STATE OF KARNATAKAversusAZAD COACH BUILDERS PVT.LTD. & ANR.

                    [2010] 12 S.C.R. 895


                  STATE OF KARNATAKA                               A
                              V.
       AZAD COACH BUILDERS PVT.LTD. & ANR.
        (Civil Appeal Nos. 5616-5617 of 2000 etc.)

                   SEPTEMBER 14, 2010
                                                                   B
  [S.H. KAPADIA,CJI., B. SUDERSHAN REDDY, K.S.
  PANICKER RADHAKRISHNAN, SURINDER SINGH
        NIJJAR AND SWATANTER KUMAR, JJ.)

     Central Sa/es Tax Act, 1956 - s. 5(3) rlw Article 286 of      C
the Constitution - Exemption of tax on sale of goods as
penultimate sale in the course of export - Held: When the
local sale or purchase between the parties is inextricably
linked with the export of the goods, then the claim for
exemption u/s. 5(3) is justified - In such a case, the 'Same       D
Goods' theory has no application - The connection between
the penultimate sale and export of goods should be real,
intimate and inter-linked and not casual, accidental or
fortuitous - The burden to establish such link is on the
assessee - In the facts of the case, the assessee has              E
established that the transaction between the assessee and the
exporter is inextricably connected with the export of the goods,
and, as such, hence eligible for exemption uls. 5(3) -
Constitution of India, 1950 - Article 286.

     The assessee was requested to build bus bodies, by            F
the exporter, in accordance with the specifications
provided by the foreign buyer. The assessee was asked
to fabricate bus bodies on the chassis supplied by the
exporter, in accordance with the specifications. The
assessee, after manufacturing the bus bodies, mounted              G
the same on the chassis made available by the exporter,
making it as a complete bus, ready for export. The
assessee claimed exemption on sale of the bus bodies.

                              895                                  H
    896     SUPREME COURT REPORTS             [2010] 12 S.C.R.


A   The Assessing Authority rejected the claim on the
    ground that the 'bus bodies' and the 'buses' were two
    different commodities and the export was not of the 'bus
    bodies' but that of the 'buses' and thus the transaction
    could not amount to penultimate sale eligible for
B   exemption u/s. 5(3) of Central Sales Tax Act. In appeal,
    the appellate authority upheld the levy of tax. The
    appellate tribunal also upheld the levy. The High Court
    held that the assessee was eligible for the benefit of
    exemption u/s. 5(3) of the Act.
c      In appeal, the Division Bench of Supreme Court felt
  that the judgments passed by Supreme Court in Sterling
  Foods vs. State of Karnataka and Vijay/axmi Cashew
  Company vs. Deputy Commercial Tax Officer cases needed
  fresh look in the light of the judgment in K.Gopinath Nair
D vs. State of Kera/a and referred the matter to larger Bench.
  The larger Bench further placed the matter before the
  Constitution Bench.

        Answering the reference and dismissing the
E   appeals, the Court

       HELD: 1. Article 286(1 )(b) of the Constitution of India
  states that no law of a State shall impose, or authorize
  the imposition of sales tax on the sale or purchase of the
  goods when such sale or purchase takes place in the
F course of export of goods. Article 286(2) authorizes
  Parliament to formulate principles for determining when
  the sale is in the course of import/export. The sale or
  purchase of goods is deemed to be in the course of
  export of goods out of the territory of India only if the
G sale or purchase either occasions 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. Therefore, under Article 286(1) of the Constitution,
  the Court has to examine whether any tax is being
H
STATE OF KARNATAKA v. AZAD COACH. BUILDERS 897
                 PVT.LTD.

imposed by the State Legislature on the sale or purchase      A
of goods "in the course of the import of the goods into
or export of the goods out of the territory of India". In
order to resist imposition of sales tax by the State, the
assessee will have to establish the identity of the goods
sold to be exported out of the territory of India. In order   B
to fulfill an export obligation, if an exporter purchases
goods and as a result of some processing, the identity
and character of the goods change, then it will not be a
case of export of the same goods. [Para 18] [908-G-H;
909-A-D]                                                      C

     2. The phrase 'sale in the course of export' comprises
in itself three essentials: (i) that t}lere must be a sale: (ii)
that the goods must actually be exported and (iii) that the
sale must be a part and parcel of the export. The word
'occasion' is used as a verb and means 'to cause' or 'to D
be the immediate cause of'. Therefore, the words
'occasioning the export' mean the factors, which were
immediate cause of export. The words 'to comply with
the agreell";nt or order' mean all transactions which are
inextricably linked with the agreement or order E
occasioning that export. The expression 'in relation to' .
are words of comprehensiveness, which might both have
a direct significance as well as an indirect significance,
depending on the context in which it is used and they are
not words of restrictive content and ought not be so F
construed. Therefore, the test to be applied is, whether
there is an in- severable link between the local sale or
purchase on export and if it is clear that the local sale or
purchase between the parties is inextricably linked with
the export of the goods, then a claim u/s. 5(3) for G
exemption from State Sales Tax is justified, in which case,
the 'same goods' theory has no application as advocated
in the *Serfling Foods and **Vijay/axmi Cashew Company
cases. [Paras 24 and 25] [913-A-E]
                                                              H
     898     SUPREME COURT REPORTS             [2010] 12 S.C.R.


 A
          *Sterling Foods, A Partnership Firm represented by its
     Partner ShriRamesh Dalpatram v. State of Karnataka and
     Anr. (1986) 3 SCC 469;**Vijayalaxmi Cashew Company and
     Ors. v. Deputy Commercial Tax Officer and Anr. (1996) 1
     sec 468, held inapplicable.
 B
         3. On an analysis of the decisions of the Supreme
     Court and in the light of the Statement of Objects and
     Reasons of the Amending Act 103 of 1976 whereby s. 5(3)
     of the Central Sales Tax Act was added and on the
 c   interpretation placed on Section 5(3) the following
     principles emerge:

               To constitute a sale in the course of export,
               there must be an intention on the part of both
               the buyer and the seller to export;
 D
               There must be obligation to export, and there
               must be an actual export.

               The obligation may arise by reason of a
 E             statute, 'the contract between the parties, or
               from mutual understanding or agreement
               between them, or even from the nature of the
               transaction which links the sale to export.

               To occasion export, there must exist such a
 F             bond between the contract of sale and the
               actual exportation, that each link is inextricably
               connected with the one immediately preceding
               it, without which a transaction sale cannot be
               called a sale in the course of export of goods
 G             out of the territory of India. [Para 23) [912-D-H;
               913-A]

        4. The burden is entirely on the assessee to establish
    the link in transactions relating to sale or purchase of
. H goods and to establish that the penultimate sale is
STATE OF KARNATAKA v. AZAD COACH BUILDERS 899
                 PVT.LTD.

inextricably connected with the export of goods by the          A
exporter to the foreign buyer, which in the instant case,
the assessee has succeeded in establishing. [Para 27]
[914-C-D]
     5. It is not correct to say that any penultimate sale      8
made in furtherance of export, irrespective of the nature
of the goods, would also be covered. It all depends on
the question as to whether the sale or purchase is
inextricably connected with the export of goods and not
a remote connection. The connection between the                 C
penultimate sale and the export of goods should not be
casual, accidental or fortuitous, but real, intimate and
inter-linked, which depends upon the nature of the
agreement the exporter has with the foreign buyer and
the local manufacturer, the integrated nature of the
transactions and the nexus between-the penultimate sale         D
and the export sale. In the facts and circumstances of the
instant case, the assessee has succeeded in satisfying
these tests and hence, eligible .for exemption under sub-
section (3) of Section 5 of the CST Act. [Paras 28 and 29]
[914-D-H]                                                       E

     6. The facts of the instant case clearly reveal that the
transaction between the assessee and the exporter is
inextricably connected with the export of the goods. The
communication between the foreign· buyer and the                F
exporter reveals that the foreign buyer wanted the bus
bodies to be manufactured by the assessee under the
specifications stipulated by the foreign buyer. The bus
bodies constructed and manufactured ·bY., the assessee
could not be of any use in the local market, but were           G
specifically manufactured to suit the specifications and
requirements of the foreign buyer. In the Purchase Order
placed on the assessee by the exporter, it is specifically
indicated that the bus bodies have to be manufactured
in accordance with the specifications provided by the
                                                                H
    900      SUPREME COURT REPORTS            (2010] 12 S.C.R.


A foreign buyer, failure to do so might result in cancellation
  of the export order. The assessee, in the instant case, has
  succeeded in showing that the sale of bus bodies have
  occasioned the export of goods. When the transaction
  between the assessee and the exporter and the
B transaction between the exporter and foreign buyer are
  inextricably connected with each other, the 'same goods'
  theory has no application. [Para 26] [913-F-H; 914-A-C]

      K. Gopinathan Nair and Ors. v. State of Kera/a (1997) 10
  SCC 1 ;Deputy Commissioner of Agricultural Income Tax
C and Sales Tax,Ernakulam v. Indian Explosives Ltd. (1985) 4
  sec 119, upheld
       Md. Serajuddin and Ors. v. State of Orissa (1975) 2 SCC
  47;Consolidated Coffee Ltd. and Anr. v. Coffee Board,
D Bangalore (1980) 3 SCC 358; Binani Brothers (P) Ltd. v.
  Union of India and Ors. (1974) 1 SCC 459; Satnam Overseas
  (Export) through its Partner and Ors. v. State of Haryana and
  Anr. (2003) 1 SCC 561; Coffee Board, Bangalore v. Joint
  Commercial Tax Officer, Madras and Anr. (1969) 3 SCC 349
E - referred to.
                        Case Law Reference:
          (1975) 2 sec 47         Referred to.        Para 2

          (1980) 3 sec 358        Referred to.        Para 3
F
          (1986) 3 sec 469        held inapplicable. Para 3
          (1996) 1 sec 468        held inapplicable. Para 4
          (1997) 10 sec 1         upheld.             Para 5
G
          (1974) 1 sec 459        Referred to.        Para 12
          (2003) 1 sec 561        Referred to.        Para 12
          (1969) 3 sec 349        Referred to.        Para 12
H
STATE OF KARNATAKA v. AZAD COACH BUILDERS 901
                 PVT.LTD.

    (1985) 4 sec 119             upheld.              Para 21      A

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

    From the Judgment and order dated 9.2.1999 of the High
Court of Bombay at Nagpur in C.A. No. 1518 of 1998 and 1546        B
to 1553 of 1998.

                            WITH

C.A. Nos. 6594-6598 of 2000.
                                                                   c
     Goolam E. Vahanvati, AG, Soli J. Sorabjee, Dhruv Mehta,
S.K. Bagaria, P.S. Narasmha, Nishanth Patil, Mihir Chatterjee,
Rohit Sharma, Nalla Jung, Sanjay R. Hegde, Ramesh K.
Mishra, Kratin Joshi, Ramesh S. Jadhav, Vikrant Yadav,
Abhishek Malviya, M.N. Shankargowda, E.C. Vidya Sagar,             D
Nitin Meshram, Bramhjeet Mishra, Preetesh Kapoor, E.R.
Kumar, N. Prasad, Nitya Bagaria, Sumit Goel, Rukmini Bobde
(for Parekh & Co.,) Yashodhara Anand, R.K. Gautam and Sarva
Mitter (for Mitter and Mitter Co.) for the appearing parties.
                                                                   E
    The Judgment of the Court was delivered by

     K. S. PANICKER RADHAKRISHNAN, J. 1. The question
that falls for consideration in this case is whether an assessee
(local manufacturer) is eligible to get exemption under sub-
section (3) of Section 5 of the Central Sales Tax Act, 1956 (for   F
short 'CST Act'), if the penultimate sale effected in favour of
the exporter is inextricably connected with the export of goods
outside the territory of India.

     2. This Court in Md. Serajuddin & Others v. State of G
Orissa (1975) 2 SCC 47, held that, under Article 286 of the
Constitution, the sale which was not liable to tax under the State
Sales Tax was only the actual sale by the exporter, but the
benefit of export sale did not extend to the penultimate sale to ..
the Indian exporter for the purpose of export. This led to the 'H
    902      SUPREME COURT REPORTS                 [2010] 12 S.C.R.

A   insertion of sub-section (3) of Section 5 of the CST Act by the
    Amending Act 103 of 1976 with effect from 1.4.1976, whereby
    the last sale or purchase occasioning the export of goods was
    granted exemption from the State levy.

B          3. The scope of the Amending Act later came up for
     consideration before a Constitution Bench of this Court in
     Consolidated Coffee Ltd. & Another v. Coffee Board,
     Bangalore (1980) 3 SCC 358 and a contention was raised that
     sub-section (3) of Section 5 of the CST Act was ultra vires
    Article 286(2) of the Constitution of India and that the
C    expression "shall also be deemed to be in the course of such
     export" occurring in Section 5(3) was intended to convey that
    the penultimate sale shall also be regarded as being in the
     course of such export. The Court held that the above
    expression intends to convey that the penultimate sale shall also
D   be regarded as being in the course of such export and held
    that sub-section (3) of Section 5 is intra vires Article 286(2) of
    the Constitution. A three Judges Bench of this Court in Sterling
    Foods, A Partnership Firm represented by its Partner Shri
    Ramesh Dalpatram v. State of Karnataka & Another (1986)
E   3 sec     469, also examined the scope of the above mentioned
    provision. The question raised in that case was whether the
    assessee was entitled to exemption from tax under Section 5(3)
    of the CST Act in respect of purchase of shrimps, prawns and
    lobsters, the purchase being of the same commodities which
F   were exported. The Court held that in order to attract sub-
    section (3) of Section 5 of the CST Act it is necessary that the
    goods which are purchased by an assessee for the purpose
    of complying with the agreement or order for or in relation to
    export, must be the same goods which are exported out of the
G   territory of India. The Court further held that the test which has
    to be applied for the purpose of determining whether a
    commodity subjected to processing retains its original
    character and identity is as to whether the processed
    commodity is regarded in the trade by those who deal in it as
H
STATE OF KARNATAKA v. AZAD COACH BUILDERS 903
  PVT.LTD. [K.S. PANICKER RADHAKRISHNAN, J]

distinct in identity from the original commodity or it is regarded,   A
commercially and in the trade, the same as the original
commodity.

      4. In V1jayalaxmi Cashew Company & Others v. Deputy
Commercial Tax Officer & Another (1996) 1 SCC 468, the                B
question raised was whether the export of cashew kernels
obtained out of raw cashew nuts would amount to export of
those goods which had been purchased. The Court held that,
since the raw cashew nuts can be used for so many purposes
and the process of extracting the kernels so elaborate, it cannot     C
be said that the goods (raw cashew nuts) purchased in the
penultimate sale were the same goods (cashew nut kernels)
which were sold to the exporter. The Court, therefore, concluded
that cashew nut kernels are not the same goods as raw cashew
nuts.
                                                                      D
       5. Sterling Foods (supra) and Vijaya/axmi Cashew
Company (supra) were essentially advocating the "same
goods" theory of course in different fact situations. Later, in K.
Gopinathan Nair & Others v. State of Kera/a (1997) 10 SCC
1, a three Judges Bench of this Court examined the question E
whether the purchase of African raw cashew nuts made by the
assessees from the Cashew Corporation of India (for short ·
'CCI') are in the course of import and, therefore immune from
liability to tax under Kerala General Sales Tax Act, 1963. In that
case, on facts the Court found that there was no privitiy of F
contract between the local users on the one hand and the
foreign exporter on the other and held that those two
transactions could not be said to be so integrally interconnected
as to represent one composite transaction in the course of
import of raw cashew nuts. The Court held that those sales by G
the CCI to the local users go out of the sweep of the exemption
provisions engrafted by Section 5(2) of the CST Act, reason
being that there was no privity of contract between the local
users and the foreign exporters.

    6. Mis Azad Coach Builders Pvt. Ltd., the assessee was            ·11
     904    SUPREME COURT REPORTS               (2010] 12 S.C.R.


A requested to build bus bodies, by the exporter, Tata
  Engineering Locomotive Co. Ltd. in accordance with the
  specifications provided by the foreign buyer, Lanka Ashok
  Layland Ltd., Colombo. The specimen copy of the Purchase
  order dated 11. 7.1988 placed on the assessee by the exporter
B 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 buyer. In one of the
  communications received from the foreign buyer it was
  stipulated that the steel and aluminium panels of the bus bodies
c be built by the assessee since the customers in Sri Lanka
  preferred them. The assessee accordingly manufactured the
  bus bodies, in accordance with the specifications stipulated by
  the foreign buyer and mounted the same on the chassis made
  available by the exporter making it as a complete bus ready
D for export.

       7. The assessee claimed exemption on sales of bus
  bodies as penultimate sales in the course of export made to
  their customers like Telco Bombay and others which was
  rejected by the Assessing Authority, treating the transactions
E as interstate sales, on the ground that the 'bus bodies' and
  'buses' are two different commodities and the bus bodies as
  such were not exported, but complete buses. The Assessing
  Authority held that the transactions could not amount to
  penultimate sale eligible for exemption under sub-section (3)
F of Section 5 of CST Act.

        8. Aggrieved by the assessment order dated 21.3.1995,
  the assessee approached the Joint Commissioner of
  Commercial Taxes (Appeals), Bangalore Division under
G Section 20(5) of the Karnataka Sales Tax Act, 1957. The
  appeal was rejected upholding the levy of tax by the Assessing
  Authority on the ground that the goods exported was different
  from the goods purchased and hence, the assessee was not
  entitled to exemption under Section 5(3) of the CST Act. The
  matter was taken up in appeal before the Karnataka Appellate
.H
STATE OF KARNATAKA v. AZAD COACH BUILDERS 905
  PVT.LTD. [K.S. PANICKER RADHAKRISHNAN, J.]

Tribunal and the appeal was rejected vide order dated                 A
14.8.1996.

      9. Feeling aggrieved by the order passed by the Tribunal,
the assessee took up the matter before the Division Bench of
the Karnatka High Court vide S.T.R.P. No. 4 of 1997. After
                                                                 8
examining the agreement between the exporter and the foreign
buyer and also the order placed by the exporter on the
assesseee, the High Court came to the conclusion that the bus
bodies supplied by the assessee to the exporters was in the
course of exports and the words "in relation to such export"
extended the scope of the exemption to the extent that even if C
there is no agreement or order but they are in relation to such
exports, the exemption could still be claimed under Section 5(3)
of the CST Act. The High Court, therefore, allowed the Revision
Petition and held that the assessee is eligible for the benefit
of exemption from tax under Section 5(3) of the CST Act.         D

     10. Aggrieved by the order of the High Court, the State of
Karnataka has come up with these appeals. A Division Bench
of this Court felt that the judgments of this Court in Sterling
Foods (supra) and Vijayalaxmi Cashew Company (supra)                  E
need a fresh look in the light of a later judgment of this Court in
K. Gopinathan Nair (supra) and hence the matter was referred
to a larger Bench, the reference order is reported in (2006) 3
SCC 338. The larger Bench then placed this matter before the
Constitution Bench and hence the matter has been placed               F
before us for consideration.

     11. Mr. Sanjay Hegde, learned counsel appearing for the
State of Karnataka submitted that the High Court has committed
a grave error in holding that the assessee is entitled to the
exemption under Section 5(3) of the CST Act. The learned G
counsel submitted that in order to attract Section 5(3) of the
CST Act, it is necessary that the goods which are sold by the
assessee for the purpose of complying with the agreement or
export order for or in relation to export, must be the same
goods which are exported out of the territory of India. The H
     906      SUPREME COURT REPORTS               [2010] 12 S.C.R.


A    learned counsel submitted that the words "those goods" in
     Section 5(3) of the CST Act are clearly referable to "any goods"
     mentioned in the preceding part of this sub-section. The
     learned counsel submitted that the goods supplied by the
     assessee and the goods actually exported by the dealer to the
B    foreign buyer were not the bus bodies but buses itself, hence,
     the benefit of exemption under Section 5(3) of the CST Act is
     rot available to the assessee.

           12. Learned counsel has, ii support of his contentions,
     placed reliance on the Constitution Bench judgments of this
~
     Court in Sterling Foods (supra) and Vijayalaxmi (supra).
     Heference was also made to the judgments of this Court in
     Consolidated Coffee Company (supra), Md. Serajuddin
     (.:'.upra), Binani Brothers (P) Ltd. v. Union of India & Others
     (1974) 1 SCC 459, Satnam Overseas (Export) through its
O    Partner & Others v. State of Haryana & Another (2003) 1 SCC
     561 and Coffee Board, Bangalore v. Joint Commercial Tax
     Officer, Madras & Another (1969) 3 SCC 349.

           13. Mr. P. S. Narasimha, the learned senior counsel
     aripearing for Respondent No. 2 submitted that the exemption
     unde• taxation law will have to be purposefully and widely
     construed. In that context, the learned senior counsel submitted
     that, under Section 5(3) of the CST Act, those penultimate sales
     are also given exemptions, if such sale was for the purpose of
r:   complying with the agreement or order for or in relation to such
     export. The learned senior counsel submitted that any
     penultimate sale made in furtherance of an export order,
     111espective of nature of the goods, would be covered and any
     other construction would render the use of those words otiose.
G          14. Mr. Soli J. Sorabjee, learned senior counsel appearing
     for the respondents submitted that Section 5(3) of the CST Act
     should be given a purposive interpretation keeping in mind the
     Statement of Objects and Reasons of the Amendment Act 103
     of 1976. The learned senior counsel submitted that the only
~I   requirement of Section 5(3) is that the goods sold to the
---STATE OF KARNATAKA v. AZAD COACH BUILDERS 907
    PVT.LTD. [K.S. PANIC KER RADHAKRISHNAN, J.]

exporter should be exported as such without loss of identity and       A
if that happens, the penultimate sale gets the benefit of Section
5(3} of the CST Act.

      15. Shri Goolam E. Vahanvati, learned Attorney General,
assisting the Court submitted that if the penultimate sale is          B
inextricably connected with the export of goods outside the
territory of India, then such a sale is eligible for exemption under
sub-section (3) of Section 5 of the CST Act. The only pre-
condition is that the exemption be linked to the penultimate
sale, preceding the export.
                                                                       c
     16. Before examining the rival contentions of the parties,
it would be appropriate to refer to the Statement of Objects and
Reasons of the Amending Act 103 of 1976 by which Section
5(3} of the CST Act was added. The relevant portion of the
Statement of Objects and Reasons reads as under:                       D

    " ..... According to the Export Control Orders, exports of
    certain goods can be made only by specified agencies
    such as the State Trading Corporations. In other cases
    also, manufacturers of goods, particularly in the small scale E
    and medium sectors, have to depend upon some
    experienced export house for exporting the goods because
    special expertise is needed for carrying on export trade.
    A sale of goods made to an export canalizing agency such
    as the State Trading Corporation or to an export house to F
    enable such agency or export house to export those goods
    in compliance with an existing contract or order is
    inextricably connected with the export of the goods.
    Further, if such sales do not qualify as sales in the course
    of export, they would be liable to States sales tax and there
    would be a corresponding increase in the price of the G
    goods. This would make our exports uncompetitive in the
    fiercely competitive international markets. It is, therefore,
    proposed to amend, with effect from the beginning of the
    current financial year, Section 5 of the Central Sales Tax
    Act to provide that the last sale or purchase of any goods H
    908       SUPREME COURT REPORTS                 [2010] 12 S.C.R.


A         preceding the sale or purchase occasioning export of
          those goods out of the 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, for, or in relation
B         to, such export."

        17. The relevant portions of Section 5 are also extracted
    hereunder for easy reference:

               "5. When is a sale or purchase of goods said to
C         take place in the course of import or export.- (1) A
          sale or purchase of goods shall be deemed to take place
          in the course of the export of the goods out of the territory
          of India only if the sale or purchase either occasions such
          export or is effected by a transfer of documents of title to
D         the goods after the goods have crossed the customs
          frontiers of India.

                xxxxxxxxx
                xxxxxxxxx
E
                  (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 the territory of India shall also be deemed to be in
F         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 for or in relation to such export.

                xxxxxxxxx
G               xxx xxx xxx''
         18. Article 286(1 )(b) of the Constitution of India states that
    no law of a State shall impose, or authorize the imposition of a
    the sales tax on the sale or purchase of goods when such sale
H   or purchase takes place in the course of export of goods.
STATE OF KARNATAKA v. AZAD COACH BUILDERS 909
  PVTLTD. [K.S. PANICKER RADHAKRISHNAN, J.]
Article 286(2) prohibits imposition of sales tax on import and A
export by the State Government Article 286(2) authorizes the
Parliament to formulate principles for determining when sale is
in the course of import/export. The sale or purchase of goods
is deemed to be in the course of export of goods out of the
territory of India only if the sale or purchase either occasions . B
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. Therefore, under Article 286(1) of the Constitution, the
Court has to examine whether any tax is being imposed by the
State Legislature on the sale or purchase of goods "in the             c
course of the import of the goods into or export of the goods
out of the territory of India". In order to resist imposition c:if sales
tax by the State, the assessee will have to establish the identity
of the goods sold to be exported out of the territory of India. In
order to fulfill an export obligation, if an exporter purchases D
goods and as a result of some processing the identity and
character of the goods change, then it will hot be a case of
export of the same goods.

       19. In Sterling Foods (supra), this Court had advocated
the "same goods" theory of course in a different situation. In that    E
case, on facts the Court found no essential difference between
raw shrimps, prawns and lobsters and processed or frozen
shrimps, prawns and lobsters, especially when the dealer and
the consumer regarded both as shrimps, prawns and lobsters
and that they continued to possess their original character and        F
identity as shrimps, prawns and lobsters, notwithstanding the
removal of heads and tails, peeling, deveining and cleaning. It
is in that context that this Court held that the processed or frozen
shrimps, prawns and lobsters were not a new and distinct
commodity and they retained the same character and identity            G
as the original shrimps, prawns and lobsters.

     20. In Vijayalaxmi Cashew Company (supra), we have
already stated that the question was whether the purchase of
raw goods made by the appellants after which the cashew
                                                                       H
    910     SUPREME COURT REPORTS                 [2010] 12 S.C.R.


A kernels were extracted and exported to foreign countries could
  be subjected to the State Sales Tax Act. The Court elaborately
  examined, in what manner the raw cashew nuts were
  processed. After getting the detailed report from the High Court
  as to how the edible kernels were extracted from raw cashew
B nuts and having examined minutely the whole process, the Court
  came to the conclusion that the kernels were not the same
  goods as raw cashew nuts purchased by the dealers. What was
  exported were the edible kernels and what was purchased for
  the purpose of export were raw cashew nuts. The Court noticed
c that since raw cashew nuts could be used for so many
  purposes and the process of extracting the kernels so
  elaborate, it could not be said that the goods (raw cashew nuts)
  purchased in the penultimate sale were the same goods
  (cashew nut kernels) which were sold for export.
D      21. In this connection, it is useful to refer to the judgment
  of this Court in Deputy Commissioner of Agricultural Income
  Tax and Sales Tax, Ernakulam v. Indian Explosives Ltd.
  (1985) 4 SCC 119, wherein this Court was dealing with the
  question whether the respondent-assessee was concerned with
E sale transactions in the course of import of chemicals, dyes etc.
  The modus operandi of the assessee in that case was to the
  effect that local purchasers used to place orders with the
  respondent quoting their Import Licence Numbers in
  accordance with their pre-existing contracts with the
F respondent. The respondent then placed orders with the foreign
  supplier for the supply of the goods and in such orders the name
  of the local purchaser who required the goods as also its
  licence numbers, were specified; the actual import was done
  on the strength of two documents like (a) the Actual Users'
G Import Licence and {b) Letter of Authority issued by Chief
  Controller of Imports and Exports whereunder the local
  purchaser was authorized to permit the respondent-assessee
  on his behalf to import the goods, to open letters of credit and
  make remittance of foreign exchange against the said licence
H to the extent of value specified therein. The Court held that there
STATE OF KARNATAKA v. AZAD COACH BUILDERS 911
  PVTLTD. [K.S. PANICKER RADHAKRISHNAN, J.]

was an integral connection between the sale         to  the local    A
purchaser and the actual import of the goods from the foreign
supplier. The movement of goods from foreign country like
United States to India was in pursuance of the conditions of the
pre-existing contract of sale between the respondent-assessee
and the local purchaser. It was noticed that the import of the       B
goods by the respondent assessee was for and on be.half of
the local purchaser and the respondent-assessee could not,
without committing a breach of the contract, divert the goods
so imported for any other purpose. The Court, therefore,
concluded that in order that the sale should be one in the course    c
of import it must occasion the import and to occasion the
import there must be integral connection or inextricable link
between the first sale following the import and the actual import
provided by an obligation to import arising from statute, contract
or mutual understanding or nature of the transaction which links
                                                                     0
the sale to import which cannot, without committing a breach
of statute or contract or mutual understanding, be snapped.

      22. Now, let us refer to the Constitution Bench judgment
of this Court in K. Gopinath Nair (supra) on which strong
 reliance was placed in the order of reference. The question E
raised was whether the purchase of African raw cashew nuts
made by the assessees from CCI was in the course of import
and, therefore immune from liability to tax under Kerala General
Sales Tax Act, 1963. The Court rejected that contention
observing that there was no direct and inseverable link between F
the transaction of sale and the import of goods on account of
the nature of the understanding between the parties as also by
reason of the canalizing scheme pertaining to the import of
cashew nuts. In that case, the Court was mainly concerned with
the interpretation of sub-section (2) of Section 5 of the CST Act. G
In the facts and circumstances of that case, the Court observed
that the transactions between the foreign exporter and the local
users in India got transmitted through an independent canalizing
import agency which entered into back to back contracts and
there was no direct linkage or causal connection between the H
    912       SUPREME COURT REPORTS                [2010] 12 S.C.R.


A   export by foreign exporter and the receipt of the imported
    goods in India by the local users and hence the integrity of the
    entire transaction got disrupted and substituted by two
    independent transactions, one between the canalizing agency
    and the foreign exporter which made the canalizing agency the
B   owner of the goods imported and the other between the
    canalizing agency and the local users for whose benefit the
    goods were imported by the canalizing agency. In such a
    situation, the Court held that the sale by the canalizing agency
    to the local users would not be a sale in the course of import
C   but would be a sale because of or by import which would not
    be covered by the exemption provision of Section 5(2) of the
    Central Sales Tax Act. The Court further noticed that a sale or
    purchase can be treated to be in the course of import if there
    is a direct privily of contract between the Indian importer and
    the for0,ign exporter and the intermediary through which such
0
    import is effected merely acts as an agent or a contractor for
    and on behalf of Indian importer.

         23. When we analyze all these decisions in the light of the
    Statement of Objects and Reasons of the Amending Act 103
E   of 1976 and on the interpretation placed on Section 5(3) of the
    CST Act, the following principles emerge:

          To constitute a sale in the course of export there must be
          an intention on the part of both the buyer and the seller to
          export;
F
          There must be obligation to export, and there must be an
          actual export.

          The obligation may arise by reason of statute, contract
G         between the parties, or from mutual understanding or
          agreement between them, or even from the nature of the
          transaction which links the sale to export.

          To occasion export there must exist such a bond between
          the contract of sale and the actual exportation, that each
H
 STATE OF KARNATAKA v. AZAD COACH BUILDERS 913
   PVTLTD. [K.S. PANIC KER RADHAKRISHNAN, J.]
     link is inextricably connected with the one immediately        A
     preceding it, without which a transaction sale cannot be
     called a sale in the course of export of goods out of the
     territory of India.

      24. The phrase 'sale in the course of export' comprises in
                                                                  8
itself three essentials: (i) that there must be a sale: (ii) that
goods must actually be exported and (iii) that the sale must be
a part and parcel of the export. The word 'occasion' is used
as a verb and means 'to cause' or 'to be the immediate cause
of'. Therefore, the words 'occasioning the export' mean the C
factors, which were immediate cause of export. The words 'to
comply with the agreement or order' mean all transactions which
are inextricably linked with the agreement or order occasioning
that export. The expression 'in relation to' are words of
comprehensiveness, which might both have a direct
significance as well as an indirect significance, depending on D
the context in which it is used and they are not words of
restrictive content and ought not be so construed.

     25. Therefore, the test to be applied is, whether there is
an in-severable link between the local sale or purchase on          E
export and if it is clear that the local sale or purchase between
the parties is inextricably linked with the export of the goods,
then a claim under Section 5(3) for exemption from State Sales
Tax is justified, in which case, the same goods theory has no
application.                                                        F

     26. The facts of this case clearly reveal that the transaction
between the assessee and the exporter is inextricably
connected with the export of the goods to Sri Lanka. The
communication between the foreign buyer and the exporter
reveals that the foreign buyer wanted the bus bodies to be G
manufactured by the assessee under the specifications
stipulated by the foreign buyer. The bus bodies constructed and
manufactured by the assessee could not be of any use in the
local market, but were specifically manufactured to suit the
                                                                    H
    914      SUPREME COURT REPORTS                 [2010] 12 S.C.R.


A   specifications and requirements of the foreign buyer. In the
    Purchase Order placed on the assessee by the exporter, it is
    specifically indicated that the bus bodies have to be
    manufactured in accordance with the specifications provided
    by the foreign buyer, failure to do so might result in cancellation
B   of the export order. The assessee in this case has succeeded
    in showing that the sale of bus bodies have occasioned the
    export of goods. When the transaction between the assessee
    and the exporter and the transaction between the exporter and
    foreign buyer are inextricably connected with each other, in our
c   view, the 'same goods' theory has no application.

         27. We may also indicate that the burden is entirely on the
    assessee to establish the link in transactions relating to sale
    or purchase of goods and to establish that the penultimate sale
    is inextricably connected with the export of goods by the
D   exporter to the foreign buyer, which in this case the assessee
    has succeeded in establishing.

           28. Mr. T. S. Narasimha, learned counsel appearing for
    Respondent No. 2 contended that any penultimate sale made
E   in furtherance of export, irrespective of the nature of the goods,
    would also be covered, is too tall a proposition to be accepted.
    It all depends on the question as to whether the sale or purchase
    is inextricably connected with the export of goods and not a
    remote connection as tried to be projected by the counsel. The
F   connection between the penultimate sale and the export of
    goods should not be casual, accidental or fortuitous, but real,
    intimate and inter linked, which depends upon the nature of the
    agreement the exporter has with the foreign buyer and the local
    manufacturer, the integrated nature of the transactions and the
G   nexus between the penultimate sale and the export sale.

         29. 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.
H
STATE OF KARNATAKA v. AZAD COACH BUILDERS 915
  PVT.LTD. [K.S. PANIC KER RADHAKRISHNAN, J.]

     30. We, therefore, find no error in tt\e decision rendered   A
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 stand dismissed. In
the facts and circumstances of the case, there will be no order
as~w~.                                                            B
K.K.T.                                    Appeals dismissed.