1.0 INTRODUCTION .-

1.1 The framers of the Constitution of India had a great vision and pragmatic approach to the extending horizon of world economy and compulsions of globalization of trade and commerce under a common canopy of international market. To develop India into a competitive force vis-a-vis the developed countries, some specific provisions were incorporated in the Constitution. Clause 1(b) of Article 286 of the Constitution is one of such pursuits. Under this Article, a State has been debarred from imposing a tax on the sale or purchase of the goods where such sale or purchase takes place in the course of the import of goods into, or export of the goods out of the territory of India. Clause (2) of Article 286 was substituted by the Constitution (Sixth Amendment) Act, 1956 and the Parliament was empowered to formulate, bylaws, principles for determining when a sale or purchase of goods takes place in the course of import of the goods into, or export of the goods out of, the territory of India. Accordingly, section 5 was incorporated in the Central Sales Tax Act, 1956 (hereinafter referred to as the CST Act), providing for that where is a sale or purchase of goods said to take place in the course of import or export. With the changing needs of the time, section 5 has been amended from time to time.

2.0 HISTORICAL BACKGROUND –

2.1 Enactment of the Central Sales Tax Act, 1956 (CST Act, 1956) was enacted by Parliament as Act No. 74 of 1956. All sections of this Act, except section 15, came into force w.e.f. 5th January, 1957 and section 15 came into force w.e.f. 1st October, 1958. Initially, this Act was not extended to all States and Territories of India, but later on, by different Acts/Notifications, it was extended to the whole of India.

2.2 Section 5 as originally enacted in the CST Act.-

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.”

(2) “A sale or purchase of goods shall be deemed to take place in the course of import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India”.

(2.3) Apex Court in the case of Ben Gorm Nilgiri Plantations Co. – The Hon’ble Supreme Court has, in the case of Ben Gorm Nilgiri Plantations Co. Vs. Sales Tax Officer, reported at (1964) 15 STC 753, held that there are a variety of transactions in which the sale of a commodity is followed by export thereof. At one end is a transaction under a contract of sale with a foreign buyer under which the goods may render the contract be delivered by the seller to a common carrier for transporting them to the purchaser. Such a sale would indisputably be one of export, whether the contract and delivery to the common carrier are effected directly or through agents. In such a case it is immaterial whether or not with reference to the provisions of the Sale of Goods Act, read in conjunction with the terms and stipulations of any particular contract, the property in the goods passes to the buyer on the Indian side of the customs frontier or beyond it. At the other end is a transaction in which there is a sale of goods in India and the purchaser immediate or remote, exports the goods out of India for foreign consumption. For instance, the foreign purchaser either by himself or through his agent purchases goods within the territory of India and exports the goods and even if the seller has the knowledge that the goods are intended by the purchaser to be exported, such a transaction is not in the course of export for the seller does into export the goods and it is not his concern as to how the purchaser deals with the goods. Such a transaction without more cannot be regarded as one in the course of export because etymologically ‘in the course of export’ contemplates an integral relation or bond between the sale and the export.

2.4 Apex Court in the case of Coffee Board.-

The Hon’ble Supreme Court has, in the case of Coffee Board Vs. Joint Commercial Taxes Officer, reported at (1970) 25 STC 528, held that Parliament has recognized in section 5(1) only two cases of sale in the course of export - (a) where the sale is effected by a transfer of documents of title to goods after the goods have crossed the customs frontiers, that is to say, the goods are already on the way to the importer, and (b) when the sale itself causes the export to take place, that is to say, the exporter and importer negotiate and complete a sale which without more would result in the export of goods. No other sale can qualify for the exemption under section 5(1) of the CST Act read with Article 286(1)(b) of the Constitution.

The Hon’ble Supreme Court further held that where the Coffee Board, a statutory body which controlled the sale and export of coffee, sold coffee by auction under which the purchaser was required compulsorily to export the coffee so purchased to a foreign buyer, it was held that the sales effected by the coffee board were not sales in the course of export as those sales did not occasion the export of goods. In this case, there were two independent sales involved in the export programme. The first was a sale between the coffee Board as seller to the export-promoter. Then, there was a sale by the export-promoter to a foreign buyer. Of the latter sale, the Coffee Board did not have any inkling when the first sale took place. The Coffee Board’s sale was not in any way related to the second sale. Therefore, the first sale had no connection with the second sale which was in the course of export, that is to say, movement of goods between an exporter and an importer.

2.5 Apex Court in the case of Mod. Serajuddin

The Constitution Bench of the Hon’ble Supreme Court has, in the case of Mod. Serajuddin Vs. State of Orissa, reported at (1975) 36 STC 136, held that the State Trading Corporation (referred to as the Corporation) alone agreed to sell the goods to the foreign buyer and was exporter of the goods. There was no privity of contract between Mod. Serajuddin (referred to as the appellant) and the foreign buyer. The privity of contract was between the Corporation and the foreign buyer. The immediate cause of the movement of the goods and export was the contract between the foreign buyer who was the importer and the Corporation who was the exporter and the shipper of the goods. All relevant documents were in the name of the Corporation whose contract of sale was the occasion of export. The expression “Occasions” in section 5 of the CST Act means the immediate and direct cause. Therefore, the export was occasioned by the contract of sale between the Corporation and the foreign buyer and not by the contract of sale between the appellant and the Corporation.

The expression “in the course” implies not only a period of time during whch the movement is in progress but postulates a connected relation. Sale in the course of export out of territory of India means the sale taking place not only during the activities directed to the end of exploration of the goods out of the country but also as part of or connected with such activities. The directions given by the Corporation to the appellant to place the goods on board the ship are pursuant to the contract of sale between the appellant and the Corporation. These directions are not in the course of export, because the export sale is an independent one between the Corporation and the foreign buyer. The taking of the goods from the appellant’s place to the ship is completely separate from the transit pursuant to the export sale.

The Corporation in regard to its contract with the foreign buyer entered into a contract with the appellant to procure the goods. Such contracts for procurement of goods for export are described in commercial parlance as back to back contracts or string contracts or chain contracts. It is only the contract which occassions the export of the goods which will be entitled to exemption as a sale in the caourse of export under section 5(1) of the CST Act and not all the chain contracts.

2.6 Remedial legislative amendment by way of insertion of sub-section(3) to Section 5 of the CST Act –

The Hon’ble Supreme Court in the cases referred to above, laid down a clear distinction between “sale for export” and “sale in the course of export” In view of this settled position of law by which penultimate sales were not allowed to be exempted and were subjected to tax, the State Trading Corproation started inviting a heavy load of tax liability. To get out this clogmire, Parliament by Act No. 103 of 1976, inserted a new sub-section (3) w.e.f. 1st April, 1976 to section 5 of the CST Act, which runs as under:-

(3)” Notwithstanding anything contained in sub-section (1) the last sale or purchase of any goods preceding the sale or purchase occassioning 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.”

2.7 Interpretation of the expression “customs frontiers of India” in the absence of any definition in the CST Act –

In sub-sections (2) and (3) to section 5 of the CST Act, the expression “customs frontiers of India” have been used. In the absence of any definition thereof in the CST Act, it became a matter of interpretation by the High Courts and the Supreme Court.

The Hon’ble supreme Court had in the case of State of Madras Vs. Davar & Co. reported at (1969) 24 STC 481, laid down that the expression “customs frontiers” in section 5(1) or 5(2) of the CST Act, did not mean customs barrier”, and it had to be construed in accordance with Notification No. S.R.O. 1683 dated 6th August, 1955 issued by the Central Government under section 3A of the Sea Customs Act, 1878, read with the Proclamation of the President of India dated 22nd March, 1956, and that consequently the expression “customs barriers” meant the boundaries of the territory including the territorial waters of India. By the Proclamation of the President of India, the territorial waters were extended into the sea to a distance of twelve nautical miles.(one nautical mile is equal to 6082.66 feet).

This position gave rise to practical difficulties as in many cases it was not possible to determine the question whether at the time of the sale or purchase, the goods had entered into or crossed the territorial waters. To overcome this difficulty, parliament inserted the definition of the expression “crossing the customs frontiers of India as clause (ab) to section 2 of the CST Act, by Act No. 103 of 1976 w.e.f. 7th September 1976, as under:-

(ab) “crossing the customs frontiers of India” means crossing the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance by customs authorities.

The Hon’ble Supreme Court has, in the case of K. Gopinathan Nair Vs. State of Kerala, reported at (1997)105 STC 586, held that said provision was not clarificatory and hence it was not retrospective in operation.

2.8 Insertion of sub-sections (4) and (5) with explanation, to section 5 of the CST Act –

Firstly, exemption to 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, are linked with two preconditions:-

(i) that such last sale or purchase takes place after the agreement is entered into or order is received for such export, and

(ii) that such last sale or purchase takes place for or in relation to such export.

The above conditions required legal proof in order to avoid uncertainty and interpretative litigation. Therefore, there was a necessity for being inserted a suitable provision in the CST Act.

Secondly, the purchases of Aviation Turbine Fuel by Indian carriers for the purpose of their international flight were involving taxing problems. In the case of Burmah Shell Oil Storage & Distributing Co. of India, reported at (1960) 11 STC 764, the Hon’ble Supreme Court held that supply of aviation spirit to aircrafts proceeding abroad was not sale in the course of export.

Apart from this, the Indian carriers had to stand the competition with other international carriers. These exigencies required also that some express provisions in this regard should be incorporated in the CST Act.

Accordingly, sub-sections (4) and (5) with the explanation were incorporated in section 5 of the CST ACt, by Finance Act No. 18 of 2005, w.e.f. 13th May, 2005, as under:-

(4) “The provisions of sub-section (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”.

(5) “Notwithstanding anything contained in sub-section (1), if any designated Indian carrier purchases Aviation Turbine Fuel for the purposes of its international flights, such purchase shall be deemed to take place in the course of export of goods out of the territory of India.”

Explanation “For the purposes of this sub-section, ‘designated Indian carrier’ means any carrier which the Central Government may, by notification in the Official Gazette, specify in this behalf”.

Thus, section 5 of the CST Act with five sub-sections, stands today with an self-explanatory mechanism, subject to scrutiny and interpretation by the High Courts and the Supreme Court.

3.0 SALE OR PURCHASE OF GOODS IN THE COURSE OF EXPORT OF THE GOODS OUT OF THE TERRITORY OF INDIA

3.1 According to section 5(1) of the CST Act, 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 transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

The above sub-section has two limbs which make a transaction of sale or purchase as an export outside the country.

(i) A sale or purchase which occasions export outside the country; and

(ii) A sale or purchase which is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

3.2 A sale or purchase which occasions export –

In this limb the expression “occasions” is the very root which determines the nature of a transaction. “occasion” used as verb generally means to cause. The Hon’ble Supreme Court has, in the case of Mod. Serajuddin reported at (1975): 36 STC 136 has held that the expression “occasions in section 5(1) of the CAST Act means the immediate and direct cause. There is an inextricable connectivity between the sale or purchase and ‘occasions export’, because the expression “in the course of export” contemplates an integral relation or bond between the sale and the export, as observed by the Hon’ble Supreme Court in the case of Ben Gorm Nilgiri Plantation Co., reported at (1964) 15 STC 753. It may be said that a sale or purchase can be said to occasion an export in the cases, where –

(i) there is a common intention of both the Indan seller and the foreign buyer, for export;

(ii) there is an obligation to export, which may arise from statute, from contract or from the nature of the transaction;

(iii) there is inseparable link between the sale and the export, which cannot be shattered without a breach of the obligation; and

(iv) there is actual export of the goods.

3.3 A sale or purchase which is affected by a transfer of dcuments of title to the goods after the goods have crossed the customs frontiers of India.

The second limb of section 5(1) speaks about another segment of export;

(i) Firstly, the expression “transfer of” has been used in the context of the expression “sale or purchase” and therefore, the expression “transfer of” has to be read with the expression “sale or purchase”. Money consideration paid or promised is one of the ingredients of sale or purchase, as held by the Hon’ble Supreme Court in the case of Khajan Chand Vs. State of Jammu & Kashmir, reported at (1984) 56 STC 214. Hence, the second limb of section 5(1) of the CST Act. lays down that transfer of documents of title to the goods, must necessarily be against money consideration, paid or promised.

(ii) Secondly, documents of title to the goods, in short, refer to those documents, on the surrender of which, the goods can be claimed from the carrier by way of transfer thereof or by way of taking delivery thereof. According to section 2(4) of the Sale of Goods Act, “document of title to the goods” includes a bill of lading, dock-warrant, ware-house keeper’s certificate, wharfinger’s certificate, railway receipt, warrant or order for the delivery of goods and any other documents used in the ordinary course of business as proof of the possession or control of goods, or authorising or purporting to authorise either by endorsement or by delivery, the possession of the documents to transfer or receive goods thereby represented.

(iii) Thirdly, in the case of transfer of documents of title to the goods, such transfer should be effected after the goods have crossed the customs frontiers of India. According to clause (ab) of section 2 of the CST Act, “crossing the customs frontiers of India” means crossing the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance by customs authorities. According to section 2(13) of the Customs ACt, 1962, “customs station” means any customs port, customs airport or land customs station. According to section 2(11) of the Customs Act, 1962, “customs area” means the area of a customs station and includes any area in which imported goods or export goods are ordinarily kept before clearance by customs authorities. The customs authorities include Collector of Customs, Collector of Customs (Appeals), Deputy Collector of Customs, Assistant Collector of Customs and such other officers of customs as may be appointed for the purposes of the Customs Act, 1962.

4.0 Some Relevant Judicial Pronouncements.-

4.1 The Hon’ble Supreme Court has, in the cases of (i)Burmah Shell Oil Storage & Distributing Co. of India Ltd. (AIR 1961 SC 315, 316) and (ii) Tata Engineering & Locomotive Co. (AIR 1971 SC. 477) has laid down that sales or purchases for the purpose of export are not protected, unless the sales or purchase themselves occasion the export and are an integral part of it. It has also been laid down that the goods must have a foreign destination where than can be said to exported.

4.2 The Hon’ble Supreme Court has, in the case of Manganese Ore (India) Ltd. Vs. The Regional Asst. Commissioner of Sales Tax, Jabalpur, reported at (1976) 37 STC 439, laid down that where the sale was not directly and substantially connected with export, and where between the seller and the buyer intermediaries were involved, such a sale would not occasion any export and would not fall within the purview of section 5(1) of the Central Sales Tax Act, 1956.

4.3 The Full Bench of the Hon’ble Madras High Court has, in the case of Dy. Commissioner of Commercial Taxes Vs. Vasantha Mills Ltd., reported at (1976) 38 STC 366, held that the sale, which occasioned the export, was the sale by the local purchaser to the foreign buyer and that sale by the assessee to the local purchaser could not be treated as a sale in the course of export.

4.4 In the case of Madras Marine and Co. Vs State of Madras, reported at (1986)63 STC 169, the Hon’ble Supreme Court has held that as there was no destination for the goods in a foreign country, it was not a case of export.

4.5 The Hon’ble Rajasthan High Court has, in the case of CTO Special Circle, Shriganganajar vs. Kotak & Company, reported at (1990) 76 STC 4 laid down that where a person buys cotton and sends it to his export house which thereafter sells it to foreign buyers, the purchase of cotton was not in the course of export.

5.0 SALE UNDER EXPORT PROMOTION SCHEME –

5.1 The Government of India had issued an export Promotion Scheme. In a nut shell, under this scheme, goods were required to be sold to foreign tourists visting the country against foreign exchange on printed vouchers on the condition that the articles purchased shall not be sold in India. In those printed vouchers maintained under the scheme, details like name and nationality of the tourist, passport number, description of goods sold, sale and value of foreign exchange and their rupee equivalent, details of foreign currency, seaport or airport of embarkation, date of tourist departure, and other details were required to be entered. Those vouchers also bore the signature and seal of the customs authority besides signature of the tourist and exporter. The purchaser was totally prohibited from selling or disposing off those goods in any part of the country.

5.2 The Hon’ble Allahabad High Court has, in the case of Commissioner of Sales Tax Vs. Ganeshi Lal & Sons, reported at (1982) 49 STC 253, held that the phrase ‘sale in the course of export’ comprises in itself three essentials, namely (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 Hon’ble High Court consequently held that the making of a sale in pursuance of the export promotion scheme or in accordance with the terms and conditions mentioned therein did not make a sale in the course of export. The sale might have been made with the intentions that the goods sold shall be taken out of India and the goods might ultimately cross the Indian border. But those by themselves did not result in a sale in the course of export. The prohibition to sell in India or the checking of goods at customs barrier had nothing to do with the sale but were only conditions of sale. Their breach did not affect the sale but might land the purchaser in difficulty and had nothing to do with the seller.

5.3 The Hon’ble Madras High Court has, in the case of Indian Art Palace vs. Deputy Commercial Tax Officer, reported at (1988)71 STC 133, examined the issue of sale to foreign tourists. In this case, the petitioner made the substantial sales to foreign tourists who paid in foreign currency. These sales were deemed to be exports under the import policy of the Government of India which were entitled to import replenishment. The Hon’ble High Court held that the sales to foreign tourists by the petitioner could not be treated as export sales or sales in the course of export.

5.4 The Hon’ble Rajasthan Sales Tax Tribunal has, in the case of (i) Maharaja Textiles Printers Vs. CTO (AE) reported at (1992) 11 RTJS 54 and (ii) Jaipur, Silk Emporium Vs. ACTO, reported at (1998)23 RTJS 70, held that sales to foreign tourists under the export promotion scheme is not export but is a local sale.

5.5 The Hon’ble Taxation Tribunal (and not Tax Tribunal) has in the case of Silver Arts Palace Vs. CTO (AE), reported at (1977)22 RTJS 181, held that sales of gems and jewellery to foregin tourists under export promotion scheme is not in the course of export, but these are local sales liable to tax.

6.0 PENULTIMATE SALES TO EXPORT ARE EXPORT SALES UNDER SECTION 5(3) OF THE CST ACT –

6.1 Section 5(3) of the CST Act:

Section 5(3) of the CST Act says that “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”. The main features of this sub-section may be summarized as under:-

(i) There should be the last sale or purchase of the goods preceding the sale or purchase occasioning the export;

(ii) Such last sale or purchase should take place after the agreement is reached or order is received for export;

(iii) Such last sale or purchase should be for the purpose of complying with the agreement or order for or in relation to such export; and

(iv) The goods purchased last, and the goods exported, should be the same and not different goods.
6.2 Some judicial pronouncements on the general nature of the transactions under Sec. 5(3) of the CST Act. –

6.2.1 The Hon’ble Supreme Court has, in the case of Murarilal Sarawgi Vs. The State of Andhra Pradesh, reported at (1977) 39 STC 294, held that mere mention of f.o.b. price or f.o.b delivery in the contract between the appellants and the M.M.T.C., which exported the goods to the foreign buyer under a separate contact, would not make the two contracts integrated. There cannot be two last purchasers in the sale of the same goods within the same State. Similarly, there could not be two exporters in respect of the same goods. The contract between the appellants and the M.M.T.C and the contract between the M.M.T.C. and the foreign buyer were different and therefore, the last purchaser within the State was the M.M.T.C.

6.2.2 The Andhra Pradesh High Court in the case of George Maijo & Co. Vs. the State of A.P. reported at (1980) 46 STC 41 and the Hon’ble Allahabad High Court in the case of Vokey Footwear & Leather Industries, reported at (1985) 58 STC 338, have held that in order to come within the purview of section 5(3) of the CST Act (i) there must have been pre-existing agreement or order to sell the specific goods to a foreign buyer; (ii) the last purchase referred to in section 5(3) must have taken place after that agreement with the foreign buyer was entered into; and (iii) the last purchase must have been made for the purpose of complying with the pre-existing agreement or order.

6.2.3 The Hon’ble Supreme Court has in the case of Consolidated Cofee Ltd. Vs. Coffe Board, reported at (1980) 46 STC 164, held that section 5(3) has been enacted to extend the exemption from tax liability under the CST Act not to any kind of penultimate sale but only to such penultimate sale as satisfies the two conditions specified therein, namely (a) that such penultimate sale must take place after the agreement or order under which the goods are to be exported and (b) if must be for the purpose of complying with such agreement or order and it is only then that such penultimate sale is deemed to be a sale in the course of export.

6.2.4 The Hon’ble Supreme Court has, in the case of Sterling Foods Vs. The State of Karnataka, reported at (1986)63 STC 239, held that in order to attract the applicability of section 5(3) 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 words “those goods” in this sub-section are clearly referable to “any goods” mentioned in the preceding part of the sub-section and it is, therefore, obvious that the goods purchased by the assessee and the good exported by him must be the same.
6.2.5 The Honble Orissa High Court has, in the case of Puri Marine Products Vs. State of Orissa, reported at (1991)82 STC 396, held that a change in the trade name or description for commerce does not change the character of the commodity and does not defeat the object of Sec.5(3) of the CST Act, 1956, if the goods remain the same. The frozen shrimps were not a new and distinct commodity but retained the same character and identify as the prawns purchased and hence the protection of section 5(3) was available to the dealer.

6.2.6 The Hon’ble Kerala High Court has, in the case of M.M. Abdul Hameed & Sons Vs. Dy. Commissioner of Sales Tax (Law), reported at (1994) 93 STC 11, held that since sub-section (3) of section 5 of the CST Act, 1956, was introduced with effect from April 1, 1956, the last sale or purchase contemplated under sub-section (3) can only be the last sale or purchase which took place on and after April 1, 1976.

6.2.7 The Hon’ble Supreme Court has, in the case of Vijaylaxmi Cashew Company and Others Vs. Dy. Commercial Tax Officer, reported at (1996) 100 STC 571, held that in order to resist imposition of sales tax by the State on the penultimate transaction contemplated by section 5(3) of the CST Act, 1956 the dealer will have to establish the identity of the goods purchased with that of the goods to be exported out of the territory of India.

The Hon’ble Apex Court, consequently, held that raw cashew-nut cannot be used as edible oil at all. Hence cashew-nut Karnels are not the same goods as raw cashewnuts

6.3 Purchases or sales preceding the penultimate sales or purchases.-

6.3.1 In the case of Bismillah & Co. Vs. State of Andhra Pradesh, reported at (1989) 73 STC 135, the Hon’ble Andhra Pradesh High Court has held where the petitioner purchased raw hides and skins in the State of A.P and sold them to Bharat Skins Corporation in Madras, who in turn exported to a foreign country, the purchases of the petitioner were not exempt under section 5(3) of the CST Act.

6.3.2 The Hon’ble Karnataka High Court has, in the case of Jaya Laxmi Industries, reported at (1996) 103 STC 182, held that the purchases of groundnut seeds by the petitioner and which were sold to the persons who in turn exported the same outside India, were not protected by section 5(3) of the CST Act, 1956.

6.3.3 The Hon’ble Rajasthan High Court has in the case of Beecham Ores and Minerals, reported at (1986) 19 STL 47, held that the sales by the local dealers to the assessee who in turn exported then outside the country, were sales for export and not sales in the course of export.

6.3.4 In the case of State of Haryana and Others Vs. Nipha Exports Pvt. Ltd, reported at (2007) VST 466, the facts were that the branch office of the respondent company purchased ginning machinery and spare components from registered dealers in Faridabad (Haryana) and despatched them to its head office in Calcutta (West Bengal) for export out of India in execution of orders booked from foreign purchasers. The Hon’ble Supreme Court in this case held that the movement of the goods from Faridabad to Calcutta was occasioned in the course of export outside India and there could be no sale between the branch office and the head office, the respondent was not liable to purchase tax under section 9 of the Haryana General Sales Tax Act, 1973.

6.4 Conflicting views in the case of purchase of raw hides and skins, but exported dressed hides and skins.-

6.4A Andra Pradesh High Court:

The Hon’ble Andhra Pradesh High Court has in the case of the State of A.P. Vs. Mohd. Basheer & Company, reported at (1939) 72 STC 185, held that “hides and skins whether in raw or dressed state” occurring in section 14(iii) of the CST Act, 1956 should be treated as the same goods for the purpose of section 5(3) of the CSt Act, 1956.

But in a latter judgment, the Hon’ble Andhra Pradesh High Court has, following the judgment of the Hon’ble Supreme Court, delivered in the case of K.A.K. Anwar & Co. Vs. State of Tamil Nadu (1988: 108 STC 258), taken a different view in the case of Al-Kabeer Exports Ltd. Vs. Commissioner of Commercial Taxes, A.P., reported at (2000) 120 STC 543. In this judgment the Hon’ble A.P. High Court has held that raw hides and skins and dressed hides and stains cannot be considered as one commodity for the purpose of claiming exemption of sales tax under section 5(3) of the CST Act, 1956. Where a dealer sells raw hides and skins to exporters, who after tanning export them, the dealer is not entitled to exemption under section 5(3) of the CST Act, 1956 on his sales.

6.4B. Allahabad High Court:

The Hon’ble Allahabad High Court has, in the case of Lucknow Skin Co. Vs. State of U.P Another reported at (1998) 108 STC 569, held that for the purpose of section 14 of the CST Act, 1956, hides skins in a raw or dressed form has been treated as one item, i.e. as goods of special importance in inter State trade or commerce. For the purposes of the CST Act, where raw skins are sold and are exported by the purchaser after converting them to dressed skins, they are to be treated as only one commercial item and not two different items and such transaction of sale shall be a sale in the course of export of goods, covered under section 5(3) of the CST Act, 1956.

6.4C. Kerala High Court:

The Hon’ble Kerala High Court has, in the cases – (i) K.K.S. Khader Mohideen Vs. State of Kerala reported at (2003)130 STC 61, and (ii) Khader Spinners Ltd. Vs. State of Kerala, reported at (2007) 10 UST 565, held that it is a mandatory condition of grant of exemption under section 5(3) that the purchase order for export should be for export of the very same commodity purchased. The raw hides and skins purchased were highly perishable and which processed, because a commercially different article, namely, dressed and tanned hides and skins. The export orders were admittedly for specific dimensions of dressed and tanned skins. The petitioner could not co-relate the export orders with the purchase of raw hides and skins, hence, he was not entitled to the exemption under section 5(3) of the CST Act, 1956.

6.4D. Madras High Court:

The Hon’ble Madras High Court has, in the case of Sreeniwas & Co. Vs. State of Tamil Nadu, reported at (2009) 19 VST 39, held that raw hides and skins and dressed hides and skins are different commodities notwithstanding the fact that they figure in section 14(iii) under one entry “as hides and skins whether in a raw or dressed state”. Section 5(3) of the CST Act would be applicable when the goods which are sold or purchased have not gone any transformation. The petitioner had purchased raw hides and skins, which after having been processed, because dressed hides and skins, which were exported. Therefore, section 5(3) of the CST Act would have no application to the case of the petitioner.

6.4E. Supreme Court of India:

The Hon’ble Supreme Court has, in the case of Shafeeq Shameel And Company Vs. Asst. Commissioner Commercial Taxes and Others, reported at (2003) 129 STC 1, held that section 5(3) of the CST Act, 1956, was not applicable where the goods which were sold or purchased had undergone any transformation. Since the dressed hides and skins exported by the appellant were goods different flow raw hides and skins purchased by it, the appellant was not entitled to the benefit of exemption of the penultimate sale or purchase under section 5(3) of the CST Act.

6.4F. FINAL VIEW:

In view of the principles laid down by the Hon’ble Supreme Court in the case of K.A.K. Anwar & Co. Vs. State of Tamil Nadu, reported at (1998)108 STC 258, and in view of ten direct judgment of the Hon’ble Supreme Court, given in the case of Shafeeq Shameel And company Vs. Asst. Commissioner, Commercial Taxes and Others, reported at (2003) 129 STC 1, it has become the settled legal position that for the pur poses of section 5(3) of the CST Act, 1956, raw hides and skins are different commodities from dressed hides and skins.

7.0 AVIATION TURBINE FUEL FOR INTERNATIONAL FLIGHTS -

According to section 5(5) of the CST Act, incorporated by Finance Act No.18 of 2005, w.e.f. 13.05.2005 a sale of Aviation Turbine Fuel to any designated Indian Carrier, as notified in the official Gazette by the Central Government, for the purpose of its international flights, shall be deemed to take place in the course of the export of goods out of the territory of India.

8.0 SOME SPECIFIC CASES UNDER SECTION 5(3) OF THE CST ACT,1956.-

8.1 Raw strimps, prawns and lobsters and frozen shrimps, prawns and lobsters-

The Hon’ble Supreme Court has, in the cases of – (i) Starting Food Vs. State of Karnataka, reported at (1986) 63 STC 239, and (ii) Canara Exports Vs. State of Karnataka, reported at (1987) 66 STC 153, held that for the purpose of section 5(3) of the CST Act, the raw shrimps, prawns and lobsters and the frozen shrimps, prawns and lobsters are commercially regarded as the same commodity.

8.2 Coir products undergoing some processing –

The Hon’ble Kerala High Court has, in the case of K.G. Vijayan Vs. State of Kerala, reported at (1990)79 STC243, held that the petitioners were exporters of coir products. In pursuance of anterior contract for export, the petitioners purchased coir products and after subjecting such coir products to sheaving, smoking and stencilling, exported them. The petitioners were entitled to exemption under section 5(3) of the CST ACt, 1956, because these was no emergence of a different commercial commodity.

8.3. Raw cashew nuts and cashew kernels-

The Full Bench of the Kerala High Court has, following the decision of the Hon’ble Supreme Court, delivered in the case of State of Travancore-Cochin Vs. Shanmrgha Vilas Cashewnut Factory (1953:4 STC 205), in the case of N. Sundareswaran Vs. State of Kerala and others, reported at (1993) 91 STC 476, held that for the purposes of section 5(3) of the CST Act, raw cashew-nuts with shells and cashew kernels exported are different and distinct commercial commodities.

Similarly, the Hon’ble Supreme Court has, in the case of Vijay Cashew company vs. Dy. commercial Tax Officer reported at (1996) 100 STC 571 has taken the same view.

8.4 Paddy and Rice –

The Full Bench of the Hon’ble Punjab and Haryana High Court has, in the case of United Riceland Limited vs. State of Haryana and Others, reported at (1997) 104 STC 362, held that paddy and rice are two different commodities subject to tax under section 6 read with section 15A and 17 of the Haryana General Sales Tax Act, 1973. Dealers are liable to pay purchase tax on the purchase of paddy, which is debusked and exported out of the territory of India as rice.

8.5 Rough Granites and Tiles –

The Hon’ble Karnataka High Court has, in the case of State of Karnataka And Another Vs. Goa Granites, reported at (2007) 5 VST 434, held that where rough granites are processed to an extent that they no more remain as granites but as tiles ready to be used in building construction and other activities, they do not remain the same commodity. Therefore, for the purpose of section 5(3) of the CST ACt, 1956, it cannot be said that what is supplied or sold are those goods which are exported. Accordingly, the assessee is not eligible to claim exemption from payment of tax under section 5(3) of the CST Act, on the ground that the sale of granite blocks to an 100 per cent export oriented unit (which exported tiles) is a sale in the course of export or sale deemed to be in the course of export.

8.6 Sale of trucks, which were exported –

The Hon’ble Bombay High Court has, in the case of State of Maharashtra Vs. Tata Engineering Locomotive Co. Ltd., reported at (2007) 7 UST 583, held that the terms and conditions of the various documents which culminated in the sale of trucks by the respondent dealer to the Government of India which was in commitment to gift those trucks to the Government of Tanzania. In order to fulfill the said commitment the goods came to be exported. Therefore, the sale of trucks by the respondent dealer to the Government of India was export sale covered by section 5(3) of the CST Act, 1956 and exempt.

Note: It appears from the judgment that the State of Maharashtra did not raise the issue that the Government of India did not sell the trucks to the Government of Tanzania but gifted them, hence there could be no sale in the course of export by the Government of India to the Government of Tanzania, because gift did not involve money consideration.

8.7 Building of body on chassis of buses and export thereof –

The facts in the case of State of Karnataka Vs. Azad Coach Builders Pvt. Ltd., reported at (2006) 145 STC 176, were that manufacturers of chassis of buses, who obtained orders for export of buses from foreign buyers, built the chassis and delivered them to the body builder. The body builder built the body thereon and delivered the complete bus to the manufacturers. Nothing was done by the manufacturers to the buses and they merely exported them to the foreign buyers. The question was whether the body builder would be entitled to the benefit of section 5(3) of the CST Act, 1956 in relation to his sale to the manufacturer as penultimate sale.

The High Court held that the body builder was entitled to the benefit of section 5(3) of the CST ACt, 1956. The department preferred an appeal claiming that to avail the benefit under section 5(3) as having made the penultimate sale, the assessee should have manufactured and sold the complete bus including chassis.

The Hon’ble Supreme Court has referred the matter to a Larger Bench as the scope of section 5(3) needed to be reconsidered on the ground that due to weight had not been given by the Supreme Court in the earlier decisions in sterling Foods vs. State of Karnataka (1986:63 STC 239) and Vijaya Laxmi Cashew Co. Vs. Dy. Commercial Tax Officer (1996):100 STC 571) to the words “in relation to such export” occurring in section 5(3), whereas the correct approach had been adopted in K. Gopinathan Nair Vs. State of Kerala (1997 105 STC 580)

9.0 PRESCRIBED PROOF FOR DEEMED EXPORTS UNDER SECTION 5(3) READ WITH SECTION (4) OF THE CST ACT, 1956.-

9.1 Where a penultimate sale is made by a dealer to the exporter within the State of Rajasthan, the selling dealer has to obtain a declaration in Form VAT-15 from the exporter and has to submit the same to his Assessing Authority in accordance with rule 21(1)(ii) of the Rajasthan Value Added Tax Rules, 2006, in order to claim exemption from tax on the said penultimate sale.

9.2 Where a penultimate sale is made by a dealer to the exporter in the course of inter-State trade or commerce, the selling dealer has to obtain a certificate in Form H from the exporter in accordance with rule 12(10)(a) of the CST (Registration & Turnover) Rules, 1957 and has to furnish the same before his Assessing Authority to claim exemption from tax on the said inter-State sale.

10.0 SALE OR PURCHASE OF GOODS IN THE COURSE OF IMPORT OF THE GOODS INTO THE TERRITORY OF INDIA.-

10.1 According to Section 5(2) of the CST Act, “a sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India”.

Thus, the sale or purchase of goods in the course of import, has got two limbs:-

(1) In the case of first limb, a sale or purchase of goods occasions import of goods which implies:-

(i) that there is a foreign exporter and an Indian importer;

(ii) that there exists an agreement for sale and purchase of the goods by the foreign exporter and the Indian importer, respectively;

(iii) that there is actual movement of the goods agreed to be sold from the foreign country to India; and

(iv) that such goods have crossed the limits of the area of a customs station in India.

(2) In the case of the Second limb, a sale or purchase of goods is affected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India, which implies:-

(i) that there is an agreement of sale or purchase of goods between a foreign exporter and an Indian importer;

(ii) that there is actual movement of such goods from the foreign country in pursuance of the said agreement, and

(iii) that there is transfer of documents of title to the goods, such as bill of landing and other relevant shipping documents to some other person before the goods have crossed the limits of the area of a customs station in India.

10.2 Some Judicial pronouncements laying down general guidelines with regard to import.-

10.2.1 The Hon’ble Supreme Court has, in the case of Dy. Commissioner of Agricultural Income Tax And Sales Tax Vs. Indian Explosives, reported at (1985) 60 STC 310, held 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 an integral connection or in-extricable link between the first sale following the import and actual import provided by an obligation to import arising from statute, contract or mutual understanding or the 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.

The Hon’ble Apex Court has further held that reading the actual user’s import licence and the letter of authority it was clear that the import of the goods by the assessee was for and on behalf of the local purchaser and the assessee coult not, without committing a breach of the contract, divert the goods so imported for any other purpose. Therefore, there was an integral connection between the sale to the local purchaser and the actual import of the goods from the foreign supplier. In other words, the movement of the goods from the foreign country to India was in pursuance of the conditions of the pre-existing contract of sale between the assessee and the local purchaser, and as such the sales in question were sales in the course of import.

10.2.2 The Hon’ble Delhi High Court has, in the case of Commissioner of Sales Tax Vs. Philips India Ltd., reported at (1992) 87 STC 397, held.-

(i) that where imports were effected by an agent on behalf of the actual user against the actual user import licence on the strength of letters of authority, the sales by the agent were sales in the course of import; and

(ii) that where pursuant to the acceptance of tenders by the Director-General of Supplies and Disposals and orders placed by him, goods were imported, there would be two sales: one by the foreign seller to the Indian dealer (importer) and the other by the Indian dealer to the ultimate consignee, and the second of these sales could not be considered a sale in the course of import.

10.2.3 The Hon’ble Kerala High Court has, in the case of Flenimgo (DFS) Private Ltd. Vs. State of Kerala & Others, reported at (2005) 142 STC 435, held that the course of import starts when the goods cross the customs barrier in a foreign country and ends when they cross the customs barrier in the importing country. The purchase by an importer of goods when they are on high sea by payment against shipping documents is also a purchase in the course of import and a sale by an importer of goods after the property in the goods passed to him either after the receipt of the documents of title against payment or otherwise to a third party by a similar process is also a sale in the course of import.

10.2.4 The Hon’ble Supreme Court has, in the case of Gopinathan Nair Vs. State of Kerala, reported at (1997) 105 STC 580, laid down propositions for deciding whether a sale or purchase of goods can be deemed to take place in the course of import under section 5(2) of the CST Act, namely –

(i) The sale or purchase must actually take place.

(ii) Such sale or purchase in India must itself occasion such import, and not vice versa.

(iii) The goods must have entered the import stream when they are subjected to sale or purchase.

(iv) The import must be affected as a direct result of the sale or purchase transaction.

(v) The course of import can be taken to have continued till the goods reach the local users only if an intermediary is involved, who does not act on his own in dealing with the foreign exporter and does not sell goods as principal to the local users.

(vi) There must be either a single sale which itself causes the import or is in progress or process of import, or, though (i) there may appear to be two sale transactions which are integrally inter-connected that they almost resemble one transaction so that the movement of the goods from a foreign country to India can be ascribed to such a composite well integrated transaction consisting of two transactions dovetailing into each other.

(vii) A sale or purchase can be treated to be in the course of import if there is direct privity of contract between the Indian importer and the foreign exporter and the intermediary through which the import is effected, merely acts as an agent or contractor for and on behalf of the importer.

(viii) The transaction in substance must be such that the canalizing agency or the intermediate agency through which the imports are effected so as to reach the ultimate local user appears only as a mere name lender.

10.3 Judicial procurements with regard to some specific cases of import.-

10.3.1 The facts of the case were that pursuant to the contracts entered into with certain textile mills, the respondent firm (Kotak & Co.) imported cotton on the basis of actual user’s import licences issued to the mills and the letters of authority issued by the Government. Under the import control regulations, importer was the mills, as the import licence and the letter of authority were issued to the mills. The respondent firm (Kotak & Co.) was precluded from selling the goods so imported to anybody other than the mills. The Hon’ble Supreme Court has, in the said case, i.e. Dy. Commissioner of Agricultural and Income Tax and Sales Tax Vs. Kotak & Co., reported at (1973) 32 STC 6, held that the sales by the respondent firm to the mills were sales in the course of import within the meaning of Sec. 5(2) of the CST Act.

10.3.2 The Hon’ble Madras High Court has, in the case of the State of Tamil Nadu Vs. Ashok a Leyland Limited, reported at (1984) 56 STC 180, held that where Ashoka Leyland Limited imported goods against the actual user’s licences held by the Tamil Nadu State Transport Department and Southern Railway, Peramboor and the goods so imported were the property of the licensees and were to be used in their factory only, the sales by Ashoka Leyland Ltd. to the licensees were the sales in the course of import within the meaning of section 5(2) of the CST Act, 1956.

10.3.3 The Hon’ble Bombay High Court had, in the case of Embee Corporation Vs. State of Maharashtra, reported at (1990) 78 STC 311, held that where the petitioner’s (Embee Corproation) tender for supplying carbonite to DGS&D was accepted and accordingly, a licence was issued to it with the condition not to dispose of the imported goods otherwise –

(a) that the applicant had not acted as an agent and relationship between the applicant and the DGS&D was that of vendor and vendee; and

(b) that the two sales, i.e. the sale by the applicant to DGS&D and that by the foreign supplier to the applicant were integrated or interlinked so as to form one transaction, and that, therefore, the sale by the applicant was a sale in the course of import, in view of the meaning of section 5(2) of the CST Act, 1956.

The above decision of the Hon’ble Bombay High Court has been affirmed by the Hon’ble Supreme Court in the case of State of Maharashtra Vs. Embee Corporation, reported at (1997) 107 STC 198.

10.3.4 The Hon’ble Supreme Court has, in the case of Minerals And Metals Trading Corporation of India Ltd. Vs. Sales Tax Officer And Others, reported at (1998) 111 STC 434, held that the bill of lading had been endorsed in favour of SAIL while the consignment was still upon the high sea and the sale was in the course of import into the territory of India; as it was effected by transfer of documents of title to the goods before they had crossed the limits of the customs station at Paradeep Port, which was a customs Sport in India.

10.3.5 The Hon’ble Madras High Court has, in the case of State Trading Corporation of India Ltd. Vs. State of Tamil Nadu And Another, reported at (2003) 129 STC 294, held that it was a case of sale in the course of import where the goods imported by the assessee had been warehoused and the clearance of the goods under section 68 of the Customs Act, 1962, was made after the title to the goods had been transferred to the buyers, who paid the duty and removed the goods out of the customs station.

10.3.6The Hon’ble Kerala High Court has, in the case of BPL Telecom Ltd. Vs. State of Kerala, reported at (2009) 23 VST 264 held that it was a case of sale in the course of import, where on the orders of ONGC for telecommunication equipment, the petitioner (BPL Telecom Ltd.) placed the orders for the same goods to Nokia, Finland and the petitioner was bound to supply the goods to ONGC only and the movement of goods from Nokia, Finland would not have been occasioned but for the orders of ONGC on BPL Ltd.

11. CONCLUSION.-

Sale or purchase in the course of import or export enjoys exemption from tax by virtue of the provisions of Article 286 of the Constitution. Whether or not a transaction of sale or purchase comes within the stream of import or export, depends upon the facts of that case, relevant legal provisions in the Act and the Rules along with the terms and conditions of the contract and the circumstantial spectrum of the situation. Exports being exempted from tax enter into the international market with the lower costing which, in turn, increases the competitiveness of our goods with that of the goods offered for sale by other countries. Similarly imports, without having suffered tax enter into our markets, so that our consumers may get goods either in the same form or in a different form, at cheaper rates. Every country strives to have favourable balance of trade, so also India. Therefore, our policy with regards to import and exports should remain such as to fit in the circumstantial needs and pressing exigencies of our country.