Tobacco Manufacturers (India) Ltd vs Commissioner of Sales‑Tax, Bihar

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 202 and 203 of 1958

Decision Date: 26 October 1960

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

In the matter titled Tobacco Manufacturers (India) Ltd versus the Commissioner of Sales‑Tax, Bihar, the Supreme Court of India delivered its judgment on 26 October 1960. The bench that heard the case consisted of Justices N. Rajagopala Ayyangar, S. K. Das, M. Hidayatullah, K. C. Das Gupta and J. C. Shah. The petitioner was Tobacco Manufacturers (India) Ltd and the respondent was the Commissioner of Sales‑Tax, Bihar, Patna. The decision was reported in the 1961 volume of the All India Reporter at page 402 and also in the 1961 Supplementary Cause Reports at page 106. The case is cited in later authorities, for example in the 1966 Supreme Court reference RF 1966 SC 376. The substantive provisions involved the Sales Tax Act, the constitutional provision Article 286(1)(a) of the Constitution of India, and the Bihar Sales Tax Act, section 107, dealing with the taxability of goods delivered outside a state for consumption.

The appellants, who were manufacturers of cigarettes and tobacco operating in the State of Bihar, challenged the levy of sales tax on sales they had effected during the financial years 1949‑50 and 1950‑51. They contended that each of those sales resulted directly in the delivery of the goods outside Bihar; consequently, they argued that the sales were exempt from tax under Article 286(1)(a) of the Constitution. The Superintendent of Sales‑Tax and the Deputy Commissioner of Sales‑Tax, both of Bihar, rejected the appellants’ objection and, relying on a prior decision of the Board of Revenue of Bengal in the so‑called Bengal Timber Case (No. 61 of 1952), held the appellants liable to pay the tax. After being deemed liable, the appellants complied with the demand and paid the tax, but they subsequently filed an application for revision before the Board of Revenue, asserting that the constitutional exemption applied to every sale that resulted in the goods being dispatched outside the State of Bihar, irrespective of whether the goods were consumed in the State of first delivery or elsewhere. The Board, in its order on the revision petition, observed that for the dispatches of goods made outside the State after 26 January 1950—when the Constitution became operative—the lower court had been guided by the Bengal Timber precedent, but that this precedent had been superseded by the Supreme Court’s decision in the United Motors case. According to the Supreme Court ruling, no tax could be levied on dispatches to places outside the State after 26 January 1950; therefore, the Board allowed the petitions and directed the sales‑tax officer to recompute the amount of tax payable by the assessee. Relying on this order, the appellants claimed a refund of the tax they had already paid, while the sales‑tax authorities opposed the claim, maintaining that a refund could be granted only for those sales in which the goods were delivered outside the State for consumption in the State of first delivery. The department thereafter sought

After the Board issued its order, the appellants sought clarification of that order. The Board declined to provide any further explanation and issued a statement that no additional clarification was necessary because the order already referred specifically to the Supreme Court’s judgment in the United Motors Case. When the tax authorities continued to refuse to refund the remaining tax amount, the appellants filed two separate applications in the High Court requesting a writ of mandamus that would compel the authorities to make the refund. The High Court examined the Board’s interpretation that sales in which goods were dispatched outside the State for consumption in a State other than the State of first delivery were exempt from tax. The Court concluded that this interpretation was erroneous and held that the appellants were not entitled to a writ of mandamus to enforce an erroneous order.

On special leave, the appeal was heard and the Court held that the correct construction of the Board’s orders was that the sales‑tax officer had been directed to determine the relief, identified as “108”, that should be granted to the assessee based on the officer’s own interpretation of this Court’s decision in the United Motors Case. The Court observed that the Board had not actually defined the effect of the United Motors judgment, nor had it decided that every sale involving goods dispatched outside the State of Bihar was automatically exempt from tax liability. Consequently, the principle that a subordinate tribunal must not refuse to implement the directions of a superior tribunal was not applicable in this situation; the precedent set in Bhopal Sugar Mills v. Commissioner of Income‑tax, [1961] 1 S.C.R. 474, was therefore held inapplicable.

The Court explained that the United Motors decision only held that sales where goods were delivered outside the State for consumption in the State of first delivery fell within the explanation to Article 286(1) of the Constitution and were consequently exempt from tax. The decision did not address other sales in which the goods, after being delivered outside the State, were intended for consumption in another State. For such sales, the Court held that the Board of Revenue’s order, which was binding on the appellant, rendered those sales taxable in accordance with the Board’s earlier decision in the Bengal Timber Case. The Court referred to the judgment in State of Bombay v. United Motors (India) Ltd. and Ors., [1953] S.C.R. 1069, which explained and applied the relevant principles, and also cited the Board of Revenue’s order in the Bengal Timber Case, 61 of 1952.

The matter proceeded as a civil appellate jurisdiction case, bearing the titles Civil Appeals Nos. 202 and 203 of 1958, and arose from the judgment and decree dated 5 October 1956 of the Patna High Court in Miscellaneous Judicial Cases Nos. 330 and 331 of 1955. Counsel representing the appellants were K. D. Chatterjee, S. N. Andley and J. B. Dadachanji, while D. P. Singh appeared for the respondents. The judgment was delivered on 26 October 1960 by Justice Ayyangar. The two appeals originated from a common judgment of the Patna High Court dated 5 October 1956, filed under Article 226 of the Constitution, and were brought before this Court pursuant to a certificate granted by the High Court under Article 132.

The High Court had issued a certificate under Article 132, and the parties seeking relief were Tobacco Manufacturers (India) Limited, an incorporated enterprise that produced cigarettes and other tobacco products at its factory in Monghyr, Bihar. The two appeals before this Court challenged the legality of the sales‑tax imposed by the Bihar Sales Tax Act, hereinafter referred to as the Act, on the company’s transactions that occurred during the financial years 1949‑50 and 1950‑51. The question raised by the appellants was very limited in scope; it concerned the correct interpretation to be given to certain orders issued by the Board of Revenue that dealt with the tax that could be levied for those two years. The material facts that bear upon this narrow point are set out briefly. The assessment of the appellants for both years was completed by the Superintendent of Sales Tax at Monghyr on 7 May 1952. The assessment concluded that the total tax liability amounted to Rs 6,44,940‑2‑6 for the year 1950‑51 and Rs 7,46,876‑1‑3 for the year 1951‑52. Before the assessing officer the appellants argued that every sale they made in which the goods were ultimately delivered outside the State of Bihar should be exempt from tax under Article 286(1)(a) of the Constitution. The assessing authority rejected this contention, holding that the sales were completed in Bihar and therefore the entire turnover of the company was liable to tax under the Act. In arriving at this view the assessing officer relied on a previous decision of the Board of Revenue in the Bengal Timber case (Case 61 of 1952). The appellants then preferred an appeal to the Deputy Commissioner of Sales Tax, Bihar, but that appeal was dismissed on 8 October 1952 on the same ground. The appellant company paid the tax demanded for both assessment years and subsequently invoked the revisional jurisdiction of the Board of Revenue. In the petitions filed before the Board, the appellants pointed out that the sales of goods sent for consumption outside Bihar, which gave rise to a tax demand of Rs 1,23,813‑0‑2 for the earlier year and Rs 7,10,185‑12‑0 for the later year, fell into two distinct categories: (a) those where the goods were delivered for consumption in the State of first delivery or first destination, and (b) those where the goods were delivered for consumption in a State other than the State of first delivery. For convenience, these categories are referred to as type (a) and type (b) respectively. The appellants contended that, on a proper construction of Articles 286(1) and 286(2), both categories of sales should be excluded from their taxable turnover.

In the proceedings before the Board, the matter of exemption under Article 286(2) was raised, and the decision of the Supreme Court on that point was brought to the attention of the Board member during the hearing. The Board, however, did not examine whether the Supreme Court decision covered both categories of sales identified by the appellants—those in which the goods delivered outside the State were intended for consumption in the State of first delivery (type a) and those in which the goods were destined for consumption in another State (type b). Without addressing that distinction, the Board issued an order on 28 August 1953 that was brief in form. The order stated: “The two points urged in this Court were among those points urged in the Lower Court and they are—(i) No tax should have been levied on the Company’s canteen sales. (ii) that dispatches outside the State for consumption in other States should not have been taxed for the period after the Constitution came into force. As regards the admitted dispatches of goods outside the State after the 26th January 1950, when the Constitution came into force, the learned Lower Court has been guided by the decision of the Board in the Bengal Timber case (Case No. 61 of 1952). But this ruling of the Board stands superseded by the subsequent decision of the Supreme Court in the United Motors case. According to the decision of the Supreme Court, no tax can be levied on dispatches to the places outside the State after the 26th January 1950 and on this point the petition are allowed, and the sales‑tax officer directed to recalculate the amount of tax payable by the assessee” (1) [1953] S.C.R. 1069.

The appellants interpreted this order to mean that every sale in which goods were delivered outside the State—whether the goods were ultimately consumed in the State of first delivery (type a) or in another State (type b)—was exempt from sales tax. The sales‑tax authorities, on the other hand, read the order as granting exemption only to those sales where the goods were dispatched outside the State for consumption in the State of first destination, that is, to sales of type a. This difference of view was reflected in the correspondence exchanged between the appellants and the tax officials. Consequently, the appellants filed an application seeking refund of the tax that had been levied on all such out‑of‑State deliveries. The tax authorities, adhering to their interpretation of the Board’s order and their reading of the Supreme Court’s United Motors judgment, refunded the tax on the type a sales but refused to refund Rs 20,923‑15‑2 for the first year and Rs 1,29,823‑5‑0 for the later year, amounts that represented tax on the type b sales. The appellants continued to press their claim for the refund of those sums.

In light of these opposing interpretations, the State of Bihar moved the Board of Revenue seeking either a review of its 28 August 1953 order or, at the very least, a clarification that would limit the order’s operation to sales falling within type a. The State argued that such a clarification would bring the Board’s order into alignment with the correct construction of Article 286(1).

In the United Motors case, this Court had earlier addressed the relevant legal principles. The appellants challenged the authority of the Board of Revenue to revisit its earlier decision and, on 25 April 1955, the Board issued an order rejecting two petitions. The order explained that the petitions were essentially miscellaneous applications filed on behalf of the State of Bihar, seeking clarification of the Board’s order dated 28 August 1953 in Cases Nos 514 of 1952. After hearing arguments, both parties conceded that the Act contained no provision permitting a party to move the court for clarification or explanation of an order, observing that such a function was essentially advisory. The parties also agreed that further clarification was unnecessary because the Board’s order already referred specifically to the Supreme Court judgment in United Motors. Accordingly, the Board dismissed the petitions.

The Court noted that while the 28 August 1953 order was terse and ambiguous, the later 25 April 1955 order was, if anything, more obscure. Nevertheless, the appellants regarded the 1955 order as favorable because the State’s request for clarification of the first order—based on the tax authorities’ interpretation—had been refused. When the tax authorities continued to deny refund of the two sums of tax previously mentioned, the appellants instituted two writ petitions in the Patna High Court under Article 226 of the Constitution, seeking mandamus to compel the refund. Their principal argument was that the Board of Revenue’s orders imposed a duty on the authorities to refund the tax. The writ petitions also made an incidental claim that, on a proper construction of Articles 286(1) and 286(2) of the Constitution, the appellants were entitled to the refund even apart from the Board’s orders.

The learned judges of the High Court primarily examined whether, on a proper interpretation of the constitutional articles, sales in which goods were delivered outside Bihar for consumption not in the state of first delivery were exempt from tax under the Bihar Sales Tax Act. After consideration, the judges decided the issue against the appellants. Subsequently, the judges addressed the central issue raised in the writ petitions: that the Board’s order of 28 August 1953 had permitted the appellants’ revision on “the second point,” which covered sales of all categories irrespective of whether the goods were intended for consumption in the state of first destination outside Bihar. The Board’s order directed the sales‑tax officer to recompute tax by allowing the exemption for such sales and held that the officer was statutorily bound to implement the Board’s directive, whether the direction was correct or not, especially since the Board had refused to modify the order to exclude particular categories of sales from its scope.

In this case the Court observed that the orders issued by the Board of Revenue were ambiguous. The learned High Court judges therefore answered the question on the premise that the Board had directed the tax officer to recompute the tax on the basis that all sales made outside the State, both of category (a) and category (b), were exempt from liability. The judges then explained that the Board’s order was clearly erroneous with respect to the category (b) sales and that a petitioner could not obtain a writ of mandamus to enforce a manifestly wrong order. Consequently the petitions were dismissed. The appellants subsequently sought certificates under Articles 132 and 133 of the Constitution, but the High Court granted only a certificate under Article 132. The present appeals arise on the strength of those certificates.

The primary argument advanced by counsel for the appellants concerned the duty of the tax authorities to obey the Board’s orders and to give effect to them. Counsel contended that the High Court erred in refusing mandamus relief on the ground that the Board’s order was erroneous. To support this submission, counsel relied on a recent decision of this Court in Bhopal Sugar Mills v. Commissioner of Income‑tax (1), wherein the Court held that when a superior tribunal issues a final direction to a subordinate officer on how to compute tax, the subordinate officer may not disregard that direction even if it is wrong. The Court further explained that a High Court, when approached for a mandamus, is bound to enforce the final order of the superior tribunal and may not refuse enforcement merely because it believes the order to be incorrect. The Court emphasized that once a tribunal’s order becomes final, it binds all parties and its correctness cannot be challenged collaterally in enforcement proceedings. Counsel attempted to place the present matter within the scope of that ruling. The ratio of the Bhopal Sugar Mills decision was expressed in a passage stating that a refusal by a subordinate tribunal to follow a superior tribunal’s directions amounts to a denial of justice and undermines the hierarchical principle that underpins the administration of justice in this country.

In this case, the Court observed that if a subordinate authority fails to obey directions issued by a superior tribunal exercising its appellate powers, the administration of justice would descend into chaos. The Court expressed difficulty in understanding how the learned Judicial Commissioner could, while strongly condemning the respondent for refusing to follow the superior tribunal’s directions, nevertheless conclude that no manifest injustice had resulted from that refusal. To invoke the principle articulated by the Court, it must be shown that the superior tribunal’s order is clear, certain, definite and free from any ambiguity, so that the subordinate authority or officer to whom it is addressed is capable of giving effect to it. The Court was of the view that the earlier decision cited could not be applied to the facts of the present dispute.

The Court then examined the earlier order of the Board, describing it as at best ambiguously worded. The Board had referred to the Bengal Timber case, which lower authorities had followed in disallowing the appellants’ claim to exemption for both type (a) and type (b) sales involving out‑of‑State delivery. Subsequently, the Board made reference to the Supreme Court’s decision in State of Bombay v. United Motors (India) Ltd. and others, treating that decision as superseding the Board’s earlier position and stating that, according to the Supreme Court, no tax could be levied on dispatches outside the State after 26 January 1950; on that ground the petitions were allowed. The Court noted that the Board member did not specify precisely how far the Supreme Court’s ruling superseded the Board’s earlier decision, leaving the matter uncertain.

Learned counsel for the appellants argued that Mr Bakshi, the Board member, drew no distinction between sales of type (a) and type (b), and therefore included both categories within a single class of sales in which the goods were delivered outside the State for consumption in other States. Accordingly, they contended that the member had either correctly or incorrectly applied the United Motors decision to all such sales. The Court rejected this construction of the order. It refused to presume that Mr Bakshi had not examined the United Motors judgment when he referred to it, nor that he was unaware of the terms of the Explanation to Article 286(1)(a) of the Constitution, whose scope and significance had been analysed in that judgment. Instead, the Court was inclined to accept the interpretation that the member himself gave in his April 1955 order, whereby he left it to the Sales‑Tax Officer to determine, based on his own reading of the Supreme Court’s judgment, the relief to which the appellants might be entitled. The Court acknowledged that this approach might not have been a satisfactory method of disposing of the revision petition, but it emphasized that the central question was whether Mr Bakshi had correctly ascertained the true scope and effect of the Supreme Court’s decision and applied it to all sales resulting in goods being delivered outside the State, thereby exempting them from tax liability.

It was observed that allowing the revision petition to be disposed of by leaving the point that had arisen for decision by the member of the Board of Revenue to be decided by the Sales‑tax Officer was not a satisfactory method. The Court then focused on the simple question of whether Mr Bakshi had determined the true scope and effect of the judgment of this Court and had interpreted it to mean that every sale which resulted in the delivery of goods outside the State of Bihar fell within the Explanation to Article 286(1) and therefore was exempt from tax liability, as reflected in the citation (1) [1953] S.C.R. 1069. Despite the cryptic language employed by the Member of the Board, the Court was of the clear opinion that he did not intend to decide that point in favour of the appellants in the manner they claimed. It was common ground that when the Board of Revenue was approached by the State Government for a review or clarification of the earlier order, Mr Bakshi, by his order dated 25 April 1955, expressed that he had earlier directed the Sales‑tax Officer to give effect to the judgment of this Court in the United Motors case and had taken no further action. The appellants’ counsel strongly argued before the Court that the Board member, having accepted the preliminary objection that the Bihar Sales‑tax Act contained no provision by which a concerned party could move the Board to clarify or explain an order, lacked jurisdiction to clarify his previous order. Accordingly, the counsel maintained that any statement made by the Board on the second occasion could not be held to modify the earlier order of 28 August 1953 or to deprive the appellants of the benefits conferred by that order. In contrast, the Court noted that, before the Board, both the State Government and the appellants had agreed that no clarification was required because the order made a specific reference to the Supreme Court’s judgment in the United Motors case. Since this observation was incorporated into the later order with the consent of both parties, the Court considered it too late for the appellants to raise a technical objection to giving effect to that sentence. Consequently, in view of the construction reached by the Court regarding the earlier order of August 1953, it was unnecessary to pursue the matter further. Accordingly, if, as a result of the Board’s order or orders, the Sales‑tax Officer was directed to give effect to the United Motors judgment, the interpretation of that judgment was left to the officer. The Court reiterated that the principle laid down in Bhopal Sugar Mills v. Commissioner of Income Tax (1) was inapplicable to this situation. The Court also indicated that, even if the decision in that case were to apply, …

The Court observed that even if the decision were applied and the High Court issued an order in the nature of a mandamus to the sales‑tax officer, such an order could only direct the officer to carry out a reassessment in accordance with the United Motors decision. That direction would leave the appellants in exactly the same position they occupy now, because no separate order from the High Court would alter their circumstances. The Court then turned to the next issue, namely whether, when the United Motors decision is properly construed, the exclusion of type (b) sales from the exemption provided under Article 286(1) was a mistake. Mr. Chatterjee, learned counsel for the appellants, attempted to demonstrate that the Court had settled three propositions in the United Motors case. First, the Court had held that sales resulting in the delivery of goods in a State for consumption in that State – that is, sales falling within the Explanation to Article 286(1) – were, by legal fiction, deemed to occur inside that State for all purposes and therefore fell within the taxing authority of the State where the delivery took place. Second, the Court had asserted that sales which, by virtue of the same fictional construction, were deemed to be inside a particular State were automatically “outside” every other State, and consequently were exempt from any tax levy by those other States. Third, the Court had further declared that any sale which did not meet the criteria of the Explanation, yet involved the delivery of goods outside the State in which title passed, was to be treated as an “outside sale” over which no State possessed the power to impose a tax. In essence, the appellants’ argument was that the Court had established that every sale which was not an “Explanation sale” – and therefore not an “inside sale” in any State – constituted an “outside sale” for all States, rendering it exempt from the imposition of sales‑tax throughout India. To support this contention, counsel relied on a passage from the judgment of the learned Chief Justice, recorded at page 1081 of the report, which read: “............... The authors of the Constitution had to devise a formula of restrictions to be imposed on the State‑power of taxing sales or purchases involving (1) [1961] 1 S.C.R 474 (2) [1953] S.C.R 1069 inter‑State elements which would avoid the doubts and difficulties arising out of the imposition of sales‑tax on the same transaction by several Provincial Legislatures in the country before the commencement of the Constitution. This they did by enacting Clause (1)(a) with the Explanation and clause (2) of Article 286. Clause (1)(a) prohibits the taxation of all sales or purchases which take place outside the State but a localised sale is a troublesome concept, for, a sale is a composite transaction involving as it does several elements such as agreement to sell, transfer of ownership, payment of the price, delivery of the goods and so forth, which may take place at different places..................... To solve the difficulty an easily applicable test for determining what is an outside sale”. The Court thus set out the precise points of contention raised by the appellants concerning the interpretation of the United Motors judgment and the scope of the exemption under Article 286(1).

In the Court’s view, the Explanation that accompanied Article 286 had to be crafted in order to resolve the difficulty of determining the appropriate State of taxation when a sale or purchase spanned more than one State. The Explanation, according to the Court, accomplished this by employing a legal fiction: it deemed that the State in which the goods were actually delivered for consumption was the State in which the sale or purchase was to be regarded as having taken place, even though the legal title to the goods might have passed in a different State. By defining an “outside” sale or purchase in contrast with an “inside” one, the Court explained that the decisive factor for locating a transaction was the place of actual delivery and consumption. The earlier requirement of establishing a sufficient territorial nexus was therefore replaced by a simpler test, namely whether the goods were delivered in the taxing State as a direct result of the sale or purchase for the purpose of consumption in that State. If the answer was affirmative, the transaction was deemed to have occurred in that State alone and to be “outside” every other State. Consequently, the other States were barred from imposing tax on the same transaction, and the risk of multiple taxation by different States was eliminated.

The Court further observed that the quoted passage clarified the scope of the Explanation and described what might be called “Explanation sales.” When a sale satisfied the conditions set out in the Explanation, it was classified as an “inside” sale in the State of delivery‑cum‑consumption, and only that State possessed the authority to levy tax. All other States were prohibited from taxing the same sale, irrespective of any other territorial connections they might have claimed. However, the passage did not address situations where a sale failed to meet the Explanation’s requirements, leaving unresolved the question of which State, if any, could tax such a transaction. As a result, the Court inferred that sales of type (a), which qualified as “inside” sales under the Explanation, would be exempt from tax under the Bihar Sales‑Tax Act because they were “outside” the State of Bihar. By contrast, sales of type (b) were not covered by the United Motors decision; therefore, the Court held that, on the authority of the Board of Revenue, the earlier Bengal Timber decision remained controlling and those transactions continued to attract tax liability. The counsel for the appellants was noted to have correctly argued that the Board of Revenue’s orders had become final between the parties, thereby fixing the liability to tax.

In this case, the Court observed that the liability to tax had to be measured according to the orders issued by the Board of Revenue, irrespective of whether those orders were right or wrong. Consequently, the Court held that it was unnecessary to examine whether, apart from its earlier decision in United Motors, the appellants might obtain any additional relief based on any other decision interpreting article 286(1) and (2). The Court reiterated that the appellants had already received a refund for the tax that had been collected on sales classified as type (a). However, the Court expressed the view that, under the Board of Revenue’s orders, the appellants were not entitled to a refund of tax on the transactions that fell within type (b). The Court also noted that the finality of the Board’s orders regarding type (b) transactions meant that the matter could not be reopened simply on the ground of a possible error in those orders. On that basis, the Court affirmed that the High Court’s judgment dismissing the appellants’ petitions was correct. Accordingly, the Court concluded that the appeals failed and were dismissed. The Court further stated that, given the circumstances, no order as to costs would be made. Therefore, the appellate process could not provide a fresh determination of tax liability beyond what had already been decided. The appeals were therefore dismissed.