Case Study: TATA Engineering and Locomotive Company Ltd. (TELCO) V. Assistant Commissioner of commercial taxes and anr. (State of Bihar)

By Disha Bhardwaj 9 Minutes Read

Citation:  1967 SCR (2) 751 

Date of judgment:  24 March, 1967 

Court: Supreme Court of India

Bench:  M. Hidayatullah, J.M. Shelat, G.K. Mitter

Facts 

• The appellant company manufactures products such as trucks, bus chassis, their spare parts and other accessories at their production outlet in Jamshedpur located in the state of Bihar. The sale of these items is proceeded through three channels :

1. Sales inside Bihar 
2. Sales through inter – state trade 
3. Sales from stockyards owned by the company in other states 

• The present case concerns the third category listed above. According to the company, the goods in the stockyards remained the property of the company as they had not been appropriated under any contract therefore the sales effected from these stockyards were taxable neither under the Bihar sales tax act nor under Central sales tax act. 
• In a similar view the company filed for tax returns for the quarter including the sales made under the first two categories (thereby excluding the third) and paid full tax due on such sales.
• On November 12, 1965 the assistant commissioner of commercial taxes, Jamshedpur sent a notice stating that the sales have not been projected correctly and directed the company to file for revised returns including those sales that have been missed out.  
• The company objected that the sales from the stockyards located in other states were not taxable in Bihar, but this plea was rejected and the company was asked to file returns for quarters ending June 30th and September 30th. 
• The appellant company filed revised returns under protest and raised an inquiry whether sales from stockyards were to be included under the Bihar sales tax act or Central sales tax act but received no reply. The company also asked for an opportunity to produce declarations from its customers but this opportunity was denied as well .The total tax was computed to be Rs 2,07,81,273 from which deducting the tax already paid, a demand for the sum of Rs.1,73,84,273 was made.
• The company filed a petition in Patna high court under article 226 of the constitution seeking the writ of certiorari quashing the decision of the assistant commissioner.

Decision of the Patna High court 

• The case came up for hearing before the court on April 20, 1966 and was dismissed on the grounds that the remedies provided under the ordinary law, that is the sales tax act have not been exhausted and hence the court did not find it fit to exercise its extraordinary powers in the concerned case. The company made a request for a certificate from the high court to make an appeal against its order but the court stated that it can only be issued upon the payment of 20% of the assessed tax as it was well within the capacity of the company and dismissed the appeal for the certificate. However, the company obtained a special leave from this court and filed an appeal to the Supreme Court under article 136. 

Judgement 

• The case eventually reached the Supreme Court of India, which provided a definitive judgment on the matter.  The Supreme Court examined the nature of the transactions, the intent of the parties involved, and the statutory provisions of the Bihar Sales Tax Act and the Central Sales Tax Act. The court ruled in favor of Telco, recognizing that the transactions in question were stock transfers and not sales. Consequently, these transactions were not subject to the Bihar sales tax. The power and jurisdiction of the assistant commissioner, Jamshedpur were restricted to the territory of Bihar and furthermore the sales made outside the state could not be utilized under the Bihar sales tax act.

Legal issues discussed 

• Whether the assistant commissioner of sales tax has the jurisdiction to levy taxes on sales made outside the state?

No 

The appellant claimed that the Assistant Commissioner wrongly applied Section 84 of the Contract Act, which had been repealed in 1930, indicating a legal error in the tax assessment process itself thereby questioning its accuracy. The commissioner’s reliance on evidence and its interpretation were contested as well, the company argued that the sales took place at the stockyards where the goods were appropriated to contracts, and thus should not be deemed as inter- state sales. The appellant company claimed that the Assistant Commissioner wrongly applied inter-state sales and thus due to the nature of sales they fall beyond the jurisdiction of the assistant commissioner of commercial taxes, Jamshedpur and the Bihar sales tax act. 

• Whether the High court can intervene in matters and exercise its extraordinary powers?

Yes 

The company invoked Article 226 to file a petition challenging the assessment order. They contended that the High Court should intervene due to the arbitrary nature of the tax imposed and the hardship it caused, despite the existence of alternative remedies. They  argued that the High Court should have issued a rule to examine the constitutionality and validity of the Assistant Commissioner’s actions, especially considering the significant tax amount involved and the potential avoidance of multiple legal actions .The Supreme Court addressed these issues, particularly focusing on whether the High Court should have exercised its jurisdiction under Article 226 despite the availability of alternative remedies, given the exceptional circumstances and significant financial implications of the case​ . 

Significance 

• Role of the High courts :

The role of High court under article 226 of the Indian constitution has a very wide jurisdiction but the courts have recognized certain limitations. First the jurisdiction of the court cannot be sought as a substitute for the ordinary remedies as they are equally efficacious and secondly if the facts are to be found on evidence, the jurisdiction is not desirable. But the exception that passes through these limitations is with regard to the aggrieved party, if the actions are being taken against the aggrieved party under invalid law or without the sanction of law the high court may interfere to avoid the hardship of such party.

• Sale and stock transfers :

The Telco vs. State of Bihar case is a landmark in Indian tax jurisprudence, especially regarding the distinction between interstate sales and stock transfers. The ruling provided clarity for businesses operating across state borders in India, particularly concerning documentation and the nature of transactions to avoid local tax liabilities. The case influenced tax policy and administration, emphasizing the need for clear guidelines and accurate record-keeping by businesses to substantiate claims regarding interstate trade and stock transfers.

Disha Bhardwaj