CASES AND COMMENTS Sale in the course of export Wadeyar v. Daulatram Rameshwarlal.

Transcription

1 CASES AND COMMENTS Sale in the course of export Wadeyar v. Daulatram Rameshwarlal. After the two Travancore 1 cases, the Supreme Court decision in Wadeyar v. Daulatram Rameshwarlal 2 constitutes another landmark in the area of " sale in the course of export " 3. Three important propositions of law can be formulated from the latter decision. (1) Export sale may take place even though the seller and the buyer are situated in India. (2) It is the passing of property in the goods from the seller to the buyer at the time of commencement of their export journey or after (but not before) that gives the "sale" 4 its character of export. (3) Export commences on shipment of goods, and not when the ship leaves the territorial waters or the port. The facts of the case may be briefly stated. The assessee had sold to a firm of exporters situated in Bombay some goods covered by the latter's licence under F. O. R. contracts during the year The 1. State of Travancore-Cochin v. Bombay Co., hereinafter called the first Travancore case, A.I.R S.C. 366: (1952) 3 S.T.C. 434: State of Travancore-Cochin v. S.V.C. Nut Factory, hereinafter called the second Travancore case, A.I.R S.C. 333 : (1953) 4 S.T.C A I.R S.C. 311: (1960) 11 S.T.C Art. 286 (1) (b) of the Constitution of India restricts the states from imposing tax on sale or purchase of goods which take place in the course of import of goods into, or export of the goods out of, the territory of India. Before the Constitution (Sixth Amendment) Act, 1956, there was no power with Parliament to define a sale in the course of export or import. Consequently judiciary had to formulate the principles for determining such a sale which was done by the Supreme Court in the two Travancore cases referred above (ibid). After the Constitutional Amendment, Parliament enacted the Central Sales Tax Act, 1956, Section 5 (1) of which provides the principles for determining an export sale. These principles are the same as laid down in the two Travancore cases, see the Law Commission Second Report (Parliamentary Legislation relating to Sales Tax), As the term is used in Sec. 4 of the Indian Sale of Goods Act, See Sales-tax Officer v. Budh Prakash, A.I.R S.C. 459: (1954) 5 S.T.C. 193; and State of Madras v. Gannon Dunkerly & Co. Ltd., A.I.R S.C. 560: (1958) 9 S.T.C Passing of property in the goods from the seller to the buyer is an essential ingredient of sale.

2 SALE IN THE COURSE OF EXPORT 133 bills of lading were obtained by the seller in the buyer's name. The question arose whether the sales had taken place in the course of export. The court found that the property in the goods did not pass to the buyer before shipment, and accordingly held that the sales were in the course of export. The second proposition stated above is considered first. The two Travancore cases had laid down two tests either of which was necessary to be satisfied by an export sale. They were : (i) An export sale should occasion the export of goods; or (ii) it should be effected by transfer of documents of title to the goods after the goods have crossed the customs frontier of India. If neither of the conditions existed, a sale could not be regarded as taking place in the course of export. The Supreme Court in the Wadeyar case without considering the legal formalism as to which of the two tests the sales in question satisfied, at once and straightaway proceeded to state that " The law is now well settled that if the property in the goods passes to the buyer after they have for the purpose of export to a foreign country crossed the customs frontier the sale has taken place * in the course of export' out of the territory of India. If therefore in the present sales the property in the goods passed to the buyer on shipment, that is, after they had crossed the customs frontier the sales must be held to have taken place ' in the course of export' " 5. This statement does not in any way go contrary to the tests laid down by the court in the two Travancore cases, but it restates the law in a clear and simplified terminology. Both the tests whether sale occasioning export or sale taking place through the transfer of documents of title to the goods clearly assume that the property in the goods does not pass to the buyer before the goods commence their export journey. The first test postulates that the sale (i. e. the property in the goods is transferred to the buyer) concurrently with the commencement of the export journey. 6 If the sale has taken place sometime before the export journey commences, the sale is dissociated from the export. The courts have held in several cases that export subsequent to sale cannot make a sale as 5. A.I.R S.C. 313, supra note The Madras High Court, however, in Abdul Salam and Co. v. Government of Madras, (1962) 13 S.T.C. 629 made a distinction between a local and a foreign buyer in the former property must pass after shipment and in the latter property might pass even before shipment. In this case the local seller had a privity of contract with uie foreign buyer through his agent in India. The property in the goods

3 134 CASES AND COMMENTS taking place in the course of export. 7 The basis for this approach could be explained thus. A state in India gets power to levy tax as soon as the sale has taken place 8 and if a subsequent event (here of export) is to determine the disability of the state from levying tax, administrative difficulties will arise. How is the state to know that the goods which are the subject of sale would be exported and not diverted to local use? How long is the state to wait? Should it postpone assessment till the goods have been exported or should it keep a list of such sales in which the assessees claim that the goods would be exported out of India? The second test postulates sale after the goods have commenced their export journey. There is not much difference between the two had passed to him before shipment through this Indian agent. The court held that the sale had occasioned export and therefore was exempt from State taxation. The court placed reliance on the following statement of the Supreme Court in the first Travancore case: " Assuming without deciding that the property in the goods in the present case passed to the foreign buyers and the sales were thus completed within the State before the goods commenced their export journey...the sales must, nevertheless, be regarded as having taken place in the course of the export..." A.I.R S.C. at 368. This statement is, however, not in line with the earlier observation of the court in the same case : " Such a sale cannot be dissociated from the export without which it cannot be affectuated, and the sale and the resultant export form parts of a single transaction." Ibid at If the property in the goods has passed to the buyer (i.e., the sale has occurred) before the course of export has begun, sale is clearly dissociated from export and has been effectuated without it. In the Wadeyar case the Supreme Court did not bring out any distinction between a foreign buyer and local buyer as to the time when the property should pass. Also note Ben Corn Nilgiri Plan* tations Co. v. Sales Tax Officer, (1962) 13 S.T.C. 309 where tea was purchased by the local agent of foreign buyer with a view to export it to his principal abroad and the Kerala High Court held that sale could not he regarded as having taken place in the course of export. No valid basis is to be found for the distinction between a local buyer and a foreign buyer. One possible reason could be that in case of a foreign buyer there is not much possibility of goods being diverted to local use after the sale. But the possibility is there particularly when the foreign buyer has an agent in India (as in the Abdul Salam case). And the courts in several cases have held that if sale has occurred before the export, the fact that the goods will be exported in the normal course is of no consequence, see infra note 7 and the text immediately following the note. 7. Note for instance Gordhandas Lalji v. Banerjee, A.I.R S.C : (1958) 9 S.T.C. 581; State of Madras v. Guruviah Naidu t A.I.R S.C. 158: (1955)6 S.T.C. 717; State of Mysore v. Mysore Spinning & Mfg. Co., A.I.R S.C : (1958) 9 S.T.C. 188; India Coffee Board v. State of Madras, A.I.R 1956 Madras 449: (1956) 7 S.T.C Power to levy sales tax is derived by the states from Entry 54,List II, Seventh Schedule of the Constitution.

4 SALE IN THE COURSE OF EXPORT 135 tests. The substance of the matter is that in either event sale does not take place before the goods have commenced their export journey. Coming to the first proposition, there was an observation in the first Travancore case 9 that "A sale by export involves a series of integrated activities commencing from the agreement of sale with a foreign buyer and ending with the delivery of goods to a common carrier for transport out of the country by land or sea " 10. On the basis of this observation, some of the High Courts had thought that the existence of a foreign buyer was necessary in case of an export sale. Thus the Madras High Court said in Gandhi & Sons v. State of Madras 11 : " A sale will occasion an export or there will be export sale as understood by the Supreme Court only where the sale is to a foreign buyer with whom the local seller has privity and when as a direct result of such sale the goods are transported across the frontier." 12 In Burmah Shell Co. v. Commercial Tax Officer, 1 * the Calcutta High Court had pointed out that in order that there should be an export of goods from India, there should be a seller in India and a buyer situated in a foreign country. The law stated in the above observations is no longer good in view of the Supreme Court's holding in the Wadeyar case. By its holding that a sale could take place in the course of export even though the buyer is locally situated, the court has achieved the result to a certain extent for which S. R. Das, J. (as the he then was), had argued in his strong and learned dissent in the second Travancore case 14. His view was that sales immediately prior to export should be regarded as taking place in the course of export since they were closely integrated with the act of export so as to constitute a part of the export process itself. The usual pattern of a transaction in which goods are exported is, manufacturer < exporter < foreign importer. That is, the foreign importer places the order with the exporter situated in India who in turn places the order with the manufacturer for implementation. 9. A.I.R S.C. 366, supra note Ibid, at 367. Emphasis supplied. 11. A.LR Madras 722: (1955) 6 S.T.C A.I.R Madras 725, ibid. 13. A.I.R Calcutta 395: (1957) 8 S.T.C The case also went to the Supreme Court, see A.I.R S.C. 315: (1960) 11 S.T.C Also note Daulatram Rameshwarlal v. Wadeyar before the (Bombay High Court), A.I.R. 1958, Bombay 120: (1957) 8 S.T.C. 617, wherein both the assessee and the state conceded that the principle that "sale which occasions the export" was not applicable when the seller and the buyer were local. 14. Supra note 1.

5 136 CASES AND COMMENTS S. R. Das, J.'s point was that the sale transaction between the local manufacturer and the exporter should be exempt from tax. The need for this approach could not be over emphasised in the context of India's present foreign exchange crisis and the desperate need for more exports. The court in the Wadeyar case has shown the way that a sale transaction between a local manufacturer and an exporter in which the property in the goods passes from one to the other after the export has commenced will not come within the purview of local taxation. This would help in promoting India's exports to the extent that they become competitive in foreign markets by not bearing local taxation. The third propostion can be taken up now. The point of time when the export commences was first considered by the Supreme Court in the second Travancore case. Therein it was stated : " It would seem, therefore, logical to hold that the course of the export out of, or of the import into, the territory of India does not commence or terminate until the goods cross the customs frontier 5 \ 15 In one High Court decision 16 the words " customs frontier" were interpreted to mean the same thing as the frontier of India which was held to extend to the territorial water belt. However, the various High Court 17 and Supreme Court decisions 18 have used the words " customs frontier " interchangeably with " customs barrier" either because of error in the Supreme Court Reports, as noted in footnote 15, supra, or because they mean one and the same thing. The words " customs barrier " more specifically than the words "customs frontier " denote the inspection house of customs at the port through which inspection every exported goods must get clearance. In the case under comment the Supreme Court has held that the sale takes place in the course of export if the title to the goods passes to the purchaser on shipment. 15. A.I.R S.C. 338, supra note 1. It may be noted that the official reports (Supreme Court Reportsj mentions the word "barrier" instead of "frontier". To resolve the perplexity, reference was made to the original judgment in the records of the Supreme Court and there the truth was found to be the word "frontier". 16. Burmah Shell Co. Ltd. v. State of Andhra Pradesh, (1960) 11 S.T.C See for example, Gandhi Sons Ltd,, v. State of Madras, A.I.R Mad.722 : (1955) 6 S.T.C. 694; Daulatram v. Wadeyar, (1957) 8 S.T.C. 617: A.I.R Bom. 120; Burmah-Shell Co. v. Commercial Tax Officer, A.I.R Cal. 395 : (1957) 8 S.T.C See for example, Gordhandas Lalji v. Banerjee, A.I.R S.C : (1958) 9 S.T.C. 581; J. V. Gokal & Co. v. AstU Collector of Sales Tax, A.I.R S.C. 595: (1960) 11 S.T.C. 186.

6 SALE IN THE COURSE OF EXPORT 137 The court pointed out that the export for Art. 286 (1) (b) of the Constitution might commence in point of time differently from export under the Exports (Control) Order, Even though under the Exports (Control) Order export may be said to begin when the ship leaves the port or more correctly when the ship goes beyond territorial waters, yet it does not mean that the course of export for purpose of Art. 286 (1) (b) also commences from the same point of time. On the question whether property in the goods passed to the buyer before shipment or after shipment, the state had relied on three circumstances which in its view indicated that the property in the goods passed before shipment even though the contract of sale was F. O. B. The first circumstance was that the bill of lading was taken in the name of the buyer. Along with this, however, there was also the fact that the bill was retained by the seller and the contract was " payment against presentation of documents". The court held that the latter fact indicated an intention of the parties that the property in the goods would not pass till after payment. The second circumstance was that the export licence was in the name of the buyer. On this point the court's view was that " the presumption in F. O. B. contracts is that it is the duty of the buyers to obtain export licence, though in the circumstances of a particular case the duty may fell on the sellers '*. 19 The third circumstance was that the Exports (Control) Order, 1954, subject to which export licence was issued, contained the condition that "the goods for the export of which licence is granted shall be the property of the licensee at the time of the export". Therefore, it was argued that the buyer in whose name the licence was must have become the owner of the goods before shipment. The court's answer was that the intention of the parties in compliance with the said order was that the property did not pass to the buyer till either the ship left the port or territorial waters, since as noted earlier, the course of export began differently for the purposes of Art. 286(1 )(b) of the Constitution and the Exports (Control) Order. The distinction in the beginning of the course of export between Art. 286(1 )(b) and the Exports (Control) Order is well maintained. It has removed the hurdle in effecting export transactions where export licence was required in view of the nontransferability of the licence. 19. A.I.R S.C. 313.

7 138 CASES AND COMMENTS In the context of India's present foreign exchange crisis the decision is of particular significance. It will no doubt be of help in promoting the country's exports. S. JV. Jain* Arbitration under Section 10A of the Industrial Disputes Act, 1947 and Articles 136, 226 and 227 of the Constitution of India. In 1956, a new provision, Section 10A, was added to the Industrial Disputes Act of 1947 providing an option to the parties to refer their industrial dispute to an arbitrator of their choice. Section 10A reads as follows: ''Voluntary reference of dispute to arbitration: (1) Where any industrial dispute exists or is apprehended and the employer and the workmen agree to refer the dispute to arbitration, they may, at any time before the dispute has been referred under Section 10 to a Labour Court or Tribunal or National Tribunal, by a written agreement, refer the dispute to arbitration and the reference shall be to such person or persons (including the presiding officer of a labour court or tribunal or national tribunal) as an arbitrator or arbitrators as may be specified in the arbitration agreement. (2) An arbitration agreement referred to in sub-section (1) shall be in such form and shall be signed by the parties thereto in such a manner as may be prescribed. (3) A copy of the arbitration agreement shall be forwarded to the appropriate Government and the conciliation officer and the appropriate Government shall, within fourteen days from the date of the receipt of such copy, publish the same in the official Gazette. Senior Research Officer, Indian Law Institute.