Inter-State sale test: prior customer orders and earmarked goods sustained tax treatment, while penalty was deleted.

Goods moved from Tamil Nadu to a head office and branch offices in other States were treated as inter-State sales where seized correspondence showed prior orders, earmarking for named customers, and delivery instructions, even though the goods routed through internal offices as a conduit. The inter-State character depended on a nexus between movement and antecedent sale orders under the Central Sales Tax Act. Penalty under the Tamil Nadu General Sales Tax Act was held inapplicable because the assessment was not a best-judgment assessment arising from an incomplete or incorrect return. The disputed turnover was curtailed to the extent not supported by the material, and consequential tax adjustment and refund verification were directed.

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Issues: (i) Whether the movement of goods from Tamil Nadu to the head office and branch offices in other States was pursuant to prior orders so as to constitute inter-State sales, and not genuine stock transfers; (ii) Whether penalty could be levied on the assessee under the Tamil Nadu General Sales Tax Act in the facts of the case.

Issue (i): Whether the movement of goods from Tamil Nadu to the head office and branch offices in other States was pursuant to prior orders so as to constitute inter-State sales, and not genuine stock transfers.

Analysis: The charging scheme under section 6 of the Central Sales Tax Act, 1956, read with section 3, taxes sales occasioning movement of goods from one State to another. The controlling principle is that the inter-State movement must be the result of an antecedent contract or covenant of sale, and not a movement independent of sale. On the seized correspondence, cartons and cases were earmarked for named customers in other States, with instructions for delivery to those parties, which showed a clear nexus between movement of goods and prior orders. The Court held that the temporary routing of goods through the head office or branch office did not destroy the inter-State character where the goods were meant to satisfy specific buyers and the branch or office merely functioned as a conduit.

Conclusion: The finding that substantial part of the disputed transfers were inter-State sales was upheld, though the taxable turnover required reduction to exclude periods and transactions not supported by the seized material.

Issue (ii): Whether penalty could be levied on the assessee under the Tamil Nadu General Sales Tax Act in the facts of the case.

Analysis: Penalty under section 12(3)(b) of the Tamil Nadu General Sales Tax Act, 1959 is attracted only in the statutory situations contemplated by section 12(2), which involves assessment to the best of judgment on an incomplete or incorrect return. Here, the assessment was made largely on the basis of the books and disclosed turnover, and the dispute related to the legal character of the stock transfer claim rather than a best judgment estimation. The Court therefore treated the penal provision as inapplicable on the facts.

Conclusion: Penalty was held not leviable and was set aside in favour of the assessee.

Final Conclusion: The assessee succeeded in part: the turnover treated as inter-State sales was curtailed to the extent found sustainable, directions were issued for consequential tax adjustment and refund verification, and the penalty was deleted.

Ratio Decidendi: Where the seized and surrounding materials establish that goods were moved to another State pursuant to pre-existing orders and earmarked for identified buyers, the movement is an inter-State sale under section 3 of the Central Sales Tax Act, 1956; but penalty under section 12(3)(b) of the Tamil Nadu General Sales Tax Act, 1959 cannot be imposed unless the assessment is one made to the best of judgment under section 12(2).

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