Full Judgment Text
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PETITIONER:
KELVINATOR OF INDIA LTD.
Vs.
RESPONDENT:
THE STATE OF HARYANA
DATE OF JUDGMENT23/08/1973
BENCH:
KHANNA, HANS RAJ
BENCH:
KHANNA, HANS RAJ
ALAGIRISWAMI, A.
CITATION:
1973 AIR 2526 1974 SCR (1) 463
1973 SCC (2) 551
CITATOR INFO :
R 1976 SC1016 (23)
RF 1981 SC 446 (6)
D 1981 SC1604 (12)
ACT:
Central Sales Tax Act, (74 of 1956) S. 3(a)-Scope of-
movement of goods when occasioned by sale-Manufacture of
goods in one State and sold in another to distributors-
Distribution agreement if constitutes contract of safe-Sale
of Goods Act (3 of 1930). S. 23-Scope of.
HEADNOTE:
Section 6 of the Central Sales Tax Act, 1956, makes every
dealer liable for payment of tax under the Act on all sales-
effected by him in the course of interstate trade or
commerce. A sale of’ goods can be held to have taken place
in the course of interstate trade under s. 3 (a) if it can
be shown that the sale has occasioned the movement of goods
from one State to another, that is, if, (i) there is a sale,
(ii) there is actual movement of goods from one State to
another, and (iii) the sale and movement of the goods formed
integral parts of the same transaction. A sale being. by
the definition in the Act, transfer of property, to be
exigible to tax under the Act it must be shown that tie
movement was the result of a covenant or incident of the
contract of sale’ The movement of goods which takes place
independently of acontract of sale would not fall
within the ambit of s. 3(a). There must be acontract of
sole preceding the movement of goods from one State to
anotherand the movement of goods should have been caused
by and be the result of that contract of sale. If there was
no contract of sale preceding the movement of goods the
movement can obviously be not ascribed to a contract of sale
nor can it ’be said that. the sale has occasioned movement
of goods from one State to the other. [471F-473B]
In the present case, the appellant was a manufacturer of
refrigerators in Faridabad. Presene refrigerators. were
sold with three different trade marks. The sale of each
brand was made through a separate distributor in Delhi
appointed for that purpose and the appellant entered into an
agreement with each of the three distributors. The
appellant dealer was bound to sell each of the brands of the
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refrigerator to one of the distributors. The price of the
refrigerators was to be fixed mutually as agreed upon
between the appellant and his distributors from time to
time. The prices were not settled for each individual
machine but periodically. The goods were manufactured in
the factory at Faridabad and excise clearance pass was
obtained after the payment of excise duty for the transport
of goods from the factory to the appellant’s godown in
Delhi. The excise pass was in favour of self. During the
transport of the goods from Faridabad to Delhi the octroi at
the barrier was paid by the appellant. At the destination
the goods were received by the staff of the appellant and
taken to their godown. The purchase orders were placed by
the three distributors after the goods reached the Head-
office of the appellant at Delhi. In pursuance of the
orders given by the distributors the Delhi staff gave
delivery of the goods at Delhi under a challan prepared at
Delhi. The property in the goods passed at Delhi to the
distributors after delivery. The price of the goods was
received by the appellant at Delhi and deposited in the
appellant’s account in its Delhi bank. The refrigerators
were also exported putside India.
The High Court, in a reference by the Tribunal, held that
the distribution agreements constituted agreements ’of sale,
that the refrigerators moved from Faridabad to: Delhi in
pursuance of the agreements of sale, and that the appellant
was therefore liable to pay sales-tax under s. 3(a) of the
Act.
Allowing the appeal to this Court,
464
HELD (1) The three agreements between the appellant and the
distributors were merely agreements for distribution and did
not constitute contracts of sale. [480B-C]
(a)The number of refrigerators which were to be purchased
by each of the distributors was not specified in the
distribution agreements nor did the agreements contain the
price which was to be charged for each refrigerator. In two
of the distribution agreements the minimum number of
refrigerators which had been agreed upon to be purchased by
the distributors was mentioned but the exact number of
refrigerators to be sold by the appellant to those two
distributors was still left to the volition of the
appellant. The mode of dealing between the parties was that
orders were placed by the distributors with the appellant
after the refrigerators had reached the appellant’s sale-
office and godown in Delhi. The price of refrigerators was
also to be mutually agreed upon from time to time. The
sales by the appellant to the distributor thus depended upon
the future agreement between the parties from time to time.
Therefore, it was the orders which were placed in Delhi by
the distributors and the acceptance thereof by the appellant
that resulted in the mutual agreement of sale. The
distribution agreement with each distributor only provided
the framework within which the different contracts of sale
were to be entered into by the distributor with the
appellant, and the distribution agreement and contract of
sale were distinct transactions. [474B-G]
(b)It is not correct to say that the distributor with whom
the first agreement was entered into was bound to purchase
all the products of the appellant. The words ’the sale
would be as mutually agreed upon from time to time’ Would
lose all significance if that was the intention of the
parties. Also, the facts that subsequently two other
distribution agreements were entered into with two others
and that the appellant was in a position to export its
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products to foreign countries during the assessment year,
show that there was no such agreement. [474G-475B]
(c)There was no appropriation towards the agreement with
each of the distributors, at Faridabad by affixing the name
plates to the refrigerators, and hence, there was no sale of
refrigerators at Faridabad. There was no evidence to show
that. the name plates were actually affixed at Faridabad and
not at Delhi. Even if they were so affixed there was
nothing to prevent the appellant from changing them because
the three different brands of refrigerators were in all
respects identical and the name plates were also easily
interchangeable. of the sale of the-refrigerators in favour
of the distributors had already taken place at Faridabad and
the refrigerators had be-en appropriated there would not
have arisenany occasion for the placing of a subsequent
order in Delhi by a distributor. But in fact orders in
respect of the various refrigerators were placed by the
distributors only in Delhi after they had been transported
to the Delhi sale-office and godown of the appellant. Since
there was no appropriation at Faridabad, there was no legal
bar to the changing of name plates by the appellant till
such time as orders were placed by the distributors after
inspection at Delhi. In answering the question whether the
transactions constituted sales in the course of interstate
trade or commerce the Court should look not merely at the
distribution agreement but should also pay regard to the
entire course of dealings between the parties. [475 B-H]
(d)Apart from the fact that the distribution agreements
could not be construed as contracts of sale there is no
material to show that there was any assent, expressed or
implied, by the distributors, to the appropriation of the
refrigerators by the appellant at Faridabad; and hence s. 23
of the Sale of Goods Act is not applicable. No authority
was given by the distributors to the appellant to
appropriate the goods at Faridabad, Further the appellant
was not, under the terms of the contract, authorised to do
some act or thing with reference to the refrigerators which
could not be done until the refrigerators were appropriated.
[477 H-478H]
(2)There was no movement of refrigerators from Faridabad
to Delhi under a contract of sale. [476G]
465
(a)If there is a choice before the parties of so arranging
their matters that lift one case they would have to incur
liability to, pay tax and in the other case the liability to
pay tax would not be attracted, they would Prefer the latter
course’There is nothing illegal or impermissible to a
party so arranging its affairsthat the liability to pay
tax would not be attracted or would be reduced. [476C-D]
The appellant could have sold the refrigerators at either of
the two places, Faridabad or Delhi. But liability to pay
tax under the Act would arise if the sale of the
refrigerators to distributors were to take place at
Faridabad and the movement of refrigerators from Faridabad
to Delhi were to take place under the contract of sale. So,
the parties expressly stated in each of the three distri-
bution agreements that it would be in Delhi that the sale
would take place to the distributors and the property
therein would pass to them. In fact, it was in Delhi that
the orders were placed by the distributors, the goods were
delivered to the distributors, and the price of the
refrigerators was paid. Hence it could not be said that the
transport of the refrigerators from Faridabad to Delhi was
in pursuance of a contract of sale. The appellant had a
godown and sale office in Delhi and there is no evidence
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that it had a godown in Faridabad. The movement of the
goods from Faridabad to the appellant’s godown in Delhi can
therefore be ascribed only to the fact that the appellant
had a godown facility in Delhi. [476D-G]
(b)The inclusion of the charges for the transport of
refrigerators from Faridabad to Delhi in the price payable
by the distributors would not show that the movement of
refrigerators from Faridabad to Delhi was occasioned by the
contract of sale. The price payable by the distributors was
the aggregate of the ex-factory price of refrigerators and
the transportation charges. As the exfactory price of the
refrigerators was fixed from time to time and as the agree-
ments with the distributors provided that the sale of the
refrigerators as well as the delivery thereof to the
distributors ’would take place in Delhi the distribution
agreements provided that the transportation charges would be
added to the exfactory price of the refrigerators in
calculating the amount payable by the distributors to the
appellant. Further, in two of the distribution agreements
it was provided that the liability of the appellant for any
shortage or damage would cease only after the goods had been
inspected by and delivered to the distributors at Delhi. In
the 3rd agreement it was provided that the appellant would
accept no responsibility for shortage or damage during
transit, but even in that case, it was not the distributor
but the insurer who would have to bear the loss and the
transit insurance expenses were borne by the appellant.
[476G477G]
Tata Engineering & Locomotive Co. Limited v. The Assistant
Commissioner of Commercial Taxes & Another, [1970] 3 S.C.R.
862, followed.
Tata Iron and Steel Co. Ltd. v. S. R. Sarkar and Ors..
[1961] 1 S.C.R. 379, Ben Gorm Niligiri Plantations Co.
Cooncor & Ors. v. Sales Tax Officer. Special Circle,
Ernakulam. & Ors. [1964] 7 S.C.R. 706, and Halsbury’s Law’s
of England, 3rd Ed. Vol. 34. pp. 62-63, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2005 (NT) of
1972:.
Appeal by special leave from the order dated the 11th April
1972 of the Punjab and Haryana High Court at Chandigarh, in
General Sales Tax Reference No. 8 of 1970.
N.A. Palkhivala, H. L. Sibal, J. B. Dadachanji, A. K.
Verma, Kapil Sibal and S. C. Agnihotri, for the appellant.
Y.M. Tarkunde, Narendra Goswami and M. N. Shroff, for the
respondent.
S. T. Desai, and 1. N. Shroff, for the intervener.
466
The Judgment of the Court was delivered by
KHANNA, J. This appeal by special leave by M/s. Kelvinator
of India Ltd. is directed against the judgment of Punjab &
Haryana High Court whereby that court answered the following
question referred to it by the Sales Tax Tribunal Haryana in
favour of the department and against the appellant
"Whether on the facts and circumstances of the
case, the agreement between M/s. Kelvinator
of India (Assessee) M/s. Spencer & Co. Ltd.,
Messrs Blue Star Engineering Co,, and M/s.
General Equipment Ltd., in pursuance of which
the refrigerators manufactured by M/s,
Kelvinator of India at Faridabad moved to
Delhi were merely for distribution of goods
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between the principal and his agents or were
agreements of sale between two parties?"
The matter relates to the assessment year 1965-66, i.e. the
period from April 1, 1965 to March 31, 1966. The appellant
company has a, factory at Faridabad in Haryana. It
manufactures refrigerators, deep freezers, compressors and
other similar articles. The factory went into production in
1964. Its registered office and sales office are at 19A
Alipore Road, Delhi. The appellant has godowns in Delhi
having full staff of godown keepers and clerks. The
appellant is a registered dealer under the Punjab General
Sales Tax Act, 1948 and the Central Sales Tax Act, 1956.
’The registration has been don-- at Faridabad.
Refrigerators and other articles are manufactured by the
appellant under a collaboration agreement with an American
company known as Kelvinator International Corporation. The
refrigerators and other articles manufactured by the
appellant are marketed under trade marks ’Kelvinator’,
’Leonard’ and ’Gem’. The entire sale of refrigerators,
compressors and spare parts in 1964 was made to Spencer &-
Co. Ltd. at Delhi. Such transfers were accepted is genuine
by the sales tax authorities. In respect of these sales the
department did not take the stand that they were inter-State
sales or that the movement of goods -.from Faridabad to
Delhi was occasioned by reason of sales made to Spencer &
Co. Ltd.
On April 26, 1965 the appellant entered into a distribution
agreement with Spencer & Co. Ltd. in respect of
refrigerators and other products having Kelvinator trade
mark. Similar distribution agreements were entered into
with Blue Star Engineering Co. (Bombay) Pvt. Ltd., on
September 15, 1965 in respect of Leonard refrigerators and
on December 11, 1965 with General Equipment Merchants Ltd.
in respect of Gem refrigerators. The agreement with Spencer
& Co. was to take effect from April 1, 1965 and the other
two agreements from the dates on which they were entered
into. The terms of the agreements were substantially
similar, except in certain matters with which we arc either
not concerned or to which reference would be made
hereinafter. The relevant clauses of agreement dated April
26, 1965 are as under
"Whereas in terms of the Manufacturing and Sales Agreement
entered into by the Company (the appellant company) with
Kelvinator International Corporation, Detroit (Michigar-
467
U.S.A.), the Company is granted exclusive right and licence
to manufacture, assemble and sell the products designed
and/or manufactured by the Company under Trade mark
"Kelvinator" or any other Trade mark in India (hereinafter
called the Territory) and whereas the Company in its Factory
at Faridabad (Punjab) has commenced the, manufacture of
Kelvinator Refrigerators, parts and Spare parts etc., and
whereas the Distributors (Spencer. & Co. Ltd.) have agreed
to be and to act as Distributors of the Company, now it is
hereby mutually agreedand declared between the parties
hereto as follows :-
1.The Company hereby undertakes to sell and the
Distributorshereby undertake to buy all products
manufactured by the Company as mutually agreed upon from
time to time. The Distributors shall have the right to sell
the Company’s Kelvinator and such other trademark products,
spare parts and parts within the Territory. Due
consideration to the recommendations of Distributors in
regard to change/alteration in existing products or
additions of new products will all the time be given by the
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Company.
2. All purchases by the Distributors from the Company shall
be on principal to principal basis at mutually agreed
prices.
3. *
4. The goods shall, be delivered to the Distributors from
the Company’s registered office in Delhi and the, property
in the same shall pass to the Distributors in Delhi on
delivery, where the sale shall always take place.
5.For the purpose of determining the liability of Distri-
butors for payment to the Company, the price quoted will be
ex-Company’s works at Faridabad. The Distributors shall
also pay to the Company all the charges on the transport of
the goods from the Company’s works at Faridabad to the
Company’s Registered Office in Delhi.
6.The Distributors shall at all times warrant the goods
to their customers only on the warranty terms issued by the
Company. All goods leaving the Company’s factory will pass
through rigorous inspection procedures laid down by the Com-
pany. No responsibility for shortage or damage occurring in
transit will be accepted by the Company.
"
Clauses 3, 6, 7 and 8 of agreement dated September 15, 1965
in respect of Leonard refrigerators were as under
"3. For the purpose of clause (1) and in order
to enable the Company to arrange its
production schedule, the Distributors
guarantee and undertake to purchase from the
Company a minimum quantity of 1500
Refrigerators per year, at a rate not less
than 80 Refrigerators per month. It is agreed
468
that the distributors will be relieved of
their obligation under Ibis Agreement to the
extent that the Company is unable to supply
the guaranteed minimum quantity of 80
refrigerators per month.
6.For calculating the liability of the
Distributors for payment to the Company, the
price quoted will be ex-factory Company’s
works at Faridabad, excluding Central Excise
and a11 other taxes, duties and charges (but
not octroi charges payable between Faridabad
and Delhi which will be to the Company’s
account) which may be levied or introduced by
the Government or any local authority from
time to time and which will be charged in
addition to the said ex-factory price. The
Distributors shall pay to the Company, the
transport charges for the goods from the
Company’s works at Faridabad lo the Company’s
godowns in Delhi.
7.All the goods shall remain the property
of the Company till they reach Delhi and are
delivered to the Distributors in Delhi, where
alone the property therein shall pass to
Distributors. The sale shall always take
place in Delhi.
S.All goods leaving the Company’s factory
will pass through rigorous inspection
procedure laid down by the Company, and will
be packed in Crates and will be delivered to
the Distributors packed as such. The Company
in no case, shall responsible for any shortage
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or damage that may occur in further transit,
once the goods have been delivered and
inspected by the Distributors in Delhi."
Clause..-, 6, 7 and 8 of agreement dated December 11, 1965
in respect of Gem refrigerators were substantially similar
to clauses 6, 7 and 8 of agreement dated September 15, 1965.
Clause 3 of agreement dated December 11, 1965 was as under:
"3.In order to facilitate the Company’s
arrangement of its production schedule, Gem
undertakes to buy from the Company a minimum
quantity of 2000 refrigerators of both 10.1
cu. ft. and 6.2 cu. ft. capacity in the first
year at a rate of not less than 150
refrigerators per month. Likewise, for the
and year, Gem agrees to buy 3000 refrigerators
and for 3rd year, 4000 refrigerators of both
sizes. The Company will, however, incur no
liabilities if for any reasons it is unable to
make the supply according to the minimum
quantities stipulated above. If for some
reasons Gem is unable to accept or purchase
the respective minimum yearly stipulated
quantities, Gem will incur no liability save
the cancellation of the Agreement at the
Company’s choice."
Procedure for transfer of goods from the factory at
Faridabad to the appellant’s company’s sales office and
godowns at 19A, Alipore Road, Delhi was described in the
objections filed on behalf of the appellant before the sales
tax authority as under :
"The company gets the goods cleared from the
Excise for
destination to its Delhi office godown in
piece-meal pay the
469
octroi themselves at the Delhi barrier along
with the freight charges and the goods are
taken delivery of by its registered office.
The buyer places its specific order according
to its requirement and to the extent goods are
available at Delhi, delivery is given by the
Delhi office after the goods are approved in
good condition by the purchaser. That the
goods, never move from the factory in
pursuance of any contract but are moved as per
routine for storage at Delhi in accordance
with the company’s own convenience. Specific
orders are placed by the buyers when the goods
are already lying. in stock. The movement
of the goods as such is not in furtherance of
any contract of sale but move to Delhi
independently of any stipulation."
Four affidavits were also filed before the assessing
authority. The affidavit is of M. B. Sutaria, Secretary of
the appellant company. Relevant parts of this affidavit are
as under :
"3. That after the goods are I manufactured in
the factory an excise clearance pass is
obtained after payment of excise duty for the
transport of goods from the factory to the
company’s godown in Delhi. The excise pass is
always for movement of goods in favour of
self.
4. That during the transport of goods from
Faridabad to,
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Delhi,the octroi at the barrier is paid
by the company.
5. That at destination the goods are
received by the com-
pany’s staff and taken in their godown.
6.That after the goods have already been
received by, the company an order is received
from the customer for the supply of good,,;.
7.That in pursuance of the said orders
Delhi staff givedelivery of the, goods at
Delhi to the customer under a challan prepared
at Delhi.
8.That thereafter the bill is raised from
Delhi and price of thegoods is received by
the Company at Delhi and deposited inthe
Company’s account in its Delhi Bank."
The other three affidavits were those of V. A. Rao of
Spencer & Co., Rajinder Nath Seth of Blue Star Engineering
Co. Ltd. and Mrs. Usha Batra of General Equipment Merchants
Ltd. In the affidavit of V. A. Rao it was stated
"2. That we select the pieces of
Refrigerators lying in the godowns of
Kelvinator of India Ltd. Delhi and if on
inspection we find that pieces of
Refrigerators suiting to our requirements, we
place specific orders on Kelvinator of India
Ltd., Delhi to supply us the goods."
The affidavits of Rajinder Nath Seth and Mrs. Usha Batra
contained similar paragraphs. The appellant company took a
policy of insurance to cover lorry risk as per Motor Lorry
Risk clauses, including theft,
470
pilferage and non-delivery denting scratching and breakage
or any other damage due to any external means, including
certain other risks from warehouse to warehouse.
In the reference order dated April 1, 1971 the Sales Tax
Tribunal while dealing with the transport of goods from
Faridabad to Delhi observed :
"The Refrigerators manufactured by the Company
were transferred to its sale, office and
godowns at 19A. Alipore Road, Delhi-6 under
despatch notes. Necessary entries in the
stock register showing receipt were made in
the stock register maintained by the Company
in the godowns and sale office at Delhi. The
issue. entries were also made in such
registers. The payments such as freight,
octroi, transit insurance and other expenses
i.e. upto the stage of sale and delivery- of
,goods to the respective distributors at the
sale office at Delhi were borne by the
company. The purchasers, namely, the
distributors placed their specific orders at
various times at Delhi upon examining and
finding the suitability of the machines in
pursuance of which the refrigerators were
delivered against receipt on delivery
challans. Bills were raised by the sale
office at Delhi and consideration was also
received by it."
The assessing authority vide its order dated March 2, 1968
held ,that the transactions between the parties were inter-
State sales and liable to be taxed as such. The movement of
refrigerators from Faridabad to Delhi was held to be
occasioned by the sales to the distributors. At first the
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sales tax-payable by the assessee was assessed by the Sales
Tax Officer to be Rs. 8,14,112.25 at the rate of 10 per cent
cf the ’transactions amounting to Rs. 81,41,142.45.
Subsequently on review ,application the tax liability was
reduced to Rs. 1,59,691.19.
On appeal filed by the appellant, the-Deputy Excise and
Taxation Commissioner as per order dated July 24, 1968 held
that the distribution agreements were not contracts of sale.
It was further held that the refrigerators were transported
to Delhi prior to their sale to distributors. The
transactions in question were consequently held not to
constitute interstate sales. The Excise and Taxation
Commissioner thereafter took suo motu action and after
hearing both the parties he held as per order dated
September 12, 1968 that as soon as the refrigerators were
manufactured they were appropriated to the contracts and
that movement from Faridabad to Delhi was under the
agreement to sell. The matter was then taken up by the
assessee in appeal to the Sales Tax Tribunal. The Tribunal
as per order dated August 14, 1969 took the view that the
agreements with the distributors were agreements of sale and
that the sales in question were inter-State sales. The ap-
pellant thereafter filed review application but the same was
dismissed by the Tribunal on November 24, 1969. Application
was thereafter filed before the, Tribunal praying, inter
alia, that the, following questions ,of law be referred to
the High Court :
"1. Whether on the facts and circumstances of the case the
Sales were local sales of Delhi or were in the course. of
471
inter-State trade and commerce giving rise to the
commencement of movements in the State of Haryana.
2.Whether on the facts and circumstances of the case the
distributorship agreements could validly be construed to be
contracts of sales even when they lack all the essential
ingredients for the formation of the same.
3.Whether on the facts and circumstances of the case the
movement of the goods from Faridabad to Company’s godowns at
Delhi at its, own ’risk and cost could be termed to be com-
mercial movements warranting the imposition of the tax under
the Central Sales Tax Act or inter-departmental movement for
facility of better enjoyment of rights."
The Tribunal, however, thought that the question reproduced
earlier would combine all the three questions suggested by
the appellant. Accordingly the question set out at the
beginning of this judgment was referred to the High Court.
The High Court in answering the question in favour of the
department found that the machines moved from Faridabad to
Delhi in pursuance of agreements of sale which had been
termed distribution agreements.
In appeal before us, Mr. Palkhiwala on behalf of the
appellant company has argued that the three distribution
agreements do not constitute contracts of sale. In the
alternative, he submits that even if the distribution
agreements were construed to be contracts of sale, the move-
ment of goods in question from Faridabad to Delhi cannot be
said to have been occasioned by the distribution agreements.
It is also urged that there was no appropriation of the
goods at Faridabad to the contract with any particular
distributor. As against that, Mr. Tarkunde on behalf of the
respondent contends that the three distribution agreements
did constitute contracts of sale and that it were the
aforesaid agreements which occasioned the movement of goods
from Faridabad to Delhi The appropriation of goods to the
contract with each of the distributors also, according to
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the learned counsel, took place in Faridabad.
Before dealing with the contention of the parties, it would
be apposite to refer to the relevant statutory provisions
and examine the legal position Section 6 of the Central
Sales Tax Act (hereinafter referred to as the Act) makes
every dealer liable for payment of tax under the Act on all
sales effected by him in the course of inter-State trade or
commerce. "Sale" with its grammatical variations and
cognate expressions, has been defined in section 2(g) of the
Act, to mean any transfer of property in goods by one person
to another for cash or for deferred payment or for any other
valuable consideration, and includes a transfer of goods on
the hirre-purchase or other system of payment by
instalments, but does not include a mortgage or
hypothecation of or a charge or pledge on goods. According
to section 3 of the Act, a sale or purchase of goods shall
be deemed to take place in the course of inter-State trade
or commerce if the sale or purchase :
(a) occasions the movement of goods from one
State to
another: or
472
(b)is effected by a transfer of documents
of title to the goods during their movement
from one State to another.
We are concerned in the present case with clause (a) and not
with clause (b). A sale of goods can be held to have taken
place in the course of inter-state trade under clause (a) of
Section 3 of the Act if it can be shown that the sale has
occasioned the movement of goods from one State to another.
A sale in the course of inter-state trade has three
essentials : (i) there must be a sale, (ii) the goods must
actually be moved from one State to another, and (iii) the
sale and movement of the, goods must be part of the same
transaction. The word "occasions" is used as a verb and
means ’to cause or to be the immediate cause of’. In the
case of Tata Iron and Steel Co. Ltd. v. S. R. Sarkar and
Ors;.(1) Shah J. (as he then was) speaking for the majority
observed that a transaction of sale is subject to tax under
the Act on the completion of the sale. A mere contract of
sale is not a sale within the definition of "sale" in
section 2(g). A sale being, by the definition, transfer of
property becomes taxable under section 3(a) "if the movement
of goods from one State to another is under a covenant or
incident of the contract of sale". In Ben Gorm Nilgiri
Plantations Co. Cooncor & Ors. v. Sales Tax Officer, Special
Circle, Ernakulam & Ors(2) this Court dealt with the
provisions of section 5 of the Act which relates to sale or
purchase of goods in the course of import or export. It was
held that a sale in the course of export predicated con-
nection between the sale and export, the two activities
being so integrated that the connection between the two
cannot be voluntarily interrupted without a breach of the
contractor the compulsion arising from the nature of the
transaction. The export, it was further observed should be
inextricably linked up with the sale so that the bond cannot
be dissociated the observations in the case of Tata Iron and
Steel Co. a s well as Ben Gorim Nilgiri Plantations Co. were
relied upon by a Constitution Bench of this Court in the
case of Tata Engineering & Locomotive Co. Limited v. The
Assistant Commissioner of Commercial Taxes & Another (3) and
it was held that the sales to be exigible to tax under the
Act must be shown to have occasioned the movement of goods
or articles from one State to another and that the movement
must be the result of a convenant or incident of the
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 18
contract of sale. It can, therefore, be said that a sale of
goods is in the course of interState trade if the sale and
movement of goods from one State to another are integral
parts of the same transaction. There must exist a direct
nexus between the sale and the movement of goods from one
State to the other. In other words the movement should be
incident of and be necessitated by the contract of sale and
thus be interlinked with the sale of goods.
It is also plain from the language of section 3 (a) of the
Act that the movement of goods from on.-. State to another
must be under the contract of sale. A movement of goods
which takes place independently of a contract of sale would
not fall within the ambit of the above clause. Perusal of
section 3(a) further makes it manifest that there must a
contract of sale preceding the movement of the goods from
(1) [1961] 1 S. C. R. 379 (2) [1964] 7 S.
C. R. 706.
(3)[1970] 3 S. C. R. 862
473
one State to another, and the movement of goods should have
been caused by and be the result of that contract of sale.
If there was no contract of sale preceding the movement of
goods, the movement can obviously be not ascribed to a
contract of sale nor can it be said that the sale has
occasioned the movement of goods from one State to the
other.
In the light of the principles enunciated above, it cannot
in our opinions be said that the transactions in question
amount to sale in the course of inter-state trade. The High
Court in the course of its judgment has noted that the
following facts were accepted by the departmental
authorities :
"1. The dealer manufactured and sold
refrigerators.
2. These refrigerators were sold with the
trade marks of ’Kelvinator’, ’Leonard’ and
’Gem’.
3.The sale of each brand was made through
a separate distributor appointed for this
purpose.
4.The manner of movement is laid down in
clause 6 of Spencer’s agreement and clause 8
of Blue Star and General Equipment Merchants
agreements.
5.The dealer is bound to sell a
’Kelvinator’ to Spencers, a ’Leonard’ to Blue
Star and a ’Gem’ to General Equipment
Merchants.
6. That refrigerators were exported outside
India.
7. The price of the refrigerators is fixed
as mutually agreed
upon from time to time.
8. The property in-goods passes at Delhi
after delivery.
9. The prices are not settled for
individual machine, but
periodically.
10.The purchase orders are placed by the
three distributors after the goods reach the
head office at Delhi."
It has further been found by the High Court that the
appellant had asserted the following facts and the assertion
of the appellant was neither rejected by the departmental
authorities nor was it dealt with in ,the respective orders
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:
"1. That after the goods are manufactured in
the factory an excise clearance pass is
obtained after payment of excise duty for the
transport of goods from the factory to the
company’s godown in Delhi. The excise pass is
always for- movement of goods in favour of
self.
2.That during the transport of the goods
from Faridabad to Delhi, the octroi at the
barrier is paid by the Company.
3. That at destination the goods are
received by company’s staff and taken in their
godown.
4. That in pursuance of the,. said orders
Delhi staff give delivery of the goods at Del
to the customer under a challan pre-pared at
Delhi.
474
5.That thereafter the bill is raised from
Delhi and the price of the goods is received
by the Company at Delhi and deposited in
company’s account in its Delhi bank.
6.That all that the assessee does is to
manufacture refrigerators and they are branded
for the purpose of sale and distribution."
In the face of the facts of the present case, we find it
difficult to hold that the sale of refrigerators by the.
appellant to the three distributors took place at Faridabad.
We are also unable to agree with the High Court that the
distribution agreements constituted agreements of sale. It
is noteworthy in this context to observe that the number of
refrigerators which were to be purchased by each of the
distributors was not specified in the distribution
agreements, nor did the agreements contain the price which
was to be charged for each refrigerator. According to the
agreement dated April 26, 1965 the appellant undertook to
sell and the distributors undertook to purchase the products
of the appellant "as mutually agreed upon from time to
time". It is, therefore, plain that sales by the appellant
company--to the distributor re,fered to in the distribution
agreement dated April 26, 1965 depended upon the future
agreement between the parties from time to time. Dis-
tribution agreements dated September 15, 1965 and December
11, 1965 no doubt mentioned the minimum number of Leonard
and Gem refrigerators which had been agreed to be purchased
by the distributors; the exact number of refrigerators to be
sold by the appellant to these two distributors was still
left to volition of the appellant. The appellant company,
it was also mentioned, would incur no liability if it was
unable to supply the guaranteed minimum number of refrigera-
tors. The mode of dealings between the parties was that
subsequent to the distribution agreements, orders were
placed by the distributors with the appellant after the
refrigerators had reached the appellant’s sale office and
godown in Delhi. The price of the refrigerators was also to
be mutually agreed upon from time to time. It is Plain that
it is the orders which were placed in Delhi by the
distributors and the acceptance thereof by the appellant
that resulted in mutual agreement of sale. It was, in our
opinion, the mutual agreement between the parties at ’the
time of the placing of the order by the distributor with the
appellant which constituted the contract of sale and not the
distribution agreement. The distribution agreement with
each distributor provided the framework within which the
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different contracts of sale-were entered into by the
distributor with the appellant. This circumstance should
not make us lose sight of the fact that the distribution
agreements and the subsequent contracts of sale were
distinct transactions.
We are not impressed by Mr. Tarkunde’s argument that under
agreement dated April 26, 1965 Spencer & Co. was bound to
purchase all the products of the appellant company. Spencer
& Co. undertook to buy the products manufactured by the
appellant company subject to the stipulation contained in
the words "as mutually agreed upon from time to time". Had
it been the intention of the parties that, Spencer & Co. was
bound to purchase all products manufactured by the appellant
company irrespective of any future agreement between the
parties, the words "as mutually agreed upon from time to
time" in clause
475
1 of agreement dated April 26, 1965 would lose all
significance. It would not have also in that event been
possible for the appellant to enter into the other two
distribution agreements of September 15, 1965 and December
11, 1965 regarding Leonard and Gem refrigerators which were
manufactured by the appellant. The fact that the appellant
was in a position to export its products to foreign
countries during the assessment year in question also shows
that there was no agreement between the parties that the
appellant was bound to sell and Spencer & Co. was bound to
purchase all products manufactured by the appellant.
The argument that the sale of refrigerators to each of the
distributors took place at Faridabad and that it was at
Faridabad that the refrigerators were appropriated towards
the agreement with each of the three distributors appears to
us to be not well-founded. The argument proceeds upon the
assumption that trade-mark name plates on, the refrigerators
were affixed at Faridabad by the appellant company. There
is, however, no direct material to show that the name plates
on, the refrigerators were actually affixed at Faridabad and
not in Delhi. Assuming that the name plates were, in fact,
affixed to the refrigerators by the appellant at Faridabad,
there was nothing to prevent the appellant from changing the
name plate of a refrigerator and affixing the name plate of
a different brand of refrigerator on the refrigferator from
which the name plate was removed. The three different
brands of refrigerators were in all respects identical
except in respect of the name plate. The said name plates,
it has been demonstrated to us,. are easily interchangeable.
In the circumstances, the alleged affixation of trade-mark
plates to the refrigerators at Faridabad would not neces-
sarily show that the appropriation of the refrigerators
towards the agreement with a particular distributor took
place at Faridabad. A very significant circumstance which
should not be lost sight of, in this context is that orders
in respect of the various refrigerators were placed by the
distributors in Delhi after the refrigerators had been
transported to the Delhi sale office and godown of the
appellant. If the sale of the refrigerators in favour of
the distributor hid already taken place at Faridabad and the
refrigerators had been appropriated there towards the sale
contract, there would have arisen no occasion for the
placing of the subsequent order in Delhi by a distributor
with regard to the said refrigerators. The fact that
subsequent orders had to be placed by the distributors in
Delhi with regard to the different refrigerators after their
arrival in Delhi shows that there was no earlier sale or
appropriation of those refrigerators towards any contract of
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sale with the distributors. The stand taken on behalf of
the department that the appropriation of the refrigerators
took place at Faridabad towards the contracts of sale with
the distributors is inconsistent with the entire course of
dealings between the parties. It may also be observed that
in deciding the question whether the transactions between
the parties constituted sales in the course of inter-State
trade or commerce, the court should look not merely at the
distribution agreements, regard should be had of the en-tire
course of dealings between the parties.
Assuming that the distribution agreements constituted
contracts of sale, it would still have to be shown that the
sale by the appellant to the distributors occasioned the
movement of refrigerators from Farida-
476
bad to Delhi in this respect we find that according to the
facts found by the Tribunal the appellant had a godown and
sale office in Delhi. There is nothing to show that the
appellant has also a godown in Faridabad. The movement of
refrigerators from Faridabad to the appellant’s godown in
Delhi in the circumstances can well be ascribed to the fact
that the appellant has a godown facility in Delhi. There
were two places at which in the nature of things the
appellant could have sold the refrigerators to the
distributors. It could be either at Faridabad where the
appellant has its factory wherein the refrigerators are
manufactured or in Delhi where the appellant has its sale
office and godown and where- also the, three distributors
have their offices. The selection of place of sale.
depended upon mutual agreement between the parties it is
also obvious that if there is a choice before the parties of
so arranging their matters that in. one case they would have
to incur liability to pay tax and in the other case the
liability to pay tax would not be attracted, they would
prefer the latter course. There is nothing illegal or
impermissible to a party so arranging its affairs that the
liability to pay tax would not be attracted or that the
brunt of taxation would be reduced to the minimum. The
appellant company in the present case would incur no
liability to pay tax under the Act if it were to transport
the refrigerators from its factory in Faridabad to its own
office and godown in Delhi and thereafter to sell them to
the distributors. The liability to pay tax under the Act
would, however, arise if the sale of the refrigerators to
distributors were to take place at Faridabad and the
movement of refrigerators from Faridabad to Delhi were to
take place under the contract of sale. ’The question with
which we are concerned is whether the appellant entered into
such an arrangement with the distributors that the liability
to pay tax would be attracted and not the other arrangement
under which no such liability could be fastened on the
appellant. So far as this question is concerned, we find
that the parties expressly stated in each of the three
distribution agreements that it would be in Delhi that the
sale of refrigerators would take place to the distributors
and the property therein would pass to them. It was again
in Delhi that the refrigerators were delivered to the
distributors. The orders for the refrigerators were placed
by the distributors in Delhi and it was also here that, the
price of refrigerators was paid. Looking to all the facts
of the case, we have no doubt that the arrangement between
the parties was that refrigerators would be sold by the
appellant to the distributors after they had been
transported to the sale office and godown of the appellant
on Alipore Road, Delhi so that no liability to pay tax under
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the Act would arise. It cannot in-the circumstances be said
that the transport of the refrigerators from Faridabad to
Delhi was in pursuance of contracts of sale between the
appellant and the distributors.
Reference has been made by Mr. Tarkunde to the fact that the
distributors were to bear the freight charges for the
transportation of refrigerators from Faridabad to Delhi. In
this respect we find that the distribution agreements show
that reference was made to transportation charges for
determining the amount or price to be paid by the
distributors to the appellant company. The price payable by
the distributors was the aggregate of the ex-factory price
of refrigerators and
477
the transportation charges. As the ex-factory., price of
refrigerators was fixed from time to time and as the
agreements with the distributors provided that the sale of
the refrigerators as well as the delivery thereof to the
distributors would take place in Delhi, there was nothing
surprising in the clause of the distribution agreements that
the transportation charges would be added to the ex-factory
prices of the refrigerators in calculating the amount
payable by the distributors to the appellant. The inclusion
of the charges for the transport of the refrigerators from
Faridabad to Delhi in the. price payable by the distributors
would not show that the movement of refrigerators from
Faridabad to Delhi was occasioned by the contract of sale.
The High Court in the course of its judgment has observed-:
"The freight from Faridabad to Delhi is borne
by the Distributors that is the Blue Star and
the General Equipment Merchants. Any shortage
or damage in transit is also the
responsibility of Blue Star and the General
Equipment Merchants; the responsibility for
this does not fall on the manufacturer."
The observations in the above paragraph that any shortage or
damage in transit was the responsibility of the Blue Star
and the General Equipment Merchants and the responsibility
for that did not fall on the manufacturer is not correct
because clause 8 of each of the two agreements dated
September 15, 1965 and December 11, 1965 relating to Leonard
and Gem refrigerators shows that the liability of the
appellant company for any shortage or damage that might
occur would cease only after the goods had been delivered
and inspected by the distributors at Delhi. The appellant
no doubt stipulated in its agreement with Spencer & Co. that
it (the appellant) would accept no responsibility for
shortage or damage occurring in transit after the goods had
passed through rigorous inspection at the time they left the
appellant’s factory. This must, however, be regarded in
the- nature of things to be a matter of mutual agreement
between the parties. Spencer & Co. might well have agreed
to bear that loss on the assumption that the advantage of
becoming the distributor for sale of Kelvinator refrige-
rators would far outweigh the loss borne by the said company
in this respect. Indeed, the possibility of any loss being
borne by Spencer & Co. because of any shortage or damage
occurring in transit of refrigerators from Faridabad to
Delhi was only theoretical, is according to the order of
reference the expenses of transit insurance were borne by
the appellant company. It would thus be the insurer who
would have to bear the loss caused by shortage or damage
occurring during transit. It may also be mentioned in this
context that the octroi charges in connection with the
movement of refrigerators from Faridabad to Delhi were paid
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by the appellant.
We have been referred to section 23 ’of the ’Sale of Goods
Act. According to that section, where there is a contract
for the sale of unascertained or future goods by
description. and goods of that description and in a
deliverable state are unconditionally appropriated to the
contract, either by the seller with the assessment of the
buyer or by the
478
buyer with the assent of the, seller, the property in the
goods thereupon posses to the buyer. Such assent may be
expressed or implied, and may be given either before or
after the appropriation is made. , The said section, in our
opinion, cannot be of much avail to the respondent. Apart,
from the fact that the distribution agreements cannot, in
our opinion, be construed as contracts of We. there- is no
material to show that there was any assent expressed or
implied by the distributors to the appropriation of. the
refrigerators by the appellant at Faridabad.
Reference has been made by Mr. Tarkunde to the- following
observations on pages 62-63 in Vol. 34 of Halsbury’s Laws of
England Third Edition
"An authority given by one party to the other
to appropriate the goods is an implied assent
by the party giving the authority to a
subsequent appropriation by the other, pro-
vided the appropriation is made in accordance
with the contract. Such an authority confers
an election on the party authorised.
An authority to appropriate is presumed where,
by the terms of the contract, one party is to
do with reference to the goods some act or
thing which cannot be done until the goods are
appropriated. When the party authorised has
determined his election by doing such act or
thing, the appropriation is finally made.
Until that time any act or thing done with
reference to the goods towards appropriation
by the party authorised is revocable, unless
it has previous to its revocation, been
assented to by the other party."
So far as the observations made in the first paragraph
reproduced above are concerned, we find that there is no
material on the record to show that an authority was given
by the distributors to the appellant to appropriate the
goods at Faridabad. As such, the aforesaid paragraph cannot
be of any material help to the respondent. The second
paragraph reproduced above relates to an authority which may
be presumed from the fact that one party by the terms of
contract is to do with reference to the goods some act or
thing which cannot be done until the goods are appropriated.
In respect of this paragraph also, as already indicated
above, we find that there is no material to show that the
appellant was under the terms of contract authorised to do
some act or thing with reference to the refrigerators which
could not be done until the refrigerators were appropriated.
Apart from that we find that the observation that "until
that time any act or thing done with reference to the goods
towards appropriation by the party authorised is revocable’
would show that there was no legal bar to the changing of
name plates by the appellant company till such time as
orders with regard to the refrigerators were placed by the
distributors after inspection of those, refrigerators.
A case which was considerable bearing on the facts of the’
present case is that of Tata Engineering and Locomotive Co.
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Ltd. V. Assistant Commissioner of Commercial Taxes,
Jamshedpur and Anr. (supra). In that case the appellant
company, which manufactured trucks and
479
buses in Jamshedpur in the State of Bihar, transferred the
vehicles to stock-yards operated by its own personnel in
other States and supplied them to the dealers. After the
promulgation of the Commercial Vehicles (Distribution and
Sale) Control Order, 1963 the appellant issued a circular
dated June 14, 1963, to the dealers asking them to submit
monthly statements regarding fresh applications registered,
retail sales, applications cancelled and stock and sales. ,
A new form of dealership agreement was also introduced under
which the appellant agreed to sell from its works in
Jamshedpur or its depots and stockvirds outside the State of
Bihar to the dealer the vehicles which shall be allotted at
its discretion. Clause 11(b) of :the agreement provided
that "the dealer shall mail to the company on the 15th of
each month ...... his firm order for purchases to be
effected during the next succeeding month and his estimated
requirements., for the two months following the next
succeeding month In fact however no firm order was called
for by the company. Pursuant to authorisation issued by the
sales office of the appellant in Bombay, vehicles were
transferred from its works at Jamshedpur to the various
stockyards in the States. The stocks available in the
stock-yards were then distributed from time to time to
dealers for which purpose an allocation letter was issued
each month by the sales office. There were many instances
where vehicles had been actually delivered from the stock-
yard prior to the issue of the allocation letter. It was
also found that on some occasions vehicles bad been moved
from a stock-yard in on-, State to a stock-yard in another.
Treating the allocation letters together with their
confirmation as transactions of sale, and the movement of
vehicles from the works to the stock-yards as the direct
result of the allocation so made, the Assistant Commissioner
imposed tax under the Central Sales Tax Act, 1956, in
relation to the sales during the period April 1, 1964 to
March 31, 1966, of vehicles which had moved from Jamshedpur
to the stock-yards in the various States. it was held by
this Court that the procedure followed by the appellant
together with the proved absence of any firm orders,
indicated that the allocation letters and the statement’s
furnished by the dealers did not themselves bring about
transactions of sale within the meaning of section 2(g) of
the Act. This Court further observed :
"It would appear from the materials placed
before us that generally the completion of the
sales to the dealers did not take place at
Jamshedpur and the final steps in the matter
of such completion were taken at the stock-
yards. Even if the appellant took into
account the requirements of the dealers which
it naturally was expected to do when the
vehicles were moved from the works to the
stock-yards it was not necessary that the
number of vehicles allocated to the dealer
should necessarily be delivered to him. The
appropriation of the vehicles was done at the
stockyards through specification of the engine
and the chassis number and it was open to the
appellant till then to allot any vehicle to
any purchaser and to transfer the vehicles
from one stockyard to another. Even the
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Assistant Commissioner found that on some
occasion vehicles had been moved from
stockyards in one State to a
480
stockyard in another State. it is not possible
to comprehend how, in the above situation it
could be held that the movement of the
vehicles from the works to the stockyards was
occasioned by any covenant or incident of the
contract of sale."
The facts of the present case have a certain amount of
similarity to the facts of the above case and, in our
opinion, the dictum laid down therein fortifies us in the
conclusion at which we have arrived.
We accordingly accept the appeal and set aside the judgment
of the High Court. The answer given by the High Court to
the question referred to it is discharged. In our opinion,
the three agreements between the appellant and the
distributors were merely agreements for the distribution of
goods and were not agreements of sale between the parties.
It cannot, in our opinion, be said that there was any
movement of refrigerators from Faridabad to Delhi under a
contract of sale. The question in the circumstances is
answered against the department. The transactions between
the appellant and the distributors did not, in our opinion,
constitute sale in the course of inter-State trade or
commerce. As such, there was no liability to pay tax under
the Act. The appellant shall be entitled to the costs from
the respondent of this Court as well as in the High Court.
V.P.S.
Appeal allowed.
481