In 1977, Odisha taxed bamboo and standing trees agreed to be severed at 10%, impacting bamboo supply and timber felling contracts. Contractors and mills filed 209 writ petitions, arguing these were immovable property or works contracts, not sales of goods.
Case Title: State of Orissa & Others v. Titaghur Paper Mills Company Ltd. & Another
Court: Supreme Court of India
Citation: 1985 AIR 1293
Bench: Justice D.P. Madon, Justice V.D. Tulzapurkar, Justice Amarendra Nath Sen
Date of Judgment: 1st March, 1985
Facts
On 23 May 1977, the Government of Orissa issued two notifications under the Orissa Sales Tax Act, 1947, declaring “bamboos agreed to be severed” and “standing trees agreed to be severed” liable to purchase tax from 1 June 1977 at 10%.
On 29 December 1977, after the Orissa Sales Tax (Amendment) Ordinance, 1977 (later replaced by the 1978 Amendment Act), fresh notifications were issued in supersession of the earlier ones, but continued the same levy and rate.
Two categories of agreements were affected:
- Bamboo Contracts – Long-term agreements between the State and paper manufacturers (e.g., Titaghur Paper Mills Co. Ltd.) granting rights to enter forests, cut, and remove bamboo for paper pulp manufacture.
- Timber Contracts – Agreements (often via auction) between the State and forest contractors to fell and remove standing trees for sale as logs.
A total of 209 writ petitions under Article 226 challenged the validity of these notifications before the Orissa High Court. The petitioners claimed these contracts were not sales of goods but transfers of immovable property interests (profits à prendre), or works contracts, outside the scope of “sale” under the Sale of Goods Act, 1930. They also alleged a lack of legislative competence, double taxation, and excessive delegation.
On 19 September 1979, the Orissa High Court, in Titaghur Paper Mills Co. Ltd. v. State of Orissa (45 STC 170), sided with the petitioners, holding that the transactions created interests in immovable property and could not be taxed as sales/purchases of goods. The State appealed to the Supreme Court.
Appellants (State of Orissa)
- Notifications were intra vires Sections 3-B and 5(1), validly subjecting “bamboos agreed to be severed” and “standing trees agreed to be severed” to purchase tax at 10%.
- “Goods” includes growing crops and things attached to the earth agreed to be severed before sale.
- Property passed only after severance and removal — taxable event was completed purchase of movable goods.
- No double taxation under the single-point levy scheme in Sections 3-B and 8.
- “Supersession” replaced earlier notifications without erasing accrued liabilities.
- Delegation to fix goods and rates was constitutionally valid.
Respondents
- Contracts conferred rights in land (profits à prendre), not sales of goods.
- Standing trees = immovable property; timber = movable after severance.
- Taxing “agreed to be severed” goods taxed before movable goods existed.
- First taxable sale occurred when State disposed of produce; later purchase tax = double taxation.
- Delegation lacked adequate guidelines; royalties were for works/services, not goods.
- Cited State of Madras v. Gannon Dunkerley — sale requires completed transfer of property.
Issues Before the Court
- Whether the 1977 notifications shifting the point of levy from sales tax to purchase tax were ultra vires Entry 54 of List II of the Seventh Schedule to the Constitution of India or beyond the scope of the Orissa Sales Tax Act, 1947.
- Whether the Bamboo and Timber Contracts entered into with the State constituted sales or purchases of goods, or whether they were in substance works contracts or grants of a profit-à-prendre (benefits arising from land).
- Whether the impugned provisions resulted in double taxation contrary to the scheme of Sections 3-B and 8 of the Orissa Sales Tax Act.
- What was the legal effect of the expression “in supersession of all previous notifications” used in the notifications dated 29 December 1977, specifically, whether it extinguished tax liabilities accrued under the earlier notifications of 23 May 1977.
- Ancillary questions concerning the competence of the sales tax authorities to assess contractors under the Act, and the effect of retrospective amendments to the definition of “dealer”.
Judgment Overview
In State of Orissa v. Titaghur Paper Mills Co. Ltd., a three-judge Bench comprising Justices D.P. Madon, V.D. Tulzapurkar, and A.N. Sen examined whether the State could impose a purchase tax on transactions involving forest produce, specifically bamboos and standing trees agreed to be severed under the Orissa Sales Tax Act, 1947.
This case reached the Supreme Court after the Orissa High Court, in the judgment in 1979, sided with the contractors, holding that such transactions were transfers of an interest in immovable property rather than sales of goods. The High Court struck down the 1977 notifications imposing the tax as ultra vires. The State appealed, defending the validity of its purchase-tax scheme.
Legislative Competence and Notifications
Justice Madon, delivering the judgment, began by looking at Sections 3-B and 5(1) of the Orissa Sales Tax Act. These sections empower the State Government to notify which goods are liable to purchase tax and to set the tax rate. The notifications challenged, dated 23 May 1977 and 29 December 1977, shifted the tax levy on “bamboos agreed to be severed” and “standing trees agreed to be severed” from the point of sale to the point of purchase at a 10 per cent rate.
The Court held that the power to specify the point of levy fell squarely within the State’s legislative competence under Entry 54 of the State List in the Seventh Schedule. The High Court had erred in declaring these notifications unconstitutional without properly considering the scope of this statutory authority.
Nature of Timber Contracts
The important question then if these transactions qualified as purchases of “goods” under the Act. The Court differentiated between timber contracts and bamboo contracts. Under the General Clauses Act, Orissa General Clauses Act, Registration Act, and Transfer of Property Act, things attached to the earth—such as trees and shrubs—are immovable property. However, standing timber is excluded from “immovable property” and included in “movable property” under the Transfer of Property Act and the Registration Act. Judicially, standing timber refers to trees ready to be felled and used for construction, making them movable property.
Thus:
- Trees or bamboo rooted in the earth are immovable unless they are standing timber.
- Trees or bamboo agreed to be severed before sale are movable property and count as goods.
- Indian law does not follow the English distinction between fructus naturales and fructus industriales; the focus is only on whether the subject is goods/movable property or immovable property.
- Sales of immovable property require registration under Section 17 of the Registration Act, while sales of goods/movable property do not.
- Under Entry 54, List II, States cannot tax sales or purchases of anything other than goods.
Nature of Bamboo Contracts
Bamboo contracts, however, were different. These long-term agreements, sometimes spanning decades, granted the paper mill exclusive rights to enter forest areas, cut, and remove bamboo. They also included ancillary rights such as building roads and erecting structures, secured by annual minimum royalty payments regardless of actual quantity cut.
The State was called the “grantor,” and payments were termed “royalty.” Reading the contracts as a whole, the Court held that these agreements constituted grants of a profit à prendre — a legal interest in immovable property under Indian law.
As such, these contracts did not amount to a sale of goods within the Sale of Goods Act or the Orissa Sales Tax Act’s definitions. Accordingly, royalties paid under bamboo contracts could not be subjected to purchase tax, and any assessments treating them as prices of goods were quashed, including in Titaghur Paper Mills’ case.
Double Taxation Argument
The Court rejected the contractors’ argument that the notifications caused double taxation. It explained that under the single-point levy regime of Sections 3-B and 8, once goods are taxable at purchase, sales tax at another stage is automatically excluded. The High Court’s view of inevitable double taxation was therefore incorrect.
Effect of “Supersession” Clause
The Court also held that the term “in supersession” in the 1977 notifications merely repealed earlier notifications and did not retrospectively nullify liabilities already accrued.
Works Contract and Excessive Delegation Arguments
The Court also declined to treat these transactions as works contracts, reasoning that the State did not contract to manufacture or process anything but only conferred rights to take forest produce. The challenge based on excessive delegation was also dismissed since the statute gave clear guidelines for the executive’s power to issue such notifications.
Use of Precedent
While concluding, the Court relied on earlier decisions, like State of Madras v. Gannon Dunkerley, to emphasise that a valid sale requires both an agreement to sell and the passing of property in the subject matter. Similarly, the court relied on STO v. Budh Prakash Jai Prakash, AIR 1954 SC 459, to hold that a taxable sale requires a completed transfer of title.
For classifying forest contracts, the Court drew on Mahadeo v. State of Bombay, 1959 SCJ 1021 and Shantabai v. State of Bombay, (1959) SCR 265, which treated certain forest rights as profits à prendre. The analogy with Ananda Behera v. State of Orissa, AIR 1956 SC 17, where a fishing licence was held as an immovable property interest, was drawn upon to support the bamboo contracts’ classification.
The Court explicitly overruled Firm Chhotabhai Jethabhai Patel v. State of MP (1977) 2 SCR 149 to the extent it held all such forest agreements as mere licences, while also holding that State of M.P. v. Yakinuddin (1963) 3 SCR 13, which confirmed that Chhotabhai no longer represented good law. While also declaring State of M.P. v. Orient Paper Mills (1977) 2 SCR 149 per incuriam for ignoring binding larger Bench decisions.
Final Decision
In the end, the Court upheld the constitutional validity of the 1977 notifications and the State’s legislative competence to tax completed purchases of goods agreed to be severed. However, it applied these principles carefully: timber contracts attracted purchase tax only on severed goods, while bamboo contracts, being grants of immovable interests, fell outside the Act’s scope.
The appeal was allowed in part: the notice to Titaghur was quashed. In cases like M.M. Khara’s, where purchase tax had been added to assessments for amounts not representing completed purchases, that component was ordered to be deleted, and other unaffected assessments were upheld.
Significance of the Judgment
This judgment clarified how state sales tax laws apply to natural resource contracts, drawing a clear line between goods and interests in land. It reaffirmed the principle of a single-point levy and resolved conflicting precedent about forest-produce agreements, ensuring that the substance of the rights transferred, rather than contractual labels, governs tax liability.
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