By TIOL News Service

NEW DELHI, MAR 18, 2015: THE issue before the issue is - Whether in order to constitute an inter-State sale, the movement of goods should be occasioned by way of sale and such movement of goods must be inextricably connected with sale. YES is the answer.

Facts of the case

The assessee, a registered dealer, engaged in the manufacture of 'Beedi', is the branch office of Company incorporated in Maharashtra. The assessee had purchased 'Beedi' leaves, for the AYs 1989-1990 and 1992-1993 by participating in the auction conducted by the Forest Department, Government of Andhra Pradesh. After the purchase, the assessee had dispatched the said 'Beedi' leaves to the head office in the State of Maharashtra. Subsequently, the branch office claimed an exemption on its gross and net turnover for the said assessment years on the ground that the aforesaid transaction was in the nature of inter-State sale and therefore, was not exigible to tax under Entry 18, Second Schedule of the Act. The Commercial Taxes Officer, however had rejected the claim for exemption made by the assessee and held that the sale was a single point sale where assessee was the final purchaser within the State and thus, the taxable event took place in the State. On appeal, the First appellate authority allowed the assessee's appeal and held that the transactions were inter-State sales and not liable to be taxed under the Act. It had remanded the matter(s) back to the AO for reassessment. During the pendency of the matter before the CTO, it had issued a show cause notice to assessee and proposed to revise the aforesaid order passed by the FAA. After the receipt of a reply by the assessee, the revision proceedings were initiated u/s 20(1).

Assessee had argued that after the purchase and delivery of 'Beedi' leaves from the seller, the leaves were dispatched to their head office at Sholapur in the State of Maharashtra as branch transfer and hence the transaction was not liable to tax in the State of Andhra Pradesh. It had further contended that since the transport the 'Beedi' leaves to their head office was the primary intention of purchase and the assessee-branch office merely acted as a conduit pipe of the head office for proper movement of goods, the sale ought to be deemed complete after its delivery to the head office and therefore, the transaction must be considered as an inter-State sale. The assessee also submitted that the purchases were in the nature of inter-State trade and consequently, the sale of 'Beedi' leaves was not exigible to tax u/s 38.

The Revisional Authority had observed that the office of the assessee at Kamareddy was not an agency but a branch office and therefore, the transactions effected by the assessee were not agency transactions on behalf of the non-resident principal. Further, it had observed that since the delivery took place in the State of Andhra Pradesh at the godowns of the seller and it was only thereafter that the goods were transferred at the instance and application of the assessee specifying the mode of transport, route of transport and the destination to which the goods have to be transported, it derived that the transaction took place in the State of Andhra Pradesh between the seller and the assessee. Therefore, the Revisional Authority had concluded that the transaction was liable to tax under the Act and set aside the order of the FAA. The high court observed that the goods were purchased for the purpose of transport to the head office of the assessee Company situated in the State of Maharashtra, the same being implicit in the agreement of purchase itself that the goods had to be transported and utilized in the State of Maharashtra, and thus, the sale qualifies as an inter-State sale of goods. Therefore, it had concluded that the Revisional Authority was not justified in revising the order of remand passed by the FAA and while allowing the appeal, had held that the assessee was not excisable to tax.

Having heard the matter, the Apex court held that,

++ in the instant case, the assessee-branch 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. In Tata Iron and Steel Company Ltd. v. S.R. Sarkar and Ors., (1961) 1 SCR 379, this Court held that under Section 3(a) of the CST Act, in an inter-State sale, the material fact is movement of goods from one State to another as an incident or result of sale and therefore, consequently the movement of goods should arise from or have a nexus to the sale. In South India Viscose Ltd. v. State of Tamil Nadu 2002-TIOL-1046-SC-CX, this Court observed that it is only if there is a conceivable link between a contract of sale and the movement of goods from one State to another in order to discharge the obligation under the contract of sale, it must be held to be an inter-State sale. On consideration of the principles enunciated in the aforesaid decisions of this Court, it becomes abundantly clear that in order to constitute an inter-State sale, the movement of goods should be occasioned by the sale and the movement of goods and the sale must be inextricably connected;

++ in view of the above, it would be beneficial for us to notice the decisions wherein this Court has laid down the principles pertaining to inter-State sale. The Constitution Bench of this Court in Cement Marketing Co. of India (P) Ltd. v. State of Mysore, (1963) 3 SCR 777, inter alia, noticed the that in order for a sale or purchase to be considered as 'Inter-State' it would be essential that there must be transport of goods from one State to another under the said contract of sale or purchase. The principle that a sale would be an inter-State sale only if the movement of the goods was the result of a covenant in the contract of sale or an incident of that contract has also been noticed in Union of India v. K.G. Khosla and Co. Ltd., (1979) 2 SCC 242. Further, in the case of Sahney Steel and Press Works Ltd. v. CTO, 2002-TIOL-104-SC-CT-LB, this Court was required to consider whether the transaction therein constituted an inter-State sale. It was a case wherein the buyer placed an order with the branch office of the assessee therein, situate at Bombay, Calcutta and Coimbatore. The given branch office then communicated the terms and specifications of the orders to the registered office of the assessee, situate at Hyderabad, and for the purpose of fulfilling that order the manufactured goods commenced their journey from the registered office within the State of Andhra Pradesh to the branch office outside the State for delivery of the goods to the buyer. The assessee therein contended that when the registered office has dispatched the manufactured goods to its branch office, it ought to be considered merely as a transfer of stock from the registered office to the branch office. This Court relied upon its earlier decision in the case of English Electric Company of India Ltd. v. Deputy Commercial Tax Officer, 2002-TIOL-1038-SC-CT-LB, to observe that when the movement of the goods from one State to another is an incident of a given contract it is an inter-State sale, and what would be decisive is whether the given contract of sale is one which occasions the movement of goods from one State to another. The aforementioned principle laid down in Sahney Steel and Press Works Ltd. case, that there must be a conceivable link between the movement of goods and the given contract of sale for the transaction to constitute an inter-state sale, has further been followed in Ashok Leyland Ltd. v. State of T.N., 2004-TIOL-09-SC-CT and in IDL Chemicals Ltd. v. State of Orissa, (2007) 14 SCC 386;

++ it may be pertinent to note that the factual scenario in the aforementioned cases, namely Sahney Steel and Press Works Ltd. case, Ashok Leyland Ltd. case and IDL Chemicals Ltd. case, are different from the instant case, however the principle of law enunciated would remain applicable. The said aforementioned cases deal with the scenario wherein the head or registered office, situated in one State, would forward goods to the branch office, situated in a different State, in pursuance to an order placed by a buyer before the given branch office. The present case, in brief, pertains to the branch office participating in an auction proceeding and thereby procuring certain goods from the State Department. Subsequently, the branch office would transfer the said goods to the head office which was situated in a different State. Therefore, in the present case there is no link between the State Department and the head office of the respondent-company herein. The decision of this Court in the case of Hyderabad Engg. Industries v. State of A.P., 2011-TIOL-27-SC-CT bears significance in understanding the proposition at hand. The issue that arose for the consideration of this Court was whether the sale or purchase of goods therein could be said to have taken place in the course of inter-State trade or commerce and therefore whether the said transaction was exigible to tax under the CST Act. The said case pertained to a Company which had its registered office in New Delhi and further was incorporated in the State of Andhra Pradesh as well. It would be pertinent to note that the Company therein was registered as a dealer under the Act as well as the CST Act. In determining the question whether the transaction therein was an inter-state sale or a 'branch-transfer', this Court referred to Sections 3(a) and 6-A of the CST Act and held that it is an accepted position in law that a mere transfer of goods from a head office to a branch office or an inter-branch transfer of goods, which are broadly brought under the phrase "branch transfers" cannot be regarded as sales in the course of inter-State trade, for the simple reason that a head office or branch cannot be treated as having traded with itself or sold articles to itself by means of these stock transfers;

++ taking into consideration the abovementioned factors it becomes clear that the delivery of the goods takes place at the godown of the seller in the State of Andhra Pradesh. The movement of goods from the godown takes place at the instance of the purchaser. The final destination of the consignment and the route or destination of the goods by the seller is inconsequential to the sale transaction. In view of the above discussion, it can be inferred that the events of sale of goods by the seller and the movement of goods from the State of Andhra Pradesh to another State are not inextricably connected and independent of each other. There is no incident of direct sale between the seller and the head office of the respondent-Company in the State of Maharashtra. It is the branch office that purchases the goods and receives them subsequent to payment made by it to the seller and thereafter, transfers it to the head office of the respondent-Company in the State of Maharashtra. The incidence of sale is complete once the purchaser, that is, the branch office renders the payment for the goods. Once the sale transaction concludes in the State of Andhra Pradesh only, the mere transport of goods from branch office in Andhra Pradesh to the head office in Maharashtra would not result in an inter-State sale. Therefore, the sale or purchase of the 'Beedi' leaves in the present case do not occasion the movement of the goods outside the State in order to qualify as an inter-State sale under Section 3(a) of the CST ACT and therefore, is exigible to tax under the Act. In view of the foregoing discussion, we are of the considered opinion that the impugned judgment and order passed by the High Court cannot be sustained and requires to be set aside. In the result, the appeal is allowed. The judgment and order passed by the High Court is set aside and the order passed by the Revisional Authority is restored.

(See 2015-TIOL-21-SC-CT-LB)