B.K. Wadeyar Sales Tax Officer IV vs Daulatram Rameshwarlal

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

Court: supreme-court

Case Number: Appeal (civil) 45-46 of 1959

Decision Date: 27 September 1960

Coram: S.K. Das, M. Hidayatullah, K.C. Das Gupta, J.C. Shah, N.R. Ayyangar

In this matter the petitioner was the Sales Tax Officer IV of the Division Licence Circle in Bombay, and the respondent was the partnership firm Daulatram Rameshwarlal, which the judgment later refers to as “the seller.” The case was decided by the Supreme Court of India on 27 September 1960, and the bench consisted of Justices S K Das, M Hidayatullah, K C Das Gupta, J C Shah and N R Ayyangar. The appeal was recorded as Civil Appeal No. 45‑46 of 1959.

The seller was a registered dealer under section II of the Bombay Sales Tax Act. In its return of turnover for the period from 1 April 1954 to 31 March 1955, the seller claimed exemption from sales tax on two categories of export sales: cotton having a total value of Rs 68,493‑2‑6 and castor oil having a total value of Rs 6,47,509‑1‑6. The exemption was claimed on the basis that the contracts were on an FOB (free on board) basis, under which the seller asserted that ownership of the goods continued to vest in it until the goods crossed the customs barrier and entered the export stream. Accordingly, the seller contended that no sales tax became realizable on those transactions, relying on the provision of Article 288(1)(b) of the Constitution.

The Sales Tax Officer rejected the seller’s claim of exemption and consequently assessed sales tax on a taxable turnover that included the cotton and castor‑oil sales. In addition, the officer assessed purchase tax under section 10(b) of the Bombay Sales Tax Act on the seller’s purchase of castor oil, which the seller later sold for the same amount of Rs 6,47,509‑1‑6. A notice of demand for the total sales tax and the purchase tax assessed was served on the seller on 30 September 1956.

Thereupon the seller filed a petition before the Bombay High Court under Article 226 of the Constitution, seeking writs to quash both the assessment order and the notice of demand and to prohibit the Sales Tax Officer from taking any further steps under those orders. The learned judge hearing the petition rejected the seller’s contention that ownership of the goods remained with the seller until the goods crossed the customs frontier, holding that the seller was not entitled to the benefit of Article 286(1)(b) of the Constitution. The judge also rejected the seller’s argument that the purchase‑tax assessment was illegal, and consequently dismissed the petition under Article 226.

The seller appealed the High Court’s decision. The appellate judges, disagreeing with the trial judge, held that the goods did remain the seller’s property until they were loaded on board the ship, and therefore the sales were exempt from tax under Article 286(1)(b) of the Constitution. However, they concurred with the trial judge that the seller was

The appellate court held that the sellers were liable to pay purchase tax under section 10(b) of the Bombay Sales Tax Act. Consequently, the court directed the Sales Tax Officer not to enforce the demand for payment of sales tax in respect of two transactions: the sale of cotton valued at Rs 68,493‑2‑6 and the sale of castor oil valued at Rs 6,47,509‑1‑6. On the basis of special leave granted by this Court, the Sales Tax Officer filed an appeal, identified as Civil Appeal No 45 of 1959, challenging the appellate court’s order that prohibited him from realizing sales tax on the cotton and castor oil sales. In parallel, the sellers filed Civil Appeal No 46 of 1959, contesting the appellate court’s judgment to the extent that it upheld the assessment of purchase tax under section 10(b).

The sole issue for determination in the appeal filed by the Sales Tax Officer concerned the point at which title to the goods passed – whether the property transferred on shipment or at some earlier moment before shipment. Established jurisprudence clarified that where title passes to the buyer after the goods have crossed the customs frontier for the purpose of export, the sale is deemed to have taken place “in the course of export” outside the territory of India. Accordingly, if in the present transactions title passed to the buyers on shipment, which occurred after the goods had crossed the customs frontier, the sales would be characterised as taking place “in the course of export” and the exemption prescribed under Article 286(1)(b) would become applicable.

The sellers asserted that the transactions were sales on a free‑on‑board (FOB) basis. Although the learned Solicitor‑General, appearing for the Sales Tax Officer, attempted to persuade the Court that the sales were not genuine FOB contracts, the affidavits and pleadings did not dispute the claim made in paragraphs 11 and 13 of the writ petition that the sales were on FOB terms. Moreover, the assessment order itself referred to the transactions as FOB sales, and the exemplar contract produced by the parties employed the expression “FOB delivered”. From these admissions, it could be concluded without doubt that the sales were conducted under FOB contracts.

Under the normal rule governing FOB contracts, the intention is that title passes to the buyer at the moment of shipment, and in the ordinary course of such contracts the transfer of property indeed occurs on shipment. Exceptions to this rule arise in certain situations, for example where the seller retains the bill of lading to his own order and subsequently transfers it to a third party; in such cases the courts have held that title does not pass to the buyer even though the goods have been shipped. The present case, however, did not raise the question of whether the parties had agreed to postpone the transfer of title beyond the point of shipment. The Court therefore did not need to address the proposition that, absent a specific agreement to the contrary, title under an FOB contract does not pass until the goods are

In this case the Court noted that the proposition that, absent a special agreement, ownership of goods under a free‑on‑board contract did not pass until the goods were actually placed on board was not contested before it. The Court also observed, as correctly emphasized by the learned Solicitor‑General, that the parties were always free to agree otherwise as to the moment when title to the goods transferred, and that such an agreement had to be determined by examining all the surrounding circumstances. The Solicitor‑General relied on three particular circumstances to persuade the Court that the sellers and the buyers had agreed that title would pass to the buyer even before shipment. The first circumstance was that the bill of lading was issued in the name of the buyer. However, the Court pointed out that this fact had to be read together with the circumstance that the sellers retained the bill of lading, the contract providing that payment would be made only upon presentation of the bill of lading. It was undisputed that the term “payment at Bombay against presentation of documents” meant precisely that the buyer would remit the price only when the seller presented the bill of lading together with the invoices. Because the bills of lading, although drafted to appear as if the buyer had shipped the goods, were actually obtained and kept by the sellers, the Court held that this fact ordinarily indicated the parties’ intention that title would not pass until after payment had been received. The second circumstance highlighted by the Solicitor‑General was that the export was to be carried out under the buyer’s export licence. The Court found that this circumstance did not demonstrate any contrary intention. It explained that, as a general rule in free‑on‑board contracts, the buyer is responsible for obtaining the necessary export licence, a principle stated in Brandt’s case ([1917] 2 K.B. 784). Although later English decisions, such as Pound v. Hardy ([1955] 1 Q.B. 499) and a House of Lords judgment ([1956] A.C. 588), recognized that the duty to obtain a licence might fall on the seller in particular factual situations, the Court affirmed that the presumption remains that the buyer bears this duty unless the specific facts of a case indicate otherwise. The third circumstance relied upon by the Sales Tax Officer concerned the Export (Control) Order, 1954, made under the powers of the Import and Export (Control) Act, 1947. The Court noted that clause 5(2) of that Order contained a provision stating that “It shall be deemed to be a condition of that licence … that the goods for the export of which licence is granted shall be the property of the licensee at the time of the export.” The Court considered that this provision was part of the material before it, but it did not accept any inference that the parties necessarily intended to comply with that condition by agreeing that title passed at the moment of export.

In this case the Court examined clause 5(2) of the Export (Control) Order 1954, which provides that “it shall be deemed to be a condition of that licence … that the goods for the export of which licence is granted shall be the property of the licence‑e​e at the time of the export.” The learned Solicitor‑General submitted that it was reasonable to think that the parties to the contract intended to satisfy that condition and that they had agreed that the goods would become the property of the buyer—the licence‑e​e—at the moment of export. He further argued that “the time of the export” should be interpreted as the instant when the customs frontier is crossed, so that property would pass to the buyer at the point when the goods crossed that frontier. The Court, however, found no justification for construing the phrase “the time of the export” in that manner. Export, as defined in the Import and Export (Control) Act 1947, means “taking out of India by sea, land or air.” The Court held that the same meaning must be given to the word in the 1954 Order. Accordingly, the time of export is the moment when the goods leave the territorial limits of India, which includes the nation’s territorial waters. Thus the export is deemed to occur when the vessel carrying the goods moves beyond those territorial limits. The Court further explained that the export cannot be said to have commenced before the ship carrying the goods departs from the port. Consequently, the parties’ intention to comply with clause 5(2) would require that ownership of the goods pass to the licence‑e​e either immediately before the ship passes beyond the territorial waters or, at the earliest, when the ship leaves the port. The Court noted that, irrespective of the view adopted, there is no indication that the parties intended the property to pass to the buyer at the instant the goods crossed the customs frontier. While it is true that in United Motors’ case (1953 (4) STC 133) and other decisions this Court held that the “course of export” begins when goods cross the customs barrier for purposes of Article 286(1)(b) of the Constitution, the Court emphasized that those earlier decisions dealt with a different legal question—namely, the commencement of the course of export under the Constitution—not the meaning of “time of the export” in the Export (Control) Order. Therefore, those decisions offered no assistance to the issue before the Court in the present matter.

In determining the moment at which the export itself begins, the Court noted that the Import and Export (Control) Act, 1947 defines export as “taking out of India by land, sea, or air.” Accordingly, the Court held that, for the purposes of the Export (Control) Order, export cannot be said to have begun until the vessel carrying the goods has at least left the port. The Court further observed that, in some situations, it would be more precise to say that export does not commence until the vessel has passed beyond India’s territorial waters. From this analysis the Court concluded that there is no situation that would support a finding that the parties entered into a special agreement whereby, despite the sales being on free‑on‑board terms, ownership of the goods would transfer to the buyer before the goods were shipped. The Court agreed with the learned judges of the Bombay High Court, who had held that the goods remained the property of the seller until they were brought to the port and loaded on board the ship, and therefore the sales were exempt from tax under Article 286(1)(b) of the Constitution.

The Court then turned to the matters raised in Civil Appeal No. 46 of 1959. The appellant contended that, when section 10(b) of the Bombay Sales Tax Act is properly interpreted, no purchase tax should be levied on the appellant. Section 10(b) provides that a purchase tax is payable on the turnover from the purchase of goods specified in column 1 of Schedule B, at the rates, if any, laid down in column 4, “where a certificate under clause (b) of section 8 has been furnished in respect of such goods and the purchasing dealer does not show to the satisfaction of the Collector that the goods have been despatched by him or by a person to whom he has sold the goods to an address outside the State of Bombay within a period of six months from the date of purchase by the dealer furnishing such certificate.” Section 8(b) allows a deduction from turnover for the sale of goods to a dealer who holds an authorisation and who furnishes the selling dealer with a certificate in the prescribed form, declaring, among other things, that the goods sold to him are intended to be despatched by him or by registered dealers to whom he sells the goods to an address outside the State of Bombay.

The Court noted that a certificate in the prescribed form had indeed been furnished by M/s Daulatram Rameshwarlal in respect of the castor oil it sold to others, and that, because of this certificate, the sellers of those goods were permitted to claim deductions. It was also undisputed that the persons to whom M/s Daulatram Rameshwarlal sold the castor oil dispatched the goods to an address outside the State of Bombay within six months of the date of purchase by M/s Daulatram Rameshwarlal. However, the Court observed that those persons were not registered dealers. The Sales Tax Officer, as well as the Bombay High Court, had taken the view that the phrase “person to whom he has sold the goods” in section 10(b) required the “person” to be a registered dealer. The Court therefore had to examine whether the language of sections 8 and 10 should be read to include only registered dealers or to extend to any buyer.

The Court observed that the expression “person to whom he has sold the goods” used in section 10(b) was intended to denote “a registered dealer to whom he has sold the goods.” The appellant‑dealer argued that the words “a person” were broad enough to cover both registered and unregistered dealers. It was submitted that the legislature deliberately chose the term “a person” instead of expressly saying “a registered dealer” and that the purpose was to impose purchase tax on any person who furnished a certificate under section 8(b) only when the goods were not dispatched outside the State of Bombay within the prescribed time by anyone. Consequently, the appellant‑dealer contended that “a person” in section 8(b) should be given a wide meaning to include a registered dealer as well as any other person. The Court could not accept this argument. A careful reading of sections 8 and 10 led the Court to conclude that the legislature was intent on ensuring that the declaration of intention to dispatch the goods outside the State of Bombay be fulfilled by actual dispatch through “a registered dealer” to whom the goods were sold. If the dispatch outside the State of Bombay was carried out by a person who was not a registered dealer, the certificate would not have been complied with. The Court found it unreasonable to hold that, although the legislature required the certificate to state that the goods were intended “for being dispatched by him or by a registered dealer to whom he sells the goods outside the State of Bombay,” the legislature would be satisfied by actual dispatch performed by someone who was not a registered dealer. Counsel for the appellant argued that the certificate needed only to declare an intention and that, if ultimately the goods were dispatched by a person who was not a registered dealer, it could not be said that the declared intention had not been carried out. He suggested that the purchasing dealer might have had a genuine intention at the time of making the declaration and that, even if the goods were later sold to an unregistered person for dispatch, the dealer should not be liable for a false declaration. While acknowledging that no false declaration of intention was made, the Court emphasized that the intention itself had not been fulfilled. The legislative scheme, the Court held, clearly provided that purchase tax should be levied where the declared intention was not carried out, and allowing otherwise would render the declaration meaningless. Accordingly, the Court concluded that the lower courts had correctly interpreted the words “a person” in section 10(b) of the Bombay Sales Tax Act as referring to a “registered dealer,” and that the purchasing dealers had rightfully been assessed purchase tax.

In this matter the Court turned its attention to the operation of section ten sub‑b of the Bombay Sales Tax Act. After a careful review of the material placed before it, the Court considered the arguments that had been advanced concerning the scope of that provision and the interpretation of the term “a person” within its language. The Court found that the earlier reasoning of the lower courts, which had held that the provision applied to the purchasing dealers in question, was well founded. Accordingly, the Court determined that the statutory requirement set out in section ten sub‑b was satisfied and that the assessment of purchase tax directed against the appellants was proper under the Act. On the basis of that conclusion, the Court decided that there was no ground on which to uphold either of the appeals that had been filed. Consequently, the Court ordered the dismissal of both appeals. In addition, the Court directed that the costs of the proceedings be borne by the appellants. Thus, the final order of the Court was that both appeals were dismissed with costs, consistent with its finding that section ten sub‑b governed the tax liability at issue.