Cadbury India Ltd v State of Kerala

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT:** ## **THE HONOURABLE MR.JUSTICE K.M.JOSEPH** **& THE HONOURABLE MR.JUSTICE K.HARILAL** **THURSDAY, THE 20TH DAY OF FEBRUARY 2014/1ST PHALGUNA, 1935** ## **OT.Rev.No. 63 of 2012 ()** **------------------------AGAINST THE ORDER IN TA(VAT) 146/2009 OF KERALA VALUE ADDED TAX APPELLATE TRIBUNAL, ERNAKULAM** **------------------** ## **REVISION PETITIONER/RESPONDENT/ASSESSEE :** **-------------------------------------------------------------------------** **M/S.CADBURY INDIA LTD THRIKKAKARA PIPE LINE JUNCTION, THRIKKAKARA POST COCHIN-682021, REP. BY SRI. K.P. MAGUDAPATHY ASSOCIATE VICE PRESIDENT (COCOA OPERATIONS)** **BY ADVS.SRI.SHAJI THOMAS SRI.N.NAGARESH SRI.R.RAGHAVAN SRI.T.V.VINU** ## **RESPONDENT/APPELLANT REVENUE :** **---------------------------------------------------------** **STATE OF KEREALA REP. BY ITS STATE REPRESENTATIVES SALES TAX APPELLATE TRIBUNAL, KOCHI-682013.** ## **BY GOVT. PLEADER SRI. BOBBY MATHEW** **THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 19/06/2013, THE COURT ON 20-02-2014 PASSED THE FOLLOWING:** **Mn** **...2/-** ## **OT.Rev.No. 63 of 2012 ()** ## **APPENDIX** ## **PETITIONERS' ANNEXURES :** **ANNEXURE A1 : COPY OF THE ORDER DATED 23.12.2011 IN TA(VAT) NO. 146/2009 & CO NO. 11/10 PASSED BY THE HON'BLE SALES TAX APPELLATE TRIBUNAL, ERNAKULAM. ANNEXURE A2 COPY OF THE AGREEMENT DATED 1ST JULY 2005 ENTERED INTO BETWEEN THE PETITIONER AND THE AGENT BHARAT COCOA AND SPICES. ANNEXURE A3 COPY OF THE SHOW CAUSE NOTICE DATED 12.2.20O7 ISSUED BY THE ASSISTANT COMMISSIONER, COMMERCIAL TAXES, ERNAKULAM. ANNEXURE A4 COPY OF THE REPLY DATED 5.5.2007 SUBMITTED BY THE PETITIONER. ANNEXURE A5 COPY OF THE ORDER DA NO. 32/AC-II/2005 DATED 30.5.2007 PASSED BY THE ASSISTANT COMMISSIONER, ERNAKULAM. ANNEXURE A6 COPY OF THE NOTICE DATED 15.10.2007 ISSUED BY THE ASSISTANT COMMISSIONER, ERNAKULAM. ANNEXURE A7 COPY OF REPLY DATED 25.10.2007 SUBMITTED BY THE PETITIONER. ANNEXURE A8 COPY OF THE ORDER DATED 12.5.2008 PASSED BY THE ASST. COMMISSIONER-II, COMMERCIAL TAXES, ERNAKULAM. ANNEXURE A9 COPY OF THE APPEAL FILED BEFORE DEPUTY COMMISSIONER (APPEALS) DATED 19.6.2008. ANNEXURE A10 COPY OF THE ORDER DATED 2.2.2009 PASSED BY THE DEPUTY COMMISSIONER (APPEALS) ERNAKULAM.** **(Contd...)** **OT.Rev.No. 63 of 2012 ()** **ANNEXURE A11 COPY OF THE APPEAL DATED 21.5.2009 FILED BY DEPARTMENT BEFORE THE KVAT APPELLATE TRIBUNAL, ERNAKULAM. ANNEXURE A12 COPY OF THE CROSS OBJECTIONS DATED 13.4.2010 IN APPEAL NO. TA(VAT) 146/2009 FILED BY THE PETITIONERS.** ## **RESPONDENT'S ANNEXURES : NIL** **//TRUE COPY//** **P.S. TO JUDGE Mn** ## KM.JOSEPH & K. HARILAL JJ. ===================== O.T.Rev.No. 63 of 2012 ===================== Dated this the 20[th] day of February, 2014 ## ORDER ## K.Harilal,J. The Revision Petitioner M/s.Cadbury India Ltd.is an assessee on the rolls of the Assistant Commissioner, Special Circle, Ernakulam. This Tax Revision Case is filed by the Petitioner challenging the common order passed by the Appellate Tribunal allowing Tax Appeal (Vat)No.146/2009 filed by the Revenue and dismissing Cross Objection No.11/10 filed by the Revision Petitioner herein. The above appeal was filed challenging the order of the Assistant Commissioner(AA), Ernakulam which set aside the assessment for the year 2005-06 and consequential penalty proceedings thereon initiated by the Assessing ## O.T.Rev.No. 63 of 2012 -: 2 :- Authority. Brief facts necessary for the disposal of the revision can be recapitulated as follows: 2. The Petitioner, a registered dealer on the rolls of Assistant Commissioner, Special Circle-II, Ernakulam is, inter alia, engaged in the activity of manufacturing of cocoa based chocolates and allied products. During the assessment period, raw cocoa beans were purchased by the petitioner directly and also through agents appointed by the petitioner. For the purpose of effecting purchases from the Agents of raw cocoa beans, the petitioner had entered into agreements with the Agents from time to time. Annexure A-2 is the copy of one of such agreements. According to the terms of the agreement, raw cocoa beans immediately after the delivery by the seller became the property of the petitioner as it is purchased by the petitioner's Agent for and on behalf of the petitioner and sale was complete at the place of purchase itself. From the place of buying, the beans are transported to the designated centres of O.T.Rev.No. 63 of 2012 -: 3 :- the petitioner using departmental delivery note in Form No.15 issued to the petitioner from the Commercial Tax Department. The buying Agents buy the raw cocoa beans with travelling salesman permit issued to the petitioner from the department as per Section 19 of the Kerala Value Added Tax Act (for short 'the Act'). So, these are materials which supported nature and method of purchase alleged above. The job of buying Agents is governed by the contractual terms well delineated in the agreement. During the assessment period 2005-06, the petitioner has effected local purchase of cocoa beans and pods through local buying Agents for Rs.25,22,60,770/-. Apart from this, the petitioner also incurred Rs.2,17,66,388.50 towards collection charges, Rs.1,28,27,592/- towards freight charges, loading and unloading charges, warehousing charge etc. The petitioner had paid tax on the value of Rs.25,22,60,770/- in their annual turnover and statement filed for the year 2005-06. Since the post O.T.Rev.No. 63 of 2012 -: 4 :- purchase expenses are not liable to be included in the value of total purchase turnover, the petitioner did not include expenses incurred towards collection charges, freight charges, loading and unloading charges, warehousing charges etc. at the time of assessment of purchase turnover. The Assessing Officer issued Annexure A-3 show cause notice under Rule 6(5) of the C.S.T.(K)Rules and Section 24(1) of the Act. The petitioner replied by Annexure-A4 letter. Dissatisfied with Annexure-A4 reply, the assessing officer passed Annexure-A5 order and Annexure-A6 order under Section 67 of the Act, 2003. The petitioner replied by Annexure-A7. Dissatisfied with Annexure A-7, the Assessing Officer passed Annexure-A8 order which was challenged in appeal. The Appellate Authority by Annexure-A10 order set aside Annexure-A8 order and remitted the matter to the Assessing authority for arriving at fresh findings on the aspects pointed out and for passing an order afresh. 3. Aggrieved by Annexure-A10, the Revision O.T.Rev.No. 63 of 2012 -: 5 :- Petitioner preferred Second Appeal before the Tribunal and the petitioner filed cross objection. The Tribunal reversed the findings of the Deputy Commissioner (Appeals) and directed the Assessing Authority to reexamine the issue in the light of the decisions reported in Cadbury India Ltd. v. State of Kerala, [2011(3)K.H.C. 316] and Kwality Cocoa Products v. State of Kerala [2002(10)K.T.R.391]. The appeal filed by the revenue was allowed and the cross objection filed by the petitioner was dismissed by Annexure-A1 order. Aggrieved by Annexure A-1 order, this Tax Revision Case is filed on various grounds and question of law. 4. We heard the learned counsel for the Revision Petitioner and the learned counsel for the Revenue. The learned counsel for the Revision Petitioner submitted that the Assessing Authority has erred in including collection charges, freight charges, loading and unloading charges and warehousing charges in the “purchase turnover”. According to him, the O.T.Rev.No. 63 of 2012 -: 6 :- nature of transaction is obviously discernible from Annexure-A2 copy of the agreement. Cocoa beans are purchased by the petitioner directly and through Agents appointed by the petitioner. The Agents are acting for and on behalf of the petitioner. So, the sale is complete at the place of purchase itself. Therefore, the word “turnover” must be understood as due amount for which the agents of the petitioner actually purchased the beans. The amounts added by the assessing officer were incurred after the sale. In view of the definition of “purchase price” which is made equal to “sale price” any amount incurred by the petitioner after the sale is not liable to be included in the purchase turnover. Collection charges and other charges referred above were given after the sale. Post sale expenses are not liable to be included in the sale price and thereby in purchase price also, the first appellate authority rightly excluded those expenses referred above taking into account the fact that they are post sale expenses. But the Tribunal went wrong O.T.Rev.No. 63 of 2012 -: 7 :- by including these expenses also in the purchase turnover without looking at the definition of 'sale price' in its correct perspective. The Tribunal went wrong by directing the assessing authority to consider the issue in the light of the decisions which are rendered while interpreting the provisions of the K.G.S.T.Act. The learned counsel cited following decisions: Deputy Commissioner of Sales Tax (Laws) v. Vikrant Tyres Ltd, [(1998) 6 KTR 342(Ker.], Deputy Commissioner of Sales Tax (Law) Board of Revenue (Taxes) Ernakulam v.Enkay Rubbers [ (1992) 84 STC 218, State of Tamil Nadu v. Chettinad Cement Corporation Ltd.[ (2010)27 VST 245 (Mad), Deputy Commissioner of Sales Tax (Law) Board of Revenue (Taxes) Kerala v. Ghanshyam Kumar Pasupathinath - [ (1991) 81 STC 63(Ker)], Kutty & co. v. State of Kerala - [ (1978) 42 STC 294 (Ker.DB)], Deputy Commissioner of Sales Tax (Law) Board of Revenue (Taxes), Kerala v. K.P.Moideenkutty [1993 Supp.(4)SCC 59], State of O.T.Rev.No. 63 of 2012 -: 8 :- T.N. And Ors. v. Kothari Sugars & Chemicals Ltd. And Ors.[ (1996) 101 STC 73(Mad)], Gwalior Rayon silk Manufacturing and Wvg. Co.Ltd. v. State of TN [(1982) 49 STC 73(Mad)], State of Punjab and Ors. v. Guranitta Mal Shauti Prakash [ (2004) 136 STC 12(SC)]. 5. Per contra, the learned Special Government Pleader submitted that the proposition laid down in 2011(3)K.H.C.316(DB)(supra) and Kwality Cocoa Products v. State of Kerala 2002(126)S.T.C.7(Ker). is squarely applicable and thereby the issue involved in this revision is a covered one. According to the learned Special Government Pleader, in the instant case, expenses included as collection charges, freight charges, loading and unloading charges are pre-sale expenses which are liable to be included in the sale price. The learned Government Pleader drew our attention to various clauses of Annexure-A2 agreement to establish the fact that the expenses referred above are pre-sale expenses. The learned Government Pleader cited Neyveli Lignite corporation O.T.Rev.No. 63 of 2012 -: 9 :- Ltd. v. CTO. Kuddalore and another, 2011(9)K.T.R. 607 to fortify the point that ownership would remain with the seller till the transfer of ownership to the buyer is effected. Thus, the Tribunal rightly reversed the findings and remitted the matter to the assessing authority for fresh consideration. 6. We have given our anxious consideration to the rival submissions made at the Bar. In view of the divergent findings of the authorities below and concurrent remand to the assessing authority on different points and directions thereunder, the question of law to be considered is whether the expenses incurred as collection charges, freight charges, loading and unloading charges and warehousing charges are liable to be included in 'purchase turnover' and liable to be assessed to tax under Section 6(2) of the Act. 7. Let us, first of all, examine the divergent findings of the authorities below. The assessing authority as well as the 2[nd] appellate authority found O.T.Rev.No. 63 of 2012 -: 10 :- that in the instant case, expenses incurred as collection charges, freight charges, loading and unloading charges, warehousing charges etc. are presale expenses which should have been included in the turnover of the company for the relevant period. Both these authorities relied on 2011(3)K.H.C.316(DB) and 2002(126)STC 7 (Kerala)(supra). Going by the order passed by the assessing authority, it could be seen that after going through the definition of “sale price” under Section (xii) of the Act without looking at Annexure-2 Agreement and nature of transaction which is said to have been effected by the Agents for and on behalf of the petitioner, hastily jumped into a conclusion as follows: “None of the above proposition is in dispute. The only issue involved is whether payment made for procurement, subsequent transport, fermentation, ware housing etc. is pre-sale expenses or not. It is certainly a pre-sale expenses. Under VAT Act, purchase price is equated to sale price. Section 2(xliv) define sale price as consideration inclusive O.T.Rev.No. 63 of 2012 -: 11 :- of anything charged for anything done by dealer in respect of goods or services at the time or before delivery thereof, excise duty, special excise duty or any other duty or taxes except the tax imposed under this Act. It has been decided so by the decision of Kwality Cocoa Products case (10 KTR 391 KER) I do not find any reason to agree with the dealer in view of above settled position.” We are of the opinion that without conducting survey on the material facts evidencing nature of the alleged sale, the assessing authority should not have arrived at such a conclusion after construing the definition only. The Assessing Authority as well as the Tribunal appear to have been carried away by the earlier decisions referred above, which were rendered under the K.G.S.T.Act. The Assessing Authority ought to have remembered that the Assessing Authority is the fact finding authority empowered with sufficient teeth to find out the actual facts. More importantly, both authorities ought to have found that in the K.G.S.T. Act, the Act under which those cases were decided, O.T.Rev.No. 63 of 2012 -: 12 :- “purchase price” and “sale price” are not defined unlike K.V.A.T.Act. Needless to say, the decisions referred above under the K.G.S.T. Act cannot be taken as decisions which covered the issue. When purchase price and the sale price are specifically defined under the K.V.A.T.Act, the assessing authority ought to have considered the matter in issue in view of these new definitions. We notice that the first Appellate Authority has made an attempt to do so. That apart, going by the decisions referred above, we are of the opinion that those decisions have been rendered after analyzing the agreement between the purchaser and Agents in those cases and also after comparing it with the actual transactions effected on records. It reads as follows: “The fundamental condition of agency arrangement is that the principal will take the loss and consequences for bona fide acts done by the agent in the course of purchase or sale made by the agent on behalf of the principal. In this case admittedly the agent purchased the goods with his funds and at his O.T.Rev.No. 63 of 2012 -: 13 :- own cost and risk and transports it to the godown of the petitioner and only after petitioner accepts the goods and takes over possession, the goods become the petitioner's property. We do not know how the petitioner can contend that the purchase made from farmers and dealers by the agent with his funds and at his own cost and risk can be treated as purchase on behalf of the petitioner. The goods procured by the agents are only sold to the petitioner against Form 25 issued by the petitioner. Though the arrangement is apparently stated as agency, the transactions prove otherwise. The agency arrangement appears to be only a scheme for splitting up of price between purchase cost, transport cost, commission etc.to avoid tax on part of the turnover. In our view, this is a clear attempt to reduce incidence of tax on the actual turnover.” What is the law governing the question in controversy involved in this case? According to the assessing authority, the assessment was made under Section 6 (2)(a) of the Act. Section 6(2) (a)of the act reads as follows: O.T.Rev.No. 63 of 2012 -: 14 :- 6(2) (Notwithstanding anything contained in sub-section (1),- (a) every dealer who purchases taxable goods from any person other than a registered dealer shall pay tax on the purchase turnover of goods at the rates specified under sub-section (1). 8. But “purchase turnover” as such is not defined in the Act whereas “purchase” is defined under Section 2(xxxvii), “purchase price” is defined under Section 2(xxxviii), 'sale' is defined under Section 2(xliii), 'sale price' is defined under 2(xliv) and 'Turnover' is defined under Section 2(lii). It is apposite to look at these definitions before analysing the facts. 2(xxxvii) “Purchase” with all its grammatical variations an cognate expressions shall be construed from the word “sale”. 2(xxxviii) “purchase price” shall be construed from the words “sale price”. 2(xliii)”sale” with all its grammatical variations and cognate expressions means any transfer whether in pursuance of a contract or not of the property in goods by O.T.Rev.No. 63 of 2012 -: 15 :- one person to another in the course of trade or business for cash or for deferred payment or for other valuation consideration, but does not include a mortgage, hypothecation, charge or pledge. 2(xliv) “sale price” means the amount of valuable consideration received or receivable by a dealer for the sale of any goods less any sum allowed as cash discount, according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods or services at the time of or before delivery thereof, excise duty, special excise duty or any other duty or taxes except the tax imposed under this Act. 2(lii) “Turnover” means the aggregate amount for which goods are either brought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or for other valuable consideration, provided that the proceeds of the sale by a person not being a company or firm registered under the Companies Act, 1956 (Central Act 1 of 1956) O.T.Rev.No. 63 of 2012 -: 16 :- and Indian Partnership Act, 1932(Central Act 9 of 1932) (or society including a cooperative society or association of individuals whether incorporated or not) of agricultural or horticultural produce grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover. Going by the definitions, purchase price is equal to sale price. On a conjoint reading of purchase price with “turnover”, it can be safely gathered that “purchase turnover” means aggregate amount of purchase price which has been defined on the basis of sale price as the valuable consideration paid or payable by a dealer for the purchase of goods which is inclusive of any sum charged for anything done by the seller in respect of the goods at the time or before the delivery of goods. Again, on a conjoint reading of 'sale' with 'sale price', it could be understood that in a transaction of “sale”, sale becomes complete by the transfer of ownership. So, there is no sale unless O.T.Rev.No. 63 of 2012 -: 17 :- ownership is transferred. In short, sale will be complete at the place or moment where transfer of ownership takes place. 9. Therefore, it can be safely concluded that post sale expenses do not form part of a sale price, whereas all pre-sale expenses are liable to be included and form part of the sale price. When applying principles which we derived above to the question involved in this case, it can be held that if the expenses in question are incurred after the sale, these expenses are not liable to be included in the purchase turnover and otherwise they are liable to be included. Then the question is which is the point or place where transfer of ownership of coco beans was effected as described in the definition of “sale price”. In addition to this, it is incumbent upon the assessing authority to take into account relevant Rule 10 of the Kerala Value Added Tax Rules also for the determination of taxable turnover of the petitioner. Rule 10(e) reads as follows: O.T.Rev.No. 63 of 2012 -: 18 :- - (e) all amounts falling under the following heads, when specified and charged for by the dealer separately without including them in the price of goods sold: i) freight ii) charges for delivery iii) cost of installation 10. No doubt under the KGST Act, this Court in Cocoa Products v. State of Kerala 2002(126) S.T.C.7 (Ker), held, inter alia, as follows: “It may also be observed that while providing exclusion of freight charge from taxable turnover under rule 9(f)(i), the goods taxable at purchase point is not considered at all. On the other hand, exclusion is provided only from sales turnover. In other words, is so far as the purchase of goods is concerned, there is no provision for exclusion of freight incurred by the purchasing dealer.” We have gone through Annexure-A2 agreement and we find that the said agreement alone is not reliable to find out the question whether the expenses in O.T.Rev.No. 63 of 2012 -: 19 :- question incurred before the sale or after. Whether the Agents referred in the agreement are actual and true Agents acting for and on behalf of the petitioner and whether the agreement is intended to split up actual price or expenses incurred so as to avoid tax on part of the turnover. Going by the agreement, we find that some clauses apparently appear to be contradictory and mutually destructive. The fundamental principles of the theory of Agency is that, where the Agents act for and on behalf of the principal, the principal is liable to take all liabilities and consequences for the bona fide acts of the Agents, but according to Clause 3.1, the company reserves the right to reject any goods/services, which are faulty or do not conform to the quality, standard or description as specified in the contract or not satisfactory to the company or adequate for the company. But, here the learned counsel for the petitioner has a case that mere right to reject the goods, cannot bring the concluded sale between the O.T.Rev.No. 63 of 2012 -: 20 :- agent and the coco seller under a cloud and it is a matter between the petitioner and the agent. Similarly, the agents have to pay for coco beans at the time of purchase from the supplier and the company will reimburse the same. We are of the opinion that Annexure-A2 agreement requires to be tested with actual facts disclosed from the material documents and other evidence deducible from the evidence to be collected from the petitioner and his Agents. If sale is effected for and on behalf of the petitioner at the moment or places where the cultivators or small dealers allegedly sold the coco beans to the Agents of the petitioner, certainly, all expenses like collection charges, (at any rate such of the said expenses incurred after the sale) freight charges, loading and unloading charges will come under the head of “post sale expenses” which are not liable to be included in the sale price. If not, certainly the same would fall under pre-sale expenses, which are liable to be included in the sale price. It is for the Assessing O.T.Rev.No. 63 of 2012 -: 21 :- authority to find out real and true point at which sale was completed. 10. In short, we are of the opinion that the Tribunal has erred in directing the assessing authority to reconsider the issue in view of the decisions laid down in 2011(3)KHC 316(DB) & 2002(126) STC-7 (Kerala)(supra), we set aside Annexure-A1 order, which is under challenge in this revision and remand back the case to the assessing authority to reconsider the question involved in the case afresh in accordance with the observations made above. Sd/- ## K.M.JOSEPH, JUDGE Sd/- K. HARILAL, JUDGE ks. //true copy// P.S. to Judge