R.K Rengaraj, Advocate
Introduction: The Central Government’s policy is, when exports are made, only products or services are to be exported and not taxes. Therefore when tax exemption is available for direct export for the exporters, the sale prior to export i.e Penultimate sale also is considered for tax exemption by the Government. Penultimate sale here refers to the last sale of any goods preceding the sale occasioning the export of goods, if such last sale is meant for export. Section 5 (3) of the CST Act deals with the penultimate sale concept. In terms of Section 5 (3) of the Central Sales Tax Act, 1956, last sales or purchase of goods preceding the sales or purchase occasioning the export of those goods out of territory of India shall also be deemed to be in the course of export, if such last sale or purchase took place after, and was for the purpose of complying with the arrangement or order for or in relation to such export.
Conditions for penultimate export sale: There are certain conditions that have to be satisfied to claim exemption for penultimate sale of export. As per the Section 5(3) of the CST Act in order to claim exemption under CST Act for penultimate export, it is obligatory and mandatory that the actual exporter should be in possession of export order from his client, i.e., foreign buyer and should take delivery of goods from the penultimate seller for the purpose of meeting out of export order.
‘A plain reading of Sub-section (3) of Section 5 makes it clear that if the following three conditions are fulfilled the penultimate sale shall be deemed to be in the course of export: .
(1) There must have been a pre-existing agreement or order to sell the goods in question to a foreign buyer;
(2) The last purchase referred to in Section 5(3) must have taken place after the said agreement with the foreign buyer was entered into; and
(3) The said purchase must have been for the purpose of complying with the said pre-existing agreement or order.’
The export sales must meet out the purpose of complying with agreement or order.
Pre-existing agreement: To cover under section 5(3) this first condition has to be satisfied is, there should be a pre-existing agreement or order to sell the goods to a foreign buyer, last purchase must be after the agreement with foreign buyer and the last purchase must be made for complying with the pre-existing order. The following are few case laws which deal about the penultimate sale.
The theory of “Same goods must be sold”: The same goods theory view has been affirmed in (1996) 100 S.T.C. 571 (SC) [Vijayalaxmi Cashew Company vs. Deputy Commercial Tax Officer] as follows :
“In order to resist imposition of sales tax by the State on the penultimate transaction contemplated by section 5(3) of the Central Sales Tax Act, 1956, the dealer will have to establish the identity of the goods purchased with the goods to be exported out of the territory of India. If, in order to fulfil an export obligation, an exporter purchases goods and as 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. The penultimate sale or purchase of goods must be of those goods which were actually exported.
It is pertinent to note that in order to claim exemption for penultimate export that the goods sold by the exporter must be the same that have been purchased by the exporter from his penultimate supplier. In a recent decision in the case, State of Karnataka vs Azad Coach Builders (P) Ltd 2010-VIL-12-SCB-CB, the Supreme Court has laid down the principles for claiming exemption under the Central Sales Tax Act, 1956 with regard to the penultimate sale of goods by a dealer to an exporter, who effects the actual exports of goods from the country. This judgment has distinguished the earlier decision of the Court in Sterling Foods (1986) 3 SCC 469 and Vijayalaxmi Cashew 1996 1 SCC 468, both of which were on the same issue. In the case of Azad Coach, the respondents were contracted to build bus bodies for the actual exporter viz., Tata Engineering Locomotive Company Ltd., in accordance with the specifications provided by the foreign buyer. The respondents manufactured the bus bodies accordingly and mounted these on the chassis made available by the exporter, thereby making it a complete bus ready for export. The respondents claimed exemption on the sales of bus bodies, as penultimate sales under Section 5(3) of the CST Act. Tax authorities rejected the claim for exemption and taxed the transactions as interstate sales on the ground that ‘bus bodies’ and ‘buses’ were different commodities and the bus bodies as such were not exported. The issue was litigated by the respondents and the Karnataka High Court upheld the appeal. Aggrieved by the decision of the High Court, Karnataka had come up in appeal to the SC.
It was the contention of the Karnataka State that the exemption for penultimate sales under the CST Act could only be claimed for those goods which were exported as such. Since, in the instant case, the respondents had sold bus bodies and the exporter, Telco, had exported buses, the benefit of exemption under Section 5(3) of the CST Act was not available. The appellants relied on the earlier decisions of the Supreme Court referred above.
The Apex Court therefore concluded that to determine whether the penultimate sale was in the course of export, the test to be applied was whether there was an inseverable link between the local sale or purchase and the export, and if such inextricable link was established, then a claim for exemption under the CST Act was available, in which case, the “same goods theory” had no application.
Applying the aforesaid principles in the instant case, the Apex Court observed that since the bus bodies were manufactured by the respondents to suit the specifications provided by the foreign buyer and that the bus bodies could not be diverted to the local market all, the transaction between the respondents and Telco and that between Telco and the foreign buyer were inextricably linked. Hence, the respondents were entitled for exemption from tax under the CST Act.
The Bombay High Court, in the recent case of Exide Industries Ltd. vs. State of Maharashtra and Ors, 2014 Bomb HC, has dealt with the case relating to exemption available for penultimate sale for exports effected in terms of section 5(3) of the Central Sales Tax Act, 1956. The HC has held that “as long as an inextricable link between the local sale of goods and their export is proved, exemption under section 5(3) cannot be denied”.
Purchase of paddy and export of rice: Paddy is a declared goods u/s 14 of CST Act, 1956. Out of Paddy rice is produced therefore Paddy and Rice may seem to be separate goods. But As per Section 15(ca) if paddy is purchased on payment of tax and rice procured out of such paddy is exported then paddy and rice will be treated as same goods for the purpose of section 5(3).
Thus paddy can be purchased without any tax if the rice produced out of it is exported as per the order of the overseas customer. Paddy sold to an exporter will be penultimate sale even though exporter does not export the same Paddy but rice procured out of such paddy.
In Veerumal Monga v. State of Haryana (2001) 123 STC 158 (P&H HC DB), rice miller purchased paddy and sold rice to the exporter. It was held that in such case, only sale of rice to exporter is penultimate sale and is exempt. However purchase of paddy by millers will not be exempt.
Purchase of packing material for the purpose of export is also a penultimate sale: The purchase of packing materials intended for export is also exempted u/s 5(3) of CST Act.
In State of AP v. Standard Packings-(1995) 96 STC 151(AP HC DB) it was held that if gunny bags purchased are used as containers for export of certain goods to a foreign country, it is deemed as export sale as per section 5(3) . The last purchase preceding the sale occasioning export should be for complying with an export order. In this case, the gunny bags purchased were for complying with export order and hence are eligible for exemption u/s 5(3).
H form is required for exemption to penultimate sale: Section 5(4) of CST Act provides that “The provisions of sub-section (3)[section 5(3)] shall not apply to any sale or purchase of goods unless the dealer selling the goods furnishes to the prescribed authority in the prescribed manner a declaration duly filled and signed by the exporter to whom the goods are sold in a prescribed form obtained from the prescribed authority.”
This prescribed form is H form and is mandatory to be filed for such penultimate export sale as proof of export. The exporter issues H form to the penultimate exporter i.e from whom the exporter has obtained the goods to be exported. The exporters will always be having proof of export like Bill of lading/Airway bill, custom clearance certificate etc, with him to claim exemption in respect of goods exported but the penultimate seller will not be having such documents. Hence the exporter issues H form to the penultimate seller declaring therein that the goods procured from him have been exported. During the CST Assessment, the A.O is very much particular about the export documents when exemption is claimed by the dealer under Section 5 (3) of the CST Act. According to this concept if seller sells the goods to the exporter, then he is not liable to charge VAT or CST if the exporter produces Form H to the seller. It is to be noted that there is no periodicity is mentioned in the CST Rules for submission of F forms. For every penultimate sale proof of export with form H is needed.
Conclusion: When Sub-section (3) of Section 5 uses the word ‘deemed’ and says that the penultimate sale ‘shall also be deemed to be in the course of export’ what is intended to be conveyed is that the penultimate sale shall also be regarded as being in the course of such export. In other words, no legal fiction is created. Therefore as held by the Supreme Court in the case of Consolidated Coffee Ltd.  46 STC 164 (SC) in view of Section 5(3) “the penultimate sale shall also be regarded as being in the course of such export” and “section 5(3) formulates a principle of general applicability in regard to all penultimate sales provided they satisfy the specified conditions mentioned therein”.