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Report No. 30

82. Propositions summarised.- From a review of the cases which I have tried to discuss above, it seems to me that the following propositions of law are well established:-

(1) Words "export" and "import" are complementary. The two notions of export and import go in pairs. The same principles must apply in determining when a sale takes place in the course of export or when a purchase takes place in the course of import.

(2) A sale would be in the course of export only if it occasions export and a purchase would be in the course of import only if it occasions import.

(3) When the interpretation of the term "occasion" brought the principle of integrated activities into play, a purchase was not regarded as taking place in the course of export any more than a sale was regarded as taking place in the course of import. Thus, a purchase could not occasion export and a sale could not occasion import.

This statement of course does not cover the field of sales or purchases that take place in the course of import or export by transfer of shipping documents before or after the goods have crossed customs frontiers of India. Indeed, apart from such transactions as are effected by transfer of shipping documents, none of the cases which I have mentioned above has decided that a purchase occasioned the export and a sale occasioned the import.

(4) Further, the term "occasion" is used in sections 3 and 5 of the Central Sales Tax Act. Apart from the historical significance of the use of such word in these sections, it would be seen that in common usage the words "cause" and "occasion" are synonymous. "Such in fact", says Ballentine "is their ordinary use" (see Law Dictionary II, p. 898). There must, therefore, be casual connection between the transaction (of sale or purchase) and the movement of goods from one State to another or from one country to another.

(5) When can it be said that there would be such a casual connection? The answer to this question would be the same, whether you look at the section in the context of its historical back-ground, that is to say, in the light of the previous decisions of the Supreme Court, or construe the section as was done on first principles in the Tata Iron and Steel case. It is that the movement must be caused by, or be the result or, a covenant or incident of the contract of sale between the parties.

(6) Now, it is obvious, that as in the case of intra-State sales or inter-State sales, so in the case of sales where the goods are intended to be sold to buyers overseas, such contract of sale must be between the Indian exporter-seller and the foreign-buyer (see the I Travancore case). The foundation of an export sale is stated to be the contract between an Indian seller and a buyer abroad. The position is the same in regard to purchases by import where there must be a contract of purchase with a foreign vendor [See (1961) 1 SCR 305, Universal Import Agency v. Chief Controller of Imports].

(7) This principle is stated also in terms of "privity of contract". It has been held that it is impossible to conceive of an export sale without the essential element of a privity of contract between the two contracting parties. In the II Travancore case it was decided, that the absence of a privity of contract between the African sellers and the Indian buyers was regarded as fatal to the contentions of the latter that their purchases were in the course of import.

(8) It is now settled law that where there are two sales leading to export, the first under which the goods are procured for sale and the property in the goods passes within the territory of India, and the second by the buyer to a foreign party resulting in export-the first cannot be regarded as a sale in the course of export. On the same principle the first sale after the purchase by import has been held to be not in the course of import.

83. Khosla's case discussed with reference to propositions above stated.-With these principles of law in my mind, I would approach Khosla's case and see if they are made applicable to it. A few facts may be recalled here. The assessee (Khosla & Co.) in the first place, entered into a contract of sale with the Director-General of Supplies and Disposals whereunder the assessee undertook to get some axle box bodies manufactured in Belgium by particular manufacturers named in the contract, and to import them and thereafter deliver them according to the directions of D.G.S.D. as contained in the contract.

What kinds of axle box bodies were required by D.G.S.D. had also been specified and set out in the contract. I would keep these facts in the forefront of other facts as it is this contract and these facts in particular which have been construed as occasioning the import of goods from the Belgium manufacturers.

The contract had been entered into between the Assessee as the seller and the D.G.S.D. as the purchaser. It may be noted that the contract was to end in a completed sale only after the goods were imported into India and were delivered to the consignees as directed by the D.G.S.D. It is only after acceptance of such delivery that the Assessee was to receive the price of goods sold by him.

84. Immediately after this contract was entered into by him, the Assessee with a view to fulfilling the same had to enter, and in fact did enter, into a contract with the Belgium manufacturers and placed orders with them for the manufacture of the required goods and for importing them into India. The Belgium manufacturers in due course exported the goods to the Madras Harbour and sent over the shipping documents, bills of lading etc. to the Assessee, and also asked him to remit the price of the goods as agreed to between them.

85. When the goods reached the Madras Harbour, they were cleared by the Assessee as his own and it was after taking delivery of the same that he despatched some of them by rail and the others locally, to the consignees indicated by the D.G.S.D.

86. It is thus clear that the Assessee entered into a contract with foreign sellers-namely, the Belgium manufacturers-for the goods to be imported into India. In this contract, the Assessee is the purchaser and the Belgium manufacturers are the foreign sellers. It is this contract which in the language of the Supreme Court (II Travancore case) is a contract of import-purchase or of purchase by import. It is true that this contract, I may even say, was necessitated by the contractual obligation the Assessee had undertaken in the earlier contract of sale which he had entered into with the D.G.S.D.

It was in pursuance of that contract that the Assessee had to enter into the later contract with the foreign sellers. It is also true that the Assessee purchased and imported the goods from Belgium for the purpose of executing the specific contract of sale which he had made with the D.G.S.D. But where, as here, there are two contracts and where the goods were imported by the Assessee under the contract of purchase with the foreign sellers, both contracts could not have occasioned the import; it is only the contract of purchase that did it.

There was privity of contract between the Assessee and the foreign sellers. It is this contract in compliance whereof the Belgium manufacturers put the goods into the export stream which from the point of view of the Assessee, the purchaser, became the import stream.

87. Further, it cannot be disputed, that the Assessee cleared the goods at the harbour as his own goods purchased from the foreign sellers by employing the machinery of import. It was thereafter that the Assessee sold his goods to the D.G.S.D. Indeed, it is the sales effected by him in, favour of the D.G.S.D. that are now in question and are claimed to be protected under Article 286(1)(b).

Thus, it may be stated that while the contract of sale between the D.G.S.D. and the Assessee occasioned (if I may use this expression) the contract of purchase between the Assessee and the foreign sellers, it was the later contract of purchase that alone occasioned import of goods into the territory of India. The first contract no doubt eventually led to the import, but cannot be regarded as germane for occasioning the import within the meaning of section 5(2) of the Central Sales Tax Act and as explained by the previous decisions of the Supreme Court.

Any covenant or incident in such contract referring to the movement of goods would also be not relevant to occasioning the import. The contract that is relevant for the purpose is the contract between the Assessee and the Belgium exporter. You cannot conceive of the Assessee importing the goods without the Belgium manufacturer exporting them from his harbour. Thus, there must be community of intention between the exporter who must exercise his volition to export and the importer who must exercise his volition to import. This was expressed as intention on the part of both the buyer and the seller to export in the Ben Gorm Nilgiri case.

88. I think the High Court and the lower taxing authorities in this case referred only to the absence of integrality between the two events, namely, the first contract of sale and the import, when they stated that there was no privity of contract between the foreign seller and the D.G.S.D.

89. Further, the matter may be looked at from another point of view. What is claimed here is that the sale by the Assessee in favour of D.G.S.D. occasioned the import, and therefore is protected under Article 286(1)(b). This claim seems to me to be basically untenable, in view of the previous decisions of the Supreme Court. The second Travancore case precisely enumerated which transactions of sales or purchases could be regarded as taking place in the course of import or export.

While I am on this point, I leave out of account such transactions as are effected by transfer of shipping documents when the goods are on high seas. I am considering only such transactions which were held to be occasioning export or import, as the case may be. In other words, we are only concerned with the group of transactions covered by the first conclusion in the second Travancore case. They are sales by export and purchases by import.

These transactions were explained in the I Travancore case as sales and purchases themselves occasioning the export or the import of the goods, as the case may be out of or into, the territory of India. This view has been accepted and no addition has been made to this group of transactions, in the later cases. I may refer here only to two cases. In Endupuri v. State of Orissa, (1962) 1 SCR 314, the Supreme Court observed:-

"it has been held by this Court. that it is only a sale or purchase which occasions the export or import that is within the exemption."

90. Again, in East India Tobacco v. State of Andhra, (1963) 1 SCR 404, it was stated:-

"On these authorities the law must be taken to be well-settled that it is only the sale under which the export is made that is protected by Article 286(1)(b) and that a purchase which precedes such a sale does not fall within the purview though it is made for the purpose of, or with a view to export."

The same is the position with purchases by import. If so, the sales by the Assessee to D.G.S.D. cannot be regarded as occasioning the import so as to earn the exemption.

91. The case may be considered from still another angle. If the present case involves two contracts, it would come squarely within the decision which the Supreme Court gave in the second Travancore case while dealing with the second type of transactions which the purchasers claimed to come under Article 286(1)(b). The facts in that case so far as relevant are similar to the present case and bear repetition here.

The Travancore purchasers placed orders with a Bombay party (who may be compared with the Assessee in the present case) for purchase of cashew-nuts from Africa. The Bombay party indented the goods on their own account and placed orders for these goods with African sellers. The African sellers shipped the goods to Cochin on c.i.f. terms. The shipping documents were made out in the name of the Bombay party as consignees and delivered to them against payment through Bankers at Bombay.

The Bombay party cleared the goods through their representatives at the port of destination, and issued separate delivery orders to the purchasers for the respective quantities ordered. Thus, the Bombay party sold the goods as principals to the purchasers. (These facts, it need hardly be stated, are almost identical with the present facts). On these facts the Supreme Court observed:-

"The Bombay party are the purchasers and they sell the goods as principals to the Respondents (Travancore purchasers) at the port of destination by issuing separate delivery orders against payments. No privity being established between the Respondents (Travancore purchasers) and the African sellers, the Respondents' purchases can only be described as purchases from the Bombay party of the goods within the State."

92. Even according to the minority view expressed by Mr. Justice S. R. Das in his dissenting judgment in the second Travancore case, a sale of the nature which the present Assessee effected in favour of the D.G.S.D. would not be saved. While expressing his view that the first sale by the importers to the dealers, wholesale or retail, was in the course of import, Mr. Justice S. R. Das made an exception in the case of a sale by an importer directly to a consumer. At p. 350 (AIR), the learned Judge says:-

"lf, however, a particular importer himself happens to be a retail dealer of the goods and sells the goods to the actual consumers then such retail sales may, like local retail sales of similar goods, be liable to sales tax by the State."

In the present case, the goods were sold to D.G.S.D. obviously for consumption and the Assessee, the importer may well be regarded as having entered into a retail deal of sales.

93. Another point may be discussed. Does the special nature of the goods in the present case make any difference and will it render the sale as one in the course of import? In para. 11 of its judgment, the Supreme Court in Khosla's case observed:-

"There was no possibility of these goods being diverted by the Assessee for any other purpose."

There is no doubt that the goods in the present case are of special nature and were required only by Southern Railway. But it is respectfully submitted that nothing can turn on this circumstance. The previous cases have not considered this circumstance as a ground in support of the case of export or import.

Whether the goods were of a special nature or not, it was not possible for the Assessee to commit a breach of his contractual obligations unless he was prepared to render himself liable for such breach. And if he was prepared to render himself liable for such breach, at would be possible for him not only to commit a breach of his contractual obligations in respect of such special goods as the axle-box bodies in question, but also to divert the goods to some other railway requiring the same and probably offering a higher price.

Of course, it would not be prudent for the Assessee to commit such wanton breach and divert the goods for some other purpose. He would not be so foolish as to render himself legally liable for such breach and expose himself to the risk of having his Import licence or other Government permits forfeited. But in law, there does not seem to be any impediment which renders it impossible for the Assessee to divert even such goods for other purposes.

94. I may in this connection refer to some of the previous cases which involved specified goods only with a view to explaining that no point was made in them on the special nature and the undivertibility of the goods. In State of Mysore v. Mysore Spinning and Manufacturing Co., (AIR 1958 SC 1002), where the question of export arose, the procedure in which the business of export was conducted was described. The first step was for the Bombay exporters to obtain a firm offer from a buyer overseas specifying the quality and quantity of cloth or yarn required by the buyer.

Then the exporters inquired from the Mills whether they could sell or manufacture the goods of the quality and quantity required by the overseas buyer. If the Mills said "yes", the next step was for the exporter to enter into a firm contract with the foreign purchaser, and then it was for the exporter to enter into a contract with the Mills for the sale of those goods. The contract had to be marked "for export only", and the prices fixed had to be higher than the inland prices. The specifications and details of the goods had also to be entered. Then the exporter obtained a final licence from the Export Controller.

This licence set out the names of the seller (Mills) and the exporter. Among other things the goods had to be marked clearly "for export only". Then the Mills informed the exporter about the despatch of the goods, and finally the exporter took delivery and shipped them overseas. Yet, the sales by the Mills were held not to occasion the export. The goods had been manufactured to order, and the Mills with their contractual obligations could not have diverted them for any other purpose. Yet, their inability to so divert the goods was not considered as in any way causing their sales to take place in the course of export.

95. Divertibility.-In East India Tobacco Co. v. State of Andhra Pradesh (AIR 1962 SC 1733), the assessees first entered into contracts with their customers abroad for the sale of special kind of tobacco called Virginia tobacco, and thereafter they made purchases of the requisite quantities of such tobacco locally and exported them to the foreign purchasers in performance of their contracts. The purchases of the assessees in the local market were held not to occasion export.

96. In a Madras case (Dhan Lakshmi Mills Ltd. v. State of Madras, AIR 1961 Mad 87), where the facts were similar to those obtaining in the present case, the Mill intimated its requirements to the Bombay importers who thereafter imported the required goods and sold them to the Mill. The Bombay importers, after having imported the goods which were in accordance with the requirements of the Mill, could not have diverted them for any other purpose without a breach of their contractual obligations with the Mill. Yet, their sales to the Mill were held as not occasioning the import.

97. There is also another point which seems to arise in connection with the present discussion. That turns upon what we mean by the word "diversion". In para. (9) of the majority judgment of the Supreme Court in Ben Gorm Nilgiri case, AIR 1964 SC 1752 (1756). The word "diversion" has been used in the following sentence:-

"There is nothing in law or in the contract between the parties, or even in the nature of the transaction which prohibits diversion of the goods for internal consumption.".

This was stated obviously with the object of emphasising that the purchaser in the auction was not bound to export the goods for the simple reason that there was no term in the contract between him and the seller which obliged him only to export the goods.

98. But the main use of this word ("Divert" or "Diversion") is to be found in the judgment of the Supreme Court of U.S.A. where the question as to when the process of exportation starts, has been dealt with. If the Supreme Court of U.S.A. evolved the doctrine of original package for determining how long the imported goods would continue to be imports and as such enjoy the immunity from State taxation, it evolved another principle for determining when the process of exportation commences, and that is what may be stated as the principle of divertibility.

Under the Constitution of U.S.A. property intended for export from the United States is not immune to local taxation under the export clause until it enters the export stream and this point is not reached until the property is delivered to a carrier for export or has in fact started on its journey from the United States. I may refer to one or two decisions of the Supreme Court in this connection.

Section 5 of the Central Sales Tax Act, 1956 - Taxation by the States of Sales in the Course of Import Back

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