State Of Karnataka vs Azad Coach Builders Pvt. Ltd. & Anr

State of Karnataka .... Appellant(s)

Versus

Azad Coach Builders Pvt. Ltd. & Anr. .. Respondents(s) [with CIVIL APPEAL NOS. 6594-6598 of 2000]

JUDGMENT

K. S. Radhakrishnan, J.

The question that falls for consideration in this case is

whether an assessee (local manufacturer) is eligible to get exemption

under sub-section (3) of Section 5 of the Central Sales Tax Act, 1956

(for short `CST Act'), if the penultimate sale effected in favour of the

exporter is inextricably connected with the export of goods outside

the territory of India.

2

2. This Court in Md. Serajuddin & Others v. State of

Orissa (1975) 2 SCC 47, held that, under Article 286 of the

Constitution, the sale which was not liable to tax under the State

Sales Tax was only the actual sale by the exporter, but the benefit of

export sale did not extend to the penultimate sale to the Indian

exporter for the purpose of export. This led to the insertion of sub-

section (3) of Section 5 of the CST Act by the Amending Act 103 of

1976 with effect from 1.4.1976, whereby the last sale or purchase

occasioning the export of goods was granted exemption from the

State levy.

3. The scope of the Amending Act later came up for

consideration before a Constitution Bench of this Court in

Consolidated Coffee Ltd. & Another v. Coffee Board, Bangalore

(1980) 3 SCC 358 and a contention was raised that sub-section (3) of

Section 5 of the CST Act was ultra vires Article 286(2) of the

Constitution of India and that the expression "shall also be deemed to

be in the course of such export" occurring in Section 5(3) was

intended to convey that the penultimate sale shall also be regarded

as being in the course of such export. The Court held that the above

expression intends to convey that the penultimate sale shall also be 3

regarded as being in the course of such export and held that sub-

section (3) of Section 5 is intra vires Article 286(2) of the Constitution.

A three Judges Bench of this Court in Sterling Foods, A

Partnership Firm represented by its Partner Shri Ramesh

Dalpatram v. State of Karnataka & Another (1986) 3 SCC 469, also

examined the scope of the above mentioned provision. The question

raised in that case was whether the assessee was entitled to

exemption from tax under Section 5(3) of the CST Act in respect of

purchase of shrimps, prawns and lobsters, the purchase being of the

same commodities which were exported. The Court held that in order

to attract sub-section (3) of Section 5 of the CST Act it is necessary

that the goods which are purchased by an assessee for the purpose

of complying with the agreement or order for or in relation to export,

must be the same goods which are exported out of the territory of

India. The Court further held that the test which has to be applied for

the purpose of determining whether a commodity subjected to

processing retains its original character and identify is as to whether

the processed commodity is regarded in the trade by those who deal

in it as distinct in identity from the original commodity or it is regarded,

commercially and in the trade, the same as the original commodity. 4

4. In Vijayalaxmi Cashew Company & Others v. Deputy

Commercial Tax Officer & Another (1996) 1 SCC 468, the question

raised was whether the export of cashew kernels obtained out of raw

cashew nuts would amount to export of those goods which had been

purchased. The Court held that, since the raw cashew nuts can be

used for so many purposes and the process of extracting the kernels

so elaborate, it cannot be said that the goods (raw cashew nuts)

purchased in the penultimate sale were the same goods (cashew nut

kernels) which were sold to the exporter. The Court, therefore,

concluded that cashew nut kernels are not the same goods as raw

cashew nuts.

5. Sterling Foods (supra) and Vijayalaxmi Cashew

Company (supra) were essentially advocating the "same goods"

theory of course in different fact situations. Later, in K. Gopinathan

Nair & Others v. State of Kerala (1997) 10 SCC 1, a three Judges

Bench of this Court examined the question whether the purchase of

African raw cashew nuts made by the assessees from the Cashew

Corporation of India (for short 'CCI') are in the course of import and,

therefore immune from liability to tax under Kerala General Sales Tax

Act, 1963. In that case, on facts the Court found that there was no 5

privitiy of contract between the local users on the one hand and the

foreign exporter on the other and held that those two transactions

could not be said to be so integrally interconnected as to represent

one composite transaction in the course of import of raw cashew

nuts. The Court held that those sales by the CCI to the local users

go out of the sweep of the exemption provisions engrafted by Section

5(2) of the CST Act, reason being that there was no privity of contract

between the local users and the foreign exporters.

6. M/s Azad Coach Builders Pvt. Ltd., the assessee was

requested to build bus bodies, by the exporter, Tata Engineering

Locomotive Co. Ltd. in accordance with the specifications provided by

the foreign buyer, Lanka Ashok Layland Ltd., Colombo. The

specimen copy of the Purchase order dated 11.7.1988 placed on the

assessee by the exporter revealed that the assessee was asked to

fabricate bus bodies on the chassis supplied by the exporter in

accordance with the specifications given by the foreign buyer. In one

of the communications received from the foreign buyer it was

stipulated that the steel and aluminium panels of the bus bodies be

built by the assessee since the customers in Sri Lanka preferred

them. The assessee accordingly manufactured the bus bodies, in 6

accordance with the specifications stipulated by the foreign buyer and

mounted the same on the chassis made available by the exporter

making it as a complete bus ready for export.

7. The assessee claimed exemption on sales of bus bodies

as penultimate sales in the course of export made to their customers

like Telco Bombay and others which was rejected by the Assessing

Authority, treating the transactions as interstate sales, on the ground

that the `bus bodies' and `buses' are two different commodities and

the bus bodies as such were not exported, but complete buses. The

Assessing Authority held that the transactions could not amount to

penultimate sale eligible for exemption under sub-section (3) of

Section 5 of CST Act.

8. Aggrieved by the assessment order dated 21.3.1995, the

assessee approached the Joint Commissioner of Commercial Taxes

(Appeals), Bangalore Division under Section 20(5) of the Karnataka

Sales Tax Act, 1957. The appeal was rejected upholding the levy of

tax by the Assessing Authority on the ground that the goods exported

was different from the goods purchased and hence, the assessee

was not entitled to exemption under Section 5(3) of the CST Act. The 7

matter was taken up in appeal before the Karnataka Appellate

Tribunal and the appeal was rejected vide order dated 14.8.1996.

9. Feeling aggrieved by the order passed by the Tribunal,

the assessee took up the matter before the Division Bench of the

Karnatka High Court vide S.T.R.P. No. 4 of 1997. After examining

the agreement between the exporter and the foreign buyer and also

the order placed by the exporter on the assesseee, the High Court

came to the conclusion that the bus bodies supplied by the assessee

to the exporters 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 High Court, therefore, allowed the

Revision Petition and held that the assessee is eligible for the benefit

of exemption from tax under Section 5(3) of the CST Act.

10. Aggrieved by the order of the High Court, the State of

Karnataka has come up with these appeals. A Division Bench of this

Court felt that the judgments of this Court in Sterling Foods (supra)

and Vijayalaxmi Cashew Company (supra) need a fresh look in the

light of a later judgment of this Court in K. Gopinathan Nair (supra) 8

and hence the matter was referred to a larger Bench, the reference

order is reported in (2006) 3 SCC 338. The larger Bench then

placed this matter before the Constitution Bench and hence the

matter has been placed before us for consideration.

11. Mr. Sanjay Hegde, learned counsel appearing for the

State of Karnataka submitted that the High Court has committed a

grave error in holding that the assessee is entitled to the exemption

under Section 5(3) of the CST Act. The learned counsel submitted

that 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 learned counsel submitted that the words

"those goods" in Section 5(3) of the CST Act are clearly referable to

"any goods" mentioned in the preceding part of this sub-section. The

learned counsel submitted that the goods supplied by the assessee

and the goods actually exported by the dealer to the foreign buyer

were not the bus bodies but buses itself, hence, the benefit of

exemption under Section 5(3) of the CST Act is not available to the

assessee.

9

12. Learned counsel has, in support of his contentions,

placed reliance on the Constitution Bench judgments of this Court in

Sterling Foods (supra) and Vijayalaxmi (supra). Reference was

also made to the judgments of this Court in Consolidated Coffee

Company (supra), Md. Serajuddin (supra), Binani Brothers (P)

Ltd. v. Union of India & Others (1974) 1 SCC 459, Satnam

Overseas (Export) through its Partner & Others v. State of

Haryana & Another (2003) 1 SCC 561 and Coffee Board,

Bangalore v. Joint Commercial Tax Officer, Madras & Another

(1969) 3 SCC 349.

13. Mr. P. S. Narasimha, the learned senior counsel

appearing for Respondent No. 2 submitted that the exemption under

taxation law will have to be purposefully and widely construed. In that

context, the learned senior counsel submitted that, 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. The learned senior counsel

submitted that 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. 10

14. Mr. Soli J. Sorabjee, learned senior counsel appearing for

the respondents submitted that 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. The

learned senior counsel submitted that 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.

15. Shri Goolam E. Vahanvati, learned Attorney General,

assisting the Court submitted that 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 sub-section (3)

of Section 5 of the CST Act. The only pre-condition is that the

exemption be linked to the penultimate sale, preceding the export.

16. Before examining the rival contentions of the parties, it

would be appropriate to refer to the Statement of Objects and

Reasons of the Amending Act 103 of 1976 by which Section 5(3) of

the CST Act was added. The relevant portion of the Statement of

Objects and Reasons reads as under:

11

".....According to the Export Control Orders, exports of certain goods can be made only by specified agencies such as the State Trading Corporations. In other cases also, manufacturers of goods, particularly in the small scale and medium sectors, have to depend upon some experienced export house for exporting the goods because special expertise is needed for carrying on export trade. A sale of goods made to an export canalizing agency such as the State Trading Corporation or to an export house to enable such agency or export house to export those goods in compliance with an existing contract or order is inextricably connected with the export of the goods. Further, if such sales do not qualify as sales in the course of export, they would be liable to States sales tax and there would be a corresponding increase in the price of the goods. This would make our exports uncompetitive in the fiercely competitive international markets. It is, therefore, proposed to amend, with effect from the beginning of the current financial year, Section 5 of the Central Sales Tax Act to provide that the last sale or purchase of any goods preceding the sale or purchase occasioning export of those goods out of the territory of India shall also be deemed to be in the course of such export if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order, for, or in relation to, such export."

17. The relevant portions of Section 5 are also extracted

hereunder for easy reference:

"5. When is a sale or purchase of goods said to take place in the course of import or export.- (1) A sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

xxx xxx xxx

xxx xxx xxx 12

(3) Notwithstanding anything contained in sub-section

(1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.

xxx xxx xxx

xxx xxx xxx"

18. Article 286(1)(b) of the Constitution of India states that no

law of a State shall impose, or authorize the imposition of a the sales

tax on the sale or purchase of goods when such sale or purchase

takes place in the course of export of goods. Article 286(2) prohibits

imposition of sales tax on import and export by the State

Government. Article 286(2) authorizes the Parliament to formulate

principles for determining when sale is in the course of import/export.

The sale or purchase of goods is deemed to be in the course of

export of goods out of the territory of India only if the sale or purchase

either occasions such export or is effected by a transfer of documents

of title to the goods after the goods have crossed the customs

frontiers of India. Therefore, under Article 286(1) of the Constitution,

the Court has to examine whether any tax is being imposed by the

State Legislature on the sale or purchase of goods "in the course of 13

the import of the goods into or export of the goods out of the territory

of India". In order to resist imposition of sales tax by the State, the

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.

19. In Sterling Foods (supra), this Court had advocated the

"same goods" theory of course in a different situation. In that case,

on facts the Court found no essential difference between raw

shrimps, prawns and lobsters and processed or frozen shrimps,

prawns and lobsters, especially when the dealer and the consumer

regarded both as shrimps, prawns and lobsters and that they

continued to possess their original character and identity as shrimps,

prawns and lobsters, notwithstanding the removal of heads and tails,

peeling, deveining and cleaning. It is in that context that this Court

held that the processed or frozen shrimps, prawns and lobsters were

not a new and distinct commodity and they retained the same

character and identity as the original shrimps, prawns and lobsters. 14

20. In Vijayalaxmi Cashew Company (supra), we have

already stated that the question was whether the purchase of raw

goods made by the appellants after which the cashew kernels were

extracted and exported to foreign countries could be subjected to the

State Sales Tax Act. The Court elaborately examined, in what

manner the raw cashew nuts were processed. After getting the

detailed report from the High Court as to how the edible kernels were

extracted from raw cashew nuts and having examined minutely the

whole process, the Court came to the conclusion that the kernels

were not the same goods as raw cashew nuts purchased by the

dealers. What was exported were the edible kernels and what was

purchased for the purpose of export were raw cashew nuts. The

Court noticed that since raw cashew nuts could be used for so many

purposes and the process of extracting the kernels so elaborate, it

could not be said that the goods (raw cashew nuts) purchased in the

penultimate sale were the same goods (cashew nut kernels) which

were sold for export.

21. In this connection, it is useful to refer to the judgment of

this Court in Deputy Commissioner of Agricultural Income Tax

and Sales Tax, Ernakulam v. Indian Explosives Ltd. (1985) 4 15

SCC 119, wherein this Court was dealing with the question whether

the respondent-assessee was concerned with sale transactions in the

course of import of chemicals, dyes etc. The modus operandi of the

assessee in that case was to the effect that local purchasers used to

place orders with the respondent quoting their Import Licence

Numbers in accordance with their pre-existing contracts with the

respondent. The respondent then placed orders with the foreign

supplier for the supply of the goods and in such orders the name of

the local purchaser who required the goods as also its licence

numbers, were specified; the actual import was done on the strength

of two documents like (a) the Actual Users' Import Licence and (b)

Letter of Authority issued by Chief Controller of Imports and Exports

whereunder the local purchaser was authorized to permit the

respondent-assessee on his behalf to import the goods, to open

letters of credit and make remittance of foreign exchange against the

said licence to the extent of value specified therein. The Court held

that there was an integral connection between the sale to the local

purchaser and the actual import of the goods from the foreign

supplier. The movement of goods from foreign country like United

States to India was in pursuance of the conditions of the pre-existing 16

contract of sale between the respondent-assessee and the local

purchaser. It was noticed that the import of the goods by the

respondent assessee was for and on behalf of the local purchaser

and the respondent-assessee could not, without committing a breach

of the contract, divert the goods so imported for any other purpose.

The Court, therefore, concluded that in order that the sale should be

one in the course of import it must occasion the import and to

occasion the import there must be integral connection or inextricable

link between the first sale following the import and the actual import

provided by an obligation to import arising from statute, contract or

mutual understanding or nature of the transaction which links the sale

to import which cannot, without committing a breach of statute or

contract or mutual understanding, be snapped.

22. Now, let us refer to the Constitution Bench judgment of

this Court in K. Gopinath Nair (supra) on which strong reliance was

placed in the order of reference. The question raised was whether

the purchase of African raw cashew nuts made by the assessees

from CCI was in the course of import and, therefore immune from

liability to tax under Kerala General Sales Tax Act, 1963. The Court

rejected that contention observing that there was no direct and 17

inseverable link between the transaction of sale and the import of

goods on account of the nature of the understanding between the

parties as also by reason of the canalizing scheme pertaining to the

import of cashew nuts. In that case, the Court was mainly concerned

with the interpretation of sub-section (2) of Section 5 of the CST Act.

In the facts and circumstances of that case, the Court observed that

the transactions between the foreign exporter and the local users in

India got transmitted through an independent canalizing import

agency which entered into back to back contracts and there was no

direct linkage or causal connection between the export by foreign

exporter and the receipt of the imported goods in India by the local

users and hence the integrity of the entire transaction got disrupted

and substituted by two independent transactions, one between the

canalizing agency and the foreign exporter which made the canalizing

agency the owner of the goods imported and the other between the

canalizing agency and the local users for whose benefit the goods

were imported by the canalizing agency. In such a situation, the

Court held that the sale by the canalizing agency to the local users

would not be a sale in the course of import but would be a sale

because of or by import which would not be covered by the 18

exemption provision of Section 5(2) of the Central Sales Tax Act. The

Court further noticed that a sale or purchase can be treated to be in

the course of import if there is a direct privity of contract between the

Indian importer and the foreign exporter and the intermediary through

which such import is effected merely acts as an agent or a contractor

for and on behalf of Indian importer.

23. When we analyze all these decisions in the light of the

Statement of Objects and Reasons of the Amending Act 103 of 1976

and on the interpretation placed on Section 5(3) of the CST Act, the

following principles emerge:

- 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.

24. 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 19

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 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.

25. Therefore, the test to be applied is, whether there is an in-

severable 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 a claim under

Section 5(3) for exemption from State Sales Tax is justified, in which

case, the same goods theory has no application.

26. The facts of this case clearly reveal that the transaction

between the assessee and the exporter is inextricably connected with

the export of the goods to Sri Lanka. The communication between 20

the foreign buyer and the 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 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. The assessee in this

case has succeeded in showing that the sale of bus bodies have

occasioned the export of goods. When the transaction between the

assessee and the exporter and the transaction between the exporter

and foreign buyer are inextricably connected with each other, in our

view, the `same goods' theory has no application.

27. We may also indicate that the burden is entirely on the

assessee to establish the link in transactions relating to sale or

purchase of goods and to establish that the penultimate sale is

inextricably connected with the export of goods by the exporter to the 21

foreign buyer, which in this case the assessee has succeeded in

establishing.

28. Mr. T. S. Narasimha, learned counsel appearing for

Respondent No. 2 contended that any penultimate sale made in

furtherance of export, irrespective of the nature of the goods, would

also be covered, is too tall a proposition to be accepted. It all

depends on the question as to whether the sale or purchase is

inextricably connected with the export of goods and not a remote

connection as tried to be projected by the counsel. The connection

between the penultimate sale and the export of goods should not be

casual, accidental or fortuitous, but real, intimate and inter linked,

which depends upon the nature of the agreement the exporter has

with the foreign buyer and the local manufacturer, the integrated

nature of the transactions and the nexus between the penultimate

sale and the export sale.

29. In the facts and circumstances of this case, we are

satisfied that the assessee has succeeded in satisfying those tests

and hence, eligible for exemption under sub-section (3) of Section 5

of the CST Act.

22

30. We, therefore, find no error in the decision rendered by

the High Court in declaring that the assessee is entitled to exemption

under Section 5(3) of the CST Act. The Reference is accordingly

answered and the appeals stand dismissed. In the facts and

circumstances of the case, there will be no order as to costs.

....................................CJI (S. H. KAPADIA)

......................................J. (B. SUDERSHAN REDDY)

.......................................J. (K. S. RADHAKRISHNAN)

.......................................J. (SURINDER SINGH NIJJAR)

.......................................J. (SWATANTER KUMAR) New Delhi;

September 14, 2010.