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Settling the Issue of Domestic Double Taxation - State of Bombay v. United Motors (India) Ltd

an appeal from the judgment and order of the High Court of Bombay, declaring the Bombay Sales Tax Act, 1952 as ultra vires the Constitution of India and consequently issuing a writ of mandamus against the State of Bombay and the Collector of Sales Tax, Bombay, directing them to desist from following the provisions of the impugned Act.

State of Bombay & Anr. v/s United Motors (India) Ltd. & Ors. - Citations: 1953 Scr 1069, AIR 1953 Sc 252 - Before The Hon’ble Supreme Court of India

Facts:
This case was an appeal from the judgment and order of the High Court of Bombay, declaring the Bombay Sales Tax Act, 1952 as ultra vires the Constitution of India and consequently issuing a writ of mandamus against the State of Bombay and the Collector of Sales Tax, Bombay, directing them to desist from following the provisions of the impugned Act.

The Bombay Sales Tax Act, 1952 (hereinafter, Act), was brought into force fully on November 1, 1952, along with the Rules notified under the same Act. Just a couple of days later, the respondents, who are dealers in motor cars, challenged the validity of the Act as being ultra vires the State Legislature, as they went against the restrictions imposed on the State Governments by Article 286 of the Constitution of India. Further, it was also alleged that the provisions under the Act were discriminatory in nature, violative of Article 14 of the Constitution of India, and even violated the respondents’ rights to freedom of trade and profession guaranteed under Article 19(1)(g) of the Constitution of India.

On the merits of the Case, the High Court of Bombay held that the definition of the term sale under the Act was wide enough to include the categories exempted expressly by Article 286 of the Constitution of India and since this was an integral part of the entire Statute, it was held that the entire Act violates the provisions of the Constitution of India. Further, the High Court refused to look into the rules framed under the Act, stating that if the Act itself is bad, then the rules will be too.

Aggrieved by this judgment and order, the appellants approached the Supreme Court of India in order to seek a proper remedy.

Procedural History

This case was a result of an Appeal against the order and judgment passed by the High Court of Judicature at Bombay, before the Supreme Court of India. The order and judgment passed by the High Court was a result of a Writ Petition originally filed by the respondents, challenging the Constitutional validity of the Bombay Sales Tax Act, 1952. This case was heard before a Constitutional Bench comprising of 5 judges, namely, M. Patanjali Sastri, C.J., Bijan Kumar Mukherjea, Vivian Bose, Ghulam Hasan and N.H. Bhagwati, JJ.

In view of the importance of the issues involved, a notice of Appeal under Order 41 Rule 1 of the Code of Civil Procedure, 1908 was issued to the Advocate General of States and the States of Bihar, Madras, Mysore, West Bengal, Uttar Pradesh, Punjab and Travancore-Cochin intervened in this matter.

Issues Raised Before The Court

The issues raised before the Court can be divided in the following manner:
· What were the implications of the Explanation attached to Article 286(1)(a) on Inter-State transactions and the tax imposed on them?
· Whether the Bombay Sales Tax Act, 1952 was in consonance with the Provisions of the Constitution of India, including Article 286.

Rules Involved
The respondents in the present case alleged that the Bombay Sales Tax Act, 1952, in its entirety, was ultra vires the provisions of the Constitution of India. The Constitutional Provisions involved are 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- For the purposes of sub-clause (a), a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed in another State.

(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 trade or commerce:
Provided that the President may by order direct that any tax on the sale or purchase of goods which was being lawfully levied by the Government of any State immediately before the commencement of this Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions of this clause, continue to be levied until the thirty-first day of March, 1951.

(3) No law made by the Legislature of a State imposing, or authorising the imposition of, a tax on the sale or purchase of any such goods as have been declared by Parliament by law to be essential for the life of the community shall have effect unless it has been reserved for the consideration of the President and has received his assent.
301. Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free.
304. Notwithstanding anything in article 301 or article 303, the Legislature of a State may by law -

(a) impose on goods imported from other States any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and

(b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest:
Provided that no bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President.
It was alleged that the provisions of the Bombay Sales Tax Act, 1952 would result in double taxation and act as a restriction to the freedom of trade and commerce as guaranteed under the Constitution of India. The Supreme Court analysed the abovementioned provisions of the Constitution in order to come to the finding that the Act was not Ultra Vires the Constitution of India.

Analysis

Opinion Given By Patanjali Sastri, C.J.

Dealing with the first issue of whether the Act was in consonance with the provisions of Article 286 (1) of the Constitution of India, it was found necessary to ascertain the scope of the power conferred on the States to impose taxes. As a result, reference was made to Article 246(3) and Entry 54 of List II of the Seventh Schedule, both when read together, give exclusive power to the State Government to make laws on taxes on goods and services except newspapers. Further, a reference was made to the Wallace Brothers Case[1], where in dealing with the competency of the Indian Legislature to impose tax on the income arising abroad to a non-resident foreign company, the constitutional validity of the relevant statutory provisions did not turn on the possession by the legislature of extra-territorial powers but on the existence of a sufficient territorial connection between the taxing State and what it seeks to tax.

Reference was also made to Article 301, which states that trade and commerce throughout the territory of India shall be free, and article 304, which allows the states to impose taxes of similar nature as imposed on goods their own state, on goods imported from other states, as long as they do not discriminate between these goods. Further, it was also stated that Article 286 explicitly states that the place of delivery will be the place of taxation in case of inter-state transactions.

On the other hand, it was also stated that this issue of territorial nexus has not been examined at length by any court, which calls for a further analysis on the same. It was stated that a purchase or sale transaction has many ingredients, according to both, common law and the Sale of Goods Act, such as agreement to purchase and sell, transfer of title, delivery of goods, etc. No one of these ingredients can be picked out as being an essential part of the transaction in order to determine the issue of territorial nexus. It was thus decided that an easily applicable test must be laid down to determine the territorial aspect of a sale transaction.

The Explanation attached to Article 286(1)(a) in the Constitution of India provides by means of a legal fiction that the State in which the goods sold or purchased are actually delivered for consumption therein is the State in which the sale or purchase is to be considered to have taken place, notwithstanding the property in such goods passed in another State. Why an "outside" sale or purchase is explained by defining what is an inside sale, and why actual delivery and consumption in the State are made the determining factors in locating a sale or purchase will presently appear.

The test of sufficient territorial nexus was thus replaced by a simpler and more easily workable test:
Are the goods actually delivered in the taxing State, as a direct result of a sale or purchase, for the purpose of consumption therein? Then, such sale or purchase shall be deemed to have taken place in that State and outside all other States. The latter States are prohibited from taxing the sale or purchase; the former alone is left free to do so. Multiple taxation of the same transaction by different States is also thus avoided.

It was further also stated that the non-obstante nature of the Explanation to Article 286(1)(a) means that it is immaterial where the goods pass in transit, and it is only the final place of delivery and consumption that determines the place of taxation. The expression "for the purpose of consumption in that State" must be understood as having reference not merely to the individual importer or purchaser but as contemplating distribution eventually to consumers in general within the State. Thus, all buyers within the State of delivery from out-of-State sellers, except those buying for re-export out of the State, would be within the scope of the Explanation and liable to be taxed by the State on their inter-State transactions.

Further, the effect of Article 286(2) on the Explanation under Article 286(1)(a) was also considered, since both provisions deal with inter-state transactions. It was suggested by the appellants that this clause (2) deals with purchase and sale transactions between two traders in different states only, because of the use of the words in the course of inter-state trade or commerce. The court disagreed with this proposition and stated that sub clause (2) provides for explaining the provision under sub clause (1)(a), only.

The provisions were construed to be constructed harmoniously, even with Articles 301 and 304, and not independent of each other as such a construction would avoid double taxation by two or more states. Further, it was also stated that sub clause (2) acts as a safeguard to the freedom of trade and commerce guaranteed under Article 301, by providing for the protection of purchase and sale transactions that are inter-state in nature. Thus, according to this view, the delivery state will tax both, the goods produced within the state and out-of-state goods equally and without discrimination.

Dealing with the second part of the case, which involved the question as to whether the provisions of the Bombay Sales Tax Act actually infringed the principles under the Constitution of India, and whether the entire Act or only certain provisions resulted in such violation.

On a reading of the bare provisions of the Act, it was found that the Act does not expressly exclude from its purview the purchases and sales made outside of Bombay, but, by way of an explanation to the definition of the term sale, states that it includes the sales or purchases under which the delivery and consumption take place in Bombay which, by virtue of the Explanation to article 286(1)(a), are taxable in Bombay. According to such a construction, there is no violation of the Constitutional Provisions. Furthermore, since the Rules to the Act expressly exclude the exemptions under Article 286(1)(a), and since both the Act and the Rules were notified on the same day, there is no reason to not consider the delegated legislation as law and the Rules and Act, on this ground are valid.

It was also contended that the exemptions provided for under the Rules are subject to certain conditions, such as provision of certificates of proof from relevant authorities and so on. It was held that there is nothing wrong in demanding certificates of proof and following other rules of proof, which are contended to be discriminatory conditions.

Reliance was also placed on certain American cases like Bowman v. Continental Company[2], where it was held that just because a part of the taxing statute is proved to be unconstitutional, it does not mean that the entire Act must be held to be void.

Following the above principles, it was held that the Act is not Ultra Vires the Constitution of India and the writ issued by the High Court was accordingly quashed.

Opinion Given By N.H. Bhagwati, J.

Justice Bhagwati, in his judgment, chose to disagree with the judgment delivered by Chief Justice M. Patanjali Sastri. He disagreed with the Construction put upon Article 286(1)(a) of the Constitution of India, according to which, if the delivery of goods from another state for consumption took place in the home state, then it would be assumed that the sale took place in the home state and tax would be imposed accordingly.

According to Justice Bhagwati, the intention behind putting in the Article 286(1) along with its Explanation is to ensure that tax is imposed in the place where the sale or purchase transaction is completed. This is because the transaction is usually complete when the transfer of goods takes place.

This is why the concept of legal fiction is mentioned in the Constitution of India, in order to overcome the difficulty of double taxation. This Explanation to Article 286(1)(a) is a non-obstante clause which takes into account the fact that under the general law of sale of goods, when the sale transaction takes place in another State, the situs would also be in that other State. The Explanation merely fixes the situs of the sale as the state where delivery of goods takes place.

Furthermore, while moving away from the Chief Justice’s opinion, he states that the Explanation must be viewed an as enabling provision, allowing the delivery state to ‘also’ levy tax on goods and services, in addition to the State which would levy tax on following the general law on sale of goods. The only restriction on double taxation thus, is when the exemptions under Article 286(1) are met, but not in the inter-state transfer of goods.

Further, in order to analyse the position of Article 286(2), Justice Bhagwati looked into the nature of sale and purchase transactions covered under Article 286(1). According to him, Article 286(1) covers the transactions in goods which result in transfer of goods for the purpose of final consumption only. He further went on to analyse various economic definitions of the term consumption, as a result of which, he came to the conclusion that Article 286(2) covers such cases as well because of the use of the words in the course of trade and commerce which include dealings between a dealer and the final consumer, as well as dealings between two dealers. This follows from the mere logic that if Article 286(1) allows taxation and Article 286(2) bans it, it will be like giving a right with one hand and taking it away with the other.

Justice Bhagwati goes on to rely on the Rule of interpretation laid down in the case of Churchill v. Crease[3], which states that if a Statute presents a general intention as well as a particular intention, the particular intention is in the nature of an exception. He therefore based his construction of the Explanation of article 286(1)(a) and article 286(2) on this rule as to the interpretation of statutes, lifting the transaction of sale or purchase covered by the Explanation to article 286(1)(a) out of the category of the transactions in the course of inter-State trade or commerce and assimilating it to a transaction of sale or purchase which takes place inside the delivery State thus investing it with the character of an intra-State sale qua the delivery State.

As a result, Justice Bhagwati also arrived at the same finding as the Chief Justice, stating that as a result of the Explanation under Article 286(1), only the delivery state can impose taxes on the sale or purchase of goods. He further agreed with the Chief Justice in the order passed by him.

Opinion Given By Vivian Bose, J.

Justice Bose in his judgment did not agree with both, Justice Bhagwati and Chief Justice M. Patanjali Sastri. He stated that prior to the enactment of the Constitution of India, the State Authorities had the right to impose taxes on the same transaction. The underlying reason behind putting in Article 286 in the Constitution of India was to prevent the same.

According to him, so long as the ban imposed by clause (2) remains, there is no difficulty because when parts of a sale take place in different States the transaction is inter-State and no tax can be imposed. On the other hand, when all the ingredients are intra-State clause (2) is not attracted. Complications only arise when the ban is lifted. The Constitution makers had before them the existing practice of the States based on the nexus theory, and so it became necessary to define just where a sale takes place in order to carry out the main theme that only intra-State sales can be taxed. This was fixed by introducing a legal fiction, stating that the delivery state has the authority to impose taxes on inter-state transactions.

Furthermore, according to him, the principle of harmonious construction applied by the Chief Justice was wrong. He stated that Article 286 deals with purchase and sale transactions and corresponds to Entry 54 of List II in the Seventh Schedule, while Article 304 deals with imports of goods into a State, and corresponds to Entries 26 and 27. Thus, they must be construed as independent of each other.

In dealing with the Explanation attached to Article 286(1)(a) of the Constitution, he states that the non-obstante clause does not mean that under the general law the place where the property passes was regarded as the place where the sale takes place, for that in itself would be a fiction. There is no such law. All it means is that there was a school of thought which regarded that as the crucial element on the nexus view and that the Constitution has negatived that idea.

Further, he also states that the Explanation cannot be extended to sub clause (2), as it expressly uses the words for the purpose of sub-clause (a). According to him, the only purpose of the Explanation is to explain where the situs of a sale is. Clause (2) has a different object. Its purpose is to prohibit taxation on sales and purchases which take place in the course of inter-State trade or commerce. He further states that so long as this prohibition exists, there will be no problems. The problems will arise if the parliament lifts the ban, which would need to be met with the Explanation under Article 286(1). He gave this purpose to the inclusion of the Explanation.

He further goes on to state that the meaning of the term consumption as used in the Constitution cannot be given a narrow meaning to only include final consumption. There may be many cases where the goods may be consumed more than once.

Coming to the validity of the Act, he refused to agree with the fact that the Rules framed under the Act would save the Act from being ultra vires the Constitution of India. He held that a skeletal legislation cannot depend upon subordinate legislation for its validity. Thus, if the Act is ultra vires, referring to the Rules enacted thereunder would have no meaning.
He was also of the opinion that the offending provisions of the Act are not severable from the rest of the Statute, and thus, held the entire Statute to be bad in law.

Conclusion
The majority opinion in this case clearly favours the appellants. According to the Order passed by the Court, the Bombay Sales Tax Act, 1952 is held to be not ultra vires the Constitution of India. Accordingly, the Writ issued to the Appellants by the High Court of Bombay was quashed and an injunction was issued to the appellants to not impose any tax that would be in contravention with the provisions under Article 286 of the Constitution of India. Each party was directed to bear their own costs.

End-Notes
[1] Wallace Brothers & Co. Ltd. v. Commissioner of Income Tax, [1948] S.C.R. 1.
[2] Bowman v. Continental Company 256 U.S. 642 65 L.Ed. 1130
[3] Churchill v. Crease (1828) 5 Bing. 177 at p. 180.

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