2018 (12) TMI 353 - HC - VAT and Sales Tax

Input tax credit - Section 11 of the KVAT Act, 2003 - stock transfer is in the course of export or not - assessee claimed input tax credit of the tax paid on purchase of raw materials from registered dealers to the extent of the stock transfer on consignment, made to the godown of the assessee at Tamil Nadu - Held that - Unless the assessee proves that the stock transfer was in pursuance of an export order, there cannot be a contention raised that the stock transfer was in the course of export merely for the reason that the goods have been identified under the Central Excise Act to be exported. Even if there is no diversion of goods and if there is no export, then necessarily the intention is not served and it cannot be said that the benefit conferred specifically for the export of goods should also be extended to those goods manufactured for export, but eventually not actually exported. The mere fact that the goods so consigned is manufactured under a Unique Product Code enabling exemption from excise duty and specifically earmarked for export would not by that alone qualify for the consignment to be treated as a consignment made in the course of export - It is also to be stated that merely for the reason that the manufactured goods are first consigned to the godown at Tamil Nadu and then exported, it would not result in dis-entitling the assessee to a claim that the stock transfer is in the course of export. This would have to be proved by sufficient documents, which the assessee could produce before the Assessing Authority. The stock transfer destined to Tamil Nadu cannot be said to be in the course of export, since the destination of the foreign buyer is not clear at the time stock transfer originates. The consideration as to whether a specific stock transfer on consignment, is in the course of export has to be considered by the Assessing Authority - Appeal allowed by way of remand.

Issues Involved:
1. Entitlement to input tax credit under Section 11 of the KVAT Act, 2003.
2. Determination of whether stock transfers on consignment to a godown in Tamil Nadu are in the course of export.

Detailed Analysis:

1. Entitlement to Input Tax Credit Under Section 11 of the KVAT Act, 2003:

The core issue is whether the assessee is entitled to input tax credit for tax paid on purchases of raw materials when these materials are stock-transferred on consignment to a godown in Tamil Nadu for export purposes. The assessee argued that the goods manufactured for export under a Unique Product Code are destined for export and thus should qualify for input tax credit. The Clarificatory Authority, however, found that the stock transfer can only be considered in the course of export if the goods are definitively headed for a foreign destination and not diverted for domestic use.

2. Determination of Whether Stock Transfers on Consignment to a Godown in Tamil Nadu are in the Course of Export:

The Clarificatory Authority concluded that the goods pooled at the godown in Tamil Nadu are not immediately destined for export, and the ultimate destination is decided only after stocking in the godown. The learned Counsel for the appellant contended that the goods manufactured under a Unique Product Code are meant for export, and hence, there should be no diversion of goods. They cited several Supreme Court decisions to support their claim that the stock transfer should be considered in the course of export.

The learned Senior Government Pleader argued that a prior export order is imperative to claim that the stock transfer is in the course of export. The goods must be exported directly from the manufacturing unit or must have a prior export order to be considered in the course of export.

Judicial Precedents and Analysis:

- Nipha Exports Pvt. Ltd. Case: The Supreme Court upheld that the movement of goods from a branch office to a head office for export, based on a prior export order, was in the course of export. This case emphasized the necessity of a prior export order for the stock transfer to be considered in the course of export.

- Burmah Shell Case: The Supreme Court emphasized that integrated activities from the agreement of sale with a foreign buyer to the delivery of goods to a common carrier are necessary to constitute a sale in the course of export. The transaction must commence with an export order.

- State of Travancore-Cochin v. Shanmugha Vilas Cashew Nut Factory: The Court held that activities preparatory to export, such as production or manufacture for export, cannot be regarded as acts done in the course of export.

The Court reiterated that every sale or purchase preceding the export is not necessarily within the course of export. It must be inextricably bound up with the export, and sales or purchases unconnected with the ultimate export as an integral part thereof are not within the exemption.

Conclusion:

The Court held that the stock transfer destined to Tamil Nadu cannot be said to be in the course of export since the destination of the foreign buyer is not clear at the time the stock transfer originates. The stock transfer is not based on any specific export order, and the goods are pooled at the godown in Tamil Nadu before export. The assessee must prove that the stock transfer was in pursuance of an export order to claim it was in the course of export.

The Court did not interfere with the order of the Clarificatory Authority but clarified that the Assessing Authority must consider whether a specific stock transfer on consignment is in the course of export based on the observations made. The assessee can substantiate their claim by producing necessary export orders before the Tribunal or any authority where the matter is pending.

The O.T. Appeal was rejected with the above reservations, and no order as to costs was made.

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