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Supreme Court rules manufacturer eligible for exemption from sales tax
September, 16th 2010

A Constitution bench of the Supreme Court has ruled that a local manufacturer is eligible to get exemption from the sales tax under Section 5 (3) of the Central Sales Tax Act (CST Act) 1956, if the penultimate sale effected in favour of the exporter was inextricably connected with the export of the goods outside the territory of India.

The Constitution bench comprising Chief Justice S H Kapadia and Justices B Sudershan Reddy, K S Radhakrishnan, Surinder Singh Nijjar and Swantater Kumar, dismissed the appeals of state of Karnataka.

Justice Radhakrishnan, in his concurrent judgement pronounced noted "The connection between the penultimate sale and the export of goods should not be casual, accidental or fortuitous, but real, intimate and interlinked, which depends upon the nature of the agreement the exporter has with the foreign buyer and the local manufacturer, the integrated nature of the transaction and the nexus between the penultimate sale and in the export sale.

In the facts and circumstances of this case, we are satisfied that the assessee has succeeded in satisfying those tests and hence, eligible for exemption under sub-section (3) of section 5 of the CST Act.

We therefore find no error in the decision rendered by the High Court in declaring that the assessee is entitled to exemption under section 5 (3) of the CST Act.

The reference is accordingly answered and the appeals than dismissed."

In the present case Azad Coach Builders Pvt Ltd, the assessee was requested to build bus bodies, by the exporters Tata Engineering Locomotives Company Ltd, in accordance with the specifications provided by foreign buyers, Lanka Ashok Leyland Ltd, Colombo.

The specimen copy on the purchase order dated July 11, 1988 supplied by the exporters revealed that the assessee was asked to fabricate bus bodies on the chassis supplied by the exporter in accordance with the specifications given by the foreign buyers.

In one of the letters received from the foreign buyers it was stipulated that the steel and aluminium panel of the bus body be build by the assessee, since the customers in Sri Lanka preferred them.

The assessee accordingly manufactured the bus bodies in accordance with the specifications provided by the foreign buyers and mounted the same on the chassis made available by the exporters making it as a completed bus ready for export.

The tax department refused to allow exemption on the grounds that the transaction was interstate sales as the bus bodies and the buses are two different commodities and the bus bodies as such were not exported, but complete buses were exported.

Joint Commissioner of Commercial Taxes (Appeals) Bangalore rejected the appeal of Azad Coach Builders.

The Karnataka Appellate Tribunal also rejected the appeal.

The Karnataka High Court, however, allowed the appeal and held that the assessee is eligible for the benefit of exemption from tax under section 5 (3) of the CST Act and the same order was challenged by state of Karnataka in the Supreme Court.

The Supreme Court held that three conditions must be satisfied namely:

1. There must be a sale

2. Goods must actually be exported

3. The sale must be a part and parcel of the export.

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