TMI Blog1978 (11) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... vy of excise duties on spirits at one stage or other in the course of trade forms another source of public revenue. In addition to those exactions, the gallonage fees are levied on the quantity of spirits handled by the trade. The gallonage fees, for instance, are payable to the State Government on spirits sold by the licensed distilleries to their customers. The assessees, who ply their trade in this milieu, sell their spirits to the licensed wholesalers and retailers as well as to other persons and institutions authorised to obtain supplies from the distilleries. While effecting such sales, what the assessees do is not only to charge the customers the price of the spirits sold but also a further amount towards recovery of the appropriate gallonage fees payable to the Government on the quantity delivered under the sale. In making out their sales invoices, they separately depict the collection of gallonage fees, as distinct from the sale price for the spirits. When the assessees' sales turnover for 1970-71 came to be determined for the purpose of assessment under the Tamil Nadu General Sales Tax Act, 1959, the question arose as to how the gallonage fees collected by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have no application to the present case. According to him, a study of the relevant provisions governing the collection of gallonage fees would bear this out. Having regard to the nature of the rival contentions before us, we have to enter into a deatiled consideration not only of the relevant statutory provisions, but also of the authorities bearing on the subject. The issue for our consideration is whether the sum of Rs. 10,16,857.32 representing the collections towards the gallonage fees was rightly included as part of the assessees' taxable turnover. This question, in its very nature, provokes two lines of inquiry: (i) What precisely is the conception of turnover under the taxing statute? (ii) Whether the gallonage fees collected by a distillery on the occasion of sales can be regarded as forming part of the sales turnover of the distillery? The Tamil Nadu General Sales Tax Act, 1959, defines "turnover" in simple language. According to section 2(r), "turnover" means the aggregate amount for which goods are bought or sold by a dealer. This, broadly, is also the line of definition of the expression in other local sales tax enactments in force in several other States in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntain the distinction between such extra collections on the one hand, and the price proper on the other. But tax laws are notoriously indifferent to the practices of the business community, the patterns of commercial invoices and the methods of keeping business accounts. They are concerned rather with finding out what really are the amounts for which the dealer sells his goods to the purchaser. Ever since the sales tax legislation got into our statute books a good number of cases have gone to courts on the perennial theme, what to include in and what to exclude from the taxable turnover. Questions, in particular, had often arisen under different State sales tax laws, as to whether a tax which the selling dealer shifts to the purchaser can be included in the dealer's sales turnover. The familiar argument addressed in such cases has been that since what is recovered by the dealer from the purchaser is tax which goes to the State, be it excise duty or sales tax or some other fiscal exaction, it could not really form part of the amount for which the goods are sold. The courts, however, have tended to consider an argument of this kind not on the mere aspect that the collection by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omers the tax levied under section 21-A of the Tamil Nadu Prohibition Act, 1937, on sales of such liquor to them. The question was, whether the tax so collected by that company was part of their taxable turnover under the Tamil Nadu General Sales Tax Act, 1959. The appeal before the Supreme Court was from a decision of this Court in Spencer Co. v. Joint Commercial Tax Officer[1969] 24 S.T.C. 161. Dealing with this particular question, this Court had earlier observed that the language of section 21-A of the Prohibition Act itself indicated that it was a tax on sale price, which meant that the two were distinct. This distinction, according to the learned Judges, must also be maintained untarnished in making the assessment of the dealer's turnover under the Tamil Nadu General Sales Tax Act, 1959. On this basis, they held that whatever amount the dealer collected by way of tax from his purchasers under section 21-A of the Prohibition Act must be excluded from his taxable turnover. On appeal, the Supreme Court agreed with this conclusion. But they preferred to rest their decision on a different line of reasoning. They said that under section 21-A of the Prohibition Act the imposition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .). must govern the present case as well. He said that the gallonage fees leviable under the Rules framed by the Government are also obligatory collections which the distilleries are obliged to effect from their purchasers under the law. He urged, therefore, that such collections must stand excluded from the distiller's taxable turnover. This submission of the learned counsel at once put us on an enquiry into the real impact and incidence of the impositions called gallonage fees. There was no dispute at the Bar that the gallonage fee, although called a fee, is a compulsory fiscal imposition designed to augment the State exchequer. The only question then is whether gallonage fees are collected by the distillers purely by virtue of their bargaining position or by virtue of their having to do so under statutory compulsion. Having regard to the way in which the Supreme Court had proceeded to decide similar questions in the cases we have referred to, the proper inquiry before us in the present case would be, on whom does the prohibition law impose the burden of gallonage fees, the distiller or the purchasers? The Sales Tax Appellate Tribunal have referred in their order to some of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lay down how, by whom and on what occasion the gallonage fees become payable. The clause, inter alia, says that, in regard to supplies of spirits obtained by the licence-holders and others from a distillery, "the gallonage fee shall be paid to the distiller by the purchaser at the time of purchase of stock from the distillery". Such purchasers will have to be sending periodical returns to the licensing authority on the quantities purchased. The returns are to be in a prescribed form. The form provides for a number of particulars to be filled in by the purchasers. One particular item of information which the purchaser has to render in his return is "the amount of gallonage fee paid on quantities obtained from a distillery". While the liability to pay gallonage fees is thus laid on the purchasers, the distillery has a corresponding obligation to collect the amounts from the purchasers. Rule 4(b) of the Madras Distillery Rules, 1960, lays down that the denatured spirit "shall be issued.....on collection of the gallonage fee at the prescribed rate to licensees of such spirit in the State". Rule 39(b)(1) of the same Rules clarifies that the rates at which the distillery "shall collec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stance of the learned counsel, is to ferret out the provisions relating to gallonage fees from a bewildering complexity of statutory instruments. Granting that different kinds of manufactured spirits might call for different regulatory provisions under the Rules, in the context of the paramount legislative policy of prohibition, we feel that the draftsman could yet have adopted a uniform style of rule-making at least for prescribing the levy and collection of gallonage fees, considering that they are general in their application to spirits of different kinds. The lack of uniformity in the text and in the format of the Rules alike has tended to obscure the real nature and incidence of these exactions. As might have been noticed, for certain kinds of spirits, the gallonage fees are prescribed in the body of the Rules themselves. For certain other kinds, one has to go hunting for them amidst the small print of the forms, because the texts of the Rules are wholly silent on the subject. Again, while the actual levy is declared by one set of Rules, the corresponding provision for collection is consigned to a different place in a different compilation. The Rules, as a whole, do not fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay that the tax is to be paid by the purchaser. Even so, the Supreme Court held that the tax was the purchaser's liability. They were obviously fully alive to the implications and consequences, as against the purchaser, which flowed from the expression "collect", which the legislature had employed to circumscribe the nature of the seller's obligation and at the same time distinguish it from the purchaser's liability. As compared to the language of the charge in section 21-A of the Prohibition Act, the Rules framed under the same Act for the collection and levy of gallonage fees seem to us to be decidedly more explicit. These Rules, as we have pointed out more than once, do not mince any words, but expressly make the demand that the gallonage fees shall be paid by the purchaser, while at the same time, making corresponding provision to the effect that the distiller shall collect the amounts from the purchaser. In these events, we think, we must agree with Mr. Thiruvenkatachari's argument that the principle to be derived from the Supreme Court's decision in Joint Commercial Tax Officer v. Spencer Co.[1975] 36 S.T.C. 188 (S.C.). must apply a fortiori to the present case. The learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Varnish (French Polish) Rules, 1959, the gallonage fees are levied on spirits not only on the occasion of sales by the distilleries to the holders of licences and others, but also on the occasion of imports effected by the residents in the State from outside. The imposition on imported spirits, also going by the same name of gallonage fees, is governed by different considerations. The importer, for instance, has generally to prepay the gallonage fees before he can obtain the import authorisation or permit from the concerned authority. Licences and licence conditions for imports are not the same as those which govern the purchase of spirits from local manufacturers. Rule 5 of the Rectified Spirit Rules, 1959, governs the levy and incidence of gallonage fees on import of rectified spirits into the State. It says that "the importer (unless already exempted) shall prepay the excise duty and the gallonage fee at the rate in force on the quantity of rectified spirit proposed to be imported and obtain an import permit by forwarding the chalan with the application for permit". Under this rule, both the initial impact and the ultimate incidence of the gallonage fees may be said to rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he question before this Court in Spencer Co. v. Joint Commercial Tax Officer(1) [1969] 24 S.T.C. 161. and Taylor Co. v. Government of Madras[1974] 34 S.T.C. 391. was whether the gallonage fees levied at the point of sale under the aforesaid Rules, and included by a licensed dealer in his sales invoices to his purchasers can be excluded from the dealer's taxable turnover for assessment to sales tax under the Tamil Nadu General Sales Tax Act, 1959. The decision in both the cases was that the amounts must be included as part of the price at which the dealer sells the liquor to the permit-holders. The case for including the amounts of gallonage fees in the taxable turnover of the seller was put in various ways by Ramaprasada Rao, J. (as he then was), while he delivered the judgment of the Bench in Spencer Co. v. Joint Commercial Tax Officer[1969] 24 S.T.C. 161.The learned Additional Government Pleader relied on the following passage: "The payment of gallonage fee appears to be one of the conditions precedent for a person to hold a licence and therefore it is an expense which he has necessarily to incur as a licensee under the Madras Liquor (Licence and Permit) Rules. We can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and remit them to the State. The learned Additional Government Pleader then urged that although the relevant Rules which have application to the present case might contemplate that the distilleries act as the mere hand that collects the gallonage fees from the purchasers for being remitted to the Government, the way things had actually happened in this case was quite different, and this has to be taken note of in considering the validity of the assessment in question before us. He explained that E.I.D. Parry, the assessees in this case, do not follow the procedure contemplated by the Rules, of first collecting the gallonage fees at the time of every sale and thereafter paying the amounts so collected to the Government. On the contrary, what they do is to maintain a large advance deposit of money with the excise department sufficient to cover, in the gross, the gallonage fees payable on their expected sales of spirits over a period. With this deposit to their credit, the assessees proceed to collect from their customers the appropriate gallonage fees as and when individual sales happened to be effected. It is common ground that what has been described above is the modus opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or "credit and collect", they do so not out of choice, but out of legal coercion. It is this consideration which the Supreme Court have regarded as paramount. The mere inversion of the statutory process without any difference in the endresult, cannot, therefore, be material to the present discussion. It may even be dismissed as spoonerism in action, as when the late Dr. Spooner, on one occasion, is reported by his biographer to have poured claret over spilled salt to make it into a purple mound. The suggestion is that ordinary mortals are accustomed to bring about the same result by spreading salt over spilled wine, just to prevent it from spreading. The learned Additional Government Pleader then relied on a recent decision of the Supreme Court in McDowell Co. Ltd. v. Commercial Tax Officer[1977] 39 S.T.C. 151 (S.C.). to say that since the assessees retained with themselves the actual collections of gallonage fees from their customers, those amounts must be regarded as part of their circulating capital and so liable to be included and taxed as forming part of their sales turnover. We think this argument involves a misunderstanding of the actual decision of the Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover for levy of sales tax in his hands. The real basis of the court's decision in that case was that excise duty paid directly by the purchasers to the State Distillery Officer for obtaining clearance for their purchase from the distilleries has nothing whatever to do with the distilleries' sales of liquor or the price at which such sales were effected. It is in this context, and by way of description, that the court said that the purchaser's payments into the treasury of excise demands did not go into the distiller's coffers of their circulating capital. In the present case, we have already referred to the reason why the assessees did not turn over their collections of gallonage fees to the Government. The reason is not far to seek. It is that they already had to their credit with the Government an advance deposit under this account. In this sense, therefore, as much money went out of the assessees' till as came into it, by way of gallonage fees, and there was really no net increase or net decrease in circulating capital, if that is the way to describe the situation. But even if it were assumed for a moment that the assessees' collections of gallonage fees form, for the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchaser's assessment, if any. Nor can we accept the learned Additional Government Pleader's theory that the gallonage fees form part of the assessees' capital expenditure. The reference to "capital expenditure", in the present context, is obviously borrowed from Ramaprasada Rao, J.'s judgment in Spencer Co. v. Joint Commercial Tax Officer[1969] 24 S.T.C. 161. The argument is that since the distiller has to have licences to manufacture and sell spirits and since the licences require that he should collect and pay the gallonage fees, the payment must form part of his "capital expenditure ". It may, perhaps, be conceded that the intricacies of cost accounting might discover elements of cost per unit even in general overheads. But we fail to see how any item which properly goes into reckoning as part of a trader's capital expenditure can have anything to do with his trading account, considering that capital expenditure is the very antithesis of circulating capital, and considering, further, that sales tax has to do with a dealer's receipts and not with his outgoings or expenses. We are inclined to feel that it would altogether assist discussion of fiscal questions of every kind ..... X X X X Extracts X X X X X X X X Extracts X X X X
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