Exemption to penultimate sale under section 5(3) of the CST Act, 1956 – Decision of the Constitutional Bench of the SC

Order of the Supreme Court in State of Karnataka Vs Azad Coach Builders Pvt. Ltd. & Anr (Civil Appeal Nos. 5616-  5617 of 2000 with Civil Appeal Nos. 6594- 6598 of 2000]

M/s Azad Coach Builders Pvt. Ltd. (hereinafter referred to as “the Assessee”) has received an order to build bus bodies, by an Indian exporter (Tata Engineering Locomotive Co. Ltd.) in accordance with an export order placed on the Indian exporter by and specifications provided by the foreign buyer (Lanka Ashok Layland Ltd., Colombo). The Assessee manufactured the bus bodies, in accordance with the specifications stipulated by the foreign buyer and mounted the same on the chassis made available by the Indian exporter making it as a complete bus ready for export.

The Assessee claimed exemption on sales of bus bodies to the Indian exporter as penultimate sales for export that are eligible for exemption under Section 5 of the Central Sales Tax Act, 1956 („CST Act). The Assessing Authority rejected the claim of penultimate sale on the ground that the `bus bodies’ and `buses’ are two different commodities. The claim of the Assessing Authority was that the expression „those goods? implies that penultimate sale should be of the same goods which are exported out of India and the bus bodies as such were not exported (i.e. complete buses were exported).

When the matter reached the Karnataka High Court, the High Court held that the bus bodies supplied by the Assessee to the Indian exporter was in the course of exports and the words “in relation to such export” extended the scope of the exemption to the extent that even if there is no agreement or order but they are in relation to such exports, the exemption could still be claimed under Section 5(3) of the CST Act.

The State of Karnataka filed an appeal to the Supreme Court. In the light of earlier decisions of the Supreme Court in various other cases, the appeal was heard by a Constitutional Bench of the Supreme Court.

Contentions of the Assessee

The Assessee put forth the following contentions:

• The exemption under taxation law has to be purposefully and widely construed. In that context, under Section 5(3) of the CST Act, those penultimate sales are also given exemptions, if such sale was for the purpose of complying with the agreement or order for or in relation to such export.
• Any penultimate sale made in furtherance of an export order, irrespective of nature of the goods, would be covered and any other construction would render the use of those words otiose.
• Section 5(3) of the CST Act should be given a purposive interpretation keeping in mind the Statement of Objects and Reasons of the Amendment Act 103 of 1976 (by which section 5(3) was inserted in the CST Act).
• The only requirement of Section 5(3) is that the goods sold to the exporter should be exported as such without loss of identity and if that happens, the penultimate sale gets the benefit of Section 5(3) of the CST Act.
• If the penultimate sale is inextricably connected with the export of goods outside the territory of India, then such a sale is eligible for exemption under Section 5(3) of the CST Act. The only pre- condition is that the exemption has to be linked to the penultimate sale that is preceding the export.

Contentions of the Government

The contentions of the Government were as follows:

• In order to attract Section 5(3) of the CST Act, it is necessary that the goods which are sold by the Assessee for the purpose of complying with the agreement or export order for or in relation to export, must be the same goods which are exported out of the territory of India. The words “those goods” in Section 5(3) of the CST Act are clearly referable to “any goods” mentioned in the preceding part of section 5(3). (referred as “same goods theory”)
• The goods supplied by the Assessee and the goods actually exported by the Indian exporter to the foreign buyer were not the bus bodies but buses itself and, hence, the benefit of exemption under Section 5(3) of the CST Act is not available to the Assessee.

Observations of the Supreme Court

The following observations were made by the Supreme Court:

• In order to resist imposition of sales tax by the State, an assessee will have to establish the identity of the goods sold to be exported out of the territory of India. In order to fulfill an export obligation, if an exporter purchases goods and as a result of some processing the identity and character of the goods change, then it will not be a case of export of the same goods.
• Following principles emerge in respect of section 5(3) of the CST Act:

– To constitute a sale in the course of export there must be an intention on the part of both the buyer and the seller to export;

– There must be obligation to export, and there must be an actual export.

– The obligation may arise by reason of statute, contract between the parties, or from mutual understanding or agreement between them, or even from the nature of the transaction which links the sale to export.

– To occasion export there must exist such a bond between the contract of sale and the actual exportation, that each link is inextricably connected with the one immediately preceding it, without which a transaction sale cannot be called a sale in the course of export of goods out of the territory of India.

• · The phrase ‘sale in the course of export’ comprises in itself three essentials: (i) that there must be a sale: (ii) that goods must actually be exported and (iii) that the sale must be a part and parcel of the export.
• · The word `occasion’ is used as a verb and means ‘to cause’ or ‘to be the immediate cause of’. Therefore, the words `occasioning the export’ mean the factors, which were immediate course (^„cause^?) of export. The words `to comply with the agreement or order’ mean all transactions which are inextricably linked with the agreement or order occasioning that export. The expression in relation to’ are words of comprehensiveness, which might both have a direct significance as well as an indirect significance, depending on the context in which it is used and they are not words of restrictive content and ought not be so construed.
• · The facts of the case revealed that the transaction between the Assessee and the Indian exporter is inextricably connected with the export of the goods to Sri Lanka especially on account of following factors:

– The communication between the foreign buyer and the Indian exporter reveals that the foreign buyer wanted the bus bodies to be manufactured by the Assessee under the specifications stipulated by the foreign buyer.

– The bus bodies constructed and manufactured by the Assessee could not be of any use in the local market, but were specifically manufactured to suit the specifications and requirements of the foreign buyer.

– In the Purchase Order placed on the Assessee by the Indian exporter, it is specifically indicated that the bus bodies have to be manufactured in accordance with the specifications provided by the foreign buyer, failure to do so might result in cancellation of the export order.

Conclusions

The appeal were dismissed with the following conclusion:

• The test to be applied is, whether there is an in-sever able link between the local sale or purchase on export and if it is clear that the local sale or purchase between the parties is inextricably linked with the export of the goods, then an exemption claim under Section 5(3) is justified
• When the transaction between a local seller and an exporter and the transaction between the exporter and a foreign buyer are inextricably connected with each other, the `same goods’ theory has no application.