Kelvinator of India Ltd. Vs. The State
of Haryana [1973] INSC 148 (23 August 1973)
KHANNA, HANS RAJ KHANNA, HANS RAJ
ALAGIRISWAMI, A.
CITATION: 1973 AIR 2526 1974 SCR (1) 463 1973
SCC (2) 551
CITATOR INFO :
R 1976 SC1016 (23) RF 1981 SC 446 (6) D 1981
SC1604 (12)
ACT:
Central Sales Tax Act, (74 of 1956) S.
3(a)-Scope ofmovement of goods when occasioned by sale-Manufacture of goods in
one State and sold in another to distributorsDistribution agreement if
constitutes contract of safe-Sale of Goods Act (3 of 1930). S. 23-Scope of.
HEADNOTE:
Section 6 of the Central Sales Tax Act, 1956,
makes every dealer liable for payment of tax under the Act on all saleseffected
by him in the course of interstate trade or commerce. A sale of' goods can be
held to have taken place in the course of interstate trade under s. 3 (a) if it
can be shown that the sale has occasioned the movement of goods from one State
to another, that is, if, (i) there is a sale, (ii) there is actual movement of
goods from one State to another, and (iii) the sale and movement of the goods
formed integral parts of the same transaction. A sale being. by the definition
in the Act, transfer of property, to be exigible to tax under the Act it must
be shown that tie movement was the result of a covenant or incident of the
contract of sale' The movement of goods which takes place independently of a contract
of sale would not fall within the ambit of s. 3(a). There must be a contract of
sole preceding the movement of goods from one State to another and the movement
of goods should have been caused by and be the result of that contract of sale.
If there was no contract of sale preceding the movement of goods the movement
can obviously be not ascribed to a contract of sale nor can it 'be said that.
the sale has occasioned movement of goods from one State to the other.
[471F-473B] In the present case, the appellant was a manufacturer of
refrigerators in Faridabad. Presence refrigerators. were sold with three
different trademarks. The sale of each brand was made through a separate
distributor in Delhi appointed for that purpose and the appellant entered into
an agreement with each of the three distributors. The appellant dealer was
bound to sell each of the brands of the refrigerator to one of the
distributors. The price of the refrigerators was to be fixed mutually as agreed
upon between the appellant and his distributors from time to time. The prices
were not settled for each individual machine but periodically. The goods were
manufactured in the factory at Faridabad and excise clearance pass was obtained
after the payment of excise duty for the transport of goods from the factory to
the appellant's godown in Delhi. The excise pass was in favour of self. During
the transport of the goods from Faridabad to Delhi the octroi at the barrier
was paid by the appellant. At the destination the goods were received by the
staff of the appellant and taken to their godown. The purchase orders were
placed by the three distributors after the goods reached the Headoffice of the
appellant at Delhi. In pursuance of the orders given by the distributors the
Delhi staff gave delivery of the goods at Delhi under a challan prepared at
Delhi. The property in the goods passed at Delhi to the distributors after
delivery. The price of the goods was received by the appellant at Delhi and
deposited in the appellant's account in its Delhi bank. The refrigerators were
also exported put side India.
The High Court, in a reference by the
Tribunal, held that the distribution agreements constituted agreements 'of
sale, that the refrigerators moved from Faridabad to: Delhi in pursuance of the
agreements of sale, and that the appellant was therefore liable to pay
sales-tax under s. 3(a) of the Act.
Allowing the appeal to this Court, 464
HELD (1) The three agreements between the
appellant and the distributors were merely agreements for distribution and did
not constitute contracts of sale. [480B-C] (a)The number of refrigerators which
were to be purchased by each of the distributors was not specified in the
distribution agreements nor did the agreements contain the price which was to
be charged for each refrigerator. In two of the distribution agreements the
minimum number of refrigerators which had been agreed upon to be purchased by
the distributors was mentioned but the exact number of refrigerators to be sold
by the appellant to those two distributors was still left to the volition of
the appellant. The mode of dealing between the parties was that orders were
placed by the distributors with the appellant after the refrigerators had
reached the appellant's saleoffice and godown in Delhi. The price of
refrigerators was also to be mutually agreed upon from time to time. The sales
by the appellant to the distributor thus depended upon the future agreement
between the parties from time to time.
Therefore, it was the orders which were
placed in Delhi by the distributors and the acceptance thereof by the appellant
that resulted in the mutual agreement of sale. The distribution agreement with
each distributor only provided the framework within which the different
contracts of sale were to be entered into by the distributor with the
appellant, and the distribution agreement and contract of sale were distinct
transactions. [474B-G] (b)It is not correct to say that the distributor with
whom the first agreement was entered into was bound to purchase all the
products of the appellant. The words 'the sale would be as mutually agreed upon
from time to time' Would lose all significance if that was the intention of the
parties. Also, the facts that subsequently two other distribution agreements
were entered into with two others and that the appellant was in a position to
export its products to foreign countries during the assessment year, show that
there was no such agreement. [474G-475B] (c)There was no appropriation towards
the agreement with each of the distributors, at Faridabad by affixing the name
plates to the refrigerators, and hence, there was no sale of refrigerators at
Faridabad. There was no evidence to show that. the name plates were actually
affixed at Faridabad and not at Delhi. Even if they were so affixed there was
nothing to prevent the appellant from changing them because the three different
brands of refrigerators were in all respects identical and the name plates were
also easily interchangeable. of the sale of the-refrigerators in favour of the
distributors had already taken place at Faridabad and the refrigerators had
be-en appropriated there would not have arisenany occasion for the placing of a
subsequent order in Delhi by a distributor. But in fact orders in respect of
the various refrigerators were placed by the distributors only in Delhi after
they had been transported to the Delhi sale-office and godown of the appellant.
Since there was no appropriation at Faridabad, there was no legal bar to the
changing of name plates by the appellant till such time as orders were placed
by the distributors after inspection at Delhi. In answering the question
whether the transactions constituted sales in the course of interstate trade or
commerce the Court should look not merely at the distribution agreement but
should also pay regard to the entire course of dealings between the parties. [475
B-H] (d)Apart from the fact that the distribution agreements could not be
construed as contracts of sale there is no material to show that there was any
assent, expressed or implied, by the distributors, to the appropriation of the
refrigerators by the appellant at Faridabad; and hence s. 23 of the Sale of
Goods Act is not applicable. No authority was given by the distributors to the
appellant to appropriate the goods at Faridabad, Further the appellant was not,
under the terms of the contract, authorised to do some act or thing with
reference to the refrigerators which could not be done until the refrigerators
were appropriated.
[477 H-478H] (2)There was no movement of
refrigerators from Faridabad to Delhi under a contract of sale. [476G] 465
(a)If there is a choice before the parties of so arranging their matters that
lift one case they would have to incur liability to, pay tax and in the other
case the liability to pay tax would not be attracted, they would Prefer the
latter course' There is nothing illegal or impermissible to a party so
arranging its affairs that the liability to pay tax would not be attracted or
would be reduced. [476C-D] The appellant could have sold the refrigerators at
either of the two places, Faridabad or Delhi. But liability to pay tax under
the Act would arise if the sale of the refrigerators to distributors were to
take place at Faridabad and the movement of refrigerators from Faridabad to
Delhi were to take place under the contract of sale. So, the parties expressly
stated in each of the three distribution agreements that it would be in Delhi
that the sale would take place to the distributors and the property therein
would pass to them. In fact, it was in Delhi that the orders were placed by the
distributors, the goods were delivered to the distributors, and the price of
the refrigerators was paid. Hence it could not be said that the transport of
the refrigerators from Faridabad to Delhi was in pursuance of a contract of
sale. The appellant had a godown and sale office in Delhi and there is no
evidence that it had a godown in Faridabad. The movement of the goods from
Faridabad to the appellant's godown in Delhi can therefore be ascribed only to
the fact that the appellant had a godown facility in Delhi. [476D-G] (b)The
inclusion of the charges for the transport of refrigerators from Faridabad to
Delhi in the price payable by the distributors would not show that the movement
of refrigerators from Faridabad to Delhi was occasioned by the contract of
sale. The price payable by the distributors was the aggregate of the ex-factory
price of refrigerators and the transportation charges. As the exfactory price
of the refrigerators was fixed from time to time and as the agreements with the
distributors provided that the sale of the refrigerators as well as the
delivery thereof to the distributors 'would take place in Delhi the
distribution agreements provided that the transportation charges would be added
to the exfactory price of the refrigerators in calculating the amount payable
by the distributors to the appellant. Further, in two of the distribution
agreements it was provided that the liability of the appellant for any shortage
or damage would cease only after the goods had been inspected by and delivered
to the distributors at Delhi. In the 3rd agreement it was provided that the
appellant would accept no responsibility for shortage or damage during transit,
but even in that case, it was not the distributor but the insurer who would
have to bear the loss and the transit insurance expenses were borne by the
appellant.
[476G477G] Tata Engineering & Locomotive
Co. Limited v. The Assistant Commissioner of Commercial Taxes & Another,
[1970] 3 S.C.R.
862, followed.
Tata Iron and Steel Co. Ltd. v. S. R. Sarkar
and Ors..
[1961] 1 S.C.R. 379, Ben Gorm Niligiri
Plantations Co. Cooncor & Ors. v. Sales Tax Officer. Special Circle,
Ernakulam. & Ors. [1964] 7 S.C.R. 706, and Halsbury's Law's of England, 3rd
Ed. Vol. 34. pp. 62-63, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 2005 (NT) of 1972:.
Appeal by special leave from the order dated
the 11th April 1972 of the Punjab and Haryana High Court at Chandigarh, in
General Sales Tax Reference No. 8 of 1970.
N.A. Palkhivala, H. L. Sibal, J. B.
Dadachanji, A. K. Verma, Kapil Sibal and S. C. Agnihotri, for the appellant.
Y.M. Tarkunde, Narendra Goswami and M. N.
Shroff, for the respondent.
S. T. Desai, and 1. N. Shroff, for the
intervener.
466 The Judgment of the Court was delivered
by KHANNA, J. This appeal by special leave by M/s. Kelvinator of India Ltd. is
directed against the judgment of Punjab & Haryana High Court whereby that
court answered the following question referred to it by the Sales Tax Tribunal
Haryana in favour of the department and against the appellant "Whether on
the facts and circumstances of the case, the agreement between M/s. Kelvinator
of India (Assessee) M/s. Spencer & Co. Ltd., Messrs Blue Star Engineering
Co,, and M/s.
General Equipment Ltd., in pursuance of which
the refrigerators manufactured by M/s, Kelvinator of India at Faridabad moved
to Delhi were merely for distribution of goods between the principal and his
agents or were agreements of sale between two parties?" The matter relates
to the assessment year 1965-66, i.e. the period from April 1, 1965 to March 31,
1966. The appellant company has a, factory at Faridabad in Haryana. It
manufactures refrigerators, deep freezers, compressors and other similar
articles. The factory went into production in 1964. Its registered office and
sales office are at 19A Alipore Road, Delhi. The appellant has godowns in Delhi
having full staff of godown keepers and clerks. The appellant is a registered
dealer under the Punjab General Sales Tax Act, 1948 and the Central Sales Tax
Act, 1956.
'The registration has been don-at Faridabad.
Refrigerators and other articles are
manufactured by the appellant under a collaboration agreement with an American
company known as Kelvinator International Corporation. The refrigerators and
other articles manufactured by the appellant are marketed under trademarks
'Kelvinator', 'Leonard' and 'Gem'. The entire sale of refrigerators,
compressors and spare parts in 1964 was made to Spencer &Co. Ltd. at Delhi.
Such transfers were accepted is genuine by the sales tax authorities. In
respect of these sales the department did not take the stand that they were
inter-State sales or that the movement of goods -.from Faridabad to Delhi was
occasioned by reason of sales made to Spencer & Co. Ltd.
On April 26, 1965 the appellant entered into
a distribution agreement with Spencer & Co. Ltd. in respect of
refrigerators and other products having Kelvinator trade mark. Similar
distribution agreements were entered into with Blue Star Engineering Co. (Bombay)
Pvt. Ltd., on September 15, 1965 in respect of Leonard refrigerators and on
December 11, 1965 with General Equipment Merchants Ltd.
in respect of Gem refrigerators. The
agreement with Spencer & Co. was to take effect from April 1, 1965 and the
other two agreements from the dates on which they were entered into. The terms
of the agreements were substantially similar, except in certain matters with
which we arc either not concerned or to which reference would be made
hereinafter. The relevant clauses of agreement dated April 26, 1965 are as
under "Whereas in terms of the Manufacturing and Sales Agreement entered
into by the Company (the appellant company) with Kelvinator International
Corporation, Detroit (Michigar467 U.S.A.), the Company is granted exclusive
right and licence to manufacture, assemble and sell the products designed
and/or manufactured by the Company under Trade mark "Kelvinator" or
any other Trade mark in India (hereinafter called the Territory) and whereas
the Company in its Factory at Faridabad (Punjab) has commenced the, manufacture
of Kelvinator Refrigerators, parts and Spare parts etc., and whereas the
Distributors (Spencer. & Co. Ltd.) have agreed to be and to act as
Distributors of the Company, now it is hereby mutually agreed and declared
between the parties hereto as follows :1.The Company hereby undertakes to sell
and the Distributors hereby undertake to buy all products manufactured by the
Company as mutually agreed upon from time to time. The Distributors shall have
the right to sell the Company's Kelvinator and such other trademark products,
spare parts and parts within the Territory. Due consideration to the
recommendations of Distributors in regard to change/alteration in existing
products or additions of new products will all the time be given by the
Company.
2. All purchases by the Distributors from the
Company shall be on principal to principal basis at mutually agreed prices.
3. * * * * *
4. The goods shall, be delivered to the
Distributors from the Company's registered office in Delhi and the, property in
the same shall pass to the Distributors in Delhi on delivery, where the sale
shall always take place.
5.For the purpose of determining the
liability of Distributors for payment to the Company, the price quoted will be
ex-Company's works at Faridabad. The Distributors shall also pay to the Company
all the charges on the transport of the goods from the Company's works at
Faridabad to the Company's Registered Office in Delhi.
6.The Distributors shall at all times warrant
the goods to their customers only on the warranty terms issued by the Company.
All goods leaving the Company's factory will pass through rigorous inspection
procedures laid down by the Company. No responsibility for shortage or damage
occurring in transit will be accepted by the Company.
******************** ********************
" Clauses 3, 6, 7 and 8 of agreement dated September 15, 1965 in respect
of Leonard refrigerators were as under "3. For the purpose of clause (1)
and in order to enable the Company to arrange its production schedule, the
Distributors guarantee and undertake to purchase from the Company a minimum
quantity of 1500 Refrigerators per year, at a rate not less than 80
Refrigerators per month. It is agreed 468 that the distributors will be
relieved of their obligation under Ibis Agreement to the extent that the
Company is unable to supply the guaranteed minimum quantity of 80 refrigerators
per month.
6.For calculating the liability of the
Distributors for payment to the Company, the price quoted will be ex-factory
Company's works at Faridabad, excluding Central Excise and a11 other taxes,
duties and charges (but not octroi charges payable between Faridabad and Delhi
which will be to the Company's account) which may be levied or introduced by
the Government or any local authority from time to time and which will be
charged in addition to the said ex-factory price. The Distributors shall pay to
the Company, the transport charges for the goods from the Company's works at
Faridabad lo the Company's godowns in Delhi.
7.All the goods shall remain the property of
the Company till they reach Delhi and are delivered to the Distributors in
Delhi, where alone the property therein shall pass to Distributors. The sale
shall always take place in Delhi.
S.All goods leaving the Company's factory
will pass through rigorous inspection procedure laid down by the Company, and
will be packed in Crates and will be delivered to the Distributors packed as
such. The Company in no case, shall responsible for any shortage or damage that
may occur in further transit, once the goods have been delivered and inspected
by the Distributors in Delhi." Clause..-, 6, 7 and 8 of agreement dated
December 11, 1965 in respect of Gem refrigerators were substantially similar to
clauses 6, 7 and 8 of agreement dated September 15, 1965.
Clause 3 of agreement dated December 11, 1965
was as under:
"3.In order to facilitate the Company's
arrangement of its production schedule, Gem undertakes to buy from the Company
a minimum quantity of 2000 refrigerators of both 10.1 cu. ft. and 6.2 cu. ft.
capacity in the first year at a rate of not less than 150 refrigerators per
month. Likewise, for the and year, Gem agrees to buy 3000 refrigerators and for
3rd year, 4000 refrigerators of both sizes. The Company will, however, incur no
liabilities if for any reasons it is unable to make the supply according to the
minimum quantities stipulated above. If for some reasons Gem is unable to
accept or purchase the respective minimum yearly stipulated quantities, Gem
will incur no liability save the cancellation of the Agreement at the Company's
choice." Procedure for transfer of goods from the factory at Faridabad to
the appellant's company's sales office and godowns at 19A, Alipore Road, Delhi
was described in the objections filed on behalf of the appellant before the
sales tax authority as under :
"The company gets the goods cleared from
the Excise for destination to its Delhi office godown in piece-meal pay the 469
octroi themselves at the Delhi barrier along with the freight charges and the
goods are taken delivery of by its registered office.
The buyer places its specific order according
to its requirement and to the extent goods are available at Delhi, delivery is
given by the Delhi office after the goods are approved in good condition by the
purchaser. That the goods, never move from the factory in pursuance of any
contract but are moved as per routine for storage at Delhi in accordance with
the company's own convenience. Specific orders are placed by the buyers when
the goods are already lying. in stock. The movement of the goods as such is not
in furtherance of any contract of sale but move to Delhi independently of any
stipulation." Four affidavits were also filed before the assessing
authority. The affidavit is of M. B. Sutaria, Secretary of the appellant
company. Relevant parts of this affidavit are as under :
"3. That after the goods are I
manufactured in the factory an excise clearance pass is obtained after payment
of excise duty for the transport of goods from the factory to the company's
godown in Delhi. The excise pass is always for movement of goods in favour of
self.
4. That during the transport of goods from
Faridabad to, Delhi,the octroi at the barrier is paid by the company.
5. That at destination the goods are received
by the company's staff and taken in their godown.
6.That after the goods have already been
received by, the company an order is received from the customer for the supply
of good,,;.
7.That in pursuance of the said orders Delhi
staff givedelivery of the, goods at Delhi to the customer under a challan
prepared at Delhi.
8.That thereafter the bill is raised from
Delhi and price of thegoods is received by the Company at Delhi and deposited
inthe Company's account in its Delhi Bank." The other three affidavits
were those of V. A. Rao of Spencer & Co., Rajinder Nath Seth of Blue Star
Engineering Co. Ltd. and Mrs. Usha Batra of General Equipment Merchants Ltd. In
the affidavit of V. A. Rao it was stated "2. That we select the pieces of
Refrigerators lying in the godowns of Kelvinator of India Ltd. Delhi and if on
inspection we find that pieces of Refrigerators suiting to our requirements, we
place specific orders on Kelvinator of India Ltd., Delhi to supply us the
goods." The affidavits of Rajinder Nath Seth and Mrs. Usha Batra contained
similar paragraphs. The appellant company took a policy of insurance to cover
lorry risk as per Motor Lorry Risk clauses, including theft, 470 pilferage and
non-delivery denting scratching and breakage or any other damage due to any
external means, including certain other risks from warehouse to warehouse.
In the reference order dated April 1, 1971
the Sales Tax Tribunal while dealing with the transport of goods from Faridabad
to Delhi observed :
"The Refrigerators manufactured by the
Company were transferred to its sale, office and godowns at 19A. Alipore Road,
Delhi-6 under despatch notes. Necessary entries in the stock register showing
receipt were made in the stock register maintained by the Company in the
godowns and sale office at Delhi. The issue. entries were also made in such
registers. The payments such as freight, octroi, transit insurance and other
expenses i.e. upto the stage of sale and deliveryof ,goods to the respective
distributors at the sale office at Delhi were borne by the company. The
purchasers, namely, the distributors placed their specific orders at various
times at Delhi upon examining and finding the suitability of the machines in
pursuance of which the refrigerators were delivered against receipt on delivery
challans. Bills were raised by the sale office at Delhi and consideration was
also received by it." The assessing authority vide its order dated March
2, 1968 held ,that the transactions between the parties were interState sales
and liable to be taxed as such. The movement of refrigerators from Faridabad to
Delhi was held to be occasioned by the sales to the distributors. At first the
sales tax-payable by the assessee was assessed by the Sales Tax Officer to be
Rs. 8,14,112.25 at the rate of 10 per cent cf the 'transactions amounting to
Rs. 81,41,142.45.
Subsequently on review ,application the tax
liability was reduced to Rs. 1,59,691.19.
On appeal filed by the appellant, the-Deputy
Excise and Taxation Commissioner as per order dated July 24, 1968 held that the
distribution agreements were not contracts of sale.
It was further held that the refrigerators
were transported to Delhi prior to their sale to distributors. The transactions
in question were consequently held not to constitute interstate sales. The
Excise and Taxation Commissioner thereafter took suo motu action and after
hearing both the parties he held as per order dated September 12, 1968 that as
soon as the refrigerators were manufactured they were appropriated to the
contracts and that movement from Faridabad to Delhi was under the agreement to
sell. The matter was then taken up by the assessee in appeal to the Sales Tax
Tribunal. The Tribunal as per order dated August 14, 1969 took the view that
the agreements with the distributors were agreements of sale and that the sales
in question were inter-State sales. The appellant thereafter filed review
application but the same was dismissed by the Tribunal on November 24, 1969.
Application was thereafter filed before the, Tribunal praying, inter alia, that
the, following questions ,of law be referred to the High Court :
"1. Whether on the facts and
circumstances of the case the Sales were local sales of Delhi or were in the
course. of 471 inter-State trade and commerce giving rise to the commencement
of movements in the State of Haryana.
2.Whether on the facts and circumstances of
the case the distributorship agreements could validly be construed to be
contracts of sales even when they lack all the essential ingredients for the
formation of the same.
3.Whether on the facts and circumstances of
the case the movement of the goods from Faridabad to Company's godowns at Delhi
at its, own 'risk and cost could be termed to be commercial movements
warranting the imposition of the tax under the Central Sales Tax Act or
inter-departmental movement for facility of better enjoyment of rights."
The Tribunal, however, thought that the question reproduced earlier would
combine all the three questions suggested by the appellant. Accordingly the
question set out at the beginning of this judgment was referred to the High
Court.
The High Court in answering the question in
favour of the department found that the machines moved from Faridabad to Delhi
in pursuance of agreements of sale which had been termed distribution
agreements.
In appeal before us, Mr. Palkhiwala on behalf
of the appellant company has argued that the three distribution agreements do
not constitute contracts of sale. In the alternative, he submits that even if
the distribution agreements were construed to be contracts of sale, the movement
of goods in question from Faridabad to Delhi cannot be said to have been
occasioned by the distribution agreements.
It is also urged that there was no
appropriation of the goods at Faridabad to the contract with any particular
distributor. As against that, Mr. Tarkunde on behalf of the respondent contends
that the three distribution agreements did constitute contracts of sale and
that it were the aforesaid agreements which occasioned the movement of goods
from Faridabad to Delhi The appropriation of goods to the contract with each of
the distributors also, according to the learned counsel, took place in
Faridabad.
Before dealing with the contention of the
parties, it would be apposite to refer to the relevant statutory provisions and
examine the legal position Section 6 of the Central Sales Tax Act (hereinafter
referred to as the Act) makes every dealer liable for payment of tax under the
Act on all sales effected by him in the course of inter-State trade or
commerce. "Sale" with its grammatical variations and cognate
expressions, has been defined in section 2(g) of the Act, to mean any transfer
of property in goods by one person to another for cash or for deferred payment
or for any other valuable consideration, and includes a transfer of goods on
the hire-purchase or other system of payment by installments, but does not
include a mortgage or hypothecation of or a charge or pledge on goods.
According to section 3 of the Act, a sale or purchase of goods shall be deemed
to take place in the course of inter-State trade or commerce if the sale or
purchase :
(a) occasions the movement of goods from one
State to another: or 472 (b)is effected by a transfer of documents of title to
the goods during their movement from one State to another.
We are concerned in the present case with
clause (a) and not with clause (b). A sale of goods can be held to have taken
place in the course of inter-state trade under clause (a) of Section 3 of the
Act if it can be shown that the sale has occasioned the movement of goods from
one State to another.
A sale in the course of inter-state trade has
three essentials : (i) there must be a sale, (ii) the goods must actually be
moved from one State to another, and (iii) the sale and movement of the, goods
must be part of the same transaction. The word "occasions" is used as
a verb and means 'to cause or to be the immediate cause of'. In the case of
Tata Iron and Steel Co. Ltd. v. S. R. Sarkar and Ors;.(1) Shah J. (as he then
was) speaking for the majority observed that a transaction of sale is subject
to tax under the Act on the completion of the sale. A mere contract of sale is
not a sale within the definition of "sale" in section 2(g). A sale
being, by the definition, transfer of property becomes taxable under section
3(a) "if the movement of goods from one State to another is under a
covenant or incident of the contract of sale". In Ben Gorm Nilgiri Plantations
Co. Cooncor & Ors. v. Sales Tax Officer, Special Circle, Ernakulam &
Ors(2) this Court dealt with the provisions of section 5 of the Act which
relates to sale or purchase of goods in the course of import or export. It was
held that a sale in the course of export predicated connection between the sale
and export, the two activities being so integrated that the connection between
the two cannot be voluntarily interrupted without a breach of the contractor
the compulsion arising from the nature of the transaction. The export, it was
further observed should be inextricably linked up with the sale so that the
bond cannot be dissociated the observations in the case of Tata Iron and Steel
Co. a s well as Ben Gorim Nilgiri Plantations Co. were relied upon by a
Constitution Bench of this Court in the case of Tata Engineering &
Locomotive Co. Limited v. The Assistant Commissioner of Commercial Taxes &
Another (3) and it was held that the sales to be exigible to tax under the Act
must be shown to have occasioned the movement of goods or articles from one
State to another and that the movement must be the result of a convenant or
incident of the contract of sale. It can, therefore, be said that a sale of
goods is in the course of interState trade if the sale and movement of goods
from one State to another are integral parts of the same transaction. There
must exist a direct nexus between the sale and the movement of goods from one
State to the other. In other words the movement should be incident of and be
necessitated by the contract of sale and thus be interlinked with the sale of
goods.
It is also plain from the language of section
3 (a) of the Act that the movement of goods from on.-. State to another must be
under the contract of sale. A movement of goods which takes place independently
of a contract of sale would not fall within the ambit of the above clause.
Perusal of section 3(a) further makes it manifest that there must a contract of
sale preceding the movement of the goods from (1) [1961] 1 S. C. R. 379 (2)
[1964] 7 S.
C. R. 706.
(3)[1970] 3 S. C. R. 862 473 one State to
another, and the movement of goods should have been caused by and be the result
of that contract of sale.
If there was no contract of sale preceding
the movement of goods, the movement can obviously be not ascribed to a contract
of sale nor can it be said that the sale has occasioned the movement of goods
from one State to the other.
In the light of the principles enunciated
above, it cannot in our opinions be said that the transactions in question
amount to sale in the course of inter-state trade. The High Court in the course
of its judgment has noted that the following facts were accepted by the
departmental authorities :
"1. The dealer manufactured and sold
refrigerators.
2. These refrigerators were sold with the trademarks
of 'Kelvinator', 'Leonard' and 'Gem'.
3.The sale of each brand was made through a
separate distributor appointed for this purpose.
4.The manner of movement is laid down in
clause 6 of Spencer's agreement and clause 8 of Blue Star and General Equipment
Merchants agreements.
5.The dealer is bound to sell a 'Kelvinator'
to Spencers, a 'Leonard' to Blue Star and a 'Gem' to General Equipment
Merchants.
6. That refrigerators were exported outside
India.
7. The price of the refrigerators is fixed as
mutually agreed upon from time to time.
8. The property in-goods passes at Delhi
after delivery.
9. The prices are not settled for individual
machine, but periodically.
10.The purchase orders are placed by the
three distributors after the goods reach the head office at Delhi." It has
further been found by the High Court that the appellant had asserted the
following facts and the assertion of the appellant was neither rejected by the
departmental authorities nor was it dealt with in ,the respective orders :
"1. That after the goods are
manufactured in the factory an excise clearance pass is obtained after payment
of excise duty for the transport of goods from the factory to the company's
godown in Delhi. The excise pass is always for movement of goods in favour of
self.
2.That during the transport of the goods from
Faridabad to Delhi, the octroi at the barrier is paid by the Company.
3. That at destination the goods are received
by company's staff and taken in their godown.
4. That in pursuance of the,. said orders
Delhi staff give delivery of the goods at Del to the customer under a challan
pre-pared at Delhi.
474 5.That thereafter the bill is raised from
Delhi and the price of the goods is received by the Company at Delhi and
deposited in company's account in its Delhi bank.
6.That all that the assessee does is to
manufacture refrigerators and they are branded for the purpose of sale and
distribution." In the face of the facts of the present case, we find it
difficult to hold that the sale of refrigerators by the.
appellant to the three distributors took
place at Faridabad.
We are also unable to agree with the High
Court that the distribution agreements constituted agreements of sale. It is
noteworthy in this context to observe that the number of refrigerators which
were to be purchased by each of the distributors was not specified in the
distribution agreements, nor did the agreements contain the price which was to
be charged for each refrigerator. According to the agreement dated April 26,
1965 the appellant undertook to sell and the distributors undertook to purchase
the products of the appellant "as mutually agreed upon from time to
time". It is, therefore, plain that sales by the appellant company--to the
distributor re,fered to in the distribution agreement dated April 26, 1965
depended upon the future agreement between the parties from time to time. Distribution
agreements dated September 15, 1965 and December 11, 1965 no doubt mentioned
the minimum number of Leonard and Gem refrigerators which had been agreed to be
purchased by the distributors; the exact number of refrigerators to be sold by
the appellant to these two distributors was still left to volition of the
appellant. The appellant company, it was also mentioned, would incur no
liability if it was unable to supply the guaranteed minimum number of refrigerators.
The mode of dealings between the parties was that subsequent to the
distribution agreements, orders were placed by the distributors with the
appellant after the refrigerators had reached the appellant's sale office and
godown in Delhi. The price of the refrigerators was also to be mutually agreed
upon from time to time. It is Plain that it is the orders which were placed in
Delhi by the distributors and the acceptance thereof by the appellant that
resulted in mutual agreement of sale. It was, in our opinion, the mutual
agreement between the parties at 'the time of the placing of the order by the
distributor with the appellant which constituted the contract of sale and not
the distribution agreement. The distribution agreement with each distributor
provided the framework within which the different contracts of sale-were
entered into by the distributor with the appellant. This circumstance should
not make us lose sight of the fact that the distribution agreements and the
subsequent contracts of sale were distinct transactions.
We are not impressed by Mr. Tarkunde's
argument that under agreement dated April 26, 1965 Spencer & Co. was bound
to purchase all the products of the appellant company. Spencer & Co.
undertook to buy the products manufactured by the appellant company subject to
the stipulation contained in the words "as mutually agreed upon from time
to time". Had it been the intention of the parties that, Spencer & Co.
was bound to purchase all products manufactured by the appellant company
irrespective of any future agreement between the parties, the words "as
mutually agreed upon from time to time" in clause 475 1 of agreement dated
April 26, 1965 would lose all significance. It would not have also in that
event been possible for the appellant to enter into the other two distribution
agreements of September 15, 1965 and December 11, 1965 regarding Leonard and
Gem refrigerators which were manufactured by the appellant. The fact that the
appellant was in a position to export its products to foreign countries during
the assessment year in question also shows that there was no agreement between
the parties that the appellant was bound to sell and Spencer & Co. was bound
to purchase all products manufactured by the appellant.
The argument that the sale of refrigerators
to each of the distributors took place at Faridabad and that it was at
Faridabad that the refrigerators were appropriated towards the agreement with
each of the three distributors appears to us to be not well-founded. The
argument proceeds upon the assumption that trade-mark name plates on, the
refrigerators were affixed at Faridabad by the appellant company. There is,
however, no direct material to show that the name plates on, the refrigerators
were actually affixed at Faridabad and not in Delhi. Assuming that the name
plates were, in fact, affixed to the refrigerators by the appellant at
Faridabad, there was nothing to prevent the appellant from changing the name
plate of a refrigerator and affixing the name plate of a different brand of
refrigerator on the refrigerator from which the name plate was removed. The
three different brands of refrigerators were in all respects identical except
in respect of the name plate. The said name plates, it has been demonstrated to
us,. are easily interchangeable.
In the circumstances, the alleged affixation
of trade-mark plates to the refrigerators at Faridabad would not necessarily
show that the appropriation of the refrigerators towards the agreement with a
particular distributor took place at Faridabad. A very significant circumstance
which should not be lost sight of, in this context is that orders in respect of
the various refrigerators were placed by the distributors in Delhi after the
refrigerators had been transported to the Delhi sale office and godown of the
appellant. If the sale of the refrigerators in favour of the distributor hid
already taken place at Faridabad and the refrigerators had been appropriated there
towards the sale contract, there would have arisen no occasion for the placing
of the subsequent order in Delhi by a distributor with regard to the said
refrigerators. The fact that subsequent orders had to be placed by the
distributors in Delhi with regard to the different refrigerators after their
arrival in Delhi shows that there was no earlier sale or appropriation of those
refrigerators towards any contract of sale with the distributors. The stand
taken on behalf of the department that the appropriation of the refrigerators
took place at Faridabad towards the contracts of sale with the distributors is
inconsistent with the entire course of dealings between the parties. It may
also be observed that in deciding the question whether the transactions between
the parties constituted sales in the course of inter-State trade or commerce,
the court should look not merely at the distribution agreements, regard should
be had of the en-tire course of dealings between the parties.
Assuming that the distribution agreements
constituted contracts of sale, it would still have to be shown that the sale by
the appellant to the distributors occasioned the movement of refrigerators from
Farida476 bad to Delhi in this respect we find that according to the facts
found by the Tribunal the appellant had a godown and sale office in Delhi.
There is nothing to show that the appellant has also a godown in Faridabad. The
movement of refrigerators from Faridabad to the appellant's godown in Delhi in
the circumstances can well be ascribed to the fact that the appellant has a
godown facility in Delhi. There were two places at which in the nature of
things the appellant could have sold the refrigerators to the distributors. It
could be either at Faridabad where the appellant has its factory wherein the
refrigerators are manufactured or in Delhi where the appellant has its sale
office and godown and where also the, three distributors have their offices.
The selection of place of sale.
depended upon mutual agreement between the
parties it is also obvious that if there is a choice before the parties of so
arranging their matters that in. one case they would have to incur liability to
pay tax and in the other case the liability to pay tax would not be attracted,
they would prefer the latter course. There is nothing illegal or impermissible
to a party so arranging its affairs that the liability to pay tax would not be
attracted or that the brunt of taxation would be reduced to the minimum. The
appellant company in the present case would incur no liability to pay tax under
the Act if it were to transport the refrigerators from its factory in Faridabad
to its own office and godown in Delhi and thereafter to sell them to the
distributors. The liability to pay tax under the Act would, however, arise if
the sale of the refrigerators to distributors were to take place at Faridabad
and the movement of refrigerators from Faridabad to Delhi were to take place
under the contract of sale. 'The question with which we are concerned is
whether the appellant entered into such an arrangement with the distributors
that the liability to pay tax would be attracted and not the other arrangement
under which no such liability could be fastened on the appellant. So far as
this question is concerned, we find that the parties expressly stated in each
of the three distribution agreements that it would be in Delhi that the sale of
refrigerators would take place to the distributors and the property therein
would pass to them. It was again in Delhi that the refrigerators were delivered
to the distributors. The orders for the refrigerators were placed by the
distributors in Delhi and it was also here that, the price of refrigerators was
paid. Looking to all the facts of the case, we have no doubt that the
arrangement between the parties was that refrigerators would be sold by the
appellant to the distributors after they had been transported to the sale
office and godown of the appellant on Alipore Road, Delhi so that no liability
to pay tax under the Act would arise. It cannot in-the circumstances be said
that the transport of the refrigerators from Faridabad to Delhi was in
pursuance of contracts of sale between the appellant and the distributors.
Reference has been made by Mr. Tarkunde to
the fact that the distributors were to bear the freight charges for the
transportation of refrigerators from Faridabad to Delhi. In this respect we
find that the distribution agreements show that reference was made to
transportation charges for determining the amount or price to be paid by the
distributors to the appellant company. The price payable by the distributors
was the aggregate of the ex-factory price of refrigerators and 477 the
transportation charges. As the ex-factory., price of refrigerators was fixed
from time to time and as the agreements with the distributors provided that the
sale of the refrigerators as well as the delivery thereof to the distributors
would take place in Delhi, there was nothing surprising in the clause of the
distribution agreements that the transportation charges would be added to the
ex-factory prices of the refrigerators in calculating the amount payable by the
distributors to the appellant. The inclusion of the charges for the transport
of the refrigerators from Faridabad to Delhi in the. price payable by the
distributors would not show that the movement of refrigerators from Faridabad
to Delhi was occasioned by the contract of sale.
The High Court in the course of its judgment
has observed-:
"The freight from Faridabad to Delhi is
borne by the Distributors that is the Blue Star and the General Equipment
Merchants. Any shortage or damage in transit is also the responsibility of Blue
Star and the General Equipment Merchants; the responsibility for this does not
fall on the manufacturer." The observations in the above paragraph that
any shortage or damage in transit was the responsibility of the Blue Star and
the General Equipment Merchants and the responsibility for that did not fall on
the manufacturer is not correct because clause 8 of each of the two agreements
dated September 15, 1965 and December 11, 1965 relating to Leonard and Gem
refrigerators shows that the liability of the appellant company for any
shortage or damage that might occur would cease only after the goods had been
delivered and inspected by the distributors at Delhi. The appellant no doubt
stipulated in its agreement with Spencer & Co. that it (the appellant)
would accept no responsibility for shortage or damage occurring in transit
after the goods had passed through rigorous inspection at the time they left
the appellant's factory. This must, however, be regarded in the nature of
things to be a matter of mutual agreement between the parties. Spencer &
Co. might well have agreed to bear that loss on the assumption that the
advantage of becoming the distributor for sale of Kelvinator refrigerators
would far outweigh the loss borne by the said company in this respect. Indeed,
the possibility of any loss being borne by Spencer & Co. because of any
shortage or damage occurring in transit of refrigerators from Faridabad to
Delhi was only theoretical, is according to the order of reference the expenses
of transit insurance were borne by the appellant company. It would thus be the
insurer who would have to bear the loss caused by shortage or damage occurring
during transit. It may also be mentioned in this context that the octroi
charges in connection with the movement of refrigerators from Faridabad to
Delhi were paid by the appellant.
We have been referred to section 23 'of the
'Sale of Goods Act. According to that section, where there is a contract for
the sale of unascertained or future goods by description. and goods of that
description and in a deliverable state are unconditionally appropriated to the
contract, either by the seller with the assessment of the buyer or by the 478
buyer with the assent of the, seller, the property in the goods thereupon
posses to the buyer. Such assent may be expressed or implied, and may be given
either before or after the appropriation is made. , The said section, in our
opinion, cannot be of much avail to the respondent. Apart, from the fact that
the distribution agreements cannot, in our opinion, be construed as contracts
of We. thereis no material to show that there was any assent expressed or
implied by the distributors to the appropriation of. the refrigerators by the
appellant at Faridabad.
Reference has been made by Mr. Tarkunde to
thefollowing observations on pages 62-63 in Vol. 34 of Halsbury's Laws of
England Third Edition "An authority given by one party to the other to
appropriate the goods is an implied assent by the party giving the authority to
a subsequent appropriation by the other, provided the appropriation is made in
accordance with the contract. Such an authority confers an election on the
party authorised.
An authority to appropriate is presumed
where, by the terms of the contract, one party is to do with reference to the
goods some act or thing which cannot be done until the goods are appropriated.
When the party authorised has determined his election by doing such act or
thing, the appropriation is finally made.
Until that time any act or thing done with
reference to the goods towards appropriation by the party authorised is
revocable, unless it has previous to its revocation, been assented to by the
other party." So far as the observations made in the first paragraph
reproduced above are concerned, we find that there is no material on the record
to show that an authority was given by the distributors to the appellant to
appropriate the goods at Faridabad. As such, the aforesaid paragraph cannot be
of any material help to the respondent. The second paragraph reproduced above
relates to an authority which may be presumed from the fact that one party by
the terms of contract is to do with reference to the goods some act or thing
which cannot be done until the goods are appropriated.
In respect of this paragraph also, as already
indicated above, we find that there is no material to show that the appellant
was under the terms of contract authorised to do some act or thing with
reference to the refrigerators which could not be done until the refrigerators
were appropriated.
Apart from that we find that the observation
that "until that time any act or thing done with reference to the goods
towards appropriation by the party authorised is revocable' would show that
there was no legal bar to the changing of name plates by the appellant company
till such time as orders with regard to the refrigerators were placed by the
distributors after inspection of those, refrigerators.
A case which was considerable bearing on the
facts of the' present case is that of Tata Engineering and Locomotive Co. Ltd.
V. Assistant Commissioner of Commercial Taxes, Jamshedpur and Anr. (supra). In
that case the appellant company, which manufactured trucks and 479 buses in
Jamshedpur in the State of Bihar, transferred the vehicles to stock-yards
operated by its own personnel in other States and supplied them to the dealers.
After the promulgation of the Commercial Vehicles (Distribution and Sale)
Control Order, 1963 the appellant issued a circular dated June 14, 1963, to the
dealers asking them to submit monthly statements regarding fresh applications
registered, retail sales, applications cancelled and stock and sales. , A new form
of dealership agreement was also introduced under which the appellant agreed to
sell from its works in Jamshedpur or its depots and stockvirds outside the
State of Bihar to the dealer the vehicles which shall be allotted at its
discretion. Clause 11(b) of :the agreement provided that "the dealer shall
mail to the company on the 15th of each month ...... his firm order for
purchases to be effected during the next succeeding month and his estimated
requirements., for the two months following the next succeeding month In fact
however no firm order was called for by the company. Pursuant to authorisation
issued by the sales office of the appellant in Bombay, vehicles were
transferred from its works at Jamshedpur to the various stockyards in the
States. The stocks available in the stock-yards were then distributed from time
to time to dealers for which purpose an allocation letter was issued each month
by the sales office. There were many instances where vehicles had been actually
delivered from the stockyard prior to the issue of the allocation letter. It
was also found that on some occasions vehicles bad been moved from a stock-yard
in on-, State to a stock-yard in another.
Treating the allocation letters together with
their confirmation as transactions of sale, and the movement of vehicles from
the works to the stock-yards as the direct result of the allocation so made,
the Assistant Commissioner imposed tax under the Central Sales Tax Act, 1956,
in relation to the sales during the period April 1, 1964 to March 31, 1966, of
vehicles which had moved from Jamshedpur to the stock-yards in the various
States. it was held by this Court that the procedure followed by the appellant
together with the proved absence of any firm orders, indicated that the
allocation letters and the statement's furnished by the dealers did not
themselves bring about transactions of sale within the meaning of section 2(g)
of the Act. This Court further observed :
"It would appear from the materials
placed before us that generally the completion of the sales to the dealers did
not take place at Jamshedpur and the final steps in the matter of such
completion were taken at the stockyards. Even if the appellant took into
account the requirements of the dealers which it naturally was expected to do
when the vehicles were moved from the works to the stock-yards it was not
necessary that the number of vehicles allocated to the dealer should
necessarily be delivered to him. The appropriation of the vehicles was done at
the stockyards through specification of the engine and the chassis number and
it was open to the appellant till then to allot any vehicle to any purchaser
and to transfer the vehicles from one stockyard to another. Even the Assistant
Commissioner found that on some occasion vehicles had been moved from
stockyards in one State to a 480 stockyard in another State. it is not possible
to comprehend how, in the above situation it could be held that the movement of
the vehicles from the works to the stockyards was occasioned by any covenant or
incident of the contract of sale." The facts of the present case have a
certain amount of similarity to the facts of the above case and, in our
opinion, the dictum laid down therein fortifies us in the conclusion at which
we have arrived.
We accordingly accept the appeal and set
aside the judgment of the High Court. The answer given by the High Court to the
question referred to it is discharged. In our opinion, the three agreements
between the appellant and the distributors were merely agreements for the
distribution of goods and were not agreements of sale between the parties.
It cannot, in our opinion, be said that there
was any movement of refrigerators from Faridabad to Delhi under a contract of
sale. The question in the circumstances is answered against the department. The
transactions between the appellant and the distributors did not, in our
opinion, constitute sale in the course of inter-State trade or commerce. As
such, there was no liability to pay tax under the Act. The appellant shall be
entitled to the costs from the respondent of this Court as well as in the High
Court.
V.P.S.
Appeal allowed.
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