SC quashes order demanding Purchase Tax from SBI on the Purchase of Exim Scrips [Read Judgment]

The two-judge bench of the Supreme Court, yesterday nullified the order passed under Bengal Finance (Sales Tax) Act, 1941 against the State Bank of India as per which purchase tax was imposed on the bank for the purchase of Exim scrips. Earlier, the Kolkata High Court had quashed the impugned order finding that the purchase of Exim scrips by the Bank did not attract the provisions of Section 4(6) (iii) of the Act. Concurring with the findings of the High Court, the Apex Court ruled that the levy is unauthorized since the “ownership” in the goods was never transferred or assigned to the SBI.

The sole question before the Court was that 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.

Both the first and second appellate authorities held that he appellants are liable to pay tax on the purchase of Exim scrips. However, the High Court concluded the appeal in favour of the petitioners. The High Court decision was based on the observation of the Apex Court that REP licences/Exim scrips were merchandise and/or goods in the commercial world and were freely bought and sold in the market and hence, no argument could be urged that they do not constitute goods for the purposes of commercial transactions.

While analyzing the relevant provisions of the Act, the Court observed that “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”,  the Court said.

On the basis of the above findings, the Court upheld the order of the High Court.

Read the full text of the Judgment below.