Holding

Transportation charges and agents' commission, when paid as part of the total consideration for raw material purchase, form part of turnover and are taxable under Section 6‑A of the Andhra Pradesh Sales Tax Act, 1957.

Summary

A.P. Paper Mills Ltd., a paper manufacturer, bought hardwood from unregistered dealers through agents who were paid a lump sum covering the cost of the wood, transportation charges and the agents' commission. The Commercial Tax Officer assessed sales tax on the total amount paid, invoking Section 6‑A of the Andhra Pradesh Sales Tax Act, 1957, while the assessee contended that tax should be levied only on the raw material cost. The Sales Tax Appellate Tribunal and the Andhra Pradesh High Court held that the transport and commission charges were post‑purchase expenses and not part of turnover, thus exempting them from tax. The State appealed, arguing that the entire consideration formed part of the turnover defined under Section 2(s) and was therefore taxable. The Supreme Court held that the transportation charges and agents' commission, being part of the total consideration for the purchase of raw material, constitute turnover and are liable to tax under Section 6‑A. Consequently, the appeal was allowed and the earlier orders set aside.

Issues considered

Whether transportation charges and agents' commission paid together with the cost of raw material constitute "turnover" under Section 2(s) of the Andhra Pradesh Sales Tax Act, 1957.
Whether such amounts are liable to sales tax under Section 6‑A of the same Act.

Subjects

sales taxturnoverSection 2(s)Section 6-Atransportation chargesagents commissionraw material purchasetax assessment

Judgment

STATE OF ANDHRA PRADESH A
\!.

MIS. A.P. PAPER MILLS LTD.

JANUARY 3, 2005

[S.N. VARIAVA, DR. AR. LAKSHMANAN AND S.H. KAPADIA, JJ.]
B

Sales Tax:

Andhra Pradesh Sales Tax Act, 1957-Sections 2(s), 6-A-Turnover- C
Transportation charges and commission paid t~ ·agent for supplying raw
material-Inclusion of, in turnover-Held, these expenses were incurred to
procure raw material and required for completing the sale transaction and
therefore form part of turnover.

Respondent-assessee, a manufacturer of paper, purchased raw D
material from unregistered dealers through agents on contract rates which
besides cost of raw material included transportation charges and agents'
commission. The assessee sought to pay sales tax on cost of raw material
only. But the Assessing Authority assessed sales tax on total turnover which
included transportation charges and the commission paid to agents. E
Assessee challenged the assessment order unsuccessfully before the
Appellate Commissioner. However, the Appellate Tribunal and the High
Court held in favour of the assessee on the ground that transportation cost
and agents' commission were incurred by assessee subsequent to purchase
of raw materials and such charges would not represent the sale
consideration. F
In the appeal filed by Revenue, it was contended that transportation
charges and commission paid to agent together with cost of raw material
constituted 'turnover' under Section 2(s) of the Andhra Pradesh Sales Tax
Act, 1957 and is liable to sales tax under Section 6-A thereof. G
Allowing the appeal, the court

HELD: I.I. Transportation charges and agent's commission paid by
assessee to agent together with cost of raw material constitute 'turnover'
under Section 2(s) of the Andhra Pradesh Sales Tax Act, 1957 and is liable H
7
8 SUPREME COURT REPORTS 12005] I S.C.R.

A to sales tax under Section 6-A thereof. 19-A; 17-CI

1.2. The Tribunal and the High Court erred in holding that the
transportation charges and agents' commission were charges incurred
subsequent to the purchase of raw material and such charges did not
represent the sale consideration. There is clear statement of assessee that
B agents were paid a total amount which included the cost of raw material,
transportation charges and commission. 112-H; 13-A-BI

1.3. The assessing authority is right in levying the tax on the total
amount paid to agents for purchasing the raw material from unregistered
C dealers. The expenses for procuring the raw material would become part
of the total turnover. Admittedly, the assessee purchased raw material
from unregistered dealers through agents and the agents were paid the
total amount which included the cost of raw material, transportation
charges and commission. The assessee, as held by assessing authority, did
not transport raw material after purchase and the agent was made
D responsible for transportation etc. and therefore total consideration paid
for the purchase of goods would form part of turnover. I12-C, D, El

E.l.D Parry(/) ltd. v. Asstt. Commissioner of Commercial Taxes and
Anr., 12000] 2 SCC 321; D.C. Johar and Sons (P) Ltd. v. Sales Tax Officer,
Ernakulam and Anr., (1971) 27 STC 120; Dyer Meankin Breweries ltd. v.
E State of Kere/a, (1970) 26 STC. 248 and Hindustan Sugar Mills ltd. v. State
of Rajasthan and Ors., (1979) 43 STC 13, relied on.

Greaves Chitram limited v. State of Tamil Nadu, (2003) 133 STC and
Ram Oxygen (P) ltd. v. Joint Commissioner, (CT) (2004) 134 STC 240,
approved.
F
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3750 of I 999.

From the Judgment and Order dated l.I2.98 of the Andhra Pradesh
High Court in T.R.C. No. 232 of 1998.

G Dabojit Borkakati for Mohanprasad Meharia for the Appellant.

P.N. Gupta for the Respondent.

The Judgment of the Court was delivered by

H DR. AR. LAKSHMANAN, J. The short question involved in this
STATE v. A.P. PAPER MILLS LTD. [LAKSHMANAN . .I.] 9
appeal is whether the transportation charges and agent's commission paid by A
the respondent - Mis A.P. Paper Mills Ltd. to the agent together with the cost
of raw materials constitute "turnover" under Section 2(s) and is liable to sales
tax under Section 6-A of the Andilra Pradesh Sales Tax Act, 1957 (6/1957).

The respondent is a public limited company engaged in the activity of
manufacturing paper. The respondent is a registered dealer under the A.P. B
Sales Tax Act, 1957 (hereinafter called as "the Act") and is an assessee on
the rolls of the Commercial Tax Officer, Aryapuram, Rajahmundry.

The respondent purchased hard wood (raw material) from unregistered
dealers through persons called agents. The hard wood is used for the
manufacture of pulp. The agents are engaged in the business of purchase of C
raw material from the unregistered dealers and supplying the same in the
factory of the respondent on contract rates which included the cost of raw
materials, transportation charges and the agent's commission. The respondent
filed their returns under the provisions of the Act. The Commercial Tax
Officer found out that the respondent was paying sales tax under Section D
6-A of the Act only on the cost of raw materials purchased from the
unregistered dealers leaving out the transportation charges and the commission
paid to the agents which amounted to Rs. 48,50,735.

The Commercial Tax Officer made an assessment including the
transportation charges and the agent's commission paid in the taxable turnover E
under Section 6-A of the Act after issuing a show cause notice. The amount
of tax determined to be paid was Rs. 2,42,537. The Commercial Tax Officer
held that the respondent is liable to pay tax on the total amount of purchase
price as per the definition of total turnover under Section 2(s) of the Act
which also included the transportation charges and the agent's commission F
for procuring the raw materials. The respondent filed an appeal before the
Appellate Deputy Commissioner against the order of the Commercial Tax
Officer dated 22.3 .1993. The appellate Authority held that the respondent did
not transport the raw materials after purchase but the agent was made
responsible for purchase of raw materials and transportation of the same to
the respondent's factory for a total consideration which included the cost of G
raw materials, transportation charges and agent's commission. The appellate
Authority held that the entire consideration paid by the respondent as the
purchase value of the raw materials liable to tax under Section 6-A of the
Act.
H
10 SUPREME COURT REPORTS [2005) I S.C.R.

A The respondent filed a second appeal before the Sales Tax Appellate
Tribunal which allowed the appeal directing the Commercial Tax Officer to >t
delete the additions made towards transportation charges and agent's
commission from the gross and the net turnovers. The Tribunal held that the
purchases made by the agents from unregistered dealers are the purchases
made by the respondent and any expenses incurred subsequent to the purchase
B of raw materials would not be included in sale consideration flowing from
the agent to the responden<. Aggrieved by the order of the Tribunal dated
13.5.1998, the appellant fiied a Tax Revision case in the High Court of
Andhra Pradesh. The High Court, without going into the merits of the case,
dismissed the revision on the summary ground that the transportation charges
c and agent's commission were incurred subsequent to the purchase of the raw
materials and the said charges, therefore, do not represent the sale con5ideration
which had passed from the buyer to the seller .!s a finding of fact.

Aggrieved by the order passed in the revision by the High Court of
Andhra Pradesh, the above appeal by way of special leave petition was filed
D by the State of Andhra Pradesh.

We have heard Mr. Debojit Borkakati, learned counsel appearing for
the appellant and Mr. P.N. Gupta, learned counsel appearing for the respondent.
~
~
It was argued by the learned counsel appearing for the appellant that
E the High Court is in error in not seeing that the agents appointed by the
respondent are engaged in the business of purchase of raw materials from the
unregistered dealers and supplying the same in the factory on contract rates
which included the cost of raw materials, transport charges and the agent's
commission. It was further submitted that the High Court is not correct in
holding that the transportation charges and the agent's commission are incurred
F
by the respondent subsequent to the purchase of raw materials and such
charges do not represent the sale consideration. Learned counsel appearing
>!
for the appellant invited our attention to Section 2(s) and Section 6A of the
Act and also relied on the judgment of this Court in the case of E. l.D. Parry
(/)ltd. v. Asstt. Commnr. of Commercial Taxes and_Anr., [2000] 2 SCC 321
G and in the case of D.C. Johar & Sons (P) Ltd v. Sales Tax Officer, Ernakulam
and Anr., 1971 (Vol.27) STC 120. Learned counsel appearing for the
respondent reiterated the contentions urged before the lower authorities and
submitted that transportation charges and commission paid to the agent would
not form pa11 of the turnover under Section 6A of the Act. He further submitted
that the finding of fact has been recorded by the Tribunal on the basis of the
H
STATE v. A.P. PAPER MILLS LTD. [LAKSHMANAN, J.] 11

related material on records and that the Tribunal being final forum on question A
l"- of finding of fact, the High Court has rightly not interfered with the said
finding of fact and this Court will not interfere with such finding.

We have gone through the orders passed by the authorities and also of
the High Court.
B
The definition of the term "turnover" as contained in Section 2(s) is as
under:-

"2{s) "turnover" means -

(i) the total amount set out in the bill of sale excluding the amount C
collected towards the tax or the tax due under the Act whichever
is less;"

The definition of "total turnover" under Section 2(r) reads thus:

"2(r) "total turnover" means the aggregate turnover in all goods of a D
dealer at all places of business in the State, whether or not the whole
or any portion of such turnover is liable to tax; including the turnover
of purchases or sales in the course of inter-State trade or commerce
or in the course of export of the goods out of the territory of India
or in the course of import of the goods into the territory of India;"
E
Section 6A which deals with levy of tax on turnover relating to purchase
of certain goods reads as follows:

"6A. Levy of tax on turnover relating to purchase of certain goods
Every dealer, who in the course of business-
(i) purchases any goods (the sale or purchase of which is liable to F
tax under this Act) from a registered dealer in circumstances in
which no tax is payable under section 5 or under section 6, as the
case may be, or
(ii) purchases any goods (the sale or purchase of which is liable to
tax under this Act) from a person other than a registered dealer, G
and
(a) consumes such goods in the manufacture of other goods for
sale or consumes them otherwise, or

(b) disposes of such goods in any manner other than by way of H
12 SUPREME COURT REPORTS [2005] l S.C.R.

A sale in the State, or

(c) despatches them to a place outside the State except as a
direct result of sale or purchase in the course of inter-State
trade or commerce,

B shall pay tax on the turnover relating to purchase aforesaid at the
same rate at which but for the existence of the aforementioned
circumstances, the tax would have been leviable on such goods under
section 5 or section 6;"

It is an admitted fact that the respondent purchased the hard wood from
C unregistered dealers through agents and that the respondent appointed certain
agents who have opened depots for buying hard wood and transporting the
same to the factory premises of the respondent and that the agents were paid
a total amount which included the cost of raw material, transportation charges
and commission. The assessing Authority is right in levying the tax on the
total amount paid to the agents for purchasing hard wood from unregistered
D dealers. It was contended by the learned counsel for the respondent that the
respondents are entitled to claim ex em pt ion on transportation charges and
commission on the ground that they would not fonn part of the turnover
under Section 6A of the Act. This contention was rejected by the assessing
authority, rightly so, in our opinion, on the ground that the respondents were
E liable to pay tax on the total amount of purchase price of hard wood. We
have already extracted the definition of "turnover" under Section 2(s) of the
Act. The expenses for procuring hard wood, in our opinion, would become
part of the total turnover. The assessing authority dismissed the appeal on the
ground that the respondent did not transport hard wood after purchase that
the agent was made responsible for transportation etc. and that, therefore,
F total consideration paid for the purchase of the goods would form the turnover.
The said submission, in our opinion, has no force.

The Tribunal, in its order, has relied on the statement of the agent
extracted at page 2 of the assessment order. It is useful to reproduce the said
statement which reads as under:
G
"I am willing to supply casuraina oil ets from local cultivators
and transport the same to your depots as per your approved rate and
conditions. Further in the application the rate of raw material supply
was split up into three components namely:- (I) cost of raw material
(2) Transport charges (3) Commission."
H
STATE v. A.P. PAPER MILLS LTD. (LAKSHMANAN. J.] 13

The finding of the Tribunal and the High Court that the transport and A
commission were charges incurred subsequent to the purchase of the hard
wood and such charges do not represent the sale consideration is against the
admitted fact on the side of the respondent who have clearly niade the statement
that the agents were paid a total amount which included the cost of raw
material, transportation charges and commission. When the facts are not in B
dispute, the Tribunal and the High Court have erred in rendering a finding
against the revenue.

In the case of E.l.D. Parry (/) ltd. v. Asstt. Commnr. of Commercial
Taxes and Anr. (supra), the question before this Court was as to whether the
planting subsidy paid by the appellants - E.l.D. Parry (I) Ltd. to the sugarcane C
growers can be said to lie a part of the price of sugarcane purchased by it
from them and can legitimately be included in the turnover of the appellants.
Whether the transport subsidy/charges in excess of 30 Km. paid by the
appellant to third party, lorry owners, for transporting sugarcane pu~t·ant to
the State Government's direction can be aggregated with the price of sugarcane
and included in the turnover of the appellants. It was contended before this D
Court by the counsel for the appellant that the planting subsidy given by the
appellants to the cane-growers was by way of an incentive to the cane-
growers for planting a particular variety in the stipulated months preceding
the planting season and that the planting subsidy being unrelated to the sale
of sugarcane could not have been treated as a part of the price for which the E
goods were bought and, therefore, could not have been rightly included in
the turnover of the appellants for determining their purchase tax liability. On
the other hand, the contention raised on behalf of the sales tax authorities was
that the act of giving planting subsidy for growing sugarcane followed by an
agreement for sale of the sugarcane by· the grower constituted one single
transaction and the planting subsidy being an amount paid in relation to the F
goods purchased had been rightly regarded as a part of the price of sugarcane
and included in the turnover of the appellants. As regards the transport subsidy,
the contention of the appellants was that the transport charges were in fact
paid by the appellants to third party lorry owners for transporting sugarcane
beyond the distance of 30 Km in view of the Government's dir~ctions and G
that the transport charges being not the amounts charged by the growers nor
being the amounts paid to them were really in the nature of the post-sale
expenses and, therefore, could not have been lawfully treated as part of the
price and included in the turnover of the appellants. The contention of the
sales tax authority, on the other hand, was that .under the agreement of sale
the cane-growers had to deliver the sugarcane at factory premises and the H
14 SUPREME COURT REPORTS [2005] I S.C.R.

A arrangements made by the appellants for transporting sugarcane by engaging
private lorries were for the purpose of enabling the cane-growers to deliver
sugarcane speedily and at specified times. It was further submitted that as
transportation charges were paid by the appellants with a view to help or
assist the sugarcane-growers they were really a part of the price for which
sugarcane was bought by the appellants and, were, therefore, rightly included
B in the taxable turnover of the appellants. After a detailed discussion, this
Court came to the conclusion that the total amount of consideration for the
purchase of goods would include the price strictly so called and also other
amounts which are payable by the purchaser or which represent the expenses >
re4uired for completing the sale as the seller would ordinarily include all of
C them in the price at which he would sell his goods. This Court further held
that the transport subsidy was a part of the consideration for which sugarcane
was sold by the sugarcane growers to the appellants. It is useful to reproduce
paragraph 21 of the above judgment which reads as under:

"For the same reasons we hold that the transport subsidy was a part
D of the consideration for which sugarcane was sold by the sugarcane-
growers to the appellants. Though the agreements between the parties
provided for delivery by the sugarcane-growers at the factory gate
and though the transport charges paid by the appellants were not to
the sugarcane-growers but to third-party lorry-owners, they were made
for securing regular supply of sugarcane as per the requirements.
E Though payments were made at the instance of the Government of
Tamil Nadu they also became a part of the implied agreement between
the appellants and the sugarcane-growers. They were not post-sale
expenses. Those amounts were paid to ensure scheduled delivery of
sugarcane. The sale of sugarcane became complete only thereafter.
F Those payments can be regarded either as payments made on behalf
of the sugarcane-growers or payments made in modification or
variation of the earlier agreements entered into by the sugarcane-
growers for selling sugarcane. In either case they could legitimately
be regarded as the components of the sale price as the sellers would
have otherwise included those amounts in the sale price."
G
In the case of D.C. Johar & Sons (P) ltd. v. Sales Tax Officer,
Ernakulam and Anr, (1971) (Yol.27) STC 120, the appellant-Company made
a claim for exemption for freight and packing and delivery charges in respect
of which separate bills were made out when selling the goods at Ernakulam.
H This Court held that the tax levied is not a tax on railway freight ; it is a tax
STATE v. A.P. PAPER MILLS LTD. [LAKSHMANAN, J.] 15
on turnover, that is, on the aggregate of sale price received by tne dealer in A
respect of sale of goods.

Earliest decisions on this point is in the case of Dyer Meankin Breweries
ltd v. State of Kera/a, (1970) (Vol. 26) STC 248. In this case, the appellant-
Company manufactured liquor at various places in U.P. and Haryana,
transported the goods from its breweries and distilleries to its place of business B
in Emakulam and sold them there. When selling liquor to the customers, the
appellant made out separate bills for ex-factory price and for "freight and
handling charges". The appellant claimed that the amount charged for "freight
and handling charges" incurred by it in transporting the goods from the
breweries and distilleries to the warehouse at Ernakulam had to be deducted C
under rule 9(f) of the Kerala General Sales Tax Rules, 1963, in determining
its taxable turnover.

This Court held that all the expenditure incurred by the appellant towards
freight and handling charges was incurred prior to the sale and was a
component of the price for which the goods were sold and the appellant was D
not entitled to the deduction claimed.

Hindustan Sugar Mills Ltd v. State of Rajasthan and Ors., (1979)
(Vol.43) STC 13: This case relates to pre-sale charges. The question that
arose in the assessment of the assessee to sales tax under the Rajasthan Sales
Tax Act, 1954, and the Central Sales Tax Act, 1956, was whether the amount E
of freight deducted from the free on rail destination railway station price in
the invoices made out by the assessee and paid by the purchasers formed part
of the "sale price" within the meaning of the definition of that term in section
2(p) of the Rajasthan Act and section 2(h) of the Central Act. The sai~s tax
authorities and the High Court took the view that the amount of freight F
formed part of the "sale price" and was, therefore, liable to be included in the
turnover of the assessee for the purpose of assessment of sale tax. On appeal
to this Court, this Court held as under:

"That the scheme of the Control Order was that the freight was
payable by the producer and he recovered it from the purchaser as G
part of the f.o.r. destination railway station price. The provision in the
contract that the delivery to the purchaser was complete as soon as
the goods were put on rail and payment of the freight was the
responsibility of the purchaser was wholly inconsistent with the scheme
of the Control Order and must be held to be excluded. by it. The
H
16 SUPREME COURT REPORTS [2005) I S.C.R.

A Control Order was paramount: it had overriding effect and if it
stipulated that the freight was payable by the producer, such stipulation
must prevail, notwithstanding any term or condition of the contract to
the contrary. Therefore, by reason of the provisions of the Control
Order, which governed the transactions of sale of cement entered into
by the assessee with the purchasers, the amount of freight formed
B part of the "sale price" within the meaning of the first part of the
definition of that term in section 2(p) of the Rajasthan Act and section
2(h) of the Central Act and was includible in the turnover of the
assessee.

Under the first part of the definition of "sale price" in section
c 2(p) of the Rajasthan Act, the expression meant the amount payable
to a dealer as consideration for the sale of any goods and, therefore,
the concept of real price or actual· price retainable by the dealer is
irrelevant. The test is, what is the consideration passing from the
purchaser to the dealer for the sale of the goods. It is immaterial to
D enquire as to how the amount of consideration is made up, whether
it includes excise duty or sales tax or freight. The only relevant
question to be considered is as to what is the amount payable by the
purchaser to the dealer as consideration for sale and not as to what
is the net consideration retainable by the dealer."

E The decision of the Rajasthan High Court was affirmed by this Court.

In a recent decision in the case of Greaves Chitram Limited v. State of
Tamil Nadu, (2003) 133 STC, the Madras High Court held that freight is
includible ifthe contract is for delivery at buyer's place. In the above judgment,
the Madras High Court held that :
F
'Though no written contract or agreement between the parties was
available, from the purchase orders and invoices, a clue could be
obtained to determine the nature and character of the transaction
entered into between parties. These documents reveal that the dealer
agreed to effect the delivery of the goods at the place of the buyer.
G What was further agreed to by the dealer was that freight charges
would be pre-paid by it. If the contract was one for delivery at the
destination railw;iy station, risk continues to be that of the seller-
dealer and consequently the freight charges paid are includible in the
sale price exigible to tax. If the contract is one in which delivery to
H the purchaser would be complete, as soon as the goods are put on rail
STATE v. A.P. PAPER MILLS LTD. [LAKSHMANAN, .I.] 17

at the pl;ice uf despatch, the risk is that of the purchaser and the A
freight charges incurred are not includible in the sale price exigible
to tax. Of course, this is not the invariable rule in all eventualities and
circumstances, e.g. goods covered by the control orders like Cement
Control Order. The dealer agreed to effect delivery at the place of the
buyer and that apart, it had also paid the transport charges besides B
including the same in the invoice. Therefore the transport charges are
includible in sale price."

In Ram Oxygen (P) Ltd. v. Joint Commissioner, (CT) (2004) (Vol. 134)
STC 240, the Tamil Nadu Taxation Special Tribunal took the similar view
and held that freight is inc!udible in turnover.
c
For the aforesaid reasons, the appeal filed by the State of Andhra Pradesh
is allowed. The question of law is answered in the affinnative and in favour
of the State. The order passed by the Sales Tax Appellate Tribunal as affirmed
by the High Court is set aside. There shall be no order as to costs.

D.G. Appeal allowed.