Introduction Sales tax is leviable, when there is sale of goods. The term ‘sale’ is defined in the sales tax laws. The Hon. Supreme Court has also analysed the said term in number of judgments. The landmark judgment is in case of
Gannon Dunkerly and Co. (9 STC 353)(SC), wherein the Hon’ble Supreme Court has observed as under in relation to ‘sale transaction’:
“Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods ……”
From above passage it is clear that to be a ‘sale’ following criteria need to be fulfilled.
(i) There should be two parties to contract i.e. seller and purchaser,
(ii) The subject matter of sale is moveable goods,
(iii) T here must be money consideration and
(iv) Transfer of property i.e. transfer of ownership from seller to purchaser.
Therefore before levying sales tax, fulfillment of above criteria is necessary.
Amongst others, it is also clear from the above that the consideration is one of the requirements for constituting ‘sale’ and in fact that is the measure of tax, normally referred to as “sale price”. Determination of sale price is debatable issue.
Free supply by customer
Sometimes, the buyer supplies certain items like moulds, tools and dies etc. to the supplier. The said supply is for manufacturing goods which are eventually to be sold to the said buyer who has supplied such items. Since such items belong to the buyer, the buyer may be writing off such items in their books of account by way of amortisation (also can be equated with depreciation). For purpose of excise payment such amortisation may be added to the cost of such items supplied by the supplier. However, question arises whether such amount is required to be added in the sale price of the supplier and whether supplier is liable to pay tax on such higher value.
Consideration by the Hon’ble Supreme Court
The Hon’ble Supreme Court had an occasion to deal with such situation in case of Ts Tech Sun (India) Ltd. vs. State of Uttar Pradesh and others (15 VST 559)(SC). The facts as narrated by the Hon’ble Supreme Court in para 11 are as under:
“Department, in this case, has sought to load amortized cost of the moulds supplied by its customer to the sale price of auto components in the hands of the appellant herein. According to the department, under section 4(1) (a) of the 1944 Act, value has to be the normal price, which has to be the sole consideration and if the price fixed is without consideration for the moulds then, according to the department, it cannot be said that price was sole consideration. In other words, according to the department, if the consideration for moulds is not taken into account then under the excise law, price, which is the measure of value, cannot be said to be the sole consideration. According to the department, in this case, price of auto components sold by the appellant was fixed or to be fixed by inter se negotiations. That, without the price of the moulds being taken into account, the price of the finished product would not reflect the real assessable value. According to the department, without the supply of moulds from its customer, final product could not be made. By use of the moulds, the appellant was able to manufacture the auto components. Therefore, according to the department, some money value was required to be attributed on account of usage of moulds as such moulds contributed to the value of the final product, namely, auto components. Therefore, by not taking into account the money value of moulds supplied by the customer, the price stood depressed. In the circumstances, according to the department, amortised cost had to be loaded to the price charged or chargeable by the appellant for the finished products.
On the above case of the department, the question which arises for determination in this civil appeal is whether section 4 of the 1944 Act read with rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (“Excise Valuation Rules, 2000”) can be read into section 3 of the U.P. Trade Tax Act, 1948?”
The Hon’ble Supreme Court thereafter analysed the legal position with reference to Excise law and Sales tax. The relevant observations of Hon’ble Supreme Court are in para 16 as under:
“Before analysing section 3 of the 1948 Act, it is important to keep in mind that in income-tax cases, tax is exigible on “real income” which means the actual income received by or which accrues to the assessee. In case of sales tax, tax is exigible on real price received or receivable by the dealer in respect of a sale. A dealer is entitled to frame his price-structure in a manner conducive to the type of his business or with a view to withstand the competition. In a given case, cost may be more than the price. The dealer may base his price-structure to give an incentive to his clients, agents, distributors, etc., particularly if he is a manufacturer. In such cases, his price-structure has to be scrutinised by the department under the sales tax law to find out the real sale price receivable by him. There may be cases where he is required to give a discount on account of defect in quality or delay. The important thing to be noted is that “price” is the amount of consideration which a seller charges the buyer for parting with the title to the goods. It comprises of the amount which the dealer himself has to pay for the purchase of the goods, the expenditure, which he is to incur for transporting the goods from the place of purchase to the place of sale, the duties, if any, levied on the particular goods bought by him, the octroi duty, which he may have had to pay and his own margin of profit after meeting handling charges including interest on the capital invested. The cost price of the goods actually paid by him under various heads of accounts would no doubt constitute the consideration for which he would part with his title to the goods. The entire amount of consideration, including the sales tax component, which the purchaser pays, would constitute the price of goods. To this extent, there is no difficulty. The difficulty comes in when by law or by legal fiction the department seeks to introduce a notional concept as an element of the “real price”. This is particularly important when there is no rule to that effect in the sales tax law. Even under the definition of “turnover” in section 2(i) one has to take into account only the aggregate amount for which goods are bought or sold. It is this aggregate amount which is taxable under section 3 read with section 2(i) of the 1948 Act.”
Accordingly, the Hon’ble Supreme Court has drawn the conclusion in para 19 as under:
“U.P. Trade Tax Act, 1948 is a self-contained code for levy of tax on sale or purchase of goods in Uttar Pradesh. Clause (bb) of section 2 defines the expression “trade tax” to mean a tax payable under the Act. Clause (h) of section 2 defines the expression “sale” to include transfer of the right to use any goods for any purpose for cash or deferred payment or other valuable with section 3F of the 1948 Act. Section 3, inter alia, provides that every dealer shall for each assessment year pay a tax at the rates provided under section 3A, section 3D or section 3H on his turnover of sales or purchases or both, as the case may be, which shall be determined in such manner as may be prescribed. Section 3F provides for tax on transfer of right to use any goods or goods involved in execution of works contract. The definition of “sale” in section 2(h) is in two parts. The first part covers the normal sale and the second part covers deemed sales. In the present case, we are concerned with sale of auto components to the buyer. It is a normal sale. The aggregate amount for which these auto parts/components are sold constitutes the turnover relating to such sales within the meaning of turnover in section 2(i). Therefore, it is on such turnover that liability of tax under section 3 of the 1948 Act has to be determined. Therefore, sales tax or trade tax under the 1948 Act is leviable on sale, whether actual or deemed, and for every sale there has to be a consideration. On the other hand, excise duty is a levy on a taxable event of “manufacture” and it is calculated on the “value” of manufactured goods. Excise duty is not concerned with ownership or sale. The liability under the excise law is event-based and irrespective of whether the goods are sold or captively consumed. Under the excise law, the liability is there even when the manufacturer is not the owner of raw material or finished goods (as in the case of job workers). Excise duty, therefore, is independent of ownership (see: Ujagar Prints vs. Union of India [1989] 3 SCC 488(1)). Therefore, for sales tax purposes, what has to be taken into account is the consideration for transfer of property in goods from the seller to the buyer. For this purpose, tax is to be levied on the agreed consideration for transfer of property in the goods and in such a case cost of manufacture is irrelevant. As compared to the sales tax law, the scheme of levy of excise duty is totally different. For excise duty purposes, transfer of property in goods or ownership is irrelevant. As stated, excise duty is a duty on manufacture. The provisions relating to measure (section 4 of 1944 Act read with the Excise Valuation Rules, 2000) aim at taking into consideration all items of costs of manufacture and all expenses which lead to value addition to be taken into account and for that purpose rule 6 makes a deeming provision by providing for notional additions.
Such deeming fictions and notional additions in excise law are totally irrelevant for sales tax purposes. Therefore, in any event, these notional additions cannot be read into clause 5.1 and clause 5.2 of the general agreement for purchase of parts dated July 31, 1997.”
Conclusion
Thus, the legal position that gets settled is that for sales tax purpose the parameters about ‘sale price’ are different. it is the actual amount, received from the buyer, that is relevant and not the notional value, if any. There may be number of such similar situations like supply of parts to be incorporated in the goods to be ultimately supplied to the buyers. In such cases also the value of such parts may be considered for levy of excise duty, but it cannot form part of sale price for sales tax purpose, as there is no receipt of such notional value from buyer. The above judgment will, therefore, serve as a good indicator for deciding the ‘sale price’.
