Agency of non-resident principal and inter-State sale test limit State sales tax liability under constitutional protection

Section 18 of the Hyderabad General Sales Tax Act treated a resident agent of a non-resident principal as the dealer for tax purposes, and the court applied that deeming fiction because the agreement gave the assessee agency powers over delivery, storage, retention as security, commission, and sale. The plea that the assessee was only a financier was rejected. On Article 286(2), the court held that inter-State protection applies only where movement of goods across State lines is the direct and necessary result of the contract of sale. Here, the goods were to be delivered within the State and any later movement to Bombay arose from separate arrangements, so the State levy remained valid.

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Issues: (i) Whether the assessee was an agent of a non-resident principal and was liable to be assessed under section 18 of the Hyderabad General Sales Tax Act. (ii) Whether the purchases and subsequent movement of goods were protected by Article 286(2) of the Constitution of India as transactions in the course of inter-State trade or commerce.

Issue (i): Whether the assessee was an agent of a non-resident principal and was liable to be assessed under section 18 of the Hyderabad General Sales Tax Act.

Analysis: Section 18 created a deeming fiction by which the resident agent of a non-resident carrying on business in Hyderabad State is treated as the dealer for the purposes of the Act. The agreement showed that the assessee was appointed to pay the balance of the purchase price, take delivery of the castor seeds, store them on behalf of the principal, retain the goods as security, receive commission, and exercise rights of pledge, lien and sale. Those powers were consistent with agency and not inconsistent with the existence of financing arrangements. The plea that the assessee was merely a financier was therefore not sustainable.

Conclusion: The assessee was rightly treated as the agent of a non-resident principal and was liable to assessment under section 18.

Issue (ii): Whether the purchases and subsequent movement of goods were protected by Article 286(2) of the Constitution of India as transactions in the course of inter-State trade or commerce.

Analysis: A sale falls within Article 286(2) only when the movement of goods from one State to another is under the contract of sale and is the direct result of that sale. Here, delivery was to be effected within the State, the sale transaction was complete on delivery, and any later movement of the goods to Bombay depended on independent contractual arrangements between the assessee and the company. Since the inter-State movement was not occasioned by the sale itself, the transaction did not fall within the constitutional prohibition. In any event, the period in question was also covered by the Sales Tax Laws Validation Act.

Conclusion: The transactions were not protected by Article 286(2) and the State levy was valid.

Final Conclusion: The tax revisions failed because the assessee was correctly assessed as agent of a non-resident principal and the disputed sales were not outside the taxing power of the State.

Ratio Decidendi: A sale is in the course of inter-State trade only when the movement of goods across State boundaries is the direct and necessary result of the contract of sale; where subsequent movement depends on a separate arrangement, Article 286(2) has no application.

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