State of Travancore-Cochin and Others vs Shanmugha Vilas Cashew Nut Factory and Others

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 8 May 1953

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

In this case the Supreme Court of India delivered its judgment on 8 May 1953 concerning the appeal titled State of Travancore-Cochin and Others versus Shanmugha Vilas Cashew Nut Factory and Others. The judgment was authored by Justice M. Patanjali Sastri and the bench was composed of Justices M. Patanjali Sastri, B. K. Mukherjea, Vivian Bose and Ghulam Hasan. The petitioner was the State of Travancore-Cochin together with other parties, while the respondents were Shanmugha Vilas Cashew Nut Factory and its associated parties. The decision was reported in the year 1953 at AIR 333 and in the Supreme Court Reports at 1954 SCR 53, and it has been cited in numerous subsequent authorities, including but not limited to APR 1955 SC 661, RF 1955 SC 765, F 1956 SC 158, E&D 1957 SC 790, RF 1958 SC 453, F 1958 SC 1002, F 1958 SC 1006, F 1960 SC 595, R 1961 SC 41, D 1961 SC 65, R 1961 SC 213, RF 1961 SC 315, R 1961 SC 1344, R 1962 SC 1006, R 1962 SC 1733, R 1963 SC 980, R 1964 SC 1729, R 1964 SC 1752, R 1971 SC 477, RF 1971 SC 870, R 1972 SC 23, RF 1974 SC 1510, E 1975 SC 1564, R 1979 SC 1721, R 1980 SC 1468, and F 1992 SC 1952.

The Court examined the constitutional provisions governing the taxation of sales and purchases of goods, specifically Article 286(1)(a), (1)(b) and (2) of the Constitution of India. These provisions delineate the scope of State power to tax sales that occur outside the State, sales that occur in the course of import or export, and sales that occur in the course of inter-State trade or commerce, while also prescribing the constitutional limitations on such taxation.

After considering the relevant statutory language and the factual circumstances of the case, the Court held the following: (i) any sale or purchase that itself gives rise to the export or import of the goods into or out of the territory of India falls within the ambit of Article 286(1)(b) and is therefore exempt from State taxation; (ii) a purchase made within the State by an exporter for the purpose of export, as well as a sale made within the State by an importer after the goods have passed the customs barrier, does not fall within the exemption and may be taxed by the State; and (iii) a sale carried out within the State by either the exporter or the importer through the transfer of shipping documents while the goods remain beyond the customs barrier is covered by the exemption, provided that the State’s power of taxation extends to such transactions.

The Court further explained that the term “course” is derived etymologically to denote movement from one point to another, and that the expression “in the course of” within Article 286(1)(b) signifies not only a period during which the movement is ongoing but also a connected relationship between the parties and the activity. Consequently, a sale that occurs in the course of export out of the country must be understood, in the context of Article 286(1)(b), as a sale that takes place during the activities directed toward the export of the goods and as a transaction that forms an integral part of, or is connected with, the export process.

In this case the Court noted that a purchase of goods intended for export was merely a preparatory act and could not be characterised as an act performed in the course of the export itself. The respondents had bought raw cashew nuts within the State of Travancore-Cochin, obtained additional nuts from the neighbouring States, and also imported nuts from Africa with the purpose of refining them and exporting the finished product to America. The imports from Africa were carried out in two distinct manners. First, the respondents purchased the nuts through intermediaries in Bombay who acted as commission agents and charged a commission for their services. Second, the Bombay commission agents sometimes procured the nuts on their own account and then sold them to the respondents as principals. In both methods the nuts were shipped directly from Africa to a port located in Travancore-Cochin. The factual investigation disclosed that, after the process of refinement, the nuts were no longer the same commercial goods as they had been when they arrived at the factory.

The Court then set out its findings. It held that purchases made in the local markets of Travancore-Cochin did not fall within the exemption provided by article 286(1)(b). Regarding purchases made in the neighbouring States, the Court observed that if the respondents’ servants effected the purchase and took delivery outside the territory of Travancore-Cochin, such transactions would be exempt under article 286 clause (i)(a). Conversely, if the purchases were effected by employing firms that carried on commission business outside the State and the goods were delivered through ordinary commercial channels, the transactions would possess an inter-State character and would therefore be covered by clause (2). Nonetheless, those transactions would remain taxable under the Sales Tax Continuance Order No 7 of 1950 issued by the President, because the tax had been levied before the Constitution came into force. Concerning the imports from Africa, the Court distinguished two situations. When the Bombay merchants acted merely as agents for the respondents, the transactions were purchases that gave rise to the import and consequently qualified for exemption under article 286(1)(b). However, when the Bombay merchants did not act as agents and instead sold the goods on their own account, those purchases were treated in the same manner as local purchases and were not exempt.

Justice S. R. Das explained that the Explanation to article 286(1)(a) did not create a new exception or a proviso; it merely clarified clause (1)(a). The Explanation did not confer any additional taxing authority on a State; rather, it removed a State’s power to tax sales and purchases where delivery did not occur within that State by deeming such sales to have taken place outside the State within the meaning of clause (1)(a). Accordingly, when a sale or purchase occurred outside a State—whether by general law or by virtue of the fictitious rule created by the Explanation—that State could not levy tax on the transaction under clause (1)(a). Conversely, if a sale or purchase took place within a State, whether by general law or because of the Explanation, the State could contemplate taxation in accordance with the provisions applicable to intra-State transactions.

In this case, the Court explained that when a sale or purchase occurs in the course of inter-State trade and commerce, no State, including the State in which the transaction is said to occur, may levy tax on it under clause (2), unless Parliament subsequently enacts a law to the contrary. The Court defined a sale or purchase “in the course of” import or export within the meaning of clause (1)(b) to include three situations: first, a transaction that itself gives rise to the import or export, as previously held by this Court; second, a transaction that takes place while the goods are on the high seas during their import or export journey; and third, the final purchase made by the exporter with a view to export and the first sale made by the importer to a dealer after the goods have arrived. Accordingly, if a sale or purchase takes place within a State, whether under the general law or by virtue of the Explanation, and it is one of the transactions described above, then no State, even the State where the transaction occurs, may tax it under clause (1)(b). Regarding local purchases, the Court held that because the High Court had found the goods to have been so altered that they could not be considered the same goods that were exported, those purchases did not fall within the protection of clause (1)(a) and could not be said to have been made “in the course” of export; consequently they were not immune from taxation under clause (1)(b). Concerning purchases from neighboring States, the Court said that if the respondents’ agents took delivery of the goods outside the State, the Explanation treats those purchases as taking place outside the State and they are therefore exempt from tax under clause (1)(a). However, if the goods were delivered directly to the respondents in Travancore-Cochin, the Explanation to clause (1)(a) applies because, according to the High Court’s finding, the goods are also consumed in the State. In that situation the neighboring States cannot tax the sales, but the purchases are characterised as inter-State trade and would normally be protected by clause (2). The majority view of the Court, however, was that such purchases become intra-State purchases under the Explanation to clause (1)(a) and therefore lose the protection of clause (2). Even if they were covered by clause (2), the Court noted that they would be liable to tax under the President’s Order of 1950 because they are not protected by clause (1)(b), the exported goods being different. As for purchases from Africa where the Bombay merchants act as agents of the respondents, pay the price and take delivery of

The Court considered three alternative factual situations concerning the liability of the respondents for sales tax. First, when the shipping documents were issued in Bombay, the purchases qualified both as transactions occurring outside the State under clause (1)(a) and as imports under clause (1)(b); consequently, they were not subject to tax. Second, where African sellers dispatched the goods either on their own initiative or through their agents and, while the goods remained on the high seas, the respondents’ agents in Bombay purchased them, the sale was exempt under both clause (1)(a) and clause (1)(b). Third, where the respondents placed separate orders with a single commission agent in Bombay, and that agent subsequently placed a consolidated order with the African seller at his own risk, the Bombay agent paid for the entire lot, issued separate invoices to each constituent, and the constituents obtained delivery orders from a Travancore bank against payment and collected the goods from a Travancore warehouse, the sale was deemed to have taken place within the Travancore-Cochin State. Under this circumstance, the transaction could not rely on the exemptions provided in clause (1)(a), clause (1)(b), or clause (2) of article 286.

The appeals arose under article 132(1) of the Constitution against the judgment and order dated 10 January 1952 issued by the High Court of Travancore-Cochin in original petitions number 5, 19, 34, 35, 71, 83, 88, 89 and 90 of 1951. The High Court had set aside the separate assessments made on the respondents under the Travancore-Cochin General Sales-Tax Act, 1124 M.E., which had been enforced since March 1949. The respondents asserted that, for purchases made after the commencement of the Constitution in 1950 up to the close of the 1950 accounting year, the State lacked authority to levy tax under article 286(1)(b). The sales-tax authorities rejected this claim, prompting the respondents to invoke article 226 and obtain the High Court’s order quashing the assessments for the period in question. The State challenged that order by filing the present appeals. These appeals were initially heard together with several other appeals in September and October 1952, but because the material facts had not been fully clarified by the High Court, the matters were remitted for further investigation and factual findings. The related appeals were finally disposed of on 16 October 1952, and the decision was reported as State of Travancore-Cochin v. The Bombay Co. Ltd. ([1952] S.C.R. 1112). After the High Court returned the record with its findings, the hearing of the present appeals continued. Counsel for the State included the advocate-general of Travancore-Cochin with counsel, while counsel for the respondents appeared on their behalf.

The Union of India was represented by M. C. Setalvad, who held the office of Attorney-General for India, and by C. K. Daphtary, the Solicitor-General for India, together with Porus A. Mehta who assisted them. The State of Madras was represented by V. K. T. Chari, the Advocate-General of that State, with V. V. Raghavan accompanying him. The State of Hyderabad was represented by V. Rajaram Iyer, the Advocate-General of Hyderabad, assisted by B. N. Sastri. The State of Punjab was represented by S. M. Sikri, the Advocate-General of Punjab, with M. L. Sethi assisting. The State of Mysore was represented by A. R. Somanatha Iyer, the Advocate-General of Mysore, and he was joined by R. Ganapathy Iyer. The State of Uttar Pradesh was represented by K. B. Asthana. No counsel appeared on behalf of the States of Bombay and Orissa. The judgment dated 8 May 1953 recorded that the opinion of the Chief Justice, together with the opinions of Justices Mukherjea, Vivian Bose and Ghulam Hasan, was delivered by the Chief Justice, while Justice S. R. Das delivered a separate opinion.

These proceedings were appeals against an order of the High Court of Travancore-Cochin which had set aside the sales-tax assessments that had been made separately against each respondent under the Travancore-Cochin General Sales Tax Act, 1124 M. E. (Act No. XVIII of 1124 M. E.), a statute that will be referred to as “the Act”. Section 3 of the Act authorized the imposition of a tax on the total turnover of every dealer for each fiscal year. The Act defined “turnover” as the aggregate amount for which goods are either bought or sold by a “dealer”, where a dealer is a person who carries on the business of buying and selling goods, as specified in section 2(d). The term “sale”, together with its grammatical variants and related expressions, was defined in section 2(h) to include, among other things, every transfer of title in goods from one person to another in the course of trade or business, whether the consideration is cash, a deferred payment or any other valuable consideration. The Act further provided that a sale or purchase would be deemed to have taken place in the State of Travancore-Cochin irrespective of where the contract was made, if the goods were physically present in the State at the time the contract was concluded, or, in the case of goods produced in the State, at any time after the contract concerning those goods was made. Section 3(4) required that turnover be calculated in accordance with rules prescribed under the Act, and rule 4 of those rules stipulated that for certain specified goods, including cashew and its kernel, the gross turnover of a dealer would be measured by the amount for which the dealer purchased the goods, whereas for all other goods the turnover would be measured by the amount for which the dealer sold the goods. The respondents in these appeals were dealers in cashew nuts operating within the State. Their business involved importing raw cashew nuts from abroad and from the neighbouring districts of the State of Madras, as well as purchasing cashew nuts in the local market. After importing and purchasing, the respondents processed the raw nuts by converting them through various methods into edible kernels, which were then exported chiefly to the United States of America. In addition, the oil pressed from the shells that were removed from the cashew nuts was also exported.

On January 26, 1950, each respondent in the appeals asserted that they were entitled to exemption under article 286(1)(b) for all purchases made from that date until May 29, 1950, which marked the close of the accounting year. The sales tax authorities rejected these claims, prompting the respondents to approach the High Court under article 226. The High Court then upheld the respondents’ exemption claims and set aside the tax assessments insofar as they concerned the specified period. The State subsequently lodged appeals against that judgment. During the hearing, the appeals in question were heard together with several other appeals arising from the same tax order. The Court observed that the material facts pertaining to the respondents’ business operations in the present appeals had not been clearly established. Consequently, it directed that these particular appeals be sent back to the High Court for further investigation and factual findings concerning those matters. By contrast, the related appeals in which the record was deemed sufficient for a complete decision were finally resolved; the judgment in those cases is reported in The State of Travancore-Cochin v. The Bombay Co. Ltd. (1), hereinafter referred to as the previous decision. Before the Court could examine to what extent the cashew-nut purchases made by the respondents, based on the High Court’s findings, fell within the protection afforded by article 286(1)(b), it first needed to determine the breadth of that protection. The relevant provision reads: “286. (1) 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) … (b) in the course of the import of the goods into, or export of the goods out of, the territory of India.” In the earlier decision, this Court identified four distinct interpretations of the sub-clause that had been presented during argument. The first view held that the exemption is confined strictly to sales that constitute exports and purchases that constitute imports—those transactions that actually give rise to the export or import—and does not extend to any other dealings, however closely related in intent or purpose, or regardless of where title to the goods passes. The second view added that, besides the export sales and import purchases themselves, the exemption also embraces the final purchase made by the exporter and the initial sale made by the importer, provided those transactions are directly and immediately connected with the export or import and constitute part of the same overall transaction. The third view limited the exemption to those sales and purchases in which ownership of the goods passes from seller to buyer during the period of transit—that is, after the goods have started moving and before they reach their foreign destination. The fourth view, which was accepted by the learned judges of the High Court, described the clause as not being confined to the precise moment of import or export; instead, it embraced the entire series of transactions that necessarily precede the export or import of the goods. This Court, however, considered it unnecessary for the purposes of the cases before it to adopt any view beyond the simple statement that any sale or purchase that directly causes the export or import of goods falls within the exemption, and rejected the narrow Bombay interpretation that limited the clause solely to transactions occurring during transit.

The Court observed that the exemption was not limited to the moment when goods actually entered or left the country; rather, it also covered the chain of transactions that inevitably preceded the export or import. Nonetheless, the Court considered it unnecessary, for the matters before it, to expand the analysis beyond the statement that “whatever else may or may not fall within article 286 (1) (b), sales and purchases which themselves occasion the export or import of the goods, as the case may be, out of or into the territory of India come within the exemption.” The Court further held that the third viewpoint, advanced on behalf of the State of Bombay, which sought to restrict the clause’s operation solely to sales and purchases occurring during the transit of the goods, was excessively narrow and could not be accepted. The Court pointed out that if the Bombay view was judged to be too narrow, then the view expressed by the lower Court could not be regarded as merely broad; it would, in fact, be overly expansive. This observation was acknowledged by the counsel who appeared in the cases, none of whom made any serious attempt to support the broader interpretation. Moreover, no argument was raised concerning the scope and effect of clause (2) of article 286, since, although the respondents in two of the appeals had bought cashew-nuts in districts adjoining the State of Madras during the relevant period, it was not disputed that such purchases, unless they qualified for exemption under article 286 (1) (a), would fall within the explanatory provision to clause 1 (a) as interpreted in the majority decision of this Court in the recent case of The State of Bombay v. United Motors (India) Ltd. (2), or under the Sales Tax Continuance Order, 1950 (C. O. No. 7 of 1950), issued by the President on 26 January 1950 pursuant to the proviso to clause (2) of article 286, and would, in either circumstance, be taxable. (1) Civil Appeals Nos. 33 and 36 of 1952, (2) [1953] S.C.R. 1069.

With reference to the decision just mentioned, it is noted in passing that, to remedy what was perceived as an unsatisfactory situation regarding the taxation of interstate commerce in the United States, the North Carolina Department of Revenue proposed federal legislation authorising the States to tax certain sales in interstate commerce. The proposed bill provided that “all taxes levied by any State upon sales of property or measured by sales of property may be levied upon or measured by sales of property in interstate commerce by the State into which the property is moved for use or consumption therein, in the same manner and to the same extent that said taxes are levied upon or measured by sales of property not in interstate commerce.” This illustration was offered to underline the similarity between the proposed American measure and the combined effect of article 286 clause (1) (a) explanation, clause (2) and article 304 as interpreted by the majority in the earlier decision. The Court noted that it is possible that the constitutional provisions under discussion were inspired by the proposed bill. The sole issue before the Court was whether, in addition to the export-sale and import-purchase already held to be covered by the exemption under clause (1) (b), any further transactions should fall within the exemption.

The bill provided that no State was permitted to discriminate against sales of property that occurred in interstate commerce, nor was any State allowed to discriminate against the sale of products originating from another State. It further provided that no State could impose a tax on the sale in interstate commerce of property that was being transported for the purpose of resale by the consignee, whether the consignee acted as a merchant or as a manufacturer. In addition, the bill stipulated that no county, city, town or any other subdivision of a State could levy a tax upon, or measure any tax by, sales of property in interstate commerce.1 It is noteworthy that the bill sought to achieve essentially the same result as would be produced by the combined operation of article 286 clause (1)(a) explanation, clause (2) and article 304, as interpreted by the majority in the earlier decision. It is possible that the constitutional provisions were inspired by the proposed legislation.

The sole question before the Court was whether, besides the export-sale and import-purchase that had previously been held to fall within the exemption of clause (1)(b), two further categories of sale or purchase would also be covered by that exemption. The first category concerned the last purchase of goods made by an exporter for the purpose of exporting them in order to fulfil orders already received from a foreign buyer or expected to be received subsequently in the normal course of business, and the first sale by the importer made to satisfy orders that gave rise to the import or that were expected to arise after the import. The second category involved sales or purchases of goods effected within the State by the transfer of shipping documents while the goods were in transit.2

Regarding the first category, the Court was of the opinion that those transactions did not fall within the protection of clause (1)(b). The exemption under the clause applies to the sale or purchase of goods that takes place in the course of the import of the goods into, or export of the goods out of, the territory of India. The expressions “import into” and “export out of” refer not to the particular article or commodity being imported or exported, but to the movement of “the goods” into or out of “the territory of India.” The term “course” denotes movement from one point to another; the phrase “in the course of” therefore implies a period during which the movement is ongoing and also presupposes a connected relationship. For example, in the English Bankruptcy Act, section 15(5), the words “debts due to the bankrupt in the course of his trade” have been held not to encompass all debts incurred during the period of trading, but only those debts that are connected with the trade.3 By analogy, a sale that occurs in the course of export out of the country must be understood, within clause (1)(b), as a sale that takes place not merely during activities directed toward the export of the goods, but as a sale that is part of, or connected with, those export activities.

In this passage the Court explained that the expression “in the course of export out of the country,” as used in clause (1)(b), must be understood to refer to a sale that occurs not merely during the period in which activities are directed toward completing the export of the goods, but also as a sale that forms part of or is connected with those export-related activities. The Court noted that the factor of time alone cannot determine whether a transaction falls within the exemption, citing the authorities 4 Ch. D. 685 and Williams on Bankruptcy, 16th Edn., p. 307. The earlier decision that had been relied upon had adopted the view that there was an integral relationship between the contract of sale and the export when the sale itself occasioned the export, and on that basis it had held that such a sale took place “in the course of export.” The Court observed, however, that it was argued that, on the same principle of connected or integrated activities, a purchase made for the purpose of export should also be covered by the exemption under clause (1)(b). The Court expressly disagreed with that contention. It pointed out that the phrase “integrated-activities” in the earlier decision was employed to describe a situation where the sale could not be separated from the export, because without the export the sale could not be effected, and therefore the sale and the ensuing export formed parts of a single transaction. In that sense the two activities—the sale and the export—were said to be integrated. By contrast, the Court held that a purchase made for export, like production or manufacture for export, is merely a preparatory act and cannot be regarded as an act done “in the course of the export of the goods out of the territory of India,” just as the other two activities cannot be treated that way. The Court further quoted a recent writer who observed that “from the legal point of view it is essential to distinguish the contract of sale which has as its object the exportation of goods from this country from other contracts of sale relating to the same goods, but not being the direct and immediate cause for the shipment of the goods… When a merchant shipper in the United Kingdom buys for the purpose of export goods from a manufacturer in the same country the contract of sale is a home transaction; but when he resells these goods to a buyer abroad that contract of sale has to be classified as an export transaction.” This citation was used to demonstrate that, because of the distinct character and quality of the two transactions, it is inaccurate to describe a purchase for export as an activity so integrated with the exportation that it could be said to occur “in the course of” the export. The same reasoning, the Court added, applies to the first sale after import, which is a separate local transaction that takes place after the goods have been imported into the country and that bears no integral relation with the export.

In this case, the Court held that any attempt to rely on the earlier decision in order to broaden the protection granted by clause (1)(b) so that it would also cover the last purchase made for export purposes and the first sale made after import, on the basis that these activities are integrated, must be rejected. The Court further rejected the proposition that it is necessary to extend the exemption to those transactions in order to prevent double taxation. While the former judgment had observed that the purpose of the exemption was to avoid double taxation on the foreign trade of the country – an objective of great importance for the national economy – the double taxation contemplated there involved the imposition of an export duty by the Central Government together with a sales tax by the State Government on the same transaction viewed respectively as an export and as a sale. The Court pointed out that such double taxation had already been eliminated by its earlier holding that both the export-sale and the import-purchase are exempt from State sales tax under clause (b). Consequently, the nation’s foreign trade already enjoys immunity from a double tax burden and is subject only to a single duty, either the export duty or the import duty, as the circumstances require. On this basis, the Court concluded that the present request for an expanded exemption under clause (1)(b) on the ground of avoiding double taxation could not be sustained.

The Court also emphasized that practical difficulties arise in giving effect to an exemption that would include the last purchase for export and the first sale after import, given the general scheme of sales-tax legislation in the country, a scheme that the Constitution-makers must have known. Under the prevailing system, tax is normally levied on the annual turnover of the seller, who may, under certain conditions, shift the tax burden to the buyer by adding it to the price of each individual sale. Imagine that seller A sells goods to buyer B, who is an export merchant, with the intention that B will later export the goods. If the sale were to be exempt, the Court asked how A could be assured that the goods would indeed be exported thereafter. Even if the goods were exported, it would be difficult for A to demonstrate to the Sales Tax Officer that the export actually occurred, should proof be required. Moreover, B might retain the goods while awaiting orders, or might later decide not to export and instead sell the goods domestically. In such a scenario, the Court questioned what position A would have before the Sales Tax Officer demanding tax. Would A escape liability by failing to collect tax from B at the time of sale, or would A be required to collect the tax despite B’s declaration of export intent, leaving B to seek a refund by providing evidence of the actual export? The Court found that these practical complications made the proposed extension of the exemption untenable.

In considering whether a seller must wait for the actual export of goods before being relieved of sales tax, the Court examined the effect of imposing tax on the buyer until such export occurs. It observed that even if a sales-tax statute allowed for an adjustment, requiring the buyer to bear the tax until export would conflict with clause (1)(b), which by definition exempts the transaction from tax. The Court further questioned the outcome if the goods were destroyed or otherwise lost before export, noting that the exemption could not depend on a future event that might never happen. Although earlier American decisions were of limited assistance because the United States Constitution phrased its import-export clause differently, the Court found it noteworthy that U.S. courts had responded to similar uncertainties by declaring that “the entrance of the articles into the export stream marks the start of the process of exportation. Then there is certainty that the goods are headed for their foreign destination and will not be diverted to domestic use. Nothing less will suffice.” The Court cited the case of Empresa Siderurgica, S.A. v. Merced for this principle. It then turned to the problem of applying the exemption to the first sale after import, especially when imported goods were mixed with other items and lost their distinct character. American courts, according to the Court, had developed the “original or unopened package” doctrine, which held that the first sale of imported goods would be exempt from state tax only if the sale was made while the goods remained in their original packaging; any sale after opening the package would not enjoy the exemption. The Court asked whether this doctrine should be adopted domestically to make the exemption workable. It also referred to Balsara’s case, which highlighted difficulties in applying the doctrine, such as whether it covered large cases only, smaller packages within them, or paper packets of cigarettes taken from loose bundles and moved in baskets. The Court subsequently noted that, following the judgment of Gwyer C.J. in the earlier Boddu-Paidanna case, this Court had unanimously held that “the doctrine has no place in this country.” Consequently, clause (1)(b) must be interpreted in light of its constitutional purpose and the commercial realities of the nation, recognizing that a substantial portion of the country’s export trade is conducted by merchant houses that purchase goods from producers and manufacturers and resell them abroad under contract. Likewise, large import houses bring in machinery and consumer goods wholesale and then sell them to retailers or, in certain instances, directly to customers.

In that case, the Court noted that the practice of selling directly to customers had been well known to the makers of the Constitution, and it was reasonable to assume that they understood the importance of foreign trade to the welfare of the nation and would not have wanted to impair it by permitting the States to tax the purchases and sales undertaken by export-and-import merchants in the country, as discussed in the earlier decisions cited at (1) [1951] S.C.R. 682, 699 and (2) [1942] F.C.R. 90. The Court observed that such broad considerations, which were largely speculative, did not provide much assistance in construing the precise scope and effect of a constitutional provision that sought to limit State taxation power. While it was true, as the previous decision had pointed out, that export-import trade was vital to the national economy, the Court also emphasized that the power of the State to levy taxes was essential for its administration and that the Constitution aimed to protect both interests without unduly restricting either. The real question, the Court explained, was how far the Constitution-makers intended to protect foreign trade by restricting the States’ authority to tax sales or purchases of goods that they had assigned to the States under entry 54 of List II. The matter involved balancing the competing claims of foreign trade, which served the national economy, against the State’s power of taxation, which was needed to meet the expanding social-welfare responsibilities of the government. The Court held that its role was to interpret the true meaning and breadth of clause (1)(b) without assuming that one constitutional purpose was more important than the other. It reaffirmed that, according to the earlier decision, clause (1)(b) shielded the export-import trade from double taxation by prohibiting States from imposing sales tax on export sales and import purchases, and it found no language in the provision that supported extending this protection to the final purchase before export or the first sale after import. Regarding sales or purchases made in the State by the transfer of shipping (c.i.f.) documents while the goods remained in transit, the Court had previously observed that the phrase “in the course of” implied a movement or progress that had a definite beginning and end. Since clause (1)(b) dealt solely with exempting certain sales or purchases from State taxation, it was sufficient to determine where the export journey began and where the import journey ended. In this regard, the Court found it useful to remember that the authority to make laws concerning customs duties, including export duties (entry 83 of List I), and the regulation of import and export across customs frontiers, together with the definition of customs frontiers (entry 41 of List I), rested exclusively with the Central Legislature.

The power to legislate on customs duties, including export duties, is vested solely in the Central Legislature, and the Indian Sea Customs Act of 1878 contains detailed provisions governing the levy of such duties. Under this Act, officers of the Central Government who are posted at customs frontiers, as defined by the Central Government, are authorised to assess exported or imported goods, compute any applicable customs duties, and collect those duties. The goods are not permitted to be shipped for transportation or cleared by the consignee or the consignee’s representatives until this assessment and collection process is fully completed. Consequently, it is logical to hold that the course of an export from India or the course of an import into India does not begin or end until the goods actually pass the customs barrier. The Court noted, however, that the question of imposing a State sales tax on the transfer of goods during the export process rarely arises in practice. When goods are moved under a contract of sale already concluded with a foreign buyer and the shipping documents have been forwarded to that buyer, the Indian seller cannot make any further sale of those goods. Likewise, when export trade is conducted through representatives or branch offices, any subsequent sale of the exported goods usually occurs abroad and therefore does not fall within the jurisdiction of an Indian State for sales-tax purposes. The issue of exemption becomes practically significant with regard to the import of goods from abroad. It is a well-recognised feature of foreign trade that sales or purchases may be effected by the transfer of shipping documents while the goods are still in transit. Such transactions, occurring in the course of an import as defined above, are regarded commercially as incident to the import transaction. Accordingly, they fall within the terms of clause (1)(b) and, in the Court’s view, should be entitled to the protection of that clause, provided that the State possesses constitutional competence to tax such sales—a point on which the Court expressly refrained from pronouncing. The Court summarised its conclusions as follows: first, sales effected by export and purchases effected by import are covered by the exemption contemplated in article 286(1)(b), a position affirmed in the earlier decision; second, purchases made within the State by an exporter for the purpose of export, as well as sales made within the State by an importer after the goods have crossed the customs barrier, do not fall within the exemption; third, sales made within the State by either the exporter or the importer through the transfer of shipping documents while the goods remain beyond the customs barrier are covered by the exemption, assuming that the State’s taxing power extends to such transactions. The Court then indicated that, in light of the foregoing discussion, it was necessary to consider the extent to which the cashew-nut purchases undertaken by the respondents fell within the exemption provided by article 286. The Court recalled that those purchases were categorised into three groups: (I) purchases made in the local market, (II) purchases from the neighbouring districts of the State of Madras, and (III) imports from Africa.

In the matter of Group I purchases, the High Court observed that the respondents acquired raw cashew nuts, whether sourced from Africa or from India, with the sole intention of exporting the kernels. The Court noted that only a trivial amount of the raw nuts entered the local market as “factory rejects,” which did not affect the overall purpose of the transactions. Moreover, the Court recorded that the great majority of the kernels were exported directly by the respondents themselves, while a comparatively small portion was sold by the respondents to other exporters who subsequently exported the same kernels. Consequently, the Court concluded that, taken as a whole, the respondents purchased the raw nuts for the purpose of exporting the kernels and actually carried out such exports. However, the Court held that these purchases could not be placed within the exemption contemplated by clause (1)(b) of article 286, even if the distinction between the raw material bought and the processed kernels shipped were disregarded. The Court further mentioned that the High Court had found the raw cashew nuts and the kernels produced from them by a mixture of mechanical and manual processes to be commercially distinct commodities, a finding that was not seriously contested before this Court. This distinction provided an additional basis for rejecting the respondents’ claim to exemption, because clause (1)(b) expressly requires that the exported goods be the same goods whose sale or purchase occurred in the course of export.

Regarding Group II purchases, the High Court determined that such purchases were made exclusively by the respondents in Civil Appeals Nos. 33 and 36 of 1952, although the Court found the exact manner in which the purchases and subsequent deliveries were carried out to be uncertain. The respondents asserted that their own paid servants effected the purchases and took delivery of the goods outside the State of Travancore-Cochin, thereby completing the transaction entirely outside the State before bringing the goods across the border. In contrast, the State contended that although the purchases originated in the neighbouring districts of Madras, the goods were delivered through ordinary commercial channels by commission agents, who then arranged for delivery to the respondents’ depots at Trichur or Quilon. The Court pointed out that, if the respondents’ version of events were correct, the transactions would fall within the exemption provided by clause (1)(a), a position that was not contested by the Advocate-General of the appellant State. Conversely, if the State’s description were accurate, the transactions would possess an inter-State character and therefore would be governed by clause (2).

It was observed that the transactions described possessed an inter-State character and therefore fell within clause (2). In that circumstance it was unnecessary to examine whether the transactions might also be covered by the explanation to clause (1)(a), because they would plainly be taxable under President’s Order C. O. No. 7 of 1950, a reference that had already been mentioned. The order was relevant since it had been admitted that sales tax had been validly imposed on such purchases before the Constitution came into force. Because the taxability of the purchases, on either factual scenario, was not contested, no submissions were made to the Court concerning the scope of clause (2) or the explanation to clause (1)(a), as had been previously indicated. The Court then turned to Group III, which the High Court had divided into two distinct categories. The first category, labelled (a), comprised purchases that were made through intermediaries referred to in the proceedings as “the Bombay party,” which carried on business as commission agents in Bombay and acted on behalf of the respondents for a commission. The High Court described those dealings as follows: “The goods are purchased when they are in the high seas and shipped from the African port to Cochin or Quilon. Goods are never landed at Bombay. The Bombay party only arranges for purchases on behalf of the assessee, gets delivery of the shipping documents on payment at Bombay through a bank which advances money against the shipping documents and collects the same from the assessee at destination.” The second category, identified as (b), involved situations where the Bombay party purchased the goods on its own account and then sold them as a principal to the respondents and other customers; in this case the goods were shipped directly to Cochin or Quilon on c.i.f. terms. The shipping documents bore the Bombay party’s name as consignee and were handed over to them against payment through bankers in Bombay. The Bombay party cleared the goods through its own representatives at the destination port and issued separate delivery orders to the respondents and other customers for the quantities each had ordered.

Analyzing the two categories, the Court noted that for the purchases falling under category (a) the Bombay party functioned merely as an agent of the respondents, establishing privity between the respondents and the African sellers. Consequently, those purchases gave rise to an import and therefore qualified for the exemption contemplated in the statute. In contrast, for the purchases described in category (b) the Bombay party acted as the purchaser and sold the goods as a principal to the respondents at the destination port, issuing separate delivery orders upon receipt of payment. Because no privity existed between the respondents and the African sellers, the respondents’ acquisitions could be characterized only as purchases from the Bombay party of goods already within the State; in other words, they were local purchases and were treated the same as the purchases classified in Group I. For the same reasons, those local purchases did not fall within the exemption. The Court further observed that the cashew nuts exported to American buyers were packed in tins placed inside wooden boxes. The sales-tax authorities had included the value of this packing material in the computation of the respondents’ turnover for assessment purposes.

The sales-tax authorities had included the value of the packing materials together with the value of the cashew kernels when they computed the respondents’ turnover for assessment purposes. The respondents argued that this inclusion was improper because the packaging could not be considered a separate article of sale apart from the kernels that were packed inside it. They further maintained that even if the packaging were treated as a separate article, the sale of the packed goods to the American buyers was itself the transaction that gave rise to the export, just as the sale of the kernels alone did. The court held that the latter argument was decisive, relying on the earlier decision, and therefore concluded that no sales tax could be imposed on the value of the packing materials. Consequently, the court affirmed the High Court’s order that set aside the challenged assessments, but directed that the matters be returned to the respective Sales Tax Officers for the purpose of making fresh assessments in accordance with the law and in view of this judgment. Each side was ordered to bear its own costs throughout the proceedings.

This appeal, together with eight similar appeals, was filed by the State of Travancore-Cochin against the judgment and order of the High Court dated 10 January 1952, which had set aside the sales-tax assessment orders made by the Sales Tax Officer and affirmed by the Assistant Commissioner on appeal. All nine appeals were heard jointly immediately after the hearing of Civil Appeal No 204 of 1952 (The State of Bombay v The United Motors (India) Ltd. and Others), which had been concluded and for which judgment had been reserved by another Constitution Bench. The construction of Article 286 of the Constitution, which is central to the present appeals, had also been addressed in the Bombay appeal, and that Constitution Bench had since delivered its judgments. The majority of that Bench interpreted clause (1)(a), its accompanying Explanation, and clause (2) of Article 286 in a manner that, despite the judge’s profound respect for their opinion, he could not accept as correct. He also found himself unable to agree with the interpretation his learned colleagues were now seeking to give to clause (1)(b) of the same article. Acknowledging the great importance of the questions involved and noting that the draft of his judgment had been prepared before the Bombay judgments were delivered, he chose to record his views for the record, while recognizing that, as a matter of precedent, the majority decision in the Bombay appeal remains binding on him. The respondents in each of these appeals conduct their business in the United State of Travancore-Cochin. They purchase raw cashew nuts locally, from neighboring States, and also import them from Africa; after processing, they obtain cashew-nut oil and edible cashew-nut kernels, which they then export in large quantities to foreign markets. They comply with the requirements of the applicable Sales Tax Act.

During the period that fell under the then-existing law, the respondents filed their sales-tax returns in the forms prescribed for the turnover covering 17 August 1949 to 29 May 1950. For purchases made after the Constitution became effective on 26 January 1950 and up to 29 May 1950, each respondent claimed that the sales tax should not be levied. The Sales Tax Officer rejected those exemption claims. On appeal, the Assistant Commissioner affirmed the assessment orders that had imposed the tax. The respondents then appealed to the High Court. By judgment dated 10 January 1952, the High Court allowed the appeals, set aside the assessment orders insofar as they imposed tax on purchases made after the Constitution’s commencement, and ordered that the tax which had been over-paid be refunded. The State subsequently filed an appeal before this Court. Because the matters raised were of general importance and attracted the interest of other States as well as the Union of India, this Court directed notices to be issued to the Advocates-General of all interested States and to the Attorney-General for India. Many of those States and the Union intervened and took part in the discussion of the legal questions presented by the appeals. After several days of hearing in September and October 1952, the Court observed that the parties were in serious disagreement over several material facts and concluded that the appeals could not be properly disposed of without a detailed factual enquiry. Accordingly, on 8 October 1952 the appeals were remitted to the High Court with a directive to investigate the disputed facts under specific heads set out in the annexure to the remand order. The High Court has now returned the case record together with its findings, and the appeals are before this Court again for final determination.

The assessments that are the subject of this dispute were made under the Travancore General Sales Tax Act, 1124 (Act XVIII of 1124). That Act had come into force on 7 March 1949 and, even after the Constitution’s commencement, remained operative subject to the Constitution’s other provisions, thereby covering the period of assessment. Following the integration of Travancore and Cochin, the 1124 Act was superseded by the United State of Travancore and Cochin General Sales Tax Act, 1125 (Act XI of 1125). However, that later Act is not relevant to the present appeals because it became effective on 30 May 1950—immediately after the period that is material to these cases. The essential provisions of Act XVIII of 1124 have already been summarized in the judgment previously read by the Chief Justice, and need not be repeated in full. It is sufficient to note that the rules made under the Act stipulated that, for cashew and its kernels, a dealer’s gross turnover was to be measured by the amount for which the goods were purchased, meaning that tax was payable on the purchase rather than on the subsequent sale of the cashew and its kernels.

The Court explained that under the rule framed by the Travancore General Sales Tax Act, the gross turnover of a dealer in cashew and its kernels was to be measured by the amount paid for the purchase of those goods; consequently, the sales tax liability arose at the time of purchase rather than at the time of sale. The respondents did not dispute that H.H. the Maharaja of Travancore possessed the authority to enact that statute at the time it was passed. Their contention was instead that, after the Constitution came into force, Travancore-Cochin became a Part B State and therefore fell within the disciplinary scope of the Constitution. Relying on Article 286, the respondents argued that the pre-constitutional law could no longer impose, nor even authorise the imposition of, any tax on their purchase of raw cashew nuts. This argument raised a significant question concerning the breadth of the power of the States, as defined by the Constitution, to levy taxes on the sale or purchase of goods.

To appreciate the constitutional provisions at issue, the Court noted that it was necessary to recall the legal situation that existed before the Constitution’s commencement. Under the Government of India Act, 1935, only the Federal Legislature could legislate on matters listed in entry 19 of List I, which dealt with imports and exports across customs frontiers as defined by the Federal Government, and on entry 44 of the same List, which covered customs duties, including export duties. Conversely, the Provincial Legislatures alone were empowered to legislate on matters listed in entry 26 of List II, concerning trade and commerce within the Province; entry 29, concerning production, supply and distribution of goods; entry 48, concerning taxes on the sale of goods; and entry 49, concerning cesses on the entry of goods into a local area for consumption, use or sale. Section 297 of the 1935 Act expressly prohibited Provincial Legislatures or Governments from imposing certain restrictions on internal trade and declared that any law contravening that section would be invalid to the extent of the contravention. The Court observed that clause (a) of sub-section (1) of Section 297 specifically targeted the legislative powers of the Province under entries 27 and 29, not entry 48, and was inserted to promote free trade throughout India by preventing Provinces from hindering the distribution of goods or creating barriers to internal commerce. Exercising the powers conferred upon them, the Provincial Legislatures subsequently enacted Sales Tax Acts for their respective Provinces. In doing so, however, they did not limit the operation of those statutes to sales or purchases occurring solely within provincial boundaries. While many of those Acts initially defined “sale” as the transfer of property in the goods, they later expanded that definition through explanatory provisions, thereby extending the tax base to transactions where any element—such as contract, delivery, payment, or the passing of property—occurred within the Province, or where the goods were produced, manufactured, or otherwise found within the Province, regardless of where the remaining elements of the transaction took place.

In this case, the Court observed that the provincial legislation attempted to make the transfer of property within the province the main trigger for levying a sales tax. However, by attaching explanatory provisions to the definition of “sale,” the legislatures gave the term a broader meaning and consequently expanded the reach of their tax statutes. As a result, several of those Acts claimed the authority to tax a sale or purchase regardless of the actual location where the transaction occurred, provided that the goods were situated within the province at the moment the contract was concluded or that the goods were produced or manufactured within the province after the contract had been formed. In effect, whenever any one of the elements of a sale—such as the contract, the delivery, the payment of price, or the passage of title—occurred inside a particular province, or whenever the goods were produced, manufactured, or otherwise found in that province, the provincial legislature considered itself free to impose a tax on that sale or purchase even though the remaining elements of the transaction might have taken place outside the province. The Court further noted that the Indian princely states were not bound by the allocation of legislative authority set out in the Government of India Act, 1935, and therefore they were generally at liberty to enact any law they deemed appropriate. Nevertheless, these states fashioned their sales-tax statutes on the model of the sales-tax Acts of the neighboring British-Indian provinces. Consequently, the Travancore Act XVIII of 1124 was essentially a copy of the Madras Sales Tax Act. The practical effect of imposing a tax on the sale or purchase of goods on the basis of a minimal connection between the transaction and the taxing province or state was that a single transaction could become liable to tax in several different provinces or states. Such multiple taxation was deliberately designed to impede and discourage free trade across India, a purpose that section 297 of the Government of India Act, 1935, had sought to prevent. This situation prevailed immediately before the Constitution of India entered into force, and the framers of the Constitution were fully aware of the problem. The Court then turned to the constitutional scheme. Articles 245 and 246 allocate legislative competence between Parliament and the State legislatures through three lists contained in the Seventh Schedule of the Constitution. Under this scheme, Parliament alone possessed the power to enact laws concerning foreign trade (entry 41 of the Union List), inter-state trade and commerce (entry 42 of the Union List), and customs duties, including export duties (entry 83 of the Union List). By contrast, the State legislatures alone were empowered to legislate on trade and commerce within the state (entry 26 of the State List), on production, supply and distribution of goods (entry 27 of the State List), on taxes on the entry of goods into a local area for consumption, use or sale therein (entry 52 of the State List), and on taxes on the sale or purchase of goods other than newspapers (entry 54 of the State List).

It may be noted in passing that List I of the Seventh Schedule to the Government of India Act, 1935 did not contain a separate or specific entry that corresponds to entry 42 of the Union List in the Seventh Schedule to the Constitution. The absence of such an entry demonstrates that the Constitution deliberately placed inter-State trade and commerce, in the same manner as foreign trade, under the exclusive jurisdiction of Parliament and consequently beyond the legislative reach of the State Legislatures. By allocating legislative powers in this manner between Parliament and the State Legislatures, the Constitution introduced article 265, which appears in Part XII and bears the heading “Finance, Property, Contracts and Suits.” Article 265 provides that no tax shall be levied or collected except under the authority of law. In the same Part XII, article 286 imposes further restrictions on the legislative competence of the State Legislatures. The text of article 286 reads as follows: “286 — Restrictions as to imposition of tax on the sale or purchase of goods. (1) 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. 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 in another State. (2) Except in so far as Parliament may by law otherwise provide, no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of inter-State trade or commerce: Provided that the President may by order direct that any tax on the sale or purchase of goods which was being lawfully levied by the Government of any State immediately before the commencement of this Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions of this clause, continue to be levied until the thirty-first day of March, 1951. (3) No law made by the Legislature of a State imposing, or authorising the imposition of, a tax on the sale or purchase of any such goods as have been declared by Parliament by law to be essential for the life of the community shall have effect unless it has been reserved for the consideration of the President and has received his assent.” In the appeals presently before the Court, the matter of sales or purchases of essential commodities does not arise; consequently, there is no need to discuss clause (3) further. Excluding clause (3), the remaining provisions of article 286, as quoted above, constitute the operative portion relevant to the issues under consideration.

In this case the Court observed that the constitutional provision, taken in a broad sense, prohibits any State from enacting a law that creates or authorises a tax on the sale or purchase of goods when such sale or purchase (a) occurs outside the territory of that State, (b) arises in the course of importing the goods into India or exporting them out of India, or (c) is part of inter-State trade and commerce. The Court further noted that, exercising the authority granted to him by the proviso to clause 2 of Article 286, the President issued the Sales Tax Continuance Order 1950. By that order the President directed that any tax on the sale or purchase of goods which had been lawfully levied by a State Government immediately before the commencement of the Constitution should continue to be levied until 31 March 1951, even though such levy was contrary to the provisions of clause 2 of Article 286.

The Court explained that, apart from the marginal note to Article 286, a simple reading of the article shows that its primary purpose is to limit the power of State legislatures to impose a tax on the sale or purchase of goods under entry 54 of the State List. The Court recalled that, under the Government of India Act 1935, the Provincial Legislatures, acting under entry 48 of List II of the Seventh Schedule, had enacted Sales Tax Acts that imposed tax on sales or purchases of goods on the basis of one or more connections of the sale with the province. This practice led to the imposition of multiple taxes on a single transaction, thereby increasing the price of the commodity and causing serious injury to the consumer. The Court affirmed that this defect had to be eliminated and that the Constitution achieved that objective through clause 1(a) of Article 286.

Clause 1(a) expressly bans any State law that imposes or authorises a tax on a sale or purchase of goods where the sale or purchase takes place outside that State. The Court interpreted this provision as an indication that the Constitution assumes a sale or purchase has a definite location, or situs. The Explanation to clause 1(a) further clarifies that, for the purpose of sub-clause (a), a sale or purchase shall be deemed to have taken place in the State in which the goods are actually delivered as a direct result of the sale or purchase for consumption in that State, even though, under the general law of sale of goods, the property in the goods may have passed in another State. The non- obstante clause in the Explanation therefore demonstrates that the framers of the Constitution adopted the view that a sale or purchase possesses a situs and that, ordinarily, the transaction is regarded as occurring at the place where the property in the goods passes.

In this case, the Court observed that although ordinary law fixes the location of a sale by the point at which the title in the goods passes, the Explanation to clause (1)(a) expressly provides that, notwithstanding that general rule, a sale or purchase shall be deemed to have taken place in the State in which the goods are actually delivered as a direct result of the transaction for the purpose of consumption in that State. Accordingly, the Constitution, by this Explanation, acknowledges that under the general law the transaction may not truly occur in the delivery State, but it requires the transaction to be treated as if it did. The Court therefore described the Explanation as creating a legal fiction. Reference was made to Income-tax Commissioner, Bombay v. Bombay Trust Corporation, where Viscount Dunedin explained the meaning of a legal fiction. When such a fiction is created, the purpose for which it is created must be examined. The Court illustrated the principle with In re Coal Economising Gas Company, which considered whether, under section 38 of the Companies Act 1867, a shareholder could obtain removal of his name from the register on the ground that a prospectus was fraudulent because it omitted certain facts, or whether his remedy was only against the promoter. Lord James, delivering the judgment, said at pages 188-189: “The Act says that an omission shall be deemed fraudulent. It provides that something which under the general law would not be fraudulent shall be deemed fraudulent and we are dealing with a case of that kind. Where the Legislature provides that something is to be deemed other than it is, we must be careful to see within what bounds and for what purpose it is to be so deemed. Now the Act does not say that the prospectus shall be deemed fraudulent simpliciter but that it shall be deemed fraudulent on the part of the person wilfully making the omission as against a shareholder having no notice of the matter omitted; and I am of opinion that the true intent and meaning of that provision is to give a personal remedy against the wrongdoer in favour of the shareholder.” The Court held that the fiction did not operate against the company and therefore no rectification of the register was possible. The Court also cited Ex parte Walton, where Lord James, referring to section 23 of the English Bankruptcy Act 1869, observed: “When a statute enacts that something shall be deemed to have been done, which in fact and in truth was not done, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to.” Those observations were later quoted with approval by Lord Cairns and Lord Blackburn in Arthur Hill v. The East and West India Dock Company. Lord Blackburn added at page 458: “I think the”

In the present matter, the Court observed that the phrase “shall be deemed to have surrendered … shall be surrendered so far as is necessary to effectuate the purposes of the Act and no further” conveys that the surrender is limited strictly to what is required to achieve the Act’s objectives and extends no further. The Court noted that there was no need to speculate on the purpose for which the Explanation introduced the statutory fiction. It pointed out that the Explanation does not simply state that a sale or purchase is deemed to occur in the delivering State. Rather, its introductory language expressly limits the deemed location to the delivering State for the specific purpose of clause (1)(a). Consequently, the only result of assigning this fictional location to a particular kind of sale or purchase in a particular State is to trigger the prohibition contained in clause (1)(a) and to remove the taxing authority of all other States with respect to that transaction, even though the other elements that constitute a sale or purchase may be present within those other States or, under general law, the title to the goods may pass in any of those States. The Court emphasized that the Explanation’s purpose terminates at that point and must not be extended beyond its intended scope.

The Court recorded that certain Advocates-General argued that a transaction falling within the Explanation remains subject to taxation by the State in which title to the goods passes under general law as well as by the State in which, by virtue of the Explanation, title is deemed to pass. Conversely, other Advocates-General maintained that, because of the Explanation, only the latter State acquires the right to tax the transaction. The Court observed that both of these positions, cited in (1) [1884] L.R. 9 App. Cas-448, were based on a misunderstanding of the true purpose of clause (1)(a) and its Explanation. As the Court reiterated, the sole objective of clause (1)(a) is to prevent the imposition of multiple taxes on a single sale or purchase. Accordingly, the clause provides that no State may levy a tax on a sale or purchase that, by the fiction created by the Explanation, is deemed to occur outside its territory. By this single operation, the taxing power of every State whose territory is outside the deemed place of the transaction is eliminated. To interpret clause (1)(a) together with the Explanation as allowing both the State where title passes under general law and the State where the transaction is deemed to occur to tax the same sale would defeat the very purpose of the clause, because it would permit the very multiple taxation that clause (1)(a) was designed to avoid.

In this case the Court explained that clause (1)(a) was intended solely to stop more than one State from laying a tax on the same sale or purchase. The effect of the clause was to take away the power to tax from every State whenever, because of the fictional device introduced by the Explanation, the transaction was deemed to occur outside the territory of that State. The Explanation, the Court said, merely clarifies how far clause (1)(a) reaches. By fictitiously placing the sale or purchase in a particular State, the Explanation declares that the transaction is outside all other States, thereby giving it the benefit of the exemption that clause (1)(a) provides. The Court stressed that the Explanation is not an exception to the rule, nor is it a proviso. It does not intend, and it does not claim, to give any State – even the State in which delivery takes place – the authority to impose a tax. The fictional location created by the Explanation cannot be stretched to serve any purpose other than that of clause (1)(a), namely the removal of the taxing power of all States whose territories are deemed not to be the place of the sale or purchase. Consequently, the Explanation ends its purpose at that point and cannot be used to grant taxing power to the delivery State, which would be outside the express purpose of the provision. Whether the delivery State may tax the kind of sale or purchase described in the Explanation, the Court observed, is a matter that depends on other constitutional provisions; neither clause (1)(a) nor the Explanation has any bearing on that separate question.

The respondents argued that even if clause (1)(a) excludes all States – as determined by the Explanation – from taxing the transaction, and even if the Explanation does not, by implication or otherwise, permit the delivery State to levy a tax, the delivery State would still have authority under entry 54 of the State List read with article 100(3) of the Constitution to enact a law imposing such a tax. The Court noted that this would indeed be the position if there were no other constitutional limitations. It was reminded that State Legislatures are empowered to make laws concerning taxes on the sale or purchase of goods under entry 54. However, if a State, exercising that power, enacted a tax on a sale or purchase that possesses the character of a transaction in the course of inter-State trade or commerce, such a law could readily intrude on the Union’s exclusive legislative field under entry 42 of the Union List. That intrusion could raise questions about the validity of the State legislation. The Court therefore reiterated that the purpose of these constitutional restrictions is to safeguard the free flow of inter-State trade, a matter placed under the exclusive jurisdiction of Parliament, and to prevent State taxation from interfering with that free flow.

In addressing the argument that a State might justify an intrusion into the Union legislative field by invoking the doctrine of pith and substance, the Court observed that Article 286(2) of the Constitution expressly limits a State’s power to levy a tax on inter-State sales or purchases. Clause (2) of Article 286 provides that, unless Parliament enacts a law to the contrary, no State law may impose a tax on the sale or purchase of goods when such sale or purchase occurs in the course of inter-State trade or commerce. Consequently, Clause (2) adds a further prohibition on the State’s taxing authority under entry 54 read with Article 100(3), supplementing the restriction already contained in Clause (1)(a). The explanation appended to Clause (1)(a) clearly identifies a sale or purchase that is of the inter-State character, and therefore neither the State in which the property in the goods passes under the general law nor the State where the goods are delivered, as illustrated in the Explanation, may levy a tax on such a transaction unless Parliament removes this ban. The Court regarded this as the intention and design of Clause (2). The contention that, if the sale or purchase described in the Explanation falls within Clause (2), then Clause (1)(a) becomes wholly redundant was rejected. The purpose of Clause (1)(a) is to place a sale or purchase that occurs outside a State beyond that State’s taxing authority. The Explanation merely illustrates the scope of that ban. Clause (1)(a) focuses on one element of a sale or purchase—its territorial location—and, by prohibiting a State from taxing a sale or purchase that takes place outside its boundaries, seeks to remedy the specific problem of multiple taxation based on the nexus theory. This limited purpose of Clause (1)(a) is satisfied by denying tax authority to those States for which, according to the Explanation, the sale or purchase is deemed to occur outside their territories. Whether the delivery State, where the sale or purchase is deemed to occur, may tax the transaction is not within the concern of Clause (1)(a) or its Explanation. Only when the issue arises as to whether a State Legislature, under entry 54 of the State List, can enact a law imposing a tax on a sale or purchase that the fiction deems to occur within its own territory does Clause (2) become relevant.

Clause (2) becomes relevant once the situation falls within its scope. That provision examines a sale or purchase according to its inter-State character and therefore places an additional prohibition in order to protect the freedom of internal trade. Consequently, the immediate objectives of the two prohibitions differ essentially. The Court found reason to hold that, although clause (1)(a) read together with the Explanation does not expressly empower the State in which, by the Explanation, the sale or purchase is deemed to occur to levy a tax on that transaction, the same clause must, by implication, be regarded as both authorising that State to impose such a tax and exempting it from the prohibition created by clause (2). To follow that line of reasoning would mean invoking the legal fiction introduced by the Explanation for a purpose that is quite different and collateral to its stated aim. The Court explained that, on principle and according to authority, a court is not permitted to interpret a provision in that manner.

The same line of argument was presented in a different and more persuasive form. It was contended that once the fiction of the Explanation determines that a particular sale or purchase has taken place within the delivery State, it must consequently follow that the transaction loses its inter-State character and therefore falls outside the reach of clause (2). This, the argument asserted, does not rely on the definition in the Explanation being applied to clause (2); rather, it asserts that the sale or purchase becomes, in the eyes of the law, a purely local transaction. The Court could not accept this proposition because it seemed to disregard the declared purposes of clause (1)(a) and of the Explanation.

The Court noted that in every inter-State sale or purchase the property passes and the transaction takes place in one State or another according to the rules laid down in the Sale of Goods Act. The inter-State character of the sale or purchase is not affected or altered merely because the property passes in one State rather than another. An inter-State sale or purchase remains inter-State regardless of the State in which the property passes.

Accordingly, while a legal fiction may be employed to locate a sale or purchase in a particular State so that it appears to be an outside sale or purchase with respect to all other States – thereby attracting the prohibition of clause (1)(a) against those other States – such a fictional location cannot change the intrinsic inter-State nature or character of the transaction. A sale or purchase that falls within the ambit of the Explanation does not become, in the eyes of the law, a purely local sale for every purpose or at all times. It is deemed to take place in the delivery State only for the purpose of clause (1)(a), that is, to remove the taxing power of all other States. The Court found no justification for the argument that the fiction embodied in the Explanation for this specific purpose could be legitimately employed to destroy the inter-State character of the transaction and transform it into an intra-State sale or purchase for all purposes.

The Court observed that the purpose for which the Explanation to clause 1(a) was introduced cannot be stretched to eliminate the inter-State character of a transaction and to treat it as a wholly intra-State sale or purchase for every purpose. Such a conversion, the Court said, lies beyond the intent and scope of clause 1(a) and its accompanying Explanation. Accepting the argument would mean that the sales-tax officer of the delivery State could compel dealers located outside that State to file turnover returns for goods they delivered to dealers within the State, even though the original sale was made with dealers inside the State. For example, a dealer in Pepsu who ships goods to a dealer in Travancore-Cochin would become subject to the jurisdiction of Travancore-Cochin and would have to file turnover returns and produce his books of account in that State. The Court could not conceive that the Constitution-makers intended to produce such an anomalous result. On the contrary, it appeared that clauses 1(a) and 2 were enacted precisely to prevent this anomaly. The Court reiterated that, on principle or authority, it is not permissible to extend the fictional device of the Explanation beyond its immediate and expressly stated purpose, as explained above.

In the Court’s judgment, until Parliament provides otherwise, every sale or purchase that occurs in the course of inter-State trade or commerce is, by clause 2 of article 286, immune from taxation by any State’s law, regardless of the place where the transaction takes place, whether under the general law or by virtue of the fiction created by the Explanation to clause 1(a). If a particular inter-State sale or purchase occurs outside a State, either under the general law or under the Explanation, it is exempt from taxation by that State’s law under both clause 1(a) and clause 2. If the same inter-State sale or purchase occurs within a State, again either under the general law or by reason of the Explanation, it remains exempt from taxation by that State under clause 2, just as a sale or purchase that takes place within a State cannot be taxed when it is made in the course of import or export within the meaning of clause 1(b). The Court noted that it was next contended that the ban imposed by article 286(2) is itself subject to the provisions of article 304. Article 304 is one of the seven articles, numbered 301 to 307, grouped under the heading “Trade, commerce and intercourse within the territory of India” in Chapter XIII. Article 301 declares that, subject to the provisions of Part XIII, trade, commerce and intercourse shall be free throughout the territory of India.

In this matter, the Court examined the constitutional provisions dealing with trade, commerce and taxation. Article 301 declares that trade, commerce and intercourse throughout the territory of India shall be free, subject only to the provisions of Part XIII. Article 302 authorises Parliament to enact laws that may impose restrictions on that freedom of trade, commerce and intercourse between one State and another when such restrictions are required in the public interest. The Union List, under entry 42, allocates exclusive power to Parliament to legislate on inter-State trade and commerce, and clause 2 of Article 286 recognises this parliamentary authority. Article 303 further bars both Parliament and State legislatures from giving preference to one State over another or from discriminating between States. Following these provisions, Article 304 states that, notwithstanding anything in Article 301 or Article 303, a State legislature may by law (a) levy on goods imported from other States any tax that is similarly levied on comparable goods manufactured or produced within that State, provided that there is no discrimination between imported and locally produced goods, and (b) impose reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be necessary in the public interest, on the condition that no bill or amendment for the purpose of clause (b) may be introduced or moved in a State legislature without the prior sanction of the President. An argument was advanced that the prohibition contained in clause 2 of Article 286 should, like the freedom guaranteed by Article 301, be subordinate to the provisions of Article 304. The Court was unable to accept this contention. While Article 301 is expressly made subject to the other provisions of Chapter XIII, which includes Article 304, no part of Article 286 is made subject to any other provision. Article 304(a) empowers State legislatures to tax goods imported from other States, whereas Article 286 curtails the power of States to impose taxation on the transaction of sale or purchase itself, which is distinct from the goods. Moreover, Article 304 is closely related to entry 52 of the State List, limiting State powers under that entry, while Article 286 governs the State’s powers under entry 54 of the State List. Consequently, Article 304 cannot be read into Article 286, and it has no bearing on clause 1(b) of Article 286. Another argument suggested that if all sales or purchases occurring in the course of inter-State trade and commerce were exempt from State taxation, this would severely and prejudicially affect State economies and impede their ability to fulfil welfare responsibilities. The Court considered that, apart from the general benefit of free trade to the public, the feared danger appeared more speculative than real. The proviso to clause 2 empowers the President to direct the continuation, up to 31 March 1951, of the sales tax that was in force before the Constitution’s commencement, and indeed the President exercised this power on the very day the Constitution came into effect, thereby preserving the status quo and eliminating any immediate threat to State revenue.

In this case, the Court noted that on the very day the Constitution became operative, the President issued an order exercising the power provided in the Constitution, as previously described. Because of that order, there was no immediate threat to the revenue of the States and the existing situation continued unchanged. The Court further observed that clause (2) of article 286 expressly authorised Parliament to remove the prohibition that clause (2) created, if Parliament considered it appropriate for the sake of State finances. Accordingly, the Constitution itself contained sufficient safeguards, and the Court said it should not assume the role of Parliament or, under the pretext of interpretation, attempt to protect State finances that Parliament could address directly. The Court then turned to an argument that extending the prohibition of clause (2) to all sales or purchases made in the course of inter-State trade or commerce would disadvantage consumers of similar goods produced within a State, because a consumer could obtain the same goods from another State without paying tax. The Court found that objection to be of little force. It observed that very few consumers actually imported goods for personal use directly from manufacturers or sellers in another State. Moreover, the expenses of carriage, handling, and the risk of loss or damage during transit would generally discourage consumers from buying directly from outside, since the total cost of such a venture would most likely exceed the sales tax saved by avoiding locally produced goods. The Court added that, if the country is regarded as a single economic unit, there is no reason to prevent a consumer in one State from obtaining cheaper goods from a neighbouring State. The Court then proceeded to discuss another important purpose of article 286, namely the encouragement of foreign trade. It explained that the Constitution gave exclusive legislative authority to Parliament over matters listed in entry 41, which concerned trade and commerce with foreign countries, and entry 83, which dealt with customs duties including export duties. The Court warned that if, in addition to the import or export duty that only Parliament could impose, State legislatures were permitted to enact a law under entry 54 of the State List imposing an additional tax on a sale or purchase that occurred during the import of goods into India or the export of goods out of India, such double taxation would inevitably raise the price of the goods. The Court reasoned that this increase could lead to a situation where essential imported goods would become unavailable at reasonable prices, or Indian exporters would be unable to compete in the world market. Such outcomes would discourage and obstruct foreign trade and would ultimately diminish Union revenue. For this reason, the Court concluded that article 286(1)(b) had been inserted in the Constitution to avoid such a calamity, and that article 286(1)(b) must be interpreted in light of its constitutional purpose and commercial background.

In this case, the Court considered the constitutional purpose of article 286(1)(b) and its commercial context. Import and export trade was described as being mainly conducted by large mercantile houses. These houses bought goods within India either in response to orders obtained from foreign buyers or in anticipation of such orders, and then shipped the goods out of India by land or sea for eventual delivery to the overseas purchasers. The same houses also bought goods abroad in response to orders received from Indian buyers, who could be wholesale or retail dealers, or in anticipation of such orders, and thereafter brought those goods into India by land or sea for delivery to their Indian customers. On occasion, Indian manufacturers or producers exported their own products directly to foreign buyers, and Indian retail dealers or even end consumers sometimes imported goods directly from overseas sellers. The Court noted, however, that the transactions involving the small merchants described in the preceding clause represented a relatively small portion of the total volume of foreign trade, which was dominated by the large export-import houses. The constitutional aim, as articulated by the Court, was to promote foreign trade and to protect Union revenue. To achieve that aim, clause (1)(b) of article 286 placed a prohibition on State legislatures, preventing them from interfering with the Union’s exclusive field of foreign trade by imposing taxes on sales or purchases that occur in the course of import or export, even if such taxes were framed as levies on sales or purchases of goods under entry 54 of the State List. The Court then identified the key question as the scope of the prohibition placed on the States. That scope, the Court explained, depended upon the interpretation of the phrase “in the course of” that appears in clause (1)(b). The same phrase also appeared in clause (2) of the same article. The Court referred to its earlier decision in The State of Travancore-Cochin v. The Bombay Company Ltd., where it had held that sales and purchases which themselves gave rise to the export or import of goods into or out of India fell within the exemption provided by article 286(1)(b). In other words, the earlier judgment had characterized transactions that directly caused the import or export as occurring “in the course of” the import or export. That earlier ruling had been sufficient to resolve the prior case, and the Court had not needed to consider any broader interpretation of the phrase at that time. The present case, however, required the Court to examine whether the exemption extended beyond those directly causative transactions. Accordingly, the Court restated that article 286(1)(b) exempted from State taxation any sale or purchase that took place “in the course of the import of the goods into or the export of the goods out of the territory of India.” The Court further observed that the word “course” suggested a notion of a gradual and continuous flow, a journey, a passage, or progress from one place to another.

Etymologically the word “course” denotes motion and a forward movement. Consequently, the expression “in the course of” clearly refers to a period of time during which that motion is actually taking place. Accordingly, the words “in the course of the import of the goods into and the export of the goods out of the territory of India” necessarily include the interval of time while the goods are travelling on their import or export journey. This interpretation, which has been described as being based on a mechanical test, has been accepted by the Advocate-General of the appellant State and, in fact, by all other Advocates-General except those of Uttar Pradesh and Mysore. The Advocates-General of the two latter States seek to restrict the exemption mentioned in paragraph (1) of the 1952 S.C.R. 1112 decision only to those sales or purchases that themselves directly occasion the export or the import. That narrow approach, however, overlooks the etymological meaning of the term “course” and disregards the considerable number of sales and purchases that occur while the goods are afloat on the high seas, through the endorsement or delivery, against payment, of the relevant shipping documents from one hand to another for consignments valued at crores of rupees. In the context of exports from India, such sales or purchases occurring within India are relatively few because the shipping documents are normally dispatched to the foreign country, and any transaction during transit that depends on the delivery of those documents usually takes place abroad. In certain situations, however, when the goods are shipped to the exporter himself or to his agent without any prior sale, a sale effected by the delivery of the shipping documents may indeed happen in India. Consider, for example, an Indian importer who places an order or indent with an overseas merchant for a large quantity of goods. The goods are shipped, and the shipping documents are sent by air mail and presented to the Indian importer through the overseas merchant’s bank. The importer receives the documents against payment, yet the goods remain on the high seas on their import voyage and a considerable period will elapse before the steamer arrives. During that interval the market price may fluctuate. The question then arises whether the importer must wait passively, hoping that the market conditions will be favorable when the cargo finally reaches port, or whether he should be permitted to realize a gain if market prices rise, or mitigate a loss if they fall, rather than having his capital immobilised for the duration of the voyage. The practical necessities of foreign trade dictate that the importer must be allowed to sell the goods by delivering the shipping documents, thereby converting the documents into money, and subsequently reinvest that money in fresh imports. This practice reflects the way foreign trade is ordinarily conducted. As noted in Halsbury’s Law of England (Hailsham Edition), volume 29, page 210, “The commercial reason for the evolution of the ‘c.i.f.’ contract lies in the length of the time taken in the carriage of goods by sea. It is to the advantage of neither seller nor buyer that the goods, the subject matter of the contract, should remain outside commerce while they are in course of shipment.”

The Court observed that the purpose of a c.i.f. contract was to address the long period required for the sea carriage of goods. It noted that it was disadvantageous to both seller and buyer if the goods subject to the contract remained outside commerce while they were in transit. The seller, the Court said, normally wished to obtain payment equivalent to the value of the goods as soon as possible after the contract date, and until actual payment was received the seller would usually like to be able to obtain credit secured by the transaction. Conversely, the buyer normally wanted to be able to handle the goods for resale or financing at the earliest opportunity. To satisfy these commercial needs of both parties, the Court explained, the c.i.f. contract was developed.

The Court further stated that sales or purchases effected by delivering shipping documents while the goods were still on the high seas were well-recognised forms of transaction. Such transactions were carried out daily on a large scale in major commercial centres such as Bombay and Calcutta, and they formed an essential part of foreign trade. To declare that these sales or purchases did not occur “in the course of” import or export, and to treat them as ordinary local transactions separate from foreign trade, the Court said, would disregard the practical realities of commercial practice.

The Court warned that accepting that view would enable a State to levy tax in addition to the customs duty or export duty imposed by Parliament. Double taxation on the same consignment would raise the price of the goods, hinder exporters from competing in the world market, and increase the burden on consumers in the case of imports. The Court held that such consequences would obstruct foreign trade and would bring about the very disaster that the Constitution seeks to prevent.

Accordingly, the Court concluded that the prohibition contained in article 286(1)(b) was intended to cover all sales or purchases of goods that occur while the goods are on the high seas. The Court said that this interpretation was required not only by the meaning of the words but also by commercial practice and constitutional considerations. The Court noted that this view was already implicit in its earlier judgment in The State of Travancore-Cochin v. The Bombay Company Ltd., where it had observed at page 1120: “We are not much impressed with the contention that no sale or purchase can be said to take place in the course of export or import unless the property in the goods is transferred to the buyer during the actual movements, as for instance where the shipping documents are endorsed and delivered within the State by the seller to a local agent of the foreign buyer after the goods have been actually shipped or”.

In the Court’s observation, the argument that documents cleared on payment or acceptance by an Indian buyer before the goods arrived placed excessive emphasis on the literal meaning of the word “course.” The argument attempted to impose a mechanical test for applying clause (b), limiting its effect only to sales and purchases that occurred while the goods were actually in transit. The Court held that such a narrow construction would diminish the usefulness of the exemption granted by the clause. The Court then identified the immediate question of how to measure the period described as the “course” of import or export, specifically determining when that period begins and ends. The learned Advocate-General of Travancore-Cochin, supported by all Advocates-General except those of Uttar Pradesh and Mysore, argued that the period is confined between two points: the moment the journey of the goods begins and the moment it ends. They maintained that normally the import or export process starts and finishes at the water’s edge, although they allowed that the subsequent movement of the goods from the port to the importer’s location, or from the exporter’s location to the port, could be added to the actual voyage on the high seas. The Court rejected this contention, referring to its earlier decision in The State of Travancore-Cochin v. The Bombay Co. Ltd. (1). According to that decision, the phrase “in the course of” is not limited to those two termini, that is, it does not stop at the moment the goods are handed to the carrier and resume only when the carrier delivers them. The Court explained that by adopting the principle of integrated activities, the agreement for sale to or purchase from a foreign merchant is included within the period denoted by the phrase.

The Court further explained that the agreement for sale or purchase that gives rise to the export or import occurs, in chronological terms, before the physical handing over of the goods to the carrier for removal from or entry into the country. Nevertheless, such a sale or purchase is considered to have taken place “in the course of” the export or import and therefore receives exemption from State taxation. The Court then turned to the issue of how far backward the commencement of the “course” of export can be traced and how far forward the termination of the “course” of import may be fixed. In its judgment, the Court concluded that the purchase made by the exporter to fulfil his agreement with the foreign buyer must be regarded as occurring “in the course of” export. The Court emphasized that this view was not based on interpreting “in the course of” as synonymous with “for the purpose of,” but rather on recognizing the exporter’s purchase as an activity so closely integrated with the act of export that it forms part of the export process itself.

The Court explained that it does not interpret the expression “in the course of” as merely synonymous with “for the purpose of”; rather, it considered the purchase made by the exporter to be an activity so closely integrated with the act of export that it forms a part of the export process itself and therefore occurs “in the course of the export.” The learned Attorney-General accepted this view, but the Advocates-General of the States dissented. They argued that if the Court adopts this approach, the analysis cannot stop at the exporter’s last purchase; it must also include the purchase made by the person who sells to the exporter and all earlier sales or purchases extending back to the producer. The Court found this line of reasoning to be without substance or cogency. In the final purchase by the exporter there is at least one party who is directly concerned with or interested in the actual export. The exporter functions as the connecting link, the commercial vinculum, between that last purchase and the export itself. By contrast, in the earlier sales or purchases neither the sellers nor the purchasers are personally concerned with or interested in the actual export of the goods; consequently, those earlier transactions are too remote to be regarded as integral parts of the export process in the same manner as the exporter’s last purchase. The demarcation line is therefore clear. The Court then set out its reasoning step by step. It noted that in some cases exporters receive orders from foreign buyers and subsequently export the goods. The Court has held that such foreign orders themselves occasion the export and thus take place “in the course of” export. However, those orders can occasion export only if the exporters possess the goods to be exported. Exporters are not necessarily the producers or manufacturers and, in many instances, must procure the goods in order to fulfil the foreign orders. The overseas orders in such cases immediately create a necessity to purchase the goods, and that purchase eventually leads to export. The three activities—receipt of a foreign order, purchase of the goods, and the actual export—are so intimately and closely connected, like cause and effect, that they may be regarded as integral parts of the export process itself. According to the Court’s earlier decision, the contract for sale with the foreign buyer initiates the export stream and occasions the export; consequently, the purchases made by the exporter to implement that contract necessarily occur chronologically after the export stream has begun and must therefore be considered activities undertaken “in the course of” export. Logically, there is no way to escape this conclusion. Accordingly, those purchases made to implement the sale that occasions the export must be exempt from sales tax. The Court questioned whether there is any compelling reason to confine this immunity solely to sales or purchases that implement a foreign order or sale, observing that in a great majority of cases

The Court observed that export merchants, who are ordinarily not the actual producers or manufacturers of the goods, begin to purchase goods ahead of time. They do so after considering the estimated total production for the year, the current local market prices, the anticipated demand from foreign countries, and the prices that either currently prevail or are expected to prevail in overseas markets. Such forward-looking purchases constitute the overwhelming majority of the activities carried out by export merchants and are regarded by businesspeople as necessary incidents of the export trade. The Court asked whether there is any logical reason why purchases made by exporters in anticipation of future foreign orders should not also be taken as initiating the “course” of the flowing stream of export trade. It noted that although the goods are kept in warehouses for a period before actual exportation, this situation is analogous to a stream that falls into a lake and then exits through an outlet at the opposite end; the undercurrent of the flow, though perhaps imperceptible on the surface, remains continuous. The Court emphasized that these well-known preliminary but essential activities of export merchants inevitably precede, lead up to, and ultimately make possible the physical movement of the goods abroad. To hold that such purchases are merely local acquisitions wholly distinct from the export trade would, in the Court’s view, unduly narrow the broad meaning of the flexible phrase “in the course of”. The Court further indicated that its reasoning is supported by the recent decision of the High Court of Australia in The Queen v. Wilkinson: Ex parte Brazell, Garlick and Coy (1952) 85 C.L.R. 467, to which reference may now be made.

Section 11(3) of a New South Wales statute called the Marketing of Primary Products Act, 1927-1940, provides, inter alia, that every producer who, except in the course of trade or commerce between the States, sells or disposes of or delivers any commodity, in respect of which a Board has been appointed, to persons other than the Board, and every person other than the Board who, except as aforesaid, buys, accepts or receives any such commodity from a producer shall be guilty of an offence. In the case referred to, Brazell, a potato producer at Dorrigo in New South Wales, agreed to sell forty-eight bags of potatoes to Garlick Coy & Co., which acted as buying agents for J. E. Long & Co., a general produce merchant with its head office at Jennings on the New South Wales side of the border with Queensland and which carried on the business of purchasing and selling potatoes in both States. The contract stipulated that the potatoes should be delivered from Brazell’s lorry on trucks at Dorrigo. Accordingly, the potatoes were loaded at Dorrigo railway station into a truck and were consigned by Garlick Coy & Co. to J. E. Long & Co. at Wallangarra on the Queensland side of the border.

After the potatoes were loaded at Dorrigo railway station, they were consigned by Garlick Coy & Co. to J. E. Long & Co. at Wallangarra, which lay on the Queensland side of the border adjoining Jennings. The potatoes subsequently arrived at Wallangarra and were sold by J. E. Long & Co. to a purchaser situated in Queensland. Following these transactions, Brazell was prosecuted for the offence of disposing of the potatoes, while the two partners of Garlick Coy & Co., namely Garlick and Coy, were prosecuted for the offence of receiving the potatoes, both charges being alleged to contravene section 11(3) of the Act. The substantive issue that arose before the court was whether the sale effected by Brazell to Garlick Coy & Co. in New South Wales could be characterised as having been carried out in the course of trade and commerce between the States. In examining the facts, the court found that the contract of sale between Brazell and Garlick Coy & Co. did not contain any term that the potatoes would be delivered to a particular buyer either in New South Wales or in any other State, other than Garlick Coy & Co. themselves, who, according to Brazell, were acting as agents for J. E. Long & Co. The court further observed that Brazell’s concern was confined to the sale of his potatoes and that, upon receipt of his payment, he retained no further interest in the potatoes. Moreover, there was no evidence that, at the moment Garlick Coy & Co. received the potatoes from Brazell, any contract existed for their sale to a person in Queensland or any other State, nor was there any indication that J. E. Long & Co. possessed definite orders for supplying the potatoes to identified inter-State buyers, or that the potatoes purchased by Garlick Coy & Co. were intended to satisfy such orders. Consequently, the court concluded that there was no binding agreement among Brazell, Garlick Coy & Co., and J. E. Long & Co. obliging the potatoes to be sold to buyers in Queensland. The magistrate therefore answered the question in the negative and entered convictions against Brazell, Garlick, and Coy. Following the convictions, the respondents moved for a writ of prohibition to restrain the informants and the magistrate from proceeding further on those convictions.

In a joint judgment, Justices Dixon, McTierman, Fullager and Kitto held that, on the basis of the foregoing facts, the disposal and the receiving described in the informations were indeed conducted in the course of trade and commerce between the States, as contemplated by the exception in section 11(3). They explained that, under the agreement for the sale and purchase of the potatoes, the agents who bought the potatoes were required to consign them to a railway station in Queensland, and that this consigning was duly carried out. For the purpose of the exemption, they stated, the act of delivering the potatoes from the lorry into the railway truck could be regarded as an essential and integral, albeit initial, step in the transportation of the potatoes to Queensland. In a separate, concurring judgment, Justice Williams observed that the magistrate had been urged to consider the transaction as a whole rather than to divide it into separate contracts of sale and purchase. Justice Williams asserted that the magistrate had erred by rejecting this submission and that the correct approach required viewing the transaction in its entirety. On that basis, Justice Williams concluded that the facts demonstrated that the acts performed by the appellants were carried out in the course of trade and commerce between the States.

In this case the Court noted that the acts done by the appellants were performed in the course of trade and commerce between the States. After summarising the facts, Webb J observed that the potatoes were shipped to Queensland and were sold there by the principal. He added that there might have been no explicit contractual requirement that the potatoes be sold in another State, and that they could possibly have been resold in New South Wales without violating any agreement. Nevertheless, Webb J held that a legal connection with inter-State trade, such as a contract with the grower, was not necessary to obtain the immunity provided by section 92. The judgment then referred to the earlier decision in Clements and Marshall Pty Ltd. v. Field Peas Marketing Board, where the court distinguished two sets of contracts: the first set involved sales by producers to dealers, and the second set involved resale by dealers to buyers in other States. The court emphasized that only the second set of contracts constituted inter-State transactions. Citing Dixon J’s remark on page 429 of the report, the Court reiterated, “We should consider the commercial significance of transactions and whether they form an integral part of a continuous flow or course of trade, which, apart from the theoretical legal possibilities, must commercially involve transfer from one State to another.” The reasoning applied by the learned Judges in that case was said to apply with full force not only to clause (2) but also to clause (1)(b) of article 286, and the expression “in the course of” was to be interpreted in the same manner as in Queen v. Wilkinson.

The Court explained that, when construed commercially, purchases made by an exporter—even in the absence of a prior export order—represent an essential and integral, albeit initial, step in the exportation of goods. Such purchases form an integral part of a continuous flow that is commercially involved in the export process, and no “legal nexus” between these purchases and the physical export is required to secure immunity from State taxation. Accordingly, the Court held that the final purchases by exporters, whether to fulfill existing foreign orders or in anticipation of future orders, must be regarded as being “in the course of” export. To give business efficacy to article 286 (1)(b), the provision must be read in this commercial sense; imposing tax on these purchases would effectively tax the export itself, thereby jeopardising export trade and ultimately harming the trade balance. The judgment reminded that export earnings pay for imports, and the same considerations apply to the first sale by importers of imported goods. While the Court set aside the relatively few instances of retail dealers importing goods directly from overseas sellers or consumers importing goods for personal use, it emphasized that, in the overwhelming majority of cases, import merchants are the entities that bring goods into the country. Their business consists of importing goods, thereby increasing the overall stock of goods available in the country.

In this case the Court noted that importers who bring goods into the country from abroad conduct their business by introducing those goods and thereby augmenting the general mass of goods that are available inside the nation. The Court explained that in some instances the importers first obtain orders from local dealers; acting upon such orders the importers then bring the goods into the country, a fact that is recorded in the report of the 1952 case cited as (1) (1952) 85 C.L.R. 467. In the majority of situations, however, the importers act on the basis of a thoughtful anticipation of local demand for the goods and consequently place orders or indents with foreign sellers. Those foreign sellers, in response to the orders placed by the prospective importers, dispatch the goods to India. Each order or indent placed with a foreign seller by an intending importer therefore creates an occasion for import, and the Court said that such purchases made by the importers are unquestionably “in the course of” the importation of the goods into India within the meaning of the Court’s earlier decision, and consequently they are exempt from the liability of sales tax. The Court further observed that the sale or purchase of goods while the goods remain on the high seas is likewise considered to be “in the course of” import, and therefore such transactions are immune from taxation by State law.

The Court then turned to the question of where the “course of import” should be said to terminate. It asked whether the course of import might end at the water’s edge. The Court reasoned that if a sale made by the importer while the goods are still on the high seas is treated as being “in the course of” import and is not subject to sales tax, there can be no logical justification for treating the first sale made by the importer to domestic dealers as a purely local sale that would be liable to State tax. If that first sale were to be regarded as a local transaction subject to State taxation, then the tax would, in effect, become an additional burden on the import itself. The Court pointed out that importers are already required to pay the customs duty imposed by Parliament; if the States were to impose further taxes on the same goods, the result would be multiple taxation, which would increase the price paid by consumers and would ultimately have an adverse effect on the nation’s import trade, an outcome that the Constitution seeks to prevent.

The Court emphasized that the essential purpose of the importers who bring goods into the country is to make those goods available to the internal market. Importers are generally not retail dealers who sell directly to end-consumers; rather, their commercial activity is completed by the first sale of the goods to either wholesale or retail dealers. Only after this first sale do the goods become part of the general mass of property situated in the particular State and thereby become subject to the taxing power of that State. Consequently, the Court held that the first sale by the importer to the dealer is so intimately connected with the act of importation that it may be regarded, from a commercial standpoint, as the culmination of the import activity and thus marks the end of the “course of import.” The Court clarified that this conclusion was not reached by applying the American doctrine of the unopened original package, a doctrine that has been abandoned even by the United States Supreme Court and has been rejected in recent Indian jurisprudence.

In addressing the issue, the Court observed that the American approach had recently been rejected by this Court in the Prohibition Case and that the expression “in the course of” should be interpreted by considering its etymology, the purpose of the Constitution, and the established notions and practices of businessmen engaged in foreign trade. The Court further noted that, although it was uncommon, an importer might also act as a retail dealer and directly sell the imported goods to the ultimate consumers. In such rare instances, the Court held that those retail sales could be subject to the State’s sales tax in the same manner as local retail sales of comparable goods. The Court clarified that determining whether an importer is also a retail dealer was a factual question capable of being proved, and that this factual inquiry did not create an insurmountable difficulty for the assessment of sales tax. Consequently, the Court found no obstacle to holding that, just as the final purchases made by exporters for the purpose of sending goods abroad fell within the expression “in the course of” export, the initial sales made by importers to dealers of goods brought into the country likewise fell within the same flexible expression “in the course of” import. The Court indicated that a line could be drawn at that point. Referring to the text of Clive M. Schmitthoff’s Export Trade (2nd edition, p. 3), the Court quoted the lecturer’s statement that when a merchant shipper in the United Kingdom buys goods from a domestic manufacturer for export, the contract of sale is a home transaction, but when the same merchant resells those goods to a foreign buyer, the contract must be classified as an export transaction. The Court rejected the argument that this passage established that the exporter’s last purchase and the importer’s first sale were merely home transactions and therefore could not be classified as export or import transactions. The Court also observed that American decisions distinguishing intra-State from inter-State trade offered no guidance for construing article 286(1)(b), which uses language different from that of the American Constitution. In the United States the question is whether a transaction is inter-State or intra-State; the present problem, the Court explained, is to determine whether a particular sale or purchase occurred “in the course of” an import or export. Simply labeling a sale or purchase as a home transaction does not resolve the issue, because such a label does not preclude the possibility that the transaction occurred “in the course of” import or export. The Court further noted that article 286(1)(b) presupposes a home transaction—i.e., a transaction occurring within the State—and then places that transaction beyond the taxing power of the State.

In this case the State argued that the transaction in question had occurred “in the course of” import or export. The State further explained that if a transaction were not a home transaction – that is, if it were carried out outside the territory of the State – then clause (1)(b) of article 286 would not have to be considered, because clause (1)(a) would already bar the State from imposing tax on a transaction that took place beyond its borders. The real issue, the State contended, arose only when a particular transaction qualified as a home transaction, meaning that it was completed within the State’s territory. In such circumstances the next question was whether that home transaction could still be described as having taken place “in the course of” import or export, as required by the language of clause (1)(b). The State emphasized that merely establishing that a sale or purchase was a home transaction did not resolve the matter, because the further inquiry demanded a proper construction of clause (1)(b) based on its ordinary meaning, the purpose of the Constitution, and the commercial background that had been explained earlier. A second line of argument advanced by the State was that if home transactions were removed from the State’s taxation sphere, the States would be stripped of one of their principal and lucrative sources of revenue, potentially crippling or even collapsing their economies. The State pointed out that clause (1)(b) contains no provision, unlike clause (2), that would permit Parliament to lift the prohibition; consequently, placing these home transactions beyond State taxing power would permanently deprive the States of a substantial portion of revenue derived from sales or purchases made by large importers or exporters, many of whom were foreigners. The State maintained that there was no justification for exempting these parties from sales tax, just as ordinary sellers or buyers in the State are required to pay it. It was also argued that the imposition of double taxation could eventually hinder foreign trade. According to the State, the Constitution’s objective, as evident from the allocation of legislative powers and from article 286, is to keep inter-State and foreign trade outside the taxing reach of the States. While inter-State trade is expressly subject to Parliament’s power under clause (2) of article 286, which allows the ban to be lifted, no similar power is granted to Parliament concerning foreign trade. The State asserted that only Parliament is competent to legislate on foreign trade; if the import or export of particular commodities proved detrimental to the country, Parliament – being better positioned than the Court to assess such matters – would be expected to enact laws restricting or even prohibiting those imports or exports. The State concluded that if imports or exports were to bear an extra tax burden without harming consumers, foreign trade, or the Union’s revenue, there would be no reason to deny the States the ability to tax such transactions.

In that case, the Court observed that the Union’s revenue would be increased if Parliament chose to raise customs or export duties, thereby augmenting the Union’s fiscal resources. The Court noted that, when clause (1)(b) of article 286 was correctly interpreted, it could deprive the States of tax revenue on certain sales or purchases. Such a loss, the Court explained, would arise directly from the purpose expressed in the constitutional provision itself. Accordingly, if the effect of that clause endangered the States’ economic interests, the Court expressed no doubt that Parliament would, on the recommendation of the Finance Commission and pursuant to an appropriate provision among articles 268 to 281—those articles being grouped under the heading “Distribution of Revenues between the Union and the States” in the same chapter that contains article 286—provide compensation to the affected States. The Court emphasized that its duty was to interpret the Constitution as it stood, and that any inconvenience caused to the States by a plain-language construction should be remedied by a competent authority other than the Court.

The Court then turned to the practical difficulties raised by the Sales Tax Officer. It was contended that the officer might find it very hard to determine what portion of the goods bought by exporters had actually been exported, or what portion of the goods imported by importers had been distributed to dealers rather than to end consumers. The Court observed that, ordinarily, sales tax is imposed at the point of sale and that sellers are allowed to pass the tax on to purchasers at the time of the transaction. The difficulty, as framed by the submissions, lay in the seller’s inability to verify whether the purchaser would truly honour a declaration that the goods were intended for export. The Court explained that a seller lacking confidence in the purchaser’s integrity would be reluctant to sell without charging sales tax. Consequently, a genuine exporter might either refrain from buying from that seller or, if compelled by urgency, might pay the tax and later claim a refund, provided a statutory provision for such a refund existed and the exporter could prove actual export.

The Court further rejected the argument that exporters could simply change their minds and sell the goods locally after obtaining an exemption, or that importers might retail the goods to consumers after receiving an exemption. It held that such speculative reasoning lacked substance because the matters were provable. If exporters or their sellers failed to satisfy the officer that the goods were purchased for export and actually exported, or if importers or their purchasers could not demonstrate that the imported goods were distributed to dealers rather than to consumers, the exemption would not be granted. The Court concluded that, should the Sales Tax Officer encounter no real difficulty in verifying the relevant facts, the exemption could be appropriately applied.

The Court observed that the Sales Tax Officer is required to determine whether goods are delivered within a State for consumption there or are delivered for resale outside that State in order to apply the Explanation to clause (1)(a). The Court questioned why the same officer could not ascertain which goods were purchased by exporters for export or which portion of imported goods were sold by importers to dealers. It noted that the Income-Tax Officer can, without difficulty, determine a business’s income, profits and gains and can apply section 10 of the Indian Income-Tax Act, as well as ascertain under section 42 the income deemed to accrue within the taxable territory. Accordingly, there should be no insurmountable difficulty for the Sales Tax Officer to calculate the turnover of a particular dealer and to work out the exemptions to which that dealer is entitled under article 286(1)(b). The Court further held that any assumed difficulty on the part of the Sales Tax Officer cannot alter or affect the correct construction of the constitutional provisions involved. In summary, the Court explained that under entry 54 of the State List, State Legislatures have the power to enact laws concerning tax on the sale or purchase of goods. Article 286, however, imposes four restrictions on such laws: (1) no State may impose tax on a sale or purchase that takes place outside the State; (2) no tax may be imposed in the course of import or export; (3) no tax may be imposed in the course of inter-State trade and commerce; and (4) no tax may be imposed with respect to essential commodities. The Explanation to clause (1)(a) merely defines what constitutes an “outside” sale or purchase. By deeming a particular sale or purchase to occur in a specific State, the Explanation indicates that the transaction is to be considered outside all other States, thereby invoking the ban in clause (1)(a) and removing the taxing power of those other States over the transaction. The Explanation does not operate as an exception or a proviso; it solely elucidates sub-clause (a). The fictional construct created by the Explanation serves only the purpose of sub-clause (a), granting the benefit of the ban to transactions that fall within its defined scope. Consequently, the purpose of the Explanation, read together with sub-clause (a), is exclusively to withdraw the power of taxation from States concerning sales or purchases deemed to be outside sales or purchases. It does not aim to confer any new taxing authority on any State, nor can it be used for any extraneous or collateral purpose. Moreover, the Explanation does not transform an inter-State sale or purchase into an intra-State sale for any purpose other than the limited objective of sub-clause (a). Thus, when a sale or purchase occurs outside a State—either by general law or by the fictional designation of the Explanation—that State, under clause (1)(a), cannot levy tax on that transaction.

The Court explained that the Explanation attached to sub-clause (a) served only the limited purpose of that sub-clause and could not be used for any other purpose. Accordingly, when a sale or purchase occurred outside a State, either because general law applied or because the Explanation created that legal fiction, the State was barred by clause (1)(a) from levying tax on that transaction. Conversely, when a sale or purchase occurred within a State, whether under the general law or because of the Explanation, and when that transaction was performed “in the course of” inter-State trade and commerce, no State—including the State where the transaction took place—could tax it under clause (2) unless Parliament later enacted a contrary law. The Court further clarified that a sale or purchase “in the course of” import or export, as contemplated by clause (1)(b), comprised three situations: (i) a transaction that itself caused the import or export, a point already established by this Court; (ii) a transaction occurring while the goods were on the high seas during their import or export journey; and (iii) the final purchase by the exporter intended for export together with the first sale by the importer to a dealer after the goods arrived. The Court then stated that if a sale or purchase took place within a State, whether under the general law or due to the Explanation, and if it fell within the import-or-export situations described above, no State—including the State where the transaction occurred—could impose tax under clause (1)(b). The Court observed that this interpretation represented its true understanding of article 286, but noted that the majority judgment in C. A. No. 204 of 1952 [The State of Bombay v. The United Motors (India) Ltd.] had adopted a different view of clause (1)(a), the Explanation and clause (2) of article 286. Consequently, while disposing of the present appeals, the Court affirmed that it was bound to follow the majority decision rather than its own view, insofar as the outcome depended on those provisions. The Court recalled the principles laid down in The State of Travancore-Cochin v. The Bombay Company Ltd. and in C. A. No. 204 of 1952 [The State of Bombay v. The United Motors (India) Ltd.] and indicated that it would now examine the rival claims on their merits. The Court observed that there was no substantial dispute regarding the nature of the respondents’ business; all respondents were large-scale exporters of cashew-nut kernels. The respondents obtained raw cashew nuts from three sources: (i) from within the State of Travancore-Cochin, (ii) from neighboring States, and (iii) from Africa. After procurement, the respondents processed the raw nuts to produce oil and edible kernels, which they subsequently exported to foreign countries.

The judgment recorded that the cashew-nut kernels processed by the respondents were ultimately shipped to foreign markets. It was noted that the Travancore Sales Tax Act levied tax solely on the purchase of “cashew and its kernels” and did not impose any tax on the subsequent sale of those items. The respondents therefore sought a sales-tax exemption for the period beginning on 26 January 1950, the date on which the Constitution became effective, and ending on 29 May 1950, the close of the relevant assessment year. To justify this exemption, the respondents relied upon article 286 of the Constitution. Consequently, the Court examined each of the three distinct categories of raw cashew-nut purchases—local, from neighbouring States, and from abroad—to determine whether any portion of these acquisitions fell within the exemptions enumerated in article 286.

Regarding the purchases made within Travancore-Cochin, the Court observed that there was no dispute that such purchases occurred inside the State’s territory and consequently could not invoke the protection granted by article 286(1)(a). Those transactions did not arise “in the course of” inter-State trade or commerce and therefore were not covered by clause (2) of the same article. The remaining issue was whether the intra-State purchases could be characterised as occurring “in the course of” export within the meaning of article 286(1)(b). The record showed that the respondents never sold the raw cashew-nuts, nor any portion thereof, either inside or outside Travancore-Cochin. Likewise, the edible kernels produced after processing were not sold domestically; the only domestic disposals were negligible factory rejections that were unsuitable for export. All edible kernels were exported to foreign destinations. On this basis, the respondents argued that every purchase—whether sourced locally, from neighbouring States, or from overseas—constituted a purchase “in the course of” export as contemplated by clause (1)(b). The State, however, contended that the goods exported were fundamentally different from the raw goods purchased because the manufacturing process transformed them, and therefore the exemption under clause (1)(b) should not apply. The High Court, on remand, examined the manufacturing steps in detail, describing processes such as baking or roasting, shelling, pressing, and peeling. While much of the work was performed manually, some stages employed mechanical drums. Roasting caused oil to be extracted from the outer shells; subsequent breaking of the shells yielded the nuts, and peeling removed the inner skin and any residual poison. The Court concluded that through this manufacturing sequence the respondents effectively consumed the raw cashew-nuts and produced new commodities—namely oil and edible kernels—which were then exported.

In this case the Court observed that the oil and edible kernels obtained from raw cashew nuts are well-recognised commercial commodities and that they constitute separate articles of trade, clearly distinct from the raw cashew nuts themselves. The Court noted that the respondents, when placing orders, specifically request “cashew-nut kernels” rather than “cashew-nuts,” which demonstrates that the goods they intend to sell abroad are not the same articles that they purchase domestically. Consequently, the exported goods cannot be said to be the very same goods that were bought; the raw nuts purchased locally are never exported. What is actually exported are new commodities that have been created through the manufacturing process, a process that transforms the raw material into a different product. The Court likened the consumption of raw cashews by the respondents to the way a jute mill consumes raw jute or a textile mill consumes cotton and yarn; in each instance the raw material is processed into a different finished product. Because the raw cashews are not themselves exported, the purchase of those raw nuts cannot be described as having been made “in the course of export” and therefore cannot attract the immunity provided by clause (1)(b).

Regarding the purchases of raw cashew nuts from neighbouring States, the Court relied on the findings of the High Court on remand. The High Court had determined that the majority of such purchases were carried out by the respondents or their agents from sellers located in those neighbouring States, and that the goods were delivered by the sellers to the respondents or their agents in the place where the purchase occurred. The contract of purchase was fully performed when, as a direct result of the purchase, delivery of the nuts took place outside Travancore. After that delivery, the respondents or their agents transported the goods—by rail or other means—into Travancore, at which point the goods had already become the respondents’ own property. Because the delivery stipulated in the purchase contract had already occurred outside Travancore, the subsequent dispatch of the goods into Travancore cannot be characterised as delivery within the State that is a direct consequence of the purchase, as required by the Explanation to clause (1)(b).

The learned Advocate-General of Travancore-Cochin conceded that purchases of this kind fall outside the Explanation and must therefore be regarded as having taken place outside Travancore-Cochin. Accordingly, such purchases should be exempt from tax under article 286(1)(a). The Court further explained that if it could be shown that, although the transactions were wholly situated in the neighbouring States, they were conducted between parties residing or carrying on business in two different States and were intended for consumption or sale in the purchaser’s State, then those transactions might be described as occurring “in the course of inter-State trade and commerce” and could be exempt from tax by both States under article 286(2). However, the transactions under consideration occurred during the period covered by the President’s order made under the proviso to that clause, and therefore no protection under clause (2) could be claimed. Moreover, the Court noted that even if the raw cashew nuts bought in the neighbouring States had been intended for export out of India and had actually been exported, the purchases would then fall within the protection of clause (1)(b).

In this case, the Court observed that the purchases of raw cashew-nuts from the neighbouring States could not be treated as occurring “in the course of export” and therefore could not rely on the exemption provided by article 286(1)(b). The factual record showed that the nuts bought from the neighbouring States were not actually exported; instead they were taken to a manufacturing process, and the items ultimately exported were different products from those originally purchased. Consequently, the protection contemplated in clause (1)(b) did not apply to those transactions. The Court further noted that, because these purchases were made outside Travancore-Cochin, they could be exempt from taxation by Travancore-Cochin only under clause (1)(a), a provision that remained unaffected by the President’s order issued under the proviso to clause (2). The Advocate-General of Travancore-Cochin thereafter suggested that another category of purchase might exist, namely where the seller located in the neighbouring State delivers the goods directly to the respondents in Travancore under the terms of the sale contract. Counsel for the respondents, however, contended that no such transactions had actually occurred. The Court held that it was unnecessary to explore this dispute in depth at this stage because the arguments had already been fully presented, and the priority was to state the correct legal principle governing any such purchases, should they exist. The Court explained that if no direct delivery from a neighbouring seller to the respondents took place, no issue would arise. Assuming, for argument’s sake, that such direct deliveries did occur, the Court found that the first requirement of the Explanation would be satisfied because the goods would be delivered within Travancore as a direct outcome of the purchase. The next inquiry would concern whether the delivery was intended for consumption within the State. The Court observed that the raw cashew-nuts, once in the possession of the respondents, underwent processing that produced cashew-nut oil and edible cashew-nut kernels. In this sense, the raw nuts were “consumed” by the respondents. Accordingly, the Court concluded that such purchases would fall squarely within the Explanation, be deemed to have taken place in Travancore, and therefore, under clause (1)(a), the neighbouring States would have no authority to levy tax on those sales or purchases. The Court expressed its own view, relying on reasoning from an Australian decision, that these purchases could be characterized as occurring “in the course of” inter-State trade and thus should be protected by clause (2). However, the Court gave precedence to the majority opinion in the Bombay appeal, holding that, because of the Explanation, the transactions become intra-State purchases in Travancore, fall outside the protection of clause (2), and become subject to taxation under Travancore law. Even if the Court’s personal view placed the purchases within clause (2), it held that they would still be liable to tax under the Travancore Act by virtue of the President’s order exercised under the proviso to clause (2).

The Court observed that those purchases could not rely on the protection of clause (1)(b) because the goods bought were not the same goods that had been exported, and consequently any such purchases would be subject to tax under the Travancore Act. The respondents obtained raw cashew-nuts from a third source, namely Africa. They placed orders with commission agents located in Bombay, and the Bombay agents transmitted the orders to the African sellers or to the sellers’ agents operating in Bombay. The African sellers then dispatched the nuts by steamer and forwarded the bills of lading, invoices and related documents to their bank in Bombay. That bank presented the documents to the Bombay agents of the respondents; the agents paid the price, received the shipping documents in Bombay and afterwards prepared their own invoices showing the amounts they had paid on behalf of the respondents together with their commissions. The agents sent these invoices and the accompanying shipping documents to a bank in Travancore. The Travancore bank forwarded all the documents to the respondents, who paid the amount shown on the Bombay agents’ invoices and received the shipping documents. These steps were ordinarily completed while the goods were still on the high seas. When the cargo arrived at a port in Travancore, the respondents cleared the goods by presenting the bill of lading and other documents. This description covered the principal mode of purchase of African raw cashew-nuts. The State of Travancore-Cochin conceded that such transactions were not liable to tax. The Court noted that, first, the purchases occurred outside the State and therefore fell within clause (1)(a). Second, the purchases were made “in the course of” import and were therefore exempt from tax under article 286(1)(b) because (i) the purchases themselves gave rise to the import, as previously held by the Court, and (ii) the property in the goods passed and the purchase was effected while the goods were on the high seas. The Court further held that these purchases could not be characterised as taking place “in the course of” export for the reasons already explained. The Court identified another mode of acquiring African raw cashew-nuts. In that scenario the African sellers shipped the nuts on their own initiative or at the direction of their Bombay agents, and while the cargo was on the high seas they effected a sale by endorsing and delivering the bills of lading at Bombay to the respondents’ Bombay agents. After that, the same documentary procedure as described above was followed. In this second mode the respondents’ purchase did not cause the import, but the sale still occurred outside the State and the property passed while the goods were on the high seas; accordingly the sale must be regarded as having taken place “in the course of” import according to the mechanical test earlier explained. The learned Advocate-General of the State did not contest that such purchases were likewise exempt from sales tax.

In this type of purchase, each respondent placed a separate order with the same commission agents in Bombay. Those agents then combined all of the individual orders into a single consolidated order and presented it to the African sellers. The African sellers shipped the entire quantity of raw cashew nuts under one bill of lading. After shipment, the sellers forwarded the bill of lading, the invoice and related documents to their bank in Bombay, and that bank delivered the same documents to the Bombay agents. The agents paid for the whole consignment, obtained possession of the shipping documents, and subsequently prepared individual invoices for each respondent. In each invoice the agents included their own commission and divided the consignment so that separate delivery orders were drawn for the quantity ordered by each respondent. The agents sent the individual invoices and delivery orders to the bank in Travancore, which in turn presented them to the respective respondents. Each respondent received the delivery order only after making payment. When the steamer arrived in Travancore, the goods were cleared on the original bill of lading, and the respondents took delivery of their portions from the warehouse of the sellers or from the Bombay agents against the delivery orders that had been issued to them.

The Court held that a purchase of this character could not be said to have occasioned the import of the goods. The import was only triggered by the consolidated order placed by the Bombay agents, because the individual orders of the respondents were never transmitted to the African sellers and the sellers did not issue separate bills of lading for each respondent. Consequently there was no direct contractual relationship, or privity, between the African sellers and any individual respondent; the import was therefore attributable solely to the agents’ own consolidated order. The Court further observed that the delivery of the single bill of lading to the Bombay agents did not constitute delivery to the respondents. The sale was deemed to occur in Travancore at the moment the delivery orders were handed to the respondents and the goods were delivered from the local warehouse. Accordingly, the goods could not rely on the exemption provided under article 286(1)(a), 286(1)(b) or 286(2). The final category described involved purchases that were made after the cashew nuts had arrived at the Travancore port and were subsequently sold and delivered ex-godown to the respondents; this clearly fell within the scope of an intra-State sale, rendering the mentioned exemption clauses inapplicable.

The Court observed that the transaction fell within the category of an intra-State sale and therefore the provisions of clauses (1)(a) and (2) of the article could not be applied to it. Consequently, the respondents were held unable to rely on exemption under clause (1)(b) for the reasons already set out in the judgment. Because the respondents did not seek any exemption from tax relating to purchases made before the Constitution came into force, the Court found that no separate discussion of that issue was necessary. In view of the foregoing reasons, the Court held that the decision of the High Court must be affirmed only to the extent that the assessments in question should be set aside. However, the Court directed that the matter be remitted to the Sales Tax Officer, who is required to carry out a fresh reassessment taking into account the principles articulated in the two earlier cases concerning clause (1)(a), the Explanation, and clause (2), as well as the principles discussed above regarding clause (1)(b). The Court further recorded the agents appointed for the parties: the agent for the appellants in all of the appeals was G. H. Rajadhyaksha; the agent for the respondents in Appeals numbered 26 and 33 was Rajinder Narain; the agent for the respondents in Appeals numbered 27, 30 to 32 and 34 to 36 was S. Subramanian; the agent representing the Union of India and the States of Madras, Hyderabad, Punjab and Mysore was also G. H. Rajadhyaksha; and the agent for the State of Uttar Pradesh was C. P. Lal.