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PETITIONER: ALWAYE AGENCIES

       Vs.

RESPONDENT: DY. COMMISSIONER OF AGRICULTURAL INCOME-TAX AND SALES TAX,ER

DATE OF JUDGMENT04/05/1988

BENCH: KANIA, M.H. BENCH: KANIA, M.H. PATHAK, R.S. (CJ)

CITATION:  1988 AIR 1313            1988 SCR  (3) 879  1988 SCC  (3)  68        JT 1988 (2)   534  1988 SCALE  (1)1165

ACT:      Kerala  General  Sales  Tax  Act-Whether  the  assessee appointed as distributor by a manufacturing company under an agreement to  effect sale  of its  product is an agent under the agreement  or a purchaser from the company and liable to tax-Under.

HEADNOTE:      This appeal  arose out  of  a  case  under  the  Kerala General Sales Tax Act. The assessee firm (assessee) had been appointed as  distributor by the Travancore Cochin Chemicals Ltd. (the  "said company")  to effect  sale of their product under an  agreement. In  the assessment of the assessee firm for the  period 1967-68  under the  Kerala General Sales Tax Act, final  assessment was  completed and  the  turnover  as reported by  the assessee  was accepted  and tax,  levied on that basis.  Later, the  assessing  authority  alleged  that certain  transactions  in  the  aforesaid  period  had  been wrongly excluded  from the turnover reported by the assessee in the  return and  the turnover had escaped assessment. The contention of  the assessee  that the  transactions did  not constitute sales  by the  said company  to the  assessee was rejected by  the Assessing  Officer and it was held that the said turnover  was liable  to be  included  in  the  taxable turnover as  escaped turnover.  An appeal by the assessee to the  Appellate  Assistant  Commissioner  was  dismissed.  In second appeal  to the  Tribunal, the  Tribunal held that the transactions in  question had  taken place  directly between the said  company and  the consumers  and the  assessee  was merely an  agent of the company, and allowed the appeal. The High Court  on revision  held that the Tribunal was wrong in concluding that  the assessee was acting only as an agent in respect of  the said  transactions between  the said company and the consumers, and allowed the Revision Application. The assessee-firm  appealed  to  this  Court  by  special  leave against the decision of the High Court.      Dismissing the appeal, the Court, ^      HELD: Both  the parties  proceeded on  the footing that the transactions  in question  were effected pursuant to the agreement, sub-clause  (a) of clause 2 whereof provided that

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the distributor had the right of sale 880 of the  product within  the stipulated  area. Bulk  supplies were effected  in waggon-load  or  lorry-load  by  the  said company direct  to the consumer pursuant to orders booked by the assessee  firm. The  distributor arranged the payment as per the  agreement and  also took the responsibility to bear entirely the resultant effects and risk from the said direct dispatches. It  was true  that the  price at which the goods were to  be sold  to the  customers was fixed by the company but that  did not  lead to  the conclusion that the assessee acted merely  as an agent of the said company. The mere fact that the  manufacturer fixes the sale price by itself cannot lead to  the conclusion  that the  distributor is  merely an agent. Under  the agreement,  what the  distributor got  was described as a "rebate" and not "Commission", as is normally expected in  an agreement of agency. This is a factor, by no means conclusive,  but to a certain extent indicative of the relationship between the said company and the assessee. More important, the supplies were made to the distributor against payment-immediate or  deferred-as provided in the agreement, and even  when the  goods  were  destined  directly  to  the customer, the  distributor had  to guarantee  to arrange the payment, as  per clause  8. Where  there was  some  time-lag between the  sending of the goods and the payment, the goods were to  be insured  at  the  cost  of  the  assessee.  This circumstance clearly  showed that  in respect  of the  goods dispatched under  orders placed  by  the  distributors,  the distributors really  acted as  purchasers of the goods which they in turn sold to the customers and did not merely act as agents of  the said  company. In  respect of  the  goods  in question, despatched  through public  carriers, although the invoices were  prepared in the names of the customers of the goods and  the  goods  were  consigned  to  the  destination through public  carrier  booked  to  self,  the  bills  were endorsed and  delivered to the assessee. In the light of the agreement,  these   circumstances  clearly  showed  that  in respect of  these transactions  the property  in  the  goods dispatched passed  to the  distributors on  the bills  being endorsed and  handed over to the distributors. [884D-H;885A- D]      Although the  Court had  referred to the assessee being described in  the agreement  as  "distributor"  and  not  as "agent" and  to the fact that what they got was described as "rebate" and  not "commission",  the Court  had not  treated these circumstances  as  decisive.  But  these  descriptions considered  in  the  light  of  the  general  tenor  of  the agreement and the circumstances surrounding the transactions between the  parties showed  that the  assessee was  not  an agent but  really a purchaser from the company in respect of the goods  in question,  and the transactions were liable to be included in the turnover of the assessee. [885G-H;886A] 881      The Bhopal  Sugar Industries Ltd. v. Sales Tax Officer, Bhopal, [1977] 3 S.C.C. 147;and Pollack & Mulla’s Commentary on the  Sale of  Goods &  Partnership Acts,  4th Edition, p. 114, referred to.

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Civil Appeal No. 523 (NT) of 1975.      From the Judgment and Order dated 31.1.1974 of the High Court of Kerala in Tax Reference Case No. 52 of 1971.

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    T.S.  Krishnamurthy   Iyer  and  P.K.  Pillai  for  the Appellant.      G. Vishwanath Iyer and N. Sudakaran for the Respondent.      The Judgment of the Court was delivered by      KANIA, J.  This is  an appeal  against a  judgment of a Division Bench  of  the  High  Court  of  Kerala  under  the provisions of the Kerala General Sales Tax Act, 1963 and Tax Reference Case  No. 52  of 1971  filed pursuant  to  special leave granted  by this Court. The Appellant before us is the M/s  Alwaye   Agencies  and   the  respondent   is  the  Dy. Commissioner  of  Agricultural  Income-tax  and  Sales  Tax, Ernakulam.      The assessee  firm was  appointed as Distributor by the Travancore Cochin Chemicals Ltd. (referred to hereinafter as the  "said   company")  to   effect  the   sale  of   Sodium Hydrosulphite manufactured  by the  said company in the area covered by  the Kerala State under an agreement entered into on  11th   February,  1967.  The  dispute  pertains  to  the transactions which  took place  between 1st  September, 1967 and 20th  December, 1968  since it is an undisputed that the transactions upto  the former  date are  not taxable.  It is common ground  that the  relations between  the parties were governed throughout  by the  said  agreement  and  that  the parties adhered  to the terms of the said agreement. In view of this  it would  be desirable to examine that agreement at this stage.  As  aforesaid,  the  agreement  is  dated  11th February, 1967.  Under the  agreement, the assessee firm was appointed  as   Distributor  for   the   aforesaid   product manufactured by  the company  for the  area covered  by  the Kerala State.  Clause 2  of the  agreement provides that the distributorship  was   on  an  exclusive  basis  giving  the distributor the  right of  sale of  the product  within  the aforementioned area  and that  supplies would  be made  only direct to  the distributor,  Sub  clause  (a)  of  clause  2 further provides: 882           "However, when  on the  advice of  the distributor           bulk  supplies  are  effected  in  waggon-load  or           lorry-load lots  the Company  may effect  supplies           direct  to   the  consumer,   provided  that   the           distributor arranges the payment as per the clause           hereinafter   mentioned   and   also   takes   the           responsibility  to  bear  entirely  the  resultant           effects  and  risks  from  effecting  such  direct           despatches."      Sub-clause (b)  of the  said clause  provides that  the company reserves  the right  to effect  the sale  of  Sodium Hydrosulphite to anybody and anywhere in India direct.      Under Clause  4, the  price which the distributor would be entitled  to charge  to the  consumer was  fixed  by  the company and  it was  provided that the distributor will sell the materials  to the clients or consumers at the said price plus certain  costs incurred  by the  distributor. Cluase  6 provides that the said company would grant the distributor a rebate of  3% on  the ex-factory  selling price,  which  the company was  entitled to determine as aforesaid. This rebate was liable  to be paid to the distributor only at the end of the month  when  the  statement  of  the  account  would  be settled. Under  Clause 7,  the  distributor  was  liable  to guarantee the minimum off take of the said product. Clause 8 of the  agreement  provides  for  mode  of  payment  by  the assessee (distributor) to the said company, and very briefly stated, it  provides that  the assessee  would  arrange  for effecting payment  either in cash or by Demand draft payable at par,  or, alternatively, would open an irrevocable letter

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of credit  in favour  of the said company negotiable against R/R or  other documents of despatch of goods. It is provided that the  letter of credit would cover the value of goods as well as  charges of  transport  for  booking  the  goods  to destination station,  Sales tax and other expenses including cost of  insurance, if  any, effected  at the  distributor’s request. An  alternative mode  of the payment is provided to the effect  that the  assessee as distributor must remit 10% of the  full value  by Demand Draft and retire the documents of despatch  of goods  sent to the assessee through bank for collection from  the bank.  Clause 8 further provides if the documents sent  by the  said company  are not retired within the stipulated  time,  interest  would  be  payable  by  the distributor on  the amount due at the rate of 12% per annum. The clause  also makes  it clear  that if the second mode of payment is  adopted by  the assessee,  consignments would be insured by  the said  company against  transit risk  and the insurance charges would have to be borne by the assessee. It may be  noted at this stage that the Tribunal has found as a fact that in respect of the said transactions 883 from  1st  September,  1967  to  20th  December,  1968,  the invoices were  prepared by  the said company in the names of the consumers  of goods  and the goods were consigned to the destinations through  public  carriers  booked  "self".  The transport bills  were endorsed  and handed  over by the said company to  the assessee.  From 20th  December, 1968,  goods were consigned  to the  destination showing  the assessee as consignor. But  we are  not concerned  with the  period from 20th December,  1968. In  the assessment of the assessee for the period  1967-68 under  the Kerala General Sales Tax Act, 1963, the  final assessment  was initially completed on 27th September, 1968  and a  turnover of Rs.70,952.61 as reported by the  assessee was  accepted and tax levied on that basis. Thereafter, it  was alleged  by the Assessing Authority that the transactions  in the  aforesaid period,  which had taken place in  the manner  set  out  earlier,  had  been  wrongly excluded from  the turnover  reported by the assessee in the return and  hence that  turnover has escaped assessment. The contention of  the assessee  that these transactions did not constitute sales by the said company to the assessee was not accepted and hence it was held by the Assessing Officer that the said  turnover was  liable to be included in the taxable turnover of  the assessee,  as escaped  turnover. An  appeal preferred  by   the  assessee  to  the  Appellant  Assistant Commissioner was  dismissed.  In  a  Second  Appeal  to  the Tribunal, the  Tribunal took the view, by majority, that the aforesaid transactions  had taken place directly between the said company  and the  consumers and the assessee was merely an agent  of the  company in  respect thereof.  The Tribunal allowed the  appeal and  directed the aforesaid transactions to be excluded from the taxable turnover of the assessee. On a revision  to the  High Court  under Section 41 of the said Act, the Division Bench of the High Court took the view that the Tribunal  was wrong in coming to the conclusion that the assessee was  acting only  as an  Agent in  respect  of  the aforesaid transactions  between the  said  company  and  the consumers and allowed the Revision Application.      The Division Bench of the High Court considered several cases which  were cited  before the  Division Bench and held that the test to determine whether there is a sale or not is to find  out whether  there  is  transfer  of  property.  It further pointed out that the question whether there has been transfer  of   property  must  necessarily  depend  upon  an appreciation of  the rights  and obligations  of the parties

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under the  contract. If  the property is transferred, unless there is a specific stipulation to the contrary, any risk of loss or injury to the goods would, thereafter, be not in the seller but  in the  buyer. They further pointed out that the delivery may be either to the distributor himself or to his 884 nominee; the  nominee could  be the  person whose orders are booked by  the distributor.  They pointed  out that  in  the present case even when the goods were despatched by the said company to  the address  of the customers, whose orders were booked  by   the  distributor,  namely,  the  assessee,  the documents of  title were not delivered to the customers, but handed over  to the  distributor on receipt of price, or the documents  of   title  were   endorsed  in   favour  of  the distributor and sent through the banks to be honoured by the distributor by  payment. In such cases, where there was some time-lag between  the despatch  of goods and the entrustment of documents of title on receiving payment through the bank, care was  taken to  stipulate that the risk would be covered by insurance  which would be at the cost of the distributor. The Division  Bench further  pointed out  that in  the  said agreement, the  distributor had  not  been  referred  to  as "Agent"  but   as  "Distributor"  and  that  this  was  also significant although  not conclusive. It was on the basis of these conclusions  that the High Court reversed the decision of the Tribunal and allowed the Revision Application.      In our  opinion, since  both the parties have proceeded on the  footing  that  the  transactions  in  question  were effected pursuant to the said agreement, the primary task to which we  must address ourselves is to examine whether under the agreement  the assessee  firm was  an agent  of the said company, or whether the assessee firm was really a purchaser of the  goods which  were booked by it. In this connections, it must  be noticed  that under  sub-clause (a)  of Clause 2 provides that  the distributor  has the right of the sale of the product  within the  stipulated area. Bulk supplies were effected in  waggon-load or  lorry-load by  the said company direct  to   the  consumer,   but  only  provided  that  the distributor arranged  the payment  as per  the agreement and also took  the responsibility to bear entirely the resultant effects and  risk from  said direct  despatches. It  is true that the  price at  which the  goods were  to be sold to the customers was  fixed by the company but that itself does not necessarily lead  to the  conclusion that the assessee acted merely as  an agent of the said company. In fact, it is well settled that  the mere  fact that the manufacturer fixes the sale price,  by itself,  cannot lead  to the conclusion that the distributor  is merely  an agent. It is significant that under the agreement what the distributor got is described as a "rebate"  and not  as "commission",  as one would normally expect in  an agreement of agency. This is a factor which is by no  means conclusive,  but to a certain extent indicative of  the  relationship  between  the  said  company  and  the assessee. What  is most  important  is,  however,  that  the supplies were made to the distributor against payment either immediate or deferred as provided in the agreement, and even when 885 the goods were destined directly to the customer, it was the distributor   who had  to guarantee  to arrange the payment. Clause 8  makes it  quite clear  that  the  arrangement  for effecting payment  had to  be made by the distributor either in case  of by  demand draft  or by  irrevocable  letter  of credit in  the company’s  favour negotiable  against R/R  or other documents of despatch of goods. It is also significant

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that where  there was  some time  lag between the sending of the goods  and the  payment, the goods were to be insured at the cost of the assessee. This circumstance, in our opinion, clearly shows  that in respect of the goods dispatched under orders placed  by the  distributors, the distributors really acted as  purchasers of the goods which they in turn sold to the customers  and did  not merely act as agents of the said company. In  respect of  the goods  in question  which  were despatched through  public carriers,  although the  invoices were prepared  in the  names of  the consumers of the goods, and the  goods were  consigned to  the  destination  through public carrier  booked to  self, as  pointed by the Tribunal and the bills were endorsed and handed over to the assessee. When  considered  in  the  light  of  the  agreement,  these circumstances  clearly   shows  that  in  respect  of  these transactions the  property in the goods dispatched passed to the distributor  on the bills being endorsed and handed over to the distributors.      Our attention  was drawn  by Shri  Krishnamurthy  Iyer, learned counsel for the assessee (appellant) to the decision of this  Court in  The Bhopal Sugar Industries Ltd. v. Sales Tax Officer,  Bhopal, [1977]  3  S.C.C.  p.  147  where  the question was whether the contract was one of agency or sale. This Court held that the question will have to be determined having regard  to the  terms and  recitals of the agreement, the intention  of the  parties as  may be spelt out from the terms of  the document and the surrounding circumstances and having regard to the course of dealings between the parties. 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. We are in complete agreement with the principles laid down in this decision. We may point out that although we have referred to the assessee being described in the agreement as "distributor" and not as "agent" and  to the fact that what they got was described as "rebate" and  not "commission",  we have  not treated  these circumstances as  in  any  manner  decisive.  In  our  view, however, these  descriptions considered  in the light of the general tenor of the agreement and the 886 circumstances  surrounding   the  transactions  between  the parties show  that the  assessee was not agent, but really a purchaser from  the company  in  respect  of  the  goods  in question.      Learned  counsel   for  the  appellant  also  drew  our attention to  a passage  in Pollack  & Mulla’s Commentary on the Sale of Goods and Partnership Acts, (4th Edition at page 114) where  the learned authors have cited with approval the statement of Lord Justice Cotton to the effect that when the vendor on  shipment takes  the bill  of lading  to  his  own order, he  has the  power of  absolutely  disposing  of  the cargo, and may prevent the purchaser from ever asserting any right of property therein. Lord Justice Cotton observed that in such  cases the  purchaser had  no property in the goods, though he had offered to accept bills or had paid the price. These  observations,   however,  in   our  view,   have   no application to  the case  before us,  because  in  the  case before us,  although the  goods were  consigned to the self, the documents  relating to the despatch of goods, namely R/R or other  documents of  title were endorsed in favour of the assessees and handed over to them on payment or were sent to

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the assessees through the bank for collection.      We may mention that it was urged by learned counsel for the  respondent,in  the  alternative,  that,  although  sub- section 21  of Section 2 of the Kerala General Sales Tax Act defines sale  in a  manner similar  to the definition of the said term under the Sale of Goods Act, Explanation 5 to sub- section 21  of Section 2 provides that two independent sales or purchases  shall, for the purposes of that Act, be deemed to have  taken place  in the  circumstances set  out in that explanation. A  perusal of  the said  explanation shows that such independent  sales or purchases take place, inter-alia, where the  goods are  transferred from  a principal  to  his selling agent  and from  the selling agent to the purchaser. It was  submitted by  him that  in view of this explanation, even ifthe  appellant firm  was merely the agent of the said company in  respect of  the transactions  in question, there were two  sales which  must be deemed to have taken place in respect of  each of the transactions for the purposes of the said Act; one from the said company to the appellant and the other from  the appellant  to the  respective consumer;  and that the  sale from  the said  company to  the appellant was liable to  be  included  in  the  taxable  turnover  of  the assessce.In ourview,  it is  not necessary  to consider this submission, because,  according to  us, in  view of the said agreement,  considered  in  the  light  of  the  surrounding circumstances, the  assesseeas distributor  was not an agent of the  said  company  in  respect  of  the  transaction  in question, but was the pur- 887 chaser and hence the transactions were liable to be included in the turnover of the assessee.      In the  result, we  find that  there is no merit in the appeal and the appeal must stand dismissed with costs. There will be an order accordingly. S.L.                                  Appeal dismissed. 888