PETITIONER:
INDIAN OIL CORPORATION LTD. & ANR.
Vs.
RESPONDENT:
UNION OF INDIA AND ORS.
DATE OF JUDGMENT10/09/1980
BENCH:
GUPTA, A.C.
BENCH:
GUPTA, A.C.
FAZALALI, SYED MURTAZA
KAILASAM, P.S.
CITATION:
1981 AIR 446 1981 SCR (1) 673
ACT:
Sales Tax legislation-Central Sales Tax Act, 1956-
Section 3(1)-Factory in Barauni in Bihar-Naphtha sent by
pipeline from Barauni to kanpur in U.P.-Orders placed
pursuant to an agreement by the buyer in Kanpur on the
seller's office in Kanpur-Sale-Whether taxable under the
Central Sales Tax or U.P. Sales Tax Act.
HEADNOTE:
The Indian Oil Corporation was a manufacturer of
naphtha with its works at Barauni in Bihar while the 5th
respondent was a manufacturer of fertilizers with its
factory at Kanpur. The Indian Oil Corporation supplies
naphtha to the 5th respondent's fertilizer factory at Kanpur
through a pipeline. Both the buyer and the seller have their
offices at Kanpur and indents are addressed by the buyer to
the seller at their Kanpur office. The pipeline from Barauni
to the petitioner's depot at Kanpur has been constructed by
the petitioner, the pipeline between the buyer's and the
seller's fences is however constructed by the buyer, the 5th
respondent.
On the question whether the sale of naphtha should be
taxed under the Central Sales Tax Act or under the U.P.
Sales Tax Act, the U.P. authorities insisted that since the
indent had been placed by the buyer on the seller at their
Kanpur Office the sale was a local sale while the sale tax
authorities in Bihar insisted that since there was transfer
of goods from one State to another the sale was inter-State
chargeable to tax under the Central Sales Tax Act.
Allowing the petition,
^
HELD: On the facts of the present case the sales are
clearly inter-State sales and the State of U.P. had no
jurisdiction to assess the petitioners to sales tax under
the State Act. As the movement of naphtha commences from
Barauni in Bihar the sales tax payable on the sales under
the agreement can be assessed and collected only by the
authorities in the State of Bihar on behalf of the
Government of India in view of section 9 of the Central
Sales Tax Act. [680E]
It is now well-settled by a series of decisions of this
Court that a sale shall be an inter-State sale under section
3(a) if there is a contract of sale preceding the movement
of goods from one State to another and the movement is the
result of a covenant in the contract of sale or is an
incident of that contract; in order that a sale may be
regarded as an inter-State sale it is immaterial whether the
property in the goods passes in one State or another. [678H-
679A]
674
Tata Iron & Steel Co. Ltd. v. S. R. Sarkar [1961] 1
S.C.R. 379; Kelvinator of India Ltd. v. State of Haryana
[1974] 1 S.C.R. 463; Oil India Ltd. v. Superintendent of
Taxes [1975] 3 SCR 767; Balabhagas Hulaschand v. State of
Orissa [1976] 2 SCR 939; Union of India v. K. G. Khosla &
Co. (P) Ltd. [1979] 3 SCR 453, referred to.
The terms of the agreement make it quite clear that the
sales of naphtha to the respondent were inter-State sales.
The source of supply is the seller's refinery at Barauni in
Bihar and the destination is the buyer's factory at Kanpur.
This clause alone is sufficient to prove that the sales in
question were inter-State sales. [679B-C]
Clause 3(iii) of the agreement which says that the
naphtha shall be supplied against indents in writing
addressed to the seller at their installation at Kanpur
cannot be read in isolation. Sub-clause (iv) of clause 3
sets out the details of the buyer's requirement for the
first four years and thereafter. Under clause 8 Indian Oil
Corporation are bound not only to bring the contractual
quantity of naphtha from Barauni to the seller's Kanpur
installation but also to provide at their own cost storage
facilities at Kanpur of a capacity equivalent to not less
than 30 days' requirement of the buyer. The indents are
therefore not outside the agreement but are relatable to the
buyer's requirements under the agreement. It is obvious that
the sales under the agreement are not possible without
inter-State movement of naphtha. Clause 3 read with clause 8
also proves that really there are no two movements but only
one movement from Barauni to Kanpur pursuant to the contract
of sale and the arrangement regarding storage facilities
provided in clause 8 is only for operational convenience, it
is only a mechanism devised to facilitate the transfer of
naphtha through the seller's pipeline to their depot at
Kanpur and from there to the buyer's factory at Kanpur
through the pipeline constructed at the buyer's cost. It is
relevant in this connection to note that under clause 7(ii)
the cost of transferring naphtha from Barauni to the buyer's
fence is to be borne by the buyer. [679G-H; 680A-C]
JUDGMENT:
ORIGINAL JURISDICTION: Writ Petition No. 444 of 1979.
(Under Article 32 of the Constitution)
F. S. Nariman & Anil B. Dewan, B. D. Barucha, Ravinder
Narain and Talat Ansari for the Petitioner.
A. Subhashini for Respondent No. 1
Lal Narain Sinha, Att. Genl. and U.P. Singh for the
Respondents Nos. 2-3.
Soli J. Sorabjee, V. K. Pandita and E. C. Agarwala for
R.4.
Subrata Roy Chowdhury, Biswaroop Gupta, Bhaskar Gupta,
Surhid Roy Chowdhury & D. N. Gupta for Respondent No. 5.
The Judgment of the Court was delivered by
675
GUPTA, J.-In this petition under Article 32 of the
Constitution of India dealer seeks relief from the same
sales being assessed to sales tax both under the Central
Sales Tax Act and the U.P. Sales Tax Act. The first
petitioner Indian Oil Corporation Limited, IOC for short,
are a government company incorporated under the Companies
Act, 1956 engaged inter alia in the manufacture and
marketing of petroleum products. The second petitioner is
the Managing Director and a shareholder of IOC. Union of
India has been impleaded as the first respondent in the
petition. The 2nd respondent is the Assistant Superintendent
of Commercial Taxes, Central Circle, Bihar. The 3rd and 4th
respondents are respectively the State of Bihar and the
State of U.P. The 5th respondent Indian Explosives Limited
are a company having their registered office at Calcutta;
they have a factory at Panki, Kanpur in Uttar Pradesh
manufacturing urea fertilizers. IOC have a refinery at
Barauni in the State of Bihar and also a depot at Panki,
Kanpur. In 1966 IOC completed pipeline from their refinery
at Barauni in Bihar to Kanpur in U.P. through Patna in Bihar
and Mughalsarai and Allahabad both in U.P. At their Barauni
refinery IOC manufacture naphtha which is the principal raw
material for production of fertilizers.
On February 9, 1970 an agreement was entered into by
and between IOC and the 5th respondent in terms of which IOC
were to sell and the 5th respondent were to buy the entire
quantity of naphtha required for the 5th respondent’s
fertilizer factory at Kanpur. Below is a summary of the
different clauses of the agreement that are relevant for the
present purpose; the numbers given to the different
paragraphs in this summary follow the numbering of the
corresponding clauses of the original agreement:
1. The agreement shall be deemed to have come into
force from September 10, 1969 [when the supply of
naphtha commenced] and shall remain in force till
December 31, 1980. It shall continue to be in
force thereafter unless terminated by either party
giving to the other not less than one year’s prior
notice of the intention to terminate the
agreement.
2. The naphtha to be supplied shall be of the
specification set out in Schedule I of the
agreement.
3. (i) The quantity of naphtha that the 5th
respondent agree to buy and IOC agree to sell
shall be 2,50,000 tonnes per annum which is the
maximum rate per annum.
(iii) The naphtha shall be supplied against the buyer’s
indents in writing addressed to the seller at the
seller’s Panki/Kanpur installation.
676
(iv) It is agreed that the buyer’s requirement of
naphtha for the first four years shall be 95,000,
1,70,000, 2,00,000 and 2,25,000 tonnes
respectively.
(viii) In case the buyer fails to take delivery during
any year the quantities of naphtha as stipulated
above for reasons other than Force Majeure at
their Kanpur plant, the seller shall be entitled
to sell the quantity which the buyer has failed to
lift. Similarly if the seller fails to deliver the
stipulated quantities of naphtha during any year
for reasons other than Force Majeure at their
Barauni refinery and/or the transportation system
from Barauni to their Panki installation, the
buyer shall be entitled to purchase the quantity
not delivered in that year from other sources.
4. The supply of naphtha to the buyer shall be made
from the seller’s refinery at Barauni.
5. The price of naphtha shall be exclusive of
transfer charges, excise duty and all other taxes
levies which shall be recovered by the seller from
the buyer at actual rates prevailing and levied by
concerned agencies from time to time.
7. (i) Naphtha shall be supplied through a pipeline
at the fence of the buyer’s fertilizer factory and
the pipeline between the buyer’s and the seller’s
fences shall be constructed by the buyer at their
expense.
(ii) The cost of transferring naphtha by the pipeline
from the point of its manufacture to the fence of
the buyer’s fertilizer factory shall be borne by
the buyer.
8. The seller shall provide at their cost storage
facilities at the seller’s Panki/Kanpur
installation of a capacity equivalent to not less
than 30 days’ requirement of the buyer.
10. (iii) Three samples of naphtha for testing will be
taken from the seller’s tank at their Panki/Kanpur
installation prior to transfer in the presence of
buyer’s representatives at such frequency as may
be mutually agreed.
According to the 5th respondent, since the commencement
of supply of naphtha under the aforesaid agreement IOC went
on charging from them sales tax at the rate prescribed by
the U.P. Sales Tax Act on the plea that the sales were
chargeable under the said Act. On or about March 16, 1974
the assessing authority under the U.P. Sales Tax Act
assessed IOC to sales tax under the said Act on their total
turnover for the assessment year 1969-70 including
677
the sales of naphtha to the 5th respondent. The 5th
respondent filed a writ petition in the Allahabad High Court
challenging the assessment made on the basis that the sales
were local and asserting that they were inter-state sales.
Before the writ petition was disposed of the U.P. assessing
authority assessed IOC for the assessment year 1970-71
treating the sale of naphtha to the 5th respondent as local
sale. On August 27, 1975 the Allahabad High Court allowed
the said writ petition quashing the impugned order of
assessment to the extent it sought to levy tax under the
U.P. Sales Tax Act on the sales of naphtha to the 5th
respondent. The High Court held that the sales under the
agreement dated February 9, 1970 were inter-state sales. IOC
preferred an appeal against the order of assessment in
respect of the assessment year 1970-71 and although the
appeal was on grounds not relevant for the present purpose,
it is necessary to refer to it because at a later stage IOC
had the scope of the appeal enlarged, induced by the 5th
respondent according to IOC, by including a ground that the
sales of naphtha under the agreement were interstate sales.
On June 29, 1978 the 2nd respondent levied sales tax under
the Central Sales Tax Act on the sales of naphtha by IOC to
the 5th respondent for the assessment year 1970-71 treating
them as inter-state sales. Under section 9 of the Central
Sales Tax Act the tax levied under that Act is collected in
the State from which the movement of the goods commenced; in
this case the movement commenced from Barauni in Bihar. IOC
preferred an appeal against this order to the appellate
authority. For the assessment year 1971-72 the assessing
authority under the U.P. Sales Tax Act treated the sales of
naphtha to the 5th respondent as inter-state sales
presumably in view of the aforesaid judgment of the
Allahabad High Court. This assessment order was challenged
by the Commissioner of Sales Tax, U.P. in revision before
the appropriate authority. For the same assessment year the
Bihar authority assessed the sales on the basis they were
inter-state sales. For the next assessment year 1972-73 the
U.P. authority again treated the sales as inter-state sales
and again the order was challenged in revision by the
Commissioner of Sales Tax, U.P. The Bihar authority also
treated the sales for that year as inter-state sales.
Thereafter for the assessment years 1973-74 and 1974-75
somewhat surprisingly the U.P. assessing authority went back
on the view taken in the immediately preceding two years and
again treated the sales as local sales and the 5th
respondent preferred appeals from these two orders of
assessment. In this confused situation IOC filed the instant
writ petition in this Court on May, 1, 1979. Meanwhile the
appellate authority under the U.P. Sales Tax Act dealing
with the appeal preferred by IOC against the order of
assessment relating to
678
the year 1970-71 had remanded the case to the assessing
authority and the assessing authority by his order dated
December 20, 1979 held that the sales were local sales.
The 5th respondent had started several other
proceedings to avoid the sale of naphtha to them under the
agreement dated February 9, 1970 being assessed to sales tax
under the U. P. Act. On August 29, 1977 they filed a suit in
the Calcutta High Court against IOC seeking to restrain IOC
from collecting sales tax from them under the U.P. Sales Tax
Act. The 5th respondent also filed two writ petitions in the
Allahabad High Court, Nos. 102 and 103 of 1978. The first
petition challenges the assessment order relating to the
year 1970-71 made by the U.P. authority. The second petition
is directed against the revisional proceedings started by
the Commissioner of Sales Tax, U.P. in respect of the
assessment years 1971-72 and 1972-73. All these proceedings
are still pending.
The petitioners’ case in the present writ petition is
that the sales of naphtha to the 5th respondent were local
sales in Kanpur and as such they were assessable under the
U.P. Sales Tax Act and that the assessment orders dated June
29, 1978 and November 30, 1978 respectively for the
assessment year 1970-71 and 1971-72 made by the Bihar Sales
Tax authority under the Central Sales Tax Act are in
violation of the fundamental rights guaranteed under
Articles 19 and 31 of the Constitution of India. The
petitioners seek a writ in the nature of certiorari for
quashing the aforesaid assessment orders and a writ in the
nature of mandamus directing the Bihar sales tax authority
to forebear from assessing the sales of naphtha to the 5th
respondent on the basis they were inter-state sales.
Alternatively the petitioners pray, in the event it is held
that “the sales are inter-state sales and not intra-state
sales”, for “appropriate reliefs, orders, and directions”
directing the State of U.P. not to assess, levy or recover
any sales tax on the sales of naphtha to the 5th respondent
under the agreement dated February 9, 1970.
Section 3(a) of the Central Sales Tax Act, 1956
provided that “a sale or purchase of goods shall be deemed
to take place in the course of inter-state trade or commerce
if the sale or purchase occasions the movement of goods from
one State to another”. It is now well settled by a series of
decisions of this Court that a sale shall be an inter-state
sale under section 3(a) if there is a contract of sale
preceding the movement of goods from one state to another
and the movement is the result of a covenant in the contract
of sale or is an incident of that contract; in order that a
sale may be regarded as an inter-state sale it is immaterial
whether the property in the
679
goods passes in one state or another. Some of these
decisions are: Tata Iron & Steel Co. Ltd. v. S. R. Sarkar
[1961] 1 SCR 379, Kelvinator of India Ltd. v. The State of
Haryana [1974] 1 SCR 463, Oil India Ltd. v. The
Superintendent of Taxes & others [1975] 3 SCR 797,
Balabhagas Hulaschand v. State of Orissa [1976] 2 SCR 939
and Union of India and Anr. v. K. G. Khosla & Co. (P) Ltd. &
Ors. [1979] 3 SCR 453. In our opinion the terms of the
agreement dated February 9, 1970 summarized above make it
quite clear that the sales of naphtha to the 5th respondent
were inter-state sales. Under clause 4 of the agreement
seller is “to make the supply of naphtha to the buyer from
its refinery at Barauni”. The source of supply is thus the
seller’s refinery at Barauni in Bihar and the destination is
the buyer’s factory at Kanpur. This one clause alone is
sufficient to prove that the sales in question were inter-
state sales.
However, on behalf of the petitioners and the State of
U.P. it is contended that the sales were not inter-state
sales and were local sales within the State of Uttar
Pradesh. It is pointed out from clause 3(iii) that supplies
of naphtha are made on the buyer’s indents in writing
addressed to the seller at their Kanpur installation and not
at their refinery at Barauni which, it is contended, shows
that the supplies are made from IOC’s storage at Kanpur to
the 5th respondent’s factory also at Kanpur. It is also
contended that the supply of naphtha to the buyer’s factory
at Kanpur involves two movements, one from Barauni to Kanpur
for storage at the seller’s depot, and the other from the
depot to the buyer’s factory. This contention is based on
clause 7(i) of the agreement which states that naphtha shall
be supplied at the fence of the buyer’s factory through a
pipeline between the buyer’s and the seller’s fences
constructed at the buyer’s expense. It is argued that this
stipulation shows that the movement of naphtha from Barauni
is arrested at the seller’s Kanpur depot and is followed by
another movement from there to the buyer’s factory which
proves that the sales are local sales and not inter-state
because in an inter-state sale the movement of goods is the
immediate and direct result of the contract of sale.
Clause 3(iii) of the agreement which says that the
naphtha shall be supplied against indents in writing
addressed to the seller at their installation at Kanpur
cannot be read in isolation. Sub-clause (iv) of clause 3
sets out the details of the buyer’s requirement for the
first four years and thereafter. Under clause 8 IOC are
bound not only to bring the contractual quantity of naphtha
from Barauni to the seller’s Kanpur installation but also to
provide at their own cost storage facilities at Kanpur of a
capacity equivalent to not less than 30 days’ requirement of
the buyer. The indents are therefore
680
not outside the agreement but are relatable to the buyer’s
requirements under the agreement. It is obvious that the
sales under the agreement are not possible without inter-
state movement of naphtha. Clause 3 read with clause 8 also
proves that really thare are no two movements but only one
movement from Barauni to Kanpur pursuant to the contract of
sale and the agreement regarding storage facilities provided
in clause 8 is only for operational convenience, it is only
a mechanism devised to facilitate the transfer of naphtha
through the seller’s pipeline to their depot at Kanpur and
from there to the Buyer’s factory at Kanpur through the
pipeline constructed at the buyer’s cost. It is relevant in
this connection to note that under clause 7(ii) the cost of
transferring naphtha from Barauni to the buyer’s fence is to
be borne by the buyer.
Each case turns on its own facts and the question is
whether applying the settled principle which we have
mentioned above to the facts of the present case the sales
can be said to be inter-state sales. An attempt to show that
some of the factors present in the instant case are present
or absent in some case or other in which this Court held the
sale to be a local sale or inter-state sale hardly serves
any useful purpose. On the facts of the present case the
sales are clearly inter-state sales and the State of U.P.
had therefore no jurisdiction to assess the petitioners to
sales tax under the State Act. As the movement of naphtha
commences from Barauni in Bihar, the sales tax payable on
the sales of naphtha under the agreement dated February 9,
1970 can be assessed and collected only by the authorities
in the State of Bihar on behalf of the Government of India
in view of section 9 of the Central Sales Tax Act.
On behalf of the State of Bihar a point was taken that
the present petition under Article 32 of the Constitution of
India complaining of violation of the fundamental right
guaranteed by Article 31 of the Constitution was not
maintainable after the repeal of Article 31 by the Forty-
Fourth Amendment of the Constitution with effect from June
20, 1979. The petition however complains also of
infringement of Article 19 and therefore does not cease to
be maintainable. Counsel for the 5th respondent sought to
raise a question regarding the justification of treating
freight as part of the sale price, but that is not a matter
that arises for consideration on the present writ petition
filed by IOC.
In the result the alternative prayer made in the writ
petition succeeds, the assessment orders for the assessment
years 1970-71, 1973-74 and 1974-75 passed by the Sales Tax
Officer, U.P. and the revision proceedings initiated by the
Commissioner of Sales Tax,
681
U.P. for the assessment years 1971-72 and 1972-73 are
quashed and respondent No. 4, the State of Uttar Pradesh, is
directed to refund to IOC the sales tax collected from them
on the sales of naphtha to the 5th respondent under the
agreement dated February 9, 1970 and, further, not to levy
sales tax on the sales under the said agreement under the
U.P. Sales Tax Act.
The writ petition is allowed as indicated above; in the
circumstances of the case we make no order as to costs.
N.K.A. Petition allowed.
682
