Commissioner Of Sales Tax vs Essex Farms (P) Ltd
1991 Latest Caselaw 472 Del

JUDGMENT

B.N. Kirpal, J.

1. The Sales Tax Tribunal has referred, under section 45 of the Delhi Sales Tax Act, 1975, the following two questions of law to this Court :

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the turnover of Rs. 27,80,122.34 was of sales inside Delhi and did not constitute inter-State trade and commerce as envisaged by the Central Sales Tax Act, 1956 ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right that the sales of Rs. 27,80,122.34 were exempt from tax under rule 29(iii) of the Delhi Sales Tax Rules, 1951 ?"

2. The aforesaid reference relates to the assessment year 1970-71 and the facts, as set out in the statement of the case, are as follows :

3. The assessed, namely, the Essex Farms (P) Ltd., carries on the business of breeding and purchase and sale of piggeries and other meat products. During the course of the same, it supplied meat, etc., worth Rs. 27,80,122.34 in that year to Government. The assessed claimed that all that was meant for defense forces and the sales were completed in Delhi itself. No sales tax was pleaded to be leviable on these sales as they were covered by rule 29(iii) of the Delhi Sales Tax Rules. The sales tax authorities, however, did not accept that the sales were exempted under this rule or that they were local sales at Delhi only. Instead it was found that those supplies were meant for defense forces in different places in India and the contract of sale involved dispatch of those supplies to places outside Delhi. They were, therefore, held assessable as inter-State sales and eligible to sales tax at the rate of 10 per cent.

4. The procedure for placement of orders for the said supplies was that the Ministry of Agriculture, Government of India, floated tender enquiries for obtaining canned meat. In the present case the "invitation of tenders and instructions to tenders" dated 24th July, 1970, was issued by the Government of India, Ministry of Food, Department of Food (Army Purchase Organisation), New Delhi.

5. In response to this invitation for tenders, the present assessed submitted its tender. It was stated that all the prices mentioned were per kilogram net f.o.r. station of dispatch and were inclusive of cost of raw materials, cost of containers, etc., and all duties and taxes (customs, export, municipal octroi, etc.) paid in respect of the stores up to their arrival of dispatch but exclusive of sales tax.

6. This tender of the assessed was accepted by the Government. It contained guarantee clause of nine months from the last day of the month of tendering. There was another document containing the special conditions of contract of the supply of canned ham, bacon and pork sausages issued by the Government. As per the delivery schedule and as and when the goods were ready, the assessed used to inform the Officer Commanding, Composite Food Laboratory, ASC, that the stores were ready for inspection. An officer of the Central Food Laboratory used to then inspect the goods and take samples and examine them. Once the goods were approved and found acceptable, they were packed by the assessed in wooden cases for dispatch.

7. The case of the assessed was that the goods were supplied at Delhi and whatever dispatches took place to places outside Delhi were by the functionaries of the Government departments. So far as the assessed was concerned, it was urged, the sale was complete when the goods were delivered in Delhi, their further dispatch, if any, outside Delhi being not part of or incidental to the sale. The Sales Tax Officer, however, came to the view that the movements of the goods from Delhi to places outside were occasioned by the contract of sale and were integral part of the contract. He for the detailed reasons given in his order, held that they invited tax as exigible to inter-State sales.

8. In appeal, the Additional Commissioner of Sales Tax confirmed this decision. It was held that the dealer was to consign goods by rail and the contract was not complete till the goods had been received at the places to which they had been consigned. The Additional Commissioner further came to the conclusion that these sales were not to Ministry of defense. Instead the contract was found to be entered with the Ministry of Food and Agriculture. Rule 29(iii) was, therefore, held inapplicable.

9. The assessed feeling still aggrieved moved the Sales Tax Appellate Tribunal in two separate appeals, one under the local Act and the other under the Central Act. These were allowed by the Tribunal and it was held that after considering the entire circumstances of the case and the law cited, the sale in the present case did not occasion the movement of goods from Delhi to another State nor could it be said that the movement was in pursuance or incidental to the contract of sale. If the goods after having been purchased and supplied at Delhi or new Delhi station were dispatched to another State, it was observed, it could not be said that this movement of goods was the result of the contract itself. The Tribunal referred to two certificates dated 24th May, 1970 and 22nd January, 1976, issued by the Officer Commanding, Composite Food Laboratory, ASC, to the effect that the goods supplied by the dealer to defense Ministry were free on rail at Delhi and New Delhi and the consignor in all these cases was the army unit.

10. The Tribunal further came to the conclusion that the provisions of rule 29(iii) were attracted to the present sales as the goods were purchased for official use of Ministry of defense. The Tribunal made reference to certificate dated 15th February, 1971, issued by the defense authorities to the effect that the goods were purchased for official use by the Officer Commanding, Composite Food Laboratory, ASC.

11. The Tribunal decided the appeal in favor of the assessed. Thereafter on an application moved by the Commissioner of Sales Tax, the aforesaid two questions have been referred to this Court.

12. It is vehemently contended by the learned counsel for the department that the sales in question were inter-State sales. He further submits that in any event the sales were not made to the Ministry of defense and, therefore, the provisions contained in rule 29(iii) of the Delhi Sales Tax Rules, 1951, were not attracted.

13. Shri Salve on the other hand has submitted that the sales were intra-State and secondly, invoking the principle of the agreement having been entered into by an agent on behalf of a disclosed principal, it is contended that the sale was made to the Ministry of defense.

14. Before examining the real contentions, it is necessary to set out rule 29(iii) of the Delhi Sales Tax Rules, 1951. The said rule is as under :

"29. In calculating his taxable turnover, a registered dealer may deduct from his gross turnover -

..........

(iii) sales of goods which are shown to the satisfaction of the assessing authority to have been made :

(a) to the Ministry of defense or to any of its subordinate offices for official use; or

(b) ........

Provided that ......"

As the question arose, under the provisions of the Bengal Finance (Sales Tax) Act, 1941, as extended to the Union Territory of Delhi, therefore, it is only if a sale is regarded as a local sale that the provisions of the aforesaid rule 29(iii) will apply. If the sale in question is to be regarded as an inter-State sale, then the provisions of rule 29(iii) would not apply and even if the sale is regarded to be to the Ministry of defense, then Central sales tax would have had to be paid. It was, therefore, necessary for the dealer to establish that the contract between the parties resulted in a local sale to the Ministry of defense.

15. With respect to question No. (i), it has been contended by the learned counsel for the Commissioner that the sales in question are inter-State sales. He has submitted that the acceptance of the tender and the other contract documents clearly postulate that there would be movement of goods from Delhi to outside Delhi. It is for this reason, it was submitted, that the contract envisaged that the delivery of the goods would take place at the railway station/siding at Delhi. If there was not to be any movement of goods from Delhi, there would have been no need, it was contended, for the agreement to require the delivery to take place at the railway station or the siding.

16. In our opinion there is no merit in this submission. The Tribunal has found as a fact that the delivery of the goods took place at Delhi. Furthermore, reliance was placed on a certificate issued by the Composite Food Laboratory, Delhi, which is to the following effect :

"It is certified that all the foods, viz., canned mutton, ham, bacon supplied to defense against various contracts by M/s. Essex Farms Pvt. Ltd., 4, Mehrauli Road, Delhi-16 are free of Delhi/New Delhi railway stations. Consignor in all the cases is Composite Food Laboratory, ASC, Delhi (defense) and consignee are the various army units."

17. The aforesaid certificate shows that even though goods were being sent out of Delhi, the consignor in all the cases was the Composite Food Laboratory, ASC, Delhi, which is a wing of the Ministry of defense. Had the contract envisaged movement of the goods, then the consignor would ordinarily have been the dealer itself. There is a catena of authorities in which the questions as to when the sale will be regarded as an inter-State or an intra-State sale, have been dealt with. It is not necessary to refer to all of them in any great detail. It is sufficient for out purpose to refer to two decisions in this connection. The case which is similar to the present one is that of Balabhagas Hulaschand v. State of Orissa . It was observed by the Supreme Court in this case that before any sale can be said to take place in the course of inter-State trade or commerce, three conditions must be satisfied, viz., (1) there is an agreement to sell which contains a stipulation, express or implied, regarding the movement of the goods from one State to another; (2) in pursuance of that agreement, the goods in fact moved from one State to another; and (3) ultimately a concluded sale took place in the State where the goods were sent and that State is different from the State from which the goods moved. In order to illustrate the aforesaid proposition of law, the Supreme Court gave three examples. The third illustration is identical to the facts of the present case and the illustration as given by the Supreme Court was as follows :

"Case No. III. - B, a purchaser in State Y, comes to State X and purchases the goods and pays the price thereof. After having purchased the goods he then books the goods from State X to State Y in his own name. This is also a case where the sale is purely an internal sale having taken place in State X and the movement of goods is not occasioned by the sale but takes place after the property is purchased by B and becomes his property."

18. The aforesaid illustration is more or less identical to the facts of the present case. Here also the purchaser buys the goods in Delhi, the property in the goods is transferred to the purchaser with delivery f.o.r. station/siding at Delhi and thereafter it is the purchaser who moves the goods, if it chooses to do so, to a place outside Delhi. The sales tax authorities and the Tribunal have found that military credit notes are issued to the railways and the movement of the goods takes place from Delhi at the expense of the Ministry of defense. The aforesaid letter dated 28th May, 1970, also certifies that the consignor is not the dealer but the purchaser. This being so, it is a case where a purchaser has bought goods in Delhi and then, de hors the contract, has either utilised them in Delhi or dispatched them from Delhi. The sale was complete when the goods were delivered and that was a local sale.

19. Another case which is similar to the present case is that of Delhi Cloth and General Mills Co. Ltd. v. Commissioner of Sales Tax [1981] 48 STC 351 (Delhi). That was a case where the dealer had offered to supply certain quantities of vanaspati ghee to the J & K Government at Delhi against cash payment. The sale note was made in the name of the Trade Commissioner of Jammu & Kashmir at Delhi though the destination was mentioned as Jammu. In the correspondence between the parties, there was no stipulation regarding the movement of the goods though the delivery of the goods was taken in Delhi and was then dispatched by the Trade Commissioner to Jammu & Kashmir. A Division Bench of this Court following the aforesaid Supreme Court decision in Balabhagas case [1976] 37 STC 207 came to the conclusion that the sale was a local sale and not an inter-State sale.

20. It is clear, therefore, that in order that a sale may be regarded as an inter-State sale, the contract or the agreement to sell must envisage the movement of the goods. To put is differently, the movement of the goods must be an integral part of the contract of sale. If a purchaser, for example, from outside Delhi comes here, purchases the goods from the market and then takes them away to a place outside Delhi, it cannot be said that such a sale is an inter-State sale. Even though the seller may know that in all likelihood the purchaser is bound to take the goods sold, to a place outside Delhi, nevertheless such a sale cannot be regarded as an inter-State sale. The reason for this is that in order that a sale should be regarded as inter-State sale, the agreement to sell must postulate that there will be movement of the goods from one State to another. In the absence of any such stipulation, it is not correct to contend that the sale is an inter-State sale. We have, therefore, no hesitation in coming to the conclusion that the decision of the Tribunal was correct.

21. Coming to the second question, it has been submitted by Shri Chhatar Singh that the agreement has been entered into with the Ministry of Food and Agriculture and not with the Ministry of defense. He, therefore, contends that the provisions of rule 29(iii) are not satisfied. The acceptance of tender no doubt shows that the tender of the dealer was accepted by the Government of India, Ministry of Food and Agriculture. The acceptance of tender further shows that the purchases were being made for and on behalf of the Army Purchase Organisation. It is further stated in the acceptance of tender that the same were for "supply of canned mutton jhatka curried to the defense Services". There are five other principal factors which can lead to only one conclusion that it was the Ministry of defense which was the actual purchaser. These factors are : (1) that according to the specifications provided in the acceptance of tender, the goods supplied had to conform to the ASC specifications of the Ministry of defense, (2) the consignee was to be the Director of Supplies and Transport, QMG, Army Head Quarters, (3) the inspecting authority was the Officer Commanding of the Army Service Corps, (4) the delivery was accepted by the military and (5) though the price to the dealer was paid by the Ministry of Food and Agriculture, but it was stipulated in the acceptance of tender that the price was to be debited to the account of the Controller of defense Accounts (Western Command).

22. From the aforesaid, it is clear that the said purchase was made for and on behalf of the military, viz., the Ministry of defense. Shri Salve is right in contending that this is a case of an agent of a disclosed principal who has made the purchases from the dealer. In law, it was sought to be contended that the purchaser was the Ministry of defense and not the Ministry of Food and Agriculture. To put it differently, the sale by the dealer was, in law, to the Ministry of defense which was the disclosed principal of the agent, viz, Ministry of Food and Agriculture.

23. In Lester v. Balfour Williamson Merchant Shippers Ltd. [1953] 1 All ER 1146, there was a sale by agents "for account of" foreign principals. The question arose with regard to the liability of the agents for act or default. It was held in that case that the agents were not the sellers. The principle which was invoked was that an agreement by an agent on behalf of a disclosed principal binds the principal qua the other contracting party and not the agent.

24. In Radhakrishna Sivadutta Rai v. Tayeballi Dawoodbhai , a contract was entered into through brokers. The question arose whether in respect of the bought and sold notes, an agent of a disclosed principal could bring an action or not. Dealing with this, the Supreme Court observed as follows :

"13. It is in the light of this legal position that we must consider the effect of the bought and sold notes in the present case. The notes referred to the appellant and added 'A/c Khaitan and Sons Ltd.'. There is no disparity in the notes at all; and so the two notes can be safely taken to evidence the terms of the contract. When along with the name of the appellant the notes specifically refer to 'Khaitan and Sons Ltd.' with the preceding words 'A/c', there can be no doubt that the appellant is shown by the notes to be acting on account of the disclosed principal. The appellant realised that the effect of the reference to Khaitan and Sons in the notes would inevitably be to support the plea of the respondent that it was not entitled to bring the present action and so it pleaded that the said reference was the result of a mistake. Therefore, there can be no doubt that if the material question had to be considered in the light of the bought and sold notes alone the appellant was acting on behalf of the disclosed principal and, on the contract thus entered into, it had no right to sue and can claim no cause of action in its favor."

25. In arriving at this conclusion, the Supreme Court followed and approved the English decision in Gadd v. Houghton (1876) 1 Ex D 357, wherein it was held that when a person makes a contract on behalf of someone else, then he does not bind himself but he binds his principal. The Supreme Court also quoted with approval, the following observations of Mellish, J. :

"When the signature comes at the end you apply it to everything which occurs throughout the contract. If all that appears is that the agent has been making a contract on behalf of some other person, it seems to me to follow of necessity that that other person is the person liable. This is one of the simplest possible cases. How can the words 'on account of Morand and Co.' be inserted merely as a description ? The words mean that Morand and Co. are the people who have sold. It follows that the persons who have signed are merely the brokers and are not liable."

26. Applying the principle of Radhakrishna's case here, we find that the Ministry of Food and Agriculture was acting on behalf of the Ministry of defense. The Ministry of defense was the disclosed principal. It is, therefore, the Ministry of defense which was bound by the contract of sale.

26. When rule 29(iii) provides that the sale shall be to the Ministry of defense, it means, in fact that the purchases are made by the Ministry of defense. The principal contracting parties were the dealer and the Ministry of defense and the Ministry of Food and Agriculture was merely an agent of the disclosed principal. The two parties, to put it differently, which were bound by the terms of the contract as a result of the issuance and acceptance of the tender, were the dealer and the Ministry of defense. The intention of the said rule is very clear and that is, on the purchases made by the Ministry of defense, sales tax under the provisions of the Delhi Sales Tax Rules should not be paid. It was submitted by the learned counsel for the department that rule 29(iii) should be literally construed. This submission cannot be accepted in view of the following observations of the Supreme Court in the case of Collector of Central Excise v. Parle Exports (P) Ltd. :

"The question of interpretation involves determining the meaning of a text contained in one or more documents. Judges are often criticised for being tied too closely to the statutory words and for failing to give effect to the intention of the Parliament or the law-maker. Such language, it has been said, in Cross's 'Statutory Interpretation' (Second Edition) at page 21, appears to suggest that there are two units of enquiry in statutory interpretation - the statutory text and the intention of the Parliament - and the Judge must seek to harmonise the two. This, however, is not correct. According to the tradition of our law, primacy is to be given to the text in which the intention of the law-giver has been expressed. Cross refers to Blackstone's observations that the fairest and most rational method to interpret the will of the law-maker is by exploring his intentions at the time when the law was made, by signs the most natural and probable. And these signs are either the words, the context, the subject-matter, the effects and consequences, or the spirit and reason of the law. We have no doubt, in out opinion, that having regard to the language used it would not be in consonance with the spirit and the reason of law to give exemption for non-alcoholic beverage bases under the notification in question. Bearing the aforesaid purpose, in our opinion, it cannot be contended that expensive items like Gold Spot base, Limca base or Thums-Up base were intended to be given exemption at the cost of public exchequer."

27. The Supreme Court took into consideration the performance and the spirit behind the enactment of the exemption notification and then came to the conclusion that the intention was not to give the exemption which had been sought for by the respondent in that case. Even in Commissioner of Income-tax v. J. H. Gotla , it was held that :

"Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used."

28. In arriving at the aforesaid conclusion, the Supreme Court followed its earlier decision in K. P. Varghese v. Income-tax Officer [1981] 131 ITR 597, wherein the Court emphasised that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided.

29. It is well-known that purchases on behalf of the Ministry of defense are also made, to a large extent, by the purchase departments of the Government of India like the Directorate General of Supplies and Disposal and the Ministry of Food and Agriculture in the present case. These departments make purchases for the benefit and on behalf of the Ministry of defense. The intention of rule 29(iii) clearly is that any purchases made by the Ministry of defense should be free of sales tax. Even if it was to be assumed thought there is no warrant for doing so, that the sale was in favor of the Ministry of Food and Agriculture, nevertheless as ultimately the purchaser was the Ministry of defense, rule 29(iii) has to be so construed to give a full effect and that is to consider the sale to be to the Ministry of defense itself. In other words, applying the principle of a purchase being made for a disclosed principal, by an agent, in the instant case, the sale has been effected by the dealer in favor of the Ministry of defense. Even if this was not so, nevertheless, on a correct interpretation of rule 29(iii), the sale in question must be regarded as a sale to the Ministry of defense. In our opinion, therefore, the provisions of rule 29(iii) were clearly applicable to the present case.

30. For the aforesaid reasons, the questions of law are answered in the affirmative and in favor of the dealer.

31. There will be no order as to costs.

32. Reference answered in the affirmative.