Madras High Court
M/S.Oil And Natural Gas Commission vs The Tamil Nadu Sales Tax Appellate ... on 29 July, 2022
Author: Mohammed Shaffiq
Bench: R. Mahadevan, Mohammed Shaffiq
W.P. Nos.20503 to 20505 of 2007
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved on : 24.06.2022
Pronounced on : 29.07.2022
CORAM
THE HONOURABLE MR. JUSTICE R. MAHADEVAN
AND
THE HONOURABLE MR. JUSTICE MOHAMMED SHAFFIQ
W.P. Nos.20503 to 20505 of 2007
M/s.Oil and Natural Gas Commission,
now known as
M/s.Oil and Natural Gas Corporation Ltd.,
presently at
Cauvery Asset, Karaikal,
Pondicherry. .. Petitioner in all the Writ petitions
Versus
1.The Tamil Nadu Sales Tax Appellate Tribunal,
(Main Bench), Rep. by its Secretary,
City Civil Court Buildings,
Chennai-600 104.
2.The Deputy Commissioner (CT) Appeals,
Chennai-600 001.
3.The Assistant Commissioner (CT),
Fast Track Assessment Circle - II,
Chennai-600 006. .. Respondents in all Writ petitions
PRAYER in W.P. No.20503 of 2007 : Writ Petition filed under Article 226 of
the Constitution of India praying to issue a Writ of Certiorarified Mandamus
calling for the records of the 1st Respondent in his proceedings in
T.A.No.789/2000, quash the order dated 21.10.2003 passed therein and further
https://www.mhc.tn.gov.in/judis
1/31
W.P. Nos.20503 to 20505 of 2007
direct the 3rd Respondent to grant deduction on the freight charges received by
the petitioner towards the crude oil supplied to M/s.Madras Refineries Ltd.
PRAYER in W.P. No.20504 of 2007: Writ Petition filed under Article 226 of the
Constitution of India praying to issue a Writ of Certiorarified Mandamus calling
for the records of the 1st Respondent in his proceedings in T.A.No.790/2000,
quash the order dated 21.10.2003 passed therein and further direct the 3rd
Respondent to grant deduction on the freight charges received by the petitioner
towards the crude oil supplied to M/s.Madras Refineries Ltd.
PRAYER in W.P. No.20505 of 2007: Writ Petition filed under Article 226 of the
Constitution of India praying to issue a Writ of Certiorarified Mandamus calling
for the records of the 1st Respondent in his proceedings in T.A.No.791/2000,
quash the order dated 21.10.2003 passed therein and further direct the 3rd
Respondent to grant deduction on the freight charges received by the petitioner
towards the crude oil supplied to M/s.Madras Refineries Ltd.
For Petitioner : Mr.R.L.Ramani
in all W.Ps. Senior Counsel
for M/s.P.V.Sudhakar
For Respondents : Mr.Richardson Wilson
in all W.Ps. Additional Govt. Pleader
COMMON ORDER
MOHAMMED SHAFFIQ, J.
These writ petitions are filed Praying for a writ of certiorarified mandamus to quash the order of the first Respondent /Tribunal and direct the third respondent to grant deduction on the freight charges received by the petitioner towards the crude oil supplied to its customer viz., M/s. Madras Refineries Ltd, (hereinafter referred to as "MRL"). https://www.mhc.tn.gov.in/judis 2/31 W.P. Nos.20503 to 20505 of 2007
2. At the outset, it may be relevant to set out the facts very briefly:
The petitioner is a Government of India undertaking engaged in exploring Crude Oil in the Cauvery Basin in the State of Tamil Nadu. The crude oil pumped out from the oil wells at Nannilam and Narimanam was transported to the oil storage point of the petitioner at Nagapattinam through pipelines. The oil is transported to the storing point of the petitioner at Tondiarpet in Chennai through trucks by road or in railway wagons. Thereafter, in terms of the directions given by the Ministry of Petroleum and Natural Gas, the Crude Oil was pumped through pipelines to the storage tank of MRL to whom the crude oil was sold. It is pertinent to mention here that the petitioner was under an obligation to sell the entire stock of crude oil only to MRL. The quantum of crude oil pumped through pipelines into the storage tank of MRL was acknowledged/ ascertained after removal of Base Sediment and Water (BS & W) and the certificate was issued by MRL only for the quantity so acknowledged/ ascertained. The Central Excise Officers stationed at MRL would certify the quantity delivered to MRL and CESS was payable only on the acknowledged quantity i.e., after removal of Base Sediment and Water (BS & W).
3. In the above background, the question arises as to whether the freight charges for the transport of crude oil from the oil well at Narimanam to https://www.mhc.tn.gov.in/judis 3/31 W.P. Nos.20503 to 20505 of 2007 the storage tank of MRL, were pre-sale expenses and thus, form part of turnover. Since, in the view of the Revenue, the delivery/sale concluded only when crude oil was pumped to the storage tank of MRL, the orders of assessment were made treating the transportation/freight charges as taxable turnover, liable to tax and the assessing authority also proceeded to levy penalty. The orders of assessment were confirmed by the First Appellate authority and the Tribunal.
4. For better appreciation, it may be relevant to set out the findings of the Tribunal, which are under challenge in these writ petitions, while confirming the rejection of the claim of deduction on freight charges made by the petitioner. Findings of the Tribunal:
"1. Though the freight charges are charged separately in the invoices raised, such freight are in the nature of partial re-imbursement.
2. The buyers Tvl.MRL were not prepared to take delivery of the oil at the oil wells at Narimanam or at the storing point at Nagapattinam. It is not proved by the appellant that the crude oil was transported at the risk of the buyers and the appellant had no responsibility of any kind as soon as the oil was loaded in the lorry or railway wagons at Nagapattinam.
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.
https://www.mhc.tn.gov.in/judis 4/31 W.P. Nos.20503 to 20505 of 2007
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 to have become the property of the buyers at Narimanam in that the appellant had undertaken to transport the crude oil through railway wagons or lorry to the Tondiarpet storing point and it was practically at Tondiarpet did the crude oil pass on the buyers Tvl.MRL and therefore the transportation of crude oil from Narimanam/ Nagapattinam to Tondiarpet has to be held as that of the appellant in connection with the ultimate sale of goods."
5. With the above findings, the Tribunal upheld the orders passed by the Assessing Officer as well as the First Appellate Authority on the premise that the sale took place at the point of time, when the crude oil was delivered into the tank of MRL and not at Narimanam as claimed by the petitioner and thus, the transport charges were liable to tax under the Tamil Nadu General Sales Tax Act, 1959 (hereinafter referred to as the "TNGST Act, 1959"). https://www.mhc.tn.gov.in/judis 5/31 W.P. Nos.20503 to 20505 of 2007
6. Aggrieved by the above order of the Tribunal, the petitioner has filed these writ petitions.
7.1. (a)The thrust of the argument of the learned senior counsel for the petitioner is that in terms of Explanation 3 to Section 2(n) of the TNGST Act, 1959, the goods were appropriated at Nannilam and Narimanam and on such appropriation, MRL becomes the owner of the crude oil i.e., on removal at Narimanam. The sale price was Ex-Narimanam and not inclusive of transportation/ freight charges. The transportation charges did not form part of the consideration for the sale of crude oil and was in-fact reimbursement of the actual transportation charges incurred for transportation of the crude oil from Narimanam to MRL. It is further contended that once the goods are identified/ appropriated, the sale is complete in terms of Explanation 3 to Section 2 (n) of the TNGST Act, 1959.
(b)The appeals filed for the assessment years 1988-89 to 1991-92, have been allowed, accepting the petitioner's claim for deduction of freight charges from taxable turnover.
(c)During the assessment year 1992-93, the sale price was fixed by the Government of India with effect from 16.09.1992 at Rs.2720 per metric ton and the break up of the same was given as follows:
https://www.mhc.tn.gov.in/judis 6/31 W.P. Nos.20503 to 20505 of 2007 Basic price -Rs.1506 per metric ton Cess - Rs.900 per metric ton Royalty - Rs.314 per metric ton
(d)The price was ex-factory, which indicated that the sale is also ex-factory and thus, the freight charges would not form part 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 https://www.mhc.tn.gov.in/judis 7/31 W.P. Nos.20503 to 20505 of 2007 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 the very nature of the goods involved in the transaction, it was necessary for the petitioner to deliver the goods at the storage point of MRL. The petitioner's submission on the basis of Explanation 3 to Section 2(n) of the TNGST Act, 1959 is wholly misplaced and that appropriation by itself would not result in completed sale and thus, the same is liable to be rejected.
9. Heard both sides.
10. It appears to us that the writ petitions must fail for the following reasons:
Failure to challenge the orders of assessment for the earlier period:
The submission of the petitioner that for the assessment years 1988-89 to 1991-92, the appeals have been allowed excluding freight charges and the same has attained finality and thus, it is not permissible for the Revenue to take a contrary view, needs to be rejected for two reasons:
a. There is no res-judicata in tax matters, the liability to pay tax from year to year is a separate and distinct liability; it is based on a different cause of https://www.mhc.tn.gov.in/judis 8/31 W.P. Nos.20503 to 20505 of 2007 action from year to year. The said position would be clear from the following judgments:
i) BSNL v. Union of India, [(2006) 3 SCC 1].
ii) Amalgamated Coalfields No. (2) [1963 Supp (1) SCR 172 : AIR 1964 SC 1013] , SCR p. 184]
iii) Devi lal Modi vs. STO, [AIR 1965 SC 1150].
b. Secondly, it has been held repeatedly by the Hon'ble Supreme Court that if a question of law is raised, the mere fact that the Revenue may not have challenged for some other assessment years or for some other assessee by itself will not preclude the Revenue from contesting the issue. The said position would be clear from the judgment in the case of Catholic Syrian Bank Ltd. v. CIT, [(2012) 3 SCC 784], wherein it was held as under:
"15. The appellant has contended that similar claims had been decided in favour of the banks for Assessment Years 1991-1992 to 1993- 1994, by the Special Bench of ITAT, which had not been challenged by the Department. As such, the issue had attained finality and could not be disturbed in the subsequent years.
16. The above contention of the appellant Bank does not impress us at all. Merely because the orders of the Special Bench of ITAT were not assailed in appeal by the Department itself, this would not take away the right of the Revenue to question the correctness of the orders of assessment, particularly when a question of law is involved....."
11. Having rejected the preliminary submission of the petitioner, we shall now proceed to examine the issue involved herein, on merits:
https://www.mhc.tn.gov.in/judis 9/31 W.P. Nos.20503 to 20505 of 2007 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.
"Section 2(n) “sale” with all its grammatical variations and cognate expressions means every transfer of the property in goods (other than by way of mortgage, hypothecation, charge or pledge) by one person to another in the course of business for cash, deferred payment or other valuable consideration and includes –
(i)...... "
(iii) A reading of the above provision would show that to constitute "sale", the following ingredients must be present and satisfied:
https://www.mhc.tn.gov.in/judis 10/31 W.P. Nos.20503 to 20505 of 2007 a. There must be transfer of property in goods.
b. Such transfer must be from one person to another.
c. It must be in the course of business.
d. It must be for cash, deferred payment or other valuable consideration.
(iv) It would thus be clear that in the absence of transfer of property in goods, there cannot be a completed sale and thus, the argument of the petitioner that the appropriation results in completed sale and once the goods are appropriated, the sale would also stand completed, needs to be rejected as the acceptance of such argument would result in levying the transactions on the basis of mere appropriation falling short of sale, which would be beyond the pale of Entry 54 of List II to the VII Schedule to the Constitution of India. It may also be relevant to clarify that under Entry 54 of List II to the VII Schedule of the Constitution of India as it existed during the relevant period in question, the power of the State to levy tax extended to levying tax on what would constitute sale within the meaning of "Sale of Goods Act, 1930" and the 6 categories of mutant sales which were deemed to be sales pursuant to the 46th Amendment to the Constitution of India. However, the acceptance of the submission of the petitioner that the appropriation of goods towards a contract of sale would confer competence to levy tax under Entry 54 of List II to the VII Schedule of the https://www.mhc.tn.gov.in/judis 11/31 W.P. Nos.20503 to 20505 of 2007 Constitution of India, would result in extending the charge/ levy to a transaction, which neither falls within the meaning of “sale” in terms of the "Sale of Goods Act, 1930" nor within the 6 categories of mutant sales which are deemed to be sales pursuant to the 46th Amendment to the Constitution of India. In other words, it results in creating a seventh category of fictional sale which is clearly beyond the pale of Entry 54 of List II to the VII Schedule read with Article 366 (29 A) of 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 composite elements of a sale such as intention of the parties, goods, delivery, etc. would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. The courts must move with the times. [See Attorney General v. Edison Telephone Co. of London Ltd., (1880) 6 QBD 244 : 43 LT 697] But the Forty-sixth Amendment does not give a licence, for example, to assume that a transaction is a sale and then to look around for what could be the goods. The word “goods” has not been altered by the Forty-sixth Amendment. That ingredient of a sale https://www.mhc.tn.gov.in/judis 12/31 W.P. Nos.20503 to 20505 of 2007 continues to have the same definition. The second respect in which Gannon Dunkerley [State of Madras v. Gannon Dunkerley & Co.
(Madras) Ltd., (1958) 9 STC 353 : AIR 1958 SC 560 : 1959 SCR 379] has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by Article 366(29-A). Transactions which are mutant sales are limited to the clauses of Article 366(29-A). All other transactions would have to qualify as sales within the meaning of the Sale of Goods Act, 1930 for the purpose of levy of sales tax.”
(v) It is clear that any transaction other than the six categories of deemed sales must qualify as a sale within the meaning of Sale of Goods Act, 1930, and the submission of the petitioner, equating appropriation to “sale” is in gross disregard to the scheme of tax on sales under the Constitution of India and also the Sale of Goods Act, 1930 and TNGST Act, 1959, thus, needs to be rejected.
II. Equating fixing of situs of sale with time of sale – misconception:
(i) In the case of unascertained / future goods, the sale is deemed to take place inside the State, where it is appropriated. To appreciate the need to fix the situs of a sale in a particular State, it may be relevant to have a look at the historical background leading to the Constitutional and Statutory amendment.
The need to fix the situs of sale was, in view of the fact that multiple States levied tax on the same transaction of sale by looking to the different ingredients of sale to assume jurisdiction resulting in a transaction of sale being subject to https://www.mhc.tn.gov.in/judis 13/31 W.P. Nos.20503 to 20505 of 2007 multiple levies. This is in view of the fact that situs of an intangible concept like a sale can only be fixed notionally either by the legislature having the competence or by Judge made law. As a matter of fact, prior 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 a reading of Explanation 3 to Section 2(n) of the TNGST Act, 1959. The relevant sections are tabulated hereunder:
https://www.mhc.tn.gov.in/judis 14/31 W.P. Nos.20503 to 20505 of 2007 Section 4 of the CST Act, 1956 Explanation 3 to Section 2(n) of the TNGST Act, 1959
4. When is a sale or purchase of goods said to Explanation (3)-(a) The sale of purchase of take place outside a State.— (1) Subject to the goods shall be deemed for the purpose of this provisions contained in section 3, when a sale Act, to have taken place in the State, wherever or purchase of goods is determined in the contract of sale or purchase might have accordance with sub-section (2) to take place been made, if the goods are within the State-
inside a State, such sale or purchase shall be (i) in the case of specific or ascertained goods, deemed to have taken place outside all other at the time the contract of sale or purchase is States. (2) A sale or purchase of goods shall be made; and (ii) in the case of unascertained or deemed to take place inside a State, if the future goods, at the time of their appropriation goods are within the State— (a) in the case of to the contract of sale or purchase by the seller specific or ascertained goods, at the time the or by the purchaser, whether the assent of the contract of sale is made; and (b) in the case of other party ins prior or subsequent to such unascertained or future goods, at the time of appropriation. their appropriation to the contract of sale by the seller or by the buyer, whether assent of Explanation (3)-(b) Where there is single the other party is prior or subsequent to such contract of sale or purchase of goods , situated appropriation. Explanation — Where there is a at more places than one, the provisions of single contract of sale or purchase of goods clause (a) shall apply as if there were separate situated at more places than one, the contracts in respect of the goods at each of provisions of this sub-section shall apply as if such places. there were separate contracts in respect of the goods at each of such places.
(iii) The submission of the petitioner that the sale is completed the moment the goods were appropriated at Nannilam or Narimanam, proceeds on a misconception and overlooks the position that the act of appropriation i.e., earmarking, setting apart or identifying the goods, is relevant only for the limited purpose of fixing the situs of sale in the case of unascertained or future 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 https://www.mhc.tn.gov.in/judis 15/31 W.P. Nos.20503 to 20505 of 2007 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. In the other sense, it may mean a final appropriation of the goods to the contract so as to pass the property therein to the buyer. Consequently, when goods are selected with the common consent of the parties there may be appropriation of the goods to the contract even though the property has not passed. The scheme of the Sales Tax Act goes to show that the Parliament left out of account the element of passing of property as of any relevance in determining the situs of sale and the question of appropriation of goods has to be decided irrespective of the passing of property.
9. In other words, the appropriation referred to in Section 4(2)(b) connotes the setting apart of goods as specific goods to be delivered under the contract of sale and not an appropriation linked with passing of property. The term ‘unconditional appropriation existed in the Sale of Goods Act years before the enactment of the Central Sales Tax Act, and if the Parliament intended to convey the same idea, the Parliament would not have omitted the word “unconditionally” in Section 4(2)(b).” (emphasis supplied)
(iv) It is thus clear that the Parliament and the State Legislature have looked to appropriation only for the purpose of fixing the situs of sale. The https://www.mhc.tn.gov.in/judis 16/31 W.P. Nos.20503 to 20505 of 2007 transfer of property has not been dispensed with, while examining, whether a transaction would constitute a "sale" or otherwise. In the absence of transfer of property, situs becomes irrelevant, as there is no completed sale. Therefore, the submission of the petitioner in looking to appropriation not only for fixing the situs, but also for determining the time of sale, is lacking merit.
III. Deduction of freight under Rule 6(c) (i) of the TNGST Rules, 1959:
(i) To examine the claim of deduction of freight charges, while arriving at the taxable turnover, it may be relevant to refer to Rule 6(c)(i) of the TNGST Rules, 1959, which reads as under :
"Rule 6:
“The tax or taxes under Section 3 or 4 shall be levied on the taxable turnover of the dealer. In determining the taxable turnover, the amounts specified in the following clauses shall, subject to the conditions specified therein, be deducted from the total turnover of a dealer;
a) ....
b) ....
c) all amounts falling under the following three heads when specified and charged for by the dealer separately, without including them in the price of the goods sold:-
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:
https://www.mhc.tn.gov.in/judis 17/31 W.P. Nos.20503 to 20505 of 2007 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 price of the goods sold. If the seller is under an obligation to transport/ carry the goods to the destination of the purchaser, and if it is shown that the risk is borne by the seller until the goods are delivered at the buyers premises in discharging his obligation to the purchaser under the contract of sale and such obligation is not discharged in the capacity of an agent of the purchaser after completion of sale, it appears that the freight would form part of the price and then irrespective of whether the same is shown separately or otherwise, the same would form part of taxable turnover liable to tax.
https://www.mhc.tn.gov.in/judis 18/31 W.P. Nos.20503 to 20505 of 2007 b. Price Ex- Factory or Works – Not conclusive delivery Ex-Factory:
In the present case, the Price is Ex-Factory at Narimannam/Nannilam.
However, the same may have no relevance in deciding the claim of deduction of freight, while determining the taxable turnover. This is in view of the fact that while the price may be ex-works, but if the delivery is not, in which case, freight cannot be deducted from the taxable turnover, then the obligation to pay the freight was on the seller/ petitioner as there was no sale at all, unless the goods were delivered at the premises/storage tanks of the buyer. Applying the said reasoning to the facts of the present case, it appears that the delivery is only at MRL premises and the sale is complete only when oil is pumped into the storage tank of MRL, which would be evident from the fact that the measurement was taken after removal of Base Sediment and Water (BS&W) at the premises of MRL. The transfer of title to the goods thus passes at the place of delivery i.e., premises of the buyer. Though the contract mentioned the price as ex-factory price, the delivery was not at the factory gate and thus freight may not be entitled for deduction. In this regard, it may be relevant to refer to the decision of the Hon'ble Supreme Court in India Meters Ltd v. State of Tamil Nadu [(2010) 9 SCC 423], wherein while dealing with the claim of deduction of freight, the relevance of Ex-factory price was considered. The relevant paragraphs of the said decision may be set out hereunder:
https://www.mhc.tn.gov.in/judis 19/31 W.P. Nos.20503 to 20505 of 2007 “8.According to the clause provided in the contract the transfer of title to the goods was to take place only on delivery of goods at the customer's place and that the customer's obligation to pay would arise only after the delivery had been so 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 was not at the factory gate. The specification of what the price would be at the factory gate, therefore, does not in the context of the term subject to which the sale was agreed to be effected, render it the point or the location at which the sale can be said to have been completed. Had the sale been completed at the factory gate, the expenses incurred thereafter by way of freight charges would then be capable of being regarded as expenditure which was in the nature of a post-sale expenditure and, if paid by the seller, regarded as an amount paid by such seller on behalf of the buyer.
.......
18. When the transfer of the property or the goods is to be at the place of the buyer to which the seller is under an obligation to transport the goods, the expenditure incurred by the seller on freight in order to carry the goods from his place of manufacture to the place at which he is required under the contract to deliver, would thus become part of the amount for which the goods are sold by the seller to the buyer and would fall within the scope of “turnover”.
(ii) In Dyer Meakin Breweries Ltd. v. State of Keralaÿ[(1970) 3 SCC 253] , Shah, C.J. (as His Lordship then was), speaking for the Court observed that expenditure incurred for freight and packing and delivery charges prior to the sale and for transporting the goods from the factories to the https://www.mhc.tn.gov.in/judis 20/31 W.P. Nos.20503 to 20505 of 2007 warehouse of the company is not admissible under Rule 9(f) of the Kerala General Sales Tax Rules, 1963.
......
27. The company claimed that the amount spent by it for freight and for “handling charges” of goods from the factories to the warehouse at Ernakulam is liable to be excluded from the taxable turnover and the taxing authorities and the High Court were in error in refusing to allow the deduction. This Court while interpreting Rule 9(f) of the Kerala General Sales Tax Rules, 1963 observed that : (Dyer Meakin case [(1970) 3 SCC 253] , SCC p. 254, para 3) “3. … 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.” It is thus clear 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.
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 https://www.mhc.tn.gov.in/judis 21/31 W.P. Nos.20503 to 20505 of 2007 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 transporting the goods from his factory or his place of business and selling them there, enter into a contract of sale FOR destination railway station. Where such a contract is made, the seller undertakes an obligation to put the goods on rail and arrange to have them carried to the destination railway station at his expense. The delivery of the goods to the purchaser in such a case is complete at the destination railway station and till then the risk continues to remain with the dealer. The freight is payable by the dealer since he has to arrange for the goods to be carried by rail to the destination railway station at his expense and there is no obligation on the purchaser to pay the freight. The purchaser is concerned only to pay the agreed price for the delivery of the goods at the destination railway station. The agreed price being inclusive of the freight, it would be a matter of indifference to the purchaser as to what is the amount of freight. Even if there is any fluctuation in the amount of freight, since the making of the contract, the purchaser would have no concern, because he is liable to pay only the agreed price which includes the freight, whatever it be. The dealer may, in such a case, pay the freight and charge the agreed price to the purchaser, or he may obtain a railway receipt on the basis of “freight to pay” and request the purchaser to pay the freight at the time of taking delivery of the goods from the railway at the destination railway station and give the purchaser credit for the amount of the freight against the agreed price. The later would merely be a convenient mode of paying the agreed price. Since it is the obligation of the dealer to deliver the goods free on rail destination railway station, the dealer is liable to pay the freight as between him and the purchaser and the purchaser can very well refuse to accept the railway receipt which is not “freight pre- paid” but “freight to pay”. But he may, ordinarily as a reasonable businessman he would, accept such railway receipt and pay the amount of freight on behalf of the dealer. When the purchasers pay the amount of freight in such a case, it would be as part of the agreed price and not as freight vis-a-vis the dealer. The amount of freight paid by the purchaser and shown in the bill as deducted from the agreed price would, therefore, clearly form part of “sale price” and fall within the first part of the definition.
https://www.mhc.tn.gov.in/judis 22/31 W.P. Nos.20503 to 20505 of 2007 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 that point after removal of Base Sediment and Water (BS & W) would indicate that the property stood transferred only then. Secondly, though not conclusive, one cannot turn a blind eye to the fact that the crude oil is transported by way of pipelines belonging to the petitioner to the oil storage point at Narimanam and thereafter through railway wagons or lorry to Tondiarpet to the storing point of the petitioner and then through pipelines belonging to the petitioners is delivered at MRL. The very fact that the pipelines, when transportation of oil commences and culminates, belongs to the petitioner, appears to be indicative of the fact that in the circumstances, it is impossible for MRL to arrange for transport from the oil https://www.mhc.tn.gov.in/judis 23/31 W.P. Nos.20503 to 20505 of 2007 wells at Nannilam and Narimanam to its storage tank. It may also be relevant to reiterate that the very fact that the goods are measured at the Storage tank of MRL after removal of base sediment and water and until the said exercise is carried out, the crude oil may not even have attained the deliverable state.
(iv) Further, there is no evidence let in whatsoever to show / demonstrate that transfer of property in the goods viz., crude oil took place at Nannilam and Narimanam and the transportation by the petitioner was only in its capacity as agent. These are matters within the exclusive/ special knowledge of the assessee / petitioner and in the absence of any pleading/ evidence being let in, the claim of deduction may not be acceptable.
(v) However, in the present case, there is nothing to indicate that delivery is Ex-Narimannam/Nannilam. To the contrary, the concurrent finding of fact by all the three authorities viz., assessing officer, First Appellate Authority and the Tribunal is that the property passes only at the storage point of the buyer viz., MRL. Thus, the claim of deduction towards freight charges rejected by the Tribunal is on the basis of the finding of facts based on evidence, which ought not to be disturbed unless shown to be perverse or not based on evidence, which is not the case here.
https://www.mhc.tn.gov.in/judis 24/31 W.P. Nos.20503 to 20505 of 2007 d. Relevance of Instructions by Oil Coordination Committee:
(i) The Oil Coordination Committee issued instructions from time to time and the same has been relied upon to submit that the entire crude oil explored is to be sold to MRL. The instructions were relied upon to state that the price is fixed by Oil Coordination Committee. Importantly, 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 oil producers will arrange to take the inventory as at midnight of 15th/16th September, 1992 of the quantity https://www.mhc.tn.gov.in/judis of crude in storage tank/ pipeline fills representing the crude oil ready 25/31 W.P. Nos.20503 to 20505 of 2007 for despatch but not actually sold to the refining companies. The adventitious gas consequent to the revised price of crude oil that accrued to the crude oil producers on such inventories will be computed and credited to the Pool Account of OCC under intimation to the Ministry.
5. The price noted above will be on the base grevity of 340 API and the existing gravity adjustments of 16 paise per barrel for every degree variation subject to a ceiling of 450 SPI shall continue.
6. The revised price of crude oil as intimated above will be applicable from Central Tank Farm of the producer and the pipeline/ road transportation charges will continue to be recovered by the producers in accordance with the transportation rates advised by the Ministry/ OCC under the current practice."
(ii) It must be clarified that if the instructions of Oil Coordination Committee are statutory in nature, it may override the clauses in the contract contrary to it. In this regard, it may be relevant to refer to the decision in the case of Hindustan Sugars Mills [(1978) 4 SCC 271], wherein while dealing with a statutory control order it was held as under:
“The Control Order is paramount: it has overriding effect and if it stipulates that the freight shall be payable by the producer, such stipulation must prevail, notwithstanding any term or condition of the contract to the contrary. The conclusion is, therefore, inevitable that the amount of freight forms part of the “sale price” within the meaning of the first part of the definition.”
(iii) However, it is not clear that the instructions of the Oil Co-
ordination Committee has any statutory force. Assuming that it does, the petitioner may well be justified in stating that freight charges must be deducted from the taxable turnover provided they are able to demonstrate that in terms of https://www.mhc.tn.gov.in/judis 26/31 W.P. Nos.20503 to 20505 of 2007 the instructions issued by the Oil Co-ordination Committee, the freight charges were not included in the sale price or that the property would pass at the station / point of despatch. A reading of the instructions issued by the Oil Co-ordination Committee, apart from the fact that there is no indication that it has any statutory force, would also reveal that the producers 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 post- sale 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. It is surprising that both the trial court as well as the High Court were of the opinion that certain customs duties were leviable because of some administrative instructions........” https://www.mhc.tn.gov.in/judis 27/31 W.P. Nos.20503 to 20505 of 2007
ii) Narinder Chand Hem Raj v. Lt. Governor & Administrator, H.P., [(1971) 2 SCC 747]:
“.....Article 265 of the Constitution lays down that no tax can be levied and collected except by authority of law. Hence the levy of a tax can only be done by the authority of law and not by any executive order.... "
(iv) Thus, we find that there is nothing expressed in the Oil Co-
ordination Committee Instructions, which indicate that the transportation is made by the producers as an agent after completion of sale necessary to claim the deduction. To the contrary, the findings of fact by all the authorities below and the nature of the commodity and the mode of transport would lead one to the conclusion that the claim of deduction of the freight element by the petitioner is liable to be rejected.
12. For all the reasons stated above, we are of the considered view that the freight 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. Thus, the writ petitions fail and are accordingly, dismissed. No costs.
[R.M.D., J.] [M.S.Q., J.] 29.07.2022 Index : Yes/No Speaking/Non-Speaking Order mka https://www.mhc.tn.gov.in/judis 28/31 W.P. Nos.20503 to 20505 of 2007 To
1.The Secretary, Tamil Nadu Sales Tax Appellate Tribunal, (Main Bench), City Civil Court Buildings, Chennai-600 104.
2.The Deputy Commissioner (CT) Appeals, Chennai-600 001.
3.The Assistant Commissioner (CT), Fast Track Assessment Circle - II, Chennai-600 006.
https://www.mhc.tn.gov.in/judis 29/31 W.P. Nos.20503 to 20505 of 2007 R. MAHADEVAN, J.
and MOHAMMED SHAFFIQ, J.
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