Return of defective goods under the original contract is not an inter-State sale when goods are rejected and sent back to the seller.

Return of defective goods by a dealer to the original manufacturer was not treated as an inter-State sale liable to tax. The transaction had to be tested under the Central Sales Tax Act, 1956, and the Sale of Goods Act, 1930, rather than the Bombay Sales Tax Act, 1959. Because the return occurred under the original contract of sale and the accompanying guarantee, and the buyers had no reasonable opportunity to examine the goods in the trade context, the goods were treated as rejected and returned under the original contract. Local turnover rules could not recharacterise that return as a fresh sale.

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Issues: Whether the return of defective goods by a dealer to the manufacturer amounted to inter-State sales liable to tax.

Analysis: The question had to be determined by reference to the definition of sale under the Central Sales Tax Act, 1956, and not by the Bombay Sales Tax Act, 1959. The return of goods by the dealer to the manufacturer was in pursuance of the original contract of sale and the guarantee accompanying the goods, which was meant for the ultimate purchaser. The buyers had no reasonable opportunity of examining the goods in the circumstances of the trade, and the return of defective goods within the contractual period could not be treated as a fresh sale merely because the goods were returned after the period mentioned in the local turnover rule. Sections 41 and 42 of the Sale of Goods Act, 1930 supported the conclusion that the goods were rejected and returned under the original contract, and the taxing authorities could not recharacterise that return as a sale.

Conclusion: The return of the defective goods did not amount to inter-State sales, and the reference was answered in the negative in favour of the assessee.

Ratio Decidendi: A return of defective goods to the original seller under the contract of sale is not a sale in the course of inter-State trade merely because local turnover rules prescribe a different period for deduction of returned goods; the transaction must be tested under the governing sales law and the factual acceptance or rejection of goods.

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