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CASE NO.: Appeal (civil)  3552 of 2005

PETITIONER: State of Rajasthan and Anr

RESPONDENT: Rajasthan Chemist Association

DATE OF JUDGMENT: 24/07/2006

BENCH: ARIJIT PASAYAT & TARUN CHATTERJEE

JUDGMENT: J U D G M E N T

ARIJIT PASAYAT, J.

       Challenge in this appeal is to the legality of the judgment  rendered by a Division Bench of the Rajasthan High Court,  Jodhpur holding that 4A of the Rajasthan Sales Tax Act, 1994  (in short the ’Act’) as introduced by the State Finance Act,  2004 was not legally sustainable to the extent that tax on first  point sale of drugs, medicines or any formulation or for that  matter any other commodity by a  manufacturer/wholesaler/distributor to retailer where   "Minimum Retail Price" (in short ’MRP’) is published  on  package, measure to which rate of tax is to be applied cannot  be with reference to such published MRP which is neither  charged nor chargeable by the wholesaler from the retailer  whether the tax is charged on sales or on purchase by the  parties to sale under Section 4A and the concerned  Notification in this regard. Writ application filed by the  respondent-Association was allowed to that extent.   

       The controversy arose in the following background:

       By the Finance Act, 2004 Section 4A was introduced  which reads as follows:

        "4A.    Levy 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.

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(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 this Section."  

       Writ Petition 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 said Notification.  

Primary challenge before the High Court was on the  ground that it takes into account an artificial amount as  turnover for the purpose of tax on "sales of goods".  The tax on  sale must be leviable with reference to something related to  taxing event, the sale or purchase of goods which becomes  subject of charge and not de hors it. With reference to Entry  54 of the Second List of Seventh Schedule to the Constitution  of India, 1950 (in short the ’Constitution’) it was submitted  that expression "tax on sale of goods" used in said Entry  means tax on the sale of goods as defined under the Sales of  Goods Act, 1930 (in short the ’Sales Act’) as  modified/extended by Clause 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 the Act.   

       Factually, the first point of sale in the State of Rajasthan  in most cases which attracts levy of sales tax is by the  wholesale distributors to the retailers and not by retailers to  end consumers when alone MRP can be charged. Under the  Weights and 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

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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 is ultra-vires.  

       The State 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 as follows:

"If Section 4A is designed to bring a levy into  existence which is divorced from the sale  subject to tax under the Act, it falls foul with  the legislative competence under Entry 54 of  List II of Schedule VII so also notification-  Annex.3 to the extent it is intended to levy tax  on first point sale with reference to price which  could be charged in respect of a subsequent  sale which has not come into existence at the  time liability to tax arise and is determined ex- hypothesi. However, the perusal of the  language of Section 4A and the notification  issued thereunder by itself does not show that  it applies only in case of sales to be taxed at  first point. In case the levy is on the last point  and the maximum retail price is to be fixed  and published under any Statute, whether  instead of determining price actually charged  in each case fixed formula is provided by the  enactment which has correlation with  determining price by keeping in view the

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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.

       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."

       In support of the appeal, learned counsel for the  appellants submitted that there is a source of power of the  State to levy tax under Article 246 read with Entry 54 of List II  of Schedule VII of the Constitution. A plain reading of the  Entry clearly demonstrates that tax under the said Entry can  be levied on the event of sale or purchase of goods. The said  Entry nowhere requires or mandates that the same can only  be on the sale price of goods. Strong reliance is placed on  decisions in Andhra Sugars Ltd. V. State of A.P. (1968 (1) SCR  705) and Ganga Sugar Corpn. Ltd. V. State of U.P. (1980 (1)  SCC 223) to contend that the Constitution empowers the  States to levy and collect tax on the happening of the taxable  event and thereafter the quantum of tax to be levied and the  measure on which the same can be levied is necessarily left for  the State to decide.  

       Per contra, learned counsel for the respondent submitted  that the High Court’s decision is on terra firma. On an  elaborate analysis of the legal position the decision has been  rendered and needs no interference. It was pointed out that  the decisions in Andhra Sugar and Ganga Sugar cases (supra)  were rendered on the peculiar facts of the cases and they  nowhere depart from the normal principle that tax is to be  levied on the sale price.  

       In order to appreciate rival submissions a few decisions  of this Court which throw beacon light on the issues involved  need to be noted. In fact, the High Court has referred to many  of them.  

       Sales Tax Office, Pilibhit v. M/s Budh Prakash Jai

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Prakash (AIR 1954 SC 459) arose under the U.P. Sales Tax  Act, 1948. In that case the issue related to levy of tax by the  assessing authority on the turnover relating to forward  contract. The assessee had challenged that the imposition of  sales tax on forward contracts was ultra vires the powers of  the State Legislature. The U.P. Sales Tax Act, 1948 had been  enacted by the provincial legislature in terms of the legislative  power conferred under the Government of India Act, 1936  under Entry 48 in List II of the Schedule Seventh of the said  Act. Under Section 2(h) of the U.P. Act, a sale was defined to  include forward contracts. This Court upheld the 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, and the definition of  "sale" in Section 2(h) of the Act XV of 1948 must, to that  extent, be declared ultra-vires.

       It was inter-alia held as follows:

"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  authorizes the imposition of a tax only when  there is a completed sale involving transfer of  title".

       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 price of the goods, and the  reason of the thing requires that such a levy  should not be made, unless stage has been  reached when the seller can recover the price  under the contract."                    The aforesaid decision makes 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 Sales Act 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 levy tax on a  sale which has not come into existence.  

       State of Madras v. Gannon Dunkerley & Co (AIR 1958 SC  560) is another decision which needs to be noted.  A   Constitution Bench of this Court considered the construction  of Entry 48 in List II of Seventh Schedule of the 1935 Act.  Tax  on the sale of goods is in pari materia with Entry 54 in List II  of Schedule VII of the Constitution. The case arose under the  Madras General Sales Tax Act, 1939 as amended by 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.

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       After referring to the definition of expression "sale of  goods" from the times of Roman Law and the Law in England,  this Court culled out and approved the following principle  stated in Benjamin’s book "Sale of Goods":-

"Hence it follows that to constitute a valid sale,  there must be a occurrence of the following  elements viz. (i) the parties competent to  contract (2) mutual assent; (3) thing of sale or  general property in which transfer from seller  to buyer and; (iv) a price in money paid or  promised".

       On the aforesaid premises,  the Court on considering the  Indian Law and after referring to Section 77 of the Contract  Act, (before enactment of Sale of Goods Act) defining sale as  originally enacted in it, and the provisions of Sales Act reached  the following conclusions about price as an essential element:

       "that it must be supported by money  consideration, and that as a result of the  transaction property must actually passed on  the goods unless all these elements are  present, there can be no sale".  

       Following conclusions were arrived approving the view in  Budh Prakash’s case (supra):-

       "A power to enact a law with respect to tax on  sale of goods under Entry 48 must, to be intra  vires, be once 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; \005\005\005.."sale" in Entry 48  must be construed as having the same  meaning which it has in the Sale of Goods Act,  1930\005\005\005\005.. 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 conclusions it was held :-

       "the expression "sale of goods" in Entry  48 is a nomen juris, its essential ingredients  being an agreement to sell moveable for a price  and property passing therein pursuant to that  agreement".

       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 the Sales Act. Tax on value of  the material used in construction of building was held to be  ultra-vires.

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       The decision in Firm of M/s Peare Lal Hari Singh v. The  State of Punjab and Anr. (AIR 1958 SC 664) also relates to  imposition of tax on supply of materials used in building  contracts and this Court followed its earlier decision in   Gannon and Dunkerley case (supra) and held that the  expression "sale of goods" in Entry 48 in List II of Seventh  Schedule of the Government of India Act, 1935 has the same  import which it bears in the Sales Act.

       The principle was reiterated in Bhopal Sugar Industries  Ltd., M.P. v. D.P. Dube Sales Tax Officer, Bhopal Region,  Bhopal (AIR 1967 SC 549) where the question arose whether  giving extended definition of "retail sale" which sought to  render consumption by the owner of motor spirit liable to tax  under the concerned Sales Tax Act by virtue of Section 3, is  beyond the competence of the State Legislature and hence  void. This Court relying on its earlier decision in Gannon and  Dunkerley (supra) held as follows::

"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 it is transferred from the seller to  the buyer; and

(4)     a price in money paid or promise.

A transaction which does not conform to this  traditional concept of sale cannot be  regarding as one in respect of which the State  Legislature is competent to enact an Act  imposing liability for payment of tax".                   The Court quashed the assessment made on the  aforesaid premises.         Levy by the State of Uttar Pradesh as to the basis of levy  once a transaction is held to be a transaction of sale came up  for consideration by a Constitution Bench in Ganga Sugar’s  case (supra). This Court said:

"Tax on sale or purchase must be on the  occurrence of a taxing event of sale  transaction".

        This Court in M/s Govind Saran Ganga Saran v.  Commissioner of Sales Tax & Ors. (AIR 1985 SC 1041) on  analyzing Article 265 noted as follows:

"The components which entered into tax are  well known. The first is the character of the  imposition known by its nature which  transpires attracting the levy. The second is a  clear communication of the person on whom  the levy is imposed and which is obliged to pay  the tax. The third is rate at which the tax is  imposed and the fourth is the measure or  value to which the rate is applied for  computing the tax liability".

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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, 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  identified.  

       In Union of India v. Bombay Tyre International Ltd. (AIR  1984 SC 420) the expressions subject of tax, the measure of  tax and nexus between the two have been succinctly analysed.  The decision arose in the context of Central Excise and Salt  Act, 1944 (in short ’Excise Act’). The controversy was what  should be included in the measure of computation of liability  and what fell outside the scope of measure to be excluded  from consideration. Referring to a large number of decisions of  different courts, including some of the decisions we have  referred to above, the principle succinctly stated in Seervai’s  Constitutional Law was approved by observing as follows:-

       "Another principle for reconciling  apparently conflicting tax entries follows from  the fact that a tax has two elements, the  person, things 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."  

       The Court also held that the measure of tax though not  always essential but is often a relevant consideration to judge  the nature of levy. Following passage from R.R. Engineering  Company v. Zila Parishad Bareilly (AIR 1980 SC 1088) was  approved:

"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\005\005\005.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".

This Court recognised 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, by  observing as follows:

       "Any standard which maintain a nexus

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with the essential character of the levy can be  regarded as a valid basis for assessing the  measure of the levy".   

       With these premises this Court found that while nature  of an excise levy is indicated by the fact that it is imposed in  respect of manufacture or production of an article, the point at  which it is collected is not determined by the point of time  when manufacture is completed but will rest on consideration  of administrative convenience and that generally it is collected  when the article leaves the factory for the first time.  

       The question of tax on sale of goods may be examined in  the said background. The subject of tax being sale, measure of  tax for the purpose of quantification must retain nexus with  ’sale’ which is subject of tax. As noticed above, tax on sale of  goods, is tax on vendor in respect of his sales and is  substantially a tax on sale price. The vendor 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.  

       Andhra Sugars’s case (supra) concerned the challenge to  levy of sales tax under 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 this 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 this 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 amount of purchase prices. But the tax  need not necessarily be levied on a dealer 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."   

       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 contents of taxing event was  not the proposition laid.  

       It was observed in Ganga Sugar’s case (supra) as follows:

"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 as too  impractical to tailor the purchase tax. It may

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even be, in rare cases, iniquitous to link  purchase tax with price, if more sensible bases  can be found".  

       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.  

       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.  

       This Court considered the ambit and scope of legislative  power of the State Legislature while imposing tax on sale of  goods in Hotel Balaji & Ors v. State of Andhra Pradesh and  Ors. (AIR 1993 SC 1048) wherein this Court said:

"So long as the levy retains the basic character  of a tax on sale, the legislature can levy it in  such mode or in such manner as it things  appropriate".

In this connection, it is relevant for the present purpose 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 on 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.  

       In Ganga Sugar’s case (supra) the court emphasized 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.  

       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.         

       In Hotel Balaji’s case (supra) levy of purchase tax at the

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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 this 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 purchased tax. In holding that levy was  essentially a tax on purchase of goods within the State, one of  the factors which weighed with this 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 of tax  on sale, price on which transaction took place and not the  value of goods is relevant criterion to hold nexus between  measure of tax and the taxing event.  

       The position would have been different had the tax on  taxable transaction of purchase have been levied with  reference to price relatable to subsequent transaction of sale.  In that event, the price forming part of subsequent sale would  have lost nexus with the transaction that become taxable in  the State.  

       However, this case did not lay down the principle that  where price is the measure to which rate of tax can be applied,  it can be something else other then the price component of  taxing event, whether agreed by mutual consent or as  regulated by statutes.

       These cases give a clear picture that Entry 54 in List II of  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.  

       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.  

       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

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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.  

       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.  

       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.

       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.  

       The charging 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 such sales.       

       Section 4A does not become workable unless read along  with definition of "turnover" and "taxable turnover".  

       The retail price of a formulation needs determination  under paragraph (7) of the order and the Government if  empowered by order to fix the price in accordance with  paragraph (7) of the order to be charged by a retailer. Where

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the maximum retail price is fixed as provided under paragraph  7 of Control Order, para 19 provides for price that can be  charged from a retailer by a wholesaler, it reads as under:

"19.    Price of formulation 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"

Applying the principles enunciated above, 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.  

       Another distinguishing feature to be kept in mind is that  centre point of legislation under Entry 54 of List II of Seventh  Schedule is ’sale’ in contrast with central point of legislation  under Entry 84 of List I of Eighth Schedule  i.e. ’Goods  manufactured or produced". While basic nexus of levy in the  former is "sale of specified goods", in the latter it is "goods  manufactured or produced in India".  

       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.  

       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.  

       It may be relevant to recall here that this Court in Hotel  Balaji’s case (supra) 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 produce was sold later, it had retained its character as a

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tax on purchase.  

       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 becomes 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 permitted to be done the  legislation can provide for any measure the purpose of  applying the rate of tax, whether it is founded on MRP or any  other fixed value which legislature may provide will make little  difference. It is not contended by appellant that even if the  measure is not relatable to MRP, it can substitute any value as  a measure of tax. Subject of tax is not the goods or goods sold,  but a transaction of ’sale of goods’ as defined under the Sales  Act.  

       Learned counsel for the appellant submitted that Union  of India and Anr. v. A. Sanyasi Rao and Ors. (1996 (219) ITR  330) supports his stand. Section 44AC was inserted in Income  Tax Act, 1961 (in short ’IT Act’) by the Direct Tax Laws  (Amendment) Act, 1989 w.e.f. 1.4.1989. Section 206C was  inserted in the said Act by Finance Act, 1988 w.e.f. 1.4. 1988.  Explanation to Section 44AC was inserted by Finance Act,  1990 w.e.f. 1.4.1991. These provisions enabled the revenue to  estimate the profits on a presumptive basis in the case of  persons dealing in country liquor, timber, forest produces etc.  Revenue’s intention was to get over the problem of assessing  income and recovering tax in cases of person dealing in such  commodities, as business of such persons existed only for  short period, and after period of contract in many cases, it was  not even possible to trace the concerned assesses and many  were found to be dealing benami. Section 44AC occurred in  Chapter IV of the I.T. Act deals with "computation of income".  Section 44AC(1) determines profits and gains of the year from  trading of certain specified goods like liquor at a particular  percentage of package price specified therein. The object of  said provision was explained in a memorandum as "with a  view to combat large scale tax evasion by person deriving  income from such businesses where the bill seeks to insert  new Section 44AC to provide for determination of income in  such cases". About Section 206C it was stated that "it is  proposed to introduce a new Section 206C to provide that any  person being a seller referred to in Section 206C shall collect  income tax of a sum equal to 20% of the amount paid or  payable by the buyer as increased by a surcharge for the  purpose of Union".  

       Interpretation of 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 statutory mandate.          

       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

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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  determined ex-hypothesi is unsustainable on that basis.  

       Though the 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.  

       In Builders’ Association of India and Ors. v. Union of  India and Ors. (1989 (2) SCC 645) it was noted as follow:                                  "36. Even after the decision of this Court in the  State of Madras v. Gannon Dunkerley & Co.  (Madras) Ltd. it was quite possible that where  a contract entered into in connection with the  construction of a building consisted of two  parts, namely, one part relating to the sale of  materials used in the construction of the  building by the contractor to the person who  had assigned the contract and another part  dealing with the supply of labour and services,  sales tax was leviable on the goods which were  agreed to be sold under the first part. But  sales tax could not be levied when the contract  in question was a single and indivisible works  contract. After the 46th Amendment the works  contracts which was an indivisible one is by a  legal fiction altered into a contract which is  divisible into one for sale of goods and the  other for supply of labour and services. After  the 46th Amendment, it has become possible  for the States to levy sales tax on the value of  goods involved in a works contract in the same  way in which the sales tax was leviable on the  price of the goods and materials supplied in a  building contract which ad been entered into  in two distinct and separate parts as stated  above. It could not have been the contention of  the revenue prior to the 46th Amendment that  when the goods and materials had been  supplied under the distinct and separate  contract by the contractor of the purpose of  construction of a building the assessment of  sales tax could be made ignoring the  restrictions and conditions incorporated in  Article 286 of the Constitution. If that was the  position can be States contend after the 46th  Amendment under which by a legal fiction the  transfer of property in goods involved in a  works contract was made liable to payment of  sales tax that they are not governed by Article  286 while levying sales tax on sale of goods  involved in a works contract? They cannot do  so. When the law creates a legal fiction such

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fiction should be carried to its logical end.  There should not be any hesitation in giving  full effect to it. If the power to tax a sale in an  ordinary sense is subject to certain conditions  and restrictions imposed by the Constitution,  the power to tax a transaction which is deemed  to be a sale under Article 366(29-A) of the  Constitution should also be subject to the  same restrictions and conditions. Ordinarily,  unless thee is a contract to the contrary in the  case of a works contract the property in the  goods used in the construction of a building  passes to the owner of the land on which the  building is constructed, when the goods or  materials used are incorporated in the  building. The contractor becomes liable to pay  the sales tax ordinarily when the goods or  materials are so used in the construction of  the building and it is not necessary to wait till  the final bill is prepared for the entire work. In  Hudson’s Building Contracts (8th Edn.) at page  362 it is stated thus:

       "The well known rule is that the  property in all materials and fittings,  once incorporated in or affixed to a  building, will pass to the freeholder \026  quicquid plantatur solo cedit. The  employer under a building contract may  not necessarily by the freeholder, but  may be a lessee or licensee, or even have  no interest in the land at all, as in the  case of a sub-contract. But once the  builder has affixed materials, the  property in them passes from him, and at  lest as against him they become the  absolute property of his employer,  whatever the latter’s tenure of or title to  the land. The builder owner may himself  be entitled to sever them as against some  other person \026 e.g. as tenant’s fixtures.  Nor can the builder reclaim them if they  have been subsequently severed from the  soil by the building owner or anyone else.  The principle was shortly and clearly  stated by Blackburn J. in Appleby v.  Meyers(1867 LR 2 CP 651): ’Materials  worked by one into the property of  another become part of that property’.  This is equally true whether it be fixed or  movable property. Bricks built into a wall  become part of the house, thread stitched  into a coat which is under repair, or  planks and nails and pitch worked into a  ship under repair, become part of the  coat or the ship."

40.     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

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Amendment does no more than making it  possible for the States to levy sales tax on the  price of goods and materials used in works  contracts as if there was a sale of such goods  and materials. We do not accept the argument  that sub-clause (b) of Article 366(29-A) should  be read as being equivalent to a separate entry  in List II of the Seventh Schedule to the  Constitution enabling the States to levy tax on  sales and purchases independent of Entry 54  thereof. As the Constitution exists today the  power of the States to levy taxes on sales and  purchases of goods including the "deemed"  sales and purchases of goods under clause  (29-A) of 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 State List."      

       In Bhopal Sugar Industries v. D.B. Dube (AIR 1964 SC  1037) it was noted as follows: 5. In Gannon Dunkerley & Company’s 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 & Company’s 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

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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 Dunkerley’s 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 declared invalid."

  The traditional concept of sale was stressed upon and  reference was made to M/s Gannon Dunkerley’s  case (supra)  for the purpose of interpreting true import of the expression  "sale of goods".                                                 

In that view of the matter, the judgment of the High  Court does not warrant any interference and the appeal is  dismissed. However, it is made clear that if the tax component  has been passed on to the subsequent purchases claim for  refund shall not be entertained. But where it has not been so  passed on and has been deposited with the authorities, the  same shall be adjusted against future demands, if any.  

       The appeal is dismissed. No costs.