Standard Motor Products of India Ltd. vs The State of Madras

Ramanujam, J.—Messrs Standard Motor Products of India Limited, the Petitioners herein, are carrying on business in motor vehicles, spare parts, tractors I. etc., at Madras. They were originally assessed for the year 1955-56 under the Madras General Sales-Tax Act, 1939 on 30th September 1959 on a taxable turnover of Rs. 55,87,570-10-7 as against the turnover of Rs. 55,65,209-9-10 returned by them. Later, the Deputy Commissioner of Commercial Taxes, acting u/s 32 of the Madras Genera] Safes Tax Act, 1959 proposed to revise suo motu the said assessment order. He considered that the order of the assessing authority was erroneous in that he had allowed exemptions on certain inter-State transactions for the period from 1st April 1955 to 6th September 1955. The Deputy Commissioner, after following the formalities, revised the original assessment and refixed the taxable turnover at Rs. 1,10,09,619-8-8. Out of the said turnover, Rs. 74,11,835-5-10 was subjected to tax at 9 pies in the rupee u/s 3(2) of the Madras General Sates Tax Act, 1939 and the balance of Rs. 35,97,784-2-10 was taxed at the rate of 3 pies in the rupee u/s 3(1) of that Act,

Against this revised order, the Petitioners filed an appeal before the Tribunal wherein they disputed a turnover of Rs. 53,83,891-15-11 representing inter-State Sates and also a turnover of Rs. 24,503-7-3 being the value of the scrap sold by them, which has been taxed at 9 pies in the rupee. The Tribunal went into details of each of the transactions and gave relief to the Petitioners in all oases where the goods involved in inter-state Sates had been consumed by the delivery State, treating those transactions as coming under the Explanation to Article 286(1)(a) of the Constitution. In respect of other inter-State transactions where the goods have not boon consumed in the delivery State but re-exported to other States by the buyer, the Tribunal took the view that by-virtue of explanation (2) to Section 2(b) of the Madras General Sates Tax Act, 1939 the State of Madras could bring to charge such transactions.

In this revision the Petitioners question not only the revised assessment on merits but also the jurisdiction of the Deputy Commissioner to revise the assessment. Therefore, we have to first of all deal with the jurisdiction of the Deputy Commissioner to reopen the assessment. The Petitioners also question the finding of the Tribunal that there has been no consumption in the delivery State in respect of the. disputed transactions. According to the Petitioners the goods consigned have been actually consumed by the buyers in the delivery States. Therefore one other question that arises for consideration is whether the Tribunal was right in holding that there has been no consumption in the delivery State in respect of the disputed transactions. Another question that arises for decision is as to whether the inter-State transactions in respect of which consumption has not taken place in, the delivery State could be brought to charge under the provisions of the Madras General Sates Tax Act.

The Tribunal also dealt with the question as to whether the Sates turnover of scrap could be taxed at 9 pies in the rupee and ultimately held that it could be taxed only at the general rate of three pies radar Section 8(1). The learned Counsel for the Petitioners, however, contends that the Tribunal erroneously assumed that only the rate of tax is disputed in respect of the transactions relating to scraps and that the Tribunal had not considered the question whether the Sates of scraps are liable to Sates tax at all. Therefore, the further question to be considered in whether the scraps sold by the Petitioner are liable to tax at all in the hinds of the Petitioners.

The learned Counsel for the Petitioners contends that the Deputy Commissioner had no jurisdiction to exercise the powers of revision on the facts of this case. According to him the Deputy Commissioner has no jurisdiction to call for account books and documents for the purpose of verifying whether the exemption of certain turnover on the ground that they were Sates for purpose of consumption in the delivery State and to make more or less a fresh investigation in respect of matters already dealt with by the assessing authority and that he is not permitted to make such a roving enquiry in exercise of his revisional powers. We are not in a position to accept the contention of the learned Counsel for the Petitioners that the revisional powers of the Deputy Commissioner can be so restricted to debar an enquiry in relation to items which according to the revisional authority have escaped assessment. The question of jurisdiction of the Deputy Commissioner u/s 32 was considered by this Court in a recent decision in Tax Case No. 193 of 1966, and it has be held therein that the power of revision u/s 32 could be exercised by the Deputy Commission to correct errors committed by the assessing authority in the order of assessment irrespective of the question as to whether the said errors could also be corrected by the assessing authority. Section 32 specifically confers on the Deputy Commissioner a power to make such enquiry or cause such enquiry to be made and to pass such orders as he thinks fit. In the face of that decision it cannot be successfully contended by the Petitioners that the Deputy Commissioner cannot make an enquiry calling for the details showing the nature of the transactions at the revisional stage. If an exemption has been granted by the assessing authority on a particular turnover, the Deputy Commissioner as a revisional aurthority is entitled to see whether the grant of such exemption by the assessing authority is proper, and for the purpose of finding out whether the order of exemption is proper or not, the Deputy Commissioner is entitled to call for not only the documents which were placed before the assessing authority by the Petitioners but all other information that may be required to sustain the exemption claimed by the Assessee. We therefore hold that the objection of the Petitioners relating to jurisdiction of the Deputy commissioner cannot be accepted.

The turnover in dispute before us can be split up as follows: Sales of Cars .. . Rs. 6,51,275-0-0 Sales of Tractors .. . RS. 27,96,174-2-0 Sales of Scraps .. . Rs. 24,503-7-3 The Petitioners were manufacturers of Standard Motor Cars and they had appointed dealers in various places alloting them specified area for their opera-ion. It happened that some of the dealers had been given areas comprising more than one State. Such dealers took delivery of the (sic) dispatched by the Petitioners at their head office and they had arranged to distribute and sell the cars in the various State allotted to them according to the requirements of the buyers in each State. To give one instance, the Petitioners had a dealer by name French Motor Car Company Limited, Calcutta. The dealership agreement between the Petitioners and the company provided that the company''s area of operation should be four States West Bengal, Assam. Bihar, and Orissa. The company had its head office at West Bengal and branch offices in the other three States. The total Sates of cars to the said company by the Petitioners was Rs. 23,72,218-7-3 which comprised (i) Sates to West Bengal consumers Rs. 13,42,406-11-05 (ii) Sates to persons in Assam State Rs. 2,15,838-13-00, (iii) Sates to buyers in Bihar State Rs. 82,600-5-0 and (iv) Sates to buyers in Orissa State Rs. 15,634-0-0. As regards the first item the Tribunal has given exemption on the ground that it is a sale for the purpose of consumption within the delivery State. As regards the other 3 items it has been held by the Tribunal that they are not such Sates but were merely inter-State Sates which could be brought to tax by the Madras State in view of the Sates Tax Laws Validation Act, 1956 read with explanation (2) to Section 2(h) of the Madras Genera] Sates Tax Act 1939. As already stated the Tribunal has exempted the turnover relating to the Petitioner'', Sates of motor vehicles to their dealers wherever the cars have been delivered by such dealers to the consumers within the State in which the goods were delivered on the ground that those transactions fell within the scope of Explanation to Article 286(1)(a) of the Constitution as the goods have been delivered for consumption within the delivery State. But as regards the transaction in respect of which the cars have been delivered in the State in which the dealers head office is situate and sent to the other States where the consumers reside the Tribunal has held that they being mere inter-State Sates not falling within the Explanation to Article 286(1)(a) could be taxed under the Madras General Sates Tax Act by virtue of explanation 2 to Section 2(h). The sum of Rs. 5,51,275 referred to under item above represent such transaction. The question is whether the Tribunals view that the transaction is question could be taxed under Madras General Sates Tax Act is correct.

The learned Counsel for the Petitioners firstly contends that the cars should be deemed to have been consumed within the delivery State as they have been taken by the buyers to their stocks and had emerged with their other stocks in trade and that such user of the cars in the buyers business within the State of delivery should be taken to be consumption, and reliance is placed on the following observations of the Supreme Court in Indian Copper Corporation Ltd. Vs. The State of Bihar and Others,

...under the Explanation to Article 286(1)(a) there need be no proof of actual consumption of the goods delivered in the State of first destination but that the Explanation was satisfied if the purpose of the delivery under the sale was for consumption in that State. If after a sale that satisfied that requirement, namely for the purpose of consumption in the State of first destination, the buyer under such a sale for his own purpose re-exported the goods that was not a matter with which the seller was concerned and would not affect the character of the sale also as one falling within the Explanation to Article 286(1)(x).

The learned Counsel also refers to the following observations in the dissenting judgement of Boss J. in the The State of Bombay and Another Vs. The United Motors (India) Ltd. and Others,

I would, therefore construe "consumption" to mean the usual use made of any article for the purpose of trade and commerce. When dealer buys from dealer that is "consumption" for the purposes of the purchaser dealer''s trade; when an ultimte purchaser buys from a retailer, that is also "consumption" for his purposes.

But even interpreting the word consumption in the widest possible sense as suggested by Boss j. the Petitioners in this case have to show that the sale in question were for purpose of consumption within the State of West Bengal where the goods were actually delivered, even though they are not under an obligation to prove actual consumption within that State-In this case, it cannot be disputed that the Petitioners actually delivered the goods to the buyers for distributing the same within the purchasers'' area of operation, that is, States covering more than one. If the Petitioners had intended that all the oars sent to the particular buyer would be sold by him within the State, then it is possible to construe that the goods were sent for consumption within the State of delivery. But in this case even at the time of the actual delivery of the goods to the buyers by the Petitioners the goods were intended to be sold partly within the State of delivery and partly outside the State. The observation of the Supreme Court referred to above in Indian Copper Corporation Ltd. Vs. The State of Bihar and Others, will not, in our view, help the Petitioners] in this case for the goods were not intended to be exclusively consumed within the State of delivery. Therefore, we are not inclined to agree with the learned Counsel for the Petitioner in the delivery State in respect of the disputed turnover in cars.

The learned Counsel then contends that in any event the transaction will fall under Article 286(1)(a) of the constitution as the transfer of property in the case sold passed from the Petitioner to the buyers only at the time when the goods were actually delivered in the delivery state and in such a case the State of Madras is prohibited from taxing the Sates in respect of which the transfer of property passed outside the state. This contention has been negatived by the Tribunal on the gourd that the Sates Tax Laws Validation Act of 1956 read with explanation 2 of Section 2(h) of the Madras General Sates Tax Act, 1939 enable the Madras State to tax an inter State sale so long as it does not fall under the Explanation to Article 286(1)(a) of the Constitution of India. The Tribunal countrued the Explanation to Article 286(1)(a) as exhaustive of all outside Sates qua dispatching State and that the notions of passing of property under the general law relating to sale of goods cannot be imported into Article 286(1)(a) for the purpose of finding out what are outside sales. The learned Counsel for the Petitioners contends that the view of the Tribunal is not in accord with he decisions of the Supreme Court in Indian Copper Corporation Ltd. Vs. The State of Bihar and Others, and Malayalam Plantations Ltd. Vs. The Deputy Commissioner of Agricultural Income Tax and Sales Tax, . We are inclined to agree with the contention of the learned Counsel.

In Indian Copper Corporation Ltd. Vs. The State of Bihar and Others, it has been observed:

The situs of what might be termed ''non-Explanation" Sates has therefore to be determined independently of the terms of the Explanation: Such Sates would be exempt from tax only if the sale took place; outside" the State but not otherwise. The expression "outside the State" is capable of boing understood in more senses than one. It could be understood as comprehending cases where an element or ingredient which constitutes a sale takes place within the State; in other words as applying solely to those cases where there exists no territorial nexus between the State imposing the tax and the sale Obviously this could not have been intended to be incorporated in Article 286 (1) because the tax in such cases would be beyond the legislative power of the State under Entry 54 of the State List read with Article 246 of the Constitution. The expression "outside" has therefore to be understood not as a sale so "outside" as not to have any territorial connection between the State in question and the sale, but in a somewhat narrower sense. The real difficulty arises in ascertaining the precise content of the narrower sense in which the word is used as meaning a sale in substance "outside" the State, though there might be some elements of the sale which if the exemption under Article 286(1)(a) were not enacted, would enable a State to levy a tax on the sale on the ground that it was within the legislative power of the State under Article 246 read with Entry 54.

The key to the problem is afforded by two indications in the Article itself: (1) the opening words of Article 286 (1) which speak of a sale or purchase taking place and (2) the non-obstante clause in the Explanation which refers to the general law relating to "sale of goods under which property in the goods has by reason of such sale or purchase, passed in another State". These two together indicate that it is the passing of property within the State that is intended to be fastened on, for the purpose of determining whether the sale in question is "inside" or "outside" the State and therefore, subject to the operation of the Explanation" that State in which the property passes would be the only State which would have the power to levy a tax on the sale.

The above passage indicates the Sates of goods under which either property in the goods passes in another State or the goods have been actually delivered for consumption in that State will be outside Sates with reference to the State of despatch and that such Sates are taxable only by the State of delivery. The said decision lias been reaffirmed in A.V. Thomas and Co. Ltd. Vs. Deputy Commissioner of Agricultural Income Tax, and Malayalam Plantations Ltd. Vs. The Deputy Commissioner of Agricultural Income Tax and Sales Tax, wherein it lias been ruled that where the explanation to Article 286(1)(a) is inapplicable it is the passing of the property within the State that is intended to be fastened on, for the purpose of determining whether the sale in question was inside or outside the State and that, therefore, subject to the operation of the Explanation that State in which the property in the goods passes would be the only State which would have the power to levy tax on the sale. Of course the dissenting judgment of Shah J. in Malayalam Plantations Ltd. Vs. The Deputy Commissioner of Agricultural Income Tax and Sales Tax, was to the effect that the doctrine of territorial nexus had full play in Sates tax legislation and that Article 283 of the Constitution had not abrogated that doctrine in the interregnum between the promulgation of the Constitution by the 6th amendment of 1956 and that, therefore the Sates Tax Laws Validation Act, 1956 having removed the inter-State ban under Article 286(2), the situs of sale cound be fixed by applying the doctrine of territorial nexus once the sale is not a sale as contemplated in Article 286(1)(a) Explanation. In Banjarang Jute Mills Ltd. v. State of Andhra Pradesh [1954] 15 S.T.C. 430 (S.C) Shah J. speaking for the Bench observed:

But the Explanation is not exhaustive of what may be called inside sales. Clause (1)(a) excludes from the reach of the power of the State Sates outside the State but it does not follow from the Explanation that it localizes the situs of all sales. The power of the State under Entry 54, List II of the seventh Schedule to tax Sates not falling within the Clauses (1)(b)(2) and (3) which may for the sake of brevity be called non explanation Sates remains unimpaired. It is not necessary for the purpose of this case to express and opinion, whether the theory of territorial nexus of the taxing State, with one or more elements, which go to make a completed sale authorises since the promulgation of the Constitution the exercise of legislative power under Entry 54, List II, of the Seventh Schedule to tax sale, where property in good has not passed within the taxing State.

In Malayalam Plantations Ltd. Vs. The Deputy Commissioner of Agricultural Income Tax and Sales Tax, Shah J. however proceeded on the basis that the matter is no longer res Integra and that though he might take a different view if the matter lias not been res Integra the position should be taken as well established that in cases of non Explanation Sates the situs of sale should be fixed with referred to the nation of passing of property under the general law relating to sale of goods. Therefore it has become necessary to find out as to where the property passed respect of the dispute Sates of ears the tribunal felt it unnecessary to go into that question and to give a finding thereon as n its view the question as to where the property passed was immaterial But as we have held that in case of no explanation Sates it is only that State in which the transfer of property took place which can levy the tax on and inter-State sale, it has become necessary to direct the Tribunal to go into the question as to where the property passed in relation to the disputed transaction of Sates of cars.

As regard the disputed turnover in relation to the tractors, the facts as found by the Tribunal were these. The Petitioners after getting purchase orders from Messers. Massey Harris Ferguson (Indian) Ltd., Bangalore dispatched the goods to the dealers in various States on their instructions and that the tractors have been used only within the States of delivery. The Tribunal has taken these transaction as similar to the transaction of Sates of cars referred to above. But we are of the view that there is clearly a difference between the disputed transactions in relation to tractors and those in respect of cars. In respect of tractors the goods have been delivered in the various States as per the instructions of the buyer and goods have been used in the delivery States. Therefore, it has to be taken that the disputed transactions in tractors are Sates coming within the Explanation to Article 286(1). The mere fact that the buyer company was in Bangalore will not make the transaction nonetheless an Explanation sale. The residence of the buyer is immaterial for fixing the situs of a sale with reference to the Explanation to Articles 286(1). We, have to, therefore, disagree with the view taken by the Tribunal and hold that the disputed transactions in tractors are to be taken as outside gales so far as the Madras State is concerned by virtue of Article 286(1)(a) Explanation.

The only other item that remains to be considered is the turnover relating to scrap sales. As already stated, the Tribunal has not gone into the question as to the assess ability of these transactions. But it merely considered the question as to what is the rate of tax applicable to these sales. The learned Counsel for the Petitioners contends that scrap Sates are not in the course of their business of manufacturing cars and tractors and that in any event, they are not dealers in scraps as such. Reliance is placed on the following decisions:--Deputy Commissioner of Commercial Taxes v. Thirvmagal Mills Ltd. (1967) 20 S.T.C. 287, City Motor Service Private Ltd. v. State of Madras (1968) 22 S.T.C. 485, State, of Tamil Nadu v. Thirumagal Mills Ltd. (1972) 29 S.T.C. 290, and State of Tamil Nadu v. Rambal Private Limited (1972) 29 S.T.C. (sic). We are of the view that the above decisions clearly lay down the principle that where an Assesses''s object was not to deal in scrap but the scrap results in the aeseseee''s activity as manufacturer and seller of another produce the turnover relating to the Sates of scrap was not assessable to tax. It has also been held in those cases that when the Assessee sells scraps he does not do it as a dealer in the course of his business- Following the principle laid down in those cases we hold that the scrap Sates cannot be taxed in the Petitioner''s hands, for Petitioners were neither dealers in scrap as such nor was it their business.

The result is the turnover under items 2 and 3 set out above are held to be not taxable and as regards item 1 (transactions of Sates of cars) there will be a direction to the Tribunal to consider the question as to whether the property in the goods concerned passed within the State of Madras, and to dispose of the appeal so far as it relates to that (sic)-over a fresh on the basis of that finding.

The tax case is, therefore, partly allowed and there will be no order as to costs.