In practice, the precise point of the sale is not easy to determine. The Sale of Goods Act, 1930 has its own connotations as regards the transfer of property with the result that, at times, there is an inevitable conflict between the various concepts.

Business enterprises generally tend to recognise a sale when goods are despatched irrespective of whether the carrier is acting for the buyer or the seller. This has become the de facto practice as far as sales in the domestic market are concerned. As regards goods despatched, it may not be entirely in line with AS 9 where the carrier is acting on behalf of the seller.

The following note was appended to the financial statements of a leading, actively-traded listed company for the half-year ending September 30, 2003:

"Auditor's have reported that accounting of freight and handling income/expenses is not in compliance with Section 209 of the Companies Act, 1956 and AS 9 on revenue recognition. The opinion tendered by the ICAI in this regard was deliberated by the Audit Committee and, keeping in view the practical aspects not considered by the ICAI, it has been decided to refer the matter to the ICAI again for their re-consideration."

This sums up the problems of interpretation that one is confronted with when dealing with AS 9.

When it comes to export of goods, different rules and practices apply for obvious reasons viz., the buyer and seller are in different countries with different legal and commercial systems. Therefore, over the years, the need for a common code of conduct in international practices began to be felt. In 1936, the International Chamber of Commerce published a set of rules for interpreting trade terms which attempted at standardisation of international practices and, thus, was born the code of conduct which came to be known as `Incoterms 1936'.

Incoterms have to be incorporated in contracts to be made binding on both the buyer and seller. However, over the years, the practices have become so common they have become universally acceptable. Incoterms are periodically updated to align with the changing business environment.

There are 13 different kinds of incoterms and each of them is represented by a three-letter abbreviation. The obligations of the seller are thus defined and whatever is unsaid is the responsibility of the buyer.

Incoterms are arranged in a logical order and starts with the one that imposes the least obligation on the seller and ends with the most. The following are the 13 incoterms: EXW (ex-works); FCA (free carrier); FAS (free alongside ship); FOB (free on board); CFR (cost and freight); CIF (cost, insurance and freight); CPT (carriage paid to); CIP (carriage and insurance paid to); DAF (delivered at frontier); DES (delivered ex-ship); DEQ (delivered ex-quay); DDU (delivered duty unpaid); and DDP (delivered duty paid).

As can be seen, EXW imposes the least obligation since the obligations of the seller are fulfilled the moment goods leave the factory. The one that casts the most responsibility on the seller is DDP at the named place of destination.

In this case, the seller undertakes the responsibility to deliver goods at the named place in the country of importation. The seller is responsible for completion of all import formalities and payments of duties and charges.

International trade is entering a new phase since jobs are getting transferred to low-cost economies. These days no manufacturer can make a legitimate claim that his product is manufactured in a particular country, as the final product is an amalgam of components manufactured in different countries. Indian auto component manufacturers have found large business opportunities of supplying components to auto manufacturers abroad. Since volumes are huge, the OEM (original equipment manufacturers) customers are in a position to demand that supplies be made by the Indian suppliers according to their convenience on a just-in-time basis which means an Indian supplier necessarily has to maintain a warehouse alongside the customer's plant.

In such situations DDP will become operative. Invoices will be raised at the time of delivery of goods. At this point, the Indian vendor, rather than doing business with the importing country, is now doing business in the importing country. Hence, there is a shift in the manner of conducting business.

A question that will arise as a consequence of this arrangement is whether maintenance of a warehouse (owned, rented or merely space booked) amounts to establishing a PE (permanent establishment) and carrying on business. And, if so, whether the Indian exporter is earning income abroad and, therefore, liable for taxes on such income.

As most DTAAs (Double Taxation Avoidance Agreements) define in Article 5, a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on and includes "a store or premises used as a sales outlet". While the definition of PE is an inclusive one, the exclusions are specific. These issues need to be addressed so that these can be built into the cost of doing business abroad. Ultimately, an Indian exporting entity may take a view that it is not worse off since relief is available from double taxation either in the form of exemption of income that has suffered tax or credit for tax that has been paid in the importing country.

At the worst, there would be annual charges to be paid for legal expenses by way of professional charges, and so on, in the importing country. However, the rules of relief for double taxation are not that simple. Relief is granted only when income is doubly taxed, that is, both in the source and residence countries. There are decided cases which state any part of income that has suffered tax only abroad and not in India, would not be entitled to relief under DTAA. Unless the DTAA has provisions for `tax-sparing' an exporter would be put to considerable loss by way of denial of relief where he is entitled to deductions — for instance, under Sections 80HHC, 80-IB of the Income Tax Act, 1961 since relief would be available only where an income has suffered double taxation.

The Indian exporter would do well to examine the various legal implications.

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