Report No. 30
121. Whether decision in Khosla's case goes beyond previous cases.-
The next question is, does the decision in K.G.Khosla's case 1 go beyond the two decisions on which the Second Report was based As has been pointed out by Mr. Justice Shah in the Ben Gorm case,2 the Legislature has, in section 5 of the Central Sales Tax Act, given legislative recognition to the interpretation of the Supreme Court. The Second Report of the Law Commission had adopted the language used in the cases decided by the Supreme Court, which was, in verbatim, adopted by the legislature in the Central Sales Tax Act.
1. K.G. Khosla and Co. Pvt. Ltd. v. Deputy Commissioner of Taxes Madras, AIR 1966 SC 1216: 17 STC 473.
2. Ben Gorm Nilgiri Plantations v. S.T.O., (1964) 7 SCR 706 (710): AIR (1964) 2 SC 1752 (1755-1756): 15 STC 753.
122. The question can be viewed in another way: was the import in K.G.Khosla's case inextricably linked up with the sale, so that the bond between the sale and the import could not be dissociated without a breach of the obligation arising under the contract or the mutual understanding between the parties arising from the nature of the transaction?
The contract, or the dealing between the parties, or "the understanding between them, formed one integral whole, and were inextricably linked together.
If it could be said that there was an integral bond or relation between the sale and the import even steymologically the sale was "in the course of import".
123. What are the essential convenants of the contract in K.G. Khosla's case ?
(i) manufacture in Belgium by a named manufacturer;
(ii) inspection in Belgium by D.G.I.S.D., London;
(iii) inspection again by Deputy Director of Inspections on the arrival of the goods in India and after clearance by K.G. Khosla;
(iv) delivery of the goods to the consignee (the Railway), and inspection by the consignee to see whether the goods are in accordance with the conditions of the contract;
(v) payment of price at various stages to K.G. Khosla; and
(vi) right of the consignee (the Railway) to reject the goods if not in conformity with the terms and conditions of the contract, irrespective of the Inspector's certificate that they were according to specifications
Now, all these are integral links of the covenant in the contract in pursuance of which the goods moved from Belgium to India, and there was no likelihood of the goods being diverted by K.G. Khosla for any other purpose.
1. Paras. 8 to 16, Supra
124. The import was occasioned by, or was in pursuance of, the convenants in the contract, the various conditions and terms in which were the supply of properly fabricated goods 'in good condition to the Railway, for whose use these goods were to be supplied and for whose benefit the stringency of conditions was introduced in the contract.
This, indeed, was one of the cases in which there was a direct connection between the sale and the import of goods, "which would make them parts of an integrated transaction of sale in the course of."1 The assessee "was connected with the actual importation" of the goods, and the sale was not intended to be complete without the import and therefore the sale was "in the course of import". We have adopted the language of Mr. Justice Shah in the Ben Gorm Nilgiri case.2
1. Paras. 8 to 16, supra.
2. Ben Gorm Nilgiri Plantations v. Sales tax Officer, (1964) 7 SCR 706 (712-713): AIR 1964 (2) SC 1752 (1755-1756): 15 STC 753..
125. Situs of sale.-Some emphasis is placed in the letter of West Bengal Government on the situs of the sale. It states, that in such cases the "actual sale" takes place between the Indian branch and the Indian purchaser after the import is complete1.
We may, in this connection, refer to the observations of Mr. Justice Rutledge in an American case, which, though relating to inter-State sales, are apposite2:-
If the only thing necessary to sustain a State tax bearing upon inter-State commerce were to discover some local incident which might be regarded as separate and distinct from "the transportation or intercourse which is" the commerce itself and then to lay the tax on the incident, all inter-State commerce could be subjected to State taxation and without regard to the substantial economic effects of the tax upon the commerce.
For the situation" is difficult to think of in which some incident of an inter-State transaction taking place within a State could not be segregated by an act of mental gymnastics and made the fulcrum of the tax. All inter-State commerce takes place within the confines of the States and necessarily involves "incidents" occurring within each State through which it passes or with which it is connected in fact. And there is no known limit to the human mind's capacity to carve out from what is an entire or integral economic process particular phases or incidents, label them as "separate and distinct" or "local", and thus achieve its desired result.'.
'It has not yet been decided that every State tax bearing upon or affecting commerce becomes valid, if only some conceivably or conveniently separable "local incident" may be found and made the focus of the tax. This is not to say that the presence of so-called local incidents is irrelevant. On the contrary the absence of any connection in fact between the commerce and the State would be sufficient in itself for striking down the tax on the process grounds alone; and even substantial connections, in an economic sense, have been held inadequate to support the local tax.
But beyond the presence of a sufficient connection in a due process or "jurisdictional" sense, whether or not a "local incident" related to or affecting commerce may be made the subject of State taxation depends upon other considerations of constitutional policy having reference to the substantial effects, actual or potential, of the particular tax in suppressing or burdening unduly the commerce.'
1. Para. 6, supra.
2. Nippert v. Richmond, (1946) 327 US 416 (423, 424): 90 L Ed 760 (764-765) (licence tax on persons for soliciting orders for garments manufactured by a company outside the State).
126. In this connection, the observations made by Das, Ag. C. J. in the Bengal Immunity case 1, (though made in relation to inter-State sales) may be referred to. He observed:-
"The truth is that what is an inter-State sale or purchase continues to be so irrespective of the State where the sale is to be located either under the general law when it is finally determined what the general law is or by the fiction created by the Explanation. The situs of a sale or purchase is wholly irrelevant as regards its inter-State character.
Now, even when the situs of a sale or purchase is in fact inside a State, with no essential ingredient taking place outside, nevertheless, if it takes place in the course of inter-State trade or commerce, it will be hit by clause (2). If the sales or purchase are in the course of inter-State trade or commerce the stream of inter-State trade or commerce will catch up in its vortex all such sales or purchases which take place in its course whatever the situs of the sales or purchases may be.".
This aspect of the matter was also dealt with in the first Travancore case, where it was pointed out, that Article 286(1)(b)
"indeed assumes that the sale had taken place within the limits of the State and exempts it if it took place in the course of the export of the goods".
1. Bengal Immunity Co. Ltd. v. State of Bihar, (1955) 2 SCR 603: AIR 1955 SC 661 : 6 STC 446 (481) (Das Actg. (CJ) .
127. Further, it should be pointed out, that what may be called the "non-local" incidents in Khosla's case 1 were so overwhelming that they more than counterbalanced the "local incidents". Chief amongst these were the stipulation that the manufacture shall take place outside India by a specified firm, and as per prescribed specifications, and that the goods shall be inspected there and imported for the consignee. 'Import' rings through every word of the contract.
The contract of sale could not have been carried without import. Conversely, but for the contract, the import would not have taken place. Integrality of the import and the sale is writ large on the face of the contract. Such being the facts, a narrower view would stultify the spirit of the immunity granted by the constitutional provisions (not to speak of the letter of those provisions as interpreted by the Courts). It should be remembered, that what is immune is not an import, but a sale in the course of import.
1. Paras. 8 to 16, supra.
128. Transactions referred to in the letter of the Government of West Bengal.-We now address ourselves to the question whether the transactions dealt with the letter of the Government of West Bengal,1 should be regarded as taxable. The letter states, that generally there is a contract between the Indian Branch of the foreign manufacturer and the Indian purchaser, laying down the specifications of the goods required and the source of their manufacture, and that the goods are shipped to the foreign manufacturer's branch, which clears them, stores them,2 and then delivers them to the Indian purchaser.
It also states, that usually there is a provision in the contract for rejection of the goods (if found not to be in accordance with the contract). Now, these facts are not identical with those in Khosla's case . As was pointed out in the Ben Gorm case 3 no single test can be laid down for all cases, and each case must depend on its own facts. Therefore, even if there is a movement of goods in pursuance of a contract, the sale would not necessarily fail within the decision in Khosla's case , if the "storage" is of such a nature as to detract from the integrality of the import and the sale.
Therefore, the assumption that such transactions would necessarily be exempt or fall within the rule laid down in Khosla's case , may not be correct. This being the position, we do not embark on a consideration of the question whether any amendment is required as to such transactions.
1. Para. 6, supra.
2. Storage is specifically mentioned in the letter of the West Bengal Government, para. 6, supra.
3. Paras. 92 to 100, supra.
129. We would also like to point out, that it does not follow from Khosla's case that other transactions involving no such obligation as was involved in its facts would necessarily be regarded as immune from taxation. Cases where orders are placed with the agent or branch of a foreign producer or manufacturer, for goods of foreign origin, may or may not contain such an obligation.
At the time of the contract of sale, the goods may be already in India with some other dealer, or they may be a type of goods which the agent has already in stock, being goods in which the agent deals usually. In the absence of a contractual obligation requiring the movement of the goods and followed by such movement, the sale by the foreign manufacturer's agent to the purchaser in India would be taxable, as it would not be a sale "in the course of import", not having occasioned the import,-unless there are any circumstances of a special character linking the import with the sale.