Supreme Court clarifies “Sale in the Course of Import” under Central Sales Tax Act: M/S Vellanki Frame Works vs. The Commercial Tax Officer (2021) INSC 25

Date of the Judgment: 13 January 2021
Citation: (2021) INSC 25
Judges: A.M. Khanwilkar, J. and Dinesh Maheshwari, J.

Can a company claim exemption from sales tax by arguing that a sale occurred during the import process, even if they handled the customs clearance? The Supreme Court addressed this question in a recent case, clarifying what constitutes a “sale in the course of import” under the Central Sales Tax Act, 1956. The Court examined whether a company that clears imported goods and then sells them can claim this exemption, or if such a sale is considered an inter-state sale. The judgment was delivered by a two-judge bench comprising Justices A.M. Khanwilkar and Dinesh Maheshwari, with the opinion authored by Justice Maheshwari.

Case Background

M/s Vellanki Frame Works, a business dealing in timber, imported timber from foreign countries. They claimed that they sold these goods to end-buyers while the goods were still on the high seas, before crossing Indian customs borders, and thus these sales should be exempt from sales tax under Section 5(2) of the Central Sales Tax Act, 1956. The Commercial Tax Officer (CTO) disagreed, stating that because M/s Vellanki Frame Works cleared the goods through customs and then sold them, the sales were inter-state sales and not exempt.

The transactions involved a four-party structure: a foreign supplier, an initial buyer, M/s Vellanki Frame Works, and the end-buyer. The goods were shipped from a foreign country, and while on the high seas, the initial buyer transferred the bill of lading to M/s Vellanki Frame Works, who then transferred it to the end-buyer. However, upon arrival in India, M/s Vellanki Frame Works filed the necessary customs documents and paid the duties.

The CTO argued that M/s Vellanki Frame Works’ actions indicated that they were the actual importers, and therefore, the sales to the end-buyers were inter-state sales, which are taxable. M/s Vellanki Frame Works contended that they were acting as agents for the end-buyers and that the sales were exempt under Section 5(2) of the Central Sales Tax Act, 1956.

Timeline

Course of Proceedings

The Commercial Tax Officer (CTO) issued assessment orders on 20.01.2010 and 18.05.2010, denying M/s Vellanki Frame Works the exemption under Section 5(2) of the Central Sales Tax Act, 1956. Instead of appealing these orders through the statutory channels, M/s Vellanki Frame Works filed writ petitions in the High Court of Judicature at Hyderabad. The High Court dismissed these petitions on 18.12.2014, upholding the CTO’s assessment. The High Court held that the sales were inter-state sales because the goods were cleared by M/s Vellanki Frame Works in India before being sold to end-buyers.

Legal Framework

The core legal issue revolves around Section 5(2) of the Central Sales Tax Act, 1956, which states:

“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.”

This section defines when a sale is considered to be “in the course of import” and therefore exempt from state sales tax. The key aspects are that the sale must either cause the import or involve the transfer of title documents before the goods cross the customs frontiers of India.

The term “crossing the customs frontiers of India” is defined in Section 2(ab) of the Central Sales Tax Act, 1956 as:

“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.”

The Act also refers to the Customs Act, 1962, for the definitions of “customs station” and “customs authorities.”

Additionally, Section 2(g) of the Central Sales Tax Act, 1956 defines “sale” as:

“any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration.”

The Supreme Court also considered Section 3 of the Central Sales Tax Act, 1956, which defines when a sale is considered an inter-state sale:

“A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase—(a) occasions the movement of goods from one State to another; or (b) is effected by a transfer of documents of title to the goods during their movement from one State to another.”

The Court also referred to Section 2(4) of the Sale of Goods Act, 1930, which defines “document of title to goods” to include a bill of lading.

Arguments

Appellant’s Arguments:

• ✓ M/s Vellanki Frame Works argued that the sales to the end-buyers were “sales in the course of import” and therefore exempt from sales tax under Section 5(2) of the Central Sales Tax Act, 1956. They contended that the transfer of the bill of lading to the end-buyers occurred while the goods were on the high seas, before they crossed the customs frontiers of India.
• ✓ They claimed that they were acting as agents for the end-buyers, merely facilitating the import process, and that the end-buyers were the actual owners of the goods.
• ✓ The appellant relied on a quadripartite agreement, stating that the agreement identified the end-buyer as the final purchaser, and the appellant was merely acting as an agent for the end-buyer to clear the goods from customs.
• ✓ They argued that the definition of “importer” under the Customs Act, 1962 includes “any person holding himself out to be the importer,” and that the customs duty was collected from the person in possession of the goods, not necessarily the owner.
• ✓ M/s Vellanki Frame Works asserted that the sale was not an inter-state sale under Section 3(a) of the Central Sales Tax Act, 1956, because the movement of goods was triggered by the import from outside India, not by a sale within India.
• ✓ The appellant argued that the debit note issued to the end-buyer was a mere formality and did not change the fact that the transfer of title had occurred on the high seas.

Respondent’s Arguments:

• ✓ The Commercial Tax Officer (CTO) argued that M/s Vellanki Frame Works was the actual importer, as they filed the bills of entry for warehousing and home consumption and paid the customs duties.
• ✓ The CTO contended that the import process concluded when M/s Vellanki Frame Works cleared the goods from customs, and any subsequent sales were inter-state sales, taxable under Section 3(a) of the Central Sales Tax Act, 1956.
• ✓ The respondent argued that the alleged agency agreement was a sham to evade tax liability and that M/s Vellanki Frame Works was the real buyer and seller.
• ✓ The CTO pointed out that the Import General Manifest (IGM) did not mention the end-buyers as importers, further supporting the view that M/s Vellanki Frame Works was the actual importer.
• ✓ The respondent argued that the goods moved from Visakhapatnam to other states, which qualified as an inter-state sale.
• ✓ The CTO highlighted that some end-buyers denied knowing M/s Vellanki Frame Works or receiving the goods, indicating that the transactions were not genuine.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the sales in question took place in the course of the import of goods into the territory of India and qualify for exemption under Section 5(2) of the Central Sales Tax Act, 1956?

The court also dealt with the sub-issue of whether the appellant was acting as an agent or a principal in the transaction.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court upheld the High Court’s decision, ruling against M/s Vellanki Frame Works. The Court held that the sales to the end-buyers were not “sales in the course of import” and were therefore taxable as inter-state sales.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• State of Travancore-Cochin and Ors. v. Shanmugha Vilas Cashewnut Factory, Quilon [AIR 1953 SC 333]: The Court agreed with the principle that sales by transfer of shipping documents while goods are beyond customs barriers are within the exemption. However, this did not apply to the facts of the case.
• J.V. Gokal & Co. (Private) Ltd. v. Assistant Collector of Sales-Tax (Inspection) and Ors [(1960) 2 SCR 852]: The Court agreed with the principle that delivery of a bill of lading while goods are afloat is equivalent to the delivery of the goods themselves. However, the Court distinguished the facts of the case.
• Tata Iron and Steel Co. Ltd., Bombay v. S.R. Sarkar and Ors [AIR 1961 SC 65]: The Court agreed with the principle that a sale is reckoned upon completion, not just a contract. However, this did not apply to the facts of the case.
• Union of India and Anr. v. Sampat Raj Dugar and Anr. [(1992) 2 SCC 66]: The Court acknowledged that the definition of “importer” in the Customs Act, 1962, only indicates the person in possession of goods at the time of filing the bill of entry, not necessarily the owner but stated that it does not negate the fact that M/s Vellanki Frame Works was the importer for customs purposes.
• State of Maharashtra v. Embee Corporation, Bombay [(1997) 7 SCC 190]: The Court agreed with the principle that the terms “sale occasioning movement of goods” and “sale occasioning import of goods” carry the same meaning. However, the court stated that this did not apply to the facts of the case.
• K. Gopinathan Nair and Ors. v. State of Kerala [(1997) 10 SSC 1]: The Court relied on the majority view of this case to show that the sales by M/s Vellanki Frame Works were not in the course of import.
• Minerals & Metals Trading Corporation of India Ltd. v. Sales Tax Officer and Ors [(1998) 7 SCC 191]: The Court agreed with the principle that transfer of a bill of lading signifies transfer of title in the goods. However, this did not apply to the facts of the case.
• Hotel Ashoka (Indian Tourist Development Corporation Ltd.). v. Assistant Commissioner of Commercial Taxes and Anr. [(2012) 3 SCC 204]: The Court distinguished this case, as it related to sales at duty-free shops, which are beyond the customs frontiers of India, unlike the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the following factors:

• ✓ The fact that M/s Vellanki Frame Works filed the bills of entry for warehousing and home consumption and paid the customs duties was a significant factor. This action indicated that they were the actual importers for the purpose of the Customs Act, 1962.
• ✓ The absence of the end-buyers’ names in the Import General Manifest (IGM) further strengthened the court’s view that M/s Vellanki Frame Works was the importer.
• ✓ The court emphasized that the import process was completed when the goods were cleared from customs by M/s Vellanki Frame Works. Any subsequent sales were considered inter-state sales.
• ✓ The court rejected the argument that the transfer of the bill of lading on the high seas was sufficient to qualify the sale as one in the course of import. The court found that the actions of M/s Vellanki Frame Works in clearing the goods from customs indicated that the sale was not complete until after the goods had crossed the customs frontiers of India.
• ✓ The court also noted that some of the end-buyers denied knowing M/s Vellanki Frame Works or receiving the goods, which cast doubt on the genuineness of the transactions.
• ✓ The court found that the debit note issued to the end-buyer was a proof of a subsequent sale after the goods were cleared from customs.

The court’s reasoning was primarily based on the factual analysis of the import process and the actions of M/s Vellanki Frame Works, as well as the legal provisions of the Central Sales Tax Act, 1956 and the Customs Act, 1962.

The following table demonstrates sentiment analysis of the reasons given by the Supreme Court as to what weighed in the mind of the court to come to the conclusion with the various points emphasised in the reasoning portion.

The following table shows the ratio of fact:law percentage that influenced the court to decide.

Flowchart of the Import Process

Conclusion

The Supreme Court’s judgment in the case of M/s Vellanki Frame Works vs. The Commercial Tax Officer clarifies the interpretation of “sale in the course of import” under the Central Sales Tax Act, 1956. The Court held that merely transferring the bill of lading on the high seas does not qualify a sale as a sale in the course of import if the subsequent actions of the seller involve clearing the goods from customs. The Court emphasized the importance of who clears the goods from customs, and any subsequent sales after customs clearance are considered inter-state sales and are therefore taxable.

This judgment underscores that the act of clearing goods through customs is a crucial factor in determining the nature of the sale. It also highlights that the definition of “importer” under the Customs Act, 1962, plays a significant role in deciding whether a sale is in the course of import or an inter-state sale.

The case serves as an important guide for businesses engaged in import transactions, emphasizing the need to carefully structure their sales to comply with tax regulations.