Allowed

M/s.Sri Lakshmi Ganesh Modern Raw and Boiled Rice Mill, v. The Assistant Commissioner(Ct) Ltu

Telangana HC30 Oct 2014WP/28718/2012

Case brief

AI extract

What is this about?

Rice millers in the Union Territory of Pondicherry challenged sales tax assessments treating their supply of levy rice to a central procurement agency in Andhra Pradesh as intra-state sales. The court held the sales were inter-state sales under Section 3(a) of the CST Act and that the State authorities lacked jurisdiction to levy VAT; the assessments were set aside.

What did the court decide?

Impugned assessment orders levying VAT under the A.P. VAT Act on the sale of levy rice to FCI, Kakinada set aside as being without jurisdiction.

M/s.Sri Lakshmi Ganesh Modern Raw and Boiled Rice… — GST and Indirect Tax | Telangana HC (2014)

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THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN AND THE HON’BLE SRI JUSTICE M.SATYANARAYANA MURTHY

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WRIT PETITION Nos.27335, 27336, 27337, 27338, 27339, 27721, 27788, 27791, 27803, 27805, 28718, 28727, 28731, 28732, 28734, 28849, 29123, 29136, 29142, 29173, 29343, 29420, 29423, 29495, 29542, 29794, 29917, 30023, 30070, 30123, 30409, 30511, 30532, 30620, 30641, 30969, 31046, 31102, 31453, 31886, 35111, 35119, 35127, 35130, 35139, of 2012 and 6462 of 2014

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WRIT PETITION No.27335 of 2012

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% Date: 30-10-2014

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# M/s. Sri Bhargavi Agro Tech, “Gayathri House”, 5-1-53, Adivipolam, Yanam – 533 464. Union Territory of Pondicherry India, rep., by its Managing Partner M. Durga Prasad Chowdary.

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…. Petitioner

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Vs.

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$ Assistant Commissioner (CT), Kakinada, East Godavari and another.

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…. Respondents ! Counsel for the petitioners: Sri S.R.Ashok, Learned Senior Counsel for Sri Vivek Chandra Sekhar S; Dr.S.R.R. Viswanath, and Sri V.Bhaskar Reddy, Learned Counsel.

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^ Counsel for respondents: Sri P. Balaji Varma, Learned Special Standing Counsel for Commercial Taxes; Sri D.Srinivas, Learned Standing Counsel for FCI,

<GIST:

> HEAD NOTE:

? Citations:

1. (2006) 42 APSTJ 52 2. (2004) 7 SCC 166 3. (2007) 6 SCC 120 4. (1988) 68 STC 187 (AP) 5. (1961) 1 SCR 809 6. AIR 1955 SC 661 7. AIR 1953 SC 252 8. [1954] S.C.R. 1117 9. AIR 1958 SC 452 10. AIR 1955 SC 765 11. (2002) 5 SCC 203 12. AIR 1986 SC 2146 13. 1962 Supp (3) SCR 1 14. AIR 1963 SC 906 15. AIR 1963 SC 548 16. AIR 1975 SC 887

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17. (1976) 4 SCC 460 18. AIR 1994 SC 1456 19. (1983) 54 STC 45 (Guj) 20. (1961) 1 SCR 379 21. (2000) 6 SCC 12 22. (2007) 9 SCC 97 23. (1992) 3 SCC 750 24. (1979 (2) SCC 242 25. (1963 (3) SCR 777 26. 1966 (2) SCR 190 27. AIR 1966 SC 1350 28. 1971 (2) SCR 849 29. AIR 1981 SC 446 30. [1974] 1 SCR 463 31. [1976] 2 SCR 939 32. (1974) 34 STC 535 (Pat) 33. A.I.R. 1952 S.C. 366 34. A.I.R. 1964 S.C. 1752 35. A.I.R. 1953 S.C. 333 36. A.I.R. 1968 Pat. 329 (FB) 37. (2014) 3 SCC 732 38. AIR 1935 PC 182 39. AIR 1997 SC 2502 40. (2004) 6 SCC 281 41. (2004) 11 SCC 1 42. AIR 1951 SC 230 43. AIR 1971 SC 740 44. 2003 (5) ALT 216 (DB) 45. (2007) 6 SCC 120 46. (2006) 7 SCC 756 47. (1917) 2 Ch 71 48. (1913) 17 C.L.R. 90 49)AIR 1958 SC 667

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THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN AND

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THE HON’BLE SRI JUSTICE M.SATYANARAYANA MURTHY

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COMMON ORDER: (per Hon’ble Sri Justice Ramesh Ranganathan)

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The orders under challenge, in this batch of Writ Petitions, are the assessment orders passed by the Assistant Commissioner (CT) assessing the petitioners to tax under the A.P. VAT Act, 2005 (hereinafter called the “Act”).

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The petitioners, who are registered dealers and are operating rice mills at Yanam in the Union Territory of Pondicherry, purchase paddy, mill it and sell rice and its byproducts. Pursuant to a meeting held on 15.09.1983, between the Commissioner of Civil Supplies and Ex-Officio Secretary to the Government, Food and Agriculture (CS) Department, Government of Andhra Pradesh and the Secretary to the Government Civil Supplies, Government of Pondicherry, a memo was issued on 31.10.1983 whereby rice millers at Yanam, including the petitioners, were permitted to purchase paddy, in East Godavari District of Andhra Pradesh, at prices not lower than the price notified by the Government of A.P, and as prevalent in Andhra Pradesh. The rice millers at Yanam were required to deliver such percentage of levy rice, to the Food Corporation of India (“FCI” for short) or the Andhra Pradesh State Civil Supplies Corporation Limited (“APSCSCL” for short), as was prescribed under the levy order. The procurement price of rice ex-mill for the year 1983-84 was also fixed for different varieties of rice. The memo dated 31.10.1983 (which shall be referred to in detail hereinafter) required the Administrator of Yanam to collect levy rice from the rice millers at Yanam, and deliver it to FCI or APSCSCL. The Government of Andhra Pradesh, vide memo dated 29.06.1990, permitted the rice millers at Yanam to purchase paddy in all the districts of Andhra Pradesh. In terms of the memo dated 31.10.1983, as modified by the subsequent memo dated 29.06.1990, the rice millers at Yanam were under an obligation to supply levy rice to the FCI, or the APSCSCL, at Kakinada at the prescribed rates.

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At the request of the second respondent, the first respondent issued showcause notices to the petitioners proposing to levy tax under the Act on the value of levy rice supplied by them to FCI, Kakinada during the period 2005-06 to 2009-10. The petitioners submitted their reply thereto contending that the levy rice, in accordance with the conditions prescribed in the A.P. Rice Procurement (Levy) Orders, 1984, (hereinafter called the “1984 order”) was supplied from Yanam to FCI, Kakinada in the course of inter-State trade and commerce; these sales of levy rice

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constituted inter-State sales within the meaning of Section 3(a) of the Central Sales Tax Act, 1956, and the tax authorities in Andhra Pradesh lacked jurisdiction to levy tax thereupon; and the Pondicherry tax authorities had exclusive jurisdiction to levy tax on inter-State sales of levy rice from Yanam to the FCI at their godowns at Kakinada.

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In the assessment orders, impugned in these Writ Petitions, the assessing authority held that, for all practical purposes, the Government of A.P. had treated the Yanam Rice Millers on par with the Rice Millers of A.P; there was neither an agreement between FCI and the Millers of Yanam nor did FCI have any knowledge of purchase of Paddy by the Yanam Millers or about the Milling or the delivery to be made to FCI; unascertained and standard goods, prone to diversion, were being accepted by FCI only after the goods reached them; as the purchaser was not bound to accept the goods, final appropriation was made in the State of A.P; as long as there was a possibility of diversion of the goods, before its actual delivery to FCI, there was no sale pursuant to which there was movement of goods; the permission accorded, in the Government memo dated 31.10.1983, is an offer open to any Rice Miller in Yanam enabling him to purchase paddy in A.P. and supply rice to FCI at Kakinada under the levy scheme; such types of offer cannot be treated as a binding contract or an agreement to sell the goods mentioned therein; it did not amount to placing an order for any definite quantity on a definite date; the assessees did not undertake to supply rice to FCI against any order placed by FCI; it did not amount to a contract in the strict sense; there was no obligation on the petitioners to deliver; there was neither an obligation on the FCI to accept the goods which had been offered nor could there be any complaint for its non-acceptance after the goods had arrived at Kakinada; the process of sale commenced only after the goods had been offered to FCI at Kakinada; it could not be said that there was privity of contract between the supplier of goods and the purchaser, or that the goods had been moved from one State to another, pursuant to the contract; as the transaction fell outside the purview of Section 3(a) of the CST Act, it is an intra-state sale in the State of A.P; in the judgments relied upon, by the assessees, there was a conceivable link between the contract of sale and the movement of goods from one State to another; in the instant case such a conceivable link was missing, in the absence of which the cases on hand were distinguishable; it was clear from the costing sheet issued by the Government of India, and the bills for payment of Mill levy Rice issued by FCI, that FCI was making the same payment towards procurement price both to the millers of

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Yanam and A.P. which, inter alia, included VAT; there was no merit in the contention that the asessees had not been paid VAT by FCI; the Commissioner of Commercial Taxes, Hyderabad had, by his circular dated 13.10.2011, withdrawn the earlier circular dated 24.06.2010, and had rescinded the same; and all the petitioners were assessed to tax under the Act, on the sale of levy rice to FCI, Kakinada, treating it an as an intra-state sale.

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In the counter affidavit, filed on behalf of the 1^st respondent, it is stated that Yanam is administered by the Government of the Union Territory of Pondichery; it is geographically proximate to East Godavari District of Andhra Pradesh; the rice millers of Yanam have obtained VAT and CST registration numbers in Pondicherry; they are assessees on the rolls of the DTO, Yanam; they are not registered under the Act; the food grains, including rice and pulses (1^st schedule goods), are not liable to tax under the Pondichery Value Added Tax Act; as sufficient paddy was not available for milling at Yanam, and there were restrictions on the movement of paddy from the State of Andhra Pradesh to other States/Union Territories, the rice millers at Yanam expressed their grievance, in the meeting held at Hyderabad on 15.09.1983, to the Government of A.P; after discussions, between the Commissioner of Civil Supplies of the Government of A.P. and the Commissioner of Civil Supplies of Pondichery, the memo dated 31.10.1983 was issued by the Government of A.P; the said memo makes no mention regarding payment of Sales Tax either on paddy or on rice; no condition was stipulated therein that the price agreed to, in the said memo, was subject to payment of sales tax either on paddy or on rice; the Yanam rice millers had supplied the milled rice to FCI , Kakinada as per the levy order, after obtaining way bills from the Pondichery Government i.e., the DTO Yanam; they handed over the rice at the FCI godown at Kakinada in the State of Andhra Pradesh; after satisfying itself regarding the quality of rice, FCI, Kakinada made payment for the value of the goods, along with other charges excluding the RD cess component, to the rice millers in Andhra Pradesh as well as the Yanam rice millers; while issuing the memo dated 31.10.1983, the Government of A.P. did not differentiate between the procurement price, payable for levy rice, between the A.P. rice millers and the Yanam rice millers; for all practical purposes, the Yanam rice millers were treated on par with the rice millers in Andhra Pradesh; the rice millers of A.P. were on the rolls of the Commercial Tax Department of the Government of Andhra Pradesh; they were paying VAT, from the amount received from FCI, on the sale of levy rice to them; while FCI paid the same amount to the Yanam rice millers, as was paid to the rice

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millers in Andhra Pradesh, the Yanam rice millers did not pay the VAT component to the Government of Andhra Pradesh; the Commissioner of Commercial Taxes, vide circular dated 20.09.2008, had stated that the Government of A.P. had treated the levy rice, supplied by the Yanam Rice Millers, as levy rice in A.P; FCI had adhered to a uniform policy of paying the same procurement price for the levy rice supplied by the Millers of Yanam and Andhra Pradesh; the State Government had issued memo dated 24.12.2008 prescribing certain conditions whereby all Collectors were requested to issue permits for movement of common and grade - A varieties of Paddy to Yanam; it was made clear that the rice millers at Yanam should not be permitted to move superfine varieties of paddy from the State of Andhra Pradesh; ever since 2005-06 till 2009-10, FCI has been paying the same amount, towards the levy rice, to millers of Andhra Pradesh and Yanam; the tax component (4% VAT) has also been paid to Yanam Rice millers for a total sum of Rs.10.13 crores; this amount has been retained by the Yanam rice millers, and has not been remitted to the Government of A.P; Section 57(4) of the A.P. VAT Act is attracted; the Government of A.P. had earlier reduced CST from 4% to 3% with effect from 01.06.2008; for the said period, FCI Kakinada had paid procurement price for levy rice to the Yanam millers by adding tax at 3% and 2% respectively; the Yanam Rice Millers and the Rice Millers Association had submitted representation dated 05.10.2007 to FCI stating that rice millers of A.P. and Yanam were paid 4% tax by FCI under the APGST Act; introduction of the A.P. VAT Act did not envisage any differential treatment to the millers of Yanam; the earlier procedure may be continued, and 4% tax be paid to them in the interest of equal justice; the FCI had, thereafter, paid the differential tax of 1% and 2% to the millers of Yanam; there is no difference in the procurement price being paid to rice millers of Yanam and A.P. for the years 200506 to 2009-10; the Commissioner of Commercial Taxes, vide circular dated 27.11.2010, had forwarded a note on the issue of Yanam rice millers; he had requested that a show cause notice be issued to the dealers, and necessary action be taken in the matter; he had subsequently clarified, by circular dated 30.04.2011, that all non-resident dealers, whether as principals or as agents, fell within the jurisdiction of the A.P. tax authorities when they had business within the State; in the absence of their having filed their returns, the period of limitation was six years; as the sale of rice to FCI was within the State, the provisions of the Act were attracted, irrespective of the location of the dealer; hence they were liable to pay tax in A.P; and assessment of tax, on local sales, under the provision of the Act is not illegal.

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In the counter-affidavit, filed on behalf of FCI, it is stated that under both the APGST Act and the AP VAT Act, rice is taxable at 4%; the tax on rice, under the CST Act, was reduced to 3% with effect from 01.04.2007; after 01.04.2007, the FCI treated the sale transactions of rice by the Yanam rice millers as an inter-state sale, and reduced the tax component on the sale of rice to FCI i.e, VAT at 4% and CST at 3%; the Yanam Rice Millers and the Rice Merchants Association submitted representation dated 05.10.2007 seeking payment of VAT at 4% on the sale of rice, and for reimbursement of the differential tax of 1% to them on par with the rice millers of A.P; they stated that they have been treating the sale as a local sale, and not as an inter-state sale; basing on this representation, letter dated 20.09.2008 was issued clarifying that the question of the FCI proposing to treat levy rice, supplied by Yanam Rice Millers, as a CST transaction did not arise, even if the Yanam Rice Millers possessed CST Registration at Yanam and supplied levy rice to FCI, and FCI should follow a uniform policy for payment of the same prices in respect of the rice millers of Yanam and A.P; in view of this clarification, FCI had paid VAT at 4% to the Yanam rice millers also; the petitioners were changing their versions to suit their convenience; when FCI treated their sale as an inter-state sale, the Yanam millers had contested that their sale was a local sale, and they should be paid VAT at 4% on par with the local rice millers; when VAT at 4% was paid to them, treating their sale as a local sale, they are now contending that they are not liable to pay VAT, though VAT at 4% was collected by them from FCI; the Yanam Rice Millers were requested to submit proof of payment of VAT, failing which recovery would be effected; though the Yanam rice millers had collected VAT at 4%, on the sale of levy rice, from FCI, they did not pay the said amount to the A.P. Commercial Tax Department, which is an offence; the Yanam rice millers were misusing the concession given to them by the Government of A.P; they have been collecting sales tax from FCI, and were not depositing the said amount to the A.P. commercial tax department, as is statutorily required; the Yanam Rice Millers wanted to be treated on par with the other rice millers of A.P, yet they do not want to pay sales tax/VAT to the A.P. Commercial Taxes Department which the rice millers of A.P. were paying; this, by itself, is discriminatory; the essence of the entire agreement, between the State of Andhra Pradesh and the Union Territory of Pondicherry, was to benefit the millers at Yanam; the memo dated 31.10.1983 has the effect of notionally extending the boundary of Andhra Pradesh, to include the adjoining Yanam province, for the administrative convenience of the milling industry located thereat;

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the procurement rates fixed by the Government, for the State of A.P, became applicable by this order; the District Collector, East Godavari was authorized to fix the quantity to be supplied to FCI; the Yanam Rice Millers, on their own, brought rice to the FCI godowns at Kakinada; the rice so brought was subject to quality/quantity tests at the FCI godown at Kakinada, and only thereafter was it purchased by FCI; the taxes applicable, at the stage of paddy purchase, as “paddy purchase tax” is waived if VAT becomes applicable at the stage of sale of rice; if it was an inter-state sale, purchase tax would have been levied and collected; non-payment of purchase tax is proof of the transaction being a local sale within A.P. attracting VAT, which is identical to how the A.P. Rice millers were treated; the cost sheet and the rates fixed by the Government of India, for the Government of Andhra Pradesh, was made applicable to the Yanam millers on the underlying principle of equal treatment; there is no separate cost sheet for the Union Territory of Pondicherry, and the price paid to the Yanam millers by FCI was strictly in accordance with the cost sheet applicable to the State of A.P; VAT at 4% was paid as per the directions of the A.P. commercial tax department, and the request of the Yanam millers; though the petitioners rice mills are located at Yanam, they were treated on par with the dealers of A.P; as per the clarification issued, the sale was treated as a local sale; and this has now been confirmed by the assessment orders.

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Elaborate submissions were put forth, on behalf of the petitioners, by Sri S.R.Ashok, Learned Senior Counsel, Dr.S.R.R. Viswanath, and Sri V.Bhaskar Reddy, Learned Counsel. Sri P. Balaji Varma, Learned Special Standing Counsel for Commercial Taxes, and Sri D.Srinivas, Learned Standing Counsel for FCI, put forth their submissions in support of the impugned orders of assessment. It is convenient to examine the rival submissions, urged by Learned Counsel on either side, under different heads.

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I. PRELIMINARY OBJECTION : ALTERNATIVE REMEDY OF APPEAL IS AVAILABLE TO THE PETITIONERS:

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A preliminary objection is raised, on behalf of the respondents, to these Writ Petitions being entertained in proceedings under Article 226 of the Constitution of India. Both Sri P.Balaji Varma, Learned Special Standing Counsel for Commercial Taxes and Sri D.Srinivas, Learned Standing Counsel for FCI, would contend that the question whether a sale, is an inter-state sale or an intra-state sale, is a mixed question of law and fact; these questions cannot be examined in Writ proceedings; it

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can only be decided by the concerned assessing authority, depending on the facts and circumstances of each case; and, if a dealer is aggrieved by an assessment order, his remedy is to prefer an appeal to the Appellate Authority, and not to invoke the extra-ordinary jurisdiction of this Court under Article 226 of the Constitution of India. Reliance is placed by them on Set Discovery Pvt. Ltd, Mumbai v. State of Andhra Pradesh.

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The petitioners invoked the jurisdiction of this Court, without availing the appellate remedy under Section 31 of the AP VAT Act. This Court admitted these Writ Petitions nearly two years ago, and they all are pending on its file ever since. In view of statutory embargo, under Section 31 of the AP VAT Act and its first proviso, prohibiting the appellate authority from entertaining an appeal, after the period prescribed therein has expired, the petitioners cannot now be relegated to the alternative remedy of a statutory appeal. The existence of an adequate or a suitable alternative remedy, available to a litigant, is merely a factor which a Court, entertaining an application under Article 226, will consider for exercising discretion to issue a writ. The existence of such a remedy does not impinge upon the jurisdiction of this Court to deal with the matter itself if it is in a position to do so on the basis of the affidavits filed. (S.J.S. Business Enterprises (P) Ltd. v. State of Bihar; Arunima Baruah v. Union of India).

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I n Sumukha Veereswari Rice Mill v. Dy. Commercial Tax Officer-II, Kakinada, E.G. District the Deputy Commissioner (CT) issue a general circular stating that all purchases made by Yanam rice millers constituted inter-state sales, and was liable to tax only under the Central Sales Tax Act. A Division bench of this Court held that, if the sale was completed in the State of Andhra Pradesh, the mere fact that the purchaser transported the goods outside the State would not make it an inter-state sale; it would, however, be an inter-state sale if the sale or purchase occasioned the movement of goods from one State to another, or where the sale or purchase was effected by transfer of documents of title to the goods during their movement from one State to another, as contemplated by Section 3 of the CST Act; whether a particular transaction fell under one enactment or the other was a mixed question of fact and law; and no general instruction could be issued in that behalf.

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It is no doubt true that the question, whether a particular sale is an "inter-state" or an "intra-state" sale, is a mixed question of fact and law, (Sumukha Veereswari Rice Mill⁴ ), and this Court would, ordinarily, not take upon itself the task of examining such questions in Writ proceedings under Article 226 of the Constitution

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of India. In the present case, however, the orders under challenge are the assessment orders wherein the facts in issue are noted. The questions, which this Court is called upon to examine, are on the basis of undisputed facts available on record. As the facts, necessary to determine whether the subject sales are inter-state or intra-state sales, are not in dispute, we see no reason to non-suit the petitioners on this score.

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II. HAVE THE ASSESSMENT ORDERS BEEN PASSED IN VIOLATION OF ARTICLE 269 AND 286 OF THE CONSTITUTION?

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It is contended, on behalf of the petitioners, that, from 1983 onwards, the petitioners were not assessed to tax by the tax-authorities in Andhra Pradesh; the 2^nd respondent issued clarifications on 27.03.1991 and 24.06.2010 that sale of levy rice, by Yanam rice millers to FCI at Kakinada, was not amenable to levy of tax by the authorities in Andhra Pradesh; the Regional Administrator-cum-Civil Supplies Authority, Yanam had, by his letter dated 08.06.2010, informed the Commissioner of Civil Supplies, Andhra Pradesh that sale of levy rice by Yanam millers to FCI at Kakinada was not liable to tax in Andhra Pradesh; purchase of paddy by the petitioners in Andhra Pradesh constituted inter-State purchases; sale of levy rice, by the petitioners to FCI at Kakinada, constituted inter-State sales from Yanam in the Union territory of Pondicherry; the tax authorities at Yanam in Pondicherry have exclusive jurisdiction to take cognizance of the said transactions; the petitioners have shown details, of their levy rice sales to FCI, Kakinada, in their returns submitted to the Pondicherry tax authorities; the impugned assessment orders are in violation of Article 269 and 286 of the Constitution of India r/w. Sections 3(a) and 9 of the Central Sales Tax Act; and they also contravene the scheme of distribution of powers between the Union and the States under Article 246 r/w. Entries 92-A of List I and 54 of List II of the Seventh Schedule to the Constitution.

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In examining the scope of Articles 286 and 269, Entry 54 of List II and Entry 92-A of List I of the VII Schedule to the Constitution, it is necessary to briefly refer to the conditions prevalent immediately before the Constitution came into force, and soon thereafter. Before the commencement of the Constitution, around two-thirds of India, as is presently known, was directly under British rule and was called ‘British India'. The remaining one-third were directly ruled by Princes, and were known as “Native States” having the trappings of a Sovereign State with power to impose taxes and to regulate the flow of trade and commerce. Many of these princely states

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erected trade barriers, impeding the free flow of trade, commerce and intercourse. (Atiabari Tea Co. Ltd v. State of Assam).

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Section 100(3) of the Government of India Act, 1935, read with Entry 48 of List II of the Seventh Schedule thereto, gave power to the Provincial Legislatures to make laws with respect to "taxes on sale of goods and on advertisements". Pursuant thereto, the Provincial Legislatures enacted Sales Tax Laws for their respective Provinces, acting on the principle of territorial nexus. They picked out one or more of the ingredients constituting a sale and made them the basis of their sales tax legislation. Tax was imposed, on the sale of goods, on the basis of a very slight territorial connection or nexus. This imposition of multiple taxes, on one and the same transaction of sale, hampered and discouraged free flow of trade. Such claims to taxing power led to multiple taxation of the same transaction by Provinces, and the accumulation of this burden ultimately fell on the consuming public. Chaos and confusion prevailed in inter- State trade and commerce as a result of the indiscriminate exercise of taxing power by different Provincial Legislatures founded on the theory of territorial nexus between the respective Provinces and the sale of goods sought to be taxed. (Bengal Immunity Co. v. State of Bihar).

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Between the years 1947 and 1950, almost all the Native States entered into engagement with the Government of India, and ultimately merged their individualities into India as one political unit. Consequently what was called “British India” became, under the Constitution, Part A States and, subject to certain exceptions, the Native States became Part B States. Before the Constitution introduced the categories of Part A States, Part B States and Part C States (excluding Part D relating to other territories), Part B States themselves, before their being constituted into so many units, contained many small States which formed themselves into unions of a number of States, and had trade barriers and custom posts even inter-se. (Atiabari Tea Co. Ltd.⁵ ). This situation posed to the Constitution makers the problem of restricting the taxing power on sales or purchases involving inter-state elements, and alleviating the tax burden on the consumer. They were, at the same time, anxious to maintain the State’s power of imposing non- discriminatory taxes on goods imported from other States, while upholding the economic unity of India by providing for the freedom of inter-state trade and commerce. It was to cure the mischief of multiple taxation, and to preserve the free flow of inter-State trade or commerce in the Union of India regarded as one economic unit without any provincial barrier, that the Constitution makers adopted

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Article 286 in the Constitution. (Bengal Immunity Co.⁶ ; The State of Bombay v. The United Motors (India) Ltd.).

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Entry 54 of List II of the VII Schedule to the Constitution, as it originally stood, read as under:-

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“taxes on the sale or purchase of goods other than newspapers”

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When Entry 54 in List II of the Seventh Schedule to the Constitution substituted for the words "tax on sales", occurring in Entry 48 of List II of the VII Schedule to the Government of India Act, 1935, the words "tax on sale or purchase", it did not thereby enlarge the powers previously conferred by Entry 48 but "merely expressed in clearer language what was implicit in that corresponding entry. 6 (Bengal Immunity Co. ; V. M. Syed Mohammad & Co. v. The State of Andhra). While the Constitution makers, by Article 246(3) read with Entry 54 of List II of the Seventh Schedule to the Constitution, conferred power on the Legislatures of Part A and Part B States to make laws with respect to "taxes on the sale or purchase of goods other than newspapers" they, at the same time by Article 286, clamped on that legislative power several fetters.

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Article 286 of the Constitution of India, as it originally stood, read thus:

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(I) 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 –

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a. outside the State; or

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b. in the course of the import of the goods into, or export of the goods out of, the territory of India.

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“Explanation.— For the purpose of 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.

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(2) Except insofar as Parliament may by law otherwise provide, no law of a State shall impose, or otherwise 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:

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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.

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(3). No law made by the Legislature of a State imposing, or authorizing 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 referred for the consideration of the President, and has received his assent.

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The object of Article 286 was to place restrictions on the legislative power of the States to impose taxes on the sales or purchases of goods. Four separate and independent restrictions were placed upon the legislative competence of the States

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to make a law with respect to matters enumerated in Entry 54 of List II. In order to make the ban effective, and to leave no loophole, the Constitution makers considered different aspects of “sales or purchases of goods”, and placed checks on the legislative power of the States at different angles. In clause (1) (a) of Article 286 they forged a fetter on the basis of situs to cure the mischief of multiple taxation by the States on the basis of the nexus theory. In clause (1) (b) they placed a ban on the States' taxing power in order to make foreign trade free from any interference by the States by way of a tax impost. In clause (2) they looked at sales or purchases in their inter-State character, and imposed another ban in the interest of the freedom of internal trade. Finally, in clause (3), the Constitution makers' placed a fourth restriction on the States' power of imposing tax on sales or purchases of goods declared to be essential for the life of the community. (Bengal Immunity Co.6).

¶58

In view of the fiction created by the Explanation to Article 286(1)(a) of the Constitution, the sale, which was in reality an inter-State sale, became an intra-state sale and consequently, on delivery, the consuming State had the right to impose tax on that sale. This was a recognition of the applicability of the nexus theory to the imposition of sales tax. (Tata Iron and Steel Co. Ltd. v. State of Bihar; The State of Bombay7) . Article 286(2) of the Constitution, as it originally stood, was a safeguard against the eventuality of the same transaction of sale being taxed by different States by applying the nexus theory resulting in multiple taxation obstructing the free flow of inter-State trade. (Tata Iron and Steel Co. Ltd.9) . The assignment of a fictional situs to a sale or purchase had no bearing or effect on the other aspects of the sale or purchase, e.g., its inter-State character or its export or import character which were entirely different topics. This fixing of a situs for a sale or purchase in any particular State, either under the general law or under the fiction, was not conclusive, and it had to be ascertained whether that sale or purchase which, by virtue of the Explanation, had taken place in the delivery State was made in the course of inter-State trade or commerce. (Bengal Immunity Co.6). Except in so far as Parliament, by law, provided otherwise, no State law could impose or authorise the imposition of any tax on sales or purchases when such sales or purchases took place in the course of inter-state trade or commerce, and irrespective of whether such sales or purchases fell or did not fall within the Explanation to Article 286(1)(a). (Bengal Immunity Co.6).

¶59

What was an inter-state sale or purchase, under Article 286(2), continued to

¶60

be so irrespective of the State where the sale was to be located either under the general law, (when it was finally determined what the general law was), or by the fiction created by the Explanation to Article 286(1)(a). The situs of the sale or purchase was wholly irrelevant as regards its inter-state character, as the fiction created for clause (1) (a) could not be used for the entirely foreign and collateral purpose of destroying the inter-state character of the transaction, and converting it into an intra-state sale or purchase. Even when the situs of a sale or purchase was in fact inside a State, with no essential ingredient taking place outside, nevertheless, if it took place in the course of inter-State trade or commerce, it was hit by clause (2). If the sales or purchases were in the course of inter-state trade or commerce, the stream of inter-state trade or commerce caught up in its vortex all such sales or purchases which took place in its course wherever the situs of the sales or purchases may have been. (Bengal Immunity Co.6).

¶61

The ban imposed under Article 286(2) looked at the transactions entirely from the point of view of their having taken place in the course of inter-state trade or commerce. Even if such transactions also fell within the category of transactions, covered by Article 286 (1)(a) and the Explanation thereto or Article 286(3), the moment Article 286(2) was attracted, by reason of the transactions being in the course of inter-State trade or commerce, the ban under Article 286 (2) operated, and such transactions could never be subjected to tax at the instance of a State Legislature. (Ram Narain Sons Ltd. v. Asst. Commissioner of Sales Tax).

¶62

By the Constitution 6^th Amendment Act 1956, Entry 92 A was inserted in List I of the VII Schedule to the Constitution, and read thus:-

¶63

“92-A: 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”.

¶64

By the same amendment, Entry 54 of List II of the VII Schedule was substituted and, thereafter, the said Entry read as under:

¶65

“Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List I”.

¶66

Article 269 of the Constitution relates to the taxes levied and collected by the Union but assigned to States. Clause (g) was inserted in Article 269(1) by the Constitution 6^th Amendment Act, 1956 and, thereafter, Article 269(1)(g) read as under:

¶67

“The following duties and taxes shall be levied and collected by the Government of India but shall be assigned between the States in the manner provided in clause (2) viz:-

¶68

“(g) taxes on the sale or purchase of goods other than news papers, where such sale or purchase takes place in the course of interstate trade or commerce”.

¶69

Clause (3), inserted in Article 269 by the Constitution (Sixth) Amendment Act,

¶70

read thus:

¶71

“Parliament may by law formulate principles for determining when the sale or purchase of goods takes place in the course of interstate trade or commerce”.

¶72

By the Constitution (6^th Amendment) Act, 1956, the Explanation in Clause (1) of Article 286 was omitted, and clauses (2) and (3) were substituted. Article 286 of the Constitution, after its amendment by the Constitution (6^th Amendment) Act, 1956,

¶73

read thus:-

¶74

(I) 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 –

¶75

a. outside the State; or

¶76

b. in the course of the import of the goods into, or export of the goods out of, the territory of India.

¶77

(2) 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 (I).

¶78

(3) Any law of a State shall, in so far as it imposes, or authorises the imposition of, 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.

¶79

Article 286(2), as it originally stood, did not altogether take away the legislative competence of the States to impose a tax on sales taking place in the course of inter-State trade or commerce, but subjected it to legislation by Parliament. By Entry 92A of List I, introduced by the Constitution (6^th Amendment) Act, 1956, the legislative power to tax sales, taking place in the course of inter-State trade and commerce, was vested exclusively in Parliament, thereby rendering the original Cl. (2) redundant. In the exercise of the power conferred by Article 286(2) & (3) read with Entry 92-A of List – I of the Seventh Schedule to the Constitution, Parliament enacted the Central Sales Tax, 1956, (Act No.74 of 1956) (“CST Act” for short), which received the assent of the President on 21.12.1956.

¶80

Article 269(3), after its amendment by the Constitution 46^th Amendment Act,

¶81

1982, reads as under:

¶82

“Parliament may by law formulate principles for determining when a sale or purchase of, or consignment of, goods takes place in the course of inter state trade or commerce”.

¶83

Clause (3) of Article 286 was substituted by the Constitution (46^th Amendment) Act, 1982, and Clause (29-A) was inserted in Article 366 of the Constitution. Thereafter, Article 286 reads thus:

¶84

Article 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 --

¶85

a. outside the State; or

¶86

b. in the course of the import of the goods into, or export of the goods out of, the territory of India.

¶87

(2) 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).

¶88

(3) Any law of a State shall, insofar as it imposes, or authorises the imposition of, -

¶89

(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; or

¶90

(b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366,

¶91

be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of tax as Parliament may by law specify.

¶92

Sub-clauses (b), (c) and (d), of clause (29-A) of Article 366 read as under:

¶93

“(29-A) ‘tax on the sale or purchase of goods’ includes –

¶94

a. ……

¶95

b. a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

¶96

c. a tax on the delivery of goods on hire-purchase or any system of payment by installments;

¶97

d. a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

¶98

e. …

¶99

f. ….

¶100

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

¶101

Instead of ‘essential’ goods in Article 286(3), as it originally stood, the amended Article 286(3) deals with (a) goods declared by Parliament to be of special importance in inter-State trade, (b) delivery of goods on hire-purchase or like system, and (c) transfer, of a right to use goods, for consideration. This provision was necessary in order to render effective the exclusive power of Parliament to tax sales taking place in the course of inter-State trade or commerce. As a result, even though a sale does not take place in the course of inter-State trade or commerce, the taxation power of the State Legislature is subject to Parliamentary control if the sale relates to goods which are of special importance in inter-State trade as declared by Parliament. Article 286(3)(b) is intended to cover transfers simulating sale or purchase, and is devised to eliminate State barriers to the free flow of inter-State transactions.

¶102

By the Constitution (Eightieth Amendment) Act, 2000, Article 269 of the Constitution was amended and, for clauses (1) and (2), the following clauses were substituted, viz.,

¶103

‘(1) Taxes on the sale or purchase of goods and taxes on the consignment of goods shall be levied and collected by the Government of India but shall be assigned and shall be deemed to have been assigned to the States on or after the 1^st day of April, 1996 in the manner provided in clause (2).

¶104

Explanation. – For the purposes of this clause. –

¶105

a. the expression “taxes on the sale or purchase of goods” shall mean taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce;

¶106

b. the expression “taxes on the consignment of goods” shall mean taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce.

¶107

(2) The next proceeds in any financial year of any such tax, except in so far as those proceeds represent proceeds attributable to Union territories, shall not form part of the Consolidated Fund of India, but shall be assigned to the States within which that tax is leviable in that year, and shall be distributed among those States in accordance with such principles of distribution as may be formulated by Parliament by law.’

¶108

The power of a State Legislature to levy tax on the sale of goods, in connection with inter-State trade and commerce, is subject to the restrictions that (i) the power to tax sales taking place “in the course of inter-State trade and commerce” is within the exclusive competence of Parliament (Art.269(1)(g) and Entry 92A of List I]; and (2) even though a sale does not take place ‘in the course of inter-State trade or commerce’, the power is subject to the conditions imposed by Parliament if the sale relates to goods declared by Parliament to be of special importance, in ‘interState trade and commerce’ (Article 286(3)). The bans imposed by Articles 286 and 269, on the taxation powers of the State, are independent and separate and must be crossed before a State Legislature can impose tax on transactions of sale or purchase of goods. The dimension given to the field of legislation, by the language of an entry in List II of the Seventh Schedule, is subject to the limits of constitutional empowerment to legislate, and cannot cross the barriers created by the Constitution. The power of the State Legislature to enact a law to levy tax by reference to List II of the Seventh Schedule has two limitations: the first arising out of the entry itself, and the second flowing from the restriction embodied in the Constitution. (State of A.P.

¶109

v. National Thermal Power Corpn. Ltd.,; Bengal Immunity Co. Ltd.⁶ Ram Narain

¶110

Sons Ltd¹⁰ ).

¶111

Articles 286 and 269(3) place fetters on the powers of a State legislature to make laws imposing tax on the sale of goods, and confer power exclusively on Parliament to formulate principles for determining when a sale is in the course of inter-state trade. Article 246 read with Entry 54 of List II of the Seventh Schedule enables the State Legislature to make laws for imposition of tax on the sale of goods other those which take place in the course of inter-state trade or commerce. Even an inter-State sale must have a situs, and the situs may be in one State or another. A sale, in the course of inter-state trade or commerce, cannot, however, be taxed by a State Legislature even if its situs is within the State, as the State Legislature lacks legislative competence to impose a tax on the sale of goods in the course of inter-

¶112

state trade or commerce. Such a tax can only be imposed by Parliament. If, therefore, a question arises whether a sale is exigible to tax by the State Legislature, the answer thereto is to be found by ascertaining whether or not it is a sale in the course of inter-state trade or commerce. (M/s.Onkarlal Nandlal v. State of Rajasthan)^.

¶113

The CST Act, made in the exercise of the powers conferred on Parliament by Articles 286(2) & (3) read with Article 246 and Entry 92-A of List I of the VII Schedule, is an Act to formulate principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce or outside a State or in the course of import into or export from India, to provide for the levy, collection and distribution of taxes on sale of goods in the course of inter-State trade or commerce, to declare certain goods to be of special importance in inter-State trade or commerce; and specify the restrictions and conditions to which State laws, imposing taxes on the sale or purchase of such goods of special importance, shall be subject to. Chapter II of the CST Act formulates the principles for determining when a sale or purchase of goods takes place in the course of inter-state trade or commerce or outside a state or in the course of import or export.

¶114

In order to determine whether the sale of levy rice by the Yanam Rice Millers to FCI, Kakinada is an inter-state or an intra-state sale, it is necessary to refer to the relevant provisions of the CST Act and the A.P. VAT Act. Before doing so, however, it is necessary to examine whether the petitioners, rice millers at Yanam, are bound by the control orders issued by the Government of Andhra Pradesh under Section 3 of the Essential Commodities Act, 1955.

¶115

III. THE GOVERNMENT MEMO DATED 31.10.1983 IS NOT A CONTROL ORDER:

¶116

Both Sri P.Balaji Varma and Sri D.Srinivas, Learned Counsel appearing on behalf of the respondents, would submit that, if the petitioners are held to be bound by the arrangement in the memo dated 31.10.19183, it can only mean that the control orders, applicable to dealers in the State of Andhra Pradesh, is applicable to the Yanam Rice Millers also; in such an event, they must be treated on par with rice millers in A.P; and they would then be liable to pay VAT under the Act. It is, however, contended, on behalf of the petitioners, that the understanding, in terms of the Government memo dated 31.10.1983, cannot be construed as a control order; and the relevant control orders do not provide for levy of tax.

¶117

Before examining the rival submissions under this head, it is necessary to note the relevant provisions of the control orders, restricting movement of paddy from within the State of A.P. to any place outside the state; and the obligations placed on licensed Millers to supply levy rice to FCI/APSCSCL. In the exercise of the powers conferred, under Section 3 of the Essential Commodities Act, 1955, the Government of Andhra Pradesh made the “A.P. Paddy (Restriction on Movement Order, 1987” (hereinafter called the “1987 order”), which extended to the entire State of A.P. Para 3 thereof placed restrictions on the movement of paddy and read thus:

¶118

“No person shall move or attempt to move or abet the movement of Paddy from any place in the State to any place outside the State except under and in accordance with a permit issued by the State Government or an officer authorized in this behalf by the State Government as the case may be”.

¶119

In the exercise of the powers conferred by Section 3 of the Essential Commodities Act, 1955, the Governor of Andhra Pradesh made the “A.P. Rice Procurement (Levy) Order, 1984” (“1984 order” for short) which extended to the entire State of A.P. Para 3 thereof related to levy on licensed millers and, thereunder, every licensed miller was required to sell to the FCI or the APSCSCL, at the procurement price, 50% of the total quantity of each variety of rice, conforming to the specifications, purchased or otherwise acquired by him for the purpose of sale from persons other than a licensed miller. Para 4-A stipulated that no miller, who delivered levy to the Government under the provisions of Para (3) by purchasing paddy from a producer or an agriculturist, should purchase paddy, conforming to the specifications, at a price lower than the notified price for the variety of paddy notified in Schedule II. Para 5 required the levy rice to conform to specifications and, thereunder, the rice required to be sold to FCI/APSCSCL, under Para 3, was required to conform to the specifications of rice for fair average quality prescribed in Schedule V; and was required not to contain refractions beyond the rejection limits shown therein. The said para further stipulated that, in case any stock of rice offered for sale did not conform to specifications, it should be reconditioned or rectified by the licensed miller, before being so offered, so as to bring it in conformity with such specifications. Para 6 related to delivery of levy rice and, under sub-clause (I) thereof, the rice, to be sold to FCI/APSCSCL under Para 3, was required to be delivered by the Licensed miller to the purchase officer in such lots, in such manner, at such place, and at such time, as the Government or FCI/APSCSCL or the purchase officer may direct. Para 7 placed restrictions on the sale and movement of rice and, under sub-para (a)(1) thereof, no licenced miller could sell or agree to sell

¶120

or otherwise dispose of the rice recovered by milling, other than the quantity specified in Para 3, except in accordance with a release certificate issued by the Collector or any officer authorized by the Government in this behalf. Para 7(a)(2) stipulated that, save as otherwise provided in sub-para (1), no licenced miller shall transport rice for sale, from the licensed premises of the rice mill, except in accordance with the release certificate referred to in sub-para (1). Para 8 related to the release certificate and, under sub-para (1) thereof, after delivery of levy rice, every licenced miller could make an application, in the Form set out in Schedule VI, to the Collector, or an officer authorized in this behalf by the Government, for issue of a Release Certificate for disposal of levy free rice. Para 8(3) stipulated that, on receipt of an application under sub-para (1), the Collector or the authorized officer should issue a release certificate for movement and disposal of the levy free rice; and the release certificate should be in the Form set out in Schedule VII and as per the directions issued by the Government in this regard. Para 12 required every licenced miller, to whom an order or direction was issued, to comply with such order or direction.

¶121

While the obligation cast on the Yanam rice millers, in terms of the arrangement between the Government of Andhra Pradesh and the Government of Pondicherry with regards supply of levy rice by Yanam rice millers to FCI at Kakinada, is similar to the statutory obligations placed on rice millers in Andhra Pradesh under the Control Orders, that does not mean that these Control Orders stand, automatically, extended to the Union Territory of Pondicherry also. Section 3(1) of the Essential Commodities Act, 1955, (“1955 Act” for short) enables the Central Government, if it is of the opinion that it is necessary or expedient so to do for maintaining or increasing supplies of any essential commodity or for securing their equitable distribution and availability at fair prices, to provide for the regulating or prohibiting the production, supply and distribution thereof, and trade and commerce therein. Section 3(2)( c) and (d) of the 1955 Act enable an order to be made, under Section 3(1), for controlling the price at which any essential commodity may be bought or sold; or to regulate by licences, permits or otherwise the storage, transport, distribution, disposal, acquisition, use or consumption of any essential commodity. Section 5(b) of the 1955 Act enables the Central Government, by a notification or an order, to direct that the power, to make orders or issue notifications, under Section 3[1] shall, in relation to such matters and subject to such conditions, if any, as may be specified in the direction, be exercisable also by the State

¶122

Government.

¶123

It is by reference to the limits of territory are the legislative powers, vested in Parliament and the State Legislatures, divided in Article 245. Generally speaking, a legislation having extra-territorial operation can be enacted only by Parliament and not by any State Legislature. (National Thermal Power Corpn. Ltd.,¹¹ ; Calcutta Gas Co. Ltd. v. The State of West Bengal; Burmah Shell Oil Storage & Distributing Co. of India Ltd. v. Belgaum Borough Municipality). In the exercise of the powers conferred under Section 3 of the 1955 Act, read with the Government of India, Ministry of Agriculture (Department of Food) Order GSR No.800 dated 09.06.1978; and G.S.R.No.452 dated 25.10.1972, the Governor of Andhra Pradesh, with the prior concurrence of the Central Government, made the 1984 Order which extended to the territorial limits of the State of Andhra Pradesh. As the power conferred on the State Government, by the aforesaid provisions and delegation of powers, to make orders under the 1955 Act is restricted to the territorial limits of the State of Andhra Pradesh, and as the 1984 Order specifically so provides, it does not have extra-territorial operation and cannot be made applicable to the Union Territory of Pondicherry.

¶124

The submission, made on behalf of the respondents, that the petitioners should be treated as rice millers in Andhra Pradesh, the provisions of the Control Orders should be made applicable to them, and they should be held obligated to pay tax under the AP VAT Act on par with rice millers in Andhra Pradesh, does not, therefore, merit acceptance. The petitioners, rice millers carrying on business at Yanam, cannot be brought within the ambit of the Control Orders which, as noted hereinabove, is limited in its operation only to the territorial limits of the State of Andhra Pradesh, and not beyond.

¶125

IV. SECTION 3(A) OF THE CST ACT: INTER-STATE MOVEMENT OF GOODS:

¶126

It is contended, on behalf of the petitioners, that the inter-state character of a transaction is to be ascertained from Section 3(a) of the CST Act; in accordance with the Government Memo dated 31.10.1983, the petitioners were purchasing paddy within the State of Andhra Pradesh, transporting it to their rice mills at Yanam, milling the paddy in their rice mills at Yanam, and supplying the prescribed percentage of the milled rice to FCI at Kakinada, in fulfillment of their levy obligation; Section 3(a) of the CST Act has overriding effect over Section 4(2) thereof; if there is

¶127

a conflict, on whether a sale is an inter-state sale or an intra-state sale, Section 3(a) would dominate Section 4(2); and the impugned assessment orders are also contrary to Section 5 of the Act.

¶128

On the other hand, Sri P.Balaji Varma, Learned Special Standing Counsel for Commercial Taxes, would submit that if the arrangement, under the Government memo dated 31.10.1983, is held not to be an extension of the 1984 Control Order, there would then be no obligation on FCI to procure levy rice from the petitioners; the sale of rice, by the Yanam Rice Millers to FCI at Kakinada, would then be an intrastate sale; there was earlier a restriction on the movement of paddy from AP to any place outside the State; this restriction has since been removed; the understanding of the parties, and the action of the authorities, show that the Yanam Rice millers understood the sale of levy rice to be local sales; and the action of the respondents, in assessing them to tax under the A.P. VAT Act, is legal and valid.

¶129

Sri D. Srinivas, Learned Standing Counsel for FCI, would submit that the arrangement entered into, and the memo issued consequent thereto dated 31.10.1983, was without visualizing the sales tax effect; instead of handing over rice to the Administrator at Yanam, the petitioners had come to A.P. on their own accord, and had delivered rice at the FCI godowns in Kakinada; by their unilateral act of selling rice to FCI at Kakinada, the petitioners had treated the sale as an “intra-state sale”; and, in the instant case, there is no conceivable link between the contract of sale and the movement of goods from one State to another.

¶130

Section 3, in Chapter II of the CST Act, prescribes when a sale or purchase of goods is 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. As Section 3(b) of the CST Act and the Explanations thereto are not relevant, these provisions need not be referred to. Before examining the scope of Section 3(a) of the CST Act, and whether the sale of levy rice by the Yanam rice millers to FCI at Kakinada falls within its ambit, it is necessary to briefly note the judgments cited by Counsel on either side.

¶131

In State Trade Corporation of India Ltd. v. The State of Mysore, the cement factory, which was required to supply the cement covered by the permit, was named in it. These permits were issued to the purchasers, and the supplier named in them was the Marketing Company. On receipt of the permit, the purchaser placed an order with the Marketing Company, and later a firm contract was made with it. The

¶132

firm contract did not provide for any supplies being made from any particular factory, and the supplies had actually been made from factories outside the State only to suit the convenience of the supplier ie the Marketing Company, and not because of any covenant in the contract. The written contracts did not, themselves, contain any covenant that the supply had to be made from any particular factory. Each contract was subject to the terms of the permit to which it expressly referred. It is in this

¶133

context that the Supreme Court held:-

¶134

“……As it is not in dispute that the sale could only be under a permit and on the terms contained in it, a contract has to be read as subject to it. Since the permits with which we are concerned provided that the supply had to be made from one or other factory situated outside Mysore, the contracts must be deemed to have contained a covenant that the goods would be supplied in Mysore from a place situate outside its borders. A sale under such a contract would clearly be an inter-State sale as defined in s. 3(a) of the Central Sales Tax Act. In view of the provisions of the Constitution and the Central Sales Tax Act earlier referred to a State could not impose a tax on such a sale….” (emphasis supplied)

¶135

In Oil India Ltd. v. The Superintendent of Taxes, crude oil was carried from Assam through the pipelines, specially constructed by the petitioner, to the refinery at Barauni in Bihar; and the oil was pumped there, and delivered to the Indian Oil Corporation. Clause 12 of the agreement provided that the petitioner shall arrange for the construction of the pipeline or such other related facilities as the company shall consider necessary for the transport of crude oil, to be produced by it, to the refinery at Barauni. The Supreme Court held that this would indicate that the construction of the pipeline was undertaken by the petitioner in pursuance of the agreement, and that it was for the specific purpose of transporting crude oil to Barauni from Assam; and this can only point to the conclusion that the parties contemplated that there should be movement of goods from the State of Assam to the State of Bihar in pursuance to the contract of sale.

¶136

In English Electric Co. v. Dy. C.T.O., the appellant sent the goods directly from the Madras branch to the buyer at Bhandup, Bombay. The railway receipt was made in the name of the Bombay branch to secure payment against delivery. There was no question of diverting the goods which were sent to the Bombay buyer. It is in this context that the Supreme Court held:-

¶137

“…………When the movement of goods from one State to another is an incident of the contract, it is a sale in the course of inter-State sale. It does not matter in which State the property in the goods passes. What is decisive is whether the sale is one which occasions the movement of goods from one State another. 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. It is not necessary that the sale must precede the inter-State movement in order that the sale may be deemed to have occasioned such movement. It is also not necessary for a sale to be deemed have taken place in the course of inter-State trade or commerce, that the covenant regarding inter-State movement must be specified in the contract itself. It will be enough if the movement is in pursuance and incidental to the contract of sale…………

¶138

…………..When a branch of a company forward a buyer's order to the principal factory of the

¶139

company, and instructs them to despatch the goods direct to the buyer and the goods are sent to the buyer under those instructions, it would not be a sale between factory and its branch.' 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 or ascertained goods ought to be deemed to have been taken place in the course of inter-State trade or commerce as such a sale or purchase occasioned the movement of the goods from one State to another. The presence of an intermediary such as the seller's own representative or branch office, who initiated the contract, may not make the matter different. Such an interception by a known person on behalf of the seller in the delivery State and such person's activities prior to or after the implementation of the contract may not alter the position…………” (emphasis supplied)

¶140

I n The Co-operative Sugar (Chittur) Ltd. v. State of T.N., the appellant was permitted to purchase sugarcane in Coimbatore and Pollachi taluks of the State of Tamil Nadu only with a view to and exclusively for the purpose of transporting it to its factory in Kerala. Whatever was purchased was transported to the appellant's factory in Kerala. The Supreme Court held that this was a case where the movement of goods was occasioned by sale by the farmers or by the purchase by the appellant, whichever way one looked at it; the movement of sugarcane from Tamil Nadu to Kerala was the incident of, and was inextricably connected with, the sale/purchase; the purchase and transport were but parts of one transaction; they could not be dissociated; there was no break between the purchase, and the movement, of the goods to another State viz., Kerala; it was immaterial, in such a case, whether the sale/purchase took place within Tamil Nadu or within Kerala; as long as the movement of goods is an incident of the sale/purchase, it amounts to an inter-State sale/purchase; it is also not necessary that the contract of sale must expressly provide for movement of goods; and it is sufficient if the movement of goods is implicit in the sale, and the sale and movement of goods are not unconnected and dissociated transactions.

¶141

In The State of Gujarat v. Bombay Metal Alloys & Mfg. Co. Pvt. Ltd., the applicant-company was carrying on business at Bombay, outside the State of Gujarat; they did not carry on any business at any place within the State of Gujarat; the purchase of goods at the public auction was a solitary business transaction entered into by the applicant-company within the State of Gujarat; after the applicantcompany's bid was accepted at the public auction, but before the goods were ascertained and specified and put in a deliverable state, the applicant-company instructed the railway administration to despatch the goods from Gujarat to Bombay, and the railway administration agreed to honour such instructions; pursuant to such instructions, the railway authorities despatched the goods to Bombay in two lots after packing, loading and weighing them in motor trucks on two different occasions;

¶142

transport receipts were obtained by the railway authorities from the transport contractors; in those receipts the Western Railway was named as the "consignor" and the applicant-company as the "consignee"; and, though the freight was payable and paid by the applicant-company, no hamali charges, for loading the goods in the trucks, were shown to have been charged to the applicant-company. It is in this context that the Gujarat High Court held:-

¶143

“……………..Taking an overall view of the material facts and circumstances of the case in their proper perspective, the conclusion is inevitable that the movement of goods in the instant case was occasioned as a result of or in pursuance of the contract of sale. It is true that the contract of sale itself is not shown to have provided for the movement of goods and that the movement of goods is not shown to have been occasioned in accordance with the specific terms of such contract. For the purposes of Section 3(a) of the Central Act, however, that is not essential. It is sufficient if the movement was an incident of such contract. The facts cumulatively indicate that the movement of goods herein satisfies the said test. The buyer, who carried on business in another State and for whom the instant transaction was a sole business venture within the territory of this State, had instructed the vendor after the conclusion of the contract of sale, but before the title to the goods passed, to despatch the goods to Bombay. Pursuant to such instructions, the goods were separated from the heap of goods and then loaded and weighed in the motor trucks and despatched to Bombay by the vendors as consignors. The buyer, who was the consignee, had to pay merely the transport charges. These facts cumulatively indicate that there was a conceivable link between the contract of sale and the movement of goods and the nexus is not otherwise explained. For the purposes of Section 3(a), it is immaterial where the property in the goods passed. Against the aforesaid background, the only conclusion possible is that the purchase of goods in the instant case was in the course of inter-state trade and that it is not exigible to purchase tax under Section 15 of the Act.

¶144

It was strenuously contended on behalf of the revenue, however, that since the Tribunal has found that there was no prior stipulation between the Western Railway and the applicant company in the contract of sale itself providing for the despatch of goods from Sabarmati to Bombay, the movement of goods could not be held to have taken place pursuant to or consequent upon such contract and that, therefore, the purchase could not be held to have been effected in the course of inter-State trade. We are unable to agree, for, as earlier pointed out, the law does not require that for the purposes of attracting the provisions of section 3(a) of the Central Act, the contract of the sale must itself make provision for or occasion the movement of the goods…………”

¶145

“…………The law on the point, therefore, is clear. The mere fact that the contract of sale itself does not provide for or occasion a movement of goods, would not be an impediment in the way of holding that section 3(a) of the Central Act applies provided it is established that the movement of goods from one State to another is in pursuance of or incidental to the contract of sale. If there is a conceivable link between the contract of sale and the movement of goods from one State to another which is not otherwise explained, the transaction in question will have to be regarded as a "sale" or "purchase", as the case may be, in the course of an inter-State trade………” (emphasis supplied)

¶146

Section 5(c) of the A.P. VAT Act stipulates that nothing contained in the Act shall be deemed to impose or authorize 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. Under the Explanation thereto, the provisions of Chapter II of the Central Sales Tax Act, 1956, shall apply for the purpose of determining when a sale or purchase takes place in the course of inter-State trade or commerce. Section 4 of the CST Act explains when a sale or purchase of goods is said to take place outside a State. Sub-section (1) thereof stipulates that, subject to the provisions contained in Section 3, when a sale or purchase of goods is determined in accordance with sub-section (2) to take place inside a State, such

¶147

sale or purchase shall be deemed to have taken place outside all other States. Section 4(2) stipulates that a sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State :— (a) in the case of specific or ascertained goods, at the time the contract of sale is made; and (b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation.

¶148

The field of taxation, on the sale or purchase of goods taking place in the course of inter-state trade or commerce, has been excluded from the competence of the State Legislature. The situs of the sale or purchase is wholly immaterial as regards inter-state trade or commerce. In view of Section 3(a) of the CST Act, all that has to be ascertained is whether the sale or purchase occasions the movement of goods from one State to another. If the transaction of sale satisfies this requirement, it is deemed to be a sale or purchase of goods in the course of inter-State trade or commerce and, by virtue of Articles 269 and 286 of the Constitution, is beyond the legislative competence of a State legislature to tax. (National Thermal Power Corpn. Ltd.,¹¹ ; Tata Iron and Steel Co. Ltd. v. S.R. Sarkar; 20th Century Finance Corpn. Ltd v. State of Maharashtra). While Section 4(2)(b) of the CST Act deems sale of unascertained or future goods to take place within a State, at the time of its appropriation to the contract of sale by the seller or the buyer, it is evident from Section 4(1) that the deeming provision in Section 4(2) is subject to the provisions contained in Section 3 of the CST Act. If the sale of goods falls within the ambit of Section 3(a) of the CST Act, it would then be an inter-state sale, notwithstanding that, in terms of Section 4(2)(b), the unascertained goods were appropriated to the contract of sale within the territorial limits of the State where the goods were delivered.

¶149

Section 3(a) of the CST Act covers sales in which the movement of goods from one State to another is the result of a covenant or incident, of the contract of sale, and property in the goods passes in either State. (State of Orissa v. K.B.Saha & Sons Industries (P) Ltd.; Commissioner of Sales Tax v. Bakhtawar Lal Kailash Chand Arhti; Union of India v. M/s K.G. Khosla & Co. Ltd.; S.R. Sarkar20; Cement Marketing Co. of India v. State of Mysore; State Trading 15 Corporation of India ; Singareni Collieries Co. v. State of Andhra Pradesh; State of Jammu & Kashmir v. Caltex (India) Ltd.; and Oil India Ltd.16). If a

¶150

contract of sale contains a stipulation for the movement of goods from one State to another, the sale would, of course, be an inter-state sale. But it can also be an interState sale even if the contract of sale does not itself provide for the movement of goods from one State to another but such movement is the result of a covenant in the contract of sale or is an incident of that contract. (State of Bihar v. Tata Engineering & Locomotive Co. Ltd.; Oil India Ltd.16; K.B.Saha & Sons Industries (P) Ltd.22).

¶151

For the purposes of Section 3(a) of the CST Act, and in order that a sale may be regarded as an inter-state sale, it is immaterial whether the property in the goods passes in one state or another. (Indian Oil Corporation Ltd. v. Union of India; S. R. Sarkar20; Kelvinator of India Ltd. v. The State of Haryana, Oil India Ltd.16; Balabhagas Hulaschand v. State of Orissa and K. G. Khosla & Co. (P) Ltd.24). It is also immaterial whether a completed sale precedes the movement of goods or follows it. What is important is that the movement of goods and the sale must be inseparably connected. If the goods move from one State to another in pursuance of an agreement of sale, and the sale is completed in the other State, it is an inter-State sale. (K.B. Saha & Sons Industries (P) Ltd.22; Bakhtwar Lal Kailash Chand Arhti23). In order to occasion the transportation of goods there must exist such a bond, between the contract of sale and the actual transportation outside the State, that each link is inextricably connected with the one immediately preceding it. Where the transportation is the result of a sale, the transportation being inextricably linked up with the sale so that the bond cannot be dissociated without a breach of the mutual understanding between the buyer and seller arising from the nature of the transaction, the sale must be held to be in the course of inter-State trade or commerce. (Commissioner of Commercial Taxes v. Bhag Singh Milkha Singh; State of Travancore-Cochin v. Bombay Co. Ltd., Alleppey; Ben Gorm Nilgiri Plantations Co. Coonoor (Nilgiris) v. Sales Tax Officer, Special Circle, Ernakulam; and State of Travancore-Cochin v. Shanmugha Vilas Cashew-nut Factory).

¶152

The question whether the movement of goods, from one State to another, is as the result of a covenant in the contract of sale, or an incident of such contract, will depend on the contract. (State Trade Corporation of India Ltd.15). To make the sale, one in the course of inter-State trade or commerce, there must be an obligation to transport the goods outside the State. The obligation may be of the seller or the

¶153

buyer and it may arise by reason of a statute, a contract between the parties, or from mutual understanding or agreement between them or even from the nature of the transaction which linked the sale to such transportation. Such an obligation may be imposed expressly under the contract itself or impliedly by a mutual understanding. It is not necessary that, in all cases, there must be pieces of direct evidence showing such obligation in a written contract or oral agreement. Such obligations are 32 inferable from circumstantial evidence also. (Bhag Singh Milkha Singh ; Shankerjee Raut Gopalji Raut v. State).

¶154

Each case turns on its own facts and the question is whether, applying the settled principles to the facts of the present case, the sale of levy rice by the Rice millers at Yanam to FCI at Kakinada, can be said to be inter-state sales. An attempt to show that some of the factors present in the instant case are present or absent in some other case, in which the sale was held either to be a local sale or an inter-state sale, hardly serves any useful purpose. (Indian Oil Corporation Ltd.²⁹ ) . Bearing these aspects in mind, let us now examine whether or not the sale of rice, by the Rice Millers at Yanam to FCI at Kakinada, is an inter-state sale.

¶155

While the 1987 Order prohibited movement of paddy, from within the State of Andhra Pradesh to any place outside the State, except in accordance with a permit issued by the State Government, the 1984 Order obligated rice millers in Andhra Pradesh to procure paddy from agriculturists at the minimum support price (para 4.A); to mill the paddy, and to deliver the prescribed portion of the milled rice either to FCI or to APSCSCL at the procurement price i.e., the price fixed by the Government of India for procurement of levy rice within the State of Andhra Pradesh (para 3); and to deliver the levy rice, sold by them to FCI or APSCSCL, to the Purchase Officer in such lots, in such manner, at such place and at such time as directed by the Government or the FCI or APSCSCL or the purchase officer. On delivery of the levy rice (ie the portion of the milled rice prescribed as levy under the Control Order), the rice millers were entitled to dispose of the remaining quantity of rice on a release certificate being issued in this regard by the District Collector (para 7); and, after obtaining a release certificate from the District Collector (para 8), the rice miller could transport the non-levy rice from his premises, for the purpose of sale, strictly in accordance with the release certificate. While both the aforesaid Control Orders were applicable only to rice millers in Andhra Pradesh, the understanding between the Government of Andhra Pradesh and the Government of Pondicherry in the meeting held on 15.09.1983, and Government of A.P. memo

¶156

dated 31.10.1983 issued pursuant thereto, extended a similar benefit, as was given to the rice millers within the State of Andhra Pradesh, to the rice millers at Yanam in the Union Territory of Pondicherry also.

¶157

The Government memo dated 31.10.1983 permitted rice millers at Yanam to procure and transport paddy from East Godavari District in Andhra Pradesh to Yanam on a no objection certificate being issued by the Yanam Administration, consistent with the instructions in vogue in Andhra Pradesh on the subject, provided the paddy was purchased at prices not less than those notified by the Government of A.P., and as prevalent in the State of Andhra Pradesh. It required the Yanam rice millers to deliver such percentage of levy (rice) to FCI or APSCSCL as was prevalent in the State of Andhra Pradesh under the Levy Order; and to be bound by the same policy as was applicable to the millers in Andhra Pradesh, in as far as levy rice was concerned. It provided that, subject thereto, levy free eligibility of rice could be disposed of by the Yanam rice millers, after meeting the internal requirements of Yanam, anywhere in the country on the permits issued by the Government of Pondicherry in consultation with the Civil Supplies authorities in East Godavari District of Andhra Pradesh. The Administrator of Yanam, on behalf of the Government of Andhra Pradesh, was required by the said memo to collect levy rice, and deliver it to FCI or APSCSCL. The civil supplies authorities of East Godavari District were required to keep an account of the deliveries made towards levy, and a joint inspection of the rice mills at Yanam was required to be caused by the civil supplies authorities of East Godavari District and the Yanam Administration to ensure that the paddy purchased by the Yanam rice millers in Andhra Pradesh was accounted for by them.

¶158

Subsequently, by memo dated 26.09.1990, the Government of Andhra Pradesh permitted the Yanam rice millers (who were hitherto required to purchase paddy only from East Godavari District), to purchase paddy from all the districts in the State of Andhra Pradesh. The said memo, however, restricted movement of paddy, and stipulated that such movement would be based strictly on the no objection certificate issued by the Administrator of Yanam. The Yanam rice millers were required to inform the Collector, East Godavari District of the paddy stocks purchased by them from all the districts, to enable him to monitor the purchases, and collect the rice due to the Government of Andhra Pradesh as per the policy. While the memo dated 31.10.1983 required the Administrator of Yanam to collect levy rice, on behalf of the Government of Andhra Pradesh, from the rice millers at Yanam and

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to deliver the same to FCI/APSCSCL, the Regional Administrator of Yanam issued circular dated 05.09.2005 instructing Yanam rice millers to deliver procurement rice to FCI at Kakinada, and receive payment on his behalf, to avoid delay and the cumbersome process at the administration level. The rice millers were, however, required to submit a detailed account of such supplies and monies to the Regional Administrator of Yanam. The petitioners claim that it is pursuant to this circular dated 05.09.2006 that the Yanam rice millers, instead of delivering levy rice to the Administrator of Yanam, had started delivering levy rice directly to FCI at Kakinada.

¶160

While Yanam, which forms part of the Union Territory of Pondicherry, is adjacent to Kakinada in the State of Andhra Pradesh, both the 1984 and the 1987 Control Orders did not have extra-territorial operation, and were not automatically applicable to the Yanam rice millers. Though the arrangement, in terms of the Government memo dated 31.10.1983, did not obligate the Yanam rice millers to purchase paddy from agriculturists in the State of Andhra Pradesh, they did so, on their own volition, as they required paddy for carrying on the business of milling rice in their rice mills at Yanam. The said arrangement, in memo dated 31.10.1983, enabled the Yanam rice millers to procure paddy from agriculturists in Andhra Pradesh, and transport paddy from Andhra Pradesh to Yanam on a permit issued by the Government of A.P; for its being milled at their rice mills in Yanam. Having done so on their own volition, the Yanam Rice Millers were thereafter obligated, in terms of the aforesaid arrangement, to transport the prescribed percentage of levy rice from Yanam for its sale and delivery to FCI/APSCSCL at Kakinada. As the sale of levy rice by the rice millers at Yanam to FCI at Kakinada, (the sale transactions brought to tax under the AP VAT Act by the impugned assessment orders), occasioned the movement of goods (levy rice) from Yanam in the Union Territory of Pondicherry to Kakinada in the State of Andhra Pradesh (from one State to another), it is evident that the sale has taken place in the course of inter-state trade and commerce, and is not exigible to tax as an intra-state sale under the A.P. VAT Act.

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V. DOES WEIGHMENT, AND ASCERTAINING THE QUALITY, OF RICE AT KAKINADA MAKE THE SALE AN INTRA-STATE SALE?

¶162

Both Sri P.Balaji Varma, Learned Special Standing Counsel for Commercial Taxes, and Sri D.Srinivas, learned Standing Counsel for FCI, would submit that as transfer of title, of unascertained goods (rice), took place at the FCI godown at Kakinada, Sections 18, 19 and 22 of the Sale of Goods Act would require it to be

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treated as a sale only at Kakinada, within the State of A.P; it is, therefore, an intrastate sale; pursuant to the memo dated 31.10.1983, the Yanam Rice Millers were permitted to purchase paddy in A.P, deliver levy rice to FCI., A.P. Region, and effect free market sales at the percentage prescribed in the levy policy, on par with the millers of A.P; the Government of A.P. had, for all practical purposes, treated Yanam Rice Millers on par with the Rice Millers in A.P; the Yanam rice millers bring rice to the FCI depots; after quality checks, after ensuring that it conforms to the quality standards, and after verification of MSP certificates etc, FCI accepts the rice; FCI makes payment for the levy rice to the Yanam rice millers as per the costing sheet issued by the Government of India for levy rice purchases made within the State of A.P, including the element of VAT; the title to the goods (rice) is transferred only on its acceptance by FCI at its godown at Kakinada in A.P; any damages/losses, occurring during transit, is to be borne by the miller, being the owner of the goods; no purchase order is issued by FCI, and there exists no agreement between FCI and the millers governing the transaction; the movement of goods from the miller’s premises at Yanam to the FCI Godown at Kakinada is not as a result of any predetermined order; the goods transported from Yanam are standard goods, and the millers are free to divert the same for sale in the open market in A.P; the Yanam rice millers were purchasing paddy in A.P, and selling the resultant rice in A.P, which constituted sales within the State of A.P liable to tax under the A.P. VAT Act; there is no sale pursuant to which there was movement of goods from Yanam; the permission accorded, in the Government memo dated 31.10.1983, is an offer open to any rice miller in Yanam enabling him to purchase paddy in A.P. and to supply rice to FCI at Kakinada under the levy scheme; the assessees have not undertaken to supply rice against any order placed by FCI; such type of offer cannot be treated as a binding contract or an agreement to sell the goods mentioned therein; it is an offer, affording an opportunity to participate in the levy scheme, which does not amount to placing an order for a definite quantity on a definite date; it does not amount to a contract in the strict sense; there is no definite or specific requirement, of a specific quantity of goods, by FCI; it does not create an obligation on the dealer to deliver, or on FCI to accept; the millers, both from Yanam and East Godavari District, offered their rice stocks for sale at the door steps of FCI; purchase of goods by FCI, and the sale of goods by millers, is completed only after its acceptance by the FCI at its godown premises in Kakinada; there is no agreement between FCI and the millers of Yanam; FCI has no knowledge regarding purchase of paddy by the

¶164

Yanam millers, or of its milling, or regarding the delivery to be made to them; unascertained standard goods, prone to diversion, was being accepted by FCI only after the goods reached them; the final appropriation was made in the State of A.P, as the purchaser was not bound to accept the goods as appropriated by the dealer in Yanam; there is a possibility of diversion of the goods before actual delivery to FCI; the sale process commenced only after the goods were offered to FCI at Kakinada; there is no privity of contract between the supplier of goods and the purchaser; it cannot be said that the goods have moved from one State to another in pursuance of a contract; as such the transactions fall outside the purview of Section 3(a) of the CST Act; and they fall under the category of intra-state sale in the State of A.P.

¶165

It is contended, on behalf of the petitioners, that weighment and ascertainment of goods, at the delivery point (FCI Godown at Kakinada), would not alter the nature of the transaction; absence of a pre-determined contract is of no consequence, as the movement of rice from Yanam to Kakinada was occasioned by an incidence of the contract of sale; the Yanam administrator had directed the petitioners to sell rice directly to FCI at Kakinada; the petitioners have not violated the arrangement; the FCI is aware of the Yanam Administrator’s circular dated 05.09.2005; the petitioners did not purchase paddy on their own volition; transfer of title under Section 18 of the Sale of Goods Act, or its appropriation, are not relevant; and inter-state movement of goods is the relevant factor.

¶166

Para 5 of the 1984 Order required the levy rice, sold to FCI/APSCSCL under Para 3 thereof, to conform to specifications of rice as prescribed in Schedule-V thereto and not to contain refractions beyond the rejection limits shown therein. This clause authorized FCI to refuse to accept the levy rice, supplied by rice millers, if it was not of the prescribed quality and weight. Would this mean that, since goods are purchased by FCI/APSCSCL at Kakinada after ascertaining the quality and quantity of levy rice supplied by the Yanam rice millers, the property in the goods passes to FCI at the time of its appropriation to the contract i.e, at Kakinada and, consequently, the sale of rice by the Yanam rice millers to FCI is an intra-State sale exigible to tax under the AP VAT Act? Sections 18, 19, 20, 21 and 23 of the Sale of Goods Act, on

¶167

which reliance is placed on behalf of the respondents, read as under:-

¶168

18. Goods must be ascertained.- When there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained. 19. Property passes when intended to pass.-

¶169

(1) Where there is a contract for the sale of specific or ascertained goods the property in them is

¶170

transferred to the buyer at such time as the parties to the contract intend it to be transferred.

¶171

(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.

¶172

(3) Unless a different intention appears, the rules contained in Section 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.

¶173

20. Specific goods in a deliverable state.-

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Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed.

¶175

21. Specific goods to be put into a deliverable state.-

¶176

Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof”.

¶177

23. Sale of unascertained goods and appropriation: -

¶178

(1). Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be express or implied, and may be given either before or after the appropriation is made. (2). Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the purpose of transaction to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract.

¶179

Levy rice, sold by the Yanam rice millers to FCI, are unascertained goods. In terms of Section 18 of the Sale of Goods Act, property in the goods is not transferred to the buyer till the goods are ascertained. As the goods (levy rice) is ascertained by FCI only on its inspection at the godown premises at Kakinada, the property in such goods would stand transferred to FCI only thereafter. Section 23 of the Sale of Goods Act stipulates that property in unascertained goods by description would pass to the buyer only when it is unconditionally appropriated to a contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller; and such assent may be express or implied and may be given either before or after the appropriation is made.

¶180

In Agricultural Produce Market Committee v. Biotor Industries Ltd. on the demand of the respondent-Company, certain quantity of castor seeds requisitioned by it was transported by the supplier which was received by it within the market area. On its receipt, the consignment was weighed by the Company within the market area. After ascertaining the exact weight of the castor seeds, payment at the agreed rate was made by the Company to the supplier. The High Court held that the sale was not effected till the consignment was received by the respondent-Company and

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was weighed within the market area. The Supreme Court observed:-

¶182

“………. the learned single Judge has rightly rejected the assertion made by the learned counsel on behalf of the Company holding that in case of shortfall or loss or damage during transport, the seller could claim damage from the transporter and that would further demonstrate that the respondent-Company did not become owner of the goods till it took the physical delivery thereof, weighing the same and satisfying itself about the quantity received by it. It was held that it was not a

¶183

mere formality to find out the quantity by it but it has the essential element of making payment depending on the extent of quantity received and in case of any drastic shortfall in the quantity, the issue would be between the supplier and the transporter. Further finding was recorded that if against the quantity of 100 quintals of castor seeds supplied by the trader, the respondent-Company received only half of it on account of loss, damage or pilferage, the company would make payment only for such quantity leaving it for the trader to recover the damages from the transporter. There would also be a case where on account of some untoward and unforeseen circumstances, such as natural calamity or theft, the respondent-Company did not receive the full quantity of castor seeds, the payment shall be made only for the quantity received by it and not for the entire quantity to be supplied by the trader. The learned single Judge has further rightly recorded the finding of fact that when the castor seeds reach the market area, it was weighed by the Company and payment thereof was agreed to be made to the tune of quantity received and till then the castor seeds continue to be in the ownership of the seller. The Company becomes the owner of the property only once the exact weight of the castor seeds was ascertained and purchase voucher was obtained. The learned single Judge rightly held that APMC is justified in contending that the sale of castor seeds did take place within the market area and the appellant was authorized to charge fees from the respondent-Company for such purchase. Therefore, the learned single Judge held that the castor seed was bought by the respondent-Company within the market area of APMC, Baroda and therefore Rule 48(1) of the Rules is applicable to the fact situation and not Rule 48(2) as contended by the counsel.

¶184

(emphasis supplied)

¶185

As stipulated in Section 19(3) of the Sale of Goods Act, the rules contained in Sections 20 to 24 (in the present case Section 23) are the rules for ascertaining the intention of the parties at the time at which property in the goods is to pass to the buyer, unless a different intention appears. The exercise of examining whether there is anything, either in the terms of the contract or in the conduct of the parties or in the circumstances of the case, which indicates a contrary intention, must be undertaken to give effect to the opening words, namely, “Unless a different intention appears” occurring in Section 19(3). The intention of the parties is the decisive factor as to when the property in goods passes to the purchaser. If the contract is silent, intention has to be gathered from the conduct and circumstances of the case. (Agricultural Produce Market Committee³⁷ ; Hoe Kim Seing v. Maung Ba Chit; Agricultural Market Committee v. Shalimar Chemical Works Limited).

¶186

While para (5) of the 1984 Order, no doubt, required the levy rice, supplied by the Yanam rice millers to meet the prescribed specifications, and enabled FCI not to purchase levy rice which does not fulfill the prescribed quality standards, it also stipulated that, in case any stock of the levy rice offered for sale did not conform to the specifications, it should be reconditioned or rectified by the licensed miller, before being so offered, so as to bring it in conformity with such specifications. Notwithstanding that FCI/APSCSCL were entitled to refuse to purchase levy rice, if it was not of the prescribed standards or quality, the understanding in terms of the memo dated 31.10.1983 obligated the Yanam rice millers to recondition/rectify the deficiencies and supply the stipulated quantity of rice, of the prescribed quality, to FCI/APSCSCL at Kakinada.

¶187

Both Sri P. Balaji Varma, Learned Special Standing Counsel for Commercial Taxes, and Sri D. Srinivas, Learned Standing Counsel for FCI, would fairly submit that, while the goods were purchased by FCI from the petitioners only after satisfying themselves of the quality, and after ascertaining the actual quantity of the levy rice supplied, the arrangement nonetheless obligated the Yanam rice millers to supply the prescribed quantity of rice to FCI; and, if the Yanam Rice Millers desired to procure paddy from Andhra Pradesh for milling it in their rice mills at Yanam, the arrangement required them to pay the minimum support price to farmers in AP, procure paddy from them, transport paddy to their rice mills at Yanam, mill the rice there, deliver the prescribed portion of the milled rice, of the prescribed quality, from their rice mills at Yanam to FCI at Kakinada, and to receive the price of levy rice from FCI, Kakinada.

¶188

Further, the details of purchase of paddy in Andhra Pradesh was required to be submitted, by each of the Yanam rice millers, to the Collector, East Godavari District, who was, thereafter, required to issue a “Mill Levy Certificate to FCI” indicating the quantity of levy rice to be delivered by the Yanam Rice Millers to FCI. Without the delivery certificate, FCI would not accept the rice delivered by the petitioners. Thus, even if the levy rice supplied by them was rejected by FCI if it was not of the prescribed quality, the Yanam rice millers were obligated, in terms of the understanding in the Government memo dated 31.10.1983, to supply an equivalent quantity of levy rice, of the prescribed quality, to FCI. While the intention of the parties was for the property in the levy rice to pass on to FCI at the time of its delivery at the FCI godowns at Kakinada, and for the Yanam Rice Millers to bear all risks till then, the arrangement, in terms of the memo dated 31.10.1983, envisaged transportation of levy rice by the rice millers from Yanam, to the FCI godown at Kakinada, in fulfillment of their obligations to supply (sell) the prescribed quantity of rice, obtained on milling the paddy procured by them in Andhra Pradesh, as levy to FCI, Kakinada. This obligation to sell levy rice to FCI, Kakinada occasioned the movement of rice from Yanam in the Union Territory of Pondicherry to Kakinada in the State of Andhra Pradesh. The said sale, in view of Section 3(a) of the CST Act, 1956, is a sale in the course of inter-state trade and commerce. The State Legislature cannot, by law, treat such sales as “sales within the State” as it is within the exclusive domain of the appropriate legislature i.e. Parliament to fix the location of sale by way of a legal fiction or otherwise. The State, where the goods are delivered in the transaction of an inter-State sale, cannot levy a tax on the basis that

¶189

one of the events in the chain has taken place within the State. (National Thermal Power Corpn. Ltd.,¹¹ ; 20th Century Finance Corpn.²¹ ).

¶190

Several restrictions were imposed on transportation of paddy from AP to the rice mills at Yanam. The transportation of paddy was required to be accompanied with a permit issued by the Government of A.P. The details of procurement of paddy was required to be intimated to the District Collector, East Godavari, and its transportation to Yanam could only be on a no objection certificate being issued by the Administrator of Yanam. While, in terms of the Government memo dated 26.09.1990, the Administrator of Yanam, was required to collect levy rice, on behalf of the Government of Andhra Pradesh, from the rice millers at Yanam and deliver it to FCI or APSCSCL, this condition was relaxed by the Yanam administrator by his circular dated 05.09.2005, and the Yanam Rice Millers were directed to supply levy rice directly to the FCI godown at Kakinada. The Yanam rice millers were, nonetheless, required to submit a detailed account of such supplies, and monies received, to the Yanam Regional Administrator. The levy rice moved from the rice mills at Yanam, to the FCI at Kakinada, under a way bill issued by the Pondichery General Sales Tax Act authorities wherein the Yanam rice millers were shown as the “consignor”, and the FCI, Kakinada as the “consignee”. On delivery of levy rice to FCI at Kakinada, the Yanam rice millers received a “bill for supply of food grains” to the effect that they had delivered the consignment of rice and their Pondicherry General Sales Tax number and CST number (assigned by the Pondicherry Authorities) were mentioned therein. These supply bills were acknowledged by FCI, Kakinada and, in the acceptance note issued by FCI, Kakinada, the Yanam rice millers were identified as dealers of Yanam.

¶191

Even if the permission accorded, in terms of the Government memo dated 31.10.1983, is presumed to be an open offer to any rice miller in Yanam, it would only mean that the Yanam rice millers were not legally obligated to procure paddy from agriculturists within the State of A.P. In this Writ Petition we are not concerned with the question whether purchase of paddy by Yanam Rice Millers, from agriculturists within the State of A.P, is an inter-state purchase of paddy or an intrastate purchase thereof. The transactions, which have been subjected to VAT under the impugned assessment orders, relate to the sale of levy rice by the Yanam Rice Millers to FCI at Kakinada. While the Yanam rice millers may well have procured paddy from agriculturists within the State of A.P, on their volition, to enable them to mill the paddy in their rice mills at Yanam, having so procured and having

¶192

transported the procured paddy from Andhra Pradesh to Yanam, the arrangement, in terms of the memo dated 31.10.1983, obligated them to supply the prescribed portion of the milled rice as levy rice to FCI, Kakinada. Sale of levy rice, and the movement of levy rice from Yanam in the Union Territory of Pondicherry to Kakinada in the State of A.P, is in the discharge of the obligations placed on the Yanam rice millers in terms of the understanding in the memo dated 31.10.1983. The fact that the FCI did not place an order on the Yanam millers for supply of rice is of no consequence, as the obligation to transport levy rice from Yanam to Kakinada is inextricably linked to the obligations placed on the Yanam rice millers by the Government memo dated 31.10.1983. It is not even the case of the respondents that the levy rice, transported from Yanam to FCI Kakinada, was diverted for sale elsewhere. What has now been subjected to tax under the A.P. VAT Act is not levy free rice which the Yanam rice millers were entitled to sell anywhere in the country, but levy rice which the Yanam rice millers were obligated to, and had in fact, supplied to FCI at Kakinada. The question whether the levy rice was capable of being diverted is, therefore, wholly irrelevant.

¶193

Where the movement of goods from one State to another is inextricably connected with the sale/purchase, the purchase and transport are but parts of one transaction. They cannot be dissociated, and there is no break between the purchase and the movement of the goods to another State. It is sufficient if the movement of goods is implicit in the sale, and the sale and movement of goods are not unconnected and dissociated transactions. (The Co-operative Sugar (Chittur) Ltd.¹⁸ ). 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 ought to be deemed to have been taken place in the course of inter-State trade or commerce as such a sale occasioned the movement of the goods from one State to another. (English Electric Co.¹⁷ ). In the present case the link between the transportation of rice from Yanam, and its sale to FCI at Kakinada, is the arrangement in terms of the memo dated 31.10.1983. The levy rice moved from Yanam to FCI at Kakinada only in satisfaction of the obligation which the Yanam Rice Millers were required to discharge in terms thereof; and the nexus between the transportation of levy rice from Yanam to the FCI godown at Kakinada is otherwise inexplicable. As there is a conceivable link, between the movement of goods and its sale, it is an inter-state sale.

¶194

The inter-State movement of rice from Yanam to Kakinada is integrally and

¶195

inextricably connected to the sale of levy rice to FCI at Kakinada and the mere fact that levy rice is delivered at the FCI godown at Kakinada, and appropriation takes place thereat, is of no consequence. It does not matter in which State the property in the goods passes. What is decisive is whether the sale is one which occasions the movement of goods from one State to another. It is not necessary that the sale must precede the inter-State movement in order that the sale may be deemed to have occasioned such movement. (English Electric Co.¹⁷ ). The obligation, to transport the goods outside the State, it may arise by reason of a statute, a contract between the parties, or from mutual understanding or agreement between them or even from the nature of the transaction which linked the sale to such transportation. Such an obligation may be imposed expressly under the contract itself or impliedly by a mutual understanding. It is not necessary that, in all cases, there must be direct evidence showing such obligation in a written contract or oral agreement. Such obligations are inferable from circumstantial evidence also. (Bhag Singh Milkha Singh³² ; Shankerjee Raut Gopalji Raut³⁶ ). While the obligation, to transport levy rice from the rice mills at Yanam to the FCI godowns at Kakinada, may not have been expressly imposed by the contract of sale between the petitioners and FCI, it is implied in the understanding, as reflected in the Government memo dated 31.10.1983, whereby the Yanam rice millers were obligated to deliver a portion of the rice milled by them at Yanam as levy to FCI at Kakinada. The movement of levy rice, from Yanam to FCI or APSCSCL at Kakinada in the State of Andhra Pradesh, is an inter-State movement integral to the scheme of arrangement between the Government of Andhra Pradesh, the Government of Pondicherry and the Yanam rice millers, and the sale of levy rice by the petitioners to FCI, Kakinada is an inter-state sale.

¶196

In the case of an inter-state sale, Section 9(1) of the CST Act requires the Government of the State, from which the movement of the goods commenced, to collect the tax so levied under the CST Act. As the movement of the goods commenced from Yanam in the Union Territory of Pondicherry, it is only the Government of Pondicherry which has jurisdiction to assess the petitioners to tax under the CST Act, and collect tax from them, and not the Government of Andhra Pradesh. The impugned assessment orders levying VAT on the petitioners, (all of whom are rice millers at Yanam), under the AP VAT Act is without jurisdiction and are, accordingly, set aside.

¶197

VI. WERE THE PETITIONERS PAID A CONSOLIDATED AMOUNT, AND IS THERE NO MATERIAL ON RECORD TO SHOW THAT THEY HAVE BEEN PAID VAT?

¶198

It is contended, on behalf of the petitioners, that the petitioners had received the prescribed consolidated price for the levy rice sold by them to FCI; the bills raised by FCI for the supply of levy rice do not show any tax payable to the Government of Andhra Pradesh; even if FCI is held to have paid tax to the petitioners, it can, at best, be treated as CST; while any excess payment by FCI may enable them to institute a suit for recovery of the amount, the petitioners cannot be subjected to tax under the AP VAT Act; the letter addressed by the President of the Yanam Millers Association cannot be interpreted as a statute; and any confusion, as is evidenced by the said letter, cannot result in tax liability.

¶199

On the other hand both Sri P. Balaji Varma, Learned Special Standing Counsel for Commercial Taxes, and Sri D.Srinivas, Learned Standing Counsel for FCI, would submit that the invoices raised by the Yanam millers on FCI show that they had claimed VAT also; FCI had paid the price, prescribed by the Government of India for purchase of levy rice in the State of A.P, to the Yanam rice millers also; the price paid for purchase of levy rice, prior to 2007-08, was inclusive of VAT; from 2007-08 onwards, VAT was paid to the suppliers of levy rice, in addition to the price fixed by the Government of India; while the tax component, paid to dealers in A.P, was recovered from them later, on their assessment by the commercial tax department, the Yanam rice millers have illegally collected VAT and have evaded its payment to the revenue; it is clear from the letter of the President of the Association, that the petitioners were aware of the tax component; the petitioners have claimed the price notified by the Government of India + 4% VAT; and the representation, submitted by the President of the Yanam Dealers Association, clearly shows that they have collected VAT.

¶200

It does appear that the petitioners had sought for and were paid by FCI, for the levy rice supplied by them, a higher price than what was paid to rice millers in Andhra Pradesh. The price paid by FCI, for procurement of levy rice, (from rice millers - both in Andhra Pradesh and at Yanam), included the VAT component. While the VAT component was factored into the procurement price prior to 2007-08, it was paid separately for the period subsequent to 2007-08. The VAT component of

¶201

the procurement price, paid to the rice millers in Andhra Pradesh, was, in turn, paid by them, along with their returns, as VAT to the Government of Andhra Pradesh. On the other hand the Yanam rice millers, having collected the VAT component from FCI along with the procurement price, have retained the said amounts, and have not paid it to the Government of Andhra Pradesh. As the Yanam rice millers were not liable to pay tax under the AP VAT Act, the sale price, which included the VAT component, is, undoubtedly, an excess payment.

¶202

From the letter dated 05.07.2007, addressed by the President of the Yanam Rice Millers and Rice Merchants Association to FCI, it is evident that, till March, 2007, the Yanam rice millers were paid the same amount as the rice millers in Andhra Pradesh i.e. both of them were paid the VAT component also. For some period, thereafter, the Yanam rice millers were paid a lesser amount, as CST on “rice” was 3% in Andhra Pradesh and VAT 4%. On the premise that the sale of rice, by Yanam rice millers to FCI, Kakinada, was an inter-state sale, they were paid the procurement price + 3% CST which was 1% less than the procurement price paid to rice millers in Andhra Pradesh, who were paid 4%, in addition, as the VAT component.

¶203

In his representation dated 05.10.2007, the President of the Yanam Rice Millers and Rice Merchants Association stated that, as per Section 4(4) of the AP VAT Act, there was a liability of 4% tax when paddy was purchased from farmers who were not dealers; and this strengthened the case of Yanam rice millers that the consideration paid/payable to them should not be reduced on the irrelevant ground of reduced sales tax. The FCI was requested to adopt a pricing method on par with the A.P. rice millers, and pay the differential amount of 1% that had been reduced to the Yanam rice millers. It is thus clear that the Yanam rice millers had sought for, and were paid, the VAT component of 4%, (over and above the procurement price stipulated under the Control Order), on par with the Andhra Pradesh rice millers. The documents placed before this Court also show that, subsequently, FCI had paid the Yanam rice millers the differential 1% tax (i.e., the different between CST of 3% and VAT of 4%). While a feeble attempt was made, by the Learned Counsel appearing on behalf of the petitioners, to contend that what was paid to the petitioners was a composite price and the invoices do not disclose the tax component, the documents placed before us, and the representation submitted by the President, Yanam Rice Millers and Rice Merchants Association, establish that the petitioners were well

¶204

aware that the price paid to them by FCI, for procurement of levy rice, included VAT at 4%.

¶205

While the Yanam rice millers, in the representation dated 05.10.2007, had contended that they were liable to tax under the AP VAT Act, and had thereby collected 4% extra from FCI, they have avoided payment of VAT, collected by them from FCI, to the Government of A.P contending that sale of levy rice to FCI is an inter-state sale not exigible to tax under the AP VAT Act. While these contradictory stands appear to have been taken by the petitioners only to enrich themselves, by retaining the excess amount paid to them by FCI towards the VAT component, the fact remains that acquiescence or consent would not confer jurisdiction on the assessing authority to levy tax, under the AP VAT Act, on inter-state sales. In view of Article 265 of the Constitution, no tax can be recovered which is not permitted by law. The executive can neither levy tax, (National Mineral Development Corpn. Ltd. v. State of M.P.,), nor can it take recourse to the process of interpretation of a statute, (Indian Banks’ Association v. Devkala Consultancy Service), to levy tax contrary to law. The consent of parties does not, by itself, confer jurisdiction upon a statutory authority. It is not open to the parties to confer, by their agreement, jurisdiction on a Court/Tribunal which it does not possess. The distinction lies in the jurisdiction to decide matters, and the ambit of the matters to be heard by a Tribunal having jurisdiction to deal therewith. While, in the latter, the question of acquiescence or irregularity may be considered and overlooked, in cases where the question is of the jurisdiction of the Court/Tribunal to make the order, no question of acquiescence or consent can affect the decision. (U.C. Bank v. Their Workmen; and Hakam Singh v. Gammon (India) Ltd; Estate Officer and Manager (Recoveries), APIIC Ltd. v. Recovery Officer, Debts Recovery Tribunal). Excess payment by FCI to the Yanam rice millers, as VAT component of 4%, notwithstanding, inter-state sale of levy rice cannot be subjected to tax under the A.P. VAT Act. It is, however, made clear that this order shall not preclude FCI from instituting appropriate proceedings, in accordance with law, to recover the excess payment made by them, to the Yanam rice millers, as the VAT component of the procurement price.

¶206

VII. SUPPRESSION OF FACTS SHOULD THIS COURT REFRAIN FROM INTERFERENCE?

¶207

Both Sri P.Balaji Varma, Learned Special Standing Counsel for Commercial Taxes, and Sri D.Srinivas, Learned Standing Counsel for FCI, would submit that, as

¶208

they have suppressed the fact that representation dated 05.10.2007 was submitted on their behalf to the FCI admitting that they should be treated on par with the rice millers in the State of Andhra Pradesh and paid VAT at 4%, the petitioners have approached this Court with unclean hands; and the Writ Petitions are, therefore, liable to be dismissed in limini.

¶209

The petitioners have, no doubt, failed to disclose, in their Writ affidavits, the fact that a representation dated 05.10.2007 was submitted, on their behalf to the FCI, by the President of their Association. In granting relief, peculiar to its own jurisdiction, a court of equity acts upon the rule that he who seeks equity must do equity. A court of equity refuses relief to a plaintiff whose conduct, in regard to the subject matter of the litigation, has been improper. This was formerly expressed by the maxim "he who has committed iniquity shall not have equity", and relief was refused where a transaction was based on the plaintiff's fraud or misrepresentation. Later it was said that the plaintiff in equity must come with perfect propriety of conduct, or with clean hands. The maxim does not, however, mean that equity strikes at depravity in a general way; the cleanliness required is to be judged in relation to the relief sought, and the conduct complained of must have an immediate and necessary relation to the equity sued for. (Arunima Baruah v. Union of India; Halsbury's Laws of England, Fourth Edition, Vol. 16, pages 874- 876; Snell's Equity, Thirtieth Edition, Pages 30-32 and Jai Narain Parasrampuria (Dead) v. Pushpa Devi Saraf). The maxim, that predicates a requirement of clean hands, cannot properly be regarded as setting out a rule that is either precise or capable of satisfactory operation. (Arunima Baruah⁴⁵ ; Spry on Equitable Remedies, Fourth Edition, page 5; Moody v. Cox and Meyers v. Casey).

¶210

For this Court to refuse to exercise its discretionary jurisdiction, suppression must be of a material fact. Material fact would mean material for the purpose of determination of the lis, the logical corollary whereof would be as to whether it is material for the grant or denial of the relief. If the fact suppressed is not material for determination of the lis between the parties, the court may not refuse to exercise its discretionary jurisdiction. What would be a material fact, suppression whereof would disentitle the petitioner from obtaining a discretionary relief, would depend upon the facts and circumstances of each case. (Arunima Baruah⁴⁵ ). Absence of clean hands is of no account unless the depravity, the dirt in question, has an immediate

¶211

and necessary relation to the equity sued for. (Arunima Baruah⁴⁵ ; Spry on Equitable Remedies, Fourth Edition, page 5; Moody⁴⁷ and Meyers⁴⁸ ).

¶212

As the power to levy and collect tax must, in view of Article 265 of the Constitution of India, be authorized by law, and a sale in the course of inter-state trade and commerce cannot be brought to tax under the AP VAT Act, failure of the petitioners to disclose the fact that a representation dated 05.10.2007 was submitted to FCI is not material for the purpose of determination of the lis, ie it is not material for the grant or denial of the relief sought for in these writ petitions which is to declare the assessment orders, treating an inter-state sale as an intra-state sale, as orders passed without jurisdiction. Even if the representation dated 05.10.2007 is taken to be an admission by the Yanam rice millers, that they were liable to tax under the AP VAT Act, it would still not confer jurisdiction on the assessing authorities to assess the petitioners to tax under the AP VAT Act, treating an inter-state sale as an intrastate sale, as acquiescence or consent will not confer jurisdiction on a statutory authority/tribunal. While the petitioners would have been well advised to disclose the representation dated 05.10.2007 in the affidavits, filed in support of these writ petitions, the fact that they have not so disclosed is not fatal.

¶213

VIII. OTHER CONTENTIONS:

¶214

It is contended, on behalf of the petitioners, that, in terms of the arrangement, the administrator of the Yanam is the person responsible for procurement of rice from the petitioners, and for its delivery to FCI, Kakinada; the assessments, if any, can only be made against him; and the assessing authority has not been authorized, under Section 59 of the AP VAT Act, to assets the petitioners to tax under the Act. They would rely on Mahadayal Premchandra v. Commercial Tax Officer, Calcutta. In reply thereto, Sri P.Balaji Varma, Learned Special Standing Counsel for Commercial Taxes, would submit that the circular dated 27.11.2010, directing the assessing authorities to issue show cause notices to the dealers ie the Yanam Rice Millers, is the authorization under Rule 59 of the A.P. VAT Rules. He would also submit that the Yanam rice millers have been assessed to R.D. cess; and, therefore, fall within the tax ambit of the A.P. commercial tax department. It is submitted, on behalf of the petitioners, to the contrary that RD cess is leviable on paddy, and not on rice.

¶215

Placing reliance on Sumukha Veereswari Rice Mill⁴ . Sri P.Balaji Varma, Learned Special Standing Counsel for Commercial Taxes, would contend that the petitioners are “casual dealers” and are, therefore, liable to tax, in respect of intrastate sales, under the AP VAT Act. On the other hand it is submitted, on behalf of the petitioners, that the petitioners cannot be treated as “casual traders” under Section 4(6) of the Act; a “dealer”, under Section 2(b) of the CST Act, includes a “casual trader” also; and no notice was issued to the petitioners as “casual traders”. As we have held that the subject sales are inter-state sales, and that the assessing authorities lack jurisdiction to levy tax thereon under the AP VAT Act, it is wholly unnecessary for us to dwell on the aforesaid rival submissions, including whether or not the petitioners are “casual dealers” under the AP VAT Act.

¶216

While Sri P.Balaji Varma, Learned Special Standing Counsel for Commercial Taxes, would also contend that the petitioners are liable to pay purchase tax, under Section 4(4) of the AP VAT Act, on the value of paddy procured by them from agriculturists in the State of Andhra Pradesh, the impugned assessment orders have not subjected the petitioners to purchase tax under Section 4(4) of the AP VAT Act, but have assessed them to tax on the sale of levy rice to FCI, Kakinada. It would be wholly inappropriate, therefore, for this Court to examine, in the present writ proceedings, whether or not purchase tax, under Section 4(4) of the AP VAT Act, can be imposed on the petitioners. It would suffice to make it clear that this Court has not expressed any opinion on whether or not the petitioners are liable to tax under Section 4(4) of the AP VAT Act, and this order does not preclude the tax authorities in the State of Andhra Pradesh from taking action in accordance with law. It is also made clear that, in case any such proceedings are instituted against them, it is open to the petitioners to take such defences as are available to them in law.

¶217

IX. CONCLUSION:

¶218

As the sale of levy rice by the petitioners, who are all rice millers at Yanam in the Union territory of Pondicherry, to the FCI at Kakinada in the State of Andhra Pradesh, are sales in the course of inter-state trade and commerce falling within the ambit of Section 3(a) of the CST Act, the impugned assessment orders, subjecting these sales to tax under the A.P. VAT Act treating them as intra-state sales, are without jurisdiction and are set aside. All the Writ Petitions are, accordingly, disposed of. The miscellaneous petitions pending, if any, shall also stand

¶219

automatically disposed of. However, in the circumstances, without costs.

¶220

_________________________________ (RAMESH RANGANATHAN, J)

¶221

______________________________________ (M. SATYANARAYANA MURTHY, J)

¶222

Date: 30.10.2014.

¶223

Note: L.R. copy to be marked. B/o MRKR/CS

M/s.Sri Lakshmi Ganesh Modern Raw and Boiled Rice Mill, v. The Assistant Commissioner(Ct) Ltu

Case brief

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M/s.Sri Lakshmi Ganesh Modern Raw and Boiled Rice Mill, v. The Assistant Commissioner(Ct) Ltu

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What the court decided

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