HOTEL BALAJI AND OTHERS ETC. ETC. v. STATE OF ANDHRA PRADESH AND ORS. ETC. ETC.

24. These then are the activities or transactions that con- stitute the taxable events on the happening of which the tax would be immediately attracted, that is to say, the tax in question becomes exigible at these points. Once these E points are reached the possibility of the sale of goods purchased within State or in the course of inter-State trade and commerce in the same form and condition, shall stand excluded. The fourth and the last condition envisaged by Section 3-AAAA set out hereinabove necessary for attract- F ing the levy would also stand fulfilled. It is only on the happening of these events that the taxing authority can reach the conclusion that the purchasing dealer has be- come liable under Section 3-AAAA."

With respect we find ourselves unable to agree with the above G understanding of the section. All that the section provided was: (i) where . the goods liable to tax at the point of sale to the consumer are sold to a deale¹ (ii) in circumstances in which no sales tax is payable by the seller and (iii) the purchasing dealer does not re-sell the said purchased goods within the State or in the course of inter-State trade or commerce (iv) the H

224 Slll'REME COURT REPORTS II992J SUPP. 2 S.C.R.

A purchasing dealer shall be liable to pay the tax which would have been ' ,.·' payable by the seller. (v) If. however, it was proved that the said goods have already suffered tax under Section 3-AAA, no purchase tax was payable under Section 3-AAAA. It is obvoous that the section did not speak of the purchased goods being used in the manufacture of other goods nor B of the manner of disposal or despatch of such manufactured goods. The only two conditions stipulated (which conditions arc not to be found in the present Section 3-AAAA) were that if the purchased goods are sold within the State or sold in the course of inter-State trade or commerce, the tax under il is not payable. This is for the simple reason that in both those contingencies, the Stale would gel the revenue (in one case under the State c Sales Tax Act and in the other case, under the Central Sales Tax Act). The policy of the legislature is not to tax the same goods twice over. The fact that in a given case, the purchased goods are consigned by the purchaser to his own depots or agents outside the State makes no difference to the nature and character of the lax. By doing so, he cannot escape even D one-time lax upon the goods purchased, which is the policy cf the Legis- lature. The tax was directed towards ensuring lery cf tax atlcast on one transaction of sale of the goods and not towards taxing the consignment of goods purchased or the products manufactured out of them. The difficulty has really arisen because of the attempt lo look lo the pro'"sions of Section E 3-AAAA through the prism of Goodyear. There is a substantial and qualitative difference between the language employed in Section 9 of Haryana Act and Section 13-AA of Bombay Act and in Section 3-AAAA of U.P. Act (as it stood prior to 1992 Amendment Act) - or for that matter as it stands now. These basic differences cannot be ignored. Con- F stitutionality of Section 3-AAAA ought to be judged on its own language and so judged, the Section, both before and after the 1992 Amendment, represents a perfectly valid piece of legislation. It is relatable to and fully warranted by Entry 54 of List II of the Seventh Schedule to the Constitu- tion.

G PART - IV (ANDHRA PRADESH)

Writ Petitions No. 655-669 of 1983 are filed by Hotel Balaji and 14 other hotels/restaurants for issuance of a writ, order or direction directing the respondents viz., State of Andhra Pradesh and its Sales Tax Authorities H not to lery and collect purchase tax on milk @ 4% under Section 6-A as

HOTEL BALA!! v. STATE OF Ai'. [JEEVAN REDDY. J.] 225

also the surcharge tax@ 10% of the tax. According to the petitioner~, such A a levy violates Article .14 as also the fundamental right guaranteed to them by sub-clause (g) of clause (1) of Article .19 of the Constitution. Civil Appeal Nos. 10753-57 of 1983 are directed against the judgment and order of a Division Bench of the Andhra Pradesh High Court upholding the validity of Section 6-A of the Andhra Pradesh General Sales Tax Act. B The case of the petitioners in the writ petitions is this: They purchase the milk required by them both from registered dealers as well as persons other than registered dealers. The authorities are collecting purchase tax @ 4% under Section 6-A from the petitioners which is illegal in view of the fact that the sale of fresh milk is exempted from tax by a notification issued by the Government of Andhra Pradesh under Section 9 of the Act being G.O.Ms. No.1091 dated 10.6.1957. Because of the said exemption notification not only the seller is exempted but also the purchaser. In some cases, the petitioners purchased milk from registered dealers like Andhra Pradesh Dairy Development Corporation which is exempted from sales tax by virtue of a notification issued under Section 9. In such cases, the tax is sought to be levied upon the petitioners which is equally illegal. The milk purchased by the petitioners is being consumed in preparing and serving to consuming public tea, coffee and other eatables. The tax levied under Section 6-A is really not upon the purchase but upon the use and consump- tion. E G.O.Ms. No.1091dated10.6.1957 as originally issued read as follows:

"In exercise of the power conferred by sub-section (1) of Section 9 of the Andhra ·Pradesh General Sales Tax Act, 1957 (Andhra Pradsh Act 6 of 57), the Governor of Andhra F Pradesh hereby exempts from the tax payable under :he said Act the sales of following goods:

(1) and (2) - omitted as unnecessary;

(3) fresh milk, curd and butter milk." G By G.0.Ms. No. 60 (Revenue) dated 10.¹.1961, item (3) was sub- stituted as follows : 11 fresh milk, curd and butter milk sold by dealers exclusively dealing in them." H

226 SlJPREMF COURT REPORTS [1992] SUPP. 2 S.C.R.

A By G.0.Ms. No. 1786 dated 20.11.1962, the words "and their bye- products realised by utilisation of surpluses thereof' were added al the end of the entry. By yet another amendment, the word 11 bye-products11 \Vas substituted by the word "products". Thus, at the relevant time item 3 of the said notification read as follows: B "fresh milk,.curd and butter milk sold by dealers exclusively dealing in ther;i and their products realised by utilisation of surpluses thereof."

It is also brought lo our notice that by G.O.Ms. No. 669 dated 26.5.1975, the Government of Anclhra Pradesh exempted the sale of pas- c turised milk by the Andhra Pradesh Dairy Development Corporation from fhe levy of lax payable under the said Act with effect from the 1st day of May, 1975.

In the Civil Appeals the appellant is Hindustan Milk Food Manufac- D turers Ltd. They purchased milk mainly from persons other than registered dealers which they utilised in manufacture of various products. Its products are sold not only within the State of Andhra Pradesh but also in other States of the country. It has an office at Dhawaleshwaram in East Godavari Distl. of Andhra Pradesh. It is registered as a dealer under the Act. In the course of their assessment proceedings for the assessment year 1979-80 E (among other assessment years) the appellant contended that the milk having been exempted by virtue of a notification issued under Section 9 is not taxable and that levy of purchase lax is incompetent. They questioned the constitutionality of Section 6-A.. The Assessing authority overruled the said objections and levied the purchase tax on the turnover of milk pur- F chased by the appellant. The matter was brought to the High Court which, as stated above, negatived the challenge lo the constitutionality of the provision.

So far as the exemption notification in G.O.Ms. No. 1091 dated G 10.6.1957 is concerned, it must be noticed that what was exempted there- under was the tax payable on the "sale of fresh milk sold by dealers exclusively dealing in them 11 • So far as agriculturists are concerned, they are not dealers al all by virtue of Explanation II to the definition of "dealer" contained in clause ( e) of Section 2. The notification has, therefore, no application to sale of milk by them. Since the purchase by Hindustan Milk H Food is almost wholly from such agriculturists, it cannot take advantage of

HOTEL BALAJI "·STATE OF A.P. [.TEEVAN REDDY, J.] 227

the said notification. If, however, any milk is purchased by the appellant or the writ petitioners from dealers exclusively dealing in milk, they would be liable to pay the purchase tax only in cases where the selling dealer is not liable to pay the tax either because of an exemption notification or other- wise.

A contention was urged before us that the milk was not at all taxable under the Act. It was submitted that milk is not mentioned in any of the Schedules I to VI appended to the Act. This argument in our opinion proceeds upon a mis-apprehension of the scope and scheme of Section 5, as we shall presently demonstrate. Fresh milk was taxable as general goods under Section 5(1) of the Act before it was amended by Amendment Act c 4 of 1989. After the coming into force of the said Amendment Act, it falls under Schedule VII, (which was introduced simultaneously with the said Amendment Act) and which takes in all goods other than those specified in first to· sixth Schedules. Milk was subject to multi-point tax prior to the said Amendment Act whereas after the said amendment if has become taxable only at single point namely, point of first sale in the State. If fresh D milk was not at all taxable under the Act, there was no necessity to issue notifications exempting its sale in certain situations.

Section 6-A was inserted by Andhra Pradesh General Sales Tax (Amendment) Act, 49 of 1976 with effect from September 1, 1976. As E originally enacted, the section read as follows:

"6-A: Levy of tax on turnover relating to purchase of certain goods:-

Every dealer, whu in the course of business- F (i) Purchases any goods (the sale or purchase of which is liable to tax under this Act) from a registered dealer in circumstances in which no tax is payable under Section 5 or under Section 6, as the.case may be, or · G (ii) purchases any goods (the sale or purchase of which is liable to tax under this Act) from a person other than a registered dealer, and

ta) either consumes suCh goods in the manufacture of other goods for sale or otherwise, or H

228 SUPREME COURT REPORTS [1992J SUPP. 2 S.C.R. • A (b) disposes of such goods in any manner, other than by way of sale in the Slate, or

(c) despatches them to a place outside the Stale except as a direct result of sale or purchase in the course of inter- Statc trade or commerce, B shaB pay tax on the turnover relating to purchase aforesaid at the same rate which but for the existence of the aforementioned circumstances, t11e tax woul<l have been lcviahic on svch goods 'inder ~ection 5 or 6.'' c The Section has boen amended in some particulars by the Amend- ment Act 18 of 1985 but these amendments do not make a difference to the nature or character of the :ax. Be that as it may, we may as well set out the Section as it stands now, in view of the fact that the validity of the Section as such is questioned before us. It reads: D "6-A • Levy of tax on turnover relating to purchase of' certain goods:

Every dealer, wh~) in the course of business:

E (i) purchases any goods (the sale or purchase of which is liable to tax under this Act) from a registered dealer in circumstances in which no tax is payable under section 5 or under Section 6, as the case may be, or

(ii) purchases any goods (the sale or purchase of which is F liable to tax under this Act) from a person other than a registered dealer, and

(a) consumes such goods in the manufacture of other goods for sale or consumes them otherwise, or G (b) discloses of such goods in any manner other than by way of sale in the State, or • (c) despatches them to a place outside the State except as a direct result of sale or purchase in the course of inter- H State trade or commerce, ..

HOTEL BALAII v. STATE OF A.P. [.JEEVAN REDDY, J.] 229

shall pay tax on the turnover relating to purchase aforesaid at tho same rate at which but for the existence of the aforementioned circumstances, the tax would have been Ieviable on such goods under Section 5 or Section 5-A or Section 6:

Pruvi<le<l that in respei;t of <leclare<l goods such rate together with the rate of additional lax specified in Section 5-A shall not exceed four percent of the purchase price of such goods.11

An analysis of the Section yields the following ingredients: c "A. (i) a dealer who in the course of business purchases any goods liable to tax under the Act,

(ii) from a registered dealer in circumstances in which no tax is payable by such selling dealer under Section 5 or 6 • D and

(iii) consumes such goods in the manufacture of other goods for sale or consumes them otherwise or,

(iv) disposes of such goods in any manner other than by E way of sale in the State or,

(v) despatches them to a place outside the State except as a direct result of sale or purchase in the course of inter- Statc trade or commerce, F (vi) such purchasing dealer shall pay the tax at the same rate at which it would have been payable by the selling dealer.

B.(i) A dealer who in the course of his business purchases G any goods which are taxable under the Act,

(ii) from a person other than a registered dealer and,

(iii) consumes such goods in the manufacture of other goods for sale or consumes thetn otherwise or, H

230 SUPREME COURT REPORTS j1992j SUPP. 2 S.C.R.

A (iv) disposes uf such goods in any manner other than by way of sale in the Stale or,

(v) despatches them to a place outside the State except as a direct result of sale or purchase in the course of inter- State trade or commerce, B (vi) such purchasing dealer shall pay the tax at the same rate at which it would have been payable by the selling dealer."

The proviso which governs both the above situations provides that in c case of declared goods the total tax shall not exceed 4% of the purchase price of such goods.

Broadly speaking, the effect is: Tax payable at sale point becomes the tax payable on the purchase point, in certain circumstances. Because, D the seller is not or cannot be taxed for certain reasons, the purchasing dealer is being taxed. Two examples, each illustrating one of the two situations envisaged by the Section may be given: (a) Andhra Pradesh Dairy Development Corporation, a registered dealer, is exempted from paying the tax on sale of pasturised milk. The purchaser of pasturised milk from the Corporation is taxed provided he satisfies one of the conditions specified in clauses (i) to (iii) mentioned in the Section, thereby becoming the last purchaser in the State of such milk. (b) Fresh milk is taxable at sale point. But when it is sold by a farmer/agriculturist raising cattle on lands held by him, he cannot be taxed because he is not a dealer. The purchaser is taxed in such cases provided he satisfies one of the conditions specified in clauses (i) to (iii) in the Section, thereby becoming the last purchaser in the State of such milk.

It would, therefore, be clear that the real object of the clauses (i) to (iii) in the Section is not to levy a consumption tax, use tax or consignment lax but only to point out that thereby the purchasing dealer converts himself into the last purchaser in the state of such goods. The goods cease to exist or case to be available in the State for sale or purchase attracting tax. In these circumstances, the purchasing dealer of such goods is taxed, if the seller is not or cannot be taxed. In this connection, observations of P.S. Poti, J. in Malabar Fntit Products Co.v. S.T.0., 30 S.T.C. 537, which have been expressly approved by this court in State of Tamil Nadu v. Ka!lda

HOTEL BALNI 1-. STATE OF AP. [.IEEVAN REDDY, J.] 231

Swami, 36 S.T.C. 191 =discussed in detail in part V may be referred to. It A is not necessary to set out the said discussion here over again.

In the circumstances, we are unable lo see how the tax in1posed by Section 6-A be described either as use tax, consumption tax or consignment tax. Since we are of the opinion, as explained in Part V, that Goodyear does not interpret Section 9 of Haryana Act and Section 13AA of Bombay Act B correctly, its reasoning cannot be brought in here lo contend that clause (c) of Section 6-A imposes a consignment tax. It is a purchase tax perfectly warranted by Entry 54 of List II of the Seventh Schedule to the Constitu- tion.

Reference to a few more provisions of the Act would be appropriate c at this stage to complete the picture.

The expression "dealer" has been defined in clause (e) of Section 2. It is not necessary to notice the entire definition except Explanation II which says that a grower of agricultural or horticultural produce cannot be deemed lo be a dealer if he sells his produce. Explanation reads as follows:

"Explanation II: Where a grower of agricultural or hor- ticultural produce sells such producer grown by himself on any land in which he has an interest whether as owner, usufructuary mortgage, tenant or otherwise, in a form different from the one in which it was produced after subjecting it to any physical, chemical or any process other than mere cleaning, grading or sorting, he shall be deemed to be a dealer for the purpose of this Act." F Section 5 is the charging section. Prior to the Amendment Act 4 of 1989, Section 5 had four sub-sections. The first sub-section made all sales/purchases by dealers within the State of Andhra Pradesh subject to tax. It. however, the goods sold were those mentioned in Schedule I they were taxable al a single point, viz., at the point of sale and at the rate prescribed in the said Schedule. Similarly, if the goods fell in the Second G Schedule they loo were taxable only at one point namely, the point of purchase at the rate prescribed. [Sub-section (2)] Schedule Ill comprises of declared goods while Schedule IV sets out goods which are totally exempted from tax under Section 8 of the Act. Schedule V deals with jaggcry and Schedule VI with liquors. In other words, goods which did not H

232 Slll'REME COURT RFPORTS [1992[ SUPP. 2 S.C.R.

A fall in any of the Schedules I to VI, fell under sub-section (1) and were taxed as general goods. In this sense, fresh milk which is not mcnt.ioned in any of the Schedules I to VI was chargeable as general goods under sub-section (!) of Section 5. By Amendment Act 4 of 1989 the entire scheme of Section 5 has been changed. The present section says that the goods mentioned in Schedules I to VII shall be taxed at the point and at B the rate specified ,herein. Schedule Vll which has been inserted by the very same Amendment Act is in the nature of a residuary Schedule; the goods which do not fall in any of the Schedules I to VI fall under Schedule VII. Even such goods have also been made taxable only at one point and at the rate specified. After the coming into force of the said Amendment Act of c 1989, fresh milk would fall under Schedule VII and taxable as such. It is, therefore, wrong to say that sale of milk was or is not taxable under the Act.

Section 9 enipowers the Government to exempt either the sale of certain goods or sales by certain persons either wholly or partly. Section 9 D reads as follows:

"9. Power of Stale Government to notify exemptions and reductions of tax (or interest):

(1) The Stale Government may, by notification in the E Andhra Pradesh Gazette, make an exemption, or reduction in rate, i~ respect of any tax or interest payable under the Act -

(i) on the sale or purchase of any specified class of goods, F at all points or at any specified point or points in series of sales or purchases by successive dealers; or

(ii) by any specified class of persons, in regard to the whole or any part of their turuover.

G (2) Any exemption from tax or interest or reduction in the rate of tax notified under sub-section (!) -

(a) may extend to the whole of the State or to any specified area or areas therein;

H (b) n1ay b~ subject to such restrictions and conditions a~

HOTEL llALAll v. STATE OF AP. [JEEVAN REDDY, J.j 233

may be specified in the notification, including conditions as to licences and licence fees."

It may be noticed that while exempting the sale or purchase of any specified class of goods the Government is empowered to specify whether the exemption operates at all points or any specified point or points in the series of sales or purchases of successive dealers. Several notifications have been ~ssucd by the Government from time to time exempting certain dealers or exempting certain goods at the point of sale or purchase, as the case may be. G.O.Ms. No.1091 is one of them. We have already noticed the rather qualified terms in which the exemption is couched. It is not a general exemption but a qualified one. In the light of the specific scheme of Section 9 and the language of G.O.Ms. No.1091, the exemption at the point of sale by a particular category of persons cannot be construed as operating to exempt the purchase tax under Section 6-A as well, much less in all cases.

- For the above reasons, appeals and writ petitions are dismissed with no order as to costs.

PART- V (DOES GOODYEAR REQUIRE RE-CONSIDERATION?) D

As mentioned earlier, counsel for all the assessees in these matters E strongly rely on the decision of this Court in Goodyear which invalidated a purchase tax levied by the Haryana and Maharashtra Sales Tax Acts. We may, therefore, notice this decision in some detail. What precisely is the ratio of Goodyear?

Provisions relating to purchase tax in Haryana Sales Tax Act and F Bombay Sales Tax Act fell for consideration in this case. Section 9 of the

- Haryana Act, before it was amended by Haryana General Sales (Amend- ment and Validation) Act, 1983, read as follows:

"9. Where a dealer liable to pay tax under this Act pur- G chases goods other than those specified in Schedule B from any source in the State and -

(a) uses them in the State in the manufacture of, -

(i) goods specified in Schedule B or H

234 SUPREME COURT REPORTS [ 1992] SUPP. 2 S.C.R.

A (ii) any other goods and disposes of the manufactured goods in any manner_otherwisc than by way of sale whether \\Olhin the Stale or in the course of inter-State trade or cummerce or within the meaning of sub-section (1) of Section 5 of the Central Sales Tax Act, 1956, in the course of export out of the territory of India. B (b) exports them, in the circumstances in which no tax is payable under any other provisions of this Act, there shall be levied, of subject to the provisions of Section 17, a tax on the purchase of such goods at such rate as may be c notified under Section 15."

A notification dated 19th July, 1974 was issued by the Government of Haryana under the said provision read with Section 15(1) of the Act in purported implementation of the said provision. Validity of Section 9 as well as of the notification was challenged in a batch of writ petitions filed in the Hig!. Court of Punjab and Haryana. The High Court upheld the challenge holding that "whereas the said provision (Section 9) provided only for the levy of a purchase tax on the disposal of manufactured goods, the notification by making a n1erc despatch of goods to the di.::alers them- selves taxable in essence, legislates and imposes a substantive tax which it obviously cannot." Goodyear !11dia Ltd. v. State of Harya11a, (1990} 76 S.T.C.71.

After it was amended by the aforesaid amendment Act, sub-sections (1) and (2) of Section 9 read as follows:

F "9. Liability to pay purchase tax. - (1) Where• dealer liable to pay tax under this Act, -

(a) purchases goods, other than those specified in Schedule B, from any source in the State and uses them - -

in the State in the manufacture of goods specified in G Schedule B; or

(b) purchases goods, other than those specified in Schedule B, fron¹ any source in the State and uses the1n in the State in the n1anufacture of any other goods and either disposes of the manufactured goods in any man-

HOTEL BALAJI v. STATE OF AP. [JEEV AN REDDY, J.] 235

ner otherwise than by way of sale in the State or despatches the manufactured goods to a place outside the State in any manner otherwise than by way of sale in the course of inter-State trade or commerce or in the course of export outside the terrritory of India within the meaning of sub-section (1) of Section 5 of the Central Sales Tax Act, 1956; or B

(c) purchases. goods, other than those specified in Schedule B, from any source in the State and exports them, in the circumstances in which no tax is payable under any other provision of the Act, there shall be c levied, subject to the provisions of Section 17 a tax on the purchases of such goods at such rate as may be notified under Section 15.

(2) Notwithstanding anything contained in this Act or the rules made thereunder, if the goods leviable to tax under this section are exported in the same condition in which they were purchased, the tax shall be levied, charged and paid at the station of despatch or at any other station before the goods leave the State and the tax so levied, charged and paid shall be provisional and the same shall be adjustable towards the tax due from the dealer on such purchase as a result of assessment or re-assessment made in accordance with the provisions of this Act and the rules made there- under on the production of proof regarding the payment thereof in the State." F Again a batch of writ petitions was filed questioning the validity of the amended provision which challenge too was upheld by the High Court in its decision in Bata India Ltd. v. State of Haryana, 54 S.T.C. 226. The main ground upon which the High Court allowed the writ petltioµs w<\S G that mere despatch of goods to a place outside the State in any manner other than by way of sale in the course of inter-State trade or commerce is synonymous with or is i11 any c~sc included within the qmbit of consi~~Jl­ ment of goods to the person making it or to any other person in the co11rse of inter-state trade or commerce as specified in Article 269(1)(iv) and Entry 92(8) of List-I of the Seventh Schedule to the Coqs\itution and thus H

236 SUPREME COURT REPORTS (1992] SUPP. 2 S.C.R.

A beyond the competence of the State legislature. According to the High Court, the taxable event was not the purchase of goods nor the use of such goods in manufacture of end-products but the despatch of goods.

Douoting the view taken in Bata India, one of the learned Judges of the Punjab and Haryana High Court, Punehhi, J. (as he then was) referred B the matter to a Full B_ench which took a different view in Desraj Pushp Kumar Gulati v. State of Punjab, 58 S.T.C.393. The Full Bench was of the view that according to Section 9 (amended) the taxing event is the act of purchase of goods which are used in the manufacture of end-products and not the act of despatch or consignment as held in Bara India. c The correctness of all the three decisions aforesaid was questioned in appeals filed before this Court. The appeals were heard by a Bench comprising Sabyasachi Mukharji, J. (as he then was) and one of us (S.Ran- ganathan, J.). Mukharji, J., in his separate judgment, set out the test for determining the taxable event in the following words: "It is well settled that the main test for determining the taxable event is that on the happening of which the charge is affixed. The realisation often is postponed to further date. The quantification of the levy and the recovery of tax are also postponed in some cases .......1~axable event is that which on its occurrence creates or attracts the liability to tax." Then the learned Judge proceeded to analyse Section 9 (amended) and concluded as follows: "Analysing the section it appears to us that the conditions specified, before the event of despatch outside the State as mentioned in Section 9(1)(b) namely, (i) purchase of goods in the State and (ii) using them for the manufacture of any other goods in the State, are only descriptive of the goods liable to tax under Section 9(.¹ )(b) in the event of despatch outside the State. If the goods do not answer both the descriptions cumulatively, even though these are despatched outside the State of Haryana, the purchase of those goods would not be tax under Section (l)(b) ..... The liability to pay tax in this section does not accrue on purchasing the goods simplicitor, but only when these are despatched or consigned out of the State of Haryana. In all these cases, it is necessary to find out the true nature of the tax. Analysing the Section, if one looks to the purchase tax under Section 9, one gets the conclusion that the Section itself does not provide for imposition of the purchase tax on the transaction of purchase of the taxable goods but when further the said taxable goods are used up and turned inlo independent taxable goods, losing its original identity, and thereafter when the manufac-

HOTEL B1".LAfl v. STATE Of AP. [JEEVAN REDDY, .J.J 237

lured goods arc despatched outside the State of Haryana and only then tax is levied and liability to pay tax is created." Accordingly, the learned Judge held, the tax is in the nature of a consignment tax which the Parliament alone could impose and not the State legislature.

The correctness of the said view is questioned by the learned counsel for the State of Andhra Pradesh and other counsel appearing for the State B Governments. The question for our consideration is whether the learned Judge was not right in holding that the taxable event under the section is not the purchase of goods used in the manufacture of end-oroducts but the despatch of manufactured goods to out-state destinations.

The other provision considered in the said decision is the one con- c tained in Section BAA of the Bombay Sales Tax Act. The said provision which was introduced into the Act by the Maharashtra Act (28 of 82) read as follows at the relevant time:

"13AA. Purchase tax payable on goods in Schedule C, Part D 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 or is not a Registered dealer and uses such goods in the 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 mav be, the purchase tax levied or leviable under the other provisions of this Act in respect of purchases of such goods, a pur- chase tax at the rate of two paise in the rupee on the purchase price of the goods so used in the manufacture, and accordingly the dealer shall include purchase price of such goods in his turnover of purchases in his return under Section 32, which he is to furnish next thereafter."

The validity of ti1e said provision was challenged inter a/ia by Hin- dustan Lever Limited which was negatived by the Bombay High Court in H

238 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A its decision reported in 72 S.T.C. 69. The High Court was of the opinion that the additional purchase tax leviable under the said provision is on the purchase value of V.N.E.Oil used in the manufacture of goods transferred outside the State and not on the value of the manufactured goods so transferred. It held further that the goods taxed under Section 13AA are consumed in the State as raw rrtaterial in the process of manufacturing B other commodities and therefore tax imposed thereon cannot be said to hinder the free flow of trade wi.thin the meaning of Article 301 of the Constitution.

The question again was which is the taxable event according to c Section 13AA. Mukharji, J. on an analysis of the section held that the taxable event is the despatch of manufactured goods outside the State which means that the levy is beyond the competence of the State legisla- ture. The attack based upon Article 301 of the Constitution was, however, repelled.

D Though agreeing with the conclusion arrived at by Mukharji, J., Ranganathan, J. made a few pertinent observations in his separate opinion. The learned Judge opined that both Section 9 of the Haryana Act and Section 13AA of the Bombay Sales Tax Act "purport only to levy a purchase tax" and further that "the tax, however, becomes exigible not on the occasion or event of purchase but only later. It materialises only if the purchaser (a) utilises the goods purchased in the manufacture of taxable goods and (b) despatches the goods so manufactured (otherwise than by way of sale) to a place of business situated outside the State. The legisla- ture, however, is careful to impose the tax only on the price at which the raw materials are purchased and not on the value of the manufactured goods consigned outside the State. The State describes the tax as one levied on the purchase of a class of goods viz., those purchased in the State and utilised as raw material in the manufacture of goods which are consigned outside the State otherwise than by way of sale." The learned Judge opined: "to me it appeared as plausible to describe the levy as a tax on purchase of goods inside the State (which attaches itself only in certain eventualities) as to describe it as a tax on goods consigned outside the State but limited to the value of raw material purchase inside the State and utilised thercin. 11 The leaarned Judge stated that he had "considerable doubts" as to the taxable event but that on further reflection he was inclined to agree with H S.Mukharji, J. that the tax though described as a purchase tax actually

llOTH BALNI i-. STATE OF AP. [JEEVAN REDDY, l] 239

became effective with reference to a totally different class of goods and that too only on the happening of an event which is unrelated to the Ael. of purchase and, therefore, in truth and essence, it was a consignment tax.

The crucial question, therefore, is what is the basis of taxation in either of the above provisions? In other words, the question is whether levy of tax is on the purchase of goods or upon the consignment of the manufactured goods? Let us first deal with Section 9 of the Haryana Act (as amended in 1983). Properly analysed, the following are the ingredients of the Section: (i) a dealer liable to pay tax under the Act purchases goods (other than those specified in Schedule B) from any sou,-ce in the State and (ii) uses them in the State in the manufacture of any other goods and c (iii) either disposes of the manufactured goods in any manner otherwise than by way of sale in the State or despatches the manufactured goods to a place outside the State in any manner otherwise than by way of sale in the. course of a inter-State trade or commerce or in the course of export outside the territory of India within the meaning of sub-section (1) of D Section 5 of the Central Sales Tax Act, 1956. If all the above three ingredients are satisfied, the dealer becomes liable to pay tax on the purchase -0[ such goods at such rate, as may be notified under Section 15.

Now, what does the above analysis signify? The section applies only in those cases where (a) the goods are purchased (for convenience sake, I E may refer to them as raw material) by a dealer liable to pay tax under the Acl in the State, (b) the goods so purchased cease to exist as such goods for the reason they are consumed in the manufacture of different com- modities and (c) such manufactured commodities are either disposed of within the State otherwise than by way of sale or despatched to a place outside the State otherwise than by way of an inter-State sale or export sale. It is evident that if such manufactured goods are not sold within the Slate of Haryana, but yet disposed of within the State, no tax is payable on such disposition; similarly, where manufactured goods are despatched out of State as a result of an inter-State sale or export sale, no tax is payable on such sale. Similarly again where such manufactured goods. are taken out of State to manufacturers' own depots 9r to the depots of his agents, no tax is payable on such removal. Goodyear takes only the last eventuality and holds that the taxable event is the removal of goods from the State and since such removal is to dealers' own depots/agents outside the State, it is consignment, which cannot be taxed by the State legislature. With the H

240 SUPREME COURT REPORTS IJ992J Sl_IPP. 2 S.C'.R.

A greatest respect at our command, \Ve heg to disagree. The levy created by the said provision is a levy on the purchase of ra\v material purchased within the State which is consumed in the manufacture of other goods within the Stale. If, however, the manufactured goods are sold within the State, no purchase tax is collected on the raw material, evidently because the State gets larger revenue by taxing the sale of such goods. (The value B of manufactured goods is bound to be higher than the value of the raw material). The State legislature does not wish to - in the interest of trade and general public - tax both the raw material and the finished (manfac- tured) product. This is a well-known policy in the field of taxation. But where the manufactured goods are not sold within the State but are yet c disposed of or where the manufactured goods are sent outside the State (otherwise than by way of inter-State sale or export sale) the tax has to be paid on the purchase value of the raw material. The reason is simple: if the manufactured goods are disposed of otherwise than by sale within the State or are sent out of State (i.e., consigned to dealers own depots or agents), D the State does not get any revenue because no sale of manufactured goods has taken place within Haryana. In such a situation, the State says, it would retain the levy and collect it since there is no reason for waiving the purchase tax in these two situations. Now coming to inter-State sale and export sale, it may be noticed that in the case of inter-State sale, the State E of Haryana does get the tax-revenue · may not be to the full extent. Though the Central Sales Tax is levied and collected by the Government of India, Article 269 of the-Constitution provides for making over the lax collected to the States in accordance with certain principles. Where, of course, the sale is an export sale within the meaning of Section 5(1) of the Central Sales Tax Act (export sales) the State may not gel any revenue but larger national interest is served thereby. It is for these reasons that tax 00 the purchase of raw material is waived in these two situations. Thus, there is a very sound and consistent policy underlying the provision. The object is to tax the purchase of goods by a manufacturer whose existence as such goods is put an end to by him by using them in the manufacture of different goods in certain circumstances. The tax is levied upon the purchase price of raw material, not upon the sale price - or consignment value - of manufactured goods. Would it be right to say that the levy is upon consignment of manufactured goods in such a case? True it is that the levy materialises only when the purchased goods (raw material) is consumed in the manufac- H ture of different goods and those goods are disposed of within the State

HOTEL BALAll "· STATlo OF A.P. [JEEVAN REDDY. J.J 241

otherwise than by way of sale or are consigned to the maufacturing-dealer's A depots/agents outside the State of Haryana. Bui does that change the nature and character of the levy? Docs such postponen1ent - if one can call it as such - convert what is avowedly a purchase tax what is on raw n1aterial (levied on the purchase price of such raw material) to a consignment tax on the manufactured goods? We think not. Saying otherwise would defeat B the very object and purpose of Section 9 and amount to its nullification in effect. The most that can perhaps be said is that it is plausible (as pointed out by Ranganathan, J. in his separate opinion) to characterise the said tax both as purchase tax as well as consignr11ent tax. But where two interpreta- tions are possible, one which sustains the constitutionality and/or effec- tuates its purpose and intendment and the other which effectively nullifies c the proVision, the former must be preferred, according to all known canons of interpretation. This is also the view expressly approved by Mukharji, J. in his opinion, as pointed out hereinbefore. In para 71 of his opinion, the learned Judge states: "it is well settled that reasonable construction should be followed and literal construction may be avoided if that defeats the D manifest object a11d purpose of the Act. Commissioner of Wealth Tax, Bihar and Orissa v. Kirpa Shankar Daya Shankar Vorah (1971) 81 !TR 763 at page 768 and Income Tax Commissioners for City ofLondo11 v. Gibbs' (1942) 10 !TR Suppl. 121 at page 132 (H.L.)".

(emphasis supplied) E

However, we would presently show that merely because the levy attaches on the happening or non-happening of a subsequent event, the nature and character of the lc\.y does not change. In several enactments, for instance, tax is levied at the last sale point or last purchase point as F 1

the case may be. How does one determine the last purchase point in the State? Only when one knows that no purchase took place "ithin the State thereafter. But that can only be known later. If there is a subsequent purchase within the State, the purchase in question ceases to be the last purchase. As pointed out pertinently by P.S.Poti, J. (as he then was) in Malabar Fruit Products Company a11d Ors. v. The Sales Tax Officer a11d Ors., G (1972) 30 S.T.C. 537, applying the logic of the dealers, it would not be possible to tax any goods at the last purchase point in the State, inasmuch as the last purchase p0int in regard to any goods could be determined only when the goods are sold later and not when the goods are purchased. In the said decision, the learned Judge was dealing with the validity and H

242 SUPRl'ME COURT REPORTS [l992J SUPP. 2 S.C.R.

A construction of Section 5-A of Kerala General Sales Tax Act, 1963, sub- section (l) whereof read as follows:

"SA. Levy of purchase tax - (1) Every dealer who in the course of his business purchases from a registered dealer or from any other person any goods, the sale or purchase B of \.vhich is liable to tax under this Act, in circu111stances in which no tax is payable under Section 5, and either -

(a) consumes such goods in the manufacture of other goods for sale or otherwise; or c (b) disposes of such goods in any manner other than by way of sale in the State; or

(c) despatches them to any place outside the State except as a direct result of sale or purchase in the course of inter-State trade or commerce, shall whatever be the quantum of the turnover relating to such purchase for 1 that year at the rates mentioned in Section 5. '

One of the arguments orged against the validity of the said provision was that inasmuch as the tax is levied depending upon the mode in which the goods purchased are consumed, disposed of or despatched, the tax is really one in the nature of consumption tax or use tax, but not sales tax. This argument was answered by the learned Judge in the following words:

"According to me, this contention is based on a misconcep- F tion of the scope of taxation on the sale of goods. It is true that sales tax is a tax imposed on the occasion of the sale of goods. But it has no reference to the point of time at which the sale or purchase takes place. It refers to the connection with the event of purchase or sale and not the point of time at which such purchase or sale takes place. G To read it otherwise would render any retrospective im- position of sales tax invalid as in every such case the tax would not be one which arises on the occasion of sale. By the same logic, it would not be possible to tax any goods at the last purchase point in the State, for the last purchase point in regard to any goods could be determined only

HOTEL BALAJI v. STATE OF AP. [JEEVAN REDDY, J.] 243

when the goods arc sold later and not when the goods are purchased. On the same reasoning as urged hy counsel, one should say in such a case that since the goods arc taxed only when the goods are sold outside the State or are despatched for such sale outside the State and so the last purchases are taxed not on the occasion' of the purchases 11 1

"If the goods arc not available in the State for subsequent taxation by reason of one or other of the circumstances mentioned in clauses (a), (b) and {c) of Section 5-A(l) of the Act then the purchaser is sought to be made liable F -i under Section 5-A. 1'

This statement accords with our understanding of the scheme of Section 9 of Haryana Act as set out hereinabove. To repeat, the scheme of Section 9 of Haryana Act is to levy the tax on purchase of raw material and not to forego it where the goods manufactured out of them are G disposed of (or despatched, as the case may be) in a manner not yielding any revenue to the State nor serving the interests of nation and its economy, as explained hereinbefore. The purchased goods are put an ~nd to by their consumption in manufacture of other goods and yet the manufactured goods are dealt with in a manner as to deprive the State of any revenue; H

244 SUPREME COllRT REPORTS [1992] SUPP. 2 S.C.R.

A in such cases, there is no reason why the State should forego its tax revenue on purchase of ra\\' material.

Another observation in f(andaswa1ni relevant for the present purpose may also be noticed:

B "It may be remembered that Section 7-A is at once a charging as well as a :remedial provision. Its main object is to plug leakage and prevent evasion of tax. In interpreting such a provision, a construction which would defeat its purpose and, in effect, obliterate it from the statute book, c should be eschewed. If more than one construction is possible, that which pre,ervcs its workability and efficacy is to be preferred tc the one which would render it otiose or sterile. The view taken by the High Court is repugnant this cardinal can~n of interpre1ation. ' 1 Lo

D In the light of the above scheme of Section 9, it would not be right, in our respectful opinion, to say that the tax is not upon the purchase .of ra\v rnaterial but on the consignment of the manufactured goods. It is well-settled that ta..Ung power can be utilised to encourage commerce and industry. It can al~o be used to scne the interests of economy and promote social and economic planning. Section 9 of 1-Iaryana Act and Section 13.AA E of Bombay Act are intended lo encourage the indu,try and at the same ti1nc deri\·e revenue. It is also not right to concentrate only on one situation viz.~ con"!ignn1cnt of goods to manufacturer's own depots (or to the depots of his agents) outside the State. Disposal of goods \vithin the State without effccling a SJ le also stards on the same footing, an inst.anc~ of which may F be captive consumpt1nn of manufactured products in the manufacture of yet other products. Once the scheme and policy of the provision is ap- preciated, there is no room, in our respectful opinion; for saying t bat the tax is on the consignment of rnanufac.tt1red goods.

\Ve may in this connection refer to the decision of a Constitution Bench G of this Court in Andhra Sugars v. State of Andhra Pradesh, 21 S.T.C. 212, relating to the validity of Section 21 of the A.P. Sugarcane Regulation of Supply and Purchase Act, 1961. Sub-section (1) of Section 21 read as follows:

"21. (1) The Government may, by notification, levy a tax at such rate not exceeding five rupees per metric tonne as

HOTEL BALAJI v. STATE OF A.P. [JEEVAN REDDY, J.] 245

may be prescribed on the purchase of cane required for use) consumption or sale in a factory."

One of the arguments urged against the validity of the levy was that since the levy is not on every purchase of sugarcane but only 11 on the purchase of cane required for use, consumption or sale in a f3ctory 11 the tax is not really a purchase tax referable to Entry 54 of List 11 of the Vllth B Schedule to the Constitution but a use tax, a tax of a different character altogether not falling under Entry 54. It was also argued that since the tax is levied at the stage of entry of cane into the factory for being used and consumed in t·hc manufacture of sugar, it is in the nature of an entry tax but since the factory was not a "local area" within the meaning of Entry 52 c of List II, the levy was incompetent. Both the arguments were rejected in the following words:

"Under that entry, the State Legislature is not bound to levy a tax on all purchase of cane. It may levy a tax on D purchases of cane required for 11 use, consumption or sale in a factory. The Legislature is competent to tax and also to exempt from payment of tax sales or purchases of goods required for specific purposes. Other instances of special treatment of goods required for particular purpose may be given. Section 6 and Schedule l, item 23 of the Bombay E Sales Tax Act, 1946, by tax on fabrics and articles for personal wear. Section 2G)(a)(ii) of the C.P. and Berar Sales Tax Act, 1947, exempts sales of goods intended for use by a registered dealer as raw materials for the manufac- ture of goods. F

Mr. Chatterjee submitted that the tax levied under Section 21 was a use tax and referred to Mcleod v. Dilworth and Co. 322 U.S. 327; 88 L.Ed. 1305, and C.G. Naidu and Co. v. The State of Madras, A.l.R. 1953 Mad. 116, 127-128; 3 STC 405. He argued that the State Legislature could not G levy a use tax which was essentially different from a purchase tax. The assumption of counsel that Section 21 levies a use tax is not well-founded. The taxable event under Section 21 is the purchase of goods and not the use or enjoyn1ent of what is purchased. The constitutional H

246 SUPREME COURT REPORTS [1992J SUPP. 2 S.C.R.

A implication of a use tax in American law is entirely ir- relevent." ..... .

1 'To appreciate another argument of Mr. Chatterjee, it is necessary to refer to a few facts. It appears that paragraph 21 of the Bill published in the Gazette on March 3, 1960, B preliminary to the passing of Act No. 45 of 196l provided for a levy of a cess on the entry of cane into the premises of a factory for use, consumption or sale therein. On December 13, 1960, this court in Diamond Sugar Mills Ltd., and Another v. The State of Uttar Pardesh and Another, c [1961] 3 S.C.R. 242, struck down a similar provision in the U.P. Sugarcane CessAct, 1956, on the ground that the State Legislature was not competent to enact it under Entry 52, List II, as the premises of a factory was not a local area within the meaning of the entry. Having regard to this decision, paragraph 21 of the Bill was amended and Section D 21 in its present form was passed by the State Legislature. The Act was published in the Gazette on December 30,

1961. Mr. Chatterjee submitted that in this context the levy under Section 21 was really a levy on the entry of goods into a factory for consumption, use or sale therein. \Ve are unable to accept this contention. As the proposed tax on the entry of goods into a factory was unconstitutional, paragraph 21 of the original Bill was amended and Section 21 in its present form was enacted. The tax under Section 21 is essentially a tax on purchase of goods. The taxable event is the purchase of cane for usei consumption or sale in a factory and not the entry of cane into a factory. As the tax is not on the entry of the cane into a factory, it is not payable on cane ctJtivated by the factory and entering the factory premises."

G For the above reasons, we find it difficult to agree with the reasoning of Mukharji, .l, in Goodyear. It is also not possible to agree with the learned Judge when he says that 1'thc two conditions specified, before the event of despatch outsi<le the State as mentioned in Section 9(l)(b), namely (i) purchase of goods in the State and (ii) using them for the manufacture of H any other goods in the State are only descriptive of the goods liable to tax

HOTEL BALNI 1•. STATE OF AP. [JEEVAN REDDY. J.j 247

248 SUPREME COURT REPORTS [19921 SUPP. 2 S.C.R.

A 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 thal the ratio of the said decision of this Court in Goodyear India Ltd. applies on all fours to the main question~at issue in this case. 1' When the counsel for the revenue sought to argue that the decision of this court in Kandaswami takes a different view B the Bench did not permit !he same to be urged in the view of the fact that the correctness of the judgment in Goodyear was not canvassed before them. The Bench said "the decision in Kandaswami though 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 c in the latter case. This aspect of the matter is elaborately dealt• \\1th in paragraphs 31 to 34 at page 796 of the report. We need nol dilate on this any more since the correctness of the judgment in Goodyear India Ltd. is not canvassed before us. 11

D It is, thus, clear that the main argument for the Bench was that the ratio of Goodyear governs the said case and it was so found. It is equally clear that the correctness of the decision in Goodyear was not questioned before the Bench and that is why the Bench took care to specifically advert to and record the said circumstance.

E So far as the decision in Murli Manolwr & Co. v. State of Haryana [1991] I S.C.C. 377 is concerned, it arose under Haryana Sales Tax Act and explains the meaning of export sale referred to in Section 9{l)(b) of the Act. There is no discussion in this decision about the point at issue before us. F The same is the position under Section BAA of the Bombay Sales Tax Act. The said provision, properly analysed, yields the follo\\ing in- gredients: (i) where a dealer who is liable to pay tax under this Act purchases any goods specified in Part I of Schedule (C) either directly or through commission agent, from a person who is or is not a registered dealer and (ii) uses such goods in the manufacture of taxable goods and (iii) despatches Ihe goods so manufactured to his own place of business or to his agcnl's place of business situated outside the Slate within India, (iv) such dealer shall pay, in addition lo the sales tax/purchase lax paid or payable or levied or leviahle, as the case tnay be, a purchase tax at the rate of t\vo paise in the rupee on the purchase price of the goods so used in

HOTEL BALAII v. STATio OF A.I'. iJEEVAN REDDY. J.] 249

the manufacture. Here again it may be noticed that the tax levied is a A purchase tax on the purchase of raw material and not upon tht; consign- ment of the manufactured goods. The object of this provision too is the •., same as of the Haryana provision. The levy is \vaived where the tnanufac- tured goods are sold within the State, or sold in the course of inter-State trade or commerce or sold in the course of export. It is retained and collected where the goods are taken out of Maharashtra Stale by v:ay of B consignment, in which event the State sees no reason not to retain and collect the levy on purchase of raw material. The provision is substantially similar to Section 9 of Haryana Act. Whatever we have said with respect to the Haryana provision applies equally to this provision. It is not neces- sary to repeat the same here. c Before parting with this matter) it is necessary to clarify an aspect: it was brought to our notice that both the Haryana and Bombay provisions have since been substituted with retrospective effect. We have not referred to those provisions in this part, for the reason that we are concerned only with the reasoning in Goodyear. D For the reasons mentioned above, we uphold the constitutional validity of the impugned provisions.

The appeals, writ petitions, S.L.Ps. and T.C. accordingly fail and arc dismissed. No order as to costs. E G.N. Petitions clismissed.