Supreme Court clarifies Sales Tax on Ship Stores: Nirmal Kumar Parsan vs. Commissioner of Commercial Taxes (21 January 2020)

Introduction

Date of the Judgment: 21 January 2020

Citation: 2020 INSC 47

Judges: A.M. Khanwilkar, J., Dinesh Maheshwari, J.

Can goods imported from a foreign country, stored in a bonded warehouse, and then sold to foreign-bound ships as ‘ship stores’ be taxed by the state where the warehouse is located? The Supreme Court of India addressed this question, clarifying the applicability of state sales tax laws in such transactions. This judgment examines whether these sales are considered ‘in the course of import’ and thus exempt from state taxes. The bench consisted of Justices A.M. Khanwilkar and Dinesh Maheshwari, with the majority opinion authored by Justice A.M. Khanwilkar.

Case Background

The appellants imported foreign-made cigarettes and stored them in a customs-bonded warehouse within the state of West Bengal. Some of these cigarettes were then sold to the masters of foreign-going ships as ship stores, without the payment of customs duty. These goods were escorted to the respective ships under the supervision of customs officials.

The Commercial Tax Officer, West Bengal, passed an assessment order on 13.03.1985, pertaining to the assessment period 01.04.1980 to 31.03.1981, rejecting the appellant’s claim for exemption from sales tax. The assessing officer stated that the sales were not in the course of import, as the cigarettes were sold from a bonded warehouse within the state. The appellants appealed this decision unsuccessfully, first before the appellate authority and then in revision before the West Bengal Taxation Tribunal, which was rejected on 30.03.2007. The Tribunal relied on the Madras Marine and Co. vs. State of Madras case to reject the revision.

A similar issue arose in another case, where the Assistant Commissioner of Commercial Taxes passed an order on 22.10.2003, under Section 65 of the West Bengal Sales Tax Act, 1994 for the assessment periods 01.04.1999 to 31.03.2000, 01.04.2000 to 31.03.2001, 01.04.2001 to 31.03.2002 and 01.04.2002 to 31.03.2003. The claim that the sales were in the course of import was rejected. The assessing authority noted that the risk in the goods was transferred when they were taken out of the bonded warehouse and that the sales did not occasion the import. The Tribunal rejected this revision on 30.03.2007, following the decision in the companion appeal. Both matters were then taken to the High Court at Calcutta, which dismissed the writ petitions upholding the decisions of the Tribunal.

Timeline

Course of Proceedings

The Commercial Tax Officer rejected the claim for sales tax exemption, stating that the sales were not in the course of import, as the cigarettes were sold from a bonded warehouse within the state. The appellants unsuccessfully appealed the decision before the appellate authority and then in revision before the Tribunal, which upheld the assessing officer’s decision. The Tribunal relied on the precedent set in Madras Marine and Co. vs. State of Madras. The appellants then filed a writ petition before the High Court at Calcutta, which was also dismissed, upholding the view taken by the Tribunal.

In the second case, the Assistant Commissioner of Commercial Taxes rejected the claim that the sales were in the course of import. The authority noted that the risk in the goods transferred when they were taken out of the bonded warehouse. The Tribunal rejected the revision petition, following the decision in the companion appeal. The High Court dismissed the writ petition, upholding the decision of the authority.

Legal Framework

The case primarily revolves around the interpretation of Article 286 of the Constitution of India, which restricts the imposition of taxes on the sale or purchase of goods, and Section 5 of the Central Sales Tax Act, 1956 (CST Act), which defines when a sale or purchase of goods is considered to take place in the course of import or export.

Section 5(2) of the CST Act 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.”

The term ‘crossing the customs frontiers of India’ is defined in Section 2(ab) of the CST Act 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 explanation to this section states that ‘customs station’ and ‘customs authorities’ have the same meaning as in the Customs Act, 1962. The relevant sections of the Customs Act, 1962 include:

✓ Section 2(11) which defines ‘customs area’

✓ Section 2(13) which defines ‘customs station’

✓ Section 7 which deals with the appointment of customs ports, airports, etc.

Arguments

Appellants’ Arguments:

• The appellants argued that the sales were in the course of import because the process of import was not complete when the goods were sold to the foreign-going ships.
• They contended that the goods were kept in a bonded warehouse, and a declaration was given that they would be exported to foreign-going vessels as ship stores under Section 88 of the Customs Act, 1962.
• The appellants relied on the definition of “crossing the customs frontiers of India” in Section 2(ab) of the CST Act, arguing that it includes the area where imported goods are kept before customs clearance.
• They cited the Supreme Court’s decision in J.V. Gokal & Co. (Private) Ltd. vs. Assistant Collector of Sales-Tax (Inspection) & Ors. [ (1960) 2 SCR 852 ], which followed State of Travancore-Cochin & Ors. vs. Shanmugha Vilas Cashew Nut Factory, Quilon & Ors. [(1954) SCR 53], to support their claim that the sales were in the course of import.
• They also relied on Minerals & Metals Trading Corporation of India Ltd. vs. Sales Tax Officer & Ors. [(1998) 7 SCC 19], to argue that the goods were still in the process of import, as they had not yet crossed the customs frontiers.
• The appellants argued that the decision in Indian Tourist Development Corporation Limited vs. Assistant Commissioner of Commercial Taxes & Anr. [(2012) 3 SCC 204], which dealt with duty-free shops, should apply to their case, as the goods were kept in bonded warehouses and then supplied to foreign-going ships.
• They distinguished the decision in Madras Marine and Co. vs. State of Madras [(1986) 3 SCC 552], stating that in that case, the goods were intended for re-export only, whereas in their case, the goods were for ship stores.
• They also argued that the 1976 amendment to Section 5 of the CST Act, with the insertion of sub-Section (3), which opens with a non-obstante clause, should be considered.

Respondents’ Arguments:

• The respondents argued that the sales were neither in the course of import nor export, as they occurred on the landmass of the State of West Bengal.
• They contended that the definition of “crossing the customs frontiers of India” in the CST Act is exhaustive and does not include bonded warehouses where the goods were kept.
• They argued that the sales did not occasion the import of the goods, as the goods had already been imported and were stored in the bonded warehouse.
• The respondents relied on the decisions in Burmah Shell Oil Storage and Distributing Co. of India Ltd. & Anr. vs. Commercial Tax Officer & Ors. [(1961) 1 SCR 902], Coffee Board, Bangalore vs. Joint Commercial Tax Officer, Madras & Anr. [(1969) 3 SCC 349], and Madras Marine (supra) to argue that the issue was already decided against the appellants.
• They distinguished the decision in Indian Tourist Development Corporation (supra), arguing that the doctrine of Unbroken Package has no application in India, as expounded in State of Kerala & Ors. vs. Fr. William Fernandez & Ors. [2017 SCC Online SC 1291].
• The respondents argued that the taxable event occurred when the goods were appropriated at the bonded warehouse, which was within the territory of West Bengal.
• They cited Kiran Spinning Mills vs. Collector of Customs [(2000) 10 SCC 228], to argue that the taxable event is the day of crossing the customs barrier, not when the goods landed in India.
• They argued that the appellants had raised the plea of having filed a declaration for the first time, and no such plea was taken before the concerned authority, nor any document was produced in support of the same.

Submissions Table

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

✓ Whether the sales of goods (imported cigarettes) from a bonded warehouse within the landmass of the State of West Bengal to foreign-bound ships as ship stores, without payment of customs duty, can be considered as sales within the territory of the State and subject to sales tax under the West Bengal Sales Tax Act, 1954 or the West Bengal Sales Tax Act, 1994.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Burmah Shell Oil Storage and Distributing Co. of India Ltd. & Anr. vs. Commercial Tax Officer & Ors. [(1961) 1 SCR 902] – The court noted that in order to exclude taxation by the State, there must be another State where the goods are delivered for consumption, and that the customs barrier does not set a terminal limit to the territory of the State for sales tax purposes.
• State of Kerala & Ors. vs. Cochin Coal Company Ltd. [(1961) 2 SCR 219] – The court reiterated that the concept of export requires two termini between which the goods are intended to move.
• Madras Marine and Co. vs. State of Madras [(1986) 3 SCC 552] – The court upheld that sales of ship stores from a bonded warehouse are taxable within the state, as the goods were appropriated within the state and not exported to another country.
• Fairmacs Trading Co. vs. The State of Andhra Pradesh [(1975) 36 STC 260 (AP)] – The Andhra Pradesh High Court held that sales of ship stores within the state are taxable, as the goods are ascertained and within the state when the contract of sale takes place.
• Fairmacs Trading Co. vs. The State of Tamil Nadu [(1978) 41 STC 157 (Mad)] – The Madras High Court held that sales of ship stores are local sales as the goods are appropriated to the contract within the state.
• Commissioner of Customs (Import), Mumbai vs. Dileep Kumar and Company & Ors. [(2018) 9 SCC 111] – The court noted that a taxation statute must be interpreted strictly.
• Kiran Spinning Mills vs. Collector of Customs [(2000) 10 SCC 228] – The court held that the taxable event is the day of crossing the customs barrier, not when the goods landed in India.
• J.V. Gokal & Co. (Private) Ltd. vs. Assistant Collector of Sales-Tax (Inspection) & Ors. [(1960) 2 SCR 852] – The court held that a sale by an importer after the property of the goods passed to him, before the goods crossed the customs frontier, is a sale in the course of import.
• State of Travancore-Cochin & Ors. vs. Shanmugha Vilas Cashew Nut Factory, Quilon & Ors. [(1954) SCR 53] – This case was followed by the court in J.V. Gokal.
• Minerals & Metals Trading Corporation of India Ltd. vs. Sales Tax Officer & Ors. [(1998) 7 SCC 19]– This case was cited to construe Section 5 of the CST Act.
• Indian Tourist Development Corporation Limited vs. Assistant Commissioner of Commercial Taxes & Anr. [(2012) 3 SCC 204]– This case dealt with the sales at duty-free shops.
• State of Kerala & Ors. vs. Fr. William Fernandez & Ors. [2017 SCC Online SC 1291] – This case was cited to argue that the doctrine of Unbroken Package is not applicable in India.
• Coffee Board, Bangalore vs. Joint Commercial Tax Officer, Madras & Anr. [(1969) 3 SCC 349] – This case was distinguished by the appellants.
• K. Gopinathan Nair and Ors. vs. State of Kerala [(1997) 10 SCC 127] – The court expounded the factors to be reckoned for determining whether the sale or purchase of goods can be deemed to have taken place in the course of import.
• Md. Serajuddin and Ors. vs. State of Orissa [(1975) 2 SCC 47]– The court held that the expression ‘in the course’ implies not only a period of time during which the movement is in progress but postulates a connected relation.
• Hyderabad Industries Ltd. v. Union of India – This case was cited in Kiran Spinning Mills case to state that Section 3 of the Tariff Act is a charging section.
• Union of India v. Apar (P) Ltd. – This case was cited in Kiran Spinning Mills case to state that the import would be completed only when the goods are to cross the customs barriers.

Legal Provisions Considered by the Court:

• Article 286 of the Constitution of India – Restrictions as to imposition of tax on the sale or purchase of goods.
• Section 5 of the Central Sales Tax Act, 1956 – When is a sale or purchase of goods said to take place in the course of import or export.
• Section 2(ab) of the Central Sales Tax Act, 1956 – Definition of “crossing the customs frontiers of India.”
• Section 2(11) of the Customs Act, 1962 – Definition of “customs area.”
• Section 2(13) of the Customs Act, 1962 – Definition of “customs station.”
• Section 7 of the Customs Act, 1962 – Appointment of customs ports, airports, etc.
• Section 2(10) of the Customs Act, 1962 – Definition of “customs airport.”
• Section 2(12) of the Customs Act, 1962 – Definition of “customs port.”
• Section 2(29) of the Customs Act, 1962 – Definition of “land customs station.”
• Section 2(43) of the Customs Act, 1962 – Definition of “warehouse.”
• Section 2(44) of the Customs Act, 1962 – Definition of “warehoused goods.”
• Section 69 of the Customs Act, 1962 – Declaration by the appellant.
• Section 88 of the Customs Act, 1962 – Export of goods without payment of import duty.
• Section 4 of the Central Sales Tax Act, 1956 – When is a sale or purchase of goods said to take place inside a State.

Authorities Table

Judgment

The Supreme Court dismissed the appeals, upholding the decisions of the lower authorities and the High Court. The Court held that the sales of imported goods, stored in a bonded warehouse within the state and sold as ship stores to foreign-bound ships, are subject to state sales tax. The Court reasoned that these sales are not considered to be ‘in the course of import’ as defined under Section 5(2) of the Central Sales Tax Act, 1956, because the goods had already crossed the customs frontiers of India before the sale. The Court also held that the sales did not occasion the import, and the goods were not meant for export.

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

How each authority was viewed by the Court?

✓ The Supreme Court followed the principles laid down in Burmah Shell Oil Storage and Distributing Co. of India Ltd. & Anr. vs. Commercial Tax Officer & Ors. [(1961) 1 SCR 902], stating that for a sale to be exempt from state tax, the goods must be delivered for consumption in another state and that the customs barrier does not set a terminal limit for state sales tax purposes.

✓ The Court also followed State of Kerala & Ors. vs. Cochin Coal Company Ltd. [(1961) 2 SCR 219], reiterating that export requires two termini between which the goods are intended to move.

✓ The Court relied heavily on Madras Marine and Co. vs. State of Madras [(1986) 3 SCC 552], which held that sales of ship stores from a bonded warehouse are taxable within the state, as the goods were appropriated within the state and not exported to another country.

✓ The Court approved the decisions in Fairmacs Trading Co. vs. The State of Andhra Pradesh [(1975) 36 STC 260 (AP)] and Fairmacs Trading Co. vs. The State of Tamil Nadu [(1978) 41 STC 157 (Mad)], which held that sales of ship stores within the state are taxable.

✓ The Court cited Commissioner of Customs (Import), Mumbai vs. Dileep Kumar and Company & Ors. [(2018) 9 SCC 111], emphasizing that a taxation statute must be interpreted strictly.

✓ The Court cited Kiran Spinning Mills vs. Collector of Customs [(2000) 10 SCC 228], to support the view that the taxable event is the day of crossing the customs barrier.

✓ The Court distinguished J.V. Gokal & Co. (Private) Ltd. vs. Assistant Collector of Sales-Tax (Inspection) & Ors. [(1960)2 SCR 852], stating that in that case, the sale occurred before the goods crossed the customs frontier, unlike in the present case.

✓ The Court distinguished Indian Tourist Development Corporation Limited vs. Assistant Commissioner of Commercial Taxes & Anr. [(2012) 3 SCC 204], which dealt with duty-free shops within the airport area, as the present case involved sales from a bonded warehouse within the state.

✓ The Court cited State of Kerala & Ors. vs. Fr. William Fernandez & Ors. [2017 SCC Online SC 1291], stating that the doctrine of Unbroken Package is not applicable in India.

✓ The Court noted that the appellants’ reliance on Minerals & Metals Trading Corporation of India Ltd. vs. Sales Tax Officer & Ors. [(1998) 7 SCC 19] was misplaced, as the facts of that case were different.

✓ The Court distinguished Coffee Board, Bangalore vs. Joint Commercial Tax Officer, Madras & Anr. [(1969) 3 SCC 349], stating that it did not apply to the present case.

✓ The Court referred to K. Gopinathan Nair and Ors. vs. State of Kerala [(1997) 10 SCC 127], to understand the factors for determining whether a sale is in the course of import.

✓ The Court referred to Md. Serajuddin and Ors. vs. State of Orissa [(1975) 2 SCC 47], to define the expression ‘in the course’ as implying not only a period of time during which the movement is in progress but postulates a connected relation.

✓ The Court referred to Hyderabad Industries Ltd. v. Union of India and Union of India v. Apar (P) Ltd., as cited in Kiran Spinning Mills vs. Collector of Customs, to support its view that the taxable event is the day of crossing the customs barrier.

Flowchart of the Case

Ratio Decidendi

The Supreme Court held that sales of imported goods from a bonded warehouse to foreign-bound ships as ship stores are subject to state sales tax because such sales are not considered to be “in the course of import” under Section 5(2) of the Central Sales Tax Act, 1956. The Court reasoned that the goods had already crossed the customs frontiers of India when they were sold, and the sales did not occasion the import. The taxable event was the appropriation of goods within the state, not the import itself. The Court emphasized that the definition of “crossing the customs frontiers of India” is exhaustive and does not include bonded warehouses.

Conclusion

The Supreme Court’s judgment in the case of Nirmal Kumar Parsan vs. Commissioner of Commercial Taxes & Ors. clarifies that sales of imported goods from a bonded warehouse to foreign-bound ships as ship stores are subject to state sales tax. The Court’s decision reinforces the principle that for a sale to be considered in the course of import, it must either occasion the import or be effected by a transfer of documents of title before the goods have crossed the customs frontiers of India. The judgment also underscores that the definition of “crossing the customs frontiers of India” is exhaustive and does not include bonded warehouses. This ruling has significant implications for businesses involved in the sale of ship stores and clarifies the scope of state taxing powers in such transactions.