Subsequent sale in case of sale in Transit

Subsequent sale in case of sale in Transit exempt under CST Act  (SIT sale) ( E1 E2 sale)



 The scheme of “in transit sale” covered by section 6(2) of CST Act, 1956
Section 3(a) of CST Act,1956 defines the interstate sale/purchase transaction. Section 3(b) defines the interstate sale effected by transfer of documents of title to goods. When the goods are in movement from one State to other. The whole section 3 reads as under:
“3. When is a sale or purchase of goods said to take place in the course of inter-state trade or commerce — A sale or, purchase of goods shall be deemed to take place in the course of interstate trade or commerce if the sale or purchase —
a.       occasion 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…”
Section 6(2) of CST Act gives exemption to subsequent interstate sale affected by transfer of documents of title to goods when the goods are in movement from one state to another. However such exemption to subsequent inter-state sale is subject to production of Form E-I, as obtained from prior vendor and ‘C’ form from buyer.

A simple example can be that, suppose A of Mumbai has sold goods to B of Ahmedabad. The goods are dispatched by lorry and L.R. is taken out by A (Mumbai) where in A is consignor and B (Ahmedabad) is consignee. If before taking delivery from transporter, B decides to sell his goods to ‘C’ of M.P., he can simply endorse the L.R. in name of ‘C’ and the sale will be complete. This is the second or subsequent interstate sale in the course of same movement. In this case A must have charged 2% CST in his bill. Being a second interstate sale affected by B to C, B is equally liable to pay CST on above transaction. However the intention of Government is not to levy multiple taxes on sale taking place in one course of movement. Therefore the subsequent sale is given exemption. 

However it is subject to production of given forms. In above example, the sale by B to C will be exempt if B produces before his assessing authority Form EI issued by A of Mumbai and Form ‘C’ issued by C of M. P.

Procedure for transfer of documents of title to goods 
The ‘sale by transfer of documents of title to goods’ has been interpreted by judiciary in many cases, some of them are cited subsequently for reference.
Normally the sale is affected by endorsement of transport documents. On the backside of the document like, L.R. the vendor can put his signature and transfer the documents to buyer. As held by Bombay High Court in case of Chhaganlal Savchand (62 ITR 133) the transfer of documents can be effected even by delivery.
It is also held by judiciary that transfer of documents can take place even by instruction. Therefore it is not necessary that the sale by transfer of documents takes place when the document is first taken out between first seller and his buyer and then transferred by the buyer to his buyer. The buyer of first seller can give instruction to dispatch the goods directly to his customer. If such instructions are given and accordingly the goods are dispatched to third party (i.e., buyer’s buyer) it is because of transfer affected by the buyer of first seller. The transfer takes place while booking the goods in transport and this is also a transfer during course of movement. This is known as notional or constructive transfer. Since this transfer is taking place during course of movement from one State to other it is eligible for exemption u/s. 6(2). In such case the first seller is consignor and the buyer’s buyer is consignee. However the commercial bills will be by first seller to his buyer and then by the first buyer to his buyer. In such a case to enable the first buyer to claim exemption, E-I form is to be issued by first seller to such first buyer.

Predetermined Sales
It will be appreciated that even if the sale is predetermined by your buyer to his buyer it does not make any difference. On the contrary it makes the case strong in the sense that there is real transfer of documents at the loading station itself and any possibility of make believe transfer gets avoided. Therefore predetermined sale cannot be an issue. The same will be clear from the judgment given below.
The above legal position is clear, amongst others, from following judgments.
M/s. State of Gujarat vs. Haridas Mulji 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 interstate sale and the one by Gujarat vendor dealer to Gujarat purchasing dealer is second interstate sale. Gujarat High Court also held that the second interstate 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. Gujarat High Court held that there is constructive transfer by instruction and hence duly covered by section 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.
M/s. Fatechand Chaturbhujdas vs. State of Maharashtra (S.A.894 of 1990 dated.12-8-1991) decided by Maharashtra Sales Tax Tribunal: - In this case the local party purchased goods from other local party and directed the same to be dispatched 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 interstate sale and the sale by local party to outside party is subsequent interstate sale, duly exempt u/s. 6(2).
In short even if there is predetermined sale, there is no adverse effect on the sale to be claimed u/s. 6(2). On the other hand, in light of above judgments, the claim gets more authentic. The transfer of property to ultimate purchaser (consignee) gets synchronized at the time of booking the goods with the carrier and hence the subsequent sales take place by transfer of documents of title to goods as held by High Court in above case of 84 STC 317. The claim of exemption is to be allowed under above circumstances subject to production of required forms.
M/s. Duvent Fans P. Ltd. vs. State of Tamil Nadu (113 STC 431)(Mad.) :- Local dealer purchased goods from other local dealer and directed to send them to his purchaser’s place in other State. Madras High Court held that the first transaction is first interstate sale and the second sale is also subsequent interstate sale exempt u/s.6(2) of CST Act. The above judgment is directly on issue and hence will govern the field.
In fact there are many judgments on this issue. However since the legal position about transfer of documents as well as predetermined sale is clear from above judgments, no further citations are given here for sake of brevity.

Taxation of works contracts 

Supreme Court in a very old case - State of Madras v. Gannon Dunkerley & Co. - AIR 1958 SC 560 = 1959 SCR 379 = (1958) 9 STC 353 (SC), had held that no tax can be levied on works contract, as tax can be levied only on ‘sale of goods’ as defined in Sale of Goods Act. In an indivisible works contract, there is no sale of goods as there could be no agreement to sell materials as such and moreover, the property does not pass as movables. The material used therein becomes property of the other party on the theory of accretion and, as such, no sales tax can be levied on such material.

In 1983,46th Amendment of the Constitution has added Clause 29A to Article 366 to expand "tax on the sale or purchase of goods" occurring in the Constitution to include a tax on the transfer of property in the goods (whether as goods or in some other form) involved in the execution of works contracts clarifying that such transfer would be deemed to be a sale of those goods by the person making it and a purchase thereof, by the person to whom the transfer is made.

Subsequently, most of States have amended their sales tax laws to cover ‘works contract’, but Central  Sales Tax Act was not amended till May 2002. Thus, till 11-5-2002, CST was not leviable on indivisible works contracts.

In Builders' Association of India v. UOI - (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = (1989) 1 SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 (SC 5 member constitution bench), it has been observed : ‘After the 46th amendment, the works contract which was indivisible one, is by a legal fiction altered into one for sale of goods and the other for supply of labour and services. After 46th amendment, it has become possible for States to levy tax on value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of goods and materials supplied in a building contract which had been entered into two distinct and separate parts.’

In Associated Cement Companies Ltd. v. CC 2001(1) SCALE 436 = (2001) 4 SCC 593 = 124 STC 59 = AIR 2001 SC 862 = 2001 AIR SCW 559 (SC 3 member bench), it was held that even if the dominant intention of the contract is rendering of service which will amount to a works contract, after forty-sixth amendment to Constitution, the State would now be empowered to levy sales tax on material used in such contract.
Contract of skill & labour - Some contracts are essentially contracts of skill & labour e.g. tailoring work, printing or cyclostyling etc. These jobs are not covered under 'works contract'. - - A contract to paint a portrait is a contract for skill and labour and not a contract for sale of goods, as substance of contract is for artist’s skill and it is only ancillary to that there would pass to the customer some materials like paint and canvas. – Robinson v. Graves (1935) 1 KB 579. However, in Lee v. Griffn (1861) 30 LJ QB 252, when a dentist agreed to make set of false teeth for a lady and to fit them into mouth, it was held a contract for sale of goods [There can be two views on the issue].


 KONE ELEVATOR INDIA PVT. LTD. Vs. State of Tamil Nadu and Ors.
Supreme Court dated 06th May, 2014

The question whether assembling components of a lift would be a works contract or sale' (including interstate sale) had been earlier decided by division bench of the Hon'ble Supreme Court of India in case of Mis Kone Elevator Vrs.State of Tamilnadu and reported in 14 SCC 788 (2010) (S.C.). However, the decision was doubted by the Hon'ble Supreme Court of India itself, and was
referred to the larger bench of five numbers.

"Once there is a composite contract for supply & installation, it has to be treated as a work contract, for it is not a sale of goods / chattel simpliciter. It is not chattel sold as chattel. The contract itself profoundly speaks of the obligation to supply goods & materials as well as installation of the lift which obviously conveys performance of labour & service. Hence, the fundamental characteristics
of works contract are satisfied.

Applicability of VAT or CST on inter-state works contracts

The State Governments have the power under entry 54 of the State List of the SeventhSchedule to the Constitution of India, to levy tax on the sale and purchase of goods within the jurisdiction of such States. In works contracts there is a deemed sales of the goods incorporated in such contracts  to the contractee, hence the tax on such deemed sales of goods can also be levied by States if such deemed sales happen within the jurisdiction of the States.

The definition of sale in the CST Act was amended in 2002 so as to include within its purview the concept of deemed sales involved in the works contracts. Hence Central Government can also levy CST on such deemed sales involved in the works contracts if such deemed sales is an interstate sales.

 In simple words one can say the powers to tax the movement of goods from one State to another for execution of works contract vest with the Central Government and not with the State Governments.

Taxable event in works contracts:

 It should be noted that taxable event in case of works contracts is the deemed sales and such deemed sales is considered to have taken place when the goods are incorporated in the works contract. Now the question arises in mind how an inter-state  deemed sales may arise in case of works contracts. This question was also raised in Gannon Dunkerley & Co. Vs State of Rajasthan (1993) 88 STC 204 (SC) , the relevant extracts of the judgement are being produced herebelow::
"On behalf of the States it has been seriously contended that a deemed sale resulting from transfer of property in goods involved in the execution of a works contract can never be a sale in the cource of inter-state trade or commerce and it cannot be an outside sale or sale in the cource of import since the transfer of property in the goods takes place only at the stage when the goods are incorporated in the work and that can take place only at the stage where the work is required to be executed. On behalf of the contractors, on the other hand, it has been urged that a works contract can involve transactions constituting a sale in the cource of inter-state trade and commerce as well as an outside sale or sale in the cource of import and that is a matter which will have to be considered in accordance with the principles contained in section  3, 4 and 5 of the Central Sales Tax  Act, 1956 keeping in view the terms and conditions of the particular contract."
The Supreme Court after considering a lot of judgments observed as follows:
"We do not propose to go into this controversy because the question whether a deemed sale resulting from  transfer of a particular works contract amounts to a sale in the cource of inter-state trade or commerce under section 3 of the Central Sales Tax Act or an outside sale under section 4 of the Central Sales Tax Act or sale in the cource of import under section 5 of Central Sales Tax Act, has to be decided in the light of the particular terms of the works contract and it cannot be decided in the abstract. As at present advised, we are not in a position to say that in no case, can there be a sale in the cource of inter-state trade or commerce or an outside sale or a sale in the cource of import in respect of a deemed sale resulting from transfer of property in goods involved in the execution of a works contract falling within the ambit of sub-clause (b) of clause (29A) of Article 366 of theConstitution."
It should be noted that at the time when the above judgement was delivered although the deemed sales involved in the works contracts was included in sub-clause (b) of clause (29A) of article 366 of theConstitution, but at the same time definition of sale as contained in CST Act, 1956 was not amended to provide for the deemed sales in the works contract within its purview, still the Supreme court held that there can be an inter-state deemed sales in works contract but the same cannot be decided in abstractbut can be decided in the light of particular terms of every contract.
In 2002 the definition of sales under CST Act was amended to include deemed sales in works contracts, which made the position crystal clear that there can be an inter-state deemed  sales in the works contracts.
The  Punjab & Haryana High Court in Thomson Press (India) Ltd. Vs. State of Haryana (1996) 100 STC 417 (P&H) held that if the inter-state movement of goods arises due to a pre-existing contract then inputs and goods involved in the execution of the works contract shall also be deemed to have moved and the State Government cannot levy tax on deemed sales of such goods. The relevant extracts of the said judgment is being produced herebelow to further understand this issue:

"Wherever the sale or purchase of goods occasions the movement of goods from one State to another, it is deemed to have taken place in the cource of inter-state trade or commerce. In the cases covered by sections 3, 4 and 5 of the Central Sales Tax Act, the State Legislature has no competence to provide for the levy of sales tax. This principle shall apply even in the case of works contract. The position cannot be different by the legal fiction introduced by the State Legislation, in pursuance of the 46th Amendment.Once the contract occasions the movement of end-product from one State to another, the inputs or the goods involved in the execution of the works contract shall also be deemed to have moved and the levy of sales tax in such a case would be outside the field of legislative competence of the State Legislature. By introducing a fiction, the State Legislature cannot convert a sale in the cource of inter-state trade and commerce into a local sale.

Clause (29A) which was added in Article 366 by the 46th Amendment only embodies an enabling provision. It doesnot, ipso facto authorize the State Legislature to levy taxes on the sale or purchase of goods where such sale or purchase takes place in the cource of inter-state trade and commerce."

Thus the High Court in the above case made it clear that if a pre-existing works contract occasions the interstate movement of goods then such goods shall be deemed to have been incorporated in such workscontract inter-state, on which no tax can be levied by the State Governments. Hence the deduction of inter-state sale or purchase of goods in pursuance of a pre-existing works contract should be allowed while calculating the deemed sales within the State jurisdiction, if such contract has occasioned such interstate movement of goods.

Now the question is when a contract can said to be occasioning the inter-state movement of goods incorporated in the works contract. In my view this depends a lot on the terms of everycontract and also on the facts of each case.

For example if a contractor manufactures some goods in his own state in pursuance of a works contractto be executed in another state, in accordance with the terms and specification of the contractee and thereafter, sends such goods to the other state for incorporation in the works contract, then it will be considered as contract occasioning the inter-state movement of goods, hence only CST liability will arise on the deemed sales of such goods incorporated in the interstate works contract.

Some case laws are provided herebelow to further understand when a works contractoccasions the interstate movement of goods:

The assessee received gray fabric from outside the State to process into dyed and printing fabric and after processing, it dispatched the same to the dispatching State. It was held that movement of cloth is occasioned by the contract of sale within the meaning of section 3 of the CST Act and the transaction amounts to an inter-state sale- East India Cotton Mfg. Co. Ltd. Vs. State of Haryana (1993) 90 STC 221 (P&H).
Printing of lottery tickets was held to be a works contract transaction because the petitioner could not have sold the lottery tickets in the market to any person and those involved not only expertise but also confidentiality. When the petitioner in Haryana prints lottery tickets, in pursuance of a contract with the State of Haryana, the provisions of the Haryana General Sales Tax Act in so far as these provide for levy of sales tax on the inputs involved in the execution of a works contract, shall be applicable. However, when the petitioner prints lottery tickets at the asking of a State other than Haryana, the position is different and provisions of Central Sales Tax Act shall apply-Thomson Press (India) Ltd. Vs. State of Haryana (1996) 100 STC 417 (P&H).
If the purchases are made specifically for the execution of the contract, then the intervention of the branch office of a contractor in the movement of the goods from outside the State, for the execution of the contract inside the State, will not change the character of a transaction and it will remain as an inter-state sale- Media Communications vs. Govt of A.P. (1997) 105 STC 227 (AP), case followed- Sahney Steel and Press Works Ltd. Vs. CTO (1985) 60 STC 301 (SC).
The petitioner entered into an agreement for supply and installations of elevators at a site in Punjab, Goods moved from Delhi to Punjab in semi-knocked down condition for installation at site kept ready as per drawings and designed by the consignee. It was held that it is an agrerement for sale between the parties instead of works contract. Further installation of lift was incidental to sale and it is an inter-state sale from Delhi, not taxable under The Punjab VAT Act.-E.C.E Industries Ltd. Vs State of Punjab (2008) 14 VST 40 (P&H).
 The petitioner purchased materials in several States outside the State of Tripura and also placed orders for supply of materials on Tripura for use in the execution of a works contract in Tripura. The terms of the contract stipulated movement of goods from such other States to the State of Tripura. The petitioner was of the view that the supplies of materials made from outside the State were inter-state sales. The Superintendent of Taxes, on the ground that the actual transfer of property in materials used in the contract took place in Tripura, assessed under the Tripura Sales Tax Act. Allowing the writ petition, the High Court held that the sales in question were inter-state sales. The fact that the use of the materials was made in a works contract or the property in the materials passed in the State of Tripura did not in any way affect the inter-state nature of the transaction.-Projects and Services Centre vs. State of Tripura (1991) 82 STC 89 (Gau).
Conclusion: From the above discussion and cases referred in my view, it can be safely concluded that the inter-state sale or purchase of goods made in pursuance of a pre-existing works contract and executed in such works contract, shall be deemed as sale or purchase in the course of inter-state trade and there cannot be any local deemed sales in such case, hence the deduction of such sale or purchase should be allowed while calculating local deemed sales.
However the terms of contract and facts of each case play a decisive role in determining the inter-state deemed sales in works contracts. Therefore it is advisable that contracts should be drafted with utmost care and help of an expert tax professional in the field of works contract must be taken while drafting such contracts, which can be invaluable and can also help avoiding unnecessary litigation to a great extent