Sale at duty free shops is outside India, not liable to VAT-Supreme Court

0 comments Tuesday, February 7, 2012

Supreme Court of India has held in a very important following case that duty free shops  are deemed to be outside India and hence sales effected in these duty free shops is sales outside India and during the cource of Import and hence is covered u/s 5 of Central Sales Tax Act, 1961 and hence outside the perview of State Government to levy VAT.
Facts:  M/s Hotel Ashoka, is managed by India Tourism Development Corporation Limited (hereinafter referred to as `the Corporation’). The Corporation is having its duty free shops at all major International Airports in India. At the said duty free shops, the appellant sells several articles including liquor to foreigners and also to Indians, who are going abroad or coming to India by air. We are concerned with a duty free shops situated at an International Airport at Bengaluru.
The appellant is registered as a dealer under the Act as well as under the Central Sales Tax Act, 1956 (hereinafter referred to as `the Central Act’). In the return filed under the Act as well as under the Central Act for the relevant period, the appellant had stated that though liquor, cigarettes, perfumes and food articles were sold at the duty free shops at the Bengaluru International Airport, no tax was payable by the appellant as the goods which had been sold at the duty free shops were sold directly to the passengers and even the delivery of goods at the duty free shops was made before importing the goods or before the goods had crossed the customs frontiers of India.
The Appellant contended no tax can be levied under the Act or under the Central Act when the goods are sold in the course of import or before the goods have crossed the customs frontier of India as per the provisions of Section 5 of the Central Act and so far as the Act is concerned, no tax can be levied, if the sale takes place before the goods crosses the customs frontiers of India as no State can tax the sale or purchase of goods which are outside the concerned State i.e. the State of Karnataka in the instant case, as per the provisions of Article 286 of the Constitution of India. 
Inspite of the above stand of the appellant, the assessing authority directed to pay a sum of Rs.4,20,70,900/- by way of sales tax. Aggreived by it the writ petition was filed before single bench of Karnataka High Court which was dismissed stating that the appellant should exhaust alternative remedy of filing appeal. On further appeal to division bench of the High Court the same was dismissed upholding the decision of single Judge.
On Appeal to Supreme Court it was held as under:
It is an admitted fact that the goods which had been brought from foreign countries by the appellant had been kept in bonded warehouses and they were transferred to duty free shops situated at International Airport of Bengaluru as and when the stock of goods lying at the duty free shops was exhausted. It is also an admitted fact that the appellant had executed bonds and the goods, which had been brought from foreign countries, had been kept in bonded warehouses by the appellant. When the goods are kept in the bonded warehouses, it cannot be said that the said goods had crossed the customs frontiers.
The goods are not cleared from the customs till they are brought in India by crossing the customs frontiers. When the goods are lying in the bonded warehouses, they are deemed to have been kept outside the customs frontiers of the country and as stated by the learned senior counsel appearing for the appellant, the appellant was selling the goods from the duty free shops owned by it at Bengaluru International Airport before the said goods had crossed the customs frontiers.(Para 18)

Upon perusal of the aforestated provision of Section 5 of the Central Act, it is clear that a sale or purchase of goods shall be deemed to take place in the course of import of the goods into the territory of India only if sale or purchase takes place before the goods have crossed the customs frontiers of India.
 Looking to the aforestated legal position, it cannot be disputed that the goods sold at the duty free shops, owned by the appellant, would be said to have been sold before the goods crossed the customs frontiers of India, as it is not in dispute that the duty free shops of the appellant situated at the International Airport of Bengaluru are beyond the customs frontiers of India i.e. they are not within the customs frontiers of India.
If this is the factual and legal position, in our opinion, looking to the provisions of Article 286 of the Constitution, the State of Karnataka has no right to tax any such transaction which takes place at the duty free shops owned by the appellant which are not within the customs frontiers of India.
(Para 30)They(Revenue)again submitted that `in the course of import’ means `the transaction ought to have taken place beyond the territories of India and not within the geographical territory of India’. We do not agree with the said submission. When any transaction takes place outside the customs frontiers of India, the transaction would be said to have taken place outside India. Though the transaction might take place within India but technically, looking to the provisions of Section 2(11) of the Customs Act and Article 286 of the Constitution, the said transaction would be said to have taken place outside India. In other words, it cannot be said that the goods are imported into the territory of India till the goods or the documents of title to the goods are brought into India.
Admittedly, in the instant case, the goods had not been brought into the customs frontiers of India before the transaction of sales had taken place and, therefore, in our opinion, the transactions had taken place beyond or outside the custom frontiers of India.
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