# [1974] 1 S.C.R. 463

- **Citation:** [1974] 1 S.C.R. 463
- **Court:** Supreme Court of India
- **Decided:** 1973-08-23
- **Bench:** R. Khanna, A. Alagir!Swami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1974-1-s-c-r-463-5994
- **Pages:** 18

## Headnote

463
C,111ra/ Sales Tax Act, (74 of 1956), S. 3(a)--Scope of-Movemmt of
goods 11·/re11 occasiorred by sale-Ma11ufacture of goods in one State and sold
in another to distributors-Distribution agreen1e11t if co,,stitutcs
c:ontract of
sal<-Sa/e of Goods Act (3 of 1930), S. 23--Scope of.
Section 6 of the Central Sales Tax Ac!, 1956, ·makes every dealer liable for
payment of tax under the Act on all sales effected by him in the course of
interstate trade or commerce. A sal_e of goods can
be held to have
taken
place in the course of interstate trade under s. 3(a) if it can be shown that .
the sale has occasioned the movement of goods from one State to another, that
. is, if, ( i) there is a sale,\ <ii) there is actual movement of goods from one
State to another, and (iii) the sale and movement of the goods formed integral
parts of the same transaction. A sale bein~. bv the definition in the Act, transfer of property, to be exigible to tax under the Act it must be shown that the
movement was the result of a covenant or incident
of the· contract of sale.
The movement of goods whiCh takes place independently of a contract of sale
would not fall within the ambit of s. 3(a). There must b: a contract of sale
precedin& the movement of goods from one State to another and the movement of goods should have been caused by and be the result of that contract
of sale.
If there was no contract of sale preceding the movement of goods
the movement can obviously be not ascribed to a contract of sale nor can it be
said· that the sale hiis occasioned movement of goods from one State to the
other. [471F--473BJ
In the present case) the· appellant was a manufacturer of refrigerators
in
Faridabad. The refrigerators·. were sold with three different trade marks. The
sale of each brand was made through a separate distributor in Delhi appointed
for 1h:;tt purf)Ose.and the appellant. entered into an agreement with e~ch of the·
three distributors. The· 'appellant .dealer wa.s bound to sell each of the brands
of the refrigerator to one of the distributors. The price of the
refrigerators
was. to. be fixed mutually as . agreed upon betweeu. the appellant and his distributors from time to time. ·The pric_es were not settled for each individual
ID;achine but periodically.
The goods were
manufactured in the
factory
at
Faridabad and excise clearance pass was obtained after the payment of ·excise
duty· for the transport of goods from the .factory, to the a(lpe1lant's godown in
Delhi. ·The excise pass was in favour of self.
DU.ring the transport of the
goods from Faridabad to Delhi the octroi at the barrier was
paid by
the
appellant. At the destination the floods were received bv the staff of the appellant and taken to their godown.
TJ1e purchase orders were placed by the three
distributors 3.fter \he goods reached the Head-office of the appellant at Delhi.
In pursuance ·of the orders given by the distributors the
Delhi staff gave
delivery of the goods at Delhi under a challan prep&red at Delhi.
The property in the _goods passed at Delhi to the distributors af_ter delivery. The price
of 1he goods was received by the aopellant at Delhi and deposited
in the
appellant's account in its Delhi bank, The refrigerators were
also exported
outside India.
The High Court, in a reference by the Tribunal, hel~ that the distribution
agreements constituted agreements of sale, that the refngerators moved from_
Faridabad to Delhi in' pursuance of the agreements of sale, and hat the appcflant was therefore liable to pay sales-tax under s. 3(a) of lhe A.;t.
Allowing the appeal t'J thb Cc:lr!,
464
SUPREME COURT REPORTS
( 1974] 1 S.C.R.
HELD :
( 1) The three agreements between the appellant and the
distri~
butots were merely agreements for distribution and did not ;onStitute contracts
of sale.
[4808-C]
·
(a) The number of refrigerators which were to be purchased by each of the
distributors was not specified in the distribution agreements nor did the
agree~
ments contain the price which was to

## Text

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KELVINATOR OF INDIA LTD.
THE STATE OF HARYANA
August 23, 1973
[H, R. KHANNA AND A. ALAGIR!SWAMI, JJ.j
463
C,111ra/ Sales Tax Act, (74 of 1956), S. 3(a)--Scope of-Movemmt of
goods 11·/re11 occasiorred by sale-Ma11ufacture of goods in one State and sold
in another to distributors-Distribution agreen1e11t if co,,stitutcs
c:ontract of
sal<-Sa/e of Goods Act (3 of 1930), S. 23--Scope of.
Section 6 of the Central Sales Tax Ac!, 1956, ·makes every dealer liable for
payment of tax under the Act on all sales effected by him in the course of
interstate trade or commerce. A sal_e of goods can
be held to have
taken
place in the course of interstate trade under s. 3(a) if it can be shown that .
the sale has occasioned the movement of goods from one State to another, that
. is, if, ( i) there is a sale,\ <ii) there is actual movement of goods from one
State to another, and (iii) the sale and movement of the goods formed integral
parts of the same transaction. A sale bein~. bv the definition in the Act, transfer of property, to be exigible to tax under the Act it must be shown that the
movement was the result of a covenant or incident
of the· contract of sale.
The movement of goods whiCh takes place independently of a contract of sale
would not fall within the ambit of s. 3(a). There must b: a contract of sale
precedin& the movement of goods from one State to another and the movement of goods should have been caused by and be the result of that contract
of sale.
If there was no contract of sale preceding the movement of goods
the movement can obviously be not ascribed to a contract of sale nor can it be
said· that the sale hiis occasioned movement of goods from one State to the
other. [471F--473BJ
In the present case) the· appellant was a manufacturer of refrigerators
in
Faridabad. The refrigerators·. were sold with three different trade marks. The
sale of each brand was made through a separate distributor in Delhi appointed
for 1h:;tt purf)Ose.and the appellant. entered into an agreement with e~ch of the·
three distributors. The· 'appellant .dealer wa.s bound to sell each of the brands
of the refrigerator to one of the distributors. The price of the
refrigerators
was. to. be fixed mutually as . agreed upon betweeu. the appellant and his distributors from time to time. ·The pric_es were not settled for each individual
ID;achine but periodically.
The goods were
manufactured in the
factory
at
Faridabad and excise clearance pass was obtained after the payment of ·excise
duty· for the transport of goods from the .factory, to the a(lpe1lant's godown in
Delhi. ·The excise pass was in favour of self.
DU.ring the transport of the
goods from Faridabad to Delhi the octroi at the barrier was
paid by
the
appellant. At the destination the floods were received bv the staff of the appellant and taken to their godown.
TJ1e purchase orders were placed by the three
distributors 3.fter \he goods reached the Head-office of the appellant at Delhi.
In pursuance ·of the orders given by the distributors the
Delhi staff gave
delivery of the goods at Delhi under a challan prep&red at Delhi.
The property in the _goods passed at Delhi to the distributors af_ter delivery. The price
of 1he goods was received by the aopellant at Delhi and deposited
in the
appellant's account in its Delhi bank, The refrigerators were
also exported
outside India.
The High Court, in a reference by the Tribunal, hel~ that the distribution
agreements constituted agreements of sale, that the refngerators moved from_
Faridabad to Delhi in' pursuance of the agreements of sale, and hat the appcflant was therefore liable to pay sales-tax under s. 3(a) of lhe A.;t.
Allowing the appeal t'J thb Cc:lr!,
464
SUPREME COURT REPORTS
( 1974] 1 S.C.R.
HELD :
( 1) The three agreements between the appellant and the
distri~
butots were merely agreements for distribution and did not ;onStitute contracts
of sale.
[4808-C]
·
(a) The number of refrigerators which were to be purchased by each of the
distributors was not specified in the distribution agreements nor did the
agree~
ments contain the price which was to be charged for ea.ch refrigerator. In two
of the ·distribution agreements the minimum nul_llber of refrigerators which
had beep agr~ed upon to be purchased by the distributors was mentioned but
the exact number of refrigerators to be sold by the appellant to those two
distributors was still left to the volition of the appellant. The mode of dealing between the parties was thilt orders were placed by the distributors with
the appellant after the refrigerators had reached the appe1lant's sale-c.)ffice ·and
godown in Delhi.
The price of tefrigerators was also to be mutually agreed
upon. from time to time.
14~ sales by the appellant to the distributor thus
depended up<Jn the future agreement beh\'een the parties from time to
time.
Therefore, it was the orders which were placed in Delhi by the distributors
and the acceptance ··thereof by the appellant that· -resulted in the mutual agree--
ment of sale.
The di.stribution agreement with each distributor on]y provided
the framework within which the different cpntracts of sale were to be entered
into by the distributor with t~e appellant, and the distribution agrCiment and
contr<..ct of sale were distinct tran3actions. [474B·G1.
(b)
It is not correct to say that the distributor with whom· the :first" agreement was
~ntered into was bound to purchase all the products of the appel1ant.
The y,1ords 'the sale would be as mutually agreed· upon from time to
time' would lose all significance if that was the intention of the parties, Also,
the facts that subsequently two other distribution agreements were entered into
with two others ancl that the ap°Pellant was in a position to export its products
to foreign cquntries during the assessment year, show that there was no such
agreement.
(474G-475B]
(c) There Via~ no appropriation towards the agreement with each of the
distributors, at Faridabad by affixing the name plates to the refrigerators, and
hence, there v,ias no sale of refrigerators at Faridabad. There was no evidence
to show that the name plates were actually affixed at Faridabad and not at
Delhi. Even if they \\'ere so affixed there was nothing to prevent the appellant
from changing them because the three different brands .of refrigerators· were
in all respects identical and the name plates were also easily interchangeable.
If the sale of the refrigerators in favour of the distributors had already taken
place at Faridabad and the refrigerators had been appropriated there wonld not
have arisen any occasion for the placing of a subsequent order in Delhi by ·a
distributor.
But in fact orders in respect of the various
refrigerators
Were~
placed by the .distributors only in Delhi after they had been transported to the
Delhi sale-office and godown of the appellant. Since there was no appropriation
at Faridabad, there was no legal b~r to the changing of name plates by the
appellant till such time as orders were placed by the distributors after inspection· at Delhi.
In answering the question whether the transactions constituted
sales in the course of interstate trade or commerce the Court should look not
merely at the distribution agreement but sbould also pay regard to· the entire
course of dealings between the parties.
[475 B-H]
(d) Apart from the fact that the distribution agreements
could not
be.
construed as contracts vf sale there is no material to show that there was any
assent, expressed or implied, by the distributors, to the appropriation of the
refrigerators by the appellant at Faridabad_: and hence s. 23 of
the Sale of
Goods Act is not applicable. .No authority was given~ by the distributors to
the appellant to ·appropriate the goods at Faridabad. Further the appellant was
not under the terms of the contract, authorised to do some act or thing W!th
reference to the refrigerators which could not l;>e dOBe until the refrigerators
were appropriated. [477 H-478Hl
(2) There \\'35 no n1ovement of refrigerators from Faridabad to Delhi
under a: contract of sale. [476GJ
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KELVINATQR LTD. v. HARYANA (Khanna, J.)
465
.
(a) If there is a choice before the parties of so urranging their matters that
m OJ!e ~se they would have to incur liability to pay tax and in the other case
· ~e hability to ~ay tax. wo~ld not be. a~tract~d: they would prefer the latter,
wursc.
There tS nothing illegal or 1mpermlSs1ble to a party so arranging its
ll'ffairs that the liability to pay tax would not be attracted· or would be reduced.
[476C-DJ
!he appellant ~uld ha~e ~C?ld the refrigera~ors at either of- the two pla~s,
Fandabad or Delhi. But hab1hty to pay tax under the Act would arise if tht(
sale of the refrigerators to distributors were to take place al Faridabad ADd the
movement o[ refrigerators from Faridabad to Delhi were to take place under
the Cllntract of sale. So, the parties expressly stated in each of the three distribution agreements that it would be in Delhi that the sale would take place to
the distributors and the property therein would pass to theni.
Jn faGt, it \Vas
.in DeJbi that the orders were placed
by the distributors,
the goods
were
deliver~ to the: distributors, and the piice of the refrigerators was paid. Hence
it could not be- said that" the transport of the refrigerators from Faridabad to
Delhi "'as in pursual.'lce of a 9Pntract of sale. The appellant had a godown and
saJe office in Delhi and there is no evidence that it had a godown in Faridabad.
The movement of the goods from Faridabad to the a~"'Je!Iant's godown in Delhi
can therefore be ascribed only to the fact that the
appellant had a godown
fμC)lity in Delhi. [4760-GJ
'
(b) The inclusion of the charges for the transport of
refrigerators
from
Faridabad to Delhi in the price payable by the distributors would not show
:that the m-:>vement of refrigerators from Faridabad to Delhi was occasioned by
11,le contract of sale. The pricC 'payable by the distributors was the aggregate cf
tb.t ex-factory price of refrigerators and the transportation charges.
As the exfaCtory price of the refrigerators was fixed from time to time and as the agree-
~ents. with the distributors provided that the -sale of the refrigerators as well as
.the delivery thereof to the distributors would take place in Delhi the distribution
agreements provided th.at the _transportation charges would be added to the -ex~
fJlctofy price_ of_ the refrigerators in calculating the amount payable by the distributors to the appellant.
Further, in two of the distribution agreements
it
wAs provided that the liability of the appellant for any shortage or damage
.woQld cease only after the goods had been inspected b.v and delivered to the_
<iistributors at Delhi. In the 3rd agreement it was provided that the appellant
lfOUld accept no responsibility for shortage or damage during transit, but even
in .that case,. it \\-'as not the distributor· but the insurer who would have to bear
ihe loss and the transit insurance.£.xpenses were borne by the appellant. ·[476G....-
477G)
1dtc. l:."ltgineering & Locomotive Co. Limit0.:1 v. The Assistant Co1nmissio11er
F
of Conunercial Taxes & A,iotlzer. [19701 3 S.C.R. 862, followed.
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Taw Iron 1md Steel Co. Ltd. v. S. R. Sarkar and Ors .. [1961] I S.C.R. 379;
Ben-Conn Niligiri Plantations Co. Cooncor-& Ors. v. Sali?s Tax Officer. Special
Circle~ Ernakulum & Ors .. [1964] 7 S.C.R. 706, and Halsbury's Laws of Eng_(a,rd,
3rii' Ed. Vol. 34. pp. 62-63, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2005 (NT) of
1972.
Appealby special leave I.ram the order dated.the 11.th April 1972 of
·the Punjab and Haryana High Court at Chandigarh, m General Sales
TaJ( Reference No. 8 of 1970.
N. A. Palkhivala, H. L. Sibal, J.B. Dadachanji, A. K. Verma, Kapil
Sibal and S. C. Agnihotri, for the appellant.
V. M. Tarkunde, Narendra Goswami and M. N. Shroff, for the
respondent.
S. T. Desai, and I. N. Shroff, for the intervener.
466
SUPREME COURT REPORTS
[ 1974 J 1 S.<::.R.
The Judgment of the Court was delivered by
KHANNA, J.
This appeal by special leave by M/s. Kelvinatc: of
India Ltd. is directed against the judgment of Punjab & Haryana High
Court whereby that court answered the following question referred to it
by the Sales Tax Tribunal Haryana in favour of the department and
against the app~llant :
"Whether on the facts and circumstances of the case, the
agreement between M/s. Kelvinator of India (Assessee),
M/s. Spencer & Co. Ltcl., Messrs Blue Star Engineering Co.,
and M/s. General Equipment Ltd .. in pursuance of which the
refrigerators manufactured by M/s. Kelvinator of India at
Faridabad moved to Delhi were merely for distribution of
goods between the principal and his· agents or were agree·
ments of sale between two parties ?"
The matter relates to the assessment year 1965-66 i.e. the period
from April I, 1965 to March 31, 1966. The appellant company hrui
a factory at Faridabad in Haryana. It manufactures refrigerators,
deep freezers, compressors and other similar articles. The factory went
into production in 1964.
Its registered office and sales office are at
19A Alipore Road, Delhi. The appellant has godowns in Delhi having
full staff of godown keepers and clerks. The appellant is a registered
dealer under the Punjab General Sal'es Tax Act, 1948 and the Central
Sales Tax Act, 1956. The registration has been done at Faridabad.
Refrigerators and other articles are manufactured by the appellant under
a collaboration agreement with an American company
:Known as
Kelvinator
International Corporation.
The refrigerators and other
articles manufactured by the appellant are marketed under trade marks
'Kelvinator', 'Leonard' and 'Gem'.
The entire sale of refrigerators.
compressors and spare parts in 1964 was made to Spencer & Co. Ltd.
at Delhi. Such transfers were accepted as genuine by the sales tax authorities.
In respect of these sales the department did not take the
siand that they W·:>re inter-State sales or that the movement of goods
from Faridabad to Delhi was occasioned by reason of sales made to
Speixier· & Co. Ltd.
On April 26, 1965 the appellant entered into a distribution agreement with Spencer & Co. Ltd. in resp.:ct of refrigerators and other pro·
ducts having Kelvinator trade mark.
Similar distribution agreements
were entered into with Blue Star Engineering Co. (Bombay) Pvt. Ltd.,
on September 15, 1965 in respect of Leonard refrigerators and on
December 11, 1965 with General Equipment Merchants Ltd. in respect
of Gem refrigerators. The agreement with Spencer & Co. w.as to take
effect from April 1. J 965 and the other two agreements from the dates
on which they were entered into. The terms of the agreements were
substantially similar, except in certain matters with which we are either
not concerned or to which reference would be made hereinafter. Th" ·
relevant clauses of·agreement.dated April 26, 1965 are as under:
"Whereas in terms of the Manufacturing and Sales Agreement entered into by the Company (the appellant company)
with Kelvinator International Corporation, Detroit (Mii:higanA
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KELVINATOR LTD. v. HARYANA (Khanna, J.)
467
U.S.A.), the Company is granted exclusive right und lice11ce to
manufacture, assemble and sell the products designed and/o;-
manufactured by the Company under Trade mark "Kelvinator ·•
or any other Trade mark in India 0hereinafter called th!
. Territory) and whereas the Company in its Factory at Farida·
bad (Punjab) has commenced the manufacture of Kelvinato: ·
Refrigerators, parts and Spare parts etc., and whereas
th~
Distributors (Spencer & Co. Ltd.) have agreed to be and to
act as Distributors of the Company, now it is hereby mutually
agreed and declared between the parties hereto as followf :-
1. The Co1npany hereby undertakes to sell and the Distri·
butors hereby undertake to buy all products manufactured by
the Company as mutua1ly agreed upon from time to time. The
Distributors shall have the right to sell the Company's Kelvinntor and such other trademark products, spare parts and paru
within the Territory. Due consideration to the recommenda·
tions of Distributor& in regard to change/alteration in existin6
products or additions of new product& will all the time be
given by the Company.
2. All purchases by the Distributors from the Company
shall be on principal to principal basis at mutually agreed
prices.
3. *******
4. The goods shalt be delivered to the Distributors l:ror.c
the Company's registered office in Delhi and the property h
the same shall pass to the Distributors in Delhi on delivery.
where the sale shall always take place.
5. For the purpose of determining the liability of Distri·
butors for payment to the Company, the price quoted will be·
ex-Company's works at Faridabad.
The Distributors shalt
also pay to the Company all the charges on the transport of
the goods from the Company's works at Faridabad to the
Company's Registered Office in Delhi.
6. The Distributors shall at all times warrant the goodi
to their customers only on the warranliy terms issued by tho
Company. All goods leaving the Company's factory will pas3
through rigorous inspection procedures laid down by the Corr.-
puny. No responsibility for shortage or damage occurring ic.
transit will be accepted by the Company.
************
************"
Cl_auses 3, 6, 7 and 8 of agreement dated September 15, 1965 ir. res.
pect of Leonard refrigerators were as under :
"3. For the purpose of clause (I) and in order to enab1~
the Company to arrange its production schedule, the Di5tributors guarantee and undertake to purchase from the Corr.·
pany a minimum quantity of 1500 Refrigerators per year, ~t
·a rate not less than 80 Refrigerators per month. It is agreed
468
SUPREME COURT :aEPORTS
[ 1974 J 1 s.c.a,
that the distributors will be. relieved of their obligation under
th~ Agreement to the extent that the Company. is .unable
to ·supply the guaranteed minimum quantity of 80 refrigerators per month.
6. For calculating the liability of the Distributors for pay·
mrnt to the Company, the price quoted will be ex-factory
Company's works at Faridabad. excluding Central Excise and
all other taxes, duties and charges (but not octroi charges payable between Faridabad and Delhi which will be to the Company's account) which may be levied or introduced by the
Government or any local authority from time to time and
which will be charged in addition to the said ex-factory price.
The Distributors shall pay to tM Company, the transport
charges for the goods from the Company's works at Faridabad
10 the. Compalll.)''s godowns in Delhi.
7. All the goods shall remain the property of the Com·
pany till they reach Delhi arid are delivered to the Distribu·
tors in Delhi, where alone the property therein shall pass to
the Distributors. The sale shall always take place in Delhi.
8. All goods leaving the Company's factory will pass
through rigorous inspection procedure laid down by the Company, and will be packed in Crates and will be delivered to the
Distributors packed as such. The Company in no case shall
be responsible for any shortage or damage .that may occur in
further transit, once the goods have been delivered
and
inspected by the Distibutors in Delhi."
Clauses 6, 7 and 8 of agreement dated December fl, 1965 in respect
of Gem refrigerators were substanilally similar to "Clauses 6, 7 and 8
of agreement dated September 15, 1965. Clause 3 Of agreement dated
December 11. 1965 was as un(ler :
"3. In order to facilitate the Company's arrangement of
its production schedule, Gem undertakes to buy from the Company a minimum quantity of 2000 refrigerators of both IO.I
cu. ft. and. 6-2 cu. ft. capacity in die first year at a rate of
not less than 150 refrigerators per month. Likewise, for the
2nd year, Gem agrees to buy 3000 refrigerators and for 3rd
year, 4000 refrigerators of both sizes. The Company will,
however, incur· no liabilities if for any reasons it is unable to
make the supply according to the minimum quantities stipu·
lated above. If for some reasons Gem is unable to accept or
]'Urchase the respective minimum yearly stipulated quantities,
Gem will incur no liability save the cancellation of the Agreement at the Company's choice."
Procedure for transfer of goods from the factory at Faridabad to the
appellant's company's sales office and godowns at 19A, Alipore Road.
Delhi was described in the objections filed on behalf of the appellant
before the sales tax authority as under :
"The company gets the goods cleared from the Excise for
destination to its Delhi office godown in piece-meal pay the
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l'ELVl.NATOR LTD. v .. HARYANA (Khan11a, /.)
469·
octroi themselves at the Delhi barrier along with the freight
charges and the goods are taken delivery of bY its registered
office. · The buyer places its specific order accordiiig to its
requirement and to the extent goods are available at Delhi,
delivery is given by the Delhi office· after the goods are approved in good condition by the purchaser. That the goods
never move from the 'factory in pursuance of ·any contract
but are moved as per routine for storage at Delhi in accordance with the company's own convenience.
Specific orders
arei placei! by the buyers when the goods are already lying in
stock. The movement of the goods as such is not in furtherance .of any contract of sale but move to Delhi independently
of any stipulation."-
:
Four affidavits were also filed before the assessing authorit). The first
affidavit is of M. B. Sutaria, Secretary of the appellanf comp~)'., Relevant parts of this affidavit are as under :
·
·
"3. That after the goods are manufactured in the factory
an excise clearanco p~ is obtained after payment of- excise
duty for tlie \ransport of goods from the fas:tory to the com'
pany's godown in Delhi. The excise pass is always for movement of goods in favour of self.
4. That during the transport of goods from Faridabad to
D~lhi, the octroi at the barrier is paid by the company.
5. That at destination the goods are received by the com-·
pany's staff and taken in their godown.
6. That after the goods have already been received by
the cqmpany an order is received from the customer for the
~upply of goods. ·
7. That. in pursuance of the said orders Delhi staff give
delive1y of the goods at-Delhi to the customer under a challan prepared at Delhi.
8. That thereafter the bill is raised from Delhi and price
.of. the goods is received by the Company at Delhi and depositcchn the Company's account in ,its Delhi Bank."
The other three aJ!idavits were those of V. A. Rao of Spencer & Co.,,
Rajinder Nath Seth of Blue Star Engineering Co. LUI. and Mrs. Ushll'
Batra of General Equipment Merchants Ltd. In the affidavit of V. A,
Rao it was stated :
"2. That we select the pieces of Refrigerators lying in the
· godowns of Kelvinator of India Ltd. Delhi ancUf on inspection we find that pieces of Refrigerators suiting to our requirements, we . place specific orders on Kelvinator of India
Ltd., Delhi to supply us the goods."
The artidavits ·of Rajinder Nath Seth and Mrs. Usha Batra contained
similar paragraphs. The appellant company took a policy of insurance'·
to cover lorry risk as per Mot.or Lorry Risk clauses, including theft,
470
SUPREME COURT REPORTS
[ 1974] 1 ~.C.R.
pilferage and non-delivery denting scratching and breakage or any
A
•Other damage due to any external means, including certain other risks
:from warehouse to warehouse.
In the reference order dated April 1, 1971 the Sales Tax Tribunal
'While dealing with rhe transport of goods from Faridabad to Delhi
.observed :
"The Refrigerators manufactured by the Company were
transferred to its sale office and godowns at 19A, Alipore
Road, Delhi·6 under despatch notes. Necessary entries in the
stock register showing receipt were made in the stock registe~
maintained by the Company in the godowns and sale office
at Delhi. The issue entries were also made in such registers.
The payments such as freight, octroi, transit in5urance and
other expenses i.e. upto the stage of sale and delivery of
goods to the respective distributors at the sale office at Delhi
were borne by the company. The purchasers, namely, the
distributors placed their specific orders at various times at
Delhi upon examil)jng and finding the suitability of the
machines in pursuance of which the refrigerators
were
delivered against receipt on delivery challans. Bills
were
raised by the sale office at Delhi and consideration was also
received by it."
,The assessiQg authority vide its order dated March 2, 1968 held
1hat the transactions between the parties were inter·State sales and liable
10 be taxed as such. The movement of refrigerators from Faridabad
10 J)~lhi was held to be occasioned by the sales to the distributors.
At first the sales tax-payable by the aosessee was assessed by the Sales
Tax Oftlcer to be Rs. 8,14,112.25 at the rate of 10 per cent of the
transactions amounting to Rs. 81,41,142.45. Subsequently on review
application the tax liability was reduced to Rs. 1,59,691.19.
On appeal filed by the appellant, the Deputy Excise and .Taxation
Commissioner as per ord·or dated July 24, 1968 held that the distri·
'bution agreements were not contracts of sale. It was further held that
the refrigerators were transported to Delhi prior to their sale to distri-
'butors. The transactions in question were consequently held not to
constitute int·~r-State sales.
The Excise and Taxation Commissioner
thereafter took suo motu action and after hearing both· the parties he
'held as per order dated September 12, 1968 that as soon as the re·
frigerators were manufactured they were appropriated to the contracts
and that inovement from Faridabad to Delhi was under the agreement
to sell. The matter was then taken up by the assessee in appeal to the
Sales Tax Tribunal. The Tribunal as per order dated August 14, 1969
·took the view that the agreements with the distributors were agreements
of sale and that the sales in question were inter-State sales. The app;ollant thereafter filed review application but the same was dismissed
'by the Tribunal on November 24, 1969. Application was thereafter
1iled before the T[ibunal praying, inter a/ia, that the following questions
of law be referred io the High Court :
"!. Whether on the facts and circumstances Of the case
the Sales were local sales of Delhi or were in the course of
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inter-State trade and commerce giving rise to the commenc:-
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2. Whether on the facts and circumstances of the case the
distributorship agreements could validly be construed to be
contracts of sales even when they lack all the essential ingredients for the formation of the same.
3. Whether on the facts and circumstances of the case the
movement of the goods from Faridabad to Compa~'s godowns
at Delhi at its own rjsk and cost could be termed to be commercial movements warranting the imposition of the tax under
the Central Sales Tax Act or inter-departmental movement for
facility of better enjoyment of rights."
The Tribunal. however, thought that the question reproduced earlY.:r
would combine all the three questions suggested by the appellant,
Accordingly the question set out at the beginning of this judgment
was referred to the High Court.
The High Court in answering the question .in favour of the department found that the machines moved from Faridabad to Delhi in pursuance
of agreements of sale which had been teQ11ed distribution
agreements.
In appeal before us, Mr. Palkhiwala on behalf of the appellant coJJfpany has argued that the three distribution agreements do not constitute
contracts of sale. In the alternative, he submits that even if. the distribution agreements were construed to. be contracts of sale, the movement of goods in question from Farldabad to Delhi cannot be said to
have been occasioned by the distribution agreements. It is also urged
that there was no appropriation of the goods at Faridabad to the contract with any particular distributor. As again~! that, Mr. Tarkunde
on behalf of the respondent contends that the tliree distribution, agree-.
ments did constitute contracts of sale and that it were the aforesaid
agreements which occasioned the movement of goods from Faridabad
to Delhi. The appropriation of goods to the contract with each of the
distributors
also, according to the
learned counsel, took place in
Faridabad.
Before d"aling with the contention of the partii!s, it would be apposite
to refer to the relevant statutory provisions and examine the legal posi·
tion Section 6 of the Central Sales Tax Act (hereinafter referred :to
as the Act) makes every dealer liable for payment of tax under the
Act on r.ll sales effected by him in t)le course of inter-State. trade or
commerce.
"Sale" with its grammatical variations and cognate ex ..
i•ressions, has been defined in section 2 (g) of the Act, to mean any
transfer of property in goods by one person to another for cash or for
deferred payment or for any other valuable consideration, and includes
a transfer of goods on the hire-purchase or other systt<m of payment by
instalments, but does not include a mortgage or hypothecation of er a
charge or .Pledge on goods. According to section 3 of the Act, 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 t:J
another; or
, SUPREME COURT REPORTS
[ 1974 J 1 s.c.R.
(b) is effected by a transfer of documents of title to the
, goods during th~ir movement from one State to another.
We itre concerned in the present case with clause (a) and not with
clans¢ (b). A sale o_f goods can be held to have taken place in the
course of inter-State trade under clause {a) of Section 3 of the Act if
it can b~ shown that the sale has occasioned the movement of goods
from one Slate to another. A sale in the course of inter-State trade has
tI1ree essentials: (i) there must be a sale, (ii) the goods must actually
be moved from one State to another, and (iii) the sale and movement
of the goods must be part of the same transaction. The word "occasions" is used as a verb and ,means 'to cause or to be the immediate
cause or. In the case of Tata Iron.and Steel Co. Ltd. v. S. R. Sarkar
WU/ Ors.(') Shah Jc (as he then was) speaking for the majority obseiVed that a transaction of sale is subject to tax under the Act on the
CQll)llletion of the sale. A mere.contract of sale is not a sale within the
,cleflll!ion of "sale" in section 2(g). A sale being, by the definition,
transfer of property becomes taxable under section 3 (a) "if the move-
~! of goods from one State to another is under a covenant or incident of the contract of sale". In Ben Gorm Nilgiri Plantations Co.
Ci;Qlicor & Ors. v. Sales Tax Officer, Special Circle, Ernakulam &
Ors(2) this Courf. dealt with the provisions of section 5 of the Act
which relates to sale or purchase of goods in the course of import or
expott. It was held that a sale in the course of export predicated con·
n'eetlon between the sale and export, the two activities being so inte--
gi',aied that the connection between the two, cannot be voluntarily interrupted without a breach of the contractor the compulsion arising from
the: nature of the transaction. The export, it was further observed
s00uld be inextricably linked up with the sale so that the bond cannot
be dissociated the observations in the case of Tata Iron and Steel Co.
as w~Jl as Ben Gonn Nilgiri Pla11tatio11s Co. were relied upon by a
(hnstitution Bench of this Court in the case of Tata Engineering &
Locomotive Co. Limited v. The Assistant Commissioner of Commer·
cial Taxes & Another (3 ) and it was held that the sales to be exigible
to tax under the Act must be shown to have occasioned the movement
of goods or articles fqim one State to another and that the movement
must be the ~esult of a convenant or incident of the contract of sale.
It can, therefore, be said that a sale of goods is in the course of interSta!e trade if the sale and movement of goods from one State to another
are' integral parts of the same transaction. There must exist a direct
nexns between the sale and the movement of goods from one, State to
the other. In other words the movement should be incident of and be
neeessitated by the-contract of sale and thus be interlinked with the sale
of goods.
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lt is also plain from the language of section 3 (a) of the Act that the
movement of goods from one State to another must be under the con·
trac,t of sale. A movement of goods which takes place independently
of :a. contract of sale would not fall within the ambit of the above
clause.
Perusal of section 3 (a) further makes it ,manifest that there
must be a contract of sale preceding the movement of the goods from
(I) rt961] I S. C. R, 379
(2) [1964] 7 S. C. R, 706.
.
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one State to another, and the mowment of goods should hm·e been
caused 1:1,i and be the result of that contract of sale. If there was no
contract of sale preceding the movement o\ goods, the movement can
obviously be not ascribed to a contract of sale nor can it be saiC! that
the sale has occasioned the movement of goods from one State to the
other.
In the light of the principles enunciated above. it cannot. in our
opiniou, bS said that the transactions in question amount to sale in the
course of inter-State trade. The High Court in the course of its judgment has noted that the following facts were accepted by the departmental authorities :
"1. The dealer manufactured and sold refrigerators.
2. These refrigerators were sold with the trade marks of
'Kelvinator', 'Leonard' and 'G.;;m'.
3. The sale of each brand was made through a separate
distributor appointed for this purpose.
4. The manner of movement is Jaid down· in cl:iusc 6 pf
Spencer's agreement and c!ause 8 of Blul) .Siar and General
Equipment Merchants agreements.
5. The,dealer i~ bound to sell a 'Kelvinator' to Spencers,
a 'Leonard' to Blue Star and a 'Gem' to General Equipment
Merchants.
6. That refrigerators were exported outside India.
7. The price of the refrigerators is fixed as mutually agreed
upon from time to time.
8. The property in goods passes at Delhi after delivery.
9. The prices are not settled for individual machine bu:
periodically.
10. The purchase orders are placed by the three distt·ibutors after the goods reach the head office at Delhi."
It has further been found by- the High Court that the appell~nt. had
asserted the following facts and. the assertion of the appellant was nei·
!her rejec~ by the departmental authorities nor was it dealt with in
the respective orders :
"1. That after the goods are manufactured in the factory
an excise clearance pass is obtained after payment of excise
duty for the transport of goods from the factory to the company's godown in Delhi. The excise pass is always for move·
ment of goods in favour of self.
2. That during the transport of the goods from Faridaba<l
to Delhi, the oc•mi at the barrier is paid by the Company.
3. That at destination the goods are received by com·
pany's staff and taktn in their goqown.
4. That in pursuance of the said orders Delhi staff giv.;;
delivery of the goods at Delhi to the customer under a challan
prepared at Delhi.
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SUFREME COURT REPORTS
[ 1974] 1 s.c.R.
5. 11rnt thereafter the bill is raised from Delhi and the
J'
price of the goods is received by the Company at Delhi and
deposited in company's account in its Delhi bank.
6. That all that the assessee does is to manufacture refrigerators and they are branded for the purpose of sale and
distribution."
In the face of the facts of the present case, we find it difficult to.
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hold that the sale of refrigerators by the appellant to the three distributors took place at Faridabad. We are also unable to ·agr~ with the
High Court that the distribution agreements constituted agreements of
sale. It is noteworthy in this context to observe that the number of
l'Cfrigerators which were to be purchased by each of the distributors
was not specified in the distribution agreements, nor did the agreements
1
contain the price which was to be charged for each refrigerator. AcC
cording to the agreement dated April 26, 1965 the appellant undertook
to sell and the distributors undertook to purchase the products of the
appellant "'as mutually agreed upon from time to time"
It is, there'
fore, plain that sales by the appellant company ·to the .distributor refered to in the distribution agreement dated April 26, 1965 depended
upon_Jhe future agreement between the parties from time to time. Disti:ibution agreements dated September 15, 1965 and December 11,
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1965 no doubt mentioned the minimum number of Leonarc and Gem
refrigerators which had been agreed to be purchased by the distributors;
the exact (!Uniber of refrigerators to be sold by the appellant to
these two distributors was still left to volition of the appellant. The
appellant company, it was also mentioned, would incur no liability if
it was unable to supply the i;uaranteed minimum number of refrigerators. The mode of d.ealings between the parties was that subsequent
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to the distribution agreements, orders were placed by the distributors
with the appellant after the refrigerators had reached the appellant's
sale office and godown in Delhi. The price of the refrigerators was
also to be mutually agreed upon from time to time. It is plain that it
is the orders which were placed in Delhi by the distributors and the
acceptance thereof by the appellant that resulted in mutual agreement
of sale. It was, in our opinion, the mutual agreement 'between the parF
ties at the .time of the placing of the order by the distributor with the
appellant which constituted the contract of sale and not the distribution agreement. The distribution agreement with each distributor l>rovided the framework within which the different contracts of saie were
entered into by the distributor with the appellant. This circumstance
should not make us lose sight of the fact that the distribution agreements and the subsequent contracts of sale were distinct transactions. ' Q
We are not impressed by Mr. Tarkunde's argument that under agreement dated April 26, 1965 Spencer & Co. was bound to purchase all
the products of the a;ipellant company. Spencer & Co. undertook to
buy the products manufactured by the appellant company subject to
the stipulation contained in the words "as mutually agreed upon from
time to time". Had it been the intention of the parties that Spencer . B
~ Co. was bound to purchase all products manufactured by the· appellant" company irrespective of any future agreement between the parties, the words "as mutually agreed upon from time to time" in clause
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1 of agreement dated April 26, 1965 would lose all significance. Jt
would nol M:ve also in that event been possible for the appellant to
enter into the other two distribution agreements of September 15, 1965
and December 11, 1965 regarding Leonard and Gem refrigerators which
were manufactured by the appellant. The fact that the appellant was
in a position to export its products to foreign countries during the assess·
ment year in question also shows that there was no agreement betweerr
the parties that the appellant was bound to sell and Spencer & Co. was
bound to purchnse all products manufactured by the appellant.
The argument that the sale of refrigerators to each of the distribu·
tors took place at Faridabad and that it was at Faridabad that the re·
fri~rato~ were appropriated towards the agreement with each of the
three.