State of Kerala v. Cochin Shipyard Ltd.

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** ## **&** **THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY ,THE 09TH DAY OF OCTOBER 2018 / 17TH ASWINA, 1940** **OT.Rev.No. 35 of 2014** **AGAINST THE ORDER/JUDGMENT IN OTHERS 803/2010 of KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM DATED 31-07-2013** ## **REVISION PETITIONER/S:** **STATE OF KERALA, REPRESENTED BY THE DEPUTY COMMISSIONER (LAW), COMMERCIAL TAXES, ERNAKULAM.** **BY ADV. GOVERNMENT PLEADER** ## **RESPONDENT/S:** **M/S.COCHIN SHIPYARD LTD., PERUMANOOR P.O., COCHIN, PIN- 682015.** **BY ADVS. SRI.P.BENNY THOMAS SRI.JOSON MANAVALAN SRI.K.JOHN MATHAI SRI.KURYAN THOMAS SRI.M.GOPIKRISHNAN NAMBIAR SRI.P.GOPINATH** ## **OTHER PRESENT:** ## **SRI V K SHAMSUDHIN SR GP** **THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 09.10.2018, THE COURT ON THE SAME DAY PASSED THE FOLLOWING:** _OT Rev. 35/2014_ 2 ## **O R D E R** ## Vinod Chandran, J. A classic case in which an overzealous action by the Intelligence Department to take penalty proceedings has ended in separate penalty and assessment proceedings having come to be agitated by the assessee before the statutory authorities. We say this because oftener than ever we have been deprecating the practise of Intelligence Officers carrying out penalty proceedings, without reference to the Assessing Officers especially when the offence detected during the course of an assessment year could as well be taken up in assessment. 2. The assessee, a public sector undertaking, wholly owned by the Union of India, had applied under global tenders and obtained purchase orders for supply of five numbers of “ _Rolls Royce UT755-L Platform Supply Vessels”_ . An agreement of contract was entered into between the Sea Tankers Management Co.Ltd., a company existing under the Laws of Cyprus and the assessee, to build, launch, equip, complete, sell and deliver the ships to the foreign buyer. There is a novation of _OT Rev. 35/2014_ 3 agreement to one Deep Sea Supply ASA, Norwegia. The Deep Sea Supply ASA obtained delivery of the goods from the Cochin Shipyard, the assessee, and exported them out of India. 3. A news report appeared in Malayala Manorama dated 31.05.2008, which led to the Deputy Commissioner (Intelligence), Ernakulam, verifying the months returns filed by the Company. The Company had claimed exemption on the sale of the above Deep Sea Vessels, being export sales in the returns filed. The documents regarding the construction and supply of Vessels were called for by office notice dated 31.01.2009 in the very same assessment year in which the sale was carried out. Penalty proceedings were initiated and it ended in levy of double the amount of tax sought to be evaded finding the sale to be not covered under Section 5(1) of the Central Sales Tax Act, 1956 (for short 'CST Act'). The First Appellate Authority rejected the appeal and the assessee was in second appeal. The second appeal stood allowed in favour of the assessee as per Annexure C order of the Tribunal. The State is in revision. _OT Rev. 35/2014_ 4 4. The learned Senior Government Pleader, on the basis of the agreement entered into between the Sea Tankers Management Co.Ltd. and the assessee company, argues that there was a delivery of the goods at the yard of the assessee-company and hence there was a sale within the State of Kerala. The title to the goods, being five ships, were transferred at the time of handing over of the ships, within the State of Kerala, at the assessee's yard. Hence, there is no question of a sale in the course of export; is the compelling submission. The learned Government Pleader took us through the various terms in the agreement, which according to him, clearly indicate that the sale was one within the State of Kerala, assessable to tax under the Kerala Value Added Tax Act, 2003 (for short 'KVAT Act'). The learned Government Pleader also relies on the decision reported in _**Ben Gorm Nilgiri Plantations Co., Coonor v. Sales Tax Officer, Special Circle, Ernakulam, [1964] 15 STC 753 (SC)**_ , wherein the specific question was considered as to the foreign buyer coming to India and purchasing tea, which he also intended to take out of the Country. The _OT Rev. 35/2014_ 5 Constitution Bench of the Hon'ble Supreme Court found that even if such an intention was clear and the factum of export of the goods purchased was known to the seller; the transaction is not in the course of export for reason of there being no export carried out by the seller. 5. The learned Counsel appearing for the assessee would however contend that the Tribunal's order has extensively dealt with the various documents produced by the assessee, which clearly indicates an export having been carried out. It is submitted that the contract was entered into after the assessee became successful in a global tender. The sale consideration was through convertible foreign exchange and the purchases were also made in pursuance of the said contract with the payments made by the buyer. The ship was built, delivered in the yard of the assessee and exported out of the Country by the purchaser at their risk and responsibility for reason of there being such a specific term in the contract. The entire transaction is in the course of export and not exigible to tax under the KVAT Act. It is also contended that there could be no penalty imposed when the Assessing _OT Rev. 35/2014_ 6 Officer at the first instance had not considered the returns in which there was clear disclosure of the entire sale consideration of the ships and an exemption raised. 6. We would have merely dealt with the aspect of whether penalty would lie or not, but for the fact that the entire issue has been considered threadbare by the Tribunal. It is submitted by the learned Counsel for the assessee that there was assessment made, against which an appeal is filed and is still pending. We would hence consider the issue itself, since the subject assessment year is 2008-09 and it would avoid multiplicity of litigation. We would not wait for the assessment proceedings to come to this Court to arrive at a final decision, since the facts have been considered threadbare by the Tribunal, the last fact finding authority. 7. The specific reference placed by the learned Senior Government Pleader is on sub-clauses (a) and (b) of Clause 4 of Article VII, which reads as thus: ## _“_ _**Article VII. TEST AND TRIALS**_ ## _**4. Method of Acceptance or Rejection**_ _(a) Upon completion of the sea trial and when the trial results are available, and if the Builder considers the results thereof_ _OT Rev. 35/2014_ 7 _demonstrates that the Vessel conforms with the Contract, the Builder shall immediately give the Buyer a written notice of completion stating when the Vessel is ready for delivery. The Buyer shall within 48 consecutive hours after receipt of this notice and the test results notify the Builder in writing of its acceptance or rejection of the Vessel._ _(b) If the results of the sea trial demonstrate that the Vessel or any part or equipment thereof does not conform to the requirements of the Contract, or if the Buyer for other valid reasons rejects the Vessel, the Builder shall take all necessary steps to rectify such nonconformity. If necessary the Builder shall for its own account carry out a further sea trial in accordance with Article VII to ascertain that the Vessel complies with the terms of the Contract. Upon demonstration by the Builder that the deficiencies have been corrected, a notice thereof and of the readiness of the Vessel for delivery, shall be given to the Buyer, who shall then within 48 consecutive hours after receipt of such notice together with the new test results notify the Builder of its acceptance or rejection.”_ Sub-clauses (g), (h) and (i) of clause (3) and clauses (4) & (5) of Article VIII reads thus: ## _“_ _**Article VIII. DELIVERY DATE AND DELIVERY**_ ## _(3)_ _**Documents to be delivered to the Buyer:**_ _xx xx_ - _(g) Commercial invoice_ _(h) Bill of sale or other relevant document that certifies that the title of the Vessel passes to the Buyer._ - _(i) Export Licence if applicable._ _OT Rev. 35/2014_ 8 ## _(4)_ _**Title and Risk**_ _Title to and risk of loss of or damage to the Vessel shall pass to the Buyer upon Delivery and Acceptance thereof by the Buyer._ ## _(5)_ _**Removal of Vessel**_ _The Buyer shall take possession of the Vessel immediately upon Delivery and Acceptance thereof, and shall remove the Vessel from the premises of the Builder within seven (7) days after the Delivery and Acceptance as aforesaid. If the Buyer does not remove the Vessel within the said period, the Buyer shall thereafter pay to the Builder reasonable mooring charges for the Vessel.”_ Clause (1) of Article XI reads thus: ## _“_ _**Article XI. OWNERSHIP, RISK AND INSURANCE**_ ## _(1)_ _**Ownership and Registration:**_ _The Buyer shall become the owner of the Vessel only upon Delivery and Acceptance thereof. It is expressly understood that, until such delivery is effected, the title to the Vessel, and her equipment, shall remain at all times with the Builder and are at the entire risk of the Builder._ _The Builder may mortgage the Vessel and its materials (excluding Buyer's Supply if possible) as security for the construction financing, including the provision of Refund Guarantee(s), for the Vessel. The Buyer shall if necessary give its consent for that purpose. Any such mortgage shall be cancelled and deleted from the relevant registry at the latest on Delivery and Acceptance._ _Any materials, parts, machinery or equipment purchased by the Builder and appropriated for the Vessel which are not utilised for the Vessel shall remain the property of the Builder after Delivery and Acceptance of the Vessel.”_ _OT Rev. 35/2014_ 9 On a reading of the aforesaid terms, it is clear, according to the learned Government Pleader, that there is a sale carried out within the State of Kerala and the foreign buyer has purchased the same and taken out the goods by themselves. 8. _**Ben Gorm Nilgiri Plantations Co.**_ was a case in which the export of tea came up for consideration. As noticed by the Hon'ble Supreme Court, the trade in tea in the State of Kerala, internal as well as export, was carried out through certain defined channels. Tea being an essential commodity, could be exported only under a licence and the manufacturer of tea applies for and obtains from the Tea Board allotment of export quota rights on payment of necessary licence fee. The manufactured tea in chest, is then transferred to the auctioneers, who conducts auctions on behalf of the manufacturers and in the case of bidders purchasing it for the purpose of export, also transfers the export quota rights to the bidder. The contention raised was that the sale to the bidder, who exports the same on the basis of the prior purchase orders, is a sale in the _OT Rev. 35/2014_ 10 course of export. We have to immediately notice that the decision came at a time when Section 5(3) was not brought into the CST Act. Despite that, we also have to notice that though the Tribunal has dealt with the consequences of Section 5(3) being brought into the statute, the same is not applicable here for the assessee having not pleaded a penultimate sale, which led to an export to the foreign buyer. Coming back to _**Ben Gorm Nilgiri Plantations Co.,**_ the Hon'ble Supreme Court found that though the intention of the parties to the transaction, to export the goods followed by actual export of goods to a foreign destination are necessary concomitants of a sale in the course of export; these two factors alone would not determine the sale having been in the course of export. The learned Judges held so insofar as what constitutes a sale in the course of export: _“... ... A sale in the course of export predicates a connection between the sale and export, the two activities being so integrated that the connection between the two cannot be voluntarily interrupted, without a breach of the contract or the compulsion arising from the nature of the transaction. In this sense to constitute a sale in the course of export it may be said that there must be an intention on the part of both the buyer and the seller to_ _OT Rev. 35/2014_ 11 _export, there must be an obligation to export, and there must be an actual export. The obligation may arise by reason of statute, 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. A transaction of sale which is a preliminary to export of the commodity sold may be regarded as a sale for export, but is not necessarily to be regarded as one in the course of export, unless the sale occasions export. And to occasion export there must exist such a bond between the contract of sale and the actual exportation, that each link is inextricably connected with the one immediately proceeding it. Without such a bond, a transaction of sale cannot be called a sale in the course of export of goods out of the territory of India. There are a variety of transactions in which the sale of a commodity is followed by export thereof. At one end are transactions in which there is a sale of goods in India and the purchaser immediate or remote exports the goods out of India for foreign consumption. For instance, the foreign purchaser either by himself or through his agent purchases goods within the territory of India and exports the goods and even if the seller has the knowledge that the goods are intended by the purchaser to be exported, such a transaction is not in the course of export for the seller does not export the goods, and it is not his concern as to how the purchaser deals with the goods. Such a transaction without more cannot be regarded as one in the course of export because etymologically “in the course of export” contemplates an integral relation or bond between the sale and the export. At the other end is a transaction under a contract of sale with a foreign buyer under which the goods may under the contract be delivered by the seller to a common carrier for_ _OT Rev. 35/2014_ 12 _transporting them to the purchaser. Such a sale would indisputably be one for export, whether the contract and delivery to the common carrier are effected directly or through agents. But in between lie a variety of transactions in which the question whether the sale is one for export or is one in the course of export i.e., it is a transaction which has occasioned the export, may have to be determined on a correct appraisal of all the facts. No single test can be laid as decisive for determining that question. Each case must depend upon its facts. But that is not to say that the distinction between transactions which may be called sales for export and sales in the course of export is not real. In general where the sale is effected by the seller, and he is not connected with the export which actually takes place, it is a sale for export. Where the export is the result of sale, the export being inextricably linked up with the sale so that the bond cannot be dissociated without a breach of the obligation arising by statute, contract or mutual understanding between the parties arising from the nature of the transaction, the sale is in the course of export.”_ 9. It is true that the Constitution Bench also held that even if the purchaser comes to India and buys tea for the purpose of taking it outside the Country, there would not be a sale in the course of export, since the seller is not concerned as to whether the purchaser takes it outside the Country or uses it or sells it within the Country. But there is no declaration that in all cases where the purchaser exports there can only be a “sale for _OT Rev. 35/2014_ 13 export” and not “a sale in the course of export”. The Court has clearly held that whether a sale is in the course of export would depend on the facts and what is significant is the inextricable link or a bond between the contract of sale and the actual exportation and there being a clear obligation on the purchaser to export the goods as per the statute contract or mutual understanding; arising and discernible from the nature of the transaction. It was categorically held that there can be no single test decisive for determination of the issue and that each case must depend upon its facts. We draw a clear distinction on facts here, especially looking at the terms of the contract and the various transactions which eventually led to the export of the ships, as has been found by the Tribunal in the present case. 10. The Tribunal looked into the ship building contract entered into between the assessee as the builder and the purchaser at Cyprus. The contract was specifically to design, build, launch, equip, complete and deliver to the buyer at the builders shipyard the platform Vessels specifically described therein. The _OT Rev. 35/2014_ 14 contract specifically mandated that the ship would be registered in the Flag State and the buyer had agreed to purchase the Vessel, take delivery and pay for the same in accordance with the contract. The buyer admittedly was a company incorporated and existing under the Laws of Cyprus, with its principal office in the said State. Clause (5) of Article II of the contract was noticed to find that the assessee had to provide delivery and pay for all certificates necessary for approval of the Vessel as further set out in the contract, together with all documents reasonably required by the buyer necessary for registration of the Vessel in the foreign Country. This necessarily establishes the fact that the purchaser intended to export the goods on its delivery and its further use could be only after its registration in the foreign State. The registration in the Flag State was to be made by the buyer at their on cost and expenses. 11. Article III of the contract dealt with the price and payment terms, which is in convertible foreign exchange, ie., United States Dollars. Clause (3)(i) of Article VIII specified that export licence if applicable _OT Rev. 35/2014_ 15 shall be made available. The assessee has taken out the export licence and it is on the strength of the export licence that the Vessels were taken out of the Country by the buyer. The export license being in the name of the assessee though the ships were physically exported by the purchaser, the movement of the ships were on the strength of the export licence obtained by the assesee, which the assessee was obliged to facilitate as per the terms of the original contract. 12. Clause (5) of Article VIII dealt with removal of Vessel and it was agreed that the buyer shall take possession of the Vessel immediately upon delivery and acceptance thereof and shall remove the Vessel from the premises of the assessee within seven days after the delivery and acceptance as aforesaid. There was a further liability on the buyer to pay reasonable mooring charges, if the removal was not effected within the time stipulated in the contract. Clause (6) of Article X provided for appointment of a Guarantee Engineer by the assessee, who had to serve on board the Vessel for such portion of the guarantee period. The buyer has to accord _OT Rev. 35/2014_ 16 necessary treatment and accommodation to the Guarantee Engineer, comparable to the Vessel's Chief Engineer, at no cost to the assessee, with a further charge on the buyer to pay the assessee a sum of USD 4,095/- for the cost and charges borne by the assessee in connection with the Guarantee Engineer. The Tribunal on the above reading of the contract found that the Vessel built, designed and transacted is an item of export, which had crossed the territorial barriers of the Country. 13. The assessee before the Tribunal had also produced the true copy of the details of foreign inward remittances effected by the buyer in respect of the Vessels covered by the contract, as also true copies of the shipping bill, commercial invoice, reconciliation statement and a true copy of the provisional certificate of registration issued by the Cyprus Registry. There is also no dispute that the Vessels were removed from the premises of the assessee and were taken out of the territorial waters of the Country for the purpose of registration at the foreign Flag State and operations commenced therefrom. _OT Rev. 35/2014_ 17 14. A reading of the factual determination made by the Tribunal convinces this Court that there is a sale in the course of export. Even going by _**Ben Gorm Nilgiri Plantations Co.**_ (supra), the sale in the course of export in the present case involved a series of integrated activities, commencing from the agreement of sale with the foreign buyer, ending with the delivery of the goods to the foreign buyer for transport out of the Country. There exists such a clear bond between the contract of sale and the actual exportation that each link is inextricably connected with the one immediately preceding it. A transaction of the like which has been dealt with by the Tribunal is definitely a sale during the course of export of goods out of the territory of India. We do not see any reason to take a different view. We find that there is no question of law arising from the order of the Tribunal and the determination on facts to find the sale to be one in the course of export under Section 5(1) of the CST Act has to be upheld. 15. In the circumstance of upholding the factual determination made by the Tribunal of the transaction _OT Rev. 35/2014_ 18 being one in the course of export covered under Section 5(1) of the CST Act, we delete the entire penalty. In this context, we also notice that the penalty, in any event, could not have been imposed for reason of the assessee having disclosed the sale in its returns and claimed exemption for reason of it being an export. The reliance placed by the Tribunal on _**Cement Marketing Company of India Ltd. v. Asst.Commissioner of Sales Tax, (1980) 45 STC 197**_ and _**Sree Krishna Electricals v. State of Tamil Nadu, (2009) 23 VST 249 (SC)**_ is upheld. We, hence, reject the O.T.Revision. No order as to costs. ## **Sd/-** ## **K.VINOD CHANDRAN** ## **JUDGE** **Sd/-** ## **ASHOK MENON** **JUDGE** _dkr_ _OT Rev. 35/2014_ 19 ## **APPENDIX** ## **PETITIONER'S/S EXHIBITS:** **ANNEXURE A THE TRUE COPY OF THE PENALTY ORDER DATED 30.01.2010 PASSED BY THE INTELLIGENCE OFFICER (IB), OFFICE OF THE DEPUTY COMMISSIONER (INTELLIGENCE), COMMERCIAL TAXES, ERNAKULAM AT EDAPPALLY.** **ANNEXURE B THE TRUE COPY OF THE 1ST APPELLATE ORDER DATED 15.10.2010 PASSED BY THE OFFICE OF THE DEPUTY COMMISSIONER (APPEALS), COMMERCIAL TAXES, ERNAKULAM IN KVATA NO.749/2010.** **ANNEXURE C CERTIFIED COPY OF THE ORDER DATED 31.07.2013 PASSED BY THE TIBUNAL IN T.A (VAT) NO.803/2010.**