Supreme Court of India

FERRO ALLOYS CORPORATION LTD. ETC.versusUNION OF INDIA AND ORS.

Citation: 1998 INSC 480
Decided: 14 December 1998
Disposal: Appeal(s) allowed
Bench: S P BHARUCHA

Holding

The sales of charge chrome to Richco were sales in the course of export and therefore exempt from levy of sales tax.

Summary

Ferro Alloys Corporation Ltd, a 100% export‑oriented unit manufacturing charge chrome, entered an off‑take agreement with Richco (Switzerland) and subsequently executed specific Charge Chrome Agreements for each shipment. The State of Orissa treated the sales for assessment years 1990‑91 and 1991‑92 as intra‑state sales liable to sales tax, contrary to its earlier position that they were export sales exempt from tax. The appellants contended that the Charge Chrome Agreements were contracts of sale to Richco abroad, thereby constituting sales in the course of export under Section 5 of the Central Sales Tax Act, 1956. The High Court dismissed the writ petitions, but the Supreme Court held that the off‑take agreement was merely an agreement to sell and the actual sales were effected by the Charge Chrome Agreements, which occasioned the export. Consequently, the sales were in the course of export and exempt from state sales tax.

Issues considered

Whether the sales of charge chrome to Richco under the Charge Chrome Agreements constitute a sale in the course of export within the meaning of Section 5 of the Central Sales Tax Act, 1956.
Whether the off‑take agreement is a sale or merely an agreement to sell, and its impact on tax liability.

Legislation cited

Central Sales Tax Act, 1956s. 5
Sale of Goods Act, 1930s. 4, s. 9

Subjects

exportsales taxCentral Sales Tax Actoff‑take agreementcharge chrome100% export oriented unitintra‑state saleexemptionsale in the course of exportSale of Goods Act

Judgment

FERRO ALLOYS CORPORATION LTD. ETC. A
v.
UNION OF INDIA AND ORS.

DECEMBER 14, 1998

[S.P. BHARUCHA ANDS. RAJENDRA BABU, JJ.] B

Central Sales Tax Act 1956-S.5-Sales in the course of E.xport-
Appellant entering into 'Off-take agreements to sell charge chrome prior to
entering into charge chrome agreements' of sale to buyer abroad-Respondent
authorities viewing transactions as intra-state sales under the off-take C
agreements and subject to levy of sales tax under the Orissa Sales Tax Act-
High Court dismissing writ petitions filed by appellants-Held, the sales of
charges chrome to the seller abroad were sales in the course of export
occasioned by the charge chrome agreement; the sales were exempt from levy
of sales tax. D
The appellant was an 100% export oriented unit, manufacturing charge
chrome. The appellant entered into an Off-take Agreement with R, a
corporation having its registered office at Zug, Switzerland. The Off-take
agreement, inter alia, recited the desire of the appellant to appoint Ras its
exclusive purchaser worldwide for the re-sale of charge chrome produced by E
the appellant at its new plant in Orissa.

Pursuant to the Off-take Agreement, Charge Chrome Agreements
were entered into from time to time and the latter stated that the appellant,
the "sellers", had agreed to sell charge chrome to R, the "buyers", on the
terms and conditions stated therein. The quantity specifications, price and F
destination were stated. Under the standard terms and conditions annexed to
the agreement, R was required to arrange for the issuance of a certificate
pertaining to the discharge of the Charge Chrome at the discharging port.
The mode of payment was also described.

Until the assessment year 1990-91, the respondents accepted the G
position that the sales made by the appellant were sales in the course of
export and, therefore, exempt from the levy of sales tax. For the assessment
years 1990-91 and 1991-92 the Respondents found that these sales were
intra-state sales subject to the levy of tax under the Orissa Sales Tax Act.
The Writ Petitions filed by the appellant thereagainst were dismissed. H
541
542 SUPREME COURT REPORTS [1998] SUPP. 3 S.C.R.

A The appellant contended that the sales effected by the appellant to R
were sales in the course of export to R and that the charge Chrome
Agreements, left no doubt in this behalf. The respondents contended that the
sale to R was under the Off-take Agreement and that the Charge Chrome
Agreements were only delivery orders thereunder. The export had been
occasioned by reason of the agreements that were entered into between R and
B the ultimate buyers, which agreements, clearly, preceded the Charge Chrome
Agreements.

Allowing the appeal, this Court

HELD: 1.1. The High Court and the authorities below were in error
C in concluding that the sales made by the appellant were not sales in the
course of export and, therefore, not exempted from the levy of sales tax.
(549-H; 550-A)

1.2. The Off-take Agreement was no more than an agreement to sell.
It was executed when the appellants were still in the course of constructing
D the charge chrome plant and did not relate to a specified quantity of charge
chrome nor was the price agreed to thereunder. The agreement did not even
state with any precision how the price of the charge chrome was to be
determined. [548-F-H]

1.3. The provisions in the charge chrome Agreements indicated not
E only that they were contracts of sale of the charge chrome but also that the
sale thereunder was a sale to R abroad and, therefore, the export of the
charge chrome was occasioned by the Charge Chrome Agreements.
[549-F]

1.4. R was not an intermediary in the sense that it was not the contract
F of sale of the charge chrome by R to the ultimate buyer which occasioned
the export. The charge chrome having been exported by the appellant to R
abroad, R resold it to the ultimate buyers. [549-G)
Md. Serajuddin v. The State of Orissa, [1975) 2 SCC 47, referred to

G CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 7816-17 of
1995 Etc.

From the Judgment and Order dated 19.5. 1995 of the Orissa High Court
in O.J.C. No. 4756-57of1993.

Harish N. Salve, Shanti Bhushan, T.L.V. Iyer, U.N. Bachawat, Jaideep
H Gupta, Prag Tripathi, P.Kapur, Praveen kumar, Ms. Kirti Mishra, Raj iv Nanda,
FERRO ALLOYS CORPN. LTD. v. U.0.1. [BHARUCHA, J.) 543
T.C.Sharma, B.K. Prasad, Y.P. Mahajan, Ms. Binu Tamta and D.S. Mehra for A
the appearing parties.

The Judgment of the Court was delivered by

• BHARUCHA. J. These appeals by special leave questions the
• correctness of the judgment and order of a Division Bench of the High Court B
of Orissa dismissing writ petitions filed by the appellants. Until the Assessment
year 1990-91, the respondents accepted the position that the sales made by
the appellants were sales in the course of export and, therefore, exempt from
the levy of sales tax. For the Assessment Years 1990-91 and 1991-92 the
respondents found that these sales were intra-State sales subject to the levy C
of tax under the Orissa Sales Tax Act. The writ petitions filed by the appellants
thereagainst were dismissed.

The appellants are an export oriented unit set up pursuant to the
resolution of the Government oflndia dated 31st Dec. 1980. That resolution
decided to give I 00% export oriented units certain concessions to enable D
them to meet the rigours of foreign demands in terms of pricing, quality,
precision, etc. According to the resolution, "(a) 100% export oriented unit
would imply an industrial unit offering for exports its entire production,
excluding permitted levels of rejects". A unit approved by the Board set up
under the resolution was required to undertake to manufacture in bond and
export its entire production for a period of I 0 years and the finished products E
were exempt from excise and other central levies. Only rejects, upto 5% or
such other percentage as the Board might fix, were allowed to be sold in the
domestic tariff area. The application of the appellants that its charge chrome
project be approved as a I 00% export oriented unit was granted by the
Government of India on 24th Oct. 1991.
F
On 15th Sept., 1981 the appellants entered into an agreement, called the
Off-take Agreement, with Mis. rv;arc Rich & Co., AG, (now called "Richco"),
a corporation having its registered office at Zug, Switzerland. The agreement
recited that the appellants intended to construct and were in the course of
constructing a new charge chrome plant in the State of Orissa, utilising G
chrome ore from mines in that State, as a I 00% export oriented unit offering
for export its entire production. Richco was an international marketing
organisation that was specialised and experienced in the distribution and
handling o[ ferro alloys, ferrous and non-ferrous ores and concentrate and
steel related commodities world wide with associated companies and/or offices
in over 30 countries, including associated representative offices in New Delhi, H
544 SUPREME COURT REPORTS [1998) SUPP. 3 S.C.R.

A Calcutta and Bombay, with personnel experienced in the marketing of charge
chrome. Richco had been a major exporter of Indian ferro alloys and maintained
well-established connections with major consumers of charge chrome
throughout the world and was well placed and highly experienced in the
marketing and transportation of charge chrome and it sought additional material
"for the purpose of re-sale to its major consumers". The recitals added that >
B the appellant "desires to appoint Richco as its exclusive purchaser worldwide
for the re-sale of charge chrome produced by the new Orissa plant and Richco
desires to accept such appointment". The Off-take Agreement defined for its
purposes, the term "the Agreed Rate" to mean "5% on F.O.B.S.T. Indian Port
price" realised by the appellants. (S.T.stands for "stored and trimmed"). Clause
C 2 of the agreement stated that the appellants appointed "Richco as the sole
and exclusive purchaser worldwide for all the charge chrome produced at the
plant during the run-up and throughout the contract period and Richco shall
be entitled to re-sell the same for its own account". The appellants undertook
with Richco that in each year the aggregate quantity of charge chrome
available for sale to Richco would not be less than the export minimum.
D Richco in turned undertook "with Facor (the appellants) to purchase at regular
intervals in each year the charge chrome ........ equal to the export minimum
at the prices agreed from time to time (as market conditions may require) by
the parties hereto .......... ".It was acknowledged that the market for which the
charge chrome was earmarked was primarily Japan and any balance would be
E earmarked for consumers in the rest of the world. For long term contracts i,vith
major consumers the appellants would have the right to participate in
negotiations so as to enable them to plan their production programme and
delivery schedule. Clause 3 stated, "The price for charge chrome to be sold
and purchased hereunder shall be that agreed between Facor and Richco from
time to time based on prevailing international prices as established by the
F major producer exporters of charge chrome (taking into account the quality
of the charge chrome) for those areas to which the charge chrome shall be
destined ....... ". It also stated, "the prices to be established shall be on a
F.O.B.S.T. Indian Port basis C+F or CIF Discharge Port basis as required by
Richco from time to time and shall be expressed in dollars or ifthe parties so
G agree in any other currency". The appellants were required to pay to Rich co )'
a discount at the agreed rate on all charge chrome purchased by Richco. It
was to be allowed by the appellants on each shipment and be paid in dollars
to the account of Richco "within thirty days from receipt of the final sale
proceeds for the charge chrome in question, provided that if the final sale
proceeds for any charge chrome shall be withheld for quality and/or quantity
H reasons then Facor shall pay the discount on the provisional payment within
FERRO ALLOYS CORPN. LTD. v. U.0.1. [BHARUCHA, J.] 545
ninety days of the date of arrival of the vessel at Richco' s nominated, port A
and the balance of such discount shall be paid when the final payment is
settled". Clause 4 of the agreement, dealing with payments, stated, "Payment
of the price by Rich co in respect of each consignment shall be made by letters
of credit for the full value providing for 90% provisional payment against
shipping documents and the balance upon receipt of final certificates of assay B
and weight at load port/discharge port''. The appellants warranted that they
would "be the sole and absolute owner (free from any adverse interests) of
all charge chrome exported to Richco hereunder''. Title and risk to each
consignment of the charge chrome would pass to Richco as agreed from time
to time. Clause 5 required the charge chrome to be sold thereunder to be
shipped in bulk. Clause 13 recorded, "This Agreement ......... have been entered C
into pursuant to the approval granted by the Govt. of India....... ".

Pursuant to the Off-take Agreement Charge Chrome Agreements were
entered into from time to time. A sample of such agreements placed on the
record states that, in terms of the Off-take Agreement, the appellants, described
as the "sellers", had agreed to sell charge chrome to Richco, described as the D
"buyers", on the terms and conditions therein stated. The quantity stated,
specifications and price were stated, the last being so many U.S. cents per
pound "of chrome content FOBST Paradeep, India in bulk payable 30 days
from Bill of Lading date". The shipping date was stated and the destination,
being Japan for supply to Messrs. Nippon Steel Corporation, Tokyo. The E
agreement signed on behalf of the buyers and sellers. Standard terms and
conditions were annexed to the agreement. Thereunder Richco was required
to arrange for the issuance of a certificate pertaining to the discharge of the
charge chrome at the discharging port. The standard terms stated that the
"final settlement will be based on weight determined at port of discharge or
ultimate buyers' works and analysis mentioned in the certificate". The payment F
would be made by confirmed irrevocable letter of credit in favour of appellants
as therein set out. Clause 4 of the standard terms stated :

"a. Should any consignments shipped under this contract fall below
the contractual specifications, the buyers reserve the right to reject G
and revert the material to the sellers or to accept such consignment
or consignments at reduced price as may be mutually agreed to
between the buyers and sellers.

b. The buyers shall pay all customs duties as well as any other duties
and taxes payable in Japan at the time of or by reason of the H
546 SUPREME COURT REPORTS [1998] SUPP. 3 S.C.R.

A importation".

Risk in respect of goods was stated to pass to Richco "from the time when
the goods shall have effectively passed the ship's rail at the port of shipment".
Title in respect of the charge chrome would pass to Richco from the appellants
"when the sellers have received the proceeds of the goods from the negotiating
B bank, without recourse to the sellers".

Documents are placed on record which show how the Off-take and
Charge Chrome Agreements were worked. All that need be referred to is the
shipping bill, which shows that it was the appellants who were the exporters
because no export licence was required under "Clause I 5(J) of Export Trade
C Control 1988-91 ".

Learned counsel for the appellants submitted that the sales effected by
the appellants to Richco were sales in the course of export to Richco. The
agreements, particularly, the Charge Chrome Agreements, left no doubt in this
D behalf. Learned counsel for the respondents submitted that the sale to Richco
was under the Off-take agreement and that the Charge Chrome Agreements
were only delivery orders thereunder. The export had been occasioned, in his
submission, by reason of the agreements that were entered into between
Richco and the ultimate buyers, which agreements, clearly, preceded the
Charge Chrome Agreements.
E
Section 5 of the Central Sales Tax Act, 1956, so far as it is relevant, reads
thus :

"5. When is a sale or purchase of goods said to take place in the
course of import or export. ( l) A sale or purchase of goods shall be
F deemed to take place in the course of the export of the goods out of
the territory ~f 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.

xxx xxx xxx
G
3. Notwithstanding anything contained in sub-section (I), 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
H with the agreement or order for or in relation to such export".
FERRO ALLOYS CORPN. LTD. v. U.0.1. [BHARUCHA, J.] 547
To analyse these provisions to the extent relevant here, the sale of A
goods is deemed to take place in the course of their export out of the territory
of India only if (1) the sale occasions the export, (2) the sale is effected by
a transfer of documents of title to the goods after the goods have crossed
the customs frontiers of India; and (3) the last sale of goods preceding the
sale occasioning the export of the goods is deemed to be in the course of
such export if it has taken place after and for the purpose of complying with B
the agreement or order relating to such export.

The appellants have based their case on all the aforesaid three limbs of
Section 5. We shall deal with the argument on the first of the aforesaid three
limbs first. C
Before we do so, we should make reference to the judgment of this
Court upon which both sides have relied, namely, the Constitution Bench
judgment in Md. Serajuddin and Ors. v. The State of Orissa, [1975] 2 S.C.C.
47. This was the judgment that occasioned the amendment of Section 5 so
as to introduce sub-section (3) therein. Analysing earlier decisions of this D
Court, various principles were laid down in Serajuddin's case to ascertain
which was the sale which occasioned the import. It was said that the sale
which was to be regarded as exempt was the sale which caused the export
to take place or was the immediate cause of the export. To establish an export,
a person exporting and a person importing were necessary elements and the E
course of export was between them. The introduction of a third party dealing
independently with the seller on the one hand and with the importer on the
other broke the link between the two for then there were two sales, one to
the intermediary and the other to the importer. The first sale was not in the
course of export because the export commenced with the intermediary. The
expression "sale" in Section 5 of the Central sales Tax Act had the same F
meaning as in the sale of Goods Act. The expression "in the course" implied
not only a period of time during which the movement was in progress but
postulated a connected relation. Sale in the course of export out of the
territory of lndia meant a sale taking place not only during the activities
directed to the end of exportation of the goods out of the country but also G
as part of or connected with such activities. Directions given to place the
goods on board a ship pursuant to the contract of sale were not in the course
of export because, in the given case, the export sale was an independent one
with a foreign buyer. In such cases, the taking of goods from the appellant's
place to the ship was completely separate from the transit pursuant to the
export sale. H
548 SUPREME COURT REPORTS [1998] SUPP. 3 S.C.R.

A In our view, the first question to answer is : which is the contract of
sale of the charge chrome to Richco? Is it, as is contended by learned counsel
for the respondents the Off-take Agreement? Or is it, as is contended by
learned counsel for the appellants that the Off-take Agreement is only the
agreement of sale to Richco an~ the contracts of sale are the Charge Chrome
B Agreements?

Section 4 of the Sale of Goods Act, 1930 states :

"4. Sale and agreement to sell (I) A contract of sale of goods is a
contract whereby the seller transfers or agrees to transfer the property
in goods to the buyer for a price. There may be a contract of a sale
c between one part-owner and another. •
*** *** *** ***
3. Where under a contract of sale the property in the goods is
transferred from the seller to the buyer, the contract is called a sale
but where the transfer of the property in the goods is to take place
D at a future time or subject to some condition thereafter to be fulfilled,
the contract is called an agreement to sell."
While on the Sale of Goods Act reference may also be made to Section 9,
which states that the price in a contract of sale may be fixed by the contract
or may be left to be fixed in the manner thereby agreed or it may be determined
E by the course of dealing between the parties. Where the price is not determined
as aforestated, the buyer must pay the seller a reasonable price.

The Off-take Agreement was executed when the appellants were still in
the course of constructing the charge chrome plant, that is to say, well before
the production of any of the charge chrome that was to be sold thereunder.
F The agreement was to operate in respect of the charge chrome that was
produced at the plant during the run-up and throughout the contract period.
Richco undertook to purchase the same at regular intervals in each year, equal
to the export minimum. The price was to be that which was agreed between
the appellants and Richco from time to time "based on prevailing international
G prices as established by the major exporter producers of charge chrome
(taking into account the quality of charge chrome) for those areas to which
the charge chrome shall be destined." The agreement, therefore, did not relate
to a specified quantity of charge chrome nor was the price agreed to thereunder.
The agreement did not even state with any precision how the price of the
charge chrome was to be determined. The agreement, therefore, was no more
H than an agreement to sell.
FERRO ALLOYS CORPN. LTD. v. U.O.l. [BHARUCHA, J.] 549
Even so, there are clear indications in the Off-take Agreement that the A
sales that were to be effected pursuant thereto were sales to Richco abroad.
Richco was to be the exclusive purchaser of the charge chrome "world-wide".
The entire quantity of charge chrome that the appellants were required to

- export by reason of their obligations as an 100% export oriented unit was
covered by the agreement. The price thereof was to be paid in dollar's. The
agreement spoke of "charge chrome exported to Richco".
B

The Charge Chrome Agreements were entered into between the appellants
as "sellers" and Richco as "buyers" and were signed on their behalf. The
quantity of charge chrome sold thereunder, its specifications and the price
therefor was specified. The price was counted in US cents..The destination C
mentioned therein was a foreign port. Under the Standard Terms and Conditions
annexed to the Charge Chrome Agreements Richco was required to arrange
for a certificate pertaining to the discharge of the charge chrome at the
discharging port. The final settlement of the price was to .be based on the
weight of the charge chrome determined either at the port of discharge or at
the works of the ultimate buyer and the analysis mentioned in the certificate. D
Richco was entitled to reject charge chrome which fell below the contractual
specifications. Whether the charge chrome fell below the contractual
specifications could only be determined by the assay carried out at the port
of discharge. The title to the charge chrome passed to Richco from the
appellants when the appellants received full consideration for the charge E
chrome "from the negotiating bank, without recourse to the sellers", that is
to say, only when the charge chrome was found to have met the contractual
specifications, which was abroad. These provisions in the Charge Chrome
Agreements indicate not only that they were the contracts of sale of the
charge chrome but also that the sale of charge chrome thereunder was a sale
to Richco abroad and, therefore, that the export of the charge chrome was F
occasioned by the Charge Chrome Agreements.

Richco was not an intermediary in the sense that it was not the contract
of sale of the charge chrome by Rich co to the ultimate buyer which occasioned
the export. The charge chrome having been exported by the appellants to G
Richco abroad, Richco resold it to the ultimate buyers. Decisions relating to
situations where there were intermediaries who purchased goods from Indian
sellers in India and then exported them to foreign buyers are, therefore, not
relevant to the present case.

We, therefore, hold that the High Court and the authorities below were H
550 SUPREME COURT REPORTS [1998] SUPP. 3 S.C.R.

A in error in concluding that the sales made by the appellants were not sales
in the course of export and, therefore, not exempt from the levy of sales tax.

We may now having decided the issue on merits, take notice of an

B
affidavit filed in this Court on behalf of the Union of India. The affidavit
supports the stand of the appellants. It annexes letters written by the Union
of India on 6th November, 1995 and 29th April, 1998 to the respondents. The
-
letters state that since the appellants charge chrome plant was Customs
bonded it was not possible for the appellants, to make any domestic sale
thereof without the approval of the competent authority and the Customs and
Central Excise authorities had certified that the appellants had not sold any
C quantity of charge chrome in India. In view thereof, and keeping in view the
fact that all export sales were exempt from the payment of State and Central
Sale Tax, the respondents were requested to ensure that the production and
export programme of the appellants' plant was not adversely affected. The
respondents did not reply to the said two letters, nor to the affidavit on behalf
of the Union of India.
D
The appeals are allowed. The judgment and order under appeal is set
aside. The writ petitions filed by the appellants are allowed and the assessment
orders impugned thereby quashed.

The respondents shall pay to the appellants the costs of the appeals.
E
S.M. Appeals allowed.

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