2006 Supreme(SC) 658

2006(6) Supreme 17
SUPREME COURT OF INDIA
(From Rajasthan High Court)
Arijit Pasayat and Tarun Chatterjee, JJ.
State of Rajasthan & Anr. — Appellants
versus
Rajasthan Chemists Association — Respondents
Civil Appeal No. 3552 of 2005
Decided on 24-7-2006
Counsel for the Parties :
For the Appellants : B. Sen, Sr. Advocate, Sushil Kumar Jain, Puneet Jain, A.P. Dhamija, Ram Niwas and R.D. Thanvi, Advocates.
For the Respondent : A.K. Ganguly, S. Ganesh, Sr. Advocates, A. Mariarputham, Ms. Aruna Mathur (for M/s. Arputham, Aruna & Co.), Ravinder Narain, Pravin Bahadur, Ajay Aggarwal, Sanjeev Dahiya and Rajan Narain, Advocates.

IMPORTANT POINT
If Section 4A of the Rajasthan Sales Tax Act is designed to bring a levy into existence which is divorced from the ‘sale’ subject to tax under the Act, it is beyond legislative competence under Entry 54 of List II of Seventh Schedule to the Constitution.

Headnote:Rajasthan Sales Tax Act, 1994 — Section 4A as introduced by the State Finance Act, 2004 — Levy of tax on retail sale price — Constitutional validity of Section 4A — Writ petitions filed by Chemists Association on ground that the provision takes into account an artificial amount as turnover for the purpose of tax on ‘sales of goods’ — Petitioners case that tax on sale must be leviable with reference to something related to taxing event, the sale or purchase of goods which becomes subject of charge and not de hors it — Factually, the first point of sale in the State of Rajasthan is by the wholesale distributors to the retailers and not by retailers to end consumers when alone MRP can be charged — First sale within the State which alone is taxable is in reality at much lesser price than the MRP printed and the same is paid or payable on contractual basis — Petitioners alleged that by devising legal fiction for deeming an artificial sale price for levy of tax having no nexus to the taxable event i.e. transactions of sale of goods at a money consideration paid or payable as defined under the sales Act, is beyond the legislative competence of the legislature in the State — Division Bench of the High Court held that Section 4A of the Act is not legally sustainable to the extent that tax on first point sale of drugs, medicines or any formulation or for that matter any other commodity by a manufacturer/wholesalers/distributor to retailer where MRP is published on package — Whether judgment of the High Court is sustainable — (Yes) — If Section 4-A is designed to bring a levy into existence which is divorced from the ‘sale’ subject to tax under the Act, it is beyond legislative competence under Entry 54 of List II of Seventh Schedule.

       Held : The subject of tax being sale, measure of tax for the purpose of quantification must retain nexus with sale which is subject of tax. As noticed above, tax on sale of goods, is tax on vendor in respect of his sales and is substantially a tax on sale price. The vendor or buyer cannot be taxed de hors the subject of tax that is sale by the vendor or purchase by the buyer. The four essential ingredients of any transaction of sale of goods include the price of the goods sold, therefore, in any taxing event of sale, which become subject matter of tax price component of such sale, is an essential part of the taxing event. Therefore, the question does arise whether a particular taxing event of sale could be subjected to tax at the prescribed rate to be measured with such price which is not the component of the transaction of sale, which has attracted the sales tax. (Para 28)

       The pivotal question, therefore, which needs to be considered is whether the measure to which rate of tax is to be applied on single point transaction of sale of any formulation by the wholesaler to the retailer can be something notional which is not related to subject of tax or to say in other words, whether MRP to be chargeable subsequent to taxing event by a retailer when he sells the same goods to consumer can provide a basis which has a nexus with taxable event to provide a valid measure to which rate of tax can be applied. (Para 41)

       The principal contention about the invalidating of the basis of the measure of tax envisaged under section 4A of the Act as inserted vide Finance Act, 2004 is that while it levies taxes on the sale transaction carried on by the manufacturer or wholesalers or distributor the measure with which total turnover is to be determined is not part of the sale which attracts tax but its premise is to be found on subsequent sale which, under the scheme of single point tax is not excisable to tax at all. The MRP which a wholesaler can charge in respect of scheduled formulations too is fixed by Control Order. In respect of scheduled formulations wholesaler is required to leave at least 16 margin in the MRP for the retailers and he is entitled to retain not more than 8 profit on the purchase price. There being statutory prohibition against the wholesalers to charge MRP from its buyer, the maximum retail price fixed on the packet has no rational connection with the taxable sale effected by the wholesalers and which becomes subject matter of charge as a first point tax. In such event, there exists no nexus between the measure of levy and subject of levy. (Para 42)

       In the context of meaning assigned to expression sale of goods or price or consideration element of such sale of goods as taxable event, the conclusion that can fairly be reached is that for the taxing event of sale, if the price is to be the basis for measuring tax, it must relate to actual transaction of sale that become subject of tax and not to a different transaction that may take place in future at a price. (Para 43)

       Section 4A of the Act which projects itself as an exception to Section 4, creates a legal fiction in respect of price of subject sale, on which rate of tax is to be applied. But levy of tax remains single point levy in a series of sales. Point of taxable sale remains the first point sale i.e. from the manufacturer/distributor or the wholesaler to the retailer. The tax is to be charged on turnover of the Assessment Year in aggregate. "Turnover" is defined under Section 2(44) and "Taxable Turnover" under Section 2(42) of the Act. For the taxable event that has occurred, the amount received or receivable is assumed to be different from which is neither received nor receivable and that amount which neither flows from the Control Order, nor which flows from buyer to seller under the contract but is relatable to a transaction of sale by a retailer which may not have come into existence. For the present, the price to which rate of tax is sought to be applied to a sale by a wholesaler to a retailer is neither the price agreed upon by the parties to the contract of taxable sale to which charge is attracted nor flows from the Control Order under which also, it is the price of formulation before end sale is to be determined within prescribed limits. (Para 45)

       The inevitable conclusion is that when the wholesaler sells any formulation to a retailer in bulk quantity, taxable event of sale of goods takes place where wholesaler and retailers are the parties to contract, the goods in question are the formulations and the consideration is one which is agreed to between the parties to that transaction within the limits permissible by law. By substituting the assumed quantity of goods or a price which is not subject matter of that contract of completed sale for the purpose of measuring tax the legislature assumes existence of contract of sale of drugs by legal fiction which has not taken place and which cannot be considered to be a sale in the manner stated in the Sales Act, which alone can be subject of tax under Entry 54 in List II. Substitution of assumed price or the assumed quantity in place of actual price/quantity in a completed sale transaction, for the purpose of levy of tax on the subject matter of tax results in taking away from it the character of sale of goods as envisaged under the Sales Act. (Para 48)

       Every transaction of sale is independent and can be subject to levy of tax and the components and the measure which can make the tax levy effective must have nexus with the taxable event. (Para 50)

       By devising a methodology in the matter of levy of tax on sale of goods, law prohibits taxing of a transaction which is not a completed sale and also confine sale of goods to mean sale as defined under the Act. This cannot be overridden by devising a measure of tax which relates to an event which has not come into existence when tax is ex-hypothesi determined, much less which can be said a completed sale and which cannot be subject of legislation providing tax on sale of goods by transplanting a sum related to as "likely price" to be charged for subsequent sale to be taxed by the devise of measuring tax for the completed transaction which has become subject of tax. (Para 51)