Stamp Duty to be levied on Delivery Orders: Bombay High Court gives its Stamp of Approval

Several writ petitions were filed before the Bombay High Court challenging the imposition, levy, and collection of stamp duty by the State of Maharashtra on Delivery Orders (DO) under Article 29 of the Maharashtra Stamp Act, 1958 (MSA). These petitions argued that the levy was in conflict with certain provisions of the Constitution of India (specifically Articles 246(1), 286(1)(b), and 286(2), alongside Entries 41 and 83 of List I of Schedule VII) with respect to the import of goods into India. This contention was based on the assertion that this taxation exceeded the State's constitutional authority, particularly in the context of imports.

While initially, the challenge was on the levy of stamp duty on ‘Bill of Entry’ (BoE), the State of Maharashtra subsequently clarified that the stamp duty was being levied on the DO.

Indisputably, the immediate trigger for the writ petitions challenging the stamp duty on DOs was a judgment delivered by the Hon’ble Gujarat High Court in various writ petitions (Essar Steel Limited vs. Superintendent of Stamps (2010) 51 (1) GLR 744 (SJ) and State of Gujarat vs. Reliance Industries 2011 SCC OnLine Guj 5032) challenging the levy of stamp duty on a BoE submitted for clearing imported goods. The petitioners argued against treating the BoE as a DO,  thereby challenging the application of the tax.

The central issue in these petitions was whether stamp duty should be applied to a Bill of Entry (BoE) and if such a BoE could be considered a DO for imported goods. The Gujarat High Court determined that stamp duty is not applicable to a BoE for two main reasons: first, a BoE does not qualify as an instrument under the law; and second, it does not establish any rights or liabilities concerning the goods. Currently, a Special Leave Petition challenging the Gujarat High Court's decision is still pending before the Supreme Court.

In respect to the present dispute regarding the levy of stamp duty on DOs in Maharashtra, the following questions of law arose for consideration before the Hon’ble Bombay High Court:

I. Whether DOs are an adjunct/ extension to the Bill of Lading (‘BoL'), which does not fall within the purview of the definition of the term ‘instrument’ under the MSA.

II. Whether DO is a document of title in the goods and whether it creates any right, title, or interest in goods.

III. Whether DO is a document created in the course of import of goods as it is created before the goods are delivered to the importers.

IV. Whether the decision of the Hon’ble Gujarat High Court is applicable in the instant case wherein BoE was held not to be a DO, or an ‘instrument’ as defined in Article 24 of the Gujarat Stamp Act, 1958 (“GSA”) and hence, not chargeable to stamp duty.

The High Court ultimately upheld the legislative competence of the State to levy stamp duty on the DO. The alternative prayer to read down the Article 29 of Schedule I of the Stamp Act of 1958, to not apply to a DO, has also been denied. While reaching this conclusion, the High Court proceeded on the following basis.

Applicability of the doctrine of pith and substance

It was held that it is the doctrine of pith and substance which must be applied to ascertain the true nature of the legislation and the entry (out of three Lists in the Seventh Schedule to the Constitution of India) within which it would fall. It is settled law that while interpreting these entries, they should not be viewed in a narrow or myopic manner but be given the widest scope to their meaning, particularly when the vires of a provision of a statute is assailed.

In such circumstances, a liberal construction must be given to the entry by looking at the substance of the legislation and not its mere form. The apex court in the matter of State of Bombay vs. FN Balsara (AIR 1951 SC 318) has held that according to the pith and substance rule, if a law is in its pith and substance within the competence of the Legislature which has made it, it will not be invalid merely because it incidentally touches upon the subject lying within the competence of another Legislature. What is to be ascertained is whether the DO is an integral part of the chain of events in the course of import of goods or if it stands independent from the import process, even though it may be incidental. If the DO is found to be independent of the import process and not an essential component of it, then the State has the authority to impose stamp duty on it. This is in accordance with the pith and substance rule, indicating that if the primary objective and fundamental purpose of Article 29, in conjunction with Section 2(l) of the Maharashtra Stamp Act (MSA), are recognized as separate from the import itself and instead viewed as a consequence of the import, the levy of stamp duty is justified.

Nature of levy of Stamp duty

A reference was made to the earlier decision of Hon’ble Bombay High Court in the matter of CCRA vs. Maharashtra Sugar Mills (52 Bom LR 82), which culled out some basic principles for the application of MSA. First, for charging stamp duty, the substance or real nature of the transaction recorded in the document is relevant, not its description, title or chosen name; second, stamp duty is imposed on the instruments and not the transactions; third, instruments are to be read as they are worded or drafted; and fourth, the act is a fiscal measure enacted to secure revenue for the State from certain classes of instruments.

The aspect of “in the course of import”

The BoE is presented for the computation of the customs duty. Once the customs duty is paid, the import process, so far as the customs authorities and the Customs Act are concerned, ends. The DO is then issued by the shipper upon proof of payment of customs duties and its own charges. The DO does not form part of the chain of the import process and the taxing event occurs beyond the course of import. Thus, it was held that DO is not an integral part of the chain of events in the course of import of goods.

It was held that the process of transfer of title in the goods in the course of import is separate, independent, and distinct from a DO. The DO entitles the person named therein or the holder to the delivery of goods. The transfer of title or ownership in the goods is independent of the entitlement of a person to receive delivery after discharging the dues of the carrier.

It was held that the phrase ‘customs frontier’ cannot be equated with a geographical boundary. As per the settled position in law, the ‘customs frontier’ is a concept in a time sequence, viz., that point in the process where the taxing and jurisdictional remit of the customs ends. This has nothing at all to do with physical or geographical borders. Consequently, it was held that the minute the customs duty is paid and cleared (along with any other dues legitimately recoverable by customs), the customs ‘frontier’ ends.

The DO in question in this group of cases only springs into being when that frontier has ended, that is, after the process of assessment and recovery of customs duty is complete. The BoL, a document of title, originates when goods are laden on the vessel. It is the first in point of time. The BoE, as the Hon’ble Gujarat High Court judgments point out, is for the purposes of customs duty assessment. This is second in point of time. The DO comes into existence as a third part of the time sequence,  after the customs duty, dues, freight, etc., are paid and the goods are lien-free, that is, available for delivery. The ‘customs barrier’ is, therefore, not a physical ‘barrier’ per se, but speaks of a point in time after the role of customs has ended.

DO as an independent instrument

Regarding the shippers' rights and their lien on the goods, the Bombay High Court noted that even after customs duties have been paid and the necessary customs clearance obtained, if the carrier's charges are still unpaid, the shipper/ carrier retains a lien on the goods. Consequently, as long as their fees remain unpaid, the shipper is under no obligation to authorize the release of the goods. Thus, there is a requirement of a DO issuing release order by the shipper to the custodian/ warehouse declaring that all its dues are settled and the lien it holds is extinguished. The High Court admitted the contention of the respondent that the DO in the present circumstances has nothing to do with the customs duty or the clearance by the customs authority for domestic consumption.

On the question as to whether DO is a document of title under Article 29 of the MSA, it was held that in terms of Section 2(l) of the MSA, the word ‘instrument’ includes every document which creates any right or liability but specifically does not include certain documents mentioned therein including a BoL. It is a DO which entitles the person named therein to take delivery of the goods after discharging the dues of a shipper. It is only after the shipper’s charges are cleared that his lien on the goods is extinguished. A right to possession of the goods is distinct from ownership of the goods. Although title to goods includes ownership and possession, the former may exist without the latter. Ownership denotes de jure possession, but another person may be in de facto possession of the goods. The distinction between title and possession is self-evident. A BoL may, for instance, may be transacted in a sale in the high sea and the title would pass. However, the new/ substituted consignee would not get physical possession of the goods sold until the goods were cleared through customs on arrival at the destination port.

Consequently, it was held that the DO is neither a BoL nor a BoE, and thereby it is not covered by any exclusion of the BoL or the BoE. The Hon’ble High Court also held that even if the contention of the petitioners is to accepted that the BoL constitutes title to the goods, without a DO, the owner or the consignee may not have possession of the goods without payment of the carrier’s charges. Only upon release of the shipper’s lien, the consignee gets entitled to delivery/ possession of the goods. Thus, it is not necessary for the DO to be a document of title to fall within the purview of the definition of ‘instrument.'

Gujarat Vs. Maharashtra

Coming to the charge of discrimination between importers in the State of Gujarat and those in Maharashtra, it was observed that the question before the Court was whether stamp duty was liable to be paid on BoE and if this  BoE was a DO in respect of goods. It was on this aspect that the Gujarat High Court, relying upon Regulation 16 of the Gujarat Maritime Board (Landing and Wharfage) Regulations, 1956, held that a BoL to be a ‘DO.'

Distinguishing the decision of the Hon’ble Gujarat High Court, the Hon’ble Bombay High Court observed that the Gujarat High Court has simply held the BoE to be distinct from a DO, which was not a subject matter of dispute in the instant proceedings. The Gujarat High Court held a BoL to also be a ‘DO.' However, this finding, based upon a provision of Gujarat Regulations, does not justify the claim of the petitioners that the ‘DO’ is an extension of a ‘BoL.' In other words, the High Court indicated that both are DOs  and are independent instruments. It was held that the DO is neither a BoL nor a BoE. Further, it was held that the law on this subject operating in the State of Gujarat has no application in the State of Maharashtra for the reasons mentioned above.

What's Next

The decision is expected to be appealed to the Supreme Court, where it might be considered alongside the Gujarat Special Leave Petition (SLP) that is already pending. Given the judgment touches upon several complex legal questions, it's important for taxpayers to wait for the final verdict on this matter. Taxpayers are advised to continue their legal proceedings and maintain their claims to protect their interests, in anticipation of a potentially favorable ruling from the Supreme Court.

About the authors: Gopal Mundhra is a Partner and Swati Agrawal is a Senior Associate at Economic Laws Practice.