High Seas Sales: Import or Inter-State Sale? Case Note on Vellanki Frame Works vs. Commercial Tax Officer – By Udai Khanna

The Supreme Court in the case Vellanki Frame Works vs. Commercial Tax Officer, decided by the bench of Justice AM Khanwilkar  and Justice Dinesh Maheshwari on January 13, 2021, dealt with the question whether sales pertaining in the factual circumstances arose in the purview of import of goods into the territory of India and qualify for exemption under Section 5(2) of the Central Sales Tax (CST) Act, 1956.

The Supreme Court upheld the decision rendered by the Telangana High Court which held that transfer of goods (coils) after filing bill of entry (BoE) is not sale in course of import but an ‘interstate sale’ even if it is under principal-agent relationship or sale and thus, liable to Central Sales Tax. The Apex Court considered in detail the definition of Importer as well as the nature of transaction by applying the principles laid down in the case K. Gopinathan Nair and Ors. v. State of Kerala and finally examined the issue in the context of Article 286 of the Constitution of India, along with relevant provisions of the Central Sales Tax Act and Customs Act by observing that sale in the course of import carries three essential features – (i) that there must be a sale; (ii) that goods must actually be imported into the territory of India; and (iii) that the sale must be part and parcel of the import.

On the aspect of consciously opting of a Writ Jurisdiction by the Assessee instead of availing the statutory appeal, the Court refused to relegate the matter to the appeal forum and went on to note that an extraordinary writ jurisdiction cannot be utilized by a litigant only to take chance and since the High Court had already made an observation on merits in the Writ Petition, the Supreme Court showed no hesitating in upholding the decision. The Court in conclusion also remarked that “A litigation cannot be allowed to be unendingly kept alive at the choice of a litigant”.

The author feels that the Apex Court is correct in noting the importance to curb the misuse of Writ Jurisdiction by litigants specially by assesses in such cases. However, one school of thought which cannot be ignored and which has also been taken in in various decisions time and again in the past, would be for the courts to simply not entertain such Writ Petitions and in that background, the High Court should have not given its opinion on the merits of the case and should have asked the parties to approach the appropriate statutory authority. Having said so, once the High Court has made its observation on merits and against that the Special Leave Petition has been preferred, it would have been difficult for the Apex Court to undo such observations and to ask the authority to decide the matter afresh.

Brief Background

This Special Leave Petition arises out of the decision in Writ Petition Nos. 2552 of 2013 and 6258 of 2013 whereby, the Telangana High Court on 18.12.2014 had upheld the assessment orders dated 20.01.2010 and 18.05.2010 passed by the Commercial Tax Officer (CTO), Chinawaltair Circle which had held that the transactions in question were not the sales in the course of import but had been inter-state sales, liable to Central Sales Tax and denied the exemption claimed under Section 5(2) of the Central Sales Tax Act, 1956 while granting time to the appellant to produce the prescribed C-Forms to the assessing authority for availing the benefit of concessional rate of tax.

This case pertains to seven transactions of similar nature form the subject matter of these appeals; one relating to the assessment for the year 2005-06 and others relating to the assessment for the year 2006-07. The common salient features of all these transactions had been that they were for the supply of timber from a foreign country and were allegedly executed in a manner that the supplier (party number 1) sold the goods in question to the first buyer (party number 2) and delivered them at the port of shipment. Thereafter, while the goods were in transit on high seas, party number 2 transferred the goods to the appellant (who was party number 3 in these transactions) by endorsing the bill of lading in favour of the appellant. Thereafter, the appellant allegedly transferred them to the end-buyer (party number 4) by endorsing the bill of lading in favour of the end-buyer.

When the goods reached the port at Visakhapatnam, the appellant filed a bill of entry for warehousing and thereafter, filed another bill of entry (BoE) for home consumption (ex-bond). On the basis of such bills of entry, the assessee was assessed for customs duty. The assessee claimed that since it only acted as an agent of the end-buyers while filing the bills of entry and since the sales of the goods in question to the end-buyers were more like the sales taking place in the course of import of goods into the territory of India, it was eligible for exemption from payment of sales tax by virtue of Section 5(2). During assessment for AYs 2005-06 & 2006-07, the Commercial Tax Officer (CTO) denied the benefit of exemption vide orders dated January 20, 2010 and May 18, 2010 on the following grounds that –

Against the said order, the assessee filed a writ before the High Court of Telangana, wherein the issue as follows: (i) as to whether the CTO before whom the dealer had filed returns under CST Act was having authority to pass the assessment order in the absence of authorisation from the Deputy Commissioner; (ii) the extent, scope and contours of judicial review of assessment order in the writ jurisdiction; (iii) as to whether the sale by appellant to Radha was an inter-state sale for the appellant having filed the bill of entry and having been assessed to customs duty; (iv) as to whether the sale in favour of Radha occasioned movement of goods into the country; (v) as to whether the procedure prescribed for duty free shop was applicable to the present case; and (vi) as to whether the appellant was entitled to be granted time to submit C-Forms?

The High Court in short rejected the contention that the appellant had only acted as an agent of the respective end-buyers while filing the bills of entry at the port of destination while the court also affirmed the assessment order and ruled that customs duty could be assessed only on the importer of goods since sale by the assessee to the end-buyer could have only been affected after the goods were cleared for home consumption having accepted the departments contention that payment of custom duty was conclusive of import having ended. After examining the Customs Act in relation to goods on importation, clearance of goods for home consumption as also the requirements of Bill of Entry (Electronic Declaration) Regulation, 1995 as well as the entries in bills of entry, the court came to the finding that the sale of goods by the appellant to end-buyer would only effectuate after the goods were cleared for home consumption and thus, appellant had imported the goods. Infact, the court also noted that the name of appellant was shows as importer and that there was no reference to Radha (the end buyer).

On the point of writ petition, judicial review of assessment order in writ jurisdiction, the High Court took note of the extensive arguments on behalf of the appellant as regards nature of transaction with reference to quadripartite agreement and endorsement of bill of lading by the importer in favor of the appellant and subsequently by the appellant in favor of Radha (end-buyer) while the goods were on high seas as also the argument that there was no finding against genuineness of the endorsements on the bill of lading. The High Court observed that the appellant had invoked writ jurisdiction against the assessment order without availing the statutory remedy of appeal and also pointed out that though certiorari was the appropriate remedy in challenge to a quasi-judicial order, the appellant had sought a writ of mandamus. The High Court further observed that it was not even the case of the appellant that the first respondent had failed to perform a statutory duty or that the appellant’s legal rights were adversely affected and therefore, the appellant was not entitled to a writ of mandamus. The High Court, thereafter, pointed out the limited parameters within which the validity of assessment orders and findings therein could be examined in certiorari jurisdiction.

In this background, the assessee’s appeal before the Supreme Court.

The main Issue involved was whether the sales in high seas took place in the course of the import of the goods into the territory of India and qualify for exemption u/s 5(2) of the CST Act as also.

Arguments raised by the Appellant/ Petitioner Counsel before the Supreme Court

The counsel for the appellant contended that the sale in question, being in the nature of “sale in the course of import”, is not taxable under the CST Act and that the sale in question, having not occasioned movement of goods between two States within India, is not an “inter-State sale” under Section 3(a) of the CST Act and rather, this sale has occasioned movement of goods from outside India into India.

The Counsel for the Appellant also referred to Article 286 of the Constitution of India while pointing out that the said Article prohibits the State Government from imposing Sales tax on sales made in the course of import or export.

The counsel even referred to Section 5 of the CST Act by referring to sub-section (2) and claimed that the sale of goods is deemed to take place in the course of import of the goods into the territory of India only if the sale occasions such import or is effected by a transfer of document of title to the goods before they have crossed the customs frontiers of India. The counsel relied on Section 3 of the CST Act and the decision of this Court in the case of State of Maharashtra v. Embee Corporation, Bombay[1]  to submit that the terms ‘sale occasioning movement of goods’ and ‘sale occasioning import of goods’ carry the same meaning insofar as Sections 3 and 5 of the CST Act are concerned and that the words “sale of goods” in Section 3 and the words “contract of sale” in Section 4(2) of the CST Act have been assigned the same meaning, which is wider to the meaning of sale in the general law.

The counsel also referred to Tata Iron and Steel Co. Ltd., Bombay v. S.R. Sarkar and Ors.[2] submitting that where sale occasions movement of goods and sale occasions import of goods, the contract of sale or a covenant of a contract of sale triggers the movement from either one State to another or from outside India into India.

The counsel also submitted that the essential ingredients of high sea sales in accordance with Section 5(2) of the CST Act would be of the transfer of document of title and transfer of goods to be made while the goods are on high seas. He relied on J.V. Gokal & Co. (Private) Ltd. v. Assistant Collector of Sales-Tax (Inspection) and Ors.[3] and Minerals & Metals Trading Corporation of India Ltd. v. Sales Tax Officer and Ors.[4] to focus on aspect that transfer of bill of lading is the same as transfer of title in goods.

He further relied on State of Travancore-Cochin and Ors. v. Shanmugha Vilas Cashewnut Factory, Quilon[5] and argued that in this case the goods moved into India from outside as a result of the quadripartite agreement; that the inter-State movement within India was only a part of one whole integrated transaction of sale; that when a part of integrated import transaction involves movement of goods within India, the department cannot selectively question only one part of the transaction and that privity of party cannot be ignored.

Further, on the aspect of sale, he submitted that issuance of debit note on a later date is of no consequence and it merely includes transfer of goods. Thus, the endorsement of bill of lading and its date are the only relevant factor for determining “sale” under Section 5(2) of CST Act.  

On the aspect of Writ Jurisdiction, the counsel contended that even though High Court was not inclined to reappreciate its evidence, has made finding on facts rather than relegating the matter to appellate authority and prays to contest the matter in a statutory appeal by relying upon Star Paper Mills Ltd. v. Union of India and Ors.[6]

Arguments raised by the Department / Respondent before the Supreme Court

The Counsel contended that conjoint reading of the agreements sought to be relied upon by the appellant and the appellant’s dealing with the goods before the customs frontier at

Visakhapatnam, make it clear that the alleged agency agreement between the appellant and Radha (end-buyer) was a sham and nominal document, drawn only for the purpose of evasion of tax liability under the CST Act and that the agency had no role to play in the import transaction. It was submitted that documents presented by the appellant before the customs frontier at Visakhapatnam could not have shown Radha as the real importer since the high seas sale agreement designated appellant as the buyer. He further contends that reading the agreements in question and the real intent behind them, coupled with filing of bill of entry by the appellant, shows that the appellant alone was the importer.

Further, he contends that delivery of goods to Radha by the appellant and their movement from Visakhapatnam (in the State of Andhra Pradesh) on way to Lucknow (in the State of Uttar Pradesh) constituted an inter-State sale and hence, the appellant has rightly been held liable to tax for this inter-State sale.

Thus, main argument raised by the counsel for the Respondent is that appellant alone cleared the goods from the customs area after filing the respective bills of entry and thereafter raised debit notes showing sales to the end-buyers and that such sales having taken place only after the goods crossing the customs frontiers of India and the end-buyers being situated outside the State of Andhra Pradesh to whom the goods were dispatched, the sales in question had only been inter-State sales.

Supreme Court Observation:

The Apex Court first determined that ‘sale in the course of import’ carries three essential features – (i) that there must be a sale; (ii) that goods must actually be imported into the territory of India; and (iii) that the sale must be part and parcel of the import. The Court referred to the case of J.V Gokal and Co. wherein the Court examined the questions as to what does the phrase “in the course of the import of the goods into the territory of India” convey by referring to the findings in Shanmugha Vilas Cashew Nut Factory case which made following observations:

“.. The course of the import of the goods may be said to begin when the goods enter their import journey i.e. when they cross the customs barrier of the foreign country and end when they cross the customs barrier of the importing country”.

The relied upon case also took note of the observation made by Justice Das who had expressed his minority judgment but agreed with the majority while holding that “ Such sales or purchases, by delivery of shipping documents while the goods are on the high seas on their import journey were and are well recognized species of transactions done every day on a large scale in big commercial towns like Bombay and Calcutta and are indeed the necessary and concomitant incidents of foreign trade. To hold that these sales or purchases do not take place ‘in the course of’ import or export but are to be regarded as purely ordinary local or home transactions distinct from foreign trade, is to ignore the realities of the situation. Such a construction will permit the imposition of tax by a State over and above the customs duty or export duty levied by Parliament. Such double taxation on the same lot of goods will increase the price of the goods and, in the case of export, may prevent the exporters from competing in the world market and, in the case of import, will put a greater burden on the consumers. This will eventually hamper and prejudicially affect our foreign trade and will bring about precisely that calamity which it is the intention and purpose of our Constitution to prevent.”

The relied upon case thereafter summarized the legal position in its Para 11 which read as “ The legal position vis-a-vis the import-sale can be summarized thus: (1) The course of import of goods starts at a point when the goods cross the customs barrier of the foreign country and ends at a point in the importing country after the goods cross the customs barrier; (2) the sale which occasions the import is a sale in the course of import; (3) a purchase by an importer of goods when they are on the high seas by payment against shipping documents is also a purchase in the course of import, and (4) a sale by an importer of goods, after the property in the goods passed to him either after the receipt of the documents of title against payment or otherwise, to a third party by a similar process is also a sale in the course of import” before concluding that  that the sales in question took place in the course of imports of goods into India.

The Apex Court also relied upon Minerals & Metals case which also relied upon J.V Gokal and Co. and observed that “The judgment states that it is well settled in the commercial world that a bill of lading represents the goods and the transfer of it operates as the transfer of goods. The delivery of the bill of lading while the goods are afloat is equivalent to the delivery of the goods themselves” thereby, treating sale in reference as that in the course of import.  The Supreme Court also emphasized on the decision in Embee Corporation which held that the terms ‘sale occasioning movement of goods’ and ‘sale occasioning import of goods’ in Sections 3 and 5 of the CST Act carry the same meaning.

It also observes that sale or purchase of goods under section 3 of the CST Act shall deemed to have taken 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. Further, section 5 provides the basic principles for determining as to when a sale or purchase of goods takes place in the course of import or export.

The Apex Court then distinguishes the decisions relied on by the Petitioner in Hotel Ashoka (Indian Tourist Development Corporation Ltd.). v. Asst Commr of Commercial Taxes & Anr, Tata Iron & Steel Co. Ltd., Bombay v. S.R. Sarkar & Ors. and State of Maharashtra v. Embee Corporation, Bombay on factual grounds.

The Court relied on the principles laid down in K. Gopinathan Nair and Ors. v. State of Kerala[7] and stated that the same would apply to the present case. The propositions in context of sale or purchase which were deemed to be imports were laid down as under:

(1) The sale or the purchase, as the case may be, must actually take place.

(2) Such sale or purchase in India must itself occasion such import, and not vice versa i.e. import should not occasion such sale.

(3) The goods must have entered the import stream when they are subjected to sale or purchase.

(4) The import of the goods concerned must be effected as a direct result of the sale or purchase transaction concerned.

(5) The course of import can be taken to have continued till the imported goods reach the local users only if the import has commenced through the agreement between foreign exporter and an intermediary who does not act on his own in the transaction with the foreign exporter and who in his turn does not sell as principal the imported goods to the local users.

(6) There must be either a single sale which itself causes the import or is in the progress or process of import or though there may appear to be two sale transactions they are so integrally interconnected that they almost resemble one transaction so that the movement of goods from a foreign country to India can be ascribed to such a composite well-integrated transaction consisting of two transactions dovetailing into each other.

(7) A sale or purchase can be treated to be in the course of import if there is a direct privity of contract between the Indian importer and the foreign exporter and the intermediary through which such import is effected merely acts as an agent or a contractor for and on behalf of the Indian importer.

(8) The transaction in substance must be such that the canalizing agency or the intermediary agency through which the imports are effected into India so as to reach the ultimate local users appears only as a mere name lender through whom it is the local importercum- local user who masquerades.”

The Court while making a note that when the goods reached the port at Vishakapatnam, the appellant carried out proceedings under Customs Act and filed a bill of entry for warehousing and thereafter, bill of entry for home consumption and only on this basis, custom duty was assessed. Post this, the goods were moved from Andhra Pradesh to other states where end buyers were situated, however, the goods were not cleared by the end-buyers after paying the requisite customs duties. In this background and applying aforementioned principles, the court held that appellant had acted merely as an intermediary or name-lender through whom the import was effected and merely acted as an agent for and on behalf of the Indian importer that is, the end-buyer. The Court also observed that the significant facts of the present case could not have been overlooked as the appellant had merely filed the bill of entry for warehousing and the bill of entry for home consumption and that before the customs authorities there was no suggestion that the goods in question had already been transferred, on high seas, to the alleged real importer.

The Apex Court agreed with High Court findings that the inclusive definition of “importer” in Section 2(26) of the Customs Act cannot be used to usurp the identity of an importer from the person who filed the bill of entry; and the person in whose name the bill of entry is filed, does not cease to be an importer. In this case, the name of the appellant was reflected as importer in the Import General Manifest (IGM) of the vessel/s that brought the goods in question to the port at Visakhapatnam. The High Court examined the entire process relating to the arrival of goods as cargo in a vessel and filing of IGM as also the contents of the bill of entry and has pointed out that the cargo declaration form, an essential part of IGM, was required to carry, amongst others, the particulars of bill of lading and the name of consignee/importer. After finding that the name of the appellant was reflected as importer in IGM, the High Court has observed that if the alleged second high seas sale had taken place, the IGM would have reflected the name of the last high seas sale purchaser as the importer and if there was any bonafide omission, the IGM would have necessitated amendment because only the last purchaser of the goods on high seas could have been the importer/consignee. The High Court has also observed that there was no material on record to show that either the IGM contained the name of end-buyer as the importer/consignee or that the same was subsequently amended in terms of Section 30(3) of the Customs Act. The Court note that these had been the pivotal reasons for which the High Court rejected the suggestion of second high seas sales in favour of the end-buyers and held that the only attempt of the appellant had been to avoid inter-State sales under the CST Act. In the given facts, the High Court specifically recorded the findings that the sale of goods by appellant to the end-buyers had not been high seas sales; and such sales could have been effected only after the appellant was assessed to customs duty and had cleared the goods for home consumption.

The Supreme Court noted that the effect of raising debit notes by the appellant on the end-buyers has its own bearing as the appellant had admittedly raised such debit notes on the end-buyers but only after having cleared the goods by filing the bill of entry for home consumption. Once the suggestion about the second high seas sales is not accepted and it is found that the appellant had been the importer of goods and had cleared them for home consumption, the natural consequence of raising of such debit notes on the end-buyers situated in different States and movement of goods to such end-buyers would be to take these transactions in the category of inter-State sales in terms of Section 3(a) of the CST Act.

In this background, the court held that the appellant was not entitled to the exemption of Section 5(2) of the CST Act and has rightly been held liable for tax over inter-State sales. It held that the High Court was right to hold that, once the appellant got released the goods after filing the bill of entry for home consumption, the import stream dried up and the goods got mixed in the local goods. Any movement of the goods thereafter was bound to be a sale under Section 3(a) of the CST Act; and such movement being from the State of Andhra Pradesh to other State would have been a matter of inter-State sale.

On the aspect of an alternative remedy, the Court held that the assessee despite being aware of the availability of remedy of statutory appeal, consciously chose to file writ petitions against the assessment orders aforesaid and consciously contested the entire matter in the High Court. The High Court, even after noticing the framework of certiorari jurisdiction, examined the merits of the case thoroughly and even examined the submission made for the first time in writ petitions that the import of goods was occasioned by the sales in question. After having consciously invoked the writ jurisdiction of the High Court and having contested the matter on merits, the appellant cannot now be allowed to reopen the matter on appeal. The Supreme Court added that litigation cannot be allowed to be unendingly kept alive at the choice of a litigant. With respect to the position in Star Paper Mills Ltd., the Court did not apply the position in this case on the ground that there were analysis of the material placed on record. The Court held in simple words that-

“extraordinary writ jurisdiction cannot be utilised by a litigant only to take chance and then to seek recourse to the other remedy after failing in its attempt on the basic merits of the case before the High Court. A litigation cannot be allowed to be unendingly kept alive at the choice of a litigant.”

The Apex Court thus held that, claimed exemption under Section 5(2) of the CST Act has rightly been denied to the appellant and the HC has been justified in dismissing the writ petitions filed by the appellant.

In conclusion, the SC observed that the deposited made by the Petitioner of an amount of Rs. 7.07 lakhs with the Department is to be adjusted against the dues of the assessee.

On the said basis, the assessee’s appeals were dismissed.

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The author, after doing his Bachelors in Law, pursued Masters in Law from the National University of Singapore. He is currently an Associate in the Dispute Resolution Practice at AZB and Partners, Delhi.

[1] (1997) 7 SCC 190

[2] AIR 1961 SC 65

[3] (1960) 2 SCR 852

[4] (1998) 7 SCC 19

[5] AIR 1953 SC 333

[6] 1995 Supp (4) SCC 674

[7] (1997) 10 SCC 1

Disclaimer: The views or opinions expressed are solely of the author.