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TMI Blog1960 (6) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier decision was not brought to the notice of the learned Judges. Sri T. Anantha Babu, learned counsel for the assessees has contended that there is a conflict between the decision in Sri Rama Purchase and Sale Society, Ltd. v. State of Madras[1958] 9 S.T.C. 761; (1958) 2 An. W.R. 428. and Batchu Subba Rao v. Commercial Tax Officer, East Godavary[1959] 10 S.T.C. 394. The learned Government Pleader, Mr. M.S. Ramachandra Rao, while not conceding that there is conflict, submitted nevertheless that these decisions have resulted in doubt and uncertainty which should be resolved and set at rest by an authoritative decision of a Full Bench. The questions raised are of public importance, affecting a large number of cases and we therefore formulate the following questions for the decision of the Full Bench: "(1) Whether transactions falling within the definition of 'sale' in the Madras General Sales Tax Act and not proved to be 'outside sales' within the Explanation to Article 286(1)(a) of the Constitution of India can be assessed to sales tax under the said Act? (2) Whether after the coming into force of the Constitution of India, the State is competent to legislate and levy tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sale of goods". For financing the nation-building activities entrusted to them, the Provinces very soon began to exploit this new avenue of taxation. The Madras Legislature was the first in the field to undertake sales tax legislation and enacted the Madras General Sales Tax Act (IX of 1939) (hereinafter referred to as the Madras Act). The Madras Act received the assent of the Governor on the 4th June, 1939, and was first published in the official Gazette on the 13th June, 1939. The preamble to the Act says that "it is expedient to provide for the levy of a general tax on the sale of goods in the State of Madras". "Sale" is defined in section 2(h), omitting what is not material, as meaning "every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration." Section 2(i) defines "turnover" as the aggregate amount for which goods are either bought by or sold by a dealer, whether for cash or for deferred payment or other valuable consideration. Section 3 is the charging section and provides that every dealer shall pay for each year a tax on his total turnover for such year. An initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 S.T.C. 188., the Supreme Court had to consider the scope of the definition of "sale" in section 2(h) and of Explanation 2 and it was therein held that though the power to tax a sale was really a power to tax a transaction of sale and a law imposing such tax would be competent if any of the ingredients of sale had taken place within the State, the Madras Act had, by its definition of "sale" in section 2(h) prior to the enactment of Explanation 2, imposed a tax only when the property in the goods passed within the State, and that in respect of sales which had taken place prior to the amendment, the tax would be unauthorised if the property in the goods passed outside the State of Madras. It was also observed that after the amendment came into force, a tax on sale which came within Explanation 2 would be valid. That was the position of law under the Madras Act prior to the enactment of the Constitution. As mentioned earlier, the power of the Provincial Legislature to make a law imposing sales tax was granted by section 100(3) of the Government of India Act, 1935, read with Entry 48 in List II of the Seventh Schedule and such a law could be made for the Province or for any part the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Government of any State immediately before the commencement of the Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions of this clause, continue to be levied until the thirty-first day of March, 1951. (3) No law made by the Legislature of a State imposing, or authorising the imposition of, a tax on the sale or purchase of any such goods as have been declared by Parliament by law to be essential for the life of the community shall have effect unless it has been reserved for the consideration of the President and has received his assent." In exercise of the powers conferred by the proviso to clause (2) of Article 286 of the Constitution, the President promulgated the Sales Tax Continuance Order, 1950, on the day the Constitution came into force, section 2 whereof ran as follows: "Any tax on the sale or purchase of goods which was being lawfully levied by the Government of any State immediately before the commencement of the Constitution of India shall, until the 31st day of March, 1951, continue to be levied notwithstanding that the imposition of such tax is contrary to the provisions of clause (2) of Article 286 of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduced therein, invested with the character of intra-State sales, and would be liable to be taxed by the State within which the goods were delivered for consumption. This decision was rendered on the 30th March, 1953. The same question again arose for decision by the Supreme Court in The Bengal Immunity Company case[1955] 2 S.C.R. 603; 6 S.T.C. 446. By its judgment dated 6th September, 1955, the Supreme Court held by a majority, that the sales falling within the Explanation being inter-State in character, could not be taxed by reason of Article 286(2) unless Parliament lifted the ban, that the Explanation to Article 286(1)(a) controlled only that clause and did not limit the operation of Article 286(2) and that the law had not been correctly laid down in The United Motors case[1953] S.C.R. 1069; 4 S.T.C. 133. We will revert to these two decisions a little later. On 30th January, 1956, the President promulgated the Sales Tax Laws Validation Ordinance (III of 1956) and that was later replaced by the Sales Tax Laws Validation Act (VII of 1956), which came into force on 21st March, 1956. Section 2 of this Act reads as follows: "Notwithstanding any judgment, decree or order of any C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, becomes necessary for us to deal with it. Two points of view have been pressed before us. On behalf of the assessees, it is contended that the several amendments made by the State Legislatures enlarging the scope of the definition of "sale" constituting, as they do, sufficient territorial nexus the basis of levy of tax, do not survive after the Constitution. The Explanation to Article 286(1)(a) lays down a restriction on the power of the States that they shall not tax outside sales. All sales which are outside sales are ipso facto not inside sales. The argument on behalf of the State may be summarised thus: The Sale of Goods Act, which is the law governing sales or purchases, does not fix the situs of a sale. The power of a State to impose tax on the sale or purchase of goods is attributable not to Article 286 but to the legislative competence of the States and that carries with it the ancillary power to take all or any of the ingredients of a sale as the basis of tax. The non-obstante clause contained in Article 286 does not have the effect of recognising the transfer of property as the basis. It was put in by way of abundant caution. The words "outside the State" in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) provided that a law could be passed by a Provincial Legislature for purposes of the Province itself. Therefore, it is beyond dispute that a Provincial Legislature could not pass a taxation statute which would be binding on any other part of India, outside the limits of the Province. But as was pointed out in Poppatlal Shah v. The State of Madras[1953] 4 S.T.C. 188., it would be quite competent to enact a legislation imposing taxes on transactions concluded outside the Province, provided that there was a sufficient and real territorial nexus between such transactions and the taxing Province. This principle which is based upon the decision of the Judicial Committee in Wallace Brothers Co., Ltd. v. Commissioner of Income-tax, Bombay[1948] 16 I.T.R. 240; L.R. 75 I.A. 86., has been held by the Supreme Court to be applicable to sales tax legislation and its propriety is now beyond question. At page 193, Mr. Justice Mukherjea, who delivered the opinion of the Court, in Poppatlal Shah's case(2), observed: "As a matter of fact, the legislative practice in regard to sales tax laws adopted by the Provincial Legislatures prior to the coming into force of the Constitution has been to auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is concerned with a tax on the transaction of sale, that is to say, a completed sale and to break up a sale into its component parts and to take one or more of such parts and to apply the theory to it will mean that the State will be entitled to impose a tax on one or more of the ingredients or constituent elements of the transaction of sale which by itself or themselves will not amount to a sale. This argument overlooks the fact that the provisions of the sales tax legislation we are considering limit its charging section to 'sale'. In order to attract the charging section there must be a completed sale involving the transfer of property in the goods sold from the seller to the buyer. The nexus theory does not impose the tax. It only indicates the circumstance in which a tax imposed by an Act of the Legislature may be enforced in a particular case and unless eventually there is a concluded sale in the sense of passing of the property in the goods no tax liability attaches under the Act. One or more of the several ingredients constituting a sale only furnished the connection between the taxing State and the 'sale'. The learned Attorney-General also said that one and the same transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that until Parliament by law made in exercise of the powers vested in it by clause (2) of Article 286 provided otherwise, no State could impose or authorise the imposition of any tax on sales or purchases of goods when such sales or purchases took place in the course of inter-State trade or commerce and the majority decision in The United Motors case[1953] 4 S.T.C. 133., in so far as it decided to the contrary, could not be accepted as well-founded on principle or authority. It was therein explained that, "the dominant, if not the sole, purpose of Article 286 is to place restrictions on the legislative powers of the States, subject to certain conditions in some cases and with that end in view Article 286 imposes several bans on the taxing power of the States in relation to sales or purchases viewed from different angles and according to their different aspects." It was pointed out by Das, Ag. C.J., as follows: "In some cases the ban is absolute as, for example, with regard to outside sales covered by clause (1)(a) read with the Explanation, or with regard to imports and exports covered by clause (1)(b) and in some cases it is conditional, e.g., in the cases of inter-State sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Here the avowed purpose of the Explanation is to explain what an outside sale referred to in sub-clause (a) is. The judicial decisions referred to in the dissenting judgment in The State of Travancore-Cochin v. Shanmugha Vilas Cashew-nut Factory[1953] 4 S.T.C. 205., and the case of East End Dwellings Co., Ltd. v. Finsbury Borough Council[1952] A.C. 109, at p. 132 clearly indicate that a legal fiction is to be limited to the purpose for which it was created and should not be extended beyond that legitimate field." The following principles emerge from a consideration of the decisions of the Supreme Court: (1) The power to levy tax on the sale or purchase of goods is not derived from Article 286 but is referable to the legislative power vested in the States under Article 246(3), read with Entry 54, List II, of Schedule VII. (2) The object of Article 286 is to place restrictions on the legislative powers of the States with respect to the imposition of taxes on the sales or purchases of goods in the course of inter-State trade or commerce. (3) The Explanation to Article 286(1) creates a legal fiction and a legal fiction must be limited for the purpose for which it is created a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nexus. Where the assessee fails to establish the exemption from taxation, the case would be governed by the Explanation to section 2(h) of the Madras Act. This was the view taken by a Division Bench of this Court in Batchu Subba Rao Co., v. Commercial Tax Officer [1959] 10 S.T.C. 394. and we find ourselves in agreement with this view. It may be pointed out that the Bench which decided Sri Rama Purchase and Sale Society, Ltd. v. State of Madras[1958] 9 S.T.C. 761. did not take note of the Explanation to section 2(h) and the decision of the Supreme Court in The Tata Iron Steel Company case[1958] 9 S.T.C. 267. and we do not think that it lays down the law correctly. There are two recent decisions, one of the Assam High Court in Surma Match Industries Ltd. v. Commissioner of Taxes [1960] 11 S.T.C. 381; A.I.R. 1960 Assam 28. and the other of the Calcutta High Court in Indian Standard Wagon Ltd. v. Commercial Tax Officer [1960] 11 S.T.C. 47; A.I.R. 1960 Cal. 25. The latter decision supports the view which we have taken though the former decision takes a contrary view. Two other matters raised during the course of arguments by learned counsel for the assessees now remain to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conveniently brought under two broad categories. T.R.C. Nos. 6, 8, 9, 10, 14, 35, 37, 40 to 42, 54 and 84 of 1957 and also 31 of 1958 fall under the first category while the remaining come under the second category. The main questions common to both the categories, on reference by us, have been answered by the Full Bench by its order, dated 11th March, 1960. A perusal of the order would show that the object of Article 286 of the Constitution of India is to place restrictions on the legislative powers of the State with respect to the imposition of tax on the sales or purchases of goods in the course of inter-State trade or commerce, that the Explanation to Article 286(1) creates a legal fiction which in reason has its appointed province and cannot therefore be stretched beyond the clear language of the provision, that the theory of territorial nexus is still available and the sales not hit by the bans in Article 286 or Explanation to Article 286(1)(a) can be dealt with according to the law of the State recognising or embodying the doctrine of sufficient territorial nexus. It is further clear that the onus is always on the assessee who claims exemption invoking Article 286(1)(a). Unl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ument on behalf of the State is two-fold. It is submitted that the sales in question are neither outside sales within the Explanation to Article 286(1)(a) nor are they sales in the course of inter-State trade or commerce within the meaning of Article 286(2) of the Constitution of India but they are all inside sales, inasmuch as the property in the goods passed, possession of the goods delivered, and the payment of consideration made in the State itself. It is not a sale in the course of inter-State trade either, as there was no privity of contract between the seller and any of the outside dealers and the goods did not move across the border as a direct result of such sale. It is further submitted that in any event, the Sales Tax Laws Validation Act, 1956, validated the levy and collection of sales tax. We feel there is much force in this argument. The material facts which are not in dispute place the matter beyond doubt that all the component parts of sale were completed within the State. The contract was made in the State and that with the buyers residing in the State in whose name the bills were prepared and who in fact paid the price. The possession of the goods was delivered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act that the goods shall be deemed to be in the course of transit from the time they are delivered to the carrier for the purpose of transmission to the buyer until the buyer or his agent takes delivery of the same and that the course of transit need not endure till the appointed destination, for it may be brought to an end if the buyer obtains delivery of the goods. The buyer need not wait till the goods reach the appointed destination. He can obtain delivery at any point and with it the transit is at an end. The course followed by the parties therefore in its ultimate analysis admits of the only conclusion that possession was delivered to the vendee beyond power of recall by the vendor in this State. Therefore, it is not correct to state that it is not an inside sale. It is argued that delivery of the goods to the common carrier does not amount to physical or actual delivery of goods to the buyer. But this argument fails to take into account the fact that immediately thereafter the receipt has been endorsed for full consideration in favour of the buyer with the result that the buyer came to have all the rights and interest of the consignor in the goods and as already observed, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property, this distinction between constructive and actual delivery comes to an end. That is how it has happened here in these cases. As soon as the consignor endorsed the railway receipt which is the document of title and received the full amount due he was left with no right in or domain over the goods sold and the buyer stepped in his shoes. This happened within the State itself. It was open to the buyer under the very provisions of section 51 to take delivery of at any point of time even without waiting for the appointed destination. We are also referred to two cases, Capco Ltd. v. Sales Tax Officer[1960] 11 S.T.C. 34; A.I.R. 1960 All. 62., and Surma Match Industries v. Commissioner of Taxes[1960] 11 S.T.C. 381; A.I.R. 1960 Assam 28. But both these cases are not in point raised by the circumstances of the present case. The facts of those cases are entirely different. Unlike the present cases, the sales in those cases were made to the buyers outside the State and the goods were despatched in the name of the buyers to the out-stations. In the Allahabad case the transactions were on F.O.R. basis and the vendor being unpaid had right of stoppage till the transit came to an end outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... category which is the subject-matter of revisions, the purchase price according to the assessee is said to have been paid by the non-resident dealer after he took delivery of the goods. The assessee thus claimed exemption under Article 286(1)(a). But the Appellate Tribunal in the absence of evidence was not prepared to make any assumption as to the place where in fact the receipts were handed over or the price was collected or whether or not there was any dealing with the railway receipt by way of transfer. The claim was rejected on the ground of paucity of evidence to bring the case within the ambit of Article 286(1)(a). The assessees did not let in any evidence on account of misapprehension as to onus and eventually they sought to rely on certain inferences to be drawn from the conduct of the parties and requested the Tribunal to decide the case on such inferences. The Tribunal was not prepared to entertain such a plea in the absence of the requisite evidence and of course the Tribunal was right therein. It is plain that the benefit of an exemption can be given only on proof of those facts which bring the case under such exemption. But as the assessees were under a misapprehen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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