Various divergent views were given by High courts of different states in respect of Branch sale transactions. Finally now Supreme Court has given its clarity and decision in the case of “Hyderabad Engineering Industries”- M/S. Hyderabad Engineering vs State Of A.P. on 4 March, 2011 (Supreme Court of India.)
Stock Transfers to a branch outside the State of original manufacture is not subject to either VAT or CST. But VAT credit on inputs is required to be reversed as per the concerned state VAT laws. But in some doubtful cases, stock transfers are considered by VAT authorities as interstate sales and proceed to collect or recover tax from the seller.
The case goes like this:
- X entered into a ‘Sales Agreement with Z in Delhi wherein X proposed to sell the goods on wholesale to Z while Z to further sell in retail. While Z was granted the exclusive rights to sell X’s products, distribution to other bulk buyers and government was retained by X. Z places its monthly intents for supply of goods to X.
- Based on these, the supplies are made by X to its branch Y from where sales are made to Z in Delhi. No Tax paid on transfer from AP to Delhi considering it as stock transfer
- However, Sales tax department had a different view and considered the same as Inter-state sales, subjecting the same to CST
- X, after not getting relief from lower authorities, filed an appeal before Supreme court.
Supreme court has referred the following clause of interstate sale in CST Act:
Section 3 of CST Act: A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase of goods
(a) Occasions the movement of goods from one State to another or
(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.
The Supreme court concluded by observing that following scenarios are covered under “inter-state sales”
- “Sale” or “agreement to sell” occasions movement of goods from one state to another) or
- Order placed before HO or branch resulted in movement of goods from one state to another (irrespective of state where property in goods passes)
Thus, it is not necessary that sale must precede movement of goods or the fact of movement of goods is mentioned in the agreement [Para 32]
Thus, even an agreement to sell can now result in classification of such transfers as “inter-state sales” and not “branch transfer”.
Manufactuers who are maintaining supply chains by introducing branches should be cautious in respect of the following:
- Where entire sales are being made by the branch to some particular dealers in the state and stock balance goes to zero.
- Where no significant staff is being maintained at branch for stocks and sales.
- Where indents are being sent by the buyers directly to HO based on which transfers are made to branch.
All the above may be subjected to Central Sales tax.
C.R. Venkata Ramani