By G. G. Goyal, Chartered Accountant
C. B. Thakar, Advocate
fiogf49gjkf0d
VAT
A very interesting but confusing situation has arisen in
relation to ‘sale-in-transit’. As per the provisions of Central Sales Tax Act,
1956, each inter-State sale is liable to tax. However, the intention of the
Government is not to levy tax on all such transactions when such transactions
are effected in the course of single movement. In other words, under the CST Act
an exempted sale category has been carved out so as to give exemption to
subsequent inter-State sale in the course of single movement. The reference is
to the provisions of S. 6(2) of the CST Act, 1956. The said Section is
reproduced below for ready reference :
“6 Liability to tax on inter-State sales
(2) Notwithstanding anything contained in Ss.(1) or
Ss.(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 Ss.(3)
of S. 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 Ss.(4) of S. 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, :
(a) 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 Ss.(1) of S. 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.”
The implication of above Section is that the first
inter-State sale transaction will fall u/s.3(a) of the CST Act and, therefore,
be liable to tax in the hands of first vendor in the moving State. However
subsequent sale effected by first purchaser, by transfer of documents of title
to goods, to his purchaser will be exempt. In fact any number of such sales
effected during the course of the said movement will remain exempt. As defined
u/s.3(b) of the CST Act, the movement of goods commences when the goods are
handed over to the common carrier and it ends when the delivery of the same is
taken from carrier. Thus during this course of movement, a number of
transactions can take place and they will be exempt. However for availing the
exemption the respective selling dealer will be liable to collect the pair of
forms as stated below.
When the first purchaser sells, he will be required to
collect E-I form from his vendor and C form from his purchaser.
When the subsequent purchaser sells, he will be required to
collect E-II form from his immediate vendor and C form from his buyer. This pair
of E-II and C forms will continue for all subsequent sales taking place in the
course of the same movement. Thus a very good facility has been provided by the
law to avoid cascading burden of tax. Except tax on the first transaction the
tax burden on subsequent sale transactions in the same movement can be avoided.
In popular terms this type of sales are referred to as ‘in-transit sales’.
The nature of ‘in-transit sale’ is now clear by number of
judgments. There can be different situations about the above exempted category
of sale. The simple is that the first purchaser buys the goods without reference
to any pre-existing order from his customer. However after the goods are in
transit he may receive the order from buyer and sell the goods by transfer of
documents. There cannot be any dispute about this transaction and it is
straightaway covered by S. 6(2).
However, dispute sometimes arises when the first purchaser
has pre-existing order. For example, A in Maharashtra has order for supply from
B in Gujarat. A purchases the said goods from C in Tamil Nadu and directs C to
dispatch the goods to B. In this case sale by C to A will be first inter-State
sale and sale by A to B will be subsequent inter-State sale and this will be
exempt subject to production of forms. However the sales tax authorities take
objection that since the goods were already earmarked for B, before putting the
goods in transport, the exempted sale as ‘sale-in-transit’ cannot take place.
However this cannot be a correct position. It is true that there was pre-existing order with A and accordingly the goods were purchased from C. However the sale to B by A is taking place only at the time of putting the goods in carrier. It is at that point of time, because of the instructions of A, the goods are booked in the name of B and hence this is transfer of documents and accordingly covered by S. 6(2). The pre-existing order with A can at the most be considered to be agreement to sale, but actual sale is taking place when the transport documents are made in his name, because of instructions of A. In this respect it can also be mentioned here that there is no need for physical endorsement of transport documents and the transfer can take place by instructions also, which can be referred to as contractive transfer. In other words when the transport documents are taken out in the name of B, the goods stood transferred to B and that is because of contractive transfer of documents, the transaction is duly covered by S. 6(2), hence exempt, subject to other conditions.
This is now a settled law in light of number of judgments on the said issue. Reference can be made to the following judgments:
State of Gujarat v. Haridas MuIji Thakker, (84 STC 317) (Guj.) :
In this case the facts are that the Gujarat dealer received order from another dealer in Gujarat. For supplying the said goods, the vendor dealer in Gujarat placed order on Maharashtra dealer and instructed to send the goods directly to the Gujarat purchasing party. Gujarat High Court held that the sale by Maharashtra dealer to Gujarat vendor dealer is first inter-State sale and the one by Gujarat vendor to Gujarat purchasing dealer is second inter-State sale. The Gujarat High Court also held that the second inter-State sale is exempt u/ s.6(2) being effected by transfer of documents of title to goods. In this case though there was no physical transfer of L.R., etc. The Gujarat High Court held that there is constructive transfer by instruction and hence duly covered by S. 6(2). This judgment duly covers both issues that there is no need for physical transfer and also that having predetermined parties does not affect the claim.
Fatechand Chaturbhujdas v. State of Maharashtra, (S.A. 894 of 1990, dated 12-8-1991) (M.s.T. Tribunal) :
In this case the local party purchased goods from another local party and directed the same to be despatched to outside State party. Even though local party was shown as consignor, taking the view that while placing order there is term for outside place dispatches, Maharashtra Sales Tax Tribunal held that the sale between two local parties is first inter-State sale and the sale by local party to outside party is subsequent inter-State sale, duly exempt ul s.6(2).
Duvent Fans P: Ltd. v. State of TamiI Nadu, (113 STC 431) (Mad.) :
A local dealer purchased goods from another local dealer and directed to send them to his purchaser’s place in another State. The Madras High Court held that the first transaction is first inter-State sale and the second sale is also subsequent inter-State sale exempt ul s.6(2) of the CST Act. This judgment also clarifies the nature of exempted sales ul s.6(2) of the CST Act.
In fact there are many judgments on this issue. However, since the legal position about transfer of documents is clear from the above judgments, for sake of brevity no further citations are given here.
In the light of the above legal position the nature of ‘in-transit sale’ is fairly settled and dealers are day in and day-out effecting such type of transactions.
However, recently the Supreme Court has delivered judgment in case of A & G Projects & Technologies v. State of Karnataka, (19 VST 239) (sq. The facts in the above case are very peculiar and the gist is as under:
The appellant, a registered dealer under the Karnataka Sales Tax Act, 1957, as well as the Central Sales Tax Act, 1956, was engaged in execution of electrical contracts. It was awarded three independent contracts towards: (i) supply of capacitor banks, (ii) execution of civil works, and (iii) creation and commissioning of capacitor banks at various sub-stations of the Karnataka Power Transmission Corporation. Pursuant to those contracts the appellant appointed Bay West as contractor located outside Karnataka for procuring capacitor banks because the latter had a prior arrangement with the manufacturers. The appellant filed its return showing turnover of inter-State sales under the Central Sales Tax Act, 1956, contending that the goods originated from the manufacturers and ultimately reached the Corporation though title to the goods vested in Bay West. According to the appellant there were three sales and it claimed exemption from tax u/s.6(2) of the Central Sales Tax Act, 1956, on the ground that the second and third sales were subsequent sales. The Assessing Officer held that the appellant was not entitled to the exemption. The Tribunal held that the movement of goods was not from the State of Karnataka, but into the State and therefore there was no inter-State sale in the State of Karnataka. On revision the High Court held that the sale of goods in favour of the Corporation was complete when the goods were appropriated to the Corporation before the commencement of goods from the place of manufacture in Tamil Nadu to the Corporation in Karnataka and, therefore the inter-State sales fellu/s.3(a), thus not entitled to exemption u/ s.6(2). The Supreme Court proceeded on the fact that all three transactions are held to be covered by S. 3(a) of the CST Act by lower authorities and accordingly interpreting S. 9(1) of the CST Act decided that the transactions are liable to tax in moving State and notin State of Karnataka.
In the above case the Supreme Court was concerned about appropriate State entitled to levy tax in relation to inter-State sale covered by S. 3(a) read with S. 9(1) of the CST Act. As can be inferred from the judgment more than one inter-State sale transactions can be liable in the same State if they are covered by S. 3(a). The Supreme Court was not analysing S. 6(2). However while dealing with the issue in relation to S. 9(1), the Supreme Court has observed about nature of ‘in-transit sale’ which can be covered by S. 6(2). Relevant portion is as under:
“Within S. 3(b) fall sales in which property in the goods passes during the movement of the goods from one State to another by transfer of documents of title thereto whereas S. 3(a) covers sales, other than those included in clause (b), in which the movement of goods from one State to another is under the contract of sale and property in the goods passes in either States [SEE: Tata Iron & Steel Co. Ltd. v. S. R. Sarkar, (1960) 11STC 655 (sq at page 667]. 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.” (Italics ours)
In the light of the above observations an issue arises as to whether having pre-existing order with the buyer will affect the claim. In the light of the above observations, one may be tempted to say that the ‘in transit sale’ must take place only after commencement of the movement and if there is a pre-exiting order with the ‘intransit’ seller, then such sale cannot qualify for S. 6(2). However it appears that such conclusion is not at all intended nor warranted.
As stated above, the Supreme Court was not analysing S. 6(2) as such, but it has referred to S. 6(2) for correctly defining scope of S. 9(1). Secondly, the Supreme Court has not laid down anything contrary so as to nullify the understanding till today as well as the above-referred High Court judgments. Even if there is pre-existing order it cannot be equated with the contract of sale. The sale takes place only when the transport documents are transferred or stand transferred by implication like contractual transfer. When the Supreme Court says about con-tract coming into existence after movement commences, the reference or the meaning of the term ‘contract’ used therein is to actual sale. The pre-existing order is at the most an agreement to sale, but the actual transfer of documents is a contract of sale and obviously the said contract is taking place after the movement has commenced, as discussed above. Therefore, on merits also the said observations are not laying down any different position. It is possible that because of the above observations the department may again proceed with their theory of existence of pre-existing order for disallowing claims. However, in the light of the position discussed above, it is not warranted and the legal position as prevailing today should remain applicable even after the above judgment.
