Bombay High Court Upholds Assessee in Sales Tax Reference on Freight Charges Under Bombay Sales Tax Act, 1959 — Freight Amount Reimbursed by Purchaser Under Ex-Factory Contract Treated as Post-Sale Expense Not Forming Part of Sale Price. Ex-Factory Delivery and Reimbursement Terms Precluded Inclusion of Freight in 'Sale Price' Under Section 2(29) of the Bombay Sales Tax Act, 1959, Following Hindustan Sugar Mills and Ravi Trading Company.

Sales tax reference under Section 61(1) of the Bombay Sales Tax Act, 1959 concerning whether freight charges incurred and collected for transporting goods from factory gates to wholesaler destination formed part of sale price.

The applicant revenue sought a decision from the High Court answering the referred question in its favour, so that freight charges would be included in sale price and subjected to sales tax.

The assessee filed appeals against assessment orders that included freight charges in the taxable sale price; the revenue filed references against the Tribunal's orders allowing the assessee's second appeals and against the larger bench decision holding freight not part of sale price.

The first appellate authority dismissed the assessee's appeals relying on Second Appeal No. 1555 of 1993 decided on 11.04.1997; the Maharashtra Sales Tax Tribunal allowed the assessee's second appeals based on a larger bench decision in Appeal No. 154 of 1998 with Rectification Application, holding freight cost did not form part of sale price; the Tribunal referred the question to the High Court under Section 61(1) by order dated 12.12.2007.

Whether the sale was legally completed at the factory gates and the freight amount incurred and collected by the assessee for transporting goods from factory gates to wholesaler's destination was a post-sale expense not forming part of sale price under Section 2(2) of the Bombay Sales Tax Act, 1959. Whether the contracts between the assessee and purchasers were sham, invalid and void, and whether the freight component was artificially excluded to evade sales tax.

The revenue argued that the definition of sale price under Section 2(29) of the Bombay Sales Tax Act, 1959 included any sum charged for anything done by the dealer in respect of goods at the time of or before delivery, and that freight charges were such a sum. The revenue submitted that the first, second and third explanations to the definition of sale price inserted in 1990, 1992 and 1998 were clarificatory and applied to the assessment years 1992 to 1995, bringing freight within the definition of sale price. The revenue relied on Hindustan Sugar Mills v. State of Rajasthan to contend that freight charges represented expenditure incurred by the dealer to make goods available at the place of sale and were therefore a component of the price charged to the purchaser. The revenue contended that the contracts between the assessee and purchasers were sham, invalid and void, and were designed only to artificially exclude the freight component from the sales price and evade sales tax. The assessee contended that the contracts clearly stipulated delivery ex-factory, the assessee transported goods only as agent or bailee of the purchasers, and the freight amount was reimbursed by the purchasers, not paid as consideration for the sale, and therefore did not form part of the sale price. The assessee relied on the Division Bench decision in Commissioner of Sales Tax v. Ravi Trading Company and the Supreme Court's dismissal of the Special Leave Petition in State of Karnataka v. Bangalore Soft Drinks Pvt. Ltd. to argue that such contractual arrangements were valid and freight reimbursement was not taxable.

Where a contract for sale of goods provides for ex-factory delivery and the seller, as agent or bailee of the purchaser, incurs freight charges for transportation that are reimbursed by the purchaser, such freight amount is a post-sale expense and does not form part of the sale price under Section 2(29) of the Bombay Sales Tax Act, 1959, and is not exigible to sales tax; a contention that the contract is sham cannot be entertained when not referred for determination and is otherwise rejected on facts and precedent.

The contractual provisions clearly stipulate that the sale was to be completed ex-factory. the amount representing freight would not be payable as part of the consideration for the sale of the goods but by way of reimbursement of the freight which was payable by the purchaser, but, in fact, disbursed by the dealer and hence it would not form part of the "sale price". The Karnataka High Court held that there was nothing sham about such a contract. we dispose of these references by answering the question referred against the revenue and in favour of the assessee.

The assessee, manufacturer of biscuits, chocolates and confectionery goods, faced sales tax demands for some assessment years between 01.04.1990 and 31.03.1995 due to inclusion of freight charges in sale price, while refunds were allowed for other years. The assessee filed appeals against the assessment orders raising demands. The first appellate authority dismissed the appeals by relying on the Tribunal's judgment in Second Appeal No. 1555 of 1993 decided on 11.04.1997. The assessee then filed second appeals before the Maharashtra Sales Tax Tribunal. The Tribunal, by considering the decision of the larger bench in Appeal No. 154 of 1998 along with Rectification Application No. 68 of 2021 on 31.05.2003, held that the freight cost incurred by the assessee on behalf of wholesale dealers and subsequently reimbursed did not form part of the sale price and hence was not exigible to sales tax. At the behest of the revenue, Sales Tax Reference No. 55 of 2017 was made questioning the decision of the full Bench of the Tribunal in Appeal No. 154 of 1998 along with Rectification Application No. 68 of 2001, and Sales Tax Reference No. 79 of 2009 was made against the Tribunal's judgment and order allowing the assessee's second appeal. By judgment and order dated 12.12.2007, the Tribunal referred the question to the High Court under Section 61(1) of the Bombay Sales Tax Act, 1959. All references were heard together and disposed of by the High Court on 12.09.2025.

• Bombay Sales Tax Act, 1959: Section 2(2), Section 2(29), Section 61(1)