The Constitution of every nation shares interdisciplinary relationships with
each subject not only in a strict academic sense but also in a pragmatic sense.
This paper seeks to explore the relationship between the sale of Goods and the
Supreme document of India in an extensive manner.
This relation gets evolved
through the judicial pronouncement as well as the legislative amendments. Sales
tax laws enacted in pursuance of the Government of India Act,1935 as also the
laws relating to sales tax passed after the coming into the force of the
Constitution proceeded on the footing that the expression sale of goods
having regard to the rule as a too broad interpretation of entries in the
legislative lists would be given a wider connotation.
However, in Gannon Dunkerleys case
, the By a series of subsequent
decisions, the Supreme Court has, on the basis of the decision in Gannon
, held various other transactions which resemble, in
substance, transactions by way of transaction sales, to be not liable to sales
tax. As a result of these decisions, a transaction, in order to be subject to
the levy of sales tax under entry 92A of the Union List or entry 54 of the
State List, should have the following ingredients, namely, parties competent to
contract, mutual assent and transfer of property in goods from one of the
parties to the contract to the other party thereto for a price.
Complexities of this position
The constitution places some restrictions on the power of the State to levy tax
on sale or purchase of goods. One of them is that no State shall levy a tax on
sale or purchase of goods taking place in the course of export or import. The
power to levy customs duty on import and export is conferred on the Union. It
can make laws in respect of trade and commerce with foreign countries and import
The power to define customs frontiers is also within the legislative sphere of
the Centre. Comprehensive legislative power in respect of international trade
and commerce is thus conferred exclusively on the Union. The Constitutional
prohibition is against levy of tax by the State in respect of sale or purchase
in the course of export or import: a sale or purchase before the beginning of
the course of export is not therefore exempt from levy of tax.
The same is the case with a sale or purchase after the course of import. when
does the course of export or import begin? when does it end?
Every journey has a starting point and a terminus. The movement of goods in the
course of export or import also should have the same features.
Does the course of export or import begin when the goods start their journey and
end when they reach the destination?
In other words, does the course
of export begin only when the goods
start moving from India to a foreign destination and end when it reaches the
Similarly, does the course of import
begin on the movement of the goods
from a foreign country and end when they reach the Indian destination?
If the answers to the above questions are in the affirmative, certain
consequences follow. A sale or purchase which itself occasions such movement of
goods will not be within the sphere of exemption.
Only a sale or purchase effected after the movement of the goods from one
country to another will fall within the exemption, this being a sale or purchase
in the course of export or import. Suppose a merchant in Cochin sells his goods
to one in London and exports the goods to London in fulfillment of the contract
of sale. On the proposition raised above, the sale will not be one in the course
Position of Law: Articles Covered
The said expression tax on the sale or purchase of goods is found in the
following provisions of the Constitution:
- Entry 92-A of List I in the Seventh Schedule refers to 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. As this entry
has to be read in the context of Article 246(1), Parliament gets the
exclusive power to make laws to levy a tax on such deemed sales also. This
can be done by Parliament by amendment of Section 2(g) and Section 6 of the
Central Sales Tax Act, 1956 (the Central Act). However, such amendment not
having been done, deemed sales taking place in the course of inter-State
trade or commerce cannot be subjected to tax under the Central Act. So has
also been held by the Full Bench of the Punjab and Haryana High Court in
Thomson Press (India) Ltd. v. the state of Haryana.
- In the context of the above provision clause (3) of Article 269 read
with sub-clause (g) of clause (1) thereof provided that 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. (Principles
enacted under Section 3 of the Central Act.)
- Entry 54 of List II in the Seventh Schedule refers to taxes on the sale
or purchase of goods other than newspapers, subject to the provisions of
Entry 92-A of List I. In other words, States do not have the power to levy
sales tax on inter-State sales as well as inter-State deemed sales. As this
Entry 54 has to be read in the context of Article 246(2), State Legislature
gets the exclusive power to make laws to levy a tax on deemed sales as well,
which all States have done, provided they are not inter-State or in the
course of import or export of goods.
- Clause (1) of Article 286 provides that 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. Thus deemed sale cannot be subjected to tax
under a State sales tax law when it takes place outside the State or in the
course of import into, or export out of, the territory of India.
- To effectuate the above provisions, clause (2) of Article 286 provides
that Parliament may by law formulate principles for determining when a sale
or purchase of goods takes place in any of the ways mentioned in clause (1),
that is, when it would be deemed to take place outside the State (principles
enacted under Section 4 of the Central Act) or in the course of import or
export of goods (principles enacted under Section 5 of the Central Act).
- The expression tax on the sale or purchase of goods also appears in
clause (3)(a) of Article 286, which provides that any law of a State shall,
insofar as it imposes, or authorizes the imposition of, - (a) a tax on the
sale or purchase of goods declared by Parliament by law to be of special
importance in inter-State trade or commerce; ... be subject to such
restrictions and conditions in regard to the system of levy, rates and other
incidents of the tax as Parliament may by law specify. Parliament has
implemented these provisions through the enactment of Sections 14 and 15 of
the Central Act.
Sub-clause (b) refers to the transfer of property in goods (whether as goods or
in some other form) involved in the execution of a works contract. Bracketed
words have great significance, to be read along with transfer of property in
goods, the word as having been used as an adverb. As
means in the manner.
The expression involved in the execution of a works contract also goes with the
transfer of property in goods.
means to have within or as part of itself (Websters Third New
International Dictionary, p. 1191). In
means during the course of
(Websters Third New International Dictionary, p. 1139). The expression as goods
or in some other form means form other than that of goods. Form here cannot mean
the shape or size of goods. When the transfer of property in goods has to be as
goods or in some other form, the word form
should mean movability
other form being immovability
. This construction is appropriate when the
context and content of clause (b) are considered.
What it means is that when transfer of property in the thing, which has to be
goods (moveable property), takes place, it would take place in such manner that
the thing in which property would pass would continue to be goods (moveable
property) or it would take the other form, that is, it would form part of an
immovable property. Thus, when new parts are replaced in a car for damaged parts
under a works contract, property in the new parts would pass while the same
would continue to be goods. When bricks are used during construction of a
building, bricks would form part of the building, an immovable property.
Execution of a works contract should involve the transfer of property in goods
in such manner, that is, transfer of property in goods in such manner should
take place during the course of and as a part of the execution of the works
contract, and not after the execution thereof is over. This test is satisfied
only if the property in the goods passes on the principle of accretion or
accession when the works contract is being executed. Thus where property in the
goods passes after the work is executed, the transaction would not be covered by
sub-clause (b), as in the case of contract for the delivery of printed material
against payment, assuming that printing job can be treated as a works contract,
which certainly it is not, in any event not in the context of sub-clause (b).
Construction of section 3 and 5 is a misconception about the applicability of
central act. While as observed by the Supreme Court Section 3 applies to a
deemed sale as respects a works contract, the question is whether clause (b)
thereof can be applicable to deemed sales as respects works contracts. Clause
(a) of Section 3 may apply to a sale whereunder property in the goods agreed to
be sold may pass in the State of despatch or in the State of destination as
observed by the Supreme Court in Tata Iron & Steel Co. Ltd. v. S.R. Sarkari
In the case of a deemed sale as respects a works contract, the property in the
goods can pass only in the destination State in which accretion would be carried
out at the work site. With this distinction clause (a) should apply to such a
deemed sale also. However, position of clause (b) is different.
Where sale is concluded by transfer of documents of title to the goods and
property in the goods thereby passes during the inter-State movement of goods,
clause (b) of Section 3 would be applicable. Under a contract of sale property
in the goods can pass on actual delivery of goods as goods being physically
delivered, or on constructive or notional delivery of goods by transfer of
documents of title to the goods or by symbolic delivery of goods on the key of
the godown wherein goods are stored being handed over to the buyer. In the case
of a deemed sale as respects a works contract, property can pass only on
accretion or accession, which can never take place when the goods or materials
meant for execution of the works contract are in movement from one State to
Thus such deemed sale can never fall under clause (b) of Section 3.Where a sale
occasions import of goods into the territory of India, it would be covered by
the first limb of Section 5(2), where under property in the goods might have
passed out of India before the commencement of course of import or in India
after the termination of the course of import.
Second limb of Section 5(2) covers a sale which is affected by transfer of
documents of title to the goods before the goods have crossed the customs
frontiers of India within the meaning of Section 2(ab) of the Central Act. For
the reasons stated above about applicability of clause (b) of Section 3, the
second limb of Section 5(2) also cannot be applicable to deemed sales as
respects works contracts.
- Rajesh Ranjan( IIIrd semester student at National Law University
Jodhpur. Rajesh is a member of the Constitutional law society of his college
and has authored several articles on constitutional issues one of which is
also published by the Center for constitutional research and development.)
- Naina Bhargava ( IIIrd semester Student at Miranda House, University of
Delhi. She has published an article on legal service India and recently her
abstract is also recognized by IIT Roorkee on the relevance of Gandhi in
The authors can be reached at [email protected] and nain[email protected]