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Judgment
P. Govindan Nair, C. J.
The question arising in these tax revision cases u/s 38 of the General Sales Tax Act, directed against the order of the Sales Tax Appellate
Tribunal, turns on the construction of Section 5(1) of the Central Sales Tax Act, 1956. We shall immediately read Section 5(1), which is as follows
:
(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 the customs
frontiers of India.
Before Section 5(1) came into existence, Article 286(1) has been the subject-matter of interpretation by many a Constitution Bench of the
Supreme Court and it had been succinctly stated-established by almost ancient decisions, the Travancore-Cochin first and second cases, namely,
State of Travancore-Cochin and Others Vs. The Bombay Co. Ltd., . and State of Travancore-cochin and Others Vs. Shanmugha Vilas Cashew
Nut Factory and Others, , that there could be a sale in the course of export even when there are more than one sale involved, which occasions the
export of the goods. All that was required was that the sales must be so linked or so inextricably connected with each other to form a single
transaction which causes the export and which causes the movement of the goods to make the sale in the course of export. Reference has been
made to the property passing in the goods by transfer of documents of title to determine whether the sale was in the course of export or not. All
this has become ancient history now for we are now governed by the section which we have extracted notwithstanding the observations in a
number of decisions of the Supreme Court, most of which had been noticed recently by the Supreme Court in the decision in Mod. Serajuddin v.
State of Orissa [1975] 36 S.T.C. 13 wherein the assessee had sold mineral ore to the State Trading Corporation and the State Trading
Corporation had exported the goods to the foreign buyer. Before the sale by the assessee to the State Trading Corporation, the assessee had
negotiated the terms of the contract for sale to the foreign buyer himself and they were settled as the terms of contract of sale to the foreign buyer.
The terms so settled were the same as those accepted by the State Trading Corporation when it entered into the contract with the foreign buyer.
All that the State Trading Corporation was entitled to was 1 per cent commission. Notwithstanding these features, the contention that was
advanced before the court that the sale was in the course of export was negatived by the Supreme Court. We are in agreement with the argument
on behalf of the assessee-respondents that the Supreme Court has purported to deal with only the first limb of Sub-section (1) of Section 6 in that
case because it appears that only the question arising on that limb was argued before the Supreme Court. Nevertheless, there are the following
observations of the said decision :
...The crucial words in the section are that a sale or purchase of goods shall be deemed to take place in the course of export of the goods only if
the sale or purchase occasions such export. The various decisions to which reference has been made illustrate the ascertainment of the preeminent
question as to which is the sale or purchase which occasions the export. Coffee Board, Bangalore Vs. Joint Commercial Tax Officer, Madras and
Another, as well as the case of Binani Bros. (P) Ltd. Vs. Union of India (UOI) and Others, . clearly indicates that the distinction between sales for
export and sales in the course of export is never to be lost sight of. The features which point with unerring accuracy to the contract between the
appellant and the Corporation on the one hand and the contract between the Corporation and the foreign buyer on the other as two separate and
independent contracts of sale within the ruling in Coffee Board, Bangalore Vs. Joint Commercial Tax Officer, Madras and Another, and Binani
Bros. (P) Ltd. Vs. Union of India (UOI) and Others, are these : The Corporation entered on the scene and entered into a direct contract with the
foreign buyer to export the goods. The Corporation alone agreed to sell the goods to the foreign buyer. The Corporation was the exporter of the
goods. There was no privity of contract between the appellant and foreign buyer. The privity of -contract is between the Corporation and the
foreign buyer. The immediate cause of the movement of goods and export was the contract between the foreign buyer who was the importer and
the Corporation who was the exporter and shipper of the goods. All relevant documents were in the name of the Corporation whose contract of
sale was the occasion of the export. The expression ''occasions'' in Section 5 of the Act means the immediate and direct cause. But for the contract
between the Corporation and the foreign buyer, there was no occasion for export. Therefore, the export was occasioned by the contract of sale
between the Corporation and the foreign buyer and not by the contract of sale between the Corporation and the appellant.
It is clear from the above passage that the Supreme Court has considered that the sale by the assessee to the State Trading Corporation was a
distinct and separate sale which had no link or connection with the export effected by the State Trading Corporation. The facts of this case as
stated in paragraphs 2 and 3 of the order of the Tribunal are as follows :
...The appellant Tvl. Chillies Export House Ltd., is a private limited company, while the other two appellants are partnership firms. The main issue
relates to the following turnovers :
______________________________________________________________
T.A. No. Name of the Turnover Name of the
and appellant involved local buyer
assessment
year
______________________________________________________________
836/72 V. P. S. 4,98,142.66 National
Ayyamperumal Agricultural
1969-70 Nadar & Sons Co-operative Market-
ing Federation Ltd.,
Tuticorin Branc
1055/72 V. P. S. 6,84,288.00 National Agricultural
1970-71 Ayyamperumal Nadar and Sons Co-
operative Market-
ing Federation Ltd.,
Tuticorin Branch.
307/74 do. 3,95,000.00 do.
1971-72
834/72 Chillies 5,49,035.65 do.
Export
House
1969-70 Limited
1054/72 do. 7,54,071.00 do.
1970-71
308/74 do. 26,60,000.00 do.
1971-72
835/72 V. P. S. A. 5,50,126.74 do.
Velayudha
1969-70 Nadar and Co.
1053/72 do. 7,48,640.29 do.
1970-71
It is the above sales which are the subject-matter of dispute besides some sundry issues which are particular only for T.A. Nos. 834/72, 835/72
and 1053/72. In all other appeals, this is the sole issue.
The appellants are dealers in chillies, pulses, etc. The impugned sales are of chillies made to Tvl. National Agricultural Co-operative Marketing
Federation Limited, D. 44, N.D.S.E. Part II, New Delhi-49, in all the appeals. The contracts in respect of all the years are identical in material
particulars (the only difference pointed out by the State Representative is that the amount receivable on presentation of the shipping documents is
100 per cent in some cases and 95 per cent in others). It is common ground that the sales were to a local buyer though the goods were shipped to
Colombo on consignment to the Co-operative Wholesale Establishment, Colombo. The facts are briefly stated here. Tvl. National Agricultural Co-
operative Marketing Federation Ltd., New Delhi, with branch at Tuticorin (hereinafter referred to as the local buyer) had the exclusive right for
export of dried chillies to Ceylon. They had entered into prior contract with the Co-operative Wholesale Establishment, Colombo, Ceylon
(hereinafter referred to as the foreign importer), for supply of chillies. In pursuance of the ""commitments"" thereunder, the local buyer entered into
contracts with the appellants for the supply of dried chillies. Every agreement for sale between the appellants and the local buyer refers to the
commitment"" which the local buyer had under an agreement for supply of chillies to the foreign importer. The presence of such a pre-existing
contract is not disputed by the authorities. For example, the Appellate Assistant Commissioner in Appeal No. 295/72 dated 16th September,
1972, has reproduced this fact in the history of the case without any comment. It is clear that the local buyer was getting 1 per cent of the invoice
price in respect of contracts for assessment years 1969-70 and 1970-71. For assessment year 1971-72, the contract does not mention the rate of
commission as the price for the year was not inclusive of commission as in earlier years. But it is stated on behalf of the appellants that it was about
2 per cent. It appears that the Government of India wished to regulate the export of chillies through its own channels to avoid cut-throat
competition among the Indian exporters and at the same time assure the quality of the export to the satisfaction of the Ceylon Government, which
was managing the foreign importer. The preamble to each contract clearly states that the contract between the appellants and the local buyer was
in pursuance of the earlier commitment on agreement between the local buyer and the foreign importer. The preamble describes the appellants as
Associate Exporter"" in all contracts for assessment years 1970-71 and 1971-72, though this appellation is absent in the contracts for assessment
year 1969-70. The preamble further states that this contract is in order to fulfil that ""commitment"" and that the present contract is a result of the
tender invited for the purpose. This narration is common for all contracts. It is always stated that the appellants shall export dry chillies to the
foreign importer at Colombo in the name of the local buyer. A specific quantity is mentioned. The quality, it is required should correspond to what
has been prescribed under the Agricultural Produce (Grading and Marketing) Act, 1937, in respect of chillies. It has to be agmarked by the
Director of Marketing and Inspection, Ministry of Agriculture, New Delhi. The price is c.i.f.. liner terms for contracts for assessment year 1969-70
and c. & f. liner terms, Colombo, for later two years. Packing instructions are given in the contract, but these instructions are alternative to the
desire, if any, by the foreign importer. Each bag shall bear identification marks of the local buyer (Nafed) as well as the name of the foreign
importer (viz., C. W. E., Colombo). It is specifically stated that the appellants ""shall export the goods to the importer in Colombo for and on behalf
of the exporter on or before the...from the Port of Tuticorin. Theshipment shall be consigned to Colombo in Ceylon"". As regards payment, it was
receivable by the appellants against the shipping documents in respect of contracts at 100 per cent in some contracts and 95 per cent in others on
shipment and balance of 5 per cent on acceptance of the goods by the foreign importer. The appellants had to pay the amounts stipulated in the
document including the buyer''s commission at 1 per cent. However, in respect of contracts for assessment year 1971-72, the amount receivable
against shipping documents from the local buyer did not include the buyer''s commission which is said to be at about 2 per cent. In the event of a
dispute, the appellant was bound by any award of an arbitrator in the agreement between the local buyer and the foreign importer. If the appellant
had any claim, such claim was also subject to arbitration as provided in the agreement between the local buyer and the foreign importer.
Otherwise, the agreement was subject to interpretation and arbitration of the Chairman of the local buyer. This is the summary of the provisions in
the various contracts between the appellants and the local buyer. Apart from the above contracts, the appellants have filed before us a copy of the
statements of sales showing the various details of invoice numbers, bill of lading number, date of despatch of documents, copies of accounts in its
books, etc. Invoice is invariably made out in the name of the foreign importer for alleged sale made ""through"" the local buyer. Bill of lading shows
the local buyer as the exporter and the foreign importer as consignee. Agmark certificate and certificate of weight are in favour of the appellants.
Both these certificates show that they refer to exports from Tuticorin. Shipping agent''s bill shows that the bill is in the name of the appellants and
that all the expenses have been listed in respect of the charges incurred by the shipping agent. The appellants also produced before us copies of
export applications made by the shipping agent on behalf of the appellants showing that the goods were actually exported. On the strength of the
terms of the contract mentioned in the preceding paragraph and documents, the appellants make their claim for exemption on the ground that the
sales are in the course of export, even if they are not export sales themselves.
A perusal of these paragraphs clearly indicates that the facts of these cases are indistinguishable with that dealt with by the Supreme Court. We
are, therefore, obliged to follow the Supreme Court and hold that on the facts of these cases, the first limb of Sub-section (1) of sections is not
attracted at all.
Counsel on behalf of the revenue, however, contended that the Supreme Court having dealt with only the first limb of Sub-section (1) of Section
5 of the Central Sales Tax Act, the further question as to whether the second limb of Sub-section (1) of Section 5 applied or not should also be
investigated before it is stated that Section 5(1) is attracted or not and that the sale is not in the course of export. He emphasised that for the
application of the second limb, all that are required are : (a) the property in the goods must; be transferred by transfer of documents of title; and (b)
that the said transfer should take place after the goods had crossed the customs frontiers. It appears to us that counsel emphasised that if these two
aspects are satisfied, the sale must be held to be a sale in the course of export. He invited our attention to that part of the contract which has been
extracted in the order of the Tribunal while stating the facts that the payment was to be made on the presentation of the documents. The statement
also indicates that the assessee had furnished all the details regarding the shipment and had produced accounts before the assessing authorities. The
Tribunal refers to these facts. Counsel Mr. C. Natarajan contended that the aspect as to whether the payment was made and the documents of title
were transferred after the goods had crossed the customs frontiers had not been investigated and should be directed to be investigated before it is
finally concluded that the assessee is liable for the tax and is not entitled to exemption in relation to the sale in the course of export. We are unable
to accept these arguments. For one thing, no contention had been raised before the Tribunal based on the second limb of Sub-section (1) of
Section 5. Therefore, we should not go into this question in the revisions before us. Considering the large interests involved, we would have been
inclined to have the matter investigated if on the rulings of the Supreme Court, there was a plausible case to be urged by the assessee before the
Tribunal or before any lower authority to whom the case may be remitted. We say so by reason of that part of the judgment that we have already
extracted from the decision in Mod. Serajuddin v. State of Orissa [1975] 36 S.T.C. 136. and by virtue of what has been stated in the head-note
of the decision in Coffee Board, Bangalore Vs. Joint Commercial Tax Officer, Madras and Another, ., in these terms, which correctly summarises
the point decided in the case :
...The word ''course'' in the expression ''in the course of means ''progress or process of, or shortly ''during''. The phrase expanded with this
meaning reads ''in the progress or process of export'' or ''during export''. Therefore, the export from India to a foreign destination must be
established and the sale must be a link in the same export for which the sale is held. To establish export a person exporting and a person importing
are necessary elements and the course of export is between them. Introduction of a third party dealing independently with the seller on the one
hand and with the importer on the other breaks the link between the two, for then there are two sales, one to the intermediary and the other to the
importer. The first sale is not in the course of export for the export begins from the intermediary and ends with the importer. Therefore, the tests
are that there must be a single sale which itself causes the export or is in the progress or process of export. There is no room for two or more sales
in the course of export....
These observations too, we feel, have been made with reference to the first limb of Sub-section (1) of Section 5. But we are of the opinion that
in order that the sale may be said to be in the course of export, these elements may be present even for the application of Sub-section (1) of
Section 5. This is because from very early times, this essential link between the sale and export had been emphasised. There cannot be a sale in the
course of export without the particular sale being intimately connected with the export.
In the State of Travancore-cochin and Others Vs. Shanmugha Vilas Cashew Nut Factory and Others, , referred to above, observations have
been made and Khanna, J., in his dissenting judgment in Mod. Seraj-uddin v. State of Orissa [1975] 36 S.T.C. 136has referred to the summary of
that decision in these terms:
...A sale in the course of export predicates a connection between the sale and export, the two activities being so integrated that the connection
between the two cannot be voluntarily interrupted, without a breach of the contract or the compulsion arising from the nature of the transaction. In
this sense, to constitute a sale in the course of export it may be said that there must be an intention on the part of both the buyer and the seller to
export, there must be an obligation to export and there must be an actual export. The obligation may arise by reason of statute, contract between
the parties, or from mutual understanding or agreement between them, or even from the nature of the transaction which links the sale to export. A
transaction of sale, which is a preliminary to export of the commodity sold may be regarded as a sale for export, but is not necessarily to be
regarded as one in the course oj export, unless the sale occasions export. And to occasion export there must exist such a bond between the
contract of sale and the actual exportation, that each link is inextricably connected with the one immediately preceding it. Without such a bond, a
transaction of sale cannot be called a sale in the course of export of goods out of the territory of India (see Ben Gorm Nilgiri Plantations Company,
Coonoor and Others Vs. Sales Tax Officer, Special Circle, Ernakulam and Others, . The appellants in that case were carrying on the business of
growing and manufacturing tea in their estates. They sold tea to the local agents of the foreign buyers. The sales were by public auction at Fort
Cochin, through brokers in accordance with the provisions of the Tea Act, 1953. The purchases by the local agents of the foreign buyers were
with a view to export the goods to their principals abroad and the goods were in fact exported out of India. It was held that the sales by the
appellants to the agents of the foreign buyers did not come within the purview of Article 286(l)(b) of the Constitution. Dealing with the contention
that the sellers had knowledge that the goods purchased from them were with the intention of exporting, Shah, J., speaking for the majority,
observed:
''But there is nothing in the transaction from which springs a bond between the sale and the intended export linking them up as part of the same
transaction. Knowledge that the goods purchased are intended to be exported does not make the sale and export parts of the same transaction,
nor does the sale of the quota with the sale of the goods lead to that result. There is no statutory obligation upon the purchaser to export the chests
of tea purchased by him with the export rights. The export quota merely enables the purchaser to obtain export licence, which he may or may not
obtain. There is nothing in law or in the contract between the parties, or even in the nature of the transactions which prohibits diversion of the
goods for internal consumption. The sellers have no concern with the actual export of the goods, once the goods are sold. They have no control
over the goods. There is therefore no direct connection between the sale and export of the goods which would make them parts of an integrated
transaction of sale in the course of export.
Our attention was drawn to a judgment of Ismail and Sethura man, JJ., in State of Tamil Nadu represented by the Deputy Commissioner of
Commercial Taxes, Madras Division, Madras v. S. Mohammed Yousuff Sahib and Company [1978] 42 S.T.C. 335. (T. C. No. 120 of 1972),
wherein the learned Judges had observed that the decision in Mod. Serajuddin v. State of Orissa(2) [1975] 36 S.T.C. 136 had not considered the
aspect of the second limb of Sub-section (1) of Section 5. With great respect, the learned Judges are correct in their observation. But also with
great respect, we have to observe that the learned Judges had not noticed the passages that we have extracted from the judgments in Mod.
Serajuddin v. State of Orissa [1975] 36 S.T.C. 136 and Coffee Board, Bangalore Vs. Joint Commercial Tax Officer, Madras and Another, and
also the observations made in the State of Travancore-cochin and Others Vs. Shanmugha Vilas Cashew Nut Factory and Others, . referred to
above. These extracts illustrate a principle which has been accepted some 25 years ago and we think that it is too late in the day to contend that
there could be a compliance of the second limb of Sub-section (1) of Section 5 without the export and the sale being linked intimately. The
Supreme Court has held that there is no such connection. They have clearly stated in the case before them that the export was by the State Trading
Corporation and the sale was by the assessee to the State Trading Corporation and the two have no connection, on facts identical to the facts of
this case. We, therefore, hold in these cases, following the Supreme Court, which we are bound to do, that there is no connection between the
sales made by the respondent-assessees to the National Agricultural Co-operative Marketing Federation Limited and the export by that
organisation to the importers in Colombo in Ceylon.
In the light of the above discussion, we set aside the order of the Tribunal, allow these revision petitions and hold that the assessees are not
entitled to claim the sales made by them to the above-mentioned Marketing Federation Ltd., as sales in the course of export. We direct the parties
to bear their respective costs, the matter being one of some difficulty as far as we can see and one of fruitful experiences as far as this court is
concerned.