ITEM NO. 1-A           ( For Judgment )

           COURT No.5     SECTION  III

              S U P R E M E   C O U R T   O F   I N D I A                            RECORD OF PROCEEDINGS

Civil Appeal No.1323 of 2009 @ SLP(C) No. 20624/2007

M/s DCM Limited ..   Appellant(s)     Versus

Commissioner of Sales Tax, Delhi ..   Respondent(s)                          

WITH

Civil Appeal No.1324 of 2009 @ SLP(C) No. 20654/2007 Civil Appeal No.1325 of 2009 @ SLP(C) No. 20655/2007 Civil Appeal No.1326 of 2009 @ SLP(C) No. 20693/2007 Civil Appeal No.1327 of 2009 @ SLP(C) No. 20750/2007

DATE : 27/02/2009      These matters were called on for pronouncement of                        judgment today.  

                                                                                For Appellant(s) Mr. Praveen Kumar, Adv.

   For Respondent(s) Ms. Sudha, Adv.

Ms. Sadhana Sandhu, Adv. Mr. D.S. Mahra, Adv.

              ---

Hon'ble Mr. Justice S.H. Kapadia pronounced the judgment of the Bench

comprising his Lordship and Hon'ble Mr. Justice H.L. Dattu.

Leave granted.

The appeals are dismissed with no order as to costs in terms of the signed

judgment which is placed on the file.

[ S. Thapar ]     PS to Registrar

 [ Madhu Saxena ]    Court Master  

[ Signed reportable judgment is placed on the file ]

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.   1323  OF 2009 (Arising out of S.L.P.(C) No.20624 of 2007)

M/s. DCM Limited … Appellant (s)

Versus

Commissioner of Sales Tax, Delhi … Respondent(s)

WITH

Civil Appeal No. 1324 of 2009 – Arising out of S.L.P. (C) No.20654 of 2007 Civil Appeal No. 1325 of 2009 – Arising out of S.L.P. (C) No.20655 of 2007 Civil Appeal No. 1326 of 2009 – Arising out of S.L.P. (C) No.20693 of 2007 Civil Appeal No. 1327 of 2009 – Arising out of S.L.P. (C) No.20750 of 2007

J U D G M E N T

S. H. KAPADIA, J.

1. Leave granted.

2. A short question which arises in this batch of civil appeals is : whether the

taking of the delivery of chemicals in Delhi by the purchasing dealers, in the context

of they being the distributors/stockists of the assessee (appellant), for the assigned

territories  outside  Delhi  would  take  away  the  transaction  in  question  from the

category of sale inter-State sale(s)?  

Facts in Civil Appeal No.         of 2009 –  arising out of S.L.P. (C) No.20624 of 2007

REPORTABLE

3. During the assessment year 1974-75 the dealer, M/s. DCM Ltd., claimed

exemptions on account of the following sales made to the registered dealers:

4. The  Assessing  Authority  vide  Order  dated  28.3.1979  did  not  grant

exemption in  respect  of the above-mentioned sales on  the  ground that  the three

above-mentioned purchasing dealers had been assigned specific territories,  under

the Contract(s), outside Delhi and that they were under contractual obligations with

M/s. DCM Ltd. to supply goods to the specified dealers who were also named by

M/s. DCM Ltd. on a price fixed and determined by M/s. DCM Ltd.  According to

the said order, even the quantity of chemicals stood determined by M/s. DCM Ltd.

According  to  the  Assessing  Authority,  under  the  above  circumstances,  the  said

chemicals meant for inter-State sales, however, to avoid liability under the Central

Sales Tax Act,  1956, the transaction was shown by the assessee (appellant - M/s.

DCM Ltd.) as a “local sale”.  Accordingly by the said order dated 28.3.79, the said

sales were taxed at 10% under the said 1956 Act.

5. Aggrieved  by  the  assessment  order  dated  28.3.1979,  appeals  were

preferred by M/s. DCM Ltd. before Addl. Commissioner who dismissed the appeals

vide his order dated 14.12.79 on the ground that the transaction(s) in question were

inter-State sales.  According to M/s. DCM Ltd., the sales were “local sales” as the

said chemicals stood sold in Delhi itself.  However, the Appellate Authority observed

that the assessee should be given an opportunity to produce ‘C’ Forms in respect of

the sales in question and accordingly it remanded the case on the limited point to

the Assessing Authority to give an opportunity to M/s. DCM Ltd. to produce the ‘C’

REPORTABLE

Forms.   

6. Aggrieved by the decision of the Appellate Authority, the assessee filed

appeal(s)  before  the  Appellate  Tribunal  which  held  that  each  of  the  three

registered/purchasing  dealers  were  distributors  who  had  executed  Agency

Agreement(s) with the assessee.  According to the Tribunal, some of the clauses of

the said Agreement(s) indicated that all supplies were to be made ex-works of the

assessee.  Under the said Agreement(s), the purchasing dealers were required to take

local delivery at  the  factory gate.   Under the  said Agreement(s),  the purchasing

dealer(s) were required to store the said chemicals in their own godowns in Delhi.

Under the said Agreement(s), however, the assessee had to fix the price(s) at which

the chemicals were to  be  sold in  the  different  assigned  territories outside  Delhi.

Accordingly  it  was  held  by  the  Appellate  Tribunal,  under  the  facts  and

circumstances  of  this  case,  that  under  the  said  Covenant  of  Agency,  since  the

chemicals were to be sold in the assigned territories outside Delhi, the transaction(s)

was inter-State  sale(s).   In this  connection,  the  Appellate Tribunal  placed heavy

reliance on clauses 3 & 7 of the said Agreement(s).  The Appellate Tribunal once

again directed the Assessing Authority to give one more opportunity to the assessee

to produce the requisite ‘C’ Forms in respect of the sales made to the said three

registered/purchasing dealers.

7. Aggrieved by the decision of the Appellate Tribunal, however, the assessee

approached the High Court of Delhi by filing an application for reference under

Section 45(1) of Delhi Sales Tax Act, 1975.  The question referred to the High Court

REPORTABLE

was : whether the Sales Tax Tribunal was right in holding that the said sale(s) was

an inter-State sale(s)?  Vide impugned judgment dated 3.7.07, the High Court held

that the sales were inter-State sales falling under Section 3(a) of the said 1956 Act.

Accordingly, the High Court directed the assessee to adduce evidence before the

Assessing Authority to show that the chemicals were locally sold by the purchasing

dealer and that they were not transferred to branches outside Delhi or sold in the

territories  outside  Delhi.   Against  the  said  Order,  however,  the  assessee  has

approached this Court by way of special leave petition(s).

ISSUE  

8. In this case great emphasis is placed by the assessee on the fact that all

supplies  were  made  ex-works  of  the  of  the  assessee  and  that  the  above  three

registered purchasing dealers (distributors/stockists)  had taken local deliveries at

the factory gate and had arranged to store the chemicals in their own godown(s) in

Delhi, both in terms of the contract and in fact.

9. Therefore, the main question which arises for determination in these civil

appeals is : whether the taking of the delivery in Delhi by the purchasing dealers for

their assigned territories outside Delhi would take away the transactions in question

from the category of inter-State sale?

Relevant clauses of the Agreement

    “1.     Territory  

(a) Whole  of  U.P.  excepting  towns/districts  of  Kanpur,  Lucknow,

REPORTABLE

Azamgarh, Ghaziabad, Hapur, Gorakpur, Faizabad, Pilakuwa.

(b) Ganesh Flour Mills and Birla Mills, Delhi excepting supplies to:

(a) Our sister concerns;

(b) Government, Semi-Govt. Department

(c) Other bulk consumers and Parties to whom we may decide to give

effect supplies.

2. Period

This agreement shall be effective from 1.11.73 to 31.12.73.   In the

event  of a breach of any of the terms of the agreement on either side,  this

agreement  shall  be  liable  to  cancellation  by  either  party  on  tendering  one

month’s notice.

3. Delivery

All  supplies  will  be  made  on  ex-works  and  you  shall  take  local

delivery of the goods at factory gate and shall arrange to store the same in

your godown in Delhi.

In  the  event  of  you  desiring  us  to  transport  the  goods  to  your

territory outside Delhi, you would give us freight charges and also be liable for

Central Sales Tax.

4. Shortage Losses Damages in Transit

The basis of billing and payment for each supply shall be the weight

shown  in  the  relative  challan  and  we  shall  not  be  responsible  for  any

shortage/losses/damages  in  transit  after the  goods  have  been  loaded  to  the

satisfaction of the Railway authorities/Carriers.

5. Selling Rates

REPORTABLE

These will be fixed by us from time to time taking into consideration

cartage and other incidental charges and you will not be entitled to charge

higher rates.

6. Sales of Products of other Manufacturers

During the period of this agreement, you shall not deal directly or

indirectly in the sale of any identical products of other manufacturers.

7. Agency Security Deposit

You shall give us a security deposit of Rs.2,000/- to ensure the due

fulfillment  of  the  agreement.   This  deposit  shall  carry interest  at  the  rate

prevailing from time to time, which will be 1% less than the Bank rate.  This

deposit shall be liable to forfeit in part or in full at our discretion in the event

of breach of the terms of agreement.”  

CONTENTIONS

10. Mr.  S.K.  Bagaria,  learned  senior  counsel  appearing  on  behalf  of  the

assessee  (appellant),  submitted  that  the  sales  effected  by  the  assessee  to  its

purchasing  dealers  (distributors)  were  “local  sales”  and  the  said  sales  did  not

occasion movement of goods from Delhi to other States.  He further submitted that

the purchasing dealers were registered dealers under the Local Act.  They were also

registered  dealers  under  the  said  1956  Act.   According  to  learned  counsel,  the

dealers had purchased the goods locally from the assessee in Delhi on the strength of

their registration certificates by issuing prescribed declarations under the Local Act

and, therefore, the said purchases were local purchases in the hands of said dealers.

According  to  learned  counsel,  after  purchasing  the  goods  in  Delhi  and  getting

delivery ex-works at the factory of the appellant, the purchasing dealers had stored

REPORTABLE

the goods in their godowns in Delhi.  According to learned counsel, the purchasing

dealers were selling the goods purchased from the appellant either by making local

sales in Delhi or by making inter-State sales to their own buyers outside Delhi or by

making branch transfers to their own branches outside Delhi.

11. Learned counsel next contended that  a local sale cannot  be deemed to

take place in the course of inter-State trade or commerce simply because the buyer

(purchasing dealer) has been assigned a territory.  According to learned counsel,

Section 3(a) of the 1956 Act creates a deeming fiction.  It provides that a sale or

purchase  shall  be  deemed  to  take  place  in  the  course  of  inter-State  trade  or

commerce if the sale or purchase occasions movement of goods from one State to

another.  Thus, according to learned counsel, in order to be covered by Section 3(a),

the  sale  in  question  itself  must  occasion  movement  of  goods  from one  State  to

another.  According to learned counsel, Section 3(a) is not attracted merely because

the  purchasing  dealer(s)  has  been  assigned  a  territory  outside  the  local  area.

According  to  learned  counsel,  assignment  of  territory  is  different  from  a  sale

occasioning movement of goods.  Mere assignment of territory by itself, according to

learned  counsel,  does  not  mean  that  the  sale  by  the  assessee  to  the  dealer(s)

occasioned the movement of goods to the assigned territories.  According to learned

counsel, the goods in question were sold locally in Delhi by the appellant.  According

to learned counsel, appellant was not concerned with subsequent sale(s).  According

to learned counsel, in the present case, the purchasing dealer(s) had no obligation to

occasion the movement of goods to the assigned territories pursuant to or as an

incident of the appellant’s sale to them.  According to learned counsel, the appellant

REPORTABLE

has sold the goods locally to the purchasing dealers who were free to sale the goods

to their own buyers in the assigned territories in either of the three ways, mentioned

above.   There was no bar or restriction on the purchasing dealers on selling the

goods  in  any  of  the  three  modes,  mentioned  above.   Learned  counsel  further

submitted that under clause 3 of the said Agreement it was made clear that in the

event of the purchasing dealer(s) desiring the assessee to transport the goods to their

assigned territories outside Delhi they would pay the freight charges and also be

liable  to  for Central  Sales  Tax and  in  such  cases  the  appellant’s  sale(s)  to  the

purchasing dealer(s) would be sale(s) in the course of inter-State trade or commerce.

According to learned counsel, the Agreement in question did not cast any obligation

upon  the  purchasing  dealer(s)  to  sell  the  goods  only  in  the  assigned  territories.

According to learned counsel, the various clauses in the Agreement relating to the

selling rates were normal commercial clauses which clauses had nothing to do with

the issue as to whether the sale(s) made by the appellant to its purchasing dealers

locally against the declaration forms submitted by them and such clauses did not

purport  to  make  such  local  sale(s)  into  inter-State  sale(s).   In  support  of  his

contention learned counsel placed reliance on number of judgments of this Court.

12. On the other hand, Mr. Ashok Panda, learned senior counsel appearing

on  behalf  of  the  Department,  submitted  that  in  view  of  the  judgment  of  the

Constitution Bench of this Court in the case of State of Bihar v. Tata Engineering &

Locomotive Co. Ltd. – (1970) 3 SCC 697, the sales in question in the present case

were inter-State sales.  Learned counsel submitted that the judgment of this Court

in  Tata  Engineering (supra)  is  squarely applicable to  the  present  case.   In  this

REPORTABLE

connection,  learned  counsel  invited  our attention  to  various  clauses  in  the  said

Contract (Agreement) by which specific territory stood assigned to the purchasing

dealer(s) coupled with an obligation by the purchasing dealer(s) to move the goods

to the assigned territory.  Under the Contract, according to the learned counsel, the

appellant had complete control over the purchasing dealer(s) coupled with the fact

that the territories were specifically assigned to protect the continuing commercial

interest  of  the  appellant.   According  to  learned counsel,  assignment  of  territory

under the Contract was to avoid competition between the distributors.  According

to learned counsel, on reading the entire Contract, the position was clear that the

assignment of territory stood coupled with an obligation of moving the goods by the

purchasing dealer(s) to the assigned territories for sale therein.   Learned counsel

submitted that each of the assigned territories were located outside Delhi.  Learned

counsel also placed reliance on the judgment of this Court in the case of Union of

India and Another v. K.G. Khosla & Co. Pvt. Ltd. & Others – (1979) 2 SCC 242, in

which it  has been held that  if a contract contains a stipulation for movement of

goods then the sale would be an inter-State sale.  It has been further held that such a

transaction could also be an inter-State sale even if the contract did not expressly

provide  for  the  movement  of  goods  but  in  fact  such  movement  took  place

consequent  upon  a  covenant  in  the  contract  or as  an  incident  of  that  contract.

According to learned counsel, both the aforestated judgments in the cases of  Tata

Engineering & K.G. Khosla (supra) were applicable to the facts of the present case

and, therefore, no interference was warranted in the impugned judgment.          

Findings

REPORTABLE

13. The main contention  advanced on behalf of the assessee before us was

that sales having been made in Delhi, ex-works of the assessee and thereafter the

chemicals having been stored in the godowns of the purchasing dealers in Delhi, the

transactions were local sales and not inter-State sales.   

14. The short point which we have to decide in this batch of civil appeals is:

whether  the  movement  of  chemicals was  under the  obligations,  indicated  in the

contract,  or  whether  such  movement  was  due  to  reasons  extraneous  to  such

obligations?   

15. In our view taking of delivery in Delhi by the purchasing dealers for their

assigned territories outside Delhi  per se would not  take away the transactions in

question from the category of inter-State sales.  The determinative test to be applied

in this case is: whether the purchasing dealers were obliged contractually to remove

the goods from Delhi,  in which they were bought,  to the assigned territories and

whether in fact the goods stood actually removed.  It is this test that would decide

the question as to whether the sales in question were “inter-State sales” or “local

sales”.  To answer the above question we need to examine the entire Contract(s).

Under  the  Contract(s),  each  purchasing  dealer(s)  was  assigned  an  exclusive

territory.  Each dealer(s) was obliged to take the chemicals to his respective territory

outside Delhi where they were to be sold.  Despite the fact that the delivery of the

goods was taken in Delhi,  the purchasing dealer(s) had to move the goods to the

respective assigned territories outside Delhi and it was the essential condition of the

contract itself that the chemicals would move out of Delhi and would be sold in the

REPORTABLE

assigned  territories  allotted  to  each  of  the  respective  purchasing  dealers.   The

covenant in the Contract obliged each of the purchasing dealers to move the goods

to the territories outside Delhi.  In fact in clause 3 there was a proviso  that if on

instructions from the purchasing dealer, the assessee was required to transport the

goods, the freight charges would have to be paid by the distributor as a purchasing

dealer and that the purchasing dealer would also be liable for sales tax.  No evidence

has  been  led  by  the  assessee  as  to  the  exact  quantity  of  chemicals  which  stood

removed under this clause and the reimbursement, if any, of tax and freight being

made to the assessee.  Clause 7 of the Contract also indicates that the chemicals were

to be sold in the territories outside Delhi.  The assignment of specific territories is

indicated in clause 1.  Under the Contract, the purchasing dealer(s) was required to

submit monthly stock of sales to the assessee.  Every month, the purchasing dealer

was required to submit a market report to the assessee.  Under the Contract, the

price at which the chemicals were to be sold in different territories was also fixed by

the assessee.   Each purchasing dealer had executed separate contract(s)  with the

assessee.  On reading the Contract we find that  movement of the goods was the

covenant  of  the  Contract.   In  the  circumstances,  we  agree  with  the  concurring

findings  of fact  recorded by all the  Authorities below that  the  sale of chemicals

effected by the assessee to its purchasing dealers who in turn were obliged to effect

their sales in their respective territories outside Delhi involved inter-State movement

of goods and, therefore, the sales in question were inter-State sales.  Accordingly, we

find no  infirmity in  the  concurring findings  of  fact  recorded by  the  Authorities

below.  In our view the judgments of this Court in the cases of  Tata Engineering

(supra) and K.G. Khosla (supra) are squarely applicable to the facts of the present

REPORTABLE

case.    

16. Before concluding, we may note that the basic contention advanced on

behalf of the assessee was that the purchasing dealer(s) had to take the delivery of

the goods ex-works; that they were required to store the chemicals in their godowns

in  Delhi  and  the  said  chemicals were to  be  disposed  of  by  the  said  purchasing

dealers in the following manners:

(a) stock transfer;

(b) inter-State sales

(c) local sales

17. It was urged on behalf of the assessee that it had no idea as to what would

happen to the chemicals after the same were given to the purchasing dealers.  It was

urged that M/s. DCM Ltd. ceased to be the owner of the goods after they were given

to the purchasing dealer(s) at the factory gate and that the assessee had no idea as to

whether the goods would be sold in Delhi or transfer to the branches or sent in the

course of inter-State  trade.   In this  connection,  reliance  was also placed  on  the

affidavits  filed by  the  three purchasing dealers.   We do  not  find merit  in  these

arguments.  Once it  is found that the purchasing dealers were obliged under the

Contract(s) to take the chemicals to their respective territories outside Delhi, once it

is  found  that  the  purchasing  dealers were  obliged  to  sell  the  chemicals in  their

respective assigned territories, once it is found that the said purchasing dealers were

obliged to enter into separate contract(s) with the assessee, once it is found that each

of  the  purchasing  dealers were  required  to  sell  the  chemicals  in  their  assigned

REPORTABLE

territories at the price fixed by the assessee and once it is found that each of the

purchasing dealers was obliged to submit monthly reports to the assessee then in

that event the mode in which each of the purchasing dealers could sell their goods

either by way of stock transfer or inter-State sale or local sale becomes irrelevant.

The obligation of the purchasing dealer(s) under the Contract indicates the control

of the assessee over the movement of the goods.     

18. For  the  aforestated  reasons,  we  find  no  infirmity  in  the  impugned

judgment of the High Court and accordingly the civil appeals filed by the assessee

are dismissed with no order as to costs.                    

……………………………J.                                     (S.H. Kapadia)

……….………………….J.                                     (H. L. Dattu)    

New Delhi; February 27, 2009.