Burmah Shell Oil Storage And... vs The Commercial Tax Officer And Others

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 751 of 1957 and 10 of 1958

Decision Date: 27 September 1961

Coram: J.C. Shah, Bhuvneshwar P. Sinha, J.L. Kapur, M. Hidayatullah, J.R. Mudholkar

In this case the Supreme Court recorded a petition filed by Burmah Shell Oil Storage and Distributing Co., of India, against the Commercial Tax Officer and others. The judgment was delivered on 27 September 1961. The bench consisted of Justice C.J. Shah, Chief Justice Bhuvneshwar P. Sinha, Justice J.L. Kapur, Justice M. Hidayatullah, and Justice J.R. Mudholkar. The appellant companies operated their petroleum business from Calcutta and maintained supply depots at Dum Dum Airport. From these depots they sold motor spirit intended for aviation use and delivered it to aircraft that either departed directly from Dum Dum Airport to foreign destinations or, after making intermediate landings within Indian territory, eventually left India. Dum Dum Airport was designated a customs aerodrome, and all aircraft arriving at or departing from it were required to observe the ordinary customs formalities. The West Bengal sales‑tax authorities attempted to impose tax on the sales of motor spirit under the Bengal Motor Spirit Sales Taxation Act, 1941, as amended. The appellant companies contended that the sales were exempt from tax under both clause (a) and clause (b) of Article 286(1) of the Constitution of India. Their argument rested on three points: first, that the transactions occurred outside the State of West Bengal because they did not fall within the Explanation to Article 286(1)(a); second, that the aviation spirit was delivered outside the customs barrier, and therefore the sales were outside the State; and third, that the sales were part of an export, since the aviation spirit was taken out of the territory of India.

The Court held that “sale” in Article 286(1)(a) refers to a completed transaction in which ownership of the goods passes to the buyer. Until the property passes, the contract of sale remains executory and the buyer possesses only a chose in action. Consequently, the taxable event cannot be identified at any earlier stage, because the critical moment for tax liability is the passing of ownership. The Explanation to clause (1) of Article 286 was introduced to prevent the same transaction from being taxed by more than one State. It serves to indicate the State that may levy the tax and also the State that may not levy it, by excluding from consideration the place where ownership passes according to the law of sale of goods. The non‑obstante clause reinforces this principle. By the fictional device created in the Explanation, a sale is deemed to have taken place in the State where the goods are delivered as a direct result of the sale for the purpose of consumption in that State. When more than one State is involved, a State that attempts to tax a sale on the basis of events occurring before the passing of ownership cannot claim that the sale occurred within its territory unless it is also the State of delivery. The Explanation therefore must be interpreted on its own terms and not be explained by reference to the Article, lest the logical relationship be reversed. Moreover, the Explanation applies only where more than one State is concerned. This reasoning was supported by reference to prior decisions, including the case of State of Bombay v. United Motors (India) Ltd.

The Court explained that the provision cannot operate by looking at the location where the property in the goods passed under the law of sale of goods. The non obstante clause confirms this approach. By the fictional rule created in the Explanation, a sale is deemed to have occurred in the State where the goods are delivered as a direct result of the sale for the purpose of consumption in that State. Consequently, when more than one State is involved, a State that seeks to tax a sale on the basis of an event occurring before the passage of property cannot claim that the sale took place within its territory unless it is also the State of delivery. The Explanation is intended to clarify the Article and must be read according to its own tenor; it cannot be interpreted by referring back to the Article because that would reverse their respective roles. Moreover, the Explanation applies only where more than one State is concerned. In arriving at this conclusion the Court considered the earlier decisions of the State of Bombay v. The United Motors (India) Ltd., [1953] S.C.R. 1969; State of Travancore‑Cochin v. Shanmugha Vilas Cashew Nut Factory, [1954] S.C.R. 53; Ramnaya Sons Ltd. v. Assistant Commissioner of Sales Tax, [1955] 2 S.C.R. 483; and The Bengal Immunity Company Ltd. v. The State of Bihar, [1955] 2 S.C.P. 603. The Court further held that, to exclude the power of taxation of the State of West Bengal under Article 286(i)(a) read with the Explanation, the appellant companies would have to identify another State where the goods could be said to have been delivered as a result of the sale for consumption in that other State. In the present case, however, the aviation spirit was delivered directly to an aircraft and no rival State could be pointed to; therefore the restriction contained in Article 286(i)(a) and the Explanation did not apply. The Court also examined the phrase “in the course of export out of the territory of India” in Article 286(i)(b) and observed that the word “export” does not merely mean taking goods out of the country. Export, in this context, signifies that the goods are sent to a foreign destination where they can be regarded as imported; the concepts of import and export are paired in the Article. The Court relied on State of Travancore‑Cochin v. The Bombay Co. Ltd., [1952] S.C.R. 1112 and State of Travancore‑Cochin v. Shanmugha Vilas Cashew Nut Factory, [1954] S.C.R. 53 for this interpretation. Finally, the Court concluded that aviation spirit loaded on board an aircraft for consumption, although taken out of the country, was not exported because it had no destination where it could be said to be imported. Accordingly, the sales could not be said to have occasioned an export nor to have been made in the course of export, and Article 286(i)(b) was therefore inapplicable. The Court held that the sales must be treated as having been made within the State of West Bengal, noting that the customs barrier did not establish a terminal limit to the territorial extent of West Bengal for the purposes of sales tax.

For the purposes of sales tax, the Court observed that although the sales occurred beyond the customs barrier, they remained within the territory of the State that was exercising the taxing power. The judgment concerned two civil appeals, numbered 751 of 1957 and 10 of 1958, which were brought before the Civil Appellate Division. Both appeals were filed against the judgment and order dated 7 December 1956 rendered by the Calcutta High Court in Matters 29 and 58 of 1956. The appellants were represented by counsel including the Attorney‑General of India, the Solicitor‑General of India, and other senior advocates. The respondents, the State of West Bengal, were represented by the Advocate‑General of West Bengal and additional counsel. The judgment was delivered on 27 September 1960 by Justice Hidayatullah.

These two appeals were filed on certificates issued under Article 132(1) of the Constitution by the Burmah Shell Oil Storage and Distributing Co. of India Ltd. and the Standard Vacuum Oil Company, hereinafter referred to as the appellant‑companies. The appeals challenged a common decision of the Calcutta High Court dated 7 December 1956. In that proceeding the High Court had been approached for writs of mandamus, prohibition and certiorari under Article 226, but the petition was dismissed by Justice D N Sinha.

The controversy arose from an assessment of sales tax on the sale of motor spirit for aviation purposes, abbreviated as aviation spirit, which the appellant‑companies supplied to aircraft destined for foreign countries. The assessment was made under the Bengal Motor Spirit Sales Taxation Act, 1941, as amended by section 2(a)(i) of the Bengal Motor Spirit Sales Taxation (Second Amendment) Act, 1954. The respondents in this Court were the Commercial Tax Officer, the Commissioner of Commercial Taxes, and the State of West Bengal, all of whom had been parties in the earlier High Court suit.

The appellant‑companies are engaged in the business of petroleum and petroleum products and operate out of Calcutta. They maintain supply depots at Dum Dum Airport, from which aviation spirit is sold and delivered to aircraft proceeding abroad and belonging to a number of different companies. The sales tax authorities in the State of Bombay had regarded these transactions as outside the ambit of the taxing statutes applicable in Bombay, relying on the provisions of Article 286 of the Constitution. In contrast, the West Bengal tax authorities adopted a different position, proceeded through the appropriate procedural steps, levied an assessment of tax, issued a demand notice and obtained payment of the tax, albeit under protest by the appellant‑companies.

The appellant‑companies subsequently filed petitions under Article 226 of the Constitution in the Calcutta High Court, contending that the tax demand was illegal. Their petitions were dismissed. After obtaining certificates, they lodged the present appeals. The matters raised before this Court, which were identical to those presented before the High Court, were that the sales in question were made in the course of export and therefore fell outside the power of the State of West Bengal to tax under the explained provisions of Article 286.

The parties contended that the sales of aviation spirit were made for export from India, that the transactions occurred outside the State of West Bengal, and that, because the spirit was delivered for consumption beyond West Bengal, the sales could not fall within the Explanation to sub‑clause (a) of the first clause of Article 286. Consequently, they argued that unless the sales could be characterized as “Explanation Sales,” the State possessed no authority to levy tax. In support of this position, it was highlighted that the respondents’ reply before the High Court contained no statement that the aviation spirit was delivered for consumption within West Bengal. The matter before the High Court had been limited to supplies to aircraft that either departed directly from Dum Dum Airport to foreign destinations or eventually reached foreign countries after landing at intermediate points within Indian territory. This limitation was similarly observed by the Court in the present appeal, and the Court indicated that it was not required to opine on sales of aviation spirit to aircraft operating wholly within West Bengal or to destinations in any other Indian State. The factual background was undisputed, and both sides acknowledged the procedure employed for supplying aviation spirit to aircraft.

The procedure, as outlined, involved a representative of the appellant companies applying to the Airport Customs Officer for an officer to supervise refuelling before an aircraft’s arrival. After landing, the aircraft’s captain or ground engineer specified the required quantity of aviation spirit. Upon receiving permission from the customs authorities, the designated amount was delivered in the presence of the deputed customs officer. The delivery details were recorded in a receipt signed by both the company’s representative and the customs officer. Additionally, duty‑drawback shipping bills were prepared, indicating the quantity of spirit supplied; these bills were countersigned by the customs officer and a representative of the aircraft. Subsequent claims for customs‑duty refunds were filed and granted. In the petition before the High Court, it was asserted that the aviation spirit was needed for consumption during flight or outside Indian territory, and therefore it was delivered for consumption outside West Bengal and, in some instances, outside India altogether. The petition also claimed that the spirit was sold in the course of export and that a customs‑duty drawback had been obtained. The respondents replied that the customs‑duty refund was irrelevant to the tax assessment. In the affidavit of the Commercial Tax Officer it was stated: “I further state that a foreign bound aircraft on leaving Dum Dum Airport consumes a portion of the aviation spirit taken in by”.

In the affidavit, the respondent stated that a foreign‑bound aircraft at Dum Dum Airport consumed a portion of the aviation spirit while still within West Bengal before departing India, and denied that the entire quantity was used outside India as alleged. The respondent further asserted that the sale of the aviation spirit did not occur outside the State of West Bengal; rather, the sale was completed in West Bengal, the purchaser paid the price within the State, and delivery was effected at Dum Dum Airport in West Bengal. The Court noted that this factual assertion was raised because the petitioners had not clearly contended that the aviation spirit was sold for consumption within West Bengal, even though the appellant companies denied such a claim. The respondents pointed out that at least some of the spirit had to be consumed in the State, a point reflected in the affidavit filed in reply to the petition and cited by the Court. The Court observed that the dispute was not a mere pleading controversy, since the overall procedure for supplying aviation spirit and its intended use was undisputed. The issue before the Court was a principle‑based one, requiring consideration of the broad factual context rather than technical minutiae. Either the entire transaction fell within the State’s taxing authority or it did not, and the fact that the spirit was consumed during take‑off or while over West Bengal before leaving the territory did not alter the applicable principles. Although the parties debated this aspect, the Court declined to engage in abstract argument and insisted on a substantive analysis. Liability for sales tax, if any, arose at the point of sale, and immunity could be claimed only if, under Article 286(1)(a) and its Explanation, the sale could be said to occur outside the State, or under Article 286(1)(b) if the sale was part of an export from India. Before addressing those two questions, the Court turned to relevant statutory provisions. The Indian Aircraft Act, 1934, governed the control of aircraft manufacture, possession, use, operation, sale, import and export. Section 16 of that Act authorized the Central Government, by notification in the Official Gazette, to declare that any or all provisions of the Sea Customs Act would, with appropriate modifications, apply to the import and export of goods by air. Sections 2(3) and 2(4) of the Sea Customs Act defined “import” as bringing goods into India and “export” as taking goods out of India.

A notification made under the Indian Aircraft Act, together with the rules framed under that Act and the Indian Aircraft Rules of 1920, designated the Civil Aerodrome at Dum Dum as a Customs Aerodrome. By virtue of rule 63 of Part IX of the Indian Aircraft Rules, 1920, the provisions of the Sea Customs Act were made applicable to the Dum Dum Customs Aerodrome with appropriate modifications. Consequently, Dum Dum Airport acquired the status of a Customs Aerodrome, and every aircraft arriving in India from foreign territories or departing from India to any such foreign territory was required to observe the ordinary customs formalities applicable to goods. Section 42 of the Sea Customs Act, which permits drawback on re‑export and was applied mutatis mutandis, provides that when any goods capable of easy identification, which have been imported by sea into any customs port from any foreign port and on which customs duties have been paid at the time of importation, are re‑exported by sea from that customs port to any foreign port, or are used as provisions or stores on board a ship proceeding to a foreign port, seven‑eighths of such duties shall, except as otherwise provided later, be repaid as drawback. (The provisos to this provision were omitted for brevity.) Under section 51, no drawback is allowed unless the claim for such drawback is made and established at the time of re‑export, and under section 52 the claimant is required to make and subscribe to a declaration. The procedural steps described in an earlier part of this judgment are relevant to these statutory requirements.

Turning to the statutory scheme governing the tax on aviation spirit, the Bengal Motor Spirit Sales Taxation Act of 1941 did not originally contemplate a tax on the sale of aviation spirit. The Act defined “motor spirit” as any liquid or mixture of liquids ordinarily used directly or indirectly as fuel for any form of motor vehicle or stationary internal combustion engine, and which has a flashing point below 76 degrees Fahrenheit. Sub‑section (4) of section 3, which is the charging provision, expressly exempted any tax on the sale of motor spirit for aviation purposes. The Act was subsequently amended by the Second Amendment Act of 1954, which deleted sub‑section (4) of section 3 and re‑enacted the proviso to the first sub‑section, inserting a new clause that imposed a tax on all retail sales of motor spirit for aviation purposes effected on or after the commencement date of the Bengal Motor Spirit Sales Taxation (Second Amendment) Act, 1954, at a rate of three annas per gallon. Further amendment came through the Bengal Motor Spirit Sales Taxation (Amendment) Act of 1955, which added an explanatory note to the definition of “motor spirit”, stating for the avoidance of doubt that in this Act the expression “vehicle” includes any means of carriage, conveyance or transport, by land, air or water. The original Act underwent another amendment by the Bengal Motor Spirit Sales Taxation (Amendment) Act of 1957, which among other changes altered the definition of “motor spirit” by removing the phrase “and which has a flashing point below 76 degrees Fahrenheit”. These successive amendments collectively rendered the retail sale of aviation spirit liable to sales tax, with “retail sale” at all relevant times defined as a sale by a retail dealer intended for consumption by the purchaser.

In the amendment made by the Bengal Motor Spirit Sales Taxation (Amendment) Act, 1957, the definition of “motor spirit” was altered once more. Among the changes that affected tax rates, the phrase “and which has a flashing point below 76 degrees Fahrenheit” was removed from that definition. As a consequence of this and the earlier amendments, the law was construed so that retail sales of aviation spirit became subject to sales tax. Throughout the relevant period, the term “retail sale” was consistently defined as a sale “by a retail dealer for the purpose of consumption by the purchaser.” After the Constitution came into force, section 22, in accordance with Article 286, was incorporated into the original Act by paragraph 3 of, and the Eleventh Schedule to, the Adaptation of Laws Order, 1950. The provision read as follows: “22(1). Nothing in this Act shall be construed to impose or authorise the imposition of a tax on the sale or purchase of motor spirit: (a) where the sale or purchase takes place outside the State of West Bengal; (b) where the sale or purchase takes place in the course of the import of such motor spirit into, or export of such motor spirit out of the territory of India; or (c) (omitted). (2) The Explanation to clause (1) of article 286 of the Constitution shall apply for the interpretation of clause (a) of sub‑section (1).” The two sub‑clauses (a) and (b) of the first sub‑section merely restated the prohibition contained in Article 286 of the Constitution, with minor modifications to suit motor spirit, and the Explanation to sub‑clause (a) of clause (1) of that Article was applied without any attempt to alter or expand its scope. The Explanation to sub‑clause (a) of the first clause of Article 286, which was heavily disputed in this case, may be quoted for clarity: “Explanation‑For the purposes of sub‑clause (a), a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State, notwithstanding the fact that under the general laws relating to sale of goods the property in the goods has by reason of such sale or purchase passed in another State.” The High Court of Calcutta, in its judgment, examined the arguments raised and dismissed them. The learned judge specifically refused to infer any legal significance from the fact that customs duties had been refunded as drawbacks on aviation spirit delivered to aircraft. He stated that it was not his duty to determine whether the appellant companies were entitled to claim or receive such customs‑duty drawbacks. Subsequently, the judge concluded that the sale in question was physically located within the State because, at the time of the transaction, both the buyer and the purchaser were situated inside the State of West Bengal.

In that case the High Court observed that, although the aviation spirit was delivered beyond the customs barrier, the delivery still occurred within the State of West Bengal because both the buyer and the seller were present in that State at the time of the sale. The Court examined the statutory provision of Article 286 from three distinct perspectives. First, it concluded that the transaction could not be characterised as an inter‑State trade since neither party was located outside West Bengal and the spirit was not physically delivered outside the State; consequently, clause (ii) of Article 286 was held not to be applicable. The Court supported this view by referring to the earlier decision of this Court in Bengal Immunity Co., Ltd. v. State of Bihar and others. Next, the Court turned to the first sub‑clause of Article 286 and considered whether the fictional rule created by the Explanation might affect the character of the sale. It held that, unless that fiction were invoked, the sale must be treated as a transaction wholly within West Bengal under the general law of sale of goods, because both the contract and the actual delivery were completed inside the State and no “outside” State was involved, even though the aircraft might consume some of the spirit while flying over a foreign State. Accordingly, the Court found that neither the Explanation nor Article 286(1)(a) applied to the present facts. Finally, the Court analysed Article 286(1)(b) and, relying on the precedent set in State of Travancore‑Cochin v. Shanmugha Vilas Cashewnut Factory and others, explained that the expression “in the course of export out of the territory of India” referred only to sales that actually caused the export of goods, not merely to sales intended for export. The Court noted that there was no foreign purchaser, that the spirit was consumed en route and never entered any foreign territory, and that no bills of lading or shipping documents were produced; therefore, no export and no sale “in the course of export” had taken place.

The appellant companies argued that their sales fell within the exemption granted by sub‑clauses (a) and (b) of the first clause of Article 286. To rely on the first sub‑clause, they cited certain decisions of this Court and contended that, unless the sale could be said to fall within the Explanation, it must be treated as a sale outside West Bengal and thus be exempt from State tax. With respect to the second sub‑clause, they maintained that an export out of the territory of India had occurred because the aviation spirit was taken abroad, and that any sale by which the spirit was taken abroad should likewise be exempt. These arguments had been advanced before the High Court, but the Court had rejected them, finding no basis for treating the transactions as inter‑State sales, as exports, or as sales falling outside the State of West Bengal. Consequently, the claims of exemption under both sub‑clauses were dismissed.

The Court observed that the two arguments presented by the parties had to be examined separately because they shared very little in common. It explained that Article 286 of the Constitution limits the authority of the States to levy taxes on the sale and purchase of goods and that, in doing so, it narrows the scope of Entry No 54 in the Second List of the Seventh Schedule. The Court noted that additional restrictions on State taxation appear in Part XIII of the Constitution, but clarified that those provisions were not relevant to the matters before it in these appeals. Likewise, the Court stated that it would not consider the later amendment of Article 286, nor the prohibition contained in the second clause of that article which bars taxes on sales made in the course of inter‑State trade and commerce. Its focus was confined to the first clause of Article 286 as it existed prior to amendment. The first clause, the Court said, is divided into two sub‑clauses. The first sub‑clause bars any State from imposing a tax on a sale or purchase of goods when such sale or purchase occurs outside the State. An Explanation has been appended to this sub‑clause, and the Court had quoted that Explanation earlier in the judgment. The Court observed that the Explanation has generated a prolonged controversy in this Court, during which various and sometimes contradictory opinions have been expressed regarding its meaning. The controversy has become more pronounced when the relationship between the two sub‑clauses of Article 286 is examined. The Court now accepts the view that the prohibitions created by the two sub‑clauses operate independently and separately, and each must be overcome on its own terms. Consequently, the Court held that it need not go beyond the first clause in deciding the present case. The Court recorded that it had heard a wide range of arguments in the appeals. The learned Attorney‑General, appearing for the appellant companies, read extensive extracts from earlier decisions of this Court and argued that unless the sales could be classified as falling within the Explanation – thereby becoming “Explanation sales” – they must be treated as having taken place outside the State of West Bengal and consequently should not be subject to tax. According to that submission, the sales could become “Explanation sales” only if the aviation spirit was delivered for consumption within West Bengal. Conversely, the learned Advocate‑General of West Bengal contended that the Explanation did not apply to the facts of the present case and that the observations made in the earlier rulings were not pertinent. The Court then turned to the language of the first sub‑clause, noting that its opening words state that no law of a State shall impose or authorize the imposition of a tax on the sale or purchase of goods where such sale or purchase occurs outside the State. The Court explained that this language plainly indicates that a State may not tax sales that take place outside its territory. However, the Court raised the question of where a sale actually occurs, observing that a sale involves many elements, and those elements may be situated in more than one State. Under the law governing the sale of goods, ownership passes when certain events happen, and at that moment the sale is deemed complete. The Court further noted that a contract for the sale of goods may be wholly within a single State if the offer, acceptance, the goods themselves, the passage of property and delivery all occur within that State, but the situation may differ when the constituent elements are distributed across two or more States.

In this case the Court observed that when all the parties to a contract were located inside a single State, and when both the offer and the acceptance were made in that State, and when the goods themselves were also physically present in that State, then the transfer of ownership in the goods occurred there and delivery was also effected there. The Court further noted, however, that the various components of a sale could be distributed across two or more States; some of the elements such as the parties, the offer, acceptance or the goods might be situated in one State while other elements might occur in a different State or in several other States. The Court recalled that before the Constitution was adopted, it was possible for more than one State to levy tax on the same sale, and that the provincial statutes then in force clearly showed that any State which had any connection with the sale—because one or more of the sale’s elements took place within its territory—considered that connection sufficient to justify the exercise of its taxing power, even though the actual passage of title might have occurred in another State. The Court explained that the Constituent Assembly intended to achieve certain objectives in the field of taxation, especially with respect to sales tax, and that Article 286 of the Constitution was drafted, among other purposes, to put an end to such multiple taxation. The first clause of that Article was described as explicit: a State was prohibited from imposing a tax on a sale that took place outside its boundaries. The Court added that the converse was also true; a State was authorized to tax a sale of goods that took place within its borders. By “sale” the Court meant a transaction that was completed by the passing of property in the goods. It stressed that before the property passed, the contract of sale remained executory and the purchaser possessed only a chose in action. The Court explained that ownership in the goods passed either when the conditions precedent specified in the contract were fulfilled, if any such conditions existed, or by operation of the law governing the sale of goods. Starting from the fundamental premise that the Constitution sought to tax only a sale completed by the transfer of ownership in the goods, the Court said it was necessary to determine at what point and in which place that transfer occurred. Consequently, the taxable event could not be identified at any earlier stage when the sale remained incomplete because the property had not yet passed. The crucial taxable event, according to the Court, was the moment when ownership in the goods passed as a result of the contract of sale. While the parties to the contract were free to agree on the timing of that event, the Court recognized that the location of the event could be uncertain and sometimes difficult to ascertain. Where the parties had not stipulated the time of passage of ownership, the Court said that the law of sale of goods supplied the answer. Even then, the Court noted, there could be similar difficulty in pinpointing the place where ownership passed. The Court clarified that the physical delivery of the goods did not resolve this problem, because delivery might occur before or after the transfer of ownership. Hence, delivery was not always the factor that determined the completion of a sale, since a sale could be completed either before delivery or after delivery. Finally, the Court emphasized that the Constitution conceived the tax base in terms of a completed sale, defined by the passing of property, rather than an executory contract.

The Court observed that the constitutional provision was intended to apply to the moment when property passed in the goods, and not to a contract that remained executory at the time of sale. Because the crucial event was the passage of property, the Court recognized that there was a real possibility that more than one State might seek to levy tax on the same transaction. One State could contend that the goods, at the time their property passed, were situated within its territory and therefore the passage of property occurred there. Another State could argue that the conditions precedent to the passage of property were satisfied within its borders, and consequently the sale was completed by the passage of property in that State. Yet a third State could maintain that the passage of property took place in its territory because one or more incidents connected with that passage occurred there. To prevent such confusion and to avoid the risk of multiple taxation, the Court noted that the Constitution’s Explanation was inserted. The Explanation served two functions: it identified the State in which the tax could be imposed, and it also specified the State or States in which the tax could not be imposed. In achieving these purposes, the Explanation excluded any consideration of the location where, under the law of sale of goods, the property in the goods might be said to have passed. The Court explained that the purpose was fulfilled by the Explanation, particularly by the non obstante clause contained therein. Accordingly, any State that attempted to tax a sale of goods on the basis that the sale was completed by the passage of property in that State could not succeed where the goods, as a direct consequence of the sale, were delivered for consumption in another State. The Explanation therefore created a legal fiction whereby the sale was deemed to have taken place in the State of delivery, rather than in the State where the passage of property occurred. By this fiction, the test of passage of property was discarded and replaced with the test of delivery as a direct result of the sale for the purpose of consumption in the delivering State. When more than one State was involved, a State that sought to tax the sale on grounds antecedent to the passage of property could not claim that the sale occurred in its territory unless it also happened to be the State of delivery, because tax liability arose only after the sale was complete. Once the sale was complete, the delivering State acquired the right to tax the sale by virtue of the fictional rule introduced by the Explanation. The Court further held that the Explanation must be interpreted in its own terms, as it was intended to explain clause (1)(a) of the Article, and not the reverse. It warned that it would be erroneous to interpret the Explanation by referring to the Article, as that would invert their respective roles. In summary, the Explanation abandoned the passage‑of‑property test and adopted the delivery‑as‑a‑direct‑result‑of‑sale test for determining the State entitled to tax the transaction.

In the case under consideration, the Court explained that when the passing of property occurs in the same State in which the goods are also delivered, there is no difficulty in determining the tax jurisdiction because the sale is wholly within that State. A sale is regarded as occurring outside a State only when the passing of property takes place in a State that is not the State where the goods have actually been delivered as a direct result of the sale for the purpose of consumption in that State. The Constitution, therefore, in certain situations shifts and confines the location of the taxable event to the State where delivery takes place; however, it is important to remember that such delivery may happen either before or after the passing of property. Consequently, no single element of the contract of sale—such as the moment of transfer of ownership—by itself determines which State has the authority to tax the sale when more than one State is involved. The decisive factor is the test of actual delivery of the goods in a State as a direct result of the sale for consumption in that State, and only that State possesses the right to tax the sale, while no other State may do so.

The Court further clarified that the Explanation to article 286(1)(a) becomes relevant only when more than one State is implicated in the transaction. The Explanation functions as a tool to identify which of the connected States is competent to tax the sale and which are not; it does not itself define what constitutes an “outside sale.” In other words, the Explanation serves to determine the appropriate taxing State among those linked to the transaction, rather than providing a definition of an outside sale. The interpretation placed by the Court on the first sub‑clause of article 286(1) aligns substantially with earlier rulings of this Court. In The State of Bombay and another v. The United Motors (India) Ltd. and others (1), the Court observed that the Explanation offers an easily applicable test for identifying an “outside sale” by effectively defining an “inside sale.” The Court quoted the test as follows: “Are the goods actually delivered in the taxing State, as a direct result of a sale or purchase, for the purpose of consumption therein? Then, such sale or purchase shall be deemed to have taken place in that State and outside all other States.”

The Court noted that the reasons for adopting this test and its impact on the second clause prompted a re‑examination of the sub‑clause in The Bengal Immunity Company Limited v. The State of Bihar and others (1). In that case, although the majority addressed various grounds presented before the Court, it declined to give a final opinion on the matter, deciding only that the bans imposed by the two clauses of article 286 were independent and required separate enforcement. No different view on the meaning of the Explanation was expressed. Subsequently, in Ramnarain Sons Ltd. v. Asst. Commissioner of Sales Tax and others (2), the Court reiterated that for article 286(1)(a), the Explanation determines, by means of the legal fiction it creates, the situs of the sale for transactions falling within that category, and once a transaction is deemed to be inside a particular State, it is automatically outside all other States.

In the judgment of the Assistant Commissioner of Sales Tax and others (2), the Court observed that for the purpose of article 286(1)(a) the Explanation creates a legal fiction which determines the location of the sale for transactions that fall within that category. The Court explained that once a transaction is deemed to occur inside a particular State, it automatically becomes a transaction outside every other State. Consequently, the only question that needs to be examined under article 286(1)(a) is whether a transaction is outside the State. If, after applying the Explanation, the transaction is held to be outside the State, then, as a matter of course, the State whose jurisdiction is thus excluded cannot impose tax on that transaction. The Court emphasized that these words – “the Explanation determines by the legal fiction created therein the situs of the sale in the case of transactions coming within that category” – are crucial to the present matter. The first issue, therefore, is whether the Explanation can govern the cases before the Court at all.

The learned Attorney‑General argued that the power to tax these transactions could arise only if the sales were “Explanation sales”, meaning that the goods were delivered as a direct result of the sale for consumption in West Bengal. The Court, however, held that the Explanation is applicable only when more than one State is involved in the same transaction. When no other State can be said to receive the goods for consumption, other than the State in which title to the goods passes, the Explanation is not required as a determining factor. The Court referred to the authorities (1) [1955] 2 S.C.R. 603 and (2) [1955] 2 S.C.R. 483 492, noting that the power to tax, which is exercisable by virtue of the transfer of title, can be removed only if there exists another State in which the goods, as a direct result of the sale, were delivered for consumption. In the absence of such a rival State, the question of removing the tax power does not arise.

Applying this principle to the present cases, the Court found that there was no rival State. When a purchaser acquires goods in West Bengal for his own consumption, the test of an “inside sale” is satisfied because the property in the goods passes within the same State and all elements of the contract of sale occur there. Moreover, if the property in the goods passes to a buyer who is also the ultimate consumer, the conditions of the Explanation are themselves fulfilled. Accordingly, to deprive the State of West Bengal of its taxation authority, the appellant companies would need to demonstrate the existence of another State where the goods could be said to have been delivered as a direct result of the sale for consumption in that other State. The Court observed that the appellant companies have not made such a demonstration.

In the matter before the Court, the parties could not invoke the Explanation, and, to use the phrasing of the earlier quotation, they could not be said to be “within that category.” The Court was of the view that the argument advanced by the learned Advocate‑General of West Bengal, which had been accepted by the High Court, was correct: the prohibition contained in Article 286(1)(a) together with the Explanation did not apply to the present situation. The appellant Companies then turned to Article 286(1)(b), which provides that “No law of a State shall impose or authorise the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place in the course of the export of goods out of the territory of India.” Their contention was that the transactions under dispute should be treated as occurring in circumstances that fall within the exemption carved out by this sub‑clause. To support this contention, the Companies argued that aviation spirit was delivered outside the customs barrier, that it was taken out of the territories of India, and that the sales gave rise to that export. They further relied on the definition of “export” found in other statutes, asserting that the term merely means “taking out of the country.” The Court noted that this provision of the Article had been interpreted on several earlier occasions and that the meaning of the phrase “in the course of” had become well settled. In State of Mysore v. Mysore Spinning and Manufacturing Co. Ltd. (1) the Court had observed that the issue could no longer be regarded as vague. While acknowledging that there is relatively less disagreement on this point than on the interpretation of the Explanation, the Court found it sufficient to refer to its leading authorities. The earliest authority on the subject is State of Travancore‑Cochin and others v. The Bombay Co. Ltd. (2), in which four possible meanings of “in the course of” were examined. The Court did not feel it necessary to recount all four, but it highlighted the view that the clause should not be limited to the moment when goods actually leave India, and that the series of transactions necessarily preceding the export also fall within its scope, a view that was deemed overly expansive. The Court then quoted its own earlier observation: “A sale by export thus involves a series of integrated activities commencing from the agreement of sale with a foreign buyer and ending with the delivery of the goods to a common carrier for transport out of the country by land or sea. Such a sale cannot be dissociated from the export without which it cannot be effectuated, and the sale and resultant export form parts of a single transaction. Of these two integrated activities, which together constitute an export sale, whichever first occurs can well be regarded as taking place in the course of the other.” The Court indicated that the significance of these observations would be further explained.

The Court referred to the decision in State of Travancore‑Cochin and others v. Shanmugha Vilas Cashew Nut Factory and Others (3). In that judgment, paragraph 62 clarified that the expression “export out of” was not meant to describe the article or commodity that was being exported. The citation to “the goods” and to “the territory of India” demonstrated that the phrase was to be understood as exportation from the country. The Court further observed that the word “course” etymologically signifies movement from one point to another, and that the expression “in the course of” conveys not only a period during which such movement occurs but also a necessary connection between the stages of the transaction. This idea of inter‑connection was reiterated with the phrase “integrated activities”, which had been employed in the earlier decision to indicate that a sale which gives rise to an export cannot be separated from that export; the sale and the ensuing export constitute a single transaction. The Court explained that a purchase undertaken for the purpose of export, like production or manufacture for export, is merely a preparatory act and cannot be regarded as an act performed “in the course of” the export of the goods from the territory of India, just as the other two activities cannot be treated in that manner.

From these observations, the Court concluded that not every sale or purchase that precedes an export automatically falls within the “course of export”. Such a transaction must be inseparably linked to the export; if a sale or purchase is not an integral part of the ultimate export, it does not qualify for the exemption. Consequently, the position was settled that sales or purchases undertaken merely for the purpose of export are not protected unless those sales or purchases themselves give rise to the export and form an integral component of it. The reasoning articulated in the two cited cases was subsequently accepted and applied in State of Madras v. Gurviah Naidu and Co. Ltd. (1), Kailash Nath v. State of U.P. (2), State of Mysore v. Mysore Spinning and Manufacturing Co. Ltd. (3) and Gordhandas Lalji v. B. Banerjee (1) A.I.R. 1956 S.C. 158, (2) A.I.R. 1057 S.C. 790, (3) A.I.R. 1958 S.C. 1002, among others. Those authorities did not advance the issue further, and therefore a detailed discussion of them was deemed unnecessary. In the earlier decisions, the meaning of “export” required no explanation because a foreign buyer was always identified as the ultimate recipient of the goods. In the present matter, however, the facts differ: the buyer does not export the goods to a foreign country.

In the present case the buyer did not ship the goods to a foreign country; instead the buyer acquired them for personal use during the aircraft’s flight to foreign destinations. The Court observed that this distinction was crucial and actually weakened the position of the appellant Companies. The appellant Companies, in order to support their claim, relied on a broad definition of the term “export,” citing other statutes in which the word was interpreted as merely “taking out of the country.” The Court, however, rejected that expansive construction for the clause under consideration. It held that the word “export” could be understood in more than one sense. In one sense, “export” meant the act of sending or removing goods from the territory of the country. In another sense, the term denoted the movement of goods from one country to another, a meaning that often, but not always, involved a commercial transaction. When goods are sent to another country, that country is said to “import” them, and in this context the terms “export” and “import” are complementary. To illustrate the difference, the Court gave two contrasting examples. In the first example, health authorities ordered goods to be destroyed by dumping them at sea; the goods were taken out of Indian territory and beyond the territorial waters, but they were not destined for any foreign country. Accordingly, such goods could not be said to be exported. In the second example, goods were placed on a steamer bound for a foreign country but were jettisoned; despite never reaching the destination, the goods could still be regarded as exported because they had a foreign destination. In both instances the goods left the country and sank to the bottom of the sea, yet only the second scenario qualified as an export. The Court explained that the first scenario would fall outside the exemption even if a sale were involved, whereas any sale associated with the second scenario would be covered by the exemption. The essential difference, the Court noted, lay in the fact that in the first case the goods had no foreign destination, whereas in the second case they did. Consequently, while every export entails taking goods out of the country, not every removal of goods from the country constitutes an export. The test, therefore, was whether the goods possessed a foreign destination where they could be deemed imported. The presence or absence of valuable consideration from the ultimate recipient at that foreign destination was irrelevant. If goods were exported and a sale or purchase occurred in the course of that export, and if that transaction gave rise to the export to a foreign destination, the exemption applied. Even purchases made by philanthropists for goods exported to foreign lands to alleviate distress, although charitable rather than commercial, could still attract the exemption. The pivotal factor, the Court concluded, was the act of sending goods to a foreign destination where they would be received as imports, linking the two notions of export and import as inseparable partners.

In this case the Court explained that the notions of import and export must be considered together, and that a transaction will be treated as an export only when the goods are taken out of the country for a destination where they can be described as imports. Applying the various tests that had been set out to the facts before it, the Court found that aviation spirit loaded onto an aircraft for the purpose of being consumed by that aircraft, although physically removed from Indian territory, could not be classified as an export because there was no foreign destination where the spirit could be said to be imported. Consequently, because the export test was not satisfied, the Court held that the sale of the aviation spirit could not be described as having taken place in the course of an export.

The Court further noted that, as was already pointed out, the sales could not be characterised as having “occasioned” the export. The seller was offering aviation spirit for the use of the aircraft itself, and this sale was not integrally connected with the act of taking the spirit out of the country. Moreover, the sale was not made for the purpose of export, as the Court had previously explained, and therefore it did not fall within the meaning of a sale “in the course of export,” a concept that requires a deeper relationship between the transaction and the export itself. Because of this, the Court concluded that the transactions did not come within Article 286 (1)(b). Accordingly, the sales had to be treated as having been made within the State of West Bengal.

The Court observed that the customs barrier is a limitation that applies only for customs purposes. While duty drawback may be permitted when goods that have once been imported are subsequently taken out of the country, such customs‑duty drawbacks have no connection with the sale of aviation spirit, which occurred in West Bengal. The customs barrier does not create a terminal limit to the territorial extent of West Bengal for the purposes of sales tax. Even though the sale was effected beyond the customs barrier, it remained a sale that took place within West Bengal because both the buyer and the seller were situated in that State and the goods were also present there. All the essential elements of a sale—including delivery of the spirit, receipt of payment and transfer of title—occurred within the State, making the transaction wholly within the jurisdiction of the taxing State.

The Court stressed that no outside State was involved where the goods could be said to have been delivered for consumption as a direct result of the sale. Accordingly, Article 286 (1)(a) and the accompanying Explanation were completely inapplicable, and the sale could not, even by a legal fiction, be treated as occurring outside West Bengal. While it was undeniable that aviation spirit was removed from the State and from the territory of India, the Court held that it could not be said to have been exported or delivered for consumption in any other State. The so‑called export was not caused by the sale, and the authorities cited by the petitioners showed that the sale was not in the course of export, a requirement for invoking Article 286 (1)(b). In view of these findings, the Court affirmed the decision of the High Court, dismissed the appeals, ordered the appellants to pay costs, and assessed a single hearing fee. The appeal was therefore dismissed.