Bharat Fritz Werner Ltd. v. Commissioner Of Commercial Taxes

S.P Bharucha, C.J:— A question of some importance is raised in this Appeal. Is sales-tax payable upon the sale of replenishment (R.E.P) licences under the provisions of the Karnataka Sales Tax Act, 1957? In other words, are R.E.P licences “goods” within the meaning thereof in the said Act? The learned single Judge came to the conclusion that they were. Hence this Appeal.

2. The applicant sold ten R.E.P licences during the period relevant appellant to the Assessment Year 1985-1986. On 17th March 1990 it was served with a notice under Section 12A of the said Act. The notice stated that the appellant's assessment for the relevant assessment year had been completed. It had thereafter been found that it had sold the said R.E.P licences. The Commissioner of Commercial Taxes, by his Circular dated 30th January 1990, had clarified that import licences and other similar licences were ‘goods eligible to tax’ under the said Act. Accordingly, the said notice was issued to make taxable the sale price of the said R.E.P licences, in the sum of Rs. 25,97,458.40.

3. The Circular referred to in the said notice stated thus:

“As per the ratio of the Supreme Court Judgment in Lottery tickets case, ‘import licences’ would be goods, and their sales in the State (if effected) would attract multipoint tax under Section 5(1) of the Karnataka Sales Tax Act 1957 as unclassified goods at the rate of 7% multipoint. Therefore, the assessing authorities/revision authorities should adopt the rate of tax on import licences and similar goods at the rate of 7% Multipoint under Section 5(1) of the Act.”

4. The Writ Petition was filed to quash the said notice and Circular and for a declaration that R.E.P licences were actionable claims and, therefore, exempt from levy of sales-tax. As we have stated, the learned single Judge dismissed the Writ Petition.

5. It was contended by Mr. I.M Chagla, learned Counsel for the appellant, that R.E.P licences were not property and, therefore, outside the definition of ‘goods’ [Section 2(m) of the Said Act], Alternatively, he contended that R.E.P licences were actionable claims, for they conferred no right in presenti, the right thereby conferred was a right in person and it was to clear goods at the Customs barrier. Reference was made to the Import and Export Control Act, the Import Control Order and import Policies to show that, ordinarily, goods were not importable into India except when covered by valid import licences and that R.E.P licences were, under successive Import Policies, freely transferable and the transferee was entitled to import the goods permitted to be imported thereby upon production before the Customs authority of only a document evidencing the transfer of the R.E.P licence in his name. Since an R.E.P licence commanded a premium, the sale tax authorities wanted, unjustifiably, to include that premium in the sales turn-over of the appellant so far as the said R.E.P licences sold during the assessment year under reference were concerned.

6. Our attention was invited to the Judgment of the Supreme Court in Swami Motor Transports (P) LTD. v. Sankaraswamigal Mutt . AIR 1963 SC 864.. The Supreme Court considered the provisions of the Madras Act 19 of 1955, which amended the Madras City Tenants Protection Act, 1922. It conferred two rights upon a tenant, namely, (i) every tenant on ejectment was entitled to be paid as compensation the value of any building erected by him; and (ii) a tenant against whom a suit for ejectment was instituted had an option to apply to the Court for an order directing the landlord to sell the land to him for a price to be fixed by the Court. The question that fell for consideration was whether the second right was a right to property. It was held that the law in India did not recognise equitable estates. No authority had been cited in support of the contention that a statutory right to purchase land was, or conferred an interest of a right in property. The fact that the right was not created by the contract but by statute did not make a difference in the content or the incident of the right; that depended upon the nature and scope of the right. The right was a right to purchase land and if such right conferred under a contract was not a right of property, the fact that such a right stemmed from a statute could not expand its content or make it any the less a non-proprietary right. A statutory right to apply for the purchase of land was not a right of property.

7. The present Appeal must really be decided upon the basis of the Judgment of the Supreme Court which the said Circular of the Commissioner of Commercial Taxes referred to as the Lottery Ticket case, namely, H. Anraj v. Government of Tamilnadu . AIR 1986 SC 63.. What was there in question was whether sales tax could be levied by a State Legislature on the sale of lottery tickets within the concerned State. In order to decide this question, the true concept of goods, sale, movable and immovable property were relevant. The Supreme Court noted that Section 2(7) of the Sale of Goods Act defined ‘goods’ as meaning every kind of movable property other than actionable claims. The expression ‘movable property’ occurring therein had to mean property of every description except immovable property. Since goods were defined to exclude actionable claims, the definition of ‘actionable claim’ in Section 3 of the Transfer of Property Act was noted. It runs thus:

“Actionable claim” means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent…..”

The Supreme Court noted that the definition, as analysed, comprised two types of claims: (a) a claim to unsecured debts, and (b) a claim to a beneficial interest in movable property which was not in possession, actual or constructive, whether present or future, conditional or contingent. Reading (b) it was clear that if the beneficial interest in movable property was not in possession of the claimant, it would be an actionable claim; but if it was in his possession or enjoyment, it would not be actionable claim but a chose in possession. The Supreme Court referred to ‘The Classes of Agreements’ in Salmond's Jurisprudence, 12th Edition, and noted that it was well settled that rights and benefits arising under agreements which were in the nature of grants partook of the character of personalty as opposed to realty and, therefore, movable property capable of being assigned or transferred. The Supreme Court noted the Decision in Swami Motor Transport (P) Ltd. aforementioned, and found that it had there been held that a statutory right to apply for the purchase of land was not a right to property. This was a case which dealt with rights under a statute which created merely obligations or rights in personam and not with an agreement in the nature of a grant. In the case of the latter type of agreements, i.e, agreements in the nature of grant, the rights or benefits arising thereunder were property, more so when a party thereto had become entitled to the same on performing his part of the contract and in fact such rights or benefits would also be assignable. The Supreme Court noted the arguments on behalf of the lottery dealers that the concept of lottery could be sub-divided into two parts, namely, a right to participate and a right to receive the prize but the two together constituted one single right. The Supreme Court held thus:

“It is not possible to accept this contention for the simple reason that the two entitlements which arise on the purchases of a lottery ticket are of a different character, inasmuch as the right to participate arises in praesenti, that is to say it is a choate or perfected right in the purchaser on the strength of which he can enforce the holding of the draw while the other is inchoate right which is to materialise in future as and when the draw takes place depending upon his being successful in such draw. Moreover, on the date of the purchase of the ticket, the entitlement to participate in the draw can be said to have been delivered unto the possession of the purchaser who would be enjoying it from the time he has purchased the ticket and as such it would be a chose in possession while the other would be a actionable claim or a chose in action as has been held in Jones v. Carter [1845 (8) QB 134] (supra) and King v. Connare (61 CLR 596) (supra) on which counsel for the dealers relied. It is thus clear that a transfer of the right to participate in the draw which takes place on the sale of a lottery ticket would be a transfer of beneficial interest in movable property to the purchaser and, therefore, amounts to transfer of goods and to that extent it is no transfer of an actionable claim; to the extent that it involves a transfer of the right to claim a prize depending on a chance it will be an assignement of an actionable claim.

(emphasis supplied)

The Supreme Court also noted that incorporeal rights like copyrights or an intangible thing like electric energy could be regarded as goods exigible to sales tax. The Supreme Court, therefore, found no reason why the entitlement to a right to participate, in a draw, which was a beneficial interest in movable property of incorporeal or intangible character, should not be regarded as ‘goods’ for the purpose of levying sales tax. The conclusion was that lottery tickets to the extent that they comprised the entitlement to participate in the draw were ‘goods’ properly so called, squarely falling within the definition of that expression as given in the Tamil Nadu Act, 1959, and the Bengal Act, 1941, and to that extent they were not actionable claims. In every sale thereof a transfer of property in the goods was involved.

8. “Goods” are defined by Section 2(m) of the said Act to mean, “All kinds of movable property (other than newspapers, actionable claims, stocks and shares and securities) and includes………” In other words, actionable claims are excluded from the definition of ‘goods’ for the purpose of the said Act.

9. Now, the Supreme Court held in H. Anraj's case (supra) that lottery tickets were movable property. So, therefore, are R.E.P licences. The real question is whether R.E.P licences confer a right in praesenti or a right in futuro. The portion of the Judgment of the Supreme Court which we have quoted above is most relevant for this purpose. It was said of a lottery ticket that it conferred upon the buyer the right to participate in the draw in praesenti, that is to say, it was a choate or perfected right in the purchaser on the strength of which he could enforce the holding of the draw; while the other was an inchoate right which was to materialise in future, as and when the draw took place and depending upon his being successful in such draw. The distinction, therefore, was whether the lottery ticket conferred a choate or perfected right in the purchaser, which was said to be a right in praesenti, or an inchoate right which was to materialise in futuro depending upon chance.

10. In the instant case, the transfer of R.E.P licences confer upon the transferee the immediate right to clear goods covered by the licences at the Customs barrier. This is not an inchoate or incomplete right. It cannot be held to materialise in future because its exercise is dependent upon the transferee buying goods covered by the licence and bringing them to Indian shores. Nor can R.E.P licences be held to be actionable claims because the Customs authorities might not clear the goods and the transferee would have to commence an action against them in a Court of Law. In our view, the transfer of an R.E.P licence confers upon the transferee a right which is choate and perfected and exercisable immediately he presents to the Customs barrier goods of the nature covered thereby.

11. It must, therefore, follow that R.E.P licences are goods within the meaning of the said Act and the premium or price received by the transferor thereof is liable to sales tax thereunder.

12. In this view of the matter, the Appeal is dismissed. There shall be no order as to costs.

13. Upon the application of Mr. Chagla, learned Counsel for the appellant, the respondents shall not take any further steps against the appellant based upon the said Circular and notice and any action already taken pursuant thereto for a period of 12 weeks from today.