2000 (3) TMI 1066 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether there is a sale of REP licences/exim scrips by the appellant exigible to tax under CST Act.
2. Whether the payment by the export house to the appellant can be treated as consideration for such sale.
3. If there is a sale/transfer of export benefit, whether it took place in the course of an export transaction outside the territory of India and not in the course of inter-State trade or commerce and therefore there is no liability to Central sales tax under the CST Act.

Detailed Analysis:

Re: Point (i):

The first question is whether there is a "sale" exigible to Central sales tax. The term "sale" is defined in section 2(g) of the Central Sales Tax Act, 1956. It means any transfer of property in goods by one person to another for cash or for deferred payment or for any other valuable consideration. Section 2(d) of the CST Act defines "goods" as including all materials, articles, commodities and all other kinds of movable property, but does not include actionable claims, stocks, shares, securities and newspapers.

In Vikas Sales Corporation v. Commissioner of Commercial Taxes [1996] 102 STC 106; AIR 1996 SC 2082, the Supreme Court considered the question whether replenishment licences/exim scrips issued as per import policy, are "goods" and whether transfer thereof is exigible to tax under sales tax laws. The Supreme Court held that replenishment licences which became export-import licence (for short "exim licence") with effect from July 3, 1991 are goods and that they were neither "actionable claims" nor "securities" which are excluded from the definition of "goods", under the CST Act and KST Act; and that transfer thereof to another constituted sale of goods within the meaning of and for the purposes of the CST Act and KST Act, exigible to tax. The following observations of the Supreme Court are relevant:

"The REP licences (and exim scrips) have their own value. They are bought and sold as such. The original licensee or the purchaser is not bound to import the goods permissible thereunder. He can simply sell it to another and that another to yet another person. In other words, these licences/exim scrips have an inherent value of their own and are traded as such. They are treated and dealt with in the commercial world as merchandise, as goods. An REP licence/exim scrip is neither a chose-inaction nor an actionable claim. It is also not in the nature of a title deed.

It has a value of its own. It is by itself a property-and it is for this reason that it is freely bought and sold in the market. For all purposes and intents, it is goods. Unrelated to the goods which can be imported on its basis, it commands a value and is traded as such. This is because, it enables its holder to import goods which he cannot do otherwise.

The appellant contends that it has not "sold" or, "transferred" REP licences/exim scrips. It is stated that under the agreements entered by it with export houses, the export houses are entitled to all export benefits (that is, REP licences/exim scrips) and it is entitled to the benefit under section 80HHC of Income-tax Act and it merely gave effect to the said term of the agreement by issuing disclaimers in favour of the export house regarding the REP licences/exim scrips. It is pointed out that in pursuance of the agreements between the appellant and export houses and in view of the disclaimers, the REP licences/exim scrips were directly issued to the export houses (in the names of the export houses), by the concerned licensing authority (Joint Controllers of Exports/Imports) of the States where the export houses are situated. According to the appellant, the question of a transfer or sale of REP licences/exim scrip would arise only if the REP licence/exim scrips had been issued in its name and if it had thereafter transferred them for consideration to anyone else.

Any transfer of property in "goods" by one person to another for valuable consideration is a sale and any consideration received for such sale is "sale price". A transaction need not be referred to as "sale" to be exigible to sales tax. If any agreement or arrangement between two parties results in transfer of goods from one to the other, there is a sale. The Import and Export Policy provided that the exporter is entitled to REP licences/exim scrips and that the exporter can transfer them to any one and enabled the transferee to import the goods permitted therein. The transfer of REP licences/exim scrips does not require any endorsement of permission from the licensing authority. A transfer of REP licences/exim scrips, which by themselves are goods, in the normal course would be by a sale invoice or letter confirming the transfer or agreement of sale coupled with delivery or by means of an endorsement of transfer on the REP licence/exim scrip itself. But, it does not mean that a transfer cannot be effected by other means. Any agreement or arrangement by which a person entitled to the REP licence/exim scrip empowers and authorises another to receive the export benefit (REP licence/exim scrip) directly from the licensing authority and undertakes to furnish the necessary disclaimer and the necessary documents to enable such other party to secure the REP licence/exim scrip directly in his name, is also a transfer of the REP licence/exim scrip. A transfer does not necessarily involve getting the REP licences/exim scrips physically by the exporter and then transferring it to someone else. If "A" is entitled to REP licence/exim scrip under the Import Export Policy, and by any stratagem or scheme, the REP licences/exim scrip to which "A" is entitled is made to be issued to "B" or to vest in "B", for a consideration paid by "B" to "A", the stratagem or scheme would itself be the agreement of sale or transfer, and the taxable event will occur, when, in pursuance of such agreement between A and B and the disclaimer issued by A, the REP licence/exim scrip to which "A" is entitled, is delivered to B, that is issued to B by the appropriate licensing authority. The act of disclaimer/renunciation for consideration, in the circumstances, is a transfer exigible to tax and the taxable event would be the issue of REP licences/exim scrips to "B". To ascertain whether there is sale, the essence of the agreement between the two parties and the reality of the transaction in its entirety should be considered and not whether there is physical delivery by the seller to buyer or whether the transaction is referred to as "sale".

The Madras High Court in P.S. Apparels v. Deputy Commercial Tax Officer [1994] 94 STC 139, makes it clear that the transaction need not be termed as "sale" or "transfer" to be exigible to tax. In that case the assessee surrendered the REP licences to a bank for consideration.

When the transaction was sought to be taxed, it was contended that there was no "sale" or "transfer". Repelling the said contention, the Madras High Court held:

"Mr. Gangadharan, learned counsel appearing in W.P. No. 19467 of 1993, raised a plea that the authorities are seeking to levy sales tax also on the value or sum received by the petitioner therein on surrendering the licence in question to the specified or designated banks and the act of surrender cannot be treated as a transaction of sale attracting liability to sales tax. The learned Additional Government Pleader (Tax) submitted that if in any case it is substantiated that there was merely a surrender and no transfer or sale has really taken place such transactions may not be taxed by the assessing authorities. The submission on behalf of the petitioner, in our view, is based upon an imperfect claim on a coloured version of the nature of the transaction itself. The act of surrender is one where the licence granted is returned back to the grantor. In the context of surrender of rights generally it conveys an abdication or giving up of a right in favour of some one who also holds an interest in the very matter. The word "surrender" is an anachronistic word for the identification or description of the action of the petitioner. It is not the case of the petitioner that the licence under consideration was returned to or handed over back to the grantor-department of the Government of India but on the other hand the specific claim is that it has been delivered to the designated bank on receipt of valuable consideration therefor."

Therefore the test is whether the export house could have received or obtained the REP licences/exim scrips, but for the agreement and consequential disclaimer by the appellant. If the answer is that the export house would have received the REP licences/exim scrips without any disclaimer or authority issued in its favour by the appellant, then there would be no transfer of sale by appellant. But, if the authority granted, and disclaimer issued, by the appellant is the basis for the export house getting the REP licence/exim scrip directly in its name, then there is a transfer by the appellant in favour of the export house.

A reading of the agreements between the appellant and export houses make it clear that the main object of the agreement is to transfer the export benefits (REP Licences/exim scrips) from the appellant to the export houses for a consideration. The following factors, that is, (a) the appellant was responsible for any claim for defective quality of goods exported, (b) that the appellant received the entire price for the exported goods, (c) that the bills of lading were in the joint names of the appellant and the export house, (d) that the relief under section 80HHC of the Incometax Act accrued to the appellant and (e) that relief under section 80HHC could not have been availed of by the export house as it did not receive any part of the sale consideration, make it clear that but for the disclaimer by the appellant issued as per the agreements, the export benefits (REP licences/exim scrips) would have been issued in the name of the appellant and not in the names of the export house. Only the exporter is entitled to the REP Licences/exim scrips under the Import-Export Policy. If the REP licences and exim scrips which became due on account of exports by the appellant, were issued in favour of the export house instead of the appellant, it is only in view of the terms of the agreement between appellant and the export house and consequential disclaimer by the appellant. Therefore, renunciation or disclaimer of export benefits (REP licences/exim scrips) by the appellant in favour of export houses amounts to a sale taxable under the Act even though REP licences/exim scrips were directly issued in the name of the export houses.

It is alternatively contended that the transaction between appellant and the export house is in the nature of a barter or exchange; that is, the export benefits to which appellant is entitled are exchanged for the income-tax benefits to which the export house is entitled. Reliance is placed on the decision of a learned single Judge of this Court in Steel Authority of India Ltd. v. Assistant Commissioner of Commercial Taxes ILR 1996 Kar 1136, wherein it is held that a contract relating to goods can be considered as a contract of sale only if the consideration for transfer of property in goods in favour of the transferee is money; and that if goods are agreed to be transferred for any other consideration like exchange with any other goods or services rendered, then in law, such a contract cannot be said to be a contract of sale of goods and therefore such a transaction cannot be subjected to sales tax. This contention is on the assumption that there is an exchange between the appellant and the export house, in respect of export benefits and income-tax benefits. But according to the respondents the consideration for transfer of REP licences/exim scrips, is not the "incometax benefits", but payment of a percentage of the f.o.b. value by the exporter. A clear examination would show that contention of the Revenue is correct. This is because, there is, in actual fact, no exchange of export benefits and income-tax benefits as the income-tax benefit would have anyhow accrued to the exporter (that is the appellant) and not to the export house having regard to the nature of transaction and the provisions of section 80HHC. Secondly "exchange" presuppose that the export house was entitled to some "benefit" under the Income-tax Act which was real and not illusory, and if there was no exchange, the export house would have enjoyed such "benefit ".

Let us therefore consider whether the export house would have or could have received any benefit at all under section 80HHC if there was no disclaimer thereof in favour of the appellant. The alleged benefit in question is the right to seek deduction of profits derived by the assessee from export of goods, in computing the total income of the assessee. In other words, the profit from export becomes tax-free. But, in this case, the export house did not get any part of the price, let alone any profit, in respect of the export. The price and profit of export is received by the appellant. Therefore, even if there was no disclaimer by the export house in favour of the appellant, the said 80HHC benefit would have accrued only to the appellant and in no event to the export house.

We therefore hold that transaction between the appellant and export houses, under which the export house obtains the REP licences/exim scrips directly from the licensing authority, in pursuance of the disclaimer by appellant, amounts to a sale of REP licences/exim scrips by the appellant to the export houses.

Re: Point No. (ii):

The next question relates to identifying the consideration for the sale or transfer of REP licences/exim scrips. It is seen from the agreement between the parties that the actual export is by the appellant and not by the export house. Even the bill of lading is in the joint names of the appellant and the export house. The entire proceeds of exports are received by the appellant. In fact, the benefit of section 80HHC of the Income-tax Act accrues to the appellant in view of the fact that the entire proceeds of the export are received by the appellant. As no part of the proceeds of export is received by the export house, the export house could not have derived any benefit under section 80HHC. Hence, the disclaimer by the export house in favour of the appellant in regard to income-tax benefit is illusory. It is not therefore possible to accept the contention of the appellant that the disclaimer regarding the benefit under section 80HHC of the Income-tax Act by the export house is the consideration for the appellant issuing disclaimer in regard to the export benefits (REP licences/exim scrips). As already held (in para 22) the disclaimer by the export house in favour of the appellant in regard to the relief under section 80HHC of the Income-tax Act is only an empty red herring intended to deviate the attention from the real consideration.

Under the agreement/arrangement between the appellant and the export house, the appellant as exporter does not render any service to the export house. Therefore, the question of the export house paying 2.4 per cent or any other percentage of the f.o.b. price to the appellant as service charge/ commission/premium/incentive does not arise. Necessarily therefore the said payment is only a consideration for the transfer of export benefits (REP licences/exim scrips). It is possible that the export benefits incidentally include the benefit of counting the export to the account of the export house, and thereby attain the minimum quantity of exports required to continue the recognition. Thus, by process of exclusion, all that remains under the agreement is the act of transfer of the benefits of export (REP licences/exim scrips) by the appellant in favour of the export house on the one hand and payment of a percentage of the f.o.b. price by the export house to the appellant on the other. The only inference therefore is that the said payment of a percentage of f.o.b. value by whatever name it is called, i.e., service charge, commission, premium or export incentive, is nothing but the consideration for transfer of the benefits of export, i.e., REP licences/exim scrips.

The contention that the appellant renders some service to the export house, in agreeing to treat the export to be counted as export by the export house and thus enable the export house to reach the export target so that their recognition as export house is continued, is without substance.

If that is so, it would mean that the appellant is giving up the benefits of export (REP licence/exim scrip), which is very valuable free of any cost. That is not what any prudent businessman would do. Nor is it the case of the appellant that they gave up such benefit free of any change.

Re: Point No. (iii):

The contention of the appellant is that even if it has to be held that there is a sale or transfer of export benefit, it took place in the course of the export transaction outside the territory of India and not in the course of inter-State trade or commerce, and therefore there is no liability to pay Central sales tax. This contention is not sound. The subjectmatter of sale or transfer which is being taxed is not the exported goods (marine products). The subject-matter of the sale is REP licences/exim scrips.

The sale or transfer of REP licences/exim scrips took place in pursuance of the agreement between the appellant and the export house. As the goods (REP licences/exim Scrips) were not in existence at the time of the agreements, the transfer is completed only on delivery of the goods. In this case therefore, the taxable event is the issue of the REP licences/exim scrips in favour of the export house by the licensing authority in pursuance of the agreement and the disclaimer by the appellant. Thus, it cannot be said that the sale/transfer took place outside the territory of India.

We do not find any error in the impugned revisional order dated January 22, 2000 passed by the Commissioner of Commercial Taxes (Karnataka). As all the points raised by appellant are answered against the appellant, it follows that there is no merit in these appeals. Accordingly, these appeals are rejected.

Appeals dismissed.