‘SALE PRICE/TURNOVER’ FOR LEVY OF CST

Introduction :

Once the transaction is held to be a sale, the next question which arises is the quantum on which such tax is leviable. This is referred to as ‘sale price’ in relation to individual transaction and ‘turnover’ in relation to aggregate of transactions during a particular period. There may be a number of different elements which require consideration while determining sale price/turnover.

Definitions :

Under the CST Act, 1956, the above terms are defined as discussed below :

“(h) ‘sale price’ means the amount payable to a dealer as consideration for the sale of any goods, less than any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged;

Provided that in the case of a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, the sale price of such goods shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to be the sale price for the purposes of this clause.”

“(j) ‘turnover’ used in relation to any dealer liable to tax under this Act means the aggregate of the sale prices received and receivable by him in respect of sales of any goods in the course of inter-state trade or commerce made during any prescribed period and determined in accordance with the provisions of this Act and the rules made thereunder.”

From the definition of sale price, it appears that though all amounts charged to the buyer till delivery is given are to be considered as sale price, the amount charged separately for freight is not to be included in the sale price.

Interpretation of above definitions :

However, interpretation of the above definitions have attracted lengthy litigations. There are a number of judgments interpreting the above terms.

Recently, the Supreme Court had an occasion to deal with the above aspect. The Supreme Court has delivered judgment in case of India Meters Ltd. v. State of Tamil Nadu (34 VST 273).

In this case, the facts were that the appellant, M/s. Indian Meters Ltd. (referred to as dealer) sold meters manufactured by it to its customers within and outside Tamil Nadu. The dealer had charged applicable tax i.e., Tamil Nadu Sales Tax or Central Sales Tax on the price charged by it. The dealer had also collected separately amounts from the buyers towards freight charges, by raising debit notes. The dealer had not paid tax on the above amounts. The Sales Tax Authorities held that these amounts are also part of sale price and accordingly levied tax on the same under the respective Acts.

Though, the Tamil Nadu Sales Tax Appellate Tribunal held in favour of dealer, the High Court held that the said amounts are part of sale price and turnover and therefore correctly held as liable to tax.

The matter came before the Supreme Court. The Supreme Court examined the facts. It was found that the clause in the sale contract provided that the transfer of title to the goods was to take place only on delivery of goods at customer’s place and the customer’s obligation to pay would arise only after the delivery had been so effected. Simultaneously it was also found that there was a clause in the contract dealing with the price. It was provided that the price was payable per unit, ex-factory delivery. The Clause further provided that sales tax and excise duty will be payable only on ex-factory price.

Based on the above terms and conditions, it was argued by the dealer that since the prices are ex-factory and freight is charged separately, the said freight was not chargeable to tax. Various judgments were cited before the Supreme Court.

Supreme Court’s ruling :

The Supreme Court has confirmed the view of the High Court.

The Supreme Court observed that in the present case, the obligation to pay the freight was clearly on the dealer, as no sale could have taken place unless the goods were delivered at the premises of the buyer. It was further observed that for giving such delivery incurring cost of freight was required on part of the dealer. The Supreme Court held that though the contract mentioned the price as ex-factory price, the delivery was not at the factory gate. Therefore, the specification of what the price would be at the factory gate cannot have any impact on the place of delivery, held the Supreme Court. The Supreme Court also observed that had the delivery been completed at the factory gate, then the expenses incurred thereafter by way of freight could have been categorised as post-sale expenses and could not have been taxable. Thus, ultimately the Supreme Court confirmed the levy. The Supreme Court reproduced legal position in the following manner.

“In Paprika Ltd. v. Board of Trade, (1944) 1 ALL ER 372, the Court observed as under :

“Whenever a sale attracts purchase tax, that tax presumably affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even the price is expressed as ‘X’ plus purchase tax.”

In this case, the learned judge also quoted with approval what Goddard, L.J., said in Love v. Norman Wright (Builders) Ltd., (1944) 1 All ER 618:

“Where an article is taxed, whether by pur-chase tax, customs duty or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consider-ation though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up or whether the seller has included tax or not” and summed up the position in the following words:

“So far as the purchaser is concerned, he pays for the goods that the seller demands, namely, the price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.”

The Supreme Court further referred to settled position as under:

“This Court had an occasion to deal with identical issues in the case of Hindustan Sugar Mills (1978) 4 SCC 271. P. N. Bhagwati J. (as His Lordship then was), clearly held that by reason of the provisions of the Control Order which governed the transactions of sale of cement entered into by the assessee with the purchasers in both the appeals before us, the amount of freight formed part of the ‘sale price’.

In this judgement, the Court comprehensively explained the entire principle of law by giving an example in para 8 of the judgment which reads as under:

“8. Take for example, excise duty payable by a dealer who is a manufacturer. When he sells goods manufactured by him, he always passes on the excise duty to the purchaser. Ordinarily, it is not shown as a separate item in the bill, but it is included in the price charged by him. The ‘sale price’ in such a case could be the entire price inclusive of excise duty, because that would be the consideration payable by the purchaser for the sale of the goods. True, the excise duty component of the price would not be an addition to the coffers of the dealer, as it would go to reimburse him in respect of the excise duty already paid by him on the manufacture of the goods. But, even so, it would be part of the ‘sale price’, because it forms a component of the consideration pay-able by the purchaser to the dealer. It is only as part of the consideration for the sale of the goods that the amount representing excise duty would be payable by the purchaser. There is no other manner of liability, statutory or otherwise, under which the purchaser would be liable to pay the amount of excise duty to the dealer. And, on this reasoning, it would make no difference whether the amount of excise duty is included in the price charged by the dealer or is shown as a separate item in the bill. In either case, it would be part of the ‘sale price’. So also, the amount of sales tax payable by a dealer, whether included in the price or added to it as a separate item, as is usually the case, forms part of the ‘sale price’. It is payable by the purchaser to the dealer as part of the consideration for the sale of the goods and hence falls within the first part of the definition?….”

Ratio of Supreme Court judgement:

The ratio of the judgement is required to be seen carefully. Even if the freight is collected separately, if the delivery is at the door of the customer, then in spite of the above exclusion of freight from the definition of sale price, it will be includible in the sale price and taxable.

The further ratio which comes out is that if it is established that the delivery is given at the seller’s place and the freight charges are incurred thereafter, then the said collection can be considered as post-sale collection. It will also be considered as reimbursement of expenditure made on behalf of the buyer. In such circumstances, it will not be taxable.

We hope the above judgement will settle the controversy for all time to come and the dealers can determine the taxation of freight accordingly.