WHETHER TAX HAS TO BE CHARGED & COLLECTED BY A DEALER ON PURCHASES AND SALES OF GOODS IN THE COURSE OF EXPORT OUT OF TERRITORY OF INDIA UNDER U.

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1 WHETHER TAX HAS TO BE CHARGED & COLLECTED BY A DEALER ON PURCHASES AND SALES OF GOODS IN THE COURSE OF EXPORT OUT OF TERRITORY OF INDIA UNDER U.P. VAT ACT, 2008? 11 Rakesh Gupta Advocate G-6, Panchwati Enclave, Church Road, Civil Lines, Agra. Mob. : Constitution of India is prime source of power of all the laws enacted in India which are formed according to wish of the constitution. Entry 54, List II Schedule VII of the constitution provides power of the State to make law reads as:- 54. Taxes on sale or purchase of goods other than news papers subject to be provisions of entry 92A of List I. As such having powers conferred on states, state legislature introduced/ enacted U.P. Sales/ Trade Tax Act, 1948/VAT Act, 2008 imposing tax on sales and purchases made in U.P. Entry 92-A List I Schedule VII of the constitution provides power to the Central Govt. to make law as under- 92A Taxes on the sale or purchase of goods other than news papers, where such sale or purchase takes place in the course of inter-state trade or commerce. While article 286 restricts imposition of tax on sales or purchase of goods in special circumstances and conditions. Article 286- Restrictions as to imposition of tax on the sale or purchase of goods- (1) No law of a state shall impose or authorize the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place- (a) (b) outside the State or in the course of the import of the goods into or export of the goods out of 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). (3) Any law of a State shall, in so far as it imposes, or authorizes the imposition of- (a) a tax on the sale or purchase of goods declared by parliament by law to be special importance in inter-state trade or commerce or

2 (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause 29A of Article 366, be subject to such restriction and condition in regard to the system of levy, rates and other incidents of the tax as parliament may by law specify. In exercise of the power conferred under clause (2) of Article 286, the parliament enacted the C.S.T. Act, 1956 by formulating principles for determining when a sale or purchase of goods takes place in the course of inter-state trade or commerce or outside a State or in the course of import or export. For these transactions Sec. 3, 4 & 5 have been incorporated in C.S.T. Act, 1956 respectively. The literal meaning of the export is to sell and transport of goods to a foreign country. Inspite of it Sec. 5 of the C.S.T. Act laid down the principles as to when a sale or purchase of goods is said to take place in the course of import or export out of territory of India. Sec. 5 of C.S.T. Act reads as under- Sec. 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 territory of India only if the sale or purchase either occasion 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. Sec. 5(3) Notwithstanding anything contained in sub-section (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of 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 in relation to such export. Sec. 5(4) The provisions of sub-section (3) shall not apply to any sale or purchase of goods unless the dealer selling the goods furnishes to the prescribed authority in the prescribed manner a declaration duly filled and signed by the exporter to whom the goods are sold in prescribed form obtained from the prescribed authority. As such from Sec. 5(1) it transpires that a sale or purchase of goods occasions he export or by a transfer of document of title to the goods directly if the goods crossed the customs frontiers of India, is a sale in the course of export. Sec. 5(3) stipulates that inspite of the Sec. 5(1) the last sale or purchase of any goods, i.e. penultimate sale or preceding sale or purchase of any goods after which occasions the export of goods, shall also be deemed to be in the course of export of such export. If such last sale or purchase took place after and for the purpose of complying with the agreement or in order or in relation to such export. Meaning thereby in other words, the penultimate sale or i.e. 12

3 preceding sale before the sale which occasions export shall also be deemed in the course of such export out of territory of India, but the penultimate sale should have been made in compliance of the agreement or order after such agreement or order or in relation to such export. While Sec. 5(4) restricts the penultimate sale by imposing a precondition that a Form i.e. Form H would be furnished to be prescribed authority by the selling dealer, issued by the exporter. as- 13 Apart from it, Proviso of Sec. 6 of C.S.T. Act, 1956 specifies also Provided that a dealer shall not be liable to pay tax under this Act on any sale of goods while in accordance with the provision of subsection (3) of Sec. 5 is a sale in the course of those goods out of territory of India. It means that in addition to sub-section (1) of Sec. 5, the penultimate sale or purchase i.e. sale or purchase before the sale which occasions export shall also be deemed to be in the course of such export. As such a dealer shall not be liable to pay tax on any sale of goods under sub-section (3) of Sec. 5 of C.S.T. Act. This fact of law has also been specifically confirmed by the Sec. 7 of U.P. VAT Act, 2008 which specifies as- No tax under this Act shall be levied and paid on the turnover of (a) sale or purchase where such sale or purchase takes place- (i) (ii) (iii) in the course of inter-state trade or commerce out side the State in the course of export out of or into the course of import out of territory of India. Meaning thereby that no tax shall be charged and collected on the turnover of sale or purchase, which takes place in the course of export out of territory of India. The words levied and paid are distinct as held by Hon ble S.C. meant as charged and collected respectively in the Peekay Re Rolling Mills (P) Ltd. vs. Asstt. Commissioner and Another 2007 (42) STJ 96. In this regard definition of turnover sale or purchase under the VAT Act, 2008 are also cognizable which are reproduced as under- 2(ap) turnover of purchase with its cognate expressions means the aggregate of the amount of purchase prices paid or payable in respect of purchase of goods made by a dealer either directly or through another dealer, whether on his own account or an account of others, after deducting the amount, if any, refunded by the seller in respect of my goods returned to such seller while such period as may be prescribed. 2(aq) turnover of sale means the aggregate of amount of sale prices of goods, old or supplied or distributed by way of sale by a dealer

4 either directly or through another, whether on his own account or an account of others. From both the above definitions of turnover of purchase and sales it is evident that amounts of purchase price paid or payable in respect of purchase of goods made by a dealer directly or through another dealer and amount of sale prices of goods, sold or supplied by way of sale by a dealer directly or through another whether on his own a/c or a/c of others shall be turnover of purchase and sale respectively. Here it will be evident from the sub-section (1) of Sec. 3 of VAT Act Subject to other provisions contained in this Act, every dealer shall be liable to payable under this Act for each assessment year, on his taxable turnover of sale, purchase or both as the case may be, of taxable goods, at such rates and at such point of sale or purchase as provided under Sec. 4 or Sec. 5. It means that this Sec. 3 is subject to other provisions or says other section i.e. Sec. 7 will prevail over this Sec. 3. Apart from it Rule 7, also excludes the turnover of sales falling under Section 7 of the Act. As such as per Sec. 7(a)(iii) no tax shall be levied and paid on the turnover of purchases and sales, made in the course of export out of territory of India as per sub-section (1) & (3) of Sec. 5 of C.S.T. Act. While tax is levied and paid only under Section 4 on the sales and levied of under Sec. 5 of U.P. VAT Act, 2008 on purchases of goods respectively made in U.P. only. A misconception has been arisen in the minds due to Sec. 13 of VAT Act, 2008 of which sub-section (1) specifies the allow-ability of credit of ITC in full and of tax, if purchased goods are re-sold - (i) (ii) (iii) inside State or in course of inter-state trade or commerce in the course of export of goods out of territory of India. The word if used in the sentence if purchased goods are resold, differentiates between two types of events or matters. It has been held in Paramjeet Singh Patheja vs. ICDS Ltd. 2007, 41 STJ 646 as It is settled by decision of this Court that the words as if in fact shows the distinction between two things and such words are used for a limited purpose. They further show that a legal fiction must limited to the purpose for which it was created. As there is clear distinction between the purchases under VAT Act, 2008 (i) purchase from registered dealer (ii) purchase from unregistered dealer. As the tax on purchases from registered dealer is charged and collected by registered dealer while purchases made from unregistered dealers, the turnover is charged u/s 5 of VAT Act. As Sec. 5 of the VAT Act defines (1) every dealer whom the course of business makes purchases of any taxable. (2) goods other than non- 14

5 vat goods from other than a registered dealer shall be liable to pay tax levied on the turnover purchase of such taxable goods. As such it means the dealer is personally liable to pay tax on such purchases to be levied. While levied means is to charge or to assess but not includes to be paid. As per Peekay Re-Rolling Mills (P) Ltd. The dealer is made himself liable to pay tax on such purchases while so the word used if in table of Sec. 13 i.e. in as if purchased goods are re-sold clearly makes distinction between the purchases made from registered dealers and purchases from unregistered dealers. As such whenever purchases are made from registered dealers on which tax already had been charged and paid by the registered dealer. Then full amount of input tax credit is to be allowed for such purchased goods which are re-sold (iii) in the course of the export of the goods out of territory of India as per subsection (1) of Sec. 13 of VAT Act. From above it is clearly distinguished that if when tax already had been paid on the purchased goods from registered dealer which have been exported out of territory of India under sub-section 1 & 3 of Sec. 5 of CST Act then the ITC which is tax deposited by the registered dealer would have been refunded in due course as per Sec. 41 of VAT Act, 2008 while if purchases of goods are made from unregistered dealer by exporter on which dealer s own liability is to pay tax to be levied as per Sec. 5 of VAT Act, 2008 but such goods have been put in the course of export out of territory of India under sub-section 1 & 3 of Sec. 5 of CST Act then there tax will not be paid by the exporter on purchases of such goods. Here it will be cognizable, that Sec. 4 of the VAT prescribes the tax payable on sales of goods shall be levied and paid. While Sec. 5 of the VAT prescribes Every dealer shall be liable to pay tax levied on the purchases of such taxable goods. These words defines dealer s liability personally, to pay tax assessed on the purchases of such taxable goods and tax shall be levied at the same rate, means purchase turnover will be charged but the tax will be paid as per Section 4 of VAT Act as no where in Section 5 of the VAT paid word is used. It means the tax will be charged on purchases under Section 5 of VAT Act while the tax will be deposited or paid at the time of sale under Sec. 4 of the VAT Act, Moreover according to sub-section (1) of Sec. 4 of VAT Act, 2008, tax payable on sale of goods shall be levied and paid on the taxable turnover of sale of Clause (a), (b) & (d) of sub-section (1) of Sec. 4 of VAT while there will be no taxable turnover if purchases or sales are made in the course of export as per Section 7 of VAT Act, Apart from it confusion has also been mis-founded as per Sec. 41 of the Provisional refund. The section has been inserted in the VAT Act, 2008 by legislature having considered the unavoidable circumstances in which if the dealer sells the goods to exporter, on which VAT had already been paid then only the tax paid on such goods 15

6 might have refunded to the exporter. As sub-clause (a) of sub-section (1) of Sec. 13, specifies, (a) subject to conditions given in column (2), every dealer liable to pay tax shall, in respect of all taxable goods except nonvat goods be allowed credit of the amount as input tax credit to the extent provided in column (3) of table below sub-section (7) of Sec. 13 specifies as- (a) (b) (c) 16 (i) (ii) Sub-section (7) of Sec. 13 specifies as- Except where- purchased goods, or manufactured goods which are manufactured by using purchased goods or packed goods which are packed by using or consuming purchase goods are to be sold in the course of the export of the goods out of territory of India, no credit of any amount of input tax shall be claimed by a dealer under sub-section (4) and no facility of input tax credit shall be allowed to the dealer in respect of purchase of any goods where- Sale of such goods by the dealer is exempt from payment of tax under Clause (c) of Section 7 or Such goods are to be used or consumed in manufacturer or packing of any goods and sale of such manufacturer or packing goods by the dealer is exempt from payment of tax either under Clause (b) or Clause (c) of Section 7. After reading this sub-section (7) of Section 13 it is apparent that except the purchased goods, manufactured goods after using purchased goods and packed goods after using or causing purchased goods after using or consuming the purchased goods which are to be sold in the course of export of out of territory of India, no credit of ITC will be for any other kind of purchases shown in (i) and (ii) of c of subsection 7 of Section 13. While ITC as per sub-section (4) of Section 13 is provisionally to be claimed on the date on which tax invoice related to such goods is received by a dealer and in respect of purchase of any goods on which the dealer himself is liable to pay tax on the date on which amount of tax payable is accounted for by the dealer in the account of tax payable by him and possesses the proof of payment of tax on the turnover of purchase liable to tax. It means when goods are resold or sold after having manufactured goods then ITC will be claimed in ITC account at the time of receiving tax invoice, while the ITC on the purchases of such goods on which dealer is himself liable to pay tax, will be accounted for in ITC account only on the date of deposition of such tax. In other words, ITC credit will be allowed on the manufactured goods which are sold in the course of export out of territory of India will

7 qualify for claiming ITC provisionally under sub-section (4) of Sec. 13 on the goods which are purchased or consumed or packed for making such exports commitment. For a moment if it is presumed that intention of the legislature had been to levy the tax on purchases or sales made to exporter and on such purchases and sales to an exporter, tax had compulsorily to be collected then. What was the necessity of having inserted Sec. 7 of VAT Act, Where no tax under this Act shall be levied and paid on the turnover of (a) sale or purchase where such sale or purchase takes place- (iii) 17 in the course of the export out of or in the course of the import into, the territory of India has specifically been mentioned. While in erstwhile Act i.e. U.P.T.T. Act, 1948 there had been no specific provision, prohibiting the levy of tax on purchases and sales under Sec. 3 & 5 of CST Act. In addition to it, proviso of sub-section (1) of Sec. 6 of CST Act that a dealer shall not be liable to pay tax under the Act or any sale of goods which is a sale in the course of export of those goods out of territory of India in accordance with the provisions of sub-section (3) of Sec. 5 of CST Act. Justifies not to levy tax on such purchases or penultimate sale. As the charging and realization of tax on such purchases or penultimate sale will amount to violation of the provisions of CST Act as well as of VAT Act, Apart from it, to attract the tax liability Hon ble S.C. in Govind Saran Ganga Saran vs. CST & Others AIR 1985 SC 1041, while analyzing Article 265 noted as- The components which entered into tax are well known. The first is the character of imposition known by it nature which transpires attracting levy. The second is a clear communication of the person on whom the levy is imposed and which is obliged to pay tax. The third is rate at which the tax is imposed and the fourth is measure or value to which the rate is applied for computing the tax liability. Here the character of imposition attracting levy of tax is totally absent. Inspite of it even prohibitions are characterized in Sec. 7 of VAT and proviso of sub-section (1) of Sec. 6 of CST Act. Even then charging and realization of tax on the sales made in the course of export out of territory of India is quite illegal and against the Article 286 of Constitution of India. The most important thing now a days for consideration is that the tax on raw materials or goods purchased by manufacturer/exporter from a dealer will attract imposition of tax by a dealer or would be exempted from imposing of tax in regard to the words used in relation to such export in sub-section (3) of Sec. 5 of CST Act. As word in relation to such export embedded in the sub-section (3) of Sec. 5 of CST Act justify the goods purchased in manufacturing

8 the goods which have been exported out of territory of India. The main purpose of having inserted the word in relation to such export was the compliance of such export such export meant the goods which have been exported out of territory of India for which an order already had been received or an agreement had been made prior to making such purchases. As such in relation to such export embedded in sub-section (3) of Sec. 5 enlarges the scope of the goods sold to or purchased by the manufacturer/exporter of goods. Where the order is received by exporter/manufacturer for specific goods then after having received the export order, if manufacturer purchases the raw materials or goods from other dealers then also purchases of such goods consumed in manufacturing such goods for which export order was received, will also be deemed to be the sales in the course of export out of territory of India. The above concept or the words in relation to such export have not been considered and concluded by Hon ble S.C. prior as held by Hon ble S.C. in State of Karnataka vs. Azad Coach Builders Pvt. Ltd (3) SCC 338 as such concept has been referred to a larger bench after noticing the decisions of Mohd. Serajuddin vs. State of Orissa (1975) 2 SCC 47 and Sterling Foods vs. State of Karnataka (1986) 3 SCC 469 and Vijay Laxmi Cashew Company vs. Deputy Commercial Tax Officer (1996) 1 SCC 468 by having had the under mentioned views- 18 In our view, the scope of Sec.5(3) needs to be reconsidered. In none of the above judgments cited on behalf of the Department, due weight age has been given by this Court to the words in relation to such export occurring in Sec. 5(3). There cannot be a bus without the bus-body. The subject matter of the inter-state movement and subject matter of the export is a bus and not a bus-body it cannot be deemed that the sale of the bus body by the assessee to the exporter is in the course of export of the bus to Sri Lanka. The basis point involved in this case is whether the test of the same goods in the essence of Sec. 5(3) or whether the test of subject matter of the contract occasioning the export is the principle behind Sec. 5(3). It is in this context that the words in relation to such exports become crucial. If a transaction is in relation to the exports, can it be denied the benefit of Sec. 5(3). From above discussion it seems certainly confirmed the no tax can be charged and collected by the dealer on the turnover of sales/ purchases of goods made to the exporter/manufacturer exporter as per sub-section (3) of Sec. 5 of CST Act. Moreover in case the goods, sold or purchased by exporter on which if tax already had been paid by the selling dealer then after ascertaining the tax charged and paid on issued such tax invoice would be made available to the exporter as a refund