J. V. Gokal and Co. (Private) Ltd vs The Assistant Collector, Of Sales-Tax (Inspection) and Others

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

Court: Supreme Court of India

Case Number: Petition No. 38 of 1959

Decision Date: 25 January, 1960

Coram: Bhuvneshwar P. Sinha, P.B. Gajendragadkar, K.C. Das Gupta, J.C. Shah

In this case the petition was filed by J. V. Gokal & Co. (Private) Ltd. against the Assistant Collector of Sales‑Tax (Inspection) and other respondents. The matter was heard by a five‑judge bench of the Supreme Court of India consisting of Justice Subbarao, Justice K. Sinha, Chief Justice Bhuvneshwar P. Sinha, Justice P. B. Gajendragadkar, Justice P. B. Gupta, Justice K. C. Das‑Gupta and Justice J. C. Shah. The judgment was delivered on 25 January 1960 and is reported in 1960 AIR 595 and 1960 SCR (2) 852. The statutory issue concerned the applicability of sales tax to a transaction described as a sale in the course of import, the transfer of shipping documents while the goods were on the high seas, and whether such a transfer amounted to delivery of the goods for the purposes of tax liability under Article 286(1)(b) of the Constitution of India.

The petitioner had entered into contracts with the Government of India for the supply of specified quantities of foreign‑origin sugar. Under these contracts the petitioner placed orders with dealers located abroad and arranged for the conveyance of the sugar to Bombay by means of steamships. While the cargo was still on the high seas and before the vessels reached Bombay harbour, the petitioner delivered to the Government the shipping documents, including the bill of lading, and received the contractual price for the sugar. After the vessels arrived at the port, the Government of India took physical delivery of the sugar and paid the requisite customs duties to the appropriate authorities.

For the assessment year 1954‑55 the Assistant Collector of Sales‑Tax held that the petitioner was liable to pay sales tax on the transaction involving the sugar sold to the Government. The petitioner contended that the sale had taken place in the course of import, and therefore fell within the exemption provided by Article 286(1)(b) of the Constitution. The sales‑tax authorities argued that the sale was not in the course of import and, irrespective of the delivery of the bills of lading against payment, the parties had intended that ownership of the goods would not pass to the Government until the actual physical delivery at the port.

The Court held that (1) the course of import commences at the point at which the goods cross the customs barrier of the foreign country and concludes at the point in the importing country where the goods cross the customs barrier there; (2) an importer who receives the shipping documents may transfer ownership of the goods while they are still on the high seas to a third party by delivering those documents against payment, and such a transfer constitutes a sale made in the course of import; (3) delivery of a bill of lading while the goods are afloat is legally equivalent to delivery of the goods themselves, as recognized in Sanders Brothers v. Maclcan & Co. (1883) 11 Q.B.D. 327; (4) a proper construction of the contracts shows that ownership passed to the Government of India when the shipping documents were handed over against payment; and (5) consequently the sales in question occurred in the course of import into India and were exempt from sales tax under Article 286(1)(b) of the Constitution.

The Court observed that, when the contracts were properly interpreted, ownership of the sugar passed to the Government of India at the moment the shipping documents were handed over against payment, and that those sales occurred during the import process and therefore were exempt from sales tax under Article 286(1)(b) of the Constitution, following the precedent set in State of Travancore‑Cochi v. The Bombay Co. Ltd., [1952] S.C.R. 1112. The judgment originated in the original jurisdiction as Petition No. 38 of 1959, filed under Article 32 of the Constitution for the enforcement of fundamental rights. The petition sought to set aside the order dated 9 February 1959 issued by the first respondent, which had annulled the order of the second respondent that permitted a deduction of Rs 1,86,42,730‑15‑0 from the petitioner’s sales‑tax turnover on the basis that the amount was not liable to tax under section 46 of the Bombay Sales Tax Act, 1953. The material facts were undisputed and could be summarised briefly. The petitioner, a private company incorporated under the Companies Act, 1956, with its registered office at Kasturi Buildings, Bombay, entered into two contracts with the Government of India on 24 March 1954 and 15 April 1954 for the supply of two sugar consignments: one comprising 9,500 long tons of Peruvian sugar and another comprising 25,000 metric tons of continental sugar. To meet these contracts, the petitioner placed orders with overseas dealers. Regarding the first contract dated 24 March 1954 for 9,500 long tons of sugar, the petitioner opened a letter of credit on 3 April; on 3 May 1954 the vessel S.S. Alba departed Salaverry, Peru, carrying 9,782.01688 long tons of sugar; on 26 May 1954 the petitioner delivered to its bankers, the Central Bank of India Limited, Bombay, the invoice of Rs 50,35,405‑11‑0 together with the bills of lading endorsed in favour of the Government of India, Ministry of Food & Agriculture, and other required documents, directing the bankers to present these to the Government and to collect the said sum from the Deputy Accountant General (Food & Rehabilitation), New Delhi; on 7 June 1954 the Government of India paid the amount to the petitioner’s bankers; and on 26 June 1954 the S.S. Alba arrived at Bombay harbour.

In connection with the second contract, the petitioner supplied a series of documentary and shipping details. The contract involved three vessels, namely S. S. Eleni, S. S. Inger Stathatos and S. S. Giovanni Marie Amendola, which together carried a total of 24,292 tons of sugar, broken down as 9,910‑858 tons, 9,919‑7158 tons and 4,464‑315 tons respectively. Letters of credit for these shipments were opened by the petitioner on 5 June 1954 for the first two vessels and on 15 June 1954 for the third vessel. The vessels departed from their points of loading on 10 July 1954 (S. S. Eleni) and on 31 July 1954 (the other two vessels). Their arrivals at Bombay Harbour were recorded as 22 July 1954 for S. S. Eleni, 12 August 1954 for S. S. Inger Stathatos and 16 August 1954 for S. S. Giovanni Marie Amendola. After the voyages, the petitioner presented to its bankers, the Bank of Baroda Limited, Bombay, three invoices together with the corresponding bills of lading. The invoices showed amounts of Rs 50,43,501‑8‑0, Rs 22,69,800‑13‑0 and Rs 50,38,997‑14‑0 respectively. The bills of lading were endorsed in favour of the Government of India, Ministry of Food & Agriculture, and were accompanied by the usual certificates. The petitioner instructed the bankers to forward these documents to the Government of India and to collect the stated sums from the Deputy Accountant General (Food & Rehabilitation), New Delhi. The Government of India made the payments to the petitioner’s bankers on 26 August 1954, 18 August 1954 and 19 August 1954, each payment being made against the delivery of the respective invoices and bills of lading. The final arrival of the vessels at Bombay Harbour was noted on 12 September 1954 (S. S. Eleni) and on 3 September 1954 (the other two vessels). These facts demonstrate that, while the vessels were still at sea, the Government had already received the title documents and had paid the purchase price to the petitioner. Upon the vessels’ arrival, the cargoes were unloaded, taken into possession and cleared by the Government after the requisite customs duties had been paid. For the assessment year 1954‑55 (1 April 1954 to 31 March 1955), the Sales Tax Officer of the Licence Circle, Division 1, Bombay assessed the petitioner to sales tax. In computing the petitioner’s turnover, the officer deducted the price of the two sales described above. On 31 January 1958, the Assistant Collector of Sales Tax issued a notice under section 31 of the Sales Tax Act proposing to review the assessment order of the Sales Tax Officer. The petitioner filed objections and made representations, contending that, if a notice were to be issued, it should have been issued under section 15 rather than section 31, because the sales had already been disclosed to the Sales Tax Officer and the corresponding deduction had been allowed by him.

In the proceeding, the petitioner also asserted that, irrespective of any other argument, the two sales had occurred during the import process and therefore were not subject to sales tax. The first respondent rejected both arguments and held that sales tax was payable on the two transactions. Consequently, the first respondent recalculated the petitioner’s liability and reassessed a total tax amount of Rs 10,22,850‑12‑0, from which the sum of Rs 315‑3‑0 already paid by the petitioner was deducted, leaving a balance of Rs 10,22,535‑9‑0. The first respondent then directed the second respondent, the Sales Tax Officer, to issue a demand notice for that balance, and on 14 February 1959 the second respondent issued such a notice. The petitioner filed the present petition seeking a writ of certiorari to set aside the demand notice issued by the second respondent. The Solicitor‑General intervened on behalf of the Union Government, while Mr Palkbivala intervened for interveners 1 to 3; both interveners supported the petitioner’s position. Representing the petitioner, Mr Purshottam Tricumdas presented four main contentions before the Court. First, he contended that, under Article 286(1)(b) of the Constitution as it stood before the Constitution (Sixth Amendment) Act 1956, the sales in question could not be taxed because they occurred in the course of importing the goods into India. Second, he argued that the Bombay State had exempted such sales by way of the explanation to Article 286(1), since the goods were intended for consumption in states other than Bombay. Third, he maintained that the sales were effected outside the State of Bombay, namely in New Delhi, and were therefore exempt under Article 286(1)(a). Fourth, he submitted that the first respondent could have interfered with the earlier assessment only under Section 15 of the Act and only within three years after the end of the assessment year 1954‑55, that is, by 31 March 1955, and that, having missed that deadline, the respondent lacked authority to revise the assessment under Section 31. The petitioner emphasized that the first contention was the most decisive; if it succeeded, none of the other issues would need to be considered. The Court observed that the first question required interpreting Article 286(1)(b) as it existed prior to amendment. That provision read: “(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— (b) in the course of the import of goods into, or export of the goods out of, the territory of India.” The Court explained that if the petitioner’s sales to the Government of India had taken place in the course of importing the goods into Indian territory, the Bombay State would have been powerless to levy sales tax on those sales. The Court then turned to the meaning of the phrase “in the course of the import of the goods into the territory of India” to determine whether it applied to the transactions at issue.

The Court examined the meaning of the expression “of the goods into the territory of India” as it appears in the constitutional provision. It identified the crucial components of the phrase as the words “import” and “in the course of”. The term “import” was explained to derive etymologically from the idea of “to bring in”; consequently, to import goods into India means to bring goods from a foreign place into the Indian territory. The Court then turned to the word “course”, which it defined as indicating movement from one point to another. Accordingly, the “course of import” commences when the goods cross the customs barrier of the foreign country and terminates when the same goods cross the customs barrier of the Indian importing country.

These expressions had previously been examined by this Court in the decision of State of Travancore‑Cochin v. Shunmugha Vilas Cashew Nut Factory (1). In that case, Chief Justice Patanjali Sastri observed at page 62 that the word “course” etymologically denotes movement from one point to another, and that the phrase “in the course of” not only implies a period of time during which the movement is ongoing but also postulates a connected relation. Further, at page 68, the learned Chief Justice explained that logically the course of export or import does not begin or end until the goods have actually crossed the respective customs barriers.

Justice Das, who later served as a Judge, wrote a dissenting judgment that practically agreed with Chief Justice Patanjali Sastri’s interpretation. At page 92, Justice Das expressed that the word “course” conveys the idea of a gradual and continuous flow, a journey, or a passage from one place to another, and etymologically it means forward movement. He added that the phrase “in the course of” clearly refers to the period of time during which the movement is in progress, and therefore the wording “in the course of the import of the goods into and the export of the goods out of the territory of India” obviously includes the entire period when the goods are on their import or export journey. The Court respectfully agreed with the observations made by the learned Judges.

From this analysis, the Court concluded that the import journey begins when the goods enter their import trajectory, that is, when they cross the customs barrier of the foreign country, and it ends when they cross the customs barrier of the importing country. The next issue for determination was the point at which a sale could be said to occur “in the course of” that import journey. The Court referred to its earlier decision in State of Travancore‑Cochin v. The Bombay Co. Ltd. (2), where it had held that a sale which occasioned the export of goods was a sale that took place in the course of export. The Court explained that, analogously, a sale that occasioned the import of goods into India would likewise be deemed to occur in the course of the import journey.

The Court explained that when a merchant situated in India sells goods to a buyer in London and completes the transaction by sending the goods out of India by ship, that sale, which brings about the export, is exempt from the levy of sales tax under Article 286(1)(b) of the Constitution. The same principle, the Court observed, applies to the opposite situation where a sale causes the import of goods into India. The Court then referred to the earlier judgment in State of Travancore‑Cochin v. Shanmugha Vilas Cashew Nut Factory (1), where the doctrine was extended to cover a sale or purchase of goods that is effected within a State by the transfer of shipping documents while the goods are in transit. That decision categorized purchases into three classes: (i) purchases made in the local market, (ii) purchases made in the neighbouring districts of an adjacent State, and (iii) imports from Africa. The African imports were further divided into two groups; the Court dealt only with the first group, which consisted of goods bought when they were on the high seas and being shipped from African ports to Cochin or Quilon. In that case, commission agents in Bombay arranged the purchase on behalf of the assessee, obtained the shipping documents at Bombay through a bank that advanced money against those documents, and then collected the documents from the assessee at the destination. By a majority, the Court held that, with respect to the first group of imports, the commission agents acted merely as agents of the respondents and that the purchases occasioned the import, thereby falling within the constitutional exemption. The Court clarified that this was not a situation where an Indian importer sold the goods to a third party while the goods were on the high seas; rather, it involved a party in Cochin purchasing goods that were still at sea through his Bombay agent, with payment made via a bank against the shipping documents. Chief Justice Patanjali Sastri, delivering the majority view, summarized the scope of the exemption at page 69 as follows: (1) sales arising from export and purchases arising from import are covered by the exemption under Article 286(1)(b); (2) purchases made in the State by the exporter for the purpose of export, as well as sales made in the State by the importer after the goods have crossed the customs barrier, are not covered by the exemption; and (3) sales in the State by the exporter or importer through the transfer of shipping documents while the goods remain beyond the customs barrier are covered by the exemption, assuming the State’s power of taxation extends to such transactions. Justice Das, in his dissent, agreed with Chief Justice Patanjali Sastri on the third conclusion and set out his reasoning at page 94.

The Court observed that transactions in which sale or purchase is effected by delivering shipping documents while the merchandise remains on the high seas are well‑known and are carried out every day on a large scale in major commercial centres such as Bombay and Calcutta; these transactions constitute necessary and concomitant incidents of foreign trade. The Court warned that to declare such sales or purchases as occurring outside the import or export process and to treat them as ordinary local or domestic dealings would disregard the practical realities of commerce. Such a narrow construction would enable a State to levy a tax in addition to the customs duty or export duty imposed by Parliament, thereby subjecting the same batch of goods to double taxation. The Court explained that this double burden would raise the price of the goods, would damage the competitiveness of exporters in world markets, would increase the cost to consumers of imported items, and ultimately would impede and prejudice India’s foreign trade—an outcome that the Constitution seeks to prevent. The learned Judge also examined at length the severe hardship that would befall an Indian importer if he were denied the ability to sell goods that were still on the high seas by delivering the shipping documents against payment. Although the case under consideration involved different circumstances, the Court agreed with the Judge’s remarks that an importer who receives the shipping documents may convey the title in the goods, while they are still on the high seas, to a third party by handing over the documents upon receipt of payment, and that such a transaction constitutes a sale that occurs in the course of import. The Court then summarized the legal position concerning import‑related sales as follows: first, the course of import begins at the moment the goods cross the customs barrier of the foreign country and concludes after the goods have crossed the customs barrier of the importing country; second, a sale that gives rise to the import is itself a sale in the course of import; third, a purchase made by an importer of goods while they are on the high seas, performed by payment against shipping documents, is a purchase in the course of import; and fourth, a sale by an importer, after the ownership of the goods has passed to him either through receipt of the title documents upon payment or by any other means, to a third party by a similar document‑handing process, is also a sale in the course of import. Turning to the specific issue of whether the petitioner’s sales to the Government of India qualified as sales in the course of import, the Court noted that, according to the facts previously narrated, the petitioner, under earlier contracts with the Government, had delivered the shipping documents, including the bill of lading, to the Government in exchange for payment while the goods were still on the high seas.

The Court observed that the petitioner delivered the shipping documents, including the bill of lading, to the Government and received payment while the goods were still on the high seas. After considering the preceding analysis, the Court concluded that these transactions fell within the fourth principle previously described, and therefore they must be treated as sales that occurred in the course of importation of the goods into India. The Court then turned to the nature of a bill of lading, defining it as a written instrument signed on behalf of the shipowner that records the embarkation of goods, acknowledges receipt of those goods, and contains a promise to deliver the goods at the end of the voyage subject to any conditions specified in the document. It is well‑settled in commercial practice that a bill of lading stands for the goods themselves and that the transfer of the bill of lading operates as a transfer of ownership of the goods. To explain the legal effect of such a transfer, the Court quoted the judgment of Bowen, L.J., in Sanders Brothers v. Madan & Co., page 341, which states that the law governing the endorsement of bills of lading is clear and that the customs of European merchants are well understood. While cargo is at sea and remains in the carrier’s possession, physical delivery of the cargo is impossible. During this period, the bill of lading is universally recognised by the law merchant as the symbolic equivalent of the cargo, and the endorsement and delivery of the bill of lading constitute a symbolic delivery of the cargo itself. Property in the goods passes by such endorsement and delivery whenever the parties intend that ownership should pass in the same manner as it would if the goods were actually delivered. For the purpose of completing the transfer of title to the indorsee, the bill of lading remains a valid symbol until the cargo is actually delivered on shore to a person with a rightful claim under it, and it carries not only full ownership of the goods but also all rights created by the contract of carriage between the shipper and the shipowner. The Court likened the bill of lading to a key that, in the hands of a lawful owner, is intended to unlock the warehouse—whether floating or fixed—in which the goods may reside. The Court reproduced this passage in full because it illustrates clearly and comprehensively the law on the subject. The Court noted that Indian law follows the same principles as English law in this respect. Accordingly, the delivery of a bill of lading while the goods are still afloat is equivalent to the actual delivery of the goods themselves. While counsel for the petitioner conceded that this equivalence is the general rule, counsel argued that, in the present case, the contract expressly provided that the parties intended that ownership of the goods would not pass to the buyer until actual physical delivery was made. The Court observed that both contracts were similar in their terms and conditions.

They follow the standard terms prescribed by the Government, and the principal terms of the contracts can be set out as follows. The first clause defines the word “sellers” as the party that sells the sugar and defines “the Government” as the President of India. The second clause requires that the sugar be packed in gunny bags that have been approved by the Government. The third clause provides that, at the time of shipment, the Government shall inspect the sugar for quality, weight and packing. The fourth clause states that the sugar shall be shipped to the ports that are specified in the contract. The fifth clause obliges the sellers to charter steamers for the shipment, authorises the Government to take delivery of the goods at the port of discharge from the ship’s rail, and places on the sellers the responsibility to pay for stevedoring, lighterage where required, the hiring of cranes, dock dues and pilotage. The sixth clause governs the mode of payment for the supplies; under it the sellers must submit a bill for the full cost‑and‑freight value to the Government in the Ministry of Food and Agriculture, New Delhi, and the bill must be accompanied by a complete set of clean on‑board bills of lading consisting of three negotiable copies and three non‑negotiable copies, a certificate of origin of the sugar, a certificate of quality, weight and packing, and a certificate from the ship‑owners confirming that the freight has been paid in full and that the ship‑owners retain no lien on the cargo for that payment. Clause 6(c) further requires the sellers to open a letter of credit at their own expense, while the Government of India agrees to arrange the necessary foreign exchange up to the amount of the cost‑and‑freight value of the quantity of sugar purchased, on production of an import licence that will be issued on application to the proper authority in the prescribed form. Clause 8 gives the Government the right, in the event that the sellers fail to supply the sugar in accordance with the contract, to recover any sum as liquidated damages and/or a penalty up to a prescribed amount. Clause 9 authorises the Government, if the sellers fail to observe or perform any provision of the contract, to terminate the contract immediately. Clause II, titled “Force Majeure,” grants the Government, when delivery in whole or in part is prevented or delayed directly or indirectly by any cause of force majeure such as war, strikes, rebellion, insurrection, political disturbances, civil commotion, fire, flood, plague or other epidemics, the right to cancel the contract for the quantities that are so prevented or delayed. After the sellers entered into the contracts, they obtained the licences required from the Government, opened the letters of credit, placed orders with foreign companies, chartered a steamer, took delivery of the goods from the foreign firms and, while the goods were on the high seas, delivered the required documents.

The Court examined the contract provisions to determine whether the parties intended that, despite the Government’s payment for the bill of lading, title to the goods would not transfer to the Government. The factual backdrop showed that both the Government and the sellers aimed for a normal transfer of ownership when the shipping documents were handed over upon payment. The sellers needed to honor their obligations to the foreign companies with whom they had opened letters of credit, and the Government sought title to the goods to prevent the sellers from diverting the cargo to other buyers offering higher prices. The contract already contained clauses securing the goods of the agreed specifications, and there was no justification for delaying the passage of title until the goods actually arrived at the port. From the sellers’ perspective, it was important that title pass while the goods were still on the high seas; otherwise they would have been obliged to pay sales tax. Moreover, none of the contract clauses cited by the respondents contradicted the ordinary mercantile practice that title passes when the documents are delivered.

The Court noted that the sellers’ obligations to bear costs such as stevedorage, lighterage, crane hire, dock dues, and pilotage, which the respondents highlighted to suggest a contrary intention, did not affect the question of title. Those expenses could be borne by the sellers even after title had transferred to the buyer. Similarly, clauses 9 to 11, which the respondents relied upon, were not inconsistent with the passage of title; they could legitimately operate at a stage before title passed. Under clause 9, if the seller failed to fulfill any contractual term before title passed, the buyer could cancel the contract. Clause II provided that, in the event of a force‑majeure incident on the high seas, the seller must send a cablegram, and the buyer would then be entitled to cancel the contract, either in whole or in part, again at a stage before title passed. Consequently, the Court concluded that delivering the shipping documents against payment did not preclude the transfer of ownership to the Government, and the contractual language supported the ordinary commercial understanding of title passing at the point of document delivery.

The Court observed that when the buyer paid and the seller subsequently failed to deliver the goods at the port, the buyer could seek other remedies for recovery of damages, but such a remedy was not provided for by either clause nine or clause two of the contract. A careful examination of all the contractual terms revealed no indication that the parties intended for ownership of the goods not to pass to the buyer even though shipping documents were delivered against payment. In addition to the contract language, counsel for the respondents relied on two factual circumstances: first, that the seller himself had chartered the vessel; and second, that the licence issued by the Government was expressly made non‑transferable. The Court found that these two facts did not demonstrate a contrary intention. When the seller chartered a steamer and the goods were loaded on that vessel, ownership of the goods transferred to the seller, placing him in a position to sell the goods to the Government. The non‑transferability of the licence bore no relevance to the question of when ownership passed to the Government. The licence was an exercise of statutory power under the applicable Act, and whether the petitioner sold the goods to the Government or to a third party, obtaining a licence was a mandatory requirement. In the present case, the licence was granted to the seller specifically for the purpose of fulfilling the contracts with the Government; it was issued several days after the contracts had been executed, and the Government subsequently took the licence from the seller and cleared the goods through its own officer. Consequently, the Court held that ownership of the goods passed to the Government of India at the moment the shipping documents were handed over against payment. This meant that the sale from the petitioner to the Government occurred while the goods were still on the high seas. Accordingly, the sale was deemed to have taken place in the course of importation into India and therefore fell within the exemption from sales tax provided by Article 286(1)(b) of the Constitution. Because the exemption was applicable, no further issue required consideration. In the result, the order issued by the Assistant Collector of Sales Tax was set aside and the order of the Sales Tax Officer was reinstated. The respondents were ordered to pay the costs of the petitioner, and the petition was allowed.