Freight Charges Form Part of Sale Price When Seller Retains Responsibility Till Delivery, Taxable under TNGST Act: Madras HC [Read Order]

In a recent ruling, the Madras High Court held that freight charges form part of the sale price when the seller retains responsibility for the goods until delivery at the buyer’s site, and such charges are liable to sales tax under the Tamil Nadu General Sales Tax Act, 1959.

Sterlite Industries (India) Limited, the petitioner, a manufacturer of sulphuric acid, was inspected by the Enforcement Wing officials on 17 December 2002. During the inspection, it was found that the petitioner had charged freight separately in certain bills.

The petitioner explained that freight was collected from customers and paid to transporters periodically, and the amount was recovered by issuing debit notes at a fixed rate per metric ton. The Assessing Officer treated these freight charges as part of the sale price and brought them to tax.

The petitioner filed an appeal before the Appellate Assistant Commissioner, who allowed the appeal by holding that the freight charges were post-sale expenses and should not form part of the sale consideration.

The Department filed an appeal before the Tamil Nadu Sales Tax Appellate Tribunal, which set aside the appellate order and upheld the assessment, holding that the petitioner’s responsibility for the goods extended until delivery at the buyer’s site.

Before the High Court, the petitioner’s counsel argued that under Section 20 of the Sale of Goods Act, 1930, ownership in specific goods passes to the buyer when the contract is made, even if delivery or payment is postponed.

They argued that since the price was fixed as ex-factory and freight was charged separately by debit note, the sale concluded at the factory gate, making the freight a post-sale charge not liable to tax. The counsel further submitted that the tribunal failed to interpret the contract as a whole and overlooked the intention of the parties.

The State’s counsel argued that the Assessing Officer rightly treated freight charges as part of the sale price, as the petitioner retained control and risk over the goods during transit.

The counsel pointed out that Clauses 4 and 5 of the agreement with the buyer specified the freight rate and required the petitioner to bear the cost of transit insurance, which showed that the sale was completed only upon delivery at the buyer’s site.

The Division Bench comprising Justice P. Velmurugan and Justice K.K. Ramakrishnan observed that the contract clearly indicated that the seller’s obligations continued beyond the factory premises. Clause 4 fixed the freight charges based on distance and diesel price and Clause 5 required the petitioner to arrange transit insurance.

The court explained that these terms established the seller’s extended responsibility for the goods during transit and that the freight was inseparably linked to the sale transaction.

The court held that although freight was billed separately, it formed part of the sale consideration as the sale was concluded only at the buyer’s site. The court upheld the findings of the Assessing Officer and the Tribunal and dismissed the tax case revisions as devoid of merit.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates