1. Sales tax assessment on tea sold via auction in one state while goods were stored in another state — dispute over outside sale under Article 286(1)(a). (Para 1 , 3 )
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1964 Supreme(SC) 93
SUPREME COURT OF INDIA
P.B. GAJENDRAGADKAR, C.J.I., K.N. WANCHOO, J.C. SHAH, N. RAJAGOPALA AYYANGAR AND S.M. SIKRI, JJ.
M/s. Malayalam Plantations Ltd., Quilon (In both the Appeals), Appellants
Versus
Deputy Commissioner of Agricultural Income-tax and Sales Tax, South Zone, Quilon (In both the Appeals), Respondent.
M/s. Outcherloney Valley Estates (1938) Ltd. (In both the Appeals), Intervenes.
Civil Appeals Nos. 678 and 679 of 1963.
Advocates appeared
M/s. G. B. Pai and T. N. Ramachandra, Advocates and M/s. J. B. Dadachanji, O. C. Mathur and Ravinder Narain, Advocates of M/s. J. B. Dadachanji and Co., for Appellants (In both the Appeals); Mr. Govinda Menon and Dr. V. A. Seyid Muhammad, Advocates, for Respondent (In both the Appeals); Mr. G. S. Pathak, Sr. Advocate, (M/s. S. N. Andley, Rameshwar Nath and P. L. Vohra, Advocates of M/s. Rajinder Narain and Co., with him), for Interveners (In both the Appeals).
Advocates:
C.B.PAI, G.S.PATHAK, GOVINDA MENON, J.B.DADACHAN, O.C.MATHUR, P.L.VOHRA, RAJINDAR NARAIN, RAMESHWAR NATH ROY, Ravindra Narayan, S.N.ANDLEY, T.N.RAMACHANDRA, V.A.SEYID MUHAMMAD
C.B.PAI, G.S.PATHAK, GOVINDA MENON, J.B.DADACHAN, O.C.MATHUR, P.L.VOHRA, RAJINDAR NARAIN, RAMESHWAR NATH ROY, Ravindra Narayan, S.N.ANDLEY, T.N.RAMACHANDRA, V.A.SEYID MUHAMMAD
For sales not involving delivery for consumption within a state, the state where the property in the goods passes is the only state entitled to levy sales tax, rendering sales where property passes in another state "outside sales."
Headnote:(A) Constitution of India - Article 286(1)(a) - General Sales Tax Act - Section 2(j) and Section 26 - Sale of Goods Act - Determination of "outside sale" for sales tax purposes - For sales not falling under the "delivery-cum-consumption" explanation, the state in which the property in the goods passes is the only state empowered to levy sales tax. The passing of property is the decisive factor in determining whether a sale is "inside" or "outside" a state. (Paras 4, 5)
(B) Doctrine of territorial nexus - View that the doctrine of territorial nexus in sales-tax legislation was not completely abrogated by the Constitution, although the prevailing interpretation for non-explanation sales focuses on the passing of property. (Paras 8, 10)
Facts of the case:
An assessee sold tea through auctions held in one state, while the goods were physically stored in godowns in another state. Delivery was made from the godowns in the state where the goods were stored. It was found that the property in the goods passed at the time of the auction in the state where the auction was held. The taxing state sought to include these sales in the taxable turnover based on the physical location of the goods at the time of the contract, asserting that the sales took place within the taxing state.
Findings of Court:
The sales were "outside sales" relative to the taxing state because the title to the goods passed in a different state. The physical presence of the goods in the taxing state is not the determining factor for "non-explanation sales" (sales not for consumption in the state of delivery).
Issues: Whether sales conducted by auction in one state, where the goods are physically located in another state and property passes at the auction site, constitute an "outside sale" under Article 286(1)(a) of the Constitution.
Ratio Decidendi: The court held that the key to determining whether a sale is "inside" or "outside" a state, subject to the delivery-for-consumption explanation, is the passing of property. Since the property passed in a state other than the taxing state, the sale was an "outside sale" and exempt from tax in the taxing state.
Result: Appeals allowed.
Legal Category Hierarchy
Table of Contents
2. Whether sales are outside the state if property passes at the auction site despite goods being physically located within the taxing state. (Para 1 , 3 )
3. For non-explanation sales, the power to tax is determined by the state where the property in the goods passes, regardless of physical location. (Para 4 , 5 )
4. A sale is an outside sale if the property in the goods passes in another state, unless it is a delivery-cum-consumption sale under Article 286(1)(a). (Para 4 , 5 )
5. Appeals allowed — High Court order reversed and Sales Tax Appellate Tribunal order restored. (Para 7 , 11 )
6. How is an outside sale determined under Article 286(1)(a) for non-explanation sales?
For sales not falling under the delivery-cum-consumption explanation, the state that has the power to tax is the one in which the property in the goods passes. (Para 4 , 5 )
7. Does the physical location of goods at the time of contract make a sale an inside sale?
No. If the property in the goods passes in another state, the sale is considered an outside sale relative to the state where the goods are physically located, unless it is a delivery-cum-consumption sale. (Para 4 , 5 )
8. What is the effect of the delivery-cum-consumption explanation in Article 286(1)(a)?
The explanation deems a sale to have taken place in the state where goods are actually delivered as a direct result of the sale for consumption in that state, regardless of where property passed. (Para 2 , 5 )
9. Can a state tax a sale based on the doctrine of territorial nexus after the promulgation of the Constitution?
While the majority held that passing of property is the decisive factor, Justice Shah observed that the doctrine of territorial nexus was not completely abrogated for non-explanation sales. (Para 8 , 10 )
Judgment
AYYANGAR, J. :(For himself and Gajendaragadkar C.J.I. and Wanchoo and Sikri JJ.)
The appellant owns several estates wherein inter alia tea is grown and was assessed to sales tax in respect of the tea sold by it during the years 1954-55 and 1955-56, by the Sales Tax Officer, First Circle, Quilon in the State of Travancore-Cochin by his order dated December 23, 1956. In the taxable turnover on which sales tax was computed by the assessing authority has included two items which are the subject of complaint in these two appeals which relate to these two years of assessment. Before the assessing officer the appellant claimed that certain sales of its tea which were conducted by auction at Fort Cochin - a place which at the relevant date was in the Madras State, were sales "outside" the Travancore-Cochin State and that consequently these sales were exempt from taxation by the State of Travancore-Cochin under Art. 286(1)(a) of the Constitution. The Sales Tax Officer rejected this contention and included the sum involved in these sales in the taxable turnover. An appeal filed to the Appellate Assistant Commissioner also failed, this authority holding that as the tea sold was, at the date of the auction, admittedly in godowns in Willingdon Island in the State of Travancore-Cochin, the sales must be deemed to have taken place within the taxing State by virtue of a provision in the State Sales Tax Act to which we shall refer later and hence liable to be included in . the taxable turnover. There was a further appeal taken by the Appellant to the Sales Tax Appellate Tribunal which upheld the appellant s contention and set aside the assessment in so far as it included the turnover relating to the auction sales of tea held at Fort Cochi, this turnover amounting to Rs. 56,43184/11/- in regard to the assessment year 1954-55 and Rs. 62,13,604/ 3/- in regard to the assessment year 1955-56 and remanded the case for fresh disposal by excluding these sums from the computation of the taxable turnover. A revision petition was thereafter filed before the High Court by the State under S. 15(b) of the General Sales Tax Act of Travancore-Cochin and the learned Judges allowed the Revision and upheld the order of the assessing officer and the Appellate Commissioner holding the turnover represented by these auction sales to be validly taxable under the State law relating to sales tax. The appellant thereafter applied to the High Court for a certificate of fitness and this having been granted the appeals are now before us.
2. Before proceeding further it is necessary to set out the statutory provision contained in the taxing enactment of the State. The General Sales Tax Act (Act XI of 1125 (ME) 1950) which imposed a sale tax on sales by dealers defines a "sale" by S. 2(j) in these terms:
" Sale with all its grammatical variations and cognate expressions means 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 and includes also a transfer of property in goods involved in the execution of a works contract, but does not include a mortgage, hypothecation, charge or pleadge;
x x x x x x x
Explanation (2)- Notwithstanding anything to the contrary in the Sale of Goods Act for the time being in force, the sale or purchase of any goods shall be deemed for the purpose of this Act, to have taken place in the State wherever the contract of sale or purchase might have been made (a) if the goods were actually in the State at the time when the contract of sale or purchase in respect thereof was made; or (b) in case the contract was for the sale or purchase of future goods by description, then, if the goods are actually produced in the State at any time after the contract of sale or purchase in respect thereof was made. "
When the Constitution came into force a new section numbered S.26 was inserted by the Adaptation. Order bringing the Act into line with Ar
