No VAT on free supply of medicines; HC declares Sec. 15(5) of Bihar VAT Act as unconstitutional

CST & VAT: Bihar VAT - Patna High Court declares section 15(5) of Bihar Vat Act (which provides for levy of tax on basis of MRP) as unconstitutional.

Facts

a)   Assessee was engaged in business of manufacture and sale of medicines. It paid sales tax after claiming exemption in respect of medicines supplied free of cost to its dealers. The revenue, however, was of the view that such quantity of medicines supplied free of cost would be subject to tax in view of provisions of Section 15(5)(b) of Bihar VAT Act, 2005 (‘the Act’).

b)   Under the Scheme of the Act every dealer registered under the Act would be liable to pay tax on the sale and purchase made by him. Section 15(5) is in nature of exception to the general scheme of taxation and provides an option to certain class of registered dealers to pay in lieu of the tax payable by them, tax at the rate specified in Section 14, on the maximum retail price of such goods.

c)   The assessee objected to such levy on the ground such transaction would not amount to sale as there being no valuable consideration for supply of such extra quantity of medicines. Aggrieved-assessee filed the instant writ to challenge the validity of provisions of Section 15(5) of the Act and the Notification No. S.O. 47 dated 05.04.2006.

The High Court held in favour of assessee as under:

1) The Supreme Court in case of State of Rajasthan v. Rajasthan Chemist Association [2007] 2007 taxmann.com 1766 (SC) held that notification to the extent it intends to levy tax on first point sale with reference to price which could be charged in respect of a subsequent sale which has not come into existence at the time liability of tax arises and is determined ex hypothesis is unsustainable on that basis.

2)  In view of aforesaid, the State legislature not being competent to provide for levy of tax on the first point of sale on the basis of MRP or any other notional value, there could be no question of the legislature providing for the same even by way of exercise of option by the dealer concerned.

3)   Thus, in light of aforesaid discussion sub-section (5) of Section 15 of the Act was to be declared as ultra vires. - Mapra Laboratories (P.) Ltd. v. Commercial Tax Officer - [2015] 63 taxmann.com 91 (Patna)