The State Of Kerala And Others vs The Cochin Coal Company Ltd

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 287 of 1958

Decision Date: 31 October 1960

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

In the case titled The State of Kerala and Others versus The Cochin Coal Company Ltd., the Supreme Court of India delivered its judgment on 31 October 1960. The opinion was authored by Justice N. Rajagopala Ayyangar and the bench was composed of Justices N. Rajagopala Ayyangar, S. K. Das, M. Hidayatullah, K. C. Das Gupta and J. C. Shah. The dispute was recorded under the citation 1961 AIR 408 and also appears in the Supreme Court Reports as 1961 SCR (2) 219. The matter concerned the applicability of sales tax under the United States of Travancore and Cochin General Sales Tax Act, 1125, specifically section 6, as amended by a notification dated 5 February 1954. The parties were the State of Kerala together with other respondents, who sued The Cochin Coal Company Ltd., the respondent.

The factual backdrop presented to the Court was that the respondent company maintained a stock of “bunker coal” on Candle Island, which lay within the territorial jurisdiction of the State of Madras. From this stock the company sold coal to steamships that called at the port of Cochin, which was located in the State of Travancore‑Cochin. The coal was delivered directly to these vessels. For the fiscal years 1951‑52 and 1952‑53 the respondent was assessed sales tax on these transactions by the State of Kerala. The respondent challenged the assessment on three grounds. Firstly, it argued that the sales could not be taxed because they were either sales made “in the course of export” or sales made “in the course of inter‑State trade” and therefore fell within the exemption provided by sub‑clause (1)(b) or clause (2) of Article 286 of the Constitution of India. Secondly, in the alternative, it contended that the sales were exempt under the February 5 1954 notification issued by the appellant State, which exempted sales made within the period 1 April 1951 to 31 March 1953 that were covered by the Explanation to Article 286(1)(a). The Court examined these submissions and held that the sales were exempt from tax by virtue of the government notification. The Court explained that the coal was delivered to the actual consumers, namely the steamships operating in Travancore‑Cochin, and that the consumers were free to use the coal either within the State or outside it according to their convenience and necessity. Because the delivery was intended for consumption within the State, the sales fell squarely within the Explanation to Article 286(1)(a). Although the transactions constituted inter‑State trade, which would ordinarily be barred from taxation under Article 286(2), the levy was nonetheless validated by the Sales Tax Validation Act, 1956. The Court relied upon the precedent set in M. P. V. Sundararamier & Co. v. The State of Andhra Pradesh, [1958] S.C.R. 1422, to support its reasoning.

The Court further observed that the sales were not “in the course of export” and therefore did not come within the prohibition imposed by Article 286(1)(b). It clarified that for Article 286(1)(b) to apply, it was insufficient that the goods merely left Indian territory; it was also necessary that the goods be intended to be transported to a destination beyond India. The concept of “export” under Article 286, the Court explained, presupposes the existence of two termini between which the goods are intended to move. Consequently, because the coal was not destined for a location outside India, the exemption under Article 286(1)(b) did not arise, and the contention of exemption under the 1954 notification remained the operative basis for relief from sales tax liability.

In this case, the Court referred to the earlier decision in Burmah Shell Oil Storage and Distributing Co. of India Ltd. v. The Commercial Tax Officer, C.A. 751 of 957 and C.A. 10 of 1958 (unreported). The matter before the Court was Civil Appeal No. 287 of 1958, an appeal from the judgment and order dated 10 September 1956 of the former Travancore‑Cochin High Court in Original Petition No. 191 of 1955. Counsel for the appellants appeared, as did counsel for the respondent. The judgment of the Court was delivered on 31 October 1960. The appeal challenged the judgment of the Travancore‑Cochin High Court, which had been issued under a certificate of fitness granted pursuant to article 133(1) of the Constitution, and it raised the question of whether the respondent, The Cochin Coal Company Ltd., was liable to sales tax under the United State of Travancore and Cochin General Sales Tax Act, 1125 (1950). The facts necessary to understand the dispute were then set out. The Cochin Coal Company Ltd., hereinafter referred to as the respondent‑company, was in the business of dealing in coal, specifically the type known as “bunker coal.” The company maintained its offices at Fort Cochin, a location that had formerly been part of the State of Madras. It imported bunker coal and kept the stock at a place called Candle Island, which at the relevant time was also situated within the State of Madras. A portion of the respondent‑company’s operations involved supplying bunker coal from its Candle Island depot to steamers that arrived at or called at the port of Cochin, which lay in the State of Travancore‑Cochin, for the purpose of the vessels’ outward voyages from that port. The usual mode of supplying the bunker coal was described as follows: before a steamer’s arrival, the steamer’s agents would enter into contracts with the respondent‑company for the trimming of coal into the vessel’s bunkers. When the steamer arrived in Cochin port, the agents would notify the respondent‑company and, after obtaining the necessary customs and port authority papers required for loading the coal onto the steamer, would present those papers at the respondent‑company’s office in Fort Cochin so that the company could fulfil its contractual obligations. The respondent‑company would then dispatch the ordered coal to the steamer through its transport contractor. Delivery orders were issued to the transport contractor, authorising the release of the coal from the stock held at Candle Island. The coal was subsequently taken to the steamer berthed in the waters of Travancore‑Cochin State, where the steamer’s chief engineer would inspect the coal, and upon being satisfied with its quality, the coal would be permitted to be …

In the transactions that formed the basis of the dispute, coal was trimmed into the bunkers of the ships. After the coal had been loaded, the price was paid to the respondent‑company on bills drawn on the steamer‑agent. Because these were the dealings carried out by the respondent‑company, the Travancore‑Cochin State claimed sales‑tax on the sale of the bunker coal. The assessment years that were relevant to the appeal were 1951‑52 and 1952‑53, and the assessment was completed on 2 February 1954 by the sales‑tax officer of the Mattancherry Circle. The respondent‑company argued that sales‑tax could not be imposed on the value of the bunker coal because the sale was either “in the course of export” or “in the course of inter‑State trade”, and therefore the sale was exempt from State taxation under sub‑clause (1)(b) or sub‑clause (2) of Article 286. The assessing officer rejected this contention. He held that the sales fell within the Explanation to Article 286(1)(a) and were therefore “inside” the State of Travancore‑Cochin, since the delivery in pursuance of the sale occurred within the State and the coal was delivered for consumption within the State. He further observed that, although an inter‑State element existed because the coal was moved from Candle Island, that fact did not affect the power of the State in which delivery took place to levy the tax. The company also contended that the same sales had been taxed in Madras State as sales actually taking place there, but the assessing officer rejected this argument as irrelevant.

Subsequently, the respondent‑company filed an appeal before the Appellate Assistant Commissioner. The Commissioner allowed the appeal, holding that the sales were “in the course of export” within Article 286(1)(b). He also observed that, even if the sales were “inside” sales falling within the Explanation to Article 286(1)(a), a notification issued by the State Government on 5 February 1954, which exempted such sales from tax, operated for the benefit of the assessee. After this decision, the Deputy Commissioner of Sales‑Tax, acting as the revisional authority, took up the matter suo motu. He called upon the assessee to show cause why the appellate order should not be set aside and why the entire turnover should be assessed to sales‑tax on the ground that the sales had taken place inside the State only. After hearing the respondent‑company, the revisional authority set aside the order of the Appellate Assistant Commissioner and restored the assessment made by the Sales‑Tax Officer. The respondent‑company then approached the High Court of Travancore‑Cochin under Articles 226 and 227 of the Constitution, seeking to set aside the revisional order. The High Court judges ruled in favour of the respondent‑company and ordered the revisional order to be set aside. However, they issued a certificate under Article 133(1) of the Constitution, enabling the State Government to file an appeal before this Court. Consequently, the matter now lies before the Supreme Court. It is noted that the respondent‑company had presented before the High Court several lines of argument in support of its claim that it was entitled to exemption from sales‑tax on the bunker coal trimmed into the steamers in the waters of Travancore‑Cochin.

In this case, the learned Judges of the High Court granted relief to the respondent‑company primarily on the basis that it was entitled to exemption from sales‑tax on bunker coal that had been trimmed by the company into steamers while the ships were in the waters of Travancore‑Cochin. Their decision rested on essentially one ground. Relying on the earlier Bengal Immunity case, the Judges held that the prohibitions contained in clauses 1(a) and 2 of Article 286 of the Constitution operated independently of each other. Consequently, they concluded that the sale of coal by the respondent‑company, although carried out in the course of inter‑State trade, fell within the ban on taxation set out in Article 286(2), even if the transaction might also satisfy the explanation to sub‑clause 1(a). The Government Pleader argued that if the exemption were to be derived from Article 286(2), it would not benefit the assessee because the validity of the tax had been preserved by the Sales‑tax Law Validation Act of 1956. The Judges, however, ruled that the Validation Act could not be invoked by the State because, according to their construction of section 26 of the Travancore‑Cochin General Sales Tax Act, 1125 (which corresponded to section 22 of the Madras Sales Tax Act, 1939), no tax had been imposed or was leviable on sales made in the course of inter‑State trade. Since the Validation Act validated only taxes that had already been levied, it could not authorise a tax that the State’s own sales‑tax statute had not imposed. The Judges acknowledged that the transaction in question was indeed a sale in the course of inter‑State trade and would therefore be covered by the ban in Article 286(2). Yet they held that the High Court’s interpretation of section 26 was incorrect in light of the Supreme Court’s decision in M. P. V. Sundararamier & Co. v. State of Andhra Pradesh. On that basis, they concluded that if the assessee could rely solely on Article 286(2) for relief, such reliance was unavailable because the Sales‑Tax Validation Act of 1956 had validated the levy.

Before the Supreme Court, counsel for the respondent‑company advanced two additional grounds to uphold the High Court’s decree. The first ground asserted that because the coal trimmed into the steamships was intended to be carried outside the territory of India, the sale was “in the course of export” within Article 286(1)(b) of the Constitution and therefore exempt from State sales‑tax. This argument was rejected by the Court, which cited its earlier decision in Burmah Shell Oil Storage & Distributing Co. of India Ltd. v. Commercial Tax Officer. In that case, the Court held that within Part XIII of the Constitution, the term “export out of the territory of India” required not merely the movement of goods out of the country but also the intention that the goods be delivered to a destination beyond India, creating a corresponding “import” into another locality outside India. Consequently, a mere movement of goods out of the country after a sale did not satisfy the condition of being “in the course of export” under Article 286(1)(b). The Court therefore dismissed the respondent‑company’s export‑based contention.

In analyzing the first contention, the Court observed that the expression “export” appearing in Part XIII of the Constitution required more than a mere movement of goods out of India. The Court explained that, for a sale to be regarded as occurring “in the course of export” under Article 286(1)(b), it must be shown that the goods were intended to be carried to a destination beyond India, so that they would be imported into some foreign locality. Consequently, the Court held that aviation spirit sold for the purpose of enabling an aircraft to fly out of the country could not be characterized as “exported” because there was no identifiable foreign destination where the spirit would be imported. The Court emphasized that a simple departure of the goods from Indian territory, without an intention that they be landed and received at a foreign port, did not satisfy the constitutional concept of export. This reasoning mirrored the principle that “export” under Article 286, like “import,” presupposes two termini—the place of departure and the intended place of arrival—and does not arise from a mere outward movement of the goods without a clear end‑point abroad.

The Court then turned to the second argument, which relied on the explanation to Article 286(1)(a). It noted that the coal in question had originally been located on Candle Island in the State of Madras and, by virtue of the contract of sale, was moved into the territory of Travancore‑Cochin. The Court recognized that this movement created an inter‑State element, thereby bringing the explanation to Article 286(1)(a) into play. The delivery of the coal was effected in Travancore‑Cochin, where it was trimmed into steam‑ships in the Cochin waters. The Court held that, since the purpose of the delivery was not export as previously determined, the delivery must be seen as intended for consumption within Travancore‑Cochin. The ultimate buyer—the steam‑ship company—was regarded as the final consumer who would use the coal for its own purposes, not for re‑export or other commercial transactions. The Court observed that the buyer could, if it chose, consume the coal within the State by exhausting it, or it could take the coal outside the State and consume it there; such a choice did not alter the character of the delivery as being for consumption within the State. The Court further explained that “consumption” may occur either by destruction of the goods, as with edible articles, or by use, as with clothing, furniture or fuel, and that the possibility of the purchaser using the goods outside the State does not defeat the conclusion that the delivery was for consumption within the State.

Edible items are generally consumed in the literal sense, meaning they are eaten and thereby destroyed, while other goods such as clothing or furniture are said to be consumed by virtue of being used, even though such use does not destroy the items. When edible articles are sold and delivered to an ultimate consumer within a State, the delivery is considered to be for consumption within that State, even if the buyer later chooses to take part of the purchase out of the State and consume it elsewhere. In the same way, if a vehicle is sold to the actual user and the transaction is not part of an export or intended for further commercial resale, the delivery to the user is for the purpose of his consumption within the State. The fact that the purchaser might later drive the vehicle to other states in the exercise of his property rights does not affect the original delivery, which therefore falls within the Explanation to Article 286(1)(a). In the present case, the coal was delivered into the ship for the ship’s consumption; consequently, the master of the vessel could use the coal while the ship was in the waters of Travancore‑Cochin, or could, if he so desired, take the coal outside those waters. A different situation would arise only if the buyer were contractually or legally obliged not to use the goods within the State of delivery, that is, if he had no choice to consume them there. Here, part of the coal delivered could and would certainly have been used by the ship during its stay in the harbour, and if that stay were prolonged by unforeseen circumstances, the entire coal might have been exhausted, and it would have been used until the ship left the port and the territorial limits of the State. The crucial fact, therefore, was that the coal was delivered to the actual consumer who was free to consume it wherever he wished, his choice being guided by convenience and necessity. Accordingly, the counsel for the respondent was correct in submitting that the sale of the “bunker coal” by the assessee company fell within the Explanation to Article 286(1)(a). If no other consideration intervened and the liability of the assessee were to be assessed solely under the charge imposed by the State Sales‑Tax Act, read in the light of the Constitution, the tax liability of the respondent company would be unmistakable. However, the counsel further argued that the State Government possessed the power to exempt sales of any designated type from tax liability under section 6 of the Sales‑Tax Act, and that a notification dated 5 February 1954, published in the official Gazette, had exempted the sales made by the respondent company in the assessment years under dispute.

It was pointed out that a notification published in the official Gazette had exempted sales made by the respondent company in the present case from the levy of sales tax for the assessment years that were under dispute. The High Court judges had not referred to this exemption, but the sales‑tax appellate authority had relied on it as one of the reasons for setting aside the assessment imposed by the Sales‑tax Officer, and the exemption had been expressly raised in the petition filed before the High Court under Article 226. Consequently, the respondent could not be denied the benefit of the notification if it was applicable. Section 6 of the Travancore‑Cochin Sales‑tax Act provides that “The Government may, by notification in the Gazette, make an exemption … in respect of any tax payable under this Act – (i) on the sale of any specified class of goods at all points or at any specified point or points in the series of sales by successive dealers; or (ii) of any specified class of persons … in regard to the whole or any part of their turnover.” The remainder of the section was not reproduced. In the Travancore‑Cochin Gazette dated 16 February 1954, a notification dated 5 February 1954 was published. That notification stated: “According to the interpretation given by the Supreme Court to Article 286(1) of the Constitution in their judgment in State of Bombay v. United Motors India Ltd., certain categories of inter‑State transactions come within the taxing powers of the State Government. While the judgment enables the Government of Travancore‑Cochin to levy sales‑tax on certain categories of non‑resident dealers selling goods for delivery and consumption in Travancore‑Cochin State from 1 April 1951, the Government, after due consideration, has decided to levy sales‑tax on such transactions only from 1 April 1953 – the date immediately following that on which the Supreme Court delivered its judgment – and to forego the levy prior to that date.” The notification was followed by detailed provisions concerning interim arrangements for filing returns, making declarations, and the manner in which tax should be assessed and paid. Although counsel for the appellant‑State argued that the notification could not have the statutory effect of granting an exemption, the Court was of the opinion that the notification was issued pursuant to the power conferred on the State Government by Section 6(1), the relevant terms of which had already been extracted. The submission was considered curious in view of the earlier developments. The appellate Assistant Commissioner, in setting aside the assessment of the respondent‑company, had observed in his order: “Even if it is considered that the sale is for consumption in this State, the company need not pay tax on the turnover since the Government have exempted from payment of tax the sales which took place before 1 April 1953.” When this appellate order was subsequently set aside by the Deputy Commissioner acting suo motu, the matter proceeded further.

In the revision of the assessment, the order made no reference to the February 5 1954 notification and did not state that the notification lacked statutory effect. The respondent company filed a petition under Article 226 of the Constitution before the High Court, asserting that it was entitled to the exemption provided by that notification. The petition specifically relied on the wording of the notification that indicated exemption for assessments within the stated period. The notification, dated 5 February 1954 and published in the Gazette of 16 February 1954, concerned assessments for the period from 1 April 1951 to 1 April 1953. The petition claimed that the assessment under challenge fell within the exemption contained in the Gazette notification. In response, the sales‑tax officer filed a counter‑affidavit stating that the notification had no application to the case because the sales involved did not come within its scope. Thus, the objection was not that the notification lacked statutory authority under section 6(1), but that the respondent’s transactions were not covered by it. The extracted portion of the notification shows it was specifically designed to give relief to non‑resident dealers engaged in inter‑State transactions that had been treated as intra‑State under the Explanation to Article 286(1)(a) as interpreted in the United Motors case. Because the respondent company’s transactions in question clearly fell within the notification both in terms of their nature and the assessment years, the company was entitled to the tax exemption provided therein. No other statutory provision was invoked in the proceedings to challenge the validity of the exemption granted by the notification. Accordingly, the appeal was dismissed and the costs of the proceedings were awarded against the appellant.