Consignment Sales Can’t Be Reclassified as Inter-State Sales Based on Pre-Agreement Evidence: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that consignment sales effected after the execution of a valid agency agreement cannot be reclassified as inter-State sales merely on the basis of materials and documents recovered during an inspection conducted prior to the agreement period. The bench of Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member) has allowed the appeal filed by Shree Karthik Papers Limited and set aside the order of the Tamil Nadu Sales Tax Appellate Tribunal that had restored a tax demand and enhanced penalty by treating the transactions as inter-State sales. The dispute pertained to the assessment year 1995-96 and involved a turnover of ₹1.51 crore relating to transactions undertaken between August 1, 1995 and March 31, 1996. The Commercial Tax Officer had rejected the company’s claim that these transactions were consignment sales and instead treated them as inter-State sales, resulting in a tax demand and penalty of over ₹25.64 lakh. Subsequently, the Additional Appellate Assistant Commissioner held that the transactions were genuine consignment sales and reduced the penalty to ₹2.21 lakh. However, the Tamil Nadu Sales Tax Appellate Tribunal later restored the original assessment and penalty, prompting the company to approach CESTAT. The appellant contended that two distinct periods were involved. While it accepted liability on certain transactions prior to August 1, 1995 and paid Central Sales Tax on those transactions, it argued that the subsequent transactions were governed by fresh agency agreements executed on August 1, 1995. According to the company, these later transactions were genuine consignment sales supported by statutory Form F declarations and could not be treated as inter-State sales based on evidence relating to an earlier period. The Tribunal examined the agency agreement entered into between the company and its agents located in Karnataka, Kerala, Odisha and West Bengal. The agreement provided that goods would remain the property of the principal until sold, that agents would sell the goods at prices recommended by the principal, maintain accounts, remit sale proceeds, and that any advances received through hundis would not constitute sale consideration. The agreement further stipulated that the principal would retain ownership and insure the goods while in transit and in the custody of the agents. Referring to Sections 3, 6 and 6A of the Central Sales Tax Act, 1956, the Tribunal observed that an inter-State sale requires movement of goods from one State to another pursuant to a prior contract of sale. It relied upon the Supreme Court’s decision in Hyderabad Engineering Industries v. State of Andhra Pradesh, which clarified that the decisive test is whether the movement of goods was occasioned by a pre-existing contract of sale. The Tribunal noted that branch transfers and consignment transfers cannot automatically be treated as sales merely because goods move across State boundaries. The Bench found that the Sales Tax Appellate Tribunal had wrongly relied on slips, blank cheques, debit notes and other materials recovered during an inspection conducted on July 26, 1995, all of which related to the period prior to August 1, 1995. According to the Tribunal, these documents could not be extrapolated to conclude that transactions occurring after August 1, 1995 were also inter-State sales. It held that the appellate tribunal’s conclusion that the company would have declared all transactions as inter-State sales had inspection occurred later was based on pure presumption and assumption rather than evidence. The Tribunal further endorsed the findings of the Additional Appellate Assistant Commissioner, who had held that discounting bills with banks, drawing hundis, or agents selling goods in bulk quantities did not alter the character of genuine consignment sales. The authority had also found that the agents submitted Form F declarations, maintained accounts, debited freight and handling charges to the principal, and that ownership and control over the goods remained with the appellant until the goods were sold. Rejecting the State of Tamil Nadu’s contention that the agency agreement was fabricated, the Tribunal observed that no such finding had been recorded by the lower appellate forum. It also found no evidence to support the allegation that the appellant had received the full sale price before the movement of goods pursuant to pre-existing contracts. The Bench held that the appellant had adequately discharged its burden under Section 6A of the CST Act by producing the necessary statutory forms and supporting records. On the question of penalty, the Tribunal held that since the transactions were correctly classifiable as consignment sales, the enhanced penalty restored by the Sales Tax Appellate Tribunal could not survive. However, it declined to interfere with the reduced penalty of ₹2.21 lakh imposed by the Additional Appellate Assistant Commissioner, observing that the appellant had not filed a separate appeal challenging that portion of the order and that adequate reasons had been recorded for its imposition. The Tribunal allowed the appeal, set aside the order of the Tamil Nadu Sales Tax Appellate Tribunal in the State’s appeal restoring the inter-State sales assessment and enhanced penalty, and restored the relief granted by the Additional Appellate Assistant Commissioner. The reduced penalty of ₹2.21 lakh was, however, maintained. Case Details Case Title: Shree Karthik Papers Limited Versus The Commercial Tax Officer Citation: JURISHOUR-1509-HC-2026(Ker) Case No.: Central Sales Tax Appeal No. 05 Of 2015 Date: 02.06.2026 Counsel For Appellant: J Rajesh Counsel For Respondent: C. Kranthi Kumar Click Here To Read Order Read More: Credit Can’t Be Denied Repair And Maintenance Services Of Plant And Machinery By Categorising As Work Contract: CESTAT

Consignment Sales Can’t Be Reclassified as Inter-State Sales Based on Pre-Agreement Evidence: CESTAT

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