Tata Iron and Steel Co. Ltd. v State of Bihar

By Anurag Jain [1]

FACTS OF THE CASE

The present matter at hand deals with the concept of Territorial Nexus as mentioned under Article 245.

The dispute in the matter is on the opinion of imposition of tax on the annual turnover of the assesse, Tata Iron and Steel Co. Ltd., after the enactment of the Bihar Sales Tax Act (Bihar Act 19 of 1947). The assessee claimed that the goods were delivered outside the province and included in the annual turnover. The Sales Tax Officer rejected the claim and subsequently concurred by the Commissioner of Chotanagpur. The matter was then taken for revision before the Board of Revenue, but they had dismissed it. However, the Board of Revenue had identified specific questions of law to the High Court.

The chronology of events concerning the sale of goods is given below for reference.

After placing an order, the Chief Sales Officer, also termed as ‘works order,’ forwarded it to Jamshedpur, where the workers could initiate manufacturing. The specifications of the goods regarding the quantity and quality were extensively mentioned in the order. An invoice was generated to pursue the cost incurred during the manufacturing process and, subsequently, delivered to the Controller of Accounts (CoA). The Controller of accounts prepared the railway receipts. Thereon, the goods were loaded and dispatched to the respective delivery point or destinations. However, the assessee was the consignee in the railway receipts, and therefore, paid the freight charges. These railway receipts were sent either to the branch offices of the assessee or its bankers. After the purchaser pays the amount of consideration, the railway receipt is delivered to him.

ISSUES IN THE PRESENT MATTER

The pertinent questions are:

  1. Whether the sale is concluded/completed within the State’s territorial boundaries or not wherein the goods are produced, found, and manufactured within the State?
  2. Is there a territorial nexus between the imposition of tax by the State of Bihar and sale transaction?
RULE TO BE APPLIED

In the Indian context, no authority can go and legislate, authorize or perform any act which is in contravention to the law or is beyond the authority delegated to them. It is derived from Article 245 [2] of the Constitution, which enumerates the extent of laws made by Parliament and the Legislature of States. It divides the jurisdiction based on the territory. One crucial aspect of such jurisdiction is the Territorial nexus. Amongst such law-making power, the Parliament is empowered to legislate or enact a law having extra-territorial operation. Hence, an Act of the State Legislature, if it gives extra-territorial operation to its provisions, can successfully be challenged in the court. However, contentions against such operation of law can withstand on the ground of territorial nexus. This means that a law enacted by the State Legislature is not invalid so that a sufficient nexus can be established between the State and the subject matter.

ANALYSIS

It is essential to understand the concept of ‘Sale of Goods.’ To understand the idea, we will refer to the Bihar Sales Tax Act, 1947 and the Sale of Goods Act, 1930.

Section 2(g) [3] of the Act states that “‘Sale‘ means, with all its grammatical variations and cognate expressions, any transfer of property in goods for cash or deferred payment or other valuable consideration, including a transfer of property in goods involved in the execution of the contract but does not include a mortgage, hypothecation, charge or pledge.”

The ambit of the term ‘sale’ should be viewed in three ways. Firstly, the meaning attached to sale in ordinary parlance; Secondly, the transactions of similar nature but referred to with a different term or name and thirdly, the transactions that may not be explicitly mentioned but meant to come under the term [4] of sale.

Section 4 of the Indian Sale of Goods Act states, “(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.” There may be a contract of sale between one part-owner and another.

Clause (1) of section 4 of the Act briefly lays down the meaning of the Sale Contract. The essentials are – buyer, seller, goods, and consideration. This contract must further fulfill the requirements of a competent party [5] under the Indian Contract Act.

(2) A contract of sale may be absolute or conditional.

Section 4(2) lays down that the contract should not be vague or ambiguous in its terms, which fails the consensus of the parties to the agreement.

We will restrict ourselves to territorial nexus and not delve into the different facets of imposition of tax in this case. We must refer to specific facts to better analyse and understand the intricacy in the present matter.

The State Legislature derives the authority and power to make laws on the subject mentioned above matter through section 100(3) [6] of India, 1935 Act read along with Item No. 48 of List II of/in the 7th Schedule. Imposition of tax on goods is a subject matter, and therefore, it is upon the State to decide the tax rates to goods may be subjected.

Item no. 48 enumerates the topic of taxes on the sale of goods and on advertisements. Section 100(3) exclusively gives the Provincial legislature power and not the federal legislature to make laws on subjects mentioned under the List II of/in the 7th Schedule. This distribution of law- making power between the central and State is based on specific grounds.

Article 1 of the Constitution of India establishes India, that is Bharat, as a ‘Union of State.’ This means that the country is divided into several states and Union territories. Now, if the responsibility of rule-making is solely given to the Central legislature, it may be overburdened as each State’s requirements are different from the other. In continuance to that, the State can ensure the betterment and welfare as they may enact any law that may help them achieve such objectives.

At the same time, article 256 [7] of the Constitution casts an obligation on the states to work and function by the law made by Parliament. This ensures that no state can make an arbitrary law and violate the fundamental rights of the citizens.

Now, the words used in Section 100 (3), “….to make laws for province or any part thereof…” are of importance. The section remains silent on the part of the provincial legislator and the extent concerning the law’s applicability. Simultaneously, it will be erroneous to presume that the section restricts the legislature to make laws only limited to the territory of the State. Therefore, one should avoid speculation or assumptions while interpreting the words and phrases used in a section.

It should be observed that a sale transaction is a combination of various small transactions of legal nature like the agreement of the sale, passing of title, delivery of goods, etc. However, there may be circumstances where the different stages involved in the contract of sale may not be performed/concluded in one place or State. However, to say that goods might be manufactured in State A, the final consumption and termination are State B.

The purchaser/buyer might live in another state where the actual consumption might take place. However, if the majority of the functions such as finding, accumulating, production, manufacturing is done in another state, it can levy sales tax on such goods.

To establish whether the State of Bihar has the territorial nexus to levy the sales tax, two elements have to be satisfied –

  1. the connection must be accurate and not illusory and
  2. the liability sought to be imposed must be pertinent to that connection.

The connection between the State and the subject matter should be genuine and not illusory. [8] This means that tax imposition must originate from valid and legitimate state law, and sufficient territorial nexus with the legislating State shall be established. It is for the court to determine if the test of the sufficiency of nexus is satisfied in each case.

TISCO, Bihar tried to levy production tax on the goods. The State of Bihar claimed that the production house is in Bihar, and thereon, the transportation of goods takes place from Bihar to Madhya Pradesh. Therefore, the majority of the sale agreement is performed in the State of Bihar, and merely the consumption of the property is done outside the State. Thus, the connection is genuine and not merely illusory.

Secondly, the liability sought to impose on such goods is the sales tax which is pertinent to the connection and agreement as the entire dispute is regarding the sales and the tax to be charged or levied on such goods.

It is to be noted that such nexus theory does not authorize the provincial legislature to impose tax but is somewhat indicative of what circumstances an Act of the legislature may impose a tax. The presence of the goods at the date of the agreement for sale in the taxing State; or the production or manufacture of goods in that State; the property wherein eventually passed as a result of the sale wherever that might have taken place, constituted a sufficient nexus between the taxing State and the sale.

Therefore, the production of goods in Bihar constitutes a sufficient territorial ‘nexus’ or connection that confers jurisdiction upon the provincial legislature and empowers them to impose a tax on such goods. Therefore, the territorial nexus is established between the subject and the objective sought by the legislation.

The RMDC case and Wallace bros. The Case acts as a precedent to the present matter.

In Wallace Bros. and Co. Ltd. v. The Commissioner of Income, [9] a company was registered and incorporated under the Companies Act, which undertook and carried its business in the territory of India. A sleeping partner of the company acted as the representative on behalf of the company to enter into various agreements.

In one such fiscal year, the company earned huge revenue and made enormous profits. The income tax authorities of India sought to impose a tax upon the respondent on such earnings and profits as accounted in the respective financial year.

The respondent had challenged the authority and the basis of such imposition. However, while deciding against the respondent, the Privy Council held that the tax’s power is derived from the doctrine of territorial nexus. Furthermore, it was held that the majority of the income earned was from British India, which created sufficient ground to establish a territorial nexus.

Similarly, in State of Bombay v. RMDC, [10] the respondent conducted a prize competition of a crossword puzzle. A prize was given in the form of a reward to the winners of the competition. Anyone who wished to participate had to solve the puzzle published in the newspaper. The newspaper was printed and published in Bangalore as well. The paper was widely circulated in Bombay and Bangalore. The participants were required to submit a form and a small fee, i.e., registration fee.

The state government decided to levy tax on the respondent company for organizing a prize competition in the State. The respondent challenged the matter in the Supreme Court. The question before the court was whether the tax could be levied upon a person, herein the respondent, who resides outside the territorial limits of the State. The Supreme Court held that there exists a sufficient territorial nexus as the competition fees attribute to the revenue earned by the respondent through the competition. Therefore, the State is legitimate in imposing a tax on the respondent for conducting such competition.

CONCLUSION

The High Court held that the State of Bihar was entitled to impose a tax on the goods in the present matter. It further held that the imposition of tax on the goods was within the territorial legislature of the State. Furthermore, it had the authority to legislate on such matters and is not violative of Article 245 of the Constitution of India. Thereby meaning that neither it goes ultra vires while performing its function of legislation nor it results in an extra-territorial function.

The court is justified in ruling that the imposition of tax is within the ambit of territorial nexus. The facts and circumstances of the case establish the territorial nexus between the sale and the tax imposing State. The mere fact that the physical transfer of property was done outside the State does not render the State powerless to impose the tax on the goods.

The author concurs with the decision of the High Court to rule in favour of the State of Bihar. The doctrine of territorial nexus does get established in the present scenario. However, it has to be observed on a case-to-case basis. The court rightly observed facts and the establishment of the connection between the object and the facts of the case. Therefore, the author feels this is one of the best judgments that is now being used as precedents in many present subject matters.

[1] 5th Semester, Symbiosis Law School, Noida.

[2] INDIA CONSTI, Article 245 – Extent of laws made by Parliament and by the Legislature of States.

[3] Section 2(g), Bihar Sales Tax Act – Definitive clause for the term sale.

[4] RBI v. Peerless General Finance and Investment Co. ltd. and Ors., 1987 SCR (2) 1; 1987 AIR 1023.

[5] Section 11, ICA, 1872 – Competent Parties.

[6] Section 100, Government of India Act, 1935 – Subject Matter of Federal and Provincial Laws.

[7] INDIA CONSTI, Art. 256 – Obligation of States and the Union.

[8] State of A.P. v NTPC Ltd., (2002) 5 SCC 203; AIR 2002 SC 1895.

[9] AIR 1948 PC 118.

[10] AIR 1957 SC 699; 1957 SCR 874.

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