2011 (7) TMI 1066 - HC - VAT and Sales Tax

Whether the transaction between the company and the agents is an agency agreement whereunder company reimburses purchase cost and expenses and the agents are paid commission? Held that - The goods procured by the agents are only sold to the petitioner against form 25 issued by the petitioner. Though the arrangement is apparently stated as agency, the transactions prove otherwise. The agency arrangement appears to be only a scheme for splitting up of price between purchase cost, transport cost, commission, etc., to avoid tax on part of the turnover. In our view, this is a clear attempt to reduce incidence of tax on the actual turnover. We, therefore, cannot accept the contention of the petitioner that the conditions provided in Explanation 5 to section 2(xxi) are not satisfied. In view of the findings above, we dismiss the S. T. Revision cases.

Summary

Issues:
Challenge to sales tax assessment on purchase of coco beans by petitioner-company for assessment years 1997-98 and 1998-99.

Analysis:
The petitioner, a manufacturer of coco-based products, challenged the sales tax assessment on the purchase of coco beans for the mentioned assessment years. The petitioner purchased coco beans directly and through appointed agents. The company had agreements with the agents for reimbursement of costs, including commission, and claimed exemption from tax by issuing Form No. 25. However, authorities found the arrangement to be a device to avoid tax. The assessing officer, first appellate authority, and Tribunal concluded the agency agreement was a means to evade tax on the actual purchase cost. The Tribunal upheld the assessment, leading to the petitioner filing revision cases.

The petitioner contended that the transactions with agents were agency agreements, while the Government Pleader argued it was a purchase and sale arrangement. The issuance of Form No. 25 by the company to agents indicated a purchase and sale relationship. The statutory form was issued for tax purposes, and the petitioner could not claim otherwise. The Tribunal found the purchase to be at the agent's cost and risk until delivery to the company's stockyard. Despite the bifurcation of costs, the entire reimbursement by the company to agents constituted the purchase cost.

The petitioner argued that the transactions did not satisfy the test of sale under Explanation 5 to section 2(xxi) of the KGST Act. However, the court found that the agency arrangement was a scheme to avoid tax on the turnover. The goods procured by agents were sold to the petitioner, and the agency structure was a method to split costs and reduce tax liability. The court dismissed the revision cases, upholding the Tribunal's findings on the nature of the transactions and the attempt to lower the tax burden.

In conclusion, the court rejected the petitioner's claims of agency agreements and upheld the assessment of sales tax on the purchase of coco beans. The judgment emphasized the statutory requirements of Form No. 25 and the actual nature of the transactions between the petitioner and agents, highlighting the attempt to evade tax through a complex arrangement.