1. Supply of motor spirit from one State to another under contract of sale — Assessment of sales tax under State Act — Dispute over inter-State trade. (Para 2 )
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1965 Supreme(SC) 371
SUPREME COURT OF INDIA
P.B. GAJENDRAGADKAR, C.J.I., K.N. WANCHOO, M. HIDAYATULLAH, V. RAMASWAMI AND P. SATYANARAYANA RAJU, JJ.
State of J. and K. and others, Appellants
Versus
Caltex (India) Ltd., Respondent.
Civil Appeal No. 864 of 1964.
Advocates appeared
Mr. S. V. Gupte, Solicitor-General of India, Raja Jaswant Singh, Advocate-General for the State of Jamu and Kasmir and Mr. N. S. Bindra, Senior Advocate, (M/s. R. H. Dhebar and R. N. Sachthey, advocates, with them), for Appellants Nos,.1 and 2; Mr. M. C. Setalvad, Senior Advocate, (Mr. D. N. Gupta, Advocate, with him), for Respondent.
Inter-state trade requires a sale and transport of goods between states under the contract of sale. Tax liability is determined by the charging section, independent of licensing machinery. Composite tax assessments are severable if individual transactions can be separated by period or item.
Headnote:(A) Constitution of India - Article 286 - Sales Tax Laws Validation Act, 1956 - Motor Spirit (Taxation of Sales) Act - Section 3, 6, 7 and 10 - Inter-State trade and commerce - Taxability of sales - A sale is said to begin 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 (Para 6). Until Parliament provides otherwise, no State may impose tax on sales or purchases of goods when such sales or purchases take place in the course of inter-State trade or commerce (Para 4).
(B) Taxing Statutes - Charging Section vs. Machinery Provisions - The charging section of a tax act determines the liability to pay tax. Provisions relating to licensing and registration are matters of machinery for collection and do not restrict the scope of the charge of tax under the charging section. A person trading without a required license remains liable to pay tax as per the charging section, and such failure may even attract penalties (Para 9).
(C) Assessment - Severability - Where an assessment order covers a period during which some transactions are taxable and others are not, the assessment can be split and dissected if the items of sale can be separated. An assessment is not necessarily invalid in toto if a part of it is found to be bad, provided the taxable items can be earmarked (Para 10).
Facts of the case:
A supplier entered into a contract to supply petrol to a farm located in a different state. The petrol was transported from a depot in one state to the farm in another state using the supplier's own tank-lorries and delivered via the supplier's pumps. The state authorities assessed sales tax for the period from January 1955 to May 1959. The supplier challenged the assessment, contending that the sales took place in the course of inter-State trade and commerce and were therefore not taxable by the state.
Findings of Court:
The court found that the transactions were in the course of inter-State trade. For the period from September 7, 1955, to May 1959, the tax was prohibited by Article 286(2) of the Constitution. However, for the period from January 1, 1955, to September 6, 1955, the constitutional ban was removed by the Sales Tax Laws Validation Act, 1956. Since the charging section of the state act applied to all retail sales and the title passed within the state, the tax for this specific period was legally valid.
Issues: (1) Whether sales tax could be imposed for the period from October 1955 to May 1959 in view of the prohibition in Article 286(2) of the Constitution; (2) Whether sales tax could be validly levied on sales taking place between January 1, 1955, and September 6, 1955, following the lifting of the ban under the Sales Tax Laws Validation Act, 1956.
Ratio Decidendi: Inter-state trade is established when there is a sale and transport of goods from one state to another under the contract of sale. While constitutional bans on inter-state sales tax may be removed retrospectively by Parliament, the state must still possess a valid taxing statute. Licensing requirements are procedural machinery and do not limit the liability created by the charging section of a tax act. Furthermore, composite assessment orders are severable if individual taxable transactions can be distinguished by period.
Result: Appeal partly allowed.
Legal Category Hierarchy
Table of Contents
2. Whether sales tax is leviable on inter-State trade — Whether local business presence is required for liability — Whether composite assessments are severable. (Para 2 , 8 , 9 , 10 )
3. Inter-State trade requires sale and transport of goods across State borders — Licensing requirements are machinery for collection and do not affect the charging section's liability. (Para 6 , 9 )
4. A composite tax assessment can be dissected and severed if individual items of sale can be separated and taxed for different periods. (Para 10 )
5. Appeal partly allowed — Tax liability upheld for period before September 6, 1955, but quashed for the period thereafter. (Para 11 )
6. What conditions must be satisfied for a sale to be considered in the course of inter-State trade?
A sale is in the course of inter-State trade only if two conditions concur: there is a sale of goods, and there is a transport of those goods from one State to another under the contract of sale. (Para 6 )
7. Does the requirement of a license for storage or business within a State limit the scope of a charging section for sales tax?
No. Licensing provisions are matters of machinery for collection and do not restrict the liability created by the charging section, which applies to all retail sales regardless of whether the assessee holds a license or has a storage depot within the State. (Para 9 )
8. Can a composite tax assessment be invalidated in its entirety if a portion of it is found to be legally unsustainable?
Not if the assessment can be split and dissected. If individual sales can be separated and taxed for different periods, the court can sever the invalid items and affirm the residue rather than treating the assessment as bad wholly. (Para 10 )
Judgement
RAMASWAMI, J.: This appeal is brought on a certificate against the judgment of the Division Bench of the High Court of Jammu and Kashmir at Srinagar dated July 10, 1962 holding that the respondent is not liable to pay sales tax for the period from January, 1955 to May 1959 under the Jammu and Kasmir Motor Spirit (Taxation of Sales) Act, 2005 (1948 A. D.).
2. The Director-General of Supplies, Delhi entered into a contract with General Manager, Caltex India (Ltd.) at Bombay (hereinafter called the respondent) for the supply of petrol, HSD and power Kero to the State Mechanized Farm at Nandpur located in the State of Jammu and Kashmir. In pursuance of this contract the respondent directed its depot at Pathankot situated in the Punjab State to supply petrol to the Nandpur Farm. The procedure adopted was as follows: The Officer in charge of the Nandpur farm placed indents with the Pathankot depot for supply of specified quantities of petrol to the farm and on receipt of the indents, the Pathankot depot transported the petrol in its own tank-lorries to Nandpur and delivered the petrol to the farm. The petrol was measured by means of dipping rods and approved by the indenting officer at Nandpur farm and thereafter the petrol was delivered to the Nandpur farm through pumps which belonged to the respondent. The price of petrol so supplied was paid to the respondent at Delhi by the Director-General of Supplies. The Petrol Taxation Officer at Srinagar considered that the sales of petrol of Nandpur farm were liable to be taxed under the Jammu and Kashmir Motor Spirit (Taxation of Sales) Act, 2005 and called upon the respondent to furnish returns of sales between 1952 to 1959. The respondent, however, furnished returns only for the period January, 1955 to May, 1959. On the basis of the returns the Petrol Taxation Officer assessed the respondent to pay sales tax to the extent of Rs. 39619.75 in respect of sales of petrol from January, 1955 to May, 1959. The respondent thereafter moved the High Court under S. 103 of the Constitution of Jammu and Kasmir for grant of a writ to quash the assessment of sales tax and to restrain the State of Jammu and Kashmir and the Petrol Taxation Authorities (hereinafter called the appellants) from levying the tax. It was contended on behalf of the respondent that the sales tax could not be imposed as the sales took place in the course of inter-State trade and commerce. Syed Murtaza Fazl Ali, J. held that the respondent was liable to pay sales tax in respect of the sales which took place during the period January, 1955 to September, 1955. Regarding the rest of the period of assessment, the learned Judge held that the appellants were not entitled to levy tax and accordingly issued a writ restraining the appellants from levying the tax for the period from October, 1955 to May, 1959. The appellants took the matter in Letters Patent appeal and the respondent also filed Cross-objection with regard to the liability to tax for the period from January, 1955 to September 1955. The Division Bench dismissed the appeal in Letters Patent and allowed the cross-objection of the respondent, holding that the appellants were not entitled to levy sales tax for the entire period from January, 1955 to May, 1959 and accordingly quashed the assessment of sales tax dated October 3, 1960,
3. It is necessary, at this stage, to indicate the legislative development in the State of Jammu and Kashmir which provides the setting for the questions to be investigated in this case.
4. Article 286 of the Constitution, as it was originally enacted, read as follows :
"(1) No law of a State impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place -
(a) outside the State; or
(b) in the course of the import of the goods into, or export of the goods out of the territory of India.
Explanation. For the purpose of sub-clause (a), a sale or purchase shall be deemed to have taken place in the
