Sales incomplete till goods delivery unless insurable risk passes to buyer. FOR destination basis sales invoice reversal for goods in transit at the year end valid-ITAT
ABCAUS Case Law Citation:
ABCAUS 1072 (2016) (12) ITAT
Assessment Year: 2011-12
Date of Judgment: 29-11-2016
Important Case Laws cited:
Morvi Industries Limited vs. CIT (SC)
CIT v. Excel Industries Ltd. (SC)
CIT v. Shoorji Vallabh Das & Co. (SC)
CIT vs. Bokaro Steel Ltd. (SC)
CIT vs. Indo Nippon Chemicals Co. Ltd. (SC)
CIT vs. Woodward Governor (SC)
Brief Facts of the Case:
The assesse was a limited company engaged in the manufacture and sale of electronic weighing; material handling; and batching and blending systems. The company dispatched weighing machines and spares to different customers vide invoices raised on different dates from 28.03.2011 to 31.03.2011, recording sales at Rs. 83,93,188/- corresponding to such invoices.
The invoices raised for the goods were on FOR destination basis. However, the goods were delivered to the respective buyers only in April, 2011 falling in the next financial year (i.e. FY 2011-12). As a result, the entries of sales already recorded were reversed in the FY 2010-11. This reversal of sales, resulted in a decline in gross profits to the extent of the difference between the cost price and the corresponding sales price as per invoices reversed.
The Revenue found this treatment as unacceptable as it was contrary to the assessee consistently followed accounting policy with respect of recognition of income. As per the accounting policy consistently followed, the sales was recognised upon dispatch of goods to customers as under:
“Sales are recognized upon dispatch to customers, which generally coincides with the transfer of ownership and are stated inclusive of excise duty and exclusive of sales tax, rebates and discounts.”
According to the assessee, the ownership of goods did not transfer unless the goods were received by the buyer and effective control transferred, which in the present case continued to be with it as at the end of the relevant year, i.e., 31st March, 2011.
Observations made by the ITAT:
Transfer of movable property is upon delivery
The Tribunal observed that transfer of movable property is upon delivery. The effective control over goods, and the risk (and reward) associated with ownership passes on delivery only. Referring to the Accounting Standard (AS) 9 issued by ICAI, the Tribunal observed that both in the strict legal sense as well as under the accounting norms, the delivery of goods generally signifies transfer of all significant risks and rewards associated with the ownership of goods, sales and, thus, income would accrue to the seller only on their delivery. The ITAT opined that It is only upon delivery to and the acceptance of goods by the corresponding party that a debt in favour of the transferor inures and income embedded in the consideration for transfer accrues.
It further observed that even if the sales booked on the basis of invoices raised, are not reversed in its accounts, an assessee would be entitled to claim a withdrawal or reduction in income as per books to the extent of the profit on ‘sales’ not accompanied by delivery of the goods ‘sold’. The only issue that would arise in such case would be if it had offered such profit element for the following year in-as much as no sales would stand to be recorded in its accounts for that year.
Case of constructive delivery
The Tribunal also considered the aspect if the instant case was of constructive delivery where the goods are delivered to the transporter/shipper for and on behalf of the buyer and the risk (and reward) from that stage onwards is to the account of the buyer. Such an understanding is normally characterised by the buyer making arrangements for the inspection of goods at the point of dispatch. As against it, in the FOR destination basis, the transportation fare is payable upon delivery, on which the goods are supplied
The Tribunal observed that the instant case indicated that it was the seller who undertook the responsibility for the delivery of goods to the buyer, though the cost thereof was perhaps borne by the buyer, which was not relevant as the seller can always adjust the price (of the goods) by factoring therein the freight cost.
Installation by Seller
Regarding the assessee’s contention that even installation of weighing machines was his responsibility, the Tribunal observed that though there was nothing on record to substantiate the same this was as reasonable as any buyer would only want a functional machine, even as installation by the seller may be insisted upon only where some technical expertise is required.
Insurable interest in the goods under transit
The Tribunal observed that no inquiry was made by the Revenue regarding this aspect and equally there was no assertion by the assessee in this regard at any stage. The ITAT opined that If the insurable interest therein was of the assessee-seller, the property in the goods had not transferred and it continued to be to the owner of the goods till their physical delivery.
Phraseology used in declared Accounting Policy Statement
Regarding the assessee’s contention that the word ‘dispatch’ used in the stated accounting policy was a euphemism for ‘delivery, assumed to ease the tedium of accounting that would otherwise arise., the Tribunal opined that primarily the decisive factor would be insurable risk. If the insurable interest was of the buyer, it was a case of constructive delivery, and the transfer of goods took place at the point of their dispatch. On the other hand as claimed, the goods under transit were not insured and there being nothing on record to repudiate the assessee’s claim, the reversal of sales could not be denied.
Held:
The Tribunal remanded the case back to the file of the AO for determination with reference to the insurable interest in the goods under transit as at the year-end. The Tribunal categorically clarified that in the event of the assessee’s claim being not allowable on the said terms; it having already offered the income to tax for the following year (AY 2012-13) the assessee can press its’ claim for rectification u/s 154 for AY 2012-13.
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