5.8 Query
Booking of Purchases/Sales of Imported Commodities-2.
1. Preamble: In a trading corporation (a Government Company) dealing with exports and imports on a large scale, a question has been raised by the Auditors of the Corporation, while auditing the accounts for the year 1970-71, on the procedure of booking the “purchases” and “sales” in respect of sales effected on “high sea” basis which are usually exempt from Sales-tax provided such sales are effected by the sellers to buyers before the ships enter the territorial waters of the country.
The Corporation which is importing these industrial raw materials on a massive scale, has entered into a sizable number of sale agreements on “high sea basis” with a view to pass on the benefit of Sales-tax to the Indian buyers. The Auditor’s suggestion may deprive the Indian buyers of the Sales-tax exemption, which is permissible under the law or alternatively may put the Corporation to heavy financial loss, if such Sales-tax liability devolves on it, in case such sales are not treated as “high sea sales” by the Sales-tax authorities. As the Auditors’ main contention was based on the opinion of the ‘Expert Committee of the Institute of Chartered Accountants of India’ obtained by us earlier on booking of purchases of imported commodities, this question is also being referred to the ‘Expert Committee of the Institute of Chartered Accountants of India’ for its considered advice. The facts of the case are brought out in the subsequent paragraphs.
2. Background. The question in regard to the point at which purchases of imported commodities by the ABTC should be booked was examined in the year 1968, in the light of legal position relating to transfer of ‘title to goods’. The Company’s Law Officer expressed a view that “in the absence of any specific mention in the contract, the rule of thumb in the Sale of Goods Act has to be applied, which states that in the case of ‘unascertained’ goods the property does not pass on until the goods are ascertained and such ascertainment will have to be unconditionally appropriated to the contract. Thus, if the Bill of Lading is taken to the order of the shipper, there is no unconditional appropriation and in such a case, the unconditional appropriation will be only when the Bill of Lading is physically transferred, which transfer takes place through the Bank under L/C”. Thus, the Law Officer had made it very clear beyond any ambiguity that if the B/Ls were made to the order of the shipper the property would not pass until the negotiation of the B/L by the bank in India was complete. This view was not shared by the Company’s Chief Internal Audit Officer, who insisted that the Corporation should book the purchases based on the date of B/L and not on the date on which the shipping documents are retired by the Banks in India, in accordance with the established conventions in the accountancy profession. In view of the divergent views between the Company’s Law Officer and the Chief Internal Audit Officer, the expert opinion of the Institute of Chartered Accountants of India was sought. The opinion of the Expert Committee was communicated by the Institute of CAs of India vide letter No. R/EAC/90/67 dated 27.5.1968.(Opinion No. 5.7), agreeing with the view expressed by the Company’s Law Officer. As such, the Corporation has been booking the purchases of the imported commodities, which are mainly for the purpose of ‘stock & sale’ on the date on which the shipping documents are released by the Banks in India after retirement. No doubt, in case where the goods had already arrived and been taken delivery of by ABTC before the retirement of the shipping documents through the Banks, the Corporation has been booking the purchases on the basis of such receipt of goods.
3. ‘High-sea’ Sales and Purchases : From 1970-71 onwards, the Corporation has been effecting some sales of imported commodities on ‘high sea’ basis. These sales are concluded before the shipments reach the Territorial Waters of India. Although the shipments are meant for sale on ‘high-sea’ basis, in the relative purchase contracts with the foreign sellers, no specific mention is made of the fact that these shipments are to be sold as such by us. The terms and conditions of contracts entered into with the foreign sellers for the purpose of ‘high-sea’ sale by the Corporation are the same as in case of other shipments which are received for ‘stock and sale’ purpose. This type of sale agreements have been entered into based on the decision of the Supreme Court that the ‘sales in the course of import’ are exempt from sales-tax provided the sales are affected on ‘high sea’, i.e. before the ships enter the Territorial waters of India. It will thus be seen that for such sales, the Corporation does not intend to bring the stocks to its godowns and then sell, which is being done in the case of other imports. In the case of high-sea sales, the entire ship-load of cargo is sold to the Indian party and it is the duty of the Indian party to arrange unloading and delivery, etc. from the ship. The modus operandi being followed in this type of sales is that the non-negotiable set of shipping documents, which are airmailed by the overseas suppliers immediately after the ship sails, are delivered to the Indian parties duly endorsed by ABTC against 100% payment. This procedure of handing over non-negotiable set of documents against payment is being resorted to due to the inherent delay in the transmission and receipt of the negotiable documents from the overseas suppliers through the Foreign and Indian Banks which are not generally received by ABTC before the ships enter the territorial waters of India. In order to save the element of sales-tax, the Indian buyers are also anxious to take possession of even non-negotiable set of documents from ABTC against payment, as the goods can be cleared by them by executing an indemnity bond in accordance with the practice followed in export/import trade.
Since the 100% payment is received from the Indian buyers against delivery of the non-negotiable documents, the Corporation has adopted a procedure in the case of high-sea sales, under which the sales are booked in the Corporation’s books on the date of delivery of non-negotiable set of documents to the Indian buyers after due endorsement in their favour. As a corollary to this, the purchases are also booked in the same date by crediting the amount payable to the overseas suppliers to their account.
4. Auditors’ view: The Corporation’s auditors have raised a point that the above mentioned procedure of booking of purchases and sales, in the case of high-sea, on the date of release of the non-negotiable documents to the Indian parties is in contravention of the advice received from the Institute of Chartered Accountants of India mentioned in para 2 above. The auditors have contended that the Corporation cannot acquire the title to the goods till the original negotiable documents are released to it by the Indian bankers and as such, cannot pass on the title to the goods to the Indian buyers which it itself does not possess. The auditors, therefore, hold the view that the purchases should be booked on the date of receipt of the negotiable set of documents by the Corporation and the sales on the date on which such negotiable documents are released to the Indian buyers duly endorsed. Any amount received from the Indian buyers against delivery of the non-negotiable documents should be treated as an advance payment and shown, as such, in the audited accounts till the negotiable set of documents are released by the Corporation.
The Corporation has explained to the auditors that the high-sea sales are distinct from the ‘other sales’ effected by the Corporation. In such sales, the title to the goods would pass from the sellers to the buyers at the point of time when it is intended to by both the parties. Indian buyers have clearly understood that they would acquire a title in respect of the consignments sold to them long before the ship enters the territorial waters of India and on that understanding they deposit 100% payment to ABTC long before the vessel enters the territorial waters of India. They are also aware that the trade practice permits them to obtain delivery of the cargo from the ships by executing an indemnity bond in favour of the Ports and Customs Authorities without waiting for the negotiable set of documents. The Corporation’s contention, therefore, is that the title to the goods passes from ABTC to the Indian buyers at the point of time when it is intended to and such intentions are put into action by performing the duties stipulated in the relative contracts, i.e. payment of the cost of the cargo against delivery of non-negotiable set of documents. The Corporation, therefore, pleaded with the auditors that the Institute’s opinion should not be applied, without discrimination, to all categories of purchases. Such purchases, which are covered by ‘high-sea’ sales, should be examined with reference to the relevant contractual terms and the intentions of the parties. Unfortunately, the auditors have failed to see the Corporation’s point of view.
5. Opinion required: The Expert Committee of the Institute of Chartered Accountants of India is, therefore, kindly requested to advise the Corporation on the following points: -
(i) Whether the procedure being followed by the Corporation in regard to the booking of purchases and sales both in the case of ‘high-sea’ sales as well as in the other cases, as brought out in paras 2 & 3 above, is correct or not, or whether any change is required keeping in view sales-tax implications of the transactions.
(ii) In case the Expert Committee does not endorse the stand taken by the Corporation before the auditors, whether it would be possible for the Corporation to adhere to this procedure by suitably amending the relative purchase and sale contracts.
Explanatory Note to (ii) above:
This specific request is being made to the Expert Committee in view of the fact that if the purchases and sales are booked with reference to the date of release of negotiable set of documents, as contended by the Auditors, Sales-tax Authorities might not treat these transactions as ‘high-sea’ sales and levy sales tax on the Corporation because by that time, the ships would have entered the territorial waters of India. If such a view is taken by the Sales-tax Authorities, it is impossible for the Corporation to pay such heavy incidence of sales-tax. If the sales-tax exemption is not available, it defeats the very purpose of contracting ‘high-sea’ sales, which are legally permissible and will deprive the local buyers, who may, themselves be consuming units of the Industrial Raw Material imported by the Corporation.
Opinion September 15, 1973
1. From the facts stated by the querist it appears that the ABTC purchases goods from foreign shippers on FAS/FOB foreign port, C & F/CIF Indian port basis. Shipping documents (Bills of Lading, etc.) are negotiated by the shippers through their Banks. Banks of the shippers make payments to their constituents against the documents and forward the documents to the State Bank of India at New Delhi, bankers of ABTC. ABTC opens letters of credit with its bankers. In terms of such letters of credit, the bankers retire the documents sent by the banks of the shippers against payment. The Bankers debit the account of ABTC and release the documents to ABTC ,who transfers these documents to its buyers in India. As, however, original copy of Bill of Lading takes time to reach India, ABTC in the first instance, transfers the non-negotiable copy of the Bill of Lading to its buyers in India. After receipt of the original copy of the Bill of Lading, ABTC endorses the same to its buyers. In the meantime the buyers take delivery of the goods from the shipping Company on furnishing an indemnity bond. ABTC gets full price of the goods against tender of non-negotiable copy of the Bill of Lading and other shipping documents.
2. Two questions have been raised by the querist. Firstly, when the purchases by ABTC should be recorded in its books of account and second, whether the sales by ABTC to its buyers in India can be exempt from payment of sales-tax on the basis of transfer of non-negotiable copy of the Bill of Lading, if at the time of such transfer the steamer carrying the goods is beyond the customs frontiers of India, though at the time of transfer of the original copy of the Bill of lading the steamer may be within the customs frontiers of India.
3. Foreign shippers take out a Bills of Lading for delivery to their orders. Bills of Lading are negotiated by them through their bankers. Under the circumstances, the property in the goods cannot pass to ABTC unless the Bills of Lading are transferred to it or to its agents i.e. the Bankers. On the facts stated by the querist, FAS/FOB foreign port would be a term for price of the goods and property in the goods cannot be said to pass to ABTC unless the Bills of Lading are transferred to ABTC or its agents. As the bankers of the shippers negotiate the documents with the Bankers of ABTC, the time when the ‘Purchase’ of ABTC can be said to take place would be the time when the Bankers of ABTC retire the documents against payment. In the opinion of the Committee, ABTC can record the transaction as a ‘purchase’ in its books only at this point of time. A reference may be made in this connection to the judgement of the Supreme Court in Commissioner of Income-tax vs. Mysore Chromite Ltd. (27 I.T.R., 128).
4. If on the terms of contract between ABTC and the foreign shippers, it can be said that, the bankers of the shippers who negotiated the documents with the bankers of ABTC, also act as the agents of ABTC, ABTC can be said to have made the purchase when the foreign bankers tender payment of the price of the goods to the foreign shippers and obtain shipping documents from them for transmission to the bankers of the ABTC. The facts as started by the querist do not, however, suggest that the foreign bankers act agents of ABTC.
5. From the facts stated, it appears that the sales by ABTC to its buyers in India cannot be held as ‘occasioning’ the import of goods into the territory of India. If this is so, ABTC can claim exemption from payment of sales tax only if its sales to the buyers in India can be said to take place in the course of import on the ground that they are effected by a transfer of documents of title to the goods before the goods crossed the customs frontiers of India within the meaning of Section 5 (2) of the Central Sales Tax Act, 1956. A sales is effected when property in goods passes to the buyer [see Supreme Court’s judgement in “Burmah Shell Co. Ltd., vs. Commercial Tax Officer” (11 S.T.C. 764) and “Daver and Co. vs. State of Madras” (24 S.T.C. 481)]. In view of the provisions of Section 5(2) of the Central Sales Tax Act, if the non-negotiable copy of a Bill of Lading can be said to be a document of title to the goods and the ‘sale’ is effected by a transfer of such documents before the goods crossed the customs frontiers of India, ABTC would be entitled to claim that ist sales by transfer of such copies of Bills of Lading take place in the course of import and are, therefore, exempt from tax.
6. In the opinion of the Committee, a non-negotiable copy of a Bill of Lading cannot be said to be a document of title to the goods so as to transfer property in goods represented thereby by transfer thereof. The very qualification that the copy of the Bill of Lading is ‘non-negotiable’ indicates that by negotiating such Bill of Lading, the holder thereof cannot pass the title to the goods. It is true that tender of the non-negotiable copy of a Bill of Lading may entitle the holder thereof to take delivery of the goods from the shipping Company. But this is for the reason that shipping companies generally agree to deliver the goods from the vessel against production of any one signed copy of the Bill of Lading, when a Bill of Lading is made out in a set of two or three copies. In Scrutton on Charter parties and Bills of Lading (17th Ed., pages 172-173) it has been stated: “The question of the passing of property in goods shipped is not of great importance to the shipowner, as he is safe in delivery to the holder of the first Bill of Lading duly presented, if he has no notice or knowledge of other claims, while if he has such knowledge, though probably in strict law he must either deliver at his peril to the rightful claimant or interplead. Yet in practice he can almost always obtain in exchange for delivery of the goods an indemnity against legal proceedings, which render him virtually safe.” Thus, the mere fact that on the tender of a non-negotiable copy of a Bill of Lading delivery of the goods can be obtained, is not sufficient to hold such a copy a document of title to the goods for the purposes of Section 5(2) of the Central Sales Tax Act, 1956.
7. If it a not possible for ABTC to claim exemption in its sales by transfer of the original bills of lading in view of such transfers taking place after the goods cross the customs frontiers of India, it is advisable for ABTC to enter prior contracts with its buyers in India on such terms that the sales can be said to occasion the import of goods into the Indian territory. ________________________
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