Report No. 61

2.15. Tax why justifiable.-

The legal concept of "sale" requires two persons. If there is no transfer of "property" in the goods in the legal sense, there is no transfer of wealth, and since there is no transfer of wealth, the transaction also has so far remained non-taxable. Since, however, it appears that tax is evaded by representing, no consignment transfer, what are really sales to the bulk consumer1 the compulsions of the situation and the need to check evasion demand that even consignments should be taxed. If goods are sent from State X to State Y as "consignment transfers", and the consignment is treated as not amounting to inter-State 'sales', Central Sales Tax cannot be levied, at present. But sales tax in State Y can be levied when the goods are sold by the branch in State Y to the bulk consumer. There is, therefore, no defeating of State sales tax in the abstract. But there might be evasion of Central Sales Tax, by fictitiously representing, as consignments, transactions which are really sales.

1. Para. 2.3, supra.

2.15A. Supreme Court case relating to distribution agreement.-

A recent Supreme Court case has considered1 two important questions which are relevant to "consignment transfers".

(1) Whether, in the circumstances of the case the despatch of refrigerators from the appellant's factory in Faridabad (Haryana) to their godowns in Delhi would be a 'sale' or 'Purchase' in the course of inter-State trade or commerce under section 3 of the Central Sales Tax Act, 1956.

(2) Whether such despatch was, under section 3(a), of that Act 'occasioned' by a 'sale'.

1. Kelvinator of India v. State of Haryana, (1973) 2 SCC 551 (561, 562), para. 12.

The facts of the case were as follows:-

The appellants, manufacturers of refrigerators etc. had their factory in Faridabad (Haryana) and registered office and godowns in Delhi. They had entered into distribution agreements with three different distributors, under which the refrigerators were sold under three different brand names. The terms and conditions in the three agreements were similar. The refrigerators were sent from Faridabad to Delhi, and kept in the appellant's godowns and finally despatched to the distributors.

The Sales Tax Tribunal, Haryana referred the question whether the despatch was an inter-State sale for the opinion of the Punjab and Haryana High Court, the High Court decided the questions in favour of the department and held that the despatch constituted 'sale' under section 3 of the Central Sales Tax Act, and was therefore taxable, under that Act. The appellants came in appeal before the Supreme Court by special leave. The principal question was whether the distribution agreements could be construed to be contracts of sale. On examination of the agreements the following facts had been accepted by the departmental authorities and by the High Court:

(i) the dealer (appellant) manufactured and sold refrigerators,

(ii) the refrigerators were sold with three different trade marks,

(iii) the sale of each brand was made through a separate distributor appointed for the purpose,

(iv) the manner of movement was laid down in the agreements,

(v) the dealer was bound to sell a particular brand to a particular distributor,

(vi) the refrigerators were exported outside India,

(vii) the price of the refrigerators was fixed as mutually agreed upon from time to time,

(viii) the property in the goods passed at Delhi after delivery,

(ix) the prices were not settled for individual machines, but on a periodical basis,

(x) the purchase orders were placed by the three distributors after the goods reached the Head Office at Delhi,

(xi) after manufacture of the goods in the factory, an excise clearance pass was obtained after payment of excise duty for the transport of goods from the factory to the company's godown in Delhi, and, the excise pass was always for the movement of goods in favour of self,

(xii) the appellants paid the octroi during the transport of the goods from Faridabad to Delhi,

(xiii) on arrival of the goods in Delhi, the Appellant's staff received them and put them in their godown,

(xiv) the appellant's staff in Delhi gave delivery of the goods to the customer at Delhi, under a challan prepared at Delhi,

(xv) the bills were raised from Delhi and the price was received by the appellant Co. in Delhi, and

(xvi) that all the appellants did was to manufacture the refrigerators in Faridabad and brand them differently for the purposes of sale and distributors. While, on the basis of the above facts, the High Court found that the distribution agreements constituted agreements of sale, the Supreme Court found it otherwise. Khanna, J., speaking for the unanimous Bench of himself and Alagiriswami, J., observed:

"In the face of the facts of the present case, we find it difficult to hold that the sale of refrigerators by the appellant to the three distributors took place at Faridabad. We are also unable to agree with the High Court that the distribution agreements constituted agreements of sale".

2.15B. The following reasons were given:

"It is noteworthy in this context to observe that the number of refrigerators which were to be purchased by each of the distributors was not specified in the distribution agreements, nor did the agreements contain the price which was to be charged for each refrigerator. According to the agreement, the appellant undertook to sell and the distributor undertook to purchase the products of the appellant "as mutually agreed upon from time to time." It is, therefore, plain that sales by the appellant company to the distributors depend upon the future agreement between the parties from time to time.

Distribution agreement dated September 15, 1965 and December 11, 1965, no doubt mentioned the minimum number of Leonard and Gem refrigerators which had been purchased by the distributors, the exact number of refrigerators to be sold by the appellant to these distributors was still left to volition of the appellant. The appellant company, it was also mentioned, would incur no liability if it was unable to supply the guaranteed minimum number of refrigerators. The mode of dealings between the parties was that subsequent to the distribution agreements, orders were placed by the distributors with the appellant after the refrigerators had reached the appellant's sale office and godown in Delhi.

The price of the refrigerators was also to be mutually agreed upon from time to time. It is plain that it is the orders which were placed in Delhi by the distributors that resulted in mutual agreement of sale1. It was, in our opinion, the mutual agreement between the parties at the time of the placing of the order by the distributor with the appellant which constituted the contract of sale and not the distribution agreement. The distribution agreement with each distributor provided the framework within which the different contracts of sale were entered into by the distributors with the appellant. This circumstances should not make us lose sight of the fact that in distribution agreements and the subsequent contracts of sale were distinct transaction "

1. Emphasis supplied.

2.15C. The Supreme Court also found the argument that the first distribution agreement obliged the appellants to sell all their refrigerators to the first distributor unconvincing, as the agreement was qualified by the terms "as mutually agreed upon from time to time" and the appellant exported its products to foreign countries. The Supreme Court rejected the contention on behalf of respondents (State of Haryana) that' the sale (to the distributors) took place in Faridabad and that appropriation towards the agreement took place there. The contention was advanced on the assumption that trade mark name plates for the different brands were affixed in Faridabad.

The Supreme Court found no material to support the assumption and even if the name plates were affixed there, the name plates could be removed and replaced in Delhi, as the three brands of refrigerators were identical except in respect of name plate. Another important factor was that orders in respect of the various refrigerators were placed by the distributors in Delhi after the refrigerators had been transported to the Delhi sale office and godown of the appellant. The court observed:

" If the sale of the refrigerators in favour of the distributors had already taken place at Faridabad and the refrigerators had been appropriated there towards the sale contract, there would have arisen no occasion for the placing of the subsequent order in Delhi by a distributor with regard to the said refrigerators. The fact that subsequent orders had to be placed by the distributors in Delhi with regard to the different refrigerators after their arrival in Delhi shows that there was no earlier appropriation of those refrigerators towards any contract of sale with the distributors.

The stand taken on behalf of the department that the appropriation of the refrigerators took place at Faridabad towards the contracts of sale with the distributors is inconsistent with the entire course of dealings between the parties. It may also be observed that in deciding the question whether the transactions between the parties constituted sales in the course of inter-State trade or commerce, the court should look not merely at the distribution agreements, regard should be had of the entire course of dealings between the parties."

2.15D. On the important question whether the movement of refrigerators from Faridabad to Delhi was occasioned by a sale, the Supreme Court held: " Assuming that the distribution agreements constituted contracts of sale, it would still have to be shown that the sale by the appellant to the distributors occasioned the movement of refrigerators from Faridabad to Delhi. in this respect, we find that according to the facts found by the Tribunal, the appellant had a godown and sale office in Delhi. There is nothing to show that the appellant has also a godown in Faridabad. The movement of refrigerators from Faridabad to the appellant's godown in Delhi in the circumstances can be ascribed to the fact that the appellant has a godown facility in Delhi1.

There were two places at which, in the nature of things, the appellant could have sold the refrigerators to the distributors. It could be either at Faridabad where the appellant has its factory wherein the refrigerators are manufactured, or in Delhi where the appellant has its office and godown and where also the three distributors have their offices. The selection of the sale depended upon mutual agreement between the parties. It is also obvious that if there is a choice before the parties of so arranging their matters that in one case they would have to incur liability to pay tax while in the other case the liability to pay tax would not be attracted, they would prefer the latter course. There is nothing illegal or impermissible to a party so arranging its affairs that the liability to pay tax would not be attracted or that the brunt of taxation would be reduced to the minimum.

The appellant company in the present case would incur no liability to pay tax under the Act if it were to transport the refrigerators from its factory in Faridabad to its own office and godown in Delhi and thereafter to sell them to the distributors. The liability to pay tax under the Act would, however, arise if the sale of the refrigerators to distributors were to take place at Faridabad and the movement of refrigerators from Faridabad to Delhi were to take place under the contract of sale.

The question with which we are concerned is whether the appellant entered into such an arrangement with the distributors that the liability to pay tax would be attracted and not the other arrangement under which no such liability could be fastened on the appellant. So far as this question is concerned, we find that the parties expressly stated in each of the three distribution agreements that it would be in Delhi that the sale of the refrigerators would take place to the distributors and the property therein would pass to them. It was again in Delhi that the refrigerators were delivered to the distributors.

The order for the refrigerators were placed by the distributors in Delhi and it was also here that the price of refrigerators was paid. Looking to all facts of the case, we have no doubt that the arrangement between the parties was that refrigerators would be sold by the appellant to the distributors after2 they had been transported to the sale office and godown of the appellant at Alipore Road, Delhi so that no liability to pay tax under the Act would arise. It cannot in the circumstances be said that the transport of the refrigerators from Faridabad to Delhi was in pursuance of contracts of sale between the appellant and the distributors "

1. Emphasis supplied.

2. Emphasis added.

2.15E. The Supreme Court rejected the contention on behalf of the respondents that since under the contract the freight charges from Faridabad to Delhi were paid by the appellants, this would show that the movement of the goods was occasioned by the contract of sale. The court found that the price payable by the distributors was the aggregate of the ex-factory price and the transportation charges. Since ex-factory price changed from time to time and since the agreements provided that the sale as well as delivery to the distributors would take place in Delhi, there was nothing surprising in the clause of the distribution agreement saying that transportation charges would be added to the ex-factory prices in calculating the amount payable by the distributors to the appellant.

The Supreme Court also found it as incorrect an observation made by the High Court that in two of the distribution agreements the liability for shortage of goods during transportation from Faridabad to Delhi was on the distributors and not on the Appellant Co. Even in the case of the third agreement, where the Supreme Court found that there was such a stipulation, tile court considered it to be of no decisive importance and only as "a matter of mutual agreement between the parties," and the distributor treating any loss or liability resulting therefrom more than off-set by the distributorship of the particular brand of the refrigerator.

The Supreme Court also rejected a contention based on section 23 of the Sale of Goods Act that where there was a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods passed to the buyer.

The Supreme Court refused to construe the distribution agreements as contracts of sale. There was also no material to show that there was any assent expressed or implied by the distributors to the appropriation of the refrigerators by the appellant at Faridabad. The Supreme Court relied upon its earlier decision in Tata Engineering etc. Co. Ltd. v. Asstt. C.C.T., (1970) 31 SCR 162., where the Court refused to consider the transport of manufactured trucks and buses from the appellant's factories in Jamshedpur to stockyards as inter-State sales, as the movement could not be proved to be occasioned by sales.

2.15F. The Supreme Court held: "We accordingly accept the appeal and set aside the judgment of the High Court. The answer given by the High Court to the question referred to it is discharged. In our opinion, the three agreements between the appellant and the distributors were merely agreements for the distribution of goods and were not agreements of sale between the parties. It cannot, in our opinion, be said that there was any movement of refrigerators from Faridabad to Delhi under a contract of sale. The question in the circumstances is answered against the department. The transactions between the appellant and the distributors did not, in our opinion, constitute sale in the course of inter-State trade or commerce. As such, there was no liability to pay tax under the Act."