In Pursuit of Knowledge

Sale on highseas — Some issues

Indirect Taxes

‘Highseas sales’ as is commonly understood in the trade is effected to claim exemption from Central Sales Tax (CST). In this article, I propose to touch upon certain issues which have been raised time and again by the Revenue.

1.0 Section 5 of the Central Sales Tax Act, 1956 (CST Act) provides when a sale or purchase of goods would said to take place in the course of import or export.

The popular trade term ‘highseas sales’ is covered by section 5(2) of the CST Act. For sake of convenience section 5(2) is reproduced hereunder:

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.

Closely reading the provisions as above brings out that the section 5(2) has two limbs as under:

First limb:

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

Second limb:

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 is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.

1.1 In case of highseas sales the highseas seller effects the sale by endorsing the Bill of Lading in favour of the highseas buyer. This type of transaction is covered by second limb of the section 5(2) if such endorsement of Bill of Lading is made/takes place before the goods have crossed the customs frontiers of India.

1.2 This requires us to consider the definition of the ‘customs station’ and ‘crossing the customs frontiers of India’.

Section 2(ab) of the CST Act defines the term ‘crossing the customs frontiers of India’. Section 2(ab) reads 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 customs authorities.

Explanation :— for the purposes of this clause, ‘Customs Station’ and ‘Customs authorities’ shall have the same meaning as in the Customs Act, 1962]

The term ‘custom station’ is not defined under the CST Act however, the meaning assigned to it under the Customs Act, 1962 is to be taken.

The Customs Act defines the ‘Custom Station’ as under :

Section 2(13) “Customs station” means any customs port, customs airport or land customs station;

Section 2(11) “Customs area” means the area of a customs station and includes any area in which imported goods or exported goods are ordinarily kept before clearance by Customs Authorities;

1.3 Therefore if the documents to the title to the goods e.g Bill of Lading is endorsed before the goods have crossed the custom station i.e. where the imported goods or exported goods are ordinarily kept before customs clearance, the sale can be claimed as covered by section 5(2) of the CST Act and hence exempt from tax.

In this background, let us consider some issues raised by the Revenue Authorities.

A) Bulk imports

2.0 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.

2.1 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

3.0 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.

3.1 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’.

3.2 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.

3.3 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.
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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.’

3.4 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.

3.5 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.

3.6 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 Fransaction – First limb of section 5(2)

4.0 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…….

4.1 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.

4.2 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

5.0 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

6.0 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.