The Velipalayam Co-operative Milk Supply Society vs The State of Madras

Ramakrishnan, J.—This appeal is directed against the order of the Board of Revenue, dated 18th October 1962, in B.P. Rt. No. 4130/52. The principal question for consideration in this revision case is whether the Assessee Velipalayam Co-operative Milk Supply Society, Limited, Nagapattinam, is entitled to exemption u/s 8 of the Madras General Sales Tax Act in respect of a turnover of Rs. 1,66,668.58, which, according to the Assessee, represents the sales of milk effected by it in accordance with the conditions of an agency licence granted to it u/s 8 of the aforesaid Act. The Deputy Commercial Tax Officer, Nagapattinam, found that the Assessee had violated the conditions of the licence in certain respects and consequently was not entitled to the exemption prayed for. The Assessee appealed, and the Appellate Assistant Commissioner of Commercial Taxes, Thanjavur, came to the conclusion that the alleged breaches of the terms of the licence were unsubstantial and, therefore, the Assessee was entitled to the exemption as prayed for and that there was substantial compliance with the conditions of the licence so as to entitle the Assessee to get the benefit of the exemption. The Commissioner of Commercial Taxes (Board of Revenue) took up the matter suo motu in revision u/s 34 of the Madras General Sales Tax Act, 1959, and after giving notice to the Assessee (to the contents of this notice we shall presently refer) held that the exemption granted in respect of the turnover aforesaid was improper. The Board based its conclusions on two grounds. One was that the nature of the transaction, in which the Assessee was concerned, did not, in fact, amount to a transaction of agency for the reasons set forth by the Board of Revenue, and secondly the Board was of the opinion that the Assessee had violated the terms of the Section 8 licence in an important respect, which disentitled him to the benefit of exemption Against the said decision of the Board of Revenue the present appeal is filed by the Assessee.

We will take up first the first finding given by the Board of Revenue that there was in fact, no agency. The Appellant-society, according to the objects set-out in its by-laws, is competent to deal with a variety of activities like enabling its members to buy and maintain good much animals, to buy and maintain breeding animals for use of the members, to purchase and own or to rent the machinery necessary for the separation of by-products of the milk, to install plans for pasteurizing milk, to purchase and distribute to its members cattle feed. Then there is the activity with which we are now concerned, to arrange for the sale of milk or its by-products, of the members. I or arranging for the sale of milk of its members the society entered into a distinct agreement, which is described as a commission agency agreement for disposal of milk with its members, and it is with the terms of this agreement rather than the terms of the by-laws of the society that we are principally concerned in this case. The more important portions of the Commission agency agreement can be set down:

Whereas I.M. No. residing at have agreed to utilize the agency of the Velipalayam Co-operative Milk Supply Society Limited., Nagapattinam for the sale of milk available and to be available with me hereafter from my milk animals and whereas the society (has) agreed to act for me and on my behalf as my agent for an agreed commission or brokerage which shall be the remuneration of the society for such service, it is agreed as follows:

(2) The society shall sell the milk at the market rate which shall be current or ruling from time to time.

(3) For every local or unit measure of milk delivered by me for sale on my behalf, the society will be entitled to a rebate or commission at the rate of 8 np. per local measure or such as may from time to time be agreed to in this behalf.

(4) Settlements of accounts in respect of such supplies shall be had as on the 15th day and closing day of every calendar month. II shall receive the monies due to me less the amounts of commission payable to the society and other deductions as may have been agreed to between me and the society. I shall be entitled to inspect the accounts of the society (at) all reasonable times free of charge.

Clause (5) deals with an agreement by the member to pay the society certain charges including transport charges based upon a calculation of the distance. The other relevant clauses are:

(7) The society is at liberty to sell the milk I supply with or without the admixture of similar supplies by other producers provided that in case of any such pooling no adulteration takes place and the admixture is only with the milk of other suppliers of the society who are on the rolls of the Central Milk Procurement Registers from time to time. The society have had made known the said list of producers to me and shall also furnish the same for general information from time to time of which I shall take notice.

(8)* * * *

(9) All sales of milk shall be and shall be deemed to be effected at the office of the society. If and in so far as milk is delivered at places other than the office of the society, the society shall be eligible to claim in the cases of retail domestic customers a service charge not exceeding Re. 0-02 P. per rupee on the value of sales. If and in so far as the society is called upon to supply milk at places and to persons and institutions other than ordinary retail domestic consumers the society is at liberty to levy a special bulk delivery charge in such cases not exceeding Re. 0-06 P. per rupee on the value of sales. The society may appropriate all such charges to itself, provided such charges shall be for such services rendered and do not otherwise affect the market price of milk.

(10) If and in so far as any part of my supplies of milk cannot be sold by the society the same shall be and shall be treated as sold to the society itself. The latter is at liberty to make such disposal of the same either in its fluid state or as by-products on its own risk and account. For such unsold milk so taken over by the society, I shall be paid at the net prices being market rate less the agreed commission and other agreed deductions, if any.

The above clauses of the agreement would show that the member on supply of milk to the society is credited with the market price less the commission payable to the society and on settlement of accounts on the 15th day of each month and on the last day of each month, the amounts due to him less the amounts of commission payable to the society and other agreed deductions are paid over to him. The society was also entitled to levy further charges by way of service charges and special delivery charges and had the liberty to appropriate all such charges to itself so long as the charges represented the value of service rendered and did not affect the market price of milk. It is, therefore, clear that the price at which the society had to sell the milk supplied to it by the members and the amount which the members got from the society, towards the value for the milk supplied, was the market price of the milk, less a commission taken by the society. Certain prescribed incidental charges were also debited to the member.

Bearing in mind the special nature of milk, the product concerned in the transaction, which is susceptible to ready deterioration, there was a chance of some of the milk remaining unsold, because it turned sour. There was also the likelihood of some milk remaining unsold for some other reason. In an ordinary type of agency the loss arising on account of such unsold items will be debatable to the principal and the agent need not bear such expenses. But there is nothing to prevent the principal and the agent from entering into an agreement as to the manner in which adjustments should be made between them in regard to the surplus milk which could not be sold for one reason or other. In this particular case it was agreed specifically between the parties that the unsold milk should be treated as having become the property of the society, and that it was entitled to take credit for the by-products get out of the milk like gova, butter, curd and so on, on its own risk and account. Further, the milk having been agreed to be supplied by each member in its unadulterated state, there was no point in keeping the stock of each member separately for the purpose of sale. There could not also be any difference between the market price of milk produced by one cowherd and another. Bearing these circumstances in mind a provision was made in the agreement itself for mixing the milk supplied by different members and sale of the combined product with the restriction that each member was to get the price of his own, supply according to its quantity. It is necessary to bear in mind these special arrangements made in the agreement, for understanding the points raised by the Board of Revenue, in reviewing the assessment order.

The Board has referred to the circumstance of the pooling of the milk, as a factor defeating the idea of a commission sale agency between the members and the Society. What we have stated above regarding the special nature of the products, namely, milk and the uniformity of its price in its unadulterated condition, even though it might have been supplied by different cowherds, would be a factor, which would justify the pooling of the product. In the decision in She rule fazle and Co. v. Commercial Tax Officer (1963) 14 S.T.C. 4., the Mysore High Court, dealing with a case of growers of arecanuts entrusting the sale of a recants to a commission agent, in which there was an agreement to pool the product and sell the same, observed:

No provision in the Act is brought to our notice which prohibits a commission agent from pooling the goods of the several principals even when those principals agree to such a pooling. We should not be understood as having laid down that if any pooling is done without the consent of the several principals the commission agent would become liable to pay sales tax. That question we have not considered.

In the present case too there is nothing in Section 8 of the Act, or on the terms of the licence granted under it which prohibits the pooling of the commodity supplied by the principals the circumstances of a particular case, where such pooling will not have any effect on the course of the agency transaction.

The Board of Revenue next referred to the fact, that, if any milk turned sour and there was loss, the society had to bear the loss and not the member. We have referred to the specific agreement in this case that in such a case the society agreed with the members as to the manner in which compensation for the loss should be adjusted between the society and the members namely by treating the society as a buyer in respect of quantity of that milk alone, and permitting the society to take credit for the by-products arising out of the sour milk or unsold milk. In our opinion this special arrangement, will not be inconsistent with an agency agreement.

The Board of Revenue has again referred to by-law No. 35, which made it incumbent upon the Board of Directors to arrange for the purchase of milk and for the sale of such milk. It has also referred to by-law No. 36 which also provides for compelling members to sell to the society the milk under penalty for default of such sales. Thirdly, it referred to the fact that the selling rate fixed was liable to be revised from time to time by the directors of the society. Learned Counsel appearing for the Appellant points out that by-laws provide for a much wider variety of transactions than what the agreement which we have mention above, covers. That under by-law No. 35, the Board of Directors could arrange for the purchase for cash or for credit and/or for commission, the milk and/or eggs, produced or supplied by the members on such terms that may appear to them reasonable and for the sale of such milk, and/or eggs to the best advantage. It was open to the Board of Directors thereafter to modify this rule and deal with the members strictly on the basis of a commission agreement. The use of the words purchase and sale in the by-laws would not ipso facto be a circumstance ruling out a commission agency agreement, if the specific agreement for the purpose contains clauses different from the by-law. Again by-law No. 36 refers to the competency of the Board of Directors to arrange for the sale of milk on credit to public institutions. Here again there is nothing in the by-law which prevents an agreement with different clauses being entered into. Thirdly, the provision for revising the selling rate referred to by the Board of Revenue is not found in the agreement, which strictly enjoins the society to sell the milk only for the market price, which is also the rate which it credits to its members on the delivery of the milk by the members to the society. The Board of Revenue has referred to the power in the society to modify the terms by unilateral decisions of its directors, and the fact that the producers had to accept such modifications, and has stated that a covenant of this nature strongly indicates a relation of vendor and vendee, and that the party authorised to modify the agreement unilaterally could not be considered to be an agent. This provision, as pointed out by the learned Government Pleader, is derived from the by-law No. 35, but it does not find a place in the particular agreement we have to consider in this case. It was not, therefore, proper on the part of the Board of Revenue, to refer to the by-laws after bypassing the specific agreement, for finding out reasons which would negative the inference of relationship of a principal and agent. The observation that there was nothing on record to show that the prices of milk were fixed after consultation with the producer-members as contended by the society goes against the terms of the agreement to which we have adverted to. It is not necessary to go into the question at greater length. After hearing the learned Government Pleader we are satisfied that the terms of the agreement between the society and its members, as revealed in the specific agreement between them clearly make out an agency for sale of milk and there is no relation of buyer and seller so far as these transactions are concerned.

The second point mentioned by the Board of Revenue for withholding the exemption u/s 8, is that in respect of the supplies made to the Government Hospital, the society collected Rs. 3,692.97 as servicing charges, as against Rs. 948.54 only that should have been collected according to the stipulation in the agreement and that it had appropriated the entire collections to itself without passing on the excess to the alleged principals. Learned Counsel for the Appellant draws our attention to the notice issued by the Board of Revenue u/s 34 of the Madras General Sales Tax Act to the Assessee, for showing cause against revision. In that notice this objection to the assessment order has not at all been adverted to by the Board of Revenue. The Assessee contends, in our opinion, rightly that it was improper on the part of the Board of Revenue to have relied upon this ground for revision, without giving an opportunity to the Assessee for rebutting it. The learned Government Pleader submits that the assessing authority had referred to a similar ground in its order, as constituting a violation of Section 8 licence and referred in this connection to two objections mentioned by the assessing authority. Firstly the society had claimed a higher amount of commission in certain cases than what had been agreed upon; secondly, the society had failed to show in the Patti supplied to the principal, the servicing charges. On account of these defects the assessing authority held the Assessee to be disentitled to exemption. But these two grounds are not the same as that which has been relied on by the Board of Revenue. This apart, the Appellate Assistant Commissioner considered the self same objections and found them to be immaterial and without substance, and held that the Assessee was entitled to exemption. But the Board of Revenue has not considered these two objections pointed out by the assessing authority. It has taken up for itself an entirely new objection regarding the failure of the Assessee to pass on the excess collection of service charges in respect of supplies to the Government Hospital to the principals. It would depend upon the terms of the agreement between the parties as to whether such a passing on was contemplated under the agreement. Learned Counsel for the Appellant points out Clause (9) of the agreement which permits the Society to appropriate service charges to itself, provided that such charges are referable to services rendered and do not affect the market price of milk. It may be that in the case of a particular customer like the Government Hospital, where the supply involved special transport problems, the society might have incurred extra expenditure and taken credit for itself for such extra expenditure without affecting the price of the milk and without crediting the extra charges to the principal. Such a procedure was definitely contemplated within the scope of the agreement, and should not have been considered as a violation of the condition of the agreement, disentitling the society to the benefit of agency. We, therefore, allow the appeal and set aside the order of the Board of Revenue with costs.