Penultimate Sales under CST Act 1956-Submission of H forms.

Tax by State Governments on sales or purchase of goods made during the cource of import or export of such goods is prohibited by article 286(1)(b) of the Constitution of India. Section 6(1) of CST Act also levies tax on interstate sales hence there is no CST liability on the sale is the cource of import or export of goods. Thus neither the State Government can impose tax/vat on sales of goods in the cource of import or export nor CST Act 1956 imposes any tax on such sales. Here in this article exemptions available on Penultimate export sales under CST Act 1956 are concentrated on:

What is Export sales: The word Export sales means direct exports i.e direct selling of goods out of India. The word Export sales has not been used in the CST Act 1956 but the word sales in the cource of exports has been used which is a wider term and includes not only direct export but also sales by transfer of documents after goods cross customs frontier and the Penultimate sale for export and export with the help of agent. Thus even indirect export could also be sales in the cource of exports.

What is Penultimate Export: As per section 5(3) of CST Act last sales or purchase of goods preceding the sales or purchase occasioning the export of those goods out of territory of India shall also be deemed to be in the cource of export, if such last sale or purchase took place after, and was for the purpose of complying with, the arrangement or order for or in relation to such export.

Exporting the goods out of India may not be possible for small units, so they may sell their goods to the big export houses. Such indirect exports also need exemption to make the products competitive in the market. That is why the exemption to penultimate export has been given and penultimate export is treated as equivalent to the direct export for the purpose of exemption.

Conditions for exemption to penultimate export: As per section 5(3) of CST Act, before claiming exemption for penultimate export, it is necessary that the final exporter should be in possession of export order from the foreign buyer and should take delivery of goods from the penultimate seller solely for the purpose of execution of such export order and should export the same goods. Thus following conditions can be summed up for  claiming exemption to penultimate export:

1.The sales must be for the purpose of complying with agreement or order in
   relation to export, and

2. Such sale is made after the agreement or order in relation to export, and

3. Same goods which are sold in penultimate sale should be exported.

It should be noted that its only the penultimate sale which is exempt but the purchase earlier to penultimate sale is not exempt and purchase tax if any imposed by the State Government on such purchase will be payable as it was held in State of Tamilnadu v. Madras Pack Marine(2000) 120 STC 105(TNTST) and also similar view in Kepee Sons v. State of Kerala(1999)116 STC 156(Ker HC DB).

Same goods must be sold: It is very necessary to claim exemption for penultimate export that the goods sold by the exporter must be the same as have been acquired by him from his penultimate supplier. For example if a person sells raw material to an exporter and the exporter manufactures some goods out of that raw material then exports such goods, in such case the sale of raw material to exporter will not be treated as penultimate sale and no exemption will be available on such sale of raw material to the exporter.

Purchase of paddy and export of rice: Paddy is a declared goods u/s 14 of CST Act  1956. Out of Paddy rice is produced therefore Paddy and Rice may seem to be separate goods.  But As per Section 15(ca) if paddy is purchased on payment of tax and rice procured out of such paddy is exported then  paddy and rice will be treated as  same goods for the purpose of section 5(3).

Thus paddy can be purchased without any tax if the rice produced out of it is exported. Paddy sold to an exporter will be penultimate sale even though exporter doesnot export the same Paddy but rice procured out of such paddy.

In Veerumal Monga v. State of Haryana(2001) 123 STC 158 (P&H HC DB), rice miller purchased paddy and sold rice to the exporter. It was held that in such case, only sale of rice to exporter is penultimate sale and is exempt. However purchase of paddy by millers will not be exempt.

Thus to get the benefit of section 5(3) in relation to paddy and rice, it is advisable that exporter should himself purchase paddy and then either produce rice out of it himself or get it procured by getting job work done for converting such paddy to rice. If direct rice is  purchased by the exporter from rice millers then paddy purchased by millers will not get benefit of section 5(3) and its only the sale of rice to exporters will be treated as penultimate export sale.

Sale of packing material for the purpose of export is also a penultimate sale: Exporters also tend to purchase the packing material which are to be used for packing of the goods to be exported. Such sales of packing material to the exporter is also a penultimate sales and is liable for exemption u/s 5(3) of CST Act.

In State of AP v. Standar Packings-(1995) 96 STC 151(AP HC DB) it was held that if gunny bags purchased are used as containers for export of certain goods to a foreign country, it is deemed as export sale as per section 5(3) . The last purchase preceding the sale occasioning export should be for complying with an export order. In this case, the gunny bags purchased were for complying with export order and hence are eligible for exemption u/s 5(3).

H form required for exemption to penultimate sale: Section 5(4) of CST Act provides that “The provisions of sub-section (3)[section 5(3)] shall not apply to any sale or purchase of goods unless the dealer selling the goods furnishes to the prescribed authority in the prescribed manner a declaration duly filled and signed by the exporter to whom the goods are sold in a prescribed form obtained from the prescribed authority.”

This prescribed form is H form and is mandatory. The exporter issues H form to the penultimate exporter i.e from whom the exporter has obtained the goods to be exported. The person exporting the goods will always be having proof of export like Bill of lading/Airway bill, custom clearance certificate etc, with him to claim exemption in respect of goods exported but the penultimate seller may not possess all these documents. Hence the exporter issues H form to the penultimate seller declaring therein that the goods procured from him have been exported.

Periodicity of H forms: Where C forms are required to be issued for transactions covering 3 months (quarter) in a year and F forms are to be issued monthly. But it is nowhere mentioned in the CST (R&T) Rules clearly about the periodicity of H forms.

However Rule 12(10)(b)  provides “The provisions of the rules framed by the respective State Governments under sub-section (3), (4) and (5) of Section 13 relating to the authority from whom and the conditions subject to which any form of certificate in Form H may be obtained, the manner in which such form shall be kept in custody and records relating thereto maintained and the manner in which any such forms may be used and any such certificate may be furnished in so far as they apply to declaration in form C prescribed under these rules shall mutatis mutandis apply to certificate in form H.”

Section 13(4)(e) of CST Act provides that State Government may make rules regarding  the authority from whom, the conditions subject to which and the fees subject to payment of which any form of certificate prescribed under clause (a) of the first proviso to sub-section (2) of section 6(E-I and E-II forms) or of declaration prescribed under sub-section (1) of section 6A(F forms) or sub-section (4) of section 8(C forms) may be obtained, the manner in which such forms shall be kept in custody and records relating thereto maintained and the manner in which any such form may be used and any such certificate or declaration may be furnished

Thus it is clear from the wording of above rule 12(10)(b) that any rule made by State Governments under section 13(3), 13(4), 13(5) in respect of C forms relating to authority from whom form to be obtained, conditions, manner of custody of such form, manner of furnishing forms and the use of such forms, shall also apply to H forms.

Now it is to be noted here that periodicity of C forms has been prescribed under CST(R&T) Rules and it is the CST State Rules made under section 13(3),13(4),13(5) (not CST(R&T) Rules), in respect of C forms which are to apply mutatis mutandis to H forms. Nowhere it is mentioned under CST(R&T) rules that the provisions of C forms under CST(R&T) Rules are to apply mutatis mutandis to H forms.

  Therefore one has to check the relevant State CST rules regarding C forms if any prescribed, to know the periodicity of H forms. So far the CST Punjab Rules are concerned no provision has been made so as to provide for periodicity of C or H forms.

Hence H forms in Punjab, in absence of any express provision regarding periodicity of C forms under CST Punjab Rules (Which should determine the periodicity of H forms) or any express  provision regarding periodicity of H forms under CST (R&T) Rules, it can not  be strictly said that H form is to be submitted on quarterly basis as in case of C forms. H forms can continued to be submitted on yearly basis in Punjab and in those states where in the relevant CST State Rules, no provision determining the periodicity of C or H forms have been made.   

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