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PETITIONER: INDIAN OIL CORPORATION LTD. & ANR.

       Vs.

RESPONDENT: UNION OF INDIA AND ORS.

DATE OF JUDGMENT10/09/1980

BENCH: GUPTA, A.C. BENCH: GUPTA, A.C. FAZALALI, SYED MURTAZA KAILASAM, P.S.

CITATION:  1981 AIR  446            1981 SCR  (1) 673

ACT:      Sales Tax  legislation-Central  Sales  Tax  Act,  1956- Section 3(1)-Factory  in Barauni  in Bihar-Naphtha  sent  by pipeline  from  Barauni  to  kanpur  in  U.P.-Orders  placed pursuant to  an agreement  by the  buyer in  Kanpur  on  the seller’s office  in Kanpur-Sale-Whether  taxable  under  the Central Sales Tax or U.P. Sales Tax Act.

HEADNOTE:      The  Indian  Oil  Corporation  was  a  manufacturer  of naphtha with  its works  at Barauni  in Bihar  while the 5th respondent  was  a  manufacturer  of  fertilizers  with  its factory at  Kanpur.  The  Indian  Oil  Corporation  supplies naphtha to the 5th respondent’s fertilizer factory at Kanpur through a pipeline. Both the buyer and the seller have their offices at  Kanpur and indents are addressed by the buyer to the seller at their Kanpur office. The pipeline from Barauni to the  petitioner’s depot at Kanpur has been constructed by the petitioner,  the pipeline  between the  buyer’s and  the seller’s fences is however constructed by the buyer, the 5th respondent.      On the  question whether  the sale of naphtha should be taxed under  the Central  Sales Tax  Act or  under the  U.P. Sales Tax  Act, the U.P. authorities insisted that since the indent had  been placed  by the buyer on the seller at their Kanpur Office  the sale  was a local sale while the sale tax authorities in  Bihar insisted that since there was transfer of goods  from one State to another the sale was inter-State chargeable to tax under the Central Sales Tax Act.      Allowing the petition, ^      HELD: On  the facts  of the  present case the sales are clearly inter-State  sales and  the State  of  U.P.  had  no jurisdiction to  assess the  petitioners to  sales tax under the State  Act. As  the movement  of naphtha  commences from Barauni in  Bihar the  sales tax  payable on the sales under the agreement  can be  assessed and  collected only  by  the authorities  in   the  State  of  Bihar  on  behalf  of  the Government of  India in  view of  section 9  of the  Central Sales Tax Act. [680E]      It is now well-settled by a series of decisions of this Court that a sale shall be an inter-State sale under section

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3(a) if  there is  a contract of sale preceding the movement of goods  from one  State to another and the movement is the result of  a covenant  in the  contract of  sale  or  is  an incident of  that contract;  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. [678H- 679A] 674      Tata Iron  & Steel  Co. Ltd.  v. S.  R. Sarkar [1961] 1 S.C.R. 379;  Kelvinator of  India Ltd.  v. State  of Haryana [1974] 1  S.C.R. 463;  Oil India  Ltd. v.  Superintendent of Taxes [1975]  3 SCR  767; Balabhagas  Hulaschand v. State of Orissa [1976]  2 SCR  939; Union  of India v. K. G. Khosla & Co. (P) Ltd. [1979] 3 SCR 453, referred to.      The terms of the agreement make it quite clear that the sales of  naphtha to  the respondent were inter-State sales. The source  of supply is the seller’s refinery at Barauni in Bihar and  the destination is the buyer’s factory at Kanpur. This clause  alone is  sufficient to prove that the sales in question were inter-State sales. [679B-C]      Clause 3(iii)  of the  agreement which  says  that  the naphtha  shall   be  supplied  against  indents  in  writing addressed to  the seller  at their  installation  at  Kanpur cannot be  read in  isolation. Sub-clause  (iv) of  clause 3 sets out  the details  of the  buyer’s requirement  for  the first four  years and  thereafter. Under clause 8 Indian Oil Corporation are  bound not  only to  bring  the  contractual quantity of  naphtha from  Barauni to  the  seller’s  Kanpur installation but  also to  provide at their own cost storage facilities at  Kanpur of  a capacity  equivalent to not less than 30  days’ requirement  of the  buyer. The  indents  are therefore not outside the agreement but are relatable to the buyer’s requirements under the agreement. It is obvious that the sales  under the  agreement  are  not  possible  without inter-State movement of naphtha. Clause 3 read with clause 8 also proves  that really there are no two movements but only one movement from Barauni to Kanpur pursuant to the contract of sale  and the  arrangement regarding  storage  facilities provided in clause 8 is only for operational convenience, it is only  a mechanism  devised to  facilitate the transfer of naphtha through  the seller’s  pipeline to  their  depot  at Kanpur and  from there  to the  buyer’s  factory  at  Kanpur through the  pipeline constructed at the buyer’s cost. It is relevant in  this connection to note that under clause 7(ii) the cost of transferring naphtha from Barauni to the buyer’s fence is to be borne by the buyer. [679G-H; 680A-C]

JUDGMENT:      ORIGINAL JURISDICTION: Writ Petition No. 444 of 1979.           (Under Article 32 of the Constitution)      F. S.  Nariman & Anil B. Dewan, B. D. Barucha, Ravinder Narain and Talat Ansari for the Petitioner.      A. Subhashini for Respondent No. 1      Lal Narain  Sinha, Att.  Genl. and  U.P. Singh  for the Respondents Nos. 2-3.      Soli J.  Sorabjee, V. K. Pandita and E. C. Agarwala for R.4.      Subrata Roy  Chowdhury, Biswaroop Gupta, Bhaskar Gupta, Surhid Roy Chowdhury & D. N. Gupta for Respondent No. 5.      The Judgment of the Court was delivered by 675      GUPTA, J.-In  this petition  under Article  32  of  the Constitution of  India dealer  seeks relief  from  the  same

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sales being  assessed to  sales tax  both under  the Central Sales Tax  Act  and  the  U.P.  Sales  Tax  Act.  The  first petitioner Indian  Oil Corporation  Limited, IOC  for short, are a  government company  incorporated under  the Companies Act,  1956   engaged  inter  alia  in  the  manufacture  and marketing of  petroleum products.  The second  petitioner is the Managing  Director and  a shareholder  of IOC.  Union of India has  been impleaded  as the  first respondent  in  the petition. The 2nd respondent is the Assistant Superintendent of Commercial  Taxes, Central Circle, Bihar. The 3rd and 4th respondents are  respectively the  State of  Bihar  and  the State of  U.P. The  5th respondent Indian Explosives Limited are a  company having  their registered  office at Calcutta; they have  a factory  at  Panki,  Kanpur  in  Uttar  Pradesh manufacturing urea  fertilizers.  IOC  have  a  refinery  at Barauni in  the State  of Bihar  and also  a depot at Panki, Kanpur. In  1966 IOC  completed pipeline from their refinery at Barauni in Bihar to Kanpur in U.P. through Patna in Bihar and Mughalsarai  and Allahabad both in U.P. At their Barauni refinery IOC  manufacture naphtha which is the principal raw material for production of fertilizers.      On February  9, 1970  an agreement  was entered into by and between IOC and the 5th respondent in terms of which IOC were to  sell and  the 5th respondent were to buy the entire quantity  of  naphtha  required  for  the  5th  respondent’s fertilizer factory  at Kanpur.  Below is  a summary  of  the different clauses of the agreement that are relevant for the present  purpose;   the  numbers   given  to  the  different paragraphs in  this summary  follow  the  numbering  of  the corresponding clauses of the original agreement:      1.   The agreement  shall be  deemed to  have come into           force from  September 10, 1969 [when the supply of           naphtha commenced]  and shall remain in force till           December 31,  1980. It  shall continue  to  be  in           force thereafter unless terminated by either party           giving to the other not less than one year’s prior           notice  of   the  intention   to   terminate   the           agreement.      2.   The  naphtha  to  be  supplied  shall  be  of  the           specification  set   out  in  Schedule  I  of  the           agreement.      3.   (i)  The   quantity  of   naphtha  that   the  5th           respondent agree  to buy  and IOC  agree  to  sell           shall be  2,50,000 tonnes  per annum  which is the           maximum rate per annum.      (iii) The naphtha shall be supplied against the buyer’s           indents in  writing addressed to the seller at the           seller’s Panki/Kanpur installation. 676      (iv) It is  agreed  that  the  buyer’s  requirement  of           naphtha for  the first four years shall be 95,000,           1,70,000,    2,00,000    and    2,25,000    tonnes           respectively.     (viii)  In case  the buyer fails to take delivery during           any year  the quantities  of naphtha as stipulated           above for  reasons other  than  Force  Majeure  at           their Kanpur  plant, the  seller shall be entitled           to sell the quantity which the buyer has failed to           lift. Similarly if the seller fails to deliver the           stipulated quantities  of naphtha  during any year           for reasons  other than  Force  Majeure  at  their           Barauni refinery  and/or the transportation system           from Barauni  to  their  Panki  installation,  the           buyer shall  be entitled  to purchase the quantity           not delivered in that year from other sources.

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    4.   The supply  of naphtha  to the buyer shall be made           from the seller’s refinery at Barauni.      5.   The  price   of  naphtha  shall  be  exclusive  of           transfer charges,  excise duty and all other taxes           levies which shall be recovered by the seller from           the buyer at actual rates prevailing and levied by           concerned agencies from time to time.      7.   (i) Naphtha  shall be  supplied through a pipeline           at the fence of the buyer’s fertilizer factory and           the pipeline  between the buyer’s and the seller’s           fences shall  be constructed by the buyer at their           expense.      (ii) The cost  of transferring  naphtha by the pipeline           from the  point of its manufacture to the fence of           the buyer’s  fertilizer factory  shall be borne by           the buyer.      8.   The seller  shall provide  at their  cost  storage           facilities   at    the    seller’s    Panki/Kanpur           installation of  a capacity equivalent to not less           than 30 days’ requirement of the buyer.      10.  (iii) Three samples of naphtha for testing will be           taken from the seller’s tank at their Panki/Kanpur           installation prior  to transfer in the presence of           buyer’s representatives  at such  frequency as may           be mutually agreed.      According to the 5th respondent, since the commencement of supply  of naphtha under the aforesaid agreement IOC went on charging  from them  sales tax  at the rate prescribed by the U.P.  Sales Tax  Act on  the plea  that the  sales  were chargeable under  the said  Act. On  or about March 16, 1974 the  assessing  authority  under  the  U.P.  Sales  Tax  Act assessed IOC  to sales tax under the said Act on their total turnover for the assessment year 1969-70 including 677 the  sales  of  naphtha  to  the  5th  respondent.  The  5th respondent filed a writ petition in the Allahabad High Court challenging the  assessment made on the basis that the sales were local  and asserting  that they were inter-state sales. Before the  writ petition was disposed of the U.P. assessing authority assessed  IOC  for  the  assessment  year  1970-71 treating the  sale of naphtha to the 5th respondent as local sale. On  August 27,  1975 the  Allahabad High Court allowed the said  writ  petition  quashing  the  impugned  order  of assessment to  the extent  it sought  to levy  tax under the U.P. Sales  Tax Act  on the  sales of  naphtha  to  the  5th respondent. The  High Court  held that  the sales  under the agreement dated February 9, 1970 were inter-state sales. IOC preferred an  appeal against  the  order  of  assessment  in respect of  the assessment  year 1970-71  and  although  the appeal was  on grounds not relevant for the present purpose, it is  necessary to refer to it because at a later stage IOC had the  scope of  the appeal  enlarged, induced  by the 5th respondent according  to IOC, by including a ground that the sales of  naphtha under the agreement were interstate sales. On June  29, 1978  the 2nd respondent levied sales tax under the Central  Sales Tax Act on the sales of naphtha by IOC to the 5th  respondent for the assessment year 1970-71 treating them as  inter-state sales.  Under section  9 of the Central Sales Tax  Act the tax levied under that Act is collected in the State from which the movement of the goods commenced; in this case  the movement commenced from Barauni in Bihar. IOC preferred an  appeal against  this order  to  the  appellate authority. For  the assessment  year 1971-72  the  assessing authority under  the U.P. Sales Tax Act treated the sales of naphtha  to   the  5th   respondent  as   inter-state  sales

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presumably  in   view  of  the  aforesaid  judgment  of  the Allahabad High  Court. This  assessment order was challenged by the  Commissioner of  Sales Tax,  U.P. in revision before the appropriate  authority. For the same assessment year the Bihar authority  assessed the  sales on  the basis they were inter-state sales.  For the next assessment year 1972-73 the U.P. authority  again treated the sales as inter-state sales and again  the order  was  challenged  in  revision  by  the Commissioner of  Sales Tax,  U.P. The  Bihar authority  also treated the  sales  for  that  year  as  inter-state  sales. Thereafter for  the assessment  years  1973-74  and  1974-75 somewhat surprisingly the U.P. assessing authority went back on the view taken in the immediately preceding two years and again  treated   the  sales  as  local  sales  and  the  5th respondent  preferred  appeals  from  these  two  orders  of assessment. In this confused situation IOC filed the instant writ petition  in this  Court on May, 1, 1979. Meanwhile the appellate authority  under the  U.P. Sales  Tax Act  dealing with the  appeal preferred  by  IOC  against  the  order  of assessment relating to 678 the year  1970-71 had  remanded the  case to  the  assessing authority and  the assessing  authority by  his order  dated December 20, 1979 held that the sales were local sales.      The  5th   respondent   had   started   several   other proceedings to  avoid the  sale of naphtha to them under the agreement dated February 9, 1970 being assessed to sales tax under the U. P. Act. On August 29, 1977 they filed a suit in the Calcutta  High Court against IOC seeking to restrain IOC from collecting sales tax from them under the U.P. Sales Tax Act. The 5th respondent also filed two writ petitions in the Allahabad High  Court, Nos.  102 and  103 of 1978. The first petition challenges  the assessment  order relating  to  the year 1970-71 made by the U.P. authority. The second petition is directed  against the  revisional proceedings  started by the Commissioner  of Sales  Tax,  U.P.  in  respect  of  the assessment years  1971-72 and 1972-73. All these proceedings are still pending.      The petitioners’  case in  the present writ petition is that the  sales of  naphtha to the 5th respondent were local sales in  Kanpur and  as such they were assessable under the U.P. Sales Tax Act and that the assessment orders dated June 29,  1978   and  November  30,  1978  respectively  for  the assessment year  1970-71 and 1971-72 made by the Bihar Sales Tax authority  under  the  Central  Sales  Tax  Act  are  in violation  of   the  fundamental   rights  guaranteed  under Articles 19  and  31  of  the  Constitution  of  India.  The petitioners seek  a writ  in the  nature of  certiorari  for quashing the  aforesaid assessment  orders and a writ in the nature of  mandamus directing  the Bihar sales tax authority to forebear  from assessing  the sales of naphtha to the 5th respondent  on   the  basis  they  were  inter-state  sales. Alternatively the  petitioners pray, in the event it is held that "the  sales are  inter-state sales  and not intra-state sales", for  "appropriate reliefs,  orders, and  directions" directing the  State of  U.P. not to assess, levy or recover any sales  tax on the sales of naphtha to the 5th respondent under the agreement dated February 9, 1970.      Section  3(a)  of  the  Central  Sales  Tax  Act,  1956 provided that  "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 occasions the movement of goods from one State to another". It is now well settled by a series of decisions of  this Court that a sale shall be an inter-state sale under  section 3(a)  if there  is a  contract  of  sale

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preceding the  movement of  goods from  one state to another and the movement is the result of a covenant in the contract of sale  or is an incident of that contract; in order that a sale may be regarded as an inter-state sale it is immaterial whether the property in the 679 goods  passes  in  one  state  or  another.  Some  of  these decisions are:  Tata Iron  & Steel  Co. Ltd. v. S. R. Sarkar [1961] 1  SCR 379,  Kelvinator of India Ltd. v. The State of Haryana  [1974]   1  SCR   463,  Oil   India  Ltd.   v.  The Superintendent  of   Taxes  &   others  [1975]  3  SCR  797, Balabhagas Hulaschand  v. State  of Orissa  [1976] 2 SCR 939 and Union of India and Anr. v. K. G. Khosla & Co. (P) Ltd. & Ors. [1979]  3 SCR  453. In  our opinion  the terms  of  the agreement dated  February 9,  1970 summarized  above make it quite clear  that the sales of naphtha to the 5th respondent were inter-state  sales. Under  clause 4  of  the  agreement seller is  "to make  the supply of naphtha to the buyer from its refinery  at Barauni".  The source of supply is thus the seller’s refinery at Barauni in Bihar and the destination is the buyer’s  factory at  Kanpur. This  one clause  alone  is sufficient to  prove that  the sales in question were inter- state sales.      However, on  behalf of the petitioners and the State of U.P. it  is contended  that the  sales were  not inter-state sales and  were  local  sales  within  the  State  of  Uttar Pradesh. It  is pointed out from clause 3(iii) that supplies of naphtha  are made  on  the  buyer’s  indents  in  writing addressed to the seller at their Kanpur installation and not at their  refinery at  Barauni which, it is contended, shows that the  supplies are  made from IOC’s storage at Kanpur to the 5th  respondent’s factory  also at  Kanpur. It  is  also contended that  the supply of naphtha to the buyer’s factory at Kanpur involves two movements, one from Barauni to Kanpur for storage  at the  seller’s depot,  and the other from the depot to  the buyer’s  factory. This  contention is based on clause 7(i) of the agreement which states that naphtha shall be supplied  at the  fence of  the buyer’s factory through a pipeline  between   the  buyer’s  and  the  seller’s  fences constructed at  the buyer’s  expense. It is argued that this stipulation shows  that the movement of naphtha from Barauni is arrested  at the seller’s Kanpur depot and is followed by another movement  from there  to the  buyer’s factory  which proves that  the sales  are local  sales and not inter-state because in  an inter-state sale the movement of goods is the immediate and direct result of the contract of sale.      Clause 3(iii)  of the  agreement which  says  that  the naphtha  shall   be  supplied  against  indents  in  writing addressed to  the seller  at their  installation  at  Kanpur cannot be  read in  isolation. Sub-clause  (iv) of  clause 3 sets out  the details  of the  buyer’s requirement  for  the first four  years and  thereafter. Under  clause 8  IOC  are bound not  only to bring the contractual quantity of naphtha from Barauni to the seller’s Kanpur installation but also to provide at  their own cost storage facilities at Kanpur of a capacity equivalent to not less than 30 days’ requirement of the buyer. The indents are therefore 680 not outside  the agreement  but are relatable to the buyer’s requirements under  the agreement.  It is  obvious that  the sales under  the agreement  are not  possible without inter- state movement  of naphtha. Clause 3 read with clause 8 also proves that  really thare  are no two movements but only one movement from  Barauni to Kanpur pursuant to the contract of sale and the agreement regarding storage facilities provided

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in clause  8 is only for operational convenience, it is only a mechanism  devised to  facilitate the  transfer of naphtha through the  seller’s pipeline  to their depot at Kanpur and from there  to the  Buyer’s factory  at Kanpur  through  the pipeline constructed  at the buyer’s cost. It is relevant in this connection  to note that under clause 7(ii) the cost of transferring naphtha from Barauni to the buyer’s fence is to be borne by the buyer.      Each case  turns on  its own  facts and the question is whether  applying   the  settled  principle  which  we  have mentioned above  to the  facts of the present case the sales can be said to be inter-state sales. An attempt to show that some of  the factors present in the instant case are present or absent in some case or other in which this Court held the sale to  be a  local sale  or inter-state sale hardly serves any useful  purpose. On  the facts  of the  present case the sales are  clearly inter-state  sales and  the State of U.P. had therefore  no jurisdiction  to assess the petitioners to sales tax  under the  State Act.  As the movement of naphtha commences from  Barauni in  Bihar, the  sales tax payable on the sales  of naphtha  under the agreement dated February 9, 1970 can  be assessed  and collected only by the authorities in the  State of  Bihar on behalf of the Government of India in view of section 9 of the Central Sales Tax Act.      On behalf  of the State of Bihar a point was taken that the present petition under Article 32 of the Constitution of India complaining  of violation  of  the  fundamental  right guaranteed  by  Article  31  of  the  Constitution  was  not maintainable after  the repeal  of Article  31 by the Forty- Fourth Amendment  of the  Constitution with effect from June 20,  1979.   The  petition   however   complains   also   of infringement of  Article 19  and therefore does not cease to be maintainable.  Counsel for  the 5th  respondent sought to raise a  question regarding  the justification  of  treating freight as  part of the sale price, but that is not a matter that arises  for consideration  on the present writ petition filed by IOC.      In the  result the  alternative prayer made in the writ petition succeeds,  the assessment orders for the assessment years 1970-71,  1973-74 and  1974-75 passed by the Sales Tax Officer, U.P.  and the revision proceedings initiated by the Commissioner of Sales Tax, 681 U.P. for  the  assessment  years  1971-72  and  1972-73  are quashed and respondent No. 4, the State of Uttar Pradesh, is directed to  refund to IOC the sales tax collected from them on the  sales of  naphtha to  the 5th  respondent under  the agreement dated  February 9,  1970 and, further, not to levy sales tax  on the  sales under  the said agreement under the U.P. Sales Tax Act.      The writ petition is allowed as indicated above; in the circumstances of the case we make no order as to costs. N.K.A.                                     Petition allowed. 682