FEBRUARY 27, 2012

By Ajay Deoras

THE Constitution of India under Article 286 (1) provides that “ No law of a State shall impose a tax on the sale or purchase of goods where such sale or purchase takes place – a) Outside the State or b) in the course of import of the goods or export of the goods out of the territory of India. However, the Constitution has not defined the terms such as “outside the State “or “in the course of import” or export”. This particular determination, therefore, came up before the judiciary. There were initially two cases before the Supreme Court, better known as the Bombay Company Ltd (3 STC 434) and Shanmugha Vilas Cashew-nut Factory (4 STC 205) cases. The decisions (vide judgments dated 16 Oct 1952 and 8 May 1953 respectively) in these cases received scripture-like importance on the subject since there was no legislative guidance in the form of special Central Act dealing with sales in relation to interstate trade and foreign trade other than the Sea Customs Act of 1868 and Land Customs Act of 1924. In the meantime, the Apex Court delivered a judgment dated 30 March 1953 in the case of United Motors (4 STC 133) which created hardships for the States as well as the traders. However, this judgment was quickly overruled by another judgment of the Supreme Court dated 6 September 1955 in Benga l Immunity (6 STC 446). Soon after this judgment, the Constitution was amended by the Parliament by enacting the Constitution (Sixth amendment) Act, 1956, dated 11 September 1956 whereby the original explanation to article 286(1) was deleted and sub-Article (2) was inserted in Article 286. Because of this amendment, the parliament got the power to make law formulating the principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in Article 286(1). Thereby, List I of the Seventh Schedule of Constitution was amended by adding entry No. 92A authorizing the Parliament to legislate about Inter-State Trade Transactions. The Central Sales tax Act , 1956 was then enacted under such authority.

Even though the CST Act was enacted, there was no specific definition of the term “Crossing the customs frontier of India” in relation to sale in the course of Import or export of the goods; hence the reliance was mainly on the provisions contained in the Sea Customs Act. So, fresh disputes started between the assessee and the Sales tax department as to what constitutes “Customs Frontier”.

In the case of Caltex (India) Ltd (13 STC 163), Madras high court observed as under: “The argument that the goods have not crossed the customs frontier and that they cannot be deemed to have done so till the duty has actually been paid and the goods have been cleared for home consumption fails to impress us. The customs frontier is only a notional barrier. When once the goods have been landed at a custom port and have been subjected to tax in the sense that levy of tax has been made thereon, even though the goods might not have been cleared for home consumption, the proper view to take should be that the goods have ceased to be part of the import stream and have notionally crossed the customs frontier. There is thereafter no objection to the goods being brought into the country and the mere fact that the importer, for the purposes of his own convenience, warehouse the goods and thereby postpones the payment of the duty levied on the goods cannot be taken to indicate that the goods are still beyond the customs frontier”.

However, While dealing with this subject, a two member bench of the Supreme Court while delivering the judgment in the case of Davar and Company (24 STC 481) for the transactions which took place in Oct 1957 observed as under:

“The expression “Customs frontier of India” in section 5 of the Central Act, in our opinion, must be construed in accordance with the notification by the Central government under section 3-A of the Sea Customs Act (which defined customs frontier of India as the boundaries of the territory including territorial waters of India) read with the proclamation of the President of India.”

However, this Supreme Court judgment invited practical difficulties, as the actual point of time when a ship crosses the territorial waters of India could not be ascertained. In the meantime, Customs Act of 1962 came into being after consolidation of the then Sea Customs Act, Land Customs Act and Air Customs Act. Customs Act of 1962 provided for various distinct areas such as Customs Area, Customs Station and Warehousing Station. It also distinguished between the imported goods and Warehoused goods. Even though there was no definition of the term Customs frontiers, definition was provided in respect of Indian Customs Water.

In view of the complexity involved in the determination of Customs frontier for the purposes of Central Sales tax Act, the matter was referred to the law Commission. Law Commission recommended the amendment to Section 2 of the CST Act. Accordingly, the CST Act was amended prospectively with effect from 7 September 1976 and the definition of “Crossing the Customs Frontier” was inserted. The said definition reads as under:

Section 2(ab) of the CST Act : “ Crossing the Customs Frontier” means crossing the limits of the area of the customs station in which the imported goods or export goods are ordinarily kept before clearance by the customs authorities”. Explanation added to the above definition states that “for the purposes of this clause, “Customs station” and “Customs authorities” shall have the same meanings as in the Customs Act, 1962”.

It is important to note the “Statement of Objects and Reasons (SOR)” in regard to the above definition which read as under:

“The phrase (Customs frontier) had been interpreted to mean, coterminous with the extent of the territorial waters. This had given rise to practical difficulties as it was difficult to determine whether, at the time of the sale or purchase, the goods had entered or crossed the territorial waters. The actual checking ( Emphasis supplied ) of the goods took place in the customs station ( Emphasis supplied) and not at the edge of the territorial waters . It was, therefore, necessary to so define the expression”.

Thus, definition in the CST Act crystalised the definition of the term” Customs Frontier” by equating it and limiting it to the area of the “Customs station” and not any further for the purposes of the CST Act.

In spite of the amendment in the CST, there has been difference of opinions as regards the position of goods stored in the Bonded warehouse and goods in Duty free shops in view of loose wording – “in which imported goods or export goods are ordinarily kept before clearance by Customs Authorities” (hereinafter referred to as “said wordings” ) – used in relation to Customs Station while defining the phrase “crossing the customs frontier” under the Central Sales tax Act whereas the said wordings have been used in the sense of Warehousing stations and Duty-free shops while defining the term “Customs Area” under the Customs Act. This apart, even in the Customs Act the Chapter VII, Section 45 talks about Customs Area whereas Section 48 talks about Customs Station in respect of unloading of the imported goods.

It is observed that conflicting view in the judicial decisions are found also due to facts that – appropriate provisions of law were not pleaded before the Courts or that the Courts took certain position based on the specific matter raised in the appeal. A quick look at few conflicting case-laws in the recent past is worth mentioning before moving further:

A) Case-laws in which sale in the course of Import was disallowed :

1) Indo tex export House P ltd: Maharashtra Sales tax larger Bench Tribunal vide its judgment dated 17 June 1995 (refer 13 MTJ 147) disallowed sale in the course of import from Bonded warehouse.

2) Indo Burma Trading Corporation: Single Bench of Maharashtra Sales tax Tribunal vide its judgment dated 23 July 2004 (refer 30 MTJ 443) in this case affirmed the decision in 13 MTJ 147.

3) MMTC (refer 110 STC 394): Division bench of AP High Court in this case held the meaning of “crossing the customs frontier of India” as time when Bill of entry is filed and the duty is assessed.

B) Case-laws in which the sale in the course of Import was allowed :

1) State Trading Corporation: Division bench of Madras High Court on 17 October 2001(refer 129 STC 294) in this case dissented from MMTC – 110 STC 394 and allowed the High seas sale from Bonded warehouse. It held that The crucial event for the purpose of sections 2(ab) and 5(2) of the Central Sales Tax Act, 1956 is the crossing customs frontier, i.e., crossing the (Outer) limits of the area of the customs station in which goods are stored and not when the goods land in India or enter the territorial waters. This decision relied on the decision of the Apex Court dated 5 August 1999 in the case of Kiran Spinning Mills (refer 113 ELT 753).

2) Radha Sons International: Division bench of the Maharashtra Sales tax Tribunal on 9 October 2007 (refer 37 MTJ 195) in this case followed the judgment in 129 STC 294 and allowed high seas sale. However reference has been filed against this judgment in the Bombay High Court. vide reference App. No. 45& 46 of 2008 dt.24-6-2008.

3) Hotel Ashoka: A two-member bench of the Supreme Court in this case while delivering the judgment on 3 Feb 2012 relied on the definition of Customs Area as per Customs Act, 1962 and held that – duty free shops are outside the customs frontier of India. Accordingly, sale inside duty-free shops is a sale in the course of Imports into India. The decision has far reaching implications in various aspects of law -

a) This decision has a bearing on not only the revenue of the Karnataka State but all other States where the goods are imported

b) This decision has placed reliance on the Customs Act instead of the provisions available under the Central Sales tax Act

c) This decision will affect all the transaction involving high seas sale – the dealers will take this case as precedent and structure the transactions without making endorsement on the document of title

d) This decision will also affect the entire transaction involving sale in transit in the course of interstate trade in India wherein the dealers will take this transaction as pari material and claim exemption without endorsing the transit document such as lorry receipt.

e) This decision will also affect many pending Special Leave Petitions and Writ petitions wherein the dealers have approached the higher Courts without exhausting other equally efficacious remedies.

f) This decision will also affect new appeals wherein the dealers may approach higher judiciary directly and add to the existing burden of the Court.

g) This decision may also have implications on the transactions of sale in the course of export out of India.

h) This decision will also affect the sales made from Special economic zones to Domestic tariff areas of India.

Against the backdrop of Above referred judicial pronouncements and discussion , we need to re-look into the legislative intention of defining the term” crossing the customs frontier of India” in CST Act vis-à-vis the provisions in the Customs Act, to arrive at proper conclusion.

Legislative intention:

a) The need to define the expression “crossing the customs frontier of India” arose because of the uncertainty over the meaning of the expression “crossing the territorial waters of India” as held in Davar’s case cited supra.

b) The phrase “entering” was not intentionally used by the lawmakers instead of the words “crossing” because Section 5 does not deal with Imports alone, it deals with Exports as well.

Thus, while crossing the customs frontier for Imports would mean the stage of assessment of the Bill of entry, for Exports it would mean stage of assessment of the Shipping Bills.

c) The point of levy of duty in Customs Act is after “Crossing the Customs Barrier” which is nothing but crossing the Customs Area” whereas the point of levy of Local Sales tax is after“Crossing the Customs Frontier” which is nothing but crossing the Customs Station”. Hence, lawmakers intentionally choose the phrase “Customs station” instead of the phrase “Customs area” while defining the term “Crossing the customs frontier” in the Central Sales tax Act.

d) Intention of the lawmakers can also be gathered from the fact that the very genesis of defining the phrase “crossing the customs frontier” was to decide the common criteria for both exports and imports and in that case it can be no better than the stage of earliest assessment of duty for exports and imports. Thus in case of imports, assessment on the Bill of Entry for home consumption or Bill of entry for warehousing whichever comes first and in case of exports assessment on the appropriate Shipping Bill shall be the stage of crossing the customs frontier. Even otherwise, the stage of crossing the customs frontier cannot be postponed till the time of filing the ex- Bond Bill of entry for home consumption because the goods can be warehoused for a normal period upto one year in a bonded warehouse before being cleared for home consumption. The intention is not to postpone the exemption for a period upto one year in that case. Parallel analogy can be extracted from the section 3 of the CST Act. While delivering the judgment in the case of P.U.Usha ( 5 VST 484), the Division Bench of the Kerala High Court has held that Section 3 of the CST Act does not permit expansion of movement of the goods beyond physical landing. Thus, the claim of sale–in-transit under section 3, by transfer of document of title (Lorry receipt / Railway receipt) cannot be allowed simply because the goods are lying in warehouse of the transporter. On a similar footing, the claim of sale-in-transit under section 5, by transfer of document of title (Bill of lading) cannot be allowed simply because the goods are lying in the bonded warehouse in the customs area.

Relevant provisions in the Customs Act

A) Customs area vis-à-vis Customs station: As per Section 2(11) – Customs area means the area of a customs station and includes any area in which imported goods or export goods are ordinarily kept before clearance by Customs Authorities; whereas as per Section 2(13) – Customs station means any customs port, customs airport or the land customs station.

From the bare perusal of the above definitions, it is clear that “Customs area” is a wider area as compared to the area of the “Customs station”. Customs Area includes Customs Port, Customs Airport, Customs Land Station and areas such as Warehousing stations and Duty free shops whereas Customs stations include only Customs Port, Customs Airport, and Customs Land Station.

B) Bonded warehouse vis-à-vis Customs station: As per Section 48 of the Customs Act, If any goods brought into India from a place outside India are not cleared for home consumption or warehoused or transshipped within 30 days from the date of the unloading thereof at a customs station, such goods may, after notice to the importer be auctioned.

Generally, warehousing is preferred in cases where the importer wants to defer the payment of customs duty. He can supply the goods to his buyers from warehouse after paying the customs duty. However, to keep the goods in warehouse, the importer has to remove goods from the Customs station by filing Bill of entry for warehousing and execute the Bond with the customs authorities for the amount equal to twice the amount of duty provisionally assessed on such Bill of entry. No doubt, the goods in bonded warehouse remain in the limits of Customs area so that at the time of removal from such warehouse, the importer or the his buyer will have to file Ex- bond Bill of entry for Home consumption, get it finally assessed and make payment of customs duty before the goods can be finally removed from the Customs area or Customs barrier of India.

C) Difference between Imported goods and warehoused goods: The Customs Act has intentionally differentiated between the Imported goods (goods not cleared for home consumption) and warehoused goods (goods deposited in warehouse) while defining these terms separately, meaning thereby that once the goods are sent for warehousing, these goods no more remain imported goods ( meaning that they have crossed customs frontier).

Epilogue:

In view of the above analysis and the factual legal position, conclusion can be drawn and summarised as under:

1) Bonded warehouses is a part of the Customs area and not a part of Customs station

2) “Crossing the customs frontier” for the purposes of the CST Act is coterminous with the –

a) date of assessment of Bill of entry for home consumption,

b) date of provisional assessment of Bill of entry for Bonded warehouse in case of imported goods and

c) date of assessment of Shipping Bill or Bill of export in case of Export goods.

3) The res judicata in the Kiran Spinning Mills cannot be taken as pari materia for the purposes of resolving the issue of crossing the customs limits under sales tax simply because the taxable event in Customs Act is “crossing-over” the Customs limit (Customs barrier) whereas the taxable event in the Sales tax is crossing-inside” the customs limits ( customs frontier).

(Author is ex-Deputy Commissioner of Sales tax, Maharashtra State and currently working with Tata Consultancy Services as domain expert. The views expressed are personal and do not in any way represent the views of the organization)