B. K. Wadeyar vs M/S. Daulatram Rameshwarlal

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 45 and 46 of 1959

Decision Date: 27 September 1961

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

In this case the Supreme Court of India rendered its judgment on 27 September 1961 in the matter of B K Wadeyar versus M S Daulatram Rameshwarlal. The bench that heard the appeal consisted of K C Das Gupta, S K Das, M Hidayatullah, J C Shah and N Rajagopala Ayyangar. The petitioner was B K Wadeyar and the respondent was the firm M S Daulatram Rameshwarlal. The decision was reported in 1961 AIR 311 and in the Supreme Court Reporter as 1961 SCR (1) 924. The respondents’ firm claimed exemption from sales tax under article 286(i)(b) of the Constitution for sales of cotton and castor oil that were made on a free‑on‑board (FOB) basis. Their contention was that under the FOB contracts they remained the owners of the goods until those goods crossed the customs barrier and entered the export stream. The respondents also contested the purchase tax that had been levied on them under section 10(b) of the Bombay Sales Tax Act. The Bombay High Court had accepted the respondents’ argument concerning the sales tax exemption but had held that they were liable to pay purchase tax. On appeal, the Supreme Court affirmed that the goods continued to be the property of the seller until they were brought to the ship and loaded on board; consequently, the sales were exempt from tax under article 286(i) of the Constitution. The Court interpreted the expression “a person” in section 10(b) of the Bombay Sales Tax Act as referring to “a registered dealer”, and therefore the purchasing dealers were correctly assessed purchase tax. The Court observed that the normal rule in FOB contracts is that the intention is for title to pass on shipment of the goods, and that the presumption is that the buyer must obtain the required export licence, although in particular cases that duty may fall on the seller. The Court considered the authorities H O Brandt & Co. v H N Morris & Co. Ltd. (1917) 2 KB 784 and M W Hardy & Co. v A V Pound & Co. Ltd. (1953) 1 QB 499. The Court noted that “export” under the Import and Export Control Act is defined as taking goods out of India by land, sea or air, and that under the Export Control Order export is not deemed to have commenced until the ship carrying the goods leaves the port or, in some circumstances, passes the territorial waters. The earlier decision of the State of Bombay v United Motors (India) Ltd. (1953) 4 STC 133 was held to be inapplicable.

In this case, the citation (1953) 4 S.T.C. 133 was held to be inapplicable to the matters before the Court. The matter came before the Civil Appellate Jurisdiction as Civil Appeals Nos. 45 and 46 of 1959 were instituted. Both appeals were filed by special leave against the judgment and order dated March 25, 1957, issued by the former Bombay High Court in Appeal No. 16 of 1957. Counsel representing the appellant in Civil Appeal No. 45 of 1959 included the Solicitor‑General of India together with two additional advocates, while the respondent in the same appeal was represented by senior counsel appointed by the government. In Civil Appeal No. 46 of 1959, the Additional Solicitor‑General of India and two other lawyers represented the respondents, and the appellants were defended by another team of counsel. The judgment for this appeal was delivered on September 27, 1960 by Justice Das Gupta of the Supreme Court. The party identified as M/s Daulatram Rameshwarlal was a firm registered under the Indian Partnership Act and, for the purposes of this case, was described as “sellers”. The sellers were also classified as registered dealers within the meaning of section 11 of the Bombay Sales Tax Act. In the turnover return filed for the period from April 1, 1954 to March 31, 1955, the sellers claimed exemption from sales tax on the sale of cotton valued at Rs. 68,493‑2‑6 and on the sale of castor oil valued at Rs. 6,47,509‑1‑6. The basis of the claim was that the transactions were FOB contracts in which the sellers retained ownership of the goods until the goods passed the customs barrier and entered the export stream, thereby rendering the sales non‑taxable under Article 286(1)(b). The Sales Tax Officer rejected the exemption claim and assessed sales tax on a taxable turnover that included the contested cotton and castor oil sales. In addition, the Officer assessed purchase tax under section 10(b) of the Bombay Sales Tax Act on the sellers’ purchase of castor oil, which later was sold for the amount of Rs. 6,47,509‑1‑6. A notice of demand for the total sales tax and purchase tax assessed was served on the sellers on September 30, 1956. The sellers then approached the Bombay High Court under Article 226 of the Constitution, seeking writs to quash assessment order and the demand notice and to prohibit the Sales Tax Officer from taking further steps. The learned judge who heard the petition rejected the sellers’ contention that ownership of the goods persisted until they crossed the customs frontier, and consequently held that the sellers were not entitled to the benefit of Article 286(1)(b) of the Constitution. Regarding the purchase‑tax assessment, the judge also dismissed the sellers’ argument that the assessment was illegal, thereby upholding the assessment. Accordingly, the learned judge dismissed the application filed under Article 226, refusing to grant any of the relief that the sellers had sought, and thereby leaving the assessment and demand notice in force. The sellers subsequently appealed the trial judge’s decision, seeking reversal of both the denial of exemption and the affirmation of the purchase‑tax assessment. The appellate bench, after hearing the arguments, rejected the trial judge’s view and held that ownership of the goods remained with the sellers until such goods were loaded on board the vessel, and consequently concluded that the sales fell within the exemption prescribed by Article 286(1)(b).

Accordingly, the appellate bench concluded that the sales were exempt from tax pursuant to the provision contained in Article 286(1)(b) of the Constitution. This ruling contrasted with the trial judge’s earlier determination that ownership transferred only after the goods crossed the customs frontier, thereby denying the sellers the exemption. By holding that title passed at the moment the merchandise was placed upon the ship, the Court interpreted the FOB clause to mean that risk and legal ownership continued with the sellers until shipment. Accordingly, the exemption prescribed by Article 286(1)(b) of the Constitution therefore became applicable to the sales in question. Thus, the appellate judgment effectively set aside the trial judge’s denial of exemption and recognized the sellers’ right to rely on the constitutional provision.

The appellate judges held that, although the sellers were not entitled to the constitutional exemption, they were nonetheless required to pay purchase tax under section 10(b) of the Bombay Sales Tax Act. Consequently, the judges issued an order directing the Sales Tax Officer not to enforce the demand for sales‑tax payment on the cotton transaction valued at Rs 68,493‑2‑6 and on the castor‑oil transaction whose total value was Rs 6,47,509‑1‑6. After obtaining special leave from this Court, the Sales Tax Officer appealed the order, filing Civil Appeal No. 45 of 1959 against the direction that barred him from realizing the sales tax on those two sales. In a separate proceeding, the sellers themselves filed Civil Appeal No. 46 of 1959, challenging the appellate court’s decision to the extent that it upheld the assessment of purchase tax under section 10(b). The only issue that required resolution on the Sales Tax Officer’s appeal was the point at which ownership of the goods passed – whether it occurred at the moment of shipment or at some earlier stage before shipment.

The Court noted that settled jurisprudence declares that if title to the goods passes to the buyer after the goods have crossed the customs frontier for export, the sale is deemed to have taken place “in the course of export” and therefore falls outside Indian territorial jurisdiction. Accordingly, if in the present transactions title passed to the buyers at the time of shipment, which necessarily followed the crossing of the customs frontier, the sales would be regarded as having occurred “in the course of export” and the exemption provided by Article 286(1)(b) would become applicable. The sellers asserted that the contracts were on an FOB (Free on Board) basis. Although the learned Solicitor‑General, appearing for the Sales Tax Officer, contended that the sales were not genuine FOB contracts, the Court observed that the writ petition specifically alleged in paragraphs 11 and 13 that the sales were FOB, and the counter‑affidavit filed by the Sales Tax Officer did not dispute those allegations. Moreover, the assessment order itself described the transactions as FOB sales, and the specimen contract presented by the parties employed the phrase “FOB delivered”. These circumstances left no doubt that the contracts were indeed FOB contracts. Under ordinary FOB terms, ownership is intended to pass and ordinarily does pass at the moment the goods are shipped. The Court recognized an exception whereby, if the seller retains the bill of lading in his own order and then transfers it to a third party, title may not pass even upon shipment. However, the present dispute did not require an examination of whether the transfer of title was postponed beyond shipment, and the Court accepted the well‑settled proposition that, absent any special agreement to the contrary, title in FOB transactions passes at shipment.

In this case, the Court noted that the proposition that, under a free on board (FOB) contract, ownership of the goods does not pass until the goods are actually placed on board the vessel was not contested before it. Nevertheless, the learned Solicitor General correctly emphasized that the parties to a contract are free to agree on a different point at which title to the goods passes. Determining whether the parties had, in fact, adopted such an alternative arrangement required an examination of all the surrounding circumstances. The Solicitor General identified three particular circumstances that, in his view, demonstrated that the sellers and the buyers had agreed that title would transfer to the buyer even before the goods were shipped. The first circumstance concerned the way in which the bill of lading was made out. The bill of lading bore the name of the buyer, which might suggest that the buyer was intended to obtain ownership at the time of shipment. However, the Court also considered that the same bill of lading was retained by the sellers, and that the contract stipulated that payment would be made only upon presentation of the bill of lading. The contract expressly provided for “payment at Bombay against presentation of documents.” Accordingly, the sellers received the bills of lading, and the buyer effected payment only after the sellers presented those bills together with the invoices. When a bill of lading is drawn as if the buyer had shipped the goods but is actually obtained and kept by the seller, that fact ordinarily indicates an intention that ownership would not pass until after payment had been received. The second circumstance highlighted by the Solicitor General was that the export was to be carried out under the buyer’s export licence. The Court held that this fact did not, by itself, show a different intention regarding the passage of title. Under the normal rule in FOB contracts, the duty to obtain the necessary export licence rests with the buyer, a principle that was articulated in the decision in Brandt’s case. Although a later English decision, Hardy v. Pound, held that Brandt’s rule does not apply to every FOB contract and that, in the particular facts of that case, the sellers were required to obtain the licence—a view later approved by the House of Lords—the Court maintained that the presumption remains that the buyer is responsible for securing the export licence, unless the specific circumstances of a case compel the seller to assume that duty. The third circumstance relied upon by the Sales Tax Officer involved a statutory provision. The Export Control Order of 1954, made under the powers granted by the Import and Export Control Act of 1947, contained a clause—clause 5(2)—stating: “It shall be deemed to be a condition of that licence … that the goods for the export …”

The provision states that the goods for which the licence is granted shall be the property of the licencee at the time of the export. The Solicitor General argued strongly that it is reasonable to infer that the contracting parties intended to obey this condition and that they agreed among themselves that the goods would become the property of the licencee, i.e., the buyer, at the time of export. It was further submitted that “time of the export” should be understood as the moment when the customs frontier is crossed, and that the analysis must assume that both buyer and seller intended the buyer to obtain ownership at the instant the goods passed that frontier. The Court, however, finds no justification for interpreting the phrase “the time of the export” to mean the moment when the goods cross the customs frontier, as suggested by the cited authorities (1) [1917] 2 K.B. 784 and (2) [1955] 1 Q.B. 499. Under the Import & Export (Control) Act, 1947, export is defined as “taking out of India by sea, land or air”. The Exports (Control) Order, 1954 adopts the same meaning for the term. Accordingly, the time of export is the time when the goods leave the territorial limits of India, which include the nation’s territorial waters. Therefore the time of export occurs when the vessel carrying the goods moves beyond those territorial limits. In any event, export cannot be said to have begun before the ship carrying the goods has departed the port. Consequently, the parties’ intention to comply with clause 5(2) of the Exports (Control) Order, whereby the goods should be the property of the licencee at the time of export, merely signifies that ownership must pass either immediately before the ship crosses the territorial waters or, at the earliest, when the ship leaves the port. Whatever interpretative approach is adopted, there is no indication that compliance with clause 5(2) implies that ownership should pass to the buyer at the moment the goods cross the customs frontier. It is correct that in the United Motor case (1) and in other decisions this Court has held that the “course of export” begins when the goods cross the customs barrier. However, those decisions were concerned with when the course of export starts for the purpose of Article 286(1)(b) of the Constitution, not with the definition of export under the Exports (Control) Order. For reasons not needing detailed exposition, the Court previously decided that the course of export commences at the instant the goods cross the customs barrier.

The customs barrier was the point at which goods crossed the customs frontier. The decisions concerning when the course of export began did not help the Court in determining the exact moment when the export itself commenced. As previously observed, the Export Control Act of 1947 defines export as “taking out of India by land, sea, or air.” Accordingly, under the Export Control Order, export cannot be said to have started until the vessel carrying the goods has departed from the port, and in some contexts it is more accurate to say that export does not begin until the vessel has passed beyond India’s territorial waters. After examining the relevant provisions, the Court concluded that no circumstance justified a finding that the parties had reached a special agreement whereby, despite the sales being on FOB terms, ownership of the goods would transfer to the buyer before shipment. The Court agreed with the learned judges of the Bombay High Court that the goods remained the seller’s property until they were brought to the ship and loaded on board, and therefore the transactions were exempt from tax under Article 286(1)(b) of the Constitution. In Civil Appeal No. 46 of 1959, the appellants argued that, when the provisions of section 10(b) of the Bombay Sales Tax Act are correctly interpreted, no purchase tax should be levied on them. Section 10(b) provides for a purchase tax on the turnover from the purchase of goods listed in column I of Schedule B, at the rates shown in column 4 of that schedule, “where a certificate under clause (b) of section 8 has been furnished in respect of such goods and the purchasing dealer does not satisfy the Collector that the goods have been dispatched by him or by a person to whom he has sold the goods to an address outside the State of Bombay within six months of the purchase date by the dealer furnishing such certificate.” Section 8(b) allows a deduction from turnover for the sale of goods to a dealer who holds an authorisation and provides the selling dealer with a prescribed certificate stating, among other things, that the goods sold are intended to be dispatched either by him or by registered dealers to an address outside the State of Bombay. It is admitted that M/s. Daulatram Rameshwarlal furnished such a certificate for the castor oil it sold to others, and that the sellers of those goods were consequently allowed deductions. It is also undisputed that the persons to whom M/s. Daulatram Rameshwarlal sold the goods dispatched them to an address outside the State of Bombay within six months of the purchase date.

In this case the Court observed that the purchasers, M/s. Daulatram Rameshwarlal, had received the goods within six months of purchase, but the persons to whom they sold the goods were not registered dealers. Both the Sales Tax Officer and the High Court of Bombay had previously held that the expression “person to whom he has sold the goods” in section 10(b) of the Bombay Sales Tax Act referred only to a registered dealer. The appellant‑dealers argued that the word “person” was sufficiently wide to include both registered and unregistered dealers, and that the Legislature had deliberately used “person” instead of “registered dealer” so that purchase tax would be levied only when the goods declared under section 8(b) were not dispatched outside the State of Bombay by any party. They urged that “a person” in section 8(b) should be interpreted to cover a registered dealer as well as any other purchaser. The Court was unable to accept this contention. A careful reading of sections 8 and 10, the Court held, showed that the Legislature was intent that the declaration of intention to dispatch the goods outside the State be effected by a registered dealer to whom the goods were sold. If the actual dispatch outside the State was performed by a person who was not a registered dealer, the certificate was not complied with. The Court found it unreasonable to think that, although the Legislature required the certificate to state that the goods were intended to be dispatched by the seller or by a registered dealer, it would be satisfied by a later dispatch carried out by a non‑registered dealer. Counsel for the appellant, Mr. Sanyal, contended that the certificate needed only to declare an intention and that a later dispatch by an unregistered dealer did not render the declaration false. He suggested that if, at the time of making the declaration, the purchasing dealer truly intended the goods to be dispatched as described, the dealer should not be held liable for a false statement even though the actual dispatch was performed by someone else. The Court, however, noted that while the dealer had not made a false declaration, the declared intention had not been fulfilled. The legislative scheme was clear that where the declared intention was not carried out, purchase tax should be imposed. To adopt any other view would render the declaration requirement ineffective.

The Court observed that when the intention declared in the certificate is not carried out, that declaration loses its effect and becomes useless. In reaching its decision, the Court concluded that the lower tribunals had correctly given the words “a person” in section 10(b) of the Bombay Sales Tax Act the meaning of “registered dealer.” Accordingly, the purchasing dealers were properly assessed purchase tax under that provision. The Court stressed that the purpose of the legislative scheme is to impose purchase tax whenever the purchaser’s declared intention to despatch goods outside the State of Bombay is not fulfilled, and that the term “person” must be interpreted to capture that statutory intent. Having found no error in the application of the statute by the courts below, the Court affirmed the assessment of purchase tax on the purchasing dealers. Consequently, the Court ordered that both appeals be dismissed. The Court further directed that the costs of the proceedings be awarded against the appellants. In summary, the appeals were dismissed with costs, confirming that the purchase tax assessments were lawful and that the interpretation of “a person” as “registered dealer” was correct.