VAT and liability of Commission Agents in Agricultural Produce Markets

VAT and liability of Commission Agents in Agricultural Produce Markets  By – N.T.Nirale Advocate

Vat that is [sales tax] is payable on sales. Not on the sales made by all people, but only on the sales made by the dealers. A question arises whether the Adtiya [Brokers] are liable to pay tax on the sales. Particularly, in the agricultural produce market, there are brokers giving various kinds of services to the agriculturists bringing their produce in the market for sale and to the persons who buy them. The Broker helps the agriculturist to store the produce in the market, to ascertain the grade of the produce, the weigh or count it, to search the customer, to fix the price, to get advance towards price consideration, to despatch the goods to the customer etc.  For all these services he charges the agriculturist a fixed some depending on the price or weight of the produce which is brought in the market and sold. It is seen that in some towns such Adtiyas are registered under the sales tax law and in some town they are not registered. It is therefore necessary to examine as to which kind of Adtiyas are liable to pay sales tax and liable for registration under sales tax law.

 In this article such position is examined in the light of Maharashtra VAT Act 2002. Section 2[8] {which is similar to section 2[11] of Bombay Sales Tax Act 1956} defines the word ‘DEALER’ as under;

“dealer” means any person who, for the purposes of or consequential to his engagement in or, in connection with or incidental to or in the course of, his business buys or sells, goods in the State whether for commission, remuneration or otherwise and includes,-

(a) a factor, broker, commission agent, delcredere agent or any other mercantile agent, by whatever name called, who for the purposes of or consequential to his engagement in or in connection with or incidental to or in the course of the business, buys or sells any goods on behalf of any principal or principals whether disclosed or not;

{Have you read the above definition? How complicatedly it is worded? Now you must have understood the meaning of the phrase “Law is that which is not simple”. Why the law makers and the bureaucrats want that the law should not be understood by the persons who have to follow it, is another story. }

Thus the Broker or the commission agent is included in the definition of ‘dealer’. However by simply calling a person as a ‘Broker’ or ‘Commission agent’ or ‘Adtiya’, he is not included in the term “dealer’ and he does not become automatically liable to pay VAT or sales tax, because in India the Govt has to function within the frame work of the “Constitution of India”.                                                                                                 

The power to levy taxes is derived by the States through Constitution of India Article 246[3] as enumerated in the State List that is, list II of seventh schedule. Entry 54 of that list gives power to levy “taxes on sale or purchase of goods other than newspapers”. These powers are subject to provisions of entry 92A of the list.  All these powers to levy tax on sale / purchase of goods are also subject to Art 286 that is, tax can not be levied on interstate sale / purchase as well as imports and exports. For levy of tax on sale or purchase, it is necessary that there has to be a sale as defined under ‘Sale of Goods Act 1930.

As per ‘Sale of Goods Act 1930, for sale, there has to be transfer of property in goods by the seller to the purchaser. In case of sale through broker in the Agricultural Produce Market, the property in goods is transferred only by express consent of the agriculturist. The Broker only brings the seller and the purchaser to gather. It is for the agriculturist to agree for the sale as suggested by the Broker. Even if the Broker is issuing sale bills [called as Adat Patti] in his own name, that does not change the nature of the transition.  The name of the seller may not be disclosed by the Broker or the name of the purchaser may not be disclosed.              

 But in any case the right to agree for the sale is always with the agriculturist. In actual market practice, the consent of the agriculturist to the proposals brought by the Broker is generally implicit. But that does not legally take away the right of the agriculturist to agree or to disagree for the sale. Therefore in strict legal sense of the term, the Broker is not selling the goods brought by the agriculturist. It is the agriculturist who is selling the goods and the Broker is only bringing seller and the purchaser together. That makes the point clear that the Broker is not selling any thing and therefore he is not liable to pay tax under VAT or sales tax law.

There is leading high court case on this point. The Nagpur high court had decided this point in case of Commissioner or sales tax vs Pandurang Tukaram Dalal [7 STC 76 Nag]. In this case The Broker had a shop where he was selling the Sarees brought by the weavers. The weaver was present in the shop with the sarees. The Broker was assisting the weaver in the negotiations. The weaver was free to take away his sarees if he was not satisfied about the price. At the end of the day the payment was given to the agriculturist by the Broker. The Broker was also issuing the sale bills in his own name and was recovering the amounts of sale price and commisson from the purchasers. The high court held that the commission agent is not liable to pay sales tax as he himself is not a seller.

In case of M/s Ramchandra Rajpal [3 STC 109] the MP high court has observed that the agent, who has dominion and possession over the goods in which he deals, is a dealer. Where there is no dominion and possession of goods, he is not a dealer.

The Madras high court has observed in case of M/s Kundanlal Radhakrishna [3 STC 121] that a broker is an agent employed to make a bargain for another and receives a commission or brokerage. His duty is to establish privity of contract between the principal and the third party. He can not sale in his own name.

In this background let us examine the definition of the words “dealer’ under section 2[8] of the MVAT Act 2002. It says that the broker or a commission agent buys or sells any goods on behalf of any principal or principals whether disclosed or not is included in the term ‘DEALER’.

This provision by it self will not make the Brokers liable to pay VAT. It is very necessary that there has to be a sale or purchaser by the Broker. There has to be the dominion over the goods. Then only one can say that the Broker is selling the goods. When the goods are brought in the Agricultural Produce Market the owner of the goods and the seller of the goods is the agriculturist and not the Broker. The Broker is only assisting the agriculturist to sale his produce. Even if the Broker is issuing the bill in his own name the can not be called as a seller of the goods. Even if he gives advance money to the agriculturist is will not be a purchase by or sale to the Broker, because all the time before sale the agriculturist is the owner of the goods sold by the broker.

The Commissioner of sales tax [Maharashtra State] had issued the circular on 22-4-1988 on the point of liability of the Brokers, when the definition of the word ‘dealer’ was amended. In that circular it is made clear that the Brokers are included in the term ‘dealer’ by amendment to section 2[11] of BST Act 1959, made on 22-4-1988. The brokers were advised to get the registration certificates. But the Commissioner has also  made it clear that ‘such agent who simply bring the selling and purchasing parties to gather without being responsible for the performance of the contracts by either party and who are not themselves engaged in the activity of buying or selling of goods are not liable by virtue of this amendment. That means even after the said amendment the Brokers will not be liable to pay tax if they are acting only as middlemen

The provisions about the Broker and the Dealer under the MVAT Act 2002 are similar to the provisions of  BST Act 1959. Hence the findings of the Nagpur high court still hold the field.

It is said that the Brokers from Sholapur district have obtained the Registration Certificates under M VAT Act 2002 and such brokers from Marathwada region [mainly from Latur] have not obtained the Registration Certificates under MVAT Act.

The MVAT Act 2002 is applicable uniformly to the entire Maharashtra State. There are not different provisions applicable to different regions of Sholapur or Latur.  There is uniform act applicable to whole State of Maharashtra.

It may so happen that the Brokers from Latur have not applied for Registration Certificate because their facts may be identical to the facts narrated in the Nagpur high court decision in case of Pandurang Tukaram Dalal. It may also be possible that the dealers from Sholapur may be having their own buying and selling of goods, in addition to their brokerage business. In that case it is very correct that they have obtained the Registration Certificates under MVAT Act. Even if the turn over of Brokerage business is in crores of rupees, the Registration is not compulsory if there is no transaction liable to tax.

For the turnover made in the capacity of purely as a broker the registration under MVAT Act is not compulsory. It is only when the turn over of sale or purchase on his own business, other than the agency business exceeds the prescribed limits for the Registration under MVAT Act, it is compulsory to obtain the Registration Certificate.

For example if the sales made by the commission agent in his own name are more than Rs. 5 lacs [Rs. 1 lac in case of importer] and the sales or purchases to taxable goods are more than Rs. 10,000, it compulsory for him to obtain the Registration Certificate under NVAT Act 2002. He can not avoid the registration by calling himself as a broker. The commission agent can also get the Registration Certificate voluntary if he so desires.

Therefore it is necessary for every Broker to examine his liability in terms of his own sales and purchases and decide whether to obtain the Registration Certificate under MVAT Act 2002 or not.

Written by ntnirale on June 12th, 2011 with comments disabled.
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