TMI Blog1952 (9) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... for a price of Rs. 1,67,515-15-1; sold to dealers in Madras 60,627 1/2 pieces for a price of Rs. 8,55,396-1-0; and sold locally 22,807 pieces for a price of Rs. 2,76,099-4-11, in all 90,684 pieces for a price of Rs. 12,99,011-5-0. It must be stated that with reference to the sale of 60,627 1/2 pieces to local dealers, the petitioners claimed that the goods covered by these sales had in fact been exported to foreign countries, while the respondent stated that it could not be defi- nitely ascertained whether those pieces were ultimately exported or not. On these facts the point in dispute before the taxing authorities was whether the petitioners were liable to pay sales tax on Rs. 8,66,212-8-1 under Rule 16(2)(i) and (ii) of the Madras Turnover and Assessment Rules as purchasers of raw hides and skins which were either tanned or exported by them. The petitioners claimed that the goods which they had purchased were all exported to foreign countries either directly or through other dealers and that they must in con- sequence be regarded as export exempt from taxation under Article 286(1)(b). The Deputy Commercial Tax Officer, Moore Market Division, rejected this contention by his order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. In this petition the following questions were raised for our determination: (1) Is the Madras General Sales Tax Act ultra vires of the powers of the Madras Legislature on the ground that entry No. 48 in the Pro- vincial List in the 7th schedule to the Government of India Act of 1935 authorised tax only on sales and not on purchases? (2) Is the imposition of tax on the purchaser by the Turnover and Assessment Rules void on the ground that the Legislature had unconstitu- tionally delegated its functions to the executive? (3) Is the Madras General Sales Tax Act void as repugnant to Article 14 of the Constitution on the ground that it discriminated against pur- chasers in some trades while taxing sellers generally? (4) Are the Turnover and Assessment Rules framed under the Madras General Sales Tax Act void on the ground that they are repugn- ant to the parent Act? (5) Whether the imposition of tax is in contravention of Article 286 of the Constitution and, therefore, illegal? We have held in Writ Petitions Nos. 21 and 41 of 1952* that this Court would not entertain in proceedings by way of writ such objections to the assessment of the sales tax as could have been u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed in another State. (2) Except in so far as Parliament may by law otherwise provide, no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of inter-State trade or commerce: Provided that the President may by order direct that any tax on the sale or purchase of goods which was being lawfully levied by the Government of any State immediately before the commencement of this Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions of this clause, continue to be levied until the thirty-first day of March, 1951." It will be seen that Article 286 deals with three classes of cases: (1) Where the sale or purchase takes place outside the State, which must mean the State imposing the tax, and according to the Explanation, sale or purchase must be deemed to take place in that Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cance as including not merely the particular transaction under which the export or import of goods takes place, but all the chain of transactions which are entered into either with the object of exporting or importing the goods or with the knowledge that they would be exported or imported. He argues that for this purpose we must have regard to the nature of the goods which are exported or imported, the usual course of the business and the exigencies of the trade in those goods and on a consideration of all the circumstances it must be decided whether the transactions in respect of which immunity is claimed under the Article are so intimately connected with the actual export or import as properly to be considered as forming part of it. It is stated that the raw hides and skins of South India enjoy considerable popularity in world markets under the name of East India Kips, that there is considerable demand for it in foreign countries, that the export of hides and skins is one of the main items of the foreign trade of this State, that they are generally purchased with the object of being exported and that it would therefore be legitimate to treat the chain of sales culminating in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to escape the prohibition in the Constitution." In Anglo-Chilean Nitrate Sales Corporation v. Alabama(2), the appellant was a Corporation carrying on the business of importing nitrate from Chile and selling it to purchasers in its original packages. In holding that a tax by the State of Alabama on these sales was obnoxious to Section 10(2) as amounting to a tax on imports the Court observed: "The right to import the nitrate included the right to sell it in the original bags while it remained the property of appellant and before it lost its distinctive character as an import. State prohibition of such sales would take from the appellant the very rights (1) 12 U.S. 419; 6 L.Ed. 678. (2) 288 U.S. 218; 77 L.Ed. 710. in respect of importation that are conferred by the Constitution and laws of the United States." It is argued on the basis of these two decisions that if import does not cease on the entry of the goods into the country but extends to the stage of their first sale, export should likewise be held to begin not when the goods leave the country, but when they are purchased with the object of being exported and that therefore the purchase made by the petitioners with the object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Section 10(2) did not apply. It was held that notwith- standing that on the documents the transaction was one of sale between the appellants and the commission agents in substance the export had begun when the goods had been entrusted to the common carrier and that Section 10(2) would therefore operate on such goods and the docu- ment of sale between the appellants and the commission agents did not affect the matter. If the contention of the petitioners is well-founded, a simple answer to the claim of the State would have been to hold that even on the basis that the sale was by the appellants to the commission agents, that was impressed with the character of export on the principle laid down in Brown v. The State of Maryland(1), and that therefore the sale could not be taxed having regard to Section 10(2). Empresa Siderurgica, S.A. v. Merced(2) is a recent decision in which the scope of the export and the import clause came up again for consideration. A Corporation in Columbia purchased a cement plant in California with a view to export it to Columbia. The factory was being gradually dismantled and the materials transported to Colifornia. During the years of assessment, a portion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in Brown v. Maryland(1) was in reality treating goods in the hands of an importer for sale as though they were still in transit until the first sale had been made." This reasoning will not apply to a transaction which takes place before the transit begins. Another reason assigned for this rule is thus stated by Marshall, C.J., in Brown v. The State of Maryland(1): "The counsel for the plaintiffs in error contended that the importer purchases, by pay- ment of the duty to the United States, a right to dispose of his mer- chandise, as well as to bring it into the country; and certainly the argument is supported by strong reason, as well as by the practice of nations, including our own. The object of importation is sale; it constitutes the motive for paying the duties; and if the United States possess the power of conferring the right to sell, as the consideration for which the duty is paid, every principle of fair dealing requires that they should be understood to confer it." That is to say, when an im- porter pays to the United States customs duties on the goods imported he thereby purchases a right to sell the goods free from any further taxation and that therefore the States ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed statute trespasses into the area of inter-State commerce, and that in turn depends on where the region of inter-State commerce begins and where it ends. If the State legislation cuts in bet- ween those two points it will be struck down as unconstitutional. But subject to this, it will have full operation. Thus, the discussion in the authorities on this subject is directed to ascertaining the points of commencement and of termination of the inter-State commerce. A number of authorities have been cited before us on the ques- tion. It will be sufficient to refer to the more important among them. In Coe v. Errol(1), timber standing in a forest in the State of New Hampshire was cut down with the object of exporting them to the State of Maine and the logs had in furtherance of this object been deposited on the river side for the purpose of being floated down. The State of New Hampshire imposed a tax on the logs of wood and the (1) 116 U.S. 517; 29 L.Ed. 715 (at pp. 718-719). question was, whether it was in contravention of Section 8(3). In negativing this contention, Bradley, J., observed: "Are the products of a State, although intended for exportation to another State and partially p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as levied on inter-State commerce. In negativing this contention the Court observed that after the goods had come to rest in the State of New York they were liable to be taxed like every other property within the State and that "its only relation to the commerce arises from the (1) 309 U.S. 33; 84 L.Ed. 565 (at pp. 572 and 575). fact that immediately preceding transfer of possession to the purchaser within the State, which is the taxable event regardless of the time and place of passing title, the merchandise has been transported in inter- State commerce and brought to its journey's end. Such a tax has no different effect upon inter-State commerce than a tax on the 'use' of property which has just been moved in inter-State commerce..........or the familiar property tax on goods by the State of destination at the conclusion of their inter-State journey: Brown v. Houston(1), American Steel and Wire Co. v. Speed(2). This Court has uniformly sustained a tax imposed by the State of the buyer upon a sale of goods, in several instances in the 'original packages', effected by delivery to the purchaser upon arrival at destination after an inter-State journey, both when the local seller ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Kentucky which prescribed various conditions under which Corporations of other States could do business in the State. As the business out of which the dispute arose was purchase of grain for inter- State commerce, it was held that the provisions of the Act amounted to an interference with that commerce, and were therefore void. In Lemke v. Farmers' Grain Company(2), North Dakota enacted a legislation requiring that the purchases of grains intended for transport to markets in Minnesota should be made only by persons holding a licence and imposed various restrictions in the matter of carrying on of that business. It was held that this was unconstitutional interference with the carrying on of inter-State commerce and was illegal. The decision in Shafer v. Farmers' Grain Company(3) is again on the validity of a North Dakota statute which introduced a compulsory system of licence and regulation with reference to the purchase of grains intended to be exported to other States. The Act was held to be unconsti- tutional. In Real Silk Hosiery Mills v. Portland(4), a statute of Oregon required licence to be taken from persons engaged in inter-State trade as a condition of their carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their destination. It was observed that the owner had "established a local facility in Chicago for his own benefit, and while, through its employment, the grain was there at rest, there was no reason why it should not be in- cluded with his other property within the State in an assessment for taxation which was made in the usual way, without discrimination." In Susquehanna Coal Company v. Smith Amboy(3), coal shipped from the State of Pennsylvania and landed at New Jersey and dumped into a coal depot was held liable for State taxation, although destined ulti- mately for ports in other States as there was something more than an incidental interruption of the continuity of the transportation through the State and there was "a business purpose and advantage in the delay." These authorities are relevant only as showing that the period during which the State loses its power to tax on the ground of inter-State com- merce should be confined to the time when there is a continuous course of transit. In Minnesota v. Blasius(4), the law relating to the power of the State to impose tax in relation to the commerce clause was thus summed up: "Thus, the State cannot tax inter-State commerce, eit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, the words "in the course of export" cannot bear the same meaning as "for the purpose of export". In their natural meaning the words "in the course of export" would have a more restricted operation than the words "for the purpose of export." Quite obviously the words "in the course of" have been suggested by the decisions of the American Courts on the commerce clause. The object of Article 286(2) is clearly to prevent States from interfering with the free flow of commerce in the country by erecting barriers of taxation. That was precisely the object of the commerce clause in America and, interpreting that clause, the decisions have established as already seen that the States enjoy full powers of taxation so long as they do not trespass into the region of inter-State commerce and that that region begins when the goods com- mence their inter-State journey and ends when they reach their destina- tion. Whether the goods are in the course of transit is the paramount question to be decided under the commerce clause. It is this concep- tion that appears to have been adopted in the words "sale of goods where it takes place in the course of inter-State trade." These words limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on against taxes, but in terms of a power on the part of Congress to regulate commerce..... As recently stated in McGoldrick v. Berwind-White Coal Mining Company(2), the law under the commerce clause has been fashioned (1) 329 U.S. 69; 91 L.Ed. 80. (2) 309 U.S. 33; 84 L.Ed. 565. by the Court in an effort 'to reconcile competing constitutional demands, that commerce between the States shall not be unduly impeded by State action, and that the power to lay taxes for the support of State Government shall not be unduly curtailed.'" It would appear that the intention of the framers of the Constitu- tion was to discard this distinction and enact one law for both foreign and inter-State trade and that they chose to adopt the law relating to inter-State commerce in America as furnishing a basis for reconciling the competing demands of both the union to control and regulate com- merce, inter-State and foreign, in the best interest of the country, and of the States to raise revenue on transactions, which are rendered possible by the protection afforded by the States. If that is the true meaning of Article 286, why, asks Mr. Rajah Ayyar, should not the Legislature have simply enacted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .I.F. contracts. That would clearly be exports not liable for taxation. The Commercial Tax Officer held that the goods which had been purchased as raw hides and skins were tanned by the petitioners in their own tannery and exported as tanned hides and skins. The petitioners contend that what they did was not tanning but merely curing the hides and skins so as to preserve them from decay and putrefaction so that they may be in a fit condition for export. If that is so-and that is not seriously disputed-the ground on which the tax was imposed in the present case must be rejected as untenable. But the substance of the matter is that the petitioners are not taxed as exporters, but as the last purchasers who exported the goods and the tax is imposed on the sum of Rs. 8,66,212-8-1 which is the price which they paid to their sellers in Dacca, Calcutta, Cawnpore and locally. Therefore, if the contention of the petitioners that all their purchases form part of the process of export fails, then they can escape taxation only by establishing that the purchases by them are not liable to be taxed, and that is the point raised in questions 2 and 3. On the second question relating to the purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then examine how far those powers have been abridged or modified by the provisions of that Article. The power to impose taxes on sales was conferred on the States by Entry No. 48 in the Provincial List in the Government of India Act, 1935, and under the Constitution that power is granted by Entry No. 54 in the State List in the Seventh Schedule. Article 245(1) enacts that "the Legis- lature of a State may make laws for the whole or any part of the State." On these provisions three possible cases can be conceived. There may be a sale which is wholly intra-State and a sale which may be described as inter-State by which is meant a sale in which the essential ingredients such as conclusion of the contract, delivery of the goods, payment of price and the passing of title take place partly in one State and partly in another or others. The first two categories do not present any difficulties; taxation of an intra-State sale will be intra vires and the taxation of an extra-State sale ultra vires of the powers of the State Legislature. The problem arises only with reference to inter-State sales. One question is whether having regard to the limitations prescribed in Article 245 (1), the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay down that when there is a sale of goods, the material element for the pur- pose of taxation is the agreement of sale under which the right of the parties get finally fixed; that the passing of property, delivery of goods and payment of price are matters on which the parties are free to settle their own terms; that the power of the State to impose taxes cannot depend on the terms of the bargains which the parties might make; and that where there is a consummated sale, the venue of the sale for purposes of taxation is the place where the agreement was concluded, the rest of the transaction being treated merely as a process of execu- tion of the agreement. Reliance was also placed on the observations of (1) [1948] F.L.J. 32 at p. 36; 16 I.T.R. 240. (3) 108 U.S. 133; 49 L.Ed. 417. (2) 191 U.S. 441; 48 L.Ed. 254. *Since reported as Poppatlal Shah v. State of Madras [1952] (3 S.T.C. 396). Black, J., in Richfield Oil Corporation v. State Board of Equalization(1). Reference may also be made to the following observations of Stone, J., in McGoldrick v. Berwind-White Coal Mining Company(2): "The place where the title passes has not been regarded as the test of inter-State character of sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L.Ed. 336. (2) 309 U.S. 33; 84 L.Ed. 565 at p. 581. (7) 191 U.S. 441; 48 L.Ed. 254. (3) 322 U.S. 327; 88 L.Ed. 1304. (8) 203 U.S. 507; 51 L.Ed. 295. (4) 322 U.S. 335; 88 L.Ed. 1309. (5) Vide 57 Harvard Law Review, page 1091. In Criminal Appeal No. 129 of 1952* we had not to consider the effect of Article 286 of the Constitution on the powers of a State to impose sales tax, as the assessment under consideration there related to the period between 1st April, 1947, and 31st December, 1947. The point for determination now is how far the power which the States otherwise possess of imposing sales tax is affected by Article 286(1)(a) and that depends on the interpretation to be given to the Explanation. Is the power of taxation conferred by the Explanation in addition to the power possessed by the State? Or, is it in substitution of it? To take an illustration, if a contract is concluded in Madras and to bring out the problem in relief, let us assume that under the agreement of parties the property in the goods also passed in Madras, but the goods are actually delivered in Bombay, would the State of Madras have the power to tax the sale? But for the Explanation, it would have had. Has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt them from taxing commodities which would be used in the State and that a power to tax such trans- actions should be conferred on them. Read in the light of this back- ground, the language of the Explanation is also significant. It applies only when the goods have been delivered for the purpose of consumption in that State. It is really what is termed in American Legislation as "use tax " which though functionally allied to sales tax, is different in its operation. In McLeod v. Dilworth Company(1), the difference between the two kinds of tax was thus explained: "A sales tax and a use tax in many instances may bring about the same result. But they are different in conception, are assessments upon different transactions, and in the interlacings of the two legislative authorities within our federation may have to justify themselves on different constitutional grounds. A sales tax is a tax on the freedom of purchase. A use tax is a tax on the enjoyment of that which was purchased." We are not concerned with the constitutional problem as it presented itself for solution in that case; because under the Constitution the States enjoy both a power under Entry 54 to tax sale and purchase o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re actually delivered in Madras and if so, that will confer on the State of Madras a power to tax the goods under the Explanation to Article 286(1)(a) which has become incor- porated in the Madras General Sales Tax Act by the Adaptation of Laws (Fourth Amendment) Order, 1952, which by virtue of Section 1(2) shall be deemed to have come into force on the 26th January, 1950. With reference to the purchases made in Cawnpore also it is stated on behalf of the respondent that the prices were paid to the banks in Madras against delivery of documents of title. This circumstance would not be sufficient to clothe the State of Madras with authority to impose a tax on these sales, though property in the goods might pass in Madras, as in the view expressed by us, the locus of the contract is not where the property passes, but where the agreement is concluded. But if the goods were delivered in Madras, as appears from the statement on behalf of the respondent, the Madras State would have jurisdiction to impose tax under the Explanation to Article 286(1)(a). We must mention that on the construction of the Explanation to Article 286(1)(a) Mr. K. Rajah Ayyar argued that the word "consump- tion" oc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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