1970 (1) TMI 72 - HC - VAT and Sales Tax

Summary

Issues:
1. Whether the supply of materials by the assessee to its constituent units for the manufacture of shoes and boots constitutes a sale liable to sales tax under the U.P. Sales Tax Act.

Detailed Analysis:
The judgment of the court pertains to three references concerning the assessment years 1959-60, 1960-61, and 1961-62 involving a central co-operative society engaged in manufacturing and selling shoes. The primary issue revolves around whether the transaction of supplying raw materials by the assessee to its members qualifies as a sale for the purpose of sales tax liability. Initially, the Sales Tax Officer taxed the assessee on the turnover of shoe sales but later contended that the supply of raw materials also constituted a sale, leading to a notice under section 21 of the U.P. Sales Tax Act. The assessee argued that the transaction was not a sale but merely a supply of goods for manufacturing shoes by members on payment of remuneration, a stance rejected by the Sales Tax Officer and subsequent appellate authorities.

The crux of the matter lies in the characterization of the transaction between the assessee and its members. The lower authorities found that the transaction was recorded as a sale in the assessee's books and that the memorandum of association indicated the society's objective to purchase raw materials for sale to its members. However, critical observations were made, such as the absence of instances where members sold raw materials independently or where primary societies sold manufactured shoes to entities other than the assessee. Notably, no direct payment was made by members for the raw materials supplied, with the assessee debiting the exact cost in their accounts. Moreover, the assessee did not profit from these transactions, and the property in the materials seemed to remain with the assessee, indicating a lack of transfer of ownership to the members.

The court delved into the operational framework of the central co-operative society, highlighting its role as a facilitator for members' manufacturing activities rather than engaging in direct sales of raw materials. Emphasis was placed on the remuneration paid to members, suggesting a service-oriented arrangement rather than a sale of goods. Despite the assessee's internal classification of the transaction as a sale, the court emphasized that the legal characterization of a transaction hinges on its substance rather than its labeling. Consequently, the court concluded that the supply of materials to constituent units for shoe manufacturing did not constitute a sale subject to sales tax under the U.P. Sales Tax Act.

In conclusion, the court answered the posed question in the negative, ruling that the transaction in question did not amount to a sale for sales tax purposes. The assessee was awarded costs in each case, with the counsel's fee set at Rs. 100. The reference was resolved accordingly, providing clarity on the tax treatment of the supply of materials within the cooperative framework.