Outward Transit Insurance – Whether Part of Taxable Sale Price
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The Contract of sale can either be Ex works contract or F.O.R contracts. Further F.O.R contracts of sale can either be F.O.R destination i.e customer godown or F.O.R transport. In F.O.R contracts the seller undertakes an obligation to arrange for carrying the goods to the destination at his own expense of freight and insurance etc. Though all these expenses incurred by seller are recovered from the buyer as part of the sale price. In Ex works contracts, the seller’s obligation ends at giving the delivery of sold goods at his factory gate and it is buyer’s obligation and expenditure to pick up the material from sellers gate. However, seller’s in Ex works contracts help the buyers in sending them the goods at the cost and risk of buyer. The actual cost incurred by seller’s in these contracts is reimbursed to them by buyers. Can a seller in an ex works contract of sale arrange to send the goods to buyer at his own risk but at the cost of buyer? Is this valid under the Insurance laws? Will cost of such transit insurance and outward freight be part of assessable value for the purpose of taxing under Central Excise and Sales Tax Act?
Insurance Law in respect of Marine Policies
The two aspects have been mixed up – one relating to the transaction of sale of the goods and the other arranging for the transit insurance for the buyer and charging the amount expended for the purpose from him separately. In connection with the proposition that insurance can be taken by a third person on behalf of another, reliance has been placed by the assessee on Chitty on Contracts Twenty-Eight Edition Vol. 2 Special Contracts P. 978 Chap. 41 Note 007 under the heading Insurance of Another’s interest . It is indicated that in varied facts and circumstances and subject to the statutory provisions of contract, it is possible to ensure the interest of another.
Para 5-012 at Page 184 of Benjamin’s Sale of Goods Fourth Edition has been made which is to the following effect:
Insurance. The passing of property is rarely of relevance to insurance. A person can insure goods to their full value against any loss on behalf of anyone who may be entitled to an interest in the goods at the time the loss occurs, provided that it appears from the terms of the policy that it was intended to cover their interest. Also a buyer will have an insurable interest in goods if they are at his risk, whether or not the property has passed to him .
Sale under the Sales Tax Laws
Sale with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other value consideration and includes :-
but does not include a mortgage or hypothecation of or a charge or pledge on goods;
When is a sale considered as completed
(1) There must be involvement of two persons competent to contract.
(2) Mutual consent of both the parties to contract.
(3) A thing in which property is transferred from seller to buyer ; and
(4) Valuable consideration.
The word sale price has been defined in Section 2(h) of Central Sales Tax Act, 1956 as follows:
Sale price means the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged :
The second part enacts an inclusive clause. It says that sale price includes any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in case where such cost is separately charged . Therefore, any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof is to be regarded as part of sale price , even if it does not fall within the first part of the definition. But there is an exception carved out of this inclusive. Not all sums charged for something done by the dealer in respect of the goods at the time of or before the delivery thereof are covered by the inclusive clause. The cost of freight or delivery or the cost of installation certainly represents an amount charged for transportation or installation of the goods at the time of or before the delivery thereof and would, therefore, fall within the inclusive clause on its plain terms but it is taken out by the exclusion clause, other than the cost of freight or delivery or the cost of installation in case where such cost is separately charged .
When the goods are sold, delivery is normally given by the seller at his own place of business or godown. In order to accommodate the customer’s convenience, the seller may also agree to send the goods to the former’s place, but on the condition that the former would pay to the latter such cost as the latter may incur in so sending the goods.
In the case of Escorts JCB Limited (Supra), the Supreme Court also ruled that even if the insurance policy has been taken by the seller in its own name on products sold by seller ex works, it should be treated as taken on behalf of the buyer and its cost should not be treated as part of assessable value.
Sale Price in case of outward insurance cover taken by seller
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Final test of inclusion of freight and insurance premium
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