MANDATORY NATURE OF FORM F FOR STOCK TRANSFER, CONSIGNMENT SALES AND JOB WORK?

 

By:

SANDEEP SHARMA

Advocate

Ghaziabad

Deemed Sales

It is said that sovereignty of the British Parliament is so vast that if it wish it can change a man into woman and a woman into a man. The presumptions in law have very vital role and legislature has power to presume certain things under certain circumstances.   Section 6-A of the Central Sales Tax Act is exercise of such power by the Parliament of India. The section was inserted in Central Sales Tax Act by CST (Amendment Act) 1972 with the following object

"Central Sales tax is not leviable in respect of transactions of transfer of goods from a head office or a principal to branch or an agent or vice-versa as these do not amount to sales. This aids evasion in that dealers try to show even genuine sales to third parties as transactions of this type. Accordingly it is proposed to provide that the burden of proving that the transfer of goods in such cases is otherwise than by way of sale shall lie on the dealer who claims exemption from tax on the ground that there was in fact no sale."

Notification No. GSR 56(E) Dated 9-3-1973 amended the CST (R& T) Rules and provided for declaration in Form F for discharge of the aforesaid burden of proof. The rule provided that transactions of one month will be covered in one declaration in Form F. Section 6-A used the expression "may" in respect of discharge of burden of proof by furnishing declaration in Form F. As such the dealer had option to discharge the onus to the satisfaction of assessing authority by other evidence. This position was affirmed by the Government of India by Memo Dated 22-01-1974 and was upheld in number of judicial decisions. I would refer to only few of such decisions:-

CST Vs Agra Food Products Pvt Ltd (1987) 67 STC 266

State of Orissa Vs Small Scale Industries Corporation 1987 67 STC 262

Vijaya Mohini Mills vs. State of Kerala (1989) 75 STC 63.

The situation has been changed by the Finance Act 2002, which inserted the words "and if the dealer fails to furnish such declarations, then the movement of such goods shall be deemed for all purposes of this Act to have been occasioned as a result of sale."  The Finance Act, 2002 got assent of the President of India on May 13, 2002. It has resulted in controversy that Form F has now became mandatory and transaction of stock transfer or consignment sale duly supported by the evidence of transportation and other documents will now be taxable as sales if declaration in Form F is not furnished.

The Circular of CTT further aggravates the situation in the State of Uttar Pradesh,. The Circular provides that in case of receipt or dispatch of goods for job work furnishing of Form F is mandatory. (Circular No.841/29-11-2005.)  The circular is as under:-

(Circular No. 19 -Reported in 2006 NTN Volume 29 Page 43)

The similar issues were raised in other States also but no State has issued instructions similar to the instructions issued in Circular Dated 29-11-2005. In fact the Commissioner of Sales Tax, Maharashtra has issued a circular wherein it has been pointed out that transaction with job worker is principal-to-principal transaction and movement of the goods is not to the place of business of the dealer or to his agent. As such declaration in Form F are not required for job work.

The circular of CST Maharashtra is as under :

Trade Circular No. 16T of 2007, dt. 20.02.2007

No. VAT/Clarification/1006/202/Adm-3

Mumbai Dt:20.02.07

Circular No. 16 T of 2007

Sub: Tax Treatment of Goods sent to other States.

Gentlemen/Sir/Madam,

1.         Queries have been received by this office regarding the tax treatment of Goods sent to other States. A dealer may send his goods to another State for various reasons. The goods may be sent for minor job work, extensive job work or for conversion or for manufacture. Apart from this, a dealer may send the goods to another State for sale or for otherwise disposal in that State. Queries have been received regarding the tax treatment of such goods under the Central Tax Act, 1956 as also under the Maharashtra Value Added Tax Act, 2002. This circular explains the treatment required to be given to such goods under these two Acts. Nothing in this circular applies or is intended to apply to the tax treatment of such goods under the Bombay Sales Tax Act, 1959 or any of the other Acts repealed by the Maharashtra Value Added Tax Act, 2002.

2.         The C.S.T. Act was amended in 1972 with effect from the 1st April 1973 by inserting a new section, namely, Section 6A. This section was further amended in 2002 by the Finance Act, 2002. Section 6A of the CST Act deals with those contingencies where a dealer has sent any goods from one State to another, not by way of sale, to the places of his business or to his agent or to his principal.                                                        

3. (1) Section 6A of the Central Sales Tax Act, 1956 provides that where the dealer claims that he is not liable to pay tax in respect of the goods sent as aforesaid to another State to his own place of business or to his agent or to his principal, on the ground that the movement of goods was not by reason of sale, then the burden of proving that the movement of goods was so occasioned, is on the dealer. It may be noted that this section applies only in those cases where the movement of good is to the place of business of the dealer in another State or to his agent or principal in another State. The section has no applicability where the goods are sent to another State for purposes other than those enumerated in that section. The word 'Agent' as used in this section means the Agent as defined in Section 182 of the Indian Contract Act. That Section reads as follows:          

182.     “Agent” and “principal” defined : “An Agent is a person employed to do any act for another or to represent another in dealing with third persons. The person for whom such work is done or who is so represented is called the “principal”.                           

(2)       Normally, persons acting as brokers, factors, auctioneers, commission agents, del credere agents etc. are the agents contemplated under this Section. It may be added that the contract of agency may be in writing, may be oral or may be inferred from the conduct of the parties and the circumstances. An agent differs from a servant or an independent operator. In an agency, the principal has a right to direct what work the agent has to do. In case of a servant, the principal has a further right to direct how the work is to be done. An independent operator is different from an agent or a servant. An agent, in the matter of agency, is bound to act subject to the direction and control of the principal. But an independent operator merely undertakes to perform certain specified work or produce a certain specified result. The manner and means of performance and production are at the discretion of the operator except in so far as they are specified by the contract.

4.         Therefore, when a dealer sends any goods to another person located in a different State for job work or for manufacturing etc., the transaction will normally be on a 'principal to principal' basis with an independent operator and not on a 'principal to agent' basis. Section 6A of the CST Act will have no applicability as regards the transaction where the goods are sent on a 'principal to principal' basis. It follows that in such instances where the contract is on a 'principal to principal' basis, it will not be required for the dealer to obtain a declaration in Form F from the person to whom the goods have been dispatched. Similarly, the amendment to Section 6A in 2002, which provides that where the dealer fails to produce the declaration in Form F, the movement of goods shall be deemed to have been occasioned as a result of sale is not applicable to 'principal to principal' transaction.

5.         Section 6A, as of course its amendment in 2002, will apply, as stated above, only when the goods are sent by a dealer to another State to the dealer's own place of business or to his agent or where the dealer is an agent, to the place of his principal. In particular, nothing in this section will apply when the goods are sent to another State, not by way of sale, to an independent operator. The tax treatment of goods under the CST Act, 1956 sent to another State, to another principal, not by way of sale, is to be worked out accordingly.

6.         Rule 53 of the Maharashtra Value Added Tax Rules, 2005 deals with reduction in set-off. Sub-rules (3) of this rule deals with the case where the claimant dealer dispatches any taxable goods outside the State, not be reason of sale, to his own place of business or of his agent or where the claimant dealer is an agent, to the place of business of his principal. If the goods are so dispatched, then in the contingencies described in the said sub-rules, the set-off available to the dealer is to be reduced as provided therein.

7.         It may be noted that phraseology used in sub-rule (3) of Rule 53 is the same as the phraseology used in Section 6A of the CST Act. In other words, the rule regarding reduction of set-off operates in only those contingencies which are covered by Section 6A of the CST Act. The rule will not apply in instances where Section 6A of the CST Act has no applicability. It is, therefore, clear that the reduction in set-off contemplated under the said sub-rule does not apply where the goods are sent to another State for job work or for manufacturing etc. on a 'principal to principal' basis. Subject to the other provisions of that sub-rule the reduction in set-off will apply only when the goods are sent to another State, not by reason of sale, to the dealer's own place of business, or to his agent or where the dealer is an agent, to the place of his principal.   

8.         There would be contingencies where a dealer located in Maharashtra receives goods, not by way of purchase, from another State. The clarifications given in this circular would apply, mutates mutandis, to such inward movement of goods from another State.

9.         This circular cannot be made use of for legal interpretation of provisions of law, as it is clarificatory in nature. If any member of the trade has any doubt, he may refer the matter to this office for further clarification.

10.       You are requested to bring the contents of this circular to the notice of all the members of your association.

 (B.C. KHATUA.)

 Commissioner of Sale Tax

 Maharashtra State, Mumbai

The Circular Dated 29-11-2005 was so patently unjust and illegal that there was general perception in the legal, administrative and industry circles that it will not withstand judicial scrutiny. However unfortunately in the case of Ambica Steels Vs State of U.P the (Reported in 2007 NTN Volume 35 Page 01) Hon'ble High Court has upheld the circular.. The Hon'ble Court observed and held as under:-

“The submission that the goods sent for job work or received for doing job work, do not amount to sale would depend upon the contract entered into between the parties and would be the subject matter of examination by the Assessing Authority. Even otherwise, under Section 2(g)(ii) of Central Act, transfer of goods used in execution of works contract is treated as sale. If the petitioner claims that it is not liable to tax on the transfer of goods from U.P. to ex U.P., then it would have to discharge the burden placed upon it under section 6A by filing declaration Form F. It would be immaterial whether the person to whom the goods are sent for or received after job work is a bailee.”

The matter is now pending for final adjudication before Hon'ble Supreme Court of India.

This decision has caused dismay and anxiety in the Trade and Industry and the manufacturers of other States are diverting business from dealers of Uttar Pradesh to dealers of other States, because there are no such unjustified demands by the assessing authorities in other States. In the State of U.P. huge demands have been created against the dealers despite the fact that the material for job work has been received against the departmental Import form for job work and the job work and dispatch after job work is fully verifiable.

The legal position till now was that presumption U/s 6-A was rebuttable presumption and the dealer can rebut initial presumption of sale by evidence proving otherwise. Form F was one of the methods to prove that transaction was not sale. The controversy gained momentum from the misinterpretation of the judgment of the Hon'ble Supreme Court of India in the case of Ashoka Leyland Vs Union of India (Reported in 2004 NTN Volume 24 Page 165.

In this case the dealer was engaged in manufacture of commercial vehicles in the state of Maharashtra and Rajasthan. The dealer has regional offices throughout the country for receiving, warehousing and selling the vehicles produced by the appellant. The dealer effected stock transfer of vehicles and filed declaration in Form F in support of claim of stock transfer. The claim was accepted in the assessment proceedings. However the assessing authority issued notices for revision of assessment order on the ground that the transfer of vehicles to regional sales office is inter-State sales from the dispatching state. The dealer challenged the re-assessment order on the ground that in view of provisions of Section 6-A of the CST Act the stock transfer was established and it cannot be reopened.

The Supreme Court of India held that by reason of sub-section (2) of Section 6-A, a legal presumption has been created for the purpose of the Act to the effect that transaction has occasioned otherwise than as a result of sale. In Para 49 of the judgment the Hon'ble Supreme Court observed and held as under: -

"On the analysis of the aforementioned provisions, the following propositions of law emerge:

(i)         The initial burden of proof is on the dealer to show that the movement has occasioned by reason of transfer of such goods, which is otherwise than by reason of sale. The assessee may file a declaration. On a declaration so filed an enquiry is to be made by the Assessing Authority for the purpose of passing an order on arriving at a satisfaction the movement of goods has occasioned otherwise than as a result of sale.

(ii)        Whenever such an order is passed, a legal fiction is created.

(iii)       Legal fiction, as is well-know, must be given its full effect."

The Hon'ble Supreme Court considered the rebuttable presumptions and irrebuttable presumptions and came to the considered opinion that the assessment order passed accepting stock transfer is irrebuttable and conclusive presumption.

The issue before Hon'ble Supreme Court was about the finality of assessment after acceptance of declaration in Form F and other evidence. The issue was not that there would be conclusive presumption of sale in the absence of declaration in Form F.  As such the Hon'ble Supreme Court held that assessment order passed is conclusive presumption of accepting stock transfer and did not held that presumption of sale is conclusive in the absence of declaration in Form F.

It is true that in Para No. 74 of the judgment the Hon'ble Supreme Court has made observation regarding Section 6-A (1) of the CST Act but in my view the observations are obitar dicta and not ratio-decendi of the judgment. The sole thrust of the judgment is about the conclusive presumption U/s 6-A(2) and not about the nature of presumption U/s 6-A(1) of the Act. In my view the decision of Hon'ble Supreme Court of India in Sondhi transport case still holds the field.

In my view the amendment made in Section 6-A by Finance Act, 2002 provides for rebuttable presumption. It is noteworthy that the words " he may furnish to the assessing authority, within .... a declaration duly filled and signed ...." remains the same and word "may" has not been substituted by word "shall". The additions of words in later half of the Section 6-A only create a presumption, which can be rebutted by the dealer.

In this regard I would refer to the presumption made under Section 28-B of the U.P. Trade Tax Act, 1948 in respect of sales of goods within the State of U.P. if the transit pass obtained is not discharged at exit check post.( failing which it shall be presumed that the goods carried thereby have been sold within the State by the owner or person-in-charge of the vehicle." )The issue came before Hon'ble Supreme Court of India in the famous case of Sondhi Transport Company Vs State of U.P.(Reported in 1982 ATJ-296) the Hon'ble Supreme Court of India has held that the presumption of sale on non-discharge of transit pass is rebuttable presumption. Similar view was expressed in the case of Khurana Roadways, Agra Vs CST (STI 1979 JR Agra 19)

In my view the Parliament has no power to change a transaction of transfer into transaction of sales by creating presumption in Central Sales Tax Act. The only way open for Parliament to impose tax on Stock transfer is by Amendment in the Constitution of India, which has already been done by 46th Constitution Amendment in Article 269(1)(h) of the Constitution of India. By activating the aforesaid provision the Parliament can authorize imposition of tax on stock transfer or consignment transfer. Nothing short of it will authorize the Parliament to impose tax on stock transfer or consignment sales. This view is fortified by the observation of Hon'ble Supreme Court of India in the case of State of Orissa Vs Titagarh Paper Mills Company Ltd (Reported in 60 STC 213). At Page 237 of the judgment the Hon'ble Supreme Court laid down the following principle of law

"As any attempt on the part of the State to impose by legislation sales tax or purchase tax in respect of what would not be a sale or sale of goods under the Sales of Goods Act, 1930 is unconstitutional, any attempt by it to do so in the exercise of its power of making subordinate legislation, either by way of a rule or notification would be equally unconstitutional and so would such an act on the part of the authorities under a Sales Tax Act purporting to be done in the exercise of powers conferred by that Act or any rule made or notification issued there under."

It will not be out of place to mention that Stock transfer do not fall under the scheme of things under Section 3 of CST Act imposing tax on interstate trade or commerce and taxing the same would be against the provisions of Article 269 of Constitution of India. For stock transfer declaration in Form C cannot be issued under Section 8(4) of CST Act read with Rule 12. Stock transfer does not fit under the ambit of Sale under Indian Contract Act or Sales of Goods Act.

The observation of Hon'ble Supreme Court of India in the case of State of Orissa Vs. Titagarh Paper Mills Company Ltd (supra) is squarely applicable to the circular of the CTT, U.P. providing that declaration in Form F is mandatory for dispatch or receipt of goods for job work. (Circular No.841/29-11-2005.)  Unfortunately the above decision was not put up before the Division bench and the argument of principal to principal nature of transaction of job work was not appreciated by the Division Bench of High Court in Ambica Steel case resulting in confirmation of the  illegal and unconstitutional circular.

Moreover in the cases covered under Section 6-A of the CST Act the inter-State movement of the goods to branch or consignment agent is for the purpose of sale in receiving State by the branch or consignment agent whereas in the case of job work the inter-State movement of the goods is not for sale but is for some processing on the goods and goods are to be returned back after the processing on the goods. The movement of the goods to job worker can not be termed as movement "to any other place of his business or to his agent or principal, as the case may be."

The job work is a contract for doing specific work for labour. The labour work is not covered under the definition of sale and it cannot be assessed to tax under the sales tax legislation of the Union or States. The job work is different from the works contract involving transfer of property in execution of works contract. The inter-State transfer for works contract is included in the definition of sales under Section 2(g) of the CST Act and is not covered U/s 6-A of the Act. Therefore the above-mentioned circular, which is aimed exclusively to-wards the labour work, which is totally outside the ambit of sales tax legislation.

The dealers in the State of U.P. are very much harassed and hard pressed due to this circular.  The dealers and authorities of the other States to whom such goods have been sent for job work are not highly intelligent and knowledgeable like our CTT and are not issuing declaration in Form F to the U.P. dealer resulting in imposition of heavy tax and unnecessary litigation. After the decision in Ambika Steel case the only hope for the dealers is from the Supreme Court of India.

I will conclude my submission with the suggestion to my brother professionals and other authorities to examine the cases of stock transfer or consignment sales on the basis of evidence or dispatch and other evidence of independent sales in the receiving state. The presumption of sale U/s 6-A of the CST Act is rebuttable presumption, which can be rebutted by the aforesaid evidence. Tax should not be imposed on the transaction of stock transfer, consignment transfer & job work on mere misplaced technicalities.