1958 (2) TMI 29 - SC - VAT and Sales Tax

Bihar Sales Tax Act, 1947 Validated by Court, Nexus Doctrine Extended

The Tata Iron & Steel Co., Ltd. Versus The State of Bihar  

The Court upheld the validity of the Bihar Sales Tax Act, 1947, ruling that the provisions were within the legislative competency of the Bihar ... Whether sales tax is an indirect tax on the consumer sales tax may be an indirect tax on the consumers? Held that:- Under the 1947 Act the primary liability to pay the sales tax, so far as the State is concerned, is on the seller. Indeed before the amendment of the 1947 Act by the amending Act the sellers had no authority to collect the sales tax as such from the purchaser. The seller could undoubtedly have put up the price so as to include the sales tax, which he would have to pay but he could not realise any sales tax as such from the purchaser. That circumstance could not prevent the sales tax imposed on the seller to be any the less sales tax on the sale of goods. The circumstance that the 1947 Act, after the amendment, permitted the seller who was a registered dealer to collect the sales tax as a tax from the purchaser does not do away with the primary liability of the seller to pay the sales tax. This is further made clear by the fact that the registered dealer need not, if he so pleases or chooses, collect the tax from the purchaser and sometimes by reason of com- petition with other registered dealers he may find it profitable to sell his goods and to retain his old customers even at the sacrifice of the sales tax. This also makes it clear that the sales tax need not be passed on to the purchasers and this fact does not alter the real nature of the tax which, by the express provisions of the law, is cast upon the seller. The buyer is under no liability to pay sales tax in addition to the agreed sale price unless the contract specifically provides otherwise. Appeal dismissed. Issues Involved:1. Vires of the Bihar Sales Tax Act, 1947.2. Applicability of the doctrine of nexus to sales tax.3. Sufficiency and reality of the nexus in the present case.4. Nature of the tax as a duty of excise or sales tax.5. Validity of the retrospective levy of sales tax.Issue-wise Detailed Analysis:1. Vires of the Bihar Sales Tax Act, 1947:The appellant challenged the validity of Section 4(1) read with Section 2(g) of the Bihar Sales Tax Act, 1947, arguing that the Bihar Legislature could not extend its legislative power to impose a tax on anything short of a sale. The Court held that the principal part of the definition of 'sale' meant the transfer of property in goods. The second proviso did not extend the definition of 'sale' but only located the sale in Bihar under certain circumstances. The taxable event remained the 'sale' involving the transfer of ownership. Therefore, the provisions were within the legislative competency of the Bihar Legislature.2. Applicability of the Doctrine of Nexus to Sales Tax:The appellant argued that the doctrine of nexus should not apply to sales tax. The Court referred to various precedents, including decisions from Australia and England, which upheld the nexus theory in tax legislation. The Court noted that the nexus theory had been applied in income-tax cases and extended it to sales tax legislation. The Court found no reason to confine the application of the nexus theory to income-tax legislation and held that it was applicable to sales tax legislation as well.3. Sufficiency and Reality of the Nexus in the Present Case:The appellant contended that the nexus in the present case was illusory. The Court held that the presence of goods in Bihar at the time of the agreement for sale or their production or manufacture in Bihar constituted a sufficient nexus between the taxing State and the sale. The Court found that these facts provided a real and pertinent connection, making the nexus sufficient for the imposition of the sales tax.4. Nature of the Tax as a Duty of Excise or Sales Tax:The appellant argued that the tax was in the nature of a duty of excise rather than a sales tax. The Court held that the tax was imposed on the producer or manufacturer qua seller and not qua manufacturer or producer. The tax was laid on the sale of goods, not on their production or manufacture. The Court distinguished between a duty of excise, which is a tax on goods, and a sales tax, which is a tax on the sale or proceeds of sale of goods. The Court concluded that the tax was a sales tax and not a duty of excise.5. Validity of the Retrospective Levy of Sales Tax:The appellant argued that the retrospective levy of sales tax destroyed its character as a sales tax and made it a direct tax on the dealer. The Court held that the primary liability to pay sales tax was on the seller, and the fact that the seller could pass it on to the purchaser did not alter the nature of the tax. The Court noted that the Bihar Legislature, acting within its legislative field, had the powers of a sovereign legislature and could make its law prospectively as well as retrospectively. The Court found no substance in the contention that the retrospective levy was invalid.Separate Judgment by Bose, J.:Bose, J., delivered a separate judgment, disagreeing with the majority. He argued that a State could only impose a tax on sales that occurred within the State and rejected the nexus theory as applied to sales tax. He emphasized that a sale could have only one situs and that it was the duty of the Supreme Court to determine that situs uniformly for the whole country. He contended that the nexus theory allowed States to tax elements of a sale rather than the sale itself, leading to multiple taxation. He concluded that the appeals should be allowed.Order of the Court:In view of the opinion of the majority, the appeals were dismissed with costs.Appeals dismissed.