Sales In Course of Import and High Seas Sales under CST Act, 1956

High Sea Sales

What it is and How it Works:-

High Sea Sales (HSS) is a sale carried out by the carrier document consignee to another buyer while the goods are yet on high seas or after their dispatch from the port/airport of origin and before their arrival at the port/ airport of destination. An High Sea Sales contract/ agreement should be signed after dispatch of goods from origin & prior to their arrival at destination. The agreement should be on stamp paper. On concluding the High Sea Sales agreement, the bill of lading (B/L) should be endorsed in favor of the new buyer. In respect of air shipment, High Sea Sales seller should write to the airline / consol agent informing that an High Sea Sales agreement has been established with the High Sea Sales buyer and that the carrier document should therefore be considered as endorsed in favor of the High Sea Sales buyer and further the Import General Maniface (IGM) should be filed by the carrier in the name of the High Sea Sales buyer. If the electronic data interchange (EDI) system allows name of High Sea buyer to be entered in the system, then there may not be any need to amend the Import General Maniface (IGM). In this case, the bill of entry/exchange (B/E) is filed in the name of the original importer as the IGM is in this importer name. However, the bill of entry/exchange (B/E) shows the name of High Sea buyer under a separate head in the B/E format. If the system has no provision for showing the name of High Sea buyer on the B/E, then the IGM should be got amended and B/E filed in the name of the High Sea buyer.

In the case of High Sea Sales, the cargo in freight (CIF) value for calculation of duty is taken to be the High Sea Sales value.

Precautions:-

There is a practice followed in customs that in case the High Sea Sales transfer takes place at import invoice value only , the custom would add 4% of  cargo in freight (CIF) value as High Sea Sales loading factor . There have been cases where High Sea sellers have sold at two percent more than import CIF but custom have added 4% of cargo in freight (CIF) as High Sea Sales value addition. Such practice of customs can be challenged at the customs duty is chargeable on genuine transaction value. In High Sea Sales contracts, the High Sea seller may not like to disclose the import value to the High Sea buyer. However, the customs can call for the original import invoice, in which case the High Sea seller may have to part with this information. To overcome this, High Sea seller should take on the responsibility of custom clearance and site delivery. After custom clearance, the High Sea seller could withdraw import invoices and only hand over clearance documents with High Sea Sales agreement to the High Sea buyer. The custom bill of entry does not indicate original import value and is prepared on High Sea Sales value.

There is no bar on same goods being sold more than once on high seas. In such cases, the last High Sea Sales value is taken by customs for purposes of duty levying. The last High Sea Sales agreement should give indication of previous title transfers. The last High Sea buyer should also obtain copies of previous High Sea Sales agreement as such documents may be called upon by the customs. High Sea Sales is also applicable to goods imported by air. Sea appearing in High Sea Sales should not be constructed by its grammatical meaning. As long as the sale is formalized after dispatch from airport / port of origin and before arrival at the first port of discharge / airport at destination, such sale is considered as High Sea Sales.

Sometime High Sea buyers buy goods after their arrival. Such sale are not High Sea Sales. The stamp paper on which the HSS agreement is executed must not bear the stamp paper purchase date as being post cargo arrival date. Such a case can easily be detected by customs as being a post arrival sale.

If the High Sea Sales does not mind disclosing original import values to High Sea buyer, in such case it is better from custom clearance point of view for the seller to endorse the Bill of Lading, invoice , packing list in favour of the High Sea buyer. The endorsement should read “Transferred on High Sea Sales basis to M/S ——– for a sales consideration of (currency and amount in that currency) “. Such endorsement should be stamped and signed by the High Sea seller.

Tax Benefits:-

High Sea Sales is considered as a sale carried out outside the territorial jurisdiction of India. Accordingly, no sales tax is levied in respect of High Sea Sales. The customs documents (B/E) is either filed in the name of High Sea buyer or such Bill of Entry has an endorsement indicating High Sea buyer’s name. The title of goods transfers to High Sea buyer prior to entry of goods in territorial jurisdiction of India. The delivery from customs is therefore on account of High Sea buyer. The CENVAT credit in respect of CVD paid on import is entitled to High Sea buyer. High Sea Sales goods are entitled to classification, rates of duty and all notification benefits as would be applicable to similar import goods on normal sale.

Applicability of Law:

Constitutional Validity:-

The concept of High Sea Sales finds its authority from Article 286 (1) (b) of the Constitution of India which states that no law of a State shall impose or authorise the imposition of, a tax on sales or purchase of goods where such sale or purchase takes place in the course of import of the goods into, or export of the goods out of, the territory of India.

Article 286 (2) further provides that the Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned above. Article 286 of our Constitution prohibits imposition of tax on the sale or purchase of goods in course of import of the goods into or export of the goods out the territory of India.

Article 246 of our Constitution speaks about subject matter of laws made by Parliament and by the legislatures of States. In consonance with the article, Seventh Schedule is annexed to the Constitution with three different lists.

List I is in respect of the subject matter of laws to be framed by the Parliament,

List II speaks about the subject matter of laws to be framed by the State Legislatures and

List III speaks about the subject matter of laws to be framed concurrently by the Parliament and the State Legislatures to frame law in respect of taxes on the sale or purchase of goods other than newspaper subject to provisions of 92A of List I.

Entry 92A of List I authorises the Parliament to frame laws in respect of taxes on the sale or purchase takes place in the course of inter-state trade or commerce. In pursuance of the power vested in our Legislature by entry 54 list II , our act is passed by our legislature. Similarly, Central Act was passed by the Parliament vide clause (92 A) of List I. Therefore, sale or purchases can be taxed under the Act which actually take place within the boundaries of our State.

Central Sales Tax Act:-

Section 5 (2) and Section 2 (ab) of Central Sales Tax Act,1956

Section 5 of the Central Sales Tax Act,1956 defines when a sales or purchase of goods is said to take place in the course of import or export. Sub-section (2) says the sale is deemed to take place in the course of import, and it reads as under:

“Sub-section (2) A sale or purchase of goods shall be deemed to take place in the course of  import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.”

1.) A sale or purchase shall be deemed to take place in the course of import of the goods into the territory of India only if

(a) the sale or purchase either occasions such import, or

(b) is effected by a transfer of documents of title to the goods before the goods have crossed the  customs frontier of India.

2.) Section 2(4) of the Sales of Goods Act,1930 defines “documents of title to goods,”

2(4) “document of title to goods” include a bill of lading, dock warrant, warehouse-keeper’s certificate, wharfinger’s certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof to the possession or control of goods, or purporting to authorise, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented”;

The bill of lading is considered to be document of title to goods and the sale can be made by endorsement delivery or by mere delivery of a blank bill of lading before the goods cross the customs frontier.

In Dictionary of English Language by Eari Jowitt, “document of title” is described as a document which enable the possessor to dealt with the property described in it, as if he were the owner. In this dictionary also it is mentioned that some documents of title (e.g. Bill of Lading) pass the ownership of goods represented by them; while other documents such as delivery order and dock warrant are mere authorities to obtain delivery of the goods.

In Ramdas Vs. S.Amer Chand & Co.(43 I.A., 164  40 Bom. 630) the Judicial Committee, after referring to the expression “document of title of goods” as defined in the Indian Contract Act, 1872 laid down that whenever any doubt arise as to whether a particular document is a “document showing title”, or a “document of title” to goods for the purpose of Indian contract Act the test is whether the document in question is used in the ordinary course of business , as proof of the possession or control of goods, or authorising or purporting to authorise, either by endorsement or delivery, the possession of the documents to transfer or receive the goods thereby represented. A warehouse keeper’s certificate or any similar document will not be a document of title, unless it is used in the ordinary course of business as representing of goods.

The AWB is not considered as negotiable instrument. On face of AWB it is mentioned as “not   negotiable”. It is a contract receipt for carriage of goods. In this respect the reference can be made to  judgment of Maharashtra Sales Tax Tribunal in case of M/s. Nawrojee Wadia & Sons (P) Ltd. (S.A. 42 of 1989 dt. 4.5.1990). In this case Tribunal has held that AWB is not a negotiable instrument and no high seas sale can be effected by transfer of such AWB.

At times, the goods are coming by AWB but the documents come through Bank against L/C etc. On payment to bank, as per relevant terms, bank issues delivery order to the importer for taking delivery from Air Freight Co. If this type of delivery order is transferred before the B/E is presented then again the high seas sale is possible.

In this respect a reference can be made to judgment in case of B. M. Shah & Co. (142 STC 297), wherein Bombay High Court has approved the high seas sale effected by transfer of Bank Delivery order. It can be mentioned that for goods coming by AWB the high seas sale can be effected if the possibility of endorsing Delivery order either issued by bank or any other competent authority exists.

3.) Section 2(ab) of the Central Sales Tax Act, 1956 defines “Crossing the customs frontiers of India”. It is defined as under:

 “Crossing the customs frontiers of India” means crossing the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance by custom authorities.”

For ready reference, reference can be made to the judgment of Maharashtra Sales Tax Tribunal in case of Anurag Agencies Pvt. Ltd. (S.A. 1506 & 1507 of 1999 dt. 31.3.2001).

In this case Tribunal has held that till the Bill of Entry (B/E) is presented to Customs Authorities, the goods continue to be within Customs Frontiers. Once the B/E is presented then the Customs Frontiers ends and the goods crosses the Customs Frontiers of India. Thus, any sale effected by transfer of documents of title to goods before B/E is presented for clearance of goods, will be in course of Import.

Thus, the easy test to prove sale by transfer of documents of title to goods before crossing Customs Frontiers of India is to show that the ultimate purchaser has cleared the goods by presenting B/E in his name. When goods come into hands of the custom authority by way of confiscation or otherwise under the provisions for the Customs Act, they are goods, which have not yet crossed the customs frontiers of India.

Collector of Customs Vs. State of  West Bengal 85 STC 121 (WBTT.)

In another case the Supreme Court held in the case of State of Madras Vs. m/s. Davar and Co. (24 STC 481) that the “customs frontier” meant the boundaries of the territories, including territorial waters of India. The sales in  the case were effected by transfer of documents of title long after the goods had crossed the custom frontier of India; the ships carrying the goods in question were all in the respective harbours within the  State when the sale were effected by the assessee by transfer of document of title to the buyer.

Explanation:- For the purpose of this clause, “customs station” and “ customs authorities” shall have the same meaning as in the Customs Act,1962.

Customs Act:-

1.)  Section 2(11) of  the Customs Act defines the area of “customs station”, and further it also includes an area in which imported or exported goods are ordinarily kept before clearance by custom authorities.

“Customs Area”:

means all areas of Custom Station and includes any area where imported goods are ordinarily kept before clearance by the Customs Authorities. Clearance by the Customs Authorities will be after filling the bill of entry and after the assessment of duty under section 28 of the Customs Act,1962. Before the assessment of the duty, the goods kept in the customs port cannot cross the limits of Customs Port. Hence, irrespective of the fact whether duty is paid or not; once the bill of entry is filed and the imported duty is assessed, the goods cross the limits of customs port. It is so held in the case of Mineral & Metals Trading Corp. of India Ltd. Vs. State of Andhra Pradesh 110 STC 394 (AP)

2.)  Section 2(12) of the Customs Act defines the “customs port” means any port appointed under clause (a) of  section 7 to be a customs port , and includes a place appointed under clause (aa) of that section to be an inland container depot;

3.) Section 2(13) of the Customs Act defines a “custom station” to mean any customs port/airport or land customs stations.

When the vessel arrives the goods are unloaded within the limit prescribed by the officer and transfer of bill of lading and sale should take place before crossing that area. Therefore it will be incorrect to take the entire customs station to be the area which could be crossed for exemption. Such sale should take place before clearance of the goods, and the clearance is from the limited area of custom station in which goods imported are kept before clearance. Section 8(a) of the customs Act,1962 provides that the commissioner may approve proper places in any customs port for the unloading or loading of the goods, and he can specify the limits of customs area.

4.) Section 2(25) of the Customs Act defines a “imported goods” means any goods brought into India from a place outside India but does not include goods which have been cleared from home consumption;

5.) Section 2(27) of Customs act defines a “India” includes a territorial waters of India;

6.) Section 2(43) of Customs Act defines a “warehouse” means a public warehouse appointed under section 57 or a private warehouse licensed under 57 or a private warehouse licensed under section 58;

7.) Section 2(44) of Customs Act defines a “warehoused goods” means goods deposited in warehouse;

8.) Section 2(45) of Customs Act defines a “warehousing station” means a place declared as a warehousing station under section 9;

9.) Section 7 of Customs Act provides that the Central Government may, by notification in the official Gazette, appoint ports and air ports or place as customs port or the custom airport or land customs station for unloading of imported goods;

10.) Section 8 of Customs Act says that collector of Customs may:

a)  approve proper places in any customs port or customs airport or coastal port for the unloading and loading of goods or for any class of goods;

b) specify the limits of any custom area;

11.) Section 9 of Customs Act, which is empowering –

The Central Board of Excise and Customs may, by notification, declare places to be warehousing stations;

12.) Section 29 of the Customs Act provides that the person incharge of a vessel or aircraft entering India shall not permit the vessel or craft to call at a land at any place other than a customs port or a customs airport;

13.) Section 31 of the Customs Act provides that the master of vessel shall not unload imported goods untill order has been given by the proper officer granting entry.

14.) Section 45 of Customs Act provides that imported goods unloaded in customs area shall remain in custody of person approved by Collector of Customs.

15.) Section 46– (1). The importer of any goods, other than goods intended for transit for transshipment , shall make an entry thereof by presenting to the proper officer a bill of entry for home consumption or warehousing in the prescribed form:

Provided that if the importer makes and subscribers to a declaration before the proper officer, to the effect that he is unable for want of full information to furnish all the particulars of the goods required under this sub-section, the proper officer may, pending the production of such information, permit him, previous to the entry thereof (a) to examine the goods in the presence of an officer of customs, or (b) to deposit the goods in a public warehouse appointed under section 57 without warehousing the same;

(2). Save as otherwise permitted by the proper officer, a bill of entry shall include all the goods mentioned in the bill of lading or other receipt given by the carrier to the consignor.

(3). A bill of entry under sub-section (1) may be presented at any time after the delivery of the import manifest or import report as the case may be;

Provided that the Collector of Customs may in any special circumstances permit a bill of entry to be presented before the delivery of such report;

Provided further that a bill of entry may be presented even before the delivery of such manifest if the vessel by which the goods have been shipped for importation into India is expected to arrive within week from the date of such presentation;

(4). The importer while presenting a bill of entry shall at the foot thereof make and subscribe to a declaration as to the truth of the contents of such bill of entry and shall, in support of such declaration, produce to the proper officer the invoice , if any, relating to the imported goods.

(5). If the proper officer is satisfied that the interests of revenue are not prejudicially affected and that there was no fraudulent intention, he may permit substitution of a bill of entry for home consumption for a bill of entry for warehousing or vice-versa.

16.) Section 48 of the Customs Act provides that if goods brought into India from a place outside India are not cleared for home consumption or warehoused or transshipped within two months from the date of the unloading thereof at a customs station or within such further time as the proper officer may allow or if the title to any imported goods is relinquished, such goods may, after notice to the importer and with the permission of the proper officer be sold by the person having the custody thereof;

provided that –

(a) animals, perishable goods and hazardous goods may, with the permission of the proper officer, be sold at any time;

(b) arms and ammunition may be sold at such time and place and in such manner as the Central Government may direct.

17.) Section 49 of the Customs Act provides that where in the case of any imported goods, whether dutiable or not, entered for home consumption, the Assistant Collector of Customs is satisfied on the application of the importer that the goods cannot be cleared within a reasonable time, the goods may, pending clearance, be permitted to be stored in a public warehouse, or in a private warehouse if facilities for deposit in public warehouse are not available; but such goods shall not be deemed to be warehoused goods for the purpose of this Act, and accordingly the provision of Chapter IX shall not apply to such goods.

Chapter IX deals with “warehousing”.

18.) Section 57 of the Customs Act provides that Assistant Collector of customs may appoint public warehouse at any warehousing station.

19.) Section 58 of the Customs Act provides that Assistant Collector of Customs may licence private warehouses at any warehousing station.

20.) Section 59 (1) of the Customs Act provides that the importer of any dutiable goods which have been entered for warehousing and assessed to duty under section 17 or 18 shall execute a bond binding himself in a sum equal to twice the amount of the duty assessed on such goods:-

(a) to observe all the provisions of this Act and the rules and regulation in respect of such goods;

(b) to pay on or before a date specified in a notice of demand

     i)  all duties, and interest, if any, payable under sub-section (2) of 61.

     ii) rent and charges claimable on account of such goods under this Act, together with interest on same from the date so specified at the rate of six percent per annum or such other rate as  is for the time being fixed by the Board;and

 (c) to discharge all penalties incurred for violation of the provisions of this act and rules and regulations in respect  of such goods.

21.) Section 60 of the Customs Act provides that when the provision of section 59 have been complied with in respect of any goods , the proper officer may make an order permitting the deposit of the goods in a warehouse within payment of duty.

22.) Section 61(1) of the Customs Act provides that any warehoused goods may be left in the warehouse in which they are deposited or in any warehouse to which they may be removed-

(a) in the case of capital goods intended for use in any hundred percent Export Oriented Undertaking, till the expiry of five years; and

(b) in the case of any other goods, till the expiry of one year, after the date on which the proper officer has made an order under section 60 permitting the deposit of the goods in a warehouse:

provided that

(i) in the case of any goods which are not likely to deteriorate, the period specified in sub-section (1) may, on sufficient cause being shown, be extended by the Commissioner of Customs for a period not exceeding six months and by the Chief Commissioner of Customs for such further period as he may deem fit;

(ii) in the case of any goods referred to in clause (b), if they are likely to deteriorate, the aforesaid period of one year may be reduced by the Commissioner of Customs to such shorter period as he may deem fit:

Provided further than when the licence for any private warehouse is cancelled, the owner of any goods warehoused therein shall, within seven days from the date on which notice of such cancellation is given or within such extended period as the proper officer may allow, remove the goods from such warehouse to another warehouse or clear them for home consumption or exportation

(2) Where any warehoused goods remain in a Warehouse beyond the period specified in sub-section (1), by reason of extension of the aforesaid period or otherwise, interest at such rate as is specified in shall be payable, on the amount of duty payable at the time of clearance of the goods in accordance with the provisions of section 15 on the warehoused goods, for the period from the expiry of the said warehousing period till the date of payment of duty on the warehoused goods;

Provided that the Board may, if it considers it necessary so to do to in the public interest, by order and under circumstances of an exceptional nature, to be specified in such order, waive the whole or part of any interest payable under this section in respect of any warehoused goods:

Provided further that the Board may, if it is satisfied that it is necessary so to do in the public interest, by notification in the Official Gazette, specify the class of goods in respect of which no interest shall be charged under this section.

For the purposes of this section, “Hundred percent Export Oriented Undertaking” has the same meaning as in Explanation: 2 to sub-section (1) of section 3 of the Central Excises Act, 1944 (1 of 1944).

Explanation:

For the purposes of this section, “Hundred percent Export Oriented Undertaking” has the same meaning as in Explanation: 2 to sub-section (1) of section 3 of the Central Excises Act, 1944 (1 of 1944).

23.) Section 62 (1) of the Customs Act provides that all warehoused goods shall be subject to the control of the proper officer.

(2) No person shall enter a ware house or remove any goods there from without the permission of the proper officer.

(3) The proper officer may cause any warehouse to be locked with the lock of the customs department and no person shall remove or break such lock.

24.) Section 63 (1) of the Customs Act provides that the owner of any warehoused goods shall pay to the warehouse –keeper rent and warehouse charges at the rates fixed under any law for the time being in force or where no rates are so fixed, at such rates as may be fixed by the Collector of customs.

(2) if any rent or warehouse charges are not paid within ten days from the date of when they become due, the warehouse keeper may, after notice to the owner of the warehoused goods and with the permission of the proper officer cause to be sold any transfer of the warehoused goods not withstanding such sufficient portion of the goods as the warehouse-keeper may select.

Explanation to provisions of the Customs Act:-

From the provision of the Customs Act, it is clear that any vessel carrying goods being imported, must call only at customs port (Section 29). The imported goods are unloaded only at a customs station as appointed by the Central Government vide section 7. Then the importer of the goods has to make entry of the goods by presenting a bill of entry (1) for home consumption, or (2) warehousing. Section 30 of the Customs Act, 1962 requires the person in-charge of a vessel carrying imported goods to deliver import manifest. Section 31 of the Customs Act,1962 says that no goods will be unloaded until an order has been given by the officer granting entry inward to such vessel, and such a permission can be granted only after the import manifest is given by the persons in charge of the vessel. Section 32 of the Customs Act,1962 says that no imported goods shall be unloaded except with the permission of the proper officer of the customs station, and unless such goods are specified in the manifest. According to section 33 of the Customs Act, 1962 unloading or loading of goods shall be at the approved places only. Section 34 of the Customs Act, 1962 says that the imported goods shall be unloaded under the supervision of the Customs Officer.

Thus, goods unloaded at the customs station may be cleared for home consumption. But the importer has a choice and can for his own convenience opt to deffer payment of duty and get the goods deposited in the ware house on executing a bond. Section 46 of the Customs Act makes provision for these two types of entry of goods. The goods may in the first instance be removed from the customs station and deposited warehouse under a bond or the importer may clear at once for home consumption. This section thus indicates two types of clearance or lawful removal. Sub-section 5 of section 46 further makes it clear that a bill of entry for home consumption may be substituted by a bill of entry for warehousing. This again demonstrates that there are two modes of removal of goods from the customs station. One can be said to be clearance of the goods for home consumption, and the other can be said to be clearance or removal for being deposited in a warehouse under a bond without payment of duty. Entry of the goods by presenting a distinct bill of entry, has to be made in either case. Section 47 specifically speaks of “clearance of goods for home consumption” and the regulations provide for separate forms of Bill of Entry. Section 57 says that the Assistant Commissioner of Customs may appoint public warehouse wherein dutiable goods may be deposited. Section 58 speaks of warehousing facility without payment of duty, and section 59 provides for execution of bond.

Documents and Procedure:-

A key factor of a High Sea Sale is the transfer of the documents of title to the goods. Section 2(4) of the Sales of Goods Act,1930 defines the “ document of title to goods” to inter alia include a bill of lading or order for delivery of goods and any other document used in the ordinary course of  business as proof of the possession or control of goods. Thus, transfer of original bill of lading , in case of import of goods through Sea Shipment and Deliver Order , in case of Air Shipment through endorsement executed in favor of the buyer and its acceptance thereof will be regarded as sale of goods.

The following is the procedure and the documentation required to make a High Seas Sale:-

v  Importer (XYZ) and High Seas buyer (ABC) shall enter into an agreement of sale to effect the sale on high seas of specific goods.

v  The document of title i.e. Bill of Lading shall be endorsed by the XYZ as follows:

Please deliver to M/s ABC or order

 Place:                              sd/-

 Date:                               XYZ

v  It may be noted that airway bill is not a document of title to goods. However, delivery order issued by banker is recognised as a negotiable document. In the Case of B. M. Shah & Co. (SA no. 139 of 1989 dated 7-2-1992)

v  XYZ to retain a copy of the endorsed Bill of Lading and hand over original Bill of Lading to ABC under covering letter.

v  ABC shall file Bill of Entry and pay customs duty, clearing charges etc. ( The assessable value for the purpose of custom duty would be sale price as mentioned in High Seas Agreement).

v  ABC to arrange for clearance of goods and arrange for transportation.

v  Documents to be kept on record by importer:

• Purchase order placed on foreign supplier.
• Import licence.
• Foreign supplier’s sale invoice.
• Letter from foreign supplier informing about dispatch of goods and giving the particular of Bill of lading, Packing list etc.
• Purchase order placed by the High Seas Buyer i.e. High Seas Sale agreement.
• Endorsed copy of Bill of Lading or banker’s delivery order as the case may be.
• Acknowledged copy of the letter, under which the endorsed Bill of Lading/ Delivery Order has been sent to the High Seas buyer.
• Sales invoice on the buyer.
• Letter by the importer to the customs authorities, intimating that the goods will be cleared by the High Seas buyer.
• Letter by the High Seas buyer to the customs authorities, intimating  that he being the purchaser, he will be clearing the goods.
• Declaration signed by the High Seas Buyer about fulfilling the obligations attached to import of goods purchased on High Seas.
• A copy of the Bill of Entry filed by High Seas Buyer.
• Letter from High Seas buyer informing that he has taken delivery of the goods, sold under High Seas agreement, from the shipping company.
• Proof of payment received from High Seas Buyer.

Case Studies:

J.V. Gokal & Co. (Pvt.) ltd. Vs. The Asstt. Collector of Sales Tax (Inspection) [(1960) 11 STC 186 (SC)]

Facts:- 

The petitioners, M/s J.V. Gokal & co. (Private) Ltd. entered into two contracts with the Government of India for supply of two consignments of sugar- One of 9500 long tons of sugar of Peruvian Origin and the other of 25000 M.T of sugar of Continental origin. The petitioner placed order with dealers in foreign countries and opened letters of credit in favour of foreign suppliers. After the ship carrying the sugar  had sailed from the foreign port , the petitioner delivered the documents of title to the goods, viz. Bills of lading duly endorsed in favour of the Government of India, Ministry of Food and Agriculture(Agriculture), their invoices and other documents to its Bankers to present the same and collect the amount from the Dy. Accountant General (Food and Rehabilitation), New Delhi. Payments were made by the Government of India to Bankers against delivery of invoice and Bills of Lading before the arrival of the Vessels. After the goods reached the port, they were unloaded, taken delivery of, and cleared by the Government of India after paying the requisite custom duties.

 While the above transactions were allowed as sales in the course of import under section 46 of the Bombay Sales Tax Act,1953, the Assistant Collector of Sales Tax (Inspection) disallowed the same at the time of hearing of the appeals on other issues and levied tax thereon. The Assistant Collector referred to the various  terms and conditions of the order especially condition no. 5 which stated that delivery will be taken at the ports of discharge by the Government or their nominees. Demurrage, dispatch and overtime will be on account of the Government but stevedorage, lighterage where necessary, hiring of cranes (except overtime expenses), dock dues and pilotage would be at the expense of sellers. Condition 4 provided that the Government may require full or part of the consignment to be discharged at one or more ports by payment of extra charge. The Asstt. Collector also observed that the sugar could be imported only against the import licence issued to Gokal & Co. and the same not being transferable, could not have been used by the Government to clear the goods.

The petitioners contended as follows.

1.    Under Article 286 (1) (b) of the Constitution , the sale were not liable as they took place in the course of import of the goods into the territory of India.

2.    The sales were exempted in the Bombay State under Explanation to Article 286 (1), as they were delivered for consumption in States other than Bombay.

3.    The sales were effected outside the State of Bombay, i.e. New Delhi and hence were exempt under Article 286 (1) (a).

4.    The Asstt. Collector could not have revised the order under section 31 and could only reassess within 3 years under section 15.

Observation and Decision:-

The Supreme Court observed that “the course of import” starts when the goods cross the customs barrier of a foreign country and when they cross the customs barrier of the importing country. The Supreme Court referred to its decisions in the case of State of Travancore- Cochin Vs. Shanmugha Vilas Cashew nut Factory (4 STC, 205) and State of Travancore – Cochin Vs. The Bombay Co. Ltd.( 3 STC,434).

The Supreme Court summarized the legal position vis-à-vis import sale as follows.

1)    The course of import of goods starts at a point when the goods cross the customs barrier of the foreign country and ends at a point in the importing country after the goods cross the customs barrier;

2)    The sale which occasions the import is a sale in the course of import;

3)    A purchase by an importer of goods when they are on high seas by payment against shipping documents is also a purchase in course of import; and

4)    A sale by an importer of goods, after the property in the goods passed to him either after the receipt of the documents of title against payment or otherwise, to a third party by a similar process is also a sale in course of import.

The Supreme Court, scrutinizing the terms of the contract observed that the liability undertaken by the sellers to meet the expenses relating to stevedorage, lighterage where necessary, hiring of cranes, dock dues and pilotage at the time of delivery of the goods were not relevant for that liability could rest with the sellers even after the property in the goods had passed to the buyers. Supreme court referred to the contentions of the respondents that the seller himself had chartered the ship and import licence issued by the Government was non-transferable and observed that the licence issued was in exercise of the statutory power under the relevant Act and the fact that the licence was non-transferable, had no relation to the property in the goods passing to the Government. The licence was given to the seller for the express object of fulfilling the contracts with the Government and Government took the licence from the seller and cleared the goods through their officer.

The Supreme Court concluded that the said transactions had taken place in the course of import into India and hence were exempt from sales tax under Article 286 (1) (b) of the Constitution of India.

Conclusion:-

This judgment indicates that even the same person can undertake two contracts, execution of one of which to follow the other, even under a single instruments, provided the instrument spelt out two distinct contracts on facts as well as in law.

Supreme Court took notice of the human conduct of a business man and commercial expediency as evidenced by its approach towards construing the agreement. It observed : “ The circumstances under which the contracts were entered into between the parties indicate that both the parties were interested to see that property in the goods  passed in ordinary way when the shipping documents were handed over to the Government against payment. The sellers had to meet their liability to the foreign companies with whom they opened letters of credit and the Government must have been anxious to get the title to the goods so that sellers might not divert the goods toward their other commitments or to other buyers for more tempting prices. Under the contract every safeguard for securing the goods of agreed specifications was provided for in the earlier clauses and therefore there was no reason for postponing the passing of the property in the goods to the buyer till the goods were actually delivered in the port. The sellers on their side would have been anxious that the property should pass when the goods were on the high seas, for otherwise they would be compelled to pay sales tax.”

Fibre Plast Corporation Vs. The State of Maharashtra SA 25 & 73/96 dt. 25.09.98

Facts:-

The appellant was holding Import Licence for HDPE plastic granules. An indent for importing the goods, was placed on N. Jivantlal & Co. Pvt. Ltd., Bombay. The said Company was the indenting agent of foreign supplier.

Indenting agent had instructed the foreign supplier M/s. Petrimax of Russia to supply the goods to the appellant. The foreign supplier loaded the goods on ship, for which bill of lading was issued by the shipping company. Before the goods crossed the frontiers of India, the appellant entered into contract with M/s. Premier Plastic Industries of Delhi. It was a contract of sale on high sea basis. A declaration in respect of high sea sale was filed before the Assistant Collector of Customs. The purchaser had also given similar declaration. The bill of lading was received from Vijaya Bank, which was sent by the supplier for handing over to the appellant on payment. The bank had endorsed the bill of lading in favour of appellant. After receipt of bill of lading from the Bank, it was endorsed in favour of M/s Premier Plastic Industries. An endorsement to that effect is made on the bill of lading. The purchasing dealer had appointed M/s R.D. Shipping Company as their agent s for clearance of the goods. The document was endorsed by M/s. Premier Plastic Industries in order to enable the clearing agent to clear the goods. Certificate given by the clearing agent, clearly shows that clearance was made on behalf of the purchaser and not the appellant. The goods were cleared by the purchaser and kept in bonded warehouse. Bill of entry was submitted to the customs. The purchaser had given a bond to the customs at the time when the goods were put in bonded warehouse as his own goods. The appellant had not given any bond and had already transferred the property in the goods when the bill of lading was handed over to the purchaser after the endorsement. The customs duty was paid by the purchaser when the goods were cleared by him from bonded warehouse. The DD was obtained by him as the bond was given by him. The  R.D. Shipping Company raised their invoice in the name of M/s. Premier Plastic Industries- purchaser as the appointment as a clearing agent was made by the purchaser. The goods were booked to Delhi by the clearing agent and charges for freight were recovered in the bill.

Assistant Commissioner of Sales Tax (Legal) submit that these sales have taken place after the goods have crossed the custom frontier, when the goods were in the bonded warehouse and thereafter cleared on payment of duty to customs, by putting bill of entry for home consumption. As per Assistant Commissioner sales will be local sale and hence not covered under section 5(2) of the Central Sales Tax Act.

Decision:-

Purchasing dealer had become owner of the respective goods before the clearance from the customs and the purchasing dealer has actually paid the customs duty after he had become the owner of the goods in question. The appellant can not be made liable for tax on amounts of the duty and clearing charges.

Conclusion:-

The said transaction falls u/s 5(2) of Central Sales Tax Act, 1956.

B.M. Shah & CompanyVs. State of Maharashtra SA 139/ 89 dt.07-02-1992

Facts:-

The appellant, were registered dealers under the Bombay Sales Tax Act,1959 as well as the Central Sales Tax Act,1956 respectively. They are importers of drugs, pharmaceuticals and laboratory chemicals. The goods so imported are exclusively sold to actual users either within the State of Maharashtra or outside the state of Maharashtra. The appellants possessed REP import licences.

To facilitate the import of goods from foreign exporters, they had opened letter of credit with Grindlays Bank Limited, Bombay. The appellants had then placed purchase orders through Messrs J.R. Sharma & Company to PLIVA Pharmaceutical, Chemical, Food and Cosmetic Industry, Zagreb, Yugoslavia, to dispatch of Oxytetracycline Hydrochloride to them through their bankers Grindlays Bank Ltd., Bombay. Accordingly, the consignor , foreign supplier, Pliva despatched Oxytetracycline Hydrochloride to the appellants. Bill of exchange was drawn on Grindlays Bank Limited, Bombay, and a copy endorsed to the appellants. The goods were despatched by air through Jugo Transport, Zagreb, and in due course, Airway bill was received by Grindlays Bank Limited, and a copy of the same was also received by appellants. The appellant had written to the Assistant Collector of Customs declaring sales of consignment to different parties on ‘high sea basis’. The appellant received cargo arrival notice from Air India informing them to have deposited the goods with the customs and contact their agent  M/s. Air Freight (P) Ltd., for delivery thereof. The appellants deposited the price of the goods with Grindlay Bank Limited and, thereafter, letters were issued by Grindlays Bank Limited addressed to Air freight  Private Limited instructing them to deliver the goods to appellants or order against payment of custom duty and all charges. The appellants had endorsed these letters in favour of their customers who had got their respective goods cleared on payment of custom duty and other charges.

Sales Tax Authority held that letter issued by Gindlays Bank Limited was not a document of title to the goods. It was not a valid delivery order. As the goods were not transferred to the customers by document of title the contention of appellants that the goods were transferred to the customers before the goods had crossed the custom frontiers of India was not proper.

Decision:-

Document issued by Grindlays Bank would be considered as deliver order with in the ambit of section 4(2) of the sale of goods act and transaction is covered by section 5 (2) of Cenral Sales Tax Act,1956.

Conclusion:-

Section 2 (4) of the sales of Goods Act said that the delivery order ought to have been issued by the owners of the goods. It could be issued by a person having control or authority over the goods. In the given case, the Grindlay Bank Limited had control over the goods, document issued by them would be considered as delivery order.

Indo Burma Trading Corporation Vs. State of Maharashtra [(2004) 30-MTJ-443 (STMah.)]

Facts:-

Indo Burma Trading Corporation is a Importer, Exporter and Reseller. He claimed High Sea Sale against 9 transactions. Out of 9 transactions of High Sea Sales, 7 were allowed 2 were rejected. Both the transaction rejected by Assessing Officer on the ground that at the time of sale same were stored in Bonded Warehouse. Assessing Officer said that at the time good sold same already crossed Custom Frontier of India, same would attract local sales tax. Assessing Officer further observed that as bill of lading split up, the High Sea Sale would not be applicable.

Matter went to Tribunal.

Decision:-

The Tribunal relied on case [Indo Tex Pvt. Ltd. Vs. The State of Maharashtra (SA no.284-285 of 1990)] already decided by Larger Bench of Tribunal. Both transactions were rejected on the ground that they cannot be considered as Sale in Course of Import and will be liable for local sales tax.

Conclusion:-

Sale occurred from Bonded Ware House would not fall under Sale in Course of Import and will attract local sales tax liability.

M/s Tata Iron & Steel Co. Ltd. Vs. State of Maharashtra [(2007) 35-MTJ-242(STMAH)]

Facts:-

M/s Tata Iron & Steel Co .ltd. duly registered under the BST Act and CST Act are resellers of iron and steel. Tata Iron & Steel were importing goods form foreign countries on specific prior order placed on them by the customers. Certain customers both in the State of Maharashtra as also in other states placed order for purchase of definite quantity of melting scrap. Customers themselves opened letter of credit. Tata Iron & Steel Co. Ltd. conveyed all these orders with detail of each customer to the foreign supplier.

The goods for which order was placed by local customer were separately despatched by the foreign supplier. There was a separate bill of lading for each customer. There was an agreement with each local customer who placed the order for sale in course of import. Tata Iron & Steel Co. endorsed the bill of lading duly dated in favour of the respective customer who himself filed bill of entry for home consumption , paid custom duty and cleared and took delivery of the goods. Tata Iron & Steel Co. Ltd. claimed such sale under section 5(2) of the CST Act. Same was rejected by the Assessing Authority.

Matter went to appellant they rejected the same on the ground that the goods were imported in bulk quantity and therefore, they are not ascertained at the time of sale by transfer of documents to title of the goods crossed the customs frontiers.

Second appeal went to Tribunal.

Decision:-

Tribunal relied on judgement of M/s B.M. Shah and Co. [(2005) 32 MTJ 869], allowed the claim of Tata Iron & Steel Co. ltd. of high sea sales.

Conclusion:-

Goods duly endorsed on bill of lading before crossing custom frontier will fall under high sea sale category. Same would be exempt from tax.

Some issues raised by the Revenue Authorities.

A) Bulk imports:-

1.0 Liquid cargo like crude oil, edible oil, some chemicals etc. or dry cargos like food grains, iron ore, etc. are imported in bulk quantity but in loose state. This cargo is loaded on the ship without being packed in any packing material. These goods are stored in different units/…… of the ship and the goods is commingled with goods belonging to different owners. This is because the goods are homogeneous in nature. Some Sales Tax authorities in the circumstances, hold the view that the endorsement of Bill of Lading, though carried out when the ship has not even touched the Indians shores, the transfer of property in the goods represented by such Bill of Lading will take place only when the goods are ascertained from the common mass of the goods stored on the ship. In their view, this happens only when the goods are unloaded into the shore tanks (in case of liquid cargos) or are loaded on to the trucks etc. on the Indian soil. In their view section 18 of the Sale of Goods Act is applicable and therefore, the transfer of property in the unascertained goods will take place only when they are ascertained.

1.1 These arguments were addressed by the Maharashtra Sales Tax Tribunal (MSTT) in the case of M/s. Vadilal Embroidary Unit (Appeal No. 74 of 1987 dt. 31-10-1991 & in the case of M/s. Bislery Brewerages Pvt. Ltd. (S.A. No. 835 of 1999 dt, 22-3-1991). Very recently, in the case of M/s. Adani Exports Ltd. (Appeal No. 169 of 2003 dt. 23-3-2007) once again the revenue raised the similar issues. The Hon’ble Tribunal held that the question regarding the point of time when the property in goods gets transferred, is governed by the special provisions contained in the Indian Bill of Lading Act. In view of these decisions it can be said that the even the bulk and commingled cargo can be claimed as highseas sales covered by second limb of the section 5(2) of the CST Act and exempt from tax.

In the judgments cited above the Tribunal has considered decisions in the case of J.V. Gokal & Co. [11:STC:186(SC)] un-reported BHC decision in the case of M/s. Singhvi Synthetic vs. B. K. Chougule {Writ Petition No. 137 of 81 dt. 1-9-1983} and other court decisions.

B) Bond to Bond sale:-

2.0 Sometimes the imported goods are stored in the warehouses on filing the bill of entry for home consumption in the name of importer (or highseas buyer). These storing is commonly referred to as bonding of goods or stored in the bonded warehouse as the customs duty on such goods is assessed and paid only on the date of clearance of goods of the customs authority. Such goods are thereafter sold ex-bond to the buyer and the transaction is claimed as ‘highseas sales – exempt u/s. 5(2) of the CST Act.

2.1 Once again the revenue authorities are inclined to treat this transaction as intra-State sales and subject it to local sales tax/VAT. The argument which they raised is the presence/location of goods at times of sales being in the state, the sale is intra state as per section 4 of the BST Act. In fact, the larger bench of the MSTT in the case of M/s. Indotex Exports Pvt. Ltd (S.A. No. 284-285 of 1990 dt. 17-6-1985 has analysed the term ‘crossing of the customs frontiers’ and has held that the sales from the bonded warehouse is not covered by section 5(2) of the CST Act. The Madras High Court in the case of State Trading Corporation of India Pvt. Ltd. (129:STC:294) has elaborately discussed the meaning of the term custom station and crossing of the custom frontiers to enable court distinguish the supreme court decision in the case of Minerals and Metals Trading Corporation of India Ltd (103:STC:394) and relied on the decision of Kiran Spinning Mills vs. The Collector of Customs 113:ELT:753 (SC) and held that sale from the ex-bonds warehouse is covered by section 5(2) of the CST Act. The Supreme Court in the Kiran Spinning (cited supra) has discussed about the point of time at which the customs duty is payable and observed that the day and time when the goods are cleared from customs is the time at which applicable rate of duty is to be assessed. Extending the logic it is clear that when the duty is paid at the time of ex-bonding the goods on the clearance from the customs station takes place and therefore, at that time it could be argued that the goods have ‘crossed the customs stations’.

2.2 The issue for consideration before the courts has been to interpret as to whether storage of goods in the bonded warehouse can be taken as ‘area of the customs’ stations where the goods are ‘ordinarily’ kept before clearance by the customs authorities.

The term ‘crossing the customs frontiers of India’ along with the terms ‘Customs Station’ and ‘Customs Area’ came up for interpretation before the Larger Bench of the Maharashtra Sales Tax Tribunal (MSTT) in the case of M/s. Indo Tex Exports Pvt. Ltd (SA Nos. 284 & 285 of 1990 dt. 17-6-1995). The Tribunal, (para 24) after a very detailed examination of these terms and the term ‘custom area’ held that the word ‘ordinarily’ appearing in section 2(ab) means usually, normally or habitually and not causally or exceptionally. MSTT observed that the goods unloaded and kept at customs station must be dealt with by the interested party within two months from the date of unloading. As per section 60 of the Customs Act, only after bond has been executed, an order permitting the goods to be warehoused can be made.

In para 25, the Tribunal has observed that the warehousing facility would be availed only in certain contingencies and therefore, warehouse is not the place where imported goods are supposed to be kept ‘ordinarily’. Accordingly, the Tribunal held that the sales effected ex-bond is sales ‘within’ the State and local sales tax is leviable.

2.3 The larger bench of the MSTT pronounced the decision in the year 1995 and held as discussed above. However, the later decisions of the Supreme Court as also Bombay High Court can be resorted to/relied upon to argue that the sales made ex-bond would also be covered by section 5(2) of the CST Act. In the case of M/s. Kiran Spinning (113:ELT:753), the Supreme Court was called upon to decide about the applicability of Additional Customs Duty in a case where on the day of import and bonding of the goods the Additional Duty was not leviable, however, on the date of clearance of goods from the bonded warehouse at a later date the duty was leviable. The Supreme Court interpreted the term ‘removable of goods’ from the term ‘custom station’ and observed as under:

‘this Court has held in Sea Customs Act — 1964 (3) SCR 787 at page 803 that in the case of duty of customs the taxable event is the import of goods within the customs barriers. In other words, the taxable event occurs when the customs barrier is crossed. In the case of goods which are in the warehouse the customs barriers would be crossed when they are sought to be taken out of the customs and brought to the mass of goods in the country.
…………….
……………

The import would be completed only when the goods are to cross the customs barriers and that is the time when the import duty has to be paid and that is what has been termed by this Court in In Re : The Bill to amend Section 20 of the Sea Customs Act, 1878 and Section 3 of the Central Excise Act, 1944 [(1964) 3 SCR 787 at page 8231 Sea Customs Case as being the taxable event. The taxable event, therefore, being the day of crossing of customs barrier, and not on the date when the goods had landed in India or had entered the territorial waters. We find that on the date of the taxable event the additional duty of excise was leviable under the said Ordinance and, therefore, additional duty under Section 3 of the Tariff Act was rightly demanded from the appellants.’

2.4 The Supreme Court decision (113:ELT:753) was considered & relied upon by the Bombay High Court in the case of Narang Hotel and Resorts Pvt. Ltd. [135:STC:289 (Bom)).

In this case, the Bombay High court was examining the claim of Narang Hotels – Flight Kitchen for exemption u/s 5(1) of the CST Act – sale in the course of exports – for supply of food to foreign airlines on board. Not accepting the claim of the appellants, the Hon’ble BHC held and observed at paras 93 & 94 as under:

93. In order to explain concept of crossing of the customs frontiers of India, Mr. Bharucha, relied upon the decision of the Supreme Court in Kiran Spinning Mills vs. Collector of Customs (1999) 113 ELT 753. As held by the Supreme Court in the case of Kiran Spinning Mills vs. Collector of Customs (1999) 113 ELT 753, which arose under the Additional Duty of Excise (Textiles and Textile Articles) Ordinance, 1978 the taxable event is the crossing of the customs barrier, and not the date when the goods had landed in India, or had entered the territorial waters. When goods are imported into India even after the goods are unloaded from the ship, and even after the goods are assessed to duty subsequent to the filing of a bill of entry, the goods cannot be regarded as having crossed the customs barrier until the duty is paid and the goods are brought out of the limits of the customs station. In the case of Kiran Spinning Mills vs. Collector of Customs (1999) 113 ELT 753 (SC), the apex Court has observed thus:

“In other words, the taxable event occurs when the customs barrier is crossed. In the case of goods which are in the warehouse, the customs barriers would be crossed when they are sought to be taken out of the customs and brought to the mass of goods in the country.”

Based on the above judgment Mr. Bharucha contended and, in our opinion, rightly that in case of import the customs frontiers of India are not crossed until the goods find their free access into the country by crossing the outer limits of the area of customs station which is possible only at the time of clearance by the customs authorities. According to him, under section 5(2) read with section 2(ab) of the CST Act and the relevant definitions in the Customs Act, the expression “before goods have crossed the customs frontiers of India” means before the goods have crossed the limits of customs station, namely, a customs port, or in other words, before the goods have crossed entire area of customs station including its outer boundary so that the goods can find their free access into the country beyond the customs station upon clearance by the customs authorities.

94. Mr. Bharucha, learned counsel for the respondents, applying the above concept to a converse case of export, submits that in case of import the expression “before the goods have crossed the customs frontiers of India” means the goods must have crossed the limits of area of customs station, namely, customs port. In other words, the goods must move or undertake onward journey to a foreign destination and cross entire customs station including its outer boundary. Turning to the facts of this case, Mr. Bharucha submitted that the sales in question are complete much prior to crossing the limits of the area of customs station in which the goods are ordinarily kept by the customs authorities. In other words, the sales are complete before the goods have crossed customs station. Sales being before crossing the customs frontiers of India the sales are local sales exigible to local sales tax.

2.5 In yet another decision the Madras High Court in the case of M/s. State Trading Corporation of India Ltd (129:STC:294) relying on the decision of the Kiran Spinning interpreted the term ‘clearance’ referred to in section 2(ab) of the CST Act and observed as under :

16. The “clearance” referred to in section 2(ab) of the C.S.T. Act, in the absence of any other compelling factor has to be regarded as having reference to the clearance of goods for home consumption under section 47 or the clearance of warehoused goods under section 68 of the Customs Act. The clearance in this case, clearly was after the transfer of document of title and was not earlier. The crossing of the limits of the customs station took place after the clearance of the goods from the warehouse for home consumption.

17. The title having passed on to the buyer before such clearance and crossing, the sale effected by the assessee/dealer was clearly one which was in the course of import. The impugned order of the Tribunal upholding the denial of exemption to the dealer in respect of these sales is, therefore, unsustainable and is set aside. The writ petitions are allowed.

2.6 From the above discussion, one may be inclined to hold the view that sales made from the bonded warehouse can be claimed as exempt from CST u/s 5(2) of the CST Act in spite of the Larger Bench decision of the Maharashtra Sales Tax Tribunal holding it to be taxable under the local act.

C) Agency Transaction – First limb of section 5(2):-

3.0 At times, the Indian representative of a foreign company and/or Indian importer enters into transaction with the local buyer to import the goods for him, pays the customs duty, clearing forwarding charges, and /or octroi duty in his name and thereafter, arranges to deliver the goods in India. Such transactions are routinely treated as intra–state transactions and are liable to local sales tax/VAT. However, in such circumstances, if it can be brought on record that the import of the goods is occasioned because of a existing contract of sale in India, it can be successfully argued that the transaction is covered by first limb of the section 5(2) of the CST Act and hence it is not exigible to CST as also the local tax. It would be appropriate to reproduce a part of the section 5(2) again.

Sec 5(2) : A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import…….

3.1 If the import is an incident to enable the importer to effect sales to a local purchaser, it could be construed as occasioning of the movement of goods in India. This is not to be confused with ‘back to back sales’ or ‘order supplies’. In case of ‘back to back sales’, the importers imports the goods and effect supplies to the local purchaser. However, the purchaser has not required the importer to import the goods with specifications and configuration, from a particular foreign vendor, make etc. Meaning thereby, the local buyer has placed an order for goods but the order does not contemplate import by the vendor.

As against this, if the local supplier (importer) has entered into an arrangement whereby it has placed purchase order on the foreign vendor intimating him about the particular configuration etc. of the goods and has also intimated the local buyer about the need for such import of goods, the transaction could have said to have occasioned the import of goods.

3.2 This type of transaction is commonly undertaken by the foreign manufacturer’s representative of India or by the channelizing agency like STC, MMTC etc.

A useful reference can also be made to the judgments of the Supreme Court in State of Maharashtra vs. Embee Corporation (and a special leave petition) [107 STC 196] [SC] & Deputy Commissioner of Agricultural Income-tax and Sales Tax, Ernakulam vs. Indian Explosives Ltd. [60 STC 310] [SC],

In a very well drafted and detailed order passed by the MSTT in the case of M/s. Tata Iron & Steel Co. Ltd (SA No.713 & 714 of 2000 dt. 9-10-2001) the MSTT has considered the Supreme Court decision in case of K. Gopinath Nair [105:STC:580(SC)) and has reproduced the observation of the Supreme Court in para 9 of the SC decision as under:

“Therefore, a sale in the course of import must necessarily require the concerned sale to occasion the import and the sale and the import must have an integrated and intertwined connection.”

Therefore, in a case where import has an integrated and intertwined connection with the local sales (to be supported by documentary evidence and conduct of the parties to the contract), the same can be claimed as covered by first part of the section 5(2) and hence not liable to tax.

D) Project import – Use in Works Contract:-

4.0 Large infrastructure project require import of plant and machinery equipment for execution of contract. In many a cases, the awarder of contract do provide in the contract about the necessity and/or need for particular make/configuration of plant and machinery to be imported by the contractor for the execution of the contract. It is now a set principle that the provisions of sections 3, 4 & 5 of the CST Act are equally applicable to the transactions of ‘deemed sales’ [a useful reference can be made SC decisions in the case of Gannon Dunkerley (88:STC:204) & 20th Century Finance Corporation Ltd. (119:STC:182)]. If it can be proved that the import has occasioned for a ultimate sale to the awarder of contract by way of works contract, certainly such transaction too can be claimed as covered by the first limb of section 5(2) of the CST Act. It may be noted that if the goods which are imported are to be worked upon, fabricated, used in further processing after their imports, it would be hazardous to claim exemption u/s 5(2) of the CST Act. In such a situation the sale; i.e., deemed sale is not of the goods which is imported but the property of the goods is passed in the form (after worked upon etc) otherwise than in which it was imported. E.g. if the transformer is imported and used as a part of plant and machinery and applied as it is in the contract, subject to fulfilling other conditions, the sale can be claimed as covered by section 5(2). However, if some raw materials, component etc. are imported and after the import they are made into sub-assembly or processed further and such processed goods are then incorporated in the contract, the original import (of components, raw material etc.) could not have being occasioned for such deemed sale. And therefore, it is not covered by first limb of section 5(2).

E) Import of intangible/incorporeal goods – Right to use such goods:-

5.0 Intangible goods like software, technical know-how, etc. is imported either for own use or for trading. At times, right to use software, digitalized music etc. is also imported in India. In case of internet downloads and downloads through the mobile handsets (SMS) of either software or the music etc, it would be worth to examine as to whether the transaction of import is occasioned because of a sub-lease of such right to use in India.

What I mean to convey here is: if in a given case the physical location of the server is outside India and the acceptance of the offer by the end user (by clicking ‘I accept’ on the net, receive SMS) triggers the sending of the email or the SMS containing the digital files of the music/ring tones etc, it can be argued that the transaction is covered by first limb of section 5(2) of the CST Act.

Revenue authorities do raise various other issues when the claim u/s. 5(2) of the CST Act is made. Issues like: splitting of the BL, endorsement of the BL, blank endorsement of BL, endorsement of airway bill, etc. are not discussed here as the law point on these issues are fairly settled.

 

F) Rejection of good by customers subsequent to High Sea Sales:-

6.0 There could be possibility whereby the goods sold on High Seas could be rejected by customers. Normally, in a works contract, the transfer of property is contemplated only after the customer giving his provisional / final acceptance. Having regard to such a stipulation forming part of the contract, the seller is contractually obliged to replace the defective part and complete the job as per terms of contract. The judicial precedents that support this view have been mentioned below for ready reference.

In the case of  Metal Alloy Co Vs. CTO [(1977) 39 STC 404 (Cal)], the High Court of Calcutta has held that the return of goods and rejection of goods stand on different footings. Return of goods is a bilateral transaction brought about by the consent of the seller and the purchaser, which consent may have been effected either prior to the delivery of the goods or subsequent to such delivery. Rejection of goods, on the other hand, is a unilateral transaction governed by the provisions of the Central Act or the Sale of Goods Act, open only to purchaser.

The Court further held that “where there was a contract for sale of stirrup pumps according to the stipulation and the goods supplied were rejected on the ground that they were not in accordance with the stipulated specifications, there was no completed sale and no property in the goods was transferred or passed to the purchaser and there was no sale of goods within the meaning of the Central Act or the Sale of Goods Act.”

In Balabhagas Hulaschand and Another Vs. State of Orissa [(1976) 37 STC 207] the Supreme Court observed as under:

“The term “sale of goods” as used in section 3 includes an agreement to sell. It has already been pointed out that an agreement to sell is undoubtedly an element of sale. In fact a sale consists of three logical steps- i) that there is an offer; ii) that there is an agreement to sell when the offer is accepted; and iii) that in pursuance of the said agreement a concluded sale takes place. When the statute uses the words “sale or purchase of goods”, it automatically attracts the definition of sale of goods as given in section 4 of the Sale of Goods Act,1930, which is a statute passed  by the same Parliament and is to some extent in pari materia to the Central Sales Tax Act so far as transaction of sale is concerned. Section 4 of the Sales of Goods  Act runs thus:

“4. (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for price. There may be a contract of sale between one part of owner and another.

(2) A contract of sale may be absolute or conditional.

(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.

(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.”

The inevitable conclusion that follows from the interpretation of Section 4 of the Sale of Goods Act is that a sale is not complete where the offer is not accepted. Hence a rejection of goods would amount of non-acceptance of an offer resulting merely in an agreement to sale and would result in a sale only if the offer is accepted. Therefore, to complete the sale, it would be the duty of the seller to supply goods that would be accepted by the buyer for sale to be complete.

Further, in the case of CST Vs. Husenali Adamji & Co. [(1959) 10 STC 297 (SC)], it was held that if by the contract of sale, the buyer reserves the right to accept or reject the goods only after the goods have reached him, it cannot be said that the seller ceases to be the owner thereof  once he outs them into bags and rails them. This conditional appropriation cannot be sufficient to convey the property in the goods to the buyer at any time before the goods reach the buyer and he has exercised his right to reject the goods or approve them and the property then passes at the buyer place.

In view of the above understanding of the judicial precedents, Company would be required to replace the part that failed the final testing. For such a replacement, there would not be any levy of sales tax.

(Republished with amendments)

Author can be reached @ [email protected]