Case Note & Summary
The State of Bihar appealed by special leave against the judgment of the Patna High Court in a reference under Section 25(3) of the Bihar Sales Tax Act, 1947. The respondent, Tata Engineering & Locomotive Co. Ltd., a public limited company incorporated under the Indian Companies Act, 1913, carried on business in manufacturing and selling trucks, bus chassis, and spare parts. Its registered office was in Bombay, while its factory was at Jamshedpur in Bihar. The company had appointed dealers throughout India under agreements which assigned each dealer an exclusive territory for resale and prohibited sales outside that territory. Dealers were required to place indents, pay the price, and obtain delivery orders from the Bombay office; goods were then delivered in Bihar for removal to the assigned territories outside Bihar. The turnover in dispute related to sales by the assessee to its dealers during the period 7th September 1955 to 31st March 1956. The Board of Revenue referred two questions to the High Court: (1) whether sales during 1st April 1955 to 6th September 1955 were exempt under Article 286(1)(a) read with the Explanation; and (2) whether sales during 7th September 1955 to 31st March 1956 were exempt on the ground that they took place in the course of inter-State trade or commerce under Article 286(2) as it then stood. The High Court answered the first question against the assessee and the second in its favour. The State appealed only against the second answer. The Supreme Court examined the scope of the expression 'in the course of inter-State trade or commerce'. It relied on a series of decisions, including State of Travancore-Cochin v. Bombay Co. Ltd., Bengal Immunity Co. Ltd. v. State of Bihar, Endupuri Narasimham & Son v. State of Orissa, Tata Iron & Steel Co. Ltd. v. S. R. Sarkar, Cement Marketing Co. of India v. State of Mysore, Ben Gorm Nilgiri Plantations Co. v. Sales Tax Officer, and K.G. Khosla & Co. v. Deputy Commissioner of Commercial Taxes. The court reiterated that a sale is in the course of inter-State trade only if there is a sale of goods and a transport of those goods from one State to another under the contract of sale. The mere fact that property in the goods passed before movement did not alter the character of the sale. In the present case, the dealership agreements imposed a contractual obligation on dealers to remove the goods from Bihar to their assigned territories; failure to do so would be a breach. The court held that where the buyer is required, as a necessary incident of the contract, to remove the goods from the State of purchase to another State, the sale must be considered as a sale in the course of inter-State trade or commerce. Accordingly, the turnover in question was exempt from Bihar sales tax. The Supreme Court dismissed the appeal and affirmed the High Court's answer to the second question.
Headnote
A) Constitutional Law - Inter-State Trade and Commerce - Interpretation of 'in the course of' under Article 286(2) - Constitution of India, 1950, Article 286(2) - The court examined prior decisions and held that a sale is in the course of inter-State trade or commerce when the movement of goods from one State to another is under a covenant or incident of the contract of sale; mere purchase of goods inside a State for sale outside the State is not itself a sale in the course of inter-State trade. Held that the expression 'in the course of' denotes movement from one point to another and postulates a connected relation between the sale and the transport of goods (Paras 3-4). B) Sales Tax - Exemption for Inter-State Sales - Contractual Obligation to Move Goods Across State Borders - Constitution of India, 1950, Article 286(2); Bihar Sales Tax Act, 1947, Section 25(3) - The assessee's dealership agreements required each dealer to remove trucks, bus chassis, and spare parts from Bihar to the assigned territory outside Bihar; failure to do so would amount to breach of contract. The court applied Tata Engineering & Locomotive Co. Ltd. v. Asstt. Commissioner of Commercial Taxes and other precedents and held that the sales were in the course of inter-State trade or commerce, thereby exempt from Bihar sales tax for the period 7th September 1955 to 31st March 1956 (Paras 3-5). C) Interpretation - Distinction Between Sale for Export and Sale in Course of Export - Integrated Transaction Test - Constitution of India, 1950, Article 286(1)(b) - The court referred to Ben Gorm Nilgiri Plantations Co. v. Sales Tax Officer, which observed that a sale in the course of export predicates a connection between sale and export, the two activities being so integrated that the connection cannot be interrupted without breach of contract or compulsion arising from the nature of the transaction; a sale preliminary to export may be for export but not in the course of export unless it occasions export. Held that the same principle applies to inter-State trade under Article 286(2) (Paras 4-5).
Issue of Consideration
Whether the sales made by the assessee to its appointed dealers for sale in their assigned territories outside Bihar during the period 7th September 1955 to 31st March 1956 were exempt from liability under the Bihar Sales Tax Act on the ground that the sales took place in the course of inter-State trade or commerce under Article 286(2) of the Constitution as it stood at the relevant time
Final Decision
The Supreme Court dismissed the appeal and affirmed the High Court's answer to the second question. The sales in question were held to be in the course of inter-State trade or commerce and exempt from Bihar sales tax under Article 286(2) of the Constitution as it stood at the relevant time.
Law Points
- Sale in the course of inter-State trade or commerce requires movement of goods from one State to another under a covenant or incident of the contract of sale
- the buyer's contractual obligation to remove goods outside the State renders the sale inter-State
- mere purchase for resale outside the State is not sufficient
- sales for the purpose of export are not necessarily in the course of export
- the expression 'in the course of' implies a connected relation between sale and transport
- Article 286(2) of the Constitution as it stood prior to amendment exempted such sales from State sales tax
