inter-state & intra state sale, branch...

Article by Mr. Hemant Desai – Advocate VAT – SURAT | www: hddesai.com 1 | P a g e

INTER-STATE & INTRA STATE SALE, BRANCH TRANSFER

Article by: Mr. Hemant Desai

B.Com.,LL.B.

Advocate – VAT- SURAT

E-mail: [email protected]

The question whether a particular sale is an inter-State sale,

intra-State sale, sales in transit or branch transfer is a mixed

question of fact and law. The facts of particular transaction have

to be examined in the light of the provisions of section 3, section

4, section 6(2) and section 6A of the Central Sales Tax Act, 1956

(for short “Act, 1956”).

To ascertain a sale is an inter-State sale two tests have to be

applied, (i) is that a sale or purchase takes place in the course of

inter-State trade if it occasions movement of the goods from one

State to another, and (ii) is that a sale or purchase takes place by

transfer of documents of title to goods during the movement of

the goods from one State to another. See - Sec. 3 & 6(2).

To ascertain a sale is inside the State, the test to be applied is

that, in the case of ‘specific or ascertained goods’ they are within

the territory of the State at the time the contract of sale is made

or in the case of ‘unascertained or future goods’ they are within

the territory of that State at the time of their appropriation to the

contract of sale by the seller or the buyer. See – Sec. 4.

To ascertain transaction is branch transfer, the test to be applied

is that, the dispatch of goods from one State to another has not

moved in pursuance of terms of the contract for sale. Here the

onus to prove branch transfer lies upon dealer. See – Sec. 6A.


The situation dealt with by Section 3 with regard to inter-state

sale has been subjected to deeming provision. The legislature in

its wisdom has used the word “shall deem to take place” dealing

with two conditions with regard to inter-state sale. The dividing

line between sales or purchase under section 3(a) and those

under section 3(b) is that, in the former the movement of the

goods is under the contract of sale or purchase but in latter the

contract comes into existence after commencement and before

termination of the inter State movement of goods.

Inter-State sale or purchase can be carved out of and separated

from inside sales or purchases for the purpose of situs of

taxation. If a contract of sale contains a stipulation for the

movement of the goods from one State to another, the sale would

certainly be an inter-State sale. It is not necessary for the

purpose of section 3(a) that the contract of sale must itself

provide for an express covenant or stipulation in the contract and

cause the movement of goods or that the movement of goods

must be occasioned specifically in accordance with the terms of

the contract of sale. It can be culled out from terms that both the

parties contemplated the inter-State movement of goods

consequential to or as an incident of the contract section 3(a) will

be attracted.

Inter-State movement inference from the contract:

Even if a contract of sale does not contain a stipulation for the

inter-State movement of goods, a reasonable inference may be

drawn that the parties to the contract well knew that the


fulfillment of the contract condition is possible only if the goods

in question are moved from one State to another.

In STC v. STATE OF MYSORE (1963) 14 STC 188, the Supreme

Court held that although a contract of sale of cement did not

itself contain any covenant that the supply had to be made from

any particular factory, as the contract was subject to the terms of

the permit which provided that the supply had to be made from

one or other factory situated outside Mysore State, the contract

must be deemed to have contained a covenant that the cement

would be supplied in Mysore from a place situated outside its

border and a sale under such a contract would clearly be an

"inter-State sale" as defined in section 3(a) of the Act, 1956.

In COMMISSIONER OF VAT, New Delhi v. STATE OF HARYANA

(2009) 23 VST 10 (CSTAA), the assessee undertook certain

bituminous road works pursuant to contracts relating to

improvement of roads awarded by Government Departments,

Corporations, PWD and other authorities. The contracts were

entered into by the assessee's main registered office at Gurgaon.

The bituminous mixture was prepared at the hot-mix plant near

Gurgaon in Haryana State owned and operated by the assessee.

The mixture had to conform to the specifications laid down in the

contracts. The assessee had paid local sales tax on the turnover

whereas the assessing authority demanded CST. The first appeal

was rejected however in second appeal before CSTAA, it is held

that in order to constitute an inter-State sale within the meaning

of section 3(a) of the Act, 1956, there need not be an express

covenant or stipulation in the contract. If it can be clearly


inferred from the contract that both the parties contemplated the

inter-State movement of goods consequential to or as an incident

of the contract, section 3(a) was attracted. In other words, if the

inter-State movement was necessarily incidental to the

implementation of the contract, that would satisfy the

requirement of section 3(a). It was clear in this case that the

inter-Sate movement of the goods was clearly within the

contemplation of the parties and the reasonable presumption

that should be drawn was that the parties well knew that the

fulfillment of the contract was not possible unless the goods in

question were brought from outside Delhi because hot operations

were not permitted to take place within the territory of Delhi in

view of the directive of the Supreme Court.

Delivery place - passing of property in goods:

If a sale occasions the movement of goods from one State to

another, it is an inter-State sale irrespective of the State where

the property in the goods passes to the buyer under the Sale of

Goods Act, 1930 or where the seller and purchaser reside. The

goods at the time of movement should be specified and meant for

the particular buyer can pass in either State and yet the sale can

be an inter-State sale. When the movement of goods from one

State to another is an incident of the contract of sale, it is a sale

in the course of inter-State trade falling under section 3(a) of the

Act, 1956. It does not matter in which State the property in the

goods passes. What is decisive is whether the sale is one which

occasions the movement of goods from one State to another. The

inter-State movement must be the result of a covenant express or


implied in the contract of sale or an incident of the contract. It is

not necessary that the sale must precede the inter-State

movement in order that the sale may be deemed to have

occasioned such movement. It is also not necessary for a sale to

be deemed to have taken place in the course of inter-State trade

or commerce that the covenant regarding inter-State movement

must be specified in the contract itself. It will be enough if the

movement is in pursuance of and incidental to the contract of

sale. From delivery point in the exporting State, there can be

intra-State sale, inter-State sale or export of the goods.

Conversely in the importing State, there can be either stock

transfer of the goods or inter-State purchase. That is, either the

goods can be consigned to the person making it or to any other

person; or there can be inter-State sale of the goods, if the

movement of the goods is in pursuance of the contract of sale.

Movement of goods is implicit in the sale:

Where the purchase and transport are parts of one transaction

and cannot be dissociated and also there is no break between the

purchase and movement of goods to another State, it is

immaterial whether the sale or purchase takes place within

exporting State or importing State. So long the movement of

goods is an incident of the sale or purchase it amounts to an

inter-State sale or purchase. It is sufficient if the movement of

goods is implicit in the sale.

In RIL v. STATE OF U.P. the writ petition filed case Misc. Batch

No. 6281 of 2010 decided on 07.09.2012 the Hon’ble Allahabad


High Court the facts were that, to obtain a marketable product,

the raw natural gas is processed to remove inert or poisonous

constituents, and condensable hydrocarbons. Then said gas is

transported to the market in underground pipelines or in

liquefied form in ocean-going tankers. RIL delivered natural gas

at the outlet flange facility located at the onshore processing

terminal at Gadimoga of A. P. State and claimed that for the

selling of lean gas sold to the purchaser through transporter,

with regard to taxability as a result of commingling of gas or the

title of the gas being transferred at the delivery point itself shall

not be answerable to “post sale” processing of gas. There is no

agreement between RIL and RGTIL or GAIL either for transport,

commingling, extracting or processing of gas transported under

the transport agreement between the consumer and the

transporter. To fulfill conditions buyers entered into agreement

with RGTIL by which the transmission of natural gas from

Gadimoga to Hajira in Gujrat took place by the carrier, i.e. RGTIL

through its pipeline and from Hajira to Orai via Bijaipur in State

of U.P. by the gas pipeline of GAIL. The Court held that,

movement of natural gas is implicit is inter State sale.

Contractual obligation of buyer to take goods outside State:

In STATE OF BIHAR v. TELCO (1971) 27 STC 127 (SC) the

respondent company, which carried on the business of

manufacturing and selling trucks, bus chassis and spare parts

thereof, had its H.O. in Bombay and its factory at Jamshedpur in

Bihar had appointed dealers all over India. Under the agreements

between the company and the dealers, each dealer was assigned


a territory in which alone they could sell the trucks, bus chassis

and spare parts purchased from the company and the dealer was

forbidden from selling them outside his territory. The dealers

placed their indents, paid the price of the goods and obtained

delivery orders from Bombay office of the company. The trucks,

bus chassis and spare parts were delivered in Bihar to the

dealers to be taken to the territories assigned to them. Under the

contracts the dealers were required to remove the trucks, bus

chassis and spare parts delivered to them in the State of Bihar to

places outside the State. The goods were so removed, the sales

were held to be inter-State sales.

In CO-OPERATIVE SUGARS (CHITTUR) LTD. v. STATE OF T. N.

(1993) 90 STC 1 (SC) the appellant, a co-operative sugar factory,

had its sugar factory in the Kerala State was permitted by

Government Order issued by the Government of T.N. to draw

sugarcane in Coimbatore and Pollachi Taluks of the State. It was

also provided in the Government Order that the appellant should

pay sales tax to T.N. on the sugarcane supplied on the specific

basis. The appellant opened its offices in Coimbatore and Pollachi

and took delivery of the sugarcane from the farmers. They also

arranged the transport of sugarcane to the appellant's factory in

Kerala under cover of delivery note which showed the appellant

itself as the seller and the buyer. Court held that, the purchases

made by the appellant were inter-State purchases as they were

permitted to purchase sugarcane in Coimbatore and Pollachi

taluks only with a view to and exclusively for the purpose of

transporting it to its factory in Kerala. The movement of goods

from T.N. to Kerala was occasioned by the sale by the farmers or


purchase by the appellant, whichever way one looked at it. The

movement of sugarcane from T.N. to Kerala was an incident of

and was inextricably connected with the sale or purchase.

In DCM LTD v. CST (2009) 21 VST 417 (SC) the dealer sold

chemicals ex-works in Delhi to registered dealers who were under

a contractual obligation to sell them in their assigned territory

outside Delhi. The obligation of the purchasing dealer under the

contract with the seller to take the goods outside the State

indicated the control of the selling dealer over movement of the

goods. The purchasing dealers were obliged contractually to

remove the goods from Delhi to their assigned territories and the

goods were actually so removed. Thereby the sales were held to

be inter-State sales vide section 3 of the Act, 1956.

Contractual obligation of the selling dealer for delivery:

In OIL v. SUPERINTENDENT OF TAXES (1975) 35 STC 445 (SC)

the OIL had its H.O. in the State of Assam and was engaged in

the business of prospecting petroleum and also producing and

transporting crude oil from the State of Assam pursuant to the

prospecting licence and mining lease granted by the State of

Assam. In pursuance of an agreement, OIL supplied crude oil to

the refinery of the IOC situated in Bihar through pipe-lines

constructed and owned by the OIL. The construction of pipe-line

was undertaken by OIL in pursuance of the agreement and for

the specific purpose of transporting crude oil to Barauni in Bihar

from Assam. Delivery of crude oil was taken by IOC after

measurement at its Barauni Refinery. The movement of crude oil


from the State of Assam to the State of Bihar was an incident of

the contract of sale and therefore the sales to refinery at Barauni

were held to be sales in the course of inter-State trade.

In IOC v. UOI (1981) 47 STC 1 (SC) the appellant agreed to

supply Naptha from its refinery at Barauni in Bihar to IEL factory

at Kanpur in U.P. a pipeline was laid by IOC from Barauni to

Kanpur to its depot and again to the factory fence of IEL. The

source of supply was the seller's refinery at Barauni in Bihar and

the destination was the buyer's factory at Kanpur U.P.. The sales

were held to be inter-State sales as there was a specific clause in

the agreement that "the supply of naptha to the buyer shall be

made from the seller's refinery at Barauni". Under this clause of

the agreement the seller was to make the supply of naptha to the

buyer from its refinery at Barauni in Bihar. Thus, the supply

clause from Barauni in Bihar to Kanpur in U.P. alone is sufficient

to prove that the sales in question were inter-State sales.

Comments:

By mutual consent the agreement to sell can be changed at any

time before the commencement of the movement of goods from

one State to another. Also the nature of transaction depends on

terms of agreement to sell which does not debar a seller to make

an agreement suitable to both the sides.

Decisions on interpretation of section 3(a) of the Act.

In TISCO v. S.R. SARKAR (1960) 11 STC 655 (SC), the majority

view of the court was that where the goods are moved from one


State to another as a result of a covenant in the contract of sale,

that would be clearly a sale in the course of inter-State trade. The

court further proceeded to hold that even a movement of goods

from one State to another, which is merely incidental to, and

which is not part of, the contract of sale, is also brought within

the fold of section 3(a) of the Act, 1956.

In STATE OF BIHAR v. TELCO (1971) 27 STC 127 (SC), Court

observed that, "if a contract of sale contains a stipulation for

such movement, the sale would, of course, be an inter-State sale.

But it can also be an inter-State sale, even if the contract of sale

does not itself provide for the movement of goods from one State

to another but such movement is the result of a covenant in the

contract of sale or is an incident of that contract."

In OIL v. SUPERINTENDENT OF TAXES (1975) 35 STC 445 (SC),

Court held that, "No matter in which State the property in the

goods passes, a sale which occasions 'movement of goods from

one State to another is a sale in the course of inter-State trade'.

The inter-State movement must be the result of a covenant,

express or implied, in the contract of sale or an incident of the

contract. It is not necessary that the sale must precede the inter-

State movement in order that the sale may be deemed to have

occasioned such movement. It is also not necessary for a sale to

be deemed to have taken place in the course of inter-State trade

or commerce, that the covenant regarding inter-State movement

must be specified in the contract itself. It would be enough if the

movement was in pursuance of and incidental to the contract of

sale."


In ENGLISH ELECTRIC COMPANY OF INDIA LTD. v. DCTO

(1976) 38 STC 475 (SC), Court observed, that "when a branch of

a company forwards a buyer's order to the principal factory of the

company and instructs them to dispatch the goods direct to the

buyer and the goods are sent to the buyer under those

instructions it would not be a sale between the factory and its

branch. If there is a conceivable link between the movement of

the goods and the buyer's contract, and if in the course of inter-

State movement the goods move only to reach the buyer in

satisfaction of his contract of purchase and such a nexus is

otherwise inexplicable, then the sale or purchase of the specific

or ascertained goods ought to be deemed to have taken place in

the course of inter-State trade or commerce as such a sale or

purchase occasioned the movement of the goods from one State

to another. The presence of an intermediary, such as the seller's

own representative or branch office, who initiated the contract

may not make the matter different. Such an interception by a

known person on behalf of the seller is the delivery State and

such person's activities prior to or after the implementation of the

contract may not alter the position."

In UOI v. K.G. KHOSLA & CO. LTD. (1979) 43 STC 457, Supreme

Court reiterated and approved the decision in OIL (1975) 35 STC

445 (SC) and held that, if a contract of sale contains stipulation

for the movement of the goods from one State to another, the sale

would certainly be an inter-State sale. But for the purposes of

section 3(a) of the Act, it is not necessary that the contract of sale

must itself provide for and cause the movement of goods or that


the movement of goods must be occasioned specifically in

accordance with the terms of the contract of sale.

In SOUTH INDIA VISCOSE LTD. v. STATE OF T. N. (1981) 48

STC 232 (SC), Court observed that, if there is a conceivable link

between a contract of sale and the movement of goods from one

State to another in order to discharge the obligation under the

contract of sale, it must be held to be an inter-State sale and that

character will not be changed on account of an interposition of an

agent of the seller who may temporarily intercept the movement.

In BHEL v. STATE OF A.P. (1996) 102 STC 345 (SC), Court

observed that "in the light of the settled legal position, it cannot

be and it has not been seriously disputed that the movement of

goods from the Hyderabad unit of the petitioner-company direct

to the customer's site in the other State are inter-State sales

pursuant to the contracts entered into by BHEL with the

customers/purchasers. The fact that the contracts were entered

into with the head office or the unit having overall responsibility

for execution is a different one or that the executing unit itself

raises the invoices and realizes the price from the customers does

not in any way detract from the position that the inter-State

movement of goods from Hyderabad is pursuant to and a

necessary consequence of the contract of sale. In the instant

case, the goods are tailor-made, manufactured according to

certain specification and designs and the components/equipment

which go into the plant are directly dispatched by the Hyderabad

unit to the customer in the other State and the goods are received

from the common carrier by the customer's representative. The


movement of such goods from Andhra Pradesh to other States

cannot but be ascribed to contracts of sale entered into by the

head office of the petitioner-company of which the petitioner is

part and parcel. The fact that the contract was not entered into

with Hyderabad unit or that the inter-State movement had taken

place at the instance of another unit of the same company does

not make material difference. It is to be noted that for the value of

the goods dispatched, the debit note is sent by Hyderabad unit to

the executing unit. It may be that the customer does not pay the

amount direct to the Hyderabad unit which manufactures and

dispatches the goods. But in the light of the settled propositions

that the branches and head office constitute one single legal

entity, it does not matter by whom the billing is done or to whom

the payment is made by the customer".

Comments:

From the above decisions, the principle which emerges is, when

the sale or agreement for sale causes or has the effect of

occasioning the movement of goods from one State to another,

irrespective of whether the movement of goods is provided for in

the contract of sale or not, or when the order is placed with any

B.O. or H.O. which resulted in movement of goods, irrespective of

whether the property in the goods passed in one State or the

other, if the effect of such a sale is to have the movement of goods

from one State to another, an inter-State sale would ensue and

result in exigibility of tax under section 3(a) of the Act, 1956 on

the turnover of such transaction. It is only when the turnover

relates to sale or purchase of goods during the course of inter-


State trade or commerce that it would be taxable under the Act,

1956.

In the below cases sales-in-transit transactions were effected

in between two States, and there was no stipulation that the

subsequent sales under section 3(b) to be eligible for

exemption must occur in between third State.

In EAST INDIA CORPORATION LTD. v. STATE OF T. N. (1975) 36

STC 370 the assessee purchased cotton from dealers outside T.N.

When goods were in transit, the R/R were endorsed in favour of

customer in Madurai which was held to be as inter-State sale.

In CST, U. P. v. MEWALAL KEWAL KISHORE (1976) 38 STC 551

both dealers "A" and "B" were from U. P., "A" entered into an

agreement with "B" under which food grains were dispatched by

"A" outside the State. R/R was obtained in the name of “A” as self

and then endorsed by "A" to "B". The Court held it was transfer of

title to the goods and sale from "A" to "B" was only an inter-State

sale though they were within same State.

In LUCAS ELECTRICAL TRACTOR SERVICE LTD. v. STATE OF

T.N. (1984) 55 STC 286 the assessee purchased batteries from

Calcutta and sold the same in entirety to buyer in T.N. before the

goods were delivered by the carrier. The sales-in-transit allowed.

In CTO v. RAJ. SMALL IND. CORPORATION (1988) 68 STC 101

the respondent, a Government company, purchased coal from

collieries in Bihar for supply to allottees in the State of


Rajasthan. The supplying colliery charged respondent 2% CST on

the sale of coal to allottees. The claim of the respondent was

effected by transfer of title to documents and fall under section

3(b) of the Act, 1956 and eligible for exemption.

In CHERANADU SSI SERVICE Co-Op SOCIETY LTD. v. STATE

OF T. N. (1993) 90 STC 521 the collieries from A.P. dispatched

coal by rail to Salem in favour of the petitioner who endorsed the

documents of title to various buyers at Salem, who took delivery

at Salem railway station. It was held that, sales of coal by the

petitioners by transfer of documents of title to the goods took

place during the movement of goods from A.P. to T.N. and were

second inter-State sales. Denied exemption Forms not produced.

In RAJENDRA TRADING COMPANY v. CTO (1994) 93 STC 71

where the dealer was registered at Rajasthan, purchased goods

from outside Rajasthan and effected subsequent inter-State sales

by transfer of documents while in transit but did not furnish

Form C held that, it could have obtained from Rajasthan.

In STATE OF T.N. v. VAN VANASPATHY UDYOG (1995) 98 STC

376 where the railways have issued a certificate in favour of

second purchaser it was held a sales-in-transit and eligible for

exemption. The dealer at T.N. had purchased from outside the

State and effected sales-in-transit to dealer within Tamil Nadu.

In STATE OF W.B. v. JOSHI JUTE CORPORATION (1996) 100

STC 17 the dealer at Calcutta placed order on a jute mill at


Calcutta and transferred documents of title in favour of dealer at

Kerala. On the basis of documents the sales were held liable for

exemption under section 6(2)(b) of the Act, 1956.

In SRI KRISHNA RICE MILLS v. STATE OF A.P. (1997) 104 STC

475 a combined reading of section 6 of the Act, 1956 and rule 12

of the Central Sales Tax (A.P.) Rules, 1957 makes it clear that for

the claim of exemption under section 6(2) of the Act, 1956 a

dealer has to furnish original Form E1 received from the dealer

from whom he purchased the goods and Form C from the dealer

to whom the goods were sold in the course of inter-State sale.

In STATE OF T. N. v. KOTHARI PLANTATIONS & IND. LTD.

(1999) 113 STC 82 under section 6(2) of the Act, 1956, a dealer in

order to claim exemption in respect of second and subsequent

sales, has to necessarily file or produce Form E1 and C.

In STATE OF T. N. v. CHORDIA ELECTRICALS (2000) 120 STC

34 the dealer at T.N. effected sales in transit of goods purchased

from outside the State within Tamil Nadu. As declaration Forms

were not obtained it was held section 9(1) of the Act, 1956 can be

invoked and T.N. was held the appropriate State for levy of tax.

In SUNDARAM FINANCE LTD. v. STO (2002) 125 STC 565 the

dealer registered in Orissa entered into an agreement with

Kirloskar Electric Co. outside the State for purchase of machinery

for supply to a party IAPL at Orissa towards commissioning of


33/11 KV receiving station by way of sales-in-transit

transactions. The same was declared eligible for exemption.

In K. MOHAN & COMPANY v. STATE OF T. N. (2002) 128 STC

279 goods were sold to a party in Kolkata and documents were

sent through bank. The buyer did not pay and retired the

documents, hence seller made arrangements for sale to another

buyer and the goods were taken delivery from the transporter. It

was held to be a continuous subsequent inter-State sale until

termination of movement is effected by taking delivery under

section 3(b).

In PRIYA CHEMICALS v. W. B. COMMERCIAL TAXES (2003) 132

STC 145 the transactions under section 6(2)(b) has to be proved

by methods envisage in section 6(2). If upon analysis of the facts

and circumstances and the accompanying documents of a

particular transaction it clearly appears that there was a

purchase from a dealer of goods of the nature mentioned in the

section and subsequent sales, the exemption shall be granted.

The dealer in Calcutta purchased goods from A.P. and supplied

within State of W.B.. The same was held eligible to exemption.

In L & T LTD. v. CCT (2003) 132 STC 272 the appellant at A.P.

entered into a contract with Vishakapatnam Steel Plant and

others for erection of specified projects within A.P. got some of

the items specified for supply manufactured at its Mumbai

factory and dispatched directly in favour of the contractees by

transfer of title to the documents, held eligible for exemption.


In following decisions as regards the sales-in-transit

transactions only two States were involved even though the

exemption claimed was disallowed:

In TISCO v. S. R. SARKAR (1960) 11 STC 655 (SC) where the

property in the goods had passed before the movement

commenced during the course of first inter-State sale, the sale

will not fall under section 3(b) of the Act, 1956 nor will the sale

be covered by section 3(b) of the Act, 1956 in which the property

passed after the movement from one State to another had ceased.

In STATE OF GUJARAT v. CHEM DYES CORPORATION (1991) 83

STC 488 the assessee purchased goods from Bombay and

dispatched them to Rajkot and R/R were handed over to

purchasers at Rajkot. The purchasers after taking delivery of the

goods from the railways would carry out the inspection of the

goods and sales were concluded only after inspection and

approval by the ultimate purchasers. The Court held that one of

the conditions of section 3(b) was sale of the goods and not

agreement of sale. Through the documents of title to the goods

were endorsed during movement of the goods, still the sale had

not taken place and not eligible for exemption vide section 6(2)(b).

In SUNDARAM INDUSTRIES, Karapakkam v. STATE OF T. N.

(1992) 86 STC 554 the claim of exemption under section 6(2)(b)

sales disallowed as the supply was subject to prior inspection.


In STATE OF T. N. v. N. RAMU BROS. (Electricals) (1993) 89 STC

481 the assessee booked orders for generators at Tamil Nadu. In

turn he purchased the goods from Delhi. The goods were sent by

transporter having their office only at Coimbatore in Tamil Nadu.

The supplier at Delhi also intimated the way-bill particulars,

insurance payable, etc. The assessee informed the purchasers. As

the transporter was not having any office other than at

Coimbatore, the assessee gave letter of authority to the

transporters to effect delivery at the door steps of purchasers. It

was held that there was termination of movement at Coimbatore

and the goods were taken delivery notionally by the assessee from

Coimbatore and that the goods were delivered by the assessee

under his own delivery notes. It was held that exemption is not

admissible under section 6(2) of the Act, 1956.

In TRACTORS & FARM EQUIPMENTS LTD. v. STATE OF T. N.

(1999) 112 STC 300 the petitioner placed order with other

manufacturers in the State for manufacture of tractor parts and

after inspection and approval at manufacture’s premises, the

goods were directed to be dispatched to TFEL’s customers outside

the State. Lorry way-bill and R/R were sent to TFEL after

dispatch. TFEL endorsed these documents and sent to customers

of TFEL. The claim under section 6(2)(b) of the Act, 1956 was

rejected on the ground property in goods passed on to petitioner.

In STATE OF T. N. v. GOPAL ENTERPRISES (1999) 113 STC 46

where documents were not produced as regards the second and


subsequent inter-State sale from T.N. to Karnataka the dealer

was not entitled to exemption.

In P. U. USHA v. STATE OF KERALA (2007) 5 VST 484,

Explanation 1 to section 3(b) along with section 6(2) makes it

clear that the transfer of documents of title to the goods must be

during the movement from one State of another and not after.

The delivery has to be taken when the movement of the goods

terminates at its destination. It is not permitted for the dealer to

expand the movement of goods beyond the time of physical

handing of goods. In this case the dealer based in Kerala

purchased paper from T.N. and after arrival at Kerala during

March 1990 at parcel office, effected transfer of title to the goods

to another dealer at Kerala during June 1990.

In CINZAC TECHNICAL SERVICES v. STATE OF KERALA (2009)

25 VST 165 the dealer at Kerala claimed exemption in respect of

a boiler manufactured outside the State to an industry in Kerala.

It was held that subsequent sale will not fall under section 6(2)(b)

as boiler can be manufactured only according to the

specifications of the ultimate purchaser. Both first purchaser and

ultimate purchaser were situated in Kerala.

Comments:

In P.U. USHA (supra) case the seller and the purchaser of the

documents of title to goods reside in the same State does not

affect the inter-State character of the sale. The concept of


duration of the movement is enlarged by the addition of the

period of custody of the goods in the hands of a carrier or bailee

for the purpose of transmission to and delivery at the other State.

Explanation 1 provides for this enlargement. The result is that

any sale which takes place while the goods are on their inter-

State journey, i.e., from the time of delivery to the carrier or

bailee by the consignor until they are unloaded by or on behalf of

the consignee in the other State, is a sale in the course of inter-

Sate trade or commerce. To constitute an inter-State movement,

the two termini of the journey of the goods must be in two

different States. This is provided in Explanation 2. A subsequent

sale contemplated by section 3(b) is one which is effected by

transfer of documents of title to the goods during their movement

from one State to another. Where the property in goods passed

before the commencement of the movement of goods, the sale will

evidently not fall within clause (b) of section 3, nor will the sale in

which the property in the goods passes after the movement from

one State to another has ceased, be covered by the clause (b). The

dividing line between sales or purchases under section 3(a) and

those falling under section 3(b) is that in the former case the

movement is under the contract, whereas in the latter case the

contract comes into existence only after the commencement and

before the termination of the inter-State movement of the goods.

Therefore, it follows that an inter-State sale can either be

governed by section 3(a), if it occasions movement of goods from

one State to another, or under section 3(b) if it is effected by

transfer of documents of title to goods after such movement has

started and before the goods are delivered. In other words, a sale


which takes place under section 3(a) is excluded from the

purview of section 3(b) and vice versa.

Scheme of section 6 (2) of the Act, 1956:

Section 6(2) was introduced in order to avoid the cascading effect

of multiple taxation. A subsequent sale falling under sub-section

(2), which satisfies the conditions mentioned in the proviso

thereto, is exempt from tax as the first sale has been subjected to

tax under sub-section (1). Thus in order to attract section 6(2), it

is essential that the concerned sale must be a subsequent inter-

State sale effected by transfer of documents of title to the goods

during the movement of the goods from one State to another and

it must be preceded by a prior inter-State sale. It is only then

that section 6(2) may be attracted in order to make the

subsequent sale exempt from levy of sales tax. However, the

proviso to section 6(2) prescribes further conditions of furnishing

certificate in Form E-I or E-II duly filled and signed by the

registered dealer from whom the goods were purchased and

declaration in Form C duly filled and signed by the registered

dealer to whom the goods were sold except where under the sales

tax law of the appropriate State the goods are exempt from tax

generally or is subject to tax generally at a rate which is lower

than such reduced rate as may be notified by the Central

Government, by notification in the official Gazette, under sub-

section (1) of section 8 of the Act, 1956. At present, such rate is

two per cent. It is only on fulfillment of these conditions that the

subsequent sale stands exempted. If these conditions are not


satisfied then, notwithstanding the fact that the sale is a

subsequent inter-State sale, the exemption would not be

admissible to such subsequent sales.

Constructive delivery:

Explanation 1 to section 3(b): An Explanation may only explain

and may not expand or add to the scope of original section.

Explanation may not be made to operate as exception. Mere

description of certain provision by way of Explanation is not

decisive of its true meaning. Explanation is to explain the

meaning and effect of the main provision and to clear up any

doubt and ambiguity in it. But ultimately it is the intention of the

Legislature which is paramount. Explanation may be in respect of

matters whose meaning is implicit and not explicit in the main

section itself. If it appears that Explanation has widened the

scope of main section, effect must be given to legislative intent.

Provision of section 3(b) read with the Explanation 1 along with

section 6(2) makes it clear that the transfer of documents of title

to goods must be during the movement of goods from one State to

another and not after. The transfer of documents of title to goods

must be during the movement of goods, i.e., before the movement

of goods terminates at its destination. Delivery of goods should be

read with reference to movement of goods from one State to

another. Where the goods reach the destination and there has to

be no further movement of the goods to another State, the

movement of the goods terminates. If the goods are supposed to

be in the movement till actual delivery, then by keeping the goods


in the possession of the transporter, all the intra-State sales of

such goods can be coloured as subsequent inter-State sales. This

cannot be the intention of the Legislature. No manipulation is

permissible. Whether a particular sale is subsequent inter-State

sale falling under section 3(b) of the Act, 1956 is to be analysed

and determined on the facts of the case. The issue may be settled

by further clarification of the expression "during their movement

from one State to another".

Division Bench of the Delhi High Court in ARJAN DASS GUPTA &

BROS. v. CST, New Delhi (1980) 45 STC 52, laid down the basic

guidelines regarding exemption of sales tax under section 6(2) of

the Act, 1956. The Court held that Explanation 1 to section 3(b)

of the Act, 1956 did not permit the dealer to expand the

movement of goods beyond the time of physical landing of the

goods in the Union Territory of Delhi. The Division Bench of the

Rajasthan High Court in Guljag Industries Ltd. v. State of

Rajasthan (2003) 129 STC 3 distinguished the judgment of Arjan

Dass Gupta & Bros. v. CST, New Delhi (1980) 45 STC 52, and

held that there was no question of any notional or constructive

delivery to the appellant in that case under section 6(2) of the

Act, 1956. The Division Bench of Kerala High Court in P. U. Usha

v. State of Kerala (supra) held that the transfer of documents of

title to goods must be during the movement of goods from one

State to another and not after. The delivery has to be taken when

the movement of goods terminates at its destination. Explanation

1 to section 3(b) does not permit the dealer to expand the

movement beyond the physical landing of the goods. Guljag


Industries Ltd. v. State of Rajasthan (2003) 129 STC 3 was

distinguished and Arjan Dass Gupta & Bros. v. CST, New Delhi

(1980) 45 STC 52 was followed.

These cases may be distinguished on the facts which are entirely

different. In the case of Arjan Dass Gupta & Bros. (1980) 45 STC

52, on the arrival of consignments in Delhi, the dealer used to

present the R/R before the civil supplies authorities for

endorsement on the R/R, which permit the import of coal within

the Union Territory of Delhi. The R/R so endorsed by the civil

supply authorities used to be endorsed by the assessee in favour

of the purchasing retailers in Delhi. The actual delivery of the

coal wagons in Delhi used to be taken by the purchasing retailers

on payment of railway freight to the railway authorities. The High

Court held that where the documents of title to goods were

transferred after the coal had landed in Delhi, the sales were

intra-State sales within Delhi. In the case of Guljag Industries

Ltd. (2003) 129 STC 3, the assessee had purchased chemicals in

the course of inter-State trade from manufacturers/suppliers

from Gujarat and effected subsequent inter-State sales to various

buyers in the State of Rajasthan which was by endorsing the

goods receipts during their movement from Gujarat to Rajasthan.

Goods passed through the areas where the assessee’s B.O. or

H.O. was located and they were carried to the destination of

subsequent buyers. Facts of the case evidently show that the

documents of title to goods were transferred during the

movement of the goods. The fact that the subsequent buyers

obtained delivery from the same transporter on or about the


same day, clinches the point of termination of movement in terms

of section 3(b) of the Act, 1956. In the case of P. U. Usha (supra),

the goods reached the destination in March, 1990 and the sales

were effected in May, June and July 1990 and delivery was taken

long after the goods had reached the destination. The sale was

effected after the goods reached its destination and not during

the movement of goods from one State to another. Thus, where

the documents of title to goods were transferred before the goods

reached the destination or before physical landing of the goods on

behalf of the consignee, the sale was held to be subsequent inter-

State sale falling under section 3(b) of the Act, 1956.

Levy and collect tax on subsequent inter-State sale:

Question arises, in which State the CST is leviable one must look

to and apply the test in section 9(1) of the Act, 1956, which reads

as under:

"Section 9. Levy and collection of tax and penalties.- (1) The tax payable by any

dealer under this Act on sales of goods effected by him in the course of inter-State

trade or commerce, whether such sales fall within clause (a) or clause (b) of section

3, shall be levied by the Government of India and the tax so levied shall be collected

by that Government in accordance with the provisions of sub-section (2), in the

State from which the movement of goods commenced:

Provided that, in the case of a sale of goods during their movement from one State

to another, being a sale subsequent to the first sale in respect of the same goods

and being also a sale which does not fall within sub-section (2) of section 6, the tax

shall be levied and collected,-


(a) where such subsequent sale has been effected by a registered dealer, in the

State from which the registered dealer obtained or, as the case may be, could have

obtained, the form prescribed for the purposes of clause (a) of sub-section (4) of

section 8 in connection with the purchase of such goods; and

(b) where such subsequent sale has been effected by an unregistered dealer, in the

State from which such subsequent sale has been effected."

Section 9(1) of the Act, 1956 confers jurisdiction to make the levy

and collection of the tax on the State from where the movement of

goods commences, and so the determinative test for discovering

the jurisdiction of a particular State, in an inter-State sale, is the

place from where the movement of the goods commenced. The

proviso to section 9(1) was substituted by section 6(a) of the

Central Act 103 of 1976 for the following, with effect from

September 7, 1976:

"Provided that, in the case of a sale of goods during their movement from one State

to another, being a sale subsequent to first sale in respect of the same goods, the

tax shall, where such sale does not fall within sub-section (2) of section 6, be levied

and collected in the State from which the registered dealer effecting the subsequent

sale obtained or, as the case may be, could have obtained, the form prescribed for

the purposes of clause (a) of sub-section (4) of section 8 in connection with the

purchase of such goods."

By the amendment, unregistered dealer was also made liable for

tax in cases of subsequent inter-State sales effected by transfer of

documents of the title to goods during their movement from one

State to another. So far as a registered dealer was concerned,

there was no material change except the introduction of the

words "could have obtained" in the phraseology of the proviso.


The Supreme Court in STO v. Oriental Coal Corporation (1988)

68 STC 398 has held that the amendment to section 9(1) of the

Act, 1956 in the year 1976 is not procedural. The amendment

imposes a substantive liability on an unregistered dealer. It also

regulates the rights inter se States to levy taxes on such inter-

State sales. The amendment being substantive in nature was

prospective and not retrospective. The amendment also conferred

jurisdiction on an officer in a particular State to levy a tax which

he otherwise could not.

Subsequent sales covered under section 3(a) of the Act, 1956:

In the case of A & G PROJECTS & TECHNOLOGIES LTD. v.

STATE OF KARNATAKA (2009) 19 VST 239 (SC), the appellant, a

registered dealer under the Karnataka Sales Tax Act, 1957, as

well as the Act, 1956, was engaged in execution of electrical

contracts. It was awarded three independent contracts towards (i)

supply of capacitor banks, (ii) execution of civil works and (iii)

creation and commission of capacitor banks at various sub-

stations of the Karnataka Power Transmission Corporation

(KPTC). Pursuant to those contracts the appellant appointed Bay

West as contractor located outside Karnataka for procuring

capacitor banks because the latter had a prior arrangement with

the manufacturers. In that transaction four parties were involved,

namely (i) A & G Projects, (ii) Bay West, (iii) manufacturers of the

equipment and (iv) KPTC being the ultimate consumer. There

were three independent contracts involved in the transaction. The

first contract was between A & G Projects and the KPTC for


supply of the equipment. The second was between A & G Projects

and Bay West for procurement of equipments. The third contract

was between Bay West and the manufacturers.

A & G Projects claimed exemption under section 6(2) in respect of

the second and third contracts contending that the said sales fell

under section 3(b). According to Revenue all the three contracts

came under section 3(a). The High Court held that the sale of

goods in favour of KPTC was completed when the goods were

appropriated by KPTC before commencement of movement of

goods from the place of manufacturers in Chennai (T.N.) to KPTC

in the State of Karnataka and, therefore, inter-State sale of goods

fell under section 3(a) of the Act, 1956.

The issue for consideration before the Supreme Court was that if

all the three contracts stood covered as inter-State sales under

section 3(a), which State was empowered to levy and collect the

tax. The tax under the Act, 1956, is levied by the Government of

India and is collected by the States. The relevant provisions are

contained in section 9(1); no other provision is relevant on this

question. Section 9(1) specifies the State wherein the CST shall

be levied and collected and the CST has to be levied and collected

in that State and in no other State. The law requires that it

should be levied and collected in the State from which the

movement of goods commenced. In this case, the assessing

authority had categorically held that all the three sales fell under

section 3(a) of the Act, 1956. The movement of goods commenced

from Tamil Nadu. So the competent State to collect CST was T.N.


and no other State. The case of the appellant regarding

subsequent sales effected during the movement of the goods was

specifically rejected by the two fact-finding authorities, the

assessing authority and the first appellate authority. It was held

by the Supreme Court that the question of taxing such sales

under the proviso to section 9(1) of the Act, 1956 did not arise. It

was essentially a case of facts and application of section 9(1) of

the Act, 1956 in case of inter-State sale covered under section

3(a), whereas proviso to section 9(1) applies only to subsequent

sales covered by section 3(b) and not to sales covered by section

3(a). The nature of transactions was determined by the assessing

authority which was confirmed by the first appellate authority.

The goods were manufactured at Chennai in accordance with the

specifications mentioned in the contract with the respondent and

the goods were delivered to KPTC in execution of the contract.

The goods were specific to the ultimate consumer. The lorry

receipt clearly mentioned the name of the consignee as KPTC.

The sale of goods in favour of KPTC was completed when the

goods were appropriated by KPTC before commencement of the

movement of the goods from manufacturer’s place at Chennai to

KPTC at Karnataka. Therefore, the inter-State sale of capacitor

banks fell under section 3(a) of the Act, 1956. The proviso to

section 9(1) of the Act, 1956 prescribing the State that would be

competent to collect sales tax applies only to subsequent sales

covered by section 3(b) and not to sales covered by section 3(a).

Under the facts of the case, the competent State to collect CST

was the State of T.N. from which the movement of goods

commenced and no other State.


Comments:

Dealing with the Act, 1956 in case of A & G Projects and

Technologies v. State of Karnataka (2009) 19 VST 239, Hon’ble

Supreme Court observed in nature of obiter dicta has created

mayhem in the sales-in-transit transactions. The view can be

that the subsequent sales be exempt only if contract with

ultimate buyer is executed after goods are dispatched by first

seller. Therefore possible course of action be thought.

‘Obiter dicta’ of SC be followed but not binding:

An ‘Obitum dictum’, as distinguished from a ratio decidendi is an

observation by Court on legal question suggested in a case before

it but not arising in such a manner as to require a decision. Such

an obiter may not have a binding precedent as the observation

was unnecessary for the decision pronounced, but even though

obiter may not have binding effect as a precedent, it cannot be

denied that it is of considerable weight. – DIRECTOR OF

SETTLEMENTS v. M. R. APPARAO 2002 - AIR 2002 SC 1598.

In DIVISIONAL CONTROLLER, KSRTC v. MAHADEVA SHETTY -

AIR 2003 SC 4172 it was observed, ‘Statements which are not

part of the ‘ratio decidendi’ are distinguishable as obiter dicta and

are not authoritative. Mere casual expression carry no weight at

all. Nor every passing expression of a Judge, however eminent,

can be treated as an ex cathedra statement having the weight of

authority’.


An observation made by a superior court is not binding. What

would be binding is the ratio of the decision. Such ratio should

be arrived at upon entering into the merit of the issues involved

in the case – DADU DAYALU MAHASABHA v. MAHANT RAM

NIWAS AIR 2008 SC 2187.

In MOHANDAS ISSARDAS v. A.N. SATTANATHAN 2000 (125) ELT

206, it was observed, ‘It would be incorrect to say that every

opinion of the Supreme Court would be binding upon the High

Courts in India. The only opinion which would be binding would

be an opinion expressed on a question that arose for the

determination of Supreme court and when though ultimately it

might be found that the particular question was not necessary for

the decision of the case, even so, if an opinion was expressed by

Supreme Court on that question, then the opinion would be

binding on High Court’. Statements which are not necessary to

the decision have no binding authority on another Court, though

they may have some merely persuasive efficacy.

In MUNICIPAL CORPN. v. GURNAM KAUR - AIR 1989 SC 38, it

was observed, ‘Pronouncements of law, which are not part of the

ratio decidendi are classed as obiter dicta and are not

authoritative.’ – similar view taken in UNITED RICELAND v.

STATE OF HARYANA (1997) 104 STC 362.

Precautions by the dealer:

It is a fact that in all cases of E-I and E-II transactions, the

ultimate buyer is known even before goods are dispatched by

original manufacturer/supplier. It is also fact that at least at


lower level, the Supreme Court’s observation is likely to be

mechanically followed.

In CTT v. DALU RAM GANPAT RAM (2010) 33 VST 433, goods

were booked by rail for transport from U.P. State to other State.

The R/R was obtained by U.P. State seller in his own name i.e.

self. The seller than transferred the R/R/ in name of buyer who

was from the U.P. State. It was held that this is inter-State sale

covered under section 3(b) of Act, 1956 by relying on CST v.

MEWALAL KEWAL KISHOR (1976) 38 STC 551.

To minimize the risk, one must ensure that property in goods

passes during movement of goods and not before movement of

goods. In case of A & G Projects, the L/R was directly in name of

ultimate buyer and hence it was held that property in goods

passed to buyer before movement of goods commenced.

The transport document should be marked as ‘Self’ and then L/R

should be transferred by endorsement in favour of first buyer and

then from first buyer to ultimate purchaser. If these precautions

are taken, a dealer can distinguish his case from A & G Projects

and can establish that the sale is by transfer of documents

during movement of goods from one State to other.

The dealer can of course depend on the case law discussed above

and state that the observation made by Supreme Court is not a

binding precedent, particularly when the statutory provision as

contained in section 3(b) of Act,1956 is entirely different. It may

be noted that, authority is not entitle to call for further


documentary evidence – see P.A.GEORGE & CO. v. ACST (1998)

110 STC 253, 264 to 266.

Dispatched of goods through agent to identified buyer:

To constitute interstate sales, one of the basic requirements is

that there should be sale. If a person sends goods outside from

its State to its B.O. in another State then it is not sale because

one cannot sell goods to oneself. Similarly if a dealer sends goods

to its agent in another State who stocks and sells goods on behalf

of the dealer, such agent is called consignment agent and such

stock transfer is also not considered as interstate sales since

there is no sales involved in it, sales will take place when such

agent will sell goods. But to prove such stock/branch transfer,

Form is required to be produced as proof.

In HYDERABAD ENGINEERING INDUSTRIES v. STATE OF A.P.

(2011) 39 VST 257 (SC) the assessee registered itself in the name

and style of HEI Prop. Jay Engineering Works Ltd. inter-alia

engaged in manufacturing of electrical fans, sewing machines,

fuel injection parts and accessories etc., claimed exemption in

respect of turnovers of stocks transferred to depot outside the

State. By an agreement dated May 1, 1979, Usha International

Ltd.(UIL), had agreed to purchase the products and sell them as

an independent principal. The assessee had its godown in every

State including Delhi. Pursuant to the agreement, UIL placed

monthly indents on the assessee with instructions to dispatch

the goods of given size and quantity to the named destination,

and the assessee dispatched the goods to its godowns to the


given destination and sent goods dispatch intimation directly to

the concerned UIL divisional office at the destination, furnishing

size and quantity dispatched with L/R number and name of the

transport company. The assessee claimed exemption by way of

stock transfer that has been rejected by the assessing authority

and also confirmed by the Tribunal and the High Court. Supreme

Court held, that it did not matter how much goods were delivered

to the B.O. which just acted as a conduit pipe before goods

ultimately reached the purchaser's hands. All that mattered was

that the movement of the goods was in pursuance of the contract

of sale or as a necessary incident to the sale itself. The movement

of goods from the assessee's factory to its various godowns

situate in different parts of the country was pursuant to sales

agreement coupled with forecasts which were nothing but indents

or firm orders. Therefore, the transaction between the assessee

and its B.O. was a clear case of inter-State sales and not branch

transfers.

The inter-State movement must be the result of a sale or an

incident of the contract: it is not necessary that the sale must

precede the inter-State movement in order that the sale may be

deemed to have occasioned such movement. It is also not

necessary for a sale to be deemed to have taken place in the

course of inter-State trade or commerce, that the covenant

regarding inter-State movement must be specified in the contract

itself: it would be enough if the movement was in pursuance of

and incidental to the contract of sale.

Significant observations by Court:


Where there is a positive case of inter-state sales, even if the

dealer had procured F-Forms, the same would still be of no

use and he may need to prove that the facts are otherwise –

see Para 19.

Where the agreement was entered with another unit or

movement of goods was at the instance of another unit of same

company does not make any material difference – see Para 32.

B.O. & H.O. constitute one single entity. Who bills or collects

from the customer does not matter - see Para 32.

Even if no firm orders have been provided, the fact that

‘forecasts’ have been provided by the buyer in the beginning

would take the colour of ‘indents’ or ‘firm orders’ - see Para 43.

Even where purchases are made to government departments

who are bulk buyers would not take it out of the purview of

inter-state sales – see Para 44.

Comments:

Decision is distinguishable from others as in the instant case,

buyer of goods was having an agency for the various states

wherein it had the sole selling rights. Nevertheless, it can be

taken as a weapon by assessing authorities who may try to catch

dealers undertaking such transactions. Facts on record should

be evident that:

1. B.O. established at various places be maintained at their own.


2. Bulk quantities of goods be dispatched without any reference.

3. Excise gate passes be prepared in the name of B.O. name.

4. Transport charges be paid by the factory.

5. Delivery of goods be taken in godown by the staff of B.O.

6. Property in goods should remain with B.O. till they are sold.

7. Goods be delivery by the B.O. to buyers at their own.

8. D/C be issued by the B.O. after the receipt of goods in godown.

9. The goods be appropriated to a particular buyer at the B.O.

10.B.O. be registered under respective State and assessed to tax.

11.The goods should neither be manufactured according to the

specification of a particular customer nor particular goods be

meant for a particular customer - exclude diversion possibility.

12.The goods must be cleared by the B.O. form the respective

places and expenses on account of freight, loading and

unloading charges from factory be bore born by dealer.


13. Delivery of the goods be made to the customer from the

godown by preparing list, delivery challan and sales invoices

from depot.

14.The in-charge of B.O. must have the full discretion to deliver

the goods in any quantity or to any customer of their choice.

15.B.O. should not acted as a conduit pipe - neither any

agreements nor any correspondences be entrained.

16.B.O. managers should have absolute discretion to supply

goods of any origin from the stock laying at godown of the sales

office situated outside the State.

Friends, above are my personal views the readers who find

contrary, the subject is open for comments and/or debate. It will

be welcomed.

“Every Government has a right to levy taxes. But no Government has the right, in the process of extracting tax, to cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of palpable injustice.” - Nani Palkhivala book on Income Tax Act, 1961 (8th Edition).

inter-state & intra state sale, branch...

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