Case: State Of Karnataka Vs. Azad Coach Builders Pvt. Ltd.

M/s Azad Coach Builders Pvt. Ltd., the assessee was requested to build bus bodies, by the exporter, Tata Engineering Locomotive Co. Ltd. in accordance with the specifications provided by the foreign buyer, Lanka Ashok Layland Ltd., Colombo. The specimen copy of the Purchase order dated 11.7.1988 placed on the assessee by the exporter revealed that the assessee was asked to fabricate bus bodies on the chassis supplied by the exporter in accordance with the specifications given by the foreign buyer. In one of the communications received from the foreign buyer it was stipulated that the steel and aluminium panels of the bus bodies be built by the assessee since the customers in Sri Lanka preferred them. The assessee accordingly manufactured the bus bodies, in accordance with the specifications stipulated by the foreign buyer and mounted the same on the chassis made available by the exporter making it as a complete bus ready for export.7. The assessee claimed exemption on sales of bus bodies as penultimate sales in the course of export made to their customers like Telco Bombay and others which was rejected by the Assessing Authority, treating the transactions as interstate sales, on the ground that the `bus bodies and `buses are two different commodities and the bus bodies as such were not exported, but complete buses. The Assessing Authority held that the transactions could not amount to penultimate sale eligible for exemption under sub-section (3) of Section 5 of CST Act.8. Aggrieved by the assessment order dated 21.3.1995, the assessee approached the Joint Commissioner of Commercial Taxes (Appeals), Bangalore Division under Section 20(5) of the Karnataka Sales Tax Act, 1957. The appeal was rejected upholding the levy of tax by the Assessing Authority on the ground that the goods exported was different from the goods purchased and hence, the assessee was not entitled to exemption under Section 5(3) of the CST Act. The matter was taken up in appeal before the Karnataka Appellate Tribunal and the appeal was rejected vide order dated 14.8.1996.9. Feeling aggrieved by the order passed by the Tribunal, the assessee took up the matter before the Division Bench of the Karnatka High Court vide S.T.R.P. No. 4 of 1997. After examining the agreement between the exporter and the foreign buyer and also the order placed by the exporter on the assesseee, the High Court came to the conclusion that the bus bodies supplied by the assessee to the exporters was in the course of exports and the words "in relation to such export" extended the scope of the exemption to the extent that even if there is no agreement or order but they are in relation to such exports, the exemption could still be claimed under Section 5(3) of the CST Act. The High Court, therefore, allowed the Revision Petition and held that the assessee is eligible for the benefit of exemption from tax under Section 5(3) of the CST Act.10. Aggrieved by the order of the High Court, the State of Karnataka has come up with these appeals. A Division Bench of this Court felt that the judgments of this Court in Sterling Foods (supra) and Vijayalaxmi Cashew Company (supra) need a fresh look in the light of a later judgment of this Court in K. Gopinathan Nair (supra) and hence the matter was referred to a larger Bench, the reference order is reported in (2006) 3 SCC 338.  The larger Bench then placed this matter before the Constitution Bench and hence the matter has been placed before us for consideration.

Reasoning:
In this connection, it is useful to refer to the judgment of this Court in Deputy Commissioner of Agricultural Income Tax and Sales Tax, Ernakulam v. Indian Explosives Ltd. (1985) 4 SCC 119 , wherein this Court was dealing with the question whether the respondent-assessee was concerned with sale transactions in the course of import of chemicals, dyes etc. The modus operandi of the assessee in that case was to the effect that local purchasers used to place orders with the respondent quoting their Import Licence Numbers in accordance with their pre-existing contracts with the respondent. The respondent then placed orders with the foreign supplier for the supply of the goods and in such orders the name of the local purchaser who required the goods as also its licence numbers, were specified; the actual import was done on the strength of two documents like (a) the Actual Users Import Licence and (b) Letter of Authority issued by Chief Controller of Imports and Exports whereunder the local purchaser was authorized to permit the respondent-assessee on his behalf to import the goods, to open letters of credit and make remittance of foreign exchange against the said licence to the extent of value specified therein. The Court held that there was an integral connection between the sale to the local purchaser and the actual import of the goods from the foreign supplier. The movement of goods from foreign country like United States to India was in pursuance of the conditions of the pre-existing contract of sale between the respondent-assessee and the local purchaser. It was noticed that the import of the goods by the respondent assessee was for and on behalf of the local purchaser and the respondent-assessee could not, without committing a breach of the contract, divert the goods so imported for any other purpose. The Court, therefore, concluded that in order that the sale should be one in the course of import it must occasion the import and to occasion the import there must be integral connection or inextricable link between the first sale following the import and the actual import provided by an obligation to import arising from statute, contract or mutual understanding or nature of the transaction which links the sale to import which cannot, without committing a breach of statute or contract or mutual understanding, be snapped.When we analyze all these decisions in the light of the Statement of Objects and Reasons of the Amending Act 103 of 1976 and on the interpretation placed on Section 5(3) of the CST Act, the following principles emerge:- To constitute a sale in the course of export there must be an intention on the part of both the buyer and the seller to export;- There must be obligation to export, and there must be an actual export.- The obligation may arise by reason of statute, contract between the parties, or from mutual understanding or agreement between them, or even from the nature of the transaction which links the sale to export.- To occasion export there must exist such a bond between the contract of sale and the actual exportation, that each link is inextricably connected with the one immediately preceding it, without which a transaction sale cannot be called a sale in the course of export of goods out of the territory of India.24. The phrase sale in the course of export comprises in itself three essentials: (i) that there must be a sale: (ii) that goods must actually be exported and (iii) that the sale must be a part and parcel of the export. The word `occasion is used as a verb and means to cause or to be the immediate cause of. Therefore, the words `occasioning the export mean the factors, which were immediate course of export. The words `to comply with the agreement or order mean all transactions which are inextricably linked with the agreement or order occasioning that export. The expression `in relation to are words of comprehensiveness, which might both have a direct significance as well as an indirect significance, depending on the context in which it is used and they are not words of restrictive content and ought not be so construed.Therefore, the test to be applied is, whether there is an in-severable link between the local sale or purchase on export and if it is clear that the local sale or purchase between the parties is inextricably linked with the export of the goods, then a claim under Section 5(3) for exemption from State Sales Tax is justified, in which case, the same goods theory has no application.The facts of this case clearly reveal that the transaction between the assessee and the exporter is inextricably connected with the export of the goods to Sri Lanka. The communication between the foreign buyer and the exporter reveals that the foreign buyer wanted the bus bodies to be manufactured by the assessee under the specifications stipulated by the foreign buyer. The bus bodies constructed and manufactured by the assessee could not be of any use in the local market, but were specifically manufactured to suit the specifications and requirements of the foreign buyer. In the Purchase Order placed on the assessee by the exporter, it is specifically indicated that the bus bodies have to be manufactured in accordance with the specifications provided by the foreign buyer, failure to do so might result in cancellation of the export order. The assessee in this case has succeeded in showing that the sale of bus bodies have occasioned the export of goods. When the transaction between the assessee and the exporter and the transaction between the exporter and foreign buyer are inextricably connected with each other, in our view, the `same goods theory has no application.We may also indicate that the burden is entirely on the assessee to establish the link in transactions relating to sale or purchase of goods and to establish that the penultimate sale is inextricably connected with the export of goods by the exporter to the foreign buyer, which in this case the assessee has succeeded in establishing.In the facts and circumstances of this case, we are satisfied that the assessee has succeeded in satisfying those tests and hence, eligible for exemption under sub-section (3) of Section 5 of the CST