Holding

The Court held that the phrase ‘in relation to such exports’ in Section 5(3) must be given weight, allowing a penultimate sale of bus‑bodies to qualify for exemption and requiring reconsideration of earlier judgments that limited the provision to the ‘same goods’ test.

Summary

The State of Karnataka challenged the claim of exemption under Section 5(3) of the Central Sales Tax Act by Azad Coach Builders, a bus‑body manufacturer that supplied completed bus bodies to exporters (TATA/Ashok Leyland) for subsequent export of whole buses. The department argued that the sale was only of bus‑bodies, not the complete bus, and therefore the 'same goods' test required for exemption was not satisfied. The appellant contended that the phrase ‘in relation to such exports’ in Section 5(3) should give effect to penultimate sales that are part of the export chain, even if the goods sold are components, provided the identity of the final export is retained. The Court examined earlier decisions (Sterling Foods, Vijaylakshmi Cashew, Consolidated Coffee, etc.) and held that those judgments had not given due weight to the statutory phrase and that the test of ‘same goods’ is not the sole principle, suggesting that the bus‑body sale is in relation to the export of the complete bus. Consequently, the Court directed that the matter be placed before the Chief Justice of India for consideration by a larger bench, effectively dismissing the present appeal.

Issues considered

Whether a penultimate sale of bus‑bodies qualifies for exemption under Section 5(3) of the Central Sales Tax Act when the final export is a complete bus
Whether the test of ‘same goods’ or the ‘subject matter of the contract’ governs the application of Section 5(3)
What is the effect of the words ‘in relation to such exports’ in Section 5(3)
Whether earlier Supreme Court judgments (Sterling Foods, Vijaylakshmi Cashew, Consolidated Coffee, etc.) need to be reconsidered

Legislation cited

Central Sales Tax Act, 1956s. 2(g), s. 5(3)
Karnataka Sales Tax Acts. Second Schedule Entry 14

Subjects

Central Sales TaxSection 5(3)penultimate saleexport exemptionsame goods testin relation to such exportsbus-bodyKarnataka Sales Taxstatutory interpretationreferral to larger bench

Judgment

i
I

STATE OF KARNATAKA A
v.
AZAD COACH BUILDERS PVT. LTD. ETC.

FEBRUARY I5, 2006

[ASHOK BHAN AND S.H. KAPADIA, JJ.] B

Central Sales Tax Act, 1956:

Section 5(3)-Words "in relation to such exports"-Connotation of-
Exporter manufacturing chassis-Giving it to bus-body builder-Body-builder C
delivering the complete bus to exporter who then exports the same-Claim of
assessee body-builder for benefit under Section 5(3)-Held, the point involved
in this case is : whether the test of the "same goods" is the essence of Section
5(3) or whether the test of the subject matter of the contract occasioning the
· export is the principle behind Section 5(3)-/t is in this context that the words D
'in relation to such exports" became crucial-Judgments of this Court in
Sterling Foods* and Vijaylakshmi Cashew Company need reconsideration
by a larger Bench-Papers be placed before Hon 'hie the Chief Justice of
India for directions-Karnataka Sales Tax Act-Second Schedule-Entry 14-
"Bus" and "bus-body".
E
*Sterling Foods v. State of Karnataka, (1986) 3 SCC 469 and
**Vijaylakshmi Cashew Company & Ors. v. Dy. Commercial Tax Officer
(1996) 1 sec 468, referred to.

K. Gopinathan Nair and Ors. v. State of Kera/a, (1997) 10 SCC 1,
relied on. F
Mohd. Serajuddin & Ors. v. State of Orissa, (1975) 2 SCC 47;
Consolidated Coffee v. Coffee Board, (1980) 3 sec 358 and Satnam Overseas
(Export) v. State of Haryana, (2003) 1 sec 561, cited.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 5616-5617 G
of 2000.

From the Final Order and Judgment and dated 8.2.2000 of Kamataka
High Court in S.T.R.P. Nos. 4/1997 C/W 5/1998.
245 H
246 SUPREME COURT REPORTS [2006 I 2 S.C.R.

A G.E. Vahanvati, S.G. (Amicus Curiae), Kavin Gulati, Sanjay R. Hegde,
Anil K. Mishra. A. Rohen Singh and Ms. Rashmi for the Appellant.
..
Soli J. Sorabjee, Joseph Vellapalli, M.N. Shankeregowda, Vikas R,
B.K. Choudhary, E.C. Vidya Sagar, E.R. Kumar. N. Prasad Pritesh Kappor,
Sumit Goel and P.H. Parekh (for P.H. Parekh & Co.) for the Respondents.
B
The Order of the Court was delivered:

ORDER

Manufacturers of buses, such as, TA TA and Ashok Leyland get orders
C for export of buses. One such export order is annexed as "R-3" in the
paperbook. These manufacturers manufacture chassis and they thereafter place
orders on the assessee for building bus-bodies (See: annexure "R-5" in the
paperbook). The name of the assessee in the present case is Azad Coach
Builders Pvt. Ltd. The foreign buyers place an order on the exporter, namely,
D TATAs for supply of "the complete bus/buses" giving specifications of the
chassis and the bus-body. In some cases, the foreign buyers even indicate the
source from which the exporter in India should get the "bus-body" constructed.
After constructing the bus-body as per the specifications and after completing
the bus in its entirety, the assessee (body-builder) delivers "the complete bus"
to TAT AlAshok Leyland who then exports the same to Sri Lanka for the
E purposes of accounting. The exporter raises a bill for chassis on the assessee
and instead of making entries in the accounts by first debiting the value of
the chassis to the body-builder (assessee) and then deducting the amount of
chassis from invoice of a complete bus, the exporter invoices the assessee
only in respect of bus-body and not for the entire complete bus. It is not
disputed that after getting the bus completed, nothing is done by the exporter
F to change the identity of the bus, thus entitling the assessee of the benefit
under section 5(3) of the Central Sales Tax Act, 1956 (hereinafter referred to
as "the said Act").

According to the department, the contract given to the assessee by the
G exporter is for the bus-body; that, "bus" and "bus-body" are different articles
mentioned in entry l 4 to the second schedule to the Karnataka State Sales
Tax Act; that, the bus-body is a separate saleable commodity different from
chassis or from the complete bus and, therefore, according to the department, '.
the assessee is not entitled to the benefit of section 5(3) of the said Act.
According to the department, in order to attract section 5(3), the assessee
H should have manufactured and sold the complete bus in order to constitute
STATE OF KARNATAKA '"AZAD COACH BUILDERS PVT. LTD. ETC. 247

-r
_I
penultimate sale under section 5(3) of the said Act. According to the A
department, since the sale, is only for the bus-body and not for the compl_ete
bus by the assessee to the exporter in India, the assessee is not entitled to the
benefit of section 5(3) of the Act. According to the department, exemption
under section 5(3) is admissible only when the commodity exported is the
same as the commodity purchased and in the present case, according to the
department, the commodity exported is "the complete bus" whereas tli"!
B
commodity purchased by the exporter is only the bus-body and, therefore,
.... the assessee is not entitled to exemption under section 5(3) of the said Act.
In this connection, reliance was placed by the department on the judgments
of this court in the following cases:

I. Consolidated Coffee v. Coffee Board, reported in [1980) 3 SCC
c
358 (para I 7);

2. Sterling Foods v. State of Karnataka, reported in [1986] 3 SCC
469 (para 3);

3. Vijay/akshmi Cashew Company & Ors. v. Uy. Commercial Tax D
Officer, reported in [I 996] I SCC 468 (para 4 ); and
~

4. Satnam Overseas (Export) v. State of Haryana reported in [2003]
-+ 1 sec 561 (para 44).

According to the department, the word "sale" as defined under section
2(g) of the said Act makes it clear that the word "sale" indicates transfer of E
property in goods by one person to another for cash or deferred payment. In
order to constitute "sale", it is urged, that, there has to be an agreement for
sale of goods between two persons competent to contract for consideration
and that the property in goods must pass as a result of such transaction. It is
submitted on behalf of the department that in order to constitute "sale", the F
agreement and the sale must relate to the same subject matter. According to
the department, "bus-body" is composite item capable of being sold in the
market as goods and the transfer of property in goods between the bus-body
manufacturer (assessee) and its purchaser (TATA) is confined only to the
bus-body and not to the complete bus. According to the department, the
words "in relation to export" as found in section 5(3) do not, in any manner, G
control the first part of the said section which uses the expression "in goods"
and the expression "those goods". According to the department, the above
two expressions have been used out of abundant caution and that the expression
"in relat\on to export" does not expand the scope of section 5(3) to include
') the goo~s ,~ther than those which are ultimately exported. According to the H
;'
248 SUPREME COURT REPORTS (2006) 2 S.C.R.

A department, section 5(3) was introduced in the said Act only to get over the
decision of this court in the case of Mohd. Serajuddin & Ors. v. State of
Orissa, reported in (1975] 2 SCC 47, in which case this court while construing
section 5( I) held that even in relation to the same goods which were sold by
the assessee to the State Trading Corporation (STC) for export, Serajuddin
B was not entitled to the benefit of that section. According to the department,
in order to get over the narrow interpretation placed by th is court on section
5(1) in the case of Mohd. Serajuddin (supra), section 5(3) was introduced in
the Act as indicated by the statement of object and reasons given for the
introduction of section 5(3) of the Act and, therefore, the introduction of
section 5(3) is not to enlarge the scope of section 5(1) so as to allow
C components or raw-materials of the ultimate export to get the benefit of
exemption which will defeat the very purpose of the said sub-section.
According to the department, the purpose behind introduction of section 5(3)
is not to include goods to the benefit of exemption other than those which are
ultimately exported.

D On behalf of the assessee, on the other hand, it has been contended that
the reason behind the amendment of section 5, after the judgment of this
court in the case of Mohd. Serajuddin (supra), is to make our exports
competitive in the international market and to boost earnings in foreign
exchange. According to the assessee, the courts are required to place a
E purposive interpretation keeping in view the current realities and developments
in the international market. On the scope of section 5(3), it is urged on behalf
of the assessee that it is "the complete bus" which leaves the premises of the
assessee. According to the assessee, the State seeks to levy CST on "the bus-
body" built on to a chassis. The bus-body is constructed by the assessee.
According to the assessee, the subject matter of the inter-state movement in
F the present case was a bus and not the bus-body because it is the complete
bus which is exported to Sri Lanka either through Mumbai or through Chennai
port. According to the assessee, it is only on delivery of completed bus that
the transfer of property in the bus-body takes place. Merely because the bus-
body involved in such a transaction is exigible to local sales tax separately
G from the bus, it cannot be contended that the bus-body is the subject matter
of export. If the argument of the department is to be accepted, then it would
follow that the bus-body is not the subject matter of inter-state movement and
' ..
if it is so held, then it would not be taxable under section 6 of the said Act.
According to the assessee, for a sale to qualify for exemption, it must be a
penultimate sale, the goods sold must be for export, the goods musN>e
H exported by the buyer (TATA), the buyer should have a pre-existing export
·'
1
STATE OF KARNATAKA 1·. AZAD COACH BUILDERS PVT. LTD. ETC. 249

-t
j
order and the sale must have been effected for complying with or in relation A
to the export order. According to the assessee, the aforestated last condition
is the principal element under section 5(3). However, the sale will not come
under section 5(3) if the buyer (TATA) subjects the goods to process after
the· sale and before its export if such process results in a change in the
identity of the goods. It is pointed out that in the present case, the chassis are
moved under customs bond for body building and export to the premises of
B
the assessee; that, the assessee delivers the completed bus, which is moved
~} ' under the bond directly to the port and exported to Sri Lanka. Consequently,
the chain never breaks. Hence, the transaction in question, according to the
assessee, is entitled to the benefit of section 5(3). According to the assessee,
the expression "in relation to" in section 5(3) is of a wide import It c
contemplates two subject matters connected with each othe~. Thus, in relation
to export of a motor vehicle constructed with bus-body, if there is a prior
order for sale of bus-body then sale of the bus-body will be in relation to the
. export of the complete bus and, therefore, sale of bus-body would constitute
penultimate sale under section 5(3). Therefore, according to the assessee, due ...
weightage must be given to the words "in relation to such exports", which D
emphasis has not been given in any of the earlier judgments of this court.
According to the assessee, it is true that in the.judgments cited hrreinabove
+ by ·the department, the test of "the same goods" has been applied and on that
basis this court has repeatedly held that when the commodity exported is the
same as the commodity purchased, the benefit of section 5(3) is admissible. E
However, according to the assessee, it is submitted that the test of "the same
goods" is evolved judicially by this court only to indicate that the goods sold
by the assessee should not have lost their separate identity at the time of
export in order to apply section 5(3). If the goods sold by the assessee do not
lose their separate identity at the time of export then the penultimate sale
would be deemed to be in the course of export by virtue of section 5(3). F
__.>! However, according to the assessee, the observations of this court to the
above effect, in the abo_ve cases including Sterling Foods (supra) and
Vijaylakshmi Cashew Company (supra) have got to be understood in the light
of the expression "in relation to such exports". According to the assessee, the
expression "in relation to such exports" has not received due weightage in
G
any of the earlier judgments. Accc,rding to the assessee, _the test of "the same
, goods" is not the principle behind section 5(3). That, the said test has been
""'"" evolved only to explain that the exporter should not have undertaken any
process to change the identity of the goods bought by him in order to confer
the benefit of exemption on the penultimate sale. If the goods do not lose
,· their identity, the benefit under section 5(3) is available. According to the H
250 SUPREME COl.'RT REPORTS [2006] 2 S.C.R.

A assessee, the only requirement in section 5(3) is that the goods sold to the
exporter should be exported as such without loss of identity and if that
happens, the penultimate sale gets the benefit of section 5(3 ).

In our view, the scope of section 5(3) needs to be reconsidered. In none
of the above judgments cited on behalf of the department, due weightage has
B been given by this court to the words "in relation to such exports" occurring
in section 5(3 ). There cannot be a bus without the bus-body. The subject
matter of the inter-state movement and the subject matter of the export is a
''bus" and not a "bus-body". It cannot be denied that the sale of the bus-body
by the assessee to the exporter is in the course of export of the bus to Sri
C Lanka. What is delivered to the exporter by the assessee is a complete bus.
It is true that for accounting purpose, there is a bifurcation between the bus-
body and a complt.te bus. Supposing, TATA! Ashok Leyland would have
given chassis free of cost to the assessee calling upon the assessee to construct
the bus-body on the chassis which construction/ fitment was to be done as
per the specifications by the exporter. In such a case, would it not amount to
D a transaction in the course of export or in relation to export of the buses? It
is in this light, we find merit in the argument advanced on behalf of the
assessee that due weightage has not been given to the words "in relation to
such exports" occurring in section 5(3). For example, in the case of Computers,
we now have a concept of, what is called as, "firmware" under which a
E programme is embedded on to the integrated circuits/chips. Supposing, TATAs
get an export order for a firmware, which cannot exist with the programme
being loaded on to the hardware, and if they provide the hardware to the
assessee who loads the programme on to the said hardware which then is sold
to TATA who exports it, can it be said that the goods supplied are not the
subject matter of the export. If the test of the "same goods" as mentioned in
F the aforestated judgments of this court in the case of Sterling Foods (supra)
and Vijaylakshmi Cashew Company (supra) is to be applied then the assessee/
supplier of firmware which contains a programme and which is the heart of
the system will never get the benefit of section 5(3). In the earlier days, when
Mohd. Serajuddin 's case (supra) held the field, India was under licence raj.
G At that time, exports were through STC. We do not have today such agencies.
That system is disbanded. If so, the question which arises for determination
is -what are the transactions covered by section 5(3)? The basic point involved
in this case is---whether the test of the "same goods" is the essence of section ' .
5(3) or whether the 'est of the subject matter of the contract occasioning the
export is the principle behind section 5(3)? It is in this context that the words
H "in relation to such exports" become crucial. If a transaction is in relation to
/)
1 .J
STATE OF KARNATAKA ''·AZAD COACH BUILDERS PVT. LTD. ETC. 251

the exports, can it be denied the benefit of section 5(3). We are, therefore, A
7 of the view that the judgments of this court in the above two cases of Sterling
Foods (supra) and Vijay/akshmi Cashew Company (supra) need
reconsideration.

Before concluding, we may also refer to the judgment of this court in
the case of K. Gopinathan Nair & Ors. v. State of Kera/a, reported in [1997] B
10 SCC 1, in which it has been held that section 5(3) will apply to penultimate
sales if such sales satisfy two conditions, namely, (a) that such penultimate
~ r sale must take place after the agreement or order under which the goods are
to be exported; and (b) it must be for the purposes of complying with such
agreement or export order. We refer to para 12 of the judgment, which reads C
as under:

12. The aforesaid decision obviously was rendered in the light of the
peculiar facts of the case before the Court. In that case the respondent-
assessee was acting on behalf of the local importers and was aimost
as good as their agent for importing the goods on their behalf from D
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
on the basis of the actual user' licence that the goods were imported
+ by the respondent-assessee 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 E
provided by an obligation to import arising from contract or mutual
understanding or nature of the transaction 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 F
light of the salient features emerging on the record of these cases. On
the contrary the decisions of the Constitution Benches of this Court
in Mohd. Serajuddin v. State of Orissa, [1975] 2 SCC 47 and in
Binani Bros. (P) Ltd v. Union of India, [1974] I SCC 459 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 G
of three learned Judges in the case of Consolidated Coffee Ltd. v.
Coffee Board, Bangalore, [1980] 3 SCC 358, which is called the
second Coffee Board case. Jn that case Tulzapurkar, J. speaking 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 H
252 SUPREME COURT REPORTS (20061 2 S.C.R.

A 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 Serujuddin 's case (supra). By the said amendment to
Section 5(3) the legislature thought it fit to grant exemption also to
the penultimate sales prior to the sales in the course of export by the
canalising agency. That was with a view to boost up foreign exchange
B 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 lax liability under the Act not to any kind of
penultimate sale but only to such penultimate sale as satisfies the two . .
conditions specified therein, namely, (a) that such penultimate sale
c 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 provision which itself postulates that but for such
D amendment the penultimate sale would have remained outside the
sweep of Section 5 sub-section (I) 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 Section
E 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 Serujuddin 's case and in the case of
Binani Bros. had laid down on the true construction of the provisions
of Sections 5( I) and 5(2) while interpreting the words 'in the course
F of export' or 'in the course of import' as found in these provisions."

In our view, these two tests, as mentioned in para 12 of the above
judgment, are the only two requirements which every penultimate sale must
satisfy in order to attract the benefit of exemption under section 5(3). In our
view, the judgment of this court in the case of K. Gopinathan Nair (supra)
G is correct and in the light of th is judgment and the tests propounded therein,
we are of the view that the aforestated two judgments of this court in the case
of Sterling Foods (supra) and Vijaylakshmi Cashew Company (supra) need
reconsideration. ..
H For the reasons aforementioned, we are of the view that the decisions
STATEOFKARNATAKA v. AZAD COACH BUILDERS PVT. LTD. ETC. 253
of this court cited hereinabove in the case of Sterling Foods v. State of A
7' Karnataka reported in (1986) 3 SCC 469 and Vijaylakshmi Cashew Company
& Ors. v. Dy. Commercial Tax Officer, reported in [1996] 1 SCC 468 need
reconsideration by a larger bench. The papers may be placed before Hon'ble
the Chief Justice of India for further directions.

R.P. B

+