Holding

The sale to Kalbhavi is a sale in the course of export under Section 5(3) of the Central Sales Tax Act and therefore purchase tax under Section 6 of the Karnataka Sales Tax Act is payable.

Summary

The respondent, a registered dealer under the Karnataka Sales Tax Act, purchased fish oil from unregistered dealers and sold it within Karnataka to another dealer, Kalbhavi, who intended to export the oil. The issue was whether the purchase of the fish oil attracted purchase tax under Section 6 of the Karnataka Sales Tax Act, i.e., whether the sale to Kalbhavi constituted a “sale in the State” exempting tax, or a sale in the course of export under Section 5(3) of the Central Sales Tax Act. The Supreme Court held that the sale to Kalbhavi is the last sale preceding the export and, by virtue of Section 5(3), is deemed to be in the course of export, not a local intra‑state sale. Consequently, the transaction falls within the ambit of Section 6, making the respondent liable to pay purchase tax. The Court set aside the High Court’s decision and restored the assessing authority’s order, allowing the State’s appeal.

Issues considered

Whether purchase tax under Section 6 of the Karnataka Sales Tax Act is payable on the purchase of fish oil sold to a dealer for export
Interpretation of the term “sale in the State” in Section 6(i) of the Karnataka Sales Tax Act
Whether the sale to Kalbhavi is deemed a sale in the course of export under Section 5(3) of the Central Sales Tax Act

Legislation cited

Central Sales Tax Act, 1956s. 5(1), s. 5(3)
Constitution of Indias. Article 286

Subjects

sales taxpurchase taxexportSection 6Section 5(3)intra-state saleinter-state saleKarnatakaCentral Sales Tax Acttax liability

Judgment

STATE OF KARNATAKA
A
v.
B.M. ASHRAF AND CO.

OCTOBER 20, 1997

B
[S.C. AGRAWAL AND B.N. KIRPAL, JJ.]

Sales Tax:

C Karnataka Sales Tax Act, 1975-Section 6--Purchase tax-Liability of
the assessee to pay purchase tax-Assessee a registered dealer purchasing
fish oil from unregistered dealer and selling the same within the State to
another dealer, for selling it to a foreign buyer pursuant to export order-
Sale of fish oil by assessee to K, although effected within the State, held,
nonetheless a sale in the course of export under Section 5(3) of the Central
D Sales Tax Act and not a ''sale in the State'' falling under Section 6(i)-Hence
assessee, held, liable to pay tax under Section 6 on the purchase of the fish
oil-Central Sales Tax Act, 1956-Set:tions 5(3) & (1)-Constitution of
India, Article 286.

J:Vord~ and Phrases :
E
Words ''sale in the State' '-Meaning of -In the context of Karnataka
Sales Tax Act.

The respondent was a registered dealer under the Karnataka Sales Tax
Act. He used to purchase fish oil from unregistered dealer and, in turn, sold
F the same in the State itself to K, another dealer. K purchased the fish oil
from the assessee in order to comply with the export order from a foreign
buyer. For Assessment Year 1978-79, the respondent-assessee claimed and
was granted exemption from payment of sales tax on sales made to K as the
export sales of the goods referred to under Section 5(3) of the Central Sales
G Tax, Act 1957. The question was whether the respondent was iiable to pay
purchase tax 11nder Section 6 of the Karnataka Sales Tax Act on purchase of
the fish oil which was sold to K. The High Court answered the question in the
negative on the ground that the purchases made by the assessee-respondent
were sold within the State of Karnataka and as such the ingredients of Section
6 of the Karnataka Sales Tax Act were not attracted. Hence this appeal by the
H s20
STATE v. B.M. ASHRAF 521
States. A
Allowing the Appeal, the Court

HELD : 1.1. Whereas intra-State sale or the inter-State sale would be
a reason for purchase tax not being levied but sale in the course of export
would not exclude the applicability of the levy of purchase tax under Section B
6 of the Karnataka Sales Tax Act. The sale by respondent to K is the last sale
preceding the sale occasioning the export of those goods out of thr. territory
of India and is , therefore , deemed to be sale in the course of export as
envisaged by Section 5(3) of the Central Sales Tax Act and therefore no tax
was levied thereon under Section 5 of the Karnataka Act. The sale by K to C
the foreign purchaser wa~ also a sale in the course of export falling under
5(1) of the Central Act. [525-H; 526-A-B)

1.2. The High Court erred in holding that the respondent having sold
the fish oil to K within the State of Karnataka would be a "sale in the State"
under Section 6(i) of the Karnataka Act and, therefore, exempt from levy of D
purchase tax. [525-G)

2. In the case of inter- State sale or sale in the course of export, the
property in the goods may stand transferred within the state but merely
because of the passing of title or sale takes place in a State would not detract E
it from its character as inter-State or export, sale. Similarly situs is irrelevant
as regards the sales being in the course of export, as in the present case. In
the context of sales tax law, the expression "sale in the State" occurring in
Section 6 of the Karnataka Act can only mean a local sale or an intra-State
sale as opposed to sale in the course of export or in the course of inter- State
trade or commerce. Therefore, whenever, there is a sale in the course of export F
or an inter-State sale, then, that would not be regarded as a "sale in the State"
falling under Section 6(i) of the Karnataka Act and, therefore sale by the
respondent to K, which was admittedly a sale in the course of export under
section 5(3) of the Central Sales Tax would not be regarded as "sale in the
State". [526-F; 527-A-B) G

Bengal Immunity Company Ltd. v. State of Bihar and Ors., [1955] VI
S.T.C. 446, relied on.

Murli Manohar & Co. and Anr. v. State o/Haryana & Anr., [1991) 80
STC 79, distinguished. H
522 SUPREME COURT REPORTS {1997) SUPP. 4 S.C.R.

A Mohd. Serajuddin v. State of Orissa, (1975) 36 STC 136 SC, referred
to.

3. By virtue of Section 5(3) of the Central Act, the sale effected by the'
respondent to K has to be regarded to be in the course of export by virtue of
which fish oil was exported to a place outside the State and since this dispatch
B was not pursuant to an intra-State sale or as a result of sale in the course of
inter- State trade or commerce, the said sale falls directly within the ambit of
section 6 of the Karnataka Act. Accordingly, the Sales Tax authorities were .
justified in levying purchase tax on the respondent [530-D-E)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 500 of 1994.
c
From the Judgment and Order dated 3.6.91 of the Karnataka High Court
in S.T.R.P. No. 16of1986.

T.L. Viswanatha Iyer, Mrs. Manjula Kulkarni and M. Veerappa for the
D Appellant.

The Judgment of the Court was delivered by

KIRP AL, J. The respondent is a registered dealer under the provisions
of Karnataka Sales Tax Act, 1957 (hereinafter referred to as 'the Act') and the
E only question which arises for consideration in this appeal by special leave
is whether it is liable to pay purchase tax under the provisions of Section 6
of the said Act.

The respondent had purchased fish oil from un-registered dealers within
the State of Karnataka. It, in tum, sold the said oil to Mis Kalbhavi Venkatarao
F & Bros. (hereinafter referred to as "Kalbhavi") who purchased the said oil in
order to comply with the export from its buyer in a foreign country.

In respect to the assessment year 1.9.78 to 31.8.79, the respondent
clamed exemption from payment of sales tax on sales made to Kalbhavi as the
G export sales of the goods referred to under Section 5(3) of Central Sales Tax
Act, 1957. This claim was allowed by the assessing authority but he came to
the conclusion that the transaction of respondent of purchasing the fish oil
from unregistered dealers would attract the levy of purchase tax under Section
6 of the said Act. Accordingly, the assessment was made, levying purchase
tax on the purchase of fish oil, made by the respondent which, in turn, had
H been sold to Kalbhavi.
STATE v. B.M. ASHRAF [B.N. KIRPAL, J.] 523
An appeal was filed before the Deputy Commissioner of Commercial A
Taxes, Mangalore by the respondent but without success. Its second appeal
to the Kamataka Appellate Tribunal, Bangalore was also dismissed with the
Tribunal confirming the Order of the Assessing Authority in treating the
transaction of purchase of fish oil as attracting the provisions of Section 6
of the Act.
B
The decision of the Tribunal was challenged by the respondent in a
Revision Petition filled in the High Court. The High Court, interpreted Section
6 of the Act and came to the conclusion that the purchase of fish oil, which
was sold by the respondent, did not attract purchase tax under Section 6 of
the Act inasmuch as the purchases made by the respondent were sold within C
the State of Kamataka and as such the ingredients of section 6 of the Act,
so as to make the purchase taxable, were not attracted.

Having heard learned counsel for the appellant, we are of the opinion
that the conclusion of the High Court that no purchase tax was payable by
the respondent, on the facts and under cirumstances of the present case, was D
not correct. As we shall presently see on the correct interpretation of the
provisions of Section 6 of the Act read with Section 5 of the Central Sales
Tax Act, the purchase of fish oil made by the respondent and sold to Kalbhavi
would attract the levy of purchase tax.

It is appropriate to refer to Section 6 of the Act and Section 5 of the E
Central Sales Tax Act which read as under:

"6. Levy of purchase tax under certain circumstances Subject to
the provisions of sub-section (5) of Section 5, every dealer who in the
course of his business purchases any taxable goods in circumstances
in which no tax under Section 5 is leviable on the sale price of such F
goods, and

(i) either consumes such goods in the manufacture of other goods
for sale or otherwise [or consumes otherwise] or disposes of
such goods in any manner other than by way of sale in the G
State, or

(ii) despatches them to a place outside the State except as a direct
result of sale or purchase in the course of inter-state trade or
commerce,

shall be liable to pay tax on the purchase price of such goods at the H
524 SUPREME COURT REPORTS (1997) SUPP. 4 S.C.R.

A same rate at which it would have been leviable on the sale price of
such goods under Section 5:

Provided that this section shall not apply: -

(i) ·in respect of sale or purchase of goods specified in the Fourth
Schedule-
B
(a) which are taxable at the point of purchase; and

(b) which have already been subjected to tax under sub-section
(4) of section 5.

C (ii) in respect of sale or purchase of goods specified in the Second
Schedule which have already been subjected to tax under clause
(a) of sub-section (3 of Section 5.)

(lii) xxx xxx xxx

(iv) xxx xxx xxx
D
[Provided further that the tax payable under this section on the purchase
of butter and ghee shall be calculated at the rate of two per cent]

(v) in respect of the purchase of cocoa pods and cocoa beans by a
co-operative society registered under the Karanataka Co-operative
E
Society Act, 1959.

[Explanation: For the purpose of this Section "consumes such goods
in the manufacture" shall include goods consumed for ancillary
purposes in or for such manufacture.]"
F
Section 5 of the Central Sales Tax Act reads as follows :

''When is a sale or purchase of goods said to take place in the course
of import or export. - (I) A sale or purchase of goods shall be deemed
to take place in the course of export of goods out of the territory of
G India only if the 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.

(2) A sale or purchase of goods shall be deemed to take place in the
course of the import of the goods into the territory of India only if
H the sale or purchase either occasions such import or is effected by
STATE v. B,M. ASHRAF [B.N. KIRPAL, J.] 525
a transfer of documents of title to the goods before the goods have A
crossed the customs frontiers of India.

(3) Notwithstanding anything contained in sub-section (I), 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 the course of such export, if such last sale or B
purchase took place after, and was for the purpose of complying with,
the agreement or order for or in relation to such export."

Section 6, on analysis, provides as follows in order that purchase tax
can be levied:-
c
(i) person who purchases the goods, is a dealer;

(ii) the purchase is made by dealer in the course of his business;

(iiI) the goods purchased are taxable goods;

(iv) such purcha~e is in circumstances in which no tax under Section D
5 is leviable on the sale price of such goods; and

(v) the dealer either

(a) consumes such goods in the manufacture of other goods
for sale or otherwise; or E
(b) consumes such goods otherwise; or

(c) disposes of such goods in any manner other than by way
of sale in the State or;

(d) despatches them to a place outside the State except as a F
direct result of sale or purchase in the course of inter-state
trade or commerce.

From the aforesaid, it wj\l be clear that if the purchased goods are
disposed of by way of sale within the State or are sold in the course of inter- G
state trade or commerce, then no purchase tax is leviable.

It is pertinent to note that whereas intra-state sale or inter-state sale
would be a reason for purchase tax not being levied but sale in the course
of export would not exclude the applicability of the levy of purchase tax under
Section 6 of the Act. The sale by the respondent to Kalbhavi is the last sale H
526 SUPREME COURT REPORTS [1997) SUPP. 4 S.C.R.

A preceding the sale occasioning the export of those goods out of the territory
of India ahd is, therefore, deemed to be sale in the course of export as
envisaged by Section 5(3)_ of the Central Sales Tax Act. The Sale by Kalbhavi
to the foreign purchaser was also a sale in the course of export falling under
Section 5(1) of the Central Sales Tax Act. Inasmuch as the sale by the
B respondent to Kalbhavi was a sale in the course of its export, therefore, no
tax was levied under Section 5 of the Act.

The High Court while holding that the purchase transactions by the
respondent were of goods on which no tax was leviable under Section 5 of
the Act and that by virtue of Section 5(3) of the Central Sales Tax Act read
C with Article 286 of the Constitution of India, the sale by the respondent to
Kalbhavi was not taxable nevertheless came to the conclusion that the
respondent had sold the fish oil to Kalbhavi within the state of Karanataka
and, therefore, this would be regarded as a sale as "sale in the State" under
Section 6(i) of the Act and, therefore, exempt from· levy of purchase tax.

D In our opinion, there is a fallacy in the aforesaid reasoning of the High
Court. The word "sale in the State" occurring in Section 6(i) of the Act would
refer to "intra-state" sale in contradistinction to "sale in the course of inter-
state trade of commerce" as referred to in Clause (ii) of Section 6. It has been
accepted by the High Court and, it is not disputed, that the sale in the present
E case to Kalbhavi falls under Section 5(3) of the Central Sales Tax Act. This,
therefore, is a sale in the course of export and ipso facto cannot be regarded
as intra-state sale. It is to be borne in mind that in the case of inter-state trade
sale or sale in the course of export, the property in the goods may stand
transferred within the State but merely because the passing of title or sale
takes places in a State would not detract it from its character as a Inter-state
F or export sale. In this connection, it will be appropriate to refer to the decision
of this Court in The Bengal Immunity Co. Ltd. v. The State of Bihar and
Others, [1955] VI S.T.C. 446. While examining the scope and ambit of Article
286 of the Constitution and, in particular, the effect of situs of sale qua inter-
state sale, it was observed at page 481 as follows:
G
"The truth is that what is an inter-state sale or purchase continues
to be so irrespective of the State where the sale is to be located either
under the general law when it is finally determined what the general
law is or by the fiction created by the Explanation to Article 286. The
situs of a sale or purchase is wholly irrelevant as regards its inter-
H State character."
I'

STATE v. B.M. ASHRAF [B.N. KIRPAL, J.] 527
Similarly situs is irrelevant as regards the sales being in the course of A
export, as in the present case. In the context of sales tax law, the expression
"sale in the State" occurring in Section 6 can only mean a local sale or a intra-
state sale as opposed to sale in the course of export or in the course of inter-
state trade or commerce.

Therefore, wherever, there is a sale in the course of export or an inter- B
state sale, then, that would nor be regarded as a "sale in the State" falling
under Section 6(1) of the Act and, therefore, sale by the respondent to
Kalbhavi, which was admittedly a sale in the course of export under Section
5(3) would not be regarded as "sale in the State".

The High Court, while allowing the respondents's revision, has placed
c
reliance on the decision of this Court in the case of Murli Manohar & Co.
and Another v. State of Haryana and Another, [1991] 80 S.T.C 79. In that case
the registered dealer had purchased raw material without paying tax against
declaration on the basis of registration certificate. From that raw material
certain goods were manufactured and sold to other dealers who, in turn, D
exported the goods outside India. The question which arose was whether the
dealer was liable to pay purchase tax on the raw material under Section 9(1)
of the Haryana General Sales Tax Act, 1973. This Court had held that the
registered dealers were not entitled to exemption under Section 9(1) of the
Haryana General Sales Tax Act, 1973 because the sales made by them were E
not in the course of export outside the territory of India within the meaning
of Section 5( 1) of the Central Sales Tax Act. It may appear that this decision
would support the dealer but the provisions of Section 9 of the Haryana Sales
Tax Act and Section 6 of the Act, with which we are concerned in the present
case, are different with regard to one important and relevant circumstance.
Section 9(1) of the Haryana General Sales Tax Act which was under F
consideration in Murli Manohar's case (supra) excluded from it's purview the
purchase of goods which were sold either out of State or in the course of
inter-state trade or commerce or "in the course of export out of territory of
India within the meaning of sub-section (i) of Section 5 of the Central Sales
Tax Act. 1956". After referring to the decision in Mod. Serajuddin v. The State G
of Orissa, 36 S.T.C. 136, it was noticed that sub section (3) was inserted in
Section 5 of the Central Sales Tax Act so as to regard penultimate sale of
purchases to the import or export of goods as being sales or purchase in the
course of export. The purchases in question in Murli Manohar 's case (supra)
were not regarded as sales in the course of export within the meaning of
Section 5(1) of the Central Sales Tax Act but were regarded as sales falling H
528 SUPREME COURT REPORTS [1997) SUPP. 4 S.C.R.

A under the purview of Section 5(3) of the Central Sales Tax Act. Section 9( 1)
of the Haryana Sales Tax Act had referred to the export sales envisaged by
Section 5( 1) of the Central Sales Tax Act and not the export sales falling within
the purview of section 5(3). This distinction and its effect were clearly brought
out in the Murli Manohar' s case (supra) at page 93 as follows:

B "It will be convenient first to dispose of the contention dealt with by
the High Court. For the purposes of this argument we shall assume
that the sales made by the assessees were "penultimate sales" which
would fall within the purview of section 5(3) of the Central Sales Tax
Act. The argument on behalf of the Revenue, which was found favour

c with the High Court, is that section 9(1) exempts only sales made in
the course of export within the meaning of Section 5( 1) of the Central
Sales Act but not those under Section 5(3) of the said Act. After
careful consideration we think that this argument was rightly accepted
by the High Court. In the first place there is no dispute before us that
section 5(3) covers a category of cases which would not otherwise
D have come within the purview of section 5(1), as explained in Mod.
Serjuddin 's case, (1975) 36 STC 136 SC. The language of section 9(1)
(a) (ii)-later 9(1 )(b)-using the words ''within the meaning of sub-section
(I) of Section 5 of the Central Sales Tax Act, 1956" has to be given
full meaning; in other words the exemption under section 9(1) has to
be restricted only to export sales falling within the scope of section
E 5(1). It seems clear, from the circumstances referred to below, that the
Legislature deliberately used these words, and intended to give a
restricted operation to section 9(1)(a)(ii) and (b). These cirumstances
are:

I. Section 9(l)(a)(ii), as originally framed, merely uses the words "in
F the course of export outside the territory of India". Clause 9(1)(b)
referred to cases where raw materials were purchased and exported
and the word "export" was defined in Section 2(e) as meaning "the
taking out of goods from the State to any place outside it otherwise
..,,_
than by way of sale in the course of inter-state trade or commerce".
G Act 44of1976 amended the definition of"export" in section 2(e) by
adding the wide words "or in the course of export out of the territory
of India" with effect from April I, 1976. But the same Act narrowed
down the scope of clause (a)(ii) by adding the restrictive words at the
end of the clause.

H 2. If a reference is made to section 24, one finds that section 24(l)(iii)
STATE v. B.M. ASHRAF [B.N. KIRPAL, J.] 529
'
refers again to sub-section (I) of Section 5 of the Central Sales Tax A
Act. However, the language of the two provisoes simultaneously
introduced in section 24(1) (a) and (b) by Act 3 of 1983 makes
interesting reading. The proviso to clause (a) refers only to "sale by
him in the course of export outside the territory of India within the
meaning of section 5 of the Central Sales Tax Act, 1956", whereas the
proviso to clause (b) refers to "sales by him in the course of export B
outside the territory of India within the meaning of sub-section (3) of
Section 5 of the Central Sales Tax Act, 1956". Thus the statute, within
the same provision, has made a distinction between a sale in the
course of export within the meaning of section 5 and such a sale
within the meaning of section 5(3). C
3. When we tum to section 27 next, we find two provisoes introduced
in section 27(I)(iv)(a) by Act 44of1976, the same amending Act that
introduced the extra words at the end of section 9(i)(a)(ii). These
provisoes make a marked contrast between sales falling under sub-
section (I) and those falling under sub-section (3) of section 5 of the D
Central Sales Tax Act.

4. As will be seen from the extract of the legislative amendments set
out earlier the Legislature has subsequently deleted the reference to
sub-section (3) of section 5 in section 9(l)(b). However, this amendment,
which has been made both in section 9 and in section 24 by Act, I E
of 1988 has not been given any retrospective effect. Considering that
the legislation is replete with instances of retrospective effect (in
some cases even to as early a date as September 7, 1955), the failure
or omission to give any retrospective effect to the amendment to
section 9 in this regard is an eloquent pointer to the intention of the F
Legislature.

In view of the circumstances outlined above, we are of the opinion
that the High Court was right in concluding that the assessee was not
entitled to the exemption under Section 9 because the sales made by
him were not sales in the course of export outside the territory of India G
within the meaning of section 5(1) of the Central Sales Tax Act."

It was further held that the goods sold either could be intra-state sale,
inter-state sale or sale in the course of export within the meaning of Section
5( I) of the Central Sales Tax Act. Having come to the conclusion that the sale
was not in the course of export within the meaning of section 5(1) of the H
530 SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R.

A Central Sales Tax Act and it was also not a local sale, it was concluded that
the sale in question was inter-state sale and, therefore, would fall within the
exemption contained under Section 9(1) of the Haryana Sales Tax Act. Such
a question does not arise in the present case because whereas in Murli
Manohar's case (supra) the goods had gone out of State of Haryana prior to
B its export from India, in the present case, according to the learned counsel
for the appellant, Kalbhavi exported the goods from Mangalore i.e. from
within the state of Kamataka. There was thus no occasion of movement of
goods from one State to another and as the sale in the course of export is
not entitled to the exemption from payment of purchase tax under section 6
ofKamataka Sales Tax Act, the decision of the High Court regarding the sales
C in question as being sales in the state and, therefore, immune from levy of
purchase tax, cannot be sustained.

From the aforesaid discussion, it follows that by virtue of section 5(3)
of the Central Sales Tax Act, the sale effected by the respondents of Kalbhavi
has to be regarded to be in the course of export by virtue of which fish oil
D was exported to a place outside the state and since this despatch was not
pursuant to an intra-state sale or as a result of of sale in the course of inter-
state trade or commerce, the said sale falls directly within the ambit of section
6 of the Act. Accordingly, the sales Tax authorities were justified in levying·
purchase tax on the respondent and the High court erred in coming to a
E contrary view.
For the aforesaid reasons, this appeal is allowed. The order of the High
Court is set-aside and the decision of the assessing authority is restored.
There shall be no order as to costs

RK.S. Appeal allowed.