Under the Sales Tax Law, transaction of sale can be taxed as per sale price of that transaction.
A ‘sale’ can take place if the transaction fulfills certain criteria. The term ‘sale’ is defined in Sales Tax Laws and it has also been defined in (MVAT Act,2002). The said definition is given in section 2(24) of MVAT Act,2002 and it is reproduced below for ready reference.
“(24) “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration hut does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly;…”
The transaction, to be ‘sale’, should be for consideration.
The above term ‘sale’ has also been subject matter of interpretation by various courts. A reference can be made to the landmark judgment in case of Gannon Dunkerly and Co.(9 STC 353)(SC). In this judgment about ‘sale’, it is observed as under:
“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 the above passage, it is clear that to be a ‘sale’ following criteria should be fulfilled.
(i) There should be two parties to contract i.e. seller/ purchaser,
(ii) The subject matter of sale is moveable goods,
(iii) There must be money consideration and
(iv) Transfer of property i.e. transfer of ownership from seller to purchaser.
Thus, to consider the transaction as ‘sale’, consideration in money terms is necessary. Without consideration, no sale can take place.
In number of cases, the customer i.e. buyer may supply certain goods to its vendor which are to be incorporated in the finished goods to be supplied by vendor to the said buyer. Similarly there may be cases, where contractee may be supplying some goods to be used in contract to be executed for it by contractor appointed by it. Both above issues are common and the tax position of same can be analysed as under:
The supply of such goods by buyer to the vendor will be free supply, as it is to be incorporated in goods to be supplied to it. It is also possible that for the purpose of Excise etc. the vendor may be required to include value of such goods in its sale price and after calculating Excise on such total value, the value of free supply by buyer will be deducted again and in fact the net amount is only charged to the buyer.
The issue arises whether such value of free supply is part of sale price of vendor for which it will be required to discharge sales tax on the same.
There is a be possibility of considering above value as sale price, if, first there is sale by buyer of said goods to the vendor and thereafter vendor again selling the said goods along with its finished goods to the buyer. Therefore, it will be required to be seen whether there is sale by buyer of the free supply made by it to the vendor.
There are instances where supply made by customer to supplier has been considered as sale and accordingly liable to tax in the hands of customer as well as supplier. Reference can be made to the judgment of Supreme Court in case of M/s. N. M. Goel (72 STC 368)(SC). In this case, the facts were that the contractee has given certain materials to contractor for use in the contract executed for the said contractee. As per terms in contract the goods to be supplied were to be valued as per the prices mentioned in the contract. It is under the above circumstances, the Supreme Court held that the transaction of supply of goods by contractee fulfills the requirements of a transaction being ‘sale’. There are two parties i.e. contractee and contractor, supply of moveable goods and consideration. The Supreme Court also held that when the possession of the goods is given to the contractor there is transfer of property and hence, the sale transaction from contractee to contractor gets complete. The Supreme Court further held that when contractor uses these goods in the contract for contractee, there is again fresh transfer of property from contractor to contractee and hence one more sale transaction from contractor to contractee. In fact, the Supreme Court has noted facts of case as under.
“The appellant, a dealer registered under the Madhya Pradesh General Sales Tax Act, 1958, made an item rate tender to the PWD for construction of food grain godowns and ancillary buildings. In that tender, prices of the materials used for the construction including cost of iron, steel and cement were included. The PWD had, however, agreed to supply from its stores the iron, steel and cement and to deduct the prices of the materials so supplied and consumed in the construction, from the final bill of the appellant. Clause (10) of the contract provided: “. . . . . if it is required that the contractor shall use certain stores to be provided by the Engineer-in-Charge as shown in the Schedule of materials hereto annexed, the contractor shall be bound to procure and shall be supplied such material and stores as are from time to time required to be used by him for the purposes of the contract only, and the value of the full quantity of materials and stores supplied at the rates specified in the said Schedule of materials may be set-off or deducted from any sums then due or thereafter to become due to the contractor under the contract or otherwise, or against or from the security deposit, or the proceeds or sale thereof if the same is held in Government securities, the same or a sufficient portion thereof being in this case sold for the purpose. All the materials so supplied to the contractor shall remain the absolute property of the Government and shall not be removed on any account from the site of the work, and shall be at all times open to inspection by the Engineer-in- Charge.” For the construction, the appellant was supplied iron, steel and cement by the PWD and the appellant purchased other materials from the market. The prices of iron, steel and cement supplied to the appellant for the work were deducted from its final bill. The Sales Tax Officer assessed the appellant to entry tax for iron, steel and cement u/s. 6(c) of the Madhya Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976, on the ground that their entry had been effected by the PWD, which was not a registered dealer, at the instance of the appellant, because the appellant had ultimately used the materials for the construction work; and the Deputy Commissioner affirmed the assessments on revision. A writ petition filed by the appellant challenging the assessments to entry tax was dismissed by the High Court. On appeal to the Supreme Court:
Based on the above, the Supreme Court has held as under:
“On these set of facts, while dismissing the appeal, (i) that since the PWD was not a registered dealer the presumption u/s. 6(c) applied, that the entry of the goods had been effected by the appellant into the local area before they were purchased by the appellant; that in order to attract entry tax not only the property in the goods had to pass from the PWD to the appellant but there had to be an independent contract-separate and distinct-apart from the mere passing of the property: mere passing of property from the PWD to the appellant would not suffice; that, in this case, for the performance of the contract, the appellant was bound to procure the materials; but in order to ensure that quality materials were procured, the PWD undertook to supply such materials and stores as from time to time were required by the appellant to be used for the purpose of performing the contract only. The value of such quantity of materials and stores so supplied was specified at a rate and got set-off or deducted from any sum due or to become due thereafter to the appellant. Clause (10) of the contract read in proper light indicated that a sale inhered from the transaction. By the use or consumption of materials in the work of construction, there was passing of the property in the goods to the appellant from the PWD. By appropriation and by the agreement, there was a sale from the PWD to the appellant as envisaged in terms of clause (10); and that, therefore, the appellant was liable to pay entry tax on the materials supplied by the PWD.”
Based on above judgment of Supreme Court there are number of other judgments where the supply of goods by contractee to contractor has been held as ‘sale’, if such supply is against pre agreed price. In such cases, normally the contractor bills for gross value and gives deduction for the material value as arrived at as per the prices agreed and claims net amount from the contractee. Thus, if such is the mode of billing by the contractor it gives sufficient indication that the supply by the contractee is as per agreed price and hence will be considered to be ‘sale’. In such cases, even if, the supply is referred to as free supply, it will be a misnomer and in reality it will be a ‘sale’ from contractee to contractor and again from contractor to contractee.
However, if there is no such situation i.e. no prices are given for the materials supplied by contractee/buyer as well as no deduction for any value for same is made in the bills of contractor, then there is no sale/purchase of such materials. This position is also clear from judgment of the Hon. Tribunal in case of CIDCO Ltd. (M.A. No.122 of 2005 in S.A. no. 1707 of 1999 DT.6.10.2007).
In this case, the appellant has purchased cement from other state and given free to contractor. In assessment, tax was levied but in first appeal the same was deleted. When the appellant was in second appeal, the Department filed Misc. Application for levy of the tax on cement. The Hon. Tribunal held that when the supply is free of cost there is no question of levy and the Misc. Appl. was rejected. This covers up the legal position. The net result is that if in the contract there are no terms giving price to the goods to be supplied to contractor, and accordingly the same is also not considered in the bills prepared by the contractor, there is no question of any sale transaction involved in such supply. In other words, there is no question of attraction of any tax under Sales Tax Laws on such free supply on either side.
The other situation is consideration of value of such supply for Excise purpose.
For purpose of paying Excise duty the vendor may consider the value of goods supplied by buyer and may be mentioned on the invoice also.
However mentioning the value of goods for payment of Excise duty cannot amount to sale/purchase and cannot bring it in fold of sale price/purchase price.
This position is clear from judgment of the Hon. Tribunal in case of Ghadge Patil Ind. Ltd. & others (S. A. 320 to 327 of 2002 dt.30.3.2007). The short gist of judgment is as under:
The facts of the case relating to year 1994-95 and others are that appellant received an order for supply of certain manufactured parts. The buyer gave certain parts as free issue to be incorporated in the manufactured goods. In purchase order there was no term about creditor particular price to be considered for the said free issues. In its sale bill appellant added the cost of such free issues in his price to calculate excise duty. The cost so added was then given deduction. On above facts lower authorities considered the cost of such supplies as part of sale price and levied tax on the same. Before the Tribunal, appellant explained the facts. The Tribunal observed that in this case the supplies are not made with any particular consideration. There was no intention on part of buyer or seller to sale/ purchase above goods nor agreed for any consideration. Therefore, there cannot be sale from appellant to buyer. The addition in price was with sole purpose of calculating duty, as it was attracted even on free supply cost, as per Excise laws. The Tribunal distinguished the judgment in case of N. M. Goyal (72 STC 368) on above facts. The Tribunal made reference to judgment in case of Gannon Dunkerley & Co. (9 STC 353), Indian Coffee & Tea Distributors Co. (6 STC 47), Indian Alluminium Cables (115 STC 161), Hindustan Aeronautical Ltd. (55 STC 314) and Auto Comp Corpn. (S.A.1083 of 99 dt.26.9.2003). The Tribunal directed to delete the addition.
Thus, it is held that for considering the free supply value as sale/purchase there should be conscious decision on the same which can be ascertained from the fact of giving prices for such supply and billing mode by supplier. Simply mentioning value for Excise duty calculation cannot make it sale/purchase, and cannot be part of price of transaction, nor can it be included in sale price.
Conclusion
Whether free supply by buyer/contractee to the vendor/ contractor will amount to sale/purchase depends upon intention of the parties coupled with underlying documents. To make the intention clear, in documents it should be specifically mentioned that the supply is free to the vendor but the value may be considered for excise payment. If the documents are not clear, then the dispute may arise and the sales tax department will certainly try to claim tax on the same.
