Supreme Court clarifies Inter-State Sales Tax: No Time Limit on Delivery for Section 6(2) Benefit in Commercial Taxes Officer vs. Bombay Machinery Store (27 April 2020)

Date of the Judgment: 27 April 2020
Citation: 2020 INSC 347
Judges: Deepak Gupta, J., Aniruddha Bose, J.

Can tax authorities impose a time limit on the delivery of goods for availing tax exemptions on inter-state sales? The Supreme Court of India addressed this crucial question in a batch of appeals, clarifying the scope of Section 6(2) of the Central Sales Tax Act, 1956. The court ruled against the imposition of arbitrary time limits by tax authorities for claiming exemptions on inter-state sales, emphasizing that the law does not specify any such timeframe. This judgment impacts businesses engaged in inter-state trade by ensuring that they are not penalized for delays in taking delivery of goods, as long as the sale occurs during the movement of goods from one state to another. The judgment was delivered by a division bench comprising Justices Deepak Gupta and Aniruddha Bose, with Justice Aniruddha Bose authoring the opinion.

Case Background

The case involves multiple appeals concerning different assessees, but the core issue revolves around the interpretation of Section 6(2) of the Central Sales Tax Act, 1956 (the 1956 Act). The primary case, *Commercial Taxes Officer vs. Bombay Machinery Store*, involves an assessee who purchased goods from outside Rajasthan and sold them within the state. The assessee claimed exemption under Section 6(2) of the 1956 Act, arguing that these were inter-state sales. The tax authorities, however, rejected this claim, arguing that the goods remained in the transporter’s godown for an extended period, thereby constituting a local sale.

The Commercial Tax Officer, Anti-Evasion Circle-I, Kota, imposed tax, interest, and penalty under the Rajasthan Sales Tax Act, 1954, after a survey. The tax authorities argued that the assessee took constructive delivery of the goods after they remained in the transporter’s godown for more than 30 days. This was based on circulars issued by the Commissioner, Commercial Taxes Department, Rajasthan, which stipulated time limits for goods to remain with the carrier. The Deputy Commissioner (Appeals), Commercial Taxes, Kota, allowed the appeals by Bombay Machinery Stores, which was later upheld by the Rajasthan Tax Board. The High Court of Rajasthan also upheld this decision and quashed the circulars. The revenue then appealed to the Supreme Court.

Similar issues were raised in the cases of Unicolour Chemicals Company, where the tax authorities also denied exemptions based on the extended time the goods remained in the transporter’s godown. The High Court, following its decision in the Bombay Machinery Store case, quashed the orders of the tax authorities and invalidated the circulars.

Timeline:

Course of Proceedings

The Commercial Tax Officer, Anti-Evasion Circle-I, Kota, rejected the claim of Bombay Machinery Store for exemption under Section 6(2) of the 1956 Act and imposed tax, interest, and penalty under the Rajasthan Sales Tax Act, 1954. The Deputy Commissioner (Appeals) allowed the appeals, relying on a decision of the Rajasthan Tax Board. The Rajasthan Tax Board upheld the Deputy Commissioner’s decision. The High Court of Rajasthan confirmed the Tax Board’s order and quashed the circulars issued by the Commissioner, Commercial Taxes Department, Rajasthan. The tax authorities then filed appeals before the Supreme Court.

In the case of Unicolour Chemicals Company, the tax authorities also rejected the claim of exemption under Section 6(2) of the 1956 Act. The Deputy Commissioner (Appeals) and the Tax Board upheld the tax authorities’ decision. The High Court, following its decision in the Bombay Machinery Store case, quashed the orders of the tax authorities and invalidated the circulars. The revenue then appealed to the Supreme Court.

Legal Framework

The core legal provisions at the heart of this case are Sections 3 and 6 of the Central Sales Tax Act, 1956. Section 3 defines when a sale or purchase of goods is considered to take place in the course of inter-state trade or commerce. Specifically, it states:

“3. When is a sale or purchase of goods said to take place in the course of inter-State trade or commerce. A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase — (a) occasions the movement of goods from one State to another; or (b) is effected by a transfer of documents of title to the goods during their movement from one State to another.”

Explanation 1 to Section 3 further clarifies:

“Explanation 1 — Where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall, for the purposes of clause (b), be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.”

Section 6 of the 1956 Act deals with the liability to tax on inter-state sales. Sub-section (2) of Section 6 provides an exemption for subsequent sales during the movement of goods from one state to another:

“(2) Notwithstanding anything contained in sub-section (1) or sub-section (1A), where a sale of any goods in the course of inter-State trade or commerce has either occasioned the movement of such goods from one State to another or has been effected by a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods, – (a) to the Government, or (b) to a registered dealer other than the Government, if the goods are of the description referred to in sub-section (3) of section 8, shall be exempt from tax under this Act:”

The court also considered Section 51 of the Sale of Goods Act, 1930, which defines the duration of transit of goods. The relevant portion of Section 51 is as follows:

“51. Duration of transit.—(1) Goods are deemed to be in course of transit from the time when they are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the buyer or his agent in that behalf takes delivery of them from such carrier or other bailee. (3) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent, the transit is at an end and it is immaterial that a further destination for the goods may have been indicated by the buyer.”

Arguments

Revenue’s Arguments:

• The revenue argued that the movement of goods in inter-state sales should not be artificially extended.
• They contended that if goods remain with the transporter for an unreasonable period after reaching the destination, it amounts to “constructive delivery” to the consignee.
• The revenue relied on circulars issued by the Commissioner, Commercial Taxes Department, Rajasthan, which stipulated that if goods remain with the transporter for more than 10 days (later extended to 30 days), it would be considered constructive delivery and the transit would be deemed to have ended.
• They cited the decision of the Delhi High Court in *Arjan Dass Gupta and Brothers vs. Commissioner of Sales Tax, Delhi Administration* [(1980) 45 STC 52 (Delhi)], which supported the concept of constructive delivery.
• The revenue also relied on Section 51 of the Sale of Goods Act, 1930, to argue that the transit ends when the carrier acknowledges holding the goods on behalf of the buyer.

Assessee’s Arguments:

• The assessees argued that the first explanation to Section 3 of the 1956 Act clearly states that the movement of goods terminates when delivery is taken from the carrier.
• They contended that the law does not specify any time limit for taking delivery.
• They argued that the circulars issued by the Commissioner, Commercial Taxes Department, Rajasthan, were illegal and without any legal basis.
• The assessees relied on the decision of the Rajasthan High Court in *Guljag Industries Limited vs. State of Rajasthan & Another* [(2003) 129 STC 3 (Raj.)], which held that the concept of constructive delivery cannot be applied to inter-state sales.
• They argued that there was no acknowledgment by the transporter that they were holding the goods on behalf of the buyer.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether, as a condition of giving the benefit of Section 6(2) of the Central Sales Tax Act, 1956, the tax authorities can impose a limit or timeframe within which delivery of the respective goods has to be taken from a carrier when the goods are delivered to a carrier for transmission in course of inter-state sale.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court disagreed with the interpretation of the Delhi High Court in *Arjan Dass Gupta and Brothers vs. Commissioner of Sales Tax, Delhi Administration* [(1980) 45 STC 52 (Delhi)], stating that the concept of constructive delivery is not applicable to inter-state sales.
• The Supreme Court agreed with the interpretation of the Rajasthan High Court in *Guljag Industries Limited vs. State of Rajasthan & Another* [(2003) 129 STC 3 (Raj.)], which held that the concept of constructive delivery cannot be applied to inter-state sales.
• The Supreme Court interpreted Section 3 of the Central Sales Tax Act, 1956, to mean that the movement of goods terminates when delivery is taken from the carrier, without any time limit.
• The Supreme Court interpreted Section 6(2) of the Central Sales Tax Act, 1956 to provide an exemption for subsequent sales during the movement of goods from one state to another, without any time limit on delivery.
• The Supreme Court found that Section 51 of the Sale of Goods Act, 1930 does not assist the revenue’s case as it requires an acknowledgment by the carrier that they hold the goods on behalf of the buyer, which was not present in these cases.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the plain reading of the first explanation to Section 3 of the Central Sales Tax Act, 1956. The court emphasized that the law clearly states that the movement of goods terminates when delivery is taken from the carrier, without any qualification or time limit. The court also highlighted that tax authorities cannot give their own interpretation to legislative provisions or impose conditions that are not explicitly mentioned in the law. The court rejected the concept of constructive delivery, stating that it was not a proper interpretation of the law.

Fact:Law

Logical Reasoning:

The court rejected the revenue’s argument that the movement of goods should not be artificially extended, stating that the law does not provide for any time limit on taking delivery. The court also rejected the concept of constructive delivery, stating that it was not a proper interpretation of the law. The court emphasized that the first explanation to Section 3 of the 1956 Act clearly states that the movement of goods terminates when delivery is taken from the carrier, without any qualification or time limit. The court also held that the circulars issued by the Commissioner, Commercial Taxes Department, Rajasthan, were illegal and without any legal basis. The court stated that tax authorities cannot give their own interpretation to legislative provisions.

The court’s reasoning was based on a plain reading of the statute, and it emphasized that there is no scope for incorporating any further words to qualify the nature and scope of the expression “delivery” within the said section. The court also stated that if the authorities felt that any assessee or dealer was taking unintended benefit under the provisions of the 1956 Act, then the proper course would be a legislative amendment and not an administrative exercise.

The court quoted from the judgment:

“The said provision does not qualify the term ‘delivery’ with any timeframe within which such delivery shall have to take place. In such circumstances fixing of timeframe by order of the Tax Administration of the State in our opinion would be impermissible.”

“There is no concept of constructive delivery either express or implied in the said provision. On a plain reading of the statute, the movement of the goods, for the purposes of clause (b) of Section 3 of the 1956 Act would terminate only when delivery is taken, having regard to first explanation to that Section.”

“The Tax Administration Authorities cannot give their own interpretation to legislative provisions on the basis of their own perception of trade practice. This administrative exercise, in effect, would result in supplying words to legislative provisions, as if to cure omissions of the legislature.”

There was no minority opinion in this case. The judgment was delivered by a division bench comprising Justices Deepak Gupta and Aniruddha Bose, with Justice Aniruddha Bose authoring the opinion.

Key Takeaways

• Tax authorities cannot impose a time limit for taking delivery of goods in inter-state sales to deny exemptions under Section 6(2) of the Central Sales Tax Act, 1956.
• The concept of “constructive delivery” cannot be applied to inter-state sales under the Central Sales Tax Act, 1956.
• The movement of goods terminates when delivery is taken from the carrier, without any qualification or time limit.
• Tax authorities cannot give their own interpretation to legislative provisions or impose conditions that are not explicitly mentioned in the law.
• Businesses engaged in inter-state trade are not penalized for delays in taking delivery of goods, as long as the sale occurs during the movement of goods from one state to another.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the movement of goods in inter-state sales terminates when delivery is taken from the carrier, without any time limit. This judgment clarifies the scope of Section 3 and Section 6(2) of the Central Sales Tax Act, 1956, and overrules the interpretation of the Delhi High Court in *Arjan Dass Gupta and Brothers vs. Commissioner of Sales Tax, Delhi Administration* [(1980) 45 STC 52 (Delhi)]. The Supreme Court upheld the view of the Rajasthan High Court in *Guljag Industries Limited vs. State of Rajasthan & Another* [(2003) 129 STC 3 (Raj.)]. This case establishes that tax authorities cannot impose conditions or time limits that are not explicitly stated in the law.

Conclusion

The Supreme Court’s judgment in *Commercial Taxes Officer vs. Bombay Machinery Store* and connected appeals clarifies that tax authorities cannot impose time limits on taking delivery of goods for availing tax exemptions on inter-state sales under Section 6(2) of the Central Sales Tax Act, 1956. The court rejected the concept of constructive delivery and emphasized that the movement of goods terminates when delivery is taken from the carrier, without any time limit. This decision provides relief to businesses engaged in inter-state trade by ensuring that they are not penalized for delays in taking delivery of goods.

Category

Parent Category: Central Sales Tax Act, 1956
Child Category: Section 3, Central Sales Tax Act, 1956
Child Category: Section 6, Central Sales Tax Act, 1956
Parent Category: Sales Tax Law
Child Category: Inter-State Sales
Child Category: Tax Exemption
Parent Category: Goods and Services Tax
Child Category: Place of Supply
Child Category: Interstate Trade

FAQ

Q: What is the main issue in the Commercial Taxes Officer vs. Bombay Machinery Store case?
A: The main issue is whether tax authorities can impose a time limit on the delivery of goods for availing tax exemptions on inter-state sales under Section 6(2) of the Central Sales Tax Act, 1956.

Q: What did the Supreme Court decide regarding the time limit for delivery?
A: The Supreme Court decided that tax authorities cannot impose a time limit for taking delivery of goods in inter-state sales. The movement of goods terminates when delivery is taken from the carrier, without any time limit.

Q: What is “constructive delivery,” and did the Supreme Court accept it?
A: “Constructive delivery” is the concept that if goods remain with the transporter for an extended period, it is deemed that the consignee has taken delivery. The Supreme Court rejected this concept in the context of inter-state sales.

Q: What is Section 6(2) of the Central Sales Tax Act, 1956?
A: Section 6(2) provides an exemption for subsequent sales during the movement of goods from one state to another. The Supreme Court clarified that this exemption is available without any time limit on taking delivery.

Q: What should businesses do to ensure they are not penalized for delays in delivery?
A: Businesses should ensure that the sale occurs during the movement of goods from one state to another and that they take delivery of the goods from the carrier. There is no time limit specified by law, and tax authorities cannot impose one.