Report No. 30
8. Khosla's case.-
In K.G. Khosla's case 1, the Supreme Court examined the scope of Article 286(1)(b) of the Constitution and of section 5(2) of the Central Sales Tax Act, 1956, and determined the area of the constitutional ban on the imposition of sales tax on import-export sales and purchases. It was held to cover sales in which the movement of goods into and from the territories of India is the result of a covenant or incident of the contract of sale.
1. K.G. Khosla & Co. Pvt. Ltd. v. Deputy Commissioner of Commercial Taxes Madras, AIR 1966 SC 1216: 17 STC 473.
9. The facts of K.G. Khosla's case1 were these:
K.G. Khosla & Co., the assessee, entered into a contract with the Director General of Supplies & Disposals, New Delhi for the supply of "axle-box bodies". The contract provided for the manufacture of boxes in Belgium and the inspection of the manufactured articles at the works of the manufacturers by a representative of D.G.I.S.D., London who was to issue an inspection certificate. A second inspection by the Deputy Director of Inspectors, Ministry of W.H. & S.,Madras was provided in the contract.
He was to issue inspection notes on receipt of a copy of the inspection certificate from London after verification and visual inspection by him. The contract also provided that goods were to be manufactured according to specifications by M/s. La Brugeoises Et Nivelles, Belgium. Khosla & Co. were entitled to be paid 90 per cent. after inspection and delivery of the stores to the "consignee" and the balance of 10 per cent. was payable on final acceptance by the "consignee".
It appears that "consignee" denoted the buyer or his nominee. In the case of deliveries on f.o.r. basis, the assessee was entitled to 90 per cent. payment after inspection on proof of despatch and balance 10 per cent. after receipt of the goods by the "consignee" in good condition. The date of delivery, according to the contract, was "in 8 months ex-your principal's works from the date of receipt of order and the approved working drawings, i.e., delivery in India by 31st July, 1957, or earlier".
The assessee was responsible for the execution of the contract in accordance with terms and conditions as specified in the tender and the Schedule attached thereto The "purchaser", notwithstanding the approval by the inspector, could reject the stores on arrival if they were found to be not in accordance with the terms and conditions of the contract. Further, K.G. Khosla and Co., was responsible for the safe arrival of the goods at the destination.
The D.G.I.S.D., London was to issue pre-inspection delay reports regularly to the D.G.S. & D., New Delhi. He was also to send copies of the inspection certificates to the Director of Inspection, Ministry of W.H. & S., Bombay. Under the bills of lading, the goods were consigned to be cleared by K.G. Khosla & Co to Madras Harbour. They were cleared by K.G. Khosla's clearing agents and despatched for delivery to the buyers thereafter.
1. Para. 8, supra.
10. The Sales Tax Officer, Madras found that the transaction was an intra-State sale and not in the course of import, because the sale was completed only when goods were delivered in Madras State and, therefore, it did not occasion the import. He also relied on the terms of the contract which gave to the purchaser the right to reject the goods if they were not in accordance with the terms and conditions of the contract. On appeal, the Appellate Tribunal held that the property in the goods had not passed to the buyers while the goods were with the Belgian manufacturers and that the sale had not occasioned the imports.
11. The matter was taken to the Madras High Court in revision. The High Court rejected the contention that the goods must be deemed to have passed to the buyers when the goods were approved in the factory of the manufacturers. It also rejected the contention that the sale by the assessee to the Government occasioned import. In the High Court's view it was necessary that the sale should have preceded the import, and as the sale had not taken place in Belgium, there was no question of the sale occasioning import of the goods.
12. Against this judgment, K.G. Khosla appealed to the Supreme Court. The Supreme Court held that the transaction was not liable for payment of sales tax, as it fell within the prohibition of Article 286(1)(b) of the Constitution read with section 5(2) of the Central Sales Tax Act. In interpreting the words "occasions the movement of goods", the Supreme Court expressed the view that the words used in sections 3(a) and 5(2) of the Central Sales Tax Act should have the same meaning in the two sections, and therefore relied on the interpretation of section 3(a) by Mr. Justice Shah in Tata Iron Steel Co. Ltd., Bombay v. S.R. Sarkar, (1961) 1 SCR 379 (391): AIR 1961 SC 65 (71-72): 11 STC 655 where it was said.-
"In our view, therefore, within clause (b) of section 3 are included sales in which property in the goods passes during the movement of the goods from one State to another by transfer of documents of title thereto; clause (a) of section 3 covers sales, other than those included in clause (b), in which the movement of goods from one State to another is the result of a covenant or incident of the contract of sale, and property in the goods passed in either State".
The Court also relied on the observations of Mr. Justice Sarkar, as he then was, in State Trading Corporation of India Ltd. v. State of Mysore, (1963) 3 SCR 792: AIR 1963 SC 548 (549): 14 STC 188: (1964) 2 SCJ 131,where it was stated.-
"In Tata Iron and Steel Co. v. S.R. Sarkar, (1961) 1 SCR 379 (391), it was held that a sale occasions the movement of goods from one State to another within section 3(a) of the Central Sales Tax Act when the movement, is the result of a covenant or incident of the contract of sale".
13. After referring to various judgments which we shall deal with in the course of our report-it is not, therefore, necessary to deal with them at this stage,-the Supreme Court held, that the High Court was in error in holding that "before a sale could be said to have occasioned the import, it is necessary that the sale should "have preceded the import".
14. The Supreme Court also held, that the movement of the axle-box bodies from Belgium into India (Madras) was the result of the covenant in the contract of sale and was an incident of such contract. The Supreme Court, lastly, observed:1
"It seems to us that it is quite clear from the contract that it was incidental to the contract that the axle-box bodies would be manufactured in Belgium, inspected there and imported into India for the consignee. Movement of goods from Belgium to India was in pursuance of the conditions of the contract between the assessee and the Director-General of Supplies. There was no possibility of these goods being diverted by the assessee for any other purpose. Consequently we hold that the sales took place in the course of import of goods within section 5(2) of the Act, and are, therefore, exempt from taxation."
1. Khosla's case , AIR 1966 SC 1216 (1220): 17 STC 473.
15. The Supreme Court, thus held the transaction to be one of import sale not liable to payment of sales tax, because of the ban of Article 286(1)(b) which prohibits the imposition of taxes on sales or purchases where the importation of goods and their movement from one country into another is a consequence of the contract of sale or is an incident thereof.
16. The Supreme Court in K.G. Khosla's case, has determined the extent of the ban of Article 286(1)(b) as follows.-
(1) Article 286(1)(b) exempts transactions from sales tax where the sale occasions the movement of goods from or to a foreign country into or from the territories of India, the movement itself being the result of a covenant or an incident of the contract of sale.
(2) It is an erroneous view of the law to think that before a sale could occasion the import, the sale should have preceded it.
(3) The contract itself showed that it was an incident of the contract that axle-box bodies would be (a) manufactured in Belgium, (b) inspected there, and (c) imported for the consignee (the buyer).
(4) Movement of goods from Belgium to India was in pursuance of the conditions of the contract.
(5) There was no possibility of the goods being diverted by K.G. Khosla for any ether purpose or to any other contract.
(6) As in inter-State sales where property in the goods could pass in either State, the property could pass in either country.