1. This revision petition under Section 38 of the Tamil Nadu General Sales Tax Act, 1959, is brought by E.I.D. Parry (India) Limited, Madras (hereinafter called the assessees), against an order of the Sales Tax Appellate Tribunal, Madras.
2. The assessees carry on business as distillers. They manufacture methylated spirit, denatured spirit and rectified spirit in their distilleries in the State and sell them to various persons and institutions. The different stages of manufacture and sale of these spirits are governed and regulated by the Rules framed by the State Government under the Tamil Nadu Prohibition Act, 1937. The regulation of the trade, under the relevant Rules, takes the form of a net work of licensing procedures. The system of licences is also at the same time utilised by the Rules for the purpose of raising revenues for the State. Periodical licence fees on holders of licences are impositions of one kind. Levy of excise duties on spirits at one stage or other in the course of trade forms another source of public revenue. In addition to those exactions, the gallonage fees are levied on the quantity of spirits handled by the trade. The gallonage fees, for instance, are payable to the State Government on spirits sold by the licensed distilleries to their customers.
3. The assessees, who ply their trade in this milieu, sell their spirits to the licensed wholesalers and retailers as well as to other persons and institutions authorised to obtain supplies from the distilleries. While effecting such sales, what the assessees do is not only to charge the customers the price of the spirits sold but also a further amount towards recovery of the appropriate gallonage fees payable to the Government on the quantity delivered under the sale. In making out their sales invoices, they separately depict the collection of gallonage fees, as distinct from the sale price for the spirits.
4. When the assessees' sales turnover for 1970-71 came to be determined for the purpose of assessment under the Tamil Nadu General Sales Tax Act, 1959, the question arose as to how the gallonage fees collected by the assessees from the purchasers have to be dealt with for purposes of assessment of the assessees' turnover in spirits. The assessing authority took the view that these collections must be reckoned as forming part of the assessees' taxable turnover, in the sense that they formed part of the aggregate amount for which they sold their goods. The assessees objected to this view of the collections of gallonage fees. But the assessing authority overruled their objections and included the amounts in the final assessment. The amounts so included came to Rs. 10,16,857.32. The tax effect of such inclusion was Rs. 30,505.72.
5. The assessees appealed against this assessment, but without success. Atthe stage of second appeal, the Sales Tax Appellate Tribunal went into some ofthe statutory rules governing the levy and collection of gallonage fees, buttheir view of the Rules only confirmed the assessing officer's tax treatmentof the gallonage fees as part of the assessees' sales turnover. Whileconfirming the assessment in this manner, the Tribunal felt themselves boundby a decision of a Division Bench of this Court reported in Spencer & Co. v.Joint Commercial Tax Officer  24 S.T.C. 161.
6. In this taxrevision case, the assessees' Learned Counsel, Mr. V.K. Thiruvenkatachari,argued that the gallonage fee is a revenue exaction laid on the purchasers ofspirits, and not a levy on the distilleries, who sell them. He said that underthe terms of the statutory rules, all that the distilleries do is to collectthe gallonage fees from the concerned purchasers and remit them to theGovernment treasury. He said that this was an obligation imposed by the law onthe distilleries. He said they had no choice at all in the matter. Heaccordingly urged that the gallonage fees could not be held to form part ofthe consideration for the sale of goods.
7. The learned AdditionalGovernment Pleader, however, submitted, adopting the view of the Tribunal inthis regard, that the present case was governed by this Court's ruling inSpencer & Co. v. Joint Commercial Tax Officer  24 S.T.C. 161. He pointedout that this decision was followed by another Bench of this Court in Taylor &Co. (Madras) P. Ltd. v. Government of Madras  34 S.T.C. 391. He urgedthat we too should follow suit.
8. Mr. Thiruvenkatachari, however,submitted that the decisions relied on by the representatives of the Statehave no application to the present case. According to him, a study of therelevant provisions governing the collection of gallonage fees would bear thisout.
9. Having regard to the nature of the rival contentions before us,we have to enter into a deatiled consideration not only of the relevantstatutory provisions, but also of the authorities bearing on the subject.
10. The issue for our consideration is whether the sum of Rs. 10,16,857.32representing the collections towards the gallonage fees was rightly includedas part of the assessees' taxable turnover. This question, in its very nature,provokes two lines of inquiry: (i) What precisely is the conception ofturnover under the taxing statute (ii) Whether the gallonage fees collectedby a distillery on the occasion of sales can be regarded as forming part ofthe sales turnover of the distillery ?
11. The Tamil Nadu General SalesTax Act, 1959, defines 'turnover' in simple language. According to Section2(r), 'turnover' means the aggregate amount for which goods are bought or soldby a dealer. This, broadly, is also the line of definition of the expressionin other local sales tax enactments in force in several other States in thiscountry. It is now a common place of this branch of the law that fiscalmeasures brought by the State Legislatures for taxing sales or sales turnoverare to be understood and applied in terms of the time-honoured juristicconception of sale. The Supreme Court held in the Gannon Dunkerley's case : 1SCR379 that 'sale' as a taxable event under the chargingprovisions of the Sales Tax Acts passed by the State Legislatures in Indiacannot be in derogation of the concept of sale under the Sale of Goods Act.One of the essential attributes of a sale under the general law is that itshould be the product of an agreement between the seller and the purchaser.This idea is brought out in the familiar expression 'bargain', which denotesthat it is essentially a mutual deal between the contracting parties. Itfollows that the consideration for the sale, which we call price, must also bepart of the bargain or agreement between the seller and the buyer. Thus, adealer's turnover must include all sums of money, which he receives from hispurchasers during a given period, usually a year, as a matter of bargain.
12. While this is the conception of sale price and sales turnover bothunder the general law and under the taxing statutes, dealers in commoditieshave a habit of marking a distinction, both in their books of account and intheir sales invoices, between sale price, pure and simple, and other amountsreceived from the customers. A dealer may, for instance, collect mahimai ordharmam from his customers. This may be separately shown in his sale bills.Where the goods are excisable, the dealer liable to duty may seek to shiftthat burden to his customer; he may do so by charging the amount separately inthe invoice. In like manner, he may also shift the sales tax leviable on thevery transaction of sale to his purchaser. It may be taken as a generalphenomenon that the price charged by a dealer for a commodity, excepting wherethe sale in question is a distress sale or one during a falling market,contains the dealer's prime cost plus his margin of profit. But the extraamounts charged by him and collected from the purchasers are over and abovethe cost and the profit margin. Generally speaking, such extra collections donot represent any profit element to the dealer himself. This is often thereason why he likes to maintain the distinction between such extra collectionson the one hand, and the price proper on the other. But tax laws arenotoriously indifferent to the practices of the business community, thepatterns of commercial invoices and the methods of keeping business accounts.They are concerned rather with finding out what really are the amounts forwhich the dealer sells his goods to the purchaser.
13. Ever since thesales tax legislation got into our statute books a good number of cases havegone to courts on the perennial theme, what to include in and what to excludefrom the taxable turnover. Questions, in particular, had often arisen underdifferent State sales tax laws, as to whether a tax which the selling dealershifts to the purchaser can be included in the dealer's sales turnover. Thefamiliar argument addressed in such cases has been that since what isrecovered by the dealer from the purchaser is tax which goes to the State, beit excise duty or sales tax or some other fiscal exaction, it could not reallyform part of the amount for which the goods are sold. The courts, however,have tended to consider an argument of this kind not on the mere aspect thatthe collection by the dealer from the purchaser represents tax due to theState, but by going into the real nature of the particular tax concerned, theburden of which is sought to be shifted by the seller on to his purchaser.
14. It is a familiar device of fiscal legislation in this country, aselsewhere, to impose a tax on someone, but provide machinery for collecting itfrom someone else. An example which comes readily to our mind is theimposition of income-tax on salaried employees with a provision for deductionat source at the time of disbursement of the salary by the person responsiblefor paying it. In cases where an obligation for tax collection is laid in thismanner on someone other than the taxpayer himself, the taxing statute usuallycontains sanctions not only against the taxpayer but also against those whomwe can properly describe as lay tax-collectors.
15. In contrast, thereare in force certain other taxing measures, where the law having laid theimposition on someone, is quite indifferent about who actually bears theultimate incidence, leaving that matter to be settled by the interplay ofmarket forces. A familiar example is that of excise duty. This duty is, inlaw, a direct imposition on the producer of manufactured articles. But thetiming of the levy is often fixed at the point of sale of the manufacturedarticles. And when this is done, the producer, who sells the dutiable articlesand who is therefore liable for the payment, is often in a position to shifthis excise burden to the purchaser. But the law itself does not compel him todo so. It does not say that he shall collect the excise from his customer andthen pay it over to the Government treasury.
16. It has thus come topass that, in examining the attributes and components of taxable turnoverunder the sales tax laws, the courts have found it necessary to keep clear thedistinction between a tax, which a dealer is under an obligation to collectfrom his customer at the time of sale of the dutiable commodity, on the onehand, and a tax, whose burden the dealer by virtue of his bargaining power isin a position to shift to his customer, on the other. This is well-illustratedin the two recent decisions of the Supreme Court. In Joint Commercial TaxOfficer v. Spencer & Co. : AIR1975SC1801 a company carrying onbusiness in Madras as a dealer in imported foreign liquor collected from theircustomers the tax levied under Section 21-A of the Tamil Nadu Prohibition Act, 1937, on sales of such liquor to them. The question was, whether the tax socollected by that company was part of their taxable turnover under the TamilNadu General Sales Tax Act, 1959. The appeal before the Supreme Court was froma decision of this Court in Spencer & Co. v. Joint Commercial Tax Officer 24 S.T.C. 161. Dealing with this particular question, this Court hadearlier observed that the language of Section 21-A of the Prohibition Actitself indicated that it was a tax on sale price, which meant that the twowere distinct. This distinction, according to the learned Judges, must also bemaintained untarnished in making the assessment of the dealer's turnover underthe Tamil Nadu General Sales Tax Act, 1959. On this basis, they held thatwhatever amount the dealer collected by way of tax from his purchasers underSection 21-A of the Prohibition Act must be excluded from his taxableturnover. On appeal, the Supreme Court agreed with this conclusion. But theypreferred to rest their decision on a different line of reasoning. They saidthat under Section 21-A of the Prohibition Act the imposition of the tax wassquarely on the purchaser and not on the seller. They further observed thatalthough the tax under that section was not a tax on the seller, the verysection compelled the seller to collect the tax from the purchaser. They,accordingly, said that the tax collected by the seller from his customersunder this provision in the Prohibition Act did not form part of his taxableturnover for the purpose of levy of sales tax under the Tamil Nadu GeneralSales Tax Act, 1959.
17. In an earlier decision of the Supreme Courtreported in Delhi Cloth & General Mills Co. Ltd. v. Commissioner of Sales Tax : AIR1971SC2216 the court had to examine the precise nature of thecollection of sales tax made by a dealer while selling the goods. The casearose under the Madhya Pradesh General Sales Tax Act, 1958, before itsamendment in 1963. The provision in that Act, as it then stood, was that salestax was payable by the seller and he had no statutory authority to collectthat tax from the buyer. The question was whether the sales tax so collectedby the dealer formed part of his sales turnover. The Supreme Court held thatin a case where, in the absence of statutory compulsion, a dealer neverthelessshifted his tax burden to the buyer, then that can only be considered as partof the valuable consideration for the sale. This decision was referred to bythe Supreme Court in the subsequent case, Joint Commercial Tax Officer v.Spencer & Co. : AIR1975SC1801 by way of making a distinction. Inthe course of their judgment in this later case, they instituted a comparisonbetween Section 21-A of the Tamil Nadu Prohibition Act, 1937, on the one hand,and the provisions of the Tamil Nadu General Sales Tax Act, 1959, on theother. They observed that, while the tax collected by a dealer under Section21-A of the Prohibition Act was a tax imposed on a purchaser which the sellerwas under a statutory obligation to collect, the sales tax leviable under theTamil Nadu General Sales Tax Act, 1959, was animposition on the sellerhimself and there was no statutory obligation on his part to collect the taxfrom the purchasers. It was on this line of distinction that the court restedits decision.
18. Mr. Thiruvenkatachari submitted before us that theprinciples laid down by the Supreme Court in Joint Commercial Tax Officer v.Spencer & Co. : AIR1975SC1801 must govern the present case aswell. He said that the gallonage fees leviable under the Rules framed by theGovernment are also obligatory collections which the distilleries are obligedto effect from their purchasers under the law. He urged, therefore, that suchcollections must stand excluded from the distiller's taxable turnover.
19 This submission of the Learned Counsel at once put us on an enquiry intothe real impact and incidence of the impositions called gallonage fees. Therewas no dispute at the Bar that the gallonage fee, although called a fee, is acompulsory fiscal imposition designed to augment the State exchequer. The onlyquestion then is whether gallonage fees are collected by the distillers purelyby virtue of their bargaining position or by virtue of their having to do sounder statutory compulsion. Having regard to the way in which the SupremeCourt had proceeded to decide similar questions in the cases we have referredto, the proper inquiry before us in the present case would be, on whom doesthe prohibition law impose the burden of galionage fees, the distiller or thepurchasers?
20. The Sales Tax Appellate Tribunal have referred in theirorder to some of the provisions in the Rules touching the levy and collectionof gallonage fees. But we find it necessary to deal with them at some greaterlength. There are three sets of Rules which have a bearing on the subject inthe present case. All of them have been made by the State Government inexercise of their rule-making power under the Tamil Nadu Prohibition Act.There are, first, the Madras Distillery Rules, 1960, which regulate themanufacture, storage and issue of spirits by the distillers. Secondly, thereare the Madras Denatured Spirit, Methyl Alcohol and Varnish (French Polish)Rules, 1959, which regulate the possession, sale and use of these distinctclasses of spirits. Thirdly, we have the Rectified Spirit Rules, 1959, layingdown similar regulatory provisions for rectified spirits.
21. Under theMadras Distillery Rules, 1960, any one who wishes to establish a distillery inthe State should have a 'distillery licence'. The Rules make elaborateprovisions for manufacture, storage and removal of spirits by thedistillery.
22. The Madras Denatured Spirit, Methyl Alcohol and Varnish(French Polish) Rules, 1959, regulate the manufacture, distribution,possession and use of a variety of spirits going under the names of methylatedspirit, denatured spirit, methyl alcohol, varnish and the like. Rule 3 saysthat only distilleries which possess distillery licence can manufacture thesespirits. The Rules prohibit transactions in these spirits otherwise than underappropriate licences. A wide variety of licences is set out under Rule 8. Thisrule provides, inter alia, that both wholesale and retail vendors of spiritsmust obtain annual licences for obtaining their supplies. Licences are alsonecessary for special classes of users such as the railways, ordnance depots,industrial users, etc. The wholesalers under licences will have to gettheir supplies from a distillery in the State. The retailers will get theirsupplies either from the distillers or from the licensed wholesalers. Thelicences are to be issued in prescribed forms. These forms carry a number ofspecial conditions. Certain general conditions are also laid down in Rule 10.General condition (IX) is the pertinent provision made by the rule-makingauthority under which the charge to gallonage fees is laid on these spirits.This clause also fixes the rates of gallonage fees at so much per litre. Itproceeds to lay down how, by whom and on what occasion the gallonage feesbecome payable. The clause, inter alia, says that, in regard to supplies ofspirits obtained by the licence-holders and others from a distillery, 'thegalionage fee shall be paid to the distiller by the purchaser at the time ofpurchase of stock from the distillery'. Such purchasers will have to besending periodical returns to the licensing authority on the quantitiespurchased. The returns are to be in a prescribed form. The form provides for anumber of particulars to be filled in by the purchasers. One particular itemof information which the purchaser has to render in his return is 'the amountof gallonage fee paid on quantities obtained from a distillery'.
23.While the liability to pay gallonage fees is thus laid on the purchasers, thedistillery has a corresponding obligation to collect the amounts from thepurchasers. Rule 4(b) of the Madras Distillery Rules, 1960, lays down that thedenatured spirit 'shall be issued...on collection of the gallonage fee atthe prescribed rate to licensees of such spirit in the State'. Rule 39(b)(1)ofthe same Rules clarifies that the rates at which the distillery 'shallcollect' the galionage fees from the purchasers are the rates prescribed inthe Madras Denatured Spirit, Methyl Alcohol and Varnish (French Polish) Rules,1959.
24. Similar provisions are found as respects sales bydistilleries of rectified spirits. These provisions are contained in theMadras Rectified Spirit Rules, 1959. The manufacture of rectified spirit canonly be by a licensed distillery (see Rule 3). Licences must be taken bypersons who wish to possess rectified spirits (Rule 6). Rule 12 provides thatsupplies can be obtained by licence-holders and others from distilleries onlyon indents. Rule 9 lays down the levy of gallonage fees at certain rates. Itproceeds to lay down that 'the gallonage fee shall be paid by the holders oflicence in the manner laid down in the licence conditions'. The licences areto be issued in prescribed forms. The forms lay down various conditions. Theseinclude conditions governing the levy of gallonage fees. Form R.L. prescribedby the rule-making authority makes appropriate provision for levy of gallonagefees on rectified spirits issued by a distillery. Paragraph 6(1) of this formlays down that the gallonage fee 'shall be paid by the licensee, in the caseof supplies obtained from a distillery, in this State, at the distilleryitself at the time of getting the supply'. The corresponding obligation of thedistillery to collect the gallonage fees from the purchasers is to be foundelsewhere in the Rules. Rule 12 of the Rectified Spirit Rules, 1959, says, inSub-rule (ii), that 'in case the supplier is the distillery, the issue shallbe made only after collection of the amount of excise duty (if payable) andgallonage fee leviable on the quantity supplied'. The distillery's obligationto collect the fee from the purchaser is also found mentioned in Rule 39(b)(2)of the Madras Distillery Rules, 1960. This rule provides the link between thetwo sets of Rules when it lays down that the gallonage fee shall be collected,if rectified, at the rates prescribed in or under the Madras Rectified SpiritRules, 1959.
25. The provisions relating to levy and collection of gallonage fees, which we have set out above, apply both tolicensed and non-licensed purchasers of spirits from the distilleries. This isindicated at the appropriate places in the relevant Rules themselves.
26. What we have attempted in the preceding paragraphs, with the assistanceof the Learned Counsel, is to ferret out the provisions relating to gallonagefees from a bewildering complexity of statutory instruments. Granting thatdifferent kinds of manufactured spirits might call for different regulatoryprovisions under the Rules, in the context of the paramount legislative policyof prohibition, we feel that the draftsman could yet have adopted a uniformstyle of rule-making at least for prescribing the levy and collection ofgallonage fees, considering that they are general in their application tospirits of different kinds. The lack of uniformity in the text and in theformat of the Rules alike has tended to obscure the real nature and incidenceof these exactions. As might have been noticed, for certain kinds of spirits,the gallonage fees are prescribed in the body of the Rules themselves. Forcertain other kinds, one has to go hunting for them amidst the small print ofthe forms, because the texts of the Rules are wholly silent on the subject.Again, while the actual levy is declared by one set of Rules, thecorresponding provision for collection is consigned to a different place in adifferent compilation. The Rules, as a whole, do not fall into a sensible orconsistent pattern. They are quite an unruly lot.
27. Shortcomings oflegal draftsmanship apart, however, two things stand out boldly and clearly onour collation and study of the relevant Rules. One is that the gallonage fee,as an exaction by the exchequer, is squarely laid by the Rules on thepurchaser of spirits. The purchaser is the one who is under a liability to paythe amount. There is no shirking this liability, unless it be under someexpress exemption. The other position which emerges is that the Rules appointthe distilleries as the accredited instrumentalities for recovery of theseamounts. The distiller is the one who is under an obligation to collect theappropriate sum of money from the purchaser and remit it to the treasury. Thisobligation also is inescapable. Under no circumstances, can the distillerexcuse himself from discharging it.
28. Mr. Thiruvenkatachari urgedthat the distinction which the gallonage Rules clearly mark between theselling distillers and the purchasers of spirits as to their respective fiscalobligations is quite akin to, and is no way different from, what Section 21-Aof the Prohibition Act itself lays down by way of allocation of fiscalobligations as between the seller and the purchaser of imported foreignliquor. He, accordingly, urged that we should decide the question before us inthis case on the same lines on which the Supreme Court decided in JointCommercial Tax Officer v. Spencer & Co. : AIR1975SC1801
29.We have earlier referred to the issue which called for decision in that caseand the view which the Supreme Court took of the nature and incidence of thetax levied by Section 21-A of the Prohibition Act. The section, excludingwords not relevant for our present purpose, is in the following terms:
Every person or institution selling foreign liquor shall collectfrom the purchaser and pay over to the Government a sales tax calculated atthe rate of... in the rupee on the price of the liquor so sold.
30. On this language, the Supreme Court, as we mentioned earlier, had hadno hesitation whatever in holding that the tax laid by the section wassquarely on the purchaser, and the part which the seller was obliged to playby the section was merely to collect the purchaser's tax for remittance to theGovernment. It might have been observed that Section 21-A does not, in terms,say that the tax is to be paid by the purchaser. Even so, the Supreme Courtheld that the tax was the purchaser's liability. They were obviously fullyalive to the implications and consequences, as against the purchaser, whichflowed from the expression 'collect', Which the legislature had employed tocircumscribe the nature of the seller's obligation and at the same timedistinguish it from the purchaser's liability.
31. As compared to thelanguage of the charge in Section 21-A of the Prohibition Act, the Rulesframed under the same Act for the collection and levy of gallon-age fees seemto us to be decidedly more explicit. These Rules, as we have pointed out morethan once, do not mince any words, but expressly make the demand that thegallonage fees shall be paid by the purchaser, while at the same time, makingcorresponding provision to the effect that the distiller shall collect theamounts from the purchaser. In these events, we think, we must agree with Mr.Thiruvenkatachari's argument that the principle to be derived from the SupremeCourt's decision in Joint Commercial Tax Officer v. Spencer & Co.  36S.T.C. 188 (S.C.) must apply a fortiori to the present case.
32. Thelearned Additional Government Pleader, however, urged that the point arisingin this case is covered by Spencer & Co. v. Joint Commercial Tax Officer 24 S.T.C. 161 a decision of a co-ordinate Bench of this Court, which hedescribed as a direct ruling on the question of the precise sales taxtreatment of the gallonage fees. He said that a subsequent Division Bench ofthis Court in Taylor & Co. v. Government of Madras  34 S.T.C. 391 notonly felt themselves bound by the earlier ruling, but also rejected thesubmission that it required reconsideration. He urged that the Supreme Court'sdecision : AIR1975SC1801 was concerned with an altogetherdifferent tax situation arising out of quite a different obligation imposed bythe legislature in the body of the Prohibition Act. He said that no generalprinciple could be derived or extracted from that decision to help decide thepresent case.
33. These submissions bear examination. We have given ourearnest consideration to them. But we are unable to accept them as valid. Inthe first place, we are unable to regard the Division Bench decisions inSpencer & Co. v. Joint Commercial Tax Officer  24 S.T.C. 161 and Taylor& Co. v. Government of Madras  34 S.T.C. 391 as direct authorities onthe question which falls for our determination in the present case. Under abroad system of head-noting or classification, all these cases, including theinstant case, can be indexed under the caption 'gallonage fees'. But, as wehad indicated earlier, this expression, as employed in the Rules before us,serves as nomenclature for a variety of exactions. All of them have onecharacteristic in common; they are specific duties on liquors and spirits,levied at so much per unit of measurement. Before our country went metric, theunit of measurement was the imperial gallon. Hence, apparently, the use of thedescriptive epithet, 'gallonage'. Even this term as a characteristic of thebasis of the levy has become out-of-date under the metric system. Besides,while all the impositions go by the same generic name of gallonage fees, thereare marked differences to be found in the various sets of Rules framed underthe statute, not only in the rates imposed, but also in their incidence, intheir impact, and in the dutiable event. For instance, both under the MadrasRectified Spirit Rules, 1959, and the Madras Denatured Spirit, Methyl Alcoholand Varnish (French Polish) Rules, 1959, the gallonage fees are levied onspirits not only on the occasion of sales by the distilleries to the holdersof licences and others, but also on the occasion of imports effected by theresidents in the State from outside. The imposition on imported spirits, alsogoing by the same name of gallonage fees, is governed by differentconsiderations. The importer, for instance, has generally to prepay thegallonage fees before he can obtain the import authorisation or permit fromthe concerned authority. Licences and licence conditions for imports are notthe same as those which govern the purchase of spirits from localmanufacturers. Rule 5 of the Rectified Spirit Rules, 1959, governs the levyand incidence of gallonage fees on import of rectified spirits into the State.It says that 'the importer (unless already exempted) shall prepay the exciseduty and the gallonage fee at the rate in force on the quantity of rectifiedspirit proposed to be imported and obtain an import permit by forwarding thechalan with the application for permit'. Under this rule, both the initialimpact and the ultimate incidence of the gallonage fees may be said to rest onthe importer. Likewise, under the latter part of condition (IX) of Rule 10 ofthe Madras Denatured Spirit, Methyl Alcohol and Varnish (French Polish) Rules,1959, it is provided that 'in the latter case of imports, the amount ofgallonage fee at the above rate, calculated for the quantity proposed to beimported, shall be paid into the treasury and the treasury receipt (chalan)shall be enclosed with the application for import permit'.
34. Thelesson to be drawn from the Rules such as these is that one cannot proceed ina general way to determine the nature and incidence of the gallonage fees onthe mere aspect of their being called so; careful attention has to be paid tothe terms of the relevant provisions governing the actual occasion and theevent of the levy, the person on whom the impact lies, and the provisions, ifany, relating to its recovery from any other quarter. We, therefore, proposeto consider the two earlier Bench decisions, Spencer & Co. v. Joint CommercialTax Officer  24 S.T.C. 161 and Taylor & Co. v. Government of Madras 34 S.T.C. 391 in the context of the particular kind of gallonage feesthey have had to consider in those cases.
35. In both the cases, thequestion had to be considered in connection with the sales tax assessment of adealer of liquor who sold them to consumers as alcoholic beverages.Transactions of sale of such liquor, among other things, are strictly governedby the provisions of the Madras Liquor (Licence and Permit) Rules, 1960,passed by the State Government under the Tamil Nadu Prohibition Act, 1937.Under these Rules, consumers of liquor have to have permits for purchase andconsumption. Dealers have to take out licences for purchase, storage and saleof liquor. The Rules provide for certain general licensing conditions to beread as having been incorporated in the licences. Condition (XI) in Rule 22 isone of them, and it levies gallonage fees in the following terms:
In addition to the annual fixed fee, or other fee, if any,prescribed for licences issued under these Rules a gallonage fee calculated atthe rates mentioned below, or at such other rates as may be notified byGovernment from time to time, shall be levied on liquor, medicated wine orsacramental wine sold or issued or imported into the State for purposes ofconsumption within the State, in the manner prescribed in these Rules.
36. The question before this Court in Spencer & Co. v. JointCommercial Tax Officer  24 S.T.C. 161 and Taylor & Co. v. Government ofMadras  34 S.T.C. 391 was whether the gallonage fees levied at the pointof sale under the aforesaid Rules, and included by a licensed dealer in hissales invoices to his purchasers can be excluded from the dealer's taxableturnover for assessment to sales tax under the Tamil Nadu General Sales TaxAct, 1959. The decision in both the cases was that the amounts must beincluded as part of the price at which the dealer sells the liquor to thepermit-holders.
37. The case for including the amounts of gallonagefees in the taxable turnover of the seller was put in various ways byRamaprasada Rao, J. (as he then was), while he delivered the judgment of theBench in Spencer & Co. v. Joint Commercial Tax Officer  24 S.T.C. 161.The learned Additional Government Pleader relied on the following passage:
The payment of gallonage fee appears to be one of the conditionsprecedent for a person to hold a licence and therefore it is an expense whichhe has necessarily to incur as a licensee under the Madras Liquor (Licence andPermit) Rules. We can therefore safely conclude that such expenses which arenecessary for the trade were incurred by them before the sale of liquor to anyperson concerned. It is not as if this gallonage fee is a tax collected bythem for and on behalf of the State for being paid over to the State. It formspart of the capital expenditure and has to be incurred by them and it wouldnecessarily be added on to the cost of the liquor sold by the petitioners fromtime to time. No attempt has been made by the petitioners to establish beforeus or at any time before the revenue, that the gallonage fee is an expenseincurred by them independently and without reference to the cost of theliquor. In fact, such a contention ordinarily cannot be raised by a merchant.Rightly, therefore, the revenue contended that the gallonage fee is likecustoms duty and has to be therefore telescoped into the assessable turnover.
38. Having studied this passage, we think the crux of thewhole reasoning is to be found in the learned Judge's observation:
It is not as if this gallonage fee is a tax collected by them forand on behalf of the State for being paid over to the State.
39. In other words, according to the learned Judge, the gallonage feeleviable under general condition (XI) of Rule 22 of the Madras Liquor (Licenceand Permit)
40. Rules, 1960, is a tax which the dealer has to payhimself and which he is not under any statutory obligation to realise from hispurchasers. This being so, it is easy enough to see on which side of thedividing line this type of case falls, in the light of the relevant principlewhich the Supreme Court subsequently enunciated in Joint Commercial TaxOfficer v. Spencer & Co. : AIR1975SC1801
41. On the viewthat the kind of gallonage fee which the two earlier Benches of this Court hadto consider was an out-and-out payment by the seller himself without anystatutory compulsion on him to collect it from his customers, the learnedJudges' ultimate determination on the question of the inclusion of the amountsin the dealer's assessable sales turnover followed as a consequence, both onprinciple and on the subsequent authority of the Supreme Court. By the sametoken, it must also be distinguished from the present case, where we have hadto consider a different set of statutory rules which cast the obligation onthe seller to collect the gallonage fees from the purchasers and remit them tothe State.
42. The learned Additional Government Pleader then urgedthat although the relevant Rules which have application to the present casemight contemplate that the distilleries act as the mere hand that collects thegallonage fees from the purchasers for being remitted to the Government, theway things had actually happened in this case was quite different, and thishas to be taken note of in considering the validity of the assessment inquestion before us. He explained that E.I.D. Parry, the assessees in thiscase, do not follow the procedure contemplated by the Rules, of firstcollecting the gallonage fees at the time of every sale and thereafter payingthe amounts so collected to the Government. On the contrary, what they do isto maintain a large advance deposit of money with the excise departmentsufficient to cover, in the gross, the gallonage fees payable on theirexpected sales of spirits over a period. With this deposit to their credit,the assessees proceed to collect from their customers the appropriategallonage fees as and when individual sales happened to be effected.
43. It is common ground that what has been described above is the modusoperandi by which the assessees have been discharging their statutoryobligation of collecting the gallonage fees from their customers and creditingthem to the Government. It may be said that, in doing so, they have reversedthe statutory process. Whereas the Rules say, 'collect and credit', what theassessees do is to credit and collect. Even so, the question is whether,because of this inversion in the collection procedure, any different resultflows for the tax treatment of such collections in the assessees' assessmentto sales tax.
44. In the course of argument, it was not suggested thatthis system of advance deposit of gallonage fees is unknown and withoutprecedent. On the contrary, a scheme of this kind seems to have been long invogue in the excise department, sanctioned also by the manual of executiveinstructions. The practical convenience of such a system, both to thedepartment and to the distilleries concerned, was hardly in doubt at any time.But the point made by the learned Additional Government Pleader is that, underthis system, if the assessees go on collecting the gallonage fees from thepurchasers at every individual sale, they would be doing so only forthemselves and not for the purposes of paying the amounts over to theGovernment. He granted that there might be a considerable sum of money alreadyin deposit with the excise authorities to the assessees' credit under thisaccount, but even so, he said, that cannot alter the fact that the collectionsactually effected by the assessees from their purchasers do not find their wayto the Government treasury. The realisations from the purchasers onlyreimburse the assessees' own purse.
45. The learned GovernmentPleader's interpretation of the assessees' practices and processes may well beaccepted as correct, but they do not, in our view, alter the crucial positionthat what the assessees collect is under legal compulsion, whenever they do itand whatever they do with it afterwards. It is beyond the scope of this caseto go into the question as to how far the procedure adopted by the assesseesof first depositing and then collecting the gallonage fees is proper or legal.But, even if the assessees ought properly to have handed over the collectionsof gallonage fees to the Government, their omission in this regard cannotalter the nature of the collections. For, whether they 'collect and credit' or'credit and collect', they do so not out of choice, but out of legal coercion.It is this consideration which the Supreme Court have regarded as paramount.The mere inversion of the statutory process without any difference in theend-result, cannot, therefore, be material to the present discussion. It mayeven be dismissed as spoonerism in action, as when the late Dr. Spooner, onone occasion, is reported by his biographer to have poured claret over spilledsalt to make it into a purple mound. The suggestion is that ordinary mortalsare accustomed to bring about the same result by spreading salt over spilledwine, just to prevent it from spreading.
46. The learned AdditionalGovernment Pleader then relied on a recent decision of the Supreme Court inMcDowell & Co. Ltd. v. Commercial Tax Officer : 1SCR914 tosay that since the assessees retained with themselves the actual collectionsof gallon-age fees from their customers, those amounts must be regarded aspart of their circulating capital and so liable to be included and taxed asforming part of their sales turnover. We think this argument involves amisunderstanding of the actual decision of the Supreme Court in that case andthe issues involved therein. The assessees before the Supreme Court weremanufacturers of 'Indian liquor' excisable under the Rules framed by theAndhra Pradesh Government under the Andhra Pradesh Excise Act, 1968. Underthose Rules, liquor cannot be removed from a distillery by anyone withoutpayment of excise duty. He must possess a licence and also pay the excise dutyto the Government's Distillery Officer before obtaining release of the liquorfrom the distillery. The question which arose in the context of sales taxassessment was whether the excise duty paid by a purchaser to the Governmentprior to, and as a condition precedent for, removal of the liquor from thedistillery was part of the distillery's sales turnover. It was found in thatcase that the excise duty was a direct payment by the purchaser to theGovernment. It was further found that such payment of excise duty, in the verynature of things, did not find a place either in the distillery's salesaccounts or in their sales invoices. In those circumstances, the State salestax authorities nevertheless proceeded to assess these amounts as part of thedistiller's sales turnover. The High Court upheld the assessment.
47.On appeal, the Supreme Court reversed the High Court's decision. They observedthat under the terms of the relevant Rules in force in the State, the exciseduty was neither charged on, nor collected by, the distillers. The learnedJudges expanded this idea by saying that the excise duty paid by thepurchasers did not go into the assessees' till and had not become a part ofthe assessees' 'circulating capital'.
48. These last observations ofthe Supreme Court were relied on by the learned Additional Government Pleaderas enunciation of a distinct principle. For the purposes of the present case,he restated the proposition by saying that a dealer's collections from hispurchasers, over and above what he charged them for the price of goodssimpliciter, go into his till, and when they do so and become part of hiscirculating capital, they will necessarily form part of his sales turnover aswell, properly assessable to sales tax in his hands.
49. We do notthink the Supreme Court purported to decide in that case that whatever goesinto a seller's till, becomes part of its circulating capital, and whateverconstitutes his circulating capital also represents his assessable salesturnover for levy of sales tax in his hands. The real basis of the court'sdecision in that case was that excise duty paid directly by the purchasers tothe State Distillery Officer for obtaining clearance for their purchase fromthe distilleries has nothing whatever to do with the distilleries' sales ofliquor or the price at which such sales were effected. It is in this context,and by way of description, that the court said that the purchaser's paymentsinto the treasury of excise demands did not go into the distiller's coffers oftheir circulating capital.
50. In the present case, we have alreadyreferred to the reason why the assessees did not turn over their collectionsof gallonage fees to the Government. The reason is not far to seek. It is thatthey already had to their credit with the Government an advance deposit underthis account. In this sense, therefore, as much money went out of theassessees' till as came into it, by way of gallonage fees, and there wasreally no net increase or net decrease in circulating capital, if that is theway to describe the situation.
51. But even if it were assumed for amoment that the assessees' collections of gallonage fees form, for the nonce,a part of their circulating capital, we do not see how that concludes thediscussion against them in their sales tax assessment. To argue that thingswhich go into a trader's circulating capital must also enter into his salesturnover may not be an accurate way of stating a principle even in thelanguage of accountancy. For, there may be items properly included in atrader's circulating capital, or for that matter, his trading account, whichmay not legitimately be included in the sales turnover. A dealer's unsoldstock-in-trade provides a case in point. The outlay on such stock, as much asthe outlay on stock that is already sold, reflects the trader's circulatingcapital. What is more, the value of stock on hand must necessarily enter intothe reckoning in the dealer's trading account, under any system of closingstock inventorying, for otherwise the result of the year's trading would notget properly ascertained. In contrast, however, as anyone can see, a trader'ssales turnover can, under no circumstances, include his stock on hand, for theexcellent reason that it remains unsold. There may be quite a few other itemsfiguring in commodity trades on which there can be room for doubt as towhether they should be included or not in the trading account or in thecirculating capital. But these considerations, relevant though they may bein accountancy theory or business practice, do not, however, touch thequestion of assessment of sales turnover. For, the only concern of a turnovertax is to arrive at the figure for which goods are sold, an inquiry whichcalls for an essentially simple and pragmatic approach. We do not understandthe Supreme Court to have lent their weight in the McDowell & Co.'s case : 1SCR914 to purely book-keeping conceptions as a basis ofassessment, in preference to a determination of the taxable turnover accordingto the words of charge which the legislature has employed in the statute.
52. For similar reasons, we must reject another notion put forward by thelearned Additional Government Pleader to the effect that the gallonage fees,in the hands of the collecting distillery, must enter into the selling cost ofthe product. This, to our mind, is really begging the question as to whetherthese collections can form part of the assessees' sales turnover. We are nothere concerned with what would be the position in the purchaser's assessment,if any.
53. Nor can we accept the learned Additional GovernmentPleader's theory that the gallonage fees form part of the assessees' capitalexpenditure. The reference to 'capital expenditure', in the present context,is obviously borrowed from Ramaprasada Rao, J.'s judgment in Spencer & Co. v.Joint Commercial Tax Officer  24 S.T.C. 161. The argument is that sincethe distiller has to have licences to manufacture and sell spirits and sincethe licences require that he should collect and pay the gallonage fees, thepayment must form part of his 'capital expenditure'.
54. It may,perhaps, be conceded that the intricacies of cost accounting might discoverelements of cost per unit even in general overheads. But we fail to see howany item which properly goes into reckoning as part of a trader's capitalexpenditure can have anything to do with his trading account, considering thatcapital expenditure is the very antithesis of circulating capital, andconsidering, further, that sales tax has to do with a dealer's receipts andnot with his outgoings or expenses.
55. We are inclined to feel that itwould altogether assist discussion of fiscal questions of every kind if peoplewho discuss them scrupulously avoid the use of jargon borrowed fromaccountancy, political economy and other disciplines. In most cases, stickingto the words of the taxing statute and asking ourselves the right questions,which the words of charge raise, might be the easiest and the mostsatisfactory way of arriving at solutions in tax cases.
56. On thepertinent question in this case as to whether the amount of Rs. 10,16,857.32is or is not to be included in the assessees' sales turnover, we have examinedno,; only the relevant provisions of the Tamil Nadu General Sales Tax Act,1959, but also the relevant Rules under the Tamil Nadu Prohibition Act, 1937,to find what fiscal character the said amount bears. And, for the reasons wehave earlier set out, we must answer the question in the assessees' favour,holding that the amount does not form part of their assessable turnover.
57. This tax revision case is accordingly allowed. The assessing authorityis directed to exclude the amount in question from the assessment for 1970-71.The respondent will pay the assessees' costs. Counsel's fee Rs. 250.