2013 (1) TMI 711 - HC - VAT and Sales Tax

Interpretation of Explanation (c) of section 2(u) of the Madhya Pradesh Value Added Tax Act, 2002 - Held that - The real object of the Explanation is to prevent the misuse by the assessee of the relationship of principal and agent for the purpose of evading tax. It is impossible to accept the contention put forward on behalf of the appellant that the Explanation has converted what, in fact, is not a sale into a sale for the purpose of assessment to sales tax. In the present case, M/s. Rahul Pharma is an agent of the petitionercompany, which is clear from the agreement (annexure P/1). It only supplies the goods to the authorized dealer of the company or supply the goods to the buyer and for the aforesaid purpose it takes commission of three per cent. It means that the agent, M/s. Rahul Pharma, used to deliver the goods not as its own property but as the property of the principal, who continues to be the owner of the goods and therefore liable to account for the sale proceeds. It is not a sale as interpreted by the honourable Supreme Court, hence, the petitioner is not liable to pay tax. Petition of the petitioner is disposed of with the directions that the delivery of the agent of the petitioner to the buyer or to the authorized distributor shall not be taxed under the provisions of the VAT Act by treating it as an independent sale. The taxation authorities shall calculate the tax liability of the petitioner accordingly

Summary

Issues:
Interpretation of Explanation (c) of section 2(u) of the Madhya Pradesh Value Added Tax Act, 2002 regarding double taxation on the sale of goods by a principal to a selling agent and then to the purchaser.

Analysis:
The petitioner, a private limited company dealing in allopathic medicines, appointed M/s. Rahul Pharma as a carry and forward agent to supply goods to authorized distributors. The tax authorities assessed the petitioner for tax under the VAT Act, considering the transaction with the agent as a taxable first sale under Explanation (c) of section 2(u) of the Act, leading to potential double taxation.

The definition of "sale" under section 2(u) of the VAT Act encompasses any transfer of property in goods for valuable consideration. However, Explanation (c) deems two independent sales when goods are transferred from a principal to a selling agent and then to the purchaser, raising the issue of whether such transactions warrant separate taxation.

Referring to the Supreme Court's interpretation in a similar case, the court emphasized that the essence of a sale involves the transfer of title to goods for a price, distinguishing it from an agency relationship where the agent acts on behalf of the principal without assuming ownership. The court highlighted that the real effect of the explanation is to tax transactions involving actual transfer of property, not mere agency contracts.

In line with the legal principles established by the Supreme Court, the court ruled that the petitioner should not be subject to tax when the agent delivers goods to buyers or authorized distributors on behalf of the petitioner, as the transactions do not constitute independent sales but rather acts of agency. Therefore, the petitioner's plea against double taxation was upheld, directing the taxation authorities to calculate the tax liability accordingly without treating agent deliveries as separate sales under the VAT Act.

In conclusion, the court disposed of the petition, providing relief to the petitioner from double taxation and instructing the taxation authorities to adjust the tax liability accordingly, in accordance with the legal interpretation of Explanation (c) of section 2(u) of the VAT Act and relevant judicial precedents.