1997 (1) TMI 459 - SC - VAT and Sales Tax

Whether the Food Corporation of India is liable to pay sales/purchase tax to the States while purchasing foodgrains or in distributing fertilizers pursuant to orders issued under section 3 of the Essential Commodities Act, 1955? Held that - Levy procurement is a sale/purchase and therefore, falls within the purview of entry No. 54 of List II of Seventh Schedule to the Constitution. The States were competent to levy sales/purchase tax on such transactions. In the light of the rulings of this Court referred to above in detail, we are unable to agree with the submission of the learned Senior Counsel for the appellants that there was no area left for consensual agreement in the parties to the procurement transactions. The view taken by the Full Bench of the Allahabad High Court in Ram Bilas Ram Gopal case 1969 (2) TMI 163 - ALLAHABAD HIGH COURT is the correct view, and the High Court of Allahabad (Lucknow Bench) was right in applying the same in the judgment under appeal. The transactions in question are all sale and exigible to tax under the State Sales Tax Act. The contention that the Explanation newly added was ultra vires entry No. 54, List II of the Seventh Schedule to the Constitution, on the assumption that the disputed transactions are not sales and, therefore, by a fiction the impugned Explanation cannot deem a sale which is not a sale, is without substance. The learned counsel fairly concedes that it is open to the State Legislature to shape a point at which tax is levied, if may be equally permissible to the Legislature to treat a particular sale or purchase as the first sale or purchase, but it cannot by legislative device or fiction of law make something as a sale/purchase which in fact is not. This argument has to fail in view of our answer to proposition No. 1 in favour of the Revenue.

Issues Involved:
1. Liability of the Food Corporation of India (FCI) to pay sales/purchase tax.
2. Constitutionality of Explanation II to section 3-D(1) of the U.P. Sales Tax Act.
3. Retrospective effect of Explanation II leading to double taxation.
4. Validity of section 3-F of the U.P. Sales Tax Act imposing surcharge.
5. Levy of market fee under the U.P. Krishi Utpadan Mandi Adhiniyam, 1964.
6. Levy of sales tax on the distribution of fertilizers by FCI.
7. Taxability of gunny bags used in transactions.

Detailed Analysis:

1. Liability of the FCI to Pay Sales/Purchase Tax:
The principal question was whether FCI is liable to pay sales/purchase tax on purchasing foodgrains or distributing fertilizers under orders issued under section 3 of the Essential Commodities Act, 1955. The Supreme Court observed that there was a difference of opinion among the High Courts. The Allahabad High Court held FCI liable to pay purchase tax, while the Punjab and Haryana High Court held the opposite. The Court analyzed various judgments, including Chittar Mal Narain Das v. Commissioner of Sales Tax, and concluded that transactions under levy orders are sales and fall within the purview of entry No. 54, List II of the Seventh Schedule to the Constitution. Thus, FCI is liable to pay sales/purchase tax.

2. Constitutionality of Explanation II to Section 3-D(1) of the U.P. Sales Tax Act:
The appellants challenged Explanation II as ultra vires entry No. 54, List II of the Seventh Schedule to the Constitution, arguing it assumed a sale where none existed. The Court, following its decision on the first issue, held that the transactions are sales and exigible to tax. Therefore, Explanation II is not ultra vires and is constitutionally valid.

3. Retrospective Effect Leading to Double Taxation:
The appellants argued that Explanation II retrospectively levied sales tax at more than one point, which is impermissible. The Court noted that the retrospective effect was applied to ensure tax collection only at one point, specifically from FCI, and provided a mechanism for credit if FCI had already paid tax to the Food Department. Thus, the contention of double taxation was dismissed, and the appellants were directed to seek remedies before the concerned authorities.

4. Validity of Section 3-F of the U.P. Sales Tax Act Imposing Surcharge:
The appellants contended that section 3-F, which levied a surcharge on dealers with a turnover exceeding Rs. 10 crores, was arbitrary and discriminatory. The Court upheld the classification based on gross turnover as reasonable, referencing the precedent set in Hoechst Pharmaceuticals Ltd. v. State of Bihar. Therefore, section 3-F was held valid.

5. Levy of Market Fee under the U.P. Krishi Utpadan Mandi Adhiniyam, 1964:
Millers challenged the demand for market fee on rice, arguing there was no sale under levy orders. The Court, affirming the High Court's view, held that the transactions are sales and thus subject to market fee under the U.P. Krishi Utpadan Mandi Adhiniyam, 1964.

6. Levy of Sales Tax on the Distribution of Fertilizers by FCI:
The FCI argued that distribution of fertilizers under the Fertilizer (Control) Order was a statutory obligation without volition, hence not taxable. The Court rejected this argument, noting the absence of statutory compulsion in the sale or purchase of fertilizers, and upheld the High Courts' decisions that these transactions are sales exigible to sales tax.

7. Taxability of Gunny Bags Used in Transactions:
The Punjab and Haryana High Court had held that gunny bags used for packing were not taxable as there was no sale of the contents (rice/paddy). The Supreme Court, having held that the transactions are taxable sales, remanded the issue of gunny bags to the assessing officer for determination based on the facts and agreements between the parties.

Conclusion:
The Supreme Court dismissed the civil appeals except those filed by the State of Punjab and Haryana, which were allowed. The transactions under levy orders were held to be sales, and FCI was liable to pay sales/purchase tax. The constitutionality of Explanation II and section 3-F was upheld. The issue of market fee and the taxability of gunny bags were remanded for further proceedings. The civil appeals related to the market fee by rice millers were scheduled for further arguments.

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