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TMI Blog1964 (9) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... ler of Stores, I.C.F., and therefore it was a local sale, and that the import effected by the petitioner was only for the purpose of enabling itself to perform its contract, namely, for the sale and delivery of the iron and steel within the state of Madras. On the other hand, the contention of the assessee is that this was a case of a sale in the course of import within the meaning of section 5(2) of the Central Sales Tax Act of 1956 inasmuch as the import of the goods in question was solely occasioned by the contract, that the contract itself involved the movement of the goods from the manufacturers in London to the purchaser (the I.C.F.), and that if the nature of the transaction, its incidents and the specific object underlying the same are taken into account it would be clear that the movement of the goods was as a direct result of a convenant in and as an essential incident of the contract of sale. It was also contended on behalf of the assessee, that the goods were not situate in Madras when the contract for sale was entered into and that the appropriation of the goods took place only in London at the time of the shipment and therefore under section 4(2) (b) of the Central Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less the Iron and Steel Controller is satisfied that the failure was due to reasons beyond the control of the importers the Government of India will be entitled to recover from you as liquidated damages (and not by way of penalty) a sum of 2% for every week or part thereof of default of the landed cost of such materials as you fail to deliver within the above date. The Government of India also reserves the right to purchase else where without notice to you, on your account and at your risk and cost, such materials as have not been shipped within the above date and you will be liable for any loss which the Government of India may sustain on this account but in any event you will not be entitled to any gain on purchase made against such default. The Government of India will however appreciate shipment of the entire quantity well before the completion period indicated above. With a view to enabling the Iron and Steel Controller to plan properly for the distribution of the steel in question immediately on arrival of consignment, you must submit to the Iron and Steel Controller advance information of all expected shipments of steel against the A/D indicating the name of the vessel, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined therein. Even at the outset, we may stated that the view taken by the Tribunal, is wrong and that the assessee's contention must be accepted as clearly well founded. The instant case is a clear and obvious one directly coming under section 5(2) of the Central Sales Tax Act. The petitioner had no liberty or freedom to acquire the goods in the market wherever it liked but it was specifically obliged to import the materials from London, the shipment and movement of the goods was solely because of the contractual stipulation contained in the contract. To put it negatively the assessee cannot perform its contract in any manner other than a direct import of the specific goods from London. I am also of the opinion that the contention of the assessee based upon section 4(2)(b) of the Central Sales Tax Act of 1956 (hereinafter referred to as the Act) is clearly well founded, and that the appropriation of the specific goods towards the contract had taken place in London, i.e., outside the State of Madras. It is not necessary for the petitioner to make out that its case is exempted by sections 4 and 5 concurrently, but it is enough if it is established that the conditions in section 4(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or export, and the problem in each case had to be solved by the application of the tests laid down in the two decisions of the Supreme Court in the First Travancore case [1952] 3 S.T.C. 434. and the Second Travancore case [1953] 4 S.T.C. 205. It was naturally realised that Article 286, as it then stood, which contained provisions merely delimiting the jurisdiction of the States to levy sales tax, did not serve the real purpose, and that, in the interests of uniformity and in view of the great importance of the export and import trade and inter-State trade and commerce there was real necessity for legislation, defining a local sales as distinguished from an outside sale, as well as a sale in the course of import and export and a sale in the course of inter-State trade and commerce. Important amendments were introduced by the Constitution Sixth Amendment of 1956. Entry No. 92-A was added in List I by which tax on sale or purchase in the course of inter-State trade or commerce was made an exclusive Union subject and Entry No. 54 of List II (State List) providing for levy of tax by the States on the sale or purchase of goods was made expressly subject to the provisions of Entry No. 92- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate to another by reason merely of the fact that in the course of such movement the goods pass through the territory of any other State. Section 4(1): Subject to the provisions contained in section 3, when a sale or purchase of goods is determined in accordance with subsection (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States. (2) A sale or purchase of goods shall be deemed to take place inside a State if the goods are within the State- (a) in the case of specific or ascertained goods, at the time the contract of sale is made; and (b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subject to such appropriation. Section 5(1): A sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India. (2) A sale or purchase of goods shall be deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le outside the State of Madras. The learned Government Pleader contended that the appropriation to the contract of sale referred to in section 4(2)(b) signifies the same idea as appropriation specified in section 23 of the Sale of Goods Act, and that the appropriation must be such as to pass the property in the goods to the buyer. He contended that such an appropriation resulting in the passing of the property took place within the State of Madras only when the assessee cleared the goods and delivered the same to the Deputy Controller of Stores, I.C.F., Madras. His argument was that whenever section 4(2)(b) of the Act applied the passing of property is the nexus for the State to levy sales tax. There is no substance in this argument and a reference to section 4(2)(a) is sufficient to repel the same. Further the acceptance of his argument would result in perpetuating the very evil which the Parliament wanted to avoid while defining under section 4 a local sale. In the case of a contract of sale of specific ascertained goods it is the State in which the goods are situated at the time of the contract of sale that will have the power to levy sales tax under section 4(2)(a), though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Malayalam Plantations Ltd. v. Deputy Commissioner(1) (though rendered later, but dealing with cases arising before 1956). The Legislature was faced with the serious problem of multiplicity of taxation of the same transaction of sale by a plurality of States resulting in the very heavy burden on the consumer and also affecting the trade and national economy in that process. It is quite legitimate to presume that when the Parliament enacted the Central Sales Tax Act of 1956 its evidence undoubted object was to formulate one single uniform test regarding the locale of the sale in all the States and that the law-making were well aware that in all the Sales Tax Acts the passing of property was not regarded as a nexus but the locale of the goods within the State either at the time of the contract of sale or later at the time of the appropriation. I have not the slightest doubt in holding that while defining the local sale the Parliament has quite properly adopted the single test which had been adopted uniformly by all the States and that the Parliament deliberately left out of account altogether the passing of property as of any relevance. To introduce any notion of passing of property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Constitution (Sixth Amendment) Act, Article 286(1)(a) (which remains unamended) is now free from the shackles of the Explanation which is deleted and by clause (2) the Parliament is invested with power to formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1), namely, outside the State or in the course of the import of the goods into, or export of the goods out of, the territory of India. Exercising the power under clause (2) the Parliament has enacted the Central Sales Tax Act (Act 74 of 1956), and by section 4(2) the doctrine of territorial nexus has been given legislative recognition, though in some what limited form." In a very recent judgment reported in Thansingh v. Superintendent of Taxes [1964] 15 S.T.C. 468; A.I.R. 1964 S.C. 1419. , the validity of the Assam Sales Tax Act of 1947 which had fixed the situs of sale for the purpose of levy of sales tax upon the actual situation of the goods came up for consideration and the Supreme Court upheld the validity holding that the Legislature has thereby not overstepped the limits of its authority. The learned Judge (Shah, J.) has summed up the position thus at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angements the assessee made in London for the manufacture of the goods and have shipments thereof. He was entitled to make his own arrangements for shipment. He may arrange either through correspondence or he may send an agent to London to attend to the manufacture and the shipment of the goods as per the terms of the contract. The circumstance, even assuming to be so, that the shipment in question at the same time constituted appropriation by the London manufacturer towards his contract with the assessee does not in any manner detract that shipment also constituting at the same time an appropriation by the assessee towards his contract with the I.C.F. The crucial question is did not the assessee set apart those goods either through himself or through someone towards the performance of this contract? The answer obviously is "yes". The fact that payment was to be made later on does not mean that there could not be an appropriation of the goods. In the instant case the contract provides that the materials since received in jetty should forthwith be delivered ex-jetty to the Deputy Controller of Stores, I.C.F., Madras, and payment was to be made after delivery. Delivery and payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rState it is essential that there must be transport of goods from one State to another under the Contract of sale or purchase. The following observations from the Bengal Immunity Co. Ltd. v. State of Bihar and Others[1955] 6 S.T.C. 446., were quoted with approval in support of the proposition: 'A sale could be said to be in the course of inter-State trade only if two conditions concur: (1) A sale of goods, and (2) a transport of those goods from one State to another under the contract of sale. Unless both these conditions are satisfied, there can be no sale in the course of inter-State trade.' Thus the tests which have been laid down to bring a sale within inter-State sales are that the transaction must involve movement of goods across the border: Mohanlal Hargovind's case [1955] 6 S.T.C. 687.; transactions are inter-State in which as a direct result of such sales the goods are actually delivered for consumption in another State: Ram Narain Sons Ltd. v. Assistant Commissioner of Sales Tax and Others [1955] 6 S.T.C. 627.; a contract of sale must involve transport of goods from one State to another under the contract of sale: Bengal Immunity Co.'s case [1955] 6 S.T.C. 446. In the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mport as the case may be was however explained by Patanjali Sastri, C.J. Patanjali Sastri, C.J., delivering the judgment on behalf of the majority emphasised the integral relation between the contract of sale and the export or import occasioned by that contract. It was held that a purchase for export is not an activity so integrally connected with the exportation of the goods as to regard that purchase as done in the course of export. The same principle was held to apply to a case of a first sale after import which would be regarded as a local transaction effected after the import of the goods into the country and having no integral relation with the actual import. Das, J., in his dissenting judgment however took a broader view that a purchase made by the exporter to carry out or implement his agreement for sale with the foreign buyer should also be regarded as having taken place in the course of export on the ground that a purchase by the exporter should be regarded as an activity closely integrated with the act of export so as to constitute the exporter's local purchase part of the export process itself. Pursuing the same reasoning the learned Judge was also of the view that in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contracts therefor contemplate or necessarily involve the movement of goods in inter-State commerce.' From the above statement it will be seen that it is in these observations that we get this conception, i.e., in order that a sale may be said to be an inter-State sale it is necessary that the movement of the goods from one State to another should be as a result of the terms of the contract which contemplate or necessarily involve the movement of the goods in the nature of inter-State trade and commerce. An examination of the later decisions of the Supreme Court shows that the above test formulated by Venkatarama Aiyar, J., "the contract of sale or purchase containing the essential stipulation or condition or covenant for the movement of the goods into India or outside India" has been uniformly applied. In Tata Iron & Steel Co. v. S.R. Sarkar [1960] 11 S.T.C. 655., the question arose about the relative applicability of section 3(a) and section 3(b) of the Act of 1956. Sinha, C.J., Imam and Shah, JJ., took one view while Sarkar and Das Gupta, JJ., took a different view on the question. In the instant case we are not concerned with the rival views as to the scope of section 3(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing observations which are apposite: 'A sale could be said to be in the course of inter-State trade only if two conditions concur: (a) A sale of goods, and (2) a transport of those goods from one State to another under the contract of sale. Unless both these conditions are satisfied, there can be no sale in the course of inter-State trade.'" This view has been followed in all the subsequent decisions of the Supreme Court. In Singareni Collieries v. State of Andhra Pradesh [1961] 12 S.T.C. 765., the question arose after the Central Sales Tax Act of 1956. On an examination of the relevant case law the position was summed up as follows at page 778: "It is manifest that in order to constitute inter-State trade or commerce, it is not sufficient if there is a sale and transportation of goods across the State's frontiers. There should be a related connection between sale and the movement of goods. In other words, it should be stipulated between the parties that deliveries should be outside the State." Applying these tests the learned Judges negatived the claim of the assessee on the ground that they transported the goods to various places outside the State not as a condition or stipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es which are necessary for the sale or purchase of cement it cannot be said that the sale itself did not occasion the movement of goods from one State to another." After referring to the observations of Shah, J., in Tata Iron Steel Co. v. S.R. Sarkar [1960] 11 S.T.C. 655., the learned Judge observed as follows at page 183: "As stated above under the contracts of sale in the present case there was transport of goods from outside the State of Mysore into the State of Mysore and the transactions themselves involved movement of goods across the border. Thus if the goods moved under the contract of sale, it cannot be said that they were intra-State sales. It was not the volition of the first appellant to supply to the purchaser the goods from any of the factories of the second appellant. The factories were nominated by the Government by authorisations which formed the basis of the contract between the buyer and the seller." In this connection it may also be noticed that Kapur, J., at page 182, has observed that in section 3 of the Central Sales Tax Act the Parliament has accepted the principle governing inter-State sales as laid down in Mohanlal Hargovind's case [1955] 6 S.T.C. 687. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into between the assessee and the Government. Even if the property in the goods passed inside the State after the steamer arrived, that would not make any difference as the passing of property inside the State is no longer of any relevance in determining the true character of a sale or purchase. It only remains to refer briefly to the decisions relied on behalf of the State. Learned Government Pleader first drew our attention to the decision in Dhanalakshmi Mills Ltd. v. State of Madras [1960] 11 S.T.C. 306. In that case the assessee, a spinning mill at Tiruppur in the State of Madras, entered into a contract with the Bombay dealers for supply of cotton. The Bombay dealers placed the orders with their suppliers in Africa and the latter shipped the goods from Africa to Port Cochin. The assessee in the meanwhile obtained the necessary transport licence. The shipping documents were in the name of the Bombay dealers who sent them to their clearing agents at Port Cochin who cleared the goods through the customs and despatched the goods by rail to the assessee at Tiruppur, who took delivery of the goods after honouring the railway receipts by payment through the bank. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the territory of India. Subba Rao, J., delivering the judgment referred to the First and the Second Travancore cases [1952] 3 S.T.C. 434 and [1953] 4 S.T.C. 205. and followed the principles enunciated therein on the question of the contract occasioning the movement of the goods. No argument was advanced based upon the further test formulated by Venkatarama Aiyar, J., in Bengal Immunity Co. case [1955] 6 S.T.C. 446. The reasoning at pages 203-204 shows that the argument advanced on behalf of the State was that even though the shipping documents were transferred to the Government on payment of the price, the property in the goods did not pass, in view of certain special conditions in the contract. It is only from this perspective that the matter was approached by the Supreme Court, and Subba Rao, J., on an examination of the conditions of the contract, came to the conclusion that the conditions did not prevent the passing of the property though the goods were on the high seas. We are therefore of the opinion that this decision, far from helping the department is helpful to the assessee, having regard to the facts of that case and the ultimate decision therein. Reference may be made t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that the property in the goods passed from the assessee to the Government only after the goods crossed the customs frontier. We have examined with care the rival contentions urged before the High Court and the reasonings of the learned Judge. Here again we must observe that this case is not of much assistance to the State as this aspect of "the contract containing a stipulation or covenant for the movement of the goods" was not relted upon nor considered by the learned Judges. The main scope of the arguments of the contending parties are contained in pages 22 to 25 and it shows that the only point that was stressed was whether title to the goods passed when the goods were on the high seas. At page 28 the learned Judges summed up the position thus: "In our opinion, a scrutiny of all the terms of the contract in the case before us does indicate an intention that the parties to the contract intended that the property in the goods should pass only when the goods were delivered ex-docks in Bombay and not at any earlier stage." In view of the later decision of the Supreme Court the State cannot rely upon this decision in support of their argument. In the case of inter-State sales or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de his supplies from local purchases in Madras itself, and that it was a simple case of a vendor importing goods on his own, for performing a contract of local sale. In this view of the facts, that case can have no application to the instant case. Referring to the decision in Gokal's case [1960] 11 S.T.C. 186. the learned Judges observed as follows: "It would be seen that on the facts there is a considerable difference between the facts of that decision and the facts in the present petition. It is easy to see that in that case the sale itself occasioned the import, because the goods contracted to be supplied were goods of foreign origin which were imported for the very purpose of fulfilling that contract by taking the necessary import licences from the appropriate authorities and the property in the goods themselves was transferred to the buyers by delivery of documents of title when the goods were on the high seas." These observations far from helping the contention of the State, are helpful to the assessee. The contract in the instant case is clear. In what manner the assessee obtained the dominion of the goods in London before the shipment is an irrelevant consideration. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the advantage of perusing the judgment of my learned brother. My learned brother has found that not merely did the sale in this case take place in the course of import into India, but he has also determined that the sale took place outside the State of Madras by reason of the fact that the appropriation of the goods to the contract of sale took place in the United Kingdom. While I agree with his conclusion that the revision case should be allowed, I think it best to confine the reasons therefor to the finding for which the materials in this case afford ample basis-that the sale in question was in the course of import into India and was therefore not taxable in Madras State, by reason of the ban in Article 286(1)(b) of the Constitution. I will refer to the contract of sale in this case very briefly. It is a contract for the supply of 3,055.57 tons of M.S. Sheets subject to certain specified conditions, to the Integral Coach Factory, Madras. The preamble to the contract states that the contract is in regard to the import of 3,055.57 tons of M.S. Sheets from the continent against the invitation to the tender for the Integral Coach Factory, Madras, by the Ministry of Heavy Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause 6 under the heading "payment" it is stated that on completion of delivery of each consignment, the seller will submit his 100 per cent. bill at full landed cost based on the C.I.F. price to the Deputy Controller of Stores. The seller was also required to intimate the name of the manufacturers to the Director-General of Inspection, Supplies and Disposals, London, for the inspection of the Stores. The schedule gives the specifications that the sheets should be of Siemsn Martin manufacture. The terms of the contract indicate that the seller, Messrs. Bengal Corporation Private Ltd., Netaji Subhas Road, Calcutta, had undertaken that the goods would be manufactured outside India, would conform to the specifications in the schedule, that the goods, after such manufacture, would be shipped between June 1957 and December 1957 to the Madras Port and that before shipment the nominee of the buyer namely, D.G.I., S.D., London, should inspect the goods to satisfy himself that the materials were in conformity with the specifications. He had also the right to be present during the stages of manufacture of the goods outside India, and the expenses for his inspection would be paid by the selle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract, there would not be any class about inspection during the stage of manufacture by D.G.I., S.D., London, or for shipment after manufacture. It is, therefore, clear that the buyer proposed, and the seller accepted that for the execution of the contract the goods should be manufactured in the United Kingdom, and shipped from the United Kingdom to the Madras Port. Such shipment was also an essential feature of the contract, because, in the event of nonshipment between June, 1957, and December, 1957, the buyer was free to place orders for similar goods elsewhere and claim from the seller damages for non-fulfilment of the contract. Therefore, this is a very clear case where the movement of the goods from the U.K. to the Madras Port was the result of a covenant as well as of an incident of the contract of sale; therefore the sale was in the course of import into the territory of India, and is not taxable by the Madras State. I will refer to the question of appropriation very briefly. It is well-known that appropriation for the purpose should be unconditional within the meaning of section 23 of the Sale of Goods Act, 1930. The goods in the instant case are no doubt unascertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 5 of the Central Sales Tax Act defining when a sale takes place in the course of import or export has been enacted in pursuance of the power granted to the Parliament under Article 286(2) of the Constitution. Section 4 of the Act which defines when a sale becomes one inside a particular State, is expressly made subject to the provisions of section 3 which define what are sales in the course of inter-State trade or commerce. Therefore, when by applying section 3 to a given case, if the sale is found to have taken place in the course of inter-State trade or commerce, there will be really no occasion to apply section 4 of the Central Sales Tax Act to determine whether that sale has taken place inside a particular State, and whether the sales tax law of that particular State can levy tax on it. It must be assessed only under the Central Sales Tax Act. Similarly, when by applying section 5 of the Central Sales Tax Act, a sale is found to have taken place in the course of import into or export out of India, then also there will be no occasion to find out whether the sale took place inside a particular State or outside it, within the meaning of section 4 of the Central Sales Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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