Bombay HC rules that appropriate State for levy and collection of CST is the State from where movement of goods commences

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1 20 January 2017 EY Tax Alert Bombay HC rules that appropriate State for levy and collection of CST is the State from where movement of goods commences Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent ruling of Bombay High Court 1, disposing the writ petition which deals with situs of inter-state sale and appropriate State for the purpose of levy and collection of Central Sales Tax (CST). Pursuant to the sale agreement with President of India, missiles assembled in Hyderabad unit (located in Andhra Pradesh) were dispatched to Nagpur branch (located in Maharashtra) by the petitioner for warhead integration and were subsequently dispatched out of the State of Maharashtra to Indian armed forces. The assessing officer (AO) in the State of Maharashtra demanded CST on the ground that since fully finished missiles were dispatched from Nagpur to the customers, the petitioner was liable to pay CST in Maharashtra. Bombay High Court observed as follows: The movement of goods from Andhra Pradesh (AP) is pursuant to the sale agreement with President of India. Missiles are assembled in the AP unit and movement of goods in course of inter-state trade commences from the state of AP. The missiles were sent to Maharashtra only for warhead integration since it was impossible to fit warhead at facility located in civilian area in AP. Placing reliance on the decision of Apex Court in case of BHEL 2, the HC concluded that the transaction was an inter-state sale commencing from AP and CST is payable in the State of AP VIL-20-BOM VIL-32-SC

2 Background and facts Assessee had been awarded contract by the Indian Armed Forces (IAF) for manufacture and supply of Brahmos cruise missiles. Pursuant to this, assessee set up a manufacturing unit at Hyderabad (located in erstwhile State of Andhra Pradesh and presently in the State of Telangana). Missiles are imported from Russia in semi knocked down (SKD) condition and assembled with certain bought out items in the Hyderabad unit and thereafter sold to IAF. The assessee manufactures three types of missiles - combat missiles, practice missiles and technology/training missiles. The combat missiles which are used in battle field are equipped with warheads. Warhead is an explosive charge used to destroy the target and surrounding areas with a blast wave. Accordingly, it is prohibited from being brought into the factory of the assessee at Hyderabad, as the same is located in civilian area. The imported warhead is stored at assessee s unit located in Nagpur (Maharashtra) which is far away from civilian area. The combat missile manufactured at Hyderabad unit is complete in all respects, except warhead integration. After the said warhead integration at Nagpur unit, combat missile are dispatched from Nagpur to IAF. The assessee treated the said transactions as inter-state sales of missiles effected from Hyderabad unit and accordingly charged and collected Central Sales Tax 14.5% and paid the same to VAT department in Hyderabad. The authority at Nagpur raised demand of CST in the State of Maharashtra on the ground that since the warheads were integrated and dispatched from Nagpur to customers, it is an inter-state sale commencing from Nagpur. Thus, the assessee is liable to pay tax in the State of Maharashtra. Aggrieved by this, assessee filed a writ petition before the Bombay High Court. The issue before the Bombay High Court was whether the situs of inter-state sale and therefore, the state to which the assessee is liable for payment of tax is AP or Maharashtra. Petitioner s contentions Missiles are meant for use by IAF for safety and security of the country and as such they are not marketable. Hyderabad unit sends missiles without warhead to Nagpur branch for job work of warhead integration, in accordance with Rule 16B of the Central Excise Rules, The cost of warhead constitutes only 2.6% of the total cost of the missile. The sales of all the missiles is effected from Hyderabad unit and in view of peculiarity and sensitivity of goods involved, the missile completed in all respects is dispatched to Nagpur unit for warhead integration. On completion of job work, the Hyderabad unit issues instruction to dispatch the missiles to concerned unit of IAF. Till such time the Nagpur branch would have no knowledge to whom the missile is to be sent. Thus, Nagpur branch cannot by itself cause the movement of missiles which is an essential ingredient of an inter-state sale. 3 Rule 16B of Central Excise Rules, 2002 deals with procedure for removal of semi-finished goods for job work.

3 Further it was contended that the missiles and warheads were finished goods by themselves and cannot be termed as semi-finished goods. The movement of goods from Hyderabad is pursuant to an agreement of sale with the President of India. It is a well settled principle that property in goods transferred to a buyer in a destination state will not alter the nature of transaction till the time movement of goods has been undertaken pursuant to an agreement of sale. Respondent s contentions Semi-finished missiles are transferred from Hyderabad to Nagpur for warhead integration and final assembly of the Brahmos missiles. Movement of semi-finished goods cannot be construed as a mere stop-over in inter-state movement as projected by petitioner. The movement of finished goods has occasioned from State of Maharashtra. Both situs of sale and the appropriation of the goods is effected within the state of Maharashtra. Therefore, Maharashtra is appropriate State for the purpose of levy and collection of the CST. Reliance was placed upon the judgement of AP HC in case of Bharat Electronics Limited 4. The background of the case is as under : Components were manufactured and transferred by Machilipatnam unit to the units in other states. These units incorporated the components in manufacturing goods and subsequently sold them. AP HC held that transfer of components from Machilipatnam units to other units is a stock transfer. It was further argued that there was no integrated movement of missiles and warheads from Hyderabad. They were moved separately and individually over a period of time. No individual warhead was earmarked for a particular missile. Hence, it cannot be said that the movement of missiles and warheads was from Hyderabad. High Court ruling HC noted that in section 9(1) of CST Act, 1956, it is stated in clear terms that the tax levied on sale of goods in course of inter-state trade or commerce shall be collected by the Government in the State from which the movement of goods commenced. Referring to the SC judgement in case of State of AP vs. National Thermal Power Corporation Limited and Ors 5, the HC stated that for a transaction to qualify as inter-state sale, there must be movement of goods from one state to another, pursuant to the contract of sale. HC observed that there was a fundamental error, in the understanding of the AO, of the provisions of the Central Sales Tax Act, Further, the understanding of the AO that it is the movement of finished goods, which would be the determining and conclusive factor is legally flawed. HC relied on the SC judgement in case of Bharat Heavy Electrical Limited 6. The background of the case is as under : BHEL entered into a contract for setting up captive power plants for aluminium smelter complex at Angul, Orissa for NALCO 7. Tiruchi unit (located in Tamil Nadu) of BHEL was designated as executing agency for the contract and was responsible for manufacturing and supplying boiler 4 [2011] 46 VST 179 (AP) VIL-10-SC VIL-32-SC 7 National Aluminium Company Limited

4 systems required for setting up power plants at Angul. Hyderabad unit of BHEL manufactured some parts/components of boiler system. Some of those were sent to Tiruchi unit of BHEL for incorporation in boiler system and remaining were sent directly to Angul for incorporating into boiler system at work-site. Parts or components manufactured by the Hyderabad unit for incorporation in the boiler systems and sent to Tiruchi were treated as branch transfers. The tax was levied by the State in which the main machinery system was manufactured. No tax was levied by the State wherein the parts or components were manufactured and sent for incorporation into the main machinery or system manufactured in other States. Parts and components manufactured in the Hyderabad unit and directly dispatched to work-site at Angul are treated as inter-state sales taxable in AP State, as the goods moved from AP pursuant to the supply contract. Since the movement of goods commenced in the state of AP, CST was leviable in AP, in accordance with section 9(1) of the Act. It is clear that it is the establishment at Hyderabad, where the components are assembled, which makes the missiles. HC observed that in the present case, the movement of goods from Hyderabad has been made pursuant to supply agreement with the President of India. HC distinguished the Bharat Electronics Limited s case relied by respondent on facts. HC thus concluded that the transaction was an inter-state sale commencing from AP and CST was payable in the State of AP. Comments Inter-state transactions have been invariably a matter of litigation. Though there are judicial precedents on situs of inter-state sale and appropriate state for collection of CST, the present case is based on different facts wherein pursuant to sale agreement, manufactured goods are sent for further processing in a different state and subsequently dispatched to customer. The HC ruling reiterates the broad principles of taxability of inter-state transactions from CST perspective. For the same transaction, a writ petition is pending before AP HC, where it is contended by the assessee that it is not a branch transfer but inter-state sale emanating from AP. Further, there is no dispute as to whether this is an inter-state or intra-state sale. It is only a question of the authority of the agent to collect the tax on behalf of the Central Government. Hence, no justification in law is seen for the distinction made by the AO about the goods being brought in semi-finished or finished status.

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