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Tata Iron & Steel Company vs. State of Bihar (1958)

September 7, 2024

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This article has been written by Pragya Pathak. The objective of this article is to elaborate upon the facts of the case, issues raised, contentions made by the parties, and the judgement passed by the Hon’ble Supreme Court in the case of Tata Iron and Steel Company vs. State of Bihar (1958). This case relates majorly to the issue pertaining to the matter of taxation, territorial nexus and constitutional law. This article discusses these topics, alongside the relevant laws and legal precedents involved.

This article has been published by Shashwat Kaushik.

Table of Contents

Introduction

There are many cases that are considered landmark in the field of tax law in relation to constitutional law, and one such case is Tata Iron & Steel Company vs. State of Bihar (1958). It involves one of the most reputed steel companies till date, Tata Iron and Steel Company (TISCO), as an appellant and the State of Bihar as the respondent. This case arose owing to the Sales Tax Officer not allowing the sales tax deductions claimed by TISCO, which further led to necessary issues such as– the State’s authority to tax, the constitutional validity of a local statute of Bihar and TISCO’s entitlement to certain deductions, etc. In the coming parts of the article, we will be delving into the facts of the case, the issues that arose as a result of the question of facts and law and the related laws that have been discussed and involved in the present factual matrix. The decision given by the Hon’ble court has evolved as a result of the analysis of the laws involved as well as the case laws the bench referred to, to guide their decision on the lines of judicial precedents already in place.

Details of the case

Name of case: Tata Iron & Steel Company vs. State of Bihar

Appellant: Tata Iron and Steel Company (represented by the then Attorney General of India M.C. Setalvad, S. P. Varma and Rajeshwari Prasad)

Respondent: State of Bihar (represented by the then Advocate General for the State of Bihar Mahabir Prasad and R. C. Prasad)

Type of case: Appeal by special leave petition (Civil Appeals Nos. 412 and 413)

Court: Supreme Court of India

Bench:

The then Chief Justice of India Sudhi Ranjan Das
Justice T. L. Venkatarama Das
Justice S. K. Das
Justice A. K. Sarkar
Justice Vivian Bose

Date of judgement: 19/02/1958

Equivalent citations: 1958 AIR 452, 1958 SCR 1355, AIR 1958 SC 452

Background of the case

The case of Tata Iron & Steel Company vs. State of Bihar (1958) deals with the combined matter of constitutional law and taxation law. The issue of application of sales tax in case of inter-state transactions between two parties is presently governed by the Central Sales Tax Act, 1956. However, this case arose due to a state law governing sales tax in the state of Bihar, namely, the Bihar Sales Tax Act, 1947. There was considerable confusion with respect to the authority of the provincial legislature of Bihar to levy sales tax on transactions that were completed outside of the state and the property in the goods dealt with, also transferred to the purchaser situated outside of the state of Bihar. For two periods, the imposition of additional sales tax led to the appellant moving to the court of law and finally filing an appeal to the Supreme Court of India for resolution of the matter.

Facts of the case

The appellant, TISCO, is a steel and iron manufacturing company, globally known for its business. When the case arose, the appellant company operated its business from its factory located in Jamshedpur, Bihar. In accordance with the then Act governing sales tax in the state of Bihar, the Bihar Sales Tax Act, 1947, the appellant company was assessed for sales tax. This Act derived its authority from the Government of India Act, 1935. The appellant company was sending its goods through railways, and the freight charges arising as a result of the same were either paid by the company or were given by the bankers to the purchasers of the goods when they paid the price for the same. The tax assessment was done for two separate periods that entailed a duration of a year each.

In the first period between 01/07/1947 to 31/03/1948, the appellant filed a tax return under Section 12 of the Bihar Sales Tax Act, 1947 for a total sum of Rs. 12,80,15,327 which was the gross turnover of the company for this period. On this, a deduction amounting to Rs. 2,88,60,787 was claimed, as this was the valuable consideration received by the appellant company for the goods manufactured in Jamshedpur, Bihar. In this first period, the deductions also entailed further amounts of Rs. 1,10,87,125 as railway freight paid by the appellant in the process of dispatching the goods outside the state of Bihar. In response to these claims, the Sales Tax Officer issued an order on 22nd July, 1949 to disallow the deduction claims of both the turnover and railway freight. In addition to this order, he also added an amount of Rs. 13,66,496 as sales tax, which the appellant company received from the purchasers of goods during this duration. The total taxable sum, with this additional amount, came to be Rs. 15,31,374.

In the second period, which lasted from 01/04/1948 to 31/03/1949, there was a return filed by the appellant company on a gross turnover amounting to Rs. 21,64,45,450. On this amount, the appellant claimed deductions of Rs. 10,71,66,233 for the goods that were being manufactured in Jamshedpur and not sold or purchased within the state of Bihar, like in the case of the first period. In this period as well, the appellant claimed deductions for the railway freight charges paid by the appellant company that amounted to Rs. 40,89,973. Thereafter, the Sales Tax Officer again disallowed both the claims by its order on September 24, 1949, and added an additional amount of Rs. 22,37,919 to the taxable turnover, treating it as sales tax on amounts realised by the appellant company from its purchasers. Thus, for the second period, the total taxable amount came to be Rs. 28,30,458.

For the gross turnovers in these two periods, prior to the Constitution, none of the goods were sold, delivered or consumed in the State of Bihar and therefore, the appellant claimed that at no point did the property in the goods rest with any purchaser in the state of Bihar.

The Sales Tax Officer did not consider any of the claims made by the appellants and included the amounts they received from their purchasers outside of the state of Bihar in the taxable turnover. Aggrieved by these assessment orders by the Sales Tax Officer, two appeals were made by the appellant company under Section 24 of the Bihar Sales Tax Act, 1947. However, the Commissioner of Sales Tax of Chota Nagpur dismissed the same. Further, when a revision was made by the Board of Revenue, the order made by the Commissioner of Sales Tax was confirmed with slight alterations, thereafter remanding the matter back to the Sales Tax Officer. Finally, the Board of Revenue referred the case to the High Court of Bihar to assess the following questions of law raised by the appellants under Section 25 of the Bihar Sales Tax Act, 1947.

Whether the Bihar Sales Tax Act of 1947, as amended in 1948, was ultra vires the provincial legislature, considering the extended meaning of “taxes on the sale of goods” in the context of the Government of India Act, 1935?
Whether the provisions contained in Section 2(g) of the Bihar Sales Tax Act, 1947 was ultra vires the then provincial legislature of the state of Bihar?
Whether it was legal to include sales tax in the taxable turnover of an assessee, such as TISCO?
Whether the jurisdiction of the Bihar Sales Tax (Amendment) Act, 1948 also covered Chotanagpur?
Whether the provisions of the Constitution of India render the levy and collection of sales tax by the Bihar Sales Tax Act, 1947, prior to 26th January, 1950, illegal?
Whether the Commissioner who passed an order, in appeal after the Constitution came into force, bound to decide the appeal in accordance with the provisions of the Constitution, with respect to the taxes levied or to be levied for the periods before 26th January, 1950?

Question (3) was decided in favour of the appellant, and no appeal was filed by the respondent in that respect. Question (4) was not presented before the Hon’ble High Court for its consideration. The rest of the questions were not decided in favour of the appellants.

Aggrieved by this response of the High Court, which was unfavourable to TISCO, an appeal was made to the Supreme Court of India, where this application was resolved. The above questions of law have been assessed and evaluated by the Supreme Court to finally come to a decision.

Issues raised in the case

In the present case, there were three issues that were primarily examined by the Hon’ble Supreme Court–

Whether Section 4(1) of the Bihar Sales Tax Act, 1947 was constitutionally valid (intra vires) and had the legal authority to levy sales tax on the goods manufactured by TISCO?
Whether the state of Bihar was legally authorised to levy taxes on the sale of the goods manufactured by TISCO inside Bihar, but which were a part of inter-state trade wherein the consumption, purchase and delivery and all of the activities relating to trade were taking place outside of the state of Bihar?
Whether TISCO’s claim for certain deductions was correct and the amount received from the purchasers as a result of the inter-state trade with its purchasers, should be made a part of the taxable turnover over which TISCO will pay tax?

Laws involved in Tata Iron & Steel Company vs. State of Bihar (1958)

Section 2(g) of the Bihar Sales Tax Act, 1947

Section 2(g) of the Bihar Sales Tax Act, 1947 defined ‘sale’ as a transfer of property in goods for money or deferred payment or any other valuable consideration, which includes a transfer of property in goods involved in the execution of a contract. However, it does not include mortgages, hypothecation, charge, or pledge. This was defined, keeping in mind all the possible grammatical variations and cognate expressions that could exist in this regard.

Section 2(i) of the Bihar Sales Tax Act, 1947

Section 2(i) of the Bihar Sales Tax Act, 1947 defined ‘turnover’ as the total amounts of sale-prices which are either received or receivable by a dealer regarding the sale or supply of goods or in pursuance of fulfilling any contract.

Section 4(1) of the Bihar Sales Tax Act, 1947

Section 4(1) of the Bihar Sales Tax Act, 1947 stated that any dealer who has a turnover that exceeds the amount of Rs. 10,000 will be required to pay sales tax on the sales that are taking place in the state of Bihar. This was with respect to Sections 5, 6, 7 and 8 of this Act, and it shall be applicable with effect from the date that the provincial government, that is, the state of Bihar, will notify in the official gazette, 30 days prior to the commencement of this Act.

Section 5 of the Bihar Sales Tax Act, 1947

Section 5 of the Bihar Sales Tax Act, 1947 specified the rate at which the tax would be payable by a dealer. It was supposed to be “levied at the rate of six pies in the rupee on the taxable turnover.”

Section 99 of the Government of India Act, 1935

Section 99 of the Government of India Act, 1935 authorised the state of Bihar and the then provincial government to make any law for the province subject to this Act.

Section 100 of the Government of India Act, 1935

Section 100 of the Government of India Act, 1935 talks about the subject matter of federal and provincial laws. This Section discusses the power of the federal and provincial governments to make laws for various lists. As per Section 100(1) of this Act, the federal government has the right to make laws under List 1 (Federal Legislative List) of the Seventh Schedule of this Act. As per Section 100(2), both the federal and provincial governments have the power to make laws under List 2 (Concurrent Legislative List) in the Seventh Schedule of this Act. Finally, as per Section 100(3), the power lies solely with the provincial government to make laws under List 3 (Provincial Legislative List) in the Seventh Schedule.

Article 246 of the Constitution of India, 1950

Article 246 of the Constitution of India, 1950 corresponds to Section 100 of the Government of India Act, 1935 and in that respect, it has been discussed in the case, as the same arose after the Constitution of India came into force.

Contentions of the parties

Appellant

The following were the significant points and the contentions of the appellants–

In accordance with the meaning of sale, contained under Entry 48 of List 2 of the Seventh Schedule to the Government of India Act, 1935, the taxes that have been levied upon the sale of goods outside the state of Bihar by the appellant, which have been covered under Section 4(1), read with Section 2(g), 2nd proviso, Clause II, of the Bihar Sales Tax Act, 1947, they do not come under the ambit of ‘tax on sale’.
The doctrine of territorial nexus is a concept which should not be brought up in this case, as it does not apply to sales tax.
The nexus that may be made in this case is not actual but only illusionary.
From the manner in which the taxes were levied in the present scenario, it can be seen that it was more in the nature of an excise duty, rather than a tax on sale.
Since the levy of the tax on sale was made retrospectively, owing to the amended Section 4(1) of the Bihar Sales Tax Act, 1947, this tax would act as a direct tax, rather than a sales tax. In the present scenario, this tax acted as a direct tax upon the party that was dealing in the goods upon whose sale the tax was being levied. It was not an indirect tax upon the consumer or purchaser of the goods, which should ideally be the case, according to the appellant.
The provisions that gave authority to the imposition of tax upon the sale of the goods of the appellant were not in accordance with the Constitution of India. That means specific provisions like Section 4(1) of the Bihar Sales Tax Act, 1947, were ultra vires the Constitution of India. The appellants contended that the authority with which the taxes were upon the goods of the appellant within the state territory of Bihar exceeded the legally provided legislative authority given to the Bihar State Legislature.
The constitutional boundaries of the state of Bihar, were not wide enough to levy taxes on the sale of the goods that were manufactured by the appellant company and sold outside the geographical territory of Bihar. Since the transaction and exchange of the goods were taking place outside the territory of Bihar, it was not fair that the state of Bihar subjected the appellant to the payment of taxes with no legal authority or apparent jurisdiction.
The deductions claimed on a part of the gross turnover of the appellant company were rejected. The appellants contended these deductions to be correct and legally valid, as the deductions were related to the amount received upon sale and purchase of the goods outside of the state of Bihar, even though these goods were manufactured within the geographical limits of the state. The deductions claimed herein were only requested by the appellant because this should ideally be the benefit given to them for manufacturing their goods in Bihar. The goods had, in any circumstance whatsoever, not been a property of any person, company or authority alike, while the sale and purchase of the goods took place. Rather, the goods were delivered, sold and consumed outside the state of Bihar.
The Sales Tax Officer included the railway freight charges paid by the appellant company while delivering the goods they manufactured. Ideally, in the opinion of the appellants, these deductions should not form part of the taxable turnover of the appellant company, as they had paid the same.

Respondent

The respondents made multiple contentions with the objective of defending Bihar Sales Tax Act, 1947. Their contentions also sought to validate the taxes imposed on the appellant company, TISCO–

The respondents contended that the authority that the Bihar Legislature derived from the Government of India Act, 1935, also gave them the authority to validly enact the Bihar Sales Tax Act, 1947. Owing to this point, the respondents said that this authority validated the imposition of taxes upon the appellant company, as well as assumed the legislative competence it required to pass such an Act.
The point of intra-state transactions was not a defence against the application of the Bihar Sales Tax Act, 1947, as its enforcement was generally governed by the applicable law. The intention behind the application of this Act upon such inter-state transactions was to regulate the sales taxes that were being imposed within the geographical bounds of the state of Bihar. In this respect, it was clarified in this contention that the mere manufacture of the goods of the appellant company and the consumption, sale and delivery of the same outside the territory of the state of Bihar had no difference upon the application of the Bihar Sales Tax Act, 1947 on the appellant company.
With respect to the authority of the Bihar State Legislature to tax the goods manufactured by the appellant company within the geographical bounds of the state of Bihar, the respondents contended that the fact of consumption and delivery of these goods outside of Bihar was not a factor affecting the authority to tax. Hence, the state of Bihar was legally entitled and well within its fiscal powers to undertake the taxation of the sales made.
As per the contention made by the respondents, the receipts of the payment of railway freight charges by the appellant company upon the delivery of the goods manufactured by them, did not affect the type of transaction in the case. TISCO, being the consignee and the payer of the receipts for the freight charges, had no value because the transfer of property of the goods and actual sale arose within the geographical limits of the state of Bihar.
With regard to the addition of the amounts received by the appellant company upon the sale, delivery or consumption of the goods manufactured by them, the respondents contended that the actual taxable amount upon which the taxes should be levied was the total proceeds from a sale. Hence, the amount upon which tax shall be levied would not be exclusive of the sale proceeds of such goods.

Judgement in Tata Iron & Steel Company vs. State of Bihar (1958)

The Supreme Court dismissed the present appeals. The opinion of the Hon’ble Court was clear on the issues raised in the case that the application of the provincial legislation dealing with the sales tax was not in compliance with the limited authority the State of Bihar holds. The court rightfully raised the doctrine of territorial nexus in this matter and highlighted that the correlation needed is not present in the matter at hand. It was also emphasised by the court of law that the imposition of sales tax after the sale is completed is totally valid and that the deductions claimed by TISCO are valid and should be allowed. As far as railway freight deductions are concerned, there was no mention of the same by the concerned court. However, the majority decision was in the favour of the plaintiff. Justice Vivian Bose dissented from the same and opined that tax should not be levied at the point of sale and the place of sale should be conclusively decided such that there is no confusion. In his view, in the case of taxing a composite unit, it must be taken into consideration as a whole. Thus, he allowed the appeal, while the same was dismissed by the majority decision of the Hon’ble Supreme Court of India.

Rationale behind the judgement

Applicability of the Bihar Sales Tax Act, 1947 on inter-state transactions

The judgement of the Hon’ble Supreme Court in this case, was landmark in the field of constitutional law and taxation law. Certain major issues were resolved in a manner that provided guidance regarding any matter that may come up in the future regarding similar facts and circumstances. On the constitutionality of the governing provisions of the Bihar Sales Tax Act, 1947, the Hon’ble Court first assessed the validity of this Act, and thereafter, it assessed the application of the Act upon inter-state transactions, as was the scenario in the current factual matrix. It was found that constitutionally, the Bihar Sales Tax Act, 1947 had the authority to levy taxes on transactions that took place strictly within the geographical bounds of the state of Bihar, in the sense that the goods upon which the taxes are to be competently levied by the state legislature of Bihar, should not only be manufactured, but also be sold and consumed within the state of Bihar.

In furtherance to this point made by the Hon’ble Supreme Court, the matter concerning inter-state sale came to the fore. The taxes levied upon the inter-state sales of the goods were found to be an action that overreached the powers held by the state legislature of the state of Bihar. This established that the specific provisions of Bihar Sales Tax Act, 1947, like Section 4(1), were not correctly applied by the state legislature in handling the matters relating to taxation of the goods manufactured by the appellant company. Additionally, the Supreme Court highlighted that the authority that the state legislature of Bihar assumed incorrectly was entirely within the power of the Parliament of India. It clarified and reiterated that the concept of fiscal federalism comes into action with the divided powers of the centre and the states. The Constitution of India has this concept embedded in itself, which is evident from Entry 92A of List 2 of the Seventh Schedule of the Constitution. The Hon’ble Court emphasised that it is very important to ensure that there exists a reasonable territorial nexus between the economic activity that is aimed to be taxed and the authority that is taxing the same. Going by this clarificatory statement of the court, it can be understood that there had to be a territorial nexus between the state of Bihar and the place of sale of goods of the appellant company. Therefore, this is a landmark judgement wherein the Hon’ble Supreme Court highlighted that territorial nexus is an extremely important factor in adjudging whether the authority to levy taxes is correctly exercised or not. This point holds great value under Indian taxation law.

Nature of sales tax

The Supreme Court was of the view that, as per the law, the onus of sales tax fell on the seller and not the buyer. Sellers often include this tax in the amount that the buyers are charged. However, this is not mandatory. It is up to the sellers to decide whether they wish to pass on this charge to the buyers or not. Hence, even if not passed on to the buyer, such a tax remains a sales tax. Furthermore, it was pointed out that the legislature holds the power to impose taxes, both on future and past transactions. This means that it is valid to impose sales tax after the completion of the sale.

Deductions on the taxable turnover of TISCO

The Hon’ble Supreme Court found that the claims of deductions made by the appellant company, insofar as they were for the sales made outside the geographical limits of the state of Bihar, should be allowed. The deductions from the gross turnover were a legal right of the appellant company, and for the transactions (essentially the sale, delivery or consumption of the goods manufactured by TISCO) that take place outside the state of Bihar, they were entitled to the same. This is a benefit that is legally accorded to any manufacturer who manufactures goods within the territory of the state of Bihar and thereafter sells, delivers or transfers for consumption in any other part of India.

Deductions on the railway freight paid by TISCO

Another issue claimed by the appellant company was with respect to the deductions of the freight charges. The Hon’ble Supreme Court of India, however, did not pass any comments on the same.

Dissenting opinion by Justice Vivian Bose

In the final judgement pronounced by the bench, there was no unanimity because there was a dissenting judgement by Justice Vivian Bose. He said that the applicability of this judgement may be hindered because of its pre-constitutional nature. However, it can be seen that because of the importance the judgement holds, it is still a landmark one that has been reiterated multiple times after independence. He made two major points in which he summed up why he did not agree with the majority decision.

The first point he made was that, as per his understanding, it was flawed to restrict taxation only to sales. The present set-up of taxation only allows for imposing taxes on the sale of goods. It would be wrong to suggest that the tax does not apply to the goods, the agreement made for such sale, or the consideration decided upon between the parties of sale because then these elements of sale would be out of the purview of assessment. He found it problematic that the taxation of goods takes place in the territory where the sale takes place.

The second point he made relates to the place of sale or the ‘situs’, as he calls it. While he acknowledged that there were various possible views regarding the place of sale, He was firm on the stance that the place of sale can only be one and not many. An analogy was drawn against the nature of the place of sale with a mystical entity which could be omnipresent or an elf that could magically present itself anywhere. He recognised the gravity of the responsibility to decide on one law for India, having apprehensions that it was arbitrary in nature. However, he also highlighted that it was crucial to have a unified law. This was necessary to eradicate any confusion that may arise regarding the subjects. For the determination of the place of sale, Justice Bose depended on the view taken by Cheshire, who is an excellent authority in the law of contracts. Cheshire had pointed out that the absolutely perfect and natural seat of a law would be in a place where the elements of such law are grouped in the most dense manner. This means that there must be a localisation of the elements of a law to make the law proper. In the simplest language, in this case, all the elements of manufacturing, packaging, etc., took place within the state of Bihar, which means that these elements of the concerned law were densely situated in the state of Bihar. If the place of sale were considered any place other than that, it would make the determination of the place of sale improper.

Justice Bose acknowledged that this stance held by Cheshire was with reference to international law, but the primary message he sought to put forth was that for any one contract, only one law should be applicable, and the best law would be that of the country where the contract arises, constituting all the essential elements. He stated that this was only a minuscule idea of what he proposed, even though it is not applicable to the issue at hand. He pointed towards the dissimilarity existing between this idea and the present scenario of differing laws used to govern one single transaction. He was of the opinion, through this reasoning, that the place of sale should be clear, and once unanimity is reached on that aspect by the court, it would be easier to decide whether sales tax should be levied in a particular territory or not.

On the application of the old explanation to Article 286 (restrictions as to the imposition of tax on the sale or purchase of goods) of the Constitution, Justice Bose was neutral, but he emphasised that the Constitution of India, being a grundnorm, is the one law that all the legislations look up to. Therefore, there should not be multiple voices. Although the Constitution of India does not adopt the idea that Cheshire proposes, it should be compartmentalised and not so fluid that advantage could be taken. It is for this reason that Justice Bose rejected the theory of territorial nexus. According to him, a sale cannot have its existence and its entity in many places, as suggested by the present legal framework, because, in his opinion, a sale, though receives legal recognition, is still a fiction.

He mentioned the example of taxing a dog only in the place where it was present and not at a place where, for instance, his mother was in gestation or where he lost his tail in a fight. There does exist a connection, but the same would be based on false assumptions. He expressed that the place of sale, once decided by the Supreme Court, must be adhered to, and it shall not be open for brainstorming by the succeeding state legislatures afterwards. Territorial nexus must exist in a manner that is not illusory. In the case of taxing a composite unit, it must be taken into consideration as a whole.

According to Justice Bose, it was not too late to change the present view held by the Supreme Court. He stated that he would allow the present appeals.

Relevant judgements referred in the case

State of Bombay vs. United Motors India Limited (1953)

In the case of State of Bombay vs. United Motors India Limited (1953), the High Court of Bombay declared the Bombay Sales Tax Act, 1952 as ultra vires the State legislature. It also directed the appellants to desist and forbear from enforcing the provisions of the ultra vires Act. In that respect, the writ of mandamus was also issued. In this case, it was alleged that by estopping the respondents from continuing their business practices through imposing restrictions such as obtaining a licence for selected cases, Article 19(1)(g) of the Constitution was infringed, and because the provisions were discriminatory in nature, they were also against Article 14, read with Article 13.

Wallace Brothers and Co. Ltd. vs. Commissioner of Income Tax, Bombay City (1954) also played an important role in arriving at a decision passed in this case.

To learn more about the case of State of Bombay vs United Motors India Limited (1953), click here.

Poppatlal Shah Partner of Messrs Indo Malayan Trading Company The Union of India vs. State of Madras (1953)

In this case of Poppatlal Shah Partner of Messrs Indo Malayan Trading Company The Union of India vs. State of Madras (1953), the court said that in accordance with the Sale of Goods Act, 1930, the appellants are not liable to pay the sales tax in this transaction, as it did not take place within the State of Madras. The respondents claimed that the sales tax should be paid by the appellants since the sale transaction was completed within the state of Madras. Their reasoning was that the true test for determining the place where the property of the goods sold was passed depended on where the actual transaction took place. They pointed out that in this matter, the actual transaction took place within the state of Madras, and the place of transfer of property upon transaction was of no value in such determination. On the other hand, the appellants claimed that the place of sale was Calcutta because when the goods were sold, the property was immediately transferred to the purchasers in Calcutta. The court decided in favour of the appellants and directed the respondents to refund the fine and the sales tax charged from the appellant. The sentence of the lower courts in this case was set aside.

The unanimous judgement delivered by the bench in this case relied on the nexus theory to analyse the sales tax legislation applicable in that matter.

State of Travancore-Cochin vs. Shanmugha Vilas Cashewnut Factory Quilon (1953)

The case of State of Travancore-Cochin vs. Shanmugha Vilas Cashewnut Factory Quilon (1953) revolved around the sales tax levied upon the total turnover of the dealers under the Travancore-Cochin General Sales Tax Act, 1949. The respondents were sellers of cashew nuts, which they imported from outside the country and the neighbouring states. After following a detailed process to make the kernels edible, they sold them in the local market. They were also involved in extracting its oil and selling them abroad. The appellants claimed that in accordance with Article 286(1) of the Constitution, the state of Tranvancore had no right to levy tax on the purchases that did not take place within the state. The Supreme Court held that the decision of the High Court would be upheld only on the basis of the quashing of the assessments and the matter at hand shall be reverted back to the Sales Tax Officer to make a reassessment of the sales tax.

Sales Tax Officer Pilibhit vs. Budh Prakash Jai Prakash (1954)

In Sales Tax Officer, Pilibhit vs. Budh Prakash Jai Prakash (1954), the respondents claimed that the provisions of the Uttar Pradesh Sales Tax Act, 1948 that mandated the imposition of tax on the forward contracts, was beyond the powers of the state and hence ultra-vires the authority of the provincial legislature. The High Court had agreed with this contention and issued a writ of certiorari to quash the wrongly done assessment. The Supreme Court affirmed this decision made by the High Court and dismissed the appeal with costs.

Delhi Cloth And General Mills Company Limited vs. Harnam Singh (1955)

In Delhi Cloth And General Mills Company Limited vs. Harnam Singh (1955), the plaintiffs were dealers of cotton cloth at Lyallpur (now in Pakistan) and dealt in these goods with the defendant that runs its business in Delhi. The plaintiffs fled to India after the partition and Lyallpur was given to Pakistan after the division, implying that the transactions that took place in Lyallpur were now governed as per the laws of the country that is now Pakistan. When the transactions of cloth were taking place between the plaintiff and defendant, the plaintiff had a balance excess amount of Rs. 11,496. The plaintiff sought to recover this monetary sum from the defendant, along with interest. However, the defendant claimed that after the partition, the Government of Pakistan froze all the assets of the evacuees. These assets were forced by the Government, to be given to the Custodian of the Evacuee Property in Pakistan. The defendant claimed that they would be able to pay the sum only if the Government of Pakistan releases the same. Otherwise, it had no liability to pay the plaintiff such sums. The Supreme Court in the instant case, said that this law was not confiscatory in nature and this law cannot be condemned by this court, because similar laws were present in all the countries, including India, in case of situations of external war or such related predicament. The plaintiff’s claim was dismissed, but the parties were to bear their own costs. The lower court decrees were set aside.

Justice Vivian Bose referred to this case, to support Cheshire’s stance regarding the proper law governing a contract.

Bengal Immunity Company Limited vs. State of Bihar (1955)

In the case of Bengal Immunity Company Limited vs. State of Bihar (1955), an appeal was filed under Article 226 (power of High Courts to issue certain writs), in furtherance to the sales tax being levied upon a company despite its absence in the state of Bihar, in entirety. The appellants were the manufacturers of biological products, sera, medicine, etc. They received a letter from the Superintendent of Commercial taxes, Patna, to deposit sales taxes in any Bihar Treasury at the earliest. The appellants indulged in conversations with the state government officials of Bihar to no avail. The High Court of Patna dismissed the petition, but a certificate was issued by it under Article 132(1), highlighting that the case dealt with important questions of law. When the case came to the Supreme Court, it was decided in favour of the appellants and the court directed the state of Bihar to not levy any sales tax on the dealers operating from outside the state of Bihar for any sale or purchase taking place in respect of inter-state transactions, even if any goods purchased are to be consumed within the state of Bihar.

By relying upon this case, the court highlighted how the bench had recognized the applicability of the theory of territorial nexus when it comes to sales tax.

State of Bombay vs. R.M.D. Chamarbaugwala Advocate General Of Mysore Intervener (1957)

The case, State of Bombay vs. R.M.D. Chamarbaugwala Advocate General Of Mysore Intervener (1957), came into picture through an appeal by the state of Bombay where the respondent ran Littlewood’s Football Pool Competitions in India. The licence was granted for the same and renewed once and the competition tax worth Rs. 10,00,000 was paid by the respondent to it for this period but thereafter, the renewal was denied. The respondent had filed a petition, aggrieved by the non-renewal. The respondent ran a prize competition through its newspaper named Sporting Star, which was alleged to be of the nature of gambling, as per the Court of Appeals. The Supreme Court agreed with this view of the Court of Appeals and held that the competition would be covered under the regulatory and taxing provisions of the Bombay Prize Competitions Tax Act, 1939. It said that the law conforms with Entry 34 and Entry 62, that relate to tax on betting and gambling. There was sufficient territorial nexus for the state of Bombay to levy tax on the respondent, even if the newspaper was not published within the state of Bombay. Owing to the nature of the competition (gambling and betting), it also fell out of the purview of trade and commerce which further disentitles it from the protection of Article 19(1)(g), as well as Article 301 (freedom of trade, commerce and intercourse) of the Constitution. The appeal was thus allowed and the petition was dismissed in the favour of the appellant.

This case was also decided, keeping in mind the applicability of the theory of territorial nexus.

Analysis of Tata Iron & Steel Company vs. State of Bihar (1958)

The judgement given in this case was in the proportion of 4:1, wherein Justice Vivian Bose gave a dissenting opinion (as discussed above). It established an important legal norm at the time and till date, this decision is considered vital, with respect to the topic of inter-state commerce and taxation law. The rationale behind this judgement was to prevent misuse of power in the course of collection of sales tax. In this case, the appellants were not liable to pay off the tax levied and the state of Bihar needed to understand the possibility of double taxation, etc., in such matters. The objective was also to ensure that the aggrieved party receives its rightful deductions and refund of the amounts paid, if any, in the name of sales tax for the goods that were not even involved in any transaction taking place in Bihar, but were only manufactured within the state of Bihar. The judgement also sought to focus on the theory of territorial nexus and its ample applicability in the case of sales tax, which was elaborated by the bench, by referring to the decisions passed in various previous judgements.

The decision passed in this case, took into consideration, the connection between the entity that is to be taxed, that is, TISCO and the entity that seeks to tax, that is., the state where the consumption of goods of TISCO takes place. The bench clarified that there was absolutely no doubt with regard to the principles of territorial nexus and previous benches that have dealt with the matters related to sales tax and inter-state taxation, also relied upon this principle.

This case remains significant in the realm of taxation laws, with respect to the constitutional framework of the country. Very important matters related to limitations when it comes to taxation of the inter-state transactions and the reiterated concept of fiscal federalism, were dealt with. The present jurisprudence of India’s taxation law holds this decision in high regards, owing to the guidance provided by it.

Conclusion

Taking notes from the judgement pronounced by the Hon’ble Supreme Court in the case of Tata Iron and Steel Company vs. State of Bihar (1958), it can be concluded fairly that the legal tenets of a state law do not apply to inter-state transactions in the absence of a territorial nexus between such a state and the object of the application of such law. Thus, this landmark judgement presents guidance with respect to matters of taxation in that aspect. Apart from this, the state law in this case, that is, the Bihar Sales Tax Act, 1947 was reasoned to be constitutionally sound by the Hon’ble Supreme Court. However, it clearly highlighted that despite the Act being constitutionally valid, it had no reason to tax the appellant on sales that were outside the ambit of the application of this law. This is where the concept of territorial nexus was discussed. It can be said that this is a very effective and significant case, as far as the crossroads of the constitution and tax law of India are concerned and holds relevance even today.

Frequently asked questions (FAQs)

What do you mean by the doctrine of territorial nexus?

The doctrine of territorial nexus is a concept that states that unless there is a nexus, that is, a connection between the object that is outside the ambit of a state upon which an action is taken and the state that has made the law, the laws made by a state legislature will not be applicable to the same. The Constitution of India also discusses this concept, under Article 245, wherein authority is endowed on the basis of the concept of territorial nexus. The application of this doctrine comes to the forefront when there are matters concerning an extraterritorial application of a law made for operation within the geographical limits of a particular state (state law). For instance, in this particular case, the state law that was claimed by the respondents to be operational in case of inter-state transactions of the goods of the appellant company.

What do you mean by ‘territoriality’ in legal terms?

In respect of this article and in general legal terminology, territoriality is the concept used by the sovereigns or countries, to demarcate the geographically limited area as a controlled area that is under such a sovereign or country. It originates from the word ‘territory’, which means an area of land, space or sea that comes within the dominion of a particular authority. Such authority may be a country, group of people or a person.

What is the law that currently governs sales tax in the state of Bihar?

At present, in the state of Bihar, sales tax is governed by two legislations, namely, the Central Sales Tax Act, 1956 which applies to the whole of India and the Bihar Finance Act, 2007 (Bihar Finance Act, 1981, before the amendment).

What does “retrospective effect” of a legislation mean?

The retrospective effect of a legislation refers to changing a law in a way that makes something legal, illegal or something illegal, legal, from the past. An action of drinking juice that was, for example, legal in 2020 is made illegal by passing a law prohibiting the administration of juices due to medical reasons, in public good, in the year 2022. While this concept is widely known and even exercised in various parts of the world, it is considered against the concept of ‘Rule of Law’, which says that law should be known and accessible to everyone. However, if any law is breached by a person because of the reason that at the time of a certain action, that action was legal and is made illegal afterwards, it becomes almost impossible for people to know precisely, the applicable laws of the land and fall prey to illegal actions attracting liabilities and sanctions.

What is the meaning of fiscal federalism?

Fiscal federalism is a concept introduced by a German-born American economist named Richard Musgrave. He came up with this concept in the year 1959. Fiscal federalism deals with the division of financial activities, responsibilities and powers between the levels of government existing in a country. In the case of India, this concept can be seen within the centre and state. In the sense of the present case, the Supreme Court highlighted this concept, because the matter of taxation is of a fiscal nature and it is necessary to know the clear demarcation of the authority managing the same in each case. Fiscal federalism deals with matters related to the transfers of grants, raising of revenues, allocation of revenues throughout different sectors to maintain equity, etc.