As per Article 286 of the Constitution of India, the
transactions taking place in the course of import and export are made immune
from levy of sales tax. In pursuance of the said article, the transactions of
sale/purchase in course of import/export are defined in S. 5 of the CST Act,
1956. The transaction of sale in course of import is defined in S. 5(2) of the
CST Act, 1956. The said Section is reproduced below.
“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 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. As per the first
limb, the sale/purchase occasioning the movement of goods from foreign country
is considered to be in course of import. Therefore, the transaction of direct
import is covered by this category. In addition to the above, there is scope to
cover further transaction also as in course of import under this limb. For
example, after import of goods, they may be required to be delivered to local
party by way of sale. If inextricable link between import and such local sale is
established, then such local sale will also be deemed to be in the course of
import covered by the above first limb and it will be exempt.
The second limb covers transactions which are effected by
transfer of documents of title to goods before the goods crosses Customs
frontiers of India. However, discussion herein is about first limb and hence
this limb is not discussed further.
In relation to the first limb, there are a number of
judgments. However, in spite of the above, it is always a debatable issue. More,
there was no direct judgment of the Supreme Court in relation to first limb
vis-à-vis works contract transactions. Therefore, there were different views
in favour and against. However, now the Supreme Court had an occasion to deal
with the said controversy. The Supreme Court has given its judgment in the case
of Indure Ltd. & Another v. Commercial Tax Officer & Others, (34 VST 509)
(SC).
The facts of this case are that N.T.P.C. invited global bids
for its ash handling plant, Farakka Super Thermal Power Project. The contract
was termed as ‘on turnkey basis’. Indure Ltd. was one of the bidders. After
submission of the bid, there were personal meetings and Indure Ltd. was the
successful bidder. The contract was divided into two separate contracts, (i)
supply contract, and (ii) erection contract. However, even if the two contracts
were stated to be separate, the Supreme Court has observed that it was only one
contract, as N.T.P.C. kept right with it, with regard to cross-fall breach
clause, meaning thereby that default in one contract would tantamount to default
in another. Therefore the issue was decided considering the transaction as works
contract. Amongst others, there were terms about imported material. The said
clauses are reproduced in the judgment as under :
“4.5.1 . . . . . . . . . For equipment of non-Indian
origin, you shall submit the details of the indices and co-efficient in line
with the provisions of bid documents within three months of the date of this
award letter.
4.5.2 The list of components/material/equipment to be
imported by you, for which the adjustment on exchange rate variation is to be
made under US$, DM and J yen will be furnished by you within three months of
the date of this award letter. The items as declared as per these lists shall
only be eligible for exchange rate variation claims.”
In light of further deliberations with N.T.P.C., Indure Ltd.
was to import MS pipes from South Korea. The company thereafter submitted
application before the DGTD, Import Export Directorate, for Special Imprest
Import Licence against the above turnkey contract. The licence was granted
mentioning in it that all components to be imported were to be exclusively used
by Indure Ltd. for the above project. On the MS pipes so imported, special
markings mentioning the name of the project were made.
The above sale by Indure Ltd., to N.T.P.C. was claimed as
sale in course of import and hence exempt. The West Bengal Sales Tax authority
held that it was not obligatory for Indure Ltd. to import the goods. It was
contended that the only obligation of the company was to complete the project
and the components should meet the required specification, irrespective of fact
whether they are imported or otherwise. Therefore, the contention was that there
is no inextricable link and S. 5(2) of the CST Act, 1956 will not apply. The
above position was confirmed up to the High Court.
The Supreme Court dealt with the issue elaborately. It also
made reference to earlier decided cases. Citing judgment in the case of K.G.
Khosla & Co. (P) Ltd. v. Deputy Commissioner of Commercial Taxes, (17 STC
473) (SC), the Supreme Court reproduced the following para from the said
judgment :
“The next question that arises is whether the movement of
axle-box bodies from Belgium into Madras was the result of covenant in the
contract of sale or an incident of such contract. It seems to us that it is
quite clear from the contract that it was incidental to the contract that the
axle-box bodies would be manufactured in Belgium, inspected there and imported
into India for the consignee. Movement of goods from Belgium 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 these goods being
diverted by the assessee for any other purpose. Consequently we hold that the
sales took place in the course of import of goods within S. 5(2) of the Act,
and are, therefore, exempt from taxation.”
The Supreme Court also referred to the judgment in the case
of State of Maharashtra v. Embee Corporation, (107 STC 196) (SC). Further, the
Supreme Court also referred to the judgment in the case of Deputy
Commissioner of Agricultural Income-tax and Sales Tax, Ernakulam v. Indian
Explosives Ltd., (60 STC 310) (SC). The Supreme Court reproduced
observations from the above judgment and the following portion from the said
reproduced part is reproduced below :
