The Kerala High Court on 18 July, 2011 in Cadbury India Vs. State of Kerala, 2011 (3) KLT SN 85 (C.No.85) : 2011 (3) KHC 316 explained that “the fundamental condition of agency arrangement is that the principal will take the loss and consequences for bonafide acts done by the agent in the course of purchase or sale made by the agent on behalf of the principal.”
A bench comprising of Justice C.N. Ramachandran Nair and Justice P.S. Gopinathan observed that in this case admittedly the agent purchased the goods with his funds and at his own cost and risk and transports it to the godown of Cadbury India and only after Cadbury India accepts the goods and takes over possession, the goods become the Cadbury’s property.
“We do not know how the petitioner (Cadbury India) can contend that the purchase made from farmers and dealers by the agent with his funds and at his own cost and risk can be treated as purchase on behalf of the petitioner (Cadbury India). The goods procured by the agents are only sold to the petitioner (Cadbury India) against Form 25 issued by the petitioner (Cadbury India). Though the arrangement is apparently stated as agency, the transactions prove otherwise,” the judgment said.
While dismissing the S.T. Revision cases the Court held that the agency arrangement appears to be only a scheme for splitting up of price between purchase cost, transport cost, commission etc. to avoid tax on part of the turnover. The Court viewed that this is a clear attempt to reduce incidence of tax on the actual turnover.
The Court, therefore, cannot accept the contention of Cadbury India that the conditions provided in Explanation 5 to Section 2(xxi) are not satisfied.
The said Explanation reads as follows:
“Explanation 5:- Notwithstanding anything to the contrary contained in this act or any other law for the time being in force, two independent sales or purchases shall, for the purposes of this Act, be deemed to have taken place,–
(a) when the goods are transferred from a principal to his selling agent and from the selling agent to the purchaser; or
(b) when the goods are transferred from the seller to a buying agent and from the buying agent to his principal, if the agent is found in either of the cases aforesaid.
(i) to have sold the goods at one rate and to have passed on the sale proceeds to his principal, at another rate, or
(ii) to have purchased the goods at one rate and to have passed them on to his principal at another rate, or
(iii) not to have accounted to his principal for the entire collections or deductions made by him in the sales or purchases affected by him on behalf of his principal; or
(iv) to have acted for a fictitious or non-existent principal.”
# Facts of the Case
The connected revision cases are filed by Cadbury India challenging the common order of the Tribunal sustaining sales tax assessment on the purchase of coco by Cadbury India company for the assessment years 1997-98 and 1998-99.
The petitioner Cadbury India is a leading manufacturer of coco based chocolates and allied products. Raw coco beans are purchased by Cadbury India directly and also through agents appointed by them. The agents purchase coco from farmers as well as from small traders and under agreement between them and the company, agents deliver coco at the godowns of the company located at various centres.
There is written agreement between the company and the agents providing for reimbursement of price paid to farmers/dealers, all the cost incurred by the agents and also commission payable to them at the agreed rate.
Coco beans is admittedly an item taxable at the point of last purchase in the State as provided in the First Schedule to the KGST Act.
Even though Cadbury India claimed that the purchase is made through agents to whom commission only was paid, the Assessing Officer noticed that the Cadbury’s claim is contrary to facts because all the agents are registered dealers who account the transactions as their purchases and sales.
In order to claim exemption from tax on purchase of coco made by the agents for sale to Cadbury India, the petitioner issued Form No.25 to the agents who in turn issued Form No.25 to the dealers from whom they purchased coco. Further, the agreement between the company and the agents establish that the company is liable to pay the agent the entire cost incurred by them until delivery of the goods at the stockyard of the company in the various centres and besides reimbursement of the cost, the company also pays certain amount which is termed as commission in the agreement.
The Assessing Officer found that the transaction the company has with the agents is outright purchase and the bifurcation of the price is only an arrangement between the parties to avoid payment of tax on the actual purchase cost incurred by the company.
The Assessing Officer, first appellate authority as well as the Tribunal after examining the terms of the agreement and the accounts came to the conclusion that the agency agreement is only a device to avoid payment of tax on the taxable turnover which is the cost incurred by the company until goods reach their stockyard where delivery is given by the agents at the cost of the company.
The Court noticed that though the entire cost reimbursed to the agent by the company may come within the description of “purchase turnover”, the Assessing Officer has added only 15% of other reimbursements to purchase price reimbursed by the company to the agents for payment to farmers and dealers. Since the assessment confirmed in first appeal is reconfirmed by the Tribunal in second appeal, the company has come up with these revision cases.
# Cadbury India
The contention raised by counsel for Cadbury India is that the transaction between the company and the agents is an agency agreement whereunder company reimburses purchase cost and expenses and the agents are paid commission.
However, Government Pleader referring to the Tribunal’s findings contended that the transaction is a pure arrangement of purchase and sale between the parties and issuance of Form No.25 by the company to the agents will clearly establish this position.
The Court completely agreed with this argument because Form 25 prescribed under Rule 32(14) of the KGST Rules is to help chain dealers to avail exemption on their purchases leaving the last dealer to pay tax in terms of the taxable entry in the Schedule which is last purchase.
In fact, admittedly all the agents of the petitioner are registered dealers who on purchase of coco beans issues Form No.25 to the dealers from whom they purchased and after making sales to the company, they obtained Form 25 issued by the company and on production of the same, the agents got sales tax exemption.
Rule 32(14) is as follows:
“Every dealer in goods taxable at the point of last purchase in the State shall, if he is not liable to tax on such goods by reason of his not being the last purchaser in the State, obtain a declaration in Form 25 from the person to whom he has sold the goods. A blank book of declaration of form 25, shall be obtained from the assessing authority, on payment of a fee at the rate of seventy rupees per book of 50 forms. Every purchaser shall issue such a declaration to the seller. The declaration so obtained shall be submitted in duplicate to the assessing authority on or before the fifteenth of the month succeeding that to which the sales relate along with a statement of such declarations showing the name and addresses of the dealers to whom the goods were sold with the particulars of sale bill, quantity, and value, and the total turnover covered by such declarations.”
What is clear from the above is that statutory Form 25 is issued only when a dealer purchases goods from another dealer and the declaration is to the effect that the selling dealer is not the last purchaser liable to pay tax. Under the scheme of the Act and Rules, unless the purchaser who issued Form 25 resells the goods to another dealer in Kerala and obtain Form 25 issued by such dealer, he will be liable to pay tax as the last purchaser.
The Court viewed that the petitioner after issuing Form 25 prescribed under Rule 32(14) could not even be allowed to raise the contention that it is issued for administrative purposes which was the argument rendered by the petitioner before the lower authorities and before High Court.
When a form prescribed under the statutory Rule is issued, the contents therein binds the dealer who issues it and so much so, Cadbury India does not have a right to contend that the transactions against which the Form 25 were issued to the agents do not represent actual purchases.
Further, the Tribunal after examining the terms of the agreement found that the purchase is at the cost and risk of the agent and the company takes over the responsibility over the goods only on delivery at the stockyard of the company. So much so, whatever is the arrangement made between the company and their agents for bifurcation of price, such as purchase cost paid to farmers/dealers, freight and cost incurred and margin paid by way of commission, the whole transaction is purchase by the company and the entire cost reimbursed by the petitioner to the agents, as per Court view, happens to be the purchase cost which is nothing but purchase turnover of the goods.
The Court viewed that the Assessing Officer was lenient in favour of Cadbury India because he has only estimated 15% of the reimbursements over and above purchase cost reimbursed as part of taxable turnover to be added to purchase cost.
Inspite of the factual position and the issuance of statutory declaration by Cadbury India to their procuring agents stating that Cadbury India purchased the goods from them, counsel for Cadbury India submitted that the test of sale provided under Explanation 5 to Section 2(xxi) of the KGST Act is not satisfied. Explanation 5 to Section 2(xxi) of the Act sets out the circumstances under which transaction between agent and principal is treated as sale.
Advocates A.M. Shaffique (Sr. Advocate.), E.K. Nandakumar, A.K. Jayasankar Nambiar, Priya Mahesh appeared for the Petitioner and Government Pleader Mohammed Rafeeq for the Respondents.