Article 286 limits State sales tax, but sufficient territorial nexus still supports taxation outside its constitutional bars.

Article 286 was construed as limiting State taxing power only for sales outside the State, in the course of import or export, or in inter-State trade, while the Explanation was treated as a confined legal fiction. Sales not proved to fall within the constitutional exemption remained taxable under the Madras General Sales Tax Act, and the burden of proving entitlement to that exemption lay on the assessee. The judgment also states that the doctrine of sufficient territorial nexus was not abolished after the Constitution; it continued to support taxation of sales not barred by Article 286, operating harmoniously with the statutory definition of sale.

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Issues: (i) Whether sales falling within the definition of sale under the Madras General Sales Tax Act and not proved to be outside sales within the meaning of Article 286(1)(a) of the Constitution could be taxed under the Act. (ii) Whether, after the commencement of the Constitution, the State could levy tax on sales and purchases on the basis of the doctrine of sufficient territorial nexus as embodied in the statutory definition of sale.

Issue (i): Whether sales falling within the definition of sale under the Madras General Sales Tax Act and not proved to be outside sales within the meaning of Article 286(1)(a) of the Constitution could be taxed under the Act.

Analysis: Article 286 was construed as imposing restrictions on the taxing power of the State, but only in respect of sales that were outside the State, in the course of import or export, or in the course of inter-State trade or commerce. The Explanation to Article 286(1)(a) was treated as a limited legal fiction, confined to the purpose for which it was created. Where the assessee failed to establish that the goods were delivered as a direct result of the sale for consumption in another State, the exemption under the Explanation was not available. On the facts of the first batch, the contract, delivery of possession, endorsement of railway receipts, and receipt of consideration were all completed within the State, so the transactions were inside sales and not protected by Article 286(1)(a). For the remaining batch, the absence of evidence on the essential facts justified denial of the exemption at that stage, though a further opportunity to adduce evidence was directed in some matters.

Conclusion: Sales not proved to be outside sales under Article 286(1)(a) were taxable under the Act, and the burden to establish the exemption lay on the assessee.

Issue (ii): Whether, after the commencement of the Constitution, the State could levy tax on sales and purchases on the basis of the doctrine of sufficient territorial nexus as embodied in the statutory definition of sale.

Analysis: The judgment held that the power to tax sales derived from the State's legislative competence under Article 246(3) read with Entry 54 of List II, and not from Article 286. The doctrine of territorial nexus continued to apply to sales not hit by the constitutional bans. Article 286 did not extinguish the nexus theory altogether; rather, it restricted its operation only within its own field. The statutory provisions were therefore read harmoniously so that sales falling outside Article 286 could still be taxed on the basis of sufficient territorial connection.

Conclusion: The State remained competent to levy sales tax on transactions supported by sufficient territorial nexus, so long as they were not barred by Article 286.

Final Conclusion: The reference was answered in favour of the revenue on the constitutional issues, the revision cases were allowed in part, some tax assessments were restored, and some matters were remanded for fresh evidence on the claimed exemption.

Ratio Decidendi: Article 286 imposes restrictions on State taxing power but does not abolish the doctrine of sufficient territorial nexus for transactions outside its prohibitions; the assessee must prove entitlement to the constitutional exemption.

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