Sale In Course Of Export U/S. 5(3) – An Update

Introduction

Under
VAT era, import and export transactions were exempted from levy of sales tax
(Vat). The export transaction is defined in section 5(1) of the CST Act.
However, section 5(1) granted exemption to direct export sale. Therefore, the
sale prior to export i.e. penultimate sale was deprived of exemption as export.

To
mitigate the said issue section 5(3) was inserted. The said sub-section is
reproduced below for ready reference.

“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 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.”

Thus
one sale prior to export is also exempt. However, the real issue is
interpretation of the scope of said sub-section.

Till
today, there are a number of judgements on this issue. However, still it cannot
be said that the issue is fully resolved.

Recent judgement

Recently
Hon. Kerala High Court had an occasion to decide one such issue about scope of
section 5(3) in case of Gupta Enterprises vs. Commercial Tax Officer,
Munnar and Ors. [2018] 48 GSTR 252 (Kerala).

The
petitioner was purchasing goods in auction and was objecting to charging of tax
on him by seller on ground that his purchase i.e. corresponding sale by seller
to him is covered by section 5(3) and no tax is applicable. Not able to
succeed, this petition was filed.  

Facts
of case, as narrated by High Court, are as under:

“3. The appellant filed
W.P. (C). No. 6210/2005 inter alia contending that he is an exporter of
sandalwood and on receipt of prior orders and satisfying the same, he attended
the auction held by the respondents. The sale was eventually confirmed in his
favour. He was called upon to pay the entire sales tax along with the balance
amount. He replied that the transaction is exempted u/s. 5(3) of the Central
Sales Tax and sought for release of the goods against his furnishing bank
guarantee. The authorities refused to release the goods. But the respondents
insisted on payment of tax before the goods are released. Placing reliance on
the decision of the Madras High Court in W.A. Nos. 94 to 96/2000 it was
contended that the demand is against the dictum laid down in the said decision
and being aggrieved by the insistence of the Sales Tax Authorities, writ
petition was filed for the following reliefs:

(i)    Issue a writ of mandamus
directing respondents 3 and 4 to release the goods purchased vide Ext. P. 3
without collecting sales tax and on the petitioner furnishing documents in
support of claim of exemption u/s. 5(3) of the CST Act and on the petitioner
paying the amount due under the auction,

(ii)   Direct respondents 3 and 4
to release the goods without collection of sale tax land on the petitioner
furnishing bank guarantee for the entire tax amount pending adjudication on
sales tax exemption by the 2^nd respondent and other consequential
reliefs.”

The
issue which arose was, whether the purchase of sandalwood was in course of
export u/s. 5(3). If goods purchased are exported in same form then the
exemption is invariably allowable. However, where goods purchased are processed
then question of integrated connection between export and prior purchase
arises. If no integrated connection or inextricable link is proved, the prior
transaction cannot fall u/s. 5(3). Hon. Kerala High Court referred to
historical background about interpretation of this section and then arrived at
conclusion.

The
observations of High Court are as under:    

“7.  The learned Single Judge after referring to the relevant provisions of
the Foreign Trade (Development and Regulation) Act, 1992, (FDTR Act), held that
while export of sandalwood can be only in such forms permitted by the DGFT,
there can be no export of sandalwood in any other form. Any export of
sandalwood except in the forms permitted by the DGFT would be an illegal export
contravening the provisions of the FTDR Act and the Customs Act. Placing
reliance on Ext. R. 3(a) addressed by the Zonal Joint DGFT to the Conservator
of Forests and Ext. R. 3(b) public notice issued by the DGFT in exercise of the
powers under “exim policy” show that sandalwood is not covered by
open General Licence, but one falling under the restricted list for which an
exporter has to make specific request for licence to DGFT, who releases quota
from time to time and that the categories of Sandalwood allowed for export are
“sandalwood chip class” in the form of heart wood chips upto 50
grams, mixed chips upto 50 grams, flakes upto 20 grams of the sandalwood
classes (Jajpokal I class, Jajpokal II class, Antibagar, Cheria Milvanthilta,
Basolabjukni, saw dust, charred billets), sandalwood chips/power sandalwood
dust obtained as waste after the manufacturing process and sandalwood in any
other form as approved by the Exim Facilitation Committee in the Directorate
General of Foreign Trade. Ext. P. 18 export licence was also issued to the
petitioner under the FTDR Act and licence to export is granted only for the
categories mentioned therein. The learned Single Judge also entered a positive
finding after referring to Ext. P. 18 export licence issued to the petitioner
under the FTDR Act that licence to export is granted only for the categories
mentioned therein, namely, sandalwood in the form of heart wood chips upto 50
grams, mixed chips not exceeding 30 grams and flakes upto 20 grams of the
sandalwood classes, Jajpokal I class, Jajpokal II class, Antibagar, Cheria
Milvachilta, Basolabukhi, saw dust, charred billets, sandalwood power, dust,
chips and flakes.

The
petitioner placed reliance on Ext. P. 17, the rules regarding selection,
cleaning, classification and disposal of sandalwood etc. issued by the
Tamil Nadu Forest Department and it was contended based on Ext. P. 17 that
various classes of sandalwood are described in Ext. P. 17 and it will be seen
therefrom that the classification is purely on the basis of weight of billets,
defects noticed in the billets and the length of the billets etc. and
these are not different types or varieties of sandalwood. The learned Single
Judge exhaustively referred to various items in Ext. P. 17 and found that the
classification of sandalwood as per Ext. P. 17 when juxtaposed with the
documents evidencing the items bid by the petitioner, as evidenced by different
documents and were put in a tabular form in paragraph 22 of the judgement. It
was concluded that export orders of foreign buyers produced by the petitioner
evidenced that they were only sandalwood chips, below 50 grams.

After
referring to the various materials as noticed above, the learned Single Judge
found that on facts the sandalwood as purchased by the petitioner from the
Forest Department is in the form of billets, roots, or even chips weighing over
50 grams, could not have been exported in consonance with exim policy and the
export licence, without converting the same into chips of the description
covered by the export licence.

There
is a prohibition, in law, for export of sandalwood in any form, other than that
permitted under the exim policy and the export licence, with an order releasing
quota for the export. So much so, the sandalwood purchased form the Forest
Department as billets, roots etc. had to be converted into flakes, power
etc. weighing below not more than 50 grams to make them exportable
goods. In commercial parlance, the goods prohibited from being exported stood
converted to exportable goods. It is also held that for the purpose of section
5(3), what is relevant for consideration is whether the goods that formed the
subject matter of the penultimate sale or purchase are the self-same goods that
are exported and in the light of the decision in Sterling Foods vs. State of
Karnataka (MANU/SC/0423/1986 :

(1986)
3 SCC 469) of the Apex Court, the words “those goods” in section 5(3)
are clearly referable to “any goods” mentioned in the preceding part
of that sub-section and it is, therefore, obvious that the goods purchased by
the exporter and the goods exported by him must be the same. On the other hand,
in the present case the goods purchased by the assessee from the Forest
Department are those which were incapable of being exported in terms of the
relevant laws. The only types of goods that can be exported as sandalwood are
those which fall under the categories permitted for export. Hence, the goods
purchased by the petitioner from the Forest Department had to undergo the
change from the commercial status of non-exportable goods to that of exportable
goods, by change in its form from billets, roots etc. to flakes of the
dimension or as dust, permitted for export, in terms of the laws relating to
export. Thus, there occurs a conversion of the goods purchased so as to facilitate
the export and as such ceased to be “such goods” which were purchased
from the Forest Department. Hence, the claim for exemption u/s. 5(3) of the CST
Act was negatived.

Though
the appellant placed reliance on the decision of the Apex Court in Consolidated
Coffee vs. Coffee Board, Bangalore (AIR 1980 SC 1403), the learned Single
Judge accepted that merely on the  basis
of the condition of sale notice, one could not be compelled to pay tax provided
the exemption applies. But the decision in W.A. Nos. 94 to 96/2000 of the
Madras High Court, which in turn referred to the case of Consolidated Coffee’s
case (supra) did not support the case of the petitioner on the issue
regarding the identity of the goods to be found among that purchased and those
exported. In the Madras decision the goods purchased by the appellant therein
(petitioner herein) were contended to be different from the goods sought to
export. But the said contention was not pursued further by the Tamil Nadu
Government.

The
different varieties of sandalwood purchased by the appellant were reduced to
small pieces for the purpose of export, though noticed by the court in the said
decision, none of the decisions on which reliance was placed by the learned
Single Judge, were referred to and there was no serious argument raised by the
State of Tamil Nadu in that regard and it was in such circumstances that the
Court accepted the assessee’s case therein.”

Further
para 9 reads as under:

“9. It was then contended by the learned
counsel that the Apex Court in the decision reported in State of Karnataka
vs. Azad Coach Builders Pvt. Ltd. (MANU/SC/8024/2006

: (2006) 145 STC 176), has
doubted the correctness of the decision in Sterling Food’s case
(MANU/SC/0423/1986 : (1986) 3 SCC 469) and also the decision in Vijayalaxmi
Cashew Company’s case ((MANU/SC/1015/1996 : (1996) 1 SCC 468), and has referred
the case to a larger Bench. It is true, the Court observed, that the said
decisions need reconsideration and the matter is placed before the larger
Bench. In the above case M/s. Tata the exporter and also a manufacturer of
chassis had a pre-existing order of export of ‘Buses”. The chassis were
moved under customs bond for body building and export to the premises of the
assessee (Bus body builder).

The
assessee then delivers the completed bus which is moved under the bond directly
to the port and exported, so that chain never breaks. The question arose was
whether in such circumstances the bus body builder is entitled to claim the
benefit u/s. 5(3) of the CST Act. It is in that context the Apex Court
considered the expression “in relation to such exports” which did not
get due weightage in the earlier decision.

But
even in the said case, the assessee only contended that the test of “the
same goods” is evolved only to explain that the exporter should not have
undertaken any process to change the identity of the goods brought by him in
order to confer the benefit of exemption on the penultimate sale. Thus there
was no dispute that if the goods undergo changes in the hands of the exporter
after the purchase and before export, he will not be entitled to claim the
benefit of section 5(3) of the CST Act, which is the main issue in the present
case. Be that as it may until a final decision is rendered by the Apex Court pursuant
to the reference order in State of Karnataka vs. Azad Coach Builders Pvt.
Ltd. (MANU/SC/8024/2006 : (2006) 145 STC 176), the decision in Sterling
Food’s case and Vijayalaxmi Cashew Company’s case beholds the field as a
binding precedent under Article 141 of the Constitution of India.”

Observing
as above Hon. High Court rejected claim of section 5(3).

Conclusion     

The
judgement is well reasoned to understand the scope of section 5(3) of CST Act
and more particularly, the effect of judgment of Supreme Court in case of State
of Karnataka vs. Azad Coach Builders Pvt. Ltd. (145 STC 176)(SC).

We
hope above will be a guiding judgement for deciding further cases.