Sales tax measure must match the taxed sale: MRP-based valuation for first-point sales was held invalid to that extent.

The Supreme Court held that, under Entry 54 of List II, the taxable event in sales tax is the sale or purchase of goods and the tax measure must retain a real nexus with that sale. Section 4A of the Rajasthan Sales Tax Act, 1994 was found to substitute the actual consideration in the wholesale sale with a notional value based on the maximum retail price printed on the package, even though that price related to a later retail sale. The Court held that while the State may choose the measure of tax, it cannot detach that measure from the taxed sale by using a price belonging to a different transaction. Section 4A was therefore invalid to that extent for first-point sales of notified goods.

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Issues: Whether Section 4A of the Rajasthan Sales Tax Act, 1994, which imposed tax on the first-point sale of notified goods by reference to the maximum retail price printed on the package, was beyond the legislative competence of the State Legislature and liable to be struck down to that extent.

Analysis: The taxable event under Entry 54 of List II is the sale or purchase of goods, and the measure of tax must retain a real nexus with that taxable event. A sales tax on goods is ordinarily a levy on the price received or receivable in the completed transaction of sale. Section 4A, however, substituted for the actual consideration in the wholesale sale a notional value drawn from the retail sale price, even though that price was not the amount paid or payable in the taxable first-point sale and related to a later transaction between retailer and consumer. The Court held that the State may determine the measure of tax, but it cannot by legal fiction detach that measure from the sale which is actually taxed or transplant into the charging event a price belonging to a future and different sale. The MRP-based measure therefore lacked the required nexus with the taxable sale by the wholesaler to the retailer.

Conclusion: Section 4A, to the extent it made the MRP the measure of tax for first-point sales of drugs, medicines and similar goods, was invalid and the challenge failed for the State.

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