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CASE NO.: Appeal (civil)  4158-4186 of 2001

PETITIONER: State of Orissa and Anr

RESPONDENT: M/s K.B. Saha and Sons Industries Pvt. Ltd. & Ors. etc

DATE OF JUDGMENT: 27/04/2007

BENCH: Dr. ARIJIT PASAYAT & LOKESHWAR SINGH PANTA

JUDGMENT: J U D G M E N T

(With Civil Appeal Nos. 5341-5344 of 2001 and  I.A.No.3 in SLP (C) No.15308/2002)

Dr. ARIJIT PASAYAT, J.

       Appellants-State of Orissa and the Orissa Forest  Department Corporation Ltd. (in short the ’Corporation’) in  these appeals call in question legality of the judgment  rendered by a Division Bench of the Orissa High Court  allowing the writ petitions filed under Article 226 of the  Constitution of India, 1950 (in short the ’Constitution’).  

       Writ petitions were filed by the respondents on the plea  that the transactions between them and the Corporation were  in course of inter-State trade and, therefore, only sales tax  under the Central Sales Tax Act, 1956 (in short the ’Central  Act’) and not the Orissa Sales Tax Act, 1947 (in short the  ’State Act’) was leviable. Accordingly, prayer was made for a  declaration that levy and collection of tax under the State Act  was unauthorized, without jurisdiction and the excess amount  collected from them under the guise of State sales tax should  be refunded.  

       Background facts as presented by the appellants are as  follows:

       The respondents have their registered office outside the  State of Orissa. They carry on business in tobacco and kendu  leaves. They prepare bidi at factories situated in the State of  West Bengal. The Corporation is a Government of Orissa  Undertaking. Trade in Kendu leaves in the State of Orissa is a  State monopoly and, therefore, is being transacted by the  Corporation which sells processed and Phal kendu leaves by  way of tender and auction every year. The writ petitioners had  registered both under the West Bengal Sales Tax Act, 1994 (in  short the ’West Bengal Act’) and the Central Act.  

       As usual, the Corporation issued tender notice for sale of  processed and Phal kendu leaves for the year 2000-2001 and  invited sealed tenders from purchasers duly registered with it.  All the writ petitioners were registered purchasers with the  Corporation and they submitted tenders which were duly

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accepted. They also entered into agreements with the  Corporation. After the sale of kendu leaves and payment of the  sale value, lifting orders were issued by the Corporation to its  respective Divisional Managers permitting the purchasers to  lift the goods. Thereafter, the concerned Divisional Forest  Officer issued transport permit in the prescribed form on the  basis of which the writ petitioners transported the kendu  leaves to their places of business in the State of West Bengal.  According to the writ petitioners the sale and purchase of  kendu leaves are deemed to have taken place in course of  inter-State trade because the sale/purchase had occasioned  the movement of kendu leaves from the State of Orissa to the  State of West Bengal and as such it is exigible to central sales  tax under the Central Act and not local Act i.e. State Act.  The  plea was resisted by the State. According to it the levy of sales  tax under the State Act was justified. To similar effect was the  stand of the Corporation.  

       The High Court referred to various provisions of the  Orissa Kendu Leaves (Control of Trade) Act, 1961 (in short the  ’Kendu Leaves Act’) under which the State of Orissa has  assumed monopoly of trading kendu leaves. Rules framed  thereunder are known as Orissa Kendu Leaves (Control of  Trade) Rules, 1962 (in short ’Central Rules’).  It was noted by  the High Court that Section 3(2)(b) of Kendu Leaves Act lays  down that notwithstanding anything contained in sub-section  (1), leaves purchased from government or any officer or agent  specified in the said sub-section by any person for  manufacture of bidis within the State or by any person for sale  outside the State may be transported by such person outside  the unit under a permit to be issued in that behalf by such  authority as may be prescribed and the permits so issued  shall be subject to such conditions as may be prescribed. The  High Court also referred to Rule 5-B which deals with disposal  of kendu leaves. Particular reference was made to sub-rule  (10) and sub-rule (11) of the said Rule. Under sub-rule (11) the  purchaser is required to execute an agreement in the  prescribed form ’H’ within 15 days from the date of receipt of  an order relating to his selection as purchaser failing which  the said order of selection shall be liable to be cancelled. Sub- rule (13) provides that purchaser shall take delivery of kendu  leaves from such depots or stores as indicated by the  Divisional Forest Officer during the agreement. Rule 6 deals  with grant of transport permit. The High Court relied upon the  said Rule for its conclusion that the transactions were in the  nature of inter-State trade. Reference was made to sub-rule (1)  of Rule 6 which lays down that an application for issue of  permit under Section 3(2)(b) of the State Act in the prescribed  form ’C’ has to be made to the Divisional Forest Officer. The  High Court found that the writ petitioners were purchasers  duly registered with the Corporation. They have submitted  their tenders pursuant to the tender of notice. Their bids were  accepted pursuant to which in each case agreement was  executed.  As an instance regarding the nature of the  transaction, reference was made to the factual position in OJC  9724/2000 filed by Ashok Bidi and Anr. In that case it was  noted that the Divisional Manager of the Corporation, Balangir  Division in his letter dated 13.11.2000  wrote to the Sub  Divisional Manager, Padampur Sub Division, requesting him  to give delivery of the stock to writ petitioner No.1 on receipt of  the transport permit from the Divisional Forest Officer, Kendu  Leaf, Padampur. In the copy which was forwarded to the  Divisional Forest Officer, Kendu Leaf, Padampur Division, the  Divisional Manager requested him to issue necessary  transport permit in favour of the writ petitioner. The challan

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indicates that the goods were to travel from Mithapali in  Orissa to Aurangabad in West Bengal.  The transport permit  also noted the destination. It was, therefore, concluded by the  High Court that kendu leaves can only be delivered after  submission of necessary transport permit and the sale can  only be completed after delivery of the goods, that is to say,  after the goods have been directed to move to the definite place  as mentioned in the transport permit. Such permits clearly  indicate the destination and also checking and examination at  check gates in between the point of despatch and destination  so as to avoid diversion of the goods. It was, therefore,  concluded that the pre conditions essential for a sale in course  of inter-State trade were satisfied and the transactions have to  be held as inter-State sale within the meaning of Section 3(a)  of the Central Act. The writ petitions were accordingly allowed.

       In support of the appeals, learned counsel for the  appellants submitted that unnecessary stress has been laid by  the High Court on the transport permit. They submitted that  even in case of intra-State trade, the transport permits were  required. There was in each case an agreement with the  Corporation and nowhere it stipulates that the goods could  only be taken outside the State. After the sale was completed  in the State of Orissa, the purchaser was free to take it to any  destination.  

The nature of the transaction has to be concluded on the  basis of the common intention of the parties. The seller had no  knowledge as to what is the ultimate destination. Mere  knowledge to the seller is not sufficient. Something more is  necessary. There was no material to show that the seller’s  intention was of inter-State trade. The permit issued for  outside the units is only for the convenience of the  purchasers, where the goods pass is immaterial.  

       Learned counsel for the Corporation submitted that the  permit was issued to facilitate transport and there was no  binding obligation and compulsion to take them outside the  State.  

       Learned counsel for the Corporation further stated that  though a casual reading of Clause 3.13 gives an impression  that there was no definite point of sale spelt out in the  agreement, yet a complete reading of the agreement in its  entirety goes to prove that sale was intended to be intra-State  sale. So far as the permit is concerned it was submitted, as  noted above, that it is only to facilitate the movement of goods.  Nobody can move the articles without the permits, but that  does not restrict loading. Knowledge of about the State of  destination is not determinative. There is no embargo on  delivery and the embargo is only on transportation.  

One of the appeals filed related to certain interim orders  passed after the disposal of the writ petitions. Learned counsel  for the Corporation stated that such a practice is unknown in  law. After the writ petition is disposed of, the Court becomes  functus officio and could not have passed any order of either  interim or final nature.          Learned counsel for the respondents on the other hand  supported the judgment of the High Court.   

        The nature of a transaction i.e. whether it is an inter- State or intra-State would depend upon the factual scenario of  the case under examination. The Corporation only accepts

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tenders from purchasers who are duly registered with it. The  registration is renewed from time to time. One of the Clauses  on which the High Court has placed great reliance is Clause  3.7. The same reads as follows:

"The tenderer shall be bound by all Forest  Department rules and regulations in  connection with the purchase and transit of  the forest produce."

It has been pointed out by learned counsel for the respondents  that in the tender document there was clear indication that  the principal place of business and additional place of  business of the respondents were all outside the State of  Orissa. The details of the registrations under the West Bengal  Act and the Central Act were indicated. The way bill of  transport and consignment of goods despatched from outside  the State of West Bengal to any place in West Bengal was also  brought on record.  

       Reference was also made to the certificate issued by the  Joint Commissioner, Income Tax, West Bengal under Section  206C of the Income Tax Act, 1961 (in short the ’Income tax  Act’) to the Corporation to the effect that the respondents  would be utilizing the kendu leaves for the purpose of  manufacture and not for trade purpose and, therefore,  authorized the Corporation not to collect tax at source in  terms of Section 206C of the Income Tax Act.  

       Though mere knowledge about the ultimate destination  cannot be sufficient, yet cumulative effect of the factual  scenario has to be considered.  

       At this juncture, it is relevant to take note of a few  decisions on the question of inter-State sale.  

       Strong reliance was placed by learned counsel for the  State on a decision of this Court in Balabhagas Hulaschand v.  State of Orissa (1976 (2) SCC 44), more particularly, the  position highlighted at page 52 which reads as follows:

"12. Furthermore, we can hardly conceive of  any case where a sale would take place before  the movement of goods. Normally what  happens is that there is a contract between the  two parties in pursuance of which the goods  move and when they are accepted and the  price is paid the sale takes place. There would,  therefore, hardly be any case where a sale  would take place even before the movement of  the goods. We would illustrate our point of  view by giving some concrete instances:

Case No. I\027A is a dealer in goods in State  X and enters into an agreement to sell his  goods to B in State Y. In pursuance of the  agreement A sends the goods from State  X to State Y by booking the goods in the  name of B. In such a case it is obvious  that the sale is preceded by the  movement of the goods and the  movement of goods being in pursuance of  a contract which eventually merges into a

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sale the movement must be deemed to be  occasioned  by the sale. The present case  clearly falls within this category.

Case No. Il\027A who is a dealer in State X  agrees to sell goods to B her  he books  the goods from State X to State Y in his  own name and his agent in State Y  receives the goods on behalf of A.  Thereafter the goods are delivered to B in  State Y and if B accepts them a sale takes  place. It will be seen that in this case the  movement of goods is neither in  pursuance of the agreement to sell nor is  the movement occasioned by the sale.  The seller himself takes the  goods to  State Y and sells the goods there. This is,  therefore, purely an internal sale which  takes place in State Y and falls beyond  the purview of Section 3(a) of the Central  Sales Tax Act not being an inter-State  sale.

Case No. III\027-B a purchaser in State Y  comes to State X and purchases the  goods and pays the price thereof. After  having purchased the goods he then  books the goods from State X to State Y  in his own name. This is also a case  where the sale is purely an internal sale  having taken place in State X and the  movement of goods is not occasioned by  the sale but takes place after the property  is purchased by B and becomes his  property".

       It is to be noted that the position in law as stated in the  same paragraph was specifically dissented from in  Commissioner of Sales Tax, U.P. and Ors. v. M/s Bakhtawar  Lal Kailash Chand Arhti and Ors. (1992 (3) SCC 750). In para  15 it was noted as follows:

"15. Shri Sehgal relies particularly upon "Case  No. III" contained in the first extract and  clause (iii) mentioned in the second extract.  Relying upon these statements, the learned  counsel contends that a concluded sale must  necessarily take place in the other State and  not in the State from which the goods  emanate. According to him, a concluded or a  completed sale must follow the movement of  goods and should not precede. If a purchase or  sale is complete in the State from which the  goods emanate, he says, it can never be an  inter-State purchase or sale. We cannot accede  to this understanding of the learned counsel.  The said observations, no doubt rather widely  worded, must be understood in the context of  the question that arose for consideration in  that case viz., whether an agreement of sale is  included within the definition of ’sale’ as  defined in the Central Sales Tax. Be that as it  may, the true position has since been  explained in the later decision  in Khosla and

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Co. It is immaterial whether a completed sale  precedes the movement of goods or follows the  movement of goods, or for that matter, takes  place while the goods are in transit. What is  important is that the movement of goods and  the sale must be inseparably connected. The  ratio of Balabhagas is this: if the goods move  from one State to another in pursuance of an  agreement of sale and the sale is completed in  the other State, it is an inter-State sale. The  observations relied upon by Shri Sehgal do not  constitute the ratio of the decision and cannot  come to the rescue of the appellant-State.  Indeed, if one looks to the language employed  in clause (a) of Section 3 it seems to suggest  that the movement of goods follows upon and  is the necessary consequence of the sale or  purchase as the case may be and not the other  way round."

       In the said judgment the view expressed by this Court in  Union of India and Anr. v. M/s K.G. Khosla & Co. Ltd. and  Ors. (1979 (2) SCC 242) was adopted. In paragraphs 15 and  17 of the  judgment in Khosla’s case the position was stated as  follows:

"15. It is true that in the instant case the  contracts of sales did not require or provide  that goods should be moved from Faridabad to  Delhi. But it is not true to say that for the  purposes of Section 3(a) of the Act it is  necessary that the contract of sale must itself  provide for and cause the movement of goods  or that the movement of goods must be  occasioned specifically in accordance with the  terms of the contract of sale.  The true position  in law is as stated in Tata Iron and Steel Co.  Ltd., Bombay v. S.R. Sarkar (1961 (1) SCR  379) wherein Shah, J. speaking for the  majority observed that clauses (a) and (b) of  Section 3 of the Act are mutually exclusive and  that Section 3(a) covers sales in which the  movement of goods from one State to another  "is the result of a covenant or incident, of the  contract of sale, and property in the goods  passes in either State" (page 391). Sarkar, J  speaking for himself on behalf of Das Gupta, J  agreed with the majority that clauses (a) and  (b) of Section 3 are mutually exclusive but  differed from it and held that "a sale can  occasion the movement of the goods sold only  when the terms of the sale provide that the  goods would be moved; in other words, a sale  occasions a movement of goods when the  contract of sale so provides" (page 407). The  view of the majority was approved by this  Court in Cement Marketing Co. of India v.  State of Mysore  (1963 (3) SCR 777);  State  Trading Corporation of India v. State of Mysore  (1963 (3) SCR 792) and Singareni Collieries  Co. v. State of Andhra Pradesh (1966 (2) SCR  190). In K.G. Khosla & Co. v. Deputy  Commissioner of Commercial Taxes, counsel  for the Revenue invited the court to reconsider  the question but the Court declined to do so.

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In a recent decision of this court in Oil India  Ltd. v. The Superintendent of Taxes  (1975 (3)  SCR 797)  it was observed by Mathew, J., who  spoke for the Court, that: (1) a sale which  occasions movement of goods from one State  to another is a sale in the course of inter-State  trade, no matter in which State the property in  the goods passes; (2) it is not necessary that  the sale must precede the inter-State  movement in order that the sale may be  deemed to have occasioned such movement;  and (3) it is also not necessary for a sale to be  deemed to have taken place in the course of  inter-State trade or commerce, that the  covenant regarding inter-State movement must  be specified in the contract itself. It would be  enough if the movement was in pursuance of  and incidental to the contract of sale (page 801  SCC p.737, para 9). The learned Judge added  that it was held in a number of cases by the  Supreme Court that if the movement of goods  from one State to another is the result of a  covenant or an incident of the contract of sale,  then the sale is an inter-State sale.

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17. This decision may be usefully contrasted  with another decision between the same  parties, which is reported in State of Bihar v.  Tata Engineering & Locomotive Co. Ltd. (1971  (2) SCR 849). In that case the turnover in  dispute related to the sales made by the  company to its dealers of trucks for being sold  in the territories assigned to them under the  dealership agreements. Each dealer was  assigned an exclusive territory and under the  agreement between the dealers and the  company, they had to place their indents, pay  the price of the goods to be purchased and  obtain delivery orders from the Bombay office  of the company. In pursuance of such delivery  orders trucks used to be delivered in the State  of Bihar to be taken over to the territories  assigned to the dealers. Since under the terms  of the contracts of sale the purchasers were  required to remove the goods from the State of  Bihar to other States, no question arose in the  case whether it was or was not necessary for a  sale to be regarded as an inter-State sale that  the contract must itself provide for the  movement of goods from one State to another.  If a contract of sale contains a stipulation for  such movement, the sale would, of course, be  an inter-State sale. But it 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."

In Oil India Ltd. v. The Superintendent of Taxes and Ors.  (1975 (1) SCC 733) the position was stated as follows:

       "This Court has held in a number of

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cases that if the movement of goods from one  State to another is the result of a covenant or  an incident of the contract of sale, then the  sale is an inter-State sale. (See Tata Iron &  Steel Co. Ltd. v. S.R. Sarkar (1961 (1) SCR  379) and State of J & K v. Caltex (India) Ltd.  (1966 (17) STC 612). Here, the crude oil was  carried from Assam through the pipelines  specially constructed by the petitioner to the  refinery at Barauni in Bihar and there the oil  was pumped and delivered to the Indian Oil  Corporation. Clause 12 of the agreement dated  January 14, 1958 provides that the petitioner  shall arrange for the construction of pipeline or  such other related facilities as the company  shall consider necessary for the transport of  crude oil to be produced by it to the refinery at  Barauni. This would indicate that the  construction of pipeline was undertaken by the  petitioner in pursuance of the agreement and  that that was for the specific purpose of  transporting crude oil to Barauni from Assam.  This can only point to the conclusion that the  parties contemplated that there should be  movement of goods from the State of Assam to  the State of Bihar in pursuance to the contract  of sale."  

       In order to decide whether sale is inter-State it is  sufficient that movement of goods should have been  occasioned by sale or should be incidental thereto. What is  important is that the movement of goods and the sale must be  inseparably connected.  It is not necessary that there should  be an existence of contract of sale incorporating the express or  implied provision regarding inter-State movement of goods.  Even if hypothetically it is stated that such a requirement is  necessary in the facts of the present case such implied  stipulation does exist. This is referable to Clause 3.7 of the  agreement.  

       At this juncture it is also relevant to take note of Clause  3.13 which reads as follows.  

"The successful tenderer shall pay security  deposit @ 25% of the full purchase price of the  lot(s) within 15 days of issue of ratification  order provided that where the tenderer makes  purchase for purpose of Export outside India,  he may, if he so elects and on furnishing the  requisite papers in support thereof, tender the  security deposit in the form of Bank Guarantee  (BG) to the extent  of 20% of the full sale value  of the stock purchased in the prescribed form  valid for a period of not less than one year and  the said BG shall be released after finalization  of the export deal."

Though, learned counsel for the Corporation submitted that  this was only for the purpose of financial transactions, yet it is  really not so. The clause clearly recognizes the possibility of a  tenderer making purchase for the purpose of export outside  India. If sale was completed intra-State, as contended by the  State and the Corporation, the question of affecting the  purchase for the purpose of export does not arise.

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       A specific query was made as to which is the specific  provision in the agreement relates to completion of sale, an  evasive reply was given that a complete reading of the clause  makes the position clear. It may be noted that in the appeal  the State has made a statement to the effect that Clause 3.6 of  the tender notice refers to finalization of sale and according to  it the sale is completed in the State of Orissa. A bare reading  of Clause 3.6 amply proves that there is no substance in such  a plea. Clause 3.6 reads as follows:

"Sale once finalized in favour of a tenderer  cannot be transferred subsequently to any  other person".  

A sale once finalized in favour of a tenderer cannot be  transferred subsequently to any other person. It does not  remotely even refer to situs of such sale.   

       The letter of the Divisional Manager of the Corporation,  Balangir Division dated 13.11.2000 is also of some relevance.  The relevant portion is as follows:

"OFFICE OF THE DIVISIONAL MANAGER, ORISSA FOREST DEVELOPMENT CORPORATION LTD. BALANGIR KENDU LEAF DIVISION

No.8827                  4202           Date 13.11.00 To Sub-Divisional Manager Padampur Sub-Division

Sub: Delivery of stock of Kendu leaves lot  No.214/BPR/9965 Division lot, B-301/1, B-302/1  and B-303/1 of Unit No. 47(B) to the purchaser vide  delivery receipt No.20710, 20711 & 20712 dt.  10.9.2000

Dear Sir,

       We \005\005\005\005..Therefore, you are requested to  give delivery of the stock to the concerned  purchaser on receipt of the transport permit from  the Divisional Forest Officer (KL) Padampur as per  the following quality specification. \005\005

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                                                       Yours faithfully,

                                                               Sd/-                                                 Divisional Manager                                                 Balangir Kendu Leaf Division

Memo No\005\005\005\005\005Date\005\005.

       Copy to the Divisional Forest Officer Padampur  Kendu Leaf Division for his information. He is  requested to please issue the necessary transport  permits in favour of the above named purchaser on  receipt of the form "C" duly endorsed by the  undersigned/our sub-Divisional Manager

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concerned.

                                               Divisional Manager                                                 Balangir Kendu Leaf Division"           As noted above, specific averments have been made in  the writ petitions about the certificate issued by the Income  tax authorities and there is no denial to this position.  

       Above being the position, the inevitable conclusion is that  the High Court was justified in its view. On the fact situation  established no interference is, therefore, called for. The  appeals are dismissed with no order as to costs.  

       In view of dismissal of the present appeals, no order is  required to be passed in I.A.No.3 in SLP (C) No.15308/2002.