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Report No. 30

6. Letter of the Government of West Bengal.-

The issue raised by the Government of West Bengal can be gathered from its letter1. "Article 286 of the Constitution of India states, inter alia, that no law of the State shall impose a tax on the sale or purchase of goods where such sale or purchase takes place in the course of import of the goods into India. This provision of the Constitution prohibits the State Government from levying any sales tax on direct import of goods from out of India by Indian purchasers.

However, in actual practice, in many cases such import of goods from out of India takes place through the intermediary of the Indian Branch of the manufacturers of foreign countries. What actually happens in such cases, is that the Indian purchaser places an order with the Indian Branch of the foreign manufacturer for supply of such goods.

There is generally a contract between the Indian Branch of the foreign manufacturer and Indian purchaser, laying down the specifications of goods required and the source of their manufacture, etc. The goods are, however, shipped from the foreign countries not to the Indian purchaser directly but to the foreign manufacturer's Branch in this country. That Branch clears the goods, stores them and then delivers such goods to the Indian purchaser.

Usually in terms of the contract, the goods can be rejected even after they have arrived in India if they are not according to the approved specifications. In such cases, therefore, there is no sale of the goods in course of their actual import into India. The actual sale takes place with the Indian Branch of the foreign manufacturer and the Indian purchaser after the import of the goods are completed.

"In this view of the matter the State Governments have been levying State Sales Tax on such sales of imported goods by Indian Branches of foreign manufacturers to Indian purchasers. This view of the matter has however, been set aside by the Supreme Court of India in the case of K.G. Khosla & Co. Private Ltd. v. Deputy Commissioner of Commercial Taxes, Madras Division (1966 STC-XVII-473) in which the learned Judges have been pleased to hold that the movement of goods from the foreign countries to India being incidental to the contract and goods being meant for use by the Indian purchaser, such sale should be held to have been made in the course of import into the territory of India.

"Following the above decision the Director General of Supplies and Disposals of the Government of India and the Indian Railway authorities have been refusing to pay sales tax on their purchase of such goods and have threatened to claim refund of sales tax so far paid on such earlier purchases. The State Government have received representations from the East India Metal Merchants Association on this point. It is apprehended that private traders will also refuse to pay sales tax on their such purchases following the above-mentioned decision of the Supreme Court."

1. Government of West Bengal, Finance Department, letter No. 2274-FT, dated 18th June, 1966 to the Government of India, Ministry of Finance, Department of Revenue.

7. To answer the reference, it will be expedient to examine the constitutional provisions relating to taxes on sales and the history of those provisions, the relevant Parliamentary enactments and the leading cases in which those provisions and enactments have been discussed and interpreted and their true import determined. But, before going into those matters, we shall discuss K.G. Khosla's case, and what was decided therein.

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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