M/S. India Meters Ltd vs State Of Tamil Nadu

2

2. The appellant is a company incorporated under the

provisions of the Companies Act. The appellant manufactures

electric meters and supplies it to the Electricity Boards. The

appellant is also a dealer registered under the provisions of the

Tamil Nadu General Sales Tax Act, 1959 as well as the Central

Sales Tax Act, 1956.

3. Brief facts which are necessary to dispose of these

appeals are recapitulated as under:

The Deputy Commercial Tax Officer, Group-VIII, the

Assessing Officer, Enforcement South passed two separate

orders under the Tamil Nadu General Sales Tax Act

(hereinafter referred to as TNGST Act) and Central Sales Tax

Act (hereinafter referred to as CST Act) on 30.6.1989 holding

that the freight and insurance charges were liable to be taxed

and the same are to be included in the turnover and thus a

sum of Rs.7,97,864/- was sought to be included towards the

taxable turnover for the assessment year 1986-87 under the

TNGST Act taxable at 10% and a sum of Rs.8,48,265/-

relating to the same period under the CST Act.

3 4. The appellant preferred appeals under TNGST Act as well

as CST Act before the Appellate Assistant Commissioner (CT),

Kancheepuram, Tamil Nadu. The Appellate Assistant

Commissioner remanded the matters to the Appellate

Assistant Commissioner for passing fresh orders of

assessment.

5. The appellant had filed two appeals before the Tamil

Nadu Sales Tax Appellate Tribunal (Additional Bench), Madras

and the appeals were registered as T.A. Nos. 766 of 1991 and

767 of 1991. Both the appeals were allowed by the said

Tribunal.

6. The respondent aggrieved by the judgment of the said

Appellate Tribunal filed two Revision Petitions before the High

Court, which were registered as Tax Cases Nos. 979 of 1993

and 980 of 1993. Consequent upon the constitution of the

Tamil Nadu Taxation Special Tribunal, under the TNGST Act,

the Revision Petitions were referred to the said Tribunal.

7. The Tamil Nadu Taxation Special Tribunal, Chennai, by

order dated 19th September, 2000 held that the freight charges

formed part of sale price and the matter was remanded to the 4

Assessing Authority to work out the actual freight charges.

Consequently, the order of the Appellate Assistant

Commissioner (CT), Kancheepuram was restored and with the

result the Revision Petitions filed by the respondent were

allowed.

8. The appellant filed a Writ Petition in the High Court of

Madras against the order of the Tamil Nadu Taxation Special

Tribunal. It was urged in the High Court that the clause in

the contract dealing with payment, provided that "payment for

100 per cent value of each consignment together with full

excise duty and sales tax will be made in Central Payment,

Madras, immediately on receipt of certified copies of

acknowledgement of delivery challans from the Chief Store

Keepers of the systems concerned, subject to purchase order

terms."

9. According to the clause provided in the contract the

transfer of title to the goods was to take place only on delivery

of goods at the customer's place and that the customer's

obligation to pay would arise only after the delivery had been

so affected. The contract also provided in the clause dealing 5

with the price that it was payable per unit ex-factory delivery.

It provided for the payment of excise duty and statutory levies,

in addition to such ex-factory price, as also the fact that the

ex-factory price mentioned was exclusive of sales tax.

10. The clause dealing with Sales Tax in clause 3 (b) further

provided that "appropriate Sales Tax, if any, found leviable in

accordance with the provisions of the relevant Sales Tax Act in

force will be paid over and above the price of goods accepted in

this order". The clause also provided that Sales Tax and

excise duty will be payable only on ex-factory price.

11. The appellant, initially, did not include the freight

charges in its taxable turnover. The original assessment was

made without taking the freight charges into account for the

year 1986-87. There was an inspection on 27.2.1987 in which

the inspecting officer had found that the assessee had

collected freight charges and insurance charges separately

under the debit notes for a total sum of Rs.16,96,530/- but

the same had not been shown in the monthly returns. The

assessing authority, therefore, determined 50% of that amount

of Rs.16,96,530/- as freight charges, after making allowance 6

for the insurance amount and levied tax on that amount of the

freight, charged by the assessee forming part of the sale price.

The assessee's appeal against that order having succeeded, a

further appeal was preferred by the Revenue, which came to

be allowed by the Tamil Nadu Special Taxation Tribunal. The

assessee is now before us questioning the correctness of that

order of the Tribunal.

12. The appellant claims that since the contract separates

the ex-factory price and the insurance and freight charges,

and, under Rule 6(c) of the Tamil Nadu General Sales Tax

Rules, the freight when specified and charges for by the dealer

separately, without including the same in the price of the

dealer, the freight charged here could not have been treated as

part of the sale price and subjected to tax.

13. Counsel for the appellant relied on a judgment of this

Court in the case of Hyderabad Asbestos Cement Products

Ltd. v. State of Andhra Pradesh (1969) 24 STC 487 : (1969)

1 SCWR 560. In that decision, rendered by a Bench of three

learned Judges of this Court, it was held that the assessee

therein had only received as price the amount of the catalogue 7

price less the freight charges, which the buyer had paid and,

therefore, what was taxable was only the price actually

received. That decision was rendered in the background of the

facts found which showed that the assessee had despatched

the goods to the stockist with the stipulation "date of delivery"

shall mean the date of railway receipt. The Court having

found that the agreement on the part of the buyer/stockist to

pay the freight charges and such freight charges been

deducted from the catalogue price, the freight charges did not

form part of the price of the goods sold. This judgment was

explained by a later two Judge Bench of this Court in the case

of Hindustan Sugar Mills v. State of Rajasthan & Ors.

(1978) 4 SCC 271. This Court in the later part of the

judgment extracted the following statement in the case of

Hyderabad Asbestos Cement Products Ltd. (supra).

".......In our judgment, under the terms of the contract, there is no obligation on the company to pay the freight, and under the terms of the contract the price received by the company for the sale of goods is the invoice amount less the freight".

14. In the instant case, the obligation to pay the freight was

clearly on the appellant as there was no sale at all, unless the

goods were delivered at the premises of the buyer and in order 8

to so deliver, the assessee necessarily had to incur freight

charges.

15. The transfer of title to the goods as provided in clause 10

read with clause 6 of the agreement was to be at the place of

delivery in the premises of the buyer. Though the contract

mentioned the price of the electric meters as ex-factory price,

the delivery was not at the factory gate. The specification of

what the price would be at the factory gate, therefore, does not

in the context of the term subject to which the sale was agreed

to be effected, render it the point or the location at which the

sale can be said to have been completed. Had the sale been

completed at the factory gate, the expenses incurred thereafter

by way of freight charges would then be capable of being

regarded as expenditure which was in the nature of a post-sale

expenditure and, if paid by the seller, regarded as an amount

paid by such seller on behalf of the buyer.

16. Both the aforementioned cases emphasise the fact that

expenses incurred by a seller on freight would be part of the

sale price, as until the transfer of title to the goods takes place

that being the only way made in which sale could have taken 9

place prior to the introduction of clause 29A of Article 366 of

the Constitution.

17. The learned counsel also drew our attention to the

decision of this Court in the case of E.I.D. Parry (I) Ltd. v.

Assistant Commissioner of Commercial Taxes & Another

(2000) 2 SCC 321. The question considered therein was the

includability of transport subsidy given by the sugar

manufacturer to the cane growers, who, under the terms of

the contract were required to supply the sugarcane at the

factory. The subsidy so given was held by the Court to be part

of the price as that amount had been given by the

manufacturer, no doubt, to secure the supply of the goods

from the grower/seller. The Court in that case did not

consider Rule 6(c), framed under the Tamil Nadu General

Sales Tax Act, as there was no occasion to refer to the same.

18. It is no doubt true that Rule 6(c) of the Rules permits

deduction of the cost on freight while determining the taxable

turnover. However, that provision must be read in the context

of definition of "turnover" as also the definition of "sale" in

Sections 2(r) and 2(n) respectively of the Act. "Turnover" is 10

defined in the Act, inter alia, to mean "the aggregate amount

for which goods are bought or sold or delivered or supplied or

otherwise disposed of in any of the ways referred to in clause

(n)".

19. "Sale" is defined in Section 2(n), inter alia, as meaning

"every transfer of the property in goods (other than by way of a

mortgage, hypothecation, charge or pledge) by one person to

another in the course of business for cash, deferred payment

or other valuable consideration". The definition goes on to

include a number of other transactions also within that

definition of "sale". The turnover of an assessee/dealer would

include the aggregate amount for which goods are bought or

sold. It is, therefore, the amount for which the goods are

bought or sold, which form part of the turnover, and a thing

can be said to be sold only when the transaction falls within

the scope of the definition of "sale".

20. When the transfer of the property or the goods is to be at

the place of the buyer to which the seller is under an

obligation to transport the goods, the expenditure incurred by

the seller on freight in order to carry the goods from his place 11

of manufacture to the place at which he is required under the

contract to deliver, would thus become part of the amount for

which the goods are sold by the seller to the buyer and would

fall within the scope of "turnover".

21. The learned counsel for the State of Tamil Nadu

submitted that freight and insurance charges are included in

the sale price of the goods. Even if freight and insurance

charges are shown separately in the Bill and added to the

price of the goods, the character of payment would remain the

same. Since freight and insurance charges represent

expenditure incurred by the dealer in making the goods

available to the purchaser at the place of sale, they would

constitute an addition to the cost of the goods to the dealer

and would clearly be a component of the price to the

purchaser. The amount of freight and insurance charges

would be payable by the purchaser not under any statutory or

other liability but as part of the consideration for the sale of

the goods and would therefore, form part of the sale price.

22. In order to crystallize the legal position, we would like to

refer important English and Indian cases.

12

ENGLISH CASES:

23. In Paprika Ltd. & Another v. Board of Trade (1944)

All E.R. 372, the court observed as under:

"Whenever a sale attracts purchase tax, that tax presumably affects the price which the seller who is liable to pay the tax demands but it does not cease to be the price which the buyer has to pay even the price is expressed as 'x' plus purchase tax."

24. In this case, the learned Judge also quoted with approval

what Goddard, L.J., said in Love v. Norman Wright

(Builders) Ltd. (1944) 1 All E.R. 618:-

"Where an article is taxed, whether by purchase tax, customs duty, or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consideration though made up of cost plus profit plus tax. So if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up or whether the seller has included tax or not."

and summed up the position in the following words :

"So far as the purchaser is concerned, he pays for the goods what the seller demands, namely, the price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover."

13 INDIAN CASES:

25. In Dyer Meakin Breweries Ltd. v. State of Kerala

(1970) 3 SCC 253, Chief Justice, Shah (as His Lordship then

was), speaking for the court observed that expenditure

incurred for freight and packing and delivery charges prior to

the sale and for transporting the goods from the factories to

the warehouse of the company is not admissible under Rule 9

(f) of the Kerala General Sales Tax Rules, 1963.

26. According to the facts of this case, Dyer Meakin

Breweries Ltd. is registered as a dealer in "Indian made foreign

liquor" under the Kerala General Sales Tax Act, 1963. The

company has a place of business at Ernakulam, Kerala. The

liquor sold by the company is manufactured or produced in

distilleries or breweries at different places in the State of U.P.

and Haryana. Liquor is transported for sale by the company

from its breweries and distilleries to its place of business at

Ernakulam. It is the practice of the company to maintain a

uniform "ex-factory price" in respect of each brand of liquor

sold at different centers after adding to the ex-factory price the

appropriate amount attributable to freight and other charges. 14

27. In proceedings for assessment of sales tax for 1963-64

the company claimed under Rule 9(f) of the Kerala General

Sales Tax Rules, 1963, Rs.59,188.99 as an admissible

deduction in respect of charges for "freight and handling

charges" collected from the customers, in the computation of

the taxable turnover. The Sales Tax Officer rejected the claim,

and the order was confirmed by the Appellate Assistant

Commissioner and by the Sales Tax Tribunal. A revision

application filed before the High Court of Kerala was

summarily dismissed. The company has appealed to this

Court with special leave.

28. Rule 9 (f) of the Kerala General Sales Tax Rules, 1963,

provides:

"In determining the taxable turnover, the amount specified in the following clauses shall, subject to the conditions specified therein, be deducted from the total turnover of the dealer....

x x x

(f) all amounts falling under the following two heads, when specified and charged for by the dealer separately, without including them in the price of goods sold;

(i) freight,

(ii) charges for packing and delivery."

15 29. The company claims that the amount spent by it for

freight and for "handling charges" of goods from the factories

to the warehouse at Ernakulam is liable to be excluded from

the taxable turnover and the taxing authorities and the High

Court were in error in refusing to allow the deduction.

30. This court while interpreting Rule 9 (f) of the Kerala

General Sales Tax Rules, 1963 observed that it is not intended

to exclude from the taxable turnover any component of the

price, expenditure, incurred by the dealer which he had to

incur before sale and to make the goods available to the

intending customer at the place of sale.

31. This court had an occasion to deal with identical issues

in the case of Hindustan Sugar Mills (supra). P.N. Bhagwati,

J. (as His Lordship then was), clearly held that by reason of

the provisions of the Control Order which governed the

transactions of sale of cement entered into by the assessee

with the purchasers in both the appeals before us, the amount

of freight formed part of the `sale price'.

16

32. In this judgment, the court comprehensively explained

the entire principle of law by giving an example in para 8 of

the judgment which reads as under:-

"8. Take for example, excise duty payable by a dealer who is a manufacturer. When he sells goods manufactured by him, he always passes on the excise duty to the purchaser. Ordinarily it is not shown as a separate item in the bill, but it is included in the price charged by him. The 'sale price' in such a case could be the entire price inclusive of excise duty because that would be the consideration payable by the purchaser for the sale of the goods. True, the excise duty component of the price would not be an addition to the coffers of the dealer, as it would go to reimburse him in respect of the excise duty already paid by him on the manufacture of the goods. But even so, it would be part of the 'sale price' because it forms a component of the consideration payable by the purchaser to the dealer. It is only as part of the consideration for the sale of the goods that the amount representing excise duty would be payable by the purchaser. There is no other manner of liability, statutory or otherwise, under which the purchases would be liable to pay the amount of excise duty to the dealer. And, on this reasoning, it would make no difference whether the amount of excise duty is included in the price charged by the dealer or is shown as a separate item in the bill. In either case, it would be part of the 'sale price'. So also, the amount of sales tax payable by a dealer, whether included in the price or added to it as a separate item as is usually the case, forms part of the 'sale price'. It is payable by the purchaser to the dealer as part of the consideration for the sale of the goods and hence falls within the first part of the definition."

17 33. This judgment has been followed in a large number of

subsequent judgments in other cases by this Court.

34. In Cement Marketing Co. of India Ltd. v. Assistant

Commissioner of Sales Tax, Indore & Others (1980) 1 SCC

71 similar question arose for consideration. In this case, while

following the case of Hindustan Sugar Mills (supra) this

court came to the clear conclusion that the amount of freight

formed part of the sale price within the meaning of the first

part of the definition of the term contained in Section 2 (p) of

the Rajasthan Sales Tax Act, 1954.

35. In Cement Marketing Co. of India Ltd. v.

Commissioner of Commercial Taxes, Karnataka 1980

(Supp) SCC 373 this court observed as under:

"This question is no longer res integra and it stands concluded by a recent decision given by this Court in Hindustan Sugar Mills v. State of Rajasthan (1978) 4 SCC 271. It has been held by this Court in that case that by reason of the provisions of the Cement Control Order which governed the transactions of sale of cement entered into by the assessee with the purchasers, the amount of freight formed part of the "sale price" within the meaning of the first part of the definition of that term in Section 2(h) of the Central Sales Tax Act, 1956 and was includible in the turnover of the assessee. This decision completely covers the present case and hence we must hold that the High Court was right 18

in taking the view that the amount of freight formed part of the sale price and was rightly included in the taxable turnover of the appellant."

36. In TVL Ramco Cement Distribution Co. (P) Ltd. etc.

etc. v. State of Tamil Nadu etc. etc. (1993) 1 SCC 192 this

court while following the ratio in the case of Hindustan

Sugar Mills (supra) observed as under:

"(i) that the freight charges should be included in arriving at the taxable turnover for purposes of Central Sales Tax and Tamil Nadu Sales Tax; and

(ii) that packing charges and excise duty thereon should also be included in arriving at the taxable turnover for purposes of both Central Sales Tax and Tamil Nadu Sales Tax."

37. In Bihar State Electricity Board & Another v. Usha

Martin Industries & Another (1997) 5 SCC 289 this court

relied on the judgment of this Court in the case of Hindustan

Sugar Mills (supra) and reiterated legal position that sale

price would be the entire price inclusive of excise duty because

that would be the consideration payable by the purchaser for

the sale of goods.

38. In the case of Black Diamond Beverages and Anr. v.

Commercial Tax Officer, Central Section, Assessment

Wingh, Calcutta & Others (1998) 1 SCC 458 this court 19

observed that freight and handling charges would be included

in the sale price.

39. In Commissioner of Central Excise, Delhi v. Maruti

Udyog Ltd. (2002) 3 SCC 547 this court observed as under:

"... ... ...The sale price realised by the respondent has to be regarded as the entire price inclusive of excise duty because it is the respondent who has, by necessary implication, taken on the liability to pay all taxes on the goods sold and has not sought to realise any sum in addition to the price obtained by it from the purchaser. The purchaser was under

no obligation to pay any amount in excess of what had already been paid as the price of the scrap."

40. In State of A.P. v. A.P. Paper Mills Ltd. (2005) 1 SCC

719 the short question arose for consideration was whether

the transportation charges and agent's commission paid by

the respondent - M/s. A.P. Paper Mills Ltd. to the agent

together with the cost of raw material constitute "turnover"

under Section 2(s) and is liable to sales tax under Section 6-A

of the Andhra Pradesh General Sales Tax Act, 1957. This

court relied on Hindustan Sugar Mills (supra) and came to

the conclusion that the transportation charges and agent's

commission would be inclusive in "turnover" under Section 20 2(s) and is liable to Sales Tax under Section 6(a) of the Andhra

Pradesh General Sales Tax Act, 1957.

41. When we apply the ratio of the judgments of the English

Courts and of our Courts, the conclusion becomes obvious

that the amount of freight and insurance charges incurred by

the dealer forms part of the sale price.

42. We may reiterate that in this case, there was specific

contract entered into by and between the parties and

according to the relevant clause of the contract, the ownership

of the goods will remain with the supplier till they are delivered

at the destination station.

43. In view of the clear clause of the contract, no other view

is possible. In our considered view, the High Court was totally

justified in affirming the judgment of the Tribunal. No

interference is called for. These appeals being devoid of any

merit are dismissed with costs.

.................................J. (Dalveer Bhandari)

.................................J. 21

(Deepak Verma) New Delhi;

September 7, 2010.