2006 (7) TMI 17 - SC - VAT and Sales Tax

MRP cannot be basis for sales tax, Supreme Court rules. Tax must reflect actual sale price.

STATE OF RAJASTHAN Versus RAJASTHAN CHEMISTS ASSOCIATION

The Supreme Court upheld the High Court's decision that Section 4A of the Rajasthan Sales Tax Act, 1994, imposing tax on the first point sale based on ... Whether section 4A of the Rajasthan Sales Tax Act, 1994 as introduced by the State Finance Act, 2004 was not legally sustainable to the extent that tax on first point sale of drugs, medicines or any formulation or for that matter any other commodity by a manufacturer/wholesaler/distributor to retailer where 'Minimum Retail Price' is published on package, measure to which rate of tax is to be applied cannot be with reference to such published MRP which is neither charged nor chargeable by the wholesaler from the retailer whether the tax is charged on sales or on purchase by the parties to sale under section 4A and the concerned notification in this regard? Held that:- The judgment of the High Court does not warrant any interference and the appeal is dismissed. However, it is made clear that if the tax component has been passed on to the subsequent purchases claim for refund shall not be entertained. But where it has not been so passed on and has been deposited with the authorities, the same shall be adjusted against future demands, if any. Issues Involved:1. Constitutionality of Section 4A of the Rajasthan Sales Tax Act, 1994.2. Legitimacy of taxing the first point sale based on Maximum Retail Price (MRP).3. Legislative competence of the State to levy tax based on MRP.4. Nexus between the measure of tax and the taxable event.Issue-wise Detailed Analysis:1. Constitutionality of Section 4A of the Rajasthan Sales Tax Act, 1994:The controversy arose when Section 4A was introduced by the Finance Act, 2004, which imposed tax based on the retail sale price (MRP) of goods. The respondent challenged the constitutional validity of this provision, arguing that it levied tax on an artificial amount rather than the actual sale price. The High Court held that Section 4A, to the extent it imposed tax on the first point sale of drugs and other commodities based on MRP, was not legally sustainable. The tax should be levied on the actual price paid or payable, not on the MRP, which is neither charged nor chargeable by the wholesaler from the retailer.2. Legitimacy of Taxing the First Point Sale Based on MRP:The primary challenge was that the tax on the first point sale should not be based on MRP, which is applicable only at the last point sale by the retailer. The High Court concluded that taxing the first point sale based on MRP, which is not the actual transaction price, is beyond the legislative competence of the State. The tax must relate to the actual sale price, not an artificial or notional amount.3. Legislative Competence of the State to Levy Tax Based on MRP:The State argued that it had the power to determine the measure of tax under Article 246 read with Entry 54 of List II of Schedule VII of the Constitution. The High Court, however, found that the measure of tax must have a nexus with the taxable event, i.e., the actual sale transaction. Taxing based on MRP, which is not the price at the first point sale, lacks this nexus and is therefore ultra vires.4. Nexus Between the Measure of Tax and the Taxable Event:The High Court emphasized that for a tax on the sale of goods, the measure of tax must be related to the actual sale price. The MRP, which is relevant only for the last point sale, cannot be used as a measure for taxing the first point sale. The Court cited various precedents, including the cases of Sales Tax Office, Pilibhit v. M/s. Budh Prakash Jai Prakash and State of Madras v. Gannon Dunkerley & Co., to underline that the tax on the sale of goods must be based on the actual transaction price, not on a hypothetical or future price.Conclusion:The Supreme Court upheld the High Court's decision, stating that Section 4A of the Rajasthan Sales Tax Act, 1994, to the extent it imposed tax on the first point sale based on MRP, was unconstitutional. The measure of tax must have a direct nexus with the taxable event, i.e., the actual sale transaction. The appeal was dismissed, and it was clarified that any excess tax collected based on the impugned provision should be adjusted against future tax liabilities if not passed on to subsequent purchasers.