2016 (12) TMI 368 - HC - VAT and Sales Tax

Whether the petitioners herein, which are two units of National Textile Corporation Ltd., could be treated as two different entities and the transfer of yarn from one of the entity to the other, for the purpose of manufacture of cloth, which is an exempted commodity, would amount to sale? - Held that - registration under the Sales Tax Act does not necessarily mean that the registered dealer becomes a separate legal entity different from its creator, namely, the company proper. In the instant case, there can hardly be any doubt on this issue, because the registration certificate issued to both the petitioners mentions that they are units of National Textile Corporation Ltd. This being not in dispute, ought not to have been brushed aside by the respondent. The registration certificates of both the units state that they are units of National Textile Corporation Ltd. Thus, this Court has no hesitation to hold that the impugned proceedings, insofar as treating both the petitioners as distinct legal entities and treating the inter units transfer of cotton and cotton yarn to the transferee, cannot be treated as sale transaction and the finding that merely, because there are two TIN numbers to treat both the units as separate units and the finding rendered by the respondent in this regard is wholly untenable. Petition allowed - decided in favor of petitioner.

Summary

Issues:
1. Whether the transfer of yarn between two units of a company for the purpose of manufacturing an exempted commodity constitutes a sale?

Analysis:
The High Court of Madras considered whether two units of National Textile Corporation Ltd. could be treated as separate entities and if the transfer of yarn between these units for manufacturing cloth, an exempted commodity, would amount to a sale. The court noted that the units received show cause notices alleging that the transfer of cotton and cotton yarn between them should be treated as a sale due to having different Taxpayer Identification Numbers (TINs).

The petitioners argued that both units are part of the same entity, supported by the fact that they share a single Permanent Account Number (PAN) and are listed under National Textile Corporation Ltd. The petitioners emphasized that the movement of goods between their units should not be considered a sale since there is no buyer-seller relationship, a fundamental requirement for a sale transaction.

The court examined the legal status of the units and the registration certificates issued to them, which clearly indicated they are part of National Textile Corporation Ltd. The court criticized the respondent's approach of treating the units as separate entities solely based on different TIN numbers, highlighting that the essence of a sale transaction was not present in the inter-unit transfers.

Referring to a prior case, the court emphasized that registration under tax laws does not establish separate legal entities, especially when units are part of a larger corporation. The court also cited a Kerala High Court case where transfers between units of the same entity were not considered sales for tax purposes.

Ultimately, the court concluded that the petitioners should not be treated as distinct legal entities, and the transfer of goods between their units did not constitute a sale. The court quashed the orders treating the transfers as sales and ruled in favor of the petitioners, emphasizing the legal entity of National Textile Corporation Ltd. and the absence of a sale transaction in the inter-unit transfers.