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2016 (2) TMI 988 - KARNATAKA HIGH COURT

2016 (2) TMI 988 - KARNATAKA HIGH COURT - TMI - Transaction in the course of import or not - Master lease agreements - goods were leased by procuring from the vendors within the State of Karnataka - vendor imported the goods - Benefit of exemption by virtue of Section 5(2) of the Central Sales Tax Act, 1956 - transaction of lease effected during the periods of 2006-07 to 2010-11 - Held that: - the requirement for getting exemption is dependent upon inextricable link to the import from the foreig .....

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nal deserves to be interfered with. The questions raised are held against the assessee and in favour of the revenue. - STRP Nos. 339-411/2015 C/W STRP No. 412/2015 - Dated:- 19-2-2016 - MR. JAYANT PATEL AND MRS. S SUJATHA JJ. PETITIONER: (BY SRI.K P KUMAR, SENIOR COUNSEL A/W SRI:VIKRAM HUILGOL FOR M/S KING & PARTRIDGE, ADVOCATES) RESPONDENTS: (BY SRI.T K VEDAMURTHY, HCGP) JAYANT PATEL J., COMMON ORDER As in all the matters, since common question arises for consideration and the matters also .....

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referred to as CST Act for short) in the transaction of lease effected during the periods of 2006-07 to 2010-11 and other consequential directions were also issued. 3. The short cut of the case appears to be that as per the petitioner during the periods of 2004-11, the Master Lease Agreements (hereinafter referred to as MLA for short) with its customers were entered into and the goods were leased by procuring from the vendors within the State of Karnataka. As per the petitioner, the operandi was .....

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e vendors on the petitioners, but the bill of entry has to be filed by the customers clearing the goods from custom authorities and the goods are taken thereafter to the customers location. As per the petitioner, after the goods are verified and accepted by the customers, the acceptance certificate has to be issued by the customers. When the goods have been delivered to them and the customers have unconditionally accepted the goods leased to them as per the MLA , as per the petitioner, the novat .....

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mining the books of accounts and records of the petitioner, passed re-assessment order on different dates i.e., 30.03.2011, 15.03.2012, 29.12.2012, 30.1.2013 under Section 39(1) of Karnataka Value Added Tax Act, 2003 (hereinafter referred to as KVAT Act for short) holding that the petitioner has leased the equipment after the import of the same from outside India and therefore, the transaction cannot be said to be in the course of import as per Section 5(2) of the CST Act. Accordingly, the re- a .....

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7 to 2007-2008. In the same manner, the other appeals were also preferred by the petitioner, ultimately, which came to be dismissed by the First Appellate Authority in respect of other assessment period of 2008-09 to 2010-11. The matters were further carried before the Tribunal by the petitioner against the aforesaid orders passed by the first Appellate Authority and the Tribunal vide order dated 25.06.2015, dismissed the appeal holding that the petitioner is liable to pay tax and no exemption i .....

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the CST Act, 1956, which is relevant for the purpose of present petitions, can be reproduced as under: Section 5. When is a sale or purchase of goods said to take place in the course of import or export. (1) xxxxxxxx. (2) A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crosse .....

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, when the matter came up before the Tribunal, the Tribunal after formulation of the point to consider as to whether the transactions effected by the petitioner is in the nature of course of import for the impugned tax periods observed at paragraph-8 to 13 as under: Point No.1:- Except for the tax periods of 2005-06 which involves the question of time limitation, the dispute is common for all the other impugned tax periods under KVAT Act and for the assessment year 2004-05 under KST Act. The app .....

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copies of the same for each year to support his submissions as urged in the grounds. Since, the material facts are not being disputed either at the level of AA or FAA, it is suffice for us to consider one representative paper book for the purpose of analyzing the transactions to come to conclusion whether the leasing transactions effected by the appellant is in the course of import falling u/s.5(2) of the CST Act. The assessing authority has taken the stand after due analysis of MLA, PO, Bill o .....

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alyzed and reliance is placed on Accounting Standard (AS)-19 and based on the fact that the transaction is in the nature of financial lease and the depreciation not being claimed by the appellant on the leased equipments. Per contra, the appellant has submitted that it is an integrated transaction and not two independent transactions to fasten the tax liability and as the integrated transaction is in the course of import falls under the purview of Section 5(2) of the CST Act and has given his su .....

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1956. Section 5. When is a sale or purchase of goods said to take place in the course of import or export. (1) A sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India only if the sale or purchase either occasion such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India. (2) A sale or purchase of goods shall be deemed to take place in the course o .....

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last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export,] (4) Xxx xxx xxx. Section 3. When is a sale or purchase of goods said to take place in the course of inter-State trade or commerce:- A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase- (a) occasion the movement of goods from one State to another;or (b) is effected by a transfer o .....

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deration; (ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (iii) a delivery of goods on hire- purchase or any system of payment by instalments; (iv) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (i). xxx xxx xxx; (ii). Xxx xxx xxx. 10. From the reading of the Clause (iv) of Section 2(g) of the Act under definiti .....

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course of import. For this purpose, Section 5(2) of the CST Act need to be analyzed. The Said sub- section has two limbs. The first limb envisages the sale or purchase in the course of import if such sale or purchase occasions such import. The second limb envisages the sale or purchase in the course of import when it is effected by transfer of documents of title to the goods before the goods have crossed the customs frontiers of India. This type of transaction is usually termed as High-Seas Sal .....

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rom one State to another u/s. 3(a) of the said Act. This has been ruled so by the Hon ble Apex Court in K.G.Khosla & Co. (P) Ltd. Vs. DCCT reported in 1966 AIR 1216 or [1966] 17 STC 473 (SC) - (decision rendered by the Constitution Bench consisting of five members). To decide whether the leasing transactions are in the course of import, the land mark decisions on this subject matter are to be looked into. 11. The important land mark decisions or judgments of the Hon ble Apex Court on the sub .....

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constitution bench of five members; 4. State of Madras vs. Devar & Co. [1969] 24 STC 481 - constitution bench; 5. Coffee Board vs. Joint Commercial Tax Officer [1970] 25 STC 528 (SC) - constitution bench; 6. State of Bihar vs. Tata Engineering & Locomotive Co. Ltd. [1971] 27 STC 127 (SC) - constitution bench; 7. Deputy Commissioner of Agricultural Income Tax & Service Tax vs. Kotak Co. [1973] 32 STC 6 (SC) - constitution bench; 8. Binani Brothers Pvt. Ltd. Vs. Union of India [1975] .....

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td. & Another vs. Commercial Tax Officer 2010 (69) Kar.L.J. 369A (SC) - two members bench; 2. K.Gopinathan Nair vs. State of Kerala/Cashew Corporation of India vs. State of Karnataka reported together in [1997] 105 STC 580 (SC) - three members bench; 12. In the above decisions Ben Gorim Nilgiri Plantations Co. and Mohammed Serajuddin cases are related to the interpretation of Article 286(1)(b) of the Constitution prior to amendment and after amendment to the Constitution (Sixth Amendment) w. .....

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t based on the actual users import licenses being used. Thus, the case laws having a direct bearing on the factual matrix of the present appeals are K.G.Khosla & Co. (P) Ltd., Embee Corporation, The Indure Ltd. And K.Gopinathan Nair/Cashew Corporation of India cases cited supra. The Hon ble Apex Court in K.Gopinathan Nair vs. State of Kerala/Cashew Corporation of India vs. State of Karnataka reported together in [1997] 105 STC 580 (SC) (three members bench); has analyzed all the leading case .....

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Act, 1956. The said propositions are as under:- (1) The sale or the purchase, as the case may be, must actually take place. (2) Such sale or purchase in India must itself occasion such import, and not vice versa, i.e. import should not occasion such sale. (3) The goods must have entered the import stream when they are subjected to sale or purchase. (4) The import of the concerned goods must be effected as a direct result of the concerned sale or purchase transaction. (5) The course of import can .....

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they are so integrally inter-connected that they almost resemble one transaction so that the movement of goods from a foreign country to India can be ascribed to such a composite well integrated transaction consisting of two transactions dovetailing into each other. (7) A sale or purchase can be treated to be in the course of import if there is a direct privity of contract between the Indian importer and the foreign exporter and the intermediary through which such import is effected merely acts .....

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me way as a lease does. The importing agent normally makes an import on the basis of an order of a local buyer. Similarly, an exporter gets an export order and makes purchase for that reason. Further, the word occasions has also been used in Section 5 of the CST Act. The Hon ble Supreme Court has held in K.G.Khosla & Co. (P) Ltd., vs. Deputy Commissioner of Commercial Taxes cited supra as under:- Movement of goods from Belgium to India was in pursuance of the conditions of the contract betwe .....

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ct. But if on the contrary the transactions between the foreign exporter and the local user in India get transmitted through an independent canalizing-import agency which enters into back to back contracts and there is no direct linkage or causal connection between the export by foreign exporter and the receipt of the imported goods in India by the local users, the integrity of the entire transaction would be disrupted and would be substituted by two independent transactions-one between the cana .....

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pects of sale vis-à-vis the movement of the goods from foreign vendor to the course of import observed from paragraph.14 to 22 as under: 14. In order to decide in the present appeals whether the sale by the appellant has occasioned the movement of goods from the foreign vendor in the course of import, it is necessary to analyze the Master Lease Agreement (MLA), Purchase order placed by the end customer on the foreign vendor, Lease Schedule and the Acceptance Certificate and so also the Sh .....

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ree Technopolls, 124-125 Yemlur P.O. Off Airport Road, Blore - 37 is taken for analysis & reproduced hereunder:- xxx xxx xxx 15. It is pertinent to note that under Clause 2 of the MLA with a caption rental procedure , envisages the provisions of the schedule namely the leasing schedule will prevail over the provisions of the MLA to the extent of any inconsistency between them. It is also to be noted that the description of the equipment and financed items in a schedule differs from the descr .....

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the format of Exhibit - B as prescribed in the MLA. Only after issuance of acceptance certificate, the Lease Schedule comes into existence. The end customer places purchase order not on the appellant but on the foreign vendor and in the case of Logica CMG, who being the end customer has placed purchase order on M/s. Tech Pacific (India) Exports Private Limited, 60, Alexandra Terrace, 61-01, The Comtech, Singapore - 118502 wherein the description of the equipments are present. This purchase orde .....

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are being mentioned as Exhibit-A1 to A3 and the same has been defined under Clause 26 under Definitions and Interpretation . Exhibit A3 is relating to charged finance item and Exhibit-A1 and A2 are Lease Schedule and Financing Schedule respectively. In the instant case in the financing schedule the value of the goods in US dollars is mentioned and within the brackets, the value in the Indian rupees is mentioned along with the rent for financing. The shipping authorization letter which has been h .....

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e goods and transports the same to his location. After due inspection of the goods and after due testing of the equipments imported on the strength of the purchase order placed by him i.e. the end customer, the acceptance certificate is issued in the form of Exhibit-B as envisaged under Clause 3.1 of the MLA. Only after the issuance of the acceptance certificate, the Lease Schedule is entered into as Master Rental and Financing Agreement (MR & FA). Before inking the Lease Schedule, the end c .....

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ementary agreement to the MLA comes into existence. This fact is evident from the definition/interpretation of the expression purchase documents appearing under Clause 26 of the MLA which defines the same as any agreement or other documentation between the end customer and the supplier of equipment relating to the purchase, ownership, use or warranty of equipment to be subject to a lease. The relevant clauses are selectively picked up from the MLA and reproduced hereunder:- xxx xxx xxx Thus, the .....

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er is placed by the end customer on the foreign vendor. The appellant stands as financial guarantor only. In the course import commences from the journey of the goods from the foreign destination and ends with the physical delivery being taken up by the end customer. Thus this being the first transaction which breaks after due location of the equipments in the nominated premises of the end customer. The second transaction commences after acceptance of the goods/equipments by the end customer aft .....

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ed as you or your . In furtherance to the same, under Clause 16 of the MLA with the caption Renter Acknowledgements , the sub-clauses (b) to (g), clearly emphasizes that the selected equipment and financed item is without the assistance of the appellant, the appellant has not made any representation or warranty about the condition, quality, fitness for purpose etc, the appellant is not liable for any representation or warranty made by the supplier of any equipment or financed items and the appel .....

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on does not fall under the purview of Section 5(2) of the CST Act. 17. The appellant submits that the transactions effected by him squarely fits into the factual matrix prevailing in the Karnataka Bank Limited case cited supra decided by the Hon ble Madras High Court by its judgment dated 30th September 2011. The factual matrix available has been narrated by her lordship at paragraphs Nos. 10 and 11 of the said decision. The comparative matrix is distinct from the present case. In order to illus .....

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ment entered between the Karnataka Bank and the lessee is dated 17th April 1998; (v). Supplementary lease agreement dated 31st July 1998. (B). Factual matrix prevailing in the present appeals: (i). Lessee M/s. Logica CMG Pvt. Ltd - PO placed on foreign vendor namely M/s. Tech Pacific, Singapore is dated 28th October 2005. (ii). Letter correspondence with the appellant for finance - Not revealed/Not available. (iii). Lessee s request to place PO on overseas supplier - No such request is made and .....

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e master lease agreement is prior to the purchase order placed by the end customer on the foreign vendor and the supplementary lease agreement or lease schedule is subsequent to the issuance of acceptance certificate followed by novation which are on the same day. Thus, the case law of Karnataka Bank Limited is not applicable in the case of the appellant because of the different scenario prevailing so far as facts are concerned. 18. The reliance place by the appellant on The Indure Limited case .....

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he CST Act. In the same manner, Embee Corporation case cited supra is also not applicable for the same reason that the occasioning of import does not result in the purchase of goods/equipments by the appellant. Further, the advance rulings relied upon by the appellant is not applicable in the present case since the factual matrix is distinct. Hence, the transactions effected by the appellant are not covered by the exemption clause as envisaged u/s. 5(2) of the Act. 19. Even by following the mino .....

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and on the mutual understanding between the local buyer and the local seller that the goods so imported by the local seller will be purchased by the local buyer. There is in such cases, a direct link between the local sale and the import. In fact it is this mutual understanding between the local buyer and the local seller which occasions the import . Proceeding further it was opined by her lordship as under: If we apply this test of inseverable link between the local sale and import to the trans .....

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by the cashew corporation of India are in exact terms of the requirements of each of the allottees and are a sum total of these requirements. There is a specific allocation of each lot before it is shipped from the foreign port, in favour of each of the allottees. The local purchaser has to clear the allocated goods on their arrival. Even a subsidiary licence is issued in favour of the local purchaser. The price of imported cashewnuts is paid by the local purchaser. The cashewnuts is paid by th .....

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after the import is irrelevant is this context . If the same test is applied in the present context, then it could be seen that the appellant has not imported goods/equipments from foreign vendor but it is the end customer s purchase order occasions the sale in the course of import and the same is completed after taking delivery of goods/equipments. This is the first transaction. The second being the novation of the imported goods by issuance of acceptance certificate & novation notice. The .....

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stomer does not fall under the purview of 5(2) of the CST Act. Once it falls outside the purview of Section 5(2) of the CST Act, the concerned transactions are nothing but sale falling under Section 2(29) of the KVAT Act 2003 and the turnovers qualifies as taxable turnover as per Section 2(34) of the KVAT Act and thus chargeable for VAT in the State. 21. Coming to the issue of levy of penalty and interest, it is observed that the appellant infact had not declared taxable sales at all during the .....

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closed in the returns filed for the relevant period. A copy of the letter is enclosed as Annexure-2 (the appellant s letter dated 19th June 2013 running from page Nos.101 to 122). Based on such a review, the appellant suio- moto discharged the output tax of ₹ 6,55,52,252/- along with applicable interest of rs.2,00,49,695/- for the period of April 2005 to March 2013. The appellant requested the same be considered as voluntary disclosure in compliance with the provisions of the KVAT Act as t .....

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.2063/2014 and not disclosed or narrated in any other STAs under consideration. While doing so, the appellant has taken shelter so far as the import transactions which is claimed as sale in the course of import which has been answered against the appellant as narrated in detail in the above paragraphs under Point no.1. It is not known whether such interest paid is in accordance with law since the AA has not dealt that matter in the impugned reassessment orders. The reasons for not having disclos .....

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ct, 1961 and also mandatory to submit Form VAT 240 from its inception. When such being the case, it is strange to note that the lower authorities have not taken cognizance of such omissions and have not given any definite finding on the admission of interest paid voluntarily by the appellant. In these circumstances, it is not possible to accept the version of the appellant that the mistakes are inadvertent and the interest as per Section 36 of the KVAT Act, 2003 is mandatory and the imposition o .....

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liance is placed on the decisions of the Hon ble Supreme Court rendered in the cases of Guljag Industries vs. Commercial Tax Officer reported in (2007) 09 VST 1 (SC) and Assistant Commercial Tax Office vs. Bajaj Electricals Limited reported in (2008) 18 VST 436 (SC). Infact, the Hon ble Supreme Court has distinguished the D.P.Metals case (2001) 124 STC 611) in Guljag Industries case cited above. In view of the above facts, the levy of interest and penalty has to be held as correct. 22. In view o .....

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al matrix of the present petitions referred to by the Tribunal and thereafter, findings recorded by the Tribunal shows that the Tribunal found that the requirement for getting exemption is dependent upon inextricable link to the import from the foreign vendor and the customer and further with the end customer and the petitioner. The Tribunal has specifically taken note of the fact that as the link is not established or proved by the petitioner and hence not covered by the exemption clause as env .....

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is not established. In our view, when the matter falls in the arena of appreciation and re-appreciation of the documents pertaining to transactions entered into by the petitioner with its customer, the same can be said to be the questions of facts examined and concluded by the Tribunal, such questions of facts cannot be gone into in the petitions before this Court which is limited to the questions of law. 14. However, the learned counsel appearing for the appellant made an attempt to contend tha .....

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tted that, the purchase order which was already produced is not considered and the Tribunal has recorded a finding on the premise that the appellant has not placed any purchase order on the oversees supplier. It was also submitted that all documents produced pertaining to the transactions right from MLA till rental agreement is entered into between the petitioner and the lessee were produced. The Tribunal failed to consider the same and has recorded a finding which is not supported by the docume .....

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16. In order to consider the aspects as to whether the view or decision or the only one view is possible and the view taken by the Tribunal can be said to be perverse or not, we have permitted the learned counsel appearing for the petitioner as well as for the respondent to make the relevant record of the case available for supporting the contention. 17. It is true that, master lease agreement is entered into between the petitioner and the customer. The Tribunal in para.14 of the Judgment has re .....

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e genuineness thereof. 18. Learned counsel for the petitioner during the course of hearing has produced a compilation which, as per him was also produced before the Tribunal pertaining to the transaction by the petitioner with its customer i.e. M/s.Mphasis Ltd., (hereinafter referred to as the customer ) wherein, in the said compilation at page.13 the bill is stated to be in the name of the petitioner whereas the shipping address is stated as that of customer. 19. In the very compilation, the ma .....

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Export Import Policy 2002-2007 or any replacement policy (the EXIM Policy) you are a company that is eligible to be set up under th Export Orientated Unit Scheme, the Export Processing Zone Scheme, the Electronic Hardware Technology Park Scheme, the Export Promotion Capital Goods Scheme or a similar scheme instituted by the Indian Government (or any state government) under which you afforded concessional customs and/or excise treatment (hereinafter referred to as a Scheme ), and (ii) you are co .....

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ble customs authorities, the requirements of any other authorities, the rules of the applicable Scheme and all applicable laws in India that apply in respect of the import of the Equipment as describedin paragraph (a) above. You acknowledge and agree that you will have sole responsibility to administer the import of the Equipment into India and shall comply with all applicable laws in the course of such import. (c) Without limiting the generality of clause 15 of the Master Agreement you uncondit .....

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ghts under this clause or otherwise in respect of the payment or non- payment of customs duty. (e) In the event that, under the Master Agreement, you are obliged to return the Equipment to us or we are entitled to repossess the Equipment from you, you will cooperate with us and immediately comply with all of our directions in order to ensure that the Equipment is promptly removed from the Equipment location. Without limiting the generality of the foregoing, your obligations under this clause inc .....

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condition and the import concession, the customer has claimed the exemption or Nil Duty as per the said scheme since the goods are to be used for 100% export oriented scheme. The aforesaid two aspects show that, so far as the Customs Act is concerned, the customer or the so called lessee is the person who is to claim benefit of exemption from duty or concessional rate of duty, as if the customer is the owner of the goods and since he has to utilize the goods for export oriented unit scheme. It .....

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y dis-entitle the petitioner to claim any benefit of the duty under the Customs Act since it is not going to use those goods for itself in export oriented unit scheme and at the same time, the customer may not be entitled for the benefit of the scheme because customer is not the owner of the goods as per the say of the petitioner and it is the petitioner who is the owner of the goods. It is hardly required to be stated that if the importer is importing the goods on behalf of somebody, naturally, .....

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p as that of lessee or lessor is defeated or not the aforesaid observations are made. Even if we proceed on the basis that master lease agreement was entered into may be in the absence of any advance payment made or any part consideration paid, then also, so far as Customs Act is concerned, the relationship is severed in as much as, the customer is shown as the owner and only the payee of the consideration is shown as that of the petitioner. 21. Apart from the above, the documents which are made .....

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with the foreign company for the purpose of importing of the goods and payment is only to be made by the appellant. To put in other words, the customer is the owner of the goods and the petitioner is only extending financial services for the payment of the price of the goods. 22. If both the documents are considered, the situation resultant would be that after MLA is entered into between the appellant and the customer, the relationship of the ownership of the goods to be imported is severed at .....

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at after the goods cross the customer frontier of the country, the transaction of not only acceptance of the product but the ownership of the goods imported vide the purchase order is re-entrusted by the customer to the petitioner and it is only thereafter, the master rental and financing agreement is entered into between the petitioner and the customer. The entrustment of the ownership and the entering of the lease agreement after the products are on Indian territory both can be said as substan .....

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ded by the Tribunal, it is not possible to accept the contention of the learned counsel for the appellant that the finding recorded by the Tribunal for division of the link and non-satisfying of both the conditions is the only view which could be possible. As such, as observed by us hereinabove, if we consider the material produced taking a lenient view that it was mixed question of law and fact, therefore, wider scrutiny, then also in our view it can be said to be a finding of fact by the Tribu .....

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he Court had no occasion to consider the aspects of entrustment of the ownership by novation of the contract as in the present case. Therefore, we find that the said decision is of no help to the petitioner. 26. Learned counsel for the petitioner also relied upon the decision of a co-ordinate Bench of this Court in case of Canara Bank vs. State of Karnataka in STRIP 82/05 decided on 24.11.2006. In the said case also, as observed by us hereinabove, the question did not come up for consideration f .....

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