Principles to determine Interstate Sales or Sale in the Course of Import

No VAT liability on supplies to a project, where contract envisages interstate procurements/imports

In a recent ruling in the case of ABB Limited, the Delhi High Court (“Court”) issued a common order in forty appeals of the taxpayer reiterating the principles relating to inter-state sales and sale in the course of import (“SICOI”) under the Central Sales Tax Act, 1956 (“CST Act”).  The Court dealt with contracts with Delhi Metro Rail Corporation (“DMRC”) for supply, installation, testing and commissioning of equipments which involved (i) goods imported in

pursuance of the contract (ii) goods procured from Indian vendors and supplied to the contract; and (iii) goods manufactured in the taxpayer’s factory outside the State and supplied to the contract. The Court held that the sale by the taxpayer to DMRC involving interstate procurements and imports were not liable to tax under the Delhi Value Added Tax (“DVAT”) Act.

Brief Facts

·            The taxpayer was awarded a contract by DMRC for supply, installation, testing and commissioning of certain systems of Delhi Metro Project (“contract”).  The contract involved manufacture and sale of engineering goods including power distribution system and SCADA system.

 

·            A lump sum price was agreed for the entire scope of work. However, the contract documents included detailed bill of goods, quantities and specifications for the goods, sources (ie name of the manufacturer/brand), detailed terms and conditions including approval of sub-contractors/suppliers, testing, certification and acceptance of goods etc.

·            For the purpose of the contract, the taxpayer imported goods into India, procured goods from vendors outside Delhi and also supplied own manufactured goods (from outside Delhi).

·            The taxpayer claimed exemption from payment of VAT in Delhi on such sales as being SICOI/interstate sales, which was denied by the Revenue Authorities (“Revenue”).

Key Contentions of the taxpayer

General contentions for both Interstate Sales and SICOI

·            The contract mandated approval of sub contractors/sub vendors by DMRC and required inspection of goods procured before shipment.

·            DMRC dictated the specifications, had control over the quality of goods to be procured and supplied, and even dictated that the packaging contained markings that the goods were for its project.

·            Customs and Excise exemptions were given by the concerned authorities on the goods procured.

·            DMRC was pursuing for VAT exemption on works contract under Entry 8 of the Sixth Schedule to the DVAT Act (which entitles to seek and obtain refund of the entire Sales Tax, including in respect of goods sold, in the course of import from the authorities).

Interstate Sales

·            The movement of own manufactured goods was directly in consequence of the contract with DMRC.

 

·            The goods had to be fabricated/tailor made in terms of the design, drawing and specifications provided by DMRC.

·            The Contract stipulated the factory in which the taxpayer was required to manufacture the goods.

·            DMRC's requirement led to procurement of goods within the country from various sub vendors and their movement from one State to another.

SICOI

·            The goods could not be diverted to other customers.  The goods were not assembly made or mass manufactured goods.  The goods were custom made and no one else could use it.

·            The taxpayer was required to mark the goods as being meant for DMRC.

Key Contentions of the Revenue

General contentions for both Interstate Sales and SICOI

·            There is no privity of contract between DMRC and the taxpayer's suppliers (foreign and domestic).  DMRC is not a party to the arrangement of supply of goods between the supplier and the taxpayer.  No orders were issued by DMRC to the supplier and no payment was made by it. 

·            There is no stipulation of transfer of goods till the final payment on satisfaction of the work done is recorded.

·            The goods imported were subjected to manufacturing process and as such it cannot be said that the interstate movement of goods or import of goods springs from the terms of the contract of sale or purchase.

·            The contact is an indivisible works contract and the only permissible deductions are those mentioned in Rule 3 of the DVAT Rules, 2005.

Interstate Sales

·            There is no specific condition that the goods are to be supplied by a particular supplier at the will and instructions of DMRC.

SICOI

·            The entire transactions between the taxpayer, DMRC and the foreign suppliers were not part of one single transaction and not inextricably interlinked and integrally connected.

·            There is no condition in the agreement with regard to non-diversion of the goods to any other person.

·           There is no prohibition in law to supply the goods to other persons, or its use for any other purpose.

Key Observations of the Court

General Observations for both Interstate Sales and SICOI

·            The contract specifically required approval of DMRC for sub contractors/vendors.  DMRC issued a letter listing out the approved or authorized list of suppliers (which included their location).

·            The goods were custom made.

Interstate Sales

·            Interstate movement of goods was within the knowledge of DMRC.  As there is a total ban of setting up/operation of heavy industry in Delhi, the goods can only be manufactured outside Delhi.

 

·            DMRC approved the locations from within the country (including the taxpayer's factories) from where the equipments and goods were to be supplied.

·            The contract need not specifically stipulate interstate movement.  The fact that, in performance of the contract, the taxpayer would have to move the goods from other States to Delhi is sufficient.

·            If the interstate movement of goods was contemplated by the parties and if reasonable presumption can be drawn that such movement was necessary for the fulfillment of the contract, the sale would fall under Section 3(a) of the CST Act.

SICOI

·           To determine whether a sale is in the course of import, the movement of goods should be integrally connected with the contract for their supply.

·           Questions such as privity of contract between end user and supplier, passing of title or where the consideration flows from are not determinative of the issue. Section 5 of the CST Act does not prescribe that the sale should have preceded the import.

·            On facts, the sale to DMRC is deemed to have taken place in the course of import in view of the following features of the contract:

o    The goods were custom made, for use by DMRC in its project;

o    Specifications were spelt out by DMRC;

o    Pre-inspection of goods was mandated;

o    Packed goods were especially marked as meant for DMRC's use in its project;

o    Suppliers of the goods (including foreign suppliers) were approved by DMRC;

o    In the Project Authority Certificate issued by DMRC, the name of the subcontractors as well as the equipment/goods to be supplied were expressly stipulated; and

o    Excise duty and Customs duty exemptions were eligible for the goods required by DMRC.

Decision of the Court

The Court held that the transactions were eligible for exemption under the DVAT Act as being interstate sale/SICOI since:

·            There is a live and conceivable link between the sale to DMRC and the movement of goods from outside Delhi (including goods manufactured by the taxpayer).

·            The import of goods is integrally connected with the contract for their supply.