GOODYEAR INDIA LTD. ETC. ETC. v. STATE OF HARYANA & ANR. ETC. ETC.

Dismissing the petitions of the appellants the High Court held that (i) three different phases are contemplated in section 13-AA of E .the Act, namely, the initial purchase of the raw material, the consump- tion thereof in the manufacture of taxa6le goods, and the despatch of the manufactured goods outside the State. If the goods purchased remain in the same form within the State, the question of levying additional tax would not arise. The High Court came to the conclusion that there was no ground to hold that the additional tax was levied on the despatch of goods and was unconnected with the initial transaction of purchase, as it was required to be paid in addition to the sales or purchase tax paid or payable in respect of the same goods which had been so purchased before the conditions specified in section 13-AA are fulfilled, (ii) in the context of the other provisions of the Act, a sort of concession is given at the time of purchase on the quantum of tax payable on the purchase of goilds which fall under Part I of Schedule C. However, there is a dear mandate of law, which is clearly under- stood between seller and buyer, that ihough tax at the conncessional rate is paid, the obligation to pay the additional tax on the happening of certain events, namely, use of such goods in manufacture of finished goilds, and despatch of finished goods outside the State, is undertaken H

550 SUPREME COURT REPO!l.TS [1989] Supp. 1 S.C.R.

by the purchaser; and (iii) implicit in the low rates of tax prescribed on raw material attributable to goods in Part I of Schedule C is the condi- tion precedent that to avail of this concession the goods in question are required to be sold in the Staie after being used in the manufacture of other taxable goods. The High Cou~t, further, was of the opinion that a manufacturer who purchases raw-material at a concessional rate on the strength of declaration in Form 15 cannot transfer the goods manufactured out of such raw-material outside the State. The High Court held that if he does so, he is liable to pay purchase tax at the full rate on the raw material under section 14. According to the High Court, similarly, a manufacturer who purchases goods covered in Part III of Schedule C, uses them in the manufacture of other taxable goods which he despatches outside the State, is liable to pay tax at rates c ranging from 6% to 15%. Section 13-AA, therefore, far from being discriminatory, serves to wipe out any discrimination between the two categories of manufacturers mentioned above and manufacturers purchasing raw-material covered by Part I of Schedule C, according to the revenue. The High Court was of the opinion that the additional purchase tax leviable under section 13-AA of the Bombay Act, is on the purchase value of VNE oil used in the manufacture of goods trans- ferred outside the State and not on the value of the manufactured goods so transferred. It further held that the tax levied under section 13-AA of the Bombay Act, falls squarely and exlcusively under Entry 54 of the State List in the 7th Schedule to the Constitution of India and the State Legislature was competent to levy it. It does not even remotely fall under Entry 92B of the Union List, according to the High Court.

The High Court was also of the view that the goods taxed under· section 13-AA of the Bombay Act, are consumed in the State as raw material in the process of producing other commodities. Hence, there was no question of any hindrance to a free flow of trade bri!llli.ng into operation Article 301 of the Constitution. According to the High Court, the petitioners had not brought forth any material to show how the free flow of trade has been affected by this additional rate of tax; and held that section 13AA is not violative of Article 14 of the Constitu- G tion; and that section 13AA of the Bombay Act and the orders requir- ing the appellants to pay additional tax@ 2% on purchase of VNE oil used by them as raw-material in the manufacture of goods despatched outside the State, were valid.

The High Court in the judgment under appeal has set out the ·H relevant provisions of the Act, which was enacted to consolidate and

GOODYEAR (I) LID. v. STATE OF HARYANA [MUKHARJI, J.] 551

amend the law relating to levy of tax on the sale or purchase of certain A goods in the State of Bombay. Section 2 contains some of ihe defini- tions. Section 24 deals with authorisations of turnover etc. Section BAA of the Bombay Act with which the High Court and these appeals are cqncerned, is in the following terms:

"B-AA. Purchase tax payable on goods in Schedule C, B Part I, when manufactured goods are transferred to outside branches.

Where a dealer, who is liable to pay tax under this Act, purchases any goods specified in Part I of Schedule C, directly or through Commission agent, from a person who is 9r is not a Registered dealer and uses such goods in the c manufacture of taxable goods and despatches the goods, so manufactured, to his own place of business or to his agent's place of business situated outside the State within India, then such dealer shall be liable to pay, in addition to the sales tax paid or payable, or as the case may be, the pur- D chase tax levied or leviable under the other provisions of this Act in respect of pure.bases of such goods, a purchase tax at the rate of two paise in the rupee on the purchase price of the goods so used in the manufacture, and accord- ingly the dealer shall include purchase price of such goods in his turnover of purchases in his return under section 32, E which he is to furnish next thereafter. n

The questions involved in these appeals are: whether section BAA of the Bombay Act is beyond the legislative competence of the State Legislature; and it is violative of Article 14 of the Constitution; and thirdly, whether the said provision is violative of Article 301 of the F Constitution. It was contended on behalf of the appeallant that section BAA of the Act is a charging section and imposes a charge of an additional rate of 2% in the rupee if the following conditions laid clown therein are satisfied: (i) the charge is levied upon a dealer who is liable to pay tax under the Act; (ii) such a dealer purchases any go0ds specified in Part I of Schedule C, directly or through commission G agent, from a person who is or is not a registered dealer; (iii) the goods so purchased are used in the manufacture of taxable goods; and (iv) the goods which are so manufactured (and not the goods on which purchase tax had been paid) are despatched to the dealer's own place of business or to his agent's place of business situated outside the State. H

552 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

According to the appellant, the said section lays down the person A who is liable to pay tax, the goods on which the same is leviable and the taxable event which would attract the liability of additional tax of two paise in the rupee, namely the despatch or consignment of goods by the dealer/manufacturer outside the State.

B According to Dr. Pal, counsel for the appellant, the taxable event is not the purchase of goods as such which is the raw-material, but it is the despatch or consignment of goods manufactured by the dealer/manufacturer to its own branch outside the state; and that thus manufactured goods are different from commercial commodity, dis- . tine! and separate from the raw materials on which p~rchase tax has already been paid. It is well-settled; it was reiterated before.us, that in c case of excise duty, the taxable event is the manufacture of goods and the duty is not directly on the goods but on the manufacture thereof. In case of sales tax, taxable event is the sale of goods. Hence, though both excise duty and sales tax are levied with reference to the goods, the two are different imposts, in one case the imposition is on the act D of manufacture or production while in case of ot.her the imposition is on the act.of sale. But in neither case the impost is a tax directly on the goods. See in this connection, the observations of this Court in re: The Bill to amends. 20 of the Sea Customs Act, 1878 ands. 3 of the Central Excises & Salt Act, 1944, [1964] 3 SCR 787 at 821 and Mis. Guruswamy & Co. v. State of Mysore, [1967] 1 SCR548 at562. E The power to tax the sale or purchase of goods is different from the right to impose taxes on use or consumption. According to Dr. Pal, such power to levy sales tax cannot be exercised at the earlier stage of import or manufacture/production nor the said power can be exercised at the later stage of use or consumption but only at the stage of sale or purchase. In respect of sales tax, the right to levy duty would not at all come into being before the time of sale/purchase. Sales tax cannot be imposed unless the goods are actually sold and may not be leviable if there is a transfer in some other form. See in this connection the observations of the Federal Court in Mukunda Murari Chakravarti & Ors. v. Pabitramoy Ghosh & Ors., AIR 1945 FC 1at22. Therefore, in 0 this case it is necessary to ascertain what is the taxable event under section 13-AA of the Act which attracts duty. A taxing event is that event the occurrence of which immediately attracts the levy or the charge of tax.

In the fiscal legislations normally. a charge is created. The mis- H chief of taxation occurs on the happening of the taxable event. Diffe-

• GOODYEAR (I) LTD. v. STATE OF HARYANA (MUKHARJI, J.] 553

rent taxes have different taxable events. In the instant case, Dr. Pal A canvassed before us that the incidence of the levy of·additionaltax of two paise in the rupee is not on the purchase of goods but such a levy is attracted only when-( a) the goods which so purchased on payment of purchase tax are used in the manufacture of taxable goods; and (b) the goods so manufactured are despatched to his owo place of business or to his agent's place of business outside the State. Therefore, the inci- B dence of tax is attracted not merely on the purchase but only when the goods so purchased are used in the manufacture of taxable goods and are despatched outside the State. In our opinion, it was rightly submit- ted that it is the effect' of section 13AA of the Act. It was further highlighted by Dr. Pal on be!!11.lf of the assessee that additional tax is not levied on the goods purchased on payment of purchase tax and despatched outside the State. The goods which are purchased on pay- c ment of purchase tax are used in the manufacture of taxable goods. What is despatched is not the raw material which have been purchased on payment of purchase tax but a completely different commodity, namely, vanaspati and soap. If the raw materials as such purchased on payment of purchase tax are despatched outside the State, the addi- .D tional tax under section 13-AA of the Ar.tis not attracted. Hence, tlle inCidence of additional tax has no nexus with the purchase of the raw-materials, as was contended by Mr. S.K. Dholakia, appearing for the State and as held by the High Court. ·

Purchase tax under section 3 of the Act is attra~ed when the . E taxable ev~nt i.e. the purchase of goods occurs, but the taxable e.x.e.itt for the imposition of additional tax of two ,paise in .the rupee occurs only 'when the goods so purchased .are used in the manufacture of taxable goods and such taxable goods are despatched outside the State by .a dealer-manufacturer. Dr. Pal drew our attention to some of the observations of this Court in Kedamath Jute Mfg. Co. Ltd. v. Commis- F sioner of Income-tax (Central), Calcutta, 82 ITR SC 363 and State of Madhya Pradesh & Ors. v. Shyama Charan Shukla, 29 STC SC 215 at 218-219. On the other hand, Mr. Dholakia submitted that the submis- sion of the appellant proceeded on the assumption that the liability to pay is the same as the obligation to pay but this was wrong. These two are different. It was submitted that the obligation to pay is not the same thing as liability to tax; and that it was wrong to proceed on tlie basis that because. 'obligation' to pay' is a later event, 'the despatch of goods' is the taxable event. This is a fallacy, according to Mr. Dholakia. In this connection, reliance was placed on the observations of this Court in R.C. Jail v. Union of India, [1962] Suppl. 3 SCR 436, where this Court reiterated that subject always to the legislative com- H

554 SUPREME COURT REPORTS [1989) Supp. 1 S.C.R.

A petence of the enacting authority, the tax can be levied at a convenient stage, so long as the character of the impost is not lost. The method of collection does not affect the essence of the machinery of collection for administrative convenience. Reliance was also placed on the observa- tions of Union of India v. Bombay Tyre International Ltd., [1984) 1 SCR 34/. B It was submitted by Mr. Dholakia that the correct approach is to first determine whether the State Legislature, having regard to Entry 54 of List II to the 7th Schedule to the Constitution, can levy tax ·on purchse of a class of goods, which class is to be identified by referenc<c to the condition of use of such goods into other taxable goods and despatch of such taxable goods outside the State. He submitted that if c it is accepted that the State could have the power to tax purchases of goods meant for use into manufacture of other taxable goods and despatch outside thereafter, then next question is whether the State enactment (like section 13AA of the Bombay Act) is so formulated as to come within the framework described. He admitted that even if it D did, it would still have to be subject to (a) the doctrine of pith anu substance, (b) the fundamental rights, and (c) Article 301.

According to Mr. Dholakia, the Act contains a charging section which is section 3. It levies tax on turnover of sales and purchases within section 2(36) and 2(35) respectively of the said Act. Section 13 E of the Act levies tax on purchases in accordance with rates prescribed in Schedule C iLthe goods are purchased from an unregistered dealer. Section 13A levies a copcessional tax on purchases if th~ goods are purchased from a registered dealer, provided a declaration in the pre- scribed form i.s given under section 12(b) of the Act, if the purchaser buys directly, or one under section 12(d) if the purchaser buys througfi · F a commission agent. In both the forms the relevant conditions are: (a) that the goods fall within Part II of Schedule C; and (b) that the goods bought would be used for manufacture of other taxable goods within the State and sold within the State. Mr. Dholakia submitted that on giving the aforesaid declaration, the purchaser would have to pay only 4% tax. The rates prescribed in Schedule Care as under: 0 · Schedule 'C'

Part Minimum Rate Maximum Rate I 2% 4% II 6% 15%

GOODYEAR (!) LTD. v. STATE OF HARYANA [MUKHARJi, J.j 555

The effect of section 13A without section 13-AA, according to A Mr. Dholakia, was that only those who bought goods which fell into Part II, would have benefitted by the declaration, since the rate mentioned in section 13A was 4%. Hence, those buying goods falling within Part I of Schedule C had not to give any declaration under section 12(b) or 12(d), as the case may be, and still manufacture the taxable goods and despatch them outside the State. According to him, B as a result of this situation, two results emerged, i.e. (i) the State lost revenue because the goods manufactured with the help of the infrastructure provided by the State escaped further tax, by goods being resold outside the State; and (ii) the purchasers of raw-materials used by the manufacturers for producing new taxable goods, were not being treated equitably because those whose purchases of goods which fell into Part II had to give a declaration to get the benefit of reduce.d c rate. On the other hand, those whose purchases of goods fell in Part!, need not give such a declaration. According to him, from the stand- point of the object of encouraging resale within the State, the classifi- cation in form of Part I and II had no rational nexus. Therefore, that construction shou.ld be made which may make section 13-AA of the D Act, to avoid this mischief.

According to Mr. Dholakia, section 13AA speaks of the require- ment of additional purchase tax from those who have paid purchase tax, if the object of the purchases is to use the goods falling in Patt I of Schedule C for manufacture of taxable goods and the despatch of such E goods outside the State. He alleged it to be a fair and reasonable construction and it will subserve the purpose of the amendment.

It is well settled that reasonable construction should be followed and literal connstruction may be avoided if that defeats the manifest object and purpose of the Act. See Commissioner of Wealth-tax, Bihar F & Orissa v. Kripashankar Dayashankar Worah, 81 !TR 763 at 768 and v. lncome-tax·.commissioners for city of London Gibbs, JO !TR Suppl. 121 HL at 132. Mr. Dholakia further submitted that the Statement of Objects & Reasons also helps this construction. In our opinion, he rightly submitted that because the accounts had to be maintained in a particular manner, is no criterion or evidence for determining when G the liability arises. The law is that the liability to tax would be determined with reference to the interpretation of the Statute which creates it. It cannot be determined by referring to another Statute. As contended by both the sides, it is well-settled that the doctrine of pith and substance means that if an enactment substantially falls within the powers expressly conferred by the Constitution upon the Legislature H

556 SUPREME COURT REPORTS [ 1989] Supp. 1 S.C.R.

which enacted it, it cannot be held to be invalid merely because it A incidentally encroches upon matters assigned to another Legislature. See Kera/a State Electricity Board v. Indian Aluminium Co, [ 1976] I SCR 552 and Prafulla Kumar Mukherjee & Ors. v. Bank of Com- merce Ltd., AIR 1947 PC 60 at 65. ·

On an analysis we find that the goods which are despatched are F different products from the goods on the purchase of which purchase tax was paid. The Maharashtra legislation has to be viewed in the context of 46th Amendment to the Constitution. The 46th Amend- ment introduced Article 269 ( l)(h) which lays down that the proceeds of the tax on consignment of goods (whether the consignment is to the person making it or to any other person) where such consignment o takes place in the course of inter-State trade or commerce, will be assigned to the States. The said Amendment also introduced Entry No. 92B in List I of the 7th Schedule. The said Amendment was made on the consideration of the 6lst Report of the Law Commission. Entry 92B in List I of the 7th Schedule and Article 269( l)(h) of the Constitu- tion bring within its sweep the consignment of goods by a person either to himself or to any other person in the course of inter-State trade or

GOODYEAR (I) LID. v. STATE OF HARYANA (MUKHARJI, J.] 557

commerce. Article 269(3) gives the power to Parliament to formulate the principles for determining when a consignment of goods takes place in the course of inter-State trade or commerce. If Entry 92B in List I is to be given the widest interpretation, as it should be, it would be clear that the constitutional changes introduced by the 46th Amendment in Article 269 read with the Entry, the tax on consign- ment of goods now comes within the exclusive legislative field of Parli- B ament. The true test to find out what is the pith and substance ..of the legislation is to ascertain the true intent of the Act which will determine the validity of the Act. If the Parliament in exercise of its plenary power under Entry 92B of List I imposes any tax on the despatch or cosignment of goods, Parliament will be competent to do so. It is, therefore, not possible to accept the argument that the chargeable event was lying dormant and is activated only on the c occurrence of the event of despatch. The argument on the construction of the enactment is misconceived. The charging event is the event the occurrence of which immediately attracts the charge. Taxable event cannot be postponed to the occurrence of the subsequent condition. In that event, it would be the subsequent condition the occurrence of which would attract the charge which will be taxable event. If that is so, then it is a duty on despatch. In that view of the matter, this charge cannot be sµstained.

As mentioned hereinbefore, the section has been challenged as being violative of Article 14 of the Constitution. This attack is based on the discrimination between the two types of taxes but in the way we have costrued the section, in our opinion, this question does not survive. It was further submitted by Dr. Pal that section BAA of the Act is violative of Article 301 of the Constitution. It makes a discri- mination between the dealer/manufacturer who despatches the goods outside the State and the other dealer/manufacturer. Both the dealer/ F manufacturers purchase the goods on payment of purchase tax and use -them in the manufacture of taxable goods. The incidence of additional tax on the purchase of goods is attracted only when such manufactured goods are despatched outside the State. If a dealer/manufacturer has to despatch the goods outside the State, he has to pay a higher rate of tax and thus he is discriminated as compared to the other dealer/manu- G facturer who purchses the raw material on payment of 4% purchase tax, but de_spatches the raw material straightaway outside the State and uses them in the manufacturer of goods outside the.State. The High Court held that there was no violation of Article 301 of the Constitution. Reference was made to the decision of this Court in Atiabari Tea Co. Ltd. v. The State of Assam & Ors., (1961] 1SCR809; H

)58 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

One has to determine: does the impugned provision amount to B restriction directly and immediately, on the trade or commerce move- ment? As was observed by this Court in Kalyani Stores v. The State of Orissa & Ors., [1966] 1 SCR 865, imposition of a duty or tax in every case would not tantamount per se to any infringement of Article 301 of the Constitution. Only such restrictions or impediments which directly or immediately impede free flow of trade, commerce and intercourse fall within the prohibition imposed by Article 301. A tax in certain c cases may directly and immediately restrict or hamper the flow of trade, but every imposition of tax does not do so. Every case must be judged on its own facts and its own setting of time and circumstances. Unless the court first comes to the finding on the available material whether or not there. is an infringement of the guarantee under Article D 301 the further question as to whether the Statute is saved under Article 304(b) does not arise. The goods taxed do not leave the State in the shape of raw material, which change their form in the State itself and there is no question of any direct, immediate or substantial hind- rance to a free flow of trade. On the evidence adduced, we are in agreement with the High Court that the challenge to the imposition in the background of Article 301 cannot be sustained and, therefore, no question whether such imposition is saved under Article 304{b) of the Constitution arises.

GOODYEAR(I)LTD. v. STATEOFHARYANA [RANGANATHAN,J.] 559

Civil Appeal No. 3033 (NT)/86 F.C.I., Kamal v. The State ofHaryana A & Ors.) are allowed and the judgment and order of the High Court are set aside.

Civil Appeals Nos. 1512 (NT)/84 [State of Haryana & Anr. v. Gedore Tools (P) Ltd.] and 1515/84 [State of Haryana & Anr. v. B Goodyear India Ltd.] are dismissed. Special leave petitions Nos. 8398- 8402/83 are dismissed, and for the reasons mentioned hereinbefore, civil appeal Nos. 4162/88 (Mis. Wipro Products Ltd. v. State of Maharashtra & Anr. and 4163/88 !Hindustan Lever Ltd. & Anr. v. State of Maharashtra & Anr.] are allowed and the judgment and order of the High Court passed therein, are hereby set aside. c In the facts and the circumstances of this case, the parties will pay and bear the respective costs. So fat as the civil appeals Nos. 1633/85 and 3033/86 are concerned, wherein the appellants are the Food Corpn. of Ilidia, I allow these appeals and setting aside the judgment of the High Court on the ground that tax on despatch or D consignment was not within the competence of the State Legislature. I am, however, not dealing with or expressing any opinion on the other contentions of the F.C.I. that in view of the nature of its business it was not liable to tax in respect of the sales tax. This contention will be decided in the appropriate proceedings. E So far as the contention regarding penalty under the Haryana Act, these proceedings fail because the charging provisions fail. In so far as the penalty proceedings are impugned on other grounds apart from the fail11te of the charging provisions, I am expressing no opinion on these aspects. F RANGANATHAN, J. I agree but wish to add a few words.

The question raised in these appeals is a fairly ticklish one. Simply stated, Section 9 of the Haryana General Salex Tax Act, 1973 as well as section 13AA of the Bombay Salex Tax Act, 1959, purport only to levy a purchase tax. The tax, however, becomes exigible not on G the occasion or event of purchase but only later. It materialises only if the purchaser (a) utilises the· goods purchased m the manufacture of taxable goods and (b) despatches the goods so manufactured (otherwise than by way of sale) to a place of bilsiness situated outside the State. The legislation, however, is careful to impose the tax only on the price at which·the raw materials are ·purchase<:t and not on the H

560 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

The above distinction becomes significant particularly in the background of the constitutional amendments referred to in the judg- ment of my learned brother. These indicate that there were efforts at sales tax avoidance by sending goods manufactured in a State out of raw materials purchased inside to other States by way of consignments rather than by way of sales attracting tax. This situation lends force to the contention of the assessees that the States, unable to tax the exodus directly, attempted to do so indirectly by linking the levy ostensibly to the "purchases" in the State.

G00DY1'AR(I)LTD. v. STAIBOFHARYANA [RANGANATHAN,J.] 561

Viewing the impugned statutory provisions from the perspectives indicated above, I agree with my learned brother that the appeals have to be allowed as held by him. ·

T.N.A. Appeals and petitions disposed of. B