Rajasthan High Court - Jaipur
Rajasthan Chemists Association vs State Of Rajasthan And Ors. on 29 March, 2005
Author: Ajay Rastogi
Bench: Ajay Rastogi
JUDGMENT Rajesh Balia, J.
1. Vide State Finance Act, 2004, Section 4A was inserted in the Rajasthan Sales Tax Act, 1994 which reads as under:
4A. Levy of tax on retail sale price,(1) Notwithstanding anything contained in any other provisions of this Act or the Rules made thereunder, tax on sale of such goods, as may be specified by the State Government by notification in the official gazette, shall be levied and collected on the retail sale price of such goods abated by the rate specified in the said notification.
(2) The goods to be specified under Sub-section (1) shall be those in relation to which it is required under the provisions of the Standards of Weights and Measures Act, 1976 Central Act No. 60 of 1976 or the Rules made thereunder or under any other law for the time being in force, to declare on the package thereof the retail sale price of such goods.
(3) The State Government may, for the purpose of fixing the rate of abatement under Sub-section (1), take into account the amount of sales tax and other local taxes, if any, payable on such goods.
Explanation.(i) Where on the package of any goods different retail sale prices are declared with reference to different areas, the retail sale price declared with the reference to the area within the State in which it is sold shall be deemed to be the retail sale price for the purposes of this section.
(ii) Where on the package of any goods different retail sale prices are declared with reference to different areas and none of the areas falls within the State, the maximum of such retail sale prices shall be deemed to be the retail price for the purposes of this section.
2. The present writ petition has been filed to challenge the constitutional validity of the aforesaid provision. It envisages 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 which have taken place, but on the "maximum retail price" of the goods declared on the package as per the provisions of the Standards of Weights and Measures Act, 1976 or the Rules framed thereunder or under any other law for the time being in force which is chargeable only at the last point sale by a 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 notification in the official gazette as may be abated by the rate specified in the said notification.
3. The present writ petition has been filed by registered association of the wholesale dealers/distributor of Chemists and Druggists engaged in the business of selling of medicines, drugs and pharmaceutical preparation to the retailers.
4. The principal contention on which the validity of the aforesaid provision has been challenged is that it takes into account the artificial amount as turnover for the purpose of tax on "sales of goods".
5. The tax on sale must be leviable with reference to the something related to taxing event, the sale or purchase of goods which become subject of charge and not de hors it. One or other component of such taxing event, whether be price or quantity of goods may be considered measure of tax to which rate can be applied and can be collected from the person connected with such transaction and not any criterion de hors the taxing event.
6. Entry 54 of the Second List of the Seventh Schedule which provides subject on which State Legislature can make law reads "tax on sale or purchase of goods other than newspapers subject to provision of entry 92-A of List I".
7. The expression "tax on sale of goods" used in entry 54 of the Second List of the Seventh Schedule has been interpreted by the Supreme Court to mean tax on the sale of goods, as defined under the Sale of Goods Act, 1930 as modified/extended by Clause (29A) of Article 366 inserted vide Forty-sixth Amendment Act, 1942, The tax on sale of medicines under the Rajasthan Sales Tax Act, 1994 and notification issued thereunder is a single point tax on the sale within the State of Rajasthan. The first point 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 consumer when alone maximum retail price can be charged. Under the Act of 1976 and under the provisions of the Drugs Price Control Order, 1995 issued by the Central Government under Section 3 of the Essential Commodities Act, 1955, the maximum retail price is determined in the case of Scheduled Formulations only. But maximum retail price is required to be displayed on the label of container as well as package in respect of all the drugs whether scheduled or non-scheduled formulations. It has been urged that by and large the first point sale in State of Rajasthan takes place between C and F agents/consignee agents/depots on the one hand as sellers, registered dealers and the wholesalers and in case of inter-State transactions such first point sale takes place between distributors and wholesalers at the negotiated and contracted price agreed to between them respective buyers and sellers which obviously cannot exceed the printed retail price minus retailer's margin and wholesaler's margin.
8. With the aforesaid premise, it has further been contended that the mention of price on the package under the aforesaid provision is the maximum retail price 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 under the provisions of the Rajasthan Sales Tax Act, much lesser price than the maximum retail price is paid or payable on contractual basis. In this connection, it is also stated that under the Drugs Price Control Order the margin at which the medicines are to be sold to retailer has also 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 per cent margin in the case of scheduled drugs. Thus, by devising the aforesaid legal fiction for deeming an artificial sale price for levy of tax having no nexus to the taxable event transactions of sale of goods at a money consideration paid or payable as defined under the Sale of Goods Act, 1930 is beyond the legislative competence of the State Legislature and therefore, the provision is ultra vires.
9. Reliance has been placed on a large number of decisions commencing from Sales Tax Officer, Pillibhit v. Budh Prakash Jai Prakash , holding that the liability to tax on sale of goods arises only in respect of a completed sale as per the provisions of the Sale of Goods Act, 1930.
10. One of the essential part of a sale under the Act of 1930 is consideration for sale which means price "paid" or "payable" but not an amount which may be price at which a transaction may take place at a future sale and holding that the State Legislature cannot by enlarging the definition of sale bring within the tax net a transaction or any component which is not in accordance with "sale" within the meaning of Section 4 of the Sale of Goods Act, 1930.
11. Since by the impugned provision, the tax is made leviable not with reference to a price in money paid or payable by the buyer to the seller who are the contracting parties to completed sale of drugs which attracts the charge but with reference to a price determined fictionally with reference to amount that may be chargeable as a price for a transaction of sale that may take place in future, it does not fulfil the presence of all the constituent elements of a completed sale as per the Sale of Goods Act. It is beyond the competence of the State Legislature to tax the sale at maximum retail price which is neither a consideration paid nor payable for the completed sale.
12. The provisions have also been challenged on the ground of vagueness.
13. Defending the validity of the provision, it has been contended by the learned Advocate-General and learned Additional Advocate-General that what is to be 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 Sale of Goods Act, 1930. 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 the 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 less than the maximum retail price that may be charged ultimately from the consumer at the last point sale as provided for abatement of maximum retail price by reducing there from 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 transactions. The levy of tax with reference to maximum retail price cannot be said to be wanting in nexus with the taxing event. Therefore, the impugned provision and notifications cannot be said to be ultra vires any provision of the Constitution.
14. However, the respondents do not seriously dispute the proposition that but for taking maximum retail price as a basis to provide measure of tax, no fictional price be fixed as measure of tax on sale of goods.
(A) Sale as subject of tax on "sale or purchase of goods" under entry 54 of the State List:
15. Budh Prakash Jai Prakash [1954] 5 STC 193 (SC) : AIR 1954 SC 459, arose under the U.P. Sales Tax Act, 1948. The question has arisen about levy of tax by the assessing authority on the turnover relating to forward contract. The assessee has 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 has been enacted by the Provincial Legislature in terms of the legislative power conferred on the Provincial Legislature under the Government of India Act, 1935 under entry 48 in List II of the Seventh Schedule to the said Act. Under Section 2(h) of the U.P. Act, "sales" was defined to include forward contracts. The Supreme Court upheld that 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 Act, and the definition of "sale" in Section 2(h) of the Act 15 of 1948 must, to that extent, be declared "ultra vires".
16. It was further said:
... 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 authorises the imposition of a tax only when there is a completed sale involving transfer of title.
17. 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 the price of the goods, and the reason of the thing requires that such a levy should not be made, unless the stage has been reached when the seller can recover the price under the contract.
18. The aforesaid decision while making 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 Sale of Goods Act, 1930 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 tax sales which have not come into existence.
19. The next case which falls for consideration and relied on by the learned Counsel for the petitioners is State of Madras v. Gannon Dunkerley & Co. Madras Ltd. . The Constitution Bench of the Supreme Court considered in this case the construction of entry 48 in List II of the Seventh Schedule to the Act of 1935 tax on the sale of goods which is in pari materia with entry 54 in List II of the Seventh Schedule to the Constitution of India. The question had arisen in a case arising under the Madras General Sales Tax Act 1939 as amended by the 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.
20. After referring to the definition of expression "sale of goods" from the times of Roman Law and the Law in England the court culled out and approved the principle stated in Benzamin's work "sale".
"Hence it follows that to constitute a valid sale, there must be a concurrence of the following elements, viz., (1) Parties competent to contract; (2) mutual assent; (3) a thing, the absolute or general property in which is transferred from the seller to the buyer ; and (4) a price in money paid or promised.
21. On this premise, 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 Indian Sale of Goods Act, 1930 reached the following conclusions about price as essential element:
...that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods. Unless all these elements are present, there can be no sale.
22. The court reached the following conclusions approving to its earlier decision in Budh Prakash Jai Prakash :
...A power to enact a law with respect to tax on sale of goods under entry 48 must, to be intra vires, be one 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 conclusion, the court said:
...the expression 'sale of goods' in entry 48 is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement.
23. 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 Act of 1930. Tax on value of the material used in construction of building was held to be ultra vires.
24. The decision in Firm of Peare Lal Hari Singh v. State of Punjab also relates to imposition of tax on supply of materials used in building contracts and the court has followed its decision rendered in Gannon Dunkerley & Co. and held that the expression "sale of goods" in entry 48 in List II of the Seventh Schedule of the Government of India Act, 1935, has the same import which it bears in the Sale of Goods Act, 1930.
25. The principle was reiterated in Bhopal Sugar Industries Ltd., M.P. v. D.P. Dube, Sales Tax Officer, M.P. , where the question arose whether giving extended definition of "retail sale" in Section 2(1) of the Act, which sought to render consumption by the owner of motor spirit liable to tax under the Act by virtue of Section 3, is beyond the competence of the State Legislature and hence void. The court relying on its earlier decision in Gannon Dunkerley & Co. said:
... In a transaction of sale of goods which is liable to tax there must be concurrence of the four elements, viz., (1) Parties competent to contract;
(2) Mutual assent;
(3) A thing, the absolute or general property in which is transferred from the seller to the buyer ; and (4) A price in money paid or promised.
A transaction which does not conform to this traditional concept of sale cannot be regarded as one in respect of which the State Legislature is competent to enact an Act imposing liability for payment of tax.
26. The court quashed the assessment made on the aforesaid premise.
27. In K.L. Johar and Co. v. Deputy Commercial Tax Officer , the Supreme Court was called upon to consider the case under the Madras General Sales Tax Act, 1939 wherein the question arose whether levy of sales tax in respect of hire-purchase transactions was illegal and unconstitutional and Explanation I to Section 2(h) of the Act defining "sale" was beyond the competence of the State Legislature. The Explanation provided that a transfer of goods on the hire-purchase or other instalment system of payment shall, notwithstanding the fact that the seller retains the title in the goods as security for payment of the price, be deemed to be a sale. The appellant-dealer contended that this amounted to an extension of the meaning of the word "sale" beyond what it meant in the Indian Sale of Goods Act, 1930 and void.
28. The Supreme Court opined, so far as the terms of agreement of hire- purchase were concerned there are two sales, one by the dealer to the financier namely, the appellant in said case and the other by the financier to the person who wanted to purchase the vehicle. As the Act levied a multi-point sales tax at the relevant time it was open to the State to tax both the sales and the fact that the sale by the dealer to the appellant had been taxed will not affect the liability of the second sale by the financier to the person who wanted to purchase the vehicle. However, significant for present purposes, considering the validity of Explanation 1 noticed above, the court drew distinction between sale on hire-purchase agreement on the one hand and the sale in which the price is to be paid later by instalments on the other pointing out that, The essence of a sale is that the property is transferred from seller to the buyer for a price, whether paid at once or paid later in instalments. On the other hand, a hire-purchase agreement, as its very name implies, has two aspects. There is first an aspect of bailment of the goods subjected to the hire-purchase agreement, and there is next an element of sale which fructifies when the option to purchase, which is usually a term of hire-purchase agreements, is exercised by the intending purchaser.
29. With this distinction in mind, the Explanation to the extent it permitted levy of tax even before the option had been exercised to purchase the goods and the property was divested from seller to vest in the purchaser, was held to be ultra vires as the State Legislature was not competent to extend the meaning of word "sale" used in entry 54 of the Seventh Schedule to the Constitution which corresponds to entry 48 of the Government of India Act, 1935 and make something a sale which has not come into existence as per term "sale" defined in the Indian Sale of Goods Act, 1930.
30. For reaching this conclusion, the court relied on its earlier decision in Budh Prakash Jai Prakash's case [1954] 5 STC 193 (SC) : AIR 1954 SC 459 and Gannon Dunkerley & Co.'s case [1958] 9 STC 353 (SC) : AIR 1958 SC 560.
31. Having struck down the Explanation which made the liability to tax arising even before the sale could fructify, went on to hold that the hire-purchase agreement entails two transactions of sale ; one by seller to financier and other by financier to the ultimate buyer.
32. Another important question arose about the fixing of the price on which the tax could be levied in respect of subsequent sale. In the case before the Supreme Court a vehicle was sold by the seller to the financier for Rs. 5,000 and the financier had agreed to transfer the vehicle to the ultimate buyer on hire of Rs. 1,487 per annum. Under the agreement the price for transfer of vehicle agreed to be paid at the close of hire-purchase agreement was Re. 1. Financier had already paid the tax at the time when he purchased vehicle from the seller at Rs. 5,000. While the Revenue contended that entire hire money was to be treated as sale price, the appellant claimed that the sale price of the vehicle could be as agreed between the financier and buyer that is Rs. 1.
33. The Supreme Court held that both the extreme contentions cannot be accepted. After considering the impact of accepting either of the contentions, said:
...In order to arrive at the value at the time of the second sale to the hirer, the sales tax authorities should take into consideration the depreciation of the vehicle and such other matters as may be relevant in arriving at such price on which the sale can be said to have taken place when the option is exercised, but that price must always be less than the original price which was Rs. 5,000 in the example given above by us.
34. Referring to the decision in Darngavil Coal Company v. Francis [1913] 7 Tax Cas 1, and approving the ratio laid therein, the court held:
...Part of the amount is towards the hire and part towards the payment of price, and it would be fore the sales tax authorities to determine in an appropriate way the price of the vehicle on the date the hirer exercises his option and becomes the owner of the vehicle after fulfilling the terms of the agreement.... it would be for the sales tax authorities to decide as best they can the value of the vehicle on the date the option is exercised and the property passes to the hirer. There may be two ways of doing it. The sales tax authorities may split up the hire into two parts, namely, the amount paid as consideration for the use of the vehicle so long as it was the property of the owner, and the payment for the option on a future date to purchase the vehicle at a nominal price. If the first part is determined the rest would be towards the payment of price.
35. This case accepted two principles. Firstly, that hire-purchase agreement contains two sales and tax in case of later sale does not become payable until option to purchase is exercised by the hirer and a completed transaction comes into existence and secondly, price content of second sale must be determined by excluding there from hire content paid or payable by the hirer for use of thing before exercise of option when title passes to him under a competed sale. The tax can be levied with reference to that amount which can properly be said to be consideration for transferring title of property in goods to buyer. Anything extra there from was excluded. In appropriate cases, it may be for the taxing authority to determine the price at which a particular sale may be taxed, where it is not possible to determine the price at the time when the sale actually takes place. This principle is in consonance with Section 9 of the Sale of Goods Act, which provides for a contingency when price is not determined by an agreement, it may be found by court on some reasonable basis.
36. The next line of cases which have been brought to the notice of the court are regarding the supply of foods, snacks, beverages and other articles by the clubs to its members or their guests or by the restaurant or hotels to their customers.
37. In Joint Commercial Tax Officer v. Young Men's Indian Association , the question arose once again under the Madras General Sales Tax Act, 1959, in respect of levy of tax to be paid on supplies of food and beverages and other articles to the members or their guests by the club. No profit was made by the club in providing those amenities. Under the provisions of the Act, the supply or distribution of goods by a society including a co-operative society, club, firm or any association to its members, for cash, or for deferred payment, or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purpose of the Act.
38. The court held that if there is no transfer of property from one to another there is no sale which would be exigible to tax. If the club even though a distinct legal entity is only acting as an agent for its members in the matter of supply of various preparations to them no sale would be involved as the element of transfer would be completely absent. The High Court has held that the case of each club was analogous to that of an agent or mandatory investing his own monies for preparing things for consumption of the principal, and later recouping himself for the expenses incurred. The Supreme Court agreed with this conclusion by referring to earlier decided cases by the courts in India as well as by courts in England and concluded that as no transaction of sale was involved there could be no levy of tax under the provisions of the Act on the supply of refreshments and preparations by each one of the clubs to its members.
39. In State of Himachal Pradesh v. Associated Hotels of India Ltd. , the Supreme Court adopted the concept of the English Law that "there is no sale when food and beverages are supplied to guests residing in hotels". It was pointed out that supply of meals was essentially in the nature of service provided to them and could not be identified as a transaction of sale. The contention of the Revenue that such transaction can be split into two parts ; one of the service and other of sale on food stuffs was rejected.
40. Considering the provisions of the Punjab General Sales Tax Act, 1948 a Constitution Bench of the Supreme Court held that the transaction between a hotelier and a visitor to his hotel whereby the former receives the latter for lodging in his hotel is essentially a contract of service and where in the performance of the service and as part of the amenities incidental to that service, the hotelier serves meals at stated hours, the transaction is not sale.
41. Thus, reiterating that the essential elements of sale of goods, i.e., to transfer any goods for value received or receivable is absent in service of foodstuffs of hotel to its residents, the State legislation's power to tax was confined to the sales of goods in stricto sensu under the provisions of the Sale of Goods Act, 1930.
42. The principle was extended and reiterated in respect of supply of foodstuffs in restaurants. Northern India Caterers India Ltd. v. Lt. Governor of Delhi , was a case relating to restaurant located in a hotel where meals were also served to casual visitors. The court holding service of such meals was not taxable as a sale under the Bengal Finance Sales Tax Act, 1941 as applied to Union territory of Delhi. A review petition against the decision in Northern India Caterers India Ltd. v. Lt. Governor of Delhi was also rejected by the Supreme Court vide judgment reported in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi .
(B) Effect of regulatory statute on element of voluntary agreement
43. In the case of Vishnu Agencies (Pvt) Ltd. v. Commercial Tax Officer , a seven-Judge Bench of the Supreme Court considered the question whether compulsory sale under any statute is exigible to sales tax. The contention was raised that amongst the four essentials of sale as approved by the Supreme Court from Benjamin on Sale and that compulsory sale under statute lacks voluntar-iness or mutual assent required for making an event transaction of sale. The question arose in the context of commodities declared as essential commodities and governed by the various orders regulating the sale and supply of such commodities under the Essential Commodities Act, 1955 with a view to making the goods available to the consumer at a fair price. Such orders sometimes provide that a person in need of any essential commodity like cement, cotton, coal or iron and steel must apply to the prescribed authority for a permit for obtaining the commodity. Those wanting to engage in the business of supplying the commodity are also required to possess a dealer's licence. The permit holder can obtain the supply of goods only to the extent of the quantity specified under permit, from the named dealer only and at a controlled price. The dealer who is asked to supply the stated quantity of the commodities to particular permit holder has no option but to supply the stated quantity of goods at the controlled price. Adverting to the essential elements of sale of goods for the purpose of levy of tax, the court referring to settled principle that subject of tax is a contract of sale of goods, held that so long as mutual consent is not totally excluded in any dealing in law it is a contract.
44. The court approved the principle enunciated in Indian Steel & Wire Products Ltd. v. State of Madras and in Andhra Sugars Ltd. v. State of Andhra Pradesh .
45. In the former case, the court observed that though the controller fixed the base price of the steel products and determined the buyers, the parties were still free to decide the other terms of the bargain, as for example, the time and date of delivery and the time and mode of payment and therefore, it could not be said that there was no agreement between the parties to sell and buy the goods. It was held that though the area within which it was possible for the parties to bargain was greatly reduced on account of the Iron and Steel Control Order, it was not correct to contend that because law imposes restrictions on freedom of contract, there could be no contract at all. "So long as mutual assent is not completely excluded in any dealing, in law it is a contract."
46. In the latter case, the court observed that the cane grower in the factory zone was free to make or not to make an offer of sale of cane to the occupier of the factory. But if he made an offer, the occupier of the factory was bound to accept it but the consent of the occupier not being caused by coercion, undue influence, fraud, misrepresentation or mistake was "free consent" as defined in Section 14 of the Contract Act, even though he was obliged by law to enter into the agreement. "The compulsion of law is not coercion as defined in Section 15 of the Act" and "in the eye of the law, the agreement is freely made."
47. Hidayatulla, J., who delivered a dissenting opinion in New India Sugar Mills Ltd. v. Commissioner of Sales Tax, Bihar had observed that:
'though it was true that consent makes a contract of sale, such consent "may be expressed or implied" and it cannot be said that unless the offer and acceptance are there in an elementary form, there can be no taxable sale'. The matter was summed up pithily stating that so long as the parties trade under controls at fixed price and accept these as any other law of the realm because they must, the contract is at the fixed price both sides having or deemed to have agreed to such a price. Consent under the law of contract need not be expressed, it can be implied.
48. The above principle from dissenting judgment was approved in Vishnu Agencies Pvt Ltd. v. Commercial Tax Officer .
49. All the aforesaid cases considered the four elements referred to above in a sale essential to constitute a sale of goods which alone could be subjected to tax under entry 54 of List II by the State legislation, and where any one or other element was found lacking, but the State legislation tried to levy tax on transaction strictly not falling within the purview of sale defined under the Act of 1930 by giving extended meaning to sale of goods, the courts intervened to strike down such transgression. Ultimately, the Parliament stepped in by amending Article 366 of the Constitution and inserted Clause (29A) by giving extended meaning to the expression "tax on sale or purchase of goods" to include certain transactions which had been held to be not falling within the purview of sale in the decisions referred to above.
50. Clause (29A) of Article 366 included within definition of tax on sale or purchase of goods : (i) a tax on the transit otherwise than in the form of a contract of property in any goods for cash, deferred payment or other valuable consideration ; (ii) a tax on the transfer of property in goods whether as goods or in some other form involved in execution of works contract; (iii) a tax on delivery of goods by hire-purchase or any system of payment by instalment; (iv) a tax on the transaction of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable considerations ; (v) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash or deferred payment or other valuable consideration, and lastly (vi) a tax on the 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 is for cash or deferred payment or other valuable considerations. This clause was inserted in the Constitution by Forty-sixth Constitution Amendment Act, 1982 retrospectively.
51. Certain transactions which were held to be not falling within definition of sale of goods and were held to be outside the purview of entry 54 of State List, as per the different judgments referred to above were brought under tax net within the competence of State Legislature. However, still the basic constraints remain that the State/legislation does not have a power to levy tax on any transaction by extending the meaning of sale beyond the province/provisions of the Sale of Goods Act, 1930 except to the extent the provision has been made under Clause (29A) of Article 366.
(C) Concept of price in a taxable sale
52. Another group of decisions which were referred to by the learned Counsel for the parties related to issues where the question has arisen what can be included and what cannot be included in the sale price ordinarily, which can form part of turnover from transactions of sale of goods, and can be subject to tax.
53. In George Oakes (Private) Ltd. v. State of Madras , it was held that "the sales tax charged from the buyer becomes part of price paid by the buyer and it is immaterial that the sales tax is shown separately from the price and making of such provision is not ultra vires".
54. The principle was reiterated in George Oakes (Private) Ltd. and Addison & Co. (Pvt.) Ltd. v. State of Madras . It was stated in that case that "there is no reason why the whole amount paid to seller by the purchaser should not be treated consideration for sale".
55. In Government of Andhra Pradesh v. Guntur Tobaccos Ltd. , the assessee was carrying on the business of re-drying raw tobacco entrusted to it by its customers. The redried raw tobacco was returned to supplier wrapped in water proof package. It was contended that charges by the redrier be split into two, viz., the remuneration for job-work and sale of packing materials on which sales tax is leviable. The court rejected the contention and said:
In the absence of any evidence from which contract to sell 'packing material' for a price might be inferred, the use of 'packing materials' by the Company must be regarded as part of execution of contract for redrying and the fact that the tobacco delivered by the constituent was taken away with the 'packing material' will not justify an inference that there was an intention to sell the 'packing material'.
56. In Hindustan Sugar Mills Ltd. v. State of Rajasthan , the question arose about the price content of a sale of cement which was subject to Cement Control Order, 1967. The Control Order had devised that no dealer could sell cement at a price exceeding Rs. 214.65 per metric tonne "free on rail, destination railway station" plus the excise duty paid thereon. The assessee despatched cement to the purchasers, prepared invoices showing "free on rail destination railway station" price of the cement despatched, added to it the amount representing excise duty and packing charges and then deducted from that amount, the railway freight to be paid by the purchasers. The assessee did not charge in the invoices sales tax on the amount of railway freight, but in order to provide against a possible claim which might be made by the sales tax authorities, the assessee claimed by way of deposit an amount "towards contingent liability of sales tax on railway freight to be paid" by the purchasers. The question arose whether the amount receivable from the buyers for the purchases towards free on rail destination railway station price in the invoices forms the part of sale price so that it can be made taxable turnover in view of the Control Order. The court negatived the contention of the assessee that freight was payable by the purchaser and the delivery of goods and transfer of title in goods was complete as soon as the goods were despatched and delivered to the carrier. That was so because under the Control Order, the goods were to be delivered free on rail destination. Therefore, the amount of freight formed the part of sale price. The court held:
The only relevant question needs to be considered is as to what is the amount payable by the purchaser to the dealer as consideration for the sale . It is not intended to apply to a case where the cost of freight is part of the price but the dealer chooses to split up the price and claim the amount of freight as a separate item in the invoice.
57. In Central Wines v. Special Commercial Tax Officer [1987] 65 STC 48 57 (SC), the same principle was applied by holding that sales tax charged to purchaser in bill but shown separately is part of the "turnover" within the meaning of the definition of "turnover" in Section 2(s) of the A.P. General Sales Tax Act, 1957. The court said:
The amount of money which goes from the pocket of the purchaser to the pocket of the dealer as a condition or consideration for the passing of the property in the goods is thus the sale price and not the tax.
58.In coming to this conclusion, the court followed its earlier decision in 58 George bakes Private Ltd.s case .
59. In Mc Dowell & Company Limited v. Commercial Tax Officer , the question arose about computation of taxable turnover of liquor manufacturer. The appellant-assessee company was carrying on the business of sale of Indian liquors in their outlets established in the State of U.P. The sale of liquor from its dealer was arranged by making condition precedent for the wholesale buyers to pay the excise duty directly to the Excise Department or to the State exchequer for obtaining distillery passes for release of liquor and on presentation of the same the bills of sales or invoices were used to be prepared by the distillery showing the price of liquor but excluding excise duty. The assessee contended that when the excise duty does not come into the common till of the assessee and it does not become part of the running capital, it does not constitute turnover. This contention was not accepted by the Supreme Court finding that the incidence of excise duty is directly relatable to manufacture. Payment of excise duty is the primary and exclusive obligation of the manufacturer and is a condition precedent to the removal of the liquor from the distillery. So when payment is made under a contract or arrangement by any other person, or when under a prior agreement, the legal liability of the manufacturer-dealer for payment of excise duty is satisfied by the purchaser by direct payment to the Excise Authorities or to the State exchequer, it would amount to meeting of the obligation of the manufacturer and nothing more. According to the normal commercial practice, excise duty should have been reflected in the bill either as merged in price or being shown separately. In the hands of the buyer the cost of liquor is what is charged by the appellant-manufacturer under its bill together with excise duty which the buyer has directly paid on seller's account. Excise duty though paid by the purchaser to meet the liability of the appellant, is thus a part of the consideration for the sale and is includible in the turnover of the appellant.
60. Lastly, reference was made in this connection to Neyveli Lignite Corporation Ltd. v. Commercial Tax Officer, Cuddalore . This was a case in which the Revenue has sought to include in taxable turnover of the assessee, the subsidy paid by the State to the manufacturer of fertiliser under an administrative scheme by the Government of India to ensure that no hardship is caused to the manufacturer and sufficient supplies of fertilisers were available. The question arose before the court whether retention price received by the appellant in view of subsidy on fertiliser was part of sale price and has to be included in turnover. It found on considering the scheme of the subsidy and other factors that the subsidy cannot be treated as a part of the sale price because the subsidy and the price were independent of each other. The court enunciated the principle as under:
It is that sale consideration, whether in cash or otherwise, which is receivable in respect of sales made by the dealer which can possibly form part of the turnover of a dealer. It is that sum which can be legitimately regarded as forming part of the aggregate amount for which the goods have been bought or sold. The sum has to be paid either by the purchaser or on his behalf by some other person. Any sum received de hors the contract of sale from another entity, whether it be the Government or anyone else, cannot be regarded as being an amount which would form part of the sale price on which tax is payable.
61. In coming to this conclusion, the court has distinguished its earlier decision in E. I. D. Parry (I) Ltd. v. Assistant Commissioner of Commercial Taxes [2000] 117 STC 457 (SC).
62. In all these cases whole amounts chargeable, whether directly as a part of sale price or by splitting the sale price into different heads, remained the amount payable by the purchaser to the seller under an agreement to sell, were considered to be part of the sale price and where the amount paid to seller was beyond the scope of agreement to sell it was held to be not part of the price component of "sale of goods" and not taxable.
63. However, none of the cases laid down that the tax on sale of goods under entry No. 54 can be levied on something not chargeable from purchaser by the seller, parties to contract, by considering it to be a price, if price is taken to be measure of tax to which rate of tax is to be applied.
64. From the aforesaid discussion, the principle which can be well-settled is ; firstly that the term "sale of goods" in entry 54, List II has the same meaning as sale defined under the Sale of Goods Act, 1930 and that the State Legislature cannot enlarge the meaning of sale so as to tax a transaction which is not sale within the meaning of Act of 1930. Clause (29A) in Article 366 gave extended meaning to "tax on sale or purchase of goods" to include certain transactions within its ambit which had otherwise been held to be not falling within precincts of sale of goods as discussed above. However, beyond such extended meaning, the principle still remains the same that the term sale of goods in entry 54, List II has the same meaning as under the Sale of Goods Act, 1930 and it envisages within it four essential elements namely (i) parties competent to contract, (ii) mutual assent, (iii) a thing, absolute or general property in which is transferred from seller to buyer, (iv) price in money paid or promised.
65. Thus "price" paid or promised to be paid, whether under agreement express or implied when price is regulated under price control orders is an essential component of taxing event for imposing tax on the sale of goods. Whether the price is fixed under price control order or the parties are forced to transact at the controlled price of the commodity, it does not lose its character of a transaction by agreement so as to go beyond the purview of sale, so long as some element of mutuality is there.
66. In this connection, the counsel for the State have placed reliance on certain decisions where the price fixed under certain statutes for transacting the particular goods has been held to be lawful basis for purpose of levy of tax.
67. The first case referred to us is State of Orissa v. Utkal Distributors (P.) Ltd. . The said case had arisen under the Orissa Sales Tax Act, 1947. In the case before the Supreme Court the assessee was a controlled stock-holder of iron and steel under the Iron and Steel Control Order, 1956 and as such it was not entitled to charge a price higher than that fixed by the Government of India. It was contended that the Central sales tax realised by the assessee from its customers was not part of the price charged by it, and therefore, it did not fall within the definitions of "sale price" and "taxable turnover".
68. Reliance was placed on Iron and Steel Control Order, 1956 read with the notification that higher price than fixed by the Government of India cannot be charged. The court opined that:
the condition and the fact that the controlled stock-holder was not entitled to charge a price higher than that fixed by the Government of India, that the valuable consideration for the sale was the price fixed by the Government of India which did not include the Central sales tax which the customer had to pay to the assessee as a controlled stock-holder. The court further held the fact that the price which the stock-holder was entitled to charge was statutorily fixed and the stock-holder was not entitled to and did not charge more are sufficient to enable us to come to the conclusion that the Central sales tax paid under the provisions of the Iron and Steel Control Notification did not form part of the price paid by the customer to the assessee.
69. As a result, the rate of tax came to be related to what could properly constitute price component of sale in view of the provisions of the Price Control Order. This case is more akin to K. L Johar's case [1965] 16 STC 213 (SC), in which in respect of the second sale under a hire-purchase agreement, the court confined the levy of tax to that part of amount which could properly be related as consideration for transfer of property in goods by excluding that part of amount which properly be said to be charged by the financier from the buyer as hire for use of such goods before property in them actually passes to the buyer.
70. This case is an authority about what can be or cannot be considered as part of price component of sale. But it does not lay down that rate of tax can be applied to any such amount as measure which is not the component of taxable sale as price.
71. The next decision relied on by the learned Additional Advocate-General is Indian Steel & Wire Products Ltd. v. State of Madras . As discussed above while considering the decision in Vishnu Agencies (Pvt) Ltd. v. Commercial Tax Officer [1978] 42 STC 31 (SC) : AIR 1978 SC 449, in which this judgment has been approved, the fact that the price has been fixed under a Control Order and dealer was under an obligation to sell the goods at controlled price, does not take away from it, the character of an agreement voluntarily arrived at for transfer of property in goods and the transaction is subject to levy of tax on sale of goods under the Madras General Sales Tax Act.
72. However, this case also does not concern the question where the turnover which is sought to be taxed is not the aggregate of the sale price actually received or receivable by the dealer under the Control Order but where the tax is sought to be levied on a price which may be charged from the buyer by a subsequent seller.
73. The next decision which is relied on by the Revenue in this connection is Food Corporation of India v. State of Kerala . It was also a case of compulsory or statutory sale, the purchase of foodgrains by the Food Corporation of India pursuant to levy orders issued under Section 3 of the Essential Commodities Act. However, this judgment, in our opinion, is of little value for deciding the controversy that has been raised before us.
74. The question of compulsory sale in various provisions of the statute by mutual agreement on number of issues other than price is not totally ruled out, has been set at rest by the Supreme Court in its Constitutional Bench decision in the case of Vishnu Agencies (Pvt) Ltd. .
75. Lastly, reliance was placed on Collector of Customs, Bombay v. Pecific Exports . It relates to the valuation of goods for the purpose of levy of excise duty under the Central Excise Act, 1944 where ad valorem duty is leviable. Section 4(1A) of the Act of 1944 ordained to levy ad valorem duty of excise at MRP printed on the package which was considered to be valuation of goods manufactured on which excise duty became leviable. In the case before the Supreme Court, the commodity in question was aluminium rods, price of which was fixed vide Aluminium Control Order. While the Central Excise Act provided that where the price is fixed under any statutory provision that has to be taken as the price for the purpose of valuing the goods for the purpose of levy of excise duty. The Excise Authorities have sought to levy the duty on higher amount by adding to maximum retail price the extra amount charged by the assessee. The assessee has urged that excess amount was charged by him for the job-work done by the assessee. He has contended that when statute ordained what shall be value of goods for the purpose of levy of duty, the amount actually charged by the assessee cannot be relevant. The court agreed with the contention of the assessee that by virtue of the proviso to Section 4A, a legal fiction has been created that the price fixed under the Control Order has to be taken as normal value of goods.
76. It is urged that by parity of reason, in the instant case, the price fixed by the notification dated 18th October, 1997 can be taken as the normal price of the sale by wholeseller to retailers in the case of drugs and medicines.
77. Obviously, the element of determination of price element of a sale transaction is absent in the case of levy of excise duty on goods manufactured by any manufacturer. The levy of excise duty may be on the value of goods or may be fixed according to quantity of goods. In cases where the levy is ad valorem, it is within the domain of the legislative authority to provide for the guidelines how the value of the goods which is conceptual value subject to duty is to be determined. Since for the purpose of determining the value of goods manufactured, for providing base for levy of excise duty was statutorily provided, there was no room for picking other criterion for determining the value of goods for the purpose of levy of excise duty.
78. The nature of duty of excise is entirely different from nature of tax on sale of goods.
79. At this stage, it is apposite to notice distinction between levy of tax envisaged under entry 84 of Union List and entry 54 of State List. Entry 84 of Union List speaks about subject "Duties of excise on tobacco and other goods manufactured or produced in India". On the other hand, entry 54 speaks of tax on purchase or sale of goods. Subject of duties of excise is goods which are manufactured in India, but not the transaction of goods. But subject of tax under entry 54 of State List is "sale" and not the goods as such. Expression goods signify that it relates to sale of movable property and not of immovables, which expression "sale" simplicitor would have included. For the purpose of entry 54 "sale" has been held to have the same meaning as it has under the Sale of Goods Act. That makes conceptual distinction between the nexus that a measure for levying duty of excise can have with subject of tax and the nexus which a measure of levy of tax on sale of goods has to have with its subject sale. Duty of excise is levied on goods manufactured and value of goods, which provide means of such duty is a conceptual value, which can be devised by Legislature by different methodology.
80. In the case of sale, price is essence for which goods are transacted, concept of value of goods does not enter into consideration.
81. The criterion relevant for levy of duty of excise cannot ipso facto apply to an impost subject of which is a completed sale of goods property in which passes for a price paid or payable by the buyer to the seller who are parties to transaction whether by overt agreement or implied agreement under regulatory provision of statute and price is an essential component of the subject of tax. For that purpose, the decision is not of much assistance for deciding the controversy before us.
82. The other decisions which have been referred to by the learned Counsel for the Revenue are (i) A. G. Varadarajulu v. State of Tamil Nadu . The decision relates dealing with Stridhan. The case has hardly any relevance to the controversy raised in this case. So also the decision rendered by the Supreme Court in (ii) H. H. Maharajadhiraj Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India , which concerns the abolition of privy purses, does not offer any assistance in deciding the controversy raised before us.
83. In the like way, the learned Counsel for the Revenue has referred to an unreported judgment by this Court rendered by a learned single Judge in Purohit Swaroop Narain v. State of Rajasthan S. B. C. Writ Petition No. 40 of 1968, decided on September 24, 1970. It was a case arising under the Rajasthan Land Reforms and Resumption of Jagir Act, 1952 seeking a mandamus for implementing and executing an order passed by the Khudkast Commissioner in favour of the petitioner. We see no relevance of the said judgment throwing any light to the controversy raised in this case.
Machinery provision to have nexus with taxing event
84. It is a settled principle that the Legislature has more room for flexibility in providing machinery for computation and recovery of tax validly imposed. Equally well-settled is that such machinery provision must have a nexus with subject of tax.
85. In State of Bombay v. R.M.D. Chamarbaugwala AIR 1957 SC 699, the question was considered by the Supreme Court while examining the validity of tax imposed on prize and betting under the Bombay Lotteries and Prize Competitions Control and Tax Act, 1948. The validity has been challenged on multiple grounds. Inter alia it was contended since tax was to be imposed on total collections from State of Bombay by the promoters of such prizes and lotteries, hence it was a tax on trade or business under entry 60 of the Seventh Schedule and not a tax on betting and gambling under entry 62.
86. While upholding the validity of the Act, by holding that it is a legislation on topic falling under entry 62, viz., betting and gambling, the tax imposed by such statute would be tax on betting and gambling under entry 62, repelled the argument that the levy is a tax on trade because it provides collection of tax from promoters of such prizes or lotteries on total amount of entry fee received by them. The court said:
To collect the tax from the promoters is not to tax the promoters but is a convenient way of imposing the tax on betting and gambling and indirectly taxing the gamblers themselves.
87. In the context of the excise duty, the matter was considered by the Supreme Court in R.C. Jall Parsi v. Union of India . The question was whether the excise duty which is leviable on the manufacture of goods could be collected from the consignee of the goods. The court said:
Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, its ultimate incident will always be on the consumer. Therefore, subject always to the legislative competence of the taxing authority, the said tax can be levied at convenient stage so long as the character of the impost, that is, it is a duty on the manufacture or production, is not lost. The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience. Whether in a particular case, the tax ceases to be in essence an excise duty, and the rational connection between the duty and the person on whom it is imposed ceased to exist, is to be decided on a fair construction of the provisions of a particular Act.
88. The court found that the machinery providing for collection of duty from the consignee, had such nexus with subject of tax, viz., goods manufactured in India and therefore the duty collected from the consignee does not lose its character as excise duty payable on manufacture of goods.
89. It may be noticed that it was also a case in which the taxing event was one which did not change with the consignment of goods and the levy was directly connected with the taxing event namely, the manufacture of the goods by the manufacturer or producer though it was ultimately collected from the consignee to whom ultimately the goods were delivered at the destination. The measure of tax to which rate of tax was to be applied remained the value of the goods manufactured and was not divorced from the "taxing subject" namely, the goods manufactured.
90. Again the matter came before the Supreme Court in Khyerbai Tea Co. Ltd. v. State of Assam . It concerned the levy of tax relating to entry 56 of List II namely tax on goods and passenger carried by road or inland waterways. In exercise of its powers, the State of Assam has enacted the Assam Taxation (On Goods Carried by Road or on Inland Waterways) Act, 1961. The liability to pay tax on carriage of tea was placed on producer of the tea. In some cases, the tax was recovered even before it was carried. The provision was challenged being ultra vires to the legislative competence of the State under entry 56 of List II on the ground that the tax is imposed before the occurrence of the event namely actual carriage of the goods by waterways. The court said that Section 3(1) of the Assam Act in terms expressly makes the carriage of goods the taxable event, and Section 3(2) makes the producer liable to pay the tax only on goods carried. If the goods produced in the tea garden are not carried, there is no occasion to pay the tax. That being so, the fact that the Legislature has adopted the machinery of making the purchaser responsible for the payment of the tax and liable for it in that sense cannot introduce any element of legislative incompetence which would vitiate the statute.
91. However, the court observed that when the Legislature constructs a machinery for the recovery of the taxes which is within its competence to impose, the said machinery should have some rational or intelligent connection with the tax. In the absence of rational nexus between the purchaser and the tax on goods carried, it may be open to a citizen to contend that the tax is not one justified by entry 56 and reiterated the principle set out in the case of R.C. Jall Parsi AIR 1962 SC 1281 that the method of collection does not affect the essence of the duty but only relates to the machinery of collection for administrative convenience. It reaffirmed that machinery provision too must retain nexus to taxing event, viz., "goods carried".
92. The decision of the Supreme Court in Rai Ramkrishna v. State of Bihar was somewhat in the same line. It also concerned the levy of tax on passenger or goods carried by road or Inland waterways. The court said:
The expression 'carried by road or on inland waterways' is an adjectival clause qualifying goods and passengers, that is to say, it is goods and passengers of the said description that have to be taxed under this entry. Nevertheless, it is obvious that the goods as such cannot pay taxes, and so, taxes levied on goods have to be recovered from some persons, and these persons must have an intimate or direct connection or nexus with the goods before they can be called upon to pay the taxes in respect of the carried goods.
93. All these cases in this connection bring out two principles very clearly. Firstly that power to tax on a particular subject must emanate from the provisions of the Constitution. Secondly, the machinery provision for levy and collection of tax must be integrally connected and having nexus with the subject of tax. Once the machinery provisions for levy and collection loses nexus with the subject of tax, it may not be permissible for the Legislature to enact such a provision.
Nexus between taxing event and measure of tax:
94. Having examined the meaning of expression "sale or purchase of goods" in entry 54 of List II of the Seventh Schedule and the concept of price component of sale, the next question arises about the nature of imposition of tax on sale of goods.
95. In examining this issue, first principle that is to be kept in view is distinction between authorisation of charge and machinery provision which made the implementation of charge effective. In the oft-quoted words of the Lord Dunedin in Whitney v. Inland Revenue Commissioner [1926] AC 37:
Now there are three stages for imposition of a tax. There is a declaration of liability, that is part of statute which determines what persons in respect of what properties are liable. Next, there is the assessment. Liability does not depend on assessment, that, ex hypothesi has already been fixed. But assessment particularises the exact sum which a person is liable to pay. Lastly comes the method of recovery if the person taxed does not voluntarily pay.
96. That is the proposition which has been quoted with approval by Federal Court in Chatturam v. Commissioner of Income-tax [1947] 15 ITR 302 and time and again by the apex Court. Reference may be made to Chatturam Horliram v. Commissioner of Income-tax and Harshad Shantilal Mehta v. Custodian .
97. The first stage contains the law imposing charge that brings levy into existence and on coming into force of a taxing statute it exists at all times. The second stage concerns quantification or computation of sum which becomes determined ex-hypothesi on occurrence of taxing event and the third stage concerns the payment recovery and collection of tax. It may be noticed that Article 265 not only requires that charge must be authorized by law but it also says collection too must be authorised by law.
98. Apparently first stage concerns the substantive provision of charge which brings the tax into existence. Provision relating to second and third stage are machinery provisions relating to computation and collection of tax.
99. This also brings to fore distinction in construing charging provision of a taxing statute on the one hand and machinery provision relating to computation and collection of tax that stands determined ex hypothesi on occurrence of taxing event. The decided cases in this connection are to be viewed in that light.
100. While essentials of charging provisions are to identify the subject, viz., person, property or transaction to be taxed, person who to be made liable, rate at which tax is to be levied, which inheres in it the measure to which rate is to be applied so that liability can stand determined ex-hypothesi on occurrence of taxing event without any hiatus. Computation and collection may take place later on. Charge having been clearly authorised, the machinery for computation and modes of recovery can be provided by Legislature in its discretion at convenient stage and place. However, charging provision must strictly conform to the subject on which legislation is authorised by the Constitution to impose tax.
101. The Federal Court in re The Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938, [1938] 1 STC 1 : AIR 1939 FC 1, found it to be quite complex to arrive at the true nature of "tax on sale of goods" not only in distinguishing it from a duty of excise but also from the "turnover tax" or "sales tax". In delineating the distinction, Sulaiman J. in his opinion said that tax on sale of goods necessarily must be a tax imposed at the time of sale of goods.
102. In Province of Madras v. Boddu Paidanna & Sons [1942] 1 STC 104 (FC) : AIR 1942 FC 33, while considering the difference between sales tax and the excise duty, considering the nature of question of excise duty, the court said:
...There is in theory nothing to prevent the Central Legislature from imposing a duty of excise on a commodity as soon as it comes into existence, no matter what happens to it afterwards, whether it be sold, consumed, destroyed or given away. A taxing authority will not ordinarily impose such a duty, because it is much more convenient administratively to collect the duty as is in the case of most of the Indian Excise Acts when the commodity leaves the factory for the first time, and also because the duty is intended to be an indirect duty which the manufacturer or producer is to pass on to the ultimate consumer, which he could not do if the commodity had, for example, been destroyed in the factory itself. It is the fact of manufacture which attracts the duty, even though it may be collected later ; and we may draw attention to the Sugar Excise Act in which it is specially provided that the duty is payable not only in respect of sugar which is issued from the factory but also in respect of sugar which is consumed within the factory.
103. While considering the issue whether excise duty and the sales tax are the taxes overlapping and two taxes cannot be levied on the manufacture of the goods, it opined that the two taxes are different. The Federal Court said : "The two taxes, the one levied upon manufacturer in respect of his goods, the other upon a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separate and distrinct impose. If in fact, they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose the duty at the moment when the excisable article leaves the factory or workshop for the first time upon the occasion of its sale. But that method of collecting the tax is an accident of administration : it is not of the essence of the duty of excise which is attracted by the manufacture itself"
104. Applying the principle, it can be said that essence of tax on sale of goods is the sale itself.
105. The principle found approval of Privy Council in Governor-General in Council v. Province of Madras [1945] 1 STC 135 : AIR 1945 PC 98.
106. The question again came up for consideration before the Supreme Court in Sri Venkateswara Rice, Ginning and Groundnut Oil Mill Contractors Co. v. State of Andhra Pradesh , in which the matter arose under the Andhra Pradesh General Sales Tax Act, 1956. The court emphasised that charge comes into existence as soon as taxing event takes place. That is not postponed later. It was said in relation to levy of purchase tax:
...Hence the turnover relating to the purchases in question became charged with the liability to pay tax as soon as those purchases were made by the assessee-millers. This means that as soon as a first miller purchases groundnut the turnover relating to that purchase, the question of exemption apart, becomes liable to tax.
107. A five-Judge Bench of the Supreme Court in Ganga Sugar Corporation Ltd. v. State of Uttar Pradesh , has considered the aspect in some detail. The question has arisen in a group of appeals arising from a common demand for tax by the State of Uttar Pradesh as to the basis of levy once a transaction is held to be a transaction of sale. The court said, Tax on sale or purchase must be on the occurrence of a taxing event of sale transaction.
108. The apex Court in Govind Saran Ganga Saran v. Commissioner of Sales Tax on analysing Article 265, has said that:
The components which enter into the concept of a tax are well-known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability.
109. 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, the 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 identical.
110. Union of India v. Bombay Tyre International Ltd. , is a landmark decision in illuminating the trinity of expression the subject of tax, the measure of tax and nexus between the two. The decision arose in the context of Central Excises and Salt Act. The controversy was what should include in the measure of computation of liability and what fell outside the scope of measure to be excluded from consideration. The court referred to a large number of decisions of different courts, including some of the decisions we have referred to above. It approved the principle succinctly stated in Seervai's Constitutional Law:
Another principle for reconciling apparently conflicting tax entries follows from the fact that a tax has two elements : the person, thing 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.
111. The court also approved that the measure of tax though not always essential but often a relevant consideration to judge the nature of levy. The court quoted with approval following passage from R.R. Engineering Co. v. Zila Parishad, Bareilly AIR 1980 SC 1088:
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.
112. The court while commended 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. The court said : "Any standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of the levy."
113. With these premise the court found that while nature of an excise 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.
114. Identifying the first sale by manufacturer as stage and point when the levy is to be collected was found to have a nexus with levy of excise duty. Price and sale are related terms and have a definite connotation. The value of excisable article is a conceptual term, which concept can be visualised by the Legislature with reference to price charged by the manufacturer at first sale in terms of Section 4. Thus, measure of excise duty was not restricted to manufacturing cost plus manufacturing profit Wholesale cash price at which the article is sold or in the absence of such statute at a price at which it is sold or capable of being sold by the manufacturer at the time of removing from factory site.
115. Thus, the court found that measure of levy is "value of excisable goods" which had direct nexus with subject of tax. Value unlike price is a conceptual value and the Legislature has unfolded its concept of value by relating it to the price at which excisable goods are sold at factory gate. Price and sale are definite terms having a definite connotation and are not a conceptual values.
116. However, the court empathically denied contention of revenue to include post removal expenses in the measure of excise duty. It said:
Accordingly, we hold that pursuant to the old Section 4(a) the value of an excisable article for the purpose of the excise levy should be taken to be the price at which the excisable article is sold by the assessee to a buyer at arm's length in the course of wholesale trade at the time and place of removal.....
Where the excisable article or an article of the like kind and quality is not sold in wholesale trade at the place of removal, that is, at the factory gate, but is sold in the wholesale trade at a place outside the factory gate, the value should be determined as the price at which the excisable article is sold in the wholesale trade at such place, after deducting there from the cost of transportation of the excisable article from the factory gate to such place.....
117. In coming to this conclusion, the court referred to the case of Atic Industries Ltd. v. H.H. Dave, Assistant Collector of Central Excise and found the principle to be not in derogation of the principle enunciated in the case at hand. Any element which augmented the price rise leaving factory gate could not be the basis of excise duty, as it will be removed from the character of excise duty, is the clear ratio emerging from Bombay Tyre's case AIR 1984 SC 420.
118. This principle was further succinctly stated by the apex Court in a very recent decision in Commissioner of Central Excise v. Chhata Sugar Co. Ltd. . Considering the provisions of the Central Excise Act, 1944, the court said:
Section 3 of the Central Excise Act, 1944 is a charging section, which creates the liability to pay the excise duty on the goods produced or manufactured in India and the said Sub-section clearly indicates the nature and character of the duty, namely, that it is a tax on production and manufacture of goods, while Section 4 is in the nature of machinery provision and, therefore, anything said therein must be read so as to carry out the basic concept of excise duty.
119. It was a case in which Revenue sought to include in assessable value of excisable goods, administrative charges collected on sale of molasses under the U.P. Sheera Niyantaran Adhiniyam, 1964. Rejecting the contention of Revenue, the court said that administrative charges in question were distinct, separate and in addition to price of molasses which price is statutory price fixed under the U.P. Act and is not relatable to taxing event identified in charging section.
120. In this case also, we are concerned with somewhat like situation relating to charge of levy on sale under Price Control Order.
121. It is discernible that in cases where the taxing event is one, e.g. in the case of excise duty the collection of tax remains a tax on manufacture of goods and can be collected from a person who has a nexus with the goods which are subject of tax. However, in the matter of levy of excise duty, the measure of tax has to be connected with the subject of tax, viz., the goods manufactured. The measure of tax must have nexus with the goods so manufactured in some way, in value. So long as the measure is related to the goods to be taxed whether in value or weight, the levy does not lose its character as a tax on manufacture of goods, the taxable events occur on goods coming into existence as a result of manufacturing event, and unless such goods are used as input in another produce, it does not result in a second taxing event. The second taxing event may arise only in case there is a manufacture of new article in which the earlier manufactured article may be used as raw material. Therefore, at any stage tax is collected as is on the event of manufacture integrally connected with the taxing event and not divorced from it.
122. Similarly, in the case of providing machinery for making the levy of tax on passenger or goods carried through road or inland waterways is a single taxing event and collecting machinery should have relative nexus with it. For levying tax on one taxing event, it cannot be connected with another taxing event.
123. The position of tax on sale of goods may be examined in this light. 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 becomes 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.
124. So far as persons connected with sale of goods is concerned they are buyers and purchasers, common parties to sale. The person who can be identified for collecting the tax may be either of them. The tax may be levied on either the seller or the purchaser. Measure of tax may be related to goods. The other component of sale is the price of goods sold. Either of can provide measure of tax. But measure vis-a-vis goods must be of goods which are subject to taxable transaction and so also if price of goods is to be measure to which rate is applied, it must be constituent of such sale which becomes taxable, or relatable to compliment of such sale.
125. Unlike excise duty, where levy is on goods manufactured, in the case of tax on sale of goods, the price cannot be considered as a conceptual idea, which can be defined independently. Price and sale are not conceptual ideas but carry definite legal connotation. Price as defined in Sale of Goods Act is essential part of a completed sale of goods which become subject of tax. As the principle is well-settled that tax cannot be levied on any transaction which is not sale in accordance with Sale of Goods Act by creating a legal fiction, it is also not permissible to divorce price as a measure of tax on sale by creating a legal fiction.
126. The question of point of collection of tax and measure of tax is not the samething.
127. If the tax is to be collected from the seller, it will be tax on the subject sale and the seller who has nexus with such taxing event is the person who is made liable. If it is to be collected from buyer, it is termed as purchase tax in the hands of buyer and the taxing event is the "purchase of goods". The purchaser has a link with goods purchased by him and also with price paid or payable by him to the seller. But he cannot be subjected to purchase tax with reference to price at which he will sell the goods subsequently. That may be subject of another taxing event of sale, if permissible under law.
Measure of tax on sale of goods generally
128. In Andhra Sugars Ltd. v. State of Andhra Pradesh , the case concerned the challenge to levy of sales tax under the 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 the Supreme 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 the Supreme 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 amounts of purchase prices. But the tax need not necessarily be levied on a dealer or 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.
129. 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 content of taxing event was not the proposition laid.
130. It was observed in Ganga Sugar Corporation Ltd.'s case :
...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 frequently 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.
131. 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.
132. 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.
133. Somewhat in like circumstances, the court had occasion to consider the ambit and scope of legislative power of the State Legislature while imposing tax on sale of goods in Hotel Balaji v. State of Andhra Pradesh [1993] 88 STC 98 (SC) : AIR 1993 SC 1048, wherein the 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 thinks appropriate.
134. In this connection, it is relevant for the present purposes 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 of 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.
Consideration of present case in the light of above principles:
135. Keeping in view the aforesaid principle, the final issue that begs an answer is whether tax on sales by wholesalers to retailers with reference to price that may be chargeable under the law on subsequent sale by retailer from end consumer retains the basic character of "tax on sale or purchase of goods" which falls within the province of permissible tax under entry 54 of List II of the Seventh Schedule.
136. In Ganga Sugar Corporation Ltd.'s case [1980] 45 STC 36 (SC); [1980] 1 SCC 223, the court emphasised : 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.
137. 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.
138. In the case of Hotel Balaji v. State of Andhra Pradesh [1993] 88 STC 98 (SC) : AIR 1993 SC 1048, 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 the Supreme 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 purchase tax. In holding that levy was essentially a tax on purchase of goods within the State, one of the factors which weighed with the Supreme 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 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.
139. The position would have been different had the tax on taxable transaction of purchase would 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.
140. 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 than the price component of taxing event, whether agreed by mutual consent or as regulated by statutes.
141. These cases give a clear picture that entry 54 of List II of the 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.
142. In the present case, there is no dispute about the fact that the subject of tax is a charge which arises on completion of a transaction of sale by the manufacturer or distributor or wholesaler to the retailer. It has all the ingredients of a sale within the meaning of the Sale of Goods Act 1930 inasmuch as the sale of the drugs or medicines by the wholesaler to retailers is as a result of contract entered into by the parties by mutual option in which property in drug is transferred from the seller wholesaler in the present case to buyer retailer in the present case for a consideration which is agreed to between the parties subject to the limits prescribed by the Control Order. However, mere identification of subject of tax is not enough to complete the charge. It needs to necessarily accompany with rate of tax to be applied to a measure having nexus to the subject of tax so that liability stands determined ex hypothesi on occurrence of taxing event.
143. The question, therefore, which needs to be considered at this stage 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.
144. It may be noticed that in any of the cases to which reference has been made, the question really did not fall for consideration whether there can be any other basis than the actual sale price or price fixed for such sale by any statute or actual weight of the goods sold for measuring the tax on the transaction of sale of goods in respect of any particular commodity or commodities. Nor it fell for consideration that if the total turnover is considered to be measure to which rate of tax is to be applied for determining the tax ex hyphothesi when the taxing event takes place the turnover could be something other than aggregate of such sums which property can be included in price as discussed above. In other words whether an artificial standard of measure to fix the taxable turnover to which rate can be applied, can be adopted ?
145. The principal contention about the invalidating of the basis or the measure of tax envisaged under Section 4A of the Rajasthan Sales Tax Act, 1994 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 exigible to tax at all. The MRP which a wholesaler can charge in respect of scheduled formulations too is fixed by DPCO. In respect of scheduled formulations wholesaler is required to leave at least 16 per cent margin in the MRP for the retailers and he is entitled to retain not more than eight per cent 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. The contention has some force.
146. The foregoing discussion leads to conclude that:
(i) Tax on "sale or purchase of goods" as subject of tax within the ambit of entry 54 of State List has been construed to mean completed sale of goods as per the Sale of Goods Act, 1930 which has four essential ingredients, viz., (1) Eligibility of contract;
(2) Mutual consent;
(3) Agreement to transfer in general property in any specified goods from seller to buyer ; and (4) For a cash consideration or pricethat is paid or payable.
(ii) Tax is to be levied as soon as such completed transactions, which have all the above ingredients, come into existence. It cannot be levied on a future transaction.
(iii) Price or consideration is an essential ingredients of any taxable transaction of sale of goods. Vis-a-vis tax on sale of goods, what constitutes price components of sale has received attention of courts and principle is settled that price components of sale transaction is that total amount which is paid or becomes payable by the purchaser to the seller of goods in pursuance of the contract of sale and it alone can be termed as price of such sale which attracts charge.
(iv) Any sum de hors the contract of sale cannot be termed as price component of sale transaction which becomes subject of tax.
(v) A transaction which has not taken place but may take place in future cannot be subject of tax under entry 54 of List II of the Seventh Schedule though may become subject of levy, when it takes place in fact.
147. 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 becomes subject of tax and not to a different transaction that may take place in future at a price. It amounts to determine fictionally the price element of completed sale which becomes chargeable to tax with reference to price that may be chargeable different from paid or promised to be paid and controlled by the statute for such subsequent transaction, which has not come into being at all much less a completed transaction, more so in the case when charge is on single point in a series of sales. Transaction is the foundation that determines the liability to tax the completed sale at the point it becomes taxable and not the subsequent sale or sales in series of sales. Price as a constituent of sale is not a conceptual value but has a well defined legal connotation.
148. 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,
149. While it appears attractive that levy is with reference to the sale consideration which may ultimately be receivable by the retail seller of the drugs or pharmaceutical products from the end consumer at the last point sale within the State, which can also be subject-matter of tax by the State within its competence under entry 54, of List II, the apparent snag is that it imports levy of tax with reference to a transaction which has not come into existence, and which cannot be subject of tax.
150. Section 4A of the Act of 1994 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. The turnover is defined under Section 2(44) and taxable turnover under Section 2(42) of the Rajasthan Sales Tax Act, 1994. For the taxable event that has occurred, the amount received or receivable is assumed to be somewhat different than which is neither received nor receivable and that amount which neither flows from the Drugs Price 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 DCO under which also, it is the price of formulation before end sale is to be determined within prescribed limits.
151. Section 4A deals with levy of tax on specified goods as may be notified in relation to which it is required under some statutory provision to declare on the package thereof the retail price of such goods. The commodities sold in packages is required under Section 39 of the Standard of Weight and Measures Act, 1976 to declare on packaging the unit of weight, the weight of packed commodity and sale price thereof. Similar provision may be operative for other commodities in terms of orders issued under Essential Commodities Act, as is in the case of Drugs Price Control Order, 1995 with which we are concerned.
152. Whether prices are to be fixed under statutes or by the manufacturer, in the absence of any price fixation by controlling authority, the usual form of declaration is about MRP chargeable or price not to exceed. It may be further qualified with expression "inclusive of all taxes" or "local taxes extra". However, retail price declared on cover does not convey the price chargeable in respect of inter-dealer sales, before stage is reached of sale to end consumer though it is obvious that such inter-dealer price is bound to be less than the MRP so declared keeping in view profit margin of intermediaries and other relevant factors. To illustrate the para 7 of the Drugs Price Control Order, 1995 provides the method of fixing retail price. It provides for considering trade margins and margin of manufacture not exceeding 100 per cent in the case of indigenously manufactured scheduled formulations and not exceeding 50 per cent in the case of imported formulations. The intermediary traders margin is to play within the trade margin taken into account while fixing retail price under para 7 of the Schedule Drugs para 19 for the postulates that trade margin for the retailer shall not be less than 16 per cent of MRP extending excess component of it. While para 8 enable the Central Government to fix MRP for Scheduled Drugs as per para 7 of the Order, para 9 provides for determining ceiling price in case of Scheduled Drugs. Para 14 requires every manufacturer, importer or distributor to display on the label of container of formulations and the minimum pack offered for retail sale, the retail price with words "retail price not to exceed" preceding it as "local taxes extra" succeeding it and "Under Government Control Price" on a red strip. Likewise, under para 15 every manufacturer, importer or distributor of non-scheduled drugs is required to display a label of container of formulations and minimum thereof offered for retail sale. The retail price of that formulation in like manner as in the case of a schedule drug excepted "Under Government control price" in red strip it must display in green strip, "Not under price control".
153. The display of MRP is primarily for consumer protection and to keep the trade margin in limit in the case of scheduled drug.
154. In the case of scheduled drugs or non-scheduled drugs they are to reach the consumer at a price not exceeding the retail price displayed on the container and package.
155. However, it is envisaged that manufacturer, distributor, importer or wholesaler does not sell the drugs directly to consumers but makes their sales to retailers. Obviously, the price ingredient of such sale is not the MRP published on package but less than it leaving room for trade margin. Such margin limit is fixed in case of scheduled drugs by DPC itself. In non-scheduled formulations, it depends purely within the domain of agreement between contracting parties, within MRP limit.
156. It will be relevant here to notice certain provisions of the Rajasthan Sales Tax Act, 1994 other than the provisions of Section 4A and the provisions of Drugs Price Control Order, 1995 under which the maximum retail price (MRP) is fixed.
The general scheme of charging provision of the Rajasthan Sales Tax Act, 1994:
157. The charging Section 4 ordains that the tax payable by a dealer under the Act of 1994, 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. Thus, making clear that there is no multi-point tax within the State 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.
158. Section 4A does not become workable unless read along with definition of turnover and taxable turnover.
159. The turnover and taxable turnover have been defined in Section 2(44) and 2(42) respectively Sub-section (44) of Section 2 states that turnover means the aggregate amount received or receivable by a dealer for sales as referred to in Clause (38) including the purchase price of the goods which are subject to purchase tax under Section 11 of the Act.
160. Taxability under Section 4A too is on total turnover in case of goods notified under it. Unless, the MRP as abated by rate prescribed in notification is to be taken to be "price" of the sale, the provision does not become operative. The amount derived in terms of notification is not the aggregate of amount received or receivable, nor it is price as defined under the Sale of Goods Act of the completed sale which has become taxable, but an amount assumed to be a price received or receivable for the taxable transaction.
The effect of single point levy:
161. Moreover the levy remains a single point levy under Section 4A. The tax- able turnover under Sub-section (42) of Section 2 means that part of turnover which remains after deducting therefrom the aggregate amount of the proceeds of sale of goods on which no tax is leviable under this Act; which have been exempted from tax or which have suffered tax under this Act, subject to other provisions of the Act; and which are taxable at a point of sale within the State subsequent to the sale by the dealer and such sale is covered by a declaration as may be required under any provision of this Act or the Rules made thereunder. Thus, making it clear that once stage is arrived where the sale transaction becomes taxable, no tax becomes payable on subsequent sale transaction as from the turnover of subsequent seller the transaction on which tax is paid has to be excluded. That is usual characteristic of single point levy.
162. The effect of single point tax in a series of sale transaction is that sale subsequent to point of sale chosen as subject of tax cannot be taxed is the opinion expressed by the apex Court in Sales Tax Officer v. Timber & Fuel Corporation . At the relevant time, under the M. P. General Sales Tax Act on sale of timber a single point tax was leviable. When the first point sale took place, it was taxable. Subsequently, said sales were exempted retrospectively. Revenue authorities then sought to tax subsequent sales that took place in M. P. The court rejected the contentions by holding that subsequent sale when took place did not attract tax. Subsequent exemption of first sale cannot automatically result in shifting of tax liability to subsequent sale. It was said:
...as the law stood at the relevant time, the sales of timber by the Madhya Pradesh Forest Department were the first sales, which were not exempt from the levy of sales tax. Hence when the taxing events took place, namely, when the sales in question took place, the assessee was not liable to pay any tax in respect of those sales, as the sales effected by him were second sales.
163. The admitted position is that the sales made by the wholesalers to the retailers are the first point sales, within the State inviting the charge of tax under Section 4 and the taxable turnover of the subsequent dealers, viz., the retailers or sub-retailers shall not include the turnover of sale of goods which had already suffered tax at the hands of wholesaler at the first point sale. Without the aid of Section 4A, the tax would have been levied at the aggregate of sale price of the dealer through the whole of the taxable period as is received by him or receivable by him from the buyer of his goods under the contract of sale.
164. In the facts and circumstances of the case, what cannot be lost sight of is that price that may become consideration as part of sale of scheduled formulation from wholesaler to retailer is also controlled by Price Control Order.
The Scheme of Drugs Price Control Order, 1995:
165. The Drugs Price Control Order, 1995 (DPCO) issued under the Essential Commodities Act, 1955 deals with fixing of price for three different persons, viz., "manufacturer", the wholesaler and the retailer. The manufacturer has been defined under paragraph 2(m) of the Order as any person who manufactures a drug. The "wholesaler" under paragraph 2(y) means a dealer or his agent or a stockiest appoint by a manufacturer or an importer for the sale of his drugs to a retailer, hospital, dispensary, medical, educational or research institution purchasing bulk quantities of drugs. Meaning thereby that wholesaler is one who sells drug in bulk quantity. The retailer under paragraph 2(t) means a dealer carrying on the retail business of sale of drugs to customers. Customer has not been defined but in the context it means the end consumer.
166. Para 3 of the Order empowers the Government with a view to regulate equitable distribution of bulk formulation named in the First Schedule and maximum sale price at which bulk shall be sold. In other words, the maximum price is fixed for the sale of bulk drugs named in First Schedule of the order and in fixing the maximum price for bulk drug, the Government has to take into consideration net worth or a return of 26 per cent of the capital employed by the manufacturer of the bulk drugs. The selling price for the bulk drug is not to exceed maximum bulk price plus local tax, if any.
167. The retail price of a formulation needs determination under paragraph 7 of the Order and the Government is 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 DPCO, para 19 provides for price that can be charged from a retailer by a wholesaler. It reads as under:
19. Price of formulations sold to the dealer.(1) A manufacturer, distributor or wholesaler shall sell a formulation to a retailer, unless otherwise permitted under the provisions of this Order or any Order made thereunder, at a price equal to the retail price, as specified by an Order or notified by the Government excluding excise duty, if any, minus sixteen per cent thereof in the case of Scheduled drugs.
168. In other words, while MRP is fixed for the purpose that no retailer shall refuse to sell a drug to a customer and shall not charge price exceeding MRP fixed under the Order plus local taxes, so also maximum price is fixed above which goods will not be sold to retailers by ordaining that no manufacturer, distributor or wholesaler shall fix the price exceeding 16 per cent less than the maximum retail price. For example if the maximum retail price for a drug to be sold by a retailer to a customer is fixed at Rs. 100, the wholesaler, manufacturer, distributor or wholesaler shall not sell a formulation to a retailer at a price exceeding Rs. 100-16 : Rs. 84. Thus, the maximum price at which a wholesaler, distributor or manufacturer can sell the formulation to a retailer for further sale is also necessarily fixed by the Drugs Price Control Order, 1995.
169. We have noticed above that even in cases where maximum rates are fixed or the retail price is fixed under the Price Control Order by statute, the transaction does not lose its character of a transaction of sale so long as there is some element of mutuality of voluntary consent is left. That is to say, where a sale price is not to exceed a particular rate there is always room for contracting party to agree for a price less than that; apart from the freedom of option to enter into a contract at all always rest with the parties. Therefore, it is a misnomer to say that the maximum price is fixed only for retailer and not for the sale by manufacturer, distributors or wholesalers to retailers. That being the position, under the statute, the price component of sale transaction from a manufacturer, distributor or wholesaler to retailer cannot be more than as provided under paragraph 19 of the order for scheduled drugs, though the same is not required to be published on package or container.
Distinguishing feature of tax on sale of goods:
170. Applying the principles enunciated above, the conclusion to which one can safely reach 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 Sale of Goods Act, 1930 which alone can be subject of tax under entry 54 of State List. Substitution of assumed price or the assumed quantity in place of actuals 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 Sale of Goods Act 1930. Holding otherwise will result in permitting the State Legislature to levy tax in presenti on the sale which has not come into existence and to allow the future transaction which under entry 54 of List II of the Seventh Schedule is not permissible.
171. Another distinguishing feature to be kept in mind is that centre point of legislation under entry 54 of List II of the Seventh Schedule is "sale" in contrast with central point of legislation under entry 84 of List I of the Seventh Schedule is "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.
172. The levy of tax on sale of goods is not a tax on goods simpliciter. One taxing event cannot be subjected to tax with reference to another taxing event which has not even taken place and may not ultimately take place at all in relation to the goods in question and which under the statute authorising levy is not subject to tax.
173. Every transaction of sale is independent and can be subjected to levy of tax and the components and the measure which can make the tax levy effective must have nexus with the taxable event. The point of collection and levy of tax may be shifted but the essential feature of the levy of tax on one taxable event cannot be altered to another taxable event which the law does not permit. Where the statute envisages multi level taxes, each event of sale becomes independently taxable event. In case it is single point tax, it is for the Legislature to choose the point at which happening of taxing event would become subject of tax and it is that contract of sale in series of sales that attracts authorisation of levy. In respect of such identified taxing event whether the tax is collected in advance or is postponed to a later stage, the liability remains in relation to that taxing event and not to any other event. Else it would result in changing the nature of basic character of subject of tax.
174. This principle has been amply discernible from the ratio laid in Commissioner of Central Excise v. ACER India Ltd. No. 2 .
175. It was a case arising under the Central Excise Act which imposes duty on manufactured goods terms as excisable goods, and became subject of levy The assessee-manufacturer of computers, peripherals, service note books and accessories, falling under different heads of excisable goods under the Central Excise Tariff Act, 1985. On orders received from its customers, it also load operational softwares. Price of which is also charged from the customers. While calculating the amount of Central excise payable thereon, the assessee claimed deduction of the value of operational softwares from the total value of computer supplied to the customers. The Revenue objected to such deduction on the premise that excise duty is payable on the entire value including the value of softwares, as part of the computer manufactured by the assessee. It was held that loading of software in the factory would come within the mischief of transaction value. The CEGAT allowed the deduction claimed by the assessee relying on a division bench decision of the Supreme Court in PSI Data Systems Ltd. v. Collector of Central Excise [1997] 2 SCC 78.
176. On appeal a division bench of the apex Court doubting the correctness of ratio laid in PSI Data Systems' case , referred to a larger Bench.
177. The court dismissed the appeal of Revenue by holding that where goods non-excisable are transplanted into excisable, will not make them excisable so as to make the assessee liable to duty on combined value. The court said:
It must be borne in mind that Central excise duty cannot be equated with sales tax. They have different connotations and apply in different situations. Central excise duty is chargeable on the excisable goods and not on the goods which are not excisable. Thus, a 'goods' which is not excisable if transplanted into a goods which is excisable would not together make the same excisable goods so as to make the assessee liable to pay excise duty on the combined value of both. Excise duty, in other words, would be leviable only on the goods which answer the definition of 'excisable goods' and satisfy the requirement of Section 3. A machinery provision contained in Section 4 and that too in the Explanation contained therein by way of definition of 'transaction value' can neither override the charging provision nor by reason thereof a 'goods' which is not excisable would become an excisable one only because one is fitted into the other, unless the context otherwise requires.
178. This illustrates the point that non-taxable subject cannot be transplanted into taxable subject to make the increased value chargeable to tax by taking it a measure. The ingredient which is not subject of charge has to be excluded from the measure of levy for computation of tax.
179. Parity of reason makes us conclude that 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 Sale of Goods Act, 1930. 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 device of measuring tax for the completed transaction which has become subject of tax. Ratio in ACER India Ltd.'s case , fully applies to present case.
180. Necessity of nexus between with subject of levy and measure of tax was also approved by the apex Court in Atic Industries Ltd. v. H.H. Dave, Assistant Collector of Central Excise . It was a case in which question arose whether excise duty will be levied at value of goods measured in terms of price chargeable by the wholesale dealers to whom the manufacturer has sold the goods manufactured by him. The appellant before the Supreme Court who was a manufacturer contended that he can be subjected to duty on price charged by him on sales to wholesalers. The Revenue took the view that the value of dye stuffs the goods should be taken at which ICI and Atul sold the same to distributors and no deduction be allowed to manufacturer in respect of trade discount. The court allowing the appeal, repelled the contention of Revenue and held as under;
The only relevant price for assessment of value of the goods for the purpose of excise in such a case would be the wholesale cash price which the manufacturer receives from sale to the first wholesale dealer, that is, when the goods first enter the stream of trade. ... If excise were levied on the basis of second or subsequent wholesale price, it would load the price with a post-manufacturing element, namely, selling cost and selling profit of the wholesale dealer. That would be plainly contrary to the true nature of excise as explained in the Voltas' case [1973] 2 SCR 1089 : AIR 1973 SC 225 : 1973 Tax LR 1710.
181. It may be relevant to recall here that the Supreme Court in Hotel Balaji's case [1993] 88 STC 98 (SC); AIR 1993 SC 1048, also 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-product was sold later, it had retained its character as a tax on purchase.
182. Similarly, if the taxing event is the single point sale and first point sale in the series of transactions of sale is the taxable event which is authorised by law to be subject to levy of sale or purchase tax, whether the tax is collected at that point or later, the component of that taxing event can alone furnish the nexus for applying the rate of tax whether it may be related to the quantities of goods sold or it may be the price for which the goods have been sold and purchased. But if one wants to travel beyond the subject-matter of taxing event, it would be a different taxing event which would be subject to tax. Similarly Supreme Court in ACER India Ltd.'s case [2004] 137 STC 596 (SC) : [2004] 3 RC 421 (SC) : [2004] 8 SCC 173, clearly held that by transplant of non-excisable goods in excisable goods, the levy cannot be imposed including the value of non-excisable goods in excisable goods.
183. We may summarise the principles deducible from above discussion:
A. (i) The principle which can be well-settled is ; firstly that the term "sale of goods" in entry 54, List II has the same meaning as sale defined under the Sale of Goods Act, 1930 and that the State Legislature cannot enlarge the meaning of sale so as to tax a transaction which is not sale within the meaning of Act of 1930.
(ii) In a transaction of sale of goods which is liable to tax there must be concurrence of the four elements, viz:
(1) Parties competent to contract;
(2) Mutual assent (3) A thing, the absolute or general property in which is transferred from the seller to the buyer ; and (4) A price in money paid or promised.
(iii) A transaction which does not conform to this traditional concept of sale cannot be regarded as one in respect of which the State Legislature is competent to enact an Act imposing liability for payment of tax.
B. Tax is to be levied as soon as such completed transactions, which have all the above ingredients, come into existence. It cannot be levied on a future transaction.
C. The compulsion of law is not coercion as defined in Section 15 of the Act and "in the eye of the law, the agreement is freely made".
D. The full amount of money which goes from the pocket of the purchaser to the pocket of dealer as a condition or consideration for the passing of the property in goods is the sale price. Whether it is charged in one lump sum or split under different heads does not make any difference.
E. When the Legislature constructs a machinery for the recovery of the taxes which is within its competence to impose, the said machinery should have some rational or intelligent connection with the tax. In the absence of rational nexus between the purchaser and the tax on goods carried, it may be open to a citizen to contend that the tax is not one justified by entry 54.
F. Subject always to the legislative competence of the taxing authority, the said tax can be levied at convenient stage so long as the character of the impost, is not lost.
G. There are three stages for imposition of a tax : (i) There is a declaration of liability that is part of statute which determines what pursuance in respect of which properties are liable. (ii) Next thing is the assessment. Liability does not depend on assessment, that ex hypothesi has already been fixed. But assessment particularises the exact sum which a person is liable to pay. (iii) Lastly, come the method of recovery if the person taxed does not voluntarily pay.
H. The components which enters into tax are well known : (i) The first is the character of the imposition known by its nature which transpires attracting the levy. (ii) The second is a clear communication of the person on whom the levy is imposed and which is obliged to pay the tax. (iii) The third is rate at which the tax is imposed and the (iv) fourth is the measure or value to which the rate is applied for computing the tax liability.
I. 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.
J. Any standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of the levy.
K. In any provision in the nature of machinery provision must be read so as to carry out the basic concept of the levy.
L. Where the sales tax or purchase tax is levied on a dealer, the levy is usually with reference to his turnover, which normally means the aggregate of the amounts of sale prices or purchase prices, as the case may be.
M. To measure tax on sale or purchase of goods, 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 frequently as too impractical to tailor the purchase tax.
N. In rare cases, when it is iniquitous to link purchase tax with price, more sensible bases can be found. It may be levied on the occupier of a factory by reference to the weight of the goods purchased by him.
O. 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 thinks appropriate.
P. Under the Rajasthan Sales Tax Act, 1994 the tax is to be charged on turnover of the assessment year in aggregate. The turnover is defined under Section 2(44) and taxable turnover under Section 2(42) of the Rajasthan Sales Tax Act, 1994.
Q. The turnover and taxable turnover have been defined in Section 2(44) and 2(42) respectively Sub-section (44) of Section 2 states that turnover means the aggregate amount received or receivable by a dealer for sales as referred to in Clause (38) including the purchase price of the goods which are subject to purchase tax under Section 11 of the Act.
R. (i) Every transaction of sale is independent and can be subjected to levy of tax and the components and the measure which can make the tax levy effective must have nexus with the taxable event.
(ii) The point of collection and levy of tax may be shifted but the essential feature of the levy of tax on one taxable event cannot be altered to another taxable event which the law does not permit.
S. (i) There is no multi-point tax within the State and the tax is levied on the first point sale within the State in a series of sales.
(ii) The effect of single point tax in a series of sale transaction is that sale subsequent to point of sale chosen as subject of tax cannot be taxed.
T. (i) Where the maximum retail price is fixed as provided under paragraph 7, of DPCO para 19 provides for price that can be charged from a retailer by a wholesaler.
(ii) the price component of sale transaction from a manufacturer, distributor or wholesaler to retailer cannot be more than as provided under paragraph 19 of the order for scheduled drugs, though the same is not required to be published on package or container.
(iii) Such price has to keep at least 16 per cent profit margin for the retailer. This is devised by prescribing the price chargeable by wholesaler to be MRP minus margin of retailers profit.
184. An important aspect of tax on sale of goods is that no tax is leviable until sale to be taxed is completed. Therefore, price as a measure of tax to quantify the tax on such sale may include all incidental and ancillary expenses or charges until sale is complete by passing of title in goods to the buyer. But it cannot include anything which does not become part of consideration received or receivable by the seller for such sale. If any amount can be named by Legislature on which rate of tax on sale of goods is to be applied, irrespective of its connection with completed sale, it will lose its character as tax on sale of goods inasmuch as fixing any sum as measure de hors the transaction of sale to be taxed will reduce the basic concept of tax on completed sale of specified goods to redundancy.
185. We have noticed above that it is only the completed transaction which can be subjected to tax and not agreement to sell, much less transactions which are yet to take place in future. Mere agreement to sell or in the case of hire-purchase agreement until option is exercised by the buyer to purchase goods, sale to buyer by financier was not held to be transactions of sale at all on which levy could be imposed. It was clearly held by the apex Court in K. L Johar and Co's case [1965] 16 STC 213 (SC) that imposition of tax under hire-purchase agreement before option is exercised by the hirer and title passes to him is ultra vires and the amount to which rate of tax is to be applied on exercise by such hirer, has to be less than the first purchase price by excluding the element of hire paid/payable by hirer up to the date of exercising option. It is a different matter that subsequently, the Parliament by amending the Constitution, vide 46th Amendment gave an extended meaning to the sale of goods to include transaction of hire-purchase which have been held to be not transactions of sale amenable to levy of tax under entry 54. But the fact remains that no tax can be levied with reference to a transaction of sale which is not completed or has not come into existence. The principle is excepted only to the extent provision has been made in Clause (29A) of Article 366.
186. The impact of levying tax on the taxing event of a transaction of sale of drugs by a wholesaler to a retailer, identifying the wholesaler as the person on whom the incident of tax falls but applying the rate to an amount related to transaction which is expected to take place in future between different parties, viz., between the retailer the present buyer as seller and the end customer as buyer to whom goods are subsequently sold will be contrary to constitutional scheme of tax on sale or purchase of goods. As per provisions of the Act, said transactions being of tax-paid goods is not further taxable. Rather it is possible that in the hands of the retailer such goods may not at all be sold either because the same are destroyed or the same may pass expiry date and returned to the manufacturer. In respect of such goods it becomes a levy of tax measured on an amount related to a non-event.
187. Moreover, law does not envisage only single intermediary sale. In a given case, subsequent sale to the taxable event may be an inter-State sale or a sale outside State, MRP may not at all become chargeable in the State to ever become subject of tax.
188. Similarly, if the first point sale in the State is inter-State sale, the rate fixed under two enactment will be to different measure in respect of two identical transaction by the same dealer.
189. Therefore, the principle that tax may be collected in advance before the event takes place or subsequent stage cannot be applied to the case of tax on single point sale of goods in a series of sale transactions. In such event, if it is justified collection of tax on sale when sale takes place between wholesaler and the retailer, it amounts to tax a subject which has not come into existence. On the other hand, if it is taken to be a mere measure of tax, and not the convenient collection of tax at earlier point, the measure of tax is by engrafting an element of event which is not taxable. In such event, as per principle enunciated in ACER India Ltd. [2004] 137 STC 596 (SC) : [2004] 3 RC 421 (SC) : [2004] 8 SCC 173, it is not permissible.
190. In this connection, the principle has clearly been stated in ACER India Ltd's case [2004] 137 STC 596 (SC) : [2004] 3 RC 421 (SC) : [2004] 8 SCC 173, that by including the value of non-excisable article with excisable article the measure of tax cannot be increased. In the wide discretion vested in Legislature to chose a suitable measure to which rate of tax may be applied, one inherent restriction is that in doing so it cannot implant a non-taxable value with taxable value.
191. The contention that like the excise duty, the sales tax is ultimately passed on to the consumer and it can be recovered from any person at a convenient stage on a sale of goods, and therefore, if a transaction of sale by wholesaler to the dealer is taxed on a price chargeable from the consumer of the goods, it retains its nexus with the transaction of sale of goods, overlooks the fact that tax on sales is not a tax on goods, but is on compendium of grains which constitute a "sale of goods". If the tax were only on goods perhaps the MRP chargeable by end-dealer could be considered as having nexus with subject of tax in which case, it may retain its connection with the goods to be taxed. But essence of subject of tax under entry 54 is "sale" and not the goods alone.
192. It was noticed by the Federal Court in Province of Madras v. Boddu Paidanna & Sons [1942] 1 STC 104 : AIR 1942 FC 33, that the tax on sale of goods on every successive transaction of sale from the manufacturer to the end-purchaser is a taxable event which can attract the tax. It is for the State legislation to make all the events as a taxable event on which taxes are charged or to make one such taxing event in a series of sales on which tax is to be charged. Once the Legislature chooses that only one transaction in a series of transactions is to be subjected to tax and also identifies the sale which in the series of sale is to become subject of tax, it cannot subject such sale to tax by transplanting component of subsequent transaction which has not come in existence and when it comes into existence subsequently. This is so because it disjuncts such measure of tax from that sale of goods which becomes subject of charge. The measure to which rate of tax is applied must have integral connection with the transaction that is the subject of tax. It cannot be said that once sale has taken place which attracts tax, it can be levied and measured on any standard divorced from the subject of sale.
193. Permitting this means permitting legislation to insert one or other of the essential ingredients of sale by creating legal fiction which in fact is not ingredient of sale which may become subject of tax. This in turn will result in extending the meaning of "sale" beyond what is meant by sale within the meaning of Act of 1930. As discussed above, it is not permissible for the State Legislature to enlarge the definition of "sale" beyond what is meant under the Indian Sale of Goods Act for taxing purposes under entry 54 of List II of the Seventh Schedule.
194. It may be viewed from another aspect. Section 4A envisages tax on a price chargeable on future sale only in respect of sale of such goods where MRP is published on package or container. The object is stated to be that in case of tax on first point sale or at earlier point, the end-buyer pays much more then the buyer at such earlier stage. With this object, to choose only the MRP branded goods have no nexus, to depart from normal levy in respect of sale of other commodities by departing from normal rules of computing taxable turnover. The end-consumer in the case of single point tax in a series of sales, invariably pays more price than the price paid at an earlier sale in series of sales, when it becomes a taxing event. On the other hand, the MRP is published with the object of protecting consumer interest and keep a check on gross profit to be earned in respect of such commodities. A legislation which defeats this object also by subjecting consumer to pay more for such commodities, than in respect of commodities, which do not carry MRP by levying tax with respect to higher value, and ultimately for consumer the taxes paid by him become part of this purchase price.
195. It is not related to subject sale which has come into existence and become taxable, and the sale which may come later on by the retailer is not subject of tax.
196. 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 become 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 granted that the legislation can provide for any measure the purpose of applying the rate of tax different from the ingredient of subject of tax, whether it is founded on MRP or any other fixed value which Legislature may provide will make little difference. Such is not even the case of State that even if the measure is not relatable to MRP, it can substitute any value as a measure of tax and rightly so because subject of tax is not the goods or goods sold, but subject is a transaction of "sale of goods" as defined under the Sale of Goods Act, 1930.
197. In this connection reference may be usefully made to principle emerging from Union of India v. A. Sanyasi Rao [1996] 219 ITR 330 SC. Section 44AC was inserted in the Income-tax Act, 1961 by the Direct Tax Laws Amendment Act, 1989 with effect from April 1, 1989. Section 206C was inserted in the said Act by the Finance Act, 1988 with effect from April 1, 1988. Explanation to Section 44AC was inserted by Finance Act, 1990 with effect from April 1, 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 produce, etc. Perhaps the Government wanted to get over the problem of assessing income and recovering tax in cases of person dealing in such commodity. It was also observed that business of such persons existed only for short period, and after period of contract in many cases it was not even possible to trace them and many were found to be dealing benami. Section 44AC occurred in Chapter IV of the Act dealing 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 44AC shall collect income-tax of a sum equal to 20 per cent of the amount paid or payable by the buyer as increased by a surcharge for the purposes of the union. . . ."
198. The validity of two provisions were challenged before various High Courts. All the High Courts upheld the competence of Parliament to enact Section 44AC and Section 206C. Interpretation of section came up before A.P. High Court. The A.P. High Court 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 Income-tax Act. It was held that the subject-matter of tax, viz., "income" cannot be determined notionally by making such specific provision when in all other cases only the real income to be computed in accordance with provision of Section 28 to Section 43C. The apex Court noted that one of the contentions raised in the petition was that "tax is levied on hypothetical income and not on real income/'
199. In the end conclusion, the court concurred with the conclusion reached by the A.P. High Court in its judgment reported in Sanyasi Rao A. v. Government of Andhra Pradesh [1989] 178 ITR 31, and held that Section 44AC is a valid piece of legislation and is adjunct to and explanatory to Section 206C. It does not dispense with regular assessment as provided in accordance with Section 28 to Section 43C of the Act. The court approved the following conclusion of the A.P. High Court:
The non obstante clause in Section 44AC(1), 'notwithstanding anything to the contrary contained in Sections 28 to 43' would be confined to the limited purpose of sustaining the deductions provided for in Section 206C, The level of profits and gains would be relevant only for explaining and justifying the level of deductions provided for in Section 206C. Collections will be made at the rates specified in Section 206C and then a regular assessment will be made like in the case of any other assessee. . . .
On this aspect, we may as well refer to the words 'in the assessment made under this Act' in Sub-section (4) of Section 206C. These words show that an assessment under the Act is still to be made even where tax is collected under Section 206C. This, in our opinion, is a strong indication supporting our construction of Section 44AC. . . . We uphold the validity of Section 206C. We also hold that Section 44AC is a valid piece of legislation, read in the manner indicated by us. Section 44AC is not to be read as an independent provision but as an adjunct to and as explanatory to Section 206C. It does not dispense with a regular assessment altogether. After the tax is collected in the manner provided by Section 206C, a regular assessment will be made where the profits and gains of business in specified goods will be ascertained in accordance with Sections 28 to 43C.
200. The court did not countenance substitution of a fictional income as a subject of tax for the purpose of determining tax but confined the operation of it as machinery provision for the purpose of deducting tax under Section 206C which was held to be measure of advance tax, subject to regular assessment. However, it clearly did not countenance substitution of subject of tax by leaving normal provision for determining real income which is subject of tax. Deviation from normal provision for determining subject of tax only in certain commodities was held to be not within the constitutional limits but violative of Article 14 of the Constitution.
201. Before us, the specific case of the respondents is also that Section 4A(1) is an adjunct to charging provision contained in Section 4 of the Rajasthan Sales Tax Act, 1994. Hence, the measure envisaged under Section 4A cannot be divorced from point of taxable sale and from the import of turnover and taxable turnover. Hence, the measure has to be read in substitute of MRP as price deemed to be recovered or recoverable to Section 4A applicable to first point sale.
202. Section 4A(1) refers to levy and collect tax on sale of goods at retail price thereof as abated by the rate specified in the notification. Read by itself, it applies to all goods whether such retail price is fixed under any statute or is required to be published on package under law. Sub-section (2) confines its applicability to goods where retail price is required to be published on package or container under any law.
203. The objects and reasons for inserting provision like Section 4A in the Sales Tax Act makes it further clear that the provision has been made to bring the levy of "tax on sale of goods" within the State of Rajasthan at par with the levy of "excise duty" under the Central Excise Act, 1944. In the Statement of Objects and Reasons for insertion of Section 4A, it has been stated that:
in the first point tax system, generally the tax is collected at the first sale by registered dealer, and no tax is leviable on subsequent sales even though the value addition is significant. It has been the experience that with the introduction of the concept of levying Central excise duty based on maximum retail price, there is increased buoyancy in the duty receipts. We in our State intend to rationalise the present tax system by switching over to the maximum retail price concept for levy of sales tax in respect of notified commodities so as to collect tax on the maximum retail sale price less abatement specified by the State Government.
204. Apparently, to achieve the aforesaid objective of collecting tax on maximum retail price under the Scheme of the tax on first point sale of goods ignore the basic difference between the subject and nature of tax between the two taxes. In drawing parity between the two taxes ; the basic difference between the two taxes as discussed above and clearly discernible from the decided cases, has been ignored. The duty of excise is on "the goods" which come into existence as a result of manufacture, or production, and therefore, the manufacture or produce of the goods remains the subject of tax irrespective at the point at which tax is collected and value of goods always have a nexus with the subject. Value of goods is a conceptual value determination falling within the domain of legislative scheme. Price of goods at any stage is only one of the mode by which value can be determined. But the subject of "tax on sale or purchase of goods" is the "sale". Price as essential element of sale has definite legal connotation and is not to be determined de hors the sale itself on any conceptual standards. It is part of it as consideration paid or agreed to be paid. Therefore, on the first point sale, it is the whole constituent factors of sale that remains the subject of tax Levying tax on such sale with a factor which is connected with last point sale divorces the levy from the basic subject of sale on which tax can be levied.
205. However, as has been analysed above that each successive sale becomes a new taxing event, providing an independent subject which can be taxed and one sale cannot be engrafted in another for the purpose of levy. It is open for the legislation to choose to have recourse to multi-point levy or single point levy. In case it decides to levy a single point tax, the point at which the sale is to be taxed is also for the legislation to decide and it is the sale which occurs at the point so devised that becomes subject of tax and not the subsequent sale. If the tax is levied at the last point within the State, the price that is paid or becomes payable within the State in respect of that sale may provide a valid basis if no other basis is provided having nexus with the sale for levy of the tax on sales.
206. Therefore, the view adopted by State of Section 4A about providing measure of tax for sale of drugs or pharmaceutical production by manufacturer, wholesaler or distributor to retailer runs counter to the single point levy.
207. If the tax on sale of goods under entry 54 is tax on sale as defined in the Sale of Goods Act, 1930, the price as defined on the goods remains an integral part of sale which becomes subject of tax and the levy cannot be divorced therefrom where price and not the weight of goods is to measure of tax.
208. 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 the Seventh Schedule so also notification, annexure 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 arises and is determined ex hypothesi.
209. However, the perusal of the language of Section 4A and the notification issued thereunder by itself does not show that it applies only in cases 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 hasardous to comment upon the validity of provisions of Section 4A in isolation and the notification issued thereunder in its entirety.
210. 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 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 notification, annexure 3.
211. 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.
212. The petition is accordingly, disposed of.
213. No order as to costs.