Exempted sales under section 6(2) of CST Act in relation to Works Contract

Query

In case of Works Contract, whether contractor can make exempted sale u/s. 6(2) of the CST Act by transfer of documents of title to goods ?

Reply:
There is special facility of exempted subsequent sale under section 6(2) of the CST Act, when sale is effected by transfer of documents of title to goods and when such sale is during movement of said goods. The transactions are better known as in-transit sale or E-I/E-II/C forms sale. In other words, there is intention to minimise CST levy within the course of single movement. As per Section 3(b) of the CST Act, the movement commences when the goods are delivered to public carrier and ends when the goods are taken delivery from the carrier.

However, a very specific issue arises when such sales is to be claimed in relation to works contract. In case of works contract, the primary agreement is to supply the goods and instal the same. Therefore, a technical issue arises that when the contractor is liable to instal, whether he can also take stand that the goods are sold by transfer of documents of title to goods during movement. There were different opinions on the issue. However, recently Hon. Telangana and Andhra Pradesh High Court had an occasion to deal with such situation in case of
Larsen and Toubro vs. State of Andhra Pradesh and Others (88 VST 422)(T & AP). There were several issues involved in this petition. However, one of the issues was about exempted sale u/s.6(2) of the CST Act. The facts and reasoning of the Hon. High Court can be noted as under:

"Within section 3(b) of the 1956 Act are sales in which property in the goods passes during movement of the goods from one State to another by transfer of documents of title thereto, whereas section 3(a) covers sales, other than those included in clause (b), in which the movement of goods from one State to another is under the contract of sale, and property in the goods passes in either States. A sale which takes place under section 3(a) stands excluded from the purview of section 3(b) and vice versa.

In order to attract section 6(2) of the 1956 Act, it is essential that the sale must be a subsequent inter-State sale and should be preceded by a prior inter-State sale. The use of the word
"subsequent"  means that the sale, on which exemption is claimed under section 6(2) of the 1956 Act, must be preceded by an earlier inter-State sale. The words
"such goods" , used in the second limb of section 6(2), refer to the goods in the first limb which are the goods sold during the course of inter-State trade or commerce either under section 3(a) or under section 3(b). The words
"during such movement"  in section 6(2) suggest that the goods are in movement, i.e., the goods have commenced movement in one State, but have not completed their movement in the other State.

Where the Legislature uses the same word or phrase in similar contexts, in different parts of the same section or statute, there is a presumption that the word is used in the same sense throughout, and to intend it in each place to bear the same meaning. It is reasonable to presume that the same meaning is implied by the use of the same expression in every part of an Act.

The conditions discernible from section 6(2) are that, while the first sale can be either a section 3(a) or a section 3(b) sale, the second or subsequent sale has to be a section 3(b) sale. A contract of sale entered into either before commencement of movement in the first State, or after completion of movement of the goods in the second State, can neither be a section 3(b) sale nor a subsequent sale exempt under section 6(2) of the 1956 Act.

It is necessary to read the contract as a whole to ascertain whether the parties, in fact, intended to transfer title to the goods during their movement from one State to another or after the goods have landed and have been utilised or incorporated in the works of the owner. The rule of construction, applicable to all written instruments, is that the instrument must be construed as a whole in order to ascertain the true meaning of its several clauses. The contract must be read as a whole, and a single clause, or a few clauses, in the contract should not be read out of context to determine the intention of the parties.

As ownership of the goods is not determined on the basis of who insures the goods, it matters little that the goods are insured, for their inter-State movement, by the owner. If the parties have agreed that the responsibility for risk of loss and damage to the goods would be that of the supplier till erection of the plant is completed, evidently transfer of title to the goods is intended to pass only on erection, and not prior thereto.

Usha Beltron Ltd. v. State of Punjab [2005] 7 SCC 58 followed.

A section 3(b) sale can arise only during movement of goods from one State to another. Mere movement of goods from one State to another would not suffice. The movement must involve a sale. The test to determine whether a sale of goods takes place in the course of inter-State trade and commerce is stipulated only by section 3 of the 1956 Act. Section 6(2) merely exempts from tax the subsequent sale which takes place in the course of inter-State trade and commerce. The person, whose contract of sale with another has occasioned movement of goods from one State to another in terms of section 3(a), cannot sell the very same goods to the very same person again. It is only where the purchaser of goods, under a section 3(a) or a 3(b) sale, sells the goods to a third party, that such a sale would be a subsequent sale falling within the ambit of section 6(2) of the 1956 Act. There can never be two sales between the same parties under the same contract
– one under section 3(a) and the second under section 6(2), as a section 3(a) sale is the first sale, and the sale exempt under section 6(2) is the second sale which takes place when the goods are in continuous movement pursuant to the first sale. As the first sale cannot, simultaneously, be a second sale also, a section 3(a) or a 3(b) sale cannot, at the same time, be a subsequent sale exempt from tax under section 6(2) of the 1956 Act.

The principles laid down in the context of an intra-State deemed sale of goods involved in the execution of a works contract would equally apply to an inter-State deemed sale of goods involved in the execution of a works contract. As the situs of the sale is irrelevant to a sale falling within the ambit of section 3(a) of the 1956 Act, and it would suffice if the movement of goods from one State to another is occasioned by the contract of sale or an agreement of sale containing a stipulation for the sale of goods or even as an incidence of such contracts, the measure or value of the goods on which tax, under section 3(a) of the 1956 Act, is to be levied would be the value of the goods when it is incorporated in the works, and neither the cost of acquisition of the goods by the contractor nor the price at which the goods were sold by the contractor to the owner under the supply contract. The value of the goods would also include the expenses incurred by the contractor (after the goods have been delivered by the carrier within the State), for transporting the goods to the site, the profit component involved in the inter-State deemed sale of goods, etc.

It is for the contracting parties to decide how, and from where, the goods should be purchased. It is not open to the State to contend that, even if the suppliers are identified in advance, they should have effected branch transfers, and then sold the goods to the contractee. When the goods move to a pre-determined buyer in the destination State, then the State from which the goods commence their journey would treat it as inter-State movement under section 3, and levy tax without giving exemption towards branch transfer. Questions, as to how a contract should be structured, and whether the goods should be sold in the course of inter-State trade or commerce or brought within the State as branch transfers, are commercial decisions, for the contracting parties to take, and not for the assessing/revisional authorities to impose.

If the name of the "owner"  is reflected in the bill of entry as the importer of the goods, it cannot be said that, notwithstanding the
"owner"  being the importer of the goods, the title to the goods continued to remain with the contractor.

The petitioner-dealers were contractors who purchased goods for incorporation in turnkey projects and claimed that such supplies were sales covered by section 3(b) read with section 6(2) of the Central Sales Tax Act, 1956 and under section 5(2) of the 1956 Act. The contracts broadly envisaged purchase of goods by the contractor from the identified suppliers referred to in the contract, most of whom are dealers outside the State, after which the goods were transported by the contractor from outside the State to the State of Andhra Pradesh. On these purchases tax was paid by the contractor under section 3(a) of the 1956 Act. The contractor was contractually bound to sell the goods to the owner, during transit, by endorsement of the lorry receipts. The material so purchased was inspected by the owner prior to its transportation from the State where the goods were manufactured, and, thereafter, for the goods to be transported by the contractor to the worksite of the owner in the other State where they were to be used in the erection and installation of the turnkey project. These goods were tailor-made for being utilised exclusively for the turnkey project. While the goods were purchased by the contractor from the supplier at a lower price, the very same goods were sold by the contractor to the owner at a higher price:

That the contracts were entered into between the owner and the petitioner-contractor, prior to an order being placed by the petitioner-contractor on suppliers outside the State for supply of the goods required for installation and erection of the project within the State, i.e., for the sale of future goods which were required to be manufactured by the suppliers, identified in the contract. The contracts could not have been, and were not, entered into when the goods were in movement from one State to another. A contract for the sale of future goods can neither be a section 3(b) sale nor a subsequent sale exempt from tax under section 6(2) of the 1956 Act. The sale could not, therefore, be a subsequent sale exempt from tax under section 6(2) of the 1956 Act."

Thus, the main principle applied by Hon. High Court was that the transfer of ownership in the goods when they are to be installed by way of contract is after installation and therefore, sale u/s.6(2) by transfer of documents of title to goods is not possible.

The judgment has far reaching effect. The situation can be seen by the law makers and make suitable changes to give real benefit of section 6(2) even in case of works contract.