Holding

The sale of naphtha was an inter‑state sale, and only the Bihar authorities could levy tax under the Central Sales Tax Act; the Uttar Pradesh assessments were invalid.

Summary

The Indian Oil Corporation (IOC) supplied naphtha from its refinery at Barauni, Bihar to the fertilizer plant of Indian Explosives Ltd. at Kanpur, Uttar Pradesh via a pipeline, under a contract that required delivery against indents addressed to IOC's Kanpur installation. The Uttar Pradesh tax authorities treated the sales as local and levied sales tax under the U.P. Sales Tax Act, while the Bihar authorities treated them as inter‑state sales and levied tax under the Central Sales Tax Act. The Supreme Court examined whether the movement of goods was the direct result of the contract of sale, applying the principle that a sale is inter‑state if it precedes and causes the movement of goods from one State to another, irrespective of where the sale is invoiced. The Court held that the contract expressly required supply from the Barauni refinery to the Kanpur factory, making the sale an inter‑state transaction, and that the single movement from Barauni to Kanpur was the operative transfer. Consequently, only the Bihar authorities could assess tax under the Central Sales Tax Act, and the Uttar Pradesh assessments were quashed, with a direction to refund taxes collected. The petition under Article 32 was allowed, and the State of Uttar Pradesh was barred from levying further sales tax on these transactions.

Issues considered

Whether the sale of naphtha by IOC to Indian Explosives Ltd. constitutes an inter‑state sale under Section 3(a) of the Central Sales Tax Act, 1956.
Whether the Uttar Pradesh Sales Tax Act has jurisdiction to levy tax on the said sales.
Whether the movement of goods is a direct result of the contract of sale despite the presence of a storage depot and pipeline.
Whether the assessment orders under both the Central Sales Tax Act and the Uttar Pradesh Sales Tax Act violate the petitioners' fundamental rights under Articles 19 and 31 of the Constitution.

Legislation cited

Central Sales Tax Act, 1956s. 3(a), s. 9
U.P. Sales Tax Act

Subjects

inter‑state salesales taxCentral Sales Tax ActU.P. Sales Tax Actpipelinecontract of salejurisdictionArticle 32Article 19Article 31tax assessment

Judgment

673

A

INDIAN OIL CORPORATION LTD. & ANR.

v.
UNION OF INDIA AND ORS. B

September JO, 1980
[A. C. GUPTA, S. MURTAZA FAZAL ALI AND P. S. KAILASAM, JJ.]

Sales Tax legislation-Central Sales Tax Act, 1956-Section 3(1)-Factory
fin Barauni in Bihar-Naphtha sent by pipeline from Barauni to Kanpur in c
U.P.-Orders placed pursuant to an agreement by the buyer in Kanpur on th~
seller's office in Kanpur-Sale-Whether taxable under the Central Sales Tax
·Or U.P. Sales Tax Act ..
The Indian Oil Corporation was a manufacturer of naphtha with its
works at Barauni in Bihar while the 5th respondent was . a manufacturer of
fertilizers with its factory at Kanpur. The Indian Oil Corporation supplies
naphtha to the 5th respondent's fertilizer factory at Kanpur through a pipe- D
line. Both the buyer and the seller have their offices at Kanpur and indents
are addressed by the buyer to the seller at their Kanpur office. The pipeline
·from Barauni to the petitioner's depot at Kanpur has been constructed by
·the petitioner, the pipeline between the buyer's and the seller's fences is how-
·ever constructed by the buyer, the 5th respondent.
On the question whether the sale of naphtha should be taxed under the
·Central Sales Tax Act or under the U.P. Sales Tax Act, the U.P. ·authorities E
insisted that since the indent had been placed by the buyer on the seller at
their Kanpur Office the sale was a local sale while the sale\ tax authorities
1n Bihar insisted that since there was transfer of goods froin one State to
another the sale was inter-State chargeable to tax under the Central Sales
Tax Act.
'
Allowing the petition,
F
HELD : On the facts of the present case the sales are clearly inter-State
sales and the State of U.P. had no jurisdiction to assess thei petitioners to
·sales tax under the State Act. As the movement of naphtha commences from
Barauni in Bihar the sales tax payable on the sales under the agreement
can be assessed and collected only by the authorities in the State of Bihar
on behalf of the Government of India in view of section, 9 of the Central
·sales Tax Act. [680E]
G
It is now well-settled by a series of decisions of this Court that a sale
shall be an inter-State sale under section 3(a) if there is a contract of sale
·preceding the movement of goods from one State to another and the move-
ment- is the result of a covenant in the contract of sale or is an incident of
that contract; in order that a sale may be regarded as an inter-State sale
it is immaterial whether the property in the goods passes in one State or
:another. [678H-679A] H
G74 SUPREME COURT REPORTS [1981] 1 S.C.R.

A Tata Iron & Steel Co. Ltd. v. S. R. Sarkar [1961] I S.C.R. 379; Kelvinator
of India Ltd. v. State of Haryana [1974] I S:.C.R. 463; Oil India Ltd. v. Supe-
rintendent of Taxes [1975] 3 SCR 767; Balabhagas Hulaschand v. State of
Orissa [1976] 2 SCR 939; Union of India v. K. G. F;hosla & Co. (P) Ltd.
[1979] 3 SCR 453, referred to.

The terms of the agreement make it quite clear that the sales of naphtha
to the respondent were inter-State sales. The source of supply is the seller's
B refinery at Barauni in Bihar and the destination is the buyer's factory at
Kanpur. This clause alone is sufficient to prove that the sales in question
were inter-State sales. [679B-C]

Clause 3(iii) of the agreement which says that the naphtha shall be sup-
plied against indents in writing addressed to the seller at their installation at
Kanpur cannot be read in isolation. Sub-clause (iv) of clause 3 sets 0ut r
c the details of the buyer's requirement for the first four years and thereafter.
Under clause 8 Indian Oil Corporation a.re bound not only to bring the
contractual quantity of naphtha from Barauni to the seller's Kanpur installa-
tion but also to provide at their own cos~ storage facilities at Kanpur of a
capacity equivalent to not Jess than 30 days' requirement of the buyer. The·
indents are therefore not outside the agreement but are relatable to the buyer's
requirements under the agreement. It is obvious that the sales under the agree-
ment are not possible without inter-State movement of naphtha. Clause 3
D . read with clause 8 also proves· that really there are no two movements but
only one movement from Barauni to Kanpur pursuant to the contract of sale
and the arrangement regarding storage facilities provided in clause 8 is only
for operational convenience, it is only a mechanism devised to facilitate the
transfer of naphtha through the seller's pipeline to their depot at Kanpur and
from there to the buyer's factory at Kanpur through the pipeline constructed
at ·the buyer's cost. It is relevant in this connection to note that under ·
E clause 7(ii) the cost of transferring naphtha from Barauni to the buyer's fence
is to be borne by the1 buyer. [679G-H; 680A-C]

ORIGINAL JURISDICTION : Writ Petition No. 444 of 1979.

(Under Article 32 of the Constitution)

F F. S. Nariman & Anil B. Dewan, B. D. Barucha, Ravinder
N arai.n and Talat A ns'ilri for the Petitioner.

A. Subhashini for Respondent No. 1

Lal Narain Sinha, Att. Genl. and U.P. Singh for the Respondents
G Nos. 2-3.
Soli J. Sorabjee, V. K. Pandita and E. C. Agarwala for R.4.

Subrata Roy Chowdhury, Biswaro.op Gupta, Bhaskar Gupta,. l
Surhid Roy Chowdhury & D. N. Gupta for Respondent No. 5.

H The Judgment of the Coun was delivered by

"
- i.lolAN OIL CORPN. v. UNION (Gupta,!.) 675,

GuPTA, J.-In this petition under Article 32 of the Constitution A
of India dealer seeks.relief from the same sales being assessed to
sales tax both under the Central Sales Tax Act and the U.P. Sales
Tax Act. The first petitioner Indian Oil Corporation Limited, IOC
for short, are a government company incorporated under the Com-
panies Act, 1956 engaged inter alia in the manufacture and marketing
of petroleum produots. The second petitioner is the Managing B
Director and a shareholder of IOC. Union of India has been
impleaded as the first respondent in the petition. The 2nd respondent
is the Assistant Superintendent of Commercial Taxes, Central Circle,
Bihar. The 3rd and 4th respondents are respectively the State of
Bihar and the State of U.P. The 5th ·respondent Indian Explosives
Limited are a company having their registered office at Calcutta; c
they have a factory at Panki, Kanpur in Ut~ar Pradesh manufacturing
urea fertilizers. IOC have a refinery at Barauni in the State of Bihar
and also a depot at Panki, ,Kanpur. In 1966 IOC completed pipe-
line from their refinery at Barauni in Bihar to Kanpur in U.P. through
Patna in Bihar and Mughalsarai and Allahabad both in U.P. At
their Barauni refinery IOC man~facture naphtha which is the principal
D
raw material for production of fertilizers.
On February 9, 1970 an agreement was entered into by and
between IOC and the 5th respondent in terms of which IOC
were to sell and the 5th respondent were to buy the entire quantity
of naphtha required for the 5th respondent's fertilizer factory at
Kanpur. Below is a s'uinmary of the different clauses of the agreement
E
that are relevant for the present purpose; the numbers given to
the different paragraphs in this summary follow the numbering of
the corresponding clauses of the original agreement :
1. The agreement shall l?e deemed to Ji.ave come into force
from September 10, 1969 [when the supply of naphtha
commenced] and shall remain in' force till December 31,
F
1980. It shall continue to be in force therea£ter unless
terminated by either party giving to the other not less than
one year's prior notice of the intention to terminate the
agreement.
2. Th~ naphtha to be supplied shall be of the specification set
out in Schedule I of the agreement. G'
3. (i) The quantity of naphtha that the 5th respondent
agree to buy and IOC agree to sell shall be 2,50,000 tonnes
per annum which is the maximum rate per annum.
(iii) The naphtha shall be supplied against the buyer's indents in
writing addressed to the seller at the seller's Panki/Kanpur
installation. - - H
SUPREME COURT REPORTS [1981] 1 S.C.R.

A (iv) It is agreed that the buyer's requirement of naphtha for the
first four years shall be 95,000, 1,70,000, 2,00,000 and
2,25,000 tonnes respectively.
(viii) In case the buyer fails to take delivery during any year
the quantities of naphtha as stipulated above for reasons
other than Force Majeure at their Kanpur plant, the seller
shall be entitled to sell the quantity which the buyer has
failed to lift. Similarly if the seller fails to deliver the
stipulated quantities of naphtha during any year for reasons
other than Force Majeure at their Barauni refinery and/or
!he transportation system from Barauni to their Panki
}
installation, the buyer shall be entitled to purchase the
quantity not delivered in that year from other sources.
4. The supply of naphtha to the buyer ~hall be made from the
seller's refinery at Barauni.
5. The price of naphtha shall be exclusive of transfer charges,
excise duty and all other taxes levies which shall be re-
D covered by the seller from the buyer at actual rates prevail-
ing and levied by concerned agencies from time to time.
7. (i) Naphtha shall be supplied through a pipeline at
the fence of the buyer's fertilizer factory and the pipeline
between the buyer's and the seller's fences shall be cons-
tructed by the buyer at their expense.
E (ii) The cost of transferring naphtha by the pipeline from the
point of its manufacture to the fence of the buyer's fertilizer
factory shall be borne by the buyer.
8. The seller shall provide at their cost storage facilities at
the seller's Panki/Kanpur installation of a capacity equi-
F valent to not less than 30 day~' requirement of the buyer.
10. (iii) Three samples of naphtha for testing will be taken from
the seller's tank at their Panki/Kanpur installa,tion prior to
transfer in the presence of buyer's representatives at such
frequency as may be mutually agreed.

·G According to the 5th respondent, since the commencement of
supply of naphtha under the aforesaid agreement. IOC went_ on
charging from them sales tax at the rate prescribed by the U.P. Sales
Tax Act on the plea that the sales were chargeable under the said
Act. On or about March 16, 197 4 the assessing authority under
the U.P. Sales Tax Act assessed IOC to sales tax under the said Act
H on their total turnover for the assessment year 1969-70 including
INDIAN OIL CORPN. v. UNION (Gupta, !.) 677

the sales of naphtha to the 5th respondent. The 5th respondent filed A
a writ petition in the Allahabad High Court challenging the asses-
sment made on the basis that the sales were local and asserting that
they were inter-state sales. Before the writ petition was disposed of the
U.P. assessing authority assessed IOC for the assessment year 1970-
71 treating the sale of naphtha to the 5th respondent as local sale.
On August 27, 1975 the Allahabad High Court allowed the said .B
writ petition quashing the impugned order of assessment to the extent
it sought to levy tax under the U.P. Sales Tax Act on the sales of
naphtha to the 5th respondent. The High Court held that the sales
under the agreement dated February 9, 1970 were inter-state sales.
IOC preferred an appeal against the order of assessment in respect of
the assessment year 1970-71 and although the appeal was on grounds
not relevant for the present purpose, it is necessary to refer to it
c
.because at a later stage IOC had the scope of the appeal enlarged,
induced by the 5th respondent according to IOC, by including a
ground that the sales of naphtha under the agreement were inter-
state sales. On June 29, 1978 the 2nd respondent fevied sales
tax under the Central Sales Tax Act on the sales of naphtha
by IOC to the 5th respondent for the assessment year , 1970- D
71 treating them as inter-state sales. Under section 9 of the
Central Sales Tax Act the tax levied under that Act is collected
in the State from which the movement of the goods commenced;
in this case the movement commenced from Barauni in Bihar.
IOC · preferred an appeal against this order to the appellate
authority. For the assessment year 1971-72 the assessing authority E
under the U.P. SaJes Tax Act treated the sales of naphtha to the
5th respondent as inter-state sales presumably in ·view df the aforesaid
judgment of the Allahabad High Court. This assessment order was
challenged by the Commissioner of Sales Tax, U.P. in revision
before tne appropriate authority. For the sanie assessment year the
Bihar authority assessed the sales on the basis they were inter-state F
sales. For the next assessment year 1972-73 the U.P. authority again
treated the sales as inter-state sales and again the order was challen-
ged in revision by the Commissioner of Sales Tax, U.P. The Bihar
authority also treated the sales for that year as inter-state sales.
Thereafter for the assessment years 1973-74 and 1974-75 somewhat
surprisingly the U.P. assessing authority went back on the view taken G
in the immediately preceding two years and again treated the sales
as local sales and ithe 5th respondent preferred appeals from these
two orders of assessment. Iri this confused situation IOC filed the
instant writ petition in this Court on May, 1, 1979. Meanwhile the
appellate authority uiider the U.P. Sales Tax Act dealing with the
appeal preferred by IOC agab:is! the order of as~essment relating to H
, SUPREME COURT REPORTS
[1981] 1 S.C.R.
A the year 1970~ 71 had r7manded the case to the assessing authority
·and the assessmg authonty by his order dated December 20 1979
held that the sales were focal sales. '

The 5th respondent had started several other proceedings to
avoid the sale of naphtha to them under the agreement dated February
9, 1970 being assessed to sales tax under the U. P. Act. On August
29, 1977 they filed a suit in the Calcutta High Court against IOC
seeking to restrain IOC from collecting sales tax from them under
the U.P. Sales Tax Act. The 5th respondent also filed two writ
pe'.itions in the Allahabad High Court, Nos. 102 and 103 of 1978.
The first petition challenges the assessment order relating to the year
I
c 1970-71 made by the U.P. authority. The second petition is directed
agaiBst the revisional proceedings started by the Commissioner of
Sales Tax, U.P. in respect of the assessment years 1971-72 and
1972-73. All these proceedings are still pending.
The petitioners' case in the present writ petition is that the sales
of naphtha to the 5th respondent were local sales in Kanpur and as such
D
they were assessable under the U.P. Sales Tax Act and that the a~ses
sment orders dated June 29, 1978 and November 30, 1978 respectively
for the assessment year 1970-71 and 1971-72 made by the Bihar
Sales Tax authority under the Central Sales Tax Act are in violation
of the fundamental rights guaranteed under Articles 19 and 31 of
the Constitution of India. The petitioners seek a writ in the nature
E
of certiorari for quashing the aforesaid assessment orders and a writ
in the nature of mandamus directing the Bihar sales tax authority to ~-·
forebear from assessing the sales of naphtha to the 5th respondent
on the basis they were inter-state sales. Alternatively the petitioners
pray, in the event it is held that "the sales are inter-state sales and not
F intra-state sales", for "appropriate reliefs, orders, and directions"
directing the State of U.P. not to assess, levy or recover any sales tax
on the sales of naphtha to the 5th respondent under the agreement
dated February 9, 1970.
Section 3(a) of the Central Sales Tax Act, 1956 provided that
"a sale or purchase of goods shall be deemed to take place in the
G course of inter-state trade or commerce if the sale or purchase
occasions the movement of goods from one State to another". It is
llOW well settled by a series of decisions of this Court that a sale
shall be an inter-state sale under section 3 (a) if there is a contract
of sale preceding the movement of goods from one state to another
H and the movement is the result of a covenant in the contract of sale
or is an incident of that contract; in order that a sale may be regarded
as an inter-state sale it is immaterial whether the property in the
INDIAN OIL CORPN. v: UNION (Gupta, J.) '679

goods passes in one state or another. Some of these decisions are : A
Tata Iron & Steel Co. Ltd. v. S. R. Sarkar [1961] l SCR 379, Kel-
vinator of India. Ltd. v. The State of Haryana [1974] l SCR 463,
Oil India Ltd. v. The Superintendent of Taxes & others [1975] 3 SCR
797, Bal!lbhagas Hulaschand v. State of Orissa [1976] 2 SCR 939
and Union of Indi'<J and Anr: v. K. G. Khosla & Co. (P) Ltd. &
Ors. (1979] 3 SCR 453. In our opinion the terms of the agreement B
<lated February 9, 1970 summarized above make it quite clear that
the sales of naphtha to the 5th respondent were inter-state sales. Under
clause 4 of the agreement seller is "to make the supply of naphtha
to the buyer from Its refinery at Barauni". The source of supply is thus
the seller's refinery at Barauni in Bihar and· the destination iS the
buyer's factory at Kanpur. This one clause alone is sufficient to prove
that the sales in question were inter-state sales.
c
However, on behalf of the petitioners and the State of U.P. it is
. contended that the sales were not inter-state sales and were local sales
within the State of Uttar Pradesh. It ,is pointed out from clause 3(iii)
that supplies of naphtha are made on the· -buyer's indents in writing
addressed to the seller at their Kanpur installation and not at their D
refinery at Barauni which, it is contended, shows that the supplies
are made from IOC's storage at Kanpur to the 5th respondent's
factory also at Kanpur. It is also contended that the supply of
naphtha to the buyer's factory at Kanpur involves two movements,
<lne from, Barauni to Kanpur for storage at the seller's depot, and
the other from the depot to the buyer's factory. This contention is E
based on clause 7(i) of the agreement which states that naphtha shall
be supplied at the fence of the buyer's factory through a pipeline
between the buye'r's and the seller's fences constructed at the buyer's
expense. It is argued that this stipulation shows that the movement
<lf naphtha from Barauni is . arres.ted at the seller's Kanpur depot
and is followed by another movement from there to the buyer's F
factory which proves that the sales are local sales and not inter-state
.because in an inter-state sale the movement of goods is the immediate
and direct result of the contract of sale. ·
Clause 3(iii) of the agreement which says that the naphtha shall
be supplied against indents in writing addressed to the seller at their
installation at Kanpur cannot be read in isolation. Sub-clause (iv) G
of clause 3 sets out the details of the buyer's requirement for the
first four years and thereafter. Under clause 8 IOC are bound not
only to bring the contractual quantity of naphtha from Barauni to
the seller's Kanpur installation but also to provide at their own cost
storage facilities at Kanpur of a capacity equiva:lent to ,not .less
than 30 days' requirement of the buyer.· The indents are therefore H
680 SUPREME COURT REPORTS [1981] 1 S.C.R.
A not outside the agreement but are relatable to the buyer's require-
ments under the agreement. It is obvious that the sales under the
agreement are not possible without inter-state movement of naphtha
Clause 3 read with clause 8 also proves that really thare are no tw~.
movements but only one movement from Barauni to Kanpur pursuant
to the contract of sale and the agreement regarding storage facilities
B
provided in clause 8 is only for operational convenience, it is only
a mechanism devised to facilitate the transfer of naphtha through th~
seller's pipeline to their depot at Kanpur and from there to the
Buyer's factory at Kat).pur through the pipeline constructed at the
buyer's cost. It is relevant in this connection to note that under
clause 7(ii) the cost of transferring naphtha from Barauni to the
I
buyer's fence is to be borne by the buyer.
Each case turns on its own facts and the. question is whether
applyil!g the settled principle which we have mentioned above to the
facts of the present case the sales can be said to be inter-state sales.
An attempt to show that some of the factors present in the instant
D case are present or absent in some case or other in which thls Court
held the sale to be a J..ocal sale or inter-state sale hardly serves any
useful purpose. On the facts of the present case the sales are clearly
inter-state sales and the State of U.P. had therefore no jurisdiction t©
assess the petitioners to sales tax under the State Act. As the movement
· of naphtha commences from Bara1:mi in Bihar, the sales tax payable
]Jj
on the sales of naphtha under the agreement dated February 9, 1970·
can be assessed and collected only by the authorities in the State of
Bihar on behalf of the Government of India in view of section 9 of
the Central Sales Tax Act.
On behalf of the State of Bihar a point was taken that the
Ji? prese,nt petition under Article 32 of the Constitution of India
complaining of violation of the fundamental right guaranteed by
Article 31 of the Constitution was not maintainable after the· repeal
of Article 31 by the Forty-Fourth Amendment of the Constituti0n
with effect from June 20, 1979. The petition however complains also
of infringement of Article 19 and therefore does not cease to· be main-
G tainable. Counsel for the 5th re'spdndent sought to raise a question
regarding the justification of tre.ating freight as part of the sale price,
but that is not a matter that arises for consideration on the present -...,.··
writ petition filed by IOC.
In the result the alternative prayer made in the writ petition
H succeeds, the assessment orders for the assessment years 1970-71,
1973-74 and 1974-75 passed by the Sales Tax Officer, U.P. and the
revision proceedi!ig~ initiated by the Co~issioner of Sales T~,
INDIAN OIL CORPN. v. UNION (Gupta, J.) 681

U.P. for the assessment years 1971-72 and 1972-73 are quashed and A
respondent No. 4, the State of Uttar Pradesh, is directed to refund
to roe the sales tax collected from them on the sales of naphtha to
the 5th respondent under the agreement dated February 9, 1970 and,
further, not to levy sales tax on the sales under the said agreement
under the U.P. Sales Tax Act. . :
B
The writ petition is allowed as indicated above; in the
circumstances of the case we make no order as ~o costs.

N.K.A. Petit~on allowed.

........

2-645 S. C. India/SO .,