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Report No. 30

Test of contractual obligation adopted.-One comes across several decisions of High Courts, where the test of contractual obligation to move the goods was applied. Thus, in Punjab case,1 where on the facts the sale was held to be in "course of export", it was recognised that even if the contract of sale is entered into between a foreign buyer on the one hand and the assessee through its agent on the other hand in India, such a sale would be in the course of export if it occasions or results in, the export of goods outside India.

1. Janki Das v. Excise and Taxation Officer, 67 Punj LR 69, (noted in the Yearly Digest, April, 1965), cols. 764 and 765: 16 STC 542 (551-552), (Harbans Singh and Jindra Lal JJ.)

In Janki Das's case,1 the facts were these. The assessee was carrying on the business of purchasing cotton in the State of Punjab. He sent cotton by rail to Bombay, and the railway receipt taken in favour of "self", was sent to his bankers at Bombay. The assessee's commission agents obtained the railway receipt after depositing with the bank 75 per cent. of the price by way of security. After taking delivery of the cotton, the commission agents kept it in their godown, and when they got an offer of purchase from a foreign buyer, they obtained the assessee's consent for its sale, and then sold it to the foreign buyer on behalf of the assessee.

The commission agents remitted the sale proceeds to the assessee, after adjusting the security already given and deducting their commission on the sale. The assessee was charged godown and other incidental charges plus the interest on the amount given as security.

On these facts, it was held, that the sale of cotton to the foreign buyer by the commission agents on behalf of the assessee was a sale "in the course of export", and therefore the assessee was entitled to deduct the purchase price of cotton from the gross turnover under section 5(2)(a)(vi) of the Punjab General Sales Tax Act,2 which authorised deduction from turnover in respect of "purchase of goods which are sold in the course of export out of the territory of India".

Applying the test of "occasioning the export", the High Court of Punjab held, that even though the contract of sale was entered into between the foreign buyer on the one hand and the assessee through its agent at Bombay etc. on the other hand, such a sale would certainly be in the course of export, if it occasions, or results in, the export of goods outside the territory of India.

1. Janki Das v. Excise and Taxation Officer, 67 Punj LR 69.

2. Punjab General Sales Tax Act, 1948 (Punjab Act 46 of 1948).

We may refer to the facts in another Punjab case.1 The assessee in that case was engaged in the export of iron ore to Japan, but, by reason of control on the commodities, the export had to be made through the State Trading Corporation. The State Trading Corporation appointed S as its broker. In the agreement of sale between the assessee and S. the assessee was specified as the seller, and S was specified as the buyer.

Regarding payment, it was provided that a certain sum (Rs. 25.000) should be arranged as an advance to be paid to the seller after signing the contract, and the balance was paid to the seller "against actual weight of iron ore loaded by the sellers when iron ore is either weighed at Kandla Port or by draft weight of the ship at the time of shipment to the foreign countries as per bargain by the buyer or by the State Trading Corporation of India".

The account was to be finally settled when the shipment was made and satisfactory report received from the foreign buyers, or the State Trading Corporation approved the material for foreign countries where iron is extracted out of it. In a letter sent by S to the assessee, it was made clear, that the Government of India was dealing with foreign countries on Government level in the export of iron ore;
that the State Trading Corporation was the business organisation on Government level, and S were the brokers who passed on the terms directed by the State Trading Corporation; that iron ore shall be shipped to Japan and the assessee was solely responsible "for the quantity and quality till the material is delivered to Japanese firm"; that "they test the material for extraction of iron, before they pass the pay orders", and that while S got the agreed brokers, in fact the assessees were the sellers and the Japanese firms were the buyers through the State Trading Corporation.

1. New Rajasthan Minerals Syndicate v. State of Punjab, (1965) 16 STC 534 (536, 540): 67 Punj LR 165 (STC issue dated 1st and 15th July, 1965) (D.K. Mahajan J.)

The question that fell to be considered, was whether the sale by the assessee was "in the course of export" under Article 286 of the Constitution read with section 5 of the Central Sales Tax Act. The High Court of Punjab, after considering the various decisions, pointed out, that the assessees were engaged in export, that by reason of control, the export had to be through the State Trading Corporation, that at no point of time, the property passed to State Trading Corporation or S;
and that after the goods were rejected either at the port or by the foreign buyers, the loss must fall on the assessee. The sale was not by the petitioner to S. It was a sale "in the course of export", and was therefore not taxable. (The court seems to have held that the sale was by the assessee to Japanese buyers, though there is no express statement to that effect in the judgment).

The following observations in another Punjab case 1 may be cited:

1. Mohan Lal Moti Lal v. Assessing Authority, AIR 1965 Punj 391 (392-394), para. 6: 16 STC 553 (559) (Punj).

The sale in the course of export predicates an inextricable connection or bond between the sale the export, leaving no option to the purchaser of not exporting without committing a breach of the contract in question. In order to attract the exemption, there must also in addition be the resultant export. The sale, in other words must itself occasion export, or what is the same thing, the export must be made under the sale.

To occasion export, there must accordingly exist between the contract of sale and actual exportation a bond so that each link is inseparably connected with the one immediately preceding it. The two activities of the sale and the export must be so integrated as to leave no possibility of a voluntary interruption without entailing a breach of the contract or an obligation arising from the nature of the transaction.

It would thus postulate common intention on the part of the contracting parties to export the goods which must be actually followed by export and this, in my view, appears to be essential in order to constitute a sale in the course of the export of the goods. There must necessarily come into existence an obligation to export and there must also be an actual export pursuant to such obligation. Merely because a sale has been followed by the export of the goods sold does not by itself clothe the sale with the quality of its being in the course of their export.

'As I understand the argument of the learned counsel for the petitioner, he wants us to grant exemption to his client merely because goods purchased have been later exported from Bombay. This, as has been repeatedly explained by the Supreme Court, is not enough; not is mere intention to export without an actual exportation, sufficient to constitute a sale in the course of export, because a sale by export involves a series of integrated activities commencing from the agreement of sale with a foreign buyer and ending with the delivery of the goods for the purpose of export.

Such a sale cannot be dissociated from the export without which it cannot be effectuated because the sale and resultant export form but parts of a single transaction. This, as I construe the various Supreme Court decisions, is the true meaning of the expression "sale in the course of export". The decisions of this Court to which reference has been made do not, in my opinion, take a different view of law'.

On the facts, however, the Court expressed no considered opinion, leaving it to the assessment authority.

In a Kerala case1, the principle was accepted (in relation to inter-State trade), that even where the transaction is complete in the State, yet, if it has caused the goods to move, it would be an inter-State sale. In that case, no final assessment had been made, and, therefore the court merely directed the Sales Tax Authorities to make a fresh assessment in the light of its decision.

The court followed the decision of the Supreme Court in Tata Iron & Steel Co., where Shah J. had, delivering the majority judgment, held, that section 3(a) of the Central Sales Tax Act covered sales in which the movement of goods from one State to another was the contract of sale and property in the goods passed in either State.

1. Mulji Ratanshi & Co. v. State of Kerala, (1961) 12 STC 657 (661)-Kerala, case under section 3(a), Central Sales Tax Act, 1956.

Similarly, in a Patna case1, it was held that the fact that the delivery of the goods took place in India was not conclusive, and since the goods were actually exported to Nepal in pursuance of the contract of sale between the parties, the sale was held to be a sale in the course of export and, therefore, not taxable.

1. Duli Chand v. State of Bihar, AIR 1963 Pat 359 (361), para. 3 (Ramaswami C.J. and Untwalia J.)

That a sale cannot be said to be inter-State sale unless there is a movement of goods from one State to another under the contract of sale was a proposition which was elaborated in a Gujarat Case1. The High Court observed, "The contract of sale must itself provide as an integral part of it that the goods shall be transported from one State to another. If the contract of sale provides for movement of goods from one State to another as a necessary incident of its performance, the sale would be a sale in the course of inter-State trade or commerce.

In such a case, it would not be relevant to inquire where the property passes. The property may pass within the State which seeks to tax the sale, but this sale would nevertheless be an inter-State sale, and, therefore, beyond the taxing power of the State." Applying this test to the facts of the case, the High Court held, that it was not an essential term of the contract of sale that the goods shall necessarily cross the border of the State of Bombay and go to another State.

The goods might, under the contract of sale, be taken delivery of by the buyers at their godowns within the State of Bombay, and if the buyers so instructed the assessee the goods might be despatched to other destination which again might be within the State or outside the State. The buyers had thus an option under the contract of sale either to take actual delivery of the goods at their godowns within the State of Bombay or to direct the assessee to despatch the goods to destinations within or outside Bombay.

The contracts of sale were entered into by the buyers with the assessee irrespective of the fact whether the buyers had received any previous indents from upcountry merchants. It was, therefore, impossible to hold on the facts and circumstances of the case that it was an integral part of the contracts of sale that the goods shall necessarily be transported from the State of Bombay to another State or that the movement of the goods from the State of Bombay to another State was a necessary incident of performance of the contracts of sale.

1. Bharatkhand Textile Manufacturing Co. Ltd. v. State of Gujarat, (1964) (Shelat C.J. and P.M. Bhagwati J.)

The principle that a movement of goods across the State border, if involved under the transaction, may convert it into and inter-State sale, was recognised in a Mysore case1, where the various decisions of the Supreme Court were also noted.

1. P.M.M. and Minerals v. State of Mysore, AIR 1965 Mys 240 (243-244),para. 6 and 8.

In a Bombay case1, the contractual test was applied. We quote a passage from the judgment, which shows both the facts of the case and the conclusion. After referring to the Burmah Shell case, the High Court stated.-

1. A. Ebrahhim & Co. v. State of Bombay, (1962) 13 STC 877 (891-892) (Tambe and V.S. Desai JJ.)

"In the light of these aforesaid principles laid down by their Lordships the facts of this case will have to be approached. It cannot be said, and indeed it has not been urged, that the sale has taken place while the ship was on high seas. On the other hand, the contention is that the sale has occasioned export. Therefore, it will have to be seen whether, on the material on record, the sale effected by the applicant is inextricably connected with taking the ship from the shores of Bombay to Costa Rica as an integral part thereof .

We have already reproduced the terms of the contract. There was an agreement between the applicant agreeing to sell the ship and the Costa Rica Company purchasing it at a price of Rs. 4,52,547. The contract was to take effect on the Government of India granting permission to the sale of the ship and to the transfer of the flag from Indian flag to Costa Rican flag. Some time before 15th April, 1954, Government of India had granted permission to both these things.

The transaction of sale was completed while the ship was in Bombay docks, and the delivery of the ship was taken up behalf of the purchasers by Messrs Madhavial & Co., in the Bombay harbour. The ship thereafter on 15th April, 1954 sailed on the high seas. These being the facts of this case, in our opinion, it is not possible to say that the sale itself was so inextricably connected with the export as an integral part thereof, that the sale itself has occasioned export.

On the other hand, the only inference that can be drawn from these facts is that the sale preceded the export and thereafter the applicant ceased to have any connection with the ship. The purchaser under the terms of the contract had option either to take the ship abroad or to break it up. In taking the ship abroad, the purchaser has only exercised his option, and the sale itself had no connection therewith. It is, however, the contention of Mr. Ganatra that the contract of sale provided that granting of permission by the Government of India to transfer the ship's flag was a condition precedent to the validity of the contract.

The Government of India has granted the permission, and, therefore, the necessary consequence is that foreign destination was given to the ship, and the ship was put in the stream of its export. Had Mr. Ganatra been able to show us that as a necessary consequence of the grant of permission by the Government of India to the transfer of the flag of the ship, it was obligatory on the purchaser to take the ship to Costa Rica, we might have been persuaded to hold that the sale was inextricably connected with the export of the ship and that the sale itself had occasioned export.

To enable Mr. Ganatra to look into this matter, we adjourned the case and granted Mr. Ganatra two days' time. Mr. Ganatra has been unable to show us any provisions of law or any rules which would have the force of making it obligatory on the purchaser to take the ship from the Bombay docks to Costa Rica Port.

The position then is that even though the Government of India granted permission for the transfer of the ship's flag, the purchaser was free to deal in any manner with the ship as envisaged in the contract. He could have either taken the ship at his sweet will as provided in the contract and could even have broken the ship in the Bombay docks. Taking the ship to Costa Rica by the purchaser, therefore, cannot in any manner be connected much less inextricably be connected with the sale".

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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