2015 (3) TMI 1168 - HC - VAT and Sales Tax

Whether the goods transported by the petitioner were liable to be assessed to sales tax under the Central Sales Tax Act, 1956 - Petitioner had been granted permission to set up a unit at the CSEZ for manufacture and export of PVC Free Foam Sheets - Held that - the Special Economic Zone is treated to be a foreign territory for the purposes of trade operations, duties and tariffs. Units like that of the petitioner are permitted to import capital goods without paying Customs Duty to the Special Economic Zone for the purpose of manufacture of their products. Such capital goods are also permitted to be transferred to other units located in similar Special Economic Zones with the permission of the fifth respondent. The petitioner has obtained permission from the fifth respondent permitting such transfer. Ext.P5 is the agreement pursuant to which, the goods were being transported. Therefore, the goods that were exported to the Special Economic Zone which is to be treated as a foreign territory for the purposes of trade and tariffs, had not crossed the customs frontiers of India. It was for the said reason that they were retained in warehoused condition by the Department of Customs and Central Excise under bond. The goods would become exigible to tax under either the CST Act or the KGST Act only after they cross the customs frontiers of India. In other words the goods would become taxable under the domestic enactments only after they are released for home consumption by the Customs authorities after payment of Customs Duty. As the said eventuality not having taken place yet, it is held that the goods have not become liable to tax under the Act that is relied upon. It is also worth noticing that the Special Economic Zones Act, 2005 is given an overriding effect over other enactments. In view of the provisions of law as well as the terms of the Export - Import Policy, there cannot be any doubt regarding the fact that the goods are not liable to tax under the Sales Tax Act of our country. Also the said taxable event of the goods clearing the customs barriers has not occurred in the case of the capital goods of the petitioner, in this case. Therefore the goods have not come into the territory of India. For the said reason they are not liable to be taxed under the CST Act. - Decided in favour of petitioner

Summary

Issues:
Challenge to sales tax assessment under Central Sales Tax Act on goods transported from Special Economic Zone.

Analysis:
The petitioner, an industrial unit in a Special Economic Zone, imported machinery for manufacturing PVC Free Foam Sheets without paying Customs Duty. The goods were retained under bond with Customs Department, not cleared for home consumption. The petitioner later agreed to lease the machinery to another unit in a different Special Economic Zone. When the goods were being transported, they were detained at a check post and assessed for sales tax under the Central Sales Tax Act. The petitioner challenged the assessment, arguing that goods in a Special Economic Zone are treated as foreign territory and not subject to domestic taxation laws until they cross customs frontiers.

The Court examined the Export-Import Policy, which exempts units in Special Economic Zones from Central Sales Tax. The definition of "capital goods" includes machinery required for production. The policy allows transfer of capital goods between units with permission. Special Economic Zones are deemed foreign territory for trade operations. The Court noted that goods had not crossed customs frontiers of India and were warehoused under bond, hence not liable for tax under domestic enactments until clearance for home consumption.

Citing Supreme Court decisions, the Court emphasized that taxable event occurs when goods clear customs barriers. As the capital goods had not entered Indian territory, they were not subject to tax. The Special Economic Zones Act, 2005, overrides other laws, reinforcing the foreign territory status of Special Economic Zones. The Court set aside the sales tax assessment, ruling in favor of the petitioner and ordering a refund of the amount deposited for the detained goods.

In conclusion, the judgment favored the petitioner, holding that goods in a Special Economic Zone are not liable for sales tax under the Central Sales Tax Act until they cross customs frontiers and are cleared for home consumption. The Court emphasized the unique status of Special Economic Zones as foreign territories for trade operations, ensuring exemption from domestic taxation until specific events occur.