Branch transfer vis-à-vis dispatch against estimated demand Introduction

It is possible that in respect of standard goods, the dealer may receive tentative requirement for future period. These documents are normally referred to as rate contracts. The dealer stocks the goods in respective states and gives delivery upon receiving concrete delivery requirement. So, actual ascertainment takes place in such state. However, the dealers while sending the goods in lots, may refer to number of orders received as rate contracts. There are judgments on both the sides stating that such a transaction may or may not amount to branch transfer. Hon’ble Maharashtra Sales Tax Tribunal has recently decided such issue in the case of M/s. Ina Bearing India Pvt. Ltd. vs. State of Maharashtra (VAT APPEAL No.20 of 2010, dated 25/2/2014). The brief facts, as narrated in the judgment are as under;

(I) The appellant regularly transferred the finished goods from its Talegaon factory to the branches at Gurgaon in the state of Haryana and at Hosur in the state of Tamilnadu, where the stock of goods was maintained for local as well as inter-state sales. All the branch transfers were declared while filing the returns under the CST Act. The appellant had maintained proper records of all branch transfers such as excise invoices, lorry receipts, etc. The appellant had received all the declarations in Form-F from the branches in respect of the transfer made to the branches.

(II) The purpose for which these branches were opened is as follows :- (a) The customer industries did not want to pile up inventory at their end and wanted the suppliers to deliver the goods to them on daily basis. Therefore, the appellant was compelled to open godowns near to the production base of the customer. In these godowns, they had to keep inventory based on the estimate/ expectation of orders from the customers so that on receipt of customer’s delivery schedule, it could supply goods promptly at a short notice. This required stock transfers to branches in a big way. (b) The customer gave his tentative requirement of quantities based on his planned production programme. The customer was at liberty to alter its sourcing pattern and delivery schedule without any liability on itself and therefore, though the supplier undertook production and transfers goods to his godown/branch, it was still not sure of the time when the customers will actually lift such goods. It can be on the next day of arrival of goods at the branch or it can be even after three months or so. This uncertainty of final sales to the customer made it necessary for the appellant to have the goods in stock in the godowns at the branches for meeting the delivery schedule decided by the customer.

(III) The appellant effected the transfers of bearings to its branches and sales of bearing so transferred at branches as follows:-(a)The appellant made planning and production plan based on the market forecast for short/medium term demand for about two or three years. The estimates of market requirements for next six to twelve months based on the trend analysis were used for monthly production plan. The production planning, therefore, started much in advance and at the beginning stage of production planning, the appellant had no idea of customers’ orders. (b)The appellant manufactured according to international standards. These standards specified the outer and internal diameters of the bearing as well as its width or thickness. These basic dimensions and feature remained valid all over the world and the product had very wide range of applications. There were various manufacturers of a single type of bearing and the customer was at liberty to purchase from any of them. In a few cases, such standard products were made more suitable for a range of application as needed by customers and such differentials were denoted by suffix or prefix with the basic bearing number. Even in such cases, basic dimension and technical features remained as per the international standards. Bearings produced by the appellant could be sold anywhere in India to any branch /any dealer/customer depending on his requirements. (c) The appellant sent the goods to its own branch in big lots under the cover of branch transfer note and lorry receipts which were made out in the name of branch after payment of applicable excise duty. (d) The branch had to maintain sufficient stock of all the varieties of bearings, which would possibly be required by the customer. Till the customer approached the branch for purchase of goods, the branch or the appellant had no information about customer’s exact order with quantities and delivery schedules. (e) The branch office sold the goods to customer from its stock on hand as and when required against the customer order/schedule, under the cover of sales invoice. The branch charges applicable local sales tax of the respective State in the sales invoice. The branch issued excise invoice to its buyer so that the buyer got the credit of excise duty paid at the time of branch transfer from its manufacturing unit at Talegaon in Pune District. (f) The appellant, after transferring the goods to branches in the State, as above, had affected local as well as interstate sales at the branches and had paid the local tax and central sales tax in the respective States. The appellant had been assessed for Gurgaon branch in Haryana for the Financial Year 2006-2007 and for the Hosur branch in Tamil Nadu for the Financial Year 2004-2005.

Based on above facts, the assessing authority observed as under and considered the transfers as interstate sales.

“The goods are dispatched against the firm purchase orders from the customers outside the State of Maharashtra. On the dispatch documents the customer’s part number is mentioned. Specific goods are meant for specific customers. The dispatch and the sale are so related that the contract of sale could not be executed without dispatching the goods from the State of Maharashtra. The dispatches from the State of Maharashtra are for sale to the outside customers. Thus, the claim of the dealer that the dispatch is otherwise than by way of sale cannot be entertained in view of the clear facts and circumstances of the case and also having regard to the law well settled in this regard at the level of the Apex Court of India.”

The Hon’ble Tribunal after discussing the issue, made following observations;

“(iv) The appellant has also furnished before us a copy of purchase order placed by m/s. maruti udyog limited, Gurgaon at page no.62 of the compilation, a copy of purchase order amendment by m/s. maruti udyog limited at page no.63 of the compilation, the copies of delivery schedule placed by m/s. maruti udyog limited, Gurgaon placed at page nos.64 to 67 of the compilation, the copies of sales/excise invoices raised by the appellant’s Gurgaon branch on m/s. maruti udyog limited, placed at page nos. 68 to 83 of the compilation, the copies of stock transfer invoices with the copies of lorry receipts placed at page nos.84 to 87 of the compilation and a copy of finished goods stock register placed at page nos. 88 to 121 of the compilation. The details necessary for the purpose of appreciation of the issue as culled out of the documents are as follows;

A perusal of documents namely purchase order, stock transfer invoices, excise invoices being sale invoices raised by the appellant’s Gurgaon branch on the customer m/s. maruti udyog limited, Gurgaon shows that all the sales effected to m/s. maruti udyog limited, Gurgaon, pertains to the purchase order no.1306582 placed by m/s. maruti udyog  limited,  Gurgaon  on  11/10/2003.  this  is  clear from a copy of delivery schedule which is furnished to us. though there are subsequent amendment to the purchase order, the original purchase order is of 11/10/2003. all these stock transfers are affected subsequent to the said purchase order. these transfers can be said to be pursuant to the purchase order with a view to ensuring delivery of the  goods  to  the  customer  m/s.  maruti  udyog  limited, Gurgaon. the transfers are pursuant to the purchase orders and the goods are delivered subsequently. The impugned transactions, therefore, effected by the appellant to m/s. maruti udyog limited, Gurgaon, by raising sales invoices by Gurgaon branch are interstate sales. the appellant has not furnished before us the documents namely copies of sales invoices in respect of sales affected from 07/04/2006 onwards  till  31/03/2007  to  m/s.  maruti  udyog  limited. Hence, we are unable to draw any inference in respect of the transactions effected from 07/04/2006 onwards.

(v) Excise invoice dt.30/05/2006 issued by the appellant’s branch at hosur to m/s.tVs motors Co. ltd. in respect of sales of 5600 bearings refers to the purchase order no.100242  placed  by  tVs  motors  on  the  appellant’s branch. the purchase order shows that it is of 31/10/2002, valid for the period 31/10/2002 to 31/03/2015. it is for the goods of the description, “n8010170-roller assy rocker”. the  excise  invoice  dt.30/05/2006  also  refers  to  the corresponding stock transfer/excise invoices nos.400468 dt.28/05/2006 and 400478 dt.27/05/2006 issued by the appellant at pune to its hosur branch. one can infer that the sales of bearings, effected by hosur branch under invoice dt.30/05/2006 are in compliance with the purchase order dt.31/03/2002, which were received by the branch under stock invoice/excise invoice dt.28/05/2006 and 27/05/2006 issued by the appellant’s branch at pune. the movement of the goods effected by the appellant’s branch at pune to its branch at hosur in tamil nadu under the above stock transfer invoices and sold subsequently pursuant to the order dt.31/10/2002 can be said to have been occasioned pursuant to the earlier purchase order dt.31/10/2002 and are therefore interstate sales.” hon’ble tribunal also referred to following judgments;

a)    Union of india and another V/s. K.G.Khosla and Co. ltd.  (43 stC 457)
b)    Sahney steel and press Works ltd. and another V/s. Commercial Tax Officer And Others (60 STC 301),
c)    Hyderabad engineering industries V/s. state of andhra pradesh (39 Vst 257)
d)    Tata  engineering  and  locomotive  Co.  ltd.  V/s. assistant    Commissioner    of    Commercial   taxes, jamshedpur and another        (26   stC   354),   and from this judgment, following para is also reproduced.

“Instead of looking into each transaction in order to find out whether a completed contract of sale had taken place, which could be brought to tax only if the movement of vehicles  from  jamshedpur  had  been  occasioned  under a covenant or incident of that contract, the assistant Commissioner wrongly based his order on mere generalities. the assistant Commissioner, on whom the duty lay of assessing the tax in accordance with law, was bound to examine each individual transaction and then decide whether it constituted an inter-state sale exigible to tax under the provisions of the act”.

Thus,  the  hon’ble tribunal  considered  such  dispatches as interstate sales. however, it also observed that each transaction is required to be examined separately and therefore, remanded the matter back to lower authority.

Conclusion
Such an uncertain position may cause several difficulties for dealers. against estimated requirements, the dealers are required to stock the goods in other states.   There may be reference to the documents for such estimated requirements and even for logistic purposes, there may be reference of such numbers on dispatch documents. however, there are a number of factors on account of which goods are not sold or are sold after long interval. There is no firm order in advance. The actual sale takes place only when ascertainment is done after receipt of firm requirement from the buyer. Therefore, merely because the purchase order number is quoted, it cannot be said that there is firm order. Therefore, there is certainly the other view that such dispatches cannot be considered as interstate sales. however, these are all judgment based facts and dealers are required to take proper precaution in such kind of transactions.