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Report No. 30

61. Second Travancore case.-

In the Second Travancore case1 the respondents were dealers in cashewnuts in the State of Travancore-Cochin. Their business consisted in importing cashewnuts from abroad and the neighbouring State of Madras in addition to purchases made in the local market, and, after processing them, exporting the kernels to other countries, mainly America.

The oil pressed from the shells was also exported. The respondents claimed exemption under Article 286(1)(b) in respect of the purchases made after the coming into operation of the Constitution. This claim was rejected by the taxing authorities, but the High Court, in a petition under Article 226, quashed the imposition of the tax. The State appealed to the Supreme Court. The Supreme Court held by a majority-(the minority gave a wider interpretation)-that-

(1) The sales and purchases which themselves occasion the export or import of the goods out of or into the territory of India, fall within Article 286(1)(b) and are exempt from State taxation.

(2) But purchases in the State by the exporter for the purpose of export, as well as sales by the importer after the goods have crossed the customs barrier, are not within the exemption.

(3) Sales in the State by the exporter or importer by transfer of shipping documents while the goods are beyond the customs barrier, are within the exemption.

(4) The word "course" and the expression "in the course of" not only imply a period of time during which the movement is in progress, but postulate also a "connected relation".

(5) Therefore, the sale in the course of export out of the country should be understood as meaning a sale taking place not only during the activities directed to the end of exportation of the goods out of the country, but also as part of or connected with such activities.

(6) Mr. Justice S.R. Das (as he then was) in minority judgment included the last purchase by the exporter and the first sale by the importer to be within the exception.

1. State of Travancore-Cochin v. Shanmugha Vilas Cashew Nut Factory, 1954 SCR 535: AIR 1953 SC 333.

62. The Chief Justice said1, that a sale " in the course of export" means a sale taking place not only during the activities directed to the end of exportation of the goods out of the country but also as part of or connected with such activities. The time factor alone was not determinative.

The phrase "integrated activities", used in the previous Travancore case 2, denoted such a sale, i.e., a sale which occasions the export which cannot be dissociated from the export without which it cannot be effectuated and wherein the sale and the resultant export form parts of a single transaction. It is in that sense that the two activities-the sale and the export-were said to be integrated. A purchase for the purpose of export like production or manufacture for export is only an act preparatory to export and cannot be regarded as an act done in the course of the export of the goods out of the territory of India.

1. 1954 SCR 54 (62).

2. 1952 SCR 1112.

63. Reference was next made to Export Trade by Schmittoff, 2nd Edn., p. 3, where the author said :

"From the legal point of view it is essential to distinguish the contract of sale which has as its object the exportation of goods from this country from other contracts of sale relating to the same goods, but not-being the direct and immediate cause for the shipment of the goods. When a merchant shipper in the United Kingdom buys for the purpose of export goods from a manufacturer in the same country the contract of sale is a home transaction: but when he resells these goods to a buyer abroad that contract of sale has to be classified as an export transaction."

64. Mr. Justice S.R. Das (as he then was) said1 that the constitutional purpose of the provision was to foster foreign trade and to preserve Union revenue. The Constitution had imposed a ban on State Legislatures preventing them from impinging upon the Union field of foreign trade and from imposing a tax on sales or purchases made in the course of import,-or, export. According to him, the phrase "in the course of" means sales which themselves occasion the export and import.

He explained the previous judgment of 1952 The first Travancore case2 by saying, that by adopting the principle of integrated activity the Court had included an agreement, for sale to or purchase from the foreign merchant as taking place within the period connoted by that phrase. The agreement for sale or purchase which occasions the export or import is obviously in point of time anterior to the actual and physical handing over of the goods to the carrier.

Nevertheless, such a sale or purchase has been held to have taken place "in the course of export" or import, and therefore exempted from sales-tax. The only point on which Mr. Justice S.R. Das differed with the majority was that he included the last purchase as an integrated activity of the export sale and the first sale after the import as an integrated activity of the import sale.

He pointed out the economic consequences of double taxation, i.e., of the imposition of sales tax on the export and import sales as eventually hampering foreign trade. The objective of the Constitution was to place inter-State trade and foreign trade beyond the taxing powers of the State. Under the Article as it then stood, in the case of inter-State trade power was given to Parliament to lift the ban, but in the case of foreign trade no such power was given.

1. 1954 SCR 53 (96).

2. 1954 SCR 53 (91).

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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