Case Note & Summary
The dispute concerned the exigibility of sales tax on sales of non-ferrous metals by an importer to the Directorate General of Supplies and Disposals (DGS&D). The petitioner, a company incorporated under the Indian Companies Act, 1913, was an importer and dealer in non-ferrous metals, registered as a supplier to DGS&D and as a dealer under the Bengal Finance Act, 1941 and the Central Sales Tax Act, 1956. It procured metals from foreign countries and domestically to fulfil contracts with the Government of India through DGS&D. Initially, imports were under Open General Licence until June 30, 1957, after which a licensing system was introduced. The Non-Ferrous Metals Control Order, 1958 and the Scarce Industrial Materials Control Order, 1965 regulated distribution and froze stocks, respectively. The Government granted import licences in terms of contracts placed with the petitioner. Respondent No.2 agreed to pay Central Sales Tax or West Bengal Sales Tax on these supplies. In 1966, the Supreme Court held in K.G. Khosla and Co. v. Deputy Commissioner of Commercial Taxes that a sale by an importer to DGS&D of goods manufactured abroad by its principal occasioned the movement of goods in the course of import, and sales tax was not exigible under Section 5(2) of the Central Sales Tax Act, 1956. Relying on this, respondent No.2 issued an order directing that sales tax should not be allowed on supplies specifically imported against contracts placed by DGS&D. Respondent No.4 deducted Rs. 60,780 from pending bills of the petitioner and threatened to recover over Rs. 2 lakhs already paid as sales tax. The petitioner approached West Bengal Sales Tax Authorities, who held that there were two sales—one by the foreign seller to the petitioner and another by the petitioner to DGS&D—and that no privity of contract existed between DGS&D and the foreign sellers; therefore, tax was exigible on the petitioner's sales to DGS&D. The petitioner filed writ petitions under Article 32 alleging violation of Article 31(1). The legal issues were whether the sales to DGS&D were in the course of import and whether the deduction and threatened recovery were justified. The petitioner contended that its sales to DGS&D were distinct from its purchases from foreign sellers and did not occasion the movement of goods in import; hence Khosla was inapplicable. The respondents argued that the sales were in the course of import and no tax was payable. The Court examined Article 286(1)(b), which prohibits state taxation on sales or purchases in the course of import or export, and Section 5(2) of the Central Sales Tax Act, 1956, which deems a sale or purchase to be in the course of import if it occasions the import or is effected by transfer of documents of title before goods cross customs frontiers. Applying the integrated activities doctrine from State of Travancore-Cochin v. Bombay Co. Ltd. and State of Travancore-Cochin v. Shanmugha Vilas Cashew Nut Factory, the Court held that the movement of goods in the course of import was occasioned by the petitioner's purchases from foreign sellers, not by its subsequent sales to DGS&D. There was no privity of contract between DGS&D and the foreign sellers, and the sales were separate and distinct. The Court distinguished Khosla on facts and quashed the order issued by respondent No.2, holding that the deduction and threatened recovery were unjustified. The writ petitions were allowed.
Headnote
A) Constitutional Law - Tax on Sale or Purchase in Course of Import - Article 286(1)(b) Constitution of India - Prohibition of State Tax on Import/Export Sales - Integrated Activities Doctrine - A sale by export involves a series of integrated activities from agreement with foreign buyer to delivery to carrier; such a sale cannot be dissociated from the export without which it cannot be effectuated, and the sale and resultant export form parts of a single transaction, whichever occurs first can well be regarded as taking place in the course of the other - Held that the expression 'integrated activities' denotes that a sale which occasions the export cannot be dissociated from the export (Paras [623H]-[624B]). B) Interpretation of Statute - Meaning of 'In the Course of Import' - Section 5(2) Central Sales Tax Act, 1956 - Legislative Definition After Sixth Amendment - There was no definition of the expression 'in the course of import' before the Sixth Amendment; Parliament later provided that a sale or purchase of goods in the course of import into India shall be deemed to take place if the sale or purchase either occasions such import or is effected by a transfer of documents of title before the goods have crossed the customs frontiers of India - Held that the statutory definition governs the scope of the exemption (Para [624C]). C) Taxation - Sale Occasioning Import - Distinction Between Purchase from Foreign Seller and Subsequent Local Sale - Constitution of India, Article 286; Central Sales Tax Act, 1956, Section 5(2) - In the present case, the petitioner as principal made the sale to the DGS&D; for effecting the sales, the petitioner had to purchase goods from foreign sellers, and it was these purchases which occasioned the movement of goods in the course of imports - No movement of goods in the course of import took place in pursuance of the contracts of sales by the petitioner with the DGS&D; the sales were distinct and separate, and there was no privity of contract between the DGS&D and the foreign sellers - Held that the petitioner's sales to DGS&D were not in the course of import and tax was exigible (Paras [627E]-[628E]). D) Precedent - Applicability of K.G. Khosla Case - Distinguished on Facts - Central Sales Tax Act, 1956, Section 5(2) - In Khosla's case, the sale by the importer to DGS&D in India of goods manufactured abroad by its principal occasioned the movement of goods in the course of import, but in the present case the foreign sellers did not enter into a contract by themselves or through the agency of the petitioner to the DGS&D, and even if the contracts envisaged import and supply from imported goods, it did not follow that the movement was occasioned by the contracts of sale - Held that the decision in Khosla was not applicable and the present case could not be distinguished from the Coffee Board's case (Para [627E]). E) Writ Jurisdiction - Violation of Article 31(1) - Unauthorised Deduction and Threatened Recovery of Sales Tax - Constitution of India, Article 31(1) - Respondent No.2 issued an order directing that sales tax should not be allowed in respect of supply of stores specifically imported against contracts placed by DGS&D; respondent No.4 deducted Rs. 60,780 from pending bills and threatened to recover more than Rs. 2 lakhs - The Court held that the order was based on a mistaken application of Khosla and quashed the order; deduction and recovery were not justified (Paras [627E]-[628E]).
Issue of Consideration
Whether sales by the petitioner to DGS&D were in the course of import under Article 286 of the Constitution and Section 5(2) of the Central Sales Tax Act, 1956, and consequently whether respondent No.4 was entitled to deduct Rs. 60,780 and recover more than Rs. 2 lakhs from the petitioner.
Final Decision
The Supreme Court allowed the writ petitions and quashed the order issued by respondent No.2. The Court held that the sales by the petitioner to DGS&D were not in the course of import; the movement of goods was occasioned by the petitioner's purchases from foreign sellers, and there was no privity of contract between DGS&D and foreign sellers. Consequently, respondent No.4 was not entitled to deduct Rs. 60,780 or recover more than Rs. 2 lakhs, and sales tax was exigible on the sales to DGS&D.
Law Points
- Sale or purchase in the course of import requires that the sale or purchase itself occasions the import or is effected by transfer of documents of title before goods cross customs frontiers
- integrated activities doctrine applies to export sales
- privity of contract between importer and foreign seller essential
- purchase from foreign seller
- not subsequent local sale
- occasions movement of goods in course of import
- state sales tax exigible on such local sale
