C. B. Thakar,
Advocate

Q.1 Please explain the concept of ‘deemed’ export and the requirements thereof.

Reply

The sales in course of export are immune from levy of sales tax. As per Article 286 of the Constitution of India, no State government is entitled to levy tax on the transactions taking place in course of export. The sale in course of export is defined in section 5 of the CST Act, 1956. Section 5(1), 5(3) & 5(4) are relevant sections, which are reproduced below for ready reference.

“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 affected 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.]

[(4) 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 filled and signed by the exporter to whom the goods are sold in a prescribed form obtained from the prescribed authority.]”

(This section 5(4) applies from 13-5-2005 and hence will not be applicable for period upto 12-5-2005).

It can be seen that section 5(1) of the CST Act, 1956 covers direct exports effected by the selling dealer. Here the selling dealer is exporter and his buyer is importer in other country.

Section 5(3) of the CST Act, 1956 is to extend the scope of sale in course of export. Under this section even if there is no direct export but export is through merchant exporter etc., still it is covered as sale in course of export. In other words, if the selling dealer effects sale to any other dealer in India, who export the same to Foreign Country, then the sale effected by selling dealer to such exporter can also be covered in the category of sale in course of export and will be exempt at par with sale in course of export as under section 5(1). This category is also known as ‘deemed export’ sales. Thus this section gives exemption to one sale prior to actual export (i.e. penultimate sale). This category of sale is also known as deemed export sales.

From the said section 5(3), it can also be seen that following three conditions should be satisfied to get the exemption under section 5(3).

I. There must be export order from importer in other country, in hands of local purchasing dealer in India (referred to as exporter).

II. The exporter must be purchasing from the local seller (referred to as claimant/selling dealer) in pursuance of said export order.

III. There must be actual export of the said goods by exporter.

This position is also discussed and confirmed in number of judgments. Readily reference can be made to following judgment.

K.J. James vs. State of Kerala (22 VST 165) (Ker)

“The first condition for grant of export exemption under section 5(3) is the availability of advance foreign order for export to the purchaser-exporter at the time of purchase. The next condition is that after purchasing the goods for complying with such order for export, actual export sales should have been made by the exporter.”

Therefore, to get the exemption as per section 5(3) of the CST Act, 1956 the claimant selling dealer is under an obligation to show the fulfillment of above conditions. If the selling dealer is not in position to discharge above burden then his claim may be disallowed. To show that the above conditions are fulfilled, the seller can obtain ‘H’ form, still mere production of such form will not be sufficient. Upto 12-5-2005 the production of H form was not mandatory and the selling dealer could claim exemption based on other supporting documents like export order copy /Bill of Lading etc.. However from 13-5-2005 the production of H form is made compulsory, in addition to above documents. Therefore the more important is showing fulfillment of required conditions. For supporting existence of export order from importer, the selling dealer is expected to obtain the copy of the said order from his exporter (purchaser) and produce it before his sales tax authorities. Secondly, for showing that actual export has taken place, the selling dealer is expected to obtain copy of bill of lading or any other document like AWB, evidencing actual export to Foreign Country. In this respect, there are number of judgments. Reference can be made to following representative judgment.

A. R. Associates vs. Commissioner of Commercial Tax and Others (122 STC 134) (Kar)

The short gist of the judgment is reproduced below.

The dealer claimed exemption in respect of a consignment of coffee beans supplied to R by producing the requisite form H and the bills of lading to prove that the goods were exported. This was disallowed by the assessing authority by an order dated April 17, 1996 on the ground that the dealer had failed to establish the factum of export within the framework of the requirement of section 5(3) of the Central Sales Tax Act, 1956 read with rule 12(10)(a) of the Central Sales Tax (Registration and Turnover) Rules, 1957. The dealer thereafter preferred an appeal which was allowed by the appellate authority by the order dated August 23, 1996. The revisional authority thereafter revised the order and withdrew the exemption granted by first appellate authority. The dealer filed appeal before Karnataka High Court.

Hon. High Court, dismissed the appeal and held that from a reading of the requirement of section 5(3) of the Central Sales Tax Act read with rule 12(10)(a) of the Central Sales Tax (Registration and Turnover) Rules, 1957 it is clear that it is insufficient for the dealer to merely produce the form ‘H’ and the bill of lading because the most important evidence that is required to be produced as per the requirements of law is the export agreement. The purpose behind the insistence of this provision is in order to ensure that there was not only in existence a valid agreement for export and an order but also to be able to identify the particular export goods and to establish a link or nexus between those goods and the export agreement. Non-fulfilment of those requirements will be fatal to the case of the dealer. High Court confirmed the revision order.

Therefore export order copy in hands of exporter and B/L copy for supporting export is necessary. The exporter (purchasing dealer) is, of course, reluctant to give such documents on the ground of confidentiality. Some time defaced copies are given. However the claims remain disallowed in absence of above documents or on ground of incomplete documents. It may be mentioned that, recognizing the difficulties faced by the selling dealers, the Maharashtra Sales Tax Department has issued internal Circular bearing no. 18A of 2009 dtd. 18-8-2009. In para 8(d) of the said Circular, it is clarified that even defaced B/L, should not be disallowed. Therefore, the claimant dealer can now produce defaced bill of lading, which exporter will be willing to give and it can now be insisted upon the Maharashtra Sales Tax Authorities for not disallowing claim for above reason of defaced B/L. Similarly the internal circular gives concession in respect of production of export order. It says that if export order number etc. is filled up in H form then claim should not be disallowed for non production of copy of such order. This will also give great relief to claimant dealers in Maharashtra. The other states are expected to follow this practical approach to help the business community.

Q.2 Please explain the nature of deemed sale by ‘transfer of right to use goods’ (Lease transaction).

Reply

The “transfer of right to use any goods for any purpose” is considered as deemed sale transaction. This is due to the enabling powers given by Constitution of India. In 1982 the Constitution of India was amended and clause (29A) was inserted in Article 366. By this clause (29A) six types of transactions, which cannot be considered to be sale in normal course are deemed to be sale for the purpose of levy of sale tax. The said six clauses are as under:

“366. Definitions.- In this Constitution, unless the context otherwise requires, the following expressions have the meanings herein respectively assigned to them, that is to say.......

(29-A) ‘tax on the sale or purchase of goods’ includes—

(a) a tax on the transfer, otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a Works Contract;

(c) a tax on the delivery of goods on hire-purchase or any system of payment by installments;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating),where such supply or service, is for cash, deferred payment or other valuable consideration, And such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

(underlining ours)

Thus transfer of right to use goods is also deemed to be a sale transaction. These transactions are also referred to as lease transactions.

The important issue in relation to lease transaction is to decide when the transaction can be said to be taxable lease transaction under the Sales Tax Laws. Neither the Constitution nor the Sales Tax Laws provide any definition of lease transaction. Therefore, the meaning is to be ascertained from the decided cases so far. Reference can be made to following important judgments.

20th Century Finance Corpn. Ltd. (119 STC 182) (SC)

In this judgment, amongst others, the Hon’ble Supreme Court has laid down the principles for determining the situs of sale of lease transaction. In nutshell, the Supreme Court has held that the situs of lease sale lies in the State where the agreement is executed, if goods are available for delivery. If the goods are not available for delivery or there is no written agreement, then the sale will be deemed to have taken place in the State where the delivery is given.

Thus for lease transactions the place of agreement is important, to find out the State where the liability arises.

Rashtriya Ispat Nigam Ltd. (126 STC 114) (SC)

In this case, amongst others, Supreme Court held that, to be a lease transaction, there should be delivery of possession to the lessee. Unless effective control given to party no Lease transaction takes place.

General Cranes (A 54 of 95 dt. 21-4-2005) (MSTT)

Crane operated by the dealer himself. Tribunal held that it is not a taxable lease transaction, as effective control with the owner.

Bharat Sanchar Nigam Ltd. (145 STC 91) (SC)

This is the latest case in the series. The issue in this case was about levy of lease tax on services provided by Telephone Companies. Supreme Court held that no such tax is applicable as the transaction pertains to service. While so holding one of the learned judges on the Bench observed as under in para 98 about taxable lease transaction.

“98. To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:

a. There must be goods available for delivery;

b. There must be a consensus ad idem as to the identity of the goods;

c. The transferee should have a legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefor should be available to the transferee;

d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statute – viz. a “transfer of the right to use” and not merely a licence to use the goods;

e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”

Krushna Chandra Behera & Another vs. State of Orissa (83 STC 225) (Orissa)

The facts in this case are that the vehicles were at the disposal of the hirer though they were run by the vehicle provider. Orissa High Court held that the effective control is of hirer since the vehicles were running as per his instructions. Therefore the transaction was held as liable to lease tax.

It can be seen that if there is delivery of possession i.e. if the hiree is put in effective control of the goods leased, then it will amount to taxable lease. On the other hand, if hiring is without giving effective control it will amount to rendering services or licensing the use, not amounting to taxable lease under Sales Tax Law.

The attention can be had to judgment in case of Bharat Sanchar Nigam Ltd. (145 STC 91), referred to above, where the Hon’ble Supreme Court has discussed about attributes of taxable lease. These observations also show when the transaction can be taxable as lease transaction and when not.