1980 (4) TMI 278 - SC - VAT / Sales Tax

Coffee Board cannot demand contingency deposits or buyer agreements before auction participation under Sales Tax Act section 5(3)

Consolidated Coffee Ltd. Versus Coffee Board, Bangalore (and other cases)

The SC partially allowed writ petitions challenging a Coffee Board circular requiring registered exporters to furnish contingency deposits or bank ... Maintainability of the writ petitions against the Coffee Board - Constitutional validity of section 5(3), a provision newly inserted in the Central Sales Tax Act, 1956, by an Amending Act (103 of 1976) - validity of a circular dated 7th February, 1977, issued by the Coffee Board - requirement to the registered exporters of coffee to furnish contingency deposits or bank guarantees equal to the amount of sales tax in respect of the exempted sales under the said section 5(3) - What is the true import of section 64(2) and whether section 64 is subject to a contract to the contrary? HELD THAT:- The fact that the payment to the defaulting buyer is limited to the actual sale price paid by him and that the surplus if any reverts to the Coffee Board clearly shows that under clause 31 upon seizure the property reverts back to the Coffee Board. In our view, clause 31 properly read amounts to a defeasance clause and nothing more, especially when it is clear that property in the coffee sold at auction passes to the buyer under clauses 19 and 20 immediately upon payment of price, weighment and setting apart of the coffee for delivery to the buyer. Once the property has passed there would be no question of reserving any right of disposal over the same to the Coffee Board within the meaning of section 25(1) of the Sale of Goods Act. It will be noticed that though on the question of the passing of the property the factual material, in the form of affidavit of the Chief Coffee Marketing Officer (on the point whether the lots exposed at the auctions are specific and ascertained goods or not) and several documents executed by the registered exporters in favour of their bankers to obtain packing and other credit facilities, was placed before us, we have not gone into the factual aspects at all and we have reached our conclusion on the point purely on the basis of construction of the relevant auction conditions from which primarily the intention of the parties is to be gathered. It is only when a clear intention in that behalf is not deducible from the terms and conditions that other factors such as the course of dealings and the conduct of the parties assume relevance. Having regard to the discussion it is clear to us that in the penultimate sales (sales of coffee effected to the registered exporters at export auctions conducted by the Coffee Board) the property in the coffee sold thereat passes to the buyer immediately upon payment of full price, weighment and setting apart of the coffee for delivery to the buyer under clauses 19 and 20 of the auction conditions and it would be at this stage, i.e., just before this stage is reached that the agreement with or order from a foreign buyer must be available or produced in order to attract section 5(3) of the Central Sales Tax Act, 1956. In the result the writ petitions are partly allowed. The impugned circular dated 7th February, 1977, to the extent to which it insists on production of an agreement with or an order from a foreign buyer from the registered exporters before participating in export auctions is quashed; it is also quashed hereafter to the extent to which it requires the registered exporters to make contingency deposits or furnish bank guarantees out of abundant caution inasmuch as such requirement would be unnecessary in view of our authoritative pronouncement. The Coffee Board may, if so advised, modify its circular or issue an appropriate circular requiring the production of an agreement with or an order from a foreign buyer from the registered exporters just before the property in the coffee sold at such auctions passes under clauses 19 and 20 of the auction conditions. As regards past dealings and transactions, final assessment, if any, made by the taxing authorities as well as recoveries if made thereunder contrary to the view expressed by us above deserve to be set aside and reassessments made and the concerned State Governments will direct their taxing authorities to do the needful and further direct the refund of recoveries made to the Coffee Board which in its turn will refund the same to the concerned registered exporters. Assessments or recoveries if made in conformity with our judgment need not be disturbed. Similarly contingency deposits or bank guarantees already obtained by the Coffee Board from the registered exporters, if they are contrary to our judgment, these will be refunded or released forthwith, as the case may be, by the Coffee Board. Petitions Partly allowed. Issues Involved:1. Maintainability of the writ petitions against the Coffee Board.2. Constitutional validity of section 5(3) of the Central Sales Tax Act, 1956.3. Proper construction of section 5(3) of the Central Sales Tax Act, 1956.4. Point of time at which the property in coffee sold at export auctions conducted by the Coffee Board passes to the registered exporters.Detailed Analysis:1. Maintainability of the Writ Petitions Against the Coffee Board:The preliminary objection raised by the Coffee Board was that no writ would lie against it challenging its circular dated 7th February, 1977, as it was engaged in a commercial activity and had the right to lay down terms and conditions for such sales. However, during the hearing, the learned Attorney-General for the Coffee Board did not press this objection, acknowledging the need for an authoritative decision on the proper construction of section 5(3). Consequently, the Court did not delve into this issue further and focused on the remaining questions.2. Constitutional Validity of Section 5(3) of the Central Sales Tax Act, 1956:The contention was that section 5(3) merely enacts an artificial rule or fiction and does not lay down any principle for determining when a sale takes place in the course of export, thus being beyond the power conferred on Parliament by article 286(2) of the Constitution. The Court rejected this argument, stating that the word 'deemed' in section 5(3) was used to impose an artificial construction and did not create a legal fiction. The provision was seen as formulating a principle of general applicability to penultimate sales that satisfy specified conditions. The Court concluded that section 5(3) was within the power conferred by article 286(2) and was not ultra vires.3. Proper Construction of Section 5(3) of the Central Sales Tax Act, 1956:The main issue was whether the 'agreement or order for or in relation to such export' referred to an agreement with a foreign buyer or included any binding agreement to export with a local party. The Court held that the expression 'the agreement' in section 5(3) referred to an agreement with a foreign buyer. This conclusion was drawn from the language of the statute, the use of the definite article 'the' before 'agreement,' and the context of the provision. The Court also considered the mischief rule, noting that the amendment aimed to address difficulties arising from previous interpretations of section 5(1) by extending the exemption to penultimate sales that immediately precede the final export sale, provided they satisfy certain conditions.4. Point of Time at Which the Property in Coffee Sold at Export Auctions Passes to the Registered Exporters:The Court examined whether the property in coffee sold at export auctions conducted by the Coffee Board passed to the registered exporters at the fall of the hammer, upon payment of the price, weighment, and setting apart for delivery, or after shipment. The Court held that section 64(2) of the Sale of Goods Act did not deal with the passing of property but with the completion of the contract of sale. The auction conditions, particularly clauses 19 and 20, indicated that the property passed to the buyer upon payment of the price, weighment, and setting apart for delivery. Clause 31, which allowed the Coffee Board to seize unexported coffee, was seen as a defeasance clause rather than a reservation of the right of disposal. The Court concluded that the property in the coffee passed to the buyer immediately upon payment of the price, weighment, and setting apart for delivery.Conclusion:The writ petitions were partly allowed. The impugned circular dated 7th February, 1977, was quashed to the extent that it insisted on the production of an agreement with or an order from a foreign buyer before participating in export auctions and required contingency deposits or bank guarantees. The Coffee Board was directed to modify its circular to require the production of such agreements or orders just before the property in the coffee passed under clauses 19 and 20 of the auction conditions. For past transactions, the concerned State Governments were directed to reassess and refund any recoveries made contrary to the Court's judgment, and the Coffee Board was instructed to release or refund contingency deposits or bank guarantees obtained contrary to the judgment.