Sufficient nexus in State sales tax upheld for goods manufactured in the State and sold from outside depot

The U.P. sales tax provision was treated as valid because a State may tax sales where there is sufficient nexus between the transaction and the taxing State, even if the sale is completed outside the State. Applying that principle, manufacture of oils and soaps in Uttar Pradesh supplied the necessary territorial connection, so clause (ii) of Explanation II to section 2(h) was upheld as intra vires. On the same reasoning, sales made from a depot at Calcutta were held taxable in Uttar Pradesh because the goods had been manufactured within the State. The assessee's challenge failed and the tax liability on the disputed sales was sustained.

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Issues: (i) Whether clause (ii) of Explanation II to section 2(h) of the U.P. Sales Tax Act was ultra vires the Legislature; (ii) whether the assessee was liable to pay tax on sales of oils and soaps manufactured in Uttar Pradesh and sold from a depot at Calcutta.

Issue (i): Whether clause (ii) of Explanation II to section 2(h) of the U.P. Sales Tax Act was ultra vires the Legislature.

Analysis: The provision was treated as materially identical to the corresponding provision considered earlier in the Bihar Sales Tax Act. The controlling principle was that the State Legislature's power to impose sales tax was not confined to sales completed strictly within the State, and that a sale could be taxed if there was a sufficient nexus between the transaction and the taxing State. Manufacture or production of the goods in the State was held to provide such nexus even where the sale took place elsewhere.

Conclusion: The clause was held to be intra vires and the challenge to its validity failed, against the assessee.

Issue (ii): Whether the assessee was liable to pay tax on sales of oils and soaps manufactured in Uttar Pradesh and sold from a depot at Calcutta.

Analysis: The goods were admittedly manufactured in Uttar Pradesh, and the sales were by the same assessee from outside the State. Applying the principle of sufficient nexus, the Court held that the State of Uttar Pradesh could tax such sales because the manufacturing activity within the State created the requisite connection with the sale.

Conclusion: The assessee was liable to tax on the disputed sales, against the assessee and in favour of the Department.

Final Conclusion: The reference was answered by upholding the impugned statutory provision and sustaining the tax liability on the inter-State sales of goods manufactured in Uttar Pradesh.

Ratio Decidendi: A State sales tax law is valid where it taxes sales of goods manufactured or produced within the State, even if the sale is completed outside the State, provided there is a sufficient nexus between the goods and the taxing State.

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