2025 (11) TMI 591 - AT - VAT / Sales Tax

Movement of goods to branch held inter-state sale under section 6A; evidentiary burden unmet, penalty quashed

M/s. Indapur Dairy and Milk Products Ltd. Versus State of Maharashtra, The Maharashtra Sales Tax Tribunal Mumbai, State of Uttarakhand, Dehradun

CESTAT upheld the State Tribunal's finding that movement of goods from the appellant's factory in Maharashtra to its branch location in Uttarakhand was ... Classification of transfer of goods - movement of goods from the Indapur factory of the appellant at Pune in the State of Maharashtra to Haridwar in the State of Uttarakhand was to fulfill the purchase orders of Patanjali - branch transfer as claimed by the State of Maharashtra or a transfer of goods to the Branch of the appellant at Haridwar covered by section 6A of the CST Act as claimed by the appellant? - HELD THAT:- What transpires from the decision of the Supreme Court in Hyderabad Engineering [2011 (3) TMI 1427 - SUPREME COURT] is that for a sale to be in the course of inter-State trade or commerce under section 3(a), there must be a sale of goods and such sale should occasion the movement of the goods from one State to another. To find out whether a particular transaction is an inter-State sale or not, it is essential to see whether the movement of the goods from one State to another is a result of a prior contract of sale. Under section 6A, if the dealer claims that the movement of such goods from one State to another was occasioned by reason of transfer of such goods by him to any other place of his business and not by reason of sale, then the burden of proving that the movement of goods was so occasioned shall be on the dealer. The mode of discharge of this burden of proof has also been provided in the form of a declaration in Form F. Mere transfer of goods from a Head Office to a Branch Office or inter-branch transfer of goods which broadly come under the phrase ‘branch transfers’ cannot be regarded as sale in the course of inter-State trade for the simple reason that a Head Office or Branch cannot be treated as having traded with itself or sold articles to itself by means of stock transfers. The State Tribunal has meticulously examined the purchase orders placed by Patanjali on the Branch Office of the appellant at Haridwar and observed that the purchase orders bear numbers, date, details of the contact person at Patanjali, quantity and unit price of the material to be supplied and the amount payable by Patanjali. The State Tribunal also found as a fact that after the Branch Office receives the purchase orders on a specific date, the Indapur factory at Pune, in response to the purchase orders, makes the goods ready for dispatch by preparing stock transfer challans, retailer invoices, Form No. 16 and lorry receipts - The State Tribunal, therefore, held that the movement of goods from the Indapur factory of the appellant at Pune in the State of Maharashtra to Haridwar in the State of Uttarakhand is in pursuance of the purchase orders placed by Patanjali, which was the sole buyer during the period under consideration. The State Tribunal, while arriving at the aforesaid finding, also took into consideration the statements made by some of the employees of the appellant at Indapur factory. The statements reveal that the appellant receives purchase orders from Patanjali in advance through e-mails or letters and then the goods are manufactured and sold on the basis of the purchase orders. The State Tribunal also examined the correspondence between the appellant and Patanjali which confirmed this fact. The State Tribunal also found that the goods manufactured by the appellant are as per the specifications of Patanjali. The State Tribunal ultimately found no reason to take a view different from the view that was taken by the Assessing Authority. The findings recoded by the State Tribunal are based on the documents on record, namely the purchase orders placed by Patanjali and the stock transfer challan, retailer invoices and the lorry receipts. The State Tribunal, on a consideration of these documents, arrived at a finding that the invoices were prepared by the Indapur Unit at Pune after the purchase orders were placed by Patanjali and in fact the purchase order numbers and the purchase order dates are mentioned in the invoices. The same invoice number is also reflected in the stock transfer challan, lorry receipt and Form No. 16 - This factual position has not been controverted by the appellant and only reliance has also been placed on section 4(2)(b) of the CST Act to contend that appropriation of goods takes place in the State of Uttarakhand after the testing is carried out by Patanjali. There is, therefore, no manner of doubt that the movement of goods from the Indapur factory of the appellant at Pune in the State of Maharashtra to the State of Uttarakhand was occasioned by the purchase orders placed by Patanjali on the appellant. There is, therefore, no error in the order passed by the State Tribunal that may call for any interference in these appeals - The show cause notice did not call upon the appellant to show cause why penalty should not be imposed. The letter dated 03.01.2019 merely called upon the appellant to produce documents failing which penalty under section 29(3) MVAT Act could be levied. The imposition of penalty upon the appellant, therefore, cannot be sustained and deserves to be set aside. The order passed by the State Tribunal holding that the movement of goods from the State of Maharashtra to the State of Uttarakhand was occasioned by the purchase orders placed by Patanjali on the appellant is upheld. However, the imposition of penalty upon the appellant is set aside - Appeal allowed in part. ISSUES PRESENTED AND CONSIDERED 1. Whether the movement of goods from the manufacturing unit in one State to a purported branch in another State was a branch transfer otherwise than by sale within the meaning of section 6A of the CST Act, or an inter-State sale occasioned by prior contract of sale within the meaning of section 3(a) of the CST Act. 2. Whether appropriation of unascertained or future goods occurred in the destination State for purposes of section 4(2)(b) of the CST Act, thereby making the sale intra-State in the destination State. 3. Whether penalty under section 29(3) of the MVAT Act read with section 9(2) of the CST Act could be validly imposed where the departmental communication did not constitute a proper show cause notice calling upon the assessee to show cause why penalty should not be levied. 4. Whether, upon a finding that an inter-State sale occurred, refund and inter-State transfer of tax under section 22(1B) of the CST Act should be directed from the destination State to the origin State and whether the assessee must deposit any additional tax. ISSUE-WISE DETAILED ANALYSIS - 1. Characterisation: branch transfer (s.6A) v. inter-State sale (s.3(a)) Legal framework: Sections 3, 6 and 6A of the CST Act govern when a sale is in the course of inter-State trade (s.3), liability to tax on inter-State sales (s.6) and the burden/mode of proof where a dealer claims movement was otherwise than by sale (s.6A), including filing of declaration in Form F and inquiry by the assessing authority. Precedent treatment: The judgment follows established principles that (a) for s.3(a) to apply there must be a sale which occasions movement of goods from one State to another, and (b) under s.6A the dealer bears the burden to prove movement was a branch transfer, dischargeable by filing Form F; branch transfers are not sales in inter-State trade. Interpretation and reasoning: The Tribunal examined documentary matrix - purchase orders, stock transfer challans, retailer invoices, Form No.16, lorry receipts, e-mails and witness statements - and found a consistent factual pattern: purchase orders issued by the buyer at destination were received at the destination branch, forwarded to the manufacturing unit, which then prepared invoices, stock transfer challans and lorry receipts referencing the purchase order number and dispatched goods. A standing Purchase Agreement specifying manufacture to buyer's specifications and delivery/payment terms corroborated pre-existing contractual arrangements. The refrigerated vans acted as temporary storage near the branch but goods were not unloaded there; testing by buyer at gate did not negate that movement was pursuant to purchase orders. The Court applied the principle that where movement is in pursuance of prior contract of sale, s.3(a) is attracted and Form F/declaration under s.6A will not avail if department shows positive case of inter-State sale. Ratio vs. Obiter: Ratio - where movement of goods is occasioned by prior contract/purchase orders from a buyer at destination (even if some acceptance occurs upon inspection), the transaction constitutes an inter-State sale under s.3(a); burden under s.6A lies on dealer and filing Form F is insufficient if facts show prior contract. Obiter - observations on commercial practices (use of refrigerated vans as temporary storage) are ancillary factual comments. Conclusion: The Court upheld the finding that the movements were occasioned by purchase orders and constituted inter-State sales under s.3(a); the claim of branch transfer under s.6A was not proved and thus tax and interest in origin State were correctly levied. ISSUE-WISE DETAILED ANALYSIS - 2. Appropriation under s.4(2)(b) of the CST Act Legal framework: Section 4(2)(b) treats appropriation of unascertained or future goods as the time when the sale is deemed to take place for intra-State determination; appropriation by seller or buyer is relevant to place of sale. Precedent treatment: The Court applied statutory text and accepted that appropriation can affect where a sale is deemed to occur, but must be construed against the factual matrix of contractual incidence. Interpretation and reasoning: The appellant's contention that appropriation occurred in the destination State post testing was rejected because testing and inspection by the buyer at arrival did not convert movement occasioned by a prior purchase order into a stock transfer; inspection is conventional commercial practice and refusal after inspection does not negate the fact that movement resulted from a prior contractual arrangement. The Purchase Agreement and purchase orders evidenced predetermined contractual obligations and specification-based manufacture, undermining the appropriation argument. Ratio vs. Obiter: Ratio - appropriation occurring on arrival and inspection will not defeat characterization as inter-State sale where movement is occasioned by prior contract and documentary evidence shows dispatch pursuant to purchaser's orders. Obiter - none material beyond factual application. Conclusion: Appropriation in the destination State did not alter characterisation; s.4(2)(b) did not render transactions intra-State because prior contractual arrangement and documentary evidence established inter-State sale. ISSUE-WISE DETAILED ANALYSIS - 3. Validity of penalty under s.29(3) MVAT Act read with s.9(2) CST Act Legal framework: Imposition of penalty must comply with principles of natural justice and statutory procedure; show cause notice requirement and the right to be heard are essential where penalty is to be levied. Precedent treatment: Procedural safeguards require a specific show cause notice inviting explanation against penalty; mere communication seeking documents with a conditional statement that penalty 'could be levied' on failure to produce documents does not equate to a show cause notice imposing penalty. Interpretation and reasoning: The departmental communication dated 03.01.2019 directed production of documents and warned that in absence of documents penalty may be levied; it did not call upon the assessee to show cause why penalty should not be imposed. The Court found that this did not satisfy the requirement of a proper show cause notice and therefore the imposition of penalty could not be sustained. The State Tribunal's reduction of penalty was endorsed in part but the Court set aside imposition entirely due to procedural deficiency. Ratio vs. Obiter: Ratio - penalty cannot be sustained where the impugned communication does not constitute a proper show cause notice calling upon the assessee to explain why penalty should not be imposed; procedural infirmity vitiates penalty. Obiter - observations on quantum reduction by Tribunal are fact-specific. Conclusion: Penalty imposed under s.29(3) MVAT Act read with s.9(2) CST Act set aside for lack of proper show cause procedure; therefore penalty annulled notwithstanding substantive tax liability. ISSUE-WISE DETAILED ANALYSIS - 4. Direction for inter-State refund/transfer under s.22(1B) of the CST Act and consequential deposit Legal framework: Section 22(1B) provides for refund/adjustment where tax has been collected in destination State but central sales tax is due in origin State; mechanism entails ascertainment and inter-State transfer by competent authorities and possible additional deposit by dealer if shortfall exists. Precedent treatment: Where origin State tax is held leviable on inter-State sale, appropriate directions can be issued to arrange transfer of tax collected in destination State to origin State, subject to ascertainment of amounts and adjustments. Interpretation and reasoning: Having held that inter-State sales took place, the Court directed that the destination State be asked to ascertain and transfer the amount to origin State under s.22(1B). The Court also preserved the obligation that if additional tax is required from the dealer to meet central sales tax liability in the origin State, such additional amount must be deposited by the dealer. Ratio vs. Obiter: Ratio - on a finding of inter-State sale, the Court can direct inter-State refund/transfer under s.22(1B) and require ascertainment by the destination State; the taxpayer remains liable to deposit any additional tax found due. Obiter - procedural directions for ascertainment are pragmatic measures. Conclusion: Direction issued to arrange transfer of tax from destination State to origin State under s.22(1B); assessing authority to ascertain transferable amount and dealer to deposit any additional central sales tax if required. OVERALL CONCLUSION The Tribunal's conclusion that movements were occasioned by purchase orders and constituted inter-State sales under s.3(a) of the CST Act is affirmed; the branch transfer claim under s.6A failed on the documentary and contractual evidence. The imposition of penalty was set aside for procedural infirmity in notice; however, tax and interest in the origin State are confirmed and directions issued for inter-State transfer/refund under s.22(1B), subject to any additional deposit by the dealer.