Case: Bhopal Sugar Industries Ltd Vs. Sales Tax Officer, Bhopal

These appeals by special leave are directed against the order of the Commissioner of Sales Tax dated May 5, 1970, rejecting the revision filed by the appellant before him against the order of the Appellate Assistant Commissioner, Sales Tax, imposing sales tax for the period April 1, 1958, to March 31, 1959, on consumption of motor spirit by the appellant for its own purposes which was treated by the sales tax authorities as a sale to the appellant and, therefore, falling squarely within the purview of section 2(1) of the Madhya Pradesh Sales of Motor Spirit and Lubricants Taxation Act, 1957, as it stood prior to May 31, 1961. It also appears that for the period April 1, 1957, to March 31, 1958, the tax was levied under the Madhya Bharat Sales of Motor Spirit Taxation Act, 1953. The appellant primarily carries on the business of manufacturing sugar and incidentally the business of selling high speed diesel oil, petrol and lubricants from the petrol pump installed by the appellant in the factory premises. The appellant entered into an agreement with the Caltex (India) Limited for supply of petrol and petroleum products to it on certain conditions. The relevant assessment years are April 1, 1957, to March 31, 1958; April 1, 1958, to March 31, 1959; April 1, 1959, to March 31, 1960; and April 1, 1960, to March 31, 1961. In the course of its business the appellant sold petrol to various trucks and other car owners and also consumed part of the petrol for its own purposes. In the instant appeal, we are only concerned with the consumption by the appellant of the quantity of petrol for its own purposes which has been, as we have indicated, treated as a sale and, therefore, exigible to sales tax.The appellant filed an appeal against the order of the respondent - Sales Tax Officer - to the appellate authority under the Madhya Pradesh Sales of Motor Spirit and Lubricants Taxation Act, 1957 - hereinafter referred to as "the Act" - and pari passu filed a petition under article 226 of the Constitution in the High Court of Madhya Pradesh challenging the constitutionality of the Act and the assessments made in pursuance thereof. The High Court, by its judgment dated January 25, 1961, dismissed the petition of the appellant. The appellant then approached this Court through a special leave petition and also a petition under article 32 of the Constitution but without any success. This Court by its judgment dated December 21, 1962, held that the High Court had erred in assuming jurisdiction in deciding disputed questions involved in the petition and should have insisted on the appellant to move the appellate authority provided under the Act. The petition under article 32, however, was allowed by this Court and a part of the definition of "sale" in section 2(1) of the Act was declared ultra vires. In the instant case, however, we are not concerned with this aspect of the matterIn compliance with the orders of this Court, the appellant filed an appeal before the Appellate Assistant Commissioner of Sales Tax, which was allowed by his order dated March 6, 1963, and the case was remanded to the Sales Tax Officer for fresh assessment after making necessary enquiries. Thereafter, the respondent-Sales Tax Officer assessed the appellant afresh by his order dated October 20, 1963, and made similar assessments for the other periods. Against this order the appellant moved this Court again, but ultimately withdrew the petition and filed a revision petition under section 28 of the Act to the Commissioner of Sales Tax, Madhya Pradesh. The Commissioner, after hearing the arguments of both the parties, invited further documents and after making further queries upheld the order of the Appellate Assistant Commissioner of Sales Tax holding that the appellant was liable to pay sales tax inasmuch as the contract which was entered into between the appellant and the Caltex (India) Ltd. was a pure and simple contract of agency and not a contract of sale. The Commissioner opined that as the contract was one of agency, the title to the property remained in the Caltex (India) Ltd. and if the appellant used the petrol for its own purposes as agent, then such a used would amount to a sale of the property of the company by the agent to itself so as to be exigible to sales tax. It is against the order of the Commissioner dated May 5, 1970, that the appellant has come up to this Court after obtaining special leave.

Court's reasoning:
Thus the essence of the matter is that in a contract of sale, title to the property passes on to the buyer on delivery of the goods for a price paid or promised. Once this happens the buyer becomes the owner of the property and the seller has no vestige of title left in the property. The concept of a sale has, however, undergone a revolutionary change, having regard to the complexities of the modern times and the expanding needs of the society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale even though the seller may be virtue of an agreement impose a number of restrictions on the buyer, e.g., fixation of price, submission of accounts, selling in a particular area or territory and so on. These restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions the transaction would still be a sale and subject to all the incidents of a sale. A contract of agency, however, differs essentially from a contract of sale inasmuch as an agent after taking delivery of the property does not sell it as his own property but sells the same as the property of the principle and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyer - pure and simpleIt is clear from the observations made by this Court that the true relationship of the parties in such a case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the said relationshipIt seems to us that the law on the subject has been stated by the court in a different context, and, therefore, this case does not appear to us to be of any assistance in determining the question at issue in the instant case. The court in the aforesaid case had inferred agency from the mere fact that under the agreement the sale was to operate in a limited territory. This by itself, in our opinion, is not sufficient to lead to the inference that the agreement was one of agency. It is always open to the buyer to purchase goods for a limited purpose and within the field of that limited purpose the buyer has absolute title to the property once it is delivered to him by the sellerIt is, therefore, clear that the moment the appellant received the supplied of Hispeedol from the seller, the Hispeedol became the property of the appellant and the appellant was absolutely free to sell the Hispeedol and petrol to any one it liked at the prices fixed within the territory specified in the agreement. Thus the title to the property passed to the appellant the moment it took delivery of the same. It is, therefore, manifest that having taken delivery of the property if the appellant was using it for its own consumption it was using its own property in which the company had no title at all and such a used therefore could not, by any stretch of imagination, be treated as a sale.Another very important circumstance which clearly shows that the contract was one of sale and not of agency is the fact that after having taken delivery of the petrol and Hispeedol the appellant sold the same to its various customers, not even mentioning that the property belonged to the Caltex Company but issued cash memos in its own name, which clearly indicates that after taking delivery of the property the appellant became the absolute owner thereof and represented itself to be the owner of the property and sold it not as the property of the company but as its own property. This fact is clearly proved by the cash memos and credit vouchers produced by the appellant at pages 195-197 of the paper book. The cash memo describes the Bhopal Sugar Industries Ltd. as the owner of the goods and so does the credit voucher. This, therefore, conclusively shows that the agreement could not have been an agreement of agency because the essential distinction between an agreement of sale and an agreement of agency is that in the former case the property is sold by the seller as his own property and in the latter case the property is sold by the agent not as his own property but as the property of his principal and on his behalfUnder this clause the appellant was required to deliver reasonable quantities of products at the request of the company to consumers designated by the company at such points within the territory as may be specified. In consideration of complying with the request, the seller-company agreed to reimburse the appellant in full for the supplies and the appellant was also entitled to be paid transportation expenses and handling allowances as may have been incurred by it. This is another decisive factor which negatives the theory that the agreement could be one of agency. Indeed such a stipulation in the agreement is wholly inconsistent with the position of the appellant being an agent for in that case there was absolutely no scope for such a stipulation and the seller-company as a principal of the agent could have instructed it to supply the goods or petrol to designated customers and there was no question of the agent being reimbursed, because the property supplied belonged to the principal and was delivered to certain persons on the instructions of the principal. This clause, therefore, is yet another important factor which shows that the agreement was intended to be a contract of sale rather than a contract of agency.Furthermore, the agreement contains a clear and unequivocal declaration by the seller-company that the statue of the appellant would not be that of an agentThis clear declaration on the part of the parties leaves no room for doubt that the agreement was intended to be a contract for sale and that the appellant was not only not regarded as an agent but was expressly excluded from the category of an agentThe cumulative effect of the circumstances mentioned above leads to the inescapable conclusion that the Hispeedol had been sold to be appellant and not held by it merely as an agent of the Caltex Company. The petrol agreement also which has been placed before us contains similar stipulations and it was not disputed by the counsel for the respondent that if the Hispeedol agreement is held to be a contract of sale, then the same would have to be said of the petrol agreement also. Thus the principles which would make the contract of purchase of Hispeedol a contract of sale would apply mutatis mutandis to the petrol agreement alsoIn our opinion, this clause does not at all conclusively show that the appellant was an agent of the company. The object of inserting this clause in the agreement appears to be that during the term of the agreement the appellant undertook to maintain proper sales, service and other record so that the companys reputation may not suffer and if any statement regarding the sales or other matter were required by the company, they were not required because the appellant was the agent of the company but it was because the company wanted to keep itself fully informed of the proper conduct of the business by the appellant in order to maintain its goodwill. It is manifest that if during the period of the agreement there were serious complaints against the appellant regarding the misuse of the privileges given to it under the agreement, the company could under the terms of the agreement terminate the agreement so as to save its reputation. Read as a whole, this stipulation does not amount to make the appellant liable to render regular accounts to the company inasmuch as the statements called for were required only for a very limited purpose, viz., to prevent the appellant from misusing his privileges and thereby jeopardising or harming the reputation of the company. In these circumstances, therefore, the argument based on this clause appears to be of no assistance to the counsel for the respondentClause 8 of the agreement clearly shows that the appellant had been loaned properties belonging to the company like petrol pumps and their accessories, etc., and it was in respect of these properties which had been given to the dealer for working the petrol pumps that the statements of account were called for from the appellant. This appears to be the modus operandi adopted by the seller-company in respect of all its distributors. There is no stipulation in the agreement which requires or enjoins on the appellant to submit accounts of the Hispeedol or petrol which he may have sold to various customers, after having taken delivery of the same from the company. In these circumstances, therefore, this argument of the learned counsel for the respondent must be overruled.Another circumstance relied upon by the respondent was the fact that the appellant was under the terms of the agreement to sell the goods at a price fixed and not higher or lower than that. We have already indicated that when a company enters into a distribution agreement it always fixes a particular price in order to protect its goodwill and in order to control the market. Such fixation of the price by itself would not be a restriction which would take away the freedom of contract of sale. Such a stipulation is found in almost all the agreements entered into between the monopolist companies and their distributors. The respondent would not, therefore, be justified in treating this circumstance in order to show that the agreement was one of agencyThe present agreement undoubtedly contains some elements of agency also, but the main question which has to be determined in this case is whether or not at the point of time when the appellant was consuming the Hispeedol or petrol for its own purposes it was acting as an owner of the goods or as agent of the seller-company. From the facts and circumstances discussed above, we have shown that the appellant, after taking delivery of the goods, was the owner of the goods and if it consumed the same for its own purposes it was not doing so as agent but as owner which it was fully entitled to do. In this view of the matter, the quantities of petrol consumed by the appellant for its own purposes would not constitute a sale so as to be exigible to sales tax. We have carefully perused the order of the Commissioner and find that the Commissioner has taken an erroneous view of the law and has drawn legally wrong inferences from the various stipulations contained in the agreement. The Commissioner has also not given effect to well-established legal principles in interpreting the agreement.