G.C. Bharuka, J.
1. These writ petitions have been filed by the petitioners seeking a declaration from this Court to the effect that the instruction/clarification issued by the Commissioner under annexure A and the Notification No. S.O. 1707, dated November 25, 1989 (annexure B), are contrary to the provisions of sections 5(1-A), 3A and 8A of the Karnataka Sales Tax Act, 1957 (in short, 'the Act', hereinafter) and are as such ultra vires their powers and cannot be enforced.
2. The petitioners are wholesale dealers in Indian manufactured liquor such as whisky, rum, etc. They are registered dealers under the provisions of the Act. The petitioners purchase the liquor from the manufacturers and the Mysore Sales International Limited, Bangalore (in short, 'MSIL') and sells it to the retail dealers in liquor. MSIL holds a distributor licence under the Karnataka Excise (Sales of Indian and Foreign Liquors) Rules, 1968.
3. The levy of tax on alcoholic liquors for human consumption, in contradistinction to other commodities, has been made multi-point as provided under sub-section (1-A) of section 5 of the Act, inserted by the Karnataka Sales Tax (Amendment) Act, 1988, with effect from April 1, 1988. The said provision reads as under :
'Notwithstanding anything contained in sub-section (1), every dealer shall pay for each year tax on his taxable turnover of sales (other than the last sale in the State) relating to all kinds of alcoholic liquors for human consumption (other than toddy, arrack, fenny, wine and beer) at the rate of thirty-five per cent of such turnover :
Provided that at any point of sale other than first point of sale and the last point of sale, the taxable turnover shall be arrived at by deducting the turnover of such goods on which tax has been levied under this sub-section at the immediately preceding point of sale :
Provided further that no tax under this sub-section shall be levied and collected up to the 31st day of May, 1988 on subsequent sales excepting the last sale of alcoholic for human consumption (other than toddy, arrack, fenny, wine and beer) which have already been subjected to tax at the rate of forty-five per cent prior to the 31st day of March, 1988 under clause (a) of sub-section (3) of section 5 of the Act.
Explanation. - For the purpose of this sub-section last sale shall be the sale by a retailer to the consumer and shall not include the first sale in the State.'
Subsequently there had been some amendments to the said provisions, but those are not material for the present purposes.
4. The challenge to the clarification issued by the Commissioner placed at annexure A and exempting notification at annexure B revolves around an interpretation of the first proviso to section 5(1-A) noticed above.
5. On an analysis of section 5(1-A) what emerges is this -
(i) Every dealer of liquor covered by the said sub-section is liable to pay tax on his taxable turnover at the prescribed rate except the dealer effecting the last sale in the State;
(ii) The proviso envisages a special mode of arriving at the taxable turnover in the case of sales other than at the first and last points (hereinafter called 'the intermediary point');
(iii) According to the said proviso, the taxable turnover of the intermediary dealer will be arrived at by 'deducting the turnover of such goods on which tax has been levied under this sub-section at the immediately point of sale'.
6. It is the aforesaid mode of determining taxable turnover which has given rise to the present controversies. According to the petitioners the Commissioner through his clarification under annexure A has sought to narrow down the extent of 'turnover' by saying that this expression will not take within its fold the amount of sales tax which the intermediary dealer has paid to his vendor as a part of the consideration.
7. The Statement of Objects and Reasons for introducing section 5(1-A) as set out along with the Bill was to the following effect :
'To implement the various announcements made by the Chief Minister in the Budget speech for 1988-89 relating to sales tax, it is necessary to make certain amendments to the Karnataka Sales Tax, Act, 1957. Opportunity is also taken to make certain consequential changes in the said Act. Hence, the Bill.'
8. Paragraph 43 of the Budget speech of 1988-89 reads as under :
'Indian-made liquor (other than beer) is presently taxed at the rate of 45 per cent at its first sale and at 5 per cent at its last sale. The sale price of these goods at the point of first sale is much less than the sale price at subsequent sales which are presently exempt from tax (except the last sale). In order to plug this loophole, it is proposed to levy tax at every at the rate of 35 per cent except the last sale and to give a set-off of the tax paid on the previous sale. Levy of last sale point tax at the rate of 5 per cent will continue.'
9. Therefore, the scheme envisaged under the impugned provisions of section 5(1-A) is that of value added taxation whereunder the value added to a commodity which has not suffered tax is only subjected to tax so that no part of turnover from first point to last point remains uncovered by levy of tax. For the present purposes, the definitions of 'taxable turnover', 'total turnover,' and 'turnover' as defined under the Act are material, and, accordingly those are being extracted hereunder :
'2(u-1). 'Taxable turnover' means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed, but prescribed, but shall not include the turnover of purchase or sale in the course of inter-State trade or commerce or in the course of export of the goods into the territory of India;'
'2(u-2). 'Total turnover' means the aggregate turnover in all goods of a dealer at all places of business in the State, whether or not the whole or any portion of such turnover is liable to tax, including the turnover of purchase or sale in the course of inter-State trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India.'
'2(v). 'Turnover' means the aggregate amount for which goods are bought or sold, or supplied or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (t) by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration :
Provided that the proceeds of the sale by a person of agricultural or horticultural produce grown within the State by himself or on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, other than the proceeds of the sale by a company relating to pepper, cardamom or rubber grown within the State by such company, shall be excluded from his turnover.
Explanation. - Subject to such conditions and restrictions, if any, as may be prescribed, in this behalf-
(i)................
(ii) the amount for which goods are sold include any sums charged for anything done by the dealer in respect of the goods sold at the time of or before the delivery thereof;
(iii).............
(iv) where for accommodating a particular customer, a dealer obtains goods from another dealer and immediately disposes of the same to the said customer, the sale in respect of such goods shall be included in the turnover of the latter dealer but not in that of the former;'
10. The crucial expression 'the turnover of such goods on which tax has been levied' under the first proviso to section 5(1-A) needs an interpretation. The first question is whether this expression includes the sales tax which has been collected by the selling dealer of a commodity. This question is no more res integra. The Supreme Court in the case of George Oakes (Private) Ltd. v. State of Madras [1961] 12 STC 476, has quoted with approval the following passage from the judgment of Goddard, L.J., in Love v, Norman Wright (Builders) Ltd. [1944] 1 All ER 618 :
''Where an article is taxed, whether by purchase tax, customs duty, or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consideration though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up or whether the seller has included tax or not'....
So far as the purchaser is concerned, he pays for the goods what the seller demands, viz., price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.'
11. In the case of Delhi Cloth and General Mills Co. Ltd. v. Commissioner of Sales Tax [1971] 28 STC 331, it has been held by the Supreme Court that :
'...........Unless the price of an article is controlled, it is always open to the buyer and the seller to agree upon the price to be payable. While doing so it is open to the dealer to include in the price the tax payable by him to the Government. If he does so, he cannot be said to be collecting the tax payable by him from his buyers. The levy and collection of tax is regulated by law and not by contract. So long as there is no law empowering the dealer to collect tax from his buyer or seller, there is no legal basis for saying that the dealer is entitled to collect the tax payable by him from his buyer or seller. Whatever collection that may be made by the dealer from his customers the same can only be considered as valuable consideration for the goods sold.'
12. Therefore, keeping in view the aforesaid judgments, it has to be held that the word 'turnover' as used in the first proviso to section 5(1-A) includes the amount of sales tax collected by the selling dealer. But, according to Mr. D'Sa, learned Additional Government Advocate, even if it be so, since no tax is levied on the sales tax components of the sale price, it cannot be said that that part of the turnover has also been subjected to levy of tax thereby qualifying itself for deduction out of the turnover of the purchasing dealer for arriving at a taxable turnover in his hands.
13. For appreciating the said submission of Mr. D'Sa, one has to look to the definition of the expressions 'turnover', 'total turnover' and 'taxable turnover' as extracted above. 'Turnover' is the aggregate amount for which goods are bought or sold which, as found above, includes the tax components. The total turnover has been defined to mean an aggregate turnover in all goods of a dealer at all places of business in the State. Then comes the determination of taxable turnover which is arrived at by making certain deductions out of total turnover for the purpose of computing tax liability if the dealer over his total turnover. Therefore, the computation of taxable turnover is only a process of computing the tax payable by a dealer over his total turnover. Once the tax is so levied, in law the entire turnover of the goods has to be held as subjected to levy of tax. To illustrate, if the goods are sold for a sum of Rs. 100 and Rs. 35 is collected as sales tax leviable thereon, the aggregate of the amounts so collected will form part of the turnover. Under the scheme of the Act, for the purpose of computing the tax liability of the dealer, the tax component is allowed as a deduction under rule 6(4)(h) of the Karnataka Sales Tax Rules, 1957. But can for this reason, it can be said that the entire turnover including the tax components has not suffered tax under the Act. In my opinion, the answer has to be in negative. Because, Rs. 35 which has been levied as tax is relatable to the entire turnover of Rs. 135. For the said reason, in my opinion, the Commissioner has erred in taking a view that the tax component forming a part of the turnover will not qualify for deduction under the first proviso to section 5(1-A) of the Act.
14. The next contention raised is regarding the validity of the Notification No. FD 271 CSI 89, dated 17th November, 1989 (annexure B), which reads as under :
'In exercise of the powers conferred by clause (b) of sub-section (1) of section 8A of the Karnataka Sales Tax Act, 1957 (Karnataka Act 25 of 1957), the Government of Karnataka hereby exempts with immediate effect the tax payable under the Act by a dealer holding a distributor licence under the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968 on the turnover of sale of all kinds of alcoholic liquors for human consumption (other than liquor imported from outside the country, toddy and arrack) to wholesale dealers subject to the condition that the said turnover of sales shall not be deemed to be the turnover on which tax has been levied for the purpose of the proviso to sub-section (1-A) of section 5 of the said Act.'
15. It is admitted by the parties before this Court that M/s. Mysore Sales International Limited, Bangalore (in short, MSIL), a State owned Corporation, has been granted a distributor licence under the said Excise Rules. Grant of distributor licence to MSIL has been held to be valid by this Court in the case of Jagdale & Sons v. State of Karnataka : ILR1989KAR101 . The intention of the Government in doing so was to channelise the business in liquor through governmental agency to prevent tax evasion by ensuring that the entire liquor in the State may commence its journey into the market through the said Corporation. Possibly, the Government while doing so was conscious of the fact that in an effort of safeguarding its own revenues it should not create additional burden of sales tax on ultimate consumer of liquor, and, therefore, advisedly the impugned exempting notification referred to above was issued. In my opinion, grant of exemption under this notification to MSIL does not in any way affect the ultimate tax liability of the present petitioners even if they purchase liquor through the said distributor. It is so because part of turnover, as explained above, which has suffered tax at any of the previous stages of sale will have to be deducted from the turnover for arriving at the taxable turnover of the dealers like the petitioners. In the absence of exempting notification annexure B, petitioners while purchasing from MSIL would have been contractually liable to pay tax on the untaxed turnover in the hands of MSIL, but because of the said notification they have escaped the said liability at that stage. Now the same amount of tax is required to be paid by them as a part of their tax liability on their own turnover. Therefore, in effect, the only difference the exempting notification has brought about is that the amount of tax which was to be paid by the petitioners to the MSIL at the point of purchase by them, will now have to be paid at the point of sale by them. Issuance of the impugned notification has not in any way affected their ultimate liability. The submission that because of the notification the petitioners have to shoulder the tax liability of MSIL is obviously based on a wrong arithmetics.
16. In the view of the matter, latter part of the notification namely 'subject to the condition that the said turnover of sales shall not be deemed to be the turnover on which tax has been levied for the purpose of the proviso to sub-section (1-A) of section 5 of the said Act', is inconsequential. It is so because that part of the turnover of the MSIL which has not borne the incidence of tax could not have been, even otherwise deducted from the turnover of the petitioners, under the first proviso to section 5(1-A) of the Act.
17. As such I do not find any infirmity in the notification at annexure B.
18. Before concluding, I find it necessary to notice one important aspect touching upon the practice which is being followed in the office of the Commissioner of Commercial Taxes. As noticed above, the present controversy has arisen because of some alleged statutory clarification issued on behalf of the Commissioner purporting to act under section 3A of the Act.
19. Section 3A of the Act reads as under :
'3-A. Instructions to subordinate authorities. - (1) The State Government and the Commissioner may from time to time, issue such orders, instruction and directions to all officers and persons employed in the execution of this Act as they may deem fit for the administration of this Act, and all such officers and persons shall observe and follow such orders, instructions and directions of the State Government and the Commissioner :
Provided that no such orders, instructions or directions shall be issued so as to interfere with the discretion of any appellate authority in the exercise of its appellate functions. (2) Without prejudice to the generality of the foregoing power, the Commissioner may, on his own motion or on an application by a registered dealer liable to pay tax under the Act, if he considers it necessary or expedient so to do, for the purpose of maintaining uniformity in the work of assessments and collection of revenue, clarify the rate of tax payable under this Act in respect of goods liable to tax under the Act, and all officers and persons employed in the execution of this Act shall observe and follow such clarification :
Provided that no such application shall be entertained unless it is accompanied by proof of payment of such fee, paid in such manner, as may be prescribed. (3) All officers and persons employed in the execution of this Act, shall observe and follow such administrative instructions as may be issued to him for his guidance by the Deputy Commissioner within whose jurisdiction he performs his functions.'
20. In the present cases annexure A which has been made the basis for invoking writ jurisdiction of this Court appear to be the gist of some circular issued by the Commissioner. On being called upon, Mr. D'Sa fairly conceded that no statutory clarification in terms of section 3-A(2) of the Act has been issued by the Commissioner and the impugned gists (annexure A in all these writ petitions) have been extracted from compilation of gists of various communications made from the office of the Commissioner and communicated for guidance to the assessing authorities. According to him, the gists are prepared out of the clarifications given by the office of the Commissioner pursuant to some queries made by individual dealers. One fails to understand as to under what statutory authority such clarifications are issued by the Commissioner or some one acting on his behalf; or how these can acquire statutory colour so as to bind the assessing authorities. Dealing with somewhat similar situation, a Bench of this Court in the case of Lipton India Limited v. State of Karnataka : ILR1994KAR1848 , had to observe thus :
'It is difficult to appreciate how the reply of the Commissioner dated April 2, 1992 to the appellant can ever be construed as suo motu clarification by the Commissioner about the rate of tax payable and that the said clarification can be said to have been made to officers and persons employed in the execution of the Act, who have to follow such clarification. The said reply given by the Commissioner was not in exercise of any suo motu power. Secondly, it was not a clarification issued in connection with any rate of tax. Thirdly, it was not addressed to any of the subordinate officers. Mr. Chidambaram, in this connection submitted that it can be said to be a clarification saying that it will not be a nil rate of tax but would be maximum rate of 30 per cent. No such instruction to any subordinate officer was found in the reply dated April 2, 1992. The said letter has nothing to do with the rate of tax payable under the Act. The reply was in connection with the appellant's query whether the exemption from sales tax would be available to its products under the notification annexure B. It must, be held that the said reply of the Commissioner of Commercial Taxes dated April 2, 1992, addressed to the appellant by any stretch of imagination cannot be said to be instruction issued by the Commissioner under section 3A(2) to its subordinates.'
21. In this background, as noticed above, I can only say that the Commissioner and its office should henceforth forbear from sending replies to individual queries having bearing on assessments under the Act and communicating the gist thereof as guidelines to the statutory assessing authorities except in a manner provided under section 3A of the Act.
22. To conclude, it is held that for the purpose of computing turnover under the first proviso to section 5(1-A) of the Act, the sales tax paid will also form part of the turnover envisaged therein. Assessments of the petitioners should be completed/rectified accordingly.
23. Writ petitions are thus allowed to the aforesaid extent. There will be no order as to costs.
24. Writ petitions allowed.