State of Travancore-Cochin and Others vs The Bombay Co. Ltd.

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 25 of 1952

Decision Date: 16 October 1952

Coram: M. Patanjali Sastri, B.K. Mukherjea, Vivian Bose, Ghulam Hasan

In the matter styled State of Travancore-Cochin and others versus The Bombay Co. Ltd., the Supreme Court of India pronounced its judgment on the sixteenth day of October, 1952. The written opinion was prepared by Justice M. Patanjali Sastri, who also served as the chief justice of the bench. The bench was constituted by Justice M. Patanjali Sastri, Justice B.K. Mukherjea, Justice Vivian Bose and Justice Ghulam Hasan, all of whom participated in the decision. The petitioner comprised the State of Travancore-Cochin together with several other interested parties, while the respondent was identified as The Bombay Co. Ltd. The decision was reported in the All India Reporter as volume 1952, page 366, and also appears in the Supreme Court Reporter at page 1112 of the same year. Subsequent authorities have cited the case numerous times, including references in reports such as 1952 SC 369, 1953 SC 252, 1953 SC 333, 1955 SC 661, 1956 SC 158, 1957 SC 699, 1958 SC 578 and 1958 SC 1006. Later authorities also refer to the decision in reports such as 1959 SC 149, 1960 SC 595, 1961 SC 41, 1961 SC 65, 1961 SC 315, 1962 SC 1733 and 1963 SC 980. Further citations are recorded in 1963 SC 1207, 1964 SC 1752, 1967 SC 1643, 1971 SC 477, 1971 SC 870, 1973 SC 1461, 1973 SC 2555, 1974 SC 1510, 1975 SC 1564, 1980 SC 1468, 1985 SC 1367 and 1989 SC 190. The provision examined by the Court was Article 286(1)(b) of the Constitution of India, which provides for an exemption from sales tax on sales that occur ‘in the course of export or import.’ The Court also considered the interpretation of the phrase ‘in the course of’ and examined whether a transaction is exempt when title passes and the sale is completed before the goods physically leave the State. The headnote of the judgment stated that, irrespective of other considerations, any sale or purchase that directly causes the export or import of goods into or out of the territory of India falls within the exemption contemplated by Article 286(1)(b).

The Court rejected the narrow view that a sale could be said to occur ‘in the course of export or import’ only if property in goods is transferred to the buyer during movement of goods. The Court gave examples such as when shipping documents are endorsed and delivered within the State to a local agent of the foreign buyer after the goods have been shipped. The Court also considered situations where such documents are cleared on payment or acceptance by the Indian buyer before the goods arrive. The Court held that this restrictive construction was incorrect because an export sale comprises a series of integrated activities beginning with the agreement with a foreign buyer. The Court added that the export sale ends with the delivery of the goods to a carrier for transport out of the country by land or sea. The Court emphasized that the sale cannot be separated from the export, because without the export the sale could not be effected. Accordingly, the Court concluded that the sale and the resulting export constitute parts of a single transaction altogether. Finally, the Court held that even when the property passes to the foreign buyer and the sale is completed within the State before the goods commence their journey, such sales must be regarded as having taken place in the course of the export and are therefore exempt under Article 286(1)(b).

In the Court’s view, the two activities that together make up an export sale form parts of a single transaction, and whichever of those activities occurs first may be said to be taking place in the course of the other. Accordingly, even when the title to the goods passes to a foreign buyer and the sale is completed inside the territory before the goods actually begin their journey, the sale is to be regarded as having taken place in the course of the export and therefore falls within the exemption provided by article 286(1)(b). The Court observed that the Commerce clause of the United States Constitution (article 1, section 8, clause 3) and the Import-Export clauses of that Constitution (article I, sections 9 (5) and 10 (2)) differ substantially in language, scope and purpose from the Indian provision, and the extensive body of American doctrinal tests cannot be relied upon to resolve questions arising under article 286 of the Indian Constitution. Moreover, the Court held that speeches made by members of the Constituent Assembly during the drafting debates are not permissible as aids for interpreting the Constitution. The Court referenced the authorities Administrator General of Bengal v. Prem Nath Mullick [22 I.A. 107 at 118], A.K. Gopalan v. The State [(1950) S.C.R. 88] and United States v. Trans-Missouri Freight Association [169 U.S. 290 at 318] in support of this reasoning.

The matter before the Court concerned three connected civil appeals, numbered 25, 28 and 29 of 1952, filed against the judgment and order dated 10 January 1952 of the High Court of Judicature of Travancore-Cochin at Ernakulam. The High Court had set aside assessments under the United State of Travancore and Cochin Sales Tax Act (No. 11 of 1125 M.E.) levied on the respondents with respect to the turnover from sales of various commodities—specifically cashew products in appeal 25, lemongrass oil in appeal 28, and tea in appeal 29. The State of Travancore-Cochin was represented by the Advocate-General together with counsel, while each respondent was represented by separate counsel. The Union of India appeared through the Attorney-General and the Solicitor-General with their assistants. The judgments were delivered on 16 October 1952 by Chief Justice Patanjali Sastri. The Court noted that the factual pattern in each case was substantially the same: the respondents engaged in export sales of the respective commodities to foreign buyers on either C.I.F. or F.O.B. terms, and the assessment was challenged on the ground that such sales occurred in the course of the export of the goods out of the territory of India.

The respondents in each of the three cases asserted that they were exempt from sales-tax assessment because the sales they made were conducted “in the course of the export of the goods out of the territory of India,” a phrase that falls within article 286(1)(b) of the Constitution. The Sales Tax Authorities rejected this argument, holding that the sale was completed before the goods were shipped and therefore could not be said to have occurred in the course of export. Consequently, each respondent filed a separate petition before the High Court of the United State of Travancore and Cochin under article 226 of the Constitution, seeking writs of certiorari and prohibition. The petitions asked that the assessments already made be set aside and that no similar assessment be imposed in the future.

The High Court heard these applications together with nine other petitions for similar relief presented by dealers in cashew nuts. A Division Bench consisting of Chief Justice Kunhiraman and Justice Subramania Iyer examined the matter and upheld the claim of exemption, quashing the assessment orders that pertained to transactions occurring after the Constitution had come into force. Following that judgment, the State appealed each of the three cases on a certificate granted under article 132(1) of the Constitution. Because the appeals raised important questions of law with possible implications for sales-tax legislation across the various States of India, this Court directed notice of the proceedings to the Attorney-General for India and to the Advocates-General of the concerned States. Those officers intervened and participated fully in the arguments. During the hearing, it became apparent that the factual matrix relating to the cashew-nut transactions was more complex than initially understood and had not been clearly established. Accordingly, the appeals involving the cashew-nut dealers were remitted to the High Court for determination of specific agreed-upon points. The three present appeals, however, were fully heard, as they could be decided on the material already on record.

Article 286(1), on which the respondents based their claim to exemption, provides as follows: “No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place. (a) outside the State; or (b) in the course of the import of the goods into, or export of the goods out of, the territory of India.” The provision continues with an explanation: “For the purposes of sub-clause (a), a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed.”

On the question of how clause (b) of article 286 (1) should be understood, the learned judges set out a broad interpretation. They observed that the expression “in the course of” expands the reach of the provision far beyond the moment at which goods actually cross the border of India. According to their view, every transaction that necessarily precedes the import or export of the goods falls within the clause. Consequently, if a sale occurs at any stage of that chain of transactions, the sale is exempt from the levy of sales tax even though the sale may have taken place inside the limits of a State. The judges emphasized that the exemption applies whenever the goods are being moved toward import into India or are being prepared for export from India. They highlighted that this point was especially relevant in the cashew-nut cases, where the parties engaged in an extensive discussion about the precise moment when a sale became complete and the precise location of the goods at that moment.

Applying this interpretation, the judges treated purchases made locally for the purpose of export as integral components of the export process. To support this construction, they referred to the debates that occurred in the Constituent Assembly on clause 264-A of the draft Constitution, which later became article 286. They quoted a speech by a member who had unsuccessfully moved an amendment proposing that “export” should be understood as the final transaction and “import” as the initial transaction. Because of the expansive meaning given to clause (b), the arguments presented before the court covered a wide spectrum, and four distinct views on the scope and meaning of the exemption were advanced for consideration. The first view, presented on behalf of the State of Madras, held that the exemption is confined to sales that directly cause an export and purchases that directly cause an import, and that it does not extend to any other transactions, however closely related in intention or purpose, even if the title to the goods passes to the buyer. The Advocate-General accompanying this view argued that a State could not impose sales tax on a transaction where title passes while the goods remain on the high seas, and therefore no exemption question would arise, although he noted that such a situation had not actually occurred. The second view, introduced subsequently, contended that in addition to the sales and purchases described in the first view, the exemption should also cover the last purchase made by the exporter and the first sale made by the importer, provided those transactions are so directly and proximately connected with the export sale or import purchase that they form part

The Attorney-General supported the view that sales or purchases effected while the goods were situated on the high seas would be exempt from tax. However, he expressed a preference not to elaborate on the broader theoretical question, because regardless of the interpretative approach, the particular transactions under consideration in the present cases would inevitably qualify for exemption. The third proposed construction limited the exemption to those sales and purchases where the title in the goods passed from seller to buyer during the actual transit of the goods—that is, after the goods had begun their movement and before they reached the foreign destination. This narrower interpretation received backing from the State of Bombay and several other States. The fourth construction, which was the one favoured by the learned Judges of the High Court in the earlier extracted passage, presented a broader understanding. It was noted that the first construction mentioned above was the most restrictive, while the last was the most expansive. The Court was of the clear opinion that the sales giving rise to the exports in each of the cases fell squarely within the ambit of the exemption provided by article 286(1)(b). Such sales necessarily involved the physical conveyance of the goods by rail, by ship, or by both, out of the territory of India, thereby employing the “machinery of export.” Accordingly, an export sale comprises a series of integrated steps that commence with the agreement to sell to a foreign buyer and conclude with the delivery of the goods to a common carrier for transportation out of the country. The sale cannot be separated from the export, because the export is essential to give effect to the sale; together they constitute a single transaction in which each activity occurs in the course of the other.

Assuming, without deciding, that in the cases before the Sales Tax Authorities the title in the goods passed to the foreign purchasers and that the sales were therefore completed within the State before the goods embarked on their journey, the Court held that the sales must nonetheless be treated as having taken place in the course of the export. Consequently, they qualified for exemption under article 286(1)(b). The provision itself presupposes that the sale occurred within the limits of the State and provides exemption when that sale is part of the export process. In the preceding discussion the Court operated on the premise that the term “sale” as used in the Constitution bears the same meaning as the term in the Sale of Goods Act. Nevertheless, counsel argued that the constitutional usage might encompass a broader concept than merely the transfer of title, a concept that, under ordinary sales law, is determined by technical rules that infer the parties’ intended effect. The Court chose not to resolve this broader definitional issue, as it was unnecessary for the resolution of the appeals.

The Court observed that the question of whether a sale could be displaced by the parties’ expressed intention was left open because it was not necessary to express any opinion on that point for the purposes of the appeals. The Court then addressed an argument that, on the construction previously indicated, a “sale in the course of export” would effectively become synonymous with the act of export itself, thereby rendering clause (b) of article 286(1) redundant. The argument was based on the premise that article 246(1), read with entry 83 of List I of the Seventh Schedule, vests exclusive legislative authority over “duties of customs including export duties” in Parliament, and that such exclusive authority would be sufficient to bar any State from imposing tax on the same transactions. The Court rejected this suggestion, holding that it had no merit. It explained that, in the absence of a provision such as clause (b) that expressly forbids the levy of tax on sales or purchases carried out through the mechanisms of export and import, it could be argued that both the Union and the States, although each possesses exclusive power of taxation in its respective sphere, might nevertheless tax the same transaction – the sale by way of export or the purchase by way of import – because the sales tax and the export duty are regarded as taxes of a different character. The Court cited the Federal Court’s decision in Province of Madras v. Boddu Paidanna and Sons, wherein it was held that both central excise duty and provincial sales tax could lawfully be imposed on the first sale of groundnut oil and cake by the manufacturer, describing the two taxes as “economically two separate and distinct imposts.” The Court cautioned that a similar line of reasoning, if applied without restraint, could lead to a cumulative tax burden on the export-import trade, a sector of great significance to the national economy. Accordingly, the Court suggested that the Constituent Assembly may have intentionally inserted article 286(1)(b) to exempt sales made by export and purchases made by import from sales tax. The Court further expressed disagreement with the contention that a sale or purchase could be said to occur “in the course of” export or import only when the title to the goods passes to the buyer during the actual movement of the goods. It noted that such a view would limit the exemption to situations where, for example, shipping documents are endorsed and delivered within the State to a local agent of the foreign buyer after the goods have been shipped, or where the documents are cleared on payment or acceptance by an Indian buyer before the goods arrive in the State. The Court held that this approach places undue emphasis on the literal meaning of the word “course” and imposes a mechanical test for applying clause (b), resulting in an unduly narrow construction that would confine the clause’s operation solely to transactions occurring during the transit of the goods. Such a restriction, the Court warned, would deprive the exemption of much of its intended usefulness. Consequently, the Court concluded that, irrespective of other considerations, sales and purchases that themselves give rise to the export or import of goods, whether out of or into the territory of India, fall within the exemption contemplated by article 286(1)(b), and that this determination was sufficient to resolve the appeals.

Within article 286 (1) (b) of the Constitution, any sale or purchase that directly causes the export or the import of goods, as appropriate, out of or into the territory of India falls within the exemption provided by that provision, and that observation alone was sufficient to dispose of the appeals before the Court. During the argument, counsel drew attention to a number of United States decisions that hold that the power “to regulate” interstate commerce, which is vested exclusively in Congress by article 1 section 8(3) of the American Constitution (the Commerce Clause), by implication excludes the power of the States to tax such goods only after the goods have entered “the export stream.” Until that point, the goods remain part of “the general mass of property in the State” and are therefore subject to the State’s jurisdiction to impose tax. The same principle has been said to apply to cases arising under article 1 section 9(5) and section 10(2) of the Constitution, commonly referred to as the Import-Export Clause, as illustrated, for example, in Empresa Siderurgica v. Merced Co. (1). Those clauses, reported in 337 U.S. 154, differ widely in their language, scope and purpose, and a diverse body of doctrines and tests has developed over time to interpret, extend or limit their operation in the context of the expanding American commerce and industry. The Court was of the opinion that these American precedents offered little assistance in resolving the questions that arise under article 286 of the Indian Constitution.

The Court also observed that the learned Judges below had relied upon speeches made by members of the Constituent Assembly during the debates on the draft Constitution, and that such reliance was unwarranted. The use of extrinsic material of that kind to interpret statutes has been generally rejected in England, and the same rule has been applied in the interpretation of Indian statutes, as shown in Administrator-General of Bengal v. Prem Nath Mallick (1). The rationale for the rule was explained by one of the Judges in Gopalan’s case (2) as follows: “A speech made in the course of the debate on a bill could at best be indicative of the subjective intent of the speaker, but it could not reflect the inarticulate mental process lying behind the majority vote which carried the bill. Nor is it reasonable to assume that the minds of all those legislators were in accord.” The same point was expressed more briefly in an American case: “Those who did not speak may not have agreed with those who did; and those who spoke might differ from each other,” United States v. Trans-Missouri Freight Association (3). Although this rule of exclusion has not always been strictly observed in the United States, where a distinction is sometimes drawn between using such material to determine the purpose of a statute and using it to determine its meaning, the Court noted that the rule appears to be adopted in Canada and Australia, as discussed in Craies on Statute Law, 5th Ed., p. 122. Consequently, the Court agreed with the conclusion reached by the lower courts.

In this case the High Court, although reaching its conclusion on grounds that differed from those presented, ordered that each of the appeals be dismissed and the parties to bear the costs of the proceedings. Consequently, after the Court’s reasoning, the appeals were formally dismissed with the order taking immediate effect and the parties required to comply. The legal representative who appeared on behalf of the appellants was counsel P A Mehta, who acted as the appellant’s agent throughout the proceedings. The counsel who represented the respondent in Civil Appeal No 25 of 1952 was M S K Sastri. The counsel appointed to represent the respondent in Civil Appeal No 28 of 1952 was Sardar Bahadur, who presented the respondent’s position before the Court. The counsel for the respondent in Civil Appeal No 29 of 1952 was V P K Nambiyar, who argued on behalf of the respondent. The counsel who acted for all of the interveners in this matter was P A Mehta, who represented them collectively. The interveners included the Union of India, the State of Bombay, the State of Madras, the State of Hyderabad, the State of Punjab, the State of Mysore and the State of Orissa. The counsel who was appointed to represent the State of Uttar Pradesh in these appeals was C P Lal, who presented the state’s arguments before the Court.