This article has been written by Vijay Shekhar Jha.

Abstract

Tax treatment of imported goods stored in a warehouse and sale made therefrom has always been an apple of discord in Indirect Taxation which continues to trouble our courts very bitterly. It has been witnessed that stand of Department in this issue has remained fairly unchanged as they have always maintained the position that in such situation importers need to pay import duty and comply with the requirement enjoined by other acts and rules/notifications made thereunder otherwise, such goods will get confiscated under section 111 of the Custom Act, 1962. But, such an interpretation is not uniformly applicable in all situations but depends on the context in which the term ‘import’ is being used.

Customs Department’s take on ‘Import’

Import & Taxable Event

Section 2(26) Customs Act, 1962 defines the term “import”. This provision reads as follows:

“”import”, with its grammatical variations and cognate expressions, means bringing into India from a place outside India;”

Thus, department invariably in almost all cases had interpreted the term “import” quite literally and looked at its meaning in an isolated manner, detached from the overall scheme of the act. All this while department has reasoned, as the term “India” as defined under section 2(27) of the Customs Act,1962 (hereinafter “act”) includes the territorial waters of India, therefore, once any good being brought from a place outside India crosses Indian Territorial Waters (which as per section 3(2) of the Territorial Waters, Continental Shelf , Exclusive Economic Zone and Other Maritime Zones Act,1976 extends up to 12 nautical miles inside sea from baseline on coast of India) importation of goods automatically takes place; what remains to be ascertained is, just the computation of duty which would be imposed as per the rates applicable. Therefore, what gets deferred is not the taxable event rather the assessment of the duty.[1]

Thus, taxable event as per the revenue department always transpires even when there has been a mere entry of goods from outside India into the territorial water of India.  

Mindset of the Revenue Department

The psyche with which department has so far worked is best illustrated at para 24 of Phoenix Overseas P. Ltd. & Anr. vs Union Of India and Ors[2] wherein Bombay High Court while supporting the stance of the revenue department had observed following

“…it is obligatory on the part of the Customs Officer to consider whether or not the goods are imported or attempted to be imported or are brought within Indian customs waters for the purpose of being imported and whether or not the same have been imported in accordance with the provisions of the Customs Act. If he finds that the goods are imported or brought, within the Indian customs waters for the purpose of being imported, contrary to any prohibition imposed by or under this Act or any other law for the time being in force, then, he is empowered to confiscate those goods [Section 111(d)] after following procedure laid down under the Customs Act.”

With this mental framework and taking strength of provision S.111 (d) and S.11 of the Customs Act, 1962 read with S.3 (3), S.3 (4) of the FT(DR)Act,1992, revenue department has so far quite mechanically gone after any goods in order to cause their seizure, if in the eyes of the department, such goods have been brought in India by infracting any provision of the customs act or any other law.  

Understanding “Import” in Proper Light

Though the word “import” as defined under this act means “bringing into India from a place outside India” but, if seen holistically i.e. in the light of scheme of the act, one would discern that the phrase ‘imported into India’ has been used in a broader sense which becomes more evident from words as couched in Section 111(d) of the act, which is read as under:

“any goods which are imported or attempted to be imported or are brought within the Indian customs waters for the purpose of being imported, contrary to any prohibition imposed by or under this Act or any other law for the time being in force”

Thus, even from the plain reading of the above provision one can easily note the distinctions which this provision chalks out which are, viz. ,“goods which are imported” or “attempted to be imported” or “brought within Indian Custom Waters for the purpose of being imported”.[3]

Here, it is pertinent to bear in mind that ‘taxable event’ which invites the levy of Custom Duty is import or export of goods into or out of India. Therefore, when goods which are being brought from  a place outside India crosses territorial water ‘taxable event’ transpires and such act of bringing goods into fall under the wide import of the term “import” and thereby gets amenable to Custom Act and other laws. In Everett (I) Pvt Ltd. vs Collector of Customs (Calcutta)[4], Single Judge has held that India includes its territorial waters and the taxable event occurs no sooner than the goods enter the “territorial waters of India” and do not postpone till they are off- landed on the landmass.[5]

 

At this juncture, in the light of scheme of the Customs Act,1962, it will be pertinent to classify the word ‘import’ into following two categories:

1. ‘Import’ which is used in the context of imposition of duty.
2. ‘Import’ which is used for the purpose of compliance of provisions of act or other law as is required under section 11(1),Section 111(d) and Section 113(d) of the Custom Act,1962.

‘Import’ when used in the context of imposition of the duty

As has already been stated, generally, goods are said to be imported and taxable event is said to have occurred once they enter territorial waters of India, but, fortunately, the Customs Act, 1962 itself provides two exemptions to this rule in the form of “warehouse” and “goods in transit”.

Warehouse

By the plain reading of S.47, S. 68 & S.69 of the act, one could easily understand that when goods are unloaded at the port, importer of the goods is given to two options. First, to store goods in the warehouse by filing ‘in bond bill of entry (also called Bond Bill of Entry)’ u/s  59. Second, to clear such goods for home consumption u/s  47 of the act.

When goods are stored in the warehouse the point of importation for the sake of imposition of duty is presumed to deferred till the point goods are finally cleared for home-consumption u/s 68. But, as per S.69 of the act, if goods are re-exported from the bonded warehouse within the time as stated in S.61 of the act, no import duty will be payable on such goods. This view has been substantiated time and again by the Apex Court, inter alia, in the following cases:

K. Bapna v. Union of India[6]–Upshot of the decision of the Apex Court was that for the goods deposited in a warehouse, the import is not complete till they are cleared for home consumption.

In Kiran Spinning Mills vs Collector of Customs[7], Apex Court expounded:

“…In other words, the taxable event occurs when the customs barrier is crossed. In the case of goods which are in the warehouse the customs barriers would be crossed when they are sought to be taken out of the customs and brought to the mass of goods in the country”

In Union of India vs Apar Pvt. Ltd.[8], Apex Court confirmed that in case of warehoused goods, the goods continue to be in customs bond. Hence, ‘import’ takes place only when goods are cleared from the warehouse.

Goods in Transit

S.53 of the Act clearly states that subject to S.11 and other conditions as may be prescribed “goods imported in a conveyance for transit in the same conveyance to any place outside India or to any custom station, the proper officer may allow goods and conveyance to transit without payment of duty”.

Speaking on this issue, Calcutta High Court in the case of Shewbuxrai Onkarmall v. Asst. Collector of Customs and others[9] very lucidly demystified the this complex issue in the following manner:

“In my view, to give the words their literal meaning would lead to an absurdity because a person may bring goods into India by a ship and may not clear the goods in India and may re-export it. In that case, would Customs duty be chargeable as soon as the vessel arrives in India? Take another case of an Aircraft landing in any AirPort in this country in course of transit. Would Customs duty be chargeable for any goods being carried in the Aircraft although no Customs clearance is sought for?”

Further, Court opined

 “By giving to the words ‘imported into or exported from’ their derivative meaning without any reference to the ordinary connotation of these words as used in the commercial sense, the decided cases in India have ascribed too general a meaning to these words which it appears from the setting context and history of the clause was not intended. The effect of the construction of ‘import’ or ‘export’ in the manner insisted upon by the Respondent would make rail-borne goods passing through a railway station within the limits of a Municipality liable to the imposition of the tax on their arrival at the railway station or departure therefrom or both which would not only lead to inconvenience but confusion, and would also result in inordinate delays and unbearable burden on trade both inter State and intra State. It is hardly likely that, that was the intention of the legislature. Such an interpretation would lead to absurdity which has according to the Rules of interpretation, to be avoided”

Thus, Court said that the goods “imported into India” would not mean the goods which crossed into the territorial waters of India and that unless and until the good are removed from the bonded warehouse, the process of importation of goods cannot be said to be complete.

‘Import’ which is used for the purpose of compliance

It is pertinent to note that in case of import which is used for the purpose of compliance of the provision of the Custom Act or provisions of any other law, import starts the moment conveyance crosses the territorial water of India. This view regarding ‘import’ (wrt compliance of other laws) is of prime importance as application of laws like NDPS Act , BIS Act etc. which also use the word ‘import’, will get vitiated in case any otherwise view is taken.

Above view is substantiated by the following provisions of the act

(I) Section 59 of the Custom Act

Under this provision importer of the goods has to execute a bond when he presents bill of entry u/s 46, binding himself, inter alia, to comply with the provisions of the Act and rules and regulations made there under. Here, it is pertinent to note that S. 11(u) Central Government has got power to prohibit importation of goods which contravenes any law. Thus, goods even warehoused can be seized u/s 110 read with S.111(d) of the act for the reason that they have been brought by contravening provisions of the custom act or any other laws (e.g. Environmental Protection Act,1986 , Food Safety and Standards Authority Act,2006, Livestock Importation Act,1898 etc.)

(II) Section 72 read with Section 141 of the Act

Another reason to contend that goods deposited in the warehouse are subject to Indian laws is that u/s 61there is a fixed time for which goods can be put in the warehouse. After the expiration of which, if, importer fails to remove it from the warehouse by paying appropriate interest, fine and penalty under sub-section (2) of that section, in that event, the proper officer can detain such goods and may also sell them. This further substantiates the view that space under warehouse has been exempted from the operation of the act for a brief period of time, if this has not been the case and had warehouses been beyond custom area[10], then, even after expiration of time as specified in S.61 Proper Officer would have no power to enter the warehouse and detain the goods.

Moreover, S.141 of the act clearly states that Conveyances and Goods in a custom area are subject to control of offices of customs. Thus, S.141 of the act substantiates the view that even bonded warehouse fall within the control of proper officer and he can enforce the provision of the act. This view has also been supported by Indian Courts time and again. Illustrative example of which is the opinion given by Calcutta High Court in the case of Imsa Shipping Agency Pvt. Ltd. vs Commissioner Of Customs[11], wherein Court opined:

“5.3……..If the law permits detention or seizure of the goods, if law permits storing or such goods in warehouses or such other place, in that event, it is open to the Customs Authority to do it. The Customs Authority under the law can detain the goods, confiscate the goods…….”

(III) Goods in Transit –Section 53, 54 of the act in explicit manner mentions that these provisions are subject to the provision of Section 11.Thus, even goods which are in transit can be seized u/s 110 on the ground that those goods are consfiscable in nature u/s 111(d).

For example- S.43 of the NDPS Act, 1985 vests power of seizure and arrest in public place to the officer (which includes customs officer as well)/department mentioned u/s 42 of that Act regarding any narcotic drug or psychotropic substance or controlled substance even when they are in transit.

Exception: The above discussion is subject to exemptions provided by Central Government under section 25 of the Customs Act and Foreign Trade Policy as notified by the Central Government. Under section 25 Central Government has been vested with power to exempt by notification in the Official Gazette, absolutely or subject to such conditions, goods of any description. Thus, we see meaning of the word ‘import’ as discussed above does not apply in case goods are brought by 100% EOU, EPCG scheme etc. Even FTP as notified by the Central Government spells out various special cases in which importer need not to comply provisions of any other law. One among such cases is stated in Para 2.36 of FTP 2015-2020 as per which when any goods (except prohibited items, arms and ammunition, hazardous waste and chemicals) is imported by the importer and warehouse them in private bonded warehouse, he need not to comply the provisions of any other law.[12] Here, it must be remembered that these exemptions do not mean that in such situations import does not take place it is just that these exemptions saves such special cases from the consequences that would have followed as per provisions of other laws pursuant to such importation.

Furthermore, it can be also argued that since S. 2 of the Custom Act,1962 clearly states that “unless the context otherwise requires” therefore, the definition given under section 2 (23) of the Custom Act,1962 will be applicable only in cases related to S.12 of the act and since the context in which ‘import’ has been used in chapter-VIII and chapter-IX of the act is materially different from the context in which it is used in S.12, ‘import’ in those cases as mentioned in those chapters should be used differently.

Endnotes

[1] Phoenix Overseas P. Ltd. And Anr. vs Union Of India and Ors. 2003 (162) ELT 25 Bom , Shri Ramakrishna Mills and Ors. v. A.C.C. 1988 (18) ECC 75 (Kerala), Apar Pvt. Ltd & Ors vs UOI MANU/MH/0038/1985, Union Of India & Others vs M/S Ganesh Das Bhojraj,(2000) 9 SCC 461 etc.

[2] 2003 (162) ELT 25 Bom

[3] Shewbuxrai Onkarmall v. Asst. Collector of Customs and others, 1981 E.L.T. 298 (Cal.)

[4] 1986(24)ELT 469

[5] Justice TP Mukherjee, Commentary on The Customs Act,1962, 613, (Sixteenth edition ,Delhi Law House 2019)

[6] 1991(60) ELT 13 (SC)

[7] AIR 2000 SC 3448

[8] 1999 (112) E.L.T. 3 (S.C.)

[9] 1981 E.L.T. 298 (Cal)

[10] It is important to note that S.2 (11) of the Custom Act, 1962 defines the term “custom area” and as per the definition given it includes ‘warehouse’ as well.

[11] 2002 (145) ELT 55 Cal

[12] refer -B.G.H. Exim Ltd. and Shri G.C. Singhvi vs Commissioner of Customs 2003(157) E.L.T. 598 (Tri. – Mumbai) and Royalex vs Commissioner of Customs 2014(310)ELT 353(Tri.- Mumbai)

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