A debatable issue arises about nature of transaction of dispatch of goods from one branch to another branch in other state. If the dispatch amounts to Branch transfer, the sale by branch to customer will be local sale.
On the other hand if the dispatch is not considered as branch transfer it will amount to inter-State sale from the moving state. To decide the nature of movement, whether inter-State sale or branch transfer, reference is required to be made to CST Act, 1956.
Under CST Act the nature of inter-State sale transaction is defined. Therefore, if the transaction falls into said definition, it will be inter-State and if not covered by the said definition, it will be a local sale. The definition of the inter-State sale is given in S. 3 of the CST Act, 1956. The said section is reproduced below for ready reference:
“A sale or purchase of goods shall be deemed to take place in the course of interstate trade or commerce if the sale or purchase –
a) occasions the movement of goods from one State to another; or
b) is effected by a transfer of documents of title to the goods during their movement from one State to another.”
It can be seen that if there is movement of goods from one state to another state because of sale, such sale will be inter-State sale. There is no condition that the clause for movement from one state to another state should be expressly provided in the sale agreement. In other words, even if the implied link between the movement and sale is established, it will be inter-State sale.
On the other hand, if the movement of goods from one state to another state is without reference to any pre-existing sale, it will not be an inter-State sale.
The cases of inter-State sales vis-a-vis branch transfers are required to be seen in light of above legal position. The branch and the head office or other branch in other State, are one and the same entity. Therefore, when a branch in one State transfers goods to branch in other State, there can be two situations: First, the branch in one State may be
transferring goods to branch in other State without reference to any particular sale agreement etc. in the transferee State. In other situation, the branch in transferee State may have pre-committed sale agreement and the branch in transferring State may be sending the goods to the branch in pursuance of said agreement. The receiving branch may thereafter deliver the goods to the customer. In this case also, though the delivery is to a branch, the transaction will be considered as an inter-State sale. In short, if there is nexus between dispatch from one State and sale in other State, such sale will be in the category of inter-State sale.
There are number of judicial pronouncements deciding nature of transactions. Reference can be made to following few important judgments:
Nivea Time (108 STC 6) (Born.)
The observations of the Bombay High Court on nature of interstate sale are as under:
“8. S. 3 of the Central Sales Tax Act, 1956 lays down when a sale or purchase of goods is said to take place in the course of interstate trade or commerce. It says:
‘A sale or purchase of goods shall be deemed to take place in the course of interstate trade or commerce if the sale or purchase –
c) occasions the movement of goods from one State to another; or
d) is effected by a transfer of documents of title to the goods during their movement from one State to another.’
In this case, we are concerned with sale or purchase falling under clause (a).
9. It is well-settled by now by a catena of decisions of the Supreme Court that a sale can be said to have taken place in the course of inter-State trade under clause (a) of S. 3, if it can be shown that the sale has occasioned the movement of goods from one State to another. A sale in the course of inter-State trade has three essentials: (i) there must be a sale; (ii) the goods must actually be moved from one State to another; and (iii) the sale and movement of the goods must be part the same transaction. The words ‘occasions’ is used as a verb and means to cause to be the immediate cause of. There must exist a direct nexus between the sale and the movement of the goods from one State to another. In other words, the movement should be an incident of and necessitated by the contract of sale and be inter-linked with the sale of goods. [See Kelvinator of India Ltd. v. State of Haryana, (1973) 32 STC 629 (SC)]. It is not necessary for a sale to be an interstate sale that the covenant regarding inter-State movement must be specified in the contract itself. It would be enough if the movement was ‘in pursuance of’ or ‘incidental to’ the contract of sale. Similarly, if the movement of goods is the result of contract and is an incident to the agreement between the parties, the transaction will remain an inter-State one no matter in which State the delivery of goods is taken by the purchaser. In other words, the question whether it is an inter-State sale or intra state sale, does not depend upon the circumstances as to in which state the property in the goods passes. It may pass in either State and yet the sale can be an inter-State sale. What is decisive is whether the sale is one which occasions the movement of goods from one State to another.”
English Electric Company of India Ltd. v. Deputy Commercial Tax Officer, (1976) (38 STC 475) (SC)
In this case, it was observed by Supreme Court as under:
“When the movement of goods from one State to another is an incident of the contract it is a sale in the course of inter-State sale. It does not matter in which State the property in the goods passes. What is decisive is whether the sale is one which occasions the movement of goods from one State to another. The interstate movement must be the result of a covenant, express or implied, in the contract of sale or an incident of the contract. It is not necessary that the sale must precede the interstate movement in order that the sale may be deemed to have occasioned such movement. It is also not necessary for a sale to be deemed to have taken place in the course of inter-State trade or commerce, that the covenant regarding inter-State movement must be specified in the contract itself. It will be enough if the movement is in pursuance of and incidental to the contract of sale.”
It was further observed:
…… If there is a conceivable link between the movement of the goods and the buyer’s contract, and if in the course of inter-State movement the goods move only to reach the buyer in satisfaction of his contract of purchase and such a nexus is otherwise inexplicable, then the sale or purchase of the specific or ascertained goods ought to be deemed to have taken place in the course of inter-State trade or commerce as such a sale or purchase occasioned the movement of the goods from one State to another . . . .
Cheeseborough Pond’s Inc. v. State of Tamil Nadu (52 STC 164)
The short gist of the judgment is as under:
The assessee was a manufacturer and dealer in face powder, having its head office and manufacturing unit at Madras and branches at Bombay and other places. A department of the Government of India, known as Canteen Stores Department which was part of the Defence Ministry, placed orders for the purchase of the goods manufactured by the assessee with the Bombay branch of the assessee. The orders, when received by the Bombay branch, were forwarded by that branch to the head office at Madras. The head office then consigned the goods by lorry to the Bombay branch warehouse, mentioning in the lorry way-bill that the goods had been dispatched against orders passed by the Canteen Stores Department. When the goods reached Bombay, these were cleared by the Bombay branch and immediately supplied to the Canteen Stores Department, after raising invoices in terms of the orders already placed. The assessing authorities as well as the Tribunal rejected the assessee’s contention that the transactions could not be regarded as sales in the course of inter-State trade, chargeable to tax u/s.3(a) of the Central Sales Tax Act, 1956. On revision, the assessee contended that the goods moved from Madras to Bombay in what was described as stock transfers and that the Canteen Stores Department placed the orders not with the head office at Madras direct, but only with the Bombay branch:
Madras High Court held,
i) that if all that the stock transfers evidenced was displacement of goods from a head office to a branch, then there would be no difficulty at all in accepting the contention that there was no inter-State sale for the simple reason that the transfers from Madras to Bombay involved no sale at all; but as found by the Tribunal, the stock transfer notes relied on by the assessee themselves clearly referred to the particular orders placed by the Canteen Stores Department with the Bombay branch of the assessee against which the goods were sent in the particular consignment or consignments, by lorry. It was, therefore, not accurate to describe the movements of the goods as inter-office, or non-sale, consignments from the head office to a branch;
ii) that the fact that the head office at Madras did not dispatch the goods direct to the Canteen Sores Department which placed the orders, but sent the goods to the Bombay branch from where the goods ultimately found their way to the purchaser did not make any difference to the application of S. 3(a) of the Act. It did not matter how many stop-overs were there in the delivery State before the goods reached the purchaser’s hands. All that mattered was that the movement of the goods was in pursuance of the contract of sale or as a necessary incident to the sale itself; and
iii) that, therefore, the transaction between the assessee and the Canteen Stores Department, Bombay, was an inter-State sale liable to tax.
M/s. Tan India Ltd. v. State of Tamil Nadu, (133 STC 311) (Mad.)
The brief gist of the judgment is as under:
Identifiable ultimate buyers in Kerala State placed specific orders at the dealer’s branch office at Palghat in Kerala. The branch office at
Pal ghat informed the head office at Kumarapalayam in Tamil Nadu about the specific requirements of the ultimate customers in Kerala. It is only on the information so furnished by the branch office, the head office either effected dispatches directly to the ultimate buyers in some transactions or to its branch office in other transactions and thereafter effected delivery to those ultimate buyers. The assessing officer treated the transactions as inter-State sales and also imposed penalty at 150% of the tax due upon the dealer. The Appellate Assistant Commissioner confirmed the same. The Tamil Nadu Sales Tax Appellate Tribunal found some transactions as inter-State sales and other transactions as stock transfer to dealer’s branch. It reduced the penalty to fifty per cent of the tax due. On revision petition both by the dealer and the Revenue:
Madras High Court held, (i) that whether the dispatches were effected from the head office to the ultimate buyers directly at Kerala or whether the deliveries were effected to the ultimate buyers outside the State through the branch make no difference in the eyes of law. The goods moved from the State of Tamil Nadu to the State of Kerala, pursuant to or incident of a contract of sale entered into by the dealer with the identifiable ultimate buyers. Further from the orders placed at the branch located at a different State and the order subsequently having been communicated to the head office in the State of Tamil Nadu, no legal consequence was likely to flow for the simple reason that the head office and the branch office were offices of the same company and they did not possess separate juridical personalities. The movement of goods from the head office was occasioned by the order placed by the customers and was an incident of the contract and therefore from the very beginning from Kumarapalayam in the State of Tamil Nadu, all the way until delivery to customers in Kerala State, it was an inter-State movement. Therefore, the transactions were inter-State sales u/ s.3(a) of the Central Sales Tax Act, 1956. [Sahney Steel and Press Works Ltd. v. Commercial Tax Officer, (1985) 60 STC 301 (SC) followed.]
Thus, the legal position is very clear. If the move-ment from transferring branch is without reference to any pre-existing sale, it will be a case of branch transfer. The sale by transferee branch to customer will be a local sale. On the other hand, if the en-marked (ascertained) goods are sent to branch for a particular customer, it will be an inter-State sale from the transferring branch, whether delivery is given through the transferee branch or directly given by the transferor branch. On the other hand, movement without reference to pre existing sale agree-ment, will amount to branch transfer.
