TATA IRON & STEEL CO. Ltd V. STATE OF BIHAR AIR 1958 SC 452 

FACTS OF THE CASE 

Tata Iron and Steel Company is a manufacturer of iron and steel and carries their business in Jamshedpur, Bihar. The company was assessed Sales tax for two periods under the Bihar Sales Tax Act,1947. This company used to send its goods to various parts of India. Tata Iron and Steel Company has its registered office in Bombay, its factory and manufacturing takes place in Bihar and the Head Sales office is in West Bengal. During the transactions, the company showed that there are some deductions in the amount of valuable consideration for the goods manufactured at Jamshedpur in the State of Bihar but sold, delivered, and consumed outside that State. The Sales Tax Officer disallowed both the claims and added a further sum of sales tax. The Appellant claimed in the High Court of Patna regarding : 

1. The legality of adding Sales tax to the turnover was decided in favor of the appellant.

2. Whether the vires and validity of the tax levied under s. 4(1) was not a sales tax within the meaning of Entry 48 in List II of the Seventh Schedule to the Government of India Act, 1935. 

3. Whether the territorial Nexus is inapplicable to the Sales Tax. 

Contention b) and c) were decided against the appellant and thus the petitioner appealed it before the Supreme Court. 

ISSUES RAISED 

1. Whether the tax levied under Section 4(1) of Bihar Sales Tax Act,1947 fall under the purview of Sales Tax Entry 48 in List II of the seventh schedule of the Government of India, 1935? 

2. Is the retrospective levy of sales tax because of the amendment of section 4(1) of the 1947 Act valid? 

3. Whether the doctrine of nexus is applicable for the sales tax? 

PETITIONER ARGUMENTS¹ 

The appellant contended that the tax levied under Section 4(1) read with Section 2(g) is not a tax on sale within the meaning of Entry 48 of List II in the Government of India Act,1935. Moreover, the doctrine of nexus does not apply to the sales tax and it is illusory. It is also contended that the tax levied is an excise duty and not a Sales tax because of the amendment of section 4(1), it destroys the character as a sales tax and makes it a direct tax on the dealer and also charges an indirect tax on the purchaser. 

During the argument, the appellant made the definition of Sale very clear by stating the definition before amendment and also the definition after amendment. 

They argued on the following points: 

1. The validity of s. 4(1) read with s. 2(g), second proviso, is challenged. They urged that section 100(3) of the Government of India Act, 1935 read with Entry 48 in List II of the Seventh Schedule has authorised the Legislature of Bihar to make a law concerning tax on the sale of goods. The tax on the Sale of goods within the meaning of Entry 48 was an imposition of a tax only when there was a completed sale involving the transfer of title in 

¹ https://main.sci.gov.in/judgments

the goods sold. Thus the Bihar Legislature cannot give an extended definition to the word “sale” and eventually extend its legislative power under Entry 48 in List II of the Seventh Schedule to the Government of India Act, 1935, in order to impose a tax on anything which is similar to that of a sale. 

2. The basis of liability under s 4(1) remained as before as the goods already being in Bihar at the time of sale or the production or manufacture of goods did not by itself constitute a ” sale ” as it should be a completed sale and thus cannot attract the tax. 

3. The learned Attorney General points out that the three cases namely Governor General v. Raleigh Investment Co., Wallace Brothers and Co. Ltd. v. Commissioner of Income Tax, Bombay City and A. H. Wadia v. Commissioner of Income Tax, Bombay in which the nexus theory was applied were income-tax cases and submitted that the principle cannot be extended to sales tax laws. Moreover, the same transaction of sale may be taxed by different States by applying the nexus theory and there will be multiple taxation which will obstruct the free flow of inter-State trade. 

JUDGMENT 

The Supreme Court gave its Judgment firstly by defining the word “Sale” and stated that there was no enlargement of the meaning of ” sale ” but the proviso raised questions on the strength of the facts mentioned and deemed the ” sale ” to have taken place in Bihar. Those facts did not by themselves constitute a” sale ” but those facts were used for locating the status of the sale in Bihar. Therefore, the provisions of s. 4(1) read with s. 2(g), second proviso, were well within the competence of the Legislature of Bihar. 

Secondly, the vires of s. 4(1) read with s. 2(g), the second proviso, is also questioned on the ground that it is in reality not a tax on the sale of goods but is a duty of excise. It is urged that, as per the clause, all sales of goods produced or manufactured in Bihar were not under the purview of tax, but only on those goods which were sold by the producer or manufacturer. In other words, the tax was laid on the producer or manufacturer only qua seller and not qua manufacturer or producer. 

Thirdly, The theory of territorial nexus does apply to sales tax legislation, although sales tax is levied only on complete sale, it can also be enforced in particular cases. One or more ingredients of sale may provide the connection between the taxing State and the sale. The nexus theory does

not impose taxes but only indicates the circumstance in which a tax is supposed to be imposed by an act of the Legislature in a particular case. It will not obstruct the free flow of goods as it is safeguarded by Article 286(2) of the Constitution of India. 

Fourthly, It was pointed out that sufficiency of the territorial connection involved consideration of two elements- a) the connection must be real and not illusory b) the liability sought to be imposed must be pertinent to that connection² 

Lastly, It was contended that the Sales Tax is an indirect tax on the consumer, It was decided that the seller could undoubtedly include the sales tax in the price, which he would have to pay but this amount could not be realized by the purchaser. This might not prevent the sales tax imposed on the seller. 

Finally, The Court upheld that the Bihar Sales Tax Act,1947 was valid as there was sufficient territorial nexus between the taxing provinces of the state and the sale wherever that had taken place. The contentions urged by the Attorney general were all dismissed with costs. 

CONCLUSION 

This is a landmark case for the Theory of territorial Nexus under Article 245 of the Constitution of India. The Principle laid in this case is that the territorial nexus can be applied to Sales Tax laws.³ 

² https://indiankanoon.org/doc/1629177/

³ J.N.Pandey, Constitutional Law of India,732 [59th edition 2022] 

This Article is written by Jayanti Roy of Department of Law, Calcutta University, intern at Legal Vidhiya. 

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