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PETITIONER: STATE OF MADRAS

       Vs.

RESPONDENT: DAVAR AND COMPANY ETC.

DATE OF JUDGMENT: 20/05/1969

BENCH: VAIDYIALINGAM, C.A. BENCH: VAIDYIALINGAM, C.A. HIDAYATULLAH, M. (CJ) SHELAT, J.M. HEGDE, K.S. GROVER, A.N.

CITATION:  1970 AIR  165            1970 SCR  (1) 572  CITATOR INFO :  RF         1986 SC1760  (11,23,24)

ACT: Central   Sales  Tax  Act  (74  of  1956)  s.   5(2)-Customs Frontiers, meaning of.

HEADNOTE: The assessee entered into contracts for sale of timber to be imported  from  Burma, to buyers, in the  State  of  Madras. After  the  ships carrying the goods arrived in  the  Madras harbour  in the State of Madras, the sales were effected  by the  assessee by transferring the documents of title to  the buyers. On the question, whether the sales took place before the  goods  crossed  the  customs  frontiers  of  India  and therefore were in the course of import of the goods into the territory  of  India and were thus not liable  to  sales-tax tinder Art. 286(1) of the Constitution. HELD  : Under s. 5(2) of the Central Sales Tax Act, 1956,  a sale or purchase shall be deemed to take place in the course of  the import of the goods into the territory of India,  if the sale or Purchase occasions such import or is effected by a  transfer of documents of title before the  goods  crossed the  customs frontiers of India.  By a  notification  issued under  s.  3A  of the Sea Customs  Act,  1878,  the  Central Government  defined  1 customs frontiers of India’  -is  the boundaries. of the territory, including territorial  waters, of India; and the extent of territorial waters of India,  at the  relevant  time, was declared by a Proclamation  of  the President of India, dated March 22, 1956, to be, a  distance of  six  nautical  miles  into the  sea  measured  from  the appropriate base line.  Therefore, in the present case,  the sales  by  transfer of documents of title  after  the  ships carrying  the  goods  arrived in the  Madras  harbour,  were effecter  after the goods had crossed the customs  frontiers of  India,  and hence, the claim of the assessees  that  the sales were in the course of import and not liable to  sales- tax should be rejected. [577 A-B, D-E, H; 578 A-C]

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JUDGMENT: CIVIL APPELLATE JURISDICTION :Civil Appeals Nos. 1462 to 1465 of 1967. Appeals  by special leave from the judgment and order  dated July  17, 1963 of the Madras High Court in Tax  Cases  Nos.- 29, 47, 132 and 160 of 1961 (Revision Nos. 16, 28, 81 and 98 of 1961). A.   K. Sen and A. V. Rangam, for the appellant. R.   Thiagarajan,   for   the  respondents  (in   C.A.   No. 1464/1967). K.   Jayaram, for the respondents (in C.A. No. 1465/1967). The Judgment of the Court was delivered by Vaidialingam,  J.  These appeals, by special leave,  by  the State  of Madras, are directed against the  common  judgment dated July 17, 1963 of the Madras High Court. 573 The  short question, that arises for consideration in  these appeals,  is  as  to whether the  turnover,  which  was  the subject of consideration by the High Court, was liable  for, sales-tax,  under the Madras General Sales Tax Act, 1959  (1 of 1959) (hereinafter called the Madras Act).  The assessees claimed  that the turnover in question represented sales  in the  course of import and, as such, not liable to tax  under the  Madras  Act.  The State of Madras claimed that  in  all these  cases  the sale had been effected by  a  transfer  of documents of title to the respective buyers after the  ships had  crossed  the  territorial waters and  hence  they  were liable  to tax under the Madras Act.  The contention of  the assessees  was  negatived by the  Assistant  Commercial  Tax Officer, as also by the Appellate Assistant Commissioner  of Commercial Taxes.  But, on further appeal by the  assessees, the  Sales Tax Appellate Tribunal accepted their  contention and held that the disputed turnovers were not liable to  tax under  the  Madras Act.  The revisions filed  by  the  State against the orders of the Sales Tax Appellate Tribunal  were dismissed by the High Court.  Hence these appeals. Though  each of the respondents in these appeals is  an  im- porter of a different commodity, the pattern adopted by each of them in the matter of importing the goods concerned  from foreign countries and in the matter of transferring title to the respective buyers, is more or less the same.  We  shall, therefore, refer only to the facts relating to the  dealings adopted  by  Davar  and  Company  (hereinafter  called   the assessee), the respondent in Civil Appeal No. 1462 of 1967. The  asessee  was assessed by the Assistant  Commercial  Tax Officer,  South Madras and Chingleput, under the Madras  Act on  a turnover of Rs. 6,60,200.07 for the year 1957-58.   It was  carrying  on business in timber at Madras  and  in  the course  of  its business the assessee imported  timber  from Burma  and  sold it to its customers in India.  Out  of  the turnover   above-mentioned,   the  assessee   disputed   its liability to the extent of a turnover of Rs. 1,95,490.67  on the  -round  that the said amount represented sales  in  the course of import and that such sales were not liable to  tax as  they were covered by Art. 286 (1) (b) of  the  Constitu- tion.  This claim was based on the following  circumstances. The  respondent-assessee entered into contracts for sale  of timber with a firm of merchants called  Velu  and   Brothers (hereinafter  called  the  buyers).  The timber  was  to  be imported from Burma.  Under the contract the buyers were  to pay  the  assessee 8% profit on the C.I.F. value  of  timber sold and also the sales tax and other charges and  expenses. The buyers were to retire the shipping documents at least 10 days before the expected arrival of the steamer

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574 carrying the timber.  The assessee imported two consignments of timber from Rangoon.  The value of the first  consignment was Rs. 99,098.05. The ship carrying the consignment arrived at the Madras Harbour on October 17, 1957.  The assessee got Rs. 1,00,000 from the buyers on October 24, 1957 and retired the  documents of title from the bank and handed  over  the, said documents on the same date to the buyers to enable them to  clear  the goods.  All charges and expenses  by  way  of import  duty,  clearance,  charges etc., were  paid  by  the buyers  on  behalf of the assessee,.  A  second  consignment reached Madras by ship on .December 17, 1957.  The  assessee obtained from the buyers, on December 23, 1957 the value  of this  consignment  after  handing over  to  the  buyers  the necessary shipping documents. On  these facts- both the Commercial Tax Officer as well  as the Appellate Assistant Commissioner came to the  conclusion that  the sales effected by the assessee to the buyers  were not  sales  in the course of import, but  were  local  sales liable to tax under the Madras Act.  The Sales Tax Appellate Tribunal, on the other hand, held to the contrary.  The High Court has concurred with the view of the Appellate Tribunal. According  to the Assistant Commercial Tax Officer  and  the Appellate  Assistant Commissioner the sale was  effected  by the  assessee to the buyer after the consignment  of  timber had  come into the Madras Port and in consequence there  was no  intention to transfer the property in the goods  to  the buyers  before they were cleared from the  customs  frontier and  hence the sales could not be considered to be sales  in the course of import.  The Appellate Tribunal took the  view that  the  sale  by  the assessee to  the  buyers  had  been effected by transferring the documents of title relating  to the goods, before the goods crossed the customs barrier  and before the import became complete.  Therefore, according  to the  Tribunal, the sales should be treated as being  in  the course  of  import and, in consequence, not liable  for  tax under the Madras Act. On the facts stated above, the parties were not in  dispute; but, before the High Court, the State raised the  contention that  the sales in question were not sales in the course  of import  as  the documents of title were handed over  by  the assessee  to  the  buyers after the  ship  had  crossed  the ’territorial   waters’.    According  to  the   State,   the expression  ‘ customs frontier, occurring in S. 5(2) of  the Central  Sales  Tax Act, 1956 (LXXIV of  1956)  (hereinafter called  the Central Act) is coterminous with the  extent  of the   territorial   waters  of  India,  as  fixed   by   the Proclamation,  dated March 22, 1956 issued by the  President of  India.  That is, according to the State, the  import  is complete when the ship carrying the goods 575 from  a foreign port enters the territorial waters  and  any sale  by the importer, by transfer of documents of title  to the goods subsequent to such entry will not amount to a sale in  the  course  of  import.   According  to  the  assessee, ’customs  frontier’ in s. 5(2) of the Central Act,  must  be treated as analogous to ’customs barrier’ and, so read,  the position  would  be  that a sale  effected  by  transfer  of documents  of  title  before the goods  cross  the  ’customs barrier’ would not be liable to tax under the Madras Act. The  High Court has, after a reference to various  decisions of  this Court as to when a sale can be considered to be  in the  course  of  import or export, held  that  the  ’customs frontier’  as  laid  down by this Court does  not  mean  any geographical  features  like  land or  coast  or  limits  of

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territorial waters, but only the operation of the  machinery of the Customs Department consisting of levy and  collection of duty and clearance of the goods.  The High Court  further held that it would be proper to construe the words  ’customs frontiers’  as  ’customs barriers’ in the Central  Act.   In this  view  the High Court held that as the  sale  had  been effected  by  transfer  of title to the  goods  before  they entered the customs barrier, the sale was not liable to  tax under the Madras Act. On  behalf  of the appellant-State, Mr. A. K.  Sen,  learned counsel,  urged  that  the view of  the  Madras  High  Court construing   the  words  ’customs  frontiers’  as   ’customs barriers’  in the Central Act was erroneous.   According  to the learned counsel, on the admitted facts the sales in  all these  cases had been effected by transfer of the  documents of title long after the sales had ceased to be in the course of  import.   This contention, on behalf of the  State,  was resisted  by Mr. Thiagarajan and Mr. K. Jaya Ram,  appearing for  the respondent in Civil Appeals Nos. 1464 and  1465  of 1967, respectively. We  are  of the view that the judgment of  the  Madras  High Court  cannot  be  sustained and  the,  expression  ’customs frontiers’ in s. 5 of the Central Act cannot be construed to mean ’customs barriers’.  Article 286(1) places a ban on the State imposing or authorising the imposition of a tax on the sale or purchase of goods where such sale or purchase  takes place outside the State or in the course of import of  goods into  or  export  of goods out of the  territory  of  India. Clause  (2)  of Art. 286 gives power to the  Parliament,  by law, to formulate principles for determining when a sale  or purchase  of goods takes place in any of the ways  mentioned in  clause  (1).   Accordingly Parliament  has  enacted  the Central Act.  Section 5 of that Act lays down the conditions under which a sale or purchase of goods can be said to  take place  in the course of import or export.  Sub-sections  (1) and (2) deal 576 with  sale or purchase of goods in the course of export  and sale  or  purchase  of  goods  in  the  course  of   import, respectively.  As we are concerned with a sale in the course of  import,  the relevant provision is sub-s. (2) of  s.  5, which is as, follows :               "5(2)  A  sale or purchase of goods  shall  be               deemed  to  take place in the  course  of  the               import  of  the goods into  the  territory  of               India  only  if the sale  or  purchase  either               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." In  this case, the claim made by the assessee for  exemption from  tax  liability  is on the -round  that  the  sale  was effected by transfer ’to the buyer of documents of title  to the  goods.  Under s. 5(2) of the Central Act, in  order  to treat the sale as one in the course of import, the documents of  title must have been transferred before the  goods  have crossed the customs frontiers of India. The question is what does the expression ’customs frontiers’ of India, in s. 5 of the  Central  Act,  mean ? To answer this  question,  it  is necessary  to  refer to certain Proclamations made  by  the, President  of India and Notifications issued by the  Central Government  under s. 3-A of the Sea Customs Act, 1878  (VIII of 1878) (hereinafter called the Act). The  President  of India has issued  a  Proclamation,  dated March  22,  1956 and that contains a declaration as  to  the

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extent   of   the  territorial  waters   of   India.    That Proclamation has been published with the notification of the Government  of India in the Ministry of External.   Affairs, No. S.R.O. 669, dated March 22, 1956 and is as follows :               "S.R.O. 669.-The following proclamation by the               President is published for general information                                PROCLAMATION                "WHEREAS     international  law  has   always               recognised that sovereignty of a state extends               to a belt of sea adjacent to its coast;               AND WHEREAS international practice is not uni-               form  as regards the extent of  this  sea-belt               commonly  known as the territorial  waters  of               the State, and consequently it is necessary to               make  a  declaration as to the extent  of  the               territorial waters of India;               I, Rajendra Prasad, President of India, in the               Seventh  Year  of  the  Republic,  do   hereby               proclaim that,                577               notwithstanding any rule of law or practice to               the  contrary which may have been observed  in               the  past  in relation to India  or  any  part               thereof,  the  territorial  waters  of   India               extend  into  the  sea to a  distance  of  six               nautical  miles measured from the  appropriate               base line."               RAJENDRA PRASAD,               President." On September 30, 1967 another Proclamation was issued by the President  of India and published with the  notification  of the Government of India in the Ministry of External Affairs, No.  F.L/  lll(1)/67,  dated September 30,  1967.   By  this Proclamation the earlier Proclamation of March 22, 1956  has been  superseded  and the territorial waters of  India  have been declared to extend into the sea to a distance of twelve nautical miles measured from the appropriate base line.  But in  the  present  appeals, we are concerned  only  with  the earlier Proclamation dated March 22, 1956. Section  3-A of the Act gives power to the  Central  Govern- ment,  to define, by notification in the  Official  Gazette, the  ’customs frontiers’ of India.  By virtue of the  powers conferred by this section, the Central Government  (Ministry of Finance, Revenue Division) had issued a notification, No. 25-Customs,  dated  April  1, 1950,  defining  the  ’customs frontiers’ of India; but it is not necessary to Consider the definition  contained in this notification, as it  has  been superseded by the issue of a fresh Notification, No.  S.R.O. 1683 dated August 6, 1955.  The latter notification,  issued by  the  Ministry of Finance  (Revenue  Division),  Customs. which is relevant for the present purpose, is as follows               New Delhi, the 6th August  1955               S.R.O.   1633.-In  exercise  of   the   powers               conferred  by section 3-A of the  Sea  Customs               Act, 1878 (VIII of 1878), and in  supersession               of the notification of the Government of India               in the Ministry of Finance (Revenue  Division)               No. 25-Customs. dated the 1st April 1950,  the               Central Government hereby defines the  customs               frontiers  of India as the boundaries  of  the               territory,  including territorial  waters,  of               India.                                    Sd/-                              Jt. Secretary." The  expression ’customs frontiers of India’ in s. 5 of  the

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Central Act, in our opinion, must be construed in accordance with the notification issued by the Central Government under S. 3-A of 578 the Act, on August 6, 1955 read with the Proclamation of the President  of India dated March 22, 1956.  So  applying  the definition  of ’customs frontiers’ it is clear that, in  the instant  case,  the  -sales were  affected  by  transfer  of documents  of  title long after the ,goods had  crossed  the customs frontiers of India.  We have already stated that the ships  carrying  the  goods  in  question  were  an  in  the respective  harbours  within the State of  Madras  when  the sales  were  affected  by  the  assessees  by  transfer   of documents  of title to the buyers.  If so, it  follows  that the  claim made by the assessees that the sales in  question were  sales  in  the  course of  import,  has  been  rightly rejected by the assessing authority.  Unfortunately,  though various  aspects seem to have- been pressed before the  High Court by the State of Madras, this notification of August 6, 1955  issued  by  the  Government  of  India,  defining  the ’customs frontiers’ of India, was not brought to the notice, of the High Court. In the result, the common order, dated July 17, 1963 of  the Madras High Court is set aside and the appeals allowed.   In the circumstances of the case, there will be no order as  to costs. V.P.S. Appeals allowed. 579