2023 (8) TMI 1647 - HC - VAT / Sales Tax

Adjacent units owned by same person transferring clinker materials cannot constitute sale under Section 22(1) Rule 10 APGST Rules

State of Andhra Pradesh Versus M/s. Deccan Cements Limited and Others

Telangana HC held that transfer of clinker from cement unit to slag unit owned by same person cannot constitute 'sale' under Section 22(1) read with Rule ... Sale or transfer - transfer of clinker from the cement unit to slag unit - Section 22 (1) read with Rule 10 of the APGST Rules, under the APGST Act - HELD THAT:- Since Unit-I had their own private mines, the clinker manufactured from the said Unit-I was transferred to Unit-II for their production purposes. That since the two units are adjacent to each other, it was natural to have transferred the clinker that they had at Unit-I to Unit-II and under the given circumstances they cannot be brought within the purview of “sale”. Moreover, the Tribunal while passing the impugned order has referred to a judicial precedent in the case of The K.C.P. Limited, [1992 (9) TMI 330 - ANDHRA PRADESH HIGH COURT], which again is a decision referred under the similar circumstances. On lookind into the facts of the case in The K.C.P. Limited, those were in respect of three different units located at three different places. Whereas, in the instant appeal, the two Units were adjoining to each other owned by the same person. Similarly, also in the case of Kelvinator of India Ltd., Vs. The State of Haryana [1973 (8) TMI 127 - SUPREME COURT] such action on the part of the assessee cannot be said to be illegal and the High Court held 'There is nothing illegal or impermissible to a party so arranging its affairs that the liability to pay tax would not be attracted or that the brunt of taxation would be reduced to the minimum.' Thus, only because a company is having two different registered units, it cannot be treated as two different persons and in the given circumstances if Unit-I transfers clinker to Unit-II, the same cannot be treated as a sale. In the instant case, both the units belong to the respondent themselves and under such circumstances, there cannot be a sale to oneself, and the so-called ‘seller’ and the so-called ‘buyer’ are one and the same entity - these Tax Revision Cases do not have any merits warranting interference to the impugned order and the revision cases therefore deserve to be and are accordingly rejected. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this matter are:- Whether the transfer of clinker from Unit-I (cement division) to Unit-II (slag division), both owned by the same company, constitutes a 'sale' under the APGST Act and relevant sales tax laws, or whether it is merely an internal transfer exempt from sales tax.- Whether the Sales Tax Appellate Tribunal (STAT) was justified in allowing the appeal of the respondent-assessee and granting exemption on the transfer of clinker on the ground that it was not a sale but an intra-company transfer.- Whether the two units, despite being separately registered and operating as distinct entities, should be treated as separate persons for the purpose of sales tax liability, or as a single juristic person.- Whether the transfer of clinker was a colourable device intended to avoid sales tax liability by artificially segregating operations into two units.- The applicability and interpretation of precedents, particularly the decision in The K.C.P. Limited case, in determining the nature of the transfer and the question of tax liability.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Whether the transfer of clinker between Unit-I and Unit-II constitutes a 'sale' under the APGST ActRelevant Legal Framework and Precedents:The definition of 'sale' under the APGST Act and the Central Sales Tax Act requires a transfer of property in goods for consideration by one person to another. The Sale of Goods Act similarly contemplates a contract of sale between a seller and a buyer, requiring transfer of title from one person to another. The Court extensively referred to the precedent set in The K.C.P. Limited case, where it was held that 'sale can only take place between two persons' and 'there cannot be any sale to one's self unless he acts in a different capacity.'Court's Interpretation and Reasoning:The Court observed that both Unit-I and Unit-II are owned by the same juristic person, the respondent company. Despite being separately registered and operating as distinct units, they are integral parts of the same company. The clinker transfer was between two units located adjacently within the same premises, with Unit-I having its own limestone quarry and producing clinker used by Unit-II for manufacturing slag cement.The Court emphasized that since the transfer was internal within the same legal entity, the transfer of clinker could not be classified as a sale. The Court relied on the principle that a sale requires a transfer between two distinct persons and noted that here the 'seller' and 'buyer' are one and the same entity. The Court further noted that the transaction lacked the essential element of transfer of property for consideration between different persons, as required under the statutory definitions.Key Evidence and Findings:The factual matrix showed that both units were part of the same company, sharing ownership and control, with a single balance sheet prepared for both units. The clinker was transferred internally for production purposes, not sold to an independent third party. The two units were adjacent, separated only by a small wall, reinforcing the internal nature of the transfer.Application of Law to Facts:Applying the legal definitions and precedent, the Court concluded that the transfer of clinker was not a sale but an internal transfer within the same person. Therefore, the transaction did not attract sales tax liability as a sale would.Treatment of Competing Arguments:The appellant argued that the two units were separate entities for sales tax purposes, bearing different names and registration, and that the transfer was a disguised sale intended to avoid tax. The Court rejected this, holding that separate registration does not convert units of the same company into different persons for the purpose of sales tax. The Court found no evidence that the transfer was a colourable device to evade tax.Conclusion:The Court held that the transfer of clinker from Unit-I to Unit-II did not amount to a sale under the APGST Act and related legislation.Issue 2: Whether the Sales Tax Appellate Tribunal (STAT) was justified in allowing the appeal and granting exemptionRelevant Legal Framework and Precedents:The STAT's decision was based on the same principles articulated in The K.C.P. Limited case and other precedents such as Kelvinator of India Ltd. Vs. The State of Haryana, which recognized that a party may arrange its affairs to minimize tax liability legally.Court's Interpretation and Reasoning:The Court found the Tribunal's reasoning well-founded and consistent with established law. The Tribunal had correctly applied the principle that intra-company transfers between units owned by the same juristic person do not constitute sales. The Court noted that the Tribunal's reliance on The K.C.P. Limited case was appropriate and applicable.Key Evidence and Findings:The Tribunal had carefully considered the factual circumstances, including the nature of the units, their ownership, and the purpose of the transfer. The Tribunal's findings that the transfer was not a sale were supported by the evidence.Application of Law to Facts:The Court agreed with the Tribunal's application of law to the facts, affirming that the exemption granted on the transfer of clinker was justified.Treatment of Competing Arguments:The appellant's contention that the transfer was a sale and that the exemption was wrongly granted was rejected. The Court found no merit in the argument that separate registration of units equated to different persons for tax purposes.Conclusion:The Court upheld the STAT's order allowing the appeal and granting exemption on the transfer of clinker.Issue 3: Whether the transfer was a colourable device to avoid sales tax liabilityRelevant Legal Framework and Precedents:The Court considered the principle that tax avoidance by lawful arrangement of affairs is permissible, as held in Kelvinator of India Ltd. Vs. The State of Haryana. The Court also referred to the principle that mere registration of separate units does not automatically convert them into separate persons for tax purposes.Court's Interpretation and Reasoning:The Court found no evidence that the transfer was made with a colourable device or intention to evade tax. The transfer was a legitimate internal movement of raw material between units of the same company, necessary for production. The Court rejected the appellant's argument that the arrangement was designed solely to avoid sales tax.Key Evidence and Findings:The factual record showed that the units operated under different sales tax schemes (deferment and holiday), but this did not alter the legal status of the transfer. The Court noted that the company's internal accounting and production processes justified the transfer.Application of Law to Facts:The Court applied the principle that lawful tax planning is permissible and distinguished it from illegal tax evasion. It found the transfer to be lawful and not a sham transaction.Treatment of Competing Arguments:The appellant's assertion of tax avoidance was not supported by evidence and was rejected.Conclusion:The Court concluded that the transfer was not a colourable device to avoid sales tax liability.3. SIGNIFICANT HOLDINGS'It is axiomatic that sale can only take between two persons. There cannot be any sale to one's self unless, of course, he acts in a different capacity. The definition of 'sale' both under the APGST Act as well as the CST Act makes it crystal-clear that in order to constitute a sale, there must be transfer of property in goods for consideration by one person to another.''The crux of the problem here is, whether the transfer of cement from the petitioner, one unit of K.C.P. Ltd, to the other two units of K.C.P. Ltd, would amount to transfer of property by one person to another. In our opinion, it does not.''There is nothing illegal or impermissible to a party so arranging its affairs that the liability to pay tax would not be attracted or that the brunt of taxation would be reduced to the minimum.'Core principles established:- A sale under the APGST Act requires transfer of property in goods for consideration between two distinct persons; intra-company transfers within the same juristic person do not constitute sales.- Separate registration of units within a company does not convert them into separate persons for sales tax purposes.- Lawful arrangement of business affairs to minimize tax liability is permissible and does not amount to evasion.- Transfers of goods between units of the same company located on the same premises are internal transfers, not sales.Final determinations:- The transfer of clinker from Unit-I to Unit-II was not a sale but an internal transfer within the same juristic person.- The Sales Tax Appellate Tribunal was justified in allowing the exemption on such transfer.- The revision petition filed by the State challenging the exemption was rightly rejected by the Court.