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PETITIONER: FERRO ALLOYS CORPORATION LTD.

       Vs.

RESPONDENT: UNION OF INDIA & ORS.

DATE OF JUDGMENT:       14/12/1998

BENCH: S.P.BHARACHA, S.RAJENDRA BABU

ACT:

HEADNOTE:

JUDGMENT:  JUDGMENT BHARUCHA.J. These  appeals  by  special  leave   questions   the correctness of the judgment and order of a Division Bench of the  High Court of Orissa dismissing writ petitions filed by the appellants.  Until  the  Assessment  year  199--91,  one respondents  accepted  the  position that the states made by the appellants were sales  in  the  course  of  export  and, therefore, exempt  from  the  levy  of  sales  tax.  For the Assessment Years 1990-91 and 1991-92 the  respondents  found that  these sales were intra-State sales subject to the levy of tax under the Orissa Sales Tax Act.  The  writ  petitions filed by the appellants thereagainst were dismissed. The  appellants  are  an export oriented unit set up pursuant to the resolution of the Government of India  dated 31st Dec.   1980.    That  resolution  decided  to give 100% export oriented units certain concessions to enable them  to meet  the  rigors  of  foreign  demands in terms of pricing, quality, precision, etc.  According to the resolution,  "(a) 100%  export  oriented  unit  would imply an industrial unit offering  for  exports  its  entire  production,   excluding permitted levels  of rejects".  A unit approved by the Board set up under the resolution was  required  to  undertake  to manufacture  in  bond and export its entire production for a period of 10 years and the  finished  products  were  exempt from excise and other central levies.  Only rejects, upto 5% or  such  other  percentage  as  the  Board  might fix, were allowed to be  sold  in  the  domestic  tariff  area.    The application of the appellants that its charge chrome project be  approved  as  a 100% export oriented unit was granted by the Government of India on 24th Oct.  1991. On 15th Sept., 1981 the appellants entered  into  an agreement, called  the  Off-Take  Agreement, with M/s.  Marc Rich & Co., AG, (now called "Richco"), a corporation  having its registered  office  at  Zug, Switzerland.  The agreement recited that the appellants intended to construct  and  were in  the  course of constructing a new charge chrome plant in the State of Orissa, utilising chrome ore from mines in that State, as a 100% export oriented unit  offering  for  export its entire   production.      Richco  was  an  international

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marketing organisation that was specialised and  experienced in  the  distribution  and handling of ferry alloys, ferrous and non-ferrous  ores  and  concentrate  and  steel  related commodities  wouldwide  with  associated  companies  and  or offices  in  over   30   countries,   including   associated representative  offices  in  New Delhi, Calcutta and Bombay, with  personnel  experienced  in  the  marketing  of  charge chrome.   Richco  had  been a major exporter of Indian ferry alloys  and  maintained  well-extablished  connections  with major  consumers  of  charge chrome throughout the would and was well placed and highly experienced in the marketing  and transportation  of  charge  chrome  and it sought additional material  "for  the  purpose  of  re-sale   to   its   major consumers".   The recitals added that the appellant "destres to appoint Richco as its exclusive purchaser  worldwide  for the  re-sale  of  charge  chrome  produced by the new Orissa plant and Richco desires to accept such appointment".    The Off-Take  Agreement  defined for its purposes, the term "the Agreed Rate" to mean "5% on F.O.B.S.T.  Indian  Port  price" relished by  the  appellants.    (S.T.stands for "stored and trimmed").  Clause  2  of  the  agreement  stated  that  the appellants  appointed  "Richco  as  the  sole  and exclusive purchaser worldwide for all the charge  chrome  produced  at the  plant  during  the  run-up  and throughout the contract period and Richco shall be entitled to re-sell the same  for its own account".  The appellants undertook with Richco that in  each  year  the  aggregate  quantity  of  charge  chrome available for sale to Richco would  not  be  less  than  the export minimum.    Richco  in  turned undertook "with Factor (the appellants) to purchase at regular  intervals  in  each year the charge chrome ........  equal to the export minimum at the prices agreed from time to time (as market conditions may require) by  the  parties  hereto ..........  ".  It was acknowledged that the market for which the charge chrome was earmarked was primarily  Japan  and  any  balance  would  be earmarked for  consumers in the rest of the world.  For long term contracts with major  consumers  the  appellants  would have  the  right  to  participate  in  negotiations so as to enable them to plan their production programma and  delivery schedule.   Clause 3 stated, "The price for charge chrome to be sold and purchased hereunder shall be that agreed between Factor and Richco from time  to  time  based  on  prevailing international  prices  as  established by the major producer exporters of charge chrome (taking into account the  quality of  the  charge  Chrome) for those areas to which the charge chrome shall be destined .......  ".  It also  stated,  "The prices to  be  established  shall be no a F.O.B.S.T.  Indian Port basis C+F or CIF Discharge Port basis  as  required  by Richco  from  time to time and shall be expressed in dollars or if the parties so agree in  any  other  currency".    The appellants  were required to pay to Richco a discount at the agreed rate on all charge chrome purchased by  Richco.    It was  to be allowed by the appellants on each shipment and be paid in dollars to the account of Richco "within thirty days from receipt of the  final  sale  proceeds  for  the  charge chrome  in question provided that if the final sale proceeds for any charge chrome shall be withheld for  quality  and/or quantity  reasons  then Factor shall pay the discount on the provisional payment  within  ninety  days  of  the  date  of arrival of  the  vessel at Richco’s nominated.  port and the balance of such  discount  shall  be  paid  when  the  final payment is  settled".    Clause  4 of the agreement, dealing with payments, stated, "Payment of the price  by  Richco  in respect  of  each  consignment  shall  be made by letters of credit for the full  value  providing  for  90%  provisional

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payment  against  shipping  documents  and  the balance upon receipt of final certificates of assay and  weight  at  load port/discharge port".    The  appellants warranted that they would "be the sole and absolute owner (free from any adverse interests)  of  all  charge  chrome   exported   to   Richco hereunder".   Title  and  risk  to  each  consignment of the charge chrome would pass to Richco as agreed  from  time  to time.   Clause  5  required  the  charge  chrome  to be sold thereunder to be shipped in bulk.  Clause 13 recorded, "This Agreement .........  have been entered into pursuant to  the approval granted by the Govt.  of India.......  ". Pursuant  to  the  Off-Take  Agreement Charge Chrome Agreements were entered into from time to time.  A sample of such agreements placed on the record states that,  in  terms of  the Off-Take Agreement, the appellants, described as the "sellers", had agreed  to  sell  charge  chrome  to  Richco, described  as  the  "buyers",  on  the  terms and conditions therein stated.  The  quantity  stated,  specifications  and price were  stated,  the  last being so many U.S.  cents per pound "of chrome  content  FOBST  Paradeep,  India  in  bulk payable 30  days  from  Bill  of Lading date".  The shipping date was stated and the destination, being Japan for  supply to Messrs.   Nippon Steel Corporation, Tokyo.  The agreement signed on behalf of the buyers and sellers.  Standard  terms and conditions  were  annexed  to the agreement.  Thereunder Richco was  required  to  arrange  for  the  issuance  of  a certificate pertaining to the discharge of the charge chrome at the discharging port.  The standard terms stated that the "final settlement will be based on weight determined at port of   discharge   or  ultimate  buyers’  works  and  analysis mentioned in the certificate".  The payment would be made by confirmed  irrevocable  letter  of  credit  in   favour   of appellants as  therein  set  out.   Clause 4 of the standard terms stated :            "aShould any consignments shipped  under  this            contract     fall     below    the    contractual            specifications, the buyers reserve the  right  to            reject  and revert the material to the sellers or            to accept such  consignment  or  consignments  at            reduced  price  as  may  be  mutually  agreed  to            between the buyers and sellers.            b.The buyers  shall pay all customs duties  as            well  as  any  other  duties and taxes payable in            Japan  at  the  time  of  or  by  reason  of  the            importation". Risk  in respect of goods was stated to pass to Richco "from the time when the goods shall have  effectively  passed  the ship’s  rail  at  the port of shipment". Title in respect of the charge chrome would pass to Richco from  the  appellants "when  the  sellers  have received the proceeds of the goods from the negotiating bank without recourse to the sellers". Documents are placed on record which  show  how  the Off  Take and Charge Chrome Agreements were worked. All that need be referred to is the shipping bill, which  shows  that it  was  the  appellants  who  were the exporters because no export licence was required under "Clause  15(j)  of  Export Trade Control 1988-91". Learned  counsel  for  the appellants submitted that the sales effected by the appellants to Richco were sales in the  course   of   export   to   Richco.   The   agreements, particularly, the Charge Chrome Agreements, left no doubt in this  behalf.  Learned counsel for the respondents submitted that the sale to Richco was under the Off-Take agreement and that the Charge Chrome Agreements were only delivery  orders thereunder.   The   export   had  been  occasioned,  in  his

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submission, by reason of the agreements  that  were  entered into   between   Richco   and  the  ultimate  buyers,  which agreements, clearly, preceded the Charge Chrome Agreements. Section 5 of the Central Sales Tax Act, 1956, so far as it is relevant, reads thus :            "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  the            customs frontiers of India.            3.Notwithstanding   anything   contained    in            sub-sention (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". To analyses these provisions to the extent  relevant here,  the  sale  of  goods  is  deemed to take place in the course of their export out of the territory of India only if (1) the sale occasions the export, (2) the sale is  effected by  a  transfer of documents of title to the goods after the goods have crossed the customs frontiers of India;  and  (3) the  last  sale  of goods preceding the sale occasioning the export of the goods is deemed to be in the  course  of  such export  if  it  has taken place after and for the purpose of complying with the  agreement  or  order  relating  to  such export. The  appellants  have  based  their  case on all the aforesaid three limbs of Section 5.  We shall deal with  the argument on the first of the aforesaid three limbs first. Before  we  do  so,  we should make reference to the judgment of this Court upon which both  sides  have  relied, namely, the  Constitution  Bench judgment in Md.  Serajuddin and Ors.  Vs The State of Orissa, (1975) 2 S.C.C.  47.  This was the judgment that occasioned the amendment of Section  5 so as  to  introduce  sub-section  (3)  therein.   Analysing earlier decisions of this  Court,  various  principles  were laid  down  in  Serajuddin’  case to ascertain which was the sale which occasioned the import.  It was said that the sale which was to be regarded as exempt was the sale which caused the export to take place or was the immediate cause  of  the export.   To  establish  an export, a person exporting and a person importing were necessary elements and the  course  of export was  between them.  The introduction of a third party dealing independently with the seller on the  one  hand  and with  the  importer  on the other broke the link between the two for then there were two sales, one to  the  intermediary and the  other  to  the importer.  The first sale was not in the course of export because the export commenced  with  the intermediary.   The  expression  "sale"  in Section 5 of the Central sales Tax Act had the same meaning as in the sale of Goods Act.  The expression "in the course" implied not  only a  period  of time during which the movement was in progress but postdated a connected relation.  Sale in the  course  of export  out  of  the  territory of India meant a sale taking place not only during the activities directed to the end  of exportation of the goods out of the country but also as part of or  connected  with such activities.  Directions given to

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place the goods on board a ship pursuant to the contract  of sale  were not in the course of export because, in the given case, the export sale was an independent one with a  foreign buyer.   In  such  cases,  the  taking  of  goods  from  the appellant’s place to the ship was completely  separate  from the transit pursuant to the export sale. In  our  view,  the  first  question  to answer is : which is the contract  of  sale  of  the  charge  chrome  to Richco?   Is  it, as is contended by learned counsel for the respondents the  Off-Take  Agreement?    Or  is  it,  as  is contended  by  learned  counsel  for the appellants that the Off-Take Agreement is only the agreement of sale  to  Richco and the contracts of sale are the Charge Chrome Agreements?            Section 4 of the Sale of Goods Act, 1930 states :            "4.Sale and agreement to sell (1) A contract of            sale  of  goods  is a contract whereby the seller            transfers or agrees to transfer the  property  in            goods  to  the  buyer for a price. There may be a            contract  of  a  contract  of  sale  between  one            part-owner and another.            3.Where  under a contract of sale the property            in the goods is transferred from  the  seller  to            the  buyer,  the  contract  is  called a sale but            where the transfer of the property in  the  goods            is  to  take place at a future time or subject to            some condition thereafter to  be  fulfilled,  the            contract is called an agreement to sell." While on the Sale of Goods Act reference may also be made to Section 9, which states that the price in a contract of sale may  be  fixed by the contract or may be left to be fixed in the manner thereby agreed or it may  be  determined  by  the course  of  dealing  between the parties. Where the price is not determined as aforestated, the buyer must pay the seller a reasonable price. The   Off-Take   Agreement  was  executed  when  the appellants were still in  the  course  of  constructing  the charge  chrome  plant,  that  is  to  say,  well  before the production of any of the charge chrome that was to  be  sold thereunder.   The agreement was to operate in respect of the charge chrome that was produced  at  the  plant  during  the run-up and throughout the contract period.  Richco undertook to  purchase  the  same  at  regular intervals in each year, equal to the export minimum.  The price was to be that which was agreed between the appellants and Richco  from  time  to time   "based   on   prevailing   international   prices  as established by the major exporter producers of charge chrome (taking into account the quality of charge chrome) for those areas to which the charge chrome  shall  be  destined."  The agreement, therefore, did not relate to a specified quantity of  charge  chrome  nor  was the price agreed to thereunder. The agreement did not even state with any precision how  the price of  the  charge  chrome  was  to  be  determined.  The agreement, therefore, was no more than an agreement to sell. Even so, there are clear indications in the Off-Take Agreement that the sales that were to be  effected  pursuant thereto  were  sales  to Richco abroad. Richco was to be the exclusive purchaser of the charge chrome  "world-wide".  The entire  quantity  of  charge chrome that the appellants were required to export by reason of their obligations as an 100% export oriented unit was covered by the agreement. The price thereof was to be paid in dolla’s. The  agreement  spoke  of "charge chrome exported to Richco". The  Charge  Chrome  Agreements  were  entered  into between the appellants as "sellers" and Richco  as  "buyers" and were  signed  on  their  behalf.  The quantity of charge

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chrome sold thereunder, its  specifications  and  the  price therefor was  specified.  The price was counted in US cents. The destination mentioned therein was a foreign port.  Under the Standard Terms and  Conditions  annexed  to  the  Charge Chrome  Agreements  Richco  was  required  to  arrange for a certificate pertaining to the discharge of the charge chrome at the discharging port.  The final settlement of the  price was  to  be  based  on  the  weight  of  the  charge  chrome determined either at the port of discharge or at  the  works of  the  ultimate  buyer  and  the analysis mentioned in the certificate.  Richco was entitled to reflect  charge  chrome which fell  below  the  contractual specifications.  Whether the charge chrome fell below the contractual  specifications could  only  be  determined  by the assay carried out at the port of discharge.  The title to the charge chrome passed to Richco from the appellants when the appellants received full consideration for the charge chrome  "from  the  negotiating bank, without recourse to the sellers", that is to say, only when the charge chrome was found to have met the contractual specifications, which  was  abroad.  These provisions in the Charge Chrome Agreements indicate not only  that  they  were the contracts of sale of the charge chrome but also that the sale of charge chrome thereunder was a sale to Richco abroad and  therefore,  that  the  export  of the charge chrome was occasioned by the Charge Chrome Agreements. Richco was not an intermediary in the sense that  it was  not the contract of sale of the charge chrome by Richco to the ultimate buyer which  occasioned  the  export.    The charge  chrome  having  been  exported  by the appellants to Richco abroad, Richco resold  it  to  the  ultimate  buyers. Decisions   relating   to   situations   where   there  were intermediaries who purchased goods from  Indian  sellers  in India   and  then  exported  them  to  foreign  buyers  are, therefore, not relevant to the present case. We, therefore, hold that  the  High  Court  and  the authorities below were in error in concluding that the sales made  by  the  appellants  were  not  sales in the course of export and, therefore not exempt from the levy of sales tax. We may now having decided the issue on merits,  take notice  of an affidavit filed in this Court on behalf of the Union of India.  The affidavit supports  the  stand  of  the appellants.   It  annexes  letters  written  by the Union of India on 6th November, 1995 and  29th  April,  1998  to  the respondents.   The  letters  state that since the appellants charge chrome plant was Customs bonded it was  not  possible for the appellants to make any domestic sale thereof without the  approval of the competent authority and the Customs and Central Excise authorities had certified that the appellants had not sold any quantity of charge chrome  in  India.    In view  thereof,  and keeping in view the fact that all export sales were exempt from the payment of State and Central Sale Tax, the respondents  were  requested  to  ensure  that  the production and export programme of the appellants’ plant was not adversely  affected.    The respondents did not reply to the said two letters, nor to the affidavit on behalf of  the Union of India. The appeals  are  allowed.    The judgment and order under appeal is set aside.  The writ petitions filed by  the appellants  are  allowed  and the assessment orders impugned thereby quashed. The respondents shall  pay  to  the  appellants  the costs of the appeals.