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CASE NO.: Appeal (civil)  5616-5617 of 2000

PETITIONER: State of Karnataka

RESPONDENT: Azad Coach Builders Pvt. Ltd. etc

DATE OF JUDGMENT: 15/02/2006

BENCH: ASHOK BHAN & S.H. KAPADIA

JUDGMENT: JUDGMENT

       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,

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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: 1.      Consolidated Coffee v. Coffee Board  reported in (1980) 3 SCC 358 (para 17);

2.      Sterling Foods v. State of Karnataka  reported in (1986) 3 SCC 469 (para 3);

3.      Vijaylakshmi Cashew Company &  Others v. Dy. Commercial Tax Officer  reported in (1996) 1 SCC 468 (para 4);  and

4.      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

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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,

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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

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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 \026 what are the transactions  covered by section 5(3)?  The basic point involved in  this case is \026 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, (a) that  such penultimate sale must take place after the  agreement or order under which the goods are to be  exported; and (b)  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:  12.     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

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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, (a)  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 (b) it must

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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.