The sales taxability of transactions relating in the course of import and export has been the subject matter of intense judicial scrutiny, particularly due to exemption from the tax granted to transactions under the Central Sales Tax Act, 1956 (“CST Act”). Section 5 of the CST Act provides that any transaction of sale or purchase that either occasions the import/export of goods into/outside India or is effected by a transfer of documents of title to goods before/after the goods cross the customs frontiers of India qualifies as a sale or purchase in the course of import/export is hence exempt from tax. The expression ‘crossing the customs frontiers of India’ has been defined in Section 2 thereof as crossing the limits of the area of a customs station in which imported goods or exported goods are ordinarily kept before clearance by customs authorities. The explanation to this Section states that ‘customs station’ will be as defined in the Customs Act, 1962, as any customs port, customs airport or land customs station. The above Act further defines ‘customs port’ as any port appointed as such thereunder as well as an inland container depot, appointed as such. The courts in India have repeatedly ruled on the above provisions of law.
In a very recent judgment, the Supreme Court dealt with the issue of exemption from tax under the above Section for sale of goods effected from duty free shops to passengers. In M/s Hotel Ashoka Vs. Assistant Commissioner of Commercial Taxes [(2012) 03 VIL (SC)], the Court held that since duty free shops were located in the customs airports of the country, sales therefrom to both inbound & outbound passengers were made before/after the goods had crossed the customs frontiers and hence such sales were exempt from tax under the CST Act. While the aforesaid decision is wholly unexceptionable, the Supreme Court has also made certain observations relating to taxability of goods from bonded warehouses and these give rise to serious legal consequences since the observations, in the context in which they have been made, will clearly have the force of law and cannot be treated as mere obiter dicta.
| SUPREME COURT SAYS |
| * when the goods are stored in the bonded warehouses, they cannot be said to have crossed the customs frontiers of India |
| * since duty free shops were located in the customs airports of the country, sales therefrom to both inbound & outbound passengers were made before/after the goods had crossed the customs frontiers and hence such sales were exempt from tax under the CST Act |
The facts of the above case were that during the relevant period, M/s Ashoka Hotels had imported goods from foreign countries and stored these in customs bonded warehouses. These goods were subsequently transferred to duty free shops situated within Bengaluru airport, as and when stocks of such goods lying at these shops were exhausted, and were subsequently sold therefrom. On the above facts, the Supreme Court has observed that when the goods are stored in the bonded warehouses, they cannot be said to have crossed the customs frontiers of India. Accordingly, the Court has concluded that sales from the duty free shops are exempt from tax, without appearing to distinguish between bonded warehouses and duty free shops. This has led to a piquant situation since the various judgements of the Courts and the Tax Tribunals relating to the taxability of goods sold from bonded warehouses have evidently not been discussed in this judgement, given that there was no need to do so since the matter in the present case was limited to sale of goods from the duty free shops.
If the relevant provisions of the CST Act and Customs Act referred to in the initial paragraph were to be perused, it would be seen the once goods are cleared by the customs authorities, upon the filing of the relevant documentation by the importer of a Bill of Entry of whatever nature, and the goods physically leave the area of the port/airport, they would be deemed to have crossed the customs frontiers of India. Typically, customs bonded warehouses are situated in areas which are evidently beyond any customs port/airport and goods are stored in such warehouses consequent to the filing of the appropriate Bill of Entry, based on which they are allowed to be cleared from the customs station and transported to such warehouses. Of course, if such a bonded warehouse were to be located within a customs port/airport, goods stored in such a warehouse could be argued to have not crossed the customs frontiers of India.
There is a significant amount of case law relating to the taxability of goods sold from customs bonded warehouses.
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It must be understood here that bonded warehouses extend to those treated as such under the Customs Act such as in 100% Export Oriented Units (EOUs)/Software Technology Parks (STPs) etc, as well as units in the Special Economic Zones (SEZs), besides those operated as such for the sole purpose of storage of goods.
Consequently, the case law referred to above has dealt with all of the aforesaid categories of bonded warehouses. More importantly, the decisions have been in conflict with one another. A detailed examination of the case law will not be possible in this article but suffice it to say that there is an adequate basis in law to argue that sales from such bonded warehouse will be exigible to the sales tax since they would not be covered within the ambit of the aforesaid exemption under Section 5 of the CST Act.
Based on the aforesaid decision of the Supreme Court however, it could now be argued that sales of goods from bonded warehouses of any kind cannot be charged to the sales tax.
This is sure to add to the uncertainty surrounding the taxability of transactions of sales in the course of import or export under Section 5 of the CST Act.
A variety of transactions, including those commonly known as High Seas Sales, effected through such bonded warehouses could now arguably be outside the tax net.
It remains to be seen as to how the tax authorities respond to the above decision and whether they would possibly seek to file a review petition. At the same time, it would be interesting to note how the Courts and the Tax Tribunals deal with this vexatious matter, in the light of this decision of the Supreme Court.
The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd. pwctls.nd@in.pwc.com
Supported by Monika Arora and Kishore Kumar