Deposit of timber by Tata Coffee Limited to Government Timber Depots (GTD) for auction is to be treated as supply under GST even if there is no consideration involved at the time of deposition, since GTD is acting as an agent of Tata: Says AAAR, Karnataka

Tata Coffee Limited - AAAR, Karnataka - Appeal dismissed

Facts of the case:

a) Appellant (Tata Coffee Limited) cuts their excessive shade trees grown in the business of Coffee / Tea / Pepper plantation and sends the same to the Government Timber Depots (GTD) as mandated by the Karnataka Forest Act. 

b) However, the sale and purchase transaction between Tata and GTD does not happen on the same date. The Appellant neither knows the rate nor knows the time at which the timber will be purchased. Appellant also does not receive any payments towards the timber deposited.

c) Upon receipt of the timber from the appellant, GTD puts those timbers in auction at the time decided by them.

d) When in auction the timber is bought by someone, the GTD purchases the timber from the Appellant and sells it to the bidder. It may so happen that only a portion of ‘a lot’ of timber is sold in auction and the rest is unsold. In such cases, GTD only purchases that portion of the lot which is sold in auction and the rest will be kept in deposit and no amount is paid towards the timber not sold.

e) It may so happen that date of deposit and the date of auction have a difference of six months, one year or more. In such cases, the Appellant will be in ambiguity about the time at which the timber will be sold and rate at which the timber will be sold.

f) When the timber is sold in auction the GTD issues an invoice to bidder and collects the amount from them. After collecting the amount from bidder, GTD deducts an amount of 10% of the sale value towards “Supervision charges” (the charges for overseeing the timber from date of deposit to date of sale in auction) and pays the remaining to the Appellant.

Arguments given by the Tata Cofee Limited:

Aggrieved by the adverse ruling given by AAR, Karnataka, the appellant has filed this appeal before AAAR, Karnataka on the following grounds.

a) That the lower Authority has erred in considering the GTD as an agent of the Appellant. 

b) That the lower Authority has erred in treating the removal of timber by appellant to GTD as supply and charging GST on the same. 

c) That removal of timber for deposition is not removal for supply to the GTD;

d) That removal happens only for the purpose of supervision / custody. Hence the time of supply would be the date of actual auction / sale to the bidder on which date the goods will be sold to GTD by the Appellant.

e) That Section 104A of the Karnataka Forest Act, 1963 makes it clear that the Appellant cannot sell the timber to anyone other than the State Government or GTD. When such is the case, the GTD is acting in the capacity of a principal and not in the capacity of an agent.

f) That the appellant is not selling through the GTD but are selling to the GTD.

g) That there is no alternative option available to the appellant except to sell to the GTD.

h) That when the Karnataka Forest Act, 1963 has a very specific restriction that the timber cannot be sold to anyone else than GTD, the sale of timber is made by the Appellant to GTD and not to the bidders in the auction.

i) That GTD is not an auctioneer acting on behalf of the Appellant but is a seller by himself.

j) That GTD charges an amount of 10% of the sale value of the timber as supervision charges towards supervising the goods or keeping the safe custody of the goods from the date of deposit to the date of sale. If the supply/sale happens on the date of deposit, there would be no need to charge the supervision charges as GTD will be supervising their own goods. However, it is because the sale/supply doesn’t occur till the date of auction/sale to the bidder, the GTD is charging a fee for overseeing the goods.

k) That GTD neither acts as an agent nor the sale occurs on the date of deposition.

l) That GTD acts as a supervisor or custodian for the timber deposited by the appellant till the time of sale and charges a consideration of 10% of the sale amount. 

Held by AAAR, Karnataka:

In the instant case, there is a transaction in goods in as much as timber is being deposited by the Appellant to the GTD.

This transaction is mandated by a statute i.e the Karnataka Forest Act, 1963 whereby the purchase and sale of timber is restricted to only the State Government.

However, the activity of depositing the timber into the GTD does not result in realisation of consideration immediately. Where the consideration is not extant in a transaction, such a transaction does not fall within the ambit of supply. But, in certain scenarios, as elucidated in Schedule I of the CGST Act, the key element of consideration is not required to be present for treating certain activities as supply. One such activity which has been detailed in para 3 of Schedule I is reproduced hereunder:

3. Supply of goods-

(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or

(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.

Thus, the question is whether the GTD is an agent of the Appellant. As per Section 182 of the Indian Contract Act, 1872, an “agent” is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the “principal”. The term “agent” has been defined under sub-section (5) of section 2 of the CGST Act as follows:

“agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another”

In this case the Depots are set up by the State Government in terms of Section 104-A(5) of the Karnataka Forest Act for the purchase and sale of timber since the Act mandates that timber can only be purchased and sold by the State Government. The sale of the timber by the Depot is done by way of auction. The proceeds of the sale are remitted to the Appellant. Therefore, notwithstanding the fact that the Depot is set up under the aegis of a statute, it functions in the capacity of an agent. We draw reference to the CBIC Circular No 57/2018 dated 04-09-2018 wherein the scope of principal-agent relationship was explained. In terms of the said Circular, the key ingredient for determining the principal-agent relationship under GST would be whether the invoice for the further supply of goods on behalf of the principal is being issued by the agent or not. Where the invoice for further supply is being issued by the agent in his name then, any provision of goods from the principal to the agent would fall within the fold of the said entry.

In the instant case, once a lot of timber is sold to a successful bidder in the auction, the purchaser is required to pay 1/4th value of the timber purchased along with applicable taxes to the Principal Chief Conservator of Forests (PCCF). On receipt of the amount, the forest department will send a sale confirmation letter to the Purchaser at which time the purchaser will pay the balance dues. Once the material is lifted by the Purchaser after payment of the sale value plus taxes, the concerned Range Forest Officer will raise a bill which will be forwarded to the Deputy Conservator of Forest (DCF). The DCF will prepare a separate bill and send the same to the Chief Conservator of Forests (CCF) who will issue the letter of credit (LOC). The LOC will be forwarded to the treasury who will issue the cheque to the DCF and the DCF will issue the same to the Appellant.

Therefore, it is observed that the sale of timber happens through the GTD and not to the GTD as claimed by the Appellant. The proceeds of the timber sold through the auction process by the GTD is given to the Appellant on completion of the auction process. As such, the GTD acts in the capacity of agent of the Appellant and this transaction of depositing of timber by the Appellant in the GTD amounts to a supply in terms of clause 3 of Schedule I of the CGST Act.

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