As it
relates to levy of tax on sale or purchase goods taking place in
the course
of export of the goods out of territory of India or in the course of import
of the goods into the territory of India, the Indian
Constitution prohibits Indian States from imposing any tax on such sale or
purchase. In the same Article of the Constitution, power of formulating
principles for determining when a sale or purchase shall be deemed in the
course of export or import has been given to the Union Parliament. The said
article 286 runs as under:-
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Restrictions as to
imposition of tax on the sale or purchase of goods.-
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(1)
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No law of a State shall impose, or authorize the imposition of,
a tax on the sale or purchase of goods where such sale or purchase takes
place-
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(a)
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outside the State; or
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(b)
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in the course of the import of the goods into, or export of the
goods out of, the territory of India.
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(2)
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Parliament may by law formulate principles for determining when
a sale or purchase of goods takes place in any of the ways mentioned in
clause (1).
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(3)
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Any law of a State shall, in so far as it imposes, or authorize
the imposition of,-
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(a)
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a tax on the sale or purchase of goods declared by Parliament by
law to be of special importance in inter-State trade or commerce; or
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(b)
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a tax on the sale or purchase of goods, being a tax of the
nature referred to in sub-clause (b), sub-clause (c) or sub clause (d)
of clause (29A) of article 366,
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Be subject to such restrictions and conditions in regard to the
system of levy, rates and other incidents of the tax as Parliament may by law
specify.”
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For the purpose
of discharging burden cast on it in clause (2) of Article 286 of the Constitution,
the Parliament, for the purpose of defining sale or purchase in the course of
export or import, has enacted section 5 of the Central Sales Tax Act, 1956.
Section 5 of the Central sales Tax Act, 1956 (hereinafter referred to as the
Act) is part of Chapter 2 of the Act. Heading of the chapter 2 of the Act
runs as follows:-
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Formulation of Principles for
determining when a sale or purchase of goods takes place in the course of
inter-state trade or commerce or outside a State or in the course of import
or export
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Section 5 of the
Act runs as under:
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5. When is a sale or purchase of goods said to take place
in the course of import or export.-
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(1)
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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.
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(2)
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A sale or purchase of goods shall be deemed to take place in the
course of the import of the goods into the territory of India only if the
sale or purchase either occasions such import or is effected by a transfer of
documents of title to the goods before the goods have crossed the customs
frontiers of India.
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(3)
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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.
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(4)
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The provisions of sub-section (3) shall not apply to any sale or
purchase of goods unless the dealer selling the goods furnishes to the
prescribed authority in the prescribed manner a declaration duly filed and
signed by the exporter to whom the goods are sold in a prescribed form
obtained from the prescribed authority.
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(5)
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Notwithstanding anything contained in sub-section (1), if any
designated carrier purchases Aviation Turbine Fuel for the purpose of its
international flight, such purchase shall be deemed to take place in the
course of the export of goods out of the territory of India.
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Explanation.-For
the purpose of this sub-section, 'designated Indian carrier' means any
carrier which the Central Government may, by notification in the Official
Gazette, specify in this behalf.
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Sub-section (1) of
section 5 of the Act defines sale or purchase in the course of export of
goods out of territory of India. This sub-section covers sales in the there
is privity of contract in between selling dealer and foreign buyer of goods.
Sub-section (2) of the said section defines when a sale or purchase shall be
deemed in the course of import of goods into the territory of India.
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Earlier to
amendment in section 5 with effect from April 01, 1976, there had been only
two sub-sections in the section. In many cases, it was found that Indian
suppliers after entering into contract of sale with foreign buyers had placed
orders with Indian manufacturers or traders for supply of goods for
fulfilling their contract with foreign buyers. Such Indian purchasers had
assured Indian manufacturers or suppliers that sale of goods, in their hands,
will also be sale in the course of export of the goods and will enjoy
exemption from tax. But in the Case of Shirajuddin vs. State of Orissa (STC
1975), the Supreme Court of India laid down the principle that sub-section
(1) of section 5 of the Act covers only those sales in which the privet of
contract exists in between Indian exporter and foreign buyer. Thus, for the
purpose of sales tax, only direct export sales were found covered under
export sales. But this was not good for promotion of export. For promotion of
export, it was found necessary to extend scope of definition of sale in the
course of export. This was why the Parliament, in April 1976, enacted
sub-section (3) of section 5 of the Act.
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I would like to point
out here that section 5 of the Act does not grant exemption from payment of
tax on sale or purchase in the course of export of the goods out of or in the
course of import of the goods into, the territory of India. Exemption from
levy of tax by the States follows from the prohibition provided in Article
286 of the Constitution. As it relates to levy of tax by the Union, for well
known reasons, levy of tax has not been found desirable. The section provides
principles for determining whether or not a particular sale or purchase is in
the course of export or import of the goods.
Sub-section (3) of section 5
of the Act, relates to a sale or purchase which shall also be deemed in the
course of export where such sale to an exporter or purchase by an exporter is
made for fulfilling its existing contract of export with foreign buyer. An
export sale or purchase defined in sub-section (3) of section 5 of the Act,
has to satisfy following conditions:
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(i)
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It should be the last sale or purchase immediately preceding the
sale occasioning the export.
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(ii)
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The local purchase by the exporter, who has entered into
contract with foreign buyer, should have been made in reference to and
in order to fulfill existing contract of export in between the exporter and
the foreign buyer;
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(iii)
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Goods purchased by the exporter should be of the description
mentioned in the export order;
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(iv)
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Goods, purchased by the exporter who has entered into the export
contract with foreign buyer, are exported to the foreign destination given by
the foreign buyer;
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(v)
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A declaration in the prescribed form (Form H) is issued by the
exporter to the dealer making sale to the exporter.
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A local
supplier, unless the exporter who supplies goods to foreign buyer tells about
the satisfaction of the aforesaid conditions, cannot ascertain that export
conditions are fulfilled. It is only the exporter, making direct export, who
knows or can prove that conditions have been fulfilled. But at the end of
local selling dealer, for proving sale in the course of export in terms of
sub-section (3) of section 5 of the Act, such local selling dealer has to
prove that sale, of goods sold by him to exporter, fulfills conditions of
sub-section (3) of section 5 of the Act. For this he will have to depend upon
the exporter.
Prior to introduction
of sub-section (4) in section 5 of the Act, it had been sufficient if
conditions of sub-section (3) were satisfied by producing copy of export
order, purchase order placed by the exporter, sale invoice issued by the
local selling dealer and copy of bill of lading or airway bill. But after
introduction of sub-section (4) in section 5 of the Act, all such evidences
are meaningless unless declaration prescribed under sub-section (4) is
furnished. Sub-section (4) speaks in clear words that provisions
of sub-section (3) shall not apply in respect of any purchase or sale of
goods unless
the dealer selling the goods furnishes to the prescribed authority in the
prescribed manner a declaration duly filed and signed by the exporter to whom
the goods are sold in a prescribed form obtained from the prescribed
authority.
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After
introduction of sub-section (4) in section 5 of the Central Sales Tax Act,
1956, sub-section (3) is applicable only if
compliance of sub-section (4) of section 5 has been made.
Sub-section (3) of section 5 is no longer independent provision. Its
applicability is subjected to sub-section (4) of the CST Act, 1956.
Sub-section (4) not only applies in respect of sales referred to in
sub-section (3) of section 5 but it also equally applies in respect of purchases referred
to in sub-section (3) of section 5. Therefore, it is mandatory for the
exporter to issue Form H to the selling dealer.
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Where several contracts of export of particular goods are
pending with an exporter and the exporter makes purchase of such goods even
if with an intention of fulfilling such export orders, he is not under any
obligation to export such goods. The exporter, without breach of any
contract, can sell such goods in the local market. But where the
exporter makes purchase of goods on condition of issuing Form H to the seller
and later issues such Form, he creates a binding on him. In that case, he has
to discharge undertakings given in Form H. If goods in respect of which Form
H has been issued, are diverted in the local market or are disposed of
otherwise than fulfilling the export order mentioned in Form H, then such
exporter enters into breach of the contract with the selling.
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If we examine Form H,
we find that it requires Registration Certificate Numbers of the selling
dealer under the State Law and the Central Sales Tax Law. Also where goods
exported are re-imported in India by the exporter, then such exporter is
under an obligation to inform the assessing authority of the seller.
Assessing authority of unregistered seller is not known.
Before introduction of sub-section
(4) in section 5 of the CST Act, 1956, circumstances have been different.
Also before amendment in relevant sub-rule (10) of Rule 12 of the Central
Sales Tax (Registration & Turnover) Rules, 1957, Form was meant for
claiming exemption from levy of tax on inter-state sale, which in absence of
application of sub-section (3) of section 5 of the CST Act, 1957 would have
been an inter-state sale. After amendment, applicability of sub-section (3)
of section 5 depends on furnishing of Form H by the exporter to the seller.
Where sub-section (3) of section 5 is found applicable, the exemption on such
sale or purchase under the State Law comes from sub-clause (b) of clause (1)
of Article 286 of the Constitution. So far as it relates to levy of tax by
the Central Government, tax on such sale is not leviable because no law have
been enacted by the Union Parliament for imposing tax on sale or purchase
taking place in the course of export of the goods out of the territory of
India.
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Before introduction of
sub-section (4) in section 5 of the CST Act, 1956, circumstances have been
different. Also before amendment in relevant sub-rule (10) of Rule 12 of the
Central Sales Tax (Registration & Turnover) Rules, 1957, Form was meant
for claiming exemption from levy of tax on inter-state sale, which in absence
of application of sub-section (3) of section 5 of the CST Act, 1957 would
have been an inter-state sale. After amendment, applicability of sub-section
(3) of section 5 depends on furnishing of Form H by the exporter to the
selling dealer. Where sub-section (3) of section 5 is found applicable, the
exemption on such sale or purchase under the State Law comes from sub-clause
(b) of clause (1) of Article 286 of the Constitution. Such purchase or sale
is exempt from levy of the central sales tax because the Central Sales Tax
Act, 1956 does not provide for levy of tax on sale or purchase taking place
in the course of export of the goods out of the territory of India.
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On examination
of Form H, we find that it requires Registration Certificate Numbers of the
selling dealer under the State Law and the Central Sales Tax Law. Also where
goods exported are re-imported in India by the exporter, then such exporter
is under an obligation to inform the assessing authority of the selling
dealer. Assessing authority of unregistered selling dealer is not known. This
implies that transaction of purchase and sale of goods should be in between a
registered selling dealer and Registered exporter.
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In view of the
foregoing discussion, it is clear that following cases of local sale or
purchase are not covered under sub-section (3) of section 5 of the Act:-
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(i)
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Where goods are purchased without reference to an export
contract;
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(ii)
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Where contract of export does not exist at the time of making
local purchase;
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(iii)
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Where a trader randomly makes purchases of goods for the purpose
of export and he exports goods whenever he gets export order from foreign
buyer;
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(iv)
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Where purchased goods are different from those mentioned in
order of export. If finished goods are the subject matter of export order and
exporter, for the purpose of manufacture of such finished goods, makes
purchase of raw material, etc. for use in manufacture of such finished goods;
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(v)
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Where goods are not exported or exported goods are re-imported
into the territory of India; or
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(vi)
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Where conditions of sub-section (3) of section 5 of the Act are
not satisfied; or
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(vii)
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Where conditions of sub-section (3) of section 5 of the Act are
satisfied but Form H has not been produced by the selling dealer before its
assessing authority;
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As it relates to
provisions of VAT Act, if export conditions are fulfilled then sale is in the
course of export and State law is not applicable to local sales. These sales
and purchases are protected by the provisions of the Constitution read with provisions
of section 5 of the Central sales Tax Act, 1956. Hence there is no impact of
commencement of VAT law in any State.
This Article is written by CMA Samir Biswal. He
can be reached at cmasamirbiswal@gmail.com.
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