State Of Mysore and Anr vs Mysore Spinning and Manufacturing Co

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

Court: supreme-court

Case Number: Appeal (civil) 66 of 1957

Decision Date: 11 February, 1958

Coram: S.R. DAS (CJ), T.L.V. AIYYAR, S.K. DAS, A.K. SARKAR, V. BOSE

In the case titled State of Mysore and Anr versus Mysore Spinning and Manufacturing Co., the matter was decided on 11 February 1958. The appeal was entitled Appeal (Civil) 66 of 1957 and was heard before the Supreme Court of India by a bench consisting of Chief Justice S.R. Das, Justice T.L.V. Aiyyur, Justice S.K. Das, Justice A.K. Sarkar and Justice V. Bose. The judgment was recorded in the 1958 volume of the All India Reporter (Supreme Court) at page 1002, and Justice V. Bose delivered the opinion of the Court. The opinion stated that it would govern Civil Appeals numbered 66 through 73 of 1957. These appeals originated from a certificate issued by the High Court of Mysore that set aside a judgment of that Court dated 29 September 1955.

The appellant in the proceedings was the State of Mysore, while the respondents were the Mysore and Minerva Mills, which were sister textile enterprises operating under common management. Both mills maintained registered offices in Bombay and operated manufacturing facilities in Bangalore, which lay within the State of Mysore. The State of Mysore sought to impose a sales tax on certain sales made by the two mills during the period from 31 March 1950 to 31 March 1951. The mills contended, and continued to maintain, that the sales in question were made in the course of export and therefore were exempt from tax under Article 286(1)(b) of the Constitution. The Sales Tax Officer rejected this contention and assessed tax on the sales. The mills appealed the assessments, filed review petitions with the Commissioner of Sales Tax, and ultimately sought relief in the High Court.

The assessments that were challenged related to five quarterly periods. The Commissioner of Sales Tax made two references concerning the first two quarters ending 31 March 1950 and 30 June 1950, which were the subject of Civil Petitions No. 110 of 1954 (relating to Minerva Mills) and No. 112 of 1954 (relating to Mysore Mills). For the remaining quarters, the mills filed writ petitions in the Mysore High Court. Writ Petitions No. 26 and No. 28 of 1954 challenged the assessment for the quarter ending 30 September 1950, the former filed by Mysore Mills and the latter by Minerva Mills. Similarly, Writ Petitions No. 27 and No. 29 addressed the quarter ending 31 December 1950, and Writ Petitions No. 30 and No. 31 concerned the quarter ending 31 March 1951. All eight petitions were heard together, and a single judgment was delivered, which is the judgment now under appeal. The High Court held that the sales in question were not taxable but granted the State of Mysore a certificate permitting an appeal to the Supreme Court.

The factual background was not contested. Both mills were engaged in the business of manufacturing and selling textile products, including cotton and yarn, from their Bangalore factories. The principal portion of their trade involved selling to licensed export dealers in ports such as Bombay, Calcutta and Madras. These dealers, in turn, exported the goods to foreign buyers. Consequently, the mills argued that the sales were part of export transactions and therefore fell within the constitutional exemption from sales tax.

In some of the cases, the Mills had entered into direct contracts with foreign purchasers and had exported the goods themselves; those sales had not been subjected to tax and there was no dispute about them. In the remaining cases, however, the Mills had no direct contact with any foreign buyer. Instead, licensed exporters at the ports acted as intermediaries between the Mills and the overseas purchasers. During the period that was under consideration, only exporters who possessed a valid licence were permitted to export. It was presumed that in the few instances where the Mills exported directly, they also held a licence, but the Court limited its analysis to the transactions that were conducted through duly licensed exporters, hereinafter referred to as “exporters.” The procedure followed for such exports was as follows. First, an exporter obtained a firm offer from an overseas buyer that specified the quality and quantity of cloth or yarn required. Second, the exporter presented this offer to the Export Controller and secured a provisional export licence for the ordered goods. Third, the exporter inquired with the Mills whether they could supply, within a reasonable time, the quality and quantity demanded by the foreign buyer. Fourth, upon receiving a positive response from the Mills, the exporter concluded a firm contract with the overseas purchaser. Fifth, the exporter then executed a contract with the Mills for the sale of those goods; this contract was required to be marked “for export only,” to list prices higher than inland rates, and to contain detailed specifications of the goods. Sixth, armed with the Mills’ contract and the provisional licence, the exporter applied to the Export Controller for a final licence, which identified both the seller and the exporter and described the commodities. Seventh, the Mills packed the goods in accordance with the regulations issued by the Textile Commissioner, dispatched them to the exporter, and clearly marked the packages “for export only.” Eighth, the Mills notified the exporter of the dispatch. Finally, the exporter delivered the goods to the ship for overseas shipment. From the beginning to the end of this process, the Mills never dealt directly with the overseas buyer, and the sales that gave rise to the export were not sales from the Mills to the exporter. Nevertheless, the Mills asserted that these sales were made in the course of export and therefore fell within the protection of Article 286(1)(b). The Court noted that this issue had been examined extensively in earlier decisions and expressed its opinion that the point was now settled.

The Court observed that the issue of whether sales were “no longer at large” had been directly addressed in The State of Travancore‑Cochin and Others v. Shanmugha Vilas Cashew‑Nut Factory (1954 SCR 53; 1953 (4) STC 205). In that case the majority, writing at page 62, held that “the last purchase of goods made by the exporter for the purpose of exporting them to implement orders already received from a foreign buyer or expected to be received subsequently in the course of business” was not protected by the constitutional provision. The Court found that the present situation fell squarely within that ruling. It noted a factual difference: the commodity bought in the earlier case was raw cashew‑nuts, while the commodity exported was the kernel obtained after processing the raw nut. Nevertheless, the Court said the ratio decidendi rested on a broader principle that covered the present facts. The Court then turned to the decision in The State of Madras v. Guruviah Naidu (1955 (6) STC 717, at 721; 1956 AIR (SC) 158, at 161), which was directly on point because the exported item—skins—was the same as the item purchased in the domestic market for final export. Counsel for the respondents had cited observations in Kailash Nath v. State of U.P. (1957 (8) STC 358; 1957 AIR (SC) 790), but the Court held that that case was not applicable, since it concerned the interpretation of a notification using the words “with a view to export” and exempted such sales from tax, whereas the language of Article 286(1)(b) was different. The Madras case made clear that sales made “for the purpose of export” were not protected unless those sales themselves “occasioned the export.” The respondents argued that the present case was distinguishable because the Government had prescribed the export process by (1) prohibiting all export except through licensed exporters and (2) requiring special packing and the marking “for export only.” They further claimed that the Government had accepted the dissenting view in the Travancore‑Cochin case and had therefore raised the starting point of the export stream. The Court rejected this contention on two grounds. First, even in the absence of the Government order, the normal course of export would have required the same procedures, so the compulsory order made no material difference and the sales could not be said to have occasioned the export. Second, the power to levy taxes on sales rested with the States under entry 54 of List II, meaning the Centre could not prevent the States from taxing sales that were otherwise taxable either by a Central Act or by rules made thereunder. Consequently, the Court affirmed that the sales in question were not protected by Article 286(1)(b) and remained subject to State taxation.

The Court observed that if a State or any of the States had voluntarily placed a self‑imposed restriction on its own power to tax, that would be a different situation, because although the States possess the authority to levy taxes in a particular field, they are not obligated to exercise that authority and may limit their own rights by legislation as far as they wish. However, the Union Government cannot compel the States to impose such a restriction. It was also submitted that the Government’s prohibition on exports except through a licensed exporter forced the mills to act in the manner they did. The Court replied that the mere fact that one party (A) is prohibited from exporting while another party (B) is permitted, for whatever reason, does not transform a transaction that would not have been an “export” transaction in the absence of the ban into an export merely because A is under a disability. The learned High Court judges had held that the sales were exempt on the basis that the exporters must “be deemed to be agents of the foreign buyers” and therefore “the sales to the agents must be presumed to be sales in favour of the principle.” The Court expressed difficulty in understanding how such a legal fiction could arise. While the legislature may sometimes create a fiction by declaring that something which does not actually exist shall be deemed to exist, the Courts are not authorized to do so. No statutory provision was invoked in the present case, and, as far as the facts are concerned, which the respondents themselves admitted, the situation was precisely the opposite. The respondents never claimed that the exporters were their agents, nor did they set up such an argument in their pleadings, except for a single sentence in which they stated that they had urged the Sales Tax Officer that “all exports out of India had to be made only through license export agents.” That statement was inaccurate; what they actually conveyed was that they were compelled to sell through licensed exporters because they themselves did not hold an export licence. Moreover, they abandoned that line of argument before the Sales Tax Commissioner, if indeed it had ever been advanced, and instead said: “(2) That the sales by the petitioner company in question were no doubt sales to export licence‑holders in India and not to overseas buyers direct. (3) That under the regulations in force the company could not themselves export the goods out of India, and they were obliged to follow the above procedure as under the Cotton Textile (Export Control) Order, it is obligatory to export the goods to overseas markets only through the export licence holders.” The Sales Tax Commissioner held that there was no doubt about the correctness of the facts as stated in paragraphs (2) and (3) above and observed: “This is clearly not a case of agency because a principal does not sell to his agent and even if this was the only way in which an export could be effected, that would not make the export.”

The Court observed that the exporter, by virtue of the purchase, became a principal rather than an agent of the seller; consequently, the transaction could not be described as an agency relationship. Moreover, the Court found no evidence that the exporters acted as agents of the respondents, noting that every contract with the exporters was executed with the exporters themselves as principals. As a result, the learned High Court judges were considered to have misunderstood the factual situation. Counsel for the respondents argued that, even if the relationship did not fit the strict contractual definition of agency, a broader interpretation of agency existed, citing Webster’s Dictionary, which includes “instrumentality” as a meaning of the term. The Court rejected this broader view, holding that only the agency relationship defined under the law of principal and agent was relevant to the respondents’ claim. The Court pointed out that there were two distinct sales, and only the second sale led to the export of the goods; the respondents were not a party to that second sale, either directly or through the exporters as agents. Accordingly, the first sale, which alone connected the respondents to the transaction, did not result in export. Because the first sale did not occasion export, the Court stated that it was immaterial whether the goods were exported through the exporters’ “instrumentality,” since, according to earlier decisions of this Court, every sale that precedes the sale that actually causes export is subject to tax. The High Court had also held that if a commodity is manufactured “with the main intention for export,” the ultimate sale should be treated as occurring “in the course of export.” The Court found this assumption unsupported by the record, noting that nothing demonstrated that the goods were produced with a primary intention to export beyond the fact that they were sold to exporters and marked “for export” at dispatch. Even assuming that such an intention existed, the Court reiterated its earlier ruling that only the sale that directly causes export qualifies for exemption, while the preceding sale to the exporter remains taxable, regardless of whether it was made “with a view to” or “for the purpose of” export. The respondents also advanced an alternative argument that, if the sales were not part of an export, they were nonetheless sales made in the course of inter‑State trade and commerce and therefore exempt under Article 286(2). The High Court did not examine this argument because it deemed the question unnecessary after deciding the primary issue. The Court noted that this point had not been raised before the Sales Tax Officer nor in the earlier appeals, although it was raised in the subsequent review.

The Court noted that the review was made to the Sales Tax Commissioner, who had held that the taxes imposed up to 31 March 1951 were valid by virtue of the President’s Continuance Order No 7 dated 26 January 1950. Since the High Court had not examined that point, the Court stated that it lacked the necessary facts to reach a decision on the issue. Because the Court was inclined in favour of the appellant on the first point, it concluded that the matter should be remanded to the High Court so that the High Court could make a determination on that point. Accordingly, the case was remanded and the costs were ordered to follow the result of the remand.

On an application for review of the judgment dated 11 February 1958, the Court issued an order on 17 April 1958. Justice Vivian Bose observed that the petition disclosed an accidental slip in the earlier judgment that required correction. The Court recorded that counsel who had appeared for the appellant in the appeals waived notice and, without giving notice, appeared to represent the State of Mysore, and that this counsel agreed that a slip existed and needed to be rectified. The slip concerned a misstatement at the close of the judgment whereby it was said that the respondents had an alternative case under Article 286(2). The Court clarified that this was erroneous; the respondents’ alternative case was actually under Article 286(1)(a). It further noted that the appellant, not the respondents, had raised a contention concerning Article 286(2), and the Court had expressed no opinion on that contention then and expressed none now. The Court then referred to question No 6, which contained two sub‑questions raised by the petitioners (the respondents). The first sub‑question asked whether, in any event, the petitioner company’s sales did not fall under Article 286(1)(a) of the Constitution. The High Court had indicated that no finding was necessary on that part, and the Court held that the remand should have directed the High Court to investigate that issue rather than the question under Article 286(2). The second sub‑question asked whether the sales fell under Article 286(2) as held by this authority. The High Court had held, against the appellant, that the sales were not affected by Article 286(2). Consequently, there was a finding on that point but not on the other. The Court therefore concluded that the remand should have been limited to Article 286(1)(a) and not to Article 286(2), and that it had not considered the position under Article 286(2). Accordingly, the order of 11 February 1958 was amended. In the third paragraph from the end of the judgment, the sentence stating that the respondents had an alternative case that the sales were exempt under Article 286(2) was replaced with a sentence stating that the respondents had an alternative case that, even if the sales were not in the course of export, they were …

The Court recorded that the respondents’ alternative contention was that, even if the transactions under consideration were not classified as exports, they nonetheless constituted sales that were carried out outside the territorial boundaries of the State of Mysore. Accordingly, the respondents argued that such sales fell within the exemption articulated in Article 286(1)(a) of the Constitution, and therefore should not be subject to the provisions that were otherwise applicable. In replacing the earlier wording, the Court inserted the phrase “sales made outside the State of Mysore and so were exempt under Article 286(1)(a)” to reflect precisely this line of argument. Having corrected the operative language of its earlier order, the Court directed that the matter be sent back to the High Court for its final determination. The remand was specified to be for final disposal by that Court, meaning that the High Court alone would now resolve the remaining issues that had been left undecided. In addition, the Court stipulated that each party would be responsible for its own legal expenses incurred in the present proceedings. No order for costs was to be made against either side by this Court, and the parties were instructed to bear their respective costs independently.