State
Of Karnataka Vs. Azad
Coach Builders Pvt. Ltd. Etc [2006] Insc 77 (15
February 2006)
Ashok
Bhan & S.H. Kapadia
Manufacturers
of buses, such as, TATA and Ashok Leyland get orders for export of buses. One
such export order is annexed as "R-3" in the paperbook. These
manufacturers manufacture chassis and they thereafter place orders on the
assessee for building bus-bodies (See: annexure "R- 5" in the
paperbook). The name of the assessee in the present case is Azad Coach Builders
Pvt. Ltd.
The
foreign buyers place an order on the exporter, namely, TATAs for supply of
"the complete bus/buses" giving specifications of the chassis and the
bus-body. In some cases, the foreign buyers even indicate the source from which
the exporter in India should get the "bus-body"
constructed. After constructing the bus-body as per the specifications and
after completing the bus in its entirety, the assessee (body-builder) delivers
"the complete bus" to TATA/Ashok Leyland who then exports the same to
Sri Lanka for the purposes of accounting. The
exporter raises a bill for chassis on the assessee and instead of making
entries in the accounts by first debiting the value of the chassis to the body-
builder (assessee) and then deducting the amount of chassis from invoice of a complete
bus, the exporter invoices the assessee only in respect of bus-body and not for
the entire complete bus. It is not disputed that after getting the bus
completed, nothing is done by the exporter to change the identity of the bus,
thus entitling the assessee of the benefit under section 5(3) of the Central
Sales Tax Act, 1956 (hereinafter referred to as "the said Act").
According
to the department, the contract given to the assessee by the exporter is for
the bus- body; that, "bus" and "bus-body" are different
articles mentioned in entry 14 to the second schedule to the Karnataka State
Sales Tax Act; that, the bus-body is a separate saleable commodity different
from chassis or from the complete bus and, therefore, according to the
department, the assessee is not entitled to the benefit of section 5(3) of the
said Act. According to the department, in order to attract section 5(3), the
assessee should have manufactured and sold the complete bus in order to
constitute penultimate sale under section 5(3) of the said Act. According to
the department, since the sale is only for the bus-body and not for the
complete bus by the assessee to the exporter in India, the assessee is not entitled to the benefit of section
5(3) of the Act. According to the department, exemption under section 5(3) is
admissible only when the commodity exported is the same as the commodity
purchased and in the present case, according to the department, the commodity
exported is "the complete bus" whereas the commodity purchased by the
exporter is only the bus-body and, therefore, the assessee is not entitled to
exemption under section 5(3) of the said Act. In this connection, reliance was
placed by the department on the judgments of this court in the following cases:
-
Consolidated
Coffee v. Coffee Board reported in (1980) 3 SCC 358 (para 17);
-
Sterling Foods
v. State of Karnataka reported in (1986) 3 SCC 469 (para
3);
-
Vijaylakshmi
Cashew Company & Others v. Dy. Commercial Tax Officer reported in (1996) 1
SCC 468 (para 4); and
-
Satnam Overseas
(Export) v. State of Haryana reported in (2003) 1 SCC 561 (para
44).
According
to the department, the word "sale" as defined under section 2(g) of
the said Act makes it clear that the word "sale" indicates transfer
of property in goods by one person to another for cash or deferred payment. In
order to constitute "sale", it is urged, that, there has to be an
agreement for sale of goods between two persons competent to contract for
consideration and that the property in goods must pass as a result of such
transaction. It is submitted on behalf of the department that in order to
constitute "sale", the agreement and the sale must relate to the same
subject matter. According to the department, "bus-body" is composite
item capable of being sold in the market as goods and the transfer of property
in goods between the bus- body manufacturer (assessee) and its purchaser (TATA)
is confined only to the bus-body and not to the complete bus. According to the
department, the words "in relation to export" as found in section
5(3) do not, in any manner, control the first part of the said section which
uses the expression "in goods" and the expression "those
goods". According to the department, the above two expressions have been
used out of abundant caution and that the expression "in relation to
export" does not expand the scope of section 5(3) to include the goods
other than those which are ultimately exported.
According
to the department, section 5(3) was introduced in the said Act only to get over
the decision of this court in the case of Mohd. Serajuddin & Others v.
State of Orissa reported in (1975) 2 SCC 47, in which case this court while
construing section 5(1) held that even in relation to the same goods which were
sold by the assessee to the State Trading Corporation (STC) for export,
Serajuddin was not entitled to the benefit of that section. According to the
department, in order to get over the narrow interpretation placed by this court
on section 5(1) in the case of Mohd. Serajuddin (supra), section 5(3) was introduced
in the Act as indicated by the statement of object and reasons given for the
introduction of section 5(3) of the Act and, therefore, the introduction of
section 5(3) is not to enlarge the scope of section 5(1) so as to allow
components or raw-materials of the ultimate export to get the benefit of
exemption which will defeat the very purpose of the said sub- section.
According to the department, the purpose behind introduction of section 5(3) is
not to include goods to the benefit of exemption other than those which are
ultimately exported.
On
behalf of the assessee, on the other hand, it has been contended that the
reason behind the amendment of section 5, after the judgment of this court in
the case of Mohd. Serajuddin (supra), is to make our exports competitive in the
international market and to boost earnings in foreign exchange.
According
to the assessee, the courts are required to place a purposive interpretation
keeping in view the current realities and developments in the international
market. On the scope of section 5(3), it is urged on behalf of the assessee
that it is "the complete bus" which leaves the premises of the
assessee. According to the assessee, the State seeks to levy CST on "the
bus-body" built on to a chassis. The bus-body is constructed by the
assessee. According to the assessee, the subject matter of the inter-state
movement in the present case was a bus and not the bus-body because it is the
complete bus which is exported to Sri Lanka either through Mumbai or through Chennai port.
According
to the assessee, it is only on delivery of completed bus that the transfer of
property in the bus-body takes place. Merely because the bus-body involved in
such a transaction is exigible to local sales tax separately from the bus, it
cannot be contended that the bus-body is the subject matter of export. If the
argument of the department is to be accepted, then it would follow that the
bus-body is not the subject matter of inter-state movement and if it is so
held, then it would not be taxable under section 6 of the said Act. According
to the assessee, for a sale to qualify for exemption, it must be a penultimate
sale, the goods sold must be for export, the goods must be exported by the
buyer (TATA), the buyer should have a pre-existing export order and the sale
must have been effected for complying with or in relation to the export order.
According
to the assessee, the aforestated last condition is the principal element under
section 5(3). However, the sale will not come under section 5(3) if the buyer
(TATA) subjects the goods to process after the sale and before its export if
such process results in a change in the identity of the goods. It is pointed
out that in the present case, the chassis are moved under customs bond for body
building and export to the premises of the assessee; that, the assessee
delivers the completed bus, which is moved under the bond directly to the port
and exported to Sri
Lanka. Consequently,
the chain never breaks. Hence, the transaction in question, according to the
assessee, is entitled to the benefit of section 5(3). According to the
assessee, the expression "in relation to" in section 5(3) is of a
wide import. It contemplates two subject matters connected with each other.
Thus, in relation to export of a motor vehicle constructed with bus- body, if
there is a prior order for sale of bus-body then sale of the bus-body will be
in relation to the export of the complete bus and, therefore, sale of bus-body
would constitute penultimate sale under section 5(3). Therefore, according to
the assessee, due weightage must be given to the words "in relation to
such exports", which emphasis has not been given in any of the earlier
judgments of this court. According to the assessee, it is true that in the
judgments cited hereinabove by the department, the test of "the same
goods" has been applied and on that basis this court has repeatedly held
that when the commodity exported is the same as the commodity purchased, the
benefit of section 5(3) is admissible. However, according to the assessee, it
is submitted that the test of "the same goods" is evolved judicially
by this court only to indicate that the goods sold by the assessee should not
have lost their separate identity at the time of export in order to apply section
5(3). If the goods sold by the assessee do not lose their separate identity at
the time of export then the penultimate sale would be deemed to be in the
course of export by virtue of section 5(3). However, according to the assessee,
the observations of this court to the above effect, in the above cases
including Sterling Foods (supra) and Vijaylakshmi Cashew Company (supra) have
got to be understood in the light of the expression "in relation to such
exports". According to the assessee, the expression "in relation to
such exports" has not received due weightage in any of the earlier
judgments. According to the assessee, the test of "the same goods" is
not the principle behind section 5(3). That, the said test has been evolved
only to explain that the exporter should not have undertaken any process to
change the identity of the goods bought by him in order to confer the benefit
of exemption on the penultimate sale. If the goods do not lose their identity,
the benefit under section 5(3) is available. According to the assessee, the
only requirement in section 5(3) is that the goods sold to the exporter should
be exported as such without loss of identity and if that happens, the
penultimate sale gets the benefit of section 5(3).
In our
view, the scope of section 5(3) needs to be reconsidered. In none of the above
judgments cited on behalf of the department, due weightage has been given by
this court to the words "in relation to such exports" occurring in
section 5(3).
There
cannot be a bus without the bus-body. The subject matter of the inter-state
movement and the subject matter of the export is a "bus" and not a
"bus-body". It cannot be denied that the sale of the bus-body by the
assessee to the exporter is in the course of export of the bus to Sri Lanka. What is delivered to the exporter
by the assessee is a complete bus. It is true that for accounting purpose,
there is a bifurcation between the bus- body and a complete bus. Supposing,
TATA/Ashok Leyland would have given chassis free of cost to the assessee
calling upon the assessee to construct the bus-body on the chassis which
construction/ fitment was to be done as per the specifications by the exporter.
In such a case, would it not amount to a transaction in the course of export or
in relation to export of the buses? It is in this light, we find merit in the
argument advanced on behalf of the assessee that due weightage has not been
given to the words "in relation to such exports" occurring in section
5(3). For example, in the case of Computers, we now have a concept of, what is
called as, "firmware" under which a programme is embedded on to the
integrated circuits/chips.
Supposing,
TATAs get an export order for a firmware, which cannot exist with the programme
being loaded on to the hardware, and if they provide the hardware to the
assessee who loads the programme on to the said hardware which then is sold to
TATA who exports it, can it be said that the goods supplied are not the subject
matter of the export. If the test of the "same goods" as mentioned in
the aforestated judgments of this court in the case of Sterling Foods (supra)
and Vijaylakshmi Cashew Company (supra) is to be applied then the
assessee/supplier of firmware which contains a programme and which is the heart
of the system will never get the benefit of section 5(3). In the earlier days,
when Mohd. Serajuddin's case (supra) held the field, India was under licence raj.
At
that time, exports were through STC. We do not have today such agencies. That
system is disbanded. If so, the question which arises for determination is what
are the transactions covered by section 5(3)? The basic point involved in this
case is whether the test of the "same goods" is the essence of
section 5(3) or whether the test of the subject matter of the contract
occasioning the export is the principle behind section 5(3)? It is in this
context that the words "in relation to such exports" become crucial.
If a transaction is in relation to the exports, can it be denied the benefit of
section 5(3). We are, therefore, of the view that the judgments of this court
in the above two cases of Sterling Foods (supra) and Vijaylakshmi Cashew
Company (supra) need reconsideration.
Before
concluding, we may also refer to the judgment of this court in the case of K.
Gopinathan Nair & Others v. State of Kerala reported in (1997) 10 SCC 1, in
which it has been held that section 5(3) will apply to penultimate sales if
such sales satisfy two conditions, namely,
-
that such
penultimate sale must take place after the agreement or order under which the
goods are to be exported; and
-
it must be for
the purposes of complying with such agreement or export order. We refer to para
12 of the judgment, which reads as under:
-
The aforesaid decision obviously was rendered in the light of the peculiar
facts of the case before the Court. In that case the respondent-assessee was
acting on behalf of the local importers and was almost as good as their agent
for importing the goods on their behalf from foreign countries. The goods
imported had to be the property of the licence- holder at the time of clearance
from the customs and it was on the basis of the actual user' licence that the
goods were imported by the respondent-assessee and. therefore, it was held on
the facts of that case that there was an integral connection or inextricable
link between the first sale following the import and the actual import provided
by an obligation to import arising from contract or mutual understanding or
nature of the transaction which linked the sale to import which could not, without
committing a breach of contract or mutual understanding be diverted elsewhere.
As we will presently see no such conclusion is possible on the facts of these
appeals and in the light of the salient features emerging on the record of
these cases. On the contrary the decisions of the Constitution Benches of this
Court in Mohd. Serajuddin v. State of Orissa (1975) 2 SCC 47 and in Binani Bros. (P) Ltd. v. Union of India (1974) 1
SCC 459 get squarely attracted. The other decision on which strong reliance was
placed by the learned senior counsel for the appellants was rendered by a Bench
of three learned Judges in the case of Consolidated Coffee Ltd. v. Coffee
Board, Bangalore (1980) 3 SCC 358, which is called the second Coffee Board
case. In that case Tulzapurkar, J. speaking for the Bench had to consider the
constitutional validity of Section 5 sub-section (3) of the Central Sales Tax
Act which was brought on the Statute Book In the light of the earlier Coffee
Board case judgment of the Constitution Bench in Coffee Board, Bangalore
(supra) and the decision in Serajuddin's case (supra). By the said amendment to
Section 5(3) the legislature thought it fit to grant exemption also to the
penultimate sales prior to the sales in the course of export by the canalising
agency. That was with a view to boost up foreign exchange earnings. While
upholding the said amendment it was held that Section 5(3) of the Central Sales
Tax Act has been enacted to extend the exemption from lax liability under the
Act not to any kind of penultimate sale but only to such penultimate sale as
satisfies the two conditions specified therein, namely,
-
that such
penultimate sale must take place (i.e. become complete) after the agreement or
order under which the goods are to be exported and
-
it 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. The
aforesaid decision, therefore, is confined to the validity of the amended
provision which itself postulates that but for such amendment the penultimate
sale would have remained outside the sweep of Section 5 sub-section (I) of the
Central Sales Tax Act and such penultimate sale could not have been treated as
sale in the course of export.
Even that
apart for interpreting the identical phraseology "in the course of"
found both in Section 5(I) and Section 5(2) this decision by three learned
Judges' Bench could naturally not be of any assistance to the appellants as
obviously the three learned Judges' Bench could not have laid down anything
contrary to what the Constitution Benches in Serajuddin's case and in the case
of Binani Bros. had laid down on the true construction of the provisions of
Sections 5(1) and 5(2) while interpreting the words 'in the course of export'
or 'in the course of import' as found in these provisions." In our view,
these two tests, as mentioned in para 12 of the above judgment, are the only
two requirements which every penultimate sale must satisfy in order to attract
the benefit of exemption under section 5(3). In our view, the judgment of this
court in the case of K. Gopinathan Nair (supra) is correct and in the light of
this judgment and the tests propounded therein, we are of the view that the
aforestated two judgments of this court in the case of Sterling Foods (supra)
and Vijaylakshmi Cashew Company (supra) need reconsideration.
For
the reasons aforementioned, we are of the view that the decisions of this court
cited hereinabove in the case of Sterling Foods v. State of Karnataka reported
in (1986) 3 SCC 469 and Vijaylakshmi Cashew Company & Others v. Dy.
Commercial Tax Officer reported in (1996) 1 SCC 468 need reconsideration by a
larger bench. The papers may be placed before Hon'ble the Chief Justice of India
for further directions.
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