Sale in course of import by transfer of documents of title

Question:- Please explain sale in course of import by transfer of documents of title to goods before the goods crosses Custom Frontiers of India ((High Seas Sale) with special reference to when the goods crosses Custom Frontiers of India.

Answer :- The High Seas Sale by transfer of documents of title to goods is covered by section 5(2) of the CST Act, 1956. The said section is reproduced below for ready reference.

“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 atransfer of documents of title to the goods before the goods have crossed the customs frontiers of India.”

There are two limbs of sale covered by above section 5(2). As per first limb the sale which occasions the import of goods from foreign country to India is covered as sale in course of import. However, in present case, we are not concerned with this type of sale and hence not discussed further.

As per second limb, the sale effected by transfer of documents of title to goods before the goods crosses the Customs Frontiers of India are covered as sale in course of import. The term “Crossing Customs Frontiers of India” is defined in section 2(ab) as under.

“(ab) ‘’crossing the 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.”

Thus, any sale effected before the goods crosses Customs Frontiers of India are entitled to exemption as sale in course of import. The above term “Crossing Customs Frontiers of India” has been subject matter of interpretation in various judgments. Reference can be made to few important judgments as under.

Anurag Agencies Pvt. Ltd. (S.A.1506 & 1507 of 99 dt.31-3-2001) (M.S.T.Tribunal)

In this case Hon. M.S.T. Tribunal has held that if the Bill of Entry is presented by the High Seas buyer it is clear case that the seller has effected sale of goods to him prior to the clearing, as unless it is so sold buyer will not be in position to present the B/E in his name. Under above circumstances the claim of seller as sale in courseof import is fully justified even if certain documents are not available. Hon. Tribunal observed as under:

14. “Generally the bill of entry are made in the name of original importer by the custom authorities but in this case specifically bill of entries were made in the name of the subsequent purchaser. In other words it can be inferred that the documents of title to the goods; i.e.bill of lading were handed over or endorsed to the buyers. If it was not the case then the bill of entry would not been made in the name of buyer by the custom authority. Thus it is immaterial to draw otherwise inference that there is no transfer of document of title to the goods by the importer to the buyer.”

Sanvik Asia Ltd., S. A. No. 1894 of 2004 dt. 8-8-2008 (M.S.T. Tribunal)

In this case the consignment came by Airway bill. Appellant claimed sale in course of import but it was disallowed on the ground that the Airway bill is not negotiable and hence sale in course of import cannot take place. Hon. Tribunal found that the bill of entry is in the name of purchaser of the appellant and hence Tribunal observed that there is indication that the goods are sold before crossing the custom frontier. Therefore the Tribunal allowed the claim.

Minerals & Metals Trading Corporation of India (S. A. No. 181 to 186 of 1999 dt. 10-4-2006) (M.S.T. Tribunal)

In this case, Hon. Tribunal has held that the burden to prove claim of exemption u/s.5(2) is on dealer. Even if B/L not available otherdocuments can be relied upon like B/E. Tribunal held that claim can be allowed based on B/E, unless Dept. has any contrary rebutting evidence to show that even if B/E in name of buyer there was no sale from appellant to buyer.

Tribunal also held that endorsement on B/L not compulsory and even by delivery transfer can take place. Tribunal relied upon judgment of B.H.C. in Chhaganlal Savchand (62 ITR 133).

In light of above judgments, it can be said that till the Bill of Entry (B/E) is presented before the Custom Authorities for clearance of the goods, it can be said that the goods have not crossed Customs Frontiers of India and sale effected till that point are entitled to exemption. In other words, once the B/E is presented the Crossing of CustomsFrontiers of India take place and no High Seas Sale can be effected thereafter.

Question:- A dealer in Maharashtra wants to effect sale in course of import by transfer of documents of title to goods when the goods are in bonded warehouse. Whether the claim will be admissible ?

Answer :- In this case, the issue is about sale from bonded warehouse. The situation about sale in course of import from bonded warehouse is not free from debate in Maharashtra.

As stated in Q.1 above High Seas Sale is to be effected before crossing the Customs Frontiers of India.

Also as discussed above, we are concerned about sale effected by transfer of documents of title to goods before the goods have crossed the Customs Frontiers of India. The essential ingredient of this type of exempted sale is that the sale must be effected prior to crossing the CustomsFrontiers of India, the meaning of which is already discussed above. If it is so effected than it is exempt as in course of import. In case of sale from bond it appears that the goods imported will be first cleared by importer from Customs authority by presenting bill of entry by himself, though such clearance may be for bonded warehouse. No sale is effected bytransfer of Bill of Lading etc. prior to this clearance. The sale will be effected after the goods are in bonded warehouse probably by way of bond transfer basis.

In our opinion, when the sale is effected from bonded warehouse, the sale cannot be said to be before crossing the Customs Frontiers of India and hence cannot be exempt. When the goods are first cleared by presenting bill of entry the goods have “Crossed CustomsFrontiers of India” as per definition of said term in CST Act,1956 (Sec.2(ab)). There cannot be crossing of Customs Frontiers again when goods are cleared from bonded warehouse.

In this respect the reference can be made to the judgment of Maharashtra Sales Tax Tribunal in case of M/s.Indo Tex Export (P) Ltd. (S.A.No.284 & 285 of 90 dt.17-6-1995). The above judgment is by Larger Bench of Tribunal and in this judgment it is held that sale effected from bonded warehouse cannot be allowable as sale in courseof import by transfer of documents of title to goods. The exemption u/s.5(2) of CST Act,1956 is denied to such sale in above case. In this case Tribunal held that once the goods are cleared from Customs for home consumption or bonded warehouse, the crossing of CustomsFrontiers gets completed. There cannot be crossing the Custom Frontiers twice. The storing of goods in bonded warehouse is for deferment of duty and nothing to do with Customs Frontiers as per section 2(ab) of CST Act,956. The Tribunal has, thus, disallowed the claim.

However in case of State Trading Corporation of India Ltd. (129 STC 294) the Madras High Court has held that the sale effected from bonded warehouse is still sale before crossing CustomsFrontiers of India and hence duly entitled to exemption. With due respect, we are of the opinion that this judgment requires reconsideration. In this case Madras High Court has relied upon judgment in case of Kiran Spinning Mills vs. Collector of Customs (113 ELT 753)(SC). In this Supreme Court judgment the issue was about payment of Custom duty. Supreme Court held that the duty is payable at prevailing rate when goods are cleared from bonded warehouse. In our opinion the above judgment cannot have impact onsection 2(ab) of CST Act,1956 since it was regarding payment of duty. As per relevant provisions of Custom Act, Supreme Court held that the duty is payable at the prevailing rate at the time of clearing the goods from bonded warehouse. However as per section 2(ab) of CST Act, the crossing the Customs Frontiers is relevant. As held by M.S.T. Tribunal in above case, the said crossing will take place while clearing the goods at first instance. Thus clearing form bonded warehouse may be relevant for payment of duty but not forsection 2(ab) of CST Act. The M.S.T. Tribunal has held that for payment of custom duty the crossing of custom area is relevant which includes the bonded warehouse also. The same position is applied by Supreme Court in above case of Kiran Spinning. The M.S.T. Tribunal has further held that for section 2(ab) of CST Act,1956 the crossing of custom station is relevant which is a narrow term compared to custom area. Therefore, M.S.T. Tribunal has held that for section 2(ab) crossing of custom station will amount to crossing

Customs Frontiers and hence claim of sale in course of import cannot be allowed from bonded warehouse, such warehouse being outside custom station.

However it may be mentioned that based on above judgment in case of Madras High Court in State Trading Corporation of India Ltd. (129 STC 294) the division Bench of Maharashtra Sales Tax Tribunal in case of Radha Sons International (S.A.1358 & 1359 of 9-10-2007) has held that even the sale from bonded warehouse is allowable, as High Seas Sale, exempt u/s.5(2) of CST Act, 1956.

Therefore, the issue can be seen from two angles. With due respect to Madras High Court judgment, in our opinion, the judgment of Larger Bench of M.S.T. Tribunal in Indo Export Tdg. Co. is laying down correct legal position. The other angle is that in any case for sale effected from bonded warehouse in Maharashtra the Sales Tax Authorities in Maharashtra will not follow the judgment of Madras High Court. It is a fact that it being a judgment under Central Act it is binding on all lower authorities unless there is any direct judgment of the High Court of the respective state or of Supreme Court. In Maharashtra, till today there is no direct judgment of Bombay High Court on above issue and the issue will go to Bombay High Court. In fact allowing reference from above judgment of Radha Sons International (S.A.1358 & 1359 of dt.9-10-2007) vide Ref. App. No. 45& 46 of 2008 dt.24-6-2008, the controversy has already reached to Bombay High Court. The outcome of judgment of Bombay High Court will prevail. Till that time for all probabilities the Maharashtra Sales Tax Authorities may follow the judgment of Larger Bench of Tribunal referred to above and may not allow the benefit. Therefore in our opinion a dealer in Maharashtra should take a cautious view of the matter keeping into account the above debatable position of law.

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