The Cement Marketing Co., Of India Ltd. vs The State Of Mysore And Another

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

Court: supreme-court

Case Number: Civil Appeal No. 255 of 1961

Decision Date: 28 August 1962

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

The case titled The Cement Marketing Co., Of Indialtd. versus The State Of Mysore And Another was decided on 28 August 1962 by the Supreme Court of India. The judgment was authored by Justice J. L. Kapur and the bench was composed of Justices J. L. Kapur, S. K. Das, A. K. Sarkar, M. Hidayatullah, and Raghubar Dayal. The petitioner in the proceedings was the Cement Marketing Co., Of Indialtd., together with another entity, while the respondents were the State of Mysore and an additional party. The judgment date was 28 August 1962 and the bench was recorded as Kapur, J. L., with the same five judges listed again for clarity. The decision was reported in 1963 AIR 980 as well as in the 1963 Supplement to the Supreme Court Reports, volume three, page 777, and it has been cited in numerous later authorities. The citator records list citations such as R 1966 SC 563, R 1966 SC 1216, R 1967 SC 585, R 1971 SC 477, R 1979 SC 1160, and RF 1992 SC 1952. The matter concerned the applicability of sales tax on the sale of goods, specifically the movement of cement across state borders, and involved the Mysore Sales Tax Act, 1948 (Mysore Act 46 of 1948) together with Article 286(2) of the Constitution of India.

The second appellant, who was the manufacturer of cement, owned more than twelve factories situated in various parts of India, none of which were located within the State of Mysore at the relevant time. The first appellant acted as the sales manager for the manufacturer, maintaining its registered head office in Bombay and a branch office in Bangalore, which lay in the State of Mysore. Cement was designated as a controlled article, and any purchaser was required to obtain an authorisation in a prescribed government form that named the quantities to be sold and the particular factory from which the cement would be supplied. The purchaser was required to place an order with the sales manager, specifying the required quantity, the destination for delivery, and the mode of transportation. In the case under consideration, all cement shipped to purchasers in Mysore was dispatched against authorisations issued by the various factories of the manufacturer, each of which was situated outside the State of Mysore. The cement therefore entered the State of Mysore and was received by a number of purchasers located therein. The Sales Tax Officer, by an order dated 31 March 1958, concluded that legal title to the goods passed to dealers and consumers outside Mysore. He further held that the actual delivery of the cement within Mysore meant that the sale had effectively taken place in Mysore. Consequently, the transaction was an intra‑state sale and was liable to tax under the Mysore Sales Tax Act, 1948. The High Court held that because the final delivery to the purchasers occurred within the State of Mysore, the loading of cement outside the State did not convert the transaction into an inter‑state sale. It further held that the sales therefore remained intra‑state in nature. The High Court therefore held that the sales which took place…

In the case before the Court, the movement of the cement from one State to another resulted directly from the terms of the contract of sale. Because the goods were transferred across State boundaries, the transactions were part of inter‑State trade or commerce and therefore fell within Article 286(2) of the Constitution of India. The Court observed that imposing a sales tax on such inter‑State sales would be contrary to the Constitution, and consequently held the tax to be unconstitutional. The Court followed the authority of M/s Mohan Lai Hargobind v. The State of Madhya Pradesh, [1955] 2 S.C.R. 509. It also relied on the decisions in Endapuri Narasimhan & Son v. The State of Orissa, [1962] 1 S.C.R. 314; Bengal Immunity Co. Ltd. v. The State of Bihar, [1955] 2 S.C.R. 603; M/s Ram Narain & Sons v. Assistant Commissioner of Sales Tax, [1955] 2 S.C.R. 483; and Tata Iron and Steel Co. Ltd. Bombay v. S. R. Sarkar, [1961] 1 S.C.R. 379. The Court distinguished the case of Rohtas Industries Ltd. v. The State of Bihar, [1961] 12 S.T.C. 615, which did not involve the same constitutional question.

The matter was now before the Civil Appellate Jurisdiction as Civil Appeal No. 255 of 1961, arising from the judgment and order dated 21 March 1960 of the Mysore High Court in Writ Petition No. 147 of 1958. Counsel for the appellants included B. J. Kolah, J. B. Dadachanji, O. C. Mathur and Ravinder Narain, while the respondents were represented by C. K. Daphtary, Solicitor‑General of India, B. R. L. Iyengar and P. D. Menon. The judgment was delivered on 28 August 1962 by Justice Kapur. The appeal challenged the High Court’s dismissal of the petition under Articles 226 and 227 of the Constitution, which sought to set aside the assessment order for the fiscal year 1955‑56, covering the period from 1 April 1955 to 31 March 1956. Because of the Validating Act (VII of 1956), the appellants did not contest their liability for the interval from 1 April 1955 to 6 September 1955. The factual background relevant to the appeal was that the first appellant, The Cement Marketing Co. Ltd., acted as the sales manager for the second appellant, The Associated Cement Co. Ltd., under an agreement dated 21 April 1954. The High Court described the first appellant as a distributor of the second appellant. The second appellant was a cement manufacturer that, at the relevant time, operated more than a dozen factories across India, none of which were located in the State of Mysore. The first appellant’s head office was in Bombay, and it maintained a branch in Bangalore, Mysore State. The first appellant was registered as a dealer under the Mysore Sales Tax Act 1948 (the “Mysore Act”). Cement, at all relevant times, was a controlled article. Whether the sale was made to a Government department such as the Director General of Supplies & Disposal, Government of India, New Delhi, to a person authorized by that officer, or to the public, each transaction was effected only on the basis of authorizations issued by appropriate Government authorities and presented by the buyers.

In the office of the first appellant, the method of handling sales was essentially the same whether the buyer was a member of the public or a government department. Every person or entity that wished to purchase cement was required to obtain an authorisation in a standard form. This authorisation permitted the first appellant to sell cement in the quantities specified and mandated that the cement be supplied from the factory identified in the document. The standard authorisation was formatted as a sale to a government contractor and contained the following particulars: “Government of India‑Ministry of Commerce & Industry. Office of the Regional Honorary Cement Adviser, 4/12 Race Course Road, Coimbatore. Central Quota. Dated 8‑10‑1955. Authorisation No. RA/CT/28/CMI/172 CQ. (CENTELEC) Period IV/55. The Cement Marketing, Name of Supplier, Co. of India, P. Box No.613, Sugar Company Building‑Bangalore‑2. You are authorised to sell cement in quantity mentioned below under this authorisation. The sale will be a direct deal between yourself and the purchaser. The Government undertakes no responsibility of any nature whatsoever: … Name and address of the person or factory in whose favour the cement is to be supplied … Quantity … Name of the indentor … Ref. No. J/117/115 dated 29‑9‑55 … from the above indentors – For manufacture of the tiles for Bharat Electronics Ltd. Supply recommended by the Commander Works Engineers (B.E.I.P.), Jalahalli. Full details of the purpose for which and the place at which cement will actually be consumed; Priority, Defence work. Signed C.C. Ramanath, Reg, Hon. Cement Advisor (Coimbatore). Copies to (1) the indentor; (2) the Deputy Development Officer, Government of India, Ministry of Commerce & Industry, Development Wing (Chemicals & Mineral Industries), Shahjehan Road, New Delhi; (3) the Controller of Civil Supplies in Mysore, Bangalore for information.” The authorisation was subject to several conditions: it had to be used within fifteen days; the cement released could be employed only for the purpose stated in the authorisation; the authorisation could not be transferred; the issuing authority retained the power to revoke the authorisation at any time and could cancel any orders booked under it. After obtaining the authorisation, the purchaser or the indentor was required to place an order with the first appellant, acting as the sales manager of the second appellant, specifying the quantity required, the destination for delivery, and the mode of shipment. The seller then entered into a contract with the first appellant using a standard form that set out the conditions of sale. Following the receipt of the order, the first appellant instructed its Bombay office to dispatch the cement in accordance with the buyer’s instructions and the terms of the authorisation. The dispatch letter had to state the authorisation number, the name of the issuing authority, the consignee, and other logistical details, although the precise wording of these ancillary details was not essential for the present discussion.

Each instruction that was issued indicated that it was given for and on behalf of the second appellant by the first appellant acting as its Sales Managers. A copy of the instruction letter was transmitted to the factory from which the cement was to be despatched, and the letter required the inclusion of the authorisation number, the name of the issuing officer, the destination of the goods and other prescribed particulars. After the factory received the instruction, the first appellant sent an advisory note to the purchaser together with the railway receipt evidencing the consignment. That advisory note likewise stated that the goods were being sent. Both the standard form contract of sale and the advisory note specified that the risk in the goods passed to the buyer at the moment the factory delivered the goods to the carriers and the railway receipt was obtained. In the present case all of the cement was dispatched, as required, against authorisations issued by the various factories belonging to the second appellant. At the relevant time each of those factories was situated outside the State of Mysore, while the cement arrived in Mysore where it was received by the various purchasers.

The first appellant maintained, and the Sales Tax Officer accepted in his order dated 31 March 1958, that it acted as the Sales Managers of the second appellant. However, regarding the nature of the transactions, the Sales Tax Officer held that although the title to the goods passed to dealers and consumers outside the State immediately, the goods were handed over to carriers outside the State and a railway receipt was obtained, and because the goods had actually been delivered in Mysore as a direct result of such sales for consumption in the State, the sale was deemed to have taken place in Mysore. The Officer further observed that “the sales of cement manufactured by A.C.C. Factories situated outside Mysore State, effected by the dealers M/s. Cement Marketing Company of India Ltd., Bangalore, to dealers and customers in Mysore State amount to intrastate sales and therefore are liable to Mysore Sales Tax Act 48.” In its judgment the High Court considered that the first appellant possessed a branch office in Bangalore within Mysore, that the public placed orders with the first appellant for cement supplies against the permits granted, and that the first appellant, after accepting the offer, collected the price from the purchasers and directed one of the second appellant’s factories to supply cement to the purchasers, with actual delivery occurring within Mysore. Accordingly, the High Court concluded that the loading of cement outside Mysore and its subsequent dispatch to the purchaser did not convert the sale into an inter‑State sale but retained it as an intra‑State sale. The present analysis suggests that the true character of the transaction may not have been correctly appreciated by the High Court.

In order for a purchaser to obtain cement, he first had to obtain an authorisation issued by a Government authority that designated the specific factory from which the cement was to be supplied. That authorisation, together with a purchase order, was required to be presented to the first appellant. Once the parties entered into a contract that used the standard form, the first appellant forwarded the order to the factory identified in the authorisation, and that factory thereafter delivered the required cement to the purchaser. The selection of the factory from which the cement was supplied was not under the control or discretion of the first appellant; it was entirely determined by the Government authority, so the supply of cement from any particular factory occurred pursuant to the authorisation rather than at the appellant’s choice. It was asserted that the sales occurring in the present matter, which involved the movement of goods from one State to another as a consequence of a covenant or incident of the contract of sale, fell within Article 286(2) of the Constitution and that, consequently, the imposition of sales tax on such sales was unconstitutional. The Article that applied at the relevant time, i.e. before its amendment, read as follows: “286 (1) 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 (a) outside the State; or (b) in the course of the import of the goods into or export of the goods out of the territory of India. Explanation ……. (2) Except in so far as Parliament may by law otherwise provide, no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of inter‑State commerce: Provided ……. ” That Article has since been repealed and replaced by a new provision enacted through the Constitution (Sixth Amendment) Act, but the transactions under consideration occurred prior to that amendment. In the case at hand, the contract itself required the movement of cement from the factory to the purchaser, that is, across the border from one State to another, because the factories were situated outside the State of Mysore. Accordingly, the transactions were clearly sales of goods in the course of inter‑State trade or commerce. Considering the nature of the transaction and the preliminary steps necessary for the sale or purchase of cement, it cannot be said that the sale did not give rise to the movement of goods from one State to another. The essential characteristics of the contracts proved in this case are analogous to those examined in M/s Mohan Lai Hargovind v. The State of Madhya Pradesh, where the assessee, a firm engaged in manufacturing and selling biris in Madhya Pradesh, imported finished tobacco from dealers in another State as part of its business operations.

In the earlier case, tobacco was procured in Bombay State, processed into biris, and then shipped to several other states. Both the Bombay exporters who supplied the assessees and the assessees themselves were registered dealers under the C. P. & Berar Sales Tax Act of 1947. The court held that the assessees imported the finished tobacco into Madhya Pradesh from persons who carried on the business of processing and selling tobacco in Bombay State. As a result of these transactions, goods moved from Bombay State to Madhya Pradesh, constituting movement across a State boundary. Consequently, the transactions were not subject to tax under Article 286(2) of the Constitution.

In State of Pravancore Cochin and Others v. The Bombay Co Ltd., a case decided under Article 286(1)(b) relating to sale and purchase in the course of export trade, the learned Chief Justice Patanjali Sastri made important observations. He explained that a sale by export comprises a sequence of integrated activities. The sequence begins with the agreement of sale with a foreign buyer and ends with delivery of the goods to a common carrier for transport out of the country by land or sea. The Chief Justice further observed that such a sale cannot be separated from the export, because without export the sale cannot be effected, and the sale and the resulting export form parts of a single transaction. At page 1120, he reiterated that any sale or purchase which occasions the export or import of goods into or out of India falls within the exemption of Article 286(1) and that this principle alone decided the appeals. Thus, to qualify under Article 286(1)(b), a sale must occasion the export of the goods. In State of Travancore Cochin and Others v. Shammugha Vilas Cashew Nut Factory and Others, the phrase “in the course of” was interpreted to mean that a sale occurs not only during activities directed to export the goods, but also as a part of or connected with those activities. At page 63, the Chief Justice explained that “integrated activities” signifies that a sale which occasions export cannot be detached from the export, because the sale and the resulting export together constitute a single transaction. In Endu Puri Narasiham & Son v. The State of Orissa, the court affirmed that sales covered by Article 286(1)(b) are exempt from tax. (1) (1935) 2 S. C. R. 509. (2) (1952) S. C. R. III2. (1) (1954) S. C. R. 53.

In this judgment the Court explained that under Article 286(1)(b) only a sale or purchase of goods which occasions the export or import of those goods out of or into the territory of India was exempt from the levy of tax on the sale or purchase. Regarding the prohibition against tax on inter‑State sales, the Court stated that for a transaction to be deemed inter‑State the essential requirement was that the goods had to be transported from one State to another under the contract of sale or purchase. The Court quoted with approval the observations from Bengal Immunity Co. Ltd. v. The State of Bihar (1) that a sale could be said to be in the course of inter‑State trade only when two conditions concurred: first, there was a sale of goods; second, those goods were transported from one State to another under the contract of sale, and that without satisfaction of both conditions the sale could not be considered inter‑State. Consequently, the tests laid down to bring a sale within the ambit of inter‑State sales required movement of goods across the State border, as reiterated in Mohanlal Hargovind’s case (2); transactions were inter‑State when, as a direct result of the sale, the goods were actually delivered for consumption in another State; and, as held in M/s Ram Narain It. Sons v. Assistant Commissioner of Sales Tax (3), a contract of sale must involve transport of goods from one State to another under the contract of sale, again following the Bengal Immunity Co. case (1). For sales occurring in the course of export or import, the Court described the test as a series of integrated activities beginning with an agreement of sale and ending with delivery of the goods to a carrier for export by land or sea, citing the Bombay Co. Ltd. case (1). The expression “in the course of” was explained to mean a sale taking place not only during activities directed to the export of the goods but also as part of or connected with such activities, and “integrated activities” was defined in similar language. The Court affirmed that these tests were again accepted in Endupuri Narasimham’s case (2). Finally, the Court noted that Section 3 of the Central Sales Tax Act, 1956 (Act 74 of 1956) embodied the principal governing principles for inter‑State sales as laid down in Mohanlal Hargovind’s case (3), stating that a sale or purchase of goods shall be deemed to occur in the course of inter‑State trade or commerce if the sale or purchase occasions the movement of goods from one State to another, or is effected by a transfer of documents of title to the goods during their movement from one State to another.

The Court explained that, according to section 3 of the Central Sales Tax Act, a sale of goods is regarded as taking place in the course of inter‑State trade or commerce when either (a) the movement of the goods from one State to another occurs as a result of a covenant or incident of the contract of sale, or (b) the transfer of documents of title to the goods takes place while the goods are moving from one State to another. In the decision of Tata Iron & Steel Co. Ltd., Bombay v. S.R. Sarkar & Another, Justice Shah clarified that clause (a) of section 3 applies to those sales, other than those falling within clause (b), where the movement of the goods from one State to another is directly caused by the terms of the contract of sale and where title to the goods passes in either State. The present case involved contracts of sale under which the goods were transported from outside the State of Mysore into Mysore, as reflected in the cited authorities [1952] S.C.R. 112, (1955) 2 S.G.R. 509, (1962) 1 S.C.R. 314, and (1961) 1 S.C.R. 379, 391. The transactions therefore required the goods to cross the State border. Because the movement of the goods was part of the contractual arrangement, the Court could not characterize those sales as intrastate. Moreover, the first appellant did not voluntarily decide to supply the purchaser from any particular factory of the second appellant; the factories had been assigned by Government authorisation, and those authorisations formed the basis of the buyer‑seller contract.

Applying the statutory tests to these facts, the Court held that the sales were inter‑State in nature and consequently exempt from sales tax. The Court therefore concluded that the earlier classification of the contracts as intrastate sales was erroneous. The decision in Rohtas Industries Ltd. v. State of Bihar, cited by the respondent, was held not to be applicable because the agreement between the first and second appellants differed fundamentally from the agreement examined in that case. In Rohtas Industries, the Court had found a seller‑buyer relationship rather than a principal‑agent relationship. In contrast, the agreement dated 21 April 1954, between the two appellants and Patmia Cement Co., expressly appointed the first appellant as the sole and exclusive Sales Manager of the second appellant. Under that clause, the Sales Manager was authorised to enter into sales contracts, receive payments, and perform all necessary acts for effective management of those contracts on behalf of the principals. The price and terms of each sale were to be fixed by the principals, and the Sales Manager was required to maintain administrative and technical staff as directed by the principals.

In the present case the Court observed that the contract required the principals to decide the specific places in India where the sales activities of the Sales Managers would be carried out. All establishment charges and other expenses incurred by the Sales Managers were deemed to be incurred for and on behalf of the principals, and the principals were obligated to bear those costs in proportion to each principal’s annual sales. The agreement further obliged the Sales Managers, at the end of every month, to submit to the principals accounts that disclosed the sales contracts concluded by the manager on behalf of each principal. Moreover, at the close of each financial year, which terminated on 31 July, the Sales Managers were required to prepare a full and proper account of all operations undertaken during that year, to submit the account for the principals’ confirmation, and thereafter to pay to each principal the price corresponding to the annual sales realizations attributable to that principal. A specific clause provided that, subject to the instructions of the principals, the Sales Managers must make all necessary arrangements to secure speedy and economical transport of cement. The Court pointed out that these contractual terms were substantially different from those in the earlier decision of Rohtas Industries Ltd., and consequently that earlier decision could not be applied to the facts before it. As a result the Court held that the imposition of sales tax on the appellant for the assessment year, except for the period from 1 April 1955 to 6 September 1955, was illegal and could not be levied for that period. Accordingly the appeal was allowed to that extent, the petition of the appellants succeeded, but the judgment did not affect the tax that had already been paid for the aforesaid period. In view of the partial success of the appellants, the Court ordered that they be awarded one half of the costs of the appeal. The appeal was therefore allowed in part. (1) (1961) 12 S.T.C. 615.