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Report No. 61

Khosla's case (1966).- The third phase is provided by K.G. Khosla's case (K.G. Khosla & Co. v. Deputy Commissioner of Commercial Taxes, AIR 1%6 SC 1216) decided by the Supreme Court on the 16th January, 1966. It is not necessary to discuss in detail the other cases on the subject decided by the Supreme Court before Khosla's case as they more or less followed the views of the Supreme Court in the unanimous judgment in the first Travancore case and majority judgment in the second case. Moreover, discussion of too many case-laws has the disadvantage of distracting one's attention from the real problem. Be that as it may, it is difficult to accept in to the view expressed in some of these cases (not cited or discussed here) that no single test can be laid down and each case must depend on its own facts.

It is submitted with respect that such a view seems to be a view of despair and underrates the importance of the principles required to be formulated by law made by Parliament under Article 286(2) which have been actually formulated by Parliament in section 5 of the Central Sales Tax Act, 1956. It may even be said that if this view is accepted then there was hardly any necessity for formulating the principles in pursuance of Article 286(2) as it now stands. Whether the principles formulated by Parliament require improvement is a different matter. While saying this we are not ignoring or underestimating the importance of the facts of each case.

But that should not mean as to why serious endeavour should not be made to make the principles as broad and comprehensive so as to fit in with the facts of each and every case as far as practicable. We must try to find out the recommendations of the Law Commission in 1956 which recommendations in turn were based on decisions in the two Travancore cases. The observations of Das, J. in paragraph (48) of his dissenting judgment as reported in the AIR will bear repetition in this connection-

"The question arises: what is the scope of the ban thus imposed on the States? The answer will depend on the meaning that may be ascribed to the phrase 'in the course' occurring in clause (1)(b) In AIR 1952 SC 366 (the first Travancore case) this Court has held that-

"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

In other words, this Court has held that sales or purchases which themselves occasion the imports or exports are sales or purchases which take place 'in the course of import or export. This was sufficient to dispose of that case and it was not there necessary to decide what else might fall within that phrase. This Court is now called upon to decide that point."

Coming now to Khosla's case, the following facts mentioned in the judgment of Sikri, J. led the Court to the decision it reached in the case-

(1) The appellant K.G. Khosla & Co.-mentioned in the judgment as the assessee entered into a contract with the Director-General of Supplies and Disposals, New Delhi for the supply of axle-box bodies.

(2) According to the contract the goods were to be manufactured in Belgium and the Director-General of the Indian Supply Department (D.G.I.S.D.), London or his representative was to inspect the goods at the works of the manufacturers.

(3) He was to issue an inspection certificate.

(4) Another inspection by the Deputy Director of Inspection, Ministry of W.H.&S., Madras was provided for in the contract. It was his duty to issue inspection notes on Form No. WSB 65 on receipt of a copy of the inspection certificate from the D.G.I.S.D., London and after verification and visual inspection.

(5) The goods were to be manufactured according to specifications by M/s La Brugeoies, ET, Nivelles, Belgium.

(6) There was a provision as to when the assessee would be entitled to be paid.

(7) The assessee was entirely responsible for the execution of the contract in all respects in accordance with the terms as specified in the contract.

(8) Any approval which the Inspector might have given in respect of the stores, materials or other particulars and the work and workmanship in the contract (whether with or without test carried out by the contractor's Inspector "shall not bind the purchaser (that is, the D.G.S.&D.) and notwithstanding any approval or acceptance given by the Inspector, it shall be lawful for the consignee of the stores on behalf of the purchaser to reject the stores on arrival at the destination, if it is found that the stores supplied by the contractor are not in conformity with the terms and conditions of the contract in all respects."

(9) Further, the assessee was responsible for the safe arrival of the goods at the destination.

(10) By an endorsement the D.G.I.S.D., London was requested to issue pre-inspection delay reports regularly to all concerned including the Railway Liaison Officer

c/o D.G.S.&D., Shahjahan Road, New Delhi. He was also requested to endorse copies of the Inspection Certificates to the Director of Inspection, Ministry of Works, Housing and Supply, Bombay.

(11) It was further found by the Sales Tax Appellate Tribunal that "the Belgium manufacturers, after manufacture consigned the goods to the appellants by ship under bills of lading in which the consignee was the appellants themselves.

(12) The goods were consigned to Madras Harbour, cleared by the appellants' own clearing agents and despatched for delivery to the buyers thereafter."

(13) In pursuance of this contract the assessee supplied the axle-box bodies of the value of Rs. 1,74,029.50 to the Southern Railway at Perambur Works and of the value of Rs. 1,32,987.75 to Southern Railway, Mysore.

The Joint Commercial Tax Officer held that the former sales were liable to tax under the Madras General Sales Tax and the latter under the Central Sales Tax Act. He rejected the contention that the sales were in course of import. He held that "there was no privity, of contract between the foreign seller and the Government for the goods. The goods were shipped only as the goods of the seller and intended for them. They were cleared as their own and delivered after clearance. The transaction is therefore one of intra-State sales and not one in the course of import. The sale is completed only when the goods are delivered in this State and so it is not occasioning the import." The Joint Commercial Tax Officer also referred to the terms and conditions of the contract relating to the rejection of the goods by the purchaser to which reference has already been made.

The Appellate Assistant Commissioner agreeing with the Joint Commercial Tax Officer, rejected the appeals by the assessee. The Appellate Tribunal also held that the sale by the appellants had not occasioned the import except that sales to the extent of Rs. 22,983.75 and Rs. 10,987.50 had taken place in the course of the import as the goods had been appropriated to the contract while the goods were on the high seas. The assessee filed two revisions before the High Court and the Deputy Commissioner of Commercial Taxes, Madras also filed two revisions challenging the deductions of the two sums of Rs. 22,983.75 and Rs. 10,987.50.

The High Court allowed the petitions filed by the Deputy Commissioner of Commercial Taxes and dismissed the petitions filed by the assessee. The High Court rejected the contention of the assessee that the sale by the assessee to the Government Department (i.e., the D.G.S.&D.) had occasioned the import on the ground that "before a sale can be said to have occasioned the import, it is 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 the import of the goods.

On the facts and materials, the Supreme Court differed from the decision of the High Court and allowed the appeals filed by the assessee and held that the sales by the assessee to the Government (Director-General of Supplies and Disposals) took place in the course of the import of goods within section 5(2) of the Central Sales Tax Act. In coming to this decision the Court first rejected (and it is submitted rightly) the view of the Madras High Court that before a sale could be said to have occasioned import "it is necessary that the sale should have proceeded the import."

In repelling the above view of the High Court, the Supreme Court proceeded on the following lines of reasoning:-

(a) "It seems to us that the expression 'occasions the movement of goods' occurring in section 3(a) and section 5(2) must have the same meaning."

(My comments.- The expression "occasions the movement of goods" occurs in section 3(a) only. In section 5(2), the expression used is "occasions such import". Moreover, the words "only if" occur before the words "the sale or purchase in section 5(2) but not in section 3. These differences in language are significant. The meaning of the term "movement" in section 3(a) is more specific than the meaning of the term "import" in section 5(2). As has been shown already, on a very strict and narrow view of Article 286(1)(b), a sale or purchase in the course of import or export would be confined only to a sale or purchase effected by a transfer of documents of title to the goods while the goods are on the high seas in the course of transit vide in this connection the observations of Patanjali Sastri, C.J. in para. 13 of the judgment (as reported in the AIR) in the first Travancore case.

There are other points of difference between a sale or purchase in the course of inter-State trade or commerce and a sale or purchase in the course of export or import. In this view of the matter, to attribute the same meaning to the expression occurring in section 3(a) and the expression occurring in section 5 does not, it is pointed out with respect, seem quite correct.)

(b) After taking the view as above, the Court cited with approval the following interpretation given by Shah, J. on section 3 in the majority judgment of the Court in Tata Iron and Steel Co. v. S.R. Sarkar, AIR 1961 SC 65:-

"In our view, therefore, within clause (b) of section 3 are included sales in which property in the goods passes during the movement of the goods from one State to another by transfer of documents of title thereto: clause (a) of section 3 covers sales, other than those included in clause (b), in which the movement of goods from one State to another is the result of a covenant or incident of the contract of sale, and property in the goods passes in either State."

(c) These observation of Shah, J. were cited with approval by the Court in the Cement Marketing Co. v. State of Mysore, AIR 1963 SC 980 although the Court in that case was dealing not with the Central Sales Tax Act but with a similar case arising under Article 286 of the Constitution before its amendment.

(d) But the same Bench of the Court in dealing with a case arising under the Act (State Trading Corporation of India Ltd. v. State of Mysore, AIR 1963 SC 548) again approved of the observations in Tata Iron & Steel Co. case

In this way, after citing a number of cases under section 3, the Court held "that the High Court was wrong in holding that before a sale could be said to have occasioned import it is necessary that the sale should have preceded the import."

When the Court was invited by the Counsel for the respondent to hold that the observations of Shah, J. in Tata Iron & Steel Co. case were obiter, and to consider the question afresh, because Shah, J. in that case was considering clause (b) of section 3, the Court observed--"We are unable to re-open the question at this stage. Shah, J. was interpreting section 3 of the Act, and although the Court was principally concerned with the interpretation of section 3(b), it was necessary to consider the interpretation of section 3(a) in order to arrive at the correct interpretation of section 3(b)."

In this way, repelling the view of the Madras High Court, the Court in a short paragraph proceeded to the question,-

"Whether the movement of axle-bodies from Belgium into Madras was the result of a covenant in the contract of sale or an incident of such contract. It seems to us that it is quite clear from the contract of sale that it was incidental to the contract that the axle-box bodies should be manufactured in Belgium, inspected there and imported into India for the consignee. Movement of the goods from Belgium into 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."

Thus in coming to this decision, the Court relied on only two grounds, namely,-

(1) the movement of the goods from Belgium to India was in pursuance of the conditions of the contract between the assessee and the Director-General of Supplies;

(2) there was no possibility of the goods being diverted by the assessee for any other purpose.

Comments on Khosla's case.

My comments on the case are as follows:-

(1) It is difficult to find out from the judgment whether the Court treated the assessee (K.G. Khosla & Co.) as merely as agent of the D.G.S.&D. or as independent importer importing the goods from Belgium as his own goods.

(2) The terms and conditions of the contract were no doubt a bit peculiar in that under them a good deal of control over the assesses was retained by the D.G.S.&D., such as control in relation to inspection of the goods both in Belgium at the stage of manufacture and also in India at Madras and Bombay and the issue of inspection certificates and inspection notes. All this may be regarded as more in consonance with the position of the assessee as an agent than with his position as an independent importer importing goods by purchase from the Belgium manufacturers.

(3) But this is more than counter-balanced by other terms and conditions of the contracts and other facts and circumstances of the case. These terms and conditions and facts and circumstances are: (i) the assessee, Khosla & Co. was entirely responsible for the execution of the contract in all respects in accordance with the terms and conditions specified; (ii) any approval which the Inspector might have given in respect of the stores, materials etc. (whether with or without test carried out by the assessee's Inspector) shall not bind the purchaser; (iii) notwithstanding any approval or acceptance given by the

Inspector it shall be lawful for the consignee of the stores (the Southern Railway on behalf of the purchaser) to reject the stores on arrival at the destination if it be found that the stores supplied by the contractor (the assessee) are not in conformity with the terms and conditions of the contract in all respects; (iv) the assessee was responsible for the safe arrival of the goods at the destination; (v) the Belgian manufacturers after manufacture, consigned the goods to the appellants (the assessee) by ship under bills of lading to which the consignee was the appellants (assessee) themselves; and (vi) the goods were consigned to Madras harbour, cleared by the appellants' own clearing agents and despatched for delivery to the buyers thereafter.

All these terms and conditions and facts and circumstances point to the assessee being the importer, himself importing his own goods. The Court however did not consider at all this aspect of the case as to whether the assessee was merely an agent of the D.G.S.&D. or was an independent importer who had entered into a contract with D.G.S.&D. to sell the goods to him after "the safe arrival of the goods at the destination."

(4) The Court also did not consider at all the finding of the Joint Commercial Tax Officer that "there was no privity of contract between the foreign seller and the Government for the goods. The goods were shipped only as the goods of the seller (i.e. the a success) and intended for them. They were cleared as their own and delivered after dearance. The transaction is therefore one of the intra-State sales and not one in the course of import." While the Court specifically stated in para. 11 of the judgment that "Movement of goods from Belgium of India was in pursuance of the conditions of the contract between the assesses and the Director-General of Supplies", there is nothing expressly stated in the judgment whether this contract could be regarded as one between the Director-General and the Belgium sellers.

It is not clear why the Court did not accept or reject this finding of the Joint Commercial Tax Officer.

(5) The findings that the movement of the goods were in pursuance of the contract between the assessee and the Director-General of Supplies and Disposals and that there was no possibility of the goods being diverted for any other use did not touch the question whether the purchase by the D.G.S.&D. after the arrival of the goods in Madras and termination of the process of import was an import-purchase by the Director-General of Supplies and Disposals or was the first purchase by him after the import.

(6) Then, the Court did not at all consider the two Travancore cases of 1952 and 1953. It does not appear that the Court's attention was drawn to these cases by the counsel who appeared for the parties. All the cases cited before and relied on by the Court were cases under section 3 of the Central Sales Tax Act, 1956 with the exception of one (Cement Marketing Co. v. State of Mysore, AIR 1963 SC 980) which arose under Article 286 as it stood before its amendment in 1956. The Court also did not consider any case under section 5 of the Central Sales Tax Act. For example, in Ben Gorm's case, AIR 1964 SC 1752, section 5 was specifically considered as also the two Travancore cases. In Ben Gorm's case (decided on 10th April, 1964), Shah J. speaking for the majority stated in relation to section 5 in para. 5 of the judgment as reported in AIR-

"This was legislative recognition of what was said by this Court" in the two Travancore cases, "about the true connotation of the expression 'in the course of the export of the goods out of the territory of India' in Article 286(1)(b). A transaction of sale which occasions export or which is effected by a transfer of documents of title after the goods have crossed customs frontiers, is therefore, exempt from sales tax levied under any State legislation."

Had the Court considered Ben Gorm's case, the Court would have been naturally led to consider the two Travancore cases because they were so thoroughly discussed in Ben Gorm's case. But even this was not done. The result therefore is that we do not know as to exactly on What basis the Court proceeded, that is, whether proceeded on the view that Khosla & Co. was an agent of the D.G.S.&D. or on the view that Khosla & Co. was an independent importer importing the goods purchased by it on its account. The previous contract with the D.G.S.&D. to sell the goods to him after the goods have been imported into the territory of India is not at all inconsistent with this position.

It may be pointed out that these two views would clearly come respectively within the two categories into which Group III (Imports from Africa) was sub-divided by Patanjali Sastri, C.J. in the second Travancore case (paras. 20 and 21 of the judgment of the learned Chief Justice as reported in the AIR). Therefore, perhaps we would have got a clear guidance from the Supreme Court in Khosla's case, had the Court's attention been drawn to the two Travancore cases and Ben Gorm's case.

Then each of the two final views of the Court in Khosla's case, namely, that the import was in pursuance of the conditions of the contract between the assessee and the Director-General of Supplies and Disposals and that there was no possibility of the goods being diverted by the assessee to any other purpose, would be equally compatible with the position of Khosla & Co. as an agent of the D.G.S.&D. as well as an importer of the goods on its own account.

The result, therefore, of this decision has been that an amount of confusion and uncertainty has been introduced in the law [section 5 as well as Article 286(1)(b)]. The State Governments have not been happy with it. Some of them have openly remonstrated against the decision on the ground that its effect has been to curtail the States' power of imposing taxes on many sale and purchase transactions which but for the decision would be clearly subject to such taxes. The Central Government has been also in a fix as to exact scope of the law as enunciated in Article 286(1)(b) and section 5.



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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