Lilawati Agarwal (Dead) by LRS. & ORS. Vs. State Of Jharkhand

The latest judgement was Lilawati Agarwal (Dead) by LRS. & ORS. Vs. State Of Jharkhand whose corams are Dipak Misra, V. Gopala Gowda and Kurian Jospeh. The date of the judgement was 1 April 2016.

So far as the issue in respect of sale in the course of inter-state trade is concerned, the Tribunal rejected the claim on the ground that there was no specific order for supply of such goods issued by DMRC nor there was specific instruction for inter-state movement of goods. The High Court found that in fact the terms of the contract envisaged inter-state movement of goods. Such movement of goods was within the knowledge of DMRC because there was total ban on setting up/ working of heavy industries in Delhi and the DMRC had approved 18 places within the country from where the equipments and goods had to be supplied. These included the premises and factories of the respondent also. On facts, therefore, it was rightly held by the High Court that the inter-state movement of goods was within the contemplation of the parties and it can be reasonably presumed that such movement was to fulfill the terms of the contract and therefore the transaction was covered by Section 3(a) of the CST Act. The law on this issue was also considered by the High Court in correct perspective after noticing the case of Tata Iron and Steel Co. Ltd. v. S.R. Sarkar[3] that where the goods moved from one state to another as a result of a covenant in the contract of sale it would be clearly a sale in the course of inter- state trade. The conclusion of the High on this issue also finds ample support from the following case laws which were noticed by the High Court (1) Oil India Ltd. v. The Superintendent of Taxes[4] (2) English Electric Company of India Ltd. v. The Deputy Commercial Tax Officer[5] (3) South India Viscose Ltd. v. State of Tamil Nadu[6]. In Oil India Ltd. this Court held that the inter-state movement must be the result of a covenant, express or implied in the contract of sale or an incident of the contract. In other words, the covenant regarding inter- state movement need not be specified in the contract, It would be enough if the movement was in pursuance of or incidental to the contract of sale. In English Electric Co. of India Ltd. the law was clarified thus: “if there is a conceivable link between the movement of the goods and the buyer’s contract, and if in the course of inter-State movement the goods move only to reach the buyer in satisfaction of his contract of purchase and such a nexus is otherwise inexplicable, then the sale or purchase of the specific/ascertained goods ought to be deemed to have taken place in the course of inter-State trade or commerce…………”. In South India Viscose Ltd. it was held that if there is a “conceivable link” between contract of sale and the movement of goods from one state to another to meet the obligation under a contract of sale it would amount to an inter-state sale and such character will not be changed on account of interposition of an agent of the seller who may temporarily intercept the movement. On the issue of sale in the course of import it is relevant to extract Section 3 and 5 of the CST Act, 1956 enacted by the Parliament in exercise of powers under Article 286(2) of the Constitution of India: “3. When is a sale or purchase of goods said to take place in the course of inter-State trade or commerce.- 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; or

(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.

Explanation1- Where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall, for the purposes of clause (b), be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.

Explanation 2 – Where the movement of goods commences and terminates in the same State it shall not be deemed to be a movement of goods from one State to another by reason merely of the fact that in the course of such movement the goods pass through the territory of any other State.

5. When is a sale or purchase of goods said to take place in the course of import or export.

(1) A sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

(2) A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.

(3) Notwithstanding anything contained in sub-section (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.”

A Constitution Bench of this Court had the occasion to consider in the case of M/s. K.G. Khosla & Co. (supra) whether sales in that case were in the course of imports. The assessee in that case had a contract with the Director General of Supplies, New Delhi for supply of axle bodies manufactured by its principals in Belgium. Although goods were inspected in Belgium also but under the contract they could be rejected on further inspection in India. After supplying the goods the assessee claimed the sales to be in course of import. After losing up to High Court, the assessee succeeded before the Supreme Court. The Constitution Bench held that Section 5(2) of the CST Act does not prescribe any condition that before the sale could be said to have occasioned import, it is necessary that the sale should precede the import. The sale is only required to be incidental to the contract. In other words the movement of goods from another country to India should be in pursuance of the conditions of the contract. The incident was held to be import of goods within Section 5(2) on the reasoning that the entire transaction was an integrated one by which a foreign seller through its Indian agent namely the assessee sold the goods to Indian purchaser namely the Director General of Civil Supplies. It will be useful to reproduce the passage from that judgment which is as follows: “ ……appellant K.G. Khosla & Co., hereinafter referred to as “the assessee” entered into a contract with the Director-General of Supplies and Disposal, New Delhi, for the supply of axle-box bodies. According to the contract the goods were to be manufactured in Belgium, and the D.G.I.S.D., London, or his representative, was to inspect the goods at the works of the manufacturers. He was to issue an inspection certificate. Another Inspection by the Deputy Director of Inspections, Ministry of W.H. & S., Madras, was provided for in the contract. It was his duty to issue inspection notes on Form No. WSB.65 on receipt of a copy of the Inspection Certificate from the D.G.I.S.D. London and after verification and visual inspection. The goods were to be manufactured according to specifications by M/s La Brugeoies. ET. Nivelles, Belgium.

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10. The next question that arises is whether the movement of axle-box bodies from Belgium into Madras was the result of a covenant in the contract of sale or an incident of such contract. It seems to us that it is quite clear from the contract that it was incidental to the contract that the axle-box bodies would be manufactured in Belgium, inspected there and imported into India for the consignee. Movement of goods from Belgium to India was in pursuance of the conditions of the contract between the assessee and the Director-General of Supplies. There was no possibility of these goods being diverted by the assessee for any other purpose. Consequently we hold that the sales took place in the course of import of goods within Section 5(2) of the Act, and are, therefore, exempt from taxation.”

For analysing the main contention advanced on behalf of the appellant that the present case is identical to that of the assessee in the case of Binani Bros. (supra), we have examined the facts of Binani Bros. (supra) with meticulous care. In para 13 of that judgment the most peculiar and conspicuous aspect of K.G. Khosla case (supra) was noticed and highlighted that “under the contract of sale the goods were liable to be rejected after a further inspection by the buyer in India.” In the same paragraph it was further highlighted with the help of a quotation from K.G. Khosla case (supra) that movement of goods imported to India was in pursuance of the conditions of the contract between the assessee and the Director General of Supplies. There was no possibility of such goods being used by the assessee for any other purpose. In the next paragraph of the Report the peculiar facts of Binani Bros. (supra) were highlighted in the following words, “….. the sale by the petitioner to the DGS&D did not occasion the import. It was purchase made by the petitioner from the foreign sellers which occasioned the import of the goods”. In paragraph 16 it was further pointed out that there was no obligation on the DGS&D to procure import licences for the petitioner. There is no difficulty in holding that Binani Bros. (supra) did not differ with the earlier judgment of a Constitution Bench in the case of K.G. Khosla (supra). A careful analysis of the facts in Binani Bros. (supra) leads to a conclusion that the case of West Bengal Sales Tax authorities in that matter that there were two sales involved in the transactions in question, one by the foreign seller to the assessee and the second by the assessee to the DGS&D, because there was no privity of contract between the DGS&D and the foreign sellers, was accepted mainly because the assessee was found entitled to supply the goods to any person, even other than DGS&D because there was no specification of the goods in such a way as to render it useable only by the DGS&D. This was coupled with the fact that the latter had imposed no obligation on the assessee to supply the goods only to itself. Further, there were no obligations of testing and approving the goods during the course of manufacture or for that matter, even at a later stage with a right of rejection. Such a right of rejecting the specific goods in the present case is identical to the similar right in respect of goods in K.G. Khosla case (supra). Hence we are unable to accept the main contention of the appellant that this case is similar to that of Binani Bros (supra). To the contrary, we agree with the reasonings of the High Court for coming to the view that the present case is fit to be governed by the ratio laid down in K.G. Khosla’s case (supra). The legal principles enunciated in K.G. Khosla (supra) have been reiterated in State of Maharashtra vs. Embee Corporation, Bombay[7] and stand supported by the judgment in the case of Deputy Commissioner of Agricultural Income Tax and Sales Tax, Ernakulam vs. Indian Explosives Ltd.[8], as well as in Indure Ltd. and Anr. vs. CTO & Ors.[9]. In these cases, sale in course of imports was accepted without requiring privity of contract between the foreign supplier and the ultimate consumer in India. The aforesaid conclusion leading to our concurrence with the views of the High Court is also based upon the salient facts, particularly the various conditions in the contract and other related covenants between DMRC and the respondent which have been spelt out in paragraph 31 of the High Court judgment, enumerated and described as follows :

“(1) Specifications were spelt out by DMRC;

(2) Suppliers of the goods were approved by the DMRC;

Pre-inspection of goods was mandated;

The goods were custom made, for use by DMRC in its project;

Excise duty and Customs duty exemptions were given, specifically to the goods, because of a perceived public interest, and its need by DMRC;

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The Project Authority Certificate issued by DMRC the name of the subcontractors as well as the equipment/goods to be supplied by them were expressly stipulated;

DMRC issued a Certificate certifying its approval of foreign suppliers located in Italy, Germany, Korea etc. from whom the goods were to be procured.

Packed goods were especially marked as meant for DMRC’s use in its project.”

Before us there was no attempt to assail the aforesaid features and to even remotely suggest any factual error on the part of the High Court in noting those features.

The salient features flowing out as conditions in the contract and the entire conspectus of law on the issues as notice earlier, leave us with no option but to hold that the movement of goods by way of imports or by way of inter-state trade in this case was in pursuance of the conditions and/or as an incident of the contract between the assessee and DMRC. The goods were of specific quality and description for being used in the works contract awarded on turn key basis to the assessee and there was no possibility of such goods being diverted by the assessee for any other purpose. Hence the law laid down in K.G. Khosla’s (supra) case has rightly been applied to this case by the High Court. We find no reasons to take a different view. In the result the appeals are found without any merit and dismissed as such. The parties are, however, left to bear their own costs.