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PETITIONER: THE CEMENT MARKETING CO., OF INDIALTD. AND ANOTHER

       Vs.

RESPONDENT: THE STATE OF MYSORE AND ANOTHER

DATE OF JUDGMENT: 28/08/1962

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. DAS, S.K. SARKAR, A.K. HIDAYATULLAH, M. DAYAL, RAGHUBAR

CITATION:  1963 AIR  980            1963 SCR  Supl. (3) 777  CITATOR INFO :  R          1966 SC 563  (21)  R          1966 SC1216  (9,10)  R          1967 SC 585  (7)  R          1971 SC 477  (9)  R          1979 SC1160  (15)  RF         1992 SC1952  (8)

ACT: Sales  Tax-Sale of goods-Transactions involving movement  of goods across the border from one, State to another Liability to  tax-Mysore  Sales  Tax Act, 1948 (Mysore  46  of  1948)- Constitution of India, Art.286(2).

HEADNOTE: The second appellant was a manufacturer of cement and at the material  time  it had over a dozen factories  in  different parts  of  India none of which was in the State  of  Mysore. The  first appellant was its sales manager and had its  head office  in Bombay with a branch office at Bangalore  in  the State of Mysore’ Cement was a controlled article and  every- one wishing to buy cement. had to get an authorisation  from the  appropriate Government authorities in a  standard  form which  authorised  the  first appellant to  sell  cement  in quantities  mentioned  therein  and the  cement  had  to  be supplied from the factory therein mentioned.  The  purchaser had to place an order with the first appellant. stating  the requirement,  where the goods were to be sent and  how  they were  to be sent.  In the present case, all the  goods  were sent  against the authorisations from the various  factories belonging to the second appellant which were all outside the State of Mysore and were received in the State of Mysore  by the various 778 purchasers.  The Sales Tax Officer by his order dated  March 31,  1958,  took the view that though the  property  in  the goods passed to the dealers and consumers outside the State, of  Mysore, since the goods had actually been  delivered  in the  State  of Mysore as a direct result of such  sales  for purposes  of  consumption in the State, the  sales  must  be

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deemed to have taken place in that State and, therefore, the sales  effected by the first appellant as the sales  manager of  the  second  appellant, to  customers  in  Mysore  State amounted  to  intrastate  sales  and  liable  to  tax  under provisions  of  the Mysore Sales Tax Act,  1948.   The  High Court held that as the actual delivery to the purchasers was within  the State of Mysore, the cement loaded  outside  the State  and despatched to the purchaser did not  convert  the sales into inter-State sales but were intrastate Wes. Held, that the sales which took place in the present case in which the movement of goods was from one State to another as a result of a convenant or incident of the contract of sale, were in the course of inter-State trade or commerce and fell within   Art’   286(2)  of  the   Constitution   of   India, Consequently, the imposition of sales tax on such sales  was unconstitutional. M/S.   Mohan Lai Hargobind v. The State of  Madhya  Pradesh, [1955] 2 S.C.R. 509, followed. Endapuri  Narasimhan & son v. The State of Orissa, [1962]  1 S.C.R. 314, Bengal Immunity Co. Ltd. v. The State of  Bihar, [1955]  2 S.C. R. 603 M/s.  Ram Narain & Sons  v.  Assistant Commissioner of Sales Tax, [1955] 2 S.C.R. 483 and Tata Iron and Steel Co. Ltd.  Bombay v. S. R  Sarkar, [1961] 1  S.C.R. 379, relied on. Rohtas  Industries  Ltd. v. The State of  Bihar,  [1961]  12 S.T.C. 615, distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 255 of 1961. Appeal from the judgment and order dated March 21, 1960,  of the Mysore High Court in Writ Petition No. 147 of 1958. B.   J.  Kolah, J. B. DadachanJi, O. C. Mathur and  Ravinder Narain, for the appellants. 779 C.   K. Daphtary, Solicitor-General of India, B.  R.      L. Iyengar and P. D. Menon, for respondents. 1962.  August. 28.  The Judgment of the Court was  delivered by. KAPUR, J This is an appeal against the judgment and order of the  High Court of Mysore in Writ Petition No. 147  of  1958 dismissing the appellant’s petition under Arts. 226 and  227 of the Constitution for quashing the order of assessment for the period of assessment 1955-56 i.e, from April 1, 1955, to March  31, 1956.  In this appeal because of  the  Validating Act  (VII  of 1956) the appellants did not  challenge  their liability  for  the period April 1, 1955,  to  September  6, 1955. The  facts  necessary for the decision of  this  appeal  are these : Appellant No. 1-The Cement Marketing Co. Ltd-are the Sales Managers of the second appellant-The Associated Cement Co. Ltd. appointed under an agreement dated April 21,  1954. The  High Court has described the first appellant to be  the Distributors of the second apppellant.  The second appellant is a manufacturer of cement and at the material time it  had over a dozen factories in different parts of India, none  of which was in the State of Mysore.  The head office of  first appellant  is at Bombay and it had then a branch  office  at Bangalore  in the State of Mysore.  The first appellant  was registered as a dealer under the Mysore Sales Tax Act  1948, hereinafter called the "Mysore Act".  At all material  times cement  was and still is a controlled article.  Whether  the sale  was  to a Government Department i.e. to  the  Director General  of  Supplies & Disposal, Government of  India,  New

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Delhi,  or to a person authorised by the said Officer or  to the’  public it was effected on authorisations given to  the buyers by appropriate Government authorities and 780 produced by them in the office of the first appellant.  Both in regard to purchases by the public and the Government  the Modus  operandi  was more or less identical.   It  was  this Every one wishing to buy cement had to get an  authorisation in  a standard form which authorised the first appellant  to sell cement in quantities mentioned, therein and the  cement had to be supplied from the factory therein mentioned.  That document was in the following form which actually ralates to a sale to a Government contractor. "Government of India-Ministrary of Commerce & Industry. Office  of  the Regional Honorary Cement Adviser  4/12  Race Course Road, Coimbatore. Central Quota.                        Dated 8-10-1955. Authorisation No. RA/CT/28/CMI/1 7 2 CQ. (CENTELEC) Period IV/55                 The Cement Marketing, Name  of  Suppliers            Co. of India P.  Box  No.613, Sugar Company Bulding- Bangalore-2. You  are  authorised to sell cement  in  quantity  mentioned below  under this authorisation.  The sale will be a  direct deal between yourself and  781 the purchaser.  The Government undertakes no  responsibility of any nature whatsoever:- Name and    Name of the   Quan-     Name of Rly.      Re- address of the person  factory or     cement is to in whose      companybe booked. favour        required to authorisation    supply is issued.     cement. 1                 2        3              4            5      M/s. G. S.     Mudhukkarai300 Bangalore      Duggal &  Co Shababadtons      Ltd Engineers & Contractors,       Jalhalli P.O.      Bangalore. Ref.  No. J/1 17/115 date 29-9-55 from the above  indentors- For manufacture of the tiles for the Bharat Electronics Ltd. Supply     recommended     by    the     Commander     Works Engineers(B.E.I.P.), Jalahalli. Full details of the purpose for which and the place at which cement will actually be consumed; Priority, Defence work. Sd. C.C. Ramanath, Reg, Hon.  Cement Advisor (Coimbatore) Copy to 1. The indentor.               2.    The  Dy.  Development Officer, Govt.  of               India,   Ministry  of  Commerce  &   Industry,               Development    Wing,(Chemicals   1,    Mineral               Industries) Shahjehan Road, Now Delhi.               3.    The  Controller of Civil Supplies in  My               sore Bangalore for information". 782 This authorisation was subject to the following  conditions: It  was to be utilised within 15 days; the  cement  released could  be used only for the purpose for which it was  given; the   authorisation  was  not  transferable;   the   issuing authority  could, if necessary, revoke the authorisation  at

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any time and even the orders booked under the  authorisation could  be cancelled. The purchaser or the indentor had  then to place an order with the first appellant as Sales Managers of  the second appellant stating the requirement, where  the goods  were  to be sent and how they were to be  sent.   The seller  entered  into a contract with the  first  appellant. This contract is in a standard form and gives conditions  of sale.   Thereupon the first appellant instructed its  Bombay office  to  despatch  the  cement  in  accordance  with  the instructions  of the buyer and the authorisation.   In  this letter  they had to mention the number of the  authorisation and the person who had issued it and also to whom the  goods were to be sent and how and certain other details which  are not  necessary for the purposes of this appeal were also  to be given. Each  instruction  indicates that it was issued for  and  on behalf  of appellant No. 2 by appellant No. 1 as  its  Sales Managers.   A copy of the letter of instruction was sent  to the  factory from where the goods were to be despatched  and the  particulars  of the authorisation had to  be  mentioned therein.  Thereafter the first appellant sent an advice to  783 the  purchaser enclosing therewith the Railway  Receipt  for the  goods  and this advice also mentioned  the  goods  were being  sent. Both the contract of sale and the advice  above mentioned stated that the goods were being despatched at the buyer’s  risk  from the time the delivery was  made  by  the factory to the carriers and the railway receipt was obtained for the goods.  In the present case all the goods were sent, as  indeed they had to be sent, against  the  authorisations from the various factories belonging to the second appellant which  at  the relevant time were all  situate  outside  the State of Mysore and were received in the State of Mysore  by the various purchasers. The  position of the first appellant is as was  accepted  by the  Sales  tax Officer in his order dated March  31,  1958, that of Sales Managers of the second appellant but in regard to  the  nature of the transactions the  Sales  tax  Officer found:-               " Though the property in the goods pass to the               dealers   and  consumers  outside  the   State               immediately  the goods are handed over to  the               carriers outside the state and railway receipt               is  taken  out since the goods  have  actually               been  delivered  In Mysore State as  a  direct               result   of   such  sale   for   purposes   of               consumption  in the State, sale is  deemed  to               have taken place in Mysore State".               and again he said:-               "Thus  the  sales of  cement  manufactured  by               A.C.C.     Factories     situated      outside               Mysore  .State  effected by the  dealers  M/s.               Cement   Marketing  Company  of   India   Ltd.               Bangalore, to dealers and customers in  Mysore               State   amounts   to  intrastate   sales   and               therefore liable to Mysore Sales Tax Act 48". 784 In  its judgment the High Court took into consideration  the fact  that  the  first  appellant had  a  branch  office  at Bangalore  within  the State of Mysore and that  the  public placed their orders with the first appellant for supplies of cement  against  permits  granted to them;  that  the  first appellant, who after accepting the offer for the supplies of cement,  collected the price from the  intending  purchasers and  then  directed  one  of the  factories  of  the  second

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appellant  to  supply cement to the  purchasers  and  actual delivery  to the purchaser was within the State)  of  Mysore and therefore the contention that cement was loaded  outside the State of Mysore and despatched to the purchaser did  not not  convert  sales into inter-State sales but  were  intra- state  sales.   It  appears  that the  true  nature  of  the transaction was not correctly considered by the High Court, The  modus  operandi above mentioned shows  that  before  an intending  purchaser could obtain cement he had to get  what is called an authorisation from a Government authority which nominated the factory from which the intending purchaser had to  get his supplies of cement.  That authorisation with  an order  had to be given to the first appellant; and  after  a contract  in  the standard form was entered into  the  first appellant  sent  the  order  to the  factory  named  in  the authorisation  and that factory then supplied the  requisite goods  to the purchaser.  The factory from where the  cement was to be supplied was not in the hands or at the option  of the  first  appellant,  but was entirely a  matter  for  the Government authority to decide, so that the cement which was supplied  from a particular factory was supplied not at  the choice   of  the  first  appellant  but  pursuant   to   the authorisation. It  was  contended that the sales which took  place  in  the present case in which the movement of 785 goods  was  from  one  State to another as  a  result  of  a covenant  or  incident of the contract of sale  fell  within Art. 286(2) of the Constitution and therefore the imposition ’of  Sales  tax  on such sales  was  unconstitutional.   The Article  applicable  at the relevant time i.e.,  before  its amendment was as follows: -               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)   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 ........................... .               (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 or commerce:               Provided................................." The Article had since been repealed and another  substituted in  its place by the Constitution (Sixth Amendment) Act  but the sales in question were prior to the amendment. In  the  present  case  the  contract  itself  involved  the movement  of goods from the factory to the purchaser  i.  e. across  the  broder from one State to  another  because  the factories  were  outside the State of Mysore  and  therefore transactions were 786 clearly  transactions  of  sale of goods in  the  course  of inter-State  trade  or commerce.  Taking the nature  of  the transaction  and preliminaries which are necessary  for  the sale  or purchase of cement it cannot be said that the  sale itself  did  not occasion the movement of  goods  from-  one State  to another.  The essential features of the  contracts proved  in the present case are analogous to those  in  M/s. Mohan  Lai Hargovind v. The State of Madhya  Pradesh.(1)  In

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that case the assessees were a firm carrying on business  of making  and selling birds in Madhya Pradesh.  In the  course of  their  business  they  imported  finished  tobacco  from dealers  in Bombay State, rolled it into biris and  exported the  biris to various other States.  Both the  exporters  of tobacco from Bombay State who supplied the assessees and the assessees  were registered dealers under the C. P.  &  Berar Sales  Tax  Act.,  1947.   It was  held  that  the  asessees imported  the  finished  tobacco into  Madhya  Pradesh  from persons who were carrying on in the State of Bombay business of  processing tobacco and selling the goods and there  was, as a result of these transactions movement of goods from the State of Bombay to the State of Madhya Pradesh and therefore the transactions involved movement of goods across the State border  and  they were not liable to be taxed by  virtue  of Art.  286  (2)  of  the  Constitution.   In  The  State   of Pravancore  Cochin & Others v. The Bombay Co Ltd. (1)  which was a case under art. 286 (1) (b) i. e. sale and purchase in the  course  of  export  trade,  Patanjali  Sastri,  C.  J., observed:-               "A  sale by export thus involves a  series  of               integrated  activities  commencing  from   the               agreement  of  sale with a foreign  buyer  and               ending  with  the delivery of the goods  to  a               common carrier for transport out of the               (1)  (1935) 2 S. C. R. 509.  (2) (1952) S.  C.               R. III2.               787               country  by land  or sea.  Such a sale  cannot               be  dissociated from the export without  which               it  cannot  be effectuated, and the  sale  and               resultant  export  from  parts  of  a   single               transactions.               At  p.  1120 the learned Chief  Justice  again               observed:               "We accordingly hold that whatever else may or               may not fall within article 286 (1) sales  and               purchases which themselves occasion the export               or  the import of the goods, as the  case  may               be, out of or into the territory of India come               within  the  exemption and that is  enough  to               dispose of these appeals". Thus a sale to fall within Art. 286 (1) (b) has to be a sale which  occasions  the  export.   Again  in  the,  State   of Travancore  Cochin  & Other8 v. Shammugha Vilas  Cashew  Nut Factory  &  Other8  (1) the words "in the  course  of"  were interpreted to mean a sale taking place not only during  the activities  directed to the end of exportation of the  goods out  of the contury but also as a part of or connected  with such  activities.   At  p.  63  the  learned  Chief  Justice explained the words "integrated activities" as follows:-               "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  affectuated,  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". In Endu puri Narasiham & Son v. The State of Orissa, it  was held in the case of sales covered (1) (1954) S. C. R. 53. (2) (1962) 1 S. C. R. 314. 788

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by  Art.  286 (1) (b) that only Bale or purchase  ’of  goods which occasions the export or import of the goods out of  or into the territory of India were exempt from the  imposition of  tax  on the sale or purchase of goods and in  regard  to prohibition  against imposition of tax on inter-State  sales the  test,  it was said, was that in order that  a  sale  or purchase  might  be inter-State it is essential  that  there must  be transport of goods from one State to another  under the contract of sale or purchase.  The following observatins from the Bengal Immunity Co.  Ltd. v. The State of Bihar (1) were quoted with approval in support of the position:-               "A  sale could be said to be in the course  of               inter-State  trade  only  if  two   conditions               concur:  (1)  A  sale  of  goods,  and  (2)  a               transport  of  those goods from one  State  to               another  under the contract of  sale.   Unless               both these conditions are satisfied, there can               be  no  sale  in  the  course  of  inter-State               trade". Thus  the  tests which have been laid down to bring  a  sale within  inter-State  sales  are that  the  transaction  must involve  movement  of  goods  across  the  border  (Mohanlal Hargovind’s  case  (2) ); transactions  are  inter-State  in which  as  a  direct  result of such  sales  the  goods  are actually delivered for consumption in another State; M/s Ram Narain It Ssns V. Assistant Commissioner of Sales tax (3)  a contract  of sale must involve transport of goods  from  one State to another under the contract of sale; Bengal Immunity Co’  case (1). in the case of sales in the course of  export or  import  the test laid down was a  series  of  integrated activitiesm commencing from an agreement of sale and  ending with the delivery of goods to a common (1) (1955) 2 S. C. R. 603, 784-5  (2) (1965) 2 S.G R. 509. (3) (1955) 2 S, C. R. 483, 504. 789 carrier for export by land or by sea ; The Bombay Co.   Ltd, case  (1).  "In the course of" was explained to mean a  sale taking place not only during the activities directed to  the end  of the exportation of the goods out of the country  but also  as  part  of or connected  with  such  activities  and "integrated activities" was explained in similar  langauage. This  Court again accepted these tests in Endupuri  Narasim- ham’s case (2).  In a. 3 of the Central Sales Tax Act,  1956 (Act 74 of 1956), the legislature has accepted the principal governing   inter-State   sales  as  laid  down   in   mohan Hargovind’s case (3).  The principles for determining when a sale  or  purchase  of goods takes place in  the  course  of inter-state sale or commerce outside the state are :               "S.3  A  sale or purchase of  goods  shall  be               deemed  to take place in the course of  inter-               State  trade or commerce if the sale  or  pur-               chase -               (a)   occasions the movement of goods from one               State to another ; or               (b)   is  effected by a transfer of  documents               of  title to the goods during  their  movement               from one State to another". In  Tata  Iron  & Steel Co. Ltd, Bombay  v.  S.R.  Sarkar  & Another  (4) Shah, J., in explaining what sales are  covered by el. (a) of s.3 above said :                "Cl.  (a)  of a. 3 covers sales,  other  than               those  included  in  Cl.  (b),  in  which  the               movement of goods from one state to another is               the  result of a convenant or incident of  the               contract  of sale. and property in  the  goods

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             passes in either State ." As  stated above under the contracts of sale in the  present case there was transport of goods from (1)  [1952] S C.R. 112. (3)  (1955) 2 S.G.R. 509. (2)  (1962) 1 S.C.R. 314. (4)  (1961) 1 S.C.R. 379,391, 790 outside the State of Mysore into the State of Mysore and the transactions  themselves involved movement of  goods  across the  border.  Thus if the goods moved under the contract  of sale, it cannot be said that they were intrastate sales.  It was not the volition of the first appellant to supply to the purchaser the goods from any of the factories of the  second appellant.   The factories were nominated by the  Government by  authorisations  which formed the basis of  the  contract between  the buyer and the seller.  Applying these tests  to the facts of the present case we are of the opinion that the sales  were  in  the nature of inter-State  sales  and  were exempt from Sales tax.  In these circumstances the contracts of sale in the present case have been erroneously considered to be intrastate sales. The decision in Rohtas Industrieg Ltd. v. The State of Bihar (1)  to which reference was made by the respondent does  not apply to the facts of the present case because the agreement between  the  first appellant and the  second  appellant  is different from that which existed between Rohtas  Industries Ltd. and the Cement Marketing Co of India in the case  above cited. (in an examination of the agreement between those two companies  this  court held that the  rotation.  ship  which existed  between the two was of seller and buyer and not  of principal agent.  In the present case the agreement is quite different.  In the first clause of the agreement between the two  appellants and the Patimia Cement Co. dated  April  21, 1954,  the  first  appellant  was  appointed  the  sole  and exclusive Sales Manager of the second appellant and as  such the first appellant was entitled to enter into contracts  of sale, receive payment of the same and do all seta and things necessary  for the effective management in  connection  with the  contracts  of  sale  entered  into  on  behalf  of  the principals.  The sale price and the terms and conditions  of sale were to be (1)  (1961) 12 S.T.C. 615.  791 determined by the principals.  The Sales Manager was to keep its  administrative  and technical staff at such  places  in India  as  was  determined  by  the  principals.   All   the establishment  charges  and  other  expenses  of  the  Sales Managers  were for and on behalf of the principals and  were to  be  defrayed by the principals in  proportion  to  their annual sales.  At the end of every mouth the Sales  Managers were to submit to the principals accounts showing sales con- tracts by it on behalf of each one of the principals. At the end of each financial year ending July 31 the Sales Managers had to make a. proper account of all their operations during the  year and after submitting them for confirmation to  the principals had to pay the price of annual sales realizations to  each of the principals to whom they happened to  relate. Clause  to  provided  that subject to  instructions  of  the principals  the  Sales Managers were to make  all  necessary arrangements  to secure speedy and economicial transport  of cement.   These terms are quite different from those in  the case  of Rohtas Industries Ltd. and therefore that  decision has no application to the facts of the present case. In  the  result,  the imposition of the  Sales  tax  on  the

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appellant  for the year of assessment except for the  period April 1, 1955, to September 6, 1955, was illegal and was not leviable  for that period.  The appeal is therefore  allowed to  that extent and the petition of the appellants  succeeds but  it  will  not  effect  the  tax  paid  for  the  period abovementioned.    In  view  of  the  partial   success   of appellants  they  will  be entitled to  half  costs  of  the appeal. Appeal allowed in part. (1) (1961) 12 S.T.C. 615. 792