Bayyana Bhimayya vs The Government Of Andhra Pradesh

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

Court: supreme-court

Case Number: Civil Appeals Nos. 223 and 224 of 1960

Decision Date: 14 December, 1960

Coram: M. Hidayatullah, J.L. Kapur, J.C. Shah

In the matter titled Bayyana Bhimayya versus the Government of Andhra Pradesh, the Supreme Court delivered its judgment on 14 December 1960. The opinion was authored by Justice M Hidayatullah, with Justices J L Kapur and J C Shah sitting on the bench. The petitioner was Bayyana Bhimayya and the respondent was the Government of Andhra Pradesh. The case is reported in the 1961 All India Reporter at page 1065 and in the Supreme Court Reports, volume 3, page 267, with subsequent citations including 1962 SC 1585, 1973 SC 1061, 1975 SC 1996, and 1978 SC 389. The issues concerned the interpretation of the Sales Tax‑Delivery order provision, the concept of two separate transactions, the applicability of sales tax at both points of sale, the definition of a sale under the Sale of Goods Act 1930 (section 2(4)), and the provisions of the Madras General Sales Tax Act 1939.

The headnote records that the respondents were engaged in the trade of gunnies. They first entered into contracts with two mills, agreeing to purchase gunnies at a specified rate for future delivery, and subsequently executed agreements with third parties whereby the third parties were charged an additional amount and were issued a provisional delivery order known as a “kutcha delivery order.” The mills, however, refused to recognise the third parties as contracting parties, treating them merely as agents of the appellants, and delivered the goods against the provisional delivery orders while collecting sales tax from the third parties. The tax authorities treated the transactions between the appellant and the third parties as new sales and attempted to levy sales tax a second time. The appellants argued that a second sale did not occur; they contended that the issuance of a provisional delivery order did not constitute a sale of goods but merely represented an assignment of the right to obtain delivery of gunnies that were not yet existing or appropriated under the contract, effectively an assignment of a forward contract.

The Court held that the documentary agreements demonstrated that the sellers did not accept the third parties as purchasers. It observed that a delivery order is a document of title to goods; possession of such a document confers not only the right to claim the goods but also the ability to transfer that right to another person by endorsement or delivery. Consequently, the Court concluded that there were two distinct transactions of sale: one between the mills and the original purchasers, and another between the original purchasers and the third parties. Accordingly, sales tax was payable at both stages. The Court referred to earlier decisions, including Pilibhit v M/s Budh Prakash Jai Prakash (1955 SCC 243), Poppatlal Shah v State of Madras (1953 SCC 677), and The State of Andhra v Kolla Sreeramamurthy (decided 27 June 1957), in support of its reasoning.

The judgment fell under the civil appellate jurisdiction of the Supreme Court, concerning Civil Appeals Nos. 223 and 224 of 1960, which were appeals from the order dated 23 November 1956 of the Andhra Pradesh High Court, Hyderabad, in Tax Revision Cases Nos. 17 and 18 of 1956. The Solicitor‑General of India and another counsel appeared for the appellants, while counsel for the respondent represented the State. The judgment was delivered by Justice Hidayatullah.

The Court noted that the present appeals were filed against certificates that had been issued by the High Court of Andhra Pradesh in a sales‑tax revision proceeding originally brought by the appellants in that Court. The factual background was set out as follows. In the financial year 1952‑53 the appellants were engaged in the trade of gunnies, a term referring to a specific commodity. They purchased the gunnies from two separate mills located in Vishakapatnam District. Subsequent to the purchase, the appellants prepared delivery orders and conveyed those orders to third‑party purchasers with whom they had concluded distinct transactions. The procedural steps adopted by the appellants were described in detail. Initially, they entered into contracts with the mills in which they agreed to buy gunnies at a predetermined price for delivery at a future date; a model of such a contract was identified as Exhibit A‑1. In addition, the appellants executed supplementary agreements with the mills, whereby the mills undertook to deliver the goods directly to the third parties if the appellants requested such delivery. The mills, however, expressly refused to recognize the third parties as independent contracting parties and treated them solely as agents of the appellants; sample agreements of this nature were marked as Exhibits A‑2 and A‑2(a). Prior to the actual delivery of the goods, the appellants concluded separate agreements with the third parties, levied an additional charge on the third parties, and handed over to each third party a delivery order that was described as a “kutcha” delivery order; exemplars of the agreement and the delivery orders were indicated as Exhibits A‑3 and A‑4.

The mills then proceeded to deliver the gunnies in response to the kutcha delivery orders, attaching an invoice and a bill of sale to each delivery; specimens of those documents were presented as Exhibits A‑6 and A‑7. In the course of these deliveries the mills collected the applicable sales tax from the third parties. The tax authorities, however, construed the transaction that occurred between the appellants and the third parties as a separate, fresh sale and accordingly attempted to impose sales tax on that transaction a second time. The appellants argued that such a second imposition was unlawful because no distinct second sale had taken place. Their objections were rejected by the Deputy Commercial Tax Officer in Guntur, and subsequent appeals to the Deputy Commissioner of Commercial Taxes, Guntur, and to the Andhra Sales Tax Appellate Tribunal, Guntur, also failed. Unsatisfied, the appellants sought revision before the High Court under the Madras General Sales Tax Act, 1939, as amended by Madras Act No 6 of 1951, but their revision was likewise dismissed. Notwithstanding the dismissals, the High Court nevertheless granted certificates, and those certificates are now the subject of the present appeals.

The appellants advanced two principal contentions. First, they maintained that the agreement with the mills and the subsequent issuance of the kutcha delivery orders did not constitute a sale of goods; instead, they characterized the arrangement as an assignment of the right to obtain delivery of the gunnies, which, at the time of the agreement with the third parties, did not yet exist as specific goods and were not yet appropriated to any contract. In the alternative, the appellants contended that the whole arrangement represented merely an assignment of a forward contract. To support these submissions, the appellants relied upon two earlier Supreme Court decisions, namely The Sales Tax Officer, Pilibhit v. Messrs Budh Prakash Jai Prakash and Poppatlal Shah v. The State of Madras, asserting that those precedents demonstrated that the transactions in question were not sales within the meaning of the applicable tax legislation.

The Court observed that the authorities cited by the appellants were not placed before it, apparently because the High Court had already demonstrated that those authorities did not apply to the facts of this matter. The learned Solicitor‑General who appeared on behalf of the appellants based his entire argument on the first submission, namely that the only thing that had been transferred was a right to obtain delivery of the gunnies and that no sale had taken place. He further maintained that a single sale transaction existed between the mills and the third parties, and that, on the basis of the assignment of that delivery right, the third parties had received the goods directly from the mills. The Court, however, disagreed with this characterization, finding that it did not reflect the true nature of the dealings either in factual terms or under the law.

First, the mills had expressly stated in their agreements that they did not regard the third parties as contracting parties having privity with the mills, as is evident from the cited authorities [1955] 1 S.C.R. 243 and [1953] S.C.R. 677, and that delivery would be made against the kutcha delivery orders to the third parties acting as agents of the appellants. Consequently, the mills recognised only the appellants as parties to the contract, and a sale therefore occurred from the mills to the appellants, on which sales tax was correctly demanded and paid. With respect to the third parties, the Court noted that they acquired the goods by paying an additional price, creating a new transaction of sale between the appellants and the third parties both in fact and in law. A delivery order, according to section 2(4) of the Sale of Goods Act, constitutes a document of title, and the holder of such a document possesses the right not only to receive the goods but also to transfer them by endorsement or delivery. At the moment the mills delivered the goods to the third parties, two distinct deliveries took place: one from the mills to the appellants, represented for the mills by the appellants’ agents, the third parties; and a second from the appellants to the third parties as buyers. Although these deliveries may have occurred simultaneously, they were separate in fact and in the eyes of the law. The Court explained that if a dispute arose concerning the goods delivered under the kutcha delivery order, the appellant could sue the mills, while the third parties could pursue breach of contract claims only against the appellant and not against the mills. Accordingly, the Court held that because there were two independent sale transactions, tax was liable at both stages, a conclusion that had been correctly identified by the tax authorities and affirmed by the High Court. The appellants also relied on a decision of the Andhra Pradesh High Court in The State of Andhra v. Kolla Sreeramamurty (3), but the Court pointed out that the facts in that case differed and that the Division Bench had expressly distinguished the present judgment, observing that the principles laid down in the earlier decision could not be applied here.

In this case the Court observed that the principle laid down in the judgment under appeal could not be applied because, as the cited case explained, the property in the goods never passed from the mills to the assessee and there was no agreement of sale of goods to be obtained in the future between the assessee and the third party. The cited case was Second Appeals Nos. 194 & 195 of 1954, which had been decided on 27 June 1957. Accordingly the Court concluded that the appeals had no merit and ordered that they be dismissed, directing that costs be awarded against the appellants and that a single hearing fee be imposed. The appeals were therefore dismissed.