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.
The scheme of section 6(2) of CST Act is that once the first interstate 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.
Before going into the subject matter, I wish state that ‘Transit Sale’ occurs occasionally. Suppose ABC & Co., Hyderabad placed an order to Mumbai Merchant for some commodities say Bearings for Industrial use. Meanwhile CBA & Co., contracted ABC & Co., and placed order for the same commodity Bearings in such circumstances M/s ABC & Co., can effect sales under the following two methods of sales.
FIRST METHOD
1. M/s ABC Ltd., will take the purchase order from M/s CBA Ltd., and inform to the his seller in Mumbai to deliver the goods at CBA & Co., then the Mumbai merchant will raise in invoice on ABC & Co., and deliver the goods to CBA & Co., in Hyderabad.
i. Now ABC & Co., will issue ‘C’ form to Mumbai Merchant and seek for E1 form for the supply made.
ii. The Mumbai Merchant on receipt of ‘C’ form declaration issue E1 form favoring M/s ABC & Co.,
iii. CBA & Co., Hyderabad will issue ‘C’ form declaration to ABC & Co., Hyderabad.
Now the transaction of transit sale is completed. It means M/s ABC & Co., transferred the goods to CBA & Co., without touching the goods or in other words without taking delivery of the goods and so CBA & Co., will be treating that they made interstate purchases.
SECOND METHOD
Suppose ABC & Co., Hyderabad placed order to Mumbai for some commodities say Bearings for Industrial use. Meanwhile CBA & Co., Hyderabad contracted ABC & Co., and placed order for the same commodity Bearings in such circumstances M/s ABC & Co., Hyderabad.
2. M/s ABC Ltd., will take the purchase order from M/s CBA Ltd., and after getting goods in transporter premises, endorse on back side of the Lorry Receipt instructing to deliver the goods to CBA & Co., Hyderabad. M/s CBA Ltd., will remit the freight charges and take the delivery of the goods.
i. Now ABC & Co., will issue ‘C’ form to Mumbai Merchant and seek for E1 form for the supply made.
ii. The Mumbai Merchant on receipt of ‘C’ form declaration issue E1 form favoring M/s ABC & Co.,
iii. CBA & Co., Hyderabad have to issue ‘C’ form declaration to ABC & Co., Hyderabad.
Now CBC & Co., purchases will be treated as interstate purchases. ABC & Co., sales will be treated as Transit Sale. Mumbai Merchant sale will be treated as interstate sales supplier.
M/s ABC & Co. will submit to the tax department E1 form issued by the Supplier and ‘C’ form declaration issued by CBA & Co., and get exemption of tax.
Whereas the concept of the Transit sale is abused by the dealers community in entire country with or without knowledge. They will be placing orders, taking delivery of the goods and supplying to the customers as transit sale keeping the Xerox copies of Lorry receipts duly endorsing subsequently i.e. after supplying to the customers say CBA & Co., and obtaining as usual the E1 Form from the supplier and ‘C’ form from the customer i.e. M/s CBA & Co., and submitting to the tax authorities and taking exemption. Such sort of transaction will be from April to March continuously hundreds of supplies will be made by single dealer. In fact it is not transit sale but they are local sales.
Even tax authorities never checked with the transporter whether such sort of endorsement in Lorry Receipt is available with them or not? Or who remitted the freight etc., due to lake of time and or lake of knowledge.
According to the Central Excise, transit sale is quite different from CST Act and also not related to Sale of Goods Act.
Now let us know who are eligible for input tax credit in Central Excise scenario.
Firstly let us take the issue. It relates to the concept of transit sales. Say for example, “ABC Ltd” purchase goods from a manufacturer and sell to say “CBA Ltd”. The goods are directly dispatched to “CBA Ltd”, and “ABC Ltd” is an intermediate person. The question is whether “CBA Ltd” is a first stage dealer? It is possible that “ABC Ltd” sells it to “X”, who sells it to “Y”, who in turns sells it to “Z”, who later sells to “CBA Ltd” and goods are directly dispatched to the “Y” from the manufacture’s premises. In other words when there is more than one, say 5 intermediate persons before the goods are dispatched to “Y”. The issue is again the same, “whether the “CBA Ltd” is a first stage dealer?” The invoice clearly shows that these persons are the purchaser from the manufacturer.
A first stage dealer has been defined in the Rule 2(ij) of the CENVAT Credit Rules, 2004[earlier Rule 2(f)] as:
“First Stage Dealer” means a dealer, who purchases the goods directly from the manufacturer under the cover of an invoice issued in terms of the provisions of Central Excise Rules, 2002 or from the depot of the said manufacturer, or from premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer, under cover of an invoice; or
It is clear from the definition that anybody who purchases the goods directly from the manufacturer under the cover of an invoice issued within the meaning of the Central Excise Rules is a first stage dealer.
Purchase or Sale has been defined under Section 2(h) of the Central Excise Act,1944 as:
“Sale” and “Purchase”, with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration”;
According to Central Excise sale or purchase means transfer of possession. It doesn’t refer to sale or purchase within the meaning of the Sale of Goods Act. In this particular case the possession is being directly transferred to “CBA Ltd” from the manufacturer. Hence “CBA Ltd” is the purchaser from the manufacturer within the meaning of Section 2(h) of the Central Excise Act. And since “CBA Ltd” is purchasing the goods (transfer of possession of goods) directly from the manufacturer under cover of Rule 11 invoice, he is a first stage dealer within the meaning of the Rule 2(ij) of the CENVAT Credit Rules.
The contrary contention that “ABC Ltd”, the intermediate person is a first stage dealer is erroneous and based on misunderstanding and misconception of law. Since possession has never been transferred to “ABC Ltd”, he has never purchased the goods within the meaning of Section 2(h) of the Central Excise Act, 1944 and as such he is not a dealer at all. It may be noted that to become a dealer, either first stage or second stage, purchase i.e. transfer of possession of goods is a must. A person who never got the possession of goods cannot be treated as purchaser of goods in the Central Excise.
That is why the like ABC Ltd., dealers are getting themselves registered under central excise under dealer registration and getting invoice in their name and subsequently transferring to third parties so that the dealer registered person can issued central excise invoice and those who can issue central excise invoice such person can sell to their customers transferring CENVAT Credit.
I wish to refer the CBEC Circulars No. 96/7/95-CX., dated 13-02-1995, 137/48/95-CX., dated 18-7-1995, Circular No. 218/52/96-CX, dated 4-6-1996, Pune Commissioner ate Trade Notice No. 76/95 dated 20-07-1995, Vadodara Commissioner ate Trade Notice No. 8/95 dated 27-1-95 etc. deals with the same question and provides certain guidelines related to the issue. All these circulars and trade notices reflect correctly the law as per the Central Excise Act. However they are not explicit with respect to the legal basis of the stand taken. This may be a cause of the confusion prevailing in the practical field.
CONCEPT OF TRANSIT SALE:
The concept of transit sale was explained by the Board in Circular No. 96/7/95 dated 13-2-95 where in it explained that:
“A registered person places an order on a manufacturer for supply and delivery of goods directly to a consumer and the goods are accordingly transported from the manufacturer’s premises to the user’s premises without being brought to the registered person’s premises. In such a situation manufacturer will issue an invoice under Rule 52A. This invoice under Rule 52A will contain, in addition to the prescribed details including the consignee’s name and address, mentioned therein, the registered person’s name and address, on account of whose instructions the goods have been dispatched. The consignee in this case will be the end user. In such a situation the registered person’s invoice is not required for availment of MODVAT credit. The duplicate copy of the manufacturer’s invoice under Rule 52A will serve as cover for transport and for availment of MODVAT by the end user”.
It is clear from this point that “CBA Ltd”, the consignee has taken CENVAT Credit the strength of the manufacturer’s invoice and hence he is the first stage dealer.
Reference may also be made to Board’s Circular No. 218/52/96-CX, dated 4-6-1996 vide file no. 267/72/96-CX.8 wherein the CBEC explained that when goods are received to a consignee directly from the manufacturer, even when the invoice shows some other person as buyer, CENVAT credit on such invoice is permissible. In this case no other invoice under Rule 57G is required. In fact the intermediate person need not to be registered as dealer of Central Excise. Thus even when name of any intermediate person is mentioned on the invoice, the consignee is eligible to take CENVAT credit on the strength of manufacturer invoice. Thus “CBA Ltd”, the consignee has taken credit on the strength of the manufacturer invoice and for that reason he is a first stage dealer. Now the ABC Ltd., will become a broker or commission agent and he can get his margin from M/s CBA Ltd., and M/s ABC Ltd., do not have any relation with central excise.
In fact an intermediate person “ABC Ltd.,” or “Any other dealer” etc., even if registered with Central Excise, is not allowed to issue any CENVAT invoice if the goods are not received by them. If the goods are sent directly to the consignee premises, even if the intermediate person is registered he cannot issue a CENVAT invoice. This point is very clear from the Pune Commissioner ate Trade Notice No. 76/95 dated 20-07-1995. Similarly Vadodara Commissioner ate Trade Notice No. 8/95 dated 27-1-95 makes it very clear that in cases of such sales invoice issued under Rule 52A (manufacturer’s invoice) “only” will be a valid document for taking credit. The use of term only makes it very clear that the intermediate person cannot issue a MODVAT invoice on such sales and even if he issues such invoices credit cannot be taken on such invoices. Thus when the intermediate persons “ABC Ltd., or any other dealer in between cannot issue a CENVAT invoice on this sale, or even if he issues no credit can be taken on such invoice, the contention that the intermediate person is a first stage dealer is wholly non-sustainable in law.
There are numerous judgments of the Hon’ble Tribunal on which such CENVAT Credit has been allowed to the assessee to the consignee on the strength of the manufacturer invoice when names of intermediate person/s were mentioned on the invoice. Some of the important judgments on this point are:
1. Inder Poly Fabs (P) Ltd. Vs. CCE [1998 (99) ELT 420]:
The Tribunal held that “wherein the facts considered were receipt of inputs by appellants who are job workers but not buyers thereof. It was held that since the name of the appellants was shown in the documents, it would establish the link between the goods and the ultimate consignee and therefore, MODVAT credit would not be denied”.
2. Mahadev Industries Vs. CCE [2000 (115) ELT 452]:
The Tribunal held that “We are not in a position to subscribe to this view for the simple reason that while a dealer trades in such excisable goods, by no stretch of imagination, the Railways were trading in the Inserts. Trading involves the change of ownership whereas the Railways were merely buying the Inserts and then desired that these Inserts were used for the manufacture of Sleepers which again were going to be their own property, on sale from the appellants. Purchase of raw materials on their account by Railways and supply thereof free-of-cost to the manufacturer does not amount to trading. Therefore, the provisions regarding registration of dealers and that the invoice of such registered dealers be the only proper documents for availing MODVAT credit is just not applicable to the facts of this case”.
3. Malawa Cotton Vs. CCE [2002 (144) ELT 645]
Credit is allowed even when intermediate person is not registered with Central Excise as held in cases of Stadmed (P) Ltd. Vs. CCE [1998 (102) ELT 466] and Dr. Curies Labs Ltd. Vs. CCE [1999 (112) ELT 539].
It may further be noted that the intermediate person need not be authorized dealer of the manufacturer to avail credit on the manufacturer’s invoice as held in CCE Vs. Uttam Industries [1997 (89) ELT 87] and in CCE Vs. Beekay Engineering [2001 (129) ELT 543].
It is clear from these legal authorities that in case of such transit sales:
1. Credit can be taken on the basis of manufacture’s invoice only.
2. The intermediate person cannot issue any CENVAT invoice
3. The intermediate person is not required to be registered with Central Excise.
Thus the intermediate person is not treated as a Central Excise dealer in such cases of transit sales and hence “ABC Ltd.,” is not a Central Excise dealer in this case of transit sales. It follows that “CBA Ltd.,”, to whom possession has been directly transferred from the manufacturer, is a first stage dealer.
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