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TMI Blog2022 (8) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reight 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... tinam. 3. There was no physical delivery or appropriation of the goods at the oil wells at Narimanam or at the storing point at Nagapattinam. 4. Passing of the property of the goods took place at Tvl.MRL, Manali after ascertainment of the quantity of crude oil as per the method adopted in the intake certificate prepared in the presence of the Excise officials. 5. The appellant had chosen to prepare the sale invoices at Madras only after getting intake certificate from Tvl.MRL on weekly basis for the quantity ascertained. 6. The appellant was not aware of the actual quantity, the value of crude oil and the gravity of the crude oil supplied to the buyers, when the despatch started at Nagapattinam. These were arrived at only after the crude oil was pumpted to Tvl.MRL through pipelines from the storing point of the appellant at Tondiarpet. 7. There cannot be delivery Ex-Narimanam since the crude oil was transported to Tondiarpet storing point at the appellant's risk and the Central Excise Authorities took the quantum of crude oil supplied to Tvl.MRL at Tondiarpet storing point when it is pumped into the storing tank of Tondiarpet. 8. The crude oil cannot be considered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the sale price/ taxable turnover. 7.2. It is also submitted by the learned senior counsel for the petitioner that the transportation charges do not form part of the sale consideration for the sale of crude oil by the petitioner to MRL as the transaction was governed by the policy Instructions issued by the Oil Co-ordination Committee and there is no reference about freight charges in the said instructions. Therefore, the learned senior counsel prayed for allowing these writ petitions by setting aside the order of the Tribunal. 8. To the contrary, the learned Additional Government Pleader (Taxes) appearing for the Revenue submitted that the freight charges are pre-sale expenses and liable to be taxed. It is further submitted that the property passed from the petitioner to MRL only when it was delivered at the storage point of MRL at Chennai, as evident from the fact that the measurements were taken after removal of Base Sediments and Water (BS & W) at the storage point of MRL which is indicative that the property and the risk continued to remain with the petitioner until then. It is also submitted that the MRL cannot take delivery at the oil well at Narimanam or Nannilam and by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Having rejected the preliminary submission of the petitioner, we shall now proceed to examine the issue involved herein, on merits: I. Equating appropriation with sale - misconception: (i) The submission of the petitioner that the sale occurs on appropriation of the crude oil at Narimanam, where the crude oil was extracted, overlooks the fact that appropriation is mere earmarking, setting apart or identification and cannot be equated with a completed transaction of sale. The mere factum of the goods being earmarked/ appropriated would not by itself result in the transaction constituting a completed sale nor would it clothe the authority the jurisdiction to levy tax on the basis of mere appropriation in the absence of transfer of property which is essential to constitute a sale. This would be evident if in a particular case after the goods have been identified / earmarked / appropriated, but the goods are destroyed before the property in the goods passes to the buyer, there cannot be any levy in such circumstances for there is no completed sale. (ii) At this juncture, it may also be relevant to refer to the definition of "sale" under Section 2(n) of the TNGST Act, 1959. &quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Constitution of India. In this regard, it may be relevant to refer to the following decision of the Hon'ble Supreme Court in BSNL v. Union of India [(2006) 3 SCC 1], wherein it was held as under: "36. Following the ratio in Gannon Dunkerley[State of Madrasÿv.ÿGannon Dunkerley & Co. (Madras) Ltd., (1958) 9 STC 353 : AIR 1958 SC 560 : 1959 SCR 379] that "sale" in Entry 48 must be construed as having the same meaning which it has in the Sale of Goods Act, 1930, this Court as well as the High Courts held that several composite transactions in which there was an element of sale were not liable to sales tax. ....... 43.Gannon Dunkerley [State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., (1958) 9 STC 353 : AIR 1958 SC 560 : 1959 SCR 379] survived the Forty-sixth Constitutional Amendment in two respects. First with regard to the definition of "sale" for the purposes of the Constitution in general and for the purposes of Entry 54 of List II in particular except to the extent that the clauses in Article 366(29-A) operate. By introducing separate categories of "deemed sales", the meaning of the word "goods" was not altered. Thus the definitions of the compos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to the 6th Amendment to the Constitution of India, different States adopted different tests to decide the situs of a sale to assume jurisdiction to levy tax on sale of goods. Resultantly, a transaction of sale was subjected to tax by more than one State. Since some States fixed the situs on the basis of the place where the contract is made, while another set of States looked to the place where property passes and the third set of States looked to the State of consumption. (ii) It is with a view to remedy the above mischief, Parliament was conferred with the authority to formulate the principles for determining, when a sale or purchase of goods takes place outside the State in terms of Article 286(2) of the Constitution of India. The Parliament in exercise of its power under Article 286(2) of the Constitution of India, had introduced Section 4 of the CST Act, 1956 formulating the principles, as to when a sale or purchase is said to take place outside a State. Importantly, Section 4 of the CST Act, 1956 has been incorporated by almost every State Legislature including the State of Tamil Nadu in its law providing for levy of tax on sale or purchase of goods, as would be clear from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goods and the same would be relevant only where there is a completed sale. Appropriation by itself would not result in a completed transaction of sale, unless and until it is accompanied by a transfer of property from the seller to the buyer for consideration. It may be necessary to note that while passing of property is an essential ingredient for a sale, the same has been left out by the Parliament only while determining the situs of sale and not from being an essential ingredient of sale. In this regard, it may be relevant to refer to the judgment of the Delhi High Court in the case of Indian Wood Products Co. Ltd. v. Sales Tax Officer [21 STC 437], wherein it was held as under: "8. ...... Under the said Section 4(2)(b) the place of sale depends upon the location of the goods at the time of their appropriation to the contract of sale......... The term "appropriation" has not been defined and in the primary sense "to appropriate" is to set apart a thing with common consent as the property of a buyer and where a person is entitled to goods which form part of a larger quantity and are not earmarked and afterwards, the rest and set apart for him, they are said to be appropriated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- i) freight; ......" (ii) The above Rule is pari materia to the definition of "sale price" under Section 2(h) of the CST Act, 1956. The above provisions have come up for consideration on numerous occasions before this Court and the Hon'ble Supreme Court and the following position appears to emerge: a. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affected. The contract also provided in the clause dealing with the price that it was payable per unit ex-factory delivery. It provided for the payment of excise duty and statutory levies, in addition to such ex-factory price, as also the fact that the ex-factory price mentioned was exclusive of sales tax. The clause dealing with sales tax in Clause 3(b) further provided that "appropriate sales tax, if any, found leviable in accordance with the provisions of the relevant Sales Tax Act in force will be paid over and above the price of goods accepted in this order". The clause also provided that sales tax and excise duty will be payable only on ex-factory price. ........ 13. In the instant case, the obligation to pay the freight was clearly on the appellant as there was no sale at all, unless the goods were delivered at the premises of the buyer and in order to so deliver, the assessee necessarily had to incur freight charges. The transfer of title to the goods as provided in Clause 10 read with Clause 6 of the agreement was to be at the place of delivery in the premises of the buyer. Though the contract mentioned the price of the electric meters as ex-factory price, the delivery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delivery of goods at the buyers premises, which we would think on the facts of the cases, takes place at the premises of MRL. c. Relevance of transfer of property in determining the claim of deduction of freight charges : 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 this regard, it may be useful to refer to the judgment of the Hon'ble Supreme Court in the case of Hindustan Sugar Mills v. State of Rajasthan [(1978) 4 SCC 271], the relevant passage of which may be extracted below: "9. We may now take another example which is very much near to the one which we have already discussed. The dealer may, instead of transpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first part of the definition. This would plainly and indubitably be tin position where the contract of sale entered into by the dealer is FOR destination railway station. But here it is necessary to bear in mind a rather important distinction. There may be a case where the contract of sale may not be FOR destination railway station, but the price alone may be so. Where such is the case, the contract does not have all the incidents of a FOR destination railway station contract, but merely the price is stipulated on that basis. The terms of such a contract may provide that the delivery shall be complete when the goods are put on rail and thereafter it shall be at the risk of the purchaser. Such a stipulation would make the railway agent of the purchaser for taking delivery of the goods. (emphasis supplied) (iii) Now, applying the above legal principles to the facts of the present case, it appears that the petitioner was under an obligation to transport the crude oil to the tank of MRL and the transfer of property in favour of MRL occurs only when the crude oil is pumped into the storage tank/ point of the MRL. The fact that the quantity, quality and the price is determined at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antly, there is no averment in the affidavit that the Oil Coordination Committee also instructs as to the place where property is to pass. In any event, a reading of the instruction would show that there is nothing in it, which has bearing on the place or time, when the property passes nor on the aspect as to whether freight charges are to be included in the sale price. The relevant portion of the instructions is extracted below: " I am directed to state that w.e.f. midnight of 15th / 16th September, 1992 the price of Indigenous Crude both onshore and offshore has been revised to Rs.2720/MT. The break-up of this price is as follows:- Rs./MT - Basic Price : Rs.1506 - Cess : Rs. 900 - Royalty : Rs. 314 2. Henceforth the applicable sales tax on the above price will be paid by the refining companies to the producers of oil viz., ONGC and OIL and thereafter the refining companies shall claim from the OCC Pool Account. 3. The increase in the price of indigenous crude oil on account of increase in the basic rate of crude of Rs.538315/MT (i.e., Rs.1506-967.85) will be adjusted by the refineries in the cope Account on the same basis as hither to. 4. The crude oi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. The following judgments may have relevance in appreciating the limitation of executive instructions in fiscal matters:- i) Harivansh Lal Mehra v. State of Maharashtra, [(1971) 2 SCC 54]: 6. .............No tax or duty can be levied or collected except by authority of law. Hence no customs duty was leviable on the basis of any administrative instruction. Every levy of customs duty or any other tax must be sanctioned by law. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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