Sale In The Course Of Import Vis-À-Vis Works Contract

Introduction

Under Sales Tax Laws, sales effected in the course of import
are exempt. The protection is given by Article 286 of the Constitution of
India. The nature of sale in the course of import is defined in section 5(2) of
the CST Act, 1956 which is as under;

“(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 there are two limbs in above
section.   The first limb covers the sale
which occasions the import.  The second
limb covers sales which are effected by transfer of documents of title to goods
before the goods cross Customs Frontiers of India.

In relation to first limb, there are a number of precedents.
There are cases, where importer has committed sale of goods to be imported, to
its buyer and the actual import is made after such commitment. The first sale
by foreign seller to importer is occasioning the import and hence covered by
first limb. However, it is also possible that the sale made by importer to the
local buyer after import can be covered by the said first limb. However, the
issue is debatable and depends upon facts of each case.

After the 46^th amendment to the Constitution, the
works contract sales are also brought in taxable net under sales tax laws.
Issue arises as to whether the theory of sale in the course of import, more
particularly sale to local buyer, after import, can be covered within first
limb of section 5(2) of the CST Act.

Inextricable link

For claiming sale to local buyer after import, as covered by
first limb as sale in the course of import, it is necessary that there is
inextricable link between import and local sale. In other words, it is required
to be seen whether the import and local sale after import are interlinked.
There are number of criteria to decide inextricable link.

Judgment of Supreme Court

Recently, the Hon’ble Supreme Court had an occasion to decide
such an issue. The judgment is in case of Commissioner, Delhi Value Added
Tax vs. ABB Ltd. (91 VST 188). The short facts of the case noted by the
Hon’ble Supreme Court are as under;

“3. Before adverting to the main issue as to whether the High
Court judgment is correct in law as well as in facts or not, it would be
appropriate to notice some of the relevant facts. The respondent is a Public
Limited Company engaged, inter alia, in manufacture and sale of
engineering goods including power distribution system and SCADA system. It
appears to be a market leader in power and automation technologies. It is a
subsidiary of ABB Ltd., Zurich Switzerland which has operational presence in
over 100 countries and employs around 1,30,000 personnel. On 15.05.2003 DMRC
invited tenders for supply, installation, testing and commissioning of traction
electrification, power supply, power distribution and SCADA system for Line 3
Barakhamba Road-Connaught Place-Dwarka Section of the DMRC. Respondent
responded.

4. DMRC short listed the respondent and then executed
the contract under which the respondent had to provide transformers,
switch-gears, High Voltage Cables, SCADA system and also complete electrical solution,
including control room for operation of metro trains on the concerned Section.
The Bid Document contained detailed bill of goods, quantities and
specifications for the goods, sources (i.e, name of the manufacturer/brand),
detailed terms and conditions requiring approval of sub-contractors/ suppliers
and testing. The goods as also the components of works required certification
as well as acceptance. The NIT required both, Technical Bid and Financial Bid.
Besides the quotation of lumpsum price for the entire scope of work the Bid
Document required individual breakup of price of goods and other details. Bid
submitted by the respondent finally culminated into a contract on 04.08.2004.
The contract document comprised of Special Conditions of Contract, General
Conditions of Contract etc.”

The Delhi sales tax authorities held that there was no link
between the import and contract between DMRC (contractee) and supplier of goods
i.e. ABB Ltd (importer). In other words the claim of sale, in the course
import, by ABB Ltd to DMRC under works contract was disallowed.

Hon’ble Delhi High Court, after going through the contract
allowed the transaction as sale in the course of import and accordingly held it
exempt. Before the Supreme Court, similar arguments were repeated. In
particular, sales tax department relied upon judgment in case of M/s Binani
Brothers Pvt Ltd (1974)1 SC 459. The Hon’ble High Court has allowed the
claim based on judgment in case of K. G. Khosla & Co AIR 1966 SC 1216.
The Hon’ble Supreme Court dealt with this argument elaborately with
reference to above judgments. The observation of the Hon’ble Supreme Court are
as under :-  

“12. For analysing the main contention advanced on
behalf of the appellant that the present case is identical to that of the
assessee in the case of Binani Bros. (supra), we have examined
the facts of Binani Bros. (supra) with meticulous care. In para
13 of that judgment the most peculiar and conspicuous aspect of K.G. Khosla
case (supra) was noticed and highlighted that “under the contract of
sale the goods were liable to be rejected after a further inspection by the
buyer in India.” In the same paragraph it was further highlighted with the help
of a quotation from K.G. Khosla case (supra) that movement of
goods imported to India was in pursuance of the conditions of the contract
between the assessee and the Director General of Supplies. There was no
possibility of such goods being used by the assessee for any other purpose. In
the next paragraph of the Report the peculiar facts of Binani Bros. (supra)
were highlighted in the following words, “….. the sale by the petitioner to the
DGS&D did not occasion the import. It was purchase made by the petitioner
from the foreign sellers which occasioned the import of the goods”. In paragraph
16 it was further pointed out that there was no obligation on the DGS&D to
procure import licences for the petitioner.

13. There is no difficulty in holding that Binani
Bros. (supra) did not differ with the earlier judgment of a
Constitution Bench in the case of K.G. Khosla (supra). A careful
analysis of the facts in Binani Bros. (supra) leads to a
conclusion that the case of West Bengal Sales Tax authorities in that matter
that there were two sales involved in the transactions in question, one by the
foreign seller to the assessee and the second by the assessee to the DGS&D,
because there was no privity of contract between the DGS&D and the foreign
sellers, was accepted mainly because the assessee was found entitled to supply
the goods to any person, even other than DGS&D because there was no
specification of the goods in such a way as to render it useable only by the
DGS&D. This was coupled with the fact that the latter had imposed no
obligation on the assessee to supply the goods only to itself. Further, there
were no obligations of testing and approving the goods during the course of
manufacture or for that matter, even at a later stage with a right of
rejection. Such a right of rejecting the specific goods in the present case is
identical to the similar right in respect of goods in K.G. Khosla case (supra).
Hence we are unable to accept the main contention of the appellant that this
case is similar to that of Binani Bros (supra). To the contrary, we
agree with the reasonings of the High Court for coming to the view that the
present case is fit to be governed by the ratio laid down in K.G. Khosla’s
case (supra).

14. The legal principles enunciated in K.G. Khosla (supra)
have been reiterated in State of Maharashtra vs. Embee Corporation, Bombay
and stand supported by the judgment in the case of Deputy Commissioner of
Agricultural Income Tax and Sales Tax, Ernakulam vs. Indian Explosives Ltd.,
as well as in Indure Ltd. and Anr. vs. CTO & Ors. In these cases,
sale in course of imports was accepted without requiring privity of contract
between the foreign supplier and the ultimate consumer in India.”

Conclusion