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PETITIONER: TIRUMALA VENKATESWARA TIMBER ANDBAMBOO FIRM

       Vs.

RESPONDENT: COMMERCIAL TAX OFFICER, RAJAHMUNDRY

DATE OF JUDGMENT: 28/11/1967

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. BHARGAVA, VISHISHTHA

CITATION:  1968 AIR  784            1968 SCR  (2) 476  CITATOR INFO :  RF         1977 SC1275  (13)  C          1989 SC1555  (9)

ACT: Andhra Pradesh General Sales Tax Act 6 of 1957,  Explanation III  to  s. 2(1) (n)-Whether ultra  vires--Whether  enlarges scope of ’sale’ to include transactions which are not sales- Whether discriminatory.

HEADNOTE: The appellant firm carried on business in Andhra Pradesh and was registered as a dealer under the Andhra Pradesh  General Sales  Tax Act 1957.  In its return for the assessment  year 1962-63  the firm claimed exemption of certain  turnover  on the  ground  that it had sent the goods  to  its  commission agents  and  under  the contract of  agency  the  commission agents were empowered to pay sales-tax and had paid the same directly  to the Sales Tax Department.  When the  Commercial Tax  Officer  sought  to assess the appellant  firm  on  the aforesaid  turnover the appellant filed a writ  petition  in the  High Court which was dismissed.  In appeal before  this Court by certificate it was contended : (i) that Explanation III to s. 2(1) (n) of the Act enlarged the scope of the word ’sale’  by treating mere entrustment to an agent as  a  sale and  therefore the Explanation was ,ultra vires,  (ii)  that the  commission  agents to whom the appellant had  sent  the goods  for sale had already paid the tax and  the  appellant could  not be taxed again on the same transaction  as  there was only one sale; (iii) that the Explanation was  violative of  Art.  14  of the Constitution as it  made  an  arbitrary classification. HELD  : (i) The real effect of the third Explanation  is  to impose  the tax only when there was a transfer of  title  to the goods and not where there is a mere contract of  agency. The Explanation says in effect that when there is in reality a transfer of property by the principal to the agent and  by the   agent  in  his  turn  to  the  buyer  there  are   two transactions  of  sale.   The phrase  "when  the  goods  are transferred"  in  cls. (1) and (2) of Explanation III  on  a proper  construction  means  "when title  to  the  goods  is transferred"  and so construed it is impossible to say  that

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the  Explanation  enlarges the scope of  the  main  section. Explanation III is not. there fore ultra vires. [480 B-E] State  of Madras v. Gannon Dunkerley & Co. (Madras)  Ltd.  9 S.T.C. 353.    referred to. (ii) As  a  matter of law there is a distinction  between  a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal  and make  over  either  the sale proceeds or the  goods  to  the principal.   The  essence  of  a contract  of  sale  is  the transfer of title to the goods for a price paid or  promised to be paid.  The transferee in such a case is liable to  the transferor  as a debtor for the price to be paid and not  as agent  for the proceeds of the sale.  The essence of  agency to  sell is the delivery of the goods to a person who is  to sell  them, not as his own property but as the  property  of the  principal who continues to be the owner of  the  goods, and  will  therefore  be  liable to  account  for  the  sale proceeds.  The true relationship of the parties in                             477 each  case  has  to  be gathered  from  the  nature  of  the contract, its terms and conditions, and the terminology used by  the parties is not decisive of the  legal  relationship. [480 G-481 B] Whether  the transactions in the present case were sales  or contracts of agency was a mixed question of law and fact and must  be investigated with reference to the  material  which the appellant might be able to place before the  appropriate authority.  The question was not one which could be properly determined in an application under Art. 226 of the Constitu- tion. [482 B] W.T.  Lamb and Sons v. Goring Brick Company, Limited  [1932] K.B. 710, and Hutton v. Lippert [1883] 8 A.C. 309,  referred to. (iii)     The classification contemplated by the Explanation between  sales through commission agents who  account  fully for all collections made and sales through commission agents who  do  not  account  for  collections  is  based  upon  an intelligible differentia and it has a rational  relationship with  the object sought to be achieved by the  statute.   It did not therefore, violate Art. 14. [482 C-D]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2176 of 1966. Appeal  from the judgment and order dated April 16, 1964  of the  Andhra Pradesh High Court in Writ Petition No. 1404  of 1963. P.   Parameswara Rao for R. V. Pillai, for the appellant. P.   Ram Reddy and A. V. V. Nair, for the respondent. The Judgment of the Court was delivered by Ramaswami,  J. The appellant is a partnership firm  carrying business in bamboos, timber and firewood at Gokavaram in the State of Andhra Pradesh.  The firm had been registered as  a dealer  under the Andhra Pradesh General Sales Tax Act  (No. VI of 1957), hereinafter referred to as the ’Act’.  For  the assessment  year 1962-63, the appellant submitted  a  return showing  a gross turnover of Rs. 13,89,130.70 P and  claimed exemption  on  a  turnover  of  Rs.  13,68,174.39  P   which according  to the appellant represented the amount of  sales effected by its commission agents and sales of firewood.  By a  notice  dated  November  28,  1963,  the  Commercial  Tax Officer, Rajahmundry called upon the appellant to show cause as to why it should not be assessed for the year 1962-63  on

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a  turnover  of Rs. 13,89,130.70 P at 2  per  cent.   Eleven items were comprised in the notice.  Item No 1, relating  to a  turnover  of  Rs.  96,527.10 P  was  under  the  firewood account.   It was alleged by the appellant that it paid  the single  point tax at 2 per cent to the Forest Department  on the  amounts  for  which  the forest  goods  were  taken  in auction.   As  regards items 2 to 11 the  appellant  claimed exemption  on  the ground that its agents,  Messrs.   Kusuma Arjayya  and Batlanki Veera Venkayya, Rajahmundry, paid  the tax.  The case of the appellant was that L1 Sup.  C.I./68-16 478 it  sent goods for sale to its commission agents  and  under the contract of agency the commission agents were  empowered to pay sales-tax and had paid the same directly to the Sales Tax  Department.   In accordance with the  usual  commercial practice  the  commission agents collected  Dharmam  on  the sales  conducted by them and appropriated those  collections for  charitable purposes.  The commission  agents  furnished accounts to the appellant but in these accounts the  amounts collected   towards   sales-tax   and   Dharmam   were   not specifically shown as it was understood between the  parties that  the  amounts  collected towards  sales  tax  would  be remitted  to  the  Sales  Tax  Department  and  the  amounts collected  towards Dharmam would be credited to the  charity account  of the commission agents and suitably  utilised  by -them.  Aggrieved by the assessment notice of the respondent disallowing its claim for exemption the appellant-firm filed a  writ  petition No. 1404 of 1963 dated  December  7,  1963 before  the High Court of Andhra Pradesh under Art.  226  of the  Constitution  praying for the grant of a  writ  in  the nature  of  certiorari calling for the records  relating  to sales-tax assessments of the appellant for the year  1962-63 and  quashing the notice dated November 28, 1963  issued  by the  respondent.  By its judgment dated April 16,  1964  the High  Court  dismissed the writ petition.   This  appeal  is brought by a certificate granted by the High Court. On  behalf of the appellant it was contended, in  the  first place,  that  Explanation III to s. 2 (1 ) (n)  of  the  Act enlarged  the  scope of the word "sale" and by  means  of  a fiction  converted  what are not sales in law  into  taxable sales  for  the  purpose  of the  Act  and,  therefore,  the Explanation  was  ultra, vires of the powers  of  the  State Legislature which had no legislative competence to impose  a tax  under  Entry  48  in  List  II  of  Sch.   VII  of  the Constitution.   Section 2 (1) (n) of the Act defines  "sale" as follows :                 "sale"  with all its grammatical  variations               and  cognate expressions means every  transfer               of  the  property in goods by  one  person  to               another  in the course of trade  or  business,               for cash, or for deferred payment, or for  any               other  valuable consideration,  (and  includes               any   transfer   of   materials   for    money               consideration  in  the execution  of  a  works               contract  provided that the contract  for  the               transfer  of such materials can  be  separated               from  the  contract for the services  and  the               work  done,  although the  two  contracts  are               embodied  in  a  single document)  or  in  the               supply  or distribution of goods by a  society               (including a co-operative society), club, firm               or  associations to its members, but does  not               include a mortgage hypothecation or pledge of,               or a charge on goods;

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              NOTE  :-By Amendment Act 26, 1961, the  brac-               keted words were substituted for the words and               includes                479                 a transfer of property in goods  involved in               the execution of a works contract.                Explanation  III  :-Notwithstanding  anything               contained in this Act or in the Indian Sale of               Goods Act, 1930 (Central Act III of 1930), two               independent sales or purchases shall, for  the               purposes of this Act, be deemed to have  taken               place-                (1)  when  the goods are transferred  from  a               principal  to his selling agent and  from  the               selling agent to the purchaser, or                 (2) when the goods are transferred from  the               seller  to a buying agent and from the  buying               agent to his principal, if the agent is  found               in either of the cases aforesaid-                (i)  to  have sold the goods at one rate  and               to  have  passed on the sale proceeds  to  his               principal at another rate; or                (ii) to have purchased the goods at one  rate               and to have passed them on to his principal at               another rate; or                (iii)     not   to  have  accounted  to   his               principal  for   the  entire  collections   or               deductions  made  by  him,  in  the  sales  or               purchases  effected  by him on behalf  of  his               principal; or                (iv) to  have acted for a fictitious or  non-               existent principal;" In  our  opinion the real object of the  Explanation  is  to prevent  the misuse by the assessee of the  relationship  of principal  and  agent for the purpose of evading  tax.   The first  situation  contemplated by the  legislature  is  that covered  by cl. 2(i) of Explanation III where the agent  has sold  the goods at one rate and passed on the sale  proceeds to  its principal at another rate.  The second situation  is where  the  agent has purchased the goods at  one  rate  and has  passed them on to the principal at another  rate.   The third situation is where the agent has not accounted to  his principal  for the entire collections or deductions made  by him  in the sales or purchases effected by him on behalf  of his  principal, and the fourth is where it appears that  the agent has acted for a fictitious or non-existent  principal. It was contended on behalf of the   appellant that the State legislature was not competent to convert by a legal  fiction a  mere  entrustment of goods for sale into a  sale  and  to impose  a tax thereon.  In our opinion, there is no  warrant for this argument.  The real effect of the third Explana- 480 tion is to impose the tax only when there was a transfer  of title to the goods and not where there is a mere contract of agency.  The Explanation says in effect that where ’there is in  reality a transfer of property by the principal  to  the agent  and by the agent in his turn to the buyer, there  are two transactions of sale.  In our opinion, the phrase  "when the   goods  are  transferred"  in  cls.  (1)  and  (2)   of Explanation  III on a proper construction means "when  title to  the  goods  is  transferred"  and  so  construed  it  is impossible to say that the Explanation enlarges the scope of the  main section.  It was pointed out by this Court in  The State  of Madras v. Gannon Dunkerley & Co. (Madras)  Ltd.(1) that  the expression "sale of goods" in Entry 48 in List  II

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of Sch.  VII of the Government of India Act, 1935, cannot be construed  in its popular sense but must be  interpreted  in its  legal sense and should be given the same meaning  which it has in the Sale of Goods Act, 1930.  It is a nomen juris, its  essential  ingredients  being  an  agreement  to   sell movables  for a price and property passing therein  pursuant to  that  agreement.  In other words, it  is  necessary  for constituting  a  sale  that there  should  be  an  agreement between the parties for the purpose of transferring title in the  goods,  that the agreement must be supported  by  money consideration  and that as a result of the  transaction  the title  to the property must actually pass in the goods.   As we  have already pointed out, the third Explanation to S.  2 (1)  (n) of the Act must be interpreted to mean  that  where there  is in reality a transfer of property in the goods  by the  principal to the agent and by the agent in his turn  to the  buyer,  there  are two transactions  of  sale.   It  is therefore impossible to accept the contention put forward on behalf  of the appellant that the Explanation has  converted what, in fact, is not a sale into a sale for the purpose  of assessment to sales-tax. It  was  contended on behalf of the appellant  that  in  any event  items  Nos. 2 to II of the notice  related  to  goods which  the  appellant had sent for sale  to  the  commission agents and as the latter had already paid the sales-tax  the appellant was not liable to be assessed to tax again on  the same transaction as there was only one sale.  As a matter of law there is a distinction between a contract of sale and  a contract of agency by which the agent is authorised to  sell or  buy on behalf of the principal and make over either  the sale proceeds or the goods to the principal.  The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid.  The transferee in such a case is liable to the transferor as a debtor for the price to  be paid and not as agent for the proceeds of  the  sale. The  essence of agency to sell is the delivery of the  goods to a person who is to sell them, not as his own property but as the property of the (1)  9 S.T.C. 353. 481 principal  who  continues to be the owner of the  goods  and will  therefore be liable to account for the sale  proceeds. The true relationship of the parties in each case has to  be gathered  from  the nature of the contract,  its  terms  and conditions,  and the terminology used by the parties is  not decisive of the legal relationship.  For instance, in W.  T. Lamb  and Sons v. Goring Brick Company Limited(1) there  was an  agreement in writing by which certain  manufacturers  of bricks  and  other building materials appointed  a  firm  of builders’  merchants "sole selling agents of all bricks  and other materials manufactured at their works".  The agreement was   expressed  to  be  for  three  years  and   afterwards continuous subject to twelve months’ notice by either party. While the agreement was in force the manufacturers  informed the merchants that they intended in the future to sell their goods themselves without the intervention of any agent,  and thereafter  they effected sales to customers  directly.   It was  held by the Court of Appeal that the agreement was  one of vendor and purchaser and not one of principal and  agent. The same principle is enunciated in Hutton v. Lippert(2), in which  there  was a contract between the  defendant  and  E, which  in  its  terms purported to be one  of  guarantee  or agency; that is to say, the defendant guaranteed the sale of E’s property in whole or by lots at a fixed price, E  giving the defendant a power of attorney to deal with the  property

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as  he thought fit, and agreeing that he should receive  any surplus over and above the fixed price as his commission  on and  recompense for the said guarantee.  It was held by  the Judicial  Committee, upon a construction of  the  agreement, that  the  transaction  was  really  a  sale  and  that  the defendant was liable to pay duty on     his   purchase-money under Act II of 1863.  At page 313 of the    Report,     Sir Robert P. Collier, who delivered the opinion of the    Board, stated as follows :                "Under  these  circumstances  it  appears  to               their  Lordships  that the Chief  Justice  was               justified  in  saying that the effect  of  the               transaction  was to give Ekstein  every  right               which  a  vendor could legally claim,  and  to               confer upon the defendant every right which  a               purchaser could legally demand., Does it  make               any  difference that the parties  have  called               this transaction by the name of a guarantee  ?               It appears to their Lordships that because the               parties have used ’this term ’guarantee’ in  a               sense  which is unusual and not applicable  to               this  case,--for  Lippert  really   guaranteed               nothing,-the nature of the transaction is  not               thereby  changed; and because they  have  said               that  Lippert was to be entitled  to  whatever               Surplus or balance shall remain on the  resale               of  portions  of  the property,  if  any  were               resold, ’as commission and                (1) [1932] K.B. 710.                L1 Sup.  Cl/68---17 a                (2) [1883] 8 A.C. 309.                482                recompense  for  the  said  guarantee,’  this               expression   does  not  convert  him  from   a               purchaser into an agent." It  is  manifest  that  the  question  as  to  whether   the transactions  in the present case are sales or contracts  of agency  is  a  mixed question of fact and law  and  must  be investigated  with  reference  to  the  material  which  the appellant  might  be able to place  before  the  appropriate authority.   The question is not one which can  properly  be determined  in an application for a writ under Art.  226  of the Constitution. It  was also submitted on behalf of the appellant  that  the third  Explanation  to s. 2(1) (n) of the Act  violated  the guarantee  under  Art.  14 of  the  Constitution  since  the classification contemplated, i.e., sales through  commission agents  who account fully for all collection made and  sales through   commission   agents  who  do   not   account   for collections,  was not made on any  intelligible  differentia and  had  no  rational relationship to the  purpose  of  the statute.   In  our opinion, there is no  substance  in  this argument as the classification     is    based    upon    an intelligible differentia and it has  a rational   relationship with  the  object  sought to be achieved  by  the   statute. Counsel  for the appellant is therefore unable to make  good his submission on this aspect of the case. For  the reasons expressed we hold that the judgment of  the High  Court of Andhra Pradesh is right and this appeal  must be  dismissed.  In the circumstances of the case we  do  not propose to make any order as to costs. G.C. Appeal dismissed. 483

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