Holding

Section 4A, insofar as it levies tax on the first point sale of drugs by reference to the MRP, is ultra vires because the measure of tax lacks a nexus with the actual sale transaction.

Summary

The Supreme Court examined the constitutional validity of Section 4A of the Rajasthan Sales Tax Act, 1994, which levied tax on the first point sale of drugs, medicines and formulations by wholesalers to retailers based on the Maximum Retail Price (MRP) printed on the package rather than the actual consideration paid. The Court held that the measure of tax must have a direct nexus with the taxable event and cannot rely on a notional future price, as this creates a legal fiction divorced from the sale defined under the Sale of Goods Act, 1930. Consequently, Section 4A, to the extent it bases tax on MRP, is ultra vires of Entry 54 of List II of the Seventh Schedule of the Constitution. The appeal was dismissed, upholding the High Court’s decision that the additional tax collected under Section 4A cannot be refunded and may be adjusted against future liabilities.

Issues considered

The constitutionality of Section 4A of the Rajasthan Sales Tax Act, 1994 which bases tax on MRP rather than actual sale price
Whether a tax measure must have a nexus with the taxable event under Entry 54, List II of the Constitution
Whether the use of MRP creates a legal fiction that is beyond the legislative competence of the State
Whether the additional tax collected under Section 4A can be refunded or adjusted

Legislation cited

Constitution of Indias. Entry 54, List II, Seventh Schedule
Drugs (Price Control) Order, 1995
Income Tax Act, 1961s. 206C, s. 44AC
Rajasthan Sales Tax Act, 1994s. 2(42), s. 2(44), s. 4, s. 4A
Sale of Goods Act, 1930
Standards of Weights and Measures Act, 1976

Subjects

sales taxconstitutional validitySection 4AMaximum Retail Pricenexustaxable eventlegal fictionEntry 54Rajasthan Sales Tax Actdrug price controlsale of goods

Judgment

STATE OF RAJASTHAN AND ANR. A
v.
RAJASTHAN CHEMIST ASSOCIATION

JULY 24, 2006

[ARIJIT PASAYAT AND TARUN CHATTERJEE, JJ.] B

Sales Tax:

Rajasthan Sales Tax Act, 1994-Sections 4A, 4, 2(44) and (42)-S.4A C
envisaged levy of sale tax on first point sale of notified drugs, medicines and
formulations by wholesaler/distributor/manufacturer to retailer on the premise
of subsequent sale by the retailer i.e. based upon the MRP declared on the
package-Validity of-Held: Measure to which sales tax rate is to be applied
must have a nexus to the taxable event and not divorced from it-If price is
to be the basis for measuring tax, it must relate to the actual sale transaction D
and not a transaction that may take place in future-If S. 4-A is designed to
bring a levy into existence which is divorced from the "sale" subject to tax
under the Act, it is beyond legislative competence under Entry 54, List II of
Seventh Schedule of the Constitution-Notification to the extent it intends to
levy tax on first point sale with reference, to price which could be charged in
respect of a subsequent sale which has not come intc existence at the time E
liability to tax arises and is determined ex-hypothesi is unsustainable on that
basis-Constitution of India, 1950-Vllth Schedule, List fl Entry 54-Sale of
Goods Act, 1930-Drugs Price Control Order, 1995.

Section 4A of the Rajasthan Sales Tax Act, 1994 envisaged levy of F
sales tax on first point sale of notified drugs, medicines and formulations
by wholesalerfdistributorfmanufacturer to retailer, not on the actual price
of consideration, but on the premise of subsequent sale by the retailer i.e.
based upon the MRP declared on the package. Respondent filed writ
petition challenging constitutional validity of Section 4A on the ground
that it takes into account an artificial amount as turnover for the purpose G
of tax on 'sale of goods'.

In appeal before this Court the question raised is whether the
measure to which rate of tax is to be applied on single point transaction
of sale of any formulation by the wholesaler to the retailer can be
·~ I H
2 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A something notional which is not related to subject of tax or to say in other
words, whether MRP to be chargeable subsequent to taxing event by a
retailer when he sells the same goods to consumer can provide a basis
which has a nexus with taxable event to provide a valid measure to which
rate of tax can be applied.

B Dismissing the appeal, the Court

HELD: I.I. Entry 54 in List II of Seventh Schedule of the
Constitution empowers the State Legislature to impose and collect taxes
on sale of goods. The measure to which tax rate is to be applied must have
C a nexus to taxable event of sale and not divorced from it. For the taxing
event of sale, if the price is to be the basis for measuring tax, it must relate
to actual transaction of sale that become subject of tax and not to a
different transaction that may take place in future at a price.
(17-E, F; 18-D]

D 1.2. Accepting the contention of Revenue that the retail sale price
likely to be received when such transaction takes place is taken only as a
basis to provide measure of levying tax on a completed transaction between
wholesalers and retailer would make it suffer from basic fallacy of •
importing the composition of sale which has not come into existence to
determine tax which is fixed as soon as the taxable sale is completed.
E (18-E, F)

2.1. The charging Section 4 under the Rajasthan Sales Tax Act, 1994
stipulates that the tax payable by a dealer under the Act shall be at single
point in the series of sales by successive dealers, as may be prescribed and
F shall be levied at such rates not exceeding fiity per cent on the taxable
turnover, as may be notified by the State Government in the Official
Gazette. This shows that there is no scope for multi point levy of tax and •
the tax is levied on the first point sale within the State in a series of sales
and tax is leviable at rate applied to aggregate of price received or
receivable by the dealer on such sales. (19-B, Cl
G
2.2. Section 4A of the Rajasthan Sales Tax Act, 1994 which projects
itself as an exception to Secti!ln 4, creates a legal fiction in respect of price
of subject sale, on which rate of tax is to be applied. But levy of tax remains
single point levy in a series of sales. Point of taxable sale remains the first
point sale i.e. from the manufacturer/distributor or the wholesaler to the
H retailer. The price to which rate of tax is sought to be applied to a sale by ...
STATEOF RAJAS THAN v. RAJASTHAN CHEMIST ASSOCIATION 3
a wholesaler to a retailer is neither the price agreed upon by the parties A
to the contract of taxable sale to Which charge is attracted nor flows from
the Drugs Price Control Order, 1995 under which also, it is the price of
formulation before end sale is to be determined within prescribed limits.
[18-F, G; 19-A, BJ

2.3. Section 4A does not become workable unless read along with B
definition of "turnover" and "taxable turnover". "Turnover" is defined
under Section 2( 44) and "Taxable Turnover" under Section 2(42) of the
Rajasthan Sales Tax Act, 1994. [19-D; 18-G)

3. When the wholesaler sells any formulation to a retailer in bulk
quantity, taxable event of sale of goods takes place where wholesaler and C
retailers are the parties to contract, the goods in question are the
formulations and the consideration is one which is agreed to between the
parties to that transaction within the limits permissible by l:1w. By
substituting the assumed quantity of goods or a prlce which is not subject
matter of that contract of completed sale for the purpose of measuring
tax, the legislature assumes existence of contract of sale of drugs by legal D
fiction which has not taken place and which cannot be considered to be a
sale in the manner stated in the Sales Act, which alone can be subject of
tax under Entry 54 in List II. Substitution of assumed price or the assumed
quantity in place of actual price/quantity in a completed sale transaction,
for the purpose of levy of tax on the subject matter of tax results in taking E
away from it the character of 'sale of goods' as envisaged under the Sale·
of Goods Act, 1930. (19-G, H; 20-A, BJ

4. Every transaction of sale is independent and can be subject to levy
of tax and the components and the measure which can make the tax levy
effective must have nexus with the taxable event. By devising a F
methodology in the matter of levy of tax on sale of goods, law prohibits
taxing of a transaction which is not a completed sale and also confine sale
of goods to mean sale as defined under the Act. This cannot be overridden
by devising a measure of tax which relates to an event which has not come
into existence when tax is ex-hypothesi determined, much less which can
be said a completed sale and which cannot be subject of legislation G
providing tax on 'sale of goods' by transplanting a sum related to as "likely
price" to be charged for subsequent sale to be taxed by the devise of
measuring tax for the completed transaction which has become subject
of tax. (20-D-F)
.... 5. If the legislation can provide for a measure of tax on subject of H
4 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A tax by substituting any notional value, which at no point of time becomes
part of or related to subject of tax viz. sale of goods, then the fact that it
is related to MRP loses its significance altogether. If this is permitted to
be done the legislation can provide for any measure the purpose of
applying the rate of tax, whether it is founded on MRP or any other fixed
B value which legislature may provide will make little difference. Subject
of tax is not the goods or goods sold, but a transaction of 'sale of goods'
as defined under the Sale of Goods Act, 1930. (20-G-H; 21-AJ

Andhra Sugars Ltd v. State of A.P., (1968) 1 SCR 705, explained.

Sales Tax Office, Pilibhit v. Mis. Budh Prakash Joi Prakash, AIR (1954)
C SC 459; State of Madras v. Gannon Dunkerley and Co., AIR (1958) SC 560;
Firm of Mis. Peare Lal Hori Singh v. The State of Punjab and Anr., AIR (1958)
SC 664 and Bhopal Sugar Industries Ltd. M.P. v. D.P. Dube, Sales Tax
Officer, Bhopal Region, Bhopal, AIR (1967) SC 549, relied on.

Mis Govind Saran Ganga Saran v. Commissioner ofSales Tax & Ors.,
D AIR (1985) SC 1041; Union of India v. Bombay Tyre International Ltd. AIR
(1984) SC 420; R.R. Engineering Company v. Zila Parishad Bareilly, AIR
(1980) SC 1088; Hotel Balaji & Ors. v. State of Andhra Pradesh and Ors.,
AIR (1993) SC 1048 and Bengal Immunity Company Ltd. v. State of Bihar,
(195512SCR603, referred to.

E 6.1. If Section 4-A is designed to bring a levy into existence which is
divorced from the "sale" subject to tax under the Act, it is beyond
legislative competence under Entry 54 of List II of Seventh Schedule. The
notification to the extent it intends to levy tax on first point sale with
reference to price which could be charged in respect of a subsequent sale
F which has not come into existence at the time liability to tax arose and is
determined ex-hypothesi is unsustainable on that basis. (22-B(
.
6.2. It is made clear that if the tax component has been passed on to
the subsequent purchases claim for refund shall not be entertained. But
where it has not been so passed on and has been deposited with the
G authorities, the same shall be adjusted against future demands, if any.
126-CI
..
Ganga Sugar Corpn. Ltd. v. State of U.P .. (1980( I SCC 223,

-
distinguished

H Union of India and Anr. v. A. Sanyasi Rao and Ors., (1996) 219 ITR ~·
STATE OF RAJASTHAN v. RAJASTHAN CHEMIST ASSOCIATION [PASA VAT, J.] 5
330; Builders' Association ofIndia and Ors. v. Union of India and Ors., [19891 A
2 SCC 645 and Bhopal Sugar Industries v. D.B. Dube, AIR (1964) SC 1037,
referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3552 of2005.

From the Judgment and Order and dated 29.3.2005 of the High Court B
of Rajasthan at Jodhpur, in D.B.C. Writ Petition No. 3407/2004.

B. Sen, Sushi! Kumar Jain, Puneet Jain, A.P. Dhamija, Ram Niwas and
.)
R.D. Thanvi for the Appellants.

A.K. Ganguly, S. Ganesh, A. Mariarputham, Aruna Mathur (for c
Arputham, Aruna & Co.), Ravinder Narain, Pravin Bahadur, Ajay Aggarwal,
Sanjeev Dahiya and Rajan Narain for the Respondent.

The Judgment of the Court was delivered by

ARIJIT PASAYAT, J. Challenge in this appeal is to the legality of the D
judgment rendered by a Division Bench of the Rajasthan High Court, Jodhpur
holding that 4A of the Rajasthan Sales Tax Act, 1994 (in short the 'Act') as
introduced by the State Finance Act, 2004 was not legally sustainable to the
extent that tax on first point sale of drugs, medicines or any formulation or
for that matter any other commodity by a manufacturer/wholesaler/distributor
/
to retailer where "Maximum Retail Price" (in short 'MRP') is published on E
package, measure to which rate of tax is to be applied cannot be with reference
to such published MRP which is neither charged nor chargeable by the
wholesaler from the retailer whether the tax is charged on sales or on purchase
by the parties to sale under Section 4A and the concerned Notification in this
regard. Writ application filed by the respondent-Association was allowed to F
>· that extent.

The controversy arose in the following background:

By the Finance Act, 2004 Section 4A was introduced which reads as
~~ G
- "4A. Levy of tax on retail sale price:-(!) Notwithstanding anything
contained in any other provision of this Act or the rules made
thereunder, tax on sale of such goods, as may be specified by the
State Government by notification in the official Gazette, shall be
levied and collected on the retail sale price of such goods abated by H
6 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A the rate specified in the said notification.

(2) The goods to be specified under Sub-Section (I) shall be those in
relation to which it is required under the provisions of the Standards
of Weights and Measures Act, 1976 or the rules made thereunder or
under any other law for the time being in force, to declare on the
B package hereof the retail sale price of such goods.

(3) The State Government may, for the purpose of fixing the rate of
abatement under sub-section (I), take into account the amount of
sales tax and other local taxes, if any, payable on such goods.

C Explanation: (i) Where on the package of any goods different retail
sale prices are declared with reference to different areas, the retail
sale price declared with reference to the area with the State in which,
it is sold shall be deemed to be the retail sale price for the purpose
of this Section.

D (ii) Where on the package of any goods different retail sale prices are
declared with reference to different areas and none of the areas fall
within the State, the maximum of such retail sale prices shall be
deemed to be the retail price for the purpose of this Section."

Writ Petition was filed by the prt>sent respondent questioning
E constitutional validity of the aforesaid provision. Section 4A in terms envisaged
levy of sales tax on any transaction of sale of notified goods not on the actual
price of consideration which is paid or becomes payable by the buyer to
seller on such sales as have taken place, but on the MRP of the goods
declared on the package as per the provisions of the Standards of Weights
F and Measures Act, 1976 (in short 'Weight and Measures Act') or the Rules
framed thereunder or any other law for the time being in force which is
chargeable only at the last point sale by the retailer. The provision is not
extended generally to all commodities sold in package and in relation to
which it is required to print retail price thereon, but only to such goods as
may be specified by the State Government by the Notification in the official
G Gazette as may be abated by the rates specified in the said Notification.

Primary challenge before the High Court was on the ground that it
takes into account an artificial amount as turnover for the purpose of tax on
"sales of goods". The tax on sale must be leviable with reference to something
-
related to taxing event, the sale or purchase of goods which becomes subject
H
STATE OF RAJASTHAN v. RAJASTHAN CHEMIST ASSOCIATION [PASA YAT, J.] 7

of charge and not de hors it. With reference to Entry 54 of the Second List A
of Seventh Schedule to the Constitution of India, 1950 (in short the
'Constitution') it was submitted that expression "tax on sale of goods" used '
in said Entry means tax on the sale of goods as defined under the Sales of
Goods Act, 1930 (in short the 'Sales Act') as modified/extended by Clause
29-A of Article 366 of the Constitution, inserted by 42nd Amendment Act,
1982. Single point tax is leviable on sale of medicines as per Notification B
issued under the Act.

·" Factually, the first point of sale in the State of Rajasthan in most cases
which attracts levy of sales tax is by the wholesale distributors to the retailers
and not by retailers to end consumers when alone MRP can be charged. C
Under the Weights and Measures Act and the provisions of Drug Price Control
Order, 1995 (in short 'Control Order), issued by the Central Government
under Section 3 of the Essential Commodities Act, 1955 (in short the 'Essential
Commodities Act'), the maximum retail price is determined in the case of
Scheduled Formulations only. On the other hand, MRP is required to be
displa.yed on the label of container as well as package in respect of all drugs D
whether scheduled or non scheduled formulations. Mention of price on the
package un4er the concerned provisions is the MRP and not the price
necessarily or actually charged at the end sale for any transaction of sale of
medicin.es in the State. The first sale within the State which alone is taxable
is in reality at much lesser price than the MRP printed and the same is paid
or payable on contractual basis. Under the Control Order the margin at which
E'
the medicines are to be sold to retailer has been fixed at a minimum level,
that is to say, unless otherwise permitted, a formulation has to be sold to a
retailer keeping at least 16% margin in the case of scheduled drugs. Thus by
t'
devising aforesaid legal fiction for deeming an artificial sale price for levy
of tax having no nexus to the taxable event i.e. transactions of sale of goods F
at a money consideration paid or payable as defined under the Sales Act, is
beyond the legislative competence of the legislature in the State, and therefore
the provision is ultra-vires.

The State on the other hand took the stand that what is to be the
measure of tax on a sale is within the domain of the State Legislature. Under G
the impugned provision, tax is levied on a completed sale within the meaning
of Section 4 of the Sales Act. However, in what manner the charge is to be
levied is a matter of details which can be worked out by Legislation. The fact
that maximum retail price is to be determined statutorily and the State
Legislature has taken into account the fact that the actual consideration at the H
8 SUPREME COURT REPORTS [20061 SUPP. 4 S.C.R.

A first point tax may be lesser than the maximum retail price that may be
charged ultimately from the consumer at the last point sale as provided for
abatement of MRP by reducing therefrom the sum at prescribed rates of
abatement for the purpose of levy of tax, it provides sound basis for uniform
liability in the State on such transaction. The levy of tax cannot be said to
B be wanting in nexus with the taxing event. Therefore, the impugned provisions
and the Notifications cannot be said to be ultra vires any provision of the
Constitution. It was however not disputed that but for taking the MRP as a
basis to provide measure of tax, no fictional price can be fixed as a measure
of tax on sale of goods. The High Court on analyzing the provision in great
detail came to hold as follows:
c "If Section 4A is designed to bring a levy into existence which is
divorced from the sale subject to tax under the Act, it falls foul with
the legislative competence under Entry 54 of List II of Schedule VII
so also notification- Annex.3 to the extent it is intended to levy tax
on first point sale with reference to price which could be charged in
D respect of a subsequent sale which has not come into existence at the
time liability to ;ax arise and is determined ex-hypothesi. However,
the perusal of the language of Section 4A and the notification issued
thereunder by itself does not show that it applies only m case of sales
to be taxed at first point. In case the levy is on the last point and the
maximum retail price is to be fixed and published under any Statute,
E whether instead of determining price actually charged in each case
fixed formula is provided by the enactment which has correlation
with determining pnce by keeping in view the provisions of Section
9 of the Sale of Goods Act whether the provision still falls beyond
the scope of Entry 54 has not been the subject matter of contention.
F In this case and therefore, we have not been called upon to decide.
In absence of any contention having been raised, it will be hazardous
to comment upon the validity of provisions of Section 4A in isolation
and the notification issued thereunder in its entirety.

In view thereof, we confine our conclusion and hold that to the extent
G that tax on first point sale of drugs, medicines or any formulation or
for that matter any other commodities by a manufacturer/wholesaler/
distributor to retailer where MRP is published on package, measure
to which rate of tax is to be applied cannot be with reference to such
published MRP, which is neither charge nor chargeable by the
wholesaler from the retailer whether the tax is charged on sales or on
H
STA TE OF RAJAS THAN v. RAJASTHAN CHEMIST ASSOCIATION [PASA YAT,J.] 9

purchase by the parties to sale under Section 4A and notification. A
The additional tax collected with reference to measure provided
under Section 4A by the wholesalers to retailers at first point sale
shall not be refunded to the dealers. In case the additional tax charged
has not been transmitted to buyers, the excess tax paid may be adjusted
against future liability under the Act of 1994 or any other dut:s to the B
Revenue under Rajasthan Sales Tax Act."

In support of the appeal, learned counsel for the appellants submitted
that there is a source of power of the State to levy tax under Article 246 read
with Entry 54 of List ll of Schedule VII of the Constitution. A plain reading
of the Entry clearly demonstrates that tax under the said Entry can be levied C
on the event of sale or purchase of goods. The said Entry nowhere requires
or mandates that the same can only be on the sale price of goods. Strong
reliance is placed on decisions in Andhra Sugars Ltd. v. State of A.P., [1968]
I SCR 705 and Ganga Sugar Corpn. Ltd. v. State of U.P., [1980] l SCC 223
to contend that the Constitution empowers the States to levy and collect tax D
on the happening of the taxable event and thereafter the quantum of tax to
be levied and the measure on which the same can be levied is necessarily left
for the State to decide.

Per contra, learned counsel for the respondent submitted that the High
Court's decision is on terra firma. On an elaborate analysis of the legal E
position the decision has been rendered and needs no interference. It was
pointed out that the decisions in Andhra Sugar and Ganga Sugar cases (supra)
were rendered on the peculiar facts of the cases and they nowhere depart
from the normal principle that tax is to be levied on the sale price.

In order to appreciate rival submissions a few decisions of this Court F
which throw beacon light on the issues involved need to be noted. In fact, the
High Court has referred to many of them.

Sales Tax Office, Pilibhit v. Mis Budh Prakash Jai Prakash, AIR (1954)
SC 459 arose under the U.P. Sales Tax Act, 1948. In that case the issue

- related to levy of tax by the assessing authority on the turnover relating to
forward contract. The assessee had challenged that the imposition of sales tax
on forward contracts was ultra vires the powers of the State Legislature. The
l.!.P. Sales Tax Act, 1948 had been enacted by the provincial legislature in
terms of the legislative power conferred under the Government of India Act,
G

1936 under Entry 48 in List II of the Schedule Seventh of the said Act. Under H
10 SUPREME COURT REPORTS [2006) SUPP. 4 S.C.R.

A Section 2(h) of the U.P. Act, a sale was defined to include forward contracts.
This Court upheld the challenge by holding that the power conferred under
Entry 48 to impose tax on the sale of goods can be exercised only when there
is a sale under which there is a transfer of property in the goods, and not
when there is a mere agreement to sell. The State Legislature cannot, by
B enlarging the definition of "sale" by including forward contracts arrogate to
itself a power which is not conferred upon it by the Constitution, and the
definition of "sale" in Section 2(h) of the Act XV of 1948 must, to that
extent, be declared ultra-vires.

It was inter-alia held as follows:
c "It would be proper to interpret the expression "sale of goods" in
Entry 48 in the sense in which it was used in legislation both in
England and India and to hold that it authorizes the imposition of a
tax only when there is a completed sale involving transfer of title".

Significantly, the Court observed about substance of the levy as under:
D
"The substance of th.: matter is that the sales tax is a levy on price
of the goods, and the reason of the thing requires that such a ievy
should not be made, unless stage has been reached when the seller
can recover the price under the contract."
E The aforesaid decision makes it clear that subject 'tax on sales of goods'
in Entry 48 of List II of the Seventh Schedule of the 1935 Act providing for
legislative field of sale of goods ought to be confined to levy of tax on sales
of goods as defined in the Sales Act and in substance, it is a levy on price
of goods and the State Legislature does not have power to enlarge the definition
p of sales by creating a legal fiction and levy tax on a sale which has not come
into existence. •
State of Madras v. Gannon Dunkerley & Co., AIR (1958) SC 560 is
another decision which needs to be noted. A Constitution Bench of this Court
considered the construction of Entry 48 in List II of Seventh Schedule of the
G 1935 Act. Tax on the sale of goods is in pari materia with Entry 54 in List
II of Schedule VII of the Constitution. The case arose under the Madras
General Sales Tax Act, 1939 as amended by Madras General Sales Tax
(Amendment) Act, I947. The definition of"sale" in Section 2(h) was enlarged
so as to include "a transfer of property in goods involved in execution of
-
H works contract''. By creating a legal fiction, it was deemed that in execution
. ·-
STATE OF RAJASTHAN v. RAJASTHAN CHEMIST ASSOCIATION fPASA YAT, J.] ]]

of a work, property in the goods involved in works contract is transferred as A
goods so as to include value (not the price) of such goods as part of taxable
turnover.

After referring to the definition of expression "sale of goods" from the
times of Roman Law and the Law in England, this Court culled out and
approved the following principle stated in Benjamin's book "Sale of Goods":- B
"Hence it follows that to constitute a valid sale, there must be a
occurrence of the following elements viz. (i) the parties competent to
contract (2) mutual assent; (3) thing of sale or general property in
which transfer from seller to buyer and; (iv) a price in money paid
or promised". c
On the aforesaid premises, the Court on considering the Indian Law
and after referring to Section 77 of the Contract Act, (before enactment of
Sale of Goods Act) defining sale as originally enacted in it, and the provisions
of Sales Act reached the following conclusions about price as an essential D
element:

"that it must be supported by money consideration, and that as a
resu It of the transaction property must actually passed on the goods
unless all these elements are present, there can be no sale".

Following conclusions were arrived approving the view in Budh E
Prakash 's case (supra):-

"A power to enact a law with respect to tax on sale of goods under
Entry 48 must, to be intra vires, be once relating in fact to sale of
goods, and accordingly, the Provincial Legislature cannot, in thP-
purp011ed exercise of its power to tax sales, tax transactions which
F
• are not sales by merely enacting that they shall be deemed to be
sales; .. "sale" in Entry 48 must be construed as having the same
meaning which it has in the Sale of Goods Act, 1930 ...... lt is of the
essence of this concept that both the agreement and the sale should
relate to the same subject matter". G
Summing up the conclusions it was held :-

"the expression "sale of goods" in Entry 48 is a nomen juris, its
essential ingredients being an agreement to sell moveable for a price
and property passing therein pursuant to that agreement". H
12 SUPREME COURT REPORTS [2006J SUPP. 4 S.C.R.

A The State Legislature does not have legislative competence to give the
expression "sale of goods" extended meaning and to enlarge its legislative
field to cover those transactions for taxing which do not properly conform to
elements of sale of goods within the Sales Act. Tax on value of the material
used in construction of building was held to be ultra-vires.

B The decision in Firm of Mis Peare lat Hari Singh v. The State of
Punjab and .4nr.. AIR (I 958) SC 664 also relates to imposition of tax on
supply of materials used in building contracts and this Court followed its
earlier decision in Gannon and Dunkerley case (supra) and held that the
expression "sale of goods" in Entry 48 in List 11 of Seventh Schedule of the
C Government of India Act, 1935 has the same import which it bears in the
Sales Act.

The principle was reiterated in Bhopal Sugar Industries ltd., M.P. v.
D.P. Dube Safes Tax Officer, Bhopal Region, Bhopal, AIR (1967) SC 549
where the question arose whether giving extended definition of "retail sale"
D which sought to render consumption by the owner of motor spirit liable to tax
under the concerned Sales Tax Act by virtue of Section 3, is beyond the
competence of the State Legislature and hence void. This Court relying on
its earlier decision in Gannon and Dunkerley (supra) held as follows: -

··in a transaction of sale of goods which is liable to tax there must be
E concurrence of the four elements, viz;

( 1) parties competent to contract;

(2) mutual assent;

(3) a thing, the absolute or general property in which it is transferred
F from the seller to the buyer; and

(4) a price in money paid or promise.

A transaction which does not conform to this traditional concept of
sale cannot be regarding as one in respect of which the State
G Legislature is competent to enact an Act imposing liability for payment
of tax".

The Court quashed the assessment made on the aforesaid premises.

Levy by the State of Uttar Pradesh as to the basis of levy once a
H transaction is held to be a transaction of sale came up for consideration by
STATE OF RAJASTHAN '" RAJASTHAN CHEMIST ASSOCIATION [PASA YAT, J.] 13

• a Constitution Bench in Ganga Sugar's case (supra). This Court said: A
"Tax on sale or purchase must be on the occurrence of a taxing event
of sale transaction".

This Court in Mis Govind Saran Ganga Saran v. Commissioner of
Sales Tax & Ors., AIR (1985) SC 1041 on analyzing Article 265 noted as B
follows:

"The components which entered into tax are well known. The first is
the character of the imposition known by its nature which transpires
attracting the levy. The second is a clear communication of the person
on whom the levy is imposed Jnd which is obliged to pay the tax. C
The third is rate at which the tax is imposed and the fourth is the
measure or value to which the rate is applied for computing the tax
liability".

Obviously, all the four components of a particular concept of tax has to be
inter related having nexus with each other. Having identified tax event, tax D
cannot be levied on a person unconnected with event, nor the measure or
value to which r·ate of tax can be applied can be altogether unconnected with
the subject of tax, though the contours of the same may not be identified.

In Union of India v. Bombay 1)we International Lid., AIR (1984) SC
420 the expressions subject of tax, the measure of tax and nexus between the E
two have been succinctly analysed. The decision arose in the context of
Central Excise and Salt Act, 1944 (in short 'Excise Act'). The controversy
was what should be included in the measure of computation of liability and
what fell outside the scope of measure to be excluded from consideration.
Referring to a large number of decisions of different courts, including some F
of the decisions we have referred to above, the principle succinctly stated in
Seervai's Constitutional Law was approved by observing as follows:-

"Another principle for reconciling apparently conflicting tax entries
follows from the fact that a tax has two elements, the person, things
or activity on which the tax is imposed, and the amount of the tax. G
The amount may be measured in many ways, but decided cases
establish a clear distinction between the subject matter of a tax and
the standard by which the amount of tax is measured. These two
elements are described as the subject of a tax and the measure of a
tax.'~
H
14 SUPREME COURT REPORTS l2006] SUPP. 4 S.C.R.

A The Court also held that the measure of tax though not always essential •
but is often a relevant consideration to judge the nature of levy. Following
passage from R.R. Engineering Company v. Zi/a Parishad Bareilly, AIR
(1980) SC 1088 was approved:

"It may be and is often so, that the tax on circumstances and property
B is levied on the basis of income which the assesscc receives from his
profession, trade, calling or property ..... Therefore, while determining
the nature of a tax, though the standard on which the tax is levied
may be a relevant consideration, it is not a conclusive consideration".

This Court recognised greater freedom in adopting measure of the tax
C to be asse;sst:d by its own standard and administrative convenience and other
factors may influence the stage at which the levy may be collected and there
may be deviation in contours of measure of tax, but did not countenance it
to be divorced from the nature of tax, by observing as follows:

''Any standard which maintain a nexus with the essential character
D of the levy can be regarded as a valid basis for assessing the measure
of the levy".

With these premises this Court found that while nature of an excise
levy is indicated by the fact that it is imposed in respect of manufacture or
E production of an article, the point at which it is collected is not determined
by the point of time when manufacture is completed but will rest on
consideration of administrative convenience and that generally it is collected
when the article leaves the factory for the first time.

The question of tax on sale of goods may be examined in the said
F background. The subject of tax being sale, measure of tax for the purpose of
quantification must retain nexus with ·sale' which is subject of tax. As noticed
above, tax on sale of goods, is tax on vendor in respect of his sales and is
substantially a tax on sale price. The vendor or buyer cannot be taxed de hors
the subject of tax that is sale by the vendor or purchase by the buyer. The
four ess~ntial ingredients of any transaction of sale of goods include the price
G of the goods sold, therefore, in any taxing event of sale, which become
subject matter of tax price component of such sale, is an essential part of the
taxing event. Therefore, the question does arise whether a particular taxing
event of sale could be subjected to tax at the prescribed rate to be measured
with such price which is not the component of the transaction of sale, which
H has attracted the sales tax.
STATE OF RA.I AS THAN v. RAJASTHAN CHEMIST ASSOCIATION (PASAYA T, J.] J5

Andhra Sugars 's case (supra) concerned the challenge to levy of sales A
tax under Andhra Pradesh Sugarcane Regulation of Supply and Purchase
Act. The tax was levied on the purchase of sugarcane as per the weights of
the goods purchased. One of the contentions raised before this Court
challenging its validity was that the tax must be levied with reference to the
turnover only and it cannot be levied with reference to the weight of the B
goods purchased. The contention was rejected by this Court by saying:

"Where the purchase tax is levied on a dealer, the levy is usually
with reference to his turnover, which normally means the aggregate
of the amount of purchase prices. But the tax need not necessarily be
levied on a dealer by reference to his turnover. It may be levied on C
the occupier of a factory by reference to the weight of the goods
purchased by him."

However, where tax is to be measured in terms of price or in terms of
weight or quantity of goods sold, whether the measure can be different from
the contents of taxing event was not the proposition laid. D
It was observed in Ganga Sugar's case (supra) as follows:

"It is a superstition, cultivated by familiarity, to consider that all sales
tax must necessarily have nexus with the price of the commodity. Of
course, price as basis is not only usual but also safe to avoid uneven, E
unequal burdens, although it is conceivable that a legislature can
regard prices which fluctuate as too impractical to tailor the purchase
tax. It may even be, in rare cases, iniquitous to link purcha~e tax with
price, if more sensible bases can be found".

It was a case in which weight of the commodity was made the basis for p
levy of the tax. But, price of goods was 1pproved to be usual meaning of levy
of tax on sale of goods. It does not deviate from basic principle that a tax of
any nature is determined ex-hypothesi on occurrence of taxing event. Its
actual computation and collection takes place later on through the machinery
provided. However, the determination of charge ex-hypothesi instantly on
occurrence of taxing event which inheres into it that measure of tax is integrally G
connected with occurrence of taxing event and is not postponed to a later
date.

Thus primarily the rate of tax relates to measure of tax to come into
existence simultaneous with occurrence of taxing event. The machinery H
16 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A provisions relating to its quantification and collection can take place later.
Providing measure to which rate is to be applied is integrally connected with
charge itself.

This Court considered the ambit and scope of legislative power of the
State Legislature while imposing tax on sale of goods in Hotel Balaji & Ors
B v. State of Andhra Pradesh and Ors .. AIR (1993) SC 1048 wherein this
Court said:

"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 things '
appropriate".
c
In this connection, it is relevant for the present purpose to notice that in
upholding the validity of additional purchase tax on goods, when the goods
manufactured by the buyer are sold outside State was that the tax was related
to purchase price, which was part of transaction of purchase and not payable
D on price at which he shall be selling his goods. Therefore, it retained its
character on tax on purchase otherwise it would have become Duty of excise
on value of goods determined in terms of price charged by manufacturer,
when such sale was not subject of tax levied by State Legislature.

In Ganga Sugar's case (supra) the court emphasized the tax on sale or
E purchase must be on occurrence of taxing event of sale transaction. While
accepting that, price of the sale transaction is not necessarily the only criterion
which may form the basis of levy of tax but it opined that price as basis is
not only usual but also safe to avoid unequal, uneven burdens. The Court
also stated that it is common sense that the reliable standard is the price
although in regard to custom duties there are still items on which duties is
F levied on the nature of goods rather than its value in money.
•
The issue which the Court was considering was the levy of tax on sale
of sugarcane and the court found that weight of cane which has sucrose
contents have a close nexus with price although theoretically they may appear
unconnected and consequently the levy of tax with reference to weight of
G sugarcane was held to be a permissible hypothesis for determining the tax.
In Hotel Balaji 's case (supra) levy of purchase tax at the last point sale
within the State by a dealer/manufacturer who has sold the goods manufactured
by him in the course of inter state trade and commerce, on the purchase price
H of the raw materials, was the sutject of challenge. The contention has been .
STATE OF RAJASTHAN v. RAJAS THAN CHEMIST ASSOCIATION lPASAYATJ] J7

raised before this Court that since tax was leviable in cases where the goods A
manufactured were not sold in the State, it amounted to levy of Excise Duty
on manufacture though named as purchased tax. In holding that levy was
essentially a tax on purchase of goods within the State, one of the factors
which weighed with this Court was that the levy was upon the purchase price
of the raw material and not upon the value of the manufactured products. B
That is to say when the tax was levied at the transaction of purchase,
notwithstanding it was leviable in case of goods manufactured by the dealer
~.
and were sold in a manner not taxable within the State is nonetheless tax
leviable at purchase price and not on the value of the manufactured products.
So it was held that the essential character of tax on purchase was retained and
consequently it did not lose its character as a tax on purchase of goods. The C
Court obviously indicated that in the case of tax on sale, price on which
transaction took place and not the value of goods is relevant criterion to hold
nexus between measure of tax and the taxing event.

The position would have been different had the tax on taxable transaction
of purchase have been levied with reference to price relatable to subsequent D
transaction of sale. In that event, the price forming part of subsequent sale
would have lost nexus with the transaction that become taxable in the State.

However, this case did not lay down the principle that where price is
the measure to which rate of tax can be applied, it can be something else
other then the price component of taxing event, whether agreed by mutual E
consent or as regulated by statutes.

These cases give a clear picture that Entry 54 in List II of Seventh
Schedule empowers the State Legislature to impose and collect taxes on sale
of goods. The measure to which tax rate is to be applied must have a nexus F
to taxable event of sale and not divorced from it.

The pivotal question, therefore, which needs to be considered is whether
the measure to which rate of tax is to be applied on single point transaction
of sale of any formulation by the wholesaler to the retailer can be something
notional which is not related to subject of tax or to say in other words, G
whether MRP to be chargeable subsequent to taxing event by a retailer when
he sells the same goods to consumer can provide a basis which has a nexus
with taxable event to provide a valid measure to which rate of tax can be
applied .
.. The principal contention about the invalidating of the basis of the H
18 SUPREME COURT REPORTS [20061 SUPP. 4 S.L'.R.

A measure of tax envisaged under section 4A of the Act as inserted vi de Finance
Act, 2004 is that while it levies taxes on the sale transaction carried on by
the manufacturer or wholesalers or distributor the measure with which total
turnover is to be determined is not part of the sale which attracts tax but its
premise is to be found on subsequent sale which, under the scheme of single
point tax is not excisable to tax at all. The MRP which a wholesaler can
B charge in respect of scheduled formulations too is fixed by Control Order. In
respect of scheduled formulations wholesaler is required to leave at least
16% margin in the MRP for the retailers and he is entitled to retain not more
than 8% profit on the purchase price. There 'ieing statutory prohibition against
the wholesalers to charge MRP from its buyer, the maximum retail price
C fixed on the packet has no rational connection with the taxable sale effected
by the wholesalers and which becomes subject matter of charge as a first
point tax. In such event, there exists no nexus between the measure of levy
and subject of levy.

In the context of meaning assigned to expression ·sale of goods' or
D price or consideration element of such 'sale of goods' as taxable event, the
conclusion that can fairly be reached is that for the taxing event of sale, if
the price is to be the basis for measuring tax, it must relate to actual transaction
of sale that become subject of tax and not to a different transaction that may
take place in future at a price.
E Accepting the contention of Revenue that the retail sale price likely to
be received when such transaction takes place is taken only as a basis to
provide measure of levying tax on a completed transaction between wholesalers
and retailer would make it suffer from basic fallacy of importing the
composition of sale which has not come into existence to determine tax
F which is fixed as soon as the taxable sale is completed.

Section 4A of the Act which projects itself as an exception to Section
4, creates a legal fiction in respect of price of subject sale, on which rate of
tax is to be applied. But levy of tax remains single point levy in a series of
sales. Point of taxable sale remains the first point sale i.e. from the
G manufacturer/distributor or the wholesaler to the retailer. The tax is to be
charged on turnover of the Assessment Year in aggregate. ·Turnover" is
defined under Section 2(44) and "Taxable Turnover" under Section 2(42) of
the Act. For the taxable event that has occurred, the amount received or
receivable is assumed to be different from which is neither received nor
H receivable and that amount which neith.:r flows from the Control Order. nor
STATE OF RAJAS THAN v. RAJASTHAN CHEMIST ASSOCIATION [PASA YAT, J.] \9

which flows from buyer to seller under the contract but is relatable to a A
transaction of sale by a retailer which may not have come into existence. For
the present, the price to which rate of tax is sought to be applied to a sale
by a wholesaler to a retailer is neither the price agreed upon by the parties
to the contract of taxable sale to which charge is attracted nor flows from the
Control Order under which also, it is the price of formulation before end sale B
is to be determined within prescribed limits.

The charging Section 4 stipulates that the tax payable by a dealer under
the Act shall be at single point in the series of sales by successive dealers,
as may be prescribed and shall be levied at such rates not exceeding fifty per
cent on the taxable turnover, as may be notified by the State Government in C
the Official Gazette. This shows that there is no scope for multi point levy
of tax and the tax is levied on the first point sale within the State in a series
of sales and tax is leviable at rate applied to aggregate of price received or
receivable by the dealer on such sales.

Section 4A does not become workable unless read along with definition D
of "turnover" and "taxable turnover".

The retail price of a fonnulation needs determination under paragraph
(7) of the order and the Government if empowered by order to fix the price
in accordance with paragraph (7) of the order to be charged by a retailer.
Where the maximum retail price is fixed as provided under paragraph 7 of E
Control Order, para 19 provides for price that can be charged from a retailer
by a wholesaler, it reads as under:

"19. Price of formulation sold to the dealer:- (I) A manufacturer,
distributor or wholesaler shall sell a fonnulation to a retailer, unless
otherwise pennitted under the provisions of this Order or any order F
made thereunder, at a price equal to the retail price, as specified by
an order or notified by the Government (excluding, excise .duty, if
any), minus sixteen per cent thereof in the case of scheduled drugs"

Applying the principles enunciated above, the inevitable conclusion is that
when the wholesaler sells any formulation to a retailer in bulk quantity, G
taxable event of sale of goods takes place where wholesaler and retailers are
the parties to contract, the goods in question are the fonnulations and the
consideration is one which is agreed to between the parties to that transaction
within the limits permissible by law. By substituting the assumed quantity of
goods or a price which is not subject matter of that contract of completed sale H
20 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A for the purpose of measuring tax the legislature assumes existence of contract
of sale of drugs by legal fiction which has not taken place and which cannot
be considered to be a sale in the manner stated in the Sales Act, which alone
can be subject of tax under Entry 54 in List II. Substitution of assumed price
or the assumed quantity in place of actual price/quantity in a completed sale
B transaction, for the purpose of levy of tax on the subject matter of tax results
in taking away from it the character of 'sale of goods' as envisaged under the
Sales Act.

Another distinguishing feature to be kept in mind is that centre point
of legislation under Entry 54 of List II of Seventh Schedule is 'sale' in
C contrast with central point of legislation under Entry 84 of List I of Eighth
Schedule i.e. 'Goods manufactured or produced". While basic nexus of levy
in the former is "sale of specified goods", in the latter it is "goods manufactured
or produced in India".

Every transaction of sale is independent and can be subject to levy of
D tax and the components and the measure which can make the tax levy effective
must have nexus with the taxable event.
•
By devising a methodology in the matter of levy of tax on sale of
goods, law prohibits taxing of a transaction which is not a completed sale and
also confine sale of goods to mean sale as defined under the Act. This cannot
E be overridden by devising a measure of tax which relates to an event which
has not come into existence when tax is ex-hypothesi determined, much less
which can be said a completed sale and which cannot be subject of legislation
providing tax on 'sale of goods' by transplanting a sum related to as "likely
price" to be charged for subsequent sale to be taxed by the devise of measuring
F tax for the completed transaction which has become subject of tax.

It may be relevant to recall here that this Court in Hotel Balaji 's case
(supra) held that where a tax was levied as a purchase tax and was confined
to the purchase price paid by the buyer, and was not chargeable at the price
at which the end produce was sold later, it had retained its character as a tax
G on purchase.

If the legislation can provide for a measure of tax on subject of tax by
substituting any notional value, which at no point of time becomes part of or
related to subject of tax viz. sale of goods, then the fact that it is related to

H
MRP loses its significance altogether. If this is permitted to be done the
legislation can provide for any measure the purpose of applying the rate of
.....
STATE OF RAJASTHAN v. RAJASTHAN CHEMIST ASSOCIATION [PASA YAT, J.] 2J
tax, whether it is founded on MRP or any other fixed value which legislature A
may provide will make little difference. It is not contended by appellant that
even if the measure is not relatable to MRP, it can substitute any value as a
measure of tax. Subject of tax is not the goods or goods sold, but a transaction
of 'sale of goods' as defined under the Sales Act.

Learned counsel for the appellant submitted that Union of India and B
Anr. v. A. Sanyasi Rao and Ors., ( 1996) 219 ITR 330 supports his stand.
Section 44AC was inserted in Income Tax Act, 1961 (in short 'IT Act') by
> the Direct Tax Laws (Amendment) Act, 1989 w.e,f, 1.4.1989, Section 206C
was inserted in the said Act by Finance Act, 1988 w.e.f. 1.4. 1988, Explanation
to Section 44AC was inserted by Finance Act, 1990 w.e.f. 1.4.1991. These
provisions enabled the revenue to estimate the profits on a presumptive basis
c
in the case of persons dealing in country liquor, timber, forest produces etc.
Revenue's intention was to get over the problem of assessing income and
recovering tax in cases of person dealing in such commodities, as business
of such persons existed only for short period, and after period of contract in
many cases, it was not even possible to trace the concerned assesses and D
many were found to be dealing benami. Section 44AC occurred in Chapter
IV of the l.T. Act deals with "computation of income". Section 44AC{I)
determines profits and gains of the year from trading of certain specified
goods like liquor at a particular percentage ofpackag.! price specified therein.
The object of said provision was explained in a memorandum as "with a
E
view to combat large scale tax evasion by person deriving income from such
businesses where the bill seeks to insert new Section 44AC to provide for
determination of income in such cases". About Section 206C it was stated
that "it is proposed to introduce a new Section 206C to provide that any
person being a seller referred to in Section 206C shall collect income tax of
a sum equal to 20% of the amount paid or payable by the buyer as increased F
by a surcharge for .the purpose of Union".

Interpretation of the two sections came up before Andhra Pradesh High
Court. The said Court while upholding the validity of the Act read down the
Section 44AC of the Act and held it only to be an adjunct to Section 206C
and to explain provision of Section 206C and not to dispense with the regular G
assessment in accordance with the provisions of the l.T, Act. It was held that
the subject matter of tax vis. 'income' cannot be determined notionally by
making such specific provisions when in all other cases only the real income
to be computed in accordance with provision of Section 28 to Section 43C.
r< ... This Court noted that one of the contentions raised in the petition was that H
22 SUPREME COURT REPORTS 120061 SUPP. 4 S.C.R.

A 'tax is levied on "hypothetical income" and not on ·'real income". In other
words, the detem1ination of"real income" was held to be the statutory mandate.

If Section 4-A is designed to bring a levy into existence which is
divorced from the "sale" subject to tax under the Act. it is beyond legislative
competence under Entry 54 of List II of Seventh Schedule. The notification
B to the extent it intends to levy tax on first point sale with reference to price
which could be charged in respect of a subsequent sale which has not come
into existence at the time liability to tax arise and is determined ex-hypothesi
is unsustainable on that basis.

Though the decision in <.iunga Sugar case (supra) at first flush appears
C to be supporting the stand of the appellants, on a deeper scrutiny it is crystal
clear that the said decision was rendered on peculiar facts of the case. The
three challenges as culled out from paragraphs 22, 23 and 25 of the judgment
make the position clear that there was no discussion in the background of
Entry 54. Para 16 of the judgment traced the history of levy on sugarcane and
D 40 years old practice of levy on sugarcane was linked with weight. It was
significantly noted that it was in the background of ·'peculiar circumstances
of sugarcane economy". The logic cannot be applied to the facts of the
present case.

In Builders' Association of India and Urs. v. Union of India and Ors.,
E [ t 989 J 2 sec 645 it was noted as follow:
"36. Even after the decision of this Court in the State of Madras v.
Gannon Dunkerley & Co. (Madras) ltd. it was quite possible that
where a contract entered into in connection with the construction of
a building consisted of two parts, namely, one part relating to the sale
F of materials used in the construction of the building by the contractor
to the person who had assigned the contract and another part dealing
with the supply of labour and services. sales tax was leviable on the
goods which were agreed to be sold under the first part. But sales tax
could not be levied when the contract in question was a single and
G indivisible works contract. After the 46th Amendment the works
contracts which was an indivisible one is by a legal fiction altered
into a contract which is divisible into one for sale of goods and the
other for supply of labour and services. After the 46th Amendment,
it has become possible for the States to levy sales tax on the value of
-
goods involved in a works contract in the same way in which the
H sales tax was leviable on the price of the goods and materials supplied
STATE OF RAJASTHAN v. RAJASTHAN CHEMIST ASSOCIATION [PASAYAT, J.) 23
in a building contract which ad been entered into in two distinct and A
separate parts as stated above. It could not have been the contention
of the revenue prior to the 46th Amendment that \"hen the goods and
materials had been supplied under the distinct and separate contract
by the contractor of the purpose of construction of a building the
assessment of sales tax could be made ignoring the restrictions and B
conditions incorporated in Article 286 of the Constitution. If that was
the position can be States contend after the 46th Amendment under
which by a legal fiction the transfer of property in goods involved in
a works contract was made liable to payment of sales tax that they are
not governed by Article 286 while levying sales tax on sale of goods
involved in a works contract? They cannot do so. When the law C
creates a legal fiction such fiction should be carried to its logical end.
There should not be any hesitation in giving full effect to it. If the
power to tax a sale in an ordinary sense is subject to certain conditions
and restrictions imposed by the Constitution, the power to tax a
transaction which is deemed to be a sale under Article 366(29-A) of
the Constitution should also be subject to the same restrictions and D
conditions. Ordinarily, unless thee is a contract to the contrary in the
case of a works contract the property in the goods used in the
construction of a building passes to the owner of the land on which
the building is constructed, when the goods or materials used are
incorporated in the building. The contractor becomes liable to pay the E
sales tax ordinarily when the goods or materials are so used in the
construction of the building and it is not necessary to wait till the
final bill is prepared for the entire work. In Hudson's Building
Contracts (8th Edn.) at page 362 it is stated thus:

''The well known rule is that the property in all materials and F
fittings, once incorporated in or affixed to a building, will pass to the
freeholder - quicquid plantatur solo cedit. The employer under a
building contract may not necessarily by the freeholder, but may be
a lessee or licensee, or even have no interest in the land at all, as in
the case of a sub-contract. But once the builder has affixed materials,
the property in them passes from him, and at lest as against him they G
become the absolute property of his employer, whatever the latter's
tenure of or title to the land. The builder owner may himself be
entitled to sever them as against some other person - e.g. as tenant's
fixtures. Nor can the builder reclaim them if they have been
subsequently severed from the soil by the building owner or anyone H
24 SUPREME COURT REPORTS [20061 SUPP. 4 S.CR.

A else. The principle was shortly and clearly stated by Blackburn J. in '"
Appleby v. Meyers, (1867 LR 2 CP 651): 'Materials worked by one
into the property of another become part of that property'. This is
equally true whether it be fixed or movable property. Bricks built
into a wall become part of the house, thread stitched into a coat
which is under repair, or planks and nails and pitch worked into a
B
ship under repair, become part of the coat or the ship."

40. We are surprised at the attitude of the States which have put
forward the plea that on the passing of the 46th Amendment the
Constitution had conferred on the States a larger freedom than what
C they had before in regard to their power to levy sales tax under Entry
54 of the State List. The 46th Amendment does no more than making
it possible for the States to levy sales tax on the price of goods and
materials used in works contracts as if there was a sale of such goods
and materials. We do not accept the argument that sub-clause (b) of
Article 366(29:A) should be read as being equivalent to a separate
D entry in List II of the Seventh Schedule to the Constitution enabling
the State> to levy tax on sales and purchases independent of Entry 54
thereof. As the Constitution exists today the power of the States to ..
levy taxes on sales and purchases of goods including the "'deemed"
sales and purchases of goods under clause (29-A) of Article 366 is to
E be found only in Entry 54 and not outside it. We may recapitulate
here with observations of the Constitution Bench in the case of Bengal
Immunity Company Ltd. v. State of Bihar, [ 1955] 2 SCR 603 in
which this Court has held that the operative provisions of the several
parts of Article 286 which imposes restrictions on the levy of sales
tax by the States are intended to deal with different topics and one
F could not be projected or read into another and each one of them has
to be obeyed while any sale or purchase is taxed under Entry 54 of
the State List."

In Bhopal Sugar Industries v. D.B. Dube, AIR (1964) SC 1037 it was
noted as follows:
G
5. In Gannon D1!nkerley & Company's case (1959] S.C.R. 379, this
Court was called upon to consider whether in a building contract
which is one, entire and indivisible, there is sale of goods. It was held
by the Court that the Provincial Legislature was not competent under
Entry 48, List II, Sch. VII of the Government of India Act, 1935, to
H " .....
STATE OF RAJAS THAN v. RAJASTHAN CHEMIST ASSOCIATION [PASAYA T,J.] 25

- -./ impose tax on the supply of materials used in such a contract treating A
it as a sale. The decision of the Court did not rest upon any peculiar
character of a building contract. It was held on the larger ground
canvassed in that case, that the expression 'sale of goods' within the
meaning of relevant legislative entry had the same connotation as
'sale of goods' in the Indian Sale of Goods Act, I 930, and therefore
the State Legislature had no power to enact legislation to levy tax
B
under Entry 48 of List II in respect of transactions which were not of
the nature of sales of goods strictly so called; and a building contract
> not being a transaction in which there was a sale of materials by the
, contractor who constructed the building, the State was not competent
to enact legislation to impose tax on the supply of materials used in c
a building contract treating it as a sale. It was therefore, held that the
definition of sale in the Madras General Sales Tax Act IX of 1939
'• was to the extent of the extension invalid.

6. In Gannon Dunkerley & Company's case [1999] S.C.R. 379., the
validity of s. 2(h)(ii) of the Madras General Sales Tax Act, 1939, as D
amended by Act XXV of 1947, in so far as it included ~oods included
... in a works contract fell to be determined, in the light of the competence
of the Provincial Legislature under Entry 48, List II, in Seventh
Schedule of the Government of India Act, 1935. Under the Constitution
the relevant entry conferring legislative power upon States to tax sale
E
- of goods in Entry 54, List II. As the scheme of division of legislative
power under the Constitution has remained unaltered, the principle of
Gannon Dunker/ey's case [1999] S.C.R. 379., applies in adjudging
the validity of the provisions of the Madhya Pradesh Act 4 of 1958.

7. Consumption by an owner of goods in which he deals is therefore F
not a sale within the meaning of the Sale of Goods Act and therefore
it is not 'sale of goods' within the meaning of Entry 54, List II,
Schedule VII of the Constitution. The legislative power for levying
tax :m sale of goods being restricted to enacting legislation for levying
tax on transactions which conform to the definition of sale of goods
within the meaning of the Sale of Goods Act, 1930, the extended G
definition which includes consumption by a retail dealer himself of
motor spirit or lubricants sold to him for 'retail sale' is beyond the
competence of the State Legislature. But the clause in the definition
in Section 2(1) "and includes the consumption by a retail dealer
himself or on his behalf of motor spirit or lubricant sold to him for H

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26 SUPREME COURT REPORTS [2006} SUPP. 4 S.C.R.

A retail sale" which is ultra vires the State Legislature because of lack
of competence under Entry 54 in List II, Schedu!e VII of the
Constitution is severable, from the n;st of the definition, and that
clause alone must be declared invalid."

The traditional concept of sale was stressed upon and reference was
B made to Mis Cannon Dunkerley 's case (supra) for the purpose of interpreting
true import of the expression "'sale of goods".

In that view of the matter, the judgment of the High Court does not
warrant any interference and the appeal is dismissed. However, it is made
clear that if the tax component has been passed on to the subsequent purchases
C claim for refund shall not be entertained. But where it has not been so passed
on and has been deposited with the authorities, the same shall be adjusted
against future demands, if any.

The appeal is dismissed. No costs.

B.B.B. Appeal dismissed.

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