Holding

The purchase of tea by the appellants was the penultimate sale in the course of export and is exempt from sales tax under Section 5(3) of the Central Sales Tax Act, 1956.

Summary

C.T. Ltd. and another, engaged in the tea trade, entered into a contract with the State Trading Corporation (STC) to supply unblended Assam tea to an Iranian buyer. To fulfil this contract they purchased tea from auction brokers. The sales tax authorities demanded payment of sales tax on these purchases. The appellants claimed exemption under Section 5(3) of the Central Sales Tax Act, 1956, arguing that the purchase was the penultimate sale in the export chain. The Taxation Tribunal rejected the claim, holding the purchase was taxable. On appeal, the Supreme Court examined the nature of the contract with STC, the absence of any transfer of title to STC, and the wording of the bill of lading, concluding that the purchase was indeed the penultimate sale and therefore exempt from sales tax. The Court set aside the Tribunal’s order and allowed the appeal.

Issues considered

The purchase of tea by the appellants from auction brokers, in fulfilment of an export contract, is exempt from sales tax under Section 5(3) of the Central Sales Tax Act, 1956.
Whether the contract between the appellants and the State Trading Corporation creates a sale of title to the tea or merely an agency relationship.

Legislation cited

Central Sales Tax Act, 1956s. 5(1), s. 5(3)
Tea Act, 1953s. 17

Subjects

sales taxcentral sales tax actexport exemptionpenultimate saletea exportagency vs saleproperty transferbill of ladingState Trading Corporation

Judgment

C.T. LTD. AND ANR. A
v.
COMMERCIAL TAX OFFICER AND ORS.

OCTOBER 29, 1996

[A.M. AHMADI, CJ., S.P. BHARUCHA AND S.C. SEN, JJ.] B

Sales Tax:

Central Sales Tax Act, 1956: Section 5(3)-Export of tea-Contract
between appellant and State Trading Corporation for supply of Tea-
Purchase of tea by appellants from auction brokers-Sales tax imposed- C
Claim for exemption from payment of sales tax-Rejected by Tribunal-
On appeal, held: the purchase of tea by the appellants at the auction in
faljilment of the export obligation was the penultimate sale in the course
of export-Hence exempt from payment of sales tax.
D
The appellants, engaged in tea business, had a contract with the
State Trading Corporation (S.T.C.) for supply of tea. This was in
pursuance to a contract entered into between the S.T.C. and
Government Trading Corporation of Iran. The appellants purchased
tea from tea auctions for fulfilling the aforesaid contracts. The sales
tax authorities issued notices requiring the appellants to pay sales tax E
upon the purchase of tea from the auction brokers. The appellants
filed writ petition before the High Court for a declaration that sale of
tea was exempted from payment of sales tax under Section 5(3) of the
Central Sales Tax Act, 1956. On transfer of the case to the Taxation
Tribunal, the Tribunal held that the sale of the tea by the auction
brokers to the appellants were not exempt from the levy of sales tax F
under Section 5(3) of the Act. Hence, the present appeal.

The contention for the appellants was that under the terms of
the contract between the appellants and S. T.C., the latter was merely
the agent of the appellants and there was no sale of tea by the G

-.... appellants to S.T.C. thereunder. The sale of tea was by the appellants
to the Iranian buyer. The purchase of tea by the appellants at the
auction was, therefore, the penultimate sale in the course of export
and, therefore, exempt from levy of sales tax under s.5 (3) of the Act.
It was also contended that in the contract between S. T.C. and
appellants, the appellants were referred to as the "Shipper" and H
99
100 SUPREME COURT REPORTS [1996] SUPP. 8 S.C.R.

A Iranian buyer as the "buyer".
~._

The contention of the respondent was that the export sale covered
by section 5(1) of the Act was the sale of the tea by S.T.C. to the
Iranian buyer, the penultimate sale in the course of export was the
sale of the tea by the appellants to S. T.C. which was covered by the
B provisions of Section 5 (3); therefore, the purchase by the appellants
of the tea at the auction was liable to sales tax. It was further contended
that the Bill of Lading had been "ndorsed in favour of S.T.C. and
that the property in the tea had passed to the S.T.C. It was also
contended that all documents were required to be prepared by the
appellants marked "Ale STC" in all relevant places and these were to
c be forwarded to S.T.C. for nego~ation.

Allowing the appeal, this Court

HELD : I.I. The purchase of the tea by the appellants at the
D auctions in fulfilment of the export obligation to the Iranian buyer
was the penultimate sale in the course of export and covered by the
terms of section 5(3) of the Central Sales Tax Act, 1956. Thus, it was
exempt from payment of sales t~x. [107-H]

1.2. The manner in which the contract between the appellants
E and S. T.C. was executed does not indicate that there was a transfer of
the property in the tea by the appellants to S. T.C. before it was
transferred to the Iranian buyer,. There was indication to the contrary,
particularly, the requirement that the appellants should prepare all
documents required for negotiation and the "seller's official invoice.•.
F should be in 5 copies". The requirement that the words "Ale STC" be
used was only to enable the Iranian buyer to identify the tea as being
sent in fulfilment of the obligation under the contract between S.T.C.
and itself. [107-D, C]

1.3. The Tea Export License for the tea was that of the appellants.
G The invoice of the appellants showed the Iranian buyer against the
column "Sold To", and no objection in this regard was raised by
......
S.T.C. The duty draw back benefit accrued entirely to the appellants.
The Bill of Lading issued by the Irano-Hind Shipping Co. Ltd. showed
the Iranian buyer's Teheran bank as consignee of the tea shipped by
H the appellants. (107-D-E]
C.T. LTD. v. COMMERCIAL TAXOFFICER[BHARUCHA,J.) 101

1.4. There was no endorsement on the Bill of Lading in favour A
of S. T.C. that would suggest transference to it of title in the tea. The
typing of the words "Ale, the State Trading Corporation of India"
below the name and address of the appellants against the column
"Shipper" did not constitute an endorsement. There was no
endorsement upon the Bill of Lading signed by or on behalf of the
Teheran bank, which was the consignee, or the Iranian buyer.[107-F] B

The Bhopal Sugar Industries Ltd. v. Sales Tax Officer. Bhopal, 40
STC 42 and Commissioner of Sales Tax, UP v. Bi~hamber Singh Layaq
Ram, 47 STC 80, cited.

Mod. Serajuddin v. The State of Orissa, 36 STC 136, held C
inapplicable.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3279 of
1990.
D
From the Judgment and Order dated 5.4.90 of the West Bengal
Taxation Tribunal at Calcutta in R.N. No. 484 (T) of 1989.

Raja Ram Aggarwal and Ms. Radha Rangaswamy for the Appellants.

N.S. Hedge, T. Ramachandran, Dilip Sinha, D. Krishnan and J.R. E
Das for Sinha & Das for the Respondents.

The Judgment of the Court was delivered by

BHARUCHA, J. These are appeals from the judgments and orders F
of the West Bengal Taxation Tribunal to which writ petitions filed in the
Calcutta High Court by the appellants were transferred.

The position being common, the facts that are referred to are the
facts of C.A. No. 1622 of 1990, where Hindustan Sheet Metal Limited is G
..... the appellant.

The State Trading Corporation entered into a contract with the
Government Trading Corporation of Iran whereunder 550 metric tonnes
(5% more or less) of unblended Assam tea were to be supplied. In tum,
S.T.C. entered into a contract on 4th August, 1986, with the appellants for H
102 SUPREME COURT REPORTS [l 996] SUPP. 8 S.C.R.

A the tea, to which a copy of S.T.C.'s contract with the Iranian buyer was
annexed.,

Pursuant to the contract between S.T.C. and the appellants, the
appellants purchased from tea auctions the tea to be supplied under the
aforesaid contracts. The deliveries of the tea were made to the Iranian
B buyer under the aforesaid contracts. In June, !987, the appellants received
letters from the auction brokers from whom the tea was purchased which
stated that the auction brokers had received notices from the respondent
Sales Tax authorities requiring the appellants to pay sales tax upon the
purchases oftea from the auction brokers. The appellants filed the writ
petition praying for a declaration that the sale of the tea by the auction
C brokers to the appellants was exempt from payment of sales tax under the
provisions of Section 5 (3) of the Central Sales Tax Act, 1956. The writ
petition was transferred for hearing to the West Bengal Taxation Tribunal.
The Tribunal, after hearing the parties, came to the conclusion that the
sales of the tea by the auction brokers to the appellants were not exempt
D from the levy of sales tax under Section 5 (3). Hence, the appeal.

Section 5, sub-sections (I) and (3) read thus:

"5. When a sale or purchase of goods said to take place in the
course of import or export. -( 1) A sale or purchase of goods
E shall be deemed to take place in the course of the export of the
goods out of the territory of India only if the sale or purchase
either occasions such export or is effected by a transfer of
documents of title to the goods after the goods have crossed the
customs frontiers of India.
F
(3) Notwithstanding anything contained in sub-section (!), the
last sale or purchase of any goods preceding the sale or purchase
occasioning the export of those goods out of the territory of
India shall also be deemed to be in the course of such export, if

-·
such last sale or purchase took place after, and was for the purpose
G of complying with, the agreement or order for or in relation to
such export."

Learned counsel for the appellants drew our attention to the averments
of the appellants in the Special Leave Petition, which had also been made
H in the proceedings before the Tribunal, and were uncontroverted, to the
C.T. LTD. v. COMMERCIAL TAXOFFICER[BHARUCHA,J.] 103

effectthat S.T.C. had introduced what was called the 'consortium approach' A
in regard to the export of tea from India so as to avoid unhealthy
competition between Indian exporters and to obtain the maximum business
from Government organisations in foreign countries, like the Iranian buyer,
the Government Trading Corporation of Iran. Thereunder, S.T.C. was to
act as the agent of the tea exporters for securing orders on their behalf and
it was to negotiate on .the basis of the individual tea samples of and the B
prices indicated ·by each exporter. It was in pursuance of this approach that
the contracts between S.T.C. and the Iranian buyer and the appellants and
S.T.C. had been entered into; the Iranian buyer had inspected the appellants'
samples and accepted the appellants' price.

Our attention was drawn by learned counsel to the contract between C
S.T.C. and the appellants, wherein the appellants were referred to as the
"shipper" and the Iranian buyer as the "buyer". The contract recited that
S.T.C. had entrusted the appellants with "the obligation of supply and
shipment of 550.000 m/Tonnes unblended Assam Tea" and the shipper
had agreed to perform such obligation in terms of the contract between
S.T.C. and the Iranian buyer. The tea should be "as per the sample approved D
by the foreign buyer". The price was quoted and was said to be "inclusive
of STC's service charge of I% of FOB value of the coritracted quantity
and the same will be recovered from the realisation of export proceeds.
All other charges including Bank charges for negotiation, LC advising,
amendment charges, etc. were to the account of the appellants". Markings
·would be as required by the Iranian buyer, but the STC's logo would be E
printed on each tea chest. The Iranian buyer's representatives and surveyors,
including STC's personnel, would have access to visit and inspect all phases
of the appellants' work. The Iranian buyer would also have the right to
send its representatives to the loading point or port for surveying the quantity
and quality of tea and all necessary documents would be counter-signed F
by them and inserted in the Letter of Credit. The Iranian buyer would
open an irrevocable, non-transferable, non divisible and non-confirmed
Letter of Credit in favour of S.T.C., payable against shipping documents,
including a full set of clean on board Bills of Lading issued or endorsed to
the order of the opening bank in terms of the Letter of Credit. Each invoice
was required to contain the necessary proportion of different grades of tea G
required to maintain the original samples submitted by the appellants and
the appellants were required to inform the Iranian buyer as also the surveyors
of the required proportions of tea for each standard.
The contract stated, "All the documents required for negotiation
should be prepared in 4 copies except seller's official invoice
which should be in 5 copies". (Emphasis supplied.) Payment would be H
104 SUPREMECOURTREPORTS[l996] SCPP.8 S.C.R.

A released to the appellants after negotiation of documents and realisation of ..
the proceeds by STC's bankers on the same terms and conditions urider
which the proceeds had been received by S.T.C. from their bank. If the
documents were not in strict confirmity with the terms of
the Letter of Credit, the payments to the appellants would be released
under reserve through their bankers. All documents would be prepared by
B the appellants marked "Ale STC" in all relevant places and forwarded to
S.T.C. for negotiation immediately after shipment. Export benefits arising
from the export of the tea under the contract would accrue to the appellant's
account fully and the S.T.C. would have no share therein. The conditions
stipulated in the Letter of Credit would form an integral part of the contract
between S.T.C. and the appellants. The appellants indemnified STC and
C would keep it indemnified against all taxes, claims, demands, action,
losses, costs, expenses, etc. arising out of or in respect of their contract
and the contract between S.T.C. and the Iranian buyer. Disputes between
the Iranian buyer and S.T.C. arising out of the export contract would be
solved amicably, as far as possible, in consultation with the appellants and
any agreement arrived by S. T.C. thereafter would be final and binding on
D the appellants; otherwise, such disputes would be finally and exclusively
subject to the jurisdiction of Iranian courts and law. Disputes between
S.T.C. and the appellants would also be settled amicably through
negotiations; otherwise, in the manner laid down in the arbitration clause
in the contract. ·

E Learned counsel for the appellants submitted that under the terms of
the contract between the appellants and S.T.C, S.T.C. was merely the
agent of the appellants and there was no sale of the tea by the appellants to
S.T.C thereunder. The sale of the tea was by the appellants to the Iranian
buyer.

F Learned counsel cited from the judgment of this Court in the case of
.The Bhopal Sugar Industries Ltd. v. Sales Tax Officer, Bhopal, 40 S.T.C.
42, the following :

"It is well-settled that while interpreting the terms of the
agreement, the Court has to look to the substance rather than
the form of it. The mere fact that the word "agent" or "agency"
is used or the words "buyer" and "seller" are used to describe
the status of the parties concerned is not sufficient to lead to the
irresistible inference that the parties did in fact intend that the
said status would be conferred. Thus the mere formal description
H of a person as an agent or a buyer is not conclusive, unless the
C.T. LTD. v. COMMERCIAL TAXOFFICER[BHARUCHA,J.] 105

context shows that the parties clearly intended to treat a buyer A
as a buyer and not as an agent. Learned counsel for the appellant
relied on several circumstances to show that on a proper
· construction of the agreement it could not, but be, held to be a
contract of sale. Learned counsel strongly relied on a decision
of this Court in Sri Tirumala Venkateswara Timber and Bamboo
Firm v. Commercial Tax Officer, Rajahmundry, (1968)21 S.T.C. B
312 at 316 (S.C.), where this Court held the transaction to be a
sale in almost similar circumstances. Speaking for the Court,
Ramaswami, J., observed as follow• :

"As a matter of law there is a distinction between a contract of
sale and a contract of agency by which the agent is authorised to C
sell or buy on behalf of the principal and make over either the
sale proceeds or the goods to the principal. The essence of a
contract of sale is the transfer of title to the goods for a price
paid or promised to be paid. The transferee in such a case is
liable to the transferor as a debtor for the price to be paid and
not as agent for the proceeds of the sale. The essence of agency D
to sell is the delivery of the goods to a person who is to sell
them, not as his own property but as the property of the principal
who continues to be the owner of the goods and·will therefore
be liable to account for the sale proceeds."
E
It is clear from the observations made by this Court that the true
relationship of the parties in such a case has to be gathered from the nature
of the contract, its terms and conditions, and the terminology used by the
parties is not decisive of the said relationship."

In Commissioner ofSales Tax, UP. v. Bishamber Singh Layaq Ram, F
47 S.T.C. 80, this Court had said :

"The crucial test is whether the agent has any personal interest
of his own when he enters into the transaction or whether that
interest is limited to his commission agency charges and certain G
out of pocket expenses, and in the event of any loss his right to
be indemnified by the principal."

Learned counsel for the appellants drew our attention to the Tea
Export License held by the appellants, which was specific for the export
of 550 M/tonnes of tea to Iran. This license was requisite under the H
106 SUPREME COURT REPORTS [1996] SUPP. 8 S.C.R.

A provisions of Section 17 of the Tea Act, 1953. Our attention was drawn to
the invoice issued by the appellants, which stated that the tea had been sold
to the foreign buyers and it was signed by the appellants after stating
"A/c. The State Trading Corporation of India Ltd." The Bill of Lading
issued in respect of the tea by the Jrano-Hind Shipping Company Ltd.
showed the appellants to be the shippers; the words "Ale. The State Trading
B Corporation of India Ltd." were typed immediately after the appellant's
name and address in the column "Shipper" only to identify the tea with
the contract between the Iranian buyer and S.T.C. Learned counsel drew
our attention to the fact that the advantage of duty draw back in respect of
the aforesaid contracts had been received by the appellants. Jn his
submission, the property in the tea had not passed from the appellants to
C S.T.C. The purchase of the tea by the appellants at the auctions was,
therefore, the penultimate sale in the course of export and, therefore, exempt
from the levy of sales tax by the provisions of Section 5 (3).

Learned counsel for the respondent Sales tax authorities submitted
that the export sales covered by Section 5(1) was the sale of the tea
D by S.T.C. to the Iranian buyer; the penultimate sale in the course
of export was the sale of the tea by the appellant to S.T.C., which
was covered by the provisions of Section 5(3); therefore, the
purchase by the appellants of the tea at the auctions was eligible to sales
tax.
E
Learned counsel for the respondents drew our attention to the
judgment of this Court in Mod. Serajuddin v. The State o/Orissa, 36 STC
136. This was a case in which, admittedly, the Indian company had sold
the goods to S. T.C .. The situation, therefore, was entirely different and
the judgment has no application to the present case, where the contention
F on behalf of the appellants is that S.T.C. was only the agent of the
appellants. We should also note that the judgment in Mod. Serajuddin's
case Jed to the introduction of sub-section (3) in Section 5 (see Statement
of Objects and Reasons thereof) so that the judgment does not reflect the
law as it now stands.
G .._.
Learned counsel for the respondents pointed out that in the contract
between the appellants and S.T.C., the appellants were referred to as the
shipper not as the seller, whereas the Iranian buyer was referred to as the
buyer. Emphasis was laid upon the fact that all documents were required
to be prepared by the appellants marked "Ale STC" in all relevant places
H and these were to be forwarded to the S.T.C for negotiation. It was pointed
C.T. LTD. v. COMMERCIAL TAXOFFICER[BHARUCHA,J.] !07

out that the contract contemplated disputes between the Iranian buyer and A
S.T.C. and not between the Iranian buyer and the appellants. Learned
.... -I counsel for the respondents referred to the Bill of Lading and submitted
that it had been endorsed in favour of S.T.C. and that, by reason thereof,
the property in the tea had passed to the S.T.C. The endorsement was by
the typing of the words "A/c. The State Trading Corporation of India
Ltd." after the name and address of the appellants in the column "Shipper" B
upon the Bill of Lading.

In our view, no term in the contract between the appellants and
S.T.C. clearly contemplates a sale, that is, the transfer of property in the
tea from the appellants to S.T.C. Such indication as there is to the contrary,
particularly the requirement that the appellants should prepare all documents c
required for negotiation and the "seller's official invoice.... should be in 5
copies". The requirement that the words "Ale STC" be used was only to
enaple the Iranian buyer to identify the tea as being sent in fulfilment of
the obligation under the contract between S.T.C. and itself.

The manner in which the contract between the appellants and S.T.C.
D
was executed reinforces our view. The Tea Export License for the tea was
that of the appellants. The invoice of the appellants showed the Iranian
buyer against the column, "Sold To", and rio objection in this regard was
raised by S.T.C. The duty draw back benefit accrued entirely to the
appellants. The Bill of Lading issued by the Irano-Hind Shipping Co. E
Ltd. showed the Iranian buyer's Teheran bank as consignee of the tea
shipped by the appellants.

Certainly, there is no endorsement on the Bill of Lading in favour of
S.T.C. that would suggest transference to it of title in the tea. The typing
of the words "A/C The State Trading Corporation of India" below the F
name and address of the appellants against the column "Shipper" does not
constitute an endorsement. There was no endorsement upon the Bill of
Lading signed by or on behalf of the Teheran bank, which is the consignee,
or the Iranian buyer.
G
There is, therefore, nothing in the contract between the appellants
_...
and S.T.C. or in the manner of its execution that establishes that there was
a transfer of the property in the tea by the appellants to S.T.C. before it
was transferred to the Iranian buyer. Hence, the purchase of the tea by the
appellants at the auctions in fulfilment of the export obligation to the
Iranian buyer was the penultimate sale in the course of export and covered H
108 SUPREME COURT REPORTS [1996) SUPP. 8 S.C.R.

A by the terms of Section 5 (3). It was accordingly, exempt from the payment
of sales tax.

In the result, the appeals succeed and are allowed. The judgment and
order of the Tribunal is set aside and the rule in the writ petitions filed by
the appellants is made absolute.
B
There shall be no order as to costs.

S.V.K.I. Appeals allowed.