Deputy Commissioner of Commercial Taxes (C.T.) vs Vasantha Mills Ltd.

Ramanujam, J.—This matter has come before the Full Bench on an order of reference made by V. Ramaswami and Sethuraman, JJ., as

they had felt that the correctness of the decision of the Division Bench in State of Tamil Nadu v. Cauvery Spinning and Weaving Mills Ltd. [1974]

33 S.T.C. 506. is open to doubt in view of the later decision of the Supreme Court in Mod. Serajuddin v. State of Orissa"".

The assessee in this case is a dealer in cotton and cotton yarn. For the assessment year 1966-67, it had reported a total turnover of Rs.

2,83,45,614.33 and, out of the total turnover, a sum of Rs. 1,23,362.40 was claimed to represent sales of cotton yarn in the course of export.

This claim was not accepted by the assessing authority, who held that the said turnover represented intra-State sales. On appeal, the Appellate

Assistant Commissioner also upheld the view of the assessing authority. On a further appeal to the Sales Tax Appellate Tribunal, it was held that

the said disputed turnover of Rs. 1,23,362.40 represented export sales and, as such, it should be excluded from the taxable turnover. The State

Government had challenged the decision of the Tribunal in this tax case.

Reliance was placed by the State on the decision of the Supreme Court in Serajuddin and Others Vs. The State of Orissa, ., in support of its

stand that the transactions in question cannot be treated either as export sales or as sales in the course of export. The assessee, however, relied on

the decision of a Division Bench of this Court in State of Tamil Nadu v. Cauvery Spinning and Weaving Mills Ltd. [1974] 33 S.T.C. 506., to

which one of us was a party, wherein similar transactions of sale have been held to be sales in the course of export. V. Ramaswami and

Sethuraman, JJ., who heard the tax case in the first instance felt that in view of the later decision of the Supreme Court in Serajuddin and Others

Vs. The State of Orissa, ., the earlier Bench decision of this Court in State of Tamil Nadu v. Cauvery Spinning and Weaving Mills Ltd. [1974] 33

S.T.C. 506. may not be correct and, therefore, referred the matter to a Full Bench.

The nature of the transactions in this case, as has been found by the Tribunal, is as follows: The assessee-mills sold cotton yarn to a local dealer,

M/s. Keshavlal Thalakchand & Company (Private) Limited, Madras, hereinafter referred as the ""local purchaser"". These are first sales of cotton in

the State of Tamil Nadu taxable at the hands of the mills at single point. The purchaser-company has, in its turn, effected sales of yarn it had

purchased from the mills to certain purchasers in Colombo. The sales between the assessee-mills and the local purchaser were on f. o. b. terms,

and the yarn purchased were earmarked for export only. The assessee-mills have to despatch the yarn directly to the purchasers at Colombo

though such despatch was to be on account and risk of the local purchaser. The relevant bills of lading show that the assessee-mills had actually

shipped the goods in the Port of Tuticorin, though the name of the local purchaser had been shown therein as the exporter. On these facts, the

assessing as well as the appellate authorities held that there are two distinct transactions of sale, one by the assessee-mills to the local purchaser

and the other by the local purchaser to the National Textile Corporation, Colombo, that the former sale having nothing to do with export is an

intra-State sale and that the latter sale alone is a sale in the course of export. The Tribunal, however, held on the same facts that though in the bill of

lading the name of the local purchaser is mentioned as exporters, the goods having been shipped by the assessee, it should be taken as an exporter

as it had actually shipped the goods, and as the AR-4 forms are in its name. Thus, the only ground on which the Tribunal held the sales effected by

the assessee to the local purchaser to be export sales is that the assessee has exported the goods in pursuance of its sale to the local purchaser.

The question, therefore, is whether the said ground relied on by the Tribunal for holding the assessee''s sales to be export sales could be sustained.

The learned counsel for the revenue submits that, in view of the recent decision of the Supreme Court in Serajuddin and Others Vs. The State of

Orissa, ., the sales in question cannot be treated either as export sales or as sales in the course of export. In the case before the Supreme Court,

the assessee had entered into two contracts with the State Trading Corporation for the sale of mineral ore. The corporation in its turn entered into

contracts with foreign buyers for the sale of the identical goods purchased from the assessee. The terms of contract between the assessee and the

corporation were as follows : The price expressed in U.S. dollars for long ton is to be f. o. b. Calcutta. The goods should be ready in Calcutta

harbour for shipment by a particular steamer. The final sampling and moisture determination and the final ascertainment of weight and price should

be done at the foreign port of discharge by certain named persons, and their certificate is to be final and binding on both the buyer and the seller.

90 per cent payment is to be made against shipping documents. The corporation will assign the relevant foreign letter of credit, which is to be

opened in its name by the foreign buyer. The corporation is to endorse the bill of lading and deliver it to the assessee. The balance to be paid after

the destinational weight and analysis on the basis of the terms mentioned in the corresponding sale contract with foreign buyers. It was claimed by

the assessee in that case in proceedings under the Central Sales Tax Act, 1956, that his sales of mineral ore to the State Trading Corporation were

sales in the course of export and, therefore, exempted from tax u/s 5 of that Act. The High Court had held that the sales were liable to tax. When

the matter was taken to the Supreme Court, it was urged that the assessee originally entered into negotiations with foreign purchasers and settled

all the conditions of contract, that it is only thereafter the corporation entered into f. o. b. contracts with the assessee, and with the foreign buyer on

identical terms, that all the necessary steps including the payment of customs duty for shipment and export have been taken by the assessee, that

the corporation could not have diverted the goods to a buyer in India without violating the export and import control orders, that the contract

between the assessee and the corporation being on f.o.b. basis, the property in the goods passed only on shipment when the goods were in the

stream of export, that having regard to the necessity of entering into contracts with foreign buyers through the channel of the corporation, the rigid

rule of privity of contract should be relaxed in considerations of equity and justice and that the presumption of the corporation being an agent of the

assessee in the export of mineral ore should be raised especially when the corporation is interested only in the commission of one dollar per long

ton from the assessee. The assessee also claimed that his sale to the State Trading Corporation constituted one integrated transaction resulting in

the ultimate export of the goods and, therefore, it should be treated as a sale in the course of export. It was held by a majority, after considering

the relative scope of Article 286(l)(b) of the Constitution and Section 5 of the Central Sales Tax Act with reference to almost all the earlier

decisions rendered by the Supreme Court, that the assessee was not entitled to claim exemption u/s 5(1) of the Central Sales Tax Act in relation to

the said contracts. The main reasons given by the majority for taking that view are : (1) The mention of f. o. b. price in the contracts between the

assessee and the corporation does not render them f. o. b. contracts with the foreign buyer. (2) The corporation had entered into independent

contracts with the foreign buyer on f. o. b. basis which alone occasioned the export of the goods. (3) The corporation having purchased the goods

from the assessee in order to fulfil its contract with the foreign buyer, the assessee''s contract with the corporation is not the direct cause for nor has

it occasioned the export. (4) Though the assessee had been required under the contract entered into with the corporation to bring the goods to a

named ship, his sale cannot be said to have caused the export and the export was actually the result of the sale by the corporation to the foreign

buyer. (5) The mere carrying out the directions given by the corporation to the assessee to place the goods on board the ship as a term of the

contract of sale, the assessee cannot be taken to be an exporter and (6) The fact that exports can be made only through the State Trading

Corporation and that the State Trading Corporation is interested in getting only a commission does not have the effect of making the assessee an

exporter when there is direct export contract only with the corporation and the foreign buyer.

Kharina, J., had dissented and has taken the view that as the goods of the assessee had been sold on f.o.b. basis without any chance of the

goods being diverted, his sale should be taken to be interlinked with the export as to form an integrated transaction, that the position of the State

Trading Corporation under its contract with the assessee was not that of a purchaser in the ordinary sense of the term, that the introduction of a

statutory intermediary like the State Trading Corporation, which is entitled only to a commission, would not affect the real nature of the transaction,

that it was the assessee who was to export the goods to the foreign buyer through the State Trading Corporation, a statutory intermediary, because

of the legal requirements under the Export Control Order, that there is nothing in Section 5 of the Central Sales Tax Act to restrict the exemption

from payment of tax to only one sale, that the use of the word singular in Section 5 and not in plural would not make much material difference in

view of Section 13 of the General Clauses Act, and that there is nothing in law to rule out two or more sales qualifying for exemption if the sales

are so interlinked with the export of the goods so as to form one integrated transaction.

Though the minority view of Khanna, J., purports to follow the earlier decisions of the Supreme Court on the point, the majority has, after

explaining the earlier decisions, struck a different note and, according to them, it is only the sale between the exporter and the foreign buyer, which

has a direct nexus with the export, that can be said to occasion the export. u/s 5 of the Central Sales Tax Act, there can be only one sale which

occasions an export and if the local sellers have no concern with the actual export of the goods under the terms of their contract, the mere fact that

they had shipped the goods in pursuance of a term of the contract of sale will not make their transaction of sale an integrated transaction with the

export. Though the earlier view was that more than one sale could occasion export if they are so interconnected as to form an integrated

transaction, the latest view of the Supreme Court in the above case is that there can be only one sale which can occasion the export and that sale

can only be with a foreign buyer.

It is urged by the revenue that in the face of the above decision of the Supreme Court, the decision of this court in State of Tamil Nadu v.

Cauvery Spinning and Weaving Mills Ltd. [1974] 33 S.T.C. 506. cannot be accepted as laying down the correct position, that it is no longer

necessary to go into the question as to whether a sale between two local dealers is interconnected with the export, that even if there is an

interconnection or an integration with the export, still under the definition of sale in the course of export, it cannot be taken to have been a cause or

occasion for the export. It is also said that the decision in State of Tamil Nadu [1974) 33 S.T.C. 506. is in accord only with the said minority view.

In State of Tamil Nadu v. Cauvery Spinning and Weaving Mills Ltd. [1974] 33 S.T.C. 506., the assessee, a spinning and weaving mill entered

into contracts of sale of cotton yarn with a buyer at Madras who had in turn contracted to sell the same to a buyer in Ceylon. The sales were on

f.o.b. terms. Under the contract the assessee should put the goods free on board and payments should be made against delivery of documents.

The bills of lading showed the assessee as consignor and the foreign buyer or his nominee in Ceylon as consignee. The goods were released under

AR-4 forms without payment of Central excise duty as they had been earmarked for export. On those facts, a Division Bench held that the

contracts did not make the assessee an agent for the purpose of export, that the property in the goods sold passed only on delivery of the

documents after the goods joined the export stream, that the sales by the assessee and the export of the goods were so interconnected as to justify

the inference that the sale and the export were integrally connected and that, therefore, the transactions were sales in the course of export.

This decision runs counter to the decision of the Supreme Court in Serajuddin and Others Vs. The State of Orissa, ., holding that the shipment

of the goods at the instance of the exporter in pursuance of the terms of the contract between him and the exporter cannot make the local seller an

exporter, that whatever be the connection between the local sale and the export sale and however much they are integrated with the actual export,

it is only the sale between the exporter and the foreign buyer which can occasion the export of the goods, that a transaction of sale between the

local seller and the exporter can never become a sale in the course of export, and that Section 5 of the Central Sales Tax Act comprehends only

one sale occasioning the export and that sale is the one between the local exporter and the overseas importer.

The learned counsel for the assessee contends that the earlier decisions of the Supreme Court in State of Travancore-Cochin v. Shanmugha

Vilas Cashew-nut Factory [1953] 4 S.T.C. 205 (S.C.)., Ben Gorm Nilgiri Plantations Company, Coonoor and Others Vs. Sales Tax Officer,

Special Circle, Ernakulam and Others, ., Coffee Board, Bangalore Vs. Joint Commercial Tax Officer, Madras and Another, and Binani Bros. (P)

Ltd. Vs. Union of India (UOI) and Others, have all laid down that not only an export sale between the local exporter and the overseas importer,

but also every sale so interconnected as to form part of one integrated transaction, could be treated as a sale in the course of export, that those

decisions have not been held to be incorrect in the latest decision of the Supreme Court and, therefore, that decision should be confined to the

facts of that case alone. According to the learned counsel, even after the said decision of the Supreme Court, the correct legal position is that in

addition to the actual export sale, sales which form one integrated transaction with the export would also come under the definition of sale in the

course of export u/s 5 of the Central Sales Tax Act.

We are not inclined to agree with the counsel for the assessee that the said decision of the Supreme Court should be confined to the facts of

that case. In fact, the Supreme Court had referred to the earlier decisions on the point and had explained the same. We have, therefore, to take the

latest decision of the Supreme Court as laying down the law on the point. May be there is much to be said in favour of the dissenting view set out

by Khanna, J., in the light of the precedents, but this court is bound by the decision as expounded by the majority view. On the principles laid

down by the Supreme Court in the said case, there is no question of two sales coining within the scope of Section 5(1) and it is only an export sale,

i. e., a sale between an exporter and the foreign buyer that will come under the definition of sale in the course of export, and all other sales even if

interconnected or integrated with the export cannot be treated as sales in the course of export. There being no room for two or more sales being in

the course of export and the only sale which can be said to occasion the export being the sale which itself results in the movement of the goods

from the exporter to the importer, the theory of integrated activity cannot any longer be invoked to make the sale between two local dealers a sale

in the course of export. Therefore, the assessee in this case cannot succeed in his claim that the disputed sales are sales in the course of export.

The tax case is, therefore, allowed. There will, however, be no order as to costs.