Burmah Shell Oil Storage And... vs Commercial Tax Officer And Others

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

Court: Supreme Court of India

Case Number: Appeal (civil) 751 of 1957

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 Supreme Court recorded that the appeal, numbered Civil Appeal No. 10 of 1958 and also cited as Appeal (civil) 751 of 1957, was filed on a certificate issued under Article 132(1) of the Constitution. The petitioners were the Burmah Shell Oil Storage and Distributing Company of India Limited together with another company, and the Standard Vacuum Oil Company; for convenience the judgment refers to them collectively as the appellant‑companies. The respondents comprised the Commercial Tax Officer, the Commissioner of Commercial Taxes and the State of West Bengal, all of whom had already been joined as respondents in the earlier proceedings before the High Court of Calcutta. The bench hearing the appeal consisted of Judges S.K. Das, M. Hidayatullah, K.C. Das Gupta, J.C. Shah and N.R. Ayyangar, and the judgment was delivered by Justice Hidayatullah.

The appellant‑companies sought to overturn a common judgment of the Calcutta High Court dated 7 December 1956. That High Court had dismissed writs of mandamus, prohibition and certiorari that had been moved under Article 226 of the Constitution by a single judge, D.N. Sinha. The dispute arose from the assessment of sales tax on the sale of motor spirit intended for aviation purposes – hereinafter called aviation spirit – which the appellant‑companies supplied to aircraft that were bound for foreign countries. The tax assessment was made under the Bengal Motor Spirit Taxation Act, 1941, as amended by section 2(a)(i) of the Bengal Motor Spirit Sales Taxation (Second Amendment) Act, 1954.

The appellant‑companies are engaged in the trade of petroleum and related products and maintain their principal place of business in Calcutta. They operate supply depots at Dum Dum Airport from which they sell aviation spirit and deliver it to aircraft belonging to various operators. The sales tax authorities in the State of Bombay, relying on the provisions of Article 286 of the Constitution, regarded such sales as falling outside the scope of the taxing statutes applicable in Bombay. In contrast, the sales tax authorities of West Bengal reached the opposite conclusion, proceeding through the prescribed procedural steps, levying tax, and issuing a demand notice. The appellant‑companies paid the demanded amount, but they did so under protest.

Following the payment, the appellant‑companies filed petitions before the Calcutta High Court under Article 226, challenging the legality of the tax imposition. Those petitions were rejected, prompting the appellant‑companies to obtain a certificate under Article 132(1) and to bring the present appeals before this Court. The principal contentions advanced, both before the High Court and now before the Supreme Court, were that the sales in question constituted exports of aviation spirit from Indian territory, that the transactions occurred outside the territorial limits of West Bengal, and that because the aviation spirit was delivered for consumption outside West Bengal, the tax could not be validly imposed under the relevant constitutional provision.

In this case, the Court noted that the sales of aviation spirit made in West Bengal could not be covered by the Explanation to sub‑clause (a) of the first clause of Article 286, and that, unless such sales could be characterised as “Explanation sales”, the authority to levy tax did not exist. The Court observed that the respondents had not, even in their reply before the High Court, alleged that the aviation spirit was delivered for consumption within West Bengal. The matter before the High Court had been limited to supplies of aviation spirit to aircraft that either departed directly from Dum Dum Airport to foreign destinations, or ultimately reached foreign countries after making intermediate landings on Indian territory. The present Court likewise confined the enquiry to those circumstances and declined to express any view on sales of aviation spirit to aircraft that flew from one location in West Bengal to another location within the same State, or to any place in another State inside India. The factual background, the Court added, was not contested. Both parties had conceded the procedure followed for supplying aviation spirit to aircraft. In brief, the procedure was that, prior to the arrival of an aircraft, a representative of the appellant‑companies applied to the Airport Customs Officer for the appointment of an officer to supervise the refuelling. After the aircraft landed, the captain or the ground engineer instructed the quantity of aviation spirit required, and, upon receiving permission from the Customs Authorities, the prescribed quantity was delivered in the presence of the Customs Officer appointed for supervision. Details of the delivery were recorded in a delivery receipt signed by the representative of the appellant‑companies and the Customs Officer. Duty‑drawback shipping bills were also prepared to show the quantity of aviation spirit supplied; these bills were countersigned by the same parties and by a representative of the aircraft. Subsequently, claims for refund of customs duty were filed and the refunds were granted. In the petition filed in the High Court, it was asserted that the aviation spirit was required for consumption during flight and/or outside the territory of India, and therefore it was delivered for purposes of consumption outside West Bengal and, in some instances, outside the territorial limits of India. It was further pleaded that the spirit was sold as part of an export transaction and that a drawback of customs duty had been obtained. The respondents, in their reply, contended that the refund of customs duty was irrelevant for the purpose of assessment. Moreover, the Commercial Tax Officer’s affidavit stated: “I further state that a foreign‑bound aircraft on leaving Dum Dum Airport consumes a portion of the aviation spirit in by at the Airport within the territory of West Bengal before it moves out of the said territory to the territory of India. I do not admit that the entire quantity is used the territorial limits of India as alleged …”

The Commercial Tax Officer asserted that the entire transaction involving the aviation spirit occurred within the territorial limits of West Bengal. He stated that the sale was not made outside the State, that the purchaser paid the price while present in West Bengal, and that the sale was completed by delivering the aviation spirit at the Dum Dum Airport, which lies within West Bengal. The officer explained that this factual position was set out because the respondents had not specifically claimed that the aviation spirit was sold for consumption outside West Bengal, even though the appellant‑companies had denied any intra‑state consumption. The respondents, however, contended that a portion of the aviation spirit must inevitably be consumed inside the State, and they supported this contention by referring to an affidavit filed in reply to the petition, a document that the Court had previously quoted. The Court observed that the matter did not warrant a contentious dispute over pleadings, given that the entire mechanism of supplying the aviation spirit and the purpose for which it was used were not in dispute. The essential issue, the Court noted, was a question of principle rather than a technicality, and the answer depended upon the broad factual context. Either the complete sale fell within the State’s authority to levy tax, or it did not, and the fact that the aviation spirit might be consumed during take‑off or while the aircraft was still over West Bengal before departing the State’s territory would not alter the applicable legal principles. Although the parties had engaged in a debate on this point, the Court chose not to examine the arguments in detail, emphasizing that the question should be resolved on its substantive merits rather than on abstract legal theorising.

The Court explained that liability to sales tax, if any, arises at the moment the aviation spirit is sold, and that a claim of immunity can be sustained only if, pursuant to Article 286(1)(a) together with its Explanation, the sale can be characterised as having taken place outside the State, or if, under Article 286(1)(b), the sale can be regarded as occurring “in the course of export of the goods out of the territory of India.” Before addressing those two alternatives, the Court turned to the relevant statutory framework. It noted that the Indian Aircraft Act, 1934 (22 of 1934) governs the manufacture, possession, use, operation, sale, import and export of aircraft. Section 16 of that Act empowers the Central Government, by way of a notification published in the Official Gazette, to declare that any or all provisions of the Sea Customs Act shall, with any modifications or adaptations specified in the notification, be applicable to the import and export of goods by air. Additionally, Sections 2(3) and 2(4) of the same Act define “import” as “bringing into India” and “export” as “taking out of India.” A notification issued under the Indian Aircraft Act, together with the rules framed thereunder and the Indian Aircraft Rules, 1920, designated the Civil Aerodrome at Dum Dum as a Customs Aerodrome, thereby subjecting that aerodrome to the provisions of the Sea Customs Act, applied mutatis mutandis.

Rule 63 of Part IX of the Indian Aircraft Rules, 1920 made the provisions of the Sea Customs Act apply mutatis mutandis to aircraft operations. Consequently, Dum Dum Airport was declared a Customs Aerodrome, and every aircraft arriving in India from a foreign country or departing from India for a foreign country was required to observe the ordinary customs procedures that apply to sea‑borne cargo. Section 42 of the Sea Customs Act, which authorises drawback on re‑export and was made applicable mutatis mutandis, states that when goods which are easily identifiable have been imported by sea into any customs port, duties having been paid on their import, and those goods are subsequently re‑exported by sea from the same customs port to a foreign port, or are supplied as provisions or stores for a ship sailing to a foreign port, seven‑eighths of the duties, unless otherwise provided, shall be refunded as drawback. Under Section 51, no drawback may be granted unless the claim for such drawback is made and proved at the time of re‑export, and Section 52 requires the claimant to submit a declaration. The procedural steps for making such a claim were explained in an earlier part of this judgment and are relevant to the matters presently before the Court.

The taxation statutes under consideration began with the Bengal Motor Spirit Taxation Act, 1941, which originally did not contemplate a tax on the sale of aviation spirit. That Act defined “motor spirit” as “any liquid or admixture of liquids which is ordinarily used directly or indirectly as fuel for any form of motor vehicle or stationary internal combustion engine, and which has a flashing point below 76 degrees Fahrenheit”. Sub‑section (4) of Section 3, the charging provision, expressly exempted any motor spirit sold for aviation purposes from tax. The Second Amendment Act of 1954 removed sub‑section (4) and re‑enacted the proviso to the first sub‑section, adding a clause that imposed a tax of three annas per gallon on all retail sales of motor spirit for aviation, effective from the commencement date of that amendment. The Bengal Motor Spirit Sales Taxation (Amendment) Act, 1955 further amended the original Act by inserting an explanation to the definition of “motor spirit”, stating that for the avoidance of doubt, the term “vehicle” includes any means of carriage, conveyance or transport by land, air or water. The Bengal Motor Spirit Sales Taxation (Amendment) Act, 1957 again amended the statute, this time removing from the definition of “motor spirit” the words “and which has a flashing point below 76 degrees Fahrenheit”. As a result of these successive amendments, retail sales of aviation spirit became subject to sales tax, and “retail sale” was consistently defined at all material times as a sale made by a retail dealer for the purchaser’s consumption.

The Court noted that the words “point below 76 degrees Fahrenheit” were removed from the definition of “motor spirit” by the 1957 amendment, and that this removal caused all retail sales of aviation spirit to become subject to sales tax, because the term “retail sale” was at all relevant times defined as a sale made by a retail dealer for the purchaser’s consumption.

After the Constitution came into force, the Adaptation of Laws Order, 1950 added section 22, in accordance with Article 286, by inserting paragraph 3 of the Eleventh Schedule. Section 22(1) stated that nothing in the Act would be construed to impose or authorise a tax on the sale or purchase of motor spirit when the sale or purchase occurs outside the State of West Bengal, or when it takes place in the course of importing such motor spirit into, or exporting it out of, the territory of India; the provision (c) was omitted. Section 22(2) provided that the Explanation to clause (1) of Article 286 of the Constitution would apply for interpreting sub‑clause (a) of sub‑section (1).

The Court explained that clauses (a) and (b) of the first sub‑section merely restated the constitutional prohibition contained in Article 286, adapting it to motor spirit without altering its substance, and that the Explanation to sub‑clause (a) was applied exactly as worded, without any modification.

The Explanation to sub‑clause (a) of Article 286, which was pivotal in the present dispute, reads: “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.”

The High Court of Calcutta examined the arguments raised and rejected them. It first refused to draw any inference from the fact that customs duties on aviation spirit delivered to aircraft had been refunded as drawbacks, observing that it was not required to decide whether the appellant companies were entitled to claim such drawbacks.

The High Court then found that the sale was physically situated within West Bengal because, at the time of the transaction, both the seller and the purchaser were located in that State, even though the actual delivery of the aviation spirit occurred beyond the customs barrier.

Subsequently, the Court considered the legal position under Article 286 from three perspectives. Firstly, it held that the transaction was not an inter‑State one because both parties were in West Bengal and the aviation spirit was not delivered outside the State; consequently, clause (2) of Article 286 did not apply, and the Court relied on the precedent set in The Bengal Immunity Co., Ltd. v. State of Bihar and Others.

Secondly, the Court examined the first sub‑clause and concluded that, unless the fictional rule created by the Explanation were applicable, the sale must be treated as occurring within the State under the ordinary law of sale of goods. Since the contract and the delivery were both completed within West Bengal, the Court reasoned that the fictional rule could not arise, even though the aircraft might later consume the spirit while flying over another State.

Finally, the High Court concluded that both the Explanation and Article 286(1)(a) that it sought to explain were inapplicable to the present case.

The High Court concluded that the transaction under dispute could not be characterised as an inter‑State trade because both the seller and the buyer were situated in the State of West Bengal at the time the contract was concluded and because the aviation spirit was not physically delivered outside that State. Accordingly, the Court held that clause (2) of Article 286 did not apply to the present case. In arriving at this conclusion, the Court relied upon the earlier decision of this Court in The Bengal Immunity Co., Ltd. v. State of Bihar and Others (1955 (2) SCR 603; 1955 (6) STC 446).The Court then examined the matter in the light of the first sub‑clause of Article 286. It observed that, unless the legal fiction created by the Explanation to that sub‑clause was applicable, the sale must be treated as a sale made within the State under the ordinary law governing contracts for the sale of goods. The Court reasoned that the contract and the delivery of the aviation spirit were both completed inside West Bengal, and therefore the fictitious “outside State” scenario could not be said to arise, even though the aircraft that would later use the spirit might fly over a foreign State. For this reason, the Court held that both the Explanation and Article 286(1)(a), which the Explanation purports to clarify, were inapplicable to the present transaction.Next, the Court turned to the second sub‑clause, Article 286(1)(b). Relying on the authority of the decision in State of Travancore‑Cochin and Others v. Shanmugha Vilas Cashew‑nut Factory and Others (1953 (4) STC 205; 1953 AIR (SC) 333), the Court explained that the phrase “in the course of export out of the territory of India” refers only to sales that, by their very occurrence, cause the goods to be exported from Indian territory, and not to sales that are simply made for a purpose that later results in export. The Court noted that there was no foreign purchaser in this case to whom the aviation spirit could be said to have been exported; the spirit was actually consumed while the aircraft was en route and never reached any foreign land. Moreover, the Court observed that no bills of lading or other shipping documents were ever drawn up, and therefore no export, nor any sale “in the course of export,” had taken place.The appellant companies asserted that their sales fell within the exemption granted by both sub‑clauses (a) and (b) of the first clause of Article 286. To support the claim under the first sub‑clause, they relied upon various decisions of this Court and argued that, unless the sale could be said to fall within the Explanation, it must be treated as a sale outside the State of West Bengal and therefore be exempt from State tax. Regarding the second sub‑clause, they contended that an export had occurred because the aviation spirit was taken abroad, and that any sale which results in such taking should also be exempt. These contentions had been presented before the High Court, but the High Court had rejected both arguments. The Court noted that the two lines of argument are distinct and have little in common, and therefore each must be examined separately. Finally, the Court reiterated that Article 286 imposes limitations on the power of States to levy taxes on sales and purchases of goods, thereby restricting the scope of State taxation in this context.

The Court explained that the matters before it concerned only the first clause of Article 286 as it existed prior to its amendment. That clause is divided into two sub‑clauses. The first sub‑clause bars a State from imposing any tax on a sale or purchase of goods when the sale or purchase occurs outside the State. An Explanation follows this sub‑clause, and the Court had previously reproduced that Explanation. The Explanation has been the source of extensive debate in earlier decisions, producing a number of apparently conflicting interpretations. The controversy intensified when the interaction between the two sub‑clauses of Article 286 was examined. The Court now accepts that each sub‑clause creates a separate, independent prohibition and must be dealt with on its own terms. Consequently, the Court confined its analysis to the first sub‑clause and did not need to consider any provision beyond it for the present case.

The learned Attorney‑General appearing for the appellant‑companies presented numerous extracts from earlier judgments and argued that, unless a transaction falls within the scope of the Explanation, it must be treated as a sale that occurs outside the State of West Bengal and therefore is exempt from tax. He asserted that a sale becomes an “Explanation sale” only when aviation spirit is delivered for consumption within West Bengal. In contrast, the Advocate‑General of West Bengal maintained that the Explanation was not applicable to the facts of this dispute and that the cited precedents did not govern the present situation. The Court noted that the opening words of the first sub‑clause plainly state that no State law may impose or authorize a tax on a sale or purchase of goods when such sale or purchase takes place outside the State. The Court then considered the question of where a sale actually takes place. It observed that a sale involves several constituent elements, any of which may occur in different States. Under the law of sale of goods, ownership passes when certain events occur, and at that moment the sale is deemed complete. A contract may be wholly situated in one State if the parties, the offer, the acceptance, the goods, the passage of title and the delivery all occur within that State. However, the Court recognized that the elements of a transaction can be distributed across two or more States, and each element may therefore be located in a different jurisdiction.

In this case, the Court observed that the various elements that constitute a sale could be distributed across two or more States, with some elements occurring in one State and other elements occurring in another State or in several other States. Before the Constitution was adopted, it was possible for a single sale transaction to be subjected to tax by more than one State. The provincial statutes that existed at that time showed that any State that had a connection with the sale because one or more of those elements occurred within its territory considered that connection to be a sufficient nexus for its taxing authority, and therefore each such State claimed the power to levy tax on the sale even though the legal transfer of ownership might have taken place in a different State. The Constituent Assembly intended to achieve certain objectives in the field of taxation, especially with regard to sales tax. Article 286 of the Constitution was designed, among other purposes, to put an end to such multiple taxation. The first sub‑clause of that article stated plainly that a State could not impose tax on a sale that took place outside the State. By the same token, the provision implied that a State could levy tax on a sale of goods that took place within its territory. The term “sale” was interpreted to mean a transaction that was completed by the passage of property in the goods from seller to buyer. Until such passage of property occurred, the contract of sale remained executory and the buyer possessed only a chose in action. Ownership of the goods could pass either because the conditions stipulated in the contract had been fulfilled, or by operation of the law governing the sale of goods. Beginning with the principle that the constitutional levy applied only to a sale completed by the transfer of property, the Court then examined the point in time and the location at which that transfer occurred. Consequently, the taxable event could not be located at any earlier stage of the transaction when ownership had not yet passed. The decisive taxable event was identified as the moment when property in the goods passed as a result of the contract of sale. Although the contracting parties were free to agree on the moment when that passage would occur, the place where it occurred could be uncertain and sometimes difficult to determine. Where the parties had not specified the time of passage, the law relating to the sale of goods supplied the rule. Even under that law, the place of passage could remain ambiguous. Physical delivery of the goods did not resolve the difficulty, because delivery might occur before or after the legal transfer of ownership. Hence delivery was not a reliable indicator of the completion of the sale, since a sale could be completed either before delivery or after delivery. The Constitution, however, based its analysis on the existence of a completed sale signified by the transfer of property, rather than on the existence of an executory contract. Because the essential element was the passage of property in the goods, the Court recognized that there was always a likelihood that different States might assert jurisdiction over the same transaction, creating potential disputes about the proper place of taxation.

In situations where more than one State claims the right to tax a single transaction, each State may base its claim on a different aspect of the sale. One State could argue that the goods in which ownership passed were situated within its territory, and therefore the transfer of ownership occurred there. Another State might contend that the conditions precedent to the transfer of ownership were satisfied in its territory, and consequently the sale was completed by the passing of ownership in that State. Yet another State could maintain that ownership passed in its territory because one or more events connected with the transfer of ownership took place within its borders. To prevent this confusing multiplicity of claims and to avoid the problem of multiple taxation, the Constitution added an Explanation. The Explanation serves two functions: it identifies the State in which the tax may be levied, and it also identifies the State or States where the tax may not be levied. It accomplishes these functions by excluding any consideration of the location where ownership of the goods is deemed to have passed under the law of sale of goods. This exclusion is achieved through the non obstante clause contained in the Explanation. Accordingly, any State that seeks to tax a sale of goods on the ground that the sale was completed by the passing of ownership in that State is barred from doing so if, as a direct result of that sale, the goods were delivered for consumption in another State. The Explanation therefore creates a legal fiction that the sale must be deemed to have taken place in the State of delivery, not in the State where the sale was completed by reason of the passing of ownership. In effect, the Explanation discards the traditional test of ownership passing and adopts instead the test of delivery “as a direct result of such sale for the purpose of consumption in that State.” Where more than one State is involved, a State that wishes to tax the sale on the basis of any event occurring before the passing of ownership cannot claim that the sale occurred in its territory unless it is also the State of delivery, because the sale becomes complete only when ownership passes, and tax liability does not arise before that moment. Once the sale is complete, the State of delivery acquires the right to tax the sale by virtue of the fiction introduced by the Explanation. The Explanation must be read in accordance with its own language and is intended to clarify clause (1)(a) of the Article, not the reverse. Interpreting the Explanation by reference to the Article would reverse their respective roles and is therefore erroneous. By discarding the test of ownership passing and adopting the delivery test for consumption, the Explanation resolves any difficulty when delivery occurs in the same State where ownership passed, making the whole transaction wholly within that State. The transaction is considered to be outside the State only when the passing of ownership takes place in a different State from the one where the goods are actually delivered as a direct result of the sale for consumption.

In the situation where the passing of property occurs in a particular State, that State may nevertheless differ from the State in which the goods are actually delivered as a direct consequence of the sale for the purpose of consumption in that State. The Constitution, in certain instances, has consequently shifted and limited the location of the taxable event to the State where delivery of the goods takes place; however, it is important to recognise that such delivery can occur either before or after the passing of property. From this it follows that no single element of a contract of sale, taken alone, can determine the State entitled to levy tax when more than one State is involved, except for the test of actual delivery of the goods in a State as a direct result of the sale for consumption in that State. That State alone, and no other, possesses the authority to tax the transaction. The Explanation to Article 286(1) applies only when more than one State is implicated; it functions merely as a tool to identify which State is competent to tax and which is not, and it does not itself define an “outside sale.” In other words, the Explanation serves to decide which of the States connected with the sale may impose tax, without providing a definition of the term “outside sale.” The approach adopted by this Court to the first sub‑clause of Article 286(1) aligns substantially with the approach expressed in earlier decisions of this Court. In The State of Bombay and Another v. The United Motors (India) Ltd. and Others (1953 SCR 1069; 1953 (4) STC 133), the Court observed that the Explanation offers an easy test for determining an “outside sale” by first defining an “inside sale.” The Court further explained that if the goods are actually delivered in the taxing State as a direct result of a sale or purchase for consumption therein, then such sale or purchase shall be deemed to have occurred in that State and outside all other States. The reasons for adopting this test were subsequently considered, and their impact on the second clause prompted a re‑examination of the sub‑clause in The Bengal Immunity Company Limited v. The State of Bihar and Others (1955 (2) SCR 603; 1955 (6) STC 446). Although the majority in that case discussed the various grounds presented before the Court, it deliberately refrained from giving any final opinion on the matter, while affirming that the prohibitions contained in the two clauses of Article 286 are independent and must be enforced separately. No divergent view on the meaning of the Explanation was expressed in that decision. Likewise, in Messrs Ramnarain Sons Ltd. v. Assistant Commissioner of Sales Tax and Others (1955 (2) SCR 483, 492; 1955 (6) STC 627), the Court observed that, insofar as the Explanation is concerned, the decisive enquiry is whether the goods are actually delivered in the taxing State as a direct result of the sale for consumption, thereby confirming the same interpretative principle applied in the earlier authorities.

In this matter, the Court explained that the Explanation to Article 286(1)(a) created a legal fiction that fixed the location of a sale for transactions that fell within that category. By this fiction, once a transaction was deemed to occur inside a particular State, it was automatically treated as occurring outside every other State. Consequently, the only question relevant to Article 286(1)(a) was whether a transaction took place outside the State in question; if the Explanation led to a conclusion that the transaction was outside the State, that State could not levy tax on it. The Court then turned to the issue of whether the present disputes could be governed by the Explanation at all. The Attorney‑General argued that the State could tax the transactions only if they were “Explanation sales,” meaning that the goods were delivered as a direct result of the sale for consumption in West Bengal. The Court held, however, that the Explanation could apply only where more than one State participated in the same transaction. Where no other State could be said to receive the goods for consumption, apart from the State in which title to the goods passed, the Explanation was unnecessary. In such circumstances, the power to tax based on the transfer of title could be removed only if another State existed where the goods were delivered as a direct result of the sale for consumption. The Court observed that in the cases before it there was no rival State. When a purchaser bought goods in West Bengal for his own consumption, the test of an “inside sale” was satisfied because the property in the goods passed in the same State and all contractual elements occurred there. Where the property passed to the ultimate consumer, the conditions of the Explanation were likewise fulfilled. Therefore, to bar West Bengal’s taxation power, the appellant companies would have to identify another State where the goods could be said to have been delivered as a direct result of the sale for consumption. Because they failed to do so, they could not rely on the Explanation, and, as the Court put it, the transactions could not be said to fall within that category.

The Court agreed with the argument of the Advocate‑General of West Bengal, which had been accepted by the High Court, that the prohibition contained in Article 286(1)(a) together with its Explanation was not applicable to the present case. The appellant‑companies then turned to Article 286(1)(b), which provides that no State law shall impose or authorise the imposition of a tax on the sale or purchase of goods when such sale or purchase takes place “in the course of … the export of goods out of the territory of India.” The companies contended that the sales they were engaged in should be treated as occurring under circumstances that fall within the exemption in this sub‑clause. To support this contention they relied on the factual backdrop that aviation spirit was delivered beyond the customs barrier, that it was removed from the territories of India, and that the sale itself gave rise to the export. They further invoked the definition of “export” found in other statutes, arguing that the term merely means “taking out of the country.” The Court noted that this clause of the article had been interpreted on earlier occasions, and that the meaning of the phrase “in the course of” had become well settled in precedent.

In State of Mysore v. Mysore Spinning and Manufacturing Co. Ltd. (1958 (9) STC 188; 1958 AIR (SC) 1002) the Court observed that the issue could no longer be described as vague. The Court further observed that there was less disagreement on the interpretation of Article 286(1)(b) than on the meaning of its Explanation, and that it sufficed to refer to the leading decisions of this Court. The earliest authority on the subject was State of Travancore‑Cochin and Others v. The Bombay Co. Ltd. (1952 SCR 1112; 1952 (3) STC 434), where four possible meanings of “in the course of” were examined. The Court did not feel it necessary to recapitulate all four meanings, but it pointed out that the view that the clause extended to the entire chain of transactions that necessarily precede the export of goods was considered too expansive. The Court explained that a sale by export involves a series of integrated activities that begin with the agreement of sale with a foreign buyer and conclude with the delivery of the goods to a common carrier for transport out of the country by land or sea. Such a sale cannot be separated from the export, because the export is essential for the sale to be completed; together they form a single transaction. Accordingly, whichever of the two activities—sale or export—occurs first may be regarded as taking place in the course of the other.

The same principle was reiterated in State of Travancore‑Cochin and Others v. Shanmugha Vilas Cashew‑nut Factory and Others (1954 SCR 53; 1953 (4) STC 205). In that decision the Court further clarified the scope of the expression “export out of” and confirmed that the phrase referred to export out of the country, not merely to the article or commodity being exported. The Court emphasized that the word “course” etymologically denotes movement from one point to another, and that the expression “in the course of” implies a period during which the movement is in progress and also postulates a connected relation between the sale and the export. This inter‑connection of the taxed sale with the export was highlighted again in clear terms, noting that the two integrated activities—sale and export—form parts of a single transaction and cannot be dissociated without defeating the purpose of the exemption under Article 286(1)(b).

In this case, the Court observed that the expression “export out of” was not intended to denote the particular article or commodity that was being exported. The reference to “the goods” together with the mention of “the territory of India” made it clear that the phrase meant the act of moving the goods out of the country. The Court further explained that the word “course” derives from an etymology that signifies movement from one point to another; consequently, the phrase “in the course of” implies not only a period during which the movement is occurring but also a relationship of connection between the events. This connection between the sale that is sought to be taxed and the export itself was emphasized in strong terms. The Court reiterated that the term “integrated activities” had been used in an earlier decision to indicate that a sale which gives rise to an export cannot be separated from the export, because the export cannot be effected without the sale, and together the sale and the export constitute a single transaction. In that sense, the two activities – the sale and the export – were described as integrated. By contrast, a purchase made for the purpose of export, or the production or manufacture of goods intended for export, is merely a preparatory act. Such preparatory acts cannot be regarded as occurring “in the course of the export of the goods out of the territory of India,” any more than the other two activities can be treated as part of the export itself.

From the reasoning expressed, the Court concluded that not every sale or purchase that takes place before an export automatically falls within the “course of export.” Only those transactions that are inseparably linked with the export, forming an integral part of it, qualify. A sale or purchase that is unrelated to the ultimate export as an essential component is excluded from the exemption. Therefore, the Court held that sales or purchases undertaken merely for the purpose of export are not protected unless those sales or purchases themselves give rise to the export and form an integral part of it. The Court noted that these principles had previously been accepted and applied in several decisions, including State of Madras v. Gurviah Naidu and Co. Ltd., Kailash Nath v. State of U.P., State of Mysore v. Mysore Spinning and Manufacturing Co. Ltd., and Gordhandas Lalji v. B. Banerjee and Others. Those earlier cases did not need to explain the meaning of the word “export” because each involved a foreign buyer to whom the goods were ultimately sent. The factual situation before this Court differed from those precedents. Here, the buyer was not exporting the goods to a foreign country; instead, the buyer purchased the goods for his own use during the aircraft’s journey to foreign destinations. The Court considered this distinction to be crucial to the issue at hand.

The Court observed that the reliance of the appellant‑companies on a broad interpretation of the term “export” actually weakened their position. The appellant‑companies had argued that “export” should be understood in a wide sense, as it is used in other statutes where the word essentially means “taking out of the country.” The Court disagreed with that approach, holding that such a meaning could not be applied to the word “export” in the provision under consideration. It noted that the term “export” could be understood in more than one way. In one sense, “export” could signify the act of sending or taking goods out of the country. In another sense, it could denote the act of sending goods from one country to another. The Court explained that the latter sense often involves a commercial transaction, but it is not limited to commercial dealings. When goods are sent to another country, that country is said to import them, and in that context the words “export” and “import” are complementary.

To illustrate the distinction, the Court provided two contrasting examples. First, it said that goods ordered by health authorities to be destroyed by dumping them in the sea could not be described as exported, even though they were taken out of India’s territorial waters and discarded in the open sea. Second, it explained that goods placed on a steamer bound for a foreign country, but later jettisoned, could still be considered “exported” despite never reaching the intended destination. In the first scenario no export occurs, while in the second an export does occur, although in both cases the goods end up at the bottom of the sea. The Court pointed out that the former situation would not qualify for the exemption even if a sale were involved, whereas any sale occurring in the course of the second type of taking out would qualify. Both examples involve goods leaving the country, but the crucial difference is that in the first case the goods have no foreign destination, whereas in the second case they do have a foreign destination.

From these illustrations, the Court derived a principle: while every export involves taking goods out of the country, not every taking out of goods from the country can be called an export. The decisive test, the Court stated, is whether the goods have a foreign destination where they can be regarded as imports. The presence or absence of valuable consideration from the receiver at the destination is irrelevant. If goods are exported and a sale or purchase occurs in the course of that export, and that transaction gives rise to the export to a foreign destination, the exemption under the law is triggered. The Court further noted that purchases made by philanthropists of goods exported to foreign countries to relieve distress may also enjoy the exemption, even though the shipment is charitable rather than commercial. The essential fact, according to the Court, is the shipment of goods to a foreign destination where they will be received as imports, and the concepts of export and import therefore function as paired notions.

Applying these various tests to the present case, the Court concluded that aviation spirit loaded onto an aircraft for consumption, although taken out of the country, does not constitute an export because it lacks a foreign destination where it would be imported.

In the case, the Court observed that aviation spirit loaded onto an aircraft for use in the aircraft could not be regarded as exported because it lacked a foreign destination where it could be deemed to be imported. Since the export test was not satisfied, the Court held that the sale could not be characterized as occurring in the course of export. Moreover, the Court noted that the sales could scarcely be said to “occasion” export; the seller merely supplied aviation spirit for the aircraft’s operation, and the transaction was not integrally linked to the removal of the spirit from the country. The sale was therefore not intended for export, as previously explained, and it did not fall within the concept of export that requires an even deeper connection. Consequently, the Court concluded that these sales did not fall within Article 286(1)(b) and must be treated as sales made within the State of West Bengal. The customs barrier, the Court clarified, functioned only as a barrier for customs purposes; a duty drawback might be permissible only when goods that had been imported are subsequently taken out of the country. Such customs duty drawbacks were unrelated to the sale of aviation spirit, which occurred in West Bengal. The Court further explained that the customs barrier did not establish a terminal limit to the territory of West Bengal for sales‑tax purposes. Even though the sale occurred beyond the customs barrier, it remained a sale within West Bengal because both buyer and seller were situated in that State and the goods themselves were present there. All the essential elements of the sale—delivery, payment of price, and acceptance—took place within the State, rendering the transaction wholly within the jurisdiction of the taxing State. No external State was involved where the goods could be deemed delivered for consumption as a direct result of the sale. Accordingly, Article 286(1)(a) together with its Explanation were entirely inapplicable, and the sale could not, even by legal fiction, be said to be outside West Bengal. While aviation spirit was indeed removed from the State and from India, it could not be said to have been exported or delivered for consumption in another State, and the purported export was not caused by the sale. On the authorities cited, the sale was not in the course of “export” to attract Article 286(1)(b). The Court therefore affirmed that the High Court’s decision was correct, dismissed the appeals with costs, and ordered the payment of one hearing fee.