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TMI Blog1991 (3) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... een renewed and was in force for the period from April 1, 1970 to March 31, 1974. On the strength of the agreement the assessee claimed that they are agents of Indian Rare Earths Ltd. and trisodium phosphate was sold by them on behalf of Indian Rare Earths Ltd. While completing the assessment of the assessee for the years 1970-71 to 1973-74, both under the Kerala General Sales Tax Act, 1963 and the Central Sales Tax Act, 1956, the assessing authority exempted the sales turnover of trisodium phosphate effected by the assessee on the ground that the assessee was only an agent and for the further reason that the sales turnover had been duly included in the sales turnover of Indian Rare Earths Ltd. during the relevant assessment years. 3.. While perusing the assessment records for the years 1970-71 to 1973-74, the Deputy Commissioner, Ernakulam, noticed that the following sales turnover of trisodium phosphate had been given exemption as agency sales for those years both under the Kerala General Sales Tax Act and under the Central Sales Tax Act: 1970-71 ... Rs. 9,68,072 1971-72 ... Rs. 11,79,097 1972-73 ... Rs. 11,54,378.10 1973-74 ... Rs. 12,90,439.75 The Deputy Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian Rare Earths Ltd. and the Peninsular Traders as between two principals. The authorities were directed to treat Peninsular Traders as an agent of Indian Rare Earths Ltd. in the transactions. The appeals filed by the assessee were allowed. Though the Appellate Tribunal had rendered findings on some other aspects also, we are concerned in these tax revision cases only with respect to the question as to whether the agreement between Peninsular Traders and Indian Rare Earths Ltd. created a relationship of agent and principal. 6.. The questions raised in these eleven tax revision cases are: "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that regarding the transactions impugned, the assessee was acting only as an agent? 2.. Is the interpretation of the agreement dated March 23, 1970, by the Appellate Tribunal correct? Is not the jural relation between the Indian Rare Earths Ltd. and the assessee one of vendor and purchaser only?" 7.. By the agreement, annexure A, the assessee was appointed as distributor by Indian Rare Earths Ltd. to effect sale of trisodium phosphate manufactured by that company. That th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in Bhopal Sugar Industries Ltd. v. Sales Tax Officer [1977] 40 STC 42, while considering the question whether the contract was one of agency or sale, held that the question will have to be determined having regard to the terms and recitals of the agreement, the intention of the parties as may be spelt out from the terms of the document and the surrounding circumstances and having regard to the course of dealings between the parties. The court has to look to the substance rather than the form of the agreement. The Supreme Court observed that the mere fact that the word "agent" or "agency" is used or the words "buyer" and "seller" are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. This view was approved by the Supreme Court in Alwaye Agencies v. Deputy Commissioner of Agricultural Income-tax and Sales Tax [1988] 70 STC 107. 10.. The distinction between a contract of sale and a contract of agency was noticed by this Court in Deputy Commissioner of Agricultural Income-tax and Sales Tax v. Alwaye Agencies [1974] 34 STC 467. This Court observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for defects in description and quality, but an agent may not do so at all because he is not a party to the contract. At page 22 the learned author further says: "Each transaction must be examined on its facts, considering the extent to which an agent's duties are appropriate. Much turns on the extent to which the principal can call for an account, for the duty to account is a typical feature of the agent's position. The ways in which the parties describe themselves are not conclusive. 'There is no magic in the word "agency". It is often used in commercial matters where the real relationship is that of vendor and purchaser.'" 12.. Having noticed the distinction between a contract of sale and a contract of agency for sale, the terms of the agreement can now be referred to to ascertain whether an agency is spelt out or whether there is an outright purchase. The agreement produced as annexure A describes the assessee as a distributor. They were appointed as distributors for the company's produce trisodium phosphate on the terms and conditions embodied in annexure A agreement. Clause 1 of the agreement refers to the appointment as sole distributor for trisodium phosphate for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent on the "ex godown, Eloor" value of the goods sold by the distributor and remitted to the company and the respective amount of commission will be credited to the distributor's account at the end of every month under advice to the distributor after realisation of sale proceeds. 17.. Any enquiry received by the company from the territory mentioned in the agreement will be passed on to the distributor, but the company shall be at liberty to deal with any party directly and to execute any order received by them. Such orders will be accepted only at the usual selling rates without any discount, but commission at the rate of 6 per cent of the "ex godown, Eloor" price will be credited to the distributor's account on realisation of such sale proceeds except in the case of direct sales to Government departments and some institutions and co-operative societies. 18.. The distributor has to endeavour to push the sales of trisodium phosphate in his territory and will not deal in any produce of a similar nature which is likely to affect adversely the sales of trisodium phosphate. 19.. The period of the agreement is one year, i.e., from April 1, 1970 to March 31, 1971. The period can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to the last inventory." On a perusal of the other clauses the Supreme Court noticed that the right to continue the business by the firm as an ongoing one would be discernible so long as the objects are lawful. The legal representatives of a deceased partner are not entitled to be partners. There is an absolute embargo to induct strangers into the partnership except with the consent of all the other partners. The Supreme Court held that the partnership would continue till there are two partners as specified in clause 5 and thereafter either partner may put an end to the partnership as partnership at will. The Supreme Court observed that this construction appears to be the intention of the parties and any other construction would run counter to the express intention of the partners manifested in the contract. Viewed in the light of the principles enunciated above, we have no hesitation to find that appendix A agreement evidences an outright purchase. 22.. Has there been a transfer of the title to the goods in favour of the assessee or was there only an entrustment of the goods for sale on behalf of the principal is the main question to be answered in these references. Clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Supreme Court has therefore of no special importance. Unlike the agreement considered by the Supreme Court in Hafiz Din Mohammad's case [1962] 13 STC 292, annexure A agreement stipulates for payment of the full value of the total quantity of the goods supplied by the Indian Rare Earths Ltd. The fulfilment of that condition makes the assessee the owner of the goods. In other words, the property in the goods has passed on to the assessee on the assessee paying the value of the goods. Every default in payment is visited with an interest of 10 per cent on the amount outstanding. After paying the value of the goods a person cannot be said to be an agent. He becomes an agent only if the goods are sold on behalf of the principal and not on his own behalf. After becoming the owner on payment of the value, the sale is not on behalf of the principal, but on his own behalf subject to the conditions embodied in the agreement regarding price. The stipulation to pay the value of the goods at the end of the month and the further stipulation to pay interest on the amount outstanding are indicative of an outright purchase. The provision to submit monthly statements showing quantity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to us the answer should be in the negative. The agreement does not provide for the return of goods. The assessee has to pay the full value of the goods taken delivery of by them. The goods are to be sold on their own responsibility after taking them to their own stock. The question of return of the goods by the assessee does not therefore arise, nor are the suppliers bound to receive back the goods from the assessee. The absence of such a provision in the agreement is a clear indication regarding the sale of goods. 26.. According to the Revenue the risk and loss are to be borne by the assessee. That is relevant, according to the Government Pleader, in deciding the question whether the property has passed or not. Reliance is placed on clause 8 of the agreement which stipulates that the assessee will be responsible for the safe custody of the material collected by them and shall keep the goods in a good condition. It is further stipulated that the assessee will not be entitled to any credit for damage to the material. This stipulation, according to the learned Government Pleader, indicates that the title in the goods had passed to the assessee. Even if the goods are damaged in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Supreme Court noticed that the distributor has the right of sale of the product within the stipulated area. Bulk supplies were effected in wagon-load or lorry-load direct to the consumer. The Supreme Court observed that the mere fact that the manufacturer fixes the sale price by itself cannot lead to the conclusion that the distributor is merely an agent. It was also held that the stipulation to pay rebate instead of commission is a factor which is by no means conclusive. The most important aspect noticed by the Supreme Court is "the supplies were made to the distributor against payment either immediate or deferred as provided in the agreement, and even when the goods were destined directly to the customer, it was the distributor who had to guarantee to arrange the payment". Where there was some time-lag between the sending of the goods and the payment, the goods were to be insured at the cost of the assessee. This circumstance, according to the Supreme Court, clearly showed that the distributors acted as purchasers of the goods which they in turn sold to the customers and did not merely act as agents of the said company. [See [1988] 70 STC 107 at 112 (SC) (Alwaye Agencies v. D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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