2025 (7) TMI 923 - SC - VAT / Sales Tax

Manufacturers liable for entry tax under Section 3 despite goods sold to State warehouse

The SC held that appellant manufacturers were liable for entry tax under Section 3 of the Madhya Pradesh Entry Tax Act, 1976. The court found two ... Liability of appellant for payment of entry tax under Section 3 of the Madhya Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976 - entry of goods into the local area as required under Section 3(1)(a) read with Section 2(1)(aa), 2(1)(b) and 2(3) of the M.P. Entry Tax Act, 1976 - no privity of contract - Sale of Liquor to State Government warehouses - HELD THAT:- Under the modus operandi adopted, as set out in hereinabove, it will be clear that demand note for each and every shop is submitted to the warehouse by the retailer. After assessing the local demand, the Divisional Commissioner issues directions to the Officer in charge for issuance of a No Objection Certificate to the manufacturing units. The manufacturing units were allowed to store beer and IMFL in departmental godowns. The manufacturing units declare the Ex-godown price and supply of liquor is effected by the warehouse after levying 5 per cent additional fee. The retail buyer deposits the amount with the warehouse and the transfer of money to the manufacturer is made by the warehouse and thereafter, delivery is taken by the retailer from the warehouse. The issue of when can a sale which involves a canalizing agent/intermediary be said to be inseverable has arisen in the context of exemption sought by assessees under the Central Sales Tax Act before this Court in several cases. In K. Gopinathan Nair & Ors. v. State of Kerala, [1997 (3) TMI 513 - SUPREME COURT], this Court, after analyzing the precedents applicable to the issue, held that 'Since there is a direct and inseverable link between the transaction of sale and the import of goods on account of the nature of the understanding between the parties as also by reason of the canalising scheme pertaining to the import of cashewnuts, the sales in question cannot be taxed under the Kerala General Sales Tax Act or the Karnataka Sales Tax Act, as the case may be.' Thus, in case a canalising agency or intermediary agency is involved, unless their role is merely that of a name lender, the sale will not be treated as an inseparable or an inseverable sale. It will also be clear that if an independent canalising agency enters into back-to-back contracts and there is no direct linkage or causal connection between the export by foreign exporter and the receipt of the imported goods in India by local users, then the integrity of the entire transaction would be disrupted and would be substituted by two independent transactions. In K. Gopinathan Nair it was held that transactions were not integral and were two separate transactions. There are no manner of doubt that there were two independent transactions, one between the appellant – manufacturers and the State Warehouse and the other between the State warehouse and the retailers. Hence, it will be difficult to accept the contention of the State that the role of the State is only supervisory and the warehouses didn’t purchase beer and IMFL from the manufacturer. There are no manner of doubt that there were two independent transactions, one between the appellant – manufacturers and the State Warehouse and the other between the State warehouse and the retailers. Hence, it will be difficult to accept the contention of the State that the role of the State is only supervisory and the warehouses didn’t purchase beer and IMFL from the manufacturer. Reverting to Sections 3(1) read with 2(1)(aa) and 2(1)(b) and 2(3), it is clear that the appellants by the sale to the warehouse caused to be effected the entry of goods and the entry was occasioned on the account of the sale into the local area for consumption, use or sale therein. It is also not disputed that the appellant is a dealer as defined under the Madhya Pradesh VAT Act 2002, as it stood then. The only contention of the appellants is this that the State warehouse is also a dealer. That makes no difference since it cannot be disputed that the appellants certainly occasioned the entry of goods and the levy of entry tax on them, which could always be passed on, is perfectly justifiable in law. This Court answered the question in favor of the State - appeal dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:(a) Whether the appellants, who are manufacturers of Indian Made Foreign Liquor (IMFL) and beer, are liable to pay entry tax under Section 3 of the Madhya Pradesh Entry Tax Act, 1976, for the period 01.04.2007 to 31.03.2008.(b) Whether the State Government warehouses, which act as intermediaries between the manufacturers and retail licensees, are dealers liable to pay entry tax or merely act in a supervisory capacity.(c) Whether the appellants 'caused to effect the entry of goods' into the local area within the meaning of the Entry Tax Act, thereby attracting liability.(d) Whether the absence of a notification under Section 3B of the Entry Tax Act, which empowers the State Government to specify the manner of collection of entry tax on foreign liquor, precludes levy and collection of entry tax on the appellants.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (c): Liability of appellants as manufacturers to pay entry tax and whether they caused entry of goodsRelevant legal framework and precedents:The Madhya Pradesh Entry Tax Act, 1976, as amended in 2007, imposes entry tax on the entry of specified goods, including Indian made foreign liquor and beer (added to Schedule II), into local areas for consumption, use, or sale. Section 3(1)(a) provides for levy of entry tax on entry of goods by a dealer. Section 2(1)(aa) defines 'entry of goods into a local area' as entry from outside the local area including from outside the State. Section 2(3) clarifies that 'has effected entry' includes 'has caused to be effected entry.' Section 14 vests assessment and collection powers with authorities under the VAT Act.'Dealer' is defined under the VAT Act to include persons carrying on business of buying, selling, supplying or distributing goods, including government departments acting as dealers. 'Goods' and 'sale' are also defined broadly under the VAT Act.Precedents relating to canalizing agencies and inseverable transactions were considered, notably the principles enunciated in K. Gopinathan Nair & Ors. v. State of Kerala, which set out tests for determining when intermediary or canalizing agency transactions are inseverable and when they constitute separate transactions.Court's interpretation and reasoning:The Court examined the factual matrix where manufacturers supply IMFL and beer to State Government warehouses, which then supply to licensed retailers. The warehouses issue No Objection Certificates (NOCs), maintain stock, collect payments from retailers, and transfer amounts to manufacturers after deducting excise duty, VAT, and transportation fees. Retailers deal with the warehouses, not directly with manufacturers.Applying the principles from K. Gopinathan Nair, the Court found that the transactions between manufacturers and warehouses, and warehouses and retailers, are two independent transactions with no inseverable or inseparable link. The warehouses are not mere agents or name lenders but enter into back-to-back contracts with manufacturers and retailers. Thus, the State's contention that warehouses only supervise sales was rejected.However, the Court emphasized that the appellants, as manufacturers, by selling to the warehouses, have caused the entry of goods into the local area. The definition of 'cause' was considered in light of precedent from Azad Coach Builders and Coffee Board, Bangalore, where 'cause' or 'occasion' was interpreted to mean the immediate cause or factor producing the event (here, entry of goods).The Court held that the appellants' sale to the warehouse causes the entry of goods into the local area for consumption or sale, attracting entry tax liability. The appellants are 'dealers' under the VAT Act and have effected entry within the meaning of the Entry Tax Act.Key evidence and findings:The Court relied on the documentary evidence including communications from the Finance Department and Excise Commissioner, and the detailed guidelines for warehouse operations, which showed the warehouses' role in storing, supervising, and facilitating supply but not purchasing or selling as principals.Nevertheless, the financial flow and contractual arrangements demonstrated that manufacturers effect entry by selling to warehouses, which then supply retailers.Application of law to facts:The Court applied the statutory definitions and principles from case law to the facts, concluding that the appellants caused the entry of goods into the local area and are liable to pay entry tax.Treatment of competing arguments:The appellants' argument that the warehouses are dealers liable to pay entry tax and that manufacturers do not cause entry was rejected. The Court found that even if the warehouses are dealers, the appellants' act of sale causes entry and they are liable. The contention that no notification was issued under Section 3B to specify collection procedure was also rejected, as discussed below.Issue (b): Role and status of State Government warehouses as dealersRelevant legal framework:Explanation II to Section 2(i) of the VAT Act includes Central or State Government or their departments or offices as deemed dealers if they buy, sell, supply, or distribute goods for valuable consideration.Court's interpretation and reasoning:The Court noted that the warehouses do not purchase or sell liquor as principals but act under supervision and control of the State Excise Department. The warehouses facilitate supply and collection but do not have privity of contract with retailers, who are licensed to purchase from the warehouses.The High Court's finding that warehouses neither purchase nor sell liquor was upheld. Therefore, the warehouses do not qualify as dealers liable for entry tax under the Act, but this does not absolve manufacturers from liability.Issue (d): Effect of absence of notification under Section 3B on levy and collection of entry taxRelevant legal framework and precedents:Section 3B is an enabling provision allowing the State Government to specify the manner and appoint competent authorities for collection of entry tax on IMFL and beer by notification. Section 14 vests powers of assessment and collection with authorities under the VAT Act.Precedents such as A.G. Varadarajulu v. State of T.N. and Union of India v. G.M. Kokil were cited to interpret the interplay between non-obstante clauses and other statutory provisions.Court's interpretation and reasoning:The Court held that Section 3B is a machinery provision and does not curtail the general power of the authorities under Section 14 to assess and collect entry tax. The absence of any notification under Section 3B does not preclude levy or collection of entry tax under the general provisions.The non-obstante clause in Section 3B would only override Section 14 if a contrary provision existed, which was not the case here. Thus, the State could recover entry tax as per the general procedure prescribed under Section 14.Key evidence and findings:The Court relied on the High Court's reasoning that since no notification under Section 3B was issued, the general machinery under Section 14 applies. Communications between the Commercial Tax Commissioner and Excise Commissioner clarified that manufacturers are liable to pay entry tax.Application of law to facts and treatment of competing arguments:The appellants' contention that no levy could be made without notification under Section 3B was rejected. The Court found no legal impediment to levy and collection under Section 14, even in the absence of notification under Section 3B.3. SIGNIFICANT HOLDINGS'The appellants by the sale to the warehouse caused to be effected the entry of goods and the entry was occasioned on the account of the sale into the local area for consumption, use or sale therein.''The appellants certainly occasioned the entry of goods and the levy of entry tax on them, which could always be passed on, is perfectly justifiable in law.''Section 3B is only a machinery provision and in the teeth of Section 14 of the M.P. Entry Tax Act, it is not correct to say that there cannot be any assessment or collection of Entry Tax merely because there is no notification under Section 3B.''When something is required to be done so as to bring the non-obstante clause into play till that thing has been done, non-obstante clause would not come into play.'Core principles established include:Entry tax liability arises on the dealer who causes the entry of goods into the local area, and this includes manufacturers selling to warehouses which facilitate supply to retailers.Transactions involving canalizing agencies or intermediaries are to be examined for inseverability; independent back-to-back contracts negate inseverability.The absence of a notification under an enabling machinery provision does not preclude levy and collection under general provisions unless a conflict exists.Government warehouses acting as supervisory agents without privity of contract do not qualify as dealers liable for entry tax, but this does not absolve manufacturers.Final determinations:The appellants are liable to pay entry tax under Section 3 of the M.P. Entry Tax Act, 1976, for the relevant period.The State Government warehouses are not dealers liable to pay entry tax.The absence of notification under Section 3B does not invalidate the levy or collection of entry tax under Section 14.The appeals are dismissed with no order as to costs.