The Honorable Supreme Court of India, in its judgment in State of Travancore-Cochin vs. Shanmugha Vilas Cashew Nut Factory And Others, Judgment Dated May 08, 1953, had occasion to examine certain sales or purchases of goods (cashew nut) if they could have been said (i) in the course of inter-State trade or commerce; or (ii) in the course of import of goods into the territory of India; or (iii) in the course of export of the goods out of the territory of India. In reference to expression “in the course of”, the Honorable Court had held as follows:-
“The word “course” etymologically denotes movement from one point to another, and the expression “in the course of” not only implies a period of time during which the movement is in progress but postulates also a connected relation. —“
The important question is that how the expression “in the course of” is to be understood in reference to (i) supply of goods or services or both in the course of inter-State trade or commerce; (ii) supply of goods or services or both in the course export of goods or services or both out of the territory of India; and (iii) supply of goods or services or both in the course of import of goods or services or both into the territory of India.
In the Constitution of India, One Hundred and First amendment has been made to make provisions for levy of goods and services tax (hereinafter referred to as GST). In the amended Constitution, in reference to GST, the expression “in the course of”, has been used in the following provisions, namely:–
1. Clause (2) of Article 246A
“246A. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
Explanation.—The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council.”.
2. Clauses (1) and (5) of Article 269A
“(1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.
Explanation.—For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.”
“(5) Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.”
3. Clause (4) (c) of Article 279A.
“(4) The Goods and Services Tax Council shall make recommendations to the Union and the States on—
(c) model Goods and Services Tax Laws, principles of levy, apportionment of Goods and Services Tax levied on supplies in the course of inter-State trade or commerce under article 269A and the principles that govern the place of supply;”
4. Clause (1) of Article 286
(1) No law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or of services or both, where such supply takes place—
(a) outside the State; or
(b) in the course of the import of the goods or services or both into, or export of the goods or services or both out of, the territory of India.”
In view of the above provisions made for levy of GST, the Constitution classifies all supplies in the following categories, namely:-
(i) supply of goods or services or both in the course of inter-State trade or commerce;
(ii) supply of goods or services or both in the course of import of goods or services or both into the territory of India;
(iii) supply of goods or services or both in the course of export of the goods or services or both out of the territory of India;
(iv) supply of goods or services or both outside the State; and
(v) any supply of goods or services or both except supplies referred to in clauses (i) to (iv) above.
In clause (5) of Article 269A of the Constitution, the Parliament has been given power to make law to formulate principles for determining place of supply, and when a supply of goods or services or both takes place in the course of inter-State trade or commerce. Likewise, in Article 286 the Constitution, the Parliament has been given power to make law to formulate principles for determining when a supply of goods or services or both takes place-
(a) Outside the State; or
(b) in the course of import of goods or services or both into the territory of India; or
(c) in the course of export of goods or services or both out of the territory of India.
A perusal of all GST Laws made by the Parliament shows that the Parliament has, for the purpose of levy of GST, classified all supplies in following categories, namely:-
(i) inter-State supply (section 7 of the IGST Act);
(ii) intra-State supply (section 8 of the IGST Act); and
(iii) Supplies in territorial waters (section 9 of the IGST Act).
In respect of supply of goods imported into the territory of India, till they cross the customs frontiers of India, and supply of services imported into the territory of India, in section 7 of the IGST Act, a provision has been made to treat them supply of goods or services or both in the course of inter-State trade or commerce. Sub-section (5) of section 7 of the IGST Act also provides the following:
(5) Supply of goods or services or both,—
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section, shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.
Here, clause (a) of above quoted sub-section (5) relates to export supply of goods or services or both. Clause (b) of above quoted sub-section (5) inter-alia includes supplies of goods or services or both which take place in all respect inside a State. Such situation arises when supplier, recipient and place of supply, all are located within the same State or Union Territory. Supply made by a Special Economic Zone developer or Special Economic Zone unit is also of export nature. In respect of these supplies, provision has been made to treat them supply of goods or services or both in the course of inter-State trade or commerce.
Tax on sale of alcoholic liquor, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel, where sale of such goods takes place in the course of inter-State trade or commerce; or outside the State; or in international trade or commerce, still continues to be levied under the Central Sales Tax Act, 1956. Earlier to One Hundred And First Amendment in the Constitution, Article 286 had been related to tax on sale or purchase of goods. The said Article had run as follows:
(1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods, where such sale or purchase takes place—
(a) outside the State; or
(b) in the course of the import of the goods into, or export of the goods out of, the territory of India.
(2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1).”
Article 269 of the Constitution relates to levy and collection of tax on sale or purchase of goods where such sale or purchase takes place in the course of inter-State trade or commerce. Clause (3) of the said Article runs as follows:–
“(3) Parliament may by law formulate principles for determining when a sale or purchase of, or consignment of, goods takes place in the course of inter-State trade or commerce.”
The Parliament, in exercise of its powers under Article 269, has enacted the Central Sales Tax Act, 1956. Long title of the said Central Sales Tax Act, 1956 runs as follows:
“An Act to▬
formulate principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce or outside a State or in the course of imports into or export from India;
provide for the levy, collection and distribution of taxes on sales of goods in the course of inter- State trade or commerce; and declare certain goods to be of special importance in inter-State trade or commerce and specify the restrictions and conditions to which State laws imposing taxes on the sale or purchase of such goods of special importance shall be subject.”
Here, we see that long title of the Central Sales Tax Act, 1956 specifically mentions about formulation of principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce or outside a State or in the course of imports into or export from India. Perusal of long titles, of all GST Laws made by the Parliament, are silent on the point of formulation of such principles.
Title of Chapter II of the Central Sales Tax Act, 1956 runs as follows:-
“Formulation of Principles for determining when a sale or purchase of goods takes place in the course of inter-state trade or commerce or outside a State or in the course of import or export.”
In the IGST Act, there is no chapter or section which speaks about formulation of principles required in clause (5) of Article 269A and Article 286.
In chapter II of the Central Sales Tax Act, the Parliament has made following provisions, namely:–
(i) Section 3, to formulate the principles to determine when a sale or purchase of any goods takes place in the course of inter-State trade or commerce;
(ii) section 4, to formulate principles for determining when a sale or purchase of any goods takes place outside the State; and
(iii) section 5, to formulate principles for determining when a sale or purchase of goods takes place in the course of import of goods into, or export of goods out of, the territory of India.
Section 3 of the Central Sales Tax Act, 1956 runs as follows:
“3. When is a sale or purchase of goods said to take place in the course of inter-State trade or commerce.-
A sale or purchase of goods shall be deemed to take place in the course of inter-state trade or commerce if the sale or purchase-
(a) occasions the movement of goods from one State to another; or
(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.
Explanation 1. – Where goods are delivered to a carrier or other Bailee for transmission, the movement of the goods shall, for the purposes of clause (b), be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.
Explanation 2.- Where the movement of goods commences and terminates in the same State it shall not be deemed to be a movement of goods from one State to another by reason merely of the fact that in the course of such movement the goods pass through the territory of any other State.”
Earlier to enactment of the Central Sales Tax Act, 1956, the Constitution Bench of the Honorable Supreme Court in its judgment in State of Travancore-Cochin vs. Shanmugha Vilas Cashew Nut Factory And Others, Judgment Dated May 08, 1953 had occasion to examine certain sales or purchases of goods (cashew nut) if they could have been said (i) in the course of inter-State trade or commerce; or (ii) in the course of import of goods into the territory of India; or (iii) in the course of export of the goods out of the territory of India. In the case before the Honorable Supreme Court, the respondents had purchased raw cashew nuts within the State of Travancore-Cochin, from the neighbouring states and also had imported such nuts from Africa, for the purpose of refining them and exporting them to America. Imports from Africa were made in the following ways:
(a) purchases were made through intermediaries doing business as commission agents at Bombay who acted as agents for the respondents charging commission; (b) the commission agents at Bombay indented the goods on their own account and they sold the goods as principals to the respondents. In either case the goods were shipped direct from Africa to a port in the Travancore-Cochin State. It was found as a fact that the process of the factory was such that the goods were not the same goods commercially after refinement.
At the relevant time, clause (1) (b) of Article 286 had stood as follows:-
“286. (1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place-
(a) * * * * * *
(b) in the course of the import of the goods into, or export of the goods out of, the territory of India.”
In the judgment referred to above, the Honorable Supreme Court has, inter alia, held as follows:
“The word “course” etymologically denotes movement from one point to another, and the expression “in the course of” not only implies a period of time during which the movement is in progress but postulates also a connected relation. For instance, it has been held that the words “debts due to the bankrupt in the course of his trade” in section 15(5) of the English Bankruptcy Act, 1869, do not extend to all debts due to the bankrupt during the period of his trading but include only debts connected with the trade [see In re, Pryce, ex parte Rensburg (1).] A sale in the course of export out of the country should similarly be understood in the context of clause (1)(b) as meaning a sale taking place not -only during the activities directed to the end of exportation of the goods out of the country but -also as part of or connected with such activities. The time factor alone is not determinative. The previous decision proceeded on this view and emphasised the integral relation between the two where the contract of sale itself occasioned the export as the ground for holding that such a sale was one taking place in the course of export. It is, however, contended that on this principle of connected or integrated activities a purchase for the purpose of export must be regarded as covered by the exemption under clause (1) (b). We are unable to agree.” [(1) 4 Ch. D. 685 and Williams on Bankruptcy, 16th Edn., p. 307.]
The Honorable Supreme Court had further observed as follows:-
“The phrase “integrated-activities” was used in the previous decision to denote that “such a sale” (i.e., a sale which occasions the export) “cannot be dissociated from the export without which it cannot be effectuated, and the sale and the resultant export form parts of a single transaction.”It is in that sense that the two activities-the sale and the export-were said to be integrated. A purchase for the purpose of export like production or manufacture for export, is only an act preparatory to export and cannot, in our opinion, be regarded as an act done “in the course of the export of the goods out of the territory of India”, anymore than the other two activities can be so regarded.”
In view of the above quoted observations of the Honorable Supreme Court, unless the two activities, viz. (i) sale or supply of any goods, and (ii) export of such goods out of the territory of India, are integrally connected, sale or supply of such goods cannot be said in the course of export of goods out of the territory of India. Similar is the case with a sale or supply of goods which takes place in the course of inter-State trade or commerce.
In my opinion, unless the Parliament formulates principles for determining supply of goods or services or both referred to in clause (5) of Article 269A and the supplies referred to in clause (1) (b) of Article 286, expression “in the course of”, used in these provisions of the Constitution, is to be understood in the light of the observations of the Honorable Supreme Court. The Law Commission of India, in its Second Report on Parliamentary Legislation relating to Sales Tax, had submitted its recommendation on sale of goods which can be said in the course of inter-State trade or commerce. Para 12 of the report runs as follows:-
’12. No doubt the expression “in the course of inter-State trade or commerce” has a very wide connotation. In India we are, however, not concerned with the regulation of commerce generally among several States as under the commerce clause in the American Constitution. What we have to determine is what is a sale or purchase in the course of inter-State trade or commerce. The problem, therefore, is to ascertain what transactions of sale or purchase can fairly be said to arise in the course of inter-State trade or commerce. For this purpose we have to fix upon some characteristics of these transactions which can well be said to stamp them with an inter-State character. In the large mass of American decisions under the commerce clause the one element which is stated to be an indispensable incident of commerce between the States is the movement of the goods which are the subject-matter of the sale or purchase from one State into another. We may refer in this connection to the definition of “inter-State commerce” given by Rottschafer in his “Constitutional Law” (1939 Ed. p. 299):—-
“The activities of buying and selling constitute inter-State commerce if the contracts therefor contemplate the movement of goods in inter-State commerce”.
Later he adds (p. 235):
“The decisive factor that renders making a contract an act of inter-State commerce is that it contemplates or necessarily involves the movement of goods in inter-State commerce and this test applies whether it be a contract to buy or one to sell”.’
The Law Commission had made its recommendation, in Para 13 of the report as follows:–
’13. The principles for determining when a sale or purchase takes place in the course of inter-State trade or commerce may be framed in the following manner:—-
“A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce, only if the sale or purchase-
(a) occasions the movement of the goods from one State to another, or
(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.
Explanation.-Where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall, for the purposes of sub–c1ause (b), be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.”‘
Paragraphs 5, 6 and 7 of the said report had been related to sale or purchase of goods in the course of import into, or export out of, the territory of India. These paragraphs had run as follows:
“5. It is convenient to take first the question of the appropriate principles to determine when a sale or purchase takes place in the course of import or export. The formulation of these principles presents the least difficulty.
6. In the Tranvancore-Cochin. Cases [(1952) S.C. 1{ 1112 and (1954) S.C.R. 53}] the Supreme Court considered Article 286 (1) (b) and held that the clause covered two classes of cases: (i) sales and purchases which themselves occasioned the import or export, (ii) sales or purchases effected by a transfer of shipping documents when the goods are beyond the customs frontiers of India.
7. The interpretation put by the Supreme Court on the clause was considered by the Taxation Enquiry Commission who stated that the position arising from the interpretation put by the Supreme Court was “perfectly satisfactory so far as foreign trade is concerned”. (T.E.C. Report, p. 48, para 7). The Law Commission had also before it the views of the Ministry of Finance on this question.
The Ministry was of the view that the decision given by the Supreme. Court had been accepted by almost all the States and no difficulties were reported to have arisen as a result of the Supreme Court judgment.”
The judgments referred to in the report and the report suggests that location of seller and buyer are irrelevant for the purpose of determining sale or purchase in the course of inter-State trade or commerce, in the course of import of goods into the territory of India or in the course of export of goods out of the territory of India.
Disclaimer: Except the quoted versions, all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to obey the law and to seek opinion of their legal advisors before acting upon the views expressed here. I and the publishers of this article disown any liability on account of any loss or damage that may be caused on account of use of views expressed here.
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