REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3781 OF 2003

M/s Hyderabad Engineering Industries    …..………….. Appellant

Versus

State of Andhra Pradesh ....………….Respondent

J U D G M E N T

H.L. Dattu, J.

1. This appeal  is  directed against  the judgment and order  dated  

21.06.2002, passed by the Division Bench of the High Court of  

Judicature of Andhra Pradesh at Hyderabad in Tax Revision Case  

No. 54 of 1991. By the impugned judgment and order, the High  

Court  has dismissed the Revision Petition filed by the assessee,  

inter-alia,  holding that  the  disputed  transactions  constitute  inter-

State sales, as contemplated under Section 3(a) of the Central Sales  

Tax Act, 1956.

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2. The  issue  that  we  are  called  upon  to  decide  in  the  case  is,  

whether  in  the  facts  and circumstances  of  the  case,  the  sale  or  

purchase of goods can be said to have taken place in the course of  

inter-State trade or commerce and thereby exigible to tax under the  

Central  Sales  Tax  Act,  1956  (hereinafter  referred  to  as,  “the  

Central Act”).  

3. M/s Jay Engineering Works Ltd. is a Public Limited Company,  

registered under the Companies Act, 1956. It has its Head Office-

cum-Registered Office at 23, Kasturba Gandhi Marg, New Delhi.  

In the State of Andhra Pradesh, the Company has registered itself  

in the name and style  of M/s Hyderabad Engineering Industries  

(Prop. - The Jay Engineering Works Ltd.).   It  is registered as a  

dealer under the Andhra Pradesh General Sales Tax Act, 1957 as  

well as Central Sales Tax Act, 1956.    

4. The  Company  is  engaged  in  the  manufacture  and  sale  of  

electrical  fans,  sewing  machines,  fuel  injection  parts  and  

accessories  etc.   The  Company  has  its  manufacturing  units  in  

different  parts  of  the  country  including  Hyderabad,  Andhra  

Pradesh.  In addition to the factory and office in Hyderabad, the  

company  has  its  branch  office  at  Vijayawada  in  the  State  of  

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Andhra  Pradesh.   Outside  the  State  of  Andhra  Pradesh,  the  

company has its godowns in different States including Delhi.  In  

Kolkata, the company has its own office in the name of Eastern  

India Usha Corporation.   

5. M/s.  Usha  Sales  Ltd.  (subsequently  known  as  Usha  

International Ltd.) (hereinafter referred to as “UIL”) is a company  

registered  under  the  Indian  Companies  Act,  with  its  registered  

office  at  19,  Kasturba  Gandhi  Marg,  New  Delhi.   It  has  16  

divisional  offices at  various places in the country with different  

names at every place wherever the assessee’s godowns are located.  

The assessee and UIL had entered into a sales agreement dated  

01.05.1979.   It  was  for a  period of  five years.   Under the  said  

agreement, the main function of UIL was to organize the sale and  

distribution of the products of the assessee and to arrange for sale  

promotion  measures  of  the  products  and  to  provide  after  sales  

service and such other services as might be required in the interest  

of sale of the said products.   The agreement also envisaged that  

UIL would purchase the said products as an independent principal  

and maintain adequate stocks and sell the same as such.  We will  

refer to these clauses in the agreement while discussing the issues  

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raised by the learned counsel for the parties at the time of hearing  

of the appeal.

6. The  Company  has  been  an  assessee  on  the  rolls  of  the  

Commercial  Tax  Officer,  Company  Circle-II,  Nampalli,  

Hyderabad.  For  the  assessment  year  1981-82,  the  assessee  

company  filed  its  annual  returns  under  the  Central  Act  in  the  

prescribed form.  

7. The  assessee  company  claimed  exemption  on  a  turnover  of  

`8,87,75,643.00 towards goods transported to out-of-state  depots  

otherwise than as a result  of direct sale which would attract  tax  

under Section 6 of the Central Act.  

8. The assessee’s case before the assessing authority, Sales Tax  

Appellate Tribunal and the High Court was that the transactions on  

which  exemptions  claimed  cannot  be  regarded  as  sales  in  the  

course of inter-State trade, chargeable to tax under the Central Act.  

This  contention  of  the  assessee  is  negatived  by  the  assessing  

authority, which view is confirmed by the Tribunal and the High  

Court.  

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9. The  findings  of  the  assessing  authority  with  respect  to  the  

nature of the transactions with its various branches, except in the  

case of Calcutta Depot, may be set out in his own words :-   

“The assessee company in Hyderabad is engaged in  the  manufacture  of  different  types  of  fans  and  fuel   injection  parts.   In  pursuance  of  the  said  sales   agreement, M/s Usha Sales Limited, Delhi (now Usha  International  Limited,  Delhi)  placed monthly  indent   on HEI Hyderabad for the supply of the goods to its   offices in various stages.  This indent is sent either by   telex or Telephone or through written communication.   This indent shows the model wise quantity required in   each of the regions and the destinations to which the  goods are to be sent are clearly mentioned at Madras,   Patna, Agra.  At times  even based on such indents   received from M/s. Usha Sales Ltd. Delhi the assessee   company is effecting the movement of goods from its   factory  in  Hyderabad  to  its  own  depots  in  the   destination  given by the Usha Sales Ltd.  Alongwith   the  goods the assessee  is  sending gate  pass (GPO)  Cum Challan  proforma invoice,  way  bill  and lorry   receipt,  which are in the name of  its  own depot or   godown.  Simultaneously  HEI  also  sends  a  direct   communication  to  the  “constituent”  and  further  requesting  the  “constitutent”  of  the  UIL  to  take   delivery.  At times, the unit of USL also informs the   HEI that it has taken delivery of goods.

In pursuance of the monthly allocation made by  the  UIL  head  office  New  Delhi,  the  various   constituents or units of USL directly correspond with   HEI for the dispatch of the goods, such constituents   issue telegrams and telex message to HEI for urgent   dispatch of the goods.

On  receipt  of  the  goods  in  the  out  of  state   depot, the depot incharge prepares invoice in favour   of the constituent of M/s Usha Sales Limited such as   Nalanda  Sales  Corporation,  Western  Sales   

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Corporation,  United  Sales  Corporation  etc.,   generally the names of these purchasing units owned   by M/s Usha Sales Ltd. are printed on the invoices  issued by the assesses depots, which shown that there  cannot be any other purchases.   

Depot  wise  stock  register  is  maintained  in  Hyderabad Factory showing modelwise quantitative   particulars of the goods sent to the depot goods sold   by the depot and the goods available with the depot  as stock at the end of prescribed period.  

The  Hyderabad  factory  did  not  receive  only  orders or indents from any of its depots.  The indent is   always placed by M/s Usha Sales Ltd.  But  for the   said indent,  neither  the Hyderabad factory nor any  depot known the model or quantity of goods to be sent   or  to  be  received.   Neither  there  is  any   communication  sent  by the  Marketing  Deptt.  of  the   assessee company as they were never received.

On receipt of goods in the out-state depot, an  invoice is prepared in favour of the respective unit of   M/s.  Usha  Sales  Ltd.  (such  as  Nalanda  Sales   Corporation etc.) and all the invoices are sent without   fail to the Hyderabad factory.  In the books of account   of the factory, the account of USL is debited for the   invoice value and the sales tax collection is credited   to the account of the respective State.

The  invoice  is  discounted  by  the  HEI  with  Canara Bank, Secunderabad and the full  amount is   received by drawing Hundi on M/s Usha Sales Ltd.   Delhi  for  10  days  on  the  due  date.   USL  makes   payment  to  Canara  Bank,  Delhi  and  on  receipt  of   such intimation the account of USL is credited in the   factory of Hyderabad.

There  were  no  transfers  from  one  depot  to  another depot.  The depot has no option to chose its   purchase.   No open sales  were conducted from the  depots.  All the sales were affected to different units of   USL  whose  names  are  printed  in  the  respective   invoices as buyers.”

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The assessing officer has further observed :-

“Thus intimate  nexus  and conceivable  link between  the  assessee  and  the  purchaser  are  manifest.   The   receipt of incident from USL HO the follow up and   pressure  for  supply  from  the  USL  divisions,  the  periodical  fixation  of  price  to  hold  goods  for  the  specified future months, the confirmation of receipt of   goods  by  the  UFL  division  proceeded  by  direct   dispatch  intimations  to  the  purchasers  supply  of   goods at “current prices” and complaints direct from  USL divisions for non delivery or short delivery all in  pursuance of sale agreement make me conclude that   the sales from HEI to USL occasioned the movement   of goods.  The delivery and raising of invoice by the   State godown are immaterial.”

10. The  assessing  officer  has  concluded  that  “from  a  factual   

description of the mode of transactions, it is evident that the inter-

State sales effected by the assessee to UIL have been camouflaged   

as branch transfers with a view to evade tax legitimation (sic) due  

to the State on these transactions”.  It is not necessary to refer to  

the tax and the penalties levied by the assessing officer under the  

Central Act, for the issue involved in the case is legal.

11. The sole question that arises for our consideration is whether  

the turn-over under dispute for the assessment year 1981-82, is an  

inter-State sale or a branch transfer.   

12. Shri  S.K.  Bagaria,  learned  senior  counsel  for  the  assessee,  

submitted that while the goods certainly moved from the factory at  

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Hyderabad to the branch office of the assessee,  such movement  

cannot be regarded as having any connection with any particular  

order or  orders placed by M/s Usha Sales Ltd.   Therefore,  it  is  

submitted that the goods moved from Hyderabad to Delhi on what  

were described as ‘stock transfers’ and such stock transfers cannot  

be brought within the charging provisions of the Central Act, since  

they cannot be regarded as sales in the course of inter-State trade  

and commerce.  It is further submitted by referring to clauses in the  

sales agreement and relying on the decision of this Court that the  

transaction in question is merely ‘branch transfers’ and not ‘inter-

State  sales’.   It  is  submitted  that  the  findings  of  the  assessing  

authority that the movement of goods from the assessee’s factory  

to  their  godowns  was  in  pursuance  of  the  agreement  of  sale  

between the assessee and UIL is not based on any material and,  

therefore,  on  mere  presumption  and  assumptions  the  assessing  

authority could not have treated the branch transfers as inter-State  

sales. It is further submitted that there was no firm commitment  

between the assessee and UIL at the time of movement of goods  

from assessee’s  manufacturing unit  to  their  godowns situated  at  

different  places  in  the  country.   It  is  further  submitted  that  the  

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assessing authority  was not  justified in relying on the  letters  of  

allocation  issued  by UIL as  a  contract  of  firm commitment  for  

purchase of goods manufactured  by the assessee.   According to  

Shri  Bagaria,  the  letters  of  allocation  issued  by  UIL  cannot  be  

construed  to  be a  contract  of  firm commitment  to  purchase  the  

goods manufactured by the assessee and those letters of allocation  

were mere forecast of UIL’s estimate of their requirements.  It is  

further contended that there was no firm commitment on the part  

of UIL to purchase specific number of specified varieties of fans  

and  for  that  matter  the  assessee  had  not  allotted  any  specific  

number of specified varieties of fans in favour of UIL at the time  

the  goods  manufactured  by  the  assessee  were  being  transferred  

from  their  factory  to  their  godowns.   It  is  contended  that  the  

assessing authority is bound to examine each individual transaction  

and decide whether it constitutes an inter-State sale.  Reliance is  

placed on the observations made by this Court in Tata Engineering  

and  Locomotive  Co.  Ltd.  v.  Assistant  Commissioner  of   

Commercial  Taxes [1970]  26  STC  354  at  page  381  (SC).   In  

conclusion, it is submitted that the assessing authority and the High  

Court were not justified in relying on the decision of this Court in  

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the  case  of  Sahney  Steel  and  Press  Works  Ltd.  and  English   

Electric Company of India Ltd.

13. We did not have the advantage of hearing the learned counsel  

for the Revenue.  However, with the permission of the Court, they  

have filed their written submissions which, to say the least, does  

not  touch upon any of  the  submissions  made  by learned  senior  

counsel for the assessee.   Their written submissions are just the  

repetition and reiteration of the findings and conclusions reached  

by the assessing authority.

14. To resolve the controversy raised in this appeal, Section 3(a) of  

the Central Act requires to be noticed.The Section reads as under :-

“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.

Explanation  1---Where  goods  are  delivered  to  a  carrier  or  other  bailee  for  transmission,  the   movement  of  the  goods  shall,  for  the  purposes  of   clause  (b),  be  deemed to  commence  at  the  time  of   such delivery and terminate at the time when delivery   is taken from such carrier or bailee.

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Explanation  2--Where  the  movement  of  goods  commences and terminates in the same State it shall   not be deemed to be a movement of goods from one  State to another by reason merely of the fact that in   the course of such movement the goods pass through  the territory of any other State.”

15. The purport of Section 3(a) is explained by this Court in  Tata  

Iron and Steel Co. Ltd. Vs. S.R. Sarkar (1960) 11 STC 655 (SC),  

wherein it is stated  “in our view, therefore, within Clause (b) of   

Section 3 are included sales in which property in the goods passes  

during the movement of the goods from one State to another by  

transfer  of  documents  of  title  thereto:   clause  (a)  of  Section  3   

covers sales, other than those included in clause (b), 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”.

16. To  make  a  sale  as  one  in  the  course  of  inter-State  trade  or  

commerce, there must be an obligation, whether of the seller or the  

buyer to transport the goods outside the State and it may arise by  

reason  of  statute,  contract  between  the  parties  or  from  mutual  

understanding or agreement between them or even from the nature  

of the transaction which linked the sale to such transportation such  

an obligation may be imposed expressly under the contract itself or  

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impliedly by a mutual understanding.  It is not necessary that in  

cases,  there  must  be  pieces  of  direct  evidence  showing  such  

obligation  in  a  written  contract  or  oral  agreement.   Such  

obligations are inferable from circumstantial evidence.   

17. Section  6  of  the  Central  Act  which  is  the  charging  Section,  

levies tax under the Central Act on all inter-State sales, determined  

as  such  under  Section  3  of  the  Central  Act.   Section  9  of  the  

Central Act provides that the tax payable by any dealer under the  

Central Act on the sale of goods effected by him in the course of  

inter-State  trade  or  commerce,  whether  such  sale  falls  within  

Clause (a) or Clause (b) of Section 3, shall be levied by the Govt.  

of India and shall be collected by that Govt. in accordance with the  

provisions  of  sub-Section  (2)  of  that  Section,  in  the  State  from  

which  the  movement  of  the  goods  commenced.   The  proviso  

enumerates an exception, but we do not consider it necessary to  

refer to it for the purpose of this case.  Section 3 of the Act deals  

with inter-State sales and details the circumstances as to when a  

sale or purchase of goods can be said to take place in the course of  

inter-State  trade  or  commerce.   A  perusal  of  Section  3  of  the  

Central Act shows that it raises a presumption of law and that is, a  

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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 transfer of documents of title to the goods during  

their movement from one State to another.  For purposes of clause  

(b)  of  Section  3,  Explanation  I  says  that  where  the  goods  are  

delivered  to  a  carrier  or  other  bailee  for  transmission,  the  

movement of the goods shall be deemed to commence at the time  

of such delivery and terminate at the time when delivery is taken  

from such carrier or bailee.  Explanation II clarifies that when the  

movement of goods commences and terminates in the same State,  

the movement of goods will not be deemed to be from one State to  

another  merely  because  of  the  fact  that  in  the  course  of  such  

movement, the goods pass through the territory of any other State.  

For a sale  to be in the course of  inter-State  trade or  commerce  

under Section 3(a),  the two conditions must  be fulfilled.   There  

must be sale of goods.  Such sale should occasion the movement of  

the goods from one State to another.  A sale would be deemed to  

have  occasioned  the movement  of  the  goods  from one  State  to  

another within the meaning of clause (a) of Section 3 of the Act  

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when the movement of those goods is the result of a covenant or  

incidence of the contract of sale, even though the property in the  

goods passes in either State.  With a view to find out whether a  

particular transaction is an inter-State sale or not, it is essential to  

see whether there was movement of the goods from one State to  

another as a result of prior contract of sale or purchase.  Section 6A  

of the Central Act provides that if any dealer claims that he is not  

liable to pay tax under the Central Act in respect of any goods, on  

the ground that the movement  of such goods from one State  to  

another was occasioned by reason of transfer of such goods by him  

to any other place of his business or to his agent or principal and  

not  by  reason  of  sale,  then  the  burden  of  proving  that  the  

movement of goods was so occasioned shall be on the dealer.  It  

also provides the mode of discharge of that burden of proof.   

18. What follows from a conjoint reading of these provisions is that  

every dealer is liable to pay tax under the Central Act on the sale of  

goods  effected  by  him  in  the  course  of  inter-State  trade  or  

commerce during the year of assessment.  Where the department  

takes advantage of the presumption under Section 3(a) and/or to  

show that there has been a sale or purchase of goods in the course  

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of inter-State trade or commerce and if the assessee disputes that  

there has been a sale or purchase of goods in the course of inter-

State  trade  or  commerce,  then  the  assessee  can  rebut  the  

presumption by filing declaration in form ‘F’ under Section 6A of  

the  Central  Act  to  prove  that  the  movement  of  goods  was  

occasioned not by reason of sale but otherwise than by way of sale.  

When the department does not take advantage of the presumption  

under Section 3(a) of the Central Act, but shows a positive case of  

inter-State sale in the course of inter-State trade or commerce to  

make it liable to tax under Section 6, the declaration in Form ‘F’  

under section 6A would be of no avail.   

19. It is an accepted position in law that a mere transfer of goods  

from a head office to a branch office or an inter-branch transfer of  

goods,  which  are  broadly  brought  under  the  phrase  ‘Branch  

transfers’ cannot be regarded as sales in the course of inter-State  

trade, for the simple reason that a head office or branch cannot be  

treated  as  having  traded  with  itself  or  sold  articles  to  itself  by  

means of these stock transfers.   

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20. In the instant case, the case of the Revenue is not only based on  

the agreement of sale but also on the presumption under Section  

3(a) of the Central Act.   

21. In  the  instant  case,  the  assessing  authority  and  the  Tribunal  

have  recorded  a  finding  of  fact  that  there  were  prior  contracts  

between  Usha  Sales  Ltd.  and the  assessee  and  in  pursuance  of  

those contracts,  the goods moved from the assessee’s  factory at  

Hyderabad to its Branch offices to be delivered to Usha Sales Ltd.  

or their nominees.  In order to appreciate the contention canvassed,  

it is necessary to set out certain clauses from the sales agreement.  

The sales  agreement  dated  01.05.1979 contained,  inter  alia,  the  

following :-

“Clause 1   The  agreement  products  shall   comprise sewing machines fan, their   component  parts/  accessories,  and  such  other  products  as  may  be  mutually  agreed  upon  from  time  to   time.  

Clause 2 The  territory  covered  by  the   agreement shall comprise of all states   of  India  excluding  West   Bengal/Andaman & Nicobar.   

Claues 3 USL shall undertake to organize sale   and  distribution  of  agreement   products  in  the  market.   Maintain  adequate  stocks  at  all  times  in  its   godowns in different regions.   

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Arrange  for  sales  promotion  measures  as may be necessary  from  time to time on mutually agreed basis.   Provide after sales service.   Provide such other services as may be  required  in  the  interest  of  sales,  a  mutually  agreed  basis  from  time  to   time.   

Clause 4 USL  shall  make  all  purchases  of   agreement  products  as  an  independent  principal  and  sell  the  same as such.   

Price (5)(a) JE’s selling prices to Usha sales shall   be intimated by JE from time to time.   The prices at which Usha Sales shall   sell  the  agreement  products  to  their   agents/dealers shall be determined by  them  so  however  that  Usha  sales   make  up  on  their  purchases  price   shall not exceed:-

Sewing Machines/Accessories 10.00      Rs. 5/- (per top)

Fans 7.35% Component parts         13.35% The  price  so  computed  shall  be  maximum  price and Usha sales shall be free to sell at   prices lower than the said maximum.   

(b) Consumer prices (except for hire purchase)   sales  shall  not  exceed  the  maximum  authorized  by  JE  from  time  to  time.   However,  Usha  sales/their  dealers/agents   shall be free to charge prices lower than the   said maximum.   

(c) Any  sales  tax/other  tax  payable  may  be   charged additionally by Usha Sales.   

Freight/handling charges shall be reimbursed on  an agreed basis.   (d) In the event of any reduction prices by JE  

corresponding  rebate  shall  be  allowed  on  

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unsold  stocks  held  by  Usha  sales/their   dealers/agents.   

Sales to Third Parties In case it is considered expedient by JE to   

supply/bill the goods directly to any of the USHA  sales  dealers  agents  against  orders  procured by  Usha Sales make JE shall pay to Usha sales the   difference  between JE’s  subsisting  selling  prices   and the invoiced value exclusive of  sale tax and  other local taxes.   

Payment  a) Payment for all purchases shall be made to JE   

within  75  days  of  the  date  of  the  bill  failing   which  Usha  sales  shall  pay  interest  at  JE’s   Maximum borrowing rates from their bankers at   that time.   

b) Usha sales shall be liable to make payment in   respect  of  supplies  invoiced  by  JE  on  its   nominees in case of default by the letter.   Sales Deliveries  

Sales/deliveries shall be made to Usha Sales   their nominees  at  any  of  JE’s  factories  region  godowns at the company’s option.”  

22. Clause  (1)  of  the  agreement  speaks  of  the  products  that  the  

assessee is required to supply to the purchaser.  Clause (2) speaks  

of  the  territory  in  which  the  purchaser  is  permitted  to  sell  the  

products  supplied  by  the  assessee.   Clause  (3)  speaks  of  the  

obligations of the purchaser in organizing the sale and distribution  

of the products supplied by the assessee.  It also provides that the  

purchaser shall keep the adequate stocks in its godowns in different  

regions and also arrange sales promotions as may be required from  

18

time to  time.   Purchaser  is  also  required  to  provide  after  sales  

service to the products supplied.  Clause (4) specifically provides  

that  the  purchaser/UIL  shall  make  all  purchases  of  the  agreed  

products as  an independent  principal  and sell  the same as such.  

Clause (5) which is a clause where price is fixed by the assessee  

and  that  price  is  the  maximum  price  and  UIL  –  purchaser  is  

permitted to sell at prices lower than the maximum price fixed by  

the assessee.  Clause (6) speaks of sales that may be made by the  

assessee to the third parties.  Clause (7) speaks of the time limit  

within which payments for the supply of goods to be made by UIL  

to  the  assessee.   Clause  (8)  is  an  important  clause  in  the  sales  

agreement.  It  specifically  says  that  the  sales/deliveries  shall  be  

made  to  UIL/their  nominees  at  any  of  the  assessee’s  factories,  

region, godowns at the option of the company.  It is clear from the  

aforesaid  clauses  set  out  herein  above,  that  the  assessee  firstly  

undertakes to sell and supply its manufactured products to UIL and  

the  UIL  will  have  the  entire  country,  except  West  Bengal  and  

Andaman and Nicobar Islands, as its distribution/selling zone.  The  

agreement  also  provides  that  UIL  will  purchase  the  products  

agreed  under  Clause  (1)   and  sell  the  same  as  an  independent  

19

principal.  Clause (8) is very relevant for the purpose of this case.  

It  obligates  the  assessee  to  make  delivery  of  the  products  

manufactured either to the UIL’s nominees or in any one of the  

godowns of the assessee at the option of UIL.  

23. From the above Clauses in the agreement, what can be inferred  

is that the assessee has undertaken to supply their  manufactured  

products to UIL or to its nominees at the agreed price at any of the  

assessee’s godowns at the option of UIL.  A contract of sale of  

goods  would  be  effective  when  a  seller  agrees  to  transfer  the  

property in goods to the buyer for a price and that such a contract  

may be either absolute or conditional.  If the transfer is in presenti,  

it is called a ‘sale’; but if the transfer is to take place at a future  

time and subject to some conditions to be fulfilled subsequently,  

the contract is called “an agreement to sell”.  When the time in the  

agreement to sell lapses or the conditions therein subject to which  

the  property  in  goods  is  to  be  transferred  are  fulfilled,  the  

“agreement to sell” becomes a ‘sale’.                                         

24. Before we deal with the issues raised in the appeal, we will  

first notice some of the decisions of this Court on interpretation of  

Section 3(a) of the Act.

20

25. In Tata Iron and Steel Co. Ltd. v. S.R. Sarkar & Others  

(supra), the majority view of this Court was that where the goods are  

moved  from one  State  to  another  as  a  result  of  a  covenant  in  the  

contract of sale, that would be clearly a sale in the course of inter-

State  trade.   The  Court  further  proceeded  to  hold  that  even  a  

movement  of  goods  from  one  State  to  another,  which  is  merely  

incidental  to,  and which is not part  of, the contract  of sale,  is also  

brought within the fold of Section 3(a) of the Central Act.

26. In  Oil  India  Ltd.  v.  The  Superintendent  of  Taxes  and  

Others [1975] 35 STC 445 (SC), this Court held “No matter in which  

State  the  property  in  the  goods  passes,  a  sale  which  occasions   

“movement of goods from one State to another is a sale in the course   

of inter-State trade”.  The inter state movement must be the result of a   

covenant, express or implied, in the contract of sale or an incident of   

the contract.  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.  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   

21

specified in the contract itself.  It would be enough if the movement   

was in pursuance of and incidental to the contract of sale.”

27. In English Electric Company of India Ltd. v. The Deputy   

Commercial  Tax officer  and Others [1976] 38 STC 475 (SC),  this  

Court  observed,  that  “when  a  branch  of  a  company  forwards  a  

buyer’s order to the principal factory of the company and instructs   

them to dispatch the goods direct to the buyer and the goods are sent   

to the buyer under those instructions it would not be sale between the   

factory and its  branch.  If  there is  a conceivable link between the   

movement of the goods and the buyer’s contract, and if in the course   

of inter-State movement the goods move only to reach the buyer in  

satisfaction of his contract of purchase and such a nexus is otherwise   

inexplicable, then the sale or purchase of the specific or ascertained   

goods ought to be deemed to have taken place in the course of inter   

State trade or commerce as such a sale or purchase occasioned the  

movement of goods from one State to another.  The presence of an   

intermediary, such as the seller’s own representative or branch office,   

who initiated the contract may not make the matter different.  Such an   

interception by a known person on behalf of the seller is the delivery   

22

State and such person’s activities prior to or after the implementation  

of the contract  may not alter the position.”

28. In  South  India  Viscose  Ltd.  vs.  State  of  Tamil  Nadu  

[1981]  48  STC  232  (SC),  this  Court  observed  that  if  there  is  a  

conceivable  link  between  a  contract  of  sale  and  the  movement  of  

goods from one State to another in order to discharge the obligation  

under the contract of sale, it must be held to be an inter-State sale and  

that character will not be changed on account of an interposition of an  

agent of the seller who may temporarily intercept the movement.

29. In  Union of India & Anr. v. K.G. Khosla and Co. Ltd.  

[1979] 43 STC 457, this Court reiterated and approved the decision in  

Oil India Ltd.’s case (supra) and held that if a contract of sale contains  

stipulation for the movement of the goods from one State to another,  

the sale would certainly be an inter-State sale.  But for the purposes of  

Section 3(a) of the Act, 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 the contract of sale.

30. In  State of Bihar v Tata Engineering and Locomotives   

Ltd. [1971] 27 STC 127(SC),  it  is  observed  “if  a contract  of  sale   

23

contains a stipulation for such movement, the sale would, of course,   

be an inter state sale.  But it can 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.”

31. In  Bharat  Heavy  Electricals  Ltd.  v.  State  of  Andhra  

Pradesh [1996] 102 STC 345  (A.P.), it is observed that “In the light   

of the settled legal position, it cannot be and it has not been seriously   

disputed that the movement of goods from the Hyderabad Unit of the  

petitioner-company direct to the customer’s site in the other State are   

inter-State sales pursuant to the contracts entered into by BHEL with   

the customers/purchasers.  The fact that the contracts were entered   

into with the head office or the unit having overall responsibility for   

execution is a different one or that the executing unit itself raises the   

invoices and realizes the price from the customers does not in any  

way detract from the position that the inter-State movement of goods   

from Hyderabad is pursuant to and a necessary consequence of the   

contract  of  sale.   In  the  instant  case,  the  goods  are  tailor-made,   

manufactured according to certain specification and designs and the  

components/equipment which go into the plant are directly dispatched  

24

by the Hyderabad unit  to  the  customer  in  the  other  State  and the   

goods  are  received  from  the  common  carrier  by  the  customer’s   

representative.  The movement of such goods from Andhra Pradesh to   

other States cannot but be ascribed to contracts of sale entered into   

by the head office of the petitioner-company of which the petitioner is   

part and parcel.  The fact that the contract was not entered into with  

Hyderabad unit or that the inter-State movement had taken place at   

the  instance  of  another  unit  of  the  same  company  does  not  make  

material difference.  It is to be noted that for the value of the goods   

dispatched, the debit note is sent by Hyderabad unit to the executing   

unit.  It may be that the customer does not pay the amount direct to   

the Hyderabad unit  which manufactures and dispatches the goods.   

But in the light of the settled propositions that the branches and head  

office constitute one single legal entity, it does not matter by whom  

the billing is done or to whom the payment is  made by the customer.”

32. From the above decisions, the principle which emerges  is –  

when the sale or  agreement  for sale  causes or  has the effect  of  

occasioning  the  movement  of  goods  from one  State  to  another,  

irrespective of whether the movement of goods is provided for in  

the contract of sale or not, or when the order is placed with any  

25

branch office or the head office which resulted in the movement of  

goods, irrespective of whether the property in the goods passed in  

one State or the other, if the effect of such a sale is to have the  

movement of goods from one State to another, an inter-State sale  

would ensue and would result in exigibility of tax under Section  

3(a) of the Central Act on the turn over of such transaction.  It is  

only when the turnover relates to sale or purchase of goods during  

the course of inter-State trade or commerce that it would be taxable  

under the Central Act.        

33. The learned counsel Shri Bagaria mainly contends that there  

is nothing in the sales agreement, express or implied, which may  

be  regarded  as  specific  covenant  under  which  the  assessee’s  

manufacturing unit was obliged to move the specific goods from  

its  manufacturing  unit  at  Hyderabad  to  its  branch  offices  for  

delivery of the goods  to UIL.  The learned counsel submitted that  

a sale can be regarded as having occurred in the course of inter-

State  trade,  if  the  concerned  contract  of  sale  itself  includes  a  

covenant  either  express  or  implied,  to  the  effect  that  the  goods  

must  move  from  one  State  to  another  for  the  purpose  of  

implementing  the  ‘sales  agreement’.  We  cannot  agree  with  the  

26

submission of learned counsel Shri  Bagaria.   We say so for the  

reason that the inter-State movement must  be the result of a sale or  

an incident of the contract.  It is not necessary that the sale must  

precede the inter-State  movement  in order  that  the  sale  may be  

deemed  to  have  occasioned  at  such  movement.   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 [See Oil India Ltd. (supra)].

34. We now turn to the facts of the present case to determine  

whether the transaction in question is inter-State trade or commerce or  

mere stock transfers to branch offices.

35. Shri  Bagaria,  learned  senior  counsel,  submits  that  the  

movement of the goods from the assessee’s factory to its godowns  

situated  outside  the  State  was  not  in  pursuance  of  the  agreement  

between the assessee and UIL; that there was no firm commitment  

between the assessee and UIL at the time of movement of the goods  

from  the  factory  to  the  godowns;  that  the  only  communication  

between the assessee and UIL were in the nature of forecasts; and the  

27

completion of the sale to the UIL did not take place at the factory  

place and the appropriation of the goods were done at the godowns  

and it  was open to the assessee till  then to allot  the  goods to any  

purchasers.  Therefore, the learned senior counsel contends that the  

findings and conclusions reached by the statutory authorities under  

the  Central  Act  are  perverse.   In  our  considered view,  though the  

submission of the learned senior counsel is attractive, but on a deeper  

consideration, it lacks merit.   

36. The  assessee,  for  the  assessment  year  1981-82  under  

Central  Act,  claimed  exemption  on  a  turnover  of  `7,88,13,639/-  

towards stock transfer of USHA brand electric fans.  The same was  

disallowed by the assessing officer and assessed to tax @10% in the  

absence  of  ‘C’  declaration  forms  by  classifying  the  transactions  

falling under Section 3(a) of the Central Act.   

37. It  is  not  in  dispute  that  there  is  “sales  agreement”  

between the parties which was entered into sometime in the year 1979  

and the same was to expire sometime in the year 1984.  Under this  

agreement, UIL had agreed to purchase the products manufactured by  

the assessee and sell it as an independent principal.  The assessee has  

its  godown in  every  State  including  Delhi.   The  UIL  has  also  its  

28

divisional  office  in  different  names  at  every  place  wherever  the  

assessee’s godown is located.  

38. In pursuance to the sales agreement, UIL placed monthly  

indents  on  the  assessee  with  instructions  to  dispatch  the  goods  of  

given size and quantity to the named destination.  Pursuance to such  

indents, the assessee dispatched the goods to its godowns to the given  

destination  and  sent  goods  dispatch  intimation  directly  to  the  

concerned UIL divisional office at the destination furnishing size and  

quantity dispatched with L.R.No. and name of the transport company.  

The statutory authorities, from the correspondence between UIL and  

the  assessee  noticed  in  their  order  that  UIL  divisional  offices  

correspondent directly with the assessee for the supply of stocks and  

also informs them about the receipt or non-receipt of the stocks.  The  

assessee, on receipt of the request for supply of goods dispatches the  

same to its state godowns and the person-in-charge of the godowns to  

the UIL division office by raising sales invoice.   

39. We have already noticed the relevant clauses in the ‘sales  

agreement’.  A close reading of the clauses would clearly indicate that  

the parties have agreed to discharge certain obligations cast on them  

under the agreement.  The agreement provides for the products to be  

29

supplied, sales zone, to organize sales and service for UIL to make  

purchases an sell products as an independent principal, selling prices  

to be informed from time to time, payments against purchases to be  

made within a particular time and the goods to be delivered to UIL  

either at the assessee’s factory or at its regional godowns.  Clause 8 of  

the agreement, if it is read with other clauses, makes it clear that there  

is stipulation for the movement of the goods from the factory to the  

godowns situated in  different  places  to  be delivered to  UIL.   It  is  

because of these covenants, the assessee is obliged to move the goods  

from its factory to the godown situated in other States to fulfill its part  

of the contract.

40. Section 2(g) of the Central Act defines the meaning of  

the expression ‘sale’.  This expression was explained by this Court in  

Balabahagas Hulsachand Vs. State of Orissa  (1976) 37 STC 207 at  

page 213.  This Court stated that the words ‘Sale of goods’ used in  

this Section includes ‘an agreement of sale’ as such an agreement is  

an element of sale and is also an essential ingredient thereof, in terms  

of Section 4(1) of the Sales of Goods Act, that is, it is sufficient if the  

agreement of sale contemplates an inter-State movement of the goods  

though  the  sale  itself  may  take  place,  at  the  destination  or  in  the  

30

course of the movement of the goods.  This view was reiterated and  

further explained by this Court in Union of India Vs. K.G. Khosla and  

Co. (1979) 43 STC 457.  The consistent view of this Court appears to  

be  that  even  if  there  is  no  specific  stipulation  or  direction  in  the  

agreement for an inter-State movement of goods, if such movement is  

an incident of that agreement, or if the facts and circumstances of the  

case denote it, the conditions of Section 3(a) would be satisfied.   

41. Shri Bagaria contends that the assessee has received only  

‘allocations’ in the nature of market or distribution forecasts and such  

allocations  are  neither  in  the  nature  of  indents  nor  orders  and the  

assessee  never  accepted  such allocations  letter  sent  by  UIL.   It  is  

further submitted that except in few instances, the actual dispatches of  

the goods to its godowns never tallied with the allocations letter sent  

by UIL.   Therefore,  such allocations  letter  cannot  be  construed as  

“firm orders”.  Therefore, the transactions cannot be brought within  

the  purview  of  inter-State  trade  or  commerce  to  attract  charging  

provisions under the Central Act.  In our view, though the ultimate  

purchaser UIL placed orders for a particular quantity of goods to be  

supplied, the assessee did not supply the actual quantity indented for.  

We  do  not,  however,  think  that  this  makes  any  difference  to  the  

31

application of Section 3(a) of the Central Act.  In our view, it does not  

matter how much goods were delivered to the branch office which  

just  acted  as  a  conduit  pipe  before  it  ultimately  reached  the  

purchaser’s hands.  All that matters is that movement of the goods is  

in pursuance of the contract of sale or as necessary incident to the sale  

itself.  Further, the sales agreement is for a period of five years.  If  

there is short supply of the goods than what was indented for, then the  

same could be  adjusted  in  the  subsequent  dispatch.   Therefore,  to  

contend that there was no firm order placed by UIL with the assessee  

and accordingly, it would not come within the purport of Section 3(a)  

of  the  Central  Act  and  they  are  mere  branch  transfers,  cannot  be  

accepted.   We  may  also  note  that  the  assessing  officer,  while  

considering this stand of the assessee, has made reference to several  

correspondence for the period from April, 1981 to March, 1982 and  

has come to the conclusion though both the assessee and UIL terms  

those correspondence as mere letter of allocations, they are infact in  

the nature of indents placed by UIL with the assessee for the supply  

of a particular model of fans, particular quantity and the destinations  

of delivery.  This finding of fact is confirmed by the final fact finding  

authority namely, the State Tax Tribunal.  To us, this finding of fact  

32

does not appear to be perverse, which would call for our interference.  

42. Shri Bagaria, learned senior counsel for the assessee, laid  

much stress on the issue that in the instant case, there is no firm order  

placed by UIL on the assessee for the supply of particular type or  

quantity of goods and the only communication that they had placed  

only a ‘forecasts’ which only depicts the requirement in a particular  

State  and  therefore,  those  forecasts  cannot  be  even  remotely  

considered as either purchase orders or indents for supply of goods.  It  

is also contended that the “sales agreement” is only an understanding  

between  the  parties  for  the  supply  of  manufactured  goods  by  the  

assessee to UIL and the agreement is not binding on the parties, since  

it does not provide for any claim for damages, if there is any breach  

of any of the conditions stipulated therein by any one of the parties.  It  

is stressed by the learned senior counsel that the assessee company,  

since it has branches in various parts of the country, its manufactured  

products are stocked in those branches and the branches in turn, have  

effected sales of those goods to consumers which would include UIL  

also.  This argument is also noticed by the final fact finding authority,  

namely the Sales Tax Appellate Tribunal and has negatived the same  

by assigning cogent reasons.  The Tribunal, after reappreciating the  

33

entire documents available on the record and also the modus operandi  

adopted by the assessee in its well considered order, has concluded  

that the so called ‘forecasts’ are nothing but request made by UIL for  

supply of goods to meet the requirements of the consumers in various  

parts of the country.  Though, the said communication is termed as  

‘forecasts’, according to the Tribunal, they are nothing but firm orders  

placed by the UIL with the assessee for supply of particular type of  

goods and particular quantity pursuant to their understanding reflected  

in the ‘sales agrement’, which is continuing one for the continuous  

supply of goods during the period of agreement which stretches over  

a  period of  5  years,  it  is  difficult  to  accept  the  submission  of  the  

learned  senior  counsel  that  the  ‘sales  agreement’  is  only  for  the  

purpose of purchasing of their goods and selling in different parts of  

the country by UIL which has its offices wherever the assessee has its  

godowns of branch offices and also difficult to accept that there was  

no movement of goods pursuant to their ‘letter of allocations’, which  

the assessee would contend that it is not a firm commitment or firm  

order  for  the  supply  of  goods.   To  be  fair  to  the  learned  senior  

counsel,  we also perused number of ‘letters of allocations’ sent by  

UIL to the assessee from time to time and the response thereof of the  

34

assessee.  On a perusal of the same, it is clear that an order was placed  

by UIL is a composite form to supply of goods through their branch  

offices and the movement of the goods thereto from the assessee’s  

factory  to  the  assessee’s  godown  was  to  fulfill  the  demand  made  

pursuant to the ‘letters of allocation’ which the assessee claims that  

the same is in the nature of forecast.  In our view, the movement of  

the goods from the assessee’s factory to its various godowns situated  

in different  parts  of  the country was pursuant  to ‘sales  agreement’  

coupled  with  ‘forecasts’  which  are  nothing  but  ‘indents’  or  firm  

orders.   Therefore,  in  our  opinion,  the  transaction  between  the  

assessee with its branch offices is a clear case of inter-State sales and  

not branch transfers, as claimed by the assessee.

43. Shri Bagaria, learned senior counsel, submitted that the  

branch  offices  of  the  assessee  would  also  effect  sales  of  products  

supplied  by  the  assessee  to  other  customers  including  State  and  

Central Govt.  Therefore, it is contended that the branch offices of the  

assessee had full discretion to sell the goods to any person of their  

choice.   In  our  view,  merely because the  branch office  could also  

effect supplies directly to some of the bulk consumers, it cannot be  

said that all supplies that are made to branch offices are not pursuant  

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to the Sales Agreement and letter  of allocation of  UIL.   Since the  

assessee could not furnish the exact figure insofar as such sales the  

assessing  authority  has  granted  exemption  on  a  turnover  of  

`87,57,071/-, being 10% of the total value of the claim towards stock  

transfer.   

44. The learned senior counsel Shri Bagaria contended that  

the case law on which reliance placed by the High Court and other  

Statutory authorities are distinguishable and none of those decisions  

support  the  case  of  the  Revenue.   This  contention  of  the  learned  

senior  counsel  need  not  detain  us  for  long,  since  the  assessing  

authority, in the instant case, after carefully considering the relevant  

clauses  in the sales agreement  and the voluminous correspondence  

between  the  assessee  and  the  UIL,  has  given  its  finding  that  the  

transaction in question is pure and simple inter-State sales and falls  

within the purview of Section 3(a) of the Central Act.  This finding of  

fact has received the approval of the First Appellate Authority and the  

Sales Tax Appellate Tribunal which is the last fact finding authority  

in the appeals filed by the assessee.   

45. The  learned  senior  counsel  also  contended  that  the  

assessing officer is expected to look into each transaction in order to  

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find out whether a completed sale had taken place which could be  

brought  to tax under Section 3(a)  of  the  Central  Act.   Reliance is  

placed on the Constitution Bench decision of this Court in the case of  

Tata Engineering and Locomotive Co. Ltd. (supra).  We are bound by  

the view expressed by the Constitution Bench decision of this Court.  

However, in the present case, the assessing officer has not just picked  

up a stray transaction to hold that the entire transaction for the entire  

period  of  assessment  is  inter-State  sales,  which  would  attract  the  

charging provision.  In our considered view, the assessing officer, in  

his  detailed and well  considered order,  has looked into nearly 378  

documents and voluminous correspondence between the assessee and  

UIL and has discussed and co-related the documents to prove on facts  

that the disputed transaction is inter-State sales though the assessee  

claims that it is a mere stock transfer.  Therefore, we cannot accept  

the submission of the learned senior counsel in this regard.   Bearing  

in mind the provisions of Section 3(a) of the Central Sales Tax Act,  

1956 and on the facts of the case, the transactions in question were  

inter-State sales taxable under the Central Act.

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46. As a result of our above discussion, we do not find any  

merit in this appeal and the same is accordingly dismissed.  No order  

as to costs.            

  …………………………J.                                                                      [ D.K. JAIN ]

   …………………………J.             [ H.L. DATTU ]

New Delhi, March 04, 2011.

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