Bombay High Court
Embee Corporation vs State Of Maharashtra on 6 July, 1990
Equivalent citations: [1990]78STC311(BOM)
JUDGMENT
T.D. Sugla, J.
1. At the instance of the assessee, Messrs. Embee Corporation, the Sales Tax Tribunal has referred to this Court the following three questions :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the appellant was not an agent of the Director-General of Supplies and Disposals, in bringing about the import of the carbamite from West Germany ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there were two sales and that the two sales were not integrated transactions ?
(3) Whether, the sale by the applicant to the Director-General of Supplies and Disposals was only an inter-State sale and not a transaction in the course of import, in view of the meaning of Section 5(2) of the Central Sales Tax Act?”
2. The assessee, Messrs. Embee Corporation, during the period 6th November, 1972 to 26th October, 1973, carried on business of buying and selling chemicals. In response to a tender invited by the Director-General of Supplies and Disposals, Government of India, New Delhi, on 26th March, 1971, the assessee had submitted a tender for supply of carbamite (undyed) 29,100 kgs. for use in the manufacture of different types of propellant explosives as per specifications. Messrs. Chemisches Werk Lowi, West Germany, were shown as the suppliers in the tender. The assessee had quoted the price c.i.f. per kg. (without commission) at Rs. 11.97 and added to the said quotation licence application fees, duty 60 per cent, port charges and miscellaneous expenses all of which were shown separately. To the said figures the Corporation had added 15 per cent as its profit.
The Director-General of Supplies and Disposals, by letter dated 29th May, 1971, had accepted the assessee’s above quoted tender to the extent of 25,000 kgs., subject, inter alia, to the condition that the contract would be governed by the conditions of the contract as contained in form DGS & D-68 (revised) including Clause 24 thereof as amended up to date. The ordered material was to be inspected by the Chief Inspector, C.I.M.E., Kirkee, Pune, at Bombay Port. The General Manager, Cordite Factory, Aruvankadu, was mentioned as the indenter. The assessee, by its letter dated 15th June, 1971, acknowledged the letter of the Director-General of Supplies and Disposals accepting the above tender and requested for the issue of import recommendation certificate because carbamite was a strategic material and could be exported by its principals only against an export permit of the West German Government. On 15th June, 1971, the assessee wrote a letter to Messrs. Chemisches Werk Lowi confirming its order to supply 25,000 kgs. of carbamite (undyed).
The Director-General, in continuation of advance acceptance earlier notified, sent his acceptance of the assessee’s aforesaid tender. The said letter also mentioned that the conditions of the contract as contained in form DGS & D-68 (revised) including Clause 24 would apply to the contract. The said acceptance letter also stipulated for inspection and for rejection in case of examination of any sample from any portion of the supply if the material was found to be not fully in accordance with the specifications quoted. Instructions were also given regarding insurance, shipping, obligation of the consignee, etc. The Director-General of Supplies and Disposals issued import recommendation certificate in favour of the assessee for procuring the said goods through a commercial channel from abroad and recommended that the import licence might be issued as per particulars. Against the said order of the Director-General of Supplies and Disposals for supply of carbamite, the Controller (Import Trade Control) issued Licence No. G/O/2108528, for the licensing period April, 1971 to March, 1972. One of the conditions of the licence was that the goods imported shall be utilised or disposed of in the manner stipulated in the Director-General of Supplies and Disposals’ letter dated 17th June, 1971 and the imported goods shall not be utilised or disposed of in any other manner without the prior written approval of the licensing authority. Another condition was that the goods for the import of which the licence had been granted, shall be the property of the licensee at the time of import and thereafter up to the time of clearance through customs.
The Director-General of Supplies and Disposals through the assessee had furnished end-use certificate which was to the effect that carbamite was allowed to be imported by the Indian Government and it was intended for consumption in India and would not be reexported or reutilised for any purpose other than consumption by the Government factory for whose consumption the same was being imported. The same was, however, without prejudice to the terms and conditions of the contract.
In the bill of lading the name of the assessee was shown as the party to be notified and the General Manager, Cordite Factory, Aruvankadu, was described as the consignee of 216 consignments of carbamite. After the aforesaid consignments of carbamite had arrived at Bombay Port, they had been forwarded to the consignee named in the contract, viz., the General Manager, Cordite Factory, Aruvankadu.
3. The Sales Tax Officer disallowed the assessee’s claim that the supply of carbamite under contract with the Director-General of Supplies and Disposals, was a sale in the course of import of the goods into India and, therefore, exempt from payment of sales tax. The Assistant Commissioner also dismissed the appeal against the said assessment order. The assessee’s second appeal before the Tribunal was also dismissed. Referring to the Supreme Court decisions in the cases of Mod. Serajuddin [1975] 36 STC 136 and Binani Bros. (P.) Ltd. [1974] 33 STC 254, the Tribunal stated that Khosla’s case , was explained in the said two decisions. It was of the view that the Full Bench of the Madras High Court in the case of Vasantha Mills Ltd. [1976] 38 STC 366, had correctly summed up the law in this regard. It is on the basis of the Madras decision that the Tribunal held that the theory of integrated activity cannot any longer be involved to make the sale between two local dealers as a sale in the course of import. In the opinion of the Tribunal, once it was held that there were two sales, consideration of the question whether the said two sales were interlinked or so related as to form one transaction became not only unnecessary but also irrelevant. On merits the Tribunal held that the detailed examination of the transaction in the present case would show that for effecting the sales by the assessee to Director-General of Supplies and Disposals it had to purchase goods from foreign principals, the assessee by its letter dated 15th June, 1971, addressed to the foreign principal confirmed the order for purchase of carbamite and import thereof in pursuance of the contract of purchase was, no doubt, for sale to Director-General of Supplies and Disposals, but it could not be said that it was the contract of sale by the assessee to Director-General of Supplies and Disposals that had occasioned the movement of the goods into the territory of India. It was the contract for purchase by the assessee with the foreign principal that had, in fact, occasioned the movement of the goods from West Germany into the territory of India. Further from the terms of the contract between the assessee and the Director-General of Supplies and Disposals it clearly appears that there was no privity of contract between the Director-General of Supplies and Disposals and foreign principal. In view of the facts and circumstances of the case, the Tribunal held that the lower authorities were right in holding that it was the first sale between the foreign principal and the assessee which had occasioned the movement of the goods from West Germany into the territory of India. The Tribunal further held that the said sale by the assessee to the Director-General of Supplies and Disposals was an inter-State sale. The Tribunal did not accept the alternate plea that the assessee had acted only as an agent. However, it allowed the appeal in part inasmuch as while it confirmed the order of the lower authority disallowing the transaction as a sale in the course of import, the matter was remanded to the Assistant Commissioner of Sales Tax in order to enable the present applicant to produce the necessary declaration in form D and thereafter for redetermination of the amount of tax.
4. Article 286(1)(b) of the Constitution of India forbids imposition of any tax on sale or purchase of goods where such sale or purchase takes place in the course of the import of the goods into or exportation of the goods out of the territory of India. Section 5(2) of the Central Sales Tax Act, 1956, in pursuance of Clause (2) of Article 286 formulates the following principle :
“A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.”
In the instant case, the moot point was whether the sale of carbamite explosives by the assessee to the Director-General of Supplies and Disposals had occasioned the import of the said articles into the territory of India in terms of Article 286(1)(b) read with Section 5(2) of the Central Sales Tax Act.
As stated earlier, both the Assistant Commissioner of Sales Tax and the Maharashtra Sales Tax Tribunal have found that the assessee had not acted as an agent and the relationship between the assessee and the Director-General of Supplies and Disposals was that of vendor and vendee. Before us, although the learned counsel for the assessee did not concede the point he was unable to seriously any further urge that the assessee-company in the transaction in question had acted as a mere agent.
The first question is accordingly answered in the affirmative and in favour of the Revenue.
5. Next pertinent question is, once it is held that there were two sale transactions, is it still necessary to further ascertain as to whether the said two sales were interlinked or integrated so as to form one transaction.
Shri Surte, the learned counsel for the assessee, has placed strong reliance upon the decision of the Supreme Court in the case of Khosla & Co. (P.) Ltd. v. Deputy Commissioner of Commercial Taxes [1966] 17 STC 473, which according to him, still remains good law. He, therefore, submitted that even if the Tribunal was right in finding that there were two sale transactions, it was necessary for the Tribunal to record a finding as to whether these two sales were so interconnected and integrated that the import was occasioned by the sale. Sikri, J. (as he then was) who delivered the judgment of the Bench of five Judges in the case of Khosla & Co. (P.) Ltd. , had applied the ratio of the Supreme Court decision in the case of Tata Iron & Steel Co. Ltd. v. S.R. Sarkar [1960] 11 STC 655 and had held that the High Court was wrong in holding that before a sale could be said to have occasioned the import it was necessary that the sale should have preceded the import. The Supreme Court in the case of Khosla & Co. (P.) Ltd. , also found that it was incidental to the covenant of sale that the axle-box bodies would be manufactured in Belgium, inspected there and imported into India for the consignee. Therefore, movement of goods from Belgium to India was in pursuance of the conditions of the contract between the assessee and the Director-General of Supplies. The Supreme Court had also emphasised the fact that in Khosla & Co. (P.) Ltd.’s case , there was no possibility of these goods being diverted by the assessee for any other purpose. Although in the judgment delivered in Khosla & Co. (P.) Ltd.’s case , there was no categorical statement to the effect that Messrs. Khosla & Co. had acted as agents and not as principals, in some of the subsequent Supreme Court decisions, the decision in Khosla & Co. (P.) Ltd.’s case , was distinguished on the ground that the arrangements between Messrs. Khosla & Co. and the Belgium manufacturer was that of principal and agent vide observations of Mathew, J., who delivered the majority judgment in the case of Binani Bros. (P.) Ltd. v. Union of India [1974] 33 STC 254, at pages 259-260 and pages 261-262. See also the majority judgment of A.N. Ray, C.J. in the case of Mod. Serajuddin v. State of Orissa [1975] 36 STC 136 at pages 147-148.
In the case of Binani Bros. (P.) Ltd. , the claim that a sale made by the petitioner was in the course of import into India was rejected upon the finding that the petitioner’s sale to the Directorate General of Supplies and Disposals was as from principal to principal. There was no privity of contract between the Directorate General of Supplies and Disposals and the foreign sellers. The foreign sellers did not enter into contract with the Government either by themselves or through the agency of the petitioner. Under the contract with the petitioner, the Directorate General of Supplies and Disposals had only undertaken to provide all facilities for the import of the goods by Messrs. Binani Bros. for fulfilling its contract. The Supreme Court had applied the ratio of its earlier decision in the case of Coffee Board v. Joint Commercial Tax Officer . In Mod. Serajuddin’s case , the majority view was that the appellant had sold the goods directly to the Corporation. The circumstance that the appellant did so to facilitate the performance of the contract between the Corporation and the foreign buyer on terms which were the same did not make the contract between the Corporation and the appellant the immediate cause of export. The contract for procurement of the goods was described as back to back contract. Both in Binani Bros. (P.) Ltd.’s case and Mod. Serajuddin’s case , the majority decision had relied upon the following quotation from the judgment of the Supreme Court in the case of Ben Gorm Nilgiri Plantations Co. v. Sales Tax Officer :
“A sale in the course of export predicates a connection 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 contract or the compulsion arising from the nature of the transaction. In this sense to constitute a sale in the course of export it may be said that there must be an intention on the part of both the buyer and the seller to export, there must be an obligation to export, and there must be an actual export. The obligation may arise by reason of statute, contract between the parties, or from mutual understanding or agreement between them, or even from the nature of the transaction which links the sale to export. A transaction of sale which is a preliminary to export of the commodity sold may be regarded as a sale for export, but is not necessarily to be regarded as one in the course of export, unless the sale occasions export. And to occasion export there must exist such a bond between the contract of sale and the actual exportation, that each link is inextricably connected with the one immediately preceding it. Without such a bond, a transaction of sale cannot be called a sale in the course of export of goods out of the territory of India.”
The Supreme Court in the case of Deputy Commissioner of Agricultural Income-tax and Sales Tax v. Indian Explosives Ltd. , had reviewed some of its earlier decisions, but no reference, however, had been made to Mod. Serajuddin’s case . The Supreme Court in Indian Explosives Ltd.’s case , applied the test of integral connection or inextricable link for determining whether a sale was in the course of an import or export. The decision in Binani Bros. (P.) Ltd.’s case, was distinguished on two grounds. Firstly, in Binani Bros. (P.) Ltd.’s case , the assessee itself held the import licence and the goods were imported not on the strength of any actual user’s licence. Secondly, in Binani Bros. (P.) Ltd.’s case, there was no term or condition prohibiting diversion of the goods after the import. Upon the said two facts, the Supreme Court held in Indian Explosives Ltd.’s case , that it was established that there was integral connection or inextricable link between the transactions of sale and the actual import making the sales in the course of import. The movement of the goods from the foreign country to India was in pursuance of the requirements flowing from the contract of sale between the assessee and the local purchaser and as such the sales in question were held to be in the course of import.
6. Shri Jetly who appeared on behalf of the Commissioner for Sales Tax strongly relied on the order of the Tribunal. He strenuously urged that the crucial question is whether the sale had occasioned the import. In this connection, he relied upon the Supreme Court decisions in the case of State of Travancore-Cochin v. Bombay Company Ltd. [1952] 3 STC 434 and State of Travancore-Cochin v. Shanmugha Vilas Cashew-nut Factory [1953] 4 STC 205, at page 207. Both these decisions were rendered before enactment of Section 5(1) which formulated the principles for determining whether a sale was in the course of import. No doubt, Section 5(1) might have had given legislative recognition to the judicial views expressed in the aforesaid cases. We are also unable to accept the extreme contention that after pronouncements made in the later cases of Binani Bros. (P.) Ltd. and Mod. Serajuddin , more than one sale cannot be said to be in the course of import. It is only the sale which is proximate or immediate to the import. The authority for this proposition, according to Shri Jetly, was the majority decision in the case of Coffee Board v. Joint Commercial Tax Officer . Under Section 5 of the Central Sales Tax Act (as the said provisions stood then), according to the majority view, the phrase “sale in the course of export” comprises three essentials : (i) there must be a sale, (ii) goods must actually be exported, and (iii) the sale must be a part and parcel of export. Hidayatullah, C.J., who delivered the majority judgment, has observed that the word “occasion” means “to cause” or “to be the immediate cause of. The sale which is to be regarded as exempt is a sale which causes the export to take place or is the immediate cause of the export. Therefore, a sale made to the exporter for exporting under separate and independent contract was not covered by the expression “sale in the course of export”. According to the majority judgment in the Coffee Board’s case , the tests were that there must be a single sale which itself causes the export or is in the progress or process of export. There is no room for two or more sales in the course of export. The only sale which can be said to cause the export is the sale which itself results in the movement of the goods from the exporter to the importer. Sikri, J., who had delivered the judgment in Khosla & Co. (P.) Ltd.’s case , had dissented in Coffee Board’s case , from the view expressed by Hidayatullah, C.J. Thereafter the legislature inserted Subsection (3) in Section 5 of the Central Sales Tax Act to extend the expression “sale in the course of export” to the last sale or purchase which took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export Shri Jelly has pointed out that in the case of import of goods the legislature did not enact in a similar colour Section 5 so as to give extended meaning to sale in the course of import. In the Coffee Board’s case , Hidayatullah, C.J., found as a fact that the two contracts of sale were independent of each other. The Coffee Board’s sale was not in any way related to the second sale and there was no connection between the two. In Ben Gorm Nilgiri Plantations Co.’s case , the majority view was that a transaction of sale which is a preliminary to export of the commodity sold may be regarded as a sale for export, but is not necessarily to be regarded as one in the course of export, unless the sale occasions export. And to occasion export there must exist such a bond between the contract of sale and the actual exportation, that each link is inextricably connected with the one immediately preceding it. Without such a bond, a transaction of sale cannot be called a sale in the course of export of goods out of the territory of India. Shah, J., who delivered the majority judgment had observed that no single test can be laid down precisely for determining the question. Each case must depend upon its facts. In general, where the sale is effected by the seller and he is not connected with the export which actually takes place, it is a sale for export. Where the export is the result of sale, the export being inextricably linked up with the sale so that the bond cannot be dissociated without a breach of the obligation arising by statute, contract or mutual understanding between the parties arising from the nature of the transaction, the sale is in the course of export. We may also mention that A.N. Ray, C.J. (as he then was), in Mod. Serajuddin’s case , had quoted with approval the above observations made in Ben Gorm Nilgiri Plantations Co.’s case . After referring to various decisions, the Supreme Court at page 149 observed that the distinction between sales for export and sales in the course of export is marked and never to be lost sight of. Reference was then made to certain features of the transaction which pointed with unerring accuracy to the contract between the assessee and the Corporation on the one hand and the contract between the Corporation and the foreign buyer on the other as two separate and independent contracts of sale.
We may also mention that Tulzapurkar, J., in the Indian Explosives Ltd.’s case , had adopted the said tests laid down in Ben Gorm Nilgiri Plantations Co.’s case .
7. For the foregoing reasons, we hold that for deciding whether a particular sale occasions import, it is necessary to examine these facts. Merely because there was more than one sale in respect of goods imported from abroad a fortiori the court cannot hold that it is only the sale which is immediate or proximate to the import which comes within the scope of Article 286(1)(b) of the Constitution read with Section 5(2) of the Central Sales Tax Act. If upon examination of the facts it is found that under a second contract a party was constituted an agent either of the importer or the foreign seller, then the ratio of the decision in Khosla & Co. (P.) Ltd.’s case , would be attracted. Even in case it is found that there are two sale transactions concerning a commodity imported from abroad–(1) between the foreign seller and the importer and (2) between the importer and the buyer in India–the court is required to consider whether the two sales were so integrated or connected as to constitute one transaction.
For this purpose it is necessary to appreciate the facts of the present case in the light of the facts in the Supreme Court decisions referred to above. In our view it will be only appropriate to examine the facts of cases in which, like the case before us, the assessees had imported goods and had sold them to Director-General of Supplies and Disposals. The first important case is that of Khosla & Co. (P.) Ltd.’s , in which the Supreme Court held that the two sales formed one transaction.
In that case, the assessee-appellant entered into a contract with the Director-General of Supplies and Disposals, New Delhi, for the supply of axle-box bodies. The goods were to be manufactured in Belgium according to specification and then, the D.G.I.S.D., London, or his representative had to inspect the goods at the works of the manufacturers and issue an inspection certificate. Another inspection was provided for at Madras. The assessee was entitled to be paid 90 per cent after inspection and delivery of the stores to the consignee and the balance of 10 per cent was payable on final acceptance by the consignee. In the case of deliveries on f.o.r. basis, the assessee was entitled to 90 per cent payment after inspection on proof of despatch and balance of 10 per cent after receipt of stores by the consignee in good condition. The assessee-appellant was entirely responsible for the execution of the contract and for the safe arrival of the goods at the destination. The contract provided that notwithstanding any approval or acceptance given by an Inspector, the consignee was entitled to reject the goods, if it was found that the goods were not in conformity with the terms and conditions of the contract in all respects. The manufacturers consigned the goods to the assessee by ship under bills of lading and the goods were cleared at the Madras Harbour by the appellant’s clearing agents and despatched for delivery to the Southern Railway in Madras and Mysore.
8. The facts obtaining in the case herein have already been staled in paragraph 2 of the judgment. It is evident that the facts in these two cases are almost identical. The only difference is that while in Khosla & Co. (P.) Ltd.’s case , goods were to be manufactured in Belgium and there was a provision in the contract for inspection in Belgium on behalf of Director-General of Supplies and Disposals, in the case herein no manufacture as such was involved and there was no provision for inspection at that end. In our opinion this difference in facts is of no consequence particularly as the foreign supplier from whom the material was to be imported was a part of the contract itself. The Supreme Court has held in Khosla & Co. (P.) Ltd.’s case , that before a sale could be said to have occasioned the import, it was not necessary that the sale should have preceded the import and that movement of goods from Belgium to India was incidental to the contract that they would be manufactured in Belgium and brought into India after inspection for the consignee. Finding all that happening in Khosla’s case , in pursuance of the contract between the assessee and Director-General of Supplies and Disposals and that there was no possibility of diverting the goods by the assessee for any other purpose, the Supreme Court held that the sate by the assessee to Director-General of Supplies and Disposals took place in the course of import of goods. All these conditions arc obviously satisfied in this case.
Next case of import is that of Binani Bros. (P.) Ltd. . In that case the assessee had contracted to supply non-ferrous metal to Directorate General of Supplies and Disposals. The Government of India granted the requisite import licence. The Supreme Court observed that there was no privity of contract between the foreign supplier and Directorate General of Supplies and Disposals. Though under the contract Directorate General of Supplies and Disposals undertook to provide all facilities for the import of goods, it was the obligation of the assessee to obtain the import licence and the assessee’s sale to Directorate General of Supplies and Disposals did not occasion the import of the goods. It is pertinent to mention that the next case of import of goods is Indian Explosives Ltd. . In that case the Supreme Court applied Khosla’s case and distinguished the Binani Bros. (P.) Ltd , on two grounds, namely, (i) the assessee itself held the import licence and (ii) there was no provision in the contract prohibiting diversion of goods to any person other than Directorate General of Supplies and Disposals. In that case, the facts are almost identical with the case herein. The only difference is that in Indian Explosives Ltd.’s case, the imports were made on the basis of actual user’s licence as against the import licence issued in favour of the applicant in the case before us. To our mind, however, this difference is not material for the reason that though import licence is granted to the applicant, it is on the basis of import recommendation certificate in which the name of the indenter/consignee who is the actual user was mentioned. Thus, the material imported in the present case also was for the actual user whose name appeared as consignee in the original shipping documents and the material could not, thus, be diverted.
In the circumstances, it appears clear to us that the facts in the present case are similar if not identical to those in Khosla’s and Indian Explosives Ltd.’s cases. Binani Bros. (P.) Ltd.’s case , is on facts distinguishable.
Having regard to the above discussion, we hold that the two sales in the present case, i.e., the sale between the applicant and the Director-General of Supplies and Disposals and the foreign supplier and the applicant are integrated or interlinked so as to form one transaction.
Accordingly, the second question is answered thus : Even though there were two sales, the sales were integrated or interlinked so as to form one transaction.
The third question is consequential and is accordingly answered in the negative and in favour of the applicant.
No order as to costs.