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CASE NO.:

Appeal (civil) 5670 of 2000

PETITIONER:

NEYVELI LIGNITE CORPORATION LTD.

RESPONDENT:

COMMERCIAL TAX OFFICER, CUDDALORE AND ANR.

DATE OF JUDGMENT: 19/09/2001

BENCH:

B.N. KIRPAL & S.N. PHUKAN & P. VENKATARAMA REDDI

JUDGMENT:

JUDGMENT

2001 Supp(3) SCR 163

The Judgment of the Court was delivered by KIRPAL, J. : Civil Appeal No.

5678 of 2000

Whether the subsidy received by the appellant is to form part of its

taxable turnover under the provisions of the Tamil Nadu General Sales Tax

Act, is a short question which arises for consideration in this and the

connected cases.

Briefly stated the facts are that in 1957 under the provisions of Section 3

of the Essential Commodities Act, 1955, the Central Government promulgated

the Fertilizer (Control) Order. This Order has been revised from time to

time and in respect of the assessment year 1996-97 we are concerned with

the provisions of the Fertilizer (Control) Order, 1985.

Under the provisions of the Fertilizer (Control) Order, maximum selling

price for different types of fertilizer is determined under Clause 3. No

manufacturer like the appellant can sell or offer for sale any fertilizer

at a price exceeding the maximum price or the rate fixed under Clause 3.

Non-compliance or violation of the same attracts penal consequences.

Fertilizer which is manufactured by the appellant is usually used by the

agriculturists. In order to ensure the availability of fertilizer at a

reasonable price, the prices are fixed under the Fertilizer (Control) Order

normally at a figure which may possibly be less than the normal market

price at which it can be sold. In order to ensure that no hardship is

caused to the manufacturer and sufficient supplies are available, the

Government of India took administrative decision and it introduced on 31st

December, 1977 a Retention Price Scheme. This was introduced with effect

from 1st November, 1977 and this Scheme, inter alia, contemplated the

fixation of maximum sale price of fertilizer under Clause 3 of the

Fertilizer (Control) Order; determination of retention price for each

manufacturer; scheme of reimbursement of the difference between retention

price fixed for the industry and the maximum selling price fixed under

Clause 3 of the Fertilizer (Control) Order; submission of Claims by the

manufacturer supported by details of manufacture along with copy of central

excise records to be addressed to the Executive Director, Fertilizer

Industry Coordination Committee, New Delhi; and disbursement of an amount

of subsidy to the claimant-industry being the difference between the

retention price and the selling price fixed under Clause 3 of the

Fertilizer (Control) Order.

The procedure enunciated on 31st December, 1977 was then substituted by

another one as stipulated in the Government's letter of 29th September,

1980. Broadly speaking, according to the procedure now prescribed, bills

for payments and recovery under the Retention price Scheme for subsidy are

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to be submitted when fertilizer is moved out of the factory along with the

proof of movement. The claims are to be made in the forms which are

prescribed and one of the conditions contained therein is that the

fertilizer which is moved, has been sold or will be sold for agricultural

purposes.

'M/s. Neyveli Lignite Corporation Limited received notices from the sales

tax authorities to the effect that according to it the subsidy received by

the appellant from the Government of India would form part of the taxable

turnover of the appellant, and, therefore, was liable to sales tax. This

was challenged by the appellant by filing a writ petition in the High Court

at Madras. With the establishment of the Tamil Nadu Taxation Special

Tribunal, the writ petition was transferred to the Tribunal.

The Taxation Tribunal by the decision dated 3rd October, 1998 came to the

conclusion that the fertilizer subsidy disbursed by the Government of India

against the claim made under the Subsidy Scheme was sale price or turnover

attracting sales tax. The writ petition was, accordingly, dismissed. Hence,

this appeal by special leave.

It has been contended on behalf of the appellant that what was received by

the appellant from the Government of India was subsidy which could not be

regarded as a part of the sale price or consideration of sale of fertilizer

made by the appellant. A number of decisions were relied upon to which we

shall refer later. Mr. Balakrishnan, on the other hand contended while

relying upon a decision in E.I.D. Parry (I) Ltd. etc. v. Asstt. Commnr. of

Commercial Taxes and Anr [2000] 2 SCC 321 that the amount of subsidy which

was received is clearly relatable to the sale of fertilizer and formed an

integral part of the sale price and would, therefore, be added to the

taxable turnover and sales tax levied thereon.

Sales tax is levied on sale or purchases of goods under Section 3 of the

Tamil Nadu General Sales Tax Act on the turnover of a dealer in a year.

Turnover' is defined in Section 2(r), inter alia, to mean the aggregate

amount for which the goods are bought or sold or supplied in any of the

ways referred to in clause (n) by a dealer whether for cash or for deferred

payment or other valuable consideration. Clause (n) of Section 2 defines

'sale' as meaning transfer of property in goods by one person to another in

the course of business for cash, deferred payment or other valuable

consideration. It appears to us that it is that sale consideration whether

in cash or otherwise, which is receivable in respect of sales made by a

dealer which can possibly form part of the turnover of a dealer. It is that

sum which can be legitimately regarded as forming part of the aggregate

amount for which the goods have been bought or sold. The sum has to be paid

either by the purchaser or on his behalf by some other person.

In the instant case, as far as the Fertilizer (Control) Order is concerned,

the appellant is only required to receive either the fixed price determined

or the maximum price which may be fixed. For example, vide notification

dated 30th January, 1988, maximum price per tonne of different types of

fertilizer specified therein was fixed. In respect of urea, the maximum

price per tonne fixed was Rs. 2,350. No manufacturer of urea could sell the

same at a price in excess of Rs. 2,350. The Explanation in the said

notification provided that the maximum price so fixed was to be inclusive

of Central sales tax, State sales tax or other local taxes wherever levied.

Neither in the notification nor in the Fertilizer (Control) Order is there

any reference to the Retention Price Scheme of the Government.

The Retention Price Scheme first enunciated by letter dated 31st December,

1977 is clearly an administrative decision of the Government of India. It

has been issued pursuant to the Ministry's Resolution and it enables a

factory, like the appellant, to receive subsidy from the Government in case

the retention price is more than the price fixed under Clause 3 of the

Fertilizer (Control) Order. It is mentioned in the assessment order that

according to the appellant the subsidy which is paid by the Government of

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India is a non-plan expenditure which is debited to the Budget allocation.

This subsidy is payable on the basis of the quantity of fertilizer produced

and removed from the factory. The forms on the basis of which subsidy has

to be given, do not indicate that the reimbursement of the subsidy is

dependent on the sale of fertilizer having been made. The basis for the

grant of subsidy is the removal of the fertilizer from the factory, though

it has to be certified by the company that the said removal is for sale for

agricultural purposes.

It is clear from the aforesaid that whereas in respect of sale of

fertilizer the purchaser has to pay the price as fixed under The Fertilizer

(Control) Order giving of subsidy is not contemplated by the said Order and

the same is given pursuant to an administrative decision taken by the

Government of India. The subsidy so given is undoubtedly to see that the

ultimate consumer gets fertilizer at a reasonable price and the

manufacturer is not unduly burdened by the lower fixation of the price of

fertilizer. The payment which is so made by the Government to a

manufacturer cannot be regarded as a discharge of any liability or

obligation by the Government towards the purchaser of fertilizer. The two

payments received by the manufacturer, namely, the subsidy and the price

fixed under the Fertilizer (Control) order are independent of each other.

Subsidy does not form part of the bargain between the manufacturer and the

purchaser of fertilizer.

At this juncture, it will be useful to refer to the decisions of this Court

which also lead to the conclusion that the subsidy so received cannot be

regarded as a part of the taxable turnover. In State of T.N. and Ors. v.

Kothari Sugars & Chemicals Ltd. and Ors., [1996] 7 SCC 751, excess amount

was paid by the purchaser to the cane grower as advance over and above

minimum cane price fixed under Clause 3 and the additional cane price fixed

under Clause 5A of the Sugarcane (Control) Order. The question arose

whether this excess amount so paid can be regarded as a part of the price

paid by the purchaser to the grower for the purposes of levy of sales tax

on purchase. After referring to the provisions of the Sugarcane (Control)

Order, 1966 and the scheme of paying to the cane grower as advance, this

Court observed as follows :

"7. In these matters there is admittedly no statutory basis since the

"State advice" to the purchasers to pay a certain amount in addition to the

minimum cane price fixed under clause 3, in anticipation of fixation of the

additional cane price under clause 5-A, does not have any statutory basis.

The amount paid as advance under the State advice also does not have any

contractual basis since this was not paid as a result of an agreement

between the grower and the purchaser. The amount of advance was paid in

anticipation of fixation of the additional cane price under clause 5-A

which means that in case the fixation under clause 5-A was at a higher

amount than the amount paid as advance then the purchaser would have to pay

the deficit amount. Similarly, when the amount of advance was in excess,

the purchaser would be entitled to refund of the excess amount,

irrespective of the fact whether the refund was actually made or not. For

the purpose of determining the price of sugarcane for computation of the

purchase tax, the only significant amount is the aggregate of the minimum

price fixed under clause 3 and the additional cane price fixed under clause

5-A, unless a higher price is paid to the grower by agreement between the

purchaser and grower."

It appears to us that the aforesaid observations are clearly applicable in

the present case. Here also, there is no statutory basis for the grant of

subsidy; and the amount was received by the appellant pursuant to the

administrative decision taken by the Central Government. Furthermore, the

subsidy is not traceable to any agreement, direct or indirect, between the

manufacturer and the purchaser of fertilizer. What was payable in law as a

sale price for fertilizer was the amount or the rate fixed under the

Fertilizer (Control) Order and no more. This position is also made clear by

the observations of this Court in M/S. George Oakes (P.) Ltd. v. State of

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Madras, [1962] 2 SCR 570, wherein a Constitution Bench observed that the

expression turnover means the aggregate amount for which goods are bought

or sold, whether for cash or for deferred payment or other valuable

consideration, and when a sale attracts purchase tax and the tax is passed

on to the consumer, what the buyer has to pay for the goods includes the

tax as well and the aggregate amount so paid would fall within the

definition of turnover. At page 580, it was observed that "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." It is clear from the aforesaid observations

that it is that amount which flows from the purchaser to the seller which

alone would form part of the turnover of the seller. Any sum received

dehors the contract of sale from another entity, whether it be Government

or any one else, cannot be regarded as being an amount which would form

part of the sale price on which tax is payable.

In Hindustan Sugar Mills etc. v. State of Rajasthan & Ors., [1978] 4 SCC

271, the question which arose was whether freight was includible in the

expression 'sale price' for the purpose of levy of sales tax. The Cement

Control Order, 1967 provided for payment of railway freight by the

purchaser and it is in this context that the question arose whether the

freight so paid was to be regarded as a part of the taxable turnover.

Examining the provisions of the Cement Control Order, it was observed that

the said provisions have statutory force and it postulated the payment or

price of Rs. 214.65 per metric tonne free on rail destination railway

station. The Control Order was regarded as being paramount having

overriding effect over contractual terms and it stipulated that the freight

which was paid formed part of the sale price within the meaning of the

definition of the said expression. It follows from this decision that

whatever is payable by the purchaser to the seller in terms of a Control

Order promulgated under Section 3 of the Essential Commodities Act has to

be regarded as a part of the sale price and no more.

If the contention of the counsel for the respondent is correct, then it

would mean that, say for sale of urea, the appellant would be getting a

price of Rs. 2,350 per tonne plus the subsidy it receives from the

Government. If this will be so, then there would be a clear violation of

the provisions of the Control Order because the manufacturer cannot sell

urea at a price higher than Rs. 2,350. If on the other hand the

manufacturer was to reduce the price of urea by the amount of subsidy it

received and was to get a sum less than Rs. 2,350 from the purchaser, the

very concept or purpose of giving subsidy would be lost. The Fertilizer

(Control) Order having been promulgated by the Central Government, it

cannot be presumed that the Central Government would be giving subsidy

which was to be regarded as a part of the price, which will have the effect

of the Fertilizer (Control) Order being breached. It is apparent that the

amount given by the Central Government under the administrative scheme of

furnishing subsidy is not to be regarded as a part of the sale price or

consideration for the sale of fertilizers by the appellant.

What is the nature of a subsidy also came up for consideration before this

Court in Assam State Electricity Board and Ors. v. Brahma Putra Steels (P)

Ltd., and Ors., [1996] 8 SCC 73. There was an industrial policy of the

Government of Assam which provided for subsidy being granted and a question

arose whether this subsidy was in any way linked with electricity charges

payable by the consumer. The Court held that the policy statement which

provided for the grant of subsidy to an industry was not linked with the

payment of electricity charges by the industry to the Board.

As already mentioned, Mr. Balakrishnan, learned senior counsel for the

respondent, relied upon a decision of this Court in E.I.D. Parry (I) Ltd.

etc. v. Asstt. Commnr. of Commercial Taxes and Anr., [2000] 2 SCC 321. In

that case, the Sugarcane (Control) Order, 1966 fixed a minimum price which

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was payable for the purchase of sugarcane. Planting subsidy, dehors the

Control Order, was announced by the manufacturer of sugar for sugarcane

growers who undertook to grow the required variety of sugarcane and to sell

the same to the said manufacturer. The question arose whether payment of

this subsidy constituted a part of the sale price and whether it was

includible in the taxable turnover. After referring to the earlier decision

of this Court including that of Kothari Sugars (Supra), it was observed at

page 336 as follows :

"18. What transpires from the above case-law is that the amounts paid by

way of consideration by the purchaser to the seller of goods in pursuance

of the contract of sale can legitimately be regarded as purchase price

while calculating the turnover for the purposes of sales tax legislation.

What can legitimately be brought to sales tax or purchase tax is the

aggregation of the consideration for the transfer of property. All the

payments should have been made pursuant to the contract of sale and not

dehors it. Any amount paid as ex gratia payment or as an advance cannot be

the component of the purchase price and therefore cannot legitimately be

included in the turnover of the purchasing dealer. Whether one of the

components of the purchase price goes to the coffers of the seller or not

will not cease to be so if it is necessary for completing the same. Thus

the total amount of consideration for the purchase of goods would include

the price strictly so called and also other amounts which are payable by

the purchaser or which represent the expenses required for completing the

sale as the seller would ordinarily include all of them in the price at

which he would sell his goods. But if the sale price is fixed statutorily

then the only obligation of the purchaser under the agreement would be to

pay that price only and no other amount can be included in the purchase

price even if the same is paid by the purchaser to the seller."

The aforesaid observations clearly support the contention of the learned

Solicitor General before us, namely, that the sale price which has been

fixed by the Fertilizer (Control) Order is the only obligation of the

purchaser under the agreement to pay the same and no other .amount

including subsidy could be included in the purchase price. In EID Parry

(supra), however, the Court came to the conclusion that the aforesaid

principle was not applicable because the planting subsidy was given to the

cane growers at the time of delivery of sugarcane by them. "The planting

subsidy was given by the appellants to the cane-growers not by way of

agrarian reforms or a social welfare measure. The appellants had given

planting subsidy as purchasers of sugarcane and as a part of the

consideration for which the sugarcane was ultimately purchased by them."

The Court regarded this subsidy as a deferred payment and, therefore,

includible in the taxable turnover. It is clear that this subsidy was paid

pursuant to an agreement between the growers and the purchasers and the

payment was made at the time of the sale. In the present case, however,

there is no agreement between the appellant and the purchasers of

fertilizer for payment of any amount by the purchasers to the manufacturer

in excess of the price fixed under the Fertilizer (Control) Order. Subsidy

is paid to the appellant not by or on behalf of the purchasers, but is paid

by the Government of India for different reasons and under its own scheme

and after a budgetary allocation. As we have already observed, the scheme

of payment postulates the right of the appellant to receive the subsidy on

its clearance from the factory and not necessarily after the sale of

fertilizer. Even before the sale of fertilizer, the right to receive the

subsidy arises and under the circumstances, it cannot be said that subsidy

would form part of the sale price or turnover of the appellant.

Learned Solicitor-General has drawn our attention to various decisions of

the High Court who have taken a similar view. Some of them are Fertilizer

Corporation of India Ltd. v. Commercial Tax Officer (OFA), Punjagutta

Division, Hyderabad and Ors., 83 STC 129 (A.P.), Coromandel Fertilizers

Ltd. v. The Commercial Tax Officer (OFA), Punjagutta Division, Hyderabad,

85 STC 552 (A.P.); Natraj Organics Ltd. v. Assistant Commissioner

(Assessment), Sales Tax, Muzaffarnagar, 96 STC 261 (Allahabad); Rashtriya

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Chemicals and Fertilizers Limited v. State of U.P. and Others, 101 STC 487

(Allahabad); Bongaigaon Refinery & Petrochemicals Ltd. v. Commissioner of

Taxes., Assam & Ors., 103 STC 132 (Gauhati); and Commissioner of Taxes and

Ors. v. Bongaigaon Refinery & Petrochemicals Ltd., 114 STC 26 (Gauhati). A

Single Judge of the Kerala High Court in Madras Fertilizers Ltd. v. Asstt.

Commissioner (Assessment), Special Circle-II, Agrl. Income-tax and Sales

Tax Dept., Ernakulam & Anr., 95 STC 134 (Kerala) after analysing the

provisions of the Fertilizer (Control) Order and the claim of payment of

subsidy, observed as follows :

"11. Sale is a bilateral transaction which stems out of a contract between

the seller and the purchaser. An essential ingredient of a sale is "price".

Fixation of the price is a matter of agreement between the parties. "Sub-

section (1) of section 9 of the Sale of Goods Act, 1932, provides that the

price in a contract of sale may be fixed by the contract, or may be left to

be fixed in manner thereby agreed, or may be determined by the course of

dealing between the parties. In cases where the price is not determined in

accordance with these provisions the buyer shall pay the seller a

reasonable price. Therefore, price is ar essential element of a contract of

sale and is ordinarily a matter of agreement between the parties. What the

purchaser of the fertiliser bargains when he purchases fertilizer from the

petitioners is to obtain a certain quantity of fertilisers at a certain

price which shall not exceed the price fixed by the Central Government by

notification under the Fertilizer (Control) Order. The sale is not

conditional on the Central Government paying any amount by way of subsidy.

There is no agreement between the parties for any further amount to be

paid, than what is paid by the purchaser at the time of the sale.

"Turnover" is defined in section 2 (xxvii) of the KGST Act as meaning the

aggregate price for which goods are either bought or sold, supplied or

distributed by a dealer. "Sale" is defined in section 2(xxi) as meaning

every transfer, whether in pursuance of a contract or not, of the property

in goods by one person to another in the course of trade or business for

cash or for deferred payment or for other valuable consideration. The

essential contract between the parties, namely, the seller and the

purchaser of fertilisers, is only for payment of the price subject to the

maximum fixed by the Central Government and not for any other. This being

the contract, any other sum received by the seller-petitioners for a

different purpose and not as consideration for the sale, is not part of the

sale price, and therefore of their turnover. The fact that the amount of

subsidy is determined with reference to the quantum of fertilisers cleared

from the factory on which considerable stress was made by the Government

Pleader, does not lead to any inference that the payment is made in

consideration of the sale. The retention price and the transfer price are

fixed with reference to various factors. The subsidy is paid for the

benefit of the public, to keep the prices at a reasonable level, and at the

same time to ensure a reasonable return on investment to the units, and not

as consideration for the sales effected by them. I am therefore of the view

that the amount of subsidy received by the petitioners for the purpose of

their units, which is not related to any particular transaction of sale,

but is related to other circumstances, cannot constitute turnover in their

hands assessable under the KGST Act."

This decision was affirmed by the Division Bench in Assistant Commissioner

of Sales Tax (Assessment), Special Circle-Il, Ernakulam & Ors. v. Krishak

Bharathi Co-op. Ltd., 99 STC 17 (Kerala) and the special leave petition

filed against the same was dismissed by this Court. We are in respectful

agreement with the view of the Single Judge of Kerala High Court and that,

in our opinion, is the correct enunciation of law.

For the aforesaid reasons, this appeal is allowed and the judgment dated

3rd August, 1998 and other orders passed subsequent thereto of the Tribunal

are set aside.

C.A. Nos. 5679-5683/2000, 6213/2000 and 6214/2000.

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For the reasons stated in our judgment in C.A. No. 5678 of 2000, these

appeals are also allowed and the impugned orders of the High Court are set

aside.

TC(C)Nos. 14/2001, 15/2001, 16/200], 17/2001, 18/2001, 19/2001 and TC(C)

Nos. 27-35/2001 @ TP(C) Nos. 239-247/01.

For the reasons stated in our judgment in C.A. No. 5678 of 2000, these

transferred cases are allowed, the result of which will be that the writ

petitions filed in the High Court stand allowed and the orders of the

Tribunal quashed.