IntroductionThere existed prior to the amendment in the CST Act, a controversy about determining the ‘situs’ of sale i.e. the State where the sale has taken place and which is the State eligible to levy tax on such sale? There were situations where on one sale, different States were contemplating levy of tax. The State from where goods moved used to claim tax, the State where actually delivery was given was also claiming tax as well as other States, picking up some connection of sale transaction with their State like, receiving payment, raising of invoice and so on.
This was known as nexus theory.
To avoid such a multiple claim, the CST Act was amended. Section 4 was inserted in the Act to determine the ‘situs’ of sale. Section 4(2) is as under:
“Section 4(2) in the Central Sales Tax Act, 1956
(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State—
(a) in the case of specific or ascertained goods, at the time the contract of sale is made; and
(b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation.
Explanation.- Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of this sub-section shall apply as if there were separate contracts in respect of the goods at each of such places.”
The attempt was to crystallise the State of sale. It was provided that the sale will be in the State where the goods are ascertained in relation to contract of sale.
Thus, the nexus theory was given go by and only one State in which physically goods are ascertained in relation to contract of sale, is the State in which sale is deemed to have taken place.
Nexus Theory revisited
The issue has now again come up for discussion. Recently, the Hon. Bombay High Court had an occasion to deal with one such issue. The judgment is in the case of M/s. Raj Shipping (W.P.4552 of 2015 and others) dated 19-10-2015.
Facts of THE Case
The short facts of the case before the Hon. Bombay High Court were as under:
“In the additional affidavit, that is filed, the Petitioner states that it is engaged in the business, namely, Bunker Supplies. Bunker supplies mainly consist of supply of petroleum products such as high speed diesel oil (HSD), light diesel oil (LDO) and furnace oil (FO) to various incoming and outgoing vessels within or beyond the port limits of Mumbai Port. These outgoing vessels, to which the supplies are made, are located beyond approximately 1.55 nautical miles from the coast of Mumbai and are anchored in various anchorage points within the territorial waters of the Union of India, off the coast of Maharashtra. It is stated that the outgoing shipping vessel places an inquiry for the required quantity of HSD with the Petitioner. Pursuant to the inquiry made by the customer, the Petitioner gave a quote for their supplies. In many cases, the Petitioner enters into a formal agreement with their customers for the purchase of HSD. At page 86 of the paper book is one of the illustrative copy of such an agreement. Pages 86 to 89 of the paper book read as under….
81) Thus, pursuant to such agreement or an approval of a quote by the customer, the shipping vessel places a purchase order/nomination with the Petitioner for the required quantity and the name of the vessel to which the supplies are to be made. The illustrative copy of the purchase order/nomination is also at page 90 of the paper book. It is on receipt of the purchase order/nomination from the shipping vessel that the Petitioner, in turn, places a purchase order on any of the oil marketing companies such as M/s. Indian Oil Company Limited, M/s. Bharat Petroleum Corporation Limited, etc. Thereafter, the further documents are prepared, including the shipping bill, and once they are ready, the oil marketing company loads the required quantity of high speed diesel in the tank lorries, which then come to the barge loading point at Mallet Bunder along with the invoice copy of the oil marketing company.
82) The sister concern of the Petitioner owns self propelled barges having large cargo tanks (below deck) ranging from 40 thousand liters (40KL) to 200 thousand liters (200KL). The barges have pumps fitted on them with a flow meter in order to pump out the HSD to the vessel. These are similar to petrol pumps where petrol is sold to the regular customers. At the Mallet Bunder, the HSD supplied by the oil marketing company is decanted into the cargo tanks of the barges owned by the Petitioner. The entire activity of decanting is done under the supervision of a Customs Officer. After taking delivery of the HSD from the oil marketing company, the barges sail to the anchorage point of the nominated vessel.
83) Paras 12 to 15 at pages 82 and 83 of the paper book read as under:
12. After reaching the anchorage point of the nominated vessel, the HSD is pumped out of the barge into the fuel tank or bunker of the nominated vessel. Once the supply is complete, the Master or the Authorised Officer of the vessel acknowledges the receipt of the ordered quantity of HSD on the Bunker Delivery Note (BDN) and the Shipping Bill. An illustrative copy of the Bunker Deliver Note (BDN) duly acknowledged by the officer of the vessel is marked and annexed as Exhibit “7”.
13. The barges go beyond 1.54 Nautical Miles from the base line of the coast of Mumbai to deliver the HSD to the vessels anchored therein, in the territorial waters of the Union of India.
14. After the delivery of the HSD to the nominated vessel is complete, the Petitioner raises an invoice on the shipping line based on the BDN. An illustrative copy of the invoice raised by the Petitioner is marked and annexed as Exhibit “8”. The Petitioner invoices the shipping line for the quantity of HSD actually delivered, along with charges for transportation and hiring of the barge belonging to its sister concern companies. These may be way of a lumpsum rate/KL previously agreed to by the Petitioner or the charges for sale of HSD and transportation may be indicated separately in the invoice.
15) The sister concern of the Petitioner separately charges the Petitioner company for the hire of the barge by the Petitioner company for the purpose of the supplies to be made to various customers. An illustrative copy of a credit note issued by the Petitioner in favour of its sister concern is marked and annexed as Exhibit “9”.”
Arguments of Petitioner
Based on the above facts, the argument of the petitioner was that the sale cannot be said to be in the State of Maharashtra. The territorial water was contended to be not part of the State and hence, the State had no jurisdiction, when sale was taking place in the territorial waters.
Alternatively, it was contended that there could be a tax liability under CST Act but not under MVAT Act. It was also contended that if at all there was a liability in the State, then it would be exempt under the Notification issued u/s.41(4) bearing no.VAT -1505/CR-135/Taxation-1 dated 30-11-2006 wherein sale of motor spirits by retail outlet was exempted from the levy of VAT .
On behalf of Revenue, the arguments were opposed, stating that the State has power to deal with impugned sales.
Hon. Bombay High Court
After considering the facts, contentions & citations from both sides, the Hon. High Court observed as under:
“95) If we apply this principle to the facts and circumstances of the present case, we do not have any hesitation in concluding that it is the goods which have been produced or manufactured or refined by the oil companies and which are drawn from their storage tanks in fixed quantity that are supplied on demand to the Petitioner. The manufacturers as also the refineries are very much within the State of Maharashtra viz. at Mumbai. The Petitioners are at Mumbai. Meaning thereby, their place of business is at Mumbai. It is from that place that the Petitioner requests the oil companies to supply to it the high speed diesel. It is received by the Petitioner from the oil companies at Mumbai. It may be that the Petitioner treats this as a contract on which they paid the sales tax as a component of the price. However, it is that very high speed diesel and supplied to the Petitioner at Mumbai which is carried from Mumbai in furtherance of a contract with parties like M/s. Leighton, which contract is also placed and finalised from Mumbai, through the barges of the Petitioner to the vessels of M/s. Leighton and which may be stationed in the territorial waters. However, Leighton comes in the picture, as have been stated by them, for the purpose of fulfilling a contractual obligation of M/s. ONGC. It is for that obligation to be discharged that they have deployed the vessels. It is these vessels which require the bunker supplies and which supplies are met by the Petitioner. The subject matter of the contract with M/s. Leighton is this high speed diesel or motor spirit which is taken and carried from Mumbai. Therefore, there is sufficient territorial nexus for the Maharashtra Value Added Tax Act to apply and to be invoked to the later sale by the Petitioner of the same goods to M/s. Leighton and other entities similarly placed. We do not see how the Petitioner can escape compliance with this legislation and by contending that the contract of M/s. Leighton being a distinct contract, the sale taking place in territorial waters that the sales tax legislation or the VAT legislation of the Maharashtra State would be applicable. Its applicability has to be tested by applying the above principles and particularly the nexus theory. After having found sufficient territorial connection, namely, between the back to back transaction and the taxing authority that we are not in a position to agree with Mr. Sridharan that MVAT Act is inapplicable.”
Thus, the Hon. Bombay High Court observed that tax applicable can be decided on the nexus theory.
With these observations, the Hon. Bombay High Court has remanded the matter back to authorities under State Act for deciding the correction position.
In other words, there is no finality regarding the issue and it is left to the appellate authorities to decide the taxability including under MVAT /CST and exemption u/s 41(4).
Conclusion
There was a great sigh of relief with the enactment of section 4(2) in the CST Act. It was felt that once the sale is established to be out of state (on which state claimed tax) based on physical ascertainment of goods, there was no taxability in such State. Therefore, it was also felt that if sale is proved to be in an area not falling within the State claiming tax, the claim of non taxability in such State would be upheld.
Some of the expectations from above judgment were about State boundaries, the situs of actual event of sale, the fate of sale taking place in territorial waters etc., in clear terms. However, the said issues remain still burning and are left to be decided by the State Authorities. It is possible that though sale is outside State, still, based on nexus theory the State authorities may attempt to levy tax on such transactions.
Dealers/State may be required to go in for a second round of litigation after the issues are dealt with by the State authorities in assessment, appeals etc. Let’s hope for finality at the earliest.
