State of Travancore-Cochin & Ors Vs. Shanmugha Vilas Cashew Nut Factory & Ors [1953] INSC 40 (8 May 1953)
08/05/1953 SASTRI, M. PATANJALI (CJ) ASTRI, M. PATANJALI (CJ) MUKHERJEA, B.K.
DAS, SUDHI RANJAN BOSE, VIVIAN HASAN, GHULAM
CITATION: 1953 AIR 333 1954 SCR 53
CITATOR INFO :
APR 1955 SC 661 (16,26,31,34,63,123,154,169,21 RF 1955 SC 765 (32) F 1956 SC 158 (9) E&D 1957 SC 790 (12) RF 1958 SC 453 (26) F 1958 SC1002 (9,11) F 1958 SC1006 (11) F 1960 SC 595 (9,10) R 1961 SC 41 (19) D 1961 SC 65 (17) R 1961 SC 213 (10) RF 1961 SC 315 (11,26) R 1961 SC1344 (5) R 1962 SC1006 (77) R 1962 SC1733 (11,12) R 1963 SC 980 (10) R 1964 SC1729 (20,35) R 1964 SC1752 (5,11,23,26) R 1971 SC 477 (5) RF 1971 SC 870 (21) R 1972 SC 23 (6) RF 1974 SC1510 (8) E 1975 SC1564 (10,14,15,16,24,50,59) R 1979 SC1721 (7) R 1980 SC1468 (15) F 1992 SC1952 (10)
ACT:
Constitution of India, 1950, art. 286 (1) (a), (1) (b) and (2)Tax on sale or purchase of goods-Sales " outside the State " -Sales "in the course of " import or export-Sales " in the course of inter-State trade or commerce " -Nature and incidents of--State's power to tax-Scope of constitutional limitations.
HEADNOTE:
Held, by (PATANJALI SASTRI C.J., MUKHERJEA, VIVIAN BOSE and GHULAM HASAN JJ.)-(i) 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 art.
286 (1) (b) and are exempt from State taxation. (ii) 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 barrier are not within the exemption. (iii) Sales in the State by the exporter or importer by transfer of shipping documents while the goods are beyond the customs barrier are within the exemption, assuming that the State power of taxation extends to such transactions.
The word " course " etymologically denotes movement from one point to another and the expression " in the course of " in art. 286 (1) (b) not only implies a period of time during which the movement is in progress but postulates also a connected relation. Consequently, a sale in the course of export out of the country 54 should be understood in the context of art. 286 (1) (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. But a purchase of goods for the purpose of export is only an act preparatory to their export and not an act done in the course of the export of the goods, The respondents purchased raw cashew nuts within the State of Travancore-Cochin, from the neighbouring states and also imported such nuts from Africa, for the purpose of refining them and exporting them to America. Imports from Africa were made in the following ways: (a) purchases were made through intermediaries doing business as commission agents at Bombay who acted as agents for the respondents charging commission; (b) the commission agents at Bombay indented the goods on their own account and they sold the goods as principals to the respondents. In either case the goods were shipped direct from Africa to a port in the TravancoreCochin State. It was found as a fact that the process of the factory was such that the goods were not the same goods commercially after refinement:
Held, (i) as regards purchases made in the local markets of the State they were not exempted under art. 286 (1) (b);
(ii) as regards purchases made in the neighbouring States, if the purchases were effected and delivery was taken by the respondents' servants outside the Travancore-Cochin State, they would be exempt under art. 286, cl. (i) (a), and if the purchases were effected by employing firms doing commission business outside the State and deliveries were made through normal commercial channels the transactions would be of an inter-State character and would fall under cl. (2) but they would be taxable under the Sales Tax Continuance Order (No. 7 of 1950) issued by the President under cl. (2) as such tax was being levied before the Constitution. (iii) As regards imports from Africa, where the Bombay merchants merely acted as agents, the transactions would be purchases which occasioned the import and would be exempt under art. 286 (1) (b), but where the Bombay merchants did not act as agents for the respondents, purchases from them would be on the same footing as local purchases and would not be exempt.
Per S.R. DAS J.-The Explanation to art. 286 (1) (a) is not an exception or a proviso but only explains cl. (1) (a). It does not confer taxing power on any State but only takes away the power of taxation of a State in respect of sales and purchases in which delivery does not take place within the State by enacting that such sales shall be deemed to have taken place outside that State within cl. (1) (a).
Consequently, if a sale or purchase takes place outside a State, either under the general law or by virtue of the fiction created by the Explanation, then that State cannot, under (1) (a), tax such sale or purchase. If a sale or purchase takes place within a State, either under the general law or by reason of the Explanation, then, if such a sale or purchase takes place 55 " in the course of " inter-State trade and commerce, no State, not even the State where the sale or purchase takes place as aforesaid can tax it by reason of (2), unless and until Parliament by law provides otherwise. A sale or purchase " in the course of " import or export within the meaning of (1) (b) includes (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 low 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 (1) (b).
As regards local purchases, as those purchases took place with. in the State they were not entitled to the protection of art. 286 (1) (a), since on the findings of the High Court, the goods purchased were so altered that they cannot be deemed to be the same as the goods which were exported, and the purchases cannot be said to have been made "in the course" of export so as to be entitled to immunity from taxation under art. 286 (1) (b). As regards purchases from the neighbouring States, if the goods were taken delivery of by the agents of the respondents outside the State, such purchases must, under the Explanation, be regarded as having taken place outside the State and accordingly would be exempt from taxation under art. 286 (1) (a). If however, the goods were directly delivered to the respondents in the Travancore-Cochin State the Explanation to art. 286 (1) (a) will apply in view of the finding of the High Court which implies that the goods are also consumed in the State, and the neighbouring States will not be entitled to tax these sales or purchases, but the purchases are " in the course of " inter-State trade and as such will be protected by (2);
but as the majority of the Court have taken a different view and as such view must prevail, such purchases will become, as a result of the Explanation to (1) (a), an intra-state purchase and will lose the protection of (2). Even if such purchases fall within (2), they would be liable to be taxed under the President's Order of 1950. They are not protected by (1) (b) as the goods exported are different goods.
As regards purchases from Africa (1) where the Bombay merchants act as agents of the respondents and pay the price and take delivery of the shipping documents in Bombay the purchases fall within (1) (a) and also (1) (b) and are not liable to tax as they take place outside the State within (1) (a) and also "in the course of import" within (1) (b);
(ii) where the African sellers ship the goods on their own initiation or on that of their agents and while the goods are on the high seas they are 56 purchased by the, respondents' Bombay agents, the sale or purchase would be exempt under (1) (a) and under (1) (b);
(iii) where the respondents place separate orders with the same commission agent at Bombay and the latter places a consolidated order with the African seller on his own responsibility and the Bombay agent after paying for the entire lot, prepares a separate invoice for each of their constituents and the latter receive the delivery orders from a Travancore bank against payment and take delivery from a Travancore warehouse the sale takes place in the TravancoreCochin State and the goods cannot claim exemption under (1) (a), (1) (b) or (2) of art. 286.
CIVIL APPELLATE, JURISDICTION: Civil Appeals Nos. 26, 27 and 30 to 36 of 1952.
These were appeals under article 132 (1) of the Constitution from the Judgment and Order dated 10th January, 1952, of the Travancore, Cochin High Court in Original Petitions Nos. 5, 19, 34, 35, 71, 83, 88, 89 and 90 of 1951, quashing the assessments severally made on the respondents in each appeal under the Travancore-Cochin General Sales-Tax Act, 1124 M. E. The respondents who were assessed under the Travancore General Sales Tax Act which came into force in March, 1949, claimed exemption from sales tax in respect of the purchases made by them after the Constitution of 1950 came into force till the end of the accounting year 1950 on the ground that under article 286 (1) (b) the State had no power to levy tax on such purchases. The sales tax authorities having rejected the claim the respondents applied to the High Court under article 226 and the High Court quashed the assessments so far as they related to the said period. The State preferred the present appeals.
These appeals were heard in part with certain other appeals in September and October, 1952, but as it was found that the material facts had not been clearly ascertained by the High Court the cases were remitted to the High Court for further enquiry and findings. The connected appeals were disposed of on the 16th of October, 1952, and the judgment is reported as the State of Travancore-Cochin v. The Bombay Co. Ltd. ([1952] S.C.R. 1112). The hearing of these appeals was continued after the High Court had returned the record With its findings.
57 T. N. Subrahmanya Iyer, Advocate-General of TravancoreCochin State (T. R. Balakrishna Iyer, with him) for the appellants.
M. K. Nambiyar (N. Palpu, with him) for the respondents in Civil Appeals Nos. 26, 27 and 30 to 36.
M. C. Setalvad, Attorney-General for India and C. K. Daphtary, Solicitor-General for India (Porus A. Mehta, with them) for the Union of India.
V. K. T. Chari, Advocate-General of Madras (V. V. Raghavan, with him) for the State of Madras.
V. Rajaram Iyer, Advocate-General of Hyderabad (B. N. Sastri, with him) for the State of Hyderabad.
S. M. Sikri, Advocate-General of Punjab (M. L.Sethi,with him) for the State of Punjab.
A. R. Somanatha Iyer, Advocate-General of Mysore (R. Ganapathy Iyer, with him) for the State of Mysore.
K. B. Asthana for the State of Uttar Pradesh. (States of Bombay and Orissa were not represented.) 1953. May 8. The judgment of the Chief Justice and Mukherjea, Vivian Bose and Ghulam Hasan JJ. was delivered by the Chief Justice. S. R. Das J. delivered a separate judgment.
PATANJALI SASTRI C. J.-These are appeals from an order of the High Court of Travancore-Cochin quashing the assessments severally made on the respondents in each appeal under the Travancore-Cochin General Sales Tax Act, 1124 M. E. (Act No. XVIII of 1124 M. E.) (hereinafter referred to as the Act).
The Act provided by section 3 for the levy of a tax on the total turnover of every dealer for each year. " Turnover " is the aggregate amount for which goods are either bought or sold by a " dealer" [section 2(d)], who is a person carrying on the business of buying and selling goods [section 2 (d) ]. " Sale", with all its grammatical variations and cognate expressions, is defined as meaning, among other things, every transfer 8 58 of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration [section 2(h)]. The sale or purchase is to be deemed to have taken place in the State, wherever the contract might have been made, if the goods were actually in the State when the contract was made or, if the goods are actually produced in the State, at any time after the contract in respect thereof was made. By section 3 (4) the turnover is to be determined in accordance with such rules as may be prescribed, and rule 4 of the rules framed under the Act prescribes that, in the case of certain goods including " cashew and its kernel", the gross turnover of a dealer is the amount for which the goods were bought by him, and in all other cases the amount for which the goods were sold by him.
The respondents are dealers in cashew-nuts in the State, and their business consists in importing raw cashew-nuts from abroad and the neighbouring districts in the State of Madras in addition to purchases made in the local market, and, after converting them by means of certain processes into edible kernels, exporting the kernels to other countries, mainly America. The oil pressed from the shells removed from the cashewnuts was also exported. The Constitution having come into force on January 26, 1950, the respondent in each appeal claimed exemption under article 286 (1) (b) in respect of the purchases made from that date till May 29, 1950, the end of the account year. The sales tax authorities having rejected the claim, the respondents applied to the High Court under article 226, and that court upheld the claim and quashed the assessments in so far as they related to the said period. The State has preferred the appeals.
The appeals were heard in part along with certain other appeals from the same order, and as it was found that the material facts relating to the course of business of the respondents in the present appeals had not been clearly ascertained, these appeals were remitted to the High Court for further enquiry and 59 findings in regard to those matters. The connected appeals, however, in which the materials on record were found sufficient for their disposal were finally decided, and the decision is reported in The State of Travancore-Cochin v.
The Bombay Co. Ltd. (1) (hereinafter referred to as the previous decision).
Before considering how far the cashew-nut purchases made by the respondents are, on the findings returned by the High Court, entitled to the protection of article 286(1)(b), it is necessary first to ascertain the scope of such protection. That clause, so far as it is material here, reads thus:
286. (1) 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(a) * * * * * * (b)in the course of the import of the goods into, or export of the goods out of, the territory of India.
In the previous decision this Court referred to four different views then adumbrated in the course of the argument as to the meaning and scope of the said sub-clause as follows:
(1) The exemption is limited to sales by export and purchases by import, that is to say, those sales and purchases which occasion the export or import, as the case may be, and extends to no other transactions however directly or immediately connected, in intention or purpose, with such sales or purchases, and wheresoever’s the property in the goods may pass to the buyer.
(2) In addition to the sales and purchases of the kind described above, the exemption covers the last purchase by the exporter and the first sale by the importer if any, so directly and proximately connected with the export sale or import purchase as to form part of the same transaction.
(3) 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 (1) [1952] S.C.R. 1112.
60 the transit, that is, after the goods begin to move and before they reach their foreign destination.
(4) The view which found favour with the learned Judges of the High Court, namely, "the clause is not restricted to the point of time at which goods are imported into or exported from India; the series of transactions which necessarily precede export or import of goods will come within the purview of this clause." This Court, however, found it unnecessary for the purpose of the cases then before it to go any further than to hold that " 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" and that the third view set out above, which was put forward on behalf of the State of Bombay and which seeks to limit the operation of the clause exclusively to sales and purchases effected during the transit of the goods, was too narrow and could not be accepted.
It may be mentioned at once, to clear the ground, that if the Bombay view was considered to be too narrow, the view expressed by the Court below cannot but be regarded as too wide. This, indeed, was recognised by learned counsel who appeared in the cases, none of whom made any serious attempt to support it. Nor was any question raised or argument advanced as to the scope and effect of clause (2) of article 286, for, although the respondents in two of these appeals(1) purchased cashew-nuts in the adjoining districts of the State of Madras during the period in question, it was not disputed that such purchases unless they were exempt under article 286(1)(a), would fall within the explanation to clause (1) (a) as interpreted in the majority decision', of this court in the recent case of The State of Bombay v. United Motors (India) Ltd. (2), or under the Sales Tax Continuance Order, 1950 (C. O. No. 7 of 1950), issued by the President on January 26, 1950, in exercise of the powers conferred by the proviso to clause (2) of article 286, and would, in either case, be taxable.
(1) Civil Appeals Nos. 33 and 36 of 1952, (2) [1953] S.C.R.
61 With reference to the aforesaid decision, it may be mentioned in passing that in order to remedy what was felt to be the unsatisfactory position in regard to the levy of tax by the States in America on sales in interstate commerce, the North Carolina Department of Revenue proposed that Congress should pass legislation authorising the States to tax certain sales in interstate commerce. The proposed bill ran thus:
" That all taxes levied by any State upon sales of property or measured by sales of property may be levied upon or measured by sales of property in inter-state commerce by the state into which the property is moved for use or consumption therein, in the same manner and to the same extent that said taxes are levied upon or measured by sales of property not in inter-state commerce. Provided: that no State shall discriminate against sales of property in interstate commerce; nor shall any state discriminate against the sale of the products of any other state. Provided, further:
that no state shall tax the sale in inter-state commerce of property transported for the purpose of resale by the consignee as a merchant or as a manufacturer. Provided, further: that no county, city, or town, or other subdivision of any State shall levy a tax upon or measure any tax by sales of property in interstate commerce"(1).
It is interesting to note that the bill sought to bring about substantially the same result as the combined operation of article 286 clause (1) (a) explanation, clause (2) and article 304 as they were interpreted by the majority in that decision would produce. It is possible that these provisions of our Constitution were inspired by the proposed bill.
The only question debated before us was whether in addition to the export-sale and import-purchase, which were held in the previous decision to be covered by the exemption under clause (1) (b), the following two categories of sale or purchase would also fall within the, scope of that exemption:
(2) See Selected Essays on Constitutional Law, Vol. I, Book V, P. 367 published by the Association of American Law Schools, 1938.
62 (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 fulfill orders pursuant to which the goods were imported or orders expected to be received after the import.
(2) Sales or purchases of goods effected within the State by transfer of shipping documents while the goods are in the course of transit.
As regards the first mentioned category, we are of opinion that the transactions are not within the protection of clause (1) (b) What is exempted under the clause is the sale or purchase of goods taking place in the course of the import of the goods into or export of the goods out of the territory of India. It is obvious that the words "import into" and "export out of" in this context do not refer to the article or commodity imported or exported. The reference to "the goods" and to "the territory of India" make it clear that the words "export out of" and "import into" mean the exportation out of the country and importation into the country respectively. 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. For instance, it has been held that the words "debts due to the bankrupt in the course of his trade" in section 15(5) of the English Bankruptcy Act, 1869, do not extend to all debts due to the bankrupt during the period of his trading but include only debts connected with the trade [see In re, Pryce, ex parte Rensburg(1).] A sale in the course of export out of the country should similarly be understood in the context of clause (1)(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 (1) 4 Ch. D. 685 and Williams on Bankruptcy, 16th Edn., p.
63 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 export. It is, however, contended that on this principle of connected or integrated activities a purchase for the purpose of export must be regarded as covered by the exemption under clause (1) (b).
We are unable to agree.
The phrase "integrated-activities" was used in the previous decision to denote that "such a sale" (i.e., a sale which occasions the export) "cannot be dissociated from the export without which it cannot be effectuated, and the sale and the resultant export form parts of a single transaction." It is in that sense that the two activities-the sale and the export-were said to be integrated. 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", anymore than the other two activities can be so regarded. 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 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 resells these goods to a buyer abroad that contract of sale has to be classified as an export transaction"(1). This passage shows that, in view of the distinct character and quality of the two transactions, it is not correct to speak of a purchase for export as an activity so integrated with the exportation that the former could be regarded as done "in the course of " the latter.
The same reasoning applies to the first (1) Schmittoff-Export Trade, 2nd Edn., P. 3.
64 sale after import which is a distinct local transaction effected after the importation of the goods into the country has been completed, and having no integral relation with it.
Any attempt therefore to invoke the authority of the previous decision in support of the suggested extension of the protection of clause (1)(b) 'to the last purchase for the purpose of export and the first sale after import on the ground of integrated activities must fail.
Nor is it correct to say that it is necessary to extend the exemption to these transactions to avoid double taxation.
It is true that in the previous decision it was indicated that the object underlying the exemption was the avoidance of double taxation on the foreign trade of this country which is of great importance to the nation's economy. But the double taxation sought to be avoided consisted in the imposition of export duty by the Central Government and the imposition of sales tax by the State Government on the same transaction in its different aspects as an export and a sale. Such double taxation is already avoided by our holding that the export-sale and the import-purchase are exempt under clause (b) from the levy of sales tax by the State. The foreign trade of this country thus already enjoys immunity from double tax burden and suffers only one tax, namely, the export or import duty as the case may be.
The claim now made for extension of the exemption under clause (1)(b) in the name of avoiding double taxation cannot be supported.
Not the least among the reasons for rejecting the view that the last purchase for the purpose of export and the first sale after import are also within clause (1) (b) is the practical difficulty in giving effect to the exemption in regard to these transactions, having regard to the general pattern of sale-tax legislation in this country of which our constitution-makers must have been well aware. The tax is usually levied on the annual turnover of the seller who is allowed under certain conditions to pass it on to the buyer by adding it to the price charged for the goods at each individual sale. Supposing A is the seller from whom 65 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 subsequently? And even if they were, it must be difficult for A to prove to the Sales Tax Officer 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 Sales 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 producingevidence of actual export, whenever that takes place? Even if a sales tax enactment provides for adjustment on those lines, would not such legislation, in so far as it compels B to suffer the tax until he actually exports the goods, contravene clause (1)(b) 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? Athough, as pointed out in the previous decision, American cases are not of much assistance in interpreting article 286 because of the different wording of the import-export clause of the Federal Constitution, it is interesting to see that such uncertainties led the American courts to lay down the rule that "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 domestic use. Nothing less will suffice.": Empresa Siderurgica, S. A. v. Merced(1).
Similar difficulties and uncertainties are encountered in bringing within the exemption the first sale after import.
How is the exemption to be applied to the (1) 337 U.S. 154.
9 66 goods imported from abroad after they are mingled with other goods and lose their distinctive character as imports? Here again, the American courts, with their practical approach to such problems, have evolved the doctrine of "original or unopened package" that is to say, the rule that the first sale of imported goods will 'be exempt from State taxation provided only such sale is made in the original packages in which the goods have arrived. Any sale of such goods made after the package is opened does not enjoy such exemption.
Are we to import the same doctrine here to make the exemption workable ? Even in America, as pointed out in Balsara's case(1), difficulties arose from time to time in applying the doctrine as "sometimes very intricate questions arose before the courts such as whether the doctrine applied to the larger cases only or to the smaller packages contained therein or whether it applied to smaller paper packages of cigarettes taken from loose files of packages at the factory and transported in baskets." Hence this court has unanimously decided that "the doctrine has no place in this country" following the lead of Gwyer C. J. in the earlier case of BodduPaidanna(2).
It was said that clause (1) (b) should be construed in the light of the constitutional purpose and the commercial background and reference was made to the manner in which a large proportion of the export trade of the country was carried on by merchant houses who purchased goods from the producers and manufacturers to resell them to buyers abroad by means of contracts concluded with them. Similarly with regard to import trade, large import houses imported machinery and consumer goods wholesale and sold them to retail dealers or, in some cases, to the customers direct.
This practice, it was argued, must have been well known to the makers of our Constitution, and it was reasonable to assume that they realised the importance of the foreign trade to the well-being of the country and would not have desired to cripple the same by allowing the States to (1) [1951] S.C.R. 682, 699.
(2) [1942] F.C.R. 90.
67 tax such purchases and sales by the export and import merchants in this country. Such general considerations based largely on speculation are not of much assistance in construing the scope and effect of a specific constitutional provision seeking to restrict the power of State taxation.
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 administration, and it must be as much the constitutional purpose to protect the one as not unduly to curtail the other. The question really is, how far did the constitution-makers want to go in protecting the 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 problem before them was one of balancing and reconciling the rival claims of foreign trade in the interests of our national economy and of the State's 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 (1) (b). It is for the court to interpret the true meaning and scope of those terms without assuming that the one constitutional purpose was regarded as more important than the other. This court has already held in the previous decision that clause (1) (b) protects the export-import trade of this country from double taxation by prohibiting the imposition of sales tax by the State on export-sales and import-purchases, and we find no warrant in the language employed to extend the protection to cover the last purchase before export or the first sale after import.
As regards sales or purchases effected in the State by transfer of shipping (c.i.f.) documents while the goods are still in transit, we have already observed that the words "in the course of" imply a movement or progress and, therefore, a beginning and an end of such movement or progress. As clause (1) (b) is concerned only with exempting certain sales or purchases from taxation by the States in this country, it is 68 sufficient to determine where the course of export begins and where the course of import ends. In this connection, it is useful to remember that the power to make laws with respect to duties of customs including export duties (entry 83 of List I) and also with respect to import and export across customs frontiers and the 'definition of customs frontiers (entry 41 of List 1) is vested exclusively in the Central Legislature, and detailed provisions have been made in the Indian Sea Customs Act, 1878, for the levy of customs duties by the officers of the Central Government who are stationed along customs frontiers as defined by the Central Government where, after appraising the goods exported or imported, the duties chargeable, if any, are computed and levied, and it is not until this process is completed that the goods can be shipped for transportation or cleared by the consignee or his representatives as the, case may be.
It would seem, therefore, logical to hold that the course of the export out of, or of the import into, the territory of India does not commence or terminate until the goods cross the customs barrier. It is, however, to be noted that the question of imposing sales tax on transfer of goods in the course of export would not often arise in practice for, where the goods are transported pursuant to a contract of sale already concluded with a foreign buyer and the shipping documents have been forwarded to him, any further sale of such goods by the Indian seller is impossible, and where the export trade is conducted through representatives or branch offices, the sale by the latter of the exported goods usually takes place abroad and would not then be subjected to tax by the State in India. It is in relation to import of goods from abroad that the question of exemption assumes practical importance. It is well known that sales or purchases by transfer of shipping documents while the goods are in transit are a characteristic feature of foreign trade and as they take place in the course of import as defined above, and are -regarded commercially as incident to the import transaction, they fall within the terms of clause (1) (b) and would be entitled, in our view, to the protection of that 69 clause, if the State is constitutionally competent to tax such sales, as to which we express no opinion.
Our conclusions may be summed up as follows (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 barrier are not within the exemption.
(3)Sales in the State by the exporter or importer by transfer of shipping documents while the goods are beyond the customs barrier are within the exemption, assuming that the State power of taxation extends to such transactions.
It remains to consider in the light of the foregoing discussion how far the cashew-nut purchases made by the respondents are within the exemption under article 286. It will be recalled that these purchases fell into three groups:
I. Purchases made in the local market, II. Purchases from the neighbouring districts of the State of Madras, and III. Imports from Africa.
As regards Group 1, the High Court finds that the purchases of raw nuts whether African or Indian are all made with the object of exporting their kernels" though there were some negligible sales in the local market of what are called " factory rejects". The High Court further finds that the bulk of the kernels were in fact exported by the respondents themselves, a small quantity being sold by the respondents to other exporters who also subsequently exported the same.
Thus, on the whole, respondents could be said to have purchased the raw nuts for the purpose of exporting the kernels and to have actually exported them. But, it will be seen, the purchases are not covered by the exemption on the construction we have placed on clause (1) (b), even if the difference between the, raw materials purchased and the manufactured 70 goods (kernels) exported is to be ignored. It may, however, be mentioned here that the High Court has found that the raw cashew-nuts and the kernels manufactured out of them by various processes, partly mechanical and partly manual, are not commercially the same commodity. This finding, which is not seriously disputed before us, would be an additional ground for rejecting the claim to exemption in respect of these purchases, as the language of clause (1) (b) clearly requires as a condition of the exemption that the export must be of the goods whose sale or purchase took place in the course of export.
As regards Group 11, the High Court has found that such purchases were made only by the respondents in Civil Appeals Nos. 33 and 36 of 1952. The High Court's finding as to how these purchases and the deliveries under them were effected is by no means clear. The respondent's contention was that the purchases were effected and the deliveries taken by their own paid servants outside the State of TravancoreCochin, and it was thus a case of a person buying goods and taking delivery thereof outside the State and bringing them across the border after the transaction was completed in all respects outside the State. On the other hand, the contention on behalf of the State was that though the purchases were made outside the State in the neighbouring districts of Madras, deliveries were effected through the ordinary commercial channels by employing commission agents who made the purchases and arranged for the deliveries at the respondents' depots at Trichur or Quilon. All that can be said here is that, if the transactions took place in the manner alleged by the respondents in these two appeals, they would be exempt under clause (1) (a). This indeed was not disputed by the Advocate-General of the, appellant State.
On the other hand, if, as claimed by the Advocate-General, the purchases were effected by the employment of firms doing business as commission agents outside the State, and the deliveries were made through normal commercial channels, the transactions would partake of an inter-State character and fall under clause (2). In that case, it would be un71 necessary to inquire further whether they would be covered by the explanation to clause (1)(a), as they would be clearly taxable under the President's Order (C. O . No. 7 of 1950) to which reference has been made already, as it was admitted that sales tax was validly levied on such purchases before the commencement of the Constitution. As the taxability of such purchase,, on either view of the facts was not disputed, no arguments were addressed to us on the scope of clause (2) and the explanation to clause (1)(a), as has, been stated.
Group III may be sub-divided into two categories according to the findings of the high Court: (a) purchases made through intermediaries called in these proceedings as"the Bombay party" doing business as commission agents at Bombay, who acted as agents for the respondents charging commission.
The dealings are thus described by the High Court: "The goods are purchased when they are in the high seas and shipped from the African port to Cochin or Quilon. Goods are never landed at Bombay. The Bombay party only arranges for purchases on behalf of the assessees, gets delivery of the shipping documents on payment at Bombay through a bank which advances money against the shipping documents and collects the same from the assessees at destination", and (b) 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 documents were made out in the name of the Bombay party as consignees 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.
It will be seen that in respect of the purchases falling under (a), the Bombay party acted merely as the agents of the respondents, privity being established between the latter and the African sellers. The purchases are 72 thus purchases which occasioned the import, and therefore come within the exemption. As regards (b), the Bombay party are the purchasers, and they sell the goods as principals to the respondents at the port of destination by issuing separate delivery orders against payment. No privity being established between the respondents and the African sellers, the respondents' purchases can only be described as purchases from the Bombay party of the goods within the State; in other words, they were local purchases and stand on the same footing as purchases falling under Group I above, and for the same reasons they do not come within the exemption.
It would appear that the cashew-nuts sold and exported to the American buyers were packed in tins placed in wooden boxes. The sales tax authorities have included the value of these packing materials in addition to the value of the kernels in computing the turnover of the respondents for purposes of assessment. It was urged that such inclusion was inadmissible inasmuch as these articles could not be regarded as separate articles of, sale apart from the kernels which are packed therein, and that even if they were to be so regarded, their sale to the American buyers was a sale which occasioned the export just as much as the sale of the kernels. The latter contention must prevail in view of the previous decision, and no sales tax can be levied in respect of these articles.
In the result, the decison of the High Court quashing the assessments in question is affirmed but the cases will go back to the Sales Tax Officer concerned in the respective appeals for making fresh assessments according to law and in the light of this judgment. Each party will bear its own costs throughout.
DAS J.-This and eight other appeals have been filed by the State of Travancore-Cochin against the judgment and order of the High Court of that State dated the 10th January, 1952, quashing the orders of assessment of sales tax made against the respondents respectively by the Sales Tax Officer and upheld on appeal by the Assistant Commissioner. These appeal* 73 were heard together immediately after the hearing of C.A. No. 204 of 1952 [The State of Bombay v. The United Motors (India) Ltd. & Others(1)] bad been concluded and judgment had been reserved by another Constitution Bench. The question of construction of article 286 of the Constitution which is involved in the present appeals was also raised in the Bombay appeal. That Constitution Bench has since delivered judgments in that appeal. The majority of that Bench have put upon clause (1)(a), the Explanation thereto and clause (2) of that article a meaning which, in spite of my pro found respect for their opinions, I am unable to accept as correct. It is again my misfortune that I am unable to agree to the interpretation my learned brethren are now seeking to place upon clause (1)(b) of that article.
As the questions involved in these appeals are of very great importance and as the draft of this judgment was prepared before the judgments in the Bombay appeal had been delivered I consider it right to keep my views on record for whatever they may be worth. It is, however, needless for me to say that the majority decision in that Bombay appeal, so long as it stands, is binding on me.
The respondents in each of these appeals carry on business in what is now the United State of Travancore-Cochin. They buy raw cashew-nuts locally and in neighbouring States and also import them from Africa and after putting them through a certain process they obtain cashew-nut oil and edible cashew-nut kernels. They export the edible kernels to foreign countries in large quantities.
In compliance with the requirements of the relevant Sales Tax Act then in force the repondents filed returns in the prescribed forms of their respective turnovers for the period between the 17th August, 1949, and the 29th May, 1950. Each of the respondents claimed exemption from sales tax on their respective purchases made between the 26th January, 1950, when the Constitution came into force, and the 29th May, (1) [1953] S.C.R. 1069 10 74 1950. The claim, however, was rejected by the Sales Tax Officer. On appeal the Assistant Commissioner upheld the assessment orders. The respondents appeal to the High Court. By its judgment dated the 10th January, 1952, the High Court accepted the appeals, quashed the assessment orders in so far as they included tax on the purchases made after the date of the Constitution and directed a refund of the tax overpaid. The State has now come up on appeal before us.
As the questions involved in these appeals are of general importance and the other States as well as the Union of India are interested in the decision, notices were directed to be issued by this court to the Advocates-General of all interested States and to the Attorney-General for India.
Many of these States as also the Union of India intervened and participated in the general discussion on the legal points involved in these appeals. After several days' hearing before us in September and October, 1952, it was found that the parties were seriously at variance on several material facts and it was felt that the appeals could not be satisfactorily disposed of without proper findings on those facts. Accordingly on the 8th October, 1952, the appeals were remitted to the High Court with directions to investigate into the disputed facts under certain heads set forth in the annexure to the order of remand. The High Court has now returned the records with their findings and the -appeals are before us again for final disposal.
The assessments in question were made under the Travancore General Sales Tax Act, 1124 (Act XVIII of 1124). That Act came into force on the 7th March, 1949, and was, after the commencement of the Constitution, continued in force subject to the other provisions of the Constitution and it was in operation during the period of assessment. After the integration of Travancore and Cochin that Act was replaced by the United State of Travancore and Cochin General Sales Tax Act, 1125 (Act XI of 1125) but we are not concerned with the latter Act, for it came into force 75 on the 30th May, 1950, that is to say, immediately after the expiry of the period relevant for the purposes of these appeals.
The relevant provisions of Act XVIII of 1124 have been summarised in the judgment just read by my Lord the Chief Justice and need not be set forth again. Suffice it to say that the rules framed under I the Act' prescribed that in the case of cashew and its kernels the gross turnover of a dealer would be the amount for which those goods were purchased by him and, therefore, sales tax was payable on the purchase and not on the sale of cashew and its kernels.
The respondents do not contend that it was not within the power of H.H. the Maharaja of Travancore to enact that law at the time he did so but they maintain that, as after the commencement of the Constitution Travancore-Cochin became a Part B State and as such amenable to and bound by the Constitution, that law, in view of article 286, could no longer impose or authorise the imposition of any tax on their purchases of raw cashewnuts. This contention, therefore, raises important questions as to the extent of the power of the States under the Constitution to impose a tax on the sale or purchase of goods. In order, however, to correctly appreciate the meaning and import of the relevant provisions of the Constitution it will be helpful to bear in mind what the position was prior to the commencement of the Constitution.
Under the Government of India Act, 1935, the Federal Legislature alone could make laws, under entry 19 in List I, with respect to import and export across customs frontiers as defined by the Federal Government and, under entry 44 of the same List, with respect to duties of custom including export duties. On the other hand the Provincial Legislatures alone could make laws, under entry 26 in List II, with respect to trade and commerce within the Province, under entry 29, with respect to production, supply and distribution of goods, under entry 48, with respect to taxes -on the sale of goods and under entry 49, with respect to' cesses on the entry of goods into a 76 local area for consumption, use or sale therein. Section 297 of that Act, however, prohibited the Provincial Legislature or Governments from imposing certain restrictions on internal trade and ended by saying that any law passed in contravention of that section would, to the extent of the contravention, be invalid. It should be noted that clause (a) of sub-section (1) of that section was directly and expressly related to and constituted a restriction on the legislative power of the Province under entries 27 and 29 and not entry 48 in List II. That section obviously was inserted in that Act for the purpose of achieving, as far as possible, free trade within India by preventing the Provinces from checking or hampering the distribution of goods or from setting up barriers against internal trade in India regarded as one economic unit.
Pursuant to the legislative power thus conferred on them the Provincial Legislatures enacted Sales Tax Acts for their respective Provinces. In enacting the Sales Tax Acts, the Provincial Legislatures, however, did not confine the operation of their legislation to sales or purchases which took place exclusively within their respective territories.
Although in most of those Acts "sale" was first defined as meaning a transfer of the property in the goods, so as to make the passing of the property within the Province the principal basis for the imposition of the tax, yet by means of Explanations to that definition, they gave extended meanings to that word and thereby enlarged the scope of their operation. Thus some of those Acts purported to tax a sale or purchase irrespective of the place where it took place, if only the goods were within the Province at the time the contract for sale or purchase was made or the goods were produced or manufactured within the Province after the contract had been made. In short, if any one or more of the ingredients of sale, e.g. the contract, delivery, payment of price, or the passing of property etc., took place within a particular Province or the goods were produced or manufactured or otherwise found there that Province felt free to impose a tax on that transaction of -sale or purchase 77 although all the other ingredients thereof took place outside that Province.
The Indian States were not governed by the distribution of legislative powers contained in the Government of India Act, 1935, and were, therefore, generally free to make whatever laws they thought fit to make. They, however, enacted Sales Tax Acts on the model of the Sales Tax Acts of neighbouring Provinces in British India. Thus the Travancore Act XVIII of 1124 was substantially a reproduction of the Madras Sales Tax Act.
The result of the imposition of tax on the sale or purchase of goods on the basis of a very slight connection or nexus between the sale or purchase and the taxing Provinces or States was that in some cases one single transaction of sale or purchase became liable to be taxed in different Provinces or States. This imposition of multiple taxes was certainly calculated to hamper and discourage free trade within India, which section 297 of the Government of India Act, 1935, was designed to achieve. This was the position immediately before the Constitution of India came into operation. Our Constitution makers were well aware of this evil.
Articles 245 and 246 distribute legislative power between Parliament and the State Legislatures as per three Lists set forth in the Seventh Schedule to the Constitution. Thus Parliament alone is empowered to make laws, under entry 41 in the Union List, with respect to trade and commerce with foreign countries, under entry 42, with respect to interState trade and commerce and under entry 83, with respect to duties of customs, including export duty. The State Legislatures, on the other hand, are alone authorised to make laws, under entry 26 in the State List with respect to trade and commerce within the State, under entry 27 with respect to production, supply and distribution of goods, under entry 52 with respect to taxes on the entry of goods into a local area for consumption, use or sale therein and under entry 54 with respect to taxes on sale or purchase of goods other than newspapers.
78 It may be mentioned in passing that in List I in the Seventh Schedule to the Government of India Act, 1935, there was no separate or specific entry corresponding to entry 42 in the Union List in the Seventh Schedule to the Constitution.
This shows that our Constitution has deliberately assigned interState trade and commerce, like foreign trade, to the exclusive care of Parliament and, therefore, out of the .reach of the law-making powers of the State Legislatures. Having thus distributed legislative powers between Parliament and the State Legislatures, article 265, which is in Part XII of the Constitution and headed "Finance, Property, Contracts and Suits" provides that no tax shall be levied or collected except by authority of law. Article 286, which is also in Part XII, imposes some restrictions on the legislative competency of the State Legislatures. That article runs as follows:
" 286. Restrictions as to imposition of tax on the sale or purchase of goods. (1) 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(a) 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.-For the purposes of sub-clause (a) 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 consumption in that State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed in another State.
(2) Except in so far as Parliament may by law otherwise provide, no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of inter-State trade or commerce:
79 Provided that the President may by order direct that any tax on the sale or purchase of goods which was being lawfully levied by the government of any State immediately before the commencement of this Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions, of this clause, continue to be levied until the thirty-first day of March, 1951.
(3)No law made by the Legislature of a State imposing, or authorising the imposition of a tax on the sale or purchase of any such goods as have been declared by Parliament by law to be essential for the life of the community shall have effect unless it has been reserved for the consideration of the President and has received his assent." In these appeals we are not concerned with sales or purchases of essential commodities and, therefore, nothing further need be said about clause (3). Leaving out that clause, the rest of the article, broadly speaking, enjoins that no State law shall impose or authorise the imposition of tax on sale or purchase of goods made(a) outside the State, (b) in the course of the import of the goods in to or the export of the goods out of India, (c) in the course of inter-State trade and commerce.
I may here mention that in the exercise of the powers conferred on him by the proviso to clause (2) of article 286 the President did, by the Sales Tax Continuance Order, 1950, direct that any tax on the sale or purchase of any goods which was being lawfully levied by the Government of any State immediately before the commencement of the Constitution should, until the 31st March, 1951, continue to be levied notwithstanding that such imposition was contrary to the provisions of clause (2) of article 286.
Quite apart from the marginal note to article 286, a cursory perusal of that article will show that its avowed purpose is to put a restriction on the power of the 80 State Legislatures to make a law imposing tax on the sale or purchase of goods under entry 54 in the State List. It may be recalled that the Provincial Legislatures purporting to act under entry 48 in List II of the Seventh Schedule to the Government of India Act, 1935, enacted Sales Tax Acts imposing tax on sales or purchases of goods on the basis of one or more of the ingredients of sale having some connection with the Province and that this practice resulted in the imposition of multiple taxes on a single transaction of sale or purchase thereby raising the price of the commodity concerned to the serious detriment to the consumer. That evil had to be curbed and that is what has been done by clause (1)(a) of article 286. It imposes a ban that 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 outside the State. This provision clearly indicates that in making it our Constitution proceeds on the footing that a sale or purchase has a location or situs. The explanation to clause (1)(a) then goes on to say that for the purpose of sub-clause (a) 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 consumption in that State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has, by reason of such sale or purchase, passed in another State. The non obstante clause in the Explanation also clearly implies that the framers of the Constitution adopted the view that a sale or purchase has a situs and further that it ordinarily takes place at the place where the property in the goods passes. The Explanation, however, provides that, in spite of such general law, 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 consumption in that State. In effect, therefore, the Constitution, by this Explanation to clause (1)(a), acknowledges that under the general law the sale or purchase of the kind therein 81 mentioned may not really take place in the delivery State, but nevertheless requires it to be treated as if it did.
That is to say, the Explanation creates a legal fiction.
Reference may be made to Income-tax Commissioner, Bombay v. Bombay Trust Corporation(1) where Viscount Dunedin explains the meaning of a legal fiction.
When a legal fiction is thus created, for what purpose, one is led to ask at once, is it so created? In In re Coal Economising Gas Company(2) the question arose as to whether under section 38 of the Companies Act, 1867, a shareholder could get his name removed from the register on the ground that the prospectus was fraudulent in that it did not disclose certain, facts, or whether his remedy was against the promoter only. James L.J. said at pages 188-9:
" The Act says that an omission shall be deemed fraudulent.
It provides that something which under the general law would not be fraudulent shall be deemed fraudulent and we are dealing with a case of that kind. Where the Legislature provides that something is to be deemed other than it is, we must be careful to see within what bounds and for what purpose it is to be so deemed. Now the Act does not say that the prospectus shall be deemed fraudulent simpliciter but that it shall be deemed fraudulent on the part of the person wilfully making the omission as against a shareholder having no notice of the matter omitted ; and I am of opinion that the true intent and meaning of that provision is to give a personal remedy against the wrongdoer in favour of the shareholder." So it was held that the fiction did not operate as against the company and there could, therefore, be no rectification of the register. Again, in Ex parte Walton(3), referring to section 23 of the English Bankruptcy Act, 1869, James L.J. said:
"When a statute enacts that something shall be deemed to have been done, which in fact and in truth (1) [1929] L.R.57 I.A. 49 at P. 55. (3) [1881]. L.R. 17 Ch 756.
(2) [1875] L.R. 1 Ch. D. 182.
82 was not done, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to." The above observations werequoted with approval by Lord Cairns and Lord Blackburn in Arthur Hill v. The East and West India Dock Company(1). Lord Blackburn went on to add at page 458:
"I think the words here
