IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR.

1. S.B. SALES TAX REVISION PETITION NO.170/2007

Commercial Taxes Officer, Special Circle, Udaipur.

versus

M/s Solkit Cosmetics, F-139, Road No.5, Mewar Industrial, Madri, Udaipur.

2. S.B. SALES TAX REVISION PETITION NO.162/2007

Commercial Taxes Officer, Special Circle, Udaipur.

versus

M/s Fragrance Cosmetics Pvt. Ltd., Mewar Sheetgarh, Sardarpura, Udaipur.

3. S.B. SALES TAX REVISION PETITION NO.163/2007

Commercial Taxes Officer, Special Circle, Udaipur.

versus

M/s Solkit Cosmetics, F-139, Road No.5, Mewar Industrial, Madri, Udaipur

4. S.B. SALES TAX REVISION PETITION NO.171/2007

Commercial Taxes Officer, Special Circle, Udaipur.

versus

M/s Fragrance Cosmetics, Mewar Sheetgarh, Sardarpura, Udaipur.

PRESENT
HON'BLE Dr.JUSTICE VINEET KOTHARI

Mr.V.K. Mathur with

Mr. Rishabh Sancheti, for the petitioner - Revenue
Mr.Dinesh Mehta, for the respondent - assessee

DATE OF JUDGMENT : 17th November, 2008.

JUDGMENT

1. Following common question of law arises in the present four revision petitions filed
by the Revenue :

“Whether the Assessing Authority was justified in imposing additional sales tax on the basis
of assessable value of the commodity “hair oil” sold by the assessee manufacturer to the
distributor M/s Bajaj Sevashram Limited computed as per Section 4 of the Central Excise
Act, 1944 irrespective of actual sale consideration charged by the assessee for sale of said
commodity?”

2. The appellate Authorities below held in favour of the assesseee that the Assessing
Authority could not impose such additional tax on the assessee and unless sale consideration
was shown to have been charged by the assessee from its purchaser under an agreement, no
such additional tax could be imposed upon the respondent – assessee. Upholding the
contention of the assessee that imposition of Central Excise Duty on the basis of assessable
value computed as per Section 4 of the Central Excise Act was hypothetical sale
consideration as far as respondent – assessee was concerned and without burden of proof
which lied upon the Revenue to establish that the respondent – assessee had collected
anything beyond the sale consideration disclosed in the sale invoices, returns and books of
accounts maintained in the regular course of business, the Appellate Authorities concurrently
held that , the Assessing Authority could not impose any such additional sales tax.

3. In the present revision petitions filed by the Revenue, the learned counsel for the
Revenue Mr. Vineet Mathur and Mr. Rishabh Sancheti candidly submitted that as far as
question of law is concerned, with the latest decision of Hon'ble Supreme Court in the case
of State of Rajasthan V/s Rajasthan Chemist Association reported in (2006) 6 SCC 773, the
said question stands decided against the Revenue and though the case involved before the
Hon'ble Supreme Court pertained to the Drug Price Control order, the analogy and ratio of
the said decision would cover the controversy in hand. He further submitted that as far as
excise duty component is concerned, actual excise duty paid by the respondent – assessee
was already included in the taxable sale price in the hands of the respondent – assessee.

4. Mr. Dinesh Mehta, learned counsel appearing for the respondent – assessee on the
other hand submitted that the controversy stands covered by the aforesaid decision of Hon'ble
Supreme Court in the case of Rajasthan Chemist Association and also the judgment of this
Court in the case of Assistant Commissioner, Anti Evasion, Commercial Taxes, Udaipur V/s
M/s Vilas Udhyog reported in 2007 (18) Tax-update 184 in which similar question though
answered in a brief judgment, concludes this issue in favour of the respondent – assessee.

5. The Hon'ble Supreme Court in the case of Rajasthan Chemist Association (supra)
while dealing with the validity of Section 4A inserted in Rajasthan Sales Tax Act, 1994
empowering the State Government to impose sales tax on the basis of maximum retail price
(MRP for short of commodity held that under Section 4A of the Act for the taxable event that
has occurred, the amount received or receivable is assumed to be different from that which is
neither received nor receivable and that amount which neither flows from the Control Order,
nor which flows from the buyer to the seller under the contact but is relatable to a transaction
of sale by a retailer which may not have come into existence. The Hon'ble Supreme Court
said in para 50 as under:

“........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
Tax (Sales Tax Act).”

6. Upholding the Division Bench decision of Rajasthan High Court striking down
Section 4A of the RST Act as ultra vires, the Apex Court said in para 46 to 55 of the said
judgment in Rajasthan Chemist Association (supra) reported in 2006 STC (147) 542 (SC) as
under :

“46. Section 4-A 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 wholesaer to the retailer. The tax is to be
charged or 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 that which is
neither received nor receivable and that amount which neither flows from the Control Order,
nor which flows from the buyer to the seller under the contact 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 the prescribed limits.

47. The charging Section 4 stipulates that the tax payable by a dealer under the Act shall
be at single point in the series by sales by successive dealers, as may be prescribed and shall
be levied at such rates not exceeding fifty per cent ion 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 the rate applied to aggregate of price received or
receivable by the dealer d on such sales.
48. Section 4-A does not become workable unless read along with the definition of
“turnover” and “taxable turnover”.

49. The retail price of a formulation needs determination under para 7 of the Order and
the Government is empowered by the order to fix the price in accordance with para 7 of the
Order to be charged by a retailer. Where the maximum retail price is fixed as provided under
para 7 of the Control Order, para 19 provides for price that can be charged from a retailer by a
wholesaler, it reads as under:

“19. Price of formulations sold to be 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.”

50. 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 the wholesaler and retailers are the parties to the contract, the goods in
question are the formulations and the consideration is one which is agreed to between the
parties to that transactions within the limits permissible by law. By substituting the assumed
quantity of goods or a price which is not the 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 the 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 (Sale of Goods Act)

51. Another distinguishing feature to be kept in mind is that the central point of
legislation under Entry 54 of List II of the Seventh Schedule is “sale” in contrast with the
central point of legislation under Entry 84 of List I of the Seventh 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”.

52 Even transaction of sale is independent and can be subject to levy of tax and the
component and the measure which can make the tax levy effective must have nexus with the
taxable event.

53. 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 confines 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 to be a completed sale and which cannot be the 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 whch has become subject of tax.

54. It may be relevant to recall here that this Court in Hotel Balaji case 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 tax on purchase.

55. If the legislation can provide for a measure of tax on the 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 the legislature may
provide will make little difference. It is not contended by the 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 Tax.”

7. In view of aforesaid authoritative pronouncement of the Hon'ble Apex Court, it can

safely be concluded that the Assessing Authority could not impose any additional t ax in the
hands of the respondent – assessee on the basis of hypothetical price or sale consideration
assuming it to be 50% of the MRP which is the assessable value as computed for the purpose
of Central Excise Act, 1944. There appears to be nothing brought on record by the Assessing
Authority to prove the case of under-billing or charging of anything beyond the disclosed sale
consideration in its returns or invoices. It is doubtless that the burden of proof in this regard
lies upon the Revenue. Even if the difference between MRP and the sale consideration shown
by the assessee may appear to be huge, it can at best give rise to the initiation of proceedings
which the Assessing Authority may initiate for discharging the aforesaid burden of proof as it
is a question of fact whether the assessee has charged something extra beyond the disclosed
sale consideration or not. Ex hypothesi sale consideration cannot be increased to assessable
value as computed under Section 4 of the Central Excise Act for the purpose of levy of sales
tax. In view of the aforesaid pronouncement of the Hon'ble Supreme Court, the appellate
Authorities below cannot be said to have committed any error in setting aside imposition of
additional tax upon the respondent – assessee.

8. The present revision petitions filed by the Revenue are thus, found to be devoid of
merit and the same are accordingly, dismissed. No order as to costs.

(Dr.VINEET KOTHARI)J.
Item No.38-41
Ss/-