TMI Blog2006 (7) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been so passed on and has been deposited with the authorities, the same shall be adjusted against future demands, if any. - Civil Appeal No. 3552 of 2005 - - - Dated:- 24-7-2006 - [Judgment] - 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. 2. The controversy arose in the following background: By the Finance Act, 2004 Section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the official Gazette as may be abated by the rates specified in the said Notification. 4. 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 29A 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. 5. 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 Measur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 9. 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. 10. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 15. After referring to the definition of expression "sale of goods" from the times of Roman law and the Law in England, this Court culled out and approved the following principle stated in Benjamin's book "Sale of Goods":- "Hence it follows that to constitute a valid sale, there must be a occurrence of the following elements viz. (i) the parties competent to contract (2) mutual assent; (3) thing of sale or general property in which transfer from seller to buyer and; (iv) a price in money paid or promised" 16. 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 el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties competent to contract; (2) mutual assent; (3) a thing, the absolute or general property in which it is transferred from the seller to the buyer; and (4) a price in money paid or promise. A transaction which does not conform to this traditional concept of sale cannot be regarding as one in respect of which the State Legislature is competent to enact an Act imposing liability for payment of tax" 21. The Court quashed the assessment made on the aforesaid premises. 22. 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" 23. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dard 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". 27 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. 28. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 33. Thus primarily the rate of tax relates to measure of tax to come into existence 6imultaneous 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. 34. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufactured 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 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 event taxing 38. 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. 39. 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. 40. These cases give a clear picture that Entry 54 in List II of Seventh Schedule empowers t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 45. 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uantity 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. 49. 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" 50. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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". 55. Interpretation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 i 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 had 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 coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terials 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." 4C. 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(29A) 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 purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovincial 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] SCR 379), applies in adjudging the validity of the provisions of the Madhya Pradesh Act 4 of 1958. 7. Consumption by an owner of goods in which he deals is therefore not a sale within the meaning of the Sale of Goods Act and therefore it is not 'sale of goods' within the meaning of Entry 54, List II, Schedule VII of the Constitution. The legislative power for levying tax on sale of goods being restricted to enacting legislation for levying tax on transactions which con form 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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