PETITIONER: STATE OF TRAVANCORE-COCHIN AND OTHERS Vs. RESPONDENT: SHANMUGHA VILAS CASHEW NUT FACTORYAND OTHERS. DATE OF JUDGMENT: 08/05/1953 BENCH: SASTRI, M. PATANJALI (CJ) BENCH: SASTRI, M. PATANJALI (CJ) MUKHERJEA, B.K. DAS, SUDHI RANJAN BOSE, VIVIAN HASAN, GHULAM CITATION: 1953 AIR 333 1954 SCR 53 CITATOR INFO : APR 1955 SC 661 (16,26,31,34,63,123,154,169,21 RF 1955 SC 765 (32) F 1956 SC 158 (9) E&D 1957 SC 790 (12) RF 1958 SC 453 (26) F 1958 SC1002 (9,11) F 1958 SC1006 (11) F 1960 SC 595 (9,10) R 1961 SC 41 (19) D 1961 SC 65 (17) R 1961 SC 213 (10) RF 1961 SC 315 (11,26) R 1961 SC1344 (5) R 1962 SC1006 (77) R 1962 SC1733 (11,12) R 1963 SC 980 (10) R 1964 SC1729 (20,35) R 1964 SC1752 (5,11,23,26) R 1971 SC 477 (5) RF 1971 SC 870 (21) R 1972 SC 23 (6) RF 1974 SC1510 (8) E 1975 SC1564 (10,14,15,16,24,50,59) R 1979 SC1721 (7) R 1980 SC1468 (15) F 1992 SC1952 (10) ACT: Constitution of India, 1950, art. 286 (1) (a), (1) (b) and (2)Tax on sale or purchase of goods-Sales " outside the State " -Sales "in the course of " import or export-Sales " in the course of inter-State trade or commerce " -Nature and incidents of--State's power to tax-Scope of constitutional limitations. HEADNOTE: Held, by (PATANJALI SASTRI C.J., MUKHERJEA, VIVIAN BOSE and GHULAM HASAN JJ.)-(i) Sales and purchases which themselves occasion the export or import of the goods, as the case may be, out of, or into, the territory of India come within art. 286 (1) (b) and are exempt from State taxation. (ii) Purchases in the State by the exporter for the purpose of export as well as sales in the State by the importer after the goods have crossed the customs barrier are not within the exemption. (iii) Sales in the State by the exporter or importer by transfer of shipping documents while the goods are beyond the customs barrier are within the exemption, assuming that the State power of taxation extends to such transactions. The word " course " etymologically denotes movement from one point to another and the expression " in the course of " in art. 286 (1) (b) not only implies a period of time during which the movement is in progress but postulates also a connected relation. Consequently, a sale in the course of export out of the country 54 should be understood in the context of art. 286 (1) (b) as 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. But a purchase of goods for the purpose of export is only an act preparatory to their export and not an act done in the course of the export of the goods, The respondents purchased raw cashew nuts within the State of Travancore-Cochin, from the neighbouring states and also imported such nuts from Africa, for the purpose of refining them and exporting them to America. Imports from Africa were made in the following ways: (a) purchases were made through intermediaries doing business as commission agents at Bombay who acted as agents for the respondents charging commission; (b) the commission agents at Bombay indented the goods on their own account and they sold the goods as principals to the respondents. In either case the goods were shipped direct from Africa to a port in the Travancore- Cochin State. It was found as a fact that the process of the factory was such that the goods were not the same goods commercially after refinement: Held, (i) as regards purchases made in the local markets of the State they were not exempted under art. 286 (1) (b); (ii) as regards purchases made in the neighbouring States, if the purchases were effected and delivery was taken by the respondents' servants outside the Travancore-Cochin State, they would be exempt under art. 286, cl. (i) (a), and if the purchases were effected by employing firms doing commission business outside the State and deliveries were made through normal commercial channels the transactions would be of an inter-State character and would fall under cl. (2) but they would be taxable under the Sales Tax Continuance Order (No. 7 of 1950) issued by the President under cl. (2) as such tax was being levied before the Constitution. (iii) As regards imports from Africa, where the Bombay merchants merely acted as agents, the transactions would be purchases which occasioned the import and would be exempt under art. 286 (1) (b), but where the Bombay merchants did not act as agents for the respondents, purchases from them would be on the same footing as local purchases and would not be exempt. Per S.R. DAS J.-The Explanation to art. 286 (1) (a) is not an exception or a proviso but only explains cl. (1) (a). It does not confer taxing power on any State but only takes away the power of taxation of a State in respect of sales and purchases in which delivery does not take place within the State by enacting that such sales shall be deemed to have taken place outside that State within cl. (1) (a). Consequently, 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 that State cannot, under (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 55 " 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 (2), unless and until Parliament by law provides otherwise. A sale or purchase " in the course of " import or export within the meaning of (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 low 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 (1) (b). As regards local purchases, as those purchases took place with. in the State they were not entitled to the protection of art. 286 (1) (a), since on the findings of the High Court, the goods purchased were so altered that they cannot be deemed to be the same as the goods which were exported, and the purchases cannot be said to have been made "in the course" of export so as to be entitled to immunity from taxation under art. 286 (1) (b). As regards purchases from the neighbouring States, if the goods were taken delivery of by the agents of the respondents outside the State, such purchases must, under the Explanation, be regarded as having taken place outside the State and accordingly would be exempt from taxation under art. 286 (1) (a). If however, the goods were directly delivered to the respondents in the Travancore-Cochin State the Explanation to art. 286 (1) (a) will apply in view of the finding of the High Court which implies that the goods are also consumed in the State, and the neighbouring States will not be entitled to tax these sales or purchases, but the purchases are " in the course of " inter-State trade and as such will be protected by (2); but as the majority of the Court have taken a different view and as such view must prevail, such purchases will become, as a result of the Explanation to (1) (a), an intra-state purchase and will lose the protection of (2). Even if such purchases fall within (2), they would be liable to be taxed under the President's Order of 1950. They are not protected by (1) (b) as the goods exported are different goods. As regards purchases from Africa (1) where the Bombay merchants act as agents of the respondents and pay the price and take delivery of the shipping documents in Bombay the purchases fall within (1) (a) and also (1) (b) and are not liable to tax as they take place outside the State within (1) (a) and also "in the course of import" within (1) (b); (ii) where the African sellers ship the goods on their own initiation or on that of their agents and while the goods are on the high seas they are 56 purchased by the, respondents' Bombay agents, the sale or purchase would be exempt under (1) (a) and under (1) (b); (iii) where the respondents place separate orders with the same commission agent at Bombay and the latter places a consolidated order with the African seller on his own responsibility and the Bombay agent after paying for the entire lot, prepares a separate invoice for each of their constituents and the latter receive the delivery orders from a Travancore bank against payment and take delivery from a Travancore warehouse the sale takes place in the Travancore- Cochin State and the goods cannot claim exemption under (1) (a), (1) (b) or (2) of art. 286. JUDGMENT:
CIVIL APPELLATE, JURISDICTION: Civil Appeals Nos. 26, 27 and
30 to 36 of 1952.
These were appeals under article 132 (1) of the Constitution
from the Judgment and Order dated 10th January, 1952, of the
Travancore, Cochin High Court in Original Petitions Nos. 5,
19, 34, 35, 71, 83, 88, 89 and 90 of 1951, quashing the
assessments severally made on the respondents in each
appeal under the Travancore-Cochin General Sales-Tax Act,
1124 M. E. The respondents who were assessed under the
Travancore General Sales Tax Act which came into force in
March, 1949, claimed exemption from sales tax in respect of
the purchases made by them after the Constitution of 1950
came into force till the end of the accounting year 1950 on
the ground that under article 286 (1) (b) the State had no
power to levy tax on such purchases. The sales tax
authorities having rejected the claim the respondents
applied to the High Court under article 226 and the High
Court quashed the assessments so far as they related to the
said period. The State preferred the present appeals.
These appeals were heard in part with certain other appeals
in September and October, 1952, but as it was found that the
material facts had not been clearly ascertained by the High
Court the cases were remitted to the High Court for further
enquiry and findings. The connected appeals were disposed
of on the 16th of October, 1952, and the judgment is
reported as the State of Travancore-Cochin v. The Bombay Co.
Ltd. ([1952] S.C.R. 1112). The hearing of these appeals was
continued after the High Court had returned the record With
its findings.
57
T. N. Subrahmanya Iyer, Advocate-General of Travancore-
Cochin State (T. R. Balakrishna Iyer, with him) for the
appellants.
M. K. Nambiyar (N. Palpu, with him) for the respondents
in Civil Appeals Nos. 26, 27 and 30 to 36.
M. C. Setalvad, Attorney-General for India and C. K.
Daphtary, Solicitor-General for India (Porus
A. Mehta, with them) for the Union of India.
V. K. T. Chari, Advocate-General of Madras (V. V.
Raghavan, with him) for the State of Madras.
V. Rajaram Iyer, Advocate-General of Hyderabad
(B. N. Sastri, with him) for the State of Hyderabad.
S. M. Sikri, Advocate-General of Punjab (M. L.Sethi,with
him) for the State of Punjab.
A. R. Somanatha Iyer, Advocate-General of Mysore (R.
Ganapathy Iyer, with him) for the State of Mysore.
K. B. Asthana for the State of Uttar Pradesh. (States of
Bombay and Orissa were not represented.)
1953. May 8. The judgment of the Chief Justice and
Mukherjea, Vivian Bose and Ghulam Hasan JJ. was delivered by
the Chief Justice. S. R. Das J. delivered a separate
judgment.
PATANJALI SASTRI C. J.-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.
XVIII of 1124 M. E.) (hereinafter referred to as the
Act).
The Act provided by section 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 or
sold by a ” dealer” [section 2(d)], who is a person carrying
on the business of buying and selling goods [section 2 (d)
]. ” Sale”, with all its grammatical variations and cognate
expressions, is defined as meaning, among other things,
every transfer
8
58
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 [section 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 section
3 (4) the turnover is to be determined in accordance with
such rules as may be prescribed, and rule 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.
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 kernels, exporting the kernels 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 January 26, 1950, the respondent
in each appeal claimed exemption under article 286 (1) (b)
in respect of the purchases made from that date till May 29,
1950, the end of the account year. The sales tax
authorities having rejected the claim, the respondents
applied to the High Court under article 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.
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
59
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 The State of Travancore-Cochin v.
The Bombay Co. Ltd. (1) (hereinafter referred to as the
previous decision).
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 article 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 on the sale 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 of 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, those sales and
purchases which occasion the export or import, as the case
may be, and extends to no other transactions however
directly or immediately connected, in intention or purpose,
with such sales or purchases, and wheresoever the property
in the goods may pass to the buyer.
(2) In addition to the sales and purchases of the kind
described above, the exemption covers the last purchase by
the exporter and the first sale by the importer if any, so
directly and proximately connected with the export sale or
import purchase as to form part of the same transaction.
(3) The exemption covers only those sales and purchases
under which the property in the goods concerned is
transferred from the seller to the buyer during
(1) [1952] S.C.R. 1112.
60
the transit, that is, after the goods begin to move and
before they reach their foreign destination.
(4) The view which found favour with the learned Judges of
the High Court, namely, “the clause is not restricted to the
point of time at which goods are imported into or exported
from India; the series of transactions which necessarily
precede export or import of goods will come within the
purview of this clause.”
This Court, however, found it unnecessary for the purpose of
the cases then before it to go any further than to hold that
” whatever else may or may not fall within article 286 (1)
(b), sales and purchases which themselves occasion the
export or import of the goods, as the case may be, out of or
into the territory of India come within the exemption” and
that the third view set out above, which was put forward on
behalf of the State of Bombay and which seeks to limit the
operation of the clause exclusively to sales and purchases
effected during the transit of the goods, was too narrow and
could not be accepted.
It may be mentioned at once, to clear the ground, that if
the Bombay view was considered to be too narrow, the view
expressed by the Court below cannot but be regarded as too
wide. This, indeed, was recognised by learned counsel who
appeared in the cases, none of whom made any serious attempt
to support it. Nor was any question raised or argument
advanced as to the scope and effect of clause (2) of article
286, for, although the respondents in two of these
appeals(1) purchased cashew-nuts in the adjoining districts
of the State of Madras during the period in question, it was
not disputed that such purchases unless they were exempt
under article 286(1)(a), would fall within the explanation
to clause (1) (a) as interpreted in the majority decision’,
of this court in the recent case of The State of Bombay v.
United Motors (India) Ltd. (2), or under the Sales Tax
Continuance Order, 1950 (C. O. No. 7 of 1950), issued by the
President on January 26, 1950, in exercise of the powers
conferred by the proviso to clause (2) of article 286, and
would, in either case, be taxable.
(1) Civil Appeals Nos. 33 and 36 of 1952, (2) [1953] S.C.R.
1069.
61
With reference to the aforesaid decision, it may be
mentioned in passing that in order to remedy what was felt
to be the unsatisfactory position in regard to the levy of
tax by the States in America on sales in interstate
commerce, the North Carolina Department of Revenue proposed
that Congress should pass legislation authorising the States
to tax certain sales in interstate commerce. The proposed
bill ran thus:
” That all taxes levied by any State upon sales of property
or measured by sales of property may be levied upon or
measured by sales of property in inter-state commerce by the
state into which the property is moved for use or
consumption therein, in the same manner and to the same
extent that said taxes are levied upon or measured by sales
of property not in inter-state commerce. Provided: that no
State shall discriminate against sales of property in inter-
state commerce; nor shall any state discriminate against the
sale of the products of any other state. Provided, further:
that no state shall tax the sale in inter-state commerce of
property transported for the purpose of resale by the
consignee as a merchant or as a manufacturer. Provided,
further: that no county, city, or town, or other subdivision
of any State shall levy a tax upon or measure any tax by
sales of property in interstate commerce”(1).
It is interesting to note that the bill sought to bring
about substantially the same result as the combined
operation of article 286 clause (1) (a) explanation, clause
(2) and article 304 as they were interpreted by the majority
in that decision would produce. It is possible that these
provisions of our Constitution were inspired by the proposed
bill.
The only question debated before us was whether in addition
to the export-sale and import-purchase, which were held in
the previous decision to be covered by the exemption under
clause (1) (b), the following two categories of sale or
purchase would also fall within the, scope of that
exemption:
(2) See Selected Essays on Constitutional Law, Vol. I,
Book V, P. 367 published by the Association of American Law
Schools, 1938.
62
(1) The last purchase of goods made by the exporter for the
purpose of exporting them to implement orders already
received from a foreign buyer or expected to be received
subsequently in 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.
(2) Sales or purchases of goods effected within the State
by transfer of shipping documents while the goods are in the
course of transit.
As regards the first mentioned category, we are of opinion
that the transactions are not within the protection of
clause (1) (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 refer to
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. For
instance, it has been held that the words “debts due to the
bankrupt in the course of his trade” in section 15(5) of the
English Bankruptcy Act, 1869, do not extend to all debts due
to the bankrupt during the period of his trading but include
only debts connected with the trade [see In re, Pryce, ex
parte Rensburg(1).] A sale in the course of export out of
the country should similarly be understood in the context of
clause (1)(b) as 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
(1) 4 Ch. D. 685 and Williams on Bankruptcy, 16th Edn., p.
307.
63
factor alone is not determinative. The previous decision
proceeded on this view and emphasised 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. It is, however,
contended that on this principle of connected or integrated
activities a purchase for the purpose of export must be
regarded as covered by the exemption under clause (1) (b).
We are unable to agree.
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, in our
opinion, be regarded as an act done “in the course of the
export of the goods out of the territory of India”, anymore
than the other two activities can be so regarded. As point-
ed out by a recent writer “From the legal point of view it
is essential to distinguish the contract of sale which has
as its object the exportation of goods from this country
from other contracts of sale relating to the same goods, but
not being the direct and immediate cause for the shipment of
the goods…… When a merchant shipper in the United
Kingdom buys for the purpose of export goods from a
manufacturer in the same country the contract of sale is a
home transaction; but when he resells these goods to a buyer
abroad that contract of sale has to be classified as an
export transaction”(1). This passage shows that, 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
(1) Schmittoff-Export Trade, 2nd Edn., P. 3.
64
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.
Any attempt therefore to invoke the authority of the
previous decision in support of the suggested extension of
the protection of clause (1)(b) ‘to the last purchase for
the purpose of export and the first sale after import on the
ground of integrated activities must fail.
Nor is it correct to say that it is necessary to extend the
exemption to these transactions to avoid double taxation.
It is true that in the previous decision it was indicated
that the object underlying the exemption was the avoidance
of double taxation on the foreign trade of this country
which is of great importance to the nation’s economy. But
the double taxation sought to be avoided consisted in the
imposition of export duty by the Central Government and the
imposition of sales tax by the State Government on the same
transaction in its different aspects as an export and a
sale. Such double taxation is already avoided by our
holding that the export-sale and the import-purchase are
exempt under clause (b) from the levy of sales tax by the
State. The foreign trade of this country thus already
enjoys immunity from double tax burden and suffers only one
tax, namely, the export or import duty as the case may be.
The claim now made for extension of the exemption under
clause (1)(b) in the name of avoiding double taxation cannot
be supported.
Not the least among the reasons for rejecting the view that
the last purchase for the purpose of export and the first
sale after import are also within clause (1) (b) is the
practical difficulty in giving effect to the exemption in
regard to these transactions, having regard to the general
pattern of sale-tax legislation in this country of which our
constitution-makers must have been well aware. The tax is
usually levied on the annual turnover of the seller who is
allowed under certain conditions to pass it on to the buyer
by adding it to the price charged for the goods at each
individual sale. Supposing A is the seller from whom
65
B the export merchant purchases the goods for export. If
the sale is to be exempt, how is A to be satisfied that the
goods would actually be exported subsequently? And even if
they were, it must be difficult for A to prove to the Sales
Tax Officer that they were so exported by B if proof was
required. On the other hand, B might be keeping the goods,
waiting for orders to come, or might change his mind and not
export the goods at all but sell them locally. In that
case, what would be the position of A vis a vis the Sales
Tax Officer demanding the tax ? Could A escape liability, if
he failed to collect the tax from B at the time of the sale
? Or is A to collect the tax, ignoring B’s declaration of
his intention to export and leaving him to apply for refund
by producing- evidence of actual export, whenever that takes
place? Even if a sales tax enactment provides for
adjustment on those lines, would not such legislation, in so
far as it compels B to suffer the tax until he actually
exports the goods, contravene clause (1)(b) which ex
hypothesi exempts the transaction from sales tax? And what
would be the position if the goods were burnt or otherwise
lost in the meanwhile, and the export never took place?
Athough, as pointed out in the previous decision, American
cases are not of much assistance in interpreting article 286
because of the different wording of the import-export clause
of the Federal Constitution, it is interesting to see that
such uncertainties led the American courts to lay down the
rule that –
“It is the entrance of the articles into the export stream
that marks the start of the process of exportation. Then
there is certainty that the goods are headed for their
foreign destination and will not be diverted to domestic
use. Nothing less will suffice.”: Empresa Siderurgica, S.
A. v. Merced(1).
Similar difficulties and uncertainties are encountered in
bringing within the exemption the first sale after import.
How is the exemption to be applied to the
(1) 337 U.S. 154.
9
66
goods imported from abroad after they are mingled with other
goods and lose their distinctive character as imports? Here
again, the American courts, with their practical approach to
such problems, have evolved the doctrine of “original or
unopened package” that is to say, the rule that the first
sale of imported goods will ‘be exempt from State taxation
provided only such sale is made in the original packages in
which the goods have arrived. Any sale of such goods made
after the package is opened does not enjoy such exemption.
Are we to import the same doctrine here to make the
exemption workable ? Even in America, as pointed out in
Balsara’s case(1), difficulties arose from time to time in
applying the doctrine as “sometimes very intricate questions
arose before the courts such as whether the doctrine applied
to the larger cases only or to the smaller packages
contained therein or whether it applied to smaller paper
packages of cigarettes taken from loose files of packages at
the factory and transported in baskets.” Hence this court
has unanimously decided that “the doctrine has no place in
this country” following the lead of Gwyer C. J. in the
earlier case of Boddu- Paidanna(2).
It was said that clause (1) (b) should be construed in the
light of the constitutional purpose and the commercial
background and reference was made to the manner in which a
large proportion of the export trade of the country was
carried on by merchant houses who purchased goods from the
producers and manufacturers to resell them to buyers abroad
by means of contracts concluded with them. Similarly with
regard to import trade, large import houses imported
machinery and consumer goods wholesale and sold them to
retail dealers or, in some cases, to the customers direct.
This practice, it was argued, must have been well known to
the makers of our Constitution, and it was reasonable to
assume that they realised the importance of the foreign
trade to the well-being of the country and would not have
desired to cripple the same by allowing the States to
(1) [1951] S.C.R. 682, 699.
(2) [1942] F.C.R. 90.
67
tax such purchases and sales by the export and import
merchants in this country. Such general considerations
based largely on speculation are not of much assistance in
construing the scope and effect of a specific constitutional
provision seeking to restrict the power of State taxation.
It is true, as pointed out in the previous decision, that
the export-import trade is important to our national
economy, but it is no less true that the State power of
taxation is essential for carrying on its administration,
and it must be as much the constitutional purpose to protect
the one as not unduly to curtail the other. The question
really is, how far did the constitution-makers want to go in
protecting the foreign trade by restricting the power of
taxing sales or purchases of goods which they conferred on
the States under entry 54 of List II. The problem before
them was one of balancing and reconciling the rival claims
of foreign trade in the interests of our national economy
and of the State’s power of taxation in the interests of the
expanding social welfare needs of the people committed to
its charge, and we have their solution as expressed in the
terms of clause (1) (b). It is for the court to interpret
the true meaning and scope of those terms without assuming
that the one constitutional purpose was regarded as more
important than the other. This court has already held in
the previous decision that clause (1) (b) protects the
export-import trade of this country from double taxation by
prohibiting the imposition of sales tax by the State on
export-sales and import-purchases, and we find no warrant in
the language employed to extend the protection to cover the
last purchase before export or the first sale after import.
As regards sales or purchases effected in the State by
transfer of shipping (c.i.f.) documents while the goods are
still in transit, we have already observed that the words
“in the course of” imply a movement or progress and,
therefore, a beginning and an end of such movement or
progress. As clause (1) (b) is concerned only with
exempting certain sales or purchases from taxation by the
States in this country, it is
68
sufficient to determine where the course of export begins
and where the course of import ends. In this connection, it
is useful to remember that the power to make laws with
respect to duties of customs including export duties (entry
83 of List I) and also with respect to import and export
across customs frontiers and the ‘definition of customs
frontiers (entry 41 of List 1) is vested exclusively in the
Central Legislature, and detailed provisions have been made
in the Indian Sea Customs Act, 1878, for the levy of customs
duties by the officers of the Central Government who are
stationed along customs frontiers as defined by the Central
Government where, after appraising the goods exported or
imported, the duties chargeable, if any, are computed and
levied, and it is not until this process is completed that
the goods can be shipped for transportation or cleared by
the consignee or his representatives as the, case may be.
It would seem, therefore, logical to hold that the course of
the export out of, or of the import into, the territory of
India does not commence or terminate until the goods cross
the customs barrier. It is, however, to be noted that the
question of imposing sales tax on transfer of goods in the
course of export would not often arise in practice for,
where the goods are transported pursuant to a contract of
sale already concluded with a foreign buyer and the shipping
documents have been forwarded to him, any further sale of
such goods by the Indian seller is impossible, and where the
export trade is conducted through representatives or branch
offices, the sale by the latter of the exported goods
usually takes place abroad and would not then be subjected
to tax by the State in India. It is in relation to import
of goods from abroad that the question of exemption assumes
practical importance. It is well known that sales or
purchases by transfer of shipping documents while the goods
are in transit are a characteristic feature of foreign trade
and as they take place in the course of import as defined
above, and are -regarded commercially as incident to the
import transaction, they fall within the terms of clause (1)
(b) and would be entitled, in our view, to the protection of
that
69
clause, if the State is constitutionally competent to tax
such sales, as to which we express no opinion.
Our conclusions may be summed up as follows
(1) Sales by export and purchases by import fall within the
exemption under article 286 (1) (b). This was held in the
previous decision.
(2) Purchases in the State by the exporter for the purpose
of export as well as sales in the State by the importer
after the goods have crossed the customs barrier are not
within the exemption.
(3)Sales in the State by the exporter or importer by
transfer of shipping documents while the goods are beyond
the customs barrier are within the exemption, assuming that
the State power of taxation extends to such transactions.
It remains to consider in the light of the foregoing
discussion how far the cashew-nut purchases made by the
respondents are within the exemption under article 286. It
will be recalled that these purchases fell into three
groups:
I. Purchases made in the local market,
II. Purchases from the neighbouring districts of the State
of Madras, and
III. Imports from Africa.
As regards Group 1, the High Court finds that the purchases
of raw nuts whether African or Indian are all made with the
object of exporting their kernels” though there were some
negligible sales in the local market of what are called ”
factory rejects”. The High Court further finds that the
bulk of the kernels were in fact exported by the respondents
themselves, a small quantity being sold by the respondents
to other exporters who also subsequently exported the same.
Thus, on the whole, respondents could be said to have
purchased the raw nuts for the purpose of exporting the
kernels and to have actually exported them. But, it will be
seen, the purchases are not covered by the exemption on the
construction we have placed on clause (1) (b), even if the
difference between the, raw materials purchased and the
manufactured
70
goods (kernels) exported is to be ignored. It may, however,
be mentioned here that the High Court has found that the raw
cashew-nuts and the kernels manufactured out of them by
various processes, partly mechanical and partly manual, are
not commercially the same commodity. This finding, which is
not seriously disputed before us, would be an additional
ground for rejecting the claim to exemption in respect of
these purchases, as the language of clause (1) (b) clearly
requires as a condition of the exemption that the export
must be of the goods whose sale or purchase took place in
the course of export.
As regards Group 11, the High Court has found that such
purchases were made only by the respondents in Civil Appeals
Nos. 33 and 36 of 1952. The High Court’s finding as to how
these purchases and the deliveries under them were effected
is by no means clear. The respondent’s contention was that
the purchases were effected and the deliveries taken by
their own paid servants outside the State of Travancore-
Cochin, and it was thus a case of a person buying goods and
taking delivery thereof outside the State and bringing them
across the border after the transaction was completed in all
respects outside the State. On the other hand, the
contention on behalf of the State was that though the
purchases were made outside the State in the neighbouring
districts of Madras, deliveries were effected through the
ordinary commercial channels by employing commission agents
who made the purchases and arranged for the deliveries at
the respondents’ depots at Trichur or Quilon. All that can
be said here is that, if the transactions took place in the
manner alleged by the respondents in these two appeals, they
would be exempt under clause (1) (a). This indeed was not
disputed by the Advocate-General of the, appellant State.
On the other hand, if, as claimed by the Advocate-General,
the purchases were effected by the employment of firms doing
business as commission agents outside the State, and the
deliveries were made through normal commercial channels, the
transactions would partake of an inter-State character and
fall under clause (2). In that case, it would be un-
71
necessary to inquire further whether they would be covered
by the explanation to clause (1)(a), as they would be
clearly taxable under the President’s Order (C. O . No. 7 of
1950) to which reference has been made already, as it was
admitted that sales tax was validly levied on such purchases
before the commencement of the Constitution. As the
taxability of such purchase,, on either view of the facts
was not disputed, no arguments were addressed to us on the
scope of clause (2) and the explanation to clause (1)(a), as
has, been stated.
Group III may be sub-divided into two categories according
to the findings of the high Court: (a) purchases made
through intermediaries called in these proceedings as”the
Bombay party” doing business as commission agents at Bombay,
who acted as agents for the respondents charging commission.
The dealings are thus described by the High Court: “The
goods are purchased when they are in the high seas and
shipped from the African port to Cochin or Quilon. Goods
are never landed at Bombay. The Bombay party only arranges
for purchases on behalf of the assessees, gets delivery of
the shipping documents on payment at Bombay through a bank
which advances money against the shipping documents and
collects the same from the assessees at destination”, and
(b) the Bombay party indented the goods on their own account
and sold the goods as principals to the respondents and
other customers; but the goods were shipped direct to Cochin
or Quilon on c. i. f. terms. The shipping documents were
made out in the name of the Bombay party as consignees and
were delivered to them against payment through bankers at
Bombay. The Bombay party cleared the goods through their
own representatives at the port of destination and issued
separate delivery orders to the respondents and other
customers for the respective quantities ordered.
It will be seen that in respect of the purchases falling
under (a), the Bombay party acted merely as the agents of
the respondents, privity being established between the
latter and the African sellers. The purchases are
72
thus purchases which occasioned the import, and therefore
come within the exemption. As regards (b), the Bombay party
are the purchasers, and they sell the goods as principals to
the respondents at the port of destination by issuing
separate delivery orders against payment. No privity being
established between the respondents and the African sellers,
the respondents’ purchases can only be described as
purchases from the Bombay party of the goods within the
State; in other words, they were local purchases and stand
on the same footing as purchases falling under Group I
above, and for the same reasons they do not come within the
exemption.
It would appear that the cashew-nuts sold and exported to
the American buyers were packed in tins placed in wooden
boxes. The sales tax authorities have included the value of
these packing materials in addition to the value of the
kernels in computing the turnover of the respondents for
purposes of assessment. It was urged that such inclusion
was inadmissible inasmuch as these articles could not be
regarded as separate articles of, sale apart from the
kernels which are packed therein, and that even if they were
to be so regarded, their sale to the American buyers was a
sale which occasioned the export just as much as the sale of
the kernels. The latter contention must prevail in view of
the previous decision, and no sales tax can be levied in
respect of these articles.
In the result, the decison of the High Court quashing the
assessments in question is affirmed 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. Each party will bear its own
costs throughout.
DAS J.-This and eight other appeals have been filed by the
State of Travancore-Cochin against the judgment and order of
the High Court of that State dated the 10th January, 1952,
quashing the orders of assessment of sales tax made against
the respondents respectively by the Sales Tax Officer and
upheld on appeal by the Assistant Commissioner. These
appeal*
73
were heard together immediately after the hearing of C.A.
No. 204 of 1952 [The State of Bombay v. The United Motors
(India) Ltd. & Others(1)] bad been concluded and judgment
had been reserved by another Constitution Bench. The
question of construction of article 286 of the Constitution
which is involved in the present appeals was also raised in
the Bombay appeal. That Constitution Bench has since
delivered judgments in that appeal. The majority of that
Bench have put upon clause (1)(a), the Explanation thereto
and clause (2) of that article a meaning which, in spite of
my pro found respect for their opinions, I am unable to
accept as correct. It is again my misfortune that I am
unable to agree to the interpretation my learned brethren
are now seeking to place upon clause (1)(b) of that article.
As the questions involved in these appeals are of very great
importance and as the draft of this judgment was prepared
before the judgments in the Bombay appeal had been delivered
I consider it right to keep my views on record for whatever
they may be worth. It is, however, needless for me to say
that the majority decision in that Bombay appeal, so long as
it stands, is binding on me.
The respondents in each of these appeals carry on business
in what is now the United State of Travancore-Cochin. They
buy raw cashew-nuts locally and in neighbouring States and
also import them from Africa and after putting them through
a certain process they obtain cashew-nut oil and edible
cashew-nut kernels. They export the edible kernels to
foreign countries in large quantities.
In compliance with the requirements of the relevant Sales
Tax Act then in force the repondents filed returns in the
prescribed forms of their respective turnovers for the
period between the 17th August, 1949, and the 29th May,
1950. Each of the respondents claimed exemption from sales
tax on their respective purchases made between the 26th
January, 1950, when the Constitution came into force, and
the 29th May,
(1) [1953] S.C.R. 1069
10
74
1950. The claim, however, was rejected by the Sales Tax
Officer. On appeal the Assistant Commissioner upheld the
assessment orders. The respondents appeal to the High
Court. By its judgment dated the 10th January, 1952, the
High Court accepted the appeals, quashed the assessment
orders in so far as they included tax on the purchases made
after the date of the Constitution and directed a refund of
the tax overpaid. The State has now come up on appeal
before us.
As the questions involved in these appeals are of general
importance and the other States as well as the Union of
India are interested in the decision, notices were directed
to be issued by this court to the Advocates-General of all
interested States and to the Attorney-General for India.
Many of these States as also the Union of India intervened
and participated in the general discussion on the legal
points involved in these appeals. After several days’
hearing before us in September and October, 1952, it was
found that the parties were seriously at variance on several
material facts and it was felt that the appeals could not be
satisfactorily disposed of without proper findings on those
facts. Accordingly on the 8th October, 1952, the appeals
were remitted to the High Court with directions to
investigate into the disputed facts under certain heads set
forth in the annexure to the order of remand. The High
Court has now returned the records with their findings and
the -appeals are before us again for final disposal.
The assessments in question were made under the Travancore
General Sales Tax Act, 1124 (Act XVIII of 1124). That Act
came into force on the 7th March, 1949, and was, after the
commencement of the Constitution, continued in force subject
to the other provisions of the Constitution and it was in
operation during the period of assessment. After the
integration of Travancore and Cochin that Act was replaced
by the United State of Travancore and Cochin General Sales
Tax Act, 1125 (Act XI of 1125) but we are not concerned with
the latter Act, for it came into force
75
on the 30th May, 1950, that is to say, immediately after the
expiry of the period relevant for the purposes of these
appeals.
The relevant provisions of Act XVIII of 1124 have been
summarised in the judgment just read by my Lord the Chief
Justice and need not be set forth again. Suffice it to say
that the rules framed under I the Act’ prescribed that in
the case of cashew and its kernels the gross turnover of a
dealer would be the amount for which those goods were
purchased by him and, therefore, sales tax was payable on
the purchase and not on the sale of cashew and its kernels.
The respondents do not contend that it was not within the
power of H.H. the Maharaja of Travancore to enact that law
at the time he did so but they maintain that, as after the
commencement of the Constitution Travancore-Cochin became a
Part B State and as such amenable to and bound by the
Constitution, that law, in view of article 286, could no
longer impose or authorise the imposition of any tax on
their purchases of raw cashewnuts. This contention,
therefore, raises important questions as to the extent of
the power of the States under the Constitution to impose a
tax on the sale or purchase of goods. In order, however, to
correctly appreciate the meaning and import of the relevant
provisions of the Constitution it will be helpful to bear in
mind what the position was prior to the commencement of the
Constitution.
Under the Government of India Act, 1935, the Federal
Legislature alone could make laws, under entry 19 in List I,
with respect to import and export across customs frontiers
as defined by the Federal Government and, under entry 44 of
the same List, with respect to duties of custom including
export duties. On the other hand the Provincial
Legislatures alone could make laws, under entry 26 in List
II, with respect to trade and commerce within the Province,
under entry 29, with respect to production, supply and
distribution of goods, under entry 48, with respect to taxes
-on the sale of goods and under entry 49, with respect to’
cesses on the entry of goods into a
76
local area for consumption, use or sale therein. Section
297 of that Act, however, prohibited the Provincial
Legislature or Governments from imposing certain
restrictions on internal trade and ended by saying that any
law passed in contravention of that section would, to the
extent of the contravention, be invalid. It should be noted
that clause (a) of sub-section (1) of that section was
directly and expressly related to and constituted a
restriction on the legislative power of the Province under
entries 27 and 29 and not entry 48 in List II. That section
obviously was inserted in that Act for the purpose of
achieving, as far as possible, free trade within India by
preventing the Provinces from checking or hampering the
distribution of goods or from setting up barriers against
internal trade in India regarded as one economic unit.
Pursuant to the legislative power thus conferred on them the
Provincial Legislatures enacted Sales Tax Acts for their
respective Provinces. In enacting the Sales Tax Acts, the
Provincial Legislatures, however, did not confine the
operation of their legislation to sales or purchases which
took place exclusively within their respective territories.
Although in most of those Acts “sale” was first defined as
meaning a transfer of the property in the goods, so as to
make the passing of the property within the Province the
principal basis for the imposition of the tax, yet by means
of Explanations to that definition, they gave extended
meanings to that word and thereby enlarged the scope of
their operation. Thus some of those Acts purported to tax a
sale or purchase irrespective of the place where it took
place, if only the goods were within the Province at the
time the contract for sale or purchase was made or the goods
were produced or manufactured within the Province after the
contract had been made. In short, if any one or more of the
ingredients of sale, e.g. the contract, delivery, payment of
price, or the passing of property etc., took place within a
particular Province or the goods were produced or
manufactured or otherwise found there that Province felt
free to impose a tax on that transaction of -sale or
purchase
77
although all the other ingredients thereof took place
outside that Province.
The Indian States were not governed by the distribution of
legislative powers contained in the Government of India Act,
1935, and were, therefore, generally free to make whatever
laws they thought fit to make. They, however, enacted Sales
Tax Acts on the model of the Sales Tax Acts of neighbouring
Provinces in British India. Thus the Travancore Act XVIII
of 1124 was substantially a reproduction of the Madras Sales
Tax Act.
The result of the imposition of tax on the sale or purchase
of goods on the basis of a very slight connection or nexus
between the sale or purchase and the taxing Provinces or
States was that in some cases one single transaction of sale
or purchase became liable to be taxed in different Provinces
or States. This imposition of multiple taxes was certainly
calculated to hamper and discourage free trade within India,
which section 297 of the Government of India Act, 1935, was
designed to achieve. This was the position immediately
before the Constitution of India came into operation. Our
Constitution makers were well aware of this evil.
Articles 245 and 246 distribute legislative power between
Parliament and the State Legislatures as per three Lists set
forth in the Seventh Schedule to the Constitution. Thus
Parliament alone is empowered to make laws, under entry 41
in the Union List, with respect to trade and commerce with
foreign countries, under entry 42, with respect to inter-
State trade and commerce and under entry 83, with respect to
duties of customs, including export duty. The State
Legislatures, on the other hand, are alone authorised to
make laws, under entry 26 in the State List with respect to
trade and commerce within the State, under entry 27 with
respect to production, supply and distribution of goods,
under entry 52 with respect to taxes on the entry of goods
into a local area for consumption, use or sale therein and
under entry 54 with respect to taxes on sale or purchase of
goods other than newspapers.
78
It may be mentioned in passing that in List I in the Seventh
Schedule to the Government of India Act, 1935, there was no
separate or specific entry corresponding to entry 42 in the
Union List in the Seventh Schedule to the Constitution.
This shows that our Constitution has deliberately assigned
interState trade and commerce, like foreign trade, to the
exclusive care of Parliament and, therefore, out of
the .reach of the law-making powers of the State Legis-
latures. Having thus distributed legislative powers between
Parliament and the State Legislatures, article 265, which is
in Part XII of the Constitution and headed “Finance,
Property, Contracts and Suits” provides that no tax shall be
levied or collected except by authority of law. Article
286, which is also in Part XII, imposes some restrictions on
the legislative competency of the State Legislatures. That
article runs as follows:
” 286. Restrictions as to imposition of tax on the sale or
purchase of goods. (1) No law of a State shall 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 purposes of sub-clause (a) 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, notwithstanding the fact that
under the general law relating to sale of goods the property
in the goods has by reason of such sale or purchase passed
in another State.
(2) Except in so far as Parliament may by law otherwise
provide, no law of a State shall impose, or authorise the
imposition of, a tax on the sale or purchase of any goods
where such sale or purchase takes place in the course of
inter-State trade or commerce:
79
Provided that the President may by order direct that any tax
on the sale or purchase of goods which was being lawfully
levied by the government of any State immediately before the
commencement of this Constitution shall, notwithstanding
that the imposition of such tax is contrary to the
provisions, of this clause, continue to be levied until the
thirty-first day of March, 1951.
(3)No law made by the Legislature of a State imposing, or
authorising the imposition of a tax on the sale or purchase
of any such goods as have been declared by Parliament by law
to be essential for the life of the community shall have
effect unless it has been reserved for the consideration of
the President and has received his assent.”
In these appeals we are not concerned with sales or
purchases of essential commodities and, therefore, nothing
further need be said about clause (3). Leaving out that
clause, the rest of the article, broadly speaking, enjoins
that no State law shall impose or authorise the imposition
of tax on sale or purchase of goods made-
(a) outside the State,
(b) in the course of the import of the goods in to or the
export of the goods out of India,
(c) in the course of inter-State trade and commerce.
I may here mention that in the exercise of the powers
conferred on him by the proviso to clause (2) of article 286
the President did, by the Sales Tax Continuance Order, 1950,
direct that any tax on the sale or purchase of any goods
which was being lawfully levied by the Government of any
State immediately before the commencement of the
Constitution should, until the 31st March, 1951, continue to
be levied notwithstanding that such imposition was contrary
to the provisions of clause (2) of article 286.
Quite apart from the marginal note to article 286, a cursory
perusal of that article will show that its avowed purpose is
to put a restriction on the power of the
80
State Legislatures to make a law imposing tax on the sale or
purchase of goods under entry 54 in the State List. It may
be recalled that the Provincial Legislatures purporting to
act under entry 48 in List II of the Seventh Schedule to the
Government of India Act, 1935, enacted Sales Tax Acts
imposing tax on sales or purchases of goods on the basis of
one or more of the ingredients of sale having some
connection with the Province and that this practice resulted
in the imposition of multiple taxes on a single transaction
of sale or purchase thereby raising the price of the
commodity concerned to the serious detriment to the
consumer. That evil had to be curbed and that is what has
been done by clause (1)(a) of article 286. It imposes a ban
that no law of a State shall impose or authorise the
imposition of a tax on the sale or purchase of goods where
such sale or purchase takes place outside the State. This
provision clearly indicates that in making it our
Constitution proceeds on the footing that a sale or purchase
has a location or situs. The explanation to clause (1)(a)
then goes on to say that for the purpose of sub-clause (a) 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, notwithstanding the fact that
under the general law relating to sale of goods the property
in the goods has, by reason of such sale or purchase, passed
in another State. The non obstante clause in the Expla-
nation also 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, however, provides that, in spite of such
general 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
81
mentioned may not really take place 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.
Reference may be made to Income-tax Commissioner, Bombay v.
Bombay Trust Corporation(1) where Viscount Dunedin explains
the meaning of a legal fiction.
When a legal fiction is thus created, for what purpose, one
is led to ask at once, is it so created? In In re Coal
Economising Gas Company(2) the question arose as to whether
under section 38 of the Companies Act, 1867, a shareholder
could get his name removed from the register on the ground
that the prospectus was fraudulent in that it did not
disclose certain, facts, or whether his remedy was against
the promoter only. James L.J. said at pages 188-9:
” The Act says that an omission shall be deemed fraudulent.
It provides that something which under the general law would
not be fraudulent shall be deemed fraudulent and we are
dealing with a case of that kind. Where the Legislature
provides that something is to be deemed other than it is, we
must be careful to see within what bounds and for what
purpose it is to be so deemed. Now the Act does not say
that the prospectus shall be deemed fraudulent simpliciter
but that it shall be deemed fraudulent on the part of the
person wilfully making the omission as against a shareholder
having no notice of the matter omitted ; and I am of opinion
that the true intent and meaning of that provision is to
give a personal remedy against the wrongdoer in favour of
the shareholder.”
So it was held that the fiction did not operate as against
the company and there could, therefore, be no rectification
of the register. Again, in Ex parte Walton(3), referring to
section 23 of the English Bankruptcy Act, 1869, James L.J.
said:
“When a statute enacts that something shall be deemed to
have been done, which in fact and in truth
(1) [1929] L.R.57 I.A. 49 at P. 55. (3) [1881]. L.R. 17 Ch
756.
(2) [1875] L.R. 1 Ch. D. 182.
82
was not done, the court is entitled and bound to ascertain
for what purposes and between what persons the statutory
fiction is to be resorted to.”
The above observations were- quoted with approval by Lord
Cairns and Lord Blackburn in Arthur Hill v. The East and
West India Dock Company(1). Lord Blackburn went on to add
at page 458:
“I think the words here ‘shall be deemed to have
surrendered……………. mean, shall be surrendered so
far as is necessary to effectuate the purposes of the Act
and no further;……………..”
In the case now before us, we have fortunately not to
speculate as to the purpose for which the Explanation has
introduced the fiction. It will be noticed that the
Explanation does not say simpliciter that the sale or
purchase is to be deemed to take place in the delivery
State. By its opening words it expressly says that the sale
or purchase is to be deemed to take place in the delivery
State for the purposes of clause (1)(a). Therefore, 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 (1)(a) and to take away the
taxing power of all other States in relation to such a sale
or purchase even though the other ingredients which go
towards the making up of a sale or purchase are to be found
within these States or even if 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.
It is said by some of the Advocates-General that a sale or
purchase which falls within the Explanation is subject to
the taxing power of the State in which the property in the
goods passes under the general law as well as to the taxing
power of the State in which, by virtue of the Explanation,
the property in the goods is to be deemed to pass. On the
other hand some of the other Advocates-General contend that
by virtue of the Explanation the latter State alone becomes
entitled to tax such a sale or purchase. Both these
contentions
(1) [1884] L.R. 9 App. Cas- 448,
83
appear to me to be founded on a misapprehension as to the
real purpose of clause (1) (a) and the Explanation thereto.
As I have already said, the only object of clause (1)(a) is
to prevent the imposition of multiple taxes on a single sale
or purchase and, therefore, it provides that no law of a
State shall impose a tax on sale or purchase which takes
place outside the State. Thus by one stroke the taxing
power of all States outside whose territories the sale or
purchase is, by the fiction, deemed, to take place is
eliminated. To say that the effect of clause (1) (a) read
in the light of the Explanation is to permit both States,
namely, the State where the property passes under the
general law as well as the State in which, by force of the
Explanation, the sale or purchase is deemed to take place,
to tax such sale or purchase is to stultify the very purpose
of that clause, for, then it will fail to prevent the
imposition of multiple taxes which it is obviously designed
to prevent. It is quite clear also that clause(1)(a) in
terms only takes away the taxing power of all States with
respect to a sale or purchase which, by reason of the
fiction introduced by the Explanation, is to be deemed to
take place outside their respective territories. The
purpose of the Explanation is only to explain the scope of
clause (1)(a). By fictionally locating a sale or purchase
in a particular State it, in effect, says that it takes
place outside all other States so as to give it the benefit
of the exemption of clause (1)(a). The Explanation is
neither an exception nor a proviso. It is not its purpose
nor does it purport, substantively and proprio vigore, to
confer any power on any State, not even on the delivery
State, to impose any tax. The fiction of the Explanation
cannot be extended to any purpose other than the purpose of
clause (1)(a), that is, to any purpose other than the
purpose of taking away the taxing power of all States
outside whose territories the sale or purchase is, by the
fiction, deemed to take place. There its purpose ends and
it cannot be used for the purpose of giving any taxing power
on the delivery State, for that is quite outside its avowed
purpose. Whether the
84
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 (1) (a) nor the
Explanation has any bearing on that questionl.
It is urged that even if by virtue of clause (1)(a) all
States in relation to which a sale or purchase is, by the
Explanation, to be deemed to take place outside their limits
are precluded from taxing such sale or purchase and assuming
that the Explanation does not, by implication or otherwise,
permit even the delivery State to tax such sale or purchase,
nevertheless the delivery State has the power under entry 54
in the State List read with article 100(3) of the
Constitution to make a law imposing a tax on such sale or
purchase. This certainly would be the position if there was
nothing else in the Constitution. It should be borne in
mind that the State Legislatures may make laws with respect
to taxes on sale or purchase of goods (entry 54). If in
purported exercise of powers under those entries a State
Legislature makes a law imposing taxes on sale or purchase
which partakes of the character of a sale or purchase made
in the course of interState trade or commerce it may quite
easily encroach upon the Union Legislative field under entry
42 in the Union List and such encroachment may conceivably
give rise to questions as to the validity of the State
legislation. It is in order to protect the free flow of
inter-State trade, which is placed in the care of Parliament
alone, against any interference by State taxation and to
prevent a recourse to the argument of pith and substance in
justification of such encroachment by a State on the Union
field that the Constitution, by article 286 (2), has
expressly placed a restriction on the legislative power of
the State in relation to tax on inter-State sale or
purchase. Clause (2) of article 286 provides that, except
in so far as Parliament may by law otherwise provide, no law
of a State shall impose a tax on the sale or purchase of
goods when such a sale or purchase takes place in the course
of inter-State trade or commerce. Clause (2),
85
therefore, 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 (1) (a). A sale or purchase
contemplated by the Explanation to clause (1) (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 this ban. This appears to me to be the
purpose and design of clause (2).
It is said that if the sale or purchase referred to in the
Explanation is to be bit by clause (2) then clause (1) (a)
was wholly redundant, for there was no point in exempting it
from the ban imposed by clause (1)(a)and hittin it by
clause (2). As already stated the purposeof clause (1)(a)
is to place a sale or purchase taking place outside a State
beyond the taxing power of that State. The Explanation only
explains, by an illustration as it were, the scope of that
ban. Clause (1) (a) only contemplates one aspect of a sale
or purchase, namely, its territorial location, and by
imposing a ban on the taxing power of a State with respect
to a sale or purchase, which takes place outside its limits,
it purports to remedy the particular evil of multiple
taxation founded on the nexus theory to which reference has
been made. That is the limited purpose of clause (1) (a)
and that purpose is fulfilled by placing a ban on those
States in relation to which a sale or purchase is, by reason
of the Explanation, deemed to take place outside their
territories. Whether the delivery State where the sale or
purchase is deemed to take place can tax such a sale or
purchase is not, as I have said, the concern of clause (1)
(a) or the Explanation. It is only when the question of the
competency of a State Legislature under entry 54 of the
State List to make a law imposing a tax on a sale or
purchase which by the fiction is deemed to. take place
within its territory is raised that clause (2) comes
86
into play. – That clause looks at a sale or purchase in its
inter-State character and imposes another ban in the
interest of the freedom of internal trade. The immediate
purpose of the two bans are, therefore, essentially
different and I see Do reason to hold that although clause
(1)(a) read with the Explanation does not expressly
authorise the State, in which the sale or purchase is, by
the Explanation, to be deemed to take place, to tax such
sale or purchase, it must nevertheless, by implication, be
regarded not only as having authorised that State to do so
but as having also exempted it from the ban imposed by
clause (2). To adopt this course is to resort to the
fiction created by the Explanation for quite a different and
collateral purpose which is entirely beyond its avowed
purpose. This, as I have explained, is, on principle and on
authority, not permissible for the court to do.
The same argument is advanced in a different and more
attractive language. It is urged that once it is
determined, with the aid of the fiction introduced by the
Explanation that a particular sale or purchase has taken
place within the delivery State, it must follow as a
corollary that the transaction loses its inter-State
character and falls outside the purview of clause (2), not
because the definition in the Explanation is used for the
purpose of clause (2) but because such sale or purchase
becomes, in the eye of the law, a purely local transaction.
I am unable to accept this argument which appears to me to
overlook the declared purposes of clause (1)(a) and of the
Explanation. In all interState sale or purchase the
property passes and the sale or purchase takes place in one
or the other State according to the rules laid down in the
Sale of Goods Act and the inter-State character of the sale
or purchase is not affected or altered by the fact of the
property passing in one State rather than in another. What
is an inter-State sale or purchase continues to be such,
irrespective of the State where the property passes. While,
therefore, to locate a sale or purchase, by a legal fiction,
in a particular State, is to make it appear to be an outside
sale or purchase in relation to
87
all other States, so as to attract the ban of clause (1)(a)
on those States, such location cannot possibly alter the
intrinsic inter-State nature or character of the sale or
purchase. A sale or purchase which falls within the
Explanation does not become, in the eye of the law, a purely
local sale for all purposes or for all times. It is to be
deemed to take place in the delivery State only for the
purpose of clause (1)(a), i.e., for taking ing away the
taxing power of all other States. I can see no warrant, for
the argument that the fiction embodied in the Explanation
for this definitely expressed purpose, can be legitimately
used for the entirely foreign purpose of destroying the
inter-State character of the transaction and converting it
into an intra-State sale or purchase for all purposes. Such
metamorphosis appears to me to be completely beyond the
purpose and purview of clause (1) (a) and the Explanation
thereto. To accede to this argument will mean that the Sales
Tax Officer of the delivery State will have jurisdiction to
call upon dealers outside that State to submit returns of
their turnover in respect of goods delivered by them to
dealers in that State under transactions of sale made by
them with dealers within that State. Thus a dealer in, say,
Pepsu who delivers goods to a dealer in, say, Travancore-
Cochin will become subject to the jurisdiction of the last
mentioned State and will have to file returns of their
turnover and support the same by producing their books of
account there. I cannot imagine that our Constitution-
makers intended to produce this anomalous result. On the
contrary, it appears to me that they enacted clauses (1) (a)
and (2) for the very purpose of preventing this anomaly. I
repeat that it is not permissible, on principle or on
authority, to extend the fiction of the Explanation beyond
its immediate and avowed purpose which I have explained
above. In my judgment, until Parliament otherwise provides,
all sales or purchases which take place in the course of
inter-State trade or commerce are, by clause (2) of article
286, made immune from taxation by the law of any State,
irrespective of the place where the sales or purchases may
take place, either under the general law or by virtue
88
of the fiction introduced by the Explanation to clause (1)
(a). If a particular inter-State sale or purchase takes
place outside a State, either under the general law or by
virtue of the fiction created by the Explanation, it is
exempted from taxation by the law of that State both under
clause (1) (a) and clause (2). If such inter-State sale or
purchase takes place within a particular State, either under
the general law or by reason of the Explanation, it is still
exempt from taxation even by the law of that State under
clause (2), just as a sale or purchase which takes place
within a State, either under the general law or by reason of
the Explanation, cannot be taxed by the law of that State,
if such sale or purchase takes place in the course of import
or export within the meaning of clause (1) (b).
I It is next contended that the ban imposed by article
286(2) is itself subject to the provisions of article 304.
That article is one of the seven articles (articles 301 to
307) grouped under the heading “Trade, commerce and
intercourse within the territory of India ” in Chapter XIII.
Article 301 proclaims that, subject to the provisions of
Part XIII, trade, commerce and intercourse throughout the
territory of India shall be free. Article 302 empowers
Parliament to impose by law such restrictions on the freedom
of trade, commerce and intercourse between one State and
another as may be required in public interest. Indeed,
entry 42 in the Union List gives exclusive power to
Parliament to make laws with respect to inter-State trade
and commerce and clause (2) of article 286 also recognises
this power of Parliament. Article 303 prohibits both
Parliament and State Legislatures from showing preference to
one State over another, or discriminating between the
States. Then comes article 304 which runs as follows:-
“304. Notwithstanding anything in article 301 or article
303, the legislature of a State may by law
(a) impose on goods imported from other States any tax to
which similar goods manufactured or produced in that State
are subject, so, however as not
89
to discriminate between goods so imported and goods so
manufactured or produced, and
(b)impose such reasonable restrictions on the freedom of
trade, commerce or intercourse with or within that State as
may be required in the public interest:
Provided that no Bill or amendment for the purpose of clause
(b) shall be introduced or moved in the Legislature of a
State Without the previous sanction of the President.”
The argument is that the ban imposed by clause (2) of
article 286 should, like article 301, be subordinated to
article 304. 1 am unable to accept the correctness of this
argument. Article 301 is expressly made subject to the
other provisions of Chapter XIII which includes article 304
but no part of article 286 is so subjected. Article 304 (a)
gives power to the State Legislatures to put a tax on goods
imported from other States whereas article 286 restricts
their taxing power on sale or purchase, i.e., the
transaction itself as distinct from the goods. Article 304
appears to me to be closely related to entry 52 in the State
List and restricts the State’s powers under that entry but
article 286 controls the State’s powers under entry 54 in
the State List. In the circumstances article 304 cannot
properly be read into article 286. Article 304, of course,
can have no bearing whatever upon clause (1) (b) of article
286.
An argument is advanced suggesting that if all sales or
purchases that take place in the course of interState trade
and commerce are put beyond the taxing power of the States
then that fact will very seriously and prejudicially affect
the economy of the States and may prevent them from
discharging the responsibilities, which all welfare States
are expected to do. Apart from the benefit that a free flow
of trade is likely to bring to the public generally the
apprehended danger appears to me, to be more assumed than
real. The proviso to clause (2) empowers the President to
direct the continuation, up to the 31st March, 1951, of the
sales tax which was being levied before the commencement of
the Constitution and in fact the President, on
90
the same day as the Constitution came into force, actually
made an order in exercise of this power as herein before
stated. There was, therefore, no immediate danger to State
revenue and the status quo was maintained. Further, clause
(2) itself empowers Parliament to lift the ban imposed by
it, should Parliament, in the interest of State economy,
think fit to do so. The Constitution has thus itself
provided ample safeguards and this court need not assume
unto itself the functions of Parliament and indirectly under
the guise of interpretation seek to secure the safety of
State finance which Parliament itself has adequate direct
power to do.
Finally, it is said that the effect of holding that the ban
imposed by clause (2) extends to all sales or purchases
which take place in the course of inter-State trade or
commerce will be to place at a disadvantage the consumers of
similar goods manufactured or produced locally, for the
actual consumer will have to pay no tax if he buys similar
goods manufactured in another State direct from the manu-
facturers or sellers in that other State. I do not think
this objection has much force. Very few actual consumers
take the trouble of importing goods for their own
consumption direct from the manufacturers or sellers outside
their State. Further, the cost of carriage, handling
charges and the risk of loss and damage in transit will
effectively deter actual consumers from procuring goods
direct from outside, for in all probability the cost of such
enterprise will exceed the sales tax which the consumer will
save by not buying the local goods. Besides, if India is to
be regarded as one economic unit there can be no objection
to a consumer in one State getting goods cheaply from a
neighbouring State.
I now pass on to another important object of article 286
which is to encourage our foreign trade. Power is given
exclusively to Parliament to make laws under entry 41 with
respect to trade and commerce with foreign countries and
under entry 83 with respect to duties of custom including
export duties. If in addition to the import or export duty,
which Parliament
91
alone can impose, the State Legislatures were left free to
make a law under entry 54 in the State List levying another
tax on a sale or purchase which takes place in the course of
the import of the goods into or the export of the goods out
of the territory of India such double taxation will
necessarily increase the price of the goods. Such
imposition may easily result in our not getting imported
goods which may be of everyday requirement at a reasonable
price or our not being able to compete in the world market
with our exported goods. This will discourage and hamper
our foreign trade and eventually affect the Union revenue.
It is to avoid that calamity that article 286(1) (b) was
introduced in the Constitution.
Article 286 (1) (b) has to be construed in the light of its
aforesaid constitutional purpose and against its commercial
background. Import and export trade is principally carried
on by big mercantile houses. They purchase goods locally
either against orders secured from overseas buyers or in
anticipation of such orders and send the goods out of India
by land or sea to be delivered eventually to the overseas
buyers. They purchase goods in foreign countries against
orders secured from local Indian buyers who may be wholesale
or retail dealers or in anticipation of such orders and
bring them into India by land or sea to be delivered to
their constituents. In some cases the manufacturers or
producers in India may themselves export their goods direct
to overseas buyers and the retail dealers or even actual
consumers in India may occasionally import goods direct from
overseas sellers. Export and import transactions of this
clause are, however, comparatively speaking, smaller in
volume than the great bulk of foreign trade put through by
the big export and import houses. The constitutional
purpose is to foster this foreign trade and to preserve the
Union revenue. For achieving that purpose, the Constitution
has by clause (1) (b) of article 286 imposed a ban on the
State Legislatures preventing them from impinging upon the
Union field of foreign trade and imposing tax on sales or
purchases made in the course of import or export under the
guise or pretence of making laws
92
with respect to taxes on sale or purchase of goods under
entry 54 in the State List.
The question arises: what is the scope of the ban thus
imposed on the States ? The answer will depend on the
meaning that may be ascribed to the phrase “in the course
of” occurring in clause (1) (b). It should be noted that
the same phrase is also used in clause (2) of that article.
In The State of Travancore-Cochin v. The Bombay Company
Ltd.(1), this court has held that ” Whatever else may or may
not fall within article 286(1)(b) sales and purchases which
themselves occasion the exports or imports of the goods, as
the case may be, out of or into the territory of India come
within the exemption…….. In other words, this court has
held that sales or purchases which themselves occasion the
imports or exports are sales or purchases which take place ”
in the course of” import or export. This was sufficient to
dispose of that case and it was not then necessary to decide
what else might fall within that phrase. This court is now
called upon to decide that point.
Article 286(1)(b) exempts from taxation by a State law all
sales or purchases which take place “in the course of the
import of the goods into or the export of the goods out of
the territory of India.” The word “course” conveys to my
mind 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 II 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 the
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. This view, which has been said to be founded on
mechanical test, is accepted by the Advocate-General of the
appellant State and, indeed, by all Advocates-General other
than-those of Uttar Pradesh and Mysore. The Advocates-
General of the two last mentioned States seek to limit the
(1) [1952] S.C.R. 1112.
93
exemption only to such sales or purchases as themselves
occasion the export or import. That narrow view, however,
fails to take note of the etymological meaning of the word
“course” and the very large number of sales or purchases
that take place while the goods are on the high seas by the
endorsement and/or delivery against payment from hand to
-hand of the relative shipping documents covering goods
worth crores of rupees. In the case of exports from India,
such sales or purchases in India will not be many for the
shipping documents will ordinarily be sent to the foreign
country and the sales or purchases, if any, during transit,
by delivery of the shipping documents will take place there.
In some cases, however, where the goods are shipped to the
exporter himself or his agent without any previous sale,
such sale by delivery of shipping documents may take place
in India. But take the case of an Indian importer who
places an order or indent with an overseas merchant for the
supply of a large quantity of goods. The goods are shipped
and the shipping documents are sent by air mail and
presented to the Indian importer by the overseas merchant
through his bank. The Indian importer receives the shipping
documents against payment. The goods are, however, on the
high seas on their import journey and it will take some time
before the steamer will arrive. The market may fluctuate in
the meantime. Is the importer to wait patiently with folded
hands trusting to luck that the market may be in his favour
when the goods actually arrive? Is he not to be allowed to
make a gain in case there is a rise in the market rate or
cut his loss if there is a downward tendency in the market
price ? Is he to keep his money locked up all this time ?
The exigencies of foreign trade require that he must be
permitted to sell the goods by delivering the shipping
documents and realise his money and to again invest it in
fresh imports. This is how foreign trade is done. It is
stated in Halsbury’s Law of England (Hailsham Edn.), Vol.
29, p. 210:
“280. The commercial reason for the evolution of the
‘c.i.f.’ contract lies in the length of the time taken
94
in the carriage of goods by sea. It is to the advantage of
neither seller nor buyer that the goods, the subject matter
of the contract should remain en dehors commerce while they
are in course of shipment. It is to the seller’s interest
to receive the money equivalent to the goods as soon as
possible after the date of the contract of sale, and until
he has received actual payment of the price he normally
desires to be able, if he wishes, to obtain credit upon the
security of the transaction. The buyer, on the other hand,
normally desires to be able to deal with the goods, for
resale or finance, as soon as possible. To meet these
business necessities on the part of both buyer and seller
the ‘c.i.f.’ contract was evolved.”
Such sales or purchases, by delivery of shipping documents
while the goods are on the high seas on their import journey
were and are well recognised species of transactions done
every day on a large scale in big commercial towns like
Bombay and Calcutta and are indeed the necessary and
concomitant incidents of foreign trade. To hold that these
sales or purchases do not take place “in the course of”
import or export but are to be regarded as purely ordinary
local or home transactions distinct from foreign trade, is
to ignore the realities of the situation. Such a
construction will permit the imposition of tax by a State
over and above the customs duty or export duty levied by
Parliament. Such double taxation on the same lot of goods
will increase the price of the goods and, in the case of
export, may prevent the exporters from competing in the
world market and, in the case of import, will put a greater
burden on the consumers. This will eventually hamper and
prejudicially affect our foreign trade and will bring about
precisely that calamity which it is the intention and
purpose of our Constitution to prevent. It is, therefore,
clear, to my mind, that the ban imposed by article 286(1)(b)
protects all sales or purchases of goods that take place
during the period the goods are on the high seas. This
construction appears to me to be imperative not only
etymologically but also commercially and constitutionally.
Indeed, this view is implicit in our judgments in the case
of The State Of
95
Travancore-Cochin v. The Bombay Company Ltd.(1) referred to
above, in which we said at page 1120:-
“We are not much impressed with the contention that no sale
or purchase can be said to take place in the course of’
export or import unless the property in the goods is
transferred to the buyer during the actual movements, as for
instance where the shipping documents are endorsed and
delivered within the State by the seller to a local agent of
the foreign buyer after the goods have been actually shipped
or where such documents are cleared on payment or an
acceptance by the Indian buyer before the arrival of the
goods within the State. This view which lays undue stress
on the etymology of the word ‘course’ and formulates a
mechanical test for the application of clause (b) places, in
our opinion, too narrow a construction upon that clause in
so far as it seeks to limit its operation only to sales and
purchases effected during the transit of the goods, and
would, if accepted, rob the exemption of much of its
usefulness.”
The question immediately arises as to how the period of time
covering the “course” of import or export is to be measured.
When does it begin and when does it end? The learned
Advocate-General of Travancore Cochin contends-and in this
he is supported by all the Advocates-General other than
those of Uttar Pradesh and Mysore-that this period is
confined within two terminii, namely, when the journey of
the goods begins and when it ends. They maintain that the
process of import or export ordinarily begins and ends at
water’s edge, although the period of journey of the goods
from the port to the place of the importer or his
representative in case of import or to the port from the
place of the exporter or his representative in case of
export may be added to the period of the actual voyage on
the high seas. This contention cannot be accepted in view
of our decision in the case of The State of TravancoreCochin
v. The Bombay Co. Ltd.(1) referred to above. According to
that decision the phrase “in the course of ” is not limited
within these two terminii, i.e., from the point of time the
goods are handed over to the carrier
(1) [1952] S.C.R, 1112,
96
upto the time they are delivered by the carrier. By
adopting the principle of integrated activities we have
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.
In my judgment 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. I take this view, not because I read the words “in
the course of” as synonymous with the words “for the purpose
of” but because I regard the purchase by the exporter as an
activity so closely integrated with the act of export as to
constitute a part of the export process itself and,
therefore, as having taken place ” in the course of the
export. The learned Attorney-General accepts this position
but the Advocates-General of the States demur. They
maintain that in this view of the matter one cannot stop at
the last purchase by the exporter but has to include the
purchase by the person who sells to the exporter and all
previous sales or purchases until one reaches the producer.
I find no substance or cogency in this line of reasoning.
In the last purchase by the exporter we have at least one
party who is directly concerned with or interested in the
actual export. The exporter is the connecting link, the
commercial vinculum, as it were,. between the last purchase
and the export. But in the earlier sales or purchases
neither the sellers nor the purchasers are personally
concerned with or interested in the actual
97
export of the goods at all. Therefore the earlier sales or
purchases may be too remote and may not be regarded as
integral parts of the process of export in the same sense as
the last purchase by the exporter can be so regarded. The
line of demarcation is easily perceptible.
Let me explain my meaning step by step. As I have already
stated, in some cases the exporters receive orders from the
foreign buyers and then export the goods. It has been held
by us that these orders themselves occasion the export and,
therefore, they take place ” in the course of ” export. But
these orders can occasion the export only if the exporters
have the goods to export. The exporters are not necessarily
the producers or manufacturers and in great many cases they
have to procure the goods to implement the foreign orders.
The overseas orders in such cases immediately necessitate
the purchase of the goods and eventually occasion the
export. The three activities are so intimately and closely
connected, like cause and effect, with the actual export
that they may well be regarded as integral parts of the
process of export itself. As according to our previous
decision the contract for sale with the foreign buyer starts
the export stream and occasions the export, the purchases by
the exporter to implement such contract necessarily take
place, chronologically speaking, after the export stream has
started and, therefore, must be an activity undertaken in
the course of the export. Logically there can be no getting
away from this conclusion. Therefore, these purchases to
implement the sale which occasions the export must be immune
from sales tax.
Is there any compelling reason to confine this immunity to
sales or purchases to implement a foreign order or sale ? It
cannot be overlooked that in a great majority of cases the
export merchants, who, as I have said, are not, generally
speaking, the actual producers or manufacturers of goods,
start purchasing goods in advance, after taking into account
the estimated quantity of the year’s total production, the
prevailing local prices, the likely demand from foreign
countries
13
98
and the prices ruling or likely to rule in the foreign
markets. Such anticipatory purchases form by far the
largest part of the activities of the export merchants and
are regarded by businessmen as necessary incidents of the
export trade. Is there any logical reason why purchases by
the exporters in anticipation of future foreign orders
should not also be taken as starting the ” course ” of the
flowing stream of the export trade ? The goods, it is true,
are stored in godowns for a while awaiting actual
exportation but that is like a stream falling into a lake
and getting out by an outlet at the other end so that the
undercurrent of the flow, even if imperceptible on the
surface, is nevertheless continuous. One cannot overlook or
ignore these well known preliminary but essential activities
of the export merchants which necessarily precede and lead
up to and, indeed, occasion or eventually make possible the
ultimate physical movement of the goods. To hold that these
purchases are independent local purchases totally distinct
from the export trade will be to unduly narrow down the wide
meaning of the flexible phrase in the course of”.
I find support for the views I have expressed above by the
recent decision of the High Court of Australia in The Queen
v. Wilkinson: Ex parte Brazell, Garlick and Coy (1) to which
reference may now be made. Section 11(3) of a New South
Wales statute called the Marketing of Primary Products Act,
1927-1940, provides, inter alia., that every producer who,
except in the course of trade or commerce between the
States, sells or disposes of or delivers any commodity, in
respect of which a Board has been appointed, to persons
other than the Board, and every person other than the Board
who, except as aforesaid, buys, accepts or receives any such
commodity from a producer shall be guilty of an offence.
Brazeil, a producer of potatoes in New South Wales at
Dorrigo in New South Wales agreed to sell 48 bags of
potatoes of Garlick Coy & Co., who were buying agents for J.
E. Long & Co., general produce merchants, whose head office
was at Jennings on the New South Wales side of
(1) (1952) 85 C.L.R. 467.
99
the border of that State and Queensland and who carried on
business of purchasing and selling potatoes in both States.
It was a term of the sale that the potatoes should be
delivered from Brazell’s lorry on trucks at Dorrigo in New
South Wales. The potatoes were loaded at Dorrigo railway
station into a truck and consigned by Garlick Coy & Co. to
J. E. Long & Co. at Wallangarra on the Queensland side of
the border adjoining Jennings. The potatoes arrived at
Wallangarra and were sold by J. E. Long & Co. to a purchaser
in Queensland. Brazell was charged with the offence of
disposing of and Garlick and Coy, the two partners of
Garlick Coy & Co. were charged with the offence of receiving
the potatoes in contravention of section 11(3) of the Act.
The question was whether the sale by Brazell to Garlick Coy
& Co. in New South Wales was in the course of trade and
commerce between the States. It was found that it was no
part of the contract of sale between Brazell and Garlick Coy
& Co. that the potatoes would go to any ascertained buyer in
New South Wales or in any other State other than Garlick Coy
& Co. who were, as Brazell believed, acting as agents for J.
E. Long & Co., that Brazell was only concerned with the sale
of his potatoes and that when he received his money he had
no further interest in the potatoes, that there was no
evidence that at the time Garlick Coy & Co. received the
potatoes from Brazell there was any contract in existence
for sale of them to any person in Queensland or any other
State or that J. E. Long & Co. had any definite orders for
the supply of them to any ascertained inter-State buyers or
that the potatoes purchased by Garlick Coy & Co. were to
fill any such orders. There was no binding agreement
between Brazell and Garlick Coy & Co. or J. E. Long & Co.
that the potatoes would be sold to buyers in Queensland, The
Magistrate answered the question in the negative and
convicted Brazell, Garlick and Coy, who thereupon moved for
a writ of prohibition to restrain the informants and the
Magistrate from further proceeding on those convictions. In
a joint judgment Dixon, McTierman, Fullager and Kitto, JJ.
said :-
100
“In our opinion on the foregoing facts the disposal and the
receiving made the subject of the informations were in the
course of trade and commerce between the States, within the
meaning of the exception in section 11(3). Under the
agreement for the sale and purchase of the potatoes the
agents buying were required to consign the potatoes to a
railway station in Queensland, and they did so consign them.
For the purpose of the exception the delivery of the
potatoes from the lorry into the railway truck can bear only
the aspect of an essential and integral, even if initial,
step in the transportation of the potatoes to Queensland.”
In a separate but concurring judgment Williams J. said :-
” It was submitted to the Magistrate that the transaction
must be looked at as a whole and not split up into separate
contracts of sale and purchase. The Magistrate rejected
this submission. In doing so he fell into error. He should
have regarded the transaction as a whole. On this basis the
facts proved that the acts done by the appellants were done
in the course of trade and commerce between the States.”
After stating the facts shortly Webb J. said:-
“The potatoes went to Queensland and were sold by the
principal in that State. It may be that there was no
binding stipulation that the potatoes would be sold in
another State, and that they could have been resold in New
South Wales without breach of agreement. But a legal nexus
with inter-State trade, by a contract with the grower, is
not required to secure the immunity given by section 92. ”
Reference was made in this case to the earlier case of
Clements and Marshall Pty Ltd. v. -Field Peas Marketing
Board (1) where there were two sets of contracts, the first
being contracts of sale by the producers to the dealers and
the second contracts of resale by the dealers to buyers in
other States. After pointing out that it was only the
second set of contracts which in themselves were inter-State
transactions Dixon J. said at page 429:
(1) (1947) 76 C.L.R- 401,
101
“We should consider the commercial significance of
transactions and whether they form an integral part of a
continuous flow or course of trade, which, apart from the
theoretical legal possibilities, must commercially involve
transfer from one State to another.”
The reasonings adopted by the learned Judges in the above
cases apply with full force not only to clause (2) but also
to clause (1)(b) of article 286 and we should construe the
words “in the course of” in the same way as it has been done
in the case of Queen v. Wilkinson(1). So construed, 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. No “legal
nexus” between these purchases and the actual physical
export is required to secure immunity from State taxation.
In my judgment 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 only way to give
business efficacy to article 286 (1)(b) is to construe it in
this commercial sense. Tax such purchases and you tax the
export itself and by that process eventually cripple our
export trade and bring about an adverse trade balance
against us in the long run. It must always be borne in mind
that with our exports we pay for our imports.
The same considerations apply to the first sale by the
importers of the imported goods. I leave out of
consideration the comparatively few cases of retail dealers
themselves importing goods direct from overseas sellers and
the still fewer cases of actual consumers importing goods
for their own consumption. In by far the largest majority
of cases it is the import merchants who bring goods into the
country from abroad. Their business is to bring in the
goods and thereby augment the general mass of goods in the
country. In some cases the importers secure orders from
local dealers and pursuant to such orders the importers
import the goods
(1) (1952) 85 C.L.R. 467.
102
from foreign lands. In most cases, however, the importers,
in intelligent anticipation of local demands for such goods,
place orders or indents with foreign sellers who, pursuant
to such orders, send out the goods. Each of these orders or
indents placed with the foreign sellers by the intending
importers occasions the import and these purchases by the
importers are certainly “in the course of” import of the
goods into India within the meaning of our previous
decision, and as such exempt from sales tax. We have also
seen that the sale or purchase of goods during the period
they are on the high seas is also “in the course of” import
and as such immune from taxation by State law. The question
then arises as to where the course of import ends. Does it
end at the water’s edge ? If the sale by the importers while
the goods are on the high seas be ,,in the course of” import
and not liable to sales tax, there can be no logical reason
why the first sale by the importers to dealers should not
also be exempted. If such sale is to be regarded as purely
a local sale and as such liable to taxation by the States,
then, in effect, the tax will be a burden on the import
itself. The importers have to pay the customs duty imposed
by Parliament and if again the States impose additional
taxes on the same goods such multiple taxation will raise
the price of the goods to the detriment of the actual
consumers and will eventually have an adverse effect on our
import trade which it is the purpose of the Constitution to
prevent. After all the business of the importers who bring
the goods into our country is only to make the goods
available to the internal trade, for they are not usually
retail dealers who sell to the consumers direct. That
business is completed only by the first sale by the
importers to the dealers, wholesale or retail. It is only
after that first sale of the goods by the importers to the
dealers that the goods become parts of the general mass of
property in the State concerned and thereafter subject to
the taxing power of that State. The first sale by the
importers to dealers, therefore, appears to me to be so
inextricably wound up with the import itself that it may be
commercially regarded as the culmination of the import
activities and,
103
therefore, the end of the course of import. I arrive at
this conclusion not by applying the American doctrine of
unopened original package, which has now been abandoned even
by the Supreme Court of America and has recently been
rejected by us in the Prohibition Case(1) but on a
construction of the phrase “in the course of”‘ in the light
of its etymology, the purpose of the Constitution and
against the background of the known notions and practices of
businessmen engaged in foreign trade. , If, however, a
particular importer himself happens to be a retail dealer of
the goods and sells the goods to the actual consumers-and
such cases are comparatively few-then such retail sales may,
like local retail sales of similar goods, be liable to sales
tax by the State. Whether an importer is or is not a retail
dealer is a question of fact which is capable of proof and,
therefore, need not be regarded as creating any insuperable
difficulty in the matter of the assessment of the sales tax.
For reasons stated above, I find no difficulty in holding
that just like the last purchases by the exporters
themselves for the purpose of sending the goods out of the
country the first sales by the importers to dealers of goods
brought by them into the country also come within the
somewhat elastic expression ” in the course of ” export or
import. As stated above, it is possible to draw the line
there.
Reference is made to Clive M. Schmitthoff’s Export Trade
(2nd Edition, page 3) where the learned lecturer says:-
“When a merchant shipper in the United Kingdom buys, for the
purpose of export, goods from a manufacturer in the same
country the contract of sale is a home transaction, but when
he resells these goods to a buyer abroad that contract of
sale has to be classified as an export transaction.”
The argument formulated on this authority is that this
passage clearly establishes that the last purchase by the
exporters and the first sales by the importers are home
transactions and cannot be classified as export or import
transactions at all, This distinction between
(1) [1951] S.C.R. 682,
104
a home transaction and an export transaction made by the
learned lecturer for the purposes of his book takes us
nowhere. Nor do the American decisions which distinguish
between intra-State trade and inter-State trade throw any
light on the problem of construction of article 286 (1)(b)
which is couched in language quite different from that used
in the American Constitution. In America the question is
clear cut, namely, is it an inter-State transaction or an
intra-State transaction. Our problem, on the other hand, is
to find out whether a given sale or purchase has taken place
“in the course of” import or export. Simply to say that the
particular sale or purchase is a home transaction does not
solve our problem, for to say so is not to say that it
cannot have taken place “in the course of” import or export.
Indeed, article 286 (1)(b) postulates a home transaction,
that is, a transaction which takes place within the State
and then places it beyond the taxing power of that State on
the ground that the transaction, has taken place “in the
course of ” import or export. If the transaction is not a
home transaction, i.e., if it takes place outside the State,
clause (1) (b) need not be invoked at all, for then clause
(1)(a) will prevent that State from taxing that outside
transaction. It is only when a particular transaction is a
home transaction in the sense that it take,,; place within
the State that the further question arises, namely, whether
that home transaction has taken place “in the course of”
import or export within the meaning of clause (1)(b). The
circumstance that a sale or purchase is a home transaction
does not, therefore, conclude the matter and we have yet to
solve that further question by the proper construction of
clause (1)(b) according to its natural meaning and in the
light of the Constitutional purpose and against the
commercial back-ground as explained above.
A second argument founded on that passage is that if those
home transactions are removed from the sphere of State
taxation then the States will be deprived of one of the
principal and fruitful sources of revenue and the economy of
the States will be crippled and may
105
even collapse. It is pointed out that there is no provision
in clause (1)(b), such as there is in clause (2), under
which Parliament may lift the ban and, therefore, to place
these home transactions beyond the taxing power of the
States will irretrievably deprive them of a very large part
of revenue which they have been realising from these sales
or purchases made by the big importers or exporters many of
whom are foreigners. There is no reason, it is urged, why
they should not be made to pay sales tax like ordinary
sellers or buyers in the States. As already stated, the
imposition of double taxation may eventually hamper our own
foreign trade. The object of our Constitution, apparent
from the distribution of legislative powers and from article
286, is to place our inter-State trade and our foreign trade
beyond the taxing power of the State. In the case of inter-
State trade power is expressly given to Parliament by clause
(2) of that article to lift the ban but in the case of
foreign trade no such power is given to Parliament by that
article to relax or lift the ban imposed by clause (1) (b)
on the legislative power of the State Legislatures. It is
for Parliament alone to make laws with respect to foreign
trade. If the import or export of particular commodities is
not beneficial to our country then Parliament, which is in a
much better position than this court to know and judge of
such matters, will, I am sure, make laws restricting or even
prohibiting such imports or exports. If our imports or
exports may bear the additional burden of taxation without
any detriment to the consumers and our foreign trade and
without any risk to the Union revenue, Parliament, I have no
doubt again, will increase the customs or export duty and
augment the revenue of the Union. If on its correct
interpretation clause (1)(b) of article 286 causes loss to
the States’ revenue by depriving them of the taxes on such
sales or purchases then such loss will clearly and solely be
attributable to the intention of the Constitution as
expressed in that clause. If that clause results in any
danger to the economy of the States, I have no manner of
doubt that Parliament
14
106
Will make good the loss to the States on the recommendation
of the Finance Commission under some appropriate article out
of articles 268 to 281 grouped under the heading ”
Distribution of Revenues between the Union and the States ”
in the very chapter in which occurs article 286 which is
engaging our attention. In any event, the court must
construe the Constitution as it finds it and if the
construction of the plain language leads to any
inconvenience to the States it will be for authority other
than this court to rectify and remove the same.
It is said that it will be very difficult for the Sales Tax
Officer to ascertain how much of the goods purchased by the
exporters had actually been exported or how much of the
goods imported by the importers had actually been
distributed amongst the dealers as opposed to actual
consumers. It is pointed out that ordinarily sales tax is
levied on sales and the sellers are permitted to pass on the
tax to the purchasers at the time of such sales. How, it is
asked, is the seller to know whether his purchaser will
actually honour his representation that he wants the goods
for the purpose of export? If the seller has no confidence
in the integrity of his purchaser he will not sell to him
without sales tax. The purchaser who is really exporter
will not then perhaps buy from such a seller or if in the
case of urgency he buys on payment of the sales tax may
claim the refund, if there be any provision in that behalf,
on proof that he actually exported the goods. It is said
that exporters may change their minds and sell the goods
locally after obtaining the exemption or the importers may
sell the goods themselves in retail to the consumers after
having got the exemption. There is no substance in this
line of theoretical reasoning, for these are matters capable
of being proved. If the exporters or their sellers cannot
prove to the satisfaction of the officer that the exporters
purchased so much goods for export and did actually export
the same or the importers or their purchasers cannot prove
that the importers imported so much goods and distributed so
much amongst the dealers as
107
opposed to actual consumers, they will not get the’ benefit
of the exemption and that is all. If the Sales Tax Officer
finds no difficulty in ascertaining whether the goods are
delivered in a State only for the purpose of consumption
within that State or whether they were delivered for the
purpose of resale out of that State so as to ascertain the
applicability of the Explanation to clause (1) (a), why
cannot the same officer find out what goods were purchased
by the exporters for the purpose of export or what part of
the imported goods were sold by the importers to the dealers
? If the Income-tax Officer can without difficulty ascertain
the income, profits and gains of a business and work out the
provisions of, section 10 of the Indian Income-tax Act and
also can ascertain under section 42 of that Act the income
deemed to accrue or arise within the taxable territory,
there cannot be any insuperable difficulty in the way of the
Sales Tax Officer determining the turnover of a particular
dealer and working out the exemptions he is entitled to
under article 286(1) (b). In any case the assumed
difficulty of the Sales Tax Officer cannot alter or affect
the correct construction of the constitutional provisions in
question.
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
article 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 (1) 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 clause (1) (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 clause (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
108
exception or a proviso but only explains sub-clause (a).
The, fiction created by the Explanation is only for the
purposes of sub-clause (a), so that sales or purchases of
the kind which fall within the Explanation get the benefit
of the ban imposed by sub-clause (a). Therefore, the
purpose of the Explanation read with sub-clause (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-clause
(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 that State cannot, under
clause (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 clause (2), unless and until Parliament by law
provides otherwise. A sale or purchase “in the course of”
import or export within the meaning of clause (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 article 286 as I read and understand
it,
109
I have already stated, however, that the majority decision
of this court in C. A. No. 204 of 1952 [The State of Bombay
v. The United Motors (India) Ltd.(1)] has taken a different
view of the meaning of clause (1) (a), the Explanation and
clause (2) of article 286. In disposing of the present
appeals, in so far as such disposal depends on those
provisions, I am bound to follow the majority decision
rather than my own view of them.
Bearing in mind the principles laid down by this court in
The State of Travancore- Cochin v. The Bombay Company
Ltd.(2) and in C. A. No. 204 of 1952 [The State of Bombay v.
The United Motors (India) Ltd. and others (1)] and those
explained above, I now proceed to consider the rival claims
on their respective merits. There is really no substantial
controversy as to the nature of the business carried on by
the respondents. All of them are exporters of cashew-nut
kernels on a fairly big scale. They procure raw cashew-nuts
from three sources, namely, (i) from within the State of
Travancore-Cochin, (ii) from neighbouring States and (iii)
from Africa. Then they put the raw cashew-nuts through a
certain process and obtain oil and edible kernels. These
edible kernels they export to foreign countries. It will be
recalled that the Travancore Sales Tax Act imposes taxes
only on the purchase of “cashew and its kernels” but not on
the sale thereof. The respondents claim exemption from
sales tax for the period between the 26th January, 1950,
when the Constitution came into force and the 29th May,
1950, which is the close of the assessment year. In support
of their claim for exemption they rely oil article 286 of
the Constitution. It is necessary, therefore, to take each
of the three categories of purchases and see if they or any
part of them come within any of the exemptions provided by
that article.
As regards local purchases of raw cashew-nuts there is no
controversy that those purchases take place within the State
and are, therefore, not entitled to the protection of
article 286 (1) (a). These purchases do not take place ” in
the course of ” inter-State trade or
(1) [1953] S.C.R. 1069.
(2) [1952] S.C.R. 1112.
110
commerce and, therefore, are not within clause (2) of that
article. The only question is whether these local purchases
can be said to take place ” in the course of ” export within
the meaning of article 286 (1) (b). There is no dispute
that the respondents do not sell the raw cashew-nuts or any
portion of it within or without the State of Travancore.
They do not sell the edible kernels, which they obtain as a
result of the manufacturing process or any part of them
within Travancore-Cochin or any other State in India except
what have been described as factory rejections of negligible
quantity which are not fit for export. All edible kernels
are exported to foreign countries. Therefore, the res-
pondents claim that all their purchases, whether made
locally or in neighbouring States or from abroad, are, ” in
the course of ” export within the meaning of clause (1) (b)
in the sense explained above. The appellant State, however,
maintains that commercially ” the goods ” exported are
entirely different from ” the goods ” purchased by reason of
the process of manufacture they are put through and are,
therefore, not entitled to the benefit of the ban imposed by
clause (1) (b).
The High Court has, on remand, enquired into the process of
manufacture through which the raw cashewnuts are passed
before the edible kernels are obtained. The High Court, in
its judgment on remand, goes minutely into the different
processes of baking or roasting, shelling, pressing,
pealing, and so forth. Although most of the process is done
by hand, part of it is also done mechanically by drums. Oil
is extracted out of the outer shells as a result of
roasting. After roasting the outer shells are broken and
the nuts are obtained. The poison is eliminated by pealing
off the inner skin. By this process of manufacture the
respondents really consume the raw cashew and produce new
commodities. The resultant products, oil and edible
kernels, are well recognised commercial commodities. They
are separate articles of commerce quite distinct from the
raw cashewnuts. Indeed, it is significant that the
respondents place orders for “cashew-nuts ” but orders are
placed
111
with them for ” cashew-nut kernels “. In the circumstances,
” the goods ” exported are not the same as the goods
purchased. The goods purchased locally are not exported.
What are exported are new commodities brought into being as
a result of manufacture. There is a transformation of the
goods. The raw cashews are consumed by the respondents in
the sense that a jute’ mill consumes raw jute, or a textile
mill consumes cotton and yarn. The raw cashews not being
actually exported the purchase of raw cashews cannot be said
to have been made ” in the course of ” export so as to be
entitled to immunity under clause (1) (b).
As regards the purchases of raw cashew-nuts from the
neighbouring States, the position, as found by the High
Court on remand, is that the bulk of such purchases were
made by the respondents or their agents from sellers in the
neighbouring States and the goods so purchased were
delivered by the sellers to the respondents or their agents
in the States where the purchases took place. The contract
of purchase was fully implemented when as a direct result of
the purchase delivery was given outside Travancore. The
respondents or their agents thereafter brought, the goods,
which by then had become their own goods, into Travancore,
by rail or otherwise. The delivery of the goods under the
contract for purchase having already taken place outside
Travancore, the subsequent despatch of those goods to
Travancore cannot possibly be said to have been delivery
within that State as a direct result of the purchase within
the meaning of the Explanation. Indeed, the learned
Advocate-General of Travancore-Cochin concedes that as
purchases of this type did not fall within the Explanation
they must be regarded as having taken place outside
TravancoreCochin and must, accordingly, be exempt from taxa-
tion by Travancore-Cochin under article 286 (1) (a). If it
could be shown that although such sales or purchases took
place entirely in those other States yet they were made
between two parties residing or carrying on business in two
States and for the purpose of consumption or of sale in the
purchasers’ State then these sales or purchases might have
been said to have
112
been made “in the course of ” inter-State trade and commerce
and as such exempt from taxation by both the States under
article 286 (2). The transactions of sale or purchase with
which we are concerned having taken place within the period
covered by the President’s order made under the proviso to
that clause, no protection under clause (2) can be claimed
for these transactions. Further, if the cashew-nuts
purchased in neighbouring States were for the purpose of
exporting them out of the territories of India and were
actually so exported, then these purchases would be ” in the
course of ” export and as such exempt from tax under article
286 (1) (b). As a matter of fact, however, the cashew-nuts
purchased in the neighbouring States were not actually
exported but were put through a process of manufacture and
the goods that were exported were not the same as those that
were purchased as explained above and, therefore, clause (1)
(b) gives no protection to these purchases. On the facts of
these cases, these purchases, however, took place outside
Travancore-Cochin and as such are, therefore, immune from
taxation by Travancore-Cochin only under clause (1) (a)
which is not affected by the President’s order made under
the proviso to clause (2).
The learned Advocate-General of Travancore-Cochin says that
there is another type of purchase from neighbouring States
where the seller in the neighbouring State directly delivers
the goods under the contract for sale or purchase to the
respondents in Travancore. Learned counsel for the
respondents maintains that there is actually no case of
purchase of this type. It is not necessary at this stage to
go into this controversy, for, the matter having been fully
argued, it is just as well to lay down the correct principle
applicable to such purchases, if any. If there is no such
purchase where the seller from the neighbouring State
delivers the goods as a direct result of such purchase to
the respondents in Travancore, no question will arise.
Assuming that there are cases of such purchases, then it is
clear that the first condition of the Explanation is
satisfied, namely, the goods are delivered within the State
as a direct result of such purchase. The next question is
113
–was such delivery for the purpose of consumption in the
State ? The raw cashew-nuts, after they reach the
respondents, are put through a process and new articles of
commerce, namely, cashew-nut oil and edible cashew-nut
kernels, are obtained. It follows, therefore, that the raw
cashew-nut is consumed by the respondents in the sense I
have mentioned. Consequently, such purchases will fall
squarely within the Explanation and will be deemed to take
place in Travancore so that under clause (1)(a) the
neighbouring States will not be entitled to impose any tax
on these sales or purchases. According to my view, and on
the reasonings adopted in the Australian case, these
purchases are “in the course of” inter-State trade and as
such will be protected by clause (2) but according to the
majority view in the Bombay appeal, which must prevail, such
purchases will become, as a result of the Explanation, an
intra-State purchase in Travancore and consequently out of
the protection of clause (2) and liable to taxation by
Travancore law. Even if according to my view these
purchases fall within clause (2) they will nevertheless be
liable to be taxed under the Travancore Act, in spite of
that clause, by virtue of the order made by the President in
exercise of the powers conferred on him by the proviso to
that clause. These purchases will not get any protection
under clause (1) (b) because the goods purchased were not
the goods that were exported. These purchases, if any,
will, therefore, be liable to be taxed under the Travancore
Act.
The third source from which the respondents purchase raw
cashew-nuts is Africa. The respondents place orders for the
purchase of raw cashew-nuts with commission agents in Bombay
and the Bombay agents pass on the orders to the African
sellers or their agents in Bombay. The African sellers
theft send the goods by steamer and send the bills of
lading, invoice etc. to their bank in Bombay. The bank
presents the documents to the Bombay agents of the
respondents and the Bombay agents pay the price
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and take delivery of the shipping documents in Bombay. The
Bombay agents then prepare their own invoice showing the
amounts paid by them on account of the respondents and their
own commission and send their invoice together with the
shipping documents to their Travancore bank. The Travancore
bank presents all these documents to the respondents who pay
the Bombay agents’ invoice amount and take delivery of the
shipping documents. All these generally happen while the
goods are on the high seas. On arrival of the goods at
Travancore port, the respondents clear the goods on
presenting the bill of lading etc. This is the main type of
purchase of African raw cashew-nuts. The appellant State
concedes that these are not liable to tax. In the first
place the purchases were outside the State and, therefore,
clause (1)(a) applies. In the next place these purchases
took place I ‘in the course of ” import and as such are
exempt from taxation under article 286(1)(b), because (i)
they themselves occasioned the import as already held by
this court and (ii) the property in the goods passed and the
purchases took place when the goods were on the high seas.
These purchases, however, cannot be said to have taken place
“in the course of” export, for reasons already explained.
There is another type of purchase of African raw cashew-
nuts. There the African sellers ship raw cashew-nuts on
their own initiative or at the instance of their Bombay
agents and while the goods are on the high seas, they are
sold by endorsement and delivery of the bills of lading etc.
at Bombay to the Bombay agents of the respondents and then
the same procedure is followed as in the first case. Here
the purchase by the respondents did not occasion the import,
but, nevertheless, the sale or purchase was outside the
State and further the goods being on the high seas at the
time when the property passed such sale or purchase must be
regarded as having taken place “in the course of” import of
the goods according to the mechanical test explained above.
The learned Advocate-General of the appellant State does not
dispute that such purchases are also to go free from sales
tax,
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The next type of purchase of African raw cashewnuts is as
follows: The different respondents place separate orders
with the same Bombay commission agents and the Bombay
commission agents place one consolidated order for the
entire quantity of the goods with the African sellers. The
African sellers thereupon ship the entire lot of goods under
one bill of lading and they send the bill of lading and
invoice etc. to their Bombay bank and the Bombay bank
presents the same to the Bombay agents. The Bombay agents
pay for the entire lot of goods and obtain delivery of the
shipping documents and then they prepare separate invoices
for each of their constituents, namely, the respondents,
including their own commission and split up the consignment
in the sense that the draw separate delivery orders covering
the respective quantity of goods ordered by each respondent
and send such invoice and delivery orders to the Travancore
bank, who presents the same to the respondents who receive
the delivery orders against payment. The goods are then
cleared on the original bill of lading on arrival of the
steamer at Travancore and thereafter the respondents take
delivery of the goods from the warehouse of sellers or the
Bombay agents against their respective delivery orders. A
purchase of this type cannot properly be said to occasion
the import of the goods. What really occasions the import
of the goods is the order placed by the Bombay agents. The
Bombay agents not having passed the orders placed by the
respondents separately to the African sellers and the
African sellers not having shipped the respective quantities
of goods under separate bills of lading none of the orders
can be said to have occasioned the import, for in such a
case there is no privity between the African sellers and the
individual respondents and the import is referable only to
the order placed by the Bombay agents which in the eye of
the law is not the order of any of the respondents but a
consolidated order placed by the Bombay agents on their own
responsibility and account with the object of eventually
distributing the goods amongst the different respondents in
fulfilment of their respective orders. In the next place
the delivery of the bill of
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lading covering the entire goods to the Bombay agents cannot
be said to be a delivery to the respondents of the goods
separately ordered by each of the respondents. The sale in
such a case takes place in Travancore on the handing over of
the delivery orders to the respective respondents and the
delivery of the goods thereunder from the warehouse in
Travancore. These goods, therefore, cannot claim exemption
from tax under the provisions of article 286 (1) (a) or 286
(1) (b) or 286 (2).
The last type of transaction in African raw cashewnuts is
where the purchase takes place after the cashew-nuts arrive
in Travancore port and are thereafter sold and delivered ex-
godown to the respondents. This is clearly a case of intra-
State sale and clauses (1) (a) and (2) of the article can
have no application to it. The respondents cannot claim
exemption under clause (1)(b) for reasons stated above.
As the respondents do not claim any exemption from taxation
with respect to pre-Constitution purchases, the same need
not be discussed separately.
For reasons stated above, the decision of the High Court
must be upheld only to the extent that the assessments
should be quashed. The matter must, however, go back to the
Sales Tax Officer who must make a reassessment in the light
of the principles laid down in the two previous cases
referred to regarding clause (1) (a), the Explanation and
clause (2) and in the light of the principles discussed
above regarding clause (1)(b).
Agent for the appellants in all the appeals: G. H.
Rajadhyaksha.
Agent for the respondents in Appeals Nos. 26 and 33: Rajinder
Narain.
Agent for the respondents in Appeals Nos. 27, 30 to 32 and
34 to 36: S. Subramanian.
Agent for the Union of India and the States of Madras,
Hyderabad, Punjab and Mysore: G. H. Rajadhyaksha.
Agent for the State of U. P.: C. P.Lal,
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