Sale in course of Import vis-a-vis Works Contract
Whether sale in course of import is permissible when the transaction is for execution of works contract?
Under VAT era one of the important Constitutional exemptions was for sale in course of import. A sale transaction taking place in course of import could not be taxed as per Article 286 of the Constitution of India. The transaction in course of import was defined in section 5(2) of CST Act, 1956, which reads as under:
“S.5. When is a sale or purchase of goods said to take place in the course of import or export –
(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 or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India……..”
It can be seen that two limbs were covered by above section. One, sale occasioning import and second, sale by transfer of documents of title to goods before goods cross Customs frontiers of India. Many a time dispute arises about first limb, as to what is its scope.
There were disputes as to whether such claim of sale in course of import is eligible when the transaction is for execution of works contract. There are number of pronouncements. However, the recent one decided by Hon. MST Tribunal in case of Larsen and Toubro Ltd. – Scomi Engineering, BHD (VAT App. No. 353 of 2015 dated 30-10-2017) can be analysed to see the scope of said exemption.
In this case the facts were that M/s. Larsen and Toubro Ltd. – Scomi Engineering, Berhad (“LTSEB” for the sake of brevity), Consortium was a registered dealer under the Maharashtra Value Added Tax Act, 2002 and under the Central Sales Tax Act, 1956. The Mumbai Metropolitan Regional Development Authority invited pre-qualification applications from entities interested for the design, development, construction, commissioning, operation and maintenance of Monorail System on turnkey basis in Mumbai Metropolitan Region. Since the project involved civil work as well as manufacture of goods of rolling stock, designing etc., and since Larsen and Toubro Ltd. was having expertise in civil work and Scomy Engineering, Berhad (based in Malaysia) has expertise in manufacture of goods, designing, installing etc., both of them jointly submitted an application for qualifying to bid in response to the said request of MMRDA. Thereafter, MMRDA issued a request for proposal inviting bids for the design, development, construction and maintenance of Monorail System. Accordingly, the consortium of Larsen and Toubro Ltd. and SEB submitted its response and submitted a proposal for manufacture and import amongst others of rolling stock from Malaysia. The joint bid was accepted by MMRDA by a letter of acceptance dated 7-11-2008. Accordingly, a contract was executed between MMRDA on one part and consortium of Larsen and Toubro Ltd., and SEB on the other part on 9-1-2009. By this contract, MMRDA awarded to LTSEB a contract for planning, designing, development, construction, manufacture, supply of Monorail System from Sant Gadge Maharaj Chowk to Wadala and from Wadala to Chembur Station. Larsen and Toubro and SEB thereafter divided their respective scope of work in accordance with the bid submitted by them and a contract was executed between two members of the consortium LTSE and SEB on 29-3-2010. In this contract, the portion of the work related to SEB was recorded for the design and supply of certain goods i.e., rolling stock, signaling equipment, switch equipment and deco equipment from outside India. These goods were manufactured by SEB in Malaysia in terms of the bid submitted by MMRDA. The appellant LTSE – SEB filed an application for determination of disputed question to the Commissioner of Sales Tax. By this application, the following question was referred to the Commissioner for determination – “Whether the rolling stocks imported pursuant to the contract with MMRDA and supplied in the course of execution of Monorail Project constitutes a transaction in the course of import u/s. 5(2) of the CST Act, 1956 and not liable to tax u/s. 8(1) of the MVAT Act, 2002?”
The Commissioner of Sales Tax rejected the claim of exemption under section 5(2) of CST Act. Hence this appeal was filed before Tribunal.
The main submission on behalf of appellant was that the transaction of import was integrated with local works contract transaction.
For throwing light on same various factors of transaction were explained like, specifications for manufacture, imported goods not usable elsewhere and meant only for given contract with MMRDA and other clauses in contract about inspection/testing etc., were pointed out.
Based on above facts it was submitted that either it is one direct import transaction between appellant and MMRDA or even if they are considered to be two sales one between Scomy Engineering, Berhad (based in Malaysia) and Consortium and other between consortium and MMRDA, still the second transaction is exempt as it is the sale which has occasioned import and hence exempt.
Reliance was place on Hon. Supreme Court judgment in case of K. G. Khosala (17 STC 473)(SC) and ABB Ltd. (55 VST 1)(Delhi).
Sales Tax Department argued that no privity of contract has been made out. There are two sales and the local sale cannot fall under section 5(2). Reliance was placed in case of K. Gopinathan Nair and Others v. State of Kerala (97 STC 189)(SC). The manufacturing as per specification was disputed on ground that only requirements were stated by MMRDA and specification are given subsequently, which cannot satisfy condition of inextricable link.
Tribunal thereafter analysed the agreements. Tribunal found that the specifications are mentioned in contract with manufacturing place at Malaysia.
About nature of consortium existence and inextricable link, Tribunal observed as under:
“20. The issue as to whether a nexus appears in the contract between MMRDA and movement of goods from Scomi Engineering, Malaysia. One has to read the terms of the contract as a whole. It has been argued before us by the learned Senior Counsel Shri Sridharan that Larsen and Toubro and Scomi Engineering formed a consortium which is neither partnership firm nor a company and nor an association of persons. It is an unincorporated consortium. It can be seen that unincorporated consortium cannot be a legal entity in the eyes of law. Scomi Engineering, which is one of the members of the consortium is itself a manufacturer and supplier of rolling stock from Malaysia. This suggests that though consortium members are executing the contract jointly, they have separate existence. If the contract is perused, on page 140 of the compilation containing contract agreement, it is mentioned in para A.1.1 that Larsen and Toubro Ltd. is India’s largest engineering and construction conglomerate with additional interest in electrical, electronics etc. Whereas in the same para, it is also mentioned that Scomi Engineering, Berhad (SEB) is a public limited company listed on the Kuala Lumpur Stock Exchange. His business focus is in the energy and logistic engineering which comprises OCTG machine shops and transportation engineering such as monorail, buses and special purpose vehicle. It is further mentioned that wholly owned subsidiary Scomi Rail, Berhad is renowned for its monorail system. These recitals in the contract show that Larsen and Toubro and Scomi though formed a consortium, they were specialised in two separate fields and each had shared execution of that part of work in which each was specialised. On page 70 of the contract, work share apportionment between consortium members is demarcated. It shows that 30% of the project value of rolling stock will be shared exclusively by Scomi Engineering. Similarly, 8% of the project value of E & M work will be shared exclusively by Larsen and Toubro. It shows that rolling stock is the responsibility of SEB whereas automatic fare collection system is the responsibility of Larsen and Toubro. Thus, the contract shows that the consortium members will operate in two separate fields, one with engineering work and the other with manufacturing, designing and maintenance of rolling stock. In the present case, Scomi Engineering, Berhad Malaysia which supplied rolling stocks is one of the members of the consortium and therefore the question naturally arises as to whether the person can sell goods to himself. Moreover, the parties are covered by the contract between MMRDA and consortium and therefore we have to look into the terms and conditions of the said contract to examine as to whether the movement of goods from Malaysia was in pursuance of the contract between consortium and MMRDA. The terms clearly show that the contract was executed by MMRDA with full understanding that Scomi Engineering, Malaysia is one of the members of the consortium which is expert and skilled in designing and manufacturing of rolling stock and the rolling stock will be manufactured in Malaysia and will be supplied to MMRDA. Therefore, there is merit in the argument of Shri S. Sridharan that merely because rolling stocks are first sent to Nhava Sheva port and they are delivered to consortium and then consortium delivered the same to MMRDA, inextricable link is not broken down.”
Tribunal observed about various judgments cited before it. Tribunal also referred to various other documents filed before it. About application of judgment cited by Sales Tax Department, Tribunal observed as under:
“38. Since Shri Sonpal has argued that the principles laid down by the Hon’ble Supreme Court in the case of K. Gopinathan Nair are not fulfilled in the present case, we have perused the said authority. The main principles laid down in that case are that a sale or purchase can be treated to be in the course of import if there is a direct privity of contract between the Indian importer and the foreign exporter and the intermediary through which such import is effected merely acts as an agent or a contractor for and on behalf of the Indian importer. Thus, it is also laid down that there must be either a single sale which itself causes the import or is in the progress or process of import or though there may appear to be two sale transactions they are so integrally interconnected that they almost resemble one transaction. If these tests are considered and the present contract is seen, it must be seen from the documents filed by appellant that though there was no express condition in the covenant that rolling stock should be imported from Malaysia, such understanding between the parties can be inferred since Scomi Engineering, BHD is one of the members of the consortium and in the document of contract, it is mentioned that Scomi Engineering has all the manufacturing unit in Malaysia. Section 5(2) of the CST Act requires that movement of the goods from foreign country should be in pursuance of the contract. From the terms of the contract, it appears that the intended movement of goods from Malaysia was envisaged by terms of the contract and it was within the contemplation of the parties and therefore it can be reasonably presumed that such movement was to fulfil the terms of the contract. When it is so, it has to be said that the goods moved from Malaysia as a part of single transaction. Even if for the sake of argument, it is held that there are two transactions of sale between MMRDA and consortium and the other between Scomi Engineering, BHD Malaysia and consortium, then also the two transactions are so connected integrally that they are inseparable. Therefore, we are not inclined to accept the argument of Shri Sonpal that conditions laid down in K. Gopinathan Nair’s case are not satisfied in this case.”
Observing as above, Tribunal concurred with appellant that its sale is in course of import covered by section 5(2) of CST Act.
Thus, the legal position is that the exemption under section 5(2) of the CST Act is eligible even though the transaction is works contract. However, the inextricable link between import and local transaction is required to be brought on record.
When the transactions are regarding specifically made goods then to establish the link is comparatively smooth. However, when the goods are standard goods more detailed contracts are required. Thus, section 5(2) exemption can be claimed with proper supporting documents.