Madras High Court
Mysore Chemical Supplies vs State Of Tamil Nadu on 2 April, 1991
Author: A.S. Anand
Bench: A.S. Anand
JUDGMENT Raju, J.
1. These two tax appeals have been filed by the very same assessee in respect of two different years 1973-74 and 1976-77 challenging the common order dated July 16, 1981, passed by the Joint Cornmissioner-II in exercise of his suo motu powers under section 34 of the Tamil Nadu General Sales Tax Act, 1959, hereinafter referred to as "the Act".
2. The appellants are dealers in chemicals and saltpetre and during the assessment years in question, they effected regular sales as well as acted as commission agents. So far as the assessment year 1973-74 is concerned, the assessing authority originally assessed them under section 12 of the Act on a total and taxable turnover of Rs. 13,28,162 and Rs. 11,49,416, respectively, by an order dated March 24, 1975. Thereupon, it was found out that the assessee, who received saltpetre for sales on commission basis from non-resident principals have transferred to their own account from agency goods and sold the same at a premium and that those sales also constituted sale within the meaning of the Act but has escaped assessment. Consequently, proceedings were initiated under section 16 of the Act to revise the earlier assessment made and after giving due opportunity, a turnover to the tune of Rs. 5,38,999 was also brought to tax subjecting the same to levy at 3 1/2 per cent. So far as the assessment year 1976-77 is concerned, while making the assessment the claim made by the assessee in respect of a turnover of Rs. 2,18,511 as being exempt on the ground that they were agency transactions on behalf of non-resident principals, came to be rejected and the said turnover was also subjected to tax by an order dated November 2, 1977. The assessing authority held that the assessee appropriated the goods of the principals to their own account and sold them as their own goods.
3. Aggrieved, the assessee filed two separate appeals before the first appellate authority who heard them in common and allowed the claim of the assessee on the ground that the turnovers referred to supra represented only sales on behalf of the non-resident principals on agency basis and not in their own right after appropriating the goods to their account. The said order of the first appellate authority was the subject-matter of a suo motu revision by the Joint Commissioner who, after issuing a show cause notice and giving due opportunity by his common order dated July 16, 1981, set aside the order of the first appellate authority and ordered restoration of the orders of the assessing authority. This has resulted in a turnover of Rs. 5,38,999 for the year 1973-74 and Rs. 2,13,901 for the year 1976-77 being subjected to sales tax under the Act. Challenging the said conclusions of the revisional authority, the above appeals have been filed.
4. Mr. C. Natarajan, learned counsel appearing on behalf of the appellants, submitted that the turnovers in question represented merely agency sales on behalf of their non-resident principals to whom proper accounts have been rendered in terms of their agency agreement and inasmuch as the entire transactions were with the prior authority as well as ratification of the principals, the conclusion of the revisional authority that there had been in effect two sales in the course of the dealings and that the sales effected by them were really sales in their own behalf after appropriating the agency goods to their own account, cannot be sustained either in law or on facts. According to the learned counsel, the conclusions of the revisional authority are opposed to law and vitiated by a wrong understanding of the vital facts and, therefore, deserve to be set aside in the above appeals. On behalf of the Revenue Mr. R. Lokapriya, vehemently contended that the assessing authority and the revisional authority were right in placing reliance upon the decisions reported in [1966] 18 STC 325 (Mad.) (L. S. Chandramouli and Company v. State of Madras) and [1973] 32 STC 350 (Mad.) (C. V. Ramaswamy Gounder and Sons v. State of Madras) which, according to the learned counsel, squarely apply to the case on hand in favour of the Revenue and consequently no interference is called for in the above appeals in favour of the appellants.
5. Before going to the merits of the case, we consider it necessary to deal with the relevant case law relied upon by the counsel on either side. The decision in State of Andhra Pradesh v. T. R. Somaraju [1965] 16 STC 177 is of a Division Bench of the Andhra Pradesh High Court. The assessees in that case were carrying on business as commission agents, and agriculturists, who manufactured jaggery from sugarcane grown by them entrusted the jaggery to the assessees for sale on commission. The assessees sorted out the jaggery into different qualities, piled it up into heaps according to the quality, auctioned the heaps of jaggery in the presence of their principals or someone on their behalf, prepared the bills indicating the quality of the jaggery and issued them to their principals. Out of the sale price and the total consideration, the assessee made certain deductions towards commission, gumasta rusum and kolagaram, but the pattis furnished to the principals made no reference to any of those deductions or even valtar and sales tax. The bills issued to the purchasers, however, seem to have stated that the sales tax collected from them would be made over to the Government and as a matter of fact in most of the cases was actually paid to the Government. In such a situation, having regard to the fact that jaggery was liable to sales tax only at the stage of first sale in the State, the assessees contended that they were not liable to pay sales tax on the jaggery sold by them, inasmuch as in terms of explanation III to section 2(1)(n), a sale must be deemed to have taken place even at the time when the principals delivered their goods to the assessees. While rejecting the claim of the commission agent, the court came to the conclusion that the first sale was really effected by the assessees, there being no prior sale and, therefore, they became liable to tax.
6. In Sri Tirumala Venkateswara Timber and Bamboo Firm v. Commercial Tax Officer [1968] 21 STC 312, the Supreme Court had an occasion to consider the real effect of explanation III to section 2(1)(n) of the Andhra Pradesh General Sales Tax Act. The Apex Court, while observing that the question as to whether the transactions in a particular case are sales or contracts of agency is a mixed question of fact and law to be investigated with reference to the material which the assessee might be able to produce before the appropriate authority, held that the explanation referred to only sought to impose the tax when there was a transfer of title to the goods in the circumstances referred to therein and not where there is a mere contract of agency. It was also held therein that as a matter of law there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal and make over either the sale proceeds or the goods to the principal and that the essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid unlike the essence of agency to sell which involves merely the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and will, therefore, be liable to account for the sale proceeds. The Apex Court held that "the true relationship of the parties in each case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the legal relationship". In the decision reported in Byappa and Sons v. State of Mysore [1969] 24 STC 34, a Division Bench of the Mysore High Court held that the distinguishing features between a sale by an agent on behalf of his principal or a sale in his own capacity and right is not merely an omission on the part of the agent to credit the realisation in full to the principal's account but the default on his part to render a full account to the principal in respect of the transaction of sale. It was further held that there was really a distinction between the failure on the part of an agent to render a full account to his principal and the failure on his part to credit to the principal's account the realisation made on his behalf and that while in the former case the sale by the agent for the purposes of the Sales Tax Act becomes his own independent transaction, it does not become so in the latter.
7. The Revenue in the course of the proceedings before the authorities below as well as before us, relied upon the decision reported in Chandramouli and Company v. State of Madras [1966] 18 STC 325, of a Division Bench of this Court and Nestle's Products (India) Limited v. State of Orissa [1974] 33 STC 356, of a Division Bench of the Orissa High Court. In Chandramouli and Company's case [1966] 18 STC 325 (Mad.), the assessee was a local agent of a non-resident principal carrying on a business of his own and he transferred the goods of his principal to his own business and collected commission from his principal on the transaction. In such a situation, this Court repelled the plea of the assessee that the transaction did not involve any sale inasmuch as he could not sell goods to himself and came to the conclusion that the assessee held two different capacities and that when he transferred the goods to himself, he not only acted in that transaction as the agent of his non-resident principal, but also as a purchaser. This Court further held that there was nothing wrong in such a dual capacity coming into play in the transaction and such transaction satisfying the definition of "sale" within the meaning of the Act. In Nestle's Products (India) Ltd. case [1974] 33 STC 356 a Division Bench of the Orissa High Court also held that where in a particular case the agent of a principal, instead of selling the goods to outsiders, sold the goods to himself by appropriating the goods owned by the principal and claiming commission by making entries in his books, there occurred a transfer of title from the principal represented by the agent to the agent himself in his independent capacity.
8. In Bhopal Sugar Industries Ltd. v. Sales Tax Officer [1977] 40 STC 42, the Supreme Court had an occasion to consider a similar situation and the difference between a contract of sale and a contract of agency. The Apex Court in the said context opined thus :
".... Thus the essence of the matter is that in a contract of sale, title to the property passes on to the buyer on delivery of the goods for a price paid or promised. Once this happens the buyer becomes the owner of the property and the seller has no vestige of title left in the property. The concept of a sale has, however, undergone a revolutionary change, having regard to the complexities of the modern times and the expanding needs of the society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale even though the seller may by virtue of an agreement impose a number of restrictions on the buyer, e.g., fixation of price, submission of accounts, selling in a particular area or territory and so on. These restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions the transaction would still be a sale and subject to all the incidents of a sale. A contract of agency, however, differs essentially from a contract of sale inasmuch as an agent after taking delivery of the property does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal."
9. The court further proceeded to state as hereunder :
"It is well-settled that while interpreting the terms of the agreement, the court has to look to the substance rather than the form of it. The mere fact that the word 'agent' or 'agency' is used or the words 'buyer' and 'seller' are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. Thus the mere formal description of a person as an agent or a buyer is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an agent. Learned counsel for the appellant relied on several circumstances to show that on a proper construction of the agreement it could not, but be, held to be a contract of sale. Learned counsel strongly relied on a decision of this Court in Sri Tirumala Venkateswara Timber and Bamboo Firm v. Commercial Tax Officer, Rajahmundry [1968] 21 STC 312 (SC) at 316 where this Court held the transaction to be a sale in almost similar circumstances. Speaking for the court, Ramaswami, J., observed as follows :
'As a matter of law there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal and make over either the sale proceeds or the goods to the principal. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid and not as agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and will therefore be liable to account for the sale proceeds.' It is clear from the observations made by this Court that the true relationship of the parties in such a case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the said relationship."
10. Thus the court in the said case ultimately came to the conclusion that notwithstanding the stipulations contained in the agreement using certain words such as commission and allowances, in substance the transaction involved therein constituted a sale so as to render the same exigible to sales tax.
11. A Full Bench of this Court in a decision reported in Deputy Commissioner of Commercial Taxes v. Anantharama Nadar & Sons [1970] 25 STC 276, recognised on principle that a commission agent can also be himself a dealer. To the same extent was said by an earlier Full Bench of this Court in a decision reported in Kandula Radhakrishna Rao v. Province of Madras [1952] 3 STC 121 while holding that a commission agent can also be a person carrying on the business of buying and selling the goods. In Commissioner of Sales Tax v. Bishamber Singh Layaq Ram [1981] 47 STC 80, the Apex Court had to consider at some length this very question with reference to the provisions of the U.P. Sales Tax Act, 1948, and it was held therein as hereunder :
"It is evident from the statement of the case that the business carried on by the assessee was more or less similar to that of a pucca arhatiya and it is a misnomer to call it a kutcha arhatiya. It actually purchased the goods from the sellers, i.e., the cultivators, and then sold them in the market to the other buyers, as if they were its own, obviously at a profit. It paid to the cultivators the price of the goods it purchased and received from the buyers the price at which it sold. Selling of goods was not simultaneous with receiving them. These facts can lead to no other conclusion except that it bought and then sold goods and not merely brought buyers into contact with sellers and arranged transactions between them. In these circumstances, the High Court should have held the assessee to be a dealer under section 2(c) of the Act, read with the explanation thereto."
12. So far as the Tamil Nadu General Sales Tax Act, 1959, is concerned, explanation (4) to section 2(n) is as follows :
"Explanation (4). - Notwithstanding anything to the contrary contained in this Act, two independent sales or purchases shall for the purposes of this Act, be deemed to have taken place -
(a) when the goods are transferred from a principal to his selling agent and from the selling agent to the purchaser, or
(b) when the goods are transferred from the seller to a buying agent and from the buying agent to his principal, if the agent is found in either of the cases aforesaid -
(i) to have sold the goods at one rate and to have passed on the sale proceeds to his principal at another rate, or,
(ii) to have purchased the goods at one rate and to have passed them on to his principal at another rate, or,
(iii) not to have accounted to his principal for the entire collections or deductions made by him in the sales, purchases effected by him on behalf of his principal."
13. A careful analysis of the above provisions of the Act in the light of the various decisions referred to supra would lead to the inescapable conclusions that (a) the true relationship of the parties, whether in a contract of sale or a contract of agency, has to be gathered from the nature of the contract, its terms and conditions and the terminology used by the parties is not decisive of the legal relationship; (b) whether the transactions in a particular case are sales or contracts of agency being a mixed question of fact and law must be investigated with reference to the material which the assessee might be able to place before the appropriate authority; (c) a contract of agency differs from a contract of sale, in that an agent after taking delivery of the property does not sell it as his own but sells it as the property of the principal, under his instructions and directions; (d) a commission agent may transfer in his capacity as the agent of the principal, property or title in the goods, to himself and there is nothing in law which militates against such a position or proposition; and (e) an agent, if he, after taking delivery of the property sells the same as his own property at his choice and for a price different than the one which he ultimately passed on to his principal, it implied only an outright purchase of the goods of the principal to himself and subsequent sale by him to the ultimate purchaser. Consequently, the dual capacity of a commission agent is neither uncommon to the concept of sale of goods nor repugnant to the principle of agency. That being the position, it next becomes relevant to consider the peculiar facts of the case on hand.
14. The assessing authority in its order for the year 1973-74 specifically rendered the following conclusion :
"It is not denied that they received the goods for sale on commission basis and render account to the principals about the sale of these goods. Pages 515 to 547 of their ledger account clearly show that they have actually taken to their own accounts goods worth of Rs. 5,38,999.65 for sale as their own goods outside agency transaction and sold them in own accounts at higher rate of Rs. 5,50,261.15. Hence, the judgment of the Madras High Court in L.S. Chandramouli & Co. [1966] 18 STC 325, applies and the transactions of Rs. 5,38,999.65 are liable to tax as 'sale to self' from agency goods constitute a sale. According to explanation (4) of sub-section (n) of section 2 of the Tamil Nadu General Sales Tax Act there will be two independent sales if the agent is found to have sold the goods at one rate and to have passed on the sale proceeds to his principals at other rate. It is true that the clause 8 of the agreements entered into with the principals authorises them to retain 'from out of sale proceeds' a sum ranging from Rs. 5 to Rs. 15 per bag to meet the charges for collection. But in the instant cases, the excess amounts collected were not retained out of the 'sale proceeds' for which accounts were rendered to the principals but outside the accounts of the sale proceeds sent to the principals."
15. For the year 1976-77, the assessing authority held as follows :
"It is not denied that they received the goods for sale as commission basis and render accounts to the principals about the sale of these goods. This evidences that they have appropriated at a lesser rate, goods worth Rs. 2,13,901.47 for sale as their own goods outside agency transaction and sold them in own account at higher rate of Rs. 2,18,511.21. Hence, the judgment of Madras High Court in L. S. Chandramouli & Co. [1966] 18 STC 325 applies and the transactions of Rs. 2,13,961.47 are liable to tax as 'sale to self' from agency goods constitute a sale."
16. On appeal, the first appellate authority no doubt expressed a view that it found from the documents and records that there is no documentary evidence to support the finding of the assessing authority that the agents have transferred the goods of the principal to their own accounts. But at the same time, we find that the appellate authority has not applied its mind to the specific page numbers given in their ledger account by the assessing authority and rendered any specific findings except making a general observation as referred to supra. In such circumstances, we consider that no exception whatsoever could be taken to the action of the Joint Commissioner in invoking powers under section 34 of the Act to set aside the order of the Appellate Commissioner.
17. On behalf of the appellants, it is vehemently contended that the revisional authority has not rendered any specific findings whatsoever with reference to the factual details and that it generally dealt with the matter as a matter of general principle and consequently the order of the Joint Commissioner cannot also be sustained. We find some justification in the said submission of the learned counsel. No doubt, the first appellate authority too did not choose to specifically deal with and come to the grips of the findings rendered by the assessing authority. That, in our view, does not absolve the revisional authority from dealing with the matter in some detail which could indicate a proper and objective consideration of the materials on record and arrive at a proper and necessary finding required of that authority exercising quasi-judicial functions involving civil consequences and rights of parties. Consequently, we set aside the order of the Joint Commissioner dated July 16, 1981 and direct the said authority, after giving an opportunity to the appellants, to objectively consider the question involved for determination in the light of the principles laid down by us supra and pass such further orders as are required in accordance with law. The appeals are allowed and remitted as indicated above; but in the circumstances, there will be no order as to costs.
18. Appeals allowed.