Case: Commissioner of Commercial Taxes Vs. Desai Beedi Company

2. Briefly stated, facts in the instant case are: The Respondent-Assessee is a registered dealer under the Act and under the Central Sales Tax Act, 1956 (for short, the CST Act) with effect from 21.02.1989. The Assessee is engaged in the manufacture of Beedi and has its factory and head office at Sholapur in the State of Maharashtra. It operates in the State of Andhra Pradesh through its registered branch office at Sirsilla Road, Kamareddy town, Nizamabad District, Andhra Pradesh.3. The Assessee is the branch office of the Respondent-Company. The Assessee had purchased Beedi leaves, for Rs. 1,07,51,740/- and Rs. 1,01,35,636/- for the assessment years 1989-1990 and 1992-1993 respectively, by participating in the auction conducted by the Forest Department, Government of Andhra Pradesh (for short, the seller). After the purchase, the Assessee had dispatched the said Beedi leaves to the head office in the State of Maharashtra. Subsequently, the branch office of the Respondent-Company claimed an exemption on its gross and net turnover of Rs. 1,07,51,740/- and Rs. 1,01,35,636/- for the said assessment years on the ground that the aforesaid transaction is in the nature of inter-State sale and therefore, is not exigible to tax under Entry 18, Second Schedule of the Act.4. The Commercial Taxes Officer, Kamareddy (for short, the CTO), by its orders dated 11.03.1992 and 31.07.1993 in G.I. No. 646/1989-90 and G.I. No. 646/1992-93 respectively, has rejected the claim for exemption made by the Assessee and held that the sale is a single point sale where Assessee was the final purchaser within the State and thus, the taxable event took place in the State.5. Being aggrieved by the said order(s) passed by the assessing authority, the Assessee had carried the matter(s) in appeal before the First Appellate Authority, i.e., the Appellate Deputy Commissioner, Secunderabad Division, Hyderabad.6. The First Appellate Authority allowed the appeal(s) filed by the Assessee holding that the transactions were inter-State sales and not liable to be taxed under the Act. The First Appellate Authority by its order dated 19.10.1993, after setting aside the assessment order, remanded the matter(s) back to the Assessment Officer for reassessment.7. During the pendency of the matter(s) before the CTO, the Commissioner of Commercial Taxes issued a show cause notice to the Assessee and proposed to revise the aforesaid order passed by the First Appellate Authority, dated 14.11.1994. After the receipt of a reply by the Assessee, the revision proceedings were initiated Under Section 20(1) of the Act. The Assessee had adopted the stand 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. The Assessee has further contended that since the transport the Beedi leaves to their head office at Sholapur was the primary intention of purchase and the Assessee-branch office merely acted as a conduit pipe of the head office of the Respondent-Company 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, in conclusion submitted that the purchases are in the nature of inter-State trade and consequently, the sale of Beedi leaves is not exigible to tax Under Section 38 of the Act. The Revisional Authority, considering the aforesaid submissions, has observed that the office of the Assessee at Kamareddy is not an agency but a branch office of the Respondent-Company and therefore, the transactions effected by the Assessee are not agency transactions on behalf of the non-resident principal. Further, it has observed that since the delivery took place in the State of Andhra Pradesh at the godowns of the seller and it is 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 could be deduced that the transaction took place in the State of Andhra Pradesh between the seller and the Assessee. Therefore, the Revisional Authority has come to the conclusion that the transaction is liable to tax under the Act and set aside the order of the First Appellate Authority and consequently, restored the order passed by the CTO, dated 23.02.1996.8. Aggrieved by the order so passed, the Assessee had approached the High Court by way of Special Appeal No. 27 of 1996. The High Court has observed that the goods in the present case were purchased for the purpose of transport to the head office of the Respondent-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, the High Court has concluded that the Revisional Authority was not justified in revising the order of remand/assessment passed by the First Appellate Authority and while allowing the appeal, has held that the Respondent herein was not excisable to tax for the assessment year 1989-1990 under the Act.9. Aggrieved by the aforesaid judgment and order passed by the High Court, the Revenue is before us in these appeals.

Court's reasoning:
15. At the outset, we would discuss the decision of this Court in K.B. Sahas case relied upon by learned Counsel for the Respondent-Assessee to fortify his stand. In our view, this decision does not apply to the facts and circumstances of the present case. The facts in the instant case are materially distinguishable from the facts in the aforesaid case. Therein, the Assessee carried on business in tobacco and Kendu leaves and had its registered office in the State of West Bengal, that is, outside the State of Orissa where the buyer is situated and the auction was conducted. The purchaser was neither situated in the State of Orissa nor registered as a dealer under the West Bengal Sales Tax, 1994. Since the place of business of all entities of the Assessee were located outside the State of Orissa, the Court considering the same held that the sale was inextricably connected to the transportation of the goods outside the borders of the State of Orissa so as to render the sale transaction complete and therefore, was an inter-State sale. 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.Section 3 enunciates the principle that when a Sale or purchase of goods can be said to have taken place in the course of inter-state trade or commerce19. 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.20. 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 Constitution Bench, vide a detailed judgment, in support of the aforesaid principle of law, observed as follows:11. In Endupuri Narasimbam v. State of Orissa, it was held in the case of sales covered by Article 286(1)(b) that only sale or purchase of goods which occasions the export or import of the goods out of or into the territory of India were exempt from the imposition of tax on the sale or purchase of goods and in regard to prohibition against imposition of tax on inter-State sales the test, it was said, was that in order that a sale or purchase might be inter-State it is essential that there must be transport of goods from one State to another under the contract of sale or purchase. The following observations from the Bengal Immunity Co. Ltd. v. State of Bihar were quoted with approval in support of the proposition:A sale could be said to be in the course of inter-State trade only if two conditions concur:(1) A sale of goods, and (2) a transport of those goods from one State to another under the contract of sale. Unless both these conditions are satisfied, there can be no sale in the course of inter-State trade.Thus the tests which have been laid down to bring a sale within inter-State sales are that the transaction must involve movement of goods across the border (Mohanlal Hargovind case transactions are inter-State in which as a direct result of such sales the goods are actually delivered for consumption in another State; Ram Narain and Sons v. Assistant Commissioner of Sales Tax a contract of sale must involve transport of goods from one State to another under the contract of sale; Bengal Immunity Company case. In the case of sales in the course of export or import the test laid down was a series of integrated activities commencing from an agreement of sale and ending with the delivery of goods to a common carrier for export by land or by sea; Bombay Company Ltd. case....21. 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. 22. Further, in the case of Sahney Steel and Press Works Ltd. v. CTO (1985) 4 SCC 173 , 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 Co. of India Ltd. v. Deputy Commercial Tax Officer (1976) 4 SCC 460 , 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.23. This Court, in Sahney Steel and Press Works Ltd. case (supra), held as follows:8....The manufacture of the goods at the Hyderabad factory and their movement thereafter from Hyderabad to the branch office outside the State was an incident of the contract entered into with the buyer, for it was intended that the same goods should be delivered by the branch office to the buyer. There was no break in the movement of the goods. The branch office merely acted as a conduit through which the goods passed on their way to the buyer. It would have been a different matter if the particular goods had been despatched by the registered office at Hyderabad to the branch office outside the State for sale in the open market and without reference to any order placed by the buyer. In such a case if the goods are purchased from the branch office, it is not a sale under which the goods commenced their movement from Hyderabad. It is a sale where the goods moved merely from the branch office to the buyer....24. The aforementioned principle laid down in Sahney Steel and Press Works Ltd. case (supra), 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) 3 SCC 1  and in IDL Chemicals Ltd. v. State of Orissa (2007) 14 SCC 386. 25. It may be pertinent to note that the factual scenario in the aforementioned cases, namely Sahney Steel and Press Works Ltd. case (supra), Ashok Leyland Ltd. case (supra) and IDL Chemicals Ltd. case (supra), 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.26. The decision of this Court in the case of Hyderabad Engg. Industries v. State of A.P. (2011) 4 SCC 705 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 as under:23. 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.27. In view of the aforesaid settled principles of law, inter-branch transfers or transfers between the head office and a branch office cannot be considered as inter-State sale as contemplated under the CST Act.29. In the instant case, the Assessee-herein is a branch office which procures Beedi leaves from the seller. The seller had issued a notice inviting for the tenders and the tender quotes stating the rate per kg at which the prospective purchasers desire to purchase the Beedi leaf to be collected, cured, bagged in trade bags and delivered at the godown of a unit. The Assessee had participated in the auction pursuant to the aforesaid invitation and succeeded in its offer. With regard to the conditions of completion of the sale transaction, it is relevant to notice Rule 3(13) of Andhra Pradesh Minor Forest Produce (Regulation of Trade in Abnus Leaves) Rules, 1970 which are applicable to the tender issued by the seller.The said Rule stipulates that the delivery of goods takes place immediately subsequent to the consideration amount being paid by the purchaser.30. The tender schedule, as issued by the seller, also stipulates that the purchaser should remove the stocks from the godowns within 30 days of issue of delivery orders failing which the purchaser will have to pay the godown rent and other expenses on watch and ward, insurance etc. Further, the period for which the stocks remain in the godown, the seller shall not be responsible for any deterioration in the quality of Beedi leaves during the storage in godown. Based on the aforementioned stipulations, it is clear that the delivery of the goods is complete at the godown of the seller on payment of the amount of the agreed consideration.31. In the instant case, the sale of the goods is between the seller and the purchaser, that is between the State Department and the Assessee-branch office in the State of Andhra Pradesh.32. 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.33. 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.34. 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.