Madhya Pradesh High Court
Commissioner Of Commercial Tax vs Shah Gordhandas Bhikharidas on 30 October, 2006
Equivalent citations: (2007)10VST349(MP)
ORDER K.K. Lahoti, J.
1. The Board of Revenue, Madhya Pradesh, Gwalior has made a statement of the case under Section 44 of the M.P. General Sales Tax Act, 1958, for the answer of following question:
Whether, under the facts and circumstances of the case, the Tribunal was justified in not including the freight charges in total turnover while holding that freight charges were shown separately in the bill and paid by buyer and the transactions were f.o.r. destination?
2. To consider the question referred for answer of this court, it will be appropriate to state facts of the case:
Both the aforesaid cases were decided by the Board of Revenue in Appeal Nos. 7-4/S/322/94 and 7-4/S/323/94 by a common order dated August 2, 1996, as question involved in both the appeals was common.
3. The question before the Board was in respect of interpretation of Section 2(h) of the Central Sales Tax Act, 1956 (hereinafter referred to as "the CST") that the freight which was shown in the bills separately, but was not charged from the purchasers, though the transaction was f. o. r. can be computed for the purposes of ascertaining sale price.
4. The sale is of cotton, inter-State. The freight charges were shown in the bills separately, but the transportation expenses were paid by the purchasers. These facts are not in dispute.
5. Now the question is that when the transaction was f. o. r. and the freight was paid by the purchasers though it was shown in the bills whether it may be included in the sale price. "Sale price" is defined in Section 2(h). For ready reference Section 2(h) of the Central Sales Tax Act, 1956 reads thus:
2(h) 'sale price' means the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged.
6. The State placed reliance on the judgment of the apex court in Hindustan Sugar Mills Ltd. v. State of Rajasthan [1979] 43 STC 13.
7. The learned Counsel for the respondent submitted that as per the definition under Section 2(h) of the CST Act, it is very specific that the cost of freight or delivery or the cost of installation if separately charged is not included in the sale price. When the freight is separately shown in the bill and in fact it was not charged by the seller from the purchasers, then it is not a part of sale price though the transaction may be f. o. r. and in fact the freight was paid by the purchasers so it is not liable for the payment of Central sales tax. Reliance is placed on the apex court judgment in Hyderabad Asbestos Cement Products Ltd. v. State of Andhra Pradesh [1969] 24 STC 487, and the Division Bench judgment of this court in Straw Products Ltd. v. Commissioner of Sales Tax, M.P. [1987] 65 STC 20, and Division Bench judgment of the Punjab and Haryana High Court in State of Haryana v. Janki Dass and Co. [1990] 79 STC 1 and submitted that the reference deserves to be answered in favour of the assessee.
8. To appreciate rival contentions of the parties, firstly, the definition of "sale price" in CST may be seen. The aforesaid definition is very specific in defining sale price. It makes a provision for due adjustment in respect of discount according to the practice normally prevailing in the trade, though inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged.
9. In the present case, the question is inclusion of the cost of the freight in the sale price. It is not in dispute that such cost though was separately shown in the bill, but in fact it was not charged from the purchaser. The railway freight was not paid by the seller, but it was payable at the time of delivery and in fact it was paid by the purchaser at the time of delivery of the goods from the railway. But the fact remains that the transaction was f. o. r. and the freight was shown separately in the bill. In these circumstances, whether it may be treated as part of sale price and whether the freight is liable for the Central sales tax or not is the question which is to be decided in this case as per order of reference.
10. The apex court's judgment in Hindustan Sugar Mills Ltd. [1979] 43 STC 13 which has been strongly relied upon by the learned Counsel for the State, may be referred. The apex court considering the question held thus (page 35):
We must, therefore, hold that, by reason of the provisions of the Control Order which governed the transactions of sale of cement entered into by the assessee with the purchasers in both the appeals before us, the amount of freight formed part of the 'sale price' within the meaning of the first part of the definition of that term and was includible in the turnover of the assessee.
11. The apex court while considering the question had an occasion to consider the law laid down by the Division Bench of the High Court in Hyderabad Asbestos Cement Products Ltd. [1969] 24 STC 487 (SC) and held thus:
This would plainly and indubitably be the position where the contract of sale entered into by the dealer is f. o. r. 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 f.o.r. 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 f. o. r. 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 liable for taking delivery of the goods. The freight in such a case would be payable by the purchaser though the price agreed upon is f. o. r. destination railway station. The price of the goods receivable by the dealer would, in that event, be the f. o. r. destination railway station price less the amount of freight payable by the purchaser. That would be the consideration payable by the purchaser to the dealer for the sale of the goods and the amount of freight being payable by the purchaser would not be included in the 'sale price' within the meaning of the first part of the definition. The position would be the same even if the dealer pays the freight and obtains railway receipt 'freight pre-paid' and claims the full f. o. r. destination railway station price in the bill. The amount representing freight would not be payable as part of the consideration for the sale of the goods but by way of reimbursement of the freight which was payable by the purchaser but in fact disbursed by the dealer and hence it would not form part of the 'sale price'.
This was precisely the basis on which the decision in Hyderabad Asbestos Cement Products Ltd. v. State of Andhra Pradesh was given by this court. There the appellant maintained a uniform catalogue rate all over the country in respect of its manufactures and the catalogue rate obviously included freight in transporting goods to the customers. The appellant despatched goods to the customers by rail under railway receipts with 'freight to pa/ and made out invoices at the catalogue rate, deducted discount from it and charged sales tax on the balance and then gave credit for the amount of freight to be paid by the customers. The question arose in the assessment of the appellant to sales tax whether the amount of freight formed part of the 'sale price' and was, therefore, includible in the turnover of the appellant. The terms of the contracts with the customers were in a printed form and Clauses (4) and (16) thereof provided as follows : '(4) The price of the said productions supplied to the stockists shall be the current general gross list price charged by the company, free on rail, less such discount as may be fixed by the company from time to time...(16)...the date of delivery shall mean the date of the railway receipt and in the case of consignments sold free on rail destination, the railway freight shall be nevertheless payable by the stockists at the destinations and the amount of freight shown on the railway receipt shall be deducted from the invoice of the company. It will be seen that under Clause (4) the price of the goods was stipulated to be 'the current general gross list price charged by the company free on rail', but Clause (16) made it clear that 'the date of delivery shall mean the date of the railway receipt' and though the goods may be sold free on rail destination, 'the railway freight shall nevertheless be payable by the stockists at the destinations and the amount of freight...shall be deducted from the invoice of the company. The combined reading of Clauses (4) and (16) clearly showed that it was only the price which was f. o. r. destination and the delivery to the customers was complete as soon as the goods were put on rail and payment of freight was the obligation of the customers as between them and the appellant. That is why Shah, J., speaking on behalf of the court, said: if, Clause (4) stood alone the price charged by the company may be deemed to be the catalogue rate less the discount payable to the purchasers. But by Clause (16) the purchasers clearly undertook to pay railway freight which was deducted from the invoice made out by the company. By Clause (16) the company received the catalogue rate less the railway freight as price of the goods sold. We are unable to agree with the High Court that "the term relating to the price in the contract between the company and the stockist envisaged by this clause [clause (16)] implies an obligation on the part of the company to pay the railway freight". In our judgment, under the terms of the contract, there is no obligation on the company to pay the freight, and under the terms of the contract the price received by the company for sale of goods is the invoice amount less the freight' and held that the amount of freight was not part of the 'sale price'. It was, to quote again the words of Shah, J., 'not made a part of the price'.
We may also at this stage refer to another decision of this court earlier in point of time. That is the decision in Tungabhadra Industries Ltd., Kurnool v. Commercial Tax Officer, Kurnool . What happened in this case was that the appellant sold and despatched hydrogenated groundnut oil to the purchasers at an agreed price which was inclusive of freight. It is not very clear from the record but it does appear that the railway receipts obtained by the appellant were on the basis of 'freight to pay and the amount of freight was paid by the purchasers and in the invoices made out by the appellant, the agreed price inclusive of freight was shown and from this the amount of freight was deducted and on the balance the amount of sales tax was computed. The appellant claimed to deduct the amount of freight from the turnover on the strength of Rule 5(1)(g) of the Turnover and Assessment Rules, which provided that in determining the net turnover of a dealer, he shall be entitled to a deduction of 'all amounts falling under the following two heads, when specified and charged for by the dealer separately, without including them in the price of the goods sold: (i) freight; (ii)... 'This court held that the deduction claimed was not permissible since the conditions for the applicability of Rule 5(1)(g) were not satisfied. It was pointed out that it was clear from the contents of the specimen invoice produced by the appellant that 'the appellant has charged a price inclusive of the railway freight and would therefore be outside the terms of Rule 5(1)(g), which requires that in order to enable a dealer to claim the deduction it should be charged for separately and not included in the price of goods sold. The conditions of the rule not having been complied with, the appellant was not entitled to the deduction in respect of freight'. Here the freight was payable by the appellant because the price was inclusive of the freight and there was no stipulation in the contract, as in Hyderabad Asbestos Cement Products Ltd.'s case [1969] 24 STC 487 (SC), that the delivery to the purchaser shall be complete when the goods are put on rail or that the payment of freight shall be the obligation of the purchaser. And it did not make any difference to this position that the freight was not initially paid by the appellant but was paid by the purchaser and given credit for against the agreed 'freight-inclusive' price in the invoice.
Now, in the light of this discussion, let us turn to examine the facts of the present appeals. The Control Order here becomes very material. It is a statutory order having binding force and effect and it must govern the transactions of sale of cement entered into by the assessee with the purchasers. The Control Order is designed to ensure availability of cement at a uniform price throughout India irrespective of the distance from the place of manufacture and Clause 8 provides a maximum price of Rs. 214.65 per metric tonne f. o. r. destination railway station at which a producer may sell cement manufactured by him. It was at this maximum price of Rs. 214.65 per metric tonne f. o. r. destination railway station that, in pursuance of this clause, the assessee sold cement to various purchasers. The price was clearly inclusive of freight. But the question is: who, under the terms of the contract, was liable to pay the freight, the assessee or the purchaser ? Was the contract one for delivery at destination railway station or was it a contract in which delivery to. the purchaser would be complete as soon as the goods are put on rail at the place of despatch ? The answer to this question would clearly be in favour of the assessee if we have regard only to the terms and conditions of the contract without taking into account the provisions of the Control Order. Clause (8) of the 'General terms and conditions of supply incorporated in the contract provided that once the goods are handed over to the railway and a railway receipt is obtained, the responsibility of the assessee shall cease and the risk shall pass to the purchaser and, therefore, if there is non-delivery or shortage or delay in delivery, it is the purchaser who, according to this clause, shall be entitled to make a claim against the railways. If there were overcharge of freight, then again under Clause (11) it is not the assessee but the purchaser who would be entitled to lodge a claim with the railway authorities. The specimen invoice produced by the assessee also made it clear that the responsibility of the assessee for shortage, loss, delay or damage shall cease as soon as the goods are delivered at the work siding and all such claims may be preferred by the purchaser against the railways and in case excess freight has been charged, the purchaser shall be entitled 'to lodge claim with the railways'. It would, thus, be seen that according to these provisions, the delivery of the goods to the purchaser would be complete as soon as they are put on rail at the work siding and the risk then passes to the purchaser and payment of freight would be the responsibility of the purchaser. This would be the position apart from the provisions of the Control Order and, on this position, there can be no doubt, for reasons already discussed, that the amount of freight would not form part of the 'sale price'. But we have to consider the impact of the provisions of the Control Order, for these provisions, having statutory force and authority, have overriding effect and the terms and conditions of the contract to the extent to which they conflict with these provisions must be held to be excluded. Let us, therefore, examine the impact of the relevant provisions of the Control Order on the terms and conditions of the contract.
12. The apex court has precisely held that under terms of the contract who was liable to pay the freight, the seller or the purchaser is the decisive factor on the basis of which the sale price may be determined.
13. The Division Bench of this court in Straw Products Ltd. [1987] 65 STC 20 had an occasion to consider the question and held thus:
5. For deciding the question arising in this case, we may usefully refer to the decision of a Division Bench of this court in Orient Paper Mills Ltd. v. Commissioner of Sales Tax, M. P. [1983] 54 STC 195. The following observations in that decision are pertinent:
The law applicable on the point has recently been clarified by the Supreme Court in Hindustan Sugar Mills Ltd. v. State of Rajasthan . In a case of a contract of the description f. o. r. destination railway station, the freight is part of the consideration payable to the seller and forms part of the price. In this class of contracts, the delivery is complete at the destination railway station and the risk till then continues to remain with the selling dealer. The freight is also paid by the selling dealer as he has to arrange for the delivery at the destination railway station. The other class of cases is where the price is only f. o. r. destination railway station but the contract of sale is really not f. o. r. destination railway station. In this class of contract although the price stipulated is f. o. r. destination railway station, the delivery is complete when the goods are put on rail and the risk is also passed to the purchaser thereafter, making the railway the agent of the purchaser. The freight in this class of cases is payable by the purchaser though the price agreed upon is f. o. r. destination railway station. The price of the goods receivable in such cases is thus the f. o. r. destination price less the amount of freight payable by the purchaser.
We respectfully agree with the aforesaid observations.
6. In the instant case, we find that the condition as regards delivery referred to above makes it very clear that the delivery of the goods was complete at the loading station when the goods were delivered to the carrier. The Tribunal has found that the freight was deducted from the price in the bills and was paid by the buyer. In these circumstances, the freight could not be held to form part of the sale price.
14. The Division Bench of Punjab and Haryana High Court (State of Haryana v. Janki Dass and Co. [1990] 79 STC 1) considering the question held thus (page 9):
In the result, we hold that in the facts and circumstances of the present cases, the amount of freight charged on the goods and later on deducted from the bill does not form part of the turnover and answer the first question in the affirmative and in favour of the assessee and against the Revenue. We also hold that the ratio of Hyderabad Asbestos Cement Products Ltd.'s case , is fully applicable to the facts of the present cases and the decisions of the Madhya Pradesh and Madras High Courts are not attracted. Thus, the second question is also answered in the affirmative and in favour of the assessee and against the Revenue.
15. The apex court again had an occasion to consider the sale price in Ramco Cement Distribution Co. Pvt. Ltd. v. State of Tamil Nadu and held thus (page 158 of STC):
6. Interesting as these arguments are, we find that they are merely a repetition of what was urged in the case of Hindustan Sugar Mills Ltd. . In that case also the point urged was that the Cement Control Order only fixes the maximum price and that there was nothing to prevent the producer from selling the cement at a lower price and that, if the producer opted to sell his cement at price lower than the control price and allow credit to the purchaser where the purchaser agreed to pay the freight, the sale price can only be the smaller amount by deducting the freight charges from the gross amount of the bill. The second argument, based on the terms of the contract between the parties, was also addressed in the Hindustan Sugar Mills Ltd.'s case . There also Clauses 5, 8 and 11 of the general terms and conditions of supply were strongly relied upon on behalf of the assessee. Under those terms and conditions, it was specifically mentioned that although the price of cement was on the basis of f. o. r. destination railway station, consignments would nevertheless be despatched 'freight to pay and credit afforded in the bill for the amount of freight payable and that the purchaser should accordingly arrange to pay railway freight or road transport charges at the destination at the time of taking delivery. This court, after referring to the above contentions, pointed out that, if the terms and conditions of the contract had stood alone, the assessee might have been entitled to succeed in excluding the freight charges on the principle of Hyderabad Asbestos Cement Products Ltd.'s case [1969] 24 STC 487 (SC) but that relief could not be given to the assessee in view of the scheme and provisions of the Cement Control Order and their implications. The terms of the Cement Control Order have been fully analysed and discussed at pages 33 to 35 of the Report. There is, therefore, no difference either on facts or in principle between this case and the Hindustan Sugar Mills Ltd.'s case [1979] 43 STC 13 (SC). We have heard learned Counsel on both sides and we do not find any reason to doubt or dissent from the decision in the Hindustan Sugar Mills Ltd.'s case [1979] 43 STC 13 (SC). On the other hand, as pointed out by the learned Judges in that case, the whole purpose of the Cement Control Order was that cement should be available for sale at all places in the country at a controlled price. No doubt, the price was described as a maximum beyond which the sale price could not go but the intention, which was also carried out by all the suppliers, was that cement was to be sold at what may be described as a controlled price on terms 'free on rail destination'. In other words, the producer was entitled to the controlled price irrespective of the amount of freight which might have been incurred in respect of the transaction. Having regard to the fact that the freight on consignments to places near the factory and consignments to places far away from the factories could show a lot of variation, the Control Order created a machinery by which all freight charges were credited to a common account and any particular cement manufacturer incurring more than a specified amount was entitled to be reimbursed for the excess freight incurred by him. As the learned Judges pointed out in the earlier decision, the whole Control Order proceeds on the footing that the freight charges are to be met by the producer and that he was entitled to a consolidated price irrespective of the freight he may have incurred. In this view of the matter, the sale price, on the terms of the Central Sales Tax Act, could only be the controlled price as fixed by the Cement Control Order.
7. We find that the factual position in these cases is also not as described by the learned Counsel for the assessee. The assessee's arguments in this regard were sought to be highlighted by the production of one of the invoices by which certain goods were despatched by Dalmia Cements to Karaikal. It is interesting to see that this invoice mentions f. o. r. cement price as the controlled price stipulated in the Cement Control Order, and this is also what is contemplated by condition 4 set out earlier. To this is added a Central excise duty. Thereafter, the assessee purports to give credit for railway freight and a net price, which is described as net price 'f. o. r.' works siding is worked out, to which are added Central sales tax, packing charges, sales tax on packing charges (if any) and a deposit to cover any levy of sales tax on freight. In our opinion, if, as stated by the assessee, all that it did was to sell the cement at net price f. o. r. with a liability on the purchasers to bear the railway freight, the invoice need not have contained all the details which it purports to contain including all the above calculations starting with the f. o. r. price at the controlled rate. In such an event all that the assessee need to have done was to invoice the purchasers at the net price f. o. r. works siding and despatch the goods under 'freight to pay'. It is also interesting to see that the invoice specifically includes a deposit to 'cover any levy of sales tax on freight'. It is clear that the invoice has been drawn up in terms of the Control Order. The price charged by the assessee is f. o. r. cement price and Central excise duty has been added on this footing. The invoice mentions the amount of railway freight and permits it to be deducted only because the freight will be paid to the railways by the purchasers on behalf of the assessee and credit is given therefor in the invoice. This process is necessary because the amounts of freight for which credit has been given have to be eventually adjusted while settling accounts between the manufacturers of cement and obtaining reimbursement, if any, from the pool account. The producer will have to satisfy the concerned authorities that, in certain instances, the freight paid is in excess of the freight which a producer can be called upon to pay in terms of paragraph 9 of the Cement Control Order. In our opinion the invoice placed before us only reinforces the factual and legal position outlined by this court in the Hindustan Sugar Mills Ltd.'s case in regard to the purpose and effect of the terms of the Cement Control Order.
8. For the reasons mentioned above we are of the opinion that the High Court was fully justified in applying the decision in Hindustan Sugar Mills Ltd. to the present case and denying the benefit of deduction of freight charges from the controlled price to arrive at the turnover of the assessee for the purpose of the Central Sales Tax Act.
16 The apex court again reiterated the law laid down by it in Hindustan Sugar Mills Ltd. [1979] 43 STC 13. A Division Bench of this court in Straw Products Ltd. [1987] 65 STC 20 following law laid down by the apex court in Hindustan Sugar Mills Ltd. [1979] 43 STC 13 held that a contract of sale of the goods f. o. r. destination railway may be of two kinds. In the first, the freight is part of the considerations payable to the seller and forms part of the price. The delivery is complete at the destination railway station and the risk till then continues to remain with the selling dealer while in the other although the price stipulated is f. o. r. destination railway station, the delivery is complete when the goods are put on rail and the risk passes to the purchaser thereafter. The freight is payable by the purchaser, though the price agreed upon is f. o. r. destination railway station. The price of the goods receivable in such cases is thus the f. o. r. destination price less the amount of freight payable by the purchaser. The Division Bench held that if the delivery of the goods was complete when the goods were delivered to the carrier, therefore, the railway freight in respect of goods sold by the dealer paid by the purchaser would not form part of the sale price.
17. Though the arguments raised by the learned Counsel for the applicant are attractive, but as per definition in Section 2(h) of the CST Act, the sale price excludes cost of freight or delivery if such cost is separately charged, which position emerges in this matter also, but the apex court in Hindustan Sugar Mills Ltd. [1979] 43 STC 13 has clarified the position and the aforesaid law of land has to be followed in this case.
18. Now, in the light of the aforesaid settled law, the factual position of this case may be seen. In this case, as stated hereinabove, the freight was paid by the purchaser at the destination and the condition was f. o. r. There is no finding on record that in fact the risk was of the purchaser or seller during the transportation. Though it is also not in dispute that the freight though it was shown in the bill, but it was not charged and did not form part of sale price of the seller and in fact it was paid by the purchaser at the time of delivery of the goods from the railway. In these circumstances, the contract between the parties in this regard was material, which has not been considered by the Tribunal nor it has been referred in the order of reference. The Board has not referred the terms of the contract between the parties which was necessary in view of the law laid down by the apex court in Hindustan Sugar Mills Ltd. [1979] 43 STC 13.
19. In view of the aforesaid, we answer the question referred in following manner:
That the Tribunal was not justified in excluding the freight charges in the total sale price, though holding that the freight charges were shown separately in the bill and paid by the buyer and the transactions were f. o. r. destination without considering the terms of the contract or transaction between the parties. If as per terms of the contract or transaction, the delivery was complete when the goods were loaded on railway and thereafter the risk of transit was of purchaser then the freight cannot be included in the sale price but in case the seller was responsible for the risk of transportation up to the destination (railway station), then the sale price was includible with the freight charges.
20. The question referred is accordingly answered.