CESTAT Delhi Sets Aside Order Treating Post-August 1995 Paper Products Transfers As Inter-State Sales

The Principal Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that paper products transferred by Shree Karthik Papers Ltd. to agents in Karnataka, Kerala, Odisha, and West Bengal after August 1, 1995 were consignment sales and not inter-State sales.

The tribunal set aside a Tamil Nadu Sales Tax Appellate Tribunal order that had restored assessment on a turnover of ₹1.51 crore by treating the transactions as inter-State sales.

A bench of President Justice Dilip Gupta and Technical Member P.V. Subba Rao held that the Tamil Nadu Sales Tax Appellate Tribunal had wrongly relied on material recovered during an inspection conducted on July 26, 1995 to determine the nature of transactions undertaken after August 1, 1995 under agency agreements that came into effect from that date.

The bench observed that the Sales Tax Appellate Tribunal had applied material relating to the period before August 1, 1995 to a subsequent period governed by a separate agreement.

“The Sales Tax Appellate Tribunal merely extrapolated the material and reasoning pertaining to the pre-inspection period i.e. 01.04.1995 to 31.07.1995 and applied the same to the subsequent period from 01.08.1995 to 13.03.1996. This view is not correct as the Sales Tax Appellate Tribunal was obliged to examine the Agreement that was entered into between the principal and the agent on 01.08.1995 for a period of two years commencing from 01.08.1995. Reliance on material found on 26.07.1995 is not justified” the bench observed.

The dispute arose from assessment proceedings for 1995-96. Shree Karthik Papers claimed that transfers of paper products to agents outside Tamil Nadu between August 1, 1995 and March 31, 1996 were consignment sales. The assessing authority rejected the claim and treated the turnover of ₹1.51 crore as inter-State sales. It also imposed tax and penalty.

On appeal, the Additional Appellate Assistant Commissioner held that the transactions were consignment sales and not interstate sales. The authority also reduced the penalty from ₹25.64 lakh to ₹2.21 lakh. However, the Tamil Nadu Sales Tax Appellate Tribunal subsequently restored the assessment and the higher penalty.

Before CESTAT, the company contended that the disputed transactions were governed by agency agreements that came into force on August 1, 1995 and that the authorities had wrongly relied on documents recovered during the inspection on July 26, 1995.

Examining the agreement, the Tribunal noted that the goods entrusted to the agents remained the property of the principal until sold. The principal was required to insure the goods while in transit and while in the custody of the agents.

The agreement also required agents to render periodic statements of account and provided that advances obtained through hundies would not be treated as sale value.

The tribunal also disagreed with the Sales Tax Appellate Tribunal's conclusion that all subsequent transactions would have been inter-State sales had the inspection taken place in March 1996.

“This finding is based purely on presumption and assumption. Once an Agreement had been entered into between the principal and agent from 01.08.1995, it would be the terms of Agreement that will govern the transactions. The mode of transactions prior to 01.08.1995 has no relevance and could not have formed the basis for determining whether the inter-State sale had taken place or not with effect from 01.08.1995,” the bench held.

Holding that the company had discharged the initial burden of proof and that the transfers were consignment sales, the tribunal allowed the appeal and restored the findings of the Additional Appellate Assistant Commissioner on the nature of the transactions. However, it declined to interfere with the reduced penalty of ₹2.21 lakh.