Report No. 30

Section 5 of the Central sales Tax Act, 1956-Taxation by the States of Sales in the Course of Import

1. Genesis of the Report.-

This reference has been made to the Law Commission in the following circumstances:-

On January 18, 1966, the Supreme Court, in K.G. Khosla's case1 laid down the boundaries, of the ban under Article 286(1)(b) of the Constitution on the imposition of sales tax on import sales. It also determined the extent and meaning of section 5 of the Central Sales Tax Act 2.

As that decision circumscribes the power of State Governments to impose sales tax, the State Government of West Bengal, by its letter dated June 18, 1966, drew the attention of the Government of India (Ministry of Finance) to the consequences of the decision on its revenues derived from sales tax on certain classes of sales and purchases-import-export sales and purchases-which, hithertofore, the State Government had been taking as being outside the ban of Article 286(1)(b).

1. K.G. Khosla & Co. Pvt. Ltd. v. Deputy Commissioner of Commercial Tax, Madras, AIR 1966 SC 1216: 17 STC 473.

2. Central Sales Tax Act, 1956 (74 of 1956).

2. The State Government, requested the Government of India to look into the matter and to take steps for amending the Central Sales Tax Act, 1956, so as to exclude such sales from the purview of section 5 of that Act.

3. The Government of India, Ministry of Finance, after noting that the Central Sales Tax Act was passed after taking into account the recommendations of the Law Commission in the Second Report, and that that Report itself was based on two decisions of the Supreme Court, requested the Ministry of Law (Department of Legal Affairs), to refer the matter to the Law Commission for its consideration, in the light of the fact that existing section 5 of the Central Sales Tax Act embodies the principles recommended by the Law Commission in its Second Report.

The Ministry of Finance, in particular, raised a query whether the decision in Khosla's case went beyond what the Law Commission in its Second Report intended. (In this connection, it referred to para. 9 of the Second Report). The Ministry of Law1 has referred the matter to the Law Commission for its consideration2.

That is the genesis of this Report.

1. Ministry of Law, Department of Legal Affairs (Advice F Section), Note No. Nil, dated the 18th July, 1966, to the Law Commission.

2. For details of the question referred to the Law Commission, see para. 5, infra.

4. Transactions to be considered in the Report-The transactions to be considered in the present Report may be gathered from the following passages in the Note of the Ministry of Laws1.

"Now, in K.G. Khosla's case (17 STC 473) which is a case under section 5(2) of the Central Sales Tax Act, 1956, the Supreme Court has held that before a sale could be said to have occasioned the import, it is not necessary that the sale should have preceded the import. The facts in that case were that the assessee entered into a contract with the D.G. S.&D. New Delhi, for the supply of axle box bodies. The goods were to be manufactured in Belgium according to specifications and the D.G.I.S.&D., London, or his representative was to inspect the goods at the works of the manufacturers and issue an inspection certificate.

Another inspection was provided for at Madras. The assessee was entitled to be paid 90 per cent. after inspection and delivery of stores to the consignee and the balance of 10 per cent. was payable on final acceptance by the consignee. In the case of deliveries on f.o.r. basis, the assessee was entitled to 90 per cent. payment after inspection on proof of despatch and the balance of 10 per cent. after receipt of stores by the consignee in good condition.

The assessee was entirely responsible for the execution of the contract and for the safe arrival of the goods at the destination. The contract also provided that notwithstanding any approval or acceptance even by an Inspector, the consignee was entitled to reject the goods if it was found that the goods were not in conformity with the terms and conditions of the contract in all respects.

The manufacturer consigned the goods to the assessee in ships under bills of lading and they were cleared at the Madras harbour by the assessee's clearing agents and despatched for delivery to the Southern Railway in Madras and Mysore. The question arose, whether the sales by the assessee to Government Departments were in the course of import of goods within the territory of India and as such exempt from taxation under section 5(2).".

'The High Court of Madras held that before a sale can be said to have occasioned the import, it was necessary that the sale should have preceded the import. All the facts hereinbefore stated "serve to show that the terms of contract did not visualise a sale in the sense that there was to be a passing of property in the goods to the purchaser when the goods were under manufacture, or after the manufacture had been completed and the goods were packed ready for export from Belgium".

All these stipulated conditions for the completion of the sale show that there could be such a transfer of property in the goods only after certain incidents had taken place in relation to those goods after the import of the goods into India. It seems illogical to conceive of a somewhat contradictory situation where, even in the absence of these incidents taking place, it could be deemed that the sale had taken place at Belgium and that such a sale had occasioned import of the goods'.

"This finding of the High Court was reversed by the Supreme Court...."

"The Government of West Bengal have stated in their letter of June 18, 1966, that in actual practise many cases of import of goods into India took place through the intermediaries of the Indian branch of the foreign manufacturers. The Indian purchaser places an order with the Indian branch of the foreign manufacturer for the supply of goods under a contract with him and the Indian branch.

The goods are shipped from the foreign country not direct to the Indian purchaser but to the foreign manufacturers' branch in this country who clears the goods and then delivers them to the Indian purchaser. It is one of the terms of such contract that the goods can be rejected even after they have arrived in India if they are not according to the approved specifications.

In the view of the State Government, therefore, in such cases, there is no sale of goods in the course of their actual import into India and precisely in the same facts the High Court of Madras has held in K.G. Khosla's case, discussed above, that there cannot be a sale in the course of import, because property in the goods passes only after certain incidents have taken place in relation to the goods after they have been imported into India. The Supreme Court has, however, ruled otherwise.".

"The Government of West Bengal points out that following this decision of the Supreme Court the D.G.S.& D. and Indian Railway authorities have been refusing to pay sales-tax on their purchase of goods and have been threatening to claim refund of sales-tax so far paid on earlier purchases. Similar demands are apprehended from private traders.".

1. Ministry of Law, Department of Legal Affairs, Advice F Section, note dated 18th July, 1966 to the Law Commission.