Objects and Basic Scheme of the CST Act
The objects of the Act, as stated in preamble of the CST Act are –
To formulate principles for determining (a) when a sale or purchase takes place in the course of inter-state trade or commerce (b) When a sale or purchase takes place outside a State (c) When a sale or purchase takes place in the course of imports into or export from India
To provide for levy, collection and distribution of taxes on sales of goods in the course of inter-state trade or commerce
To declare certain goods to be of special importance in inter-State trade or commerce and specify the restrictions and conditions to which State laws imposing taxes on sale or purchase of such goods of special importance (called as declared goods) shall be subject.
As explained later, * Entry 92A of List I (Union List) empowers Central Government to impose tax on inter-state sales * Article 269(3) and Article 286(2) of Constitution authorises Parliament to formulate principles for determining when the sale or purchase takes place outside a State or in the course of imports and exports. * Article 286(3) of Constitution authorises Parliament to place restrictions on tax on ‘declared goods’.
CST Act imposes the tax on inter state sales and states the principles and restrictions as per the powers conferred by Constitution.
Basic scheme of the CST Act – The basic scheme of the CST Act is as follows.
Sales Tax Revenue to States – The CST Act provides for levy on Inter-State sales and also defines what is ‘Inter-State Sale’. However, the concept that revenue from sales tax should be collected by States has been retained. Thus, though it is called Central Sales Tax Act, the tax collected under the Act in each State is kept by that State only. This is provided in Article 269(1)(g) of Constitution of India. – – CST in each State is administered by local sales tax authorities of each State.
Tax collected in the State where movement of goods commences – The scheme of CST Act is that Central Sales Tax is payable in the State from which movement of goods commences (i.e. from which goods are sold). The tax collected is retained by the State in which it is collected. CST Act is administered by Sales Tax authorities of each State. Thus, the State Government Sales Tax officer who collects and assesses local (State) sales tax also collects and assesses Central Sales Tax.
Tax on Inter State sale of goods – CST is tax on inter State sale of goods. Sale is Inter-State when (a) sale occasions movement of goods from one State to another or (b) is effected by transfer of documents during their movement from one State to another.
State Sales Tax law applicable in many aspects – CST Act makes provisions for very few procedures and rules. In respect of provisions like return, assessment, appeals etc., provisions of General Sales Tax law of the State applies.
CST Act defines some concepts – Under the authority of Constitution, the CST Act defines concepts of ‘Sale Outside the State’ and ‘sale during the course of import/import’.
Declared goods – Some goods are declared as goods of special importance and restrictions are placed on power of State Governments to levy tax on such goods.
Inter-State and Intra-State Sale – Entry 92A of List I – Union List reads : ‘Taxes on the sale and purchase of goods other than newspapers, where such sale or purchase takes place in the course of Inter-state trade or commerce’. Entry 54 of list II – State List – reads : ‘Tax on sale or purchase of goods other than newspapers except tax on Inter State sale or purchase’. Thus, sale within the State (Intra-State sale) is within the authority of State Government, while sale outside State (Inter-State sale) is within the authority of Central Government.
Sale where both buyer and seller are from same State is Intra-State sale e.g. from * Mumbai to Pune or * Ahmedabad to Surat * Howrah to Kolkata * Mysore to Bangalore etc. These are Intra-State sales. However, when buyer and seller are in different States, it is Inter-state sales. e.g. : Chennai (Tamil Nadu) to Trivandrum (Kerala) * Allahabad (UP) to Hyderabad (Andhra Pradesh) * Bhubaneshwar (Orissa) to Daman (Union Territory) etc.
Newspaper specifically excluded – It can be seen that ‘newspapers’ are specifically excluded from purview of both Union as well as State list. The obvious reason is that newspapers have a very vital role to play in a democratic society. Freedom of speech and free flow of information is the backbone of democracy and hence newspapers have been excluded from tax. [Otherwise, ‘newspaper’ are ‘goods’, but for the exclusion].
Taxable event in sales tax – In re Sea Customs Act – AIR 1963 STC 437= (1964) 3 SCR 827 (SC 9 member bench), it was held that in case of sales tax, taxable event is the act of sale. It is not a tax directly on goods.
Categories of Sales – Sales can be broadly classified in three categories. (a) Inter-State Sale (b) Sale during import/export (c) Intra-State (i.e. within the State) sale. – Murli Manohar and Co. v. State of Haryana (1990) 4 CLA 304 (SC) = (1991) 80 STC 79 = 1990(2) SCALE 821 = (1991) 1 SCC 377 (SC 3 member bench). In this case, it was observed that they cannot conceive fourth category of sale.
If sale or purchase to Marketing Agency is in same State, it will be an Intra-State sale even if goods are despatched outside the state as per instructions of the marketing agency. – ACC v. CST – AIR 1991 SC 1122.
Tax on Inter-State sale is levied by Union (i.e. Central) Government while tax on Intra-State sale is levied by State Government of the State in which sale takes place. No tax is levied on sales during import or export.
Sale within the State is ‘residuary sale’ – As we will see later, ‘sale within State’ is residuary sale. Thus, first we have to decide if sale is ‘Inter State’. If not, we have to find if it is ‘Sale during export or import’. If not, then the sale is ‘Intra State’. Thus, if a sale is Inter State of during export or import, it cannot be ‘Sale within the State’.
Mode of a sales transaction – Initially, buyer places an order on seller for supply of goods, called ‘Purchase Order’. After the goods ordered are ready, the buyer may come to the business place (godown, factory or warehouse) of seller and obtain delivery of goods. This will be ‘Sale within the State’. Alternatively, buyer may ask seller to send the goods by transport. In such cases, the seller will book the consignment by rail, road, ship or air as per requirement of buyer to the destination where buyer requires the goods. In such a case, generally, (a) if buyer and seller are in the same State, it is Intra-State sale (b) if they are in different States, it is Inter-State sale (c) if buyer is outside India, it is sale during export (d) if seller is outside India, it is sale during import.
Recovery from customer is not essential for sales tax – Normally, sales tax is treated as indirect tax as it can be and is usually recovered from buyer. However, the liability to pay tax is on the dealer, whether or not he collects if from buyer.
Background of CST
Sales Tax is one of the most important Indirect Tax for purpose of taxation by State Governments. Revenue from CST goes to State from which movement of goods commences. Total CST revenue in 98-99 was Rs 8,538 Crores. Revenue of some major States was – Maharashtra – Rs 1,442 Crores. Tamilnadu – Rs 934 Crores. West Bengal – Rs 799 Crores. Gujarat – Rs 787 Crores, Haryana – Rs 739 Crores. [ET, Bom 21.7.2000].
CST is proving to be a hindrance in introducing VAT. CST has been reduced to 3% (from 4%) w.e.f. 1-4-2007. It is announced that it will be reduced by 1% every year and made Nil by 1-4-2010.
Recent Changes – Following are recent change in CST Law.
12th May 2000 – Following changes were made vide Finance Act, 2000, effective from 12-5-2000.
Provision of interest on delayed payment – Section 9(2) and 9(2A) were amended to provide for recovery of interest for delayed payment of Central Sales Tax (CST). Section 9(2B) was inserted to provide that provisions in general sales tax law of each State relating to due date of payment of tax, rate of interest for delayed payment and assessment and collection of interest, shall apply to assessment and recovery of interest on Central Sales Tax also. As per section 120 of Finance Act, 2000, the provisions were given full retrospective effect.
The word ‘interest’ was not present in section 9(2) earlier. In – India Carbon Ltd. v. State of Assam 1997(5) SCALE 51 = (1997) 106 STC 460 (SC) = 1997(6) SCC 479 = 1997 AIR SCW 3091 = 26 CLA 152 = AIR 1997 SC 3054 = (1998) 8 CC (Reports) 276 (SC), it was held that that interest for delayed payment cannot be levied on CST. (Since, there was no provision under CST Act). The section 9(2) of CST was amended with retrospective effect to nullify the effect of the judgment.
11th September 2001 – Provisions in respect of Central Sales Tax Appellate Authority have been introduced by adding sections 19 to 26 w.e.f. 11-9-2001. The Appellate Authority has been constituted on 3-12-2001. – – However, the sections have not been made effective till April, 2003.
11th May 2002 – Substantial and far reaching changes have been made in CST Act, vide Finance Act, 2002. Some of these are made to facilitate introduction of VAT provisions in sales tax, while some are made to overcome difficulties created by some Supreme Court Judgments. Major changes made by Finance Act, 2002 are as follows –
Widening of definition of sale – Definition of ‘sale’ is amended by including (i) Transfer other that by contract (compulsory transfer) (ii) Goods involved in Works contract (iii) Transfer of right to use goods (like – leasing) (iv) Transfer among members of unincorporated association (v) Supply of food articles [Hire purchase was covered earlier also [New section 2(g)]. So far, there was no CST for inter state transactions of works contract, leasing or sale of food articles.
Since there was no CST on leasing transactions, dealers were avoiding sales tax by showing transaction as ‘inter state sale’. Only lease agreement was executed in one State while goods were delivered in another State. Now, even if lease is held as inter state, CST will be payable.
F form made mandatory to prove stock transfer – Submission of ‘F’ form to prove stock transfer made mandatory. If not furnished, the transfer will be treated as occasioned as a result of sale. [So far, stock transfer could be proved by other evidence also] [Amendment to section 6A(1)]
CST rate 3% or local sales tax rate whichever lower if under c form – Section 8(1) is amended to provide that rate of CST to registered dealer will be 3% or at the rate applicable for sale within the State, whichever is lower. Section 8(2) has been amended to provide that if certain goods are exempt generally from state sales tax, CST payable on such goods will be Nil, even if sold to unregistered dealer.
rate if sale to unregistered dealer – If general sales tax rate for sale within the State is less than 3%, the CST rate will also be less than 3%, if goods are sold to unregistered dealer (i.e. dealer who cannot furnish C form). [If the purchasing dealer can furnish H form, question of charging Central Sales Tax does not arise]. – – If local sale tax rate is Nil, same rate will apply in interstate sale to unregistered dealer. If local sales tax rate is more than 3%, the same rate will apply in respect of sale to unregistered dealer.
Meaning of ‘sale exempt from tax generally’ – Explanation to section 8(2A) which defined the meaning of ‘sale exempt from tax generally if sold within the State’ has been transferred as explanation to section 8(2). It is transferred verbatim and there is no change.
Goods for telecommunication network can be purchased against C form – Section 8(3)(b) is amended to provide that goods meant for ‘telecommunications network’ can be purchased at concessional rate of CST on submission of form ‘C’.
It may be noted that only goods used in telecommunications network will be eligible for purchase by registered dealer. Thus, telecommunication equipment not connected or associated with telecommunications network will not be eligible. Similarly, equipment used merely for servicing and repairs of telecommunication equipment may not be held as eligible.
State Government cannot waive condition of C/D form – Section 8(5) empowers State Government to reduce the sales tax rate applicable in Inter State Sale, by issuing a notification. This section has been amended to provide that such reduction can be given only after fulfilling conditions of section 8(4), i.e. on submission of C/D form. Section 8(5)(a) and 8(5)(b) are also amended to provide that the State Government can reduce CST rates only for sale to registered dealers / Government. Thus, reduction in CST rate made by State Government will apply only if sale is to registered dealer / Government. The lower rate will not apply if sale is to unregistered dealer (as he cannot provide C form).
No CST if sale to SEZ – Sections 8(6), 8(7) and 8(8) have been incorporated to provide that inter state sale made to a unit in SEZ (Special Economic Zone) will be exempt from CST. The purchasing dealer has to submit a declaration in prescribed form. Consequential amendment is made by inserting section 13(1)(aa) to authorise Central Government to make rules to provide form and manner of furnishing declaration u/s 8(8). [CST Rule 12(10)(a) has have been subsequently amended on 16-1-2003. It is provided that SEZ unit will supply H form duly countersigned and certified by authority specified by Central Government authorizing establishment of unit in SEZ, – – Development Commissioner is the authority to allow setting up of SEZ unit].
Penal provision amended – Penal provisions of section 10 are amended to make them applicable for declarations u/s 8(8) and purchases u/s 8(6) by SEZ units.
Tax on re-sale of declared goods permitted – So far, local sales tax on declared goods could be charged only at one stage. Now, this restriction has been removed by deleting the words ‘and such tax shall not be levied at more than one stage’ from section 15(b). This amendment was necessary for introduction of VAT (Value Added Tax).
14th May 2003 – Following changes have been made vide Finance Act, 2003 –
Exemption to supplies to foreign missions/UN etc. – Central Government can, by issue of notification, exempt (a) supplies made to officials or personnel of foreign diplomatic mission or consulate or UN or other similar international body entitled to diplomatic privileges (b) Supplies to consular or diplomatic agent of foreign mission or United Nations or similar international body. [section 6(3) inserted in CST Act].
Appeal to appellate authority – Appeal to Central Sales Tax Appellate Authority can be made only if dispute u/s 6A read with 9 relates to sale of goods effected in inter-state sale. [Amendment to section 20(1)]. It is provided that Appellate Authority can call for records from assessing authority or relevant State Governments. These records will be returned to them as soon as possible. [amendment to section 21(1)]. It is provided that appeal shall not be rejected without giving opportunity of hearing to appellant, assessing authority and State Government concerned. [Amendment to section 21(3)]. Appellate Authority can grant stay of recovery of demand. [Amendment to section 23]. [Note that sections 19 to 26 have been brought into force w.e.f. 17-3-2005].
10th September, 2004 – Following changes are made by Finance (No. 2) Act, 2004 – (a) Appeal will lie with CST Appellate Authority only in case of disputes u/s 6A read with section 9 of CST Act (b) Appellate Authority can grant stay and can order pre-deposit of tax before entertaining appeal (c) Supplies to SEZ developer will be exempt from CST.
17-3-2005 – CST Appellate Authority has been constituted and provisions in respect of Appellate Authority have been made effective vide Notification No. SO 326(E) dated 17-3-2005.
13 May 2005 – Following changes have been made by Finance Act, 2005 – (a) Definition of ‘works contract’ introduced (b) Provision made to issue rules for determining ‘sale price’ in case of sale of goods involved in works contract (c) ‘Sales tax law’ to include State VAT law (d) Form H made mandatory (e) Sale to diplomatic missions, UN etc. exempt only if prescribed certificate is produced (f) purchase of aviation turbine fuel by Indian carrier used for international flights will be ‘export’ and hence exempt from State sales tax.
1-10-2005 – C and F forms to be submitted every quarter (till 30-9-2005, it was sufficient, if one C or D form is submitted for each financial year. The C, D, E-I/E-II and F forms should be submitted within 3 months from end of the period to which they relate. STO can allow late filing if the dealer unable to submit the forms within prescribed time.
1-3-2006 – Appeal to CST Appellate Authority will lie only against highest Appellate Authority of the State [During 17-3-2005 to 28-2-2006, appeal was to be filed with CST Appellate Authority directly against order of assessing authority].
18-4-2006 – LPG (liquid petroleum gas) for domestic use is added to list of ‘declared goods’ u/s 14 of CST Act to maintain tax rates at reasonable level.
1-4-2007 – CST rate reduced to 3%. ‘D’ form abolished. Tobacco products removed from list of declared goods.
India is Union of States – Our Constitution generally follows British pattern, though concepts of federal structure are borrowed from American and other Constitutions. India is a Union of States. The structure of Government is federal in nature. Government of India (Central Government) has certain powers in respect of whole country. India is divided into various States and Union Territories and each State and Union Territory has certain powers in respect of that particular State. Thus, there are States like Gujarat, Maharashtra, Tamilnadu, Kerala, Uttar Pradesh, Punjab etc. and Union Territories like Pondicherry, Chandigarh etc.
Taxation under Constitution – In the basic scheme of taxation in India, it is envisaged that (a) Central Government will get tax revenue from Income Tax (except on Agricultural Income), Excise (except on alcoholic drinks) and Customs (b) State Government will get tax revenue from sales tax, excise on liquor and tax on Agricultural Income (c) Municipalities will get tax revenue from octroi and house property tax.
Income Tax, Central Excise and Customs are administered by Central Government. As regards sales tax, Central Sales Tax is levied by Central Government while State Sales Tax is levied by individual State Governments. Though Central Sales Tax is levied by Central Government, it is administered by State Governments and tax collected in each State is retained by that State Government itself.
Article 246 of our Constitution indicates bifurcation of powers to make laws, between Union Government and State Governments. Parliament has exclusive powers to make laws in respect of matters given in list I of the Seventh Schedule of the Constitution (called ‘Union List’’). List II (State List) contains entries under jurisdiction of States. List III (concurrent list) contains entries where both Union and State Governments can exercise power. [In case of Union Territories, Union Government can make laws in respect of all the entries in all three lists].
Union List relevant to taxation – List I, called “Union List”, contains entries like Defence of India, Foreign affairs, War and Peace, Banking etc. Entries in this list relevant to taxation provisions are as follows :
Entry No. 82 – Tax on income other than agricultural income.
Entry No. 83 – Duties of customs including export duties.
Entry No. 84 – Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet preparations containing alcohol, opium or narcotics.
Entry No. 85 – Corporation Tax.
Entry No. 92A – Taxes on the Sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce.
Entry No. 92B – Taxes on consignment of goods where such consignment takes place during Interstate trade or commerce.
Entry No. 97 – Any other matter not included in List II, list III and any tax not mentioned in list II or list III. (These are called ‘Residual Powers’.)
State list pertaining to taxation – State Government has exclusive powers to make laws in respect of matters in list II of Seventh Schedule to our Constitution. These entries include Police, Public Health, Agriculture, Land etc. Entries in this list relevant to taxation provisions are as follows:
Entry No. 46 – Taxes on agricultural income.
Entry No. 51 – Excise duty on alcoholic liquors, opium and narcotics.
Entry No. 52 – Tax on entry of goods into a local area for consumption, use or sale therein (usually called Octroi or Entry Tax).
Entry No. 54 – Tax on sale or purchase of goods other than newspapers except tax on interstate sale or purchase.
Restrictions on powers of taxation
Restrictions on power of State Government on imposition of tax on sale or purchase of goods are provided in Article 286 of Constitution of India, as follows :
State Government cannot impose tax on sale or purchase during imports or exports; or tax on sale outside the State. [Art 286(1)]
Parliament is authorised to formulate principles for determining when a sale or purchase takes place (a) outside the State (b) in the course of import and export. [Article 286(2)]
Parliament can place restrictions on tax on sale or purchase of goods declared as goods of special importance and State Government can tax such declared goods only subject to these restrictions [Article 286(3)].
Under these powers, CST Act has defined the terms ‘sale outside a State’ and ‘sale during export/import’. Provisions for ‘declared goods’ have also been made in the CST Act.
No restriction on Inter-State Trade and Commerce – Each State and Union Territory has certain autonomy. However, the trade and commerce has to be free all over India, without which India cannot be ‘One Nation’. As we saw above, tax on Inter-State sale/purchase can be imposed only by Central Government. Provisions in respect of inter-State Trade and Commerce in Constitution of India are summarised below :
Trade, commerce and intercourse throughout the territory of India shall be free, subject to provisions of Articles 302 to 304 of Constitution. (as stated below) [Article 301]
Restrictions on trade or commerce can be placed by Parliament in the public interest. (Article 302)
No discrimination can be made between one State and another or give preference to one State over another [Article 303(1)]. Such discrimination or preference can be made only by Parliament by law to deal with the situation arising from scarcity of goods [Article 303(2)]
State can impose tax on goods imported from other States or Union Territories, but a State cannot discriminate between goods manufactured in the State and goods brought from other States [Art. 304(1)].
State Legislature can impose reasonable restrictions on freedom of trade and commerce within the state in public interest. However, such bill cannot be introduced in State Legislature without previous sanction of the President (proviso to Article 304).
Tax on local goods and goods from other States must be same
Local Sales Tax rate (i.e. Sales tax payable under State sales tax laws) must be same both for local goods and goods brought from other States. e.g. assume that if a product is manufactured in M.P. the sales tax rate is 6%. In that case, same rate will apply in case of goods brought from other State on stock transfer and sold within the State of M.P.
Charging section of CST
As per the Constitution, tax on Inter State sale/purchase can be levied only by Union Government. CST Act has been enacted for this purpose. Section 6(1) of CST Act provides that subject to other provisions of the CST Act, every dealer shall be liable to pay tax under this Act on all sale of goods (other than electrical energy) effected by him in the course of Inter-State trade or Commerce. Section 6(1) is called as ‘Charging Section’ as it imposes levy on sale of goods on Inter-State sale.
Important words in charging section – (a) Levy is on sale of goods (i.e. levy is not on purchases) (b) it is on sale as defined under section 2(g) (c) sale should be of goods as defined in section 2(d) (d) there is no levy on electrical energy, though electrical energy is ‘goods’. [section 6(1)] (e) sale should be in course of inter-state Trade or commerce as defined in section 3.
Liability Subject to other provisions of Act – The levy is subject to other provisions of Act, i.e. the liability is not absolute. e.g. section 8(1) prescribes lower rate of taxes in certain cases, section 6(2) exempts subsequent sales by transfer of documents during movement of goods etc. Proviso to section 6(1) exempts sale of goods in the course of exports. Thus, the levy is subject to these and other exemptions.
Meaning of ‘Inter State Sale’
Section 3 of CST Act defines Inter-State sale or purchase as follows : A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase (a) occasions the movement of goods from one State to another or (b) is effected by a transfer of documents of title to the goods during their movement from one State to another. Thus, inter-state sale can be as per section 3(a) or section 3(b).
It has been held that these two modes are mutually exclusive. – Tata Iron and Steel Co. (TISCO) v. S R Sarkar – (1960) 11 STC 655 (SC) = AIR 1961 SC 65 = (1961) 1 SCR 379 – confirmed in UOI v. K G Khosla & Co. Ltd. – (1979) 43 STC 457 (SC) = (1979) 2 SCC 242 = AIR 1979 SC 1160 = (1979) 3 SCR 453, i.e. when a sale falls under section 3(a) it cannot fall under section 3(b) and CST can be levied only once. In Bharat Heavy Electricals v. UOI – AIR 1996 SC 1854 = (1996) 102 STC 373 (SC) = (1996) 4 SCC 230 = JT 1996(4) SC 427, it was held that whether a particular sale is inter-state or not has to be decided only with reference to section 3 of CST Act alone and no other section. Similarly, to decide question in which State the tax is leviable, only section 9(1) is relevant – no other provision is relevant.
Sale which ‘Occasions movement of goods’ – As per section 3(a), ‘Inter State sale’ takes place if the sale occasions movement of goods from one State to another. In CST v. Suresh Chand Jain – (1988) 70 STC 45 (SC), it was held that a sale can be said to be in the course of inter-state only if two conditions concur viz. (i) sale of goods and (ii) a transport of those goods from one State to another.
There are following essential ingredients of inter-State sale under this sub-section:
Transaction must be a completed sale.
Location of buyer and seller is immaterial. Thus, even if buyer and seller are within the same State, sale will be inter-state, if sale occasions movement of goods from one State to another. e.g. the buyer may have construction site in another State and may ask seller to despatch goods directly to the site. Inter State sale by transfer of documents is also possible even when buyer and seller are in same State.
There should be an agreement to sale which contains a stipulation (express or implied) regarding movement of goods from one State to another. – Balabhgas Hulaschand v. State of Orissa (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (1976) 2 SCC 44 = 1976 2 SCR 939.
It is immaterial whether a completed sale precedes the movement of goods or follows the movement of goods or takes place while the goods are in transit. What is important is that movement of goods and the sale must be inseparably connected – CST, UP v. Bakhtawar Lal Kailash Chand Arhti – (1992) 87 STC 196 = 1992 AIR SCW 2246 = AIR 1992 SC 1952 = JT 1992 (4) SC 388 (SC 3 member bench) [In Balabhgas Hulaschand v. State of Orissa (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (1976) 2 SCC 44 = 1976 2 SCR 939, it was held that concluded sale should take place in a State which is different from the State from which goods move. However, now the later judgment (i.e. 1992 judgment) prevails].
Even if goods move from one state to another in pursuance of agreement to sale and the sale is completed in the State in which goods are received, it will be an inter-State sale. – Balabhgas Hulaschand v. State of Orissa 1976 2 SCR 939 = (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (1976) 2 SCC 44. [However, this would be so only if there is stipulation in the agreement regarding transfer of property in goods].
There should be physical movement of goods from one State to another. Such movement must be inextricably connected with sale. – Balabhgas Hulaschand v. State of Orissa (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (176) 2 SCC 44 = 1976 2 SCR 939 * State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench).
The contract may not provide for movement of goods. It is enough if such movement is result of covenant of sale or is incidental to the contract. It is sufficient if the movement of goods is implicit in the sale.- UOI v. K G Khosla and Co. (P.) Ltd. – (1979) 43 STC 457 (SC) = AIR 1979 SC 1160 = (1979) 2 SCC 242 = (1979) 3 SCR 453. It is not necessary that covenant regarding inter-State movement must be specified in the contract itself. It is enough if the movement is in pursuance of and incidental to the contract of sale – English Electric Co. of India Ltd. v. Dy CTO – (1976) 38 STC 475 (SC) = AIR 1978 SC 19 = (1977) 1 SCR 631 – same view in Oil India Ltd. v. Superintendent of Taxes – (1975) 35 STC 445 (SC) = AIR 1975 SC 887 = (1975) 3 SCR 797 (SC).
It is immaterial in which State the property (i.e. ownership) of goods passes to the buyer. – Oil India Co. Ltd. v. Superintendent of Taxes (1975) 3 SCR 797 (SC) = AIR 1975 SC 887 = (1975) 35 STC 445 (SC) * English Electric Co. of India Ltd. v. Dy CTO – (1976) 38 STC 475 (SC) = (1977) 1 SCR 631 = AIR 1978 SC 19. Property may pass in either State – Tata Iron and Steel Co. (TISCO) v. S R Sarkar – (1960) 11 STC 655 (SC) = AIR 1961 SC 65 = (1961) 1 SCR 379.
Sale need not precede the inter-State movement. Sale can be either before the movement or after the movement. – Oil India Co. Ltd. v. Superintendent of Taxes (1975) 3 SCR 797 (SC) = AIR 1975 SC 887 = (1975) 35 STC 445 (SC). It is immaterial in which State the property in the goods is passed. It is not necessary that inter-State movement must precede the sale – ITC Classic Finance and Services v. CCT – (1995) 97 STC 330 (AP HC) * English Electric Co. of India Ltd. v. Dy CTO – (1976) 38 STC 475 (SC) = AIR 1978 SC 19 = (1977) 1 SCR 631 * ONGC v. State of Bihar – (1976) 38 STC 435 (SC) = AIR 1976 SC 2478 = (1977) 1 SCR 34.
Movement of goods should be incident of sale and should be necessitated by the contract of sale and this be inter-linked with the sale of goods – Kelvinator of India Ltd. v. State of Haryana (1973) 32 STC 629 (SC). The movement or despatch of goods from one State to another should be under a covenant or incident of contract of sale with the buyer – Tata Iron and Steel Co. (TISCO) v. S R Sarkar – (1960) 11 STC 655 (SC) = (1961) 1 SCR 379 = AIR 1961 SC 65.
Mode of transport is immaterial. It may be aircraft, rail, post, motor transport, angadia, ship or hand cart – State of Bombay v. United Motors – AIR 1953 SC 252 = (1953) 4 STC 133 (SC)
Even if buyer takes delivery from the seller, it can be inter-State sale if movement of goods to other State is a necessary part of transaction, e.g. if cement is issued within the State to a buyer but as per allotment order the buyer had to necessarily take the goods out of the State, it is an Inter-State Sale. – Mohanlal Hargovandas v. State of MP – (1955) 6 STC 687 (SC).
Situs of a sale or purchase is wholly irrelevant as regards its inter-state character – Bengal Immunity Co. Ltd. v State of Bihar AIR 1955 SC 661 = (1955) 2 SCR 603 = (1955) 6 STC 446 (SC). Situs of sale is immaterial.
Sale of machinery is inter-state even if it is erected and commissioned in another State. In Inter State sale, situs of sale is irrelevant. – State of Andhra Pradesh v. Usha Breco (2001) 121 STC 621 (AP HC DB).
Sale should conclude in different State. – State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench). [Meaning that if sale concludes in the same State, subsequent movement will be on behalf of purchaser alone and will not be inter State sale].
Temporary movement through another State is not Inter State sale – Explanation 2 to section 3 states that if movement of goods starts from one State and ends in the same State, it will not be deemed to be movement of goods during ‘inter State sale’; even if during transit goods pass through other State.
Sale by transfer of documents
Section 3(b) provides for Inter-State sale by transfer of documents of title to goods during the movement from one State to another.
As per section 3(b), a sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase is effected by a transfer of documents of title to the goods during their movement from one State to another.
This definition is important as all subsequent inter-state sales to registered dealers by transfer of documents during movement of goods are exempt from sales tax [E-I, E-II transaction, as explained later].
Section 3(a) requires that sale should ‘occasion movement of goods’. There is no such requirement in section 3(b). Hence, for purpose of section 3(b), the movement of goods from one State to another need not be occasioned by sale. For example, if the goods are being sent to a branch by transport, sale during movement by transfer of document will also be an ‘inter state sale’ u/s 3(b).
What is ‘Document of Title of Goods’ – When the goods are handed over to the carrier, he hands over a receipt to the seller. The seller sends the receipt to buyer. The buyer gets delivery of goods on submission of the receipt to the carrier at other end. The receipt of carrier is ‘document of title of goods’. The words ‘document of title’ is defined under section 2(4) of Sale of Goods Act. Such document is usually called (a) Lorry Receipt – LR in case of transport by Road (b) Railway Receipt – RR – in case of transport by rail (c) Bill of Lading – BL – in case of transport by sea (d) Air Way Bill – AWB – in case of transport by air. It is called ‘document of title’ as one who submits the same is entitled to get delivery of goods, if document is in his name or endorsed in his name.
Transfer of Document – The document of title may be in favour of buyer, Agent of seller, Banker or even ‘Self’. When the document is in favour of Agent/Banker/self; the agent/banker/‘self’ has to transfer the document in favour of the purchaser. Such transfer is normally by way of endorsement on the ‘document of title’. The endorsement is made on ‘document of title’ by writing words in the nature of ‘Deliver to or to the order of . . . . . . . . . . . . . . . . . . . . .’. The endorsement has to be signed by the endorser. The person in whose favour document is endorsed can further endorse the same in favour of other person. Thus, there can be more than one endorsements of the document. Technically and legally, document can be transferred by mere delivery even without endorsement. However, endorsement is a convenient mode of transfer as it gives proof that the transfer is in due course of trade. In Dy. Commissioner v. ARS Thirumeninatha Nadar Farm – (1968) 21 STC 184 (Mad HC DB), it was held that sale by transfer of document of title of goods may be effected by handing over the document and that endorsement to that effect on the document is only one of the proofs but not necessarily the only way to prove the fact – quoted with approval in State of Tamilnadu v. N Ramu Bros. – (1993) 89 STC 481 (Mad HC DB).
Transfer of Document is a symbolic delivery of goods to the purchaser. It carries with it full ownership of goods. Delivery of ‘document of title’ is equivalent to the delivery of goods themselves. – J V. Gokal and Co. (P.) Ltd. v. Assistant CST – 1960(2) SCR 852 = 110 ELT 106 = 11 STC 186 = AIR 1960 SC 595 (SC 5 member constitution bench) – quoted and followed in MMTC v. STO 1998 AIR SCW 3475 = 1998(5) SCALE 446 = AIR 1999 SC 121.
Stock Transfer/Branch Transfer
One of the basic and obvious conditions of Inter-State sale is that there should be a sale. If a manufacturer sends goods to his branch in other State, it is not a ‘sale’ as you cannot sell to yourself. Similarly, if a dealer sends goods to his Agent in other State who stocks goods on behalf of the dealer, it is not a sale. Such agent is usually called ‘Consignment Agent’. Goods are despatched to another State on consignment basis and the person despatching goods retains ownership of goods. Since no sale is involved, there is no ‘Inter State Sale’.
In Goodyear India Ltd. v. State of Haryana – (1990) 76 STC 71 (SC) (at page 98), it was held that mere consignment of goods by a manufacturer to his own branches outside the State does not amount to sale or disposal as such; the consignment of goods is neither sale nor a purchase.
This is called ‘stock transfer’ or ‘branch transfer’. Here, movement of goods takes place from one State to another, but it is not an inter State sales.
Stock transfer for works contract – Stock transfer for works contract in different State is permissible and in such case, there will be no sales tax liability in State from which goods moved. – State of AP v. Bhooratnam (2000) 117 STC 371 (AP HC DB). [Now tax will be payable after 11-5-2002].
No stock transfer of tailor made goods – As explained later, stock transfer envisages transfer of standard products, which are sold off the shelf. If buyer is known or identified before removal of goods from factory, it is not really a ‘stock transfer’. In short, stock transfer of tailor made goods or custom built products is a bogus stock transfer, shown just to avoid CST.
Consignment Agent – Goods are despatched to Consignment Agent by Principal. Goods remain property of the Principal. Agent sells goods on behalf of Principal. Consignment Agent collects sales proceeds and remits the same to Principal. The Consignment Agent can recover his commission, godown charges, insurance charges etc. Despatch to Consignment is not a sale as property in goods is not transferred and hence no CST is payable.
C&F Agent – Some times, Clearing & Forwarding Agents [C&F Agents] are appointed at various places. Such agents stock and sale goods on behalf of the principal. In Piramal Health Care Ltd. In re (2000) 37 CLA 353 (MRTPC), it was observed, ‘A C&F Agent does not have the right to property in the goods stocked with him by the manufacturer. His duties are confined to stocking the goods and forwarding them to persons and places as instructed by the manufacturer. The right to sell the goods does not vest in him’.
Branch Transfer – Here, the Principal has his own branch/depot in another State where goods are sent. These are stocked at depot in the branch and sold. There is no transfer of property when goods are despatched to branch and hence there is no liability of CST. This is often called ‘stock transfer’ or ‘branch transfer’ or ‘depot transfer’.
When Stock Transfer is treated as Inter-State sale – Goods are despatched to branch/consignment agent in another State and then these are sold from the branch, depot or place of consignment of agent. However, if the movement of goods is occasioned on account of sale, the movement will be treated as inter-State Sale. One illustration will make the distinction clear.
Let us assume that Tata Iron and Steel Co. Ltd. (TISCO), manufacturing Steel, has a factory at Jamshedpur, Bihar. TISCO manufactures Steel of various standard shapes and sizes. TISCO has a depot at Howrah in West Bengal. Steel plates, rods, billets etc. are sent to its depot at Howrah. When the goods are sent from Jamshedpur to Howrah, there is inter State movement, but the movement has not occasioned on account of any covenant or contract for sale. Hence, it is not an Inter-State sale but a stock transfer. Sale takes place when a customer approaches TISCO depot at Howrah and takes delivery from Howrah. Here, the sale by TISCO from its Howrah depot is an Intra-State sale within West Bengal.
However, assume that a buyer from Howrah wants Steel of a particular size and specification, which is not a standard size and specification and hence is not available in Howrah depot of TISCO. He approaches TISCO and TISCO manufactures Steel in its Jamshedpur factory in Bihar as per the specific requirements of the buyer. After manufacture, goods are sent to depot of TISCO at Howrah and goods are sold to the buyer from Howrah depot of TISCO. In such case, the movement of goods from Jamshedpur, Bihar to Howrah, West Bengal has occasioned as a necessary incident of contract and hence it is a Inter State sale, even if goods are supplied from depot of TISCO at Howrah and invoice is raised from TISCO, Howrah.
Double taxation when stock transfer held as sale – In Ashok Leyland Ltd. v. UOI 1997(2) SCALE 242 = (1997) 9 SCC 10 = (1997) 105 STC 152 (SC), the dealer despatched the goods to his depot in another States from his factory in Tamilnadu, treating the same as stock transfer. Dealer sold the goods from the depots and paid sales tax in the State in which goods were sold. Later, the dealer received notice from Tamilnadu sales tax authorities that in respect of its sale of vehicles to various State transport undertakings from the depot, the movement of goods from Tamilnadu has to be treated as ‘inter state sale’. Dealer pleaded that if Tamilnadu sales tax authorities ask him to pay tax on such stock transfer, it will be double taxation, as he has already paid sales tax in respective States when goods were sold from the depots. Other State Governments will not refund the sales tax collected by those State Governments. Supreme Court appreciated the difficulty, which has arisen because there is no central mechanism which would decide questions of such nature. Supreme Court directed dealer to continue with assessment. If the assessing authority and appellate authority of Tamilnadu decided against the dealer, the dealer should approach Supreme Court for suitable directions. – similar directions were given in KCP Ltd. v. State of MP (1998) 108 STC 580 (SC).
In Bharat Heavy Electricals v. UOI – AIR 1996 SC 1854 = (1996) 102 STC 373 (SC) = 1996(4) SCC 230 = JT 1996(4) SC 427, somewhat similar situation arose, when sales tax really payable to one State was collected by another State. The Supreme Court ordered the another State Government to pay tax to State Government to which it was really due [After formation of Central Sales Tax Appellate Authority, that authority will be in a position to give such a relief].
Authority to resolve disputes in course of inter state sale – To overcome the difficulties as above, ‘Central Sales Tax Appellate Authority’ has been constituted u/s 19 of CST Act. [Sections 19 to 26 were incorporated in CST Act w.e.f. 11.9.2001]. The provisions are discussed in a later chapter. [The CST Appellate Authority has not been constituted till May, 2003].
Burden of proof in case of consignment despatches – Since consignment despatches are usually resorted to avoid liability of CST, section 6A of CST Act provides that when a dealer claims that transfer of goods outside State is not a sale (i.e. it is branch transfer/consignment sale); he has to prove that the inter-State transfer of goods is not a sale. (In legal terminology; this means that burden of proof is on dealer to establish that the inter-State transfer of goods is not a sale). Sales tax authorities do not have to prove that the sale is ‘Inter State’. The authorities can presume the same unless contrary is proved by the dealer. Dealer will have to prove that it is not an Inter-State sale. For this purpose, he must produce a declaration from agent/branch from other State in prescribed form ‘F’. [Till 11-5-2002, production of ‘F’ form was not mandatory and other proof could be produced to prove stock transfer].