Holding

The tax under section 4B is a tax on the consignment of goods and becomes payable only when the manufactured goods are dispatched outside the State; such a levy is beyond the State’s constitutional competence, rendering the tax, penalty and interest unlawful.

Issues considered

Whether the purchase tax under section 4B of the Punjab General Sales Tax Act becomes exigible at the time of purchase of raw material or only upon dispatch of the manufactured goods outside the State.
Whether the State Legislature has the constitutional competence to levy a tax on the consignment of goods sent outside the State.
Whether penalty and interest can be imposed when the underlying tax liability is held to be invalid.

Legislation cited

Haryana Sales Tax Act, 1974s. 24(3), s. 9(1)
Punjab General Sales Tax Act, 1948s. 10(6), s. 11, s. 4B

Subjects

purchase taxconsignment taxinter‑state saletax liabilitypenaltyinterestconstitutional validityArticle 269Section 4BPunjab General Sales Tax Act

Judgment

MUKERIAN PAPERS LTD. A'

.....iP V.
STATE OF PUNJAB

FEBRUARY 13, 1991 ·
[RANGANATH MISRA CJ M.N. VENKATACHALIAH, B
A.M. AHMADI, JJ.]
Punjab General Sales Tax Act, 1948: Sections 4B, 10(6) and
--~ 11 D-Raw Material consumed in manufacture of goods sent outside the
State-Purchase Tax on such raw material-Levy of_:_Wheiher valid
interest and penalty on such levy-Imposition of.
,__ c
The appellant, a registered dealer under the Punjab General
Sales Tax Act, 1948 despatched some part of the manufactured goods
outside the state, without paying the tax on the taxable raw material
consumed in the manufacture of such goods. The assessing authority
·~
issued a show cause notice for the assessee's failure to pay the said tax.
D
Interest was also demanded on the tax amount; The assessee disputed
its liability to pay penalty and interest on the amount of tax withheld on
the plea that thete was no wilful default on its part; as it was under a
bona fide belief that no tax was to be paid on the raw material used in
the manufactured goods sent outside State. The assessee further stated
that it had acted on legal advice that it was not liable to pay any Pur-
chase Tax and, therefore, in the absence of a clear intention to avoid the E
.-> -~
payment of tax, there could be no question of imposition of penalty and
demand for interest. The assessee's submissions did not f'lnd favour
with the Revenue, as also the Tribunal,· and the assessee sought a refe-
rence to the High Court under section 22(1) of the Act. But the Tribunal
rejected application for reference. Thereafter the assessee preferred
appeals to this Court, against the Tribunal's rejection of reference as F

...... -- also the Tribunal's order in appeal .

On behalf of the appellants, it was contended that the main question
involved in this case is concluded by several decisions of this Court, and
it was not liable to pay the tax, as demanded by the Revenue.
G
On behalf of the Revenue it was contended that the assessee was
liable to pay the tax on the raw materials used in the manufactured
goods sent outside the State.
\

Allowing the appeals, this Court,
H

347
348 SUPREME COURT REPORTS [1991] 1 S.C.R,

+·
-
HELD: 1.1 Under Section 4B of the Punjab General Sales Tax
A
Act, 1948 the tax becomes exigible not on the purchase of the raw
material or on the use thereof in the manufacture of a new and distind
commodity but only after the goods so manufactured are despatched to
a place outside the State. Once the goods are sent outside the State the
purchaser is made liable to pay the tax at the rate prescribed on the
B purchase of such goods provided no tax is payable on the purchase
thereof under any other provision of the Act. it is obvious that the tax
though described as purchase tax is in effect a tax on consignment since
it becomes effective on the happening of an event which has nothing to
do with the actual purchase. Even if the raw material is used in the
manufacture of any taxable goods, the purchaser does not become liable
c
to pay tax on the raw material until the manufactured item is sent out of
the State. And between the manufacture of the goods out of the
-
purchased raw material and their actual despat~ ~utside the State
there may be a long time gap. The liability of- tax falls only after
despatch of the manufactured goods outside the State and that event
may have no relation to the actual purchase or manufacture. That being
D so, the tax though described as a purchase tax is actually a tax on the
consignment of the manufactured goods, the levy of which is beyond the
competence of the State Legislature as the power to impose such tax is vested
in· Parliament by virtue of clause (h) of Article 269(1) of the Constitution
read with Entry 92B in Schedule 7, List I. [352H; 353A-E; 354B]

E 1.2. Even though the language of section 4B of the Act is not
identical to section 9(1) of the Haryana Sales Tax Act, it is in substance
similar in certain respects, particularly in respect of the point of time
when the liability to pay tax arises. Under that provision also the liabi-
lity to pay purchase tax on the raw material purchased in the State
which was consumed in the manufacture of any other taxable goods
F arose only on the despatch of the goods outside the State. [353D-E]

Mis. Goodyear India Ltd. v. State of Haryana, AIR 1990 SC 781;
applied.

State of Tamil Nadu v. M.K. Kandaswami etc., [1976] 1SCR38;
G referred to.

2. Since the Revenue was not entitled to levy the tax which it
purported to levy as purchase tax on the raw material, there can be no
>--
question of imposition of penalty or interest on the unpaid amount of
tax. Therefore, the action taken in exercise of power under section 10(6)
H and section HD of the Act cannot be allowed to stand. [354G-H]
MUKERIAN PAPERS v. STATE OF PUNJAB [AHMADI, J.) 349

~ CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 936 A
, _./ (NT), 937, 2339 & 2340 of 1988.

From the Judgments and Orders dated 12.8.1987, 3. 7 .1986, and
22.8.1988 of the Sales Tax Tribunal, Punjab in Misc. Reference No. 60 of
1986-87, First Appeal No. 379 of 1986 and in Appeal Nos. 46 and 47 of
1987-88. B

- ~ V.M. Tarkunde, R.C. Misra and Ms. Meera Aggarwal for the
Appellant.

,__ H.S. Munjral and C.M. Nayar for the Respondent.

The Judgment of the Court was delivered by
c
AHMADI, J. the assessee-appellant M/s. Mukerian Papers Ltd.,
-~ is a company engaged in the manufacture of paper at Mukerian in the
State of Punjab and is a registered dealer under the Punjab General
Sales Tax Act, 1948 ('The Act' hereinafter). The assessee despatched D
some part of the manufactured goods outside the State of Punjab for
sale on cosignment basis. However, the assessee had not paid the taxes
on the taxable raw material consumed in the manufacture of such
goods. A show cause notice was, therefore, issued by the Assessing
"-'-. ~ Authority under section 10(6) of the Act for the assessee's failure to
pay the taxes along with the return as required by section 4B of the E
Act. Interest on the tax amount which the assessee had failed to pay
was also claimed under Section llD of the Act. The assessee disputed
its liability to pay penalty and interest on the amount of tax withheld
on the plea that there was no wilful or intentional default on the part
of the assessee to pay the taxes due under section 4B of the Act as the
-i assesee was under a bona fide belief that no tax was to be paid on the F
i --.....- raw material purchased for the manufacture of paper which was ulti-

mately sent outside the State on consignment basis. This impression,
based on the language of the statute, stood confirmed by the subse-
quent decisions of the Punjab & Haryana High Court in the case of
Goodyear India Ltd., 53 STC 163 and Bata India Ltd., 54 STC 226 till
those decisions were overruled by the Full Bench decision in Des Raj G
Pushpak Kumar's case 58 STC 393. The assessee further contended
- - - that it had acted on legal advice that it was not liable to pay any
" purchase tax and, therefore, in the absence of a clear intention to
avoid the payment of tax, there could be no question of imposition of
penalty and demand for interest. On the other hand it was contended
on behalf of the revenue that the two decisions on which the assessee H
350 SUPREME COURT REPORTS [ 1991] 1 S.C.R.

placed reliance were subsequent to the date on which the liability to , ...../._,-.._,_.
A pay the tax had arisen and hence the assessee could not take shelter '-
under the said two decisions. The submissions made on behalf of the o
assessee did not find favour with the Revenue. The assessee thereupon ·'
sought a reference under section 22(1) of the Act but the Presiding
Officer of the Tribunal by its order dated 12th August, 1987 rejected
B the application as he saw no point.of law to make a reference to the
High Court. Civil Appeals Nos. 936 and 937 of 1988 arise out of the
said order of 12th August, 1987. In the other tWo appals Nos. 2239 and
2240 of 1988 the appellants have cont(( to this Court tlirectly from the
Tribunal's order in appeal without going through the formality of seek-
.....
c
ing a reference under section 22(1) of the Act in view of the rejection
of a similar request by the impugned order of 12th August, 1987. This
Court granted special leave to appeal without insisting on the appel-
la'nt-assessee approaching the·High Court in view of the Full Bench
•.

--
decision of that Court in Des Raj's case. As the facts are identical and
common questions of law arise we have thought it proper to dispose of
all the four appeals by this common judgment. ·
D
Counsel for the assessee-appellant contended that the main
question of law involved in this case is concluded by the deeision of this
Court in M/s. Goodyear India Ltd. v. State of Haryana, AIR 1990 SC
781 which was an appeal arising from the High Court's decision in the
case of the same assessee reported in (1983) 53 STC 163 to which A~
E reference is made hereinabove. He further pointed out that while
deciding the true scope of section 9 of the Haryana General Sales Tax
Act, 1974, which, says counsel, is inpari materia with section 4B of our
Act, this Court affirmed the High Court's view expressed in Goodyear
India Ltd., 53 STC 163 and Bata India Ltd., 54 STC 226 and disap-
proved the Full Bench view in Des Raj's case 58 STC 393. Counsel for
P· the Revenue, however, placed strong reliance on this Court's decision ~ ).-,.:-
in State of Tamil Nadu v. M.K. Kandaswami etc., il976] 1SCR38 and ~ ).__ ·
submitted that the assessee's case falls within the ratio of the said
decision. But counsel for the assessee pointed out that this Court had
considered the ratio of Kandaswami's case in the subsequent decision
and had pointed out that in that case this Court was not concerned with
G the actual argument with which it was concerned in the subsequent
case and, therefore, the decision in the former case is not an authority
for the question of law involved in the subsequent case. In order to
appreciate the rival submissions it would, we think, be appropriate to
r
examine the language of section.4B of the Act, which reads as under:

H ''4B. Levy of Purchase tax on certain goods-
MUKERIANPAPERS v. STATE OF PUNJAB [AHMADI, J.] 351

Where a dealer who is liable to pay tax under this Act
A
purchases any goods other than those specified in Schedule
B from any source and-

(i) uses them within the State in the manufacture of
goods specified in Schedule B, or
B
(ii) uses them_ within the_ State .in the manufacture .of
-- ~
any goods, other than those specified in Schedule B,
and sends the goods so manufactured outside the
State in any manner other than by way of sale in the
course of inter-State trade or commerce or in the
course of export out of the territory of India; or
c
(iii) uses such goods for a purpose other than that of
resale within the State or sale in the course of inter-
State trade or commerce or in the course of export
out of the territory of India, or
.\ D
(iv) sends them outside the State other than by way
of sale in the course of inter-State trade or commerce
or in the course of export out of the territory of India,

and no tax is payable on the purchase ofsuch goods under
any other provision of this Act, there shall be levied a tax E
on the purchase of such goods at such rate not exceeding
the rate specified under sub-section (1) of section 5 as the
State Government may direct."

We may firs~ read the plain language of the section bearing in
___...
- I~
mind the contextual setting and the objective of the law. The section F
seeks to provide for the levy of purchase tax on certain goods. It seeks
to levy a tax on the purchase of goods, other than those specified in
Schedule B, which are used in the manufacture of goods specified in
Schedule B or in the manufacture of goods, other than those specified
in Schedule B and sent outside the State in any manner other than by
way of sale in the course of inter-State trade or commerce or in the G

---- course of export out of Indian territory provided of course no tax is
payable on the purchase of such goods under any provision of the Act.
' Where a dealer purchases raw material other than the goods referred
to in Schedule B and uses the said raw material within the State in the
manufacture of goods specified in Schedule B, he becomes liable to
purchase tax_ at the rate specified by the State Government not exceed- H
352 SUPREME COURT REPORTS [ 1991] 1 S.C.R.
. r
ing the maximum fixed under section 5(1) provided no tax is paid on ___..__.,.,,.
A
such goods under any other provision of the Act. However, when the \.__
raw material is used within the State in the manufacture of goods
under than the one specified in Schedule B and the manufacturer
'sends' the ,goods so manufactured outside the State in any manner
(other than by way of sale in the course of inter-State trade or com-
B merce or in the course of export out of India) he becomes liable to pay
purchase tax at the rate specified. To attract this provision the revenue --y--
m ust show that (i) the manufacturer is a dealer liable to pay tax under '
the Act (ii) h~ has purchased goods other than those specified in
Schedule B from any source (iii) he has used the said goods within the
State in the manufacture of any goods other than those specified in
Schedule B and (iv)·he has sent the goods so manufactured outside the
c State in any manner other than the one excepted. Before this provision
can be invoked the above requirements must be strictly proved. The
first requirement identifies the tax-payer, the second and the third '"r--
requirements identify the goods liable to .tax in the event the fourth
requirement of the goods so manufactured being sent outside the State
D takes place. Thus the liability to pay purchase tax does not accrue on 1-
the purchase of the raw material within the State or its use in the
manufacture of goods other than those specified in Schedule B but
falls on the dealer when the goods so manufactured are sent outside
the State. To avoid a duplication of the levy the charging-clause pro- ~·
vides that the purchase tax will be leviable under Section 4B provided
it is not leviable on the said goods under any other provision of the
Act. Although the purchase tax is levied on the raw material pur-
chased by .the manufacturer, the actual levy is postponed till after the
said raw material is consumed in the manufacture of another commer-
cially distinct commodity having its own separate identity and charac-
ter and is actually sent outside the State. The relevant date is the date
F on which the goods are sent outside the State. The taxable event takes ~~
place when the taxable goods are sent outside the State and not before - ---r \. ·
that date notwithstanding the fact that the raw material was purchased
and converted into a new commodity long before that date. In the
present case .since it is not disputed th~t the demand of purchase tax is
based on the fact that the goods manufactured within the State from
G raw material purchased earlier had been sent outside the State of sale
on consignment basis, we are concerned only with clause (ii) of Section
4B whereunder the tax liability accrues on the date the goods are sent
outside the State.
ir
Under Section 4B of the Act the tax becomes exigible not on the
H purcahse of the raw material or on the use thereof in the manufacture
MUKERIAN PAPERS v. STATE OF PUNJAB [AHMADI, J.] 353

of a new and distinct commodity but only after the goods so
A
manufactured are despatched to a place outside the State. Once the
goods are sent outside the State the purchaser is made liable to pay the
tax at the rate prescribed on the purchase of such goods provided no
tax is payable on the purchase thereof under any other provision of the
Act. It is, therefore, obvious that the tax though described as purchase
tax is in effect a tax on consignment since it becomes effective on the B
happening of an event which has nothing to do with the actual pur-
chase. Even if the raw material is used in the manufacture of any
taxable goods, the purchaser does not become liable to pay tax on the
raw material until the manufactured item is sent out of the State. And
between the manufacture of the goods out of the purchased raw mate-
rial and their actual despatch outside the State there may be a long
time gap. There is, therefore, no room for doubt that the liability of C
tax falls only after despatch of the manufactured goods outside the
State and that event may have no relation to the actual purchase or
manufacture. That being so, the conclusion is inescapable that the tax
though described as a purchase tax is actually a tax on the consignment
of the manufactured goods. Therefore, even though the language of D
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.
particularly 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 purchased in the State which was consumed in the
manufacture of any other taxable goods arose only on the despatch of E
the goods outside the State. We are, therefore, of the opinion that the

- ratio of the said decision of this Court in Goodyear India Ltd. (supra)
applies on all fours to the main question at issue in this case.

-
In the case of Goodyear India Ltd. (supra), this Court was con-
cerned with the interpretation of section 9( 1) and section 24(3) of the F
-Haryana A~t. The facts revealed that the assessee"company, which
-~ was· engaged in the manufacture of automobile tyres and tubes at its
factory at Ballabgarh in Haryana, had purchased raw materials from
within and outside the State for the manufacture of the said products.
After manufacturing the same, the assessee-company despatched
some part of the manufactured products to its depots ,outside the State. G
The revenue sought to recover purchase tax on the raw material
purchased in the State and consumed in the manufacture of such goods
under section 9(1) of the Haryana Act. The action of the revenue was
challenged in the High Court of Punjab. & Haryana. The High Court
held that both on principle and on precedent, a mere despatch of
goods to various depots of the assessee-company outside the State did H
354 SUPREME COURT REPORTS [1991] 1 S.C.R.

not fall within the ambit of the phrase "disposes of the manufactured
A goods in any manner otherwise than by way of sale" employed in
section 9( l)(a)(ii) of the Haryana Act. The High Court also held that
the decision of this Court in Kandaswami (supra) was not an authority
for the proposition that a mere despatch of goods outside the State fell
within the ambit of the said provision. This Court while upholding the
B final order passed by the High Court came to the conclusion that as the
tax levied was a tax on consignment of goods, the provisions imposing-
the said tax were beyond the competence of the State Legislature as Y--:
the power to impose such tax vested in Parliament by virtue of clause
(h) of Article 269(1) of the Constitution read with Entry 92B in
--1
Schedule 7. List I, inserted by the 46th Amendment to the Constitu-
tion. This Court also clarified that even before the amendments intro-
C . duced by the 46th Amendment came into effect, Entry 54, in List II of
-
the 7th Schedule read with Article 246(3) of the Constitution confer-
red power on the State Legislature to impose a tax on sale or purchase , y---
of goods and not on the mere consignment of goods,. since consign- · -.
ment of goods simpliciter is neither a sale nor purchase or disposal of
D goods. Holding that in substance the levy was sought on the consign-
ment of goods, this Court held that it was not liable to tax since the
State's power to tax did not extend that far.

Counsel for the revenue placed reliance on an earlier decision of
this Court reported in the case of Kandaswami (supra) which dealt
E with Section 7A of the Tamil Nadu Act which though not identical was
similar tci Section 9(1) of the Haryana Act. The decision in Kandas-
wami though rendered 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 in the latter case. This
aspect of the matter is elaborately dealt with in paragraphs 31 to 34 at
F page 796 of the Report. We need not dilate on this any more since the
correctness of the judgment in Goodyear India Ltd, is not canvassed
before us. This Court, therefore, affirmed the High court's view in
Goodyear India Ltd., 53 STC 163 and Bata India Ltd, 54 STC 226 and
disapproved of the Full Bench decision in the case of Des Raj 58 $TC
393.
G
Once it is found that the revenue was not entitled to levy the tax
which it purported to levy as purchase tax on the raw material, there
can be no qu_estion of imposition of penalty or interest on the unpaid
r
amout of tax. Therefor~, th~ action taken in exercise of power under
section 10(6) and sectio.p 1110 of the Act cannot be allowed to stand
H. and must be set aside. __;
MUKERIAN PAPERS v. STATE OF PUNJAB [AHMADI, J.] \355

In the result these appeals succeed. We allow all these appeals A
and set aside the decision of the Salex Tax Tribunal, Punjab, in each
case. Any recovery made under the impugned orders will be refunded
within a period of three months from today. Having regard-to the facts
and circumstances of the case, we make no order as to costs.
B
G.N. Appeals allowed.

-