2017 (6) TMI 1091 - HC - VAT and Sales Tax

Court dismisses appeal, sales tax liability upheld for local sale under KVAT Act.

The court dismissed the appeal, ruling that the transaction was a local sale taxable under the KVAT Act. The appellant did not qualify for exemption under ... Sale in the course of export - Section 5(3) of the Central Sales Tax Act - declaration under Section 5(4) of the CST Act - Special Economic Zones Act - exemption under Section 7 - Special Economic Zones Act - power of State under Section 50 - deemed foreign territory of a SEZ - zero rate sale / sale in the course of export under KVAT Act - Section 6(7)(b) of the KVAT Act - Same Goods Theory - completion of auction sale - place and time of sale - estoppel by acceptance of tender terms / non conditional bidSale in the course of export - Section 5(3) of the Central Sales Tax Act - declaration under Section 5(4) of the CST Act - Whether the auction sale of sandalwood to the appellant constituted a sale 'in the course of export' within the meaning of Section 5(3) of the CST Act and thereby exempt from State tax. - HELD THAT: - The Court held that to attract Section 5(3) the penultimate sale must be inextricably connected with an export and the burden to prove such connection lies on the assessee. Reliance was placed on the principles in State of Karnataka v. Azad Coach Builders that there must be intention of both parties, an obligation to export and actual export demonstrating an inseverable link. Moreover sub section (4) requires a prescribed declaration by the exporter furnished to the seller; no such declaration or prescribed form was produced. Applying these principles to the auction sale (completed at the Marayoor depot under the tender conditions) the Court found no inextricable link to an exportation that would bring the sale within Section 5(3) or invoke benefit without the mandatory declaration. [Paras 11, 17, 18, 19]Sale did not qualify as a sale in the course of export under Section 5(3) of the CST Act and the appellant failed to comply with the declaration requirement of Section 5(4).Special Economic Zones Act - exemption under Section 7 - Special Economic Zones Act - power of State under Section 50 - deemed foreign territory of a SEZ - Whether provisions of the Special Economic Zones Act rendered the sale outside the taxing power of the State or entitled the appellant to exemption from KVAT. - HELD THAT: - The Court observed Section 7 contemplates exemptions subject to terms and conditions to be prescribed (i.e., rules) and applies to enactments specified in the First Schedule (Central enactments); the KVAT Act is not in that schedule and no rules were invoked. Section 50 empowers the State Government to notify exemptions but is discretionary and no notification under Section 50 was shown. Deeming provisions (Section 53) and the Act's overriding effect do not, in the absence of prescribed rules or State notification, displace the KVAT liability. Consequently the SEZ Act did not operate to render the impugned auction sale outside the State's taxing power in the facts of this case. [Paras 13, 14, 15, 16]Provisions of the SEZ Act did not relieve the appellant of KVAT liability; no rule or Section 50 notification was produced to support exemption.Section 6(7)(b) of the KVAT Act - zero rate sale / sale in the course of export under KVAT Act - Whether Section 6(7)(b) of the KVAT Act or Section 13(1) (zero rate sale) entitled the appellant to exemption for sale to a SEZ unit situated outside Kerala. - HELD THAT: - Section 6(7)(b) grants exemption only for specified items (building materials, industrial inputs, plant and machinery, etc.) and subject to conditions; it does not extend to sale of goods like sandalwood purportedly for export. The provision is also confined to sales to SEZ establishments 'in the State', and the appellant's unit is located outside Kerala. Section 13(1) treats sales in the course of export as zero rated, but the sale was not held to be in the course of export for reasons already stated. Therefore neither Section 6(7)(b) nor Section 13(1) availed the appellant. [Paras 16, 20]Neither Section 6(7)(b) nor the zero rate sale provision of the KVAT Act exempted the appellant from KVAT on the auction sale.Same Goods Theory - manufacturing/processing converting restricted goods - Whether the 'Same Goods Theory' aided the appellant so that the purchased sandalwood would be treated as the same goods exported (and thus exempt) after processing. - HELD THAT: - The Court noted prior authority where sandalwood (a restricted item) purchased at auction was converted into chips and dust for export; conversion involved manufacturing process and the exported commodity was different from the auctioned good, defeating the 'Same Goods Theory'. Following that analysis, and applying State of Karnataka v. Azad Coach Builders principles, the Court found the theory inapplicable where the product exported is not the same as the auctioned items and where the link to export was not proved. [Paras 17, 18]Same Goods Theory did not assist the appellant; the auctioned sandalwood was not shown to be the 'same goods' exported.Completion of auction sale - place and time of sale - estoppel by acceptance of tender terms / non conditional bid - Whether the terms of the e auction and the appellant's acceptance of those terms rendered the transaction a local sale exigible to KVAT and whether the appellant could disown tax liability after participating without protest. - HELD THAT: - The tender documents specified sale at the Marayoor depot, required payment of bid value and applicable taxes before delivery, disallowed conditional offers, and mandated that KVAT at the prevalent rate be paid by all successful bidders irrespective of destination. Auction sale is complete at acceptance (fall of hammer / confirmation), and the appellant neither informed the Department of any claim to exemption nor challenged tender terms prior to bidding. The Court held that having participated on unqualified terms and taken delivery after satisfying tax, the appellant cannot repudiate the contractual and statutory consequences; the sale was complete in Kerala and taxable under the KVAT Act. [Paras 26, 27, 28, 29, 30]The auction sale was a local sale completed in Kerala under the tender terms; the appellant, having bid unconditionally and accepted those terms, is not entitled to repudiate KVAT liability.Final Conclusion: The Writ Appeal is dismissed. The auction sale of sandalwood at Marayoor was a local sale exigible to KVAT; the appellant failed to establish that the sale was in the course of export under the CST Act or that SEZ or KVAT provisions exempted it, and having bid unconditionally under the tender terms the appellant cannot avoid the tax liability. Issues Involved:1. Whether the movement of goods from Kerala to a Special Economic Zone (SEZ) in Tamil Nadu constitutes a transaction 'in the course of export of the goods outside the territory of India' and is thus exempt from state tax.2. Whether the transaction falls under Section 5(3) of the Central Sales Tax Act (CST Act) to get exemption from payment of tax.3. Whether the transaction can be regarded as an 'interstate sale' and if exemption can be granted under Section 8(6) of the CST Act or if it is a 'local sale' as contended by the Department.4. Whether the appellant can seek relief from tax liability under the Kerala Value Added Tax Act (KVAT Act) without challenging the provisions contained in the Tender.5. Whether the 'Same Goods Theory' as explained by the Supreme Court in State of Karnataka Vs. Azad Coach Builders Private Limited and another [(2010) 9 SCC 524] helps the appellant.Detailed Analysis:1. Movement of Goods and Export Transaction:The court examined whether the movement of goods from Kerala to the appellant's unit in a Special Economic Zone (SEZ) in Tamil Nadu constitutes an export transaction. The appellant claimed that the purchase was for export purposes and thus should be exempt from state tax. However, the court found that the sale was completed in Kerala, and the movement of goods to Tamil Nadu did not constitute an export transaction. The court noted that the appellant did not provide sufficient evidence to prove that the goods were purchased for export.2. Applicability of Section 5(3) of the CST Act:The court analyzed whether the transaction fell under Section 5(3) of the CST Act, which exempts the last sale or purchase preceding the export from tax. The court found that the appellant failed to furnish the required declaration from the exporter to the prescribed authority, which is a mandatory requirement under Section 5(4) of the CST Act. Thus, the transaction did not qualify for exemption under Section 5(3).3. Interstate Sale vs. Local Sale:The court considered whether the transaction could be regarded as an interstate sale or a local sale. It referred to previous judgments, including the Supreme Court's decision in Commissioner of Commercial Taxes, Hyderabad Vs. Desai Beedi Company, which held that the movement of goods must be inextricably connected with the sale to constitute an interstate sale. The court concluded that the sale was completed in Kerala, and the movement of goods to Tamil Nadu was not inextricably connected with the sale, making it a local sale taxable under the KVAT Act.4. Relief from Tax Liability Without Challenging Tender Provisions:The court noted that the appellant participated in the tender without raising any objections to the tax conditions specified in the tender documents. The court held that having accepted the terms of the tender, the appellant could not later seek relief from tax liability without challenging the tender provisions at the appropriate time.5. 'Same Goods Theory':The court referred to the Supreme Court's decision in State of Karnataka Vs. Azad Coach Builders Private Limited, which emphasized that the transaction between the assessee and the exporter must be inextricably connected with the export of goods. The court found that the appellant did not establish such a connection and that the goods purchased (sandalwood) were not the same as the goods exported (sandalwood products). Therefore, the 'Same Goods Theory' did not apply to the appellant's case.Conclusion:The court dismissed the appeal, affirming that the transaction was a local sale taxable under the KVAT Act and not an export transaction or interstate sale. The appellant failed to meet the requirements for exemption under Section 5(3) of the CST Act and did not challenge the tender provisions at the appropriate time. The 'Same Goods Theory' did not support the appellant's case, and the court upheld the tax liability as determined by the Department.