Karnataka High Court
Smt. Narayani Rao vs Commissioner Of Commercial Taxes In ... on 29 June, 1992
Equivalent citations: ILR1992KAR2180
Author: Shivaraj V. Patil
Bench: Shivaraj V. Patil
JUDGMENT K. Shivashankar Bhat, J.
1. The following question has been referred for the consideration of the Full Bench, by a Division Bench of this Court :
"Whether, the exemption under rule 6(4)(f) of the Karnataka Sales Tax Rules, 1957, is available to a dealer in all circumstances, or is restricted in the manner laid down in the judgments of the Supreme Court in the cases of Dyer Meakin Breweries Ltd. and D. C. Johar & Sons (P) Ltd. [1971) 27 STC 120 STC 120 ?"
2. The petitioner's husband (hereinafter referred as "the dealer") was carrying on business in silica sand, and was registered as a dealer under the provisions of the Karnataka Sales Tax Act, 1957 ("the Act", for short). The instant case pertains to the assessment year 1st July, 1981 to 30th June, 1982. The assessing authority accepted the claim of the dealer that the freight charges which were specified and charged separately were to be excluded under rule 6(4)(f) of the Karnataka Sales Tax Rules, 1957 ("the Rules", for short) to arrive at the taxable turnover in respect of silica sand sold by the dealer to the various purchasers. It is stated in the assessment order that the dealer extracted silica sand and sold it to various purchasers and at the time of the sale he collected freight charges separately by raising debit bills. These freight charges were not shown in the same bills. The assessment order further stated that the sale price fixed with the buyers was at the point of extraction of the silica sand and the buyers agreed to pay transport charges separately from the place of extraction to the factory of the buyers. For the present purpose it is unnecessary for us to traverse the facts in detail.
3. The Deputy Commissioner of Commercial taxes took up the matter suo motu and revised this order and held that these freight charges were not deductible under rule 6(4)(f). According to the Deputy Commissioner, a mere stipulation of the condition to transport silica sand on behalf of the buyers will not change the real character of the same; the condition of weighment at the place of buyers, testing for quality of goods proves that the buyer has reserved the right of rejecting the goods if such goods were not up to the standard expected. According to the Deputy Commissioner the agreement entered into between the dealer and others in some cases appears to have been made only to see that the freight charges were split up in order to claim the deduction from the total turnover of the dealer. The Appellate Tribunal affirmed this order. After referring to the terms and conditions of some of the contracts the Appellate Tribunal held that the amount payable by the purchaser to the dealer included freight charges and therefore the same shall form part of the sale price irrespective of the fact whether the cost of freight is shown separately as payable by the purchaser or not. The Appellate Tribunal thereafter agreed with the finding of the Deputy Commissioner that for all practical purposes the place of sale shall be regarded as the place where the goods were made available to the buyers. The Appellate Tribunal opined that the purchasers did not intend that the sale of silica sand should be completed only at the pit head by drawing samples.
4. When the matter came up before the Division Bench, a decision of the Supreme Court in Vinod Coal Syndicate v. Commissioner of Sales Tax [1989] 73 STC 317 was cited on behalf of the petitioner to contend that, having regard to the language of rule 6(4)(f), the freight charge in the instant case has to be excluded while computing the taxable turnover. A doubt arose as to whether the decision in Vinod Coal Syndicate's case [1989] 73 STC 317 (SC) took a divergent view from that taken earlier by the Supreme Court in Dyer Meakin Breweries Ltd. v. State of Kerala [1970] 26 STC 248 and D. C. Johar & Sons (P.) Ltd. v. Sales Tax Officer [1971] 27 STC 120.
5. Section 2(1)(v) defines "turnover", which reads thus :
"(v) 'turnover' means the aggregate amount for which goods are bought or sold, or supplied or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (t) by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration :
6. Provided that the proceeds of the sale by a person of agricultural or horticultural produce grown within the State by himself or on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, other than the proceeds of the sale by a company relating to pepper, cardamom or rubber grown within the State by such company, shall be excluded from his turnover.
7. Explanation. - Subject to such conditions and restrictions, if any, as may be prescribed, in this behalf -
(i) (Omitted by Act 7 of 1966) (1-4-1966).
(ii) the amount for which goods are sold include any sums charged for anything done by the dealer in respect of the goods sold at the time of or before the delivery thereof.
(iii) Omitted by Act 23 of 1983) (18-11-1983).
(iv) where for accommodating a particular customer, a dealer obtains goods from another dealer and immediately disposes of the same to the said customer, the sale in respect of such goods shall be included in the turnover of the latter dealer but not in that of the former."
8. Section 2(1)(u-2) defines "total turnover" which in substance means the aggregate turnover in all goods of a dealer. Section 2(1)(u-1) defines "taxable turnover" which in effect means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover as may be prescribed. Section 5(6) states that the "total turnover", "taxable turnover" or "turnover" shall be determined in accordance with the rules as may be prescribed.
9. We are concerned with rule 6 in this regard. According to rule 6(1) the total turnover of a dealer shall be the aggregate of the various amounts stated in sub-clauses (a) to (f) thereof. Rule 6(4) states that in determining the taxable turnover the amounts specified in clauses (a) to (p) of the said sub-rule shall be deducted from the total turnover. Clause (f) which is relevant reads as follows :
"(f) all amounts which are actually incurred under the head 'freight' when specified and charged for by the dealer separately without including such amounts in the price of the goods sold;"
10. To consider the question referred to us, necessarily we have to refer to a few of the decisions rendered by the Supreme Court having a bearing on the present question. In Dyer Meakin's case , the Supreme Court was concerned with similar provisions of the Kerala General Sales Tax Act and the Rules. The appellant (the company) therein had its place of business in Ernakulam. It was getting liquor manufactured or produced at different places in other States. The said liquor was being transported from the place of manufacture, to its place of business at Ernakulam. It had a uniform ex-factory price in respect of the liquor sold by it; but while selling at different centres it was adding to this ex-factory price the appropriate amount attributable to freight and other charges. The company made out as per bills, for the ex-factory price and for "freight and handling charges". It claimed exclusion of freight and handling charges in the computation of the taxable turnover by relying on rule 9(f) of the Kerala General Sales Tax Rules. In fact rule 9(f) provided for the deduction from the turnover, of the freight and charges for packing and delivery. There was no dispute that the sale of the liquor took place in Ernakulam and that the company arranged to transport liquor from the factories elsewhere to its warehouse at Ernakulam. The Supreme Court held at page 250 :
"......... All the expenditure incurred is prior to the sale and was evidently a component of the price for which the goods were sold. It is true that separate bills were made out for the price of the goods ex-factory and for 'freight and handling charges'. But, in our judgment, the Tribunal was right in holding that the exemption under clause (f) of rule 9 applies when the freight and charges for picking and delivery are found to be incidental to the sale and when they are specified and charged for by the dealer separately and expenditure incurred for freight and packing and delivery charges prior to the sale and for transporting the goods from the factories to the warehouse of the company is not admissible under rule 9(f). Rule 9(f) seeks to exclude only those charges which are incurred by the dealer either expressly or by necessary implication for and on behalf of the purchaser after the sale when the dealer undertakes to transport the goods and to deliver the same or where the expenditure is incurred as an incident of sale. It is not intended to exclude from the taxable turnover any component of the price, expenditure incurred by the dealer which he had to incur before sale and to make the goods available to the intending customer at the place of sale."
11. It was thus held that the freight and handling charges incurred by the company to have the goods transported to its place of business, though separately specified and charged, were not deductible under rule 9(f). The deductible charges are the charges incurred by the dealer for and on behalf of the purchaser after the sale. The expenditure incurred by the company until the sale is effected will be part of the cost of the company and therefore will necessarily be a component of the price charged for the sale. To the same effect was the decision rendered by the Supreme Court in D. C. Johar & Sons (P.) Ltd. v. Sales Tax Officer [1971] 27 STC 120 which again is a case that arose under the Kerala General Sales Tax Act; the concluding observation of the Supreme Court at page 121 is as follows :
"......... The fact that the price includes the expenditure incurred by the company for railway freight for transporting the goods form the factory site to its place of business does not make the tax imposed upon that component a tax on railway freight."
12. Earlier in Webbs Sales and Service (P.) Ltd. v. Commissioner of Commercial Taxes [1969] 24 STC 84 a Bench of this Court had held that the freight paid by the dealer in order to bring the goods from any place to any other place after he has agreed to sell the goods to the customer so that he could deliver these goods to the customer at the point specified by him was deductible under rule 6(4)(f). It was pointed out at page 86 :
"......... If the dealer agrees to sell to the customer goods of a particular description and these goods have to be purchased by the dealer from the manufacturer so that there could be an implementation of that agreement to sell, and the customer who agreed to purchase these goods consents to pay the freight which the dealer has to incur for bringing the goods from the place of manufacture to the place where the purchaser wants them to be delivered, there could be very little doubt that the freight incurred by the dealer in that situation falls wholly within clause (f)(i) of rule 6(4)."
13. However, in Arvind Motors v. State of Karnataka [1985] 59 STC 337 a Full Bench of this Court overruled the aforesaid decision rendered in Webbs Sales and Service case on the ground that the ratio of the decision in Webbs Sales case is impliedly overruled by the two decisions of the Supreme Court in Dyer Meakin's case [1970] 26 STC 284 and D. C. Johar & Sons case [1971] 27 STC 120. It was contended before us that this Full Bench decision in Arvind Motors case [1985] 59 STC 337 (Kar) is no longer good law after the decision of the Supreme Court in Vinod coal Syndicate's case [1989] 73 STC 317.
14. Here, the Supreme Court was concerned with the provisions of the U.P. Sales Tax Act. The facts of the case found in the reported decision are, that the appellant before the Supreme Court was a commission agent in the coal business. In its turnover, certain sums paid by the principals to the appellant for supplies of coal made directly by the suppliers were included. The appellant claimed deduction of these sums as freight charges. The Supreme Court observed at page 319 :
"It appears from the impugned judgment of the High Court that the only ground on which the High Court has held that the amount paid on account of freight by the principals should be included in the taxable turnover of the appellant is that he benefits of the relevant provision in explanation II to clause (i) of section 2 of the U.P. Sales tax Act was not invoked by the appellant, and, therefore, it was not open to the appellant to take advantage of that clause in the explanation. Clause (i) of section 2 of the U.P. Sales Tax Act, defines the expression 'turnover' as the aggregate amount for which goods are supplied or distributed by way of sale or sold, by a dealer, either directly or through another. Clause (i) of explanation II provides that 'the amount for which goods are sold shall include any sums charged for anything done by the dealer in respect of the goods sold at the time of or before the deliver thereof, other than the cost of freight or delivery, or cost of installation or the amount realised as sales or purchase tax, when such cost or amount is separately charged'. Plainly, the Legislature intended that where the cost of freight was charged separately, that amount could not be included in the turnover of a dealer. That is what was done in this case. The freight was separately charged and was paid accordingly by the principals. The High Court erred in including the cost of freight in the taxable turnover of the appellant."
15. It is clear from the above that the Supreme Court was concerned with the application of the U.P. Act to the fats of the particular case. Obviously the facts were such that the cost of freight shown separately by the appellant therein was the one which was to be excluded while computing the taxable turnover. The nature of the transaction and the circumstances under which the cost was incurred by the appellant in the said case are not discernible. The earlier decisions rendered by the Supreme Court in Dyer Meakin case and D. C. Johar & Sons case [1971] 27 STC 120 were not referred to. In these circumstances it is not possible for us to accept the contention of the learned counsel for the petitioner that this decision of the Supreme Court runs counter to the ratio of the earlier two decisions. The distinction about the cost being the post-sale expenditure or pre-sale expenditure and whether the cost of freight was an expenditure incurred as an incident of sale were not considered by the Supreme Court in Vinod Coal Syndicate's case [1989] 73 STC 317 obviously because the said aspects did not arise for consideration.
16. According to Mr. H. L. Dattu, learned Government Advocate, there are five factors which require to be considered while construing rule 6(4)(f); they are : (i) the said rule does not proved for the deduction of forwarding charges; (ii) it provides for the deduction of post-sale expenses only; (iii) the said rule excludes only those charges which are incurred either expressly or by necessary implication for and on behalf of the purchaser after sale when the assessee undertakes to transport the goods and deliver the same; (iv) cost of freight, if it becomes part of the sale price then it is not excluded from the taxable turnover; however if it is incurred after the sale then this rule is attracted and the cost gets excluded; and (v) the cost of freight incurred for the inward journey of the goods to the dealer is not deductible; only freight outwards is deductible. We are of the view that the basic test is the test applied by the Supreme Court in Dyer Meakin's case in D. C. Johar & Sons case [1971] 27 STC 120. If cost incurred by the dealer is incidental to his acquisition of the goods, it would be part of his expenditure and would necessarily form a component of the price when he sells the goods. However, if the cost of freight is charged by the dealer because the transportation of the goods is for and on behalf of the purchaser who purchased the goods from him, it will be a case of post-sale expenditure to which the benefit of rule 6(4)(f) will be available. Similarly, if the dealer incurs the expenditure towards freight of his own goods, normally it would add itself to the cost of his goods and hence will be an element of the price for the goods when he sells it.
17. Only because the freight is specified and separately charged, without including such an amount in the sale price, it cannot be automatically held as a deductible item. The facts of each case will have to be examined to see the real nature of the alleged cost of freight, though specified and separately charged, so that cost which would normally be a component of the cost of goods to the dealer may not escape the tax net.
18. The decision of the Supreme Court in Hindustan Sugar Mills Ltd. v. State of Rajasthan [1979] 43 STC 12 pertains to the interpretation of the term sale price defined in the Central Sales Tax Act which again was referred and relied upon by a Division Bench of this Court in Kurkunta and Seram Stones (P) Ltd. v. State of Karnataka [1987] 87 STC 105 supra; ILR 1992 Kar 163. We are of the view that it is unnecessary to consider the said decision having regard to the question posed for our consideration in this reference.
19. Consequently, the question referred to us is answered as follows :
20. The exemption under rule 6(4) of the Karnataka Sales Tax Rules, 1957, is not available to a dealer irrespective of the particular circumstances of the case. The availability of the deduction under the said rule has to be tested in the manner laid down by the judgments of the Supreme Court in Dyer Meakin and D. C. Johar & Sons [1971] 27 STC 120.
21. Reference is answered accordingly.