2025 (1) TMI 217 - AT - VAT / Sales Tax

Goods movement between manufacturing unit and depots ruled as stock transfers, not taxable inter-state sales

CESTAT NEW DELHI ruled on central sales tax demand for goods movement from appellant's Rajasthan manufacturing unit to Bihar and Jharkhand depots. The ... Demand of central sales tax on movement of goods from the manufacturing unit of the appellant situated in the State of Rajasthan to its depots in the State of Bihar and the State of Jharkhand - inter-state supply of goods or inter-state stock transfers - HELD THAT:- A perusal of the order dated 04.10.2017 passed by the Rajasthan Tax Board shows that it has reproduced the observations of the Rajasthan Tax Board in Appeal No’s. 1229-1233 decided on 24.11.2014. It is the order passed in these five appeals that were assailed by M/S CARLSBERG INDIA PVT. LTD., M/S UNITED BREWERIES LTD. AND M/S MOUNT SHIVALIK INDUSTRIES LTD. VERSUS THE STATE OF RAJASTHAN, THE COMMISSIONER COMMERCIAL TAXES, JAIPUR, THE ASSISTANT COMMISSIONER COMMERCIAL TAX DEPARTMENT, JAIPUR, THE STATE OF BIHAR AND THE STATE OF JHARKHAND [2024 (10) TMI 1124 - CESTAT NEW DELHI] It was held in the case that 'The movement of goods cannot also be considered incidental to the Master Agreement. Reliance placed by the Rajasthan Tax Board and the learned senior counsel for the State of Rajasthan on clause 2 of the Master Agreement to justify that the movement of goods occurred incidental to the Master Agreement, is not correct.' Conclusion - The transactions were stock transfers, not sales. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the movement of goods from the manufacturing unit in one State to the dealer's depots in other States amounted to an inter-state sale (liable to Central Sales Tax) or to inter-state stock transfers (not an inter-state sale) in the factual matrix of state liquor procurement policies and master agreements. 2. Whether the Master Agreement and the State Liquor Policy (including clause deeming supply against OFS an 'agreement to sell' under section 4(3) of the Sale of Goods Act) create a prior binding contract of sale which renders the initial movement of goods an inter-state sale. 3. Whether reliance on delivery clauses, depot-stocking obligations and license conditions (including minimum stock maintenance and recoupment obligations) can convert routine inter-state transfers to depots into sales in law. 4. What is the legal effect of the Officer's/Corporation's OFS mechanism, payment only on disposal, and risk/cost allocation in determining when the contract of sale is concluded for sales-tax purposes. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of movement: inter-state sale v. inter-state stock transfer Legal framework: Central Sales Tax principles distinguish movement occasioned by a sale (inter-state sale) from movements for stocking/transfer where sale is concluded later at the destination. Section 4(3) of the Sale of Goods Act and statutory/commercial incidents (time and place of contract, transfer of property and risk, payment terms) govern when contract of sale is effected. Precedent treatment: The Tribunal examined and relied on authorities which held that agreements granting only a standing option or distribution arrangement, with sales concluded by later orders, do not effectuate a prior sale (Allahabad High Court decision in Central Distillery and Breweries; Karnataka High Court in BASF India; Supreme Court in Kelvinator of India). Those precedents were followed for their ratio that absence of obligation/definiteness on quantity/price/time precludes treating prior transfers as sales. Interpretation and reasoning: The Tribunal analysed the Liquor Policy, OFS mechanism and Master Agreement. It found (a) OFS are issued by the State Corporations based on depot requirements and have validity periods; (b) the Corporations have no obligation to procure minimum quantities or to purchase particular brands merely by execution of the Master Agreement; (c) payment is made only after disposal by the Corporation; (d) the manufacturer bears cost and risk of delivery to depots and has to maintain/recoup minimum depot stocks as per license; and (e) clause 10.1 treats supply against OFS as agreement to sell under section 4(3) - meaning the OFS, not the Master Agreement or depot transfers, concludes the contract. On these facts, the Tribunal reasoned that the initial movement from factory to depots is to create or replenish stock and is not occasioned by any prior contract of sale. Ratio vs. Obiter: Ratio - where (i) the procurement policy and master agreement leave quantity, time and price to be specified later by OFS, (ii) the depot transfer is at the manufacturer's cost and risk and payment depends on disposal, the initial movement is an inter-state stock transfer and not a concluded inter-state sale. Observations distinguishing particular clauses of the Master Agreement as non-determinative are ratio insofar as applied to like factual matrices; comparison of dissimilar contractual structures in other cases is obiter. Conclusions: The Tribunal concluded that the movements to depots were inter-state stock transfers; sale occurred only when OFS were issued and goods delivered/sold pursuant to those OFS, with VAT paid locally on sale. Issue 2 - Effect of Master Agreement and Liquor Policy clauses on existence of prior binding sale Legal framework: Contract formation requires offer, acceptance and intention; for a sale, price, parties and goods must be sufficiently certain or be determinable by reference to an agreed mechanism. The Sale of Goods Act (s.4(3)) allows for future agreements to amount to agreement to sell if the parties so agree, but the factual matrix must support that the master arrangement itself creates a present obligation to sell. Precedent treatment: The Tribunal followed precedents (Kelvinator, BASF, Central Distillery cases) that held distribution/standing agreements lacking specified quantities/price/obligation do not by themselves constitute agreements of sale; such precedents were applied, not overruled. Interpretation and reasoning: The Tribunal parsed clauses of the Master Agreement - noting they stipulate manner of delivery, cost/risk allocation, quality standards, and that deliveries must be in line with OFS. The Master Agreement was found to grant only an option to the Corporation to purchase later and did not impose a binding obligation on the Corporation to procure, nor did it fix quantity, price or time. Therefore, the Master Agreement is more in the nature of a standing order/tender and not an agreement to sell. Clause 2 (delivery) addresses logistics and does not concern manufacture or create an inter-state delivery obligation; clause 10.1 of the Liquor Policy makes clear that supply pursuant to OFS constitutes the agreement to sell. Ratio vs. Obiter: Ratio - a master/distribution agreement that leaves key terms to be fixed by subsequent OFS and contains no enforceable obligation on the buyer to purchase cannot be treated as a contract of sale that renders earlier physical movements a sale. Remarks that particular clauses 'do not contemplate inter-state delivery' are ratio as applied here; broader statements on commercial practice are obiter. Conclusions: The Master Agreement and Liquor Policy clauses, read as a whole, do not evidence a prior binding contract of sale antecedent to depot transfers; the contract of sale is constituted by OFS and related exchanges, not by mere stocking obligations or delivery-method clauses in the Master Agreement. Issue 3 - Effect of depot stocking obligations, license clauses and risk/cost allocation on characterisation Legal framework: Incidence of cost/risk and payment timing bear upon determination of when property and the contract pass; licensing conditions imposing minimum depot stocks or recoupment obligations are commercial/regulatory measures but do not ipso facto determine existence of sale. Precedent treatment: The Tribunal treated earlier authorities distinguishing warehousing/stocking arrangements (which required depot stocks without assured purchase) as instructive - these were followed to the extent the factual features matched. Interpretation and reasoning: Although license clause (e.g., clause 5A) required maintaining minimum stocks and recoupment obligations, these obligations were administrative/regulatory duties to ensure supply continuity and did not obligate the State Corporations to purchase specified quantities. The manufacturer bearing cost/risk of transit and payment being contingent on resale by the Corporation reinforced that title and sale remained to be effected later. Thus, depot stocking and license obligations, standing alone, cannot convert initial inter-state transfers into taxable inter-state sales. Ratio vs. Obiter: Ratio - obligations to maintain depot stock and to recoup within prescribed timelines, coupled with manufacturer bearing cost/risk and payment after disposal, support characterising initial movements as stock transfers. Statements to the contrary relying solely on such clauses without examining contractual purchase obligations are not sustained. Conclusions: Depot stocking obligations and license conditions do not, per se, create a sale at the time of inter-state movement; they are consistent with stock transfers where sale is effected later by OFS. Issue 4 - Role and legal effect of OFS and post-delivery payment on timing of sale Legal framework: An order constituting an offer accepted by delivery/performance can bring a sale into existence; parties may by contract stipulate that a particular document or event (e.g., OFS) constitutes the agreement to sell under the Sale of Goods Act. Precedent treatment: The Tribunal treated clause deeming OFS to be agreement to sell as determinative in the contractual chain in light of commercial practice and precedents where subsequent orders concluded sales. Interpretation and reasoning: Clause 10.1 of the Liquor Policy expressly construes supply against OFS as an agreement to sell under section 4(3). The OFS specify quantity and a delivery validity period; if goods are not delivered within validity period the OFS lapses. Payment by the Corporation occurs only on disposal, and unsold or expired stock is for the Corporation to manage (including draining after six months), further indicating title/purchase is not consummated at initial transfer. Therefore the Tribunal concluded that OFS operate as the operative contracts of sale and that movement to depots was preparatory stock transfer. Ratio vs. Obiter: Ratio - where contractual scheme designates a subsequent document/order as the agreement to sell and the buyer has discretion to issue such orders, sale occurs on/after that order; movements prior to such order are stock transfers. Observations on payment-after-disposal strengthening this view are ratio in the present facts. Conclusions: OFS conclude the contract of sale; movements prior to issuance/completion of OFS are inter-state stock transfers, not inter-state sales. Final Determination The Tribunal applied the above analysis and followed the cited precedents to hold that the movements from manufacturing units to depots, in the presence of the Liquor Policy, Master Agreement and OFS mechanism, were inter-state stock transfers and not inter-state sales. The Tribunal set aside the impugned Board orders that had treated such movements as inter-state sales and allowed the appeals.