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SUPREME COURT OF INDIA
8th May 1953
M. PATANJALI SASTRI, CJI., B.K. MUKHERJEA, S.R. DAS; BOSE AND GHULAM HASAN JJ.
State of Travancore-Cochin and others - Appellants
Versus
Shanmugha Vilas Cashewnut Factory, Quilon-Respondents.
Civil Appeals Nos. 26, 27 and 30 to 36 of 1952.
Advocates appeared
Shri T. N. Subramania Iyer, Advocate General of Travancore-Cochin (Shri T. R. Balakrishna Iyer, Advocate, with him), Instructed by Shri G. H. Rajadhyaksha, Agent-for Appellants in all the Appeals.
Shri M. K Nambiyar, Senior Advocate (Shri N. Palpu, Advocate, with him), Instructed by Shri Rajinder Narain, Agent-for Respondents (in C. As. Nos. 26 & 33 of 1952)
Shri M. K. Nambiyar, Senior Advocate, (Shri N. Palpu, Advocate, with him), Instructed by Shri S. Subramanian, Agent-for Respondent (in Civil Appeals Nos. 27, 30-32 & 34-36 of 1932).
Shri M. C. Setalvad, Attorney- General for India & Shri C.K.Daphtary, Solicitor-General for India (Shri Porus A. Mehta, Advocate, with them), instructed by Shri G. H. Rajadhyaksha, Agent - for the Interveners (Union of India).
Shri V. K. T. Chari, Advocate-General of Madras (Shri V. V. Raghavan, Advocate, with him), instructed by Shri G. H. Rajadhyaksha, Agent-for State of Madras.
Shri V. Rajaram lyer, Advocate-General of Hyderabad (Shri B. N. Sastri, Advocate, with him), instructed by, Shri G. H. Rajadhyaksha, Agent-for State of Hyderabad.
Shri S. M. Sikri, Advocate- General of Punjab (Shri M. I.. Sethi, Advocate, with him). instructed by Shri G. H. Rajadhyaksha, Agent-for State of Punjab (1).
Shri A. R. Somnatha Iyer, Advocate-General of Mysore (Shri R. Ganapathi Iyer. Advocate with him), instructed by Shri G. H. Rajadhyaksha, Agent-for State of Mysore.
Shri K. B. Asthana, Advocate, instructed by Shri C. P. Lal, Agent-for State of U.P.
The respondents were dealers in cashew nuts in the State of Travancore-Cochin and their business consisted in importing raw cashew nuts from abroad and the neighboring districts of the State of Madras in addition to purchases made in the local market, and, after converting them by means of certain processes into edible kernels, exporting the kernels to other countries, mainly America. The oil pressed from the shells removed from the cashew nuts was also exported. After the coming into force of the Constitution, the respondents claimed exemption from sales tax under Article 286 (1) (b). The claim was rejected by the sales-tax authorities but held up by the High Court on an application under Article 226 of the Constitution.
Held1 (Per Patanjali Sastsi C.J., Mukherjea, Bose and Ghulam Husan J.J., Das J. dissenting): (I) The last purchase of goods made by the exporter for the purpose of exporting them to implement orders already
1. On appeal from A.I.R. 1952 Trav. Co. 83.
received from a foreign buyer or expected to be received subsequently hi the course of business, and the first sale by the importer to fulfil orders pursuant to which the goods were imported or orders expected to be received after the import, are not within the protection of Art. 286 (I) (b). What is exempted under the clause is the sale or purchase of goods taking place in the course of the import of the goods into or export of the goods out of the territory of India. It is obvious that the words "import into" and "export out of" in this context do not mean the article or commodity imported or exported. The reference to "the goods" and to "the territory of India" make it clear that the words "export out of" and "import into" mean the exportation out of the country and importation into the country respectively. The word "course" etymologically denotes movement from one point to another, and the expression "in the course of" not only implies a period of time during which the movement is in progress but postulates also a connected relation. A sale in the course of export out of the country should be understood in the context of clause (1) (b) 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. The time factor alone is not determinative. The previous decision1 proceeded on this view and emphasized the integral relation between the two where the contract of sale itself occasioned the export as the ground for holding that such a sale was one taking place in the course of export.
(2) The phrase "integrated activities" was used in the previous decision to denote that "such a sale" (i.e. a sale which occasions the export) "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." It is in that sense that the two activities-the sale and the export-were said to be integrated. A purchase for the purpose of export like production or manufacture for export, is only an act preparatory to export and cannot be regarded as an act done "in the course of the export of the goods out of the territory of India." In view of the distinct character and quality of the two transactions, it is not correct to speak of a purchase for export as an activity so integrated with the exportation that the former could be regarded as done "in the course of" the latter; The same reasoning applies to the first sale after import which is a distinct local transaction effected after the importation of the goods into the country has been completed, and having no integral relation with it.
(3) Sales in the State by the exporter or importer by transfer of shipping documents while the goods are beyond the customs frontier are within the exemption, assuming that the State power of taxation extends to such transactions.
(4) The decision of the High Court quashing the assessments in question is conferred but the cases will go back to the Sales Tax Officer concerned in the respective appeals for making fresh assessments according to law and in the light of this judgment.
Per Das J. (contra): (I) The non obstante clause in the Explanation clearly implies that the framers of the Constitution adopted the view that a sale or purchase has a situs and further that it ordinarily takes place at the place where the property in the goods passes. The Explanation
1. (1952) S.C.R. 1112 at p. 626 ante.
to clause (i) (a) of Article 286,however, provides that, in spite of such genera law, a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State.
In effect, therefore, the Constitution, by this explanation to clause (1) (a) acknowledges that under the general law the sale or purchase of the kind therein mentioned may not really take pi ace in the delivery State but nevertheless requires it to be treated as if it did. That is to say, the explanation creates a legal fiction. The only effect of this assignment of a fictional location to a particular kind of sale or purchase in a particular State is to attract the ban of clause (I) (a) and to take away the taxing power of all other States in relation to such a sale or purchase ever) though the other ingredients which go towards the making up of a sale or purchase are to be found within these States or even under the general law the property in the goods passes in any of those States. The purpose of the Explanation ends there and cannot be stretched or extended beyond that purpose. The Explanation is neither an exception nor a proviso. It is not its purpose nor does it import, substantively and proprio vigore, to confer any power on any State, not even on the delivery State, to impose any tax. Whether the delivery State can tax the sale or purchase of the kind mentioned in the Explanation will depend on other provisions of the Constitution. Neither clause (i) (a) nor the Explanation has any bearing on that question.
(2) Clause (2) of Article 286 places yet another ban on the taxing power of the State under entry 54 read with Article 100(3), in addition to the ban imposed by clause (i) (a). A sale or purchase contemplated by the Explanation to clause (I) (a) undoubtedly partakes of the nature of a sale or purchase made in the course of inter-state trade and, therefore, no State, whether it is the State in which the property in the goods passes under the general law or the State where the goods are delivered as mentioned in the Explanation, can impose a tax on such sale or purchase, unless and until Parliament lifts the ban.
(3) Article 304 cannot properly be read into Art. 286, and it can have no bearing whatever upon clause (1) (b) of Art. 286.
(4) The word "course" in the phrase "in the course of" occurring in clause (1)(b) of Article 286 conveys the idea of a gradual and continuous flow, an advance, a journey, a passage or progress from one place to another. Etymologically it means and implies motion, a forward movement. The phrase in the course of clearly has reference to a period of time during which the movement is in progress. Therefore, the words "in the course of import of the goods into and the export of the goods out of the territory of India" obviously cover the period of time during which the goods are on their import or export journey. In view of the decision in State of Travancore-Cochin v. Bombay Co. Ltd. [(1952) S.C.R, 1112] it cannot be accepted that the period of time covering the "course" is confined within two terminil, namely, when the journey of the goods begins and when it ends. By adopting the principle of integrated activities, have been included the agreement for sale to, or purchase from,
the foreign merchant as taking place within the period connoted by that phrase. The agreement for sale or purchase, which occasions the export or import as the case may be, is obviously, in point of time, anterior to the actual and physical handing over of the goods to the carrier for taking the goods out of the country or for bringing them into the country as the case may be, but nevertheless such a sale or purchase has been held to have taken place "in the course of" export or import and as such exempt from taxation by the States. The question is how far backward we can trace the commencement of the "course" of export and how far forward we can fix the termination of the "course" of import.
The purchase made by the exporter to implement his agreement for sale with the foreign buyer is to be regarded as having taken place "in the course of" export, this being an activity so closely integrated with the act of export as to constitute a part of the export process itself. There is no compelling reason to confine this immunity to sales or purchases to implement a foreign order or sale. The purchases made by the exporter even without any previous order for export form "an essential and integral. even if initial, step" in the exportation of the goods. They form "an integral part of a continuous flow" which is commercially involved in the export process. The last purchases by the exporters-whether in fulfilment of foreign orders already secured or in anticipation of future orders- must in a commercial sense be "in the course of" the export. The same considerations apply to the first sale by the importers of the imported goods. The first sale by the importers to dealers appears to be so inextricably wound up with import itself that it may be commercially regarded as the culmination of the import activities and, therefore, the end of the course of import.
"To Summarise: The State Legislatures, under Entry 54 of the State List, have power to make laws with respect to tax on the sale or purchase of goods. On this general power Art. 286 places four restrictions, namely, that no law of a State shall impose or authorise the imposition of tax on the sale or purchase of goods when such sale or purchase takes place (I) outside the State, (2) in the course of import or export, (3) in the course of inter-State trade and commerce, and (4) in respect of essential commodities. The Explanation to Cl. (I) (a) only explains what is an outside sale or purchase, for by saying that a particular sale or purchase is to be deemed to take place in a particular State it only indicates that it is to be deemed to take place outside all other States so as to attract the ban of d. (1) (a) and thereby take away the taxing power of those other States with respect to such sale or purchase. The explanation does not operate as an exception or a proviso but only explains sub-d, (a). The fiction created by the Explanation is only for the purposes of sub-d. (a), so that sales or purchases of the kind which fall within the Explanation get the benefit of the ban imposed by sub-d. (a). Therefore, the purpose of the Explanation read with sub cl. (a) is only to take away the power of taxation of those States in relation to those sales or purchases which are to be deemed to be outside sales or purchases. Its purpose is not and, indeed, it does not purport to confer any taxing power on any State, and it cannot be resorted to for any such extraneous or collateral purpose. It does not convert an inter State sale or purchase into an intra-State sale for any purpose other than the limited purpose of sub-cl. (a). If a sale or purchase takes place outside a State, either under the general law or by virtue of the fiction created by the Explanation, then the State cannot, under d. (1) (a), tax such sale or purchase, If a sale or purchase takes place within a State either under the general law or by reason of the Explanation, then, if such a sale or purchase takes place "in the course of" inter-State trade and commerce, no State, not even the State where the sale or purchase takes place as aforesaid can tax it by reason of cl. (2), unless and until Parliament by law provides otherwise. A sale or purchase "in the course of" import or export within the meaning of cl. (1) (b) includes (I) a sale or purchase which itself occasions the import or export as already held by this Court, (ii) a sale or purchase which takes place while the goods are on the high seas on their import or export journey, and (iii) the last purchase by the exporter with a view to export and the first sale by the importer to a dealer after the arrival of the imported goods. If a sale or purchase takes place within a State, either under the general law or by reason of the Explanation, then, if it takes place in the course of import or export as explained above, no State, not even the State within which such sale or purchase takes place can tax it by reason of clause (1) (b). This, in short, is the true meaning and import of Art. 286 as I read and understand it."
Judgment
Patanjali Sastri, C.J.I.
[With him Mukherjea, Bose and Ghulam Hasan, JJ.]- These are appeals from an order of the High Court of Travancore-Cochin quashing the assessments severally made on the respondents in each appeal under the Travancore-Cochin General Sales-tax Act. 1124 M. E (Act No. 18 of 1124 M. E.) (hereinafter referred to as the Act).
2. The Act provided by S. 3, for the levy of a tax on the total turnover of every dealer for each year. "Turnover" is the aggregate amount for which goods are either bought of sold by a "dealer" (S. 2 (j) ), who is a person carrying on the business of buying and selling goods (S. 2 (d)). "Sale", with all its grammatical variations and cognate expressions, is defined as meaning, among other things, every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration (S. 2 (h)). The sale or purchase is to be deemed to have taken place in the State, wherever the contract might have been made, if the goods were actually in the State when the contract was made or, if the goods are actually produced in the State, at any time after the contract in respect thereof was made. By S. 3 (4) the turnover is to be determined in accordance with such rules as may be prescribed and R. 4 of the rules framed under the Act, prescribes that, in the case of certain goods including "cashew and its kernel", the gross turnover of a dealer is the amount for which the goods were bought by him, and in all other cases the amount for which the goods were sold by him.
3. The respondents are dealers in cashew-nuts in the State and their business consists in importing raw cashew-nuts from abroad and the neighbouring districts in the State of Madras in addition to purchases made in the local market. and, after converting them by means of certain processes into edible kernets, exporting the kernets to other countries, mainly, America. The oil pressed from the shells removed from the cashewnuts was also exported. The Constitution having come into force on 26th January 1950, the respondent in each appeal claimed exemption under Art. 286 (1) (b) in respect of the purchases made from that date till 29th May 1950 the end of the account year. The Sales-tax authorities having rejected the claim the respondents applied to the High Court under Art. 226, and that Court upheld the claim and quashed the assessments in so far as they related to the said period. The State has preferred the appeals.
4. The appeals were heard in part along with certain other appeals from the same order, and as, it was found that the material facts relating to the course of business of the respondents in the present appeals had not been clearly ascertained, these appeals were remitted to the High Court for further enquiry and findings in regard to those matters. The connected appeals, however, in which the materials on record were found sufficient for their disposal were finally decided, and the decision is reported in State of Travancore-Cochin v. Bombay Co. Ltd., A.I.R. 1952 S. C. 366 (A) (hereinafter referred to as the previous decision).
5. Before considering how far the cashew-nut purchases made by the respondents are, on the findings returned by the High Court, entitled to the protection of Art. 286 (1) (b), it is necessary first to ascertain the scope of such protection. That clause, so far as it is material here, reads thus:
"286. (1) No law of a state shall impose, or authorise the imposition of, a tax an the salt or purchase of goods where such sale or purchase takes place
(a) * * * *
(b) In the course of the import of the goods into, or export of the goods out of, the territory in India."
In the previous decision this Court referred to four different views then adumbrated in the course of the argument as to the meaning and scope of the said sub-clause as follows:
(1) The exemption is limited to sales by export and purchases by import, that is to say
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