http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8  

PETITIONER: UNION OF INDIA & ANR.

       Vs.

RESPONDENT: K. G. KHOSLA & CO. (P) LTD. & OTHERS

DATE OF JUDGMENT06/03/1979

BENCH: CHANDRACHUD, Y.V. ((CJ) BENCH: CHANDRACHUD, Y.V. ((CJ) DESAI, D.A. PATHAK, R.S.

CITATION:  1979 AIR 1160            1979 SCR  (3) 453  1979 SCC  (2) 242  CITATOR INFO :  R          1981 SC 446  (6)  F          1981 SC1754  (9)  E&R        1992 SC1952  (8,9,12,15)

ACT:      Central Sales  Tax Act,  1956  S.  3(a)-Scope  of-Goods manufactured in  the State  of Haryana  in  accordance  with production programme advised by head office-Goods despatched from Delhi-Whether inter-state or intra-state sale.

HEADNOTE:      The respondent  company who  was a  manufacturer of air compressors  and   garage  equipment   had  its  factory  at Faridabad (in  the State  of Haryana) and its head office in Delhi (Union  Territory of  Delhi). The head office drew the production programme  and advised the factory to manufacture the goods  in accordance  therewith. After the goods were so manufactured in  the factory they were collected by the head office and  brought  to  Delhi  and  despatched  to  various customers whether  outside Delhi  or in  Delhi. The price of goods was  received at  the  head  office.  In  other  words excepting the  manufacture of goods at the factory all other activities, were carried out from the head office in Delhi.      In respect  of sale  of goods manufactured at Faridabad the respondent  company filed  sales tax  returns  with  the sales tax  authorities at Delhi on the ground that the sales were effected  from Delhi  by the  head office and that they were intra-state  sales within  the territory  of Delhi  and accordingly paid sales tax at Delhi.      In November,  1965, however,  the sales tax authorities of Haryana  demanded payment  of sales  tax under  the  East Punjab  General   Sales  Tax,   Act,  1948  for  the  period commencing from April 1, 1961 and ending with the year 1964- 65 pointing  out that  the sales  effected were  inter-state sales liable  to be assessed by them under the Central Sales Tax Act, 1956.      In its  writ petition  the  respondent-company  alleged that since  all its  activities were  being carried on by or through the  head office in Delhi and no sales were effected by or from the factory at Faridabad sales tax was paid by it in Delhi and since the sales tax authorities in Haryana were

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8  

demanding payment  of Central  Sales Tax  in respect  of the same  transaction   the  High   Court  might   resolve   the controversy.      The High  Court held  that the sales fell under s. 3(a) of the  Central Sales  Tax Act,  1956 and  were liable to be assessed  to   inter-state  sales   tax  by  the  Sales  Tax Authorities at  Faridabad and  accordingly ordered  that the sales tax  paid by the respondent in Delhi be transferred to the Sales Tax Authorities at Faridabad.      On appeal  the Union  of India contended that since the situs of sale was Delhi Sales Tax was payable in Delhi.      Dismissing the appeal, 454 ^      HELD: 1  (a) The  High Court  was right in holding that the sales  were inter  state sales  and that the turnover on sales was  assessable to  sales tax  under the Central Sales Tax Act, 1956 and that the amounts of sales tax wrongly paid in Delhi  be transferred  to the  Sales Tax  Authorities  at Faridabad. [462 A-B]      (b) In  order that  a sale may be regarded as an inter- state sale  it is  immaterial whether  the property  in  the goods passes  in one  State  or  another.  The  question  as regards the  nature of  the sale,  that is, whether it is an inter State sale or an intra-State sale does not depend upon the circumstance  as to  in which  State the property in the goods passes.  It may pass in either and yet the sale can be an inter-State sale. [461 G-H, 462 A]      In the instant case the contracts of sales were made at Delhi and  in  pursuance  of  those  contracts,  goods  were manufactured  at   Faridabad  according   to  specifications mentioned in  the contracts.  This, therefore,  is not  that type of  case in which goods are manufactured in the general course of  business for  being sold  as and  when offers are received by  the manufacturer  for their purchase. Contracts of sales  were finalised  in the  instant case  at Delhi and specific goods  were manufactured  at Faridabad in pursuance of those  contracts. These  were "future  goods" within  the meaning of s. 2(6) of the Sale of Goods Act, 1930. After the goods were  manufactured to agreed specifications, they were despatched to  the head  office at Delhi for being forwarded to the  respective customers  at whose instance and pursuant to the  contracts with whom the goods were manufactured. The despatch of  goods of  Delhi was  but a  convenient made  of securing the  performance of  contracts made  at Delhi. Thus the movement of goods was occasioned from Faridabad to Delhi as a  result or  incident of  the contracts  of sale made in Delhi. [458 H, 459 A-D      (c) For the purpose of s. 3(a) it is not necessary that the contract  of sale  must itself provide for and cause the movement of  goods or  that the  movement of  goods must  be occasioned specifically  in accordance  with  the  terms  of contract of sale. [459 E]      Tata Iron  and Steel Co. Ltd., Bombay v. S. S. Sarkar & Ors., [1961]  1 SCR  379; Central  Marketing Co. of India v. State of Mysore, [1963] 3 SCR 777; State Trading Corporation of India  v. State  of Mysore,  [1963] 3  SCR 792; Singareni Collieries  Co.   v.  Commissioner   of  Commercial   Taxes, Hyderabad, [1966]  2 SCR  190; K.  G. Khosla  & Co.  v.  Dy. Commr. of Commercial Taxes, [1966] 3 SCR 352; Oil India Ltd. v. The  Superintendent of  Taxes &  Ors., [1975]  3 SCR 797; followed.      Tata Eng. & Locomotive Co. Ltd. v. The Asstt. Commr. of Commercial Taxes & Anr., [1970] 3 SCR 862; distinguished.      State of  Bihar &  Anr. v.  Tata Eng.  & Locomotive Co.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8  

Ltd., [1971] 2 SCR 849; referred to.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 2077 of 1972.      From the Judgment and Order dated 2-8-1971 of the Delhi High Court in Civil Writ No. 162-D of 1966.      E. C. Agarwala and R. N. Sachthey for the Appellants.      Lal Narain Sinha, K. K. Jain, S. K. Gupta, Pramod Dayal and Bishamber Lal for the Respondent No. 1 455      Rameshwar Dial,  Adarsh Fial,  and  A.  D.  Mathur  for Respondents 2-3.      The Judgment of the Court was delivered by      CHANDRACHUD, C. J.-This appeal by certificate raises an interesting controversy between the Sales Tax Authorities in the Union  Territory of  Delhi and  those  in  Haryana,  the question being as to which of the two authorities can assess respondent 1  to sales  tax. One  of the  reliefs sought  by respondent 1  is that until the Sales Tax authorities of the two territories  settle  their  differences,  no  sales  tax should be  levied or  recovered from  it since,  it does not know to  whom to pay the tax. This controversy arises on the following facts.      Respondent 1  is a private limited company called K. G. Khosla &  Co. (P)  Ltd., having its head office in the Union Territory of  Delhi at  1, Deshbandhu Gupta Road, New Delhi. The company  carries on  business  in  Air  Compressors  and garage equipment  which it  manufactures in  its factory  at Faridabad, which  was formerly in the State of Punjab and is now a part of the State of Haryana.      For  the   purposes  of  sales  tax,  respondent  1  is registered as  a dealer both in the Union Territory of Delhi and in  the State  of Haryana. It filed returns of sales tax with the  sales Tax authorities in Delhi since, according to it, the  sale  of  goods  manufactured  in  the  factory  at Faridabad was  being effected from Delhi by its head office. The sales tax was being paid by the company under the Bengal Finance (Sales  Tax) Act,  1941 as extended to Delhi, on the basis that  the sales  effected by  the company  were intra- State sales  within the  territory of Delhi. On November 24, 1965, however, the Sales Tax Assessing Authority at Gurgaon, which was then in the State of Punjab but which subsequently became a  part of the State of Haryana, sent a notice to the company under  sections 11 and 14 of the East Punjab Central Sales Tax  Act, 1948  and rule  33 made  thereunder that, in respect of the period commencing on April 1, 1961 and ending with the  year 1964-65,  the sales  made by the company were liable to  assessment in  Haryana.  On  March  13,  1968  an assessment was  made by the Assessing Authority at Faridabad on the  basis that  the sales  effected by  the company were inter-State sales  liable to  be assessed to sales tax under the Central Sales Tax Act, 74 of 1956. An appeal against the order of assessment is said to be pending.      In the  meanwhile, on  February 14,  1966, the  company filed a  writ petition  before the Punjab High Court Circuit Bench at  Delhi which,  after the recorganisation of States, was dealt with by the Delhi High 456 Court. The  Chief Commissioner  of the  Union  Territory  of Delhi and  the Assessing  Authority of  the  territory  were impleaded as  respondents 1  and 2  to  the  writ  petition. Respondent 3  was the  State of  Punjab and respondent 4 the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8  

Assessing Authority  at  Gurgaon.  Respondent  3  was  later substituted by the State of Haryana.      The company  contended by its writ petition that except the manufacturing  of goods at the Faridabad factory, all of its activities, including those of booking of orders, sales, despatching of  goods, billing  and receiving  of sale price were being  done by and through the head office in Delhi and that no  sales were  effected by or from the factory. Since, however, both  the Sales  Tax authorities,  namely, at Delhi and Haryana, were demanding payment of sales tax on the same sale transactions,  the company  prayed by its writ petition that the  High Court  do resolve the controversy between the Sales Tax  authorities of  the two  States  and  decide  the question of  their respective  jurisdiction  to  assess  its turnover.      The State of Haryana contended by its counter affidavit to the writ petition that the goods were manufactured by the company at  Faridabad in pursuance of contracts of sale with outside purchasers,  that those  goods were  appropriated to the various  contracts of  sale in  the State of Haryana and that the  movement of  the goods from Faridabad to Delhi and onwards was  caused as a necessary incident of the contracts of sale  made by  the company.  The sales,  according to the State of  Haryana had  taken place  at Faridabad  during the course of inter-State trade.      The Union  of India,  on the other hand, contended that the goods  were brought  from Faridabad  to Delhi  and  were thereafter sold  by the  company to  the various  purchasers outside Delhi.  These sales according to the Union of India, were governed by the Bengal Finance (Sales Tax) Act, 1941 as extended to  Delhi, their situs being the Union Territory of Delhi.      The Delhi  High Court  by its  judgment dated August 2, 1971 allowed  the writ  petition and  granted a  declaration that the  sales effected  by respondent  1 which  fell under section 3 (a) of the Central Sales Tax Act, 1956 were liable to be  assessed to  inter-State sales  tax by  the Sales Tax authorities at  Faridabad  since,  those  sales  caused  the movement of  goods from  Faridabad to  Delhi. The High Court added that  the writ  petition was  confined  to  the  goods manufactured  at  Faridabad  in  pursuance  of  pre-existing contracts of sales and therefore, its judgment would have no application to the local sales 457 effected by  respondent 1  at Delhi. In the result, the High Court passed an order directing that the amount of tax which respondent 1  had wrongly  paid to the sales tax authorities at Delhi  on the inter-State sales between 1.4.1961 to 30-9- 1965 be transferred by the Sales Tax authorities at Delhi to the Sales  Tax authorities  at Faridabad. The High Court has granted a  certificate of  fitness to  the Union of India to file an  appeal to  this Court under Article 133, (1) (b) of the Constitution.      The question  which arises  for decision is whether the sales made  by respondent  1 were  made at  Faridabad in the course of  inter-State trade  as contended  by the  State of Haryana or  whether  they  are  intra-State  sales  effected within the  Union Territory  of Delhi  as contended  by  the appellant, the  Union of  India. The answer to this question would depend  upon the  course and nature of transactions in relation to  which the  movement of  goods was  caused  from Faridabad to  Delhi and  the terms of the contracts of sales which caused  that movement.  But before  adverting to those aspects of  the matter,  it would be necessary to notice the relevant provisions  of the Central Sales Tax Act 74 of 1956

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8  

("The Act").      Section 3 of the Act provides as follows:           "3. When  is a  sale or  purchase of goods said to      take place  in  the  course  of  inter-State  trade  or      commerce:-      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 purchase:-           (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." There are  two Explanations  to the section but they have no bearing on the appeal.      Section 9(1) of the Act provides as follows:-           9. "Levy  and collection  of tax and penalties (1)      the tax  payable by  any dealer under this Act on sales      of goods  effected by  him in the course of inter-State      trade or  commerce,  whether  such  sales  fall  within      clause (a)  or clause (b) of section 3, shall be levied      by the  Government of India and the tax so levied shall      be collected by that Government 458      in accordance  with the  provisions of sub-section (2),      in the  State from  which the  movement  of  the  goods      commenced." There  is   a  proviso  to  section  9(1)  to  which  it  is unnecessary to refer since it has no application.      In the  light of  these  provisions,  what  has  to  be considered is  whether the  sales effected  by respondent  1 occasioned the  movement of  goods from one State to another State, which  on the  facts of  the instant case would mean, from the  State of  Haryana to the Union Territory of Delhi. It is  only if  a sale  occasions the movement of goods from one State  to another  that it  can be  deemed to have taken place in  the course of inter-State trade or commerce within the meaning  of section  3 (a)  of the  Act. Clause  (b)  of section 3 is not relevant for our purpose.      The course and manner of its business have been set out by respondent  1 in paragraphs 3 and 27 of the writ petition in the following terms:           "3. Orders  for the  supply of  goods from various      parties are received by the petitioner’s company at its      head office  in Delhi.  The head  office  draws  out  a      production  programme   and  advises   the  factory  to      manufacture the  goods in  accordance therewith.  After      the goods are so manufactured in the factory, the goods      are collected  by the  head office  and brought  to its      head office  in Delhi.  From its  head office the goods      are despatched  to various  customers  whether  outside      Delhi or  in Delhi. The price of goods is also received      at the  head office.  In short,  the position  is  that      excepting the  manufacture of goods at the factory, all      other activities  including that  of booking of orders,      sales, despatching  and billing  and receiving  of sale      price are  being carried  out from  the head  office in      Delhi."           "27. The  goods manufactured  in the  factory  are      future goods  within the  meaning of  the Sale of Goods      Act and  the dispute  does  not  relate  to  any  ready      goods."      It is  clear  from  these  averments  that  goods  were manufactured by  respondent 1  in its  factory at Faridabad, Haryana, in  pursuance of  specific orders  received by  its

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8  

head office  at Delhi.  The contracts  of sales were made at Delhi and  in  pursuance  of  those  contracts,  goods  were manufactured  at   Faridabad  according   to  specifications mentioned in  the contracts.  This, therefore,  is not  that type of  case in which goods are manufactured in the general course of business for being 459 sold as and when offers are received by the manufacturer for their purchase.  Contracts of  sales were  finalised in  the instant case  at Delhi  and specific goods were manufactured at Faridabad  in pursuance  of those  contracts. Those  were "future goods"  within the  meaning of  section 2(6)  of the Sale of  Goods Act,  1930. After the goods were manufactured to agreed  specifications, they  were despatched to the head office at  Delhi  for  being  forwarded  to  the  respective customers at  whose instance  and pursuant  to the contracts with whom  the goods  were manufactured.  The goods could as well  have  been  despatched  to  the  respective  customers directly from  the factory  but they  were sent in the first instance to  Delhi as  a matter  of convenience, since there are better  godown and  rail facilities at Delhi as compared with Faridabad. The despatch of the goods of Delhi was but a convenient mode  of securing  the performance  of  contracts made at  Delhi. Goods  conforming to  agreed  specifications having been manufactured at Faridabad, the contracts of sale could be  performed by  respondent 1 only by the movement of the goods  from Faridabad  with the  intention of delivering them to  the purchasers.  Thus, the  movement of  goods  was occasioned from  Faridabad to  Delhi as a result or incident of the contracts of sale made in Delhi.      It is  true that  in the  instant case the contracts of sales did  not require or provide that goods should be moved from Faridabad  to Delhi. But it is not true to say that for the purposes of section 3(a) of the Act it is necessary that the contract  of sale  must itself provide for and cause the movement of  goods or  that the  movement of  goods must  be occasioned specifically  in accordance with the terms of the contract of  sale. The  true position in law is as stated in Tata Iron  and Steel  Co. Ltd.,  Bombay v.  S. R. Sarkar and others(1)  wherein   Shah,  J.  speaking  for  the  majority observed that  clauses (a)  and (b)  of section 3 of the Act are mutually exclusive and that section 3(a) covers sales in which the  movement of  goods from  one State to another "is the result  of a  covenant or  incident of  the contract  of sale, and  property in  the goods  passes in  either  State" (page 391). Sarkar, J. speaking for himself and on behalf of Das Gupta,  J. agreed with the majority that clauses (a) and (b) of section 3 are mutually exclusive but differed from it and held that "a sale can occasion the movement of the goods sold only  when the terms of the sale provide that the goods would be  moved; in other words, a sale occasions a movement of goods  when the contract of sale so provides" (page 407). The view  of the  majority was approved by this Court in the Central 460 Marketing Co.  of India v. State of Mysore,(1) State Trading Corporation of  India v.  State of  Mysore(2) and  Singareni Collieries  Co.   v.  Commissioner   of  Commercial   Taxes, Hyderabad.(3) In  K. G.  Khosla & Co. v. Deputy Commissioner of Commercial  Taxes,(4) counsel for the Revenue invited the Court to  reconsider the  question but the Court declined to do so.  In a recent decision of this Court in Oil India Ltd. v. The  Superintendent of  Taxes & others(5) it was observed by Mathew,  J., who  spoke for  the Court,  that: (1) a sale which occasions  movement of goods from one State to another

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8  

is a  sale in  the course of inter-State trade, no matter in which State  the property in the goods passes; (2) it is not necessary  that   the  sale  must  precede  the  inter-State movement in  order that  the sale  may  be  deemed  to  have occasioned such  movement; and  (3) it is also not necessary for a sale to be deemed to have taken place in the course of inter-State trade  or commerce,  that the covenant regarding inter-State Movement  must  be  specified  in  the  contract itself. It  would be enough if the movement was in pursuance of and  incidental to  the contract  of sale (page 801). The learned Judge added that it was held in a number of cases by the Supreme  Court that  if the  movement of  goods from one State to  another is the result of a covenant or an incident of the  contract of  sale, then  the sale  is an inter-State sale.      The decision  in  Tata  Engineering  &  Locomotive  Co. Limited v.  The Assistant  Commissioner of  Commercial Taxes and Another(6)  on which the Union of India relies, proceeds on a  different consideration  and is  distinguishable.  The appellant therein  carried on  the business of manufacturing trucks in Jamshedpur in the State of Bihar. The sales office of the  appellant in  Bombay used to instruct the Jamshedpur factory to  transfer stocks of vehicles to the stockyards in various States  after taking  into  account  the  production schedule and  requirements of customers in different States. The stocks available in the stockyards were distributed from time to  time to  dealers. The transfer of the vehicles from the factory  to the  various  stockyards  was  a  continuous process and  was not  related  to  the  requirement  of  any particular customer.  It  was  the  stockyard  incharge  who appropriated the required number of vehicles to the contract of sale  out of  the stocks  available with  him. Until such appropriation of vehicles was made, it was open 461 to the  company to  allot any vehicle to any purchaser or to transfer the  vehicles from  the stockyard in one State to a stockyard in  another State.  At page  870 of  the report, a statement occurs  in the judgment of Grover, J., that it was not possible  to comprehend  how in  the above  situation it could be  held that  "the movement  of the vehicles from the works to  the stockyards  was occasioned  by any covenant or incident of  the contract of sale." This statement is relied upon by the Union of India in support of its contention that the contract of sale must itself provide for the movement of goods from  one State  to another. We are unable to read any such implication in the observation cited above. At page 866 of the  report, after  referring to  certain decisions,  the Court observed  that  the  principle  admits  of  no  doubt, according to  the decisions of this Court, that the movement of goods  "must be  the result  of a covenant or incident of the contract of sale."      This decision  may be  usefully contrasted with another decision between  the same  parties, which  is  reported  in State of  Bihar &  Anr. v. Tata Engineering & Locomotive Co. Ltd.(1). In that case the turnover in dispute related to the sales made by the company to its dealers of trucks for being sold  in   the  territories   assigned  to  them  under  the dealership agreements. Each dealer was assigned an exclusive territory and  under the  agreement between  the dealers and the company,  they had to place their indents, pay the price of the goods to be purchased and obtain delivery orders from the Bombay  office of  the company.  In  pursuance  of  such delivery orders  trucks used to be delivered in the State of Bihar to  be taken  over to  the territories assigned to the dealers. Since  under the terms of the contracts of sale the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8  

purchasers were  required to remove the goods from the State of Bihar  to other  States, no  question arose  in the  case whether it  was or  was not  necessary  for  a  sale  to  be regarded as  an inter-State  sale  that  the  contract  must itself provide  for the  movement of goods from one State to another. If  a contract  of sale  contains a stipulation for such movement,  the sale would, of course, be an inter-State sale. But  it an  also be  an inter-State  sale, even if the contract of sale does not itself provide for the movement of goods from  one State  to another  but such  movement is the result of  a covenant  in the  contract of  sale  or  is  an incident of that contract.      The decisions to which we have referred above show that in order that a sale may be regarded as an inter-State sale, it is immaterial whether the property in the goods passes in one State  or another. The question as regards the nature of the sale, that is, whether it is an inter- 462 State sale  or an intra-State sale, does not depend upon the circumstances as to in which State the property in the goods passes. It  may pass in either State and yet the sale can be an inter-State sale.      The High  Court was,  therefore, right  in holding that the sales  in question  are inter-State  sales and  that the turnover of  sales is  assessable to  sales  tax  under  the Central Sales Tax Act, 1956 at the instance of the Sales Tax authorities at Faridabad. The amount of tax which respondent has wrongly  paid to  the Sales  Tax authorities at Delhi on such inter-State sales from 1-4-1961 to 30-9-1965 shall have to be  transferred by  the Sales Tax authorities at Delhi to the Sales  Tax authorities  at Faridabad, as directed by the High Court.      The appeal  is accordingly  dismissed but there will be no order as to costs. N.K.A                                      Appeal dismissed. 463