A) ABSTRACT / HEADNOTE

The Supreme Court examined whether manufacturers of beer and Indian Made Foreign Liquor (IMFL) in Madhya Pradesh—supplying through State-run warehouses—“caused to be effected the entry of goods into the local area” within the meaning of Section 3(1)(a) read with Sections 2(1)(aa), 2(1)(b) and 2(3) of the M.P. Entry Tax Act, 1976, for the levy period 01.04.2007 to 31.03.2008. The Court treated the State’s warehousing model as a canalising mechanism but held that this produced two independent transactions: from manufacturers to the State warehouse, and from the warehouse to retailers. Even so, the manufacturers’ sale to the warehouse occasioned the entry into the local area, thereby satisfying the statutory trigger for entry tax. The Court further clarified that Section 3B of the Entry Tax Act is an enabling/machinery provision and the absence of a Section 3B notification does not preclude assessment and collection under Section 14. Precedents on occasioning and inseverable link—Coffee Board, Azad Coach Builders, K. Gopinathan Nair, Hyderabad Industries, and Kerala State Warehousing Corporation—were applied to demarcate inseverable from severable sales and to identify when an intermediary’s role disrupts transactional unity. The appeals failed; the levy on manufacturers stood sustained.

Keywords: Entry tax; entry of goods into the local area; caused to be effected the entry of goods; canalising agency; IMFL; beer; State warehouse; Section 3(1)(a); Section 2(3); Section 14; Section 3B; VAT dealer; Azad Coach Builders; Coffee Board; K. Gopinathan Nair.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The controversy centered on incidence of entry tax when the State of Madhya Pradesh canalised IMFL and beer distribution via departmental warehouses. The appellants, licensed manufacturers under the M.P. Excise Act, 1944, supplied spirits after obtaining NOCs, with transit passes under Rule 14(1) of the M.P. Foreign Liquor Rules, 1996, and raised invoices to the State warehouse. The State’s warehouse model was formalised through communications and Guidelines for Officers-in-Charge dated 27.03.2002. Under this model, manufacturing units declare ex-godown prices; warehouses effect supply to retail contractors by adding 5%; retailers deposit amounts at an in-house bank counter; the Excise Commissioner ensures payment to manufacturers; and day-end reconciliations allocate 5% to the departmental head with the balance to manufacturers. The appellants argued that no privity existed between them and retailers; the State warehouse sold/distributed to FL-1 licensees, while manufacturers (FL-9/FL-9A) could sell only to FL-10 (the warehouse). The 2007 Amendment added “Indian made foreign liquor and beer” to Schedule II at 2%, making entry tax exigible for 01.04.2007–31.03.2008. The State asserted that the warehouses neither purchase nor sell liquor and merely supervise the flow. The High Court upheld the levy on manufacturers. On appeal, the Supreme Court framed the issue for consideration around whether manufacturers “caused to effect” entry into the local area, and whether absence of a Section 3B notification disabled levy in light of Section 14. The report also records the later 04.10.2008 clarification by Commercial Tax Commissioner correcting an earlier communication, confirming manufacturers as liable.

D) FACTS OF THE CASE

The appellants bottled and supplied beer and IMFL under M.P. Excise licences, dispatching goods upon NOC and Transit Passes issued to the concerned State warehouse. Invoices were drawn in the name of the State warehouse; retailers (FL-1) obtained supplies upon demand notes; warehouses levied an additional 5% over ex-godown price, collected duty/VAT, and supervised loading by the retailers. Punjab National Bank counters within warehouses received retailers’ deposits, which were credited first to the Government account and then, by direction of Deputy Commissioners, transferred partly as 5% fee to the department and balance to the manufacturing unit. The Divisional Deputy Commissioners issued NOCs to manufacturing units after assessing local demand. The State argued that it did not purchase/sell liquor; it supervised sale from manufacturers to retailers. The appellants contended the transaction was between Government warehouses and retailers, that manufacturers had no privity with retailers, and that only warehouses caused entry into the local area. They further pointed to communications in June 2007 suggesting warehouse liability and argued that without a Section 3B notification—a special collection mechanism for foreign liquor—no levy could be imposed on manufacturers because the value and incidence crystallised at the warehouse stage. The State relied on a 04.10.2008 clarification reversing the earlier stance and maintained manufacturers were liable to entry tax. The levy period in dispute was 01.04.2007 to 31.03.2008, after which entry tax was withdrawn, and transportation fee allegedly rose from 6% to 8%.

E) LEGAL ISSUES RAISED

i. Whether the appellants-manufacturers “caused to effect the entry of goods into the local area” within the meaning of Sections 3(1)(a), 2(1)(aa), 2(1)(b) read with Section 2(3) of the M.P. Entry Tax Act, 1976 for the period 01.04.2007–31.03.2008?
ii. Whether the State’s canalising/warehouse model created an inseverable link between manufacturers and retailers, thereby displacing the manufacturers’ liability for entry tax?
iii. Whether absence of a notification under Section 3B barred assessment and collection of entry tax in view of Section 14?

F) PETITIONER/ APPELLANT’S ARGUMENTS

i. The counsels for Petitioner / Appellant submitted that the State-run warehouse (FL-10) is the operative seller/distributor, and retailers (FL-1) purchase against NOCs and demand notes, leading to two distinct privity chains where manufacturers (FL-9/FL-9A) have no privity with retailers. They highlighted the prescribed procedure: NOC issuance, Transit Pass under Rule 14(1) of the M.P. Foreign Liquor Rules, 1996, invoice to warehouse, 5% addition over ex-godown price, retailers’ deposit at PNB counters, and transfer of balance to manufacturers. On this footing, entry is occasioned by the warehouse, not by manufacturers, satisfying the statutory expression “has effected entry” / “has caused to be effected entry” only at the warehouse node, since warehouses “sell” or at least “distribute” within the meaning of a “dealer” under Explanation II to Section 2(i) of the M.P. VAT Act, 2002. The appellants urged that value of goods for entry tax crystallizes at the warehouse-retailer sale, and without a Section 3B notification designating collection machinery for foreign liquor, no levy could be effectuated upon manufacturers. They relied on the June 2007 communications suggesting warehouse liability and on the fact that post 01.04.2008 entry tax was dropped while transportation fee rose from 6% to 8%, indicating the fiscal design placed incidence at the warehouse-retailer interface.

G) RESPONDENT’S ARGUMENTS

i. The counsels for Respondent submitted that the High Court rightly held manufacturers liable, since warehouses neither purchase nor sell liquor and only supervise movement; the sale by manufacturer is the proximate cause of entry into the local area. They argued Section 3B is a machinery/enabling provision, and Section 14 independently vests assessment/collection power in VAT authorities; absence of a Section 3B notification does not suspend levy. They drew attention to the 04.10.2008 communication correcting the 02.06.2007 view and clarifying manufacturers’ liability. The State relied upon M/s Bhagatram Rajeevkumar v. C.S.T., M.P. to defend the principle of levy, though the Supreme Court ultimately held Bhagatram inapposite on facts. The State’s core point remained that the appellants’ sale into the warehouse caused the entry, squarely triggering Section 3(1)(a) read with Sections 2(1)(aa), 2(1)(b), and 2(3), since “has effected entry” includes “has caused to be effected entry”.

H) RELATED LEGAL PROVISIONS 

i. Section 3(1)(a), M.P. Entry Tax Act, 1976—incidence on entry into a local area for consumption, use or sale, by a dealer.
ii. Section 2(1)(aa), 2(1)(b), and 2(3), M.P. Entry Tax Act, 1976—definitions of entry of goods, entry tax, and the deeming that “has effected entry” includes “has caused to be effected entry”.
iii. Section 14, M.P. Entry Tax Act, 1976—assessment/collection machinery through VAT authorities.
iv. Section 3B, M.P. Entry Tax Act, 1976—special provision for foreign liquor collection, enabling in nature, non-obstante not displacing Section 14 absent contrary notification.
v. Definition of “dealer”, Section 2(i), M.P. VAT Act, 2002—including Government departments buying/selling/distributing goods.
vi. M.P. Foreign Liquor Rules, 1996, Rule 14(1)—Transit Pass regime for movement to warehouse (as noted in pleadings).

I) JUDGEMENT

The Supreme Court first mapped the canalised supply architecture and held that, on facts, there exist two independent transactions: manufacturer → State warehouse and warehouse → retailer. It rejected the State’s contention that the warehouse performed only a supervisory role and did not purchase from manufacturers—observing instead that the warehouse’s conduct, custody, and financial flows (including collection at PNB counters, 5% add-on, and remittance of the balance to manufacturers) bespoke a distinct transactional leg. Yet, this disaggregation did not exonerate manufacturers. Turning to the incidence clause in Section 3(1)(a) and the definitional deeming in Section 2(3)—that “has effected entry” includes “has caused to be effected entry”—the Court reasoned that the sale by manufacturers to the warehouse occasioned the entry into the local area for consumption, use or sale therein. To elucidate “cause/occasion”, the Court referenced Azad Coach Builders and Coffee Board, emphasising that “occasion” as a verb means “to cause” or “to be the immediate cause of” and that the legal test interrogates inextricable linkage in movement. Applying that test to entry into a local area, the Court concluded that manufacturers’ sales were the immediate cause of entry. On the Section 3B argument, the Court affirmed the High Court’s view: Section 3B is machinery/enabling; Section 14 supplies the general collection mechanism; the non-obstante in Section 3B does not foreclose Section 14 absent a contrary notification. The Court found Bhagatram irrelevant to the present controversy. The appeals were dismissed, and the levy on manufacturers sustained.

a. RATIO DECIDENDI

The ratio rests on a two-step doctrinal synthesis. First, as a matter of transactional characterization, the Court accepted that the State’s canalising created two separate sales: manufacturer → warehouse and warehouse → retailer. This flows from principles in K. Gopinathan Nair, Hyderabad Industries, Kerala State Warehousing Corpn., and Azad Coach Builders: where an intermediary is not a mere name-lender and enters back-to-back contracts, unity fractures into independent legs, disrupting inseverability. Second, on incidence, Section 3(1)(a) triggers when a dealer effects or causes entry into a local area for consumption, use or sale. Section 2(3) widens the net by equating effecting with causing to be effected. Thus, even conceding two independent transactions, the sale by the manufacturer to the warehouse is the immediate cause of entry into the local area. The statutory phrase “entry…for consumption, use or sale therein” captures this entry, given that the goods’ destination and purpose are inherent in the warehouse model’s design. Hence, manufacturers are dealers who caused entry and are properly liable to entry tax; any passing on of the levy is a matter of incidence-shifting downstream, not of legal liability. The Section 3B plea collapses because Section 3B neither creates the charge nor suspends Section 14; it only provides a special collection modality, which—absent notification—leaves Section 14 fully operative. The ratio, therefore, ties causation in movement to statutory incidence and articulates a harmonious construction of Sections 3(1)(a), 2(1)(aa), 2(1)(b), 2(3), 14, and 3B.

b. OBITER DICTA

Two strands assume an obiter hue. First, in clarifying inseverability, the Court traversed import-in-course precedents to illustrate the canalising agency test. While decisive to reject the State’s “pure supervision” claim, this comparative taxonomy also signals that mere presence of a State-controlled intermediary does not ipso facto immunise upstream dealers from tax obligations pegged to movement. The guidelines and banking arrangements—demand notes by retailers, warehouse scrutiny, PNB deposit, batch recording, and transport permits—were highlighted to show the operational autonomy of the warehouse leg. Second, the Court’s remarks on passing on the levy—that the entry tax, if justifiably levied on manufacturers, “could always be passed on”—serve to segregate legal incidence from economic incidence, reminding that pricing/commission structures (e.g., 5% add-on, later transportation fee adjustments) do not govern taxability. Finally, the Bhagatram discussion underscores restraint: precedents upholding entry tax on other commodities with different sales-tax contexts do not automatically steer outcomes when statutory causation and machinery overlap (between Sections 3B and 14) are in issue. These observations refine the doctrinal boundaries for future disputes where canalisation, causation of entry, and machinery provisions intersect.

c. GUIDELINES 

i. When a canalising agency is present, determine whether it is a mere name-lender or an independent contracting party. If back-to-back arrangements, independent price declarations, banking/reconciliation, and custody/permit issuance exist, treat as two independent sales rather than an inseverable transaction.
ii. For entry tax incidence, apply the causation test embedded in Sections 3(1)(a) and 2(3). Ask whether the upstream sale caused the entry into the local area for consumption, use or sale therein. If yes, liability can rest on the upstream dealer, notwithstanding a subsequent downstream sale.
iii. Treat Section 3B as a machinery/enabling provision. Absence of a 3B notification does not stall assessment/collection under Section 14; the non-obstante in Section 3B does not override Section 14 unless a contrary notification exists.
iv. Differentiate legal from economic incidence. The possibility that levy can be passed on does not determine who is the “dealer” causing entry under the statute; liability follows causation, not pricing mechanics.
v. Use comparative precedents carefully. Import/entry cases like Coffee Board, Azad Coach Builders, K. Gopinathan Nair, and Hyderabad Industries provide tests for causation and inseverability; Bhagatram may be inapplicable when the statutory matrix and factual canalisation differ.

J) CONCLUSION & COMMENTS

The decision squarely aligns statutory causation with commercial mechanics. By recognising two independent sales and yet attributing causation of entry to the upstream manufacturer’s sale into the warehouse, the Court carefully avoids both extremes: it neither collapses the chain into a single inseverable sale nor immunises upstream dealers via the presence of a State intermediary. The warehouse architecture—demand notes, NOCs, PNB deposits, batch-wise tracking, and transport permits—demonstrated a robust institutional canalisation, but Section 2(3)’s deeming clause and Section 3(1)(a)’s breadth ensured that the first sale in the chain triggered entry for tax purposes. On machinery, the ruling provides welcome clarity: Section 14 remains a dependable default mechanism; Section 3B may create a special regime, but silence under 3B is not a legislative veto. From a policy lens, the outcome discourages forum shopping on collection mechanics and stabilises revenue certainty in sectors with State canalisation. It also implicitly endorses that indirect tax administration should track movement-causation rather than formalistic labels of who issues the last invoice before retail. For industry, the message is to model pricing and pass-through anticipating entry tax liability at the point of first local-area movement occasioned by their sale, unless the legislature expressly fashions a different collection pivot through a notified special mechanism.

K) REFERENCES

a. Important Cases Referred

i. Coffee Board, Bangalore v. Joint Commercial Tax Officer, Madras & Anr., [1969] 3 SCC 349—definition of “occasion” as “to cause”; applied to causation analysis. Quoted: “the sale which is to be regarded as exempt is a sale which causes the export to take place or is the immediate cause of the export.”
ii. State of Karnataka v. Azad Coach Builders Pvt. Ltd. & Anr., (2010) 9 SCC 524—inseverable link test; occasioning export; adopted to read “cause/occasion” in entry context. Quoted extract at para 27.
iii. K. Gopinathan Nair & Ors. v. State of Kerala, (1997) 10 SCC 1—principles summarising when canalised transactions disrupt unity into two independent sales.
iv. Hyderabad Industries Ltd. v. Union of India & Ors., (2000) 1 SCC 718—applied on course of import and transactional unity; cited.
v. Kerala State Warehousing Corpn. v. State of Kerala, (2005) 10 SCC 142—relied on for canalising/intermediary analysis.
vi. A.G. Varadarajulu & Anr. v. State of T.N. & Ors., (1998) 4 SCC 231; Union of India v. G.M. Kokil, 1984 Supp SCC 196—non-obstante construction sustaining Section 14 despite Section 3B.
vii. M/s Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. & Ors., 1995 Supp (1) SCC 673—held inapplicable; distinguished.

b. Important Statutes Referred

i. Madhya Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976—Section 3(1)(a); Sections 2(1)(aa), 2(1)(b), 2(3); Section 14; Section 3B.
ii. Madhya Pradesh VAT Act, 2002—Section 2(i) (dealer); interlink via Section 14 of Entry Tax Act.
iii. M.P. Foreign Liquor Rules, 1996—Rule 14(1) on Transit Pass for movement to warehouse.
iv. The Madhya Pradesh Entry Tax (Amendment) Act No. 9 of 2007—added IMFL and beer to Schedule II at 2%.