"Inter-State Sales Tax Applies Where Contract Precedes Dispatch," Rules Punjab and Haryana High Court

The Punjab and Haryana High Court has dismissed the writ petitions filed by Modern Food Industries (India) Limited (MFIL) challenging the tax demands imposed by the State of Haryana. The Court upheld the decision of the Sales Tax Tribunal, which classified the transactions between MFIL and the Bihar government as inter-State sales, thereby subjecting them to tax under the Central Sales Tax Act, 1956. The judgment reaffirms the principles governing inter-State trade and the criteria for determining whether a transaction qualifies as a stock transfer or a taxable sale.

Modern Food Industries (India) Limited, a public sector undertaking, entered into a Memorandum of Understanding (MOU) with the Bihar government to supply "Poshahar" (energy food) for distribution among vulnerable sections of society. MFIL operated a manufacturing plant in Faridabad, Haryana, from where it dispatched the energy food to its branches in Patna and other locations. The Excise and Taxation Officer of Haryana assessed these supplies as inter-State sales and levied taxes accordingly. MFIL contended that these transactions were stock transfers and therefore exempt from Central Sales Tax.

The Court, in its analysis, rejected MFIL's assertion that the transfers were mere stock transfers. The Court referenced the established legal principle that when goods move from one State to another as a result of a contract of sale, such transactions are to be treated as inter-State sales. The Sales Tax Tribunal had upheld this view, noting that the energy food was dispatched from Faridabad to fulfill specific contractual obligations to the Bihar government, making it subject to inter-State sales tax​.

The Court further noted that MFIL had failed to provide sufficient evidence to substantiate its claim that the transactions were stock transfers. The production of "F" forms, which are crucial in proving stock transfers under Section 6A of the Central Sales Tax Act, was insufficient in this case. The Court observed that the presence of a pre-existing contract and the specific formulation of goods for delivery indicated that these were sales and not mere transfers between branches​​.

The Court relied heavily on precedent, particularly the judgment in Sahney Steel and Press Works Limited vs Commercial Tax Officer, which lays down the criteria for determining whether a movement of goods between states constitutes a sale. The judgment clarified that if the movement is occasioned by a contract of sale, it is to be considered an inter-State sale. In the case of MFIL, the agreement with the Bihar government and the subsequent dispatch of goods met this criterion​.

Justice Sanjeev Prakash Sharma stated, "The movement of goods from Faridabad to Patna, Madras, and Kanpur branches for a specific purpose in pursuance of a prior contract makes it an inter-State sale, taxable under the Central Sales Tax Act. The petitioner’s contention of these being stock transfers does not hold, given the contractual obligations involved."

The High Court’s dismissal of MFIL’s writ petitions solidifies the application of the Central Sales Tax Act in cases involving the movement of goods across state lines under specific contracts. The judgment underscores the necessity for companies to provide clear evidence when claiming stock transfers to avoid tax liabilities. This decision is likely to impact similar disputes in the future, reinforcing the criteria used to distinguish between stock transfers and inter-State sales.

Date of Decision: 02 September 2024

M/s Modern Food Industries (India) Limited vs State of Haryana and Others