Branch Transfer vis-à-vis inter State sales

Query: A company has standard production which is transferred to branches as per projections made by the sales team. The sales team projects the sales based on market movements. The sales tax department in contemplating that such projection means sales and hence it amounts to inter State sales from the State of movement. Whether the Stand of the department is justified?

Reply: Inter-states sales can take place, if there is movement due to any pre-committed sales. The burden to prove the inter-state sales is on department. Only having sales projections for dispatch purpose cannot amount to sending the goods as per any pre-committed sales. It is possible that while making the projections, the sales team might have considered demand of prospective buyers. However, that is not the criteria for determining sales. At the most, such is a cause for transfer of goods for sale but not a movement due to sale.

From the goods actually transferred, the ascertainment for delivery to particular buyer will be made at the branches and hence it will be sale in such State in light of section 4 of the CST Act, 1956. In my opinion, the department is not justified in contemplating interstate sales under above circumstances.

Certain judgments can also be referred to as under;

Central Distillery & Breweries Ltd. vs. Commissioner of Trade Tax, U.P., Lucknow (115 STC 296)

“The petitioner was a manufacturer of liquor having a distillery at Meerut in the State of Uttar Pradesh, with its Head Office at Delhi. Its tender to the Delhi Administration for supply of rum for the years 1984-85 to 1986-87, for sale at Government run retail vends in Delhi was accepted and agreements for the three years were executed. Under the agreement the petitioner was granted a licence to supply rum to the retail vends in Delhi. The orders for the actual purchase and sale were to be placed subsequently by the Collector at fortnightly intervals and the licensee was required to keep a buffer stock of at least two truck loads at warehouse within the territory of Delhi. Clause 18 of the agreement required the dealer to have licensed premises within the State of Delhi for which purpose it could be allowed the use of a bonded warehouse established by the Government on payment of the specified rent and furnishing of a security deposit. Clause 16 specifically stated that by virtue of this agreement, the Government did not guarantee purchase of any specified quantity of rum during the year or during any portion of it and the licensee shall not be entitled to any compensation or relief on the ground that the sufficient orders were not placed. The Sales Tax Department took the view that the goods in question were taken to Delhi from the State of U.P. to be supplied to the Delhi Administration in pursuance of the agreements, referred to above, and, therefore, the goods moved to Delhi in pursuance of the said agreements, which occasioned the movement of goods from U.P. to Delhi and, therefore, the transactions amounted to inter-State sales within the meaning of section 3(a) of the Central Sales Tax Act, 1956. This was confirmed by the Tribunal. On revision petitions: Held, that the intention of the parties was to bring about intra-State sales at Delhi from the warehouse of the dealer that it was required to establish within the territory of Delhi
where the dealer was required to maintain a buffer stock of at least two trucks without any guarantee that any purchase would be actually made by the Delhi Administration. As and when the Delhi Administration made the purchase, the dealer who was to be a L1-A licensee would supply the goods and replenish the stocks. Therefore, as indicated by the agreement, the movement of the goods to Delhi was not in pursuance of any transaction of sale but in pursuance of the licence under
which the dealer was to maintain a warehouse with a minimum stock within the territory of Delhi. The agreement by itself did not bring about any sale or purchase and, therefore, the transport of goods from the distillery in U.P. to the warehouse in Delhi could not be treated as a movement of goods occasioned by any sale or purchase. There was no evidence to show that the supply of rum to the Delhi Administration in the three years resulted in any inter-State sales taxable in State in U.P.”

State of Andhra Pradesh vs. Coromandel Paints & Chemicals Ltd.(98 STC 82)

“The Shipping Corporation of India called for tenders for the supply of paints suitable for marine ships. The respondent submitted its tender, which was accepted. The terms of the acceptance of the tender, were, inter alia, that during the period of contract the respondent should supply paints to vessels owned, managed and chartered vessels against the orders placed by the officers/agents of the Shipping Corporation of India at the rates and on the terms mentioned in the Schedule. On the basis of the tender agreement the sales tax assessing authority held that there had been inter-State sales of goods and, rejecting the claim that the movement of goods was by way of stock transfers covered by Form F, brought the goods to tax under the Central Sales Tax Act, 1956. The Tribunal held in favour of the respondent. On revision petitions:

Held, dismissing the petitions, that where the terms of the agreement enjoin supply of goods against an order already placed, it amounts to a contract if the goods are specified but they are to be delivered at a future date as and when specified. But, where neither the quantity nor the goods have been specified and the supply has to be made at a stated period of the required quantity, it cannot be said that there was a sale or even an agreement to sell, it is merely a standing offer. In the instant case, the terms of the letter of acceptance of the tender contemplated that the respondent would keep paints of the varieties, which were the subject-matter of tender, ready at their sub-offices or branches and that they were bound to supply as and when the order was placed by the Shipping Corporation with the respondent; this would only be a standing offer but not a “sale” or an “agreement to sell”. Neither was there an agreement to sell containing a stipulation regarding movement of goods from one State to another, nor did the goods in fact move from one State to another in pursuance of the contract. Acceptance of the tender of the respondent to meet the requirements of the orders that would be placed from time to time resulted in a standing offer by the respondent pursuant to which arrangements were made for the sale of paints to the Shipping Corporation. There was no obligation on the Shipping Corporation to accept the goods which had been moved to the branches; nor could there be any complaint for not taking of the goods after the goods had arrived at the branches; here the process of sale commenced only after an order was placed by the Shipping Corporation with the respective branches which delivered the goods and effected sales. There were therefore no inter-State sales taxable under the Central Sales Tax Act.”

Balabhagas Hulaschand vs. State of Orissa ((37 STC 207)(SC)

The Hon’ble Supreme Court along with example explained as under;

“Case No. II-A, who is a dealer in State-X, agrees to sell goods to B but he books the goods from State X to State Y in his own name and his agent in State Y receives the goods on behalf of A. Thereafter the goods are delivered to B in State Y and if B accepts them a sale takes place. It will be seen that in this case the movement of goods is neither in pursuance of the agreement to sell nor is the movement occasioned by the sale. The seller himself takes the goods to State Y and sells the goods there. This is, therefore, purely an internal sale which takes place in State Y and falls beyond the purview of section 3(a) of the Central Sales Tax Act not being an inter-state sale.”

Indian Duplicators Ltd. vs. State of Tamil Nadu (57 STC 263)(Mad.)

The gist of said judgment is as under:

“The assessee, a manufacturer and dealer in duplicators, its accessories and duplicating ink, etc., in Madras with branches outside, dispatched goods to its Hyderabad branch and the branch supplied the goods to local buyer against orders placed by the buyers with the branch office at Hyderabad. There was no contract for supply of goods by the Madras office to the Andhra Pradesh buyer. The bills were raised and collected in the name of the branch at Hyderabad and sales tax was also paid according to the rates prevailing in Andhra Pradesh. But the goods had the mark of the Andhra Pradesh buyer’s name on them. The assessee claimed exclusion of such turnover on the ground that it represented stock transfer from Madras to the Hyderabad branch. The assessing authority held that the goods in question were moved from Madras specifically for the purpose of satisfying the requirements of the buyer in Andhra Pradesh, and that the sales were inter-State sales falling under section 3(a) of the Central Sales Tax Act. 1956. The Appellate Assistant Commissioner held the transaction as representing stock transfer. The Board of Revenue, by its suo- moto powers, set aside the order of the Appellate Assistant Commissioner on the ground that there was a close nexus between the order placed by the buyer in Andhra Pradesh, with the branch of the assessee at Hyderabad and the movement of goods for Madras to Hyderabad, and therefore, the turnover was to be regarded as representing inter-State sales falling under section 3(a) of the Central Act. On appeal to the High Court:

Madras High Court held that on the facts and circumstances of the case, that though there was a movement of goods from Madras to Hyderabad, such movement was of goods manufactured in the ordinary or general course of business of the assessee and for being sold as and when the manufacturers received orders for purchase at its branch office at Hyderabad. There was no establishment of any direct link or nexus between the assessee and the movement of goods for supply to the Andhra Pradesh buyer, especially when the goods dispatched by the assessee were manufactured by it in the ordinary course of its business. The mere fact that the mark of the Andhra Pradesh buyer’s name was found on the goods would not necessarily lead to the conclusion that there was a completed transaction of sale by the assessee in Madras by the appropriation of the goods towards any contract. Therefore, the transaction was not to be regarded as representing inter-Sate sales effected by the assessee.”

Steel Authority of India Ltd. vs. State of Orissa and others (30 VST 334)(CSTAA)

The small gist of judgment is as under:

“The appellant, an undertaking of the Government of India, had a steel plant in Rourkela from where different items of iron and steel were manufactured and dispatched to its various branches located all over the country.

The Time Bound Scheme was evolved by the Central Government under the Iron and Steel Control Order, 1956, to estimate the demands for different kinds of steel products from different areas and to advise a suitable production programme to the steel plants. Demands from eligible customers for a quarter were registered making suitable allotments and offering and delivering the products at the specified price through branches.

The branch sales office, after compiling the demands under the TBS scheme and other schemes prepared the forecast and sent it to the Central Production Planning Department through its regional office. The Central Production Planning Department and the regional office finalised the branch-wise dispatch programme and sent it to the plants. The plants, on manufacturing the goods, dispatched them to the different branch sales offices. On receipt of the material mostly by rail the branch sales offices sent communications to the customers to deposit the sale price and take delivery of the goods. Acting on that the customers made full payment and lifted the goods from the wagon or stockyards on the basis of delivery order, challan and invoice issued by the branch sales offices. Claiming that the dispatches from Rourkela were in the nature of stock transfers and on that footing paying local sales tax to the respective States, the appellant filed F forms under section 6A of the Central Sales Tax Act, 1956, read with rule 12(5) of the Central Sales Tax (Registration and Turnover) Rules, 1957, for most of the stock transfers and claimed exclusion of the value of stock transfers from the turnover under the Central Sales Tax Act, 1956. The assessing authority disallowed the claim for exclusion and treated the transactions under the Scheme as inter-State sales and levied tax under section 3(a) of the Central Sales Tax Act, 1956, at four per cents, in the absence of C forms. The Assistant Commissioner confirmed the assessments but granted relief in regard to the quantum of turnover based on actual sales figures. The Tribunal confirmed the assessments granting some incidental reliefs. On appeal to the Appellate Authority:

Held, remanding the matter to the Tribunal for fresh disposal, that the Tribunal had not referred to documents to show the modus operandi of the transactions negating the case of the assessing authority that there was an inextricable link between the contract of sale and the movement of goods pursuant thereto. The goods were not tailor-made but they were of standard make and the production programme was based on assessment of market demand in general rather than to cater to the requirements of particular customers. The mere fact that the objective of the Scheme was stated to be to give commitment to the customers regarding supply materials against firm orders did not lead to the necessary inference that the offer and acceptance resulting in an agreement of sale would have come into effect before the goods were dispatched from the steel plant. It was wrong to characterise the scheme itself as spelling out an agreement of sale. A general statement of the objective did not control the operative clauses of the scheme and the actual modalities of the transactions.”

Thus, the legal position is required to be decided in light of above judgments, as well as other judgments on the issue. Further, it is also settled that each transaction is required to be examined.

Under above legal and factual position, there cannot be inter-state sales on the facts given in the query.