Telangana High Court Upholds ₹43.48 Crore CST Demand Against Mahindra & Mahindra For Inter-State Sales

The Telangana High Court on 5 August held that movement of vehicles from Mahindra & Mahindra Ltd.'s Zaheerabad manufacturing unit to its regional sales offices in other States constituted inter-State sales under Section 3(a) of the Central Sales Tax Act, 1956.

A Division Bench comprising Justices P. Sam Koshy and Narsing Rao Nandikonda upheld a tax demand of around Rs. 43.48 crore, and dismissed two writ petitions filed by the company. It observed:

“...It is not necessary, for a transaction to fall within Section 3(a) of the CST Act, 1956 that the contract of sale be reduced to a single formal document bearing that description. It is sufficient that the covenant or incident of sale be discernible from the conduct and correspondence of the parties, read as a whole.”

The dispute concerned the movement of vehicles from the company's Zaheerabad manufacturing unit to regional sales offices in other States. Mahindra & Mahindra claimed that the vehicles were transferred as stock to its regional offices and that the transfers were covered by the exemption under Section 6A of the CST Act.

The company argued that its regional offices prepared estimates of expected demand, which were consolidated into Advance Planning Optimisations (APOs) and sent to the manufacturing unit. It contended that the APOs were only sales projections and did not amount to firm orders.

The tax authorities, however, relied on audit material showing that dealers had placed firm orders with the regional offices and made advance payments before the vehicles were dispatched from Zaheerabad. The authorities found that the APOs were prepared on the basis of these orders and used to determine the vehicles to be manufactured and dispatched to the respective regional offices.

The High Court held that the substance of the transactions, rather than the terminology used by the company, determined their legal character. It found that describing the documents as “rolling plans” or “APOs” could not alter their nature when the material showed a direct chain from dealer orders and advance payments to the manufacture and dispatch of the corresponding vehicles.

It also rejected the argument that the absence of a formal purchase order prevented the transactions from being treated as inter-State sales. It held that a contract of sale need not be contained in a single formal document and that its existence, as well as its connection with the movement of goods, could be established from the conduct and correspondence of the parties read as a whole.

Further, the Bench held that filing Form F declarations under Section 6A, which provides for declarations supporting claims that goods were transferred otherwise than by way of sale, did not by itself protect the transactions from scrutiny. Where evidence establishes that the movement of goods was occasioned by a pre-existing contract of sale, the claim of stock transfer exemption can be rejected. It concluded that the disputed vehicle movements satisfied the requirements of Section 3(a) of the CST Act and were taxable as inter-State sales. It held:

“...It is held that the transactions impugned herein constitute inter-state sales within the meaning of Section 3(a) of the CST Act, 1956 and are exigible to tax accordingly…”

Accordingly, the High Court upheld the assessment order dated 3 February 2009 and dismissed both writ petitions.

For Petitioner (s): Karthik Ramana Puttamreddy, Advocate 

For Respondent (s): Swaroop Oorilla, Special Government Pleader