TaxTMI 
TaxTMI 
1992 (4) TMI 229
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd sale of Indian made foreign liquor. For the relevant assessment years under the First Schedule to the KGST Act before its amendment by Finance Act 18 of 1987, Indian made foreign liquor, manufactured and sold by the assessee, was taxable under entry 36 of the First Schedule to the KGST Act. It provided as follows: "THE FIRST SCHEDULE Goods in respect of which single point tax is leviable under subsection (1) or sub-section (2) of section 5. ------------------------------------------------------------------------ Sl. Description of goods Point of levy Rate of No. tax ------------------------------------------------------------------------ 36. Liquor other than foreign At the point of first sale 55" liquor, arrack and toddy in the State by a dealer who is liable to tax under section 5. Explanation (1).-'Liquor' means and includes toddy, wine, brandy, champagne, sherry, rum, gin, whisky, beer, cider, cocoa-brandy, arrack and all other distilled or spirituous or fermented beverages brought into or produced or manufactured in the State. Explanation (2).-'Foreign liquor' means any liquor manufactured in any country other than India and brought to India. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ved for both the years. In the appeals preferred by the assessee, the first appellate authority [the Deputy Commissioner of Agricultural Income-tax and Sales Tax (Appeals), Kozhikode] affirmed the findings and conclusion of the assessing authority to the effect that the turnover on which the assessee is assessable will be the sale price paid by the Beverages Corporation to M/s. Shaw Wallace and Company Limited on the goods delivered by the assessee. The first appellate authority noticed that the payments made by the Beverages Corporation to M/s. Shaw Wallace and Company Limited included the price paid for the goods supplied by M/s. Shaw Wallace and Company Limited from other sources also and directions were given to exclude the price paid for the goods supplied by M/s. Shaw Wallace and Company Limited from other sources, from the assessments of the assessee. In second appeals filed by the assessee, the Sales Tax Appellate Tribunal (in short, "the Tribunal") posed the question as to what is the correct turnover at which the assessee has to be assessed. After noticing the rival pleas and the relevant documents, the Tribunal came to the conclusion that "the Revenue could not establish....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ith the extra price realised by them for the property for goodwill and brand name" when no such contention has been raised in the grounds of appeal before the Tribunal? 6.. Whether, in the light of the provisions contained in rule 13(1) of the Foreign Liquor Rules, the Tribunal was justified in law in holding that the alleged sale of liquor by the assessee to M/s. Shaw Wallace and Company has to be deemed as the first sale of foreign liquor which is liable to tax within the State? 7.. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sales tax alleged to have been collected while under-billing the goods is an allowable deduction in computing the taxable turnover of the assessee? 4.. We heard Shri T. Karunakaran Nambiar (Senior Government Pleader) who appeared for the Revenue, and Shri K. Parasaran (Senior Advocate) and Shri C. Natarajan (Advocate) who appeared for the respondent (assessee). Though seven questions have been framed, no serious argument was advanced on question No. 3, which related to the finding on section 19B of the KGST Act. It was fairly agreed at the Bar that in the light of the Division Ben....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ract entered into by M/s. Shaw Wallace and Company Limited with the Beverages Corporation, and the amount paid by the Beverages Corporation to M/s. Shaw Wallace and Company Limited has nothing to do with the sale effected by the assessee to M/s. Shaw Wallace and Company Limited. Both the sales are independent. Their reality and independent existence cannot be ignored. There is no basis to ignore the two different and independent sales. 6.. In order to appreciate the rival pleas advanced before us in greater detail, as also the findings of the Tribunal in that regard, it will be useful to extract rule 52(1) (as amended) of the Kerala Distillery and Warehouse Rules, 1968; rules 11 and 13(9) of the Foreign Liquor Rules and rule 11(1) of the Foreign Liquor Compounding, Blending and Bottling Rules, 1975. Rule 52(1) of the Kerala Distillery and Warehouse Rules, 1968, as it stood at the relevant time as per amendment is to the following effect: "52. To whom issues for local consumption may be made.-(1) Indian made foreign spirit may be issued for consumption within the State only to the FL 9 licensees in the State." The explanatory note which is not part of the notification, but ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... compounding, blending and bottling units and FL 10 licensees operating in the State." The explanatory note, which is not part of the notification, but is intended to indicate the general purport, stated as follows: "Consequent on the formation of a public sector corporation to function as the sole agency for the distribution of foreign liquor, the wholesale dealers (FL 1 licensees) will have to obtain their requirements of foreign liquor from the FL 9 licensees in the State and the foreign liquor Retail and FL 3 (hotel/restaurant) licensees from FL 1 licensees in the State. It has therefore become necessary to enable the foreign liquor bonded warehouse licensee and FL 9 licensee (public sector corporation) to procure the requirements of foreign liquor from the distilleries, breweries and compounding, blending and bottling units operating in the State. The amendment is intended to achieve this object." Rule 11(1) of the Kerala Foreign Liquor (Compounding, Blending and Bottling) Rules, 1975, is as follows: "11. Strength and issue of bottled liquors.-(1) Liquors shall be issued from the finished products store only in bottles, and (i) under bond for export; or (ii) on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....). At this juncture, we should indicate that it is seen from the delivery note, lorry receipt and invoice (pages 120, 122 and 123 of the files) that the transport is made in pursuance to the sale by the assessee to M/s. Shaw Wallace and Company Limited, that the goods are being despatched under instructions from M/s. Shaw Wallace and Company Limited, that the consignor is the assessee and the person to whom the goods are consigned is the Beverages Corporation. The delivery note contained serial No. P. 393356 dated January 15, 1986. The lorry receipt at page 122, dated January 15, 1986, shows that the consignor is the assessee and the consignee is the Beverages Corporation and the goods transported are 200 c. boxes Bonoparte Brandy and 400 c. boxes Director's Special Whisky, both admittedly the trade label of M/s. Shaw Wallace and Company Limited. The invoice seen at page 123 of the paper book dated January 15, 1986 mentions the number of the delivery note-serial No. P. 393356 dated January 15, 1986 in conformity with the delivery note seen at page 120. The invoice is drawn by the assessee on M/s. Shaw Wallace and Company Limited and the goods are specified or referred to as Bonopar....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 20 to 23, 28, 29, 39 and 119 to 125) counsel argued that though there was only one delivery note, it reflected a plurality of contract-a sale by the assessee to M/s. Shaw Wallace and Company Limited and the further sale by M/s. Shaw Wallace and Company Limited to the Beverages Corporation, that there was a delivery of the goods by the assessee-company to M/s. Shaw Wallace and Company Limited, that title to the goods in the instant case (movable property) passed by delivery, that even if there is any illegality, it has no relevance, that illegality merely renders a contract unenforceable and not void and even under the illegal contract title can pass. This is so even if possession of the movable property is not given. It was argued that the "factual sale" by the assessee to M/s. Shaw Wallace and Company Limited was not disputed by the Revenue, but only its legality. It was further contended that even if there was an infraction of the Abkari laws, that cannot prevent the factual sale by the assessee to M/s. Shaw Wallace and Company Limited, which is crucial under the sales tax law and for the infraction, if any, the penalties under the Abkari laws alone can be invoked. It was stres....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the controversy before the Appellate Tribunal centered round substantially on a question of fact, namely, what is the correct turnover at which the assessee should be assessed? That, admittedly, will be represented by the price obtained by the sale of the goods by the assessee. Before the Tribunal the Revenue admitted that there was the sale of the goods by the assessee (paragraph 8 of the order). The sole question was, who is the buyer? To whom was the goods sold by the assessee? There was no plea nor any material either before the Tribunal or before us to substantiate that there was any privity between the assessee and the Beverages Corporation. The Revenue had, no case that the assessee had entered into any contract with or sold the goods to the Beverages Corporation. What was sought to be made was, that though there was a contract for sale of the goods between the assessee and M/s. Shaw Wallace and Company Limited, it should be ignored. The legality of the said sale alone was projected and not the factum of sale. The sale was not assailed as "sham" or a "make believe". It may be that the supply of the goods by the assessee was made to the Beverages Corporation. But it was as a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rte Brandy and Directors' Special Whisky to the Kerala State Beverages Corporation, dated January 9, 1986 (page 16 of the paper book). (3) Delivery note in form No. 26 (No. P. 393356) filled by the assessee in transporting the goods specifying as one in pursuance of a sale to M/s. Shaw Wallace and Company Limited and the goods being despatched under the instructions from M/s. Shaw Wallace and Company Limited to the Kerala State Beverages (M & M) Corporation Ltd., Ernakulam (pages 120 and 121 of the paper book). (4) Invoice specifying the delivery note No. 393356 dated January 15, 1986 raised by the assessee against M/s. Shaw Wallace and Company Limited for the supply of 600 cases of Bonoparte Brandy and Directors' Special Brandy (page 123 of the paper book). (5) Lorry receipt No. 1322267 dated January 15, 1986, mentioned in the above (page 122 of the paper book). (6) Inspection report of the Registrar of Companies, Kerala, dated December 19, 1986. (7) Profit and loss account of the assessee-company for the period ending June 30, 1986. (8) Relevant provisions of the Abkari Act and the Rules. 11.. The Appellate Tribunal adverted to the main or the operative porti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....other products supplied to M/s. Shaw Wallace and Company Limited are the sole property of M/s. Shaw Wallace and Company Limited. (4) The assessee does not have any right to use the said labels or brand names. They manufactured the products and labelled them as directed by M/s. Shaw Wallace and Company Limited. The assessee invoices at a certain price on the sales made to M/s. Shaw Wallace and Company Limited. Since the goods are branded, the assessee cannot sell the goods to anybody else other than M/s. Shaw Wallace and Company Limited. It will be a violation of the agreement and M/s. Shaw Wallace and Company can prohibit the assessee from selling the goods to anybody else. (5) The higher price realised by M/s. Shaw Wallace and Company Limited from the Beverages Corporation is on account of the brand name, such as "Bonoparte", "Directors' Special", "etc., of M/s. Shaw Wallace and Company Limited. What is realised by the assessee from M/s. Shaw Wallace and Company Limited is the sale price of the commodity. The goodwill and the brand name exclusively belong to M/s. Shaw Wallace and Company Limited. The assessee cannot realise any price for the same. The substantially hi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aw Wallace and Company Limited from the Beverages Corporation is the extra price realised by them for the property in the goodwill or the brand name. (12) It is an admitted position of the department that there is a sale by the assessee. According to the department, the sale by the assessee to M/s. Shaw Wallace and Company Limited is not cognisable. Even assuming that the sale by the assessee to M/s. Shaw Wallace and Company Limited is illegal, that need not be visited with a sales tax assessment at a price different from what is disclosed, unless it is established that a price different from what is disclosed is realised by the assessee. (13) The assessee was engaged in the act of selling goods to M/s. Shaw Wallace and Company Limited for a price agreed to between them. Even if assessee and M/s. Shaw Wallace and Company Limited, the matter should be dealt with under the relevant provisions of the Kerala Abkari Act and Rules framed thereunder. It is not necessary to decide whether the sale of the assessee to M/s. Shaw Wallace and Company Limited is legal or not as the Revenue need look only at an accomplished fact. Plainly viewing, the transaction of sale is complete, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rtions of the agreement executed between the assessee and M/s. Shaw Wallace and Company Limited, the various documents produced in the paper book and also the orders passed by the assessing authority, the first appellate authority and the Appellate Tribunal. On a fair and proper reading of the order of the Appellate Tribunal, we are of the view that the findings and the conclusion reached by the Appellate Tribunal are in accordance with law. The detailed findings entered by the Appellate Tribunal, which we have extracted in paragraph 12 supra, are based on material available before it. Counsel for the Revenue could not successfully contend that the various findings arrived at by the Appellate Tribunal are not based on any material or they are perverse or arbitrary. We are of the view, that the findings and the conclusion arrived at by the Appellate Tribunal are logically in accord with the documents available in the case. We shall now broadly advert to this aspect. Admittedly, the assessee-company had entered into a contract with M/s. Shaw Wallace and Company Limited for the manufacture and supply of Indian made foreign liquor, products to be marketed by M/s. Shaw Wallace and Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Brandy" and "Directors' Special Whisky", etc. The delivery note specified that the goods were sold by the assessee to M/s. Shaw Wallace and Company Limited. The invoice was also to the same effect. Since the goods are labelled containing the brand name of M/s. Shaw Wallace and Company Limited, the assessee could not sell the goods to anybody else other than M/s. Shaw Wallace and Company Limited or deliver the goods to any other person except under instructions from M/s. Shaw Wallace and Company Limited. It is evident that the higher price realised by M/s. Shaw Wallace and Company Limited is on account of their goodwill and brand name. The assessee never received any money from the Beverages Corporation. The assessee was paid only by M/s. Shaw Wallace and Company Limited. The relationship between the assessee and M/s. Shaw Wallace and Company Limited is that of seller and buyer. The Beverages Corporation was not a party to the agreement, entered into between the assessee and M/s. Shaw Wallace and Company Limited. The moment the goods are invoiced and put on lorry, the title to the property passes to M/s. Shaw Wallace and Company Limited. The goods were sent to the Beverages Corporat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The decisions-Sajan Singh v. Sardara Ali [1960] 1 All ER 269 at page 272 (PC), Belvoir Finance Co. Ltd. v. Stapleton [1970] 3 All ER 664 at page 667; Kingsley v. Sterling Industrial Securities Ltd. [1966] 2 All ER 414 at page 426 and Watts v. Seymour [1967] 2 QB 647 at pages 652 and 654-and Chalmers' Sale of Goods (17th Edition) page 19, indicate that where property in goods (movable) is transferred in pursuance of an illegal transaction, it remains in the transferee notwithstanding the illegality. The above decisions, if applied to the facts of this case, would show that as per the law as it stood then, even if the sale by the assessee/distillery of Indian made foreign liquor to M/s. Shaw Wallace and Company Limited was illegal, the title to the goods passed to M/s. Shaw Wallace and Company Limited on delivery. The contract entered into between the assessee/ distillery and M/s. Shaw Wallace and Company Limited may be illegal but that will not in any way affect the passing of the title to the goods to the transferee-M/s. Shaw Wallace and Company Limited. This is so even if physical possession was not given to M/s. Shaw Wallace and Company Limited; but was given only to the nominee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the buyer, that duty was to be paid by the buyer. The bill of sale prepared by the distillery (seller) showed only the price of liquor, excluding the excise duty. The Revenue took the view that excise duty payable by the manufacturer (seller), but which was paid by an arrangement between the manufacturer and the buyer, by the buyer, was actually part of the consideration for the sale and so should be included in the turnover of the seller (manufacturer) for determining the liability for sales tax. On facts, it was admittedly part of the consideration for the sale. The court held that the payment of excise duty was the primary and exclusive obligation of the manufacturer and if payment was made under a contract or arrangement, by any other person, it would only be a meeting of the obligation of the seller (manufacturer) and nothing more. It was held that the consideration for the sale is the amount charged by the manufacturer (seller) under its bill together with excise duty, which the buyer directly paid on seller's account and the excise duty was rightly included in the turnover of the manufacturer (seller). Justice Sri Ranganath Misra, delivering the main judgment in McDowell's ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s observed by Lord Reid in Greenberg v. Inland Revenue Commissioners [1971] 47 Tax Cas 240 (HL) that one must find out the true nature of the transaction. It is unsafe to make bad laws out of hard facts and one should avoid subverting the rule of law." The three decisions of the House of Lords, stressed by Chinnappa Reddy, J., in the decision in McDowell's case [1985] 59 STC 277 at page 286. Ramsay [1981] 1 All ER 865 (HL), Burmah Oil [1982] Simon's Tax Cases 30 (HL) and Furniss [1984] 1 All ER 530 (HL) were considered in a later decision of the House of Lords in Craven v. White [1988] 3 All ER 495. There are subsequent decisions of the Court of Appeal in England on the subject. The latest is the one reported in Moodie v. Inland Revenue Commissioners [1992] 193 ITR 501; [1991] 1 WLR 930 (CA). Various articles of interest regarding the new perspective or approach or emerging principle focussed in Ramsay case [1981] 1 All ER 865 (HL), and the subsequent decisions have appeared in Law Reviews. A few of them are: [1982] 98 LQR 209, 1982 BTR 200, [1983] BTR 221, 1984 Cam L.J. (Vol. 43) Notes page 259,1986 BTR 327,1987 BTR 180 (220),1988 BTR 482 and 1991 BTR 283. The last articl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....made foreign liquor and M/s. Shaw Wallace, and Company Limited is a business house specialising in dealing such goodswithout manufactory. The goods delivered to the Beverages Corporation bore the brand name, goodwill and label of M/s. Shaw Wallace and Company Limited. That is a decisive circumstance to show that the agreement entered into between the assessee and M/s. Shaw Wallace and Company Limited was based solely/really on commercial or business purpose, and it is a far cry to allege or assume that the agreement between the assessee and M/s. Shaw Wallace and Company Limited had only a "business effect" and so a "device". There is no material to show that the agreement is a preordained one, solely brought out for tax mitigation. It has not been brought out that the true nature of the transaction is not what it purports to be. In this view of the matter, we are of opinion that reliance on McDowell's case [1985] 59 STC 277 (SC) is wholly misplaced. We repel the argument of the Revenue to the contrary. 18.. No other point was argued before us. In the result, we are of the view, that the common order, passed by the Kerala Sales Tax Appellate Tribunal, Additional Bench, Palghat, i....