Paper Seller Loses Tax Exemption Claim — Product Identity Changed Before Export

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Case Name

Azam Laminators § Limited v. The Commercial Tax Officer (FAC) Pudukottai I & Others

Court Name: High Court of Judicature at Madras

Case No.: W.P. No. 4382 of 2008 and M.P. No. 1 of 2008

Decided on: 15th September 2022

Coram: Hon’ble Mr. Justice S. Vaidyanathan and Hon’ble Mr. Justice C. Saravanan

Key Takeaways

1. Product Identity Matters for Export Exemption: To claim a tax exemption under Section 5(3) of the Central Sales Tax Act, 1956, the goods sold by the manufacturer to the merchant exporter must be the same goods that are ultimately exported. If the product undergoes a change in its commercial identity, the exemption is not available.

2. Form ‘H’ Must Be Valid for the Relevant Assessment Year: The Form ‘H’ submitted by the petitioner was valid only up to 31.03.2001 (after re-validation), but the commercial invoice was dated 28.01.2002, which falls in the next assessment year (2001-2002). This mismatch was a critical factor in denying the exemption.

3. Change in Commercial Identity = No Exemption: The petitioner sold M.G. Plain Kraft Paper at ₹16/kg, but what was exported was Poly Coated with LDPE Kraft Paper in Parcel Leaf Size — a clearly different product. The court found this to be a change in commercial identity.

4. Writ Jurisdiction is Limited: The Government Advocate pointed out that a writ under Article 226 of the Constitution of India is confined to reviewing the decision-making process, not the decision itself.

5. Supreme Court Precedent Applied: The law was settled by the Supreme Court in State of Karnataka v. Azad Coach Builders Pvt Ltd & Another, and the High Court applied this precedent to the facts of this case.

Issue

Can a manufacturer claim tax exemption under Section 5(3) of the Central Sales Tax Act, 1956 when the goods sold to a merchant exporter undergo a change in their commercial identity before being exported?

In simpler terms: Did Azam Laminators deserve a tax exemption on its sale of Kraft Paper to a merchant exporter, even though the exported product was different from what was originally sold?

Facts

• Who is the Petitioner? Azam Laminators § Limited, a company based in Pudukottai, Tamil Nadu, represented by its Managing Director, A.R. Safiullah. They manufacture paper products.

• What did they do? The company sold M.G. Plain Kraft Paper to a merchant exporter. The merchant exporter had received a purchase order from a buyer in Kuala Lumpur, Malaysia for Parcel Leaf Size paper.

• What exemption did they claim? The company claimed an exemption under Section 5(3) of the Central Sales Tax Act, 1956, which allows a tax exemption on sales made to merchant exporters when the goods are ultimately exported.

• What happened initially? The returns filed by the petitioner were accepted by the Assistant Commissioner (CT) by his order dated 20.06.2002.

• Then what changed? The original authority later reviewed the assessment by invoking Section 16(1) of the TNGST Act, 1951 read with Section 9(2) of the CST Act, 1956, and by an order dated 03.02.2003, the exemption was disallowed.

• What happened on appeal? The petitioner appealed, and the Appellate Assistant Commissioner (CT), Thanjavur allowed the appeal by order dated 21.04.2003 in C.S.T. Appeal No. 2 of 2003.

• Then the Tribunal reversed it! The Commercial Tax Department appealed to the Sales Tax Appellate Tribunal, which reversed the Appellate Commissioner’s order by its impugned order dated 05.12.2007 in S.T.A. No. 430 of 2003.

• So the company came to the High Court: The petitioner filed this writ petition under Article 226 of the Constitution of India to quash the Tribunal’s order.

• Key evidence issue: The Form ‘H’ submitted by the petitioner was valid up to 31.03.1998 and was re-validated up to 31.03.2001, but the commercial invoice was dated 28.01.2002 — falling in the Assessment Year 2001-2002, which was beyond the validity of Form ‘H’.

Arguments

Petitioner’s Arguments (Azam Laminators):

1. No Change in Product: The petitioner argued that M.G. Plain Kraft Paper supplied to the merchant exporter was converted into Parcel Leaf but did not undergo any change in its essential nature. Therefore, what was sold by the petitioner was essentially what was exported.

2. Form ‘H’ Supports the Claim: The merchant exporter issued Form ‘H’ to the petitioner, which substantiates that the goods sold (Kraft Paper) were indeed exported by the merchant exporter.

3. Relied on Supreme Court Precedent: The petitioner’s counsel relied on the decision of the Supreme Court in State of Karnataka v. Azad Coach Builders Pvt Ltd & Another reported in (2010) 36 VST 1 (SC), and also cited three Madras High Court decisions that followed this precedent:

• Ziptex Fasteners Pvt Ltd v. Commercial Tax Officer, Ponneri & Others reported in (2010) 30 VST 273 (MAD)
• Zip Industries Ltd v. Commercial Tax Officer, Chennai reported in (2018) 18 GSTL 585 (MAD)
• The State of Tamil Nadu, rep. by the Deputy Commissioner (CT) vs. Tvl. Parasakthi & Co., Theni and others in W.P. Nos. 44202 & 44203 of 2002 dated 05.02.2021

Respondents’ Arguments (Commercial Tax Department):

1. Well-Reasoned Tribunal Order: The Government Advocate argued that the Tribunal’s order was well-reasoned and did not require any interference.

2. Writ Jurisdiction is Limited: A review under Article 226 of the Constitution of India is confined to the decision-making process and not the decision itself, so the writ petition was liable to be dismissed on this ground alone.

3. Form ‘H’ Was Not Valid for the Relevant Period: Form ‘H’ was valid only up to 31.03.2001 (after re-validation), but the transaction in question pertained to Assessment Year 2001-2002, meaning the Form ‘H’ did not cover the relevant transaction.

4. Total Change in Commercial Identity: The product sold by the petitioner (M.G. Plain Kraft Paper) and the product exported by the merchant exporter (Poly Coated with LDPE Kraft Paper in Parcel Leaf Size) were completely different in commercial identity.

Key Legal Precedents

1. State of Karnataka v. Azad Coach Builders Pvt Ltd & Another — (2010) 36 VST 1 (SC)

This is the most important precedent in this case. The Supreme Court laid down the law on when a manufacturer can claim exemption under Section 5(3) of the Central Sales Tax Act, 1956 for sales made to merchant exporters. The principle is that the goods sold must be the same goods that are exported — if the product changes its commercial identity, the exemption is not available. The Madras High Court applied this principle directly to the facts of this case.

2. Ziptex Fasteners Pvt Ltd v. Commercial Tax Officer,b Ponneri & Others — (2010) 30 VST 273 (MAD)

This is a Madras High Court decision that followed the Supreme Court’s ruling in Azad Coach Builders. It was cited by the petitioner to support their argument that the product did not change its identity.

3. Zip Industries Ltd v. Commercial Tax Officer, Chennai — (2018) 18 GSTL 585 (MAD)

Another Madras High Court decision following the Azad Coach Builders precedent, also cited by the petitioner.

4. The State of Tamil Nadu, rep. by the Deputy Commissioner (CT) vs. Tvl. Parasakthi & Co., Theni and others — W.P. Nos. 44202 & 44203 of 2002 dated 05.02.2021

A more recent Madras High Court decision also following the Azad Coach Builders precedent, cited by the petitioner.

Key Statutory Provisions:

• Section 5(3) of the Central Sales Tax Act, 1956 — Provides exemption for sales made to merchant exporters when the goods are ultimately exported.
• Section 16(1) of the TNGST Act, 1951 read with Section 9(2) of the CST Act, 1956 — Used by the original authority to review and revise the assessment.
• Article 226 of the Constitution of India — Under which the writ petition was filed before the Madras High Court.

Judgment

The Court’s Decision: Writ Petition Dismissed

The Madras High Court (Division Bench of Justice S. Vaidyanathan and Justice C. Saravanan) dismissed the writ petition on 15.09.2022, upholding the Sales Tax Appellate Tribunal’s order. Here’s why:

Reason 1 — Product Identity Changed:

The court carefully examined the commercial invoices and purchase orders. The petitioner sold M.G. Plain Kraft Paper at ₹16/- per kg (69,278 kg in total). However, what the merchant exporter actually exported was Poly Coated with LDPE Kraft Paper in Parcel Leaf Size — a clearly different product. The court noted that there was even no value addition in the price declared in the merchant exporter’s commercial invoice; in fact, the exported product was priced below the cost at which the petitioner had sold the paper. This clearly showed a change in commercial identity.

Reason 2 — Form ‘H’ Was Not Valid for the Relevant Period:

The Form ‘H’ submitted by the petitioner was valid up to 31.03.1998 and was re-validated only up to 31.03.2001. However, the commercial invoice of the petitioner was dated 28.01.2002, which falls in the next Assessment Year (2001-2002). Therefore, the Form ‘H’ did not cover the transaction in question.

Orders Made:

• The writ petition was dismissed.
• There was no order as to costs (meaning neither party had to pay the other’s legal costs).
• The connected miscellaneous petition (M.P. No. 1 of 2008) was closed.

FAQs

Q1: What is Section 5(3) of the Central Sales Tax Act, 1956, and why is it important here?

Section 5(3) provides a tax exemption on sales made to merchant exporters, provided the goods sold are ultimately exported. The petitioner was trying to claim this exemption on its sale of Kraft Paper. The court denied it because the exported product was different from what was sold.

Q2: What is Form ‘H’ and why did it matter?

Form ‘H’ is a declaration issued by a merchant exporter to the seller, confirming that the goods purchased have been exported. It is a key document to claim exemption under Section 5(3) of the CST Act. In this case, the Form ‘H’ was invalid for the relevant assessment year, which weakened the petitioner’s claim.

Q3: Why did the court say the product’s identity changed?

The petitioner sold M.G. Plain Kraft Paper, but the merchant exporter exported Poly Coated with LDPE Kraft Paper in Parcel Leaf Size. The paper had been coated with LDPE (Low-Density Polyethylene) and cut into specific parcel leaf sizes — making it a commercially different product.

Q4: Why didn’t the Supreme Court precedent (Azad Coach Builders) help the petitioner?

The petitioner cited State of Karnataka v. Azad Coach Builders Pvt Ltd & Another (2010) 36 VST 1 (SC) to argue that the product didn’t change. However, the court applied the same precedent against the petitioner, because the facts showed that the product did change its commercial identity — which is exactly what the Azad Coach Builders case says would disqualify the exemption.

Q5: What does “no order as to costs” mean?

It simply means the court did not order either party to pay the other’s legal fees. Each party bears their own costs.

Q6: What is the practical lesson from this case for businesses?

If you are a manufacturer selling goods to a merchant exporter and want to claim a tax exemption under Section 5(3) of the CST Act, 1956, make sure:

• The goods you sell are the same goods that are exported (no change in commercial identity).
• Your Form ‘H’ is valid for the correct assessment year covering the transaction.
• Keep proper documentation including commercial invoices and purchase orders.

This writ petition has been filed against the impugned order dated

05.12.2007 passed by the Sales Tax Appellate Tribunal in S.T.A. No.430

of 2003. By the impugned order, the Tribunal allowed Commercial Tax

Department's appeal against order dated 21.04.2003 of the Appellate

Assistant Commissioner (CT), Thanjavur in C.S.T Appeal No.2 of 2003.

The petitioner herein had claimed exemption under Section 5(3) of the

Central Sales Tax Act, 1956 on a sale made to the merchant exporter.

2. The specific case of the petitioner is that the returns filed by

the petitioner was also accepted by the Assistant Commissioner (CT) by

his order dated 20.06.2002 and thereafter, by invoking Section 16(1) of

the TNGST Act, 1951 r/w Section 9(2) of the CST Act, 1956, the

assessment was sought to be reviewed and the original authority

revised the assessment by an order dated 03.02.2003 whereby, the

exemption claimed by the petitioner was disallowed. The appeal filed by

the petitioner was, thereafter, allowed by the Appellate Commissioner

by his order daed 21.04.2003, which now stands reversed by the

impugned order of the Appellate Tribunal. The specific case of the

petitioner is that the petitioner had effected sale of M.G. Plain Kraft

Paper to a merchant exporter, who, in turn had received a purchase

order from a buyer from Kuala Lumpur, Malaysia for Parcel Leaf Size

and that the merchant exporter also exported the goods to the overseas

buyer from Malaysia and the merchant exporter, therefore issued Form

'H' to the petitioner.

3. The specific case of the petitioner is that the impugned order

passed by the Appellate Tribunal is erroneous inasmuch as it has not

considered the fact that M.G. Plain Kraft Paper supplied by the

petitioner to the merchant exporter, which was converted as Parcel Leaf

did not undergo any change and therefore, what was sold by the

petitioner to the merchant exporter was exported by the petitioner. In

this connection, the learned counsel for the petitioner has placed

reliance on the decision of the Hon'ble Apex Court in State of

Karnataka v. Azad Coach Builders Pvt Ltd & Another reported in

(2010) 36 VST 1 (SC), which decision has been followed by this court

in the following cases:

(i) Ziptex Fasteners Pvt Ltd v. Commercial Tax

Officer, Ponneri & Others reported in (2010) 30 VST

273 (MAD);

(ii) Zip Industries Ltd v. Commercial Tax Officer,

Chennai reported in (2018) 18 GSTL 585 (MAD); and

(iii) The State of Tamil Nadu, rep. by the Deputy

Commissioner (CT) vs. Tvl.Parasakthi & Co., Theni

and others in W.P. Nos.44202 & 44203 of 2002 dated

05.02.2021.

4. It is further submitted that the merchant exporter has also

issued Form 'H' to substantiate that the goods sold by the petitioner,

namely Kraft Paper, has been exported by the merchant exporter and

therefore, there is an error committed by the Tribunal in allowing the

appeal filed by the Commercial Tax Authority.

5. The impugned order is defended by the learned Government

Advocate (Taxes) for the respondents/Commercial Department stating

that it is a well reasoned order and the same does not require any

interference. It is further submitted that a review under Article 226 of

the Constitution of India is confined to the decision making process and

not the decision per se and therefore, on this count also, the writ

petition is liable to be dismissed. On facts, it is further submitted that

the dispute pertains to the Assessment Year 2001-2002 whereas, Form

'H', which has been filed by the petitioner itself shows that Form 'H'

was valid initially up to 31.03.1998 and was re-validated up to

31.03.2001. Therefore, it would not pertain to the transaction in

question. That apart, it is submitted that there is a total change in the

commercial identity of the product sold by the petitioner and the

product that has been exported by the merchant exporter and

therefore, it is submitted by the learned Government Advocate (Taxes)

that the order passed by the Appellate Tribunal deserves to be upheld

and the present writ petition is liable to be dismissed.

6. We have heard the arguments of the learned counsel appearing

for the petitioner and the learned Government Advocate (Taxes)

appearing for the Commercial Tax Department and perused the

materials available on record.

7. The Law on the subject is settled in terms of the decision of the

Hon'ble Supreme Court in State of Karnataka v. Azad Coach

Builders Pvt Ltd & Another reported in (2010) 36 VST 1 (SC), which

has been also followed by this court in three decisions, referred supra.

Further, on perusing the records, particularly the commercial invoice

raised by the petitioner on the merchant exporter and the purchase

order of the foreign buyer from Kualalampur, Malaysia on the merchant

exporter and the commercial invoice raised by the merchant exporter

on the foreign buyer indicate that, what has been sold by the petitioner

is not what has been exported by the petitioner. The commercial

invoice of the petitioner indicates the price of M.G. Plain Kraft Paper as

at Rs.16/- per Kg and that the petitioner had sold 69.278.0 Kg

M.G.Plain Kraft Paper to the merchant exporter. What the merchant

exporter has exported is Poly coated with LDPE Kraft Paper in Parcel

Leaf size. There is no value addition in the price declared in the

commercial invoice of the merchant exporter. On the other hand, what

has been exported by the merchant exporter is, much below the cost on

which the petitioner has sold, as detailed below:

8. That apart, Form 'H' which has been filed by the petitioner also

indicates that it was valid up to 31.03.1998 and was re-validated up to

31.03.2001. The commercial invoice of the petitioner is dated

28.01.2002 which comes in the next Assessment Year. Therefore, we

are of the view that the writ petition is liable to be dismissed.

9. Accordingly, the writ petition is dismissed. However, there is

no order as to costs. Consequently, the connected miscellaneous

petition is closed.

[S.V.N., J.] [C.S.N., J.]

15.09.2022