M/S. Goverdhan Hathi... v. Appellate Asst. Comm...

Ansari, C.J:— This batch of three revision petitions, seeks to vacate the petitioner having been charged tax on sales of kerosene oil, in the assessment years 1953–1954, 1954–1955 and 1957–1958. The claim for the exemption from the tax on the aforesaid sales, had been made on the basis of the dealer's being only the agent, and having earlier registered as such; but the claim had been rejected on the ground of the sales not being on behalf of Caltex India, Ltd., because of the petitioner's having bought the oil from the aforesaid concern earlier. The petitioner has, for the assessment year 1953–1954, claimed exemption on Rs. 8,45,905-9-6 out of the total turnover of Rs. 17,63,726-11-0, on the ground of the amount representing sales of kerosene as commission agent for Caltex India Ltd. As regards the next assessment year 1954–1955, the amount asked to be exempted is Rs. 7,49,804 nP. 84; and so far as the assessment year 1957–1958 is concerned, Rs. 4,17,151 nP. 33 has been requested to be excluded for the same reason. The written agreement, which the petitioner asserts to be of agent, is dated June 1, 1952; but mentions the document to be kerosene sales agreement. It is not disputed that the petitioner's licence under Section 9 of the General Sales Tax Act, No. XI of 1125, had been renewed for all the three assessment years, and which Section, omitting the unnecessary proviso, reads thus:—

“Government may, on application and on payment of such fee as may be prescribed in that behalf, license any person under this section who for an agreed commission or brokerage buys or sells on behalf of known principals specified in his accounts in respect of each transaction and may exempt from the tax or the taxes payable under Section 3 such of his transactions as are carried out in accordance with the terms and conditions of his licence.

“Provided also that the burden of proving that a transaction is exempt, by virtue of this Section, from the tax or taxes payable under Section 3, shall be on the licensee.”

2. The assessing authority had disallowed all the claims for the reason, which reads as follows:—

“The agreement between the assessee and Caltex was, however, not made available for verification. A copy of the same was, therefore, called for from the company direct for verification. It is seen from the covering letter and copy of agreement furnished by the company that the previous agreement was replaced by a fresh and totally different one with effect from 1-6-1952. Whatever be the merit or defects of the previous agreement, the current one-cannot be construed as a commission agency agreement in the accepted sense of the term and as contemplated under section 9. At best it is a distributorship, and the company reserves no ownership or other rights over the stocks in the possession of the assessee. I think the first clause of the agreement itself will set at rest any doubt or controversy. As per clause 12, the risk of loss or damage is also on the assessee. In the light of these facts, I feel that the claim for agency exemption under Section 9, will not stand and will be disallowed.

3. The appeals against the aforesaid rejections having failed, the petitioner appealed to the Sales Tax Appellate Tribunal, and the Tribunal has also dismissed the appeals. It has found from clauses 2, 4, 5, 8, 12, 17, and 34 of the agreement that it is one of sale of kerosene to the petitioner, and, therefore, does not create the relationship of principal and agent between Caltex and the petitioner. There are no findings by the taxing authorities, nor by the Appellate Tribunal on what are the terms of the licenses, that had been renewed for the three assessment years, and whether these licenses cover the sales of kerosene by the petitioner as agent of the Caltex Company. The three revision petitions before us are against the orders for the three assessment years. Revision Petition No. 55/59 covers the assessment year 1954–1955; No. 57/59, the assessment year 1957–1958; and No. 58/59 is against the rejection of the claim for the assessment year 1953–1954. The grounds taken in all are common, and have been formulated in the form of the following three questions:—

(1) “Whether on a true construction of the agreement dated 1-6-1952 between the assessee and Caltex (India) Limited, the kerosene supplied by Caltex India Ltd., to and sold by the petitioner are as purchaser or as commission agent?”

(2) “Whether the respondent is precluded from levying and collecting sales tax on the disputed turnover on account of the fact that a license under Section 9 of the Sales Tax Act was granted to the petitioner?”

(3) “Is the order of the Sales Tax Appellate Tribunal, Kerala, Trivandrum, in the above matter, sustainable in view of the failure of the Tribunal to decide the question of law?”

4. It is clear that, should we answer the first question in petitioner's favour, a finding would be necessary on whether he has observed the terms of his license under Section 9; for, it is not disputed that to obtain the benefit under the Section, a dealer must not only show his being an agent, but also having observed the terms of the license. In these circumstances, the cases have to be remanded; and adjudications of the other questions become unnecessary. Nor it should be disputed that, should the petitioner be really a purchaser, any erroneous view earlier entertained by the taxing department when renewing the licenses, would not preclude the State from cancelling them, after it had been correctly apprised of the correct position. The decisive issue in these revision petitions, therefore, is whether the agreement, on a fair reading of all its terms, be really one of agency; which, in other words, means the necessity to decide how far the taxing authorities and the Appellate Tribunal have correctly held it to be of sale. The agreement contains 42 clauses, and these can be grouped under two heads. The first should cover the rights and liabilities of the parties, so long as the agreement continues; and the other, after it had been terminated. Coming to the first head, clause 2 provides for the quantity of the oil to be purchased, whose minimum for each month would be required by the company and must be ordered; clause 5 is about the company's right to change the prices, not only of what is sold to the petitioner, but what is to be sold by him; clause 8 casts the duty on the petitioner not to represent his being the selling agent of the company; clause 9 reserves the right of the company to sell directly; clause 15 makes the property of the company to be in trust for the company; clause 17 enables the company to fix the prise at which the petitioner is to sell the oil and clause 19 enables the company to insure the property as well as the stock of kersone with the petitioner. The liabilities under the agreement are to be found in clause 4, that makes the purchaser liable to pay for all the kerosene purchased on the dates of the commodity being shipped; in clause 7 that fixes the area, wherein the oil purchased must be sold; in clause 10 that provides for payment of packages to be refunded on returnable receptacles being sent back in sound condition: and in clause 12 that lays the loss or damage or deterioration during the voyage, on the petitioner. Further clause 13 provides for petitioner's taking safeguards against contamination of the oil sold and not to adulterate; clause 14 requires him to furnish facilities for the storage of purchased kerosene; and clause 18 casts the responsibility of due care for the protection of the company's properties. In addition, clause 20 makes expenses incidental to storage, to be of the petitioner, and clause 22 provides him indemnifying the company against third party's claims. Correct reports in writing of all sales effected by the petitioner, irrespective of whether they be on cash or credit, must be, under clause 25, submitted to the company's office in Madras; clause 26 requires sales accounts being kept; and under clause 28 all accounts, on termination of the agreement, must be settled.

5. Such are the positions of the parties during the agreement; and after the termination, their rights and liabilities are as follows:— Under clause 31 the company is given the option to use the premises used by the petitioner; by clause 34 not only the properties of the company are to be surrendered, but the stock of the kerosene already purchased, should also be given up and the price, if paid to be repaid. Finally, clause 36 directs the petitioner, during the continuance of the agreement, to furnish security for the due performance of the obligations he had undertaken under the agreement.

6. It is clear that to hold this agreement to be one of sale only, would be to pay inadequate attention to certain provisions of the agreement. Taking some of such clauses seriatim, the company is, by clause, 2, given the right to notify in writing the minimum quantity of kerosene, which the petitioner must order each month, and further the right to require his maintaining at all such times such minimum stock of kerosene as the company may notify. The ordinary rule of contract being formed on the acceptance of the offer being communicated, is, by clause 3, excluded, whereunder the company has the right to treat any order or orders accepted or acknowledged as cancelled, and the petitioner's right to revoke any offer before acceptance is also taken away. The two provisions are consistent with the right of a principal to determine how much oil should his agent have, and to over-ride what the agent thinks he requires. Further, though the petitioner, under the earlier clause, is to pay the price at the time of the shipment, yet the company has, under clause 5, the right, from time to time and without previous notice, to change all or any prices, whether they be of the petitioner or of his purchasers. It appears to us that this clause clearly indicates the right of a principal to control the price in the market of the commodity with an agent, clause 7 not only confers the right to define the area, in which the petitioner is to sell the oil, but also authorises the company, at its absolute discretion, from time to time, to increase, reduce, restrict, or otherwise alter the said area or territory. This provision looks more like the principal's authority of limiting the locality, wherein his goods are to be sold, than a purchaser being restricted within a defined area to sell commodities he had purchased. Then there is the obligation under clauses 13 and 14, which provides for taking reasonable precaution against contamination of the kerosene by water, dirt, impurities, or other matters injurious to its quality, and for storage of the kerosene purchased from the company in duly licensed manner, the company having the discretion to make monthly deductions for providing such duly licensed storage facilities. We do not see why owners of goods should be placed under such restrictions, unless the intention be of the sales being the business of another. Again the company may, without being under any obligation, from time to time, furnish, under clause 15, equipment and other property for receiving, storing, or conveying kerosene, or otherwise for use by the petitioner in his business; and, though such equipment, other property and receptacles not paid for by the petitioner, remain the sole and absolute properties of the company, yet the absence of any payment for their use, is significant. Clause 16 restricts the petitioner's right of buying or selling the products of another company; clause 17 fixes the price, at which the oil is to be sold to the public within the area; and by clause 19 the company cannot only insure all its property or equipment stored with, loaned to, or rented by the petitioner, but can also insure all kerosene sold to the petitioner, against loss by fire, and that, not only during the transit, but even when in the petitioner's possession, provided the kerosene be in the warehouses, that are put up by the company. We do not see how the company can have insurable interest in the property sold to another and undertake to bear insurance expenses, unless it be that the company really is the principal. We find clauses 25 and 26 requiring accounts to be kept of daily sales, not only cash, but of credit; and these accounts are to be made available for inspection by the authorised representatives of the company. Finally, clause 34 requires the petitioner to deliver, on termination of the agreement, not only what are the Company's property, but kerosene as well; and what has been paid for, shall be treated as repurchased by the company at the original price, less the discount and deductions.

7. Having weighed these with the other provisions in the agreement, it is clear that the business carried under the agreement, would be of the company, rather than that of the petitioner. To put it differently, there is no such freedom of control, nor sufficiency of profit, nor liberty of action left to the petitioner, to fairly hold selling the kerosene oil to be the petitioner's business. It is true that clause 8 forbids the company being held out as a principal; but should the business be of the company, the direction like clause 8, would not convert it into that of the petitioner. It has to be weighed with the directions of keeping accounts, of circumscribing the area, of determining the re-sale price, of insuring the kerosene already sold, of not being bound even after acceptance, as well as of security for the due performance of such acts. On weighing all these, we have come to the conclusion that under this agreement, the petitioner would be doing the business of another.

8. In this connection, it is well to remember that purporting to purchase commodities, would not be fatal to the agreement in substance being of agency; and in support of this view we would quote the following part of paragraph 17 of American Jurisprudence (Vol XLVI, page 211), where it is stated:

“The primary test of whether a particular contract or transaction whereby goods are delivered or shipped by one party to another for sale by the latter, creates the relation of buyer and seller or only a relation of principal and agent, is the intention of the parties to be gathered from the whole scope and effect of the language used, and mere verbal formulas, if inconsistent with the real intention, are to be disregarded. It does not matter by what name the parties chose to designate it. That does not determine its character. The courts look beyond mere names within to see the real nature of the agreement, and determine from all its provisions taken together, and not from the name that has been given to it by the parties, or from some isolated provision, its legal character and effect. The Courts will not permit the parties by designating the transaction as a consignment for sale to use it as a cloak or device to disguise the real character of the transaction, and thus enable the consignor to retain a lien or security for the purchase price as against levying creditors of the consignee. It has been held that one appointed exclusive seller of goods which he was to purchase from the owner at a discount, and which he could not sell below retail price, or a dealer undertaking to order, for a customer, goods which he does not have in stock, is a mere agent.”

9. The case relied in support of the first of the two propositions lastly stated, is Willcox & Gibbs Sewing Machine Co. v. Ewing (35 Law Ed. p. 882, at p. 815). There, the plaintiff was, by contract, appointed exclusive vendor of defendant's machines, which he was to purchase from defendant at a large discount, and could not sell below the regular retail prices. In such circumstances, he was held to be mere agent of the defendant to sell the machines, and the principal to have a right to determine or revoke the authority at his own mere pleasure, when not otherwise agreed between them. The learned Judge observes as follows:—

“It is true that the machines he undertook to sell were to be purchased by him from the company at a large discount. But he could not sell them by retail below the regular retail prices. This arrangement was the mode adopted to protect the company's interests, and to secure to the plaintiff such compensation for his services as would induce him to devote his time, attention and abilities to the company's interests. He was still a mere agent to sell such machines as might be delivered to him under the contract. We perceive nothing in the agreement of 1874 to take the case out of the general rule that “the principal has a right to determine or revoke the authority given to his agent at his own mere pleasure; for, since authority is conferred by his mere will, and is to be executed for his own benefit and his own purposes, the agent cannot insist upon acting when the principal has withdrawn his confidence, and no longer desires his aid.”

10. In this country as well, vesting the agent with ownership has not been held to be fatal to the agreement being one of agency; for, in Provincial Government of Madras v. Veerabhadrappa (1 S.T.C 245 at pp. 268, 280) Satyanarayana Rao J. has observed as follows:—

“Section 8, in my opinion, is intended to cover transactions of accommodation contemplated by explanation 4 to the definition of ‘turnover’ in the Act. In such a case, notwithstanding the fact that at some point of time the ownership of the goods had vested in him while the purchase was made only to accommodate a particular person, if he shows in his accounts the agreed commission or brokerage, and acts on behalf of a known principal and not a fictitious and non-existing one and also makes it possible to levy the tax by including the turnover in the turnover of the seller's principal or purchaser's principal, he would escape from the liability to pay the tax notwithstanding that the ownership had vested in him at some point of time.”

11. Viswanatha Sastri J. also has observed as follows:—

“There may be cases where an agent buys goods himself and immediately thereafter sells the same goods to his principal for the cost price plus an agreed amount for commission. Conversely, he may buy his principal's goods himself and then sell them to strangers for the cost price plus an additional sum representing his commission. In such cases, an agent is, in law, a buyer or seller of goods, as the case may be, and would be a ‘dealer’ within the definition in Section 2(b) of the Act. But in truth and in fact, he is really buying and selling for the benefit of his principal, charging a commission for himself as his remuneration. In such cases, Section 8 might well come into play, and an agent of this description who takes out a license under Section 8, would be exempt from sales tax in respect of such of his transactions as are carried out in accordance with the terms of Section 8 and the licence issued thereunder.”

12. In Radhakrishna Rao v. The Province of Madras (3 S.T.C 121) the Full Bench has described who is a commission agent, and has shown him to be a person, who has control over or possession of the goods, and to have the authority from the owner of the goods to pass the property in and title to the goods. In these circumstances, is was held that when a commission agent sells goods belonging to his principal with his authority and consent and without disclosing to the buyer, the name of the owner, there is certainly a transfer of property in the goods from the commission agent to the buyer, and such a business can properly be described as a business of selling goods. The learned Judges further held that similar position would arise even in the case of a commission agent buying for an undisclosed principal, and such a person would be liable to sales tax under Section 3, but would be exempted under Section 8. Coming to Singarajanaballi Krista Reddi v. State of Madras (4 S.T.C 379) it was found that under Section 8 of the Madras General Sales Tax Act the exemption granted to a commission agent, to whom a licence had been issued under that section, does not extend to all the transactions carried on by him, but is limited to such of his transactions as are carried out in accordance with the terms of the licence issued to him. It was further held that his claim to immunity from tax, is dependent on his fulfilling the conditions of his licence. The learned Judge in State of Madras v. V.P Srinivasulu (5 S.T.C 202) held that when goods were sold by an unlicensed commission agent, there was only one sale, and in respect of that one sale, tax could not be levied twice by the department, once in the hands of the commission agent treating him as a dealer, and a second time in the hands of the principal treating the same turnover as the turnover of the principal. In Immidi Satyanarayana v. State of Madras (now Andhra) (6 S.T.C 216) it was held that where goods are sold by a commission agent, who is not licensed under the Madras General Sales Tax Act, 1939, and he has paid tax, as there is one sale effected by the commission agent, the price for such sale, cannot be treated as the turnover of the principal also, and the latter cannot be required to pay the tax for the second time. The Allahabad High Court in Panna Lal v. Commissioner of Sales Tax (7 S.T.C 722) has held that a commission agent, when he agrees to work for his principal as the latter's agent, and to obtain for his principal the goods, which the latter wants, undertakes a duty, which he has to discharge by purchasing the goods required and supplying them to his principal. The transfer of the goods purchased by him to his customer, is an act done in the discharge of his duty as an agent. Such a contract between the principal and the commission agent, is not one of sale, but of agency, and the transfer of property in the goods is not a sale within the meaning of the Sale of Goods Act, 1930. The learned Judges have further held that though the purchase of goods on behalf of the assessee's principal was a sale, the subsequent supply to the principal, did not amount to a sale by the assessee to the principal, as defined in the Sale of Goods Act.

13. The learned Government Pleader relies on Ramachandra Nathore v. Commissioner of Sales Tax (8 S.T.C 845) where the Madhya Pradesh High Court has held the transaction under the following circumstances to be of sale. A dealer in bidies, appointed an agent in U.P, who had to sell the goods at prices fixed under the agreement. The agent was entitled to a commission, but had to submit account of stock received and sold and the balance on hand at the end of every month. There was further no responsibility for any shortage in transit or liability to receive any unsold stock, if the agreement be terminated. In these circumstances, the real effect of the transactions was held to be sales within the meaning of Section 2(g), Explanation II of the State Act. We would respectfully disagree, should the learned Judges be considered as having taken the view in the case that a person is not an agent, because at certain points in dealings with his principal, he becomes vested with the ownership. We think that where vesting of ownership in the agent is to sell the goods of the principal, the earlier transfer would be incidental to the main purpose of making the person an agent, and would not convert the transaction into one of sale. The learned Government Pleader next relied on Rohtas Industries Ltd. v. State of Bihar (9 S.T.C 248) where it was held that the cement delivered, despatched, or consigned by the assessee to the Cement Marketing Company of India, Limited, or to their orders, or in accordance with their directions, were sales to the latter, and were, therefore, liable to be taxed under the Bihar Sales Tax Act. We respectfully differ from the proposition that sales to the agent for purposes of selling the principal's goods, would always attract the tax; for, should the proposition, so broadly stated, be accepted as correct, we do not see how a commission agent can be exempted from the operation of the sales tax. The Government Pleader has also referred to Commissioner of Sales Tax v. New India Sugar Mills (10 S.T.C 74) where it was found that any unconditional appropriation of the goods by the assessee as soon as the sugar was packed in the factory and put in deliverable state, would amount to sales; and, therefore, the assessee would be liable to pay the tax. We do not think the case decides anything, which is contrary to the view we are taking in this case.

14. It is clear from the aforesaid survey of the decisions, that three High Courts have held vesting of ownership in the commission agents, not being sufficient to deprive the agents of the benefits of licences, should they hold such licences for carrying on the business; and the consequence of the proposition, being established is that the vesting of ownership in agents for purposes of carrying on their agencies would not be fatal to their being treated as agents. It further follows that the commission agency would be merely illustration of the broader rule of persons being still agents, though they be getting the ownership of the goods for purposes of their doing business of agency. Therefore, the provisions in the agreement of June 1, 1952, whereby the petitioner is to purchase the goods, pay for them, and carry them at his risk, would not be fatal to his case of the agreement being of agency. These, with others, clearly show that in carrying out the terms of the agreement, the petitioner cannot be treated as carrying on his own business. With prices for sales by the petitioner being fixed by the company and with the liability to pay the company what price it determines, discount on the price paid to the company is the only profit that the petitioner earns; and we think such discounts really amount to commission on the sales of the kerosene effected by the petitioner. Then the area, in which the petitioner has to operate, is fixed by the company; the storing is with the facilities afforded by the company; and on termination of the agreement what remains must be given up. On these grounds we hold that the true position of the petitioner is not that of a purchaser but of an agent, which is further emphasised by the requirement of keeping and rendering accounts. It is true that the assessee is not to put himself as an agent, but such secret direction by the principal would not affect the rights of a stranger. We, therefore, feel that the Appellate Tribunal has wrongly interpreted the agreement to be of sale. The position of the petitioner, being an agent, is further strengthened by his having taken licence under Section 9 of the Sales Tax Act, and the assessing authorities as well as the Appellate Tribunal have erred in not deciding what are the terms of the licence. Indeed, we have not been able to find what the licence in 1952 contains though it is clear that the subsequent years extended what was then granted. It follows that the petitioner would become entitled to exemption on his sales of kerosene for the aforesaid three assessment years, should he be found to have sold in accordance with the licence that had been renewed in his favour under Section 9, after the taxing authorities had seen the agreement of June 1, 1952. We would, therefore, remand the cases to the Appellate Tribunal to determine what were the terms of the licence. It is clear that the petitioner would be entitled to the benefit of Section 9, only when it is established that he did the business in the three assessment years according to the renewed licences after the taxing authorities had seen the agreement.

15. Accordingly, we allow the revision petitions, vacate the earlier judgments, and remand the cases to the Appellate Tribunal to decide afresh the appeals before it, in view of what we have held to be the legal position. Costs will abide the final result.