2016 (8) TMI 400 - HC - VAT and Sales Tax

Court denies tax exemption for transformed sandalwood exports under CST Act Section 5(3)

GUPTA ENTERPRISES, EASTERN STREET Versus COMMERCIAL TAX OFFICER, MUNNAR, DEVIKULAM, IDUKKI DISTRICT AND OTHERS

The Court dismissed the appeals, holding that the appellant's purchase of sandalwood and its export in a different form did not qualify for tax exemption ... Sandalwood – restricted item - Penultimate sale - export of sandal wood flakes, chips/dust - Section 5(3) of the CST Act - whether an assessee (local manufacturer) is eligible to get exemption under sub-section (3) of Section 5 of the Central Sales Tax Act, 1956, if the penultimate sale effected in favour of the exporter is inextricably connected with the export of goods outside the territory of India. Held that: - The Apex Court made it clear that the test to be applied is, to see whether there is an inseverable link between the local sale or purchase and export and if it is found that it is inextricably linked together, then a claim under Section 5(3) for exemption from State sales tax would be justified and under such circumstance, the “same goods theory” will be having no application - entirely different commodities having different uses, which could never be regarded as the same goods, to have extended the benefit of Section 5(3) of the CST Act – manufacturing process involved for conversion of sandalwood (ineligible for export) to sandalwood flakes, chips, dust (eligible for export) – benefit of exemption not available. Burden of proof – Held that: - The burden is entirely on the assessee to establish the link in transactions relating to sale or purchase of goods and the export; that the penultimate sale is inextricably connected with the export of goods by the exporter to the foreign buyer. The appellants have not substantiated the position to tilt the balance in their favour. Appeal dismissed – decided against appellant. Issues Involved:1. Whether the 'penultimate sale' of sandalwood by the Forest Department prior to the export of sandalwood flakes, chips/dust by the appellant qualifies for exemption under Section 5(3) of the CST Act.2. Applicability of the 'Same Goods Theory' as discussed in the case of State of Karnataka vs. Azad Coach Builders Private Limited and another.Issue-wise Detailed Analysis:1. Exemption under Section 5(3) of the CST Act:The primary issue was whether the sale of sandalwood by the Forest Department to the appellant, which was later converted into sandalwood flakes, chips, or dust for export, qualifies for exemption from tax under Section 5(3) of the CST Act. The appellant claimed exemption, arguing that the sandalwood purchased was intended for export after conversion. However, the Department resisted, stating that the sale of sandalwood and the export of its processed forms are not the same goods, and thus, the exemption does not apply. The Court examined the scope of Section 5(3) of the CST Act, which allows exemption for the last sale or purchase of goods preceding the export if it is for the purpose of complying with an export agreement. The Court concluded that since the sandalwood underwent significant processing to become flakes, chips, or dust, it lost its original identity, and thus, the exemption under Section 5(3) was not applicable.2. Applicability of the 'Same Goods Theory':The Court analyzed whether the 'Same Goods Theory' could aid the appellant's claim for exemption. This theory, as discussed in State of Karnataka vs. Azad Coach Builders Private Limited, requires that the goods sold in the penultimate sale must be the same as those exported. The appellant argued that the sale and export were inextricably linked, thus qualifying for exemption. However, the Court found that the transformation of sandalwood into flakes, chips, or dust constituted a manufacturing process, resulting in a different end product. The Court referred to the Supreme Court's decision, emphasizing that the connection between the penultimate sale and export must be real, intimate, and interlinked, not casual or fortuitous. The Court concluded that the significant change in the commodity's form meant that the 'Same Goods Theory' did not apply, and thus, the appellant was not entitled to the claimed exemption.Conclusion:The Court dismissed the appeals, affirming that the appellant's purchase of sandalwood and its subsequent export in a different form did not qualify for tax exemption under Section 5(3) of the CST Act. The transformation of the goods meant they were no longer the same, and the 'Same Goods Theory' did not support the appellant's case.