State Trading Corporation of India Ltd vs State of Mysore

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

Court: Supreme Court of India

Case Number: Petitions Nos. 65 and 66 of 1960

Decision Date: 28 August 1962

Coram: A.K. Sarkar, S.K. Das, J.L. Kapur, M. Hidayatullah, Raghubar Dayal

In this case, the Supreme Court recorded that the petition was filed by State Trading Corporation of India Limited against the State of Mysore, and the judgment was delivered on 28 August 1962. The matter was heard by a bench consisting of Justice A. K. Sarkar, Justice S. K. Das, Justice J. L. Kapur, Justice M. Hidayatullah and Justice Raghubar Dayal. The citation of the decision is reported in 1967 AIR 585 and also appears in R 1971 SC 870 (pages 13‑14). The issue concerned the levy of sales tax by the Mysore legislature on sales of cement that were supplied from factories situated outside Mysore to purchasers within the state.

The Court explained that Article 269(2) of the Constitution, as amended by the Sixth Amendment Act of 1956, reserves to the Government of India the power to tax sales of goods, other than newspapers, when such sales occur in the course of inter‑State trade. Article 269(3) empowers Parliament to enact a law to define the circumstances in which a sale is deemed to be inter‑State. Pursuant to this power, Parliament enacted the Central Sales Tax Act, 1956 (Act 74 of 1956), and Section 3 of that Act provides that a sale shall be deemed to take place in the course of inter‑State trade if the sale occasions the movement of goods from one State to another.

During the fiscal year 1957‑58, the corporation made several sales of cement that were supplied from its factories outside Mysore to buyers inside Mysore. The State of Mysore imposed tax on those sales under two separate sales‑tax statutes enacted by the Mysore legislature. The corporation challenged the assessment orders under Article 32 of the Constitution, arguing that the State lacked authority to tax the sales because they were inter‑State in nature. The Court held that a movement of goods from one State to another, as required by Section 3(a), is satisfied when the movement results from a covenant or incident of the contract of sale, following the principle set out in Tata Iron and Steel Co. Ltd. v. S. R. Sarkar, 1961 1 S.C.R. 379. Since the sales were made under permits issued by the Government which stipulated that the supply must originate from factories outside Mysore, the sale contracts contained an implied covenant that the goods would be delivered in Mysore from outside its borders. Accordingly, the Court concluded that the sales were inter‑State sales within the meaning of Section 3(a) and therefore could not be taxed by the State of Mysore.

The Court observed that, in accordance with Article 269 of the Constitution, the taxing officer possessed no authority to impose a tax on inter‑State sales because such taxation was prohibited by the Constitution. The officer could not create jurisdiction for himself by mistakenly deciding a collateral fact. Consequently, the petitions were not deemed incompetent under the principle set out in the case commonly referred to as Ujjain Bai’s case; the decision in Ujjam Bai v. State of Uttar Pradesh [1963] I S.C.R. 778 was held to be inapplicable. The judgment concerned original jurisdiction under Petitions Nos. 65 and 66 of 1960, filed under Article 32 of the Constitution of India for the enforcement of fundamental rights. Counsel for the petitioners included R. J. Kolah, J. B. Dadachanji, O. C. Mathur and Ravinder Narain, while the respondents were represented by C. K. Daphtary, Solicitor General of India, and R. Gopalakrishnan together with P. D. Memon. The opinion of the Court was delivered on 28 August 1962 by Justice Sarkar. The two petitions sought writs to set aside assessment orders that imposed sales tax and also asked for consequential relief to prevent the levy and collection of that tax. The petitioners claimed that the assessment orders were entirely void and that they infringed fundamental rights guaranteed by Article 19(1)(f) and Article 31. In each petition there were two petitioners: the State Trading Corporation of India Ltd. and the Cement Marketing Company of India Ltd. The respondents comprised the State of Mysore, represented by one of its officers who, as the second respondent, issued the assessment orders imposing the tax. The assessment orders that were challenged were directed against the Marketing Company with respect to certain cement sales made in the financial year 1957‑58. The petitioners asserted that the Marketing Company had acted as an agent of the Trading Corporation in making those sales. Whether that characterization was correct was not material, because the Marketing Company did not dispute its liability to be taxed in its capacity as an agent of the corporation. The sole issue in dispute was whether the sales, which involved the movement of goods from outside the State of Mysore into the state, were subject to tax. The petitioners argued that the sales were inter‑State transactions performed in the course of inter‑State trade and therefore could not be taxed by any State legislature. Although the assessment year was the same—1957‑58—two separate assessment orders were issued because, during that year, Mysore was governed by two different sales‑tax statutes: the Mysore Sales Tax Act 1948 and the Mysore Sales Tax Act 1957. The latter Act repealed the former with effect from 1 October 1957. Consequently, sales occurring between 1 April 1957 and 30 September 1957 were taxed under the 1948 Act, while sales occurring between 1 October 1957 and 31 March 1958 fell under the 1957 Act. Both assessment orders were contested by the petitioners. The tax in question had been levied under the State’s legislation. The Court then referred to Article 286(2) of the Constitution as it was originally framed, which stipulated that, except as provided by Parliament, a State could not enact a law imposing tax on an inter‑State sale or purchase.

The Constitution originally stated that, except to the extent that Parliament by law provided otherwise, a State could not enact legislation that taxed an inter‑State sale or purchase. That clause was removed by the Constitution (Sixth Amendment) Act, 1956, which became operative on 11 September 1956. The same amendment also altered Article 269, and after the amendment Article 269 read as follows: “(1) The following duties and taxes shall be levied and collected by the Government of India… (2) taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter‑State trade or commerce… (3) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in the course of inter‑State trade or commerce.” The Constitution Amendment also changed the Seventh Schedule by inserting item 92A into List I, thereby granting the Union the authority to tax sales or purchases of goods other than newspapers made in the course of inter‑State trade or commerce. Simultaneously, the old entry 54 in List II was replaced with a new entry that gave a State the power to tax all sales or purchases of goods other than newspapers that are subject to entry 92A of List I. Consequently, after this amendment the States were no longer permitted to tax an inter‑State sale or purchase. On 21 December 1962 Parliament enacted the Central Sales Tax Act, and Section 3 of that Act defined the term “inter‑State sale.” Section 3 came into force on 5 January 1957, although the other taxing provisions of the Act were implemented at a later date, which is not relevant to the present considerations. The entire assessment year 1957‑58 fell after Section 3 of the Central Sales Tax Act, 1956, had become effective. Therefore, during that year a State could not levy tax on a sale that qualified as an inter‑State sale under the definition contained in Section 3 of the Central Sales Tax Act. Section 3 defined an inter‑State sale in two ways, one of which stated: “A sale or purchase of goods shall be deemed to take place in the course of inter‑State trade or commerce if the sale or purchase (a) occasions the movement of goods from one State to another.” The petitioners argued that the disputed transactions fell within this category, and consequently the respondent State lacked authority to tax them. The pivotal question thus became whether those sales indeed occasioned the movement of cement from another State into Mysore as contemplated by the definition. In the decision of Tata Iron & Steel Co. Ltd. v. S.R. Sarkar (1), it was held that a sale occasions the movement of goods from one State to another under Section 3(a) of the Central Sales Tax Act when such movement results from a covenant or incident of the contract of sale. The Court noted that the cement involved in the contested transactions was, in fact, moved from another State into Mysore.

Mysore was not denied as the destination for the cement, and the respondents only argued that the movement of the cement was not caused by any covenant in, or incident of, the contract of sale. Consequently, the result of the appeal depended on whether the transfer of cement from another State into Mysore arose from a covenant in the sale contract or was merely an incident of that contract. To answer that question, the Court had to examine the contract itself, and to understand the contract it was necessary to refer to the procedure of the sales, a matter on which there was no dispute. At the relevant time, cement could be purchased only under a permit issued by the Government and only on the terms contained in that permit; such permits were issued pursuant to certain statutory provisions. All the sales under consideration were made under such permits. The petitioners had not produced any specimen copy of a permit in their pleadings, although the existence of the permits was not contested and they had been mentioned in the petitions. The Court therefore allowed the petitioners, at the hearing, to produce a specimen copy of a permit, which the respondents accepted as a correct example. The specimen showed that a cement factory, which was required to supply the cement covered by the permit, was named in the document. The matters before the Court involved sales in which the permits required supplies to be drawn from factories located outside Mysore. These permits were issued to the purchasers, and the supplier named in them was a Marketing Company. Upon receipt of a permit, the purchaser placed an order with the Marketing Company, and subsequently a firm contract with that company was executed. When assessing the assessment orders, the Taxing Officer observed that the firm contracts did not specify that supplies had to be made from any particular factory, and that the actual supplies had been drawn from factories outside the State of Mysore solely for the convenience of the Marketing Company, not because of any covenant contained in the contracts. While it was true that the written contracts did not expressly contain a covenant requiring supply from a particular factory, the Court found that the agreement between the parties was not fully set out in the contracts. Moreover, each contract was expressly subject to the terms of the permit to which it referred. Since it was undisputed that a sale could be effected only under a permit and on the conditions laid down in that permit, the contract had to be read as subject to those conditions. Because the permits in question stipulated that the supply must be made from one or another factory situated outside Mysore, the contracts must be deemed to contain a covenant that the goods would be supplied in Mysore from a place situated outside its borders. Accordingly, a sale under such a contract constituted an inter‑State sale.

The Court observed that the sale in question fell within the meaning of section 3(a) of the Central Sales Tax Act and that, in accordance with both the Constitution and the provisions of that Act, a State was prohibited from imposing any tax on such a sale. Consequently, the Court was of the view that the petition ought to succeed. It was nevertheless contended that the petitions were incompetent, relying on the earlier decision in Smt Ujjam Bai v. State of Uttar Pradesh (1963) 1 S.C.R. 778, on the ground that the Taxing Officers appointed under the Mysore Acts possessed jurisdiction to determine whether a particular transaction was an inter‑State sale and that any error they might make in that quasi‑judicial function did not infringe any fundamental right. The Court, however, found that judgment to be clearly distinguishable. Referring to the reasoning of Das J., the Court noted that he had held that “if a quasi‑judicial authority acts without jurisdiction or wrongly assumes jurisdiction by committing an error as to a collateral fact and the resultant action threatens or violates a fundamental right, the question of enforcement of that right arises and a petition under Article 32 will lie.” He further explained that where a statute is intra‑vires but the authority acts outside its jurisdiction, a petition under Article 32 is nevertheless competent. Applying that principle, the Court concluded that here the Taxing Officer had no authority to levy tax on inter‑State sales, a prohibition that stemmed directly from the Constitution, and that the officer could not create jurisdiction for himself by misdetermining a collateral fact, which he apparently did. Accordingly, the Court held that the decision in Ujjam Bai’s case was not applicable and that the petitions were fully competent. The Court therefore allowed the petitions, directing that appropriate writs be issued to set aside the assessment orders referred to in the petitions and to restrain the respondents from imposing or collecting tax on the sales of goods that moved from outside into Mysand. The Court declined to award costs, observing that the petitioners had failed to disclose certain permits and had not presented their case as clearly as possible; having been granted some indulgence, the Court deemed it appropriate to deprive them of costs. The petitions were thus allowed.