M/s. Mahindra & Mahindra Ltd. v. The Assistant Commissioner (CT)

What happened

The petitioner manufactures motor vehicles at Zaheerabad and sells them through regional sales offices (RSOs) and authorised dealers in other States. The RSOs, with dealers, prepare a monthly forecast and an Advance Planning Optimization (APO) which the Sales Support Group at Mumbai consolidates and sends to the factory; the petitioner said that it was only a projection and that vehicles are identified by engine and chassis number only at the RSO when a customer buys. In assessment year 2007-08, it had inter-state sales of ₹54,85,74,667 against Form C, export sales of ₹24,98,20,975 and stock transfers of ₹4,68,58,02,885 for which it claimed exemption. After a notice dated 5 July 2008 and a revised show-cause notice dated 16 October 2008, the first respondent denied the exemption on stock transfers and export sales, and levied higher tax for want of Form C declarations, resulting in a demand of ₹43,48,84,477 on the stock transfers. The petitioner relied on TELCO v. CCT, (1970) 1 SCC 622; the State relied on its audit data showing that dealers placed orders on their branches with advance payments and that the APOs were prepared on that basis, and on Balabhagas Hulaschand v. State of Orissa and English Electric Co. v. Deputy Commercial Tax Officer.

Questions before the court

• Were the transfers of vehicles from the factory to the RSOs branch transfers under section 6A or inter-state sales under section 3(a) of the CST Act?

Why the court ruled this way

The Court could not accept the petitioner's description of the transactions as simple branch transfers or the APO as a mere sales prediction; whatever the nomenclature, a document that originates in dealer-level demand, is aggregated centrally and directly triggers manufacture and despatch of the corresponding quantum to the branch from which the demand arose is in substance an indent or purchase order (paragraph 21). The audit material showed that dealers placed orders on branches with advance payments and that the factory manufactured and despatched on the strength of the consolidated APOs, so the movement of goods was an incident of a pre-existing contract of sale; it is not necessary for section 3(a) that the contract be recorded in one formal document, and it would be form over substance to hold otherwise (paragraph 22). Form F declarations do not by themselves protect a transaction, and the presumption stood rebutted by the petitioner's admitted business practice and the audit evidence, so the denial of exemption was sustainable also on that independent ground (paragraph 23). The question of law was answered against the petitioner, and the transactions were inter-state sales liable to tax, with no illegality, arbitrariness or want of jurisdiction under Article 226 (paragraph 24).

Controlling point

The impugned transactions are inter-state sales under section 3(a) of the CST Act.

Order and next steps

Writ Petition No. 3704 of 2009 was dismissed and the impugned order of 3 February 2009 upheld; Writ Petition No. 7449 of 2009 was dismissed on similar lines; pending miscellaneous petitions were closed with no order as to costs.

Practical implications

A manufacturer sending goods to branches against dealer orders and advances should not treat the movement as a mere stock transfer; the Form F declaration is not a safe harbour where the pre-existing order chain is shown.

Limits of this ruling

• The Court dealt with the facts shown by the audit material and the company's own business practice; it did not hold that every branch transfer supported by Form F is an inter-state sale.