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Report No. 61

3.41. Khosla's case-facts of.-

We shall now concentrate on K.G. Khosla & Co. Pvt. Ltd. v. Deputy Commissioner of Commercial Taxes, Madras, AIR 1966 SC 1216: 17 STC 473: (1966) 3 SCR 352. The facts of that case 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 work 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 Inspection, 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. of the price after inspection and deliver' 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 of 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 & 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.

3.42. 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 buyer while the goods were with the Belgium manufacturers and that the sale had not occasioned the import.

3.43. 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 assesses 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.

3.44. Against this judgment, K.G. Khosla & Co. appealed to the Supreme Court. The Supreme Court held that the transaction was not subject to payment of sales tax, as it fell within the prohibition of Article 286(1)(b) read with section 5 of the Central Sales Tax Act. In interpreting the words "occasions the movement of goods" in section 5(2), the Supreme Court expressed the view that the words used in section 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 the Tata Iron and Steel Co. Ltd. v. S.R. Sarkar, paras. 3.34 to 3.37, supra. After referring to various judgments, 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"1

1. Para. 3.43, supra.

3.45. 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:

"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."

Certain Problems connected with Powers of the States to Levy a Tax on the Sale of Goods and with the Central Sales Tax Act, 1956 Back

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