Claim for exemption held justified in case, HC

Facts in Brief:

1. The Appellant is a registered dealer engaged in the business of manufacturing and trading of Reverse Osmosis (RO) water purifying systems, water treatment plants, their parts and accessories etc.

2. The Audit Officers of the Trade and Tax Department conducted a DVAT audit in the premises of the Appellant on 22nd August 2008. According to the Appellant, it provided the explanations, clarifications and documents sought by the Audit Officers regarding the transactions under Section 5 (2) of the CST Act (sale or purchase of goods in the course of import of the goods) and Section 6 (2) of the CST Act (liability to tax on inter-State sales).

3. According to the Department, however, the Audit team noted discrepancies in the books of accounts and returns filed by the Appellant.

Default Assessment Orders

4. Accordingly, the Value Added Tax Officer (VATO) issued on 4th and 11th January 2009 default assessment orders of tax and interest under Section 9 (2) of the CST Act read with Section 32 and penalty assessment orders under Section 33 of the Delhi Value Added Tax Act, 2004 ('DVAT Act') for the periods May 2006 to February 2007 and April to September, 2007 respectively. The VATO held that the transactions involving E-I/C Forms (for inter-state sales) and high sea sales did not conform to the conditions prescribed under the CST Act for claiming exemption.

5. Accordingly demands of tax, interest and penalty were raised against the Appellant for the said periods.

On appeal HC held as under,

6. The Court finds that there is no discussion in either the order of the VATO or of the OHA or the AT of the documents with reference to the transactions of sale in the course of import. The only reference made is to the agreement with MUL. The mere fact that the agreement executed by the Appellant with the dealer did not contain a clause requiring goods to be imported or that the Appellant had itself got the goods released from the Customs authorities would not by itself be factors determinative of the issue whether it was a sale in the course of import.

7. It would have to be examined whether there was an inextricable link between the said import and the subsequent sale and whether the imported goods could have been diverted to some other buyer or destination. In the sample document concerning the PO placed on the Appellant by NCS Sugars Ltd., the mention of the name of NCS Sugars Ltd. as the consignee in the invoice raised by Grundfos and in the B/L might be the link factor. However since the documents produced are unverified copies, no definitive opinion thereon can be expressed at this stage. They would have to be examined in detail by the VATO transaction-wise with reference to the settled legal position as explained in the aforementioned decisions.

8. The Court finds that the OHA has merely repeated what has been stated by the VATO and in turn the AT too has virtually reproduced the order of the OHA. The latter two orders are of an omnibus type with reference to all transactions for both periods i.e. AYs 2006-07 and 2007-08. However, there is no detailed examination of the different transactions and the documents in support thereof produced by the Appellant. This exercise ought to have been undertaken at the level of the VATO at least.

9. Consequently, the Court finds that the impugned order of the AT and the corresponding orders of the VATO and the OHA pertaining to the claims for exemption with reference to Section 5 (2) CST Act for the AYs in question require to be set aside and the matters remanded to the VATO for a fresh determination.

Inter-state sale

10. The Court next examines the issue pertaining to inter-state sales with reference to Section 6 (2) of the CST Act. The burden here is on the Appellant which is claiming exemption to show that the sale of goods has "occasioned the movement of goods from one State to another." There should have been a movement of the goods from one state to another as a result of a prior contract of sale. In Hyderabad Engineering Industries v. State of AP (2011) 4 SCC 705, in the context of inter-state sales as defined under Section 3(a) of the APGST Act, it was explained as under:

"For a sale to be in the course of inter-State trade or commerce under Section 3(a), the two conditions must be fulfilled. There must be sale of goods. Such sale should occasion the movement of the goods from one State to another. A sale would be deemed to have occasioned the movement of the goods from one State to another within the meaning of Clause (a) of Section 3 of the Act when the movement of those goods is the result of a covenant or incidence of the contract of sale, even though the property in the goods passes in either State. With a view to find out whether a particular transaction is an inter-State sale or not, it is essential to see whether there was movement of the goods from one State to another as a result of prior contract of sale or purchase.”

The case of the Appellant is that it received orders from buyers outside Delhi for providing RO water treatment systems or parts for manufacturing RO water purification systems. The Appellant purchased some of the components from various suppliers situated outside Delhi against Form-C and directed the supplier to despatch the goods to the place/address of the ultimate buyers. The goods were sent by the supplier outside Delhi to the ultimate buyers outside Delhi. The supplier only sent the invoice and the GR/RR to the Appellant at Delhi.

The Appellant made payment and issued C-Forms against the said purchases and, in turn, requested and obtained E-1 Form from the supplier. The Appellant then sent its invoices along with the GR/RR to the ultimate buyers who in turn would get the goods retired/released from the transporters at his end and would issue form C to the Appellant. It is claimed that since this was a sale transaction effected by the Appellant while the goods were in movement therefore, the Appellant is entitled to exemption on the said subsequent sale effected during movement by furnishing certificate in form E-1 given by the supplier and C-Form given by the ultimate purchaser.

The VATO denied the Appellant the above benefit on the ground that the documents produced by the Appellant were not found convincing "as transactions against E-1/C-Forms involve diversion of movement of goods from original destination to some other/different destination by the purchasing dealer by way of endorsement on transportation documents while the goods are in transit." Further on perusal of the sale and purchase invoices there were "significant differences" in the description of the items. It was therefore concluded that the Appellant had failed to prove that the purchase of goods by E- 1/C-Forms was a case of sale of RO water purification systems in the course of inter-state transaction under Section 6 (2) of the CST Act. The OHA repeated the above reasons and so did the AT. It is significant that none of the above orders refer to any particular transaction.

A set of sample documents have been enclosed with the appeals in respect of the transactions of inter-state sale. One of them pertains to the PO placed on the Appellant by Ramgarh Chini Mills on 27 th August 2006 for supply of a water treatment plant. Two of the components were 'cation resin' and 'anion resin'. In turn the Appellant appears to have placed a PO on Auchtel Products Ltd. (APL). It is stated that the said two components have been described in the PO by their brand names, viz., Auchtel Duolite A-113 and Auchtel Duolite C-20 respectively. It was contended by Mr. Devnath that the Appellant had placed sufficient material before the VATO to substantiate the above plea and yet the VATO proceeded on the basis that the description of the commodities did not match.

He further pointed out that Annexure-1 mentions the Job Order No. PXD-597 which is also mentioned in the PO and finds mention in Auchtels invoice.

11. Secondly, it is pointed out that Auchtels Tax Invoice contained an instruction that the goods were to be despatched directly to Ramgarh Chini Mills. Thirdly, the lorry receipt also showed that the consignee was Ramgarh Chini Mills, Ramgarh. This is stated to be the proof of the inextricable link and yet none of the documents were actually examined and discussed in the default assessment above orders of the VATO.

12. As already observed, the default assessment orders of the VATO give no indication of any detailed examination of the documents. It is not clear which document the VATO is referring to when he concludes that the description of the commodity is different or when he concludes that there is "diversion of movement of goods from original destination to some other/different destination." Even the OHA and the AT make no reference to any particular transaction or document pertaining to inter-state sales and have simply repeated the reasoning of the VATO.

13. At least the documents produced for the sample transaction concerning the PO placed on the Appellant by Ramgarh Chini Mills do not show that there is any diversion of the goods to some other destination. Also, if indeed it is correct that 'Duolite' is the brand name for 'Cation' or 'Anion' resin, then the exemption cannot be denied on the ground of the description of the commodity not matching that mentioned in the PO. In any case, as explained in State of Karnataka v. Azad Coach Builders Pvt. Ltd. (2010) 9 SCC 524, where it is able to be shown that the local sale or purchase between the parties is "inextricably linked with the export of the goods" then a claim for exemption is justified and "the same goods theory has no application."

14. The Court finds that the general cursory approach of the authorities and the VATO, in particular, is unhelpful when the High Court is called upon to examine the correctness of their orders. They must reflect application of mind to the materials on record. Consequently, even in respect of the transactions of inter-state sales, the Court finds that the impugned order of the AT and the corresponding orders of the VATO and the OHA require to be set aside and the matters remanded to the VATO for a fresh determination.

Conclusion

15. The impugned Order No. ATVAT/2014/3015-3020 dated 21st August/1st September 2014 passed by the AT and the corresponding orders of the VATO and OHA challenged before it in the appeals are hereby set aside. The matters pertaining to the Appellant for the AYs 2006-07 and 2007-08 are remanded to the VATO concerned for a fresh consideration on the basis of the documents already on record.

16. Needless to say that the VATO will examine each transaction with reference to the legal position explained in the aforementioned and other relevant decisions and determine whether the claim for exemption in each case is justified. The exercise is to be completed within a period of six months from the date of the first hearing before the VATO pursuant to the remand. The Assessee and the Revenue will extend their full co-operation to the VATO and not seek any unnecessary adjournment.

17. It is clarified that the Court has not expressed any view on the merits of the contentions of the parties. 

Case Reference - Triveni Engineering And ... vs Commissioner Of Trade And Taxes.