sale in the course of import & high seas sales - h d...

Article by Mr. Hemant Desai – Advocate – VAT – Surat | www: hddesai.com |

Sale in the course of Import & High Seas Sales

Article by: Mr. Hemant Desai

B.Com.,LL.B.

Advocate – VAT- SURAT

E-mail: [email protected]

1. Hon’ble Supreme Court on February 3, 2012 in HOTEL ASHOKA

(ITDC) v. ACCT decision reported in JT 2012 (2) SC 66; (2012) 2

SCALE 290 held that, the sale by duty free shops at the arrival lounge

and dispatch gate to the passenger of the international airport located

at a place well inside the customs area are transactions outside India

not exigible to any tax by State in which the airport is situated.

Reaching to conclusion the Apex Court considered the provisions of

section 5 of the Central Sales Tax Act, 1956 (for short as ‘Act, 1956’)

and Article 286 of the Constitution of the India.

2. Apex Court referred to the admitted facts that, the goods which had

been brought from foreign countries by the appellant had been kept in

bonded warehouses and they were transferred to duty free shops

situated at International Airport of Bengaluru as and when the stock

of goods lying at the duty free shops was exhausted. Apex court also

referred to an admitted fact that the appellant had executed bonds

and the goods which had been brought from foreign countries had

been kept in bonded warehouses by the appellant. When the goods are

kept in the bonded warehouses, it cannot be said that the said goods

had crossed the customs frontiers. The goods are not cleared from the

customs till they are brought in India by crossing the customs

frontiers. When the goods are lying in the bonded warehouses, they

are deemed to have been kept outside the customs frontiers of the

country and the appellant was selling the goods from the duty free

shops owned by it at Bengaluru International Airport before the said

goods had crossed the customs frontiers. Thus the locations of the

duty free shops were at a place much before the incoming passengers

clear their baggage through the customs hence held that, the goods


sold at such duty free shop having been sold before the goods crossed

Customs Frontiers of India, is squarely covered by section 2 (11) of the

Customs Act, 1962 as well as Article 286 of the Constitution.

3. The State placed reliance on the non existence of transfer of document

of title to the goods as provided in the later part of section 5 (2) the

Court held that, with regard to sale not taking effect by transfer of

documents of title to the goods are absolutely irrelevant. Transfer of

documents of title to the goods is one of the methods whereby delivery

of the goods is effected. Delivery may be physical also. In the instant

case, at the duty free shops, which are admittedly outside the customs

frontiers of our country, the goods had been sold to the customers by

giving physical delivery and therefore held to be not amenable to any

levy under the State laws.

4. Section 5(2) of the Act, 1956 has been matter of considerable debate

and explained or interpreted by the Supreme Court. Case of BINANI

BROS. (P) LTD. v. UOI reported in (1974) 1 SCC 459; (1974) 33 STC

254 the apex court has considered and explained various cases. The

recent decision supra has tempted me more to analyze the subject

matter in detail. In the said context the relevant statutory provisions

as well as the Article of Constitution of India are reproduce as below:

Article 286 - Restrictions as to imposition of tax on the sale or purchase of goods:

(i) No law of a State shall impose, or authorize the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place --

(a) outside the State; or

(b) in the course of the import of the goods into, or export of the goods out of, the territory of India.

1[***]

2[(2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1).

3[(3) Any law of a State shall, in so far as it imposes, or authorises the imposition of,--

http://www.manupatrafast.com/ba/dispbot.aspx?nActCompID=17280#f1




(a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or

(b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify.]]

1 Explanation omitted by the Constitution (Sixth Amendment) Act, 1956, section 4.

2 Substituted by the Constitution (Sixth Amendment) Act, 1956, section 4, for clauses (2) and (3).

3 Substituted by the Constitution (Forty-sixth Amendment) Act, 1982, section 3, for clause (3).

CUSTOMS ACT, 1962

Section 2 - Definitions

In this Act, unless the context otherwise requires,-

(11) "customs area" means the area of a customs station and includes any area in which

imported goods or export goods are ordinarily kept before clearance by Customs Authorities;

(12) "customs port" means any port appointed under clause (a) of section 7 to be a customs

port, and includes a place appointed under clause (aa) of that section to be an inland

container depot;

(13) "customs station" means any customs port, customs airport or land customs station;

THE CST ACT, 1956:

Section 2 - Definitions

In this Act, unless the context otherwise requires,-

1(ab) "crossing the customs frontiers of India" means crossing in the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance

by customs authorities.

Explanation: For the purposes of this clause, "customs station" and "customs authorities"

shall have the same meanings as in the Customs Act, 1962 (52 of 1962);]

1. Inserted by Act 103 of 1976, section 2 w.e.f. 7-9-1976.

Section 5 - When is sale or purchase of goods said to take place in the course of import or export.

(2) A sale or purchase of goods shall be deemed to take place in the course of import of the

goods into territory of India only if the sale or purchase either occasion such import or is

effected by a transfer of documents of title to the goods before the goods have crossed the

customs frontier of India.




5. As per Article 286(1) of the Constitution of India, tax cannot be levied

by State Government in respect of sale in the course of import.

Section 5(2) of the Act, 1956 clarifies the ambit and scope of words

used in article 286(1). It refers that, a sale or purchase of goods is

deemed to be in the course of import of goods into territory of India

only if (a) the sale or purchase occasions such import; or (b) the sale

or purchase is effected by a transfer of documents of title to the goods

before the goods have crossed the customs frontier of India.

6. Provisions of Customs Act, 1962 is interlinked with Act, 1956. So

combined operation of both and conjoint reading of section 4(b) and (c)

of the GVAT Act, 2003 read with section 5 (2) of the Act, 1956 and

definition clause 2(ab) thereof, makes the position clear that such law

has incorporated the definition under the Customs Act has to be fully

applied for understanding the impact under the Vat Tax Law. Due to

the nexus, combined and conjoint reading only provides answer in

most convincing way. For proper analysis of subject matter I have

dissected only the relevant provisions which stand as follows.

7. In the course of Import: The crucial words of the phrase are "import"

and "in the course of". The term "import" signifies etymologically "to

bring in". To import goods into the territory of India therefore means

to bring into the territory of India goods from abroad. The words

"course" means "progress from point to point". The course of import,

therefore, starts from one point and ends at another. It starts when

the goods cross the customs barrier in foreign country and ends when

they cross the customs barrier in the importing country. The words

“in the course of import” cover the period of time during which the

goods are said to be in import journey. – see J.V.GOKAL & CO. (P)

LTD. v. ACST (1960)11 STC 186; AIR 1960 SC 595. Apt on the subject

in INDURE LTD. v. CTO (2010) 9 SCC 461; (2010) 34 VST 509, the

facts were that, the appellant was awarded execution of ash handling

plant by NTPC in which MS Pipes were imported for the project. Such


import was made to meet with stipulation of contractual condition

which was in the complete knowledge and after obtaining consent

from NTPC. As per condition the goods bear’s embossed logo on the

imported pipes therefore the apex court held that, the import of pipes

is ‘in the course of import’ is exempt and outside the net of State tax.

8. Crossing the custom frontiers of India: This words find in section

2(ab) of the Act, 1956 is a definition clause. The said definition is

intended an application to section 5. Explanation to the said provision

shows that customs station for the purpose of the said clause will

have the same meaning as in the Customs Act, 1962. Turning to the

said Act it will find Customs frontier of India means the area of

customs station where imported or to be exported goods is ordinarily

kept before clearance by the customs authorities or customs station.

Word ‘customs station’ defined in section 2 (13) to mean any customs

port, customs airport or land customs station. The word ‘land

customs station’ is defined by section 2 (29) to mean any place

appointed under clause (b) of section 7 to be a land customs station.

Section 7 of the Customs Act, 1962 entitles the Central Government

by a notification in the official gazette to appoint (a) the ports and

airports which alone shall be customs ports or customs airports for

the unloading of imported goods and the loading of export goods or

any class of such goods and (b) the places which alone shall be

customs stations for the clearance of goods imported or to be exported

by land or inland water or any class of such goods. So far as section 7

(a) is concerned, decision of the Madras High Court in STATE

TRADING CORPORATION OF INDIA LTD. v. STATE OF T. N. reported

in (2003) 129 STC 294 is worth to take note. The question before the

Madras High Court was as to whether Tamil Nadu General Sales Tax

Act would apply to transaction wherein goods, which were sought to

be sold, and which were stored in customs port of Chennai would be

said to have crossed the customs frontiers of India when they went

out of warehouse. Relying upon sections 5(2) and 2 (ab) of the Act,


1956 read with section 68 of the Customs Act and section 7(a) thereof,

it was held that, such transaction of sale would be treated to be sale

in the course of import and was outside the tax net of Tamil Nadu

General Sales Tax Act. It is obvious that the said decision is rendered

in the light of notification u/s 7 (a) of the Customs Act, 1962. This

decision clearly lays down that, Customs Area means all area of

Customs Station includes any area where imported goods are

ordinarily kept before clearance by the Customs Authorities.

Therefore, Customs Area is a broader term than the Custom Station.

9. Occasions such import: This expression will find in section 5(2) has

the same meaning as the expression “occasions the movement of

goods” occurring in section 3(a) of the Act, 1956. Occasions the

movement of goods means goods moved by reasons of sale and it shall

be associated with the transfer of property from seller to the buyer, as

defined in the Sales of Goods Act, 1932. It is not necessary that the

sale by foreign exporter to the Indian purchaser should precede the

import. There should be privity of contract between the Indian

importer and the foreign exporter. In the case of STATE OF

MAHARASHTRA v. EMBEE CORPORATION (1997) 107 STC 196; AIR

1998 SC 1549, it was held that completed sale need not precede

import. It is enough if the movement of goods occasions on account of

‘agreement of sale’.

10. Privity of Contract: In order that the sale should be one in the

course of import, it must occasions the import and to occasion the

import, there must be an integral connection or inextricable link

between the first sale following the import and the actual import,

provided by an obligation to import arising from statute, contract or

mutual understanding or nature of the transaction which links the

sale to the import, which cannot, without committing a breach of

statute or contract or mutual understanding, be snapped.


11. The apex court examined the constitutional provisions of article 286 of

the Constitution and sections 5 and 2(ab) of the Act, 1956 at

paragraph 12 in dissenting decision K.GOPINATH NAIR v. STATE OF

KARANATAKA (1997) 105 STC 580; AIR 1997 SC 1925. In this

decision, guidelines have been laid down after analyzing the various

decisions of the Constitution Bench of the Supreme Court. The law

laid is worth to take note reads as under:

"In the light of the aforesaid settled legal position emerging from the Constitution Bench

decisions of this court the following propositions clearly get projected for deciding whether the

concerned sale or purchase of goods can be deemed to take place in the course of import as

laid down by section 5(2) of the Central Sales Tax Act, 1956 :

(1) The sale or purchase must actually take place. (2) Such sale or purchase in India must

itself occasion such import, and not vice versa, i.e., the 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 must be effected as a direct result of the sale or purchase

transaction. (5) The course of import can be taken to have continued till the goods reach the

local users only if the import has commenced through the agreement between the foreign

exporter and an intermediary who does not act on his own in the transaction with the foreign

exporter and who in 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 progress or process

of import; or, though there may appear to be two sale transactions, the two are so integrally

inter-connected 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 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 importer. (8) The

transaction in substance must be such that the canalising agency or the intermediate agency

through which the imports are effected so as to reach the ultimate local user appears only as

a mere name lender through whom it is the local importer-cum-local user who masquerades.”

This is a land mark decision holds the field on even date, the settled

proposition which says if the aforesaid conditions are satisfied then

the transaction of sale or purchase would be in the realm of sale or

purchase in the course of import entitling in to earn exemption u/s

5(2) of the Act, 1956. It is important to note that this decision was

based on condition that imported goods would be sold and utilized by

particular specified entity i.e. NTPC.


12. In CC v. STATE OF W.B. (1992) 85 STC 121 WBTT the goods

confiscated by the Customs when sold by the authorities they claimed

that sale of a goods was before the goods cross the custom barrier and

hence tax is not leviable. The Court held that, goods did not occasion

import and the sale is not by transfer of document. Also disallowed

the claim that the cash memo issued is not a document of title.

13. It was DAVER’S case (1969) 24 STC 481 SC, which set the ball rolling

for the amendment of section 2(ab). The SC in this case equated the

custom frontiers with custom barriers. Custom barriers were equated

with the limits of Territorial Waters. In the said case dealer retired the

documents of title from bank, and handed over to buyer to enable

them to clear the goods. So the sale came in to existence much after

the goods entered the Territorial Water, and hence the claim was

disallowed. The interpretation lead the judgment was that, when the

goods crossed the boundaries of Territorial Water, the course of

import comes to an end and the transfer of documents of title to the

goods thereafter would be a local sale.

14. To neutralize the above decision the definition crossing the custom

frontiers of India was inserted by Act 103 of 1976 under the Act,

1956. In which two aspects can be noted, (1) crossing the limits of

custom area or custom station (2) where the goods are ordinary kept

before clearance by the custom authorities. Important thing to be

noted is that, the meaning of crossing the limit of custom area or

custom stations which are the notified area for the purpose of

Custom. The legislature has by specific incorporation adopted the

definition under the Custom Act, 1962. Therefore any interpretation

given to this definition by the Courts shall apply to the Act, 1956.

15. The above definition states, “Imported goods or Export goods are

ordinarily kept before clearance”. Therefore keeping of the goods in


bonded warehouse can it become subject matter for measure of tax?

The sensible answer is No. The reason is under the Custom Act, 1962

when the goods are imported and landed, two situations will arise i.e.

either the goods can be cleared for home consumption or they can be

kept in bonded warehouse, this is a normal trade practice to store any

imported goods.

16. For the phrase used “before clearance” means clearance under the

Customs Act, 1962 it may be either for home consumption or ex-bond.

There is no other mode for clearance of goods that anybody will find

under the said Act. If the goods are kept in bond, there is only a

provisional assessment and clearance under the custom is done only

when they are finally assessed for levy of duty. Imported goods are

defined under the Act, 1962 means “any goods brought into India

from a place outside India but do not include goods which have been

cleared for home consumption.”

17. Law corollary: It is well settled that the course of import comes to an

end when they are brought for clearance, i.e. when the imported goods

are made to be free for mixed in common mass of the Country for

consumption. Till time they made clear, they are in the custody and

control of the Custom Authority. Without following the procedure

under the Custom Act, 1962 they cannot be moved out. Therefore,

when the goods are in bonded warehouse they cannot be said to be

cleared. In PRIYANKA OVERSEAS PVT.LTD. reported in AIR 1991 SC

593; (1991) 78 AIR 185 SC confirmed that, control and custody of an

authority of custom continue till the goods are actually removed from

the warehouse that to after final assessment of duty. Payment of

custom duty depends on the determination, when the goods are to be

cleared. This can be observed from a decision of a Delhi HC in JAIN

SHUDH VANAPATI’S case (1983) 14 ELT 1688; ILR 1983 DELHI 327.

In this case the entry of goods in Territorial Water though amounting

to import yet it will not for physical purpose determine the date and


time for purpose of calculating the rate of duty. Both under any

circumstances cannot co-extensive.

18. The above principle can be further seen in MMTC v. STATE OF AP

(1998) 110 STC 394 and also in BRIJLAL TULSIAN (1997) 117 STC 75

WBTT. Later in the SC in KIRAN SPINNING MILL 2000 (10) SCC 228

which reconfirm the proposition. Hon’ble SC held that, “if the goods

mixed with common mass of the Country, then the goods can be said

to be cleared”. So when the goods which are in warehouse the custom

barrier would be crossed when they are sought to be taken out of the

custom and brought to the mass of goods in the Country.

19. Transfer of documents before goods cross customs frontiers: In

MMTC v. STATE OF A.P., (1998) 110 STC 394 there is a reference

about the history of the legislation for incorporating section 2(ab). The

conclusion is inevitable at para 11, once the Bill of Entry (B/E) is filed

and the imported duty is assessed, then only the goods can cross the

limits of the customs port, therefore any transfer of documents of title

before the clearance of the goods by the customs authorities on

making the assessment of goods would amount to sale the course of

import, as after the assessment is made and on filing of the B/L the

goods get mingled with the general goods and merchandise of the

Country. In BRIJLAL TULSIAN v. CTO (1997) 107 STC 75 at page 83,

para 9 by relying upon decision (1992) 85 STC 121 it is held that,

course of import would continue till the goods have crossed the

custom station namely a custom port, station including its outer

boundary. In view of these clear position of law the MADRAS MARINE

(1986) 63 STC 169 SC cannot be used as a tool to disallow the claim

u/s 5(2). The distinction lies is that there was never a claim for “sales

in the course of export”. There was only a claim for export. In another

case of STC v. STATE OF T.N. (2003) 129 STC 294 at page 298, para

13, Court observed that until such time the duty payable on those

goods is not paid, which determined with reference to the rate on the


removal of the goods from warehouse, the goods cannot be regarded

as having crossed the customs barrier. At page 299, para 16 Court

held that, term “clearance” referred to in section 2(ab) of the Act, 1956

in absence of other compelling factor has to be regarded as having

reference to the clearance of goods for home consumption u/s 47 or

clearance of warehoused goods u/s 68 of the Customs Act, 1962.

Court observed that, clearance in this case, clearly was after the

transfer of document of title and was earlier. The crossing of the limits

of the customs station took place after the clearance of the goods from

warehouse for home consumption. Reaching to conclusion the Court

relied upon the KIRAN’S case supra and allowed the writ petition.

20. HIGH SEAS SALES: High Seas sales understanding can be found in

the latter part of section 5(2) of the CST Act, 1956 viz “or is effected

by transfer of document of title to the goods before the goods

have crossed the customs frontiers of India.”

21. Prime requirement is that, the sale needs to be valid as per the India

Contract Act, 1872 and the Indian Sale of Goods Act, 1930. There

must be offer and acceptance by the both competent parties and the

object of the contract be lawful not opposed by any law. In fulfilling it,

the consideration and consent of the concern parties be obtained. In

the context of it the features for High Seas sales stands as follows:

The sale be effected by transfer of document;

Document transferred is the document of title to the goods;

Effected transfer before goods crossed customs frontiers.

(i) HIGH SEAS SALES BY TRANSFER OF DOCUMENT:

22. High seas sales can be made by transfer of document before the expiry

date of transferable import licence. If goods arrived after expiry of

import licence and importer endorsed the documents in favour of the


purchaser, it is case that, since licence is not extended the importer

do not hold valid licence and such transfer if made it do not confer

any valid title in the goods on the purchaser. Even if subsequent

extension is made that will also not make transaction valid. Therefore

such sales will not fall within the ambit of section 5(2) of the Act,

1956. See – LUCAS ELECTRICAL TRACTOR SERVICES LTD. v. STATE

OF T.N. (1984) 55 STC 286.

23. High seas sales cannot be made if goods which are imported against

non transferable licence. In the case of KRISHNADOS KIKANI v.

STATE OF T.N. (1976) 38 STC 223 the facts were that, import licence

was in name of appellant and licence could not be transferred.

Agreement between appellant and purchasers only made purchasers

obliged to help appellant in importing goods by paying premium or

part of price in advance and taking all steps required for importing

goods within time prescribed. In fact, contract with foreign seller was

only by appellant and order was placed only in name of appellant and

import was also effected in name of appellant. Court held that, there

was a sale by appellant to purchasers in respect of these transactions,

which were liable to tax under Tamil Nadu General Sales Tax Act.

24. For high seas sale document the word “transfer” denotes the existence

of two parties, one who give and the other who receives. The high seas

transaction cannot happen between the H.O. and B.O. or principal

and agent. To avoid controversy about transfer of document of title,

the claim of high seas sale be made on judicial stamp paper.

25. Endorsement on the document of title can be made in favour of

particular person or it can be left blank than also it is legal. In case of

blank endorsement the holder of the document may at any time fill in

the blank part by putting the name of transferee and thereby title in

such goods stands transferred to the person name appears therein.

The person in whose name the Bill of Lading (B/L) is endorsed can


again endorse in favour of another party. There can be sale by

endorsement on the delivery order – see STATE OF A.P. v. KOLLA

SREE RAMAMURTHY (1962) 13 STC 522 SC.

26. The endorsement is dominated by intention of the parties. Unless

there is an evidence of a contrary intention of the parties, the transfer

of the B/L with endorsement in favour of the buyers will amount to

the sale of goods and the passing of the property in goods from the

seller to buyer – see MILKIRAM (INDIA) PVT. LTD. v. THE STATE OF

BOMBAY (1963) 14 STC 18. Intention of the parties has to be gathered

from the facts, i.e. documentary evidences. When the seller endorses

the B/L in favour of the buyer and delivers the document to him, the

transfer gets complete immediately. In the commercial trade, the

endorsement on transfer of B/L is generally put on the back side of it

in which the signature of the person transferring is necessary but the

date is not necessary.

27. Transfer of documents may be effected by handing over to the

purchaser. An endorsement and signature on the document itself by

the transferee is only mode of proof, but not necessarily the only way

of proving the fact of transfer. Actually, such endorsement is not a

legal requisite for a valid transfer of documents, which can take place

by mere delivery of the documents. See – DCCT v. A.R.S.

THIRUMENINAATHA NADAR (1968) 21 STC 184.

(ii) DOCUMENTS OF TITLE TO GOODS:

28. Documents of title are document showing the possession and control

over the goods mentioned in that document. Following are the

documents enumerated as the document of title of goods – see Indian

Sale of Goods Act, 1930 – section 2(4):


“Includes Bill of Lading, Dock warrant, Warehouse keeper’s certificate, Wharfingers certificate,

Railway receipt, multimodal transport document, Warrant or order for delivery of goods; and

any other document used in the ordinary course of business as proof of the possession or

control of goods or authorizing or purporting to authorize, either by endorsement or by

delivery, the possessor of the document to the transfer or receive goods thereby represented.”

Briefly it should understand as document of title in ordinary

mercantile practice. It must be possession showing the control over

the goods. Should be capable of endorsed to other person by

authorization. Person endorsed should be able to receive the goods or

able to transfer. The B/L, Air Way Bill (AWB), railway receipt, lorry

receipt, and delivery order are the documents which ordinarily the

mercantile community comes across.

(iii) DOCUMENTS SIGNIFICANCE:

29. Bill of lading (B/L) has a prime importance in the import trade,

particularly in high seas as it is document used for transport of the

goods by sea. B/L is "writing, signed on behalf of the owner of the ship

in which goods are embarked, acknowledging the receipt of the goods,

and undertaking to deliver them at the end of the voyage subject to

such conditions as may be mentioned in the bill of lading”. It is well

settled in commercial world that a B/L represents the goods and the

transfer of it operates as a transfer of the goods. The legal effect of the

transfer of a B/L has been enunciated by Bowen, L. J., in Sanders

Brothers v. Maclean & Co. (1883) 11 Q.B.D. 327 that a cargo at sea

while in the hands of the carrier is necessarily incapable of physical

delivery. During this period of transit and voyage, the B/L by the law

merchant is universally recognized as its symbol, and the

endorsement and delivery of the B/L operates as a symbolical delivery

of cargo.

30. B/L is issued by the owner of the shipping lines which acknowledges

the receipt of goods for transportation. The shipping company


undertakes to transport the goods mentioned therein from the port of

embarkation to the port of destination. B/L ought to contain the name

of the consignor; the name of the consignee the name of the master of

the vessel; the name of the vessel; the place of departure and

destination; the price of the freight; and in the margin, the marks and

numbers of the things shipped – see Jacobsen's Sea Laws.

It is usually made in three originals, or parts. One of them is

commonly sent to the consignee on board with the goods; another is

sent to him by mail or some other conveyance; and the third is

retained by the merchant or shipper. The master should also take care

to have another part for his own use. The B/L is assignable, and the

assignee is entitled to the goods, subject, however, to the shipper's

right, in some cases, of stoppage in transit. It can be bearer and any

holder present the same can take delivery of good. It can be made

through order that delivery can be made to order of the consigner. It’s

an agreement for transfer of goods and not contract of sale but still it

is transferable by endorsement. The endorsement on it enables the

holder to take the delivery from port.

31. Air Way Bill (AWB) is document issued by a carrier either directly or

through its authorized agent. It is a non-negotiable transport

document. It covers transport of cargo from airport to airport. By

accepting a shipment an IATA cargo agent is acting on behalf of the

carrier whose AWB is issued.

32. AWBs have eleven digit numbers which can be used to make

bookings, check the status of delivery, and current position of the

shipment. The number consists of:

The first three digits are the airline prefix. Each airline has been

assigned a 3-digit number by IATA, so from the prefix we know

which airline has issued the document.


The next seven digits are the running number/s - one number for

each consignment.

The last digit is what is called the check digit. It is arrived at in the

following manner:

The seven digits running numbers are divided by 7, by using a long

division calculation. The remainder becomes the check digit. That is

why no AWB number ends with a figure greater than 6. AWBs are

issued in sets of different colours. The first three copies are classified

as originals. The first original, blue in colour, is the shipper’s copy.

The second, coloured blue, is retained by the issuing carrier. The

third, coloured orange, is the consignee’s copy. A yellow copy acts as

the delivery receipt, or proof of delivery. The other copies are all white.

33. AWB is only a contract of carriage of goods between the carrier and

the consignor by the prescribed route and nothing more. It is not

understood and not treated by the trade as negotiable. Bejamin has

observed that it’s transfer of constructive possession of the goods. It is

also not negotiable under ITAT Rules and ordinarily no endorsement

can be made on it.

34. Like B/L, the AWB is a contract for transit of goods but the B/L is

supposed to be the document of title of goods where as the AWB is

only contract for transit and not the title of goods. In the case of

Videocon Leasing Co., B’bay HC took a view that goods imported by

air are also within ambit of high seas.

35. Railway receipt and lorry receipt are also considered as document

of title. Since the rail and road transport is not used much in import

trade, they do not find place in the problems relating to high seas

sales.

36. Delivery order is also recognized as a document of title. When the

AWB is sent by the foreign supplier through the bank, the bank on


receipt of the payment, issues the delivery order, requesting the air

carrier to deliver the goods covered by the AWB to the person name in

the delivery order.

37. When the goods are coming by air and the purchaser is an importer

the immediate payment of price is to be made by the bank which is

shown as a consignee in the AWB. At this moment the bank is not the

owner of goods; the importer is notified in the foreign supplier’s

invoice and in the AWB. The bank has a limited control over the goods

for recovery of the price due to finance. After receipt of price the bank

issues delivery order as control over goods the importer can get the

delivery. Hence the delivery order issued by the bank is a document of

title and it can be transferred by endorsement. – BAYYANA BHIMAYYA

v. GOVT. A.P. – AIR 1961 SC 1065; (1961) 12 STC 147. Following the

principle endorsement on AWB also should amount to sale.

38. Postal parcel receipt issued from the post office is not a document of

title. Such intimation does not enable the holder to transfer or receive

the goods mentioned therein. If such intimation is sold then the buyer

takes the delivery of goods not as owner of the goods but as an agent

of the original holder. See – LUCAS ELECTRICAL TRACTOR

SERVICES LTD. v. STATE OF T.N. (1984) 55 STC 286.

(iv) HIGH SEAS SALE IS COMPLETE WHEN?

39. High seas sale is complete as soon as the endorsement is made on the

document of title and it is handed over to the buyer. Since such sale is

covered by deeming provision of section 5(2) of the Act, 1956 the place

and time of completion of sale becomes irrelevant.

40. Where the sale is of unascertained goods the property in the goods is

not transferred to the buyer unless the goods are ascertained. See –

section 18 of the Sale of Goods Act, 1930. But in case of specific or


ascertained goods, the property in the goods is transferred to the

buyer at the time parties to the contract intended to be transfer. See –

section 19 of the Sale of Goods Act, 1930. However where there is

unconditional contract for the sale of specific goods in a deliverable

State, the property passes, immediately to the buyer on the contract

being made – see section 20 of the Sale of Goods Act, 1930.

41. The goods covered by the B/L can be said to be specific goods in a

deliverable State, as the contract is entered into for a goods prior to its

arrival by vessel. The goods in it are specified vide B/L, the formalities

with customs authorities informing the transaction is processed

therefore section 20 of the Sale of Goods Act, 1930 will be applicable.

Such sale will be high seas sale can enjoy the benefit u/s 5(2) of the

Act, 1956. Here the provision of the Sales of Goods Act, 1930 are not

relevant in case of high seas sales, because in case of high seas sale

the sale is effected by transfer of B/L which is governed by Indian Bill

of Lading Act, 1856.

(v) WHEN DOCUMENTS OF TITLE BE TRANSFERRED?

42. To claim the exemption of tax on high seas sales, the document of title

must be transferred before the goods cross the customs frontiers of

India. Section 5 of the Act, 1956 states as to when a sale or purchase

can be said to take place in the course of import and export. It does

not specify as to when such course will commence and terminate. For

inland interstate sales, explanations of the Act, 1956 specifies such

course. In inter State trade and commerce the movement of goods is

deemed to commence when the goods are delivered to a carrier for

transmission and terminate when the delivery is taken from carrier. If

the sale is effected by transfer of documents of title during the

movement the sale falls into as deemed to be inter-State sale.


43. As the provision relating to the sales in the course of import also

forms part of the Act, 1956 vide para 9 of this article. In view of it

export and import transactions also can be read in the same line. That

will be in conformity with the principle of harmonious reading of the

provision of the statute.

44. Therefore as stated supra, the movement of goods in case of high seas

sales commences when the goods are handed over by the foreign

supplier to the shipping company at the port of embarkation and will

terminate when the delivery of imported goods is taken out the B/L is

the port of beginning and the taking out the goods from the docks is

the end of the course of import.

45. For taking physical delivery of imported goods the B/L has to be

handed over to the port customs authority that process can be

possible only vessel crossing frontiers of India as defined by section

2(ab) of the Act, 1956. The import of goods will commingle thereafter

only therefore any transaction taking place prior to that is not

amenable for levy under the State Law.

(vi) CLEARANCE OF GOODS:

46. Where the loaded vessel or cargo enters the port, the captain of the

ship notifies its entry to the port trust and the customs authorities.

The manifesto is the statement giving the details of goods in the ship

cargo. The detail relate to the name of the consignor and consignee,

bank, import license number, description of goods, etc. Approved

clearing house agents at the port arranges for clearance of the goods.

They maintain the registers about the clearance work done by them.

47. Generally the foreign supplier makes out the invoice and the B/L in

the name of bank with which letter of credit is opened by the importer.

The name of the importer is noted on both, the invoice and the B/L as


person to whom intimation of arrival of goods is to be given. When the

importer receives the intimation about the entry of the ship in the port

of destination, he approaches the bank and makes the payment

towards the price of goods and bank charges etc. The bank after

satisfying the payment makes the endorsement on the B/L in favour

of the importer. When the goods are not imported on actual users

licence, the endorsement can be blank. The date is normally not put

below the signature of the endorsement.

48. When the B/L duly endorsed in the delivered by the bank to the

importer. He has to proceed to clear the goods by appointing a

clearing house agent. For clearing the goods the B/E has to be

presented to the customs authorities. The B/E shows the description

of goods to be cleared, import licence details origin of goods, port of

embarkation, ship by which goods are coming, valuation of the goods,

duty payable etc. though the B/E is physically presented by clearing

agent the name of the original importer is shown as presenter,

because the foreign suppliers invoice and B/L shows his name, the

customs authorities assess the duty at the rates prevailing on the date

of clearance.

49. There is an elaborate procedure set for clearance of goods under the

Customs Act, 1962. Section 46 of the said Act requires every importer

of goods to make entry by presenting to customs officer B/E for home

consumption or for warehousing in prescribe form. If the goods are

cleared for warehousing cannot be removed out of the warehouse

unless they are again cleared for home consumption vides section 68

of the said Act. The goods can be cleared for home consumption only if

the customs authorities are satisfied that the goods are not prohibited

goods and the import duty assessed and other charges there on are

paid. The order for clearance is given thereafter, whereby the goods

will cross the Customs frontiers of India. The imported goods cease to


be imported only after the same are taken out of the customs frontiers

gate i.e. as soon as they are cleared for home consumption.

50. The rate of duty payable on any imported goods is the rate and

valuation in force on the date on which the goods are actually

removed from the warehouse – see Customs Act, 1962 – Section 15.

51. The importance in high seas is the valuation of the goods for the

purpose of assessment of the duty. The duty is chargeable on

imported goods with reference to their value. The value can be

determined as shown in foreign supplier’s invoice convertible at the

rate of exchange as in force on the date on which the B/E is

presented.

52. The value can also be deemed to the price at which such goods are

ordinarily sold at the time and the place of import – see Customs Act,

1962 – Section 14. Therefore the duty on goods sold on high seas can

be assess on the sale transaction value at the time and place of

importation i.e. invoice of high seas sale, freight, transit insurance,

unloading and handling charges are to be included. In ESSAR OIL

LTD. v. CC 2004 (174) ELT 379 (CESTAT) it was held that landmass of

India where unloading occurs is the place of importation and all

charges for loading, unloading and handling for delivery at the port

are to be included. Hence the duty will be much more than the duty

which would have been payable on the valuation of the original

importer.

53. The job of presenting the B/E and physical payment of the duty is

done by the clearing house agent. They arrange to take the delivery

from the docks and hands over the goods to the godown keeper or the

carrier as directed by the importer or the high seas sale buyer. For the

job done they prepares the bill for clearing charges. Such bill is made

out in the name of the person in whose name the B/E is presented. It


is also a mercantile practice to show the name of the high seas buyer,

in the bill clearing charges because the job of clearing is done on

behalf of the high seas buyer. When the clearing charges bill is made

“on account” of such buyer the payment of the same is also made by

the buyer and not by the importer.

54. If the goods are coming by air, the AWB for transport of goods is made

out by the air transporter on receipt of goods from foreign suppliers at

the airport of embarkment. The AWB is made out in the name of the

bank with which the L/C is opened. After satisfying the payment, the

bank gives a letter addressed to the air transporter to deliver the

goods to the person named therein. Such letter is called delivery

order. Against presentation of the delivery order, the air transporter

gives the delivery of goods to the person named therein, of course after

payment of the customs duty.

55. Though the AWB is a contract for transport of goods from the port of

embarkation to the port of destination. It is not considered as

document of title as B/L is considered as document of title in case of

sea transport. Therefore the high seas sales cannot be effected by

endorsement on the AWB but are effected by endorsement on the

delivery order given by the bank. The person in whose name the

delivery order is endorsed can get the delivery after payment of

customs duty to the customs authorities.

(vii) SPLITTING ONE BILL OF LADING:

56. Merely because there was more than one sale in respect of goods

imported from abroad the court cannot hold that it is only the sale

which is immediate or proximate to the import which comes within the

scope of Article 286(1)(b) of the Constitution read with section 5(2) of

the Act, 1956. If upon examination of the facts it is found that under a

second contract a party was constituted an agent either of the


importer or the foreign seller, then the ratio of the decision in K.G.

KHOSLA & Co. (P.) Ltd. v. DCCT case (1966) 17 STC 473 would be

attracted. Even in case it is found that there are two sale transactions

for commodity imported from abroad (1) between the foreign seller and

the importer and (2) between the importer and the buyer in India the

court is required to consider whether the two sales were so integrated

or connected as to constitute one transaction.

57. There can be a contingency when the goods under one B/L are sold on

high seas to more than one person. The foreign suppliers invoice is

one. The B/L is one but the contract of sale of those goods is made

with different parties. Here the B/L is regarded as a symbol of goods

mentioned in it. An endorsement on the B/L while the goods are in

the hands of the carrier may confer upon the endorsee all the rights

and liabilities of the shippers as if the contract evidenced by the B/L

had been originally made with him. An endorsement and the delivery

of the B/L is a symbolic delivery of the goods entitling the holder of

the bill of physical delivery of goods at the port of discharge. By the

custom of merchants internationally accepted B/L is document of

title.

58. Clue from above since the B/L can be transferred by mere

endorsement and delivery, the endorsee gets all the rights and

liabilities against the shipper. The B/L gives a symbolic delivery of the

goods entitling the holder to the physical delivery of goods at the port

of destination. There is no prohibition that the B/L cannot be

endorsed to more than one person. Therefore when it is endorsed than

that person become tenants-in-common of the whole lot of goods.

Their ownership will be in proportion in which they have contributed

the entire lot.

(viii) ESSENTIAL DOCUMENTS FOR HIGH SEAS SALES:


59. In order to avail the benefit of high seas transaction following are the

essential documents. Their significance and extreme care is to be

taken before producing the authority.

Order placed by the importer with the foreign supplier.

Import licence issued by GOI relating to the import of goods.

Invoice of sales raised by the foreign supplier to importer.

Supplier dispatch intimation, B/L and packing list.

Order placed by the high seas buyer to the importer.

Letter from importer accepting the high seas order.

B/L to the suppliers dispatched by foreign supplier.

AWB if the goods are coming by air.

Delivery order by bank when goods are by air.

Importer letter forwarding B/L with endorsement.

Sale invoice raised by the importer on the high seas buyer.

Buyer letter to customs authorities intimating goods be cleared.

Declaration by buyer fulfilling obligations to import of goods.

Letter to the clearing house agent to act for it.

B/E for clearing goods which are sold on high seas.

Clearing house agent intimating, clearance - goods dispatch.

Clearing house agent charges and duty paid reimbursement.

Clearing agent certifying duty payment paid on behalf of buyer.

Confirmation letter of the high seas buyer taking the delivery.

Payment proof by the high seas buyer to the importer.

Conclusion: Section 5 derives its authority from article 286(2) of the

Constitution of India by which the Parliament is empowered by law to

formulate principles for determining when is a sale or purchase of goods

said to take place in the way mentioned in clause (1)(b) of that article, that

is, in the course of import of goods into territory of India, which transaction

cannot be taxed by State. It is observed that section 5(2) of the Act, 1956

has two limbs. The recent case of apex court falls into the first limb of said


section which does not required endorsement as the transaction happened

at the location before the outer boundary of Customs Frontiers of India and

therefore held not amenable to levy of tax by State. The endorsement is

necessary for transaction cases falling in for second limb.

Friends, above are my personal views the readers who find contrary, the

subject is open for comments and/or debate. It will be welcomed.

Lastly, I most respectfully say that, I belief in destiny, I believe in Almighty.

How can I explain the faith put on me to write an article on such a

wonderful subject? I accepted the task and completed it within schedule

time but sincerely I dedicate to my beloved late father and all those who

have played role in shaping me, my metal makeup, made me responsible

and have helped me deserve for it. From bottom of my heart I convey hearty

thanks to all my well wisher and wishes heartiest greetings to The Gujarat

Sales Tax Bar Association, A’bad on its “Golden Jubilee Year”.