Endupuri Narasimham And Son vs The State Of Orissa And Others

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

Court: Supreme Court of India

Case Number: Petition No. 12 of 1959

Decision Date: 14 March, 1961

Coram: S.K. Das, J.L. Kapur, M. Hidayatullah, J.C. Shah, T.L. Venkatarama Aiyyar

In the case titled Endupuri Narasimham And Son versus The State of Orissa and Others, decided on 14 March 1961, the Supreme Court of India heard the petition filed by Endupuri Narasimham and Son challenging a tax imposed under the Orissa Sales Tax Act, 1947. The bench hearing the matter comprised Justice S.K. Das, Justice J.L. Kapur, Justice M. Hidayatullah, Justice J.C. Shah, Justice AIyyar and Justice T.L. Venkatarama, and the judgment was delivered by Justice T.L. Venkatarama. The petitioner, identified as a registered dealer under the Orissa Sales Tax Act, 1947, was engaged in purchasing and reselling castor seeds and other commodities within the State of Orissa. In the declaration made to obtain its registration certificate, the petitioner stated that goods purchased in Orissa would be resold in that State. Contrary to this declaration, the petitioner sold the goods to dealers located outside the State. The Sales Tax Officer consequently included the purchase made inside Orissa in the petitioner’s taxable turnover pursuant to section 5(2)(a)(II) of the Act. The petitioner contended that the purchase was part of inter‑State trade and therefore exempt from tax under Article 286(2) of the Constitution of India. The Court held that the transaction which attracted tax was wholly intra‑State and was distinct from the subsequent sale to out‑of‑state dealers. Accordingly, the intra‑State transaction fell within the ambit of section 5(2)(a)(II) of the Act and was taxable, whereas the inter‑State sale to dealers outside Orissa was exempt under Article 286(2). The Court distinguished the earlier decision of Messrs. Mohanlal Hargovind Das v. The State of Madhya Pradesh, [1955] 2 S.C.R. 509, and reiterated that for a transaction to be considered inter‑State, there must be actual transport of goods from one State to another under a contract of sale or purchase. A purchase made within a State for resale outside that State does not, by itself, constitute inter‑State trade, and the levy of tax on such a purchase does not violate Article 286(2). The Court also followed the precedents set in Bengal Immunity Company Limited v. The State of Bihar, [1955] 2 S.C.R. 603, and State of Travancore‑Cochin v. Shanmugha Vilas Cashew Nut Factory, [1954] S.C.R. 53. The citation for this decision is reported in 1961 AIR 1344 and 1962 S.C.R. (1) 314, with additional references in APL 1962 SC 107, R 1963 SC 980 and RF 1971 SC 477. The petition was filed under Article 32 of the Constitution seeking enforcement of fundamental rights, and the parties were represented by counsel for the petitioner and counsel for the State of Orissa.

The petitioner was a joint Hindu family firm that operated a business in Berhampur, Orissa, and was registered as a dealer under the Orissa Sales Tax Act, 1947 (hereinafter referred to as the Act). The firm’s ordinary activity involved purchasing castor seeds, turmeric, gingili and other commodities within the state and then selling those items to dealers located outside the state. The Sales Tax Officer of Berhampur treated the purchases made by the petitioner inside Orissa, but subsequently sold to out‑of‑state dealers, as part of the petitioner’s taxable turnover. Consequently, the Officer assessed a tax of Rs 27,161‑13‑0 on those sales for the sixteen quarters beginning on 1 April 1952 and ending on 31 March 1956. In the petition filed under Article 32 of the Constitution, the petitioner challenged the validity of that tax, asserting that the purchases in question were made in the course of inter‑State trade and that levying tax on them contravened Article 286(2) of the Constitution.

The tax had been imposed pursuant to section 5 of the Act, which, in relevant part, provided that the tax payable by a dealer would be levied at the rate of one quarter of an anna in the rupee on his taxable turnover. The section defined “taxable turnover” as the portion of a dealer’s gross turnover for a period that remained after deducting, among other things, (a) the dealer’s turnover during that period on sales to a registered dealer of goods specified in the purchasing dealer’s certificate of registration as intended for resale in Orissa or for use in the execution of any contract in Orissa, and (b) sales to a registered dealer of containers or other materials for packing such goods. The provision further stated that if such goods were used by the registered dealer for purposes other than those specified in his certificate, the price of the goods so used would be included in his taxable turnover.

Accordingly, the section required a seller to include a sale in his taxable turnover, except where the buyer was a registered dealer who declared that the purchase was for resale within Orissa. In such a case, the sale was excluded from the seller’s turnover. However, if the registered dealer subsequently sold the goods outside the state in breach of his declaration, the purchases made by him became liable to be included in his turnover and subject to sales tax. That precise situation occurred here. The sales to the petitioner had not been counted in the sellers’ taxable turnover because the petitioner had obtained a registration certificate on the basis of a declaration that the goods would be resold in Orissa. In violation of that declaration, the petitioner sold the goods to dealers outside the state, and therefore the sellers became liable to tax under section 5(2)(a)(ii) of the Act.

In this case the petitioner contended that the purchases in question were made in the course of inter‑State trade and that imposing sales tax on them was therefore beyond the authority of the State. The provision relied upon was Article 286(2) as it stood before the sixth amendment, which provided that, except where Parliament made a law to the contrary, no State law could impose or authorize a tax on the sale or purchase of any goods when such sale or purchase occurred in the course of inter‑State trade or commerce. The petitioner argued that the goods had been bought for the purpose of being sold to dealers outside Orissa and that, because they were indeed sold to such dealers, the purchases were part of inter‑State trade and the tax levied upon them contravened Article 286(2). The Court did not accept this argument. It observed that the transactions on which tax had been imposed were wholly intra‑State. They consisted of sales made by persons located in Orissa to other persons located in Orissa, involving goods that were physically present in Orissa at the time of purchase. The fact that the purchaser later sold those same goods to dealers outside the State was deemed irrelevant, because those later sales were distinct and separate from the purchases on which the tax was assessed. The present levy therefore applied to purchases made within Orissa, not to the subsequent inter‑State sales. While the later sales are indeed inter‑State and are exempt from tax under Article 286(2), the purchases themselves are purely intra‑State, and a tax on them does not offend the constitutional prohibition. To support its contention, the petitioner relied on the Court’s decision in Messrs. Mohanlal Hargovind Das v. The State of Madhya Pradesh (1) [1955] 2 S.C.R. 509. In that case the petitioners, who were registered dealers under the Central Provinces and Berar Sales Tax Act, 1947, carried on the manufacture and sale of bidis in Madhya Pradesh. For their business they imported processed tobacco from the State of Bombay in large quantities, rolled it into bidis and sold the finished products to dealers in other States. The sales tax authorities imposed a tax on the purchases on the ground that the petitioners had, in breach of the declaration in their registration certificate, sold the bidis to merchants outside Madhya Pradesh. The petitioners claimed that their purchases were made in the course of inter‑State trade and that the tax therefore violated Article 286(2); the Court accepted that contention. The present case differs because the assessment here involved purchases that did not involve any movement of goods outside Orissa. For a sale or purchase to qualify as inter‑State, it is essential that the goods be transported from one State to another under the contract of sale or purchase. The Court referred to the observations in Bengal Immunity Company Limited v. The State of Bihar (1), which held that a sale is said to be in the course of inter‑State trade only when two conditions concur: (1) a sale of goods and (2) transport of those goods from one State to another under the contract of sale. Since the present purchases lacked any such transport, they cannot be characterized as inter‑State transactions, and consequently the tax imposed on them does not contravene Article 286(2).

The Court observed that in the earlier case the goods had been physically moved from the State of Bombay to the State of Madhya Pradesh. In contrast, the present matter involved purchases that the tax authorities wished to assess, and these purchases did not entail any movement of the goods outside the territorial limits of the State of Orissa. The Court explained that for a sale or purchase to qualify as inter‑State, it is essential that the goods be transported from one State to another under the contract of sale or purchase. The Court then referred to the observations made in Bengal Immunity Company Limited v. The State of Bihar (1), which held that a sale can be said to be in the course of inter‑State trade only when two conditions concur: (a) there is a sale of goods, and (b) those goods are transported from one State to another under the contract of sale. Unless both conditions are satisfied, there can be no sale in the course of inter‑State trade. Turning to the analogous provision in Article 286(1)(b), which prohibits the imposition of tax on the sale or purchase of goods in the course of import or export, the Court reiterated the ruling in State of Travancore, Cochin v. Shannugha Vilas Cashew Nut Factory (2). It held that exemption applies only to a sale or purchase that actually occasions the export or import of the goods out of or into the territory of India, or a sale within the State by the exporter or importer effected by the transfer of shipping documents while the goods are beyond the customs barrier. A sale that precedes or follows such export or import is not covered by the exemption. Applying the same principle, the Court concluded that a purchase made inside a State for the purpose of selling the goods outside that State cannot itself be characterised as taking place in the course of inter‑State trade, and therefore the levy of tax on that purchase does not conflict with Article 286(2) of the Constitution. Accordingly, the petition was dismissed with costs, and the order recorded the dismissal of the petition.