Indian Oil Corporation Ltd. & ANR
Vs. Union of India & Ors [1980] INSC 176 (10 September 1980)
GUPTA, A.C.
GUPTA, A.C.
FAZALALI, SYED MURTAZA KAILASAM, P.S.
CITATION: 1981 AIR 446 1981 SCR (1) 673
ACT:
Sales Tax legislation-Central Sales Tax Act,
1956- Section 3(1)-Factory in Barauni in Bihar-Naphtha sent by pipeline from
Barauni to kanpur in U.P.-Orders placed pursuant to an agreement by the buyer
in Kanpur on the seller's office in Kanpur-Sale-Whether taxable under the
Central Sales Tax or U.P. Sales Tax Act.
HEADNOTE:
The Indian Oil Corporation was a manufacturer
of naphtha with its works at Barauni in Bihar while the 5th respondent was a
manufacturer of fertilizers with its factory at Kanpur. The Indian Oil
Corporation supplies naphtha to the 5th respondent's fertilizer factory at
Kanpur through a pipeline. Both the buyer and the seller have their offices at
Kanpur and indents are addressed by the buyer to the seller at their Kanpur
office. The pipeline from Barauni to the petitioner's depot at Kanpur has been
constructed by the petitioner, the pipeline between the buyer's and the
seller's fences is however constructed by the buyer, the 5th respondent.
On the question whether the sale of naphtha
should be taxed under the Central Sales Tax Act or under the U.P.
Sales Tax Act, the U.P. authorities insisted
that since the indent had been placed by the buyer on the seller at their
Kanpur Office the sale was a local sale while the sale tax authorities in Bihar
insisted that since there was transfer of goods from one State to another the
sale was inter-State chargeable to tax under the Central Sales Tax Act.
Allowing the petition, ^
HELD: On the facts of the present case the
sales are clearly inter-State sales and the State of U.P. had no jurisdiction to
assess the petitioners to sales tax under the State Act. As the movement of
naphtha commences from Barauni in Bihar the sales tax payable on the sales
under the agreement can be assessed and collected only by the authorities in
the State of Bihar on behalf of the Government of India in view of section 9 of
the Central Sales Tax Act. [680E] It is now well-settled by a series of
decisions of this Court that a sale shall be an inter-State sale under section
3(a) if there is a contract of sale preceding the movement of goods from one
State to another and the movement is the result of a covenant in the contract
of sale or is an incident of that contract; in order that a sale may be
regarded as an inter-State sale it is immaterial whether the property in the goods
passes in one State or another. [678H- 679A] 674 Tata Iron & Steel Co. Ltd.
v. S. R. Sarkar [1961] 1 S.C.R. 379; Kelvinator of India Ltd. v. State of
Haryana [1974] 1 S.C.R. 463; Oil India Ltd. v. Superintendent of Taxes [1975] 3
SCR 767; Balabhagas Hulaschand v. State of Orissa [1976] 2 SCR 939; Union of
India v. K. G. Khosla & Co. (P) Ltd. [1979] 3 SCR 453, referred to.
The terms of the agreement make it quite
clear that the sales of naphtha to the respondent were inter-State sales.
The source of supply is the seller's refinery
at Barauni in Bihar and the destination is the buyer's factory at Kanpur.
This clause alone is sufficient to prove that
the sales in question were inter-State sales. [679B-C] Clause 3(iii) of the
agreement which says that the naphtha shall be supplied against indents in
writing addressed to the seller at their installation at Kanpur cannot be read
in isolation. Sub-clause (iv) of clause 3 sets out the details of the buyer's
requirement for the first four years and thereafter. Under clause 8 Indian Oil
Corporation are bound not only to bring the contractual quantity of naphtha
from Barauni to the seller's Kanpur installation but also to provide at their
own cost storage facilities at Kanpur of a capacity equivalent to not less than
30 days' requirement of the buyer. The indents are therefore not outside the
agreement but are relatable to the buyer's requirements under the agreement. It
is obvious that the sales under the agreement are not possible without
inter-State movement of naphtha. Clause 3 read with clause 8 also proves that
really there are no two movements but only one movement from Barauni to Kanpur
pursuant to the contract of sale and the arrangement regarding storage
facilities provided in clause 8 is only for operational convenience, it is only
a mechanism devised to facilitate the transfer of naphtha through the seller's
pipeline to their depot at Kanpur and from there to the buyer's factory at
Kanpur through the pipeline constructed at the buyer's cost. It is relevant in
this connection to note that under clause 7(ii) the cost of transferring
naphtha from Barauni to the buyer's fence is to be borne by the buyer. [679G-H;
680A-C]
ORIGINAL JURISDICTION: Writ Petition No. 444
of 1979.
(Under Article 32 of the Constitution) F. S.
Nariman & Anil B. Dewan, B. D. Barucha, Ravinder Narain and Talat Ansari
for the Petitioner.
A. Subhashini for Respondent No. 1 Lal Narain
Sinha, Att. Genl. and U.P. Singh for the Respondents Nos. 2-3.
Soli J. Sorabjee, V. K. Pandita and E. C. Agarwala
for R.4.
Subrata Roy Chowdhury, Biswaroop Gupta,
Bhaskar Gupta, Surhid Roy Chowdhury & D. N. Gupta for Respondent No. 5.
The Judgment of the Court was delivered by
675 GUPTA, J.-In this petition under Article 32 of the Constitution of India
dealer seeks relief from the same sales being assessed to sales tax both under
the Central Sales Tax Act and the U.P. Sales Tax Act. The first petitioner
Indian Oil Corporation Limited, IOC for short, are a government company
incorporated under the Companies Act, 1956 engaged inter alia in the
manufacture and marketing of petroleum products. The second petitioner is the
Managing Director and a shareholder of IOC. Union of India has been impleaded
as the first respondent in the petition. The 2nd respondent is the Assistant
Superintendent of Commercial Taxes, Central Circle, Bihar. The 3rd and 4th
respondents are respectively the State of Bihar and the State of U.P. The 5th
respondent Indian Explosives Limited are a company having their registered
office at Calcutta;
they have a factory at Panki, Kanpur in Uttar
Pradesh manufacturing urea fertilizers. IOC have a refinery at Barauni in the
State of Bihar and also a depot at Panki, Kanpur. In 1966 IOC completed
pipeline from their refinery at Barauni in Bihar to Kanpur in U.P. through
Patna in Bihar and Mughalsarai and Allahabad both in U.P. At their Barauni
refinery IOC manufacture naphtha which is the principal raw material for
production of fertilizers.
On February 9, 1970 an agreement was entered
into by and between IOC and the 5th respondent in terms of which IOC were to
sell and the 5th respondent were to buy the entire quantity of naphtha required
for the 5th respondent's fertilizer factory at Kanpur. Below is a summary of
the different clauses of the agreement that are relevant for the present
purpose; the numbers given to the different paragraphs in this summary follow
the numbering of the corresponding clauses of the original agreement:
1. The agreement shall be deemed to have come
into force from September 10, 1969 [when the supply of naphtha commenced] and
shall remain in force till December 31, 1980. It shall continue to be in force
thereafter unless terminated by either party giving to the other not less than
one year's prior notice of the intention to terminate the agreement.
2. The naphtha to be supplied shall be of the
specification set out in Schedule I of the agreement.
3. (i) The quantity of naphtha that the 5th
respondent agree to buy and IOC agree to sell shall be 2,50,000 tonnes per
annum which is the maximum rate per annum.
(iii) The naphtha shall be supplied against
the buyer's indents in writing addressed to the seller at the seller's
Panki/Kanpur installation.
676 (iv) It is agreed that the buyer's
requirement of naphtha for the first four years shall be 95,000, 1,70,000,
2,00,000 and 2,25,000 tonnes respectively.
(viii) In case the buyer fails to take delivery
during any year the quantities of naphtha as stipulated above for reasons other
than Force Majeure at their Kanpur plant, the seller shall be entitled to sell
the quantity which the buyer has failed to lift. Similarly if the seller fails
to deliver the stipulated quantities of naphtha during any year for reasons
other than Force Majeure at their Barauni refinery and/or the transportation
system from Barauni to their Panki installation, the buyer shall be entitled to
purchase the quantity not delivered in that year from other sources.
4. The supply of naphtha to the buyer shall
be made from the seller's refinery at Barauni.
5. The price of naphtha shall be exclusive of
transfer charges, excise duty and all other taxes levies which shall be
recovered by the seller from the buyer at actual rates prevailing and levied by
concerned agencies from time to time.
7. (i) Naphtha shall be supplied through a
pipeline at the fence of the buyer's fertilizer factory and the pipeline
between the buyer's and the seller's fences shall be constructed by the buyer
at their expense.
(ii) The cost of transferring naphtha by the
pipeline from the point of its manufacture to the fence of the buyer's
fertilizer factory shall be borne by the buyer.
8. The seller shall provide at their cost
storage facilities at the seller's Panki/Kanpur installation of a capacity
equivalent to not less than 30 days' requirement of the buyer.
10. (iii) Three samples of naphtha for
testing will be taken from the seller's tank at their Panki/Kanpur installation
prior to transfer in the presence of buyer's representatives at such frequency
as may be mutually agreed.
According to the 5th respondent, since the
commencement of supply of naphtha under the aforesaid agreement IOC went on
charging from them sales tax at the rate prescribed by the U.P. Sales Tax Act
on the plea that the sales were chargeable under the said Act. On or about
March 16, 1974 the assessing authority under the U.P. Sales Tax Act assessed
IOC to sales tax under the said Act on their total turnover for the assessment
year 1969-70 including 677 the sales of naphtha to the 5th respondent. The 5th
respondent filed a writ petition in the Allahabad High Court challenging the
assessment made on the basis that the sales were local and asserting that they
were inter-state sales.
Before the writ petition was disposed of the
U.P. assessing authority assessed IOC for the assessment year 1970-71 treating
the sale of naphtha to the 5th respondent as local sale. On August 27, 1975 the
Allahabad High Court allowed the said writ petition quashing the impugned order
of assessment to the extent it sought to levy tax under the U.P. Sales Tax Act
on the sales of naphtha to the 5th respondent. The High Court held that the
sales under the agreement dated February 9, 1970 were inter-state sales. IOC
preferred an appeal against the order of assessment in respect of the
assessment year 1970-71 and although the appeal was on grounds not relevant for
the present purpose, it is necessary to refer to it because at a later stage
IOC had the scope of the appeal enlarged, induced by the 5th respondent
according to IOC, by including a ground that the sales of naphtha under the
agreement were interstate sales.
On June 29, 1978 the 2nd respondent levied
sales tax under the Central Sales Tax Act on the sales of naphtha by IOC to the
5th respondent for the assessment year 1970-71 treating them as inter-state
sales. Under section 9 of the Central Sales Tax Act the tax levied under that
Act is collected in the State from which the movement of the goods commenced;
in this case the movement commenced from Barauni in Bihar. IOC preferred an
appeal against this order to the appellate authority. For the assessment year
1971-72 the assessing authority under the U.P. Sales Tax Act treated the sales
of naphtha to the 5th respondent as inter-state sales presumably in view of the
aforesaid judgment of the Allahabad High Court. This assessment order was
challenged by the Commissioner of Sales Tax, U.P. in revision before the appropriate
authority. For the same assessment year the Bihar authority assessed the sales
on the basis they were inter-state sales. For the next assessment year 1972-73
the U.P. authority again treated the sales as inter-state sales and again the
order was challenged in revision by the Commissioner of Sales Tax, U.P. The
Bihar authority also treated the sales for that year as inter-state sales.
Thereafter for the assessment years 1973-74
and 1974-75 somewhat surprisingly the U.P. assessing authority went back on the
view taken in the immediately preceding two years and again treated the sales
as local sales and the 5th respondent preferred appeals from these two orders
of assessment. In this confused situation IOC filed the instant writ petition
in this Court on May, 1, 1979. Meanwhile the appellate authority under the U.P.
Sales Tax Act dealing with the appeal preferred by IOC against the order of
assessment relating to 678 the year 1970-71 had remanded the case to the
assessing authority and the assessing authority by his order dated December 20,
1979 held that the sales were local sales.
The 5th respondent had started several other
proceedings to avoid the sale of naphtha to them under the agreement dated
February 9, 1970 being assessed to sales tax under the U. P. Act. On August 29,
1977 they filed a suit in the Calcutta High Court against IOC seeking to
restrain IOC from collecting sales tax from them under the U.P. Sales Tax Act.
The 5th respondent also filed two writ petitions in the Allahabad High Court, Nos.
102 and 103 of 1978. The first petition challenges the assessment order
relating to the year 1970-71 made by the U.P. authority. The second petition is
directed against the revisional proceedings started by the Commissioner of
Sales Tax, U.P. in respect of the assessment years 1971-72 and 1972-73. All
these proceedings are still pending.
The petitioners' case in the present writ
petition is that the sales of naphtha to the 5th respondent were local sales in
Kanpur and as such they were assessable under the U.P. Sales Tax Act and that
the assessment orders dated June 29, 1978 and November 30, 1978 respectively
for the assessment year 1970-71 and 1971-72 made by the Bihar Sales Tax
authority under the Central Sales Tax Act are in violation of the fundamental
rights guaranteed under Articles 19 and 31 of the Constitution of India. The
petitioners seek a writ in the nature of certiorari for quashing the aforesaid
assessment orders and a writ in the nature of mandamus directing the Bihar
sales tax authority to forebear from assessing the sales of naphtha to the 5th
respondent on the basis they were inter-state sales.
Alternatively the petitioners pray, in the
event it is held that "the sales are inter-state sales and not intra-state
sales", for "appropriate reliefs, orders, and directions"
directing the State of U.P. not to assess, levy or recover any sales tax on the
sales of naphtha to the 5th respondent under the agreement dated February 9,
1970.
Section 3(a) of the Central Sales Tax Act,
1956 provided that "a sale or purchase of goods shall be deemed to take
place in the course of inter-state trade or commerce if the sale or purchase
occasions the movement of goods from one State to another". It is now well
settled by a series of decisions of this Court that a sale shall be an
inter-state sale under section 3(a) if there is a contract of sale preceding
the movement of goods from one state to another and the movement is the result
of a covenant in the contract of sale or is an incident of that contract; in
order that a sale may be regarded as an inter-state sale it is immaterial
whether the property in the 679 goods passes in one state or another. Some of
these decisions are: Tata Iron & Steel Co. Ltd. v. S. R. Sarkar [1961] 1
SCR 379, Kelvinator of India Ltd. v. The State of Haryana [1974] 1 SCR 463, Oil
India Ltd. v. The Superintendent of Taxes & others [1975] 3 SCR 797,
Balabhagas Hulaschand v. State of Orissa [1976] 2 SCR 939 and Union of India
and Anr. v. K. G. Khosla & Co. (P) Ltd. & Ors. [1979] 3 SCR 453. In our
opinion the terms of the agreement dated February 9, 1970 summarized above make
it quite clear that the sales of naphtha to the 5th respondent were inter-state
sales. Under clause 4 of the agreement seller is "to make the supply of
naphtha to the buyer from its refinery at Barauni". The source of supply
is thus the seller's refinery at Barauni in Bihar and the destination is the
buyer's factory at Kanpur. This one clause alone is sufficient to prove that
the sales in question were inter- state sales.
However, on behalf of the petitioners and the
State of U.P. it is contended that the sales were not inter-state sales and
were local sales within the State of Uttar Pradesh. It is pointed out from
clause 3(iii) that supplies of naphtha are made on the buyer's indents in
writing addressed to the seller at their Kanpur installation and not at their
refinery at Barauni which, it is contended, shows that the supplies are made
from IOC's storage at Kanpur to the 5th respondent's factory also at Kanpur. It
is also contended that the supply of naphtha to the buyer's factory at Kanpur
involves two movements, one from Barauni to Kanpur for storage at the seller's
depot, and the other from the depot to the buyer's factory. This contention is
based on clause 7(i) of the agreement which states that naphtha shall be
supplied at the fence of the buyer's factory through a pipeline between the
buyer's and the seller's fences constructed at the buyer's expense. It is
argued that this stipulation shows that the movement of naphtha from Barauni is
arrested at the seller's Kanpur depot and is followed by another movement from
there to the buyer's factory which proves that the sales are local sales and not
inter-state because in an inter-state sale the movement of goods is the
immediate and direct result of the contract of sale.
Clause 3(iii) of the agreement which says
that the naphtha shall be supplied against indents in writing addressed to the
seller at their installation at Kanpur cannot be read in isolation. Sub-clause
(iv) of clause 3 sets out the details of the buyer's requirement for the first
four years and thereafter. Under clause 8 IOC are bound not only to bring the
contractual quantity of naphtha from Barauni to the seller's Kanpur
installation but also to provide at their own cost storage facilities at Kanpur
of a capacity equivalent to not less than 30 days' requirement of the buyer.
The indents are therefore 680 not outside the agreement but are relatable to
the buyer's requirements under the agreement. It is obvious that the sales
under the agreement are not possible without inter- state movement of naphtha.
Clause 3 read with clause 8 also proves that really thare are no two movements
but only one movement from Barauni to Kanpur pursuant to the contract of sale
and the agreement regarding storage facilities provided in clause 8 is only for
operational convenience, it is only a mechanism devised to facilitate the
transfer of naphtha through the seller's pipeline to their depot at Kanpur and
from there to the Buyer's factory at Kanpur through the pipeline constructed at
the buyer's cost. It is relevant in this connection to note that under clause
7(ii) the cost of transferring naphtha from Barauni to the buyer's fence is to
be borne by the buyer.
Each case turns on its own facts and the
question is whether applying the settled principle which we have mentioned
above to the facts of the present case the sales can be said to be inter-state
sales. An attempt to show that some of the factors present in the instant case
are present or absent in some case or other in which this Court held the sale
to be a local sale or inter-state sale hardly serves any useful purpose. On the
facts of the present case the sales are clearly inter-state sales and the State
of U.P.
had therefore no jurisdiction to assess the
petitioners to sales tax under the State Act. As the movement of naphtha
commences from Barauni in Bihar, the sales tax payable on the sales of naphtha
under the agreement dated February 9, 1970 can be assessed and collected only
by the authorities in the State of Bihar on behalf of the Government of India
in view of section 9 of the Central Sales Tax Act.
On behalf of the State of Bihar a point was
taken that the present petition under Article 32 of the Constitution of India
complaining of violation of the fundamental right guaranteed by Article 31 of
the Constitution was not maintainable after the repeal of Article 31 by the
Forty- Fourth Amendment of the Constitution with effect from June 20, 1979. The
petition however complains also of infringement of Article 19 and therefore
does not cease to be maintainable. Counsel for the 5th respondent sought to
raise a question regarding the justification of treating freight as part of the
sale price, but that is not a matter that arises for consideration on the
present writ petition filed by IOC.
In the result the alternative prayer made in
the writ petition succeeds, the assessment orders for the assessment years
1970-71, 1973-74 and 1974-75 passed by the Sales Tax Officer, U.P. and the
revision proceedings initiated by the Commissioner of Sales Tax, 681 U.P. for
the assessment years 1971-72 and 1972-73 are quashed and respondent No. 4, the
State of Uttar Pradesh, is directed to refund to IOC the sales tax collected
from them on the sales of naphtha to the 5th respondent under the agreement
dated February 9, 1970 and, further, not to levy sales tax on the sales under
the said agreement under the U.P. Sales Tax Act.
The writ petition is allowed as indicated
above; in the circumstances of the case we make no order as to costs.
N.K.A. Petition allowed.
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