Report No. 30
132 Suggestions received.-
We shall now summarise the suggestions received by us 1. (Vide paragraph 133 to 138).
1. These suggestions were received in response to the Press Communique issued by us inviting views on the question referred to us. Views of State Governments were also invited by a separate letter.
133. Many persons and commercial bodies have stated that there is no need to amend the law as laid down in Khosla's case1.
It has been pointed out in one of the suggestions2, that the exemption (as interpreted in Khosla's case does not means a loss of tax, but the liability for tax is transferred to the other party, if the other party is at all liable to tax. If the Director General of Supplies and Disposals had imported the goods in his own name, there was no question of tax. Khosla and Co. were merely acting as indent agents, and should not be called upon to pay tax.
In another suggestion sent by a Cotton Association3, it has been stated, that cotton is an essential commodity and is being specifically imported into India only against "mills orders who alone was given import licenses and hence ought to get the benefit of section 5 as in the course of import into India".
In one suggestion it has been emphasised that4 the import of goods is subject to rigorous control by Government; that since devaluation, import has become costlier, and that in the context of rising industrial production and maintenance of the same at reasonable levels, it becomes necessary to import capital goods not available in India and spare parts for machinery for preventive maintenance, as well as essential raw materials to keep production at reasonable levels. If sales tax were to be charged on imported goods, it certainly adds to the cost of the end products and this element can scarcely be ignored in the context of inflationary tendencies.
In a suggestion sent by a Textile Mills in Bombay5, it has been stated that any change in the law, to impose tax on cotton imported by foreign trading agents, will cause disorder in the whole business sector of cotton import.
In one article6, it has been emphasised that Khosla's case merely follows previous rulings, in Tata Iron Co. etc., namely, movement of goods as a result of a convenant or incident of the contract of sale; that if protection to export and import trade was needed in 1950, there is even a greater need today, and that transactions in which movement is not the result of a contract or in which there is a possibility of diversion, are still taxable.
1. S. Nos. 21, 29, 36, 44, 46 and 78.
2. S. No. 21.
3. S. No. 36.
4. S. No. 44 (A Chamber of Commerce).
5. S. No. 46.
6. Article by R.V. Patel, in Sales Tax Review 1966 (September), pp. 118 to 121 (Enclosure to S. No. 78).
134. A few suggestions are to the effect that the propositions laid down in Khosla's case should be codified1.
1. S. Nos. 30 and 43.
One suggestion is to amend section 5(2) of the Central Sales Tax Act, 1956, as follows1.-
1. S. No. 30 (from an Industrial concern in Bombay).
"A sale or purchase of goods shall be deemed to take place in the course of import of the goods into the territory of India, if incidental to the contract to import the goods the sale or purchase 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.".
A Chamber of Commerce1 has suggested that an Explanationshould be added to section 5, to clarify that the following types of transactions should be regarded as sales/purchases having taken place in the course of impor.-
1. S. No. 43.
(a) supplies of goods to Government Departments, where the goods are imported on the strength of an import licence granted to the suppliers on the specific recommendation of the Government Department concerned, and are handed over by the suppliers to the Government Department concerned; and
(b) goods imported by suppliers at the request of holders of Actual Users' licenses and on the strength of a letter of authority obtained by them in favour of the suppliers and handed over to license holders after clearance,
135. Some of the suggestions even go further and desire an extension of the exemption not only to situations covered by Khosla's case but to others.1
1. S. Nos. 28, 37, 52 read with 57 (53).
Thus it has been pointed out1 that a sale by transfer of documents of title is not practicable now since import licenses are usually not transferable and therefore the transfer documents is not recognised by customs authorities. As such goods can be cleared only by the licensee or his agent and customs duty is paid in his name and delivery is taken only in his name.
If the view that because the importer (license holder) has control over the goods until clearance therefore the sale is not in the course of import is upheld-(a view stated to be taken by Bombay Sales Tax authorities) then no sale can be said to have taken place during the course of import.
It has, therefore, been suggested, that section 5(2), in so far as it relates to "occasioning the import", should be amplified to cover forward transactions whereunder the holder of an import license, before or after ordering out the goods, enters into a "forward contract" for sale with, say, B, and B deposits, with the license holder, some security and on receipts of shipping documents in the Bank, B pays the amount to the license holder, who pays it in the Bank and gets the documents released, and then,-
1. S. No. 28.
(a)(i) the license holder passed the documents to B to pay customs duty and to take delivery, or
(ii) B pays the duty to the license holder, who takes delivery, and
(b) thereafter the license holder issues his bill to B for sale of the goods as per terms of the contracts, and settles the account finally by recovering the balance of the sale price or by refunding the excess, as the case may require;
It has been stated, that in the above case, the sale has taken place much before the goods are cleared from customs, and even the sale price is paid by the buyer to the seller before clearance. Merely because the customs duty is paid in the seller's name because he had the import license, the sale is not recognised by the Sales tax authorities in Maharashtra as a sale in the course of import; but if this view is correct, no sale can be said to have taken place during the course of import.
It is also stated, that practically no sale (of imported goods) can be made without license, and bona fide transactions of "forward sale", where the contract is made in advance, and the value of the goods is also paid in advance, should be treated as sales in the course of import.
Another suggestion is1, that the first sale after import should be exempted, and, to compensate the States for loss of revenue, a customs duty surcharge or similar levy could be introduced. Individual States may agree to such amendment if, for instance, revenues collected as part of customs in lieu of sales tax are allocated for export promotion schemes. Such an amendment, it is stated, would be a great advantage, for the following reasons-
1. S. No. 37 (Indo-German Chamber of Commerce).
(a) Economy in collection would be achieved, since individual contracts need not be scrutinised.
At present, it is stated, thousands of contract documents are verified by trade, sales tax authorities and tribunals etc. to determine taxability.
(b) Revenues would be paid on clearance through customs.
(c) Undue accumulation of tax on same material will be avoided, and there will be no dislocation of normal import trade channels.
At present, it is stated, numerous contracts are artificially placed to suit sales tax requirements, with corresponding disadvantages to the purchaser and the trade. The suggestion further, urges, that it is the wording "in the course of import" which has caused various interpretations, and that these complications are, unfortunately, not removed by the judgment in Khosla's case, because it will be very difficult to find a more precise wording.
In the suggestion of a Millowners Association1, it has been stated, that there is every need for enlarging the area of transactions covered not only by section 5(2), but also by section 5(1). It is stated, that the sub-sections, as at present worded, do not encompass several other situations which could be genuinely described as sales or purchases taking place in the course of import or export in the true spirit of Article 286.
A good example of liberal extension, it is stated, is the exemption for two sales prior to export under the Bombay Sales Tax Act, 1959 2. It is also urged, that it is a widely prevalent practice in the import trade of India to import one's requirements through the local agent of the overseas manufacturers; and the local agents' presence has obvious advantages (obtaining quotations quickly and correctly, financing, helping in clearing, etc.). In essence, it is stated, imports by local agents for subsequent sale are no different from direct imports by the Indian customers from the overseas manufacturers.
1. S. No. 52, read with S. No. 57.
2. The reference seems to be to section 12, Bombay Sales Tax Act (Bombay Act 51 of 1959).
The suggestions of one Chamber of Commerce1 is, that if section 5 is amended so as to exclude transactions of the type in issue in Khosla's case, then, further complications would arise in interpretation of the section, leading to further disputes, proceedings and harassment of dealers. It states, that the scope of section 5 should be enlarged so as to apply the section not only to the cases of the nature specified in Khosla's case, but also to other like transactions, in particular cases in which the licenses are issued for the import of particular kinds of goods, whether manufactured or not for a particular purpose. If the scope of section 5 is so enlarged, then, it is stated, it would certainly put an end to the uncertainty in the construction of the section.
1. S. No. 53.
136. A few replies1 are in favour of restricting the exemption in a manner which would, in effect, nullify the decision in Khosla's case.
1. S. Nos. 32, 45, 90, 102.
One suggestion1 is that section 5 requires substantial amendment so as to exclude the transactions of the type in issue in Khosla's case.
1. S. No. 32.
The suggestion of a State Government1 is, that an Explanation should be inserted in section 5, to clarify that, for the purpose of this section, where there takes place more than one sale in the course of a single movement of goods from a foreign country to India, the exemption admissible under this section will be confined only to the first of such sales. The proposed Explanation, it is stated, may also apply to a sale by transfer of documents of title.
1. S. No. 45.
The suggestion of the Administration of a Union territory1, is, that a provision should be made, either by amending section 5(2) or by inserting an Explanation, that only sales or purchases, arising from contracts between a seller exporting the goods from a foreign country and a person purchasing the goods from such seller or purchasing the goods by transfer of documents of title to the goods before the goods have crossed the customs frontiers of India, shall be deemed to take place in the course of import.
1. S. No. 90.
One State Governments 1 has suggested, that only cases where movement (inter-State or by way of import) is a direct result of a convenant in the contract of sale, should be covered. Its letter makes a distinction between movement occasioned by a convenant and movement incidental to the contract. We quote the amendment suggested by it in section 5.-
1. S. No. 99 (A State Government).
"Amendment of section 5:-In section 5 of the principal Act, the following Explanation shall be added at the end, namely.-
"Explanation.-Where the movement of goods is merely incidental to but not a direct result of a convenant of the contract of sale, it shall not be deemed to be the movement occasioned by such sale or purchase."1.
1. Similar amendment in section 3 has been suggested, in the same letter.
137. Some of the suggestions 1 have emphasised the need for legalising the collection of tax by dealers before the decision in Khosla's case.
1. S. No. 55, S. No. 66, S. No. 29.
Thus, it has been suggested1 that for the tax already charged by dealer and deposited with Sales Tax Authorities claims should be against the State and not against dealer. It has been stated, that the tax received by the dealers from the D.G.S.&D. has already been deposited by the dealers with the Sales Tax Authorities concerned, in terms of the State laws. Now, the D.G.S.&D. are deducting the amounts of Sales Tax, even in cases where the supplies were completed before 18th January, 1966, (date of the judgment in Khosla's case ).
It is, therefore, suggested, that while considering an amendment of section 5, a provision should be made in the Act, if necessary, that in cases of sales made prior to 18th January, 1966, for which sales-tax has been already deposited, the sales tax should not be realised from the parties (dealers), and any realisation made on that account should be refunded to them. The trade should not be allowed to suffer.
1. S. No. 66.
Another suggestion1 is, that an Ordinance to confine the application of the judgment in Khosla's case to subsequent transaction is advisable, in order to save State Governments from refund claims on past transactions.
1. S. No. 29.
138. The Finance Ministry1 has in its reply to the Law Commission's request for comments as to the need for amendment of section 5, stated, that its views are those expressed in the papers which led to the reference to the Law Commission.
1. S. No. 89.
Those papers1 raise a query whether the Act of 1956 was intended to cover transactions of the type in issue in Khosla's case or the transactions referred to the Government of West Bengal's letter. In those papers emphasis was laid on para. 9 of the earlier Report 2, where the suggestion to exempt the first sale following import was not accepted.
1. Ministry of Finance, Dept. of Revenue & Insurance, U.O. No. 3(3)-ST/66, dated 2nd July, 1966 to Ministry of Law, Deptt. of Legal Affairs.
2. Second Report of the Law Commission (Parliamentary legislation relating to Sales Tax), para. 9.
It is stated, that there is nothing in the printed Report of the Law Commission to suggest that it was the Law Commission's intention that transactions of the nature described in the judgment in Khosla's case should fall within the scope of "sale in the course of import". The papers seek the advice of the Law Ministry as to whether any amendment to section 5(2) of the Act is called for, if the judgment in Khosla's case goes beyond the intention of Law Commission, and also whether (if the object cannot be achieved by amending the Act), the Constitution should be amended for the purpose.
139. We have already stated1, that we do not consider any change in the law to be necessary. For the purpose of the present Report, it is not necessary to consider the question of codification of the propositions laid down in Khosla's case, or enlargement of the existing exemption in any other manner. We bring those the various suggestions to the notice of the Government, for such action as may be considered proper.
1. Para. 130, supra.
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