Export order prior to “Sale” for section 5(3) of CST Act,1956

“S.5. When is a sale or purchase of goods said to take place in the course of import or export. –

(3) Notwithstanding anything contained in s/s. (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..”

Conditions required to be fulfilled
There are number of points of dispute in relation to interpretation of above section. As per the overall interpretation, following conditions are required to be fulfilled for earning exemption under this section.

1. There should be pre existing export order from the foreign buyer with Indian seller (Indian exporter).
2. The Indian exporter should purchase goods from another Indian vendor for compliance of above export order.
3. There should be actual export by the Indian Exporter.

Controversy
Number of controversies arise on account of interpretation of above conditions. The basic controversy sometime relates to date of sale by local vendor to exporter and the date of receipt of Indian export order by the exporter. The sales tax authorities interpret that the exporter should place order on the local vendor only after receipt of export order from the foreign buyer. The further argument of the dealer can be that the exporter can receive proposal for export or may initially receive export order verbally (and then confirmed subsequently in writing). The argument will be that even if the order is placed on receipt of verbal order or based on proposal it should be valid subject to the condition that before actual sale by the local vendor to Indian exporter there is a confirmed export order from the foreign buyer. Accordingly dealers argue that their sale to Indian exporter should be covered by section 5(3) and exempt. However, the litigation arises due to such difference in interpretation.

Recent Judgment
Hon. Bombay High Court has recently an occasion to deal with such a controversy. The reference is to judgment of Hon. High Court in case of Exide Industries Ltd. vs. The State of Maharashtra (W.P. No.12025 of 1012 dt. 4.8.2014)(Bom).

The short facts as narrated in the judgment are reproduced below.

“3. The short but very interesting question that has arisen for consideration before us is the interpretation of section 5 of the Central Sales Tax Act, 1956 (CST Act) and in particular s/s. 3 thereof.

Section 5(3) inter alia provides that notwithstanding anything contained in s/s. (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 in relation to such export. In the facts of the present case under a purchase order/agreement dated 5th March, 2004 M/s. Crown Corporation Pvt Ltd (hereinafter referred to as “M/s. Crown”) required the Petitioner to supply Submarine Navy Batteries of the type and specifications more particularly set out therein. On 25th May, 2004 the Algerian Navy placed a purchase order on M/s. Crown, for the supply of Submarine Navy Batteries. On 14th September, 2004, the Petitioner sold and supplied Submarine Navy Batteries to M/s. Crown, who in turn exported the same to the Algerian Navy. The ARE -1 was prepared by the Petitioner on 14th September, 2004 showing the Petitioner as the seller, M/s. Crown as the purchaser, and the Algerian Navy as the consignee. In these circumstances, the Petitioner contends that the sale effected by them of Submarine Navy Batteries to M/s. Crown, is exempt from the levy of sales tax under the BST Act by virtue of the provisions of section 5(3) of the CST Act. On the other hand, the Respondents contend that since the purchase order placed by M/s. Crown on the Petitioner on 5th March, 2004 was before the date when the Algerian Navy placed the purchase order on M/s. Crown (i.e., on 22nd May, 2004), the sale by the Petitioners to M/s. Crown did not take place after, and for the purpose of complying with, the agreement or order of the Algerian Navy (i.e., on 22nd May, 2004). It was therefore not “for or in relation to such export” as contemplated under the provisions of section 5(3) of the CST Act. It is in this light that we are called upon to decide the interpretation of the said provision. After adverting to the facts, we will analyse the provisions of the CST Act in some depth, later in this judgment.”

After referring to the facts in detail, the Hon. High Court on merits of the case observed as under:

“26. Section 5(1) of the CST Act stipulates that 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. As, the section originally stood prior to its amendment in 1976 and thereafter in 2005, the sale by an Indian exporter from India to the foreign importer, alone qualified as the sale which had occasioned the export of the goods. According to the Export Control Order, exports of certain goods could be made only by specified agencies such as State Trading Corporations. In other cases also, manufacturers of goods, particularly the small and medium scale, had to depend upon some export houses for exporting their goods because special expertise was needed for carrying on the export trade. A sale of goods made to an export canalising agency such as State Trading Corporations or to an export house, in compliance with an existing contract or order, was inextricably connected with export of the goods. At the same time, since such a sale did not qualify as sales in the course of export, they were liable to State Sales Tax which corresponded in the increase in the price of the goods and made exports out of India uncompetitive in the fiercely competitive international markets. To tackle this problem, section 5 was amended by the Central Sales Tax (Amendment Bill, 1976) by inserting s/s. (3) therein 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. This is the legislative intent in inserting s/s. 3 to section 5 of the CST Act.

    The word “sale” also has been defined in the Central Sales Tax Act u/s. 2(g) which reads as under :-

2(g) ‘sale’ with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration and includes –

    a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

    a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

    a delivery of goods on hire-purchase or any system of payment of instalments;

    a transfer of the right to use any goods for any purpose

(whether or not for a specified period) for cash, deferred payment or other valuable consideration;

    a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

    a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, but does not include a mortgage or hypothecation of or a charge or pledge on goods.

As defined u/s. 2(g), a sale means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration and also includes transfers as set out in clauses (i) to (vi) of section 2(g). In view thereof, the words “last sale” appearing in section 5(3) of the CST Act will have to be construed keeping in mind the definition of the word “sale” in section 2(g).

    Keeping in mind the provisions of section 5(3) and section 2(g), we have to decide whether the purchase order/agreement dated 5th March, 2004 placed by M/s. Crown on the Petitioner would be a “sale” as contemplated u/s. 5(3) r/w section 2(g) as contended by the Revenue, or whether selling and supplying the Submarine Navy Batteries to M/s. Crown on 14th September, 2004 would fall within the word “sale” as contemplated under the said provisions. To our mind, it is clear that the purchase order/ agreement dated 5th March 2004 between the Petitioner and M/s Crown can never be construed as a “sale” as contemplated under the provisions of section 5(3) of the CST Act. As set out earlier, section 2(g) defines the word “sale” to mean any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration and includes transfers as more particularly set out in clauses (i) to (vi) of the said section. We do not find that the purchase order/ agreement dated 5th March, 2004 can by any stretch of the imagination fall within the definition of the word “sale” in section 2(g). This is for the simple reason that the word “sale” contemplates inter alia transfer of the goods or a transfer of the right to use any goods for any purpose or delivery or supply of goods [See. Section 2(g), Clauses (i), (iii), (iv), (v), (vi)] by one person to another. In the peculiar facts of this case and after carefully perusing the purchase order/agreement dated 5th March, 2004 between the Petitioner and M/s. Crown, we are of the view that there was no “sale” of the Submarine Navy Batteries by virtue of the said purchase order/agreement.

In the facts of the present case, there was no transfer of goods as contemplated u/s. 2(g) of the CST Act. On a perusal of the said agreement and its various clauses, at the highest, it can be said that the same amounts to an “agreement to sell”, that maybe performed at a future date by the Petitioner. It is this performance that translates into a “sale” of the Submarine Navy Batteries.

    In the facts of the present case, we find that in performance of the purchase order/agreement dated 5th March, 2004, the Petitioner sold and supplied the Submarine Navy Batteries to M/s. Crown on 14th September, 2004. This sale was after the date when the Algerian Navy placed its purchase order on M/s. Crown. The purchase order placed by the Algerian Navy on M/s. Crown was dated 22nd May, 2004. In this view of the matter, we find that the sale of the Submarine Navy Batteries by the Petitioner to M/s. Crown was the “last sale preceding the sale occasioning the export” as contemplated u/s.

5(3) and the same took place after, and for the purpose of complying with the purchase order dated 25th May, 2004, placed by the Algerian Navy on M/s. Crown. In view thereof, the sale of Submarine Navy Batteries by the Petitioner to M/s. Crown on 14th September, 2004 were deemed to be in the course of export as contemplated u/s. 5(3) of the CST Act and therefore, could not be taxed as a local sale under the provisions of the BST Act.”

    Conclusion

Thus the controversy is now resolved. The requirement is that there should be an export order prior to sale to Indian Exporter. Therefore, even if the local vendor supplies to the Indian exporter based on export proposal with the Indian exporter, but confirmed export order is received by the Indian exporter before actual sale by the local vendor to Indian exporter, still there will not be any difficulty in application of section 5(3) and exemption will be available.