2025 (9) TMI 1153 - HC - VAT / Sales Tax

Freight reimbursed by buyer for ex-factory transport is not part of sale price under Section 2(2)

The Commissioner Of Sales Tax, Mumbai, The Commissioner Of Sales Tax Maharashtra State, Mumbai Versus Parle Products Ltd.

The HC held that freight charged by the seller for transporting goods from factory to purchaser, when initially borne by the seller and later reimbursed ... Scope of sale price - freight amount incurred and collected by the appellant for transporting the goods from the factory gates to the wholesaler's destination - post-sale expense - forming part of the sale price within the meaning of Section 2(2) of the Bombay Sales Tax Act, 1959 or not - HELD THAT:- The Division Bench in in Ravi Trading Company [2017 (10) TMI 490 - BOMBAY HIGH COURT] based upon the emphasised portion, concluded that the amount representing freight would not be payable as part of the consideration for the sale of the goods but by way of reimbursement of the freight which was payable by the purchaser, and in fact, disbursed by the dealer and hence it would not form part of the “sale price”. The Karnataka High Court held that it was open for an assessee to contract that the sale would be ex-factory and the assessee would initially bear the freight charges to transport the goods to the purchaser’s place, subject to the purchaser reimbursing the freight amount to the assessee. The Karnataka High Court held that there was nothing sham about such a contract. This view was upheld by the Hon’ble Supreme Court, which dismissed the Special Leave Petition after leave was granted therein. The argument of the Appellant (Revenue) regarding a sham agreement or sham contract also cannot be a valid reason to interfere with the tribunal’s orders favouring the respondent assesses - these references are disposed off by answering the question referred against the revenue and in favour of the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether, on the admitted contractual terms delivering goods ex-factory with the seller transporting goods as agent/bailee and obtaining reimbursement of freight from the purchaser, the freight amount constitutes part of the 'sale price' within the meaning of Section 2(29) of the Bombay Sales Tax Act, 1959 (thus taxable) or is a post-sale expense/reimbursement not forming part of the sale price. 2. Whether post-enactment explanatory insertions to the statutory definition of 'sale price' (inserted in 1990, 1992 and 1998) operate to include such freight reimbursements within the sale price for the assessment years in question (1992-1995). 3. Whether the contractual arrangement (ex-factory sale with seller arranging transport and obtaining reimbursement) can be treated as sham/void for the purpose of including freight in the sale price. ISSUE-WISE DETAILED ANALYSIS Issue 1: Freight reimbursement-part of sale price or post-sale expense? Legal framework: The governing test is the statutory definition of 'sale price' under Section 2(29) which includes amounts charged 'for anything done by the dealer in respect of goods at the time of or before delivery thereof' except specified exclusions. The characterisation of when 'sale' is complete (ex-factory vs. delivery at destination) and the contractual apportionment of duties and risk are central to determine whether freight is part of consideration or a later reimbursement. Precedent treatment: The Court considered and relied upon the reasoning in the referenced higher and coordinate bench authorities which held that where the contract provides delivery ex-factory and freight is disbursed by the dealer but payable by the purchaser (reimbursed), the freight does not form part of the sale price. The decision in Hindustan Sugar Mills (paras relied upon) was examined and distinguished to the extent it deals with different contract characterisations; the coordinate Division Bench decision (Ravi Trading Company) applied the relevant passage of Hindustan Sugar Mills to reach the conclusion that reimbursed freight is not sale price. Interpretation and reasoning: The Court emphasised the admitted contractual term that sale concluded ex-factory. Under those terms the seller's arrangement of transport and payment of freight was in the capacity of agent/bailee for the purchaser; the purchaser bore the liability for freight and agreed to reimburse. The essence is that freight was not paid as part of the consideration for the sale but as a subsequent disbursement on behalf of the purchaser. Even accepting later explanatory insertions to the statute as clarificatory (see Issue 2), the Court found nothing in those explanations that would convert such reimbursements into sale price given the contractual allocation. Ratio vs. Obiter: Ratio - Where contracts stipulate ex-factory delivery and freight is paid by the seller as agent/bailee to be reimbursed by the purchaser, the freight reimbursement does not form part of the sale price within the meaning of the definition and is not taxable as sale price. Observational/obiter - General propositions in precedent about when freight may be part of price where the contract stipulates price F.O.R. destination but retains incidents of delivery differently (distinguished on facts). Conclusion: Freight amounts incurred by the seller as disbursement on behalf of purchaser pursuant to an ex-factory contract and reimbursed by purchaser are not part of the sale price and are not exigible to sales tax as sale price. Issue 2: Effect of post-period explanatory amendments to the definition of 'sale price' Legal framework: The explanations inserted into the statutory definition in 1990, 1992 and 1998 are acknowledged; their temporal applicability to the assessment years (1992-1995) was contested by counsel. Precedent treatment: The Court noted the applicant's submission that the explanations are primarily clarificatory and therefore should apply; the Court examined the content of the explanations in light of the contractual facts and relevant authorities. Interpretation and reasoning: Even assuming arguendo that the explanations apply, the Court found nothing in them that would alter the characterisation of reimbursed freight in cases where the contract expressly treats sale as complete ex-factory and freight as a reimbursement by purchaser. The statutory explanations do not negate the contractual apportionment or convert agent/disbursement transactions into consideration forming sale price. Ratio vs. Obiter: Ratio - Clarificatory or subsequent explanations, where they do not expressly overrule or alter the effect of an existing contract-based characterisation, do not operate to include reimbursed freight within sale price. Observational - Applicability of explanations to particular assessment years is factual/legal but immaterial where explanations do not change dispositive outcome. Conclusion: The post-period explanatory insertions do not assist the revenue; they do not, on the admitted facts, bring reimbursed freight within the statutory sale price for the assessment years concerned. Issue 3: Allegation of sham contracts-can the contractual characterisation be disregarded? Legal framework: The court may normally examine sham or colourable transactions where pleaded and relevant; however, scope of reference determines permissible issues. Precedent treatment: The Court referred to prior decisions (including state and high court authority affirmed by dismissal of leave) holding that parties may validly contract an ex-factory sale with the seller initially bearing transport and obtaining reimbursement; such arrangements are not ipso facto sham where genuine and recorded. Interpretation and reasoning: Two considerations: (a) the question whether the contract was sham was not referred to the Court for determination; and (b) prior judicial authority establishes that such contractual arrangements are not inherently sham and may be legitimately recognized for tax characterisation. Absent specific factual findings or a reference asking the Court to probe sham character, the Court declined to treat the contracts as void or artificial. Ratio vs. Obiter: Ratio - Mere allegation that contractual terms were intended to avoid tax, without specific reference or factual determination in the reference, cannot justify disregarding an otherwise valid ex-factory contract; prior authoritative decisions support the legitimacy of such contractual arrangements. Observational - Factual determination of sham requires appropriate pleading and adjudication which was not before the Court. Conclusion: The sham/void contract argument fails both for want of referral of that issue to the Court and because binding precedent upholds the validity of ex-factory contracts where the seller initially bears freight to be reimbursed by purchaser; accordingly, the contractual characterisation stands and cannot be disregarded to treat freight as sale price. Overall Disposition On the contractual facts (ex-factory sale, seller as agent/bailee arranging transport and obtaining reimbursement), and in light of applicable precedent and statutory interpretation, the freight reimbursed to the seller does not form part of the sale price and is not taxable as sale price; the references are answered against the revenue and in favour of the assessee.