M/s. Dunlop India Ltd. vs Commissioner of Sales Tax, M.P.

A.K. Mathur, J.

This is a reference made by the Board of Revenue at the instance of the applicant/Assessee. The period of assessment in the present case is 1.1.1977 to 30.4.1977.

The applicant / Assessee - M/s Dunlop India Limited was assessed to tax for the calendar year 1977. The assessee is engaged in the business of sale of rubber tyres and tubes. For the period 1.1.1977 to 30.4.1977, the rate of tax was 11% and it was reduced to 9% from 1.5.1977. Subsequently it was further reduced by 1.5% from 17.10.1977. The assessee-applicant made certain sales to various customers and after the sales were effected the purchasing dealer did not retire the documents. It is alleged that the assessee cancelled the sales and made sales to the same very customer and charged a low at the rate of tax as applicable from 1.5.1977 and 17.10.1977. The Assessing authority charged the tax at the rate prevalent at the time when the original sale was effected. Aggrieved against this order of Assessing Officer, an appeal was preferred and the assessment was upheld in the first appeal. In second Appeal also, the Tribunal maintained the order of assessment. Hence, a petition was moved on behalf of the assessee to refer the following question for answer before this Court. The question is referred to this Court which reads as under :-

whether under the facts and circumstances of the case, the Board of Revenue was justified in holding that once bills were prepared and the goods were delivered to the transporter and the purchasing party had not retired the documents and the sales were cancelled by issue of credit notes and goods were sold to the same very customers subsequently by issue of fresh bill then which shall be the date of complete sale, whether the date of first bill or of the subsequent bill?

We have heard the learned counsel for the parties and perused the record. It is an admitted position that the assessee despatched the goods to the buyers through the carrier and the papers were sent to the Bank; but the purchaser did not collect the goods nor did he retired the documents through the bank and meanwhile, there was a reduction in the rate of sales tax. Then again, the applicant-Company issued a credit note in favor of the purchaser/customer and fresh sales were effected to the very customers at the low rate of tax. The question is that whether the first sale which was effected by the Assessee/Company, shall fall in the definition of word ''sale'' nor not. The word ''sale'' has been defined u/s (n) of in the M.P. General Sales Tax Act, which reads as under:-

S.2 (n); ''Sale'' with all its grammatical variations and cognate expressions means any transfer of property in goods for cash or deterred payment or for other valuable consideration and includes -

(i) a transfer, otherwise than in pursuance of a contract, or property in any goods for cash, deferred payment or other valuable consideration;

(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract;

(iii) a delivery of goods in hire purchase or any system of payment by installments.

(iv) a supply of goods by any unincorporated association or body of persons to a member thereof for case, deferred payment or other valuable consideration.

(vi) A supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply or service is for cash, deferred payment or other valuable consideration;

and such transfer, delivery or supply or any goods, shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and purchase of these goods by the person to whom such transfer, delivery or supply is made, but does not include a transfer of the right to use any goods for any purpose (whether or not for a specified period) a mortgage. hypothecation, charge or pledge."

Shri Nema, learned counsel for the applicant/Assessee has submitted that when the customer has declined to accept the goods despatched by the assessee, then the sale has not been effected, therefore, when sale was not effected then revenue is not entitled to tax over turn over on the basis of the rate which was prevalent at that time. In support thereof, learned counsel has invited our attention to the case of Matal Alloy Co. V. Commi. Tax Officer Vol. 39 1977 S.T.C. 404, State of Tamil Nadu v. Asholk Layland Ltd. Vol. 56 1984 S.T.C. 180. and Peico Electronics & Electricals Ltd. State of Tamil nadu Vol. 78 1990 S.T.C. 88. As against this, Shri Seth, Adv. for the non-applicant, submitted that in fact, the sale is completed when the goods were despatched by the Assessee to the customers through the carrier and the papers were forwarded to the Bank. Thereafter, the Assessee has no control over the first goods. Learned counsel submitted that the whole transaction is nothing, but a stratagem employed by the assessee because the rate of sale tax was anticipated to be reduced; therefore, by implying the subterfuge method, the sale was not effected. There after the same goods were sold to same customer when the rate of tax was reduced w.e.f. 1.5.1977. Therefore, the learned counsel submitted that it was nothing but a stratagem employed by the assessee to cause a loss of revenue to the State and such kind of stratagem cannot be permitted so as to cause loss to the revenue.

The question is that whether the goods which were sent by M/s Dunlop India Ltd., to its customers at the first instance amounts to sell or not. Once the goods were despatched from the assessee and the papers were forwarded to the Bank, so far as the assesseee is concerned, the whole transaction is complete because this despatch of goods with the papers of the bank was as per the order issued by the customers. It is a different thing that the customer did not collect the paper and credit notes. From the facts, it is transpired that when the company''s record was inspected by the flying squad, it was found that an attempt was made by the assessee-company to take the benefit of reduced rate of sales tax. An attempt was made by issuing a credit notes that the goods were returned back and the customers did not accept goods. Thereafter, another sale was shown of the same goods to the same customers at the reduced rate of tax. Therefore, it was only the paper work which was maneuvered by the assessee-company to take the benefit of sale. It was not a bona-fide act in which the goods were sold to one customer and he did not accept the same and returned back to the Company. But the very fact that crude attempt was to pay the reduce rate of sale tax by showing second sale of the goods. Such kind of stratagem cannot be countence. It is true that if the assessee-company sent the goods and the goods has been returned back from the original customer on account of not taking delivery and thereafter, the goods were sold to a third party, it could be legitimately canvassed on behalf of the assessee that since the goods were return back therefore, sale was not complete and when they were sold to another customer, meanwhile the rate of tax was reduced and reduced rate of tax was charged rom the customers. But, this is not a case here. As per the finding of the Assessing Officer, it appears that it is only a paper work which was manipulated goods were not returned and this was detected by the flying squad that the sale of same goods were made in favor of the same customer subsequently. Therefore, this kind of subterfuge employed by the Assessee-Company to avoid the payment of sales tax and to canvass that earl it sale has not taken place, is nothing but an attempt on the part of the company to cause loss revenue to the State.

Their Lordships of the Hon. Supreme Court had an occasion to examine a subtle distinction between avoidance of tax and evasion to tax. In the case of McDowell and Co. Ltd. Vs. Commercial Tax Officer, it was observed by Chinnappa Reddy, J. -

The proper way to construe a taxing statue while considering a device to avoid tax, is not to ask whether the provisions should be construed literally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.

Therefore, one has to see that whether the transaction is real or unreal and it has been made with a view to avoid tax. In the present case, it looks apparent that when the rate of tax was reduced on 1.5.1977 the goods which were already despatched that transaction was cancelled by showing that the customer has not accepted the goods and thereafter, the same goods were subsequently sold to the same customer; therefore, it was nothing but clear device to evade the tax. Their Lordships of the Hon, Supreme Court further observed :

Tax planning may be legitimate provided it is within the frame work of law. Colourable devices cannot be part of the tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to debious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.

We can understand that if it has been a bonafidely planning to avoid the tax; but the stratagem employed by the assessee-Company that the goods were not accepted by the customers and thereafter on subnsequent date, after the rate of tax having been reduced w.e.f. 1.5.1977, the same sale was again shown in favor of the same customers at the reduced rate of sale tax, is nothing but a device to avoid the tax, which is absolutely not warranted under the law. The said judgment has been subsequently followed by Hon. Supreme Court in the case of Commissioner of Wealth Tax, Gujarat-II, Ahmedabad Vs. Arvind Narottam (Individual), and it was observed by Hon. Justice Sabyasachi Mukharji, J., as he then was

He invited us that Having regard to the taxoing statute the tax avoidance device should be exposed. Justice Chainnappa Raddy has noticed the change in judicial attitude to the tax avoidance devices.

Justice Reddy mentioned that in the country of its birth the principles of Westminster of condoning tax avoidance have been given a decent burial. In that every country the phrase ''tax avoidance'' is no longer condoned or looked upon with sympathy.

Then again the case of M/s McDowell (Supra) came up for consideration before the Hon. Supreme Court in Union of India (UOI) and Others Vs. Playworld Electronics Pvt. Ltd. and Another, and their Lordship of the Hon. Supreme Court observed;

It is true that tax planning may be legitimate provided it is within the frame work of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. It is also true that in order to create the atmosphere of tax compliance, taxes must be reasonably collected and when collected, should be utilised in proper expenditure and not wasted.

Therefore, in view of the observations made by their Lordships of the Hon. Supreme Court, it is apparent that any kind of dubious method employed for avoidance of tax cannot be looked upon with sympathy and the same has been condemned. In the present case, it is apparent that the sale which was effected earlier was sought to be shown re-sale in order to avoid the tax by showing that the customer has not accepted. The same goods were shown to have been sold to the same customers subsequently at the reduced rate of tax on account of change in rate of tax. Such kind of act cannot be countenance by this Court as a subterfuges is writ at large.

Shri B.L. Nema, learned counsel for the applicant/Assesses, invited our attention in the case of Peico Electronics case (supra) and in that case, the invoices were then forwarded to the appellant''s banker with an advice to the customer to retire the documents and take delivery of the goods from the carrier. It was further stipulated that in case, the documents or not to retire by the customer, the goods may be returned to the party and the return goods thereafter were sold to other parties. In this context it was observed that since the documents were not retired by the customer, there was no completed sale or transfer of property in goods and therefore, the sale of goods on such transaction shall he returned and accordingly the tax was refunded. It is true that if the transaction was bonafide that the goods were returned back by the customer denying the purchase of the same, it is possible to conclude that the sale was not effected. But, in fact, this was a stratagem imployed by that assessee that the same goods were shown to have been refused by the customer and thereafter on subsequent date the same goods were again sold to the same customer. Therefore, the stratagem employed by the assessed is apparent that this concellation of sale was shown then again re-sale of the goods to the same party is nothing but on the poor stratagem to evade the tax and such kind of stratagem cannot be countenance and it speaks volume for itself that this sale and re-sale was only with a view to deliberately avoidance of the tax. In the case of Peico Electronics case (supra) it was a bonafide transaction as the customer refused to honour the purchase; therefore, the goods were returned back. The tax which are paid by the party, was directed to be returned because the transaction of sale has not taken place. But, in the present case, that is not the case here, the party is same, goods are same and second sale is in papers only there is not evidence of receipt of goods by assessee. In the cases of Metal Alloy Co. P. Ltd. v. Commissioner, Tax Officer Vol. 39 1977 S.T.C. 404, the question was that what is the effect of rejection of goods and return of the goods. The Court made distinction that the return of goods and rejection of goods stand on different footing. Accordingly, this case also does not provide us any assistance whatsoever. In the case of State of Tamil Nadu v. Ashok Leyland Ltd. Vol. 56 1984 S.T.C. 180, their lordships held that (he first sale was refused and thereafter the second sale was affected to another party not the same party and in that context, the second sale was a bona-fide sale by the assessee. But as already pointed out above that it was not a bona-fide transaction. Hence, in the facts and circumstances of the case, we answer this reference against the assessee and in favor of the revenue and upheld the order of the Board of Revenue dated 6.6.1994 and hold that second sale was a sham sale.