Radhakrishna Agencies vs The Commissioner of Commercial Taxes and Others

K. Sreedhar Rao, J.—In the above appeals, the common questions of law are involved for determination. Hence, both the cases are clubbed together for common disposal. The appellants are C and F dealers having contract with M/s. Karol Lubricants India Limited, who in turn has contract with KSRTC for supply of grease and lubricants. The appellants are C and F dealers and they make payments for every consignment to the seller to lift the goods and deliver the same to the depots of KSRTC in Karnataka at several places. The appellants initially pay freight and insurance and later on collect from KSRTC.

The Assessing Officer (A.O.) issued notice to the respondents calling upon them to pay VAT on the freight charges and insurance which are deemed to be part of sale price of the product.

It is the contention of the appellants that the freight and insurance charges are not part of sale price of the product and that they are post sale expenditure for delivery of consignment to the KSRTC at various places as part of the contract. The A.O. rejected the contention and levied the tax. The Joint Commissioner of Commercial Taxes allowed the appeal filed by the appellants. The Additional Commissioner initiated suo motu revision proceedings and subsequently dropped the proceedings. The Commissioner of Commercial Taxes initiated revision proceedings and set aside the order of the Joint Commissioner and held that freight and insurance forms part and parcel of sale price. The appellants aggrieved by the same, filed these appeals.

The following questions of law are framed for consideration in the above appeals:

Freight and insurance having been defined as services and liable to service tax in the Finance Act, 1994 and as per settled law by judgments of Hon''ble Supreme Court of India in the cases of Bharat Sanchar Nigam Ltd. and Another Vs. Union of India (UOI) and Others, ; Imagic Creative Pvt. Ltd. Vs. The Commissioner of Commercial Taxes and Others, ; Tamil Nadu Kalyana Mandapmam am Assn. Vs. Union of India (UOI) and Others, and judgment dated 18-4-2011 of this Hon''ble Court in Writ Appeal Nos. 671 to 726 of 2011 (T-RES) in the case of Sky Gourmet Catering Private Limited, Bangalore v. The Assistant Commissioner of Commercial Taxes (Enforcement-13), Sky Gourmet Catering Private Limited Vs. The Assistant Commissioner of Commercial Taxes, The Commissioner of Commercial Taxes, The State of Karnataka and The Commissioner of Service Tax whether the revisional order passed by the Commissioner of Commercial Taxes No. KVAT/SMR/CR-02/11-12, dated 20-8-2011 holding that charges relating to freight and insurance formed part of sale price of grease and lubricants liable to tax under Karnataka Value Added Tax Act, 2003 is sustainable in law?

This Hon''ble Court themselves having clarified in the judgment dated 18-4-2011 rendered in Writ Appeal Nos. 671 to 726 of 2011 (T-RES) in the case of Sky Gourmet Catering Private Limited, that in the judgment previously rendered in the case of APCO Concrete Block and Allied Products, Bangalore v. The Deputy Commissioner of Commercial Taxes, Audit-1, DVO, Bangalore Division, Bangalore and Others2010 (69) Kar. L.J. 305 (HC) (DB), they were not called upon to decide whether sales tax was payable on the sale price inclusive of transportation charges and the Hon''ble Supreme Court of India having rendered the judgment in the case of India Meters Limited Vs. State of Tamil Nadu, in the context of provisions of Tamil Nadu General Sales Tax Act, 1959 existing in the year 1986-87 when the Finance Act, 1994 had not come into force, whether the impugned revisional order passed by Commissioner of Commercial Taxes by applying the said judgments to hold that charges relating to freight and insurance formed part of sale price and taxable turnover relating to sales of grease and lubricants, liable to tax under KVAT Act, 2003, is sustainable in law?

Whether the revisional order passed by Commissioner of Commercial Taxes, impugned herein, holding that charges relating to freight and insurance formed part of sale price and taxable turnover relating to sales of grease and lubricants on the ground that Karnataka Value Added Tax Rules, 2005 do not provide for deduction of freight and insurance charges, vis-�-vis the legal position that freight and insurance are services defined in Finance Act, 1994 and that therefore provisions of KVAT Act, 2003 did not have applicability, is sustainable in law?

The learned Government Advocate relied upon the decision of the Supreme Court in the case of India Meters Limited, to contend that 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 the 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 become part of sale consideration and sale price. Therefore, the appellants are liable to pay the tax under the VAT Act. The decision of this Court in the case of APCO Concrete Block and Allied Products, is also relied upon. In the said decision, in the communication issued by the Government dated 18-5-2007 in respect of Rule 3, the following clarifications have been issued:

(a) If the freight/transportation charges are paid by the seller price to the delivery of goods and ownership and risk remains with the seller, then such transportation charges are part of the sale consideration and liable to tax.

(b) If the freight/transportation charges collected are post-sale expenditure, then the said charges do not form part of sale consideration and not liable to tax. The dealers who collect

such charges are required to prove this point, with documentary evidence to claim deduction on such charges.

(c) There is no cause for amending the current rule to provide for deduction generally in all cases. Hence, request for amendment of Rule 3 in this regard cannot be acceded to.

It is held that if the title in goods is not transferred and seller is under obligation to deliver the goods to the place cited by the buyer. The freight and insurance would form part of the sale price.

The Counsel for the appellants relied upon the decision of this Court in the case of Sky Gourmet Catering Private Limited, in paragraph 30, the following observations are made:

However, the learned Counsel for the Revenue sought to rely on the judgment of this Court in the case of APCO Concrete Block and Allied Products v. Deputy Commissioner of Commercial Taxes, in STA No. 84 of 2009, disposed of on July 8, 2010, wherein it is held as under (pages 315 and 316 in 44 VST):

In the light of the expressed provisions under the Acts and the Rules and the explanation given by the Government, the position is clear that the dealer collects freight charges as part of total order value. Though it is specifically mentioned what is the cost of component to the said transportation charges, collecting the value before effecting sale of the goods, when sale of goods becomes complete only after the delivery of the goods, therefore, it becomes part of taxable turnover. If after transfer of title on the goods by delivery of the goods, for which he has already collected the price of the goods and after delivery if he receives the transportation charges, then the said amount does not form part of the taxable turnover as it is not a part of the sale consideration or paid prior to sale of the goods. That appears to be a clear manifestation of the intention by the Legislature a contained in various definitions referred to above and the clarifications issued by the Government. In that view of the matter, the order passed by the Revisional Authority is strictly in accordance with law, whereas, the Appellate Authority was carried away by the legal position prior to the enactment of the Act and thus he got confused himself without looking into the express provisions contained in the Act. The Revisional Authority was therefore justified in interfering with the order as the order was prejudicial to the remedy.

The Government Advocate per contra submits that the Sky Gourmet Catering Private Limited''s case, has no application to the facts of this case because the sale of food items in service was indivisible and it is held that the State Legislature and the Parliament are empowered to levy service tax.

The Counsel for the appellants relied upon the decision of the Supreme Court in the case of State of Karnataka and Another Vs. Bangalore Soft Drinks Pvt. Ltd., In the said decision the facts in the cited case is similar to the one on hand. The respondents were delivering the soft drink consignment to the wholesalers. The freight and octroi incurred by the petitioner was held to be excluded from the tax turnover and not forming part of sale price. The Supreme Court has extracted entire text of the judgment of the Division Bench of this Court and finally passed the following order:

ORDER

We have heard learned Counsel for the appellants. We have read the elaborate judgment of the High Court that is under appeal. We are entirely in agreement with the view taken by the High Court on the question of freight. The facts, as set down in the order of the Tribunal, did not warrant its conclusion that the agreement between the respondent and its wholesalers was a sham insofar as it related to the option regarding transportation of the respondent''s products.

The only question of law that was raised in the SLP relates to freight. There is no question of law that relates to octroi and, therefore, the leave that has been granted must be held to be limited to the aspect of freight.

On thorough consideration of the submissions made at the Bar, it is evident from the decision cited above that the freight and insurance charges should form part of sale consideration is one very much depending upon the terms and conditions of the contract. In India Meters Limited''s case, the Supreme Court has held that the decisive factor would be when the transfer of the property in the goods taken place, after delivery of goods to the buyer or whether under the contract, the seller had obligation to transport and deliver the goods to the buyer. In the present case, Annexure-B is the contract document which reads as follows:

Sub: Supply of Greases

This is to inform you that you are being our authorised dealer we entrust you to execute the supplies of Greases to all the Divisions of KSRTC as per Order No. KST/CO/P/3/49/GREASE/1461, dated 18-7-2009 for the period from 18-7-2009 till the completion of the order. The details of lubricants, rates and other terms and conditions are as under:

Terms and Conditions

Kindly acknowledge the receipt of the same for having agreed to all the terms and conditions.

As per the terms of the contract, it is the buyer-dealer has to collect the transport, freight and insurance charges from the KSRTC by submitting the tax invoice. The terms of the contract disclose that under the contract, the dealer shall make full payment for each consignment before lifting the consignment from the spot. The document also disclose the basic price to be charged to KSRTC for supply of consignment. The terms also clearly specifies that separate arrangements shall be made by you (appellants) for transport of the goods to all the units of M/s. KSRTC located in different places in the State of Karnataka. As per the prevailing market rates, you (appellants) are permitted to charge freight at Rs. 3/- per k.g. which includes loading, unloading and door delivery charges irrespective of the distance to be covered. The terms of contract makes it clear the appellants collects only freight and insurance charges for transport. Annexure-C is the copy of the tax invoice, which discloses that the appellants had entrusted transportation of goods to Vijayanand Road lines (VRL) for delivery. The said transporter is a common carrier. The entrustment of goods to common carrier would enable the consignor to sue for any damages, short delivery or no delivery. In other words, in law, the entrustment of goods to common carrier would results in deemed transfer of title of goods in favour of consignee. The lorry receipt produced discloses that the freight charges indeed are collected by separate transporter for the services rendered. Therefore, at any rate, in the circumstances, it cannot be held that the freight and insurance charges would form part of sale price of goods supplied. In that view of the matter, the appeals are allowed. The questions of law are answered in favour of assessee.