The decision of the Supreme Court in A&G Projects & Technologies Ltd. Vs. State of Karnataka [(2008) VIL 40 SC], wherein it had laid down certain important principles governing the taxation of inter state sales of goods under the Central Sales Tax Act 1956 (the Act). While the Court had analyzed the two categories of inter state sales as visualised in Sections 3(a) and (b) of the Act, it essentially specified the conditions that were to be met for in transit sales under Section 3(b) above, in order to qualify for exemption from tax under Section 6(2) of the Act.
The Court held that if a contract for sales of goods subsequent to the first sale, which occasioned the movement of goods on an inter state basis, was already in place prior to the commencement of the inter state movement of goods, the benefit of exemption from central sales tax on the subsequent sales, as in transit sales, was not available.
This decision of the Supreme Court was understood by the Department to mean that if the subsequent buyer of goods was identified prior to the commencement of movement of goods on an inter state basis pursuant to the first and initial sale, a contract for sale of goods would automatically be presumed to exist and hence the subsequent endorsement of the transport/ownership documents, by way of E1/E2 endorsements, would be futile and the benefit of exemption from the CST for such in transit sales would not be available. This led to the issuance of demands in several jurisdictions and assessees were significantly challenged as a result.
Luckily, better sense seems to have prevailed, albeit gradually, and a recent clarificatory circular issued by the West Bengal VAT authorities(Trade Circular NO. 11/2010 dated 4-10-2010) has set out the departmental position on the matter. This is a welcome circular even though it states that it is clarificatory in nature but not at all an interpretation of law, whatever that means!
The said Circular states that the Commissioner of Commercial Taxes, West Bengal has taken cognizance of the reports coming in from various quarters that the assessing authorities had started disallowing the exemption from tax for in transit sales, under Section 6(2) of the Act, on the ground that the decision of the Supreme Court in the A&G Projects case (supra) required that the contract for the subsequent sales could only be effected subsequent to the commencement of the movement of goods on an inter state basis. Thus, all cases of in transit sales where pre existing orders were in place were being denied the benefit of exemption from tax.
The Circular goes on to state as follows:
The fact cannot be denied that in the commercial world, a 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.
There Circular thereupon refers to the decision in A&G Projects and extracts para 11 of the judgement as follows:-
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 cont-ract 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.
It then states that empha-sing the above para of the jud-gement, 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.
Thereafter, the following principles relating to inter State sales as laid down by the Supreme Court in past decisions, have been reiterated:-
i) a 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.
v) an agreement to sell and a sale of goods are two different concepts under the Sale of Goods Act, 1930.
vi) 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.
Thereupon, the circular clarifies as follows:-
i) in case of sale falling u/s. 3(a), any kind of endorsement of consignment note/LR etc. cannot be accepted.
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.
It is perhaps for the SECOND time that such a clear delineation of the ratio of the decision in A&G Projects has been set out through a departmental circular and it would hopefully result in a cessation of proceedings denying the benefit of exemption from tax for in transit sales under the CST Act.
Andhra Pradesh was the first state to examine this issue. After examining the observations of the Supreme Court judgment in case of A & G Projects, and the legal provisions, Commissioner of Commercial Taxes of Andhra Pradesh has issued the circular No. CCT-AIII[2]91/2010 dated 7-5-2010. It is clarified by the Commissioner that
“the second and subsequent inter-state sales [transit sales] are not eligible for exemption on the ground that such sales are made to predetermined buyer is not legally valid and hence not correct.”
Thus not only Andhra Pradesh but West Bengal has also interpreted and clarified the position arising out of Supreme Court judgment in case of A & g Project. Since the question involved relates to sale covered by CST Act which is a Central Act, the interpretation given by any high court is binding on all the states. On same analogy the department of sales tax of OTHER state has to consider the interpretation given by the other States(ANDHRA & WEST BANGAL). It can not give any other interpretation to the observations of the Supreme Court.
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