Open Purchase Orders Are Standing Offers, Movement of goods are mere stock transfers, No Sales Tax Payable: Karnataka High Court

The Karnataka High Court has held that open purchase orders are only standing offers that do not constitute a confirmed "agreement to sell" and that movements of goods are mere stock transfers.

The division bench of Justice Dinesh Kumar and Justice M.G. Uma has observed that the open purchase orders do not constitute any contract. The Purchase Orders issued from time to time for the supply of goods constituted a contract between the parties. Thus, the sale effected pursuant to such Purchase Orders is an intra-state sale in that state.

The petitioner/assessee is in the business of manufacturing and selling automotive paints. It is a registered dealer under the provisions of the K-VAT Act. Its manufacturing unit is situated near Mangalore in Karnataka. It has warehouses (branch offices) in Maharashtra, Tamil Nadu, Haryana, and Uttarakhand.

After the product is approved by the customers, the petitioner receives open purchase orders. Petitioner transfers the stock to its godowns situated near the customers' manufacturing unit and supplies the paint as and when the indent is received.

The Deputy Commissioner of Commercial Taxes passed an order under Section 9(2) of the CST Act read with Section 39(2) of the KVAT Act by accepting the statutory declarations made in Form F in support of an exemption for stock transfers.

The Enforcement Officers of the Commercial Tax Department inspected the petitioner's premises at Mangaluru and the branches situated outside Karnataka. On verification of the documents, the Department came to the conclusion that the petitioner was manufacturing automotive paints against specific orders given by the customers, and therefore, the company could identify the customer for whom the paint was required.

The enforcement authorities recommended reassessment under Section 9(2) of the CST Act read with Section 39 of the KVAT Act for the purpose of levying tax under Section 3(a) of the CST Act.

Based on the investigation report, the department issued proposition notices for reopening the assessment proceedings and concluded the proceedings by rejecting "F- forms" on the stock transfer turnover on the ground that inter-state movement of goods from the manufacturing unit at Mangalore to various depots in other states was against pre-existing contracts and amounted to an inter-state sale liable to tax under Section 3 of the CST Act.

The assessee contended that for any sale to be treated as an interstate sale, three conditions are essential. Firstly, there should be a sale; secondly, there should be interstate movement of goods; and thirdly, interstate movement ought to have been occasioned by the sale.

The department contended that specific orders are placed by the purchasers, and based on such orders, the petitioner manufactures and supplies the paint. Thus, the manufacture of paint pursuant to specific orders is customer specific. Goods move from Mangalore to various destinations to be delivered to customers. Therefore, sales happen simultaneously with the movement of goods from the petitioner's factory. Therefore, the petitioner is liable to pay the Central Sales Tax.

The issue raised was whether the inter-state transfer of goods under Form-F to petitioner's depots situated in different states amounts to an inter-state sale under Section 3(a) of the CST Act.

The court allowed the petition and held that whilst goods were stored in various states, ownership and title to the goods vested with the assessee. Pursuant to the Purchase Orders received from time to time, the assessee has delivered the goods from its depot in that state to the respective purchasers.

Case Title: M/s. BASF India Ltd. Versus State of Karnataka

Case No: Writ Petition No.43797 Of 2019

Citation: 2022 LiveLaw (Kar) 461

Date: 14.10.2022

Counsel For Petitioner: Senior Advocate V. Sridharan

Counsel For Respondent: AGA Jeevan J. Neeralgi

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