking the MRP as a basis to provide
measure of tax, no fictional price can be fixed as a measure of
tax on sale of goods. The High Court on analyzing the
provision in great detail came to hold as follows:
"If Section 4A is designed to bring a levy into
existence which is divorced from the sale
subject to tax under the Act, it falls foul with
the legislative competence under Entry 54 of
List II of Schedule VII so also notification-
Annex.3 to the extent it is intended to levy tax
on first point sale with reference to price which
could be charged in respect of a subsequent
sale which has not come into existence at the
time liability to tax arise and is determined ex-
hypothesi. However, the perusal of the
language of Section 4A and the notification
issued thereunder by itself does not show that
it applies only in case of sales to be taxed at
first point. In case the levy is on the last point
and the maximum retail price is to be fixed
and published under any Statute, whether
instead of determining price actually charged
in each case fixed formula is provided by the
enactment which has correlation with
determining price by keeping in view the
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provisions of Section 9 of the Sale of Goods Act
whether the provision still falls beyond the
scope of Entry 54 has not been the subject
matter of contention. In this case and
therefore, we have not been called upon to
decide. In absence of any contention having
been raised, it will be hazardous to comment
upon the validity of provisions of Section 4A in
isolation and the notification issued
thereunder in its entirety.
In view thereof, we confine our conclusion and
hold that to the extent that tax on first point sale
of drugs, medicines or any formulation or for that
matter any other commodities by a
manufacturer/wholesaler/distributor to retailer
where MRP is published on package, measure to
which rate of tax is to be applied cannot be with
reference to such published MRP, which is neither
charge nor chargeable by the wholesaler from the
retailer whether the tax is charged on sales or on
purchase by the parties to sale under Section 4A
and notification.
The additional tax collected with
reference to measure provided under Section
4A by the wholesalers to retailers at first point
sale shall not be refunded to the dealers. In
case the additional tax charged has not been
transmitted to buyers, the excess tax paid may
be adjusted against future liability under the
Act of 1994 or any other dues to the Revenue
under Rajasthan Sales Tax Act."
In support of the appeal, learned counsel for the
appellants submitted that there is a source of power of the
State to levy tax under Article 246 read with Entry 54 of List II
of Schedule VII of the Constitution. A plain reading of the
Entry clearly demonstrates that tax under the said Entry can
be levied on the event of sale or purchase of goods. The said
Entry nowhere requires or mandates that the same can only
be on the sale price of goods. Strong reliance is placed on
decisions in Andhra Sugars Ltd. V. State of A.P. (1968 (1) SCR
705) and Ganga Sugar Corpn. Ltd. V. State of U.P. (1980 (1)
SCC 223) to contend that the Constitution empowers the
States to levy and collect tax on the happening of the taxable
event and thereafter the quantum of tax to be levied and the
measure on which the same can be levied is necessarily left for
the State to decide.
Per contra, learned counsel for the respondent submitted
that the High Court’s decision is on terra firma. On an
elaborate analysis of the legal position the decision has been
rendered and needs no interference. It was pointed out that
the decisions in Andhra Sugar and Ganga Sugar cases (supra)
were rendered on the peculiar facts of the cases and they
nowhere depart from the normal principle that tax is to be
levied on the sale price.
In order to appreciate rival submissions a few decisions
of this Court which throw beacon light on the issues involved
need to be noted. In fact, the High Court has referred to many
of them.
Sales Tax Office, Pilibhit v. M/s Budh Prakash Jai
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Prakash (AIR 1954 SC 459) arose under the U.P. Sales Tax
Act, 1948. In that case the issue related to levy of tax by the
assessing authority on the turnover relating to forward
contract. The assessee had challenged that the imposition of
sales tax on forward contracts was ultra vires the powers of
the State Legislature. The U.P. Sales Tax Act, 1948 had been
enacted by the provincial legislature in terms of the legislative
power conferred under the Government of India Act, 1936
under Entry 48 in List II of the Schedule Seventh of the said
Act. Under Section 2(h) of the U.P. Act, a sale was defined to
include forward contracts. This Court upheld the challenge by
holding that the power conferred under Entry 48 to impose tax
on the sale of goods can be exercised only when there is a sale
under which there is a transfer of property in the goods, and
not when there is a mere agreement to sell. The State
Legislature cannot, by enlarging the definition of "sale" by
including forward contracts arrogate to itself a power which is
not conferred upon it by the Constitution, and the definition of
"sale" in Section 2(h) of the Act XV of 1948 must, to that
extent, be declared ultra-vires.
It was inter-alia held as follows:
"It would be proper to interpret the expression
"sale of goods" in Entry 48 in the sense in
which it was used in legislation both in
England and India and to hold that it
authorizes the imposition of a tax only when
there is a completed sale involving transfer of
title".
Significantly, the Court observed about substance of the
levy as under:
"The substance of the matter is that the sales
tax is a levy on price of the goods, and the
reason of the thing requires that such a levy
should not be made, unless stage has been
reached when the seller can recover the price
under the contract."
The aforesaid decision makes it clear that subject ’tax on
sales of goods’ in Entry 48 of List II of the Seventh Schedule of
the 1935 Act providing for legislative field of sale of goods
ought to be confined to levy of tax on sales of goods as defined
in the Sales Act and in substance, it is a levy on price of goods
and the State Legislature does not have power to enlarge the
definition of sales by creating a legal fiction and levy tax on a
sale which has not come into existence.
State of Madras v. Gannon Dunkerley & Co (AIR 1958 SC
560) is another decision which needs to be noted. A
Constitution Bench of this Court considered the construction
of Entry 48 in List II of Seventh Schedule of the 1935 Act. Tax
on the sale of goods is in pari materia with Entry 54 in List II
of Schedule VII of the Constitution. The case arose under the
Madras General Sales Tax Act, 1939 as amended by Madras
General Sales Tax (Amendment) Act, 1947. The definition of
"sale" in Section 2(h) was enlarged so as to include "a transfer
of property in goods involved in execution of works contract".
By creating a legal fiction, it was deemed that in execution of a
work, property in the goods involved in works contract is
transferred as goods so as to include value (not the price) of
such goods as part of taxable turnover.
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After referring to the definition of expression "sale of
goods" from the times of Roman Law and the Law in England,
this Court culled out and approved the following principle
stated in Benjamin’s book "Sale of Goods":-
"Hence it follows that to constitute a valid sale,
there must be a occurrence of the following
elements viz. (i) the parties competent to
contract (2) mutual assent; (3) thing of sale or
general property in which transfer from seller
to buyer and; (iv) a price in money paid or
promised".
On the aforesaid premises, the Court on considering the
Indian Law and after referring to Section 77 of the Contract
Act, (before enactment of Sale of Goods Act) defining sale as
originally enacted in it, and the provisions of Sales Act reached
the following conclusions about price as an essential element:
"that it must be supported by money
consideration, and that as a result of the
transaction property must actually passed on
the goods unless all these elements are
present, there can be no sale".
Following conclusions were arrived approving the view in
Budh Prakash’s case (supra):-
"A power to enact a law with respect to tax on
sale of goods under Entry 48 must, to be intra
vires, be once relating in fact to sale of goods,
and accordingly, the Provincial Legislature
cannot, in the purported exercise of its power
to tax sales, tax transactions which are not
sales by merely enacting that they shall be
deemed to be sales; \005\005\005.."sale" in Entry 48
must be construed as having the same
meaning which it has in the Sale of Goods Act,
1930\005\005\005\005.. It is of the essence of this
concept that both the agreement and the sale
should relate to the same subject matter".
Summing up the conclusions it was held :-
"the expression "sale of goods" in Entry
48 is a nomen juris, its essential ingredients
being an agreement to sell moveable for a price
and property passing therein pursuant to that
agreement".
The State Legislature does not have legislative
competence to give the expression "sale of goods" extended
meaning and to enlarge its legislative field to cover those
transactions for taxing which do not properly conform to
elements of sale of goods within the Sales Act. Tax on value of
the material used in construction of building was held to be
ultra-vires.
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The decision in Firm of M/s Peare Lal Hari Singh v. The
State of Punjab and Anr. (AIR 1958 SC 664) also relates to
imposition of tax on supply of materials used in building
contracts and this Court followed its earlier decision in
Gannon and Dunkerley case (supra) and held that the
expression "sale of goods" in Entry 48 in List II of Seventh
Schedule of the Government of India Act, 1935 has the same
import which it bears in the Sales Act.
The principle was reiterated in Bhopal Sugar Industries
Ltd., M.P. v. D.P. Dube Sales Tax Officer, Bhopal Region,
Bhopal (AIR 1967 SC 549) where the question arose whether
giving extended definition of "retail sale" which sought to
render consumption by the owner of motor spirit liable to tax
under the concerned Sales Tax Act by virtue of Section 3, is
beyond the competence of the State Legislature and hence
void. This Court relying on its earlier decision in Gannon and
Dunkerley (supra) held as follows::
"In a transaction of sale of goods which is
liable to tax there must be concurrence of the
four elements, viz;
(1) parties competent to contract;
(2) mutual assent;
(3) a thing, the absolute or general property
in which it is transferred from the seller to
the buyer; and
(4) a price in money paid or promise.
A transaction which does not conform to this
traditional concept of sale cannot be
regarding as one in respect of which the State
Legislature is competent to enact an Act
imposing liability for payment of tax".
The Court quashed the assessment made on the
aforesaid premises.
Levy by the State of Uttar Pradesh as to the basis of levy
once a transaction is held to be a transaction of sale came up
for consideration by a Constitution Bench in Ganga Sugar’s
case (supra). This Court said:
"Tax on sale or purchase must be on the
occurrence of a taxing event of sale
transaction".
This Court in M/s Govind Saran Ganga Saran v.
Commissioner of Sales Tax & Ors. (AIR 1985 SC 1041) on
analyzing Article 265 noted as follows:
"The components which entered into tax are
well known. The first is the character of the
imposition known by its nature which
transpires attracting the levy. The second is a
clear communication of the person on whom
the levy is imposed and which is obliged to pay
the tax. The third is rate at which the tax is
imposed and the fourth is the measure or
value to which the rate is applied for
computing the tax liability".
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Obviously, all the four components of a particular concept of
tax has to be inter related having nexus with each other.
Having identified tax event, tax cannot be levied on a person
unconnected with event, nor the measure or value to which
rate of tax can be applied can be altogether unconnected with
the subject of tax, though the contours of the same may not be
identified.
In Union of India v. Bombay Tyre International Ltd. (AIR
1984 SC 420) the expressions subject of tax, the measure of
tax and nexus between the two have been succinctly analysed.
The decision arose in the context of Central Excise and Salt
Act, 1944 (in short ’Excise Act’). The controversy was what
should be included in the measure of computation of liability
and what fell outside the scope of measure to be excluded
from consideration. Referring to a large number of decisions of
different courts, including some of the decisions we have
referred to above, the principle succinctly stated in Seervai’s
Constitutional Law was approved by observing as follows:-
"Another principle for reconciling
apparently conflicting tax entries follows from
the fact that a tax has two elements, the
person, things or activity on which the tax is
imposed, and the amount of the tax. The
amount may be measured in many ways, but
decided cases establish a clear distinction
between the subject matter of a tax and the
standard by which the amount of tax is
measured. These two elements are described
as the subject of a tax and the measure of a
tax."
The Court also held that the measure of tax though not
always essential but is often a relevant consideration to judge
the nature of levy. Following passage from R.R. Engineering
Company v. Zila Parishad Bareilly (AIR 1980 SC 1088) was
approved:
"It may be and is often so, that the tax on
circumstances and property is levied on the
basis of income which the assessee receives
from his profession, trade, calling or
property\005\005\005.Therefore, while determining
the nature of a tax, though the standard on
which the tax is levied may be a relevant
consideration, it is not a conclusive
consideration".
This Court recognised greater freedom in adopting
measure of the tax to be assessed by its own standard and
administrative convenience and other factors may influence
the stage at which the levy may be collected and there may be
deviation in contours of measure of tax, but did not
countenance it to be divorced from the nature of tax, by
observing as follows:
"Any standard which maintain a nexus
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with the essential character of the levy can be
regarded as a valid basis for assessing the
measure of the levy".
With these premises this Court found that while nature
of an excise levy is indicated by the fact that it is imposed in
respect of manufacture or production of an article, the point at
which it is collected is not determined by the point of time
when manufacture is completed but will rest on consideration
of administrative convenience and that generally it is collected
when the article leaves the factory for the first time.
The question of tax on sale of goods may be examined in
the said background. The subject of tax being sale, measure of
tax for the purpose of quantification must retain nexus with
’sale’ which is subject of tax. As noticed above, tax on sale of
goods, is tax on vendor in respect of his sales and is
substantially a tax on sale price. The vendor or buyer cannot
be taxed de hors the subject of tax that is sale by the vendor
or purchase by the buyer. The four essential ingredients of any
transaction of sale of goods include the price of the goods sold,
therefore, in any taxing event of sale, which become subject
matter of tax price component of such sale, is an essential
part of the taxing event. Therefore, the question does arise
whether a particular taxing event of sale could be subjected to
tax at the prescribed rate to be measured with such price
which is not the component of the transaction of sale, which
has attracted the sales tax.
Andhra Sugars’s case (supra) concerned the challenge to
levy of sales tax under Andhra Pradesh Sugarcane Regulation
of Supply and Purchase Act. The tax was levied on the
purchase of sugarcane as per the weights of the goods
purchased. One of the contentions raised before this Court
challenging its validity was that the tax must be levied with
reference to the turnover only and it cannot be levied with
reference to the weight of the goods purchased. The contention
was rejected by this Court by saying:
"Where the purchase tax is levied on a
dealer, the levy is usually with reference to his
turnover, which normally means the aggregate
of the amount of purchase prices. But the tax
need not necessarily be levied on a dealer by
reference to his turnover. It may be levied on
the occupier of a factory by reference to the
weight of the goods purchased by him."
However, where tax is to be measured in terms of price or
in terms of weight or quantity of goods sold, whether the
measure can be different from the contents of taxing event was
not the proposition laid.
It was observed in Ganga Sugar’s case (supra) as follows:
"It is a superstition, cultivated by familiarity,
to consider that all sales tax must necessarily
have nexus with the price of the commodity. Of
course, price as basis is not only usual but
also safe to avoid uneven, unequal burdens,
although it is conceivable that a legislature can
regard prices which fluctuate as too
impractical to tailor the purchase tax. It may
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even be, in rare cases, iniquitous to link
purchase tax with price, if more sensible bases
can be found".
It was a case in which weight of the commodity was made
the basis for levy of the tax. But, price of goods was approved
to be usual meaning of levy of tax on sale of goods. It does not
deviate from basic principle that a tax of any nature is
determined ex-hypothesi on occurrence of taxing event. Its
actual computation and collection takes place later on through
the machinery provided. However, the determination of charge
ex-hypothesi instantly on occurrence of taxing event which
inheres into it that measure of tax is integrally connected with
occurrence of taxing event and is not postponed to a later
date.
Thus primarily the rate of tax relates to measure of tax to
come into existence simultaneous with occurrence of taxing
event. The machinery provisions relating to its quantification
and collection can take place later. Providing measure to
which rate is to be applied is integrally connected with charge
itself.
This Court considered the ambit and scope of legislative
power of the State Legislature while imposing tax on sale of
goods in Hotel Balaji & Ors v. State of Andhra Pradesh and
Ors. (AIR 1993 SC 1048) wherein this Court said:
"So long as the levy retains the basic character
of a tax on sale, the legislature can levy it in
such mode or in such manner as it things
appropriate".
In this connection, it is relevant for the present purpose to
notice that in upholding the validity of additional purchase tax
on goods, when the goods manufactured by the buyer are sold
outside State was that the tax was related to purchase price,
which was part of transaction of purchase and not payable on
price at which he shall be selling his goods. Therefore, it
retained its character on tax on purchase otherwise it would
have become Duty of excise on value of goods determined in
terms of price charged by manufacturer, when such sale was
not subject of tax levied by State Legislature.
In Ganga Sugar’s case (supra) the court emphasized the
tax on sale or purchase must be on occurrence of taxing event
of sale transaction. While accepting that, price of the sale
transaction is not necessarily the only criterion which may
form the basis of levy of tax but it opined that price as basis is
not only usual but also safe to avoid unequal, uneven
burdens. The Court also stated that it is common sense that
the reliable standard is the price although in regard to custom
duties there are still items on which duties is levied on the
nature of goods rather than its value in money.
The issue which the Court was considering was the levy
of tax on sale of sugarcane and the court found that weight of
cane which has sucrose contents have a close nexus with
price although theoretically they may appear unconnected and
consequently the levy of tax with reference to weight of
sugarcane was held to be a permissible hypothesis for
determining the tax.
In Hotel Balaji’s case (supra) levy of purchase tax at the
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last point sale within the State by a dealer/manufacturer who
has sold the goods manufactured by him in the course of inter
state trade and commerce, on the purchase price of the raw
materials, was the subject of challenge. The contention has
been raised before this Court that since tax was leviable in
cases where the goods manufactured were not sold in the
State, it amounted to levy of Excise Duty on manufacture
though named as purchased tax. In holding that levy was
essentially a tax on purchase of goods within the State, one of
the factors which weighed with this Court was that the levy
was upon the purchase price of the raw material and not upon
the value of the manufactured products. That is to say when
the tax was levied at the transaction of purchase,
notwithstanding it was leviable in case of goods manufactured
by the dealer and were sold in a manner not taxable within the
State is nonetheless tax leviable at purchase price and not on
the value of the manufactured products. So it was held that
the essential character of tax on purchase was retained and
consequently it did not lose its character as a tax on purchase
of goods. The Court obviously indicated that in the case of tax
on sale, price on which transaction took place and not the
value of goods is relevant criterion to hold nexus between
measure of tax and the taxing event.
The position would have been different had the tax on
taxable transaction of purchase have been levied with
reference to price relatable to subsequent transaction of sale.
In that event, the price forming part of subsequent sale would
have lost nexus with the transaction that become taxable in
the State.
However, this case did not lay down the principle that
where price is the measure to which rate of tax can be applied,
it can be something else other then the price component of
taxing event, whether agreed by mutual consent or as
regulated by statutes.
These cases give a clear picture that Entry 54 in List II of
Seventh Schedule empowers the State Legislature to impose
and collect taxes on sale of goods. The measure to which tax
rate is to be applied must have a nexus to taxable event of sale
and not divorced from it.
The pivotal question, therefore, which needs to be
considered is whether the measure to which rate of tax is to be
applied on single point transaction of sale of any formulation
by the wholesaler to the retailer can be something notional
which is not related to subject of tax or to say in other words,
whether MRP to be chargeable subsequent to taxing event by a
retailer when he sells the same goods to consumer can provide
a basis which has a nexus with taxable event to provide a valid
measure to which rate of tax can be applied.
The principal contention about the invalidating of the
basis of the measure of tax envisaged under section 4A of the
Act as inserted vide Finance Act, 2004 is that while it levies
taxes on the sale transaction carried on by the manufacturer
or wholesalers or distributor the measure with which total
turnover is to be determined is not part of the sale which
attracts tax but its premise is to be found on subsequent sale
which, under the scheme of single point tax is not excisable to
tax at all. The MRP which a wholesaler can charge in respect
of scheduled formulations too is fixed by Control Order. In
respect of scheduled formulations wholesaler is required to
leave at least 16% margin in the MRP for the retailers and he
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is entitled to retain not more than 8% profit on the purchase
price. There being statutory prohibition against the
wholesalers to charge MRP from its buyer, the maximum retail
price fixed on the packet has no rational connection with the
taxable sale effected by the wholesalers and which becomes
subject matter of charge as a first point tax. In such event,
there exists no nexus between the measure of levy and subject
of levy.
In the context of meaning assigned to expression ’sale of
goods’ or price or consideration element of such ’sale of goods’
as taxable event, the conclusion that can fairly be reached is
that for the taxing event of sale, if the price is to be the basis
for measuring tax, it must relate to actual transaction of sale
that become subject of tax and not to a different transaction
that may take place in future at a price.
Accepting the contention of Revenue that the retail sale
price likely to be received when such transaction takes place is
taken only as a basis to provide measure of levying tax on a
completed transaction between wholesalers and retailer would
make it suffer from basic fallacy of importing the composition
of sale which has not come into existence to determine tax
which is fixed as soon as the taxable sale is completed.
Section 4A of the Act which projects itself as an exception
to Section 4, creates a legal fiction in respect of price of subject
sale, on which rate of tax is to be applied. But levy of tax
remains single point levy in a series of sales. Point of taxable
sale remains the first point sale i.e. from the
manufacturer/distributor or the wholesaler to the retailer. The
tax is to be charged on turnover of the Assessment Year in
aggregate. "Turnover" is defined under Section 2(44) and
"Taxable Turnover" under Section 2(42) of the Act. For the
taxable event that has occurred, the amount received or
receivable is assumed to be different from which is neither
received nor receivable and that amount which neither flows
from the Control Order, nor which flows from buyer to seller
under the contract but is relatable to a transaction of sale by a
retailer which may not have come into existence. For the
present, the price to which rate of tax is sought to be applied
to a sale by a wholesaler to a retailer is neither the price
agreed upon by the parties to the contract of taxable sale to
which charge is attracted nor flows from the Control Order
under which also, it is the price of formulation before end sale
is to be determined within prescribed limits.
The charging Section 4 stipulates that the tax payable by
a dealer under the Act shall be at single point in the series of
sales by successive dealers, as may be prescribed and shall be
levied at such rates not exceeding fifty per cent on the taxable
turnover, as may be notified by the State Government in the
Official Gazette. This shows that there is no scope for multi
point levy of tax and the tax is levied on the first point sale
within the State in a series of sales and tax is leviable at rate
applied to aggregate of price received or receivable by the
dealer on such sales.
Section 4A does not become workable unless read along
with definition of "turnover" and "taxable turnover".
The retail price of a formulation needs determination
under paragraph (7) of the order and the Government if
empowered by order to fix the price in accordance with
paragraph (7) of the order to be charged by a retailer. Where
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the maximum retail price is fixed as provided under paragraph
7 of Control Order, para 19 provides for price that can be
charged from a retailer by a wholesaler, it reads as under:
"19. Price of formulation sold to the dealer- (1)
A manufacturer, distributor or wholesaler shall
sell a formulation to a retailer, unless
otherwise permitted under the provisions of
this Order or any order made thereunder, at a
price equal to the retail price, as specified by
an order or notified by the Government
(excluding excise duty, if any), minus sixteen
per cent thereof in the case of scheduled
drugs"
Applying the principles enunciated above, the inevitable
conclusion is that when the wholesaler sells any formulation
to a retailer in bulk quantity, taxable event of sale of goods
takes place where wholesaler and retailers are the parties to
contract, the goods in question are the formulations and the
consideration is one which is agreed to between the parties to
that transaction within the limits permissible by law. By
substituting the assumed quantity of goods or a price which is
not subject matter of that contract of completed sale for the
purpose of measuring tax the legislature assumes existence of
contract of sale of drugs by legal fiction which has not taken
place and which cannot be considered to be a sale in the
manner stated in the Sales Act, which alone can be subject of
tax under Entry 54 in List II. Substitution of assumed price or
the assumed quantity in place of actual price/quantity in a
completed sale transaction, for the purpose of levy of tax on
the subject matter of tax results in taking away from it the
character of ’sale of goods’ as envisaged under the Sales Act.
Another distinguishing feature to be kept in mind is that
centre point of legislation under Entry 54 of List II of Seventh
Schedule is ’sale’ in contrast with central point of legislation
under Entry 84 of List I of Eighth Schedule i.e. ’Goods
manufactured or produced". While basic nexus of levy in the
former is "sale of specified goods", in the latter it is "goods
manufactured or produced in India".
Every transaction of sale is independent and can be
subject to levy of tax and the components and the measure
which can make the tax levy effective must have nexus with
the taxable event.
By devising a methodology in the matter of levy of tax on
sale of goods, law prohibits taxing of a transaction which is
not a completed sale and also confine sale of goods to mean
sale as defined under the Act. This cannot be overridden by
devising a measure of tax which relates to an event which has
not come into existence when tax is ex-hypothesi determined,
much less which can be said a completed sale and which
cannot be subject of legislation providing tax on ’sale of goods’
by transplanting a sum related to as "likely price" to be
charged for subsequent sale to be taxed by the devise of
measuring tax for the completed transaction which has
become subject of tax.
It may be relevant to recall here that this Court in Hotel
Balaji’s case (supra) held that where a tax was levied as a
purchase tax and was confined to the purchase price paid by
the buyer, and was not chargeable at the price at which the
end produce was sold later, it had retained its character as a
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tax on purchase.
If the legislation can provide for a measure of tax on
subject of tax by substituting any notional value, which at no
point of time becomes part of or related to subject of tax viz.
sale of goods, then the fact that it is related to MRP loses its
significance altogether. If this is permitted to be done the
legislation can provide for any measure the purpose of
applying the rate of tax, whether it is founded on MRP or any
other fixed value which legislature may provide will make little
difference. It is not contended by appellant that even if the
measure is not relatable to MRP, it can substitute any value as
a measure of tax. Subject of tax is not the goods or goods sold,
but a transaction of ’sale of goods’ as defined under the Sales
Act.
Learned counsel for the appellant submitted that Union
of India and Anr. v. A. Sanyasi Rao and Ors. (1996 (219) ITR
330) supports his stand. Section 44AC was inserted in Income
Tax Act, 1961 (in short ’IT Act’) by the Direct Tax Laws
(Amendment) Act, 1989 w.e.f. 1.4.1989. Section 206C was
inserted in the said Act by Finance Act, 1988 w.e.f. 1.4. 1988.
Explanation to Section 44AC was inserted by Finance Act,
1990 w.e.f. 1.4.1991. These provisions enabled the revenue to
estimate the profits on a presumptive basis in the case of
persons dealing in country liquor, timber, forest produces etc.
Revenue’s intention was to get over the problem of assessing
income and recovering tax in cases of person dealing in such
commodities, as business of such persons existed only for
short period, and after period of contract in many cases, it was
not even possible to trace the concerned assesses and many
were found to be dealing benami. Section 44AC occurred in
Chapter IV of the I.T. Act deals with "computation of income".
Section 44AC(1) determines profits and gains of the year from
trading of certain specified goods like liquor at a particular
percentage of package price specified therein. The object of
said provision was explained in a memorandum as "with a
view to combat large scale tax evasion by person deriving
income from such businesses where the bill seeks to insert
new Section 44AC to provide for determination of income in
such cases". About Section 206C it was stated that "it is
proposed to introduce a new Section 206C to provide that any
person being a seller referred to in Section 206C shall collect
income tax of a sum equal to 20% of the amount paid or
payable by the buyer as increased by a surcharge for the
purpose of Union".
Interpretation of the two sections came up before Andhra
Pradesh High Court. The said Court while upholding the
validity of the Act read down the Section 44AC of the Act and
held it only to be an adjunct to Section 206C and to explain
provision of Section 206C and not to dispense with the regular
assessment in accordance with the provisions of the I.T. Act. It
was held that the subject matter of tax vis. ’income’ cannot be
determined notionally by making such specific provisions
when in all other cases only the real income to be computed in
accordance with provision of Section 28 to Section 43C. This
Court noted that one of the contentions raised in the petition
was that ’tax is levied on "hypothetical income" and not on
"real income". In other words, the determination of "real
income" was held to be the statutory mandate.
If Section 4-A is designed to bring a levy into existence
which is divorced from the "sale" subject to tax under the Act,
it is beyond legislative competence under Entry 54 of List II of
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Seventh Schedule. The notification to the extent it intends to
levy tax on first point sale with reference to price which could
be charged in respect of a subsequent sale which has not
come into existence at the time liability to tax arise and is
determined ex-hypothesi is unsustainable on that basis.
Though the decision in Ganga Sugar case (supra) at first
flush appears to be supporting the stand of the appellants, on
a deeper scrutiny it is crystal clear that the said decision was
rendered on peculiar facts of the case. The three challenges as
culled out from paragraphs 22, 23 and 25 of the judgment
make the position clear that there was no discussion in the
background of Entry 54. Para 16 of the judgment traced the
history of levy on sugarcane and 40 years old practice of levy
on sugarcane was linked with weight. It was significantly
noted that it was in the background of "peculiar
circumstances of sugarcane economy". The logic cannot be
applied to the facts of the present case.
In Builders’ Association of India and Ors. v. Union of
India and Ors. (1989 (2) SCC 645) it was noted as follow:
"36. Even after the decision of this Court in the
State of Madras v. Gannon Dunkerley & Co.
(Madras) Ltd. it was quite possible that where
a contract entered into in connection with the
construction of a building consisted of two
parts, namely, one part relating to the sale of
materials used in the construction of the
building by the contractor to the person who
had assigned the contract and another part
dealing with the supply of labour and services,
sales tax was leviable on the goods which were
agreed to be sold under the first part. But
sales tax could not be levied when the contract
in question was a single and indivisible works
contract. After the 46th Amendment the works
contracts which was an indivisible one is by a
legal fiction altered into a contract which is
divisible into one for sale of goods and the
other for supply of labour and services. After
the 46th Amendment, it has become possible
for the States to levy sales tax on the value of
goods involved in a works contract in the same
way in which the sales tax was leviable on the
price of the goods and materials supplied in a
building contract which ad been entered into
in two distinct and separate parts as stated
above. It could not have been the contention of
the revenue prior to the 46th Amendment that
when the goods and materials had been
supplied under the distinct and separate
contract by the contractor of the purpose of
construction of a building the assessment of
sales tax could be made ignoring the
restrictions and conditions incorporated in
Article 286 of the Constitution. If that was the
position can be States contend after the 46th
Amendment under which by a legal fiction the
transfer of property in goods involved in a
works contract was made liable to payment of
sales tax that they are not governed by Article
286 while levying sales tax on sale of goods
involved in a works contract? They cannot do
so. When the law creates a legal fiction such
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fiction should be carried to its logical end.
There should not be any hesitation in giving
full effect to it. If the power to tax a sale in an
ordinary sense is subject to certain conditions
and restrictions imposed by the Constitution,
the power to tax a transaction which is deemed
to be a sale under Article 366(29-A) of the
Constitution should also be subject to the
same restrictions and conditions. Ordinarily,
unless thee is a contract to the contrary in the
case of a works contract the property in the
goods used in the construction of a building
passes to the owner of the land on which the
building is constructed, when the goods or
materials used are incorporated in the
building. The contractor becomes liable to pay
the sales tax ordinarily when the goods or
materials are so used in the construction of
the building and it is not necessary to wait till
the final bill is prepared for the entire work. In
Hudson’s Building Contracts (8th Edn.) at page
362 it is stated thus:
"The well known rule is that the
property in all materials and fittings,
once incorporated in or affixed to a
building, will pass to the freeholder \026
quicquid plantatur solo cedit. The
employer under a building contract may
not necessarily by the freeholder, but
may be a lessee or licensee, or even have
no interest in the land at all, as in the
case of a sub-contract. But once the
builder has affixed materials, the
property in them passes from him, and at
lest as against him they become the
absolute property of his employer,
whatever the latter’s tenure of or title to
the land. The builder owner may himself
be entitled to sever them as against some
other person \026 e.g. as tenant’s fixtures.
Nor can the builder reclaim them if they
have been subsequently severed from the
soil by the building owner or anyone else.
The principle was shortly and clearly
stated by Blackburn J. in Appleby v.
Meyers(1867 LR 2 CP 651): ’Materials
worked by one into the property of
another become part of that property’.
This is equally true whether it be fixed or
movable property. Bricks built into a wall
become part of the house, thread stitched
into a coat which is under repair, or
planks and nails and pitch worked into a
ship under repair, become part of the
coat or the ship."
40. We are surprised at the attitude of the
States which have put forward the plea that on
the passing of the 46th Amendment the
Constitution had conferred on the States a
larger freedom than what they had before in
regard to their power to levy sales tax under
Entry 54 of the State List. The 46th
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Amendment does no more than making it
possible for the States to levy sales tax on the
price of goods and materials used in works
contracts as if there was a sale of such goods
and materials. We do not accept the argument
that sub-clause (b) of Article 366(29-A) should
be read as being equivalent to a separate entry
in List II of the Seventh Schedule to the
Constitution enabling the States to levy tax on
sales and purchases independent of Entry 54
thereof. As the Constitution exists today the
power of the States to levy taxes on sales and
purchases of goods including the "deemed"
sales and purchases of goods under clause
(29-A) of Article 366 is to be found only in
Entry 54 and not outside it. We may
recapitulate here with observations of the
Constitution Bench in the case of Bengal
Immunity Company Ltd. v. State of Bihar
(1955 (2) SCR 603) in which this Court has
held that the operative provisions of the
several parts of Article 286 which imposes
restrictions on the levy of sales tax by the
States are intended to deal with different
topics and one could not be projected or read
into another and each one of them has to be
obeyed while any sale or purchase is taxed
under Entry 54 of the State List."
In Bhopal Sugar Industries v. D.B. Dube (AIR 1964 SC
1037) it was noted as follows:
5. In Gannon Dunkerley & Company’s case
([1959] S.C.R. 379.), this Court was called
upon to consider whether in a building
contract which is one, entire and indivisible,
there is sale of goods. It was held by the Court
that the Provincial Legislature was not
competent under Entry 48, List II, Sch. VII of
the Government of India Act, 1935, to impose
tax on the supply of materials used in such a
contract treating it as a sale. The decision of
the Court did not rest upon any peculiar
character of a building contract. It was held on
the larger ground canvassed in that case, that
the expression ’sale of goods’ within the
meaning of relevant legislative entry had the
same connotation as ’sale of goods’ in the
Indian Sale of Goods Act, 1930, and therefore
the State Legislature had no power to enact
legislation to levy tax under Entry 48 of List II
in respect of transactions which were not of
the nature of sales of goods strictly so called;
and a building contract not being a transaction
in which there was a sale of materials by the
contractor who constructed the building, the
State was not competent to enact legislation to
impose tax on the supply of materials used in
a building contract treating it as a sale. It was
therefore, held that the definition of sale in the
Madras General Sales Tax Act IX of 1939 was
to the extent of the extension invalid.
6. In Gannon Dunkerley & Company’s case
([1999] S.C.R. 379.), the validity of s. 2(h)(ii) of
the Madras General Sales Tax Act, 1939, as
amended by Act XXV of 1947, in so far as it
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included goods included in a works contract
fell to be determined, in the light of the
competence of the Provincial Legislature under
Entry 48, List II, in Seventh Schedule of the
Government of India Act, 1935. Under the
Constitution the relevant entry conferring
legislative power upon States to tax sale of
goods in Entry 54, List II. As the scheme of
division of legislative power under the
Constitution has remained unaltered, the
principle of Gannon Dunkerley’s case ([1999]
S.C.R. 379.), applies in adjudging the validity
of the provisions of the Madhya Pradesh Act 4
of 1958.
7. Consumption by an owner of goods in
which he deals is therefore not a sale within
the meaning of the Sale of Goods Act and
therefore it is not ’sale of goods’ within the
meaning of Entry 54, List II, Schedule VII of
the Constitution. The legislative power for
levying tax on sale of goods being restricted to
enacting legislation for levying tax on
transactions which conform to the definition of
sale of goods within the meaning of the Sale of
Goods Act, 1930, the extended definition
which includes consumption by a retail dealer
himself of motor spirit or lubricants sold to
him for ’retail sale’ is beyond the competence
of the State Legislature. But the clause in the
definition in Section 2(1) "and includes the
consumption by a retail dealer himself or on
his behalf of motor spirit or lubricant sold to
him for retail sale" which is ultra vires the
State Legislature because of lack of
competence under Entry 54 in List II, Schedule
VII of the Constitution is severable, from the
rest of the definition, and that clause alone
must be declared invalid."
The traditional concept of sale was stressed upon and
reference was made to M/s Gannon Dunkerley’s case (supra)
for the purpose of interpreting true import of the expression
"sale of goods".
In that view of the matter, the judgment of the High
Court does not warrant any interference and the appeal is
dismissed. However, it is made clear that if the tax component
has been passed on to the subsequent purchases claim for
refund shall not be entertained. But where it has not been so
passed on and has been deposited with the authorities, the
same shall be adjusted against future demands, if any.
The appeal is dismissed. No costs.