Supreme Court of India
K. GOPINATHAN NAIR ETC.versusSTATE OF KERALA
- Citation
- 1997 INSC 307
- Decided
- 21 March 1997
- Bench
- A M AHMADI
Holding
A sale by a canalising agency to local users is not in the course of import unless the sale is inseverably linked to the import and there is privity of contract between the foreign exporter and the local buyer.
Summary
The appellants, processors of cashew nuts in Kerala and Karnataka, purchased raw cashew nuts imported by the Cashew Corporation of India (CCI), a canalising agency, and argued that these purchases were "in the course of import" and thus exempt from state sales tax under Section 5(2) of the Central Sales Tax Act, 1956. The State tax authorities assessed sales tax, and the Kerala and Karnataka High Courts upheld the tax, rejecting the exemption claim. The Supreme Court examined whether the sale by CCI to the local users was integrally linked to the import, applying the test that a sale must occasion the import and be inseverably connected to it. Relying on a series of Constitution Bench decisions, the Court held that the two transactions – CCI’s purchase from foreign exporters and its subsequent sale to local users – were independent, with no privity of contract between the foreign seller and the local buyers, and therefore not in the course of import. Consequently, the sales were taxable under the respective State sales tax Acts. The Court also held that the amendment defining "crossing the customs frontiers" was prospective and could not be applied retrospectively. The appeals by the appellants were dismissed.
Issues considered
- The applicability of Section 5(2) of the Central Sales Tax Act, 1956 to sales made by a canalising agency to local users.
- Whether the sale by the Cashew Corporation of India to the processors constitutes a transaction "in the course of import" under the Act.
- The effect of the amendment defining "crossing the customs frontiers of India" on transactions occurring before its enactment.
Legislation cited
- Central Sales Tax Act, 1956s. 2(ab), s. 3, s. 5(1), s. 5(2)
- Constitution of Indias. Article 286
- Karnataka Sales Tax Act, 1957
- Kerala General Sales Tax Act, 1963
Subjects
sales taxcentral sales tax actimport exemptioncanalising agencyArticle 286sale in the course of importprivity of contractretrospective legislation
Judgment
A K. GOPINATHAN NAIR ETC.
j
v.
STATE OF KERALA
MARCH 21, 1997
B [A.M. AHMADI, CJ., S.B. MAJMUDAR AND
SUJATA V. MANOHAR, JJ.]
Sales tax---Central Sales Tax Act 1956, s.5 (2)-Kerala General Sales
Tax Act, 1963-Karnataka Sales Tax Act, 1957-Wlzether import of raw
C cashew nuts by canalising agency and its purchases by actual users in India
could be said to be a transactio11 i11 the course of impo1t and, therefore, eligible
for exemption-Held, per maj01ity, on facts, no; Held, per Sujata V. Manohar,
J., dissenting, yes-Constitution of I11dia, A1ticle 286 (J)(b ).
Central Sales Tax Act 1956, s.2 (ab )-'Crossing the customs frontiers
D of India'-Held, per cwiam, being a substa11tive provision will have no
retrospective effect and will not cover transactions in questio11-I11terpretation
of Statues.
The appellants, engaged in the purchase of raw cashewnuts and
. E export of cashew kernels after processing, placed orders for import of raw
cashewnuts from African countries through the Cashew Corporation of
India (CCI) which was a canalising agency. Purs~ant to the said orders, .
the CCI had imported raw cashewnuts and had ·made them available to
the assessees.
F · The contention of the appellants that these transactions, during
assessment years 1970-71 to 1973·74, were purchases by them in the course
of import and therefore outside the sweep of the Central Sales Act, 1956
by virtue of s. 5 (2) thereof was rejected by the Kerala Sales Tax Appellate
Tribunal. The Tax Revision cases were also dismissed by a Division Bench
G of the Kerala High Courts.
CCl's contention that the sales made by it of imported raw
cashewnuts to local users in Karnataka were in the course of import and
therefore outside the purview of the Karnataka Sales Tax Act, 1957 was
rejected by the Karnataka Appellate Tribunal as well as the High Court.
H CCI then appealed to this Court.
226
'
~-
!
\ K.GOPINATIIANNAIR v. STATE '121
._.
Dismissing the appeals, th.is Court A
HELD: Per Majority (Majmudar, J. for himself and Ahmadi, CJ!.):
1.1. Sales by the CCI to the local users were not in course of import
of raw cashew from African countries and were therefore outside the sweep
of the exemption provisi_ons engrafted by s. 5(2) of the Central Sales Tax B
Act. [251-E]
._ 1.2. There were two transactions. One was the import of raw cashew
by CCI. The second transaction was the sale by CCI to local users. That
sale would remain an independent transaction between the importer CCI
and the local purchaser and there was no privily of contract between the C
local users on the one hand and the foreign exporter on the other. These
two transactions could not be said to be so integrally interconnected as to
represent .,,one composite transaction in· the course of import of ~w
cashewnuts. [251-B·D]
D
.. Mis Binani Bros. (P) Ltd. v. Unio11 of India, [1974] 1 SCC 459 and
.Md Serajuddin v. 17ze State of Orissa, [1975] 2 SCC 47, followed.
Be11 Grom Nilgiri Plantations Company, Coonoor v. Sales Tax Officer,
Special Circle, Emakulam, [1964] 7 SCR 706; KG. Khosla & Co. v. Deputy
Commissio11er of Commercial Taxes, [1966] 3 _SCR 352; Coffee Board, E
Bangalore v.Joint Commercial TarO'fficer, .Madras, [1969] 3 SCC 349; 17ze
State of Bihar v. Tata Engineering and Locomotive Co. Ltd., [1970] 3 SCC
697; T71e Deputy Commissioner of Agricultural Income Tax and Sales Tax,
Central Zone, Emakulam v. Mis Kotak & Co.,. [1974] 3 SCC 148; Deputy
Commissioner ofAgncultural Income Income Tax and Sales Tax,· Emakulam F
. v. Indian Explosives Ltd., .[1985] 4 SCC 119 and CollSolidated Coffee Ltd. .
v. Coffee Board, Bangalore, [1980] 3 SCR 625, referred to.
Per Sujata V. Manohar, J; (dissenting) :
1.3. The Sales in question were in the course of import and could not G
be taxed under the Kerala General Sales Tax Act or the Kamataka Sales
Tax Act. [268-C, E]
1.4. There was an inseverable link as the import made by CCI was a
·necessary consequence of the specific- requirements submitted by the
processors and was a result of the obligations it had undertaken under H
···':~
228 SUPREME COURT REPORTS [1997] 3 S.C.R.
A such arrangement with the local processors which had crystallised later in
the form of the contract of sale. [267-E]
KG. Khosla & Co. v. Deputy Commissioner of Commercial Taxes,
[1966] 3 SCR 352; The Deputy Commissioner of A!Jlicultural Income Tax
and Sales Tax, Central Zone, Emakulam v. Mis Kotak & Co., [1974] 3 SCC
B 148 and Deputy Commissioner of A!Jlirnltural Income Tax and Sales Tax,
Emakulam v. Indian Explosives Ltd., [1985] 4 SCC 119, followed.
Coffee Board, Bangalore v. Joint Commercial Tax Offiw; Madras, \
[1969] 3 SCC 349 and Md. Serajuddin v. The State of Orissa, [1975] 2 SCC
C 47, distinguished.
Mis Binani Bros. (P) Ltd. v. Union of India, [1974] 1 SCC 459; Ben
Grom NilgiTi Plantations Company, Coonoor v. Sales Tax Office1; Special
Circle, Emakulam, [1964] 7 SCR 706; The State of Bihar v. Tata E1iginee1ing
and Locomotive Co. Ltd., [1970] 3 SCC 697 and Consolidated Coffee Ltd.
D v. Coffee Board, Bangalore, [1980] 3 SCR 625, referred to.
Per Curiam:
2. The enactment of a new definition regarding crossing the customs
frontiers of India as laid down by S.2 (ab) could not be legitimately pressed
E in services for deciding the question of sales tax liability of appellants
during the assessment years when such definition was not on the statute
book. This amendment which sought to confer a substantial benefit to the
local users was not procedural amendment which could have any
retrospective effect. [252-E]
F R. Rajagopal Reddy v. Padmini Chandrasekharan, [1993] 2 SCC 630
and Gmikapati Veerava v. N. Subbaiah Choudhary, AIR (1957) SC 540,
referred to.
CIVIL APPEALLATE JURISDICTION: Civil Appeal Nos. 4955-
G 77 of 1991 Etc.
From the Judgment and Order dated 1.11.91 of the Kerala High
Court in T:R.C. Nos. 28-29, 32-35, 40-41, 44, 65, 69-71, 74-83 of 1988.
P.S. Potti, R.F. Nariman, N. Santosh Hegde, T.L. Viswantha Iyer, S.
H Prasad, S. Balakrishnan, M.K.D. Nambordiri, E.M.S. Alnam, FazlinAnam,
K.GOPINATIIANNAIR v. STATE[S.B.MAJMUDAR,J.] 229
G.V. Chandra Sehkar, A.D.N. Rao, A. Subba Rao, M.T. George, Kh. A
Nobin Singh and M. Veerappa for the appearing Parties.
The Judgments of the Court were delivered by
... S.B. MA.JUMDAR, J. According to our esteemed colleague Sujata
V. Manohar, J., these appeals are required to be allowed. With profound B
respect, it is not possible for us to agree with her findings and the
conclusions in so far as it is held by her that Section 5 sub-section (2) of
the Central Sales Tax Act, 1956 will cover the transactions in question. We,
however, agree with her so far as it is held that Section 2 (ab) of the Central
Sales Tax Act has no retrospective effect and that there is no evidence on C
record to attract the second part of Section 5(2) which deals with sale on
high seas. We, therefore, record our separate reasons for confirming the
decisions impugned in these appeals.
In ClVil Appeal Nos. 4955-77 of 1991 a common question falls for
consideration. 1t-is- to the following effect: D
"Whether the purchases of African raw cashewnuts made by the
assessees from the Cashew Corporation of India (for short 'CCI')
are in the course of import and, therefore immune from liability
to tax under Kerala General Sales Tax Act, 1963 (hereinafter E
referred to as 'the Act')."
Appellants in these cases are engaged in the purchase of raw cashewnuts
and export of cashew kernels after processing. The assessments relate to
years 1970-71 to 1973-74. It is the case of the appellants that they had
placed orders for import of raw cashewnuts from African countries through F
the CCI which was a canalising agency and pursuant to the said orders the
CCI had imported these raw cashewnuts and had made them available to
the assessees. Consequently these transactions would be styled as pur-
chases by the assessees in the course of import and were outside the sweep
of the Act. This contention of the assessees was rejected by the Kerala G
Sales Tax Appellate Tribunal, Addi. Bench, Ernakulam. Their Tax
Revision cases were also dismissed by a Division Bench of the Kerala High
Court and that is how the appellants have preferred these appeals by
obtaining special leave to appeal from this Court.
In Civil Appeal Nos. 3647-52 (NT) of 1986 CCI is the assessee. The H
230 SUPREME COURT REPORTS [1997) 3 S.C.R.
A sale of imported raw cashewnuts from African countries to the local ·
I
/ _.
purchasers by the CCI have been brought to tax under the provisions of
the Karnataka Sales Tax Act, 1957. The appellant is a private company
registered under the Companies Act and is said to be a subsidiary of the
!
State Trading Corporation wholly owned by the Government of India. The ...
B appellant company, the registered office of which is at Cochin in Kerala,
imports raw cashew from East African countries under licenses issued by
the Controller of Imports and Exports, and allots such cashew to the actual
users for being processed and for export of a certain percentage of the raw
cashew allotted. In this process the appellant-company sells cashew to the
actual users. The appellart had not got itself registered as a dealer in the
C Karnataka State nor had it filed returns for the years 1970-71 to 1975-76.
The contention of the appellant-company before the Taxing Authority was
to the effect that the transaction of sale by the company to the actual users
was in the course of import and, therefore, the State Sales Tax Act could
not encompass such a transaction. The Taxing Authority in Karnataka on ...
D the other hand sought to levy sales tax on the appellant on the basis that
it was a non-resident dealer. The contention of the CCI was negruived by
Karnataka Appellate Tribunal, Bangalore. The appellant's ReVi.sion before
the High Court came to be dismissed by a Division Bench of the High
Court by its order dated 3rd March 1986 aad that is how the CCI is before ·
us on special leave.
E
It becomes, therefore, clear that a common question arises for our
determination as to whether the import of raw cashewnuts by the CCI from
African exporters and its purchase by actual users in India could be said
to be a transaction in the course of import and, therefore, eligible for
p exemption under Section 5 (2) of the Central Sales Tax Act, 1956. Both
the Kerala High Court as well as the Karnataka High Court have taken the
view that these transactions are not saved by Section 5 (2) of the Central
Sales Tax Act, 1956 and they are eligible to local sales tax. It is this view
that has been seriously brought in challenge by Shri Potti, learned senior
counsel appearing for the appellants in Civil Appeal Nos. 4955-77 of 1991
G and Shri Hegde, learned senior counsel appearing for the appellant CCI
in Civil Appeal Nos. 3647-52 of 1986. The learned counsel appeariµg for
the respondent-State of Kerala and State of Karnataka on the other hand
have supported the decisions of these High Courts.
H In order to resolve this controversy it is necessary at the outset to
.. - '
K. GOPINATHAN NAIR v. STATE [S.B. MATMUDAR, J.] 231
look at the relevant constitutional and statutory provisions. Under Article A
286 of the Constitution of India restrictions have been placed on the power
of a State to tax sales. Articles 286 (1) and 286 (2) lay down as under:
"286. Restrictions as to imposition of tax on the sale or purchase
of goods.-(1) No law of a Stale shall impose, or authorise the
imposition of, a tax on the sale or purchase of goods where such B
sale or purchase takes place-
(a) outside the State; or
(b) in the course of the import of the goods into, or export of the C
goods out of, the territory of India.
(2) Parliament may by law formulate principles for determining
when a sale or purchase of goods takes place in any of the ways
-mentioned in clause (1)".
D
Parliament in exercise of its powers under Article 286 sub-Article (2)
enacted Central Sales Tax Act, 1956. As laid down by Section 3 thereof, a
sale or purchase of goods shall be deemed to take place in the course of
inter~State trade or commerce if the sale or purchase-( a) occasions the
movement of goods from one State to another: or (b) is effected by a
transfer of documents of title to the goods during their movement from one E
State to another. Under Section 5 (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 effected by a transfer of documents of title to the goods after the
goods have crossed the customs frontiers of India. Under sub-section (2), p
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. It, therefore, becomes a moot question as to whether the
sale of raw cashewnuts imported by CCI from African countries, to local G
users in State of Karnataka or Kerala, as the case may be, can he said to
be sales in the course of import of these raw cashewnuts into the territory
of India. For deciding this question the provision of sub-section (2) of
Section 5 will have to be kept in view. As per the said provision the sale
of imported raw cashewnuts shall be deemed to take place in course of H
232 SUPREME COURT REPORTS (1997) 3 S.C.R.
A import only if such sales by CCI to the local actual users or conversely the
purchases of such imported raw cashew by the local users from the CCI
have occasioned such import of raw cashew. The second part of sub-
section (2) of Section 5 is not attracted on the facts of the present cases
as factually it is not found in these cases that such sales were effected by
transfer of documents of title to goods, namely, the raw cashewnuts before
B they crossed the customs frontiers of India. The entire controversy, there"
fore, centers round the short question, namely, whether the sales of these
imported cashewnuts by CCI to local users were in the course of import
of these cashewnuts and whether such sales had occasioned the import.
C There are various decisions of the Constitution Benches of this Court
which have laid down clear parameters for answering this question. In the
case of Ben Gorm Nilgiri Plantations Company, Coonoor and Ors. v. Sales
Tax Officer, Special Circle, Emakulam and Ors. [1964) 7 SCR 706 a majority
of the Constitution Bench of this Court speaking through Shah, J., had an
D occasion to consider the question whether sale of tea by the assessee-ap-
pellants to local agents of foreign buyers would earn exemption under
Article 286 ( 1) (b) of the Constitution of India by being treated as sale in
the course of exports. It is trite to observe that the phraseology 'sale or
purchase in the course of export' as employed by Section 5 (1) of the
Central Sales Tax Act is in pari materia with the phraseology employed by
E Section 5 sub-section (2) dealing with 'sale or purchase in the course of
import'. In the aforesaid case the appellants were carrying on business of
growing and manufacturing tea in their estates. They sold tea to the local
agents of foreign buyers. The sales were effected by public auction at Fort
Cochin. These auctions were conducted by brokers of tea. The Sales Tax
F Officer assessed the appellants to pay sales tax on transactions of auction
held at Fort Cochin. It was contended by the appellant-assessees that
purchases by local agents of foreign buyers were for their principals abroad
and the goods were in fact exported out of India and, therefore, the sales
by appellants were in the course of export out of the territory of India and
were thus exempt from tax under Article 286 (1) (b) of the Constitution.
G The aforesaid contention of the appellants was negatived by all the
authorities under the Sales Tax Act. They thereafter also failed before the
High Court. The majority of the Constitution Bench also dismissed their
appeal. Shah, J ., speaking for the majority held that the transaction of sale
which is preliminary to export of the commodity sold may be regarded as
H a sale for export, but is not necessarily to be regarded as one in the course
K GOPINATHAN NAIR v. STATE [S.B. MAJMUDAR, J.] 233
of export, unless the sale occasions export. Etymologically the expression A
'in the course of export', contemplates an integral relation or bond between
the sale and the export. In general where a sale is effected by the seller,
and the seller is not connected with the export which actually takes place,
it is a sale for export. Where the export is the result of the sale, the export
being inextricably linked up with sale so that the bond cannot be dis- B
sociated without a breach of the obligations arising by statute or contract
of mutual understanding between the parties arising from the nature of the
transaction, the sale is in the course of export. It was further laid down as
under:
"A sale in the course of export predicates a connection between the C
sale and export, the two activities being so integrated that the connection
between the two cannot be voluntarily interrupted, without a breach of the
contract or the compulsion arising from the nature of the transaction. In
the present case there was between the sale and the export no such bond
as would justify the inference that the sale and the export formed parts of D
a single transaction or that the sale and export were integrally connected.
The appellants were not concerned with the actual exportation of the goods
and the sales were intended to be complete without the export, and as such
it cannot be said teat the said sales occasioned export. The sales were
therefore for export and not in the course of export. Therefore the sales
by the .appellant to the agents of foreign buyers do not come with the E
purview of Art. 286 (i) (b) of the Constitution".
As per the aforesaid decision of the Constitution Bench before a sale can
be said to have taken place in the course of export the export must have a
direct nexus with the sale and the activity of sale and export must be p
completely inter-linked. On the same reasoning as in the aforesaid case,
therefore, a sale in the course of import must necessarily require the
concerned sale to occasion the import and the sale and the import must
have an integrated and interwined connection. If that is not so it would not
be a sale in the course of import but i.t would be a sale by import or because
of import. In the case of K.G. Khosla & Co. v. Deputy Commissioner of G
Commercial Taxes, [1966) 3 SCR a letter Constitution Bench of this Court
had to deal with the question whether sales in that case were in the course
of import. Section 5 Sub-section 2 directly fell for consideration of the
Constitution Bench. In that case the appcllant-assessee had entered into a
contract with the Director General of Supplies, New Delhi for supply of H
234 SUPREME COURT REP.ORTS [1997) 3 S.C.R.
A axle bodies manufactured by its principals in Belgium. The goods were
inspected on behalf of the buyers in Belgium but under the contract they
were liable to rejection after further inspection in India. In pursuance of
the contract the appellant supplied axle bodies to the Southern Railway at
Perambur and Mysore. It was the contention of the appellant that the sales
effected by them in favour of Director General of Supplies. New Delhi '
B
were in the course of import. That contention was rejected by the Joint
Commercial Tax Officer, Madras who held that these were intra-State sales
because the seller was the consignee of the goods and the buyer had
reserved the right to reject the goods even after their arrival in India.
Accordingly assessment was made under Madras General Sales Tax Act
c in respect of supplies at Perambur and another assessment was made
under Central Sales Tax Act in respect of supplies at Mysore. The appel-
lant lose before the Appellate Assistant Commissioner but partially suc-
ceeded before the Tribunal which held that part of the goods were sold in
the course of import. Both the parties filed two Revision Applications in
D the High Court. The High Court allowed the Revision Application of the
State and rejected that of the assessee. The appellant thereafter ap-
proached this Court by special leave. Allowing the appeal of the assessee
it was held by the Constitution Bench of this Court speaking through Sikri,
J., that Section 5 sub-section (2) of the Central Sales Tax Act does not lay
down any condition that before a sale could be said to have occasioned
E import it is necessary that the sale should have preceded the import. That
it was quite clear on the facts that it was incidental to the contract that the
axle-box bodies would be manufactured in Belgium, inspected there, and
imported into India for the consignee. Movement of goods from Belgium
to India was in pursuance of the conditions of the contract between the
F assessee and the Director General of Supplies.There was no possibility of
those goods being diverted by the assessee for any other purpose. Conse-
quently the sales took place ~n the course of import of goods within Section
5 (2) and, therefore, were exempt from taxation. The facts of the aforesaid
case indicate that the assessee was the agent of the foreign seller. The
principals were in Belgium. They exported the goods through the agency
G of the appellant and sold them to the Director General of Civil Supplies.
New Delhi who was the consignee. Thus the entire transaction was an
integrated transaction by which a foreign seller through its Indian agent,
namely, the assessee sold the goods to Indian purchaser, namely, the
Director General of Civil Supplies. Consequently it was treated as one
H integrated transaction of sale by a foreign exporter of goods to Indian
K GOPINATHAN NAIR v. STATE [S.B. MAJMUDAR, J.] 235
importer, namely the Director General of Civil Supplies, New Delhi A
through the agency of its local agent, namely, the assessee and, therefore,
the transaction was treated by the Constitution Bench as representing sale
in the course of import. The third Constitution Bench judgment is found
in the case of Coffee Board, Bangalore v. Joint Commercial Tax Officer,
Madras and Another, [1969) 3 SCC 349. In that case the Coffee Board had B
sold coffee at the export auctions with a view that the coffee may get
exported through these auction purchasers to outside countries. It was the
contention of the Coffee Board that sales were in the course of export of
coffee out of the territory of India since the sales themselves occasioned
the export of coffee and coffee so sold was not intended for use in India
or for sale in Indian markets. This contention canvassed in the writ petition C
under Article 32 of the Constitution by the Coffee board was rejected by
the majority of the constitution Bench speaking through Hidayatullah, CJ.
It was held that the petitioners cannot claims exemption from tax. 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) D
that the sale must be a part and parcel of the export. Therefore either the
sale must take place when the goods are already in the process of being
exported which is established by there having already crossed the customs
frontiers, or the sale must occasion the export. The Phrase expended with
this meaning reads 'in the progress or process of export' 'or during export'. E
Therefore the export from India to a foreign destination must be estab-
--- lished and the sale must be a link in the same export for which the sale is
held. The tests are that there must be a single sale which itself causes the
export or is in progress or process of export. There is no room for two or
more sales in the course of export. The only sale which can be said to cause . F
the export is the sale which itself results in the movement of the goods from
the exporter to the importer. Sale must be an integral part of the precise
export before it can be said to have occasioned that particular export.
Applying the aforesaid test laid down by majority in that decision to 'sales
in the course of import' three essentials would obviously be required to be
met before the sale can be said to be in the course of import, (i) there must G
be a sale; (ii) the goods must actually be imported; and (iii) the sale must
be part and parcel of the import. Consequently it must be shown by the
appellants that the sale by CCI to the local users of imported raw
cashewnuts had occasioned the import and such a sale was a part and
parcel of the import. If there are two independent sales, one by a foreign· H
236 SUPREME COURT REPORTS (1997) 3 S.C.R .
.
A exporter to CCI and second sale by CCI to the local users, the link between
the import of raw cashewnuts and their actual delivery to their al:tual users
would be broken. The integrated course of import would then be found
wanting. The next Constitution Bench judgment is rendered in the case of
The State of Bihar and Another v; Tata Enginee1ing and Locomotive Co.
B Ltd., (1970) 3 SCC 697. In that case the Constitution Bench of this Court
had to examine pari materia provision found in Article 286 (2) of the
Constitution dealing with sales in the course of inter-State trade or com-
merce. Hegde, J., speaking for the Constitution Bench made the following
pertinent observations in para 14 of the Report:
c "The decided cases establish that sales will be considered as sales
in the course of export or import or sales in the course of inter-
State trade and commerce under the following circumstances:
(1) When goods which are in export or import stream are sold;
D (2) When the contract of sale or law under which goods are sold
require those goods to be exported or imported to a foreign
country or from a foreign country as the case may be or are
required to be transported to a State other than the State in
which the delivery .of goods take place; and
E (3) Where as a necessary incidence of the contract of sale goods
sold are required to be exported or imported or transported
out of the State in which the detivery of goods takes place."
This takes us to yet another Constitution Bench Judgment of this Court in
p the case of Mis Binani Bros. (P) Ltd. etc. etc. v. Union of India & Ors.,
(1974) 1 SCC 459. In this case a Constitution Bench of this Court speaking
through Mathew, J., had an occasion to once again examine the question
whether the sales in that case were in the course of import of goods so as
to be covered by Article 286 (l)(b) of the Constitution read with Section
G 5(2) of the Central Sales Tax Act, 1956. In that case the petitioner under
Article 32 before this Court was a dealer in non-ferrous metals. He was
supplying the same to the Directorate General of Supplies & Disposals
(DGS & D). The petitioner used to import these metals. The petitioner
had sold the imported material as principal to the DGS & D. For effecting
these sales it had purchased the goods from foreign sellers and these
H purchases from the foreign sellers occasioned the movement of goods in
KGOPINATHANNAIR v. STATE[S.B.MAJMUDAR,J.] 237
- the course of import. It was held by the Constitution Bench that the A
movement of goods was occasioned by the contracts for purchase which
the petitioner entered into with the foreign sellers. No movement of goods
in the course of import took place pursuant to the contracts of sale made
by the petitioner with the DOS & D. The petitioner's sale& to DOS & D
were distinct and separate from his purchase from foreign sellers. To put B
it differently, the sales by the petitioner to the DOS & D did not occasion
the import. On the contrary purchases made by the petitioner from the
foreign sellers occasioned the import of the goods. There was no privity of
contract between DOS & D and the foreign sellers. The foreign sellers did
not enter into any contracts by themselves or through the agency of the
petitioner with the DOS & D and the movement of goods from the foreign C
countries were not occasioned on account to the sales by the petitioner to
DOS & D. It was further held that though under the contract DOS & D
undertook to provide all facilities for the import of the goods for fulfilling
the contracts including an Import Recommendation Certificate, there was
no absolute obligation on the DOS & D to procure these facilities. And it D
was the obligation of the petitioner to obtain the import licence. Therefore,
even if the contracts envisaged the import of goods and their supply to the
DOS & D from out of the goods imported, it did not follow that the
movement of the goods in the course of import was occasioned by the
contracts of sale by the petitioner with DOS & D. As we will presently E
show, the ratio of the decision of the aforesaid Constitution Bench directly
gets attracted on the facts of the present cases. Substituting DOS & D for
local users and the petitioners in that case by the CCI it becomes clear that
on the same reasoning by which the Constitution Bench held in the
aforesaid case that the sale by petitioner to DOS & D was not in the course
of import it will have to be held that the sales by CCI in the presents cases F
to local users were also not sales in the course of import. Another Con-
stitution Bench judgment which also gets squarely attracted on the facts of
the present cases is rendered in the case of MD. Serajuddin & Ors. etc. etc.
v. 17te State of Orissa, [1975) 2 SCC 47. In the aforesaid case this Court
was concerned with the interpretation of the term 'in the course of export' G
as found in Section 5(1) of the Central Sales Tax Act. However, while
interpreting the said phraseology the Constitution Bench also construed
identical phraseology found in Section 5 (2) dealing with 'in the Course of
import'. In that case the appellant before this Court was assessee who was
registered dealer under the Central Sales Tax Act, 1956, carrying on H
238 SUPREME COURT REPORTS [1997] 3 S.C.R.
A business of mining and exporting mineral ores to foreign countries. He had
entered into four contracts for sale of chrome concentrates. Two of them
were directly with foreign buyers. The other two were with the State
Trading Corporation (STC) ever since export of mineral ores was canalised
through it. The STC in turn entered into contracts with foreign buyers. The
B High Court held sales under the first two contracts directly with foreign
buyers exempt from sales tax being in the course of export. But it held sales
under the contract with STC not exempt from sales tax under Article 286
(1) (b) of the constitution read with Section 5(1) of the Central Sales Tax
Act. The majority of the Constitution Bench speaking through Ray, CJ.,
upheld the decision of the High Court against the assessee. It was held that
C Section 5 of the Central Sales Tax Act has given a legislative meaning to
the expression 'in the course of export' and 'in the course of import'. The
expression 'in the course' implies not only a ~eriod of time during which
the movement is in progress but postulates a connected relation. Sale in
the course of export out of the territory of India means sale taking place
D not only during the activities directed to the end of exportation of the goods
out of the country but also as part of or connected with such activities. In
Paragraph 18 of the Report the following pertinent observations were made
"A sale in the course of export predicates a connection between
E the sale and· export. No single test can be laid as decisive for
determining that question. Each case must depend upon its facts.
But it does not means that distinction between transactions which
may be called sales for export and sales in the course of export is
not real. Where the sale is effected by the seller and the seller is
not connected with the export which actually takes place, it is a
F
sale for export. Where the export is the result of sale, the export
being ineXtricably linked up with sale so that the bond cannot be
dissociated without a breach of the obligations arising by statute,
contract, or mutual understanding between the parties arising from
the nature of the transaction the sale is in the course of export."
G
While considering the question whether the sale is in the course of export,
the Constitution Bench considered the further question whether there
should be a single sale or there can be two or more independence sales.
In this connection, it was observed that there must be a single sale which
H itself causes the export and there is no room for two or more sales in the
-(
K.GOPINATHANNAIR v. STATE[S.B.MAJMUDAR,J.] 239
course of export. The sale which is to be regarded as exempt is a sale which A
causes the export to take place or is the immediate cause of the export. To
establish export a person exporting and a person importing are necessary
elements and the course of export is between them. Introduction of a third ·
party dealing independently with the seller on the one hand and with the
importer on the other breaks the link between the two for then there are B
two sales one to the intermediary and the other to the importer. The first
sale is not in the course of export because the export commences with the
intermediary. The tests are that there must be a single sale which itself
causes the export or is in the progress or process of export. There is no
room for two or more sales in the course of export. The only sale which
can be said to cause the export is the sale which itself results in the C
movement of the goods from the exporter to the importer. So the test is
whether there were independent transactions or only one transaction which
occasioned the movement of the goods in the course of export. Applying .
this principle to the facts of the case it was held that the sale by the assessee
to the STC which was the canalising agency for exports had no connection D
with the export by STC of the purchased goods to the foreign buyers and,
therefore, the sale by the assessee in favour of the canalising agency,
namely, STC was held no to be a sale in the course of export but was found
to be a sitle for export. In this connection the following pertinent observa-
tions were made in paragraphs 25 and 26 of the Report :
E
"Hence the contention on behalf of the appellant that the contract
between the appellant and the Corporation and the contract be-
tween the Corporation and the foreign buyer formed integrated
activities in the course of export is unsound. The pre-eminent
question is as to which is the sale or purchase which occasions the F
export. The distinction between sales for export and sales in the
course of export cannot be disregarded.
' ·'• fhe
features which point with unerring accuracy to the contract
between the appellant and the Corporation on the .one hand and
the contract between the Corporation and the foreign buyer on G
the other as two separate and independent contracts of sale are:
There was no privily of contract between the appellant and the
foreign buyer. The privity of contract is between Corporation and
the foreign buyer. The immediate cause of the movement of goods
and export was the contract between the foreign buyer who was H
240 SUPREME COURT REPORTS [1997] 3 S.C.R.
A the importer and the Corporation who was the exporter and
shipper of the goods. All relevant documents were in the name. of
the Corporation whose contract of sale was the occasion of the
export. The expression "occasions" in Section 5 of the Act means
the immediate and direct cause. But for the contract between the
Corporation and the foreign buyer, there was no occasion for
B
export. Therefore, the export was occasioned by the contract of
sale between the Corporation and the foreign buyer and not by
the contract of sale between the Corporation and the appellant.
The appellant sold the goods directly to the Corporation. The
c circumstance that the appellant did so to facilitate the performance
of the contract between the Corporation and the foreign buyer on
terms which were similar did not make the contract between the
appellant and the Corporation the immediate cause of the export."
D Sales or purchases through canalising agencies who export or import goods
were also considered in paragraph 28 of the Report. It was held that system
of canalisation of exports or imports through the State Trading Corpora-
. tion is constitutionally valid. The broad reasons for the system of canalisa-
tion are control of foreign exchange and prevention of abuse of foreign
exchange. Counsel for Minerals and Metals Trading Co. which became the
E successor to the Corporation did not contend that the Corporation is an
agency. Agency is created by actual authority given by principal to the
agent or principal's ratification of contract entered into by the agent on his
behalf but without his authority. Agency arises by an ostensible authority
conferred by the principal on the agent or by an implication of law in cases
p of necessity. The contention on behalf of the appellant that STC was an
agent of necessity because the STC was a special agency to carry out
certain public policies, was turned down. It was held that the sale by the
assessee to the canalising agency which exported the goods was a sale
transaction between two principals and there was no aspect whatsoever of
principal and agent.
G
Applying the ratio of the aforesaid Constitution Bench decision to
sale or purchase in the course of import as envisaged by Section 5 (2) which .
is a pari materia provision and is almost a mirror image. of the provision
of Section 5 (1) dealing with converse type of cases it has, therefore, to be
H held that any purchase of goods imported by canalising agency like CCI
-(
K.GOPINATHANNAIR V. STATE[S.B.MAJMUDAR,J.) 241
- which is the importer of such goods and which sells them to the actual A
users would also partake the character of a sale between principal and
principal wherein the foreign seller would be out of picture and such
transactions cannot be termed as a well-nit integrated transaction between
all the three of them so as to make the transaction one of sale or purchase
in the course of import. But it may as well be a transaction because of or B
by import carried out by the canalising agency like CCI. It is also pertinent
to note that the Constitution Bench in Serajuddin's case {supra) has heavily
relied upon other Constitution Bench judgment in the case of Binani Bros.
(supra) which was directly concerned with the interpretation of Section 5
(2) of the Central Sales Tax Act as we have seen earlier.
c
Learned senior counsel for the appellants invited our attention to a
decision of a Bench of two learned judges of this Court is the case of The
Deputy Commissioner of Agricultural Income Tax and Sales Tax, Central
Zone, Emakulam v. Mis Kotak & Co., Bombay, Etc. Etc., (1974] 3 SCC 148.
The said decision was rendered in the light of the peculiar facts of the case D
which came. up for consideration of this Court;. The Bench speaking
through Hegde, J., noted the fact that the assessee-firm before them had
imported cotton against actual user's import licence granted to the mills
concerned and was selling the cotton to them. That the assessee was also
precluded from selling to anybody other than the mills to whom the user's E
import licence had been granted. It was also noted that the assessee firm
had entered into contract with the mills, dated March 20, 1964, that the
import licence issued in favour of the mills was made available to the firm
for utilisation of the contract, that the letter of authority authorising the
firm to import cotton was also issued. That the bill of lading obtained by
the foreign supplier on shipment of the goods was also obtained by the firm F
and the cotton was thus sent to India. On the peculiar facts of that case,
therefore, it was held that the assessee-firm was acting on behalf of the
Indian importer mills concerned. Consequently it must be held that the
Court treated the assesse as an agent of the Indian importer mills con-
cerned. In the light of the aforesaid peculiar facts of the case, therefore, G
the Bench applied the ratio of the decision of this Court in the case of KG.
Khosla & Co. {Supra). It is difficult to appreciate how the said decision
can be of any avail to the appellants on entirely different set of facts which
have remained well established on record and which will be adverted to by
us in the latter part of this judgment. H
242 SUPREME COURT REPORTS [1997] 3 S.C.R.
A It is time for us now to refer to two other judgments of this Court
rendered by benches of three learned Judges and on which strong reliance
was placed by the learned senior counsel for the appellants. In the case of
Deputy Commissioner ofAgricultural Income Tax and Sales Tax, Emakulam
v. Indian Explosives Ltd., [1985] 4 SCC 119 this Court dealt with the
question whether the respondent-assessee was concerned with sale trans-
B
actions 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
C 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 whereundq the local purchaser was authorised to permit the
D respondentcassessee 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 srecified therein. The import licence expressly con-
tained two conditions, (i) that the goods imported will be the property of
the licence-holder at the time of clearance through the Customs and (ii)
that the goods will be utilised only for consumption as raw material or
E accessories in the licence-holder's factory and that no portion thereof will
be sold to or be permitted to be utilised by any other party. In the light of
these facts the decision of the Kerala High Court that respondent-assessee
had affected sales in the course of import, was upheld by this Court.
Tulzapurkar, J ., speaking for this Court observed that there was an integral
F 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 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.
The import of the goods by the respondent assessee was for an on behalf
G 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. In paragraph 4 of the Report it was further observed in the
light of various decisions of this Court to which we have made a reference.
earlier, that in order that the sale should be one in the course of import it
H must occasion the import and to occasion the import there must be integral
f
K. GOPINATHAN NAIR v. STATE [S.B. MATMUDAR, J.] 243
connection or inextricable link between the first sale following the import A
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.
B
The aforesaid decision obviously was rendered in the light of the
peculiar facts of the case before the Court. In that case the respondent-as-
sessee was acting on behalf of the local importers and was almost as good
as their agent for importing the goods on their behalf from foreign
countries. The goods imported had to be the property of the licence-holder
at the time of clearance from the customs and it was Oil the basis of the C
actual user's licence that the goods were imported by the respondent-as-
sessee and, therefore, it was held on the facts of that case that there was
an integral connection or inextricable link between the first sale following
the import and the actual import provided by an obligation to import
arising from contract or mutual understanding or nature of the transaction D
which linked the sale to import which could not, without committing a
breach of contract or mutual understanding be diverted elsewhere. As we
will presently see no such conclusion is possible on the facts of these
appeals and in the light of salient features emerging on the record of these
cases. On the contrary the decisions of the Constitutions Benches of this
Court in Serajuddin's case (supra) and in the case of Binani Bros. (supra) E
get squarely attracted. The other decision on which strong reliance was
placed by the learned senior counsel for the appellants was rendered by a
Bench of three learned Judges in the case of Consolidated Coffee Ltd. and
Anr. etc. v. Coffee Board, Bangalore etc. etc. [1980] 3 SCR 625 which is
called the second Coffee Board case. In that case Tulzapurkar, J. speaking p
for the Bench had to consider the constitutional validity of Section 5
sub-section (3) of the Central Sales Tax Act which was brought on the
Statute Book in the light of the earlier Coffee Board case judgment of the
Constitution Bench in Coffee Board, Bangalore (supra) and the decision in
Serajuddin's case (supra). By the said amendment to Section 5 (3) the
legislature thought if fit to grant exemption also to the penultimate sales G
prior to the sales in the course of export by the canalising agency. That was
with a view to boost up foreign exchange earnings. While upholding the
said amendment it was held that Section 5(3) of the Central Sales Tax Act
has been enacted to extend the exemption from tax liability under the Act
not to any kind of penultimate sales but only to such penultimate sale as H
244 SUPREME COURT REPORTS [1997] 3 S.C.R.
A satisfies the two conditions specified therein, namely, (a) that such penul-
timate sale must take place (i.e. become complete) after the agreement or
order under which the goods are to be exported and (b) it must be for the
purpose of complying with such agreement or order and it is only then that
such penultimate sale is deemed to be a sale in the course of export. The
aforesaid decision, therefore, is confined to the validity of the amended
B provision which itself postulates that but for. such amendment the penul-
timate sale would have remained outside the sweep of Section 5 sub-section
(1) of the Central Sales Tax Act and such penultimate sale could not have
been treated as sale in the course of export. Even that apart for interpreting
the identical phraseology "in the course of' found both in Section 5(1) and
C Section 5 (2) this decision by three learned Judges' Bench could naturally
not be of any assistance to the appellants as obviously the three learned
Judges Bench could not have laid down anything contrary to what the
Constitution Benches in Serajuddin's case (supra) and in the case of Binani
Bros. (supra) had laid down on the true construction of the provisions of
D Sections 5(1) and 5(2) while interpreting the words 'in the course of export'
or 'in the course of import' as found in these provisions.
Reliance placed by our esteemed colleague Sujata V. Manohar, J. on
the judgments of this Court in the cases of Indian Explosives Ltd.. and Mis
Kotak & Co. (supra) for taking the view that ratio of the Constitution Bench
E judgment in Md. Serajuddin case (supra) woul<i not be applicable as the
legislature had amended the relevant provisions of Section 5, in our view,
is not apposite. In the first place, as noted earlier, the decisions of smaller
benches of learned Judges of this Court that decided Indian Explosives and
Mis. Kotak & Co.'s case (supra) cannot be pressed in service by the
F appellants when on facts of the present case the contrary ratio of the
decisions of the Constitution Benches which decided MD. Serajuddin's case
(supra) and Mis Binani Bros. 's case (Supra) squarely get attracted. Even
that apart, with great respect to our esteemed colleague Sujata V.
Manohar, J., it could not be assumed that the legislature by inserting
sub-section (3) of Section 5 had in any way departed from the ratio of the
G aforesaid Constitution Bench decisions on the statutory scheme as was then
existing. It is trite to observe that the legislature is competent to remove
the substratum of the earlier judgment cf this Court by inserting a new
provision. It is necessary to visualize that but for sub-section (3) of Section
5 as introduced by the latter amendment, the penultimate transactions
H would have remained outside the sweep of the phrase 'sale in the course
(
KGOPINATIIANNAIR v. STATE[S.B.MAJMUDAR,J.] 245
of export'. It is only because of the latter amendment that by a legislative A
fiction even the penultimate sales were sought to be covered by the said
phrase. It is pertinent to observe in this connection that there is no such
amendment introduced by. the legislature for extending the sweep of the
phrase 'sale in the course of import'.
In the light of the aforesaid settled legal position emerging from the B
Constitution Bench decisions of this Court the following propositions
clearly get projected for deciding whether the concerned sale or purchase
of goods can be deemed to take place in the course of import as laid down
by Section 5(2) of the Central Sales Tax Act :
(1) The sale or the purchase, as the case may be, must actually
c
take place.
(2) Such· sale or purchase in India must itself occasion such
import, and not vice versa i.e. import should not occasion
such sale. D
(3) The goods must have entered the import stream when they
are subjected to sale or purchase.
(4) The import of the concerned goods must be effected as a E
direct result of the concerned sale or purchase transaction.
(5) · The course of import can be taken to have continued till the
imported goods reach the local users only if the import has
commenced through the agreement between foreign exporter
and an intermediary who does not act on his own in the F
transaction with the foreign exporter and who. in his turn does
not sell as principal the imported goods to the local users.
(6) There must be either a single sale which itself causes the
import or is in the progress or process of import or though
there may appear to be two sale transactions they are so G
integrally inter-connected that they almost resemble one
transaction so that the movement of goods from a foreign
country to India can be ascribed to such a composite well
integrated transaction consisting of two transactions dovetail-
ing into each other. H
246 SUPREME COURT REPORTS [1997] 3 S.C.R.
A (7) A sale or purchase can be treated to be in the course of
import if there is a direct privity of contract between the
Indian importer and the foreign exporter and the inter-
mediary through which such import is effected merely acts as
an agent or a contractor for and on behalf of Indian importer.
B (8) The transaction in substance must be such that the canalising
agency or the intermediary agency through which the imports
are effected into India so as to reach the ultimate local users
appears only as a mere name lender through whom it is the
local importer-cum-local user who masquerades.
c If the aforesaid conditions are satisfied then obviously the transaction
of sale or purchase would be in the realm of sale or purchase in the course
of import entitling it to earn exemption under Section 5(2) of the Central
Sales Tax Act. But if on the contrary the transactions between the foreign
exporter and the local users in India get transmitted through an inde-
D pendent canalising-import agency which enters into back to back contracts
and there is no direct linkage or causal connection between the export by
foreign exporter and the receipt of the imported goods in India by the local
users, the integrity of the entire transaction would get disrupted and would
be substituted by two independent transactions, one between the canalising
E agency and the foreign exporter which would make the canalising agency
the owner of the goods imported and the other between the import
canalising agency and the local users for whose benefit the goods were
imported by the wholesale importer being the canalising agency. In such a
case the sale by the canalising agency to the local users would not be a sale
in the course of import but would be a sale because of or by import which
F would not be covered by the exemption provision of Section 5 sub-section
(2) of the Central Sales Tax Act.
On the facts of these cases ·and in the light of the propositions
enumerated above it is impossible to accept the contention of learned
G senior counsel for the appellants that the sales in the present cases effected
by the CCI in favour of the local users were in course of import of raw
cashew from African countries.
We may state that a clear finding of fact is reached by the Tribunal
in cases arising out of Revisions Before the Kerala High Court and also by
H the Karnataka High Court in the appeals by CCI that neither the CCI nor
J f
K.GOPINATIIANNAIR v. STATE[S.B.MAJMUDAR,J.] 247
the assessee had led any evidence to show that goods were sold by transfer A
of documents of title on high seas, and hence it had to be held that CCI
had not sold the goods to local users on high seas and before the goods
crossed the customs frontiers of India and resultantly the latter part of
Section 5(2) is not attracted on the facts of these cases. Consequently it is
· not necessary to dilate on these aspects any further.
B
Now is the time for us to take stock of the situation and to see
whether the aforesaid requirements for the applicability of Section 5(2)
have been met in the present cases or not.
Prior to September 1970 the assessees imported raw cashewnuts C
from African countries under an Open General Licence. After processing
these cashewnuts the assessees exported cashewnut kernels to other
countries. By a Notification issued under the Import Trade (Control)
Order bearing No. 3-1970 dated 31st of August 1970, "cashewnuts" were
deleted from the schedule of items which could be imported under an D
Open General Licence. Instead they were now required to be imported
through a canalising agency, namely, the G:CI. As a result, for the relevant
assessment years 1970-71 to 1972-73 the assessees imported their require-
ment of cashewnuts from African countries through the CCI. As the CCI
is acting as a canalising agency, it after collecting the information regarding
the requirements of actual users in connection with the import of raw E
cashew is found to have acted on its own in its dealing with the foreign
exporter. Therefore, CCI cannot be said to be an agent of the local users.
It has been found as a fact that CCI deals with the foreign exporter on its
own though while so acting it may be keeping in view its further obligation
to sell the imported cashew to the concerned private local users who have F
•
to process the same for exporting the processed cashewnuts ultimately. It
is also well established on record that on account of the demands by local
users and the agreement to sell the imported cashew by CCI to the local
users the CCI undertakes the task of importing cashew on wholesale basis
from the foreign exporters by entering into independent contracts with the
foreign exporters. The following salient features of the transactions which G
remain well established on record and which have been enumerated by the
Kerala High Court deserve to be noted at this state :
(a) There was a direct, distinct and independent contract of
purchase between the CCI on the one hand and the foreign H
\
248 SUPREME COURT REPORTS [1997] 3 S.C.R.
A sellers in Africa on the other.
"C
(b) The transactions under which the CCI sold the imported raw
cashewnuts to the assessees on payment of the price thereof
are wholly unconnected with the contract of purchase, the
CCI had entered into with the foreign sellers. i
B
(c) There is no privity of contract between the assessees and the
foreign sellers.
(d) The assessees remained undisclosed to the foreign sellers.
c (e) The foreign sellers know nothing of the understanding be-
tween CCI and the assessees, discernible from the various
orders and agreements executed between them in connection
with the distribution of the raw cashewnuts.
(f) The bills of lading were undisputably made out in the name
D
of the CCI and the CCI therefore has obtained a complete
and indefeasible title to the goods purchased by them from
foreign sellers.
(g) The transaction under which the raw cashewnuts were put on
E board the ship did not create any real rights and obligations
as between the foreign sellers and the assesses although the
raw cashewnuts are supposedly imported for their benefit.
(h) The circumstance that the contract between CCI and the
foreign sellers was in the CIF form strengthens the position
• F that there were two distinct, independent and unconnected
purchases.
(i) Sale price for distribution of goods to actual users will be '
determined by the public sector agency concerned subject to
the gnidance and general control of the Ministry of Foreign
G
Trade.
In this connection it will also be profitable to keep in view the findings
recorded by the Kerala Appellate record. At page 88 of the Paper Book
,
is found a letter dated 4.11.1970 addressed by CCI to one similarly situated
H local user Baku! Cashew Co., Quilon. The said letter calls upon the local
(
K. GOPINATIIAN NAIR v. STATE [S.B. MAJMUDAR, J.] 249
~er to furnish requisite bank guarantee for the entire value of the goods A
allotted to it or in the alternative open a Letter of Credit in favour of the
Cashew Corporation of India, Cochin/State Trading Corporation of India,
Cochin through the Cochin Branch of its bankers in Quilon. The letter
further recites that clearance of respective quantity of cashewnuts would
be done by executing a bond with customs with the help of following B
documents:
1. Provisional invoice to be issued by CCI in the absence of original
supplier's invoice.
2. No. and date of sub-licence issued in its favour.
c
3. Delivery order in local users favour issued by the steamer agent.
The Tribunal also noted the further fact that the foreign exporter issues
invoice of the exported commodity to India in favour of CCI Ltd. whose
import licence is also mentioned at the top of the invoice. That licence is D
in favour of Cashew Corporation of India. A copy of such invoice is found
at page 94 of the Paper Book. This invoice leaves no room for doubt that
the privity of contract between the foreign exporter and the Indian im-
porter is between the CCI as importer and the foreign exporter at the other
end which would clearly pre-suppose that the goods moved in the import
" stream on account of the purchase by CCI, the Indian importer, which E
places order for import of cashew with the foreign exporter. The local users
are nowhere in the picture at that stage. It may be that the CCI acting as
a wholesale importer places the orders for import of cashew in the light of
these prior agreements with the locai users. But that would make it a
wholesale importer acting upon the requirements of the local users who p
would remain local purchasers through the wholesale seller-cum-importer
CCI. At page 95 of the Paper Book is also found CCl's invoice in turn
issued for a lesser quantity of p. 161 imported material in favour of the
concerned local user in whose favour the sub-licence is issued. At page 96
is found a copy of the Bill of landing which also shows that the foreign
exporter has exported the goods in favour of the CCI, Cochin through the G
concerned ship. It is also found established on record that the goods could
be cleared through customs by the local users after making full payment of
the goods to the CCI. Thus ownership of the goods remains with the CCI
till the concerned documents are cleared through the bankers of the local
users. The subsidiary licence issued to the local users a copy of which is H
250 SUPREME COURT REPORTS [1997) 3 S.C.R.
A found as Annexure 'I' at page 99 of the Paper Book shows that the goods
for the import of which the licence has been granted shall be the property
of the licensee at the time of clearance through the customs. It was
submitted by the learned senior counsel for the appellants that that was a
mistaken condition imposed in the subsidiary licence. Be that as it may,
during the relevant period of assessment such subsidiary licence clearly
B
_showed that the main licence to import was in favour of CCI and the
sub-licence was available to the local user who could become the owner
of the goods imported only after making full payment of the goods to the
CCI and after getting clearance of the goods through the customs. Even .
the Letter of Authority given by the Ministry of Foreign Trade to CCI as
c importer of the goods to permit the indentor to clear imported goods
through the customs also reflects the same position. The Kerala Tribunal
in Paragraph 21 of its judgment has found that the allottees cannot claim
absolute ownership of the goods before customs clearance as it is
evidenced from a letter dated 29.2.1971 sent by the Cashew Corporation
D of India to certain allottees, wherein it has been specifically stated that if
steps are not taken by the allottee to take delivery of the goods that
reached the Port immediately, the Corporation will allot those goods to
any other needy customer. It is also found that the aforesaid communica-
tion of the Corporation to the allottees would go to show undoubtedly that
· the goods remain the property of the Corporation with specific right to
E . re-allot or re-sell the same to other parties until the goods are cleared
through customs. So, the allottees cannot claim ownership of property in
the goods before they clear the goods through customs. It was submitted
that the CCI was under an obligation to allot the requisite quantity of
imported cashewnuts to the local users for whose benefits the goods were
F imported. But that will not reflect that local user was the importer.
Agreement between CCI and local user may give a contractual right to the
local user to enforce its demands against CCI and in a given case it may
be enforced by specific performance against CCI. That claim, however, has
nothing to do with foreign exporter who only deals with ·CCI as bulk
importer of the goods and against whom the local user cannot have any
G legally enforceable right. All the aforesaid features which are well estab-
lished on record leave no room for doubt that it is on account of the sale
to CCI by foreign exporter that the raw cashew get imported in India and
the importer is CCI and not the local user. It is the demand of the local
users which prompted the canalising agency like CCI to place orders for
H import of the concerned quantities. But CCI deals with foreign exporter
(
K.GOPINATIIANNAIR v. STATE[S.B.MATMUDAR,J.] 251
on its own and gets bulk imports of cashewnuts. It is the sale to the CCI A
by the foreign exporter or conversely the purchase by the CCI of the raw
cashew from the foreign exporter that occasions the movement of raw
cashew from African countries to India. The imported cashew remains to
the ownership of the importer CCI and only on retirement of documents
on payment of value of the allotted cashew by the local users and on their B
getting the goods cleared from customs that the property in the concerned
imported goods would pass from CCI to the local users. Thus there are
two clear transactions. One transactions is import of raw cashew by CCI
from foreign exporters. The second transaction which is back to back
transaction is of sale by the canalising agency like CCI which is the
wholesale importer in favour of the local users for whom the goods are C
indented. That independent sale which may be based even on a prior
agreement of sale by CCI to local users would remain an independent
transaction between importer CCI and the local purchaser, namely, the
local user. There is no privity of contract between the local users on the
one hand and the foreign exporter on the other. These two transactions D
cannot be said to be so integrally interconnected as to represent one
composite transaction in the course of import of raw cashewnuts as tried
to be submitted by learned senior counsel for the appellants. On the facts
of these cases, therefore, the decisions of the Constitution Benches of this
Court in Serajuddb1's case (supra) and in case of Binani Bros. (supra) get
squarely attracted and as a result these sales by the CCI to the local users E
go out of the sweep of the exemption provisions engrafted by Section 5(2)
of the Central Sales Tax Act. The conclusions to which the Kerala and
Karnataka High Courts reached, therefore, cannot be faulted.
The alternative contention canvassed on behalf of the appellants by p
learned senior counsel Shri Po ti based on Section 2 (ab) of the Central
Sales Tax Act which defines 'crossing the customs frontiers of India' as
crossing the limits of the area of a custom station in which imported goods
or exported goods are ordinarily kept before clearance by customs
authorities, also cannot be of any avail to the appellants for the simple
reason that this amendment was brought on the Statute Book niuch after G
the relevant assessment years. This amendment whicli sought to confer
substantial benefit to the local users cannot be said to be a procedural
· amendment which could have any retrospective effect. On the contrary this
substantive provision is of a temedia1 nature and it cannot have any
restrospective effect by implication. The provision is also not expressly H
·•
252 SUPREME COURT REPORTS [1997] 3 S.C.R.
A made retrospective. As laid down by a three member Bench of this Court
in the case of R. Rajagopal Reddy (Dead) by LRs. & Ors. v. Padmi11i
Chandrasekhara11 (Dead) By LRs., [1995] 2 SCC 630 wherein one of us, S.B.
Majumdar, J., spoke for the Bench, that it is now well settled that where a
statutory provision which is not expressly made restrospective by the legis-
B lature seeks to affect vested rights and corresponding obligations of parties,
such provision cannot be said to have any restrospective effect by necessary
implication. In para 15 of the Report reliance was placed on an earlier
decision of this Court in the case of Garikapati Veerava v. N. Subbiah
Choudhary, AIR (1957) SC 540 wherein Chief Justice S.R. Das speaking
for this Court had made following pertinent observations :
c
"The golden rule of construction is that, in the absence of anything
in the enactment to show that it is to have restrospective operation,
it cannot be so construed as to have the effect of altering the law,
applicable to a claim in litigation at the time when the Act was
passed."
D
Consequently it cannot be said that the enactment of a new definition
regarding crossing the customs frontiers of India as laid down by Section
2( ab) of the Central Sales Tax Act for considering the liability to pay sales
tax could be legitimately pressed in service for deciding the question of
E sales tax liability of appellants during the assessment years when such
definition was not on the statute book. For all these reasons no case is
made out by the appellants for our interference in these cases. With great
respect to our esteemed colleague Sujata V. Manohar, J., it is not possible
to agree with her conclusion that there is a direct and inseverable link
F between the transaction of sale and the import of goods on account of the
nature of the understanding between the parties as also by reason of the
canalising scheme pertaining to the import of cashewnuts. Nor it is possible
for us to agree with her finding that these transactions are covered by the
exemption provisions of Section 5 (2) of the Central Sales Tax Act. In view
of our findings that these transactions are not covered by the exemption
G provisions of Section 5(2) all the appeals are liable to fail and are accord-
ingly dismissed, however, with no order as to costs.
MRS. SUJATA V. MANOHAR, J.
H CIVIL APPEALS NOS. 4955-77/91,_1167-71!92& 1546/93.
K.GOPINATHANNAIR v. STATE(SUJATAV.MANOHAR,J.] 253
The assessees are processors of cashewnuts in Kerala. Prior to A
September 1970 the assessees imported raw cashewnuts from African
countries under an open general licence. After processing these
cashewnuts the assessees exported cashewnut kernel to other countries. By
a Notification issued under the Import Trade (Control) Order bearing No.
3-1970 and dated 31st of August, 1970, "cashewnuts" were deleted from the B
schedule of items which could· be imported under an open general licence.
Instead they were now required to be imported through a canalising
agency, namely, the Cashew Corporation of India Ltd. As a result, for the
assessment years 1970-71 to 1972-73 the assessees imported their require-
ment of cashewnuts from African countries through the Cashew Corpora-
tion of India Ltd. The assessees were called upon to pay sales tax under C
the Kerala General Sales Tax Act in respect of the cashewnuts purchased
by them from the canalising agency. According to the assessees, the sales
effected by the Cashew Corporation of India to them are not exigible to
tax under the Kerala General Sales Tax Act since these are sales in the
course of import and hence are exempt from the State sales tax under D
Section 5(2) of the Central Sales Tax Act, 1956. This contention of the
assessees has been negatived by the sales tax authorities in Kerala. In a
revision which was filed by the assessees before the Kerala High Court, the
Kerala High Court remanded the matters to the Sales Tax Tribunal to
consider the following question, namely :
E
"Whether the purchases of African nuts made by the assessees
from the Cashew Corporation of India are in the course of import
eligible for exemption under Section 5(2) of the Central Sales Tax
Act?"
The Tribunal after re-considering the matter answered the question F
against the assessees. This finding of the Tribunal has been upheld by the
Kerala High Court in revision. Hence these appeals have come before us.
Civil Appeals Nos. 3&47-52/86.
This group of appeals also deals with the import of cashewnuts, but G
in the State of Karnataka, by the Cashew Corporation of India Ltd. which
is a canalising agency for the import of cashewnuts for sale to the proces-
sors of cashewnuts in Karnataka. The processors, after processing
cashewnuts, export cashew kernel. However, which under the Kerala
General Sales Tax Act, 1965, cashew was assessable at the last point of H
254 SUPREME COURT REPORTS [1997] 3 S.C.R.
A purchase in the State, under the Karnataka Sales Tax Act, 1957 cashew is
assessable at the first point of purchase in the State. Hence, in these
appeals, assessment of sales tax by the State of Karanataka is sought to be
made on the Cashew Corporation of India in respect of cashew imported
by it at the instance of the processor and sold to the processor. The
transactions which are the subject-matter of controversy in these appeals,
B
however, are identical with the transactions which are the subject-matter
of appeals in the Kerala matters.
Before we decide whether the import of cashew nuts by the Cashew
Corporation of India and the purchase of cashewnuts by the asses-
C sees/processors from the Cashew Corporation of India is in the course of
import or whether it is a local sale liable to tax under the Kerala or
Karnataka General Sales Tax Act, it is necessary to set out the exact nature
of the transaction in question.
D The Import Trade (Control) Policy for April 1971-March 1972, in
Part B, Paragraph 51 deals with import through Public Sector Agencies.
Under the subheading "Canalisation of Imports'', it states that import of
certain items will be arranged only through Public Sector Agencies. The
canalising agency in the case of cashewnuts is the Cashew Corporation of
India Ltd. Under the Import Trade (Control) Handbook of Rules and
E Procedures, 1970 the procedure for imports through Public Sector Agen-
cies is set out. It, inter alia, states that the canalising agency will pool the
import requirements of actual users and import will be arranged in bulk
through the agency concerned. It also provides that consolidated import
licences/release orders will be issued in such cases to the importing agency
p concerned. The value of the consolidated licence/release order to be issued
will be equal to the aggregate value of all the licences/~elease order which
could have been issued to the individual actual users had they applied
separately. Such licences/release orders will be subject to the condition,
inter alia, that the imported goods shall be distributed by the licensee to
the actual users whose particulars are shown in the relevant import applica-
G tion for use in their respective factories. Therefore, the quantity imported,
the specifications of the goods imported and the place from which they are
imported are all as per requirements of the local processors.
In the present case, letters were issued by the State Trading Corpora-
H tion of which the Cashew Corporation of India was a subsidiary, informing
K.GOPINATHANNAIR v. STATE[SUJATAV.MANOHAR,J.] 255
the processors regarding canalisation of import of cashewnuts through the A
Cashew Corporation of India and requesting the processors tO apply in
proforma for the allotment of raw cashewnuts. Based on these applications,
the Cashew Corporation of India obtained from the Government of India
a bulk licence for the import of raw cashewnilts. Necessary orders were
placed with foreign dealers for supply of cashewnuts by the Cashew Cor- B
poration of India. The cashewnuts to be imported were marked in separate
lots in respect of each allottee before shipment from the foreign port.
Allotment orders in respect of each marked lot were made in favour of the
concerned processor by the Cashew Corporation of India and the shipment
was effected only on the basis of the acceptance of such an allotment order
by the concerned processor. The Cashew Corporation of India prepared C
separate invoices in the name of each allottee in respect of each separate
and marked shipment. A separate bill of leading was prepared in respect
of goods pertaining to each allottee. The insurance premium for this lot
was also charged by the Cashew Corporation of India from the allottee.
For the clearance of these goods from the customs, separate documents of D
title pertaining to each processor were prepared and subsidiary import
licence were also issued in the name of each allottee by the Cashew
Corporation of India in respect of their earmarked lots. A simultaneous
letter of authority was also issued by the Chief Controller of Imports and
Exports in favour of the allottee in respect of the lot concerning which the
allottee was given a sub-licence. On the marine insurance taken by the E
Cashew Corporation of India a separate endorsement was taken in the
name of each allottee and the premiiim was included in the C.l.F. value of
the goods so despatched. The steamer agent issued a delivery order to the
processors' clearing agent and the goods were accordingly cleared by the
clearing agents of the processors. The Cashew Corporation of India F
charged to the assessee the price which it had paid to the foreign seller
and a commission for their work as a canalising agency.
Thus it is clear that although the canalising agency placed a bulk
order for the import of cashewnuts and opened a letter of credit in favour
of the foreign sellers, the bulk order so placed was a sum total of the G
requirements of all the processors of cashewnuts in whose favour allotment
orders were issued. The Cashew Corporation of India had from the incep-
tion marked separately each lot imported by it in favour of each allottee.
ft had also in turn, prepared a corresponding set of documentation in
favour of the allottee and the allottee was required to open a corresponding H
256 SUPREME COURT REPORTS [1997] 3 S.C.R.
A letter of credit in favour of the Cashew Corporation of India in respect of
the lot being imported on its behalf. The allottees also paid the correspond-
ing insurance premium for the marine insurance taken out by the Cashew
Corporation of India pertaining to the import of cashewnuts.
We have to consider whether the transaction between the Cashew
B Corporation of India and each of the processors can be considered as a
sale by the Cashew Corporation of India to the processor in the course of
import. Under Article 286 of the Constitution of India, restrictions have
been placed on the power of the State to tax sales. Article 286 (1) and (2)
provide as follows:-
c "286 (1) : No law of a state shall impose, or authorise the imposition
of, a tax on the sale or purchase of goods where such sale or
purchase takes place -
t
(a) outside the State; or
D
(b) in the course of the import of the goods into, or
export of the goods out, of the territory of India;
(2) Parliament may by law formulate principles for determining
when a sale or purchase of goods takes place in any of the ways
E mentioned in clause (1)."
Article 269 (1) (g) and (3) provide as follows :
"269 (1) : The following duties and taxes shall be levied and
collected by the Government of India but shall be assigned to the
F States in the manner provided in clause (2), namely -
(g) taxes on the sale or purchase of goods other than newspapers,
where such sale or purchase takes place in the course of inter State
Trade or commerce;
G (3) Parliament may by law formulate principles for determining
when a sale or purchase of, or consignment of, goods takes place
in the course of inter-State trade or commerce."
Accordir.gly, the Central Sales Tax Act, 1956 in Sections 3 and 5 lays
H down principles for deciding whether a sale or purchase takes place in the
f
K. GOPINATIIAN NAIR v. STATE [SUJATA V. MANO HAR, J.] 257
course of inter-State trade or commerce or in the course of import or A
export:
"3. When is a sale or purchase of goods said to take place in the
course of inter-State trade or commerce - A Sale or purchase of
goods shall be deemed to take place. in the course of inter-State
trade of commerce if the sale or purchase - B
(a) occasions the movement of goods from one State to
another; or
(b) is effected by transfer of documents of title to the goods
during their movement from one State to another. C
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 D
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.
(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 E
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 F
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."
G
Clearly, therefore, the language of Sections 3, (5) and 5(2) is similar,
and the requirements in each of these provisions for considering whether
a sale or purchase of goods can be said to take place in the course of
inter-State trade or commerce or export or import are similarly worded.
Under the first requirement so specified, in each of the three cases the sale H
258 SUPREME COURT REPORTS [1997] 3 S.C.R.
A or purchase in question should occasion the requisite movement of goods.
This movement may be either from one State to another or it may be from
another country to India or it may be from India to another country, as the
case may be. We must, therefore, consider whether the sale or purchase
which is before us, that is to say, the transaction between the Cashew
B Corporation of India and the assessees/processors, has occasioned the
import of cashewnuts from Africa into the territory of India.
How does one determine whether a sale has occasioned the move-
ment of goods either from a foreign country into India or from India to a
foreign country or from one State in India to another State in India? This
C Court has, in the course of several decisions that I shall refer to, laid down
some basic tests to determine whether the sale in question has occasioned
the requisite movement of goods. These are :
(1) There should be a direct connection between the sale and the
import or export of goods or their being sent to another State.
D
(2) Such movement should be inextricable linked with the sale so that
the bond between the sale transaction and movement cannot be severed
without a breach of his obligation by the seller or the purchaser, as the
case may be.
E (3) This obligation (to import, export etc.) may arise by statute, by .
contract or even by mutual understanding between the parties, from the
very nature of the transaction. It is immaterial whether the sale has
preceded such movement or succeeded such movement. So long as there
is an unbreakable chain linking the sale and the movement of goods, it will
F be covered by Section 5 or Section 3, as the case may be. Usually such an
unbreakable chain is forged by the terms of the contract of sale, or from
operation of statute or even from an understanding between the local buyer
and the local seller. Of course where there is only one sale -- between a
local buyer and a foreign seller or a local seller and foreign buyer, the
contract of import or export causes import or export. But the application
G of Section 5 is not confined to such contracts alone as the cases cited
hereafter will show. If only a one-sale test were to be applied, these would
be the only contracts qualifying for exemption. Such is not the interpreta-
tion put on Sections 3 and 5 because in several cases this Court has
considered even a sale other than an import sale or an export sate as a sale
H in the co\irse of import or export if there is a direct connection between
l
K GOPINATIIAN NAIR v. STATE [SUJATA V. MANOHAR, J.] 259
the sale and the import or the export. A
The distinction between an independent sale and a linked sale is
clearly brought out by a Constitution Bench of this Court in the case of
Ben Gonn Nilgiri Plantations Company, Coonoor& Ors. v. Sales Tax Officer,
Special Circle, Emakulam & Ors., [1964] 3 SCR 706 at 711 which decided
the requirements of a sale in the course of export (two Judges dissenting). B
In this case, the appellants carried on the business of growing and manufac-
turing tea. The purchasers were local agents of foreign buyers. The sales
were by public auction. It was the common case of all the appellants that
the purchases by the local agents of the foreign buyers were with a view to
export the goods to their principal abroad and in fact the tea was exported. C
The appellants contended that the sales of tea to the local agents were in
the course of export. Three Judges, out of the five Judges concerned, held
that this was not a sale in course of export. They said that the transaction
of sale which is a preliminary to export may be regarded as a sale for export
but it is not necessarily to be regarded as one in the course of export.
D
The test laid down in this case is : in order that the sale should be
in the course of export, the export must be inextricably linked with the sale
so that the bond cannot be severed without a breach of the obligations
arising by statute, contract or mutual understanding between the parties
arising from the nature of the transaction; so that export cannot be inter- E
rupted without a breach of the contract between the local buyer and the
local seller. In that case the local seller had no interest in the export of tea.
Hence the sale was not in the course of export.
This test is reiterated in the subsequent decisions dealing with ex-
ports and imports. In the case of K.G. Kliosla & Co. v. Deputy Commis- F
sioner of Commercial Taxes, [1966) 3 SCR 352, another Constitution Bench
of this Court interpreted Section 5 (2) of the Central Sales Tax Act, 1956
and held that Section 5(2) does not not lay down any condition that before
a sale could be said to occasion the imports, it is necessary that the sale
should precede the import. G
Since this is one of the earliest case dealing with a sale in the course
of import, I refer briefly to its facts.
The assessee entered into a contract with the Director General of
Supplies and Disposal, New Delhi for the supply of axle-box bodies. H
260 SUPREME COURT REPORTS [1997) 3 S.C.R.
A According to the contract the goods were to be manufactured in Belgium
and the D.G.l.S.D., London or its representative, was entitled to inspect
the goods in Belgium. It was the assessee's responsibility to get the goods
manufactured in Belgium and import them into India. Accordingly the
assessee supplied axle-box bodies to the Southern Railway at Perambur
works after importing them from Belgium. The question was whether this
B
was a sale in the course of import. The Court said that the sale by the
assessee to the Railways need not have preceded the import. This Court
further held that the movement of goods from Belgium to India was in
pursuance of the conditions of contract between the assessee and the
Director General of Supplies. There was no possibility of those goods being
C diverted by the assessee for any other purpose. Consequently, the sales
took plar& in the course of imports.
The.next important case decided by this court deals with a sale in
the course of export of goods. This is the case of Coffee Board, Bangalore
D v. Joillt Commercial Tax Officer, Madras & Anr., [1969] 3 SCC 349. It is a
decision of a Constitution Bench of this Court with one Judge dissenting..
In this case, the Coffee Board had sold coffee which was to be exported
out of India. Such coffee for export was specially screened and selected.
Auctions were held known as "Export Auctions" for sale of this coffee. The
purchasers at such auctions subsequently exported the coffee. The question
E was whether the sale by the Coffee Board to the local purchaser would be
considered as a sale in the course of export. The Court said that in order
that the sale may occasion the export or cause of export, such a sale must
be the immediate cause of export. Therefore, the introduction of a third
party dealing independently with the seller on the one hand and with the
F foreign importer on the other hand, broke the link between the sale and
the export. It, therefore, held that such a sale was not in the course of
export.
In this case a special emphasis has been laid on the fact that there
wexe two sales--one sale to the intermediary, and the other sale to the
G importer. The Court observed that there must be a single sale which should
cause the export. It said that there is no room for two or more sales in the
course of export. The court was clearly impressed by the fact that when
the Coffee Board sold the coffee to a purchaser locally, there was no
stipulation that the purchaser was bound to export coffee. Obviously if the
H Coffee Board had sold the coffee to a foreign buyer, the export of coffee
I I
K. GOPINATIIAN NAIR v. STATE [SUJATA V. MANOHAR, J.) 261
would have followed. This is what a one-sale test amounts to. But Section A
5 (1) does not say that only a sale by a local purchaser to a foreign buyer
is a sale in the course of export. The language of Section 5(1) is much
wider. Any sale which occasions the export is a sale in the course of export.
A literal adoption of a one-sale test would result in ignoring earlier
decisions of the Constitutional Bench where two sales were involved and a B
sale subsequent to the sale between a local buyer and a foreign seller was
held to be a sale in the course of import when it was established that there
was a firm link between the subsequent sale and the prior import.
The one-sale test must be understood in the context of the facts
which the court was required to consider. The sale prior to export was C
independent of the export. Hence in that case, the earlier sale had not
occasioned the export.
In fact, these observations in the Coffee Board's case (supra) have
been explained in T71e Deputy Commissioner of Agricultural Income Tax and D
Sales Tax, Central Zone, Emakulam v. M/s. Kotak & Co, Bombay Etc.,
[1974] 3 SCC 148 and the Deputy Commissioner of Agricultural Income Tax
& Sales Tax, Emakulam v. Indian Explosives Ltd., [1985] 4 SCC 119 on the
basis that in the Coffee Board's case (Supra) there was no inextricable link
between the local sale and the export, while in the ca~es of Indian Ex-
plosives and Kotak & Co. (Supra) there was such an inextricable link E
between the import of the goods and the local sale.
In the case ofM/s Kotak& Co. (supra) the assessee-firm was engaged
in the supply of foreign cotton to textile mills on the basis of actual user's
import licence issued to the textile mills. The assessee-firm contacted the p
foreign suppliers and if the offers received were found acceptable to the ,
mills, the assessee entered into a contract with the concerned mill and on
that basis, accepted the offer made by the foreign supplier. The textile mill
issued a letter of authority authorising the assessee-firm to import cotton.
One of the terms of the letter of authority was that the person or firm in
whose favour it has been issued will purely act' as an agent of the licensee G
and the licence holder will have to ensure that the goods on importation
will be delivered to him and shall not be disposed of otherwise. This clause
was read as a part of the contract entered into between the assessee and
the textile mills. This Court held that from the facts as set out above it was
clear that the case fell within the rule laid down by this Court in K. G. H
262 SUPREME COURT REPORTS [1997) 3 S.C.R.
A Khosla's case (supra). The sale was in the course of import although there
were two sales, one entered into by the essessee with the foreign supplier
and the other sale by the assessee with the textile mills.
In the same year in the case of Mis. Binani Bros. (P) Ltd. v. Union
B of India & Ors., [1974] 1 SCC 459, a Constitution Bench of this Court
· considered Section 5 (2) of the Central Sales Tax Act. In this case, the
assessee was a registered dealer in nonferrous metals. The assessee was
also an importer of these metals. The assessee was on the approved list of
registered supplier to the Directorate General of supplies and Disposals,
for whom it had imported and supplied non-ferrous metals for several
C years. In order to get import licences the petitioner used to get Import
Recommendation Certificates issued by the D.G.S. & D. or other
authorities like the State Trading Corporation. The assessee claimed that
the imports had been occasioned by their contractual obligations to D.G.S.
& D. This Court, however, negatived the contention. It said that there were
D two sales involved, namely, the sale to the petitioner by the foreign seller
and the sale by the petitioner to the D.G.S. & D. Under the import licences
granted to it, the assessee was entitled to import the goods from any person
or country and the import licences issued to it imposed no obligation on
the petitioner to supply the goods only to D.G.S. & D. after the goods were
imported. Hence there were two independent sales and the sale transaction
E between the assessee and the D.G.S. & D. cannot be considered as·having
occasioned the import.
This judgment has been explained and distinguished in the sub-
F sequent case of Indian Explosives Ltd. (supra). In this case, the local
purchaser used to place orders with the assessee quoting their import
licence numbers. The assessee then placed orders with the foreign supplier
for the supply of goods. In such orders the name of the local purchaser
who required the goods as also its import licence numbers were specified.
On receipt of the goods, the assessee used to invoice the local purchaser.
G This Court held that the sale effected by the assessee to the local purchaser
was in the course of import as there was an integral connection between
the sale to the local purchaser and the actual import of goods from the
foreign supplier. This Court cited with approval the ratio laid down in K.G.
Khosla's case (supra). It distinguished Binani Brothers's case (supra) on
H two material aspects; (1) In that case the assessee itself held the import
K. GOPINATIIAN NAIR v. STATE [SUJATA V. MANO HAR, J.] 263
licence and the goods Wt<re imported on the. strength of such an import A
. , licence and (2) There was no term or condition prohibiting diversion of
the goods after the import. However, in the case before them, the integral
connection or inextricable link between the transaction of sale and the
actual import were established.
B
In· the case of The State of Bihar & Anr. v. Tata Engineering &
Locomotive Co. Ltd., (1970) 3 SCC 697, a constitution Bench of this Court
considered the provisions of Section 3 of the Central Sales Tax Act, 1956,
to decide what can be considered as a sale in the course of inter-State trade
or.commerce. Noting the similarity in language between Sections 3 and 5,
the Court relied upon the. decisions of this Court dealing with Sections 5 C
(1) and 5(2). In the case before the Court the assessee sold their trucks,
buses, chassis and spare parts to the appointed dealers for the purpose of
being sold in the territories outside the State assigned to these dealers
under the dealership agreement. The Court held that the sales were in the
course of inter-State trade or commerce. Dealing with the expression "in D
the course of', it observed that sales or purchases which themselves oc-
casions the export or import . or movement of goods from one State to
another come within the exemption. If the sale cannot be dissociated from
the export or import or movement of goods from one State to another, then
the sale and the resultant export or import or movement of goods must be E
considered as forming part of a single transaction.
In the case of Md. Serajuddin & Ors. v. The State of Orissa, (1975] 2
sec 47, however, the one-sale test appears to have been applied in
isolation. The assessee entered into two contracts with the State Tradition
Corporation for supplying mineral ore for export since the export of F
mineral ore was canalised through the State Trading Corporation. The
State Trading Corporation, in turn, entered into contracts with foreign
buyers. By a majority of four to one, this Court held that the sale by the
assessee to the State Trading Corporation was not a sale in the course of
export even through it was a canalising agency for export. This was because G
it felt that 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 because, now instead of one there were two sales - one
to the intermediary albeit a canalising agency, and the other to the im-
porter. It was this emphasis on one sale which led the court into not placing H
264 SUPREME COURT REPORTS [1997] 3 S.C.R.
A sufficient emphasis on the test propounded in Ben Gomi Nilgiri Plantations'
case (supra) although this test was affirmed by it as valid. ,_
This decision led to the amendment of Section 5 by Parliament by
the addition of sub-section (3) which makes a sale preceding the export
B sale also a sale in the course of export in circumstances set out therein,
thus obviating any difficulties which may arise in the case of sales in the
course of export by virtue of this emphasis on a single sale in the case of
Md. Serajuddin (supra).
To put it a little differently, when there is a local sale followed by
C export of the goods sold; or import of goods followed by a local sale, one
must examine whether the export or th,e import of goods is an essential
ingredient of the local sale. In some cases dealing with exports, the court
found that the local sale lacked this essential ingredient because the local
seller of the goods had no interest in seeing that the goods were exported,
D altltough the local purchaser may have bought the goods for export. To the
local seller, it was immaterial whether the goods were in fact exported or
not. So that there was no understanding between the local seller and the
local buyer that the goods must be exported.
E · This seldom happens in the case of imports whenever the local seller
imports the goods as per the specifications of a specific local buyer and on
the mutual understanding between the local buyer and the local seller that
the goods so imported by the local seller will be purchased by the local
buyer. There is in such cases, a direct link between the local sale and the
F import. In fact it is this mutual understanding between the local buyer and
the local seller which occasions the import. That is why the cases dealing
with imports have not resorted ~o differentiating between one sale or two
sales. They have applied the test as prescribed by Section 5: whether the
import is a result of understanding/contract between the local buyer and
local seller. If it is, the local sale falls under section 5. If it is not -- as may
G well happen if the importer sells his goods after they arrive to the best
available offeror in the market, then the sale is not covered by Section 5.
That is why there has been no need to amend Section 5 to expressly cover
a local sale following import.
H Now, If we apply this test of inseverable link between the local sale
K.GOPINATIIANNAIR v. STATE[SUJATAV.MANOHAR,J.) 265
and import to the transaction in the present case, it is clear that the local A
sale which is between the assessees and the Cashew Corporation of India
is inextricable linked with the import of cashewnuts by the Cashew Cor-
poration of India. In the first place, the very scheme of canalisation in the
present case envisages that the Cashew Corporation of India ascertains the
exact requirements of the former importers who are now required to B
secure their supplies through the canalising agent. Orders of import which
are placed by the Cashew Corporation of India are in exact terms of the
requirements of each of the allottees and are a sum total of these require-
ments. There is specific allocation of each lot before it is shipped from the
foreign port, in favour of each of the allottees. The local purchaser has t-0 C
clear the allocated goods on their arrival. Even a subsidiary licence is
issued in favour of the local purchaser. The price of imported cashewnuts
is paid by the local purchaser. The Cashew Corporation of India is only
paid a commission. There is thus a clear allocation of the goods being
imported in favour of the local purchaser and there can be no question of
the diversion of the import to anybody else. The cumulative effect of this D
arrangement is : it is the specific requirement of local purchaser which has
led to the specific import. Whether the actual sale takes place before the
import or after the import is irrelevant in this context (vide KG. Klwsla's
case [supra]. It is the arrangement between the local buyer and the local
seller which has occasioned the import. E
The respondents drew our attention to the fact that in the case of
any default by the local purchaser, the canalising agency would be entitled
to sell the goods elsewhere. This, however, in my view, does not detract
from the. fact that the import is as per the requirements of the local F
purchaser .and is directly linked with it. A specific allocation is made in
favour of eac~ of the local purchasers. The orders for import are placed
to comply With the specific requirements of the local purchasers. A default
clause cannot alter the nature of the transaction between the local pur-
chaser and the canalising agency. The very term 'canalising agency' in the G
context of the canalisation scheme as set out earlier strengthens the argu-
ment that the imports were effected on behalf of and/or for the benefit of
the local purchaser who had agreed to purchase these cashewnuts. The fact
that only a commission is charged by the canalising agency from the local
purchasers also reinforces this conclusion. In these circumstances, the fact H
\
266 SUPREME COURT REPORTS [1997] 3 S.C.R.
A that a bulk order is placed by the canalising agency with the foreign
supplier does not snap the link between the transaction of sale by the
Cashew Corporation of India to the assessees and the import of cashewnuts
by the Cashew Corporation of India. It is the local sale which has given
rise to the import. It will qualify as a sale in the course of import.
B
The respondent-State has placed strong reliance on the case of Md.
Serajuddin (supra). It was contended that in the light of the observations
made there, unless there is only one sale-the sale which results in import
the sale cannot be considered as causing the import. The real test, in my
C view, is of inseverable linkage. This is how observations regarding the need
for one sale in the earlier Coffee Board's case (supra) have been explained
by this Court in the cases of Indian Explosives and Kotak & Co. (supra).
In the case of Consolidated Coffee Ltd. & Anr. Etc. v Coffee Board,
Bangalore etc. etc., [1980] 3 SCR 625 also, this Court has observed that
D Section 5 (1) was construed by this Court in the context of two sales rather
very strictly in the two cases, namely, the Coffee Board and Md. Serajuddin
cases (supra). Referring to the Statement of Objects and Reasons in
respect of the amending Act which brought about the introduction of
sub-section (3) in Section 5, this Court observed that from the Statement
of Objects and Reasons, it is clear that Md. Serajuddin's decision (supra)
E is specifically referred to as having necessitated the amendment. Secondly,
from the Statement of Objects and Reasons, it is clear that penultimate
sales made by small and medium scale manufactures to an export canalising
agency or private export house to enable the latter to export those goods
in compliance with existing contracts or orders, are regarded as inextricably
F connected with the export of the goods and hence earmarked for conferral
of the benefit of exemption.
The assessees contend that in any event, the test of one sale laid
down in the cases of Coffee Board and Md. Serajuddin (supra) should be
G confined only to export sales and should not be applied to imports. They
further contend that even in the area of export the test has now been ruled
out by reason of a subsequent amendment made to Section 5 of the Central
Sales Tax Act as a result of which sub-section (3) has been introduced in
Section 5. Hence such a test should not now be applied to imports for the
H first time.
f
K. GOPINATHAN NAIR v. STATE [SUJATA V. MANO HAR, J.] 2fj7
In view of similarity of language in Sections 5(1) and 5(2), no such A
distinction is possible between imports and exports. Similar texts will have
to be applied to both the sub-sections. There is no express amendment as
far as imports are concerned which can assist the processors in the present
case. It may be that such an amendment was not necessary in the case of
imports because the difficulty with the penultimate sales had mainly arisen B
in the case of exports. However, whether it is exports or imports or
inter-State sales, what needs to be emphasised is the basic requirement
prescribed under Sections 3 and 5, namely, that the transaction in question
·must occasion either the export or the import or the movement of goods
from one State to another. This clearly postulates an inseverable link
between the transaction of sale in question and the import or export or C
movement of goods from one State to another, as the case may be. The
one-sale test referred to in some cases dealing with exports is only an
aspects of this basis test. We are concerned with a sale which occasions an
import. Therefore, we have to see whether there is such an inextricable and
direct link between local sales which are before us and the import of D
cashewnuts from African countries into India by the Cashew Corporation
of India. The facts already set out show that there is such an inseverable
link as the import made by the Cashew Corporation of India is a necessary
consequence of the specific requirements submitted by the processors and
is a result to the obligations which it has undertaken under its arrangement
with the local processors which has crystalised later in the form of the E
contract of sale. The sales in question are, therefore, in the course of
import.
It was also argued by Mr. Pot~ learned counsel appearing for the
assessees, that in the present case, the sale by the Cashew Corporation of F
India to the assessee took place before the goods crossed the customs
frontiers of India. Hence it is a sale in the course of import. He placed
reliance upon Section 2(ab) of the Central Sales Tax Act, 1956, which
defines "cross_ing the customs frontier of India" as crossing the limits of the
area of a customs station in which imported goods or export goods are
ordinarily kept before clearance by customs authorities. He submitted that G
since the goods were sold by the Cashew Corporation of India to the
assessees before the goods were cleared by the customs authorities they
must be considered as having been sold in the course of import because
they were sold before the goods crossed the customs frontiers of India.
This definition, however, of crossing the customs frontiers of India has been H
\
268 SUPREME COURT REPORTS [1997] 3 S.C.R.
A introduced only by Act 103 of 1976 long after the imports in question took
place. It would have no application to the present case. The contention of
Mr. Poti that this definition must be applied even to goods imported prior
to 1976 because it is only,clarificatory in nature, cannot be accepted. Prior
to the introductions of this definition in the Central Sales Tax Act of 1956,
B crossing the customs frontiers of India was understood as crossing the limit
of territorial waters of India. The definition, therefore, cannot be con-
sidered as merely clarificatory. Since it came to be introduced in the
Central Sales Tax Act after the imports in question, it cannot be resorted
to for the purposes of the present case.
C It was next submitted by Mr. Poti that the sale in the present case
was effected by a transfer of documents of title to the goods before the
goods crossed the customs frontiers of India even in the sense of crossing
the territorial waters of India. Hence it was a sale in the course of import.
He relied upon the second part of Section 5(2) of the Central Sales Tax
Act for this purpose. The Tribunal, however, has found as a fact that there
D is no clear evidence as to when the sale by transfer of documents took
place. In the absence of any factual basis, therefore, this submission also
cannot be accepted .
. However, since there is a direct and inseverable link between the
E transaction of sale and the import of goods on account of the nature of the
understanding between the parties as also by reason of the canalising
scheme pertaining to the import of cashewnuts, the sales in question cannot
be taxed under the Kerala General Sales Tax Act or the Karnataka General
Sales Tax Act, as the case may be. The appeals are accordingly allowed.
There will, however, be no order as to costs.
F
After submitting this judgment, I have had the benefit of reading the
judgment of my learned brother S.B. Majumdar J. I have the highest regard
for his views. I am, however, unable to agree with him for reasons which,
I hope, are clear from what I have already said.
G S.M. C.A. Nos. 4955-77/96 dismissed.
C.A. Nos. 1167- 71192, 1546193
and 3647-52/86 allowed.
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