K GOPINATHAN NAIR Vs. STATE OF KERALA

JUDGEMENT

(1.) THESE tax revision cases raise the question whether the purchases of African raw cashewnuts made by the assessees from the Cashew Corporation of India (for short, "the CCI") are in the course of import and therefore immune from liability to tax under the Kerala General Sales Tax Act, 1963 ?

(2.) THE argument of the counsel for the assessees Sri Padmanabhan is that the procedure adopted by the parties, namely, CCI and the assessees resulting in the allotment of the imported raw cashewnuts to the assessees reflects a transaction inextricably bound up with the import by the CCI in terms of the import licence granted to them by the Government and therefore the purchases made pursuant to the transaction are immune from liability to tax. Dilating on this point it was further argued by the counsel that the CCI has been interposed only as a conduit connecting the assessees with the foreign sellers. This procedure was necessitated on account of the import and export order whereunder only the CCI can import raw cashewnuts from foreign countries. THE inextricable link spoken above is not broken by the introduction of the CCI. That it is not possible by the introduction to break the link is further clear from the fact that the raw cashewnuts imported, cannot be diverted to any other purchasers than the assessees from whom orders for supply of imported raw cashewnuts have been taken. THE above position is further established by the fact that the contract between the foreign seller and the CCI is on f. o. b/c. i. f basis and as such the property in the goods would pass on shipment. Lastly it was argued that even assuming that the assessees did not have any direct contract with the foreign seller for the purchase of the raw cashewnuts, the privity of contract between them and the foreign seller must be presumed because the canalising agent, i. e. , the CCI, is the agent of the assessees. In support of the above contentions the counsel relied on some of the terms in the contract between the assessees and the CCI and the CCI and the foreign seller. He also relied on the clauses in the import licence issued in favour of the CCI. THE learned Special Government Pleader for Taxes Sri T. Karunakaran Nambiar on behalf of the Revenue refuted the above arguments. According to the counsel none of the documents would establish that the transactions under which the assessees were to get the imported raw cashewnuts, could be said to be inextricably bound up with the import. Expanding, this point he argued thus : THE CCI imports the raw cashewnuts from East African countries on the strength of the import licences issued to it by the Controller of Imports and Exports. THE raw cashewnuts thus imported would thereafter be purchased by the assessees. One of the circumstances relevant is that CCI should remain as owner of the imported raw cashewnuts up to the time of actual purchase by the assessees from the port whereat the ship as per the bill of lading was to discharge the goods. It is true that separate bills of entry were drawn before the letters of authority enabling the assessees to take delivery of the imported cashew earmarked to them from the port were given. THEse letters of authority were sent through banks and the assessees received them after making payments. THE customs duty no doubt is paid by the assessees. THE said payment under the circumstances must be deemed to be payment on behalf of the CCI.

(3.) REGARDING the merits of the contentions : It is essential to find out why the Government of India introduced the canalisation system. The main reason, as observed by the Supreme Court, is control of foreign exchange and prevention of abuse of foreign exchange. Having understood the position thus let us first see what would be the impact of this system of canalisation on the relationship between the CCI and the assessees. Does this system bring about the relationship of principal and agent between the assessees and the CCI. The answer depends upon the construction of the various conditions incorporated in the licence issued in favour of the CCI by the Export and Import Authority. Under the licence the CCI was to place orders with the foreign suppliers for the sale of the raw cashewnuts, after ascertaining the requirements of the assessees and after taking letters of acceptance from them, and therefore the CCI functions only as an agent of the assessees, is the argument of the counsel for the assessees. On the other hand the counsel for the Revenue contends that the terms of the contract, the assessees have entered into with the CCI and also the conditions contained in the licences would indicate the contra. As rightly pointed out by the Government Pleader none of the statements in the various documents referred to by the counsel for the assessees in support of the argument that the CCI must be treated as an agent, would establish that an agency is created by actual authority given by the assessees to the CCI. It should in this connection be remembered that an agency can be created only by actual authority given by the principal to the agent or by the principal's ratification of contract entered into by the agent on his behalf but without the authority. We therefore are of the view that the relationship between the assessees and the CCI cannot be said to be the relationship between the principal and agent. On the other hand the relationship between them is that of, two principals. It therefore follows that CCI acts on its own and not as an agent of the allottees. We are fortified in this view by the decision of the Supreme Court in Mod. Serajuddin v. State of Orissa [1975] 36 STC 136.