Indirect Taxes

Q.1 H is situated in Maharashtra and has received order from K in Madhya Pradesh. K in turn has received order from T in Tamil Nadu which is situated in Special Economic Zone and entitled to issue ‘I’ form under CST Act,1956. ‘K’ wishes to issue ‘I’ form to H against his purchase. The goods will be directly dispatched from Maharashtra to Tamil Nadu. Please explain the taxability of above transaction in hands of H, particularly whether his sale will be exempt u/s. 8(6) as against ‘I’ form received from K.

Ans. Before we opine on the issue it will be useful to refer to legal background. H’s transaction is falling in the category of inter-state sale. H is selling to K but as per his instructions the goods are directly going to T, T. N. H’s sale to K is first inter-state sale and the sale by K to T is subsequent inter-State sale. This legal position is clear from the reading of section 3(b) of CST Act, 1956. A reference can also be made to decided cases as under.

1. M/s.State of Gujarat vs. Haridas Mulji Thakker (84 STC 317)(Guj).

In this case the facts are that the Gujarat dealer received order from another dealer in Gujarat. For supplying the said goods, the vendor dealer in Gujarat placed order on Maharashtra dealer and instructed to send the goods directly to the Gujarat purchasing party. Gujarat High Court held that the sale by Maharashtra dealer to Gujarat vendor dealer is first inter-State sale and the one by Gujarat vendor dealer to Gujarat purchasing dealer is second inter-state sale. Gujarat High Court also held that the second inter-state sale is exempt u/s. 6(2) being effected by transfer of documents of title to goods. In this case though there was no physical transfer of L.R. etc. Gujarat High Court held that there is constructive transfer by instruction and hence duly covered by section 6(2). This judgment also duly covers further issues, that there is no need for physical transfer and also that having predetermined parties does not affect the claim.

2. M/s. Fatechand Chaturbhujdas vs. State of Maharashtra (S.A. 894 of 1990 dated 12-8-1991).

In this case the local party purchased goods from other local party and directed the same to be dispatched to outside State party. Even though local party was shown as consignor, taking the view that while placing order there is term for outside place dispatches, Maharashtra Sales Tax Tribunal held that the sale between two local party is first inter-Atate sale and the sale by local party to outside party is subsequent inter-state sale, duly exempt u/s. 6(2).

3. M/s. Duvent Fans P. Ltd. vs. State of Tamil Nadu (113 STC 431)(Mad.)

Local dealer purchased goods from other local dealer and directed to send them to his purchaser’s place in other State. Madras High Court held that the first transaction is first inter-State sale and the second sale is also subsequent inter-state sale exempt u/s. 6(2) of CST Act.

From above, it is also clear that so far as H is concerned his sale is to K.

As per sections 8(6) & (7) of CST Act the sale to any unit in SEZ is exempt from levy of tax. Sections 8(6) & (7) read as under.

8. Rates of tax on sales in the course of inter-State trade or commerce.

(1) to (5)

(6) Notwithstanding anything contained in this section, no tax under this Act shall be payable by any dealer in respect of sale of any goods made by such dealer, in the course of inter-State trade or commerce to a registered dealer for the purpose of setting up, operation, maintenance, manufacture, trading, production, processing, assembling, repairing, reconditioning, re-engineering, packaging of for use as packing material or for use as packing accessories in an unit located in any special economics zone or for development, operation and maintenance of special economic zone by the developer of the special economic zone, if such registered dealer has been authorized to establish such unit or to develop, operate and maintain such special economic zone by the authority specified by the Central Government in this behalf.

(7) The goods referred to in sub-section (6) shall be the goods of such class or classes of goods as specified in the certificate of registration of the registered dealer referred to in that sub-section…”

(underlining ours)

From above it is clear that only sale to a registered dealer who intends to use the said purchases in SEZ unit is exempt from tax under above section. A further reference can also be made to Rule 12 (11) of CST Act (R & T) Rules,1957 which prescribe for issue of ‘I’ Form. The said Rule is as under.

“11. The dealer, selling goods in the course of inter-State trade or commerce to a registered dealer under sub-section (6) or under sub-section (8) of section 8 or under sub-section (1) of section 5 of the Central Sales Tax Act,1956 read with section 76A of the Customs Act, 1962 (52 of 1962), shall furnish a declaration for the purposes of sub-section (8) of the said section 8 in ‘Form I’ duly countersigned and certified by the Authority specified by the Central Government authorizing the establishment of the unit in the Special Economic Zone (notified under section 76A of the Customs Act, 1962 (52 of 1962) that the sale of goods is for the purpose of establishing a unit in such Zone.”

Read with above Rule 12(11) it is also clear that only an unit in SEZ can issue ‘I’ form. The said form is to be countersigned by the SEZ authority, appointed by Central Govt.. From details to be furnished in ‘I’ form also it can be clear that only SEZ unit can issue ‘I’ form. Amongst others ‘I’ form requires following details.

“(c) Number and date of Registration No. issued by the Development Commissioner, SEZ concerned, alongwith details of goods specified in the Certificate of Registration..”

Under above legal position K will not be able to obtain ‘I’ form from SEZ authority and issue the same to H.

In our opinion H’s sale to K is normal first inter-State sale and K cannot be able to issue ‘I’ form. In any case K being not in SEZ unit, H cannot sale to it as exempt sale against Form ‘I’. H can effect normal sale against Form ‘C’ to K and K can effect further sale u/s. 6(2) of CST Act, 1956. K can very well accept ‘I’ form from T whereby its sale to T will be exempt.

We also add that in relation to ‘I’ form there is no deemed exemption system. In case of export, a dealer can directly export or can sale to another dealer against Form ‘H’ who can export. Such prior sale is exempt u/s. 5(3) of CST Act as deemed export. However such deemed exempt sale prior to sale against ‘I’ form is not possible. Only direct sale to SEZ unit is exempt. Hence from above angle also there is no possibility of exempted sale when sale is effected to K.

In light of above we opine that H cannot make sale against ‘I’ form to K. The tax will be attracted as first inter-State sale as discussed above.

Q.2 The dealer has imported goods from foreign country. He has cleared the goods from customs for warehousing and accordingly kept the goods in bonded warehouse. From there the goods are sold to customers and the sale is claimed as exempt, being covered by second limb of section 5(2) of CST Act, 1956. Whether the claim will be successful ?

Ans. The issue is to be seen as per provisions of section 5(2) of CST Act, 1956. The section 5(2) reads as under:

“S.5. When is a sale or purchase of goods said to take place in the course of import or export –

(1) ——

(2) A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India. …..”

It can be seen that there are two limbs of section 5(2). As per first limb the sale or purchase occasioning movement of goods from foreign country are exempt as sale in course of import.

As per second limb the goods sold by transfer of documents of title to goods before goods crosses the Customs Frontiers of India are exempt. As per query the issue involved is about second limb. The important issue is about sale by transfer of documents of title to goods before goods crosses the Customs Frontiers of India. When the Customs Frontiers of India is crossed is the mute question. There are conflicting judgments on above issue. In Maharashtra, the larger bench of Maharashtra Sales Tax Tribunal in case of Indo Tex Export P. Ltd. (S.A. 284 & 285 of 1990 dt. 17-6-1995) held that sale from bonded warehouse is not allowable as in course of import u/s. 5(2). However recently the division bench of Maharashtra Sales Tax Tribunal has delivered judgment in case of Radh Sons International (S.A. 1358 & 1359 of 2004 dt. 9-10-2007). In this case irrespective of larger bench judgment, the division bench of Tribunal has allowed the claim as in course of import.

Tribunal in this respect has relied upon judgment of Madras High Court in case of State Trading Corpn. (129 STC 294) and held that the said judgment being of High Court under CST Act,1956 it is binding on it. Accordingly, the claim is allowed.

From above discussed legal position it can be said that till the Madras High Court judgment prevails the claim has to be allowed. If any other High Court takes different view or any higher forum rules otherwise, the claim will be disallowable.