Issues of Inter-State Sales vis-à-vis Branch Transfers and Practical difficulties & Solutions

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1 Issues of Inter-State Sales vis-à-vis Branch Transfers and Practical difficulties & Solutions - CA Satish Saraf, FCA, Hyderabad casaraf@yahoo.co.in; On arose of the need with the recommendations of the Taxation enquiry commission, the Government of India formulated and legislated by Parliament, the statute by name The Central Sales Tax Act, A unique statute formulated & legislated by Union and tax collected by the State. The apparent relation between the Inter State Sales as per Section 3 of the Central Sales Tax Act, 1956 (hereafter in after called Act ) and Branch Transfers as per Section 6A of the Act is mutually exclusive but in reality is not so. The understanding of the above two provisions of the Act along with the Judgments of the various courts, will prove that the relationship is not mutually exclusive. It is very much important to know the following provisions of the Constitution of India, which enables or empowers the Union of India and State Governments to levy the tax on sale or purchase of goods. Entry 54 of State List VII Schedule. o Empowers the State Governments to levy tax on sale or purchase of goods other than newspaper subject to entry 92A of List-I Entry 92A of Union List VII Schedule. o Empowers the Union of India to levy tax on sale or purchase of goods other than newspaper in the course of Inter State trade or commerce. Entry 92B of Union List VII Schedule. o Empowers the Union of India to levy tax on Consignment of goods in the course of Inter State trade or commerce, whether the consignment is to the person making it or to any other person. Article 286 of the Constitution. o No State law shall impose or authorize the imposition of tax on the sale or purchase of goods which take place outside the State, Imports & Exports o Parliament to formulate principles on the above matter. o Restrictions on the levy of tax on the declared goods by the States. o Tax on the sale or purchase of goods referred in Article 366(29A)(a)(b)(c) & (d). Article 366(29A)(a) of the Constitution Tax on sale or purchase of goods, tax on transfer, otherwise than in pursuance of a contract Entry 92A & 92B of the List I read with article 286 & 366(29A)(a) make it clear that, the Central Government has the authority to levy tax on Branch Transfers and Consignment-Sales in the course of Inter State trade or commerce. In spite the Central Government has the authority to levy tax on

2 the Branch transfers and consignments till date the Central Government has not came out with any statute for levy of tax on these transactions. The issues of Inter-state sale vis-à-vis branch transfers are analyzed in the following paragraphs in the light of Section 3, Section 6A and related Judgments of the various Courts. It is presumed that the learned readers are having the knowledge of the provisions of the Act; it is an attempt to make their memories afresh. The provisions of the Act and related Judgment are discussed with a focus to establish a relationship between inter-state sales and branch transfers. Section 3 of the Act, spells when is a sale or purchase of goods said to take place in the course of inter-state trade or commerce, if the sale or purchase is occasions the movement of goods from one State to another or is effected by a transfer of documents of title to the goods during their movement from one State to another and also gives two explanations in relation to the inter-state trade or commerce. The Supreme Court of India in the case of Balabhadas Hulaschand Vs. State of Orissa 37 STC 207 has laid down the conditions to constitute a transaction as sale or purchase in the course of interstate trade or commerce, they are: 1. That there is an agreement to sell which contains a stipulation, express or implied, requiring movement of goods from one State to another; 2. That in pursuance of the said contract the goods in fact moved from one state to another; 3. That ultimately a concluded sale takes place in the State where the good are sent which must be different from the State from which the goods move. In a contract of sale, two parties are present one seller and another purchaser. It is not always the movement of goods is occasioned by the seller, even if the goods, after purchase the purchaser make the movement of goods from one State to another as per the terms of contract, it is viewed as inter-state sale or purchase. The Supreme Court held in the case of Tata Engineering and Locomotives Co. Ltd 27 STC 127 and also in various other cases. Section 3, has two part Section 3(a) and 3(b), the movement of goods from State to another in the course of inter-state trade or commerce the contract is necessary in the case of transactions falling under the first part and under the second part it arises during the movement from one State to another. The second part of section 3 does not require any contract before the movement of goods from one State to another because the contractual obligation to move goods from one State to another was may or may not be in pursuance of any contract. This was held in the case of Larson and Toubro Ltd 20 STC 150 (Mad), this judgment was reversed on other point in various cases. The Supreme Court held in the case of State of Tamil Nadu Vs. Cements Distributors (P) Ltd 36 STC 389, mere movement of goods from one State to another without any element of sale within the meaning of the Act, is not an inter-state sale. The all conditions stipulated in the definition of sale as per Section 2(g) of the Act, in brief they are - Transfer of property in goods, by one person to another, for cash or for deferred payment or for any other valuable consideration, in pursuance of a contract, etc. If movement of goods is not in pursuance of a contract or the movement of goods is

3 not between two different persons or if it is not for consideration, etc. the transaction is not a sale or purchase in the course of inter-state trade or commerce. The following transactions are not treated as inter-state sale basing on the nature of the transactions and the persons involved, etc. Goods are sent by the dealer from Head Office to its branches and vis-à-vis or from one Branch to another branch. In these kinds of transactions sale is not involved. Goods are sent by the dealer from one State to another State to his agent for on account sales. In these transactions the movement is not occasioned by any sale. Goods are sent by the dealer of one State to another dealer in another Sate on the basis of Consignment. In these transactions the movement is not occasioned by any sale. Section 6A Burden of proof, etc., in case of transfer of goods claimed otherwise than way of sale is inserted in to the act by the Central Sales Tax (Amendment) Act, 1972, with effects from This particular section is inserted in to the statute to fix the burden of proof on the dealer who is dispatching the goods for the purposed of branch transfers, consignment transfers etc. Section 6A(1) of the Act, Where any dealer claims exemption on the inter-state movement of goods is otherwise than by way of sale like Branch Transfers, consignment transfer or transfer to agent on account sale, the burden of proving the same is on the dealer dispatching the goods. The dealer shall submit before the appropriate authority with in the time permitted, a declaration duly filled and signed obtained from the prescribed authority along with the evidence of dispatch of the goods. If, the dealer fails to furnish the declaration, the inter-state movement of goods shall be deemed for all the purposes of the Act to have been occasioned as a result of sale. Section 6A(1) is amended by Finance Act 2002, with effect from , makes compulsory furnishing of declaration in Form-F for the dealer and for the authority to levy tax in case where ever the dealers does not furnish he declaration in Form F. As per the Madras High Court in the case of Talbros Automotive Components Limited V. State of Tamil Nadu 16 VST 578, the dealer claiming exemption shall submit the two proofs one being the Declaration in Form F and the other being evidence of proof of dispatch. In the absence of these two documents the transaction of otherwise than by way of sale will become a deemed sale. Section 6A(2) of the Act, the assessing authority on satisfactory inquiry, the particulars contained in the declaration are true, the assessing authority make an order be deemed for the purposes of the Act to have been occasioned otherwise than as a result of sale, subject to the provisions contained in Section 6A(3) of the Act. Section 6A(2) is amended and Section 6A(3) is inserted in to the Act by Finance Act 2010, Dt: , by virtue of this amendment the ratio laid down by the Supreme Court judgment in the case of Ashok Leyand Ltd 134 STC 473 is reversed. In this case the Supreme Court has held that unless the declaration in Form F filed by the dealer fraudulently, the process of assessment by reassessment / revision it will become unending.

4 Section 6A(3) of the Act, the assessing authority on discovery of new facts, can reassess the dealer or a revision can be taken up by the higher authority on the ground that the order of the assessing authority are contrary to Law. The reassessment or revision is to be made adopting the provisions of the general sales tax law of the State. Under Section 6A of the Act the burden is always on the dealer dispatching the goods in the course of inter-state movement of goods otherwise than by way of sale, whereas under Section 3 of the Act, the burden is on the revenue to prove the transaction is occasioned as a result of sale in case of inter-state movement of the goods. On analysis of Section 6A, the assessment order is not always conclusive and it is always subject to reassessment or revision, whereas in case of Section 3 it is conclusive and the dispute may arise on the rate of tax only. The States in various cases on the various fictitious grounds have held the interstate movement of goods otherwise than sale as sale and levied tax, in various occasions the courts have also concluded saying the revenue is correct. In the following illustrative cases the various courts have passed judgments in revenue side: CASE TITLE CITATION BRIEF PARTICULARS C.S.T. Vs. Pravin Chemicals Industries C.T.O. Vs. Spinning Accessories P. Ltd State of Orissa Vs. Orissa Small Industries Corpn. Swastik Rubber Products (P) Ltd Vs. C.S.T Mehta Group of Industries Vs. State of Haryana State of A. P. Vs. Gromor Chemicals (P) Ltd C.S.T. Vs. Housing & General 85 STC 18 (All) 66 STC 138 (All) Branch Transfer Note at Head Office in the name of the Branch and Sale Bill of Branch in the name of the customer were prepared by the same person. 67 STC 90 (Raj) The dispatch of goods from Branch (factory) to Head Office were in pursuance of contract of sale entered into between the buyer and the dealer acting through its Head office and also it was found that the purchaser s own packing was sent to factory in which the goods were delivered. 67 STC 262 (Ori) That after enactment of Section 6A, the onus to prove that the dispatches were not interstate sale shifted to the dealer and in this case the dealer did nothing to discharge its onus in that respect. 72 STC 52 (All) Certain transfer of goods from Depot-1 to Depot-2, denote the same quantity and value of goods which were noted in the Depot-2 bills of sale. 75 STC 42 (Punj) The movement of goods from factory to Head Office (both in different States) was occasioned by pre-existing orders of Sale. The dealer has failed to maintain the records of quantitative details. 79 STC 42 (AP) The Tribunal found that all goods sent from Branch (factory) to Head Office were sold to a single customer and to none else there. The goods are moved from U.P. to Delhi, and

5 Finance Co. Ltd., State of T.N. Vs. Kerala State Small Industries Development and employment Corporation Ltd., State of T.N. Vs. Andaman Timber Industries Ltd., C.T.O. Anti-Evasion Vs. Goodwill Paint Industries Modi Spinning & Weaving Mills Vs. C.T.T. thereafter delivered to the customers at Delhi, to comply the order received at Delhi. 122 STC 608 (SC) Goods imported from abroad were unloaded at a port in T.N. and the dealer had opened a branch in in the same place before the arrival of goods. The goods were sent directly to customers in Kerala and the same were shown as Branch Transfer to Kerala Branch, it was held as Inter-state sale. 108 STC 454 Company was having Head Office at Calcutta (Mad) and branches at Chennai, Mumbai & Delhi. Company moved goods from Head Office to branches in pursuance of orders received at Calcutta, it was held as Inter-state sale. 117 STC 71 (RTT) The dealer was not able to discharge the burden of proof placed on it by law to show that the transactions in question were not liable to tax under the CST Act as Inter-State sale. 13 VST 432 (All) For Interstate stock transfer burden of proof lies on the dealer to prove the movement of goods. If failed to produce documents to establish the claim of stock transfer. If stock transfer notes and sale invoice of depot contain any agreement numbers at the time of movement of goods it amounts to interstate sale. C.T.T. Vs. Kapri Bath Aid Pvt. Ltd 33 VST 748(All) Movement of goods from one state to another state as branch transfer in pursuant to an agreement or contract amounts to interstate sales. Hyderabad Engineering Industries Vs. State of A.P. 39 VST 257 (SC) Movement of goods from one state to another in pursuant to an agreement even if not provided in contract amounts to interstate sale. In the following illustrative cases the various courts have passed judgments in dealer side: CASE TITLE CITATION BRIEF PARTICULARS C.S.T Vs. Swadeshi Metal Works 66 STC 64 (All) From the certain documents found and seized from the Head Office, the AO inferred that certain transactions are Inter-State Sales and not branch transfers. The Tribunal on the basis of material on record, it was held that the dispatches from the Head Office were merely branch transfers and sales were actually of the Delhi branch. Government Wood Works Vs. State of Kerala 69 STC 62 (Ker) Mere transfers from one unit to another of the same entity could not amount to sale.

6 State of A.P. Vs. Tungabhadra Industries Ltd., C.S.T. Vs. India Crown Cork Ltd., 111 STC 127 (Bom) State of A.P. Vs. Coromandel Paints & Chemicals Ltd. Ahura Welding Electrode Mfgrs. Ltd., Vs. State of T.N. Larsen & Tourbo Limited Vs. Orissa State North Star India Pvt. Ltd. Vs. C.T.T. Killick Nixon Limited Vs. State of Maharashtra Tropicana Beverages Vs. Karnataka State Agrimas Chemicals Ltd Vs. Haryana State State of A.P. Vs. Akkamamba Textiles Ltd., 86 STC 235 (AP) The transfer by the factory to various depots did amount to branch transfer as the transports were not related to any particular contract of sale. The Tribunal as per the documentary evidence placed on record by the dealer, it was held the movement of goods from Head Office to Branch as stock transfer. The High Court held that the action of the Tribunal was justified and its finding was a pure finding of fact based on material on record. 98 STC 82 (AP) The acceptance of the tender did not amount to an agreement of sale, it was merely a standing offer, and the movement of the goods outside the State was not in pursuance of agreement of sale, therefore, no Inter-State Sale. 115 STC 626 (Mad) The goods were not goods manufactured to any special specifications of the buyer and there was no compulsion to deliver to the buyer the every same goods that were dispatched in any particular consignment, held as Branch Transfer. 15 VST 484 (Ori) Works contract dealer claiming exemption before the assessing authority on interstate branch transfer by producing declaration forms is valid exemption. 25 VST 378 (All) Statutory forms obtained from prescribed authority and furnished by officer at other branch not found to be fabricated or false. Rejection of claim of stock transfers is not justified. 32 VST 470 (Bom) 54 VST 472 (karn) 64 VST 134 (P&H) Mere withdrawal of appeal before High court by the dealer and settled the matter under amnesty scheme does not bar the claim of stock transfer by the assessing authority under CST Act. Dealer can claim exemption on interstate branch transfers by producing declaration forms even before the appellate authority. Dealer can claim exemption on interstate branch transfers by producing declaration forms even before the High Court. 66 VST 37 (AP) Interstate movement of goods to branch or depot and sale by depot or branch, paid local taxes thereon and goods receipt acknowledged by the depot. Even if transferring the goods to transporter s premises by dealer amounts to stock transfer on production of statutory forms.

7 On the analysis of the Judgments mentioned above, the revenue have disallowed the claim of the dealer as branch transfers or consignment transfers on the weak and imaginary ground such as: Specialized goods sent to branch after receipt of the order from the customer. The agreement between the principal and the agent is not properly worded. Advance amount received from the customer and supplies are made after. The goods are delivered to the customer on the same day or immediate next day. The quantity of goods received, as it is sent to the customer. The goods are sent to the customer in the same lorry or by the same transporter. The branch is having pre-order and head office is aware of the order. STN contains the name of the customer or having abbreviations of the name of the customer. In case of Works Contract the goods are sent directly to the place of the customer. The remedies / precautions in case of branch transfers, etc.,: The branch should take the delivery of the goods and goods must be stored in the branch premises. The branch should keep the proper record of the goods received and sold. The branch should collect the local sales tax and pay to the State. The record of such payment be made available at Head Office. Same lorry or transporter to be avoided when the good are dispatched to the customer. It is always the general goods must be stock transferred, special goods generally sold directly to the customer. The goods received by the branch should not be sold to a particular customer only. The name of the customer should not be mentioned in the Stock Transfer Note, etc. The quantity of various item sent to the branch and branch sales to the customer should not match (it is advisable to avoid one to one relation between dispatch & sales by branch). Before, I conclude, I would like to thank Mrs. Nitika R. Badeka, CA Hemandra V. Shah & CA P V Raman Kumar for giving me an opportunity of presenting this paper. I would like to also thank my father and Guru Sri S. Hanmanth Rao, Advocate for helping me in preparation of this paper. I conclude by saying, the way form Section 3 to Section 6A is NO WAY, but the way from Section 6A to Section 3 is HIGHWAY.