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Sale in course of import not liable to tax
December, 20th 2006

Sales tax/VAT is payable on sale of goods in India under state and central legislation. However, in view of the specific provisions contained in Article 286 of the Constitution, no tax can be levied on import of goods into India. 
 
Accordingly, provision has been made in Section 5(2) of the Central Sales Tax Act to provide for exemption from sales tax where, inter alia, sale occasions import of goods into the country. 
 
Despite existence of specific provisions in the law and clarifications by a Constitution Bench of the Supreme Court, tax authorities have been raising the issue time and again. 
 
The Supreme Court, in the case of K G Khosla [(1966) 17 STC 473], laid down the following twin tests for a transaction to qualify as sale in the course of import: Movement of goods from the foreign country is in pursuance of the condition of contract between the assessee and the customer and that there is no possibility of the goods being diverted to any other person by the assessee. 
 
The Supreme Court, in the case of Binani Brothers [(1974) 1 S.C.C. 459], held that sale was not in the course of import on the basis of the following distinguishing features: There were two separate sale transactions, one to the assessee by the foreign supplier and the other by the assessee to the Indian customer; there was no privity of contract between the foreign seller and the Indian customer; and the movement of goods from the foreign country was not occasioned on account of sale by the assessee. 
 
The aforementioned principles were strictly followed by the apex court in its subsequent judgments, including that in the case of Embee Corporation [(1997) 7 SCC 190]. 
 
The provisions of the Central Sales Tax Act and State Sales Tax/VAT acts being absolutely clear, there is no doubt on which transaction will constitute sale in the course of import and hence be exempt from tax. However, despite the test laid down by the Supreme Court having passed scrutiny for more than 40 years, tax authorities keep raking up the issue. 
 
Also challenged many times is the decision of the Constitution Bench in the case of K G Khosla, only to be turned down. 
 
It would be of interest to reproduce the relevant portion of the SCs decision in the case of Embee Corporation: Learned counsel then urged that the decision of the Constitution Bench in the Khosla case has not been correctly decided and as such this case be referred to a larger Bench. We have considered the matter and found that Khosla case1 has held the field for nearly more than three decades and its correctness has not been doubted so far. We, therefore, reject the prayer. 
 
However, even today tax authorities are rejecting the claims of assessees on flimsy grounds. Since such sales generally take place for supply against tenders or EPC contracts etc., these cases not only lead to uncertainty with regard to the applicable taxes but also add to the transaction costs of companies. 
 
In view of the prevailing economic scenario and India having become a global trading partner, it is imperative that tax authorities take a pragmatic view, stop raising issues with a revenue bias, and avoid unnecessary litigation. This will go a long way in solidifying industrys faith in tax authorities. 

Ashok Dhingra 
(The writer is Partner & Head, Indirect Tax Practice, Khaitan & Co., Advocates, Notaries, Patent & Trademark Attorneys)

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