STATE OF TRAVANCORE-COCHIN AND OTHERS v. SHANMUGHA VILAS CASHEW NUT FACTORY AND OTHERS.

Citation: [1954] 1 S.C.R. 53; 1953 INSC 44

Court: Supreme Court of India

Bench: M. PATANJALI SASTRI, BIJAN KUMAR MUKHERJEA, SUDHI RANJAN DAS, VIVIAN BOSE, GHULAM HASAN

Judgment date: 1953-05-08

Case summary

1953 INSC 44. Supreme Court of India judgment dated 1953-05-08. STATE OF TRAVANCORE-COCHIN AND OTHERS v. SHANMUGHA VILAS CASHEW NUT FACTORY AND OTHERS. Read...

Judgment text

54 SUPREME COURT REPORTS (1954) s. C. R. 53 this extent and with the deepest regret I express my respectful dissent. Ktdar Nath In my view, the convictions cannot be upheld and Bajoria there should be a retrial in the normal way. v. 'l'he State of West Appeals dismissed. Bengal. Agent for the appellant in C. A. No. 84: Sukwmar Ghose. Agent for the appellant in C. A. :No. 85: R. R. Biswas. Agent for the respondent: G. H. Rajadhyaksha. STATE OF TRAVANCORE-COCHIN AND OTHERS 1963 j v. May8. SHANMUGHA VILAS CASHEW NUT FACTORY AND OTHERS. ... [PATANJALI SASTRI c. J. , MUKHERJEA, s. R. DAS, VIVIAN BosE AND GHULAM HASAN JJ. ] Constitiition of India, 1950, cirt. 286 (1) (a), (1) (b) and (2)- Tax on scile or p11rchase of goods-Sales "oittside the State "-Sales "·in the cmirse of" import or export-Sales "in the coiirse of inter- State trade orco1mnerce "-Nat-nre and incidents of-State's power to fox-Scope of constitutional limitations. Held, by (PATANJALI SASTRI 0. J.

, lVIUKHERJEA, 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 prngress but postulates also a connected 'relation.

Consequently, a sale in the course of export out of the country • should be understood in the context of art. 286 (1) (b) as meaning a sale taking place not only d~tring the activities directed to the end of exportation of the goods out of the country, but also as 1Ja1·t 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 ra'v 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) puxchases were made through intermediaries doing business as comm.

ission agents at Bombay who acted as agents for the respondents charging commission ; (b) the commission agents at BombaY indented the goods on their O\Vn 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: Held1 (i) as regards purchases made in the local inarkets of the State they were not exempted under art. 286 (1) (b); (ii) as regards purchases made in the neighbouring States, if the purchases \Vere effected and delivery was taken by the respondents' servants outside the Travancore-Oochin State, they \vould be exempt under art. 286, cl.

(i) (a), and if the purchases were effected by employ· ing firms doing commission business outside the State and deliveries were made through normal commercial channels the tran· sactions \vould 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 hy the President under cl. (2) as such tax \Vas being levied before the Oonstitut~on. (iii) A. s regards imports froin Africa, where the Bombay merchants merely acted as a. gents1 the t1:ansactions would be purchases which occasioned the import and would he exempt under art. 286 (1) (b), but where the Bombay merchants did not act as agents for the respondents, purchases from them \vould be on the same footing as local purchases and would not be exempt. Pe1· S. R. DAS J. -The Explan"tion 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 a\vay the po\ver of taxation of a State in respect of sales and purchases in \V hi ch 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, il 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 th. at State cannot, under (1) (a), tax such sale or purchase. If a sale or purchase takes ptace within a State, either under the general law or by rea. j.... son of the Explanation1 then, if such a sale or purchase takes place f' • . ,,.. "in the course of" inter-State trade and commerce, no State, n-0t 1953 even the State where the sale or purchase takes place as aforesaid can tax it bv reason -of (2), unless and until Parliament bv State of law provides otherwise.

A sale or purchase " in the course of;, Travancore-import or export within the meaning of (1) (b) includes (i) a Cochin sale or pmchase which itself occasions the import or export as and Others already held by this court, (ii) a sale or purchase which takes v. pla-0e while the goods are on the high seas on their import or ex- Shanmugha Vila• port journey. and (iii) the last purch11se by the exporter with a Cashew view to export and the first sale by the importer to a dealer after Nut Factory, the arrival of the imported goods. If a sale or purchase takes and Others. pl11ce within a St11te, either under the general 111w 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 within 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 pm·-chases from the neighbouring States, if the goods were taken delivery of by the agents of the respondents outside the State, such purchases must, under tlie 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.

A8 regards pnrchases from Africa (i) 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 a~ents and while the ! ioods are on the hi(lh seas they a~·~ • purchased by the respondents' Bombay agents, tbe sale or purchase would he 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 Africrtn seller on his own responsibility and the Bombay agent after paying for the entire lot, prepares a separate invoice for ertch of their constituents and the latter receive the delivery orders from a Travancore bank against payment a.

nd take delivery from a Travancore warehouse the sale takes place in the Travancore-Cochin State and the goods cannot claim exemption under (l) (a), (1) (b) or (2) of art. 286. 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, ofthe 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 Ceueral 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-Gochin v. The Bombay Go. Ltd. ([1952] S. C. R. 1112). The hearing of these appeals was continued after the High Court had returned the record with its findings. .. .... T. N. Subrahmanya Iyer, Advocate-General of Travancore-Oochin State (T. R. Balakrishna Iyer, with State of him) for the appellants. Travancore- Oochin M. K. Nambiyar (N.

Palpu, with him) for the and Others respondents in Civil Appeals Nos. 26, 27 and 30 to 36. v. M. 0. Setalvad, Attorney-General for India and Shanmugha Vilas 0. K. Daphtary, Solicitor-General for India (Porus Cashew A. Mehta, with them) for the Union of India. . Nut Factory, and Others. 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. Bikri, 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. PATAN. JALI SASTRI C. J.

-These are appeals from an order of theHigh Court ofTravancore-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 t11x 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(j)], 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 ~ • 1953 of the property in goods by one person to another in the course of trade or business for cash or for deferred State of h Travancore- payment or ot er valuable consideration [section 2(h) ].

aochin The sale or purchase is to be deemed to have taken and Others place in the State, wherever the contract might have v. . been made, if the goods were actually in the State Shanmugha Vilas when the contract was made or, if the goods are Nu~a;,:::,Y actually produced in 'the State, at any time after and Others. ' the contract in respect thereof was made. By sec~ .. tion 3 (4) the turnover is to be determined in accord- Paianjali ance with such rules as may be prescribed, and .. Sastri a. J, rule 4 of the rules framed under the Act pres-cribes 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 fespondents 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 cashew-nut~ 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 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-Gochin v. The Bombay Go. Ltd. (') (hereinafter referred to as the previous decision). . . f: h h h Skanmugha Be£ ore cons1dermg how art e cas ew-nut pure ases 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 (r) (1952] $. C. R. irr2; 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 'as t" h' h 'l d . transac 10rrn w 10 n~ce~sari y prece. e export. or impo~~ of goods will come w1thm the purview of this clause.

This Court, however, found it unnecessary for the urpose of the cases then before it to go any further P 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 pur- . chases 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(') purchased cashew-nuts in the adjoining districts of the ::ltate of Madras during the period in question, it was not disputed that such purchases unless they were exempt under article286(l)(a), would fall within the explanation to clause (l)(a) as interpreted in the majority decision . of this court in the recent case of The State of Bombay v. United Motors (India) Ltd. ('), 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 r952. (2) [1953] S. C. R. 1069. ? · S. C. R.

SUPREME COURT REPORrs 61 With reference to the aforesaid decision, it may be mentioned in passing that in order to remedy what was State of felt to be the unsatisfactory position in regard to the Travancore-levy of tax by the States in America on sales in inter- Cochin state commerce, the North Carolina Department of and Others Revenue proposed that Congress should pass legislations vh V'l authorising the States to tax certain sales in inter- han~~;h:w i as state commerce. The proposed bill ran thus: Nut Factory, " That all taxes levied by any State upon sales of pro- and Others. perty or measured by sales of property may be levied Patanjali upon or measured by sales of property in inter-state sastri a. J. 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 inter-state commerce "(2). It is interesting to note that the bill sought to bring # about substantially the same result as the combined 1 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(l)(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 . • (1) The last purchase of goods made by the exporter for the purpose of exporting them to implement orders State of l d d f Travancore- a rea y receive rom a foreign buyer or expected to Cochin be received subsequently in the course of business, and and Others the first sale by the importer to fulfil orders pμrsuant ... v. . ' to which the goods were imported or orders expected Shanmuuha Vilas to be received after the import. Cashew Nut Factory,• (2) Sales or purchases of goods effected within the and Others.

\ State by transfer of shipping documents while the goods are in the course of transit. Patanjali As regards the first mentioned category, we are Sastri 0. J. 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" etymo- .

logically 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('). ] A sale in the course of export out of the country should similarly be understood in the context of clause (l)(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, • r· . ,. factor alone is not determinative.

The previous decision proceeded on this view and emphasised State of the integral relation between the two where the Travancore· contract of sale itself occasioned the export as the Cochin ground for holding that such a sale was one taking andOthers place in the course of export. It is, however, contended v. . . . l f t d . t t d t' · ShanmughaVilas that on th is prmc1p e o connec e or m egra e · ac iv1- Cashew ties a purchase for the purpose of export must be Nut Factory, regarded as covered by the exemption under clause (1) a.. d Others. (b). We are unable to agree. Patanjali The phrase "integrated activities" was used in the Sastri c. J. 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 J.. 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 pointed 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"(').

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 (r) Schmittof! -Export Trade, 2nd Edn. , ! '· 3 . • sale after import which is a distinct local transaction effected after the importation of the goods into the State of Travancore- country has been completed, and having no integral Cochin relation with it. Any attempt therefore to invoke the and Others authority of the previous decision in support of the v. . suggested extension of the protection of clause (l)(b) ShanmughaVila•to the last purchase for the purpose of export and the Cashew first sale after import on the ground of integrated acti- N. ut Factory, and Others. vities. must fail.

Nor is it correct to say that it is necessary to extend Patanjali the exemption to these transactions to avoid double Sastri 0. J. 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 I 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 (l)(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 • B the export merchant purchases the goods for 1953 export. If the sale is to be exempt, how is A to be satisfied that the goods would actually be exported Tr~~~~:!. ,_ subsequently?

And even if they were, it must be Cochin difficult for A to prove to the Sales Tax Officer that and Others they were so exported by B if proof was required. On v. the other hand, B might be keeping the goods, Shanmugha Vilas waiting for orders to come, or might change his Naashaw . h ll ut Ji' actory mmd and not export t e goods at a but sell them and Others. locally. In that case, what would be the position of A vis· a vis the Sales Tax Officer demanding Patanjali ... the tax ? Could A escape liability, if he failed to Sastri a. J . 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 . ;f.

for adjustment on those lines, would not such legislation, in so far a;s it, compels B to suffer the tax until he actually exports the goods, contravene clause (l)(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- "lt 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(').

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 "'> 1953 .. goods imported from abroad after they are mingled with other goods and lose their distinctive character as State of Travancore- imports? Here again, the American courts, with their Cochin practical approach to such problems, have evolved the and Others doctrine of "original or unopened package", that is to v. . say, the rule that the first sale of imported goods will Shanmugha Vilas be exempt from State taxation provided only such sale Cashew is made in the original packao:es in which the goods Nut Factory ..... , and Others. have arrived. Any sale of such goods made after the • package is opened does not enjoy such exemp- Patanjali tion. Are we to import the same doctrine here Saatri O. J, to make the exemption workable ?

Even in America, as pointed out in Balsara' s case('), 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('). 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 pro-portion 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 tax such purchases and sales by the export and import 1953 merchants in this country. Such general consider- (1) [1951] S. C. R. 682, 699. (2) [194'] F. C. R. 90. State of ations based largely on speculation are not of muc h Travancore. assistance in construing the scope and effect of a Cochin specific constitutional provision seeking to restrict the and Others power of State taxation. It is true, as pointed out in v. . the previous decision, that the export-import trade is Shanmugha Vilas .

t t t t' 1 b t 't • 1 Cashew nnpor an o our na 10na economy, u I is no ess Nut Facwry true that the State power of taxation is essential for and Others. carrying on its administration, and it must be as much the constitutional purpose to protect the one as not Patanjali unduly to curtail the other. The question really is, Sastri c. J. 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 recon-ciling 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 (I) (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 • sufficient to determine where the course of export State of begins and where the course of import ends. In this Travancore· connection, it is useful to remember that the power to Oochin make laws with respect to duties of customs including and Others export duties (entry 83 of List I) and also with respect v. . to ·import and export across customs frontiers and the Shan~ug; Vilas definition of customs frontiers (entry 41 of List I) is Nut";:C%ry vested exclusively in the Central Legislature, and and Others. detailed provisions have been made in the Indian Sea Customs Act, 1878, for the levy of customs duties by Patanjali • the officers of the Central Government who are stationed Sa. tri a. J.

along customs frontiers as defined by the Central Government where, after appraising the goods exported or imported, the duties chargeable, if any, are com-puted 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 J 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 )lave 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 eni;J. tled, in our view, to the protection of that • clause, if the State is constitutionally competent to tax 1953 such sales, as to which we express no opinion· State of Our conclusions may be summed up as follows:- Travancore· 0 (1) Sales by export and purchases by import fall a:! a ~~~rs within the exemption under article 286 (1) (b). This v. was held in the previous decision. · · Shanmugha Vilas (2) Purchases in the State by the exporter for the N caFshew . hS b h utactory purpose of export as wel1 as sa 1 es m t e tate y t e and Others. importer after the goods have crossed the customs _ barrier are not within the exemption.

' Patanjali ... (3) Sales in the State by the exporter or importer Sastri a. J . by transfer of shipping documents while the goods are l 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 I, 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 (I) (b), even if the difference between the raw materials purchased and the manufactured • 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 Shanmugha"Vilas · 1 d" t d b c Jd b dd.

· serious y ispu e eiore us, wou e an a it10nal 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 II, 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 servant-s 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 {l} (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 wore 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- .

, necessary to inquire further whether they would be covered by the explanation to clause {l)(a), as they State of would be clearly taxable under the President's Order Travancore· (C. 0. No. 7 of 1950) to which reference has been made Cochin already, as it was admitted that sales tax was validly and Others levied on such purchases before the commencement of v. 't t' A th t b"l"t f h h Shanmugha Vila• th e C ons t i u 10n. s e axa 1 1 y o sue pure ases Cashew on either view of the facts was not disputed, no argu- Nut Factory ments were addressed to us on the scope of clause (2) and Others. and the explanation to clause (l)(a), as has been stated. Patanjali ... Sastri C. J . Group I II may b e su b d - ivi e d d 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 1 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 • 1 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 • were heard together immediate! y after the hearing of C. A. No. 204 of 1952 [The State of Bombay v. The 1 United Motors (India) Ltd & Others( )] had been concluded and judgment had been reserved by another Constitution Dench. The question of construction ·of article 286 of the Constitution which is invoked 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 (l)(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 lo,-,g 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 t'-lrnovers 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. were heard together immediately after the hearing of l9. 53 O. A. No. 204 of 1952 [The State of Bombay v. The State of United Motors (India) Ltd. & Others(')] had been con- 7'ravancore· cludedand judgment had been reserved by another Con- Cochin Rtitution Bench.

The question of construction of and Others article 286 of the Constitution which is involved in the , v", f' . . . 8 nan:m,ug1Ml 11 as present appeals was also raised m the Bombay appeal. cashew That Constitution Bench has since delivered judgments Nut Factory in that appeal. The majority of that Bench have put and Others. upon clause (l){a), the Explantion thereto and clause · - (2) of that article a meaning which, in spite of my pro- Da. • J . . ,. 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 se-eking to place upon clause (l)(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 t. he Constitution came into force, and the 29th May, (1) (1953] S. C. R. 1069 . • 19. 53 1950.

The claim, however, was rejected by the Sales Tax Officer. On a. P.. peal the Assistant Commissioner State o) Travancor REME COURT REPORTS 77 although all the other ingredients thereof took plaee outside that Province. &ate of The Indian States were not governed by the distri- Travancore-bution of legislative powers contained in the Govern- Cochin. ment of India Act, 1935, and were, therefore, generally and Others free to make whatever laws they thought fit to make. v. ha,, . 81 1anniug "' i1 a8 They, h owever, enact ed S a es 1 T ax A cts on t h e mo d 1 e cashcui of the Sales Tax Acts of neighbouring Provincell in t»ut Factory British India. Thus the Travancore Act XVIII of and Others. 1124 was substantially a reproduction of the Madras Das J. 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 J. imposition of multiple taxes was certainly calculated to h~mper 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, tfnder 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 . vith 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, • 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 inter-as S d d l'k . £' •• d h tate tra e an commerce, 1 e 1ore1gn tra e, to t e exclusive care of Parliament and, therefore, out of the reach of the Jaw-making powers of the State Legislatures. 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 take•1 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) ]~xcept 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: - .

Provided that the President may by order direct 1953 that any tax on the sale or purchase of goods which State of was being lawfully levied by the government of any Travancore· State. immediately before the commencement of this Cochin Constitution shall, notwithstanding that the imposition and Othm of such tax is contrary to the provisions, of this clause, v. . t b 1 . d t"l th th" t fi t d fShanmugha Vilas continue o e evie un I e . 1r y- rs ay o Cashew March, 1951. Nut Factor; (3) No law made by the Legislature of a State and Other•. imposing, or authorising the imposition of a . tax on the sale or purchase of any such goods as have been Da. • J. 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 re. ceived his assent. " In these appeals we are not concerned with sales or purchases of essential commodities and, therefore, nothi. o.

g 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 into 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,i is to put a restriction on the power of the • State Legislatures to. make a law imposing tax on the sale or purchase of goods under entry 54 in the State ]] d h h p List. It may be roca e t at t e rovincial Legisla. tures 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 ilas purchases of goods on the basis of one or more of tho . d' t f l h . t• 'th h mgre ien s o sa e avmg some connec ion w1 t e 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 (l)(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) theu 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 Explanation 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 snch sale or purchase for the purpose of consumptioh in that State. Jn effect, therefore, the Constitution, by this Expla. nation. to clause (l)(a), acknowledges that under the geμernl law the_ sale or pl! rchase of the kiμd therein . . • mentioned may not really take place in the delivery State, but nevertheless requires it to be treated as if it State of did. That is to say, the Explanation creates a legal Travancore-fiction. Reference may be made to Income-tax Com- Cochin 1 missioner' Bombay v.

Bombay Trust Corporation( ) and Others where Viscount Dunedin explains the meaning of a v. legal fiction. Shanm ughha Vilas 0as e1v When a legal fiction is thus created, for what pur- Nut Factory pose, one is led to ask at once, is it so created? In and Others. 2 In 1'e Coal Economising Gas Company( ) the question DasJ. 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 om1ss10n 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. A. gain, in Ex parte 3 W alton( ), 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, D. 75Ci.

(2) [1875] L. R. I Ch. D. 182. II • 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('). Lord Vilas Bl kb dd 458 ac urn went on to a at page . , : "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 (l)(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 (l)(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 contentioirn . + (t) [1884] L. R. 9 App. Cas. 448. . -· • f;i. O. R. SUPRE_M:E COURT REPORTS 83 appear to me to be founded on a misapprehension as JfiaJ to the real purpose of clause (l)(a) and the Explanation thereto. As I have already said, the only object of Tr~~~~ °fr•. 0 clause (l)(a) is to prevent the imposition of multiple Cochin taxes on a single sale or purchase and, therefore, it and Others provides that no law of a State shall impose a tax on v.

sale or purchase which takes place outside the State. ShanmughaVilas Thus by one stroke the ta:x:ing power of all States Cashew N itt Factory outside whose territories the sale or purchase is, by the and Others. fiction, deemed ·to take place is eliminated. To say that the effect of clause ( l) (a) read in the Das J. 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(l)(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 (l)(a). By fiction-ally 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 (l)(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 (l)(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 • SUPREME COUR'l' REPORTS [1954] delivery State can tax the sale or purchase of the kind mentioned in the Explanation will depend on other . f h C . provis10ns o t e onstitut10n. Neither clause (1) (a) nor the Explanation has any bearing on that question. It is urged that even if by virtue of clause (l)(a) all aVvlasS · 1 t' t h' h 1 h · b ta tes m re a 10n o w IC a sa e or pure ase is, y 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 inter- State 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), • therefore, places yet another ban on the taxing power of the State under entry 54 read with article 100 (3), State of in addition to the ban imposed by clause (1) (a). A Travancore· sale or purchase contemplated by the Explanation to Cochin clause (1) (a) undoubtedly partakes of the nature of a and Others sale or purchase made in the course of inter-State v. trade and, therefore, no State, whether it is the State Shan~ug:a Vila• in which the property in the goods passes under the Nut U:a;:ry general law or the State where the goods are delivered and Others. as mentioned in the Explanation, can impose a tax on DasJ. 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 hit by clause (2) then clause (1) (a) was wholly redundant, for there was no point in exempting it from the ban imposed by clause (l)(a) and hitting it by clause (2). As already stated the purpose of clause (l)(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 [1954] into play. That clause looks at a sale or purchase in its inter-State character and imposes another ban in State of 7'ra,ancore- the interest of the freedom of internal trade. The Cochin immediate purpose of the two bans are, therefore, essen-andOthers tially different and I see no reason to hold that , . v. .

although clause (l)(a) read with the Explanation does Shan~u~ha Vilas not expressly authorise the State, in which the sale or 0 Nut ; :~ory purchase is, by the Explanation, to be deemed to take 0 and Others. place, to tax such sale or purchase, it must nevertheless, by implication, be regarded n6t only as having Da8J. 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 antl 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 (l)(a) and of the Explanation. In all inter- Sta te 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 Goodl'\ 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. 'Vhat 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 • all other States, so as to attract the ban of clause ( 1)(a) 1 sa on those States, such location cannot possibly alter the ;;;; 8 01 intrinsic inter-State nature or character of the sale or Travancore· purchase. A sale or purchase which falls within the Cochin Explanation does not become, in the eye of the law, a and Others purely local sale for all purposes or for all times. It is v. v. . h d l' S I Shanmugha ilas to be d eeme d to ta k e p ace m t 1 e e ivery tate on y 0 1 for the purpose of clause (l)(a), i. e. , for tak. ing Nut;::t~ry ing away the taxing power of all other States. I can and Others . . ,. see no warrant for the argument that the fiction Da1J. embodied in the Explanation for this definitely express- ..

, ed purpose, can be legitimately used for the entirely ' foreign purpose of destroying the inter-State character of t,he 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 argum 2l s c. n. I1I2. S. C. R. SUPREME COURT R"nORTS . 93 exemption only to such sales or purchases as them-scl ves 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 ar. e 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 pay-. . ment. 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. £. ' contract lies in the length of the time taken 94 SUPi~EME COURT REPOR'l S [i954j 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 Vilas contract of sale, and until he has received actual pav-ment 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(l)(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 s. c. R. SUPREM]. l COURT REPORTS 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 docu- Shan'/Ju~ha ments 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 la vs undue stress on the etymology of the word 'coi'.

trse' 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 th{} 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 Travancore- Oochin v. The Bombay Co. Ltd. (') 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 c;trrie:r (r) [l952] S. C. R, r n2, • up to 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 l'il"s b · b · l . . f . . case may e, 1s o v10us y, m pomt o time, anter10r 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 t. he 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 • export of the goods at all. Therefore the earlier sales or purchases may be too remote and may not be State of regarded as integral parts of the process of export in Travancore-the same sense as the last purchase by the exporter Cochin can be so regarded. The line of demarcation is easily and Others perceptible. · Shanm

Source: Supreme Court eSCR. Dataset: Dattam Labs, CC BY 4.0. Text extracted automatically; compare with the source PDF for layout and accuracy.