By TIOL News Service

NEW DELHI, NOV 09, 2016: THE seminal question for consideration in this appeal is whether the State Bank of India (SBI) and its branches, which are registered dealers under the Bengal Finance (Sales Tax) Act, 1941 would be liable to levy of purchase tax under Section 5(6a) of the Act for accepting the Exim Scrips (Export Import Licence) on payment of premium of 20 per cent of the face value of the scrips in compliance with the direction contained in the letter of Reserve Bank of India (RBI) dated 18th March, 1992.

The authorities of the revenue as well as the Taxation Tribunal had held against the SBI but the Division Bench of the High Court of Calcutta in a writ petition has dislodged the said conclusion holding, inter alia, that the purchase of Exim scrips by the Bank did not attract the provisions of Section 4(6) (iii) of the Act and resultantly quashed the orders of fora below and issued consequential directions.

The SBI is a body corporate constituted under the State Bank of India Act, 1955 for the extension of banking facilities in the country and for other public purposes. The bank has to perform various functions as per the directions issued from time to time by the RBI in keeping with the economic and monetary policies of the Central Government.

Policies are notified by the Government of India under the Imports and Exports (Control) Act, 1947, as amended from time to time, and the Imports (Control) Order, 1955, to regulate imports into and exports out of the country and contain different incentive schemes and subsidies to build up foreign exchange resources of the country. Before July 4, 1991 there was provision for issuance of Replenishment Licences which were referred to as "REP Licences". The objective behind the grant of such licences was to provide the registered exporters the facility of importing essential goods required for the manufacture of the products to be exported. Such licences were made freely transferable and such transfer did not require any endorsement or permission from the licensing authority and only a letter from the transferor the transferee became the lawful holder of the licence and was entitled to either import the goods for which the licence had been issued or sell the licence to someone else.

The aforesaid policy remained in vogue till July 3, 1991, when it was substituted by a new policy with effect from July 4, 1991 and the nomenclature of the REP Licence was changed to "Exim Scrip" (Export Import Licence). The provisions governing Exim scrips were more or less the same as those governing REP licences with certain minor variations which are really not pertinent for the purpose of adjudication of the controversy.

In March, 1992, the RBI took a policy decision to the effect that the unutilised Exim scrips in the hands of the holders who were willing to dispose of the same should be mopped up through specified branches of the SBI. In pursuance to such a decision, the RBI issued a circular, being No. 12/92 on 27th March, 1992.

The RBI, pursuant to the circular sent a letter on March 18, 1992 to the Chairman, State Bank of India, Bombay, authorising all designated branches of the said Bank to purchase Exim scrips from holders, who intended to dispose of the same at a premium of 20 per cent of the face value of the Exim scrips, from March 23, 1992, subject to certain terms and conditions. In due course, various holders of Exim scrips sold and/or surrendered their Exim scrips to the Bank and received a premium of 20 per cent of the face value of the scrips in compliance with the direction contained in the letter of the RBI dated March 18, 1992.

In the course of assessment proceedings under the Act for the four quarters ending on March 31, 1993, the Commercial Tax Officer, informed the assessee that apart from payment of sales tax on the sale of gold and silver, it would also be liable to pay "purchase tax" in respect of purchase of Exim scrips from the holders thereof at a premium of 20 per cent of the face value. Before the assessing authority, it was contended by the SBI that the Exim scrips had not actually been purchased but the same had been surrendered by their holders pursuant to the terms contained in the letter of the RBI dated March 18, 1992. It was also put forth that such surrender could not be treated as purchase for the purpose of levying tax under Section 4(6) of the Act. It was also averred that Exim scrips were not "goods" within the meaning of Section 2(d) of the Act and hence, no purchase tax could be levied under Section 4(6) of the said Act on the surrender of the Exim scrips by its holders. In addition to the above, a specific objection was taken that the Bank had not entered into any transaction on its own which could be regarded as purchase to attract the provisions of Section 4(6) of the Act but had merely acted as an agent of the RBI in terms of the order contained in the above mentioned circular dated March 18, 1992.

The assessing officer did not accept the said stand of the Bank and levied purchase tax under Section 5(6a) of the Act, amounting to sum of Rs. 1,00,04,000/- on the total taxable specified price of Rs. 25,00,00,000/-. In the order of assessment, the assessing authority held that the scheme contained in the circular of the RBI dated March 18, 1992, provided for sale of Exim scrips by the holder and purchase by designated bankers and consequently such sale or purchase by the bankers could not by any stretch of imagination be treated as an act of surrender. It was also held that the purchase of the Exim scrips by the bankers from the holders thereof were as much sales as purchase by private importers who availed of the same for import of goods.

The aforesaid order of assessment was assailed in an appeal before the Assistant Commissioner, Commercial Taxes, Calcutta (South) Circle, who vide order dated September 19, 1996, rejected the appeal and confirmed the order of assessment.

The tribunal by its order dated 11th February, 1998 rejected all the contentions made on behalf of the appellants and dismissed the appeal preferred by them. As has been stated, the SBI had not levied purchase tax. When the matter travelled to the tribunal, the question arose whether the Bank by payment at a premium of twenty per cent on the face value or unutilised face value thereof was exigible to purchase tax under Section 4(6)(iii) read with Section 5(6) of the Act. The tribunal narrated the facts and noted the stand and the stance of the assessee and the Revenue and came to hold that the Bank had acted in relation to the impugned transactions as agent of RBI, which is an instrumentality of the Government of India, to accept Exim scrips on payment of a premium to the holders thereof and the activity is thus covered by Section 6(1)(a) and (b); that under Section 6(1)(n) such activity was certainly "incidental" or "conclusive" to the promotion or advancement of the business of the Company, because admittedly the assessee received commission for these transactions; that the stand that the Bank was not a dealer in view of the Banking Regulation Act, 1949 was unacceptable, for when Section 8 of the Act is correctly construed, it would be clear that purchase of Exim scrips was not prohibited by it; that the Exim scrips were goods as has been conclusively settled in Vikas Sales Corporation and another v. Commissioner of Commercial Taxes and another - 2002-TIOL-608-SC-CT-LB ; that the submission to the effect that the purchase is made not for resale and hence, the bank would not be liable for tax does not commend acceptation, for legislature does not contemplate or lay down that Section 4(6)(iii) would apply to purchase for the purpose of only resale but has left the expression unspecified and unqualified; that there is no rationale to restrict it to resale and limit the expression; that Section 4(6)(iii) uses the word "purpose", a purchase for any purpose other than those specified in clauses (i) and (ii) of Section 4(6) would be enough to attract the clause and in the case at hand, RBI's letter dated March 18, 1992 the purpose was to forward the "scrips" to the Joint Chief Controller of Imports and Exports, Government of India, after suitably cancelling them; that use of the purchased scrips by way of cancellation and onward transmission to the Joint Chief Controller was clearly subsequent to completion of the transactions and such use cannot keep the transactions out of the mischief and purview of Section 4(6)(iii); that the transactions were really "surrenders" and not "purchases" is untenable because surrender is also envisaged by operation of law and hence, the concept of "surrender" is inapplicable in the instant case; and that there was enough indication of "sale" and "purchase" and transfer of property in the scrips as is evident from documents that the holder of script was "encashing" them by completely foregoing his "entitlements" under it.

The said order was challenged before the High Court of Calcutta in a writ petition wherein it was contended that the Bank was not a "dealer" within the meaning of Section 2(c) of the Act in respect of the Exim scrips since it does not and/or did not carry on the business of sale or purchase of such Exim scrips; that in the case at hand it was only a solitary case and that too for a brief period from March 23, 1992 to May 31, 1992 but neither before nor after the said period had any such transaction been entered into which could justify the finding of the tribunal that the assessee-Bank had an intention to carry on business in purchase of Exim scrips and that mere lack of regularity or frequency would not convert a business into non-business and would not make a dealer a non-dealer; that there was no material on record to arrive at the conclusion that it was clearly established that the writ petitioner No. 1, i.e., the SBI, had the intention to carry on business in purchase of Exim scrips; that even if the Bank was to be treated as a dealer, the provisions of Section 4(6)(iii) would have to be related to the business being carried on by the Bank inasmuch as the said provisions would otherwise suffer from vagueness and would expose it to attack on the ground of constitutional validity; that keeping in view the scheme of the Act and the intent and purpose of relevant provision, purchase tax could be levied on a dealer only if he carried on business of buying or selling the goods in question; that whatever may be the nature of the transaction, the Bank had only acted as an agent of the RBI in the transaction relating to Exim scrips and would not, therefore, come within the definition of the expression "dealer" as defined in Section 2(c) of the 1941 Act;

The High Court held:.

In view of what we have indicated hereinabove, we are unable to sustain the judgment and order of the learned Tribunal and we, accordingly, set aside the same and we also quash the order of assessment dated June 30, 1995 passed by the Commercial Tax Officer, Park Street Charge, as also the order dated September 19, 1996, passed by the Assistant Commissioner, Commercial Taxes, Calcutta (South) Circle, in Appeal case No. A495/1995-96 under Section 20(1) of the Bengal Finance (Sales Tax) Act, 1941".

The matter is before the Supreme Court.

The Supreme Court observed,

The replenishment licences or Exim scrips would, therefore, be "goods", and when they are transferred or assigned by the holder/owner to a third person for consideration, they would attract sale tax. However, the position would be different when replenishment licences or Exim scrips are returned to the grantor or the sovereign authority for cancellation or extinction. In this process, as and when the goods are presented, the replenishment licence or Exim scrip is cancelled and ceases to be a marketable instrument. It becomes a scrap of paper without any innate market value. The SBI, when it took the said instruments as an agent of the RBI did not hold or purchase any goods. It was merely acting as per the directions of the RBI, as its agent and as a participant in the process of cancellation, to ensure that the replenishment licences or Exim scrips were no longer transferred. The intent and purpose was not to purchase goods in the form of replenishment licences or Exim scrips, but to nullify them. The said purpose and objective is the admitted position. The object was to mop up and remove the replenishment licences or Exim scrips from the market.

Be it noted that the initial issue or grant of scrips is not treated as transfer of title or ownership in the goods. Therefore, as a natural corollary, it must follow when the RBI acquires and seeks the return of replenishment licences or Exim scrips with the intention to cancel and destroy them, the replenishment licences or Exim scrips would not be treated as marketable commodity purchased by the grantor. Further, the SBI is an agent of the RBI, the principal. The Exim scrips or replenishment licences were not "goods" which were purchased by them. The intent and purpose was not to purchase the replenishment licences because the scheme was to extinguish the right granted by issue of replenishment licences. The "ownership" in the goods was never transferred or assigned to the SBI.

We unhesitatingly concur with the view of the High Court that the SBI was not liable to levy of purchase tax under the Act.

Consequently, the appeal, being devoid of merit, stands dismissed.

(See 2016-TIOL-186-SC-CT)