By G. G. Goyal | Chartered Accountant
C. B. Thakar | Advocate
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The issue whether transfer of goods from head office to a branch office is a branch transfer or inter- State sale is always highly debatable. As per section 6A(1) of the CST Act, 1956, when the transfer is not pursuant to a pre-existing contract of sale, it will amount to a branch transfer. However, whether the movement from head office to a branch or from one branch to another branch in another State is due to the pre-existing sale contract or not is a contentious issue and has to be decided on facts of the case. There are number of judgments, which throw light on the above subject.
Branch transfer of goods can be of two types, (a) finished goods and (b) intermediatory goods. In case of finished goods, there can be factual position that the goods have been moved because of a pre-existing sale order and hence it may amount to inter-State sale. However, in respect of intermediatory goods like parts and components, the situation may be different. Some aspects about transfer of components and parts can be examined as under:
Reference can be made to judgment of the Andhra Pradesh High Court in the case of Bharat Electronics Ltd. v. Deputy Commissioner (CT), No. II Division, Vijayawada & Another, (46 VST 179) (AP). The facts in this case are that the unit of the above appellant dealer at Machilipatnam in Andhra Pradesh dispatched certain materials to its branch in another State. The goods dispatched were manufactured goods at Machilipatnam, like night-vision devices, etc. The said goods were to be incorporated in the equipment manufactured at the branch in another State (where the goods were dispatched) and the finished goods were supplied by that branch to the customer. On the sale of finished goods, tax was discharged in the said State of sale. However, the Andhra Pradesh authorities disallowed branch transfer claim on the ground that such transfer was connected with pre-existing sale order and hence it G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT was inter-State sale. The issue was contested before the Andhra Pradesh High Court.
The High Court examined the nature of inter-State sale and its requirements. The High Court referred to observations in the case of K.C.P. Ltd. (Ramakrishna Cements) 1993 (88 STC 374) (AP) and reproduced following portion:
“that the company may have several units or divisions located at different places engaged either in the same line of manufacture or trading or in different manufacturing or trading activities. Normally, the units or divisions will have no separate identity of their own, much less a distinct legal entity. There may be separate establishments, separate planning and separate management, but these aspects by themselves do not detract from the basic characteristic of communion with the corporate body that had created these units or divisions. They can claim no independent existence apart from the company itself. The property of these units or divisions is legally held by the company. The profits generated by the units formed part of the company’s income and would go to the benefit of the general body of shareholders of the company. So also, the liabilities or losses incurred by the individual units, in the ultimate analysis, would have to be borne by the company. It was the company that could sue for the recovery of property or dues or be used for the outstandings due on account of dealing of the units. A single balance sheet was prepared by the company in respect of all the units and divisions owned and controlled by the company . . . .”
The Andhra Pradesh High Court also referred to law laid down by the Supreme Court in the case of Bharat Heavy Electricals Ltd. (102 STC 345) (SC) and reproduced the following observations:
“The Tribunal missed to note that the plant and equipment which is the subject-matter of contract such as boiler package or turbo-generator package is incapable of being manufactured and despatched as a finished unit. Necessarily, the equipment/components or assembled units have to be despatched to the customer’s site and installed there. The contract does not contemplate the dispatch of a readymade finished product to the customer’s place for instantaneous use in the power-plants, etc. On the other hand, it is clear from the terms of the contract, especially the price payment clause, that the components and parts forming part of the larger package should be supplied from time to time by BHEL. It is not at all possible to transfer the finished product such as ‘boiler package’ at a time. It may be noticed that the Tribunal itself has given a different reasoning for excluding the inter-unit transfers from the taxable net at paragraph 29, sub para 3. The Tribunal rightly puts it on the ground that the article transferred from the petitioner unit to the executing unit (Trichy, etc.) loses its identity as it is incorporated into a larger component or equipment. There is yet another closely allied reasoning to say that the goods sent to Trichy or other executing unit does not stand on the same footing as those sent direct to the customer’s site. In the case of the former, there is interruption of movement and the snapping of inextricable bond that should exist between the inter-State movement and the contract of sale. In regard to the goods sent to Trichy unit (or other executing units), the dispatch therefrom to inter-State customer takes place after assembling or processing and it is the sole concern of that unit. Trichy unit can even retain the goods for itself and divert them for any other use. There is nothing to indicate that the goods sent by Hyderabad unit to Trichy or other units are earmarked for any particular contract. The Hyderabad unit had no inkling of their ultimate utilisation and whether, how and when the goods will be moved to the customer’s place by Trichy unit. As far as Hyderabad unit is concerned, it is a case of pure and simple stock transfer to another unit under ‘F’ forms. At best, the inter-State movement, or to put it in other words, the inter-unit movement to Trichy can only be said to be for the purpose of fulfilling the contract, but not in the course of fulfilment of the contract of sale, a distinction recognised in the Tata Engineering & Locomotive Co.’s case (1971) 27 STC 127 (SC); AIR 1971 SC 477; (1971) 2 SCR 849. The movement to Trichy in our opinion is not a necessary consequence of the contract, nor is it incidental to the contract that goods of this nature should first be moved to Trichy. As already observed, there is no inextricable and uninterrupted bond between the contract and the movement of goods to Trichy or other sister units of the petitioner.”
After noting the above legal position, the High Court observed as under about the facts of the particular case before it:
“It is only if the goods, which move from one State to another, are sold as they are and are not incorporated in, or do not form part of, other goods would the question of such transfer of goods attracting levy of tax under the CST Act, as an inter-State sale, arise. It is not in dispute that the goods supplied by the Machilipatnam unit, to other units of BEL located outside the State, are merely components of, and are incorporated in, the goods manufactured by other units of the petitioner company locate outside the State of A.P., and the goods transferred by the Machilipatnam unit are not sold to the Armed Forces as they are. The transfer of goods by the Machilipatnam unit, to other units of the petitioner-company located outside the State, fall within the ambit of section 6A(1) of the CST Act, and are not inter-State sales exigible to tax u/s.6 of the Act. The order of the first respondent, holding that the transfer of such components by the Machilipatnam unit to other units of the petitioner-company situated outside the State constitutes inter-State sales under the CST Act, must therefore be quashed.”
Thus, the legal position emerges is that if the goods transferred are supplied as it is to the customer and link between transfer and such sale is established, then it may amount to inter -State sale from the moving State. However, if the transfer is of components and parts, then even if they are in relation to pre-existing order of finished goods in which such parts and components are to be incorporated, there is no possibility of inter-State sale of such parts and components from the moving State. This also clarifies the position that the movement should be linked with the ultimate goods to be supplied to the customer and not with the intermediatory goods which may be incorporated in the ultimate goods to be supplied. This judgment will certainly be a guiding judgment on the above-referred issue.
