ACC Ltd. vs State of Karnataka

N. Kumar J.

The assessee has preferred these petitions challenging the order passed by the Karnataka Appellate Tribunal, which confirmed the order passed by the appellate authority as well as the original authority, who held that the sale is complete only when the goods are delivered at the works site of the customers and therefore, the pumping charges collected by the assessee constitute pre-sale; expenses and included in the sale price of goods sold by the assessee. The subject-matter of these petitions is the assessment year 2005-06 (April, 2005-March, 2006). The assessee is a public limited company registered under the provisions of the Karnataka Value Added Act, 2003 (for short hereinafter referred to as "the Act") and is engaged in the manufacture and sale of cement including ready mix concrete. The assessee had effected sale of ready mix concrete (RMC) to its customers and had filed its returns as per the provisions of the Act and had claimed exemption on the charges collected by it for pumping ready mix concrete at the customers'' site. The assessing authority, Deputy Commissioner of Commercial Taxes, issued a notice u/s 39 of the Act proposing to levy tax on the turnover relating to pumping charges of RMC. The authority further proposed to levy penalty and interest under the Act for the alleged short-payment of tax in respect of the same. The assessee filed a detailed reply and also documentary evidence and contended that the turnover relating to pumping charges was a post-sale expenses and therefore, the same was not liable to sales tax and consequently, requested the authority to drop the proposal made in the notice. The assessing authority after considering the contention of the assessee and looking into the documents produced by them held that until and unless RMC is taken to the point where it is put to use at the site of the buyer, the property in goods will not be passed on to the buyer. The sale transaction of RMC gets completed only after it is pumped to the point where it is finally put to use, which includes pumping charges constituting pre-sale expenses and hence form part of taxable turnover. Therefore, overruling the assessee''s objections, the assessing authority levied tax and also demanded interest as well as the penalty. Aggrieved by the said order of the assessing authority the assessee preferred an appeal to the Joint Commissioner of Commercial Taxes (Appeals). The Appellate Commissioner on a re-appreciation of the entire material on record held that ready mix concrete is manufactured with its ingredients like jelly, cement, sand, etc., and in order to avoid hardening of the RMC after a certain period of time, due to exposure to moisture, chemicals are added to keep the RMC in a liquefied stature till its delivery to the customers depending upon the distance the vehicle carrying RMC is to reach the customer''s place. If the RMC is hardened, it becomes unusable and therefore it is mandatory that every customer has to utilize the services of the assessee for transportation of RMC from the manufacturing place to the customer''s site and pump the RMC at the required and specified place. As per the definition of "turnover" as defined u/s 2(36) of the KVAT Act, 2003 anything done at the time of delivery or prior to delivery of goods would constitute part of the turnover. The sale is complete only when the goods are delivered at the work site of the customers and not at the factory premises or business premises of the assessee. Thus, the pumping charges collected by the assessee constitutes pre-sale expenses and includable in the sale price of goods sold by the assessee. Accordingly, he upheld the order of the assessing authority and dismissed the appeal. Aggrieved by the same, the assessee preferred an appeal to the Karnataka Appellate Tribunal. The Tribunal held that RMC being a product having special characteristics, till delivery it must be protected from atmosphere. Hence, the property in goods, viz., RMC does not pass to the buyer till the delivery of RMC. Therefore, all expenses prior to such delivery constitute the sale price and therefore the Tribunal declined to interfere with the well-considered order passed by the lower authorities and dismissed the appeal. Aggrieved by the said order, the assessee has preferred these revision petitions.

The learned counsel for the petitioner assailing the impugned order contends that it is not obligatory on the part of the assessee to pump the RMC so as to deliver the goods to the customers. An option is given to the customer to have the services of pumping the RMC or not to utilise the services of pumping provided by the assessee. The price fixed for pumping is an expenditure of costs of RMC to be supplied to the customers'' site. From the invoice raised, this fact is clear and therefore, the service charges collected from the customers for pumping the RMC from the vehicle to the site cannot be construed as pre-sale expenses and cannot be included in the sale price. In support of his contention, he relies on the judgment of the apex court as well as the judgment of this court and contends in the facts of this case, the service charges collected by the assessee for pumping RMC cannot be included in the sale price. Therefore, the impugned order is liable to be set aside.

Per contra, the learned Government Advocate appearing for the respondent contends that all the charges incurred till the delivery of RMC to the customers'' site form part of the sale price and when it is supplied to the customers'' site by availing of the service of pumping, the delivery takes place only after pumping and therefore the pumping charges are in the nature of pre-sale expenses. Delivery, is complete only when RMC comes out of the other end of the pumping machine and therefore, orders passed are legal and valid and do not call for interference.

Therefore, the question of law that arise for consideration in these revision petitions is whether the pumping charges collected by the assessee from the customers, form part of a pre-sale expenses and thus, chargeable to tax under the Act?

The apex court in the case of State of Karnataka and Another Vs. Bangalore Soft Drinks Pvt. Ltd., dealing with the question whether transportation charges are pre-sale expenses, has gone into the question of when exactly the delivery of goods takes place.

It was held that (pages 416-418 in 117 STC)...the Tribunal held that as the goods were not taken delivery of by the wholesale buyer at the factory site, it is a delivery at the place of the buyer by the revision petitioner. This may not be correct in view of the fact that in this case, the revision petitioner has a dual role to play, one as that of seller and the other as that of a carrier or transporter of the goods in view of the above nature of the contract and in view of the fact that the freight charges were collected by him for transportation of the goods from the factory site to the place of the buyer. This is clearly borne out from the nature of the contract entered into between the parties particularly in view of condition No. 4 of the contract and as a consequence thereof, he had also collected the freight charges separately from the buyer as per the debit note issued or prepared separately, which has been extracted in the assessment order made by the assessing authority. Therefore, the Tribunal had lost sight of the fact that the petitioner here has a dual role to play, one of a seller and other of a carrier of the goods and it is in his other capacity as a carrier of the goods, he received the goods for and on behalf of the buyer, who is a wholesaler in this case, for the purpose of transportation of the goods to the buyers'' place. So the Tribunal is not correct in saying that the goods were delivered at the door of the buyer. True, the petitioner had transported the goods to the place of wholesale buyer in the vehicle belonging to the revision petitioner. But this does not mean that the goods were delivered by the seller at the place of, the buyer, because in this case, as we have already stated the revision petitioner had also undertaken and collected the freight charges from the buyer to deliver the goods at the place of the buyer and thus in his capacity as a carrier of the goods, he had undertaken to transport the goods to the place of the buyer and not in his capacity as a seller of the goods. The Tribunal as well as the assessing and the appellate authority having forgotten about dual role of the revision petitioner, one as that of a seller of the goods and the other as that of a carrier of the goods having collected the freight charges separately from the buyer, have fallen into a serious error in including the freight charges to the sales turnover of the assessee, which is patently incorrect in view of the nature of the contract entered into between the parties and in view of the fact that the petitioner had collected the freight charges separately....

...the real test to be applied is whether the goods have passed to buyer at the factory of the assessee or at the place of the buyer. For this, the Tribunal itself has clearly found that the revision petitioner has sold Fanta and Coca-cola at the factory itself and even otherwise, the materials available on record would clearly indicate that the goods have passed to the buyer at the site of the factory and subsequent transportation of the goods by the revision petitioner was done in his capacity as a transporter of the goods. That being so, the observations made by the Tribunal that it was only on paper and not in reality does not appear to be correct, as the Tribunal as well as the appellate and assessing authority have totally forgotten the fact that the revision petitioner has another role to play which was that of the carrier of the goods to transport the goods for and on behalf of the buyer to the place of the, buyer.

...Therefore, the freight charges which were collected separately by the revision petitioner in his capacity as the carrier of the goods cannot be included in the sales turnover of the revision petitioner for the purpose of computation of the sales tax. So, they are liable to be excluded from the turnover of the assessee for computing the sales tax.

In this case, admittedly the transportation charges are included in the cost price. Therefore, the aforesaid judgment has no application to the facts of this case.

In Kurkunta and Seram Stones (P) Ltd. Vs. State of Karnataka, explaining the meaning of the word "sale price", this court held as under (page 111 in 87 STC):

Therefore, at the outset, the transaction of the sale has to be considered with reference to the first part of the definition of ''sale price'' in section 2(h) of the Central Act. In case the cost of freight or delivery is invariably part of the sale consideration, then no further question would arise. However, in a case where the cost of freight or delivery is included by the dealer not in his capacity as the seller, but, as a matter of convenience and on behalf of the purchaser, and it is independent of the cost element of the goods in question for the seller, then the second part of the definition would be attracted; in which case, applicability of the exclusory words has to be examined.

In the instant case, section 2(36) of the Act defines "Turnover" as under:

''Turnover'' means the aggregate amount for which goods are sold or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (29) 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 other valuable consideration, and includes the aggregate amount for which goods are purchased from a person not registered under the Act and the value of goods transferred or despatched outside the State otherwise than by way of sale, and subject to such conditions and restrictions as may be prescribed the amount for which goods are sold shall include any sums charged for anything done by the dealer in respect of the goods sold at the time of or before the delivery thereof.

Therefore from the aforesaid definition, it is clear that section 4 of the Act which deals with the liability to tax and rates thereof prescribes that every dealer who is or is required to be registered as specified in sections 22 and 24, shall be liable to pay tax, on his taxable turnover. Therefore, for imposing tax it is necessary to find out what is the turnover. As is clear from the definition, "turnover" means aggregate amount for which goods are sold or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (29) by a dealer and subject to such conditions and restrictions as may be prescribed the amount for which goods are sold shall include any sums charged for anything clone by the dealer in respect of the goods sold at the time of or before the delivery thereof.

Therefore, all expenses incurred by the assessee at the time of delivery or before the delivery thereof is included in the turnover. As held by the Supreme Court in the aforesaid judgment, the real test to be applied is whether the goods have passed to the buyer. In the case of cost of freight if delivery forms part of the sale consideration, then, those expenses would form part of the turnover. It is only in case where cost of freight or delivery is included by the dealer not in his capacity as the seller but as a matter of convenience and on behalf of the purchaser and it is independent of the cost element of the goods in question for the seller, then it will not form part of the sale price. Therefore, it depends on the facts of each case.

In the instant case, the facts are not in dispute. The assessee is a manufacturer of ready mix concrete. The said ready mix concrete is manufactured with its ingredients like jelly, cement, sand, etc., and in order to avoid hardening of the RMC after certain period of time due to exposure to moisture, chemicals are added to keep the RMC in a liquefied stature till its delivery to the customers depending upon the distance the vehicle carrying RMC is to reach the customer''s place. If the RMC is hardened it becomes un-usable. As is clear from the material on record, the assessee transports the RMC from the manufacturing place to the customer''s site. Therefore, in the case of RMC, transportation charges invariably forms part of the sale consideration. After it reaches the site of the customer, the RMC is to be delivered to the customer. The choice of taking the delivery is given to the customer. He has the option of getting the entire RMC dumped at the site from the lorry or he has also been provided an option to get the RMC to a particular place such as roof top or any floor. Therefore, the RMC is delivered by pumping the RMC from the lorry to the specified place by the customer. All expenses incurred till the delivery constitutes sale price. In order to deliver the RMC at the specified place, if the assessee uses the pump, then the charges collected by the assessee from the customer as pumping charges form part of the sale price. If the RMC is not delivered through pumping, then the charges is not collected from the customer and it will not form part of the sale price. Therefore, the sale transaction of the RMC gets completed only when it is delivered at the point where it is finally put to use. All expenses incurred till such stage, if such delivery includes the service of pumping then the pumping charges are also included in the pre-sale expenses and hence, form part of the taxable turnover. In a contract of this nature, there is no dual role played by the assessee. He is not pumping the RMC for and on behalf of the customer. He has to pump the RMC to the specified place as shown by the customer in order to deliver the RMC. Therefore, even if the pumping charges are collected separately as is clear from the invoice produced before us, or as per terms of the contract, still the said, pumping charges invariably form part of the sale transaction which facilitates the delivery of the goods and it would form part of pre-sale expenses. In the aforesaid judgment of the apex court, there were two contracts one is manufacturing fanta and coco-cola and the assessee was delivering those products at his site. The customer had an option to transport those goods from the site of the manufacture to his site either by using his own transportation or by using the transportation facility provided by the assessee. The transportation provided by the assessee is including taking delivery of the goods from the manufacturing place to the customer''s site, which contract is conspicuously missing in this case. The assessee at no point of time will take delivery of RMC from the customer and then pumps it to the specified place at the site. Therefore, the ratio of the judgment has no application to the facts of this case. Having regard to the totality of the circumstances, the terms of the contract, the intention of the parties, it is clear that the sale of the product, viz., RMC and transporting it from the manufacturing place up to the customer''s site and pumping it to the place where the customer specifies, the pumping charges become part of the sale transaction. In that view of the matter, we do not see any merit in this appeal. Hence, we pass the following:

ORDER

The petitions are accordingly dismissed. The impugned order passed by the Tribunal, is hereby confirmed.