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GUPTA ENTERPRISES, EASTERN STREET Versus COMMERCIAL TAX OFFICER, MUNNAR, DEVIKULAM, IDUKKI DISTRICT AND OTHERS

2016 (8) TMI 400 - KERALA HIGH COURT

Sandalwood – restricted item - Penultimate sale - export of sandal wood flakes, chips/dust - Section 5(3) of the CST Act - whether an assessee (local manufacturer) is eligible to get exemption under sub-section (3) of Section 5 of the Central Sales Tax Act, 1956, if the penultimate sale effected in favour of the exporter is inextricably connected with the export of goods outside the territory of India. - Held that: - The Apex Court made it clear that the test to be applied is, to see whether .....

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ed for conversion of sandalwood (ineligible for export) to sandalwood flakes, chips, dust (eligible for export) – benefit of exemption not available. - Burden of proof – Held that: - The burden is entirely on the assessee to establish the link in transactions relating to sale or purchase of goods and the export; that the penultimate sale is inextricably connected with the export of goods by the exporter to the foreign buyer. The appellants have not substantiated the position to tilt the bala .....

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n, making it an exportable commodity in view of the fact that sandal wood is a restricted item, which cannot, as such, be exported) will come within the purview of Section 5(3) of the CST Act to get exemption from the payment of tax, is the common issue involved in these cases. Will the distinction drawn by the Constitution Bench of the Apex Court in State of Karnataka vs. Azad Coach Builders Private Limited and another (2010) 9 SCC 524 (Paragraph 27 and 28)in respect of the Same Goods Theory co .....

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in the export of different sandal wood items, to satisfy the requirements of foreign buyers. The third respondent/Forest Department issued Ext..P1 notification for sale of 'sandal wood', subject to the specific terms and conditions as set forth in Ext.P2. The petitioner participated in the auction and came to be the successful bidder, upon which, the auction was confirmed on his name, as per Ext.P3 proceedings dated 06.01.2005, showing the particulars as to the amount to be satisfied, i .....

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t order and such other particulars, copies of which are produced and marked as Exts.P6 and P7. It was also pointed out that on an earlier instance, the petitioner was permitted to have the goods released on furnishing Bank guarantee and that the assessment proceedings have been finalised for the years 1992-93 to 1994- 95 as borne by Exts.P9 to P11 orders, without any tax liability. It was in the said circumstance, that the petitioner chose to move this Court by filing O.P.No.14989 of 2001, and W .....

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was not entitled to have the benefit of Section 5(3) of the CST Act. It was contended that the Forest Department, who had effected the sale, was never told at any point of time that the purchase of sandal wood was for export, pursuant to an order placed by a foreign buyer and that it was to give effect to such export obligation. It was further pointed out that the goods sold to the assessee was only 'sandal wood'; whereas the goods exported pursuant to the export order were 'sandal w .....

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Reliance was sought to be placed on the verdict passed by a Division Bench of the Madras High Court (W.A.Nos.94 to 96 of 2000)in respect of the case projected by the appellant/petitioner whereas the law declared by the Supreme Court in Sterling Foods vs. State of Karnataka [(1986) 3 SCC 469] and Vijayalaxmi Cashew Co. vs. CTO [(1996) 1 SCC 468] were pressed into service from the part of the Department. After hearing both the sides, the learned Single Judge declined interference and the writ pet .....

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the Reference order in [(2006 )3 SCC 338], the decision in Sterling's case and Vijayalaxmi Cashews' case would govern the field, as the binding precedents under Article 141 of the Constitution of India. It was accordingly, that the contentions raised by the appellant were turned down, affirming the verdict passed by the learned single Judge, in turn, dismissing the appeal as per the judgment dated 07.12.2006. 8. On being aggrieved of the turn of events, the matter was taken up by the app .....

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5(3) of the CST Act. After hearing the Civil Appeals, the Apex Court observed that the matter required to be considered by a Division Bench of this Court, in the light of the observations of the Apex Court in 'paragraphs 27 and 28' of the Constitution Bench decision and accordingly, the common verdict passed by this Court on 07.12.2006 was set aside and the matter was remanded for fresh consideration. It is accordingly, that these appeals have been listed before the Court and have been h .....

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sandalwood dust, chips/flakes alone. The contention of the Department/State is that both are entirely different commodities and were having different uses, which could never be regarded as the same goods, to have extended the benefit of Section 5(3) of the CST Act. It is also pointed out that, after purchase of Sandalwood, it has undergone serious changes, by way of chipping and processing, whereby it was converted to flakes, chips etc of the requisite size; thus losing the identity of the orig .....

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tion 5(3) of the CST Act and hence no relief is liable to be extended. 10. Section 5(3) of the C.S.T. Act reads as follows: 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 .....

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sideration before the Apex Court right from its inception at different points of time, ultimately laying the position at rest by virtue of the Constitution Bench decision in (2010)9 SCC 524 (cited supra). The opening paragraph of the said decision itself shows that the question considered therein was whether an assessee (local manufacturer) is eligible to get exemption under sub-section (3) of Section 5 of the Central Sales Tax Act, 1956, if the penultimate sale effected in favour of the exporte .....

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Constitution Bench in this regard, though the discussion herein could be limited to the minimum/necessary extent. 12. As observed by the Supreme Court, the penultimate sale before the export was actually taxable prior to insertion of sub-section (3) to Section 5 of the CST Act. The position in this regard was made clear by the Apex Court as per the decision in (1975)2 SCC 47 (Mohd. Serajuddin vs. State of Orissa) to the effect that the sale, which was not liable to tax under the State Sales Tax .....

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he vires of the provisions, it was held as unsustainable and sub-section (3) of Section 5 was held as intra vires to Article 286(2) of the Constitution. The Bench also observed that, merely for the reason that the notification for sale had insisted the liability to payment of tax, that by itself could not be a ground to deny the benefit, if it was otherwise liable to be exempted in terms of Section 5(3). Later, in Sterling Foods vs. State of Karnataka ((1986) 3 SCC 469), a question was raised as .....

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ed could be reckoned as the same goods, as the raw cashew nuts were purchased for preparing the kernels to be exported and in turn to have the benefit of exemption from tax under section 5(3) of the Act. After an in-depth analysis, the Apex Court observed that, it could not be said that the raw cashew nuts purchased in the penultimate sale were the same goods( cashew nut kernels) which were sold to the exporter and as such, tax liability could not be avoided. These two decisions have been relied .....

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es emerging from the situation as given in paragraph 26, which is reproduced below: 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 .....

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of the territory of India. Paragraph 27 (corrected vide Official Corrigendum No.F.3/Ed.B.J/120/2010 dated 25.10.2010) reads as follows: 27. 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 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 .....

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d ought not be so construed. 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. 14. The Apex Court made it clear that the test to be applied is, to see whether there i .....

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f 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 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 manufacture .....

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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.. 15. The Bench observed that the assessee Azad Coach Builders Pvt. Ltd manufactured the bus bodies and fitted them to chasis supplied by the exporter(Tata) and that such bodies manufactured were in accordance with the specifications provided by the foreign buyer, which could not have been used in the local market, by .....

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ween the assessee and the exporter and the transaction between the exporter and foreign buyer were inextricably connected with each other, the 'same goods theory' had no application. 16. It is also relevant to note that the Apex Court has alerted all concerned that the burden is entirely on the assessee to establish the link in transactions relating to sale or purchase of goods and the export; that the penultimate sale is inextricably connected with the export of goods by the exporter to .....

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ot a remote connection as tried to be projected by the counsel. In the words of Supreme Court, the connection between the penultimate sale and the export of goods should not be casual, accidental or fortuitous, but real, intimate and interlinked; 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. 17. Testing the given facts and .....

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