The Madras High Court has that a dealer claiming high seas sale exemption must prove, through cogent transactional documents, that the transfer of title took place before the goods crossed the customs frontier. If the dealer’s own invoices are raised from Tamil Nadu after the goods have landed in India, and customs duty is paid by the dealer itself, the transaction cannot be treated as a high seas sale merely because the goods moved from Mumbai to buyers outside Tamil Nadu. In such a case, tax under the TNGST Act validly applies.
The second ratio is that where a dealer avails a conditional exemption under G.O.Ms.No.381 by furnishing a declaration as to intended use of goods, and later fails to prove that the goods were used for the declared manufacturing purpose, the tax consequence specified in the notification itself automatically follows. The dealer cannot avoid that consequence by shifting to an alternative plea under Section 5(3) of the CST Act or by arguing that the State lacks taxing power over export-related sales, because the levy in such a case is for breach of the conditions of the State exemption availed by the dealer.
On the alleged high seas sales, the Division Bench comprising Dr Justice G. Jayachandran and Justice N. Mala noted that the claim could have been established through bills of entry, exporter invoices, Ford’s own sale invoices, and transport documents. However, the Court found that Ford had not produced complete supporting material, including bills of entry for certain cars, despite undertaking to do so. The Court further noted that the sale invoices raised by Ford were subsequent to the goods entering Indian territory and were issued from Ford’s office at Chengalpattu, Tamil Nadu.
The Court held that transport documents like lorry receipts could only show movement of goods from Mumbai to other locations, but they were not conclusive proof that title had passed on the high seas. Likewise, the mention of dealer names in the foreign supplier’s invoices did not by itself establish a high seas sale. The Court emphasised that, in the absence of contrary evidence, the place of transfer had to be determined from Ford’s own sale invoices, and those invoices showed the Tamil Nadu address as the place from which transfer was effected. The Court also recorded that customs duty had been paid by Ford itself and not by the alleged outside-State buyers, which further weakened Ford’s high seas sale theory.
The High Court therefore found that Ford had failed to prove that transfer of title occurred while the goods were still on the high seas. It held that there was clear material showing that the sales were effected from Tamil Nadu through invoices raised after the goods had landed at Mumbai. The Court also remarked that Ford’s alternative plea that the same transactions should be treated as interstate sales was mutually destructive of its own high seas sale claim.
On the exemption notification issue, the Court closely examined G.O.Ms.No.381. It noted that the notification granted exemption for specified local sales and purchases only when the goods were to be used by Ford in manufacture, assembling, packing or labelling connected with manufacture of passenger cars and components at the Maraimalai Nagar factory. The Court particularly relied on the third proviso, which clearly stated that if Ford, after furnishing the declaration, failed to use the goods for the specified purpose and disposed of them in any other manner, it would have to pay tax at the applicable rate on the turnover relating to purchase of such goods.
The Court observed that all three authorities had concurrently found that Ford violated the declaration furnished under G.O.Ms.No.381. The problem for Ford was not merely legal interpretation, but failure of proof. It could not correlate the purchases with the exports by producing supporting records, and its offer to furnish H-forms was found to be of no assistance without proof of actual export linkage. The Court also noted two factual weaknesses against Ford: first, the goods were supplied to its Parts Division Centre rather than directly in the manner contemplated under the notification; and second, Ford had produced no evidence showing that the materials were in fact used in manufacture as declared.
The High Court rejected Ford’s reliance on Section 5(3) of the CST Act. It held that this benefit, in the facts of the case, was available to the sellers who sold goods to exporters, not to Ford after it had independently availed a State exemption by furnishing declarations under G.O.Ms.No.381. Once Ford had opted to claim the State exemption and was later found to have violated the mandatory conditions attached to that concession, it could not turn around and invoke an inconsistent alternative protection under the CST Act or the Constitution to escape the consequence specifically provided in the notification.
Briefly, Ford India challenged a Tamil Nadu Sales Tax Appellate Tribunal order arising out of assessment year 2001–2002 under the Tamil Nadu General Sales Tax Act, 1959. Ford had originally disclosed taxable turnover of Rs. 131.64 crores, but on scrutiny the Assessing Officer found higher actual turnover, disallowed certain exemption claims, levied additional sales tax, interest and penalty, and completed assessment on a proposed turnover of Rs. 260.07 crores.
Before the High Court, Ford pressed two principal disputes. The first was its claim that sales of imported Mondeo cars were “high seas sales” and therefore not taxable under the TNGST Act. The second was its challenge to tax levied for alleged violation of the exemption granted under G.O.Ms.No.381 dated 15.09.1997, which exempted certain local purchases made for use in the manufacture, assembling, packing or labelling connected with manufacture of passenger cars and components at Ford’s Maraimalai Nagar factory.
On the exemption issue, Ford’s case was that the goods purchased under the notification were used in pre-packing, modular carton integration, sequencing and related operations connected with manufacture of passenger cars and components, and therefore the exemption ought to have been allowed. In the alternative, Ford argued that even if the goods were not covered by the notification, the sales were directly linked to exports and could not be taxed by the State in view of Article 286(1)(b) of the Constitution and Section 5(3) of the CST Act.
On the imported cars issue, Ford contended that out of 98 imported cars during the relevant year, only two were sold within Tamil Nadu and tax had already been paid on those two. According to Ford, the remaining cars were sold before crossing the customs frontier, the vehicles landed at JNPT, Mumbai, and were directly delivered from Mumbai to dealers in other States. Ford said the mere fact that invoices showed its Chengalpattu address could not justify treating the sales as Tamil Nadu sales, because the cars never physically entered Tamil Nadu.
The Department opposed both claims and argued that Ford had failed to prove that the goods purchased under G.O.Ms.No.381 were actually used for the declared manufacturing purpose. According to the Department, once Ford had obtained exemption by furnishing declarations, any disposal of those goods otherwise than for the declared purpose attracted the built-in tax consequence under the notification itself. On the imported cars issue, the Department argued that Ford had failed to produce documents proving that the sale took place before entry into the customs frontier, and the records instead showed invoices issued from Tamil Nadu after the goods had landed in India.
