Q.1 Please explain the scheme of “in transit sale” covered by section 6(2) of CST Act, 1956?
Ans.: Section 3(a) of CST Act,1956 defines the interstate sale/purchase transaction. Section 3(b) defines the interstate sale effected by transfer of documents of title to goods. When the goods are in movement from one State to other. The whole section 3 reads as under:
“3. When is a sale or purchase of goods said to take place in the course of inter-state trade or commerce — A sale or, purchase of goods shall be deemed to take place in the course of interstate trade or commerce if the sale or purchase —
occasion the movement of goods from one State to another; or
is effected by a transfer of documents of title to the goods during their movement from one State to another…”
Section 6(2) of CST Act gives exemption to subsequent interstate sale effected by transfer of documents of title to goods when the goods are in movement from one state to another. However such exemption to subsequent inter-state sale is subject to production of Form E-I, as obtained from prior vendor and ‘C’ form from buyer.
A simple example can be that, suppose A of Mumbai has sold goods to B of Ahmedabad. The goods are dispatched by lorry and L.R. is taken out by A (Mumbai) where in A is consignor and B (Ahmedabad) is consignee. If before taking delivery from transporter, B decides to sell his goods to ‘C’ of M.P., he can simply endorse the L.R. in name of ‘C’ and the sale will be complete. This is the second or subsequent interstate sale in the course of same movement. In this case A must have charged 4% CST in his bill. Being a second interstate sale effected by B to C, B is equally liable to pay CST on above transaction. However the intention of Government is not to levy multiple taxes on sale taking place in one course of movement. Therefore the subsequent sale is given exemption. However it is subject to production of given forms. In above example, the sale by B to C will be exempt if B produces before his assessing authority Form EI issued by A of Mumbai and Form ‘C’ issued by C of M. P.
In light of above it is clear that the sale effected by transfer of documents of title to goods is eligible for exemption u/s. 6(2). These exempted sales are also referred to as “Sale in transit”.
Q.2 What is the procedure for transfer of documents of title to goods and the relevant judgments therefore. Whether pre- determined sales are covered by above category of “in transit sale”?
Ans.: The ‘sale by transfer of documents of title to goods’ has been interpreted by judiciary in many cases, some of them are cited subsequently for reference.
Normally the sale is effected by endorsement of transport documents. On the backside of the document like, L.R. the vendor can put his signature and transfer the documents to buyer. As held by Bombay High Court in case of Chhaganlal Savchand (62 ITR 133) the transfer of documents can be effected even by delivery.
It is also held by judiciary that transfer of documents can take place even by instruction. Therefore it is not necessary that the sale by transfer of documents takes place when the document is first taken out between first seller and his buyer and then transferred by the buyer to his buyer. The buyer of first seller can give instruction to dispatch the goods directly to his customer. If such instructions are given and accordingly the goods are dispatched to third party (i.e., buyer’s buyer) it is because of transfer effected by the buyer of first seller. The transfer takes place while booking the goods in transport and this is also a transfer during course of movement. This is known as notional or constructive transfer. Since this transfer is taking place during course of movement from one State to other it is eligible for exemption u/s. 6(2). In such case the first seller is consignor and the buyer’s buyer is consignee. However the commercial bills will be by first seller to his buyer and then by the first buyer to his buyer. In such a case to enable the first buyer to claim exemption, E-I form is to be issued by first seller to such first buyer.
It will be appreciated that even if the sale is predetermined by your buyer to his buyer it does not make any difference. On the contrary it makes the case strong in the sense that there is real transfer of documents at the loading station itself and any possibility of make believe transfer gets avoided. Therefore predetermined sale cannot be an issue. The same will be clear from the judgment given below.
The above legal position is clear, amongst others, from following judgments.
M/s. State of Gujarat vs. Haridas Mulji Thakker (84 STC 317)(Guj):- In this case the facts are that the Gujarat dealer received order from another dealer in Gujarat. For supplying the said goods, the vendor dealer in Gujarat placed order on Maharashtra dealer and instructed to send the goods directly to the Gujarat purchasing party. Gujarat High Court held that the sale by Maharashtra dealer to Gujarat vendor dealer is first interstate sale and the one by Gujarat vendor dealer to Gujarat purchasing dealer is second interstate sale. Gujarat High Court also held that the second interstate sale is exempt u/s. 6(2) being effected by transfer of documents of title to goods. In this case though there was no physical transfer of L.R. etc. Gujarat High Court held that there is constructive transfer by instruction and hence duly covered by section 6(2). This judgment duly covers both issues, that there is no need for physical transfer and also that having predetermined parties does not affect the claim.
M/s. Fatechand Chaturbhujdas vs. State of Maharashtra (S.A.894 of 1990 dated.12-8-1991) decided by Maharashtra Sales Tax Tribunal :- In this case the local party purchased goods from other local party and directed the same to be despatched to outside State party. Even though local party was shown as consignor, taking the view that while placing order there is term for outside place dispatches, Maharashtra Sales Tax Tribunal held that the sale between two local parties is first interstate sale and the sale by local party to outside party is subsequent interstate sale, duly exempt u/s. 6(2).
In short even if there is predetermined sale, there is no adverse effect on the sale to be claimed u/s. 6(2). On the other hand, in light of above judgments, the claim gets more authentic. The transfer of property to ultimate purchaser (consignee) gets synchronized at the time of booking the goods with the carrier and hence the subsequent sales take place by transfer of documents of title to goods as held by High Court in above case of 84 STC 317. The claim of exemption is to be allowed under above circumstances subject to production of required forms.
M/s. Duvent Fans P. Ltd. vs. State of Tamil Nadu (113 STC 431)(Mad.) :- Local dealer purchased goods from other local dealer and directed to send them to his purchaser’s place in other State. Madras High Court held that the first transaction is first interstate sale and the second sale is also subsequent interstate sale exempt u/s.6(2) of CST Act. The above judgment is directly on issue and hence will govern the field.
In fact there are many judgments on this issue. However since the legal position about transfer of documents as well as predetermined sale is clear from above judgments, no further citations are given here for sake of brevity.
Thus the “sale in transit” can be effected by any of above modes.