McDowell & Company Limited v. CTO

McDowell & Company Limited vs CTO (1986 AIR 649) is one of the earliest cases in independent India dealing with the concepts of tax planning and Tax Evasion. The case pertained to whether excise duty paid is a part of "turnover," for the computation of sales tax under the Andhra Pradesh General Sales Tax Act, 1947 of a liquor manufacturer when the excise duty is paid directly by the purchaser to the government exchequer. The Court upheld the legitimacy of tax planning in India and dealt with the legitimacy of transaction structuring to avoid payment of tax.

Facts

Manufacture, sale-wholesale and retail including storage and transport of liquor in Andhra Pradesh is regulated by the Andhra Pradesh Excise Act, 1968 and the rules made thereunder. The manufacturer (McDoweel in the present case) is required to pay excise duty before removing liquor from distilleries. In the given case, the purchasers paid excise duty directly to the government to obtain distillery passes for removing liquor from distilleries.

Manufacturers are required to pay sales tax as a percentage of total turnover under the provisions of The Andhra Pradesh General Sales Tax Act, 1957 (Sales Tax Act). The appellant manufacturer paid sales tax based on its turnover which excluded excise duty. Notably, the invoices raised by the manufacturer do not include excise duty deposited by the purchaser to the exchequer on behalf of the manufacturer. The company was assessed for sales tax based on its returns but later the Commercial Tax Officer was of the view that the manufacturer had failed to include the excise duty paid on the liquor sold by it as part of the turnover.