Basic Concepts of Central Sales Tax

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 IndiaTo provide for levy, collection and distribution of taxes on sales of goods in the course of inter-state trade or commerceTo 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.

Constitutional Background

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].

Sale within the State

Article 286(1) of Constitution of India specifies that a State shall not impose tax on sale or purchase of goods where such sale or purchase takes place (a) outside the State or (b) in the course of imports of goods into, or export of the goods out of territory of India. Article 286(2) of Constitution states that Parliament may by law formulate the principles for determining when a sale or purchase of goods takes place in any of the ways mentioned above i.e. outside the State or in the course of import/export. In absence of such powers, each State might have had its own definition of ‘sale outside the State’ or ‘sale during import/export’, which could have caused confusion or double taxation. In exercise of these powers conferred by Constitution, Parliament introduced section 4 of CST Act to define what is ‘sale outside a State’ and section 5 of CST Act to define what is ‘sale during course of import/export’.

What is ‘Sale outside a State’ - CST Act defines 'sale outside a State'. [This definition is under powers conferred vide Article 286(2) of Constitution, as explained above]. - - This definition is important as 'sale outside a State' cannot be taxed by State Government.

Section 4(1) defines ‘Sale Outside a State’ in a round about way. The section states that ‘subject to provisions of section 3, when a sale or purchase is inside a State as per section 4(2), such sale or purchase will be outside all other States’. Thus, it is necessary to understand ‘what is sale inside a State’.

Sale inside a State - Section 4(2) states that a sale or purchase of goods shall be deemed to take place inside a State if the goods are within the State (a) in the case of specific or ascertained goods, at the time the contract of sale is made and (b) in the case of un-ascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation. Explanation to this section states that where there is a single contract of sale or purchase of goods situated at more than one place, provisions of section 4(2) shall apply as if there were separate contracts at each of such places.

Inter State sale is not covered - Definition of ‘sale inside State’ is subject to section 3 of CST Act, i.e. it is subject to condition that the sale should not be ‘Inter State Sale’. This is obvious because tax on Inter State sale cannot be imposed by State Government as per Constitution. Thus, if the sale is ‘Inter State’ it cannot be inside the State, even if by aforesaid definition, it could be called as Intra State (inside the State) sale.

In Gannon Dunkerley v. State of Rajasthan (1993) 66 Taxman 229 = (1993) 10 CLA 56 (SC) = 1992 (3) SCALE 173 = 1993 AIR SCW 2621 = (1993) 1 SCC 364 = (1993) 88 STC 204 (SC - 5 member bench), it was observed, ‘Location of situs of the sale in sales tax legislation of the State would have no bearing on the chargeability of tax on sales in the course of inter-State sale or commerce since they fall outside the legislative competence of the State Legislatures and will have to be excluded while assessing the tax liability under the State legislation. The same is true of sales which are outside the State and sales in the course of import and export. The question whether a sale is an outside sale or sale inside the State or whether it is a sale in the course of import or export will have to be determined in accordance with the principles contained in sections 4 and 5 of CST Act and the State Legislature while enacting the sales tax legislation for the State cannot make a departure from these principles.

'Inter State sale' or 'sale during export' is not 'intra state sale' - If sale is 'inter state sale' or 'sale during export', it cannot be termed as 'intra state sale'. - State of Karnataka v. B M Ashraf 1997(6) SCALE 425 (SC) = 1997 AIR SCW 4011 = (1997) 107 STC 571 (SC) - reversing the decision in B M Ashraf v. State of Karnataka - (1991) 84 STC 394 (Kar HC DB). Thus, such sale has no 'situs'. [For further discussions on this topic, see discussions on 'Situs of inter state sale'].

Sale to ship which is within territorial waters is ‘local sale’ – One interesting question, which has not yet been finally resolved, is whether the territorial waters belong to respective State Government or to Central Government. If the territorial waters belong to State Government, sale from coastal town to a ship in territorial waters will be ‘sale within the State’. If territorial waters belong to Union, the sale will have to be held as ‘inter State sale’.

High Courts have taken a consistent view that sale within territorial waters is ‘Sale within the State’. In other words, the territorial waters belong to respective coastal State Government. This view seems to be a practical view also, as considering these areas under Union Government will cause tremendous administrative problems like police, maintenance of law and order, control over fishing, taxation etc. In fact, the territorial waters is not declared as ‘Union Territory’ and hence really cannot be under Union Government as per Article 1(3) of Constitution of India.

Situs of sale in Inter State Sale or during export

In 20th Century Finance Corporation Ltd. v. State of Maharashtra 2000(5) SCALE 13 = 2000 AIR SCW 2514 = (2000) 6 SCC 12 = 119 STC 182 = AIR 2000 SC 2436 (SC 5 member bench - 3 v. 2 order), it was held that if situs of sale has not been fixed or covered by any legal fiction, the location of sale would be place where property in goods passes. - . - Mere location or delivery of goods would not be situs of sale. - . - Location or delivery of goods within the State would not be the situs of sale. - . - Situs of sale would be where the property in goods passes, namely where the contract is entered into. [Judgment in case of 'lease of property' but may be held applicable to other sales also].

This decision of 5 member Supreme Court bench is that 'situs' of sale is where contract is executed and not where goods are located for use, is likely to create some difficulties in case of transactions like leasing, hire purchase etc., as leasing companies can shift their offices to neighbouring states to avoid sales tax. In fact, Supreme Court has noted this possibility, but has held that Parliament has ample powers to plug the loophole. [Now, this loophole has been plugged by amending CST Act w.e.f. 11-5-2002 by including ‘lease’ in definition of ‘sale’].

In State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench), it was held that situs may be fixed by appropriate State legislation or by judge made law, but none of the two can artificially appoint a situs of sale so as to create territorial nexus attracting Stale sales tax or inter state sales tax, in breach of section 3 of CST Act. No State legislature can fix the situs of sale within the State or artificially define the completion of sale in such a way as to convert an inter-state sale into an intra-state sale or to create a territorial nexus to tax an inter-state sale, unless permitted by appropriate central legislation.

Goods under CST Act

Sales tax liability is on ‘goods’. Section 2(d) of CST Act defines that ‘goods’ includes all materials, articles, commodities and all kinds of movable property, but does not include newspapers, actionable claims, stocks, shares and securities. Following should be noted.

Goods must be ‘movable’ - Goods includes all movable property. It includes * steam - Nizam Sugar Factory Ltd. v. CST - (1957) 8 STC 61 (AP HC) * Electrical energy - CST v. MP Electricity Board - (1970) 25 STC 188 (SC) * animals and bird in captivity - K J Abraham v. Asst. STO - (1960) 11 STC 291 (Ker HC) * Goods include uprooted trees, second hand goods, rejected goods, worn out goods etc.

NO TAX ON IMMOVABLE PROPERTY - Section 3(14) of General Clauses Act define that ‘Immovable property’ includes land, benefits arising out of land and things attached to the earth or permanently fastened to anything that is attached to the earth. However, as per section 2(7) of Sale of Goods Act, goods include standing crop, grass and things attached to and forming part of the land, which is agreed to be severed before sale or under contract of sale.

No tax on Newspapers though they are ‘goods’ - Newspapers are in fact ‘goods’, but are specifically excluded in view of entry No. 92A of List I to Seventh Schedule to Constitution of India (Union List) where newspapers are specifically excluded from purview of tax on inter-State sales of goods. It may also be noted that entry 54 of List II (State List) authorises States to levy tax on sale of goods other than newspapers only. Weeklies and magazines like ‘Illustrated Weekly of India’ and ‘Eastern Economist’ have been held as ‘newspaper’. - A H Wheeler and Co. (P.) Ltd. v. State of Bihar - (1960) 11 STC 18 (Bihar Board).

Supreme Court in Printers (Mysore) Ltd. v. Asst. CTO - JT 1994 (1) SC 692 = (1994) 93 STC 95 (SC) = (1994) 9 MTJ 444 (SC), has held that though newspapers are not liable to CST, they can purchase their raw materials at concessional rate on submission of C form.

Goods of intangible character are ‘goods’ - Goods of incorporal or intangible character like patents, lottery ticket, advance licenses, copyright can be liable to sales tax.

Can there be inter-state sale of intangible goods ? – Goods must move physically from one State to another to constitute an inter-state sale. In case of sale of advance license/DEPB, the license/pass book can physically move from one State to another. However, in case of certain intangible goods like patent, copyright and trade mark, there is no physical movement of goods from one State to another. These goods cannot be said to be located at a particular place. In view of this, it seems that sale is concluded at a place where agreement of sale is executed, as property in ‘goods’ can be said to have passed in that State.

Plant & machinery assembled at site is not ‘goods’ - Plant and Machinery or structure assembled and erected at site cannot be treated as 'goods' for the purpose of levy of sales tax, if it is not marketable and movable. Following case law would be relevant, even if it is under Central Excise.

'Sale’ under CST Act

Section 2(g) (as amended in w.e.f. 11-5-2002) define that sale with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or for deferred payment or for any other valuable consideration, and includes (i) Transfer other that by contract (compulsory transfer) (ii) Goods involved in Works contract (iii) Right to use goods (like leasing) (iv) Transfer among members of unincorporated association (v) Supply of food articles (vi) Hire purchase; but does not include a mortgage or hypothecation or a charge or pledge on goods.

AMENDMENT ON 11 MAY 2002 - Definition of ‘sale or purchase of goods’ in Constitution was amended vice Article 366(29A) w.e.f. 2-3-1983. However, definition of ‘sale’ under CST Act was not amended till May 2002. Hence, till 11-5-2002, there was no CST on inter state transactions of goods involved in works contract, leasing, transfer among members of unincorporated association or sale of food articles.

Essentials of valid sale – As per aforesaid definition, essential requirements of sale are (a) there must be transfer of goods (b) general property in the goods should be transferred to buyer from seller (c) consideration i.e. price must be paid or agreed to be paid. It may be cash, deferred payment or any other valuable consideration (d) ‘Sale’ includes hire purchase, goods involved in works contract, lease or sale of food articles.

Transfer of ‘Property’ essential - There is no sale unless there is ‘transfer of property’. ‘Property’ means a thing over which a person has a domain. This implies transfer of ownership. Mere ‘agreement to sale’ does not mean sale as there is no transfer of property. ‘Property’ is different from ‘possession’. Property in goods can pass even before handing over possession. Conversely, transfer of possession does not necessarily mean that it is a transfer of property.

No sales tax on mere ‘agreement to sale’ - Though 'sale' includes ‘agreement to sale’, it is only for purposes of deciding whether a sale is an 'Inter State Sale' or 'sale during export or import'. However, for purpose of sales tax liability, 'sale' only means 'concluded sale'. In Tata Iron and Steel Co. (TISCO) v. S R Sarkar - (1960) 11 STC 655 (SC) = AIR 1961 SC 65 = (1961) 1 SCR 379, it was held that a transaction of sale is subject to tax under CST on the completion of sale, and a mere contract of sale in not a ‘sale’ for purpose of levy of CST.

Transactions which are not ‘sales’

Charge/mortgage/hypothecation/pledge is not ‘sale’ - Definition of ‘sale’ u/s 2(g) specifically state that ‘sale’ shall not include a mortgage or hypothecation or a charge or pledge of goods.

In mortgage, immovable property is transferred for securing payment or performance of a promise. Pledge is bailment of goods as security for payment of a debt or performance of a promise. (Thus, mortgage is of immovable property while pledge is of goods). In mortgage, the possession of immovable property may or may not be handed over. In pledge, possession of goods is handed over by owner to person making the advances. Hypothecation means a pledge without immediate possession of goods. In hypothecation, goods remain in possession of owner and he can deal with goods in normal course. However, person making advance has right to have possession if advances are not repaid in stipulated time. Banks normally make advances on the basis of hypothecation of stock of raw material, work in process, consumables and finished goods. The borrower is owner of these goods and can deal with them in normal course of business. This is termed as 'floating charge'. Bank can take the possession of the hypothecated goods (raw material, WIP, finished goods, consumables etc.) if borrower fails to make payment of borrowed money when due.

Job Work/processing - Here, the owner sends the goods for some job work (like machining, cutting, heat treatment, welding etc.) or processing (like bleaching, painting etc.). Goods are returned to owner after such job work/processing. Property in goods remains with the person supplying material. Thus, this is contract for labour or work and not a contract of sale and there is no CST liability. This is so even if the job worker uses some material while doing the job work or processing, as materials added by job worker are affixed or blended with the material of the owner who sent the goods and hence these vest in the owner by accession and not under any contract of sale. - - Note that mere job work/processing is not ‘works contract’. Even if it is held as works contract, there is no ‘transfer of property in goods involved in works contract’ in job work/processing. Hence, CST is not payable even after amendment to definition of ‘sale’ w.e.f. 11-5-2002.

Consignment/depot transfer/branch transfer - Goods are despatched to Consignment Agent/branch/depot by Principal. Goods remain property of the Principal. Agent sells goods on behalf of Principal. Consignment Agent collects sale proceeds and remits the same to Principal.

Transfer of goods from one branch to another cannot be termed as ‘sale’ as a sale can be only from one person to another person. In case of branches, they are only one legal entity. This would be so even if accounting entries resembling sales are made and they are separately registered under Sales Tax Act. - KCP Ltd. v. State of AP - (1993) 88 STC 374 (AP HC DB) - same view in UP State Cement Corporation Ltd. v. CST - (1979) 43 STC 476 (All HC) * State of Orissa v. Orissa Road Transport Co. Ltd. - (1983) 53 STC 329 (Ori HC DB).

Barter or exchange is not a ‘sale’ - As per definition of CST Act, transfer of goods can be for ‘any other valuable consideration’ also. In Devi Dass Gopal Krishnan v. State of Punjab (1967) 20 STC 430 (SC), it was held that in definition of ‘sale’, ‘valuable consideration’ takes colour from preceding expression ‘cash or deferred payment’. It is consistent legislative practice to treat the expression as ‘monetary consideration’. If so, it can only mean some other monetary payment in nature of cash or deferred payment’.

Exchange of goods is a ‘barter’ and not a ‘sale’ and hence not taxable. – Steel Authority of India v. ACCT ILR 1996 Karn 1136.

FREE GIFT IS NOT ‘SALE’ - It is obvious that free gifts given by Company cannot be taxed as there is no ‘consideration’.

Deemed sales under CST Act

There are some transactions which are defined as ‘sales’ under CST Act. Strictly, they may not amount to ‘sales’ as per Sale of Goods Act. However, these are ‘deemed sales’. Definition of ‘tax on sale or purchase of goods’ as contained in Article 366(29A) does make provision of taxing these ‘deemed sales’. These include compulsory sale, hire purchase, lease, transfer of right to use goods (hire), goods involved in works contract, sale of food articles and sale among members of unincorporated bodies. These are discussed below.

Compulsory sale is taxable - As per section 2(g)(i) [As amended on 11-5-2002], transfer of property, otherwise than in pursuance of contract, for cash, deferred payment or valuation consideration is ‘sale’. Thus, any transfer of property for valuation consideration will be taxable, even if there is no contract.

Goods involved in works contract - As per section 2(g)(ii) [as amended on 11-5-2002)], ‘sale’ includes a transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract is taxable. Thus, Central Sales Tax can be levied on ‘goods involved in works contract’.

Hire Purchase is ‘Sale’ - As per section 2(g)(iii), ‘sale’ includes a delivery of goods on hire-purchase or any system of payment by instalments. [It was ‘sale’ under CST Act even prior to amendment of definition of ‘sale’ w.e.f. 11-5-2002].

In 'hire purchase', possession of goods is delivered by owner to hirer on condition of payment of agreed number of instalments. Hirer has option to purchase the goods as per terms of agreement. (usually, a nominal payment is provided at the end of hire period). Property in goods is passed on to the hirer after all terms of agreement are fulfilled. If the hirer does not fulfil the conditions of hire-purchase (e.g. does not pay instalments on due dates) possession of goods can be taken back by owner giving goods on hire purchase. Article 366(29A) of Constitution has been amended in 1983 to specifically include `hire purchase’ in definition of ‘sale’. Definition of 'sale' as per CST Act also states that 'sales' include 'hire purchase'. Thus, hire purchase is ‘sale’, even prior to 11-5-2002.

Transfer of right to use (like leasing and hire) - As per section 2(g)(iv) as amended w.e.f. 11th May 2002, ‘sale’ includes a transfer of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. -- In common parlance, this transaction is termed as ‘leasing’ or ‘hire’.

The transaction is taxable only when exclusive possession of goods and right to enjoy them freely for contracted period is given.

Article 366 (29A) of Constitution has been amended in 1983 to include ‘leasing’ in definition of ‘sale’. Many State Governments had amended State Sales Tax laws to cover leasing for taxation. However, CST Act was not amended, and hence, there was no CST on leasing or hire upto 11-5-2002.

In lease, property in goods remains with owner and he only ‘leases’ the goods for use to another for certain charges. After the lease period is over, the owner can take back the goods.

PROVIDING TELEPHONE APPARATUS AND OTHER APPLIANCES TO SUBSCRIBER IS ‘TRANSFER OF RIGHT TO USE THE GOODS’? – In State of Uttar Pradesh v. UOI 2003(130) STC 1 (SC), it has been held that supplying instrument./apparatus and other appliances in the premises of a subscriber, which are connected with a telephone line to area exchange is ‘transfer of right to use the goods’ and hence is taxable. - - After the judgment, State Governments have started levying sales tax on telephone rentals charged by telecom department to consumer. Tamilnadu Government has imposed tax even on mobile telephones.

In case of land lines, the telephone department gives telephone instrument on exclusive lease to subscriber. The cable connecting telephone instrument to the telephone pole can also be said to be exclusively leased to the subscriber. However, further cabling and the area exchange through which telephone calls are further transmitted are not for exclusive use of the subscriber. - - It should be noted that what is taxable is ‘transfer of right to use’ and not ‘right to use’.

‘Transfer’ must necessarily be accompanied by the hand from which and the hand to which something is to be transferred, that is to say, ‘transfer’ must carry with it ‘from’ and ‘to’. If either of them is wanting, there can be no transfer. - Deepchand Gulabchand Naik v. MPSRTC AIR 1977 MP 42 = 1971 MPLJ 667. The word ‘transfer’ as used in ‘Transfer of Property’, ‘Transfer of Shares’ indicates that after such ‘transfer’, the transferor loses possession of or right over the goods transferred (may be temporarily or permanently) and transferor gets exclusive rights over the article or thing transferred. -- Thus, ‘transfer’ implies some exclusiveness to the transferee. For example, if a person boards a bus, can it be said that the bus owner has ‘transferred’ right to use bus to the passenger? The bus owner has only ‘allowed’ the use of bus to the passenger on non-exclusive basis. Similarly, the telephone department is only allowing use of the equipment in telephone exchange to subscriber on non-exclusive basis.

In case of mobile phone, even the equipment belongs to the subscriber himself and the mobile telephone company has not transferred right to use of that equipment or any other goods to the customer.

In view of this, in case of land line, at the most what can be charged to tax is the rental attributable to telephone equipment and cable from the telephone to the pole and not for full rental charges. In case of mobile equipment, there is really no ‘transfer of right to use goods’ to customer.

As discussed in following paragraph regarding taxability of ‘Hire of goods’, it has been consistently held that hire is taxable only when exclusive possession is transferred to the hirer. This is correctly so, as if the owner keeps the goods in his possession or control, there is no ‘transfer of right to use’, but only ‘allowing use’

In view of this, in the humble opinion of author, judgment of Supreme Court in respect of sales tax on telephone rental charges appears to need review.

LEASE TAX ONLY ON ‘GOODS’ AND NOT ON IMMOVABLE PROPERTY - Lease is taxable only if it is of movable property. Tax cannot be levied if plant and machinery fixed in building is leased, as it is immovable property and not ‘goods’. – Karthik Engineering Works v. State of Karnataka (2000) 119 STC 88 (Karn HC DB). - - This is correct, as section 2(g)(iv) uses the words ‘goods’ and hence only lease of movable property is taxable.

Sale to member of unincorporated association or body of persons - As per section 2g(v) of CST Act (as amended w.e.f. 11-5-2002), ‘sale’ includes supply of goods by an unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

In ‘sale’ there must be transfer of property from one person to another. There cannot be a sale or supply of goods by seller to himself. Thus, there is no ‘sale’ when goods are sold to members of a club or a hostel run by members themselves. Now, these transactions can be taxed w.e.f. 11-5-2002. Of course, such transactions will be mostly local and rarely on inter-State basis.

In fact, Constitution was amended in 1983 itself to permit such levy. State governments had already introduced such tax. In Cosmopolitan Club v. TNTST (2002) 127 STC 475 (Mad HC DB), it was held that supply of food to members is sale, whether the club is incorporated or un-incorporated.

Sale of food Articles - As per section 2(g)(vi), ‘sale’ include supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply or service is for cash, deferred payment or other valuable consideration.

Though inter state sale of food articles is taxable w.e.f. 11-5-2002, normally, such sale may be rare in ‘inter state sale’ as the transaction will be normally complete within the State itself. [Some problems may arise e.g. food served in aeroplane or train where food may be obtained in one State but may be ‘served’ in other State].

SALE IN CANTEEN TO WORKMEN IS ALSO TAXABLE – In Delta Jute Industries v. CTO (2001) 121 STC 186 (WBTT), it was held that supply of food to workman at a price is a ‘sale’ and is taxable. - same view in - same view in Tata Iron v. State of Orissa (1975) 35 STC 195 (Ori) * Tata Iron v. State of Bihar (1985) 58 STC 302 (Pat). - - In a contrary decision, in CST v. Hukumchand Mills (1988) 68 STC 378 (MP) – followed in Shri Dayabhai v. State of MP (1999) 116 STC 500 (MP HC) - it was held that canteen run by contractor in factory as required under Factories Act is a service to workers. It is not ‘sale’ and there is no liability to sales tax.

Person liable to pay CST

Section 8(1) specifies that every dealer who in the course of inter State trade or commerce sales the goods shall be liable to pay tax under the Act. Thus, liability is on the dealer who 'sells' the goods.

Dealer - Section 2(b) defines that “dealer” means any person who carries on (whether regularly or otherwise) the business of buying, selling, supplying or distribution of goods, directly or indirectly, for cash, or for deferred payment, or for valuable consideration, and includes ( a) a local authority, a body corporate, a company, any cooperative society, club, firm, Hindu undivided family or other association of persons which carries on such business (b) a factor, broker, commission agent, del credere agent, or any other mercantile agent, by whatever name called, and whether the same description as herein before mentioned or not, who carries on the business of buying, selling, supplying or distribution, goods belonging to any principal whether disclosed or not and (c) an auctioneer who carries on the business of selling or auctioning goods belonging to any principal, whether disclosed or not and whether the offer of the intending purchaser is accepted by him or by the principal or a nominee of principal.

There are two explanations to the definition of ‘Dealer’. Explanation 1 states that a mercantile agent, agent handling goods, agent for collection of payment and every branch or officer in a State of a firm of Company which is outside the State is also a ‘dealer’. Explanation 2 states that ‘Government’ is also a dealer except in case of sale of old and discarded stores or waste.

Government as dealer - Explanation 2 to section 2(b) clarifies that Government, which, whether or not in the course of business; buys, sells, supplies or distributes; goods, directly or otherwise, for cash or for deferred payment or for commission, remuneration or other valuable consideration shall be a dealer.

The exception is sale, supply or distribution of un-serviceable or old stores or old materials or waste products or obsolete or discarded machinery or parts or accessories. This exception is made as all Government departments have to make such sale of old goods. However, this exception is only to Government and not for private enterprises. Public Sector Undertakings (PSU i.e. Government Companies) are not ‘Government’ and hence are not exempted under this clause.

GOVERNMENT CAN BE DEALER IF SPECIFICALLY INCLUDED IN THE DEFINITION OF ‘DEALER’ – In State of Uttar Pradesh v. UOI 2003(130) STC 1 (SC judgment dated 4-2-2003), the definition of dealer was inclusive definition and it read ‘Dealer includes Government which (whether in the course of business or otherwise) undertakes buying, selling, supplying or distribution of goods. - - In view of this definition, it was held that Department of Telecommunications (DOT) which is supplying telephone is a ‘dealer’. ‘Carrying on business’ is not required. [in view of specific definition]

Ancillary, incidental and casual business is also covered - It has been held that any activity which is incidental or ancillary to the main business also constitutes business and thereby the person engaged in such business becomes a dealer - Member, Board of Revenue v. Controller of Stores AIR 1989 SC 1468 = (1989) 74 STC 5 (SC). In State of Orissa v. Orissa Road Transport Co. Ltd. 1997 AIR SCW 3489 = 107 STC 204 = (1997) 5 SCALE 589 = AIR 1997 SC 3409 (SC 3 member), it was held that occasional sale of disposable un-serviceable spare parts at yearly interval by a transport company would make the organisation 'dealer'. [Decision on basis of definition under Orissa Act, but relevant for CST].

Club as a dealer – A members’ club whether incorporated or unincorporated is a ‘dealer’ and will require registration. – Cosmopolitan Club v. State of Tamil Nadu 1999(115) STC 183 (TNTST) * All India Skin & Hides Tanners v. CTO (1999( 115) STC 388 (TNTST). [Article 366(29A)(e) of Constitution of India specifically states that supply of goods by unincorporated body to its members will be ‘sale’].

Collection of tax only by registered dealer - A 'register dealer' means a dealer who is registered under CST Act. [section 2(f)]. Section 9A specifies that only a registered dealer can collect taxes in respect of sales made by him in Inter State Trade. He can collect taxes only according to CST Act and rules. Further, a person who is not a registered dealer cannot collect any amount representing as CST.

‘Business’ under CST

Definition of ‘Dealer’ specifies liability on any ‘person’ who carries on ‘business’.

BUSINESS - Section 2(aa) of CST Act defines that ‘business’ includes (i) any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit and whether or not any gain or profit accrues from such trade, commerce, manufacture, adventure or concern and (ii) any transaction in connection with or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern.

Following points emerge from this definition :

Profit motive is immaterial.Business normally implies something done on regular basis. However, since business includes ‘Adventure’, occasional transactions may also be covered. Adventure implies some ‘speculation’.

Incidental or ancillary business is also covered e.g. sale of used car, sale of scrap, sale of old machinery, sale of old furniture etc. is taxable, though normally the dealer may not be in business of selling cars, furniture or machinery e.g. Central Excise Authorities selling the goods confiscated by them are liable to pay sales tax.

Any transaction in connection with or incidental or ancillary to, the main business would constitute ‘business’, even though the transaction by itself may not have the characteristics of business as understood in ordinary parlance - State of Tamilnadu v. Binny Ltd. - (1982) 49 STC 17 (SC). (in other words, ingredients of frequency, continuity etc. would not be necessary).

State relevant to a dealer

Normally, State from which movement of goods commences is entitled to collect CST.

Appropriate State - As per section 2(a) of CST Act, ‘Appropriate State’ means (a) in relation to dealer who has one or more places of business in the same State, that State and (b) in relation to a dealer who has places of business situated in different States, every such State with respect to place or places of business situated within its territory. Thus, a dealer has to register only with sales tax authorities where he has ‘place of business’.

Place of Business - Section 2(dd) of CST Act defines that ‘Place of Business’ includes (i) Place of business of agent where dealer carries on business through an agent (ii) Warehouse, godown or other place where a dealer stores his goods (iii) place where a dealer keeps his books of account. This is an ‘inclusive definition’ i.e. other places of business e.g. where dealer has a shop or factory is obviously covered. A dealer can have more than one ‘places of business’ within one State or even within one City.

If a dealer has more that one place of business in one State, he has to make a single application in respect of all the places. One of the places should be specified as 'principal place of business'. This place should be same as declared by him under general tax law of the State.

If a dealer has ‘places of business’ in different States, he will have to register in each such State.

State authorised to collect tax - According to section 9(1) of CST Act, the CST payable shall be collected in the State from which the movement of goods commenced. This is in case of section 3(a) i.e. sale occasions movement of goods or under section 3(b) i.e. sale effected by transfer of documents. In case of sale by transfer of documents, subsequent sales are exempt from tax if buyer is a registered dealer.

STATE FROM WHERE MOVEMENT OF GOODS STARTS - Section 8(1) provides that every dealer who sells goods in Inter State sale is liable to pay CST. Section 9(1) provides that under CST Act, tax will be levied by Government of India, but tax so levied will be collected by State Government from where the movement of goods commenced. Thus, if goods are sold by a dealer from Andhra Pradesh to a purchaser in Kerala and goods are despatched from Andhra Pradesh, tax will be collected in State of Andhra Pradesh. Tax collected by Andhra Pradesh State is retained by Andhra Pradesh State itself. Dealer in Andhra Pradesh will be registered under CST Act with Sales Tax authorities in Andhra Pradesh and rules and procedures in respect of return, assessment, penalty, appeal, recovery etc. will be as per General Sales Tax Law of Andhra Pradesh.

Liability in case of subsequent sale - When the goods are sold by transfer of documents during the movement of goods from one State to another, there is no sales tax liability if (a) sale is by transfer of documents and (b) required declarations are given by seller and buyer. If such declarations are not received or if sale is not by transfer of documents, CST is payable in the State in which dealer is situated. The CST is payable by the subsequent seller. Liability arises even if such subsequent dealer is not a registered dealer.

Goods involved in Works Contract

‘Goods involved in works contract’ have been included in definition of ‘sale’ w.e.f. 11-5-2002. Note that the CST is on ‘goods involved in works contract’ and not on ‘works contract’ as such. This distinction is vital in deciding aspects of valuation and also whether a particular transaction is inter state sale.

WHAT IS WORKS CONTRACT - Some contracts are for contracts for labour, work or service and not for sale of goods, though goods are used in executing the contract for labour, work or service e.g. when a contractor constructs a building, the buyer pays for cost of building which includes cost of building material, labour and other services offered by the Contractor. Property in building is passed on to buyer and there is no contract for supply of building material as such.

An air conditioner manufacturer may undertake a ‘works contract’ for designing, fitting and commissioning of air conditioning equipment. This is contract for sale of labour and material and not contract of sale. Property in air conditioning equipment passes as an incidental to the works

contract. Here, there is no sale of ‘goods’. It is a ‘works contract’ and not liable to CST. – State of Madras v. Voltas Ltd. (1963) 14 STC 446 and 861 (Mad HC) – also indirectly approved in Batliboi v. STO (2000) 119 STC 583 (Guj HC DB).

Laying of pipe line is yet another example of works contract, where passing of property in the pipe is incidental to works contract.

It is difficult to establish whether a particular contract is ‘contract for work’ or ‘contract of sale’ and rigid and inflexible fast tests cannot be laid down. It depends on main object of the parties, circumstances and custom of trade. Generally, a contract of sale is a contract whose main object is the transfer of the property in, and delivery and possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for labour and work. The aspects like ownership of material, value of skill and labour compared to value of material can be considered, but these are not conclusive. - Halsbury’s Laws of England - quoted with approval in State of Gujarat v. Variety Body Builders - AIR 1976 SC 2108 = (1976) 38 STC 176 (SC). – same view in State of Himachal Pradesh v. Associated Hotels - (1972) 29 STC 474 (SC) = AIR 1972 SC 1131 = 1972(2) SCR 937 = (1972) 1 SCC 472

In Vanguard Rolling Shutters v. CST - (1977) 39 STC 372 (SC) = AIR 1977 SC 1505, it was observed that it is difficult to lay down any rule of universal application to decide whether a contract is a works contract or contract for sale of goods. If the contract is primarily for supply of materials at prices agreed and the work or service is incidental to the execution of contract, it will be contract for sale. On the other hand, where contract is primarily a contract of work and labour and materials are supplied in execution of such contract, it is a works contract.

In Hindustan Aeronautics Ltd. v. State of Orissa (1984) 55 STC 327 (SC) = (1984) 1 SCC 706 = 1983(2) SCALE 1090 = AIR 1984 SC 744 (SC 3 members), HAL imported materials and components on behalf of Government of India and manufactured aircrafts on behalf of Government of India. The goods belonged to Government of India but were entrusted to HAL for manufacture of aircraft to be delivered to Air Force. It was held that it is a works contract. It was observed that in contract for work, person producing has no 'property' in the thing produced as a whole, even if part or even whole of material used by him may have been his property. In contract of sale, the thing produced as a whole has individual existence as sole property of the party who produces it some time before delivery and the property therein passes only under the contract relating thereto to the other party for a price. In State of Gujarat v. Kailash Engineering Co. (1967) 19 STC 13 (SC) = AIR 1976 SC 2108, it was held that if unfinished goods are held as property of buyer, it is a works contract.

In UOI v. Central India Machinery Mfg Co. Ltd. (CIMMCO) AIR 1977 SC 1537 = (1977) 40 STC 246 (SC), it was held that if property in final article passes only after it is completed, the contract will be of sale, even if raw material is purchased on behalf of buyer.

In State of Tamilnadu v. Anandam Viswanathan – (1989) 1 SCC 613 = (1989) 73 STC 1 (SC), it was observed that nature of contract can be found out only when intentions of parties are found out. The fact that in the execution of works contract some materials are used, and the property in the goods so used, passes to other party, the contractor undertaking the work will not necessarily be deemed, on that account, to sell the materials. - - Primary difference between a contract of work or service and a contract for sale is that in the former, there is in the person performing or rendering service, no property in the thing produced as a whole, notwithstanding that a part or even the whole of the material used by him may have been his property. Where the finished product supplied to a particular customer is not a commercial commodity in the sense that it cannot be sold in the market to any other person, the transaction is only a works contract.

In Hindustan Shipyard Ltd. v. State of Andhra Pradesh 2000 AIR SCW 2582 =(2000) 6 SCC 579 = 119 STC 533 = 2000(5) SCALE 216, after reviewing entire case law, following principles were evolved - (1) It is difficult to lay down any inflexible rule (2) Transfer of property of goods for a price is the linchpin of definition of sale. Main object of parties has to be found out. Substance of the contract and not form is to be looked into. (3) If the thing to be delivered has individual existence before the delivery as sole property of the party who is to deliver it, it is a sale. (4) If bulk of material used belongs to the manufacturer who sells the end product, it is strong pointer that the contract is for sale of goods and not of work and labour. However, the test is not decisive. Relative importance of material qua work is important.

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.

‘Works Contract’ was one of the ways of avoiding sales tax. Hence, Constitution was amended on 2nd February, 1983 (46th amendment). Clause 29A was added to Article 366 to cover ‘transfer of property in goods involved in execution of works contract’. 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].

MERE SUPPLY OF LABOUR NOT COVERED – Taxable event is transfer of property in goods. In case of contract for supply of labour, there is no transfer of property in goods and hence there is no tax liability. – Ashok Kumar Garg v. UOI (2002) 128 STC 442 (P&H HC DB) * Rajiv Gumber v. S. (2002) 128 STC 494 (P&H HC DB).

Contractor need not be owner if he sales flat before construction – The contractor need not be owner of property. He will be liable even if he never had absolute ownership of the flat. – Mittal Investment Corporation v. ACCT (2001) 121 STC 3 (Karn HC DB). The judgment was modified in Mittal Investment Corporation v. ACCT (2001) 121 STC 14 (Karn HC DB) to the extent that it was held that the contractor is not liable if he enters into agreement with buyer after construction of flat, but will be liable if he enters into contract before construction of flat. [Decision as per Karnataka Sales Tax Act, but principle may apply in other cases also.]

Value liable for Works Contract Tax – Some important case law is discussed here.

BUILDERS ASSOCIATION OF INDIA v. UOI - This is a landmark judgment of Supreme Court on ‘works contract’. (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 ( 5 member Constitution bench). The background of this case is that after amendment to Constitution in 1983, various State Governments imposed levy on works contract. The tax was levied by some State Governments on full value of contract which included the material cost and other costs like labour, supply of services etc. However, in the judgment, Hon. Supreme Court held that the power of States to levy tax on works contract is subject to limitation of Article 286 i.e. tax cannot be levied by State on (a) Outside the State (b) during import/export. (c) Restrictions placed on ‘declared goods’ are applicable even while levying tax on works contract. Further, tax cannot be imposed on full value of contract. The tax is on ‘transfer of property in goods involved in execution of works contract.’ Thus, tax on works contract can be levied only on ‘value of goods involved’ and not on whole value of works contract.

GANNON DUNKERLEY AND CO. v. STATE OF RAJASTHAN - This is also an important judgment on ‘Works Contract' (1993) 66 Taxman 229 = (1993) 10 CLA 56 (SC) = 1992 (3) SCALE 173 = 1993 AIR SCW 2621 = (1993) 1 SCC 364 = (1993) 88 STC 204 (SC - 5 member bench judgment)]. Here, it was held that taxable event is the transfer of property in the goods involved in the execution of a works contract. The said transfer of property takes place when goods are incorporated in the works. Hence, value of goods at the time of incorporation in the works can constitute measure for levy of tax. However, cost of incorporation of the goods in works contract cannot be made part of measure for the levy of tax. It was held that value of goods involved in works contract would have to be considered for taxation on works contract. Charges for labour and services have to be deducted from total value of works contract. Moreover, tax cannot be levied on goods which are not taxable under sections 3, 4 and 5 of CST and goods covered under sections 14 and 15 of CST. If contractor is not able to give detailed break up, legislature can prescribe scales for deductions permissible on account of cost of labour and services for various types of works contract. It is permissible to have a uniform rate for works contract. This rate may be different from the rates applicable to individual goods.

The judgment in this case was subsequently followed in Builders’ Association of India v. State of Karnataka - (1993) 88 STC 248 = AIR 1993 SC 991 = (1993) 1 SCC 409 = 1993 AIR SCW 152 (SC - 5 member bench).

In Daelim Industrial Co. v. State of Assam (2003) 130) STC 53 (Gau HC), it was held that in case of works contract, tax is payable only of value of goods and not on cost of design and engineering.

STATE OF KERALA V. BUILDERS ASSOCIATION - In State of Kerala v. Builders Association of India - 1996 (8) SCALE 730 = (1997) 104 STC 134 = (1997) 2 SCC 183 = AIR 1997 SC 3640 = 1997 AIR SCW 977 (SC), the position was that a convenient, hassle-free and simple method, which was 'rough and ready method' was evolved by State Government for collection of sales tax on Works Contract. This was optional to assessee. It was held that legislature can evolve such alternate, simplified and hassle-free methods of assessment, making it optional to assessee. - . - In the field of taxation, legislation must be allowed greater 'play in joints'. Allowance must be made for 'trial and error' by the legislature. - - In Mycon Construction v. State of Karnataka 2002 AIR SCW 2156 = 127 STC 105 (SC), it was held that a simplified composition scheme instead of regular assessment, can be evolved, if it is on optional basis. Validity of such provision has been upheld.

OTHER JUDGMENTS - In Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC), it was observed that State Legislature can tax all the goods involved in works contract at a uniform rate which may be different from the rates applicable to individual goods which are involved in execution of works contract.

Government can make a provision allowing contractors option to opt for composition by paying a sum based on total consideration of contract. - Mytcon Construction v. State of Karnataka (1998) 111 STC 322 (Karn HC).

ROYALTY PAYABLE CAN BE INCLUDED FOR PURPOSE OF WORKS CONTRACT TAX – If contractor has to pay royalty and property gets transferred to him, it can be included for purpose of works contract tax. – Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC) – followed in B Seenaiah v. CTO (2001) 124 STC 248 (AP HC DB). However, in ACTO v. R K Constructions (2001) 124 STC 701 (Raj HC), it was held that if material is supplied by Government to contractor for use in Government contract, there is no ‘transfer of property in goods’ to contractor and no sales tax is leviable, even if Government had collected royalty.

SALE PRICE FOR PURPOSE OF CST – So far, no specific provision has been made in CST and hence ‘sale price’ will have to be determined on basis of definition of ‘sale price’ as contained in section 2(h) of CST Act. As per this definition, freight or delivery or the cost of installation is not includible when separately charged. Thus, value of goods involved will have to be calculated excluding these charges.

‘C’ form can be supplied/ received for purchases / sales for works contract - Many High Courts have held that ‘C’ form can be issued for purchase of goods which are used in works contract. The dealer is entitled to registration and he can receive sales tax forms in respect of his sales. See the discussions under ‘C Form’ in a later chapter. These judgments pertain to period prior to 11-5-2002.

After amendment of definition of ‘sale’ w.e.f. 11-5-2002, now C form can certainly be issued as ‘works contract’ has been specifically included in definition of ‘sale’.

CST on works contract - Central Sales Tax will be payable on goods involved in works contract, if goods move from one State to another on account of such works contract from 11th May 2002 onwards.

WORKS CONTRACT OF MOVABLE PROPERTY - There can certainly be inter State works contract in case of movable property e.g. printing contracts. In fact, Central sales tax can be levied on any goods involved in works contract in case of movable property.

WORKS CONTRACT IN CASE OF IMMOVABLE PROPERTY - One interesting question that is likely to arise is whether there can be ‘goods involved in works contract’ if finally the article becomes immovable property in other State. For example, if a dealer undertakes supply and erection of machinery in other State, whether it will be a ‘inter State works contract’. In the opinion of author, it will be held so, as the movement of goods from one State to another certainly occasions on account of the works contract. - - It must be remembered that in case of works contract, the sales tax is on ‘goods involved in the execution of contract’ whether the property passes as goods or in some other form. There is no CST on ‘works contract’ as such. Thus, CST on works contract is really only on goods involved, which certainly move from one State to another.

It may be noted that a ‘sale’ can be inter-State even if property in goods is transferred in other State.

Quantum of CST Payable

Rate of Central Sales Tax

CST rate w.e.f. 1-4-2007 in case of sale to registered and unregistered dealer - Position w.e.f. 1-4-2007 is as follows –

In case where local sales tax rate is 4%, CST applicable in case of sale to unregistered dealer will be only 4% as against 10% as was applicable upto 31-3-2007. In case of sale to registered dealers, the CST rate will be 3%.In case where local sales tax rate is 12.5%, CST applicable in case of sale to unregistered dealer will be 12.5%. This position is same as was applicable upto 31-3-2007. In case of sale to registered dealers, the CST rate will be 3%.In case where local sales tax rate is 1 to 3%, CST applicable in case of sale to unregistered dealer will also be 1 to 3%, as against 10% as was applicable upto 31-3-2007. The rate will be 1% even when sale to unregistered dealer is by transfer of documents. In case of sale to registered dealers, the CST rate will be 1 to 3% as applicable to the goods within the State.In case where local sales tax is Nil, CST applicable in case of sale to unregistered dealer will also be Nil. This position is same as was applicable upto 31-3-2007. In case of sale to registered dealers, the CST rate will be Nil.

Sale to Government will be equivalent to sale to unregistered dealer w.e.f. 1-4-2007

Welcome change – The change is really welcome. In case of goods where State sales tax rate is 4%, if the buyer does not furnish C form, the selling dealer will be liable to pay tax @ 4% instead of 3%. So far, in such cases, he was required to pay CST @ 10%, which was indeed a very heavy penalty. Thus, risks involved in not getting C form from buyer have been considerably reduced.

In view of this, harassment in getting blank C form from department and ‘charges’ payable for getting blank C forms should come down. Of curse, provision of submitting C form on quarterly basis continues. Thus, ‘expenses’ involved in getting blank C forms from department cannot be avoided.

Of course, the tax burden is heavy where local sales tax rate is 12.5%, since in that case, the selling dealer will have to pay CST @ 12.5%, instead of @ 3%, if the buyer fails to furnish C form.

CST rate at a glance

The CST rates at a glance as applicable w.e.f. 1-4-2007 are as follows, in case of both declared goods and other goods –

Sales tax rate for sale within the State CST rate in case of sale to registered dealers

CST rate in case of sale to unregistered dealers

Nil Nil Nil1% 1% 1%2% 2% 2%3% 3% 3%4% 3% 4%8% 3% 8%10% 3% 10%12.5% 3% 12.5%20% 3% 20%

Note – Usually, State Vat rates of 2%, 3%, 8% and 10% do not exist. However, these rates are given only to explain the principle.

State sales tax to be inclusive of additional tax / surcharge / turnover tax - Many State Governments have introduced ‘Additional Sales Tax’, turnover tax or surcharge on tax. It has been held that this additional sales tax is also sales tax for purposes of deciding the rate of duty.

Goods eligible for registration by Dealer

All goods purchased by ‘Registered Dealer’ are not eligible for concessional rate. Only those goods for which he is eligible and which are contained in his Registration Certificate are eligible for concessional rate. Section 8(3) of CST Act indicates the goods which a registered dealer can obtain at concessional rate. Only those items can be incorporated in Registration certificate issued to him. As per this section, goods ( a) for resale, (b) for use in manufacture or processing for sale (c) in telecommunications network (d) in mining (e) in power generation/distribution, or (f) containers and packing materials are only eligible for concessional rate. [The words ‘telecommunications network’ have been inserted w.e.f. May, 2002]

MEANING OF ‘FOR USE’ - ‘For use’ means ‘intended for use’. If the intention of legislature was to limit the exemption only to goods actually used, the phraseology would have been ‘goods used’ or ‘goods actually used’. Thus, when the purchase of goods was with intention to use, the mere fact that some of the material was in fact used for other purposes does not make any difference - State of Haryana v. Dalmia Dadri Cement Ltd. - (1988) 68 STC 173 (SC) = AIR 1988 SC 342. [Thus, bona fide intention to use is enough to avail the concession. Actual use is not essential.]

TAX AT FULL RATE PAYABLE IF WRONG DECLARATION GIVEN - The tax at full rate will be payable on material in respect of which the declaration in form ‘C’ was wrongly given, and not on cost of finished product manufactured out of such material. – Hira Cement v. State of Orissa (1998) 108 STC 619 (Ori HC DB).

Resale - Resale means selling in the same condition in which the goods are purchased. Goods purchased for sale can be obtained by registered dealer at concessional rate. It may be noted that goods sold first time in the State are liable to State sales tax even if tax was paid while purchasing in Inter State transaction. Following example will illustrate the position. Assume that goods are purchased by a registered dealer in Karnataka from a registered dealer in Maharashtra. CST @ 4% was charged by dealer in Maharashtra while effecting the sale. Now, when goods are sold by Karnataka dealer in Karnataka State, the State Sales Tax (i.e. Karnataka State Sales Tax) will be payable by him, as it is the first sale in Karnataka State.

Use in manufacture - Manufacture implies a change but every change is not manufacture. There must be transformation; a new and different article having a distinctive name and character must emerge.

In Union of India v. Delhi Cloth Mills Co. Ltd. AIR 1963 SC 791 = 1963 Suppl (1) SCR 586 = 1977 (1) ELT (J199) (SC) and 1990 (27) ECR 151 SC]; a five member constitution bench of Supreme Court has held the manufacture means bringing into existence a new substance. Manufacture is end result of one or more processes, through which original commodity passes. Thus, manufacture implies a change but every change is not manufacture. A new and different article must emerge having a distinctive name, character or use. - same view in South Bihar Sugar Mills Ltd. v. UOI - AIR 1968 SC 922 = (1968) 3 SCR 21 reproduced in (1978) 2 ELT J336 (SC).* Hindustan Polymers v. CCE - 1989 (43) ELT 165 (SC) = (1989) 4 SCC 323 = AIR 1990 SC 1676 * Gramophone Co of India Ltd. v. CC - 1999 (7) SCALE 205 = 1999 AIR SCW 4501 = JT 1999(9) SC 275 = 1999(114) ELT 770 (SC 3 member bench) * Triveni Engineering v. CCE 2000(5) SCALE 468 = 2000 AIR SCW 3144 = 40 RLT 1= JT 2000(9) SC 38 = 120 ELT 273 (SC).

TRADE PARLANCE IS IMPORTANT - The test to be applied is whether a commodity subject to processing retains its original character and identity or whether the processed commodity is regarded in the trade by those who deal in it, as distinct identity from original commodity. Nature and extent of processing may vary. With each process, the original commodity experiences change. But it is only when the change or series of change take commodity to a point where commercially it is recognised as a new and distinct commodity, then it can be said that new commodity has come into being. The test is whether in the eyes of those dealing in the commodity or in commercial parlance, the processed commodity is regarded as distinct in character and identity from the original commodity - Sterling Foods v. State of Karnataka - 1986 (63) STC 239 = 1986(2) (3 ?) SCC 469 = AIR 1986 SC 1809 = 1986(2) SCALE 106 = 1986 (26) ELT 3 (SC). Similar views in Aditya Mills Ltd. v. UOI (1989) 1 CLA 137 (SC) = (1989) 73 STC 195 = 37 ELT 471 = AIR 1988 SC 2237.

ITEMS ELIGIBLE FOR CONCESSIONAL RATE - Following items will be treated as ‘in manufacture’ of goods (a) Raw materials which form integral part of goods manufactured (b) Fuels and consumables consumed during manufacture (c) Machines, spares, tools, exhaust fan in plant (d) Storage and handling equipment for materials like storage racks, handling trucks (e) Goods required for process directly related to actual production e.g. research, training (f) Computer/Internal telephone system if used for production in offices.

Goods which will not be eligible are (a) Administrative use like office stationery, books (b) Motor cars for office work or transport of employees (c) Coolers, furniture etc. for office (d) Building material like sand, lime, cement, steel etc. required for construction of building even if the building is to be used for installing machinery and plant (e) Goods required for hospital attached to factory even if the hospital is a legal requirement for the factory.

JOB WORK ELIGIBLE - GOODS NEED NOT BE SOLD BY THE MANUFACTURER HIMSELF - It is not necessary that goods are sold by the manufacturer himself. The intention of the provision is to ensure that cost of manufactured or processed goods should not be unduly enhanced by higher taxes. Hence, benefit of concessional rate should be available whether the goods are sold by manufacturer himself or by some one else who got the goods manufactured by the registered dealer - Assessing Authority v. East India Cotton Mfg. Co. - (1981) 48 STC 239 (SC). In this case, goods purchased by assessee under ‘C’ form were used for processing of goods belonging to others on job work basis. The goods, after processing, were sold by third parties. The purchase under ‘C’ form was held valid. - similar view in CTO v. Foreign Import & Export (1994) 95 STC 101 (SC) - also in Bhavnagar Chemical Works v. CST - (1992) 84 STC 432 (Guj HC DB) * State of Tamilnadu v. Photo Centre (1999) 114 STC 55 (Mad HC DB) * Prasad Productions v. State of Tamilnadu (1998) 111 STC 51 (Mad HC DB).

USE FOR AGRICULTURAL PRODUCTION NOT PERMITTED - In Travancore Tea Estate v. State of Kerala (1977) 39 STC 1 (SC) = (1977) 1 SCR 755, it was held that fertiliser used in agricultural process to cultivate tea is not eligible for concession 'for manufacture of tea'. - . - . - Fertiliser used is only for cultivation of tea, which ended with harvest of tea leaves.

ITEMS DECLARED AS ELIGIBLE BY GOVERNMENT CIRCULAR - Central Government, Ministry of Finance has issued circular No. 9(88) ST/57 dated 12-11-1958 giving list of goods eligible for about 60 different industries. The circular clarifies that all the machinery, plant, spare parts and accessories which are directly used in manufacturing, processing, mining and generation and distribution of power may be allowed to be purchased at concessional rate of tax. However, motor vehicles, office equipment and other similar items, which are not directly used in production, should not be considered as eligible. - -List of eligible items for unspecified industries is also given. This includes (1) Fuels (2) Electricity including lighting and heating (3) Lubricating oils and lubricants (4) Raw or basic materials (5) Chemicals and auxiliary materials (6) Other materials like spare parts, belts etc.

Rule 13 of CST (Registration and Turnover) Rules states that goods intended for use as raw materials, processing materials, machinery, plant, equipment, tools, stores, spare parts, accessories, fuel or lubricants, in (a) manufacture or processing of goods for sale (b) in mining (c) in generation or distribution of electricity or any form of power; are eligible.

Use in processing - Purchase at concessional rate against ‘C’ form is available for use ‘in processing’. Thus, the process need not amount to manufacture. In Chowgule and Co. (P.) Ltd. v. UOI - (1981) 47 STC 124 (SC) = AIR 1981 SC 1014 = (1981) 1 SCC 653 reproduced in 1993 (69) ELT 34 (SC), it was held that ‘blending’ is a ‘process’. In Hind Nippon Industries (P.) Ltd. v. State of Karnataka - (1991) 81 STC 46 (Kar HC DB), it was held that processing raw granite blocks and preparing them into finished granite blocks is a ‘process’ and hence crane purchased for lifting the granite blocks is eligible for concessional rate of CST.

Use in telecommunications network - Goods can be procured at concessional rate of sales tax for use in telecommunication network. [As per amendment to section 8(3)(b) w.e.f. 11-5-2002].

The term ‘telecommunications network’ has not been defined under the Act. Hence, it has to be understood the way it is understood in trade parlance, i.e. as understood by those who are dealing with it.

As per Concise Britannica Encyclopedia, ‘telecommunication’ is communication between parties at a distance from each other.

As per Encyclopedia Britannica, ‘telecommunication’ is science and practice of transmitting information by electromagnetic means. A wide variety of information can be transferred through a telecommunications system, including voice and music, still-frame and full motion pictures, computer files and applications and telegraphic data. - - ‘Telecommunication network’ is system of links and switches and the controls that govern their operation, that allows for data transfer and exchange among multiple users. When several users of telecommunications media wish to communicate with each other, they must be organised into some form of network. - - ‘Telecommunication media’ is equipment and systems - metal wire, terrestrial and satellite radio and optical fibre - employed in the transmission of electromagnetic signals. - [Source - www.britannica.com as downloaded on 1-5-2002]

As per Hercount Academic Press Dictionary of Science and Technology, telecommunications network is a system of telephone lines, switches, and signal repeaters that connect all users so that communication can take place. [Source - www.hercount.com as downloaded on 1-5-2002]

As per American Heritage Dictionary, telecommunication is science and technology of communication at a distance by electronic transmission of impulses, as by telegraph, cable, telephone, radio or television. . [Source - www. dictionary.com as downloaded on 1-5-2002]

ONLY GOODS USED IN NETWORK ELIGIBLE - 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.

Use in mining - Goods used ‘in mining’ are eligible. In case of Chowgule & Co. (P.) Ltd. v. UOI - AIR 1981 SC 1014 = (1981) 47 STC 124 (SC) = (1981) 1 SCC 653 reproduced in 1993 (67) ELT 34 (SC) the Company was mining ore. After extraction, ore was carried to dressing plant where processing of washing, screening and dressing was done. Later the ore was conveyed to river side by conveyors and transported to harbour by barges. It was stocked as per physical and chemical composition. Blending was done to meet specifications and ore was loaded in ship. Company contended that mining, conveying, carrying, dressing, blending and loading of ore is one integral process. It claimed that conveyors, machinery, vehicles, barges etc. used for carrying goods from mine to place of processing are used ‘in process’ and is eligible for registration. Department contended that mining is a distinct process and dressing is a distinct process. Conveyors, vehicles etc. used for carrying the ore is not used ‘in process’. However, contention of Company was upheld by Supreme Court and it was held that the whole processing operation is integral.

Use in power generation/distribution - Goods used in electricity or power generation or distribution are eligible. In National Aluminium Co. Ltd. v. State of Orissa - (1994) 93 STC 529 (Ori HC DB), (Para 7), it was held that ratio of decision of Supreme Court in J K Cotton Spinning Mills is applicable and concessional rate is applicable when the goods purchased are integrally connected with the process of generation and distribution of power though not directly used in the same. In CST v. Rajasthan Electricity Board (1997) 104 STC 89 (SC), it was held that electricity board can purchase motor vehicles, tyres, paints, varnishes etc. under 'C' form.

Packing Material - Packing material and containers used for packing of goods are eligible [section 8(3)(c) of CST Act]. Packing material and container used for packing of packing material is also eligible [section 8(3)(c) of CST Act]. Tin sheets and tin plates purchased and cut into different shape to make a container for packing the goods are eligible - Lt. Governor Delhi v. Ganesh Flour Mills Co. Ltd. - (1973) 31 STC 354 (SC).

Machinery, stores, spare parts, fuel, lubricants etc. are eligible - Rule 13 of CST (Registration and Turnover) Rules states that goods intended for use as raw materials, processing materials, machinery, plant, equipment, tools, stores, spare parts, accessories, fuel or lubricants, in (a) manufacture or processing of goods for sale (b) in mining (c) in generation or distribution of electricity or any form of power are eligible.

Calculation of Sales Turnover

Sales tax is payable on ‘turnover of a period’. Rate is determined as per section 8, while ‘turnover’ is determined as per section 2(j).

Turnover - ‘Turnover’ (often called ‘taxable turnover’) is defined under section 2( j) as aggregate of the sale prices received and receivable by the dealer in respect of sales of any goods in the course of inter-State trade or commerce made during any prescribed period and determined in accordance with provisions of Central Sales Tax Act and Rules. Section 8A(1) states that in determining turnover, deduction of sales tax should be made from the aggregate of sale price. Prescribed period is the period in which sales tax return has to be filed as per local sales tax law. Such period is usually quarterly - it is monthly also in some States. Thus, total of ‘sale price’ of all Inter-State sales effected during

the prescribed period (monthly, quarterly as the case may be) less the Central Sales Tax payable is the ‘turnover’ ( taxable turnover) of dealer for that period.

The ‘aggregate sale price’ i.e. total sale price for the prescribed period, is assumed as inclusive of Central Sales Tax and backward calculation is made. Thus, if aggregate of sale price is ‘S’ and rate of tax is ‘R’; ‘turnover’ and ‘tax payable’ will be calculated as follows :

100 x STurnover = ---------- 100 + R

S x RTax Payable = ---------- 100 + R

Round off of CST payable - As per section 9B of CST Act, tax payable should be rounded off to nearest rupee.

Prescribed period under CST - The ‘prescribed period’ is the period in respect of which a dealer is liable to submit returns under the General Sales Tax law of the appropriate State e.g. if the dealer is registered in West Bengal and if Sales Tax Law of West Bengal (local sales tax law) prescribes that return of tax should be submitted quarterly i.e. every three months, the turnover is ‘aggregate sale price’ of that three-month period less tax payable.

YEARLY ASSESSMENT OF CST LIABILITY - It may be noted that though sales tax returns are submitted quarterly/monthly, sales tax assessment is done for the whole year. All sales, rejections, returns during the whole year are considered for assessment and tax payable is calculated. As per section 2(k), ‘year’ means the year applicable to a dealer under general sales tax law of the State (now, most of dealers follow the ‘April-March’ year, as that is compulsory for Income Tax purposes.)

Aggregate Sale price - Gross Turnover is aggregate sale price for a prescribed period. - - Section 2(h) states that, ‘Sale Price’ means the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof, other than cost of freight or delivery or the cost of installation, in cases where such cost is separately charged.

SALE PRICE INCLUSIVE OF CST - The ‘sale price’ is total consideration received and is taken as inclusive of CST, whether or not it is shown separately in Bill (Invoice). Invoice can be prepared (a) by showing sales tax separately in invoice or (b) by not showing it separately - in which case it will be cum-tax price i.e. price inclusive of CST. In either case, ‘Sale Price’ will be the total amount received by the seller i.e. inclusive of sales tax.

Inclusions in Sale price - Following items are includible.

ANY SUM CHARGED FOR BY DEALER AT OR BEFORE DELIVERY – ‘Sale Price’ includes any sum charged for anything done by the dealer in respect of goods at the time or before the delivery of goods. Thus, ‘sale price’ will include – (a) Weighment charges charged for weighing of goods at the time of delivery (b) Design charges in respect of goods.

CENTRAL SALES TAX - whether or not shown separately in invoice. [Then back calculations are made]. {If sales tax is not charged separately in invoice, the dealer has to prove that burden of sales tax has been borne by him and invoice includes sales tax. See case law discussed earlier in this chapter}.

EXCISE DUTY - The excise duty payable is includible in 'sale price' - Hindustan Sugar Mills v. State of Rajasthan - (1979) 43 STC 13 = 1978 UPTC 653 = AIR 1978 SC 1496 (2258 ?) = 1979(1) SCR 276 = 1978(4) SCC 271.

PACKING MATERIAL AND PACKING CHARGES - Sales tax is leviable on packing material as well as packing charges (i.e. labour charges for packing goods). Sales tax is leviable on packing charges, even if shown separately - CST v. Rai Bharat Das - (1988) 71 STC 277 (SC) = AIR 1989 SC 315. * Ramco Cement Distribution Co. (P.) Ltd. v. State of Tamilnadu - (1993) 88 STC 151 (SC) = AIR 1993 SC 123 = (1993) 1 SCC 192 = 1992 JT (Supp) SC 729. * Dalmia Cement (Bharat) Ltd. v. State of Tamilnadu - (1991) 83 STC 442 (Mad HC DB) * State of Tamilnadu v. V V Vanniaperumal (1990) 76 STC 203 (Mad HC FB).

COST OF FREIGHT - Freight is includible only if (a) Freight is not shown separately in invoice or (b) Contract is for sale FOR destination. This aspect has been discussed in following paragraph, under 'Exclusions from Sale Price'.

FREIGHT AND DELIVERY CHARGES INCIDENTAL TO SALE ONLY ARE DEDUCTIBLE - Freight and delivery charges allowable as deduction are only those which are incidental to sale. Thus, in case of sale of goods from depot, transport charges from factory to the depot cannot be allowed as deduction - Dyer Meakin Breweries Ltd. v. State of Kerala - (1970) 26 STC 248 (SC).

DESIGN CHARGES IN RESPECT OF GOODS INCLUDIBLE - Design Fee charged separately in respect of the goods manufactured as per design and sold to buyer is includible for purpose of sales tax, as it is a pre-sale expense and forms part of manufacturing cost - American Refrigerator Co. Ltd. v. State of Tamilnadu - (1994) 94 STC 261 (Mad HC DB).

Exclusions from sale price - Following charges are not to be included for calculation of CST liability.

FREIGHT AND TRANSPORT CHARGES FOR DELIVERY OF GOODS - Generally, CST is payable only on ex-works price and no CST is payable on freight and transport charges. However, CST is payable on freight charges if (a) Freight charges are not shown separately in invoice or (b) Contract is for FOR destination.

COST OF INSTALLATION AND COMMISSIONING - It is not includible if shown separately in invoice, as is clarified in section 2(h).

CASH DISCOUNT - The cash discount for making timely payment is not includible, as is clarified in section 2(h) itself.

SUBSIDY PAID BY GOVERNMENT NOT PART OF TURNOVER - In Indian Aluminium Cables Ltd. v. CST (1999) 115 STC 161 (All HC), it was held that if excise duty is refunded to manufacturer under Central Government scheme (as benefit for deemed export for supply against global tender) and is not recovered from purchaser, it is not includible in taxable turnover. – confirmed in CST v. Indian Aluminium Cables (1999) 115 STC 172 (SC).

TRANSIT INSURANCE - Transit Insurance charges incurred at the request by buyer are not chargeable to CST.

GOODS RETURNED BY BUYER - Section 8A(b) provides that if goods are returned by buyer within six months, its sale price will be deducted from ‘aggregate sale price’, if satisfactory evidence is produced before sales tax authority in respect of the same. Supreme Court in Dy CST v. Motor Industries Co. = 1983(2) SCC 108 = (1983) 53 STC 48 (SC) has held that the claim of deduction in respect of such returned goods is allowable in the assessment year relating to financial year in which sale of goods had taken place. If assessment is completed, adjustment or refund can be demanded by claiming in time. – quoted in State of Tamil Nadu v. English Electric - (1992) 84 STC 1 (SC). [confirmed and followed in State of Maharashtra v BASF (India) Ltd. (2000) 117 STC 543 (SC)]. e.g. if goods are sold in March 1993 (i.e. financial year 92-93) and these were returned in July 1993, deduction in respect of goods returned will be allowed during assessment of the year 92-93 and not 93-94, even if goods were returned in 93-94. The reason is goods returned formed part of turnover of 92-93 and not of 93-94.

Goods need not be returned to the place of despatch. Insisting on returning to seller may create hardships when there are various inter State sales. – Madras Petrochem v. State of Tamilnadu (1998) 109 STC 233 (Mad HC DB). [In this case, it was held that goods could be returned to agent or branch of the seller].

GOODS REJECTED BY BUYER - Calcutta High Court, in case of Metal Alloy Co. (P.) Ltd. v. CTO, Bhavanipur Charge Calcutta, (1977) 39 STC 404 (Cal HC), has held that the period of six months is not applicable in respect of rejected goods, as in respect of rejected goods, there is no ‘completed sale’ at all within the meaning of CST Act or Sale of Goods Act as the purchasing party has not accepted the goods. Return of goods and rejection of goods stand on different footings. Return of goods is a bilateral transaction brought about by consent of seller and purchaser, while rejection of goods is a unilateral transaction, open only to purchaser. Hence, liability of sales tax does not arise even if goods come back after six months.

Exemptions from CST

CST is leviable even if sale of goods inside a State is exempt from sales tax in that State [section 6(1A)]. - - However, this section is subject to (a) section 6(2) which provide for exemption of tax in respect of sales during movement of goods (b) section 6(3) which provide that Central Government can grant exemption to foreign diplomatic missions, UN, international organizations etc. (c) section 8(1) which provides for lower/nil sales tax rate when sale is to registered dealer/Government, when local sales tax is lower than 4%/Nil. (d) proviso to section 6(1) providing for exemption when sale is penultimate to export as defined u/s 5(3). (e) section 8(2)(c) providing for exemption if local sales tax is generally exempt (f) Section 8(6) exempting sale to SEZ unit. (g) Exemption by issue of notification by State Government. (h) Sale during export/import is not taxable, as charging section 6(1) levies tax only on inter-State sale.

Subsequent Sales by transfer of documents - CST Act envisages a single point levy at the first point of sale. Subsequent sales during movement of goods are exempt to avoid multi-point levy of tax. Section 6(2) of CST Act provides that notwithstanding anything contained in section 6(1) or 6(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 transfer of documents of title during movement from one State to another, any subsequent sale during such movement effected by transfer of documents of title to such goods to (A) Government or (B) registered dealer is exempt from tax. The condition is that certificate in prescribed form has to be obtained from Government/Registered dealer.

FIRST SALE SHOULD BE INTERSTATE - The first sale should be inter-State, i.e. (a) sale of goods should occasion movement of goods from one State to another or (b) sale should be effected by transfer of documents during movement of goods from one State to another. These are basic requirements of inter-State sale as per section 3 of CST Act, which we have already seen.

TRANSFER OF DOCUMENTS OF TITLE - Documents of title should be transferred to subsequent buyer. Transfer is usually made by endorsement, but really, such endorsement is for purpose of convenience and easy proof only.

CERTIFICATE REQUIRED - Dealer selling the goods has to issue a certificate in prescribed form to the purchasing dealer. Subsequent purchaser also has to issue certificate in prescribed form. These certificates have to be produced to Sales Tax assessing authority, within prescribed time. In absence of such certificates, the subsequent sale will not be treated as exempt [proviso to section 6(2)]. Such certificate is not essential if sale of such goods is generally exempt from tax inside the State or is generally subject to tax at less than 4%. However, in such cases, other satisfactory evidence has to be produced that the sale is to Government or registered dealer whose certificate of registration entitles him to procure the goods in question [second proviso to section 6(2)]. - - Interestingly, in case of sale by transfer of documents, submission of C or D form is not mandatory if local sales tax rate is less than 4% but more than Nil. Other evidence is acceptable. However, in case of direct sale, submission of C form is mandatory even if local sales tax rate is less than 4%.

Lower rate for sale to registered dealer if local sales tax rate is lower than 4% - As per section 8(1), CST payable in respect of sale to registered dealer/ is 4%. However, if local sales tax rate is less than 4%, same (i.e. lower) rate will apply in respect of sale to registered dealer. [Sale to Government will be equivalent to sale to unregistered dealer w.e.f. 1-4-2007].

In the opinion of author, if local sales tax rate is exempt or chargeable at rate lower than 4%, subject to certain conditions which cannot be complied with by the seller, the exemption/lower rate will not apply and CST will be payable @ 4%.

Inter State Sales to unregistered dealer exempt, if sale within the State is ‘generally exempt’ - If sales within the State are generally exempt, same rate will apply for sale to unregistered dealers. [section 8(2)(c)] In such case, it is not necessary to obtain any sales tax form (like C form) from buyer. In fact, he cannot issue any form as he is not registered.

Section 8(2)(c) clarifies that the exemption in respect of inter state sale to unregistered dealers is available only if the sale within the State is generally exempt. As per explanation to this sub-section, such exemption granted by State Government should be ‘general’. It should not be in special circumstances or under specified conditions or at specified stages or on basis other than turnover e.g., if exemption of sales tax for sale within the State is available only to small units having lower than prescribed turnover or only to new units for limited number of years, the sale is not ‘exempt generally’. In such cases, inter-State sale will be taxable.

Exemption by notification - State Government can grant exemption under section 8(5) in respect of inter-State sales effected from the State. Such notification should be in (A) public interest and (B) by way of notification in Official Gazette (C) exemption may be subject to condition. (D) The exemption may be (a) to any dealer for goods or classes of goods or (b) in respect of all sales of classes of goods by any class of dealers (E) The exemption may be total or partial.

As per amendment inserted w.e.f. 11th May 2002, such notification can be issued only subject to fulfilment of requirements of section 8(4) in respect of submission of declaration by registered dealer/Government. In other words, such exemption cannot be granted to unregistered dealer (as he cannot furnish any C/D declaration).

State Government cannot waive condition of submission of C Form or D form when State Government has issued notification for concessional rate - State Government can grant concessions in CST under section 8(5) of CST Act, by issuing a notification.

As per amendment to section 8(5) w.e.f. 11-5-2002, the power is subject to fulfilment of requirements of section 8(4), i.e. subject to submission of C/D form by purchaser.

Exemption from CST if sale to SEZ - Sub-sections 8(6), 8(7) and 8(8) have been incorporated w.e.f. 11th May 2002 in CST Act to provide that inter state sale made to a unit in SEZ (Special Economic Zone) will be exempt from CST.

Special Economic Zone (SEZ) is set up for export purposes. Such zone is treated as if it is a foreign territory within India. Units in SEZ can import inputs and capital goods without payment of customs duty and procure indigenous inputs and capital goods without payment of Excise duty. All their products should be exported. If their final products are sold in India, excise duty equal to normal customs duty on such goods is required to be paid, as if the goods are ‘imported’. - - It may be noted that the exemption from CST is only if the sale is to unit in SEZ and not in respect of sale to EOU (Export Oriented Unit), unit in STP (Software Technology Park) or EHTP (Electronic Hardware Technology Park).

The registered dealer in SEZ can obtain goods from selling registered dealer outside the zone without payment of CST. The goods can be obtained for purpose of manufacture, production, processing, assembling, repairing, reconditioning, re-engineering, packaging or for use as trading or packing material or packing accessories. The registered dealer in SEZ should have been authorised to establish such unit in SEZ by authority specified by Central Government. [section 8(6)].

Development Commissioner of SEZ is authorised to permit a person to set up unit in SEZ.

The goods which the unit in SEZ can obtain without CST shall be specified in the sales tax registration certificate of SEZ unit. [section 8(7)]. - - Thus, existing SEZ units should get their sales tax registration certificate amended to include all the articles which they intend to procure.

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).

SEZ UNIT HAS TO SUBMIT H FORM DULY CERTIFIED - As per CST Rule 12(10)(a) (amended on 16-1-2003), 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]. In such case, supplies to unit in SEZ will not be liable to CST.

Exemption to supplies to foreign missions/UN etc. - Central Government can, by issue of notification, exempt from CST (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].

Sale during Import and Export

Sale in course of export

Article 286(1)(b) of Constitution of India prohibits imposition of sales tax on import and export by State Government. Since charging section 6(1) of CST Act levies tax only on inter-State sale, naturally, there is no CST on sale during export/import. [Interestingly, prohibition on taxing sale during export/import is only on State Government and not on Union Government].

Article 286(2) authorises Parliament to formulate principles for determining when sale is in the course of import/export. Under these powers, section 5 of CST Act has been enacted. Principle is that Export sales have to be tax free so that Indian exports become competitive in world market. Similarly, imports are subject to customs duty and hence these should not be subject to sales tax.

EXPORT SALE AND SALE IN THE COURSE OF EXPORT – The term ‘Export sale’ is not used in the Act. Generally, ‘export sale’ means direct exports. However, the term ‘sale during export’ is much broader than ‘export sale’. ‘Sale during export’ includes not only direct exports, but also (a) Sale by transfer of documents after goods cross customs frontier (b) Penultimate sale for export (c) Export with help of agent.

What is ‘Sale in course of Export’ - Section 5 of CST Act defines when a sale or purchase is said to be in course of export as follows : A sale or purchase of goods is deemed to be in course of export of the goods out of the territory of India, only if ( a) the sale or purchase either occasions such export or (b) is effected by a transfer of documents of title to goods after the goods have crossed the customs frontiers of India. Section 5(3) states that notwithstanding provisions of section 5(1), last sale or purchase of goods preceding the sale or purchase occasioning the export of those goods out of territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the arrangement or order for or in relation to such export.

Sale should occasion the export - Occasion means ‘to be immediate cause of’. Sale and Export should constitute part of an integrated activity. Unless such sale occasions export, it is not a sale in course of export.

In Spares Corporation v. State of AP - (1995) 97 STC 645 (AP HC DB), the spares were delivered to owners of trawlers, who took the spares to high seas. This was not treated as sale during export even if these were removed from Customs warehouse under section 69 for exportation. Though they were exports for Customs Act, these cannot be treated as ‘export’ for section 5 (1) of CST Act.

SALE TO FOREIGN TOURIST IS NOT ‘SALE IN COURSE OF EXPORT’ - Sale to foreign tourist in India is not ‘sale in course of export’. This is so even if goods are purchased by the foreign tourist in ‘duty free area’ in airport before departure. - Indian Tourism Dev. Corpn In re- STR Vol 44 No 7 II-113 (Maharashtra Sales Tax Tribunal). The decision is in respect of sale in arrival lounge, where it was held that it is not ‘sale in the course import'. The principle is applicable in respect of 'sale in course of export' also.]

Goods should be destined to foreign country, though actual reaching of destination not necessary - In case of Burmah Shell Oil Storage and Distributing Co. of India Ltd. (1960) 11 STC 764 (SC) = AIR 1961 SC 315, the Company supplied aviation fuel to foreign going aircrafts at the airport. This was not treated as sale in course of export as there was no destination to goods in foreign country. However, once goods are shipped to a foreign destination and once they leave territorial waters of India, export is complete even if goods do not reach destination.

Sale in course of export by transfer of documents - It is possible to have sale by transfer of documents after goods cross the Customs frontier, i.e. goods are cleared by Customs authorities and are handed over to carrier for loading in vessel / aircraft. Normally, such sales are rare in exports as exports are after a firm contract [sale by transfer of documents are quite common in imports.]

Meaning of ‘Crossing Customs Frontiers of India’ - Section 2(ab) of CST Act states that ‘Crossing Customs Frontiers of India’ means crossing the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance by customs authorities. Customs Station and Customs Authorities have same meaning as per Customs Act. Customs Station means customs port (for vessels), customs airport (for aircrafts) or land customs station (for trucks or motor vehicles). Central Government is authorised to specify such places. Within such customs port, ‘Customs Area’ is specified by Customs Authorities where imported goods or export goods are ordinarily kept by customs authorities.

Relevance of this provision is that documents of title can be transferred immediately after goods are entrusted to carrier after obtaining clearance from Customs authorities for export. It is not necessary to wait till the ship/aircraft actually leaves India.

Exports with help of agents - Even when exports are arranged with the help of an agent, sale will be sale in course of export if the goods are not sold to agent any time. In CT Ltd. v. CTO - (1996) 7 SCALE 865 = (1996) 10 SCC 729 = (1997) 104 STC 94 (3 member bench), State Trading Corporation (STC) had contract with dealer (CT Ltd.) for supply of tea to overseas buyers. Invoices were raised directly by dealers on overseas buyer. The export licence was in the name of dealer. The name of shipper was 'CT Ltd. a/c STC'. It was held that STC was only an agent. Property in goods never transferred to STC. Mere writing the words a/c STC does not mean that documents were endorsed to STC. Thus, CT Ltd. were the actual exporters and not STC.

Penultimate sale for export

Export is a specialised business and many small units are unable to export directly. Export is often effected through specialised agencies like Export Houses etc., termed as ‘Merchant Exporters’ under EXIM Policy. [Manufacturers who export the goods themselves are termed as ‘Manufacturer Exporters’ in EXIM Policy]. Such indirect exports also need exemption from taxes to make the products competitive. Hence, such penultimate sale, i.e. sale preceding the sale occasioning export is also deemed to be in the course of export under section 5(3) of CST Act and is exempt from tax. [Such exemption is really against principles of VAT and hence the section may have to be amended].

Exemption to penultimate sale is subject to the condition that the penultimate sale ( i.e. last but one sale) is (a) for purpose of complying with agreement or order in relation to export and (b) such sale is made after the agreement or order in relation to export and (c) same goods which are sold in penultimate sale should be exported. In other words, the final exporter should be in possession of export order from foreign buyer and should take delivery of goods from the supplier making penultimate sale solely for execution of such export order and export the same goods.

PURCHASE PRIOR TO PENULTIMATE SALE NOT EXEMPT - It may be noted that only penultimate sale is exempt but purchases earlier to penultimate sale are not exempt and purchase tax is payable if prescribed. – State of Tamilnadu v. Madras Pack Marine (2000) 120 STC 105 (TNTST). – same view in Kepee Sons v. State of Kerala (1999) 116 STC 156 (Ker HC DB) * Bhagwan Rice Mill v. ACCT 1999(113) STC 102 (Karn HC DB) * Sovereign Spices v. State of Kerala (1998) 110 STC 429 (Ker HC DB).

Pre-existing arrangement essential - There must be a pre-existing agreement or order to sell the specified goods to a foreign buyer, last purchase must be after the agreement with foreign buyer and the last purchase must be made for complying with the pre-existing order. Only then the transaction is covered under section 5(3) i.e. it is treated as a ‘penultimate sale’ - George Maijo and Co. v. State of Andhra Pradesh - (1980) 46 STC 41 (AP HC) same view in Consolidated Coffee Ltd. v. Coffee Board - AIR 1980 SC 1468 = (1980) 3 SCR 625 = (1980) 46 STC 164 (SC 3 member bench) - Second Coffee Board case.

Purchase of packing material for export permissible - If gunny bags purchased are used as containers for export of certain goods to a foreign country, it is deemed as ‘export sale’ as per section 5(3). The last purchase preceding the sale occasioning export should be for complying with an export order. In this case, the gunny bags purchased were for complying with export order and hence are eligible for exemption under section 5(3) - State of AP v. Standard Packings - (1995) 96 STC 151 (AP HC DB).

Sale during Import

As per Article 286(1) of Constitution of India, sales tax cannot be levied by State Government in respect of sale during import.

A sale or purchase of goods is deemed to be in course of import of the goods into the territory of India, only if ( a) the sale or purchase either occasions such import or (b) is effected by a transfer of documents of title to goods before the goods have crossed the customs frontiers of India [section 5(2) of CST Act].

Imports could be (a) direct imports (b) imports through agent (c) import by transfer of documents.

Direct Imports - When the user directly imports for his own use or consumption, no question of any further sale arises. This is so even if an agent arranges the imports - CST v. Glass Trading and Sales Corpn. (1991) 84 STC 195 (Delhi HC).

Sale by Agents in India - It is common to import goods through agent. Some illustrations will make the provision clear. M/s K G Khosla & Co. entered into contract for sale with DGS & D, New Delhi (A Central Government department) for supply of axle bodies. These were to be manufactured by principal of K G Khosla & Co. in Belgium. Goods were to be inspected by representative of DGS & D in Belgium, but DGS & D was entitled to reject the same on receipt in India if goods were found not as per specifications. Goods were cleared by Khosla & Co. from port and were despatched by railway to Government departments. It was held that Khosla & Co. were agents of foreign manufacturer and sale by Khosla & Co. to Government departments was in the course of imports. If two sales are integrated or inter-linked so as to form one transaction, they are ‘sale in course of imports’ - K G Khosla & Co. v. Dy. CCT - (1966) 17 STC 473 = AIR 1966 SC 1216.

Privity of contract between the ultimate buyer and exporter necessary - If the contract between foreign supplier and importer on one hand and importer and Indian buyer on the other hand are independent of each other, the sale within India cannot be termed as ‘in the course of imports’. One illustration will clarify. In Binani Bros. (P.) Ltd. v. UOI - (1974) 33 STC 254 (SC) = AIR 1974 SC 1510 = (1974) 1 SCC 459 (Constitution Bench), the assessee contacted to supply non-ferrous metal to DGS&D. Government granted import licence to the assessee. The assessee imported goods and then supplied to DGS&D. It was held that there was no privity of contract between foreign supplier and DGS&D. Hence, sale of assessee to DGS&D is not ‘sale in the course of import’.

Sale during import by Transfer of Documents - Many importers, acting as agents, import goods and the documents are transferred to ultimate buyer in India. Such buyer usually clears goods from Customs. This is ‘sale during import’ if the documents are transferred (i.e. endorsed in favour of buyer) before goods are cleared from customs.

SALE OF GOODS STORED IN CUSTOMS BONDED WAREHOUSE - One question is the taxability when goods are sold when they are stored in customs bonded warehouse, before clearance from warehouse. In Kiran Spinning Mills v. CC 1999(113) ELT 753 = 2000 AIR SCW 2090 (SC 3 member bench), it has been held that goods continue to be in customs barrier when they are in customs bonded warehouse. Import would be completed only when goods cross customs barrier and not when they land in India or enter territorial waters.

Thus, if documents are transferred when goods are in customs bonded warehouse, it will be treated as transfer of documents before goods cross customs barrier. – view confirmed in State Trading Corporation v. State of Tamil Nadu (2003) 129 STC 294 (Mad HC DB).

Thus, sale before clearance from customs bonded warehouse will be ‘sale during import’ and will not be taxable.

Sale after Import is a distinct sale - An importer may import the goods, stock the same and sell to buyers. This is not a sale in course of import. Tax would be payable when the goods are sold in India as if the goods are being sold for the first time in India. Such sale may be Inter-State or Intra-State.

In CC v. State of WB - (1992) 85 STC 121 (WBTT), it was held that sale of imported goods confiscated by customs authorities cannot be called as ‘sale during course of import’ as sale did not occasion import and the sale was not by transfer of documents.

Declared Goods

Goods of special importance

There are restrictions on imposition of sales tax on declared goods.

Article 286(3)(a) of Constitution of India authorises Parliament to declare some goods as of ‘special importance’ and to impose restrictions and conditions in regard to power of States in regard to levy, rates and other incidence of tax on such goods. Parliament can restrict powers of State Government to tax such ‘declared goods’. Section 2(c) of CST Act defines ‘Declared Goods’ as those declared under section 14 of CST Act as ‘goods of special importance in Inter State Trade or commerce. Section 14 of CST Act gives a list of such goods and section 15 specifies restrictions on power of States to tax such goods.

ADDITIONAL EXCISE IN LIEU OF SALES TAX - Industries urged that central excise duty and sales tax should be collected at one stage itself so that multiple taxation is avoided. Central Government and State Governments agreed to replace sales tax on some commodities with excise duty. With this in view, Additional Excise Duty was imposed on some goods under the Act ‘Additional Duty of Excise (Goods of Special Importance) Act, 1957’. Additional excise duty is levied on textile fabrics, sugar and tobacco products under this Act. These three items are also ‘Declared Goods’ under CST. This list could not be widened much later, due to difference of opinions between State Governments and Central Government

Goods of special importance - Section 14 gives list of ‘goods of special importance’ called ‘declared goods’. Important among them are :

Cereals i.e. paddy, rice, wheat, bajra, jowar, barley etc.Coal and coke in all forms excluding charcoalCotton in un-manufactured form but not cotton wasteCotton fabrics, cotton yarnCrude oilHides and skinsIron and Steel i.e. pig iron, sponge iron, iron scrap, steel ingots, billets, steel bars, steel structurals, sheets, plates, discs, rings, tool steel, tubes, tin plates, steel wheels, wire rods; defectives of above etc.JuteOil-seeds i.e. groundnut, til, cotton seed, linseed, castor, coconut, sunflower, mahua, kokum, sal etc.Pulses i.e. gram, tur, moong, masur, urad etc.Man-made fabrics - fabrics of man-made filament yarn i.e. artificial textile materials, polyester filament yarn, staple fibres, polyester staple fibre, tyre cord fabric, impregnated textile fabrics etc.Sugar and Khandsari SugarWoven fabrics of woolAviation Turbine Fuel sold to a turbo-prop aircraft

Un-manufactured tobacco, cigars, cigarettes, biris, chewing tobacco, snuff etc. were 'declared goods' upto 31-3-2007. Now, they are not 'declared goods' w.e.f. 1-4-2007.

Restrictions on State taxation on declared goods

Section 15 of CST Act places following restrictions and conditions in regard to powers of State Governments to tax declared goods inside the State.

Tax on declared goods not to exceed 4% - Tax on declared goods within a State cannot exceed 4%. [section 15(a)].

As per provision in section 15(1) upto 11-5-2002, tax on declared goods could be imposed only at one stage. Now, this restriction has been removed w.e.f. 11th May 2002, as such restriction was against principles of VAT.

Normally, such tax was imposed by States at first stage for convenience and control. After that, subsequent sales within State were exempt from tax. Now, there is no such restriction on imposing local/Central sales tax on subsequent sale.

However, such tax will not be automatic. Each State will have to suitably amend their sales tax laws to impose the tax on re-sale.

Reimbursement of local tax if declared goods sold Inter-State - If any declared goods, on which Intra-State sales tax (i.e. State sales tax) is paid; is sold in Inter-State sale; then the tax levied on sale within the State should be reimbursed to the person making such Inter-State sale [section 15(b)]. However, (a) the Inter-State sale of goods must be in same form. (b) If Inter-State sale of the goods are exempt from tax, refund of tax paid on Intra-State sale is not available. (c) The word used is ‘reimbursement’. Thus, the tax on local sale must have been paid.

Goods must be sold in same form to obtain reimbursement - Declared goods purchased must be sold in same form i.e. identical goods must be sold. Identity of goods must not be lost e.g. (a) Mung, chana and urad converted into dal is same commodity. (b) Round timber logs are different from sized timber (c) Dried coconuts and watery coconuts are different commodities. (d) Condensed milk is different from ‘milk’. (e) Oil seeds and oil extracted from these seeds are different commodities. (f) Ice is different commodity than water. Thus, if goods sold after processing are different commodity, reimbursement of local sales tax is not available.

Some articles which are held as ‘declared goods’ - Some items which are held as ‘declared goods’ are as follows. Thus, sales tax cannot be levied at rates higher than 4%.

CAST IRON CASTINGS ARE ‘DECLARED GOODS’ - In case of Pyare Lal Malhotra v. State of Tamilnadu (1976) 3 SCR 168 (SC) = (1976) 37 STC 319 (SC) = 1976 UPTC 282 = AIR 1976 SC 800 - reproduced in 1983 (13) ELT 1582 (SC) - a 4 member bench decision , Supreme Court held that when separate commercial commodity comes into existence, they become separately taxable goods. Central Government, vide its letter dated 28th Feb., 1977 had clarified that ‘Cast Iron’ includes ‘Cast Iron Castings’. One entry in section 14 reads ‘pig iron and cast iron including ingot moulds, bottom plates, iron scrap, cast iron scrap, runner scrap and iron skull scrap.’ In view of this entry and clarification of Central Government, manufacture of Cast Iron Castings from pig iron was not treated as ‘manufacture’ as both fall under same heading and no tax was levied. This circular has been upheld in Vasantham Foundry v. UOI - AIR 1995 SC 2400 = (1995) 99 STC 87 (SC) = 1995 AIR SCW 3556 = 94 ELT 32 = (1995) 5 SCC 289 - 3 member bench. In this case, it was held that cast iron castings in its basic rough form is ‘Cast Iron’ and hence is ‘declared goods’.

GI PIPES ARE DECLARED GOODS - Steel tubes are galvanised to make the pipe corrosion resistant. After galvanising, it is called ‘Galvanised iron pipe’. Since galvanising does not change the structure and function, making GI pipe from Steel tubes does not bring a new commodity into existence and hence GI pipes are ‘declared goods’ - Gujarat Steel Tubes Ltd. v. State of Kerala (1989) 2 CLA 100 (SC) = (1989) 74 STC 176 (SC) = (1989) 2 JT 474 (SC).

CORRUGATED SHEETS - Corrugated iron sheets even after corrugation are still ‘iron and steel’. – State of Gujarat v. Shah Veljibhai Motichand (1969) 23 STC 288 (Guj HC) – followed in Gujarat Small Industries Corp v. CST (1999) 116 STC 193 (Guj HC DB).

HR AND CR STEEL STRIPS - In Jindal (India) Ltd. v. Dy CCT (2000) 117 STC 426 (WBTT), it was held that both HR (Hot Rolled) Steel strips and CR (Cold Rolled) steel strips are one for purposes of ‘declared goods’ under CST Act. [The decision was in respect of dispute over incentive scheme].

SEWING THREAD IS DECLARED GOODS - In State of Tamilnadu v. R V Krishniah - (1994) 92 STC 262 (Mad HC DB), it was held that ‘sewing thread’ and ‘cotton yarn’ are ‘same commodities’ and hence is liable only to single point tax - similar decision of Orissa High Court - (1982) 51 STC 410 and 411 - contrary decisions in (1976) 37 STC 227 (Ker HC), (1976) 38 STC 11 (All HC) and (1981) 48 STC 460 (Ker HC).

Special provisions about paddy and pulses - Special provisions in respect of paddy and pulses are as follows.

SET OFF OF TAX ON PADDY - If paddy is taxed within State and rice (which is produced from paddy) is also taxed, tax paid on paddy should be given set off while levying tax on rice e.g. if tax of Rs. 1,000 is paid on paddy and tax payable on rice produced from the paddy come to Rs. 1,500, then tax of only Rs. 500 will be actually payable on rice [section 15(c)].

NO TAX ON CONVERSION OF PULSES - Each of the pulses whether whole or separated and whether with or without husk, shall be treated as a single commodity for purpose of levy of tax under State tax law i.e. if tax is paid on raw pulses, no further tax is payable after it is processed [section 15(d)].

PURCHASE OF PADDY AND EXPORT OF RICE - If paddy is purchased on payment of sales tax and rice procured out of such paddy is exported, the paddy and rice will be treated as ‘same goods’ for purpose of section 5(3) of CST Act. [section 15(ca) of CST Act.] Thus, paddy can be purchased without payment of sales tax, if rice made from such paddy is exported. As per normal provisions, the procurement of paddy should be specifically for export purposes. In Veerumal Monga v. State of Haryana (2001) 123 STC 158 (P&H HC DB), rice miller purchased paddy and sold rice to the exporter. It was held that in such case, only sale of rice to exporter is penultimate sale and is exempt. However, purchase of paddy by millers will not be exempt. – same view in Monga Rice Mill v. State of Haryana 2002(125) STC 304 (P&H HC DB). Thus, to get benefit of this provision, the exporter should himself procure paddy and then get job work done to convert into rice. He should not purchase rice directly from miller.

Sales Tax rates applicable for sale of declared goods - State Governments cannot charge sales tax for sale within the State at the rate which is more than 4%. As per section 8(2) of CST Act, if declared goods are sold to unregistered dealer, the sales tax rate is equal to Vat rate as applicable within the State. [Till 31-3-2007, it was twice the rate applicable in case of local sales]. It may be remembered that State cannot levy tax on declared goods at rates over 4%.

Forms and Procedures under CST

Source of Procedures under CST Act

Procedures are important for any taxation law. Often valuable tax concessions are lost or penalties are imposed only because prescribed procedures are not followed.

Procedures for CST Act are covered as follows :

Rules framed by Central GovernmentRules framed by State Governments under CST ActRules as prescribed in State Sales Tax Laws of each State.

Central Sales Tax Act is a peculiar Act - though the tax is levied as Central Sales Tax, it is administered by respective State Governments. 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 State Machinery acts as machinery of Central Government for administration of CST Act. In Khemka & Co. v. State of Maharashtra AIR 1975

SC 1549 = (1975) 3 SCR 753 = 1975(2) SCC 22, it was held that substantive laws of Central Act must be applied. State Act is applicable for procedures alone.

CST Act and Rules framed by Central Government make provisions for very few procedures. In respect of other procedures and provisions, provisions as applicable in the State in respect of the General Sales Tax Law of the State are also applicable in respect of Central Sales Tax in respect of dealers registered in that State. State Governments are also authorised to frame rules under CST Act.

Some Provisions of State Laws applicable to CST - Section 9(2) of CST Act provides that all provisions of 'General Sales Tax Law' of each State, except those provided in CST Act and Rules itself, in respect of the following shall also apply to persons liable under Central Sales Tax Act in that State :

Periodic ReturnsAssessment, provisional assessment and reassessmentAdvance payment of taxesRegistration of transferee and imposition of tax liability on transfereeRecovery of tax from third partiesAppeals, review, revision and references [except in case of appeals u/s 6A or 9]Refunds, rebate, penalties and interestCompounding of offencesTreatment of documents furnished by dealer as confidential.Offences and penalties (except those covered in CST Act itself)

State authorised to administer and collect Tax - CST Act is administered by States. The State authorised to collect tax is authorised to administer the tax.

Registration under CST Act

CST Act makes provisions for registration of dealer. Registration brings many advantages e.g. the dealer can issue ‘C’ form and purchase goods at concessional rate.

Compulsory Registration under CST - Section 2(f) states that 'registered dealer' means a dealer who is registered under section 7 of CST Act. As per section 7(1), every dealer liable to pay Central Sales Tax has to register himself with sales tax authority. As per section 6(1) of CST Act, every dealer effecting sale in the course of Inter State trade or commerce is liable to pay CST. Thus, only those dealers who ‘effect’ inter state sales are required to register under CST Act. ‘Effect’ means ‘bring about, accomplish, cause to exist or occur’ [Concise Oxford Dictionary 1994 edition]. Thus, intermediaries like agents, transporters etc. who only facilitate sales are not required to be registered, as they do not ‘effect’ sales.

Central Government has authorised State Governments to prescribe State Sales Tax authorities authorised for the purpose of registration. Thus, registration under CST Act is done by State Sales Tax authorities who are authorised for the purpose.

Voluntary Registration - A dealer registered with State sales tax authorities may voluntarily apply for registration under CST Act even if he is not liable to pay Central Sales Tax [section 7(2) of CST Act]. He is entitled to apply for registration even if goods sold or purchased by him are exempt under State sales tax law. This application for registration can be made any time. This provision is mainly useful when the dealer makes purchases in Inter State but all his sales are within the State. Thus, he is not liable for payment of any CST. However, he can make purchases in Inter State at concessional rate only if he is registered. Hence, he can register even if he is not liable to pay any CST.

Application for registration - Application for registration should be made in prescribed form ‘A’ as per CST (Registration and Turnover) Rules; within 30 days from the date when dealer becomes liable to CST. Application fee of Rs. 25 is payable (by way of court fee stamps). Application has to be signed by (a) proprietor of business (b) one of the partners in case of business owned by partnership firm (c) Karta or Manager of HUF (d) director or principal officer of Company (e) principal officer in case of association of individuals or (f) officer authorised by Government in case of Government.

ADDITIONAL PLACES OF BUSINESS - If a dealer has places of business in different States, he has to obtain separate registration in each State. However, if he has more than one places of business within the same State, he has to get only one registration with additional places of business endorsed on the Certificate. Definition of 'place of business' has already been explained in earlier chapter.

Security from dealer under CST Act - As per section 7(2A) of CST Act, the Registering authority can ask for proper security from the applicant for (a) realisation of taxes due and (b) proper custody and use of forms (like C, E-I/E-II, F and H) which are supplied by Sales Tax authorities for use by the dealer [section 7(2A)]. Additional security can also be demanded from a dealer who is already registered [section 7(3A)]. Security cannot be demanded without granting opportunity of personal hearing. The security should not be more than estimated tax liability for the current year i.e. year in which security/additional security is demanded [section 7(3BB)]. Security may be in form of surety, execution of a bond, by deposit of Government securities or by way of cash deposit. Demanding security is not essential. Moreover, security demanded should be reasonable and for good and sufficient reasons.

The security can be forfeited, after giving personal hearing, if the CST due is not paid by dealer or the blank sales tax forms issued to him are misused [section 7(3D)]. After such forfeiture, additional security has to be furnished. If such additional security is not furnished, sales tax authority may not issue further blank sales tax forms.

The security can be refunded, partly or wholly, if, sales tax authorities are of opinion that such security is not required.

Order demanding security or additional security or not refunding security is appealable. Appeal should be filed within 30 days. The appellate authority can condone the delay in filing of appeal, if sufficient cause is shown [section 7(3H)]. There is no further appeal against the order of Appellate Authority and the order passed by Appellate Authority is final [section 7(3J) of CST Act].

Other documents required at time of registration - Other documents required at the time of registration vary from State to State. Normally, following are asked for - (a) Particulars of Directors/ partners (b) Copies of articles of association, memorandum in case of company and partnership deed if applicant is a firm (c) Copies of rent agreements (d) Nominations as Manager (e) List of places of business, godown (f) Details of machinery (g) Details of bankers (h) Photographs of directors / partners.

Certificate of Registration under CST - The registering authority will ensure that application is in conformity with provisions of CST Act. He can make necessary enquiries e.g. (a) particulars given are correct (b) Materials requested for registration are eligible for inclusion and the goods are in fact needed for the business. After he is satisfied and after obtaining required security, the dealer will be issued a Certificate of Registration in prescribed form ‘B’. A copy of the same will be issued for every additional place of business in the State. This certificate should be kept at principal place of business and a copy of the certificate should be kept at each additional place of business in the State.

AMENDMENT OF CERTIFICATE - The certificate can be amended e.g. change of name, change of business, change of class of goods in which he carries business, change/addition of place of business, warehouses etc. This amendment can be made on application from dealer or by sales tax authorities themselves after giving notice to dealer. In Orient Paper Mills v. CST - (1969) 23 STC 308 (MP HC), it was held that the amendment will be effective from date of application for amendment - quoted with approval in Larsen and Toubro Ltd. v. CCT - (1995) 97 STC 102 (Pat HC FB). [In view of SC judgments cited above in respect of effective date of registration, these decisions appear to be correct].

All items of purchase and sale must be included in Registration - The ‘Registration certificate’ is indeed very important. As per section 10(c), false representation when purchasing any goods that the class of goods are covered by the registration certificate, is an offence. As per section 10(a), furnishing a false certificate is an offence. Thus, while issuing ‘C’ form or other forms under the Act, it must be ensured that goods are covered in the Registration Certificate. This is particularly so because there is no provision to amend the Registration Certificate with retrospective effect.

Cancellation of CST Registration - Registration can be cancelled either on request of dealer or suo motu by sales tax authorities.

Forms for Declarations

A dealer has to issue certain declarations in prescribed forms to buyers/sellers. These forms are prescribed in Central Sales Tax (Registration and Turnover) Rules, 1957. Out of these forms, forms C, E-I, E-II, F and H are printed and supplied by Sales Tax authorities and are supplied by them. Dealer has to issue declarations in the forms printed and supplied by the Sales Tax authorities only. These forms are in triplicate. [Form D was to be issued by Government and can be printed/typed by the Government department making purchases. Now form D has been abolished w.e.f. 1-4-2007].

Declaration in Form C - As per section 8(1)(b) of CST Act, sales tax on Inter State sale is 4% or sales tax rate for sale within the State whichever is lower, if sale is to registered dealer and the goods are covered in the registration certificate of the purchasing dealer. Otherwise the tax is higher - (10% or tax leviable on sale of goods inside the State, whichever is higher). If the selling dealer pays CST @ 4% or lower (if applicable), he has to produce proof to his sales tax assessing authority that the purchasing dealer is eligible to get these goods at concessional rate. Otherwise, the selling dealer will be asked to pay balance tax payable plus penalty as applicable. Section 8(4)(a), therefore, provides that concessional rate is applicable only if purchasing dealer submits a declaration in prescribed form ‘C’.

AUTHORITY TO ISSUE BLANK C FORM - The blank C form has to be obtained by purchasing dealer from Sales Tax authority in the State in which goods are delivered, which is usually the place where purchasing dealer is registered. However, in case on Inter State sale by transfer of

documents, the purchasing dealer may not be registered with the sales tax authorities in the State where the goods are delivered. In such case, he can obtain blank C form from sales tax authority where he is registered.

C Form is mandatory to avail concessional rate - Submission of C form is mandatory and unless C form is submitted, concessional rate of sales tax will not apply. It has been held that this procedure is designed to prevent fraud and collusion, and facilitate administrative efficiency. Hence it is mandatory. Concession can be denied if the form is not submitted - Kedarnath Jute Mfg Co. v. CTO - (1965) 3 SCR 626 = (1965) 16 STC 607 (SC) = AIR 1966 SC 12.

STATE GOVERNMENT CANNOT WAIVE THE CONDITION OF C/D FORM - Section 8(5) has been amended w.e.f. 11th May 2002 to provide that State Government can issue an exemption subject to fulfilment of requirements of section 8(4). This sub-section requires declaration form registered dealer/Government. Thus, State Government cannot waive condition of C/D form.

Number of Transactions per ‘C’ certificate - One declaration in C form can cover all transactions in one whole financial year, irrespective of total amount/value of transactions during the year. [rule 12 amended w.e.f. 7-8-1998].

ONE CERTIFICATE FOR EACH FINANCIAL YEAR - If a transaction covers more than one financial year, separate C form is required for each financial year. Provision of one 'C' form per financial year has been upheld in Laxmi Agarbatti Factory v. UOI (1996) 102 STC 248 (MP HC DB).

Procedure in case of Loss of C form - If duly completed or blank C form is lost when it was in custody of purchasing dealer or when the form was in transit to selling dealer, the purchasing dealer will have to furnish ‘Indemnity Bond’ to sales tax authority (from whom the blank forms were obtained) in prescribed ‘G’ form. If the duly completed C form is lost after it is received by selling dealer, he has to submit indemnity bond to sales tax authority of his State.

Certificate in D Form - As per section 8(1)(a) of CST Act as existing upto 31-3-2007, sales tax on Inter State sale is 4% or general sales tax rate for sale within the State whichever is lower, if sale is to Government. Otherwise the tax was higher - (10% or tax leviable on sale of goods inside the State, whichever is higher). Section 8(4)(b), therefore, provided that concessional rate is applicable only if Government (which is purchasing goods) issues a certificate in prescribed form ‘D’. Now D form has been abolished and sale to Government will be treated as sale to unregistered dealer w.e.f. 1-4-2007.

Declarations in E-I and E-II form - As per section 6(2) of CST Act, first Inter State sale is taxable. Subsequent sale during movement of goods by transfer of documents is exempt from tax, if the subsequent sale is to Government or a registered dealer. This is subject to condition that such subsequent seller obtains declaration (a) from the selling dealer i.e. from registered dealer from whom goods were purchased. (b) from purchaser a declaration in C form or declaration in D form. The selling dealer has to make declaration in E-I form if it is a first sale and in E-II form if it is a subsequent sale. One example will clarify the requirements. Assume that W despatches goods from Karnataka to Orissa and raises invoice on X in Madhya Pradesh, W charges 4% CST and pays the same in Karnataka. During movement of goods, X sells goods to Y in West Bengal and Y ultimately sells goods to Z in Orissa. Z takes delivery of goods and the ‘movement of goods’ comes to end. Sale from X to Y and Y to Z is by transfer of documents. In this case, W will receive declaration in ‘C’ form from X and will issue declaration in ‘E-I’ form to X. Later, X will issue declaration in ‘E-II’ form to Y and receive declaration in C form from Y. Finally, Y will issue declaration in E-II form to Z and will receive declaration in ‘C’ form from Z, which will complete the chain. If the chain is broken, CST will be payable again.

Some provisions of C form applicable to E-I/E-II forms - Following provisions of C form are also applicable in respect of E-I/E-II form (a) One declaration for all transactions in one year (b) Separate declaration for each financial year (c) Indemnity bond if form is lost (d) Issue of duplicate form (e) Submission at any time before assessment (f) Like C form, the E-I/E-II forms are mandatory and sales tax concession is not available if the required form is not submitted.

Declaration in F Form - We have seen that when the goods are despatched to another State on consignment basis or to branch of dealer in another State, there is Inter State movement of goods but there is no sale and hence no CST is payable. This provision is often misused and goods are despatched in the garb of consignment or branch transfer though actually it may be a sale. Hence, section 6A(1) of CST Act provides that when a dealer claims that the Inter State movement of goods is not a sale, he has to prove the same. (In legal terminology, it is called that ‘burden of proof’ is on the dealer). For this purpose, he must produce a declaration in ‘F’ form received from Consignment Agent or Branch Office in another State.

As per section 6A(1) as amended w.e.f. 11-5-2002, submission of F form is mandatory to prove stock transfer. Otherwise, the transaction will be treated as ‘sale’ for all purposes of CST Act.

Goods can be sent to other State for further manufacture - Goods can be purchased at concessional rate if the goods are for use in the manufacture. Thus, after manufacture, the sale need not be in the same State. In Indian Aluminium Co. Ltd. v. STO - (1993) 90 STC 410 (Ori HC DB), the company was manufacturing Aluminium Ingots at Hirakud, Orissa. These were despatched to plants of the company in other States for further manufacture of Aluminium coils, sheets etc. Plants in other States were sending ‘F’ forms. The department accepted the forms without any objection.

One form F covering receipts during the month can be issued. If space in form F is not adequate, a separate list may be attached as annexure to form F giving details, provided that the annexure is firmly attached to the form. The blank form has to be obtained from sales tax authority in which the transferee is situated, i.e. State where goods were received. If the form is lost, indemnity bond has to be given and duplicate form clearly marked as ‘Duplicate’ can be issued.

Certificate in form H - Sale during course of export is exempt from CST. As per section 5(3) of CST Act, penultimate sale is also deemed to be in course of export and is exempt from CST. Dealer actually exporting the goods has proof of export like customs documents, bank certificate, airway bill/bill of lading, shipping bill etc. However, the penultimate seller does not have any direct evidence to prove that his sale is exempt from tax. In such cases, the actual exporter has to issue a certificate to the penultimate seller in form H. The blank ‘H’ forms are to be obtained from sales tax authority by the final exporter.

SEZ UNIT HAS TO SUBMIT I FORM - As per CST Rule 12(10), SEZ [Special Economic Zone] unit will supply I form. In such case, supplies to unit in SEZ made by dealer outside special economic zone will not be liable to CST.

Appeals and Penalties

Appeals to Appellate Authority

Assessment of Central Sales Tax is done by sales tax officer who also does assessment of local sales tax. Normally, appeal against assessing authority lies with State sales tax authorities (like Appellate Commissioner or Tribunal etc). However, in case of decision of assessing authority u/s 6A read with 9 of CST Act, the appeal will lie with ‘Central Sales Tax Appellate Authority’, if the issue relates to dispute concerning the sale of goods effected in inter-state sale. In other matters, the appeal will lie with State Appellate authorities as per local sales tax law.

These provisions have been made effective from 17-3-2005.

Section 6A states that if a dealer claims a particular transaction as stock transfer and not a sale, the burden of proof will be on him to prove that it was not a sale. Section 9 provides that sales tax will be collected in the State from which the movement of goods commenced, by State Government of that State. In case of subsequent sale by transfer of documents, the sales tax is exempt if it is a E-I – E-II transaction u/s 6(2). However, if such sale is to unregistered dealer, the transaction will not be supported by E-I E-II forms. In such case, fresh tax becomes payable in the State in which the buyer could have obtained the sales tax form.

Formation of Appellate Authority – A separate ‘Central Sales Tax Appellate Authority’ will be constituted by Central Government. The Authority will consist of Chairman, Officers of Legal Service of Central government of level of Additional Secretary and officer of State Government of rank of Secretary who is expert in sales tax matters / officer of Central Government of rank of Additional Secretary who is expert in sales tax matters. Central Government will provide administrative staff to the Authority. [section 19 of CST Act]. The authority will regulate its own procedures. [section 23 of CST Act].

Till such separate authority is formed, ‘Authority for Advance Ruling’ formed u/s 245-O of Income Tax Act will function as ‘Appellate Authority’, by making suitable changes in the present structure of the ‘Authority for Advance ruling’. After constitution of Appellate Authority’ u/s 19 of CST Act, the appeals will be transferred to that authority. [section 24]. The Authority for Advance Ruling has been constituted as CST Appellate Authority w.e.f. 17-3-2005.

Matters appealable to the authority – Appeals against the decision of assessing officer u/s 6A read with section 9 of CST Act will lie with ‘Central Sales Tax Appellate Authority’, if the issue relates to dispute concerning the sale of goods effected in inter-state sale. In such case, appeal will lie with the CST Appellate Authority and not with Appellate Authority of State Government. [section 20(1)]. Dealer whose claim u/s 6A or 9 is rejected by assessing authority will file appeal to CST Appellate Authority, if the dispute relates to sale of goods effected in inter-state sale. Appeal should be filed within 45 days from date on which order is served on him. Further extension of 15 days can be granted by Appellate Authority. [section 20(2)]. Appeal must be filed in quadruplicate and accompanied by a fee of Rs 5,000/-.

Procedure for hearing – On receipt of appeal, a copy of appeal will be forwarded to assessing authority as well as State Governments concerned. Appellate Authority will call upon assessing authority and State Government/s to furnish relevant records. The records will be returned to assessing authority/State Government as soon as possible. [section 21(1)]. Authority will hear the matter, examine the matter and either accept or reject the appeal. Before rejecting appeal, opportunity of hearing will be given to appellant or his authorised representative and also to State Government concerned. [section 21(3)]. Appeal should be normally decided within 6 months. [section

21(4)]. Copy of order will be sent to appellant and assessing authority. [section 21(5)].

Authority can order refund by one State Government – It may happen that sales tax was paid to one State Government while in fact, it was payable to another State Government. In such case, the Appellate Authority, which is an All India Authority, can order one State Government to order payment of taxes to another State Government. Section 26 provides that order of CST Appellate Authority will be binding on assessing authorities and other authorities under State sales tax laws. - - There is no provision for appeal against the order of CST Appellate Authority.

Offences under the Act

Central Sales Tax Act provides for penalties and punishments in respect of certain offences. In respect of offences not provided in the CST Act, provisions of General Sales Tax Law of the State where the dealer is carrying on business are applicable.

CST Act envisages three types of punishments (a) Imprisonment and fine which can only be imposed by Court of Law (b) Compounding of offences by Sales Tax authorities (c) Penalty in certain cases which can be imposed by Sales Tax authorities.

Section 10 of CST Act provides that punishment upto six months of simple imprisonment or with fine or both can be imposed for following offences under CST Act.

Knowingly giving declaration in form C, E-I, E-II, F or H which he knows, or has reason to believe, to be falseNot registering under CST Act when required to be registeredFalse representation by a registered dealer that the goods being purchased are covered under his Certificate of Registration for concessional rateFalsely representing that he is a registered dealer, though he is not.Misusing or using for different purpose the goods obtained under C form or H form prescribed for SEZ unit, at concessional rate Having in possession C forms or H form prescribed for SEZ unit, which are not obtained as per provisions of Act.Collecting any amount representing as Central Sales Tax by an unregistered dealer or by a registered dealer in contravention of provisions of Act.Provisions regarding offences in ‘General Sales Tax Law’ (excepting those enumerated above) are applicable in respect of offences committed by dealers in that State.

Punishment by Court of law - Punishment of imprisonment and/or fine can be imposed only by Court of law. If the offence is a continuing offence, fine of Rs. 50 per day till offence continues can be imposed. The person has to be prosecuted in a criminal case. Such prosecution can be launched only with previous sanction of State Government or its authorised officer. The offences are cognizable and bailable.

Compounding of offences - Some offences can be compounded by Sales Tax Authorities. Compounding means the dealer agreeing to pay a fine and sales tax authorities agree to drop further action in respect of the offence. - - This is termed as ‘penalty in lieu of prosecution’ under CST Act.

PENALTY IN LIEU OF PROSECUTION - Section 10A of CST Act authorises imposition of penalty in lieu of punishment in respect of offences regarding (a) obtaining goods not included in registration certificate (b) purchasing goods representing that he is registered dealer, though he is not (c) using goods for purposes different than the purposes for which purchased. (Other offences can be compounded by Sales Tax authorities, if provision exists in State Sales Tax Law). The penalty can be upto one and half time the tax which would have been payable. The penalty can be imposed by Sales Tax Authority having jurisdiction over the dealer’s place of business. Once penalty is imposed, prosecution for same offence shall not be instituted. The penalty is collected by Union of India in the State in which the dealer is registered or if he is not registered - in which he should have got himself registered.

Offences cognizable and bailable - The offences under CST Act are cognizable and bailable. [section 11(2)]. However, Court can take cognizance of offence under CST Act only with previous sanction of State Government or its authorised officer. The offence can be tried only in court of presidency magistrate of a magistrate of first

class or court above that. [section 11(1)]

Punishment for other offences - Besides above, State laws provide for other offences like late payment or non-payment of tax, false declaration of turnover, non-filing or late filing of returns etc. These provisions are also applicable in respect of dealers in that State who make inter State sale [section 9(2A) of CST Act].

No limitation for launching prosecution - As per Economic Offences (Inapplicability of Limitation) Act, 1974; there is no limitation for launching prosecution in respect of offenses under CST Act and any other offense that may be tried along with offense under Central Sales Tax Act, 1956.

Other provisions

Liability of company in liquidation - As per section 17(1), if a liquidator or receiver is appointed for a Company, he should inform sales tax authorities within 30 days of the appointment. The appropriate authority [assessing officer i.e. sales tax officer - section 16(a)] will inform him within three months the amount of tax due from company which is in liquidation. [section 17(2)]. Liquidator cannot sell assets of company before setting aside amount of due as informed by sales tax authorities - unless such transfer or sale is by order of Court. [section 17(3)]. Otherwise, liquidator is personally liable. [section 17(4)].

PRIORITY OF STATE DUES - Government dues most of the times have priority over other dues in case of liquidation. The priority is subject to provisions of Companies Act.

Liability of directors of Private limited Company in case of liquidation - Section 18 provides that if a private limited company is being wound up, liability of directors of such private limited company is personal if amount cannot be recovered in liquidation i.e. the tax due can be recovered from his personal property. He can save the liability only if he proves that non-payment of tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to affairs of the company.

Recovery of CST – Provision of State Sales Tax laws apply for recovery of CST also. Many of State Sales Tax Laws provide that sales tax dues will have priority over any tax due and a charge is created. In the opinion of author, such a provision, even if contained in local sales tax law, cannot apply to CST. The reason is that only procedural provisions of local sales tax law can apply and not substantive provisions.