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Kerala Arecanut Co. v. State Of Travancore-Cochin .

Kerala High Court

Aug 23, 1957

Judgment

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Factual and Procedural Background

The petitioner is the Kerala Arecanut Company, Kokala, Trichur, a registered firm of three partners. The 1st respondent is the State of Travancore-Cochin and the 2nd respondent is the Sales Tax Officer, First Circle, Trichur. The petitioner challenged an assessment order (Ext. C) dated 24-11-1955 made by the 2nd respondent under the Travancore-Cochin General Sales Tax Act, 1125. The sole ground of challenge was that the purchases in question took place "in the course of inter-State trade or commerce" and were therefore exempt from State taxation under Article 286(2) of the Constitution as it stood before the Sixth Amendment (excluding the proviso).

Relevant statutory or rule references noted in the opinion include: rule 4(2)(c) of the Travancore-Cochin General Sales Tax Rules, 1950 (defining gross turnover for arecanuts as the amount for which goods are bought by the dealer) and rule 5A (which provides that tax shall be levied on turnover of arecanuts when purchased by a person who in the State is the last dealer in such goods liable to tax, and places the burden of proving that a transaction is not liable for taxation on the dealer).

The factual description of the mode of dealing (from an affidavit filed by the 2nd respondent and accepted by the court as correct) states that the petitioner acted as commission agent with authority to purchase on behalf of non-resident constituents: the petitioners fixed price and made purchases on behalf of non-resident purchasers, paid the price, obtained signed memos confirming the purchases, despatched the goods to the purchasers, and billed the purchasers for packing, postage and incidental charges.

The narrow legal question before the court was whether, in the absence of a contractual term requiring transportation of the goods across State frontiers, such purchases by the commission agent can be treated as purchases "in the course of inter-State trade or commerce" for the purpose of Article 286(2).

Legal Issues Presented

Whether purchases effected by the petitioner (as commission agent on behalf of non-resident principals), where the contracts of sale did not include transportation across State frontiers as a term, can be regarded as having taken place "in the course of inter-State trade or commerce" within the meaning of Article 286(2) of the Constitution (pre-Sixth Amendment).
Whether the precedents and authorities cited (including dissenting and majority views in earlier cases and academic authorities) require treating such purchases as exempt from State sales tax notwithstanding the absence of a contractual provision for inter-State transport.

Arguments of the Parties

Petitioner's Arguments

The petitioner contended that the transactions in issue took place "in the course of inter-State trade or commerce" and therefore were exempt from taxation under Article 286(2) of the Constitution.
Counsel for the petitioner (Mr. Nambiar) argued that the statement by Venkatarama Ayyar, J. (in his dissent in Bengal Immunity Co. Ltd. v. State of Bihar) conflicted with the majority decision in State of Trav.-Co. v. S.V.C. Factory (1953) and was therefore of no effect; he relied on dissenting passages and other authorities to support a broader construction of Article 286(2).

Respondents' Position (as reflected in the opinion)

The 2nd respondent's affidavit described the factual course of dealings: the petitioner purchased and paid for the goods on behalf of non-resident principals, obtained confirmations, and despatched the goods. This factual account supports the view that transportation across State boundaries was not an express term of the contracts of sale.
It was not contended by the petitioner that transportation across the State frontier was a contractual term; the legal issue was whether such sales could nonetheless be regarded as being in the course of inter-State trade without that contractual element.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bengal Immunity Co. Ltd. v. State of Bihar, (1955) 6 STC 446 : AIR 1955 SC 661 (dissent of Venkatarama Ayyar, J.)	Proposition (dissent): A sale is "in the course of inter-State trade" only if (1) there is a sale of goods and (2) the transport of those goods from one State to another is under the contract of sale.	The court treated this statement as the correct view of the law for the purposes of the case and adopted it: absent a contract term requiring inter-State transport, the purchases could not be regarded as in the course of inter-State trade.
Rottschaefer on Constitutional Law (authority cited)	Text: buying and selling constitute inter‑State commerce if the contracts contemplate or necessarily involve movement of goods in inter‑State commerce.	Used as supporting authority for the court's view that the contract must contemplate or necessarily involve inter‑State movement for Article 286(2) immunity.
Hartman on State Taxation of Inter-state Commerce (text) and Wiloil Corporation v. Pennsylvania, 294 U.S. 169 (1935)	Doctrine: immunity refused where sales contract did not contemplate or require shipment from outside the State even though shipment was in fact made to fill the contract.	Appealed to by the court as supportive of the proposition that the contract must require or contemplate inter‑State shipment for exemption to apply.
Indian Coffee Board v. State of Madras, (1956) 7 STC 135 : AIR 1956 Mad 449 (Madras HC)	Rule: A sale completed by delivery within the State does not come within Article 286(2) even if purchaser intended and did transport goods outside the State; requires both a sale and transport under the contract.	Cited as an adoption of the Venkatarama Ayyar, J. formulation; the court relied on this as supportive authority for treating the absence of a contractual inter‑State transport term as decisive.
Ashok Leyland Ltd. v. State of Madras, (1957) 8 STC 210 : AIR 1957 Mad 263	Similar principle as in Indian Coffee Board: sales completed and delivery within State are liable to State sales tax; the inter‑State stream begins after buyer takes delivery.	Cited as corroborative Madras High Court authority consistent with the court's view that delivery within State completes the sale and prevents Article 286(2) immunity absent contractual inter‑State transport.
State of Travancore-Cochin v. S.V.C. Factory, (1953) 4 STC 205 : AIR 1953 SC 333	Majority: if purchases were effected by commission agents outside the State and deliveries made through normal commercial channels, transactions would partake of an inter‑State character and fall under clause (2).	The court interpreted this passage as not displacing the requirement that the contract contemplate inter‑State transport; it read other passages in the judgment as clarifying that mere acts preparatory to export/purchase do not amount to acts "in the course of" export or inter‑State commerce.
Clements and Marshall Pty. Ltd. v. Field Peas Marketing Board, (1947) 76 CLR 401	Emphasis on considering commercial significance of transactions and whether they form integral parts of a continuous flow involving transfer from one State to another.	Quoted in the opinion (via Das, J.'s dissent in S.V.C.) and discussed; the court noted such passages stress mode of construction rather than a rule displacing the contractual requirement for inter‑State transport.
State of Bombay v. United Motors (India) Ltd., (1953) 4 STC 133 : AIR 1953 SC 252	Dissent (Bose, J.): argued that normal commercial flow crossing boundaries could render a sale inter‑State even if delivery occurred within a State.	The court acknowledged this dissent but treated such passages as emphasizing interpretative approach (commercial significance) and held they do not establish that absence of contractual inter‑State transport is irrelevant.

Court's Reasoning and Analysis

The court proceeded step-by-step as follows:

It identified the governing constitutional provision — Article 286(2) as it stood before the Sixth Amendment — and framed the petitioner's contention that the purchases were in the course of inter‑State trade or commerce and therefore exempt from State taxation.
It noted the procedural posture: the assessment order (Ext. C) dated 24‑11‑1955 was challenged only on this constitutional ground and that no parliamentary legislation or Presidential Order under the proviso to Article 286(2) was relevant to the case.
It confined statutory consideration to the necessary rules (rule 4(2)(c) and rule 5A of the Travancore‑Cochin General Sales Tax Rules, 1950) to show the statutory framework for taxation and the dealer's burden of proving exemption.
It accepted the affidavit of the 2nd respondent as a correct factual description of the mode of dealing: the petitioner acted as commission agent, purchased and paid on behalf of non‑resident principals, obtained confirmations and despatched goods, but the contracts did not include transportation across the State frontier as a contractual term.
The court posed the legal question narrowly: whether, in the absence of a contractual term requiring inter‑State transport, the purchases could be considered as taking place "in the course of inter‑State trade or commerce".
The court concluded that they could not. It relied principally on the formulation by Venkatarama Ayyar, J., in his dissent in Bengal Immunity Co. Ltd. v. State of Bihar, which requires concurrence of two conditions for a sale to be "in the course of inter‑State trade": (1) a sale of goods and (2) transport of those goods from one State to another under the contract of sale.
To reinforce this view the court cited academic authorities (Rottschaefer and Hartman) and the Wiloil U.S. case for the proposition that contractual contemplation or requirement of inter‑State movement is central to immunity.
The court observed that the Madras High Court had adopted the Venkatarama Ayyar J. formulation in Indian Coffee Board v. State of Madras and in Ashok Leyland Ltd. v. State of Madras, and relied on those authorities to support its conclusion.
It examined contrary passages and dissents (including the majority language in S.V.C Factory and dissenting opinions emphasizing commercial significance and normal flows across boundaries) and concluded these passages amount to rules of construction and contextual emphasis rather than displacing the requirement that the contract contemplate or require inter‑State transport.
On this basis the court held that the petitioner’s purchases, made through the agency of the petitioner but without contractual terms providing for inter‑State transport, were not purchases "in the course of inter‑State trade or commerce" within Article 286(2) and therefore not immune from State sales tax.

Holding and Implications

HOLDING: The petition is DISMISSED.

Implications and immediate consequences:

The assessment order (Ext. C) made by the 2nd respondent on 24‑11‑1955 stands; the sales/purchases in question are not treated as being "in the course of inter‑State trade or commerce" for the purpose of Article 286(2) because the contracts did not contemplate or require inter‑State transportation.
The petition was dismissed without any order as to costs.
The opinion does not purport to establish a broader novel principle beyond applying the contractual‑requirement approach (as formulated in the cited authorities); the court treated competing authorities emphasizing commercial significance as interpretative guidance rather than as displacing the requirement that the contract contemplate inter‑State movement. The opinion, therefore, applies existing lines of authority to the facts and does not announce a new expansive precedent beyond that application.

Disposition: Petition dismissed.

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The Judgment of the Court was delivered by

M.S Menon, J.:— The petitioner, the Kerala Arecanut Company, Kokala, Trichur, is a registered firm consisting of three partners. The 1st respondent is the State of Travancore-Cochin, and the 2nd, the Sales Tax Officer, First Circle, Trichur.

2. Article 286(2) of the Constitution as it stood before the Sixth Amendment (excluding the proviso) read as follows:

“Except in so far as Parliament may by law otherwise provide, no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of inter-State trade or commerce”

and the contention urged on behalf of the petitioner is that the transactions with which we are concerned took place “in the course of inter-State trade or commerce” and are as a result exempt from taxation under the Travancore-Cochin General Sales Tax Act, 1125.

3. The assessment order impugned is Ext. C, an order of the 2nd respondent dated 24-11-1955. The order is not challenged on any ground other than the one mentioned above and it is hence unnecessary to consider any of the provisions of the Travancore-Cochin General Sales Tax Act, 1125, or the Travancore-Cochin General Sales Tax Rules, 1950, except to point out that under rule 4(2)(c) of the said rules the gross turnover of a dealer in arecanuts is the amount for which the goods are bought by him and that rule 5A provides:

“The tax shall be levied on the turnover of ……… arecanuts …… under S. 3, sub-section (1) when purchased by a person who in the State is the last dealer in such goods liable to tax and who is not exempt from taxation under the Act. Provided that the burden of proving that a transaction is not liable for taxation under this rule shall be on the dealer”.

4. No Parliamentary legislation as contemplated by the opening words of article 286(2) or any Presidential Order in pursuance of the proviso thereto also arises for consideration. The petitioner acts as a commission agent both for the sellers and purchasers of arecanut. It is agreed that the following averments in the affidavit filed by the 2nd respondent may be taken as a correct description of the course of dealing in respect of the purchases effected by the petitioner on behalf of its non-resident principals:

“They (the petitioner firm) are commission agents with authority to purchase on behalf of their non-resident constituents. The statement that the non-resident purchasers or their representatives fix the price and directly purchase from the owners is wrong. The price is fixed and the purchase is made by the petitioners on behalf of the non-resident constituents. The petitioners also pay the price on behalf of the non-resident constituents. After the purchase, the petitioners take signed memos from the constituents confirming the purchase. Subsequently the goods are despatched to the purchasers by the petitioner. The bills sent to the purchasers contain the amounts spent by the petitioners on account of packing, postage, and other incidental and customary charges”.

(paragraph 2).

5. It is not contended that transportation across the State frontier, is a term of the contracts of sale and the question for determination is whether, in the absence of such a term the purchases can, be considered as purchases which took place “in the course of inter-State trade or commerce”. We take the view that they cannot be so considered and the law on the subject is as laid down by Venkatarama Ayyar, J., in his dissenting judgment in Bengal Immunty Co. Ltd. v. State of Bihar, (1955) 6 STC 446 : (AIR 1955 SC 661) (A) :

“A sale could be said to be in the course of inter-State trade only if two conditions concur: (1) A sale of goods, and (2) a transport of those goods from one State to another under the contract of sale. Unless both these conditions are satisfied, there can be no sale in the course of inter-State trade. Thus, if X, a merchant in State A goes to State B, purchases goods there and transports them into A, there is undoubtedly a movement of goods in inter-State commerce. But that is not under any contract of sale”, (page 583 of STC): (p. 734 of AIR).

6. It is agreed that if this is a correct statement of the law the petition must fail as the only difference between the illustration given in the Judgment and the facts of this case is that the purchase and bans-port are effected not directly by the non-resident buyer but through the agency of the petitioner.

7. To the same effect as the statement of Venkatarama Ayyar, J. is the following passage from Rottschaefer on Constitutional Law:

“The activities of buying and selling constitute inter-State commerce if the contracts therefor contemplate or necessarily involve the movement of goods in inter-State commerce”. (page 229):

and from Hartman on State Taxation of Inter-state ‘Commerce:

“The Court had refused immunity to the sale where the sales contract did not contemplate or require shipment from a point outside the State, although shipment was in fact so made to fill the contract. This doctrine was established by the Wiloil case (Wiloil Corporation v. Pennsylvania, (1935) 294 U.S 169 (B). (page 149).

8. The statement of Venkatarama Ayyar, J. has also been adopted as a correct statement of the law by the Madras High Court in Indian Coffee Board v. State of Madras, (1956) 7 STC 135 : (AIR 1956 Mad 449) (C) and Ashok Leyland Ltd. v. State of Madras, (1957) 8 STC 210 : (AIR 1957 Mad 263) (D). In the former case the court said:

“A sale completed by delivery within the State of Madras to the purchaser or his agent does not come within the scope of Article 286(2) even if the purchaser bought the goods with the intention of transporting them outside the State and did transport them outside the State. Unless both the conditions of (1) a sale of goods, and (2) a transport of those goods from one State to another under the contract of sale are satisfied, there can be no sale in the course of inter-State trade”. (Head Note).

9. The relevant portion from the Head Note of the latter case is:

“The assessee company assembled motor cars in Madras State and sold these cars to dealers outside State. In respect of certain sales, the outside State dealers sent their drivers to the assessee's factory who took delivery of the cars and transported them outside the State. The assessee contended that though the delivery of the cars was effected within the Madras State, as such delivery was for immediate transport of the cars sold outside the State, the sales were in the course of inter-State trade within the meaning of Article 286(2) of the Constitution and were therefore exempt from taxation. Held, that as the sales were completed and delivery was effected within the Madras State, the sales were liable to sales tax under the Madras Act. The stream of inter-State trade or commerce commenced only after the dealer as buyer took delivery of the goods, and the antecedent sale to him by the assessee was a distinct and closed transaction before that stream commenced”.

10. The majority decision in (1955) 6 STC 446 : (AIR 1955 SC 661) (A) does not deal with the question. Das, Actg. C.J, said:

“It is not necessary, for the purposes of this appeal, to enter upon a discussion as to what is exactly meant by inter-state trade or commerce or by the phrase ‘in the course of’, for it is common ground that the sales or purchases made by the appellant company which are sought to be taxed by the State of Bihar actually took place in the course of inter-State trade or commerce”.

11. According to Mr. Nambiar, learned counsel for the petitioner, however, the statement of Venkatarama Ayyar, J., is opposed to the majority decision in State of frav-Co. v. S.V.C Factory, (1953) 4 STC 205 : (AIR 1953 SC 333) (E) and should hence he considered as of no effect. One of the groups of purchases in that case consisted of purchases of cashew-nuts from the State of Madras. The Travan-core-Cochin Advocate-General submitted that those purchases

“were made outside the State in the neighbouring districts of Madras, deliveries were effected through the ordinary commercial channels by employing commission agents who made the purchases and arranged for the deliveries at the respondents' depots at Trichur or Quilon”.

and the court said:

“If, as claimed by the Advocate-General, the purchases were effected by the employment of firms doing business as commission agents outside the State, and the deliveries were made through normal commercial channels, the transactions would partake of an inter-State character and fall under clause (2)” (page 218 of STC): (p. 339 of AIR).

12. We are unable to read this statement as meaning that even if transportation across the State frontier was not part of the contracts of sale, those sales should nonetheless be considered as having taken place in the course of inter-State trade or commerce. An earlier passage in the same judgment will make the position clear:

“A purchase for the purpose of export like production or manufacture for export, is only an act preparatory to export and cannot, in our opinion, be regarded as an act done ‘in the course of the export of the goods out of the territory of India’, any more than the other two activities can be so regarded”, (page 212 of STC): (p. 336 of AIR).

13. In (1953) 4 STC 205 : (AIR 1953 SC 333) (E) Das, J., in his dissenting judgment quoted with approval the following passage from the judgment’ of Dixon, J., in Clements and Marshall Pty. Ltd. v. Field Peas Marketing Board, (1947) 76 CLR 401 at p. 429 (F) :

We should consider the commercial significance of transactions and whether they form an integral part of a continuous flow or course of trade, which, apart from the theoretical legal possibilities, must commercially involve transfer from one State to another”

and in State of Bombay v. United Motors (India) Ltd., (1953) 4 STC 133 : (AIR 1953 SC 252) (G). Bose, J., in his dissenting judgment said:

“A, a Bombay dealer, sells goods to B, a dealer in Madras, for consumption in Madras. I will assume that delivery is made to B himself in Bombay and that he carries the goods across in person. If that is the normal way in which trade and commerce in that particular line of goods flows across the boundary, then that would, in my opinion, be a sale in the course of inter-State trade and commerce despite the facts, including delivery, mentioned above. Ordinarily, goods of this nature are delivered to a carrier but that makes my point all the stronger. So long as the ban imposed by clause (2) remains the situs of the sale and the place of delivery are not material provided the sale is caught up in the vortex of inter-State trade and commerce”, (page 166 of STC): (p. 268 of AIR).

14. Learned counsel for the petitioner drew our attention to these passages and contended that they militate against the view taken by Venkatarama Ayyar, J., in (1955) 6 STC 446 : (AIR 1955 SC 661) (A) and by the Madras High Court in (1956) 7 STC 135 : (AIR 1956 Mad 449) (C) and (1957) 8 STC 210 : (AIR 1957 Mad 263) (D).

15. We are unable to agree. As we understand the passages extracted above, they only mean that in interpreting a contract of sale its “commercial significance” and “the normal way in which trade and commerce in that particular line of goods flows across the boundary” should not be forgotten. In other words, what the passages do is to emphasise a mode of construction and a way of approach rather than postulate a rule to the effect that even if the contracts of sale do not require or necessarily involve transportation across the State boundary, the sales should nonetheless be considered as taking place “in the course of inter-State trade or commerce”. In the light of what is stated above this petition has to be dismissed and it is hereby dismissed, though in the circumstances of the case without any order as to costs.

D.H.Z

16. Petition dismissed.