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Report No. 61

The second Travancore case (1953).- The controversy was raised again in the second Travancore case (State of Travancore-Cochin v. Sanmugha Vilas Cashewnut Factory, Quilon, AIR 1953 SC 333). The same five judges who heard and decided the first Travancore case heard and decided this case also. As a matter of fact, appeals in this case formed part of the first Travancore case also, but after they had been heard in part along with the other appeals from the same order, it was found that the material facts relating to the course of business of the respondents in the second Travancore case had not been clearly ascertained and accordingly those appeals were remitted to the High Court for further enquiry and findings in regard to those matters. The other appeal however in which the materials on record were found sufficient were finally decided in the first Travancore case.

In the second Travancore case the respondents were dealers in cashewnuts in the State of Travancore-Cochin and their business consisted in importing raw cashewnuts from (i) abroad, and (ii) in purchasing them from the neighbouring districts in the State of Madras as also, (iii) in purchases made in the local market and after converting them by means of certain processes into edible kernels, exporting the kernels to other countries, mainly America. The oil pressed from the shells removed from the cashewnuts were also exported.

The Constitution having come into force on the 26th January, 1950, the respondents in each appeal claimed exemption under Article 286(1)(b) in respect of the purchases made from that date till the 29th May, 1950, the end of the account year. The sales tax authorities having rejected the claim, the respondents applied to the High Court under Article 226 and the High Court upheld the claim and quashed the assessments so far as they related to the said period. The State of Travancore-Cochin then filed the appeals to the Supreme Court.

Before considering how far the cashewnut purchases made by the respondents were entitled to the protection of Article 286(1)(b), the Court again felt the necessity "to ascertain the scope of such protection." In this connection the Court reiterated and recapitulated the four different views mentioned in the first Travancore case as to the meaning and scope of Article 286(1)(b) and after having done so, repeated what it had held in the previous case in para. 14 of the previous judgment-

"Whatever else may or may not fall within Article 286(1)(b), sales and purchases which themselves occasion the export or import of the goods, as the case may be, out of or into, the territory of India come within the exemption."

Then the Court proceeded to discuss and decide the only question debated before it as to "whether in addition to the export-sale and import-purchase, which were held in the previous decision to be covered by the exemption under clause (1)(b), the following two categories of sale or purchase would also fall within the scope of that exemption:-

"(1) The last purchase of goods made by the exporter for the purpose of exporting them to implement orders already received from a foreign buyer or expected to be received subsequently in the course of business, and the first sale by the importer to fulfil orders pursuant to which the goods were imported or orders expected to be received after the import.

(2) Sales or purchases of goods effected within the State by transfer of shipping documents while the goods are in the course of transit."

As regards the first category mentioned above, the Court was of the opinion "that the transactions are not within the protection of clause (1)(b)". In support of this view the Court gave a number of reasons. The Court first pointed out in para. 10 of the Judgment as reported in AIR-

"The word 'course' etymologically denotes movement from one point to another, and the expression 'in the course of not only implies a period of time during which the movement is in progress but postulates also a connected relation."

And in support of this reasoning the Court sought to give an analogy from the English Bankruptcy Act, 1869. It was held in the case of In re Pryce; Ex parte Rensburg, (1877) 4 Ch D 685 that the words "debts due to the bankrupt in the course of his trade" in section 15(5) of English Bankruptcy Act, 1869, "do not extend to all debts due to the bankrupt during the period of his trading but include only debts connected with the trade. "A sale in the course of export out of the country", the Court observed in para. 10 of the judgment, "should similarly be understood in the context of clause (1)(b) as meaning a sale taking place not only during the activities directed to the end of exportation of the goods out of the country but also as part of or connected with such activities. The time factor alone is not determinative. The previous decision proceeded on this view and emphasised the integral relation between the two where the contract of sale itself occasioned the export as the ground for holding that such a sale was one taking place in the course of the export."

(Underlined by me.)

The Court did not agree with the contention that on this principle of connected or integrated activities a purchase for the purpose of export must be regarded as covered by the exemption under clause (1)(b). The Court said-"A purchase for the purpose of export like production or manufacture for export, is only an act preparatory to export and cannot, in our opinion, be regarded as an act done 'in the course of the export of the goods out of the territory of India' any more than the other two activities (i.e., production or manufacture for export) can be so regarded.* (Para. 11 of the judgment.)

The views of Schmitthoff in his book-Export Trade-were cited by the Court in this connection with approval-

"From the legal point of view it is essential to distinguish the contract of sale which has as its object the exportation of the goods from this country from other contracts of sale relating to the same goods, but not being the direct and immediate cause for the shipment of the goods When a merchant shipper in the United Kingdom buys for the purpose of export goods from a manufacturer in the same country, the contract of sale is a home transaction; but when he re-sells these goods to a buyer abroad that contract of sale has to be classified as an export transaction." (2nd Edn., p. 3).

The Court observed that "The same reasoning applies to the first sale after import which is a distinct local transaction effected after the importation of the goods into the country has been completed, and having no integral relation with it." (Para. 11).

(Underlined by me.)

The Court also referred to the practical difficulty in extending the exemption of Article 286(1)(b) to the last purchase for the purpose of export and the first sale after the import. "Supposing", the Court observed in para. 13 of the judgment, "A is the seller from whom B the export merchant purchases the goods for export. If the sale is to be exempt, how is A to be satisfied that the goods would actually be exported subsequently? And even if they were, it must be difficult for A to prove to the Sales tax Officer that they were so exported by B, if proof was required. On the other hand, B might be keeping the goods, waiting for orders to come or might change his mind and not export the goods at all but sell them locally.

In that case, what would be the position of A vis-a-vis the Sales tax Officer demanding the tax? ,Could A escape liability if he failed to collect the tax from B at the time of the sale? Or, is A to collect the tax ignoring B's declaration of his intention to export and leaving him to apply for refund by producing evidence of actual export, whenever that takes place? Even if a sales tax enactment provides for adjustment on those lines, would not such legislation, in so far as it compels B to suffer the tax until he actually exports the goods, contravene clause (1)(b) which ex hypothesi exempts the transaction from sales tax? And what would be the position if the goods were burnt or otherwise lost in the meanwhile, and the export never took place?"

Noticing all these practical difficulties and uncertainties, the United States Supreme Court laid down the following rule in the case of Expresa Siderurgica, S.A. v. Merced, (1949) 337 US 154-

"It is the entrance of the articles into the export stream that marks the start of the process of exportation. Then there is certainty that the goods are headed for their foreign destination and will not be diverted to domestic use. Nothing less will suffice.

The Court then observed that similar difficulties and uncertainties would arise if the exemption were sought to be extended to the first sale after import. In the first place, the first sale after import will be a local sale because it takes place after the goods have been actually imported into India i.e., after the termination of the process of importation. In the next place, how is the exemption to be applied to goods imported from abroad after they are mingled with other goods and lose their distinctive character? In this connection the Court rejected the American doctrine of "original or unopened package."

It is in the light of these discussions and conclusions that the Court considered whether the imports of cashewnuts by the .respondents fell within the exemption of Article 286(1)(b), and if so, to what extent. These imports were divided into two categories-(i) purchases made through intermediaries (called "the Bombay party") doing business as commission agents at Bombay. As the Bombay party acted as agents of the respondents charging commission, privity was established between the respondents and the African sellers. That being so, the purchases of cashewnuts by the respondents from the African sellers occasioned the import and therefore they came within the exemption of Article 286(1)(b) and were not subjected to sales tax law of the State.

In the other category, the Bombay party indented the goods on their own account and sold the goods as principals to the respondents and other customers but the goods were shipped direct to Cochin or Quilon on c.i.f. terms. The shipping documents were made out in the name of the Bombay party as consignees and were delivered to them against payment through bankers at Bombay. The Bombay party cleared the goods through their own representatives at the port of destination and issued separate delivery orders to the respondents and other customers for the respective quantities ordered.

The Bombay party were thus the purchasers from the African sellers and the Bombay party sold the goods as principals to the respondents at the port of destination by issuing separate delivery orders against payment. No privity being established between the respondents and the African sellers, the respondents' purchases were purchases from the Bombay party of the goods within the State. In other words, they being thus local purchases could not come under the exemption under Article 286(1)(b).

As regards the sales or purchases effected in the State by transfer of shipping (c.i.f.) documents while the goods are still in transit, the Court's decision was that it was well known that such sales or purchases formed a characteristic feature of foreign trade, they therefore fell within the exemption of Article 286(1)(b), "if the State is constitutionally competent to tax such sales" as to which the Court expressed no opinion. After such examination and discussion of the position, the Court summed up its conclusions as follows in para. 16 of the judgment:-

"(1) Sales by export and purchases by import fall within the exemption under Article 286(1)(b). This was held in the previous decision.

(2) Purchases in the State by the exporter for the purpose of export as well as sales in the State by the importer after the goods have crossed the customs frontier are not within the exemption.

(3) Sales in the State by the exporter or importer by transfer of shipping documents while the goods are beyond the customs frontiers are within the exemption, assuming that the State power of taxation extends to such transactions."

S.R. Das, J. who was a party to the unanimous decision of the Court in the first Travancore case did not agree this time with the majority view and wrote a long dissenting judgment. He dissented from the majority view on the construction and meaning of Article 286(1)(a) dealing with restrictions placed upon a State as to imposition of tax on the sale or purchase of goods where such sale or purchase takes place outside the State. He also dissented this time as to the scope of the expression "in the course of" occurring in Article 286(1)(b). He posed the question, as to what was the scope of the ban imposed on the States by Article 286(1)(b)? He felt that the answer would depend on the meaning that may be ascribed to the phrase "in the course of" occurring in clause (1)(b).

He referred to the unanimous decision of the Court in the first Travancore case according to which "whatever else may or may not fall within Article 286(1)(b), sales and purchases which themselves occasion the exports or imports of the goods, as the case may be, out of, or into, the territory of India come within the exemption . " According to him, this was sufficient to dispose of that case and it was not then necessary to decide what else might fall within that phrase. He said. "This Court is now called upon to decide that point", (vide para. 48 of his judgment) Das, J. then described the practice of foreign trade in India and how it was carried on. And he expressed his views in para. 51 of his judgment as follows:-

"In my judgment the purchase made by the exporter to implement his agreement for sale with the foreign buyer is to be regarded as having taken lace 'in the course of export, I take this view, not because I read the words 'in the course of as synonymous with the words 'for the purpose of but because I regard the purchase by the exporter as an activity so closely integrated with the act of export as to constitute a part of the export process itself and, therefore, as having taken place 'in the course of the export. The learned Attorney-General accepts this position but the Advocates-General of the States demur. They maintain that in this view of the matter one cannot stop at the last purchase by the exporter but has to include the purchase by the person who sells to the exporter and all previous sales or purchases until one reaches the producer.

I find no substance or cogency in this line of reasoning. In the last purchase by the exporter we have at least one party who is directly concerned with or interested in the actual export. The exporter is the connecting link, the commercial vinculum, as it were, between the last purchase and the export. But in the earlier sales or purchases neither the sellers nor the purchasers are personally concerned with or interested in the actual export of the goods at all. Therefore the earlier sales or purchases may be too remote and may not be regarded as integral parts of the process of export in the same sense as the last purchases by the exporter can be so regarded. The line of demarcation is easily perceptible."

He summarised his views as regards the true scope and meaning of a sale or purchase in the course of import or export in para. 59 of the judgment reported in the AIR as follows:

"A sale or purchase 'in the course of import or export within the meaning of clause (1)(b) includes (i) a sale or purchase which itself occasions the import or export as already held by this Court, (ii) a sale or purchase which takes place while the goods are on the high seas on their import or export journey, and (iii) the last purchase by the exporter with a view to export and the first sale by the importer to a dealer after the arrival of the imported goods. If a sale or purchase takes place within a State, either under the general law or by reason of the Explanation, then, if it takes place in the course of import or export as explained above, no State, not even the State within which such sale or purchase takes place can tax it by reason of clause (1)(b). This, in short, is the true meaning and import of Article 286 as I read and understand it."



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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