Holding

Sections 15B of the Gujarat Sales Tax Act, 3‑AAAA of the Uttar Pradesh Sales Tax Act, and 6‑A of the Andhra Pradesh General Sales Tax Act are intra‑vires purchase taxes under Entry 54 of List II.

Summary

The Supreme Court examined the constitutional validity of purchase‑tax provisions in three State sales‑tax statutes: Section 15B of the Gujarat Sales Tax Act, Section 3‑AAAA of the Uttar Pradesh Sales Tax Act, and Section 6‑A of the Andhra Pradesh General Sales Tax Act. The petitioners argued that these provisions amounted to a consignment, use or consumption tax and were therefore ultra vires the State’s power under Entry 54 of List II of the Seventh Schedule. The Court held that each provision merely levies a tax on the purchase of raw material or goods and, despite referencing subsequent use or disposal, retains the character of a purchase tax within the State’s legislative competence. The Court also rejected the ratio in Goodyear India Ltd. v. State of Haryana as inapplicable, emphasizing a liberal construction of Entry 54. All appeals and writ petitions were dismissed with no order as to costs.

Issues considered

The constitutionality of Section 15B of the Gujarat Sales Tax Act, 1969.
The constitutionality of Section 3‑AAAA of the Uttar Pradesh Sales Tax Act, 1948.
The constitutionality of Section 6‑A of the Andhra Pradesh General Sales Tax Act, 1957.
Whether the provisions constitute a consignment, use or consumption tax beyond State competence.
The applicability of the ratio in Goodyear India Ltd. v. State of Haryana to the present provisions.

Legislation cited

Andhra Pradesh General Sales Tax Act, 1957s. 6-A
Central Sales Tax Act, 1956
Constitution of Indias. Seventh Schedule, List II, Entry 54
Gujarat Sales Tax Act, 1969s. 15B
Uttar Pradesh Sales Tax Act, 1948s. 3-AAAA

Subjects

constitutional validitypurchase taxsales taxEntry 54consignment taxuse taxinterpretation of statutesGoodyear casestate legislative competence

Judgment

A HOTEL BALAJI AND OTHERS ETC. ETC.
v.
STATE OF ANDHRA PRADESH AND ORS. ETC. ETC.

OCTOBER 22, 1922

B [S. RANGANATHAN, V. RAMASWAMI AND
B.P. JEEVAN REDDY, JJ.]

Andhra Pradesh General Sales Tax Act, 1957:

C Section 6-A-Levy of tax on turnover relating to purchase of certain
goods-Nature of tax-Neither use tax, consumption tax nor consignment
tax-Hence valid.

Gujarat Sales Tax Act, 1969:

D Section !SB r/w Rule 42-E-Levy of purchase tax-Nanire of tax on
purchase price of raw materials and not on manufactured products-Not a
tax on consignment-Legislature competent to levy such tax as long as the
levy retains the character of tax on sale-Validity of the provision upheld.

Uttar Pradesh Sales Tax Act, 1948:
E
Section 3-AAAA--Purchase lax-Levy of-Nature of levy-Legisla-
ture-Whether competent to levy such a tax.

Constitution of India, 1950 :

Seventh Schedule-List II-Entry 54-Sales Tax Acts of Gujarat,
F
Andhra Pradesh and Uttar Pradesh-Sections: 6-A, 15-B and 3-AAAA
respectively-Legislative competence of and validity of the provisions.

Interpretation of Statutes :

G Liberal Construction-To be avoided if it defeats the manifest object
and purpose of the statute-Reasonable construction to be followed-Where
two constructions possible, the one which sustains constitutionality to be
prefemd.

The constitutional validity of S.158 of Gujarat Sales Tax Act, S.3-
H AAAA of Uttar Pradesh Sales Tax Act and S.6A of the Andhra Pradesh
182

'
HOTEL BALAJI v. STATE OF AP. 183

General Sales Tax Act was challenged in the present Appeals, Writ Peti· A
tions SLPs and Transferred case.

S.15-B of the Gujarat Sales Tax Act, 1969 was introduced by Amend·
ment Act, 1986. It provided for levy of additional purchase tax on raw
materials purchased by a manufacturing dealer in case he used the said raw
material for the manufacture of other goods which he despatched to his own B
place of business or to his agent's place of business outside the State but
within India. By the Amendment Act, 1987, the section was substituted.

Writ Petitions were filed before the High Court challenging the
validity of unamended S.15-B on the ground that it levied a consignment
tax and hence was outside the competence of State Legislature. During the c
pendency of the writ petitions, S.15-B was subsitituted by an Ordinance.
Subsequently the Gujarat Sales Tax Amendment Act 6 of 1990 was enacted
in terms of and replacing the Ordinance. S.15-B was given retrospective
effect from 1.4.1986, the date on which it first came into force. In view of
the said Amendment Act, the Writ Petitions came to be dismissed as D
infructuous. A fresh batch of Writ Petitions were filed challenging the
validity of substituted S. 15-B on the ground that it continued to be a
consignment tax. The High Court having dismissed the Writ Petitions,
the matter has come up before this Court.

Section 3-AAAA of the U.P. Sales Tax subjected the purchase of E
"goods liable to tax at the point of sale to the consumer" to purchase tax
payable by the purchasing dealer, in a case where the selling dealer was
not liable to pay the sales tax on such sale. Purchase tax was payable at
the same rate as the sales tax. If, however, the purchasing dealer resold
such goods within the State or in the course of inter-State trade or F
commerce, he was not liable to pay the purchase tax. While the Civil
Appeals were pending in this Court as regards the validity of S.3-AAAA,
the High Court, while deciding some Writ Petitions, applied the ratio in
Good Year and held that section was ultra vires the legislative competence
of the State Legislature. It held that under the said provision the taxable
event was not the purchase of the goods by the purchasing dealer but the G
subsequent event namely use of the said goods in the manufacture of other
goods and their despatch without effecting a sale within the State of U.P.
to a place outside U.P. To overcome this decision an Ordinance was issued
which was later replaced by the U.P. Sales Tax (Amendment) Act, 1992, the
constitutional validity of which has been challenged before this Court. H
184 SUPREME COURT REPORTS [1992J SUPP. 2 S.C.R.

A In the A.P. Sales Tax Act Section 6-A was inserted by the Andhra
Pradesh General Sales Tax (Amendment) Act of 1976 with effect from
1.9.76. The effect was that tax payable at sale point became tax payable on
purchase point in certain circumstances. Writ Petitions were filed before
the High Court challenging the validity of S.6-A. It was contended that the
notification issued under S.'I of the Act exempted from tax certain goods
B
which were sought to be taxed under S.6-A and that S.6-A was in fact a
consumption or consignment tax and hence void. Unable to succeed before
the High Court, the assessees challenged the vires of the said section
before this Court.

C Apart from challenging the constitutional validity of the above-said
provisions of the three State Sales Tax Acts, the correctness of (;ood Year
India Ltd. v. State of Haryana, [1990] 2 SCC 71 which invalidated certain
purchase tax levied by the Haryana and Maharashtra Sales Tax Acts, was
also questioned by the Revtmue before this Court.

D Dismissing the matters, this Court,

HELD: (By the Court): S.lSB of the Gujarat Sales Tax, 1969, S3-
AAAA of Uttar Pradesh Sales Tax Act, 1948 and S.6-A of the Andhra
Pradesh General Sales Tax Act, 1957 are intra vires the powers of the
respective State Legislatures and hence valid. [249-D]
E
Per B.P Jeevan Reddy, J: (for himself and V Ramaswami, J.)

1. The necessity and significance of the delegated legislation is well-ac-
cepted and needs no elaboration. They cannot travel beyond the purview of
the Act. Where the Act says that Rules on being made be deemed "as if
F enacted in this Act", the position may be different. But where the Act does not
say so, the Rules do not become part of the Act. [212-B, CJ

Halsbury's Laws of England (3rd. Edn.) Vol36, referred to.

2. Entry 54 of List II of Seventh Schedule to the Constitution must
G receive a liberal construct.ion, it being a legislative entry. The Legislature
cannot be confined to onl)' one form of levy. So long as the levy retains the
basic character of a tax on sale, the Legislature can levy it in such mode
or in such manner as it thinks appropriate, the wellRestablished principles
in such matters being that reasonable construction should be followed and
H literal construction may be avoided if that defeats the manifest object and
HOTEL BALA!! 1·. STATE OF A.I'. 185

purpose of the Act. The Legislature must be presumed to know its limita- A
tions and act within those limits. Transgression must be clearly estab-
lished, and is not to be lightly assumed. [214-H; 215-A, BJ

3. A person other than a registered dealer is not amenable to the
.. discipline of the Sales Tax Act. He cannot indeed collect any tax and,
therefore, will not make over or pay any tax. This the legislature is B
justified in presuming. If, however, in any case it is proved that such
person has paid the tax, the purchasing dealer will get an exemption to
that extent. If a benefit is claimed by the purchasing dealer, it is for him
to prove the fact which enables him to claim the benefit. That burden
cannot be passed on to any one else. [222-C, DJ C
4. So far as registered dealers are concerned, all that the purchasing
dealer need to prove is that the said goods have already been or may be
subjected to tax under State Act or Central Sales Tax Act. On this score,
there is no difficulty for the purchasing dealer. From the bill given by the
selling dealer, the purchasing dealers can prove the payment. Or he can D

.. simply prove, as a matter of law that the said goods are liable to be taxed
under any other provision of the Act or under the Central Sales Tax Act.
[222-E, F]

GUJARAT SALES TAX ACT/RULES:
E
5.1. S.15-B of the Gujarat Sales Tax Act read ·as a whole, is ap·
plicable only to those goods which are used in the manufactm e of other
goods. The levy is upon the purchase price of raw material an J not upon
the value of the mannfactured products. [214-G, HJ

5.2. Rule 14E of Gujarat Sales Tax Rules along with 'U5B of the F
Gujarat Sales Tax Act provide for set off etc., in case the manufactured
goods are sold within the State of Gujarat. It no doubt means that set off
etc. is not available if the manufactured goods are disposed of otherwise
than by way of sale or are consigned to manufacturer's own depots or to
the depots or his agents outside the State of Gujarat. There is nothing G
objectionable in the State doing so. It cannot be said that by reading Rule
42-E into S.15-B, the levy becomes a consignment tax. [213-E-F]

Godrej & Boyce Mfg. Co. v. Commissioner of Sales Tax, (1992 ) 4 J.T.
(S.C.) 317 and Andhra Sugars Ltd. & Anr. v. The State of Andhra Pradesh
and Anr., 21 S.T.C. 212, relied on. H
186 SUPREME COURT REPORTS 11992] SUPP. 2 S.C.R.

·c ;. A Goodyear India Ltd. v. State of Haryana, [1990] 2 SCC 71, dissented
from.

Ramkrishna v. State of Bihar, A.I.R. 1963 S.C.1667, referred to.

U.P. SALES TAX ACT:
B
6.1. All that section 3-AAAA of the U.P. Sales Tax Act prior to its
substitution in 1992 provided was; (i) where the goods liable to tax at the
point of sale to the consumer are sold to a dealer (ii) in circumstances in
which no sales tax is payable by the sellers and (iii) the purchasing dealer
C does not re-sell the said purchased goods within the State or in the course
of inter-state trade or commerce (iv) the purchasing dealer shall be liable
to pay the tax which would have been payable by the seller. (v) If, however,
it was proved that the said goods have already suffered tax under section
3-AAAA, no purchase tax was payable under section 3-AAAA. It is obvious
D that the section did not speak of the purchased goods being used in the
manufacture of other goods nor of the manner of disposal or despatch of
such manufactured goods. The only two conditions stipulated (which
conditions are not to be found in the present Section 3-AAAA) were that
if the purchased goods are sold within the State or sold in the course of
inter-state trade or commerce, the tax under it is not payable. This is for
E the simple reason that in both the contingencies, the State would get the
revenue (in one case under the State Sales Tax Act and in the other case,
under the Central Sales Tax Act). The policy of the legislature is not to tax
the same goods twice over. The fact that in a given case, the purchased
goods are consigned by the purchaser to his own depots or agents outside
F the State makes no difference to the nature and character of the tax. By
doing so, he cannot escape even one-time tax upon the goods purchased,
which is the policy of the Legislature. The tax was directed towards
ensuring levy of tax at least on one transaction of sale of the goods and ...
not towards taxing the consignment of goods purchased or the products
manufactured out of them. [223-G-H; 224-A-D]
G
6.2. There is no vagueness in the provision viz. sub-sec.(2) of S..l-
AAAA of U.P. Sales Tax Act nor can it be said that it placed heavy and
uncallf'..~-- for burden upon the purchasing dealer or that it is not prac-
ticable for the purchaser to establish that the seller (other than th~
H regis.ered dealer) has paid the tax or not. [222-B]
HOTEL BALA!! v. STATE OF A.P. 187

6.3. The difficulty has really arisen because of the attempt to look to A
the provisions of Section 3-AAAA through the prism of Goodyear. There
is a substantial and qualitative difference between the language employed
in Section 9 of Haryana Act and Section 13-AA of Bombay Act on the one
hand and in Section 3-AAAA of U.P. Act on the other (as it stood prior to
1992 Amendment Act or for that matter as it stands now). These basic
differences cannot be ignored. [224-EJ
B

Constitutionality of Section 3-AAAA of the U.P. Sales Tax Act ought
to be judged on its own language and so judged, the Section, both before
and after the 1992 Amendment, represents a perfectly valid piece of
legislation. It is relatable to and fully warranted by Entry 54 of List II of c
the Seventh Schedule to the Constitution. [224-F]

Goodyear India Ltd. v. State of Haryana, [1990] 2 SCC 71, dissented
from.

ANDHRA PRADESH GENERAL SALES TAX ACT/RULES: 0
7.1. The real object of clauses (i) to (iii) in Section 6-A of the A.P.
Sales Tax Act is not to levy a consumption tax, use tax or consignment tax
but only to point out that thereby the purchasing dealer converts himself
into the last purchaser in the state of such goods. The goods cease to exist
or cease to be available in the State for sale or purchase attracting tax. In
E
these circumstances, the purchasing dealer of such goods is taxed, if the
seller is not or cannot be taxed. The tax imposed by S.6-A cannot be
described either as use tax, consumption tax or consignment tax. It is a
purchase tax perfectly warranted by Entry 54 of List-II of the Seventh
Schedule to the Constitution. [230-G & 231-B] F
7.2. While exempting the sale or purchase of any specified class of
goods the Government .is empowered to specify whether the exemption
operates at all points or any specified points in the series of sales or
purchase of successive dealers. Several notifications have been issued by
the Government from time to time exempting certain dealers or exempting G
certain goods at the point of sal~, or purchase, as the case may be. G.0.Ms.
1091 is one of them. The exemption is couched in qualified form. Thus, it
is not a general exemption but a qualified one. In the light of the specific
scheme of Section 9 of the A.P. Sales Tax Act and the language of G. 0.
Ms. No. 1091, the exemption at the point of sale by a particular category H
188 SUPREME COURT REPORTS fl992J SUPP. 2 S.C.R.

A of persons cannot be construed as operating to exempt the purchase tax
under Section 6-A of the Act, as well, much less in all cases. [233-B, CJ

73. •"resit milk was taxable as general goods under Section 5(1) of
the Andhra Pradesh Sales Tax Act before it was amended by Amendment
Act 4 of 1989. After the coming into force of the said Amendment Act, it
B falls under Schedule VII, (which was introduced simultaneously with the
said Amendment Act) and which takes in all goods other than those
specified in first to sixth Schedules. Milk was subject to multi-point tax
prior to the said Amendment Act whereas after the said amendme.nt it has
become taxable only at single p·oint namely, point of first sale in the State.
C If fresh milk was not at all taxable under the Act, there was no necessity
to issue notifications exempting its sale in certain situations. [227-C-D]

Goodyear Tndia Ltd. v. State of ffaryana [1990] 2 SCC 71, dissented
from.

D RATIO OF GOODYEAR· RECONSIDERATION OF:

8.1. The ingredients of S1•ction 9 of Haryana Sales Tax Act are : (i)
a dealer lialile to pay tax under the Act purchases goods (other than those
specified in Schedule B) from any source in the State and (ii) uses them
in the State in the manufacture of any other goods and (iii) either disposes
E of the manufactured goods in any manner otherwise than by way of sale
in the State or despatches the manufactured goods to a place outside the
State in any manner otherwiS<. than by way of sale in the course of an
inter-state trade or commerce or in the course of export outside the
territory of India within the meaning of sub-section (1) of Section S of the
F Central Sales Tax Act, 1956. If all the above three ingredients are satisfied
the dealr.r becomes liable to pay tax on the purchase of such goods at such
rate, as may be notified under Section 15. It applies only in those cases
where (a) the goods are purchased (referred to as material) by a dealer
liable to pay tax under the Act in the State, (b) the goods so purchased
cease to exist as such goods for the reason they are consumed in the
G manufacture of different commodities and (c) such manufactured com·
modities are either disposed of within the State otherwise than b)' way of
sale or despatched to a place outside the State otherwise than ~ t way of
sale or despawhed to a place outside the State otherwise than 1y way of
an inter-State sale or export sane. It is evident that if such ma1 11factured
H goods are not solo within the State of Haryana, but yet dispos· d of within
HOTEL BALAJI v. STATE OF AP. 189

the State, no tax is payable on such disposition; similarly, where manufac- A
tured goods are despatched out of State as a result of an inter-State sale
or export sale, no tax is payable on such sale. Similarly against where such
manufactured goods are taken out of State to manufacturers' own depots
or to the depots of his agents, no tax is payable on such removal. Goodyear
takes only the last eventuality and holils that the· taxable event is the
removal of' goods from the State and since such removal is to dealers' own
B
depots/agents outside the State, it is consignment, which cannot be taxed
by the State Legislature. This is not correct. The levy created by the said
provision is a levy on the purchase of raw material purchased within the
State which is consumed in the manufacture of other goods within the
State. If, however, the manufactured ·goods are sold within the State, no c
purchase tax is collected on the raw material, evidently because the State
gets larger revenue by taxing the sale of such goods. (The value of
manufactured goods is bound to be higher than the value of the raw
material). The State Legislature does not wish to - in the interest of trade
and general public - tax both the raw material and the finished (manufac- D
lured) product. This is a well-known policy in the field of taxation. But
where the manufactured goods are not sold within the State but are yet
disposed of or where the manufactured goods are sent outside the State
(otherwise than by way of inter-State sale or export sale) the tax has to be
paid on the purchase value of the raw material. The reason is simple : if
the manufactured goods are disposed of otherwise than by sale within the E
State or are sent out of State (i.e. consigned to dealers' own depots or
agents), the State does not get any revenue because no sale of 1nanufac-
tured goods has taken place within Haryana. In such a situation, the State
would retain the levy and collect it since there is no reason l'or waiving the
purchase tax in these two situations. [239-B-D; 240-A-D] F

8.2. In the case of inter-State sale, the State of Haryana does get the
tax-revenue - may not be to the full extent. Though the Central Sales Tax
is levied and collected by the Government of India, Article 269 of the
Constitution provides for making over the tax collected to the State in G
accordance with certain principles. Where, of course, the sale is an export
sale within the meaning of Section 5 (1) of the Central Sales Tax Act
(export sales) the Stele may not get any revenue but larger national
interest is served thereby. It is for these reasons that tax on the purchase
of raw material is waived in these two situations. Thus, there is a very
sound and consistent policy underlying the provision. The object is to tax H
190 SUPREME COURT REPORTS 11992) SUPP. 2 S.C.R.

A the purchase of goods by a manufacturer whose existence as such goods
is put and end to by him by using them in the manufacture of different
goods in certain circumstances. 1Lhe tax is levied upon the purchase price
of raw material, not upon the sale price· · or consignment value · of
manufa~tured goods. Levy materialises only when the purchased goods
(raw material) is consumed in thf manufacture of different goods and
B those goods are disposed of within the State otherwise than by way of sale
or are consigned to the manufacturing-dealers' depots/agents outside the
State of Haryana. Such postponement does not convert what is avowedly
a purchase tax on raw material (levied on the purchase price of such raw
material) to a consignment tax on the manufactured goods. Saying other-
c wise would defeat the very object and purpose of Section 9 and amount to
its nullification in effect. The most that can perhaps ·be said is that it is
plausible to characterise the said tax both as purchase tax as well as
consignment tax. But where two interpretations are possible, one which
sustains the consititutionality and/or effectuates its purpose and intend-
ment and the other which effectively nullifies the provisions, the former
D must be preferred, according to all known canons of interpretation.
[240-E-H; 241-A-C]

8.3. Jn several enactments tax is levied at the last sale point or last
purchase point, as the case may be. The last purchase point in the State can
E be determined only when one knows that no purchase took place within the
State thereafter. !Int that can only be known later. If there is a subsequent
purchase within the State, the pmcchase in question ceases to be the last
purchase. Applying the logic of the dealers, it would not be possible to tax any
goods at the last purchase point in the State, inasmuch as the last purchase
point in regard to any goods could be determined only when the goods are
F sold later and not when the goods a<e purchased. [241-F-G]

8.4. The scheme of Section 9 of Haryana Sales Tax Act is to levy the
tax on purchase of raw material and not to forego it where the goods
manufactured out of them are disposed of (or despatched, as the case may
G be) in a manner not yielding any revenue to the State nor serving the
interests of the nation and its economy. The purchased goods are put an
end to by their consumption in manufacture of other goods and yet the
manufactured goods are dealt with in a manner as to deprive the State of
any revenue; in such cases, there is no reason why the State should forego
its tax revenue on purchase of raw material. It would not be right to say
H that the tax is not upon the purchase of raw material but on the consign-
HOTEL BALAJI t'. STATE OF A.P. 191

men! of the manufactured goods. It is well settled that taxing power can A
be utilised to encourage commerce and industry. It can also be used to
serve the interests of economy and promote social and economic planning.
It is also not right to concentrate only on one situation viz., consignment
of goods to manufacturer's own depots (or to the depots of his agents)
outside the State. Disposal of goods within the State without effecting a
sale also stands on the same footing, an instance of \\'hich may be captive
B
consumption of manufac~ured products in the manufacture of yet other
products. Once the scheme and policy of the provision is appreciated,
there is no room for saying that the tax is. on the consignment of manufac-
tured goods. (243-G-H; 244-A-F]

8.5. When the tax is levied on the purchase of raw material, on the
c
purchase price - and not on the manufacture of goods or on the consignment
value (such a concept is unknown to Haryana Act) or sale price of the
manufactured goods - the construction placed in Goodyear runs against the
very grain of the provision and has the effect of nullifying the very provision.
By placing the said interpretation, Section 9 has been rendered nugatory. D
The tax purports to be and is in truth a purchase tax levied on the purchase
price ofraw material purchased by a manufacturer. [247-A-C]

8.6. S. 13AA of the Bombay Sales Tax Act is substantially similar to
Section 9 of Haryana Sales Tax Act. Whatever is said with respect to the
Haryana provision applies equally to this provision. [249-D] E

Andhra Sugars Ltd. & Anr. v. T71e State of Andhra Pradesh & Anr., 21
S.T.C. 212 and State of Tamil Nad11 v. Kandaswami, 36 S.T.C. 191, .relied
on.

Goodyear India Ltd. v. State of Haryana, (1990] 2 SCC 71, dissented
F
from.

Mukerian Papers Ltd. v. State of Punjab, (1991] 2 S.C.C. 580, Ex-
plained.
G
M11rli Manohar and Company v. State of Haryana f 1991] I S.C.C. 377,
distinguished.

Malabar Fntit Prod11cts Co. v. S.T.0., 30 S.T.C. 537, approved.

Hind11sta11 Lever Ltd. v. State of Maharashtra, 79 S.T.C. 255; J.K. Steel H
192 SUPREME COURT REPORTS IJ992] SUPP. 2 S.C.R.

A Ltd. v. L'nion of India, A.LR. 1970 S.C. 1173; Bata India Ltd. v. State of
Haryana, 54 S.T.C. 226; Desraj Pushp Kumar Gulati v. State of Punjab, 58
S.T.C. 393; Commissioner of Wealth Tax, Bihar and Orissa v. Kirpa Shankar
Daya Shankar Vorah, (1971) 81 ITR 763; Yusuf Shabeer and Ors. v. State of
Kera/a and Ors., (1973) 32 S.T.C. 359 and Income Tax Commissioners for
City of London v. Gibbs, (1942) 10 ITR Suppl. 121 (H.L.), referred to.
B
Per Ranganathan, J. (Concurring):

I. The provisions of the IJ.P. and Gujarat Sales Tax Acts are clearly
beyond challenge. The section in the IJ.P. Act is a very direct and simple
provision to the effect that a tax will be levied on purchases made within
c the State in certain circumstances. The ambit of Entry 54 in the State List
in the Constitution of India must be interpreted in the widest possible
manner. The State has full powers to levy a tax with reference to sales or
purchases inside the State and to a certain extent even sales made in the
course of inter-State trade or commerce. It certainly comprehends a power
D to tax the last sale in the State of certain goods. The tax is nothing but a
tax on purchase, pure and simple, well within the scope of the State's
Legislative power. It is true that one has to look at not merely the form
but the substance of the statute and examine what exactly is the purport
behind the levy, but should not permit one's imagination to read a pur-
pose or words into the statute which are not there. [198-C-G]
E
2. The Gujarat provision is more careful but makes a mention of the
purchased goods being used for manufacture. But, these are only words
descriptive of a class of goods the purchase of which is sought to be
brought to tax. Here again, lhe intention of the legislature is to tax, at
F purchase point, a class of goods viz. goods purchased by a manufacturer.
It has no concern, with what the manufacturer does with the manufac-
tured goods. Presumably the idea is that the manufacturer is able to profit
by adding value to the purchased raw material by utilising the infrastruc-
ture, fillips or facilities provided in the State to.encourage setting up of
G industries therein and so can afford to pay tax on the purchased raw
materials. The concession provided by rule 42E of the Gujarat Sales Tax
Rules is an independent provision relieving him and the public consuming
the manufactured goods of additional burden where such goods are sold
inside the State and get taxed on the added value. [198-H; 199-A, BJ

H 3. The marginal title to the provisions under challenge indicates that
HOTEL BJ\LAJI v. STATE OF AP. 193

their direct purpose is to levy a tax on purchases effected in the State in A
certain circumstances. The tax is couched as a tax on all goods (in U.P.)
and on raw or processing materials and consumable stores (in the State
of Gujarat). It is designated as a purchase tax. It is levied on the turnover
of such purchases. There is no reference in the U.P. statute to any condi-
tion for imposition of the tax except that it should be a sale to the
consumer and in the State of Gujarat that it should be a purchase by a
B
manufacturer. It is very difficult to read into these provisions any ulterior
motive on the part of the States to levy a tax on use, consumption or
consignment in the guise of a purchase tax. The langnage of these two
provisions is wholly different from that used in the Haryana and Bombay
Acts. Even in the context of those Acts, it may be equally plausible to c
consider the provisions either as a purchase tax or a tax on consignment.
There is no such ambignity in the langnage used in these provisions, and
the levy is only of a purchase tax. Such a levy is clearly within the domain
of the State Legislature. [199-C-F]
D
4. A person can be said to be the last purchaser of certain goods only
when he consumes those goods himself or, in case they are raw
materials/stores and the like, unless he uses them in the manufacture of
other goods for sale. From this category have to be excluded cases where
the manufactured goods are either sold in the State or sold in the course
of inter-State trade or commerce because, in those two instances, the State E
will be in a position to collect the tax in respect of the sale of the
manufactured goods · the sale price of which will also include the price of
raw materials on which apriori the State could have only got a lesser
amount of tax · and to tax both would escalate the price and affect the
consumer. Also excluded are cases where the manufactured goods are F
exported abroad to earn foreign currency. If these situations are borne in
mind, one would realise that the langnage used in the various clauses and
phrases used in these legislations is only to levy a tax on the last purchase
in the State and not with a view to levy a tax either on the use or
consumption of raw materials or on the manufacture or production ·or
manufactured goods or on the despatch of the goods manufactured from G
the State otherwise than by way of sale. In the Haryana case also the
statute mentioned these several alternatives but a consideration of section
9(1)(b) of the Haryana Act as well as of the corresponding clause of the
Bombay Act were posed in isolation and emphasis placed on consignment
being a sine qua non of the levy. This larger concept, namely, that these H
194 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A various alternatives are not set out in the section with a view to fasten the
charge of tax at the point of use, consumption, manufacture, production
and consignment or despatch but in an attempt to make clear that what
is sought to be levied is a tax on raw materials on the occasion of their
last purchase inside the State had not been projected or considered. This
approach would basically alter the parameters and remove the provision
B l'rom the area ol' vulnorability. [2UO-F-H; 2Ul-A-0 J

5. It is difficult to define a last purchase except with reference to the
mode of the use of the purchased goods subsequent to that purchase and
in that sense the levy of tax can crystallise only at a point of time when the
c goods have been utilised in a particular way. The mere fact that the
pu~chase cannot be characterised as a last purchase except by reference
to the subsequent utilisation of those goods cannot mean that the taxable
event is not the purchase but something else. The more appropriate test
would be to see whether the ambit of the power to levy a tax in respect of
D sale of goods is very wide and will cover any tax which has a nexus with
the sale or purchase of goods including a last purchase in the State. In
this view of the matter the leYy under the A.P. Act is also within the
legislative competence of the State. [201-E, F; 202-A, B]

6. The conclusion reached as to the vires of the provisions under
E challenge is contrary to the conclusion reached in Goodyear on somewhat
analogous provisions. No final conclusion is expressed as to whether the
conclusion in Goodyear was rightly reached in the context of the
provisions of the statutes considered there, or would need a second look
and fresh consideration in the context of what has been said now. There
F is no hesitation to accept the point of view now presented and which
appeals to be more realistic, appropriate and preferable, particularly the
view one way or the other would affect the validity of a large number of
similar legislations all over India, merely because it may not be consistent
with the view taken in Goodyear. Consistency, for the mere sake of it, is no
virtue. [202-C, DJ
G
Distributors (Baroda) P. Ltd. v. Union of India, (1985 )155 l.T.R. 120
S.C., relied on.

Goodyear India Ltd. v. State of Haryana, [1990] 2 SCC 71, referred
H to.
HOTEL BALATl v. STATE OF A.P. (RANGANATHAN, J.j 195

ORIGINAL JURISDICTION : Writ Petition (c) Nos. 655-69 of A
1983.

(Under Article 32 of the Constitution of India).

WITH
B
W.P. (C) 8131-33/82, 8125-30/82, 8349-8368/82, 8146-8166/82, 9610-
9630/82, 3756-87/83, 3698-3755/83, 947-960/83, 250/86, C.A. Nos. 4099-
4103/82, 10753-57/83, 10758-60/83, 10761/83, W.P. (C) No. 12834/85, C.A.
Nos. 1280-83/92, 4737/91, 4302/91, 3410/91, 3481/91, 2850/91, 3171/91,
2866/91, 3905-12/91, 4202- 05/91, 70/92, SLP(C) No. 1045/89, T.C. (C) No. C
220/88, W.P. (C) No. 175/92.

G. Ramaswamy, Attorney General, G.L. Sanghi, B.K. Mehta, San-
tosh Hegde., R.R. Aggarwal, Anil B. Divan, H.N. Salve, K. Parasaran, Ms.
Suman Bose, Dr. Debi Pal, A.B. Rohtagi, R.N. Sachthey, A.C. Gulati, B.B. D
Sawhney, Mrs. Janaki Ramachandran, S. Ganesh, Ravinder Narain, S.
Sukuraman, D.K. Sinha, J.R. Das, J. Gupta, Ashok K. Srivastava, H.S.
Munjral, S. Walia, G. Bansal, D.P. Mukherjee, R. Mohan, Mukul Mudgal,
A. Subba Rao, Ms. Lala Krishnamurti, M.N. Shroff, D. Dave, Ms. Deepa
Dixit, K.J. John, A.T.M. Sampath, P. Sen, G.S. ChatterJee, Ashok Mathur,
M. Haravu, V.J. Francis, V. Subramaniam, P.S. Seetharaman, Ms. Indu E
Malhotra, A.S. Bhasme, R.B. Misra Dr. B.S. Chauhan, Ajay K. Aggarwal,
Ms. Radha Rangaswamy, Anil Sachthey, Badri Nath Sharma, T.V.S.N.
Chari, B. Kanta Rao and Ms. Suruchi Aggarwal for appearing parties.

The Judgments of the Court were delivered by F
RANGANATHAN, J. Taking a cue from the decision of this Court in
Goodyear India Ltd. v. State of Haryana (1990] 2 S.C.C. 71, to which I was
a party, a contention has been raised, in these appeals and writ petitions,
that corresponding provisions of the Gujarat Sales Tax Act, the U.P. Sales
Tax Act and the Andhra Pradesh General Sales Tax Act, are ultra vires the G
powers of the State Legislature insofar as they seek to levy a purchase tax
in certain circumstances. My learned brother, Jeevan Reddy, J., has dis-
cussed the provisions and contentions elaborately and exhaustively in his
judgment. It is unnecessary for me to set out over• again the statutory
provisions considered in Goodyear or, those which are challenged in these H
196 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A petitions and appeals or the details of the decision in Goodyear as these
have been discussed in great detail in the judgment of my learned brother.
I however, think that I owe it to myself to add a separate judgment as I
was a party to Goodyear and explain my views on the provisions presently
under challenge in the light of what has already been stated by me in
Goodyear.
B
So far as the U.P. Sales Tax Act is concerned, I do not think that the
impugned provision of the said Act (viz. S.3AAAA, as inserted in 1992 with
retrospective effect from 1.4.1974) bears any comparison with the
provisions that were considered in Goodyear. S.3AAAA is a very simple
C provision. According to its marginal note, its effect is the imposition of a
liability to purchase tax on certain transactions. This liability is attracted in
respect of goods, which are liable to tax at the point of sale to the
cons..,mer. In other words, the goods in question as such have run through
their gamut of sales in the State. There will be no more sales in the State
D of the goods in that form, which can be taxed by the State, whether
intra-State or inter-State, or in the course of export. Such goods arc then
made liable to tax in the hands of a- purchaser dealer-cum-consumer either
because he purchases them from a registered dealer by whom tax is not
payable or because he pmchases them from a person other than a
registered dealer i.e. a person who is not accessible to the revenue, whose
E sales cannot be easily verified or from whom tax may not be easily
recovered. To put it differently, since the tax is at the point of sale to the
consumer, the Legislature, in order to ensure that goods do not escape tax
in the State altogether, make the purchaser liable in respect of the last sale
in the State of the goods in question, if otherwise the sale of the goods have
F not borne tax earlier in the State. This, on the face of it, is a provision
which seems to be perfectly within the legislative competence of the State
Legislature.

The argument urged on behali of the assessees, however, is that no
person can be said to be the "consumer" of the goods in the State unless
G he consumes the goods himself or utilises the goods (where they are in the
nature of raw material) for the manufacture or production of other goods.
It is urged, therefore, that as no sale can be postulated to be a sale to the
consumer unless and until one of the above events happen, the real taxable
event is not the purchase of the goods but their consumption, manufacture
H or production in the State, or their despatch, otherwise than by way of a
HOTEL BALAJI v. STATE OF AP. [RANGANATHAN, J.] 197

sale outside the State, whether in the same form or in a manufactured A
condition. It is therefore said that, in substance, the statutory provision is
no different from the one considered by us in Goodyear and that the ratio
of Goodyear will apply here equally.

So far as the Andhra Pradesh provision is concerned, t~e argument B
is the same, with an added advantage to the assessees that the section
brings out more emphatically their point of view. Under section 6-A(i),
purchase of goods from a registered dealer is subjected to tax because,
though the sale or purchase of that item of goods is generally liable to tax,
no tax became payable by the registered dealer on the sale because of the
circumstances set out in section 5 or 6. This corresponds to s. 3AAAA(a) c
of the U.P. Act. As against this, clause (ii) of section 6-A deals with
purchase of goods liable to tax from a person other than a registered dealer
and imposes a liability to pay tax where the goods purchased are consumed
by the purchaser either in the manufacture of other goods for sale or
otherwise and the goods are disposed of otherwise than by way of sale or D
despatched outside the State otherwise than in the course of inter-State
trade or commerce. In other words, the real taxable event for the charge
under section 6-A(ii), it is said, is not the purchase of goods but the
consumption, manufacture or consignment of the same or other goods
outside the State. If that be so, it is said, the imposition is ultra vires the
State Legislature on the principle of the decision in Goodyear. E

So far as the State of Gujarat is concerned, the provisions of section
15B, inserted by a retrospective amendment of 1990, are somewhat dif-
ferent. Cutting out certain words not relevant in the present context, it F
provides that where a dealer, being liable to pay tax under the Act,
purchases any taxable goods and uses them in the manufacture of taxable
goods, a purchase tax will be levied on the turnover of such purchases. Rule
42-E, which was also framed w.e.f. 1.5.90, provides that, where the assessee
is a registered dealer and the goods manufactured by him have been sold
in the State of Gujarat, he will be entitled to relief in respect of the G
purchase tax levied under section 15B. Here again, it is argued, the
provision is tainted because it refers to manufacture of the purchased
goods and the rule ensures that no purchase tax is levied if the manufac·
tured goods are sold in the State itself; in other words, the levy comes in
only if they are consigned outside the State, attracting Goodyear. H
198 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A It will be seen at once that the three provisions under consideration
vary from one another. S.3AAAA of the U.P. Act does not make the tax
conditional on the use or consumption of raw materials purchased or the
manner of dealing with the goods manufactured out of such purchases of
raw materials. Section 158 of the Gujarat Act is slightly different. It talks
of the use of tile goods purchased in the manufacture of other taxable
B
goods but it does not make any reference to the consumption of the goods
otherwise or their despatch or consigmnent. The Andhra Pradesh Act is
more elaborate and deals with various situations in relation to the pur-
chased goods.

c Of these, I am of opinion that the provisions of the U.P. and Gujarat
Acts are clearly beyond challenge on the grounds put forward by the
petitioners. The section in the U.P. Act is a very direct and simple
provision to the effect that a tax will be levied on purchases made within
the State in certain circumstances. The ambit of Entry 54 in the State List
D in the Constitution of India must be interpreted in the widest possible
manner. The State has full powers to levy a tax with reference to sales or
purchases inside the State and to a certain extent even sales made in the
course of inter-State trade or commerce. It certainly comprehends a power
to tax the last sale in the State of certain goods. I have explained earlier
the reason why the incidence of tax in such sales is thrown under the Act
E on the consumer. The tax is nothing but a tax on purchase, pure and simple,
well within the scope of the State's Legislative power. The attempt, on
behalf of the petitioners, to undertake an analysis of what will eventually
happen to the purchased goods where the purchaser is the consumer and,
on the basis thereof, to suggest that the legislature really intends to tax
.
F consumptio.n, production or consignment is no doubt ingenious but far-
fctched, artificial and unrealistic. It is true that one has to look at not
merely the form but the substance of the statute and examine what exactly
it is that the State purports to levy a tax in respect of but one should not
permit one's imagination to read a purpose or words into the statute which
are not there.
G
The Gujarat provision is more careful but makes a mention of the
purchased goods being used for manufacture. But, as pointed out by
Mukharji J. in Goodyear, these are only words descriptive of a class of
goods the purchase of which is sought to be brought to tax. Here again,
H the intention of the legislature is to tax, at purchase point, a class of goods
HOTEL BALAJI v. STATE OF A.P. [RANGANATHAN, J.] 199

viz. goods purchased by a manufacturer. It has no concern, unlike the A.P. A
or Haryana Acts, with what he does with the manufactured goods.
Presumably the idea is that the manufacturer is able to profit by adding
value to the purchased raw material by utilising the infrastructure, fillips
or facilities provided in the State to encourage setting up of industries
therein and so can afford to pay tax on the purchased raw materials. The
concession provided by rule 42£ is an independent provision relieving him
B
and the public consuming the manufactured goods of additional burden
where such goods are sold inside the State and get taxed on the added
value.

In my opinion, there is considerable force in the substance of the C
contention of these States that these provisions only impose a tax on
purchases. The marginal title to the provisions indicates that their direct
purpose is to levy a tax on purchases effected in the State in certain
circumstances. The tax is couched as a tax on all goods (in U.P.) and on
raw or processing materials and consumable stores (in the State of D
Gujarat). It is designated as a purchase tax. It is levied on the turnover of
such purchases. There is no reference in the U . P. statute to any condition
for imposition of the tax except that it should be a sale to the consumer
and in the State of Gujarat that it should be a purchase by a manufacturer.
It is very difficult to read into these provisions any ulterior motive on the
part of the States to levy a tax on use, consumption or consignment in the E
guise of a purchase tax. The language of these two provisions is wholly
different from that used in the Haryana and Bombay Acts. As I have stated
in my judgment in Goodyear, even in the context of those Acts, it may be
equally plausible to consider the provision either as a purchase tax or a tax
on consignment. There is no such ambiguity in the language used in these
F
provisioins. I have no doubt that, so far as these provisions are concerned,
on the face of these acts, the levy is only of a purchase tax. Such a levy is
clearly within the domain of the State Legislature.

The Andhra Pradesh Act, however, is different in its arrangement.
The provisions of section 6-A of this Act are more or less analogous to the G
provisions of the Haryana Act considered in Goodyear. The question,
therefore, arises as to whether the decision in Goodyear should be applied
in the context of the Andhra Pradesh Act. On behalf of the State of Andhra
Pradesh - and indeed the other two States also - it has been contended that
Goodyear needs reconsideration. Our attention has been drawn to one H
200 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A angle of approach lo the statutory provisions in question which had. per-
haps escaped our notice in the Goodyear case. It was pointed out that the
sum and substance of these provisions is that no sale or purchase of any
goods should go without being taxed atleasl once in the State. Primarily
the tax is levied on sales. Where a registered dealer sells his goods he will
be liable to tax normally in respect of the taxable goods except where his
B
turnover does nol reach up to the minimum prescribed under the Sales Tax
Act. Sometimes, he may not pay any tax or may pay a concessional rate of
tax on his sales because of certain declarations or certificates he may
receive that the goods will be used inside the State. Again, where goods
are purchased from a person other than a registered dealer, the tax at the
c sales point may escape actual taxation for many reasons : such person may
not be a dealer at all or, being an unregistered dealer, the State may not
be able to ascertain his whereabouts and ensure that he is taxed or that
the tax is collected. In cases where no sales tax is paid al the point of sale,
it becomes necessary for the State Legislature to provide that the tax will
D be met by the purchaser. Invariably in such cases the legislations attach
levy of tax to the last purchase made in the State, of a particular item of
goods. Of course, the legislation could have simply said that tlie last
purchase in the State will attract tax unless the tax is payable or has been
paid at one of the earlier stages of sale and could not have been objected
E to. But that type of legislative wording might lead to difficult questions as
to the definition of the expression 'last purchase". That is why the section
imposing purchase tax is worded in the manner in which it has been worded
in the Andhra and Haryana Acts. As pointed out by the learned counsel
for the assessees in the U.P. cases, a person can be said to be the last
F purchaser of certain goods only when he consumes those goods himself or,
in case they are raw materials/stores and the like, unless he uses them in
the manufacture of other goods for sale. From this category have to be
excluded cases where the manufactured goods are either sold in the State
or sold in the course of inter-State trade or commerce because, in those
G two instances, the State will be in a position to collect the tax in respect of
the sale of the manufactured goods - the sale price of which will also
include the price of raw materials on which a priori the State could have
only got a lesser amount of tax - and to tax both would escalate the price
and affect the consumer. Also excluded are cases where the manufactured
goods are exported abroad to earn foreign currency. If these situations are
H
HOTEL BALAJI v. STATE OF AP. [RANGANATHAN, J.] 201

borne in mind, one would realise that the language used in the various A
clauses and phrases used in these legislations is only to levy a tax on.the
last purchase in the State and not with a view to levy a tax either on the
use or consumption of raw materials or on the maufacture or production
' .
of manufactured goods or on the despatch of the goods manufactured from
the State otherwise than by way of sale. In the Haryana case also the statute
B
mentioned these several alternatives but a consideration of section 9(1) (b)
of the Haryana Act as well as of the corresponding clause of the Bombay
Act were posed in isolation before us and emphasis placed on consignment
being a sine qua non of the levy. This larger concept, namely, that these
various alternatives are not set out in the section with a view to fasten the
charge of tax at the point of use, consumption, manufacture, production
c
and consignment or despatch but in an attempt to make clear that what is
sought to be levied is a tax on raw materials on the occasion of their last
purchase inside the State had not been projected before, or considered by

- us. I am inclined now to think that this is an approach that basically alters
the parameters and removes the provision from the area of vulnerability.

It is true that it is difficult to define a last purchase except with
D

reference to the mode of the use of the purchased goods subsequent to
that purchase and in that sense the levy of tax can c1ystallise only at a point
of time when the goods have been utilised in a particular way but will it be
E
correct to say that the power of the Stale to levy a tax on sales or purchases
cannot include a right or power to tax goods at the point of their first sale
in the Slate or their last purchase in the State? The mere fact that the
purchase cannot be characterised as a last purchase except by reference to
the subsequent utilisation of those goods cannot mean that the taxable
event is not the purchase but something else. What we are really concerned F
with in deciding the question of constitutional validity of the levy of a sales
tax is to pose the question -

"Is the tax levied one with reference to the sale or purchase
of goods ?11
G
The ambit of the power to levy a tax in respect of sale of goods is very wide
and will cover any tax which has a nexus with the sale or purchase of goods
including a last purchase in the State. This I think is a more appropriate
test to be applied in these cases rather than the test of "taxable event" which
is somewhat ambiguous in the context. I am not inclined to agree that a H
202 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A tax on the sale or purchase of goods will cease to be so merely because the
determination of its character as a last purchase would depend upon
certain subsequent events which may be spread over a subsequent period
of time. Jn this view of the matter I am inclined to agree with my learned
brother Jeevan Reddy, J. that the levy under the Andhra Pradesh Act is .'
also within the legislative competence of the State.
B
I am quite conscious that the conclusion I have expressed here as to
the vires of the provision impugned is contrary to the conclusion I reached
in Goodyear on somewhat analogous provisions. I need not, for the pur-
poses of the present cases, express any final conclusion as to whether the
C conclusion in Goodyear was rightly reached in the context of the provisions
of the statutes there considered or would need a second look and fresh
consideration in the context of what has been said here. But, I should not,
I think, hesitate to accept the point of view now presented to us which

-
appeals to me as more realistic, appropriate and preferable, particularly
when I see that the view one way or the other would affect the validity of
D a large m;mber of similar legislations all over India, merely because it may
not be consistent with the view I took in Goodyear. Consistency, for the
mere sake of it, is no virtue. If precedent is needed to justify my change of
mind, I may quote Bhai,<wati J. (as he then was) in Distributors (Baroda) P.
Ltd. v. Union of India, (1985) 155 I.T.R. 120 S.C. :
E
''We havC given our most an.icious consideration to this
question, particularly since one of us, namely, P.N. Bhag-
wati, J. was a party to the decision in Cloth Traders' case.
But having regard to the various considerations to which
F we shall advert in detail when we examine the arguments
advanced on behalf of the parties, we are compelled to
reach the conclusion that Cloth Traders' case must be
regarded as wrongly decided. The view taken in that case
in regard to the construction of s. SOM must be held to be
erroneous and it must be corrected. To perpetuate an error
G is no heroism. To rectify it is the compulsion of the judicial
conscience. ln this, we derive comfort and strength from
the wise and inspiring words of Justice Bronson in Pierce
v. Delameter (A.M.Y. at page 18) : "a judge ought to be
wise enough to know thal he is fallible and. therefore, ever
H ready to learn : great and honest enough to discard all mere
HOTEL Bi\IAJI '"STATE OF A.P. [.JEEVAN REDDY, J.[ 203

pride of opinion and follows truth wherever it may lead : A
and courageous enough to acknowledge his errors".

' . For the reasons above mentioned, I agree with my learned brother
and hold that the impunged provisions under all the three enactments are
intra-vires the powers of the concerned State Legislature. B

B.P. JEEVAN REDDY, J. Validity of provisions of several States
Sales Tax enactments imposing purchase tax fall for our consideration in
this group of appeals and writ petitions. Initially the matters arising from
Andhra Pradesh (writ petitions 655-669/83 Hotel Balaji and Ors. v. State of C
Andhra Pradesh and Civil Apeal No. 10753-57/83 Hindustan Milk Food
Manufacturers Limited v. State of Andhra Pradesh) came up for hearing.
During the course of hearing, counsel for the petitioners/appellants relied
upon the decision of this court in Goodyear India Ltd. v. State of Haryana
(1990) 76 S.T.C. 71 whereas the counsel for the State of Andhra Pradesh D
challenged the correctness of the said decision and pleaded for re-con-
sideration of the said judgment. It was then brought to our notice that a
large number of matters corning from different States raising inter alia the
question relating to the correctness of the ratio of Goodyear were also
posted before us. Indeed it was brought to our notice that a bench of E
three-Judges comprising M.N. Venkatachaliah, A.M. Ahmadi, JJ. and one
of us (B.P. Jeevan Reddy, J.) had directed two matters namely State of
Punjab v. Industrial Cables India Ltd., C.A. No. 2990 (N.T.) of 1991 and
the State of Punjab v. Hindustan Lever Ltd., C.A.480/91 raising a similar
question to be posted before a Bench of three-Judges. Those matters are
also before us. It is in this manner that a large number of appeals and writ
F
petitions arising from several States came to be posted before us for
hearing. During the course of hearing, however, we found that on account
of restriction of time it would not be possible for this Bench to hear all the
matters. Accordingly, we indicated to the counsel that we shall confine our
attention only to three State enactments namely, Gujarat, Uttar Pradesh G
and Andhra Pradesh. Counsel appearing in these matters have been heard
fully. This judgment, therefore, deals only with the validity of Section !SB
of the Gujarat Sales Tax Act, Section 3-AAAA of Uttar Pradesh Sales Tax
Act and Section 6-A of the Andhra Pradesh General Sales Tax Act. We
shall first take up Section 15B of the Gujarat Sales Tax Act. H
204 SUPREME COURT RF.PORTS [1992J SUPP. 2 S.C.R.

A PART - fl (GUJARAT)

Though several appeals and writ petitions from this State are placed
before us, it is sufficient to refer to the facts in Civil Appeal No. 3410 (N.T.)
of 1992 as representative of the facts in all the matters. This appeal is
preferred by the writ petitioner against the judgment of a Division Bench
B of the High Court of Gujarat upholding the constitutional validity of
Section 15B of the Gujarat Sales Tax Act, 1969 as substituted by the
Gujarat Sales Tax (Amendment) Act 6 of 1990.

The Gujarat Sales Tax Act, 1969 (b°eing Act No. 1of1970) came into
c effect on and from May 6, 1970, replacing the Bombay Sales Tax Act, which
was in force in the State of Gujarat till then. Section 15 of the Act levied
purchase tax on purchases made by a dealer from a person who is not a
registered dealer. Section 15A was introduced by amendment Act 7 of
1983. It provided for levy of concessional rate of tax in respect of purchase
D of raw material made by Recognised dealers (who are necessarily manufac-
turers), provided the goods (raw material) purchased by them fell in
Schedule II or Ill (other than prohibited goods). Section 15B was intro-
duced by Amendment Act of 1986. It provided for levy of an additional
purchase tax on raw material purchased by a manufacturing dealer in case
he used the said raw material for the manufacture of other goods which he
E despatched to his own place of business or to his agent's place of business
situated outside the State but within India. By an Amendment Act made
in 1987, the Section was substituted. There was, however, no substantial
change in the Section. Following upon the decision of this court in
Goodyear, a batch of writ petitions was filed in the Gujarat High Court
F challenging the validity of Section 15B on the ground that in truth and
effect it levied a consignment tax and, hence was outside the competence
of the State Legislature. While the said writ petitions were pending, Section
15B was substituted by an Ordinance being Ordinance No. 3 of 1990 issued
on 20.4.1990. Subsequently, the Gujarat Sales Tax Amendment Act 6 of
1990 was enacted in terms of and replacing the Ordinance. The substituted
G Section 15(B) was given retrospective effect on and from April 1, 1986, the
date on which Section 15(B) first came into force. In view of the said
Amendment Act, the batch of writ petitions challenging Section 15(B), as
it stood prior to its substitution by the 1990 Amendment Act, were dis-
missed as having become infructuous. A fresh batch of writ petitions
H followed questioning the validity of the substituted Section 15(B), again on
HOTEL BALAJI v. STATE OF A.P. [JEEVAN REDDY, .I.] 205

the· ground that it continued to be, in essence, a consignment tax. The A
contention was that Section 15(B) must be read along with Rule 42(E) of
the Gujarat Sales Taxe Rules (inserted by Notification dated 1.5.90) and if
so read, the position is the same as was obtaining prior to 1990 Amend-
ment. Yet another ground urged was that the levy imposed by the new
provision is really in the nature of an excise duty, and thus beyond the
competence of the State legislature. The assessees placed strong reliance
B
upon the decision of the Division Bench of the Bombay High Court in
Hindustan Lever Ltd. v. State of Maharashtra, 79 S.T.C. 255 where, the
petitioners say, construing a similar provision in the Bombay ~ales Tax Act
it was held that the levy created by the said provision is in the nature of
an excise duty. Disagreeing with the Bombay judgment, the High Court c
dismissed the writ petitions.

Counsel for the appellant/assessee urged that Section 15B (as sub-
stituted in 1990) is no different from the earlier provision. The basic
scheme of the earlier provision is now split into two provisions namely, D
substituted Section 15B and Rule 42E, which Rule was inserted into the
Rules simultaneously. This is a dear instance of colourable legislation and
ought not to be countenanced by this court. The High Court was in error
in justifying the same on the theory that just as it is open to an assessee to
reduce the tax burden by resorting to legitimate tax planning, similarly it E
is open to a legislature to ~ake an appropriate enactment .to remain
outside the mischief pointed out by the court. It is submitted that as rightly
held by the Bombay High Court construing a similar provision, the levy
created by the substituted Section 15B is really upon the manufacture of
goods and, therefore, not a tax referable to Entry 54 of List II of the
Seventh Schedule to the Constitution. On the other hand, it is argued by F
Sri B.K. Mehta, learned counsel appearing for the State of Gujarat that the
Legislative competence of the Gujarat Legislature to enact Section 15B
ought to be determined on its own language and not with reference to a
Rule made by the Government of Gujarat as the delegate of the legislature.
He submitted that on its own language, Section 15B levies a pure and G
simple purchase tax on raw material purchased by a manufacturer. It is
unconcerned with what happens to the manufactured goods. For the
purpose of Section 15B, it is immaterial whether the manufactured goods
are sold inside the State ur despatched to a place outside the State of
Gujarat or are dealt with or disposed of otherwise. The principle of H.
206 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A Goodyear has absolutely no application to this provision. Counsel also
submitted that when the tax is upon the purchase price of the raw material
and is rclatable to the act of purchase, it cannot be held to be an excise
duty which is levied on the act of manufacture and is levied with reference
to the value of such manufactured goods.
B
For a proper a~prcciation of the contentions arising herein it would
be appropriate to notice.a few relevant provisions of the Act. Clause (16)
in Section 2 defines the expression 'manufacture' in the following words :

' manufacture" with all its grammatical variations and cog-
1

c nate expressions, means producing, making, extracting,
collecting, altering, ornamenting, finishing or otherwise
processing, treating, or adapting any goods; but does not
include such manufactures or manufacturing processes as
11
may be prescribed.

D Clauses 35 and 36 define the expressions "turn-over of purchases"
and "turn-over of sales". It would be enough to notice the definition of the
expression 11 turn-ovcr of purchases 11 • It reads :

1
'turn over of purchases' means the aggregate of the
E amounts of purchase price pair! and payable by a dealer in
respect of any purchase of goods made by him during a
given period, after deducting the amount of purchase price,
if any, refunded to the dealer by the seller in respect of any
goods purchased from the seller and returned lo him within
the prescribed period."
F
Section 3 is a charging section. Section 15 which levied purchase tax
on purchase of certain goods from a person who is not a registered dealer
read as follows ot the relevant time :

"15 Purchase tax payable on certain purchases of goods.
G
Where a dealer who is liable to pay tax under this Act
purchases any goods specified in Schedule II or III from
a person who is not a Registered dealer, then, unless the
goods so purchased are resold by the dealer, there shall
H be levied, subject to the provisions of section 9.
HOTEL BALAJI v. STATE 01' A.P. [JEEVAN REDDY, J.] 207

(i) in the case of goods specified in Schedule II, a A
purchase tax on the turnover of such purchase at
the rate set out against them in that Schedule,
and

(ii) in the case of goods specified in Schedule III, a
purchase tax on the turnover of such purchase at B
a rate equivalent to the rate of sales tax set out
against them in that Schedule."

The said Section has, however, been substituted by Gujarat Amend-
ment Act 9 of 1992 with effect from 1.4.1992, but since the Amendment is
not a retrospective one, it is unnecessary to notice the amended provision. c
Section 15A provides for a concessional rate of tax in the case of
purchases of raw material by a recognised dealer provided the goods pur-
chased are those specified in Schedule II or lII (other than the prohibited
goods) and he issues a certificate contemplated by Section 13(1)(B). Prior to D
the Amendment Act 9of1992, Section 15(A) read as follows:

"!SA. Purchase tax payable on purchases of goods by
certain dealers where · (i) a recognised dealer purchases
any goods specified in Schedule II or Ill other than
prohibited goods, under a certificate given by him under E
clause (B) of sub-section (1) of section 13, or

(ii) a commission agent holding permit purchases any
' goods specified in Schedule. II or III other than prohibited
goods on behalf of his principal who is recognised under a
certificate given by him under clause (C) of sub-section (1) F
of section 13,·

there shall be levied a purchase tax on the turnover of
such purchase at the rate of two paise in the rupee."
G
Since the Amendment of this provision in 1992 is also not retrospec-
tive, it is unnecessary to notice the same.

We may now set out Section 15B both as it obtained prior to
Amendment Act 6 of 1990 and as substituted thereby. Prior to Amend-
ment, it read thus : H
208 SUPREME COURT REPORTS I 1992] SUPP. 2 S.C.R.
A "Where any dealer liable lo pay tax under this Act uses any
goods other than declared goods purchased by him or
through commission agent as ra\v or processing n1aterials
or consumable stores (irrespective of whether su~h goods
are prohibited goods or not) in the manufacture of taxable
goods and despatches any of the goods so manufactured •
B
to his own place of business or to his agents place of
business situate outside the State but within India such
dealer will be liable to pay, in addition to any tax paid or
payable under other provisions of this Act, a purchase tax
at the rate of four paise in the rupee on the purchase price
c of such raw or processing materials or consumable stores
used in the goods so manufactured and despatched and
accordingly he shall include the purchase price thereof in
his turnover of purchases in his declaration or return under
section 40 which he is to furnish next thereafter.

D Provided that where the raw materials so used is bul-
lion or specie, the purchase tax payable on such bullion
or specie under this section shall not exceed the aggregate
of the rates of sales tax and the general sales tax payable
on bullion or specie."
E
After it is substituted in 1990 with retrospective effect from 1.4.1986,
this Section reads thus:

"Where a dealer who being liable to pay tax nnder this Act
purchases either directly or through a commission agent
F any taxable goods (not being declared goods) and uses
them as raw or processing materials or consumable stores,
in the manufacture of taxable goods, then there shall he
levied in addition to any tax levied under the other
provisions of this Act, a purchase tax at the rate of -
G (a) two paise in a rupee on the turnover of such purchases
made during the period commencing on the 1st Aprtil, 1986
and ending on the 5th August, 1988; and

(b) four paise in rupee on the turnover of such purchases
H made at any time after the 5th August, 1988, provided that
HOTEL BALA!! v. STATE OF A.P. [JEEVAN REDDY, J.] 209

where the raw materials purchased for use in the manufacA A
ture of goods are bullion or specie, the rate of purchase
tax on the turnover of purchases of such raw materials shall
not exceed the aggregate of the rates of sales tax and
general sales tax leviable on bullion or specie under Entry
I in Schedule III."
B
Inasmuch as strong reliance is placed by the asse>See/appellants upon
Rule 42E inserted by G.S.R. 1090 (64) T.H. dated 1.5.1990, it would be
appropriate to read the said Rule here:

"42-E. Drawback, set off or refund of purchased Tax under
section 158: c
42-E. In assessing the purchase tax levied under section
15B and payable by a dealer (hereinafter referred to as "the
assessee") the Commissioner shall subject to conditions of
rule 47 in so far as they apply, and further conditions
specified below, grant him a draw-back, set off or as the
D
case may be refund of the whole of the purchase tax paid
in respect of purchase of goods effect on and from the 1st
April, 1986 used by him, as raw materials, procesSing
materials, or consumable stores, in the manufacture of
taxable goods." E
Conditions:-(1) the assessee is a registered dealer,

(2) the goods purchased are taxable goods other than
declared goods,
F
(3) the said goods have been used by the assessee within
the State as raw materials or processing materials or conA
sumable stores in the manufacture of taxable goods,

(4) the goods so manufactured have been sold by the
assessee in the State of Gujarat. 11 G
In view of the retrospective amendment of Section 15B, it may not
be necess;iry to refer to Section 15B as it obtained prior to the 1990
amendment except to point out that in material particulars, it was similar
to Section 13AA of Bombay Sales Tax Act, which was considered in
Goodyear and held to be outside the legislative competence of the State H

r
210 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A Legislature. The correctness of the ratio in Goodyear has been discussed
by us in Part V.

Section 15 makes the purchaser liable to pay the tax provided there-
under in case he purchases the goods mentioned in Schedule II and III
B from a person who i& not a registered dealer. If, however, the good& '°
purchased are resold by him, he is not liable to pay the &aid tax. Section
15A applies only to Recognised dealers. A recognised dealer is defined in
section 32 in short, it means a dealer who is a manufacturer and whose
turnover of sales or purchases exceeds the specified limit. If the recognised
dealer purchases goods &pecified in Schedule II or III (other than
c prohibited goods) and i&&ues a certificate contempleted by Section 13
(1).(B), he is entitled to pay purchase tax on a concessional rate. Then
come& Section 15B which provides for levy of an additional purchase tax.
An analysi& of the Section yields the following ingredients: (i) where a
dealer who being liable to pay tax under Act; (ii) purchases either directly
D or through a comm1ss10n agent; (iii) any taxable goods not being
declared goods and (iv) uses them as raw or proce&&ing materials or a&
consumable stores in the manufacture of taxable goods (v) then there shall
be le;ied in addition to any tax levied under other provi&ions of the Act, a
purchase tax at the rates &pecified. It is. thus clear that section 15B does
not speak of nor does it refer in any manner to the movement sale or
E disposal of manufactured goods. According to this section, it is immaterial
whether the manufactured good& arc sold within the State or dealt with in
some other manner. It is equally immaterial whether the manufacturer
consigns them to his own depot& or the depots of his agents outside the
State. Therefore, the ratio of Goodyear - keeping aside its correctness for
F the time being - has absolutely no application. The Haryana and Bombay
provisions considered in the said decision spoke of the manufactured goods
being disposed of within the State otherwise than by way of sale or
de&patched out of State othervise than in the course of inter-State trade
or commerce or in the cour&e of export within the meaning of Section 5(1)
of the Central Sales Tax Act. Similarly the Bombay provision spoke of the
G manufactured good& being sent to the depots of the manufacturer or his
agents outside the State of Mahara&htra. It was these features which
weighed with thi& court in characterising the tax a& one in the nature of a
consignment tax (This aspect has been dealt with in part V). Since the said
feature is absent in the impugned provision, we hold, agreeing with the
H High Court, that the tax imposed hy Section !SB cannot be characterised
HOTEL BALAll v. STATE OF AP. [.!EEV/\N REDDY, J.[ 211

as a consignment tax. A
The main contention of the appellants, however, is that Section 158
should not be read in isolation but in conjunction with Rule 42E which was
introduced in the Rules simultaneously with the amendment of Section
15(B) and which Rule indeed supplements Section 15B. They say that if
both the provisions are read together, the effect and consequence is the
B
same as that of Section 15B as it obtained prior to 1990 amendment, which
means the tax is really upon the consignment of manufactured goods.

We shall first notice what Rule 42E pro,ides. It says that, in assessing
the purchase tax levied under Section 15B, the assessee shall be granted a C
drawback, set-off or as the case may be, refund of the whole of the
purchase tax paid in respect of purchase of goods effected on or after
1.4.1986 and which goods have been used by him as raw material, process-
ing material or as consumable stores in the manufacture or taxable goods
- subject however to the conditions prescribed in the said Rule and further D
subject to the conditions specified in Rule 47 in so far as they are ap-
plicable. The four conditions specified in the Rule 42E are:

(1) the assessee is a registered dealer,

(2). the goods purchased are taxable goods other than E
declared goods,

(3) the said goods have been used by the assessee within
the State as raw materials or processing materials or con-
sumable stores in the manufacture of taxable goods,
F
(4) the goods so manufactured have been sold by the
assessee in the State of Gujarat.

Condition No. 4, emphasised by the assessees says that the benefit of
set off/drawback/refund shall be available only if the manufactured goods G
are sold within the State of Gujarat. According to them it means that,
where the manufactured goods are consigned by the manufacturer to his
own depots or to his agents, depots outside the State of Gujarat, the benefit
of drawback etc. will not be available, which means that purchase tax shall
be levied upon the purchase of raw material. This, say the appellants, is
precisely what the old Section 15-B provided for. According to them, the H

•
212 SUPREME COURT REPORTS IJ992] SUPP. 2 S.C.R.

A present Section JSB read with Rule 42E is nothing but a re-incarnation of
Section l5B as it stood prior to 1990 Amendment Act and falls squarely
within the ratio of Goodyear This argument raises in turn the question:
how far is it permissible to refer to the Rules made under an Act while
judging the legislative competence of a legislature to enact a particular
provision? The necessity and significance of the delegated legislation is
B well-accepted and needs no elaboration at our hands. Even so, it is well to
remind ourselves that Rules represent subordinate legislation. They cannot
travel beyond the purview of the Act. Where the Act says that Rules on
being made shall be deemed "as if enacted in this Act", the position may
be different. (It is not necessary to express any definite opinion on this
C aspect for the purpose of this case). But where the Act does not say so,
the Rules do not become part of the Aot. Sri Mehta relies upon the
following statement of law in Halsbury's Laws of England (3rd Edn.) Vol.
36 at page 401 :

D "Where a statute provides that subordinate legislation
made under it is to have effect as if enacted in the statute
such legislation may be referred to for the purpose of
construing a provision in the statute itself. Where a statute
docs not contain such a provision, and does not confer any
power to modify the application of the statute by subor-
E dinate legislation, it is clear that subordinate legislation
made under the statute cannot alter or vary the meaning
of the statute itself where it is unambiguous, and it is
doubtful whether such legislation can be referred to for the
purpose of construing an expression in the statute, even if
F the meaning of the expression is ambiguous. 11

He says that this statement of law has been referred to with approval
by Hegde, J. in his opinion in J.K. Steel Ltd. v Union of India, A.LR. 1970
S.C. 1173. Though the opinion of Hegde, J. is a dissenting one, he submits,
G the majority has not held to the contrary on this aspect. He also relies upon
the English decisions referred to in the opinion of Hegde, J. and points
out that no decision of this court has expressed any opinion on the subject,
a fact noted by Hegde, J.. He commends the view taken by Hegde, J. for
our acceptance. Sri Mehta points out further that Section 86 which confers
H the Rule making power upon the Government does not say that the Rules
HOTEL BALAJI v. STATE OF AP. [JEEYAN REDDY, J.] 213

when made shall be treated as if enacted in the Act. Being a rule made by A
the Government, he says, Rule 42E can be deleted, amended or modified
at any time. In such a situation, the legislative competence of a legislature
to enact a particular provision in the Act cannot be made to depend upon
the Rule or Rules, as the case may be, obtaining at a given point of time,
he submits. We are inclined to agree with the learned counsel. His submis- B
sion appears to represent the correct principle in matters where the
legislative competence of a legislature to enact a particular provision
arises. If so, the very foundation of the appellants' arguments collapses.

Even if we agree with the appellants and read Rule 42E along with
Section lS(B), they cannot succeed. Rule 14E provides for set off etc. in c
case the manufactured goods are sold within the State of Gujarat. It no
doubt means that set off etc. is not available if the manufactured goods are
disposed of otherwise than by way of sale or are consigned to
manufacturer's own depots (or to the depots of his agents) outside the
State of Gujarat. What in effect the State says is this: "Raw material when D
purchased is taxable but I won't tax the raw material if you sell the goods
manufactured out of such raw material within the State because I derive
larger revenue there; I do not want to tax both the raw material and the
manufactured goods, in the interest of trade and public. But if you dispose
of the manufactured goods in some other manner, I will tax the purchase E
of raw material because there is no reason why I should forego the
purchase tax due on raw material, when I am not getting any revenue from
your method of disposal or despatch of manufactured products." There is
nothing objectionable in the State saying so. It can indeed rely on the
principle of the decision of this court in Godrej & Boyce Mfg. Co. v.
F
Commissioner of Sales Tax, reported in (1992) 4 J.T. S.C. 317. It is
difficult to see how can it be said that by reading Rule 42E into Section
JSB, the levy becomes a consignment tax. In any event, the ratio of
Goodyear cannot be accepted as good law for the reasons mentioned in
part V.
G
We are equally not satisfied with the argument that the Gujarat
legislature has resorted to a device, a stratagem to circumvent the decision
of this court or that it is an instance of fraud on power - what is sometimes
referred to as 'colourable legislation'. That a legislature is empowered to
amend a provision to remove the defect pointed out by a court is well-ac- H
214 SUPREME COURT REPORTS l199:i.j SUPP. 2 S.C.R.

A cepted. So far as the Gujarat Act is concerned, it was never the subject-
matter of an adverse decision either by this court or the Gujarat High
Court. Writ Petitions were no doubt pending challenging the validity of
Section 15B as it then stood. It was perfectly open to the Legislature to act
to set its house in order to obviate a possible adverse verdict applying the
ratio of Goodyear. The question is whether the provision now enacted, with
B
retrospective effect, is beyond the legislative competence of Gujarat Legis-
lature? It not, no further question arises.

So far as the retrospectivity given to Section 15B by the 1990 Amend-
ment Act is concerned, it is hardly open to doubt in the light of several
c decisions of this court commencing from Ramakrishna v. State of Bihar,
A.LR. 1963 S.C. 1667. This is not even a case where the old provision was
struck down by a court. The period or retrospectivity covers only the period
during which Section 15B has been in force. The levy was already there. In
any event, in view of our conclusion that Goodyear does not represent the
D correct position in law, this aspect has really no relevance.

It is then contended that the levy is really in the nature of excise
duty or use tax inasmuch as it attaches not on purchase of goods but on
their use in manufacture of other goods. This argument in our opinion
misses the true nature of tax. It is an additional tax on the purchase of raw
E
material used in manufacture of other goods. A certain concession is given
to manufacturers (recognised dealers) in purchase of certain types of raw
material (Section 15A); an additional purchase tax is levied under Section
15B; and in certain situations, this tax is refunded or set off, as the case
may be under Rule 42-E. All these provisions are intended to encourage
F industry and to derive revenue at the same. time. Counsel for the assessees
placed strong reliance upon the word "then" occurring in the section and
its placement. He e.nphasised that the tax is payable only when the dealer
(1) purchases the goods and (2) uses them in the manufacture of other
goods. It is not possible to agree. Heading of Section 15B is "Purchase tax
G on raw or processing materials or consumable stores used in manufacture
of goods in certain cases." The Section, read as a whole, is applicable only
to those goods which are used in the manufacture of other goods. The levy
is upon the purchase price of raw material and not upon the value of the
manufactured products. Entry 54 of List II must receive a liberal construc-
H tion, being a legislative entry. The Legislature cannot be confined to only
IIOTEL BALA.II 1·. STATE OF AP. [JEEVAN REDDY . .I.] 215

one form of levy. So long as the levy retains the basic character of a tax on A
sale, the legislature can levy il in such mode or in such manner as it thinks
appropriate. As affirmed by M ukharji, J. in Goodyear, the well-established
principles in such matters is 11 that reasonable construction should be fol-
lowed and literal construction may be avoided if that defeats the manifest
object and purpose of the Act." The legislature must be presumed to know B
its limitations and acted within those limits. Transgression must be clearly
established, and is not to be lightly assumed.

For the very same reasons, the argument that it is a use tax also fails.
In essence, the provision is akin to the one considered by this court in
Andhra Sugars Ltd. & Anr. v. The State of Andhra Pradesh & Anr., 21 S.T.C. c
212.

For the above reasons, the appeals and writ petitions are dismissed
with no order as to costs.
D
PART - III (UTTAR PRADESH)

These Civil Appeals and Writ Petition are filed by the Tribeni
Tissues Limited, Varanasi, Uttar Pradesh. The Appeals are preferred
against the Judgment of a learned Single Judge of Allahabad High Court E
allowing Sales Tax Reyisions No.325, 327 and 328 of 1989 preferred by the
Commissioner of Sales-tax, Uttar Pradesh against the orders of the Sales-
tax Appellate Tribunal. The assessment years concerned are 1978-79 to
1981-82.

The appellant is a dealer registered under the U.P. Sales tax Act,
F
having an office at Varanasi. It has a paper mill at Calcutta. The appellant
purchases sun hemp, raw jute, old hemp rope cuttings, Old Jute rope
cuttings and jute cuttings etc. at Varanasi and sends them to the paper-mill
at Calcutta for being used as raw material. These purchases are made .by
the appellant from farmers, 'kabadis' and other persons who arc not G
registered dealers. The turnover relating to such purchases was subjected
to purchase-tax under section 3-AAAA by the assessing authorities which
the appellant objected to. The Tribunal, by a majority of 2:1 held in favour
of the appellant against which the Commissioner preferred revisions before
the High Court. Section-3AAAA read as follows at the relevant time. H
216 SUPREME COURT REPORTS I1992] SUPP. 2 S.C.R.
A '
1
3-AAAA. Liability to purchase tax on certain transactions
- Where any goods liable lo lax al the point of sale lo the
consumer are sold to a dealer but in view of any provision
of this Act no sales tax is payable by the seller and the
purchasing dealer does not resell such goods within the
State or in the course of inter-State trade or commerce, in
B
the same form and condition in which he had purchased
them the purchasing dealer shall subject to the provisions
of Section 3, be liable to pay tax on such purchases at the
rate at which tax is leviable on sale of such goods to the
consumer within the State;
c
Provided that if it is proved lo the satisfaction of the
assessing authority that the goods so purchased had al-
ready been subjected to tax or may be subjected lo tax
under Section 3-AAA, no lax under this section shall be
payable."
D
The section subjected the purchase of "goods liable to tax at the point
of sale to the consumer" to purchase lax payable by the purchasing-dealer,
in a case where the selling dealer was not liable to pay the sales-tax on
such sale. Purchase tax was payable at the same ralc as the sales tax. If,
E however, the purchasing dealer resold such goods within the State or in
the course of inter-State trade or commerce, he ~'as not liable to pay the
purchase tax. The expression "goods liable to tax at the point of the sale
to the concumer" is explained in Section 3-AAA. Section 3A prescribes the
rates of tax. As it stood al the relevant time, sub-sections (1) and (2)
F prescribed different rates for different goods. Sub-section (2A) which
alone is relevant herein, read as follows:

"3A (2A): The t·1rnover in respect of goods other than those
referred to in sub-sections (1) and (2) shall be liable to tax
at the point of sale by the manufacturer or importer at the
G rate of seven per cent, provided that the State Government
may from time to time, hy notification in the Gazette modify
the rate or point of tax on the turnover in respect of any
such goods with effect from such date as may be notified
in that behalf, so however, that the rate does not exceed
H seven per cent.''
HOTEL HALAll v. STATE OF A.P. [JEEVAN REDDY .I.[ 217

(The goods concerned herein, according to hoth the parties, fall A
within sub-section (2A) of Section 3A).

The State Government issued a notification dated 30.5.1975 in terms
of and as contemplated by the proviso to sub-section (2A) of Section 3-A
declaring that with effect from June I, 1975, the turnover in respect of
guo<ls specified in colu1nn 2 l)f the Schedule lo th~ notific£ttion shall be B
liable to tax at the point of sale and at the rate specified respectively in
columns (3) and (4) thereof. The Schedule, in so far as relevant may be set
out:

"SCHEDULE
c
'M' stands for sale by manufacturer in Uttar Pradesh.
'I' stands for sale by the Importer in Uttar Pradesh.
SI. Description of goods Point at which Rate of tax
No. tax shall be
levied D
(Items No.I to 14 omitted as
unnecessary.)
15. Old, discarded, unservice-
able or obsolete machinery,
stores or vehicles including E
\Vaste products except cinder,
coal ash and such items a<.; are
included in any other notification
issued under the Act.
(Item Nos. 16 to 25 omitted as sale to consumer 5 per cent
unnecessary.)
F

.. 26. Jute and Hemn Goods Mor I 4 ner cent

The controversy before the High Court was a limited one. It was:
"whether the said goods will fall under the entry at SI. No. 15 of the
notification dated 30th May, 1975 as contended by the learned standing G
counsel (for the State of Uttar Pradesh) or under SI. No. 26 as .ll)te and
Hemp goods under the notification dated 1st October, 1975 as urged on
behalf of the assessee." (Quoted from the judgment of the High Court.)
The learned Judge held that the goods fall under item No.15 and accord-
ingly allo\ved the revisions filed hy the Commissioner. The correctness of
the Judg1nent of the High Court is questioned in these Civil Appeals. H
218 SUPREMF COURT REPORTS [1992) SUPP. 2 S.C.R.

A While the Civil Appeals were pending in this Court, a Division Bench
of the Allahabad High Court held in C.M.W.P.No.168 of 1983 and batch
(decided on 3rd April, 1991) that Section 3-AAAA was ultra vires the
legislative competence of the legislature of Uttar Pradesh and, therefore,
void. The Division Bench followed and applied the ratio of Goodyear and •
held that under the said provision the taxable event is not the purchase of
B the goods by the purchasing dealer but the subsequent event namely use
of said goods in the manufacture of other goods and their despatch without
effecting a sale within the State of Uttar Pradesh to a place outside the
Uttar Pradesh. To get over the said decision and to remove the defect
pointed out therein, the Governor of Uttar Pradesh issued an Ordinance
C being Ordinance No. 45 of 1991 on 12th December, 1991 substituting
Section 3-AAAA in its entirety with effect from April 1, 1974. The said
Ordinance has since been replaced by U.P. Sales-tax (Amendment) Act 8
of 1992. Section 3-AAAA as substituted by the aforesaid Amending Act
reads thus:

D "3-AAAA. Liability to purchase tax on certain transactions.

(1) Except as provided in sub-section (2) and subject to
the provision of Section 3, every dealer, who purchases any
goods liable to tax at the point of sale to consumer-
E
(a) from any registered dealer in circumstances in which
no tax is payable by such registered dealer, shall be liable
to pay tax on the purchase price of such goods at the same
rate at which, but for such circumstances, tax would have
been payable on the sale of such goods;
F
(b) from any person other than a registered dealer, whether
or not tax is payable by such person, shall be liable to pay
tax on the purchase price of such goods at the same rate
at which tax is payable on the sale of such goods.
G
(2) Exemption shall be granted in the tax payable under
sub-section (1) to the extent of the amount of tax,-

(a) to which the goods purchased from a registered dealer
have already been subjected or may be subjected under any
H provision of this Act or the Central Sales Tax Act, 1956;
HOTEL BALAJJ v. STATE OF AP. [JEEVAN REDDY, .I.[ 219

(b) already paid in respect of the goods purchased from A
any person other than a registered dealer;

(c) on the sale of goods liable to be exempted under Section
4-A;

( d) to which the sale of dressed hides and skins (or tanned B
leather) and ginned cotton obtained from raw hides and
skins and raw cotton so purchased or rice obtained from
paddy so purchased during the period commencing on
September 2, 1976 and ending with April 30, 1977, are liable
under any provision of this Act or the Central Sales Tax
Act. 1956."
c
Writ Petition No. 175 of 1992 is preferred questioning the constitu-
tional validity of the said provision.

We shall first deal with Civil Appeals. According to the statement of D
facts contained in the .Judgment of the High Court, the appellant purchased
1
'sun hemp, raw jute, old hemp rope cuttings, old jute rope cuttings and
jute cuttings etc." Item No. 26 of the notification dated October 1, 1975
speaks of "jute and hemp goods". The appellant inter alia purcha<ed "sun-
hemp" and "raw jute''. Certainly they do not fall under item 26 of the
Schedule. Coming to "old hemp rope cuttings, old jute rope cuttings and
E
jute cuttings" they fall, by their very nature more properly under item 15
because admittedly they are discarded, worn-out, and waste material. It
would be rather odd lo call them "jute the hemp goods" in the presence of
item (15). The High Court was, therefore, justified in holding that the
goods purchased by the appellant are properly relatable to item 15 and not F
to item 26 of the notification.
>

The learned counsel for the appellant urged that item 15 is confined
only to oldi disL:an.led, unserviceable and obsolete 1'stores11 which in the
context me.ans 11 stores11 maintained by a factory or industry. Having regard
to the language of item 15, he submitted, it does not take in old discarded G
material coming fron1 other sources. W c see no warrant for this restricted
reading of item 15. Be that as it may, once the said goods do not fall under
item 26: as held by us, they n1ust fall under itctn 15, since it is not suggested
that there is any other item which takes in these goods. The Civil Appeals
accordingly fail and arc dismissed. No costs. H
220 SUPREME COURT REPORTS [1992) SUPP. 2 S.C.R.

A Writ Petition No.175 of 1992.

In view of the fact that Section 3-AAAA has been substituted by the
1992 Amendment Act with retrospective effect from April I, 1974, it is not
re;;lly necessary for us to deal at any length with the Section as it stood
prior to the said amendment or with the correctness of the judgment of
B the Division Bench .of the Allahabad High Court declaring the same as
beyond the legislative eµmpctence of the U.P. Legislature. Suffice it to say
that the decision of the Division Bench closely follows and applies the ratio
of Goodyear which according lo us does not represent the correct position
in law as explained in Part V.
c Coming to Section 3-AAAA as it now stands, an analysis of the
Section yields the following ingredients:

A. (i) A dealer who purchases any goods liable lo tax at
the point of sale to the consumer~
D
(ii) from any registered dealer in circumstances in which
no lax is payable hy such registered dealer,

(iii) the purchasing dealer shall be liable lo pay tax on the
purchase price of such goods al the same rate al which the
E lax would have been payable on the sale of such goods.

B. (i) A dealer who purchases any goods liable to tax at
the point of sale to consumer,

(ii) from any person other than a registered dealer, whether
F or not such person is liable to pay the tax on such sale,

(iii) the purchasing dealer shall he liable to pay tax on the
purchase price of such goods at the same rate at which tax
is payahle on the sale of such goods.

G C. The purchasing dealer is, however, entitled to be exM
empted from the tax payahle under the above two heads
to the extent of the amount of tax n1entioned in clauses
(a),(b),(c) and (d) of sub-section (2). Clause (a) speaks of
the tax paid or p<.Jyablc under any of the pro\~sion of U.P.
H Act or C.S.T. Act. Clause (b) speaks of the tax already paid,
HOTEL BALAfl v. STATE OF AP. [JEEVAN REDDY. J.J 221

if any, in respect of goods purchased from any perosn other A
than a registered dealer. Clause (c) refers to sale of goods
entitled to exemption under section 4A and clause (d)
refers to sale of dressed hides and skins.

In short, the scheme of the section is this: (1) if a dealer purchases
the goods liable to tax at the point of sale to the consumer from any
B
registered dealer who is not liable to pay tax on such sale, the purchasing
dealer shall pay such lax. If, however, the purchasing dealer establishes that
the goods purchased by him have already been subjected to er may be
subjected to tax under the U.P. Act or Central Sales Tax Act, he will get
an exemption to that extent. (2) If the said goods arc purchased from a c
person other than a registered dealer the purchasing dealer shall pay the
tax payable on sale of such goods. If, however, he proves that tax payable
has been paid, either wholly or partly, by the seller, the tax payable by the
purchasing dealer shall be exempted to that extent. (3) Similar exemption
will be available to the purchasing dealer in case he establishes any of the D
facts mentioned in clauses (c) and (d) of sub-section (2). The central idea
is that no transaction of sale (of goods taxable at the point of sale to
consu111er) should go untaxed. Either the seller pays the tax or the pur-
chaser pays. It is for achieving this central purpose that Section 3-AAAA
has been enacted providing for several situations.
E
It would be immediately evident that section that Section 3-AAAA
does not speak of and does not refer in any manner to the user of the goods
purchased. It is immaterial whether the goods purchased are used in the
manufacture of other goods or dealt with otherwise. Much less does it
speak of the manner in which the goods manufactured out of such pur- F
chased goods, if any, are dealt with. The exemptions provided in sub-sec-
tion (2) are equally un-related to the above aspects. Sub-section (1) is clear
and simple. The tax becomes payable by the purchasing dealer in the two
situations contemplated by clauses (a) and (b) of the said sub-section. If
he can establish any of the facts mentioned in clauses (a) to ( d) of
sub-section (2), he gets an ap;iropriate exemption. Otherwise not. We are, G
therefore, unable to see any room for contending that the tax imposed by
the said section is in the nature of consignment tax or a use or consumption
tax. Simply because the petitioner chooses to take the goods purchased by
him out of the State, in the sa1ae form and condition or otherwise, for being
used as raw material in his factory at Calcutta, makes no difference to the H
222 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A levy. The validity of the levy cannot depend upon what a particular dealer
or person chooses to do with the goods.

It was argued for the petitioner that sub-section (2) of Section
3-AAAA places a heavy and uncalled for burden upon the purchasing
dealer; that it is not practicable for the purchaser to establish that the
B selling person (other than the the registered dealer) has paid the tax or
not. It is submitted that the petitioner purchases his goods from hundreds
of persons who are not registered dealers and it cannot reasonably be
expected of the petitioner to gather the particulars of or from all such
persons. We are unable to appreciate this contention. A person other than
c a registered dealer is not amenable to the discipline of the Act. He cannot
indeed collect any tax [Section 8(A) (2)] and, therefore, will not, ordinarily
speaking, make over or pay any tax. This the legislature is justified in
presuming. If, however, in any case it is proved that such person has paid
the tax, the purchasing dealer will get an exemption to that extent. It a
D benefit is claimed by the purchasing dealer, it is for him to prove the fact
which enables him to claim the benefit. That burden cannot be passed on
to any one else. So far as registered dealers arc concerned, all that the
purchasing dealer need prove is that the said goods have already been or
may be subjected to tax under State Act or Central Sales Tax Act. On this
score, we see no difficulty for the purchasing dealer. From the bill given
E by the selling dealer, the purchasing dealer can prove the payment. Or he
can simply prove, as a matter of law that the said goods are liable to be
taxed under any other provision of the Act or under the Central Sales Tax
Act. We are equally unable to see any vagueness in the provision nor is it
established that any such vagueness is operating to the prejudice of the
F petitioner.

In this view of the matter, it is unnecessary, strictly speaking, to
consider whether the present Section 3-AAAA is in effect and substance
the same as the one obtaining prior to 1992 Amendment Act. For the sake
of completeness; however, we may mention that under Section 3·AAAA
G (before it was substituted in 1992) tax was payable by the purchasing dealer
where he purchased goods liable to tax at the point of sale to the consumer
in circumstances where no tax is payable by the seller, provided he did not
resell the said goods, in the same form and condition, within the State or
in the course of inter-State, trade or commerce. The section was under-
H stood by the Division Bench in the following manner :
HOTEL BALAJI v. STATE OF AP. [JEEV AN REDDY, J.] 223

"23. That brings us to the vital question as to which are the A
circumstances in which sale of the goods purchased within
the State or in the course of inter-State trade and com-
merce in the same form and condition in which the dealer
purchased the goods, may be rendered impossible. To our
mind, keeping in view the usual course of business, the
B
normal possibilities seem to be these:

1. use and consumption of the goods purchased by the
purchasing dealer in the manufacture of some other tax-
able goods within the State;

2. despatch of the manufactured goods, without sale,
c
outside the State otherwise than in the course of inter-
State trade and commerce;

3. despatch of the goods out of the territory of India
pursuant to a contract of sale, i.e. despatch in the course D
of an export sale;

24. These then are the activities or transactions that con-
stitute the taxable events on the happening of which the tax
would be immediately attracted, that is to say, the tax in
question becomes exigible at these points. Once these E
points are reached the possibility of the sale of goods
purchased within State or in the course of inter-State trade
and commerce in the same form and condition, shall stand
excluded. The fourth and the last condition envisaged by
Section 3-AAAA set out hereinabove necessary for attract- F
ing the levy would also stand fulfilled. It is only on the
happening of these events that the taxing authority can
reach the conclusion that the purchasing dealer has be-
come liable under Section 3-AAAA."

With respect we find ourselves unable to agree with the above G
understanding of the section. All that the section provided was: (i) where
. the goods liable to tax at the point of sale to the consumer are sold to a
deale1 (ii) in circumstances in which no sales tax is payable by the seller
and (iii) the purchasing dealer does not re-sell the said purchased goods
within the State or in the course of inter-State trade or commerce (iv) the H
224 Slll'REME COURT REPORTS II992J SUPP. 2 S.C.R.

A purchasing dealer shall be liable to pay the tax which would have been '
,.·'
payable by the seller. (v) If. however, it was proved that the said goods
have already suffered tax under Section 3-AAA, no purchase tax was
payable under Section 3-AAAA. It is obvoous that the section did not speak
of the purchased goods being used in the manufacture of other goods nor
B of the manner of disposal or despatch of such manufactured goods. The
only two conditions stipulated (which conditions arc not to be found in the
present Section 3-AAAA) were that if the purchased goods are sold within
the State or sold in the course of inter-State trade or commerce, the tax
under il is not payable. This is for the simple reason that in both those
contingencies, the Stale would gel the revenue (in one case under the State
c Sales Tax Act and in the other case, under the Central Sales Tax Act). The
policy of the legislature is not to tax the same goods twice over. The fact
that in a given case, the purchased goods are consigned by the purchaser
to his own depots or agents outside the State makes no difference to the
nature and character of the lax. By doing so, he cannot escape even
D one-time lax upon the goods purchased, which is the policy cf the Legis-
lature. The tax was directed towards ensuring lery cf tax atlcast on one
transaction of sale of the goods and not towards taxing the consignment of
goods purchased or the products manufactured out of them. The difficulty
has really arisen because of the attempt lo look lo the pro'"sions of Section
E 3-AAAA through the prism of Goodyear. There is a substantial and
qualitative difference between the language employed in Section 9 of
Haryana Act and Section 13-AA of Bombay Act and in Section 3-AAAA
of U.P. Act (as it stood prior to 1992 Amendment Act) - or for that matter
as it stands now. These basic differences cannot be ignored. Con-
F stitutionality of Section 3-AAAA ought to be judged on its own language
and so judged, the Section, both before and after the 1992 Amendment,
represents a perfectly valid piece of legislation. It is relatable to and fully
warranted by Entry 54 of List II of the Seventh Schedule to the Constitu-
tion.

G PART - IV (ANDHRA PRADESH)

Writ Petitions No. 655-669 of 1983 are filed by Hotel Balaji and 14
other hotels/restaurants for issuance of a writ, order or direction directing
the respondents viz., State of Andhra Pradesh and its Sales Tax Authorities
H not to lery and collect purchase tax on milk @ 4% under Section 6-A as
HOTEL BALA!! v. STATE OF Ai'. [JEEVAN REDDY. J.] 225

also the surcharge tax@ 10% of the tax. According to the petitioner~, such A
a levy violates Article .14 as also the fundamental right guaranteed to them
by sub-clause (g) of clause (1) of Article .19 of the Constitution. Civil
Appeal Nos. 10753-57 of 1983 are directed against the judgment and order
of a Division Bench of the Andhra Pradesh High Court upholding the
validity of Section 6-A of the Andhra Pradesh General Sales Tax Act.
B
The case of the petitioners in the writ petitions is this: They purchase
the milk required by them both from registered dealers as well as persons
other than registered dealers. The authorities are collecting purchase tax
@ 4% under Section 6-A from the petitioners which is illegal in view of
the fact that the sale of fresh milk is exempted from tax by a notification C
issued by the Government of Andhra Pradesh under Section 9 of the Act
being G.O.Ms. No.1091 dated 10.6.1957. Because of the said exemption
notification not only the seller is exempted but also the purchaser. In some
cases, the petitioners purchased milk from registered dealers like Andhra
Pradesh Dairy Development Corporation which is exempted from sales tax
by virtue of a notification issued under Section 9. In such cases, the tax is D
sought to be levied upon the petitioners which is equally illegal. The milk
purchased by the petitioners is being consumed in preparing and serving
to consuming public tea, coffee and other eatables. The tax levied under
Section 6-A is really not upon the purchase but upon the use and consump-
tion. E
G.O.Ms. No.1091dated10.6.1957 as originally issued read as follows:

"In exercise of the power conferred by sub-section (1) of
Section 9 of the Andhra ·Pradesh General Sales Tax Act,
1957 (Andhra Pradsh Act 6 of 57), the Governor of Andhra F
Pradesh hereby exempts from the tax payable under :he
said Act the sales of following goods:

(1) and (2) - omitted as unnecessary;

(3) fresh milk, curd and butter milk." G
By G.0.Ms. No. 60 (Revenue) dated 10.1.1961, item (3) was sub-
stituted as follows :
11
fresh milk, curd and butter milk sold by dealers exclusively
dealing in them." H
226 SlJPREMF COURT REPORTS [1992] SUPP. 2 S.C.R.

A By G.0.Ms. No. 1786 dated 20.11.1962, the words "and their bye-
products realised by utilisation of surpluses thereof' were added al the end
of the entry. By yet another amendment, the word 11 bye-products11 \Vas
substituted by the word "products". Thus, at the relevant time item 3 of the
said notification read as follows:
B "fresh milk,.curd and butter milk sold by dealers exclusively
dealing in ther;i and their products realised by utilisation
of surpluses thereof."

It is also brought lo our notice that by G.O.Ms. No. 669 dated
26.5.1975, the Government of Anclhra Pradesh exempted the sale of pas-
c turised milk by the Andhra Pradesh Dairy Development Corporation from
fhe levy of lax payable under the said Act with effect from the 1st day of
May, 1975.

In the Civil Appeals the appellant is Hindustan Milk Food Manufac-
D turers Ltd. They purchased milk mainly from persons other than registered
dealers which they utilised in manufacture of various products. Its products
are sold not only within the State of Andhra Pradesh but also in other
States of the country. It has an office at Dhawaleshwaram in East Godavari
Distl. of Andhra Pradesh. It is registered as a dealer under the Act. In the
course of their assessment proceedings for the assessment year 1979-80
E
(among other assessment years) the appellant contended that the milk
having been exempted by virtue of a notification issued under Section 9 is
not taxable and that levy of purchase lax is incompetent. They questioned
the constitutionality of Section 6-A.. The Assessing authority overruled the
said objections and levied the purchase tax on the turnover of milk pur-
F chased by the appellant. The matter was brought to the High Court which,
as stated above, negatived the challenge lo the constitutionality of the
provision.

So far as the exemption notification in G.O.Ms. No. 1091 dated
G 10.6.1957 is concerned, it must be noticed that what was exempted there-
under was the tax payable on the "sale of fresh milk sold by dealers
exclusively dealing in them 11 • So far as agriculturists are concerned, they are
not dealers al all by virtue of Explanation II to the definition of "dealer"
contained in clause ( e) of Section 2. The notification has, therefore, no
application to sale of milk by them. Since the purchase by Hindustan Milk
H Food is almost wholly from such agriculturists, it cannot take advantage of
HOTEL BALAJI "·STATE OF A.P. [.TEEVAN REDDY, J.] 227

the said notification. If, however, any milk is purchased by the appellant or A
the writ petitioners from dealers exclusively dealing in milk, they would be
liable to pay the purchase tax only in cases where the selling dealer is not
liable to pay the tax either because of an exemption notification or other-
wise.

A contention was urged before us that the milk was not at all taxable B
under the Act. It was submitted that milk is not mentioned in any of the
Schedules I to VI appended to the Act. This argument in our opinion
proceeds upon a mis-apprehension of the scope and scheme of Section 5,
as we shall presently demonstrate. Fresh milk was taxable as general goods
under Section 5(1) of the Act before it was amended by Amendment Act c
4 of 1989. After the coming into force of the said Amendment Act, it falls
under Schedule VII, (which was introduced simultaneously with the said
Amendment Act) and which takes in all goods other than those specified
in first to· sixth Schedules. Milk was subject to multi-point tax prior to the
said Amendment Act whereas after the said amendment if has become
taxable only at single point namely, point of first sale in the State. If fresh D
milk was not at all taxable under the Act, there was no necessity to issue
notifications exempting its sale in certain situations.

Section 6-A was inserted by Andhra Pradesh General Sales Tax
(Amendment) Act, 49 of 1976 with effect from September 1, 1976. As E
originally enacted, the section read as follows:

"6-A: Levy of tax on turnover relating to purchase of
certain goods:-

Every dealer, whu in the course of business-
F
(i) Purchases any goods (the sale or purchase of which is
liable to tax under this Act) from a registered dealer in
circumstances in which no tax is payable under Section 5
or under Section 6, as the.case may be, or ·
G
(ii) purchases any goods (the sale or purchase of which is
liable to tax under this Act) from a person other than a
registered dealer, and

ta) either consumes suCh goods in the manufacture of other
goods for sale or otherwise, or H
228 SUPREME COURT REPORTS [1992J SUPP. 2 S.C.R.
•
A (b) disposes of such goods in any manner, other than by
way of sale in the Slate, or

(c) despatches them to a place outside the Stale except as
a direct result of sale or purchase in the course of inter-
Statc trade or commerce,
B
shaB pay tax on the turnover relating to purchase aforesaid
at the same rate which but for the existence of the
aforementioned circumstances, t11e tax woul<l have been
lcviahic on svch goods 'inder ~ection 5 or 6.''
c The Section has boen amended in some particulars by the Amend-
ment Act 18 of 1985 but these amendments do not make a difference to
the nature or character of the :ax. Be that as it may, we may as well set
out the Section as it stands now, in view of the fact that the validity of the
Section as such is questioned before us. It reads:
D
"6-A • Levy of tax on turnover relating to purchase of'
certain goods:

Every dealer, wh~) in the course of business:

E (i) purchases any goods (the sale or purchase of which is
liable to tax under this Act) from a registered dealer in
circumstances in which no tax is payable under section 5
or under Section 6, as the case may be, or

(ii) purchases any goods (the sale or purchase of which is
F liable to tax under this Act) from a person other than a
registered dealer, and

(a) consumes such goods in the manufacture of other goods
for sale or consumes them otherwise, or
G
(b) discloses of such goods in any manner other than by
way of sale in the State, or •
(c) despatches them to a place outside the State except as
a direct result of sale or purchase in the course of inter-
H State trade or commerce,
..
HOTEL BALAII v. STATE OF A.P. [.JEEVAN REDDY, J.] 229

shall pay tax on the turnover relating to purchase aforesaid A
at tho same rate at which but for the existence of the
aforementioned circumstances, the tax would have been
Ieviable on such goods under Section 5 or Section 5-A or
Section 6:

Pruvi<le<l that in respei;t of <leclare<l goods such rate B
together with the rate of additional lax specified in Section
5-A shall not exceed four percent of the purchase price of
such goods.11

An analysis of the Section yields the following ingredients: c
"A. (i) a dealer who in the course of business purchases
any goods liable to tax under the Act,

(ii) from a registered dealer in circumstances in which no
tax is payable by such selling dealer under Section 5 or 6
• D
and

(iii) consumes such goods in the manufacture of other
goods for sale or consumes them otherwise or,

(iv) disposes of such goods in any manner other than by E
way of sale in the State or,

(v) despatches them to a place outside the State except as
a direct result of sale or purchase in the course of inter-
Statc trade or commerce,
F
(vi) such purchasing dealer shall pay the tax at the same
rate at which it would have been payable by the selling
dealer.

B.(i) A dealer who in the course of his business purchases G
any goods which are taxable under the Act,

(ii) from a person other than a registered dealer and,

(iii) consumes such goods in the manufacture of other
goods for sale or consumes thetn otherwise or, H
230 SUPREME COURT REPORTS j1992j SUPP. 2 S.C.R.

A (iv) disposes uf such goods in any manner other than by
way of sale in the Stale or,

(v) despatches them to a place outside the State except as
a direct result of sale or purchase in the course of inter-
State trade or commerce,
B
(vi) such purchasing dealer shall pay the tax at the same
rate at which it would have been payable by the selling
dealer."

c case ofThedeclared
proviso which governs both the above situations provides that in
goods the total tax shall not exceed 4% of the purchase
price of such goods.

Broadly speaking, the effect is: Tax payable at sale point becomes
the tax payable on the purchase point, in certain circumstances. Because,
D the seller is not or cannot be taxed for certain reasons, the purchasing
dealer is being taxed. Two examples, each illustrating one of the two
situations envisaged by the Section may be given: (a) Andhra Pradesh
Dairy Development Corporation, a registered dealer, is exempted from
paying the tax on sale of pasturised milk. The purchaser of pasturised milk
from the Corporation is taxed provided he satisfies one of the conditions
E specified in clauses (i) to (iii) mentioned in the Section, thereby becoming
the last purchaser in the State of such milk. (b) Fresh milk is taxable at
sale point. But when it is sold by a farmer/agriculturist raising cattle on
lands held by him, he cannot be taxed because he is not a dealer. The
purchaser is taxed in such cases provided he satisfies one of the conditions
F specified in clauses (i) to (iii) in the Section, thereby becoming the last
purchaser in the State of such milk.

It would, therefore, be clear that the real object of the clauses (i) to
(iii) in the Section is not to levy a consumption tax, use tax or consignment
lax but only to point out that thereby the purchasing dealer converts
G himself into the last purchaser in the state of such goods. The goods cease
to exist or case to be available in the State for sale or purchase attracting
tax. In these circumstances, the purchasing dealer of such goods is taxed,
if the seller is not or cannot be taxed. In this connection, observations of
P.S. Poti, J. in Malabar Fntit Products Co.v. S.T.0., 30 S.T.C. 537, which
H have been expressly approved by this court in State of Tamil Nadu v. Ka!lda
HOTEL BALNI 1-. STATE OF AP. [.IEEVAN REDDY, J.] 231

Swami, 36 S.T.C. 191 =discussed in detail in part V may be referred to. It A
is not necessary to set out the said discussion here over again.

In the circumstances, we are unable lo see how the tax in1posed by
Section 6-A be described either as use tax, consumption tax or consignment
tax. Since we are of the opinion, as explained in Part V, that Goodyear does
not interpret Section 9 of Haryana Act and Section 13AA of Bombay Act B
correctly, its reasoning cannot be brought in here lo contend that clause
(c) of Section 6-A imposes a consignment tax. It is a purchase tax perfectly
warranted by Entry 54 of List II of the Seventh Schedule to the Constitu-
tion.

Reference to a few more provisions of the Act would be appropriate
c
at this stage to complete the picture.

The expression "dealer" has been defined in clause (e) of Section 2.
It is not necessary to notice the entire definition except Explanation II
which says that a grower of agricultural or horticultural produce cannot be D
deemed lo be a dealer if he sells his produce. Explanation reads as follows:

"Explanation II: Where a grower of agricultural or hor-
ticultural produce sells such producer grown by himself on
any land in which he has an interest whether as owner,
usufructuary mortgage, tenant or otherwise, in a form
E
different from the one in which it was produced after
subjecting it to any physical, chemical or any process other
than mere cleaning, grading or sorting, he shall be deemed
to be a dealer for the purpose of this Act."
F
Section 5 is the charging section. Prior to the Amendment Act 4 of
1989, Section 5 had four sub-sections. The first sub-section made all
sales/purchases by dealers within the State of Andhra Pradesh subject to
tax. It. however, the goods sold were those mentioned in Schedule I they
were taxable al a single point, viz., at the point of sale and at the rate
prescribed in the said Schedule. Similarly, if the goods fell in the Second G
Schedule they loo were taxable only at one point namely, the point of
purchase at the rate prescribed. [Sub-section (2)] Schedule Ill comprises
of declared goods while Schedule IV sets out goods which are totally
exempted from tax under Section 8 of the Act. Schedule V deals with
jaggcry and Schedule VI with liquors. In other words, goods which did not H
232 Slll'REME COURT RFPORTS [1992[ SUPP. 2 S.C.R.

A fall in any of the Schedules I to VI, fell under sub-section (1) and were
taxed as general goods. In this sense, fresh milk which is not mcnt.ioned in
any of the Schedules I to VI was chargeable as general goods under
sub-section (!) of Section 5. By Amendment Act 4 of 1989 the entire
scheme of Section 5 has been changed. The present section says that the
goods mentioned in Schedules I to VII shall be taxed at the point and at
B the rate specified ,herein. Schedule Vll which has been inserted by the very
same Amendment Act is in the nature of a residuary Schedule; the goods
which do not fall in any of the Schedules I to VI fall under Schedule VII.
Even such goods have also been made taxable only at one point and at the
rate specified. After the coming into force of the said Amendment Act of
c 1989, fresh milk would fall under Schedule VII and taxable as such. It is,
therefore, wrong to say that sale of milk was or is not taxable under the
Act.

Section 9 enipowers the Government to exempt either the sale of
certain goods or sales by certain persons either wholly or partly. Section 9
D reads as follows:

"9. Power of Stale Government to notify exemptions and
reductions of tax (or interest):

(1) The Stale Government may, by notification in the
E Andhra Pradesh Gazette, make an exemption, or reduction
in rate, i~ respect of any tax or interest payable under the
Act -

(i) on the sale or purchase of any specified class of goods,
F at all points or at any specified point or points in series of
sales or purchases by successive dealers; or

(ii) by any specified class of persons, in regard to the whole
or any part of their turuover.

G (2) Any exemption from tax or interest or reduction in the
rate of tax notified under sub-section (!) -

(a) may extend to the whole of the State or to any specified
area or areas therein;

H (b) n1ay b~ subject to such restrictions and conditions a~
HOTEL llALAll v. STATE OF AP. [JEEVAN REDDY, J.j 233

may be specified in the notification, including conditions A
as to licences and licence fees."

It may be noticed that while exempting the sale or purchase of any
specified class of goods the Government is empowered to specify whether
the exemption operates at all points or any specified point or points in the
series of sales or purchases of successive dealers. Several notifications have B
been ~ssucd by the Government from time to time exempting certain
dealers or exempting certain goods at the point of sale or purchase, as the
case may be. G.O.Ms. No.1091 is one of them. We have already noticed
the rather qualified terms in which the exemption is couched. It is not a
general exemption but a qualified one. In the light of the specific scheme C
of Section 9 and the language of G.O.Ms. No.1091, the exemption at the
point of sale by a particular category of persons cannot be construed as
operating to exempt the purchase tax under Section 6-A as well, much less
in all cases.

- For the above reasons, appeals and writ petitions are dismissed with
no order as to costs.

PART- V
(DOES GOODYEAR REQUIRE RE-CONSIDERATION?)
D

As mentioned earlier, counsel for all the assessees in these matters E
strongly rely on the decision of this Court in Goodyear which invalidated a
purchase tax levied by the Haryana and Maharashtra Sales Tax Acts. We
may, therefore, notice this decision in some detail. What precisely is the
ratio of Goodyear?

Provisions relating to purchase tax in Haryana Sales Tax Act and
F
Bombay Sales Tax Act fell for consideration in this case. Section 9 of the

- Haryana Act, before it was amended by Haryana General Sales (Amend-
ment and Validation) Act, 1983, read as follows:

"9. Where a dealer liable to pay tax under this Act pur- G
chases goods other than those specified in Schedule B from
any source in the State and -

(a) uses them in the State in the manufacture of, -

(i) goods specified in Schedule B or H
234 SUPREME COURT REPORTS [ 1992] SUPP. 2 S.C.R.

A (ii) any other goods and disposes of the manufactured
goods in any manner_otherwisc than by way of sale whether
\\Olhin the Stale or in the course of inter-State trade or
cummerce or within the meaning of sub-section (1) of
Section 5 of the Central Sales Tax Act, 1956, in the course
of export out of the territory of India.
B
(b) exports them, in the circumstances in which no tax is
payable under any other provisions of this Act, there shall
be levied, of subject to the provisions of Section 17, a tax
on the purchase of such goods at such rate as may be
c notified under Section 15."

A notification dated 19th July, 1974 was issued by the Government
of Haryana under the said provision read with Section 15(1) of the Act in
purported implementation of the said provision. Validity of Section 9 as
well as of the notification was challenged in a batch of writ petitions filed
D in the Hig!. Court of Punjab and Haryana. The High Court upheld the
challenge holding that "whereas the said provision (Section 9) provided
only for the levy of a purchase tax on the disposal of manufactured goods,
the notification by making a n1erc despatch of goods to the di.::alers them-
selves taxable in essence, legislates and imposes a substantive tax which it
E obviously cannot." Goodyear !11dia Ltd. v. State of Harya11a, (1990} 76
S.T.C.71.

After it was amended by the aforesaid amendment Act, sub-sections
(1) and (2) of Section 9 read as follows:

F "9. Liability to pay purchase tax. - (1) Where• dealer liable
to pay tax under this Act, -

(a) purchases goods, other than those specified in
Schedule B, from any source in the State and uses them
-
-

in the State in the manufacture of goods specified in
G Schedule B; or

(b) purchases goods, other than those specified in
Schedule B, fron1 any source in the State and uses the1n
in the State in the n1anufacture of any other goods and
H either disposes of the manufactured goods in any man-
HOTEL BALAJI v. STATE OF AP. [JEEV AN REDDY, J.] 235

ner otherwise than by way of sale in the State or A
despatches the manufactured goods to a place outside
the State in any manner otherwise than by way of sale
in the course of inter-State trade or commerce or in
the course of export outside the terrritory of India
within the meaning of sub-section (1) of Section 5 of
the Central Sales Tax Act, 1956; or
B

(c) purchases. goods, other than those specified in
Schedule B, from any source in the State and exports
them, in the circumstances in which no tax is payable
under any other provision of the Act, there shall be c
levied, subject to the provisions of Section 17 a tax on
the purchases of such goods at such rate as may be
notified under Section 15.

(2) Notwithstanding anything contained in this Act or the
D
rules made thereunder, if the goods leviable to tax under
this section are exported in the same condition in which
they were purchased, the tax shall be levied, charged and
paid at the station of despatch or at any other station before
the goods leave the State and the tax so levied, charged and
paid shall be provisional and the same shall be adjustable E
towards the tax due from the dealer on such purchase as a
result of assessment or re-assessment made in accordance
with the provisions of this Act and the rules made there-
under on the production of proof regarding the payment
thereof in the State."
F
Again a batch of writ petitions was filed questioning the validity of
the amended provision which challenge too was upheld by the High Court
in its decision in Bata India Ltd. v. State of Haryana, 54 S.T.C. 226. The
main ground upon which the High Court allowed the writ petltioµs w<\S G
that mere despatch of goods to a place outside the State in any manner
other than by way of sale in the course of inter-State trade or commerce
is synonymous with or is i11 any c~sc included within the qmbit of consi~~Jl
ment of goods to the person making it or to any other person in the co11rse
of inter-state trade or commerce as specified in Article 269(1)(iv) and
Entry 92(8) of List-I of the Seventh Schedule to the Coqs\itution and thus H
236 SUPREME COURT REPORTS (1992] SUPP. 2 S.C.R.

A beyond the competence of the State legislature. According to the High
Court, the taxable event was not the purchase of goods nor the use of such
goods in manufacture of end-products but the despatch of goods.

Douoting the view taken in Bata India, one of the learned Judges of
the Punjab and Haryana High Court, Punehhi, J. (as he then was) referred
B the matter to a Full B_ench which took a different view in Desraj Pushp
Kumar Gulati v. State of Punjab, 58 S.T.C.393. The Full Bench was of the
view that according to Section 9 (amended) the taxing event is the act of
purchase of goods which are used in the manufacture of end-products and
not the act of despatch or consignment as held in Bara India.
c
The correctness of all the three decisions aforesaid was questioned
in appeals filed before this Court. The appeals were heard by a Bench
comprising Sabyasachi Mukharji, J. (as he then was) and one of us (S.Ran-
ganathan, J.). Mukharji, J., in his separate judgment, set out the test for
D determining the taxable event in the following words: "It is well settled that
the main test for determining the taxable event is that on the happening of
which the charge is affixed. The realisation often is postponed to further
date. The quantification of the levy and the recovery of tax are also
postponed in some cases .......1~axable event is that which on its occurrence
creates or attracts the liability to tax." Then the learned Judge proceeded
E to analyse Section 9 (amended) and concluded as follows: "Analysing the
section it appears to us that the conditions specified, before the event of
despatch outside the State as mentioned in Section 9(1)(b) namely, (i)
purchase of goods in the State and (ii) using them for the manufacture of
any other goods in the State, are only descriptive of the goods liable to tax
F under Section 9(.1 )(b) in the event of despatch outside the State. If the
goods do not answer both the descriptions cumulatively, even though these
are despatched outside the State of Haryana, the purchase of those goods
would not be tax under Section (l)(b) ..... The liability to pay tax in this
section does not accrue on purchasing the goods simplicitor, but only when
these are despatched or consigned out of the State of Haryana. In all these
G cases, it is necessary to find out the true nature of the tax. Analysing the
Section, if one looks to the purchase tax under Section 9, one gets the
conclusion that the Section itself does not provide for imposition of the
purchase tax on the transaction of purchase of the taxable goods but when
further the said taxable goods are used up and turned inlo independent
H taxable goods, losing its original identity, and thereafter when the manufac-
HOTEL B1".LAfl v. STATE Of AP. [JEEVAN REDDY, .J.J 237

lured goods arc despatched outside the State of Haryana and only then tax A
is levied and liability to pay tax is created." Accordingly, the learned Judge
held, the tax is in the nature of a consignment tax which the Parliament
alone could impose and not the State legislature.

The correctness of the said view is questioned by the learned counsel
for the State of Andhra Pradesh and other counsel appearing for the State B
Governments. The question for our consideration is whether the learned
Judge was not right in holding that the taxable event under the section is
not the purchase of goods used in the manufacture of end-oroducts but the
despatch of manufactured goods to out-state destinations.

The other provision considered in the said decision is the one con-
c
tained in Section BAA of the Bombay Sales Tax Act. The said provision
which was introduced into the Act by the Maharashtra Act (28 of 82) read
as follows at the relevant time:

"13AA. Purchase tax payable on goods in Schedule C, Part D
I, when manufactured goods are transferred to outside
branches. ·

Where a dealer, who is liable to pay tax under this Act,
purchases any goods specified in Part I of Schedule C,
directly or through Commission agent, from a person who
E
is or is not a Registered dealer and uses such goods in the
manufacture of taxable goods and despatches the goods,
so manufactured, to his own place of business or to his
agent's place of business situated outside the State within
India, then such dealer shall be liable to pay, in addition F
to the sales tax paid or payable, or as the case mav be, the
purchase tax levied or leviable under the other provisions
of this Act in respect of purchases of such goods, a pur-
chase tax at the rate of two paise in the rupee on the
purchase price of the goods so used in the manufacture,
G
and accordingly the dealer shall include purchase price of
such goods in his turnover of purchases in his return under
Section 32, which he is to furnish next thereafter."

The validity of ti1e said provision was challenged inter a/ia by Hin-
dustan Lever Limited which was negatived by the Bombay High Court in H
238 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A its decision reported in 72 S.T.C. 69. The High Court was of the opinion
that the additional purchase tax leviable under the said provision is on the
purchase value of V.N.E.Oil used in the manufacture of goods transferred
outside the State and not on the value of the manufactured goods so
transferred. It held further that the goods taxed under Section 13AA are
consumed in the State as raw rrtaterial in the process of manufacturing
B other commodities and therefore tax imposed thereon cannot be said to
hinder the free flow of trade wi.thin the meaning of Article 301 of the
Constitution.

The question again was which is the taxable event according to
c Section 13AA. Mukharji, J. on an analysis of the section held that the
taxable event is the despatch of manufactured goods outside the State
which means that the levy is beyond the competence of the State legisla-
ture. The attack based upon Article 301 of the Constitution was, however,
repelled.

D
Though agreeing with the conclusion arrived at by Mukharji, J.,
Ranganathan, J. made a few pertinent observations in his separate opinion.
The learned Judge opined that both Section 9 of the Haryana Act and
Section 13AA of the Bombay Sales Tax Act "purport only to levy a
purchase tax" and further that "the tax, however, becomes exigible not on
E the occasion or event of purchase but only later. It materialises only if the
purchaser (a) utilises the goods purchased in the manufacture of taxable
goods and (b) despatches the goods so manufactured (otherwise than by
way of sale) to a place of business situated outside the State. The legisla-
ture, however, is careful to impose the tax only on the price at which the
F raw materials are purchased and not on the value of the manufactured
goods consigned outside the State. The State describes the tax as one levied
on the purchase of a class of goods viz., those purchased in the State and
utilised as raw material in the manufacture of goods which are consigned
outside the State otherwise than by way of sale." The learned Judge opined:
"to me it appeared as plausible to describe the levy as a tax on purchase
G of goods inside the State (which attaches itself only in certain eventualities)
as to describe it as a tax on goods consigned outside the State but limited
to the value of raw material purchase inside the State and utilised thercin. 11
The leaarned Judge stated that he had "considerable doubts" as to the
taxable event but that on further reflection he was inclined to agree with
H S.Mukharji, J. that the tax though described as a purchase tax actually
llOTH BALNI i-. STATE OF AP. [JEEVAN REDDY, l] 239

became effective with reference to a totally different class of goods and A
that too only on the happening of an event which is unrelated to the Ael.
of purchase and, therefore, in truth and essence, it was a consignment tax.

The crucial question, therefore, is what is the basis of taxation in
either of the above provisions? In other words, the question is whether levy
of tax is on the purchase of goods or upon the consignment of the B
manufactured goods? Let us first deal with Section 9 of the Haryana Act
(as amended in 1983). Properly analysed, the following are the ingredients
of the Section: (i) a dealer liable to pay tax under the Act purchases goods
(other than those specified in Schedule B) from any sou,-ce in the State
and (ii) uses them in the State in the manufacture of any other goods and c
(iii) either disposes of the manufactured goods in any manner otherwise
than by way of sale in the State or despatches the manufactured goods to
a place outside the State in any manner otherwise than by way of sale in
the. course of a inter-State trade or commerce or in the course of export
outside the territory of India within the meaning of sub-section (1) of D
Section 5 of the Central Sales Tax Act, 1956. If all the above three
ingredients are satisfied, the dealer becomes liable to pay tax on the
purchase -0[ such goods at such rate, as may be notified under Section 15.

Now, what does the above analysis signify? The section applies only
in those cases where (a) the goods are purchased (for convenience sake, I E
may refer to them as raw material) by a dealer liable to pay tax under the
Acl in the State, (b) the goods so purchased cease to exist as such goods
for the reason they are consumed in the manufacture of different com-
modities and (c) such manufactured commodities are either disposed of
within the State otherwise than by way of sale or despatched to a place F
outside the State otherwise than by way of an inter-State sale or export
sale. It is evident that if such manufactured goods are not sold within the
Slate of Haryana, but yet disposed of within the State, no tax is payable on
such disposition; similarly, where manufactured goods are despatched out
of State as a result of an inter-State sale or export sale, no tax is payable
on such sale. Similarly again where such manufactured goods. are taken out G
of State to manufacturers' own depots 9r to the depots of his agents, no
tax is payable on such removal. Goodyear takes only the last eventuality
and holds that the taxable event is the removal of goods from the State and
since such removal is to dealers' own depots/agents outside the State, it is
consignment, which cannot be taxed by the State legislature. With the H
240 SUPREME COURT REPORTS IJ992J Sl_IPP. 2 S.C'.R.

A greatest respect at our command, \Ve heg to disagree. The levy created by
the said provision is a levy on the purchase of ra\v material purchased
within the State which is consumed in the manufacture of other goods
within the Stale. If, however, the manufactured goods are sold within the
State, no purchase tax is collected on the raw material, evidently because
the State gets larger revenue by taxing the sale of such goods. (The value
B
of manufactured goods is bound to be higher than the value of the raw
material). The State legislature does not wish to - in the interest of trade
and general public - tax both the raw material and the finished (manfac-
tured) product. This is a well-known policy in the field of taxation. But
where the manufactured goods are not sold within the State but are yet
c disposed of or where the manufactured goods are sent outside the State
(otherwise than by way of inter-State sale or export sale) the tax has to be
paid on the purchase value of the raw material. The reason is simple: if the
manufactured goods are disposed of otherwise than by sale within the State
or are sent out of State (i.e., consigned to dealers own depots or agents),
D the State does not get any revenue because no sale of manufactured goods
has taken place within Haryana. In such a situation, the State says, it would
retain the levy and collect it since there is no reason for waiving the
purchase tax in these two situations. Now coming to inter-State sale and
export sale, it may be noticed that in the case of inter-State sale, the State
E of Haryana does get the tax-revenue · may not be to the full extent. Though
the Central Sales Tax is levied and collected by the Government of India,
Article 269 of the-Constitution provides for making over the lax collected
to the States in accordance with certain principles. Where, of course, the
sale is an export sale within the meaning of Section 5(1) of the Central
Sales Tax Act (export sales) the State may not gel any revenue but larger
F national interest is served thereby. It is for these reasons that tax 00 the
purchase of raw material is waived in these two situations. Thus, there is a
very sound and consistent policy underlying the provision. The object is to
tax the purchase of goods by a manufacturer whose existence as such goods
is put an end to by him by using them in the manufacture of different goods
G in certain circumstances. The tax is levied upon the purchase price of raw
material, not upon the sale price - or consignment value - of manufactured
goods. Would it be right to say that the levy is upon consignment of
manufactured goods in such a case? True it is that the levy materialises
only when the purchased goods (raw material) is consumed in the manufac-
H ture of different goods and those goods are disposed of within the State
HOTEL BALAll "· STATlo OF A.P. [JEEVAN REDDY. J.J 241

otherwise than by way of sale or are consigned to the maufacturing-dealer's A
depots/agents outside the State of Haryana. Bui does that change the
nature and character of the levy? Docs such postponen1ent - if one can call
it as such - convert what is avowedly a purchase tax what is on raw n1aterial
(levied on the purchase price of such raw material) to a consignment tax
on the manufactured goods? We think not. Saying otherwise would defeat
B
the very object and purpose of Section 9 and amount to its nullification in
effect. The most that can perhaps be said is that it is plausible (as pointed
out by Ranganathan, J. in his separate opinion) to characterise the said tax
both as purchase tax as well as consignr11ent tax. But where two interpreta-
tions are possible, one which sustains the constitutionality and/or effec-
tuates its purpose and intendment and the other which effectively nullifies c
the proVision, the former must be preferred, according to all known canons
of interpretation. This is also the view expressly approved by Mukharji, J.
in his opinion, as pointed out hereinbefore. In para 71 of his opinion, the
learned Judge states: "it is well settled that reasonable construction should
be followed and literal construction may be avoided if that defeats the D
manifest object a11d purpose of the Act. Commissioner of Wealth Tax, Bihar
and Orissa v. Kirpa Shankar Daya Shankar Vorah (1971) 81 !TR 763 at page
768 and Income Tax Commissioners for City ofLondo11 v. Gibbs' (1942) 10
!TR Suppl. 121 at page 132 (H.L.)".

(emphasis supplied) E

However, we would presently show that merely because the levy
attaches on the happening or non-happening of a subsequent event, the
nature and character of the lc\.y does not change. In several enactments,
for instance, tax is levied at the last sale point or last purchase point as F
1

the case may be. How does one determine the last purchase point in the
State? Only when one knows that no purchase took place "ithin the State
thereafter. But that can only be known later. If there is a subsequent
purchase within the State, the purchase in question ceases to be the last
purchase. As pointed out pertinently by P.S.Poti, J. (as he then was) in
Malabar Fruit Products Company a11d Ors. v. The Sales Tax Officer a11d Ors., G
(1972) 30 S.T.C. 537, applying the logic of the dealers, it would not be
possible to tax any goods at the last purchase point in the State, inasmuch
as the last purchase p0int in regard to any goods could be determined only
when the goods are sold later and not when the goods are purchased. In
the said decision, the learned Judge was dealing with the validity and H
242 SUPRl'ME COURT REPORTS [l992J SUPP. 2 S.C.R.

A construction of Section 5-A of Kerala General Sales Tax Act, 1963, sub-
section (l) whereof read as follows:

"SA. Levy of purchase tax - (1) Every dealer who in the
course of his business purchases from a registered dealer
or from any other person any goods, the sale or purchase
B of \.vhich is liable to tax under this Act, in circu111stances in
which no tax is payable under Section 5, and either -

(a) consumes such goods in the manufacture of other
goods for sale or otherwise; or
c (b) disposes of such goods in any manner other than by
way of sale in the State; or

(c) despatches them to any place outside the State except
as a direct result of sale or purchase in the course of
D inter-State trade or commerce, shall whatever be the
quantum of the turnover relating to such purchase for
1
that year at the rates mentioned in Section 5. '

One of the arguments orged against the validity of the said provision
was that inasmuch as the tax is levied depending upon the mode in which
E the goods purchased are consumed, disposed of or despatched, the tax is
really one in the nature of consumption tax or use tax, but not sales tax.
This argument was answered by the learned Judge in the following words:

"According to me, this contention is based on a misconcep-
F tion of the scope of taxation on the sale of goods. It is true
that sales tax is a tax imposed on the occasion of the sale
of goods. But it has no reference to the point of time at
which the sale or purchase takes place. It refers to the
connection with the event of purchase or sale and not the
point of time at which such purchase or sale takes place.
G To read it otherwise would render any retrospective im-
position of sales tax invalid as in every such case the tax
would not be one which arises on the occasion of sale. By
the same logic, it would not be possible to tax any goods at
the last purchase point in the State, for the last purchase
H point in regard to any goods could be determined only
HOTEL BALAJI v. STATE OF AP. [JEEVAN REDDY, J.] 243

when the goods arc sold later and not when the goods are A
purchased. On the same reasoning as urged hy counsel,
one should say in such a case that since the goods arc taxed
only when the goods are sold outside the State or are
despatched for such sale outside the State and so the last
purchases are taxed not on the occasion' of the purchases
11 1

B
and, consequently, it is beyond the competence of the
Legislature. That certainly cannot be and the Supreme
Court has held in the decision in State of Madras v.
Narayanaswami Naidu, (1968) 21 S.T.C.1 (S.C.), that the
goods are taxable in such cases in the financial year when
they become the last purchases." c
The decision of Poli, J. was affirmed by a Division Bench of Kerala
High Court in Yusuf Shabeer and Ors. v. State of Kera/a and Ors., (1973)
32 S.T.C. 359. Both these decisions were expressly referred to and ap-
proved by a three-Judge Bench of this Court in State of Tamil Nadu v. D
Kandaswami and Ors., (1975) 36 S.T.C. page 191. Kandaswami was con-
cerned with the construction of Section 7-A of the Tamil Nadu General
Sales Tax Act which too a levied purchase tax and is couched in language
similar to Section 5-A of the Kerala Act. While dealing with the scheme
of Section 7-A, this court quoted with approval certain passages from the
judgment of Poti, J. including the following sentence: E

"If the goods arc not available in the State for subsequent
taxation by reason of one or other of the circumstances
mentioned in clauses (a), (b) and {c) of Section 5-A(l) of
the Act then the purchaser is sought to be made liable
F
-i under Section 5-A. 1'

This statement accords with our understanding of the scheme of
Section 9 of Haryana Act as set out hereinabove. To repeat, the scheme
of Section 9 of Haryana Act is to levy the tax on purchase of raw material
and not to forego it where the goods manufactured out of them are G
disposed of (or despatched, as the case may be) in a manner not yielding
any revenue to the State nor serving the interests of nation and its economy,
as explained hereinbefore. The purchased goods are put an ~nd to by their
consumption in manufacture of other goods and yet the manufactured
goods are dealt with in a manner as to deprive the State of any revenue; H
244 SUPREME COllRT REPORTS [1992] SUPP. 2 S.C.R.

A in such cases, there is no reason why the State should forego its tax revenue
on purchase of ra\\' material.

Another observation in f(andaswa1ni relevant for the present purpose
may also be noticed:

B "It may be remembered that Section 7-A is at once a
charging as well as a :remedial provision. Its main object is
to plug leakage and prevent evasion of tax. In interpreting
such a provision, a construction which would defeat its
purpose and, in effect, obliterate it from the statute book,
c should be eschewed. If more than one construction is
possible, that which pre,ervcs its workability and efficacy
is to be preferred tc the one which would render it otiose
or sterile. The view taken by the High Court is repugnant
Lo this cardinal can~n of interpre1ation. 1'

D In the light of the above scheme of Section 9, it would not be right,
in our respectful opinion, to say that the tax is not upon the purchase .of
ra\v rnaterial but on the consignment of the manufactured goods. It is
well-settled that ta..Ung power can be utilised to encourage commerce and
industry. It can al~o be used to scne the interests of economy and promote
social and economic planning. Section 9 of 1-Iaryana Act and Section 13.AA
E
of Bombay Act are intended lo encourage the indu,try and at the same
ti1nc deri\·e revenue. It is also not right to concentrate only on one situation
viz.~ con"!ignn1cnt of goods to manufacturer's own depots (or to the depots
of his agents) outside the State. Disposal of goods \vithin the State without
effccling a SJ le also stards on the same footing, an inst.anc~ of which may
F be captive consumpt1nn of manufactured products in the manufacture of
yet other products. Once the scheme and policy of the provision is ap-
preciated, there is no room, in our respectful opinion; for saying t bat the
tax is on the consignment of rnanufac.tt1red goods.

\Ve may in this connection refer to the decision of a Constitution Bench
G
of this Court in Andhra Sugars v. State of Andhra Pradesh, 21 S.T.C. 212,
relating to the validity of Section 21 of the A.P. Sugarcane Regulation of
Supply and Purchase Act, 1961. Sub-section (1) of Section 21 read as follows:

"21. (1) The Government may, by notification, levy a tax at
H such rate not exceeding five rupees per metric tonne as
HOTEL BALAJI v. STATE OF A.P. [JEEVAN REDDY, J.] 245

may be prescribed on the purchase of cane required for A
use) consumption or sale in a factory."

One of the arguments urged against the validity of the levy was that
since the levy is not on every purchase of sugarcane but only 11 on the
purchase of cane required for use, consumption or sale in a f3ctory 11 the
tax is not really a purchase tax referable to Entry 54 of List 11 of the Vllth B
Schedule to the Constitution but a use tax, a tax of a different character
altogether not falling under Entry 54. It was also argued that since the tax
is levied at the stage of entry of cane into the factory for being used and
consumed in t·hc manufacture of sugar, it is in the nature of an entry tax
but since the factory was not a "local area" within the meaning of Entry 52 c
of List II, the levy was incompetent. Both the arguments were rejected in
the following words:

"Under that entry, the State Legislature is not bound to
levy a tax on all purchase of cane. It may levy a tax on
D
purchases of cane required for 11 use, consumption or sale
in a factory. The Legislature is competent to tax and also
to exempt from payment of tax sales or purchases of goods
required for specific purposes. Other instances of special
treatment of goods required for particular purpose may be
given. Section 6 and Schedule l, item 23 of the Bombay E
Sales Tax Act, 1946, by tax on fabrics and articles for
personal wear. Section 2G)(a)(ii) of the C.P. and Berar
Sales Tax Act, 1947, exempts sales of goods intended for
use by a registered dealer as raw materials for the manufac-
ture of goods. F

Mr. Chatterjee submitted that the tax levied under
Section 21 was a use tax and referred to Mcleod v. Dilworth
and Co. 322 U.S. 327; 88 L.Ed. 1305, and C.G. Naidu and
Co. v. The State of Madras, A.l.R. 1953 Mad. 116, 127-128;
3 STC 405. He argued that the State Legislature could not G
levy a use tax which was essentially different from a
purchase tax. The assumption of counsel that Section 21
levies a use tax is not well-founded. The taxable event
under Section 21 is the purchase of goods and not the use
or enjoyn1ent of what is purchased. The constitutional H
246 SUPREME COURT REPORTS [1992J SUPP. 2 S.C.R.

A implication of a use tax in American law is entirely ir-
relevent." ..... .

1
'To appreciate another argument of Mr. Chatterjee, it is
necessary to refer to a few facts. It appears that paragraph
21 of the Bill published in the Gazette on March 3, 1960,
B preliminary to the passing of Act No. 45 of 196l provided
for a levy of a cess on the entry of cane into the premises
of a factory for use, consumption or sale therein. On
December 13, 1960, this court in Diamond Sugar Mills Ltd.,
and Another v. The State of Uttar Pardesh and Another,
c [1961] 3 S.C.R. 242, struck down a similar provision in the
U.P. Sugarcane CessAct, 1956, on the ground that the State
Legislature was not competent to enact it under Entry 52,
List II, as the premises of a factory was not a local area
within the meaning of the entry. Having regard to this
decision, paragraph 21 of the Bill was amended and Section
D
21 in its present form was passed by the State Legislature.
The Act was published in the Gazette on December 30,
1961. Mr. Chatterjee submitted that in this context the levy
under Section 21 was really a levy on the entry of goods
into a factory for consumption, use or sale therein. \Ve are
E unable to accept this contention. As the proposed tax on
the entry of goods into a factory was unconstitutional,
paragraph 21 of the original Bill was amended and Section
21 in its present form was enacted. The tax under Section
21 is essentially a tax on purchase of goods. The taxable
event is the purchase of cane for usei consumption or sale
F
in a factory and not the entry of cane into a factory. As the
tax is not on the entry of the cane into a factory, it is not
payable on cane ctJtivated by the factory and entering the
factory premises."

G For the above reasons, we find it difficult to agree with the reasoning
of Mukharji, .l, in Goodyear. It is also not possible to agree with the learned
Judge when he says that 1'thc two conditions specified, before the event of
despatch outsi<le the State as mentioned in Section 9(l)(b), namely (i)
purchase of goods in the State and (ii) using them for the manufacture of
H any other goods in the State are only descriptive of the goods liable to tax
HOTEL BALNI 1•. STATE OF AP. [JEEVAN REDDY. J.j 247

under Section 9(l)(b) in the event of despatch outside the State". When A
the tax is levied on the purchase of raw material, on the purchase price -
and not on the manufacture of goods or on the consignment value (such a
concept is unknown to Haryana Act) or sale price of the manufactfured
goods - the above construction, in our respectful opinion, runs against the
very grain of the provision and has the effect of nullifying the very
provision. By placing the said interpretation, Section 9 has been rendered
B
nugatory; except for the two minor areas pointed out in Murli Manohar and
Company v. State of Haryana, [1991] 1 S.C.C. 377, the Section - which has
its parallels in all the State enactments - has practically become redundant.
This was the main reason we undertook to reconsider the said decision which
course we would not have ordinarily agreed to adopt. In our respectful c
opinion, the tax purports to be and is in truth a purchase tax levied on the
purchase price of raw material purchased by a manufacturer. In certain
situations (the three situations mentioned above viz., sale of manufactured
goods within the State, inter-State sale and export sale of manufactured
goods) it is waived. In other cases, it is not.
D
It is argued for the assessees that apart from Goodyear a Bench of
three Judges of this Court has independently approved and affirmed the
correctness of the ratio and reasoning in Goodyear. Reference is to
Mukerian Papers Ltd. v. State of Punjab, [1991] 2 S.C.C. 580. The case arose
under the Punjab General Sales Tax Act and the provision which fell for E
interpretation was Section 4B. It levied purchase tax on the raw material
used in the manufacture of goods which in turn are sold outside the State
otherwise than by way of sale in the course of inter-State trade or com-
merce or in the course of export out of the territory of India. The argument
for the assessee/appellant was "that the main question of law involved in F
this case is concluded by the decision of this court in Goodyear India Ltd.
v. State of Haryana which was an appeal arising from the High Court's
decision in the case of the same assessee ..... ". It was this contention which
was examined by the Bench. Section 4B of the Punjab Act was analysed
and it was found that it is in material particulars, similar to Section 9 of
the Haryana Act even though the language was not identical. Ahmadi, J. G
speaking for the Bench observed: "therefore, even though the language of
Section 4B of the Act is not identical with the relevant part of Section 9(1)
of the Haryana Act, it is in substance similar in certain respects, particular-
ly in respect of the point of time when the liability to pay tax arises. Under
that provision, as here, the liability to pay purchase tax on the raw material H
248 SUPREME COURT REPORTS [19921 SUPP. 2 S.C.R.

A purchased in the State which was consumed in the manufacture of any
other taxable goods arose only on the despatch of the goods outside the
State. We are, therefore, of the opinion thal the ratio of the said decision
of this Court in Goodyear India Ltd. applies on all fours to the main
question~at issue in this case. ' When the counsel for the revenue sought to
1

argue that the decision of this court in Kandaswami takes a different view
B
the Bench did not permit !he same to be urged in the view of the fact that
the correctness of the judgment in Goodyear was not canvassed before
them. The Bench said "the decision in Kandaswami though in the context
of an analogous provision was distinguished by this court in Goodyear India
Ltd. on the ground that it did not touch the core of the question at issue
c in the latter case. This aspect of the matter is elaborately dealt• \\1th in
paragraphs 31 to 34 at page 796 of the report. We need nol dilate on this
any more since the correctness of the judgment in Goodyear India Ltd. is
not canvassed before us. 11

D It is, thus, clear that the main argument for the Bench was that the
ratio of Goodyear governs the said case and it was so found. It is equally
clear that the correctness of the decision in Goodyear was not questioned
before the Bench and that is why the Bench took care to specifically advert
to and record the said circumstance.

E So far as the decision in Murli Manolwr & Co. v. State of Haryana
[1991] I S.C.C. 377 is concerned, it arose under Haryana Sales Tax Act
and explains the meaning of export sale referred to in Section 9{l)(b) of
the Act. There is no discussion in this decision about the point at issue
before us.
F
The same is the position under Section BAA of the Bombay Sales
Tax Act. The said provision, properly analysed, yields the follo\\ing in-
gredients: (i) where a dealer who is liable to pay tax under this Act
purchases any goods specified in Part I of Schedule (C) either directly or
through commission agent, from a person who is or is not a registered
G dealer and (ii) uses such goods in the manufacture of taxable goods and
(iii) despatches Ihe goods so manufactured to his own place of business or
to his agcnl's place of business situated outside the Slate within India, (iv)
such dealer shall pay, in addition lo the sales tax/purchase lax paid or
payable or levied or leviahle, as the case tnay be, a purchase tax at the rate
H of t\vo paise in the rupee on the purchase price of the goods so used in
HOTEL BALAII v. STATio OF A.I'. iJEEVAN REDDY. J.] 249

the manufacture. Here again it may be noticed that the tax levied is a A
purchase tax on the purchase of raw material and not upon tht; consign-
ment of the manufactured goods. The object of this provision too is the
•., same as of the Haryana provision. The levy is \vaived where the tnanufac-
tured goods are sold within the State, or sold in the course of inter-State
trade or commerce or sold in the course of export. It is retained and
collected where the goods are taken out of Maharashtra Stale by v:ay of
B
consignment, in which event the State sees no reason not to retain and
collect the levy on purchase of raw material. The provision is substantially
similar to Section 9 of Haryana Act. Whatever we have said with respect
to the Haryana provision applies equally to this provision. It is not neces-
sary to repeat the same here. c
Before parting with this matter) it is necessary to clarify an aspect: it
was brought to our notice that both the Haryana and Bombay provisions
have since been substituted with retrospective effect. We have not referred
to those provisions in this part, for the reason that we are concerned only
with the reasoning in Goodyear. D
For the reasons mentioned above, we uphold the constitutional
validity of the impugned provisions.

The appeals, writ petitions, S.L.Ps. and T.C. accordingly fail and arc
dismissed. No order as to costs. E
G.N. Petitions clismissed.