Nut Crackers

Indirect Taxes

Questions & Answers

Q.1 A dealer has entered into a turnkey contract for supply and laying of cables. The supply is from the dealer’s office in foreign country, directly in the name of contractee, whereas the bill for laying cables will be raised in the state where the contract is executed. In the work of laying cables certain materials, purchased locally will be used and hence it is a works contract. As per State VAT Act of the executing state, the contractee is liable to make the TDS and pay it to the Govt. The contractee is contemplating to make TDS on full amount whereas the dealer is suggesting for TDS on the bill relating to laying of cables. What is the legal position, please explain.

Ans. Normally, under Sales Tax Laws TDS is made applicable on Works Contract transactions. Therefore, making TDS in relation to bill of laying cables is according to law and cannot be objected to. The real issue is about TDS being made in relation to import bills. In my opinion this is not a correct position. Following are the reasons for the same.

1. As stated above, the import is coming directly in the name of contractee. The implication is that the contractee is importing from Foreign Country. In other words, this is a purchase by contractee in course of import. The transaction of sale or purchase in course of import is immune from levy of Sales Tax by Constitution of India. This is clear from Article 286 which reads as under.

“Article 286 in The Constitution of India 1949

286. Restrictions as to imposition of tax on the sale or purchase of goods

1. No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place

(a) outside the State; or

(b) in the course of the import of the goods into, or export of the goods out of, the territory of India.

2. Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1). …”
   (Underlining ours)

In light of above article the principles to determine sale or purchase in course of import are embodied in section 5(2) of the CST Act, 1956. The said section 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. (1) ——

2. (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 is clear that a purchase which occasions movement of goods from foreign country is in course of import. This being the position no tax on the same is attracted. When no tax is attracted there cannot be TDS application also in relation to such transaction. In number of judgments it is settled that TDS cannot apply to the transactions which are outside the purview of levy of tax under Local Act. Reference can be made to following judgments.

1. State of Chhattisgarh and others vs. VTP Constructions (12 VST 14) (SC).

2. Steel Authority of India Ltd. vs. State of Orissa (118 STC 297) and

3. Nathpa Jhakri Jt. Venture vs. State of Himachal Pradesh (118 STC 306)(SC)

In above cases it is held by Hon’ble Supreme Court that TDS provisions cannot be made applicable to sales/purchases taking place in course of import/export and any provision made contrary to above position will be illegal and unconstitutional.

In light of above no TDS is applicable on the import transaction, nor contractee will be justified in making the TDS in relation to such transaction. Any deduction will be unauthorized as well as unconstitutional.

2. The other aspect of the matter is that, as stated above, the TDS can apply to the Works Contract transaction. From the facts discussed above it is clear that there is direct supply of materials from foreign country to contractee. The said transaction is of simple supply. After taking delivery of the goods through Custom formalities, contractee becomes owner of the same. The transaction gets complete. Thus it is a pure supply transaction not involving works contract. Under above circumstances the TDS provisions cannot apply.

It may be that the contract awarded by contractee is on turnkey basis. However the agreement is to be read in totality and keeping into account the intention of the parties to the contract. From the above mode of executing the transaction it clearly appears that there are two separate transactions embodied in one contract document. One transaction is in relation to supply of materials (cables) from foreign country and other is for laying of cables by use of materials and labour. The first one is pure supply transaction. The second one is of works contract involving material and labour. The bills will also be prepared accordingly. This position is also clear from the fact that on import of material contractee becomes owner of the said cables. It is contractee which is handing over cables to you for executing the labour contract; i.e., laying of cables. Therefore, both the transactions; i.e., supply of cables from foreign country and laying of the cables are separate transactions. The first one being for pure supply the TDS provisions cannot apply. Only for the transaction of laying cables the TDS will apply, it being works contract.

In light of above we opine that making TDS on aggregate amount by contractee will not be correct nor it will be as per law.

Q.2 An importer is importing liquid chemicals in one tank ship. It contains the liquid in bulk for the querist importer as well as other importers. In the case of querist importer also the quantity is large, but there are separate bill of ladings (B/Ls) for smaller lots. The importer is interested in effecting sale in the course of import (High Seas Sale, HSS) by transfer of such B/L for each smaller quantity. He is apprehensive that since the goods are coming in bulk which will be ascertained and delivered to the individual High Seas Buyers (HSB) purchasers after unloading from ship it may not be allowable as HSS but local sale, liable to tax. What will be the correct legal position?

Ans. The issue referred to is basically under Central Sales Tax Act, 1956. The issue is whether claiming given sale as sale in course of import and hence exempt u/s. 5(2), is correct in eyes of law.

Before we opine on the issue it will be necessary to refer to legal background in relation to the given facts.

Sale in course of import is exempt from levy of any sales tax as per provisions of Constitution of India. The definition of sale in course of import is given in section 5(2) of CST Act,1956. The said section 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……..”

As seen above there are two limbs of sale which can be covered by section 5(2).

First limb covers such sale which occasions movement of goods from Foreign Country to India. This can be said to be direct import purchase by buyer and export sale by Foreign Party. This is exempt.

The second limb covers sale which is effected by transfer of documents of title to goods before the goods crosses the Customs Frontier of India. In fact this sale can take place after first import purchase of the said goods, where such sale is effected by transfer of documents of title to goods before goods crosses Customs Frontiers of India. On given facts, this is the relevant limb of section 5(2). These transactions are known as High Seas Sale transactions (HSS).

Therefore, to be eligible for exempted sale as HSS, following conditions are required to be fulfilled.

1. There is import by importer.

2. The imported cargo is represented by document of transport like, Bill of Lading (B/L).

3. There is agreement for HSS with HSB.

4. The B/L is endorsed in favour of HSB.

5. The endorsed B/L is delivered to the buyer.

6. The above formalities are to be completed before goods crosses the custom frontiers.

7. By various judgments it has now been established that the endorsement should be before the Bill of Entry (B/E) is filed to the custom authorities. In other words if the B/E is filed by the High Seas Buyer (HSB) in his name it means that the documents are transferred before the goods have crossed the Custom Frontiers.

In this respect reference can be made to various judgments. Readily reference can be made to following judgments of Maharashtra Sales Tax Tribunal where, based on the fact that the B/E is in the name of HSB, the claim of HSS is allowed by the court.

Anurag Agencies Pvt. Ltd. (S.A. 1506/1507 of 1999 dt.31-3-2001)

Minerals & Metal Trading Corpn. of India Ltd. (S.A.388 of 98 dt.10-4-2006)

In above cases, Bill of Entry was in the name of the purchaser. Tribunal held that, B/E would not have been in name of purchaser unless the B/L was transferred. Therefore even if in some cases B/L copies were not available Tribunal allowed the claim based on B/E.

Therefore it can be concluded that if HSB has presented B/E in its name, it will be a exempted sale as HSS.

Given facts are to be considered in light of above legal position.

From the facts narrated it is clear that dealer is importing liquid chemical in bulk quantity. However the imported bulk quantity is represented by separate B/Ls of smaller quantities. The sale is effected by transfer of above B/Ls. It is presumed that the B/Es will be presented by respective HSBs. After effecting sale as above in the terms of HSS agreement, the HSBs will take further steps for clearing goods. An importer, as seller, can also involve in this process as agent of HSB for effecting clearing of the goods from customs as well as handling the goods physically. Under above circumstance, HSS transactions will be as per law and hence duly exempt as per section 5(2) of CST Act, 1956.

The only apprehensive issue which may arise is that the liquid chemical is coming in bulk in the ship tank. The tankers contain chemical represented by several B/Ls belonging to importer as well as it may contain chemicals of other importers also. It appears that the chemical will be unloaded in the shore storage tank in the port and deliveries will be affected to the HSBs from such storage tank. The actual ascertainment of the chemical pertaining to each HSB will be done at this point. An issue may arise as to whether such ascertainment after clearing the goods can adversely affect the claim.

In this respect we opine that on given facts of the case the claim cannot be affected. Following legal position supports above view.

1. Though the chemical is coming in bulk in one tanker it is fact that the same is represented by separate B/Ls.

2. The shipping agency is duty bound under the relevant shipping transport customs and laws, including Indian Bill of Lading Act,1856, to deliver the goods in respect of each B/L.

3. Therefore, on transfer of B/L the sale gets complete and the exemption accrues to seller. The responsibility of delivering the goods out of bulk quantity to the HSB is of shipping agency.

4. The above position has been affirmed by various judicial pronouncements. Ready reference can be made to following judgments of Maharashtra Sales Tax Tribunal and Bombay High Court Vadilal Embroidery Unit (A.No.74 of 1987 dt. 31-10-1991) Tata Iron and Steel Co. Ltd. (TISCO) (S.A.713 & 714 of 2000 dt. 9-10-2001) Adani Exports Ltd. (A. 169 of 2003 dt. 23-3-2007) CST vs. Tata Iron & Steel Co. Ltd. (5 VST 137)(Bom).

In above cases the issue was similar that is, the goods were coming in bulk. The HSS claim was sought to be disallowed on the ground that the ascertainment of the goods is done after unloading (after crossing Custom Frontiers) and hence not covered by section 5(2) of CST Act. However Hon’ble Tribunal as well as Hon.Bombay High Court have rejected the said ground and allowed the claim.
It may also be mentioned that in case of Vadilal Embroidery Unit and Adani Export Ltd. the issue was same; i.e., bulk import of liquid (in those cases oil) and still the claims are allowed.

In light of above, the legal position is clear that even in case of bulk import also HSS is allowable if the goods sold on HSS basis are identified separately by separate B/L.

5. The other objection which may arise is that the goods may actually be unloaded and handled and put in shore storage tank by importer (HSS seller). The deliveries to the respective HSBs may be given thereafter. Therefore, objection may arise that inspite of showing sale on HSS basis, the goods are cleared by importer and given deliveries by it and therefore the claim is not allowable. It may also be objected on the ground that showing above manner of documents of transfer of B/L etc. is to claim exemption illegally. However, it can be said that the goods are sold on HSS basis as per HSS agreement. The clearing, stocking and delivery etc., if done by importer must be on behalf HSB, as agent. Without this position, unloading of goods physically may not be possible for importer, as B/E is presented by the HSB. Therefore, in our opinion, the above objection cannot be sustainable under the law. In other words, the claim of HSS is allowable on above facts of the case.