Sale during import and export
Sale in course of export
Article 286(1)(b) of Constitution of India prohibits imposition of sales tax on import and export by State Government. Since charging section 6(1) of CST Act levies tax only on inter-State sale, naturally, there is no CST on sale during export/import. [Interestingly, prohibition on taxing sale during export/import is only on State Government and not on Union Government].
Article 286(2) authorises Parliament to formulate principles for determining when sale is in the course of import/export. Under these powers, section 5 of CST Act has been enacted. Principle is that Export sales have to be tax free so that Indian exports become competitive in world market. Similarly, imports are subject to customs duty and hence these should not be subject to sales tax.
Export sale and sale in the course of export – The term ‘Export sale’ is not used in the Act. Generally, ‘export sale’ means direct exports. However, the term ‘sale during export’ is much broader than ‘export sale’. ‘Sale during export’ includes not only direct exports, but also (a) Sale by transfer of documents after goods cross customs frontier (b) Penultimate sale for export (c) Export with help of agent.
What is ‘Sale in course of Export’ – Section 5 of CST Act defines when a sale or purchase is said to be in course of export as follows : A sale or purchase of goods is deemed to be in course of export of the goods out of the territory of India, only if (a) the sale or purchase either occasions such export or (b) is effected by a transfer of documents of title to goods after the goods have crossed the customs frontiers of India. Section 5(3) states that notwithstanding provisions of section 5(1), last sale or purchase of goods preceding the sale or purchase occasioning the export of those goods out of territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the arrangement or order for or in relation to such export.
Sale should occasion the export – Occasion means ‘to be immediate cause of’. Sale and Export should constitute part of an integrated activity. Unless such sale occasions export, it is not a sale in course of export.
In Spares Corporation v. State of AP – (1995) 97 STC 645 (AP HC DB), the spares were delivered to owners of trawlers, who took the spares to high seas. This was not treated as sale during export even if these were removed from Customs warehouse under section 69 for exportation. Though they were exports for Customs Act, these cannot be treated as ‘export’ for section 5 (1) of CST Act.
Sale to foreign tourist is not ‘sale in course of export’ – Sale to foreign tourist in India is not ‘sale in course of export’. This is so even if goods are purchased by the foreign tourist in ‘duty free area’ in airport before departure. – Indian Tourism Dev. Corpn In re- STR Vol 44 No 7 II-113 (Maharashtra Sales Tax Tribunal). The decision is in respect of sale in arrival lounge, where it was held that it is not ‘sale in the course import’. The principle is applicable in respect of ‘sale in course of export’ also.]
Goods should be destined to foreign country, though actual reaching of destination not necessary – In case of Burmah Shell Oil Storage and Distributing Co. of India Ltd. (1960) 11 STC 764 (SC) = AIR 1961 SC 315, the Company supplied aviation fuel to foreign going aircrafts at the airport. This was not treated as sale in course of export as there was no destination to goods in foreign country. However, once goods are shipped to a foreign destination and once they leave territorial waters of India, export is complete even if goods do not reach destination.
Sale in course of export by transfer of documents – It is possible to have sale by transfer of documents after goods cross the Customs frontier, i.e. goods are cleared by Customs authorities and are handed over to carrier for loading in vessel / aircraft. Normally, such sales are rare in exports as exports are after a firm contract [sale by transfer of documents are quite common in imports.]
Meaning of ‘Crossing Customs Frontiers of India’ – Section 2(ab) of CST Act states that ‘Crossing Customs Frontiers of India’ means crossing the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance by customs authorities. Customs Station and Customs Authorities have same meaning as per Customs Act. Customs Station means customs port (for vessels), customs airport (for aircrafts) or land customs station (for trucks or motor vehicles). Central Government is authorised to specify such places. Within such customs port, ‘Customs Area’ is specified by Customs Authorities where imported goods or export goods are ordinarily kept by customs authorities.
Relevance of this provision is that documents of title can be transferred immediately after goods are entrusted to carrier after obtaining clearance from Customs authorities for export. It is not necessary to wait till the ship/aircraft actually leaves India.
Exports with help of agents – Even when exports are arranged with the help of an agent, sale will be sale in course of export if the goods are not sold to agent any time. In CT Ltd. v. CTO – (1996) 7 SCALE 865 = (1996) 10 SCC 729 = (1997) 104 STC 94 (3 member bench), State Trading Corporation (STC) had contract with dealer (CT Ltd.) for supply of tea to overseas buyers. Invoices were raised directly by dealers on overseas buyer. The export licence was in the name of dealer. The name of shipper was ‘CT Ltd. a/c STC’. It was held that STC was only an agent. Property in goods never transferred to STC. Mere writing the words a/c STC does not mean that documents were endorsed to STC. Thus, CT Ltd. were the actual exporters and not STC.
Penultimate sale for export
Export is a specialised business and many small units are unable to export directly. Export is often effected through specialised agencies like Export Houses etc., termed as ‘Merchant Exporters’ under EXIM Policy. [Manufacturers who export the goods themselves are termed as ‘Manufacturer Exporters’ in EXIM Policy]. Such indirect exports also need exemption from taxes to make the products competitive. Hence, such penultimate sale, i.e. sale preceding the sale occasioning export is also deemed to be in the course of export under section 5(3) of CST Act and is exempt from tax. [Such exemption is really against principles of VAT and hence the section may have to be amended].
Exemption to penultimate sale is subject to the condition that the penultimate sale (i.e. last but one sale) is (a) for purpose of complying with agreement or order in relation to export and (b) such sale is made after the agreement or order in relation to export and (c) same goods which are sold in penultimate sale should be exported. In other words, the final exporter should be in possession of export order from foreign buyer and should take delivery of goods from the supplier making penultimate sale solely for execution of such export order and export the same goods.
Purchase prior to penultimate sale not exempt – It may be noted that only penultimate sale is exempt but purchases earlier to penultimate sale are not exempt and purchase tax is payable if prescribed. – State of Tamilnadu v. Madras Pack Marine (2000) 120 STC 105 (TNTST). – same view in Kepee Sons v. State of Kerala (1999) 116 STC 156 (Ker HC DB) * Bhagwan Rice Mill v. ACCT 1999(113) STC 102 (Karn HC DB) * Sovereign Spices v. State of Kerala (1998) 110 STC 429 (Ker HC DB).
Pre-existing arrangement essential – There must be a pre-existing agreement or order to sell the specified goods to a foreign buyer, last purchase must be after the agreement with foreign buyer and the last purchase must be made for complying with the pre-existing order. Only then the transaction is covered under section 5(3) i.e. it is treated as a ‘penultimate sale’ – George Maijo and Co. v. State of Andhra Pradesh – (1980) 46 STC 41 (AP HC) same view in Consolidated Coffee Ltd. v. Coffee Board – AIR 1980 SC 1468 = (1980) 3 SCR 625 = (1980) 46 STC 164 (SC 3 member bench) – Second Coffee Board case.
Purchase of packing material for export permissible – If gunny bags purchased are used as containers for export of certain goods to a foreign country, it is deemed as ‘export sale’ as per section 5(3). The last purchase preceding the sale occasioning export should be for complying with an export order. In this case, the gunny bags purchased were for complying with export order and hence are eligible for exemption under section 5(3) – State of AP v. Standard Packings – (1995) 96 STC 151 (AP HC DB).
Sale during Import
As per Article 286(1) of Constitution of India, sales tax cannot be levied by State Government in respect of sale during import.
A sale or purchase of goods is deemed to be in course of import of the goods into the territory of India, only if (a) the sale or purchase either occasions such import or (b) is effected by a transfer of documents of title to goods before the goods have crossed the customs frontiers of India [section 5(2) of CST Act].
Imports could be (a) direct imports (b) imports through agent (c) import by transfer of documents.
Direct Imports – When the user directly imports for his own use or consumption, no question of any further sale arises. This is so even if an agent arranges the imports – CST v. Glass Trading and Sales Corpn. (1991) 84 STC 195 (Delhi HC).
Sale by Agents in India – It is common to import goods through agent. Some illustrations will make the provision clear. M/s K G Khosla & Co. entered into contract for sale with DGS & D, New Delhi (A Central Government department) for supply of axle bodies. These were to be manufactured by principal of K G Khosla & Co. in Belgium. Goods were to be inspected by representative of DGS & D in Belgium, but DGS & D was entitled to reject the same on receipt in India if goods were found not as per specifications. Goods were cleared by Khosla & Co. from port and were despatched by railway to Government departments. It was held that Khosla & Co. were agents of foreign manufacturer and sale by Khosla & Co. to Government departments was in the course of imports. If two sales are integrated or inter-linked so as to form one transaction, they are ‘sale in course of imports’ – K G Khosla & Co. v. Dy. CCT – (1966) 17 STC 473 = AIR 1966 SC 1216.
Privity of contract between the ultimate buyer and exporter necessary – If the contract between foreign supplier and importer on one hand and importer and Indian buyer on the other hand are independent of each other, the sale within India cannot be termed as ‘in the course of imports’. One illustration will clarify. In Binani Bros. (P.) Ltd. v. UOI – (1974) 33 STC 254 (SC) = AIR 1974 SC 1510 = (1974) 1 SCC 459 (Constitution Bench), the assessee contacted to supply non-ferrous metal to DGS&D. Government granted import licence to the assessee. The assessee imported goods and then supplied to DGS&D. It was held that there was no privity of contract between foreign supplier and DGS&D. Hence, sale of assessee to DGS&D is not ‘sale in the course of import’.
Sale during import by Transfer of Documents – Many importers, acting as agents, import goods and the documents are transferred to ultimate buyer in India. Such buyer usually clears goods from Customs. This is ‘sale during import’ if the documents are transferred (i.e. endorsed in favour of buyer) before goods are cleared from customs.
Sale of Goods stored in customs bonded warehouse – One question is the taxability when goods are sold when they are stored in customs bonded warehouse, before clearance from warehouse. In Kiran Spinning Mills v. CC 1999(113) ELT 753 = 2000 AIR SCW 2090 (SC 3 member bench), it has been held that goods continue to be in customs barrier when they are in customs bonded warehouse. Import would be completed only when goods cross customs barrier and not when they land in India or enter territorial waters.
Thus, if documents are transferred when goods are in customs bonded warehouse, it will be treated as transfer of documents before goods cross customs barrier. – view confirmed in State Trading Corporation v. State of Tamil Nadu (2003) 129 STC 294 (Mad HC DB).
Thus, sale before clearance from customs bonded warehouse will be ‘sale during import’ and will not be taxable.
Sale after Import is a distinct sale – An importer may import the goods, stock the same and sell to buyers. This is not a sale in course of import. Tax would be payable when the goods are sold in India as if the goods are being sold for the first time in India. Such sale may be Inter-State or Intra-State.
In CC v. State of WB – (1992) 85 STC 121 (WBTT), it was held that sale of imported goods confiscated by customs authorities cannot be called as ‘sale during course of import’ as sale did not occasion import and the sale was not by transfer of documents.