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

Introduction

Under VAT era, one of the
important Constitutional exemptions was for sale in course of import. A sale
transaction taking place in course of import could not be taxed as per Article
286 of the Constitution of India. The transaction in course of import was
defined in section 5(2) of CST Act, 1956, which reads as under:

““S.5. When is a sale or
purchase of goods said to take place in the course of import or export –

(1) —-

(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 to the above section. First, sale occasioning import, and second,
sale by transfer of documents of title to goods before goods Crosses Customs
Frontiers of India. Many a time dispute arises about first limb, as to what is
its scope. There are a number of pronouncements. However, the recent one
decided by Hon. M.S.T. Tribunal in case of Larsen and Toubro Ltd. – Scomi
Engineering, BHD (VAT App.No.353 of 2015 dated 30.10.2017) can be analysed
to see the scope of said exemption.

Facts of the case

Hon. Tribunal has noted
facts as under:

“The factual background of
this appeal can be stated as below – Appellant, M/s.Larsen and Toubro Ltd. –
Scomi Engineering, Berhad (“LTSEB” for the sake of brevity), Consortium is a
registered dealer under the Maharashtra Value Added Tax Act, 2002 (“MVAT Act”
for short) and under the Central Sales Tax Act, 1956 (“CST Act” for short)
bearing Registration No.27870728473V and 27870728473C respectively. The Mumbai
Metropolitan Regional Development Authority invited pre-qualification
applications from entities interested for the design, development,
construction, commissioning, operation and maintenance of Monorail System on
turnkey basis in Mumbai Metropolitan Region. Since the project involved civil
work as well as manufacture of goods of rolling stock, designing etc.
and since Larsen and Toubro Ltd. is having expertise in civil work and Scomy
Engineering, Berhad (based in Malaysia) has expertise in manufacture of goods,
designing, installing etc., both of them jointly submitted an
application for qualifying to bid in response to the said request of MMRDA.
Thereafter, MMRDA issued a request for proposal inviting bids for the design,
development, construction and maintenance of Monorail System. Accordingly, the
consortium of Larsen and Toubro Ltd. and SEB submitted its response and
submitted a proposal for manufacture and import amongst others of rolling stock
from Malaysia. The joint bid was accepted by MMRDA by a letter of acceptance
dated 07/11/2008. Accordingly, a contract was executed between MMRDA on one
part and consortium of Larsen and Toubro Ltd. and SEB on the other part on
09/01/2009. By this contract, MMRDA awarded to LTSEB a contract for planning,
designing, development, construction, manufacture, supply of Monorail System
from Sant Gadge Maharaj Chowk to Wadala and from Wadala to Chembur Station.
Larsen and Toubro and SEB thereafter divided their respective scope of work in
accordance with the bid submitted by them and a contract was executed between
two members of the consortium LTSE and SEB on 29/03/2010. In this contract, the
portion of the work related to SEB was recorded for the design and supply of
certain goods i.e. rolling stock, signaling equipment, switch equipment and
deco equipment from outside India. These goods were manufactured by SEB in
Malaysia in terms of the bid submitted by MMRDA. The appellant LTSE – SEB had
filed an application for determination of disputed question to the Commissioner
of Sales Tax. By this application, the following question was referred to the
Commissioner for determination – “Whether the rolling stocks imported pursuant
to the contract with MMRDA and supplied in the course of execution of Monorail
Project constitutes a transaction in the course of import u/s. 5(2) of the CST
Act, 1956 and not liable to tax u/s.8(1) of the MVAT Act, 2002?”

3. After giving elaborate
hearing to both sides, the Commissioner of Sales Tax answered this question in
the negative holding that the import of rolling stocks and supplied to MMRDA in
the course of execution of Monorail Project does not constitute a transaction
in the course of import u/s. 5(2) of the CST Act and it is a local sale liable
to tax under the provisions of the MVAT Act. Being aggrieved by the order of
determination of disputed question, the appellant consortiums have approached
the Tribunal in appeal.”

Submission of appellant

The main submission on
behalf of appellant was that the transaction of import was integrated with
local works contract transaction.

For throwing light on same
various factors of transaction were explained like, specifications for
manufacture, imported goods not useable elsewhere and meant only for given
contract with MMRDA and other clauses in contract about inspection/testing etc.
were pointed out.

Based on above facts it was
submitted that either it is one direct import transaction between appellant and
MMRDA or even if they are considered to be two sales one between Scomy
Engineering, Berhad (based in Malaysia) and Consortium and other between
consortium and MMRDA, still the second transaction is exempt as it is the sale
which has occasioned import and hence exempt. Reliance was place on Hon.
Supreme Court judgment in case of K. G. Khosala (17 STC 473)(SC) and ABB Ltd.
(55 VST 1)(Delhi).

Submission of Department

On behalf of Sales Tax
Department, it was argued that no privity of contract has been made out. There
are two sales and the local sale cannot fall under section 5(2). Reliance was
placed in case of K. Gopinathan Nair and others vs. State of Kerala (97
STC 189)(SC). The manufacturing as per specification was disputed on
ground that only requirements were stated by MMRDA and specification are given
subsequently, which cannot satisfy condition of inextricable link. Judgement in
ABB Ltd. was tried to be distinguished on above facts.   

Tribunal’s Observations

The Tribunal thereafter
analysed the agreements. The Tribunal found that the specifications are
mentioned in contract with manufacturing place at Malaysia. About the nature of
consortium existence and inextricable link, the Tribunal observed as under:

“20. The issue as to
whether a nexus appears in the contract between MMRDA and movement of goods
from Scomi Engineering, Malaysia. One has to read the terms of the contract as
a whole. It has been argued before us by the learned Senior Counsel Shri.
Sridharan that the Larsen and Toubro and Scomi Engineering formed a consortium
which is neither partnership firm nor a company and nor an association of
persons. It is an unincorporated consortium. It can be seen that unincorporated
consortium cannot be a legal entity in the eyes of law. Scomi Engineering,
which is one of the members of the consortium is itself a manufacturer and
supplier of rolling stock from Malaysia. This suggests that though consortium
members are executing the contract jointly, they have separate existence. If
the contract is perused, on page 140 of the compilation containing contract
agreement, it is mentioned in para A.1.1 that Larsen and Toubro Ltd. is India’s
largest engineering and construction conglomerate with additional interest in
electrical, electronics, etc. Whereas in the same para, it is also
mentioned that Scomi Engineering, Berhad (SEB) is a public limited company
listed on the Kuala lampur Stock Exchange. His business focus is in the energy
and logistic engineering which comprises OCTG machine shops and transportation engineering
such as monorail, buses and special purpose vehicle. It is further mentioned
that wholly owned subsidiary Scomi Rail, Berhad is renowned for its monorail
system. These recitals in the contract show that Larsen and Toubro and Scomi
though formed a consortium, they were specialised in two separate fields and
each had shared execution of that part of work in which each was specialised.
On page 70 of the contract, work share apportionment between consortium members
is demarcated. It shows that 30% of the project value of rolling stock will be
shared exclusively by Scomi Engineering. Similarly, 8% of the project value of
E & M work will be shared exclusively by Larsen and Toubro. It shows that
rolling stock is the responsibility of SEB whereas automatic fair collection
system is the responsibility of Larsen and Toubro. Thus, the contract shows
that the consortium members will operate in two separate fields, one with
engineering work and the other with manufacturing, designing and maintenance of
rolling stock. In the present case, Scomi Engineering, Berhad, Malaysia which
supplied rolling stocks is one of the members of the consortium and therefore
the question naturally arises as to whether the person can sell goods to
himself. Moreover, the parties are covered by the contract between MMRDA and
consortium and therefore we have to look into the terms and conditions of the
said contract to examine as to whether the movement of goods from Malaysia was
in pursuance of the contract between consortium and MMRDA. The terms clearly
show that the contract was executed by MMRDA with full understanding that Scomi
Engineering, Malaysia is one of the members of the consortium which is expert
and skilled in designing and manufacturing of rolling stock and the rolling stock
will be manufactured in Malaysia and will be supplied to MMRDA. Therefore,
there is merit in the argument of Shri. S. Sridharan that merely because
rolling stocks are first sent to Nhava Sheva port and they are delivered to
consortium and then consortium delivered the same to MMRDA, inextricable link
is not broken down.”

The Tribunal observed about
various judgments cited before it. The Tribunal also referred to various other
documents filed before it. About application of judgment cited by Sales Tax Department,
the Tribunal observed as under:

“38.  Since Shri Sonpal has argued that the
principles laid down by the Hon’ble Supreme Court in the case of K. Gopinathan
Nair are not fulfilled in the present case, we have perused the said authority.
The main principles laid down in that case are that a sale or purchase can be
treated to be in the course of import if there is a direct privity of contract
between the Indian importer and the foreign exporter and the intermediary
through which such import is effected merely acts as an agent or a contractor
for and on behalf of the Indian importer. Thus, it is also laid down that there
must be either a single sale which itself causes the import or is in the
progress or process of import or though there may appear to be two sale
transactions they are so integrally interconnected that they almost resemble
one transaction. If these tests are considered and the present contract is
seen, it must be seen from the documents filed by appellant that though there
was no express condition in the covenant that rolling stock should be imported
from Malaysia, such understanding between the parties can be inferred since
Scomi Engineering, BHD is one of the Member of the consortium and in the
document of contract, it is mentioned that Scomi Engineering has all the
manufacturing unit in Malaysia. Section 5(2) of the CST Act requires that
movement of the goods from foreign country should be in pursuance of the
contract. From the terms of the contract, it appears that the intended movement
of goods from Malaysia was envisaged by terms of the contract and it was within
the contemplation of the parties and therefore it can be reasonably presumed
that such movement was to fulfill the terms of the contract. When it is so, it
has to be said that the goods moved from Malaysia as a part of single
transaction. Even if for the sake of argument, it is held that there are two
transactions of sale between MMRDA and consortium and the other between Scomi
Engineering, BHD Malaysia and consortium, then also the two transactions are so
connected integrally that they are inseparable. Therefore, we are not inclined
to accept the argument of Shri. Sonpal that conditions laid down in K.
Gopinathan Nair’s case are not satisfied in this case.”

Observing as above, the
Tribunal concurred with appellant that the sale is in course of import covered
by section 5(2) of CST Act. 

Conclusion     

The nature of sale in
course of import, more particularly when the facts are complex and there is no
express condition of import, is very delicate and required to be decided based
on judgments. The above judgment will be one more important judgment to throw
light on the subject and provide necessary guidance to trade and authorities. _