Kelvinator of India Ltd v. the State of Haryana
KHANNA, J. This appeal by special leave by M/s. Kelvinatc: of
India Ltd. is directed against the judgment of Punjab & Haryana High
Court whereby that court answered the following question referred to it
by the Sales Tax Tribunal Haryana in favour of the department and
against the app~llant :
"Whether on the facts and circumstances of the case, the
agreement between M/s. Kelvinator of India (Assessee),
M/s. Spencer & Co. Ltcl., Messrs Blue Star Engineering Co.,
and M/s. General Equipment Ltd .. in pursuance of which the
refrigerators manufactured by M/s. Kelvinator of India at
Faridabad moved to Delhi were merely for distribution of
goods between the principal and his· agents or were agree·
ments of sale between two parties ?"
The matter relates to the assessment year 1965-66 i.e. the period
from April I, 1965 to March 31, 1966. The appellant company hrui
a factory at Faridabad in Haryana. It manufactures refrigerators,
deep freezers, compressors and other similar articles. The factory went
into production in 1964. Its registered office and sales office are at
19A Alipore Road, Delhi. The appellant has godowns in Delhi having
full staff of godown keepers and clerks. The appellant is a registered
dealer under the Punjab General Sal'es Tax Act, 1948 and the Central
Sales Tax Act, 1956. The registration has been done at Faridabad.
Refrigerators and other articles are manufactured by the appellant under
a collaboration agreement with an American company :Known as
Kelvinator International Corporation. The refrigerators and other
articles manufactured by the appellant are marketed under trade marks
'Kelvinator', 'Leonard' and 'Gem'. The entire sale of refrigerators.
compressors and spare parts in 1964 was made to Spencer & Co. Ltd.
at Delhi. Such transfers were accepted as genuine by the sales tax au
thorities. In respect of these sales the department did not take the
siand that they W·:>re inter-State sales or that the movement of goods
from Faridabad to Delhi was occasioned by reason of sales made to
Speixier· & Co. Ltd.
On April 26, 1965 the appellant entered into a distribution agree
ment with Spencer & Co. Ltd. in resp.:ct of refrigerators and other pro·
ducts having Kelvinator trade mark. Similar distribution agreements
were entered into with Blue Star Engineering Co. (Bombay) Pvt. Ltd.,
on September 15, 1965 in respect of Leonard refrigerators and on
December 11, 1965 with General Equipment Merchants Ltd. in respect
of Gem refrigerators. The agreement with Spencer & Co. w.as to take
effect from April 1. J 965 and the other two agreements from the dates
on which they were entered into. The terms of the agreements were
substantially similar, except in certain matters with which we are either
not concerned or to which reference would be made hereinafter. Th" ·
relevant clauses of·agreement.dated April 26, 1965 are as under:
"Whereas in terms of the Manufacturing and Sales Agree
ment entered into by the Company (the appellant company)
with Kelvinator International Corporation, Detroit (Mii:higan-
E ..
KELVINATOR LTD. v. HARYANA (Khanna, J.) 467
U.S.A.), the Company is granted exclusive right und lice11ce to
manufacture, assemble and sell the products designed and/o;
manufactured by the Company under Trade mark "Kelvinator ·•
or any other Trade mark in India 0hereinafter called th!
. Territory) and whereas the Company in its Factory at Farida·
bad (Punjab) has commenced the manufacture of Kelvinato: ·
Refrigerators, parts and Spare parts etc., and whereas th~
Distributors (Spencer & Co. Ltd.) have agreed to be and to
act as Distributors of the Company, now it is hereby mutually
agreed and declared between the parties hereto as followf :-
1. The Co1npany hereby undertakes to sell and the Distri·
butors hereby undertake to buy all products manufactured by
the Company as mutua1ly agreed upon from time to time. The
Distributors shall have the right to sell the Company's Kelvinn
tor and such other trademark products, spare parts and paru
within the Territory. Due consideration to the recommenda·
tions of Distributor& in regard to change/alteration in existin6
products or additions of new product& will all the time be
given by the Company.
2. All purchases by the Distributors from the Company
shall be on principal to principal basis at mutually agreed
prices.
3. *******
4. The goods shalt be delivered to the Distributors l:ror.c
the Company's registered office in Delhi and the property h
the same shall pass to the Distributors in Delhi on delivery.
where the sale shall always take place.
5. For the purpose of determining the liability of Distri·
butors for payment to the Company, the price quoted will be·
ex-Company's works at Faridabad. The Distributors shalt
also pay to the Company all the charges on the transport of
the goods from the Company's works at Faridabad to the
Company's Registered Office in Delhi.
6. The Distributors shall at all times warrant the goodi
to their customers only on the warranliy terms issued by tho
Company. All goods leaving the Company's factory will pas3
through rigorous inspection procedures laid down by the Corr.
puny. No responsibility for shortage or damage occurring ic.
transit will be accepted by the Company.
************
************"
Cl_auses 3, 6, 7 and 8 of agreement dated September 15, 1965 ir. res.
pect of Leonard refrigerators were as under :
"3. For the purpose of clause (I) and in order to enab1~
the Company to arrange its production schedule, the Di5tri
butors guarantee and undertake to purchase from the Corr.·
pany a minimum quantity of 1500 Refrigerators per year, ~t
·a rate not less than 80 Refrigerators per month. It is agreed
468 SUPREME COURT :aEPORTS [ 1974 J 1 s.c.a,
that the distributors will be. relieved of their obligation under
th~ Agreement to the extent that the Company. is .unable
to ·supply the guaranteed minimum quantity of 80 refrigera
tors per month.
6. For calculating the liability of the Distributors for pay·
mrnt to the Company, the price quoted will be ex-factory
Company's works at Faridabad. excluding Central Excise and
all other taxes, duties and charges (but not octroi charges pay
able between Faridabad and Delhi which will be to the Com
pany's account) which may be levied or introduced by the
Government or any local authority from time to time and
which will be charged in addition to the said ex-factory price.
The Distributors shall pay to tM Company, the transport
charges for the goods from the Company's works at Faridabad
10 the. Compalll.)''s godowns in Delhi.
7. All the goods shall remain the property of the Com·
pany till they reach Delhi arid are delivered to the Distribu·
tors in Delhi, where alone the property therein shall pass to
the Distributors. The sale shall always take place in Delhi.
8. All goods leaving the Company's factory will pass
through rigorous inspection procedure laid down by the Com
pany, and will be packed in Crates and will be delivered to the
Distributors packed as such. The Company in no case shall
be responsible for any shortage or damage .that may occur in
further transit, once the goods have been delivered and
inspected by the Distibutors in Delhi."
Clauses 6, 7 and 8 of agreement dated December fl, 1965 in respect
of Gem refrigerators were substanilally similar to "Clauses 6, 7 and 8
of agreement dated September 15, 1965. Clause 3 Of agreement dated
December 11. 1965 was as un(ler :
"3. In order to facilitate the Company's arrangement of
its production schedule, Gem undertakes to buy from the Com
pany a minimum quantity of 2000 refrigerators of both IO.I
cu. ft. and. 6-2 cu. ft. capacity in die first year at a rate of
not less than 150 refrigerators per month. Likewise, for the
2nd year, Gem agrees to buy 3000 refrigerators and for 3rd
year, 4000 refrigerators of both sizes. The Company will,
however, incur· no liabilities if for any reasons it is unable to
make the supply according to the minimum quantities stipu·
lated above. If for some reasons Gem is unable to accept or
]'Urchase the respective minimum yearly stipulated quantities,
Gem will incur no liability save the cancellation of the Agree
ment at the Company's choice."
Procedure for transfer of goods from the factory at Faridabad to the
appellant's company's sales office and godowns at 19A, Alipore Road.
Delhi was described in the objections filed on behalf of the appellant
before the sales tax authority as under :
"The company gets the goods cleared from the Excise for
destination to its Delhi office godown in piece-meal pay the
'·'
.g
Ii:
l'ELVl.NATOR LTD. v .. HARYANA (Khan11a, /.) 469·
octroi themselves at the Delhi barrier along with the freight
charges and the goods are taken delivery of bY its registered
office. · The buyer places its specific order accordiiig to its
requirement and to the extent goods are available at Delhi,
delivery is given by the Delhi office· after the goods are ap
proved in good condition by the purchaser. That the goods
never move from the 'factory in pursuance of ·any contract
but are moved as per routine for storage at Delhi in accord
ance with the company's own convenience. Specific orders
arei placei! by the buyers when the goods are already lying in
stock. The movement of the goods as such is not in further
ance .of any contract of sale but move to Delhi independently
of any stipulation."- :
Four affidavits were also filed before the assessing authorit). The first
affidavit is of M. B. Sutaria, Secretary of the appellanf comp~)'., Re-
levant parts of this affidavit are as under : · ·
"3. That after the goods are manufactured in the factory
an excise clearanco p~ is obtained after payment of- excise
duty for tlie \ransport of goods from the fas:tory to the com'
pany's godown in Delhi. The excise pass is always for move
ment of goods in favour of self.
4. That during the transport of goods from Faridabad to
D~lhi, the octroi at the barrier is paid by the company.
5. That at destination the goods are received by the com-·
pany's staff and taken in their godown.
6. That after the goods have already been received by
the cqmpany an order is received from the customer for the
~upply of goods. ·
7. That. in pursuance of the said orders Delhi staff give
delive1y of the goods at-Delhi to the customer under a chal
lan prepared at Delhi.
8. That thereafter the bill is raised from Delhi and price
.of. the goods is received by the Company at Delhi and deposi
tcchn the Company's account in ,its Delhi Bank."
The other three aJ!idavits were those of V. A. Rao of Spencer & Co.,,
Rajinder Nath Seth of Blue Star Engineering Co. LUI. and Mrs. Ushll'
Batra of General Equipment Merchants Ltd. In the affidavit of V. A,
Rao it was stated :
"2. That we select the pieces of Refrigerators lying in the
· godowns of Kelvinator of India Ltd. Delhi ancUf on inspec
tion we find that pieces of Refrigerators suiting to our re
quirements, we . place specific orders on Kelvinator of India
Ltd., Delhi to supply us the goods."
The artidavits ·of Rajinder Nath Seth and Mrs. Usha Batra contained
similar paragraphs. The appellant company took a policy of insurance'·
to cover lorry risk as per Mot.or Lorry Risk clauses, including theft,
470 SUPREME COURT REPORTS [ 1974] 1 ~.C.R.
pilferage and non-delivery denting scratching and breakage or any A
•Other damage due to any external means, including certain other risks
:from warehouse to warehouse.
In the reference order dated April 1, 1971 the Sales Tax Tribunal
'While dealing with rhe transport of goods from Faridabad to Delhi
.observed :
"The Refrigerators manufactured by the Company were
transferred to its sale office and godowns at 19A, Alipore
Road, Delhi·6 under despatch notes. Necessary entries in the
stock register showing receipt were made in the stock registe~
maintained by the Company in the godowns and sale office
at Delhi. The issue entries were also made in such registers.
The payments such as freight, octroi, transit in5urance and
other expenses i.e. upto the stage of sale and delivery of
goods to the respective distributors at the sale office at Delhi
were borne by the company. The purchasers, namely, the
distributors placed their specific orders at various times at
Delhi upon examil)jng and finding the suitability of the
machines in pursuance of which the refrigerators were
delivered against receipt on delivery challans. Bills were
raised by the sale office at Delhi and consideration was also
received by it."
,The assessiQg authority vide its order dated March 2, 1968 held
1hat the transactions between the parties were inter·State sales and liable
10 be taxed as such. The movement of refrigerators from Faridabad
10 J)~lhi was held to be occasioned by the sales to the distributors.
At first the sales tax-payable by the aosessee was assessed by the Sales
Tax Oftlcer to be Rs. 8,14,112.25 at the rate of 10 per cent of the
transactions amounting to Rs. 81,41,142.45. Subsequently on review
application the tax liability was reduced to Rs. 1,59,691.19.
On appeal filed by the appellant, the Deputy Excise and .Taxation
Commissioner as per ord·or dated July 24, 1968 held that the distri·
'bution agreements were not contracts of sale. It was further held that
the refrigerators were transported to Delhi prior to their sale to distri
'butors. The transactions in question were consequently held not to
constitute int·~r-State sales. The Excise and Taxation Commissioner
thereafter took suo motu action and after hearing both· the parties he
'held as per order dated September 12, 1968 that as soon as the re·
frigerators were manufactured they were appropriated to the contracts
and that inovement from Faridabad to Delhi was under the agreement
to sell. The matter was then taken up by the assessee in appeal to the
Sales Tax Tribunal. The Tribunal as per order dated August 14, 1969
·took the view that the agreements with the distributors were agreements
of sale and that the sales in question were inter-State sales. The ap
p;ollant thereafter filed review application but the same was dismissed
'by the Tribunal on November 24, 1969. Application was thereafter
1iled before the T[ibunal praying, inter a/ia, that the following questions
of law be referred io the High Court :
"!. Whether on the facts and circumstances Of the case
the Sales were local sales of Delhi or were in the course of
KELVINATOR LTD. v. HARYANA (Khanna, /.) 471
A inter-State trade and commerce giving rise to the commenc:
ment of movements in the State of Haryana.
2. Whether on the facts and circumstances of the case the
distributorship agreements could validly be construed to be
contracts of sales even when they lack all the essential ingre
dients for the formation of the same.
3. Whether on the facts and circumstances of the case the
movement of the goods from Faridabad to Compa~'s godowns
at Delhi at its own rjsk and cost could be termed to be com
mercial movements warranting the imposition of the tax under
the Central Sales Tax Act or inter-departmental movement for
facility of better enjoyment of rights."
The Tribunal. however, thought that the question reproduced earlY.:r
would combine all the three questions suggested by the appellant,
Accordingly the question set out at the beginning of this judgment
was referred to the High Court.
The High Court in answering the question .in favour of the depart
ment found that the machines moved from Faridabad to Delhi in pur
suance of agreements of sale which had been teQ11ed distribution
agreements.
In appeal before us, Mr. Palkhiwala on behalf of the appellant coJJf
pany has argued that the three distribution agreements do not constitute
contracts of sale. In the alternative, he submits that even if. the dis
tribution agreements were construed to. be contracts of sale, the move
ment of goods in question from Farldabad to Delhi cannot be said to
have been occasioned by the distribution agreements. It is also urged
that there was no appropriation of the goods at Faridabad to the con
tract with any particular distributor. As again~! that, Mr. Tarkunde
on behalf of the respondent contends that the tliree distribution, agree-.
ments did constitute contracts of sale and that it were the aforesaid
agreements which occasioned the movement of goods from Faridabad
to Delhi. The appropriation of goods to the contract with each of the
distributors also, according to the learned counsel, took place in
Faridabad.
Before d"aling with the contention of the partii!s, it would be apposite
to refer to the relevant statutory provisions and examine the legal posi·
tion Section 6 of the Central Sales Tax Act (hereinafter referred :to
as the Act) makes every dealer liable for payment of tax under the
Act on r.ll sales effected by him in t)le course of inter-State. trade or
commerce. "Sale" with its grammatical variations and cognate ex ..
i•ressions, has been defined in section 2 (g) of the Act, to mean any
transfer of property in goods by one person to another for cash or for
deferred payment or for any other valuable consideration, and includes
a transfer of goods on the hire-purchase or other systt<m of payment by
instalments, but does not include a mortgage or hypothecation of er a
charge or .Pledge on goods. According to section 3 of the Act, 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 t:J
another; or
, SUPREME COURT REPORTS [ 1974 J 1 s.c.R.
(b) is effected by a transfer of documents of title to the
, goods during th~ir movement from one State to another.
We itre concerned in the present case with clause (a) and not with
clans¢ (b). A sale o_f goods can be held to have taken place in the
course of inter-State trade under clause {a) of Section 3 of the Act if
it can b~ shown that the sale has occasioned the movement of goods
from one Slate to another. A sale in the course of inter-State trade has
tI1ree essentials: (i) there must be a sale, (ii) the goods must actually
be moved from one State to another, and (iii) the sale and movement
of the goods must be part of the same transaction. The word "occa
sions" is used as a verb and ,means 'to cause or to be the immediate
cause or. In the case of Tata Iron.and Steel Co. Ltd. v. S. R. Sarkar
WU/ Ors.(') Shah Jc (as he then was) speaking for the majority ob
seiVed that a transaction of sale is subject to tax under the Act on the
CQll)llletion of the sale. A mere.contract of sale is not a sale within the
,cleflll!ion of "sale" in section 2(g). A sale being, by the definition,
transfer of property becomes taxable under section 3 (a) "if the move
~! of goods from one State to another is under a covenant or in
cident of the contract of sale". In Ben Gorm Nilgiri Plantations Co.
Ci;Qlicor & Ors. v. Sales Tax Officer, Special Circle, Ernakulam &
Ors(2) this Courf. dealt with the provisions of section 5 of the Act
which relates to sale or purchase of goods in the course of import or
expott. It was held that a sale in the course of export predicated con·
n'eetlon between the sale and export, the two activities being so inte-
gi',aied that the connection between the two, cannot be voluntarily inter
rupted without a breach of the contractor the compulsion arising from
the: nature of the transaction. The export, it was further observed
s00uld be inextricably linked up with the sale so that the bond cannot
be dissociated the observations in the case of Tata Iron and Steel Co.
as w~Jl as Ben Gonn Nilgiri Pla11tatio11s Co. were relied upon by a
(hnstitution Bench of this Court in the case of Tata Engineering &
Locomotive Co. Limited v. The Assistant Commissioner of Commer·
cial Taxes & Another (3 ) and it was held that the sales to be exigible
to tax under the Act must be shown to have occasioned the movement
of goods or articles fqim one State to another and that the movement
must be the ~esult of a convenant or incident of the contract of sale.
It can, therefore, be said that a sale of goods is in the course of inter
Sta!e trade if the sale and movement of goods from one State to another
are' integral parts of the same transaction. There must exist a direct
nexns between the sale and the movement of goods from one, State to
the other. In other words the movement should be incident of and be
neeessitated by the-contract of sale and thus be interlinked with the sale
of goods. ··- ·'
lt is also plain from the language of section 3 (a) of the Act that the
movement of goods from one State to another must be under the con·
trac,t of sale. A movement of goods which takes place independently
of :a. contract of sale would not fall within the ambit of the above
clause. Perusal of section 3 (a) further makes it ,manifest that there
must be a contract of sale preceding the movement of the goods from
(I) rt961] I S. C. R, 379 (2) [1964] 7 S. C. R, 706.
. (ll (1970]3 S, C R. 862
c::
'· F
KELVINATOR LTD. v. HARYANA (Khanna, J.) 473
one State to another, and the mowment of goods should hm·e been
caused 1:1,i and be the result of that contract of sale. If there was no
contract of sale preceding the movement o\ goods, the movement can
obviously be not ascribed to a contract of sale nor can it be saiC! that
the sale has occasioned the movement of goods from one State to the
other.
In the light of the principles enunciated above. it cannot. in our
opiniou, bS said that the transactions in question amount to sale in the
course of inter-State trade. The High Court in the course of its judg
ment has noted that the following facts were accepted by the depart
mental authorities :
"1. The dealer manufactured and sold refrigerators.
2. These refrigerators were sold with the trade marks of
'Kelvinator', 'Leonard' and 'G.;;m'.
3. The sale of each brand was made through a separate
distributor appointed for this purpose.
4. The manner of movement is Jaid down· in cl:iusc 6 pf
Spencer's agreement and c!ause 8 of Blul) .Siar and General
Equipment Merchants agreements.
5. The,dealer i~ bound to sell a 'Kelvinator' to Spencers,
a 'Leonard' to Blue Star and a 'Gem' to General Equipment
Merchants.
6. That refrigerators were exported outside India.
7. The price of the refrigerators is fixed as mutually agreed
upon from time to time.
8. The property in goods passes at Delhi after delivery.
9. The prices are not settled for individual machine bu:
periodically.
10. The purchase orders are placed by the three distt·i-
butors after the goods reach the head office at Delhi."
It has further been found by- the High Court that the appell~nt. had
asserted the following facts and. the assertion of the appellant was nei·
!her rejec~ by the departmental authorities nor was it dealt with in
the respective orders :
"1. That after the goods are manufactured in the factory
an excise clearance pass is obtained after payment of excise
duty for the transport of goods from the factory to the com
pany's godown in Delhi. The excise pass is always for move·
ment of goods in favour of self.
2. That during the transport of the goods from Faridaba<l
to Delhi, the oc•mi at the barrier is paid by the Company.
3. That at destination the goods are received by com·
pany's staff and taktn in their goqown.
4. That in pursuance of the said orders Delhi staff giv.;;
delivery of the goods at Delhi to the customer under a challan
prepared at Delhi.
474 SUFREME COURT REPORTS [ 1974] 1 s.c.R.
5. 11rnt thereafter the bill is raised from Delhi and the J'
price of the goods is received by the Company at Delhi and
deposited in company's account in its Delhi bank.
6. That all that the assessee does is to manufacture re
frigerators and they are branded for the purpose of sale and
distribution."
In the face of the facts of the present case, we find it difficult to. B
hold that the sale of refrigerators by the appellant to the three distri
butors took place at Faridabad. We are also unable to ·agr~ with the
High Court that the distribution agreements constituted agreements of
sale. It is noteworthy in this context to observe that the number of
l'Cfrigerators which were to be purchased by each of the distributors
was not specified in the distribution agreements, nor did the agreements 1
contain the price which was to be charged for each refrigerator. Ac- C
cording to the agreement dated April 26, 1965 the appellant undertook
to sell and the distributors undertook to purchase the products of the
appellant "'as mutually agreed upon from time to time" It is, there'
fore, plain that sales by the appellant company ·to the .distributor re
fered to in the distribution agreement dated April 26, 1965 depended
upon_Jhe future agreement between the parties from time to time. Dis
ti:ibution agreements dated September 15, 1965 and December 11, D
1965 no doubt mentioned the minimum number of Leonarc and Gem
refrigerators which had been agreed to be purchased by the distributors;
the exact (!Uniber of refrigerators to be sold by the appellant to
these two distributors was still left to volition of the appellant. The
appellant company, it was also mentioned, would incur no liability if
it was unable to supply the i;uaranteed minimum number of refrigera-
tors. The mode of d.ealings between the parties was that subsequent B
to the distribution agreements, orders were placed by the distributors
with the appellant after the refrigerators had reached the appellant's
sale office and godown in Delhi. The price of the refrigerators was
also to be mutually agreed upon from time to time. It is plain that it
is the orders which were placed in Delhi by the distributors and the
acceptance thereof by the appellant that resulted in mutual agreement
of sale. It was, in our opinion, the mutual agreement 'between the par- F
ties at the .time of the placing of the order by the distributor with the
appellant which constituted the contract of sale and not the distribu-
tion agreement. The distribution agreement with each distributor l>ro
vided the framework within which the different contracts of saie were
entered into by the distributor with the appellant. This circumstance
should not make us lose sight of the fact that the distribution agree
ments and the subsequent contracts of sale were distinct transactions. ' Q
We are not impressed by Mr. Tarkunde's argument that under agree
ment dated April 26, 1965 Spencer & Co. was bound to purchase all
the products of the a;ipellant company. Spencer & Co. undertook to
buy the products manufactured by the appellant company subject to
the stipulation contained in the words "as mutually agreed upon from
time to time". Had it been the intention of the parties that Spencer . B
~ Co. was bound to purchase all products manufactured by the· appel-
lant" company irrespective of any future agreement between the par-
ties, the words "as mutually agreed upon from time to time" in clause
ff
KELVINATOR LTD. v. HARYANA (Khanna, /.) 4 7!7
1 of agreement dated April 26, 1965 would lose all significance. Jt
would nol M:ve also in that event been possible for the appellant to
enter into the other two distribution agreements of September 15, 1965
and December 11, 1965 regarding Leonard and Gem refrigerators which
were manufactured by the appellant. The fact that the appellant was
in a position to export its products to foreign countries during the assess·
ment year in question also shows that there was no agreement betweerr
the parties that the appellant was bound to sell and Spencer & Co. was
bound to purchnse all products manufactured by the appellant.
The argument that the sale of refrigerators to each of the distribu·
tors took place at Faridabad and that it was at Faridabad that the re·
fri~rato~ were appropriated towards the agreement with each of the
three. distributors appears to us to be not well-founded. The argu
ment proceeds upon the assumption that trade-mark name plates on
the refrigerators were affixed at Faridabad by the appellant company.
There is, however, no direct material to show that the name plates on
t.l1e refrigerators were actually affixed at Faridabad and not in Delhi.
Assuming that the name plates were, in fact, affixed to the refrigera·
tors by the appellant at Faridabad, there was nothing to prevent the
appellant from changing the name plate of a refrigerator and affixing
the name plate of a different brand of refrigerator on the refrigerator
from which the name plate was removed. The three different brands
of refrigerators w.ere in all respects identical except in respect of the
nari:te plate. The said name plates, it has been demonstrated to us,
are easily interchangeable. In the circumstances, the alleged affixation
of trade-mark plates to the refrigerators at Faridabad would not neces
sarily show that the appropriation of the refrigerators towarcfs the agree
ment with a particular distributor t.ook place at Faridabad. A very
significant circumstance which should not be lost sight of in this con
text is that orders in respect of the various refrigerators wern placed
by the distributors in Delhi after the refrigerators had been transported
to the Delhi sale office and godown of the appellant. If the sale of
the refrigerators in favour of the distributor had already taken place aL
Faridabad and the refrigerators had ,been appropriated there towards
the sale colltract, there would have arisen no occasion for the _placing of
the subsequent order in Delhi by a distributor with regard to the said
refrigerators. The fact that subsequent orders had to be placed by
the distributors in Delhi with regard to the different refrigerators after
their arrival in Delhi shows that there was no earlier sale or appro
priation of those refrigerators towards any contract of sale with the
distributors: The staI\d taken on behalf of the department that the
appropriation of the refrigerators took place at Faridabad towards the
OOtltracts of sale with the distributors is inconsistent with the entire
course of dealings between the parties- It may also be observed that
in deciding the question whether the transactions between the parties
constituted sales in the course of inter-State trade or commerce, the
court should look not merely at the distribution agreements, regard
should be had of the entire course of dealings between the parties.
Assuming that the distribution agreements constituted contracts of
sale, it would still have to be shown that the sale by the appellant to
Uie distributors occasioned the movement of refrigerators from Farida-
476 SUPREME COUR? REPORTS [ 1974 J 1 s.c.R.
.bad to Delhi In this respect we find that ac~ording to the facts found · A
.by the Tribunal, the appellant had a godown and sale office in Delhi.
There is nothing to show that the appellant has also a godown in
Faridabad.. The movement of refrigerators from Faridabad to the
.appellant's godown in Delhi in the circumstances can well be ascribed
to the fact that the appellant has a godown facility in Delhi. There
were two places at which in the nature of things the appellant could
·have .sold the refrigerators to the distributors. It could be either at
Faridabad where the appellant has its factory wherein tl!e refriger~tors
.are manufactured or in Delhi where the appellant has its sale office
and godown and where also the three distributors have their offices.
The selection of place of sale depended upon mutual agreement bet
ween the parties. It is also obvious that if there is a choice before the
parties of f.O arranging their matters that in one case they would have
to incur 'liability to pay tax and in the oilier case the liability to pay
tax would not be attracted, they would prefer the latter course. There
is nothing illegal or impermissible to a party so arranging its affairs
that the liability to. pay tax would not be attracted or that the brunt of
taxation would be reduced to the minimum. The appellant company
in the present case would incur no liability to pay tax under the. Act if
· it were to transport the refrigerators from its factory in Faridabad t'1
its own office and godown in Delhi and thereaft~r to sell them to the
distributors. The liability to pay tax under the Act would, however,
arise if the sale ·of the refrigerators to distributors were to take place
.at Faridabad and the movement of refrigerators from Faridabad to
Delhi were to take place under the contract of sale. The question
with which we are concerned is whether the appellant entered into
such an arrangement with the distributors that the liability to pay tax
·would be attracted and not the other arrangement under which no such
liability could be fastened ori the appellant. So far as this question is
. ·concerned, we find that the parties expressly stated in each of !he. three
distribution agreements that it would be i.n Delhi that the sale of
refrigerators would take place to the distributors and the property
therein would pass to them. It was again in Delhi that the refrigera
·tors were delivered to the distributors. The orders for the refrigera
tors were placed by the dis~ributors in Delhi and it was also here that
the price of refrigerators was paid. Looking to all the facts of the
case, we have no doubt that the arrangement between the parties was
that refrigerators would be sold by the appe!Jant to the distributors
after they had been transported to the sale office and godown of the
appellant on Alipore Road, Delhi so that no liability to pay tax under
the Act would arise. It cannot in the circumstances be salti that the
transport of the refrigerators from Faridabad to DeJhi was in pursuance
of contracts of sale between the appellant and the distributors.
Reference has been made by Mr. Tarkunde to the fact that the
distributors were to bear the freight charges for the transportation of
refrigerators from Faridabad to Delhi. .In this respect we find that
the distribution agreements show that reference was made to transpor
tation charges for determining the amount or price to be paid by the
distributors to the appellant company. The price payable by the dis·
tributors was the aggregate of the ex-factory price of refrigerators and
·G
. KELVINATOR LTD. v. HARYANA (Khanna, J.) 477
A·: the transportation charges. As .the ex-factory pric~ 9f re~igerators
was fixed from time to tlllle and as the agreements with the distnbutors
provided that the ·sale of the refrigerators .as ·well .as the delivery the~e
of to the distribqtors would take place m ·Delhi, there was nothing
surprising in the clause of the distribution agr~emen~ that the transpor
tation charges would be added to the e_x-fac,o,y. pnces of the refn~
rators in calculating the amount payable by the- distributors to ili_e
D · appellant. The inclusion of the charges for th~ transport of ~e refri
gerators from Faridabad to Delhi. in the price payable by the distri
butors would not show that the movement of refrigerators from Farida
bad to Delhi was occasioned by the contract of sale. ·
The High Court in the course of its judgment has observed':
"The freight from Faridabad to, Delhi is borne by ~e
C • Distributors that is the Blue Star and the General Equip
ment Merchants. Any shortage or damage in transit is also.
the responsibility of Blue Star and the General Equipment
Merchants; the responsibility for this does not fall on the
manufacturer."
The observations i.ri the above paragraph that any shortage or damage
ri' in transit was the responsibility of the Blue Star· and the General
Equipment Merchants and the responsibility for that did not fall on
the manufacturer is not correct because clause 8 of each of the two
agreements dated September" 15, 1965 and December 11, 1965 relat
ing to Leonard and Gem refrigerators shows that the liability of the
appellant company for any shortage or damage that might occur would
cease only after the goods )lad been delivered and illspected by the di~-
E tributors at Delhi. The appellant no doubt stipulated in its· agreement
with Spencer & Co. that it (the· appellant) would accept no responsi
bility for shortage or- damage occurring in transit after the goods had
passed through rigorous inspection at the time they left the appellant's
factory. This must, however, be regarded in the nature of things to
be a matter of mutual agreement between the parties. ·spencer & Co.
might well have agreed to bear that loss on the assumption that the
Jt advantage of becoming the distributor for sate· of Kelvinator refrig<'
rators would far outweigh the loss borne by the said company in this
respect. Indeed, the possibility· of any loss being borne by Spencer & ·
Co. be_cause of al!-y shortage or damage occurring in transit of refri"
gerators from Faridabad to Delhi was only theoretical. is according to
the order of reference the expenses of transit institance were borne by
, the appellant company. It would thus be the insurer who would have
G . to bear the loss caused by shortage or damage .ccurring during transit.
It may also be mentioned in this context that 'the octroi charges in
connection with 'the movement of .refri)!t!ralbts from Faridabad to
Delhi were p:iid b_y the ~ppeilan~
We have been referred to section 23 of 1U Sate' of Goods Act.
According to that section, where 'there is. a co:atract" for the . sale · of
ii n";~rtained. or fu~e goods by description iind goods of· that deS-:
cnption .3Ild m a deliverable stale are unconditionally ,appropriated to
· \he contract, either by the s_eller with ihc asseJ!I cf .the buyer or by tU
5-'-382Sup.CJ/74 .
478 SUPREME COURT REPORT3 ( 1974 J 1 s.c.R.
buyer with the assent of the seller, the property in the ,;;:iods thereupon
passes to the buyer. Such assent may be expr~ss~ o; implied, and
may be given either before or after the appropnation JS made. The
said section, in our opinion, cannot be of much avail to the respon
dent. Apart from the fact that the distribution agree!Ilents cann?t, in
our opinion, be construed as contracts of sale, t~ere is no ~at~nal to
•how that there was any assent expressed or implied by the d1strtbu•ors
to the appropriation of the refrigerators by the appellant at Faridabad.
Reference has been made by Mr. Tarkunde to the following ob
servations on pages 62-63 in Vol. 34 of Halsbury's Laws of England
Third Edition :
. "An authority given by nne party to the other to appro
priate the goods is an implied assent by the party giving the
authority to a subsequent appropriation by the other, pro
vided the appropriation is made in a.ccordance with the con
tract. Such an authority confers an election on the party
authorised.
An authonty to appropriate is presumed where, by the
terms of the contract, one party is to do with reference to
the goods some act or thing which cannot be done. until the
goods are appropriated. When the party authorised has
determined his election by doing such act or thing, the ap
propriation is finally made. Until that time ap.y act or thing
done with reference. to the goods towards appropriation by
the party authorised is revocable, unless it has, previous to
its revo;::ation, been assented to by the other party."
-So far as the observations made in the first paragraph reproduced
. above are concerned, we find that there is no material on the record
to show that an authority was given by the distribu'ors to the appel
lant to appropriate the goods at Faridabad. As such, the aforesai?
paragraph cannot be of any material help to the respondent. The
second paragraph reproduced above rela•es to an authority which may
be presumed from the fact that one party by the terms of contract is
to do with reference to the .goods some act or thing which cannot be
done until the goods are appropria,ted. In respect of this paragraph
also, as already indicated above, we find that there is no material to
show that the appellant was under the terms of contract authorised
to do some act or thing with reference to the refrigerators which. could
not be done until the refrigerators were appropriated. Apart from
that we find that the observation that "until that lime any act or thing
dohe with reference to the goods towards appropriation by ·the party
authorised i• .revocable" would show that there was no legal bar to tht\,
changing of name plates by the apoellant company till such time as
orders with regard to the refrigerators were placed by the distributors
after inspection of those refrigerators.
A case which was considerable bearing on the facts of the present
case. is that of Tata Engineering and Loconwtive Co. Ltd. v. Assistant
Commissioner of Commercial Taxes, /amshedpur and Anr. (supra).
In that case the appellant company, which manufactured trucks and
B.
[
f ..
KELV!l'<ATOR LTD. v. HARYANA (Khanna, J.) 479
buses in Jamshedpur in the State of Bil\ar, transferred the vehicles to
stock-yards operated by its own personnel in other States and supplied
them to the dealers. After the promulgation of the Commercial
Vehicles (Distribution and Sale) Control Order, 1963 the appellant
issued a circular dated June 14, 1963, to the dealers asking them to
submit monthly statements regarding fresh applications registered, re-
tail sales, applications cancelled and stock and sales.. A new form of
dealership agreement was also introduced under which the appellant
agn;ed to sell from its works in Jamshedpur or its depots and stock-
yards outside the State of Bihar to tbe dealer the vehicles which shall
be allotted at its discretion. Clause 11 (b) of the agreement provided
that "the dealer shall mail to the company or. t)le 15th of ·each month
...... his firm order for purchases to be effected during - the next
• succeeding month and his es•im1ted requirements. . . . . . for the two
C months following the next succeeding month ...... " ln fact however
.u
no firm order was called for by the company. Pursuant to authorisa
tion issued by the sales office of the appellant in Bombay, vehicles
were. transferred from its works. at J amshedpur to the various stock
.Yards in the States. The stocks available in the stock-yards were then .
distributed from time to time to dealers for which 'purpose an alloca-
tio'n Je•ter wa; issued each month by the sales office. ThC1:e were
many instances where vehicles had been actua!Jy delivered !\om the
stock-yard prior to the issue of the allocation letter. It was also found
that on some occasions vehicles had been moved from a stock-yard in
one State to a s•ock-yard in ·another. Treating the allocation letters
together with their confirmation as transactions of sale, and the moveJ
. men! of, vehicles from the works to the stock-yards as the direct result
of the allocation so made, the Assistant Commissioner imposed tax
under tile Central Sales Tax Act, 1956, in relation to the sales during
th~ period April t., 1964 to March 31, 1966, of vehicles which ha<l
moved from Jamshedpur to the stock-yards in the various States. It
was he.Id by this Court that the procedure followed by the appellant
together with the proved absence of any firm orders. indicated that the
allocation letters and the statem~n1 s furnished bv the dealers did nor
themselves bring about transactions of sale within the meaning of
section 2 (g) of the Act. This Court further observed :
"It would appear from the materials placed before us that
generally the completion of the sales to the dealers did not
take _place at Jamshedpur and the final s!_eps in the matter of
such completion, were taken at the s•ock-yards. Even if the
appella11: took jnto account the requirements of the dealers
which it-.naturally was expected to do when the vehicles were
moved from the works to the stock-yards it was not necessary
that the number of vehicles allocated to the dealer should
nec~ssai;ily be delivered" to hi_m. The appropriation of the
vehicles was done at the stockyards through specification of
the engine and the chassis number and it was open to the
appellant till then to allot any vehicle to any purchaser and
to transfer the vehicles from one stockvard to another. Even
the Assistant Commissioner found that on some occasion
vehicles had ·been moved from stockyards in one State to a
480 SUPREME COURT REPORTS [ 197'1] 1 s.c.R.
stockyard in another State. It is not possible to comprehend
how in the above situation it could_ be held that the move
ment of the vehicles from the works to the stockyards was
occasioned by any oovenant or incident of the contract of
sale."
The facts of the present case have a certain amo,wit of similarity to
the facts of the above case and, in our opinion, the dictum laid down
therein fortifies us in the conclusion at which we have arrived.
We accordingly accept the appeal and set aside the judgment of
the High Court. The answer given by tlie High Court to the question
referred to it is discharged. In our opinion, the three agreements
between the appelladt and the 'distributors were merely agreements for
"the distribution of goods and were not agreements of sale between the
parties. It cannot, in our opinion, be said t11at there was any move
ment of refrigerators from Faridabad to Delhi under a contract of
sale. The question in the circumstances is answered against the depart
ment. The transactions between the appellant and t)le distributors did
not, in our opinion, constitute sale in the course of inter-State trade
or commerce. . As such, there was no liability ·to pay tax under the
Act. The appellant shall be entitled to the costs from the responden!
of this Court as well as in the High Court.
V.P.S. Appeal allowed.
v