PADDY AND RICE: SALE IN THE COURSE OF EXPORT

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      Here in this article, we are going to discuss export cases of rice relating to pre-VAT period. We know that in view of Article 286 of the Indian Constitution, States cannot levy tax on sale or purchase where such sale or purchase takes place in the course of export out of or in the course of import into the territory of India. In exercise of its powers under the same article of the Constitution, the Union Parliament, in section 5 of the Central Sales Tax Act, 1956, has formulated principles for determining when a purchase or sale shall be deemed to take place in the course of such export or import.
       Section 5(1) of the Central sales Tax Act, 1956 (hereinafter referred to as CST Act) deals with sales in the course of export where there is no intermediary in between foreign buyer and Indian exporter.  Section 5(3) deals with export sales where direct exporter, in order to fulfill an existing export sale contract, makes purchase of goods under the contract from within India.  This sub-section has been introduced in the CST Act with effect from April 01, 1976.  Sub-sections (1) & (3) of section 5 of the CST Act run as under:-

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 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.

      Such exporter may be called a direct exporter. A trader, manufacturer or producer, without entering into export contract with foreign buyer directly, may also export its goods. But it cannot do so without an intermediary.  Such person finds an exporter who affects export sale and enters into contract of sale directly with the foreign buyer. Such person finds export order for the goods. Conversely, an exporter who enters into export contract with foreign buyer, may also, for fulfilling its export contract, contract the trader, manufacturer or producers of goods for purchase of goods. Such trader, manufacturer or producer of goods may be called an indirect exporter.

      Earlier than April 01, 1976, many direct exporters, after entering into export contract with foreign buyers, used to place purchase orders with local traders, manufacturers or producers for the goods of the specification under the export order. Such local traders, manufacturers or producers as well as exporters contended that sales by traders, manufacturers or producers to exporters were also covered under sale in the course of export of the goods out of the territory of India as defined in section 5(1) of the Central Sales Tax Act, 1956. I can recollect that State Trading Corporation (STC) was one of the exporters who used to procure export orders from foreign buyers of European countries for sale of leather shoes. After procuring export orders, it used to place purchase orders with local shoe manufacturers of Agra city on terms and conditions similar to terms and conditions of the export order. STC had assured local manufacturers that sale by them to STC was also sale in the course of export of the goods under section 5(1) of the CST Act. On the other side, State Revenue Department was of the opinion that there were two sales viz. one sale of shoes by manufacturers to STC and the other sale of same shoes by STC to foreign buyers. Revenue was also of the opinion that sale of shoes by manufacturers to STC was a local sale where delivery of shoes was affected within the State and an inter-state sale where delivery of shoes was affected at a place outside the State; and sale of those shoes by STC to foreign buyers was sale in the course of export of the goods out of territory of India.
      In 1975, the Honorable Supreme Court gave an important decision in the case of Mod Sirajuddin v. State of Orissa [36 STC 136 (SC)] wherein the Apex Court held that export sale through intermediary was not covered under sub-section (1) of section 5 of the CST Act. Only those sales, in which there had been direct privity of contract in between Indian seller and foreign buyer, were found to be covered under sub-section (1) of section 5 of the CST Act.
      It was then, that the Parliament, in order to encourage export of goods, enacted sub-section (3) in section 5 of the CST Act.
      In cases of export sales falling under sub-section (1) of section 5 of the CST Act, contract of export sale exists in between Indian seller and foreign buyer. There is no intermediary in between them. Sub-section (3) of section 5 of the CST Act covers the export sales which are made through intermediary. In sub-section (3) of section 5 of the CST Act, a fiction has been created for treating a local sale or purchase, made in specified circumstances, as a sale in the course of export of the goods out of territory of India.
      Study, of provisions of sub-section (3) of section 5 of the CST Act, reveals that there is no scope for treating two local sales or purchases in the course of export. Sub-section (3) of section 5 embraces only last sale or purchase preceding the sale or purchase occasioning the export of those goods out of the territory of India if it satisfies other specified conditions.
       For the sake of arguments, for a moment, let us forget about the fiction created in sub-section (3) of section 5 of the CST Act about the deemed export sale. Then we see that the sale or purchase occasioning the export of goods out of the territory of India is the sale or purchase in which there is privity of contract in between the Indian selling dealer (exporter) and the foreign buyer. Let there be three dealers A, B & C in India and D, a foreign buyer.  Dealer A is the exporter and it enters into contract of export sale of goods of certain description with the foreign buyer D. Dealer B is a trader of goods of such description and dealer C is either another trader of such goods or manufacturer of such goods of such description.  Neither A nor B possesses goods which are to be supplied by A to foreign buyer D. Dealer A places order of purchase of such goods with B. Thereafter, dealer, B for fulfilling its contract with A, places order of purchase of same goods with C. In this case, there will be three distinct contracts of purchase and sale. First contract will be in between A and D in relation to export of goods, second will be in between A & B for local sale/purchase of goods and third in between B & C. Third contract will also be for local sale/purchase of goods. From view point of privity of contract in between Indian selling dealer and foreign buyer, there is only one sale in which there is privity of contract in between Indian selling dealer and foreign buyer. Such sale is in between A & D. Therefore, in view of provisions of section 5(3), there can be only one sale by A to D occasioning the export of those goods out of the territory of India. Sale of goods by C to B and sale of goods by B to A are local sales because none of them occasions the export of goods out of India.
      Now let us consider the fiction created in sub-section (3) of section 5 of the CST Act. It says “… 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 purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.” If we look at the discussion in preceding paragraph, we find that sale in between A & D is the sale occasioning export of goods and sale by B to A is the last sale or purchase of goods preceding the sale (sale by A to D) occasioning the export of those goods out of the territory of India.  Now, if this sale (sale by B to A) satisfies the condition that such last sale or purchase has taken place after, and was for the purpose of complying with, the agreement or order for or in relation to such export then this sale will also be in the course of export of the goods out of the territory of India.
      Now, let us consider the sale of goods by C to B. It is a

C —————— B   ——————     A —————— D Foreign buyer

      Now, fiction created in sub-section (3) of section 5 of the CST Act defines only the last sale or purchase preceding sale or purchase occasioning the export of goods out of India as sale or purchase in the course of export out of India, 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. If we assign serial numbers to sales in the chain in backward direction leaving export sale by A and if we assign serial No. 1 to sale by B to A, serial No. 2 to sale by C to B, then sale at serial no. 1 (sale by B to A) is the last sale preceding sale occasioning export. Only this sale by B to A (or purchase by A from B), if it fulfills other conditions, will qualify for the purpose of fiction created in sub-section (3) of section 5. Sale by C to B, being second last (last but one) sale to sale occasioning export will not qualify. Such sale by C to B (and purchase of B from C) will be a sale within India, a local sale.
      In absence of fiction created in sub-section (3) of section 5 of the CST Act, sale by B to A and sale by C to B, both, will be local sales within the country. It is because of the fiction created in section 5(3) of the CST Act, that last sale or purchase, preceding sale occasioning export of the goods out of India, if it fulfills other conditions, is a sale or purchase in the course of export of the goods out of India.

Effect of clause (ca) of section 15 of the CST Act:-
      Section 5(3) of the CST Act was introduced with effect from April 01, 1976 and clause (ca) of section 15 was inserted on 28-09-1998. In clause (ca) of section 15, by fiction created in it, paddy has been equated to rice for the purpose of section 5(3). In between April 01, 1976 and the effective date of insertion of clause (ca) in section 15, direct exporters could purchase rice for fulfilling their export contracts of sale of rice. A miller–cum-exporter makes purchase of paddy and sells rice. Since, paddy and rice were different commodities. Hence, section 5(3) had been of no use for miller-cum-exporters of rice in the aforesaid period.  
      Because of fiction created in clause (ca) of section 15 of the CST Act, if export contract is for export of rice, then manufacturer-cum-exporter of rice can purchase paddy for fulfilling the contract. In such cases exporter procures rice out of paddy and thereafter dispatches rice under the export order. But this fiction has been created only for the purpose of section 5(3) of the CST Act. In such cases, sale or purchase of paddy can only be said to be in the course of export, if it is the last sale or purchase preceding the sale or purchase occasioning export of rice.
      In my personal opinion, clause (ca) of section 15 of the CST Act is like an explanation or extension to sub-section (3) of section 5 of the CST Act in relation to export of rice falling under that sub-section. It is not intended to curtail the benefit which direct exporters of rice have been enjoying since the introduction of section 5(3) in the circumstances mentioned therein. In cases of rice export, by insertion of clause (ca) of section 15 of the CST Act, the Parliament has extended the scope of section 5(3) to give benefit to those who are direct exporter of rice manufactured by them and who makes purchase of paddy for fulfilling their export contract of rice.

      Let us assume that a dealer A is an exporter of rice, dealer B is a manufacturer of rice and dealer C is a trader of paddy. A obtains order for export of rice from a foreign buyer. Thereafter, A, for fulfilling export contract, places order for purchase of rice from Manufacturer B. After receiving purchase order from A, B places order to C for purchase of paddy for fulfilling its contract with A. We know that only last sale or purchase preceding sale occasioning export of goods out of India can fall under section 5(3). In this case, sale of rice by A to foreign buyer is the sale occasioning export and consequently, sale or purchase of paddy, is second last sale or purchase to sale occasioning export. Therefore, purchase or sale of paddy, in view of provisions of section 5(3), cannot be said in the course of export of the goods out of India. Whereas, sale of manufactured rice by B to A, being last sale or purchase preceding the sale occasioning export of rice out of India, will enjoy status of sale or purchase in the course of export of goods out of India. In this case purchase or sale of paddy will be a local sale.

      Let a dealer A be a manufacturer/exporter (direct exporter) of rice. After obtaining export order from foreign buyer, such miller-cum-exporter, in order to fulfill his export order, places order for purchase of paddy with B, who is trader of paddy. After receiving paddy from B, miller-cum-exporter procures rice out of paddy purchased from B and thereafter, dispatches such rice to foreign buyer. In this case, purchase of paddy by A or sale of paddy by B to A will fall in the category of last sale or purchase preceding the sale or purchase occasioning export. Difference in goods exported (rice) and goods purchased (paddy) for fulfilling contract will be met out by fiction created in clause (ca) of section 15 of the CST Act. In this case, purchase or sale of paddy, by virtue of provisions of section 5(3) read with clause (ca) of section 15, will be in the course of export of the goods out of the territory of India.

Decision in the case of M/s Monga Rice Mills, etc. v. State of Haryana & Anr. (Decision Date April 13, 2004)

         An important judgment has been given by the Honorable Supreme Court in the aforesaid case. In the cases before the Honorable Apex Court, appellants were millers who used to procure paddy, process it and sell it to exporters who exported it out of India.
        The question for consideration before the Honorable Court had been about the nature of purchase of paddy as is evident from following paragraphs of the judgments:-
   Page 1 paragraph 1:-
“These civil appeals by special leave involve a common question of law as to whether the State has power and competency to levy tax on paddy, purchased by the miller for sale of rice to the exporter, in view of section 5(3) read with section 15(ca) of the Central Sales Tax Act, 1956. …”
Page 8 last paragraph:-
“The question which we have to decide in these civil appeals is: whether the purchase of paddy by the appellant (miller), who procures rice from it and sells the rice to the exporter, is a purchase which occasions export or is it a purchase for export? …”

        “There are three categories of sales, namely, local sale, inter-state sale and export sale. Section 5, therefore, covers direct export whereas section 5(3) covers last sale or purchase preceding direct export which is deemed to be in the course of export. The last sale or purchase preceding the direct export is deemed to be in the course of export as the two are so closely connected that breach of one may result in breach of the composite contract. It is for this reason, that section 5(3) inter alia requires such sale or purchase transaction being entered into after and in compliance with the export order placed by the foreign buyer. The underlying rationale of section 5(3) is that such penultimate sale or purchase must occasion export in order to constitute a sale or purchase in the course of export. Section 5(3) does not cover the penultimate transaction which occasions sale in the local market, nor does it cover sale for export. In the present case, appellant is a miller within the State; it buys paddy and procures rice therefrom within the State and sells it to the exporter within the State and as such it is a local sale which does not fall under section 5(3). It is a sale for export and not a sale which occasions export.”

        Petitioners had claimed that, in view if provisions of section 5(3) and 15 (ca), purchase of paddy by them had been in the course of the export of the goods out of India. Disallowing the claim of the petitioners, the Honorable Apex Court has held that purchase of paddy had been local purchase and on such purchase, levy of tax was attracted under the Haryana General Sales Tax Act, 1973. The purchase of paddy had been purchase for export and not a purchase in the course of export.

        It will be useful to consider another case here. A rice miller carries on business of sale of rice to exporters. It purchases rice from local market and procures rice from it. Thereafter, it receives a purchase order for rice from exporter who certifies that rice, being purchased by it, is for the purpose of complying with, a particular export agreement or order for export of rice. Here, in view of the judgment given by the Honorable Apex Court in case of M/s Monga Rice Mills, referred to above, we find that purchase of paddy is a local purchase. If we examine sale of rice by the miller to exporter who makes purchase of rice for fulfilling its export order, we find that the sale, of rice by the miller to such exporter, falls under section 5(3) of the Central Sales Tax Act, 1956 and therefore, sale of rice by the miller is a sale in the course of the export of the goods out of India. Such sale of rice will not become a local sale simply because purchase of paddy has been a local sale or purchase.

        Next important question is that whether the State can exempt local purchase of paddy from levy of tax on the condition that rice procured out of such paddy is sold in the course of the export of the goods out of India where such export is covered either under section 5(1) or section 5(3) of the CST Act. I am of the view that where a sale or purchase is a sale or purchase within the State, the State is fully competent for levying tax or for granting partial or full exemption from tax on such sale or purchase. Levy and exemption may also be conditional. For granting exemption, imposition of condition that goods manufactured will be sold in the course of export, is a valid condition.

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