Case: Kil Kotagiri Tea and Coffee Estates Company, Limited and Others Vs. State of Kerala

We may add that the three other appellants in the present group are : The Kil Kotagiri Tea and Coffee Estate Co. Ltd.; M/s. Peria Karamalai Tea and Produce Co. Ltd. and M/s. Chembra Peak Estate Ltd. The appellant M/s. Ouchterloney Valley Estates Ltd. produces tea in its own tea estates and sells its products. It does not itself carry on the business of buying and selling its products. The managing agents of the appellant are M/s. Peirce Leslie & Co. Ltd., Coimbatore. The quantities of tea produced by the appellant were sold by public auction at Fort Cochin; the purchasers paid the consideration at Fort Cochin and obtained from the auctioneers delivery notes requesting the godown keepers at Wellingdon Island to deliver the goods. After the goods are produced, they are sent to the godowns at Wellingdon Island and the sale by public auction is held at Fort Cochin. Fort Cochin was in the State of Madras, whereas Wellingdon Island was in the State of Travancore at the relevant time. The periods for which assessment has been levied against the appellant are 1952-53, 1953-54, 1954-55, 1955-56 and 1956-57.The procedure followed for the public auctions in question must now be indicated. This is how the procedure has been summarised in the present proceedingsproduced in the concerned estates are graded, weighed and packed in chests in the estates and are subsequently forwarded with garden invoices to the godowns of their clearing and forwarding agents, Messrs. Peirce Leslie & Co. Ltd., Cochin, at Wellingdon Island to be stored there awaiting further instructions. Thereafter, the brokers in Fort Cochin check the weight of the chests, draw samples of their contents and group the chests in lots. They then publish printed catalogues giving the name of the estate and the godowns, the numbers of the lots, the serial numbers and total number of chests in each lot, the weight of each chest and the total weight of each lot and advertise the sale of such chests with export rights, by public auction, at Fort Cochin on a particular date and hour. The sale is conducted, by samples, at Fort Cochin, at the proclaimed date and hour and is confirmed in the name of the highest bidder. The bid may be for an entire lot or for a portion thereof, technically known as brake. The buyer shall be entitled to open the chests bid by him and examine the contents thereof to ascertain the actual state and condition of the tea. Difference or inferiority in quality, description, deterioration, damage and defect in packing will entitle the buyer to submit claims or rejection, or allowance or damage. Such claims must be submitted, after inspection, no doubt, not later than 5 P.M. on the 3rd day before the prompt day (ninth day after date of sale) or in the case of removal before the prompt day, at least 24 hours before such removal. Payment shall be made in Cochin on or before prompt day, in cash or by cheque or draft on a Cochin bank. If the buyer shall fail to pay for the tea or any part thereof on the due date for payment, the goods may be resold. Any loss arising on such resale shall be borne by the buyer. Delivery shall be taken before 5 P.M. on the 5th day after prompt day. The goods will be at sellers risk to the extent of the sale price only, until 5 P.M. on the 5th day after prompt day or until removal by the buyer, if removed earlier".When the assessment proceedings in question were pending before the Sales Tax Officer, it was urged by the appellant that the impugned transactions which were included in the turnover of the appellant were not liable to tax on several grounds. The substantial contention against the appellant was that the transfers of tea which were sought to be assessed could be assessed by the respondent State of Kerala because of a previous decision of the Kerala High Court in Deputy Commissioner of Agricultural Income-tax and Sales Tax v. A. V. Thomas & Co., Ltd (I.L.R. 1960 Ker. 1395). In that case, the Kerala High Court had proceeded to deal with the matter on the basis that the property in the goods sold passed at Fort Cochin on the fall of the hammer at the auction and that they could not be said to be "outside" sale within the meaning of Article 286(1)(a) of the Constitution. The High Court was inclined to take the view that the said Constitutional provision had no reference exclusively to the transfer of the property in the goods according to the provisions of the Indian Sale of Goods Act, 1930 (No. 3 of 1930) (hereinafter called "the Act"); and so, explanation 2 to section 2(j) of the Travancore Act was not violative of Article 286(1)(a), and that if at the moment when the property passed, it being not relevant where the property passed, the goods were in the State of Travancore-Cochin, then it was not an "outside" sale quoad Travancore-Cochin and could be subjected to sales tax by that State. Since this judgment of the Kerala High Court was binding on the Sales Tax Authorities at the time when they considered the dispute between the appellants and the respondent State of Kerala in the present proceedings, they have held that the transactions with which the appellant was concerned could be validly assessed by the respondent State. The same view, in substance, has been accepted by the High Court when it rejected the revision application filed by the appellant before it.Meanwhile, the decision of the Kerala High Court in the case of A. V. Thomas & Co (I.L.R. 1960 Ker. 1395) was reversed by this Court when the matter came before it in appeal in A. V. Thomas & Co. Ltd. v. Deputy Commissioner of Agricultural Income-tax and Sales Tax, Trivandrum (1963 14 S.T.C. 363; A.I.R. 1964 S.C. 569). In that case, this Court has held that the Explanation to Article 286(1) creates a fiction as between two States, one where the goods are delivered for consumption in that State, and the other where the title in the goods passed and the former is treated as the situs of the taxable event to the exclusion of the latter. In regard to sales of teas in lots by public auction, this Court held that the property in teas passed to the buyer under section 64 of the Act as soon as the offer was accepted on fall of the hammer at Fort Cochin in the State of Madras and, therefore, the only State which could have power to levy a tax on such sale would be the State of Madras and so far as the Travancore-Cochin was concerned, the sale would be an outside sale. The same view has been expressed by this Court in a subsequent decision coming from Kerala in Malayalam Plantations Ltd., Quilon v. The Deputy Commissioner of Agricultural Income-tax and Sales Tax, South Zone, Quilon (1964 15 S.T.C. 665). The result is that the decision of the Kerala High Court in the case of A. V. Thomas & Co. (I.L.R. 1960 Ker. 1365) on which the Sales Tax Authorities and the High Court of Kerala have decided the dispute between the appellants and the respondent State in the present proceedings is no longer good law, and that would inevitably mean that the appellants must succeed on the ground that the sales of tea having taken place in the same manner as the sales of tea which had come before this Court in the two decisions to which we have just referred, they are "outside sales" so far as the respondent State is concerned and cannot be legitimately assessed to tax under the relevant provisions of the Sales Tax Act.Mr. Menon for the respondent State has, however, strenuously contended that the question as to whether the present sales are outside sales so far as the respondent is concerned, has never been properly tried, and he urges that if the essential incidents in regard to the present sales are taken into account, it would be found that the said sales are "inside" sales so far as the respondent State is concerned. It is common ground that if the sales are held to be inside sales so far as the respondent State is concerned, the view taken by the High Court would have to be confirmed and the appellants would have to pay the sales tax as ordered by the Sales Taxthe other hand, if the sales in question are not inside sales as urged by Mr. Setalvad for the appellants, the view taken by the High Court must be reversed and the appeals allowed.

Court's reasoning:
3. It appears that in the two decisions of this Court to which we have just referred, this point has not been considered.would be noticed that the whole of the argument thus presented by Mr. Menon proceeds on the assumption that the contract of sale by sample in the present proceedings was a contract of goods which were in a sense unascertained and it could be concluded only when the buyer inspected the goods and accepted them.The position in regard to the relevant provisions of the Act bearing on the question as to when title in the goods sold passes, is not in doubt. If the contract of sale is for ascertained goods which are actually described in the list prepared before the sales are held and it appears that all material particulars about the goods are shown in the list, then the question as to when title passes would depend essentially upon the intention of the parties expressed in the terms of the contract. Section 19(1) of the Act provides that where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Section 19(2) adds that for the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. Under section 19(3) it is provided that unless a different intention appears, the rules contained in sections 20 to 24 would be relevant to decide this question. One thing is clear in the present case, viz., that the goods in question were not unascertained goods, nor were they not in existence; goods were clearly in existence, they had been graded, weighed and packed in numbered chests and a list was prepared in respect of the contents of these chests separately. It is true that what the buyers are shown at the time of sale by public auction are samples and the rules authorise the buyer to inspect the goods; but that is not to say that the sale is a sale of unascertained or non-existingdo not think that such importance can be attached to the expression "to have been accepted by the buyer" on which Mr. Menon rests his argument. We have already seen that condition 11 has referred to the chests as having been purchased by the buyer; and that would be clearly against Mr. Menons case. So, it would be reasonable not to base our decision principally on the words used by the conditions, such as "purchased" or "accepted", but to take into account the substance of these conditions.8. It may be stated at this stage that after the public auction takes place, claims have to be made by the buyer not later than the third day before the prompt day, or 24 hours before removal of goods, whichever event happens earlier. The prompt day is the 10th day on or before which payment has to be made by the buyer, and possession has to be taken by him before 5 P.M. on the fifth day after the prompt day (condition No. 22). The goods continue to be at the sellers risk to the extent of the sale price only until 5 P.M. on the fifth day after the prompt day or until removal by the buyer if removed earlier (condition No. 23).Condition 12 clearly shows that the buyer has a right to make claims either on the ground of difference or inferiority in quality disclosed or inspection, or as a result of a defect in packing or any other ground whatsoever. After the time specified by this condition has expired, the buyer cannot make a claim to reject the goods, nor can he ask for any allowance or damages in respectour opinion, condition 13 is not merely an enabling condition; it is an obligatory condition and it gives the buyer only one remedy, and that is to move the Arbitrator for appropriate relief.This condition is consistent with the provisions of section 64(2) of the Act, and it cannot be said to support Mr. Menons contention that the title in the goods does not pass to the buyer until he has inspected them and indicated his acceptance.Condition 16 is a general condition as to arbitration and it provides that any disputes or differences which may arise between the parties shall be referred to arbitration as therein indicated. Reading conditions 13 and 16 together, there can be no doubt that all claims which the buyer is entitled to make must be made to the arbitrators and it is the decision of the arbitrators that will determine the dispute between the buyer and the seller.11. We have carefully considered all the rules under which sales in question have been held by public auction, and we are satisfied that title to the goods passed to the buyer under section 64(2) of the Act as soon as the sale was completed by the auctioneer announcing its completion by the fall of the hammer. The initial auction cannot, in our opinion, be treated as an executory contract which became a conditional contract on the fall of the hammer. The auction was an auction sale in respect of ascertained goods and it was concluded in every case on the fall of the hammer. On that view of the matter, we must hold that the High Court was in error in coming to the conclusion that the Sales Tax Authorities were justified in imposing sales tax against the appellants in regard to the transactions which have given rise to the present appeals.