1969 (5) TMI 47 - SC - VAT and Sales Tax

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? Held that - Appeal allowed. The expression customs frontiers of India in section 5 of the Central Act, in our opinion, must be construed in accordance with the notification issued by the Central Government under section 3-A of 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 effected 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 all in the respective harbours within the State of Madras when the sales were effected 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.

Summary

Issues Involved:
1. Liability of turnover for sales tax under the Madras General Sales Tax Act, 1959.
2. Interpretation of "customs frontiers" in Section 5(2) of the Central Sales Tax Act, 1956.

Issue-wise Detailed Analysis:

1. Liability of Turnover for Sales Tax under the Madras General Sales Tax Act, 1959:
The primary issue in these appeals was whether the turnover in question was liable for sales tax under the Madras General Sales Tax Act, 1959 (Madras Act). The assessees argued that the turnover represented sales in the course of import and was thus exempt from tax under the Madras Act. The State of Madras contended that the sales were effected by a transfer of documents of title after the ships had crossed territorial waters, making them liable for tax under the Madras Act.

The Assistant Commercial Tax Officer and the Appellate Assistant Commissioner of Commercial Taxes initially rejected the assessees' claim. However, the Sales Tax Appellate Tribunal accepted the assessees' contention, ruling that the disputed turnovers were not liable for tax. The Madras High Court upheld the Tribunal's decision, leading to the State's appeal to the Supreme Court.

2. Interpretation of "Customs Frontiers" in Section 5(2) of the Central Sales Tax Act, 1956:
The crux of the legal debate centered on the interpretation of "customs frontiers" in Section 5(2) of the Central Sales Tax Act, 1956 (Central Act). The State argued that "customs frontiers" were synonymous with the territorial waters of India, as defined by the Proclamation dated March 22, 1956. Thus, any sale by transfer of documents of title after the goods entered territorial waters would not be considered a sale in the course of import.

Conversely, the assessees contended that "customs frontiers" should be interpreted as "customs barriers." According to this view, sales effected by transferring documents of title before the goods crossed the customs barrier would be exempt from tax under the Madras Act.

The High Court, referencing various decisions, concluded that "customs frontiers" should be construed as "customs barriers," focusing on the operations of the customs department, including the levy and collection of duty and clearance of goods. Thus, the High Court held that the sales were effected by transferring title before the goods crossed the customs barrier, making them non-taxable under the Madras Act.

The Supreme Court, however, disagreed with the High Court's interpretation. The Court emphasized that "customs frontiers" should be understood in light of the Proclamation by the President of India and the relevant notifications issued under Section 3-A of the Sea Customs Act, 1878. Specifically, the notification dated August 6, 1955, defined "customs frontiers" as the boundaries of the territory, including territorial waters, of India.

Applying this definition, the Supreme Court concluded that the sales in question were effected by transferring documents of title after the goods had crossed the customs frontiers of India. Therefore, the sales were not in the course of import and were rightly subjected to tax under the Madras Act by the assessing authority.

Conclusion:
The Supreme Court set aside the common order dated July 17, 1963, of the Madras High Court, ruling that the interpretation of "customs frontiers" as "customs barriers" was erroneous. The appeals by the State of Madras were allowed, and the turnovers in question were deemed liable for sales tax under the Madras General Sales Tax Act, 1959. There was no order as to costs.