2022 (8) TMI 224 - HC - VAT and Sales Tax

Seeking to grant deduction on the freight charges received by the petitioner towards the crude oil supplied to its customer - Explanation 3 to Section 2(n) of the TNGST Act, 1959 - Rule 6 (c)(i) of TNGST Rules - HELD THAT - Deduction of freight charges from turnover under Rule 6 (c)(i) of TNGST Rules, is admissible only if the two conditions set-out therein viz., (i) Freight must not be included in the price of the goods sold; and (ii) The amount charged by way of freight must be specified and charged separately, are cumulatively satisfied. The examination of the 1st condition viz., whether freight forms part of the price of goods sold, would necessarily lead one to the question as to when the sale was completed, for which, the consistent view taken is that the expenses incurred for making the goods available to the purchaser or pre-sale expenses, would be liable to tax. The said test is also applicable, while examining the claim of deduction of freight from turnover while arriving at taxable turnover. The expenditure incurred by way of freight upto the place of sale, would form part of the price of the goods sold. Price Ex- Factory or Works - conclusive delivery Ex-Factory or not - HELD THAT - The price being ex-works may have no bearing on the claim of deduction of freight charges, if the delivery is not ex-works and the transfer of property in goods is postponed until the delivery of goods at the buyers premises, which we would think on the facts of the cases, takes place at the premises of MRL. Relevance of transfer of property in determining the claim of deduction of freight charges - HELD THAT - A claim for deduction of freight charges would have to be determined not on the basis of whether price is Ex-Works or F.O.R. Destination, instead for determining such deduction, the enquiry ought to be the point where the property passes and who bears the risk until the delivery. The freight charges until passing of property would form part of the sale price /taxable turnover. The fact that risk is borne by the seller until a particular point, is again prima facie indicative that the property does not pass until and unless it is shown that risk was borne by the seller in the capacity of an agent - in the present case, there is nothing to indicate that delivery is Ex-Narimannam/Nannilam. To the contrary, the concurrent finding of fact by all the three authorities viz., assessing officer, First Appellate Authority and the Tribunal is that the property passes only at the storage point of the buyer viz., MRL. Thus, the claim of deduction towards freight charges rejected by the Tribunal is on the basis of the finding of facts based on evidence, which ought not to be disturbed unless shown to be perverse or not based on evidence, which is not the case here. Relevance of Instructions by Oil Coordination Committee - HELD THAT - A reading of the instructions issued by the Oil Co-ordination Committee, apart from the fact that there is no indication that it has any statutory force, would also reveal that the producers are entitled to recover the transportation rates, as evident from a reading of Clause 6 of the communication dated 04.11.1992. Though Clause 1 speaks about the price of goods both onshore and offshore, the price is only Basic Price , which is again not indicative of whether the freight element is included or otherwise. Normally, the freight charges are not included in the basic price. It may also be relevant to note that assuming these instructions are executive/ administrative in nature, the same may override the terms of contract, but cannot override the statutory provisions, which mandate that freight would form part of the sale price/ taxable turnover if the same is pre-sale expenditure, but eligible for deduction in case it is a postsale expenditure. Thus, there is nothing expressed in the Oil Coordination Committee Instructions, which indicate that the transportation is made by the producers as an agent after completion of sale necessary to claim the deduction. To the contrary, the findings of fact by all the authorities below and the nature of the commodity and the mode of transport would lead one to the conclusion that the claim of deduction of the freight element by the petitioner is liable to be rejected. The freight charges form part of the price of the goods and thus, not entitled to deduction, in the absence of the petitioner showing that the property stood transferred in terms of the contract or Oil Co-ordination Committee instructions at the point of despatch i.e., Narimannam - petition dismissed.

Summary

Issues Involved:
1. Whether the freight charges for the transport of crude oil from the oil well to the storage tank of MRL were pre-sale expenses and thus part of the turnover.
2. Whether the sale was completed at Narimanam/Nannilam or at the storage tank of MRL.
3. Whether the petitioner was entitled to a deduction of freight charges from the taxable turnover under Rule 6(c)(i) of the TNGST Rules, 1959.
4. The relevance and impact of the Oil Coordination Committee instructions on the determination of freight charges and taxable turnover.

Detailed Analysis:

1. Whether the freight charges for the transport of crude oil from the oil well to the storage tank of MRL were pre-sale expenses and thus part of the turnover:
The Tribunal found that the freight charges were pre-sale expenses and thus formed part of the taxable turnover. The Tribunal's findings included:
- The buyers were not prepared to take delivery at the oil wells or the storage point at Nagapattinam.
- The crude oil was transported at the seller's risk until it reached the storage tank of MRL.
- The property of the goods passed to MRL only after the quantity was ascertained at MRL's storage tank.
- The invoices were prepared only after obtaining the intake certificate from MRL.

The Court upheld the Tribunal's findings, stating that the freight charges were part of the price of the goods sold, as the delivery was completed only at MRL's storage tank. Therefore, the freight charges were pre-sale expenses and part of the taxable turnover.

2. Whether the sale was completed at Narimanam/Nannilam or at the storage tank of MRL:
The petitioner argued that the sale was completed at Narimanam/Nannilam upon appropriation of the crude oil, relying on Explanation 3 to Section 2(n) of the TNGST Act, 1959. However, the Court rejected this argument, stating that appropriation is mere earmarking and cannot be equated with a completed sale. The Court emphasized that a sale requires the transfer of property, which occurred only when the crude oil was delivered to MRL's storage tank.

3. Whether the petitioner was entitled to a deduction of freight charges from the taxable turnover under Rule 6(c)(i) of the TNGST Rules, 1959:
The petitioner claimed a deduction for freight charges under Rule 6(c)(i) of the TNGST Rules, 1959, which allows deduction if freight is not included in the price of the goods sold and is charged separately. The Court held that the deduction was not admissible as the freight charges were pre-sale expenses and formed part of the price of the goods sold. The Court also noted that the price being ex-factory did not conclusively determine the point of delivery, which was at MRL's storage tank.

4. The relevance and impact of the Oil Coordination Committee instructions on the determination of freight charges and taxable turnover:
The petitioner argued that the Oil Coordination Committee instructions governed the transaction and did not mention freight charges. The Court found that the instructions did not indicate the point of transfer of property or whether the freight charges were included in the sale price. The Court emphasized that the instructions could not override statutory provisions, which mandate that pre-sale expenses form part of the taxable turnover.

Conclusion:
The Court dismissed the writ petitions, holding that the freight charges were pre-sale expenses and part of the taxable turnover. The sale was completed only upon delivery at MRL's storage tank, and the petitioner was not entitled to a deduction for freight charges under Rule 6(c)(i) of the TNGST Rules, 1959. The Oil Coordination Committee instructions did not affect the determination of the point of sale or the inclusion of freight charges in the taxable turnover.