Salim Akhtar, MA. L.L.B.
‘Sale in transit’ (subsequent sale) under Section 6(2) of Central Sales Tax (CST) Act 1956 has become ‘an apparatus of harassment’ for the suppliers of the goods (manufactures or dealers). The State Revenue Assessing Officers are enjoying this tool by imposing taxes and penalties by treating it as ‘pre-determined’ sale under Section 3(a) instead of 3(b) of Central Sale Tax Act, 1956; even the suppliers (manufactures or dealers) produce relevant documents and declarations, prescribed in this Act for such transactions.
As per Central Sales Tax Act 6(2), if any sale takes place during transit of goods from one state to other through transfer of title by endorsing ‘transport document’ in favour of the consignee (manufacturer or dealer) by its original buyer. Such Sale is treated as subsequent sale and exempted from further levy of tax under CST Act, but mandatorily requires declaration forms ‘EI or EII’ as per the nature of its transactions. Under this transition, it is irrelevant to endorse the ‘name of the consignee’ (recipient or end user of goods) in ‘nucleus document like Invoice or Bill’, since no such provision is available in the CST Act, 1956.
But as per Rule, 11 (2) of Central Excise Rules, 2002, the ‘invoice’ shall be serially numbered and shall contain the registration number, address of the concerned Central Excise Division, name of the consignee, description, classification, time and date of removal, mode of transport and vehicle registration number, rate of duty, quantity and value, of goods and the duty payable thereon. Further refer Sub Rule (2) of Rule, 9 of Cenvat Credit Rules, 2004, ‘No CENVAT credit under sub rule (1) shall be taken unless all the particulars as prescribed under the Central Excise Rules, 2002 or the Service Tax Rules, 1994, as the case may be, are contained in the said document’.
Further provided that if ‘the said document does not contain all the particulars but contains the details of duty or service tax payable, description of the goods or taxable service, assessable value, Central Excise or Service tax Registration number of the person issuing the invoice, as the case may be, name and address of the factory or warehouse or premises of first or second stage dealers or provider of taxable service’ then the Assistant or Deputy Commissioner of Central Excise may allow the CENVAT credit to the receiver of the goods if he is satisfied with the books of accounts of the receiver.
Now, it has established from the above that the ‘name of the consignee’ (recipient) is mandatorily required in the core document i.e. ‘Invoice’ issued under Rule, 11 of CEX, 2002 and unless the receiver of the goods does not have its name in the invoice, the Cenvat Credit may not be claimed until it is allowed by the Assistant or Deputy Commissioner of Central Excise as per his satisfaction.
On the other hand, if the original buyer endorses the ‘Lorry Receipt’ during transit of goods in favour of consignee (manufacturer or dealer) irrespective of endorsement of the core document i.e. ‘invoice’, then it meets the requirement of subsequent sale under Section 6(2) of Central Sales Tax Act, 1956 and exempted from further levy of tax on production of declaration forms EI or EII as the case may be and the excise rules are irrelevant here.
It is peculiar to see such controversial provisions between two Central Government Statutes and for these controversial provisions the Assessing Officers take advantages and put in trouble to the business entities though they are innocent and have no concern about it and un-necessary bear the financial burdens due to such types of provisions of law. So when they follow excise rules then it is treated as ‘pre-determined’ sale or if they follow the CST Act then ‘Cenvat Credit’ may not be available due to absence the name of the consignee in the Invoice, then what they should do!
Now the questions arise
1) Whether 6(2) provision of CST Act, 1956, is suitable in the present scenario which was created 59 years ago, since it is just opposite of Central Excise Rules as explained above?
2) Whether it is possible for a supplier to sell the goods in transit without obtaining prior orders from its customers to full fill the requirement of 6(2) sale in the present situation, wherein the economy is badly damaged?
3) Whether the supplier would be in a position to bear the financial loss, if he does not receive any order for the said goods during transit or even after receipt of the goods?
And the answers of these questions would be in ‘negative’ in my opinion!
Because, it is universal truth that no one wants to take financial risk in the business due to unstable situations in the present time, hence, most of the suppliers obtain the orders or contracts from the customers in advance then they place the orders to manufacturers or dealers to send the goods directly to their customers as consignee under excise invoices to avail the Cenvat Credit to follow the excise laws.
Simultaneously they also issue commercial invoices on the basis of the excise invoices and endorse the ‘Lorry Receipts’ in favour of the customers to fulfil the requirement of 6(2) sale as per CST Act, 1956 and subsequently issue EI or EII forms as the case may be to bridge these transactions. It is fact that they are not doing such things by their own sprit but having done by compulsion due to such types of confused or controversial laws.
Thus it is FUNNY that if the suppliers follow Excise Rules then it is incorrect as per Central Sales Tax Act and if they follow the Central Sales Tax Act then it is wrong as per Central Excise Rules. Hence, it is not practical possible for the supplier to follow both the rules at a time which are having so much disparities. So, the Assessing Officers take advantage of these lacunas and put in trouble to the suppliers even they are well aware about the practical difficulties.
On this issue a Bench of two Judges, Hon’ble Justice Mr. S. Kapadia and Mr. Aftab Alam has set aside the order passed by the Karnataka High Court on 14th August 2007 vide its order dated 11 December, 2008 against Civil Appeal No. 7233 of 2008 (arising out of S.L.P. (C) No. 1065/08) filed by A And G Projects And Technologies Versus State of Karnataka. In their judgement they quoted Para 18 which was delivered in the case of Bharat Heavy Electrical Ltd. and Others Vs. Union of India and Others – (1996) 4 SCC 230, which read as under:
“18. We may, at this stage refer to the decision of the Bombay High Court in CST v. Barium Chemicals Ltd. – (1981) 48 STC 121. A particular transaction of inter-State sale was subjected to Central sales tax in Andhra Pradesh. The same sale was again sought to be taxed under Central Sales Tax Act in Maharashtra, which was questioned. The High Court adopted the following approach: Central sales tax is levied and collected by the Central Government; it is immaterial in which State it is collected; it cannot be levied or collected twice over; the State Governments are merely agents of the Central Government in the matter of levy and collection of Central sales tax; if so, once levied and collected in one State, rightly or wrongly, it cannot be levied and collected in another State. In our opinion, this may be an oversimplification of the matter. Maybe, from the point of view of the assessee, this approach is sound enough but from the point of view of the States (keeping Article 269 in mind) and the provisions of the Central Sales Tax Act, this may not be correct. Section 9(1) specifies the State wherein Central sales tax shall be levied and collected and the Central sales tax has to be levied and collected in that State and in no other State. The approach of the Bombay High Court makes Section 9(1) [which is enacted pursuant to Section 269(2), as pointed out hereinabove] otiose and superfluous. It would not be proper to say, in the light of the above constitutional and statutory provisions, that the dispute as to in which State a particular inter-State sale is to be taxed is a matter between the States and that so far as the assessee is concerned, it is enough if he pays the tax at one place, whether it is really leviable in that State as per Section 9(1) or not. The law requires that it should be levied and collected in the State from which the movement of goods commences [Section 9(1) read with Section 3(a)].”
Besides the above, the Hon’ble Supreme Court of India had already settled down the principles of 6(2) sale in the case of Tata Iron & Steel Co. Ltd. Versus S.R. Sarkar (1960) 11 STC 655 (SC), which read as under:
1) Mere contract of sale is not a sale within the definition u/s. 2(g) of CST Act, ’56.
2) 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.
3) 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 i.e. RR is not permissible under 3(a) sale.
4) 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 or subsequent sale has been made between second seller and the next or the final purchaser.
Please refer a Judgement of Hon’ble Orissa High Court in case of M/S. Bateman Engineering (India) Versus State of Orissa And Others … Opp. … on 6 September, 2011 Against W.P. (C) No.23389 of 2011 In the matter of an application under Articles 226 and 227 of the Constitution of India.
In this judgment the Court has allowed 6(2) sale and directed to the assessing officer to give the exemption of tax by considering the declaration forms irrespective the other facts.
Please also refer a recent judgement delivered by the Hon’ble High Court of Kerala at Ernakulum in WP (C). No. 17170 of 2014 (U) filed by M/s East Coast Constructions and Industries Ltd. Versus Kerala State Electricity Board Additional R3 Impleaded 2) Deputy Chief Engineer 3 ) Commercial Tax Officer. The Court delivered the following CST Act, 1956:
“In transit sale Exemption under Section 6(2) of the CST Act 1956 Contract executed for Kerala State Electricity Board Petitioner made sale in transit to Board and sought for C Form from Board. Whether Board can seek proof of payment of tax under the CST Act? Held No. Board directed to issue Form C upon petitioner producing E2 certificate.
Petitioner executed contract for Kerala State Electricity Board. Petitioner purchased goods from outside the State and transferred the same to the Board by way of sale in transit. Petitioner furnished ‘C’ Form to the seller who in turn issued Form E1 to enable the petitioner avail the benefit under Section 6(2) of the CST Act 1956. Petitioner sought for C Form from the Board to avail the benefit under Section 6(2) of the CST Act. Board denied ‘C’ Form on the ground that petitioner did not produce proof of payment of tax under the CST Act. On refusal by Board to issue Form C, Petitioner filed writ of mandamus directing the Board to issue ‘C’ Form for the value of materials supplied.
Held: first sale alone will be taxable and the tax on subsequent sale will be exempted if dealers are registered. Board cannot insist on proof of tax paid by the first seller but can only demand Form E2 from the petitioner. Since Board has already admitted supply of materials by the petitioner, they are bound to issue ‘C’ Forms. Board directed to issue ‘C’ Forms to the petitioner as and when petitioner produces E2 certificate. Petition allowed in favour of assessee”
Now, I thank and congratulate to the Commissioner of Commercial Taxes, Government of West Bengal, Kolkata who understood the difficulties of the dealers and issued a clarificatory Trade Circular No. 11/2010 dated 04.10.2010. In this Circular he narrated the facts nicely by quoting Judgments of High Courts and Supreme Court of India and some contents of this Circular are given below:
“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 take 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.
..xxx.. Emphasing 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…xxx.
Circumstances being as such, we may have a relook 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.
..xxx.. 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.”
Even though the issue has already settled down by the Hon’ble Supreme Court of India in its earlier judgments, yet the Assessing Officers do not understand or do not want to understand the facts and difficulties of the dealers and keep on raising the same issue repeatedly by demanding tax and penalties during assessments of books of accounts of the dealers, though the dealers are not doing anything beyond the rules. Should it not be treated a contempt of Court!
However, I would like to expect to all the Commissioners of Commercial Taxes of State Governments, if they take appropriate steps same as taken by the Commissioner of Commercial Taxes, West Bengal by issuing a clarificatory Trade Circular in the matter in light of judgments of Apex Court. I also expect from the Central Government to give the guidelines regarding 59 years old provision of CST Act 1956 in line with the Central Excise Rules to avoid such un-necessary litigations to save the time of judiciary and financial burden which is borne by the business entities in the shape of extra taxes and penalties.
(These are my personal views and are expected from the concerned to clarify the issue)
(Author is Manager (Taxation) With Jindal Steel & Power Limited, Angul ( Odisha))