Introduction
Under Central Sales Tax Act, 1956 (CST Act), the transaction of ‘sale’ (inter- state sale) is liable to tax. A transaction of sale becomes inter-state sale, if because of such sale, there is movement of goods from one State to another State. In other words, if there is link between inter-state movement of goods and the pre-agreed sale between the transferor (seller) and the buyer then there will be inter-state sale.
However, there can be inter-state movement of goods (otherwise than an agreement to sale), like; when goods are sent from one branch in one State to another branch in other State of the same entity or to the agent or principal as the case may be (commonly known as ‘consignment transfer/branch transfer’).
There is a lot of litigation about claim of branch transfer vis-à-vis inter-state sale. The transferor branch may be transferring goods to another branch for compliance of requirement of a local customer of the transferee branch. Whether there is conceivable link between dispatch to branch and ultimate sale to the local customer will decide the nature of transaction. If there is conceivable link then the branch transfer will amount to inter-state sale. If there is no such conceivable link, then it will not amount to inter state sale and claim of branch transfer will remain allowable.
Whether there is conceivable link between branch transfer and ultimate sale will depend upon facts of each case. Therefore, there can not be any general ratio for deciding the nature of transaction.
Dispatch of Semi-finished goods
An interesting issue arose before Maharashtra Sales Tax Tribunal (MSTT) in case of Multi Flex Lami Prints Ltd. (Appeal No. 61 of 2008 dated 29.7.2013).
Facts were that the appellant/dealer was engaged in the activity of supply of packaging pouches. The packing pouches were to be supplied to one particular customer and they were printed accordingly as per his specifications. Appellant had manufacturing unit at Mahad in Maharashtra. There, on the raw materials, processes like colour separation, cylinder making, printing and lamination were carried on. After above processes, the processed goods were sent to Silvassa the unit. In the Silvassa unit, processes like slitting and pouching were done. Thereafter the pouches were supplied to the customers.
In the assessment, the branch transfer claim was allowed. However, in revision proceedings, the said claim was disallowed holding that the transfer is interstate sale. The fact of manufacturing the goods as per specification of customer in Mahad and dispatch to Silvassa was considered as the determinative factor for holding the transfer as inter state sale.
Judgment of Hon’ble Tribunal
Before the Hon’ble Tribunal, several arguments about legality of the revision order were taken. However, Hon’ble Tribunal considered the revision action as valid. On merits, Hon’ble Tribunal held that the revision is not correct. The observations of Hon’ble Tribunal are reproduced below:
“It was explained in the said letter that the processes, namely colour separation, cylinder making, printing and lamination had been carried out at the factory in Mahad and thereafter, the laminated films were dispatched to Silvassa Unit of the appellant for further processing such as slitting and pouching. It was then explained by the appellant to the revising Officer that the goods sent to Silvassa Unit were Semi finished goods and thereafter they were slit according to the specification of width given by the customer. The slit films were then stretch-wrapped and packed, which is known as primary packing. The said film rolls were thereafter put in corrugated boxes which are known as secondary packing. It was also explained by the appellant to the revising Officer that in case the customer requires the material in pouch form, the laminated/slitted films is converted into pouches of types/sizes as per specification of the customers and after quality check and packing they are dispatched to the customer. It also appears that it was explained by the appellant to the revising officer that, although the goods become identifiable to a particular customer at the time of leaving Mahad Unit but in a Semi finished condition. It was explained by the appellant that the semi finished goods received by the Silvassa Unit were subjected to further processing of slitting and pouching at Silvassa unit and were thereafter dispatched to the customers at various places outside Silvassa in finished form. It would appear that it was the case of the appellant before the revising officer that the goods sent to the branch were not delivered/ sold as such by the Silvassa branch, but they were different goods from the goods sent to the Silvassa branch. A perusal of revision order shows that the revising officer had not controverted this factual submission of the appellant and thus accepted the contention of the appellant that the goods sent by the appellant to the Silvassa unit were the goods manufactured up to lamination stage and further process such as slitting and pouching were done at Silvassa unit and the goods ultimately delivered to the buyers outside Silvassa were after slitting and pouching made at Silvassa. In support of the claim that slitting and pouching of laminated and printed packaging film amounts to manufacturing activity, the appellant has relied upon the judgment dated 24th September 2012 of the Bombay High Court in Income Tax Appeal No.741 of 2010. The revenue has however relied upon the judgment of the Delhi High Court in the case of Faridabad Iron and Steel Traders Association v/s. Union of India in Civil Writ Petition Nos. 7595 of 2001 and 94 of 2002 decided on 21-11-2003 to support it’s case that slitting of laminated films does not amount to manufacture. The concept of manufacture envisages that the processes to which the goods are subjected to should not only bring about change in the goods but the change should be such that the goods after subjecting to processes emerge as a different commercial commodity. In Faridabad Iron and Steel Traders Association, it was held by the Delhi High Court that mere cutting or slitting of Steel Sheet does not amount to manufacture because the identity of the product remains unchanged. We are of the view that in the context of the facts of the present case it would be most appropriate to decide the issue relying upon the judgment of the Bombay High Court in Income Tax Appeal No.741 of 2010. We agree with the appellant that the nature of goods actually delivered to the buyers by Silvassa unit are different from the goods sent by the appellant’s factory at Mahad to it’s Silvassa Unit. This fact is borne out from the description in the stock transfer invoices raised by the appellant on its Silvassa branch and the sales invoices issued by the Silvassa branch to the buyers.”
It is further observed as under;
“In the present appeal before us, the goods manufactured and ultimately delivered to the customer by the Silvassa branch of the appellant are made as per the specifications of the customer. Manufacturing involves the processes namely, colour separation, Cylinder making, printing, lamination, slitting and pouching. Processes upto lamination stage are done at Mahad factory in Maharashtra. The goods manufactured upto lamination stages are sent to Silvassa branch. But they are not delivered to the customer in the form in which they are received by Silvassa branch because the goods in the form in which they are received by Silvassa branch are not ready to be delivered/sold to the customers as per their requirement/orders. The goods received by Silvassa branch are subjected to further processing of slitting and pouching so as to make them appropriate for delivery to the customer as per his specification. Slitting and pouching is done at Silvassa. Thus, it is clear that the goods delivered by Silvassa branch of the appellant to the customer is a different commercial commodity from the goods sent by Mahad factory of the appellant to Silvassa branch and therefore it is difficult to hold that there is an inter-State sale of the same goods which were manufactured by the Mahad factory of the appellant and dispatched to Silvassa branch. In the case of Bharat Electronics Ltd., (46 VST179), The petitioner had manufactured night vision devices at its Machilipatnam Unit which were transferred to other units of the petitioner outside the State to be incorporated in the equipment to be manufactured at the other units which were eventually sold there from to end customers. It was held by the Andhra Pradesh High Court that it is only if the goods which move from one State to another are sold as they are would the question of such transfer of goods attracting levy of tax under the C.S.T Act as an inter-state sale arise.”
Conclusion
The above judgment will be useful for deciding the nature of transaction, when there is branch transfer of Semi-finished goods. However, the nature of processes carried out at relevant places is also required to be seen before arriving to conclusion. It is expected that above judgment will provide guidelines.
