EY Tax Alert. Executive summary

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1 27 March 2015 EY Tax Alert SC over-rules AP High Court judgment, holds that beedi leaves purchased in auction by branch in AP and transferred to HO in Maharashtra not to be an inter-state sale 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 gives an update on the recent judgment of the Supreme Court in the case of Commissioner of Commercial Taxes, Hyderabad v. Desai Beedi Company [TS-77-SC-2015-VAT]. The Apex Court reversed the judgment of the Andhra Pradesh High Court and held that transfer of beedi leaves, purchased by assessee s branch office in the State of Andhra Pradesh (AP) in the auction conducted by the Forest Department and subsequently transferred to its head office in the State of Maharashtra, cannot be treated as inter-state sales and would be liable to tax in the State of AP in terms of provisions of the erstwhile Andhra Pradesh General Sales Tax Act, The Court referred to numerous judicial precedents in its order which lay down the essential characteristics of inter-state trade. Earlier, AP High Court had noted that the goods were purchased for transfer and their use to head office in another state and had accordingly held that the sale was in the course of inter-state trade occasioning the movement of goods in another state and therefore not liable to tax in the State of AP.

2 Background and facts The assesse, engaged in the manufacture of beedi, had its head office in the State of Maharashtra and a branch office in the State of AP. Branch office in AP was registered as an assessee under the erstwhile Andhra Pradesh General Sales Tax Act, 1957 (the AP Act) as also under the Central Sales Tax Act, 1956 (CST Act). The assessee branch office purchased beedi leaves in the assessment years and in the auction held by Forest Department of Government of AP. The purchased leaves were then transferred by the assessee to its head office in the State of Maharashtra for utilization. As per Rule 5 (2) (xviii) of the erstwhile Andhra Pradesh General Sales Tax Rules, 1957 (the AP Rules) read with Section 5 of the AP Act, purchase of beedi leaves was to be treated as turnover liable to AP sales tax. However, as per Rule 6 (1) (f) (i), one could deduct the amounts in respect of goods sold in the course of inter-state trade from the taxable turnover. The assessee claimed such a deduction in respect of purchase of beedi leaves treating it as inter-state sale, not liable to tax under the provisions of the AP Act. However, assessing officer denied the deduction claimed by the assessee, citing the reasons that the sale was a single point sale in the State of AP and point of levy of tax i.e. taxable event happened within the state. Hence, the assessee was liable to tax on such sale being the final purchase in the state. Assessee filed appeal before Appellate Commissioner, who allowed the assessee s appeal remanding the case for reassessment. However, Revenue proposed Revision proceedings and passed a revision order holding that the assessee branch is not acting as an agent or the conduit pipe of its HO in the State. The assessee branch took the delivery of goods in the state; leading to conclusion that sale had happened within the State thereby liable to AP sales tax. Assessee moved AP High Court, which held that the goods were purchased for transfer and use to its HO in another State (which was implicit in purchase agreement), hence qualifying as interstate sale. Aggrieved by the High Court order, Revenue filed appeal before the Supreme Court. Revenue (petitioner) contentions Revenue contended that the sale in the state of AP has no connection or nexus with the movement of goods to another state. The transaction of sale gets concluded at the time of payment by purchaser i.e. assessee branch to the Forest Department and delivery of such goods at the auctioneer s premises within the state. The interstate movement of goods happening thereafter has no connection whatsoever with such sale transaction. Therefore, the sale cannot qualify as inter-state sale and would be liable to State s sales tax. Assessee s (respondent) Contentions The assessee took a stand that as goods were purchased with the intention of transferring them to its HO in the State of Maharashtra, the said movement of goods is inextricably linked to sale of the goods by the auctioneer to the assesse in the State of AP. The assessee contended that the sale was exempt from State sales tax being in the nature of inter-state sale The assessee relied upon the judgment of the Apex Court in the case of State of Orissa and Anr. V. K. B. Saha and Sons Industries Pvt. Ltd. and Ors 1 wherein it was held that sale and purchase of kendu leaves were deemed to have taken place in the course of inter-state trade. 1 [(2007) 9 SCC 97]

3 Supreme Court Ruling The key facts of the instant case as observed by the Apex Court are given below: In the instant case, the assesseebranch office situated in the State of Andhra Pradesh is a registered dealer under the Act and has participated in the sale transaction as the purchaser of goods from the seller. It is only subsequent to the payment and delivery of goods, the assessee transports them to the head office of the respondent-company in the State of Maharashtra. The sale transaction concludes between the State Department and the auction purchaser as and when the payment is made by the latter and the incidence of transport has no link to the already concluded sale transaction. The Supreme Court dismissed the assessee s reliance on the case of K. B. Saha (supra), stating that it is materially distinguishable from the facts of the present case. In that case, the buyer of kendu leaves was situated in the State of West Bengal. He had no presence at all in the State of Orissa and auction was also conducted outside Orissa. As all the entities of assessee were outside the state of Orissa, the sale was in the course of inter-state trade and movement of goods was inextricably linked to such sale. The Court then referred to Section 3(a) of CST Act which states that sale or purchase of goods would be inter-state when it occasions the movement of goods from one State to another. The Court also took note of other judicial precedents 3 which lay down that in interstate trade, movement of goods from one state to another should arise as a result of sale and should be inextricably connected to the sale. The court also referred to the decision of its Constitution Bench in the case of the Cement Marketing Co. of India (P) Ltd. v. State of Mysore 4, wherein it was held that transport of goods from one state to another (i.e. across the border) under the contract of sale or purchase is essential in inter-state trade. The court then referred to its decision in the case of Sahney Steel and Press Works Ltd. v. CTO 5 wherein facts of the case were as follows: Buyer placed orders with assessee s branch office in Bombay branch office then forwarded the details of order to its registered office in Hyderabad. The Hyderabad office would then manufacture the goods to fulfil the said order and transfer the goods to its branch in another state for delivery to the buyer. Court held in this case that the movement of goods from one state to another is an incident of a given contract and hence the sale in in the course of inter-state trade. It would have been a different situation if the registered office had merely transferred some goods to its branch office and thereafter branch would sell the goods in the open market without any reference to pre-placed order by the buyer. The Court also noted its own decision in the case of Kelvinator of India Ltd. v. The State of Haryana 2 in which essentials of inter-state trade have been explained as follows: There must be a sale; The goods must actually be moved from one state to another, and The sale and the movement of goods must be part of the same transaction 2 [(1973) 2 SCC 551] 3 i. TATA Iron and Steel Company Ltd. v. S. R. Sarkar and Ors., [(1961) 1 SCR 379] ii. South India Viscose Ltd. v. State of Tamil Nadu [(1981) 3 SCC 457] 4 [(1963) 3 SCR 777]; also held in Union of India v. K. G. Khosla and Co. Ltd. [(1979) 2 SCC 242] 5 [(1985) 4 SCC 173] relying on decision in the case of English Electric Company of India Ltd. v. Deputy Commercial Tax Officer [(1976) 4 SCC 460]

4 However, the court observed that the decision in the case of Sahney (supra) could not be applied to the present facts of the case as in the present case, the sale of auctioned goods takes place within the state and there is no link between such sale and further movement of goods to HO in another state. The Court further referred its own decision in the case of Hyderabad Engg. Industries v. State of AP 6 wherein it was held that transfers between the HO and branch office (inter branch transfers) cannot be considered as interstate sale because one cannot trade with oneself. Having gone through the plethora of judicial precedents, the Court also took into consideration the provisions of Rule 3(13) of Andhra Pradesh Minor Forest Produce (Regulation of Trade in Abnus Leaves) Rules, 1970 which stipulates that delivery of goods takes place immediately subsequent to the consideration amount being paid by the buyer. The terms of Tender Schedule for auction of Beedi leaves were also considered which instructed that delivery of goods should be taken within 30 days of issue of delivery orders, failing which purchaser will have to pay godown rent etc. and also the Department will not be liable for any deterioration of the goods. The above terms make it clear that delivery of goods is complete at the godown of the seller and the sale is between the Forest Department and the assessee branch in the State of AP. Based on the above discussion, the Court finally came to the conclusion that events of sale of goods by the seller and the movement of goods from the State of AP to another State are not inextricably connected and are independent of each other. There is no incident of direct sale between the seller and HO of respondent company in the State of AP. Finally, it was held that as it becomes clear that the sale transaction concludes in the State of AP, then the mere transport of goods to another State would not change it in inter-state sale and that the sale would be liable to sales tax in the State of AP. The order of the High Court stood over-ruled to that effect. Comments The decision rendered by the Apex Court is significant and emphasizes on the essentials of inter-state trade. It also reiterates the need of presence of inextricable link and cross border movement of goods as a result of sale / purchase in inter-state trade or commerce. Though the judgment is in the context of old provisions of sales tax law, still the guiding principles laid down in the judgment can also be applied in the current regime of VAT law to determine whether particular transaction can be treated as inter-state trade or not. However, the fact remains that while determining whether sale of goods and cross border movement of goods are independent of each other or inextricably linked to each other, would depend on the facts and circumstances of each case to be examined in depth. 6 [(2011) 4 SCC 705]

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