C.T. Kochouseph vs. The State Of Kerala And Anr. Etc.

REPORTABLE

2025 INSC 661
IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 941 – 945 OF 2004

C.T. KOCHOUSEPH ..... APPELLANT

VERSUS

STATE OF KERALA AND ANOTHER ETC. ..... RESPONDENTS


W I T H

CIVIL APPEAL NO. 4745 OF 2007

CIVIL APPEAL NO. 4746 OF 2007

CIVIL APPEAL NOS. 1937 – 1939 OF 2008

CIVIL APPEAL NO. 6055 OF 2008

CIVIL APPEAL NOS. 938 – 939 OF 2009

CIVIL APPEAL NOS. 3024 – 3025 OF 2012

A N D

CIVIL APPEAL NOS. _________ OF 2025
(ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NOS. 9420-9422 OF 2012)



J U D G M E N T


SANJIV KHANNA, CJI.

Leave granted in SLP (C) Nos. 9420-9422 of 2012.
Signature Not Verified
Digitally signed by
babita pandey
Date: 2025.05.09
17:07:38 IST
Reason:

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 1 of 47


2. This judgment decides a batch of matters pertaining to Section 5A of the Kerala
1
General Sales Tax Act, 1963 and the pari materia provision of Section 7A of
2
the Tamil Nadu General Sales Tax Act, 1959.

3. The following issues arise for our consideration:
I. Whether the purchase of goods by the appellants from dealers who
were exempted from payment of tax by virtue of notifications or
exemptions issued under the Kerala Act or the Tamil Nadu Act, is a
purchase "which is liable to tax" within the meaning of Section 5A of the
Kerala Act or Section 7A of the Tamil Nadu Act?
II. Whether the appellant-assessee who had purchased goods, that were
exempt from payment of sales tax or from the dealers who were exempt
from payment of sales tax, are liable to pay purchase tax under Section
5A of the Kerala Act or Section 7A of the Tamil Nadu Act?
III. Whether the purchase tax, as imposed by Section 5A of the Kerala Act
or Section 7A of the Tamil Nadu Act, is a tax in the nature of
manufacture or consignment tax or an inter-state levy, and
therefore ultra vires the Constitution and beyond the legislative powers
of the state legislature ?

4. At the outset, it is important to note that this is essentially a legacy dispute.
Following the enactment and enforcement of the Value Added Tax in 2005 and
the Goods and Services Tax Acts in 2017, the legal issue in question no longer
arises for consideration under the current legal framework.


1
For short, “Kerala Act”.
2
For short, “Tamil Nadu Act”.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 2 of 47


S TATUTORY P ROVISIONS
5. At this stage, it will be apposite to quote the relevant statutory provisions of
both the Kerala and Tamil Nadu Acts.

Tamil Nadu General Sales Tax Act, 1959
“Section 2(g) “dealer” means any person who carries on the
business of buying, selling, supplying or distributing goods,
directly or otherwise, whether for cash, or for deferred payment,
or for commission, remuneration or other valuable consideration,
and includes –
(i) A local authority, company, Hindu undivided family, firm or
other association of persons which carries on such business;
(ii) a causal trader,
(iii) a factor, a broker, a commission agent or arhati, a del credere
agent or an auctioneer, or any other mercantile agent by
whatever name called, and whether of the same description as
hereinbefore or not, who carries on the business of buying,
selling, supplying or distributing goods on behalf of any principal,
or through whom the goods are bought, sold, supplied or
distributed;
(iv) every local branch of a firm or company situated outside the
State;
(v) a person engaged in the business of transfer otherwise than
in pursuance of a contract of property in any goods for cash,
deferred payment or other valuable consideration;
(vi) a person engaged in the business of transfer of property in
goods (whether as goods or in some other form) involved in the
execution of a works contract;
(vii) a person engaged in the business of delivery of goods on
hire purchase or any system of payment by instalments;
(viii) a person engaged in the business of transfer of the right to
use any goods for any purpose (whether or not for a specified
period) for cash, deferred payment or other valuable
consideration;
(ix) a person engaged in the business of supplying by way of, or
as part of, any service or in any other manner whatsoever of
goods, being food or any other article for human consumption or
any drink (whether or not intoxicating), where such supply or
service is for cash, deferred payment or other valuable
consideration;

Explanation (1)- A society (including a co-operative society), club
or firm or an association which, whether or not in the course of
business, buys, sells, supplies or distributes goods from or to its
members for cash, or for deferred payment, or for commission,
remuneration or other valuable consideration, shall be deemed
to be a dealer for the purposes of this Act .

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 3 of 47


Explanation (2)- The Central Government or any State
Government which, whether or not in the course of business,
buy, sell, supply or distribute goods, directly or otherwise, for
cash, or for deferred payment, or for commission, remuneration
or other valuable consideration, shall be deemed to be a dealer
for the purposes of this Act;

XX XX XX

Section 2(j) “goods” means all kinds of movable property (other
than newspapers, actionable claims, stocks and shares and
securities) and includes all materials, commodities, and articles
including the goods( as goods or in some other form) involved in
the execution of a works contract or those goods to be used in
the fitting out, improvement or repair of movable property; and all
growing crops, grass or things attached to, or forming part of the
land which are agreed to be severed before sale or under the
contract of sale;

XX XX XX

Section 2(n) “sale” with all its grammatical variations and cognate
expressions means every transfer of the property in goods (other
than by way of mortgage, hypothecation, charge or pledge) by
one person to another in the course of business for cash,
deferred payment or other valuable consideration and includes
–
(i) a transfer, otherwise than in pursuance of a contract, of
property in any goods of cash, deferred payment or other
valuable consideration;
(ii) a transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract;
(iii) a delivery of goods on hire-purchase or any system of
payment by installments;
(iv) a transfer of the right to use any goods for any purpose
(whether or not for a specified period) for cash, deferred payment
or other valuable consideration;
(v) a supply of goods by any unincorporated association or body
of persons to a member thereof for cash, deferred payment or
other valuable consideration;
(vi) a supply, by way of or as part of any service or in any other
manner whatsoever, of goods, being food or any other article for
human consumption or any drink (whether or not intoxicating)
where such supply or service is for cash, deferred payment or
other valuable consideration, and such transfer, delivery or
supply of any goods shall be deemed to be a sale of those goods
by the person making (such) the transfer, delivery or supply and
a purchase of those goods by the person to whom such transfer,
delivery or supply is made;


Civil Appeal Nos. 941-945 of 2004 & Ors. Page 4 of 47


Explanation (3)-(a) The sale of purchase of goods shall be
deemed for the purpose of this Act, to have taken place in the
State, wherever the contract of sale or purchase might have been
made, if the goods are within the State-
(i) in the case of specific or ascertained goods, at the time the
contract of sale or purchase is made; and
(ii) in the case of unascertained or future goods, at the time of
their appropriation to the contract of sale or purchase by the
seller or by the purchaser, whether the assent of the other party
is prior or subsequent to such appropriation.

Explanation (3)-(b) Where there is a single contract of sale or
purchase of goods , situated at more places than one, the
provisions of clause (a) shall apply as if there were separate
contracts in respect of the goods at each of such places.

XX XX XX


Section 2(q) “total turnover” means the aggregate turnover in all
goods of a dealer at all places of business in the State, whether
or not the whole or any portion of such turnover is liable to tax;

Section 2(r) [“turnover” means the aggregate amount for which
goods are bought or sold, or delivered or supplied or otherwise
disposed of in any of the ways referred to in clause (n), by a
dealer] either directly or through another, on his own account or
on account of others whether for cash or for deferred payment or
other valuable consideration, provided that the proceeds of the
sale by a person of agricultural or horticultural produce other than
tea, [and rubber (natural rubber latex) and all varieties and
grades of raw rubber] grown within the State by himself or on any
land in which he has an interest whether as owner, usufructuary
mortgagee, tenant or otherwise, shall be excluded from his
turnover;

Explanation (1)- “Agricultural or horticultural produce” shall not
include such produce as has been subjected to any physical,
chemical or other process for being made fit for consumption,
save mere cleaning, grading, sorting or dying;

Explanation (1-A).- Any amount charged by a dealer by way of
tax separately without including the same in the price of the
goods bought or sold shall not be included in the turnover.

Explanation (2)- Subject to such conditions and restrictions, if
any, as may be prescribed in this behalf-
(i)[………]

Explanation (2) (ii) the amount for which goods are sold shall
include any sums charged for anything done by the dealer in

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 5 of 47


respect of the goods sold at the time of, or before the delivery
thereof;

Explanation (2) (iii) any cash or other discount on the price
allowed in respect of any sale and any amount refunded in
respect of articles returned by customers shall not be included in
the turnover; and

Explanation (2) (iv) where for accommodating a particular
customer, a dealer obtains goods from another dealer and
immediately disposes of the same to the said customer, the sale
in respect of such goods shall be included in the turnover of the
latter dealer but not in that of the former;

Explanation (3)- Any amount realised by a dealer by way of sale
of his business as a whole, shall not be included in the turnover.

Explanation (4)-The aggregate amount for which the goods are
bought or sold or delivered or supplied through a factor, broker,
commission agent or arhati, del credere agent or an auctioneer
or any other mercantile agent, by whatever name called, whether
for cash or for deferred payment or other valuable consideration,
shall be deemed to be the turnover of such factor, broker,
commission agent, arhati, del credere agent, auctioneer or any
other mercantile agent, by whatever name called.

XX XX XX

Section 3. Levy of taxes on sales or purchases of goods .-
(1) Every dealer (other than the dealer, casual trader or agent of
a non- resident dealer) whose total turnover for a year [exceeds
three lakhs of rupees] and every casual trader or agent of a non-
resident dealer, whatever be his turnover for the year, shall pay
a tax for each year in accordance with the provisions of this act.

2) Subject to the provisions of sub-section (1), in the case of
goods mentioned in the First Schedule, the tax under this Act
shall be payable by a dealer at the rate and [only] at the point
specified therein on the turnover in each year relating to such
goods:
Provided that all spare parts, components and accessories of
such goods shall also be taxed at the same rate as that of the
goods if such spare parts, components and accessories are not
specifically enumerated in the First Schedule and made liable to
tax under that Schedule;

[Provided further that in the case of goods mentioned in the First
Schedule which are taxable at the point of first sale, the tax under
this Act shall be payable by the first or earliest of the successive
dealers in the State who is liable to tax under this section.]


Civil Appeal Nos. 941-945 of 2004 & Ors. Page 6 of 47


Section 3(2-A) Subject to the provisions of sub-section (1), in the
case of goods mentioned in the Fifth Schedule, the tax under this
Act shall be payable by a dealer at the rate and at the point
specified therein on the turnover in each year relating to such
goods:

Provided that in respect of sale by the first dealer to another
registered dealer, the dealer selling the goods shall furnish to the
assessing authority in the prescribed manner within the
prescribed period a declaration duly filled in and signed by the
dealer to whom the goods are sold containing the prescribed
particulars in a prescribed form, obtained from the prescribed
authority.

Section 3(2-B) Subject to the provisions of sub-section (1), in the
case of goods mentioned in the Sixth Schedule, the tax under
this Act shall be payable by a dealer at the first point of sale and
the second point of sale, and at the rate specified therein on the
turnover in each year relating to such goods;

XX XX XX

Section 7-A . Levy of purchase Tax . – (1) [Subject to the
provisions of sub-section (1) of section 3, every dealer] who in
the course of his business purchases from a registered dealer or
from any other person, any goods, (the sale or purchase of which
is liable to tax under this Act) in circumstances in which [no tax is
payable under (sections 3 or 4,) as the case may be, *[not being
a circumstance in which goods liable to tax under sub-section (2)
of section 3 or section 4, were purchased at a point other than
the taxable point specified in the First or the Second Schedule],
and either-
(a) *[consumes or uses such goods in or for the manufacture of
other goods for sale or otherwise; or]
(b) disposes of such goods in any manner other than by way of
sale in the State; or
(c) [despatches or carries them] to a place outside the State
except as a direct result of sale or purchase in the course of inter-
State trade or commerce,
shall pay tax on the turnover relating to the purchase aforesaid
at the rate mentioned in [sections 3 or 4], as the case may be.


Section 8. Exemption from tax. – Subject to such restrictions
and conditions as may be prescribed, a dealer who deals in the
goods specified in the Third Schedule shall not be liable to pay
any tax under this Act in respect of such goods.

XX XX XX


Civil Appeal Nos. 941-945 of 2004 & Ors. Page 7 of 47


Section 17. Power of Government to notify exemptions and
reductions of tax. –
(1) The Government may, by notification, [issued whether
prospectively or retrospectively,] make an exemption, or
reduction in rate, in respect of any tax payable under this Act –
(i) on the sale or purchase of any specified goods or class of
goods, at all points or at a specified point or points in the series
of sales by successive dealers; or
(ii) by any specified class of persons, in regard to the whole or
any part of their turnover; [or] (iii) on the sale or purchase of any
specified classes of goods by specified classes of dealers in
regard to the whole or part of their turnover.

Section 17(4) The Government may, in such circumstances and
subject to such conditions as may be prescribed, by notification,
remit the whole or any part of the tax or penalty or fee payable in
respect of any period by any dealer under this Act.”

Kerala General Sales Tax Act, 1963
“ 5. Levy of tax on sale or purchase of goods : - (1) Every
dealer (other than a casual trader or agent of a non-resident
dealer) whose total turnover for a year is not less than [one lakh
rupees] and every casual trader or agent of a non-resident
dealer, whatever be his total turnover for the year, shall pay tax
on his taxable turnover for that year,––
(i) in the case of goods specified in the First or Second
Schedule, at the rates and only at the points specified against
such goods in the said Schedule;
[ x x x ]
(iii) in the case of transfer of the right to use any goods for
any purpose (whether or not for a specified period) at the rate of
[six per cent] at all points of such transfer on an aggregate
turnover of [rupees one lakh] and above;
[(iv) (a) in the case of transfer of goods involved in the
execution of works contract where transfer is in the form of goods
at the rates and at the points specified against such goods in the
First, Second or Fifth Schedule [ x x x ]
(b) In the case of transfer of goods involved in the execution
of works contract (where the transfer is not in the form of goods
but in some other form) specified in the Fourth Schedule, at the
rate specified against such contract in the said Schedule:
Provided that no tax is payable in respect of the turnover of
goods the transfer of which was effected without any processing
or manufacture on which tax was levied under clause (i) on any
earlier sale in the State or which are exempted from tax and for
goods coming under the Fifth Schedule, no tax specified for the
first sale is payable, on which tax was levied in any earlier sale
in the State:

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 8 of 47


Provided further that tax payable in respect of turnover of
goods coming under the second schedule the transfer of which
was effected without any processing or manufacture shall not
exceed the rate and only at the points specified against such
goods in the said Schedule].

(v) in the case of goods specified in the Fifth Schedule at
the rates and at the two points specified against such goods in
the said Schedule;

[Provided that where there are no two points of sale in the
State for any goods coming under the Fifth Schedule and the first
sale is to a person other than a registered dealer, the rate
specified in column (8) of that Schedule shall apply to such sales]

[(2) Every dealer other than a dealer referred to in sub-section
(1) whose total turnover for a year in respect of the goods
specified in the First or Second or Fifth Schedule or goods
involved in the execution of works contract (whether it is in the
form of goods or in some other form) specified in the Fourth
Schedule is not less than [rupees one lakh] shall pay tax at the
rate and only at the point or points specified against the goods in
the First or Second or Fifth Schedule or goods involved in the
execution of works contract (whether it is in the form of goods or
in some other form) specified in the Fourth Schedule, as the case
may be, on his taxable turnover in that year relating to such
goods:

Provided that where a tax has been levied under sub-
section (1) or sub-section (2) of this section or under section 5A
in respect of the sale or purchase or goods specified in the
Second Schedule and such goods are sold in the course of
interstate trade or commerce, the tax so levied shall be refunded
to such person in such manner and subject to such conditions as
may be prescribed

[(2A) (i) Notwithstanding anything contained in this Act or the
rules made thereunder every dealer shall pay turnover tax on the
turnover of goods as specified hereunder, namely:-

(a) by an oil company defined in the Explanation under
serial number [97] of the First Schedule to this Act whose total
turnover in a year exceeds rupees fifty Iakhs at the rate of three
per cent on the turnover from the Ist day of April, 1991 till 31st
day of July, 1991 and thereafter at the rate of four per cent on the
turnover:


Civil Appeal Nos. 941-945 of 2004 & Ors. Page 9 of 47


[(b) by any dealer in Foreign Liquor (Indian made) or
Foreign Liquor (Foreign made) as specified in entries against
serial numbers 53 and 54 of the First Schedule at the rate of three
per cent on the turnover at all points;

(c) by any dealer in jewellery made of gold, silver and
platinum group of metals at the rate of three per cent on the
turnover;

(d) by any dealer in cooked food including beverages not
falling under the entries against serial numbers 53 and 54 of the
First Schedule sold or served in hotels and/or restaurants and
not covered by the entries against serial number 40 of the First
Schedule whose turnover in a year.––

exceeds rupees five lakhs but does not Rupees one thousand
exceed rupees ten lakhs exceeds rupees ten lakhs but does not
at the rate of one per cent exceeds rupees twenty five lakhs on
the turnover exceeds rupees twenty five lakhs at the rate of two
per cent on the turnover:

Provided that tax under sub-sections (1) and (2) of section
5 on such turnover and tax under section 5A shall not be levied
on such dealer;

(e) by any dealer in medicines and drugs including
Allopathic, Ayurvedic, Homoeopathic, Sidha or Unani
preparations or Glucose I. P. at the point of first sale in the State
at the rate of half per cent on the turnover of such goods:

Provided that dealers other than those who receive the
goods on branch transfer or on consignment shall not be liable to
pay turnover tax when the total turnover does not exceed rupees
fifty lakhs in the year;

(f) by any dealer in tea at the point of second sale in the
State at the rate of three fourth per cent on the turnover of such
good;

(g) by any dealer not coming under sub-clauses (a) to (f) of
goods coming under the First Schedule or the Fifth Schedule
whose total turnover in a year exceeds rupees fifty lakhs at the
rate of haIf per cent on the turnover of such goods at all points of
sale or purchase as the case may be.]

Provided that no tax under this sub-section shall be payable
on that part of such turnover–

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 10 of 47


[(i) x x x ]
(ii) which relates to:
(a) sale or purchase of goods in the course of interstate
trade or commerce:
(b) sale or purchase of goods in the course of export out of
the territory of India or sale or purchase in the course of import
into the territory of India;
(c) sale or purchse exempted from tax by notification under
section 10;
(d) all amounts falling under the head 'freight', when
specified and charged for by the dealer separately without
including such amounts in the price of the goods sold;
(e) all amounts falling under the head 'charges for delivery',
when specified and charged for by the dealer separately without
including such amounts in the price of the goods sold;
(f) all amounts allowed as discount, provided that such
discount is allowed in accordance with the regular practice of the
dealer or is in accordance with the terms of a contract or
agreement entered into in a particular case and provided also
that the accounts show that the purchaser has paid only the sum
originally charged less discount;
(g) all amounts allowed to purchasers in respect of goods
returned by them to the dealer when the goods are taxable on
sales provided that the goods were returned within a period of
three months from the date of delivery of the goods and the
accounts show the date on which the goods were returned and
the date on which and the amount for which refund was made;
and
(h) all amounts received from the sellers in respect of goods
returned to them by the dealer, when the goods are taxable on
the purchase value provided that the goods were returned within
a period of three months from the date of delivery of the goods
and the accounts show the date on which the goods were
returned and the date on which and the amount for which refund
was received:

Provided further that save as otherwise provided in this
sub-section, no other deduction shall be made from the total
turnover of a dealer for the purposes of this sub-section.
(ii) The provisions of this Act and the rules made thereunder
shall, so far as may be, apply in relation to the assessment,
collection or refund of the turnover tax under this sub-section
including the provisions relating to appeals and penalties, as they
apply in relation to the assessment, collection or refund of tax
under the other provisions of this Act.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 11 of 47


[(iii) Notwithstanding anything contained in sub-section (1)
of section 22, no dealer shall collect from his purchaser the
turnover tax payable by him under this sub-section.]

(3) Notwithstanding anything contained in sub-section (1)
or sub-section (2), the tax payable by a dealer in respect of any
sale of industrial raw materials, [component parts, containers or
packing materials] which is liable to tax at a rate higher than [two
and a half per cent] when sold to industrial units for use in the
production of finished products inside the State for sale or for
packing of such finished products inside the State for sale, as the
case may be, shall be at the rate of only [two and a half per cent]
on the taxable turnover relating to such industrial raw materials,
[component parts, containers or packing materials], as the case
may be:

Provided that this sub-section shall not apply where the
sale of such finished products is not liable to tax either under this
Act or under the Central Sales Tax Act, 1956 (Central Act 74 of
1956) or when such finished products are exported out of the
territory of India:

Provided further that the provisions of this sub-section shall
not apply to any sale unless the dealer selling the goods
furnishes to the assessing authority in the prescribed manner a
declaration duly filled in and signed by the dealer to whom the
goods are sold containing the prescribed particulars in the
prescribed form.]
[(3A) x x x x ]

(4) Notwithstanding anything contained in sub-section (1), every
dealer registered under sub-section (3) of section 7 of the Central
Sales Tax Act, 1956 (Central Act 74 of 1956), shall, whatever be
the quantum of his total turnover, pay tax for each year in respect
of the sale of the goods with reference to the purchase of which
he has furnished a declaration under sub-section (4) of section 8
of the aforesaid Central Act [on his taxable turnover in respect of
such goods:]

Provided that this sub-section shall not apply to any dealer
in respect of the sale of the goods the purchase of which is liable
to tax under subsection (1).

[(5) Notwithstanding anything contained in sub-section (1) or sub-
section (2), but subject to sub-section (6), where goods sold are
contained in containers or are packed in any packing materials,
the rate of tax and the point of levy applicable to such containers

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 12 of 47


or packing materials, as the case may be, shalI, whether the price
of the containers or the packing materials is charged separately
or not be the same as those applicable to goods contained or
packed, and in determining turnover of the goods, the turnover in
respect of the containers or packing materials shall be included
therein.

(6) Where the sale or purchases of goods, contained in any
containers or packed in any packing materials is exempt from tax,
then, the sale or purchase of such containers or packing
materials shall also be exempt from tax.

Explanation:– In sub-section (5) and sub-section (6), the word
"containers'' includes gunny bags, tins, bottles or any other
containers.]

5A. Levy of purchase tax :–(1) Every dealer who, in the course
of his business, purchases from a registered dealer or from any
other person any goods, the sale or purchase of which is liable
to tax under this Act, in circumstances in which no tax is payable
under [Sub-Sections (1), (2), (3), (4), or (5) of Section 5] and
either:–
(a) consumes such goods in the manufacture of other
goods for sale or otherwise: or
(b) [uses or] disposes of such goods in any manner other
than by way of sale in the state; or
(c) despatches them to any place outside the State except
as a direct result of sale or purchase in the course of inter-state
trade or commerce; shall, whatever be the quantum of the
turnover relating to such purchase for a year, pay tax on the
taxable turnover relating to such purchase for the year at the
rates mentioned in Section 5.

(2) Notwithstanding anything contained in sub-section ( 1), a
dealer (other than a casual trader or agent of a non-resident
dealer purchasing goods, the sale of which is liable to tax under
section 5, shall not be liable to pay tax under sub-section (1) if
his total turnover for a year less than [one lakh rupees]:

Provided that where the total turnover of such dealer for the
year in respect of the goods mentioned in clause (i) of sub-
section (1) of section 5 is not less than [fifty thousand rupees], he
shall be liable to pay tax on the taxable turnover in respect of
those goods.

(3) Notwithstanding anything contained in the foregoing
provisions of this section, a dealer referred to in sub-section (1),

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 13 of 47


who purchases goods, the sale of which is liable to tax under
clause (ii) of sub-section (1) of Section 5, and whose total
turnover for a year is not less than [one lakh rupees] but not more
than [one lakh ten thousand rupees] may, at his option instead of
paying the tax in accordance with the provisions of subsection
(1), pay tax
[at the rate] mentioned in [ x x x x ] sub-section (1) of Section 7
in accordance with the provisions of that section.”



UMMARY OF THE TATUTORY OSITION
S S P

6. A brief overview of the relevant statutory provisions is set out below:

• Section 3 of the Tamil Nadu Act is the charging provision. It imposes a
liability to pay tax on every dealer whose annual turnover exceeds the
prescribed threshold, as well as on every casual dealer and agent of a
non-resident dealer. The tax is payable on the dealer’s taxable turnover
at the rates specified under the Act. Section 3 does not differentiate
between sale and purchase. The heading refers to ‘sales or purchase’.
• The term ‘turnover’ is defined in section 2(r) of the Tamil Nadu Act to
include the total value of goods bought, sold, supplied or distributed by
a dealer, whether directly or through others, and whether on the dealer’s
own account or on behalf of another. However, the definition excludes
the sale proceeds of agricultural or horticultural produce, except where
the produce is tea grown in Tamil Nadu either by the dealer or on land
in which the dealer holds an interest. The Explanation to this provision
clarifies that produce which has undergone physical, chemical or other
processing for the purpose of making it fit for consumption ceases to be
treated as agricultural produce. This exclusion does not apply where the
processing is limited to cleaning, grading, sorting or drying.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 14 of 47


• Section 3(2) of the Tamil Nadu Act further provides that, in the case of
goods enumerated in the First Schedule, tax is payable at the rate and
point of levy specified therein, irrespective of the dealer’s aggregate
turnover.
• Section 8 of the Tamil Nadu Act deals with exemptions and states that
no tax shall be payable on the sale of goods specified in the Third
Schedule, subject to such conditions and restrictions as may be
prescribed.
• Section 17 of the Tamil Nadu Act empowers the State Government to
grant, by notification, either full or partial exemptions from tax or
reductions in the rate of tax. Such notifications may apply to particular
goods or classes of goods, at all or specific points of sale, or to particular
dealers or classes of dealers in respect of the whole or any part of their
turnover. These exemptions may apply generally throughout the State
or be confined to specified local areas and may be subject to conditions
or restrictions. The Government is also empowered to vary or cancel
such notifications.
Section 18 of the Tamil Nadu Act provides that where a dealer
•
contravenes any condition or restriction specified in a notification issued
under section 17, the exemption shall be deemed not to have been
granted, and the dealer shall be liable to pay tax accordingly.
• Section 7A of the Tamil Nadu Act, introduced by Act 1 of 1959, imposes
a purchase tax in circumstances where no tax is payable under sections
3, 4, or 5. It applies where a dealer purchases goods liable to tax and
the goods are (i) used in the manufacture of other goods, (ii) disposed
of otherwise than by sale within the State, or (iii) sent outside Tamil

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 15 of 47


Nadu otherwise than by way of inter-State sale. In such cases, the
purchasing dealer is liable to pay tax on the purchase aforesaid at the
applicable rate mentioned in Section 3 or 4.
• The provisions of the Kerala Act reflect a framework broadly similar to
that of the Tamil Nadu Act, particularly in relation to charging,
exemptions, and the imposition of purchase tax.
• Section 5 of the Kerala Act is the charging section. It provides that every
dealer whose turnover exceeds the prescribed threshold, as well as
every casual dealer and agent of a non-resident dealer, is liable to pay
tax on the turnover for that year. In the case of goods specified in the
First or Second Schedule, the tax is payable at the rate and at the point
of levy specified therein. The heading reads — “levy of tax on sale or
purchase of goods”.
3
• Section 5A of the Kerala Act is in pari materia to section 7A of the Tamil
Nadu Act. It provides for the levy of purchase tax in specified
circumstances. The section applies where a dealer, in the course of
business, purchases goods that are liable to tax, from either a registered
dealer or any other person, but no tax is payable under section 5 in
respect of such transaction. If such goods are (i) consumed in the
manufacture of other goods, whether for sale or otherwise, (ii) used or
disposed of in a manner other than by sale within the State, or (iii)
dispatched to a place outside the State, except where such dispatch is
in the course of inter-State trade or commerce, the dealer becomes

3
Inserted by Act 14 of 1970.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 16 of 47


liable to pay tax on the purchase turnover relating to such goods. The
rate applicable shall be as specified in section 5.


ECISIONS OF THIS OURT NTERPRETING IMILAR OR DENTICAL ROVISIONS
D C I S I P

7. A three-Judges Bench of this Court in State of Tamil Nadu v.
4
M.K.Kandaswami and Others , way back in the year 1975, had interpreted
5
Section 7A of the Madras General Sales Tax Act, 1959. On analysis of sub-
section (1) to Section 7A, this Court delineated the following ingredients that
must be cumulatively satisfied for the purpose of levy :
i. The person who purchases the goods is a dealer;
ii. The purchase is made by him in the course of his business;
iii. Such purchase is either from a registered dealer or from any other
person;
iv. The goods purchased are goods, the sale or purchase of which is liable
to tax under the Madras Act;
v. Such purchase is in the circumstances in which no tax is payable under
Sections 3, 4 or 5 of the Madras Act; and
vi. The dealer either consumes such goods in the manufacture of other
goods for sale or otherwise, or despatches such goods in any manner
other than by way of sale in the State, or despatches them to a place
outside the State except as a direct result of sale or purchase in the
course of inter-State trade or commerce.


4
(1975) 4 SCC 745.
5
For short, “Madras Act”.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 17 of 47


8. To effectuate the object and purpose of the enactment of Section 7A of the
Madras Act, or for that matter Section 5A of the Kerala Act, this Court outright
rejected the contention, reversing the decision of the High Court, inter alia,
holding that when the sale is exempt and therefore not to be included in the
turnover of the dealer selling the goods, the exemption would equally enure to
the benefit of the purchaser who is liable to pay tax in terms of Section 7A(1)
of the Madras Act. This is unacceptable as it would render Section 7A(1) wholly
nugatory. Clarifying the distinction between three inter-related but distinct
concepts, namely, ‘taxable person’, ‘taxable goods’ and ‘taxable event’, which
must be satisfied before a person can be saddled with tax liability, it is observed
that conflating the three could result in a serious error in the interpretation and
application of the Madras Act. Referring to Section 7A as the charging
provision read with Section 3(2) and the definition clauses of the term ‘goods’
in Section 2(j), ‘dealer’ in Section 2(g) and ‘sale’ in Section 2(n) in the context
of ‘taxable person’, ‘taxable goods’ and ‘taxable event’, it is held, that the
expression – “goods, the sale or purchase of which is liable to tax under the
Act”, refers to the character and class of goods in relation to their exigibility.
Essentially, this expression is held to define “taxable goods”, that is, goods
listed in the First Schedule of the Act, the sale or purchase of which is subject
to tax at the specified rate and point of levy. The words “the sale or purchase
of which is liable to tax under the Act” qualify the term “goods” and, by
necessary implication, exclude goods that are totally exempt from tax “at all

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 18 of 47


6 7
points” under Section 8 or Section 17(1). Such “exempt goods”, not being
“taxable goods”, cannot be brought to charge under Section 7-A.

9. Elaborating further on the contours of Section 7A, viz . the expression “under
the Act”, M.K.Kandaswami (supra), elucidates that Section 7A creates a
separate and independent charge which is distinct and not subject to Section
3. In effect, Section 7A is a charging provision itself, intended to bring to tax
goods which, under normal circumstances, would have been taxed at some
point in the State, but in the circumstances, no tax was payable under Sections
3, 4 or 5 of the Madras Act. Section 7A brings such goods to tax at the hands
of the purchaser, provided the purchaser is a dealer, in the following three
alternative circumstances:
a) when he consumes the goods in the manufacture of other goods for
sale or otherwise, or
b) despatches them in any manner other than by way of sale in the
State, or
c) despatches them to a place outside the State, except as a direct
result of sale or purchase in the course of inter-State trade or
commerce.

8
Referring to ingredient (iv) and (v) , it is observed that these are not mutually
exclusive; the existence of one does not necessarily negate or preclude the
other. In fact, ingredients (iv) and (v) can co-exist harmoniously. Ingredient (iv)

6
Both — sale or purchase.
7
‘Exempt goods’ here, as explained hereinafter, refers to goods on which no sales or purchase tax
can be levied.
8
Ingredient (iv). The goods purchased are goods, the sale or purchase of which is liable to tax under
the Madras Act.
Ingredient (v). Such purchase is in the circumstances in which no tax is payable under Sections 3, 4
or 5 of the Madras Act.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 19 of 47


is satisfied if the particular goods in question are shown to qualify as ‘taxable
goods’. However, there may be a particular circumstance in a given case,
because of which the sale or purchase does not attract tax under Sections 3,
4 or 5 of the Madras Act. Section 7A addresses such situations by imposing a
tax on the purchasing dealers’ purchase turnover, provided that one of the
alternative conditions — (a), (b) or (c) to Section 7A(1) — is fulfilled.

10. M.K.Kandaswami (supra) also considers Section 5A of the Kerala Act and
interprets it in the same manner. Specific reference was made to a decision of
the Single Judge of the High Court of Kerala in Malabar Fruit Products
Company, Bharananganam Kottayam and Others v. Sales Tax Officer,
9
Palai and Others wherein the constitutional validity of Section 5A was
challenged. The Single Judge upheld the validity of Section 5A and elucidated
the legislative scheme by giving examples. For instance, in a case where a
sale is made by the seller whose turnover is below the specified minimum, the
purchaser may be liable to pay tax on the purchase in the circumstances
mentioned in clauses (a), (b) and (c) of Section 5A(1). Another example
considers the sale of agricultural or horticultural produce, which is excluded
from the turnover of the seller. In this scenario, although the person selling
such produce is treated as a ‘dealer’, such sale is not part of his turnover; the
purchaser may nonetheless be taxed under Section 5A, when agricultural or
horticultural produce are “goods liable to tax” and the conditions thereof are
satisfied. This judgment was upheld by the Division Bench of the High Court of

9
(1972) 30 STC 537 (Ker).

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 20 of 47


10
Kerala in Yusuf Shabeer and Others v. State of Kerala and Others .
Approving the view taken in Yusuf Shabeer (supra), this Court observed:
“34. In our opinion, the Kerala High Court has correctly construed
Section 5-A of the Kerala Act which is in pari materia with the
impugned Section 7-A of the Madras Act. “Goods the sale or
purchase of which is liable to tax under this Act in Section 7-A(1)”
means “taxable goods”, that is, the kind of goods, the sale of
which by a particular person or dealer may not be taxable in the
hands of seller but the purchase of the same by a dealer in the
course of his business may subsequently become taxable. We
have pointed out and it needs to be emphasised again that
Section 7-A itself is a charging section. It creates a liability
against a dealer on his purchase turnover with regard to goods,
the sale or purchase of which though generally liable to tax under
the Act, have not due to the circumstances of particular sales,
suffered tax under Sections 3, 4 or 5, and which after the
purchase, have been dealt by him in any of the modes indicated
in clauses ( a ), ( b ) and ( c ) of Section 7-A(1).”

In view of the reasoning given, the appeals preferred by the State of Tamil
Nadu were allowed and the judgment of the High Court was reversed. The
decisions of the High Court of Kerala in Malabar Fruit Products (supra) and
Yusuf Shabeer (supra), as observed above, were approved.

11. We have examined the judgment of this Court in State of Kerala v.
11
T.S.Govindarajulu Naidu , which upheld the judgment of the High Court of
12
Kerala in T.S. Govindarajalu Naidu v. State of Kerala . In our view, the
Division Bench of the High Court of Kerala misapplied the ratio laid down in
M.K. Kandaswami (supra) in accepting the assessee’s contention. M.K.
Kandaswami (supra) involved an exemption granted under Section 17(1) of
the Tamil Nadu Act on the sale of goods. Misinterpreting the ratio in M.K.
Kandaswami (supra), the High Court held that the exemption extended to both

10
(1973) 32 STC 359 (Ker).
11
1993 Supp 3 SCC 656.
12
(1979) 43 STC 233 (Kerala).

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 21 of 47


sales tax and purchase tax, thereby excluding the applicability of purchase tax
under Section 7A of the Tamil Nadu Act or the pari materia provision of Section
5A of the Kerala Act. Unfortunately, this aspect was not addressed in the brief
judgment delivered by this Court in T.S.Govindarajulu Naidu (supra) which
dismissed the State’s appeal against the High Court’s decision. This Court
recorded that an exemption had been granted under Section 10 of the Kerala
Act and observed that the exemption applied to the payment of tax under the
Act, encompassing both sales and purchase tax.

12. A two-Judge Bench of this Court in Goodyear India Ltd. and Others v. State
13
of Haryana and Another examined the relevant provisions of the Haryana
14
General Sales Tax Act, 1973 as well as the scope, effect, and validity of
15
Section 13-AA of the Bombay Sales Tax Act, 1959. The Court referred to its
earlier judgment in M.K.Kandaswami (supra) which was relied upon by the
Revenue but was sought to be distinguished on the ground that the legal
question involved was different. The contention of the assessee was accepted.
The Court observed that Section 9 of the Haryana Act begins with the words,
“where a dealer liable to pay tax under the Act,” rather than “whether a dealer
has paid tax or has not paid tax.” The phrase “liable to pay tax under the Act”
refers to the obligation to pay sales tax on certain purchases. The Court
clarified that the liability to pay tax arises upon the occurrence of a taxable
event, that is, the event that gives rise to the charge. Although the assessment
and actual recovery of tax may happen later, the liability is triggered by this
taxable event. The imposition of tax involves three stages. First, the declaration

13
(1990) 2 SCC 71.
14
For short, “Haryana Act”.
15
For short, “Bombay Act”.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 22 of 47


of liability. This is established by the statute and defines who is legally bound
to pay tax. Second, assessment, which quantifies the liability, but does not
create it; the liability already exists under the law. Lastly, recovery, this is
initiated when the taxpayer fails to pay voluntarily. Crucially, the liability to pay
tax arises on the occurrence of the taxable event, it does not exist or accrue
prior to that event, nor can it arise at a later point in time. Referring to the
clauses of Section 9, the Court held that the key phrase attracting taxation is:
“goods, the sale and purchase of which is liable to tax under the Act.” This
phrase relates to the nature and category of goods in terms of their taxability.

13. Contrary to the interpretation in M.K.Kandaswami (supra), the decision in
Goodyear (supra) observes that Section 9 of the Haryana Act does not itself
impose purchase tax merely on the act of purchasing taxable goods. Instead,
the tax is imposed when these goods are used in such a way that they lose
their original identity and are transformed into new taxable goods or goods
which are then dispatched outside the State. Only at that stage is the tax levied,
and the liability to pay arises. While referring again to M.K.Kandaswami
(supra) and specifically to ingredients (iv) and (v) mentioned therein, the Court
16
noted that ingredient (vi) was neither argued nor properly considered in that
case. Instead, only a brief mention was made regarding the wording of the
section. The Court then referred to constitutional provisions, including the
Constitution (Forty-Sixth Amendment) Act, 1982 and Entry 54 of List II in the
Seventh Schedule of the Constitution of India, to hold that no tax is payable

16
Ingredient (vi). The dealer either consumes such goods in the manufacture of other goods for sale
or otherwise, or despatches such goods in any manner other than by way of sale in the State, or
despatches them to a place outside the State except as a direct result of sale or purchase in the course
of inter-State trade or commerce.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 23 of 47


under the Haryana Act when goods are exported outside the State in the
course of an inter-State sale.

14. In his concurring opinion, Ranganathan J. observed that Section 9 of the
Haryana Act and Section 13-AA of the Bombay Act both aim to levy purchase
tax, but the tax does not become payable at the moment of purchase. Instead,
liability arises later, if the purchaser either uses the goods to manufacture other
taxable goods, or dispatches the manufactured goods to a place of business
outside the State, other than by way of inter-State sale or export.

15. At this point, it is important to note the distinction in the wording of Section 9 of
the Haryana Act. As stated in paragraph 8 of Goodyear (supra), the amended
Section brought within its scope the purchase of goods (other than those listed
in Schedule B) from within the State, when such goods are used to
manufacture other goods, or when the manufactured goods are disposed of
outside the State other than by way of inter-State sale or export.

17
16. A similar issue with reference to the Gujarat Sales Tax Act, 1969, Uttar
18
Pradesh Sales Tax Act, 1948 as well as the Andhra Pradesh General Sales
19
Tax Act, 1957 was examined by a three-Judge Bench of this Court, which
included Ranganathan, J., in Hotel Balaji and Others v. State of A.P. and
20
Others . Jeevan Reddy, J., writing for himself and Ramaswami, J., referred
to some earlier judgments and concurred with the opinion expressed in
M.K.Kandaswami (supra), while disagreeing with the ratio in Goodyear
(supra). The ratio in Goodyear (supra), it was stated, cannot be accepted for

17
For short, “Gujarat Act.”
18
For short, “Uttar Pradesh Act”.
19
For short, “Andhra Pradesh Act”.
20
1993 Supp (4) SCC 536.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 24 of 47


detailed reasons being set out in Part-V of the judgment. Referring to the
relevant State enactments, it was stated that where a purchaser uses goods
as raw material, processing material, or consumable stores in the manufacture
of taxable goods, purchase tax becomes leviable upon the occurrence of such
events. In such a situation, it is immaterial whether the manufactured goods
are sold within the State or dealt with in some other manner, including
consigning to the manufacturer’s own depots or to the depots of his agents
outside the State. The contention that such a levy amounts to excise duty or
use tax—since it attaches on the use of goods in manufacturing of other goods
and not on the purchase of goods—was rejected as missing the true nature of
the tax. This Court clarified that such a tax is on the purchase price of raw
materials used in the manufacture of goods, not on the value of manufactured
products. A concession granted to the manufacturers in the purchase of certain
types of raw material etc. does not preclude the imposition of purchase tax
when the statutory conditions viz . happening of certain events are met. On the
question whether the decision in Goodyear (supra) requires reconsideration,
it is observed as under:
“90. The crucial question, therefore, is what is the basis of
taxation in either of the above provisions? In other words, the
question is whether levy of tax is on the purchase of goods or
upon the consignment of the manufactured goods? Let us first
deal with Section 9 of the Haryana Act (as amended in 1983).
Properly analysed, the following are the ingredients of the
Section : (i) a dealer liable to pay tax under the Act purchases
goods (other than those specified in Schedule B) from any source
in the State and (ii) uses them in the State in the manufacture of
any other goods and (iii) either disposes of the manufactured
goods in any manner otherwise than by way of sale in the State
or despatches the manufactured goods to a place outside the
State in any manner otherwise than by way of sale in the course
of a inter-State trade or commerce or in the course of export
outside the territory of India within the meaning of sub-section (1)
of Section 5 of the Central Sales Tax Act, 1956. If all the above
three ingredients are satisfied, the dealer becomes liable to pay

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 25 of 47


tax on the purchase of such goods at such rate, as may be
notified under Section 15.

91. Now, what does the above analysis signify? The section
applies only in those cases where (a) the goods are purchased
(for convenience sake, I may refer to them as raw material) by a
dealer liable to pay tax under the Act in the State, (b) the goods
so purchased cease to exist as such goods for the reason they
are consumed in the manufacture of different commodities and
(c) such manufactured commodities are either disposed of within
the State otherwise than by way of sale or despatched to a place
outside the State otherwise than by way of an inter-State sale or
export sale. It is evident that if such manufactured goods are not
sold within the State of Haryana, but yet disposed of within the
State, no tax is payable on such disposition; similarly, where
manufactured goods are despatched out of State as a result of
an inter-State sale or export sale, no tax is payable on such sale.
Similarly again where such manufactured goods are taken out of
State to manufacturers' own depots or to the depots of his
agents, no tax is payable on such removal. Goodyear takes only
the last eventuality and holds that the taxable event is the
removal of goods from the State and since such removal is to
dealers' own depots/agents outside the State, it is consignment,
which cannot be taxed by the State legislature. With the greatest
respect at our command, we beg to disagree. The levy created
by the said provision is a levy on the purchase of raw material
purchased within the State which is consumed in the
manufacture of other goods within the State. If, however, the
manufactured goods are sold within the State, no purchase tax
is collected on the raw material, evidently because the State gets
larger revenue by taxing the sale of such goods. (The value of
manufactured goods is bound to be higher than the value of the
raw material.) The State legislature does not wish to — in the
interest of trade and general public — tax both the raw material
and the finished (manufactured) product. This is a well-known
policy in the field of taxation. But where the manufactured goods
are not sold within the State but are yet disposed of or where the
manufactured goods are sent outside the State (otherwise than
by way of inter-State sale or export sale) the tax has to be paid
on the purchase value of the raw material. The reason is simple:
if the manufactured goods are disposed of otherwise than by sale
within the State or are sent out of State (i.e., consigned to dealers
own depots or agents), the State does not get any revenue
because no sale of manufactured goods has taken place within
Haryana. In such a situation, the State says, it would retain the
levy and collect it since there is no reason for waiving the
purchase tax in these two situations. Now coming to inter-State
sale and export sale, it may be noticed that in the case of inter-
State sale, the State of Haryana does get the tax revenue — may
be not to the full extent. Though the Central Sales Tax is levied
and collected by the Government of India, Article 269 of the

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 26 of 47


Constitution provides for making over the tax collected to the
States in accordance with certain principles. Where, of course,
the sale is an export sale within the meaning of Section 5(1) of
the Central Sales Tax Act (export sales) the State may not get
any revenue but larger national interest is served thereby. It is for
these reasons that tax on the purchase of raw material is waived
in these two situations. Thus, there is a very sound and
consistent policy underlying the provision. The object is to tax the
purchase of goods by a manufacturer whose existence as such
goods is put an end to by him by using them in the manufacture
of different goods in certain circumstances. The tax is levied upon
the purchase price of raw material, not upon the sale price — or
consignment value — of manufactured goods. Would it be right
to say that the levy is upon consignment of manufactured goods
in such a case? True it is that the levy materialises only when the
purchased goods (raw material) is consumed in the manufacture
of different goods and those goods are disposed of within the
State otherwise than by way of sale or are consigned to the
manufacturing-dealer's depots/agents outside the State of
Haryana. But does that change the nature and character of the
levy? Does such postponement — if one can call it as such —
convert what is avowedly a purchase tax on raw material (levied
on the purchase price of such raw material) to a consignment tax
on the manufactured goods? We think not. Saying otherwise
would defeat the very object and purpose of Section 9 and
amount to its nullification in effect. The most that can perhaps be
said is that it is plausible (as pointed out by Ranganathan, J. in
his separate opinion) to characterise the said tax both as
purchase tax as well as consignment tax. But where two
interpretations are possible, one which sustains the
constitutionality and/or effectuates its purpose and intendment
and the other which effectively nullifies the provision, the former
must be preferred, according to all known canons of
interpretation. This is also the view expressly approved by
Mukharji, J. in his opinion, as pointed out hereinbefore. In para
71 of his opinion, the learned Judge states:

“It is well settled that reasonable construction should
be followed and literal construction may be avoided if
that defeats the manifest object and purpose of the Act.
See C.W.T. v. Kripashankar Dayashankar Worah and
Income Tax Commissioner for City of London v. Gibbs”

(emphasis supplied)”

92. However, we would presently show that merely because the
levy attaches on the happening or non-happening of a
subsequent event, the nature and character of the levy does not
change. In several enactments, for instance, tax is levied at the
last sale point or last purchase point, as the case may be. How
does one determine the last purchase point in the State? Only

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 27 of 47


when one knows that no purchase took place within the State
thereafter. But that can only be known later. If there is a
subsequent purchase within the State, the purchase in question
ceases to be the last purchase. As pointed out pertinently by P.S.
Poti, J. (as he then was) in Malabar Fruit Products Co. v. S.T.O.
[(1972) 30 STC 537 (Ker)] applying the logic of the dealers, it
would not be possible to tax any goods at the last purchase point
in the State, inasmuch as the last purchase point in regard to any
goods could be determined only when the goods are sold later
and not when the goods are purchased. In the said decision, the
learned Judge was dealing with the validity and construction of
Section 5-A of Kerala General Sales Tax Act, 1963, sub-section
(1) whereof read as follows:

“5-A. Levy of purchase tax.— (1) Every dealer who in
the course of his business purchases from a registered
dealer or from any other person any goods, the sale or
purchase of which is liable to tax under this Act, in
circumstances in which no tax is payable under Section
5, and either—

(a) consumes such goods in the manufacture of other
goods for sale or otherwise; or

(b) disposes of such goods in any manner other than
by way of sale in the State; or

(c) despatches them to any place outside the State
except as a direct result of sale or purchase in the
course of inter-State trade or commerce;

shall, whatever be the quantum of the turnover relating
to such purchase for a year, pay tax on the taxable
turnover relating to such purchase for that year at the
rates mentioned in Section 5.””

17. Referring to the argument and discussion on the validity of Section 5A of the
Kerala Act in Malabar Fruit Products Company (supra), this Court, in Hotel
Balaji (supra) observes:
“93. One of the arguments urged against the validity of the said
provision was that inasmuch as the tax is levied depending upon
the mode in which the goods purchased are consumed, disposed
of or despatched, the tax is really one in the nature of
consumption tax or use tax, but not sales tax. This argument was
answered by the learned Judge in the following words:

“According to me, this contention is based on a
misconception of the scope of taxation on the sale of

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 28 of 47


goods. It is true that sales tax is a tax imposed on the
occasion of the sale of goods. But it has no reference
to the point of time at which the sale or purchase takes
place. It refers to the connection with the event of
purchase or sale and not the point of time at which such
purchase or sale takes place. To read it otherwise
would render any retrospective imposition of sales tax
invalid as in every such case the tax would not be one
which arises on the occasion of sale. By the same
logic, it would not be possible to tax any goods at the
last purchase point in the State, for the last purchase
point in regard to any goods could be determined only
when the goods are sold later and not when the goods
are purchased. On the same reasoning as urged by
counsel, one should say in such a case that since the
goods are taxed only when the goods are sold outside
the State or are despatched for such sale outside the
State and so the last purchases are taxed not on the
‘occasion’ of the purchases and, consequently, it is
beyond the competence of the Legislature. That
certainly cannot be and that Supreme Court has held
in the decision in State of Madras v. Narayanaswami
Naidu [(1968) 21 STC 1 (SC)] that the goods are
taxable in such cases in the financial year when they
become the last purchases.”

94. The decision of Poti, J. was affirmed by a division bench of
Kerala High Court in Yusuf Shabeer v. State of Kerala [(1973) 32
STC 359 (Ker)]. Both these decisions were expressly referred to
and approved by a three-Judge Bench of this Court in State of
T.N. v. Kandaswami [(1975) 4 SCC 745] . Kandaswami [(1975)
4 SCC 745] was concerned with the construction of Section 7-A
of the Tamil Nadu General Sales Tax Act which too levied a
purchase tax and is couched in language similar to Section 5-A
of the Kerala Act. While dealing with the scheme of Section 7-A,
this Court quoted with approval certain passages from the
judgment of Poti, J. including the following sentence:

“If the goods are not available in the State for
subsequent taxation by reason of one or other of the
circumstances mentioned in clauses (a), (b) and (c) of
Section 5-A(1) of the Act then the purchaser is sought
to be made liable under Section 5-A.”

95. This statement accords with our understanding of the scheme
of Section 9 of Haryana Act as set out hereinabove. To repeat,
the scheme of Section 9 of Haryana Act is to levy the tax on
purchase of raw material and not to forego it where the goods
manufactured out of them are disposed of (or despatched, as the
case may be) in a manner not yielding any revenue to the State
or serving the interests of nation and its economy, as explained

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 29 of 47


hereinbefore. The purchased goods are put an end to by their
consumption in manufacture of other goods and yet the
manufactured goods are dealt with in a manner as to deprive the
State of any revenue; in such cases, there is no reason why the
State should forego its tax revenue on purchase of raw material.

96. Another observation in Kandaswami [(1975) 4 SCC 745]
relevant for the present purpose may also be noticed: (SCC p.
751, para 26)

“It may be remembered that Section 7-A is at once a
charging as well as a remedial provision. Its main
object is to plug leakage and prevent evasion of tax. In
interpreting such a provision, a construction which
would defeat its purpose and, in effect, obliterate it from
the statute book, should be eschewed. If more than
one construction is possible, that which preserves its
workability, and efficacy is to be preferred to the one
which would render it otiose or sterile. The view taken
by the High Court is repugnant to this cardinal canon
of interpretation.”

97. In the light of the above scheme of Section 9, it would not be
right, in our respectful opinion, to say that the tax is not upon the
purchase of raw material but on the consignment of the
manufactured goods. It is well settled that taxing power can be
utilised to encourage commerce and industry. It can also be used
to serve the interests of economy and promote social and
economic planning. Section 9 of Haryana Act and Section 13-AA
of Bombay Act are intended to encourage the industry and at the
same time derive revenue. It is also not right to concentrate only
on one situation viz., consignment of goods to manufacturer's
own depots (or to the depots of his agents) outside the State.
Disposal of goods within the State without effecting a sale also
stands on the same footing, an instance of which may be captive
consumption of manufactured products in the manufacture of yet
other products. Once the scheme and policy of the provision is
appreciated, there is no room, in our respectful opinion, for
saying that the tax is on the consignment of manufactured
goods.”

18. Ranganathan, J., in his concurring opinion, observed that he was delivering a
separate judgment since he had been a party to Goodyear (supra) and wished
to explain his views. He acknowledged the force of the argument of the States
that the provisions in question only impose a tax on purchases. He observed
that it is designated as a purchase tax and levied on the turnover of such

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 30 of 47


purchases. Pertinent to us are his observations that the State may sometimes
give up tax or specify concessional rates of tax on sales based on some
declarations or certificates, but the goods may be taxed in the hands of the
purchaser. It is emphasised that such a levy clearly falls within the legislative
competence of the State Legislature. The ambit of the power to levy tax in
respect of the sale or purchase of goods is very wide and would cover any tax
having nexus with the sale or purchase of goods, including attaching a levy to
the last purchase in the State. This test, Ranganathan, J. held, was a more
appropriate one than the ambiguous standard of ‘taxable event’. A tax on the
sale or purchase of goods will not cease to be a tax simply because the
determination of the character as a ‘last purchase’ depends on certain
subsequent events that may be spread over a subsequent period of time.

19. In our opinion, the judgment in Hotel Balaji (supra) covers the issues in
question. However, Hotel Balaji (supra) did not consider and examine the
judgment of the three-Judge Bench in Mukerian Papers Ltd. v. State of
21
Punjab , which followed the ratio of Goodyear (supra). Interpreting the
22
provisions of Section 4B of the Punjab General Sales Tax Act, 1948,
Mukerian Papers Ltd. (supra) held that one of the requirements for the accrual
of purchase tax is that the manufactured goods must be sent outside the State.
The liability to pay purchase tax does not arise at the time of purchasing raw
materials within the State or their use in manufacturing goods other than those
listed in Schedule B. It was observed that, although the purchase tax is levied
on the raw materials purchased by the manufacturer, the actual levy is deferred

21
(1991) 2 SCC 580.
22
For short, “Punjab Act”.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 31 of 47


until those materials are consumed in the manufacture of a commercially
distinct commodity. The relevant date, for the purpose of taxation, is the date
on which the goods are sent outside the State. Thus, the taxable event occurs
when the goods are sent outside the State, regardless of when the raw
materials were purchased or converted into a new commodity. The Revenue
relied on the decision in Kandaswami (supra), contending that it was rendered
in the context of a similar provision and thus its ratio covers the case. Rejecting
this argument, this Court in Mukerian Papers Ltd. (supra), observed that
although Kandaswami (supra) was indeed rendered in relation to an
analogous provision, it had been distinguished in Goodyear (supra) on the
ground that it did not address the core that arose in the latter case. Notably,
Mukerian Papers Ltd. (supra), in paragraph 6, holds that the Bench need not
dilate on that issue further, as the correctness of Goodyear (supra) had not
been questioned before it.

20. Mukerian Papers Ltd. (supra), Goodyear (supra), as well as the decision in
Hotel Balaji (supra), were considered by a three-Judge Bench of this Court in
Devi Dass Gopal Krishan Pvt. Ltd. and Others v. State of Punjab and
23
Others . The three-Judge Bench in Devi Dass (supra) comprised two Judges
– A.M. Ahmadi, J. (as his Lordship then was) and M.N. Venkatachaliah, CJI.
24
– who were also members of the Bench in Mukerian Papers Ltd. (supra).
In Devi Dass (supra), this Court noticed that several state legislations—
including those from Punjab, Tamil Nadu, Kerala, West Bengal, and Bombay—
had been brought up for consideration in Hotel Balaji (supra). However, due

23
(1994) Supp 2 SCC 59.
24
A.M. Ahmadi, J., as his Lordship then was, was the author of the judgment in Mukerian Papers Ltd.
(supra).

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 32 of 47


to time constraints, only the cases relating to the Uttar Pradesh, Gujarat, and
Andhra Pradesh Acts were taken up in Hotel Balaji (supra), segregating the
cases concerning the other States. One of the arguments raised in Devi
Dass (supra) was that a conflict existed between Hotel Balaji (supra) and
Mukerian Papers Ltd. (supra), the latter being said to squarely affirm the
decision in Goodyear (supra). A reference was sought to a larger Bench on
this basis. Rejecting the contention, this Court noted that the correctness
of Goodyear (supra) had not been examined in Mukerian Papers Ltd.
(supra), a fact expressly recorded in Mukerian Papers Ltd. (supra) and further
addressed in paragraph 101 in Hotel Balaji (supra). Moreover, Mukerian
Papers Ltd. (supra) merely applied Goodyear (supra) to the specific facts of
the case; it neither affirmed nor dissented from the reasoning
in Goodyear (supra). Referring to the issue of the vires of the State
enactments that were struck down as unconstitutional in Goodyear (supra) on
the grounds that they imposed a tax during the course of inter-State trade or
commerce amounting to a consignment tax, and also that the taxable event
was not purchase, specific reference was made to the reasoning of
Ranganathan, J. in Hotel Balaji (supra), which reads as under:
“3. (…)The learned Judge recalled his observations in his
concurring opinion in Goodyear and observed that the particular
viewpoint presented in Hotel Balaji was not presented
in Goodyear and that on reconsideration, he finds the reasoning
in support of the validity of the provisions more persuasive. The
learned Judge said: (SCC pp. 549-50, para 10)

“This larger concept, namely, that these various
alternatives are not set out in the section with a view to
fasten the charge of tax at the point of use,
consumption, manufacture, production and
consignment or despatch but in an attempt to make
clear that what is sought to be levied is a tax on raw
materials on the occasion of their last purchase inside
the State had not been projected before, or considered

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 33 of 47


by us. I am inclined now to think that this is an
approach that basically alters the parameters and
removes the provision from the area of vulnerability .”
(emphasis supplied)”
This Court in Devi Dass (supra) affirmed the reasoning in Hotel Balaji (supra),
clearly holding that the decision in Goodyear (supra) did not lay down the
correct law:
“6. Now coming to the merits of the contention, we are of the
considered opinion that there is no reason to take a view different
from the one taken in Hotel Balaji [1993 Supp (4) SCC 536 :
(1993) 88 STC 98] . All the contentions urged now have been
considered and dealt with in the said decision. In our opinion, the
approach adopted in Goodyear [(1990) 2 SCC 71 : 1990 SCC
(Tax) 223] does not accord with the scheme, intendment and
language of the relevant provisions of the Haryana and Bombay
Acts and cannot be accepted.”

21. Appropriate at this stage would be to refer to the order dated 27.10.2009
passed in the present batch of appeals, wherein the two-Judge Bench referred
the matter to a larger Bench. After making a reference to Section 5A of the
Kerala Act, this Court distinguished ‘payability’ and ‘liability’ to observe:
“We have analyzed Section 5A of the Act. In our view, Section 5
is the charging section. Under Section 5A, what is, inter alia,
stated is that every dealer who, in the course of his business
purchases from a registered dealer or from any other person any
goods, the sale or purchase of which is liable to tax under this
Act, in circumstances in which no tax is payable under sub-
sections (1), (2), (3), (4) and (5) of Section 5 and who either
consumes such goods in the manufacture of other goods for sale
or who uses or disposes of goods in any manner other than by
way of sale in the State or who despatches such goods to any
place outside the State, except as a direct result of sale or
purchase in the course of inter-State trade or commerce shall pay
tax on the taxable turnover relating to such purchase for the year
at the rates mentioned in Section 5.

If one carefully analyse Section 5A of the Act, it becomes clear
that there is a clear dichotomy between liability to tax [taxability]
on the one hand and "payability" on the other. The significance
of Section 5A, prima facie, appears to be that if the State has lost
revenue/tax which otherwise it would have recovered had the
purchase taken place from a registered non-exempted dealer,
then Section 5A enables the State to recover such loss from the

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 34 of 47


assessee herein. In such a case, Section 5A would stand
attracted, subject to the other conditions being fulfilled. This is
where the difference between "payability" and "leviability" comes
into existence. The goods in question were undoubtedly liable to
tax. However, since exemption notification under Section 10 of
the Act came into the field, though liable to tax, such goods were
exempted from payment of tax. In our view, therefore, there is a
clear demarcation between these two concepts of
"leviability/taxability" on the one hand vis- a-vis "payability" on the
other. Our view is also fortified to this extent by the reasoning of
the judgement of this Court in the case of State of Tamil Nadu
vs. M.K. Kandaswamy & Ors. reported in [1975] 36 S.T.C. 191.
In that case, a three-Judge Bench of this Court was required to
decide interpretation and scope of Section 7A of the Madras
General Sales Tax Act, 1959 [for short, "Madras Act"], which
section was in pari materia with Section 5A of the Act. While
interpreting Section 7A of the Madras Act, this Court observed
that the main object of Section 7A of the Madras Act is to plug
leakage and prevent evasion of tax. It further stated that, in
interpretation of such a provision, a construction which would
defeat the purpose of the Act should be eschewed. It further
observed that the phraseology used in Section 7A of the Madras
Act, though somewhat involved, is fairly plain when it comes to
giving meaning of the Section. The Court further observed that
the language of Section 7A of the Madras Act [which is akin to
Section 5A of the Act] indicates the meaning of the word
"taxability/liability" is to be read in the context of the expression
"taxable goods". If one reads the judgement, it clearly indicates
what we have said in the earlier paragraphs, namely, that the
concept of "taxability/leviability" is different and distinct from the
concept of "payability". That is why when the goods, which are
otherwise liable to tax, are exempted by virtue of notification from
payability under Section 10 of the Act, Section 5A of the Act has
been enacted to levy tax on certain transactions on which
otherwise the State loses its revenue. This distinction has not
been kept in mind in the decision of a two-Judge Bench of this
Court in the case of Peekay Re-rolling Mills (P) Ltd. vs. Assistant
Commissioner & Anr. reported in 2007 (4) S.C.C.30. In that
judgement, it has been held that the expression "levy" would
include ‘collection’ or ‘payment’ as well and not merely
authorisation of the levy. With respect to our learned brothers, we
do not agree that the word ‘levy’ in the context of Section 5 and
Section 5A of the Act would include ‘collection’ or ‘payment’ of
tax.

In the circumstances, on account of difference of opinion, we
direct the Registry to place the present batch of civil appeals
before the Hon’ble the Chief Justice of India for referring the
matter to the larger Bench of this Court.”


Civil Appeal Nos. 941-945 of 2004 & Ors. Page 35 of 47


22. A reading of the aforesaid quotation would reveal that the Division Bench
clearly agreed with the reasoning given in M.K.Kandaswami (supra)
distinguishing ‘taxability’/‘liability’ and ‘payability’ as two different concepts in
tax. The reference order notes that the exemption granted under Section 10 of
the Kerala Act does not affect the taxability/liability, but only payability. Thus,
where goods ordinarily subject to tax are exempted from payment under
Section 10 of the Act by virtue of a notification, Section 5A has been enacted
to nonetheless impose tax on certain transactions, thereby safeguarding the
State’s revenue from potential loss. The reasoning and ratio in
M.K.Kandaswami (supra) was expressly agreed as correct. However, what
prompted the two-Judge Bench to refer the matter to a larger Bench was the
decision of another two-Judge Bench of this Court in Peekay Re-Rolling Mills
25
(P) Ltd. v. Assistant Commissioner and Another , which the Bench felt
holds that the expression ‘levy’ would include ‘collection’ or ‘payment’ as well
and not mere authorisation for levy. The two-Judge Bench in the reference
order dated 27.10.2009 did not agree with the observation that the ‘levy’ would
include ‘collection’ or ‘payment’ of tax in the context of Section 5 and 5A of the
Act.

23. We have examined the judgment in Peekay Re-Rolling Mills (P) Ltd. (supra),
which refers to several decisions, including the judgments in Bhawani Cotton
26
Mills Ltd. v. State of Punjab and Another and Shanmuga Traders and
27
Others v. State of Tamil Nadu and Others . The Court in Peekay Re-
Rolling Mills (P) Ltd. (supra) holds that Sections 5 and 5A of the Kerala Act

25
(2007) 4 SCC 30.
26
(1967) 20 STC 290.
27
(1998) 5 SCC 349.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 36 of 47


are distinct and independent, relying on the observations in M.K.Kandaswami
(supra). The Court quotes the finding that Section 7A of the Madras Act is a
self-contained charging provision and applies the same reasoning to uphold
the validity of the levy under Section 5A of the Kerala Act.

24. However, the two-judge Bench in Peekay Re-Rolling Mills (P) Ltd. (supra)
states that the observations in M.K. Kandaswami (supra) have no real bearing
on the relevant issue, since M.K. Kandaswami (supra) did not involve a
question of tax on declared goods under Section 14 of the Central Sales Tax
28
Act, 1956 and conditions laid down in this regard, particularly that of a single-
point levy. Since Section 15 of the Central Act mandates that tax on declared
goods must be levied at a single point, the Court held that once the goods are
declared goods they cannot again be taxed under Section 5A. That would
amount to a second-stage levy, contrary to the scheme under Section 15 of
the Central Act.

25. Peekay Re-Rolling Mills (P) Ltd. (supra) then turns to the majority view in
Bhawani Cotton Mills (supra). In Bhawani Cotton Mills (supra) the majority
judgment of the Constitution Bench authored by Vaidialingam, J. had
examined the question of levy of purchase tax on declared goods which are
goods of national importance included in Schedule C notified in terms of
29
Section 14 of the Central Act. Section 15 of the Central Act, as then

28
For short, “Central Act”.
29
“15. Every sales tax law of a State shall, in so far as it imposes or authorises· the imposition of a tax
on the sale or purchase of declared goods, be subject to the following restrictions and conditions,
namely :-
(a) the tax payable under that law in respect of any sale or purchase of such goods inside the State
shall not exceed three per cent of the sale or purchase price thereof, and such tax shall not be levied
at more than one stage;
(b) where a tax has been levied under that Law in respect of the sale or purchase inside the State of
any declared goods and such goods are sold in the course of inter-State trade or commerce, the tax

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 37 of 47


applicable, had a stipulation that sales tax law of a State, insofar as it imposes
or authorizes levy of tax, shall be subject to the conditions specified in Clauses
(a) and (b). Clause (a) in specific terms has stated that tax in respect of any
sale or purchase of declared goods inside the State shall not exceed 3% of the
sale and purchase price and secondly, the tax will not be levied at more than
one stage. In the said case, the levy of purchase tax on cotton was set aside
on the grounds that the tax imposed under the Punjab Act conflicted with
Section 15 of the Central Act. The plea of the assessee that sales tax may
have been paid by the earlier transactions and therefore the levy of purchase
tax would violate clause (a) to Section 15 was accepted. Pertinently, Bhawani
Cotton Mills (supra) refers to the decision of this Court in A.V. Fernandez v.
30
The State of Kerala , which refers to the following observations in Chatturam
31
Horilram Limited v. Commissioner of Income Tax, Bihar and Orissa , to
distinguish three stages in the imposition of tax, namely, declaration of liability,
assessment and recovery:
“If there is a liability to tax, imposed under the terms of the taxing
statute, then follow the provisions in regard to the assessment of
such liability. If there is no liability to tax there cannot be any
assessment either. Sales or purchases in respect of which there
is no liability to tax imposed by the statute cannot at all be
included in the calculation of turnover for the purpose of
assessment and the exact sum which the dealer is liable to pay
must be ascertained without any reference whatever to the same.

There is a broad distinction between the provisions contained in
the statute in regard to the exemptions of tax or refund or rebate
of tax on the one hand and in regard to the non-liability to tax or
non-imposition of tax on the other. In the former case, but for the
provisions as regards the exemptions or refund or rebate of tax,
the sales or purchases would have to be included in the gross
turnover of the dealer because they are prima facie liable to tax
and the only thing which the dealer is entitled to in respect thereof

so levied shall be refunded to such person in such manner and subject to such conditions as may be
provided in any law in force in that State.” – as quoted in Bhawani Cotton Mills (supra).
30
AIR 1957 SC 657.
31
AIR 1955 SC 619.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 38 of 47


is the deduction from the gross turnover in order to arrive at the
net turnover on which the tax can be imposed. In the latter case,
the sales or purchases are exempted from taxation altogether.
The Legislature cannot enact a law imposing or authorising the
imposition of a tax thereupon as they are not liable to any such
imposition of tax. If they are thus not liable to tax, no tax can be
levied or imposed on them and they do not come within the pur-
view of the Act at all. The very fact of their nonliability to tax is
sufficient to exclude them from the calculation of the gross
turnover as well as the net turnover on which sales tax can be
levied or imposed.”

26. This reasoning in Bhawani Cotton Mills (supra) applies only where the
exemption is absolute—i.e., from both sale and purchase. It does not apply
when the exemption is partial. If the legislature exempts sales but taxes
purchases, the tax on the purchaser remains valid. In such cases, an
exemption for one leg of the transaction does not imply exemption for the other.
This interpretation is supported by the language of Sections 5A and 7A of the
Kerala and Tamil Nadu Acts, which allow purchase tax even where no sales
tax is imposed on the seller or the sale.

27. Peekay Re-Rolling Mills (P) Ltd. (supra) also refers to Shanmuga Traders
(supra), which had been distinguished by the High Court in the impugned
judgment. However, the Court was of the opinion that in the impugned
judgment the Division Bench of the High Court erroneously distinguishes
Shanmuga Traders (supra) from the facts of the case. Shanmuga Traders
(supra) again is a case relating to declared goods under Section 14 of the
Central Act, which it was held can be taxed only at a single point. It is for the
State to determine whether the single point should be the point of first sale,
intermediate sale or the last sale in the State. If the State designates the point
of first sale as the single point of taxation and then exempts that point—
whether through a general provision or one specifically applicable to a

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 39 of 47


particular class of sellers or goods—then tax cannot be levied either at the first
sale or at any subsequent stage. The ratio in the said case is not applicable as
this is not a case of declared goods and the bar under Section 15 of the Central
Act does not apply.

28. Peekay Re-Rolling Mills (P) Ltd. (supra) also relies on M/s Pine Chemicals
32
Ltd. and Others v. Assessing Authority and Others , which holds that
exemption arises only when there is a tax liability. The Court reaffirms that
exemption presupposes that tax is otherwise leviable. This was further affirmed
33
in Associated Cement Companies Ltd. v. State of Bihar and Others ,
which clarified that exemption is relevant only when there is liability. Thus,
goods can be liable or exigible to tax, but due to exemption, the obligation to
pay may not arise.

29. Peekay Re-Rolling Mills (P) Ltd. (supra) refers to Assistant Collector of
34
Central Excise, Calcutta Division v. National Tobacco Co. of India Ltd. ,
which makes a distinction between "levy" and "assessment", holding that levy
includes both imposition and assessment of tax but not collection. This
interpretation stems from Article 265 of the Constitution, which separately
mentions levy and collection. Cases like Somaiya Organics (India) Ltd. and
35
Another v. State of Uttar Pradesh and Collector of Central Excise,
Hyderabad and Others v. Vazir Sultan Tobacco Company Ltd., Hyderabad
36
and Others are also cited, particularly with respect to excise duty under the
Central Excise and Salt Act, 1944. These cases explain that levy is on

32
(1992) 2 SCC 683.
33
(2004) 7 SCC 642.
34
(1972) 2 SCC 560.
35
(2001) 5 SCC 519.
36
(1996) 3 SCC 434.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 40 of 47


manufacture, while collection is deferred to the stage of removal for
administrative convenience, and this did not affect the nature of the levy, which
was on the manufacture of the goods. These observations pertain to the levy
of excise duty under the Central Excise and Salt Act, 1944. It has been
consistently held that excise duty is levied on the event of manufacture or
production of goods. While the point of collection may be deferred until the
goods are removed, the taxable event remains manufacture. In our view, the
decision in Peekay Re-Rolling Mills (P) Ltd. (supra) does not support the
argument advanced by the assessees. The legal position is well established;
the levy or incidence of tax, and the payment of tax are distinct concepts.
Goods may be liable or exigible to tax by virtue of their nature or transaction,
but when an exemption is granted, it only means that the payment of tax is not
required—though the liability in principle remains.

30. The confusion in Peekay Re-Rolling Mills (P) Ltd. (supra) arises under the
portion of the judgment viz . “distinction between ‘levy’ and ‘collection’”. Peekay
Re-Rolling Mills (P) Ltd. (supra) refers to the following observations of this
Court in National Tobacco Co. of India Ltd. (supra) :
“19. The term ‘levy’ appears to us to be wider in its import than
the term ‘assessment’. It may include both ‘imposition’ of a tax as
well as ‘assessment’. The term ‘imposition’ is generally used for
the levy of a tax or duty by legislative provisions indicating the
subject-matter of the tax and the rates at which it has to be taxed.
The term ‘assessment’, on the other hand, is generally used in
this country for the actual procedure adopted in fixing the liability
to pay a tax on account of particular goods or property or
whatever may be the object of the tax in a particular case and
determining its amount. The Division Bench appeared to equate
‘levy’ with an ‘assessment’ as well as with the collection of a tax
when it held that ‘when the payment of tax is enforced, there is a
levy’. We think that, although the connotation of the term ‘levy’
seems wider than that of ‘assessment’, which it includes, yet, it
does not seem to us to extend to ‘collection’. Article 265 of the
Constitution makes a distinction between ‘levy’ and ‘collection’ .

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 41 of 47



(emphasis supplied)”

In our opinion, the word ‘levy’ rightly refers to the exigibility or imposition of tax.
The ‘assessment’ of tax is the second stage and refers to the determination of
the tax liability imposed by the levying/charging/imposition provisions. The
‘collection’ or ‘recovery’ of tax is the third aspect. Lastly, it must be remembered
that Peekay Re-Rolling Mills (P) Ltd. (supra) is also a case of declared
goods.

ONCLUSION
C

31. In view of the aforesaid discussion and applying the ratio in terms thereof, we
must reject the argument on behalf of the assessee that Section 7A of the
Tamil Nadu Act and Section 5A of the Kerala Act will have no application when
tax is exempt at the hands of the seller, or for that matter, the tax under Section
3 or Section 5 of the aforesaid Act at the hands of the seller is payable at the
point of first sale. Sections 5A or 7A, as the case may be, impose purchase tax
specifically in situations where the seller is granted exemption from payment
of tax. The legal position is that exemption from payment of tax at the time of
sale is a pre-condition for attracting Sections 5A and 7A respectively. Further,
the fact that in case the goods were not exempt from payment of tax at the time
of sale and the goods would have attracted tax at the first point of sale, is
immaterial and inconsequential. Levy of purchase tax is governed by the
provisions and stipulations of Sections 5A or 7A. They are independent and in
a way constitute charging sections. Purchase tax is leviable on and payable by
the purchaser. However, the legislations do not levy the purchase tax to tax
the transaction of the sale and purchase twice. Instead, it levies purchase tax

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 42 of 47


only where no sales tax was payable on the sale. Further, purchase tax has
not been made leviable in all situations, except in three situations, namely, (a)
where the goods on which no tax is paid were used in manufacture; or (b)
where the goods were despatched out of the State other than by way of inter-
State trade or commerce; or (c) where the goods are disposed of in a manner
other than sale within the State. However, the need to satisfy the conditions do
not change the nature of the charge, which is, tax on purchase. These aspects
and the constitutionality has been explained in Hotel Balaji (supra) and Devi
Dass (supra) referred to above.

32. The challenge to the constitutional validity must be rejected on the basis of the
ratio elucidated by this Court in Kandaswami (supra), Hotel Balaji (supra) and
Devi Dass (supra). The contention of the appellant-assessees that the
constitutional validity of the impugned provisions was not examined while
deciding Kandaswami (supra) ought to be rejected, even if we would accept
that the question of constitutional validity was not directly addressed. Hotel
Balaji (supra) specifically upholds the constitutionality of the impugned
provisions, disagreeing with the opinion/ratio expressed in Goodyear (supra).
We would also like to record that purchase tax is levied on the purchase of
goods on which no tax has been paid on account of any exemption as a result
of which the seller is not required to collect and pay sales tax. The decision
whether or not to levy purchase tax is a prerogative and power of the State
Legislature. As noticed above, the liability to pay is distinct from levy of tax.
This being so, the argument that purchase tax is leviable when there is cross-
border or inter-State movement of the goods or is a consignment tax must be
rejected. Even otherwise, the event, that is inter-State movement of the goods,

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 43 of 47


which does not amount to inter-State sale, falls within the legislative domain
and power of the State Legislature. The State, when it imposes such tax, does
not exceed its power to impose tax conferred by the State List as inter-State
sale of goods is not being subjected to tax. The rationale explaining the validity
have been elucidated in both Hotel Balaji (supra) and Devi Dass (supra).

33. While examining tax provisions, we must give sufficient latitude to the
Legislature. Income generation in the form of taxes is an important source of
revenue for both the State and the Central governments. Some play in the
joints should be given to the Legislature while dealing with laws relating to
taxation and economic activities except in case of encroachment upon the
power to tax that is not vested with them in terms of the Union or the State List,
37
etc.

34. Realising the above legal position, a different set of arguments was raised in
Civil Appeal Nos. 3024-3025 of 2012 filed by M/s Britannia Industries Limited.
According to us, the arguments do not have any merit and must be rejected.
We would briefly refer to the said arguments and our reasons for rejecting
them.

35. It is submitted that in terms of Section 17 of the Tamil Nadu Act, sales of
vegetable oil by the dealers up to a particular turnover was granted exemption
38
from payment of tax. This, in our opinion, supports the case of the Revenue
for what is granted is exemption from payment of sales tax and not the

37
See Chief Commissioner of Central Goods and Service Tax and Others v. Safari Retreats (P) Ltd.
and Others , (2025) 2 SCC 523; Elel Hotels and Investments Limited and Others v. Union of India,
(1989) 3 SCC 698; Federation of Hotel and Restaurant Association of India, Etc. v. Union of India and
Others , (1989) 3 SCC 634.
38
As per Government Order dated 27.03.1998, as amended by Government Order dated 02.06.2000.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 44 of 47


purchase tax. Thereafter, reference is made to sub-sections (1), (2) and (2A)
of Section 8 of the Central Act. In particular, with reference to explanation to
Section 8(2A) of the Central Act, it is submitted that the benefit of the said sub-
39
section is not available as the Government Order granting exemption had
specified circumstances or conditions for grant of exemption. This, it is
submitted, is to ensure that the exemption is available only to intra-State sales
and not inter-State sales. This argument also supports the case of Revenue.
The contention that purchase tax payable under Section 7A at the rates
mentioned under Sections 3 and 4 should be treated as exempt in view of the
GO issued under Section 17, as stated above, is untenable. The GO refers to
the tax payable at the time of sale, that is, the sales tax. The GO does not grant
exemption from payment of purchase tax. The grant of exemption being for the
purpose of payment of sales tax, it does not follow that purchase tax would not
be payable when conditions of Section 7A are satisfied. Further, it would be
contradictory or rather nugatory to argue that the rate of tax specified in the
Schedule should be taken as nil as no payment is to be made on the sale
amount as sales tax. If we accept this argument, it would defeat the very
purpose and objective of enacting Section 7A of the Tamil Nadu Act. Section
7A is only attracted where the sales tax is not payable, which means there
should be an exemption notification under Section 17 or exemption under the
Third Schedule, read with Section 8 of the Tamil Nadu Act.

36. In view of the aforesaid reasoning, the judgments of this Court in Kailash Nath
40
and Another v. State of Uttar Pradesh and Others and Collector of

39
For short, “G.O.”
40
AIR 1957 SC 790.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 45 of 47


41
Central Excise, Bombay-I and Another v. Parle Exports Pvt. Ltd. will have
no application. The reason as noted above is simple: the exemption notification
pertains solely to tax on sales and does not extend to purchase tax, which
becomes payable only when sales tax is exempt.

37. In view of the above, we also reject the argument that the applicable rate of tax
on purchase would be nil as the tax payable on the sale in view of the
exemption from payment of sales tax is nil. Reliance placed on Casio India
42
Company Private Limited v. State of Haryana is misplaced and liable to
be rejected as Casio India (supra) deals with the issue of payment of tax
under the Central Act and not with the provisions we are concerned. The ratio
of the said case cannot be applied in view of the direct judgments of this Court
in Kandaswami (supra), Hotel Balaji (supra) and Devi Dass (supra).

38. The argument that the rate applicable under Section 7A would be the effective
rate and not the rate mentioned in the Schedule must be rejected for the
reasons set out above. The exemption in the present case relates only to
payment of sales tax and not purchase tax. For the same reason, we would
reject the argument relying upon the judgment in the case of Rajputana
43
Agencies Ltd. v. CIT and Thermax Private Limited v. Collector of
44
Customs (Bombay) . These decisions again are directly not applicable to the
legislations in question but relate to the rate of tax applicable in case of
dividend tax or the levy of additional duty under the Central Excise Rules, 1944
with reference to the provisions of the relevant enactments and the rules

41
AIR 1989 SC 644.
42
(2016) 6 SCC 209.
43
(1959) 35 ITR 168.
44
(1992) 4 SCC 440.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 46 of 47


thereunder. It must be remembered that excise duty and customs duty are
payable by the importer or the manufacturer. There is no reverse levy in the
case of customs duty or the excise duty in terms of the two enactments.
Purchase tax can be levied and payable, even the sales tax is not payable.

39. Accordingly, question nos. I and II are answered in affirmative, that is, in favour
of the Revenue and against the appellant-assessees in terms of the aforesaid
reasoning and decision. Question No. III is answered in negative in favour of
the State and against the appellant-assessees by upholding the constitutional
validity of Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act.
The reference is answered accordingly. All the appeals preferred by the
appellant-assessees are dismissed and the judgments/orders of the High
Court of Kerala and the High Court of Judicature at Madras are upheld.

40. The stay order(s) shall stand vacated.

41. Pending applications, if any, shall stand disposed of.

42. There shall be no order as to costs.


......................................CJI.
(SANJIV KHANNA)


…......................................J.
(SANJAY KUMAR)


…......................................J.
(R. MAHADEVAN)
NEW DELHI;
MAY 09, 2025.

Civil Appeal Nos. 941-945 of 2004 & Ors. Page 47 of 47