2023 (3) TMI 1004 - HC - VAT and Sales Tax

Inter unit transfer of goods would constitute a sale or not - Rejection of claim of the petitioner that the transfer of goods from one unit of the petitioner company to another unit does not constitute sale - whether independent registrations are obtained by the units and whether different business are carried out by different units of the same company to conclude that two different entities are in existence? HELD THAT - It is found that mere independent registrations or the fact that different lines of business would not convert an inter unit transfer as constituting a ''sale''. Unless and until it is shown that there are two distinct legal entities involved in a transaction, levy of tax by treating it as a transaction of sale is wholly impermissible. It would be relevant to refer to the following judgment of the Andhra Pradesh High Court in KCP. LIMITED VERSUS STATE OF ANDHRA PRADESH 1992 (9) TMI 330 - ANDHRA PRADESH HIGH COURT wherein it was held that mere registration certificate obtained by different branch or unit will not by itself result in different units becoming distinct and different legal entities capable of transferring properties/goods from one entity / person to another which is a sine qua non for a transaction to be treated as a sale attracting the charging provision. It is thus evident that unless and until there are two distinct entities, the question of sale may not arise. However, the Tribunal has not even addressed this issue and has misdirected itself in looking at the factum of independent registrations and independent lines of business to conclude that the alleged inter unit transfer would constitute sale. It is deemed appropriate to remand the matter back to the Tribunal for examining the question on the strength of the documents whether both Hi-Tech Carbon Unit and Cement Unit are different units of Indian Rayon and Industries Limited. If the answer is in the affirmative, then the question of levy of tax cannot be sustained. Writ petition disposed off.

Summary

Issues:
Challenge to order of Appellate Tribunal on transfer of goods between units constituting sale.

Analysis:
The case involved a challenge to the order of the Appellate Tribunal confirming the rejection of the claim that the transfer of goods between two units of the petitioner company did not constitute a sale. The petitioner had two divisions, a Cement unit, and a Hi-Tech Carbon unit, each with separate registration certificates. The dispute arose when the Cement Division transferred stock to the Hi-Tech Carbon Unit, which was deemed taxable as a sale under the Tamil Nadu General Sales Tax Act, 1959. The lower authorities upheld the tax claim, leading to the petitioner's appeal before the High Court.

To determine if the inter-unit transfer constituted a sale, the Court referred to Section 2(n) of the TNGST Act, which defines "sale" as a transfer of property in goods for consideration. The Court noted that for a transaction to be considered a sale, it must involve a transfer of goods between two entities supported by consideration. The Court emphasized that if the transfer did not meet these criteria, the levy of tax would not be justified.

The Court found that the petitioner had provided evidence demonstrating that the Hi-Tech Carbon Unit and Cement Unit were not separate entities but different units of the same company. The Court highlighted various documents, including agreements and official orders, indicating that both units were part of the petitioner company. The Court criticized the Tribunal for focusing on independent registrations and different business lines to determine the existence of separate entities, stating that such factors were irrelevant in the absence of distinct legal entities.

Citing precedents, including a judgment from the Andhra Pradesh High Court and the Supreme Court, the Court emphasized that separate registration certificates do not establish distinct legal entities capable of transferring goods. The Court reiterated that unless there are two separate entities involved, a transaction cannot be considered a sale. The Court concluded that the Tribunal had erred in its assessment and remanded the matter for further examination to determine if the two units were indeed separate entities. The Tribunal was directed to decide within three months, and the writ petition was disposed of with no costs incurred.