Andhra HC (Pre-Telangana)
Andhra Cement Co. Ltd. vs State Of Andhra Pradesh on 21 November, 1992
Equivalent citations: [1993]88STC164(AP)
Author: Syed Shah Mohd. Quadri
Bench: Syed Shah Mohd. Quadri
JUDGMENT P. Venkatrama Reddy, J.
1. These three T.R.Cs. are filed against a common order of the Sales Tax Appellate Tribunal dated November 18, 1987, in T.A. Nos. 612/85, 521/83 and 466/83, respectively. T.A. No. 466/83 (on the file of S.T.A.T.) arose out of the assessment made against the petitioner-company for the year 1980-81. T.A. No. 521/83 relates to the year 1981-82. T.A No. 612/83 also relates to the same year, i.e., 1981-82. All the three appeals were dismissed by the Sales Tax Appellate Tribunal. Hence these tax revision cases.
2. The petitioner is a manufacturer and dealer in cement. For the assessment years 1980-81 and 1981-82, the amounts of Rs. 43,01,169 and Rs. 89,64,519 were collected towards the freight charges from the stockists and dealers by way of assessment and reassessment orders (sic). The legality of these assessments is challenged in T.R.C. Nos. 287 and 208 of 1988. For the assessment year 1981-82, the Commercial Tax Officer made a reassessment revising the tax from 4 1/2 per cent to 83 per cent on the freight charges of Rs. 89,64,519. This was the subject-matter of appeal in T.A. No. 612/85 and T.R.C. No. 197 of 1988 arises out of that appeal.
3. At the outset it may be stated that there is no dispute in these T.R.Cs. with regard to the tax levied on the freight charges forming part of the sale bills in so far as the rail despatches are concerned and the entire dispute is only with respect to despatches by lorries. It should also be mentioned that no separate arguments were addressed on the question of rate of tax in T.R.C. No. 197 of 1988. Obviously, if the freight charges under dispute are includible in the turnover the revised rate applied is legally correct.
4. During the relevant years, the sale of cement was governed by the Cement Control Order, 1967, as amended from tune to time. The Cement Control Order was promulgated by the Central Government in exercise of powers conferred on them by the Industries (Regulation and Development) Act, 1951.
5. Clause 3 of the said Order lays down a prohibition against the removal of cement whether sold or unsold from the premises of the factory without the previous permission in writing of the Central Government. Clause 4 confers power on the Central Government for sale of cement to any person or to transport the cement on such modes of transport or on such terms and conditions which may be specified in the order issued by the Central Government. Under the proviso to Clause 4, the Central Government can authorise the State Government to decide upon the details of the allottees and the quantities to be supplied to each of them by each of the cement producers within the total quantities of cement allocated to the State Government. Under Clause 5, the Central Government may, with a view to securing proper distribution of cement, issue such orders, general or special, as may be necessary to any producer as to the disposal of his stock. Clause 6 provides for maintenance and filing of accounts and returns regarding the production and disposal of cement. Ex-factory prices admissible to the producer for the different varieties of cement are specified in the schedule to the Control Order. Clause 8 obliges the producer to sell the cement of different varieties at the prices specified therein--"free on rail destination railway station plus the excise duty paid". The price stipulated varied from Rs. 318.94 per M.T. to Rs. 350.94 per M.T. To the f.o.r. destination railway station price as mentioned above and the excise duty paid, the packing charges at the rates specified by the Central Government can also be added. The explanation to Clause 8 defines the expression "free on rail destination railway station" as meaning "the price (including the cost of transport by the cheapest mode except where any other mode of transport has been specified by the Central Government under Clause 4, at the destination point)".
6. Clause 9 provides for payments to be made into Cement Regulation Account. Clause 9 enjoins that every producer shall pay to the Controller within one month of the close of the month in which the sale took place, an amount equivalent to the amount, if any, by which the f.o.r. destination price of such cement exceeds the aggregate of the following amounts, viz. :
(i) ex-factory price as specified in the Schedule ;
(ii) selling expenses calculated at the rate of Rs.3.71 per metric tonne;
(iii) excise duty paid thereon ; and
(iv) in the case of packed cement, the charges fixed by the Central Government under the first proviso to Clause 8.
7. The proviso to Clause 9 provides that the expenditure incurred by the producer on freight by the cheapest mode of transport or if any other mode of transport has been specified by the Central Government under Clause 4 by such mode of transport shall be reimbursed to the producer by the Controller from out of the Cement Regulation Account referred to in Clause 11. Clause 10 of the Order fixes the wholesale and retail prices of the cement and prohibits sale by dealers at a price exceeding the same. Clause 11 deals with Cement Regulation Account which the Controller has to maintain as a part of mechanism to ensure the realisation of the objectives of the order and its proper implementation. The amounts credited by the producer under Clause 9 and such other sums of money as the Central Government may grant from time to time, after due appropriation made by Parliament shall go into the Cement Regulation Account. The amount credited to such account shall be spent for the specified purposes mentioned in Sub-clauses (i) to (iv) of Clause 11(2). One such purpose is to pay for or equalising the expenditure incurred by the producer on freight in accordance with the provisions of the Order. The power to vary the prices and alter the schedules is reserved to the Central Government by Clause 12. Clause 13 provides for delegation of powers exercisable by the Central Government. The procedure regarding the claims by producers for reimbursement towards equalising freight or equalising concession is dealt with under Clause 14.
8. In the case of ordinary cement, the ex-factory price per metric tonne as given in the schedule was Rs. 220 whereas, as already noted, the f.o.r. destination railway station price as stipulated in Clause 8 was Rs. 318.94 per M.T. The Cement Controller of Government of India, by his communication dated January 3, 1981, issued to all the cement producers notified the f.o.r. destination price of varieties of cement chargeable by the producers with effect from January 1, 1981. The price of ordinary Portland cement of indigenous quality is given as follows :
(a) Price of ordinary Portland cement for destination railway station .. Rs. 318.94
(b) Packing charges .. Rs. 62.98
(c) Excise duty .. actuals) The Supreme Court in the case of Hindustan Sugar Mills Ltd. v. State of Rajasthan [1979] 43 STC 13, analysed the scheme of the Cement Control Order as follows :
"The underlying object behind these provisions was that cement should be available at uniform price throughout the country and that is why it was provided that no producer shall sell cement at a price exceeding Rs. 214.65 per metric tonne 'free on rail destination railway station' plus packing charges and excise duty. This was the maximum price at which the Central Government intended that cement should be available anywhere in India, irrespective of the distance from the place of manufacture. Now this price was worked out on the basis of average freight and since the actual freight would necessarily be more or less than the average freight depending on the distance of the place of destination from the manufacturing site. Clauses 9 and 11 of the Control Order provided a machinery by which the producer could be ensured the retention price specified in the schedule along with the selling agency commission at the rate of Rs. 3.00 per metric tonne, packing charges and excise duty. This result was achieved by providing that the producer should hand over to the Controller the excess of the 'free on rail destination railway station' price including packing charges and excise duty realised by him over the retention price, selling agency commission, packing charges and excise duty and he should then be reimbursed the amount of expenditure actually incurred by him on freight by the cheapest mode of transport. This would leave with the producer the retention price together with the selling agency commission, packing charges and excise duty and also reimburse him the actual freight paid by him."
9. We shall now refer in brief to the nature of transactions and indicate as to how the controversy has arisen in the present case. The typical bill filed by the petitioner shows that he has charged the cost of cement at the f.o.r. destination railway station price as specified in Clause 8 of the Control Order, added thereto the excise duty, packing charges and sales tax. After having arrived at the gross amount made up of the above components, he deducted from that gross amount the notional railway freight charges. This deduction or rebate was obviously on account of the fact that the cement was despatched by lorry arranged by the petitioner, the freight for which was borne by the buyer. The petitioner raised debit note on the stockist (buyer) in respect of lorry transport charges. It may be stated that the lorry transport charges are much higher than the proportionate railway freight. For instance in the sale made to a stockist at Karamchedu, Prakasam district on March 31, 1981, the railway freight amount (deducted in the bill) is Rs. 168, whereas the lorry freight realised from the stockist by way of debit note is Rs. 616.70. The total debit note amount is Rs. 43,01,169 for the year 1980-81 and it is Rs. 89,64,519 for the year 1981-82. The aggregate of railway freight deduction given in the bills is Rs. 13,28,250 for the year 1980-81 and Rs. 25,52,950 for the year 1981-82. As far as the railway freight amount of bill is concerned, the petitioner paid sales tax thereon and he is not disputing that part of it. What is being disputed in the tax revision case is the difference between the debit note amount and the railway freight amount shown in the bill. This differential amount which is under dispute comes to Rs. 29,72,918 for the year 1980-81 and Rs. 64,11,569 for the year 1981-82.
10. The plea of the petitioner is that the cement was despatched to the stockist-buyers in Andhra Pradesh at their request and on their instructions by means of lorries. The lorries were arranged by the petitioner-company through a transport contractor not because the company was under an obligation to do so but in the interests of maintaining good manufacturer-stockist relationship. As a corollary to the said plea, it is contended that the sales to stockists were completed and the delivery was given at the factory itself and thereafter the goods were transported by the buyers at their own cost and risk. It is also contended that the petitioner merely extended what is known as "post-sale service". Hence it is argued that the lorry freight charges over and above the proportionate railway freight do not come under turnover and therefore are not exigible to sales tax. This is the plea put forward in the explanation submitted before the assessing authority and reiterated before us in the course of hearing the T.R.Cs. The said plea was rejected by the Sales Tax Appellate Tribunal relying upon the judgment of the Supreme Court in Hindustan Sugar Mills Ltd. case . It is the case of the petitioner that the said judgment has no application to a case of despatch by lorry and that the exigibility of sales tax on the lorry freight depends upon the mutual agreement and contractual terms but not governed by the Cement Control Order. We find force in this contention of the learned counsel for the petitioner. In our view, the Tribunal has not appreciated the distinction between the despatches by rail and despatches by a costlier mode of transport such as lorry.
11. In order to find an answer to the question posed for our consideration, our primary task would be to closely examine the celebrated decision of the Supreme Court in Hindustan Sugar Mills Ltd. case . The legal principles with regard to the exigibility of sales tax on freight charges are no longer in doubt in view of the exposition of law made by the Supreme Court in that case.
12. The Supreme Court first referred to the general terms and conditions of supply incorporated in the specimen invoice some of which are similar to the printed terms and conditions contained in the order form in the present case. The Supreme Court observed that the answer to the question would be clearly in favour of the assessee, if regard is had only to the terms and conditions of the contract without taking into account the provisions of the Control Order. Considering the terms of contract the Supreme Court observed that :
"the delivery of the goods to the purchaser would be complete if 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".
13. Having so observed the Supreme Court proceeded to consider the impact of the provisions of the Cement Control Order because, according to the Supreme Court, "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".
14. The Supreme Court then posed the question in the following terms :
"...........the question would remain as to who, between the assessee and the purchaser, is liable to pay the freight and that requires us to consider whether there is anything in the Control Order which overrides the relevant provisions of the contract bearing on this question and, by necessary implication, excludes them."
15. The Supreme Court then discussed the effect and impact of the Control Order. Bhagwati, J., speaking for the Bench observed :
"Clause 9 clearly contemplates that the f.o.r. destination railway station price would be realised by the producer, for the excess of such price over the retention price and the selling agency commission is required to be paid over by the producer to the Controller in the Cement Regulation Account. The amount of freight has, therefore, to be realised by the producer from the purchaser and that postulates that it is the producer who pays the freight to the railway authorities. The proviso to Clause 9 makes this doubly clear by providing that 'the expenditure incurred by the producer on freight......... shall be reimbursed to the producer' and again Clause 11 uses the expression '..........paying or equalising the expenditure incurred by the producer on freight'. It is, therefore, clear that under the scheme of the Control Order, the freight is paid by the producer and he then recovers it from the purchaser."
16. The Supreme Court then made these crucial observations :
"But that does not conclude the controversy. The question still remains : When the producer pays the freight, does he do so because, as between him and the purchaser, he is liable to pay the freight and he then recovers it as part of the price or the obligation to pay the freight is on the purchaser and the producer pays it on behalf of the purchaser and then recovers it by way of reimbursement."
17. The Supreme Court proceeded to answer that question in the following words which in our view represent the true ratio of the judgment, We again quote what the Supreme Court has said :
"We are of the view that the former, and not the latter, represents the correct legal position. If the obligation to pay the freight were on the purchaser and in fact the purchaser paid the freight, as happened in both the cases before us in respect of every transaction of sale of cement, the amount of freight would obviously be deducted from the f.o.r. destination railway station price in the invoice and only the balance would be realised by the assessee. There would be no question of the assessee realising the amount of freight from the purchaser because the purchaser would have paid the freight in discharge of his own liability and the assessee would have no claim to recover it from the purchaser. Then how would the terms of Clause 9, proviso to that clause and Clause 11 of the Control Order be satisfied ? How would it be possible to give effect to Clause 9 if what is realised by the assessee is not the f.o.r. destination railway station price but that price less the amount of freight ? How would the assessee claim to be entitled to be reimbursed under the proviso to Clause 9 if he has not incurred any expenditure on the freight ? The entire statutory scheme would become unworkable. The scheme of the Control Order clearly proceeds on the basis that the freight is payable by the producer and he recovers it from the purchaser as part of the f.o.r. destination railway station price. The provision in the contract that the delivery to the purchaser shall be complete as soon as the goods are put on rail and payment of the freight shall be the responsibility of the purchaser is wholly inconsistent with the scheme of the Control Order and must be held to be excluded by it. 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."
18. It is to be noted that the Supreme Court was concerned with a case of despatch of cement to the purchasers at various destinations by rail and the question was whether the railway freight charges deducted in the invoice and paid by the buyer himself would form part of the sale price or turnover. The Supreme Court held against the assessee based upon the provisions of the Cement Control Order. Under the Cement Control Order, the producer is obliged to sell at the price not exceeding the rate specified in Clause 8 free on rail destination plus the excise duty and packing charges as allowed by the Central Government. The expression "free on rail destination railway station" is defined to mean the price specified including the cost of transport by the cheapest mode. The producer gets the reimbursement of the freight by the cheapest mode of transport. This reimbursement is made by the Controller out of the cement regulation account. By reason of inclusion of average freight in the price, the remittance of excess amount (as amplified by Clause 9) to the cement regulation account and the reimbursement of the expenditure on account of freight by the cheapest mode of transport, the Supreme Court held that the producer has to bear the freight in discharge of his own obligation but not on account of the purchaser and he recovers the same as part of the price. That is so irrespective of the fact whether the buyer actually pays the freight at the destination railway station and whether the property and risk passes to the buyer the moment the goods are put on rail. Therefore, the freight element becomes an integral part of sale consideration. That being the ratio of the judgment of the Supreme Court, the same cannot be applied to a case of despatch of cement by costlier mode of transport, viz., lorry transport. Applying the same test as the Supreme Court did, let us ask the questions : (1) According to the Cement Control Order, is the producer obliged to bear the freight attributable to lorry freight ? (2) Does the f.o.r. destination price fixed under the Cement Control Order include an element of freight payable on lorry transport ? and (3) Does he get the reimbursement of the lorry freight from the Cement Controller ? The answers to these questions are obviously in the negative. It is only the freight by the cheapest mode of transport (which is normally if not invariably, is the rail transport) that he is supposed to bear and recover from the buyer as part of the price. It is only that amount which he gets by way of reimbursement from out of the cement regulation account after depositing the excess amount under Clause 9 of the Control Order.
19. Another point to be noted is that contract apart, it is no part of the assessee's obligation to send cement by lorries, If the buyer is interested in transport by a costlier mode such as by a lorry and if he desires to take delivery of the goods at the factory premises through the media of the lorry transporter or otherwise and then transport them to the destination at his own risk and cost, there is nothing in the Control Order which prohibits such arrangement. The Control Order operates in so far as and to the extent of transport by cheapest mode and the freight incurred thereon. The cheapest mode of transport generally being the rail transport and as the Supreme Court was concerned with a case of despatch of cement by railway, the principle of that decision cannot be applied to the facts of the present case. Any freight incurred or collected over and above the freight for cheapest mode of transport is outside the purview of the Control Order. If so, whether or not lorry freight is includible in turnover depends upon the contractual terms and mutual understanding between the parties. This particular aspect has been untouched by the Supreme Court in Hindustan Sugar Mills Ltd. case . The Tribunal committed a legal error in thinking that whatever may be the nature of freight charges incurred, the aforementioned judgment of the Supreme Court would apply when once the sales are regulated by the Cement Control Order. The Tribunal after referring to the judgment of the Supreme Court found no legal basis in classifying the freight charges as freight incurred for transport by road and the corresponding freight for rail transport. This view is obviously based upon a misunderstanding of the true scope and effect of the judgment of the Supreme Court.
20. Having reached the conclusion that the Cement Control Order does not stand in the way of the petitioner's claim for exclusion of differential freight charges on account of transport by lorry, let us now revert back to the facts of this case. The cement sold to the stockists was despatched by the petitioner by lorries. The lorry freight amount was collected by the petitioner by way of separate debit note. The mere fact that the lorry freight charges were not included in the bill but collected by way of separate debit notes, does not alter the situation. The liability to pay sales tax does not depend upon the question whether the freight charges are collected by including the same in the invoice or by raising a debit note. Even the method of accounting is not decisive. This position is fairly clear from the judgment of the Supreme Court in Hindustan Sugar Mills Ltd. case and of the Division Bench of this Court in Central Wines v. Special Commercial Tax Officer [1982] 49 STC 83. The Division Bench cited with approval the following observations of Viswanatha Sastri, J., speaking for the Full Bench of this Court in Government of Andhra v. East India Commercial Co. Ltd. [1957] 8 STC 114 :
"The fact that the payment is not shown in the bill or invoice as part of the price but separately as an item charged to the purchaser is not a decisive factor."
21. The Division Bench then observed :
"When the sales tax payable on the sale of goods is collected by the seller from the purchaser to part with his title in the goods to the purchaser, that becomes part of the price and that amount is includible in the turnover of the dealer. A dealer cannot escape this liability by merely adopting any particular method of accounting. The fact that the amount realised by the dealer from the purchaser for the sale of goods is kept in the suspense account till the assessment of the seller is completed or that it is not included in the bill or in the invoice and recorded separately is not material. What is material is whether that amount was collected from the purchaser by the seller to part with his title in the goods and the purchaser paid that entire amount for acquiring title to the goods."
22. The Division Bench also made the following pertinent observations :
"Unless the amount of sales tax was also paid by the buyer, the seller would not part with those goods and the buyer would not acquire title to the goods. The amount realised by the seller, though entered in the suspense account, goes into his common till."
23. The fact that the charges were collected by the assessees towards lorry freight at the time of sale or in close proximity thereto, would prima facie indicate that these charges are realised by the assessee as part of sale consideration. The further fact that the assessee almost invariably collected the lorry freight amount from the stockists-buyers by raising separate debit notes would give rise to a presumption that the assessee would not have parted with the goods but for the buyer agreeing to the despatch of cement by the lorries. This presumption has got to be rebutted by the assessee by adducing cogent proof to the contra. The burden is on the assessee to prove that the freight charges though invariably collected by him, do not form part of the sale consideration. It is the case of the petitioner that it was purely left to the option of the buyer to choose the mode of transport and the assessee did not compel the stockist to agree for the transport of cement by lorries. In other words, the petitioner pleads that it was at the specific request of the buyer that lorry transport was arranged for and on account of the buyer and the freight charges realised from the buyer were made over to the transport contractors whom the company engaged on regular basis. These facts have got to be proved before the assessee can succeed. The Tribunal did not enter any finding on these crucial aspects because the claim was rejected at the threshold purporting to rely upon the judgment in Hindustan Sugar Mills Ltd. case . Another facet of the argument which has been put forward by the learned counsel for the petitioner is that the delivery of cement must be deemed to have been given to buyers ex-works, that is to say, at the factory premises and if so, the freight charges for the transport of cement was necessarily on account and at the risk of the buyers only. The learned counsel further adds that the assessee did no more than extending the facility of lorry transport through the media of its transport agents and the amounts collected by way of separate debit notes represent, what are known as "post-sale charges" which were ultimately passed on to transport contractor. In this connection, the learned counsel for the petitioner sought to rely upon certain printed terms of the contract and a few letters exchanged between the petitioner and the stockists. The learned counsel for the petitioner therefore submits that the ratio of the judgment of the Supreme Court in Hyderabad Asbestos Cement Products Ltd. v. State of Andhra Pradesh would squarely apply to this case. The Tribunal did not go into this aspect either, in the view which was taken by it. We do not have sufficient material before us to decide these essentially factual questions. As already noticed, the petitioner has to make out his case on these aspects for the purpose of sustaining its claim for exclusion of lorry freight charges.
24. In the light of the above discussion, we set aside the orders of the Sales Tax Appellate Tribunal and direct the Tribunal to consider afresh whether the amount representing differential freight charges on account of lorry transport is exigible to tax, keeping in view the approach indicated above and the observations made by us. It is open to the petitioner to adduce additional evidence by filing a petition before the Tribunal for the purpose of substantiating its case and the Tribunal will consider the same on its own merits. Having regard to the fact that the assessments date back to nearly ten years, we consider it just and proper to direct the Tribunal to dispose of the appeals expeditiously.
25. The T.R.Cs. are allowed accordingly. No costs.