Case: State Of Rajasthan And Anrs Vs. Rajasthan Chemist Association

By the Finance Act, 2004 Section 4A was introduced which reads asLevy of tax on retail sale price:- (1) Notwithstanding anything contained in any other provision of this Act or the rules made thereunder, tax on sale of such goods, as may be specified by the State Government by notification in the official Gazette, shall be levied and collected on the retail sale price of such goods abated by the rate specified in the said notification.(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 or the rules made thereunder or under any other law for the time being in force, to declare on the package hereof the retail sale price of such goods.(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 reference to the area with the State in which, it is sold shall be deemed to be the retail sale price for the purpose of this Section.(ii) Where on the package of any goods different retail sale prices are declared with reference to different areas and none of the areas fall within the State, the maximum of such retail sale prices shall be deemed to be the retail price for the purpose of thisPetition was filed by the present respondent questioning constitutional validity of the aforesaid provision. Section 4A in terms envisaged levy of sales tax on any transaction of sale of notified goods not on the actual price of consideration which is paid or becomes payable by the buyer to seller on such sales as have taken place, but on the MRP of the goods declared on the package as per the provisions of the Standards of weights and Measures Act, 1976 (in short Weight and Measures Act) or the Rules framed thereunder or any other law for the time being in force which is chargeable only at the last point sale by the retailer. The provision is not extended generally to all commodities sold in package and in relation to which it is required to print retail price thereon, but only to such goods as may be specified by the State Government by the Notification in the official Gazette as may be abated by the rates specified in the saidchallenge before the High Court was on the ground that it takes into account an artificial amount as turnover for the purpose of tax on "sales of goods". The tax on sale must be leviable with reference to something related to taxing event, the sale or purchase of goods which becomes subject of charge and not de hors it. With reference to Entry 54 of the Second List of Seventh Schedule to the Constitution of India, 1950 (in short the Constitution) it was submitted that expression "tax on sale of goods" used in said Entry means tax on the sale of goods as defined under the Sales of Goods Act, 1930 (in short the Sales Act) as modified/extended by Clause 29-A of Article 366 of the Constitution, inserted by 42nd Amendment Act, 1982. Single point tax is leviable on sale of medicines as per Notification issued under thethe first point of sale in the State of Rajasthan in most cases which attracts levy of sales tax is by the wholesale distributors to the retailers and not by retailers to end consumers when alone MRP can be charged. Under the Weights and Measures Act and the provisions of Drug Price Control Order, 1995 (in short Control Order), issued by the Central Government under Section 3 of the Essential Commodities Act, 1955 (in short the Essential Commodities Act), the maximum retail price is determined in the case of Scheduled Formulations only. On the other hand, MRP is required to be displayed on the label of container as well as package in respect of all drugs whether scheduled or non scheduled formulations. Mention of price on the package under the concerned provisions is the MRP and not the price necessarily or actually charged at the end sale for any transaction of sale of medicines in the State. The first sale within the State which alone is taxable is in reality at much lesser price than the MRP printed and the same is paid or payable on contractual basis. Under the Control Order the margin at which the medicines are to be sold to retailer has been fixed at a minimum level, that is to say, unless otherwise permitted, a formulation has to be sold to a retailer keeping at least 16% margin in the case of scheduled drugs. Thus by devising aforesaid legal fiction for deeming an artificial sale price for levy of tax having no nexus to the taxable event i.e. transactions of sale of goods at a money consideration paid or payable as defined under the Sales Act, is beyond the legislative competence of the legislature in the State, and therefore the provision isState on the other hand took the stand that what is to be the measure of tax on a sale is within the domain of the State Legislature. Under the impugned provision, tax is levied on a completed sale within the meaning of Section 4 of the Sales Act. However, in what manner the charge is to be levied is a matter of details which can be worked out by Legislation. The fact that maximum retail price is to be determined statutorily and the State Legislature has taken into account the fact that the actual consideration at the first point tax may be lesser than the maximum retail price that may be charged ultimately from the consumer at the last point sale as provided for abatement of MRP by reducing therefrom the sum at prescribed rates of abatement for the purpose of levy of tax, it provides sound basis for uniform liability in the State on such transaction. The levy of tax cannot be said to be wanting in nexus with the taxing event. Therefore, the impugned provisions and the Notifications cannot be said to be ultra vires any provision of the Constitution. It was however not disputed that but for taking the MRP as a basis to provide measure of tax, no fictional price can be fixed as a measure of tax on sale of goods. The High Court on analyzing the provision in great detail came to hold asSection 4A is designed to bring a levy into existence which is divorced from the sale subject to tax under the Act, it falls foul with the legislative competence under Entry 54 of List II of Schedule VII so also notification- Annex.3 to the extent it is intended to levy tax on first point sale with reference to price which could be charged in respect of a subsequent sale which has not come into existence at the time liability to tax arise and is determined ex-hypothesi. However, the perusal of the language of Section 4A and the notification issued thereunder by itself does not show that it applies only in case of sales to be taxed at first point. In case the levy is on the last point and the maximum retail price is to be fixed and published under any Statute, whether instead of determining price actually charged in each case fixed formula is provided by the enactment which has correlation with determining price by keeping in view the provisions of Section 9 of the Sale of Goods Act whether the provision still falls beyond the scope of Entry 54 has not been the subject matter of contention. In this case and therefore, we have not been called upon to decide. In absence of any contention having been raised, it will be hazardous to comment upon the validity of provisions of Section 4A in isolation and the notification issued thereunder in its entirety.In view thereof, we confine our conclusion and hold that to the extent that tax on first point sale of drugs, medicines or any formulation or for that matter any other commodities by a manufacturer/wholesaler/distributor to retailer where MRP is published on package, measure to which rate of tax is to be applied cannot be with reference to such published MRP, which is neither charge nor chargeable by the wholesaler from the retailer whether the tax is charged on sales or on purchase by the parties to sale under Section 4A and notification.

Reasoning: the first point of sale in the State of Rajasthan in most cases which attracts levy of sales tax is by the wholesale distributors to the retailers and not by retailers to end consumers when alone MRP can be charged. Under the Weights and Measures Act and the provisions of Drug Price Control Order, 1995 (in short Control Order), issued by the Central Government under Section 3 of the Essential Commodities Act, 1955 (in short the Essential Commodities Act), the maximum retail price is determined in the case of Scheduled Formulations only. On the other hand, MRP is required to be displayed on the label of container as well as package in respect of all drugs whether scheduled or non scheduled formulations. Mention of price on the package under the concerned provisions is the MRP and not the price necessarily or actually charged at the end sale for any transaction of sale of medicines in the State. The first sale within the State which alone is taxable is in reality at much lesser price than the MRP printed and the same is paid or payable on contractual basis. Under the Control Order the margin at which the medicines are to be sold to retailer has been fixed at a minimum level, that is to say, unless otherwise permitted, a formulation has to be sold to a retailer keeping at least 16% margin in the case of scheduled drugs. Thus by devising aforesaid legal fiction for deeming an artificial sale price for levy of tax having no nexus to the taxable event i.e. transactions of sale of goods at a money consideration paid or payable as defined under the Sales Act, is beyond the legislative competence of the legislature in the State, and therefore the provision isState on the other hand took the stand that what is to be the measure of tax on a sale is within the domain of the State Legislature. Under the impugned provision, tax is levied on a completed sale within the meaning of Section 4 of the Sales Act. However, in what manner the charge is to be levied is a matter of details which can be worked out by Legislation. The fact that maximum retail price is to be determined statutorily and the State Legislature has taken into account the fact that the actual consideration at the first point tax may be lesser than the maximum retail price that may be charged ultimately from the consumer at the last point sale as provided for abatement of MRP by reducing therefrom the sum at prescribed rates of abatement for the purpose of levy of tax, it provides sound basis for uniform liability in the State on such transaction. The levy of tax cannot be said to be wanting in nexus with the taxing event. Therefore, the impugned provisions and the Notifications cannot be said to be ultra vires any provision of the Constitution. It was however not disputed that but for taking the MRP as a basis to provide measure of tax, no fictional price can be fixed as a measure of tax on sale ofprincipal 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 ofthe 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 athe 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 is4A 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 prescribedcharging Section 4 stipulates that the tax payable by a dealer under the Act shall be at single point in the series of sales by successive dealers, as may be prescribed and shall be levied at such rates not exceeding fifty per cent on the taxable turnover, as may be notified by the State Government in the Official Gazette. This shows that there is no scope for multi point levy of tax and the tax is levied on the first point sale within the State in a series of sales and tax is leviable at rate applied to aggregate of price received or receivable by the dealer on such4A does not become workable unless read along with definition of "turnover" and "taxableof the two sections came up before Andhra Pradesh High Court. The said Court while upholding the validity of the Act read down the Section 44AC of the Act and held it only to be an adjunct to Section 206C and to explain provision of Section 206C and not to dispense with the regular assessment in accordance with the provisions of the I.T. Act. It was held that the subject matter of tax vis. income cannot be determined notionally by making such specific provisions when in all other cases only the real income to be computed in accordance with provision of Section 28 to Section 43C. This Court noted that one of the contentions raised in the petition was that tax is levied on "hypothetical income" and not on "real income". In other words, the determination of "real income" was held to be the statutorySection 4A is designed to bring a levy into existence which is divorced from the"sale" subject to tax under the Act, it is beyond legislative competence under Entry 54 of List II of Seventh Schedule. The notification to the extent it intends to levy tax on first point sale with reference to price which could be charged in respect of a subsequent sale which has not come into existence at the time liability to tax arise and is determinedis unsustainable on thatthe decision in Ganga Sugar case (supra) at first flush appears to be supporting the stand of the appellants, on a deeper scrutiny it is crystal clear that the said decision was rendered on peculiar facts of the case. The three challenges as culled out from paragraphs 22, 23 and 25 of the judgment make the position clear that there was no discussion in the background of Entry 54. Para 16 of the judgment traced the history of levy on sugarcane and 40 years old practice of levy on sugarcane was linked with weight. It was significantly noted that it was in the background of "peculiar circumstances of sugarcane economy". The logic cannot be applied to the facts of the present case.We are surprised at the attitude of the States which have put forward the plea that on the passing of the 46th Amendment the Constitution had conferred on the States a larger freedom than what they had before in regard to their power to levy sales tax under Entry 54 of the State List. The 46th Amendment does no more than making it possible for the States to levy sales tax on the price of goods and materials used in works contracts as if there was a sale of such goods and materials. We do not accept the argument that(b) of Articleshould be read as being equivalent to a separate entry in List II of the Seventh Schedule to the Constitution enabling the States to levy tax on sales and purchases independent of Entry 54 thereof. As the Constitution exists today the power of the States to levy taxes on sales and purchases of goods including the "deemed" sales and purchases of goods under clauseof Article 366 is to be found only in Entry 54 and not outside it. We may recapitulate here with observations of the Constitution Bench in the case of Bengal Immunity Company Ltd. v. State of Bihar (1955 (2) SCR 603 ) in which this Court has held that the operative provisions of the several parts of Article 286 which imposes restrictions on the levy of sales tax by the States are intended to deal with different topics and one could not be projected or read into another and each one of them has to be obeyed while any sale or purchase is taxed under Entry 54 of the StateBhopal Sugar Industries v. D.B. Dube (AIR 1964 SC 1037 ) it was noted asIn Gannon Dunkerley & Companys case ([1959] S.C.R. 379.), this Court was called upon to consider whether in a building contract which is one, entire and indivisible, there is sale of goods. It was held by the Court that the Provincial Legislature was not competent under Entry 48, List II, Sch. VII of the Government of India Act, 1935, to impose tax on the supply of materials used in such a contract treating it as a sale. The decision of the Court did not rest upon any peculiar character of a building contract. It was held on the larger ground canvassed in that case, that the expression sale of goods within the meaning of relevant legislative entry had the same connotation as sale of goods in the Indian Sale of Goods Act, 1930, and therefore the State Legislature had no power to enact legislation to levy tax under Entry 48 of List II in respect of transactions which were not of the nature of sales of goods strictly so called; and a building contract not being a transaction in which there was a sale of materials by the contractor who constructed the building, the State was not competent to enact legislation to impose tax on the supply of materials used in a building contract treating it as a sale. It was therefore, held that the definition of sale in the Madras General Sales Tax Act IX of 1939 was to the extent of the extension invalid.6. In Gannon Dunkerley & Companys case ([1999] S.C.R. 379.), the validity of s. 2(h)(ii) of the Madras General Sales Tax Act, 1939, as amended by Act XXV of 1947, in so far as it included goods included in a works contract fell to be determined, in the light of the competence of the Provincial Legislature under Entry 48, List II, in Seventh Schedule of the Government of India Act, 1935. Under the Constitution the relevant entry conferring legislative power upon States to tax sale of goods in Entry 54, List II. As the scheme of division of legislative power under the Constitution has remained unaltered, the principle of Gannon Dunkerleys case ([1999] S.C.R. 379.), applies in adjudging the validity of the provisions of the Madhya Pradesh Act 4 of 1958.7. Consumption by an owner of goods in which he deals is therefore not a sale within the meaning of the Sale of Goods Act and therefore it is not sale of goods within the meaning of Entry 54, List II, Schedule VII of the Constitution. The legislative power for levying tax on sale of goods being restricted to enacting legislation for levying tax on transactions which conform to the definition of sale of goods within the meaning of the Sale of Goods Act, 1930, the extended definition which includes consumption by a retail dealer himself of motor spirit or lubricants sold to him for retail sale is beyond the competence of the State Legislature. But the clause in the definition in Section 2(1) "and includes the consumption by a retail dealer himself or on his behalf of motor spirit or lubricant sold to him for retail sale" which is ultra vires the State Legislature because of lack of competence under Entry 54 in List II, Schedule VII of the Constitution is severable, from the rest of the definition, and that clause alone must be declaredtraditional concept of sale was stressed upon and reference was made to M/s Gannon Dunkerleys case (supra) for the purpose of interpreting true import of the expression "sale of goods".