The true nature of a transaction evidenced by a written agreement has indeed to be ascertained from the covenants and not merely from what the parties chose to call it.

Headnote:
BIHAR SALES TAX ACT, 1944 - S. 2(g), 2(h), 4, 5(2) - SALE - AGREEMENT BETWEEN MANUFACTURING COMPANIES AND MARKETING COMPANY - CONSTRUCTION - WHETHER SALE BY MANUFACTURING COMPANIES TO MARKETING COMPANY - LIABILITY TO PAY SALES TAX.
Fact of the Case:

The Rohtas Industries Ltd., a public limited company, was engaged in the manufacture of cement and was registered as a "dealer" under the Bihar Sales-Tax Act, 1944. In proceedings for assessment of sales-tax, the company denied its liability under the Act to pay tax in respect of cement supplied, delivered or consigned pursuant to orders issued by the Cement Marketing Company Ltd. The plea of the company was disallowed by the Sales-Tax Officer, the Commissioner, Sales Tax, Patna Division, and the Board of Revenue, Bihar. The High Court of Judicature at Patna answered the question "against the company."
Finding of the Court:

The High Court answered the question "against the company."
Issues: Whether on the construction of the agreement dated the 4th June, 1942, between the assessee Messrs. Rohtas Industries Ltd., Dalmia Nagar (along with 3 other manufacturing Companies) and the Cement Marketing Company of India Ltd., the cement delivered, despatched or consigned by the assessee to the Cement Marketing Company of India Ltd., or to their order on in accordance with their directions are sales to the latter within the meaning of the Bihar Sales Tax Act (Bihar Act VI of 1944).
Ratio Decidendi: The true nature of a transaction evidenced by a written agreement has indeed to be ascertained from the covenants and not merely from what the parties chose to call it. The words of an agreement must be carefully scrutinized in the light of the surrounding circumstances. The appointment of the Marketing Company under cl. (2) of the agreement to be the sole and exclusive Sales Manager of the manufacturing companies for sale of cement does not indicate an intention to constitute it an agent of the manufacturing companies. There is no convenant in the agreement that the manufacturing companies were to sell their goods through the Marketing companies: the manufacturing companies merely appointed the Marketing Company to be the "sole and exclusive sales manager" for sale of cement. The preamble which has been strongly relied upon merely recites that the Marketing Company is by its constitution, authorised to act as the selling agent or agent of any company manufacturing or dealing in cement. But even in the preamble, there is nothing to indicate an intention that the manufacturing companies were appointing the Marketing Company their agent for sale of cement. It is expressly recited therein that the Marketing Company was appointed to regulate the business and for the more efficient and economic working of the business, and to sell the products of the manufacturing companies. By paragraph 3, the manufacturing companies contracted not to sells directly or indirectly any cement to any person save and except through the Marketing Company. By this covenant, the manufacturing companies appointed the Marketing Company the sole sellers of cement manufactured by them, i.e., the Marketing Company was made the sole purchasers of cement from the manufacturing companies. By paragraphs 22 and 23, the Dalmia Group agreed to wind up their entire selling organization, and the two Groups undertook not to maintain any selling organization and selling organizations in existence on the date of the commencement of the contract were taken over by the Marketing Company. Clause 14 which authorised the Marketing Company to appoint and to continue its agents and stockists on such terms and conditions as they thought fit and to supply such stockists with such quantity of cement as they might regularly require, raises a strong inference that the Marketing Company was constituted monopoly purchasers of the cement manufactured by the manufacturing companies during the subsistence of the agreement. Clause 5 of the agreement strenghtens the view that the relation between the manufacturing companies and the Marketing Company was that of sellers and buyers. By that clause, the Marketing Company agreed, in respect of ordinary cement, to pay to the manufacturing companies at the rate of Rs. 24 per ton supplied at Works, and for special cements, such amounts above the basic rate of Rs. 24 per ton as the directors of the Marketing Company in their discretion, having regard to the difference between the selling prices of such cement and the ordinary cement, deemed proper The rate fixed by cl. 15 was again liable to be revised from time to time by the director of the Marketing Company. By that clause, the Marketing Company reserved to itself the right to modify from time to time the terms by unilateral decisions of its directors, and the manufacturing, companies agreed to accept such modifications. A covenant of this nature strongly indicates a relation of vendor and purchaser and the party authorised to modify unilaterally the agreement cannot be an agent. By cl. 30, provision was made for payment of interest by the Dalmia Group if they desired immediate payment in cash for any supplies for which credit had been given by the Marketing Company. It is implicit in the terms of cl. 30 that the manufacturing companies had no control over the terms on which cement was to be sold or otherwise disposed of by the Marketing Company. But ii the Dalmia Group desired immediate payment when the Marketing Company gave credit to its agents and stockists, they were liable to pay interest to the Associated Group. Clause 6 of the agreement supplies another cogent indication about the relationship between the manufacturing companies and the Marketing Company. By that clause, the Marketing Company was authorised to sell cement at such price or prices and on such terms as it might in its sole discretion think fit. The Marketing Company was ordinarily required to fix the prices having regard to the cost of all production, but it was entitled to fix the price at which cement was to be sold, and such price could be even less than the costs of manufacture. By cl. 7, the manufacturing companies undertook to deliver, despatch or consign cement in accordance with the orders and instructions from the Marketing Company and from the factories or works specified by the Marketing Company. Such contracts were to be made only by the Marketing Company in its own name and for itself. The manufacturing companies had no control over the terms of the contracts : they merely undertook to deliver the goods as instructed by the Marketing Company. By cl. 9, the manufacturing companies undertook to keep themselves in readiness to supply cement manufactured by them in accordance with orders and instructions of the Marketing Company and according to the "quotas" set out in cl. 8.
Final Decision: The appeals therefore fail and are dismissed with costs, one hearing fee.

Judgment

SHAH, J.: Rohtas Industries Ltd., a public limited company registered under the Indian Companies Act having its registered office at Dalmia Nagar in the State of Bihar, is engaged in the manufacture, amongst other commodities, of cement, and is registered as a "dealer" under the Bihar Sales-Tax Act, 1944. In proceedings for assessment of sales-tax, the company denied its liability under the Act to pay tax in respect of cement supplied, delivered or consigned pursuant to orders issued by a company called the Cement Marketing Company Ltd; hereinafter called the Marketing Company, in the following six quarters ending : September 30,1945, June 30, 1946, September 30,1946, December 31,1946, March 31,1947, and June 30,1947, on the plea that there was no sale by the appellant company to the Marketing Company. The plea of the company was disallowed by the Sales-Tax Officer : also by the Commissioner, Sales Tax, Patna Division and by the Board of Revenue, Bihar. At the instance of the company, the following question was referred by the Board of Revenue to the High Court of Judicature at Patna for its opinion :

"Whether on the construction of the agreement dated the 4th June, 1942, between the assessee Messrs. Rohtas Industries Ltd., Dalmia Nagar (along with 3 other manufacturing Companies) and the Cement Marketing Company of India Ltd., the cement delivered, despatched or consigned by the assessee to the Cement Marketing Company of India Ltd., or to their order on in accordance with their directions are sales to the latter within the meaning of the Bihar Sales Tax Act (Bihar Act VI of 1944)."

2. The High Court answered the question "against the company."

3. Section 4 of the Bihar Sales Tax Act imposes liability to pay tax upon every dealer whose gross turnover exceeds Rs.5,000. The tax under the Act is leviable at prescribed rates on the taxable turnover, i.e., that part of a dealer s gross turnover during any period, which remains after deducting there from turnover on sales specified in S. 5 sub-sec. (2). The expression "turnover" is defined in S(2)(i) as meaning the aggregate of the amounts of sale price received and receivable by a dealer in respect of a sale or supply of goods or carrying out any contract effected or made during a given period. "Sale Price" is defined in S. 2(h), as meaning the amount payable to a dealer as valuable consideration for (1) the sale or supply of any goods......... "Sale" is defined in S. 2(g) as meaning - omitting parts which are not material - any transfer of property in goods for cash or deferred payments or other valuable consideration including a transfer of property in goods involved in the execution of a contract.

4. It is common ground that the company had supplied goods pursuant to the directions received from the Marketing Company. The company pleaded before the taxing authorities and the High Court that cement supplied to the order of the Marketing Company under the covenants contained in an agreement dated June 4, 1942, was not sold but was entrusted for sale to the Marketing Company and according the amounts received by the company from the Marketing Company under the terms of the agreement not being sale price were not liable to be included in its taxable turnover. In these appeals filed with special leave, the question for determination is as to the true effect of the agreement dated June 4, 1942, to which the company and the Cement Marketing Company were parties.

5. The parties to the agreement were five companies - The Associated Cement Companies Ltd., the Patiala Cement Company Ltd., the Rohtas Industries Ltd., (the company), the Dalmia Cement Company Ltd., and the Cement Marketing Company Ltd. (the Marketing Company). In the agreement, the Associated Cement Companies Ltd. and the Patiala Cement Company Ltd. were collectively referred to as the Associated Group and the Dalmia Cement Company Ltd., and the Rohtas Industries Ltd., were collectively referred to as the Dalmia Group. Th

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