Certain Problems Connected With Power Of The States To Levy A Tax On The Sale Of ...

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Law Commission Report

Certain Problems Connected With Power Of The States To Levy A Tax On The Sale Of ...

L-AW COMMISSION OF INDIA

SIXTY--FIRST REPORT

CERTAIN PROBLEMS CONNECTED WITH
POWERS OF THE STATES TO LEVY A TAX
ON 'THE SALE OF GOODS AND WITH THE
CENTRAL SALES TAX ACT, 1956.

hiay, 1914

'Cimayglcr Na).

1 A.
1 B.
I C.
1 D.
1 E.

!.~J

10.

11.
I2.

C'(')N'l"ENTS

.'SI.|!:~ject-mu:tc1'

Intro sj.tCm1'y. , _ _ , , . ,

The a'::.)p.-.3 for levy or sales tax by State Government.

'J'axabi'.ity or Works contracts.

Hit':-pttrchasc transactions

$33.1-:s ofuontrolicd comrnoditics.

Safe by A:-zsociatiuns to Members. . . .
Some genera] ohmzrx-ations as to taxation on sate

E.'-'3.~i]'l.JFJ ot'Centra] Sales Tax by means of transfer
-1»? :2.-:1:J:1s from om: Stato to another, on what pur-
ports to be consignment transfer or a transfer to
another branch of the same institution.

Sales in the course of I:nporL--}'ﬂ:asIa's Case _ .

Co'1ﬁiotin_g decisions of the Courts as to the Central
Saics Tax in regard to the scope of the pcnal pm-
visions ofthat Act . . . . ,

Punishment for evasion of Sales Tax . . .

Disrtowat of ex-:55; amounts cotlected by a dealer
from a customer as sales tax.

Establishtnont of chI:ok--posts for preventing evasion
and ensuring better collection of taxes on the sale of
goods.

Other questions--Deﬁnition9.
Section 3 and the rate of tax.
Retrospective restrictions under articles 286(3).

Conclusions. . . . . . I . .
Summary of conclusions and recommendations.
Note by Shri 5- P. Sen Vanna.

rages
. 1

. 117

. 136
142

153

13.0. No. F.2(4)f73--L.C.
LAW COMMISSION OF INDIA
'A' Wing, Shastri Bhavan,
New Delhi--1.
May 21, 1914.

P. B. Gajendragad ltar

I have great pleasure in forwarding herewith the 61st Report
of the Commission on certain problems referred by you to the
Commission by your D. 0. letter No. F. 352'PS_x'MLJ,/73 dated
the 12th April, 1973.

Having regard to the nature of the subject and its importance,
the Commission first made a prelilninary study of the said prob-
lems and framed El Questionnaire in respect of them. This
Questionnaire was sent to the Ministries concerned, the State
Governments, the High Courts, Bar Associations and other in-
terested persons and bodies. The replies received in response to
his Questionnaire were then duly considered by the Commission
and the draft Report on the subject was prepared by the Mem-
ber-Secretary, Mr. Baltshi, and discussed by the Commission.
After the discussion, the Report was ﬁnalised.

One of us, Mr. -S. P. Sen-Verma, has signed the Report, sub-
ject to a separate note ; which deals with the problem posed by
section 5 of the Central Sales Tax Act.

I may add that some of the problems, on which recommen-
dations have been made by the Commission in this Report, are
complex and vexed; but the Commission hopes that its relevant
recommendations may afford a satisfactory solution which may
help solve the diﬂiculties mentioned by you in your letter.

With the forwarding of this Report, the present Com-
mission will have completed seventeen Reports since it began to
function on the 1st of October, 1971. As you know, some of
"these Reports are short documents, because they deal with speci-
ﬁc problems which, in the opinion of the Commission, needed
early legislative solution.

Yours
Stif-
(P. B. Gajendragadkar)

Hon'ble Mr. H. R. Gokhale,

Minister of Law, Justice & Company Affairs,
Government of India,

New Delhi--].

Enci : As above.

l'ntro.--1. The genesis of this Report lies in a letter received Genesis,
an

by us from the Minister of Law and Justice, which is reproduced points
below :-- referred
to the _
Cornmission.

"As you are aware, the Government had the advantage of
obtaining the views of the Law Commission on more
than one occasion in connection with certain problems
arising out of the levy of sales tax and particularly
central sales tax. The principles set out in the Cen-
tral Sales Tax Act, 1956, for determining when a sale
or purchase takes place in the course of inter--State
trade or in the course of import or export of goods
into or from India were laid down on the basis of the
recommendations contained in the Second Report of
the Law Commission. Similarly, certain problems
arising out of the deeisiorrof the Supreme Court in
K. G. Khostn's case were considered by the Law Com-
mission in its 30th Report.

2. Experience in working of both State Sales Tax and Cen-
tral Sales Tax has thrown up certain problems which
are of importance not only from the po-int of view of
the proper administration of the sales tax laws but also
for raising the. resources necessary for development
activities.

3. As you are aware, the scope for the levy of sales tax by
State Governments has been restricted in respect of
works contracts, hire--purchase transactions and also
on the transfer of controlled commodities by virtue of
statutory orders.

4. Certain State Governments have stated that Central sales
tax is being evaded by means of transfer of goods from
one State to another on what pm'porI.t to be con.sEgn~
mam transfer or a transfer to another branch of the
same institution. A suggestion has been made that
such transfers should themselves be made liable to
tax. A VlEW has also been expressed that section 5
of the Central Sales Tax Act as interpreted by the
Supreme Court in K. G. Kh0.5'Ia.'s ease unduly res-
tricts the taxing power of the -State.

Scope of
the Re-
port.

Constitu-
tiunal
position.

5. In the administration of Central Sales Tax also there are
conflicting decisions of the courts as to the scope of the
penal provisions of that Act. It may also be neces-
sary to consider whether the provisions with regard
to penalties for the evasion of sales tax should not be
amended so as to do away with the concept of means rea
or to bring it in line with the recommendations made
by the Commission with regard to oﬁences under other
ﬁscal laws.

"6. I also understand that cliﬁiculties are being felt with
regard to certain other matters such as the disposal
of excess amounts collect.ed by a dealer from a custo-
mer as sales tax and the establishment of check--posts
for preventing evasion a.nd the better collection of taxes
on the sale of goods.

7. Some of these issues are of considerable importance in
the day--to-day administration of sales tax and are of
importance to tlm State and to the public alike. A
speciﬁc reference to some of these problems was made
at the meeting of the Ministers for sales tax of the
States in the Northern Zone.

8. I shall, therefore, be grateful if the Commission could
look into these and other related problems arising out
of the administration of Central Sales Tax and the con-
stitutional restrictions on the imposition of sales tax
by State Government."

lntro.--2. This Report, thus, deals with certain problems
connected with---

(a) power of the States to levy a tax on the sale of goods;

('0) the Central Sales Tax Act, 1956.

Neither the entire subject of Sales tax, nor the whole ﬁeld
of the power referred to above, is intended to be covered in this
Report. Nor will the Report cover the whole of the Central
Sales Tax Act. It is coﬁned to certain speciﬁc problems.

Intro.--3. The letter of reference1 mentions several topics.
Before discussing them, a few words about the power to levy
a tax on the sale of goods would be relevant. Under the Cons-
titution, the power to levy tax on the sale or purchase of goods

I. Para Intro. 1, Supra.

is referrable to the legislative power vested in the States, by
virtue of the speciﬁc entry in the State list? "But the power to
levy such tax on inter--.State sales' is vested in the Union Parlia-
n1ent.'~' Again. there are certain restrictions on the powers of
the Stat-3-53. We shall presently proceed to explain this appa~
rently complex scheme. The reasons for such a complicated
scheme will also be apparent from the discussion that follows.

l11tro.----¢. The legislative authority' of the States to impose a
tax on sales and purchases is restricted by three limitations con-
tained in articles 2S6(l)(a), 286(l)(b) and 286(3) of the
Constitution respectively. These limitations overlap to some
extent; but they are cumulative, and the legislative power to tax
may be exercised only if it is not hit by any of the limitations.

There are general limitations in articles 301 to 304, but they
are not material for our purpose.

Intro.--S. Before 1956. there was a fourth limitation as to
inter-State sales and purchases. After 1956, this lirnitation assumed
the form of absence of a power to tax inter--State sale or pur-
chase, and the power is now exclusively vested in the Parliament".

The three limitations relate to ------
(i]- tax on sales in the course of import or export;

(ii) tax on sales outside the State; and

(iii) tax on sale of essential goods.

The main purpose of the limitation regarding tax on sale or
purchase in the course of import or export is to protect interna-
tional trade from taxation by States.

The main purpose of the limitation on the power of the
-States to tax sales or purchases outside the State is to prevent
the imposition of an unduly heavy burden upon the consumer by
multiple taxation upon a single transaction of sale".

Constitution, T-'th Schedule. Stale List. Cntfy 54_

Constitution, Tth Scliedule, Union List, entry 92A.

See para Intro. 12, r'n_ﬁ'a,

Para Intro. 3, supra.

Constitution. Seventh Schedule, Union List, entry 92A.

cf Berlgal Tianber Wading Corporation V. C..'S'.T. A.l'.R. 1967 SI).
I348, I349; (I96?) 2 S.C_R. 54? [on the old article 286 (1)7.

9"JI-I'-AMJIW

Limitations
on States
powers.

The object
of consti-
tutional

restrictions.

The
matters
under re-
f e rence.

Points en-
urnerated.

T.lte object of the third limitation--as to taxation of sale or
purchase of essential goods---is obvious.

lnLro.»~I5. in considering the various topics1 on which the
Conunissioifs views have been sought, these objects of the Consti-
tutional restrictions as to ﬁscal powers will have to be borne in
mind.

Two Madras cases'-' have explained in detail the scheme of
the taxation of sale of goods before and after the Constitution,
and under the Central Sales Tax Act, 1956. We need not go
into those details here.

lntro.»~7. Coating now, to the matters raised in the letter of
reference, (3) we can broadly classify them into the following
categories : --

['21) Points requiring amendment of the Constitution------parti--
cularly, State List, entry 54, which prescribes the taxing
power of the States in respect of tax on the sale of
goods;

(b) Points not requiring amendment of the Constitution.
but requiring amendment of certain statutory provisions
passed in pursuance of article 286 of the Constitution,
such as sections 3, 4 and 5 of the Central Sales Tax

Act. 1956.

Points requiring amendment of the Central Sales 'lax
Act. 1956, in respect of matters other than those men-
tioned in lfb) above [e.g. punishment for the evasion
of tax).

Points at (:1) and (b) involve constitutional questions.

lntro.--8. The various points that arise for consideration
from the letter of reference' can be enumerated as follows:#

( i) T he scope for the levy of sales tax by State Government,
in respect of works contracts. hire--purehase transactions
and also on the transfer of controlled commodities by
virtue of statutory orders.

|. Para. Inlft'-. I. m,w'rr.
3_ [a] Lnr.~:'ir :3: Tr):iF)i'a Ltd. V. Jm'm' Cami.I1t4't'."r.-." Tm.' 0,n"'.l'.7t'.t'J'. {[972]
2 M.l...l. 553: (H3-.'i'.r') ?0 S.T.C. 150.
(bf. Sf.rg'i.ia-,'\'_s_'.|'1;p:.5_"lr{1'i'{,i.'Lfr/. 1'. D.'.',_rJuf_l«' C.T.0
3_ Para. Irltro., strpru.
4_ Para. lnTro.. supra.

t'|969')3 M.l_..!. 25.

(ii) Evasioii of Central Sales Tax by nteaiis of transfer of
goods from one State to another. on what purports to

be a consignment transfer or a transfer to another branch
of the same institution.

(iii) Whether section 5 of the Central Sales Tax Act, as inter-
preted by the Supreme Court in K. G. Kh0.rl'a'_-r case,
unduly restricts the taxing power of the States.

(ix-"l Conflicting decisions of the Courts as to the (Terural

sales tax in regard to the scope of the penal provisions
of that Act. '

Iii-'J Whether the provisions with regard to penalties for the
evasion of the sales tax should not be amended. so as
to do away with the concept of many red or to bring
them in line with the recommendations made by the

Law Commission with regard to oﬁences under other
ﬁscal laws.

(vi) Dilhcultics felt with regard to certain other matters.
such as, the disposal of excess amounts collected by a
dealer from :1 customer as sales tax.

(vii) Establishrnent of cheek-posts for preventing, evasion

and better collection of taxes on the sale of goods.

We shall discuss them serially in due course.

Intro.--9. Our Report deals with issues which have been ex-
pressly referred to us by the Minister of Law, Justice and Company
Affairs by his letter dated 12th April, 19731 as well as issues
which arise therefrom. Before we proceed to deal with these
issues. we ought. in fairness, to- point out that the ultimate de-
cision of most of these issues will involve considerations of policy
of a complex political and economic character. The area cove-
red by these considerations, however. is outside our inquiry. and
our Report will be conﬁned to the legal aspects of the issues
under inquiry: and our recommendations and suggestions will
be based on certain assumptions made by us from the relevant
statements in the communication of the Minister for Law,
Jttstiee and Company Affairs. We shall refer to these assump-
tions in due course, when we deal with the serveral issues seri-
ally. We thought it necessary to make this observation. in order
to avoid any misunderstanding about 1he scope of our inquiry
and about the character and effect of our recommendations and
suggestions.

l S -: Mr). [1',r._1. 1, .rr.i,'.~r;1.

Policy
matters
outside
the in-
quiry.

ﬁfnigrlilésis 1ntro.----l0. An analysis of the long title of the Central Sales
Cgnu-31 Tax Act will indicate the principal purposes of the enactment.

Sales Tax Thggc an-1_..
.-"let.

(1) to formulate. principles for determining when a sale or
purchase. of goods takes placcw

(a) in the course of inter-State trade or commerce (sec-
tion 3], or

(b) outside a State {section 4}, or

(cl in the course of import into or export from India
t section 5);

(3) to provide for the-

fa) levy {sections 6 & 8},

(ti) collection [section 9(1) and 9(2)], and

{c) distribution [see, section 9(4)] of taxes on sales at
(1) above, and sale of goods declared to be of spe-
cial importance in inter-State trade or commerce,

and

(3) to declare certain goods to he of special importance in
inter--State trade or commerce [section 14] and

(4) to specify the restrictions and conditions to which State
laws imposing taxes on the sale or purchase of such
goods of special importance shall be subject [section
15]

The remaining sections of the Act relate to ancillary matters
or confer powers, e.g., section 1 (giving the short title, etc),
section 2 giving deﬁnitions), section 7 (providing for registration
of dealers). sections 9A, 10 and 11 {banning the collection of
tax except by registered dealers, enumerating oi"fe.i1ces and pro-
viding for penalty, cognizance, etc.,) section 12 (providing for
indemnity to oﬁicers), section 13 (granting a rule-making power)
and section 16 (repealing an earlier Act declaring certain goods

to be essential commodities).

We now proceed to discuss the questions referred to us, and
such other matters as have raised diﬁiculties.

CI-LIKPTER I

The scope for the levy of sales tax by State Governments

1.1. We deal, in this Chapter, with the scope for the levy of Introductory

sales tax by State Governments. We shall deal later in detail
with the power to tax three specific transaction5.----worl-rs contracts
hire-purchase transactions, and the transfer of controlled com-
modities by virtue of statutory orders.

1.2. The three transactions' mentioned above may appear Absence
to be unconnected with one another. But certain legal issues 3;: ElE:';1ifl';t
are common to them. These issues arise out of the concept of of Pro-
sale as known to the general law of sale of goods,--pa.rticularly, Egﬁtgénﬂgﬂ
the passing of property and the consensual element in a. sale. The element.
total absence of these elements, or their presence in an inperfect
form, has raised questions as to whether the transactions are tax-

able as sales.

1.3. The Constitution does not deﬁne the expression "sale". Deﬁnimﬂ

E ' jf "Sales!
In the Sale of Goods Act-', a contract of sale 1S defined as in the
. ._ Sale of
follows. GUNS
Act.

"A contract of sale of goods is a contract whereby the seller
transfers or agrees to transfer the property in goods to the buyer
for a price. There may be a contract of sale between one part-
owner and another".

The Act makes it clear that "a contract of sale may be ab-
solute or conditional3."

The difference between a "sale" and an "agreement to sell"
is also laid down in the Act'. "Where, under a contract of sale,
the property in the goods is transferred from the seller to the buyer
the contract is called a sale, but where the transfer of the property

. Para. LI, supra.

. Section 4(1), Sale of Goods Act, 1930.
Section-1(2), Sale of Goods Act, 1930.
. Section -1 (3), Sale of Goods Act, 1930.

-F-_UJ|~Jn---

in the goods is to take place at a l'L-.turc time or subicct. to seine
condition thereafter to be fulﬁlled, the contract is called an
agreement to sell."

As to when the agreement ripens into a sale, the Act provi-
des :1

"An agreement to sell becomes a sale when the time elapses
or the conditions are fulﬁlled subject to which the
property in the goods is transferred."

Passing of property thus plays an important part in the concept
of sale of goods under the Act.

Power of 1.4. The power of the States to levy a tax on the sale or

Stateﬁ t0 purchase of goods is to be found in the Constitution, 7th Sche--
levy tax on

»ﬁale==_ dule, State List, entry 54. The Supreme Court? has consistently
meaning held that the expression "sale of goods", as used in the legisla-
attrihuterl to . . . . . . .

Salt tive entries In the Constitution and in the Government of India

Act. 1935, bears the same meaning as it has" in the Sale of
Goods Act, 1930.

Therefore, while the State Legislature niay, under the State
List, entry 54, legislate in respect of the series of acts beginning
with an agreement of sale between parties competent to contract
and resulting in the transfer of property from one of the parties
to the agreement to the other for a price (and matters inciden-
tal thereto), it cannot levy a tax on a transaction which is not a
"sale" within the Sale of goods Act.

Saleﬁunder l_4A_ In England the Sale of Goods Act deﬁnes a contract
_Ii_1§Ltng1'Sh of sale of goods as='------

"a contract whereby the seller transfers or agrees to trans-
fer the property in goods to the buyer for a money
consideration, called the price."

1. Section 4 (3), Sale of Goods Act, 1930.
'-'. (a) State of Madras V. Gannon Dunkerlcv & Co. Ltd. (1959) S.C.R
379; A.I.R. 1953 S.C. 550;
(b) New Indian Sugar Mills v. Commissioner of Sales Tax, Bihar
(1933) Supp. 2 S.C.R. 459; A.I.R. 1963 SC. 1207;
(c) Bhopal Sugar [ndustri-es V. S.T.0. (1964) l S.C.R. 481; A.[.R.
1964 S.C. 1037.

3. A5 to the Sale ofﬁoocls Act, scc para 1.3, Supra.
4. The Sale of Goods Act, 1893, section 1(1) and 1(3) (Eng).

9
The Act gives different names to the two ti-ansactIons:--

"Where under a contract of sale the property in the goods
is transferred from the seller to the buy:-r the contract
is called a sale; but where the transfer of the property
in the goods is to take place at a future time or subject
to some condition thereafter to be fulﬁlled the contract
is called an agreement to sell."

1.43. It would appear that at common law also, "sale of sale undgr
goods" had :1 narrow meaning, and the passing of pr0pert3'-----in1- C0mm0ﬂ1ﬁW-
mediately or at an appointed time----was of the essence of the
transaction. As the Indian Contract Act1 (as originally enacted)
provided_.--"Sale is the <::t'Cl1El[1g€ of property for a price. It in-
volves the transfer of the ownership of the thing sold from the
seller to the hL1}'e1"'.

1-5. It may be that the narrow concept of sale in the com-- Narrow
mon law, and in the statute based thereon'-', is due to the fact '3°"°'EPl- °f
that sale was originally a "'cash_ and carry" transaction. Perhaps. '
the most dramatic illustration of the diﬂiculties in breaking with
the past in this respect is the long struggle of warranty law with
the principle of career enrp.'or-----the principle that "he who does
not open his eyes, opens his pursc"',--a maxim reflecting a phase
in the histor:-' of sales law when a sale was a "cash and carry"
transaction".

This may account for the fact that the emphasis is on the
passing of property,--though the position in regard to payment
of the price and other aspects has undergone modiﬁcation.

1.5.4. This requirement as to the passing of property being Som_e tran-
essential, it is well-established' that a transaction lacking transfer
of property cannot be taxed as a sale by creating a legal fiction not amount
in the shape of a deeming clause which seeks to extend the con-- m 'sale
cept of 'sale'.

1'. Section 'N, Indian Contract Act (repealed).

2. Para l.=t-A and 1.413, Supra.
3. fa) Harnilton, "The Ancient Maxim Caveat Emptor," {l93l) 40 Yale
LJ. 1133.
(la) Kessler, "Protection ofthe Consumer" (1964-65) 74 Yale L}.
262, 263.
4. Dy. C'.I'.O'. v. E~tfi_>HfIr'!!a L!i'., *5s.I.R. l953 S.C. 838, 840; (1968)
2 S.C.R, 42].

No property
passed in
hire-pur-
chase and
building
contracts.

Certain
transactions
not to be
regarded as
sale.

Deﬁnition of
'sale' in the
Central
Sales Tax
Act.

1.6. Since the expression "sale of goods" in the Constitution.
State List, entry 54, has the same meaning as in the Sale of
Goods Actsl, a hire-purchase agreement is not a sa1e2, as no
property passes in such transaction until the option to purchase
is exercised and the other terms of the agreement fulﬁlled", Simi-
larly, in a building contract which is entire and indiyisible, there
is no "sale" of goods'. It is a contract of worlrs5, involving skill
and labour, and not directly pertaining to the transfer of property
in goods in specie. Consignments of goods by a principal to his
agent is also not a sale, there being no passing of property for
a price" from one person to another.

1.7. Several other transactions fall outside the concept of
"sale" because of the absence of the essential requirement of
sale. For example a transaction between an hotelier and a resi-
dent customer of the hotel is one of "sort-'iee.". and is not taxable'
under the head of "sale of goods". it there is a consolidated
charge for boarding and lodging.

The allotment of the goods of a ﬁrm amongst its partners, on
the dissolution of the ﬁrm, also does not amount to a "sale". A
provision in a Bombay Aet3, in so far as it purported to tax such
allotment, was held9 to be ultra wire: the State Legislature.

1.8. We may now refer to the deﬁnition of 'sale' in the Cen-
tral Sales Tax Act, The Act deﬁnes 'sale' as foIlows1°:--

" 'Sale', with its grammatical variations and cognate expres-
sions, means any transfer' 0,!' property in _tmod.s' by one
person to another for cash or for deferred payment or

1. Para 1.4, Supra.

". KL. Johar &Co, V. Dy. C.T.0. A.I.R. i965 S.C. 1032, 1089;
(1965) 2s.c. R. 112.

3. See Chapter 1-B, :'rrfr¢:r. (I-Iire-purchase).

4. .S'i'ate .:.g,r'}i:fadrns V. Gannon Dmzken't'v & Co. A.I.R. I958 S.C. 560,
67?; (1959) S_C.R. 379.

5. See Chapter l-A, infra (Works Coittraet).

6. See Chapter 2, t'i2fro(Consignm:i1ts}.

7. Associated Hole': of Indi.1LId. v. Exer'se& Tttrarforr U,[ji'cer, .S'E.m-Ia
A.I.R. I966 Punj. 449,454 to 453, para 18 to 35.

3. Section 25(3), Bombay Sales Tax Act, 1963 (3 of 1953}.

9. State ofﬂujarat V. M'.".S'. Rtmzanlof :51 C0._. A.I.R. i965
60, 69, para 17-13.

10_ Section art}, Central Sales Tax Act, 1956.

Guj.

'L.--
._ z 'w

4:}. Inc:

for any other valuable consideration, and includes 3
transfer of goods on the hire--pnrehase or other system
of payment by instalments, but does not include a
mortgage or hypothecation or a charge or pledge on
goods".

We shall discuss in detail certain elements of this deﬁnition
later'.

-.....s.-.'..p

1.9. This, in brief, is the meaning gitren to the expression should the
"sale of goods", (at) with reference to the constitutional compe-- ﬁ'::1|;5,t;'Bf
-, tenet: of the State Legislatures to levy a tax thereon and (13) in widened"?

the Central Sales Tax Act.
The question that new falls to be considered is:-----

15 it desirable to extend the scope of taxability under the
head of 'tax on the sale or purchase of goods' ? The
question has several branches. Each of them requires
full discussion.

--------j---«------- - --.----------- . ------- - . -...._.__ . -.-

I . Para 13.1], :2-rfm (Hire Purchase),
20 M. of I.,aw}'74--2

I111roduCt0I'_3'.

Hudson's
deﬁnition
of huildin g
contracts.

Works, the
essential
feature.

New Works
or repairs.

CHAPTER I A

TAXABILITY OF WORKS CONTRACIS

Introductory

1A.]. l"-laving discussed generally' the power of the States,
we now discuss the legal position regarding taxability of works
contracts in particular. A typical example of a works contract is
a building contract, which could be usefully considered in some
detail.

Building contracts

1A.2. According to Hudson :1

"A huliding or engineering contract may be deﬁned, for the
purpose of this book, as an agreement under which a person (in
this book called variously the builder or contractor}, undertakes
for reward to carry o-ut for another person (variously referred to
as the building owner or employer), works of a building of civil
engineering character."

lA_3. The essential nature of the contract is the carrying out
of works?

IA-4. A works contract may comprise new works. and also
repairs, for example, the operations of the Central Public Works
Department are divided primarily into two categories, "original
works" and ''repairs''. It has been stated?' that "original works"
comprise all new constructions, whether of entirely new works or
of additions and alternations to existing works or replacement or
remodelling of existing buildings. Repairs include operations
undertaken to maintain buildings and works in proper condition.
The works on which expenditure does not exceed Rs. 75,000

1. Hudson, Building & Engineering Contracts, (1965), page 1 _
2. See also para IA-7 and IA-20, infra.
3, Report of the study Team on CPWD (July 3965]. page 13.

2,:

-are classiﬁed as minor works and those on which it exceed f'
Rs. 75,000 as major works. All original works and repairs cost- T
ing more than Rs. 5,000 and relating to Central Civil buildings
are to be executed through the agency of the Central Public
Works Department. Prior concurrence of the Nlinistry of Works
and Housing is necessary for entrusting civil works to any agency
other tl1an the Central Public Works Departnient".

1A.5. Materials do constitute a valuable part of the total Iv1a;lcrIa.ls
cost of works. And that is why the question often arises whether 3;" ggtgfal

a works contract can be treated as a sale for the purposes of cost.
laws taxing sales-

lA.6. It has been estimated} in the ease of works construet- Mal'-ﬂ"1'=11S 3
valuable

ed for t-he C.P.W.D- that materials and stores account for nearly part

two--thirds of the cost of works" (In the case of departmental C-P-W-D
and depart-

exeeution of works, the Government has to arrange for all the re-- [ngnt 'ﬁ,rQ.ﬂ[g_

quirements of materials and stores).3
Diﬁerettce between "work: and sale"

IA. 7. The primary difference between a contract for work EFETEDCE
..(of service) and a contract for the sale of goods is that in the for- m"{ﬁ;°,,'} of
mer there is in the person performing the work rendering a Works and

. _ . . . contract
service, no property 111 the thing produced as a whole, even If a far sa]¢_
part or even a whole of the materials used by him may have
been his property. 4-5. Eventually, the property passes ;3 in the
generality of building contracts, the agreement between the par-
ties is that the contractor should construct a building according
to the speciﬁcations contained in the agreement, and in consi-
deration therefor, he should reeeive the payment as provided
therein. There is, in such agreement, neither a contract to sell
the materials used in construction, nor does property pass therein
as rnovables. The materials pass to the owner of the building
only as an accretion to the building. A contract for the sale of

materials cannot be implied from such an agreement.

Report of the Study Team on C.P.W.D. (Jul),-' 1955), page 78.

. Report ofth-2 Study Team on C.P.W,D. (July, T965) page 7],

_ .-'iv. to the practice regarding payment, see para IA-18 infra.

4. C.5'.T. V, Prirmhorrurii Preinjf. '[1970] 26 S.T.C. 33, 4].

5, 3:: also pzira l.-1-27, Infra.

5. 5'f"If:? 0Jr."l«il;2:'Iras v. Git.-'If!':J.'l D.m»i:e.".|'e_]f, (I958) A.l.R.. 1958 SC. 560
(on appeal from A.l.R. 1954 Mad. 1130).

F.,;.'\)

Splitting up 1A.8. Where the contract is indivisible, it cannot be split up,
'33' 3s"°""° and even the fact that the assessee has split it up for his own

immaterial. _ _ _ 1
purposes 1S immaterial.

lA.9. Gannon Dunkertejfs case? is an example of taxation

Cannon _

[I)unlterIey's of composite contracts, involving the supply' of goods and servi-

case' ccs. It is the leading case, holding that States cannot tax works
contracts.

In Gunrur Tobacco case" various aspects of a contract of
work were thus dealt with :--

"A contract for work in the execution of which goods were
used may take one of three forms. The contract may
be for work to be done for remuneration for supply
of materials used in the execution of the works for a
price; it may be a contract for work in which the use
of materials is accessory or incidental to the execution
of the work; or it may be a contract for work, and
the use or supply of materials, though not accessory
to the execution of contract, is voluntary or gratituous
In the last class there is no sale, because, though
property passes it does not pass for a price, whether
a contract is of the first or the second class must
depend upon the circumstances; if it is of the first, it
is a composite contract for work and sale of goods:
where it is of the second category, it is a contract for
execution of work not involving sale of goods."

1;'§fk5'5;gr';f lA.11. Work contracts, thus are of various types. For the

ctswhere the present purpose, it is sufficient to state that where the question

::°l'é"':?:u°f whether a particular contract of work is taxable by the States
be split as a contract of sale arises, one has to distinguish between
ﬁlflefgd contracts in which the element of sale is divisible and contracts
it canmt in which such element cannot be split up and which are, there-
1'°- fore, indivisible. Briefly, the position is as fo1lows:~----

(a)Where the agreement constitutes a single contract (as
above), it is not open to the State 'to split up' the

I. (as C. S. T. v. Asha Watch Co. (1971) 28 S.T.C. 395 (Gujarat) :
(b) Variety Body Builders 'in'. C.S.T, (1971) 23 S.T.C. 339 (Gujarat).
2 . State ofM'adm.5' v. Gannon Dunkeriey (5: Co. A.I.R. 1958 S.C. 560
(1959) s.C.R. 379
3. Government of Andtira Pradeslz V. Gunmr Tobacco Lrd., (I965)
16 S.T.C. 240 at page 255 (S.C.)

agreement into its component parts, i.e. to single out
that which relates to the supply of materials and to
impose a tax thereon treating1 it as one of sale.

(b]Where the contract is one for the execution of work
for a lump sum as oﬁfered by a tender and accepted
by the contractor, no separate agreement for the supply
of materials is involved, 2,3 even though there is a term
in the agreement that the property in materials would
pass to the employer as soon as the goods were
brought to the site by the contractor.

(e) Parties may, however. enter into distinct and separate
contracts, one for the transfer of materials for money
consideration and the other for payment of the remu-
neration for services and for work done.'

{d)The burden of showing that a works of service contract
involves a taxable sale of the materials used is upon
the taxing authorities, and the burden is not dis-
charged by merely showing that property in goods
which belonged to the party performing the service or
executing the contract stands transferred to the other
party.5

Position in some other countries

lA.12. The position in Australia in this respect may be con- I_n Austra-
trasted. in a new South Wales ease," the Supreme Court of New '

South Wales held, that the agreement between the parties was
one to do certain work and to supply certain materials, and not
an agreement for the sale or delivery of the goods."'

. Stare uf'M'a:1'rn3 V. Gum-ton Duitlzeriey. A.[.R. 1948 S.C. 560.

was

2. Pears La! v. State ofPmr}'uI..b (1958) 9 S.T.C'. 412 (S.C.).
3. C'art'S2't'Il'_r case, A.l.R. 1961 SC. I615, 1619.
4. .'_-ItrHeof'.'14odr:r.s V. Gannon Durrkerie-_1-', A-LR. 1958 SC. 560.

5. Government: ofdizdhra Pradesh v. Gunter Tobacco Lid. (1965) 16
S.T.C. 240, 255 (S.C.).

*5. Sydney Hydraulic and Central Erzgineermg Co. V. Biackwaad :5:
Son, 8N.S.W.S.R. 10.

7. In-ing's Comrnonwealth Sales Tax Law and Practice (1950) page Ti.

Tﬁe posi-
TJOI1 'EE-
garding
passing of
property.

.16

In 1932, the Legislature' intervened, and enacted, in the
statute of 1930, a new provision, section 3(4), in the following

tcrrns9:--»-
"For the purpose of this Act, a person shall be deemed to

have sold goods, if, in the performance of any contract
(not being a contract for the sale of goods) under

which he has received, or is entitled to receive, 'valuable

consideration. he supplies goods the property in which
[whether or goods or in some other form) prI.'>'Se.t'_.
under the terms of the contract. to some other person."
After this, the question arose in later case whether3 a con-
tractor who fabricated piles and used them in construc-
ting a bridge was liable to pay sales tax on the value
of the piles. The majority of the court held that
though there was, in fact, no sale of the piles, in law
there was one, by: reason of 3et'n'on 3(4) of the Act.

Parrfrrg of property

JA.13. A treatise which deals with the practice in respect of
building contracts4 states the position as to the passing of property
(in the materials) in works. contracts, in these words :--

"Materials b_rought on to the sitc by the contractor remains-
his property, in the absence of a provision to the con-«
trary, until they become aﬂixed to the land i.e., are
built into the works}-", whereupon they become the
property of the owner of the freehoid."' If the employer
has an estate or interest less than the freehold, he en~
joys the property during such estate or interest. In the
case of ships the property passes when the materials

1. See Shite ofi'tIad.v'r2.5' 1-'. Gamzarz Dunkw'Ie_1~' & Co. AI .R. 19 58
5.C. S60, S70.
. Section 3(4), Comtnonwealth Sales Tax Act {Australia}.

3. .M.R. Hornibraok, (Print) Ltd, v. Federal Cm-imia'r.sr'o.-:-er oj'1Ta.\'ntrb:r
(1939) 52 C.L.R. 272, 231.

4. Keaiing, Building Contracts (1955) page 96.
5. Keating, Building Contracts (1955), page 96
5. Tifpp V. .z=trmfra,r;e,(lS39) 4M & W. 68?'.

. Eh:-2.: V. M.cm'_. (1302) 3 East 38

I-I

'-1

are ﬁxed, 'or, in a reasonable sense, made part}: of the
I -.31

corpus .

]A.14. It is, however, stated in the same treatiscf' "I is com-
mon to have a clause which purports to vest materials and some-
times plant in the employer before. they are ﬁxed. The principal
objects of such a clause are to provide a security to the t2l'I1pl0}'f:1'
for money advanced and to enable the employer to obtain the
spectly completion of the works by another contractor in the
event of the original eontraetor's default. by providing materials
and plant on the site read}; to use free from t.he claims of the ori-
ginal contractor, and his creditors, or his trustee in bani-zruptey
or liquidator. Whether or not the clause achieves its purpose
Llt.'pCr'I:.lS- upon the words used." If the forrnula used is "the mate-
rials sir-all become and he",' or "be and become" the property of
the employer, then normalJ_v "the clause means what it says. opera-
tes according to its tenor and effectively transfers the title."-7 :--

If, on the other hand; words like 'considered to be', are
used. the clause may he ineﬁeetive to achiex-'e its pur-
pose, the property may remain in the contractor."

IA.l5- Clause 11 of the form of the Royal Institute of Contract

British Architeetsi may he referred to, in this connection :-- lfprmlof
oya
.__ T . . Institute
Clause 1l--bnﬁxed materials when taken into account l0Uf Brit]-sh
be the property of the employer. Architects-

Where in any certiﬁcate of which the Contractor, has rec.eiv--
ed payment the Architect has in accordance with clause 24(1))

1. Smtlz '.5 , .'lfnort= (1896) ll App. Cast. 350, 331, t'H.L..). for other cases
on ships, see Re Salmon and Woods, cu'. .0. Gerald. fll.-l85) 3. Mon-,
Bkptc}-_ C215 13?; Reid V. ."lIac.';erh & Gray (1904) AC. 32.3 ('H_L_J_
Re B!_}=.rl'r Snip Btzr'.?:'.lr'r:_,r,r etc. Ce. L.!'.-'!. (1936) Ch. 49-1 fC.A ).

.-, Keatine, Building Contracts r']955_]. page 97",

3. See, e.g. clause ll. R.I.B.A. f0]'.Tl tinl'ra'l.

4. Barmett etc. Ltd'. V. Sugar City, {[951} AJC. 736 (P.C.).

5. See Realms V. Barlow, (1884) 12 Q.B.D. 436 {C.A.}.

6. ("at Bennett' etc. Ltd'. V. S'u_enr City, (1951) A.C. 736, 814.
(h) Re Whiter at p. Bollnird, (1873) 8Ch. D. 225.

7. Kcating, Building Contracts (I955), page 230.

Provision
in another
form ado-
pt.ed by
Association
of sub-
contractors.

When does
property
in materi-
als pan.

of these Conditions included the value of any unﬁired materials
and goods intended for, and placed on or adjacent to the Works,
such materials and goods shall become the property of the Em-
ployer and shall not be removed except for use upon the Works
unless the Architect has authorised in writing such removal, but
the Contractor shall remain responsible for loss or damage to the
same.'".

lA.16. Another form (adopted by the Association of sub-
contractors) has this clause'

"Vesting of Materials

1i.--All plant, materials and equipment of any kind whatso-
ever which are brought on to the site by the Contractor but are
not intended for incorporation in the Works shall remain the pro-
perty of the Contractor in any event. Any materials, ﬁtments or
other goods delivered to the site for incorporation in the Works
shall remain the property of the Contractor and shall not be-
come the property of the Employer until whichever is earlier
of the following times :--
(a) When the same have been incorporated in the 'Works.

When the same have been paid for in full (subject only
to the deduction of such sums as the Employer may be
entitled to retain in accordance with the provisions of
clause 12 hereof).

lb)

without prejudice to any other rights or remedies the Contractor
shall have a lien on any unincorporated materials, ﬁtments or
goods which may have become the property of the Employer for
the amount of any unpaid portion of the Contract price due to
the Contractor."

1A.17. It is not always easy to determine when the property
in the materials passes in a Works. Contract; this is because pay-
ment is not usually made in a lump sum.

1. Keating, Building Contracts (I955), page 310--311.

128.18. Take, for example, the practice in the Central Public Practice

Works Department, which has been thus described1--'*-': "A Con- in C'P'w'D'

tractor is required to submit a running hill each month on or before
the date fixed by the Engineer--in--cha.rge for all works executed
in the previous month and the Engineer-in--charge has to take
or cause to be taken the requisite measurements for the purpose
of having the bill veriﬁed and the claim, to the extent admissible,
adjusted, as far as possible before the expiry of 10 days from
presentation of the bill. If the contractor does not submit the
bill within the time ﬁxed, the Engineer-in--eharge may depute
a subordinate, within 7 days of the date ﬁxed to measure the work
in the presence of the Contractor whose countersignature to the
measurement list will be sufficient warrant and the Engineer-in-
charge may prepare a bill from such a list."

Tests adopted

lA.l9. It may sometimes be diﬂicult to decide whether a.Te5m for

contract is of works or of sale. Several tests are adopted," for the Eliglifﬂgigglgl;
purpose,--e.g. one test is whether primarily the transfer of the warns con.
movable article is taken as such, or whether the transfer is only ""l'°'5 and
ancillary to another contract. Another test is whether the article S3 G'
supplied has itself a general market. A contract to produce photo-

graphs of a particular person is, for example, one of works,'

because the photographs would have no general market. The
production is really of a work of art requiring skill."-°'

1A.20. It has been stated that states are faced with several States _
problems' owing to the extension of the principle to other cases liﬂggﬁegfth
involving "body building".

Whether amendment needed

lA.2i. It is in this background that we have considered the Conclusion.
question whether the power to tax indivisible contracts of works
should he conferred on the Sates.

I. Report of the Study Team _on Central Public Works Department
{[965}, page 82.
2. As to C.['.W. D. works in general. see para lA.6, .-rupm.
3. See also para |A.'i', supra.
4. B. C. Kama 1;. A.m'.rra1rr.S'.T.0., {I971} 28 S.T.C. I. 3 (M.P.).
5. C.S.T. V. Patel Indrh Ltd. (I971) 28 S.T.C. 516 (Bum bay) (M0d}' CJ.
and Chandrachud J.)
6. Camera House v. State of Maharashtra, A.l.R. 1956 Born. 43?
{Abhyankar 35 Vimadalal JJ) (Reviews cases). I
Notes in the Ministry of Finance.

_'--l

In our view, in its judgments on this question,
the Supreme Court, with respect appears to have
adopted an unusually restricted interpretation of the
expression "sale". It is true that the expression "sale" is not
deﬁned in the Constitution--but, it is a well--reeognised canon
of construction that the words used in the three Legislative Lists
should receive the widest possible interpretation and it was, we
venture to suggest, somewhat inappropriate to have taken
recourse to the narrow deﬁnition of the word "sale" contained
in the sale of Goods Act for the purpose of interpreting that
expression occurring in the state List, entry 54- That is the
principal juridical" ground on which we have expressed our
prcferencel for the transfer of the power to tax such contracts
to the State Legislatures. We ought to add that before the judg-
ment of. the Supreme Court was pronounced? "sale" was usually
regarded as including works contracts, and works contracts were.
as such, regarded as falling within the power of the States to
tax under State List, entry 54, and taxes on that basis were being
levied and recovered.

1A.22. The present positior on the subject and the possible
alternatives, may be brieﬂy stated thus :--

{i)Thc Union has the power to tax works contracts under
Constitution, Seventh Schedule, Union List. entry 97.

(ii) The power to tax inter-State works has not, so far, been
exercised by the Union, and the deﬁnition of 'sale' in
the Central Sales Tax Act does not include Works con--
tract.

{iii} The power to tax works contracts withfri the State also
vests in the Union, under Union List, entry 97 (as in-
terpreted in the judgments of the Supreme Court).

Before the judgments of the Supreme Court, however, sale
was usually regarded as including :1 works contract. The ques-
tion is ultimately one of policy, but the Commission would pre-
fer restoration of the power to the States.

Narrow interpretation of the expression "sa.le" was not the
practice before the Supreme Court judgments. Entries in the legis-
lative list, should reccivt: a broad interpretation. Fine nuances

1. Para 1.22, supra.
3. Gamma: Dm:kerfey'.s case.

need not be material. The transactions resemble sale in substance.
Hence, the power should be given to the States.

M? this alternative is adopted, there are several drafting devi-
ces open, e.g.:--

fa] arnending State List, entry 54, or
(b) adding a fresh entry in the State List, or

The Commission prefers the last one. It would avoid mul1i--
ple amendments.

(iv) Whether the course at (iii) should be adopted or not,
is a matter of policy, involving ﬁnancial and political
implications.

(V) In the alternative, power to tax intra--State works con-
tracts could (if a policy decision to that effect is taken
by the Union), be exercised by the Union, and the
necessary law passed The proceeds of the tax imposed
thereunder could, then be distributed to the State Arti~
cle 269 may have to be amended in that case.

(vi) Whether the course referred to at (V) above, should be
adopted or not, is again a matter of policy, invoking
ﬁnancial and political considerations.

Nature
of hire-
purchase
under the
Indian
Act.

CHAPTER 113

HIRE--PURCHASE TRANSACTIONS

Introductory

1B. 1. In this Chapter, we shall deal with the question of
tax on hire-purchase transactions. Before dealing with the
position regarding tax on such transactions, it is desirable to
refer brieﬂy to the nature of hire--purchase.

Nature of hire-purchase

1B. 2. The deﬁnition of hire-purchase agreement in the
recent Indian Actl dealing with hire-purchase is as follows :---

"(c) 'hire--purchase agreement' means an agreement under
which goods are let on hire and under which the
hirer has an option to purchase them in accordance
with the terms of the agreement and includes an
agreement under which-

{i) possession of goods is delivered by the owner
thereof to a person on condition that such person
pays the agreed amount in periodical instalments,
and

(ii) the property in the goods is to pass to such person
on the payment of the last of such instalments,
and

(iii) such person has a right to terminate the agree-
ment at any time before the property so passes ;"

In the same Act, "hire--purchase price" is deﬁned as

fo1lows:--
(d) "hire--purehasc price" means the total sum payable
by the hirer under a hire-purchase agreement in

:_ station 20:) and 2{d), Hire-Purchase Act, 1972 {Central Act26 of

1972).
[It has not yet been brought into force].

«22

order to complete the purchase of, or the acquisition
of property in, the goods to which the agreement
relates; and includes any sum so payable by the
hirer under the hire--purchase agreement by way of
a deposit or other initial payment, or credited or to
be credited to him under such agreement on account
of any such deposit or payment, whether that sum
is to be or has been paid to the owner or to any
other person or is to be or has been discharged
by payment or money or by transfer or delivery of
goods or by any other means ; but does not include
any sum payable as a penalty or as compensation
or damages for a breach of the agreement".

1B. 3. A hire-purchase agreement may be distinguished Distinction

from certain other types of credit transactions. f'3'fv"t""=°'1
hire-pur-

First, there are "credit sale" agreements. A credit sale 3%: and
agreement in the present context may be deﬁned as an un-eond:'-- agreemgnts
rionnl contract for the sale of goods, under which the whole or s--a'feg=di*
part of the purchase price is payable by instalments} We are '
not concerned with credit sales where the entire price is payable
in one instalment. We are concerned with credit sales with
price payable in instalments. The contract for the sale is "nn--
conditional", in the sense that the property in the goods is
transferred to the buyer under the contract. If the transfer of
the property is to take place at a future time, or subject to some
condition thereafter to be fulﬁlled? then the agreement is not
a credit sale agreement, but a conditional sale.3 Credit sales
are distinct from hire--purch.ase agreements, because, in a credit
sale, the buyer is a person to whom the property has been trans-
ferred ; he is not a hirer of the goods, but the owner. A credit
sale resembles a hire--purchasc, inasmuch as the price is payable
by instalments.

It is obvious that the seller under a credit sale takes a risk,
because in case of default by the buyer, his only remedy is to
sue the buyer, for the price.

113. 4. Next, we must distinguish an agreement of a com Comm

ditional sale from a hire purchase. A conditional sale agreement tional

may be deﬁned' as an agreement for the sale of goods under which 5313'

I A.G. Guest, Law of Hire-purchase (1966), page 14, paragraph 32.
2. Compare the Sale of Goods Act.

3. As to conditional sales, see para 1B.4, frrﬂra.

4 A.G. Guest, Law of Hire~purehased (1966), page 15, paragraph 33.

-.-Chart
Showing
difference.

the purchase price or part of it is payable by instalments, and the
property in the goods is to remain in the seller (notwithstanding
that the buyer is to be in possession of the goods) until such
conditions as to the payment of instalments or otherwise, as
may be speciﬁed in the agreement, are fulﬁlled. Property does
not pass immediately, but remains in the seller during the con-
tinuance of the agreement. To this extent, such agreements
resemble hirenpurehase. But the distinction is that the buyer
under a conditional sale is bound to buy the goods, while, in
the case of a hire-purchase, the hire--purchaser has the right to
elect whether he will buy the goods or return them to the
seller.

It should be noted that though the seller in a conditional
sale remains the owner, the buyer (in a conditional sale) is
a person who, "having agreed to buy goods", obtains with the con-
sent of the seller possession of the goods and, therefore, he can
pass a good title to third parties}

1B. 5. The following chart will show the similarities and
differences between hire--purchase and other transactions :--

Credit Sale Conditional Outright Hire-
with price payable sale sale purchase
in instalments
(i) Property Property docs l_3'r0peI'tj.' passes Property does
passes not pass in1rn4:- immediately. not pass imme-
immediately. diatly. diately.
{ii} Possession Possession Possession Possession
transferred. transferred. transferred. transferred.

-(iii) Obligation Obligation to Obligation to No obligation to
to buy exists-- buy exists. buy carried out buy, though
in fact there bysale. there is an
is already a option to buy.
sale.

(iv) Price pay- Price payable Price already Price payable
able by in- by instalments. paid. by instalments.
stalments.

(vj Buyer can Buyer can pass Buyer can pass Buyer cannot pass

pass title to title Lee V. title to third title because he

third parties. Butler: parties. has not agreed
to buy', (He!by 3-4
v. Mathews).

D-I

. See the sale of Goods Act.
. Lee V. Butler, (1893) 2Y.B. 311.
. Heiby V. .Mar}iews,{189S} A.C. 41'}.
.See also Burrerworrlr v.Kr'irgsway Mot'or.5', (I95-1} l W.L.R. 1286.

,h_ L.) N

1B. 6. In an outright sale, of course, the property passes Outright
immediately, and the obligation to buy has been carried out and, WC'
therefore, it is distinct from a hire--purchase.

1B. 7. At this stage it may be relevant to say a few words iT']::\:;1eT;°f
about the nature of the rights passing under hire-purchase. under
While, traditionally, a hire-purchase agreement has not been re- h]i]F°'P"1"
garded as a mortgage or security transaction, a different View 6 am"
seems to have been taken in practice} Professor A. G. Guest has
said,3 "It would be realistic to accept that the rights of a hirer
under a hire---purchase agreement must now be regarded as a
valuable species of property." It may be noted that the hirc---pur-
chase legislation of the States in Australia does recognise the

"property" of hircrs."

IB. 8. For example, section 9 of the Hire--purchase Act,
1960 (New South Wales), refers to the assignment of "the right,
title and interest" of a hirer. The English decision in Wfckfzam
Holdings' rejected "the nakedness of the hirer's property rights".
In an earlier English case,-5 the rights of hirers had been recog-
nised. The recognition of the property rights of a hirer is equally
discernible in another English cases. The recent Indian Act also
recognises certain rights of the hirer'.

Taxahility of fu.'re-pzrrefzase transactions-Position in States.

113. 9. Taxabilit}; of hirc--purchasetransactions (under the. Taxability
power to levy a tax on the sale or purchase of goods) can be Of hiF°'P"1"

considered separately with reference to :--
( 1) position as regards power of the States;
(2) position under the Central Sales Tax Act;
(3) position as regards the Union Territories.
Power of

1B. 9A. Hit'e--purchase (until its fructiﬁeation in sale) is a the statgg

mere bailinent, and is not analogous to sale. Property may ulti4 t_--Di£Et'1°'
mately pass to the hirer ; but that is problematic, and dependent V1.22, him.

on the volition of the hirer3. The essence of sale is the passing Dﬂachgzfa
_ ill']. -

See R. Baxt "Correspond-_'ncc", (1970) 44 Aust. L..T. 296.
A.G. Guest, Note in (1962) 73 L.Q.R. 30,33.

R. 313:? "Cnrres_oorLtlence", (l9"0} 4-1 Aust. I_.]. 296.
irl-'I'ckn'ta.Irz H0!tIm;,r.\', (1967) 1 W.L.R. 295.

Bizlsizn .-Motor S.-ipp!__v C9. 1;. C-J3. (l9J4] l K. B. 244.
Spellman '~.'. Spelhrzarr {I961} 1 W.T,.R. 921.

Hit:-,1.Ircha-se Act. 1972 (Ct:;1|ft'ai Act 26 of 1972}.

3 Para J-H--]B-S supra.

_bc :1 Io. _ua _-A _\..4 N _

Position
as s_um-
martsed.

Position
under the
Central
Sales Tax
Act.

of property, which is absent in the case of hire--p-urchase (until
its ultimate fruition). The hirer enjoys the use of the goods
until determination of the agreement; but the title to goods still
remains in the owner.

It is because of this difference between hire-purchase and
sale that the constitutional power of the States to levy a tax on
the sale or purchase of goods' has been construed as not in-
cluding a hire-purchase which does not result in sale?

If a hire--purchase results in sale, sales tax is undoubtably
leviable by the States. No doubt, it is difficult to determine the
"sale price" for the purpose of the sales tax law," but this has
no bearing on the question of legislative competence.

1B. 10. The position as regards the power of States to levy
a tax on hire-purchase can be brieﬂy stated as follows :---

(a) The States cannot tax hire--purchase transactions not
resulting in sale,'

(b) The States can tax hire--purchase transactions result-
ing in sale, but only to the extent to which the tax
is levied on the sale price", the sale price in this
case being a notional ﬁgure which has to be calcu-
lated according to the criteria legally permissible".

It would appear that (as of 1966) the Sales Tax Acts of
some States included, within the expression "sale", hire-purchase
etc. with a non obstante clause. But this provision must be read
as subject to what is stated above.

Position under the Central Sales Tax Act
1B.I1. The deﬁnition of "sale" in Central Sales Tax Act,
which we have already quotedl, is as follows'; :--

"(g) 'sale', with its grammatical variations and cognate
expressions, means any transfer of property in goods

State List, entry 54.

K.L. Joker v. D-y.C.T-0., A.I-R. 1964 S.C. 1032.
See para 1B.26, infra.

Para 1B.9A., supra.

K.L. Joker V. Dy. C.T.0., A.I.R. S.C. 1082.

Para I 13.25 and l 13.26, infra.

Para----8. supra.

Section 2(g), Central Sales Tax Act.

_m_---|_5\_\.n_.L_<,.:.g._.'

-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-pur-
chase. or other system of payment by instalments,
but does not include a mortgage or hypothecation of
or a charge or pledge on goods."

It is obvious that in the earlier part of the deﬁnition, transfer
oi". 'property' is required; but, in the latter part (the inclusive
part]. transfer of 'goods' is enough, and transfer of 'property' is
not required. It is, therefore, a plausible View to take that hire-
purchasc. not resulting in sale is also covered by the deﬁnition.

IB. I2. The question whether the Central Sales Tax Act
applies to a hire-purchase not resulting in sale has indirectly
come up for discussion in two cases before the Supreme Court.
In one of them' (which related actually to works contracts),
the argument was advanced that because the Central Sales Tax
Actwas wide enough to cover such hire-purchases, it showed that
the legislative entry relating to power to tax (inter-State} sa.les
or purchase should also be widely construed; and if that was
so. then the legislative entry regarding taxation of (internal)
sale or purchase (State List, entry 54), should also be widely
construed so as to include works contracts. The argument did
not succeed. The Supreme Court pointed out that there was
a difference in the position regarding Parliament's power and
power of the States. So far as Parliament was concerned, it
could. tax hire--purchasc not resulting in sale under the residuary
power.

113. 13. In another case,'-' the validity of the Bengal Finance
Sales Tax Act, 1947 as extended to the Delhi Union T€I1'it0I"f.7,'
was in issue, in so far as the provision in that Act taxing hire-
purcltase not resulting in sale was concerned. The Supreme
Court upheld its validity, and again pointed out that Par1iament's
power oE levying taxes was wider than that of the States. The
Court frsgrthcr pointed out that this had already' been held in
Mirhm-z Laiii; case" where it was stated that under article 246(4)

1. E)'./.-mirm Di.-m'rt=r.I'e_i-".s' ca.-re, ('Works Contracts), A.I.R. 1958 S.C. 560
l_:>ri appeal front A.1.R. 1954 Mad. I130).
!n.rrat};ir-ii! Se-ppi'y Ltd. ruse. A.l.R. l962 S.C. 53, 59, Para I3,
reversing f.rz.u.':zlineiz.' S'irp_.5'i'i'c_» L!:f._. A.I.R. 1956 Punj. l'.-'7.

F. .-'t»l'.=':.='i'.2-z L.-;i_f'.r c.-it-3, .'\.I.R. [2133 S.C. 633, 635, (W.irks Contracts).

39 M ;_:1' l,=aw;"i'--l.--3.

'l-J

Discussion
in Supreme
Court
C3533 213

to Central
Sales Tax
Act.

Deﬁnition
in Bengal
Act. as
extended to
Delhi as in
1954.

Doubt aris-
ing due to
absence of
non-obsranre
clause not
shares.

Position in
Union Ter-
ritories--
Delhi.

of the Constitution, Par]iament's power was untrammelled in rela-
tion to Part C States--now Union territories.

An argument was then advanced that since, in other Part C
States, such sales were not taxed, there was discrimination
against traders in Delhi. The Supreme Court rejected this argu-
ment, ﬁrst on the ground that there was no evidence that in
other Part C -States such sales were not taxed; and secondly by
observing that the Central Sales Tax Act levied tax on such
hire--purchase also throughout India. With respect to the second

reason (pertaining to the Central Sales Tax Act), it may be I

permissible to point out that the Central Sales Tax Act relates
only to inter-State sales.

Thus, the position is that while there is no reported case
directly relating to the scope of "sale"3 in the Central Sales
Tax Act (in relation to hire-purchase), we can draw assistance
from the views of the Supreme Court which were expressed in
dealing with the question of the validity of the Act, giving that
expression a wide scope.

1B. 14. A doubt was expressed during our discussion as to
whether the absence of a non-obsranze clause in the deﬁnition
of "sale" in the Central Sales Tax Act* makes any difference.-"
We have, however, after careful consideration, come to the con-
clusion that the words "transfer of goods" are clear enough to
cover hire-purchase not resulting in sale.

Position in Union Terri:ories--DeI.-hi

1B. 15. By way of example of taxation on hir'::-purchase
transactions in a Union Territory, we may take the case of Delhi
to which the Bengal Finance etc. Act extends. In a judgment
rendered" in 1962, the deﬁnition of sale was quoted as follows;
and, apparently. this was' the deﬁnition as it stood in 1954.

" 'Sale' means any transfer of property in goods for cash
or deferred payment or other valuable consideration,

See on this point, para 1B.15, :'r:jJva.

Para lB.1l_. supra.

Para 113.11, supra.

Para 1B.l1 supra.

Such mm obstarzre clause is found in some State A-:15.

instalment Supply Ltd. care, A.I.R. 1962 S.C. 53.

Sec ],r;|,5-fgfmenf Suppl)' Ltd. V. State of D9315, A.I.R. I956 Ptlllj.
17?, para 2.

~4°~"'."'-*N."

Mn .......-¢.._-

':-

including a transfer of property in goods involved
in the execution of a contract, but does not include
a mortgage, hypothecation, charge or pledge.

"E.r,nimian'on.--A transfer of goods on the hire--purchase
or other instalment system of payment shall, not-
withstanding that the seller retains a title to any
goods as security for payment of the price, he deem-
ed to be a sale."

1B. 16. With reference to this deﬁnition, the Supreme Court
observed :

"It is clear from the deﬁnition that it includes not only
what may be compendiously described as a_ sale
under the Sale of Goods Act, but also transactions
which, strictly speaking, are not sales, not even
'contracts of sale' but only contain an element of
sale, that'is, the option to purchase, and that is the
reason why the Explanation ends with the words
"be deemed to he a sale", therehyindicating that a.
legal fiction has been introduced into the concept
of 'sale' as ordinarily understood. The Explanation
has included, within its amplitude, a mere transfer
of goods without the transfer of title to the goods,
if it is in the course of an agreement of the nature
of 'hire--pur-chase' or other instalment system of pay-
ment."1

lB.17. It was argued that the Explanation had the eﬁect of
extending the concept of "sale" to what, in law, was not a real
sale and therefore, it was unconstitutional. This argument was
rejected by the Court. It was pointed out that under article 246
(4) of the Constitution, it was Parliament which had the power
to legislate for Part C States, that the power was untramelled
by the limitations prescribed by article 246, clause (2) and (3),
or State List, entry 54, that the power of Parliament was plenary
and absolute, subject only to such restrictions as are imposed by
the Constitution, and there was no restriction which was mate-
rial to the present question. It was, therefore, competent for
Parliament to impose a tax on hire-purchase transactions for
Part C States and to impose it under the name of "sales tax".

1. I.»-1.rta|'rrzcn! Strap!)-'PrE1'aIe Ltd. V. Union t?_.l'IlPt'--ff'f1, A-l-R- 1952 SC-
53, 57, para 5,

Defmition
in Bengal
Act as
extended
to Delhi
before
l9,<.9.

1B. I8. T he Court stated that in Mithan Lalir case} a simi~
lar question had arisen, namely, whether Parliament can enact a
law imposing tax on the supply of materials used in building
contracts in Part C States. It had been held by the Court, for
the same reasons, that it was within the competence of Parlia-
ment to impose such a tax. The Court also observed that the
decision in the Sum» of Madras' v. Gannon Drrrzkerley 5.' Co.
(Madras) Ltd.,3 was inapplicable in relation to Part C States.
That decision had been given on a statute passed by the Provincial
Legislature under the Gosernment of India Act, 1935. and it had
been pointed oL1t in that case that the power of the Provincial
Legislature to impose a tax on sales under Provincial Entry 48
in Schedule VII of the Government of India Act, 1935, did not
extend to imposing a tax on the value ol' the matcritlls in build-
ing contracts which are entire and indivisible.

IE. 19. The deﬁnition of "sale" in the Bengal Finance
(Sales Tax} Act, 1941, as extended to Delhi, was as follows
before 1959 :--

"[g) 'sale' means any transfer of pi-opertjr in goods for
money consideration and includes a transfer of pro-
perty in goods supplied in the execution of a contract
but does not include a mortgage, hypothecation, charge
or pledge; and any grammatical variation of the ex-
pression 'sa1e' shall be construed accordingly.

E.rpIam.r.n'rnz 1.--A transfer of goods on hire-purchase
or other instalment system of payment shall, not-
withstanding that the seller retains a title to any
goods as security for payment of the price, be
deemed to be a sale.

E.rplamc.utr'on I-1.--A sale shall be deemed to have taken
place in the State of Delhi if the goods are actually
delivered in the State of Delhi as a direct result of
such sale for the purpose of consumption in the
State of Delhi, notwithstanding the fact that under
the general law relating to the sale of goods the
property in the goods has by reason of such sale
passed in another State."

1. It-fr".f.='.-.:1r:.[r'r."-'. "Tin! S.ra!ecfDr--H1fc:zrf ti'??(.|I'.';J';", C. 533.
S.E.C. 41."-.
2. Gcrmmn Dmn'rer!e}= & Cn.'_\ case

(1955: .':'.C.R. 379, 9 s.r.<:. 353.

1B. 20. In I959, the Explanation relating to hire--purchase Amend-
(in the Bengal Act as extended to Delhi) was removed by a r1"9"5'},tl°f
Central Act. The Statement of objects and Reasons to the Bill
which led to the Amendment Act statedl :

"Sub-clauses (C) and [d)«~T'hE deﬁnitions of 'sale' and
'sale price' have been revised so as to be in con-
formity with the deﬁrritions in the Central SaIe.s Tax
Act, 1956."

The deﬁnition as substituted was as follows :--

"('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 hire-purchase
or other systern of payment by instalments, but does
not include a mortgage or hypo-thecation of or a
charge or pledge on goods.

Explanation. A salt: or purchase of goods shall be
deemed to take place inside the Union territory of
Delhi if the goods are within that territory :---

rji) in the case of speciﬁc or ascertained goods. at
the time of contract of sale is made; and

(ii) 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 subsequent to such
appropriation."

lB.21. This then is the present position as to hire pur-- PT'-"§€'1t
chase POSIEIOII.

Need for amendment

1B.?.2. We have made an attempt to analyse the legal posi- Conﬁr-

tion, in order to bring out certain aspects which appeared to re- 3§,°,_$_E_;"a
quire emphasis. matter of
policy.

1. Central Act 21' of I959.

Lease
treated

as sale in
Australia.

Constitu-
tional
aspects.

E.fl'eet of
judgment
in Johnr's'
case.

Whether or not the power to tax hire--purchase transactions
(not resulting in sale) should be conferred on the States is a
matter of policy.

(iii) Financial

There may, lastly, be a ﬁnancial justification for levying a
tax on hire--purchase, the object being to augment the revenues
of tile States. This is a matter of policy. and would require de-
tailed examination of a financial character.

' 1B. 23. It may be noted that in Australia, a lease of goods
is treated as a sale, and the lessor incurs tax liability at the time
the lease is entered into.'

As regards hire--purchase, in Australiaf the sale value of
goods leased under a "'11ire--pu.rchase agreement" is equal to the
"fair wholesale value" of the goods.

The sale value of goods leased under any other type ot
arrangement is the amount which, in the C0mmissi0ner"s Upinirm.
is fair and reasonable having regard to the terms and period of
the lease and to the wholesale market value of the goods. In
all cases, sale value does not include any amount Pttyable in
respect of sales tax, but any excise taxes on the goods are in-
eluded.

1B. 24. Whether ﬁnancial needs require such an extension
of the power of the States is a question of policy. But, assuming
that ﬁnancial needs so require, there are certain constitutional
aspects which may be dealt with.

1B. 25. The effect of the judgment in K. L. Iohar Se Co.'s
case" is to reduce the base on which sales tax is payable. A
tax on hire--purchase can be levied on the full value of the hire-
purchase transaction by the Union under the rcsiduary power---
Union List, entry 9?'. The "purchase ingredient" of the hire-
purchase transaction is. however, within the States' legislative
competence, and it is possible to argue that unless resolutions
are passed by State Legislatures under article 252(2) of the

1, World Tax Se:-ies--Taxation in Australia, (1953). Page 30 P11?-'1 452-3-

2. World Tax. Series~Taxaticm in Australia, (1958), page 82 para 4,-'16.

K.L. John)' & Ca. V. Dy. C.T.0., A.l.R. I965 S. C. 1083, 1039.
(1965) 2 S.C.R. I12.

Constitution the Centre may not have the power to levy a tax
on the full value, including the purchase ingredient. A better

alternative would, therefore, be to include hire-purchase within
the power of the States.

1B. 26. In Johar's case,' the Supreme Court made the fol-
lowing observations as to the alternative methods, under the
existing constitutional set up of deciding the value of a vehicle
given for hire-purchase :---

"There may be two ways of doing it. The Sales tax
authorities may split up the hire into two parts,
namely, the amount paid as consideration for the
use of the vehicle so long as it was the property of
the owner, and the payment for the option on a
future date to purchase the vehicle at a nominal
price. If the first part is determined, the rest would
be towards the payment of price. The ﬁrst part
may be determined after ﬁnding out the proper
amount to be paid as hire in the market for a vehicle
of the type concerned or in such other way as may
be available to the sales tax authorities.

"The second method may be to take the original price
ﬁxed in the hire-purchase agreement and to calcu-
late the depreciation and all other factors that may
be relevant in arriving at the price when the second
sale takes place to the hirer, including the condi-
tions of the vehicle at the time of the second sale."

"It is, therefore, for the sales tax authorities to find out the
price of the vehicle on,_which tax has to be paid in either of the

ways indicated by us above or such other way as may be just
and reasonable."

Constitutional' dichotomy

1B. 2?. At this stage, we should point out that there are
certain constitutional complications attendant on a proposal for
the levy of a tax on hire-purchase. A hire--pt1rehase transaction
is a composite transaction, made up of two elements, namely,
(i) hailment or hiring; and (ii) sale which is not effected im-
mediately. The amount paid by way of hire-purchase price
under a hirc--purchase agreement is, as pointed out by the Sup-

(_;f'{:.Eﬁ.irTJ.il'{Ir':_(--.'-.'.J._/\;V..?D_]r'. C.?.--5.', Ate. 1955 5.7? Ttiislifitgir
1092 (Paras 30-22).

Observa-
' n in

Joiner':

case.

Constitu-
tional
dichotomy
and comp-
lications
resulting
therefrom.

Nolc_e_isla-
tive com-
petence to
tax sale
part.

'Present

I. ':u[Dm5?
to be
removed
by amend-
merit.

reme Courtﬁe partly towards the hire and partly towards the pay-
ment of price.

1B. 28. Now, in so far as the ltire»purchase price repre-
sents Ihe sale price also, Parliament has no legislative competence
to impose any tax thereon, because of State List, entry 54.
Parliament has legislative competence to levy a tax only in rela~
tion to the 'hirc' part of the hire-purchase price, and not with
reference to the 'sale' part of the price.

Theoretically, the two could be treated separately, but, from
a practical point of view, it would be diliicult to determine what
is the 'hire' part of the hirc--purchasc price (under a hirc--pur-
chase transaction) and what is the 'sale' part. The Supreme
Court has suggested that there may be two ways of determining
the 'hire' part and the 'sale' part involved in a hire-purchase
price. But, both the methods suggested by the Court involve, in
substance, a splitting up. If the Union decides to levy a tax on
the 'hire" part only, it cannot do so without splitting up. Simi-
larly, if the States wish to tax the 'sale' part, they cannot do so
without splitting up. lt would, therefore, appear that the more
convenient method would be to tax the composite price,----al'ter
such constitutional amendment as is necessary. This will avoid
an attack on the validity of the law o-n the ground that it amounts
to an encroachment by Parliament into the sphere of 'sale', or
an encroachment by the States into the sphere of 'hire'.

1B. 29. Since the present constitutional position represents
a dichotomy? in the sense that tax on the hire part is within the
competence of the Union only, and tax on the sale part is within
the competence of the States only, it becomes necessary to amend
the Constitution, so that the amendment will authorise levy of
the entire tax by one legislative authority. One alternative
would be an amendment which authorises Parliament to levy
a tax on hire-purchase, in which case, Parliarnenfs existing resi-
duary power to tax the 'hire' part (of the hire-purchase price)
and the new power to be transferred to Parliament with regard
to the 'sale' part of the hire-purchase price, will be merged, and
this will enable Parliament to provide for a tax on hire--purchase
transactions without the necessity ol'. a demarcation between the

l_ K. L. altar & Ca. V. Deputy Corriinert-E3! Tax Oﬂfcer, A.l.R. I956
S.C. 1032, 1091.
'-. Para 1B. 28, supra.

'hire' part and 'sate' part. The other alternative would be to
transfer the entire power to the States. This will achieve a
merger of the existing power of the States t.o tax the 'sale' part
and the new power (to be transferred) to tax the 'hire' part,
and will enable !l:e State l_«:g;is[ate;'cs to provide for a tax on
hire--purehase price without demarcation as aforesaid.

18. 30. The legal complications involved in a tax on hire-
purchase, it" the present dichotomy is maintained, may he again
mentioned. The 'price" tin hire-purchases) is a composite. one.
Though, in one aspect, the instalments paid (or stipulated to be
paid), represent the "hire" for the use of the vehicle. still they
represent, in another aspect, the instalments of "price? payable
as consideration for the transfer of title. If the transaction were
one of pure "'hiring" (i.e. without the sale element), the hirer
would have paid much less.

If the union is to tax them, it cannot tax the safe pan'. If
the States are to tax them, they cannot tax the 'hire' part. That
is the present position.

(a) If the tax is levied by Parliament on the actual
instalments of hire-purchase and the sale materia-
Jises, then there may he a partial encroachment an
the State List, entry 54. Where the hire---purchase
transaction itself results in sale, by the exercise of
the option, a "sale" takes place of the goods which,
till then, had been hired. As the Supreme Court
has held'- :

"When all the terms of the agreement are satisﬁed and
the option is exercised, a sale takes place of the
goods which till then had been hired. When this
sale takes place, it will be liable to sales tax, for
the taxable event under the Act is taking place of the
sale ...................... .."

At the time when the hire-purchase transaction materialises
in a sale,--usually, on payment of the last instalment with or
without some nominal optional rnone3r,----sale in law and in fact
has resulted, and the last instalment, since it passed the property
in the goods, should be construed as eﬁecting a sale. That. in
fact, is the intention of the parties.

i. K. L. .rormAf."r:,ie.r.o., (1965) 2 s.c..a.. 13, 25.

l'.iTeets of
pI'e:-Lent
dichotomy.

Position if
above
dicltotomjt-'
is not
kept.

Conclusion
and recom~
me ndation.

It is really the price element that goes to add to what might
strictly be called the hire, to yield the amount stipulated.

(h) It the method of taxing the actual instalments (whether
the tax is levied on the total, or is levied every year) is not to
be adopted. the o:-.13: other a'.'t'ma'.s.'.e {where the sale m:tt::ria-
lises) is to resort to notional splitting up. The notional splitting
up will separate the hire part from the sale part . This is, how-
ever. a cumbersome process.

Two questions of detail thus arise when a hire--purchasc
agreement leads ultimately to a sale, (1) whether sales-tax could
be levied at the inception of the contract of hire--purchase, or
whether the taxing authority should wait till the option is exer-
cised and the title passes. (12) What is the amount of consi-
deration for which the sale, which takes place when the option
is excsrcised, should be deemed to be effected.

1B. 31. If we abolish the dichotomy referred to above in
regard to hire-purchase, the position would become less comp--
heated. as the above difficulties would be avoided. The whole
power to tax (intra--State) hire-purchase in the wide sense could
be transferred :-»-

(ij either to the Union with a prov.-'isle-n for assignment
of the proceeds to the State ;1

or
( ii) to the States.
Which of the two courses should be adopted is a matter of
policy. Our preference is for transfer of the power to the States,

because in our vievarhasically the entire transaction takes place
in the State and the States should be given the power.

IE. 32. In the light of the above discussion, our conclusions
as to taxation of hire-purchase are as follows :--

Ht'r-9-pm'chase not resulting in sale.

(1) The Union has the power to tax hire-purchase not
resulting in sale, inter-State or within the State, under
the Union List, entry 97.

i_ A;-rjclc 259 of the Constitution wcrld require to be amended, in this
-3358.

nu.'

(ii) The power to tax inter-State hire-purchase (not re-
sulting in sale) under the Union List, entry 97, seems
to have been exercised by the Union, vide the deﬁni-
tion of 'sale' in the Control Sales Tax Act.

(iii) The power to tax hirepurchase within: the State also
vests in the Union, under Union List, entry 97 (as
interpreted in the judgements of the Supreme Court.
Whether this power should be transferred to the
State is a question of policy. But in the Commission's
view, a broad view1 should be taken of the legislative
entries, and ﬁne nuances need not matter, and the
Commission prefers allotting the power to the States
(by amending the Constitution]. The question is
ultimately one of policy, as already stated.

If this alternative is adopted, there are several drafting de-
vices open, e._t_I.

(a) amending State List, entry 54, or
(b) adding a fresh entry in the State List, or

(e) inserting, in article 366, a wide deﬁnition of 'sale'.
The Commission prefers the last one, as avoiding
multiple amendments.

Under the drafting device at (a) above, it will be necessary
to amend State List, entry 54 {to add hire--purehase), but at
the SttI11E time also to amend Union List, entry 9225;, so that
inter--State hire--purehasc ( not resulting in sale) may continue
to be excluded from the purview of the States, notwithstanding
the proposed addition of hire-purchase to the State List. Under
this device, it will be necessary to add the following in 7th Sche-
dule, both at the end of Union List, entry 92:'; and at the end
of State List. entry 54 t after converting the existing full-stop into
a semi-Colon) :

"transfer of goods on the hire-purchase or other 'S)«'S[EI'11
of payment by instalments, hire-purchase resulting
in sale."

If necessary, a non--obs.r.ante clause may be added to the effect
that property need not pass.

|. c_.'". discussion as to works contract.

38
The .-mn--ohsmnte clause. would be as follows :

"transfer of goods on the hirc-purchase or other in-
stalment system of payment, _notwithstanding the
fact that the transferor retains the title in the goods
as security for payment of the amount stipulated".

The second device (13) above would be to add fresh entries-h
say, State List. entry 54A and Union List, entry 9213.

The third device would be to add at wide dcfluitioii of
"sale" in article 366.

The Commission prefers the last device" (c) above as it
avoids multiple amendments.

(iv) Whether the course at (iii) should be adopted or not,
is a matter of policy, involving ﬁnancial and political
considerations.

(V) In the alternative, the power to tax intra--State hire-
purchase could (if a policy decision to that eliect is
taken by the Union), be exercised by the Union,
and the necessary law passed. The proceeds of the
tax imposed thereunder could, then, be distributed
to the States. Article 269 of the Constitution 'will
have to be amended for the latter purpose, so as to
have an expanded deﬁnition of ''sale'''.

lt will be desirable, in this case, to have separate taxing legis-
la.t.i-on, as the Central Sales Tax Act is conﬁned to tax on inter-
Smte transactions.

If this alternative is adopted, it is suggested that it will be
desirable to transfer the entire power to the Union, i.e.._ the power
to tax hirc--purchase resulting or not resulting in sale (inter-State).
This will be practically convenient, and check evasion.

1!?!

1_ A510 the nan-obstanre clause, of section 2 (h), Explanation 1.
Madras General Sales Tax Act (Madras Act 9 of 1939) quoted in
'K.L. Joulrar J: Ca. V. Dy. C.T.Cl., A.I.R. 1965 S.C. 1032, 1036 (on
appeal from A.I.R. E958 Madras S61).

1. Amendment of article 366 of*l'.e Fonstitution.

(vi) W'hu:thL'r the course referred to at (V) above should
or should not, be adopted. is again :1 matter of
policy, iilvolving ﬁnancial and political c0nsidera.Liun.~:.

Hii'e-purchaw resulrirrg in safe

(viii Hire--purchu.sc resulting in sale is governed by the
position applicable to sale in general, except that
only the sale elnsmcnt can be taxed under the IIIIHIE
of sales: tax'.

E-'-_u':t .'§'_l,'_Lf__£L'.S.l]"H1l-]II'C:--',i?I1'i.l. to ]1ii-u-purchase rcsLiIt.7ng in 3312, 26:12
W] abovc.

Sale of
t"ontrolled
C,'ommotii-
ties

C':ise law
:25 showing
:1 lluid
position

CHAPTER I-C

SALE OF CONTROLLED COMMODITIES

1-C. 1. So far, we have dealt with transactions where the
fact that property does not pass immediately in the goods, or does
not pass in specie, raises legal difficulties in the way of the tran-
sactions bcing regarded as "sale or purchase of goods" within the
meaning of the constitutional power of the States to levy a tax.'
We have now to deal with a class of transactions where such
legal difficulty arises by reason of the absence of the consensual
element required in a sale. We refer to those transactions where.
by law, the free choice of the partiesmusually, the se1ler--is res-
tricted in the matter of price, quantity of goods to be sold. party
to whom they are to be sold or any other matter pertaining to
the sale. Brieﬂy, such sales may be referred to as sales of con-
trolled eomrnodities. Here, there is no question about the passing
of the property in the goods. The property does pass to the buyer.
But the absence of the consensual elernr:nt--whose place is taken
by a restriction imposed by or under a statute--creates cor1tro1.'cr-
sies as to whether and in what cases the legal restrictions imposed
by or under the statute destroy the character of "sale".

l--C. 3. A study of the case law on the subject shows that
the position in this respect is ﬂuid? Broadly speaking, the test
adopted is, whether the area of bargaining is or is not large en-
ough to permit the element of consent to operate. If the area
of bargaining is large_ enough, the transaction is a sale. lt was
held in one judgment of the Supreme Court" that sales tax can
be imposed on the sale of such commodities, notwithstanding
that some of the terms and conditions of the sale (eg. the price)
are regulated by or under statute. An earlier judgment of the
-Supreme Court' had, however, held that if the area of bargaining

Conslitution. Seveiith Schedule, State List, entry 54.

Sec para 1-C. 6, infra.

Indian Steel' Wire Products V. State of .Madras, A.l.R. 1968, SC.
478, 430, 433; (1968) l S.C.R.

4. .-\'eti»'Ir1dI'n Sug .1' .-'l/f1'H.'.' Ltd. V. C'.S.T., Bfhar, A.l.R. I963 S.C. 110?
U963) Supplement 2 S.C.R. 459.

'o: no -

41
I
is very small, the transaction is not a "sale"' because the element
of consensuality is missing.

1-C. 3. The test mentioned above is, however, a diiﬁcult one Djtﬁcum,
to apply, and, to avoid controversies, it would be better it" the gfappl§(it1',I
position could be simpliﬁed. In a welfare State where the State We *5"
regulates economic activities in the public interest, controls are
likely to continue for sometime, and the problem in question is
likely to recur.

As the Supreme Court has observed :1

"the State may compel persons to make contracts. as
where, by a series of Road Traffic Acts from 1930
to- 1960. a motorist must insure against third--party
risks ; it may, as by the Rent Restriction Acts, pre---
vent one party to a contract from enforcing his rights
under it; or it may empower a Tribunal either to
reduce or to increase the rent payable under lease.
In many instances a statute prescribes the contents
of the contract. The Money-lenders Act, 192?, die-
tates the terms of any loan caught by its provisions.
The Carriage of Goods by Sea Act, 1924, contains
six pages of rules to be incorporated in every contract
for "the carriage of goods by sea from any port in
Great Britain or Northern Ireland to any other port";
the Hire--pnrchase Act, 1933, inserts into hire--pur-
chase contracts a number of terms which the parties
are forbidden to exclude ; successively Landlord and
Tenant Acts from 1927 to 1954 contain provisions
expressed to apply 'inotwithstandlng any agreement
to the contrary."

1--C. 4. A survey of the judicial decisions shows that the tests
which have been adopted'do not reveal a simple or single cri-- F-'£1?°l'['f
terion which could be neatly or precisely stated. Some of the I" ma
decisions might give the impression that if the party to whom
the seller is to sell the goods is not to be selected by the Govern-
ment or by the authority acting in pursuance of the"law, then the
transaction could be regarded as a sale. But some of the decisions
do not emphasise any such test. Again, the fact that there was

1. I.=z.'I:'.m Srteetln-V1' lVfre Pr0;I.'r'.'!5' Ltd. i''- 53:11'? Of-'W»'H3f'!IS. A-l-R- 5953
S.C. 473, ll S.T.C. l33.

no offer and no acceptance, is sometimes highlighted ;1 but, then,
there are cases'-' where many essential matters were not subject
to offer or acceptance and not only the party to whom the goods
are to be delivered, but also the price and the manner of trans-
portation and payment- were determined by the Controller ; and
yet the transaction was regarded as 3. sale. No doubt, cases at
the extrentcs may be easy to decide. For example, where only
the price is regulated by law and most of the other matters are
left to contract, the transaetiort could be regarded as a sale, on
the 1'c:isonZ=ng that the effect of the price control order is only
to Hllpuf-llllptlic, upon the ztgreemerit between the parties, the
rut.) fiftett under the control order.-"* This is one extreme. At
the other extreme is the case" where ev::1'}-' aspect of the transac-
tion was wholly and completely controlled-. and therefore it has
been held that there. is no sale. But, in a fairly large number of
cases. it is not easy to decide on which side of the line the case
shotild be regarded as falling.
The undermentioned cases'-"i Show the extent of the con-
t1't)ver:~:§.'.
-. See the .'J'Ptl"J";;?'.';;'.f_L'uF-.'1'HfEV{'(£.'§d:.-'5£.i'.R. I307.
-'. See the !m)'r'.-5.1: Smrn' & ."i'0H Pi'adm'.'._u Cf!"-'i.', .--'\.I.R. iUﬁ3 S.C. 473.
'lee .'-'rm'-:r:_f' R:r;':r.sI.'r.mv. lfam.--.I1 (".*'rc;-era' T2-'mp.'r-', A.l.R. I969
.5-J.
4. hes I-i~lr.'.'_-.1 /zmr.vm Pr"r'v-are Lia'. V. t'_'.,-.-n-i1t?rcr'.'if Trifn' 0,.fF3t'e.'i'. 77'.
Cdlisttlla. \'v".'.l<l}' FQQISS. I41.
5. ,'i--l,'\. _-'(tn-' he r St£.','rI." :'L1|'r'.'l'.i~ L'.-'1'. V. Cami.-m'.n.-T->sr.-r of Safes T'm'.
A.l.R. I963 SIC. 1207'.
'3. h-.'!i':i.=.' .'i!r'el 6': Wfrt' FI'0ri:.'cr,a' '~'. .S'Im'xa of -W::rIi'n,-r. .=\.[.R. I953 31'.
478.
7. ,-!im'i'.-rt: Si.r';r:ri'LfJ. 'K. State a_J"An:i'!Ji'r2 Pr':.'c'1't.*.sFz. A.[.R. |!JI'iH S.C-. 599-
" 5'r.>_--'e=:ifRnjirz'.'H1:::.-x». M_.'.~;. K.ri.»'a.Ii1 Urrrrrr.' T.'m,rJm' ti Hm.i'.. .~'\.l.R.
i'-}rriJ FLC. 3'43.
'3_ _'t-]_- 1, ('.l'.1.?rf_-Jr .1«ﬁ'.'I _-'V¢.ir¢:I_I'_rz D»_'|'§ \-'_ (_,'.).Im,I1.I'.;.-t'f:'HrL'I' 11.5' .5'c:r2'.'*.s Tax'. .-'\.I.R.
|'J7't] S.C. 2000.
1'3. S:.I.'u'r .I:ri.'; S'rI:r:r=' .'rﬁ'2'i'.:. mie1':m_ih'1:=:' 1:. .9'-'rift? -.2_.-" .1-f_I'.soi'r>. A.['.R. 1973
ELC. 37.
I1, ].--'.-'-.-.'m:.I _.1t3gimi'e.s Pm'. L.-'d. 'J. Cmmirerciaf T:L'r O_{?r't'e.", Sctzlticzh, 77
CWN I41 fCalcL.Itl'a}. '
I2. (jg.-iii':zi5'.5iriizc*i'o_f.5'crIe.s' Tax. M.P. v. A-J'.,'i.i.'::rrz.IJt.:2rt' .'-Erma! of Prtnmt
{l9"."0) L-"3 S.T.C. 302 {lblttdhya Pr.1dr:.~h).
t.'_ Cgii-;_:_:if_v_«;'o.IzrJi'r2fSt?I€.S 721$ V. Rum H.I'1'::.s Rt!-'tr Grip-.'.rF, A.l.R. [970
All. 518 ffF.B.).
14. }t'..»"v'.,«*f. Kim'.-'2 & Om.-.°.-'5 \-. Sit.-tt° oj"A.P. cl'; O!Frcr.t', (1971) 27 SCI .C.
191 IjAr:ril'.ra Praeie<.l:).
I5. The E.x'c.fa».? (C; '.Fr.';m.rr':'m 0_ﬁ?r'e'r. Hr'.r.s'::r an-zrf n'h':J.'''!('n'' 1;. Ja.rwam' Si.I.'e.|'r_
(I971) 27' .'5.T.C. 53:42 (!'L1nj'db & [la='}'El11R"J-
Irf-_ (:',f;,u':___r.|.'.i'.'.',fI|2!I' V.'=..9rrm \-'. Special C'.T.O. {l9'.'*'l) 23 S.T.C. 333, 39
Mtn-: r._1 Pr.1:i_e~1h_]--tSupp1ies to Goveritntenl tint!eJ' reqtii.-.r't:'e
or-Jere}.

:1 H 4;'+mnda i-1...-an-nnswzlﬂh-V I----- wH=n"~v-v vw-uh---- - ----n--A--..

of sugarcane, an essential commodity. raised the question whether
it fell within the deﬁnition of "sale" in the Mysore Sales Tax Act.
Answering the question in the afﬁrmative, the Supreme Court
emphasised several aspects of the transaction in issue.

First, the Supreme Court pointed out that though there was
no choice (in general) as to sale by the grower of sugarcane
to the factory, there was some element of choice, for example, if
the factory was closed or the grower did not grow sugarcane.
Secondly, though it was true that 95 per cent of the sugarcane
had to be sold, the parties had the choice to increase the quantity
above 95 per cent, and the delivery-of the sugarcane was to be
in such lots or on such dates and at such time as was agreed
between the parties. Thirdly, the goods were unascertained and
were to be inspected. All these aspects indicated freedom not
only in the formation of the contract, but also in its performance.
Even though the parties were determined by the order and the
minimum price was ﬁxed and the minimum quantity was also
ﬁxed by the order, that did not complete the picture, because the
parties made the offer and acceptance, chose the terms of delivery,
and could obtain supply of a larger quantity or stipulate for a
price higher than the minimum.

1--C. 6. It appears to us that the very fact that an elaborate
analysis has to be undertaken wheneve-r a question arises whether
or not the choice left is adequate, shows that there is need for
clarifying the scope of the constitutional power in this regard.
We are of the View that the fact that the consensual element is
lacking in some respects, does not necessarily make it unjt1stiﬁ-
able to tax them by extending the deﬁnition of sale. There is
no doubt that for a long time, controls over the transfer of goods
of one class or another will be an unavoidable feature of our
economy. A realistic View should, threfore, be taken. Subject
to the control imposed by law. these transactions result in trans-
fer of goods for price, and should be taxable.

l--C. 7. Here again, we prefer an amendment of article 366.
The deﬁnition of "sale" to be inserted'-' in that article could have
an Explanation as follows:

1. Stately'.-trig Sugar i1«fr'.'!.v Ltd. is. State o}'Mysoi~c, (1972). 29 S.T.C.
246, .261, 262 {S.C.).
3. See r;c:u.n ne_1:1-arians in c:n1e:'.i-3.1 with w )I'l\'S contracts and hire-
gtlirchase.
20 M ot"l,..:1w,'74-4.

Case relat-

ing to
sugarcane-«
a recent
illustration.

Recom-
mend-ation
to cover
sales of
controlled

commodities.

One alter-
nativc----l:'x-
planatiori
to be added
to State
List, entry
54.

Another
alternat-
ti-.'e--

'.ll1]E rttiment
of State
i.i.~:l. entry
54.

RECUTI11
nientiation.

"'E.rpIam2t£ui-z.------A transaction does not cease to be a sale
merely becausc--

(a) the goods are required to be delivered in compli-
ance with any obligation laid down by or under
any law regulating trade and commerce in, or pro-
duction, supply or distribution of, the goods or any
law dealing with price control, or T

(b) the terms and conditions on which the goods are
to be delivered are laid down by or under any
such low."

1-C. 8. Another possible alternative is an amendment to State
iisl, entry 54.

1--C.9. We recommend that one or the other of the two
alternatives' mentioned above should be adopted. The lirst alter-
native" would be better, as it would apply to article 269 and
Union List, entry 92A also.

1'.' -1-'era 1-C. 7' and lz-C. 8, supra.
2. Insertion in article 366 ofa deﬁnition of sale with the l'CCIJ:"['l"l'l'l3fl'\it3Li
Explanation.

_..u..._

CHAPTER 1-D
SAl.E "BY ASSOCIATIONS TO l'~.-1E1'vlBERS

Dwwl). I. Some problems seem to have arisen in regard to the 3,9,3 'hp
sales of refreshments and other articles by associations to their
members. A few illustratix-'c cases on the subject may be examiner! 7 "
for understantling the problem.

l----D.2. Co--opcrative societies furnish one e.n-tample of such Co-'operative

associations. In one of the earlier ease-5,1 decided by the Supreme '""°"°5'
Court, it was held that where there was nothing on record to
show that the <:o--operative canteen was acting merely as an agent
of its members (in providing facilities for making Food available
to the members}. it could not be urged that the transaction was
not a sale. It could not be said that the society was acting
only as an agent or :4. trustee. A registered society is a body cor-
porate with power to hold property etc. and the property which
it holds cannot be assumed to be the property of the members.
The society is a juridical person, and the supply of refreshments
by it for a price paid or promised results in :1 transfer of property
in the refreshments. it could not, therefore, be urged as a
proposition of law that when a co-operative society supplies, to
its members, refreshments for a price under the scheme of distri-
bution or supply of refreshments, the transaction can in no event
be regarded as a sale.

l-«----lJ.3. Though the above case" related to a co-operative Unincorpo-
society, the court (Shah I.) did make certain observations as _r|f;';':-Jﬂiatiom
to the position in regard to unincorporated societies, as follows :--

"In the ease of an unincorporated society, club or a ﬁrm
or an association, ordinarily the supply and distribu-
tion by such a society, club, ﬁrm or an association,
of goods belonging to its members, may not result
in sale of the goods which are jointly held for the
beneﬁt of the members of the society, club. ﬁrm or

:. oi». e.r.o. ~.-. 'F.'rt_r"z'r-'Ir!-Irralftr Ll'd.,7Ail.R. [963 SC.' 333, s4:, s4:
8-13, paragraphs T and I3, {I968} 2 S.C'.J. 343.
3. Para l-T). 2, '.'i.rpr.u'.

Supply by
club to
members
not 'sale'.

No 'saIc'
in such
circum-
stances in
l.-n_:',-Sand.

the association, when, by virtue of the relinquishment
of the common rights of the members, the property
stands transferred to a member in payment of a
price. and the transaction may not prfma fncie be
regarded as a 'sale' within the meaning of the Act."

But the Court made it very clear {towards the end of the
judgment.)1 that it was not called upon in this case to decide
whether an turincorpoi-axed club which supplies goods for a price
to its members, may be regarded as selling goods to its members.

1--D.4. Then. there are clubs. In it case." decided by the
Supreme Court on appeal from Madras, the Cosmopolitan club,
Madras, the Youngmen's Indian Association, Madras and the
Lawley Institute, Ootacamund, ﬁled writ petitions under article

226 of the Constitution, challenging the levy of sales tax under

Madras General Sales Tax Act. 1959. on snacks, beverages and
other articles supplied to their members or guests. The High
Court held that the club was not a 'dealer' within the meaning
of section Ztg), read with Explanation I, of the Madras Act. and
that there was no 'sale' within the meaning of section 2(h), read
with Explanation I, of the Act. On appeal to the Supreme Court
it was held that a member's club cannot be made subject to the
provisions of the Sales Tax Act concerning sales, because the
members are joint owners of all the club property. The supply
of articles to a member at a ﬁxed price by the Club cannot be

regarded as a "sale".

1--D.5. It is necessary to mention here that, in England, it
was held in Gray} v. Eva.'ns,'"' that a transaction whereby a mem-
ber of a club acquired liquor which was the property of the
club was not sale but merely transfer of special property. This
case was decided eleven years before the English Act relating to
the sale of goods was passed in 1893.

The basis of the decision was that the transaction was a
release of the rights of the other members to the "purchaser".
It might have been thought} therefore, that when section lfl)

1. D}-'. C.T.0. Y. Eerfiefsf Irrrlfrr Ltd, A.l.R. 1968 SC. 338. 543, Para 13.
'-'. J.C'.T.0. V. l":3.!m-3 .-"r'l'_r'.'.'i'.'.t I:-:c'.!'1'a.':' A5'_s1::I:1'a.'r'0rr, ([970) I S.C.O. 467
(on appeal fJ'u'm .-'\.I.R. 1964 Red. 63).
3. Graﬁx-'. Errors'. ((89.2) S Q.B.D. 373.
4. Atiyah, Sale of Goods (1966). page 9.

'12

of the Sale of Goods Act speciﬁcally enacted (in 1893) that---
" . . . . . . . . ..T here may be a contract of sale between
one part owner and another,"
the basis of Grajjl v E vans had ceased to be valid.

It may be noted that the Indian -Sale of Goods Act has :1
similar provision.' But in Homes y. 3ttr'ﬂ'€Ii',2 a Divisional Court
followed the earlier case, and the Sale of Goods Act was 11ot
even ret'c1'red to. A well-known writer has stated," that "this
view of the law has now been accepted for so long that it is
unlikely to be upset by a higher court."

The English cases mostly relate to licensing} But the point to
he noted is, that the provision in the Sale of Goods Act as to
"part. owner" has not come in their way.

T he position in this respect, as was observed in an Australian
case," is simply that "a part of the common property is appro-
priatetl to the separate use of the members, and he makes a
corresponding contribution from his separate property to the com-
mon fund." The question must, of course, always be as to the
meaning of the word "sale" or "sell" in the particular statute
which comes under consideration. If no reason is seen for giving
the word an extended meaning. one would think it perfectly
correct to say that an ordinary unincorporated members' club
does not "sell", in the true sense, liquor which a member obtains
from the common store on payment of money to the common
fund.

l----D.6. The broad general principle which constitutes a com-
mon feature of these transactions, is the absence of a transfer
of property. It would appear that these transactions are not
'sale'. because there is no transfer of property.

l--D.6A. T his, then, is the present position. The question
now to be considered is, whether it is desirable that the taxability
of such transactions should be provided for by expanding the

1. 'Section 4(1). Tndiart Sale of Goods Act.
2. Dat=i'e.r v. Brtrnen'. {I902} I KB. 666.
3. Atiyah, Sale of Goods {I966}, page 9.
4. For a review ofcascs. see Trebanng Club V. .\!acr.fon'ai'r1,{l94) F AI]
E.R. 454.
5. Wat.i'on V. J. & .4.G. J:1J'tm'0n Ltd, (I936) 55 C.L.R 63, 70 (per
Dixon L].

General
observa-
trons.

.-'\m( ndrnent
oi Consti-
Iuilon not
ii-:--ede.tl.

U nii1CI:I I'po-
J'dt€{.l
zissctiulions
exist in
varioizs
arrange-
ments.

No evasion.

"sale" for the purpose of the legislative power of
be achieved only by amending

concept of
tho Statcs,--a result which can
the Constitution.

]-D.7. Wo do not think that it would be appropriate to
amend the Constitution for this purposc. The number of such

' clubs and associations would not be vcry large. Moreover, taxa-

tion of such transactions might discourage the eo--operative move-
rncnt.

]----D.3. Unincorporated associations exist in a "'rnyriatl of
structural arrztngenicnls." As a general proposition, each is liable
for the activities of its members when the activity has been autho-
rised, supported, or ratiﬁed by the association.

l--D.9. It should be also noted that there. can he no serious
question of evasion in such cases. A rncinber really takes his
own goods.

1--~D.1D. 'We'. therefore, do not rcconiniend any change.

1. American Law lnslitutew-Study of the Division of jurisdiction
betweeii State and Federal Courts. page 74 (Proposed Final Draft
No. 1, 1965). cited in Note on "Llriincorporatcd Associations"
(1965) 75 Yale L.J. ITS.

CHAPTER 1-E

SOME GENERAL OBSERVATIONS AS TO TAXATION ON
SALE

l~--i'~.'..l. So far, we have dealt with specific transactions. A
few general observations may now be made.

A sale of goods requires an agreement to transfer title in
goods for ll1DIlf>}', followed by the actual passing of such title as
at result of the agreement. This broad concept, thus requires
(i) an ﬂgr't'('."?'t'£'.FIE' to transfer title, (ii) in goods, (iii) for money
and (iv) passing of title as a result of the agreement. Most of the
problems that have arisen as to the taxability of various transac-
tions are due to the fact that one (or more) of the ingredients
mentioned above are missing from the transaction. This will be
clear if the ingredient and its antithesis are represented as in the
following chart, which also mentions the situation where the
antithesis exists.

Art!£'Ifrt'.t'r'.s'

,'r.',2rr£u't:=.'i'!

Title passing tr.-'r.imu.' agregmemr, or no
transfer of title.

ii ) .4_t:r€.vrrteiit to .tt':r.-t.-Jar
rirha.
Title passing under agreement but not
ﬁn" goods.
Ilimrrt.-tt't=e .tt'.r¢.:att'tm--

(ii) In goods

Works contracts (No agreement to trans-
fer the very trends wltich come into
existence).
Title passing for value other than money.
Ilftrstrrrrive sr'a'rrart'm1----
Baater.

[i ii | For :n--.ut€_v

Title (,lDI'::. not pass because there is only
an agreement [or some prior step), and
no complete sale.

I.'i'r| Pa-"Mag nftitle as a result
of the (I_!;"f'{.'{'t'?f£"fT.f

Il!u.I.'rr.:2!i1'€ st'fua!£'an.t--
(at) Hire-purchase.
{bi Cmtsignnicnt transfer 1

1. See chapter 2, in rlTage Si.

General
observa-
tions as

In "s-ale".

The basic
drawback
of the
331 csent
Sch-mic.

1»~E.3. lhe basic defect in the present scheme is that a Very
limited type of economic activity is taxable by the States,----and
other economic activities are not taxable, except by way of
excise duties or indirectly by way of stamp duties. This leaves
room for loopholes and gaps. It would appear that some day, it
will be desirable to consider the possibility of devising a tax
which will embrace all transactions which are regarded as adding
value or which are entered into with that object.

L")

CHAPTER 2

EVASION OF CENTR.'--\L SALES TAX BY MEANS OF
TRANSFER OF GOODS FROM ONE STATE TO
ANOTHi:'.R_. ON WHAT PU-R PORTS TO BE
CONSIGNMENT TRANSFER OR A TRANSFER
TO ANO'l'Hl:'R BRANCH OF THE SAME
INSTITUTION

In traducfory

2.]. The question that is considered in this chapter is one Ingredients
connected with the basic concept of sale. In order that the turn-- of "de-
ovcr from a transaction may be taxable under the Act, the tran-
saction must have four constituent elements, viz. (1) parties com-
petent to contract; (ii) mutual assent; (iii) transfer of property
in goods from the seller to the buyer, and (iv) price in money
paid or promised.

2.2. It has been stated1 that tliﬂiculties exist in relations to Consign-
the taxation of 'consignment transfers',--z'.e. transfer of goods by
one branch of a commercial agency or institution to another
branch outside the State. Central Sales Tax, it is stated, cannot
be levied on such transfers, because there is no inte-r--State 'sale',
even though there is inter--State movernent.

Evasion by reason of non--ra.ration.

3.3. The problem does not appear to be totally new. The Fgfth
Fifth Finance Commission had made the following observations?
in this regard. sion'5

TECUM-

""S.32. The Uttar Pradesh Taxation Enquiry Committee
has also remarked that in many cases transactions
shown as consignments and works contracts, which
are not liable to States' sales taxation, were not
genuine and that they were manipulated to hide the
real nature of sales transactions. It is desirable that
the Government of India as well as State Gov-

I. Isio-;es in the Ministry of Finance. T I i "T-

-2-

-. Fifth Finance Cornmission. Report, page 89, para 8.32.

mendations.

};' \"ttSll'J|l.

Section 6A. '

ernments may consider what measures should be
devised to meet this situation."

2.4. It Jgppears that States are faced with erosion of the
revenue, occurring through transfers on a consignment basis.

2.5. It may be noted that the Central Sales Tax (Amend-
ment) Act, 1972 partly mitigates the situation by casting the
onus on the transfer or to show that the transfer is otherwise
than by way of sale.

Section 6.15. (newly inserted in the Central Sales Tax Act)'
is as follows :

"6A(l) Where any dealer claims that he is not liable
to pay tax under this Act, in respect of any goods, on
the ground that the movement of such goods from one State
to another was occasioned by reason of transer of such goods
by him to any other place of his business or to his agent or
principal, as the case may be, and not by reason of sale, the
burden of proving that the movement of those goods was so
occasioned shall be on that dealer and for this purpose be may
furnish to the assessing authority, within the prescribed time or
within such further time as that authority may, for suiﬁcient cause,
permit :1 declaration, duly ﬁlled and signed by the principal
oﬁicer of the other place of business. or his agent or principal.
as the case may be, containing the prescribed particulars in the
prescribed form obtained from the prescribed authority, along
with the evidence of despatch of such goods.

2) If the assessing authority is satisﬁed after making such
inquiry as he may deem necessary that the particulars contained
in the declaration furnished by a dealer under sub--section (1)
are true, he may, at the time of, or at any time before. the
assessment of t.he tax payable by the dealer under this Act,
make an order to that effect, and thereupon, the movement of
goods to which the declaration relates shall be deemed for the
purposes of this Act to have been occasioned otherwise than as
a result of sale.

Exp!mmtr'on.+---In this section. "assessing authority", in
relation to a dealer, means the authority for the time
being competent to assess :1 tax payable by the dealer
under this Act."

1. ';*l.r'i1ic:1clr1_ier-1lvV.V:V'ti.'VtVfV:l oi' 1972.

L':

3.6. Ex-cn this prtwision, it is stated, has bccn assailed in the
evidence before the Select Committcc as unconstitutional} We
lnwc. been asked to consider whether consignments should bc
tnscd asnccr the Act.

Two r_1'pe.'.' of trarr.s'crc;tir>ir.s'

2.? It sccms to us that in cxairiining this question, two types
41: Ir;tn:~:.;ctions have to bc kcpt apart from cnch othcr, namclg.-av

ti} bonn ﬁde consignments, and (ii) sham consignments.

'tn-'ircrc goods are consigned from cnc branch of an establish-
mcn! tn nnothcr, ham? ﬁrte, there is no isalc', bccztuse thcrc
czmn:-1. he a sale by thc scllcr to ]1in1sclt. To constitute a 'salc'.
thcrc r:;=.tst be two diffcrcnt persons?

Whcr.-._ on tho othor hand, the consignment from branch to
branch is a sham transaction, and thc transaction is, in reality.
onc intcndcd to transfer property to :1 different 'person', there is
no ditliculty in taxing it as a salc." No doubt, it may not
be easy to discover the true nature. of tho 1ransact.ion; and the
proccse: oi gathering the relevant facts may involve some labour.

("rise Fa H.'

2.8. A few "cases dealing with the transfer of goods to a
branch or the like transactions will elucidate. what is stated above.
In the Tom £n_r,uu'cering Ca. case,' thc asscssec, a manufacturer
of trnc".-*. was assessed in respect of transactions in which the
vehicles wcrc moved from the site of works in Jamshedpur to
various stockyards in different States. The terms of contract bet-
ween the assesses and the dealers showed that when vehicles
wcrc moved from the works to the Stockyards, it did not neces-
sarily happen that the numbcr of vehicles allocated to the dcalcr
was delivered to him.

The Supremc Court observed :

....... ..Thc points which would rc_quirc determination
would be whether the transactions which havc been
suhjcctctl to tax were of sale within the deﬁnition of

L Notes in tho MiI1iStI'_\-' of Financc.

-. if. section 2f_l]['g), Contra] Salcs Tax Act. 1956.

F. .'rfm'rfHa'J'a Kmnm' *6. State a_,"Madrar, (1968) [2 S.T.C. T-'2 (Mad).

4. Tutu E.r:_g'iJ:ecn'n_:: & Locrmrorive Co. Ltd'. v, ,.4_sn',-.-m,r;r (',m,,m'5_,--,},,,,;.r
r.-_f'('oHHJ.I:*I'£'.".'n' 7'n.rc.\'. .-'LIR 1970 g_f__ I-15:" RES' 1:86 (-Gm._.,»._., _f_-L

Criticisrn
of Section
6A.

Burro fade
L'-[)l1'1'I'_.Z!'l-

moms and
sham con-
signmciits.

Ielco {'t2j't'
dccidcd by
the Sunrcrnc
Court.

"the

that expression contained in section 2(3) and whe-
ther the rrtoventent of goods from Jamshedpur to
the stock;-ards of the appellant in the different States
was occasioned by any convenant or incident of the
contract of sale ..... .." After examining the procedure
followed by the appellants in their negotiations with
dealers and despatch of vehicles to stockyards, the
Supreme Court held :w--

allocation of letters and the statements furnished by
the dealers did not by themselves bring about tran-
sactions of sale within the meaning of section 2.(_g)
of t.he Act. The Assistant Commissioner himself
found that sometimes the vehicles were sent from
the works at Jarnshedpur even before an allocation
letter had. been issued. It would appear from the
materials placed before us that generally the seo1nple~
tion of the sales to the dealers did not take place at
Jamshedpur and the ﬁnal steps in the matter of such
completion were taken at the stockyards. Even if the
appellant took into account the requirement of the
dealers which it naturally was expected to do when the
vehicles wgrc moved from the works to the stock-
}'E1]'dS, it was not necessary that the number of vehi-
cles allocated to the dealer should necessarily be
delivered to him. The appropriation of the vehicles
was done at the stockyards through 'speciﬁcation of
the engine and the chasis number, a.nd it was open
to the appellant till then to allotany vehicle to any
purchaser and to transfer the vehicles from one stock-
yard to another ....... .. lt is not possible to com-
prehend how in the above situation it could be held
that the movement of the vehicles from the works
to the stockyards was occasioned by any convenant
or incident of the contract of sale ................... ..
Consequently the appeals are allowed and the order
of the High Court and the Assistant Commissioner is
set aside ..... ...."

2.9. In a Madras case, Mahertdrrr Kumar Jﬂshwarlal Jr Co.,
Vs. State of Madras' the petitioners' ﬁrm were jaggcrjtr and

1. .'ti'al:eJ't'dri? h'r.rmar I.s'}t1a'ar!rtl 1!: Ca. V. Shaft-' of M".adra.r,,
21 S.T.C. 72 (Madras).

foodgrains merchants. in Tirupathur, Madras State. Another
ﬁrm Chunilal Bhagwandas & Co., Bombay. comprised the
same partners as the petitioners. The petitioner ﬁrm (in
Madras State) transferretl. to the Bombay ﬁrm, jaggery of
a certain value. The Sales Tax Department of the (erstwhile)
.\-'1adras State took the view that the transfer of jaggery
represented a "sale" by the Madras ﬁrm to the Bombay ﬁrm,
and should. therefore. be assessed for Central Sales Tax.
On the other hand. the petitioner contended that since the
partners in both the ﬁrms were identical, therefore, in spite of the
fact that their share capital ratio was different, there could be
no sale at all, because one person cannot sell to himself. The
Sales Tax Appellate Tribunal, to which the petitioners appealed
against the decision of the assessing authority, held that even
though the two ﬁrms had the same partners, the fact that the
proﬁt--sharing ratio of the partners in the two ﬁrms was different,
made a diﬁerence, and that this difference would enable the two
ﬁrms being viewed as two different persons, with the result that
one ﬁrm could effectively sell goods to another, thereby attracting
the levy of sales tax on the transactions.

2.10. The petitioners ﬁled a revision before the Madras High
Court.

It was hold that there was no sale. The High Court relied
on the Supreme Court decision in Harayanappa v. Bhaskara
Krfxhnappal, which said "" . . . . ..sinee a ﬁrm has no legal existance,
the partnership property will vest in all the partners and in that
sense, every partner has an interest in the property of the partner-
Ship. During the subsistence of the partnership, however, no part.-
ner cant deal with any portion of the property as his own. Nor can
he assign his interest in a speciﬁc item of the partnership pro-
perty to anyone. His right is to obtain such proﬁts, if any, as
fall to his share in the assets of the ﬁrm . . . . . . . .."

Relying on these observations, the Madras High Court held,----

". . . .What emerges, therefore, from the above reasoning is
that in regard to the present transaction, it is the case
of the same group of ﬁrm partners transfering a parti-
cular item of property, to which they were entitled. to
theniselves. In other words, the broad principle that a
person cannot sell .to himself will be attracted in regard
to the present transaction also. . . "

F. H._?ra_}'a!rn',7p1 V. Bfra::'ttt.*a Krr'.t.rrrt::,':I_.9:.' .~'\.I.R. I066 S.C. i300.

Question of
(:D1|.'|_1llI'i1£'[1.E
cc: Eh !.lc retl.

'[".Ix;-'itioit DI1
L'CT'i\i£I'I|'t'1ClTl..
not within

ptci-.-:t11 Act.

2.11. The High Court also referred, with approval, to tlirce
more cases', and said, "'}.. .The decisions we have cited ctbove
in support of our conclusion rely upon the deﬁnition of 'sale', and
that to constitute Ll sale Lht.'1'C- niust be two different persons, in the
ortlinttry sense of the term 'person'. When two partnerships have
-.'i".insi'c:'i'ctl gtmtls from one to the other and the partii-crs of the
two Jirins are itlentical, it will really be 11. case of one person trans-
ferring goods to himself. There is, therefore, no 'sale' so far its
the tlelinition of Rule' is concerned. whether it be under the Matti»
rtis General Sales tzix Act or the Central Sales Tax Act. We
then.-1'ore, allow the revision ease and set aside the asscss:n:.nt on
the tlisputetl turnover. . .

.4ii.'eirr."im»nr if rhasirable -- C'on3n'ti.-tiona! posiriori

2.12. This, then. is the position. Is it necessary to avoid
totally the process of gathering the relevant facts referred to
above, by introducing a provision taxing even consignments from
branch to branch ? Such a legislative provision is theoretically
within the competence of Parliament, under its residuary power
of taxation. But the Constitutional scheme'3--so far as taxation
on a transaction qua sale is concernetl--is somewhat narrow.

2.13. Taxation of mere consignments is not also within the
scheme of the present Central Sales Tax Act. That Act is rela-
tahle to taxes on the saic or purchase of goods {other than news-
papcrsj, where such sale or purchase takes place in the course
of inter--Statc trade or cummcrce3.

The Act is intended to he adniinistcred as a eomplcrnentary
piece of legislation to the State Sales Tax act*'. The constitutional
provision relating-'*, Emer alia, to taxes on the sale or purchase of

1. {a) The State of .'»Icrdi'a5' represented by Lire Deputy Cormrrert-r'uf
'f'n.i: Oﬂicer. .-liriciras Di»-£s'£:J:i. M':i:dm3 V. Sr! Mtnpgmz E!2crrr'm!.s.
{'1".U.No. 4'.) of 1930; unreported case);
tb) Rajt: Cfretrior 8: Oriiers v. Sfare of .-'LIm.'ru.s, {£95.31 S.S.T.C.

132 (Mad).
{c} State of Puniub 1:. Jufﬁandur P'egembie.r S_r.-zd'i't'a!e, (1966) IT-'
S.T.C. 326

9. See for detailed discussion, para 3.26 to {Punj} mfm.

3. See also para 2.30, etc. seq infra.

*5. Cf section '."[_2], l{2}'9{2) and 9(3), Central Sales Tax Act, 1956.

5. Constitution, .-'krtielts 269(1) (g) and 269(2).

goods (other than newspaper.-_} in the course of inte-r--State trade
or commerce. is also limited to 'sale' in the strict sense.

3.14. "Tire pI'oL'ectls of such taxes. in so far as they are attri-
butable to the States, do not form part of the Consolidated Fund
of India, and are assigned to the State in which the tax was
collected'. When all these aspects are borne in mind, it will be
realised that without a constitutional amendment widening the
scope of the expression 'sale or purchase' wherever it occurs in the
Coiisritiirirrii in the confer: of fitter-Strife sale or purt'i'ut:.'e, eon-
fttsion will result if consignment transactions are brought within
the deﬁnition of 'sale' in the Central Sales Tax Act. Hence, it
such transactions are to be taxed, it will be necessary to amend
the Constitution in several plt1Ces---r.'.g. article 209 whereunder
the proceeds are distributed to the States.

2.15. The legal concept of "sale" requires two persons. ll
there is no transfer of "property" in the goods in the legal sense,
there is no transfer of wealth, and since there is no transfer of
wealth, the transaction also has so far remained non--tax.abie--.
Since. however, it appears that tax is evaded by repi'e.i'erii'r'izg, no
cort.9i'_s_,=rimerit n'nu.rfer. wtrrrr are rerillgt-' sales to the batik con.:mmer3,
the eompulsions of the situation and the need to cheek evasion
demand that even consignments should be taxed. If goods are
sent from State X to State Y as "consignment transfers", and
the consignnient is treated as not amounting to inter-State 'sales',
Central Sales Tax cannot be levied, at present. But sales tax
in State Y can be levied when the goods are sold by the branch
in State Y to the bulk consumer. There is, therefore. no defeating
of State sales tax in the abstract. But there might be evasion of
Central Sales Tax, by iietitiously representing, as consignments,
transactions which are really sales.

2.151-'L A recent Supreme Court case has considered3 two
important questions which are relevant to "consignment transfers".

(1) Whether. in the circumstances of the case the despateh
of refrigerators from the appellant's factory in Faridahad (Har-
yana) to their godowns in Delhi would he a 'sale' or 'Purchase'

1. Section 9(3), Central Sal

9. Para 2.3. Suprzr.

3. Kehinaror offrrdfrx ~.-'. State of Hm-yanrz. {I973} 3 Supreme Court Case
551, 561, 562, para 13.

es Tax Act, 1956.

Constituti-
enal
diﬁieulty in
widening the
scope of sale
Consignment
transactions.

_T'.or why
jtlstiﬁable.

Supreme
ourt

ease relating

to distribu-

tion agree-

in the course of inter--State trade or commerce under section 3
of the Central Sales 'tax Act, 1956.

(2) Whether such despatch was, under section 3(a), of that
Act 'occasioned' by a 'sale'.

The facts of the case were as follows:--~

.Thc appellants, manufacturers of refrigerators etc. had their
factory in Faridabad (Haryana) and registered ofﬁce and godowns
in Delhi. They had entered into distribution agreements with
three different distributors, under which the refrigerators were
sold under three different brand names. The terms and conditions
in the three agreements were similar. The refrigerators were
sent from Faridabad to Delhi, and kept in the appcllant's godowns
and ﬁnally despatched to the distributors. The sales Tax Tribu-
nal, Haryana referred the question whether the despatch was an
inter-State sale for the opinion of the Punjab and Haryana High
Court, the High Court decided the questions in favour of the
deapartment and held that the despatch constituted 'sale' under
section 3 of the Central Sales Tax Act, and was therefore taxable,
under that Act. The appellants came in appeal before the Supreme
Court by special leave. The principal question was whether the
distribution agreements could be construed to be contracts of sale.
On examination of the agreements the following facts had been
accepted by the departmental authorities and by the High Court 1
(i) the dealer (appellant) manufactured and sold refrigerators,
(ii) the refrigerators were sold with three different trade marks,
(iii) the sale of each brand was made through a separate distri-
butor apointed for the purpose, {iv} the manner of movement
was laid down in the agreements, (V) the dealer was bound to
sell a particular brand to a particular distributor, (vi) the refri-
gerators were exported outside India, (vii) the price of the refri-
gerators was ﬁxed as mutually agreed upon from time to time,
(viii) the property in the goods passed at Delhi after delivery,
(ix) the prices were not settled for individual machines, but on
a periodical basis, (X) the purchase orders were placed by the
three distributors after the goods reached the Head Oﬁice at
Delhi, (xi) after manufacture of the goods in the factory, an
excise clearance pass was obtained after payment of excise duty
for the transport of goods from the factory to the company's
godown in Delhi, and, the excise pass was always for the move-
ment ef goods in favour of self, (xii) the appellants paid the
octroi during the transport of the goods from Faridabad to
Delhi, (xiii) on arrival of the goods in Delhi, the Appellant's

id: H.-t-............:.._._.v....._.....;...1_..a.ﬁ5-...«un. ----u 2...... K g

stztli received them and put them in their godown, (xiv) the
appellant's staff in Delhi gave delivery of the goods to the cus-
tomer at Delhi, under a challan prepared at Delhi, (iv) the bills
were raised from Delhi and the price was received by the appe-
llant Co. in Delhi and (xvi) that all the appellants did was to
manufacture the refrigerators in Faridabad and brand them diffe-
rently for the purposes of sale and distributors. While, on the
basis of the above facts, the High Court found that the distribu-
tion agreements constituted agreements of sale, the Supreme
Court found it otherwise. Khanna J ., speaking for the unanimous
Bench of himself and Alagiriswami J., observed: "In the face
of the facts of the present case, we ﬁnd it difficult to hold that
the sale of refrigerators by the appellant to the three distributors
took place at Fmidabad. We are also unable to agree with the
High Court that the distribution agreements constituted agree-
ments of sale".

2.1513. The following reasons were given : "It is noteworthy
in this context to observe that the number of refrigerators which
were to be purchased by each of the distributors was not speci-
fied in the distribution agreements, nor did the agreements contain
the price which was to be charged for each refrigerator. Accord-
ing to the agreement, the appellant undertook to sell and the
distributor undertool-: to purchase the products of the appellant
"as mutually agreed upon from time to time." It is, therefore,
plain that sales by the appellant company to the distributors "de-
pend upon the future agreement between the parties from time
to time. Distribution agreement dated September 15, I965 and
December 11, 1963, no doubt mentioned the minimum number
of Leonard and Gem refrigerators which had been purchased by
the distributors, the exact number of refrigerators to be sold by
the appellant to these distributors was still left to volition of the
appellant. The appellant company, it was also mentioned, would
incur no liability if it. was unable to supply the guaranteed miniv
mum number of refrigerators. The mode of dealings between
the parties was that subsequent to the distribution agreements,
orders were placed by the distributors with the appellant after
the refrigerators had reached the appellants sale ofﬁce and godown
in Delhi. The price of the refrigerators was also to be mutually
agreed upon from time to time. It is plain that it is the orders
which were placed in Delhi by the dfstribtttors that resulted in
mutual agreement of sale'.

1. .-Ltnnt-:1» ;'.l;}_1li'L3.l.
20 M ofLaw,-'?4-- 5

"It was, in our opinon, the mutual agreement between the
parties at the time of the placing of the order by the distributor
with the appeliant which constituted the contract of sale and not
the distribution agreement. The distribution agreement with each
distributor provided the framework within which the diﬁerent
contracts of sale were entered into by the distributors with the
appellant. This circumstances should not make us lose sight
of the fact that in distribution agreements and the subsequent
contracts of sale were distinct transaction. .

?..15C. The Supreme Court also found the argument that the
ﬁrst distribution agreement obliged the appellants to sell all their
refrigerators to the ﬁrst distributor unconvincing, as the agree-
ment was qualiﬁed by the terms "as mutually agreed upon from
time to time" and the appellant exported its products to foreign
countries. The Supreme Court rejected the contention on behalf
of respondents (State of Haryana) that the sale (to the distri-
butors) took place in Faridabad and that appropriation towards
the agreement took place there. The contention was advanced
on the assumption that trade mark name plates for the different
brands were affixed in Faridabad. The Supreme Court found no
material to Support the assumption and even if the name plates
were aiﬁxcd there, the name plates could be removed and re-
placed in Delhi, as the three brands of refrigerators were identical
except in respect of name plate. Another important factor was
that orders in respect of the various refrigerators were placed by
the distributors in Delhi after the refrigerators had been trans-
ported to the Delhi sale office and godown of the appellant. The
court observed : " . . . . . .If the sale of the refrigerators in favour
of the distributors had already taken place at Faridabad and the
refrigerators had been appropriated there towards the sale con-
tract, there would have arisen no occasion for the placing of the
subsequent order in Delhi by a distributor with regard to the
said refrigerators. The fact that subsequent orders had to be
placed by the distributors in Delhi with regard to the different
refrigerators after their arrival in Delhi shows that there was no
earlier appropriation of those refrigerators towards any contract
of sale with the distributors. The stand taken on behalf of
the department that the appropriation of the refrigerators took.
place at Faridabad towards the contracts of sale with the distri-
butors is inconsistent with the entire course of dealings between
the parties. It may also be observed that in deciding the ques-
tion whether the transactiens between the parties constituted sales
in the course of inter-State trade or commerce, the court should

'U'

.. _',_J

look not merely at the distribution agreements, regard should be
had of the entire course of dealings between the parties.. . . . . ."

2.151). On the important question whether the movement of
refrigerators from Faridabad to Delhi was occasioned by a sale,
the Supreme Court held : " . . . . . . .Assu.ming that the distribu-
tion agreements constituted contracts of sale, it would still have
to be shown that the sale by the appellant to the distributors
occasioned the movement of refrigerators from Faridabad to
Delhi. In this respect, we ﬁnd that according to the facts found
by the Tribunal, the appellant had a god/own and sale oﬂlce in
Delhi. There is nothing to show that the appellant has also a
godown in Faridabad. The movement of refrigerators from
Faridabad to the appellant's godown in Delhi in the circumstances
can he aeribed to the fact that the appellant has n godown facility
in Delhi'. There were two places at which, in the nature of
things, the appellant could have sold the refrigerators to the
distributors. It could be either at Faridabad where the
appellant has its factory wherein the refrigerators are
manufactured, or in Delhi where the appellant has its office and
godown and where also the three distributors have their oiﬁces.
The selection of the sale depended upon mutual agreement bet-
ween the parties. It is also obvious that if there is a choice before
the parties of so arranging their matters that in one case they
would have to incur liability to pay tax while in the other case
the liability to pay tax would not be attracted, they would prefer
the latter course. There is nothing illegal or impermissible to a
party so arranging its affairs that the liability to pay tax would not
be attracted or that the bnmt of taxation would be reduced to
the minimum. The appellant company in the present case would
incur no liability to pay tax under the Act if it were to transport
the refrigerators from its factory in Faridabad to its own oﬁice
and go-down in Delhi and thereafter to sell them to the distributors.
The liability to pay tax under the Act would, however, arise if
the sale of the refrigerators to distributors were to take place at
Faridabad and the movement of refrigerators from Faridabad to
Delhi were to take place under 'the contract of sale. The ques-
tion with which we are concerned is whether the appellant entered
into such an arrangement with the distributors that the liability
to pay tax would be attracted and not the other arrangement under
which no such liability could be fastened on the appellant. So
far as this question is concerned, we ﬁnd that the parties expressly

1. Emphasis supplied.

"stated in each of the three distribution agreements that it would
be in Delhi that the sale of the refrigerators would take place to
the distributors and the property therein would pass to them. It
was again in Delhi that the refrigerators were delivered to the
distributors. The order for the refrigerators were placed by the
distributors in Delhi and it was also here that the price of refrige-
rators was paid. Looking to all facts of the case, we have no
doubt that the arrangement between the parties was that refri-
gerators would be said by the appellant to the d:'.s:i-tbrirors after'
they had been transported to the sale office and godown of the
appellant at Alipore Road, Delhi so that no liability to pay tax
under the Act would arise. It cannot in the circumstances be
said that the transport of the retrigerators from Faridabad to
Delhi was in pursuance of contracts of sale between the appellant
and the distributors . . . . . .."

2.15E. The Supreme Court rejected the contention on behalf
of the respondents that since under the contract the freight
charges from Faridabad to Delhi were paid by the appellants,
this would show that the movement of the goods was occasioned
by the contract of sale. The court found that the price payable
by the distributors was the aggregate of the ex--factory price and
the transportation charges. Since ex--faetory price changed from
time to time and since the agreements provided that the sale as
well as delivery to the distributors would take place in Delhi, there
was nothing surprising in the clause of the distribution agreement
saying that transportation charges would be added to the ex-
factory prices in calculating the amount payable by the distribu-
tors to the appellant. The Supreme Court also found it as in-
correct an observation made by the High Court that in two of
the distribution agreements the liability for shortage of goods
during transportation from Faridabad to Delhi was on the distri-
butors and not on the appellant Co. Even in the case of the
third agreement, where the Supreme Court found that there was
such a stipulation, the court considered it to he of no decisive
importance and only as "a matter of mutual agreement between
the parties," and the distributor treating any loss or liability result-
ing therefrom more than oﬁset by the distributorship of the parti-
cular brand of the refrigerator. The Supreme Court also rejected
a contention based on section 23 of the Sale of Goods Act that
where there was a contract for the sale of unaseertained or future
goods by description and goods of that description and in a deli-

1. Em phasis adiicd.

verable state are uneonditiortally appropriated to the contract,
either by the seller with the assent of the buyer or by the buyer
with the assent of the seller, the property in the goods passed to
the buyer. The Supreme Court refused to construe the distribu-
tion agreements as contracts of sale. There was also no material
to show that there was any assent expressed or implied by the
distributors to the appropriation of the refrigerators by the appel-
lant at Faridabad. The Supreme Court relied upon its earlier
decision in Tam Erzgfneering easel, where the Court refused to
consider the transport of manufactured trucks and buses from
the appellant's factories in Jamshedpur to stockyards as inter-State
rates, as the movement could not be proved to be occasioned by
sales. '

2.15F. The Supreme Court held : "We accordingly accept the
appeal and set aside the judgment of the High Court. The answer
given by the High Court to the question referred to it is dis-
charged. In our opinion, the three agreements between the
appellant and the distributors were merely agreements for the
distribution of goods and were not agreements of sale between
the parties. lt cannot, in. our opinion, be said that there was
any rnovcmcnt of refrigerators from Faridabad to Delhi under
a contract of sale. The question in the circumstances is answered"
against the department. The transactions between the appellant
and the distributors did not, in our opinion, constitute sale in
the course of inter-State trade or commerce. As such, there was
no liability to pay tax under the Act."

Aiizeiidmerir, if n'.<:si'rab!e----}'»'eer.l to check evasion

2.16. This, then, is the present position. Need to bring, Tgﬁ Itwblem
within the range of taaability, transactions not falling within the §'cai2"i'§;
existing tax structure. in this ﬁeld (or, for that matter, in any '"'35i°"'
other ﬁeld) can arise by reason of the fact that the narrow scope
of the tax structure is being abused. in the present case, from
the suggestion made by the State Governments we infer that
evasion on a large--scale is being restored to. It would 3150
appear that the insertion in 197r'2 of section 6A" is not regarded
as adequate to check such evasion.

L Tara Engfrieering ere. Co. Lin'. V. Arrtr. C.C.T,/& ii.l.;:.;.»_.rf(i97n)31
S.C.R. 162: S.C.C'. 622.
9. Para 2 _ 5, supra.

It would seem, therefore, that it is thought that evasion can-
nut be checked otherwise than by taxing all consignments. Even
though there is a logical ditﬁculty in equating a consignment with
a sale, it seems that that has been regarded as necessary.

rm, 2.17. On that basis, the amendment called for will have to

I-"<=1'Dﬂli'-'==~ achieve the object of bringing, within the range of taxable acti-
vities, all consignments of goods from one State to another,---
subjcct, of course, to certain possible limitations which we shall
presently clcal withl. For achieving this object, two broad alter-
nativcs are open.

Alternative 2.13. According to the first alternative, such transactions
ms Act could be taxed by a separare mt not to be combined with the

present Central Sales Tax. According to the second alternative,
such transactions could be included within the present structure
of the Central Sales Tax. Though the latter course is likely to
necessitate a radical expansion of the scope of "sale" under the
Alternative Central Sales Tax Act,----as also, perhaps, in some of the consti-
""'°" . tutional provisions", nevertheless, from the practical point of view,
the of that course would appear to be preferable to the ﬁrst alternative.
':2? in the The first a1ternat.iv_e~-----that is to say, a separate Act to tax inter-

State consignments not amounting to sa1c,-----ma5~" mean the dupli-
cation of numerous provisions already found in the Central Sales
Tax Act.

The question 2.19. It, then. the second alternative" is to be adopted, tilt.'
2: fgfynfelk next broad question that arises is. whetlier the tax on the inter-
Statc consignntents should he leviable in the same manner as the
present Central sales tax is levied. or whether any other device
should be adopted in that behalf. One possible device could
be this---the State to which goods are consigned from another
State [otherwise than hy way of sale} may be empowered to
levy a higher rate of tax on such goods when sold internally with-
in the consignee State. with a provision for granting rebate in
respect of such inter-State sales tax as has been actually levied
on those goods. Though this device may avoid an amendment
of the scope of 'sale' in the Central Sales Tax Act (which will
be necessary under the other alternative), it will also involve
some other amendments. Moreover, the oonsfgxmr State -would
not get any additional revenue if this device is adopted, at least

1. Sec tiara 2.21.
'. These need not be enumerated for the present purpose.
3. Para 2.18, supra.

-23;

in cases where the consignee State does not avail itself of the
power to levy higher tax. On the other hand, if the present
scheme given in the Central Sales Tax Act is extended to cons1gn~
mcnts not amounting to sale, there would he symmetry, and also
a certain amount of smoothness in working, because the ex-
perience gained in the working of the present Act would continue
to be valuable and useful for the collection and realisation of
the extended tax also.

2.20. if it is decided to pursue the approach suggested above, Legiggtgme
namely, extending the present Act to consignments not amount» 'l'""°°5-

ing to sales. there could be a number of legislative devices which
one can adopt for the purpose. It is unnecessary to go into all of
them. Our preference is for expanding the deﬁnition of "sale"
in the Central Sales Tait Act.'

2.21. We shall now consider the question whether all consign- what should

mcnts should he covered by the extended tax, or whether any the

limitations in that respect are desirable. There can be no dispute
that the tax should extend only to consignments made in the
course of business', i.e. to consignments made by a dealer in
the business of buying or selling goods. But a person who
carries on the business of buying selling goodsi, may be a
manuiucturcr, an importer, a distributor, a wholesaler or a retailer
or may possibly fall under some other category. From the
point of view of principles of economics, the State where the
goods are manufactured or imported from outside India for the
first time, and from which the goods are then consigned {with-
out sale) to other States in the course of business, can legitimately
claim that it should not lose, on such 'non-sale' consignments
the tax which would have been earned if there
inter--State sale proper. The resources of the State would, to a
large extent, have been employed in facilitating the manufacture
or import of the goods. When one comes to the stage
of the wholesaler who is not himself a manufacturer
or importer. this ground of justiﬁcation does not, perhaps, apply
with the same force. Therefore, as a matter of abstract logic
some distinction could be made between manufacturers and
importers (on the one hand) and wholesalers etc. on the other
hand. However, it is possible that such distinctions might lead
to an increase in administrative work, and we are not inclined to
recommend any such distinctions.

para 2.23 in}?-a (recommendation).
9. Compare section 2(b), deﬁnition of "clealer".
3. Section 2(b), deﬁnition of "dealer".

imitations.

had been an '

Deﬁnition of

2.22. The principal purpose, then (of the deﬁnition of 'sale'

"S919 3h"'"" as proposed to be amended] will be to levy a tax on a dealer in

cover
transfers
other than
by sales.

Arnendment
a matter
of policy.

Recommen-
dation.

respect of goods where the movement of such goods from one
State to another is occasioned by reason of consignments of such
goods by him to any other place of his business or to his agent
or principal, ot.'ierwr'.re than by reason of sale.

2.22A. We may state here that whether the law should or
should not be amended so as to include consignments in a matter
of policy. in some of the replies to the Questionnaire issued by
us on the subject, the economic difficulties likely to he created
if cortsigiiments are taxed have been referred to. We express no
opinion on the matter.

Recoritmendarioiz to amend the Act

2.23. We. therefore, recotnmentl' that if it is decided as at
inatter of policy to tax consignments, then the tieﬁnitioti of
"sale"'--'--" in the Central Sales Tax Act should, after carrying out
the requisite constitutional amendments, be amended some-what
on these lines' :--
"(g} "sale' means any transfer of property in goods l.'«yone

person to another for cash or deferred payment or for

any other valuable consideration", and includes---

(i) a transfer of goods on hire--purchase" or other system
of payment by instalinents, and

( ii) a con.ri_enmem' of goods occasiorring their ?1"1f?Veﬂle'l'iI
from one place to another, where such consignment
is by a dealer to any other place of his brurines.-t or
to ht'; agent or principal.

1. Ainendrnents. needed in the Constitution to he considered separately.
see para 1.25 at seq. intro.

3. Section Hg), Central Sales Tax Act.

5. This is not intented to be a precise draft. _

4. Consequential amendments, if necessary, in the other provisions of
the Central Sales Tax Act, shouldibe separately considered.

5. As to amendment of the words referring to "valuable consideration".
there is at separate recommendation. See Chapter 8.

e_ Portion relating to hire-purchase is subject to the discussion in the
relevant chapter.

but does not include a mortgage or hypothecation or a
charge or pledge of goods ; and its grammatical varia-

tions and cognate expressions shall be construed
accordingly."

2.24. We are conscious that the item {relating to consigm The mm.
ments) proposed to be added as shovel, will introduce a cer- Eleggétgf
tain amount of complexity in the Act; but, if the object of mem_
cliecking evasion is to be achieved, thi.s complexity cannot be
avoided. "The tax laws are aimed at dealing with complex
problems of iniinite variety, necessitating adjustment of several
disparate eicrnents."

2.25. It should, perhaps, be unnecessary to point out that The

the added item (as proposed above) will cover all inter--State "'T""'t"l';IiH
consignments in the course of business; and will eliminate any 31021;; an
inquiry as to whether the particular consignment constituted aﬁgggn'
bane ﬁde sale or a ﬁctitious sale. Also, it will cover successive
inter--State consignments of the same goods in the course of
business.

Constitiitional po5i'£z'on--~--coricepr of sale

2.26. We shouldpoint out that to achieve the above ob- con9mu_
ject, an arnendtnent of the Constitution, in order to authorise tional
the distribution of the proceeds of the tax on consignrnems, is fnngfgdglm
unavoidable. No doubt, Parliament already possesses the needed.
power to levy a tax on intcr--Stste consignments under its resi-
duary power. But the distribution of the proceeds of the tax
to be so levied cannot be provided for within the language of
article 269, and must need an expansion of the scope of article
269. It would appear that the expression "sale or purchase",
occuring in article 269 {and in Union List, entry 92A] will
have to be given the same 'u1terpretation as has been given to
it under State List, entry 54.

When an expression is used in a legal document without
change at several places, normally it should bear the same
interpretation, in the interest of symmetry and to avoid confu-
sion. This is the first point to be considered.

1. Para 2.23 Supra.

"Sale of

:oods"--a

composite
expre-
ssion.

Metapho-
rical use of
sale.

How far
legal con-
cept ex-
tended.

The mean-
ing of
"sale" laid
down in
Simpson

1:. Canon}.

2.27. A decision1 of the Supreme Court also throws light
on the meaning of "sale":---

"The expression 'sale of goods' is a composite expres~
sion, consisting of various ingredients or elements.
Thus, there are the elements of bargain. or contract
of sale, the payment or promise of payment of
price, the delivery of goods and the actual passing
of title, and each one of them is essential to a
transaction of sale though the sale is not comple-
ted or concluded unless the purchaser becomes the
owner of the property."

2.28. It has been observed in an Australian' case :--

"The word 'sale' is used in various metaphorical senses.
When a man enters into a contract of employment,
he is sometimes said to 'sell his labour'. but really
there is no transaction of sale; the contract is a
contract of eniploymcnt, not a contract. of sale.
-Similarly, when a banker 'deals in credit' he makes
loan contracts and does not sell anything."

2.29. It may well be that the legal conception of a sale is
not strictly inapplicable to the case of hire--purchase. There
may be a semblance of a reason in the case of tax on a hire-
purchase by treating it as sale, by acting on what we regard as
the suhstance of the transaction. On the other hand, there is
some occasion for surprise at ﬁnding in any particular legisla-
tion the word "sale" or the word "sell" used as referring to I
transaction of consignment.

2.30. A modern judicial expression of the prime facie mean-
ing of "sale" is to be found in Simpson V. CanoHy3. It was
held in that case that an agreement to extinguish an existing
debt if land is transferred, is not a "sale" of land. The Court
observed :

"But the general principle of English law is that a sale
means the exchanging of property for money. That

" I. Papaliai Shah -.r. State oruadi-as, .-t.1.a. 1953 so. 274.
9. Bari: of New South Waits V- Commonwealth, (1943) 76 C.L.R-1,
234 (per Latham, C.J.'l.
3. Simpson v. Conolly, (1953) 2 All BR. 414, 47? (Finncmorc 1.).
(I11: Edited Bth editions of Benjamin on Sales).

appIies--and 1 think both counsel agree with this---
to a sale of land and sale of chattels equally."
Such is the primary meaning of the word "sale".

2.31. There are, no doubt, to be found authorities and wide, de_
statutes which have extended that meaning. Upjohn 1.1, for ﬁnitions.

example, cited the following from T. C_Vpl'lEl Williams' Books,
the Contract of sale of land.

" 'Sale' in the strict and primary sense of the word, means
an agreement for the conveyance of property for
a price in money; but the word 'sale' may be used
in law in the wider sense and so applied to the
conveyance of land for a price consisting wholly or
partly of mone'_v's worth other than the conveyance
of some other land."

2.32. Even here. the essential concept of transfer of the Essential
property in goods is not abandoned. concept---

transfer
IJI'0p€1'I§.".
2.33. The distinction between "sale" and "agency" has been [_)is'tinc-
discussed at length in Cordon Woadraﬁ'e'.s' case". All this dis- §;';'gnbfjc
mission is intended to drive at the submission that it is diﬁicult and
to place an expanded interpretation on "sale or purchase" in agency'

article 269, so as to cover a sale not properly so called.

2.34. An amendment to expand the meaning of 'sale' (to The need
cover consignment) is considered necessary because since sec-3l'e°::':)';';g;_
tion 9(3) of the Central Sales Tax Act has, for its power and tutional
origin, article 269(2) of the Constitution, it is desirable that basis-
the constitutional provision itself should be unambiguous, so
as to authorise the distribution of proceeds of a tax on consign-
ments under section 9(3) read with the deﬁnition of "sale".

The exclusive object of entry 92A (in the Union List) was to
confer, on the Union, the power to levy a tax on inter-State
transactions of sale or purchase of goods. These transactions
were, before the insertion of that article, regarded [according i
to an interpretation subsequently found to be erroneous) as
falling within the power of the States. By a new entry,---entry
92A----that power was in 1956 vested in the Union, but the pro-

mfnasasitaw Brothers vﬂuayer, mass) 3'}... 13.11. sis, 335 (Upjohn if
1. Cordon Woodraﬁi v. S.K'.:'|-LA. Majiddr C-:J., A.I.R. 1967 SI'. 18].

In com-
lT¥C|l'l |'.iiiI'-
iance 'salc'
does not
include
consign-
rrtcnis.

Past inter-
pretation
not a sure
giiitle.

The com-
mon notion
is differ-
cut.

ceeds were, by an amendment of article 269 which was made
simultaneotisly, directed to be distributed to the States.

3.35. And since, in State List, entry 54, "sale" has been
narrowly construed, it is very likely that in article 269 and
Union List, entry 92A, also, it will be narrowly construed, parti-
cularly liaving regard to the close relationship of article 269(3)
to entry 92.-'X.

2.36. Consignment of goods without passing of property is
not, even in popular language, equated with "sale". Thus.
both the legal and popular meanings of 'sale' exclude consign-
ments without transfer oE property.

2.37. No doubt. it is true that the Central Sales Tax has--
on one plausible interpretation'--itself levied a tax on hire-
purchase not resulting in sale. and, on that basis. it could be
argued that the strict commonlaw concept of "sale" has not
been adhered to by the legislature. But this does not neces-
sarily lead to the conclusion that, for the purpose of article
269 of the Constitution, the interpretation of the expression
"'sa1e" should be wide. Legislative practice, reflected in a deﬁ-
nition (which itself is open to two interpretat.ions2], is not con-
clusive on a question of competence of the very legislature which
has adopted that practice. (The word 'competence' is used
here not to indicate the power of the Union to tax, but to con-
note its power to assign the revenues from the tax to the

States) .

As Lord Radcliffe e::nphasised3, "resort to a later Act can
rarely, if ever. be justified, unless the message that it conveys
is a plain one itself, at least free from ambiguity".

Though it is commonplace. it has to be emphasised
that the passing of property for price is of the essence of sale,
and where the property does not pass I as in consigrttnent trans-
fers), an essential feature of sale as known to the law and 'also
as understood by the layman, is missing.

1. See discussion relating to hire-purchase.

1, See discussion relating to hire-purchase.
3. In Re M'm: M'anawa,1', (1951) A.C. 161, 177 [P.C.}.

"it

As has been ebservccll, "Alike in the ordinary use of lan-
guage and in its legal concept, a sale connotes the mutual as-
sent (if two parties" and, of course, the passing of property.

Amemfment of the Con.9ti2'tm'on

2.39. '1' herefure, if consignments are as a matter of policy Reeom-_
intended to be included in the Central Sales Tax Act, it will be ?:°:':n";:1':i"
e'.<.".=i€:able to amend article 269(1) Ifg) and 269(3) of the C011-tl1_e C_ou-
stitution"- by adding an Explanation to that article, somewhat 5""""°"'

on the "iollowing lines":----

"Explanation.--Fer the purpose of this article the ex-
pression "sale Jr purchase" include-s*--~

a consignment oz goods occasioning their movement
from one place to another, by a dealer to any other
place of his business or to his agent or princi-

pal."

1. KJ'rkPf£'SSUI1s,ﬁ€£.'f(Jr of Tuxm] V. Rurfmiz (Jofm: & Co. Ltd.) (1955)
2 All ER. 345, 348 {I-i.L._',! ijVi=:e. uni Sim..wnd.=_).
2. There are provisions of the Constitution Lrilng Ihc cxpl-c5.;,'.;m ==5a]¢H
but they do not seem te require amenc]:|.ent in the present context,
3. This is not intended tn be a precise draft.
4. A: r: Itira-purchase, see ani:le 366 as proposed to be amendecf.

Scope of the
Chapter.

Need for_
demarcation

CHAPTER 3

SALES IN THE COURSE OF IMPORT---KHOSLA'S CASE

Introductory

3.1. In this Chapter, we shall deal with a question concern-
ing the taxation of sales in the course of import. The question
is one of considerable constitutional iuiportance. It arises from
the judgment in Khoslds case, which interpreted section 5 of
the Central Sales Tax Act and its relationship to article 286(1)
(b) and article 286(2) of the Constitution. The question is a
vexed one and its proper consideration and appreciation in-
volves a study of the historical and constitutional background',
and that background must be dealt with in order to unrave the
various issues turning essentially on the taxability of purchases
connected with expert and sales connected with import.

3.1331. We shall first deal with the constitutional aspect.
Where there are two Governments operating in respect of a
subject matter--in this case, taxation, demarcation of their res-
pective jurisdictions becomes unavoidable. Taxation of trans-
actions relating to commodities is a major source of revenue
in almost all the countries of the world, and it is also well-
known that the power to tax such transactions may have to be
exercised at various stages. Where this power is divided bet-
ween two Governments, care has to be taken to see that the
power of one Government is not so exercised as to impede the
the policy legitimately adopted by the other Government.
Secondly, since matters concerning international trade have nece-
ssarily to be vested in the national Government, care has also to
be taken to see that legislation passed by the States does not im-
pinge upon international trade. These broad considerations have
led to the inclusion in the Constitution of the relevant provisions,
of which article 286(1) is material'.

I. See para 3.13 21 See infra. Page 80.
2. Paras 3.6, 4, inﬂ-an Page '36.

,-R

.,-,. ..,,.,_._..~.__
..___.-----

3.2. It may be stated that in the period prior to the Consti- position
tution, the authority of a province to levy a tax on transactions "_°f°"*.'h"-
of sale was not subject to limitations of the nature laid down in 5:? mu.
article 286 of the Constitution. The provinces had power to levy
a tax on the sale of goods and on advertisements under the Go-
vernment of India Act, 1935, Seventh Schedule. Provincial List.
entry 43. g'

There was no express provision in the Government of India
Act prohibiting the provinces from levying a tax on sales which
took place in the course of import or export or in the course of
inter state trade or commerce, or on transactions which took
place outside their respective territories. Of course, as regards
the legislative power of the provinces, the general limitation that
they could legislate only "for the province or any part thereof",
was always applicable.

A Provincial Legislature could not pass laws having
extra-territorial operation. But this did not limit legislative com»
petence (as to a tax on the sale of goods) to sales concluded within _.
the boundaries of the province} A sufficient territorial nexus
between the taxing state and the sale" was enough to maintain
the validity of the law.

3.225;. In this connection, a judgement of the Federal Court Judgment
is of interest. In 1942, the Federal Court had to consider the °fedi':ﬂ
question" whether a tax levied by a province on the ﬁrst sale com-L.
hy the manufacturer or the producer could be said to he an excise
and, thercfore,outside the competence of the state. The Federal
Court upheld the validity of the tax, on the ground that the tax
was on the occasion of sale and not on the occasion of manufac-
ture. In the course of the arguments, the well-known American
case of Brown v. The state of Maryland" was cited, where an act
of the state of Maryland, prohibiting the importers of foreign
goods from selling their goods without taking a licence, for which
50 dollars had to be paid, was held to be repugnant to the pro-

vision in the Constitution of the U.S.A. which provides that:"no my 5 A
state shall, without the consent of Congress, allow any imposts " w_~,,,.__
or duties on on imports or exports, except what maybe absolutely """""":M__,.

necessary for executing its inspection laws."

1. P5pat!alSaah v. sum» of'M'ar2'ra.r, (1953) 4 s.r.c. 133; A.I.R. 1953
so. 274; (1953) S.C.R. an

2. Sz.m.:t'nn;n:rm:'er& Ca. V. State of Andhra Pradesh ALR. 1958
S.C. 463, 479, 493, (1968) S.C.J. 459.

3. Madras Prowl-Ice V. Buddha Paidnnna & Sons, A.l.R. 1942 EC. 33,
37 Gwyer C.3.

-I. Brawn V. State afMao-land (1827) 12 Wheat 419.

"F4

The Federal Court pointed out that provisions which were
being considered in the American case were very different from

the prcwisions of the Government of India Act.

One of the

points of difference emphasised by The Federal Court was that
the American Constitution also provides that Congress alone has
power "to regulate commerce with foreign nations, among the
several states, and with the Indian tribes"; and it was held that
the Maryland tax was not less repugnant to this provision also:
Marshall CJ. asked:

"To what purposes should the power to allow importa-

tion be given, unaccompanied with the power to

authorise the sale of the thing in1ported'?......Cong-
ress has a right, not only to authorise importation,
but to authorise the importer to sell . . . . . . . ..what

does the importer purchase, if he does not purchase
the privilege to" sell?"

The Federal Court added:

"On this View of the Commerce clause, it would indeed

be difficult to recognise the right of the State to
impose a tax upon the first sale of the commodity,
at any rate so long as it remained in the importer's
hands. In the In-zdian C()rt.5'IttttIt'0t'I Act no site}:
questirm ariseszl and the right of the Provincial
Legislatures to levy a tax on sales can be considered
without any reference to so formidable a power
vested in the Central Government. Lastly, the pro-
hihition in the American Constitution is against the
laying of "any imports or duties on imports or
exports"; the prohibition is not merely against the
laying of duties of customs, but is expressed in
what we conceive to be far wider terms; and it does
not appear to us that it would necessarily follow
from the principle of the Maryland decision that
in India the payment of customs duty on goods
imported from abroad or the payment of an excise
duty on goods manufactured or produced in India
can be regarded as conferring some kind of licence
or title on the importer or manufacturer to sell his
goods to any purchaser without incurring a further

Em -hasis SL1 pplied.

'.,__ ..,,_:._.--.---.. .7-----no.-----,n w.-p¢,u_.,,..q_-.__,....,,.-.v --u~...aw-..._ .._n----._---.-...,-.._,..-------..------n.-:u.u-----------

a...:--~ ------_u ---'n.._... -

liability to tax. That was the view which commen-
ded itself to the Court in (1827) 12 Wheat, 4191
and it was view adopted and argued before us. The
analogy with the American case is an attractive
one; but, for the reasons which we have given we
are wholly unable to accept it."

3.3. The matter is illustrated by section 2(g) of the C.P. and
Berar Sales Tax Act, 1947 (as then in force). which provided"
as follows :

" 'sale' with all its grammatical variations and cognate
expressions means any transfer of property in
goods for cash or deferred payment or other valu-
able consideration, including a transfer of property
in goods made in course of the execution of a con-
tract, but does not include a mortgage, hypothe-
cation, charge or pledge.

t I I I

Explanation {H).--Notwithstanding anything to the con-
trary in the Indian Sale of Goods Act, 1930, the sale of any
goods which are actually in Central Provinces and Berar at
the time when the contract of sale as deﬁned in that Act in
respect thereof is made, shall, wherever the said contract of
sale is made, be deemed for the purpose of this Act to have
taken place in the Central Province and Berar."

3.4. This Act was enacted in exercise of the powers con-
ferred upon the Provincial Legislature by the Government of
India Act, 1935, 7th Schedule Provincial list--Entry 48. In
exercise of that power, the Legislature was competent to enact
a law for levying sales tax acting on the principle of territorial
nexus, i.e., the province could ﬁx upon one or more ingredi-
ents of sale, and make it the foundation for imposing liability
for sales tax. The Provincial Legislature, relying upon either
the manufacture of the goods within the province, or the exist-
ence of the goods at the date of the contract of sale within the
province, or the making of the contract of sale within the pro-
vince, as the basis, could provide for levying sales tax. "Sale"
within the territory was not a condition of the exercise of the
power to levy sales tax."

1. Brown V'. State aflirfaryinna', (1827) 12 Wheat 419.
'. See Anwrrr Khan V. Stare ofM.P., A.l.R. 1970 SC. 1755.

5. See Arm-or Khan V. Stole ofﬂef. P., A. I. R. 1970 S. C. 1756 26 S. T. C'
381.

20 M of Lawj';'4--6.

Section
2(3) GP.
and Berar
Sales Tax
194? and
its con-
struction by
the Sup-

reme Court.

Other de-
cisions of
the
Supreme
Court.
é

Position
under the
Constitu-
tion.

Import-
anee of
the Con-
stittrtional
prohibi-
tion.

7'6

3.5. It has been held by the Supreme Court in a large num-
ber of cases1 that under the Government of India Act, 1935
the Provincial Legislature [was competent to enact a law for
levying sales tax acting on the principles of territorial nexus,
i.c., the province could fix upon one or more ingredients of
sale; and make it the foundation for imposing liability for sales
tax.

The position is however. substantially different under the
Constitution. Even if a sale is inside the Statc--and therefore
not subject to the ban under article 286(l)(a)----it cannot be
taxed by the States it it falls within either of the other two
bans prescribed in article 286.

3.6. The Constitution has dealt with the matter by an
cxpress and elaborate provision. Broadly speaking, it not only
prohibits taxation by the States of a sale" outside the State, but
also prohibits taxation of a sale in the course of import or
export----or in inter-State trade or commerce. This provision is
to be found in article 286(1).

3.7. Under article 286(i}fb) of the Constitution, no law
of a State shall impose, or authorise the imposition of, a tax on
the sale or purchase of goods where such sale or purchase takes
place "in the course of the import of the goods into, or export
of the goods out of. the territory of India" The principal ob-
ject of the prohibition is to 2rQ_t§G§.,.iE!,t¢IZIlﬁ.tiDnal..n'ade.

3.8. Such a prohibition' is based on one of those consti-
tutional doctrines which form the heart of the federal concept.
It is the basic need for the demarcation of the taxing power on

1. ta} Poparlal Shah 'it'. Stats ofiilndrrrs, A. 1. R. 1953 S. C. 2?4; (1953)
S. C. R. 67?.
(b) Tatar Iron :3: Steel Co. Ltd. V. State of Bihar, (1968) 9 S. T. C. 267;
A. I. R. 1958 S. C. 452'. (1958) S. C. R. 1365.
(C) Bharat Sugar Mills Ltd. V. Stare o_.r'Bi.i!ar, {I960} ll 5. T. C. 793;
A. I. R. 19618. E1183.
{:1} Tikaram at So.-i.rLtd. V. (hm.-m'.r.ri'a.-arr of Sales Tax (1968) 22
S. T. C. 308; A. I. R. I963. S. C. 1286.
(e) Ammr Khan Mnhboob V. Commissioner of Sales Tax (i9'i'(i} 26
S. T. C. 38], 383; A. I. R. 1910 S. C. 1756.
'. For brevity. "Sale" is used in the above discussion to include pur-
chase.
3. Para 3 . 7, Supra.

77'

transactiom relating to commodities, that constitutes the spirit
of the constitutional prohibition. Verbal controversies and ques-
tions of interpretation naturally arise on the formula that may
be adopted to give effect to this spirit. But the essential and
basic consideration is the one to which we have referred.

In the celebrated American case of Brown V. Maryiantfl
Marshall C. I. observed:--

"The constitutional prohibition on the States to lay a
duty on imports. a prohibition which vast majority
of them must feel an interest in preserving, may
certainly come in conflict with the acknowledged
power to tax persons and property within their
territory. The power, and the restriction on it,
though quite distinguishable when they do not ap-
proach each other, may yet, like the intervening
colours between white and black, approach so nearly
as to perplex the understanding, as colors
1:-erplex the vision in making the distinc-
tion hetween them. Yet the distinction exists.
and must be marked as the cases arise. Till the}.-
do arise, it might be premature to state any rule
as being universal in its application. It is suit'-
ctent for the present to say. generally. that when
the importer has so acted upon the thing imported
that it has become incorporated and mixed up with
the mass of property in the country..it has, per-
haps, lost its distinctive character as an "'import"
and has become subject to the taxing power of the
State; but while remaining the property of the im-
porter, in his yrarehousc, in the original form or
package in which it was imported, a tax upon it is
too phiinly a duty on imports to escape the prohi-
bition in the Constitution."

3.8.4.. Problems of interpretation of such prohibitions are 5£0ibn'tC;'_3
unavoidable. Clark J. in Smite of H"ism.~:s-ii: V, I. C. Pemry pmmﬁgm
C02, observed as fo11ows:---

"that there is "a 'need for clearing up the tangled under-
growth of past cases' with reference to the taxing

1. Brown 'In'. M'eryL'.rnd, ([827] 5 L. 67';-'.
3. State of Wise; rsiir V. J. C. ."e.'i-ry CJ., (1l)»10_} 3-11 U. S. 435, 445.

Question

of sale in
the course
of import.

'38

power of the States is a concomitant to the negative
approach resulting from :1 ea.se--by--case resolution
of 'the extremely limited restri.etions that the Con-
stitution placed upon the States .... ..

"Commerce between the States having grown up like
Topsy, the Congress meanwhile not having undertaken
to regulate taxation of it. and the States having
understandably persisted in their efforts to get some
return for the substantial beneﬁts they have aﬁordcd
it, there is little wonder that there has been no end
of cases testing out state tax levies. The resulting
judicial application of constitutional principles to
speciﬁc State statutes leaves much room for con-
troversy and confusion, and little in the way of
precise guides to the States in the exercise of their
indispensable power of taxation. This Court alone
has handed down some three hundred full-dress
opinions spread through slightly more than that num-
ber of reports. As was said in. Miller Bros. Ca. V.
State of Maryiand? the decisions have been not
always clear, consistent or rec-oncilable. A few have
been speciﬁcally over--ruled, while others no longer
fully represent the present state of the law. From the
quagmire there emerge, however, some ﬁrm peaks of
decision which remain unquestioned . . . . . .."

This shows the complexity of the cluestion.

3.9. We now come to the specific question to be considered

in this Chaptermthe question of taxation of sale in the course
of import, with reference to the judgment of the Supreme Court
in Kh05Ia's ease".

3.10. Consideration of this question, as a matter of policy,
was deliberately avoided in the earlier Report'.

Since the pre-

sent law is that a sale of the nature illustrated in Khos!_a's case is
a sale in the course of import, the question to be considered is
whether it should be made liable to taxation by the States------thus
overriding what was laid down in KFmsla'.r case.

1.
1:

.M:'lt'.r.-r Bros. Ca. V. State of }l«f..:ryIumI.
E. U. Klxesfn 3:. Ca. V. Deputy Co.-vi-rt.-':si9ncr of Taxes, A.'l.R. 1966
S.C. I216; (1966) 3 S.C.R. 352.

20th Report, Page 65, para 13] . Section 5 of the Central Sales Tax Act
'1'.-:xatio:1 by States of Sales in the course of import.

3.11, As already stated} the earlier Report of the Law Com- Suggestions
mission was conﬁned to a narrow legal question. Suggestions that ﬁ'é':_'3'I1,;;;*°'r':'r
were received by the earlier Commission", however, indicate that
several alternatives are open in this context.

[ i) The proposition laid down in K:'wsta's case may
be left as it is";

(ii) The prr:po>.i1ion Zaid down in K!1r).s'.'a":.' case may be
codiﬁed';

tiii] 'l'hat propoiirion may not only he niaintaiiictl, but
]'t'li.jy' also be ertendetl in its scope";

{iv} Th;-1L [3|'t'.{"n}5lll01l niav be abrogated, so as to allow
the States to levy sales tax on such transactions";

3.11A. The choice is, thus fairly wide ; and a decision in the Entries in
matter necessarily requires an examination of matter of eonsti- §,]f§°E°f§1t;t_
tutional' policy. 'The. reason why sales in the course of import ing_to inter.-
(or export) are taken out of the domain of taxation by States is 'I';'lt::t';'c',:l§_
well lrnotvn. l\"l'r.'..I'l.'_d_l'_i4wtill-fttl:ElI]g_il'lE_E3I'l1El.tlOI!Ell trade were intended

to be kept excluazivcly within the competence of the Union, and -"
the C0nStituti0n--maltcrs were anxious to see that the legislative
power of the State was not exercised in a manner which would
impair the efficient performance of the responsibility of the Cen-

tre in the ﬁeld of international relations. This is evident not only
from the entries in Union List relating to international affairs

in general, but also from the entries relating to international trade

in particular. For example, trade and commerce with foreign
countries, and imports and exports across customs frontiers,
are dealt with by a speciﬁc entry in the Union List--Union List,
Entry _'~'_l_I. Duties of customs, including export duties, fall within

the exclusive competence of the Union---Union List, Entry 33;.
The general principles laid down in the Constitution. article
246(1), about the paramountcy of entries in the Union List need

». |. Para 3.10, Supra.
30th Report, pages 66 to 72, paragraphs 13?. to I39.
3. Cf. Stlth Report, page 66 para I33.

Cl'. 30th Report, page 67. para 134.

Ct'. 30th Report, page 70, para 136.

Cf. 30th R:-nrt, pages 67, 68 and 69, para E35.

.='~.-a

Background
of the

I:-roblem.

not be elaborated here. For abundant caution, some of the en-
tries in the State List expressly lay down that the power there»
under is to be subject to the legislative power of the Union under
a speciﬁc entry. Forkexairiple, see State List, entries 1], 13, 22,
24, 32, 33, 54, 63 etcfmln fact, the entry relating to the taxing
power of the State in relation to sale or purchase of goods (State
List, entry 54) provides that the power is subject to Union List,
Entry 92A. (Entry 92A--Taxes on the sale or purchase of
goods other than newspapers, where such sale or purchase takes
place in the course of inter--State trade or Commerce.

It is this anxiety of the Constitution-makers to preserve inter-
national tradc from the taxing power of the States which is re-
flected in Article 286(L) (b), which prohibits the imposition, by
a law of a State, of a tax on the sale or purchase of goods where
such sale or purchase takes place. in the course of the import of
the goods into, or export of the goods out of, the territory of
India.

3.12. We majv now consider whether the preservation of
international trade from taxation by the States justifies the ini-
position of a prohibition against the levy of tax by the States on
transactions of the nature which ﬁgured in KiwsIa'.s case. The
question to be considered is. when there is a transaction in which
there are tag;-__§g,1Fe;s, namely, (i) a sale by a foreign manufacturer,
dealer or other foreign trader to an Indian importer, and (ii) a
sale by the Indian importer to the ﬁrst purchaser in India
should the second sale be regarded as deserving of exemption
from state taxation, even in the special circumstances that were
present in Kliosiait case ?

Chronological events relevant to the problem

3.13. To put the question in its proper perspective, it would
be convenient to refer to the legislative and judicial background
of the problem. We shall deal with important developments in
their chronological order. These are :

(1) Article 286. as it E':l(lSt{.'.(.l1 before 1956;

(2) The two Trai-uzmcore cases?

|. Para 3.l3A and 3.14. infra-
" Para 3.15, irrﬁra.

{3} The Law C.'omn1ission's 2nd Report, which used the
word 'occasion', with intent to give the effect to the
propositions laid down in the Travnncore cases?

(4) The Central Sales Tax Act, 1956, passed with the
same intent?

(5) Case-law before Khosla's case;5
(6) Khoslds case;*
(7) 30th Report;-" of the Law Commission;

(3) Our conclusion?'

3.132%. Article 286(1) before its amendment by the Consti-- Article 236

. . . 6.
tution tsixth Amendrnent) Act, was as fol!ows:-- ham": 195

{I } No law of :1 State shall impose, or authorise the impo-

sition of :5 tax on the sale or purchase of goods where such sale
or purchase takes place----

(:1) outside the State; or

(b) in the course of the import of the goods into, or export
of the goods out of the territory of India.

(Explanation not quoted).

3.14. When article 286 of the Constitution (before 1956) A_rti<:le 286-
used the expression "course of import" and the expression mdth of
"course of export", it did use language which could have a wide
meaning as well as a narrow meaning. The language could, if a
narrow meaning is to be given, be conﬁned to that sale which
itself constitutes the import. Or, in a wider sense, it could be
applied to all transactions which took place in the course of bring~
ing the goods from outside into India. A similar wide view was
possible as regards export. In fact, one of the members of the
Constituent Assembly', Shri Amiyo Kurnar Ghosh, wished to

I. Pars. 3.22. infra.
Para 3.22, infra.
Para 3.23 or see .r'nfr:.'.
P313 3.4] at Jet infra.
Pam 3.43 at su infra.
Pm': 3.66 at me infra
7. Para 3.13 A Srrpra.

H. See Vol. 9, Constitunt Assembly Debates 333, 334, 346.

._.. 'll _n _.. mg

Para 3.14
[Con.rd.J

First
Travarzcore
cam.

makc it clear that export meant the last transactions, and.
mat only at the point of these transactions, last or ﬁrst,
as the case may be, the sales will be exempted from sales tax.
and at no other point. Another mernber------Shr1 Jagat Narain
Das----also expressed a desire for clariﬁcation. In reply, Dr.
Ami:-edkar stated that while he knew that some friends did not
like the phraseology, he would add that the Drafting Committee
had spent a good deal of time in order to choose the exact phra-
seology. However, Dr. Arnhedkar added that the Drafting
Committee would further examine this phrascoiogy, so as to re-
1110'-.-'L' the criticism. The Drafting Committee, however, does not
appear to have made any charge after this debate'.

TEA VANCORE CA3 ES.

3.15. The ambiguity" in the language of article. 236 became
apparent when the first 1"rav.r.mcore case was decided. As 15
wc11--known._ four alternative constructions were advanced before
the Supreme Court in that case as to the meaning of "course of",
and the court was circmnspoct enough to observe that it was
conﬁning its decision to the particular situation in the case,
namely, what may he described roughly as {i] import --pur-
chase. and (ii) cxport--~sale. These, the court held, were
deﬁnitely exempt, whatever else may or may not fall within the
exemption.

3.16. The ﬁrst Travancore case dealt with sale by export.
The second Tmvoncore case also dealt with export sales. But
the whole field was covcred in the discussion.

In the first Tranvancore c.:m.-,3 the Supreme Court held as
folIows:--

"Whatever else may or may not fall within article 286(1)
(1)), sales and purchases wh_i§h__th_i:t11§eljIes occasion the
exp_<qr__t__or t,'r_i_e__igipr;rt of the goods. as the case may be,
out of or into the territory of India some within the
exemption, and that is enough to dispose of these

appea ."

'. The Report of the Drafting Committee dated 3rd November, 190,9
does not deal! with this point.

3. Para 3.14, Supra

3. State of Trarnncore-Cochin in'. Bombay Co. Lia'. {I952} S.C.R. 1112,
AIR 1952 SC 36ﬁ{1953) IMLJI 3 STC 434.

"We are clearly of the opinion that the sales here in ques-
tion, which occasioned the export in each case, fall
within the scope of the exemption under Article 286
(1) (b). Such sales must of necessity he put through
by transporting the goods by rail or ship or both out
of the territory of India, that is to say; by employing
the machinery of export. A sale by export thus in-
volves a series of . integrated activities commencing
from the agreement of sale with a foreign buyer
andmending with the delivery of the goods to a common
carrier for transport out of the country by land or sea.
Such a sale cannot be disassociated gfronrthe export
without vvhich it" cannot be lefifectuated, and the sale
and resultant export form parts of a single transaction.
Of these two integrated activities, which together con-
stitute an export sale, whichever first occ=_'.r:< can well
be regarded as taking place in the course of the other.
Assuming without deciding that the property in the
goods in the present eases passed to the foreign buyers
and the sales were thus completed within the state
before the goods commenced their journey as found
by series tax authorities, the sales must, nevertheless,
be regarded as _having taken piac"e"ili"tl:ie course of the
expoFt"'ai1dMeire, therefore, exempt under Article 286
f_1)(b). That clause, indeed, assumes that the sale
had taken place within the limits of the State and
exempts it if it took placefin the coiirse of the export
of the goods concerned."

3.17. In the second Travancore easel, these observations Second
were sought to be taken advantage of, and it was argued that ;F;sae"a"°°"
the '3St..PJ1IEl3?1S€ of.s90<.1s.Izis,d.e..131,_ti!s......s:sps:rtcr for the pur- '
pose of exporting them to implement orders already received
from a foreign buyer (or expected to be received subsequently
in the course of business) and the first sale by the importer to
fullil__o_rders pursuant to which the goods were imported (or
orders expected to he received after the import), would also
fall witlriin the scope of the exemption in Article 286(1) (b) of
the Constitution. The majority of the judges of the Supreme
Court, however, rejected this'argg_njc;1t_

1. State of Trot-armors-Cochin v. .S.V.C. For-Jory. A.[.R. 1953
333, 33-5. 331, (I954; SCR 4 STC 205.
'.F

Summing up the conclusions, and explaining the observations
in the first case, tl1e majority observed that:

"{1} Sales by export and purchase by import fall within
the exemption under article 286(1) (13).
f

{2} Purchase in the State by the exporter for the purpose
of export as well as sales in the State by the importer
after the goods have crossed the customs barriers' are
not within the expression, and

' (3) Sales in the State by the exporter or importer by trans-
fer of shipping documents While the goods are beyond
the customs barriers are within the exemption assum-
ing that the State's power of taxation extends to such
transactions.

(4) The word "course" and the expresion "in the. course
of" not only imply a period of time during which
movement is in progress, but postulate also the con-

nected relation.

(5) Therefore, the sale in the course of export out of the
country should be understood as meaning a sale taking
place not only during the activities directed to the
exportation of the goods out of the country, but also
as part of it connected with such activities. The time
factor alone was not determinative."

While this was the majority view, the minoritj,'---3.18.. Das J.
as he then was--would regard the last purchase by_,the exporter
and the first sale by the importer to be within the exemption.

;'?;'::.drEf°i':1'_ 3.13. The Supreme Court used the word 'occasion' in the

tended to Travancore cases. But this was not intended to give a precise

ﬁg: 33%;' deﬁnition. We may, in this oonnection, refer to what Lord Reid
tion. has !said recently' about the function of a court:
"It is not the function of a court to frame deﬁnitions: some
latitude should be left for future developmen ."
fl-'§,,"';";,§»'§,,, ' 3.19. In this manner, the majority judgment in the second

iprzpioﬁitiw gravancore ea.se'deﬁried the scope of article Ziiﬁ, and mI__.r_I;:£ed
ms. and 0E___11__I-.hC.p0l6I1ll51l width. ,Qf.,CD11SI£l-liiliﬂtl which had been left

Taxation
Enrruirr
Commission.

I: the expression is "barriern".
2. Saunders 1:. Anglia Building Society (1970) 3 All B.R. 961, 963

(H.I..)

open by the first case. The question of exemption in respect of
import and export did not itself present rnuch dilliculty, either to
the Government or to the business community during those years,
but. as is well known, considerable complications were caused
and uncertainties created by judicial pronouncements in respect
of exemption under another he-ad. namely, sales or purchase out-
side a State and sales or purchases in inter--State trade or comv
mercc. Because of these complications and uncertainties, the Tax-
ation Enquiry Commission' considered the question of inter--State
trade in detail. The Commission found the dichotomy in article
236, 'as__it then stood, unsatisfactoryf and 'suggested that a new
dichotomy shonl-.l he adopted, namely, sales in the course of inter-
State tratic or commerce and sales not in the course of intcr--
State and commerce. Taitation of intctf--State sales should be \

dealt with cxcluE~i'U'ely by the Centre, so as to secure uniforniity

and coordination. That Commission further recommended that
the Central legislation, which would give eﬁect to this recom-
mendation, should also deal with the deﬁnition of the local of
sales for the purpose of deﬁning in detail the relevant jurisdic-
tions of the Union and the States, and the States intcr--se. En»
tirely irres,*:cetix»'e of the power of the Central Government to
levy a tax, the Commission said. that. it was absolutely necessary \
that there should he abodyeotlaw which deﬁnes the circurnstan-- '
ccs in which a sale becomes taxable by a particular State and by"
no other. in support of the advantages of Parliamentary legis-
lation as contrasted with the rigidity resulting from constitu~
tional provisions, the Taxation Enquiry Commission made cer-
tain observations". These observations were as follows :--~-

"Wc realise. of course, that the legislation itself may have to
be modiﬁed from time to time in the light of new circumstances
not fully provided for. or of judicial interpretation of the original
provisions. Parliamentary legislation, as distinguished from con-
stitutional provisions. will have the obvious advantage that these
modiﬁcations can be made as required without undue delay or
ditiieulty. lt will not, of course, sutﬁce to deﬁne the jurisdiction
inter-sc of individual States. The other important aspects of Cent-
ral iegislationwonld be the deﬁnition in adequate detail of what
constitutes a sale or purchase in the course oi inter-State trade

1. Taxation Enquiry Co;nmis.:ion, Report 0953-54), Vol. 3, pages as
to 62, paragraphs ii to 21.

1. Taxation Enqiiry Cnrrniission, Report (I953-54;, V0]. 3. pagcg 53
59, paragraph 21).

Consti-
tutional
Amend-
meet.

or commerce. In this matter too, the emhodicnt of the princi-
ples in an enactment of Parliament, and not in the Constitution
itself, would have the advantage that the details of the law can,
without undue rigidity, M modiﬁed to suit new facts or unfore-
seen circumstances. As we have stated, the Constitution itself
would of course lay down the hroad division of tax power bet-
ween the Union and the States. The important fact would re-
main that all sales would fall under one or the other of these
categorie.s. The Union, which under the scheme would, of
course, derive no revenue from the taxation of intcr--State sales
or purchases, would be solely interested, in the legislation which
it promotes, in securing, from a practical angle, the maximum
possible co--ordination between ditferent States in regard to the
operation of the inter-State sales tax and the maximum possible
equity in the appointment oi the 1'f.'lC'-"Eit1'[ proceeds to the States
in which the goods have been pliysicaily deliveretl and those from
which the pl'1'_-.'SiC£ll dcspatch has taken place. In the actual pro-
visions of law, it will no doubt avoid the many pitfalls which have
been a feature of the present constitutional provisions as they
have been interpreted and implcrnentcd, and ct-'cn E.' it does not
fuily succeed in oing so as the outset, the relevant legislation,
as we have emphasised', can be modiﬁed at stlbsequcnt stages in
conlorniity with the adininistrativc and other requirements as
they arise from time to time."

3.20 Havitig, thus, recommended that sales in the course of
Enter--State trade or commerce should be regulated by Central
legislation, and that principles for determining when sales took
place in [he course of iriter--State trade or commerce should be
laid down by Parliarnentarja legislation, the Taxation Enquiry
Commission recommended an ar_r1endment_o£ the Constitution
for conferring theﬂnécessiaryii-legislative powers on Parliament.

Along with this recommendation, relating to intcr--State trade
or commerce, the Taxation Enquiry Commission recommended an
amendment of article 286 so that Parliament may, by law, also
formulate principles for determining when a sale or purchase of
goods takes place in the course of import or export'.

3.21. In pursuance of this recommendation of the Taxation
Enquiry Commission, the Constitution t Tenth Amendment]

|. Taxation Enquiry Commission. Reports, (I953-54), Vol. 3, page
56, paragraph 15, sub-paragraph --C.

...o

Bill' was introduced in Parliarnent, and under that Bill Parlia-
ment was empowered to formulate by law the principles for
determining when a sale or purchase of goods takes place in one
of the ways mentioned below :--

ti) outside :1 State;
(ii) in the course of the import goods into or export goods
out of the territory of India;

( iii] in the course of inter-State trade or commerce.

This Bill became the Constitution (Sixth Amendment] Act,
which revised article 236.

It may be stated that this power is couched in phraseology
which does not compel Parliament to adopt the judicial cons-
truction placed on the constitutional power. The power is wide
enough to empower Parliament to amplify or modify that con-
struction. or to adopt a new one".

3.22. The Law Commission was consulted as to the principles E?'

to be formulated under amended article 286, and the commission, the Law
with the intention of codifying what had been laid down in the
ﬁrs: Travancore case and by the majority in the second Trawm- 23,? 3}"
core case, suggested certain "propositions". On the basis of these 1935'
propositEon3 section 5, Central Sales Tax Act, 1956 was

enacted, dealing with a sale in the course of import or export.

Sections 3 and 4 of the Act also follow the Commission's Case law
rccomlnendations. but we are priniarily concerned with section 5.
It may be noted that this was the View of the majority of the
Law Commission.

3.23. Legislative determination (in section 5 of the Central
Sales Tax Act)4 as to when a sale is regarded as in "the course
of import", did not prevent the accumulation of case law. The
words "occasions the import" used in the section came up for
judicial construction in several decisions, including Khos!a's case.
Most of the relevant decisions have been reviewed in the -Report
of the Law Commission" dealing with section 5. That Report
was the aftermath of the judgment of the Supreme Court in
KhosL:1's case.

T. The Constitution Tenth Amendment Bill actually passed as the
Sixth Amendment.
'. See para. 3.69, iriﬁar.
'- 2m! Report of Law Commission.
See para. 3 . 26, in no.
4. Para. 3.22. supra-
5. 30-th Report of the Law Co"i1m'ssion.

law
Commis-
sion's
earlier
Report
{End Re-
port).

3.24. An important question concerning section 5 was decided
in the judgment of the Supreme Court, in Khasiais case'.
At this stage, it will be suﬂicient to mention that in Khoshfs
case, it was held that the sale of the materials in question by
Khosla to the Director General of Supplies and Disposals was
so integrally connected with the import of those materials (at
the earlier stage) from the Belgian manufacturers by Klxoslas,
that the sale to the Director General of Supplies & Disposals
was to be regarded as having occasioned import, within the
meaning of section 5.

The sale by K!2osias--which may be described as an inter-
nal salemwas not independent of the import, but had occasion-
ed import, and was therefore held to be exempt under section 5
of the Central Sales Tax Act. Because of this Judgement, there
is, at present, no right in the States to impose a tax on a sale

' between an Indian buyer and an Indian seller, if the transaction

Falls within the principle of Kho.rIn's ease. The question to be
considered in this Chapter is, whether this position unduly res-
tricts the taking power of the States.

3.25. The Central Sales Tax Act was itself enacted after
consulting the Law Commission. After KhosIa'.s' case, the Law
Commission was, in 1967, again requested to consider the ques-
tion whethcr section 5 of the Central Sales Tax Act should be
amended. The Commission recommended no change in the
section. The question has now to he considered again, in View
of the present reference.

3.26. In the 2nd Report of the Law Commission, dealing with
Parliamentary legislation relating to sales tax, the word
'occasion' was used by the majority of the Commission while
suggesting the propositions to which legal effect should be given.
The Commission," (in its rnaiority Report], after discussing the
two Travancore--C'ochin cases, came to the conclusion that the
test of "occasioning" the movement lused in these cases) parti-
cularly in the light of the majority judgment in the second
Truvaucore case should be adopted. But, the Commission made
it very clear that it was not giving a draft.

I. K. G. Kﬁarﬁr dt Ca. V Deputy Corzimrltsioner (I966) 3 S.C.R. 352;
I'\.l'.R.1956 S. C. 1216.
2. 2114 Report of the Law Corn-nission on Parliamentary legislation,
clatirzg to sales tax, page 3, para 10.

3.27. Section 5 of the Central Sales Tau: Act, which was Eamon

enacted in implementation of the majority View in the 211:! Re- 5 of
port of the Law Commission, was also intended to implement 'tiriﬁlglfﬁ
the law enunciated by the majority of the Court in the Tr.:wan-- Ta.x,if.ct
core-Cocitin cases. As observed by Shah J', in :1 later ease", Jfifgefgd
the Act gave Eegislatiu: recognition to the View of the Supreme theiaw

Court in the two Travanwre-Cochin cases. This aspect of themuncimd

in the
matter was also adverted to L1 the 30th Report of the Law I_'rm*o_nr:on-
Commission. E'a';':""

3428'. The word 'occasion' does appear to have a wide Wide
meaning as well as a narrow one, as already pointed out'~'- 0'ff"i:g;';§
non'.

It would appear :l1a.t in Kira-.sta'.s' cgtse the word. ﬂoccasion'

(used in section 5 of the Central Soles Tax. Act} reeeeived at
wide interpretation whereuncicr the ﬁrs! sale after import be-
coiI1eIs"e'Jteo1pt, iii certain conditions are satisﬁed. We have to
exalnine if this wide view requires modiﬁcation.

No doubt, the two Trait-gmeure easestiid not relate to the
border-line sittration prescntedwin Khush': case.' The VIEW
taken by S. R. Bets 1. in his minority judgment in the second
T:-avancore ease, represented on; extre , that is to say. accor-
ding to that view, the first sale after import and the East sale>
before export were to be €.'A:E'f'i1p£ in every case. The argument
that the ﬂrst sale after import and the last purchase for export
were -exempt in every case was rejected by the majority in the
second I'rat'anc0:'e-Cecirin case,

3.20. it is also true that in between the two extremes, many Intcnﬁon
situations couid arise, and in K.i:n::s!:?'.§ case a broad view of the "ff "."'i°'
exemption was taken in respect of a sale which was treated as 111- ii); m
volving import. 9?"-"Dd

TI:2'Lr'|Zt'lI'.'D?'€

case.
However, it must be remembered that in Khostss case, the

Courtjros primarily concerned with the interpretation of section
5 and, as such, not necessarily bound by the earlier decisions in
the two Travcmcore cases which dealt with the interpretation of
article 236(l)(bJ. It is, therefore, permissible to infer that, in
interpreting the word 'occasion' used in section 5, the Court may

L See 30th Report of the Law Commission, page 6!). para. )3}.
'. Bore Corm NtIg'1'rt' Plantation Co. -v. Safes Tax Oﬁicer, A.1.R- 1968
S.C. 1752, I155.
'. Para. 3.14. supra.
4, Se': disussaion in 3051,: Report, page 32, para. 65(5).

Distinc-
tion
between
domestic
sales
and
export
sales.

have been justified i.n accepting the broader meaning of the word.
We will refer to this aspect of the matter later.' when we examine
the judgrnent in Kho5ln'.r case in greater detail.

3.30. A distinction between domestic sales anti export sales
was made in the second Travancore case, where the Supreme
Court, in the majority jtidgmcnt, s'.tit!:'*

"As pointed out by a recent writer, from the legal point
of View it is essential to distinguish the contract of
sale which has as its object the exportation of goods
from this country from other contracts of sale relat-
ing to the same goods, but not being the direct and
immediate cause for the shipment of the goods......
When a merchant shipper in the United Kingdom
buys for the purpose of export goods from a manu-
facturer in the same country the contract of sale
is a home transaction; but when he I'€.'I€ilS these
goods to a buyer abroad that contract of sale has
to be classiﬁed as an export transaction: Schmittofi--
Export Trade, 2nd Ed. page 3."

"This passage shows that, in View of the distinct charac-
ter and quality of the two transactions, it is not
correct to speak of purchase for export as a pur-
chase in the course of import. The same reason-
ing applies to the ﬁrst sale after import which is a
distinct local transaction effected after the impor-
tation of the goods into the country has been com-
pleted, and having no integral relation with it."

3.31. Perhaps, the words "distinct local transaction" used in
the second Travancore--Cochi.'t cases have been constructed as
suggesting an antithetical situation, where the local transaction
and the international transaction are not distinct from each other,
but integral parts of the same transaction. But, as already stated.'
according to the majority judgment, the intention was to exempt
only the import-purchase and cxport--sale.

1. Para 3.47, frrfra.

2. State of Travancors Cochin V S. V. C'. Factory. A.-I. R. 1953
s. C. 333, 336.

Para 3.30, ssrpra.

Para 3.29, supra.

-D-Ln
u u

._..,,_&::,,_

_.....p. --on-.-

3.32. At this stage, we may refer to several cases decided by some pfe.
the Supreme Court before Khoshfs case. One of them which
deals with inter-State sales, in Tam Iron & Steel Co. v. S. R. M5,.
Sarkar} on which the decision of the Supreme Court in EEG.

}(Jm.n't.:'s case is primarily founded.

In that case, the company had its registered olﬁce in Bombay.
its Head Sales office in Calcutta in the State of West Bengal and
its factories in Jamshedpur in the State of Bihar. The company
was registered as a "dealer" under the Bihar Sales Tax Act, and
was also registered as a "dealer" in the State of West Bengal
under the Central Sales Tax Act, 1956. For period of assess-
ment July 1, 195'? to March 3], 1958 the company submitted its
return of taxable sales to the Commercial Tax Oiﬁcer, Lyons
Range, Calcutta, disclosing a gross taxable turnover of Rs. 9,
571.71 up. in respect of sales liable to Central Sales Tax in the
State of West Bengal. By his memorandum dated August 12,
3959, the Commercial Tax Officer directed the company to sub-
mit 21 statement of sales from Jamshedpur for the period under
assessment, "documents relating to which were transferred in
West Bengal or of any other sales that may have taken place in .
West Bengal under section 3(b) of the Central Sales Tax Act,
1956." The company, by its letter dated September 30, 1969,
informed the Tax Officer that the requisition for production of
statement of sales made from Jamshedpur in the course of inter-
State trade or commerce was without jurisdiction. The company
contended that "all the sales from Jamshedpur were of the type
mentioned in section 3(a) of the Central Sales Tax Act and at the-
same time, some of them also fell within the category mentioned
in section 3(b) of the Ac ," that even if the sales were of the-
type mentioned in section 3(b] of the Act, the apporpriate State
of the place where the sales take place or are effected alone had
jurisdiction to assess such sales to Central Sales Tax, and that
in respect of inter-State sales from Jamshedpur, the suits of the
sale was always the State of Bihar as the goods were in Bihar
either at the time of the contract of sale or at the time of appro-
priation to the contract." By his order dated October 21, 1959,
the Commercial Tax Oﬂicer made a "best judrnent assessment"
on a gross turnover of Rs. 90,CI0,09,5ﬁ1.71 rip. of inter-State
sales and called upon the company to pay Rs. 4l,14,7l8.l2 np.
as tax under the Central Sales Tax Act.

1. Tam Iron & Steel Ca. V. S. R. Sarkar, (1961) 1 S.C.R. 379;
A.I.H.. 1951 SC. 65, 71, 72; ll S.T.C. 655.
20 M of Lawj'74--7,

3.33. The company had, on December 15, 1958, ﬁled with
the Sales Tax Oﬂicer, Jarnshcdpur a. return of inter-State Sales
made from Jamshedpur for the period July 1, 195? to- March
31, 1958 and a return for the same period for the sales made from
Dhanbad with the Sales Tax Oﬂioer, Dhanbad. In these returns,
the company included all sales in which movement of the goods
had taken place from the State of Bihar to destinations outside
that state. The total turnover in respect of inter-State sales as
shown in the return exceeded Rs. 26 crores and the company
paid as required by the Bihar Sales Tax Act Rs. 71 lakhs odd as
advance tax under the Central Sales Tax Act, 1956.

By this petition, the company impugned the validity of the
order of the Commercial Tax Ofﬁoer and claimed a writ of certio--
rari quashing and setting aside the assessment order dated
October 21, 1959, and a writ of mandamus directing the Corn-
rnercial Tax Ofﬁcer to refrain from taking steps in enforcement
or implementation of the order.

3.34. Mr. Justice Shah delivered the majority judgment. He
first discussed the eﬁect of the various amendments made by the
Constitution [SixtheArnendment} Act of 1956 (investing Parlia-
ment with exclusive authority to enact laws imposing tax on
sales or purchases taking place in the course of inter--State trade).

The actual discussion related to inter--State sales and inter
aiia to the question how far section 3(a) or section 3(1)] of the
Central Sales Tax Act applied to the sales in question.

According to the majority, the decision in the two cases had
no bearing on the interpretation of section 3, c1auses(a) and (ti).
In those cases, the expression "in the course of import and
export" and "in the course of inter--State trade or commerce"
used in article 286 fell to be determined. The Constitution did not
deﬁne those expressions, and Parliament had, in the Central Sales
Tax Act, sought to deﬁne (by section 3) when a sale or purchase

is said to take place in the course of inter-State trade or com-- '

merce and to deﬁne (by section 5) when a sale or purchase is
said to take place in the course of import or export, and further
to deﬁne (by section 4) when a sale or purchase of goods is
said to take place outside a State. In delivering the majority
judgment, Mr. Justice Shah observed' :--

"In interpreting these deﬁnition clauses, it would be
inappropriate to requisition in aid the observations

1. Taralron etc. 1-. 3. R..S'arkar, (1951) 1 s.c.n. 379, 391; A.I.R. 1951
s.C. ass, 71, 72; 11 s.r.c. 555;

made in ascertaining the true nature and incidents
without the assistance of any deﬁnition clause of
"sale outside the State" and "sale the course of
import or export" and "sale in the course of inter-
State trade or commerce" used in article 286.

"In our view, therefore, within clause (13) of section 3
are included sales in which property in the goods
passes during the movement of the goods front one
State to another by transfer of documents of title
thereto; clause (a) of section 3 covers sales, other
than those included in clause (1)), in which the
movement of goods from one State to another is
the result of a covenant or incident of the contract of

sale, and property in the goods passes in either
State."."

3.35. In his minority judgment, Mr. Justice Sarkar (as he
then was) expressed the view, that a sale cannot fall under both
clause (a) and clause (b) of section 3. For, then, it would be
liable to be taxed twice. Clauses (a) and (I3) were mutually
exclusive. Interpreting these two clauses, he said that clause (:1)
contemplates a sale where the contract of sale occasions the
movement of the goods sold, and clause (13), a sale where trans-
fer of property in the goods sold is effected by a trans-
fer of documents of title to them. Of course, in the ﬁrst case, the
movement of the goods must be from one State to another,

and in the second, the documents of title must be transferred
during such movement.

3.36. Tl1l§.iﬂ__eh(_:F;i_§i_{)_];* ;g,jse,s_htj1e_,qnestion..uzhether, if the words 955332303
"in the course of", which occur in article 286(1), had been left "far ex.
undeﬁned, the kind of conclusion arrived at in Khosla'.s' case I-T'!-"Tf|;""d
could have been avoided. 'The matter, though now academic, C3": of
is of interest. A distinctio_n_ hetween__a sale "for export" and a '3"P°""-
sale "in the course of cxport1""was well-established by 1956,
the former being regarded as outside the exemption {in article
286), and the latter being regarded as within the exemption.

3.37. In the Ben Ge-rm2 case, on the facts of the case, Ben

the sale was regarded as not exempt. The purchasers were local

I. See 30th report, page 42, paragraph 93 {3)(a.), and the Ben Germ
case. Para 3.3-T, infra.

. Ben Germ ."v'E!trErEPla::It1tEoi: Co. V. .S'n(e_r Tux Oﬂieer, AIR. 1964
S.C. I752, (I964) 7 SCR. 706.

The ratio
in Ben
Germ
case.

agents of foreign buyers, and the purchase was not "in the course
of export". But the judgment of the majority in that case
would seem to suggest that if the integrated activity was such
that the export was a necessary condition of the contract, and
if there was no likelihood of diversion, then, the sale woud be
in the course of export. The minority-' view in that case went
further. It was prepared to extend that principle to a contract
in which export could be faker: to the intended, and would not
rte:-es.mrr'ly conﬁne it to cases where there was an express
pi-m'is':'o.=z for the export of the goods purchased in India.

3.38. Mr. Justice Shah, who delivered the majority' judg»
mcnt, laid down the principles applicable in such cases as
follows1:--

(1) Before the Constitution Amendrnent of 1956 there
was no legislative guidance, but such cases were
governed by the interpretation put on the consti-
tutional provisions in the two Travancore cases'-'-3.

(2) After the amendment of 1956. guidance was pro-
vided in section 5 of the Central Sales Tax Act,
which was "legislative recognition" of what was
said by the Supreme Court in the two T.-avancore
cases.

(3) There is a distinction between. a sale "for export"
and a sale "in the course of export"-

(a) In general, where the sale is effected by the seller
and he is not connected with the cxportwhich
actually takes place, it is a sale "for export".
As an example, where a foreign purchaser or his
agent purchases goods within India and they or
one of them export or exports the goods out of
India, the sale would he sale "for export",
but such a transaction is not "in the course of
export even though the Indian seller had the
knowledge of intended export.

1. Ben Germ N1'!gr'rr'PlanmIi'on Ca. V. Sales Tax Ojﬁcer, (1964) TSCR
706, 71 I, 712. AIR 1964 SC 1752..
2. (1952) S.C.R. 1112 (First Trot-encore case).
3-. (I954) S.C.R. 53 (Second Tran-arrcare case).

(b) Where the export is the result of a sale and the
expert is inextricably linked up with the sale, so
that the bond cannot be dissociated without a
breach of contract, the sale is in the course of
export.

3.39. In the majority judgment,' it was held that the know-- |}f(1j10""-E
ledge that the goods purchased are intended to be exported, ;.,.,§,'°,;'
did not make the sale and export parts of the 'same transaction'. 009'? 05:1
There was nosraiaitory c_;-hiigation upon the purchaser to export ;',',°',,";;g_
the chests of tca___purchased by him with the export rights. The F3'P*"'T-
export quota ii-zereh: enabled the purchaser to obtain an export
licence, which the purchaser may or may not obtain. There
was nothing in law or in the contract between the parties, or
even in the nature of the transaction, which prohibited diversion
of the goods for internal consumption. The sellers had no
concern with the actual expert of the goods. Once the goods
were sold, they E' the sellers) had no control over the goods.

There was therefore, no direct connection between thre sale and
export of the goods, which would make them parts of an
integrated transaction of "sale in the course of export."

3.40. Thus, several tests for determining when a sale is in I_£"i°C'l;35'5
the course of export, were discussed in the Ben Germ case? were
but none was regarded as applicable on the facts. The tests
discussed were:---- in Ben

Germ

(ii obligation; mm'

(ii) nomdivertibilily;
{iii} direct connection;

{iv} part of the same transaction.

We do not pause to discuss various other judicial decisions
of the Supreme Court and the High Courts before and after
Khostifs case, as these have been exhaustively reviewed in the
earlier Report?

a
I

1. Ben Germ Nr'.fgt'rt' Pfturtariort Ca. V. S.T.0. (I96-1) 3" S.C.R. 706, 713
AIR_l96-4 SC 1752.
3. Para 3.33 to 3.39, Supra.
3. 30th Report of the Law Cure ission.

KIro.rta'.r
case-facts
of

3.41. We shall now concentrate on Kfz0s!a'.r case} The
facts of that case were these:---

K. G. Khosia & C0,, the asessee, entered into a contract
with the Director General of Supplies & Disposals, New Delhi
for the supply of "axlc--box bodies". The contract provided for
the manufacture of boxes in Belgium and the inspection of the
manufactured articles at the work of the manufacturers by a
representative of D.G:I.S.D., London who was to issue an ins-
pcction certiﬁcate. A second inspection by the Deputy Direc-
tor of Inspection, Ministry of W.l-l. & S., Madras was provided
in the contract. He was to issue inspection notes on receipt
of a copy of the inspection certiﬁcate from London after veri-
ﬁcation and visual inspection by him. The contract also pro-
vided that goods were to be manufactured according to speciﬁ-
cations by Mfs. La Brugeoises Et. Nivelles, Belgium. Khosla
& Co. were entitled to be paid 90 per cent of the price after
inspection and delivery of the stores to the "consignee", and
the balance of 10 per cent was payable on ﬁnal acceptance by
the "consignee". It appears that "consignee" denoted the buyer
of his nominee. In the case of deliveries on f.o.r. basis, the
assessce was entitled to 90 per cent payment after inspection
on proof of despatch and balance 10 per cent after receipt of
the goods by the "consignee" in good condition. The date of
delivery, according to the contract, was "in 8 months ex--your
principals works from the date of receipt of order and the
approved working drawings, i.e., delivery in India by 31st July,
195?, or earlier." The assessee was responsible for the execu-
tion of the contract in accordance with terms and conditions
as speciﬁed in the tender and the Schedule attached thereto.
The "purchaser", notwithstanding the approval by the inspec-
tor, could reject the stores on arrival if they were found to be
not in accordance with the terms and conditions of the contract.
Further, K. G. Khosla & Co., was responsible for the safe
arrival of the goods at the destination. The D.G.I.S.D., London
was to issue pre-inspection delay reports regularly to the
D.G.S. & D., New Delhi. He was also to send copies of the
inspection certiﬁcates to the Director of Inspection, Ministry of
W.H. 8.: S., Bombay. Under the Bills of lading, the goods

I K.C. klrcsla & Co. Pvt. Ltd. v. Deputy Commzirsioner ofCommere1'a-I
T:.rxe.r, Madras, A.I.R. 1966 S.C. 1216, I7 S.'l'.C 473, (1966) 3 S.C.R. _352.

-U

were consigned to be cleared by K. G. Khosla & Co. to Mad-
ras Harbour. The}; were cleared by K. G. Khos1a's clearing
agents, and despatched for delivery to the buyers thereafter.

3.42. The Sales Tax Oﬁ-leer, Madras found that the trans-
action was an intra--State sale and not in the course of import
because. the sale was completed only when goods were deliver-
ed in Madras State and, therefore, it did not occasion the im-
p01't. He also relied on the terms of the contract which gave
to the purchaser the right to reject the goods if they were not
in accordance with the terms and conditions of the contract.
On appeal, the Appellate Tribunal held that the property in the
goods had not passed to the buyer while the goods were with
the Belgiam manufacturers and that the sale had not occasion-
ed the import.

3.43. The matter was taken to the Madras High Court in
revision. The High Court rejected the contention that the goods
must be deemed to have passed to the buyers when the goods
were approved in the factory of the manufacturers. It also
rejected the contention that the sale by the assesses to the Gov-
ernment occasioned import. In the High Court's ViCW it was
necessary that the sale should have preceded the import, and
as the sale had not taken place in Belgium, there was no ques-
tion of the sale occasioning import of the goods.

3.44. Against this judgment, K. G. Khosla 8: Co. appealed
to the Supreme Court. The Supreme Court held that the trans-
action was not subject to payment of sales tax, as it fell within
the prohibition of article 286(l)(b) read with section 5 of
the Central Sales Tax Act In interpreting the words "occasions
the movement of goods" in section 5(2). the Supreme Court
expressed the view that the words used in section 3(a) and
5(2) of the Central Sales Tax Act should have the same mean-
ing in the two sections, and therefore relied on the interpreta-
tion of section 3(a) by Mr. Iustice,Shah1 in the Tom Iron &
Steel Co. case.

After referring to various judgments, the Supreme Court
held, that the High Court was in error in holding that "before
a sale could be said to have occasioned the import, it is neces-
sary that the sale should "have precededthe import"?

K 1. -'-Faro Iron and Steel Ci.-.ALrd. v. 5.1%. Sarkar, para. 3.34 to 3.3'! supra.
'. Para 3.43, supra.

3.45.
the axle-box bodies from Belgium into India (Madras)

the movement of
'WES

The Supreme Court also held that

the result of the covenant in the contract of sale and was an

incident of such contract.

The Supreme Court lastly observed:

"It seems to us that it is quite clear from the contract that

Khaslafs C350

3.46.

it was incidental to the contract that the axle--box
bodies would be manufactured in Belgium, ins-
pected there and imported into India for the con-
signee. Movement of goods from Belgium to India
was in pursuance of the conditions of the contract
between the assessee and the Director--General of
Supplies. There was no possibility of these goods
being diverted by the assessee for any other purpose.
Consequently we hold that the sales took place in
the course of import of goods within section 5(2)
of the Act, and are, therefore, exempt from taxa-
tion."

The propositions laid down in K. G. Kho.5'Irt'.s' case may

5"m"""'i5°'3- be thus summarised :---~

(I)

(2)

(3)

Article 286(l)(b) of the Constitution read with sec-
tion 5, Central Sales Tax Act, exempts transactions
from sales tax where the pale __o_ceas_ions the movement
of goodstroni or to a foreign country into or from the
territories of India, the movement itself being the result
of a covenant or an incident of the contract of sale.

It is an erroneous View of the law to think that before
a sale could occasion the import, the sale should have
preceded it.

The contract itself showed that it was an incident of
the contract that axle-box bodies would be (a) manu-
factured in Belgium, (b) inspected there, and (C) int-
ported for the consignee {the buyer).

Movement of goods from Belgium to India was in
pursuance of the conditions of the contract.

There was no possibility of the goods being div.-'crted by
K. G. Khosla for any other purpose or to any other
contract.

(6) As in inter--State sales where property in the goods
could pass in either State, the property could pass in
either country.

3.47. Kizosl'a's case was decided exclusivelyl on section 5 of Case decided
the Central Sales Tax Act, and irrespecﬂtiie of article 286{1).§g°;::'t;';:1Y5_
Whether, after the passing of the legislation by Parliament for-
mulating the principles referred to in article 286--t'.e. the Central
Sales Tax Act, 1956, Sections 3, 4 and 5--it is still necessary, in
testing the \"3.lldll_+' of taxattion by a State of the particular sale or
purchase, to have recourse to article 286 of the Constitution, or
whether the Court is to apply only the provisions of the Central
Sales Tax Act relevant to the exemption claimed, is a question
which is of considerable importance.

It was presumably assumed in Khotrlds case that since Parlia-
ment had formulated principles -in section 5, the test was to be
sought only in that section Apparently because of this implicit
assumption, when K!:osla'.t ('(158 was argued, the earlier decisions,
particularly the decisions in the two Travancore cases, were not
referred to, and the judgment of the court seems to have been
based entirely on the language of section 5, without the aid of the
discussion and pronouncements in the two Travartcore cases.

Interpreting then, section 5, and taking into account only the
language of section 5, the Supreme Court, in Khoslais ease, selec-
ted, out of the two views possible as to a sale which is to be
exempt as occasioning import, the__,_wider_ view, which had the
eﬁect of holding that the chain of sales exempt is not necessarily
conﬁned to the import or to the sale ending with the entry of the
goods into India at the customs barrier, but could, at least in the
situation which presented itself in Khosln's case, extend beyond
that point.

3.4?A. In regard -to the decision in Khosl'a'.r case, it is relevant
to repeat that during the course of the arguments, the two Tm- -
vctneore decisions, which would have supported the case of the
State, do not appear to have been cited on behalf of the State,
nor were they cited by the assessee. And, for the assessee, rc-
lianee was placed mainly on the Tara Iron 8: Steel case. Since
the parties in the case concentrated their attention on section 5,
Khosla's case appears to have been decided independently of
article 286, and on the basis only of section 5 of the Act. Because

--~--____.{.

1. Para 3.29, supra.

.---

30th Report

100

of the several distinct features of the transactions with which the
Court was dealing in Khc-s!a'.s' case, the purchase by Khosla from
the Belgium ﬁnn and the sale by him to the Railways constituted,
were regarded as inseparable. The argument that there were
two different and distinct transactions--the ﬁrst of which was
exempt from tax, but the second was not (on the principle laid
down by the Supreme Court in the two Travtmcore cases), does
not appear to have been advanced.

3.48. The judgment in Khos!a's case led to a reference to the
Law Commission by the Government of India in 1967. Attention
to this judgment had been drawn by the State Government of West
Bengal; since the judgment circumscribed the power of the State
Government to impose sales tax on certain types of transactions.
The exact question referred to the Law Commission in 1967 W351
the following :--

"Since the provisions of section 5 of the Central Sales Tax
Act incorporate verbatim the principles recommended
by the Law Commission on the basis of the earlier
Supreme Court judgments in Travancore-Cochin cases,
the Commission is requested to examine the matter
further and consider whether they would recommend
any amendments of the Act, so as to exclude transac-
tions of the type hereinbefore discussed iromthe pur-
view of section 5 of the Central Sales Tax Act"?

3.49. The Law Commission" in the reference took into
account the history of the Act of 1956, judicial decisions prior as
well as subsequent to that Act relating to the boundaries of the
ban under article 286(l)(b) of the Constitution (imposition of
sales tax on import sales), and the judgment under consideration
(K.hosla's case}. Thchmajority of the Commission took the view
that the propositions which emerged from the judgment in

1. 3fJtl1 Report of the Law Commission (Section 5 of the Central
Sales Tax Act etc.) {February-, 1967), page 3, para 5.

9. Second Report of the Law CommissiDn--ParIiarnenlry legislation
relating 1:) sales Tax (1956).

5. 39th Report of the Law Commission (Section 5 of the Central Sales
Tait Act--Taxation by the States on sales in the course of import).
(February 1957), page 65, paragraph 130. '

101

Khoslais case were consistent with the two Travaﬂcﬂre C3565 On
which the earlier Report of the Law Commission was based, and
did not go beyond the intendment of these decisions. The mino-
rity {Shri K. G- Datar and Shri R. P. Mookerjee) took a contrary
VIEW'.

The Commission, of course, took care to mention that it was
permissible to bring about a suitable modiﬁcation of the position
in such manner as may be legally appropriate, but the Commission
did not profess to deal with matters of policy} For the sake of
convenience, however, the Commission summarised several sug-
gestions" received by it, and brought them to the notice of the
Government.

After this Report,5 there h£p_r_e been no notable legislative de-
velopments, relevant to the question under consideration.

3.50. We shall now refer to a few decisions subsequent to
Khoslds case. In the State of Bihar 1:. Tara Engineering C0,,'
the Supreme Court stated that the decided cases established that
sales will be considered as sales in the course of export or import
or sales in the course of inter--State trade and commerce under
the Following circumstances:

(1) When goods which are
stream are sold;

in the export or import

(2) When the contracts of sale or the law under which
goods are sold require those goods to be exported
or imported to a foreign country or from a foreign
country as the case may be, or the goods are requi-
red to be transported to a State other than the State

in which the delivery of goods takes place, and

(3) Where, as a necessary incident of the contract of
sale, goods sold are required to be exported or
imported or transported out of the State in which

the delivery of goods take place.

1. 39th Report of the Law Commission (Section 5 of the Central Sac
Tax Act) Taxation by the states Dn Sales in the course of (import)
(February. 1961), page 65. paragraph 135.

See para 3.11, .-mpra.
30th Report, page 65. page l3l.

. Stare ofﬂihar V. Tara Errgineerirxg ac Locomotive (P.) Ltd. (1971) 2'.-'

S.T.C. 12?, I49 (S.C.); A.I.R. 1971 S.C. 477.

,5 'as _re

Decisions
after
Khosh-1'.r
ease-import
sales.

Application
of Kho.ri'a'.s
case to
export
sales.

Application
of the
principle to
Inter-sales-
a Kerala
case.

102

3.51. in another recent case relating to export saIes,--Tntn
Engineering Co. V. Asst. Commissioner,' the Supreme Court,
after referring to the earlier decisions, observed~--

"It has been laid down that the sale in the course of export
predicated a connection between the sale and export, the two
activities being so integrated that the connection between the two
cannot be voluntarily interrupted without a breach of the con-
tract or the compulsion arising from the nature of the transac-
tion. To occasion export, there must exist such a bond
between the contract of sale and the actual exportation that each
link is inextricably connected with the one immediately preced-
ing it. The principle? thus admits of no doubt, according to the
decisions of this court, that the sales to be exigible to tax under
the Act (Central Sales Tax Act, 1956) must be shown to have
occasioned the movement of the goods or articles from one State
to another. The movement must be the result of a covenant or
incident of the contract of sale."

It will be noticed that according to the judgments referred
to above, the essential test is of an integral connection between
the sale sought to be taxed andthe import.

3.52. This test of integrated connection has been applied to
inter-State sales also. "To occasion export, there must exist such
a bond between the contract of sale and the actual exportation,
that each link is inextricably connected with the one immediately
preceding it." So observing, the Kerala High Court3 treated a
sale in the following circumstances, as an inter-State sale. The
facts were as follows:-----

Thc assessee, a dealer in coir--yam in the (erstwhile) Tra-
vancore--Cochin State, eﬁected sales of coir--yarn to certain ﬁrms
in port Cochin (then in the Madras State). The assessee used
to go to the ﬁrm at port Cochin and enter into written agreements
with them as to speciﬁed varieties of coir yarn, with reference
to samples shown to and retained by the purchasing ﬁrms. The
price per candy of coir would be fixed. The assesee then used

1. Tam Engineering & Locomotive Co. Ltd. V. Assistant Cornmissiouer
ofC'omirzerr.=in!Tt1res, (l9'.-'0) I S.C.J. 622; 26 S.T.C, 354 AIR. 1970
5.0 128! (1970) 3 S.C.R. S62.

5. This Sentence relates to Inter-State Sales.
-". MK. Sub;-nrrzaniam v. The State of Keraia,

{Karate}.

[I9'.?]) 28 S.T.C. 733, 735

103

to purchase coir from various manufacturers, transport the goods
at his expense to the purchasing ﬁrm at port Cochin, and, when
the goods arrived at port Cochin, the assessee, or his agent used
to deliver the goo-ds to the purchasers and receive an advance
payment. After a week or two, the coir would be tried, inspec»
red and re--handled, and the rate would be fixed. After ﬁnal
weighment and bailing, the invoice would _be drawn and the
balance due would be received. On these facts, it was held that
the inter-State movement of the goods from the (erstwhile)
Travancore Cochin State to the (erstwhile) Madras State was
the direct result of a covenant or incident of the contract of sale.
Thus, the principles which had been applied in relation to export
sales' and import sales'-' was applied to inter--State sales also.

3.52A. Recently, an important judgment relating to i1nport£§;rIﬂI"-I
sa1es--B:'nanr"s ca.-a=--has been pronounced by the Supreme ' '
Court. We shall refer to this later?'

3.53. It was conceded in a recent Patna case* that the ing1'e- Patna cases
dients for holding that a sale or purchase of goods is i.u the ﬁlgﬁigfattg
course of import or in the course of export or in the course of sales.
inter-State trade or commerce, are similar.

3.54. There are, no doubt, cases on the border-line. A I?" g3';1:::F'
Madras case is in point?' In that case, the National Agricultural '
Marketing Federation, which had the exclusive right to export
dried chillies to Ceylon, entered into contracts with various co-
operative establishments in Colombo for supplying chillies.
Thereafter, the Federation allotted quotas to various dealers in
the State of Tamil Nadu for the supply of chillies, for which
purpose it entered into separate contracts with those dealers.

The contract entered into by the Federation with one of the
dealers----the assesser*rprovided (besides other matters) that the
assessee should despatch the goods to the importer in Colombo,
for and on behalf of the Federation, on or before the stipulated
date, from the port of Tuticorin. It was held that. the sale
between the Federation and the assessee was not an export sale.

1. Ber: Germ case. A.I.R. 1964 S.C. I752.

3. Compare K'Fzos!a'.s' ca.-re, A.I.R. 1956 Sc. 1246 (1966) 3 S.C.R. 352.

3. Para 3.55, infra.

4. Commissioner of Commercial Taxes v. Bfiag Sing}: Mlfikha Sing}:
(I971) 23.S.'I'.C. 649, 651.

5. Eretrnmutim Nader v. Join: Commercial Tax Oﬁicer, (1971) 28
S.T.C. 549. 651 (Madras).

Bfnanf
Brothers'
case.

104

The stipulation in the contract (between the assess-ee and the
Federation) requiring the assessee to put the goods on board
the ship, was only to fulﬁl the terms of the export sale between
the Federation and the foreign importer, and did not mean that
transaction was inextricably connected with the export
sale. The export sale was the result of the contract between
the importer in Ceylon and the Federation in India. Instead
of the Federation taking delivery from the assessee, the assessee,
on behalf of the Federation, put the goods on board the ship,
but the sale between the Federation and the assessee did not
occasion export.

3.55. Import sales came up before the Supreme Court in a
recent case,--Binant' Brothers v. Union of India} The question
related to sales tax in respect of stores supplied to the Director
General of Supplies and Disposals which had been speciﬁcally
imported against licences issued by the Chief Controller of Im-
ports and Exports. on the basis of the import recommendation
certiﬁcate issued by the Director General of Supplies and Dispo-
sals {or other authority like the State Trading Corporation}.
The transaction was held not to be exempt as a. sale in the
course of import.

3.55A The facts in detail were as follows:-----

The petitioner was an importer and a dealer in non-ferrous
metals (zinc, lead, copper, tin etc.), and was on the approved
list of registered suppliers to the D.G.S&D. The petitioner had
been importing and supplying non-ferrous metals to respondents
Nos. 1, 2 and 3 during the past several years. The Government
of India,in placing an order with the petitioner, used to grant
import licences in terms of the contracts. On the basis of the
judgment of the Supreme Court in Khostas case'-' the respondent
No. 2, issued an order to all the authorities concerned, including
respondent No. 4 (namely, the Pay and Accounts Oﬁicer,
Ministry of Works, Housing and Supply) directing that sales
tax should not be allowed in respect of suppliesfstores which
had been speciﬁcally imported against licences issued by the

1. MES. B:'r:.:zm'Bras. (P.) Ltd. v. Union oflndia and others (W.P. No.
39 of1969). (11.12.1973) {Ray C.J.}
Khanna, Mathew, Alagiriswami and Bhagwati, J1) Judgment by
Mathew I. (1914) S.C.T. page 29, item 17; (1974) 1 S.C.C. 459, 474
(S.C.C. lst April, 19714).

1. K.G. Kfaosfa v. Dy. C.C.I. (supra).

[05

Chief Controller of Imports and Exports on the basis of import
recommendation certiﬁcate issued by the D.G.S&D. (or other
authority like the S.T.C.] for supplies against contracts. The
respondent No. 4, in pursuance of the said order, deducted a
sum of Rs. 66,780 from the amount payable to the petitioner in
respect of pending bills, and also threatened to recover Rs. 235,
130. being the amount paid by respondent No. 2 as sales tax,
in respect of contracts which had already been executed. The
petitioner contended that the transctions in question, namely,
the sales which the petitioner made to he D.G.S. 8: D., were not
sales which occasioned the movement of the goods in the course
of imports, and were separate and distinct from the contracts
of purchases made by the petitioner with the foreign sellers.
The later alone occasioned" the movement of the goods in the
course of import and the decision in Khoslair case was not
applicable.

3. 56. It was held that the transactions in question which the
petitioner entered into with the D.G.S&D. were not"'sales in
the course of import," but were separate and distinct from the
contract of purchases made by the petitioner with the foreign
sellers. The latter alone occasioned the movement of the goods
in the course of import. Khosl'a'.s' case was distinguished, . . . .
apparently on the ground that in that case there was an obligation
to import, while there was, in the present case, no obligation re-
garding import. The court made these points in arriving at its
roncIusion:---

' (a) In the case under consideration, the court was con-
cerned with sales made by the petitioner as principal
to the D.G.S&D. No. doubt, for effecting these sales,
the petitioner had to purchase goods from foreign
sellers and it was these purchases from the foreign
sellers which occasioned the movement of goods in
the course of import.

(b) The petitioner's sales to the D.G.S&D. were however,
distinct and separate from his purchases from foreign
sellers. To put it diﬁerently, the sales by the petitio-
ner to the D.G.S&D. did not occasion the import. It

was purchases made by the petitioner from the foreign
sellers which occasioned the import of the goods.

(c) The foreign sellers did not enter into any contract, by
themselves or through the agency of the petitoner,
with the D.G.S&D., and the movement of goods from
the foreign countries was, therefore, not occasioned

106

on account of the sales by the petitioner to
the D.G.S&D.

(d) There was no obligation under the contracts on the
part of the D.G.S&D. to procure import licences of
petitioner. On the other hand, the recommendation
for import licence made by D.G.S&D. did not carry
with it any imperative obligation upon the Chiet
Controller of Imports and Exports to issue the import
licence. It may appear from this judgment that
Khoslaﬁs case will, in future, be strictly to
cases where there is an obligation to import.

3.57. The following observations distinguishing Khosltfs case
are of importance.

"In Khoshfs case, it might be recalled that Khosla and Co.

entered into the contract of sale with the D.G.S&D. for
the supply of axle bodies manufactured by its principal
in Belgium and the goods were to be inspected by the
buyer in Belgium but under the contract of sale the
goods were liable to be rejected after a further inspec-
tion by the buyer in India. It was in pursuance of this
contract that the goods were imported into the country
and supplied to the buyer at Perambur and Mysore.
From the sraternent of facts of the case as given in that
judgment of Ike High Court it is not clear that there
was a sale by the manufacturers in Belgium to Khosla
& Co. their agent in India. It would seem that the only
sale was the sale by Khosla & Co. as agent of the manu-
facturer in Belgium.' In the concluding portion of
the judgement of this Court, it was observed as
follows:--

. . . . . . .It seems to us that it is quite clear from the con-
tract that it was incidental to the contract that
the axle-box bodies would be mauufacturered
in Belguim, inspected there and imported into India for
the oonsignm. Movement of goods from Belgium to
India was in pursuance of the conditions of the con-
tracts betwecn the assessee and the Director-General
of Supplies. There was no possibility of these goods
being diverted by the assessee for any other purpose.
Consequently we hold that the sales tool: place in the
course of import of goods within section 5(2) of the
Act, and are, therefore, exempt from taxation. As

1. Emphasis supplied.

.r_g,.................a._.-.- .-...,..-.a--. --P -n .--in'

-6"

10?

already stated, there was to be an inspection of the
goods in Belgium by the representative of the D.G.S&D.
but there was no completed sale in Belgium as, under
the contract, the D.G.S&D. reserved a further right of
inspection of the goods on their trival in India."

Two views possible---as to the ward "occasion".

3.58. As is apparent from the above discussion, two views

. . _ .._o-H--u--r~*

are possible as to,t?.lJ.e.theI the word-."oceasrons" can be construed
widely as was done in Khoslcfs case. Words like 'occasion',
'case' and the like, are vague and formless, when used in the

abstract.
As Lord Reid said recently:1

"In very many cases it cannot be said positively that one
construction is right and other wrong. Construction so
often depends on weighing one consideration against
another. Much may depend on one's approach. It
more attention is paid to meticulous examination of the
language used in the statute, the result may be diﬁerent
from that reached by paying more attention. to the ap-
parent object of the statute so as to adopt that meaning
of the words under consideration which best accord
with it."

3.59. The word "occasion" could be, very roughly, inter-

Two inter-
pretations
possible
on the
word
'occasion'.

'occasiorﬂ

preted as having a meaning approaching the meaning usually and

attributed to the word "cause". On such interpretation, one could
state that it is because of the contract of sale between the parties
that the materials had their movement from the foreign country
to India, and the contract of sale between the parties has (in that
sense) "occasioned the movement of the goods" into the territory
of India, by way of import.

Any argument that by virtue of the decision in Khoslds case,
the ﬁrst sale after import is regarded as 'occasioning the import'
within section 5, would require a discussion of what is meant by
the word "occasion" or "cause".

3.60. The meaning of the expression "cause" may, therefore,
be usefully examined at this stage. "Cause" originally meant
bot "cause" and "reason". "Cause" is the condensed expression
of the factors of any phenomenon, the effect being the fact
itself."-'

1. R. v. National Iris. Comm. Ex parte Hudson (1902; 2 W.L.I-'L 210,
215 tI~I.L.) {per Lord Reid).
3. 2 GH. Lewes. Problems of Life and Mind, sec. 19 cited by Prescott
Hall, "Doctrine of Proxirnate Cause" 15 Ba Harv. L. Rev. 541, 566.
20 M of Law,.'74--3

'cause'.

I03

"Of these two senses of the word 'cause', viz. that which
brings a thing to be, and that on which a thing under
given circumstances follows, the former is that of which
our experience is the earlier and more intimate, being
suggested to us by our consciousness of willing and
doing."

3.61. On the general question of causation, there is an illu-
mination passagc in the speech of Lord Shaw of Dunferrnline,
in a case9 often cited :--

"To treat proxima cause as the cause which is nearest in
time is out of the question. Causes are spoken of as
if they were as distinct from one another as heads in a
row or links in the chain, but-------if this metaphysical to-
pic has to be referred to---it is not wholly so. Causation
is not a chain, but a net. At each point inﬂuences,
forces, events, precedent all simultaneously meet ; and
the radiation from each po-int extends inﬁnitely. At
the point where these various inﬂuences meet, it is for
the judgment, as upon a matter of fact, to declare which
of the causes thus joined at the point of effect was the
proximate and which was the remote cause."

(This passage may have been partly inspired by the argument of
Wright K. (3.).

5°!"-WP" '?f 3.62. In another case3, Viscount Simon L. C. said:
cause impli-

W' "The interpretation to be applied does not involve any meta-
physical or scientiﬁc view of causation. Most results
are brought about by a combination of causes, and a
search for 'the cause' involves a selection of the govern-

ing explanation in each case."

In the same case, Lord Wright said :

"This choice of the real or efficient cause from out of the
whole complex of the facts must be made by applying
common sense standards."

1. J. H. Newman, Grarnmcr of Assent, I55.

2, Lay and Shipping Co. Ltd. 1:. Norwich Urziorz Fire Insuragice Society
Ltri (1918) AL'. 353, 369 (Compare Arguments of Wright K.C. at
page 352, 353.

3. Yorkshire Dale S.S. Co. Ltd. v. Minister of War Transport, The
Cohwold {[942} AC. 69] , 698, 706.

.1-....

109
3.63. In yet another easel. Dennjng L. J. said :

"It is always a matter of seeing whether the particular event
was sufficiently powerful a factor in bringing about the
result as to be properly regarded by the law as a cause

of it. . . . . . . ..".

3.64. Of the various kinds of "causes" discussed above, we Dim" cause
think that the one nearest to the legislative intention in section 5 IIl=?«1'1¢5tt1_1°_ _
of the Central Sales Tax Act is the direct or immediate canse9. f§:15L$nv?n'u
Even that is somewhat wider than what was intended. The word Section 5-
"occasion" was really used in the sense of a sale which itself

con.s'?Erute3 the import.
ParIr'amen.t's intent

3.65. No doubt, even 11n<1B1.'.Khos1a's case every sale after _Saie after
iniportjs not exempt. But even the situation where the import is,_'f;1]'(§'e1'§ tgngﬁ
an integral part of the sale (as in Kho3l'a's case) was, in our " xcludecl by
view, intended to be excluded from the scope of section 5 accord '""amem'

ing to what we presume to be the intention of Parliament.

Conclusion

3.66. It is in the light of this background that we have to §f,';"i,§§§;h_,,

examine whether the position resulting from Khoslds case should need_ed-4:lis-
be modiﬁed. We shall conﬁne ourselves to the legal aspects of Cussmn °°"'

ﬁned to legal
the matter. aspects.

3.67. In our opinion, when Parliament, in enacting section 5,
used the word 'occasion', it presu_n1_a_bly__intended to adopt the
narrow interpretation placed-upon the word by Patanjali Sastri
CJ'_who spoke for the majority of the Court in the second
Travancore case. We are, therefore, inclind to recommend that
the broad interpretation placed on that word in Kho5la'.s' case
needs to be legislatively restricted.

3.68. In view of what is stated above, we recommend an IW0 propo-

amendment of the Central Sales Tax Act which will give effect to f,:.§§}'c',',"' will
the following propositions3-- have to

be given
(1) A purchase of goods made by an exporter from 3. local °ﬁ°"' '°'
seller for the purpose of exporting them in order to

1. Cor;'<. *.-'. Kirby' M'c:cIer1.uLf.cI'. {£952} 2 All. ER. 402, 407.
1. Cl". para 3.30 supra.
i'. This is not a. draft.

Power to
formulate a
wide one.

110

implement a contract of sale with a foreign buyer, shall
not be deemed to be a purchase which has occasioned
the export, even if it be a term of the contract of pur-
chase that the goods shall be exported, and even if,
pursuant to such contract, the goods are exported and
even if the goods would not have been exported but for
the aforesaid term of contract.

(2) A sale of goods made by an importer to a local buyer
in order to implement a contract of sale with the local
buyer, shall not be deemed to be a sale which has
occasioned the import, even if it be a term of the con-
tract of sale that the goods shall be imported, and even
if, pursuant to such contract, the goods are imported
and even if the goods would not have been imported

but for the aforesaid term of contract.

3.69. Such an amendment will fall under article 286(2). We
may state here' that the power to formulate principles under
article 286(2) of the Constitution is, no doubt, a wide one; and,
Parliament in exercise of this power, is not conﬁned to merely
codifying or adopting prc-existing judicial interpretation as we
have already pointed out". Operating within the limits neces-

"\sarily implied by the expressions "import" and "export", Parlia-

ment can formulate principles which would codify the existing
judicial interpretation, modify it, or extend it, or even adopt an
entirely new approach. In other words. it is not merely the
mechanical and verbal formulation of something which is already
existing that is contemplated, but a certain amount of discretion
is implicit, particularly because the power is a power to "formu-
late" principles--a creative function.

3.70. This is not to say that it is an unlimited power. Some
time ago, a. distinguished writer'-', while discussing the subject of
judicial discretion in the interpretation of statutes, stated :---

"A judge has discretion to include a ﬂying heat within a
rule as to ships or vessels. He has no discretion to in-
clude a motor-car within such a rule."

This is true of the power to formulate principles also.

K -1. "dice a[so.para.3.2l,V suhira.
2. Glanville Williams, "Language and Law", 61, l. R. 71, 302.

lll

The principles to be formulated will not, therefore, overstep
the ﬁeld of "import" or "export". But, as already stated', within
the limits indicated by import and export, there is considerable
latitude, even as regards principles which may be derived from
judicial decisions. The task of Parliament is creative because
"cases do not unfold their principles for the asking"; and it may
be necessary__for Parliamentary legislation to deﬁne them from
time to time, as occasion arises".

Judges, in the judicial process, can go with their logic, their
analogies, their philosophies, till they reach a certain point. As
Cardozo has pointed out" :------

"At ﬁrst, we (judges) have no trouble with the paths, they
follow the same lines. Then they begin to diverge, and
we must make a choice between them." -

Where Judges have made their choice, Parliament is free to
afﬁrm or reverse or modify what they have chosen. Where judges
have not, "as";-,'et, made their choice, Parliament is free to make
its own choice. And, where the choice made by Parliament by
formulating certain principles is frustrated, Parliament can re-
formulate the principles.

3.71. We may state that during the course of our discussion, Substitution
we considered the question whether it would be expedient to re- of anothﬁf
place the word 'occasion' by another less ambiguous and more ,',',',;,',;',.,f§',§
precise word in order to avoid any future diﬁiculty. But we "occasion"
ultimately came to the conclusion that it would not be advisable 33:5,-j,1e_
to amend section 5 by substituting another word for 'occasion',
because we apprehend that the use of any new wo-rd may, in turn,
create problems of its own. In our view, the purpose which we
have in mind would be served effectively if we add two propose
tions'' to section 5, which would make it clear that the broader
interpretation placed on the word 'occasion' in Kho.rIa's case was
not within the contemplation of Parliament when it enacted sec-
tion 5.

3.i'2. One of us, Mr. S.P. Sen Vanna has, in a separate note,
suggested the insertion of elaborate provisions to emphasise that
the word 'occasion' used in section 5 must receive the narrowe

l. Para 3.69, supra.
". oﬁ para 3.19, supra.

3. Cardozo, Niture of the Lirlicial Process. pages I9, 20, 22.
4. See para 3.68, wpra.

112

interpretation. His suggestions are made in a positive form and
they seek to make it clear that the ﬁrst purchase after import and
the last sale before export are not exempted from state taxation
under section 5.

In fact, when we were discussing section 5, Mr. Sen Varma
had urged that the Commission should adopt the course which he
has ultimately adopted in his separate note. We fully discussed
his proposals, but came to the conclusion that the purpose which
we all had in mind would he more eiiectively served by adding
two propositions framed in a negative form so as to remove the
anomaly resulting from the wider construction placed on the word

'occasion' in Khoshfs case.

We also felt that any attempt to achieve this result by making

elaborate provisions in a positive form may conceivably raise

\ unanticipated problems in future, and that is a possibility which
we are anxious to avoid.

Besides, we were inclined to take the view that the elaborate
provisions which our colleague has set out in his separate note
may, with respect, appropriately form part of discussion of the
point in a judgment but may be out of place in _a statutory pro-
vision of the nature L1l1Ci.Ef,,C§l}l1§;l_d'_Ql:j1il0l1. That is why we regret
we were not able to accept our col1eague's suggestions, though we
gave them the respectful consideration which they deserved.

Before we conclude, we must, however, emphasise the fact
that the Commission is unanimously of the view that the word
'occasion' used in section 5 must receive a narrow construction
and that the ﬁrst purchase after import and the last sale before
export should not be entitled to exemption from taxation by the

States concerned.

Summary of the principal points discussed in this Chapter

3.73. We now propose to summarise the points which we
have discussed in this Chapter at some length. We are consci-
ous that this process will inevitably involve repetition, but, hav-
ing regard to the fact that the problem with which this Chapter
deals is vexed and complex, we think it necessary even at the
risk of repetition to summarise our conclusions in order to make

our view clear beyond any doubt.

if 1) Before the Constitution was adopted and while the
Government of India Act. 1935 was in operation, there was no
speciﬁc 'oar on the power of the Provinces to impose a tax on
all transaction in respect of commodities so long as the trans-

113

actions took place within their territorial limits. That being
so, the provinces had the power to impose a tax on the sale or
purchase of goods in the course of import or export.

(2) When the Constitution was adopted, article 286(1) put
some restrictions as to the imposition of tax on the sale or pur-
chase of goods as speciﬁed therein. Article 2S6(1)(b) exem-
pts from tax the sale or purchase of goods into or export of
goods out of the territory of India. The clause 'in the course
of' is capable of a wider or a narrower interpretation.

{3jI'!'his clause came to be considered by the Supreme Court
in the ﬁrst. Trrn-'rmcor.=3 case. That case was COIICE-l'Il€=Cl with an
export sale and, as such, even within the narrow meaning of
the expression 'in the course of export', it was clearly exempt

trotn being taxed. That, in fact, was the unanimous decision of
the Court.

Having held that the export sale was exempt from tax under
article 286(1) lb), the Court proceeded to explain the meaning
of the expression 'in the course of export'. While doing so, it
used the word 'occasion' and observed, inter aha, that a. sale,
which itself occasions export. would be within the protection of
article 28(«f'1)(b). This observation; we think, was intended
to cover only export sales of the kind with which the Court
was dealing in that case and exclude. all other sales. But. it
must be conceded, that the word 'occasion' used in the judg-

ment was capable of a wider as well as a narrower interpre-
tation.

(4) In the second Travancore case, the question which the
Court had, incitlentally, to consider was whether the word
'occasion' used inithe earlier judgment was intended to be inter-
preted in its wider or narrower sense. Patanjali Sastri C. I.,
who spoke for the majority of the Court, clearly and explicitly
stated that the word 'occasion' used in the earlier judgment,
which was unanimous, was intended to be interpreted in the
narrower sense and so the judgment expressly stated that the
first sale after import and the last purchase before export did
not fall within the protection of article 286(1) (b).

S. R. Das, L, however, who was a party to the earlier
judgment, had presumably understood the word 'occasion' in
its wider sense and so, in his minority judgment, he expressed

I14

his view to that eﬁect and added that the ﬁrst purchase after
import and the last sale before export fell under article
2Sti(1)(b).

(5) It was in view of this disvergence of judicial opinion
about the interpretation of the words 'in the course of import
or expert' that article 286(2) was inserted in the Constitu-
tion. By this article, Parliament was empowered to make a
law formulating principles for determining when a. sale or
purchase of goods takes place in any of the ways mentioned
in clause (1) and this includes clause 28-5(1)(b) in which the
relevant words "in the course of" occur.

{6} Having thus empowered Parliament to formulate prin-
ciples for the interpretation of article 286(1), the Union Gov-
ernment referred the matter to the Law Commission for its
opinion. In its majority report, the Law Cornmissio-n used the
word 'occasion' in suggesting the principles which should be
followed in enacting the law under article 286(2), and though
there is reason to believe that the majority View was in favour
of the narrower construction placed on the relevant words in
article 286{1)L'b) by the unanimous judgment in the first
Travancore case, as explained by the majority judgment in the
second Travancore case, the Report, in terms, did not make
this position clear and was content to use the word 'occasion'
without any Explanation that it was used in the narrower sense.

(7') The relevant portion of the text of section 5 similarly
used the word 'occasion' without any Explanation showing that
the intention of Parliament in using the word was to adopt the
narrower View propoundcd by Patanjali Sastri J. in the second
Travancore case. The result was that the ambiguity flowing
from the use of the word 'occasion', which has a wider as well
as a narrower meaning, remained and, as already explained by
us, a wider View was accepted by the Court in Khoslds case.

(8) We are clearly of the view that the relevant words
which were used in article 286(1) (b) by the Constitution were
not intended to aﬁect the preexisting right of the States to
tax the first purchase after import and the last sale before export
and that the framers of the Constitution, therefore, must be pre-
sumed to have used those words in their narrower sense. That,
in fact, was the judicial interpretation of the word in the two
Trawmcore cases.

115

As we have just pointed out, when the Law Commission in
its majority report, used the word 'occasion', presumably, it
used that word in the narrower sense; it did not expressly say
so. In the absence of any express statement to that effect in
the report, in the text of section 5, which bodily lifted the word
'occasion' from the Report and inserted in Section 5, the Legis-
lature did not add any Explanationjto indicate that the word
'occasion' was used in the narrower sense and that substantially
is responsible for the decision in the Khoskfs case which plac-
ed a broader interpretation on the word 'occasion' and there-
by, For the ﬁrst time, unduly restricted the preexisting right of
the States to tax the first purchase after import and the last
sale before export.

(9) After the -Supreme Court rendered its decision in Kho-
.sIn's case, the Union, Government referred to the Law Com-
mission for its opinion the question whether the decision in
Kizosiais case was consistent with its earlier decisions in the
Travcmr.-ore cases. This reference was presumably made be-
cause the States complained that the decisions in Kizosinh case
unduly restricted their power to tax the ﬁrst purchase after
import and the last sale before export.

The rnajorityl of the Law Commission, in its 30th Report,
expressed the view that Khasia's case was consistent with the
two Tnsrvencore cases. Conﬁning ourselves to the speciﬁc
question which was referred to that Commission, we wish to
state that this ViL'W of the majority was not correct, if due re-
gard is had to the exposition of the law in the majority judg-
ment in the second Travancore case.

On the speciﬁc question referred to the Commission, there-
fore, the minority view in the 30th Report was correct. We do
not, however, wish to express any opinion with reference to the
other observations made in the minority report.

(10) In this connection, it may not be irrelevant to point
out that the reference to the Commission made after the
Supreme Court rendered its decision in Khoslair case was
somewhat inappropriately worded. After the passing of the Cen-
tral Sales Tax Act, 1956, it was section 5 of the Act which was
in operation and in that case, the decisions in the
Travancore cases which dealt not with section 5, but with
article 286(l)(b), though relevant, were technically not bin-
ding. In our view, the query addressed to the Commission should

1 . 30th Report.

llé

have been whether the Supreme Court had correctly interpreted
section 5 in K}w5Ia's case when it held that the sale by Khosla
to the Railways fell within the protection of section 5. We have
thought it necessary to make this ineidential observation in
order to clarify the true legal position at the time when the refe-
rence was made.

i' l 1) After a careful study of the relevant constitutional judicial
and legislative history, we have come to the unanimous conclusion
that the undue restriction which after the judgement in Khoslrzﬂs
case began to operate on the power of the States to tax the two
categories of transaction in question should be removed. For
that purpose, we are recommending the acceptance of two propo-
sitions whilst our colleague, Mr. Sen Verma, is recommending
n'.o1'c detailed propositions, The object of both the 1'ccon1-
nicntiutioi'.5. is. how'e\-'er, one and the same.

E 12) Since this interpretation unduly restricts the power of
the Statee and was not intended lay Parliament, the Suggestion
now is that the law should be brought in line with what was
decided in the two Ira»-'aricor'e cases, so far as sales or purchases
in the course of import and purchases in the course of export
are CDl'.~'.'L'I'l1Cd. Hence, an amendment on the lines recommen-
ded: is required.

1 . Para 3.68, .5Hpr.:.'.

1'!

CHAPTER 4

CONFLICTING DECISIONS OF THE COURTS AS TO THE
CENTRAL SALES TAX IN REGARD TO THE SCOPE
OF THE PENAL PROVISIONS OF 'I'I-[AT ACT

INTRODUCTORY

4. 1. In this Chapter we propose to deal with a provision The _¢1USE_
of the Central Sales Tax Act of considerable importance. Brieﬂy {§i'5'."§{§.i1;'P
stated, section 9(2) of the Act imposes a duty, on the sales ta:-;1aW5

. under
ofhcers of the States, to assess and re--asses_s, and to collect and Section
enforce payment of, the Central tax. It provides that they shall 9(?-J-
also have the same powers for this purpose as they have under
the State Act. These two propositions are wound up by a gene-
ral enactment to the effect that, for the above purposes, the
speciﬁed provisions of the General Sales Tax laws of the State
shall apply in relation to the Central tax. The broad effect oi
this provision is that, in relation to matters concerning the admi-
nistration to the tax. the Central Sales Tax Act is not self--eon--
tained. In order to ascertain the precise legal provision applicable
on a point of administration. one has to consult the State law.
I\loreoi.'er. rnanj; of the provisions of State Sales tax law are to
be ascertained from the rules made under the State law. This

position. of course, is not an accident, but is deliberate.

4.2. There is. thus, no doubt that section 9(2) necessitates The result-
:1 complicated studyl, involving:--- mg com-

plexity.
(i) the Central Act.
(ii) the State Act.
fiii': the rules under the Central Act. and

( iv) the rules under the State Act?

1. para 4.1. .S'rrpra.
'3. cf. the diicussiot in C. S'. T. V. Kn-rtr'!a!i"M!'o}zm1!hr!(l9ﬁi') 19 S. T. C.
371 (M. 'P.).

ll?

Legisla-
tion by
reference.

The ques-
tion of
applicabi-
lity of
State
amend-
ments.

118
.'i'rrcH'0n 9(2)--legfs!ari0n by reference

4.3. Section 9(2) is, thus, an example of the familiar de-
vice of legislation by a reference. Because of the adoption of
this device, however, a few problems as to the precise effect of
the sI.1b--section have arisen. We shall discuss these problems
one by one.

4.4. Under the section, the provisions of the "General Sales
Tax" law of the State concerned on various matters mention-
ed in the section, apply in relation to the collection and assess-
ment of tax. A controversy has arisen as to whether only the
provisions of the State Act, as they existed when the Central
Act was parsed, are attracted by virtue of this sub-section. or
whether amendments made in the State Act subsequent to the
passing of the Central Act also become applicable.

4.5. Most High Conrtsl, 2, 3 have taken the latter view.
The Madhya Pradesh High Court has also held that the pro-
cedure for recovery of Central Sales Tax by the States is
governed by the law in force at the time of the recovery of the
tax, and not by the law in existence when the Central Act
came into force.' The judgment points out that the deﬁnition
of "sales tax law" uses the words "for the time being". This
is also the Mysore view." In the Mysore case", it was held
that in the last part of sub--seetion (2) of section 9 of the Con-
tral Act, the applicability of the provisions of the General Sales
Tax law of the State has not been confined only to those
cases where the authorities have exercised any power under that
law (i.e. the State law). Subject to any rules made under the

1. Auto Pins {India} V. The State A. I. R. l9":'(J Punj. 333, 337, paragraphs
3 to 11 .

2. Is'. 1:'. Adi'm1ra}=mra Sorry V. Cam. Tax Qtfﬁcer (1963) 14, S. T. C. 587

(Mys.J

. C. S. T. V. Kanrilal Mriiranlczl. (I967) l9 S. T. C. 377 M. P.

4. M,I'.s'. Jiwanman Sons (P) Em'. V. Dcpnrty C'ur.urrn'.i'.siur1er of Sales Tax
(1971) M. P. L. J. 684; 23 S. T. C. 247, 251 (B-ishmher Dayal, C. J.
and Shiv Prasad J.) {Madhya Pradesh}

5. [a} K. V. Adfnur.-tyarra Setty V. C. T. O, (1963) 14. S.T.C. 517

S97' [Mysore]; '
(b Jdysore Electrical Industries V. C. T. 0. A. l. R. 19?!) Mysore
259, 263 para 15.
6. K. V. Adfnarnyana Serry V. C'. T. 0. {I963} 14 S. T. C. 587, 59'.-'
[Mysore].

119

Central Act, the provisions of the general sales tax law of
the State could be applicable for all or any of the purposes
mentioned in section 9(2).

4.6. The Madras view, however, is different} The Madras Madras
view makes a distinction -between amendments of a substantial 'flew'
character and others; and, according to the discussion in a
Madras; Case's', subsequent amendments of the State Act would
apply only if they do not make any substantial change.

4.7. So far as this particular pro-blem, namely, the appli-- The view
cabilit_v to the Central Act of subsequent amendments in the 'riqfdj-'gin,
State Act is concerned, it would appear that the majority views of High
is likely to prevail. In fact. practical considerations demand lgllﬂf to
that such amendments should apply, because otherwise the prevail.
whole scheme of the Central Sales Tax Act would be frus-
trated. It would be obvious that the Act is intended to be

administered in combination with the State Act.

Section 9(2) is. in fact. explicit on the point, when read
with the deﬁnition of "general Sales Tax law." The same
authorities as administer the State Act, are expected to admi-
nister the Central Act also. Any other interpretation would
necessitate the preservation of each State Act. as it existed in
l9.'it3,«--which'\1.'uuld become impossible in course of time.
. . . . . . Desirability
4.8. The I11Elj'Gl"li.} VIEW )5 likely to prevail. as we have 511- of 3m.=,.,,i_
ready stated". In our view. it is necessary to make the position men' *1"

. . regards
clear. Therefore an amendment IS desirable". co,,,,1,.,c_

tion of
section
_. ...,.,c.___. .,,_______._ ..,,u_._..... %___;-.... '(Tn 9{2)_
1. (a) Hoff J. /l. Karecwi E:-air V. C. T. 0. A. I. R. 1967 Mad. 171,
3'5. para 9 [Vceraswami and Natesan J J).

(in) Safe of.-1fr1r?'ra.s' V. M'. Angappa Clierriur, (I968) S.T.C. 22

Madras.
(c) D. H. Sh.-1f.'& Ca. V. The State of Madras, (1967) 2 M. L.I
26].
(d) K. A. Raniiidu Cheirfar V. Stare ofM'adra.v, (1967) 2 M.L.J. 315-
Hujr' J'. A. Kareem Sui: V. C.T.0. A.I.R. 1963' Mad. 1?].
Para 4.5, supra.
Section 2(1), Central Sa1esTax Act.
Para 4.7, supra.
See para 4.-15, i'rifra.

_m.,.-:-..
I'-

C0u5tit1.1-
tional
position
consider-
ed.

The prin-
ciple in
Slroma
Rr:0'.5' (.'{r.5'€.

120
Section 9(2) --rhe con_m'mtia:-ial position

4.9. So much as regards the question of consfruction. of the
language of section 9(2). What is a rnatter of more conse-
quence is the question of constitutionality of the provisions
of the section. In this context, we have to refer to a Madras
easel, where the High Court observed:--

"In fact, for the Central Legislature to adopt a State
law not only as it exists at the time but also as it
niay exist in future, including amcndnients made
from time to time, will amount to alitlication of its
legislative functions'-". This is because, if the Cen-
tral Legislature purports to adopt a State law to
be made in future by wa_~,'.of an amendment, the
Central Legislature would have had no occasion to
apply its ownmiud in making the law."

These observations raise an important constitutional question.

4.10. In this connection, a judgment of the Supreme Court
is of importance.3 The facts of the case were as follows:----

On lﬁth. August, 196.1, the administration of Pondieherry
became vested in the Government of India by virtue of a the
fare transfer. The F'0T'JdiCl1CI'I'jr' Administration Act, [962 (42
of 1962), constituted that territory as a separate centrally
administered unit; and under the Union Territories Act, 1963
(20 of 1963]: a Legislative Assembly was set up for that area.
The - ssembly, under that Act, acquired the power of enact-
ing laws in respect of items in Lists II and III of the Seventh
Schedule to the Constitution. The Assembly thereafter passed
the Pondicherry General Sales Tax Act, 1965(1O of 1965),
which was published on 3rd June, 1965, after receiving the
President's assent on 25th May, 1965. The Act provided that
section N2] of that Act would come in1:o force on such date

I. D. H. She}! & CO. V. The Store of Pr-:i'aa'ra.s, (I967), S.T.C. 146.,
149 (Mad) (1967) 2 M.L.J. 261.

9. Emphasis supplied.

". B. Sfmnm R00 ':5. L":-J01? Terﬂtoryof Pozrriicfrarrtv, (I967) 2 M,I_,J.

{S.C.} 93, 100, 105; A.I.R. 1967 S. C. 1480; 20 S.T.C. 214; (195?) 2S.C.R. 283.

121

i; as the Government may by notiﬁcation appoint. Section 2(1) of the Act provided that:--

"The Madras General Sales Tax Act 1959 (1 of J95?) ( hereinafter referred to as the Act), as in force in the State of Madras immediately before the commencement of this Act shall extend to and come ]I'J[U force in the Union Territory of Pondichcrry subject to the following modiﬁcations and adap- tations . . . . . _ . .."

I} 4.11, Thus, there was to be a time interval between the date of passing and date of commencement of the Pondicherry Sales Tax Act. If, in between the two dates, the Madras Legis-

, lature amended its own Sales Tax Act, that amendment would ' become applicable to Pondieherry. The validity of this position was at issue. The Supreme Court held the Pondicherry Act to be void. The reasons for this conclusion of the Supreme Court were thus stated:------

"In the present case, it is clear that the Pondicherry Legislature not only adopted the Madras Act as it stood at the date when it passed the Priacipal Act.

but also enacted that if the Madras Legislature were to amend its Act prior to the date when the Pondicherry Government would issue its notiﬁcation It would he the amended Act which would apply.

The Legi.s'la;'are at that stage could not am'r'ci'p-are that the Madras Act would not be amended, nor c0m'tJ it prerﬁcate ivhat amendmem' or arrrenalmerars H-'otr."r.l he_earr:'ea' out or whetfter they would he of a sweeping c.v'mmcrer or urhetner they wotrla' be stiitable in Pona'a'c.lzerry.1 [In point of fact the M3."

dras Act was amended, and by reason of section 2(1) read with section 1(2) of the principal Act, it was the amended Act which was brought into operation in Pondichcrry. The result was that the Pondicherry Legislature accepted the amended Act, thottgh it was not and could not be aware what the provisions of the amended Act would be. There . was, in these circumstances a total surrender in the matter of sales tax legislation by the Pondicherry E Assembly in favour of the Madras Legislature, ' and for that reason we must agree with Mr. Desai, i 1. Emphasis supplied.

An ana-

lysis of the doc-

trine.

122

that the Act is void. or as is often said. "still- born".

4.12.. The judgment in the easel cited above was consider- ed by Suhba Rao, C. J., in a subsequent case? relating to section 5, Punjab General Sales Tax Act. There the Chief Justice, ix.-lie was a part}; to the majority; judgment in Shame:

Rm)': ca.s'€, explained and distinguished the same, and observed as follois-'s:--

"Section H2} of the said Act provided that the Act would come into force on such date as the Gov- ernment by notification may appoint. The elfect of the section was that the Madras Act as it stood on the date of the notiﬁcation issued would be in force in the Union Territory of Pondicherry. In- deed, it turned out that the Madras Act was amend- ed before. the said notiﬁcation. This Court held that there was a total surrender in the matter of sales tax legnsiatiorz by the Poridfcfierry Asserribl)' in favour of the Madras Legisiatiire, and for that reason the said sections were void or still--bo1n."

4.|_<.. if the argument that there is a total surrender of the legislative function,3 is regarded as applicable to the provision in section 9( 2) of the Central Sales Tax Act", then, it could Te contended with some force that Parliament is not compe- tent to apply future amendments made by the States in their own Sales Tax laws, since Parliament could not have applied its mind to them. If such a View were to be taken by the Supreme Court, the majority interpretation5 of the present pro- vision in section 9(2) will not stand.

I. Shstrmrz Ru',-J V. Porzdiefzerry Ar.1.=1zr'r1r'.rrr.a!i'on (1967) 20 S.T.C. 430 5.13.; A.I.R. 'I967 S.C. 1480. para -4.11 supra.

2. .Me.i'srs. Devi Doss Gopal Krfshnmr V. State of Punjab & Other:

(1957), 20 S.T.C; 430; A.I.R. 196'.-' S.C. 1895. See para 4.13B ii-rfrzz.

Lu Para 4.12, supra.

4. Para 4.4, supra.

5. Para 4.5, supra 1"" -'* 123 4.1395. Three cases1 reported in 1973 raise the important Three re- question of the constitutional validity of sections 6, 8 and 9 of §°s",;'o°"°8 I the Central Sales Tax Act, 1956. In all the cases, the impugned valifiitil gf sections were challenged as violative of the principles of delegated §"°;';é'""9" legislation and, in particular, as violating the law laid down in Shame Rao V. Union Territory of Pondicherryﬁ While all the judgments upheld the sections, the reasonjngs that were given were divergent, with the result that an authoritative interpretation should await a verdict from the Supreme Court. A brief review of the cases is given below.

4.13AA. In the Gwalior Rayon case? the main ground of Gwalior challenge was that _since the Constitutio-n vested the exclusive R"3*"'" "as" power of imposing sales tax on inter--State transactions in Parliament, it was not competent for Parliament to delegate the power of ﬁxing rates of tax on such transac-

tions to State Legislatures. (Section 8, inter alto, provided that a State Legislature could vary the rate of tax laid down in the section in certain circumstances}. Section 8(2) (b), which provided that if a State ﬁxes a higher rate than ten per cent on intra-State sales that rate would apply to inter-State sales also in preference to the ten per cent laid down by Parliament was challenged as amounting to abdication of legislative power by Parliament in favour of State Legislatures. It was contended that section 8(2) (b) was ultra vi':-es as it amounted to an eftace-

ment of itself by Parliament and, therefore, wholly invalid.

Dayal C. J." negatived these arguments and accepted the con- tentions raised on behalf of the State that the instant case was not a piece of delegated legislation at all and that the principles relating thereto were inapplicable to such a case. On the other ' hand, he held, it was a case of legislation by reference by which

--E------- -aw 4h.._.¢-.w-up ....

an Act of another legislature was adopted without physically in- I corporating all the details.

.5 4.1313. Relying on text book writers on Constitutional Law on the distinction between Delegated Legislation and Legislation |. Sec i'nﬁ'o. '

2. Sfirrnsr Ran V. Umbra Territory of Prmrficircrry, A. I. R. 1967 S. C. l-1:"-0 . (E96?) .1 M. C. D. 93. Para 4.11, Supra.

. Gn.=:.~..'ior Rayon Si'."."r Maiznfocrurz'r1g(W1-g.) Co. Ltd'. V. Assistant Commis- _rr'a.-'r.~r of Solar Tax, (1973) 31 S. T. C. 9 (M. P.) (1973) M. P. L. .I., 85.

4. Two separate but concurring judgements were given by Bishambhar

l)a3'ai, C. .l. and Raina, J.

26 .2-'l of Law,-'74 -9 1.4 i 124 by reference, Dayal, C. I. concluded that since the provision actually referred to the law prevailing in a particular State and not to a particular part of the State, the reference should be treated as the adoption of the law as it stood from time to time. On this basis. he distinguished the decision in Shama Rae': easel Raina, J., also accepted the position that the present case was not a piece of delegated legislation and, therefore, there was no need to see if it suffered from excessive delegation. However, he felt that the principles which limit excessive delegation would be a good guide to examine the question of abdication of legis- lative power or self-eﬁacement in the case of legislation by refer- ence also. The question that had to be decided was whether the power to determine the rate of tax (Which, according to section 8(2) (b), could be increased by State Legislature to more than 10 per cent as laid down in the Act) was an essential legislative function which could not be assigned to another legislative body, the executive or another authority. Relying on Bose. J.'s views in Raf Narain Sirzgfi v. P. A. Commmeez that an executive authority could be authorised to modify existing and future laws eitcepting in essential features, Raina, J.. inferred that since it was open to a Legislature to leave it to the executive to determine details relating to the working of taxation laws, such as the selec- tion of persons on whom the tax is to be laid, the rate at which it is to be charged in respect of different classes of goods and the like, it could be said that the ﬁxing of the rate of tax was not an essential feature of legislation relating to tax and hence could be assigned to another authority. He distinguished the decision in Devi Doss Gaps! Krishmm 5; Others v. State of Pun- y'ab3 on the ground that the basis principle was that ﬁxing of rate of tax could be delegated to an authority provided the statute contained a policy or principle which would furnish guidance to the delegate in the exercise of such powers. He held that fixing the limit of the rate of tax was only one of the modes of exercising such guidance and was not the only method of doing so. A delegation could be controlled by indicating the policy, or by providing guidance otherwise.

1. He also distinguished the Shame Roe': case on the basis of the deiegate being the executive.

2. Rcrjﬁfararlvt Singk v. P. A. Committee (1955) 1 S. C. R. 290.

3. Deva' Das v. Sims of Pzmjab (1967) 20 S. T. C. 430 (S. C.) In this case, sections of the Punjab General Sales Tax Act, 1948 was struck down by the Supreme Court as self-effacement by the Legislature inasmuch as it conferred an uncontrolled power on the State Government to levy tax at rates ﬁxed by itself.

--;-a--.

l I E 125

4.I3C. Thus, Raina, I ., though agreeing with the view that in a legislation by reference, it is permissible to adopt the provisions of another statute as they exist as well as any amendments in future, held that the question of abdication of the legislative function or self--eﬁacenJent must, in such a case, be examined on the same principles as governed the limits of valid delegation. He distinguished the decision in Shame Rae': case' on one more ground other than those mentioned by Dayal, C. l., and said that in Sham.-1 Reds case, an entire enactment which was not in force at the time of enactment was adopted. In the present case, there was adoption of a provision of the Act of the State Legislature by general reference, which was limited to the rate of tax.

4.131). The next case to be considered is a Gujarat one, Rallis India." The main argument was that Parliament had ab- dicated its legislative function in favour of State Legislatures in enacting sections 6, 8 and -9 of the Central Sales Tax Act. Bhagwati, C. J., narrowed down the scope of the inquiry to the proposition that it was sufficient to attract the constitutional inhi- bition against abdication if there was surrender by the legislature of an essential legislative function even in respect of a particular subject matter of legislation in favour of another person or autho- rity which was not empowered by the Constitution to exercise that function. I-le then went on to discuss what was an essential legislative function. Relying on Mukherjea, I .'s observations in In re the Delhi Laws Act, 1912,' that the essential legislative function oonsisted in the determination of the legislative policy and of formally enacting that policy into a binding rule of con- duct, Bhagwati, C. 1., explained that it was not always possible for the Legislature to ascertain the facts and circumstances "in all cases, which would have to be determined outside the halls of the legislature." The Legislature will have, in such circum- stances, necessarily to delegate subsidiary or ancillary powers of legislation to delegates of its choice for carrying out the policy. However, such delegation should be within limits, and should not be "unconﬁned and _.vagrant". He then posed the question:

" . . . . . . . . . .has the Parliament said that within its allotted ﬁeld, which is here tax on inter-State sales, what will operate is not

1. Shame: Roe v. Union Territory of Pandfcherry. (1967) 20 S. T. C. 215 (s. c.)

2. Raﬁ)": India Ltd. v. R. S. Jashi, 31 S. T. C. 26], 277 (Gujarat).

3. In re Delhi Laws' Act, I912 ([95]) S. C. R. 747.

Ram: India case.

(Gujarat) l26 its own legislative policy determined and "chosen by it, but ]egislat.ive policy enunciated by the State Legislature, which has plenary power of legislation within its own ﬁeld and which is not subject to any guidance or control from Parliament ? If it has, it will be a clear case of abdication or self-etfacement." After a 'detailed examination of sections 6, S and 9, he concluded that the provisions did not amount to abdication.

(i) The Court distinguished the power of State Legislatures under section 8 to declare the rate of tax as nil [under section 8(2-A)] as not amounting to 'exemption' from tax. It did not affect chargeability, though the rate of tax might be nil.

(ii) About section 8(5), which empowered the State Govern-

ment in the public interest to direct that the inter-State rate of tax would be at a rate lower than those prescribed in sub-sections (1) and if 2), the court held that such a power was in the nature of a conditional legislation, which had been recognised since the decision in Queen v. Burch} Even assuming that the provision was a piece of delegated legislation, the court held that it was valid, because Parliament had clearly laid down the policy or principle which was to guide the State Government in exercise of the pov.-'er, namely, that it should be in the public interest.

(iii) Regarding the rate of tax under section 8(2~A) [sub section (2--A) of the section formed the target of the main attack}, the court held that a deliberate choice of legislative policy on the part of Parliament was discernible, inasmuch as the pur- pose behind the provisions in section S(2--A) was to ensure that consumers in the States to which the goods were imported were not placed at a disadvantage as compared with the con- sumers in the State from which the goods were imported. This could have been carried out by Parliament-----(1) by prescribing separate schedules of rates for each State in the Act itself and by amending it from time to time as and when changes were brought in State rates, or (2) by prescribing separate schedules of rates in the Act and allowing the State to amend them from time to time, or (3) by adopting the rate structure as provided in sub--scctions (I), (2) and (2-A) of section 3. The ﬁrst two methods, which were undoubtedly within Parliament's competence, could not be adopted on practical considerations. The third, which provided a self-operating machinery whereby the rate

1. Queen V. amt, (rats) 3 A.C. ass.

\I 12?

structure of the Central Act could be adjusted to the rate struc- tures of State sales tax laws according to the formula laid down in section 3, provided, according to the court, a highly efticient method of carrying out the legislative policy.

4.1313. This was the position regarding section 8. as discussed in Raflis India case. Section 9, which provided that the existing machinery in each State for assessment, re--assessment, collection and enforcerncnt of payment of tax on iutra--State sales would assess, re-assess, collect and enforce payment of inter-State tax under the Act, was also (in that case) challenged as exceeding the limits of delegated legislation, inasmuch as it related to sub- stantive matters rather than adoption of procedural provisions. On this, Bhagwati, C.J., found nothing excessive as far as the adoption of the general sales tax law of the appropriate State in the matter of advance payment of tax was concerned. On the question of adoption of provisions relating to penalty, imposi- tion of tax liability on a transferee of or successor to a business and recovery of tax from third parties, the court did' not give any opinion. However, it was observed that even if they were vio- lative of any principle, the provision was clearly severahle. and would not aﬁect the validity of section 9. 011 the question of the applicabﬂity of Shanta Rae': case,' the Court held that Par- liament had applied its mind and made a deliberate choice of legislative policy, and there was no parallel between the existing situation and that decision.

4.13F. In the Thallam case' also, the grounds of attack [before Tfraiiam the Andhra Pradesh High Court) were alleged abdication by"

Parliament of its legislative function in the enactment of sections 8 and 9 of the Act. Gopal Rao Ekhote, 1., reduced the question to whether even essential functions of legislation, that is to say, laying down the policy and a rule of binding conduct, had been delegated by Parliament to an agency not contemplated by the Constitution. On section 8, the court held that Parliament could not be said to have abdicated its functions merely because it had authorised the State Legislature to ﬁx the same rates in respect of transactions within the State and apply them to transactions which were subject to central tax. The Court held that it was

1. Shanta Raov.

215 (S.C.)

5. Tlrallam Balasuhrafamanyam v.

489 (AP-}i (1972) 1 An W.R. 263.

U.-1.r'rm Territory of Pomitcfrerry, (1967) 20 S.T.C'.

State of A.P., (I973) 31 S.T.C. asc.

(AJ1d.h.ra] Conclusion.

Punjab 128 not a case of applying future laws to central transactions without Parliament applying its mind, but a piece of delegated legislation. On this view, the Court felt it unnecessary to consider the effect of the judgngent in Shama Rao's easel which, according to the Court, struck a diﬁerent note as regards application of future laws from the previous decisions starting with R. V. Burch" and In re. Delhi Laws Act." Ekbote, I., concluded with the following ob-

servations :--

"We have no hesitation in holding that in delegating the power to fix the rates to the State Legislatures and applying those rates to the transactions subject to tax under the Central Sales Tax Act, whether pre- vailing or future, it is a case of permissible piece of delegated legislation and, therefore, quite valid. Sec- tions 8 and 9, therefore, do not amount to abdication of legislative function by Parliament . . . . . . . ."

This observation would seem to indicate that the Court would have upheld any' challenge as to the constitutionality of section 9(3) on the 'oasis of prospective amendment of State Tax laws and their validity under section 9(3). The Mysore} MP." and Punjab and I-Iaryana High Courts" have already held that section 9(3) was valid and prospective modiﬁcations and amendments to State tax laws and their applicability to transactions under the Central Sales Tax Act was not abdication of Parliamentary duty. The Madras High Court had, however, taken a different view'. 7 4.13A. An argument that section 9(2) amounts to excessive delegation was advanced before the High Court' of Punjab, . Simma Rm:-'s case, supra.-

'. Queer: V. Ba-rah, (1873) 3 A.C. 839.

3. In re. the De!hiLai+'s Act, 1912 (1951) S.C.R. T47.

4. igsygrore Electrical Industries V. Com. Tax Oﬁicer, A.I.R. I970 Myrs.

5. Commissioner of S.T. V. Kamila! Malian Lot, A. I. R. 1968 M. P. 20.

6. Aura Pins {Index} V. State of Haryana, A. I. Ft. 1970 Punj. & Har- yana 333.

7. ta) Haji Kareem Sm': V. Dy. Cami. Tax Oﬁicer, A. I. R. 1967 Mad. l?'l.

(b) D. H. Shah & Ca. V. State ofllladras, (1967) 2 ML? 261.

8. Tek Charm' Dania: Ram V. Excise :5: Tax Oﬁicer, (1972) 29 s. T. C. sss, 503 (F. B.) Punjab.

129

which, however, rejected it. The High Court relied on clause (2) of article 258 of the Constitution, which runs as follows' :--

"(2) A law made by Parliament, which applies in any State, may, notwithstanding that it relates to a matter with respect to which the Legislature of the State has no power to make laws, confer powers and impose duties, or authorise the conferring of powers and the imposition of duties upon the State or oﬂicers and authorities thereo ."

It is in exercise of that power that section 9(2) of the Central Act had been enacted. Availing of the services of the hierarchy of the functionaries acting under the State Act and con- ferment of powers on them, providing for the procedure to be followed by them and imposition of duties upon them in terms of the procedural, remedial and other provisions devised there- under to enable them to administer various provisions of the Central Act, falls squarely within the scope of clause (2) of article 258, and cannot legitimately be contended to be unauthorised or excessive delegation on the part of the Parliament in favour of the State _or the authorities administering the State Act.

4.14. It may, in this connection, be noted that section 9(2) $05 makes three types of provisions.'-' In the ﬁrst place, it imposes I91-'0Vi3I',0!=8 certain duties on the oﬁcers acting under the general Sales 1g}$'f11°n Tax law of the particular State, by requiring them to assess, re-assess, collect and enforce payment etc. of the tax or penalty under the Central Act, as if the tax or penalty under the Central under the Central Act, as if the tax or penalty were leviable under the State Act. Secondly, for this purpose it confers certain powers on the officers of the States in relation to the tax or penalty. Here again, there is a reference to the general Sales Tax of the State. Thirdly, it contains a general provision stating that the speciﬁed provisions of the general Sales Tax law of the State shall apply "accordingly". Each of these provision of sec- tion 9(2) refers to the "general sales tax law" of the State."

If subsequent amendments of the various State laws are not attracted for the purposes of section 9(2) of the Central Act,

1. Constitution, Article 258 (2).

'. Para 4.5 and 4.5B. supra.

3. For deﬁnition of "general sales tax law", see section 2(1).

£_ilterna-

tives for remedying the situa-

tion.

130

then the position becomes unworkable, because it is always dith- cult to apply, for the purposes of the Central Act, a State Law (which has been amended), without the amendment. Psycholo- gically, there would be a diﬁiculty in doing so, on the part of the ofﬁcer concerned. Moreover, it is common experience that after some time it is not easy to get copies of the State law as it stood in 1956,--which is the year of enactment of the Cen-

tral Act.

Remedy suggested 4.15. To remedy such a situation (if it does arise), there are, theoretically speaking, several courses open. (a) In the ﬁrst Provision in section 9(2), the Union could frame its own self place, instead of the incorporating contained code of the rules relating to assessment of tax under the Central Act. Whether or not the Union also -appoints its own assessing authorities for the purpose, is immaterial for this purpose. It could delegate the necessary powers to the State authorities. The only diiference would be that State authorities will then he deriving that power not from the State law read with section 9(2), but from the Con- tral Government directly.

(b) The second alternative would be to amend the Consti- tution. and to provide there what is now contained in section 9(2) of the Central Sales Tax Act, 1956. For obvious reasons, this is not a very convenient method.

to) The third alternative would be to insert, in section 9(2), a particular date, say, "as in force on the ﬁrst day of April, 1974." Initially, this date could be inserted by adding the quoted words after the words "general sales tax law," wherever they occur in section 9(2) or elsewhere in the Central Sales Tax Act. Subsequently, every year, by a short amendment of _the Central Sales Tax Act, the year '1974' (or the subsequent year) could be replaced by the year then current. This would mean that the Sales Tax law in force in the State on the ﬁrst April of the then current year would be attracted to the Central tax. No doubt, if, after the 1st April of one year and before the 1st April of the next year, a particular State Legislature makes any amendments, those amendments would not be attracted. Theore- tically this cannot be avoided. But there is a practical way of avoiding it. The Centre can request the States, by a general letter, not to make amendments in the Sales Tax laws of the 131 States which would be operative from a date other than the 1st April. Except to meet urgent situations, this is the practice even now. in most States.

4.16. As we have an apprehension that there is a reasonable ﬁiﬂgéon possibility of section 9(2) being required to be construed as at- far amgnd. tracting only the unamended State law, we consider it advisable, mﬂét 0' and recommend that the last alternative' indicated above should $31? tic, be carried out, as am urgent measure. Such an amendment would 3"?"

be harmless in any case, and would avoid any controversy or 33' likelihood of attack on the constitutionality of this part of the section. As a long term measure, it will of course be desirable to make the Act self contained."

-Section 9(2) and oﬁences covered 4.17. There is another problem arising out of section 9(2). HOW 531' It seems that a view prevails? that only offences speciﬁcally listed noflﬁsﬁd in the Central Sales Tax Act are recognised for the purpose of in the initiating action under section 9. So, for offences provided in Ecltmal State laws,--for example, for delay in the ﬁling of return, delay covered.

in payment of tax etc.~---punishment is not permissible.

4.18. The position could be clariﬁed by adding, in section Rccfzimt-i 9(2), the word "offences" before the words "compounding of $615: on offences". We recommend an amendment of section 9(2) ac- '_'0EfeI1°_=3"

cordingly. '9'}§§f'"°"

Penalties 4.19. There is another question arising out of section 9(2), Penalty concerning penalties. In a Calcutta case} it was held that the Iélﬂirlaw penalty leviable under the State law could not be imposed for how fa, failure in ﬁling, or delay in ﬁling, returns under the Central Act. altl'aC1cd--- According to this case, section 9(2) of the Central Sales Tax Act' E§j§f"'"

does not incorporate that substantive law of penalty for non-st1b- mission of returns under the Bengal Finance (Sales Tax] Act 1941.

. Para 4.15 (c), supra.

See para 4.15 (a), .mprr.r_ and para 4.28, infra.

. Notes in the Ministry of Finance.

. Mohan La! Cftokhani v. S.T.O. 28 S.T.C. 367, 373 (Cal-}.

. Referred to in the judgment as section 9 (3) , because it was so numbered at the time of the assessment in question.

e.nn.-,..I_~3.-

The principal considera-

tions.

Insuiﬁcient importance attached to the word 'pcna1ties".

132

4.20. The principal reasons for this construction were as follows :--

In the ﬁrst instance, section 9(2) of the Central Sales Tax Act, makes the whole provision "subject to the other provisions of this Act and the rules made thereunder", Secondly. the authorities for the time being empowered to assess, re--assess, collect and enforce payment of any tax under the general sales tax law of the appropriate State are only so empowered "on behalf of the Government of India."

Thirdly, this power includes the power to "assess, re--assess, collect and enforce payment of tax, including any penalty payable by a dealer under this Act". Hence, the central idea is "penalty" payable under this (Central) Act, and not penalty payable under a State law.

Fourthly, the power is "qualiﬁed by the words as if the tax or penalty payable by such a dealer under this Act is a tax or penalty payable under the general sales tax law of the State".. This is a deeming provision and can deem no more than what it says, namely that the "penalty payable under this (Cen- tral) Act", and not any other penalty, will be deemed "as if"

payable under the general sales tax law of the State.

Fifthly, the other words in section 9(2) are---"for this pur- pose they may exercise all or any of the powers they have under the general sales tax law of the State", followed by the provisions which have also been quoted above. There, the limit- ing words are "for this purpose", and not "any other purpose".

4.21. It should, with respect, he stated that the Calcutta judgmentl does not attach suﬁicient importance to the word "penalties", which occurs towards the end of section 9(2) before the words "compounding of offences". That word. in the context, could refer only to penalties Ieviable under the State Acts. How- ever, this judgment shows the need for a clariﬁcation of the position.'

1. Para 4.19 and 4.20, supra.

2, see para. 4.26 for further discussion.

133

Section 9(2) and the equality clause 4.22. Another point of great importance was raised in the sarnel-1' Calcutta case. Counsel for the petitioner argued that if. section 9(2) was to have the eﬁect of attacking the substantive provisions of State laws as to penalties, a situation would be created whereunder the law would diﬁer from State to State, be- cause the substantive provisions of each State sales tax law vary. This, he argued, would introduce inequality, and violate article

14. The High Court, in its judgment, referred to this argument, but did not decide it because the matter was settled by the con- struction placed on section 9(3)--namely that it did not attract the penalty provisions of the law of the State. Nevertheless, the judgment did discuss the matter at some length. In the course of the discussion, the Court referred to the Supreme Court judg- ment3 upholding the validity of the procedure under the Income- tax Act, 1922 for the recovery of tax, and treating it as not hit by article 14. Having mentioned this judgment, the High Court also quoted the observations in the judgment made by one of the Judges-

"Wc must be in a position to postulate some reasonable basis for the differentiation and we cannot get away from this necessity by vague references to the wisdom of the Legislature or by in- dulging in pure speculation as to what might have been at the back of its mind. Speaking broadly, for the enforcement of the levy of a Central tax like the income-tax, there should be unifor- mity of procedure and identity of consequences from non-pay- meat. The machinery for recovery might be different between the several States, but the defaulting assessee must be put on the same footing as regards the penalties."

The High Court after quoting the above passage observed :

"These observations are very relevant for the point under de- cision in this appeal before us. Mr. Mukherjee, the learned Advocate for the appellant, has argued that, if the Central Sales Tax Act by reason of section 9(2) of its provision is construed 1

1. Mahan La! Clrakhani v. C'.T.0. (1971) 28 S.T.C. 363 (Ca.I.).

9. Para 4.19, supra.

3. Purrlrottam v. Adolf. Collector, AIR. 1956 SC. 20; 23 I.T.R. 891.

Question of equality.

Observa-

tions of the Sup-

reme Court in N. K. Namrafa Mudaiiafs C059.

134

to authorise the State Government to impose a penalty for delay or non-submission or returns of turnover, then it will lead to a chaotic situation, because different penalties are provided under different State sales tax statutes in diﬁerent States. A few illus- trations were given by Mr. Mukhcrjee on this point. According to him, Andhra Pradesh provides only for best judgment assess- ment and so also the Central Sales Tax (Madras) Rule 5(4). But here. under section 11(1), a full scale assessment is contem- plated in West Bengal. The State of Bihar introduces a penalty for such failure a sum not exceeding ﬁve rupees per day, whereas Orissa introduces a penalty for the same ground but for which penalty cannot exceed 1|10th per cent of the tax due or rupees ﬁve for every day ti1ereafter."1 4.23. It may be noted in State of Mridras v. N. K. Nara:-aja Mudaiiarﬁ the question mooted was as to whether, in the face of article 3U_1 and 393 of the Constitution providing for freedom of trade, commerce and intercourse and for prohibition against preference of one State over another or discrimination between one State and another, the adoption by the Central Act of varying rates of sales tax in force in various States under the State laws was constitutionally valid. The Supreme Court observed as follows :--

"An Act, which is merely enacted for the purpose of imposing tax which is to be collected and to be retained by the State does not amount to a law giving, or authorising the giving of, any preference tp one State over another, merely because varying ra-res of tax prevaii in different States. The ﬂow of trade does not necessarily depend upon the rates of sales tax ; it depends upon a variety of factors, such as the source of supply, place of consumption, existence of trade channels, the rates of Ercight trading facilities, availability of efﬁcient transport and other facilities for carrying on trade. It is where diﬁerentiation is based on considerations not dependent upon natural or busi- ness factors which operate with morc or less force in different localities that Parliament is prohibited from making a discrimi- nation. Prevaiience rates of tax on sales of the same cammoriiry' cannot be regarded in isolation as discriminative of the subject to discriminate between one State and another."

1. The judgement gives other examples of disparity. '. State of.-'l-facirns V. N. K. Norarcgia ﬂvfrtdaiiar, A.I.R. 1970 SC. 1742.

135

4.2.4 and 4.25. This case thus related to rates. But the reason- ing in this case could perhaps be adopted to support the validity of section 9(2), against an attack on the ground of inequality. The position however, cannot be treated as being beyond doubt.

4.26. in view of the discussion above,' and particularly in Express View of the Calcutta ease} the insertion of an express provision $°¥:,s'°"

as to penalties" appears to be desirable. 1=en,altY desirable.

One alternative would be to insert the following sul:---seetion in section 9 :--

"{2.~*x). In particular, without prejudice to the generality of the provisions of sub-section (2), penalties leviable under the general Sales Tax law of the State shall also he leviable for the purposes of this Act, as if the tax under this Act had been levied under the general Sales tax law of the State".

4.27. But this would not meet the objection of inequality' R°°°"1' mendation.

which has been sometimes raised. A better course would, there- fore, be to prescribe the penalties in the Central Act. We would 1'ec.0mm;nd this course on principle. We cannot lay down details of the pt'{}\'isi0nS to be made, as that involves various adminis- trative aspects.

Coachmen.

4.28. In fact, as regards the whole Central Sales Tax Act, uremic Act we nraj; suggest that the Act should be self--contained. The speci- :1':]"fﬂgnl_'¢ ﬁe amendments suggested above should,5 of course. be 1111- rained. dcrtal:c.n, as a.n urgent measure, But, as a long term measure, it ' "hle to make the Act self-contained, in respect of matters"

for is-:h.?ch section 9(2) at present provides.

1. Para, 4.19 to4.25 supra.

3. S.I';rE .'rfo.='m.-z La! C.='.'.').5:}1cmi V. C.T.O., (1970) 23 S.T.C. 363, 367, 373, 33"-l, 3552'. (Calcutta). (RB. 1'».-Iukherjee, CJ. and BC. Mitra J.)

3. E-lee Para 4.21 srrprcr.

1. .''~.'-.~r-. M.-ia'i;i.-2 Ln! Chi;-.Umm' 'V, Commercial Trix Oﬁicer {I }l'i;. 23 S. T. C. 367, 3T3 {Cal.). Supra.

3'. P:l'.'£|.. 4.16, 4.18, 4.27 supra.

ii. Cf para 4.16, s.-rpm. read with 4.15 (C).

The ques-

tion of men: rec:

wiLh regard to offences.

Recommen-

dations in Law Com-

mission's 47th Re-

port.

CHAPTER 5 PUNISHMENT FOR EVASIDN OF SALES TAX Introductory

5.1. One of the questions which we have been asked to consider is, whether the provisions with regard to penalties for the evasion of sales tax should not be amended, so as to do away with the concept of mans rea or to bring them in line with the recommendation made by this Law Commission in its 47th Report with regard to oﬁeuces under other ﬁscal laws.

Men: Rea 5.2. It may be noted that this Law Commission, in its Report on the offences connected with social and economic legislation,1 made several recommendations for amendment of the enactments dealing with social and economic offences, includ- ing laws relating to direct taxation. It should be noted, how- ever, that not all the amendments recommended in the Report were applicable to laws relating to direct taxes. Some of the recommendations for amendment were expressly stated as not applicable to the Income-tax Act and other taxation laws, having regard to the complicated nature of offences under those laws. Thus, it was noted in that Report? that provisions as to the following were absent from the Income-tax Act :--

(i) Elimination or modiﬁcation of men: rea;

(ii) Conﬁscation;

(iii) Stoppage of business (on conviction) ;

(iv) Higher powers of Magistrate j

-- (v) Special rules of evidence.

1. 47111 Report of the Law Commission {Social and Economic Offences}.

2. 47th Report {Social and Economic Offences), page 130, para 15.54.

136

13?

5.3. But amendments for inserting such provisions in the Amend- enactment relating to direct taxes were ruled out, having regard :1b€_~',i.i¢ on to the complicated nature of the offences under the Act. mam'-T5 "0! 1"B-CC|1'.'l1lIIEIl-

ded in taxation law.

5.4. The same reasoning applies to oﬂences under sales tax Change in laws. That the offences under the Sales Tax Act will be of a .;'l:"n§}"

complicated nature, cannot be denied. No change is, there- ';=°°mm¢"' fore, recommended on the question of mans rea.1 g§;'.;;'f,,,§f,_;

T811 5.5. and 5.6. It may also noted, with reference to mens ('_.'ourt deci- rea under the Act, that it has been held that to bring home the ;,'ﬁg'i's:§'e'ed oﬁence under section 10(b), a guilty animus or mans Tea is for mens essential." This View is concluded by a series of decisions? rm' 5.7. We shall now examine,----(i) such provisions of the laws P1'°"'l3i°"5 relating to direct taxes as are suitable for sales tax laws; and 1:; 1d§.§.°}s"'

(ii) such of the amendments recommended in the Commis- ¢°n5id31'°d-

sion's Report on Social and Economic offences' as were intended for direct tax laws provided they are suitable for adoption in sales tax laws.

Higher punishment 5.8. We shall ﬁrst consider the question of higher punish- ment for certain oﬂfences. In the h] h Social and Economic Oilencesiu the oﬁence of making false plﬁu-Eﬁment statements in declarations under the Ineome--tax Act was speciﬁ- "E! Céﬁﬁiﬂ eally dealt with, and a recommendation was made to regulate O ewes' the punishment according to the amount of tax which would have been evaded if the statement by the assessee (now dis- covered to be false), had been accepted as true. If the amount of such tax exceeds one lalch of rupees, or if the case is one of a second or subsequent conviction, the recommendation was to prescribe the maximum punishment of 7 years' imprison~ The ques-

Commission's Report en ti?" 05

1. Para 5.2 (1'), Supra.

2. Misra Limestone Ca. V. 5'. T. Oﬁicer, A.I.R.. 1971 Orissa 122, 124.

3. Manjunuth Type Borreading Works V. State of Mysore (I969) 2'3 S.T.C. 433 (Mysore).

(b) Cammissibner a_fSo!es Tex, Indore V. Bombay Genera! Starts', A.I.R. 1969 Madhya Pradesh 213,

4. 41th Report of the Law Commission.

5. 47th Report of the Law Commission, Page 174.

Recommen-

dation to amend sec-

tion 10, as to insert minimum punishment Adequacv of punish-

ment--a Gujarat case.

138

ment (and ﬁne), with a minimum of six months' imprison- ment--there was also a recommendation as to relaxation of the minimmn. In other cases, the maximum imprisonment recom- mended was three years (with ﬁne as an alternative), but there was to be no minimum. The same approach could be adopted for offences under the Central Sales Tax Act. But, in this case, the ﬁgure of one Iakh of rupees, should be reduced to ten thousand rupees because, even for evasion of tax to the tune of Rs. 10,000, the turnover would have to be fairly high. Further, we are of the opinion that there need he no relaxation of the minimum in this case.

5.9. Accordingly, We recommend that section 10 of the Central Sales Tax Act should be revised as follows :--

"ID. If any person--

. . . . . ..[(a) to (f) as in existing section] he shall he punishab1c--(i) if the amount of tax which would have been evaded if the offence had not been discovered o-r the amount illegally collected, as the case may be, exceeds ten thousand rupees, or if the case is one of a second or subsequent conviction for an offence under this Act, with imprisonment for a term which may extend to seven years, but which shall not be less than six months, and with, fine;

(ii) in any other case, with imprisonment for a term which may extend to three years, or with ﬁne, or with both ;

and when the offence is a continuing one, the ﬁne under sub- clause (i) or sui:---clause (ii) of this clause, may be a daily ﬁne which may extend to ﬁfty rupees for every day during which the oﬁence continues."

5.10. It is heartening to note that some High Courts are alive to the need for adequate punishment for oﬂences relating to taxes. Thus, for example, in a recent Gujarat case,1 the High Court observed :

"One can understand an oﬁence against the person of an individual committed on account of the emo-

1. Stare ofGujarn: V. Korfmbhar, (1972) 29 S. T. C. 95, 9? (Gujarat) (M.P. Thakkar J.).

w- t...-._.._....._. .:_ '.5 ' ..--..-

: j K . q-5-Jnq»---r------d-.u___ .

pt 139 tions of an individual getting the better of his reason .... ..When, however, offences against public revenues are committed by businessmen with deliberation, no lenient view of the matter can be taken by the courts. Let it not be forgotten that the public revenues collected by way of taxes from the citizens are inter aiin employed by the State for ensuring that the citizens are not deprived of their right to possess property. If oﬁences against public revenue are committed by businessmen, it would amount to robbing the State which pre- vents them from being robbed by others.

Where a charge is that of ﬁling false returns and of failing to account for sales running into as large a sum of Rs. 138,914.31, to impose a penalty of a ﬁne of Rs. 10 (it is no overstatement to make) is to make mockery of the provisions contained in section 63 of the Act. To impose a ﬁne of Rs. 10 can very well be equated with the issuance of a licence to defraud public revenues on' payment of Rs. 10.

A time has come when the courts cannot afford to take"

an unduly lenient view of contravention of the provisions enacted by the Legislature to prevent fraud against public revenues."

Abetment 5.11. The question of abetrnent of oﬁences may now be considered.

5.12. In the Commission's Report1 on Social and Econo- mic oﬁences, a re--draft of the section of the Income-tax Act relating to abetmentf was suggested. We recommend that on the same lines, a new section should be inserted in the Central Sales Tax Act" as [follows :----

"10-B. Abetnient of false accounts. etc. If a person abets or induces in any manner another person to make and deliver an account, statement or declaration relating

1. 41th Report of the Law Commission.

' . Income Tax Act, 1961

3. Section 10 B 20 M of Lawf74----10.

Abetment.

Recommen' glation of insert sec-

tion 103 relating to abetrnent.

MB to any transaction chargeable to tax under this Act, which is false and which he either knows to be false or does not believe to be true, he shall be punishable-

(i) it the amount of tax which would have been evaded if the declaration, account or statement had been accepted as true, exceeds ten thousand' of rupees"

or if the case is one of a second or subsequent con- viction for an offence under this Act, with impri- sonment for a term which may extend to seven years, and with ﬁne ;

(ii) in any other case, with imprisonment for a term which may extend to three years, or with ﬁne, or with both".

Corporations' Punishmcm $13. The question of' puitishrnent of Corporations was of Ctor- considered in the Com1ntss1on's Report? on Social and Econo- poralons.

mic offences, and the insertion of the following section in enact- ments dealing with social and economic offences was recommen- ded.

"IO-B. (I) When a corporation is convicted of an oﬂ'-ence under this Act, it shall be competent to the Court before which I the conviction takes place, to pass on the corporation a' sentence of public condemnation, in addition to any other punishment to which the corporation may be sentenced.

(23: When such a sentence is passed,_the court shall cause the name and place of business of the corporation, the offense, the fact that the corporation has been so sentenced and any other punishment imposed, and such other particulars as the court may consider to be appropriate in the circurnstances of the case, to be published at the expense of the corporation in such newspapers or in such other manner as the court may direct.

(3) The expenses of such publication shall be recoverable from the corporation in the same manner as fine.''.

HI. As to the amount cf-Page 59, Supra.

2. 47th Report, Page 172, and P. 61-62, Para SJ.

*1 '_-,z--..... - .i -

.-L [41 5.14. We recommend that a similar provision should be Rccommcn- inserted in the Central Sales Tax Act,' as section 10-C. 'l.jna::1?t"£_,_

- hon 10-C regarding Corpora-

Pubiication of names of convicted L-uiivfduals U093-

5.l5. We also recommend" that a provision for publication of Sgction i{}D--Publi-

names of Convicted individuals should he added in the Cent}-a1 cation Of Sales Tax Act. Legislative precedents are available on the namgs 9:

subject and we need not, therefore, suggest a draft. ?°"."}'.°'-Cd lndlwduals.

"7."Fé6;§x.a"i;e pa: as s$c[£o'=. we

5. It could he put as section 10-!) Collection of excess amount by dealers.----

No legisla-

tive com-

petence in States.

Provisions for penalty held void in absence of proce-

dural safe-

guard.

{Case relat-

ing to U.['.

Act.

CHAPTER 6 DISPOSAL OF EXCESS AMOUNTS COLLECTED BY A DEALER FROM A CUSTOMER AS SALES TAX 6.1 It appears that some diﬁiculty has been felt as regards the disposal of amotutts illegally collected as saIes--tax by a dealer from a customer. Such a situation usually arises when Sales Tax is realised from a person in respect of goods not liable to tax. State Acts sometimes contain provisions to the effect that such amounts will be forfeited to the State Government. But such a provision has been held' to be beyond the legislative competence of the States, as it is not incidental to the power to let" a "tax" on the sale of goods, because, on hypothesi, the amount in question is not Ieviable as "a tax".

Thus, section 5(c) of Andhra Pradesh General Sales Tax Act (6 of 1957) as amended was held to be ultra vires the State Legislature," on this ground. The section provided for liability of the dealer to pay illegally collected tax to the Gov- ernment.

6.2. Even where the provision was framed in terms of "penalty", and not merely in terms of "forfeiture". it was held to be void, in the absence of procedural safeguards which com- plied with article l9(l)(f) of the Constitution. On this ground, a provision in the Bombay Sales Tax Act was held to be void."

6.3. In a recent case'* decidedibv the Supreme Court a deal- er wrongly collected a certain sum as sales tax from the cus- tomer. The question was whether the State Legislature is I. Abdul Qua-dar and Co. 1-'. Sales Tax Ojficer, Hyderabad (1964) 6 S.C.R:

86?; A.I.R. 1964 S.C. 922, 923 to 925 (Section 11, Hyderabad General Sales Tax Act).

V. Audisesfrtah dc Ca. 'V. State ofA.-rdhra Prades-h, (I968) 22. S.T.C. 222 {Andhra Pradesh). (Section 5, Andhra Act).

3, Kantilalﬂabulal V. H. C. Patel, A.I.R. 1968 S.C. 4-15, 448, Para 9; (1968) l.S.C.R. 735. (Section 12-A, Bombay Sales Tax Act, 1946).

ll;

4. State of U. P. V. Amaapuma Biscuit Mfg. Co. (1973) l.S.C.R. Q63 (dated 3rd May, 1973). A.I.R. 1973 S.C. 1333 {July}. (Section 29A, U. P. Act).

142

I43 competcut to pass a law for the deposit of that amount in the Government Treasury.

The U.P. Legislature had, through an amending Act, sub- stituted the following provision (in place of the old section) in the U. P. Sales Tax Act--

"29A. (1) Where any amount is realised from any person by any dealer purporting to do so by way of realisation of tax on the sale of any goods to such person, such dealer shall deposit the entire amount so realised into the Government treasury, within such period as may be prescribed, notwithstanding that the dealer is not liable to pay such amount as tax or that only a part of it is due from him as tax under this Act. -

Any amount deposited by any dealer under sub-section (1) shall. to the extent it is not due as tax, be held by the State Government in trust for the person from whom it was realised by the dealer, or for his legal representatives, and the deposit shall discharge such dealer of the liability in respect thereof to the extent of deposit.

Where any amount is deposited by any dealer under sub-section (1) such amount or any part thereof shall, on a claim being made in that behalf in such form as may be prescribed, be paid to the person from whom such dealer had actually realised such amount or part, or to his legal representative, and to no other person:

"Provided that no such claim shall be entertained after the expiry of three years from the date of the order of assessment or one year from the date of the ﬁnal order on appeal, revision or reference, if any, in respect thereof, whichever is later."

6.4. The constitutional validity of this provision was chal- lenged in the Allahabad High Court, which declared it as un- constitutional. There was an appeal to the Supreme Court (on a certiﬁcate granted by the High Court). The Supreme Court dismissed the appeal, relying on its two earlier decisions. The first was Cornnrissiorter of Sales Tax V. Gang-a Sugar Corpora- tion Ltd} in which the Supreme Court had declared a similar provision [section 8-A(4]] ultra vlres the Constitution. Section 8-A(4] read as follows:----

(2) (3)

1. Corrrnnssiorrer aj'5'al'es Tax V. Grange Sugar Carporariorr Ltd. (1970) 25, '::.T.C. [55 (S.(_'..). (Section SA, U, P Act).

Earlier _ cases relied on.

An Andhra llradcsh CESC.

A case from BN1 2: r.

Three aspects considered.

144

"S-A(4). Without prejudice to the provisions of clause

(g) of subsection (2) of section 14, the amount realised by any person as tax on sale of any goods shall, notwithstanding- anything contained in any other provision of this Act, be deposited by him in the Government Treasury within such period as may be prescribed, if the amount so realised ex~ ceeds the amount payable as tax in respect of that sale or if no tax is payable in respect thereof."

The second case was Abdul Quudar & Co. v. Sales Tax Officer, Hyderafzadﬂ In that case also the Supreme Court had de- clared section ll(2) of the Hyderabad General Sales Tax Act. which required the dealers to deposit tax wrongly collected by them in the Government Treasury, to be ultra vires the Consti- tution.

6.5. In another judgment 'of the Supreme Court,'~' section 20A of the Bihar Sales Tax Act, (which was substantially simi- lar to section 29A of the U.P. Act") was held to be void. The question which the Supreme Court posed to it- self was--~"ls there any entry in List 11 or List II! of the Seventh Schedule to the Constitution under which the State Legislature could make such a law?"

It was contended before the Supreme Court that Entry 54 in List II or in the alternative, entry 7 in List III gives sulﬁ- cient power to the State to legislate on the subject under dis- pute. However, the Court rejected this contention, and dismiss- ed the appeal, and declared the provision of the Bihar Act as ultra vires the Constitution.

It is needless to state that the Supreme have been applied by several High Courts.' 6.6. What, then, would be done to clarify the position '.7 We consider three aspects in this content-- . ' Court decisions [a] the position under the ordinary law as to the eﬂeet of mistake of law; 1

1. zfbdltd Quarter & -Co. v. Sales--Tax Oﬂicer. Hyderabad, (1954) 15 S.T.C. 493, A.-I. R. 19643. C. 922. .

.2. Asoka Jifurkerirag Ltd. v. State of Biker, {l9?0)l S.C.N.R. 283, (1970) l S.C.C. 354. {Section 20 A, Bihar Act). -

3. Para 6.3 supra.

4*. Lakshmizrarrzyarza Coinmercial Corp. 52? {Andhra Pradesh).

V. C. T. 0 (19792) 29 S.T.C'..

145

(b) the proper course to be adopted;

1.' C) the constitutional position.

(21) Ordinary law as to eﬁecr of nzisrake of law 6.6A. The Supreme Court has held' that if it is established that a payment, even though it be a tax, has been by a party labouring under 21 mistake of law, the party is entitled to recover the same, that the party receiving the same is bound to repay or return it, and that no distinction can be made in respect of a tax liability and any other liability on :1 plain reading of section 72 of the Indian Contract Act.

6.7. The settled position in law, as regards the liability of Liability of the State, as laid down by the Supreme Court,'-53-" is asS""e' follows:---

{:1} Where tax is levied by mistake of law, then ordi- narily it is the duty of the State, subject to any provision of the law relating to sales tax, to refund the tax;

(13) If refund is not made, remedy through court is open, subject to the same restrictions and also to the period of limitation. namely, three years, from the date when the mistake had become known to the person who had mad_e the payment by mis- take.

(c) The High Courts have the power, for the enforce- ment of "statutory rights and iundtimental rights, to give consequential relief by ordering repayntent. of money realised by the Government without the authority of law. The power is, of course, dis- cretionary.

L 'S'uI:'.i' Tax Oﬁieer v. Jnmhinya Let, A. L R. 1959 s.C. 135; (l959)S.C.R. 1350. =

2. "liter? of ﬁferafa v. A!mm'nr'um Industries (1965), 16 S. T. C. 639 {gig}, referred to in the Yearly Digest (1965) K.L.R. 523.

3. State of Madiiya Pradesh v.' Sheiial Blmi, A. I. R. 1964 S.C. I000, 1010. para 14 to l7.

4. Gill' & Co.v.Com:neri-tut' tax Ofﬁcer, Civil Appeal No. 1580- 1595 of 196'! dated 9-2-1963 (I963) S.(.'.. Notes 80; (1968) 22 S.T.C. 524 (S. C.) Liability of the dealer.

Three parties in-

voltcd.

State to EEJCLLTE 31.'-

storalion to citizen.

146

6.8. These propositions deal with the liability of the .'>'mre to refund money illegally realised. The liability of the deahtr to refund, to the citizen, the amount illegally realised cannot also be disputed. It is well settled that a person who is illegally made to pay a tax is entitled to refund.' 6.9. It should be remembered that there are three parties involved in the question which is under consideration. First, there is the citizen who has been illegally deprived of a certain amount of money under the guise of tax; secondly, there is the dealer who, knowingly or otherwise, has recovered the amount from the citizen without the authority of law: and thirdly, there is the Government which, as a sovereign, is naturally anxious that the amount should be refunded to its rightful owner, that is, the citizen.

6.10. Not much argument is needed in support of the pro- position that the State, as the sovereign charged with the ad- vanccmentof justice, ought to see that what belongs to the citizen is restored _to him. The machinery by which this objec- tive is to be achieved, and the provision to be made to achieve it and other matters, are matters of detail rather than of prin- eiple. A legislative provision dealing with this problem must take us to the point of the ultimate destination of the amount. The provision in most State laws relating to Sales Tax leave the matter at the stage of vesting the money in the State. or satisfy themselves with prescribing penalties for the illegal realisation of tax. It is obvious that if a satisfactory legislative formula can be devised which carries out the objective men- tioned above in the fullest manner. it would not only advance substantive justice, but also make for a clariﬁcation of the law in a ﬁeld where some such clariﬁcation or declaration of the law appears to be.en_:tincntly needed. The general proposition in the Contract Act' for restitution gives e-Eect to a well-csta- blished principle of the common law; and what is needed is a provision which works out this principle in the particular ﬁeld of taxation in an eﬁective manner.

1. c}: section 72, Contract Act.

2. Section 72, Indian Contract Act, 19?2.

147

(b) Consritttriorrtti Position 6.11. The present constitutional position is clear. The 'tCi§rTll;}5t1'11;5i_ legislative power to deal with the disposition of amounts collec- tion_ ted illegally as sales tax is not relatabic to the taxing power of the States,' and it would seem that this power can be derived only from the rcsiduary legislative power. which vests in the Union}.

to enact Central legislation on the subject of amounts illegally ﬁewigggﬁfr colleetgd by any person front members of the public by way HI:-' 1J0Wer of tax though not chargeable as tax. Since legislative power entry' in this regard does not fall within any particular taxation entry,"

it would fall only under the residuary power, which rests with the Parliament." Therefore, the proposed provision could be made applicable to all amounts levied under the guise of tax, but not so legally leviable.

6.13. As to the enact content of the provision, some think-- Precedent ing is required. The usual provision in the State Sales Tax ?f,i:'}t:ED;,,_"e Act does not go to the fullest length. Then, there is the precedent Tax Act adopted in the Income tax Act} but it is not completely ap- f'.fI,',',S§§},°5i_ propriate. The theoretical basis for the proposed provision dered. would, of course, he unjust enrichment,5 but the practical pro- blem is, how money belonging to a member of the public should be made to reach him back. We think thatiit would be use- ful to provide that if a dealer or other person holding such money cannot prove that he has paid it to the rightful owner, he sirottlri be reqttireo' to pay it into the State Treasury, and failure to do so should render him liable to prosecution and punishment.

6.14. It is hardly necessary to provide administrative penal- No need to ties for failure by the dealer or the person to deposit this amount. $g'i';'t'I?ag'_',';

However, the Sales Tax Inspector or other officer examining the penalties.

See decisions cited in para 6.1 to supra.

3. See para 6.11, supra.

1. Constitution Seventh Schedule, Union List, entry 97'.

5. Section 2763, Income Tax Act, 1961. cf. Section 72, Contract Act, and para 6.5, supra.

l(ccornmen--

dation to enact sepa~ rule law re-

garding amount il-

legally col-

lected as takes.

148

accounts can, if he ﬁnds that a violation of the proposed statu- tory requirement has been committed, initiate suitable criminal proceedings.

6.15. We, therefore, recommend that a legislative provision somewhat on the following lines, should be made by a separate lawl.

...

'-A-bum "{1} Where any person other than a public otﬁceri has, purporting to act in pursuance of any law impos- ing a tax, realised from any other person as tax any amount not legally due from such person as such tax, he shall", unless he proves that he has refunded the amount to that person or has other- wise accounted for the amount in accordance with such law,--

(a) deposit the amount so" eolbcted without. delay in

(b) the nearest Government Treasury, and shall by general or special notice intimate the par-

ticulars of the case to that person and to the authority _to whom he would be liable to account if the amount had been legally due as tax.

"{2} All amounts received under sub-section [1] shall (3) (4) be credited tp the public account of India, or to the public account of the State*, as the case may be; but the Union of India or the State, as the case may he, shall be liable "to refund the amount to the person from whom it was realised.

The Central Government or the State Government, as the case may he, shall cause public notice to be given" every six months of the receipt of such amounts, giving the prescribed particulars. -

Notwithstanding anything to the contrary in any law or contract, 'when any amount is deposited-by a person in compliance with the provisions of this . To be implemented by a separate law.

. The expression 'public oﬁieer' to be deﬁned. punishment for contravention can be imposed. . See article 266 of the Constitution .

. Expression "presc1'ibed"' to be defined-

149

section, such deposit shall constitute a good and a complete discharge of the liability of that person in respect of such amount to the person from whom it was collected. ' {5} The person from whom the amount deposited in pur- suance of this section was collected, shall be entitled to apply to the authority to whom it was paid for refund of the amount to him, and the said authori- ty shall allow the refund if it is satisﬁed that the claim is in order :

Provided that no such refund shall he allowed unless the application is made before the expiry of the period vvithin which the applicant could have claim- ed the amount front the person who collected it by a civil suit, if his liability had not been discharged in accordance with the provision of sub-section (4).

Provided further that no claim for such refund shall be rejected without giving the applicant a reasonable opportunity of being heard.

(6) Nothing in sub--set:tiou' (5) shall affect the right of the person entitled to refund of any amount thereunder to ﬁle a civil suit for the recovery of such amount against the Government; and the period of limitation for such suit shall be computed from the date of receipt or publication of the notice under sub-section { 3)."

6.16. Two other questions-relating to tax illegally collected _ were raised during our discussions. and may be examined at ﬁa'::"ﬁg,alfm. this stage; ﬁrst, whether a dealer who deliberately collects as overcharg- tax sum not legally due, is guilty of an offence, and second, if '"3l'"' he is not so guilty, whether a provision in that behalf should be recommended. We deal with them below:

6.17. As to criminal liability for over--charging tax, the mm' at-

oﬁcncc most probably committed by a dealer in the circurns-- cheating tanccs mentioned above is that of cheating. In so far as is n1ate-- §';"';'3'$'d rial for the present purpose, the relevant section in the Indian charging.

Penal Code', (dealing with cheating) punishes a person who.

M iii. Seciior1w415_ir7e;idVxi.-ith section 420, l.P.C. C-'kc.-'a.l:1arg~ in g whether .':n7ClLinis to :: represen-

tstion.

Represen-

tation as to a matte1'of law.

150

by "deceiving" another person, induces that person to do a cer- tain thing,----in the present case, the payment of money not legally due. The crucial word is the word "deceiving". The starting point in the search for guilt in a case alleged to be one of cheating, ll; a consideration of the question whether there was :1 "deception". The Indian Penal Code does not deﬁne the ex- pression "deceiving". Roughly speaking, there is deception when there is untnie representation (made knowingly). which in- duces belief in the mind of the person to whom the representa- tion is made, and which is intended to induce such belief.

6.18. The first question, then, to be considered, is whether there is a representation by a dealer when he over-charges tax. It is well-established that a representation may be by words or by conduct. Verbal assertions or direct representations are not required to constitute deception. "Actions speak louder than words". In an English case often citedl, it was pointed out that if a wrong--doer who pretends to be a college student, by putting on clothes peculiar to the students of a particular college, goes to a shop and thus obtains goods at credit, he would be guilty of the (statutory) offence of obtaining goods by "false prete-noes5"', even though he did not say that he was a member of the college. In the present case, of course, there is really something more than an implied assertion or assertion by conduct; there is an express demami. Hence there is no doubt that there is a re- presentation. ' 6.19. Another question to be considered, in regard to the -

meaning of deception or representation is, whether a represen- tation as to a matter of law constitutes deception. In England, (in respect of the offence relating to false pretences), because of the requirement that them must be a "false pretence", the general View taken was that there must he an untrue representa- tion as to fact'''. In the discussion of the law on the subject, therefore, a distinction was usually made between a representa- tion of fact (on the one hand) and a representation as to opinion, or prediction, or promise (on the other hand). It was generally stated that the "pretence" must relate to the present or the past,

1. Rear v. Barnard, {I83'7)"}' car and P. 734.

'. See now, Theft Act, 1958, section 15.

3. Section 32, Larceny Act, 1916 (repealed) [see now, section I5 (4), Theft Act, 1963].

'--.-w 151 and not the future. On the speciﬁc question whether a repre- sentation as to a matter of law would be covered by the statu- tory offence of false pretence, there was some uncertainty. Many writers took the view that it was covered, but there was no direct reported English case. The position has now been clariﬁed by the Theft Act. Section 15, of that Act punishes a person who by "deception" induces the person deceived to do a certain thing. One of the sub-sections of the Act which is important for the present purposel, is as follows :--

"{4}. For the purpose of this section, "deception"

means any deception (whether deliberate or reck- less) by words or conduct as to fact or as to law, including a deception as to the present intentions of the person using the deception or any other person." _ an Si gniﬁcance 6.20. Since, in India, the only crucial word is "deceiving , of the word Courts are, it appears, free to adopt a wider interpretation than "deceiving". was adopted by English Courts under the old statutes. After all, such fraud as is deliberate, though not relating to a matter of "fact", ought not *to go unpunished. The way of the trans-

gressor ought to be made as hard as possible. It is, therefore, a proper view to take that if a dealer deliberately overcharges tax, he is deceiving the customer, because he is, by his own act, inducing the customer to believe that the tax is legally charge-

able. --

6.21. No doubt, the absence of an effective penal provision Adequacy would be deplorable, "both because the courts are reluctantly §,,,,,,,?,',C,'i' compelled to allow dishonesty to go unpunished and because of turn. the serious waste of judicial time involved in the discussion of futile legal subtleties'*." But, as stated above, the law is ade- quate in India to deal with deception as to tax.

6.21A. As a matter of fact, many State Acts relating to provision Sales tax also contain provisions relating to" punishment for over- "1 3""

charging tax; and this provision in the State Acts would be ' attracted, in respect of over-charging under the Central Sales Tax Act, by virtue of the general provision in section 9(2) of

1. Section 15 (4), Theft Act, 1968 (Eng.). -

1'. Section 415, Indian Penal Code.-

3. Par: 6.19 Supra.

4. Note in (1955) 72 Law quarterly Review 183. quoted by Lord Goddard C..l. in Russel'! v, Smith, (195?) 2 AH. E.R. I-'96, 'I97.

Doubt its in provisions in State laws as to overcharg-

ing.

152

the Central Act,---partieularly 'because it is now proposed to add the word "offences?" in section 9(2).

6.22. No doubt, an objection could be raised that the sec- tions in the State Laws are themselves invalid, because, if tax is not legally chargeable, a provision imposing a penalty for illegal charging falls outside the purview of the States' legislative power. There is some justification" for entertaining such a doubt, in view of the Supreme Court deeisionsa, already cited. Most of them deal with thecivil aspect, but one relates to the penal aspect. That was a case from Bombay" and a. provision in the Bombay Sales Tax Act imposing a "forfeiture" of the amount illegally collected as tax was held to be void, as violating article 19(1) (f) of the Constitution. The Court said that it "assumed"

that the Legislature had legislative competence to enact the provision. But, earlier, it stated that a Gujarat decision holding that such a provision is incidental to the power to tax sale "cannot be sustained" We may, however, point out that the provision in the Penal Code' would apply', in any 'case. Hence the second question posed above" does not arise, and it is not necessary to introduce anv amendment in the penal law on this point.

1. See discussion relating to section 9. Central Sales Tax Act.

2. See Para 6.1 to 6.13 Supra.

3. Kanrilal Bbufal v. H.-C. Pan? AIR. 1968 S.C. 445.

4. Section 415, Penal Code.

5. Para 6.20, Supra.

6. Para 6.16, Sr.-pm. CH:\PTER 7 ESTABLISHMENT OF CHECK--POSTS FOR PREVENTING EVASION AND ENSURING BETTER COLLECTION OF . _ TAXES ON THE SALE OF GOODS 7.1. One of the questions which we have been asked to eonsi-- introduc- der is the establishment of chcck--posts for preventing evasion and ton"

ensuring better collection of taxes on the sale of goods. We assume that 'eht-t:k--posts', in this context, would be in the nature of barriers put up to ensure that in inter-state movement, goods do not escape the tax lawfully leviable. It appears that some

9. obscurity exists as to legislative competence to provide for such eheek--posts. Because of this obscurity, our discussion will con- eentrate on legislative competence.

. 7.2. The power of the Union to levy inter--state sales tax is Egifglive primarily derived from Union List, entry 92A under which I so far as is material) a law can be made imposing a tax on inter- state sale or purpose of goods. Now, it is well-settled' that the legislative entries in the Constitution must be given -the widest _ possible interpretation and the Legislature is competent to enact g provisions to check the evasion of tax". The amplitude of the ' legislative power in relation to measures for enforcement" is [ welI-established.

7.3. On this principal, the imposition of interest on arrears ::~fmt|i'11'i:*";°:

of sales tax has been upheld. Though the State List, entry 54, t1-ieg_ of the Constitution does not refer to interest, the power to charge interest on arrears is regarded as incidental to the power to impose sales tax'.

. Board of Revenue V. R..5'. Tlraver, A.I.R. l968 S.C. 59, 64, (l968jl S.C.R. 148, 20 S.T.C. 453, 66 l.T.R. 664. '

2. See 49th Report of the Law Commission, pages 7 to 9 para 13 to

19. (cases reviewed).

3. (a) Ravinclzandra v. C.I.T (1954) 25 I.'I'.R. T58, (1955) 1 S.C.R. 829

(b) Balaji v. I.T.0. (1962) 2 S.C.R. 983, 43 I.T.R. 3-93.

' 4. 3. Ram Clzand v. s.r.o. (1953) All L.J. 970, 972,- 23 S.T.C'. 423(D.B.) (Oak C J. and T.P. Mukherji L}. E u---

. . _.:.a..:an:;_-gr. -

153

Suggestion referrcd to.

J1-dici all decisions------

Andhra case.

Parliament competent to setup check-post under the Central Act.

154

7.4. We understand, however, that States have, in view of certain judgments", urged3 that there should be a provision in the Central Sales Tax Act for setting up check-posts. We, there- fore, proceed to a discussion of the case law.

7.5. As a starting point for discussion, we may take a recent case' of the Andhra Pradesh High Court. It held sub- section (3) and (4) of section 29 of the Andhra Pradesh Gene- ral Sales Tax Act, 195? to be beyond the legislative competence of the State. Under those sub--sections, the ofﬁcer-in-charge of the check-post could seize goods not covered by way hills con- taining the prescribed particulars. and could conﬁscate them if the penalty levied was not paid. It was held by the High Court, following a Supreme Court judgrnentﬁ. that the power to con- ﬁscate and seize goods was not ancillary or incidental to the power to tax the sale or purchase of goods. We shall, in due course, discuss the judgment of the Supreme Court".

'.-'.6. It seems to us, however, that the position should be considered separately with reference to the Central Sales Tax Act and with reference to the State Sales Tax Acts. So far as the position under the Central Sales Tax Act is concerned, it is obvious that the creation of check-posts and the confermentgof other powers including, if necessary, powers for the seizure of goods, falls within the competence of Parliament. Whether or not such a power is incidental to the power to levy taxes, is, in the case of Parliament, immaterial in the present context because, if Union list entry 92A does not give the power, Parliament has it under its residuary legislative power. What precise amend- ments should be made to provide for such cheek-posts and to confer such powers is not a matter with which we are concerned at the moment, and we should make it clear that any provisions that may be proposed in this regard should take care to comply with the fundamental rights, particularly, articles 19 and 31 of the Constitution. But legislative competence of Parliament cannot be doubted.

. Judgment reported in 27 S.T.C. page 1 and 2'! S.T.C. page 4 (S.C). . See para 7.'! and 7.10, infra.

. Notesin the Ministry of Finance.

. Arlandpur District Co-operative Marketing Society Ltd. v. Special Assistance Commercial Tax Ojﬁcer, {19'r'2) 29 S.T.C. 649, 653, 654 t'Andhra Pradesh).

5. Check-post Office v. K. P. AbriuHa}1,(197l) 2? S.T.C. 1

6. See Para 7.7, infra.

Owni-

.- ---..--t-.. .n.

7'-W W"-

_ ._... _..........._.,,,_.-

155

7.7'. So far as the creation of check--posts for the purposes of Sfnttj' Sales Tact Arrrr is concerned, there are two important decisions of the Supreme Court to he noted. In K. P. Abdu1la's case', a section of the Madras Sales Tax Act" was at issue. Sub- section (1) of that section authorised Government to set up chcck--posts or barriers. to prevent or check the evasion of tax. Sub--scction (2) of that section empowered the check--post oliicer to stop the vehicle or boat at the check-post or barrier, to keep it Stationary as long as it may be reasonably necessary, to exaniine the contents of the vehicle or boat, to inspect the records etc. and to take the name and address of the driver, the owner of the vehicle or boat and the consignor and the consignee of the goods. Sub--section (3) of that section conferred power on the chcck--post oliicer to .reiz,e and co;-zfiscate any goods under transport in such vehicle or boat which were not covered by the specified documents. subject to certain procedural safeguards and subject to an option to the person in charge of the vehicle- to pay, in lieu of conﬁscation, a speciﬁed sum, including tax. The Supreme Court found the power to conﬁscate the goods to- be invalid, on the ground that such a power could not be said. to be 'fairly and reasonably comprehended in the power to legis- late in respect of taxes on sale or purchase of goods'. The following observations of the Supreme Court are relevant :--

""sub--seetion (3) assumes that all goods carried in a vehicle near a check--post are goods which have been sold within the State of Madras and in respect of which liability to pay sales tax has arisen, and autho- rises the Cheek-post Oﬁiccr, unless the speciﬁed documents are produced at the check--post or the barrier, to seize and conﬁscate the goods and to give an option to the person affected to pay penalty in lieu of conﬁscation. A provision so enacted on the assumption that goods carried in a vehicle from one State to another must be presumed to be transported after sale within the State is unwarranted. In any event, the power conferred by sub--section (3) to seize and conﬁscate and to levy penalty in respect of all goods which are carried in a vehicle whether

1. Check-Post Oﬁrer. Coinrbarare v. KP. Abdzdfafz, (1971) 2? S T.C. l;A.[.R.19?2 S.C 792, (1972) 2 SCR 817.

'. Section 42, Madras General Sales Tax Act , I959. 20 M of Law,.'74--l1 Check-posts under State Sales Tax laws.

State Legis-

latures competent to estab-

lish cheek-

posts.

Constitu-

tional amendment not appro-

prlate.

Checleposts in inter-

State trans-

actions-

Rule struck down as _deal1'ngwith mter--State transac-

tions.

156

the good: are sold or not is' not inct'a'enta.I or ancillary to the power to hwy sales taxi".

77.8. It should bementioned here that suh--sections(1)and{2) of section 42 of the Madras Act (which related to setting up of check--posts and stopping of vehicles) were not found by the Supreme Court to be wanting in constitutional validit_v. What was held to be void was sub-section (3), in one respect? The State Legislature can still create check-posts. The validity of that power in the abstract is not denied at all. But, it any power to seize and conﬁ.rcaIe3 the goods is to he validly given, the legis- lative provision conferring the power must bear in mind the observations made by the Supreme Court, particularly as regards the invalidity of the rigid presumption of sale found in the Madras Act'.

7.9. We do not think that this position can be appropriately altered by a. constitutional amendment. Nor do we think that the triew taken by the Supreme Court departs from the view that it has taken regarding corresponding provisions in the legislation dealing with direct taxes. In fact, most of the jutslicial decisions relating to the corresponding provisions in the -Income-tax Act are referred to in the judgment of the Supreme Court itself. We are mentioning this 'Because a belief prevails in some quarters that the position is diﬁerent under the Incc-rne--tax Act.

7.lﬂ. The second case'.---Ha:-asraj Bagrechd'.r r:ase------ decided by the Supreme Court also relates to check--posts. But it must be noted that in that case a rule made by the Government of Bihar was struck down because it authorised restrictions on inter-State transactions, -- a matter admittedly beyond the competence of the State Legislature. The rulein question" was as follows:--

"( 1] No person shall tender at any railway station. steamer station, air-port, post ozlﬁce or any other place, whether of similar nature or otherwise, notiﬁed . Emphasis supplied.

. See para '7 .7, supra.

. See para 7.?, supra.

. See para 'l."l, supra.

. Ha-nsraj Bogreclra v. State ofﬁihar (1971) 27 S. T. C. 4 (S. C.) . Rule 31-B, Bihar Sales Tax Rules, 1959.

E}-L/}.#¢ﬂIa>-I 157 under section. 42, any consignment of such goods, exceeding such quantity, as may be speciﬁed in the notiﬁcation. for transaction to any place ozttride the state of Bihar, unless such person has obtained a despatch permit in Form XXVILD from the appro- priate authority referred to in the Explanation to rule 31 and no person shall accept such tender unless the said permit is surrendered to him."

It is plain that a State I_eg'islatui'e has no competence to make such rules regarding inter-state sales. But the position of the Union Parliament is obviously different, and the jutlgmcnt in the above cases does not throw any doubt on the legislative power of the Union.

7,11. Prima facfe, therefore, there should not be any legal N.-_ am. tiiﬂiculty in regard to the insertion of a provision for the e5tahlish- titutional ment of check-posts or the adoption of other measures, which dlfﬁcuh-V' may be reasonably necessary for preventing the evasion of the tax levied under the Central Sales Tax Act. Any objection under article 301 of the Constitution could be met by relying article

302. What precise provisions should be made, is a matter of admi- nistrative characterg and we suggest that the Department con- cerned may. if it regards the establishment of check-posts (or the adoption of other measures) necessary for the proper en- forcement of the Central Sales Tax Act, chalk out an outiine of such measures, and process the matter in consultation with the Ministry of law. As already pointed out', the provisions of articles 19 and 31 of the Constitution will have to be borne in mind when drafting such provisions.

1. SEE Para 7.6 supra.

Introd uc-

tcry.

' Meaning of "C'ustoms frontiers".

CHAPTER 8 OTHER QUESTIONS--DEFINIT[0NS 8.1. So far, we have dealt with questions speciﬁcally raised in the letter of reference. Certain other related questions concern- ing the Central Sales Tax Act, though not mentioned in the letter of reference, will now be considered.

8.2. The ﬁrst question relates to the meaning of the expres- sion "customs frontiers". Under section 5 (1) and 5(2) of the Act, the transfer of shipping documents after the outgoing goods have crossed the "customs frontiers of India", is regarded as a sale in the course of export, and conversely, where the sale takes place before the incoming goods have entered the customs frontiers of India, it is regarded as a sale in the course of import. The result is that if the sale takes place after the incoming goods have entered the customs frontiers, it is not a sale in the course of import.

Now it may be noted that the Supreme Court has, in one case' interpreted the expression 'customs trontiers' as meaning or denoting the customs frontiers as deﬁned? for the purpose of the Customs law. In that case, the State raised the contention that the sales in question {z'.e., sales eﬁectcd while the goods were in the Madras harbour), were not sales in the course of import, as the documents of title were handed over by the assessee to the buyers after the ship had crossed the 'territorial waters'. Accord- ing to the State, the expression 'customs frontiers', occurring in section 5(2) of the Central Sales Tax Act, 1956, was eo-tcrmi- nous with the extent of the 'territorial waters' of India, as fixed by the Proclamation, dated March 22, 1956 issued by the Presi- dent of India. According to the State, the import was complete when the ship carrying the goods from a foreign port entered the territorial Waters, and any sale by the importer, by transfer of documents of title to the goods subsequent to such entry, would not amount to sale in the course of import. On the other ml. State ofsradm v. Dover (Si: Co., A.I.R.. 1970's.c. 155, 15?, para 7.

9. Deﬁned in section 3A, Sea Customs Act, 1378 (repealed).

158 159

hand, according to the assessec, 'customs frontiers' in section 5(2) of the Central Sales Tax Act, must be read, to analogous to 'customs barriers", and, when it is so read, the position would be that a sale effected by transfer of documents ot title before the goods have crossed the 'customs barrier' would not be liable to tax under the Madras Act, even though the goods have entered the territorial waters, and thus crossed the "customs frontiers".

The Supreme Court upheld the contention of the State of Madras and agreed with the former interpretation.

8.3. This decision of the Supreme Court was rendered with P05ili0IH'm1- dc-r the Cus-

refcrence to an assessment year when the Sea Customs Act of mm, Act' 1878 was in force, as the assessment in question related to the 1962- assessee's turnover for 1957-58. But the problem can survive under the Customs Act, 1962 also, because, under the latter Act, the deﬁnition of 'India' includes Indian territorial waters. The question could arise whether 'customs frontiers', in the Central Sales Tax Act, means the frontiers of "India" as deﬁned in the Customs Act,--which includes territorial waters.

8.4. The result of the interpretation placed by the Supreme Diﬂiciiltiea Court9 is, that if, after the goods being imported have crossed 'iﬂgsggcgit the "customs frontiers" (as interpreted by the Supreme Court) position- but have not yet reached the "customs barriers" as usually understood, a sale takes plaoe by transfer of shipping documents, the sale is not regarded as taking place in the course of import.

Local sales tax is, therefore, leviable on such sales. Now, it has been stated3 by orde circles that this interpretation will cause practical diﬂicultic-s.

Apparently, the practical diﬂiculty likely to be caused is in relation to determination of the actual location of the goods at the time of sale, with reference to customs frontiers, which, after all, are not visible like barriers on the shore. The ex- pression "custorns frontiers" was given a vide meaning in the old Sea Customs Act, or to state the position in terms of the present Customs Act, l962,--"territorial waters" have been

1. As to 'CLISIO its barriers' see para 8, 6 injiug.

3. Para 8.3 and 8.4 .1'tt;)rr.'.

3. Notes in the Finance Ministry Recommem (lotion to deﬁne "cross-

ing the cus-

toms fron-

tiers".

Expressions used in the Customs Act, 1962.

l60 included within 'India',--hecause such a wide connotation is con- sidered nccessary for the purposes of the enforcement of the customs law, particularly for surveillance and similar purpose. But, in practice, the actual checking of the goods mostly takes place not at the edge of the national territorial waters, but at a "customs station", when the goods cross the customs barriers'. The expression "customs station" has a statutory connotationﬁ. and can be conveniently utilised.

8.5. It would, therefore, be convenient from the practical point of view--and theoretically unobjectionable--~--if the ex- pression "crossing the customs frontiers." is deﬁned, for the pur- pose of the Central Sales Tax Act, in the following tern1s~°'--'* :----

"(aa) 'crossing the customs frontiers' means crossing the limits of a customs stationl established by or under the authority of the Central Government for the purpose of the Customs Act, 1962, and its grammatical variations and cognate expressions shall be construed accord-

ingly."

We recommend an amendment of section 2 of the Central Sales Tax Act, accordingly.

8.6. It may, incidentally, be noted that the Customs Act, 1962, does not use the expression--

(a) 'customs frontiers', or

(b) 'customs barriers'.

The expression "customs waters" is used in section 115 of that Act. The expression "land frontiers" is used in sections 105 and 109 of the Customs Act, 1962.

The expression "customs barriers" has been used in the case---law, including the second Travancore case {as reported in the Supreme Court Reports), and the expression "customs frontiers" also occurs in some of the reported cases under the Central Sales Tax Act.

1. No definition of "Customs barriers" could be discovered in the Customs Act. See para. 8.6 Infra.

5. Section 2.{13], Customs Act. 1962. road will1 section EUU) 5355011 2(l2), section 2(I.-'9), and section 7.

3. To be inserted as section 2(aa) in the Central Sales Tax Act, 1956.

4. This is not intended to be a precise draft.

161

8.7. The word, 'export', which is one of the crucial words in Sectio_n 5--- section 5, has created some problems. It has been heldl, that i:1:1;"C';'r1,'3? of in the context and setting in which the expression 'export out of the territory of India' occurs in Part XVIII of the Constitution, it is not suﬂicicnt that the goods were merely moved out of the territory of India, but that it is further necessary that the goods should be intended to be transported to a destination beyond India, so that they were in the course of 'import' into some other locality outside India. In other words, the concept of ex- port, according to this view, postulates also the concept of 'im- port'. There should be two territories; and there is no 'export' of goods if the goods are intended to be taken out of the country without any intention of their being landed in specie in some foreign port. Now, it has been stated" that this interpretation results in the levy of local sales tax on sales of coal, aviation fuel and other supplies to ships or airlines involved in interna- tional carriage.

8.8. Some of the relevant cases on the subiect are summarised Case Law. below :--

In Store of Keraia v. Cochin Con! Co,3 the question decided was, whether the sale of bunker coal was in the course of export. Bunker coal was stocked at Candle island in the State of Madras. It was sold to steamers call- ing at the port of Cochin in the State of Travancore- Cochin, and delivered there. The assessee contended, that no sales tax could be levied on these sales, since they were either sales "in the course of export" or "in the course of Inter--State trade", and therefore, exempt under which sales falling within the Explanation to Constitution, or under the Government notiﬁcation under which sales failling within the Explanation to article 286(1)(a) made during a particular period were exempted from liability to pay a tax. It was held, that the delivery was for consumption within the State, and the sale fell within the Explanation of Article 286(1) (a), and though the sales were in the course of inter-State trade falling within article 286{ 2) the tax was validated by the Sales-tax Validation Act, 1956. It

1. Sec Supren-re Court cases cited in para. 8.8 mm.

9. Notes in the Ministry of Finance.

3» T319 SFITF3 of Keraisi om! Others v. The Cochin Coat' Camps-ray Ltd. (1961) 2 S. C. R. 219; A. I. R. 196! S. C. 4-O8, 4l0.

162

was also held, that the sales were not made "in the course of export", and did not fall under article 286 {1} (bjl, and that for article 286(l)[b) to apply, it was not sulﬁcient that the goods merely moved out of the territory of India, but it was also necessary that the goods should be intended to be transported to a desti- nation beyond India.

A similar point was raised in Bria-riwh Sim'! 0:'! .S'tora.;3¢- and Disrribttting Co. of lmllrt Ltd. v. the Commercitrl Tax Officer', where the sale was of aviation spirit to international aeroplanes, and an exemption from taxation was claimed on the ground that the sale was in the "course of export". The sales were however held to be excluded from the phrase "in the course of export", because there was no destination into which the aviation spirit could be said to be imported, the sale being for use in the course of the journey. Explaining the meaning of the word "export", Mr. Justice Hidayatullah said that the test in he case of exports was that the goods must have a foreign destination where they could be said to be imported.

"If the goods are exported and there is a sale or purchase in the course of that expert, and the sale or purchase occasions the export to a foreign destination, exemp- tion is earned... The crucial fact is the sending of the goods to a foreign :Ie.rrim1tior1--xvhere they would be received as imports". The two notions of ex- port and import, thus, go in pairs."

"Applying these several tests to the cases on hand. it is quite plain that aviation spirit loaded on board an aircraft for consumption, though taken out of the coun- try, is not exported, since it has no destination where it can be said to be imported, and so long as it does not satisfy this test, it cannot be said that the sale was in the course of export. Further, as has already been pointed out, the sale can hardly be said to occasion the export. The seller sells aviation spirit for the use of the aircraft. and the sale is not integrally connected with the taking out of aviation spirit. The sale is not-

even for the purpose of export, as explained above.

I. Burmalz Shel! 0:'! Storage and Distriburirrg Co. of India Ltd. v. The Cmnme:-eial Tax Officer'. (I961) 1 S. C. R. 902, 921, 923; A. I. R. 1961 S. C.3l5, 323, 324; II S. T. C. 'F64.

'. Emphasis supplied.

'PF [63 It does not come within the course of export, which requires an even deeper relation. The sales, thus. do not come within article 236(1) (bl ."

These decisions were noted, in a different context, in the Report of the Law Commission on Kho.ria's ease'. At that time. liowever, the question to be considered by tl1e Commission was :1 narrow one, namely, whether the proposition laid down in Kftoritf.-: care required to be modiﬁed.

8.9. The question has now been raised', whether, in 1.-'iew of The quee- ' the effect of these decisions on liability to local sales tax, the 'f$L1g"ftIr;:od1- position should not be modified. Under section 5(1) of the fgosjti-on. Central Sales Tax Act, a sale or purchase shall be deemed to take place in the Course of export, it the sale or purchase occa-

sions "export".

The Central Sales "Farr Act has no deﬁnition of the expression "export", and, as construed by the Supreme Court_. that expres- sion means the taking of gums out of indie. to a piece atemirie Illdfcis. lf there is no precise or single destination for goods, then, according to the l!'+lt:]'pl'Cl3tiOn placed by the Supreme Court there is no "e7;port". 1".ii.-. has led to the sale of fuel to international carrier being taxed by the States.

8.10. One cannot be dogmatic as to whether this intcrprt-.-- Reaso1_:I tation requires modiﬁcation. If, however, it is felt that the present Esoggzﬁ position causes hardship to aircraft and ships purchasing fuel. tionofthe by rendering" them liable to local taxation, we do not see any ll1:':9:;'r'c_ objection to the law being amended so as to regard such tran- min" qt sactions as in the course of export. "="P°"'-

The reasons that would justify a. special provision for fuel supplied to international carriers are many. Unless there is unj- formity in the levy of sales tax on such fuel, airlines or other international carriers would have a tendency to uplift fuel at a place either in a non--taxing country outside India or from States within India where the taxation is low. This aspect is directly connected with international trade. and with the prevention of discrimination between States.

\2--_.--_--_--.__.--__'_,_______ L, .___ __ L 3'.lth Report, pag,:s 43 and 49 p.ir.1gr.1phs 104 and E06.

2. See para 8. Iv', .ru'p.I'a.

3. Para 3.8. supra.

Other reasons.

l'::.xplana-

non regarding fuel.

164

Moreover, there is no direct beneﬁt accruing to the Airlines from the States. Unlike road transport owners (or other internal carriers], who depend on the highways maintained by the State Governments for the ellieient running of their transport, airlines or other international carriers derive no such assistance.

8.11. There are also other reasons, relevant to federalism. For example, the growth of aviation and international carriage is important for national defence, and for the development of the country's economy and the spread of its culture. Hence a position which militates against such growth can. with propriety, be modiﬁed.

8. l_2. Only a small percentage of fuel uplifted by aircraft from a State {while operating scheduled international or domestic ser- vices) is actually used by that aircraft in that State generally.

Again, the problem of modernisation and introduction of larger and faster aircraft involves huge ﬁnancial outlay and the industry has, therefore, to conserve its resources to the maximum, in order to meet these growing needs.

The proﬁt margin of the Air Transport Industry is also quite small. Any increase in operating cost caused by a heavy State levy of sales tax on fuel would have a crippling effect on the Airline Industry. It may also affect the Tourist Industry, if on account of' excessive taxation, airlines reduce the services into and operated out of India. This would entail loss of valuable foreign exchange.

8.13. It may, therefore, be convenient to add' an Explanation dealing with sale of fuel to an international carrier to be inserted as follows in section 5, since one of the reasons in support of the present position, as given in the judgment of Hidayatullahg I ., is that the sale is not integrally connected with the taking out of the goods.

"E.rpltman'on.--A sale of fuel _to an international carrier for the purpose of consumption in international carriage shall be deemed to occasion export of the fue ."

I' A Constitutional amendment does not appear to be necessary. The proposed legislative provision will fall within Article 286.

2. Bnrmah SI'.-ell ease, A.l.R. 1961 S.C. 315, 323, Para 8.8 supra.

165

We do not think that any general deﬁnition of 'export' is necessary.

8.14. We shall deal with another question which also pertains gtzction to deﬁnitions contained in the Central Sales Tax Act. Most Sales waglflgle Tar Acts of States (as well as the Central Sales. Tax Act)' deﬁne considera-

tion' ILEI. the 'sale' as meaning a transfer of property in goods etc. for "each deﬁnition or for deterred payment or other valuable consideration", or in of sale.

similar terms.

Elucidating the expression "money: consideration" occurring in the deﬁnition of "purchase" in the Punjab General Sales Tax Act, 1948, the Supreme Court' has pointed out, that the ex- pression "valuable consideration" takes its colour from the pre» ceding expression "cash or deferred payment". If so, it can only mean some other monetary payment in the nature of "cash or deferred payrment."

8.15. In a Madras case} however, the words "other valuable A Madras consideration." which occurred in section 2(n), Madras General °"5°' Sales Tax Act, 1959 (Madras Act 1 of 1959), were regarded as covering a case where the assessee supplied gold jewels and [in consideration therefor) received equal weight of gold and labour charges for making the jewels. Here the goods were transferred in lieu of gold, but still the transaction was held to be a sale.

An Allahabad case' not cited before the Madras High Court, takes a diﬁerent View on this point.

3.16. This being the position, it would, be advisable to Recom- clarify the law, by amending section 2( g), Central Sales Tax $°';'[1::';';'§ Act, so as to adopt the interpretation5 placed by the Supreme section Court," namely, that the expression "valuable consideration" 2(3)- nicans some' other payment in the nature of cash or deferred payment. We recommend an amendment accordingly.

1. See section l2(g), Central Sales Tax Act.

'5. Devi Doss V. Stare afPurrjab (1969) 1 S.C.J. 19. 28. 29.

3. V.R. Vudfvc-I AcJ'mri' v.ii"I»fa.:1'r:1s Sales Tax Appellate Trfburral, (1969;

2 M.L.J. 4 (D.'B.) criticised in (I969) 2 M.L.I. (Journal) 9.

4. S'.T.C. V. Ram Kunrar, U969} 19 S.T.C. 400 (Allahabad), (Manchanda and BL g 13.}.

5. Devi Doss v. State ofPrmjaZJ, Para SJ4, supra.

' (E. Para 8.14, .5-upra..

Intro-d Lic-

tors Section 3(2) ('0) CHAPTER 9 SECTION 8 AND THE RATE OF TAX 9.1. We now come to a question pertaining to the rate of tax. The rate of tax under section 8 is to be calculated accord- ing to £1 complicated scheme ; and the rate diﬁers according (1) as the sale is to the Government or a registered dealer, (2) or as the sale is to any other person. The rate also differs, in the ﬁrst case {sale to Government or registered dealers} if the goods are meant (a) for re-sale, as distinguished from the case where {b} they are meant for use in manufacture. In the second case, (sale to a person other than Gotrernment or a registered dealer), the rate diﬁers (i) in regard to sale of "declared goods." as distinguished {ii} from sale of other goods ; and, in both cases, there is a special concession in the case of goods which enjoy exemption under the State law, or goods, which, under the State law, are taxable at a rate lower than 3 per cent.

9.2. The tax structure is thus somewhat complicated. The scope for simpliﬁcation is limited, so long as the present structure is maintained.

9.3. There is a constitutional question concerning section 8(2) (la), which requires to he considered.

Under section 8(2) (11), the tax payable by any dealer on his turnover, in so far as the turnover or any part thereof relates to the sale of goods in the course of interstate trade or commerce not falling within subsection (1), shall, in the case of goods other than declared goods, be calculated at the rate of ten per cent, or at the rate applicable to the sale or purchase of such goods inside the appropriate State, w.'n'c?1ei.=er is higher.

The expression 'appropriate State', as deﬁned in the Act' means, rotighly, the State in which the place or business of the dealer is situated.

l . Section 2(4).

156

L2 167 9.4. Now, a question has arisen about the constitutionality of this provision. The argument is to the effect that the pro- vision for ten per cent rate violates the freedom of trade, in cases where the State rate is lower than ten per cent. Several other arguments have been put forth, but only the above one has suc- cccd-:d_.----and that too only in the Madras High Court.' We have. while discussing" section 9 referred to certain dceisions which discuss s. 8(2) (b) also. By imposing a higher rate for inter- State sale, it is stated, Parliament discriminates against importing States. The exporting State charge only the lower rate for internal sales while charging ten_ per cent for inter-State sales, which is unfair to the importing State.

9.5. A Supreme Court case", State 1;. Nataraja Mudnliar, on the subject may be discussed ﬁrst. The background of that case was as follows :--

In an earlier case. Larsen & Toabro Ltd. v. Joint Comrrrerctal Tax Oﬁc.-:r4, the Madras High Court (Veeraswami I.) had struck down sub--se-ctions (2) and (EA) and (5) of section 8 of the Central Sales Tax Act. on the ground that they violated articles 301 and 303(1) of the Constitution, inasmuch as the differential rates or exemptions in various States had an unequal burden on same or similar goods, and this aﬁected their free movement or flow of inter--State trade and commerce. In State V. Nataraja Mm1'ai'£ar5, the Supreme Court reversed the Madras High Court decision, and upheld the validity of the various sub-sections. Shah J. delivering the judgment of the Supreme Court (for himself, Mitter and hfaidyalingam JI.) held:

It . . . . . .The rates of tax prevailing in different States on transactions of sale in the diverse commodities are undoubtedly not uniform. According to the High Court, such a scheme was "obviously quite discrimi- natory and considerably affected the freedom of trade, commerce and "intercourse", the differential

5. Case-law on the subjml is discussed infra (Para 9.10) and also in Para

4.l3A to 4.l3F. supra.

. Para 4.l3A to 4.131: supra.

3. State of Mhdras V. N. K. Nataraja Mudafiar, (1963), 22 S.T.C. 3'.?6 (Supreme Court) {Shah 1.}. '

4. Larsen and Tamara Ltd. V. J.C.T.C-'. (I967) 20 S. T. C. 150 (M:1d.) (Vecraswami J.)

5. N. 3 supra.

l-.'l 168 rates or exemptions in various States imposing an unequal burden on the same or similar goods which aﬁected their free movement or ﬂow in interstate trade and commerce, and that a higher rate of tax in a state worked as a barrier to the free movement of similar goods to another st.ate where there was no tax or a lower rate of tax, and for trade in particular goods declared or undeclared to be free throughout the territory of India, the rate of tax or exemption as the case may he must be uniform. We are unable to accept the view propounded by the High Court. The ﬂow of trade does not necessarily deperzd upon the rates of sales tax : it depends upon a variety of factors' . . . . .. Instances can easily be imagined of cases in which, notwithstanding the lower rate of tax in a particular part of the country, goods may be purchased from another part, where a higher rate of tax prevails . . . . . . The rates of tax in force at the date when the Central Sales Tax Act was en- acted have again not become crystalised. The rate which the State Legislature determines, subject to the maximum prescribed for goods referred to in section 8(1) and (2) are the operative rates for these tran- sactions ; in respect of transactions falling within sec- tion 8(2) (b) the rate is between the range of two and seven per cent. The rate which a State legisla- ture imposes in respect of inter-state transactions in a particular commodity must depend on a variety 0; factors. A State may be led to impose a high rate of tax on a commodity either when it is not consumed at all within the state, or if it feels that the burden which is falling or consumers within state will be more than offset by the gain in revenue ulti- _mately derived from outside consumers. The im- position of rates of sales tax is normally inﬂuenced by factors political and economic. If the rate is so high as to drive away prospective traders from pur~ chasing a commodity and to resort to other sources of supply, in its own interest the State will adjust the rate to attract purchasers. Again, in a democratic constitution. political forces would operate against the levy of an unduly higher rate of tax. The rate of

1. Emphasis supplied.

169

tax on sales of a commodity may not ordinarily be based on arbitrary considerations, but in the light of the facility o-f trade in a particular commodity, the market conditions--internal and external--and the likelihood of consumers not being scared away by the price which includes a high rate of tax. Attention must also be directed to sub--section (5) of section 3 which authorises the State Government, notwithstand- ing anything contained in section 8, in the public interest to waive tax or impose tax on sales at a lower . rate on inter--state trade or commerce. It is clear that the Legislature has contemplated that elasticity of rates consistent with economic forces is clearly _ intended to be maintained . . . . . . The Central Sales Tax, though levied for and collected in the name of Central Government, is a part of the sales tax levy imposed for the beneﬁt of the States. By leaving it to the States to levy sales tax in respect of a commodity on intra--state transactions, no discrimina- tion is practised, and by authorising the State from which the movement of goods commences to levy, on transactions of sale, Central Sales tax, at rates prevailing in the State, subject to the limitation al- ready set out, in our judgment, no discrimination can be deemed to be practised ....... ..Prevalence of different rates of sales tax in the State which have been adopted by the Central Sales Tax Act for the purpose of levy of tax under that Act is, as already mentioned, not determinative of the giving of prefer- ence or making a discrimination. The view expressed by the High Court that section 8(2), 8(2A) and 8(5) infringe Article 301 and Article 303(1) cannot be sustained."

9.6. Before this judgment of the Supreme Court was delivered, the question of validity of section 8(2) (bl had come up before the Madras High Court in another case. There,' the High Court held section 8(2) (h) of the Central Sales Tax Act, 1956, to be void and ultra vi:-es article 301 of the Constitution. Section ' 8(2) (b) provides that certain inter-State sales are subject to a ﬁxed rate of tax or the int:ra--State tax, whichever is higher.

1. S'1'roEaI:sbnri.MI'Hs Ltd. v. Deputy C.T.0. (1968) 22 S.T-C. 436 (hlartras) ton.) l Tit] ?

The Madras High Court held that the provision for differential rates of taxation, provided in section 8, was unconstitutional and violativc of the l'reedon1 of trade, commerce and intercourse guaranteed by article 30l. This was also the High Court's deci- sion in Lmsen cit Totrbro Ltd. v. Joint Commercrkrl Tax Oﬁicerl, which was over-ruled later by the Supreme Court in State of Mud:-co' v. N. K. Ncn'm'r:,r' Mtrdalfar."-* But the Suprenie Court judginent in Store of Madras v. N. K. Nataraj Murfalirir was pro- nounced after the Madras judgment in the present case.

9.7. In at Delhi case', the Delhi High Court upheld the validity; of section 3(2) (b), following the reasoning in the Sup- reme Court decision in State of Madras V. A. K. Natrafa Mudalfar, and declined to follow the decision in the Siraicikshn-rt' M'a'l'Is Ltd, ' c--ase_._ decided by the Madras High Court." I Comm 9.8. There is, thus a conflict of decisions amongst the High sion. Courts. But, in view of the Supreme Court judgement" it is almost certain that the Supreme Court will over--ruIe the Madras ' High Court judgment in the Sitalakshmi case, if the matter comes up on appeal before the Supreme Court.

Hence. no recommendation for clariﬁcation need be made. [

1. Lars-=91: & Toubrtulrd. V. Joint Comma:-t-inf Tax O_,f?ie'er (1967) 20 S.T.C. J50 (Mad) ' . State of Madras V. }''-''.K. Nararaj .1-frrrfalfcrr (1968) 22 S.T.C. 37$ {Supreme Court} {Shah J.) A

3. Para 9.5. Supra. ,

4. GeHerr2l'Agene1'es {fndfirl Ltd. V. The Sales Tax 0_.f3'.-"car (1963) 29 3-T-C 270, 273, 274, 277 [_De]hi).

5. Sfraiokshmf M:'!f5 Ltd. V. Deputy C'.T.O. (1963) 22 S.T.C. 436 {Mad- ras} {D.B.). Para 9.-E Supra.

6. State of Madras V. Nrriaraj Mudaliar See para 9.5 supra.

to' CHAPTER I D RETROSPECTIVE RESTRICTIONS UNDER ARTICLE 286(3) 10.1. Under article 286(3) of the Constitution, Parliament Question' is competent to declare certain goods to be of special importance in inter--State--trade or commerce. The result of such a declara- tion is that any law of a State imposing tax on the sale or purchase of the goods so declared is subject to such restrictions and conditions (in relation to speciﬁed matters) as Parliament "may by law specify.

It appears' that doubts have arisen as to whether. under this article. restrictions having retrospective effect could be imposed in regard to the powers of the State Legislature.

10.12. In this connection, an amendment regarding coal may be rc-ferrcd to-- In one case} the Supreme Court had held that the c.xpr-sssion "coal" in section 14 of the Central Sales Tax Act. 195:'. inchtded charcoal. But States had been treating charcoal as at ntm-declared conlntodil}-'. and the need for amending the law anti For giving retrospective effect to the amendment (to safeguard State rsvcnttes) arose. But, it is stated, the matter was not free frorn doubt. The am.:ndment" was drafted as below, at the Select Ctiinmittt:-3 stage of the l97l Bill.

"(til for clause ti), the following clause shall be, and shall be deemed always to have been suhsltituted, namely :--

"(ij coal, including coke in all its forms. but e.r-- eluding charcoal :

Provided that during the period commencing on the 3rd day of February, 1967 and ending with the date of commencement Ir. of Fi-na.nc-2.

2. |::v(J.*?l.|'ﬂI'.5'.S'n!'0J'1€l' Uf St?J'£.'.)' Tn:t..l.', :1-'il'a|t"i!'/E_}'.fl l"J'(¢'t3rI'.'.l'i[T '.'. _/{g_I.'u'(,I,Iz.' Smgf; {,',|';m-H-J51 .',x'r'rz_,-;r.'r, (Feb. 23, I967'). [9 S.T.C. 469.

5. C€ﬂll':ilS'ﬁ.l.C3'Tai€ A=ne:t.l.1"l'Jt1I Bill. l97l, which led to thc Amend- rncnt Act 0| l97'2'..

1i'l 2o at-t t.-3' 1_;tw,»';4ﬁ:2 whether legisla-

tion under article 286 can be retros-

riectivc.

Amend-

rncnt regarding coal.

Select Commit-

1cc's ob-

sch-'ations.

An1cILi-

me-nt illus-

trative of doubt on the subject.

No scope for devising suitable mcch anism.

I72 of section '11 of the Central Sales Tax (Amendment) Act, 1972, this clause shall have effect subject to the modiﬁcation that the words "but excluding charcoal" shall be omitted."

10.3. The Select Committee' on the Bill of I971 made the followiiig observations which explain the above'-' amendment.

"(ii Sub~clcut.re (a}--This sub-clause seeks to exclude with retrospective eﬁect, charcoal from the deﬁnition of "coal" contained in clause (i) of section 14 of the Principal Act. The Committee feel that the retrospective eﬁect to the amendment through this Sub--cIause excluding charcoal from the scope of the term "coal", should not tzﬂect the position during the :'mert-'enz'rrg period from the 23rd February, 1967 {rite date of the Supreme Crmrt jtidgrnenf in. Ia.m'ant S.r'ngh Charon Sirrgifs case) and the coming into force of the aniendmcnt. It should be ensured that the Supreme Court judgment would prevail during the aforesaid period and "charcoal" will be treated as declared goods, and no dealer would be required to pay tax on "charcoal" at a rate exceeding the one applicable to "coal" in the appropriate State. The sub-clause has been amended accordingly."

10.4. The above amendment has been rcierred to as an example of the doubt prevailing on the subject of retrospective effect being given to a law falling within article 286(3). It is stated3 that there may be similar occasions in future when rett'ospective_eﬁect may have to be given, and a suitable mecha- nism has, therefore, to be devised.

10.5. We have given our careful consideration to the matter, but we do not think that any suitable mechanism could be devised I. Report 0;' the Select Co.-nniittc; on the Central Sales Tait (A.t1ien;ltn-':nl) Bill, 1971. (Nth August, 1972; page viii.

3. Para 10.2, Supra.

3. Notes in the Ministry of Finance.

I73 in this regard as to article 286.1 Whenever a diﬁieulty arises as to the interpretation of words denoting goods declared as es- sential by section 14, {of the Central Sales Tax Act), the neces- sary amendmetlt will have to be made in the form in which it was made'-2 with reference to 'coal'? There does not appear to be much scope for any other device.

10.6. Hence, no amendment is recommended on the above \.

-- . oehang:

point. ,w,m_ mended.

II".-a_ra 10.1, supra. V =. The Central Safes Tax (Amendment) Act, 1972 (151 of 197;J_)_ 7-'. E-'etra 10.3, mprc;-.

Points demt with.

l"cculiari-

Lies of taxation and com-

modities.

CHAPTER I I CONCLUSIONS

11.3. We have, in the preceding chapters, made an attempt to deal with such problems as appeared to require attention. The mass of case law and the numerous controversies create an im- pression that the Act bristles with problems. At the same time, we would like to say that there is no room for grave despon-- dency.

11.2. We would, in this connection, like to note what has been stated by an American writer1 on the problem 0!.' evasion of ta:te_s on transactions relating to comrnoclities.

"Where the payers of a particular tax are few in number. the administration can exercise a careful and detailed supervision, which is impossible where the number of tax--payers is large. A general sales or turnover tax suffers from the circumstance that it must be collected in small amounts from :1 large number of tax-payers. The tax administration cannot enquire C31'Eft1ll}' into the accounts of every little country sider mill and evcrv corner candy store. Instead. it must trust to the honesty of the tax--payers and to such devices as the sample cheek. even though this involves the loss of a substantial proportion of the tax revenue through evasion. The alternative--to allow an exemption which will eliminate the flood of returns from small dealers and small manufac- turersﬁweakcns the economic character of the tax."

1. Schultz and I-lsirris. American Public Finance, (mt-,9}, pages 533-534.

l74 CHAPTER 12 SUMM.-'--'tRY OF CONCLUSIONS AND REC()'.Vl_-MEN DATIONS In this Chapter. we stimnaarise our principal conclusions and reeonunentlations.

Ptrhri l--})eﬁm':'irm of "c't:.s:om.s' f.I'0rr3.r'er.s".

The expression "crossing the customs frontiers" should be ChﬂD1El'3- deﬁned {for the purpose of the Central Sales Tax Act), as mean- ing crossing the limits of a customs station established by or under the authority of the Central Governnrent for the purposes of the Customs Act, 1962, and its grammatical variations and cognate expressions should be construed accordingly.

Prtinr 2+-.S'cr.le of fire'? In imernoriarral Carrier An Explanation dealing speciﬁcally with the sale of fuel to an '7-1"-'P"=T 3- international carrier should be inserted in section 5 of the Central Sales Tax Act, as follows :--

'"EJrp£rma!:'oJ=2:

Sale of fuel to an international carrier For the purpose of consumption in international carriage shall be deemed to occas- ion export of the fuel."

Point 3--.'§een':m '2{_g')~Deﬁnr'tr'ou of mic and element of wrlmrbfe c:onsfdemu'un.

Section Ztg}, Central Sales Tax Act, should be amended so ChapIeI'3- as to adopt the interpretation placed by the Supreme Court,' namely, that the expression "valuable consideration" (in the delinition of sale) means some pn_w1-zen? in the noriire of cash or deferred pct}-nzem'.

I. Date!' 13.25' V. SI:-rm ofPw1ja£J, (I967; 30 S.T.C. 43-0, 444. 445 [S.C.] [75 Chapter lft.

I76 Point 4--~l'l/'orF;.'r Contracts.

o tax indivisiblc contracts 3 has been raised. The ssible alternatives. mew The question whether the power t of works should be conferred on the State present position on the subject, and the po he brieﬂy stated Lhus'.--~ to tax works contracts (1) The Union has the power List.

under Constitution, Seventh Schedule. Union entry 97.

(ii) The power to tax r'm.'ei'-Srnre works contracts has not, so far, been exercised by the Union. and the deﬁni~ tion of 'sale' in the Central Sales Tax Act does not include Works contracts.

(iii) The power to tax works contracts within the State also vests in the Union. under Union List, entry 9'! (as interpreted in the in-rlgments of the Supreme Court).

power should or should not be But, for the reasons transfer to the The question whether the transferred to the States, is one of policy. given in the Report, the Commission prefers its States.

IF this alternative. is adopted. there are several drafting device.-; open, e.g.~--

tal amending State list. entry 54, or

(h) adding a fresh e--ntt'_\* in the State list, or of "sale".

(C) inserting in article 366 :1 wide deﬁnition would The Cornrnission prefers the last one. It avoid multiple amendments.

(iv) Whether the course at (iii) should be adopted or not, is it matter of policx-'. invoiving ﬁnancial and political considera-

tions.

alternative, power to tax intra-State Works eision to that cﬁect is taken by the law tr) In the contracts could ( it :1 policy the Centre], be exercised by the Union. and the necessary passed. The proceeds of the tag; imposed thereunder could, then. be distributed to the States. Article 269 of the Constitu-

tion may have to be amended in that euse.

17?

{vi} Whether the course referred to at (V) above, should he adopted or not, is, again, a matter of policy, involving ﬁnancial and political considerations.

Pr,i.r'.r;r 3--H:'re--ptirchase.

'i"i1e question of. taxation of hire-purchase ag1'-eetncnts not rcsttiting in sale has been raised before the Commission. The presciwt position and possible alternatives may he brieﬂy' stated thu.~.':--

:i:J!r-J't.'-fPIif't','rl{1«5'€3 not r'e.s'ttltiirg in title.

ii} The Union has the power to tax hire-purchase not resuI« ting in sale, i'nrc=r--.'a'."ate or within the State, under the Union List. entry 97.

t it The power to tax inrm---.'~IraIe hire--purchase {not resulting in sale) under the Union List, entry' 97, seems to have been exercised hy the Union, 1'fde the deﬁnition of 'sale' in the Central Sales: Tax Act.

{iii} The power to tax hire purchase not resulting in sale, 1-i':'!f:{.rr rite Strife also vests in the Union, under Union List, entry 97 (as: interpreted in the judgments of the Supreme Court).

l"r-c. question whether the power should or should not be transferred to the States, is one of policy. But, for the reasons gi\'r:i'i in the Report the Commission prefers its transfer to the States.

If this alternative is adopted, there are several drafting devices open, rig.

(rt) amending State List, entry 54, or

(b) adding [1 fresh entry in the State List. or re) inserting in article 366, at wide deﬁnition of sale.

'I'll:-.1 Commission prefers the last one (amendment of article

366) . as it avoids multiple antendments. If, however, State List, entry 54 { to atld hire-purchase) is amended, it is necessary also to amend Union List, entry 92A. so that Enter-State hire--purt:hase t' not resulting in sale) may continue to be excluded from the pLt1'¥iCW of the States, notwithstanding the addition of hire~ pttrchase to the Sltllt': List.

Chttpfcr 1 B. Chapter 2.

173

In case this alternative is adopted, the following could be added in the Constitution, 'i'th Schedule, both at the end of Union List, entry 92A and at the end of State List, entry 54 (after converting the existing full-stop into a semi-colon);

"transtcr of goods on the hire--purchase or other system of payment by instalments,' hire-purchase resulting in sale."

(iv) Whether the course at (iii) should be adopted or not, is a matter oi". policy, involving ﬁnancial and political considera- tions.

(ii) In the alternative, the power to tax intra--State hire- purchase could (if a policy decision to that effect is taken by the Union) be exercised by the Union, and the necessary law passed. The proceeds of the tax imposed thereunder could, then, be distributed to the States. Article 269 of the Constitution will have to be amended for the latter purpose.

'This will, however, require separate legislation, as the Central Sales Tax Act is conﬁned to tax on ii-:t'er--Sr'¢1t'c transactions.

If this alternative is adopted, it is suggested that it will be desirable to transfer the entire power to the Union, z'.e., the power to tax hire--purehase resulting or not resulting in sale (intra--State], by amending Union List, entry 92A. This will be practically convenient and cheek evasion.

(vi) Whether the course referred to at (V) above, should be adopted or not, is again a matter of policy, involving ﬁnancial and political considerations.

Hire put-c.lm.s'€ re.s'uh'iHg in sale

(vii) Hii-e--purchase resulting in sale is governed by the posi- tion applieable to sale in general, except that only the sale element can be taxed under the name of sales tax. For suggestions in regard to hire--purchase resulting in sale. see (v) above.

Point 6------Crmsi'gmnenrs.

What are described sometimes as "consignment transfers"

are not taxable as sales under the present law. The Union can

1. If necessary, a non-obstante clause may be added to the eﬁ'ect that property need not pass.

l7'9 tax them under the residuary power, but even if such a tax is levied, the proceeds of the tax cannot be distributed to the States without amending article 269l[1)(g) and 269{'_3) of the Consti- tution.

Therefore, if, as a matter of policy, consignments are to be included in the Central Sales Tax Act, it will be necessary1 ﬁrst to amend article 269(1)(g) and 269(3) of the Constitution, by adding an Explanation to that article. somewhat on the fines9:--

""E.rpi:tnatt'on.--~wFor the purpose of this article. the ex- pression "sale or purchase" includes a consignment of goods oecasioning their movement from one place to another, by a dealer to any other place of his business or to his agent or principal."

Porhr 7'--Srtie of controlled crm;-mod.t'n'e.s.

The position with reference to the taxability of sales of con- trolled commodities has become uncertain, in cases where the transactions are subject to statutory control. Although, in theory, the rules on the subject appear to be clear, in practice, their application seems to involve nice distinctions. based on how far the consensual element has been abrogated. Accordingly, it is recommended that the position in this regard may be made clear, by a constitutional amendment amplifying the power of the States. Article 366 of the Constitution should be amended for the purpose, by inserting a wide deﬁnition of 'sale'.

Prom: 8_.S'ttppl_x= of goods by elttbr etc. A suggestion has been made that the power of the States to levy a tax on the supply of goods by clubs, societies and other associations to their members may be made clear, in view of the restrictive intet'p1"etation* placed by courts. No change on the

-J. |.'Jl.l'lC_1: proirisions or" the sicn "salc", but Il'tCfr' do not seem ]Jl'CSCl']l i.I(]I'l[E'X[.

This is rt)'. i.1t:r::1eJ to be a precise draft. .1. After the proposed amendment of the Constitution, the desired amendments in Central Sales Tax Act could be made.

See, for example, ta} Dir. C.T.0. V. Bitjiefd ltzrlia Ltd. A.I.R. 1968 S.C. 833, {b} J. C. ?'.0. \-'_ Yotiiig A{:rn"_-r I.-rdittit A.t.mr:t'an'oir, (1970) .'i.C.C. 462, Consrittttion using the expres-

to rcqtnre amendment in the 'F following ' Chapter 1-22.

Chapter 1D.

Chapter 3.

Chapter 4 q 130 ztbtwe point is. however. considered necessary, as such cases would not be many. There is not much possibility of evasion, and the sale is really by mernhers to members.

Pniir: 9w~[}IJ[J<'i}'f um! E_rpor.r----Ki'io.s!a's case.

The judgment in Klmslrfs crass,' which restricts the power of the Stzttes, as regards sales in the course of import, is considered at length. The recommendation is for an amendment which will give cflcct to the following propositions?

("'1 ,1 A puichase of goods made by an exporter from a local seller. for the purpose of exporting them in order to implement a contract of sale with a foreign buyer, shall not be deemed to be a purchase which has occasioned the export, even if it he a term of the contract of purchase that the goods shall be exported and even if. pursuant to such contract. the goods are exported and even if but for_s11ch term, the goods would not have been ex-

ported.

t 1] A sale of goods made by an intporter to a local buyer, in order to irnplement a contract of sale with the local buyer, shall not be deemed to be a sale which has occasioned the import. even it it be a term of the contract of sale that the goods shall be imported. and even if, pursuant to such contract. the goods were imported and even it, but for such term, the goods would not have been imported.

Pant: l0:------Reference to State Sales Tax Law~--~_S'ecIiorz 9, Central' Sales Tax Ace'.

Section 9(2) of the Central' Sales Tax Act applies the provi- sions of the general Sales Tax Law oi the State for the speciﬁc purpose of the Central Sales Tax Act. The question has arisen whether the "reference is to the State law as it existed in 1956 (when the Central Act was enacted} or whether amendments made in the State law after 1956 can be taken into account.

There is also a doubt arising from the fact that an objection of undue delegation may be raised with reference to section 9(2) of the Central Act. To remedy such a situation, there are. theoretically speaking. several courses open. I. R'. G. KFr0.t'la's ease, A.I.R. I966 S.C. 1216; N966] S.C.R. 352.

3. This is not a draft.

181

(ii Fz'r.ir alrernatii-'e.--In the first place, instead of the incorporating provision in section 9(2), the Union could frame its own self-contained code of provisions relating to assessment of tax levied under the Central Act. Whether or not the Union also appoints its own assessing authorities for the purpose, is immaterial.

Instead of so appointing t.he assessing authorities it could delegate the necessary powers to the State authorities. The only difference would be that State authorities will, then, be deriving that power not from the State law read with section 9(2), but from the Central Government}

(ii) Second alrernatit-'e--T'1ie second alternative would he to amend the Constitution, and to provide there what is now contained in section 9(2) of the Central Sales Tax Act. For obvious reasons. this is not a very convenient method.

(iii) Third alterrmm-e_'I'he. third alternative would be to insert, in section 9t2) a particular date, say, "as in 'force on the first day of April, l9?4". Initially. this date could be inserted by adding the quoted words after the words "general sales tax law", wherever they occur in section 9(2) or elsewhere. Subsequently, every year, by :1 short amendment of the Central Sales Tax Act, the year then current (ie. the year current at the time of each subsequent amendment) could be substituted.

This would mean that the Sales tax law in force in the State on the first April of the then current year would be attracted to the Central Sales Tax Act. No doubt, if, after the 1st April of one year and before the 1st April of the next year, a particular State legislature makes any amendments in its own Sales T ax Law, those amendments would not be attracted. This situation cannot, in theory, be avoided. The Union can, however, request the States, by a general letter, not to make amendment in the Sales Tax laws, during the middle of the year, as far as possible.

As a short term measure, the third alternative should be adopted. In ad_dition_._ as a long term measure, the ﬁrst alter- native should be adopted.

Pt'!iFfF I1---Penaln'e.r+u.recrr'oii 9(2) Cenzrnf Sales Tax Act. C_.hapl;:|'4_ There is some uncertainty as to how far section 9(2) of the Central Sales Tax Act covers penalties leviable under the State ._._ . , ._ _ __ _, ' I_ See also point 12, inﬁ-:1.

Chapter 4.

Chapter 5.

l8?.

Sales Tax" law. The doubt arises because of absence of speciﬁc mention of penalties.

One alternative {to remove the doubt on the subject) would be [0 insert the following sub-section in section 9 :----

"2 (A) In particular, and without prejudice to the gene» rallty of the provisions of sub-section (2), penalties leviable under the general Sales Tax law of the State shall also be leviable for the purposes of this Act, as if the tax under this Act had been levied under the general Sales Tax law of the State."

But this would not meet the objection of inequality which has been raised in some cascsl. To remove that objection, a better course would be to provide penalties in the Central Act. [Details of the provision cannot be indicated, as that involves several administrative aspects}.

Poirtt 12-----Central Sales Tax Act to be 3eIf--con1az'nea'.

As regards the entire Central Sales T ax Act, the recommenda- tion is that the Act should be self--contained. The speciﬁc amend- ments suggested above" should, of course. be undertaken, as an urgent measure. But, as a long term measure, it is desirable to make the Act self-contained, in respect of matters for which section 9(2), at present provides".

Point 13----Pum'.rhmenr under section 10. Central Sales Tax Act.

Punishment for the offence of making false statements in declarations under the Act, should be dealt with on the basis of the amount involved, that is to say, by regulating the punish- ment according to the amount of tax which would have been evaded if the statement by the assessee (discovered to be false), had been accepted as true. If, say, the amount of such tax exceeds ten thousand rupees, or if the case is one of a second or subsequent conviction, the maximum punishment could be seven 1-sears imprisonment. with a suitable minimum in other cases, the maximum imprisonment could be three years ( with fine as an alternatixe), but there need be no minimum.

I_ See _»'|.-foimrr La! Cliakham' v'. C'rmm1e'r't'a'cr( Tax Oﬁicer, (l93'l] 23 S.T.C. 367, 33'} (Cal).

. Points I0 and It, supra.

3_ See also point l0 sripm.

hi 183 In that case. section 10 of the Central Sales Tax Act, 1956.. could be revised as follows :--

"I0. If any person----

. . . . . . . .{(a) to (1') 'as in existing section], he shall be punish-

able-

ifij if the amount of tax which would have been evaded if the oticnee had not been discovered or the amount illegally collected. as the case may he, exceeds ten thousand rupees. or if the case is _one of a second or subsequent conviction for an offence under this Act. with lmprisorirnent for a term which may extend to seven years but which shall not be less than six months, and with ﬁne:

in any other case, with imprisoninent for :1 term which may extend to three years, or with ﬁne. or with both ;

(ii) and when the offence is a continuing one, the ﬁnd under sub-

cluuse (i) or sub--clanse {ii} of this clause, may he a daily ﬁne which may extend to ﬁfty rupees for every day during which the offence continues.

Poim' 1-i----Mz'n.immn punishmenr--ReIa.rmior2 of-' While inserting minimum punishrnentl it is not desirable to inserl any provision for relaxation.

Pain: l5+~--AheE'mem--Prop05ed section 1013' Central Sales Tax Act.

A new section should be inserted in the Central Sales Tax Act as follows :--

"I0-B. If a person ahets or induces in any manner another person to- make and deliver an account, statement, or declaration relating to any transaction chargeable to tax under this Act, which is false and which he either knows to be false or does not believe to be true, he shall be punishable?

(i) if the amount of tax which would have been evaded if the declaration, account or statement had been '. Sec, '~.'»p.r'rr. Point I3.

(Ihanrcr 5.

('|1:lpter ."-.

Abclment (3 false ac-

counts etc. Chapter 5 Chapter 5.

l8-4 accepted as true. exceeds of ten thousand rupees or if the case is one of :1 second or subsequent conviction for an offence under this Act, with im- prisonment fora term which may extend to seven vents'. and with ﬁne :

(ii) in any other case, with imprisonment for :1 term which may extend to three years, or with ﬁne, or with both.

Poi:-at 16»--«Corporritirm.s': Proposed SECFEFOJE 10-C. Central Saics Tax Act.

The following section should be inserted in the Central Sales "fart Act.

"ICI-(I. (1) When a corporation IS convicted of an (3) olifencc under this Act, it shall be competent to the Court before which the conviction takes place, to pass on the corporation a sentence of public condemnation, in addition to any other punishment to which the corporation may be sentenced.

When such a sentence is passed, the court shall cause the name and place of business of the corporation, the offence, the fact that the corporation has been so sentenced and any other punishment imposed, and such other particulars as the court any consider to be appropriate in the circumstances of the case, to be published at the expense of the corporation in such newspapers or in such other manner as the court may direct.

The expenses of such publication shall be recoverable from the corporation in the same manner as ﬁne-.."= Point 1'i-----Publication of name of convicted individual.

A provision for publication of name of convicted individual should be added3 in the Central Sales Tax Act.

. Minimum punishtnent not regardej as necessary in this case.

2. cf. section 541', Cr.P.C. 1398.

. It could be put as section I0-D. I85 Poem !S----SeparaEe law regarrhirg amoimr fﬂegaﬂy collected as ("mm 6 taxes. -

To facilitate and enforce recovery by the citizen of any amount illegally realised as tax by a private person {whether as sales tax or. any other tax), a separate law containing a provision [somewhat on the following lines}, s;hou]d be made1 by Parlia- ment :

"Where any person other than a public ofiic.-31'" has, purporting to act in pursuance of any law imposing a tax, realised from any other person as tax any amount not iogaiiy due from such person as such tax, he shall", unless he p1'OV'€3F that he has refunded the amount to that person or has otherwise accounted for the amount in accordance with such law. deposit the amount so collected without delay in the nearest Governrnent Treasury, and shall intimate the parti- CLLiEl[S of the case to that person by special or general notice and to the authority to whom he would be liable to account if the amount had been legally due as tax."

Thin is the proposed principrii provisforz'. The Treasttry' would, of course. refund the amount deposited. to the person entitled. Limitation for suit for refund ahcitiid run from date of publication of notice. Other incidental nnd"p-rocrdurai provixions could be devised, as may be considered suitable.

Pom: 19----Check posts. Ch3|'-'t=1' 77» It has been stated that there is some constitutional diﬂiculty in regard to provisions for the establishment of check posts for checking the evasion of tax on the sale of goods. A preliminary examination of the case law, however, shows that there should be no serious diﬁicnlty, ii the provision is properly framed.

We would like to place on record our warm appreciation of the vaiuabie assistance we have received from Mr. Bakshi, }v'iem.bcr--Secretar_v of the Commission in the preparation of this llcptiri.

1. To be ii'npiE.'neiitori by a separate law.

.1. The e.»r;ire'-ssion "Public Officer" to be deﬁned.

3. Punishment for cnntrcwcntion can be imposed.

_ -J.-; J1: r.-iovant citapter for detailed 1'GCDmn'JC;1dalit}n.

136

P. B. Gajendragadkar Chairman P. K. Tripathi Member S. S. Dhavan Member

5. P. Sen Varma Member' P. M. Bakshi Mcmber--Secrclary Dated : New Delhi. the 20th May, 1974.

I. Shri S. P. Sen "v'a1'ma has signed the report subject to a separate note.

LAW COMMISSION Note by Member, Shri S. P. Sen-Varrna 1-regret that 1 have to differ from the view of my esteemed Reasons for a separate colleagues regarding the scope and nature of the amendment of note.

section 5 of the Central Sales-Tax Act, 1956. I think that unless that section is made comprehensive as well as precise, as far as practicable, by suitable amendments, doubts and ambigui- ties regarding the scope and meaning of the section will persist and they will not be likely to be removed by the two proposals (negative in character) suggested in the majority report. I am fortiﬁed in the View I have taken regarding the amendment of section 5 by what 8. R. Das, I. (as he then was) said in his dissenting judgment in the second Travancore case. He ﬁrst posed the question as to what was the scope of the ban imposed on the States by article 286(l](b) ? I-Ie felt, the answer would depend on the meaning that may be ascribed to the phrase "in the course of" occurring in clause (1)(b) of article 286. He re- ferred to the unanimous decision of the Court in the ﬁrst 'I'ravan- eore case according to which "whatever else may or may not fall within article 286(l)(b), sales and purchases which themselves occasion the exports or imports of the goods, as the case may be, out of or into the territory of India come within the exemp- tion . . . . . .". According to him, this was sufficient to dispose of that case and it was not then necessary to decide what else might fall within that phrase. Then Das, J. said --

"This Court is now called upon to decide that point."

(Vida para 48 of the judgment as reported in the A.I.R.) In my opinion, the two proposals of the majority relating to the amendment of section 5 will leave the point still undecided thereby keeping the door open for doubts, disputes and ambi- guides-

18'! 20 M of I_aw,"'.?4--«l3 I38 I circulated this note without this paragraph and the few subsequent paragraphs to the other Members of the Commission including the Chairman. The speciﬁc suggestions made in this note were not before the Coinmission on any previous occasion during our discussion although the matter was discussed In a general Way when I put forward my views that a comprehensive amendment would be 'vCl_¥ likely' to reduce chances of doubts and ambiguities. But neither my view expressed at that time was acceptable to my colleagues nor the speciﬁc suggestions now made. in this note have been agreed to by them before the ﬁnalisation of their views.

Before I close this topic I like to make a brief mention of the objections made by the Chairman and other Members to my speciﬁc suggestions during the discussions of their note and my note.

In the revised draft note of the majority prepared after such discussions substantially the same objections in a slightly different language have been given. These objections are, (1) "it would not be quite appropriate to insert such elaborate provisions in the Act" in view of the narrow problem before the Commission arising from l<.hosla's case, (2) any attempt "to cover other aspects of import--salcs and export-purchases is likely to create compli- cations. The verbal formula that mav be thought of in this res- pect would create iutiicacies of its own", (3) "while a detailed discussion and elaborate treatment of various aspects might be appropriate in a judgment, it would be out of place in a statutory provision of the nature under consideration."

As regards objection (1), I may say that in View of the sharp divergence of opinions since almost the very beginning, on this complex subject not only in the highest judiciary of the land and other Courts and authorities but also in the Law Commission of India, we should try to ensure that section 5 which in a sense explains and deﬁnes the scope of article 236(1)fb) should be as clear as possible. In View of the history before us we should not hesitate to make elaborate provisions in the section in spite of the narrow problem arising from Khoslefs case. And on a perusal of the judgment in Khosl.'a's case 1': appears clear that problem thrown up by it cannot be regarded as narrow because it 189 has sew.-'era! facets, In my view the suggestions of the majority may make it necessary to make yet another reference to the Law Commission on the same subject as contained in section 5.

As regards objection (2), it is diﬁicult to see why other neces-

-sary and relevant aspects of in1port--sales and export--purchases should not be clearly speciﬁed in section-5. Because in present section 5 this has not been done, brevity of the section has been attained with serious consequences trailing behind in the shape of attihiguitics. doubts and disputes about the scope and extent of the section.

So far as sales or purchases preceding export and sales or purchases succeeding import are concerned, they may----but only 1nay--be covered by the suggestions of the majority, but those suggestions do not expressly take such sales or purchases out of the purview and cope of section 5 and article 286(1)(b) with the result that again it may be agitated before the Supreme Court that such sales or purchases come within the scope of that section and that article. And who knows that the Supreme Court may not in the absence of clear language in section 5 in this regard decide, in spite of the suggestions of the majority being incor- porated in that section, to adopt the View which Das, J. (as he then was) so elaborately and forcefully put forward in his dis-

-senting judgment in the second Travancore case? A dissenting judgment is as if it were, to use the word of a great Judge in America, "brooding" in the heavens ready for descent and accept- ance. on earth at any time. In this way, the suggestions of the majority may, if accepted, create more intricacies and compli- cations because those suggestions of the majority do not speci- ﬁcally exclutlc the ﬁrst sale or purchase before the export and the last sale or purchase after the import. Therefore the sharp controversies as to whether they are sales or purchases in the course of export or import will remain. I am fortiﬁed in this V'ie\V because Das, I. did not accept the view that the first sale _ or purchase before export and the last sale or purchase after import were sales or purchases for the purpose respectively of export or import. His stand was that such sale or purchase was so integrally connected with expert or import that they formed integral parts of such export or import. In my suggestions, I have tried to make the position as clear as possible.

As regards objection (3), here again I respectfully differ. I readily admit that human language is imperfect and slippery and 190 any unnecessary lenth and prolixity of language must be avoided in a statute- But if after elaborate discussion and examination of an enactment from various aspects with the assistance of the members of the Bar, the Court has pointed out ﬂaws, defects, lacunae and ambiguities in the enactment, the framers of the statute should make every attempt to remove those ﬂaws, de- fects, lacunae and ambiguities and for that purpose should not ﬁghtshy of making the language of the enactment elaborate in so far as that is necessary, but no more As Viscount Bryce said in his Inaugural Lecture on February 25, 1371 on entering the duties of Rcgius Professorship of Civil Law at Oxford--

"The power of stating a proposition of law in comprehensive and exact terms wide enough to cover all cases con- templated and yet precise enough to exclude cases more or less similar, to which the rule is not intended to apply, is valuable to the text--writer and quite indis- pensable to the framers of statutes."

(underlined by me.) If we look at the Indian Statute Book and the Statute Book of any other English-speaking country, we shall ﬁnd that they abound in sections with elaborate provisions. Even the Con- stitution of India has many articles which are very lengthy and these lengthy articles occur in large number in Part XIII--Fin-- ance, Property, Contracts and Suits (art. 286 occurs in this Part), because provisions relating to these matters are in their very nature very complex and intricate and to bring out their scope, meaning and implications, elaborate provisions were felt necessary.

I must admit, however, in all humility that hun1an--being being imperfect, a perfect statute has not yet been written not will it ever be.

I now propose to deal with and discuss article 2S6(1){b) of Introductory the Constitution and section 5 of the Central Sales Tax Act, 1956 in an attempt to ﬁnd out the exact scope and meaning of these two provisions as they have been topics of controversy for a long time. For this purpose I like to discuss in brief the constitutional position in regard to sal.es taxes in general because that may help us in forming a clear view of the particular matter ' which is the immediate object of this study.

Reference from the Government in April, 1973.

Constitution (Sixth Am-

endment Act 1956.

191

The letter dated the 12th April, 1973 received from the Minister of Law, Justice and Company Affairs constitutes the third reference from the Government of India to the Law Com- mission relating inter alia to the scope, extent, meaning and implications of article 286 of the Constitution; and as a matter of fact the Central Sales Tax Act, 1956 was passed on the re- commendations contained in the Commission's report on the ﬁrst reference. The ﬁrst reference was made shortly after the intro- duction of the Constitution (Tenth Amendment) Bill, 1956 in Parliament in which there was a proposal to empower Parlia- ment to formulate by law principles inter alia for determining when a sale or purchase of goods takes place in the course of the import of the goods into, or export of the goods out of, the territory of India. This Constitution (Amendment) Bill on its enactment became the Sixth Constitution (Amendment) Act, 1956. By this amendment, a number of changes was made in the Constitution with. respect to sales tax. These changes in brief were as follows :--

(1) A new entry 92A was introduced in the Union List in the Seventh Schedule to the Constitution whereby Parliament acquired exclusive power to make law with respect to "taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce ;"' formerly, Parliamenfs power to make law was con-

ﬁned to entry 92 of the Union List to "taxes on the sale or pur- chase of newspapers and on advertisements published therein". This entry 92 remains unchanged even now. Thus by new entry DEA, Parliament's power was enlarged to cover the power to make laws with respect to taxes on the sale or purchase of goods other than newspapers in the course of interstate trade and com- mence. This amendment was in a sense in consonance with the exclusive power to Parliament to make laws with respect to "inter--State trade and commerce" speciﬁed in entry 42 of the Union List- We are not however much concerned here in this note either with the new entry 92A or with the provisions con- tained in articles 301 to 307 which broadly speaking may be regarded as the commerce clauses of our Constitution.

(2) The second change was that a new entry 54: was subs- tituted for the original entry 54 in the State List. Original entry 54 was as follows :--

"54. Taxes on the sale or purchase of goods other than newspapers."

192

The new entry 54 reads as follows :---

"54. Taxes on the sale or purchase of goods other than newspapers subject to the provisions of entry 92A of list 1".

The combined elfect of these two changes namely, the in- sertion of entry 92A in List I and the amendment of entry 54 in List II as well as of the substitution of new clause ( 2) for the original clause in article 286 was that a State Legislature was completely denuded of whatever power it had, to make laws with respect to taxes on the sale or purchase of goods in the course of inter--State trade or commerce by virtue of the origi- nal clausc (2) of article 286 and entry 54 of List ll as it stood before the amendment of 1956.

(3) The third change brought about the Sixth Constitutional Amendment of 1956 was the insertion of :1 new sub~clause (g) 1l'I clause (1) of article 269 whereby taxes on the sale or purchase of goods other than newspapers in the course of inter-State trade or commerce "shall be levied and collected by the Govern- ment of India but shall be assigned to the States in the manner provided in clause (2)" of article 269.

(4) The fourth change made by the Sixth Amendment in 1956 was the insertion o[ a new clause ( 3) in article 269 as follows :--

"(3) Parliament may, by law, formulate principles for determiuin whena sale or urchase of _oods takes 3 P E place in the course of inter--5tate trade or commerce."

(5) In the ﬁfth place, the Explanation to clause (1) of article 286 was omitted as it became unnecessary in View of the pro- visions of new clause (2) of article 286. The Explanation which was omitted laid down for the purposes of article 236 (1) (al, a rule that "a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of con- sumption in that State, notwithstanding the fact that under the general law relating to the sale of goods, the property in the goods has by reason of such sale or purchase passed in another State." The Explanation had also given rise to a gear deal of legal controversy and practical dilﬁculty.

I93 (6) Sixtlily, for clauses (2) and (3), two new clauses (2) and {3} were substituted in article 236 as follows.'--

"{2} Parliament may by law formulate principles For deter- mining when a sale or purchase takes place in any of the ways mentioned in cl:1use (T).

(3) Any law of a State shall, in so far as it inlposcs, or authorises the imposition of, a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce, be subject to such restrictions and condi-

tions in regard to the systeiu of levy, rates and other incidents of the tax as Pariiamcnt may by law specify."

Power of The above analysis shows the far-reaching changes lgﬂgfgﬁlrgte I1'l'cl{lC by the Sixth Constitutional Amendment in the r|]'ir15,'iplcg_ structure of the sales tax system of the country and in the powers and jurisdiction of Parliament and State Legislatures with respect thereto. It was for the first time. in our constitu- tional history that Parliament was empowered to formulate by law principles for determining when a sale or purchase. of goods takes place in any of the following ways, that is to say :--

(a) where such sale or purchase takes place outside a state lart. 286(l.]I(a]]:

(b) where such sale or purchase takes place in the course of the import of the goods into, or export of the goods out of, the territory of India [art 286(1) 03)];

(c) where such sale or purchase takes place in the course of inier--Statc trade or commerce [arts 269(3)].

[N.B.--It seems' that the use of the word "when" in article 269(3) and article 286(2) and the use of the word "where" in entry 92A of the Union List or in article 236(1), were not intended to signify any distinction and difference because such distinction and ditference are not easy to discern in respect of the same subject matter. It seems that these two diﬁerent conjunctions "when" and "wl1cre" were used to signify the same situation.'] The object of these provisions was to make it clear that"a State Legislature cannot make any law which may have the effect 194 of extra-territorial operation, that is, operation beyond and out- side the territory of the State. That a State Legislature has no such extra-territorial power of legislation is clear from the provisions of article 245 and article 246(3) of the Constitution. This however is not the case with Parliament in view of the speciﬁc provisions of article 245(2). In this connection the words "for the whole or any part of a State" in article 245 (1) and the words "for such State or any part thereof" in article 246(3) may be noted.

The Law Commission in 1956 was invited by the Government of India to make recommendations relating to the formulation of principles in respect of the three matters speciﬁed above.

It may not be out of place to mention here that there is no No spacjﬁc speciﬁc entry in any of the t.hree Lists in the Seventh Schedule '="l"3'l"".'*"-' . . . . Constitution to the Constitution under which Parliament has the power to relating m make law with respect to taxes on sales or purchases of goods miles 0"

taking place outside a State or in the course of import or export f,?,f§h§,ﬂ.,., although Parliament may exercise such power under article 243 i1}1l'3°'::1'-SB read with residuary entry 97 of the Union List. No such law has §',,.,§.'§,'2§? °' however, been enacted by Parliament. The position therefore is that at present there is no parliamentary law with respect to taxes on these two categories of sales and purchases and the Legislature of a State has no power at all in relation to these cases because powers of the States have been expressly taken away by article 286(1). Therefore, when in accordance with the principles formulated by Parliament in section 4 and section 5 of the Cen- tral Sales Tax Act, 1956, any sale or purchase of goods is a sale or purchase taking place outside a State or a sale or purchase taking place in the course of import or export, such a sale or pur- chase is not taxable at all under any law at present. The Central Sales Tax Act, 1956 provides only for the imposition of taxes on inter-State sales or purchases under Chapter III of the Central Sales Tax Act, 1956. It may be mentioned here that "goods"

as deﬁned in the Act do not include newspapers.

The question for our present purpose therefore naturally E::'f[loqg':5' arises,--which exactly are the sales or purchases of goods taking decided. place in the course of the import of the goods into, or export of the goods out of, the territory of India '.7 And herein lies the rub-

My endeavour in this note will be to ﬁnd out and recommend a correct and proper solution of this question so as to set at rest as far as practicable all doubts and controversies which have Importance of foreign trade in the inter-

ests of federal ﬁna-

nce and of

-sales-tax in the interests of State economy.

195

been agitating and troubling the minds of all concerned practically since the adoption of the Constitution. And if for this purpose I am to suggest rules, principles, guidelines and criteria which may not be strictly logical and may to some extent even smack' of artiﬁciality, I should not hesitate in doing so, for, as has been said, life of the law is not logic but experience.

Export and import trade, that is foreign trade has all along been under the exclusive power and jurisdiction of the Centre (entry 41 of the Union List). This was so even under the Government of India Act, 1935 (entry I9 of the Federal List in the Seventh Schedule); but in that Act there was no pro- vision eorrcsponding to article 286 of the Constitution. I need not stop here to consider section 29? of the Government of India Act, 1935 as that section cannot be of much help in grasping the scope of article 286 except that that section prohi- bited under sub-section (1]{a) a Provincial Legislature or a Provincial Government from enacting any law or taking any executive action prohibiting or restricting the entry into or export jrom the Province of goods of any class or description. It should be noted that in view of the language used, this pro- hibition or restriction was operative not only in relation to other Provinces but also as regards foreign countries. Foreign trade being thus within the exclusive competence of Parliament, Par- liament has the power to impose by law, and has in exercise of that power actually imposed by law, customs duties on im- ports and exports under the Sea Customs Act, 1878 (now under the Customs Act, 1962) read with the Indian Tariﬁ Act, 1934 {entry 83 of the Union List corresponding to entry 44 of the Federal List in the Seventh Schedule to the Government of India Act, 1935). Importance of import and export and cus- toms duties on import and export in the interests of federal ﬁnance and economy cannot be over-emphasised. Therefore, the framers of the Constitution were anxious that our foreign trade should not be subjected' to the power of the States to impose by law taxes on sales 'or purchases of goods if such sales or purchases could be regarded as sales or purchases of goods taking place in the course of import or export.

At the same time, in the interests of State Finance and economy, the makers of the Constitution did not like to curtail unnecessarily the power of the States to impose taxes on the sales or purchases of goods because perhaps the most impor- tant source of revenue for the States was the taxation of sales or 196 purchase of goods under entry 54 of the State List. They, therefore, proceeded on the View that only those sales or pur- chases should be taken out of the States' power to impose taxes which were in a strict sense sales or purchase taking place in the course of import and export and no more. And this objec- tive was sought to he achieved by article 2.'%6(1)(b). In the absence of the bar of article 286( 1)(h), sales and purchases taking place in the course of import or export might be subjec- ted to taxes under the salcs--tax laws of the States. The result in that case would he not only reduction of the volume of foreign trade but also double taxation. This was noted by the- Supreme Court in the first Travaneore ease in 1952 and also in the second Travancore case in 1953. Thus, Palanjali Sastri C.J., in the first "l'ra\-ancore case observed in paragraph 12 of the judgment as reported in AIR as foIlows:---

"It might well be argued, in the absence of a. provision like clause tfb) prohibiting in terms the levy of til)'; on the sale or purchase of goods where such sales or purchases are eﬁected through the machi-

nery of export and import, that both the powers of taxation though exclusively vested in the Union and the States respectively, could be exercised in respect of the same sale by export or purchase hy import, the sales--tax and the export duty being regarded as essentially of a different character. A similar argument induced the Federal Court to hold in Province of Madras vs. Boddu Paidanna and Sorts, 1942 PCB. 90, that both Central excise duty and provincial sales tax could be validly im- posed on the ﬁrst sale of groundnut oil and cake by the manufacturer or producer as 'the two taxes are economically two separate and distinct imposts'. Lest similar reasoning should lead to the imposi- tion of such cumulative burden on the export- import trade of this country which is of great im- portance to the nation's economy, the Constituent Assembly may well have thought it necessary to exempt in terms sales by export and purchases by import from sales--tax by inserting article 286(1) (b) in the Constitution."

Then in the second Tt'a\-'ancore case in 1953, while cxplainiiig and further clarifying' the decision in the first Travancore ease, "WP.

,g.u.-:-"'- 'IN :-

197

the same Chief Justice (Patanjalj Sastri, CJ.) observed in para-- graph (I4) of the judgment as reported in AIR--

"it is true, as pointed out in the previous decision, that the export-import trade is important to our national economy, but it is no less true that the State--power of taxation is essential for carrying on its admini- stration, and it must be as much the constitutional purpose to protect the one as not unduly to cur- tail the other. The question really is, how far did the Constitution makers want to go in protecting Lhe foreign trade by restricting the power of taxing sales or purchases of goods which they conferred on the States under entry 54 of List II. The pro- blem before them was one of balancing and recon- ciling the rival claims of foreign trade in the inter- ests of our national economy and of the States' power of taxation in the interests of the expanding social welfare needs of the people committed to its charge and we have their__solution as expressed in the terms of clause (l)(b). It is for the Court to interpret the true meaning and scope of those terms without assuming that the one constitutional pur- pose was regarded as more important than the other. This Court has already held in the pre- vious decision that clause (1)03) protects the ex- port--import trade of this' country from double taxation by prohibiting the imposition of sales tax by the State on export sales or import purchases, and we ﬁnd no warrant in the language employed to extend the protection to cover the last purchase before export or first sale after import."

In the above analysis of the constitutional position I have tried to show that the implication of article 286 even before 1955 was that there might be some sales or purchases in the twilight zone of foreign trade which could legitimately be regarded as part and parcel of foreign t'rade itself and therefore be regarded as sales or purchases in the course of import or export so as to take them out of the States' power and competence. It "is therefore, the essential job of all concerned to ﬁnd out and pin- point as correctly as possible, sales and purchases in that twilight zone so that such sales and purchases may be excluded from the power and competence of the States.

198

Before 1956, there was no speciﬁc provision in the Consti- tution on this aspect of the matter. Naturally therefore it was left to be decided and determined by the Courts and in ﬁnal analysis by the Supreme Court itself. And as we have already indicated, Supreme Court, did decide and determine this thorny question although, as we shall presently see, the decisions of the Supreme Court could not set at rest all the doubts and mis- givings as to the scope and meaning of the expression 'sale or purchase of goods taking place in the course of import of the "goods into-_. or export of the goods out of, the territory of India'.

The ease of State of Travancore--Cochin and Others vs. the Bombay Company Limited, AIR 1952 S. C. 366 (referred to as the ﬁrst Travancore case) was one of export sales and the res- pondents were assessed to sales tax on the turn over of the sales of their commodities (coir products, lemon grass oil and tea) in which they dealt. The dealings followed more or less the same pattern in all the cases and consisted of export sales of the respective commodities to_ foreign buyers on either e.i.f. or f.o.b. terms as the case might be. The respondents claimed exemption from assessment in respect of the sales effected by them on the ground inter alto that such sales took place in the course of the export of the goods out of the territory of India within the meaning of article 286(l)(b] of the Constitution. However, the sales--tax authorities rejected this contention of the respondents as in their view the sales were completed before tm goods were shipped and could not therefore he considered to have taken place in the course "of the export. This view of the State Sales Tax Authorities might have been regarded as the only correct view had article 286(1) (la) not been there in the Constitution. Indeed such a view might be fully supported had the cases arisen under the Government of India Act. 1935 where, as already pointed out, there was no provision corres- ponding to article 286. But as we have tried to show that in making the provisions of article 286, the makers of the Consti- tution proceeded on the assumption and implication that in the interests of foreign trade of India, there might be some sales or purchases of goods which should be regarded as sales or purchases taking place in the course of the import of the goods into or export of the goods out of the territory of India, although in the narrowest sense such sales or purchases were not in the actual course of import or export. According to the nar- rowest view, only those sales or purchases which are eﬁeeted by the tranfer of documents of title to the goods on the high seas The ﬁrst "I ravancore case (1952).

199

(beyond the customs frontiers of India) would come within the scope of article 286(1) (b) and no more.

Be that as it may, the High Court of Travancore-Cochin did not accept this narrow view and accepted the contention of the respondents, and quashed assessment made by the State Sales Tax Authorities and held that the cases came within the exemption of article 286 and were not liable to sales--tax under the State sales-tax law. As a matter of fact, the Travancore- Cochin High Court in its judgment clearly expressed the view that :--

"The words 'in the course of' make the scope of this clause very wide. It is not restricted to the point of time at which the goods are imported into or export- ed from India. The series of transactions which necessarily precede export or import of goods will come within the purview of this clause. Therefore, while in the course of that series of transactions the sale has taken place, such sale is exempted from the levy of sales tax. The sale may have taken place within the boundaries of the State. Even then, sales-tax cannot be levied if the sale had taken place while the goods were in the course of import into India or in the course of export out of Indi ".

This wide view put forward by the High Court on the mean- ing and scope of article 286[ 1)(b) drew forth from learned counsel appearing before the Supreme Court on behalf of the Union, the several State Governments, and the respondents as many as three other different views on the scope, meaning and interpretation.,of article 286(1) (h) thereby clearly showing that that article contained in its apparently simple language seeds of conﬂict, discord and dissent as each of the four views (in- cluding the view of the Travanoore-Cochin High Court] might be regarded as legitimate and proper according to the npholders of the respective views. These. four views were, in the words of the Supreme Court as follows :--

(1) According to the first view put before the Supreme Court on behalf of the State of Madras {now Tamil Nadu)--

The exemption granted by article 236(1) (b) is limited to sales by export and purchases by import, that is to say, those sales and purchases which occasion the expert or import, -as the case may be, and extends to no other transactions however directly 200 or immediately connected, in intention or purpose, with such sales or purchases, and whcresoever the property in the goods may pass to the huyer. The Advocate-General, Madras thought that a State could not impose salesrtax though title passed within the State limits while the goods are still under transport on the high seas and no question of exemption could therefore arise.

(2) According to the second view.------In addition to the sales and purchases of kind described above (in the first view), the exemption covers the last purchase by the exporter and the first sale by the importer, if any so directly and proximately con- nected with the export sale or import purchase so as to form part of the same transaction. This View was sponsored by the Attorney~genera1 of India.

(3) According to the third w'ew.----The exemption covers "only" those sales and purchases under which the property in the goods concerned is transferred from the seller to the buyer during the course of transit, that is, after the goods begin to move and before they reach their foreign destination. This was the View supported by the State of Bombay (as it then was) and certain other States.

(4) The four-ii; view which was the View of the Travancore-- Cochin High Court in the case, has been expressed by the High Court in the passage already extracted from its judgment.

Of these four views, according to the Supreme Court, the ﬁrst ViBW was the narrowest and the fourth view, the widest.

After referring to these four views and brieﬂy discussing them, the Supreme Court stated in para 10 of the judgment as reported in the A.1.R.--

"We are clearly of opinion that the sales here in ques- tion, which occasioned the cxport in each case, fall within the scope of the exemption under article 286{l)(b). Such sales must of necessity be. put throng?! by tmnsporring the goods by rail or ship out of the territory of India that is to say, by emp- loying the machinery of export. A sale by export thus involves a series of integrated activities com- mencing from the czgreemeni of sale with (I foreign b£t}'e!' and ending with the delivery of the goods to a common carrier for transport out of the country by 20] {and or sea. Such a sale cannot be dissociated from the export without which it cannot be eﬁectuated, and the sale and the resultant export Form parts of a single transaction. Of these two integrated acti- vities which together constitute an export, which- ever ﬁrsf occurs can well be regarded as taking place in the course of the other. Assumirzg without decicling that the property in the goods in the present cases passed to the foreign bu_ver.5' and the sales were thus completed within the State before the goods cor-nmerzced their journey as found by the Sales Tax Authorities, the sales must, nevertheless, be regarded as having taken place in the course of the export and are therefore exempt under article 286(1) [b]. That clause, indeed, assumes that the sale has taken

-place within the limits of the State and exempts it if it takes place in the course of the export of the goods concerne ."

(N.B.--The lines have been underlined by me.) And in para 14 of the judgment, the Court held----

"Wc accordingly hold that whatever else may or may not fall within article 286{1)(b), sales and pur- chases which themselves occasion the export or the import of the goods, as the case may be, out of or into the territory of India come within the exemp- tion and that is enough to dispose of these appeals."

It may be pointed out that though in the body of the judg- ment the expressions "export sale", "import purchase", "sale by export" and "purchase by import" have been used, in its final conclusion in para. 14 of the judgment, quoted above, expres-

-sion "sales and purchases which themselves occasion the export or import" has been used. In the second Travancore case how- ever, as we shall have occasion to note, this order was reversed, and the expressions "sales by export" and "purchases by import"

have been used in the ﬁnal conclusions of the Court and not the expression "sales and purchases which themselves occasion the export or impo ."

The Supreme Court expressed no opinion on the point raised in the course of the argument as to whether 'sale' imports a wider concept than the passing of title in the goods from the seller to the buyer which under the law relating to the sale of 202 goods is determined by highly technical rules based upon the presumed intention of the parties and liable to be displaced by their expressed intention.

The Court did not accept the suggestion made from the Bar that on the construction of article 286(1)(b) indicated by.the Court, a "sale in the course of export" would become practically synonymous with "export" and reduce clause (b) to a mere redundancy. The Supreme Court pointed out that in the absence of article 236(ll(b) which expressly prohibits imposition of taxes on the sale or purchase of goods in the course of import or export, the States might impose tax on such sales and pur- chases in exercise of their exclusive power under entry 54 of the State List and the Union also might impose customs duties. in exercise of its exclusive power under entry 83 of the Union List and thus the same sale by "export and the same purchase by import would be subject to both sales-tax and customs duties, because these two imposts are essentially of a diﬁerent charac- ter. As already mentioned, the Supreme Court in support of this view cited the Federal Court case of Province of Madras vs. Boddu Paidanna (1942) FCR 90 where the Federal Court held that both central excise duty and provincial sales tax could be validly imposed on the ﬁrst sale of groundnut oil and cake by the manufacturer or producer as "the two taxes are economi- cally two separate and distinct imposts."

In the result the Supreme Court by agreeing with the con- clusion of the Travancore--Cochin High Court though on diﬂ'e- renr grounds dismissed the appeals ﬁled by the State of Travan- core-Cochin.

The following speciﬁc points which emerge from this decis- ion deserve mention seriatim :---

(1) That the language of article 286(l)(b) which may prima facfe appear to be simple is not so in reality and is cap- able of different interpretations, is clear from as many as four different views mentioned in the judgment.

(2) A sale in order that it may come within the scope of the exemption under article 286(1) (b) must be a sale which it- self occasions the export (or as the case may be, which itself occasions the import.) (3) A sale which itself occasions an export is a sale by export which involves a series of integrated activities commen- cing from the agreement of sale with a foreign buyer and ending.

.___.___ _, .._, _.¢Iu______ __ _____ _

-------

--- --h-._ 203 with the delivery of the goods to common carrier for transport out of the country by land or sea.

(4) Such a sale i.e. a sale which itself occasions the export therefore cannot be dissociated from the export without which it cannot be cllectuated and the sale and the resultant export from parts of a single transaction.

(5) Even where the property in the goods passes to a foreign buyer and the sale is thus completed within the State before the goocis commence their journey, the sale must, never- theless, be regarded as having taken place in the course of :1- port and is therefore exempt under article 286(l)(b).

(6) As a matter of fact, article 286{l)(h) assumes that the sale which itself occasions on export has taken place within the Iioriis of the State and exempts it if it takes place in the course of the export of the goods concerned.

(7) In order that a sale or purchase can take place in the course of export or import it is not essential that the property in the goods must be transferred to the buyer during their actual movement, as for instance, where (in the case of export) and siiipping document are eridorsed, and delivered within three State by the seller to a local agent of the foreign buyer after the goods have been actually shipped or where (in the case of import) such documents are cleared on payment or acceptance by the Indian buyer before the arrival of the goods within the Store. This view, which lays undue stress on the etymology of the word "course" and formulates a mechanical test for the application of clause (b) of article 286(1) places too narrow "a construction upon that clause in so for as it seeks to limit its operoiion only to sales and purchases effected during the transit of the goods and would, if accepted, rob the exemption of much of in.' usefulness. (Para 13 of the judgment) {My co.-nmears.----As a matter of fact, second part of sub- section (lj and second part of sub--section (2) of section 5 give effect to this view, but are not limited to 'it only. The first part of each of these two sub-sections goes further and gives client to the view of the Supreme Qoun expressed in its ﬁnal conclusion in para 14 of the judgment.) I have dealt with and analysed this case in some detail in or- der to see whether the pit}: and substance of the meaning of 20 M of Law.-'74-'4 204 sale or purchase of goods taking place in course of import of the goods into or export of the goods out of, the territory of India, that is to say, whether the true and correct meaning and scope of article 2Ei6{l)(b) have been brought out in the judg- ment. The judgment, it is submitted with respect, is marked by lucidity and terseness of expression and shows clarity of views on a difficult subject but in spite of these qualities, the judgment has not been able to set at test all doubts and disputes as to the meaning of article 286(1) (b); on the contrary, it has given rise to sharp divergence of opinions, as will appear from the second T ravancore case to which we now proceed.

The controversy was raised again in the second Travancore case (State of Travancore--Cochin vs. Sanmugha Vilas Cashew- nut Factory, Quilon, A.I.R. 1953 SC. 333). The same five judges who heard and decided the ﬁrst Travancore case heard and decided this case also. As a matter of fact, appeals in this case formed part of the ﬁrst Travancore case also, but after they had been heard in part along with the other appeals from the same order, it was found that the material facts relating to the course of business of the respondents in the second Travan-- core case had not been clearly ascertained and accordingly those appeals were remitted to the High Court for further en- quiry and ﬁndings in regard to those matters. The other appeal however in which the materials on record were found suiiicient were ﬁnally decided in the ﬁrst Travancore case.

In the second Travancore case the respondents were dealers in cashewnuts in the State of Travanoore-Cochin and their business consisted in importing raw cashewnuts from (i) ab- road, and (ii) in purchasing them from the neighbouring districts in the State of Madras as also (iii) in purchases made in the local market and after convening them by means of cer~ tain processes into edible kernels, exporting the kernels to other countries, mainly America. The oil pressed from the shells removed from the cashewnuts were also exported. The Consti- tution having come into force on the 26th January, 1950, the respondents in each appeal claimed exemption under article 286(1) (13) in respect of the purchases made from that date till the 29th May, 1950, the end of the account year. The sale--tax authorities having rejected the claim, the respondents applied to the High Court under article 22.6 and the High Court upheld the claim and quashed the assessments so far as they related to the said period. The State of Travancore-Cochin then ﬁled the appeals to the Supreme Court.

The second Travancore case (1953) 205 Before considering how far the cashewnut purchases made by the respondents were entitled to the protection of article 286(1) (b), the Court again felt the necessity "to ascertain the scope of such protection." In this connection the Court reiterated and recapitulated the four different views mentioned in the ﬁrst Travancore case as to the meaning and scope of article 286(1) (b) and after having done so, repeated what it had held in the previous case in para 14 of the previous judgment--

"Whatever else may or may not fall within article 286(1) (b), sales and purchases which themselves occasion the export or import of the goods, as the case may be, out of, or into, the territory of India come within the exemption."

Then the Court proceeded to discuss and decide the only question debated before it as to "whether in addition to_th_e export-sale and import--purchase, which were held in the pre- vious decision to be covered by the exemption under clause

(l)(b), the following two categories of sale or purchase would also fall within the scope of that exemption :--

"[1] The last purchase of goods made by the exporter for the purpose of exporting them to implement orders already received from a foreign buyer or expected to be received subsequently in the course of business, and the first sale by the importer to fulﬁl orders pur- suant to which the goods were imported or orders ex- pected to be received after the import.

{2} Sales or purchases of goods eifected within the State by transfer of shipping documents while the goods are in the course of transi ."

As regards the ﬁrst category mentioned above, the Court was of the opinion "that the transactions are not within the pro- tection of clause (1)(b)". In support of this view the Court gave a number of reasons. The Court ﬁist pointed out in para. 10 of the Judgment as reported in AIR--

"The word 'course' etymologically denotes movement from one point to another, and the expression 'in the course of' not only implies a period of time during which the movement is in progress but postulates also a connected relation."

20 M. of Law,l74--15 206 And in support of this reasoning the Court sought to give an analogy from the English Bankruptcy Act, 1369. It was held in the case of In re Pryce; Ex parte Rensburg (1377) 4 Ch. D. 685 that the words "debts due to the bankrupt in the course of his trade" in section 15(5) of English Bankruptcy Act, 1369, "do not extend to all debts due to the bankrupt during the period of his trading but include only debts connected with the trade.

"A mic in the course of export out of the country", the Court observed in para. 10 of the judgment, "should similarly be understood in the context of clause (l){b) as meaning a sale taking place not only during the activities directed to the end of exportation of the goods out of the country but also as part of or connected with such activities. The time factor alone is not determinative. The previous decision proceeded on this View and emphasised the integral relation between the two where the contract of sale itself occasioned the export as the ground for holding that such a sale was one taking place in the course of the export."

(Underlined by me.) The Court did not agree with the contention that on.this prhidple of connected or integrated activities a purchase for the purpose of export must be regarded as covered by the ex- emption under clause (I)(b). The Court said----"A purchase for the purpose of export like production or manufacture for export, is only an act preparatory to export and cannot, in our opinion, be regarded as an act done 'in the course of the export of the goods out of the territory of-India' any more than the other two activities (i.e- production or manufacture for export) can he so regarded." (Para. 11 of the judgment.) The views of Schmitthoff in his boolc--Export Tradem- were cited by the Court in this connection with approval-

"From the legal point of view it is essential to distinguish the contract of sale which has as its object the exporta- tion of the goods from this countnr from other contracts of sale relating to the same goods, but not being the direct and immediate cause for the shipment of the goods ............. ..When a merchant shipper in the United Kingdom buys for the purpose of export goods from a manufacturer in the same country the contract of sale is a home transaction; but when he re-sells these goods to a buyer abroad that contract of sale 2.07 has to he classiﬁed as an export transaction." (2nd Edn. p. 3).

The Court observed that "The same reasoiiirzg applies to the first sale after l'mpor2' which is a distinct local transaction eﬁccted after the importation of the goods into the country has been completed, and having no integral relation with it." (Para. 11).

( underlined by me.) The Court also referred to the practical difﬁculty in extend- ing the exemption of article 286(l}(b) to the last purchase for the purpose of export and the _ﬁ.rst sale after the import. "Supposing", the Court observed in para. 13 of the judgment, "A is the seller from whom B the export merchant purchases the goods -for export. If the sale is to be exempt, how is A to be satisﬁed that the goods would actually be exported subse- quently? And even if they were, it must he diﬂicult for A to prove to the Sales--tax Oiﬁcer that they were so exported by B, if proof was required. On the other hand, B might be keeping the goods, waiting for orders to come or might change his mind and not export the goods at all but sell them locally. In that case, what would be the position of A vis--a--vis the Sa.les--tax Officer demanding the tax? Could A escape liability if he failed to collect the tax from B at the time of the sale'? Or, is A to collect the tax ignoring B's declaration of his intention to export and leaving him to apply for refund by producing evidence of actual export, whenever that takes place? Even if a sales-tax enactment provides for adjustrnt on those lines, would not such legislation, in so far as it compels B to suﬂer the tax until he actually exports the goods, contravene clause (1)(h) which ex hypothesi exempts the transaction from sales-

tax? And What would be the position if the goods were burnt. or otherwise lost in the meanwhile, and the export never took place?"

Noticing all these practical diﬁiculties and uncertainties, the United States Supreme Court laid down the following rule in the case of Expresa Siderurgica, S. A. vs. Merced (1949) 337 US. 1S4--- ' "It is the entrance of the articles into the export stream that marks the start of the process of exportation. Then there is certainty that the goods are headed for their foreign destination and will not be diverted to domes- tic use. Nothing less will sufﬁce.

208

The Court then observed that similar -difﬁculties and un- certainties would arise if the exemption were sought to be extended to the ﬁrst sale after import. In the first place, the first sale after import will be a local sale because it takes place after the goods have been actually imported into India i.e. after the termination of the process of importation. In the next place, how is the exemption to be applied to goods imported from abroad after they are mingled with other goods and lose their distinctive character? In this connection the Court re- jected the American doctrine of "original or unopened package."

It is in the light of these discussions and conclusions that the Court considered whether the imports of cashewnuts by the res- pondents fell within the exemption of article 286(I](b), and if so, to what extent. These imports were divided into two categories--(i) purchases made through intermediaries (called "the Bombay party") doing business as commission agents at Bombay. As the Bombay party acted as agents of the respon- dents charging commission, privity was established between the respondents and the African sellers. That being so, the pur- chases of cashewnuts by the respondents from the African sellers occasioned the import and therefore they came within the exemp- tion of article 286(1J[b) and were not subiected to sales-tax law of the State.

In the other category, the Bombay party indented the goods on their own account and sold the goods as principals to the respondents and other customers but the goods were shipped direct to Cochin or Quilon on c.i.f. terms. The shipping docu- ments were made out in the name of the Bombay party as con- signees and were delivered to them against payment through bankers at Bombay. The Bombay party cleared the goods through their own representatives at the port of destination and issued separate delivery orders to the respondents and other customers for the respective quantities ordered.

The Bombay party were thus the purchasers from the African sellers and the Bombay' party sold the goods as principals to the respondents at the port of destination by issuing separate de- livery orders against payment. No privity being established between the respondents and the African sellers, the respondents' purchases were purchases from the Bombay party of the goods within the State. In other words, they being thus local pur- chases could not come under the exemption under article 286(1) (13)-

----.u-a- - "-

" "--:------unj~ . _.._. .¢_ .--......_...____.._.....

209

As regards the sales or purchases effected in the State by transfer of shipping (c.i.f.) documents while the goods are still in transit, the Court's decision was that it was well known that such sales or purchases formed a characteristic feature of for- eign trade. they therefore fell within the exemption of article 286{1)(b), "if the State is constitutionally competent to tax such sales" as to which the Court expressed no opinion.

After such examination and discussion of the position, the Court summed up its conclusions as follows in para. 16 of the judgment :--

"( 1) Sales by export and purchases by import fall within the exemption under article 286(1)(b). This was held in the previous decision.

(2) Purchases in the State. by the exporter for the purpose of export as well as sales in the State by the importer after the goods have crossed the customs frontier are not within the exemption.

(3) Sales in the State by the exporter or importer by trans-

fer of shipping documents while the goods are beyond the customs frontiers are within the exemption, assum- ing that the State power of taxation extends to such transactions."

S. R. Das, I. who was a party to the unanimous decision of the Court in the ﬁrst Travancore case did not agree this time with the majority view and wrote a long dissenting judgment. He dissented from the majority view on the construction and mean- ing of article 286(1) (a) dealing with restrictions placed upon a State as to imposition of tax on the sale or purchase of goods where such sale or purchase takes place outside the State. He also dissented this time as to the scope of the expression "in the course of" occurring in article 286(1) (bl. He posed the ques- tion, as to what was the scope of the ban imposed o-n the States by article 286(1) (b)? He felt that the answer would depend on the meaning that may be ascribed to the phrase "in the course of" occurring in clause {1](b). He referred to the unanimous decision of the Court in the ﬁrst Travancore case according to which "whatever else may or may not fall within article 286(l)(h), sales and purchases which themselves occasion the experts or imports of the goods, as the case may be, out of, or into, the territory of India come within the exemption ....... .."

20 M of Law.'74--l6 .. ___..i 210 According to him, this was suﬂicient to dispose of that case and it was not then necessary to decide what else might fall within that phrase. He said, "This Court is now called upon to decide that point". (ride para. 43 of his judgment) Date, 1., then des- cribed the practice of foreign trade in India and how it was car- ried on. And he expressed his views in para. 51 of his judgment as follows :--

"In my judgment the purchase made by-the exporter to im- plement his agreement for sale with the foreign buyer is to be regarded as having taken place 'in the course of' export. I take this view, not because I read the words 'in the course of' as synonymous with the words 'for the purpose of' but because I regard the purchase by the exporter as an activity' so closely integrated with the act of export as to constitute a part of the export process itself and, therefore, as having taken place 'in the course of' the export. The learned Attorney- General accepts this position but the Advocates--Gen-- eral of the States delnur. They maintain that in this View of the matter one cannot stop at the last purchase by the exporter but has to include the purchase by the person who sells to the exporter and all previous sales or purchases until one reaches the producer. I ﬁnd no substance or cogeucy in this line of reasoning. In the last purchase by the exporter we have at least one party who is directly concerned with or interested in the actual export. The exporter is the connecting link, the commercial vineulutn, as it were, between the last purchase and the export._ But in the earlier sales or purchases neither the sellers nor the purchasers are personally concerned with or interested in the actual export of the goods at all. Therefore the earlier sales or purchases may be too remote and may not he re- garded as integral parts of the process of export in the same sense as the last purchases by the exporter can he so regarded. The line of demarcation is easily per- ceptible."

He summarised his views as regards the true scope and mean- ing of a sale or purchase in the course of import or export in paragraph 59 of the judgmental reported in the AIR as foilows:~---

ii .... ..A sale or purchase 'in the course of' import or ex- port within the meaning of clause {l){b_} includes Complexity of the sub1ect.

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(i) a sale or purchase which itself occasions the import or export as already held by this Court, (ii) a sale or purchase which takes place while the goods are on the high seas on their import or export journey and (iii) the last purchase by the exporter with a view to export and the ﬁrst sale by the importer to a dealer after the arrival of the imported goods. If a sale or purchase takes place within a State, either under the general law or by reason of the Explanation, then, if it takes place in the course of import or export as explained above, no State, not even the State within which such sale or purchase takes place can tax it by reason of clause (1) (b): This, in short, is the true meaning and import of articl'e 286 as I read and understand it."

I have dealt at length with the two Travancore cases to show their supreme importance in relation to the restrictions on the power of the States to impose by law taxes on the sale or purchase of goods when such sale or purchase takes place in the course of import or export. The matter is highly complex and diﬂicult. In my opinion, it becomes easy to grasp their true meaning, scope and content in the background of actual facts. Except in such background, our ideas may continue to remain hazy and our vision blurred. Law is a social science dealing with the actual' problems faced by man as a member of society in connection with his aﬁairs and dealing with other men. Hence it makes for clarity it legal problems are considered in the context of the realities of life. To use the language of the great German legal philosopher and sociological jurist, Rudolf Von Jhering, we are concern not so much with jurisprudence of conceptions as with iurisprudence of actualities. That article 286(1) (b) is capable of more interpretations is readily seen from the long dissenting judgment of S. R. Das, J. and I shall presently show that this divergence of views on the scope, meaning and interpretation of article 286(l)(b) of the Constitution and section 5 of the Cen- tral Sales Tax Act is still persisting. Therefore I should try my level best to deﬁne the scope of these provisions so that in future, doubts, conflicts and divergences may be reduced to the minimum if not altogether eliminated. It may be pointed out here with great respect to the views of Das, J. that his view that "a sale or purchase occasioning export or import" includes the last sale before export of the goods and the first purchase after import of the goods may not be universally acceptable as it was not accept- able to the majority of the Judges in the second Travancore case.

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The last sale or the ﬁrst purchase, however it may appear to be in the interests of foreign trade of our country cannot but im- pinge beyond reasonable limit upon the power of the States to levy sales-tax. One may take the view that to include in the name of integrated activities, such a sale or such a purchase as taking place in the course of export or import does not appear to be based upon very sound reason. For in the case of the last sale or purchase before the export-sale, where is the certainty that after such last sale or purchase and before such export--sa1e, the exporter will not change his mind or that the goods will not he lost, destroyed, pilfered, damaged or rendered less valuable? And in the case of the ﬁrst sale or purchase after the import is comp- letely at an end, on what rational basis can it be said that such ﬁrst sale or purchase is integrally connected with the import even if such ﬁrst sale or purchase is in pursuance of a contract pre- viously entered into between the importer and the ﬁrst purchaser?

There is no doubt however that the two Travancore cases decided by the Supreme Court before the Sixth Amendment of the Constitution are landmarks in our constitutional history in relation to the construction and interpretation of article 286 of the Constitution.

The next phase in connection with the matter started in 1956 mm:

when the'CoI1stituEion { Tenth Amendment) Bill was introduced gfginﬁw in Parliament and passed by Parliament as the Constitution (Sixth commission mnendment) Act. In the same year, the Government in the (1955)- Ministry of Law referred to the Law Commission, the question of the principles that should be formulated by parliamentary le- gislation for determining when a sale of goods takes place (a) outside a particular state, (b) in the course of import or export, or (c) in the course of inter-state trade or commerce in pursuance of the provisions of clause (2) of article 286 and clause (3) of article 269 as inserted by the Constitution Sixth Amendment. The Law Com-

mission in its Second Report (Parliamentary Legislation relating to Sales-tax) dealt with these three matters. The report of the majority covered only about 10 pages and a separate note consisting of four pages was written by Dr. N. C. Sen Gupta, :1. Member of the Commission. In paragraph 10 of the majority report, the Commission recommended the acceptance of the prin- ciples laid down by the Supreme Court in the two Travancore cases and the language used by the Commission in the aforesaid paragraph 10 was more or less the same as the language used Kl1os1a's case (1966).

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in the decisions of the Supreme Court in the two Travancore eases, specially in the ﬁrst case. The Commission did not accept the views expressed by Das. J. in the second Travancore case nor did it accept. the suggestion of the Ministry of Commerce and Industry that the last purchase preceding the export should be accepted as a transaction in the course of expert on the ground that the exemption of such transactions from sales-tax will stimu- late exports. As that Ministry did not however suggest that a similar exemption shou-Id be granted to the ﬁrst saie following the import, it appeared to the Commission to be somewhat illo- gical that the last purchase preceding the export should be exempt whereas the ﬁrst sale following the import should not be exempted.

With great respect to the views of the Commission in the Second Report, it is felt that the Commission borrowed the language used in the unanimous decision of the Supreme Court in the ﬁrst Travancore case without critically and carefully examining whether that language would be precise enough to remove all doubts and ambiguities and con- ﬂicts, as is evident from the minortiy judgment of Das, J. in the second Travancorc case. Moreover, from the observations of the Court in para. 14 of the judgment in the ﬁrst Travancore case, it was clear that the Court did not consider the matter in a comprehensive manner. This aspect was speciﬁcally mentioned by Das, J. in his minority judgment.

Be that as it may, the Government and Parliament accepted the majority views of the Law Commission in the Second Report in relation to sales or purchases in the course of import or export and section 5 of the Central Sales Tax Act, 1956 adopted verbatim the language of the recommendations of the Commission in para- graph 10 of the Report.

The third phase is provided by K. G. K.hosla's case (K. G. Khosla & Co. vs. Deputy Commissioner of Commercial Taxes, AIR 1966 S.C. 1216] decided by the Supreme Court on the 16th January, 1966. It is not necessary to discuss in detail the other cases on the subject decided by the Supreme Court before Khoslzfs case as they more or less followed the views of the Sup- reme Court in the unanimous judgment in the ﬁrst Travancore case and majority judgment in the second case. Moreover, dis- cussion of too many case-laws has the disadvantage of dis- tracting one's attention from the real problem. Be that as it may, it is diﬂicult to accept in toto the View ex-

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pressed in some of these cases (not cited or discussed here) that no single tcst can be laid down and each case must depend on its own facts. It is submitted with respect that such a view seems to be a View of despair and underrates the importance of the principles required to be formulated by law made by Parliament under article 286(2) which have been actually formulated by Parliament in section 5 of the Central Sales Tax Act, 1956. It may even be said that if this view is accepted then there was hardly any necessity for formulating the principles in pursuance of. article 286(2) as it now stands. Whether the principles formu- lated by Parliament require improvement is a different matter. While saying this We are not ignoring or underestimating the im- portance of the facts of each case. But that should not mean as to why serious endeavour should not be made to make the princi- ples as broad and comprehensive so as to ﬁt in with the facts of each and every case as far as practicable. We must try to ﬁnd out the recommendations of the Law Commission in 1956 v.-'hicl1 re- commendations in turn were based on decisions in the two Tra~ vancore cases. The observations of Das, J. in paragraph (48) of his dissenting judgment as reported in the A.I.R. will bear repe- tition in this counection--

"The question arises : what is the scope of the ban thus lI]1- posed on the States fr' The answer will depend on the meaning that may be ascribed to the phrase 'in the course' occurring in clause (1) (b) ....... ..In AIR 195 2 S. C. 366 (the first Travancore case) this Court has held that--

'"Wl1atever else may or may not fall within article 286- (1){b) sales and purchases which themselves occa-

sion the export or import of the goods, as the case may be, out of or into the territory of India come within the exemption . . . . . . .."' In other words, this Court has held that sales or put- chases which themsclves occasion the irnpprts or ex-' ports are sales or purchases which take place 'in the course of' import or export. This was suﬁicienr to dis- pose of that case and it was not there necessary to de- cide what else niighr fall within that phrase. This Court is now called upon to decide that point."

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Coming new to Khosla"s case, the following facts mentioned in the judgment of Sikri, J. led the Court to the decision it reached in the case --

(1) The appellant K. G. Khosla & Co.--1nentioned in the judgment as the assessee--enterea' into a contract with the Direc- tor-General of Supplies and Disposals, New Delhi for the supply of axle-box bodies.

(2) According to the contract the goods were to be manu- factured in Belgium and the Director-General of the Indian Supply Department (D.G.I,S.D.), London or his representative was to in- spect the goods at the works of the manufacturers.

(3) He was to issue an inspection certiﬁcate.

(4) Another inspection by the Deputy Director of Inspection, Ministry of W.H. 8: 5., Madras was provided for in the contract. It was his duty to issue inspection notes on Form No. WSB 65 on receipt of a copy of the inspection certiﬁcate from the D.G.I.- S. D., London and after veriﬁcation and visual inspection.

(5) The goods were to be manufactured according to speci- ﬁcations by M/s La Brugeoies, E'[','Nive1les, Belgium.

{6} There was a provision as to when the assessee would be entitled to be paid.

(It) The assessee was entirely responsible for the execution of the contract in all respects in accordance with the term: as speciﬁed in the contract.

(8) Any approval which the Inspector might have given in respect of the stores, materials or other particulars and the work and workmanship in the contract (whether with or without test carried out by the contractor's Inspector "shalt not bind the pur-- chaser (that is, the D.G.S. &. D.) and notwithstanding any appro- val or acceptance given by the Inspector, it shall be lawful for the consignee of the stores on behalf of the purchaser to reject the stores on arrival at the destination, if it is found that the stores supplied by the contractor are not in conformity with the terms and conditions of the contract in all respects."

(9) Further, the assessee was responsible for the safe arrival of the goods at the destination.

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(10) By an endorsement the D.G.I.S.D., London was re- quested to issue pre-inspection delay reports regularly to all con- eerned including the Railway Liaison Officer cfo D.G.S.&.D., Sltahjahan Road, New Delhi. He was also requested to endorse copies of the lnspection Certiﬁcates to the Director of Inspec- tion, Ministry' of Works, Housing and Supply, Bombay.

(11) It was further found by the Sales Tax Appellate Tri- bunal that "the Belgian: manufacturers, after manufacture consigned the goods to the appellants by ship under bills of fading in which the consignee was the appellants themselves.

(12) The goods were consigned to Madras Harbour, cienreci by the appellants' own cieoring agents and desptztched for delivery to the buyers thereafter."

(13) In pursuance of this contract the assessee supplied the axle-box bodies of the value of Rs. 1,'.-'=1,029.50 to the Southern Railway at Perambur Works and of the value of Rs. l,32,93'i.75 to Southern Railway, Mysore.

The Joint Commercial Tax Oﬂicer held that the former sales were liable to tax under the Madras General Sales Tax and the latter under the Central Sales Tax Act. He rejected the conten~ tion that the sales were in course of import. He held that "there was no priviry, of contract between the foreign seler and the Government for the goods. The goods were shipped only as the goods of the seller and intended for them. They were cleared as their own and delivered after clearance. The transaction is therefore one of intra--state sales and not one in the course of import. The sale is completed only when the goods are delivered in this State and so it is not occasioning the import." The Joint Commercial Tax Oﬂieer also referred to the terms and condi- tions of the contract relating to the rejection of the goods by the purchaser to which reference has already been made.

The Appellate Assistant Commissioner agreeing with the Joint Commercial Tax Oﬂicer, rejected the appeals by the assessec. The Appellate Tribunal also held that the sale by the appellants had not occasioned the import except that sales to the extent of Rs. 22,983.i'5 and Rs. 10,987.50 had taken place a in the course of the import as the goods had been appropriated to the contract while the goods were on the high seas. The asscssee ﬁled two revisions before the High Court and the Deputy Commissioner of Commercial Taxes, Madras also ﬁled .--..__......u..,»-q-..- -A7 , -Q...

-.-------:-------o-----u--- ---q--.-us-u--u--au 217 two revisions challenging the deductions of the two sums of Rs. 22983.75 and 10987.50. The High Court allowed the petitions ﬁled by the Deputy Commissioner of Commercial Taxes and dismissed the petitions ﬁled by the assessee. The High Court rejected the contention of the assessor: that the sale by the assessee to the Government Department (i.e. the D.G.S.&lJ.) had occasioned the import on the ground that "before a sale can be said to have occasioned the import, it is necessary that the sale should have preceded the import" and as the sale had not taken place in Belgium there was no question of the sale occasioning the import of the goods.

On the facts and materials, the Supreme Court differed from the decision of the High Court and allowed the appeals ﬁled by the assessee and held that the sales by the assessee to the Government (Director--General of Supplies and Disposals) took place in the course of the import of goods within section 5(2) of the Central Sales Tax Act.

In.' coming to this decision the Court ﬁrst rejected (and it is submitted rightly) the View of the Madras High Court that before a sale could be said to have occasioned import "it is necessary that the sale should have proceeded the import."

ln repelling the above View of the High Court, the Supreme Court proceeded on the following lines of reasoning:--

(a) "It seems to us that the expression 'occasions the move-

ment of goods' occurring in section 3(a) and section 5(2) must have the same meaning."

(My comments.----Tl1e expression "occasions the movement of goods" occurs in section 3(3) only. In section 5(2), the expression used is "occasions such import". Moreover, the words "only if" occur heforethe words "the sale or purchase in section 5(2) but not in section 3. These differences in language are signiﬁcant. The meaning of the term "movement" in sec- tion 3(a) is more speciﬁc than the meaning of the term "import" in section 5(2). As has been shown already, on a very strict and narrow View of article 2861,' 1)(b), a sale or purchase in the course of import or export would he conﬁned only to a sale or purchase effected by a transfer of documents of title to the goods while the goods are on the high seas in the course of transit vide in this connection the observations of Patanjali Sastri, C. J. in para. 13 of the judgment (as reported in the AIR) in as M of Lats.-311 .17 218 the ﬁrst Travancore case. There are other points of diﬁerence between a sale or purchase in the course of inter~Statc trade or commerce and a sale or purchase in the course of export or import. In this view of the matter, to attribute the same mean- ing to the expression occurring in section 3(a) and the_expres- sion occurring in section 5 does not, it is pointed out with res- pect, seem quite correct.) (13) After taking the view as above, the Court cited with approval the following interpretation given by Shah, J. on section. 3 in the majority judgment of the Court in Tata Iron and Steel Co. vs. S. R. Sarkar (AIR 1961 SC 65) :---

"In our view, therefore, within clause (11) of section 3 are included sales in which property in the goods passes during the movement of the goods from one State to another by transfer of documents of title thereto: clause (3) of section 3 covers sales, other than those included in clause (in), in which the movement of goods from one State to another is the result of a covenant or incident of the contract of sale, and property in the goods passes in either Stale."

(c) These observation of Shah, I. were cited with approval by the Court in the Cement Marketing Co. vs. State of Mysore {AIR 1963 SC 980) although the Court in that case was dealing not with the Central Sales Tax Act but with a sirniiar case arising under article 286 of the Constitution before its amendment.

id) But the same Bench of the Court in dealing with a case arising under the Act (State Trading Corporation of India Ltd. vs. State of Mysore AIR 1963 SC 548] again approved of the observations in Tata Iron 8:

Steel Co. case In this 'gay, after citing a number of cases under section 3, the Court held "that the High Court was wrong in holding that before a sale could be said to have occasioned import it is necessary that the sale should have preceded the irnpo ."

When the Court was invited by the Counsel for the respon- dent to hold that the observations of Shah, J. in Tata Iron 6;

»-»""-'-'vs 219 Steel Co. case were obiter, and to consider the question afresh, because Shah, J. in that case was considering clause (in) of sec- tion 3, the Court observed-----"We are unable to re-open the ques- tion at this stage. Shah, J. was interpreting section 3 of the Act, and although the Court was principally concerned with the interpretation of section 3(b), it was necessary to consider the interpretation of section 3(a) in order to arrive at the correct interpretation of section 3(1)) ."

In this way, repelling the view of the Madras High Court, the Court in a short paragraph proceeded to the question,---

"Whether the movement of axle--hodies from Belgium into Madras was the result of a covenant in the contract of sale or an incident of such contract. It seems to us that it is quite clear from the contract of sale that it was incidental to the contract that the a;xIe--hox bodies should be manufactured in Belgium, inspected there and imported into India for the consignee. Movement of the goods from Belgium into India was in pursuance of the conditions of the contract between the assessee and the Director-General of Supplies. There was no possibility of these goods being diverted by the asses- sec for any other purpose. Consequently we hold that the sales took place in the course of import of goods within section 5(2) of the Act, and are, there- fore, exempt from taxation."

Thus in coming to this decision, the Court relied on only two grounds, namely,---

(1) the movement of the goods from Belgium to India was in pursuance of the conditions of the cant:-act hcztween the assesses and the Da'rec£0r~General of Supplies;

(2) there was no possibility of the goods being diverted by the assessee for any other purpose.

C-J"l'lTl31tS on EC1 :: sla's cases.

My comments on the case are as follows :----

(1) It is difficult to ﬁnd out from the judgment whether the Court treated the assesses (K. G. Khosla & Co.) as merely as agent of the D.G.S.&D. or as independent importer importing the goods from Belgium as his own goods.

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(2) The terms and conditions of the contract were no doubt a bit peculiar in that under them a good deal of control over the assessee was retained by the D.G.S.&D.. such as control in rela- tion to inspection of the goods both in Belgium at the stage of manufacture and also in India at Madras and Bombay and the issue of inspection certiﬁcates and inspection notes. All this may be regarded as more in consonance with the position of the assessee as an agent than with his position as an independent importer importing goods by purchase from the Belgium manu-

factuters.

(3) But this is more than counter--balanced by other terms and conditions of the contracts and other facts and circumstances of the case. These terms and conditions and facts and circum- stances are: (1) the assessee, Khosla 3.: Co. was entirelv respon- sible for the execution of the contract in all respects in accor- dance with the terms and conditions speciﬁed; ( ii) any approval which the Inspector might have given in respect of the stores. materials etc. (whether with or without test carried out by the assessee's Inspector) shall not bind the purchaser; (iii) notwithstanding any approval or acceptance given by the Inspccw tor it shall be lawful for the consignee of the stores (the Southern Railway on behalf of the purchaser) to reject the stores on arrival at the destination it' it be found that the stores supplied by the contractor L' the assessee) are not in conformity with the terms and conditions of the contract in all respects; (iv) the assessee was responsible for the safe arrival of the goods at the destination; (V) the Belgian manufacturers after manufacture. consigned the goods to the appellants (the assessee) by ship under bills of lading to which the consignee was the appellants (asses- see) thernselves; and (vi) the goods were consigned to Madras harbour, cleared by the appellants' own clearing agents and despatched for delivery to the buyers thereafter.

All these terms and conditions and facts and circumstances point to the assessee being the importer, himself importing his own goods. The Court however did not consider at all _this aspect of the case as to whether the assessee was merely an agent of the 116.5. & D. or was an independent importer" who had entered into a contract with D.G.S. 8: D. to sell the goods to him after "the safe arrival of the goods at the destination."

[4] The Court also did not consider at all the ﬁnding of the Joint Contriiercie.-l Tax Ollicer that "tli-.2-re was no privity of con- tract betwccn the foreign seller and the Government for the 221 goods. The goods were shipped only as the goods of the seller (1.8. the assesses) and intended for them. They were cleared as their own and delivered after clearance. The transaction is theretore one of the intra--State sales and not one in the course of import." While the Court speciﬁcally stated in para. 11 of the judgment that "Movement of goods from Belgium of India was in pursuance of the conditions of the contract between the assessee and the Director--General of Supplies", there is nothing expressly stated in the judgment whether this contract could' be regarded as one between the Director-General and the Belgium sellers.

It is not clear why the Court did not accept or reject this ﬁnding of the Joint Commercial Tax Othcer.

(5) The ﬁndings that the movement of the goods were ill pursuance of the contract between the assessee and the Director- General of Supplies and Disposals and that there was no possi- bility of the goods being diverted for any other use did not touch the question whether the purchase by the D.G.S. 8: D. after the arrival of the goods in Madras and termination of the pro- cess ot import was an import-purchase by the Director--G-eneral of Supplies and Disposals or was the iirst purchase by him alter the import.

(6) Then, the Court did not at all consider the two Tl'a'l|'Bl'l- eore cases of I952 and 1953. It does not appear that the Court's attention was drawn to these cases by the counsel who appeared for the parties. All the cases cited before and relied on by the Court were cases under section 3 of the Central Sales Tax Act, 1956 with the exception of one (Cement Marketing Co. vs. State of M3-'sore, AIR 1963 SC 980) which arose under article 286 as it stood before its amendment in 1956. The Court also did not consider any case under section 5 of the Central Sales Tax Act. For example, in Ben GorIn's case (AIR 1964 SC 1752). section 5 was speciﬁcally considered as also the two Travancore cases. In Ben Gorrn's case {decided on 10th April, 1964), Shah J. speaking for the majority stated in relation to section 5 in para. 5 of the j.udgment as reported in AIR--

'This was legislative recognition of what was said by this Court" in the two Travaneore cases, "about the true connotation of the expression 'in the course of the ex- port of the goods out of the territory of Inida' in article 28ﬁ(1)(b). A transaction of sale which 222 occasions export or which is eﬁected by a transfer of documents of title after the goods have crossed cus- toms frontiers, is therefore, exempt from sa.les--tax levied under any State legislation."

Had the Court considered Ben Gornfs case, the Court would liave been naturally led to consider the two Travaneore cases because they were so thoroughly discussed in Ben Gorn1's case.

But even this was not done.

The result tlierefore is that we do not know as to exactly on what basis the Court proceeded, that is, whether proceeded on the view that Khosla & Co. was an agent of the D.G.S. & D. or on tit; view that Khosla E: Co. was an independent importer irnpurting the goods purchased by it on its account. The previous contract with the D.G.S. & D. to sell the goods to him after the goods have been imported into the territory of India is not at $1 inconsistent with this position. It may be pointed out that these two views would clearly come respectively within the two categories into which Group III (Imports from Africa) was subdivided by Patanjali Sastri, C. J. in the second Travancore case (paras. 20 and 21 of the judgment of the learned Chief Justice as reported in the AIR). Therefore, perhaps we would have got a clear guidance from the Supreme Court in Khosla's case, had the Court's attention been drawn to the two Travan-- core cases and Ben Gori-n's ease.

Then each of the two ﬁnal views of the Court in Khosla's case} namely, that the import was in pursuance of the conditions of the contract between the assessec and the Director-General of Supplies and Disposals and that there was no possibility of the goods being diverted by the assessee to any other purpose, would be equally compatible with the position of Khosla & Co. as an agent of the D.G.S. 8.: D. as well as an importer of the goods on its own account.

The result, therefore, of this decision has been that an amount of confusion and uncertainty has been introduced in the law [sec- tion 5 as well as article 286(1) (b)]. The State Governments have not been happy with it. [Some of them have openly remon- strated against the decision on the ground that its etfect has been to curtail the States' power of imposing taxes on many sale and purchase transactions which but for the decision would be clearly subject to such taxes. The Central Government has been also Second re-

ference to the Law _ Commission (1966).

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in a fix as to exact scope of the law as enunciated in article 2S6(1)(bJ and section 5.

Therefore, within about only six months after the decision the Ministry of Finance raised the query whether the decision in Khosla's case went beyond what the Law Commission in its Second Report intended and thereupon the Ministry of Law referred the matter to the Law Commission on the 18th July, 1966 for its consideration.

After careful consideration of the whole matter at length the Commission was divided in its opinions. The majority view was that "the propositions emerging from Khosla's case are con»- sfsfertt with the two T ravancore cases on which the Second Report of the Law Commission was based and do not go beyond the intendment of those decisions. The particular situation involved in Khosla's case was, no doubt, not in issue at that time, but there is nothing in those decisions, which is inconsistent with the test of contractual obligation applied in Khosla's case". But it is submitted with respect that the general conclusion of the Com- mission that _"the propositions emerging from Khosla"s case are consistent with the two Travancore cases . . . . .." is ditlicult to accept. If Khosla's case is consistent with the Tr-avancore cases, then why have the States been clamouriug and rcmonstrating against Khosla's decision? Can the States now impose tax on the ﬁrst sales after import in the face of the Khosla decision? Why then did not the majority recommend that the States might exercise their powers of taxation, the Khosla decision notwith- standing? Why then the Ministry of Finance raised the query at all ? All these questions remained unanswered in the report of the majority.

In my view, correct approach was adopted in the minority reports signed by Shri K. G. Datar and Shri R. P. Mookerjee. Their conclusion was that KhosIa's case was inconsistent with the decisions in the Travaneore cases. Mr. Datar in his report said---

"For the reasons stated in the foregoing paragraphs, I am of the opinion that the present decision in IChosla's case is not consistent with the previous decisions of the Supreme Court which I have discussed above. In particular, the decision goes beyond the decisions of the Supreme Court in the two Travancore cases and is likely to create uncertainty in the law."

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Uncertainty in the law the decision has, no doubt, created. But the small amendments suggested in section 5 by Shri Data: and Shri Mookerjee would not, I am afraid, remove the uncertainty. Shri Datar says in para. 115 of his note---

"At present the section reads ' . . . . . .if the sale or pur- chase . . . . ..occasions such. import . . . . ..' and 'if the sale or purchase occasions such import . . . . ..'. If only the Travancore cases were to be followed and accepted, it would be only the sale occasioning the export and only the purchase occasioning the import."

But I do notthinlvz these small changes using only sale in relation to export and only purchase in relation to import would clear away the uncertainty and doubt. My reason is simple because every sale transaction involves a sale as well as a purchase--sale by the person from whom the property in the goods passes and a purchase by the person to whom such property passes. Sale and purchase may be regarded as the obverse and reverse of the same transaction. Even article 286 does not appear to have limited sale to export or purchase to import, had it been so.- tben in clause (1)(b) of that article the words "export of the goods out of' would have been placed before the words "the import of the goods into". Das, J. also in para. 51 and para. 59 of his judgment in the second Travancore case used the ex- pressions interchangeably.

In view of the detailed discussion of Khos1a's case and the My dl-3_ commenLs I have offered on that case, I regret to say that I 3$1'¢°f|1€|1i- ﬁnd it difficult to persuade myself to accept the view of my colleagues in relation to that case in their report in the present bY_fh£_= case. i have already shown that the words "occasions such ,"3§1,';§;'.{ ml export" in subsection (1), and the words "occasions such irn-- case- port" in sub--seetion (2), of section 5 are not free from ambiguity.

We should, therefore, try as clearly as possible to deﬁne the exact scope and content of these words.

We should not hesitate even to recast section in new language by dropping the word "occasions" if that helps in deﬁning and delimiting with suilicicnt clarity the limits of "the course" of import or export. The difficulty with the worn "ocea_=;ion" hoth as a verb and as a [noun is that its connotation is very wide. This is why the Suprcine Court in the ﬁrst Travancore case used 225 the words "sales and purchases which themselves occasion the export or import of the goods, as the case may be, out of or into the territory of India"-----the emphasis being laid upon the pronoun "thernse1ves" to indicate that such sales or purchases alone (no other sales or purchases) are the direct, proximate and immediate cause of the import or export. Other sales or purchases may be only indirectly or remoteiy connected with the import or export, but they are not the direct, proximate or immediate cause. And Law Commission in making their recommendations in the Second Report borrowed the words used by the Supreme Court with this difference that instead of the words "sales or purchases which therriseives occasion etc." the Law Commission used the words "0nI_,v if the sale or purchase . . . . ..occasions etc." In sectio 5 also the words "onI_v if" have been used. But even then it seems that the Supreme Court was not sure whether the language used in the ﬁrst Travancore case (as cited above) would fully carry out its intention and objective. Therefore even in the ﬁrst case, the Supreme Court, while expressing its clear opinion in para 10 of the judgment as reported in the AIR. used the expression "A sale by export" to mean a sale which itseﬂ occa- sions the cxport. In the second of the three views pressed from the Bar before the Court, the expressions "export sale" or "im- port purchase" were used. These two expressions were also used in the very same second view as reiterated by the Court in the second Travancore case. But while stating its ﬁnal con- clusion in para. 14 of the judgment in the ﬁrst Travancore case, the Court mentioned only the expression "sales and purchases which themselves occasion the export or the import".

While however this expression was also quoted in the judg- ment in the second Travancore case, in expressing its final con- clusion in para 16 of the judgment as reported in the AIR, the Court used the expression "sales by export" and the expression "purchase by import" in conclusion { 1). The Court said--

"Our conclusions may be summed up as foI1ows:---

(1) Sales by export and purchases by import fall within the exemption under article 286(1)(b). This was held in the previous decision.

(2) ................... .. j (3) ...................

226

-We had already referred to the importance of foreign trade Difference and customs duties in our national ﬁnance and economy, we Egiggcﬂihe have also pointed out that the States' power to impose taxes on export and the sale or purchase of goods should not be unduly curtailed as gciggﬁcr? that may adversely affect the States' ﬁnance and economy. In considering the meaning of "occasion" we should keep in View both these aspects. And we should not ignore the impact of export and import trade in its proper perspective on the indus- trial growth and development of our country.

We should in this connection note not only the relative Importance of export and import but also the difference between the two so far as our national economy and economic growth are concerned. Thus, increase in exports not only improves Indiafs foreign exchange position and increases her foreign ex- change reserves by reducing and ultimately eliminating adverse balance of trade and payments but also directly encourages and accelerates the industrial and agricultural growth and develop- ment of the country. Increase in imports has just the reverse eﬁects. It tends to weaken our foreign exchange position and to deplete our foreign exchange reserves and thereby cripples our capacity' for selfreliance in the economic sphere, attainment of which should, as far as practicable, be the aim of any self-- respecting nation. It imported foreign goods, articles and materials ﬂood our internal markets, then the goods, articles and materials produced in the country may ﬁnd it diﬂicult to compete with imported goods and in this process imports directly tend to hamper and hinder the growth and development of our in- dustries, tradc, business and agriculture.

Even in the case of exports. care is called for so that the Care no» expert of raw materials, specially those which are likely to be:§:SI,:'1'1.5r'I depleted without any chance or possibility of replenishment, is exports. not encouraged unless that becomes absolutely necessary in the overall interests of our national economy a.nd national economic growth. It is well--known that formerly raw materials exported from India other than those needed for immediate consumption in the foreign countries where they were exported, were quite often convened into manufactured products and ﬁnished goods and those manufactured and ﬁnished goods were imported into India for use and consumption in this country. The hitter ex- perience in this regard in prelndependence days is well known and has not yet been forgotten. Any student of India's eco- nomic history is aware of the baneful consequences of this two- way process in the export trade.

Care to be taken in the use of langu-

age in legisla-

tive darft-

ing.

22?

This is why our export and import trade has been under a strict system of control and licensing under the Import and ]-_-'.x- port (Control) Act, 1947, passed in March, 1947 on the eve of attainment of Independence when a national Government headed by Jawaharlal Nehru was in power. The Act was of temporary duration in the beginning but has continued in force ever since. It is now more or less a permanent statute. in this connection, reference may also be made to the Foreign Exchange Regulation Act, 1947, its objective being to provide in the economic and ﬁnancial interests of India for the regula- tion ot certain payment, dealings in foreign exchange and seen- rities and the import and export of currency and billion. I may also refer to the Export {Quality Control and Inspection} Act, 1963 whose object is to provide for the sound develop- ment of the export trade of India through quality control and inspcction----thc aim is thus to boost the export part of for- eign trade. All this shows that the Central Government and Parliament regard export trade more important than import trade in the nation's economy.

Therefore, we must be very circumspect in erttentling the length of the course of import. And while our national aim should be to boost and develop export trade, we should not unduly lengthen the course of export either for the simple reason that the power of the States in the ﬁeld of sales--tax should not he unnecessarily curtailed. If the goods manufactured in our country are of high quality and never go below the stand- ard quality, then that itself will, increase the demand for such goods in foreign markets specially if such quality goods are produced having regard to the tastes and fancies of foreign buyers irrespective of the imposition of taxes on the sales or purchases of the goods before their export. In this view no unnecessary encroachment in the State ﬁeld is required.

In rccasting section 5, we should not only specify the sales and purchases which do not come within the course of import or expert but also try to indicate the positive aspect of the matter by spelling out clearly the transactions which should come within the limits and boundaries of such course. We should not forget that in judicial decisions language plays an insigni- ﬁcant role but in legislative enactments language is the life-blood. T hercfore, in accepting a principle, criterion or guide--line laid in a judicial decision, the legislator must he very wary in adopt- ing the language used by the Court. ' 238 In this way, we may hope to define clearly limits of scope of article 286[ l}(h). There is no doubt that we are dealing with at twilight zone, but to mark out and delimit its outer boun- daries is our task, however difficult it may be. This much is certain that twilight zone does not fall within the area of complete darkness. Twilight is intimately and directly connected with light, it is in a sense. part of the light. There is a natural and direct link ljetvvc-cn twiliglit and light. At every moment twilight before the morning is gradually and in1perce--pti'ely ap- proaching, and evolving itself into, light of the day and at every moment twilight before night is gradually and imperceptibly receding from the light of the day and involving itself into darkness of the night. Therefore, in connection with the affairs of rnen, one is justiﬁed in treating twilight as part of light instead of treating it as part of darkness, and then try to draw the lJUuI1(l21l"_ii~lil1E beyond which one should not go. To demarcate and delineate that correct boundarydine is therefore the problem and to find a solution of the problem by a pragmatic approach based upon all relevant facts and circumstances of the situation is the reward which Law, the matrix of all social scien- ces, hold out to those who submit to its rigorous discipline.

Dealing with at.

twilight zone whose boundaries should be deﬁned with care.

In the light of the above discussions I suggest that section 3113869 5 of the Central Sales T an Act, 1956 may be recast on the lines indicated below :---

Section 5 The following principles are formulated for determining when a sale or purchase of goods takes place in the course of the export of the goods out of, or import of the goods into, the terri- tory of India, namely :--

(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, if and only if such sale or purchase, either------

fa] itself occasions such export, that is to say, itself is such as that it can be carried out only by initiating the process of export with the delivery of the goods to a common carrier for transportation to their foreign destination thereby ensuring that the goods are on their movement to such destination and there is no possibility of the goods being diverted to any tran- saction, use or purpose within India ; or trons for amendment of section

5. 229

(b) is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

Explanmr'on.--For the purposes of this clause-,--(i] goods delivered to a common carrier for transportation as aforesaid in pursuance of a contract of sale of the goods shall be deemed to he delivered in pursuance of the sale or purchase itself to which the contract relates although such sale or purchase is completed after such delivery;

(ii) a sale or purchase of goods which itself otherwise occa- sions the export of the goods within the meaning of sub--cIausc {a) shall not cease to be so merely because such sale or purchase is completed---

(a) within the State concerned before the delivery of the goods to a common carrier for transportation as aforesaid, or {bl after the arrival of the goods at their foreign desti- nation.

( 2) The last sale or purchase of goods preceding the sale or purchase which occasions the export of the goods under clause (1) {a} or any other sale or purchase preceding such last sale or purchase shall not be deemed to be a sale or purchase taking place in the course of the export of the goods out of the territory of India even if such last or other sale or purchase---

(i] is for the purpose of exporting the goods to implement any order already received or expected to be received from, or to implement any contract already entered or expected to be entered into, with any person for or in relation to the export of the goods, or

(ii) is an act preparatory to such export.

(3) In deciding whether a sale or purchase of goods occa- sions the export of such goods out of the territory of India, it shall be considered among other factors whether there is a pri- vity of contract between the exporter and the foreign buyer 'for the sale or purchase of the goods.

(4) A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India, if and only if such sale or purchase either---

fa) itself occasions such import. that is to say, itself is such as that it can be carried out only by initiating 230 ;he process of import with the delivery of the goods to a common carrier for transportation to their Indian destination thereby ensuring that the goods are on their moyement to such destination and there is no possibility of the goods being diverted to any tran- saction, use or purpose outside India ; or

(b) is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.

Exp!nm:fion---For the purpose of this clause,---

(i) goods delivered to a common carrier for transportation as aforesaid in pursuance of a contract of sale of the goods shall be deemed to be delivered in pursuance of the sale or purchase itself to which the contract relates although such sale or purchase is completed after such delivery;

( ii) a sale or purchase of goods which itself otherwise occa- sions the import of the goods within the meaning of sub--clause (a) shall not cease to be so merely because such sale or purchase is con1pleted----

fa) within the foreign country concerned before the deli- very of the goods to a common carrier for trans- portation aforesaid, or

(b) after the arrival of the goods at their destination in India.

(5) The last sale or purchase of goods succeeding the sale or purchase which occasions the import of the goods under clause (4) (a) or any other sale or purchase succeeding such last sale or purchase shall not be' deemed to be a sale or purchase taking place in the course of the import of the goods into the territory of India even if such last or other sale or purchase is for the purpose of importing the goods to implement any order already received or expected to he received from, or to implement any contract already entered or expected to be entered into, with any person _for or in relation to the import of the goods.

(6) In deciding Whether a sale or purchase of goods occasions the import of such goods into the territory of India, it shall be considered among other factors whether there is a privity of ......,..---I-'-

.l"_ 23} contract betwen the importer and the foreign seller for the sale or purchase of the goods.

NB.

(1) The above suggestions do not constitute a legislative draft strictly speaking, but section 5 may be redrafted on the basis of these suggestions. I have tried to make the language wide and comprehensive enough to cover all cases contemplated and yet exact and precise enough to exclude cases: to which the section is not intended to apply.

(2) I have not omitted in the above suggestions the ex- pression "occasions such export" and the expression "occasions such import" on the ground that these expressions received judi- cial recognition more than twenty years back and legislative recognition eighteen years back. But I have tried to explain these expressions to deﬁne comprehensively as weﬂ as precisely, as far as practicable, their scope and content,----the necessity for such explanation being to remove the ambiguities of the word "occasions".

S. P. Sen--Verma New Delhi, the 20th May, 1974.

MGIPRRND--2i} Law;":'4--Sec. IV NS--2l-9-74

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