State
Of Rajasthan & Anr Vs. Rajasthan Chemist
Association [2006] Insc 445 (24 July 2006)
Arijit
Pasayat & Tarun Chatterjee Arijit Pasayat, J.
Challenge
in this appeal is to the legality of the judgment rendered by a Division Bench
of the Rajasthan High Court, Jodhpur holding that 4A of the Rajasthan Sales Tax
Act, 1994 (in short the 'Act') as introduced by the State Finance Act, 2004 was
not legally sustainable to the extent that tax on first point sale of drugs,
medicines or any formulation or for that matter any other commodity by a
manufacturer/wholesaler/distributor to retailer where "Minimum Retail
Price" (in short 'MRP') is published on package, measure to which rate of
tax is to be applied cannot be with reference to such published MRP which is
neither charged nor chargeable by the wholesaler from the retailer whether the
tax is charged on sales or on purchase by the parties to sale under Section 4A
and the concerned Notification in this regard. Writ application filed by the
respondent-Association was allowed to that extent.
The
controversy arose in the following background:
By the
Finance Act, 2004 Section 4A was introduced which reads as follows:
-
"Levy of tax on retail sale
price:-
-
Notwithstanding
anything contained in any other provision of this Act or the rules made thereunder,
tax on sale of such goods, as may be specified by the State Government by
notification in the official Gazette, shall be levied and collected on the
retail sale price of such goods abated by the rate specified in the said
notification.
-
The goods to be
specified under Sub- Section (1) shall be those in relation to which it is
required under the provisions of the Standards of Weights and Measures Act,
1976 or the rules made thereunder or under any other law for the time being in
force, to declare on the package hereof the retail sale price of such goods.
-
The State
Government may, for the purpose of fixing the rate of abatement under
sub-section (1), take into account the amount of sales tax and other local
taxes, if any, payable on such goods.
Explanation:
-
Where on the
package of any goods different retail sale prices are declared with reference
to different areas, the retail sale price declared with reference to the area
with the State in which, it is sold shall be deemed to be the retail sale price
for the purpose of this Section.
-
Where on the
package of any goods different retail sale prices are declared with reference
to different areas and none of the areas fall within the State, the maximum of
such retail sale prices shall be deemed to be the retail price for the purpose
of this Section." Writ Petition was filed by the present respondent
questioning constitutional validity of the aforesaid provision.
Section
4A in terms envisaged levy of sales tax on any transaction of sale of notified
goods not on the actual price of consideration which is paid or becomes payable
by the buyer to seller on such sales as have taken place, but on the MRP of the
goods declared on the package as per the provisions of the Standards of weights
and Measures Act, 1976 (in short 'Weight and Measures Act') or the Rules framed
thereunder or any other law for the time being in force which is chargeable
only at the last point sale by the retailer. The provision is not extended
generally to all commodities sold in package and in relation to which it is
required to print retail price thereon, but only to such goods as may be
specified by the State Government by the Notification in the official Gazette
as may be abated by the rates specified in the said Notification.
Primary
challenge before the High Court was on the ground that it takes into account an
artificial amount as turnover for the purpose of tax on "sales of
goods". The tax on sale must be leviable with reference to something
related to taxing event, the sale or purchase of goods which becomes subject of
charge and not de hors it. With reference to Entry 54 of the Second List of
Seventh Schedule to the Constitution of India, 1950 (in short the
'Constitution') it was submitted that expression "tax on sale of
goods" used in said Entry means tax on the sale of goods as defined under
the Sales of Goods Act, 1930 (in short the 'Sales Act') as modified/extended by
Clause 29-A of Article 366 of the Constitution, inserted by 42nd Amendment Act,
1982. Single point tax is leviable on sale of medicines as per Notification
issued under the Act.
Factually,
the first point of sale in the State of Rajasthan in most cases which attracts
levy of sales tax is by the wholesale distributors to the retailers and not by
retailers to end consumers when alone MRP can be charged. Under the Weights and
Measures Act and the provisions of Drug Price Control Order, 1995 (in short
'Control Order), issued by the Central Government under Section 3 of the
Essential Commodities Act, 1955 (in short the 'Essential Commodities Act'), the
maximum retail price is determined in the case of Scheduled Formulations only.
On the other hand, MRP is required to be displayed on the label of container as
well as package in respect of all drugs whether scheduled or non scheduled
formulations. Mention of price on the package under the concerned provisions is
the MRP and not the price necessarily or actually charged at the end sale for
any transaction of sale of medicines in the State. The first sale within the
State which alone is taxable is in reality at much lesser price than the MRP
printed and the same is paid or payable on contractual basis. Under the Control
Order the margin at which the medicines are to be sold to retailer has been
fixed at a minimum level, that is to say, unless otherwise permitted, a
formulation has to be sold to a retailer keeping at least 16% margin in the
case of scheduled drugs. Thus by devising aforesaid legal fiction for deeming
an artificial sale price for levy of tax having no nexus to the taxable event
i.e. transactions of sale of goods at a money consideration paid or payable as
defined under the Sales Act, is beyond the legislative competence of the
legislature in the State, and therefore the provision is ultra-vires.
The
State on the other hand took the stand that what is to be the measure of tax on
a sale is within the domain of the State Legislature. Under the impugned
provision, tax is levied on a completed sale within the meaning of Section 4 of
the Sales Act. However, in what manner the charge is to be levied is a matter
of details which can be worked out by Legislation.
The
fact that maximum retail price is to be determined statutorily and the State
Legislature has taken into account the fact that the actual consideration at
the first point tax may be lesser than the maximum retail price that may be
charged ultimately from the consumer at the last point sale as provided for
abatement of MRP by reducing therefrom the sum at prescribed rates of abatement
for the purpose of levy of tax, it provides sound basis for uniform liability
in the State on such transaction. The levy of tax cannot be said to be wanting
in nexus with the taxing event. Therefore, the impugned provisions and the
Notifications cannot be said to be ultra vires any provision of the
Constitution. It was however not disputed that but for taking the MRP as a
basis to provide measure of tax, no fictional price can be fixed as a measure
of tax on sale of goods. The High Court on analyzing the provision in great
detail came to hold as follows:
"If
Section 4A is designed to bring a levy into existence which is divorced from
the sale subject to tax under the Act, it falls foul with the legislative
competence under Entry 54 of List II of Schedule VII so also notification-
Annex.3 to the extent it is intended to levy tax on first point sale with
reference to price which could be charged in respect of a subsequent sale which
has not come into existence at the time liability to tax arise and is determined
ex- hypothesi. However, the perusal of the language of Section 4A and the
notification issued thereunder by itself does not show that it applies only in
case of sales to be taxed at first point. In case the levy is on the last point
and the maximum retail price is to be fixed and published under any Statute,
whether instead of determining price actually charged in each case fixed
formula is provided by the enactment which has correlation with determining
price by keeping in view the provisions of Section 9 of the Sale of Goods Act
whether the provision still falls beyond the scope of Entry 54 has not been the
subject matter of contention. In this case and therefore, we have not been
called upon to decide. In absence of any contention having been raised, it will
be hazardous to comment upon the validity of provisions of Section 4A in
isolation and the notification issued thereunder in its entirety.
In
view thereof, we confine our conclusion and hold that to the extent that tax on
first point sale of drugs, medicines or any formulation or for that matter any
other commodities by a manufacturer/wholesaler/distributor to retailer where
MRP is published on package, measure to which rate of tax is to be applied
cannot be with reference to such published MRP, which is neither charge nor
chargeable by the wholesaler from the retailer whether the tax is charged on
sales or on purchase by the parties to sale under Section 4A and notification.
The
additional tax collected with reference to measure provided under Section 4A by
the wholesalers to retailers at first point sale shall not be refunded to the
dealers. In case the additional tax charged has not been transmitted to buyers,
the excess tax paid may be adjusted against future liability under the Act of
1994 or any other dues to the Revenue under Rajasthan Sales Tax Act." In
support of the appeal, learned counsel for the appellants submitted that there
is a source of power of the State to levy tax under Article 246 read with Entry
54 of List II of Schedule VII of the Constitution. A plain reading of the Entry
clearly demonstrates that tax under the said Entry can be levied on the event
of sale or purchase of goods. The said Entry nowhere requires or mandates that
the same can only be on the sale price of goods. Strong reliance is placed on
decisions in Andhra Sugars Ltd. V. State of A.P. (1968 (1) SCR 705) and Ganga
Sugar Corpn. Ltd. V. State of U.P. (1980 (1) SCC 223) to contend that the
Constitution empowers the States to levy and collect tax on the happening of
the taxable event and thereafter the quantum of tax to be levied and the
measure on which the same can be levied is necessarily left for the State to
decide.
Per
contra, learned counsel for the respondent submitted that the High Court's
decision is on terra firma. On an elaborate analysis of the legal position the
decision has been rendered and needs no interference. It was pointed out that
the decisions in Andhra Sugar and Ganga Sugar cases (supra) were rendered on
the peculiar facts of the cases and they nowhere depart from the normal
principle that tax is to be levied on the sale price.
In
order to appreciate rival submissions a few decisions of this Court which throw
beacon light on the issues involved need to be noted. In fact, the High Court
has referred to many of them.
Sales
Tax Office, Pilibhit v. M/s Budh Prakash Jai Prakash (AIR 1954 SC 459) arose
under the U.P. Sales Tax Act, 1948. In that case the issue related to levy of
tax by the assessing authority on the turnover relating to forward contract. The
assessee had challenged that the imposition of sales tax on forward contracts
was ultra vires the powers of the State Legislature. The U.P. Sales Tax Act,
1948 had been enacted by the provincial legislature in terms of the legislative
power conferred under the Government of India Act, 1936 under Entry 48 in List
II of the Schedule Seventh of the said Act. Under Section 2(h) of the U.P. Act,
a sale was defined to include forward contracts. This Court upheld the
challenge by holding that the power conferred under Entry 48 to impose tax on
the sale of goods can be exercised only when there is a sale under which there
is a transfer of property in the goods, and not when there is a mere agreement
to sell. The State Legislature cannot, by enlarging the definition of
"sale" by including forward contracts arrogate to itself a power
which is not conferred upon it by the Constitution, and the definition of
"sale" in Section 2(h) of the Act XV of 1948 must, to that extent, be
declared ultra-vires.
It
was inter-alia held as follows:
"It
would be proper to interpret the expression "sale of goods" in Entry
48 in the sense in which it was used in legislation both in England and India and to hold that it authorizes the imposition of a tax only
when there is a completed sale involving transfer of title".
Significantly,
the Court observed about substance of the levy as under:
"The
substance of the matter is that the sales tax is a levy on price of the goods,
and the reason of the thing requires that such a levy should not be made,
unless stage has been reached when the seller can recover the price under the
contract." The aforesaid decision makes it clear that subject 'tax on
sales of goods' in Entry 48 of List II of the Seventh Schedule of the 1935 Act
providing for legislative field of sale of goods ought to be confined to levy
of tax on sales of goods as defined in the Sales Act and in substance, it is a
levy on price of goods and the State Legislature does not have power to enlarge
the definition of sales by creating a legal fiction and levy tax on a sale
which has not come into existence.
State
of Madras v. Gannon Dunkerley & Co (AIR
1958 SC 560) is another decision which needs to be noted. A Constitution Bench
of this Court considered the construction of Entry 48 in List II of Seventh
Schedule of the 1935 Act. Tax on the sale of goods is in pari materia with
Entry 54 in List II of Schedule VII of the Constitution. The case arose under
the Madras General Sales Tax Act, 1939 as amended by Madras General Sales Tax
(Amendment) Act, 1947. The definition of "sale" in Section 2(h) was
enlarged so as to include "a transfer of property in goods involved in
execution of works contract".
By
creating a legal fiction, it was deemed that in execution of a work, property
in the goods involved in works contract is transferred as goods so as to
include value (not the price) of such goods as part of taxable turnover.
After
referring to the definition of expression "sale of goods" from the
times of Roman Law and the Law in England, this Court culled out and approved the following principle stated in
Benjamin's book "Sale of Goods":- "Hence it follows that to
constitute a valid sale, there must be a occurrence of the following elements
viz.
-
the parties
competent to contract
-
mutual assent;
-
thing of sale or
general property in which transfer from seller to buyer and;
-
a price in money
paid or promised".
On the
aforesaid premises, the Court on considering the Indian Law and after referring
to Section 77 of the Contract Act, (before enactment of Sale of Goods Act)
defining sale as originally enacted in it, and the provisions of Sales Act
reached the following conclusions about price as an essential element:
"that it must be supported by money consideration, and that as a result of
the transaction property must actually passed on the goods unless all these
elements are present, there can be no sale".
Following
conclusions were arrived approving the view in Budh Prakash's case (supra):-
"A power to enact a law with respect to tax on sale of goods under Entry
48 must, to be intra vires, be once relating in fact to sale of goods, and
accordingly, the Provincial Legislature cannot, in the purported exercise of
its power to tax sales, tax transactions which are not sales by merely enacting
that they shall be deemed to be sales; .."sale" in Entry 48 must be
construed as having the same meaning which it has in the Sale of Goods Act,
1930.. It is of the essence of this concept that both the agreement and the
sale should relate to the same subject matter".
Summing
up the conclusions it was held:- "the expression "sale of goods"
in Entry 48 is a nomen juris, its essential ingredients being an agreement to
sell moveable for a price and property passing therein pursuant to that
agreement".
The
State Legislature does not have legislative competence to give the expression
"sale of goods" extended meaning and to enlarge its legislative field
to cover those transactions for taxing which do not properly conform to
elements of sale of goods within the Sales Act. Tax on value of the material
used in construction of building was held to be ultra-vires.
The
decision in Firm of M/s Peare Lal Hari Singh v.The State of Punjab and Anr. (AIR 1958 SC 664) also
relates to imposition of tax on supply of materials used in building contracts
and this Court followed its earlier decision in Gannon and Dunkerley case
(supra) and held that the expression "sale of goods" in Entry 48 in
List II of Seventh Schedule of the Government of India Act, 1935 has the same
import which it bears in the Sales Act.
The
principle was reiterated in Bhopal Sugar Industries Ltd., M.P. v. D.P. Dube
Sales Tax Officer, Bhopal Region, Bhopal (AIR 1967 SC 549) where the question
arose whether giving extended definition of "retail sale" which sought
to render consumption by the owner of motor spirit liable to tax under the
concerned Sales Tax Act by virtue of Section 3, is beyond the competence of the
State Legislature and hence void. This Court relying on its earlier decision in
Gannon and Dunkerley (supra) held as follows::
"In
a transaction of sale of goods which is liable to tax there must be concurrence
of the four elements, viz;
-
parties
competent to contract;
-
mutual assent;
-
a thing, the
absolute or general property in which it is transferred from the seller to the
buyer; and
-
a price in money
paid or promise.
A
transaction which does not conform to this traditional concept of sale cannot
be regarding as one in respect of which the State Legislature is competent to
enact an Act imposing liability for payment of tax".
The
Court quashed the assessment made on the aforesaid premises.
Levy
by the State of Uttar Pradesh as to the basis of levy once a transaction is
held to be a transaction of sale came up for consideration by a Constitution Bench
in Ganga Sugar's case (supra). This Court said:
"Tax
on sale or purchase must be on the occurrence of a taxing event of sale
transaction".
This
Court in M/s Govind Saran Ganga Saran v.
Commissioner of Sales Tax & Ors. (AIR 1985 SC 1041) on analyzing Article
265 noted as follows:
"The
components which entered into tax are well known. The first is the character of
the imposition known by its nature which transpires attracting the levy. The
second is a clear communication of the person on whom the levy is imposed and
which is obliged to pay the tax. The third is rate at which the tax is imposed
and the fourth is the measure or value to which the rate is applied for
computing the tax liability".
Obviously,
all the four components of a particular concept of tax has to be inter related
having nexus with each other.
Having
identified tax event, tax cannot be levied on a person unconnected with event,
nor the measure or value to which rate of tax can be applied can be altogether
unconnected with the subject of tax, though the contours of the same may not be
identified.
In
Union of India v. Bombay Tyre International Ltd. (AIR 1984 SC 420) the
expressions subject of tax, the measure of tax and nexus between the two have
been succinctly analysed.
The
decision arose in the context of Central Excise and Salt Act, 1944 (in short
'Excise Act'). The controversy was what should be included in the measure of
computation of liability and what fell outside the scope of measure to be
excluded from consideration. Referring to a large number of decisions of
different courts, including some of the decisions we have referred to above,
the principle succinctly stated in Seervai's Constitutional Law was approved by
observing as follows:- "Another principle for reconciling apparently
conflicting tax entries follows from the fact that a tax has two elements, the
person, things or activity on which the tax is imposed, and the amount of the
tax. The amount may be measured in many ways, but decided cases establish a
clear distinction between the subject matter of a tax and the standard by which
the amount of tax is measured. These two elements are described as the subject
of a tax and the measure of a tax." The Court also held that the measure
of tax though not always essential but is often a relevant consideration to
judge the nature of levy. Following passage from R.R. Engineering Company v. Zila
Parishad Bareilly (AIR 1980 SC 1088) was approved:
"It
may be and is often so, that the tax on circumstances and property is levied on
the basis of income which the assessee receives from his profession, trade,
calling or property.Therefore, while determining the nature of a tax, though
the standard on which the tax is levied may be a relevant consideration, it is
not a conclusive consideration".
This
Court recognised greater freedom in adopting measure of the tax to be assessed
by its own standard and administrative convenience and other factors may
influence the stage at which the levy may be collected and there may be
deviation in contours of measure of tax, but did not countenance it to be
divorced from the nature of tax, by observing as follows:
"Any
standard which maintain a nexus with the essential character of the levy can be
regarded as a valid basis for assessing the measure of the levy".
With
these premises this Court found that while nature of an excise levy is
indicated by the fact that it is imposed in respect of manufacture or
production of an article, the point at which it is collected is not determined
by the point of time when manufacture is completed but will rest on
consideration of administrative convenience and that generally it is collected
when the article leaves the factory for the first time.
The
question of tax on sale of goods may be examined in the said background. The
subject of tax being sale, measure of tax for the purpose of quantification
must retain nexus with 'sale' which is subject of tax. As noticed above, tax on
sale of goods, is tax on vendor in respect of his sales and is substantially a
tax on sale price. The vendor or buyer cannot be taxed de hors the subject of
tax that is sale by the vendor or purchase by the buyer. The four essential
ingredients of any transaction of sale of goods include the price of the goods
sold, therefore, in any taxing event of sale, which become subject matter of
tax price component of such sale, is an essential part of the taxing event.
Therefore, the question does arise whether a particular taxing event of sale
could be subjected to tax at the prescribed rate to be measured with such price
which is not the component of the transaction of sale, which has attracted the
sales tax.
Andhra
Sugars's case (supra) concerned the challenge to levy of sales tax under Andhra
Pradesh Sugarcane Regulation of Supply and Purchase Act. The tax was levied on
the purchase of sugarcane as per the weights of the goods purchased. One of the
contentions raised before this Court challenging its validity was that the tax
must be levied with reference to the turnover only and it cannot be levied with
reference to the weight of the goods purchased. The contention was rejected by
this Court by saying:
"Where
the purchase tax is levied on a dealer, the levy is usually with reference to
his turnover, which normally means the aggregate of the amount of purchase
prices. But the tax need not necessarily be levied on a dealer by reference to
his turnover. It may be levied on the occupier of a factory by reference to the
weight of the goods purchased by him." However, where tax is to be
measured in terms of price or in terms of weight or quantity of goods sold,
whether the measure can be different from the contents of taxing event was not
the proposition laid.
It
was observed in Ganga Sugar's case (supra) as follows:
"It
is a superstition, cultivated by familiarity, to consider that all sales tax
must necessarily have nexus with the price of the commodity. Of course, price
as basis is not only usual but also safe to avoid uneven, unequal burdens,
although it is conceivable that a legislature can regard prices which fluctuate
as too impractical to tailor the purchase tax. It may even be, in rare cases,
iniquitous to link purchase tax with price, if more sensible bases can be
found".
It was
a case in which weight of the commodity was made the basis for levy of the tax.
But, price of goods was approved to be usual meaning of levy of tax on sale of
goods. It does not deviate from basic principle that a tax of any nature is
determined ex-hypothesi on occurrence of taxing event. Its actual computation
and collection takes place later on through the machinery provided. However,
the determination of charge ex-hypothesi instantly on occurrence of taxing
event which inheres into it that measure of tax is integrally connected with
occurrence of taxing event and is not postponed to a later date.
Thus
primarily the rate of tax relates to measure of tax to come into existence
simultaneous with occurrence of taxing event. The machinery provisions relating
to its quantification and collection can take place later. Providing measure to
which rate is to be applied is integrally connected with charge itself.
This
Court considered the ambit and scope of legislative power of the State
Legislature while imposing tax on sale of goods in Hotel Balaji & Ors v.
State of Andhra Pradesh and Ors. (AIR 1993 SC 1048) wherein
this Court said:
"So
long as the levy retains the basic character of a tax on sale, the legislature
can levy it in such mode or in such manner as it things appropriate".
In
this connection, it is relevant for the present purpose to notice that in
upholding the validity of additional purchase tax on goods, when the goods
manufactured by the buyer are sold outside State was that the tax was related
to purchase price, which was part of transaction of purchase and not payable on
price at which he shall be selling his goods. Therefore, it retained its
character on tax on purchase otherwise it would have become Duty of excise on
value of goods determined in terms of price charged by manufacturer, when such
sale was not subject of tax levied by State Legislature.
In Ganga
Sugar's case (supra) the court emphasized the tax on sale or purchase must be
on occurrence of taxing event of sale transaction. While accepting that, price
of the sale transaction is not necessarily the only criterion which may form
the basis of levy of tax but it opined that price as basis is not only usual
but also safe to avoid unequal, uneven burdens. The Court also stated that it
is common sense that the reliable standard is the price although in regard to
custom duties there are still items on which duties is levied on the nature of
goods rather than its value in money.
The
issue which the Court was considering was the levy of tax on sale of sugarcane
and the court found that weight of cane which has sucrose contents have a close
nexus with price although theoretically they may appear unconnected and
consequently the levy of tax with reference to weight of sugarcane was held to
be a permissible hypothesis for determining the tax.
In
Hotel Balaji's case (supra) levy of purchase tax at the last point sale within
the State by a dealer/manufacturer who has sold the goods manufactured by him
in the course of inter state trade and commerce, on the purchase price of the
raw materials, was the subject of challenge. The contention has been raised
before this Court that since tax was leviable in cases where the goods
manufactured were not sold in the State, it amounted to levy of Excise Duty on
manufacture though named as purchased tax. In holding that levy was essentially
a tax on purchase of goods within the State, one of the factors which weighed
with this Court was that the levy was upon the purchase price of the raw
material and not upon the value of the manufactured products. That is to say
when the tax was levied at the transaction of purchase, notwithstanding it was leviable
in case of goods manufactured by the dealer and were sold in a manner not
taxable within the State is nonetheless tax leviable at purchase price and not
on the value of the manufactured products. So it was held that the essential
character of tax on purchase was retained and consequently it did not lose its
character as a tax on purchase of goods. The Court obviously indicated that in
the case of tax on sale, price on which transaction took place and not the
value of goods is relevant criterion to hold nexus between measure of tax and
the taxing event.
The
position would have been different had the tax on taxable transaction of
purchase have been levied with reference to price relatable to subsequent
transaction of sale.
In
that event, the price forming part of subsequent sale would have lost nexus
with the transaction that become taxable in the State.
However,
this case did not lay down the principle that where price is the measure to which
rate of tax can be applied, it can be something else other then the price
component of taxing event, whether agreed by mutual consent or as regulated by
statutes.
These
cases give a clear picture that Entry 54 in List II of Seventh Schedule
empowers the State Legislature to impose and collect taxes on sale of goods.
The measure to which tax rate is to be applied must have a nexus to taxable
event of sale and not divorced from it.
The
pivotal question, therefore, which needs to be considered is whether the
measure to which rate of tax is to be applied on single point transaction of
sale of any formulation by the wholesaler to the retailer can be something
notional which is not related to subject of tax or to say in other words,
whether MRP to be chargeable subsequent to taxing event by a retailer when he
sells the same goods to consumer can provide a basis which has a nexus with
taxable event to provide a valid measure to which rate of tax can be applied.
The
principal contention about the invalidating of the basis of the measure of tax
envisaged under section 4A of the Act as inserted vide Finance Act, 2004 is
that while it levies taxes on the sale transaction carried on by the
manufacturer or wholesalers or distributor the measure with which total turnover
is to be determined is not part of the sale which attracts tax but its premise
is to be found on subsequent sale which, under the scheme of single point tax
is not excisable to tax at all. The MRP which a wholesaler can charge in
respect of scheduled formulations too is fixed by Control Order. In respect of
scheduled formulations wholesaler is required to leave at least 16% margin in
the MRP for the retailers and he is entitled to retain not more than 8% profit
on the purchase price. There being statutory prohibition against the
wholesalers to charge MRP from its buyer, the maximum retail price fixed on the
packet has no rational connection with the taxable sale effected by the
wholesalers and which becomes subject matter of charge as a first point tax. In
such event, there exists no nexus between the measure of levy and subject of
levy.
In the
context of meaning assigned to expression 'sale of goods' or price or
consideration element of such 'sale of goods' as taxable event, the conclusion
that can fairly be reached is that for the taxing event of sale, if the price
is to be the basis for measuring tax, it must relate to actual transaction of
sale that become subject of tax and not to a different transaction that may
take place in future at a price.
Accepting
the contention of Revenue that the retail sale price likely to be received when
such transaction takes place is taken only as a basis to provide measure of
levying tax on a completed transaction between wholesalers and retailer would
make it suffer from basic fallacy of importing the composition of sale which
has not come into existence to determine tax which is fixed as soon as the
taxable sale is completed.
Section
4A of the Act which projects itself as an exception to Section 4, creates a
legal fiction in respect of price of subject sale, on which rate of tax is to
be applied. But levy of tax remains single point levy in a series of sales.
Point of taxable sale remains the first point sale i.e. from the
manufacturer/distributor or the wholesaler to the retailer. The tax is to be
charged on turnover of the Assessment Year in aggregate. "Turnover"
is defined under Section 2(44) and "Taxable Turnover" under Section
2(42) of the Act. For the taxable event that has occurred, the amount received
or receivable is assumed to be different from which is neither received nor
receivable and that amount which neither flows from the Control Order, nor
which flows from buyer to seller under the contract but is relatable to a
transaction of sale by a retailer which may not have come into existence. For
the present, the price to which rate of tax is sought to be applied to a sale
by a wholesaler to a retailer is neither the price agreed upon by the parties
to the contract of taxable sale to which charge is attracted nor flows from the
Control Order under which also, it is the price of formulation before end sale
is to be determined within prescribed limits.
The
charging Section 4 stipulates that the tax payable by a dealer under the Act
shall be at single point in the series of sales by successive dealers, as may
be prescribed and shall be levied at such rates not exceeding fifty per cent on
the taxable turnover, as may be notified by the State Government in the
Official Gazette. This shows that there is no scope for multi point levy of tax
and the tax is levied on the first point sale within the State in a series of
sales and tax is leviable at rate applied to aggregate of price received or
receivable by the dealer on such sales.
Section
4A does not become workable unless read along with definition of
"turnover" and "taxable turnover".
The
retail price of a formulation needs determination under paragraph (7) of the
order and the Government if empowered by order to fix the price in accordance
with paragraph (7) of the order to be charged by a retailer. Where the maximum
retail price is fixed as provided under paragraph 7 of Control Order, para 19
provides for price that can be charged from a retailer by a wholesaler, it
reads as under:
-
"Price of formulation sold to the
dealer-
-
A manufacturer,
distributor or wholesaler shall sell a formulation to a retailer, unless
otherwise permitted under the provisions of this Order or any order made thereunder,
at a price equal to the retail price, as specified by an order or notified by
the Government (excluding excise duty, if any), minus sixteen per cent thereof
in the case of scheduled drugs" Applying the principles enunciated above,
the inevitable conclusion is that when the wholesaler sells any formulation to
a retailer in bulk quantity, taxable event of sale of goods takes place where
wholesaler and retailers are the parties to contract, the goods in question are
the formulations and the consideration is one which is agreed to between the
parties to that transaction within the limits permissible by law. By
substituting the assumed quantity of goods or a price which is not subject
matter of that contract of completed sale for the purpose of measuring tax the
legislature assumes existence of contract of sale of drugs by legal fiction
which has not taken place and which cannot be considered to be a sale in the
manner stated in the Sales Act, which alone can be subject of tax under Entry
54 in List II. Substitution of assumed price or the assumed quantity in place
of actual price/quantity in a completed sale transaction, for the purpose of
levy of tax on the subject matter of tax results in taking away from it the
character of 'sale of goods' as envisaged under the Sales Act.
Another
distinguishing feature to be kept in mind is that centre point of legislation
under Entry 54 of List II of Seventh Schedule is 'sale' in contrast with
central point of legislation under Entry 84 of List I of Eighth Schedule i.e.
'Goods manufactured or produced". While basic nexus of levy in the former
is "sale of specified goods", in the latter it is "goods
manufactured or produced in India".
Every
transaction of sale is independent and can be subject to levy of tax and the
components and the measure which can make the tax levy effective must have
nexus with the taxable event.
By
devising a methodology in the matter of levy of tax on sale of goods, law
prohibits taxing of a transaction which is not a completed sale and also
confine sale of goods to mean sale as defined under the Act. This cannot be
overridden by devising a measure of tax which relates to an event which has not
come into existence when tax is ex-hypothesi determined, much less which can be
said a completed sale and which cannot be subject of legislation providing tax
on 'sale of goods' by transplanting a sum related to as "likely
price" to be charged for subsequent sale to be taxed by the devise of
measuring tax for the completed transaction which has become subject of tax.
It may
be relevant to recall here that this Court in Hotel Balaji's case (supra) held
that where a tax was levied as a purchase tax and was confined to the purchase
price paid by the buyer, and was not chargeable at the price at which the end
produce was sold later, it had retained its character as a tax on purchase.
If the
legislation can provide for a measure of tax on subject of tax by substituting
any notional value, which at no point of time becomes part of or related to
subject of tax viz. sale of goods, then the fact that it is related to MRP
loses its significance altogether. If this is permitted to be done the
legislation can provide for any measure the purpose of applying the rate of
tax, whether it is founded on MRP or any other fixed value which legislature
may provide will make little difference. It is not contended by appellant that
even if the measure is not relatable to MRP, it can substitute any value as a
measure of tax. Subject of tax is not the goods or goods sold, but a
transaction of 'sale of goods' as defined under the Sales Act.
Learned
counsel for the appellant submitted that Union of India and Anr. v. A. Sanyasi Rao
and Ors. (1996 (219) ITR 330) supports his stand. Section 44AC was inserted in
Income Tax Act, 1961 (in short 'IT Act') by the Direct Tax Laws (Amendment)
Act, 1989 w.e.f. 1.4.1989. Section 206C was inserted in the said Act by Finance
Act, 1988 w.e.f. 1.4. 1988.
Explanation
to Section 44AC was inserted by Finance Act, 1990 w.e.f. 1.4.1991. These
provisions enabled the revenue to estimate the profits on a presumptive basis
in the case of persons dealing in country liquor, timber, forest produces etc.
Revenue's
intention was to get over the problem of assessing income and recovering tax in
cases of person dealing in such commodities, as business of such persons
existed only for short period, and after period of contract in many cases, it
was not even possible to trace the concerned assesses and many were found to be
dealing benami. Section 44AC occurred in Chapter IV of the I.T. Act deals with
"computation of income".
Section
44AC(1) determines profits and gains of the year from trading of certain
specified goods like liquor at a particular percentage of package price
specified therein. The object of said provision was explained in a memorandum
as "with a view to combat large scale tax evasion by person deriving
income from such businesses where the bill seeks to insert new Section 44AC to
provide for determination of income in such cases". About Section 206C it
was stated that "it is proposed to introduce a new Section 206C to provide
that any person being a seller referred to in Section 206C shall collect income
tax of a sum equal to 20% of the amount paid or payable by the buyer as
increased by a surcharge for the purpose of Union".
Interpretation
of the two sections came up before Andhra Pradesh High Court. The said Court
while upholding the validity of the Act read down the Section 44AC of the Act
and held it only to be an adjunct to Section 206C and to explain provision of
Section 206C and not to dispense with the regular assessment in accordance with
the provisions of the I.T. Act. It was held that the subject matter of tax vis.
'income' cannot be determined notionally by making such specific provisions
when in all other cases only the real income to be computed in accordance with
provision of Section 28 to Section 43C. This Court noted that one of the
contentions raised in the petition was that 'tax is levied on
"hypothetical income" and not on "real income". In other
words, the determination of "real income" was held to be the statutory
mandate.
If
Section 4-A is designed to bring a levy into existence which is divorced from
the "sale" subject to tax under the Act, it is beyond legislative
competence under Entry 54 of List II of Seventh Schedule. The notification to
the extent it intends to levy tax on first point sale with reference to price
which could be charged in respect of a subsequent sale which has not come into
existence at the time liability to tax arise and is determined ex-hypothesi is
unsustainable on that basis.
Though
the decision in Ganga Sugar case (supra) at first flush appears to be
supporting the stand of the appellants, on a deeper scrutiny it is crystal
clear that the said decision was rendered on peculiar facts of the case. The
three challenges as culled out from paragraphs 22, 23 and 25 of the judgment
make the position clear that there was no discussion in the background of Entry
54. Para 16 of the judgment traced the history of levy on sugarcane and 40
years old practice of levy on sugarcane was linked with weight. It was
significantly noted that it was in the background of "peculiar
circumstances of sugarcane economy". The logic cannot be applied to the
facts of the present case.
In
Builders' Association of India and Ors. v. Union of India and Ors.
(1989 (2) SCC 645) it was noted as follow:
-
"Even after
the decision of this Court in the State of Madras v. Gannon Dunkerley & Co.
(Madras) Ltd. it was quite possible that
where a contract entered into in connection with the construction of a building
consisted of two parts, namely, one part relating to the sale of materials used
in the construction of the building by the contractor to the person who had
assigned the contract and another part dealing with the supply of labour and
services, sales tax was leviable on the goods which were agreed to be sold
under the first part. But sales tax could not be levied when the contract in
question was a single and indivisible works contract. After the 46th Amendment
the works contracts which was an indivisible one is by a legal fiction altered
into a contract which is divisible into one for sale of goods and the other for
supply of labour and services. After the 46th Amendment, it has become possible
for the States to levy sales tax on the value of goods involved in a works contract
in the same way in which the sales tax was leviable on the price of the goods
and materials supplied in a building contract which ad been entered into in two
distinct and separate parts as stated above. It could not have been the
contention of the revenue prior to the 46th Amendment that when the goods and
materials had been supplied under the distinct and separate contract by the
contractor of the purpose of construction of a building the assessment of sales
tax could be made ignoring the restrictions and conditions incorporated in
Article 286 of the Constitution. If that was the position can be States contend
after the 46th Amendment under which by a legal fiction the transfer of
property in goods involved in a works contract was made liable to payment of
sales tax that they are not governed by Article 286 while levying sales tax on
sale of goods involved in a works contract? They cannot do so. When the law
creates a legal fiction such fiction should be carried to its logical end.
There
should not be any hesitation in giving full effect to it. If the power to tax a
sale in an ordinary sense is subject to certain conditions and restrictions
imposed by the Constitution, the power to tax a transaction which is deemed to
be a sale under Article 366(29-A) of the Constitution should also be subject to
the same restrictions and conditions. Ordinarily, unless thee is a contract to
the contrary in the case of a works contract the property in the goods used in
the construction of a building passes to the owner of the land on which the
building is constructed, when the goods or materials used are incorporated in
the building. The contractor becomes liable to pay the sales tax ordinarily
when the goods or materials are so used in the construction of the building and
it is not necessary to wait till the final bill is prepared for the entire
work. In Hudson's Building Contracts (8th Edn.) at page 362 it is stated thus:
"The
well known rule is that the property in all materials and fittings, once
incorporated in or affixed to a building, will pass to the freeholder quicquid
plantatur solo cedit. The employer under a building contract may not
necessarily by the freeholder, but may be a lessee or licensee, or even have no
interest in the land at all, as in the case of a sub-contract. But once the
builder has affixed materials, the property in them passes from him, and at
lest as against him they become the absolute property of his employer, whatever
the latter's tenure of or title to the land. The builder owner may himself be
entitled to sever them as against some other person e.g. as tenant's fixtures.
Nor
can the builder reclaim them if they have been subsequently severed from the
soil by the building owner or anyone else.
The
principle was shortly and clearly stated by Blackburn J. in Appleby v.
Meyers(1867
LR 2 CP 651): 'Materials worked by one into the property of another become part
of that property'.
This
is equally true whether it be fixed or movable property. Bricks built into a
wall become part of the house, thread stitched into a coat which is under
repair, or planks and nails and pitch worked into a ship under repair, become
part of the coat or the ship."
-
We are surprised
at the attitude of the States which have put forward the plea that on the
passing of the 46th Amendment the Constitution had conferred on the States a
larger freedom than what they had before in regard to their power to levy sales
tax under Entry 54 of the State List. The 46th Amendment does no more than
making it possible for the States to levy sales tax on the price of goods and
materials used in works contracts as if there was a sale of such goods and
materials. We do not accept the argument that sub-clause (b) of Article
366(29-A) should be read as being equivalent to a separate entry in List II of
the Seventh Schedule to the Constitution enabling the States to levy tax on
sales and purchases independent of Entry 54 thereof. As the Constitution exists
today the power of the States to levy taxes on sales and purchases of goods
including the "deemed" sales and purchases of goods under clause
(29-A) of Article 366 is to be found only in Entry 54 and not outside it. We
may recapitulate here with observations of the Constitution Bench in the case
of Bengal Immunity Company Ltd. v. State of Bihar (1955 (2) SCR 603) in which
this Court has held that the operative provisions of the several parts of
Article 286 which imposes restrictions on the levy of sales tax by the States
are intended to deal with different topics and one could not be projected or
read into another and each one of them has to be obeyed while any sale or
purchase is taxed under Entry 54 of the State List." In Bhopal Sugar
Industries v. D.B. Dube (AIR 1964 SC 1037) it was noted as follows:
-
In Gannon Dunkerley
& Company's case ([1959] S.C.R. 379.), this Court was called upon to
consider whether in a building contract which is one, entire and indivisible,
there is sale of goods. It was held by the Court that the Provincial
Legislature was not competent under Entry 48, List II, Sch. VII of the
Government of India Act, 1935, to impose tax on the supply of materials used in
such a contract treating it as a sale. The decision of the Court did not rest
upon any peculiar character of a building contract. It was held on the larger
ground canvassed in that case, that the expression 'sale of goods' within the
meaning of relevant legislative entry had the same connotation as 'sale of
goods' in the Indian Sale of Goods Act, 1930, and therefore the State
Legislature had no power to enact legislation to levy tax under Entry 48 of
List II in respect of transactions which were not of the nature of sales of
goods strictly so called; and a building contract not being a transaction in
which there was a sale of materials by the contractor who constructed the
building, the State was not competent to enact legislation to impose tax on the
supply of materials used in a building contract treating it as a sale. It was
therefore, held that the definition of sale in the Madras General Sales Tax Act
IX of 1939 was to the extent of the extension invalid.
-
In Gannon Dunkerley
& Company's case ([1999] S.C.R. 379.), the validity of s. 2(h)(ii) of the
Madras General Sales Tax Act, 1939, as amended by Act XXV of 1947, in so far as
it included goods included in a works contract fell to be determined, in the
light of the competence of the Provincial Legislature under Entry 48, List II,
in Seventh Schedule of the Government of India Act, 1935. Under the
Constitution the relevant entry conferring legislative power upon States to tax
sale of goods in Entry 54, List II. As the scheme of division of legislative
power under the Constitution has remained unaltered, the principle of Gannon Dunkerley's
case ([1999] S.C.R. 379.), applies in adjudging the validity of the provisions
of the Madhya Pradesh Act 4 of 1958.
-
Consumption by
an owner of goods in which he deals is therefore not a sale within the meaning
of the Sale of Goods Act and therefore it is not 'sale of goods' within the
meaning of Entry 54, List II, Schedule VII of the Constitution. The legislative
power for levying tax on sale of goods being restricted to enacting legislation
for levying tax on transactions which conform to the definition of sale of
goods within the meaning of the Sale of Goods Act, 1930, the extended
definition which includes consumption by a retail dealer himself of motor
spirit or lubricants sold to him for 'retail sale' is beyond the competence of
the State Legislature. But the clause in the definition in Section 2(1)
"and includes the consumption by a retail dealer himself or on his behalf
of motor spirit or lubricant sold to him for retail sale" which is ultra vires
the State Legislature because of lack of competence under Entry 54 in List II,
Schedule VII of the Constitution is severable, from the rest of the definition,
and that clause alone must be declared invalid." The traditional concept
of sale was stressed upon and reference was made to M/s Gannon Dunkerley's case
(supra) for the purpose of interpreting true import of the expression
"sale of goods".
In
that view of the matter, the judgment of the High Court does not warrant any
interference and the appeal is dismissed. However, it is made clear that if the
tax component has been passed on to the subsequent purchases claim for refund
shall not be entertained. But where it has not been so passed on and has been
deposited with the authorities, the same shall be adjusted against future
demands, if any.
The
appeal is dismissed. No costs.
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