Sunday, September 19, 2010

The Taxation of Sales Preceding Export Transactions - Part I

Last week, the Supreme Court decided an interesting issue relating to statutory interpretation, very similar to the issue which had arisen in Daga Capital, discussed earlier. The question which the Court in State of Karnataka v. Azad Coach Builders was the extent to which States may tax sales transactions which immediately precede an export/import transaction. The controversy arises because the Constitution places a restriction on the taxing power of States when it comes to taxing sales of purchases of goods ‘in the course of’ import or export.

Article 286(1) of the Indian Constitution reads-

(1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place-

(a) outside the State; or

(b) in the course of the import of the goods into, or export of the goods out of, the territory of India. [emphasis supplied]

The question of whether transactions prior to the actual import/export could be said to be ‘in the course of’ export or import was first considered by the Supreme Court in Md. Serajuddin & Others v. State of Orissa (1975) 2 SCC 47; which answered the question in the negative. This prompted the Parliament to change the law by means of a legislative amendment, after which the relevant provision of the Central Sales Tax Act reads-

Section 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-section (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. [emphases supplied]

There are two aspects of the amended clause (3) that merit attention.

First, in what seems to be an effort to narrow the scope of the provision, the text provides for an exemption when the ‘sale or purchase of any goods’ occasions ‘the export of those goods’. This connection between the goods being sold (any goods) and those being exported (those goods) suggests that the goods being exported should be the same as those which were sold. This was the ‘same goods’ test, and received judicial approval in Sterling Foods v. State of Karnataka & Another (1986) 3 SCC 469 and Vijayalaxmi Cashew Company & Others v. Deputy Commercial Tax Officer & Another (1996) 1 SCC 468. This interpretation of the provision also draws support from the Statement of Objects and Reasons of the Amending Act 103 of 1976 which added clause (3). The object of section 5(3) was explained as-

... A sale of goods made to an export canalizing agency such as the State Trading Corporation or to an export house to enable such agency or export house to export those goods in compliance with an existing contract or order is inextricably connected with the export of the goods. ... It is, therefore, proposed to amend, with effect from the beginning of the current financial year, Section 5 of the Central Sales Tax Act to provide that the last sale or purchase of any goods preceding the sale or purchase occasioning 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. [emphases supplied]

However, the last part of clause (3) seems to widen the scope of the exemption by laying down a requirement that the sale or purchase should be ‘for the purpose of complying with, the agreement or order for or in relation to such export’. This ‘inextricable connection’ test also finds limited support in the above Statement of Objects and Reasons, and was stressed on by the Apex Court in K. Gopinathan Nair & Others v. State of Kerala (1997) 10 SCC 1. However, since after applying this test, the Court had concluded that the exemption was not available on facts, there was no need for the Court to consider a conflict between the ‘same goods’ test and the ‘inextricable connection’ test.

It was this conflict that fell for the Court’s consideration in Azad Coach Builders, which I shall discuss in a subsequent post.

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