Is Stock Transfer betewen two units of the same Company is taxable under GST – Analysis based on judgement of High Court
Whether Stock Transfer is taxable event under GST? Its is one of the most controversial subject under GST and prone to litigation. Let’s analyze the subject in view of judgement prononuced by the High Court of Kerala and High Court of Telangana.
Case:1
M/s. ABCO TRADES (P) LTD. Vs. THE ASSISTANT STATE TAX OFFICER, WP No. 17377 of 2020, Order dated 21-08-2020, Prononuced by the High Court of Kerala.
Facts: The petitioner’s consignment of lubricant oil was detained by the department with the objection that consignee was shown as unregistered person in the E-way Bill and in delivery challan CGST and SGST was charged. The petitioner argued that although the E-way Bill shows the consignee as unregistered but Invoice which was accompanied with goods shows the GSTIN of the consignee. Further, it was by mistake that CGST and SGST was show in delivery challan. It was also contended that the goods are stock transferred and not sold, there need not be a payment of tax at all.
The Hon’ble High Court taking the note of this submission held that “the reasons shown in Ext.P5(c) for detaining the consignment are not sufficient to attract the provisions of Section 129 of the GST Act. Tax is not applicable on the transaction. The detention in the instant case cannot, therefore, be seen as justified.” Thereby allowed the writ petition and directed the respondent to release the goods detained.
Case: 2
M/s. SAME DEUTZ-FAHR INDIA (P) LTD, Vs. State of Telangana, WP No. 13392 of 2020, Judgement dated 23-09-2020 Pronounced by the High Court of Telangana.
Fact: The petitioner is engaged in manufacturing of tractors and its spares. The Registration certificate issued by the State of Telangana shows that its principal place of business is Hayatnagar and it has also additional place of business at Bongulur, Village, Ibrahimpatnam Mandal. The 4 tractors were dispatched and E-way bill was also issued. The Invoice shows Consignee and consigner as same with address of consignee at Hayatnagar. The goods were detained with the reason that there is mismatch of movement of goods and E-way Bill. It was also objected that the goods were being transported from Ranipet, Tamil Nadu to Bongulur village, Ibrahimpatanam Mandal, Hyderabad, but as per E-way bill, the goods have to be transported from Ranipet, State of Tamil Nadu to Hayathnagar in the State of Telangana.
A Show Cause Notice was issued to petitioner calling upon as to why the proposed tax and penalty should not be payable. The tax proposed was Rs.1,67,612/- towards CGST and equal amount towards State GST along with equal penalty, totalling to Rs.6,70,448/-. Petitioner under the apprehension that the goods would be confiscated and there would be arrest of the Company’s officials under the Act, the petitioner paid the said amount and got the detained goods released on 05-03-2000 by paying Rs.6,17,4481/-.
The petitioner filed the petition before Hon. Telangana High Court and argued that there was only a stock transfer from its factory in Ranipet in the State of Tamil Nadu to its Depot at Bongulur Village Ibrahimpatanam Mandal in the State of Telangana, that there is no element of sale of goods or services in it, and mere transfer of goods inter-State would not attract the provisions of the Act because there is no taxable event in it.
The Respondent (department) argued that he was not aware that the petitioner had got depots at different places in country. He also stated that it was not reflected in the invoice or in the E-way Bill; He alleged that unlike VAT regime Branch transfer is taxable under the GST Regime, though he did not quote any provision of law in respect of the said plea.
The Court held that there was no occasion for the department to collect tax and penalty from the petitioner on the pretext that there is illegality in the transport of goods as it merely amounts to Stock Transfer and there is no element of sale of goods or services in it. Accordingly, petition was allowed and Ordered for refund of the tax and penalty paid by the petitioner along with interest and Rs.1500/- towards cost.
Analysis:
If we take a look at the above decisions of the High Courts, it has been concluded that Stock Transfer is not sale of goods and there is no element of sale of goods or services. However, no detailed discussion is made but when argument was put forth that the Stock Transfer would not attract the provisions of the Act because there is no taxable event, no counter argument had been put forth by the Department. These decisions may be considered as guiding principal because till date no appeal or review petition is filed and two different high courts have given the same view.
In order to analyse the above decision, we must first take a look at Section 7 of CGST Act, 2017, that whether Stock Transfer constitutes any “Supply”. The Section 7 reads as under:-
Scope of supply.— (1) For the purposes of this Act, the expression ―supply includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;
[(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.]”
The words “Supply” is wider and includes all form of supply given at Section 7(1)(a) above, but it can be simplified as given below:-
(i) Supply of goods by way of sale;
(ii) Supply of goods by way of transfer;
(iii) Supply of goods by way of barter;
(iv) and so on.. made or agreed to be made….
In case of Stock Transfer there is no sale of goods, the reason is, in sale of goods there should be transfer of title of goods, should be in possession of goods and against consideration. There is no consideration or neither there is transfer of title of goods, as Head Office did not make any sale of goods to its branch/depot/warehouse, although there is movement of goods, the title of the goods remains with the Head Office, the company. To bring within the ambit of “Supply of goods” the mandatory is Title as well as possession both have to be transferred for a transaction to be considered as a supply of goods. Thus, it becomes clear that in case of Stock Transfer title of goods are not transferred nor there is any transaction, therefore, it does not constitute as “Supply of goods”.
A question can be raise of Para 2 of Schedule-I, which reads as under :-
“2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.”
As we have seen above, that as there is no transfer of title of goods, it cannot be said as “Supply of goods” and Para 2 says that “Supply of goods or Service…” but in case of Stock Transfer there is no supply of goods, hence not applicable. The Schedule-I, Para 2 is applicable to supply of goods and not for transfer of goods. The specific clause which deals with “Transfer” is available at Para 1 of Schedule-II, so one can take a view that for activity of transfer of goods, Schedule-I is not applicable and Schedule-II is to be taken into consideration.
Let’s consider Schedule-II, Para 1 which deals with “Transfer”. The sub-clause (a) states that “any transfer of the title in goods is a supply of goods;” In case of Stock Transfer there is no transfer of title of goods, therefore, not applicable. (b) states that “any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services;” In case of Stock Transfer no right is transferred or there is no undivided share, hence not applicable. (c) states that “any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods”. In case of Stock Transfer, no such agreement for future supply or any consideration. therefore, no applicable.
The purpose of Stock Transfer activity can be multifold viz. testing/ checking/ repairs/ shwoing to potential customers/ inspection etc. Under the pre-GST era, the Stock Transfer transactions were not subject to tax. Under GST era, schedule I clause (2) creates ambiguity and hence, the taxability of Stock Transfer transaction is prone to litigation. Till the the time there is specific judgement of High Court or Supreme Court addressing the applicability of tax on Stock Transfer in view of provision in Schedule I clause (2), the aforesaid judgements of Keral and Telangana High Court can be taken as base to defend.
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