1990 (2) TMI 278 - HC - VAT and Sales Tax

Issues Involved:
1. Competence of the State Government to collect sales tax on the amount of excise duty paid by the petitioner.
2. Constitutionality of section 5(3-D) of the Karnataka Sales Tax Act, 1957.

Issue-wise Detailed Analysis:

1. Competence of the State Government to Collect Sales Tax on Excise Duty:
The petitioner argued that the State Government, as the manufacturer of arrack, should not be required to pay excise duty on its own product. The excise duty paid by the petitioner, being post-sale, should not be part of the price of arrack and thus should not attract sales tax. The petitioner relied on the precedent set in D. Cawasji & Co. v. State of Mysore [1969] 1 Mys LJ 461, where it was held that the State could not collect sales tax on excise duty.

The court noted that the challenge to the Forty-sixth Amendment was not pursued, leaving two contentions for consideration:
1. Competence of the State Government to collect sales tax on excise duty.
2. Constitutionality of section 5(3-D) of the Karnataka Sales Tax Act.

The court examined the precedent in Cawasji's case, where it was held that excise duty collected from the licensees was not part of the sale price of arrack. The court observed that the excise duty was collected from licensees when arrack was issued from government depots, and this duty was treated as part of the sale price for sales tax purposes. However, the court in Cawasji's case concluded that excise duty paid by the purchaser could not be part of the price at which goods were sold by the seller.

The court then referred to the Supreme Court's decision in McDowell & Co. Ltd. v. Commercial Tax Officer [1985] 59 STC 277, where it was held that excise duty, though paid by the purchaser, is part of the consideration for the sale and is includible in the turnover of the manufacturer. The court highlighted that excise duty is a charge on the manufacture of goods, and its collection from the buyer is for administrative convenience.

The court concluded that the decision in Cawasji's case was no longer good law in light of the Supreme Court's ruling in the Second McDowell case. The payment of excise duty by the licensee is part of the consideration for the sale of arrack, making it taxable as an integral component of the sale price.

2. Constitutionality of Section 5(3-D) of the Karnataka Sales Tax Act:
The petitioner contended that section 5(3-D) of the Karnataka Sales Tax Act, which treats containers or packing materials as part of the goods for tax purposes, violates Article 14 of the Constitution. Section 5(3-D) stipulates that the rate of tax on containers or packing materials should be the same as that on the goods contained or packed, irrespective of whether the containers or packing materials have already been taxed or whether their price is charged separately.

The court examined the principle behind section 5(3-D), noting that it simplifies the tax collection process by treating the sale of goods contained in a container as a single transaction. This approach prevents tax evasion by ensuring that the price of the container or packing material is included in the turnover of the goods.

The court referred to the Supreme Court's decision in Raj Sheel v. State of Andhra Pradesh [1989] 74 STC 379, which upheld a similar provision in the Andhra Pradesh General Sales Tax Act. The Supreme Court held that the value of packing materials should be included in the price of the goods for tax purposes, as the transaction is essentially for the sale of the goods.

The court also noted that the distinction between a packing material simpliciter and a packing material containing goods has been recognized for purposes of the Central Excises and Salt Act and upheld by the Supreme Court in Union of India v. Bombay Tyre International Ltd. [1986] 59 Comp Cas 460 (SC). The inclusion of packing material in the assessable value of goods was upheld as it contributes to the marketability of the goods.

The court concluded that section 5(3-D) does not violate Article 14 of the Constitution, as it is based on a reasonable classification that simplifies tax collection and prevents tax evasion. The classification has a reasonable nexus with the object of the Act.

Conclusion:
The court dismissed the petition, holding that the State Government is competent to collect sales tax on the amount of excise duty paid by the petitioner, and that section 5(3-D) of the Karnataka Sales Tax Act is constitutional. The petitioner was ordered to pay Rs. 2,000 as costs to the State Government.

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