In a very recent decision, the Supreme Court (SC) has laid down the principles for claiming exemption under the Central Sales Tax Act, 1956 (CSTA) with regard to the penultimate sale of goods by a dealer to an exporter, who effects the actual exports of goods from the country (State of Karnataka vs Azad Coach Builders Pvt Ltd 2010-VIL-12-SCB-CB). This judgment has distinguished the earlier rulings 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.
Before going into the details of the case, it would be worthwhile to briefly understand the underlying provisions as prescribed under the relevant Section 5 of the CSTA, inter alia relating to exports of goods from India. Originally, this provision only exempted the actual exports from the country from the levy of sales tax. This led to the insertion of sub section 3 of Section 5 of the CSTA whereby the last sale or purchase occasioning the exports of goods was also granted the benefit of exemption. Now, this sub section reads as follows: (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.
However, notwithstanding this insertion, the claim for exemption must still pass muster under Article 286 of the Constitution which prohibits the imposition of tax on any sale or purchase of goods in the course of the import of goods into or exports of goods out of the territory of India. Consequently, the claimant for the exemption would still need to establish the identity of the goods so sold to have been exported out of India, to qualify for the exemption, notwithstanding the insertion of sub section 3 as above.
It was as a result of the aforesaid position in law the SC had, in its earlier judgements in Sterling Foods and Vijayalaxmi Cashew (supra) propounded the ‘same goods theory’, whereby it was held that the penultimate sale of goods could only qualify for exemption if the exporter had exported the goods so purchased without undertaking any processing which would physically alter the characteristics of the purchased product and whereby the identity of the goods had therefore changed. In the case in point, the SC took note of these decisions, among others, and came to the significant conclusion that the ‘same goods theory’ would not have application, if certain other conditions were met.
In the subject case, the respondents were contracted to build bus bodies for the actual exporter, Tata Engineering Locomotive Co Ltd (Telco), in accordance with the specifications provided by the foreign buyer to Telco. 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 CSTA. 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 argued by the State that the exemption for penultimate sales under the CSTA 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 CSTA was not available. The appellants relied on the decisions of the SC cited supra.
On the other hand, the respondents submitted that the relevant exemption would have to be purposefully and widely construed. Accordingly, if the penultimate sale was in furtherance of an export order and the goods so sold retained their identity while being exported, then such sale would qualify for the exemption. It was submitted that if the penultimate sale was inextricably connected with the export of goods outside India, then such sale would be eligible for the exemption under the CSTA.
The Court examined the Statements of Objects and Reasons of the Amending Act 103 of 1976 by which sub-section 3 was inserted in Section 5 of the CSTA. It also analysed the above Article 286 of the Constitution, which prohibited the imposition of tax on sales in the course of exports. Thereafter, the Court examined the "same goods theory" as propounded in Sterling Foods and Vijayalaxmi Cashew. The Court also took note of its earlier judgement in Deputy Commissioner vs Indian Explosives Ltd (1985) 4 SCC 119 (SC), wherein the issue of exemption from tax on import was under consideration and where it was held that there was an integral or inextricable link between the import and the subsequent sale following the import and hence no tax could be charged on such sales, as they occasioned such imports.
Finally, the SC also referred to the judgement in K Gopinathan Nair vs State of Kerala (1997) 10 SCC 1, wherein the inextricable link between the two transactions was found missing and this resulted in two independent transactions, one of import and the other of a subsequent sale between two buyers.
As a result, the Court determined the following principles as being relevant:-
n 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;
n there must be an obligation to export, and there must be an actual export.
n the obligation could arise for any reason.
n to occasion the export, there must exist such a bond between the contract of sale and the actual exportation that each link was inextricably connected with the one immediately preceding it.
The Court further stated that the phrase 'sale in the course of export' comprised of 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 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 CSTA 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 CSTA.
This is a landmark case as it settles the prolonged uncertainty that was prevalent in the matter, which was significantly affecting the exemption from tax for exports from India. It will be interesting to see how this exemption, or more precisely, zero rating would be preserved under the forthcoming GST. Clearly, the expectation is for the dispensation from tax to remain intact.
The Author is Leader Indirect Tax Practice PricewaterhouseCoopers email@example.com
Supported by Abhishek R Shah and Vaibhav Shah