Supreme Court Upholds Revenue in Sales Tax Dispute Over Includibility of Excise Duty in Taxable Turnover. Excise Duty on IMFL Is a Manufacture Levy and Rule 22 Merely Provides Collection Mechanism, So It Forms Part of Manufacturer's Turnover Under Tamil Nadu General Sales Tax Act, 1959.

Appeals against judgments of Madras High Court dismissing writ petitions in tax revision cases concerning inclusion of excise duty in taxable turnover for sales tax.

Appellants sought a declaration that excise duty paid by TASMAC was not includible in their taxable turnover and that no sales tax was payable on the excise duty element; they sought quashing of assessments.

Commercial Tax Officer assessed sales tax including excise duty on IMFL in the appellants' turnover; appellants challenged the assessment.

Madras High Court dismissed the writ petitions, relying on McDowell & Company Limited v. Commercial Tax Officer, 1985 (3) S.C.R. 791, and held that excise duty was includible in turnover.

Whether excise duty paid on IMFL by TASMAC at the time of removal is includible in the taxable turnover of the manufacturer under the Tamil Nadu General Sales Tax Act, 1959. Who bears the primary liability to pay excise duty under the Tamil Nadu Prohibition Act, 1937 and the relevant rules: the manufacturer or TASMAC? Whether Rule 22 of the Manufacture Rules, by requiring the person removing goods to pay excise duty, shifts the incidence of duty to TASMAC and absolves the manufacturer. Whether the ratio of McDowell & Company Limited v. Commercial Tax Officer is applicable to the Tamil Nadu provisions or is confined to the Andhra Pradesh rules. Whether Explanation (1-A) to Section 2(r) of the Sales Tax Act excludes excise duty from the turnover. Whether an equitable estoppel arises against the State because of the representation contained in Rule 22.

Appellants argued that under Section 17-C of the Prohibition Act, TASMAC had exclusive wholesale privilege, and under Rule 22, the person removing goods (TASMAC) was liable to pay excise duty; therefore, they were not liable and the duty was not part of sale consideration. Appellants contended that they never collected excise duty from TASMAC and had no statutory or contractual authority to realise it, relying on Bombay Tyre International and Federal Court decisions to argue that excise duty is on removal, not manufacture. Appellants submitted that McDowell case was distinguishable as being based solely on Andhra Pradesh rules; they also invoked Explanation (1-A) to Section 2(r) and claimed equitable estoppel due to Rule 22 misleading the manufacturer. Respondents, as inferable from the judgment, supported the High Court's reliance on McDowell and argued that excise duty is a levy on manufacture, its incidence falls on the manufacturer, and the method of collection does not alter its nature; thus the duty forms part of turnover.

Excise duty is a tax on manufacture or production, and its incidence falls on the manufacturer or producer, although its collection may be deferred to a later stage for administrative convenience. The point of collection does not alter the essential nature of the tax. A rule requiring the person removing goods from a factory to pay excise duty in advance is only a machinery provision for convenient collection; it does not shift the primary liability from the manufacturer. Therefore, excise duty paid on goods forms part of the manufacturer's sale price or turnover for sales tax purposes. The principle in McDowell & Company Limited v. Commercial Tax Officer applies generally: payment of excise duty by another person under a contract or arrangement amounts only to meeting the obligation of the manufacturer. Explanation (1-A) to Section 2(r) excludes only sales tax separately charged, not excise duty, and no equitable estoppel arises from a rule prescribing mode of collection.

Excise duty is levied upon goods manufactured or produced Entry 84 of List I and Entry 51 of List II of the Seventh Schedule to the Constitution). Its incidence falls, therefore, on the manufacturer or producer of the goods. The collection of excise duty may be deferred to such later stage as is, administratively or otherwise, most convenient. The liability to pay excise duty on the IMFL is, therefore, that of the manufacturer thereof. Rule 22 only provides a mode for collecting the excise duty, a mode which is obviously convenient for it requires the party removing the IMFL from the factory of its production to pay in advance the excise duty thereon. It is amply clear from the citation of the authorities of this court in that judgement that it elaborated upon the concepts of excise duty and concluded that "the incidence of excise duty is directly relatable to manufacture but its collection can be deferred to a later stage as a measure of convenience of expediency".

The appellants filed writ petitions before the Madras High Court challenging the inclusion of excise duty in their taxable turnover. The High Court dismissed the writ petitions, relying on McDowell & Company Limited v. Commercial Tax Officer. The appellants then appealed to the Supreme Court by way of the present civil appeals.

• Tamil Nadu Prohibition Act, 1937: Section 17-C, Section 18-A, Section 18-B, Section 18-C
• Tamil Nadu Indian-Made Foreign Spirits (Manufacture) Rules, 1981: Rule 22
• Tamil Nadu Indian-Made Foreign Spirits (Wholesale) Rules, 1981: Rule 15
• Tamil Nadu General Sales Tax Act, 1959: Section 2(r), Explanation (1-A), Section 2(n), Section 3
• Constitution of India: Seventh Schedule, Entry 84 List I, Entry 51 List II