TMI Blog1972 (4) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... t be sent to the Tribunal so that it is known how a case is to be stated. The attention of the Tribunal is invited to the relevant part of section 22(4) of the Sales Tax Act". Keeping this direction in view, Mr. M.L. Batra, the then Sales Tax Tribunal, in the present case drew up the statement of the case and referred the question of law set out above for the opinion of this court. Thereafter, the present reference was placed before me and Gopal Singh, J., on 24th March, 1971. Mr. Sibal, the learned counsel for the assessee at the hearing, pointed out that the agreements between the assessee and the distributors, that is, the distribution agreements dated 26th April, 1965, 15th September, 1965, and 11th December, 1965, had not been made part of the statement of the case, as also the Tribunal's order dated 24th November, 1969, on the review application made on 14th August, 1969. There were certain other documents which the counsel stated should have been made part of the statement of the case. For instance, the modified original assessment order dated 2nd May, 1968, and the affidavits filed by the assessee before the Assessing Authority dated 10th June, 1966, 29th March, 1967, 30th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and deep-freezers but also to market them in brands known as "Kelvinator", "Leonard" and "Gem". They have also the right under the collaboration agreement to use further brands for its products. As soon as the company started its production, it passed on its entire production to Spencer Co., Delhi, for sale in the market. The procedure adopted by the company was that the goods manufactured at Faridabad were sent to its godowns in Delhi and from the godowns in Delhi they were sold to Spencer Co. So far as these sales are concerned the department has not taken the plea that they are inter-State sales or that the movement of the goods was occasioned by reason of the sales made to Spencer Co. On 20th April, 1965, the company entered into a distribution agreement with Spencer Co., and similar agreements were entered into with the Blue Star Ltd. on 15th September, 1965, and the General Equipment Merchants on 11th December, 1965. The agreement with Spencer Co. was to take effect from 1st January, 1965, whereas the other agreements were to take effect on the date on which they were entered. The clauses in these agreements are more or less the same. The only difference between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... December, 1969, or till terminated by giving at least 6 months clear notice on either side delivered through registered post. On the termination of this agreement, the distributors will have the right to return at the company's expenses all unsold units and spare parts thereof purchased from the company under these premises, but shall have no other claims whatsoever on the company on any other account except for outstanding warranty claims, if any. Blue Star Agreement: 1. The company hereby undertakes to sell only to the distributors and the distributors hereby undertake to buy from the company all Leonard refrigerators manufactured by the company. 3.. For the purpose of clause 1 and in order to enable the company to arrange its production schedule the distributors guarantee and undertake to purchase from the company a minimum quantity of 1,500 refrigerators per year at a rate not less than 80 refrigerators per month. It is agreed that the distributors will be relieved of their obligation under the agreement to the extent that the company is unable to supply the guaranteed minimum quantity of 80 refrigerators per month. 8.. All the goods leaving the company's factory will pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een settled in between the parties." The procedure for the transfer of the goods from Faridabad to the company's registered office at 19-A, Alipur Road, Delhi, stated in the objections, is as follows: "The company gets the goods cleared from the excise for destination to its Delhi office godown in piecemeal, pay the octroi themselves at the Delhi barrier along with the freight charges and the goods are taken delivery of by its registered office. The buyer places its specific order according to its requirement and to the extent goods are available at Delhi, delivery is given by the Delhi office after the goods are approved in good condition by the purchaser. That the goods never move from factory in pursuance of any contract, but are moved as per routine for storage at Delhi in accordance with the company's own convenience. Specific orders are placed by the buyers when the goods are already lying in stock. The movement of the goods as such is not in furtherance of any contract of sale but move to Delhi independently of any stipulation." Four affidavits were filed before the Assessing Authority. The first one is of Mr. M.B. Sutaria, Secretary, Kelvinator of India. The relevant para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eonard' and 'Gem'. The sale of each brand was made through a separate distributor appointed for this purpose. I have studied the agreements in respect of each of them. The names of distributors, trade marks of refrigerators and dates of agreements are given below: Distributor Trade marks of Date of refrigerator execution Spencer Co. Ltd. Kelvinator 26-4-1965 (operative w.e.f. 1-1-1965) Blue Star Engineering Co. Bombay Pvt. Ltd. Leonard 15-9-1965 General Equipment Merchants Ltd. Gem 11-12-1965 * * * A peep into the actual performance of the contract has revealed that the refrigerators moving from the factory at Faridabad on a particular day were delivered to the distributors concerned the same day. Examples typifying the mode are given below: * * * The manner of movement which is plain enough to understand has been explained by the dealer in a rather circuitous way. According to them, the refrigerators move from the factory to the head office at Delhi where these are stored. Then buyers place orders according to their requirements and the goods move from the company's godowns to the distributors concerned. This kind of a gimmick can scarcely conceal the true nature of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion has separately been initiated to tackle this amount under the Punjab General Sales Tax Act. Documentary evidence produced by the dealer established beyond doubt that goods worth Rs. 48,304.39 were exported outside India, hence beyond the purview of taxation. As regards the third item of Rs. 28,318.58 it relates to the aggregate of scrap sales made in the course of inter-State trade. As already held in Part A of the order dated 2nd March, 1968, the sale of scrap does not fall within the business activities of the dealer." Against the final order of the Assessing Authority, the assessee preferred an appeal to the Deputy Excise and Taxation Commissioner, Ambala Division. The Appellate Authority allowed the appeal and it will be appropriate to set out the reasons of that authority in its own words: "The true effect of this agreement to my mind is to constitute Spencer and Co. as the sole channel for distribution of Kelvinator refrigerators. It is not a contract for sale of a specified number of refrigerators by the appellant-company to Spencers. It is neither for ready goods nor in itself a contract to buy future goods. The words 'as mutually agreed upon from time to time' ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Central Act read with section 21(1) of the Act and revised the order of the Appellate Authority. The relevant part of the order of the Commissioner is as follows. After setting out the relevant clauses of the agreements, it is stated: "In the face of these provisions of the agreement, I really wonder how the Appellate Authority came to a conclusion that the agreement was not an agreement of sale but of distribution only. This agreement fulfils all the requirements of sub-section (1) of section 4 of the Sale of Goods Act, 1930. The respondent agreed to transfer the property in 'Kelvinator' refrigerators to the distributors for a price as soon as the goods were manufactured at Faridabad. The sale was complete as soon as the price was settled and the goods were delivered under the agreement. I, therefore, hold that the agreement is an agreement to sell. ............ it is obvious that as soon as the 'Kelvinator' refrigerators were manufactured, they were appropriated to the contract and their movement from Faridabad to Delhi was under the agreement to sell. The movement of goods from the State of Haryana to the Union territory of Delhi was, therefore, directly occasioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant undertook to sell and the distributor undertook to buy all products manufactured by the appellant. In fact, it is admitted that some of the products manufactured by the appellant-company are being sold to Blue Star Engineering Co. (Bombay) Pvt. Ltd. and some others to General Equipment Merchants Limited. How much to the one and how much to the other is not disclosed in the distributorship agreement, and is left to be decided by mutual agreement from time to time. (f) That the appellant has even reserved the right to be consulted by the distributor while fixing his (distributor's) price to his consumers. (g) That the appellant's transport of goods to Delhi godown in anticipation, makes no difference, especially there is no contract of sale of specific goods to which the movement of item can be attributed. The distributor may lift the goods immediately on arrival or may not do so. The goods may lie in godown for months or even may be sold to another. Even the name plates may be interchanged, if so required, or considered necessary. (h) In respect of a certain fixed percentage of the units, the appellant has even reserved a right to dictate the price at which the distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against requisitions received from the distributors in which mutually agreed prices were mentioned and charged. It is argued that these agreements did no more than give an option to the distributors on the goods manufactured by the appellant and merely gave them the first right of refusal to purchase. The appellant had a say in the matter of fixing sale prices and it was stipulated that the refrigerators were to be delivered and the title passed to the distributors only in Delhi on delivery. There is happily no great controversy in this case regarding definition of sale and what constitutes an inter-State sale under the Central Sales Tax Act. It is settled law now that in order that the sales may be deemed to be sales made in the course of inter-State trade, the movement of goods must be occasioned by a contract of sale and there should be in the contract some incidental provision to which the movement from one State to another can be definitely attributed. The learned counsel for the appellant has himself referred to the observations of the Supreme Court in the case of State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 S.T.C. 353 (S.C.). in order to define the term ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was stipulated that the prices would be such 'as mutually agreed upon from time to time' and the property in the goods shall pass to the distributors only in Delhi after delivery. The prices were admittedly not to be settled for individual machines but periodically for all machines of the same make and specifications. The settlement of prices was incidental to the agreement which moved the machines to Delhi and were not separate agreements. In fact both went hand-inhand and any disagreement regarding prices meant virtual disappearance of the agency agreements. These agreements can, therefore, only be deemed to be agreements of sale and not as agreements of distribution or agency. In this connection, I might refer to the following observations of their Lordships of the Supreme Court in the case of Sri Tirmuala Venkateswara Timber and Bamboo Firm v. Commercial Tax Officer, Rajahmundry[1968] 21 S.T.C. 312 (S.C.).: 'As a matter of law there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal and make over either the sale proceeds or the goods to the principal. The essence of a contract of sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted and approved by them keeping in view their own market demand. 6. Question of facts now raised: 1. The size of the refrigerators, i.e., 10. 1 cu. ft. and 6.2 cu. ft., were not agreed to be sold in the alleged agreements. 2. The difference in prices was not stipulated in the agreement. 3. The supplies were never made by the applicantcompany against the pending orders as has been held in the impugned order. The sales were effected as stated in para. 5 above." The review application was disposed of by the Tribunal by its order dated 24th November, 1969, in the following terms: "In that case, the appeal of the applicant, M/s. Kelvinator of India Limited, Faridabad, was dismissed by the impugned order on the main ground that the agency contracts entered into by this firm with certain other dealers, namely, M/s. Spencer Co. Ltd., M/s. Blue Star Engineering Co. (Bombay) Pvt. Ltd. and M/s. General Equipment Merchants Ltd., were in fact as well as in law contracts of sale, and, therefore, the transactions between M/s. Kelvinator of India Ltd. and these firms were interState sales liable to tax under section 9(3) of the Central Sales Tax Act, 1956. M/s. Kelvinator of India L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and circumstances of the case, the agreement between M/s. Kelvinator of India (the assessee) and M/s. Spencer Co. Ltd., M/s. Blue Star Engineering Co. (Bombay) Private Ltd. and M/s. General Equipment Merchants Ltd., in pursuance of which the refrigerators manufactured by M/s. Kelvinator of India at Faridabad moved to Delhi were merely for distribution of goods between a principal and his agents or were agreements of sale between the parties." The contentions on behalf of the assessee are: (1) That the distribution agreements do not amount to a contract of sale in the eyes of law and, therefore, even if the movement of goods has taken place in pursuance of these agreements, it will not fall within the mischief of section 3(a) of the Central Act. (2) That the movement of goods from the factory of the company at Faridabad to its godowns in Delhi was in routine and had no connection whatever with the ultimate sales made to the distributors. (3) That the authorities below erred in not examining each transaction independently. A duty was cast on the Assessing Authority to examine each individual transaction and then decide whether it constituted an inter-State sale exigible to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms: "2. In this Act, unless the context otherwise requires ...... (g) 'sale', with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or for deferred payment or for any other valuable consideration, and includes a transfer of goods on the hire-purchase or other system of payment by instalments, but does not include a mortgage or hypothecation of or a charge or pledge on goods." Sections 18 to 26 of the Indian Sale of Goods Act, 1930, lay down the rules indicating when there is transfer of property in the goods sold between the seller and the buyer. Section 18 lays down that the goods must be ascertained. Section 19 may be reproduced in extenso: "19. (1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. (2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. (3) Unless a different intention appears, the rules contained in sections 20 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to reserve the right of disposal. (3) Where the seller of goods draws on the buyer for the price and transmits the bill of exchange and bill of lading to the buyer together to secure acceptance or payment of the bill of exchange, the buyer is bound to return the bill of lading if he does not honour the bill of exchange and if he wrongfully retains the bill of lading the property in the goods does not pass to him." Section 26 merely enunciates the principle that risk prima facie passes with property. The only other provisions of law to which a reference has to be made are the definitions of "agreement" and "contract" in the Contract Act. Section 2(e) defines "agreement" and section 2(h) a "contract". They are in the following terms: "2. In this Act the following words and expressions are used in the following senses, unless a contrary intention appears from the context......... (e) Every promise and every set of promises, forming the consideration for each other, is an agreement (h) An agreement enforceable by law is a contract." Now, I propose to deal with the decisions which have interpreted section 3(a) and other provisions of the Central Act which have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of transferring title to goods, which presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods. Unless all these elements are present, there can be no sale. Thus, if merely title to the goods passes but not as a result of any contract between the parties, express or implied, there is no sale. So also if the consideration for the transfer is not money but other valuable consideration, it may then be exchange or barter but not a sale. And if under the contract of sale, title to the goods has not passed, then there is an agreement to sell and not a completed sale. Moreover under the law there cannot be an agreement relating to one kind of property and a sale as regards another. There must be an agreement between the parties for the sale of the very goods in which eventually property passes." In Ben Gorm Nilgiri Plantations Co., Coonoor v. The Sales Tax Officer, Special Circle, Ernakulam[1964] 15 S.T.C. 753 (S.C.)., three out of five Honourable judges of the Supreme Court, constituting the Bench, observed as follows: "A sale in the course of export predicates a connectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re effected directly or through agents. But in between lie a variety of transactions in which the question whether the sale is one for export or is one in the course of export, i.e., it is a transaction which has occasioned the export, may have to be determined on a correct appraisal of all the facts. No single test can be laid as decisive for determining that question. Each case must depend upon its facts. But that is not to say that the distinction between transactions which may be called sales for export and sales in the course of export is not real. In general where the sale is effected by the seller, and he is not connected with the export which actually takes place, it is a sale for export. Where the export is the result of sale, the export being inextricably linked up with the sale so that the bond cannot be dissociated without a breach of the obligation arising by statute, contract or mutual understanding between the parties arising from the nature of the transaction, the sale is in the course of export." In Tata Engineering Locomotive Co. Ltd. v. Assistant Commissioner of Commercial Taxes, Jamshedpur[1970] 26 S.T.C. 354 (S.C.)., after noticing the decisions already ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o any more cases cited at the Bar, because the Supreme Court decisions have clearly enunciated the principles to find out whether a particular sale is or is not an inter-State sale. The difficulty only arises in the application of these principles to the facts of a given case, particularly of a border-line case. It will be, therefore, necessary to set down the facts that are not disputed. The sum total of these facts will ultimately determine whether on the rule laid down by the Supreme Court the sales in question are inter-State sales or not. The facts fall in two categories: those which have been dealt with by the departmental authorities and have been accepted by them though they have put a different interpretation on them. The other category of facts is where nothing is said by the departmental authorities one way or the other. Those facts were asserted by the assessee but they have not been either rejected or dealt with in their respective orders. First I propose to set up the facts which have been accepted by the departmental authorities: 1.. The dealer manufactured and sold refrigerators. 2.. These refrigerators were sold with the trade marks of "Kelvinator", "Leonard" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Blue Star and General Equipment Merchants. For the first time from 7th April, 1966, onwards, machines are being exported out of India. So far, more or less, a set of machines received was given to Spencers, another set received was given to Blue Star and another set received was given to General Equipment Merchants, and after 7th April, 1966, a set received was exported. But from the month of May, 1966, this procedure seems to have undergone a change. Machines received necessarily were not passed on to one or the other. Some machines were left over, and it cannot be said that the machines received were specifically received for delivery to any particular distributor or for export. This is all the material which has to be kept in view in order to correctly and properly construe the agreements. After giving our thoughtful consideration to the entire material as well as to the various judicial pronouncements, we are of the view that in the circumstances of this case, the answer to the question referred to us for decision has to be in favour of the department. As earlier observed, so far as the law on the subject is concerned, certain principles have been enunciated by their Lordsh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igned to Spencers. If there was evidence that the machines had left without any label, possibly the contention that the machines were not appropriated to the Spencer's agreement would have had some material bearing, but in the absence of such evidence, we must assume that the machines, when they left for Spencers, were labelled at the factory and that would be in compliance with clause 6, which definitely lays down that all machines leaving the company's factory will pass through rigorous inspection procedure laid down by the company. In the presence of these clauses, the contention of Mr. Sibal, learned counsel for the assessee, that the movement of goods from the factory of the company at Faridabad to its godown in Delhi was in routine, becomes meaningless. If the movement of the goods is in routine for the purpose of storage in the godowns at Delhi, then the effect of clause 8 would be completely wiped out. The inspection procedure is warranted by the clauses referred to above and, therefore, the machines must necessarily be deemed to have been earmarked for that particular distributor. Further under the agreements no choice is left with the dealer to select his buyer as he is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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