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PETITIONER: MUKERIAN PAPERS LTD-

       Vs.

RESPONDENT: STATE OF PUNJAB

DATE OF JUDGMENT13/02/1991

BENCH: AHMADI, A.M. (J) BENCH: AHMADI, A.M. (J) MISRA, RANGNATH (CJ) VENKATACHALLIAH, M.N. (J)

CITATION:  1991 SCR  (1) 347        1991 SCC  (2) 580  JT 1991 (1)   400        1991 SCALE  (1)221

ACT: Punjab General Sales Tax Act, 1948: Sections 4B, 10(6)  and 11D-Raw  Material  consumed  in manufacture  of  goods  sent outside the State-Purchase Tax on such raw material-Levy of- Whether  valid interest and penalty on such  levy-Imposition of.

HEADNOTE: The appellant, a registered dealer under the Punjab  General Sales Tax Act, 1948 despatched some part of the manufactured goods  outside  the  state, without paying the  tax  on  the taxable  raw  material consumed in the manufacture  of  such goods.   The assessing authority issued a show cause  notice for  the assessee’s failure to pay the  said  tax.  Interest was  also   demanded  on  the  tax  amount.   The   assesses disputed   its liability to pay penalty and interest on  the amount of tax withheld  on the plea that there was no wilful default  on its part, as it  was  under  a bona fide  belief that no tax was to be paid on the  raw  material  used  in the  manufactured goods sent outside  State.  The   assesses further   stated that it had acted on legal advice  that  it was not liable to  pay  any  Purchase Tax and, therefore, in the  absence of a clear intention to avoid  the  payment  of tax,  there could be no question of imposition  of   penalty and demand for  interest.  The  assessee’s  submissions  did not   find  favour with the Revenue, as also  the  Tribunal, and  the  assesses  sought  a  reference to the  High  Court under section 22(1) of the Act.  But  the  Tribunal rejected application   for   reference.   Thereafter   the   assesses preferred   appeals  to this Court, against  the  Tribunal’s rejection   of  reference  as also the Tribunal’s  order  in appeal.      On  behalf  of the appellants, it was  contended   that the   main  question involved in this case is  concluded  by several  decisions of this Court,  and it was not liable  to pay  the tax, as demanded by the Revenue.      On  behalf  of the Revenue it was  contended  that  the assesses was liable to pay the tax on the raw materials used in the manufactured goods sent outside the State.               Allowing the appeals, this Court,                                                         348

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HELD:  1.1 Under Section 4B of the Punjab General Sales  Tax Act,  1948 the tax becomes exigible not on the  purchase  of the raw material or on the use thereof in the manufacture of a new and distinct commodity but only after the goods  so manufactured  are despatched to a place outside  the  State. Once  the goods are sent outside the State the purchaser  is made  liable  to pay the tax at the rate prescribed  on  the purchase  of  such goods provided no tax is payable  on  the purchase  thereof under any other provision of the Act.   It is obvious that the tax though described as purchase tax  is in effect a tax on consignment since it becomes effective on the  happening of an event which has nothing to do with  the actual  purchase.  Even if the raw material is used  in  the manufacture  of  any taxable goods, the purchaser  does  not become  liable  to  pay tax on the raw  material  until  the manufactured item is sent out of the State.  And between the manufacture  of the goods out of the purchased raw  material and  their actual despatch outside the State there may be  a long  time gap.  The liability of tax   only after  despatch of  the manufactured goods outside the State and that  event may have no relation to the actual purchase or  manufacture. That being so, the tax though described as a purchase tax is actually a tax on the consigmment of the manufactured goods, the  levy of which is beyond the competence of the State  as the  power  to impose such tax is vested  in  Parliament  by virtue  of clause (h) of Article 269(1) of the  Constitution read  with Entry 92B in Schedule 7, List 1.  [352H;  353A-E; 354B] 1.2.  Even though the language of section 4B of the  Act  is not identical to section 9(1) of the Haryana Sales Tax  Act, it is in substance similar in certain respects, particularly in  respect of the point of time when the liability  to  pay tax arises.  Under that provision also the liability to  pay purchase  tax  on the raw material purchased  in  the  State which  was consumed in the manufacture of any other  taxable goods  arose only on the despatch of the goods  outside  the State. [353D-E]          M/s.  Goodyear India Ltd. v. State of Haryana,  AIR 1990 SC 781; applied.           State  of Tamil Nadu v. M. K. Kandaswami  etc.,  [ 19761 1 SCR 38; referred to. 2.    Since  the Revenue was not entitled to  levy  the  tax which  it  purported  to levy as purchase  tax  on  the  raw material, there can be no question of imposition of  penalty or  interest  on the unpaid amount of tax.   Therefore,  the action  taken in exercise of power under section  10(6)  and section 11D of the Act cannot be allowed to stand. [354G-H]                                                    349

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeal Nos.  936  (NT), 937, 2339 & 2340 of 1988. From the Judgments and Orders dated 12.8.1987, 3.7.1986, and 22.8.1988  of  the  Sales  Tax  Tribunal,  Punjab  in  Misc. Reference  No. 60 of 1986-87, First Appeal No. 379  of  1986 and in Appeal Nos. 46 and 47 of 1987-88.                                    B               V.M.  Tarkunde,  R.C.  Misra  and  Ms.   Meera Aggarwal for the Appellant.                H.S. Munjral and C.M. Nayar for the Respondent.             c       The Judgment of the Court was delivered by       AHMADI,   J.  the  assessee-appellant  M/s.   Mukerian

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Papers   Ltd., is a company engaged in  the  manufacture  of paper   at   Mukerian  in  the State of Punjab  and   is   a registered   dealer  under  the  Punjab  General  Sales  Tax Act,   1948   (’The   Act’   hereinafter).   The    assessee despatched   some part of the  manufactured  goods   outside the   State   of   Punjab  for sale  on  consignment  basis. However,  the assessee  had  not  paid  the  taxes  on   the taxable  raw  material  consumed  in  the  manufacture    of such goods. A  show  cause  notice  was,  therefore,  issued by  the  Assessing Authority under section 10(6) of the  Act for   the  assessee’s  failure  to pay the taxes along  with the   return  as  required  by  section  4B  of   the   Act. Interest  on  the  tax amount   which   the   assessee   had failed  to  pay was also claimed under Section  11D  of  the Act.   The  assessee  disputed its liability to pay  penalty and  interest on the  amount  of  tax  withheld on the  plea that  there was no wilful or intentional  default   on   the part  of the assessee to pay the taxes due under section  4B of   the  Act  as  the assesee was under a bona fide  belief that  no  tax  was   to  be  paid   on   the   raw  material purchased   for   the  manufacture  of   paper   which   was ultimately sent outside  the  State  on  consignment  basis. This   impression,based on the language  of   the   statute, stood   confirmed   by  the  subsequent  decisions  of   the Punjab  &  Haryana  High  Court  in  the  case  of  Goodyear India Ltd., 53 STC 163 and  Bata  India  Ltd.,  54  STC  226 till  those  decisions were overruled by  the   Full   Bench decision   in   Des  Raj  Pushpak  Kumar’s   case   58   STC 393.  The   assessee   further   contended that it had acted on  legal advice  that  it  was  not  liable  to   pay   any purchase tax and, therefore,  in  the  absence  of  a  clear intention  to avoid the payment of tax, there could  be   no question    of   imposition   of  penalty  and  demand   for interest.   On   the   other  hand  it   was   contended  on behalf of the revenue  that  the  two  decisions  on   which the  assessee                                                    350 placed  reliance  were subsequent to the date on  which  the liability  to pay the tax had arisen and hence the  assessee could  not take shelter under the said two  decisions.   The submissions  made  on behalf of the assessee  did  not  find favour  with the Revenue.  The assessee thereupon  sought  a reference  under section 22(1) of the Act but the  Presiding Officer of the Tribunal by its order dated 12th August, 1987 rejected the application as he saw no point of law to make a reference to the High Court.  Civil Appeals Nos. 936 and 937 of  1988 arise out of the said order of ]2th  August,  1987. In  the  other  two appals Nos. 2239 and 2240  of  1988  the appellants  have  come  to  this  Court  directly  from  the Tribunal’s  order  in  appeal  without  going  through   the formality of seeking  a reference under section 22(1) of  the Act  in  view of the rejection of a similar request  by  the impugned  order  of 12th August, 1987.  This  Court  granted special leave to appeal without insisting on the appellant- assessee  approaching  the High Court in view  of  the  Full Bench  decision  of that Court in Des Raj’s  case.   As  the facts  are  identical and common questions of law  arise  we have thought it proper to dispose of all the four appeals by this  common  judgment.        Counsel for the assessee-appellant contended that the main  question of law involved in this case is concluded  by the  decision of this Court in M/s.  Goodyear India Ltd.  v. State  of  Haryana,  AIR 1990 SC 781  which  was  an  appeal arising  from the High Court’s decision in the case  of  the same  assessee  reported  in  (1983) 53  STC  163  to  which

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reference is made hereinabove.  He further pointed out  that while  deciding the true scope of section 9 of  the  Haryana General Sales Tax Act, 1974, which, says counsel, is in pari materia with section 4B of our Act, this Court affirmed  the High  Court’s view expressed in Goodyear India Ltd., 53  STC 163  and  Bata India Ltd., 54 STC 226 and  disapproved   the Full  Bench view in Des Raj’s case 58 STC 393.  Counsel  for the Revenue, however, placed strong reliance on this Court’s decision  in  State of Tamil Nadu v. M.K.  Kandaswami  etc., [19761  1  SCR 38 and submitted that  the  assessee’s  -case falls  within the ratio of the said decision.   But  counsel for the assessee pointed out that this Court had  considered the  ratio of Kandaswami’s case in  the subsequent  decision and  had  pointed out that in that case this Court  was  not concerned  with  the  actual  argument  with  which  it  was concerned  in  the  subsequent  case  and,  therefore,   the decision  in  the former case is not an  authority  for  the question  of law involved in the subsequent case.  In  order to  appreciate the rival submissions it would, we think,  be appropriate  to  examine the language of section 4B  of  the Act, which reads as under:       "4B.  Levy of Purchase tax on certain goods-                                                       351 Where  a  dealer  who is liable to pay tax  under  this  Act purchases any goods other than those specified in Schedule B from any source and-          (i)  uses them within the State in the manufacture.          of goods specified in Schedule B, or               B          (ii)  uses  them   within   the   State   in    the          manufacture,of  any  goods,   other   than    those          specified  in  Schedule  B,and  sends  the    goods          so    manufactured    outside   the  State  in  any          manner  other   than  by  way  of   sale   in   the          course   of  inter-State  trade  or   commerce   or          in    the course of export out of the territory  of          India; or          (iii)  uses such goods for a  purpose  other   than          that   of resale within the State or sale  in   the          course   of  inter-State  trade  or   commerce   or          in  the  course  of  export out of the territory of          India, or                                 D           (iv) sends  them  outside  the  State  other  than          by   way  of sale in the  course   of   inter-State          trade  or  commerce  or in the course of export out          of the territory  of  India,          and no tax is  payable  on  the  purchase  of  such          goods  under any other provision of this Act, there          shall   be   levied  a  tax  on the   purchase   of          such   goods  at  such  rate  not   exceeding   the          rate  specified under sub-section (1)  of   section          5  as  the State Government may direct.       We  may  first  read  the  plain   language   of   the section   bearing  in mind the contextual setting  and   the objective  of  the  law.  The  section seeks to provide  for the levy of purchase tax on certain goods  specified  in  to levy  a  tax  on the purchase of  goods,  other  than  those Schedule  B,  which  are used in the  manufacture  of  goods specified  in  Schedule B or in the  manufacture  of  goods, other  than those specified in Schedule B and  sent  outside the  State  in any manner other than by way of sale  in  the course of inter-State trade or commerce or in the course  of export out of Indian territory provided of course no tax  is payable on the purchase of such goods under any provision of

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the  Act.  Where a dealer purchases raw material other  than the  goods referred to in Schedule B and uses the  said  raw material  within  the  State in  the  manufacture  of  goods specified  in Schedule B, he becomes liable to purchase  tax at the rate specified by the State Government not exceed-                                                       352     ing the maximum fixed under section 5(1) provided no tax is paid on such goods under any other provision of the  Act. However,  when the raw material is used within the State  in the  manufacture  of goods under than the one  specified  in Schedule  B  and  the  manufacturer  ’sends’  the  goods  so manufactured outside the State in any manner (other than  by way  of sale in the course of inter-State trade or  commerce or  in the course of export out of India) he becomes  liable to pay purchase tax at the rate specified.  To attract  this provision the revenue must show that (i) the manufacturer is a  dealer  liable  to  pay tax under the  Act  (ii)  he  has purchased  goods  other than those specified in  Schedule  B from any source (iii) he has used the said goods within  the State  in  the  manufacture of any goods  other  than  those specified  in Schedule B and (iv) he has sent the  goods  so manufactured outside the State in any manner other than  the one  excepted.   Before this provision can  be  invoked  the above  requirements  must  be  strictly  proved. The   first requirement  identifies  the tax-payer, the second  and  the third  requirements identify the goods liable to tax in  the event  the fourth requirement of the goods  so  manufactured being  sent  outside  the  State  takes  place.   Thus   the liability  to  pay  purchase  tax does  not  accrue  on  the purchase of the raw material within the State or its use  in the  manufacture  of  goods other than  those  specified  in Schedule  B  but  falls  on the dealer  when  the  goods  so manufactured  are  sent  outside  the  State.   To  avoid  a duplication  of the levy the charging clause  provides  that the purchase tax will be leviable under Section 4B provided it  is  not  leviable  on the said  goods  under  any  other provision  of the Act.  Although the purchase tax is  levied on  the  raw  material purchased by  the  manufacturer,  the actual levy is postponed till after the said raw material is consumed in the manufacture of another commercially distinct commodity having its own separate identity and character and is  actually sent outside the State.  The relevant  date  is the  date   on which the goods are sent outside  the  State. The  taxable  event takes place when the taxable  goods  are sent   outside   the  State  and  not   before   that   date notwithstanding the fact that the raw material was purchased and  converted into a new commodity long before  that  date. In the present case since it is not disputed that the demand of  purchase  tax  is  based on  the  fact  that  the  goods manufactured  within the State from raw  material  purchased earlier  had  been  sent  outside  the  State  of  sale   on consignment basis, we are concerned only with clause (ii) of Section 4B whereunder the tax liability accrues on the  date the  goods are sent outside the State.  Under  Section 4B of the Act  the  tax   becomes   exigible not   on  the purchase of the raw material or on   the   use thereof  in  the  manufacture                                                        353 of   a   new  and  distinct  commodity   but   only    after the    goods   so manufactured are despatched  to  a   place outside  the  State.  Once  the   goods are sent outside the State  the purchaser is made liable to  pay  the tax at  the rate prescribed on the  purchase  of  such  goods   provided no  tax is payable on the purchase thereof under  any  other provision   of  the Act. It is, therefore, obvious that  the

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tax though described  as  purchase tax is in effect a tax on consignment since it becomes  effective  on  the   happening of an event  which  has  nothing  to  do  with  the   actual purchase.  Even  if  the  raw  material  is  used   in   the manufacture   of  any taxable goods, the purchaser does  not become  liable  to  pay  tax  on  the raw material until the manufactured item is sent  out  of  the  State.  And between the manufacture of  the  goods  out  of  the  purchased  raw material  and  their  actual despatch  outside   the   State there   may  be  a  long time gap. There is,  therefore.  no room  for  doubt  that  the  liability  of  tax  falls  only after  despatch  of  the  manufactured  goods  outside  the State  and  that  event may  have   no   relation   to   the actual   purchase   or  manufacture.  That  being  so,   the conclusion  is  inescapable  that  the  tax though described as  a purchase tax is actually a  tax  on  the   consignment of  the  manufactured  goods.  Therefore,  even  though  the language    of  section 4B of the Act is not identical  with the relevant  part  of  section 9( 1) of the Haryana Act, it is  in substance similar in  certain   respects.particularly in  respect of the point of time when the liability  to  pay tax arises. Under that provision, as here, the liability  to pay   purchase   tax on the raw material purchased  in   the State   which   was  consumed  in  the  manufacture  of  any other  taxable   goods  arose  only  on  the   despatch   Of the  goods  outside the State. We are,  therefore,  of   the opinion  that  the ratio of the said decision of this  Court in   Goodyear  India  Ltd.  (supra) applies on all fours  to the  main  question  at issue in this case.          In the case of Goodyear India Ltd.  (supra),   this Court   was   concerned with the interpretation  of  section 9(1) and  section  24(3)  of  the  Haryana  Act.  The  facts revealed  that   the   assessee-company,   which was engaged in  the  manufacture  of  automobile  tyres  and  tubes   at its  factory  at  Ballabgarh  in  Haryana,   had   purchased raw   materials  from within and outside the State  for  the manufacture   of  the  said  products.      After   manufacturing   the   same,   the     assessee- company    despatched some part of the manufactured products to  its depots outside  the  State  -  The  revenue   sought to   recover   purchase   tax   on    the    raw    material purchased  in the State and  consumed  in  the   manufacture of  such  goods under section 9(1) of the Haryana  Act.  The action   of   the  revenue  was challenged   in   the   High Court  of  Punjab  &  Haryana.  The  High  Court held   that both  on  principle  and  on  precedent,  a  mere   despatch of  goods  to  various  depots   of   the   assessee-company outside  the  State  did                                                  354 not  fall  within the ambit of the phrase "disposes  of  the manufactured  goods in any manner otherwise than by  way  of sale"  employed in section 9(l)(a)(ii) of the  Haryana  Act. The High Court also held that the decision of this Court  in Kandaswami (supra) was not an authority for the  proposition that a mere despatch of goods outside the State fell  within the ambit of the said provision.  This Court while upholding the  final  order  passed  by the High  Court  came  to  the conclusion  that as the tax levied was a tax on  consignment of  goods, the provisions imposing the said tax were  beyond the  competence  of the State Legislature as  the  power  to impose such tax vested in Parliament by virtue of clause (h) of Article 269(1) of the Constitution read with Entry 92B in Schedule  7. List I, inserted by the 46th Amendment  to  the Constitution.   This Court also clarified that  even  before the  amendments introduced by the 46th Amendment  came  into

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effect,  Entry 54, in List 11 of the 7th Schedule read  with Article  246(3) of the Constitution conferred power  on  the State  Legislature  to impose a tax on sale or  purchase  of goods  and  not  on the mere  consignment  of  goods,  since consignment  of  goods  simpliciter is neither  a  sale  nor purchase  or disposal of  goods.  Holding that in  substance the levy was sought on the consignment of goods, this  Court held  that it was not liable to tax since the State’s  power to  tax  did not extend that far.       Counsel for the revenue placed reliance on an  earlier decision  of this Court reported in the case  of  Kandaswami (supra)  which dealt  with Section 7A of the Tamil Nadu  Act which  though not identical was similar to Section  9(1)  of the Haryana Act.  The decision in Kandaswami though rendered in  the context of an analogous provision was  distinguished by  this Court in Goodyear India Ltd. on the ground that  it did  not  touch  the core of the question at  issue  in  the latter case.  This aspect of the matter is elaborately dealt with  in paragraphs 31 to 34 at page 796 of the Report.   We need  not dilate on this any more since the  correctness  of the judgment in Goodyear India Ltd, is not canvassed  before us.   This Court, therefore, affirmed the High court’s  view in  Goodyear India Ltd., 53 STC 163 and Bata India  Ltd,  54 STC  226 and disapproved of the Full Bench decision  in  the case of Des Raj 58 STC 393. Once  it is found that the revenue was not entitled to  levy the  tax which it purported to levy as purchase tax  on  the raw  material,  there can be no question  of  imposition  of penalty or interest on the unpaid amount of tax.  Therefore, the  action taken in exercise of power under  section  10(6) and section 11D  of the Act cannot be allowed to stand   and must be set aside.                                                     355 In  the  result these appeals succeed.  We allow  all  these appeals  and  set  aside  the  decision  of  the  Sales  Tax Tribunal, Punjab, in each case.  Any recovery made under the impugned  orders will be refunded within a period  of  three months   from  today.   Having  regard  to  the  facts   and circumstances of the case, we make no order as to costs.                B          G. N.                               Appeals allowed.                                                        356