Report No. 2
Separate Note On Inter-State Sales Tax
I regret that I have to differ from some of the conclusions of the majority of my colleagues. I wish to make it clear also that I do not concur in all their arguments for the other conclusions from which I do not disagree.
The laws regarding sales "in the course of import or export" and "in the course of Inter-State trade" have been sufficiently complicated by the four decisions of the Supreme Court where judgments proceed to discuss a multitude of matters. What is wanted now is a simpler and more clear-cut definition of the principles for deciding the matter. In considering the principles we should not be too much influenced by the fear that some transactions may escape taxation, if a particular view is taken.
That may or may not be,'though I should add that so far as export and import are concerned, there are very good reasons for thinking that there would be no case of escaping taxation altogether. Export and import are in most cases subject to another tax, the customs duty; and if by chance the goods exported or imported happen to escape the imposition of sales tax, that would not mean that the goods will necessarily go free of tax altogether. I am mentioning this as the majority report refers to this apprehension in the course of its reasons.
The Chief consideration in laying down the principles of taxation ought to be the interest of the trade and the consumers generally. Every taxation of goods adds to the burden that the consumer has to bear. With the rising prices and the many factors contributing to inflation, it would be far from wrong to desire that the burden should not be unnecessarily increased and that the trader should not be required to submit, not only to the payment of tax but also the harassment inevitable in connection with the assessment of the tax, more than is necessary.
A further and no less important aspect of the question is the bearing of the States' powers of taxation on the larger policy regarding foreign trade. Foreign trade is regulated by the Union, with reference to the current needs of the country as a whole, in part by manipulating the customs duties. There are occasions, due, for instance, to the overstocking of a particular commodity in India, or to the need for earning foreign exchange, when export of a commodity should be promoted by removing or reducing export duties and conversely, import of commodities in short supply may have to be promoted by manipulating import duties.
The powers of States to tax sales for such commodities by a too narrow limitation of sales in the course of "export or import" may easily hamper the freedom of the Union to influence prices by necessary manipulation of tariffs and may enable the States to frustrate the Union's policy. The power of States which they still retain after the Constitutional amendment to tax inter-State sales should not be so extended over commodities of foreign trade as to narrow the power of the Union to regulate prices for export and import from time to time as may happen when States are enabled to frustrate or nullify any act of the Union in the wider interests of the country, e.g. for reducing prices, by regulations for internal taxation on sales of the commodities which may wholly out-balance the effect of tariff changes on prices.
What is wanted is a simpler and more perfectly intelligible set of rules which will have regard to the interests not only of the finances of the State but also in a much larger measure to the interests of the trade and the consumers and the interest of the Union in respect of foreign trade. This will have to be specifically considered at the time of legislating under the new powers given to the Parliament by the Constitution. But we should bear in mind these principles in laying down the general principles also.
In the light of these remarks I should have the report modified in the following respects:
I. With regard to the sale in the course of export or import, the decision of the Travancore-Cochin case is purported to be followed with a rider which, in my opinion, makes the rule largely infructuous to prevent State taxation of sales in the course of export or import. I fully endorse the opinion of the 'Ministry of Commerce & Industry that the last purchase preceding the export should also be considered to be a sale or purchase in the course of export or import, which, incidentally appears to have been the view put forward by the Attorney General in the first Travancore-Cochin case. His argument is thus summarised in the judgment of the Chief Justice in AIR 1952 SC (367):
"In addition to the sales and purchases of the kind described above, 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 as to form part of the same transaction. This view was sponsored by the Attorney-General."
This interpretation accords more with the commonsense view of the expression "in the course of export or import."
The words "in the course of" must be given a proper meaning and would extend to transactions intimately connected with the export or import. There will be very few cases indeed in which a sale is made by a person who has the goods in stock and forthwith books it for export when alone the sale may be said to have 'occasioned' the export or import in terms of the opinion of the majority. In most of the commercial transactions a contract with a foreign agency for export or import of goods is made and on the strength of that, the exporter purchases goods from others and sells or the importer contracts to sell.
Among other parties, the Government of India, some time ago used to export large quantities of jute goods and it is still exporting other commodities without ever having a stock. When there is an agreement with a foreign State like the U.S.A. or Argentina for the export of that quantity, the Government comes and places the orders with the Jute Mills and they deliver the goods at the Ship's side and look to the Government of India for payment and it does not "Occasion" the export, but it is the purchase immediately prior to the export which is made by the Government.
The majority report objects that if this is exempted, it will be illogical not to exclude the whole stream of transactions preceding the export and an American Judgment is cited in support. But in legislating, the legislature is not bound to be logical. It can put its own limited construction upon the words used and it is no criticism of a legislation that if logical, it ought to extend to other items. If on a consideration of grounds of policy and other matters, the application is limited to less than what might be logically deduced, there will be no harm done.
In my opinion, the same principle ought to apply to the first sale after import, if, as a matter of fact, the sale was made in pursuance to a contract prior to importation. It seems to me, therefore, that the draft in paragraph 10 of the definition of a sale or purchase in the course of export and import is too narrow. If this definition is given, there will be very few transactions in which the State imposition of sales tax would be excluded.
II. With regard to sales in the course of Inter-State trade or commerce, the meaning of the words, "In the course of Inter-State trade or commerce" appear to me to be unduly restricted. Undoubtedly if a sale is effected, which directly occasions the movement of goods or is effected by a transfer of documents of title showing the movement from one State to another, it would be a sale for Inter-State trade. This definition, however, again makes the words "in the course of" practically infructuous. No attempt should be made to limit "the course" of trader to the only two possible alternatives.
There are other ways in which a sale may be effected Inter-State. For instance, a trader in Assam sends jute or tea to a warehouse in Calcutta in expectation of prospective sale. Thereafter the seller enters into a transaction of sale of the goods in Assam when, the goods are located in the Calcutta warehouse and gives a firm delivery order to the purchaser and the purchaser takes delivery from the warehouse in Calcutta.
In this case it is undoubtedly a case of Inter-State sale between Bengal and Assam, but it would not come under either of the clauses (a) and (b), as drafted, because the movement has not been occasioned by the sale but has preceded it and the transfer of documents has not taken place during the movement from one State to another but after it.
The definition proposed would thus be, in my opinion, too narrow. I would prefer an interpretation as in the passages quoted from Rottschafer in paragraph 12,'with the proviso that the movement of goods should have taken place in pursuance to the contract. That would leave it to the court, with reference to the facts of a particular case to determine whether the sale contemplated and in fact was followed by the movement of goods from one State to another.
III. With regard to the question of the situs of sale also I find it difficult to agree fully in the conclusion that a sale should be deemed to take place where the goods are at the time the contract of sale is made or in the case of unascertained goods when the goods are appropriated to the contract. There will be difficulty in applying this test in some cases, for instance in the case where goods have been shipped by boat from a station in Assam to Calcutta to be warehoused there and a sale is effected before the boat arrives in Calcutta. In such a case it would be difficult to locate the place where the goods are at the date of the contract, assuming it to be specified goods.
The difficulty is intensified by the fact that the boat which carries the jute passes through a foreign territory, that is, Pakistan and it may well be that at the date of the contract, the goods are in Pakistan. I think a simpler definition would be to say that a sale takes place outside a State when either the contract for sale or the delivery of the goods takes place outside the State. That would be a simple and easy test to apply, and it would violate no principle whatsoever, now that Article 286(2) is out of the way. I therefore sign the report,'subject to these comments.
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