IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 05..12..2008 C O R A M THE HONOURABLE MRS. JUSTICE PRABHA SRIDEVAN and THE HONOURABLE MR. JUSTICE K.K. SASIDHARAN W.P. Nos.10390 of 1999 and 22939 of 2004 M/s. Iqra Traders, 560-562, Anna Salai, .. Petitioner in Chennai-6. W.P.10390 of 1999 The Commercial Tax Officer, T. Nagar (East) Assessment Circle, .. Petitioner in Chennai. W.P.22939 of 2004 versus 1. The Commercial Tax Officer, T. Nagar (East) Assessment Circle, 46, Greenways Road, Chennai-28. 2. The Joint Commissioner (CT) (SMR), Ezhilagam, Chepauk, Chennai. 3. The Appellate Assistant Commissioner (CT) III, Kuralagam Annexe, Fifth Floor, Chennai-108. 4. The State of Tamil Nadu, Rep. by its Secretary, Commercial Taxes and Religious Endowment Department, Ezhilagam, Chepauk, Chennai. 5. The Union of India, Rep. by the Secretary, Ministry of Finance, .. Respondents in New Delhi. W.P.10396 of 1999 1. Tvl. Iqra Traders, 4/K, IV Floor, Century Plaza, 560-562, Anna Salai, Chennai-18. 2. The Registrar, The Tamil Nadu Taxation Special Tribunal, .. Respondents in Chennai-1. W.P.22939 of 2004 - - - - - https://hcservices.ecourts.gov.in/hcservices/ Mr. R.L. Ramani, Senior Counsel for M/s. Chandran Karupiah (For Petitioner in W.P. No.10390 of 1999 and 1st Respondent in W.P.22939 of 2004) Mr. Haja Nazirudeen, Spl. Govt. Pleader (Taxes) (For Respondents 1 to 4 in W.P. No.10390 of 1999 and Petitioner in W.P. No.22939 of 2004) Mr. M. Gopikrishnan, A.C.G.S.C. (For Respondent-5 in W.P. No.10390 of 1999) - - - - - PRAYER : W.P. No.10390 of 1999 filed under Article 226 of the Constitution of India praying for a writ of certiorari to call for the records of the second respondent therein in his proceeding in M3/61636/97 and quash the order dated 8.9.1998. W.P. No.22939 of 2004 filed praying for a writ of certiorari to call for the records on the file of the second respondent therein pertaining to the order dated 9.4.2003 made in TC(A) No.140 of 1999 and quash the same as illegal. O R D E R PRABHA SRIDEVAN, J. The assessee is a dealer in granite. For the assessment year 1994-95, the assessee claimed exemption under Section 5(3) of the Central Sales Tax Act, 1956 ('CST Act' in short) with regard to the sale of rough granite blocks to two exporters, viz. Chettinad Granites and Apex Exports. The Assessing Officer found that the rough granite blocks sold by the assessee were exported as polished sized granite blocks which are commercially different from rough granite blocks and therefore, the assessee cannot claim the exemption under Section 5(3) of the CST Act. Therefore, the sale of rough granite blocks was proposed for assessment under the Tamil Nadu General Sales Tax Act, 1959 ('TNGST Act' in short). Aggrieved, the assessee filed A.P. Nos.3 and 5 of 1995, which were allowed. The Joint Commissioner, invoking his suo motu powers of revision, set aside the above orders, confirming the original orders. The assessee thereafter filed W.P. No.10390 of 2004 with regard to the sale to Apex Exports, claiming the benefit of Section 5(3) of the CST Act. The assessee also filed an appeal before the Tamil Nadu Sales Tax Appellate Tribunal with regard to the sale to Chettinad Granites. The Tribunal allowed this appeal. So, the Revenue has filed W.P. No.22939 of 2004. We will deal with the facts separately and then https://hcservices.ecourts.gov.in/hcservices/ with the submissions and the legal points together. 2. M/s. Chettinad Granites is a 100% Export Oriented Unit. According to the assessee, the rough granite blocks purchased by them are cut in standard sizes through sawing machines. Thus, there is no chemical process involved and there is no change in the chemical or physical composition of the goods purchased and sold. 3. Learned senior counsel Mr. R.L. Ramani appearing for the assessee submitted that the granite blocks are merely cut to size for export and only the end-users shape them to their specific requirement. Therefore, the process employed by the exporter does not change the nature or identity of the goods. 4. We have seen the abstract of Form-H sales of the assessee for the assessment year 1994-95 and the sale to Chettinad Granites. It is seen that what was sold under the sale bills were rough blocks. But the description of the goods exported under the documents referred to in Form-H would show that those were polished slabs and were exported, and the bill of lading also shows this : "ONE 20' OPEN TOP CONTAINER SAID TO CONTAIN TWO A' FRAMES OF ONE SIDE MIRROR POLISHED GRANITE RANDOM SLABS 20mm THICK SPECIAL PARADISO, OCEAN GREEN, BLACK, RED MULTI COLOUR & COLOMED JUPRANA – 315.25 SQ.M." All the export documents in the name of Chettinad Granites would show that only polished slabs were the exported goods. 5. Next we come to the assessee's transaction with M/s. Apex Exports. The learned senior counsel submitted that the goods were the same, that as far as this transaction is concerned, the exporter is in New Delhi and therefore, there was no local sale and the goods were straightaway exported by the assessee himself on behalf of Apex Exports and thus, there cannot be any sale nor any tax liability under the TNGST Act. Learned senior counsel also made an attempt to give a different construction to the words "in relation to" in Section 5(3) of the CST Act. According to the learned senior counsel, assuming without admitting that because of the polishing the identity of the rough blocks changed and they ceased to be those goods, this was something that was done "in relation to the export" and therefore, in any event, it would be brought under Section 5(3) of the CST Act. 6. Factually, we find that with regard to Apex Exports, the blocks were made ready and Apex Exports had intimated to the assessee that they would come to Madras to mark the material on receipt of information from the assessee. Therefore, the goods were taken delivery here. All the export documents bear the signatures, and in any event, the assessee knew that the transaction was taxable under https://hcservices.ecourts.gov.in/hcservices/ the State Act unless this transaction was brought under Section 5(3) of the CST Act. Therefore, the argument that there was no sale within the State is only to be rejected. 7. The rough granite blocks that were purchased by Apex Exports were sold as dressed granite blocks. This is seen from the export documents. Therefore, there is a difference in the the goods exported by Chettinad Granites and the goods exported by Apex Exports. We will see whether it changes the taxability. 8. Learned senior counsel relied on (2006) 146 S.T.C. 688 [C.I.T. vs. Vijay Granites P. Ltd.], wherein it was held that cutting and polishing of granite slabs did not involve manufacture and (2006) 145 S.T.C. 176 [State of Karnataka vs. Azad Coach Builders Pvt. Ltd.], where the question was whether the body builder, who is the penultimate seller, would be entitled to the benefit of Section 5(3) and the Supreme Court had referred the matter to a Larger Bench, 80 S.T.C. 199 [R.B. Takkur Takkur Pvt. Ltd. vs. Coffee Board, Madras], which dealt with coffee powder and the exemption under Section 5(3) of the CST Act and also (2003) 10 S.C.C. 771 [CCE vs. Associated Stone Industries (Kota) Ltd.]. 9. The learned Special Government Pleader (Taxes) submitted that the Tribunal had totally lost sight of the change in identity of the goods at the hands of the exporter, and neither granite slabs nor dressed granite blocks are the same as rough granite blocks commercially, nor do the words indicate the same goods either in common or in commercial parlance. He relied on 2007 (5) VST 434 (Karn) [State of Karnataka vs. Goa Granites], which according to him, answers all the questions raised in both these cases. 10. We will now discuss Goa Granite's case (supra), which in our opinion, is very crucial for deciding the issue on hand. Like the assessee herein, Goa Granites was a dealer/assessee registered both under the Karnataka Sales Tax Act and the Central Sales Tax Act sold rough granite blocks to a 100% EOU. The question there was whether Section 5(3) of the C.S.T. Act will apply. Extracts from various judgments are referred to in Goa Granites. In (1986) 63 S.T.C. 239 (SC) [Sterling Foods vs. State of Karnataka], a three Judge Bench of the Supreme Court, held thus : "It is clear on a plain reading of sub-section (3) of section 5 of the Central Sales Tax Act, 1956, that in order to attract the applicability of that provision, it is necessary that the goods which are purchased by an assessee for the purpose of complying with the agreement or order for or in relation to export, must be the same goods which are exported out of the territory of India. The words 'those goods' in this sub-section are clearly referable to 'any goods' mentioned in the preceding part of the sub- https://hcservices.ecourts.gov.in/hcservices/ section and it is therefore obvious that the goods purchased by the assessee and the goods exported by him must be the same. If by reason of any processing to which the goods may be subjected after purchase, they change their identity so that commercially they can no longer be regarded as the original goods, but instead become a new and different kind of goods and then they are exported, the purchases of original goods made by the assessee cannot be said to be purchases in the course of export." 11. This view has been affirmed again in (1996) 100 S.T.C. 571 (SC) [Vijayalaxmi Cashew Company vs. Deputy Commercial Tax Officer] as follows : "In order to resist imposition of sales tax by the State on the penultimate transaction contemplated by section 5(3) of the Central Sales Tax Act, 1956, the dealer will have to establish the identity of the goods purchased with the goods to be exported out of the territory of India. If, in order to fulfil an export obligation, an exporter purchases goods and as result of some processing the identity and character of the goods change, then it will not be a case of export of the same goods. The penultimate sale or purchase of goods must be of those goods which were actually exported." In (2003) 129 S.T.C. 1 [Shafeeq Shameel and Company vs. Asst. Commissioner, Commercial Taxes], which related to the question whether raw hides and skins were same as dry hides and skins, the Supreme Court observed as follows : "... that section 5(3) of the Central Sales Tax Act, 1956, was not applicable where the goods which were sold or purchased had undergone any transformation. Since the dressed hides and skins exported by the appellant were goods different from raw hides and skins purchased by it, the appellant was not entitled to the benefit of exemption of the penultimate sale or purchase under section 5(3) of the CST Act, 1956." 12. We have already found that what was exported to Chettinad Granites were slabs and not blocks. The rough granite blocks undergo a process before they are converted into slabs which are polished on the one side by using abrasives. The Joint Commissioner observed that this activity is clearly a manufacturing process. It is this finding that the learned senior counsel attacked by citing Vijay Granites' case (supra). Even if as per Vijay Granites, the process by which granite blocks become granite slabs is not a manufacturing activity, we must hold that the two commodities are entirely different commodities. https://hcservices.ecourts.gov.in/hcservices/ 13. Vijay Granites which deals with the question whether there was manufacturing activity in the context of Income Tax Act does not help the assessee. Goa Granites succinctly dealt with this issue in the following words : 'While considering the issues involved in this revision petition, we are not considering whether any manufacturing activity is involved while rough granite blocks are cut/sliced into thin pieces as slides and polished or cut." Vijay Granites was one that arose under the Income Tax Act and the assessee claimed deduction under Section 80-I on the ground that they had manufactured polished granites. This Court held that cutting and polishing slabs of granite before exporting them did not involve any process of manufacture or production. 14. The specific entry under Part-D refers to granite blocks and polished granite slabs as two different commodities. There is value addition to the granite blocks after they are cut into slabs. The cleaning, polishing and honing of the blocks into granite slabs cannot be equated to the cleaning, deveining and freezing of lobsters and prawns. Lobsters and prawns, before cleaning and after cleaning, remain lobsters and prawns, whereas the granite blocks become granite slabs which are understood differently by the common man. The Tribunal erred in reversing this finding of the Joint Commissioner. 15. What is to be seen is whether rough granite blocks are the same as dressed granite blocks or polished granite slabs or whether they are two different taxable commodities. If they are different, then Section 5(3) of the CST Act will not apply and the local sale by the assessee to Chettinad Granites will give rise to a tax liability under the TNGST Act. The Karnataka High Court held that neither in common parlance nor in commercial parlance, can sliced, thin, polished slabs be regarded as the rough granite blocks. 16. Learned senior counsel also referred to (1980) 46 S.T.C. 63 [Deputy Commissioner of Sales Tax (Law) vs. Pio Food Packers] which dealt with the question whether sliced, canned pineapple was the same as pineapple. There, the words in the section were "consumes such goods in the manufacture of other goods for sale or otherwise" and the Court held that pine apple fruit is not consumed in the manufacture of pineapple slices for the purpose of being sold in sealed cans. In fact, there is no manufacture in the present case and therefore, this decision cannot help the assessee. The other case was with regard to shrimps, prawns and lobsters bought locally, whose heads and tails were cut, peeled, deveined, cleaned and frozen before exporting them. The Supreme Court held that the goods were the same. Before the Division Bench of the Karnataka High Court, (1991) 82 S.T.C. 355 [T. Azeezur Rahman and Company vs. State of https://hcservices.ecourts.gov.in/hcservices/ Tamil Nadu] was also cited, but that decision had been overruled. In any event, the Karnataka High Court did not rely on this judgment. It held that the rough granite blocks that were sold by the assessee and the polished tiles which were exported by the exporter were two different commodities in common parlance as well as commercial parlance. 17. In Goa Granites, the Karnataka High Court laid down the distinction as to why granite blocks and slabs are not one commodity in the following words : "If this test is applied, neither in common parlance nor in commercial parlance, can sliced, thin, polished tiles be regarded as the rough granite blocks. When rough granite blocks are subjected to process of cutting, slicing into required size and polished and exported as tiles, the rough granite blocks case to be granite blocks and become a distinct and different commercial commodity from the original commodity. In the trade circle, they are not considered as one and the same commodity. ... If they are cut or sawn to very specific dimension and sold either as smaller blocks or cut sizes of granite blocks to the exporter and if that exporter exports those small cut sizes of granite blocks, it can definitely be said, that what is sold and whit is exported are one and the same commodity. ... Therefore, what is sold and what is exported is not 'those goods' or the 'same goods', which is eligible for exemption under section 5(3) of the Act." We find ourselves entirely in agreement with the learned Judges of the Karnataka High Court in Goa Granites with regard to the Chettinad Granites sale. In Goa Granites, the good exported were slabs, and the Court held against the assessee. 18. Therefore, in order to decide whether the penultimate sale or purchase would be a deemed sale or purchase under Section 5(3) of the CST Act, the goods, the subject matter of the sale within the State, must be the same goods that are exported out of India, i.e. the goods exported out of India must be the same as the goods purchased by the exporter. There may be small changes, but essentially the identity of the goods shall not be lost. If they are lost, then it will not be a deemed sale for the purpose of Section 5(3) of the CST Act. 19. If we take the case of exports to Apex Exports, what the assessee exported was also only granite blocks. In fact, even in Goa Granites, we find the following observations in favour of the assessee : https://hcservices.ecourts.gov.in/hcservices/ "If they are cut or sawn to very specific dimension and sold either as smaller blocks or cut sizes of granite blocks to the exporter and if that exporter exports those small cut sizes of granite blocks, it can definitely be said, that what is sold and what is exported are one and the same commodity." "If it was a case of mere cutting or sawing to a specific dimension and beveled edges are polished, it could be a case of export of the same goods and therefore, eligible for tax exemption under section 5(3) of the Act." 20. The Joint Commissioner has erred under the misconception that the exporters sold granite slabs. We find from the bills of lading that Apex Exports exported dressed granite blocks. A random comparison of the assessee’s iinvoices and the bills of lading showed that even the number of blocks is the same. We are informed that dressing only means that the blocks are cleaned and the rough edges are smoothened. To repeat the words of the Supreme Court in Sterling Foods' case (supra) : "...The test which has to be applied for the purpose of determining whether a commodity subjected to processing retains its original character and identity is as to whether the processed commodity is regarded in the trade by those who deal in it as distinct in identity from the original commodity or it is regarded, commercially and in the trade, the same as the original commodity. It is necessary to point out that it is not every processing that brings about change in the character and identity of a commodity. ... The test is whether in the eyes of those dealing in the commodity or in commercial parlance the processed commodity is regarded as distinct in character and identity from the original commodity." Therefore, the finding of the Joint Commissioner with regard to the sale to Apex Exports is not correct, and hence, that this sale to Apex Exports is covered by Section 5(3) of the CST Act deserves to be accepted. 21. Now we come to the other ground as regards the words "in relation to", that the words "in relation to" must be construed so as to mean that if any change in the identity of the goods had been undergone, either by processing or by manufacturing in relation to such export, then it would come under Section 5(3) of the CST Act. Section 5 of the CST Act reads thus : https://hcservices.ecourts.gov.in/hcservices/ "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. (2) 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. (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." In Sterling Foods' case, the Supreme Court makes it clear that it is necessary that the goods which are purchased by an assesee for the purpose of complying with the agreement or order for or in relation to such export must be the same goods which are exported out of the territory of India. Therefore, in view of this decision, the said words must be read in reference to the "agreement or order". 22. The learned senior counsel submitted that Sterling Foods' case may not be relied on since in Azad Coach Builders case (supra), the correctness of the said judgment has been doubted and the matter has been placed for consideration before a larger Bench. In Azad Coach Builders case, it was held thus : "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 complete bus........ 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)....... If so, the https://hcservices.ecourts.gov.in/hcservices/ question which arises for determination is — What are the transactions covered by Section 5(3)? The basic point involved in this case is 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". The Supreme Court also quoted from Gopinathan Nair's case, in partiuclar, paragraph 12. We quote the following from the said case : "12. ...... In that case the respondent assessee was acting 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’s 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