Indian Copper Corporation Ltd vs The State Of Bihar And Others

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 210 of 1959

Decision Date: 7 November, 1960

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

In the matter of Indian Copper Corporation Ltd. versus the State of Bihar and others, the decision was rendered on 7 November 1960 by a five‑judge bench of the Supreme Court of India. The bench was composed of Justice N. Rajagopala Ayyangar, Justice S. K. Das, Justice M. Hidayatullah, Justice K. C. Das Gupta and Justice J. C. Shah. The author of the reported judgment was N. Rajagopala Ayyangar. The petition was filed by Indian Copper Corporation Ltd. and the respondents were the State of Bihar together with several other parties. The judgment date is recorded as 07/11/1960 and the bench is identified again as Ayyangar, N. Rajagopala. The citation for the case appears as 1961 AIR 347 and 1961 S.C.R. (2) 276, with additional citator references including 1964 S.C.R. 569, 1965 S.C.R. 161, 1966 R.F. 376, 1970 A.P.L. 306, among others. The statutory issue concerned the interpretation of the term “Explanation Sales” under Article 286(1)(a) of the Constitution of India in relation to the Bihar Sales Tax Act, 1947, specifically sections 2(g) and 33 of that Act.

The factual background set out that the appellant, Indian Copper Corporation Ltd., had effected a series of sales during the period from 26 January 1950 to 31 March 1950. In each of those transactions, the title to the goods passed within the State of Bihar, but the actual delivery of the goods was made to locations outside Bihar for the purpose of consumption outside Bihar. The appellant distinguished two categories of such sales: in the first category, the goods were delivered to a state that was the first destination and were intended to be consumed in that destination; in the second category, the goods were delivered outside Bihar but were not intended for consumption in the state of first delivery. The appellant argued that both categories fell within the meaning of “outside sales” as defined by the Explanation to Article 286(1)(a) and therefore should be exempt from Bihar’s sales tax. The Court observed that the sales in which the goods were delivered to a first‑destination state for consumption therein qualified as “outside the State of Bihar” within the Explanation and consequently the State of Bihar could not levy tax on them. Conversely, the sales where the goods, although delivered outside Bihar, were not destined for consumption in the state of first delivery did not meet the definition of “Explanation Sales” and were not “outside” sales; accordingly, the Bihar Sales Tax Act retained the power to tax those transactions. The Court further explained that where the property in the goods passed within Bihar as a direct result of the sale, the transaction could not be treated as an “outside” sale for the purpose of Article 286(1)(a) unless it fell within the constitutional Explanation. For the first category of sales, the appellant was entitled to the exemption and it was not necessary for it to prove actual consumption in the first‑destination state. The Court relied on earlier decisions such as State of Bombay v. United Motors (India) Ltd., [1953] S.C.R. 1060 and Bengal Immunity Company Ltd. v. The State of Bihar, [1955] 2 S.C.R. 603, as well as on the unreported cases Burmah Shell Oil Storage & Distributing Co. of India Ltd. v. The Commercial Tax Officer, C. A. No. 751 of 57 and C. A. No. 10 of 1958. Finally, Justices S. K. Das and J. C. Shah noted that section 33, introduced into the Bihar Sales Tax Act by the Adaptation of Laws Order, 1951, imposed the same constitutional restrictions on the State’s taxing power over pre‑Constitution statutes as Article 286 does for post‑Constitution statutes, thereby taking away only the power to tax “Explanation Sales” while preserving the power to tax “non‑Explanation Sales.”

Section 33 of the Bihar Sales Tax Act, which was introduced by the Adaptation of Laws Order, 1951, removed the State’s authority to tax sales that fell within the “Explanation” but retained the power to tax sales that did not fall within that Explanation. Consequently, a sale in which the goods were delivered outside Bihar, yet the delivery was not a direct result of the sale and the goods were not intended for consumption in the state of first delivery, was excluded from the Explanation. In such a case, the State’s right to impose tax on the sale, if the tax liability arose under any other provision of the Act, was not limited by Section 33(1)(a)(i). The judgment concerned Civil Appeal No. 210 of 1959, which had been entertained by special leave from the Patna High Court’s order dated 16 January 1958 in Judicial Case No. 156 of 1957. Counsel for the appellant was B. C. Ghose and P. K. Chatterjee, while counsel for Respondents 1 to 5 was S. P. Varma and counsel for Respondents 6 to 20 was R. C. Dutta. The appeal was decided on 7 November 1960 and the opinion of the Bench comprising Justices Hidayatullah, Das Gupta and Ayyangar was delivered by Justice Ayyangar, whereas the opinion of Justices S. K. Das and Shah was delivered by Justice Shah. The sole issue before the Court was whether sales in which goods were delivered outside the State of Bihar for the purpose of consumption, but not within the state of first delivery or first destination, were exempt from Bihar’s sales tax under Article 286(1)(a) of the Constitution as it stood before its recent amendment. The respondent company, India Copper Corporation Ltd., hereinafter referred to as the assessee‑company, was engaged in the business of copper and other mineral products and its General Manager’s office was located in Singhbhum, Bihar. The disputed assessment covered the period from 26 January 1950 to 31 March 1950. The company’s usual practice was to make provisional deposits toward its sales‑tax liability and to adjust the amount after the annual assessment was completed; it followed this practice for the tax year 1949‑50. For the financial year 1 April 1949 to 31 March 1950, the Superintendent of Sales‑Tax, Singhbhum, determined the company’s tax liability to be Rs 3,60,703‑4‑0 by an assessment order dated 13 November 1950, and the company paid the balance beyond its prior deposits. That financial year comprised two distinct periods: (1) the pre‑Constitution period from 1 April 1949 to 25 January 1950, and (2) the post‑Constitution period from 26 January 1950 to 31 March 1950. There was no dispute regarding the tax payable for the pre‑Constitution period. However, the assessee‑company contested that, for the post‑Constitution period, it was not liable to pay any sales tax on certain sales.

In the case before the High Court, the assessee‑company contended that for sales made to buyers in which the property in the goods passed within the State of Bihar but the actual delivery of the goods occurred outside Bihar for consumption outside the State, the sales were exempt from tax under Article 286(1)(a) of the Constitution as it then stood. The company communicated this position by sending a formal letter to the Commissioner of Commercial Taxes, Bihar, on 30 December 1952, in which it demanded a refund and attached a detailed statement showing the particulars of the goods sold, the bill numbers, the dates and the amounts, so that the claimed refund could be calculated. Following the letter, the company filed a formal petition for review of the assessment order by submitting a revised return under section 12(2) of the Bihar Sales‑tax Act together with an application for a refund. The departmental authorities rejected both the revised return and the refund application by an order dated 20 July 1953. Subsequent attempts to obtain relief through revision proceedings before the department also failed, and the company therefore filed an application under Articles 226 and 227 of the Constitution before the Patna High Court. The application sought a writ to set aside the assessment order dated 13 November 1950, to annul the orders that rejected the company’s requests for review, reassessment and refund, and to direct the departmental authorities to refund the amount that had been collected in respect of sales for which the goods were delivered outside Bihar.

The High Court judges held that the assessment order of the Superintendent of Sales‑tax, Singhbhum, dated 13 November 1950, should be set aside and that the matter should be remitted to the Superintendent for a new reassessment in accordance with law for the period after the Constitution had come into force. The Court further directed that the respondent state should refund to the assessee the portion of tax that had been paid in excess of the amount that would be determined by the new reassessment. In arriving at the applicable law, the judges distinguished between two categories of sales. The first category comprised sales that directly resulted in the goods being delivered to a State outside Bihar and consumed in that State. The judges concluded that such sales fell within the Explanation to Article 286(1)(a) of the Constitution, were “inside” the State of first delivery and therefore “outside” the State of Bihar for the purposes of the Article, and consequently were exempt from Bihar sales‑tax. The second category involved sales in which the goods, after being delivered to a first destination State, were not consumed there but were re‑exported to other States. The judges held that this second category did not fall within the Explanation to Article 286(1)(a) and therefore was not covered by the constitutional exemption. Dissatisfied with this outcome, the assessee‑company subsequently filed further proceedings, which eventually led to the appeal before this Court.

In the first instance, the appellants applied to the High Court for a Certificate of fitness under Articles 132 and 133 of the Constitution, but that request was denied. After the denial, they obtained special leave to appeal to this Court under Article 136, and the present appeal therefore reached this forum. Counsel for the appellants, identified as Mr B C Ghose, advanced three principal submissions for this Court’s consideration. The first submission argued that, when Article 286(1)(a) and its pre‑amendment Explanation were read properly, the state could not tax any sale that directly caused delivery of goods for consumption outside the State. According to this construction, it was immaterial whether the goods were intended for consumption in the first destination or for re‑export to other States. The second submission contended that even if Article 286(1)(a) exempted only those sales in which the goods were delivered for consumption in the first destination, the evidence on record showed that the assessee could still claim exemption. The counsel further submitted that the material placed before the Court demonstrated that every transaction for which exemption was claimed satisfied the condition of delivery for consumption in the first destination. The third and narrower submission argued that even assuming the Explanation required delivery for consumption in the first destination, the High Court erred by insisting that the assessee prove actual consumption of the goods in that State. The Court erred by demanding that the assessee demonstrate actual consumption of the goods in that State, rather than merely showing that the goods were delivered for the intended purpose. We shall now consider these three points in the order in which they were originally raised before this Court.

Article 286(1)(a) together with the Explanation whose construction is central to the first submission reads as follows in the present judgment. The provision states that 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 outside the State. The provision also mentions a second circumstance, designated as sub‑clause (b), the wording of which is omitted here. The accompanying Explanation provides that for sub‑clause (a), a sale or purchase shall be deemed to have taken place in the State where the goods have actually been delivered as a direct result of the transaction. The Explanation further adds that this deeming applies even though, under the general law of sale of goods, the property in the goods may have passed in another State because of the sale or purchase. The scope and purpose of this Explanation were examined by this Court in the decision of The State of Bombay v. Unitea Motors (India) Ltd. A passage from that judgment has been reproduced below to aid the present analysis of the Explanation in this case. The Court’s discussion in that earlier case highlighted the need for a clear and practical test to determine when a sale should be treated as occurring outside the State for tax purposes.

In support of his submission, counsel relied on a passage that explained the constitutional purpose behind the restrictions on State powers to tax sales or purchases that have inter‑State elements. The passage observed that the framers of the Constitution needed to devise a formula that would prevent the confusion and difficulty that had arisen when several Provincial Legislatures imposed sales‑tax on the same transaction before the Constitution came into force. To achieve this, they enacted clause (1)(a) together with its Explanation and clause (2) of Article 286. Clause (1)(a) bars the taxation of any sale or purchase that takes place outside the State, but the concept of a “localised” sale is difficult because a sale comprises several components – the agreement to sell, the transfer of ownership, the payment of price and the delivery of goods – each of which may occur at different locations. To address this difficulty, the Explanation was intended to furnish a simple, workable test for identifying an “outside” sale. By means of a legal fiction, the Explanation states that the State in which the goods are actually delivered for consumption is to be treated as the State where the sale or purchase is deemed to have taken place, even if title to the goods passed in another State. Consequently, an “outside” sale is defined by first delineating an “inside” sale, with actual delivery and consumption in the State becoming the decisive factors. The test of a sufficient territorial nexus is thereby replaced by the question: are the goods actually delivered in the taxing State, as a direct result of the sale or purchase, for the purpose of consumption there? If the answer is affirmative, the transaction is deemed to have occurred in that State and in no other State, thereby prohibiting the other States from taxing the same transaction and avoiding multiple taxation. The quoted passage also noted that this portion of the judgment remains unaffected by the dissent expressed in the later decision of The Bengal Immunity Company Ltd. v. The State of Bihar.

The argument derived from this passage was essentially that Article 286(1)(a) imposes a complete prohibition on any legislature’s power to levy a tax on sales that are outside the “taxing State.” Determining which sales are “outside” is not straightforward because it depends on the “situs” of the sale, which in most cases cannot be pinpointed with certainty. The location of a sale depends on a variety of factors that may or may not converge, such as where the agreement is made, where ownership passes, where payment is effected and where delivery occurs. The Constitution makers did not give a direct definition of an “outside” sale; instead, they chose to explain the concept of an “inside” sale, implying that any transaction not meeting the criteria of an “inside” sale must be treated as an “outside” sale. The Explanation therefore requires that delivery be for the purpose of consumption in the State, which the Court refers to as the “delivery‑cum‑consumption” State. When this condition is satisfied, that State alone acquires the authority to tax the transaction, while all other States are barred from doing so. This approach ensures that the same transaction is not subject to multiple taxations by different States.

In this case, the Court observed that the Explanation to Article 286(1)(a) treats a sale that is outside a State by describing it as an “inside” sale, so that a transaction that does not qualify as an “inside” sale must be regarded as an “outside” sale. The Court pointed out that the Explanation can be satisfied only when the goods are delivered for the purpose of consumption in the State of first destination, that is, the State where the goods are actually used. If those conditions are met, the State of “delivery‑cum‑consumption” – a convenient term the Court used for the State in which the goods are delivered as a direct result of the sale for consumption – acquires the power to tax the transaction as a fictitious “inside” sale. Consequently, every other State in India, except the State of delivery‑cum‑consumption, is barred from taxing the same sale because the sale is deemed “outside” those other States.

The learned counsel argued that the Explanation is exhaustive of what the Constitution‑makers intended to be a taxable sale. From this premise, the counsel drew two conclusions. First, in cases where goods are, as a direct result of the sale, delivered outside the State of Bihar for consumption in the State of first destination, the conditions of the Explanation are fulfilled and the sale is “outside” Bihar; therefore Bihar cannot impose tax on it. The Court noted that there is no dispute on this point and that the High Court judges, apart from a matter of detail to be addressed later, accepted the assessee’s position. Second, the counsel contended that where goods are delivered outside Bihar but not for the purpose of consumption in the State of first destination, the Explanation is not satisfied; consequently the sale is not “inside” any State under the Explanation and must be treated as “outside” every State within the meaning of Article 286(1)(a). The High Court rejected this second argument, and the Court agreed with that rejection.

The Court further explained that the passage from the United Motors judgment, which was cited earlier, dealt exclusively with sales covered by the Explanation and with no other category. When the Explanation’s requirements are satisfied, such sales are, by fiction, deemed to occur “inside” the State of delivery‑cum‑consumption and “outside” all other States. Thus, only the State that is deemed “inside” the sale is exempt from the prohibition imposed by Article 286(1)(a), while all other States remain subject to that prohibition.

In the circumstances described, the ban that is imposed by Article 286(1)(a) is intended to apply only to those sales that satisfy the conditions set out in the Explanation, and every other State would be liable to enforce that ban with respect to such sales. The Chief Justice, in the excerpt that was quoted, did not address the situation of sales that fail to meet the requirements of the Explanation. Consequently, the location, or situs, of sales that fall outside the Explanation must be determined without reference to the explanatory provision. Such sales would escape taxation only if they can be shown to have taken place “outside the State” and not otherwise. The next issue that arises is whether a sale can be said to occur “outside” a State when, as a result of the contract, ownership of the goods passes to a purchaser who is situated within that State. In other words, if the transfer of title occurs inside the State but the goods themselves are delivered to a destination outside the State, does that transaction count as being “inside” the State for the purpose of the tax provision? The answer depends on how the phrase “a sale or purchase which has taken place outside the State” found in Article 286(1) is interpreted. The expression “outside the State” can be understood in more than one way. One possible meaning would cover only those cases in which no element or ingredient of the sale occurs within the State, that is, where there is no territorial connection at all between the State imposing the tax and the transaction. Such a broad interpretation cannot have been intended, because it would permit a tax that lies beyond the legislative competence of a State under Entry 54 of the State List read with Article 246 of the Constitution. Therefore, the term “outside” must be read not as indicating a complete lack of any territorial nexus, but in a somewhat narrower sense. The difficulty then is to determine the precise content of that narrower sense, which treats a sale as effectively “outside” the State even though certain aspects of the transaction might, in the absence of the exemption, allow a State to claim jurisdiction to levy tax under its constitutional powers. As has already been observed, locating the situs of a sale is a complex task, and many factors that together constitute the completion of a sale—including the moment of delivery—each claim to be sufficient for fixing the locus of the transaction. For example, the place where the goods are situated at the time the contract is concluded, the place where the contract itself is formed, the place where title to the goods passes, and the place where physical delivery occurs may each compete for recognition as the determining factor for the situs of the sale.

In determining the locus of a sale, the Court observed that the location where the ownership of the goods passes and the location where delivery occurs both vie for recognition as the site of the transaction. Prior to the Constitution, each of these factors, along with similar considerations, was treated as providing a sufficient territorial link for the State in which any of those events took place to claim legislative authority to levy tax on the sale. Such an approach resulted in multiple States imposing tax on the same sale, which placed a heavy burden on consumers, damaged trade, and harmed the national economy. The Court noted that Article 286(1)(a) was enacted to remedy this situation by limiting the power to tax a sale to a single State. Consequently, the next issue for the Court was to identify which State could be said to have jurisdiction over the sale, that is, the State in which the sale was not “outside” its territory, or equivalently, the State in which the sale was “inside.” The Court explained that the Constitution itself offers two clues to resolve this problem. First, the opening words of Article 286(1) refer to a sale or purchase that takes place. Second, the non‑obstante clause in the Explanation mentions the general law relating to a “sale of goods under which property in the goods has, by reason of such sale or purchase, passed in another State.” Together, these provisions indicate that the decisive factor is the passing of property within a State, which determines whether the sale is considered “inside” or “outside” that State. Accordingly, the State in which property passes alone possesses the authority to impose tax on the sale. The Court further cited its recent decision in Burmah Shell Oil Storage & Distributing Co. of India Ltd. v. The Commercial Tax Officer, wherein it was held that “sale” under Article 286(1)(a) means a completed transaction by which property in the goods passes, and that prior to the passing of property the contract remains executory, giving the buyer only a chose in action. The Constitution therefore envisions tax liability based on the completion of the sale through the transfer of property, not on an executory contract. Nevertheless, even when a sale is not “outside” a State, the power of that State to tax may be negated by the Explanation’s non‑obstante clause, which shifts the situs of the sale to the delivery‑cum‑consumption State, making that State the one in which the sale transaction must be deemed to occur.

In this case the Court explained that when the conditions laid down in the Explanation are satisfied, the sale transaction is, by operation of law, treated as occurring “inside” the State where delivery is effected and consequently as occurring “outside” the State in which title to the goods passes. Accordingly, the Court held that where the title to the goods passes in a State as a direct result of a sale, the sale is not regarded as taking place outside that State for the purposes of Article 286(1)(a), unless the Explanation applies to shift the situs of the transaction. The Court further noted that even when the Explanation does not apply, the power of a State to levy a tax may still be excluded if the transaction is barred by any of the other prohibitions contained in sub‑clauses (1)(b), (2) and (3) of Article 286. On this basis, the submission of counsel for the appellants—that the State of Bihar lacks authority to impose tax on sales that are not covered by the Explanation because such sales are “outside” the State under Article 286(1)(a)—was expressly rejected.

The second argument raised by counsel for the appellant contended that, even assuming the first submission to be erroneous, every sale made by the assessee‑company fell within the ambit of the Explanation to Article 286(1)(a). The Explanation, according to counsel, covered sales that resulted directly in the delivery of goods for consumption in the State of first destination, and the Court of the High Court was said to have erred in finding that some of the sales did not satisfy this requirement. To support this contention, counsel referred to two matters. The first was an application dated 30 December 1952 filed on behalf of the assessee‑company to the Commissioner of Commercial Taxes, Bihar, Patna. In that application the company claimed a refund of tax paid on the ground that sales made between 26 January 1950 and 31 March 1950 were not assessable under Article 286 of the Constitution. The application stated that the total sales of raw copper, brass sheet and circles, dispatched under railway receipts for the buyers’ consumption, were listed along with the tax that had been paid on those sales. This claim for refund was annexed to the petition filed under Articles 226 and 227 of the Constitution and was referenced in paragraph 9 of that petition, where a copy of the letter was marked as Exhibit 1A. Paragraph 9 specifically described the refund claim as relating to “sales made to buyers outside Bihar State for consumption”. Counsel pressed that both paragraph 9 and the annexed document unequivocally asserted that the sales on which the refund was claimed involved delivery of the goods outside the State of Bihar for the purpose of consumption.

In the circumstance that neither the State of first destination nor the State of Bihar filed any counter‑affidavit to dispute the allegations, the High Court was bound to conclude that the conditions of the Explanation were fulfilled and should therefore have ordered the refund that was claimed. The Court, however, regarded this contention as without merit. An examination of the material submitted in Exhibit A and of paragraph 9 of the petition reveals that the petitioner did not differentiate between two categories of sales: those in which the goods were delivered outside the State of Bihar for the purpose of consumption in the State of first destination, and those in which the goods were delivered outside the State of Bihar for consumption in a state other than the first destination. The petition itself makes it clear, particularly in its later paragraphs, that the assessee company sought a tax exemption for all sales where delivery occurred outside the State of Bihar, irrespective of whether the ultimate consumption took place in the State of first destination or elsewhere. For example, paragraph 17(1) of the petition states that “the petitioner was not liable to pay tax on goods delivered outside the State of Bihar which was also for consumption outside the State of Bihar,” and clause (iii) of the same paragraph repeats the proposition that “the goods being outside the State of Bihar, delivered outside the State of Bihar and consumed outside the State of Bihar were not liable to sales‑tax by the State of Bihar.” Clause (v) similarly refers to “goods delivered outside the State of Bihar for consumption outside the State of Bihar.” The same line of reasoning is reiterated in paragraph 19, which contains the prayer for relief. These statements demonstrate that the assessee’s position was that invoking the exemption provided by Article 286(1)(a) required only that the goods be delivered outside the State of Bihar, and that it was irrelevant whether the delivery was intended for consumption in the State of first destination or elsewhere.

The Court observed that this argument was identical to the one previously raised by counsel, and consequently affirmed the High Court’s distinction between the two kinds of sales that had already been identified. The final argument advanced by counsel was that the High Court erred in insisting that the assessee prove actual consumption of the goods in the State of first destination before the tax exemption could be claimed. In the judgment now under appeal, the learned judges expressed the view that “the petitioner would not be entitled to exemption if the goods were not consumed in the State” of first destination, thereby implying that proof of consumption within that state was a necessary condition for the exemption. The Court therefore concluded that the requirement advanced by the High Court was an unwarranted addition to the statutory Explanation and could not be accepted as a condition for granting the relief sought.

The appellant’s counsel argued that the Explanation to Article 286(1)(a) does not require proof that the goods actually reached the point of consumption in the first destination state. According to that Explanation, it is sufficient that the purpose of the delivery in the sale was to have the goods consumed in the destination state. The counsel contended that if, after a sale satisfying this condition, the buyer later re‑exports the goods for his own purposes, such subsequent action does not affect the nature of the original sale and therefore does not change its character under the Explanation to Article 286(1)(a). Consequently, the appellant submitted that the High Court erred by obliging the assessee to demonstrate that the goods were truly consumed in the first destination state, an additional requirement not prescribed by the Explanation. The Court found this submission well‑founded, noting that the respondent’s counsel did not dispute that the High Court’s order extended beyond the scope of the Explanation. Accordingly, the Court modified the High Court’s order, clarifying that when goods are delivered outside Bihar directly as a result of a sale intended for consumption in the first destination state, the assessee is entitled to exemption from the sales tax without needing to prove actual consumption in that state. With this modification, the appeal was dismissed, and no order regarding costs was made.

Shah J. concurred with the conclusion reached by Justice Rajagopala Ayyangar, while indicating a different analytical approach and therefore providing separate reasons. He noted that the Bihar Sales Tax Act 1947 was enacted under the legislative authority granted to Provincial Legislatures by Entry 42 of List II read with Section 100(3) of the Government of India Act 1935. Section 2(g) of that Act defined “sale” for the purposes of the statute as any transfer of property in goods for cash, deferred payment, or other valuable consideration, subject to the proviso that, notwithstanding any contrary provision in the Indian Sale of Goods Act 1930, a sale of goods (i) actually present in Bihar at the time the contract of sale defined in Section 4 is made, or (ii) produced or manufactured in Bihar, shall be deemed, irrespective of where the delivery or contract occurs, to have taken place in Bihar for the purposes of the Act. This definition underpins the territorial nexus required to levy the tax.

The provision stating that a transaction “to have taken place in Bihar” was based on the power granted by entry 42 of List II of the Government of India Act, 1935. Under that entry the Provincial Legislatures were permitted to impose a tax on sales by identifying any fact or circumstance that created a territorial connection with the State’s taxing authority, even where the title to the goods passed outside the Province or the delivery under the contract occurred outside the Province. Consequently, a statute could validly tax sales solely on the existence of a nexus such as the production or manufacture of the goods, or the presence of the goods in the Province at the date of the contract of sale, regardless of where the sale itself was concluded. Such legislation was deemed competent under the Government of India Act, 1935, as illustrated by the decisions in Tata Iron and Steel Co., Ltd. v. The State of Bihar and Poppatlal Shah v. The State of Madras (2). By Article 286 of the Constitution certain restraints were placed upon the legislative powers of the States, which read as follows:

“Art. 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) 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.” [1958] S.C.R. 1335. [1953] S.C.R. 677. Explanation: For the purposes of sub‑cl. (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 that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed into 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.”

With the objective of restricting the taxing authority of the States over statutes that pre‑dated the Constitution, the legislature effected amendments to bring those statutes into conformity with the constitutional limitations.

By means of the Adaptation of Laws Order, the provisions of the Bihar Sales Tax Act were brought into force with retrospective effect from 26 January 1950 through the insertion of section 33. Section 33 stated that, notwithstanding any other provision in the Act, a tax on the sale or purchase of goods could not be imposed under the Act when the transaction occurred outside the State of Bihar, or when the transaction was part of the import of the goods into, or the export of the goods out of, the territory of India. It further provided that after 31 March 1951 a tax on any sale or purchase could not be imposed where the transaction took place in the course of inter‑State trade or commerce, unless Parliament by law authorised otherwise. Section 33 also incorporated the Explanation to clause (1) of article 286 of the Constitution for the purpose of interpreting sub‑clause (1)(a) of sub‑section (1). By this amendment the same restrictions that article 286 placed on post‑Constitution statutes were also imposed on the pre‑Constitution law governing Bihar’s taxing power. In the earlier decision of Bengal Immunity Co., Ltd. v. State of Bihar, the Court had observed that the operative provisions of the various parts of article 286—namely clause (1)(a), clause (1)(b) and clause (2) as well as clause (3)—were intended to address distinct topics and could not be merged or read into one another. Consequently, the incorporation of section 33 into the Bihar Sales Tax Act, together with article 286, created a three‑fold limitation on the State’s power to tax. From 26 January 1950 onward the Bihar Legislature was prohibited from levying a tax on sales that occurred outside the State, on sales that were part of the import into or export out of India, and on any sale that was part of inter‑State trade or commerce. The Explanation to article 286(1)(a), as adopted by sub‑section (2) of section 33, deemed a sale to take place in the State where the goods were actually delivered for consumption, even though under the general law of sale the title to the goods might have passed in a different State. This principle was later affirmed in State of Bombay v. United Motors (India) Ltd., where the Court held that a sale described in the Explanation—commonly referred to as an “Explanation sale”—was taxable only by the State in which the goods were delivered for consumption, and that other States were barred from imposing tax on the same transaction.

In this case the Court explained that a transaction described as an “Explanation sale” may be taxed only by the State in which the goods are actually delivered as a direct result of the sale for the purpose of consumption in that State. The authority to levy the tax arises because, under the Explanation, the sale is deemed to occur in that particular State and to occur outside every other State; consequently the other States are expressly prohibited from imposing a tax on the same transaction, while the State where delivery takes place retains the exclusive right to tax it. The Bihar Sales Tax Act, which was enacted under the power granted by entry 42 of List II of the Government of India Act, 1935, and which is preserved by Article 372 of the Constitution as existing law, is subject to the combined effect of sub‑sections (1) and (2) of Section 33. By virtue of those provisions the State of Bihar is not competent to tax sales of goods that are made in the course of imports into India or exports out of India, and, after 31 March 1951, it is also not competent to tax sales that occur in the course of inter‑State trade or commerce. The Court further referred to its earlier exposition of the Explanation to Article 286(1)(a) in the United Motors case (1) and held that the Bihar State is likewise incompetent to tax “Explanation sales” where the goods are delivered in another State as a direct result of the sale for consumption in that other State. By this additional prohibition, to the extent covered by sub‑section (1)(a)(i) and sub‑section (2) of Section 33, the State of Bihar is stripped of the power to tax such sales; however, this prohibition does not completely extinguish the State’s authority to tax sales that are connected to the State by a genuine territorial nexus. In other words, the enactment of Section 33(1)(a)(i), which provides that no tax shall be imposed under the Act when the sale takes place outside the State of Bihar, removes only the power to tax “Explanation sales” that do not occur within Bihar, while leaving intact the power to tax “non‑Explanation sales.” In a non‑Explanation sale, although under the general law of sale of goods the title to the goods may pass outside Bihar, a nexus between the State’s taxing power and the sale still exists as contemplated by the definition of “sale” in Section 2(g). If a sale involves goods that are delivered outside Bihar but not as a direct result of the sale or not for the purpose of consumption in the State of first delivery, such a sale falls outside the scope of the Explanation. Consequently, the right to tax that sale, when it arises on the basis of a territorial nexus under the Act, is not affected by the prohibition contained in clause (1)(a)(i) of Section 33. Thus, the Court concluded that the State of Bihar’s authority to tax a sale on the basis of a real territorial nexus remains undiminished by Section 33, and that all sales defined by Section 2(g) are subject to tax except those that fall within Section 33(1)(a)(ii), Section 33(2) and “Explanation sales” occurring outside Bihar.

According to the Bihar Sales Tax Act, every sale is subject to tax except those that fall within section 33(1)(a)(ii), section 33(2) or are classified as “Explanation sales” that occur outside the State of Bihar. The appellant company is engaged in manufacturing copper and other mineral products within Bihar. Its registered office and principal place of business are located in the Singhbhum district of Bihar, and it is duly registered as a dealer under the Bihar Sales Tax Act of 1947. During the assessment year that ended on 31 March 1950, the appellant dispatched its products to various locations throughout India and subsequently paid the tax that had been assessed by the Sales Tax Officer. The appellant now seeks a refund of the tax paid for the period from 26 January to 31 March 1950, contending that the tax was remitted on a mistaken understanding of the law. The High Court, hearing an application filed under Article 226 of the Constitution, directed the sales‑tax authorities to refund any portion of tax that could not be shown to have been paid in relation to sales of goods that were delivered and consumed in the state of first destination. It was undisputed that the appellant could not be required to pay sales tax on goods that were delivered to and consumed in a state outside Bihar. The appellant further asserted that even where there was no evidence proving actual consumption in that other state, it should not be liable for tax on goods delivered for consumption there. The Court held that the High Court erred in holding that the exemption provided by Article 286(1)(a), together with the accompanying Explanation incorporated by section 33 of the Bihar Sales Tax Act through the Adaptation of Laws Order 1951, applied only to sales of goods delivered and consumed in the state of first destination. The Court clarified that once goods are delivered for the purpose of consumption, it is irrelevant whether actual consumption later occurs in the same state. The State’s power to levy sales tax based on a territorial nexus between the taxing authority and the sale is therefore limited by the incorporation of Article 286(1)(a)(i) and its Explanation into the Act. Consequently, any sale made on or after 26 January 1950 in which goods, as a direct consequence of the sale, are delivered to another state for consumption in that other state, is not subject to Bihar sales tax. Accordingly, the High Court’s directions are modified: the order issued by the Superintendent of Taxes is set aside, and he is directed to refund the tax paid in accordance with this judgment. The appellant will be entitled to exemption from tax where the goods are, as a direct result of the sale, delivered to another state for consumption there.

The Court observed that the tax exemption applied only in the situation where the goods in question were the direct result of a sale and were delivered in a State other than the one in which the seller was located, for the specific purpose of being consumed in that other State. In other words, the exemption was conditioned upon the fact that the sale gave rise to goods that were subsequently taken out of the State of sale and taken into another State specifically for consumption there. The Court therefore concluded that the matter before it was resolved in favour of the appellant on that ground. Accordingly, the Court dismissed the appeal, but made clear that the dismissal operated subject to the modification that had been previously ordered. This meant that while the appeal was rejected, the earlier modification of the orders of the tax authority, which had set aside the original assessment and directed a refund of tax paid, continued to apply. Thus, the appellant remained entitled to the exemption from tax payment so long as the goods satisfied the condition of being a direct result of the sale and delivered to another State for consumption there.