2010 (9) TMI 883 - SC - VAT / Sales Tax

Import of MS pipes under turnkey contract held sale in course of import under Section 5(2), tax refund ordered

SC held that import of MS pipes by the appellant company for execution of a turnkey works contract with a public sector undertaking constituted a sale in ... Sale in the course of import - works contract - article 286(1)(b) of the Constitution - integral and inseparable part of the contracts between parties - Whether import of MS pipes by the appellants was pursuant to a term of contracts between appellant No. 1 and National Thermal Power Corporation Limited ('the N.T.P.C.') - HELD THAT:- The leading case dealing with section 5(2) of the Act is reported in K.G. Khosla and Co. (P.) Ltd.[1966 (1) TMI 54 - SUPREME COURT], In the aforesaid judgment, two questions were projected for consideration by the Constitution Bench, if the sales were in the course of import within the meaning of section 5(2) of the Act; and, secondly if the property in the goods passed in Belgium and consequently the sales were outside the State within the meaning of article 286(1)(a) of the Constitution. The Constitution Bench was of the opinion that the assessee must succeed on the first point and it will not be necessary to deal with the second point. It is to be noted that import had occasioned only on account of the covenant entered into between the company and N.T.P.C. and the imported pipes were used exclusively for erection and commissioning of the plant. The respondents have failed to establish that these pipes were not used in the plant of N.T.P.C. It was not the respondent's case that the pipes so imported were not necessary components for the erection and commissioning of the plant. Admittedly, the said pipes were used as components in the ash handling plant in the same condition as they were imported without altering their originality. Thus, the ground which was sought to be raised before us for the first time has not been considered by any of the authorities and in our opinion rightly so. Thus, we also do not deem it fit and proper to consider the same at this belated stage. We are also of the considered opinion that such import would fall within the Constitutional umbrella. It is also to be noted that the company had admittedly imported the goods into India for completion of the project on turnkey basis of N.T.P.C. Thus, by virtue of article 286(1)(b) of the Constitution, they would not be taxable. We are of the opinion that the order passed by the Division Bench of the High Court as also the orders passed by the Tribunal and other authorities cannot be sustained in law. The same are hereby set aside and quashed. The appellant is held entitled to claim the benefit of section 5(2) of the Act. We have been given to understand that pursuant to the demand notice issued by the respondents, the company has already deposited the sales tax liability 'under protest'. The respondent-State would refund the same to the company with simple interest at the rate of six per cent from the date of its deposit till its refund within a period of three months, from the date of communication of the said order. In case the amount is not refunded within three months, from the date of communication of said order, then the respondents would be liable to pay compound interest on the amount deposited by the appellants with the respondents at the rate of 12 per cent per annum. Issues: (i) Whether import of MS pipes by the appellants was pursuant to a term of contracts between appellant No. 1 and National Thermal Power Corporation Limited (for short, 'the N.T.P.C.'). (ii) Whether import of the said MS pipes and supply thereof by the appellant No. 1 to N.T.P.C. constitutes an integral and inseparable part of the contracts between them.Issue (i): Whether import of MS pipes by the appellants was pursuant to a term of contracts between appellant No. 1 and N.T.P.C.Analysis: The contract awarded was divided into supply and erection portions with a cross-fall breach clause and specific contractual provisions concerning imported components, price adjustment for imported supplies, ownership vesting upon despatch in India, and a requirement that listed imported items be exclusively used for the project. The MS pipes were included in the list of items notified to the contractee, were imported under a special imprest licence with condition of exclusive use for the project, were marked for the project, and an end-use certificate was issued confirming supply to the project.Conclusion: The import of the MS pipes was pursuant to a term of the contracts and thus in favour of the assessee.Issue (ii): Whether import of the said MS pipes and supply thereof by the appellant No. 1 to N.T.P.C. constitutes an integral and inseparable part of the contracts between them.Analysis: Applying the test of integral connection/inextricable link, the facts show an obligation and mutual understanding that the imported components, including the MS pipes, were to be used exclusively for the turnkey project, with contractual measures preventing diversion and ensuring ownership transfer on despatch. Earlier decisions establishing that a sale need not precede import and that an obligation arising from contract can make a sale occasion import were applied. The ground raised belatedly that the pipes underwent manufacturing was not previously argued and the pipes remained in their original condition for use in the plant.Conclusion: The import and supply of the MS pipes formed an integral and inseparable part of the contracts and the issue is decided in favour of the assessee.Final Conclusion: On the decided issues, the sales of the MS pipes are held to be sales in the course of import within the meaning of Section 5(2) of the Central Sales Tax Act, 1956, and the contractual and factual matrix supports entitlement to the statutory protection invoked.Ratio Decidendi: Where a contract creates an obligation or mutual understanding that links a sale to import such that the connection cannot be broken without breach, the sale occasions the import under Section 5(2) of the Central Sales Tax Act, 1956, and is treated as a sale in the course of import.