Report No. 61

The first Travancore case (1952).- The case of State of Travancore-Cochin v. Bombay Company Limited, AIR 1952 SC 366 (referred to as the first Travancore case) was one of export sales and the respondents were assessed to sales tax on the turn over of the sales of their commodities (coir products, lemon grass oil and tea) in which they dealt. The dealings followed more or less the same pattern in all the cases and consisted of export sales of the respective commodities to foreign buyers on either c.i.f. or f.o.b. terms as the case might be. The respondents claimed exemption from assessment in respect of the sales effected by them on the ground inter alia that such sales took place in the course of the export of the goods out of the territory of India within the meaning of Article 286(1)(b) of the Constitution.

However, the sales tax authorities rejected this contention of the respondents as in their view the sales were completed before the goods were shipped and could not therefore be considered to have taken place in the course of the export. This view of the State Sales Tax Authorities might have been regarded as the only correct view had Article 286(1)(b) not been there in the Constitution. Indeed such a view might be fully supported had the cases arisen under the Government of India Act, 1935 where, as already pointed out, there was no provision corresponding to Article 286. But as we have tried to show that in making the provisions of Article 286, the makers of the Constitution proceeded on the assumption and implication that in the interests of foreign trade of

India, there might be some sales or purchases of goods which should be regarded as sales or purchases taking place in the course of the import of the goods into or export of the goods out of the territory of India, although in the narrowest sense such sales or purchases were not in the actual course of import or export. According to the narrowest view, only those sales or purchases which are effected by the transfer of documents of title to the goods on the high seas (beyond the customs frontiers of India) would come within the scope of Article 286(1)(b) and no more.

Be that as it may, the High Court of Travancore-Cochin did not accept this narrow view and accepted the contention of the respondents, and quashed assessment made by the State Sales Tax Authorities and held that the cases came within the exemption of Article 286 and were not liable to sales tax under the State sales tax law. As a matter of fact, the Travancore-Cochin High Court in its judgment clearly expressed the view that:-

"The words 'in the course of make' the scope of this clause very wide. It is not restricted to the point of time at which the goods are imported into or exported from India. The series of transactions which necessarily precede export or import of goods will come within the purview of this clause. Therefore, while in the course of that series of transactions the sale has taken place, such sale is exempted from the levy of sales tax. The sale may have taken place within the boundaries of the State. Even then, sales tax cannot be levied if the sale had taken place while the goods were in the course of import into India or in the course of export out of India".

This wide view put forward by the High Court on the meaning and scope of Article 286(1)(b) drew forth from learned counsel appearing before the Supreme Court on behalf of the Union, the several State Governments, and the respondents as many as three other different views on the scope, meaning and interpretation of Article 286(1)(b) thereby clearly showing that article contained in its apparently simple language seeds of conflict, discord and dissent as each of the four views (including the view of the Travancore-Cochin High Court) might be regarded as legitimate and proper according to the upholders of the respective views. These four views were, in the words of the Supreme Court as follows:-

(1) According to the first view put before the Supreme Court on behalf of the State of Madras (now Tamil Nadu)-The exemption granted by Article 286(1)(b) is limited to sales by export and purchases by import, that is to say, those sales and purchases which occasion the expert or import, as the case may be, and extends to no other transactions however directly or immediately connected, in intention or purpose, with such sales or purchases, and wheresoever the property in the goods may pass to the buyer. The Advocate-General, Madras thought that a State could not impose sales tax though title passed within the State limits while the goods are still under transport on the high seas and no question of exemption could therefore arise.

(2) According to the second view.-In addition to the sales and purchases of kind described above (in the first view), the exemption covers the last purchase by the exporter and the first sale by the importer, if any so directly and proximately connected with the export sale or import purchase so as to form part of the same transaction. This view was sponsored by the Attorney-general of India.

(3) According to the third view.-The exemption covers "only" those sales and purchases under which the property in the goods concerned is transferred from the seller to the buyer during the course of transit, that is, after the goods begin to move and before they reach their foreign destination. This was the view supported by the State of Bombay (as it then was) and certain other States.

(4) The fourth view which was the view of the Travancore-Cochin High Court in the case, has been expressed by the High Court in the passage already extracted from its judgment.

Of these four views, according to the Supreme Court, the first view was the narrowest and the fourth view, the widest. After referring to these four views and briefly discussing them, the Supreme Court stated in paragraph 10 of the judgment as reported in the AIR-

"We are clearly of opinion that the sales here in question, which occasioned the export in each case, fall within the scope of the exemption under Article 286(1)(b). Such sales must of necessity be put through by transporting the goods by rail or ship out of the territory of India that is to say, by employing the machinery of export. A sale by export thus involves a series of integrated activities commencing from the agreement of sale with a foreign buyer and ending with the delivery of the goods to a common carrier for transport out of the country by land or sea. Such a sale cannot be dissociated from the export without which it cannot be effectuated, and the sale and the resultant export form parts of a single transaction.

Of these two integrated activities which together constitute an export, whichever first occurs can well be regarded as taking place in the course of the other. Assuming without deciding that the property in the goods in the present cases passed to the foreign buyers and the sales were thus completed within the State before the goods commenced their journey as found by the Sales Tax Authorities, the sales must, nevertheless, be regarded as having taken place in the course of the export and are therefore exempt under Article 286(1)(b). That clause, indeed, assumes that the sale has taken place within the limits of the State and exempts it if it takes place in the course of the export of the goods concerned."

(N.B.- The lines have been underlined by me.)

And in para. 14 of the judgment, the Court held-

"We accordingly hold that whatever else may or may not fall within Article 286(1)(b), sales and purchases which themselves occasion the export or the import of the goods, as the case may be, out of or into the territory of India come within the exemption and that is enough to dispose of these appeals,"

It may be pointed out that though in the body of the judgment the expressions "export sale", "import purchase", "sale by export" and "purchase by import" have been used, in its final conclusion in para. 14 of the judgment, quoted above, expression "sales and purchases which themselves occasion the export or import" has been used. In the second Travancore case however, as we shall have occasion to note, this order was reversed, and the expressions "sales by export" and "purchases by import" have been used in the final conclusions of the Court and not the expression "sales and purchases which themselves occasion the export or import."

The Supreme Court expressed no opinion on the point raised in the course of the argument as to whether 'sale' imports a wider concept than the passing of title in the goods from the seller to the buyer which under the law relating to the sale of goods is determined by highly technical rules based upon the presumed intention of the parties and liable to be displaced by their expressed intention.

The Court did not accept the suggestion made from the Bar that on the construction of Article 286(1)(b) indicated by the Court, a "sale in the course of export" would become practically synonymous with "export" and reduce clause (b) to a mere redundancy. The Supreme Court pointed out that in the absence of Article 286(1)(b) which expressly prohibits imposition of taxes on the sale or purchase of goods in the course of import or export, the States might impose tax on such sales and purchases in exercise of their exclusive power under entry 54 of the State List and the Union also might impose customs duties in exercise of its exclusive power under entry 83 of the Union List and thus the same sale by export and the same purchase by import would be subject to both sales tax and customs duties, because these two imposts are essentially of a different character.

As already mentioned, the Supreme Court in support of this view cited the Federal Court case of Province of Madras v. Boddu Paidanna, 1942 FCR 90 where the Federal Court held that both central excise duty and provincial sales tax could be validly imposed on the first sale of groundnut oil and cake by the manufacturer or producer as "the two taxes are economically two separate and distinct imposts."

In the result the Supreme Court by agreeing with the conclusion of the Travancore-Cochin High Court though on different grounds dismissed the appeals filed by the State of Travancore-Cochin. The following specific points which emerge from this decision deserve mention seriatim:-

(1) That the language of Article 286(1)(b) which may prima facie appear to be simple is not so in reality and is capable of different interpretations, is clear from as many as four different views mentioned in the judgment.

(2) A sale in order that it may come within the scope of the exemption under Article 286(1)(b) must be a sale which itself occasions the export (or as the case may be, which itself occasions the import.)

(3) A sale which itself occasions an export is a sale by export which involves a series of integrated activities commencing from the agreement of sale with a foreign buyer and ending with the delivery of the goods to common carrier for transport out of the country by land or sea.

(4) Such a sale i.e., a sale which itself occasions the export therefore cannot be dissociated from the export without which it cannot be effectuated and the sale and the resultant export from parts of a single transaction.

(5) Even where the property in the goods passes to a foreign buyer and the sale is thus completed within the State before the goods commence their journey, the sale must, nevertheless, be regarded as having taken place in the course of export and is therefore exempt under Article 286(1)(b).

(6) As a matter of fact, Article 286(1)(b) assumes that the sale which itself occasions an export has taken place within the limits of the State and exempts it if it takes place in the course of the export of the goods concerned.

(7) In order that a sale or purchase can take place in the course of export or import it is not essential that the property in the goods must be transferred to the buyer during their actual movement, as for instance, where (in the case of export) and shipping document are endorsed, and delivered within the State by the seller to a local agent of the foreign buyer after the goods have been actually shipped or where (in the case of import) such documents are cleared on payment or acceptance by the Indian buyer before the arrival of the goods within the State. This view, which lays undue stress on the etymology of the word "course" and formulates a mechanical test for the application of clause (b) of Article 286(1) places too narrow a construction upon that clause in so far as it seeks to limit its operation only to sales and purchases effected during the transit of the goods and would, if accepted, rob the exemption of much of its usefulness. (Para. 13 of the judgment)

(My comments.- As a matter of fact, second part of sub-section (1) and second part of sub-section (2) of section 5 give effect to this view, but are not limited to it only. The first part of each of these two sub-sections goes further and gives effect to the view of the Supreme Court expressed in its final conclusion in para. 14 of the judgment.)

I have dealt with and analysed this case in some detail in order to see whether the pith and substance of the meaning of sale or purchase of goods taking place in course of import of the goods into or export of the goods out of, the territory of India, that is to say, whether the true and correct meaning and scope of Article 286(1)(b) have been brought out in the judgment. The judgment, it is submitted with respect, is marked by lucidity and terseness of expression and shows clarity of views on a difficult subject but in spite of these qualities, the judgment has not been able to set at rest all doubts and disputes as to the meaning of Article 286(1)(b); on the contrary, it has given rise to sharp divergence of opinions, as will appear from the second Travancore case to which we now proceed.