Central Sales Tax Act 1956 envisages single point of taxation i.e. tax at the first point of sales. Subsequent sales during the movement of the goods from one state to another have been exempted under section 6(2) of CST Act.
Before proceeding to understand which sale is exempted under section 6(2) and the conditions for exemption, one should understand some relevant concepts relating to it.
What is a sale by transfer of documents of title: Section 3(b) provides that a sale or purchase effected by transfer of documents of title to the goods during their movement from one state to another shall be deemed to take place in the course of interstate trade or commerce.
Explanation 1 to section 3 provides that the movement of goods commences when goods are delivered to carrier and terminates when delivery is taken from the carrier.
Explanation 2 to section 3 provides that where the movement of goods commences and terminates in the same state it shall not be deemed to be a movement of goods from one state to another by reason merely of the fact that in the course of such movement the goods pass through the territory of any other state.
For example if goods are booked from Delhi to Mumbai by Railway, movement of goods will commence as soon as goods are handed over to the Railway booking office at Delhi for transport. The movement will be deemed to continue even if goods reach Mumbai and are lying in possession of railways. The movement will be deemed to have terminated only when the delivery of goods is taken at Mumbai on submission of railway receipt. Thus goods will be deemed to be in movement for sales tax purposes till delivery is taken at destination.
What is document of title to goods: Document of title to goods means a document which evidences that the person holding the document has the title of the goods i.e he is the owner of the goods which are represented by the said document.
In normal trade practices when the goods are handed over to the carrier by the seller for transportation to reach the buyer, the carrier issues a receipt to the seller. The seller then sends this receipt to the buyer and the buyer gets delivery of goods on submission of such receipt to the carrier when goods reach at the buyer’s destination. This receipt issued by carrier is document of title to goods.
Thus a document of title to goods may be a lorry receipt (in case of road transport), a Railway receipt (incase of transport by rail), Bill of Lading (in case of transport by sea or an airway bill (in case of transport by air).
What is transfer of documents of title to goods: under section 6(2) of CST provides exemption from CST on sales subsequent to interstate sales, which has been effected by transfer of documents of title of goods during their movement. Thus it becomes essential to understand what is transfer of documents of title of goods.
Section 2(4) of the Sales of Goods Act permits transfer of goods by ‘endorsement or delivery of documents of title. Thus documents of title of goods can be transferred by mere delivery or by endorsement on document. Even though goods can be transferred by mere delivery of documents without endorsement on such document, but it is advisable and also convenient to transfer the documents by written endorsement on the documents as it gives proof that the transfer is in due course of trade, for the purpose of claiming exemption u/s 6(2) of CST Act.
Conditions for claiming exemption u/s 6(2) of CST Act: Section 6(2) of CST Act provides that notwithstanding anything contained in section 6(1) or 6(1A), where a sale of any goods referred in section 8(3)[i.e. goods which are mentioned in the registration certificate of the dealer], in the course of inter state trade or commerce has either occasioned the movement of such goods from one state to another or has been effected by transfer of documents of title during movement from one state to another, any subsequent sales during such movement effected by transfer of documents of title of such goods to a registered dealer, shall be exempt from tax. The condition is that certificate in prescribed form has to be obtained from the registered dealer. Section 6(2) runs as under:
(2) Notwithstanding anything contained in sub-section (1) or sub-section (1A), where a sale of any goods in the course of inter-State trade or commerce has either occasioned the movement of such goods from one State to another or has been effected by a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods to a registered dealer, if the goods are of the description referred to in sub-section (3) of section 8, shall be exempt from tax under this Act:
Provided that no such subsequent sale shall be exempt from tax under this sub-section unless the dealer effecting the sale furnishes to the prescribed authority in the prescribed manner and within the prescribed time or within such further time as that authority may, for sufficient cause, permit,
a) a certificate duly filled and signed by the registered dealer from whom the goods were purchased containing the prescribed particulars in a prescribed form obtained from the prescribed authority; and
b) if the subsequent sale is made to a registered dealer, a declaration referred to in sub-section (4) of section 8:
Provided further that it shall not be necessary to furnish the declaration referred to in clause (b) of the preceding proviso in respect of a subsequent sale of goods if, the sale or purchase of such goods is, under the sales tax law of the appropriate State exempt from tax generally or is subject to tax generally at a rate which is lower than three per cent. or such reduced rate as may be notified by the Central Government, by notification in the Official Gazette, under sub-section (1) of section 8 (whether called a tax or fee or by any other name); and (b) The dealer effecting such subsequent sale proves to the satisfaction of the authority referred to in the preceding proviso that such sale is of the nature referred to in this sub-section.”
From reading the above section the following conditions can be summed up which are required to be fulfilled before claiming exemption of CST on subsequent sales under section 6(2):
1. First sale should be an inter state sales: The first sales must be interstate sales. It can be either a section 3(a) or section 3(b) sale. A sales is considered as an interstate sales as per section 3 of CST Act if
(a) It occasions the movement of goods from one state to another or
(b) It is effected by transfer of documents of title to the goods during the movement of goods from one state to another.
Section 3(b) has already been explained above.
2. Transfer of documents of title: Subsequent sales must be a section 3(b) sale i.e. it should be a sales by transfer of documents of title to goods during the movement of such goods from one state to another. As already explained above movement of goods from one state to another commences when goods are handed over to carrier and movement is deemed to continue till delivery is taken at the other end.
3. Subsequent sales must be to a registered dealer: The subsequent sales is exempt only if it is made to registered dealer
4. The goods should be of description referred to in section 8(3) of CST Act: Another requirement for claiming exemption for subsequent sales u/s 6(2) of CST Act is that the sale should be of goods which are specified in the certificate of registration of purchasing dealer.
5. Certificates required: Dealer selling the goods has to issue a certificate in prescribed form to the purchasing dealer (Prescribed forms are E1 form if its first sale and E2 form if subsequent sales). Subsequent purchaser has to issue certificate in prescribed form (This is C form) to his seller. Such certificates are to be produced before assessing authorities within prescribed time. The certificates in C, E1 and E2 forms are to be issued on quarterly basis.
The requirements for issuing the above forms i.e. who is to issue which form and to whom which form is to be issued can be explained with the help of following example:
Suppose W in Punjab sends goods in Delhi and raises invoice on X in Bihar, during the movement of goods X sells goods by endorsing documents of title to goods in favour of Y who is a dealer in U.P and Y sells ultimately goods to Z who is a dealer in Delhi by further endorsing the documents of title while the goods are still in transit. Z finally takes delivery of goods in Delhi and the movement of goods comes to an end.
Now in above example W will issue E-I form to X and will get ‘C form’ from X.
X will issue E-II form to Y and will get ‘C form’ from Y.
Y will issue E-II form to Z and will get ‘C form’ from Z
A dealer who sells goods in transit has to obtain E-I/E-II forms from the seller and C form from the buyer. Submissions of both E-I/E-II and C form is mandatory to avail exemption.-Phool Chand Gupta v. State of AP 104 STC 601(SC)
Provisions of C form applicable to E1/E2 forms: Some provisions which are applicable to C forms are also applicable to E-I/E-II forms. For example one declaration for one quarter, indemnity bond if form is lost, issue of duplicate form, sales tax concession is not available if the forms are not submitted.
Latest case of Delhi High Court and Supreme court’s verdict in A&G Projects and Technologies Ltd case: The Supreme court in A & G Projects and Technologies Ltd v. State of Karnataka  19 VST 239;  2 SCC 326 explained the scheme of section 6(2) of CST Act and held that once the first inter state sale has suffered CST then subsequent sales effected by transfer of documents during transit will be exempt provided conditions prescribed u/s 6(2) are satisfied. This has been done to remove the cascading effect. The observation of the Supreme court in the said case is provided as below
“Analyzing Section 6(2), it is clear that sub-section (2) has been introduced in Section 6 in order to avoid cascading effect of multiple taxation. A subsequent sale falling under sub-section (2), which satisfies the conditions mentioned in the proviso thereto, is exempt from tax as the first sale has been subjected to tax under sub-section (1) of Section 6 of the CST ACT 1956. Thus, in order to attract Section 6(2), it is essential that the concerned sale must be a subsequent inter-State sale effected by transfer of documents of title to the goods during the movement of the goods from one State to another and it must be preceded by a prior inter-State sale. It is only then that Section 6(2) may be attracted in order to make such subsequent sale exempt from levy of sales tax.
However, the proviso to sub-section (2) of Section 6 prescribes further conditions and it is only on fulfillment of those conditions that the subsequent sale stands exempted. If those conditions are not satisfied then, notwithstanding the fact that the sale is a subsequent sale, the exemption would not be admissible to such subsequent sales. This is the scheme of Section 6 of the CST ACT 1956.”
In a recent case namely Mitsubishi Corp. Ind. Ltd. Vs Value Added Tax officer decided by Delhi High court wherein sighting the above observation of the Supreme court it was argued by the counsel for the state that if the first Inter State sales is an exempted sale then the subsequent sales should not get the benefit of Section 6(2) of CST Act even if all the conditions u/s 6(2) are satisfied since the first sales had not suffered tax. The Delhi High Court in this regard observed as under:
“A reading of the said portion of the Supreme Court decision only indicates that where the first sale is taxed, the second sale would be exempted because of the object of avoiding the cascading effect. However, the Supreme Court decision cannot be understood to mean that where the first sale is exempted, the second sale must be taxed even though the conditions under Section 6(2) for exemption stand satisfied.”
Thus even if the first sales was exempted due to exemption on tax available in the state where from the first sale is made the subsequent sales in other state will be exempted if the conditions u/s 6(2) of CST Act are satisfied.
Exemption in case of Predetermined contract of sales u/s6(2) Supreme court in its verdict in A&G Project(Supra) case examined sales u/s 3(a) and 3(b) and laid down conditions for section 3(b) sales which need to be fulfilled before claiming exemption u/s 6(2).
It was held by Supreme Court that if a contract of subsequent sales is in existence before the commencement of the movement of goods for the purpose of exemption u/s 6(2) of CST Act then the exemption u/s 6(2) will not be available. But the decision of the SC has been interpreted by department in various states to mean that if there is predetermined subsequent buyer before the movement of goods starts even then subsequent sales will not qualify for exemption u/s 6(2) as in transit sales.
But better sense have seemed to be prevailed as the West Bengal Govt has issued an explanatory circular regarding to set out the position in this regard. It has been explained in the circular that in A & G technology case it was held that pre determination of contract of subsequent sales before the movement of goods starts may result in denial of exemption u/s 6(2) but it cannot be understood to mean there cannot be pre determination of the buyer especially in case of tailor made goods and pre determination of buyer or receiving of an order from the subsequent buyer will not result in denial of exemption u/s 6(2)
The circular is reproduced as below.
GOVERNMENT OF WEST BENGAL
DIRECTORATE OF COMMERCIAL TAXES,
14, BELIAGHATA ROAD, KOLKATA-700 015.
Trade Circular No. 11 /2010 Date: 04.10.2010
Sub : Inter state sale that comes u/s. 3(b) of the CST Act, ’56 and is usually claimed as exempted u/s. 6(2 of the Act.
Reports are coming in from different corners highlighting the fact that dealers, registered in West Bengal, who have since been effecting inter state sales u/s. 3(b) of the CST Act, ’56 and have since been claiming those subsequent sales as exempted u/s. 6(2) of that Act, are now denied their claims by the assessing authorities of Directorate. Further, the dealers, registered in West Bengal, who have effected inter state sales falling u/s. 3(a) of the Act are, in some cases, denied issue of certificates in form E-1 by the assessing authorities. The reason, as presumed by assessing authorities, is that in all such cases the concerned dealers have effected the purported inter state sales u/s. 3(b), not during the movement of goods from one state to another, pursuant to sales u/s. 3(a) but prior to the commencement of movement of goods from one state to another.
The fact cannot be denied that in the commercial world, substantial number of transactions of subsequent sales takes place particularly for specially made goods where a dealer first collects order from his outside state customer and thereafter places his corresponding purchase order either to inside state supplier or to outside state supplier. Therefore, there exists one pre-existing order or pre-determined party at the hands of a subsequent seller when he is making agreement of purchase/sale with the inside state or outside state supplier.
Reports, thus received, also show that assessing authorities are following the ratio of the judgment of Hon’ble Supreme Court of India pronounced in the case of A & G Projects & Technologies Ltd. –vs- State of Karnataka reported in 19 VST 239(2009). In that judgment Hon’ble Court had an occasion to refer to inter state sale falling u/s. 3(a) and that u/s. 3(b) and also to refer, in that connection to exemption of sale prescribed u/s. 6(2)
while Hon’ble Court was virtually concerned to decide on the appropriate state which would be competent to levy CST in relation to a long chain of 3 inter state sales, all being decided by the assessing authority of Karnataka as inter state sales falling u/s. 3(a) of the Act. (Reference para 8 & 9 of the judgment). Hon’ble Court was pleased in that context to lay down the following principles of law in para 11:
“The dividing line between sales or purchases u/s. 3(a) and those falling u/s. 3(b) is that in the former case the movement is under the contract whereas in the latter case the contract comes into existence only after the commencement and before termination of the inter state movement of the goods.”
Emphasizing on the part underlined above i.e. the contract comes into existence only after commencement, in the latter case, the assessing authorities are denying the dealer’s claim of subsequent sales u/s. 6(2) where they find pre-existing order or pre-determined party at the hands of the subsequent seller. This has resulted in denial of sale falling u/s. 3(b) and consequential denial of issue of certificate in form E-1 etc. to the original supplying dealer who has effected sale u/s. 3(a) and also denial of claim of sale u/s. 6(2) to the subsequent seller who has effected subsequent sale. Circumstances being as such, we may have a re-look on the position of law. From the definition prescribed under the Act, we see that section 3(a) requires that not the contract of sale but the sale itself would occasion the movement of goods from one state to another. Section 3(b) requires that sale is to be effected i.e. contract of sale should come into existence by transfer of documents of title to the goods after the commencement of movement and before termination thereof.
Now let us see what is observed by Hon’ble Courts from time to time. In the judgment delivered in the case of Tata Iron & Steel Co. Ltd. –vs- S.R. Sarkar (1960) 11 STC 655 (SC), Hon’ble Supreme Court has settled the following principles:
i) Mere contract of sale is not a sale within the definition u/s. 2(g) of CST Act, ’56.
ii) An inter state sale can either be governed u/s. 3(a) if it occasions movement of goods from one state to another or u/s. 3(b) if it is effected by transfer of documents of title after the commencement of movement. They are mutually exclusive.
iii) A sale (transfer of property) becomes an inter state sale u/s. 3(a) if movement of goods from one state to another is under contract of sale. It implies that not a contract of sale but the sale itself occasions the movement of goods and, therefore, any contemplation of endorsement of consignment note/RR is not permissible under 3(a) sale.
iv) Transfer of document of title to the goods will arise only in case of sale u/s. 3(b) and that too during its movement irrespective of when the contract of this second/subsequent sale has been made between second seller and the next/the final purchaser.
Moreover, a sale falling u/s. 3(b) takes place only when the transport documents are physically transferred or stand transferred by implication and obviously that by instruction. This has already been accepted as constructive transfer of transport documents, in judicial parlance, as envisaged by Hon’ble Apex Court in the case of G.A. Galiakotwalla & Co. (P) Ltd. –vs- The State of Madras reported in 37 STC 576 (1976)(SC).
Besides above, we see that in the case of State of West Bengal & Others –vs- Joshi Jute Corporation & another reported in 100 STC 17 (1996) Hon’ble Calcutta High Court has observed that a dealer in jute goods in Calcutta placed an order upon a jute mill in Calcutta for certain jute goods. Under instruction from the dealer, the goods were delivered directly to a party in Kerala. Hon’ble Court has admitted that sale made by dealer in jute goods in Calcutta to Kerala party was subsequent sale within the meaning of section 6(2) of the Act and hence exempt.
When principles of law laid down above are holding the field, Hon’ble Supreme Court has pronounced the judgment in case of A & G. Projects & Technologies Ltd. (supra). As mentioned earlier, in this case Hon’ble Supreme Court again laid down almost the same principles of law in same languages excepting that in earlier judgment (Tata Iron & Steel Co. Ltd. etc.) the sale contemplated u/s. 3(b) is held to be one which is effected by transfer of documents of title to the goods during their movement from one state to another and in the latest case (A & G. Projects & Technologies Ltd.) it is held to be one where contract comes into existence only after the commencement and before the termination of the inter state movement of goods. In both the cases, Hon’ble Court has emphasized on the materialization of the contract by using the terms “sale is effected” in earlier case and “contract comes into existence” in latter one and not on its written or verbal understanding. ‘Sale is effected’ means contract of sale has come into existence and nothing more than that. Nothing new is, therefore, observed by Hon’ble Apex Court in the latter case.
It is, therefore, clarified for all concerned that –
i) in case of sale falling u/s. 3(a), any kind of endorsement of consignment note/LR etc. cannot be invited;
ii) as contract of sale and sale itself are altogether different in case of inter state sale, pre-existing order or pre-determined parties will not negate any 3(b) sale if other requirements are found fulfilled i.e. physical or constructive transfer of documents of title to the goods is made;
iii) purchase of goods from local dealer and sale of it to outside state purchaser by transfer of documents of title to the goods will also qualify as sale falling u/s. 3(b);
iv) once a sale is established as 3(b) sale, the same will automatically qualify itself to come under the ambit of section 6(2) of the Act;
v) section 6(2) is simply concerned with a valid 3(b) sale, a certificate in form E-I/E-II issued by supplier and a declaration in form ‘C’ collected from customer and nothing more than that.
All concerned are, therefore, requested to follow the clarifications given above. Issue of certificate in form E-I/E-II and of declaration form in Form ‘C’ in connection with subsequent sale is to be streamlined accordingly. It is hereby informed, in this connection, that authority will take a tough stand if it is found that a dealer registered in West Bengal is claiming input tax credit under WBVAT Act on purchase of an item from a local dealer while at the same time he is claiming inter state sale of the said purchased item u/s. 3(b) of the CST Act, ’56, in this way or that, and thereby as exempted u/s. 6(2) of the same Act.
I want to make it clear that this circular is clarificatory in nature and not at all an interpretation of law.
Although the above circular is issued by West Bengal Govt. and is an explanatory in nature but it would be very helpful in interpreting the relevant provisions of the law which are applicable in other states of India.