THE DEPUTY COMMISSIONER OF AGRICULTURAL INCOME TAX & SALES TAX, ERNAKULAMversusINDIAN EXPLOSIVES LTD.

            THE DEPlJTy COMMISSIONER OF AGRICULTURAL                 A
               INCOME TAX & SALES TAX, ERNAKllLAM
                               v.
                     INDIAN EXPLOSIVES LTD.

                         AUGUST 19, 1985
                                                                     B
[V .u. TULZAPURKAR, SABYASACHI MUKHARJf AND RANGANATH MISRA, JJ. J

      Sales "in the course of import of the goods into India" -
Whether the goods imported and supplied to customers . on the
strength of Actual Users' Im.port Lic"ences of the customers are
exempt from sales tax under the Kerala General Sales Tax Act,        C
1950 - Constitution of India, 1950 Article 286 (I) (b).

       The Respondent,-assessee deals in chemicals, dyes etc.
import goods on the strength of the Actual Users' Import Licences
that had been obtained by the customers and supply the same for
use by the latter in their factories. The sales in question were     D
put through by the respondent asseasee in the following manner.
The indigenous purchaser used to place orders with the respon-
dent-asseasee quoting his Import Licence Number, quantity of
goods, rate, etc. as agreed to by previous correspondence with
the respondent-assessee; the respondent-assessee then placed
orders with the foreign supplier for the supply of the goods and
in such orders the name of the local purchaser who required the      E
goods as also its licence numbers, were specified; the actual
import was done on the strength of two documents like, (a) the
Actual Users' Import Licence and (b) Letter of Authority issued
by Chief Controller of Imports and Exports whereunder the local
purchaser was authorised to permit the respondent-assessee on his
behalf to import the goods, to open letters of credit and make       F
reml,ttance of foreign exchange against the said licence to the
extent of vaiue specified therein. The import licence expreasly
contained two conditions (i) that the goods impot:ted will be the
property of the licence-holder at the time of clearance through
the Customs and (ii) that the goods will be utilised only_ for
consumption as raw material or accessories in · the licence-         G
holder's factory and that .no portion thereof will be sold to or
be permitted to be utilised by any other party. On receipt of
 the· goods the respondent-a.Ssessee used to invoice the local
purchaser.

     The respondent-assessee was assessed to Sales Tax during        H
the assessment years 1961-62, 1962-63 and 1963-64 under the
     624          SUPREME COURT REPORTS           [1985] SUPP.2 s.c.R.


A General Sales Tax Act, 1950 on the turn over of sales effected by
  them in those years of goods, imported on the strength of the
  customers' Actual Users' import Licences and supplied to them.
  Such turnover subjected to tax was to the tune of Rs. 3,15,586.19
  in the year 1961-62 and Rs. 4,03,427.72 in the year 1963-64. The
  respondent-assessee contended thst these sales were in the course
B of Article 286 (I) (b) of the Constitution. The contention was
  negatived by the assessing authority as also by the Appellate
  Assistant Commissioner but the Appellate Tribunal in second
  appeal accepted the contention and beld thst the disputed tum
  over in each year was not taxable. In the revisions preferred by
  the Deputy Commissioner the High Court confirmed the Tribunal's
  view. Hence the Revenue appeals by special leave of the Court.
c
           Dismissing the appeals, the Court,

       HEU>: 1.1 In order thst the sale should be one in the
  course of import it must occasion the import and to occasion the
  import there must be integral connection or inextricable link
  between the first sale following import and .the actual import
D provided by an obligation to import arising from statute,
  contract or mutual understanding or nature of the transaction
  which links tbe sale to import which cannot, without cOlllldtting a
  breach of statute or contract or mutual understanding, be sapped.
  [628 B-C]

E           Ben Gorm Nilgiri Plantations CalpiJily, Cocmoor and Ors. v.
     Sal.es Tax Officer, Special Circle ErMlmlaw & Ors. [1964] 7 SCR
     706 relied on.                   •

        1.2   Reading the two documents, namely the Actual Users'
  Import Licence and letter of Authority issued by the Chief
F Controller of Imports and Exports together, it is clear that tbe
  import of the goods by the respondent-assessee was for and on
  behalf of the local purchaser and the respondent-assessee could
  not without committing a breach of the contract, divert the goods
  so imported for any other purpose. Having regard to the terms
  and conditions on which the respondent-assessee imported the
G goods and the manner in which the· transactions were put through,
  i t is clear thst there was an integral connection between the
  sale to the local purchaser and the actual import of the goods
  from ·the foreign supplier. In other words it ls clear thst the
  movement of the goods from the foreign country (here the United
  States) to India was in pursuance of the conditions of the
 H


                                                                          I
 COMMR. OF AGRI. TAX v. INDIAN EXPLOSIVES [TULZAPURKAR, J ·]      625


pre-existing contract of sale between the resporulent-assessee and       A
the local purchaser. That being so the sales in question were in
the course of import. [627 A-'D]

      Ben Gono Nilgil'.i Plantations ~, Coouoor Md ors. v.
Sales Tax Officer, Special Circle Krnalmlam & Ors. [1964] 7 SCR
706 and K.G. Khosla & eo. (l'vt.) Ltd.' Delhi v. Deputy                  B

Comnissioner of C!:moercial Tu><es, &dras Division, (1966] 3 SCR
352 followed.

      Ci>ffee Board, llaugslore v. Joint Cw!Percial T.tt Officer,
Madras & Aar. (1970] 3 SCR 147 and State of llih.& & Aor. v. Tata
EugiDeering & l.ocQix;tive Co. Ltd. (1971] 2 SCR 849 referred to.        c
      M/s. lli:n&li Bros (l') Ltd. v. Union of Inciia & Ors. [1974] l
sec 459 distinguished.
      CIVIL APPELLATE JURISDICTION      Civil Appeals Nos. 867-869
of 1974.                                                                 D

      T.s. Krishnamurthy, T. Karunakaran Nambiar and P.K. Pillai
for the Appellant.

      F.S. Nariman, R.F. Nariman, R.Suresh and D.N. Gupta for the
Respondent.
                                                                         E
      The Judgment of the Court was delivered by

      TULZAPURKAR, J. The co!I!Itl.on question raised in these appeals
is whether the sales effected by the responddnt-assessee in the
three concerned years of gooG.s imported and supplied to customers
on the strength of Actual Users' Import Licences of the customers        F
were exempt from sales tax under the Kerala General Sales Tax
Act, 195u on the ground that these were sales "in the course of
import of the goods into the territo·ry of India".

      The responctent-assessee deals in chemicals, dyes, etc. The
concerned assessment years are 1961-62, 1%2-63 a11d 1963-64. The         G
respondent-assessee was a~sessed to sales tax under the General
Sales Tax Act 195U on the turnover of sales effected by them in
those years of goocis imported on the. strength of the customers'
Actual Users Import Licences and supplied to them. Such turnover
subjected to tax was to the tune of Rs. 3,15,586.19 in the year
1961-62, Rs. 13,40,949~98 in the year 1962-63 and.Rs. 4,03,427.72        !I
in the year 1963-6'-+·    The rcspcndent-assessee contended that
    626              SUPREME COURT l<EPORTS           [1985] SUPP.2 s.c.R.


A   these sales were in the course of import of goods into Ind.la and
    hence not taxable by virtue of Art. 286(l)(b) of the constitu-
    tion. The contention was negatived by the assessing authority as
    also by the Appellate Assistant Collllllissioner but the Appellate
    Tribunal in second appeal accepted the contention and held that
    the disputed turnover in esch yesr was not taxable. In the
B   revisions preferred by the Deputy Comnissioner, the High Court
    confirmed the Tribunal's view. In doing so the High Court consi-
    dered the several decisions that were cited before it and Ulti-
    mately following the test laid down by this Court in Ben Gorm
    Nilgiri Plantations Company, Cooooor and Ors. v. Sales Tax
    Officer, ,special Circle J!rnaku!Bll & Others [1964] 7 SCR 706, and
    mainly relying upon another decision of this Court in K.G. Kbosla
c   & Co. (Pvt.) Ltd. v. Deputy Camrtssiooer of Comnercial Tax,
    Madras Division, [1966] 3 SCR 352 =AIR 1966 SC 1216, it took
    the view that the sales covered by the disputed turnover in the
    facts and circumstances of the case were sales in the course of
    import. , :rhe Revenue has come up in appeal to this Court.

          It was not disputed that goods were imported, by the
D   respondent-assessee in the strength of the Actual Users' Import
    Licences.that had been obtained by the customers and supplied to
    them for use by the latter in their factories. The sales in
    questioU were put through by the reSpondent-assessee, as found
    both by the Tribunal and the High Court, in the following manner.
    The indigenous purchaser for example M/s. Hindustan Insecticides
E   Limited in Kerala, used to place orders with respondent-assessee
    quoting his Import Licence Number, quantity of goods, rate, etc.
    as agreep. to by previous correspondenc:;:e with the r-~spondent­
    assessee; the respondent-assessee th~n placed orders with the
    foreign supplier for the supply of the goods and in such orders
    the   name
             ~f the, local purchaser who required the goods as also
F   its licence numbers, were specified; the actual import was done
    on the: strength of two documents like (a) Actual Users Import
    Licence and (b) Letter of Authority issued by Chief Controller of
    Imports and Exports whereunder the local purchaser was authorised
    to permit _the    respo~ent-asse.ssee     on his behalf to import the
    goods, ,to open letters of credit and make remittance of foreign
G   exchange against the said licence to the extent of value speci-
    fied therein. , The import licence expressly contained two condi-
    tions, · (i) that the goods imported will be the property of tl)e
    licenc.,C.holder at the time of clearance through the Customs and
    (ii) that the goods will be utilised only for consumption as raw
    material or accessories in the licence-holder's factory and that
H   no portion thereof will be sold to or be permitted to be utilised
  COMMR. OF AGRI. TAX v. INDIAN EXPLOSIVES [TULZAPUI<KAR, J.]   627

                                                                      A
by any other party. Reading these two documents together it was
clear that the import of the goods by the respondent-assessee
was for and on behalf of the 1¢cal purchaser and the respondent-
assessee could not, without committing a breach of the contract,
divert the goods so_ imported for any purpose. On receipt of the
goods the respondent-assessee used to invoice the· local
                                                                      B
purchaser. Having regard to the terms and conditions on which .the
respondent assessee imported the goods and the manner in ·which
the transactions were put through, it cannot be disputed that
there was an integral connection between the sale to the local
purchaser and the actual import of the goods from the foreign
supplier. In other words it is clear that the movement of the
goods from the.foreign country (here the United States) to· India
                                                                      c
was in pursuance of the conditions of the pre-existing   contract
of sale between the respondent-asses see and the local purchaser•
If that' be so the view of the Tribunal and the High Court that
the ·sales in questi9n were in the course of import will have to
be upheld.
                                                                      D

      The ·test of integral connection or inextricable link
between the sale ·and the actual import or export in order that
the sale .could become a sale in the course of import·or· export
had been cl.early enunciated by this Court in Ben Gorm Ni.lgiri
Plantal:ions Company's case (supra). There the question related to
sale of tea which was claimed to be in the course of export· out
                                                                      E
of the tesritory of India and though by majority it was held
that the sales in question were not "in the course of export",
the Court at. p.711 of the .Report laid down the test thus:·

           "A sale in the course of export predicates a
           connection between. th~ .sale- and exp<>"rt, the   two
                                                                          F
           activities being so integrated that the connection
           between the two cannot be voluntarily interrupted,
           without a breach of the contract of the compulsion
           arising from the nature of the transaction. In this
           sense_to constitute a sale in the course of export it
           may be said 'that there must be an intention on the
                                                                          G
           part of both the buyer and the seller to export, there
           must be an actual export. The obligation may arise by
           reason of statute, contract between the part.ies, or
           from mut~1· understanding o.r; agreement between them,
           or even from the nature_of the transaction which links
           the sale to export. A transaction of sale which is a
                                                                      'H
           preliminary to export of the commodity sold may be
           regarded as a sale for export, but is not necessarily
    628            SUPREME COURT REPORTS            [1985] SUPP.2 s.c.R.


A              to be regarded as one in the course of export, unless
               the sale occasions export. And to occasion export
               there must exist such a bond between the contract of ·
               sale and the actual exportation, that each link is
               inextricably connected with the one ii:wiediately
               preceding it. Without such a bond, a transaction cf
B              sa1e cannot be caned a sale in the course of export
               of goods out of the territory of India."

    Conversely, in order that tne sale should be one in the course of
    import iC must occasion the import and to occasion the import
    there must be integral connection or inextricable link between
    the first sale foll.owing the import and the actual import
c   provided by an obligation to import arising from statute,
    contract or mutual understanding or nature of the transaction
    whi.ch lillks the sale to import whicn cannot, without collJllitting a
    breach of statute or contract or mutual understanding, be sapped.

         Counse). for the appellant attempted to suggest that the
    aforesaid test of integral connection or inextricable link.
D   between the sale and the actual import or export in order that
    the sale could become a Pale in the course of impart or export
    has been diluted or deviated from in Coffee Board, Baugalore v.
    Joint Commercial Tax Officer, Madras & ~J:Jr, [1970) 3 SCR 147, hut
    the suggestion has to be rejected. We may point out that such
    suggestion was expressly rejected aod the observations regarUing
    two independent sales in that case were properly explained as
    appropriate to the facts of that case by this Court in State of
    Bihar & An.r. v. Tata Engineering & Localotive Go. L!:d. [ 1971] 2
    SCR 849, where the test of integral connection or inextricable
    link was reaffirmed as a correct and well-settled test to decide
    the question.
                                                                             .
F
          CoWlSel for the appellant fairly conceded that the facts in
    K.G. llliosla. & Co. 's ca..e (supra) were on all fours with the facts
    obtaining in the instant appeals and that the ratio of that
    decision would appear. to govern the question arising in these
    appeals, but he contended that a different view has been taken
G   by this Court in l'J.,, Biooni Bros (I.') I.t:d. v. Ufiloo of lDd1a &
    Otilers,_[1974] l SCC 459, and in view of this later decision the
    High Court ought not to have applied the ratio of z:.G. Xbosla &
    Co. 's decision to this case. It is not possible to accept this
    contention as in our view lliD8ni Bros's case is clearly
    distinguishable on two material aspects.            In that case the
H   assessee itself held the import licence ancl the goods WU11
    imported on the strength of such import licence and not on the
      COOMR. OF AGRI. TAX v. INDIAN EXPLOSIVES [TUIZAPURKAR, J. J 629

                                                                         A
    strength of any Actual Users Licence as is the case here.
    Secondly,   unlike   in   the present case there was no term or
    condition prohibiting diversion of the goods after the import. In
    fact, it is these two factors obtaining in the instant case which
    establish the i.ntegral connection or inextricable link between
    the transactions of sale and the actual import making the sales
    in the course of import. In fact as pointed out earlier, the         E
    movement of the goods from the foreign country to India was in
    pursuance of the requirements flowing from the contract of sale
    between the respondent-assessee and the local purchaser and as
    such the sales in question 1m1st be held to be in the course of
    import.            ·
                                                                         c
         The view of the Tribunal and the High Court is confirmed and
    the appeal8 are dismissed. No order as to costs.




    S.R.                                            Appeal dismissed •




•