27 November 1970
Supreme Court


Case number: Appeal (civil) 2402 of 1966






DATE OF JUDGMENT: 27/11/1970


CITATION:  1971 AIR  477            1971 SCR  (2) 849  1970 SCC  (3) 697  CITATOR INFO :  R          1975 SC1564  (29,33,60)  RF         1979 SC1160  (17)  R          1985 SC1689  (5)  F          1985 SC1754  (9)

ACT: Constitution  of India, 1950, Art. 286(2) as  it  originally stood-In  the  course  of  inter-State  trade  or  commerce, meaning of.

HEADNOTE: The assessee, having its registered office in Bombay and its factory   in  Bihar,  was  carrying  on  the   business   of manufacturing  and  selling trucks, bus  chassis  and  spare parts  to  their appointed dealers and  others.   Agreements were  entered  into between the assessee and  the  appointed dealers,  under which, each dealer was assigned a  territory in  which alone the dealer could shell. The dealers  had  to place  the indents, pay the price of goods to  be  purchased and  obtain  delivery  orders from the  Bombay  office.   In pursuance  of  the  delivery orders  the  trucks  etc.  were delivered  in Bihar to be taken to the territories  assigned to  them for sale there.  If the dealers failed to abide  by the term requiring them to move the goods outside the  State of   Bihar  they  would  have  committed  breach  of   their contracts, On  the question whether the turnover relating to the  sales made  by  the assessee to its dealers for sale  by  them  in their  respective  territories outside the State  of  Bihar, during the period 7th September 1955 to 31st March 1956, was exempt from liability to pay sales-tax under the Bihar Sales Tax  Act,  on the ground that the sales took  place  in  the course  of inter-State trade or commerce, under Art.  286(2) as it, then stood, HELD  :  Where under the terms of a contract  of  sale,  the buyer is required, as a necessary incident of the  contracts to remove the goods from the State in which he purchased the goods  to another State and when the goods are  so  removed,



the  sale  must  be considered as a sale in  the  course  of inter-State trade or commerce. [854 G-H; 858 A-13] State  of  Travancore Cochin v. The Bombay Co.  Ltd.  [1952] S.C.R.  1112, State of Travancore Cochin v. Shanmugha  Visal Cashew  Nut Factory, [1954] S.C.R. 53, Bengal  Immunity  Co. Ltd.  v.  State  of Bihar, [1955]  2  S.C.R.  603,  Endupuri Narasimham  & Son v. State of Orissa, [1962] 1  S.C.R.  314, Tata Iron & Steel Co. Ltd. v. S. R. Sarkar, [1961] ]  S.C.R. 379, The Cement Marketing Co. of India (P) Ltd. v. State  of Mysore,  14 S.T.C. 175, Ben Gorm Nilgiri Plantations Co.  v. Sales  Tax,  Officer, Special Circle,  Ernakulam,  [1964]  7 S.C.R. 706, K. G. Khosla & Co. (P) Ltd. v. Dy.  Commissioner of  Commercial  Taxes,  Madras,  17  S.T.C.  473  and   Tata Engineering & Locomotive Co. Ltd. v. Asstt.  Commissioner of Commercial Taxes & Anr. [1970] 1 S.C.C. 622, applied. Coffee  Board,  Bangalore v. Joint Commercial  Tax  Officer, Madras, 25 S.T.C. 528, explained.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No.2402 of 1966. 1-2-L694SupCI/71 850 Appeal  by special leave from the judgment and  order  dated May 4, 1966 of the Patna High Court in Misc.  Judicial  Case No. 284 of 1962. A.   K. Sen and U. P. Singh, for the appellants. N.   A.   Palkhivala,  S.  B.  Mehta,  B.  Datta,  for   the respondent. The Judgment of the Court was delivered by. Hegde,  J.  This is an appeal by special leave.   It  arises from the judgment of the High Court of Patna in a  Reference under  s.  25(3)  of the Bihar Sales Tax  Act,  1947.   That reference  was called for by the High Court at the  instance of  the  assessee  company  (the  respondent  herein.    The questions referred for the opinion of the High Court by  the Board of Revenue were :               "(1) With regard to the sales which took place               in  the period from 1st of April, 1955 to  the               6th  September 1955, whether the  assessee  is               entitled, upon the facts found by the Board of               Revenue  with  regard to these  categories  of               sales,  to exemption from liability under  the               Bihar  Sales-Tax Act because of the  provision               of  Article 286(1) (a) of the Constitution  as               it  stood at the relevant date read  with  the               explanation to that article.               (2)   With  regard  to the  sales  which  took               place in the period from 7th September,  1955,               to  31st March, 1956 whether the  assessee  is               entitled, upon the facts found by the Board of               Revenue  with  regard to these  categories  of               sales,  to exemption from liability under  the               Bihar  Sales-tax  Act on the ground  that  the               sales took place in the course of  inter-State               trade  or  commerce under Art. 286(2)  of  the               Constitution  as  it  stood  at  the  relevant               period." The  High Court answered the first question in the  negative and  against the assessee.  It answered the second  question in  the  affirmative  and in favour of  the  assessee.   The assessee  has not come up in appeal.  This appeal has  been brought by the State of Bihar contesting the correctness  of the opinion given by the High Court on the second of the two



questions referred to earlier. The  assessee is, a Public Limited Co.,  incorporated  under the  Indian Companies Act, 1913.  It carries on business  of manufacturing and selling inter-alia trucks and bus  chassis and  spare parts thereof to their appointed  dealers,  State Transport  Organizations  and individual  buyers  throughout India.  The registered office of                             851 the   assessee   is  at  Bombay  but   its   factory   where manufacturing proCess. is being carried on is at  Jamshedpur in  Bihar.  The assessee has appointed several  dealers  all over India for the sale of its trucks, bus-chassis and spare parts.  Those dealers are appointed under agreements entered into  between  the  in and the assessee.   The  turnover  in dispute  relates  to the sales made by the assessee  to  its dealers  of trucks, bus-chassis and spare parts  for  being sold   in  the  territories  assigned  to  them  under   the dealership agreements.  The agreements between the  assessee and its dealers appear to be similar.  Under the agreements, each dealer is assigned a territory .in, which alone he can sell the trucks, bus-chassis and other spare parts purchased by  him  from the assessee company.  He is  forbidden  from selling  anyone of those articles to any  purchaser  outside his territory.  As per the agreements, dealers will have  to place  their  indents,  pay the price of  the  goods  to  be purchased and obtain delivery orders from the Bombay  office of  the  assessee.  In pursuance of those  delivery  orders, trucks, bus chassis and other spare parts were delivered in Bihar to be taken over to the territories assigned to  them. Under  the contracts of sale, the dealers, were required  to remove  the  trucks,  bus  chassis  and  the  spare   parts, delivered  to them. in the State of Bihar to  place  outside Bihar.   These are facts found by the Board of  Revenue  and affirmed by the High Court.  On the basis of these facts, we have  whether the sales with which we are concerned in  this appeal  are  sales that took place in the course  of  inter- State  trade and commerce as contemplated by Art. 286(2)  of the  Constitution  as it stood at, the  relevant  time.   In other words the question for decision is, whether the  sales in question were sales for the purpose of inter-State  trade or  commerce  or whether they were sales in  the  course  of inter-State  trade or commerce.  As seen earlier,  the  High Court has held that, those sales took place in the course of interState trade or commerce. The  expression  "in  the  course  of"  appearing  in   Art. 286(1)(b) came up for consideration in State of  Travancore Cochin  and Ors. v. The Bombay Co. Ltd. (1) Therein in  this Court held that whether else may or may not fall within Art. 1286(1)(b)  of the Constitution,. sales and purchases  which themselves occasion the export or import of the goods as the case  may  be out of or into, the territory  of  India  come within  the  exemption.   In that case  this  Court  further observed  that  a  sale  by export  involves,  a  series  of integrated activities commencing from the agreement of- sale with  a  foreign buyer and ending with the delivery  of  the goods  to a common carrier for transport out of the  country by land or sea.  Such a sale cannot be dissociated  from,the export  without which it cannot be effectuated and the  sale and the resultant export form parts of a single transaction. Of these two integrated activities which to- (1)  [1952] S.C.R. 1112. 852 gather constitute an export sale, whichever first occurs can well be regarded as taking place in the course of the other. Even in cases where the property in the goods passed to  the



foreign buyers and the sales were thus completed, within the State  before  the goods commenced their journey  from  the State,  the sales must be regarded as having taken place  in the  course  of the export and therefore exempt  under  Art. 286(1)(b).   The same exposition of the law is true  of  cl. (2)  of  Art.  286 as it stood prior  to  its  amendment  on September 11, 1956. The next decision in which Art. 286(1)(a), 1(b) and (2) came to be considered by this Court is State of Travancore Cochin and Ors. v. Shanmugha Vilas Cashew Nut Factory and Ors.  (1) Therein   this  Court  observed  that  the   word   "course’ etymologically  denoties movement from one point to  another and the expression "in the course of" in Art. 286(1)(b)  not only  implies a period of time during which the movement  is in  progress  but  postulates  also  a  connected  relation. Consequently,  a  sale in the course of export out of  the country should be understood in the context of Art.  286(1)- (b)  as  meaning  a sale taking place not  only  during  the activities  directed to the end of exportation of the  goods out  of the country, but also as part of or  connected  with such activities.  But a purchase of goods for the purpose of export is only an act preparatory :to their export and.  not an act done in the course of the export of ,the goods. In The Bangal Immunity Company Ltd. v. The State of Bihar and  Ors.  (2)  Venkatarama Ayyar, J. observed that  a  sale could  be a sale in the course of inter-State trade only  if two  conditions  concur  : (1) a sale of  goods  and  (2)  a transport of those goods from one State to another under the contract of sale. In  Endupuri Narasimham and son v. The State of  Orissa  and Ors.  (3),  this  Court held that in order that  a  sale  or purchase  might be inter-State, it is essential  that  there must be a transport of goods from one State to another under the contract of sale or purchase.  IA purchase made inside a State for sale outside the State cannot itself be, held  to be  in the course of inter-State and the imposition  of  tax thereon is not repugnant to Art. 286(2) of the Constitution.  In  Tata Iron and Steel Co. Ltd. v. S. R. Sarkar  and  ors. (4)  this  Court  held that within cl. (b) of S.  3  of  the Central  Sales  Tax Act, 1956, 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  and also covers sales in which  movement  of goods from one State to another is the result of a  covenant or incident of the contract of sale and property in (1) [1954] S.C.R. 53.    (2) [1955] 2 S.C.R.603. (3) [1962] 1, S.C.R. 314.   (4) [1961] 1 S.C.R. 379. 853 the goods passes in either State.  Clause (b) of s. 3 of the Central Sales Tax Act, 1956 says :               "That  no  law  of a  State  shall  impose  or               authorise  the  imposition of,. a tax  on  the               sale  or purchase of goods where such sale  or               purchase  takes  place in the  course  of  the               import  of goods into, or export of the  goods               out of,. the territory of India."               In The Cement Marketing Co. of India  (private               Ltd.  and  anr.  v. The State  of  Mysore  and               anr.(1), this Court held that where the  goods               were transported outside the State as required               by the contract of sale, they are  inter-State               sales and hence exempt from sales-tax.  On the               facts of that case it was held that the  sales               transactions  themselves involved movement  of



             goods across the border.               In  Ben Gorm Nilgiri Plantations  Co.  Coonoor               and ors. v. Sales Tax Officer, Special Circle,               Ernakulam  and  ors.(2)  this  Court  had   to               consider what sales are sales in the course of               export  and what sales are for the purpose  of               export.   In the course of the judgment  Shah,               J. (one of us) observed :               "A  sale in the course of export predicates  a               connection  between the sale and  export,  the               two  activities being so integrated  that  the               connection   between   the   two   cannot   be               voluntarily  interrupted, without a breach  of               the  contract or the compulsion  arising  from               the nature of the transaction.  In this  sense               to  constitute a sale in the course of  export               it may be said that there must be an intention               on  the part of both the buyer and the  seller               to   export,  there  must  be  obligation   to               export,. and there must be an actual export.               The obligation 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               links  the sale to export.  A  transaction  of               sale  which is a preliminary to export of  the               commodity  sold may be regarded as a sale  for               export, but is not necessarily to be  regarded               as  one  in the course of export,  unless  the               sale occasions export." In  K. G. Khosla and Co. (P) Ltd. v. Deputy Commissioner  of Commercial Taxes, Madras(3 )  this Court held that before a sale  could  be  said to have  occasioned  the  import,  the movement of goods must have incidental to the contract or in pursuance of the conditions of the contract and there should be no possibility (1) 14, S.T.C. 175 (S.C.)    (2) 117 S.T.C. 473. (S.C.) (3)  [1964] S.C.R. 706. 854 the  goods  being  diverted by the assessee  for  any  other purpose. meaning thereby that there should be no possibility of diversion according to law or contract and not in  breach of them.’ In  Tata Engineering and Locomotive Co. Ltd. v.  The  Asstt. Commissioner  of  Commercial Taxes and anr.(1),  this  Court after referring to the earlier decisions observed :               "It  has been laid down that the sale  in  the               course   of  export,   predicated   connection               between   the   sale  and  export,   the   two               activities   being  so  integrated  that   the               connection   between   the   two   cannot   be               voluntarily  interrupted without a  breach  of               the  contract or the compulsion  arising  from               the  nature of the transaction.  To occasion               export  there must exist such a  bond  between               the   contract   of  sale   and   the   actual               exportation  that  each link  is  inextricably               connected  with the one immediately  preceding               it.   The principle thus admits of  no  doubt.               according to the decisions of this Court, that               the sales to be exigible to tax under the  Act               (Central Sales Tax Act, 1956) must be shown to               have  occasioned the movement of the goods  or               articles  from  one  State  to  another.   The               movement  must be the result of a covenant  or



             incident of the contract of sale."               If we apply the principles enunciated by  this               Court  in the decisions referred to  above  to               the facts of this case, it is obvious that the               sales with which we are concerned in this case               are sales in the course of inter-State  trade.               The dealers were required to move the  trucks,               buses, chassis and other spare parts purchased               by  them  from the State of  Bihar  to  places               outside  Bihar.  They are so required  by  the               terms  of the contracts entered into  by  them               with the assessee.  They would have  committed               breach  of  their contracts and  incurred  the               penalty   prescribed   in   their   dealership               agreements, if they had failed to abide by the               term requiring them to move the goods  outside               the State of Bihar.               The decided cases establish that sales will be               considered as sales in the course of export or               import  or sales in the course of  inter-State               trade   and  commerce  under   the   following               circumstances:               (1)   When goods which are in export or import               stream are sold;               (2)   When  the contract of sale or law  under               which goods are sold require those goods to be               exported  or imported to a foreign country  or               from  a foreign country as the case may be  or               are  required  to be transported  to  a  State               other               (1) [1970] 1 S.C.C.622.               855               than the State in which the delivery of  goods               takes place and               (3)   Where  as  a necessary incident  of  the               contract of sale goods sold are required to be               exported  or imported. or transported  out  of               the State in which the delivery of goods takes               place. But  Mr. A. K. Sen, learned Counsel for the State  of  Bihar contended that this Court has taken a different view of  the law  in  Coffee  Board, Bangalore v.  Joint  Commercial  Tax Officer,  Madras and anr.(1). According to him the ratio  of that  decision  is that whenever goods are  delivered  in  a State  in  pursuance  of a contract of  sale,  the  sale  in question  becomes exigible to tax in the State in which  the goods  are delivered unless they are taken out of the  State for  purposes of consumption and not resale, or the same  is taken  out of the State in pursuance of an already  existing agreement to resell in the State to which it is taken.   The decision  in  Coffee  Board case (supra) does  not,  in  our opinion, afford any basis for these contentions. We  have  earlier  noticed that this Court in  a  series  of decisions  has  pronounced in unambiguous terms  that  where under the terms of a contract of sale, the buyer is required to  remove  the goods from the State in which  he  purchased those  goods  to  another State and when the  goods  are  so moved, the sale in question must be considered as a sale  in the course of inter-State trade or commerce.  This is a well established position in law.  In the Coffee Board case  this Court  did  not  deviate from this  position  nor  could  it deviate  as the earlier decisions were binding on it.   Fur- ther  in  the  course of his  judgment,  the  learned  Chief Justice  who spoke for the Court referred with  approval  to the  earlier  decisions  of  this  Court  where  distinction



between  the  sales in the course of  inter-State  trade  or commerce  and sales for the purpose of interState trade  and commerce were explained.  On the basis of the facts in  that case, his Lordship came to the conclusion that the export of the  coffee in question was, not integrated with  the  sales with  which  the Court was concerned and that there  was  no direct bond between the export and the sales.  In the course of his judgment his Lordship observed :               "Here there are two independent sales involved               in the export programme.  The first is a  sale               between  the  Coffee Board as  seller  to  the               export  promoter.  Men there is the  sale  by               the  export promoter to a foreign  buyer.   Of               the  latter  sale, the Coffee Board  does  not               have  any  inkling when the first  sale  takes               place.  The Coffee Board’s sale is not in  any               way  related to the second  sale.   Therefore,               the first sale has no connec-               (1)   25 S.T.C. 528 (S.C.)               856               tion  with  the second sale which  is  in  the               course of export, that is to say, movement  of               goods between an exporter and an importer." This finding clearly brings out the distinction between  the facts  of the Coffee Board’s case (supra) and the  facts  of the cases wherein this Court held that the sales in question were sales in the course of export or import.  In the Coffee Board’s  case this Court found that what was insisted on  by the  Coffee  Board  was that the coffee set  apart  for  the purpose of the export must be exported; it was not incumbent for  the  purchasers at the auction to  export  that  coffee themselves; they may do it themselves or they may sell it to somebody  who may export it outside India.  On  that  basis, this Court came to the conclusion that the sales effected by the Coffee Board are not sales in the course of export; they are  only  sales for, the purpose of export.  The  ratio  of that decision does not bear on the facts before us.  Herein, under  the  terms of the contracts of sale,  the  purchasers were required to remove the goods from the State of Bihar to other  States.  Hence the sales with which we are  concerned in  this  case  must be held to be sales in  the  course  of inter-State trade or commerce. For the reasons mentioned above, we agree with the  findings of the High Court.  In the result this appeal fails and  the same is dismissed with costs. V.P.S. Appeal dismissed 857