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A.V Fernandez v. State
Factual and Procedural Background
The petitioner is a registered manufacturer of cocoanut oil and cake who obtained a certificate of registration under Form VI pursuant to Rule 20 of the Travancore-Cochin General Sales Tax Rules, 1350. The petitioner sought a deduction under clause (k) of sub-rule (1) of Rule 7, equal to the value of cocoanut and/or copra purchased and converted into oil and cake, provided that the sale price of the oil is included in his turnover. The petitioner was denied this deduction on the ground that the cocoanut oil was sold outside the State of Travancore-Cochin. The petitioner challenged the validity of this denial, raising the question whether the sale price of cocoanut oil sold outside the State should be included in turnover for the purposes of the Travancore-Cochin General Sales Tax Act, 1125, and the rules framed thereunder.
Legal Issues Presented
- Whether the sale price of cocoanut oil sold outside the State of Travancore-Cochin can be considered part of the petitioner's turnover under the Travancore-Cochin General Sales Tax Act, 1125, and related rules.
- Whether the denial of the deduction under Rule 7(1)(k) read with Rule 20(2) violates constitutional provisions, particularly Article 286 of the Constitution of India.
- Whether the provisions impugned violate Part XIII of the Constitution by affording a concession when the sale is made within the State but denying it when the sale is effected outside the State, implicating Articles 301 and 303.
Arguments of the Parties
Petitioner's Arguments
- The petitioner contended that the denial of the deduction under Rule 7(1)(k) and Rule 20(2) was invalid because the sale price of cocoanut oil sold outside the State should be included in turnover for tax purposes.
- The petitioner argued that Section 26 of the Travancore-Cochin General Sales Tax Act, added to conform with Article 286 of the Constitution, restricts imposition of tax on sales outside the State but does not amend the definition of “sale” in Section 2(j) of the Act.
- The petitioner maintained that the definitions of “sale” and “turnover” in Section 2 of the Act apply broadly and include sales outside the State, thus the deduction should be allowed.
Respondent's Position (Implied from Court's Analysis)
- The denial of the deduction was justified because the sale of cocoanut oil outside the State is exempt from sales tax under Article 286, and therefore no double taxation arises requiring such deduction.
- The purpose of the deduction under Rule 7(1)(k) and Rule 20(2) is to avoid double taxation on the same commodity within the State, not to provide a concession for sales outside the State where tax is not levied.
- The provisions do not violate constitutional guarantees of free trade under Articles 301 and 303, as they do not discriminate between States or impose direct restrictions on inter-State trade.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| In re Chandramoreswara Oil Co., Kumool, AIR 1954 Mad 983 | Clarification of the principle that deductions for purchase turnover apply only when sales turnover is taxable within the State; exemption of inter-State sales precludes such deductions. | The Court relied on this precedent to support the view that the deduction is not available when the sale of oil is outside the State and exempt from tax, thus no double taxation arises. |
| Sri Radhakrishna Groundnut Oil Mill, Desu Venkjah Guiitur v. State of Madras, 67 Mad LW 784 | Rejection of deduction claims where purchases were made outside the taxable territory; deduction applies only if tax was paid on purchase turnover within the State. | The Court cited this case to emphasize that deductions under similar sales tax rules are contingent upon tax having been paid on the purchase within the State, reinforcing the denial of deduction for sales outside the State. |
| Banking Case, 79 CLR 497 (Privy Council) | Distinction between regulation and prohibition of inter-State trade; direct and immediate restrictions violate freedom of trade, while indirect or remote impediments may be permissible. | The Court applied the principle that the provisions impugned do not directly and immediately restrict inter-State trade, and thus do not violate constitutional protections under Article 301 and related provisions. |
| McCarter v. Brodie, 80 CLR 432 | Determination of the object or purpose of legislation challenged under trade freedom provisions is based on the legal effect of the law itself, not on its social or economic consequences. | The Court used this precedent to analyze the impugned provisions’ purpose, concluding that they do not impose unconstitutional restrictions on trade. |
Court's Reasoning and Analysis
The Court began by examining the definitions of “sale” and “turnover” under Section 2 of the Travancore-Cochin General Sales Tax Act, 1125, noting that sales outside the State, such as those at Kozhikode in Madras State, fall within these definitions. However, the Court recognized that Section 26, added to the Act to conform with Article 286 of the Constitution, prohibits the imposition of sales tax on transactions occurring outside the State.
The Court reasoned that the deduction under Rule 7(1)(k) and Rule 20(2) is designed to avoid double taxation within the State—specifically, to prevent taxing both the purchase of copra and the subsequent sale of oil produced from it. If the sale of oil occurs outside the State and is exempt from tax, the rationale for the deduction disappears because there is no double taxation.
The Court relied on analogous provisions and judicial decisions under the Madras General Sales Tax Act and related rules, which similarly denied deductions for sales outside the taxable territory. These precedents supported the conclusion that the deduction is contingent on the sale turnover being taxable within the State.
Regarding constitutional challenges, the Court analyzed Articles 301 and 303, which guarantee freedom of trade and prohibit discriminatory laws between States. It found that the impugned provisions do not violate these articles, as they do not discriminate between States or impose direct restrictions on inter-State commerce.
The Court also considered foreign jurisprudence, including the American commerce clause and Australian constitutional provisions, but found them instructive only as background. The Court emphasized the distinction between direct prohibitions and permissible regulations of trade, adopting the Privy Council’s test that only direct and immediate restrictions violate constitutional trade freedoms.
Applying this test, the Court held that the provisions in question do not directly and immediately restrict inter-State trade and thus are constitutionally valid.
Holding and Implications
DISMISSED
The Court dismissed the petition challenging the denial of the deduction under Rule 7(1)(k) read with Rule 20(2) of the Travancore-Cochin General Sales Tax Rules. The holding confirms that sales tax deductions intended to avoid double taxation apply only when both purchase and sale transactions occur within the State and are subject to tax. Sales made outside the State, exempt under Article 286, do not qualify for such deductions. The decision clarifies the interaction between State sales tax laws and constitutional provisions governing inter-State commerce but does not set a new precedent beyond affirming the existing legal framework. The petition was dismissed with costs and an advocate's fee of Rs. 150/-.
The Judgment of the Court was delivered by
Menon, J.:— The petitioner is a registered manufacturer of cocoanut oil and cake who has obtained a certificate of registration in Form VI as provided in sub-r. (i) of R. 20, Travancore-Cochin General Sales Tax Rules, 1350. Cocoanuts and copra are taxed at the purchase point & according to sub-r. (2) if the said rule a registered manufacturer like the petitioner is entitled to a deduction under el. (k) of sub-r. (1) of R. 7 equal to the value of the cocoa-nut and or copra purchased and converted by him into oil and cake “provided that the amount for which the oil is sold is included in his turnover.”
2. Sales tax is levied on the not turnover of a dealer and what R. 7(1)(k) does is to direct that in determining the not turnover all amounts which a registered manufacturer of cocoanut oil and cake may be entitled to deduct from his gross turnover under R. 20 should be deducted in accordance with the conditions specified in that rule. The petitioner has been denied the deduction under R. 7(1)(k) read with R. 20(2) on the ground that he sold the cocoanut oil manufactured by him not within but outside the State of Travancore-Cochin, and his attempt in this petition is to challenge the validity, of that denial. The main question for determination, therefore, is whether the sale price of the cocoanut oil-sold outside the State can be considered as part in his turnover for purposes of the Travaucore-Cochin General Sales Tax Act, 1125 and, the rules framed thereunder. The relevant portions of the definition of the terms “sale” and “turnover” as given in S. 2 of the Act read as follows:
(i) “Sale” with all its grammatical variations and cognate expressions means every transfer of the property in goods by one person to another in the course of trade or business for cash or for deterred payment or other valuable considerations-and includes also a transfer of property in goods involved in the execution of a works contract, but does not include a mortgage, hypothecation, charge or pledge;
Explanation (2)— Notwithstanding anything to the contrary in the Sale of Goods Acts for the time being in force, the sale of purchase of any goods shall be deemed for the purpose of this Act, to have taken place in the State of Travancore-Cochin wherever tile contract of sale or purchase might have been made—
(a) if the goods were actually in the State of Travancore-Cochin at the time when the contract of sale or purchase in respect thereof was made; or
(b) in case the contract was for the sale or purchase of future goods by description, then, if the goods are actually produced in the State of Travancore-Cochin at any time after the contract of sale or purchase in respect thereof was made;
(k) “turnover” means the aggregate amount for which goods are either bought by or sold by a dealer, whether for case or for deferred payment or other valuable consideration, provided that the proceeds of the sale by a person of agricultural or horticultural produce grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover.”
3. And going by the definition there can be no doubt that the petitioner's sales at Kozhikode in the Madras State of the cocoanut oil manufactured by him in this State are sales within the meaning of S. 2(j) and the prices obtained by him for the said sales are part of his turnover as defined in Section 2(k) of the Tavancore-Cochin General Sales Tax Act, 1125.
4. The Travancore-Cochin General Sales Tax Act, 1125, is a pre-Constitution enactment and in order to bring it into conformity with Article 286 of the Constitution, Section 26 was added by the Travancore-Cochin General Sales Tax (Amendment) Act, 1951, with effect from 26-1-1950. Section 26 reads as follows:
“(1) Notwithstanding anything contained in this-Act—
(a) a tax on the sale or purchase of goods shall not be imposed under this Act—
(i) Where such sale or purchase takes place outside the State of Travancore-Cochin; or
(ii) where such sale or purchase takes place in the course of import of the goods into or export of the goods out of, the territory of India;
(b) a tax on all the sale or purchase of any goods shall not, after 31-3-1951, be imposed where such sale or purchase takes place in the course of inter-State trade or commerce except in so far as Parliament may by law otherwise provide,
(2) The Explanation to cl. (i) of Article 286 of the Constitution of India shall apply for interpretation of sub-cl. (1) of cl. (a) of sub-s. (1),”
5. Article 286 provides that
“No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods”,
6. Where such sale or purchase takes place in the circumstances specified in that Article and what S. 26 has done according to the petitioner is to incorporate into the Act that restriction on the imposition of a tax on such sale and purchase of gods by a specific provision and not to amend the definition of the term “sale” in S. 2(j) by confining it to those cases alone in which a sales tax can be collected by the State without violating the provisions of Article 286 of the Constitution.
7. The words “Notwithstanding anything contained in this Act” with which S. 26 opens give considerable force to the contention that the ambit of the definition has been left untouched by the introduction of that section by the amending Act of 1951 and we propose to assume that the contention has to be sustained.
8. The definitions given in Section 2 of the Travancore-Cochin General Sales Tax Act, 1125, however, will apply only in the absence of “anything repugnant in the subject or context” and on a perusal of the Act and the rules we cannot resist the conclusion that the definition embodied in S. 2(j) and (k) of the Act are clearly inapplicable to the provisions with which we are concerned. There can be no doubt that what has been intended is a taxation of copra at the purchase point and the avoidance of sales tax in respect of the oil extracted by a registered manufacturer from such copra to the extent of the value of the copra used for the said manufacture in all those cases where but for the concession he would have been liable to pay both the purchase tax on copra and the sales tax on oil under the Travancore-Cochin General Sales Tax Act, 1125.
9. In other words, the object is the avoidance of a double taxation by the State, one at the purchase point of copra and the other at the sale point of oil, and it is impossible to invoke the definition and say that the concession will be available to a registered manufacturer even in those cases where only one and not both the taxes can be realised from him under the provisions of the Act.
10. The provisions applicable to registered manufacturers of groundnut oil and cake under the Madras General Sales Tax Act, 1939 and the Madras General Sales Tax (Turnover and Assessment) Rules, 1939, are similar to those applicable to the petitioner and in — ‘In re Chandramoreswara Oil Co., Kumool’, AIR 1954 Mad 983 (A) the Madras High Court said:
“The assessee are registered manufacturers of groundnut oil. They purchased groundnuts and extracted oil from them but sold the oil outside the State, i.e, in Bombay. They were taxed on the turnover of the purchase price. They now claim that as the oil was sold outside the State, and as that sale is exempted from taxation under Article 286 of the Constitution, they are entitled to claim a rebate of tax they paid on the purchase turnover in respect of the groundnuts from which they extracted the oil, under R. 18(2), Madras General Sales Tax Turnover and Assessment Rules. This contention was not accepted by the Tribunal. We think that the conclusion reached by the Tribunal is correct, and there is no ground admitting these revision petitions. Under the Madras General Sales Tax Act, the groundnuts are taxable on the purchase turnover, and R. 5(i)(k), Turnover and Assessment Rules, provides that all amounts, which a registered manufacturer of groundnut oil, (‘other than refined groundnut oil’) and cake may be entitled to deduct from his gross turnover under R. 18 subject to the conditions specified in that rule, shall be deducted for ascertaining the not turnover on which the assessment is levied. That is clear from the opening words of R. 5. The object, therefore, of R. 5 is to arrive at the taxable not turnover. To determine the not turnover, certain deductions are allowed under that rule, and sub-r. (k) of R. 5(1) relates to the groundnuts and groundnut oil. Rule 18(2) provides
“Every such manufacturer shall be entitled to a deduction under Cl. (k) of sub-r. (1) of R. 5 equal to the value of the groundnut and/or kernel purchased and converted by him into oil and cake provided that the amount for which the oil is sold is included in his turnover.”
11. The object of R. 5 being to determine the taxable not turnover, the turnover of the sale of the oil, which is contemplated by R. 18(2), is the taxable turnover from which the purchase turnover of the groundnuts from which the oil was extracted should be deducted. The exemption is based upon the principle, that on the same commodity the dealer should not be called upon to pay the tax twice over. If he had already paid tax on the purchase turnover, and if Ire converted those groundnuts into oil and sold the oil, on the sale turnover of the oil which includes the purchase price of the groundnuts, he should not again be called upon to pay the tax. For that purpose and in order to avoid double taxation on the same commodity, this deduction is allowed. All this, of course, is on the assumption that otherwise the entire turnover of the sale of the oil would be liable to tax. If the assessees were exempted from paying on the sale turnover of the oil as the sale was outside the State, they cannot claim the benefit of the deduction under R. 18 (2) of the Turnover and Assessment Rules. This was the conclusion reached by the Appellate Tribunal and we think that is sound.”
12. And in — ‘Sri Radhakrishna Groundnut Oil Mill, Desu Venkjah Guiitur v. State of Madras’, 67 Mad LW 784 (B):
“The third point urged by the assessee was that in allowing the deduction under R. 18, Madras General Sales Tax Turnover and Assessment Rules, read with R. 5(1)(k), the assessec was entitled also to deduct the purchase price of groundnut or groundnut kernel when the purchases were made outside the taxable territory. We agree with the Tribunal in rejecting this contention also. The scheme of the taxation is not to provide for any special concession for the manufacture and sale of the groundnut oil as such. The scheme, as we understand it, is that, if a registered manufacturer of oil purchase groundnut and pays the tax under R. 4(2) on the purchase of that groundnut, if he subsequently converts that groundnut into oil and sells the oil, he would normally be liable to further sales tax on the sales turnover of that oil but for R. 18(2), Therefore, if he has already paid the tax on the purchase of the groundnut which was subsequently converted into oil, he is given a deduction under R. 18(2) read with R. 5(1)(k), Turnover and Assessment Rules.
13. We have already discussed the question in other cases and held that where oil is sold without liability to sales tax no question of deduction arises. The converse of it is what we have to consider in this case. Such deduction is allowed only where the purchase has already been made subject to tax under the Sales Tax Act. If the purchases were made outside the State of Madras, these purchases would not come within the scope of R. 4(2); and if groundnut oil is extracted from groundnut on the purchase of which no fax was paid, the sales turnover of such oil would be liable to tax under the scheme of the Sales Tax Act, and R. 18(2) would not apply to the turnover of the oil so extracted from groundnut on the purchase of which no tax was paid.”
14. The only further question that arises for consideration is whether the provisions above mentioned violate Part XIII of the Constitution by affording a concession when the sale of oil is made within the State and denying the same when it is effected outside the State.
15. Article 301 provides that subject to the other provisions of Part XIII “trade, commerce and intercourse throughout the territory of India shall be free” and Article 303(1) that the Legislature of a State shall not have power
“to make any law giving, or authorising the giving of, any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another, by virtue of any entry relating to trade and commerce in any of the lists in the Seventh Schedule.”
16. The only entry in the Seventh Schedule relating to “trade and commerce” as far as a State Legislature is concerned is Entry 26 of List II — “trade and commerce within the State subject to the provisions of Entry 33 of List III — and as sales tax legislation by a State is supported not by that entry but by Entry 54 of List II—“taxes on the sale or purchase of goods other than newspapers” — it is clear that the provisions impugned are in no way open to challenge under Article 303(1) of the Constitution.
17. The commerce clause of the American. Constitution, Article 1, Section 8(3)
“To regulate commerce with foreign nations, and among the several States, and with the Indian tribes”
18. Contains no express provisions guaranteeing the freedom of inter-State trade and commerce and the problem of discriminatory legislation by the States had to be solved by judicial interpretation to the effect that the power of Congress to regulate inter-State commerce is a power that is plenary and exclusive.
19. American cases bearing on the commerce clause beginning with — ‘Cibbon v. Ogden’, (1861) 9 Wheat. 1 (C), were cited before us but in view of the difference in language we have come to the conclusion that apart from providing an instructive back-ground of judicial approaches and shifting ideologies they will not in any way save us from what Mr. Justice Franks further has described in an expressive phrase as “the anguish of Judgment” 47 Col. L. Rev. 528 (D).
20. The model for Article 301 was not the commerce clause of the American Constitution but S. 92 of the Australian
“trade, commerce, and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free”
21. Which the Constituent Assembly widened to include not merely the freedom of inter-State trade, commerce and intercourse but intr-State trade, commerce and intercourse, as well. No section of the Australian Constitution has given rise to so much litigation or so many differences of judicial opinion as S. 92. In — ‘James v. Cowam’, 43 CLR at 422 (E), Rich, J., said:
“The rhetorical affirmation of S. 92 that trade, commerce and intercourse between the States shall be absolutely free, has a terseness and elevation of style which doubtless bests the expression of a sentiment so inspiring. But inspiring sentiments are often vague and grandiloquence is sometimes obscure. If this declaration of liberty had not stopped short at the high-sounding words “absolutely free” the pith and force of its diction might have been sadly diminished. But even if it was impossible to define precisely what it was from which interstate trade was to be free, neither because a common place definition form such a pedestrian conclusion or because it needs an exactness of conception seldom achieved where Constitutions are projected, yet obmutescence was both unnecessary and unsafe. Some hint at least might have been dropped, some distant allusion made, from which the nature of the immunity intended could afterwards have been deduced by those whose lot it is to explain the elliptical and expound the unexpressed”
22. And almost the last words of Latham, C.J, prior to his retirement in April 1952 were:
“When 1 die, S. 92 will be found written on my heart. It is quite time that some consideration was given to the possibility of doing something about S. 92 when I say doing nothing, I mean doing something other than submitting to a series of judgments and endeavouring to work out a proposition which will be consistent with all of them”. (Australian Law Journal, Volume 26, p. 2).
23. Equally potent is the comment of Sir ??? Jennings on Part XIII of the Constitution in his lectures entitled “Some Characteristics of the Indian Constitution”:
“The new generation of Australian lawyers would like to get rid of S. 92 of their Constitution, which seems to them to be more trouble than it is worth. It seems certain that in twenty years Indian lawyers will be able to point out that the Australian lawyers do not know what trouble is,”
24. The case before us is comparatively simple and in order to decide it there is no need to travel beyond the decision of the Privy Council in the Banking Case, 79 CLR 497 (F), which adopted the distinction between prohibition and regulation of inter-State trade, and between direct and remote effect. Lord Porter delivering the reasons of their Lordships for dismissing the appeals said:
“In this labyrinth there is no golden thread. But it seems that two general propositions may be accepted: (1) that regulation of trade, commerce and intercourse among the States is compatible with its absolute freedom, and (2) that S. 92 is violated only when a legislative or executive act operates to restrict such trade, commerce and intercourse directly and immediately as distinct from creating some indirect or consequential impediment which may fairly be regarded as remote”,
25. And also settled, as stated by Dixon, J. in — ‘McCarter v. Brodie’, 80 CLR 432 (G), that
“the object or purpose of an Act challenged as contrary to S. 92 is to be ascertained from what is enacted and consists in the necessary legal effect of the law itself and not in its ulterior effect socially or economically.”
26. The question whether an enactment is regulatory or something more or whether a restriction is direct or only remote or incidental cannot but be based on questions of fact and degree but the distinction is real and very often a Court may have no difficulty to decide on which side of the boundary a particular enactment falls and operates. The test suggested by the Privy Council certainly narrows the area of dispute though as stated by Lord Porter “It is beyond hope that it should be eliminated.”
27. We are not concerned in this case with provisions that are regulatory or a contention that they are something more; the only matter we have to adjudge is whether any restriction on the freedom of trade and commerce that may result from the provisions impugned can be considered as the direct and immediate result of the provisions themselves. We have no doubt that they cannot be so considered and in that view this petition must fail and has to be dismissed. We dismiss the petition with costs, Advocate's fee Rs. 150/-.
28. Petition dismissed.
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