Shree Bajrang Jute Mills Ltd vs State Of Andhra Pradesh

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 542 of 1962

Decision Date: 6 February 1964

Coram: J.C. Shah, P.B. Gajendragadkar, K.N. Wanchoo, K.C. Das Gupta, N. Rajagopala Ayyangar

In the matter of Shree Bajrang Jute Mills Ltd. versus the State of Andhra Pradesh, the Supreme Court of India delivered its judgment on the sixth day of February, 1964. The opinion was authored by Justice J. C. Shah and the judgment was pronounced by a bench consisting of Justices J. C. Shah, P. B. Gajendragadkar, K. N. Wanchoo, K. C. Das Gupta and N. Rajagopala Ayyangar. The case is reported in the 1966 All India Reporter at page 376 and in the 1964 Supreme Court Reporter (sixth series) at page 691, with a later citator reference in the 1968 Supreme Court Reporter at page 339 (sixth series). The statutory matters involved concerned the liability to tax sales of goods delivered to places outside a State for consumption in those places, the scope of the “Explanation” to Article 286(1)(a) of the Constitution of India, and the interpretation of the expression “actually delivered” under the Indian Sale of Goods Act, 1930, section 39.

The petitioner, Shree Bajrang Jute Mills Ltd., was engaged in the manufacture of jute articles and operated a factory located at Guntur in the State of Andhra Pradesh. The company regularly supplied jute bags by rail to cement factories belonging to the Andhra Cement Corporation (A. C. C.) that were situated outside the territorial limits of Andhra Pradesh. To secure a steady supply, A. C. C. entered into a contractual arrangement with the petitioner. Under the dispatch instructions issued by A. C. C., the petitioner loaded the jute bags onto railway wagons, obtained railway consignment receipts made out in the name of A. C. C. as the consignee, and, after receiving the purchase price, handed those receipts over to the Krishna Cement Works at Tadepalli. The receipt was handed to the agent of A. C. C. who was present at the Krishna Cement Works for the purpose of receiving the railway documents and making the corresponding payment.

When the petitioner prepared its sales return for the assessment year 1954‑55, it reported a gross turnover that included the value of the jute bags shipped to A. C. C. The petitioner claimed a reduction in tax liability for the portion of its turnover that related to the goods dispatched by rail to A. C. C. outside Andhra Pradesh, relying on the argument that those sales fell within the “Explanation” to Article 286(1)(a) and therefore were not taxable by the State of Andhra Pradesh.

The Commercial Tax Officer and the Deputy Commissioner of Commercial Taxes rejected the petitioner's claim. They held that because the railway consignment receipts were delivered to the buyer's agent within the State of Andhra Pradesh and because the purchase price was also realized from that agent within the State, the goods must be deemed to have been delivered to the buyer within Andhra Pradesh. Consequently, the authorities concluded that the petitioner was liable to pay sales tax on those transactions. The petitioner appealed this assessment, and the Appellate Tribunal set aside the order of the tax officials, allowing the reduction sought by the petitioner.

The State of Andhra Pradesh then filed a revision petition, and the High Court, exercising its revisional jurisdiction, restored the order of the Deputy Commissioner, thereby reinstating the tax liability. The principal question before the Supreme Court was whether the sales made by the petitioner to A. C. C. could be characterised as “non‑Explanation sales,” that is, sales that fell outside the protective scope of the Explanation to Article 286(1) of the Constitution.

The Court held that when goods are delivered pursuant to contracts of sale that are intended for consumption in a State other than the State of origin, the State of origin lacks the authority to tax those sales under the limitation imposed by Article 286(1)(a) read with its Explanation. For the Explanation to apply, the goods must have been actually delivered as a direct consequence of the sale, meaning that the physical transfer of the goods—or an act that places the goods in the possession of the purchaser—must have occurred. The Court explained that the term “actually delivered” in this context refers only to the tangible delivery of the goods or an action that results in the purchaser obtaining possession, and does not encompass a merely symbolic or notional delivery such as the handing over of railway receipts alone.

In this case, the Court explained that the phrase “actually delivered” must be read to mean only the physical hand‑over of the goods or any act that places the goods in the purchaser’s possession. The expression does not include a merely symbolic or notional delivery. The Court relied on earlier decisions such as C Govindarajulu Naidu & Co. v. State of Madras (A.I.R. 1953 Mad. 116), M/s Capco Ltd. v. Sales Tax Officer (A.I.R. 1960 All. 62) and Khaitan Minerals v. Sales Tax Appellate Tribunal for Mysore (A.I.R. 1963 Mysore 141), which were expressly followed. Additional authorities that were referred to for guidance included Poppat Lal Shah v. State of Madras, [1953] S.C.R. 677; Tata Iron & Steel Co. Ltd. v. State of Bihar, [1958] S.C.R. 1355; Tobacco Manufacturers (India) Ltd. v. Commissioner of Sales Tax, Bihar, [1961] 2 S.C.R. 106; Indian Copper Corporation Ltd. v. State of Bihar, [1961] 2 S.C.R. 276; and State of Kerala v. Cochin Coal Co. Ltd., [1961] 2 S.C.R. 219. These authorities collectively support the view that a sale can be regarded as “non‑Explanation” only when the goods are physically transferred to the buyer within the state for the purpose of consumption. The Court stressed that the requirement of actual delivery is essential to determine the situs of the transaction for tax purposes, because when goods are delivered outside the state, the state cannot levy sales tax in violation of the explanation to Article 286(1)(a). The reliance on physical delivery therefore aligns tax liability with the place of consumption.

The Court further observed that Section 39 of the Indian Sale of Goods Act cannot be used to treat the delivery of railway receipts, which merely represent title to the goods, as an actual delivery of the goods for the purposes of Article 286. The rule contained in Section 39(1) was held to have no application where a constitutional provision limits the legislative authority of the States and vests the exclusive power to levy sales tax in the State where the goods have been physically delivered for consumption. The judgment concerned Civil Appeal No. 542 of 1962, which arose from the order dated 7 April 1960 of the Andhra Pradesh High Court in Tax Revision case No. 27 of 1958. The appellant, Shree Bajrang Jute Mills Ltd., is a manufacturer of jute products and a registered dealer under the Madras General Sales Tax Act. For the assessment year 1954‑55 the appellant claimed a deduction of Rs 21,80,118‑1‑3 from its turnover, relating to jute goods supplied by rail to the Associated Cement Company Ltd. (referred to as “the A.C.C.”) under dispatch instructions from that company. The Commercial Tax Officer rejected the claimed deduction, an order that was affirmed by the Deputy Commissioner of Commercial Taxes. The Sales Tax Appellate Tribunal reversed that order, holding that the appellant was entitled to exemption for the turnover related to the goods supplied to the A.C.C. A revision petition against the Tribunal’s order was heard by the High Court of Andhra Pradesh, together with many other petitions raising common issues. Counsel for the appellant and counsel for the respondent presented their submissions before the High Court, which set aside the Tribunal’s decision and restored the order of the Deputy Commissioner. The present appeal was filed on 6 February 1964, and the judgment was delivered by Justice Shah.

The appellant’s manufacturing unit was located at Guntur, while the Associated Cement Company owned cement factories at several locations, including the Krishna Cement Works at Tadepalli in Andhra Pradesh, and required jute bags for packaging its products. To obtain a dependable supply of such bags, the Associated Cement Company entered into a contract with the appellant that contained four material conditions. The first condition stipulated that, unless expressly stated otherwise in the contract, all goods were to be sold free on road from Guntur. The second condition required that the goods be packed, well pressed, and marked, and then bound in bales of a specified quantity. The third condition provided that payment had to be made in cash in exchange for a Mills Delivery Order on the seller’s due date, or against railway receipts, dock receipts, or mate’s receipts, the latter being handed by a dock or ship officer to the seller’s representative. The fourth condition declared that ownership of the goods would not pass from the seller to the buyer while the seller retained any bills of lading, railway receipts, dock warrants, mate’s receipts, or any other document of title, regardless of whether such documents were in the names of the seller or the buyer, until full payment was received. Additionally, the buyers agreed that the risk of loss, deterioration, or damage to the goods during transit by land, canal, or sea, or while the goods were in the custody of the seller or any third party in a warehouse, dock, or other premises, would be borne by the buyers even though ownership of the goods did not pass during such times. Whenever the Associated Cement Company needed gunny bags for packing its products, it issued dispatch instructions that required the appellant to send the jute bags by railway to the cement factories situated outside the State of Andhra Pradesh. In compliance with those instructions, the appellant loaded the bags onto railway wagons, obtained railway receipts naming the Associated Cement Company as consignee, and, against the receipt of the price, delivered those receipts to the agent of the Associated Cement Company at the Krishna Cement Works, Tadepalli, which was commonly accepted as the party designated to receive the receipts and make payment. It was also uncontroversially established that the jute bags were sold to the Associated Cement Company solely for the purpose of packing cement at the factories to which they were shipped, and not for any other purpose. The assessing authority, together with the Deputy Commissioner, concluded that because the railway receipts were handed to the buyer’s agent within Andhra Pradesh and the price was also realized from that agent within the State, the sale must be deemed to have taken place in Andhra Pradesh, thereby obliging the appellant to pay sales tax on the price of the goods sold.

The Court observed that the High Court had accepted the principle that, under the Government of India Act of 1935, each provincial legislature possessed the authority to impose a tax on the sale of goods in respect of any transaction, irrespective of whether the ownership of the goods transferred inside or outside the province, provided that the province could establish a territorial connection with at least one element of the sale. The Court referred to the decisions in Poppat Lal Shah v. State of Madras [1953] S.C.R. 677 and The Tata Iron & Steel Company Ltd. v. State of Bihar [1958] S.C.R. 1355 to illustrate this rule. However, the Court noted that this broad power had produced a situation in which several provinces simultaneously claimed the right to levy sales tax on the same transaction, each relying on a different element of the transaction that it claimed to be territorially linked to the province. The result, according to the Court, was the potential for multiple taxation of a single sale, which threatened to impose an excessive financial burden on consumers. To address this problem while preserving an important source of revenue for the states, the Constitution introduced a special provision that limited the legislative competence of the states in matters of sales tax.

In explaining the constitutional restriction, the Court reproduced the original wording of Article 286 as it stood at the time of enactment. The first clause prohibited any state law from imposing, or authorising the imposition of, a tax on the sale or purchase of goods when such sale or purchase occurred outside the state, or when it took place in the course of importing the goods into India or exporting them out of the country. The explanatory note to sub‑clause (a) clarified that a sale or purchase would be deemed to have taken place in the state where the goods were actually delivered for consumption, even if, under the general law of sale, ownership had passed in another state. The second clause, subject to any contrary provision of Parliament, barred a state from levying a tax on a sale or purchase that occurred in the course of inter‑state trade or commerce, while allowing the President, by order, to permit the continuance of any tax law that had been lawfully in force before the Constitution commenced, until 31 March 1951. The third clause stipulated that any state law imposing a tax on goods declared by Parliament to be essential for the life of the community would have no effect unless the law had been reserved for the President’s consideration and had received his assent. After the Constitution came into force, the Court noted that a Presidential Order was issued to bring the various Provincial Sales Tax Acts into conformity with the limitations imposed by Article 286.

In this case the Court observed that, after the Constitution came into force, a Presidential Order was issued to bring the provincial sales‑tax statutes into conformity with the limitations imposed by Article 286 of the Constitution. Article 286, the Court explained, restricted the legislative power of the States to levy taxes on sales and purchases in four distinct ways: it barred a tax on sales or purchases that occurred outside the State; it barred a tax on sales or purchases that were part of imports into or exports out of India; it barred a tax on sales or purchases that took place in the course of inter‑State trade or commerce; and it barred a tax on sales and purchases of goods that Parliament had declared essential for the life of the community. The Court noted that although these limitations may sometimes overlap, a State may impose a tax on a sale or purchase only when none of the limitations applies, because the restrictions operate cumulatively.

The Court further stated that the sales which gave rise to the present dispute were not sales that had taken place in the course of inter‑State trade or commerce. Accordingly, the only issue to be decided was whether those sales were “outside the State” of Andhra. The Court referred to settled authority that, under Article 286(1) as it stood before amendment by the Constitution Sixteenth Amendment Act of 1956, sales that directly resulted in the delivery of goods in a State for consumption in that State fell within the Explanation to Article 286(1). Such sales were deemed, for the purpose of clause (1)(a), to be “inside” that State, and therefore within the taxing jurisdiction of the State where the delivery occurred, while being outside the taxing jurisdiction of every other State. The Court cited the decisions in Tobacco Manufacturers (India) Ltd. v. The Commissioner of Sales‑tax, Bihar, Patna (1); Indian Copper Corporation Ltd. v. The State of Bihar and others (2); and The State of Kerala and others v. The Cochin Coal Company Ltd. (3) as support for this rule.

However, the Court emphasized that the Explanation to Article 286(1) was not exhaustive of every transaction that might be characterised as “inside sales”. While clause (1)(a) excluded from a State’s power sales that occurred outside the State, the Explanation did not necessarily locate the situs of all sales. The Court observed that the power conferred on a State by Entry 54 of List II of the Seventh Schedule to tax sales that do not fall within clauses (1)(b), (2) or (3) — that is, sales outside the Explanation, which may be described for brevity as “non‑Explanation sales” — remained untouched. The Court added that, for the purposes of the present dispute, it was unnecessary to express an opinion on whether the theory of territorial nexus of the taxing State, with one or more elements that complete a sale, authorises, since the Constitution’s commencement, the exercise of legislative power under Entry 54, List II of the Seventh Schedule to tax sales even where the property in the goods has not passed within the taxing State.

The remaining question, the Court concluded, was whether the transactions in which the appellant sold goods to the Andhra Co‑operative Council (A.C.C.) could be characterised as “non‑Explanation sales”. The determination of that point would decide if the State of Andhra possessed the authority to levy the sales tax in question.

In this case the Court observed that, if the goods were delivered under contracts of sale that were concluded outside the State of Andhra and the goods were intended for consumption in the State to which they were delivered, then the State of Andhra could not levy tax on those sales because such taxation was prohibited by Article 286(1)(a) read with its Explanation. The factual findings of the tax authorities were that the title to the goods dispatched by the appellant passed to the Andhra Cotton Corporation within Andhra when the railway receipts were handed over to the corporation’s agent against payment of the price. Nevertheless, the Court noted that the essential question remained whether those transactions should be classified as “non‑Explanation sales,” meaning they fell outside the Explanation to Article 286(1). The Court explained that, to bring the Explanation into play, the goods must have been actually delivered as a direct consequence of the sale for the purpose of consumption in the State where the delivery occurred. The parties did not dispute that the goods were supplied for consumption outside Andhra, in the respective States where they were destined. The respondents argued that the goods were in fact delivered inside Andhra at the moment the railway receipts were delivered to the buyer’s agent. The Court held, however, that the term “actually delivered” in this context signifies only a physical delivery that places the goods in the purchaser’s possession; it does not encompass a symbolic or notional delivery such as entrusting the goods to a common carrier or handing over documents of title like railway receipts. Relying on the judgment in C. Govindarajulu Naidu & Company v. State of Madras, the Court reiterated that “actual delivery” means physical delivery and excludes constructive delivery through the transfer of title documents. The Court emphasized that the purpose of the Explanation is to confer taxation authority on a State only with respect to goods that truly enter that State for use, and that treating notional delivery of title documents as actual delivery would defeat that purpose. The same principle had been affirmed in the decisions of M/s Capco Ltd. v. Sales Tax Officer and Khaitan Minerals v. Sales Tax Appellate Tribunal for Mysore. Counsel for the respondent‑State relied upon section 39 of the Indian Sale of Goods Act, 1930, which provides that where a seller, pursuant to a contract, sends goods to a carrier for transmission to the buyer, such sending is deemed delivery to the buyer. The Court observed, however, that this statutory rule merely creates a prima facie inference of delivery when its conditions are met and does not convert the handing over of railway receipts—mere documents of title—into actual delivery for the purposes of Article 286. Consequently, the Court concluded that the High Court erred in inferring from the passage of property within Andhra, manifested by the delivery of railway receipts, that the goods had actually been delivered within the State.

In this case, the Court explained that under the Indian Sale of Goods Act, when a contract of sale authorises the seller to dispatch the goods to the buyer, the act of delivering those goods to a carrier for onward transmission is, on its face, treated as delivery of the goods to the buyer. However, the Court emphasized that this statutory rule does not convert the mere handing over of railway receipts, which merely represent title to the goods, into an actual physical delivery of the goods for the purpose contemplated in Article 286 of the Constitution. The Court observed that Section 39(1) of the Sale of Goods Act creates a prima facie inference that delivery has occurred only when the specific conditions laid down in that provision are satisfied, and that this inference cannot be applied to a constitutional provision which, while limiting the legislative competence of the States, vests the exclusive authority to levy sales tax in the State where the goods are in fact delivered for consumption. Consequently, the Court held that the High Court was wrong in reasoning that the passage of property within the State of Andhra Pradesh, together with the delivery of railway receipts, demonstrated that the goods had been actually delivered inside that State. The Court further stated that if the High Court’s inference cannot be sustained, the factual record leaves no alternative conclusion but that the State of Andhra Pradesh possessed no jurisdiction to impose tax on those sale transactions in which the goods were sent under railway receipts to destinations outside Andhra Pradesh and were physically delivered for consumption in those other States. Accordingly, the Court allowed the appeal, set aside the order of the High Court, and restored the order of the Appellate Tribunal. The appellant was awarded costs of the proceedings in this Court and in the High Court, to be recovered from the respondent State, and the appeal was disposed of in the appellant’s favour.