Nature of sale when the claim of exempted sale u/s 6(2) of CST is disallowed
A dealer makes exempted sales u/s 6(2) of the CST Act, 1956 to the buyer dealer, who is within same state. The form ‘E1’ is not received from the seller, though ‘C’ form is received from the buyer. The assessing authority suggests that since the exemption is not allowable, the sale will be local sale and benefit of ‘C’ form also can not be given. Whether the view of the assessing authority is correct?
The elaborated facts can be mentioned as under:
The dealer purchases goods in the course of inter-state trade from other state vendors. When the goods are in movement, the dealer effects the sale of such goods (referred to as ‘in transit sale’). The buyer includes buyers situated within same state. For exempted ‘in transit sale’ dealer obtains form ‘E1’ from his vendors and form ‘C’ from his buyers. In few cases, dealer receives ‘C’ forms but does not receive ‘E1’ forms in relation to sale made to intra state buyers. Therefore, the sale is not exempt but taxable. The issue for reply is under above circumstances, whether the tax will be attracted under CST Act or local Act.
Before we give reply, it will be useful to refer to relevant legal back ground.
The inter state sales are covered by CST Act. As per the Scheme of CST Act, every inter state sale is taxable. However, under CST Act, there are two kinds of inter state sales. The nature of inter state sale transaction is defined in section 3 of the CST Act. The said section reads as under;
“S.3. When is a sale or purchase of goods said to take place in the course of inter-State trade of commerce.- 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-
occasions the movement of goods from one State to another; or
is effected by a transfer of documents of title to the goods during their movement from one State to another.
Explanation1.– Where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall, for the purposes of clause (b), be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.
Explanation 2.– Where the movement of goods commences and terminates in the same State it shall not be deemed to be a movement of the goods from one State to another by reason merely of the fact that in the course of such movement the goods pass through the territory of any other State…….”
As per section 3(a) the direct inter state sale between two parties is covered.
There is extension of inter state sale by section 3( b). As per this section the sale effected by transfer of documents of title to goods, when the goods are in inter state movement. As per Explanation -1, to section 3(b), the movement commences, when the goods are loaded in transport and it terminates upon taking delivery from the transport. Any sale made during above movement is inter state sale. They are also referred to ‘in transit sale’ in the market.
Section 6(2) of the CST Act seeks to give exemption to such ‘in transit sale’. Section 6(2) is reproduced below for ready reference.
“6 Liability to tax on inter-State sales
(2) Notwithstanding anything contained in sub-section (1) or sub-section (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 a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods to a registered dealer, if the
goods are of the description referred to in sub-section (3) of section 8, shall be exempt from tax under this Act.
Provided that no such subsequent sale shall be exempt from tax under this sub-section unless the dealer effecting the sale furnishes to the prescribed authority in the prescribed manner and within the prescribed time or within such further time as that authority may, for sufficient cause, permit,-
a certificate duly filled and signed by the registered dealer from whom the goods were purchased containing the prescribed particulars in a prescribed form obtained from the prescribed authority, and
if the subsequent sale is made to a registered dealer, a declaration referred to in sub-section (4) of section 8.
Provided, further that it shall not be necessary to furnish the declaration referred to in clause (b) of the preceding proviso in respect of a subsequent sale of goods if, –
the sale or purchase of such goods is, under the sales tax law of the appropriate State exempt from tax generally or is subject to tax generally at a rate which is lower than three per cent or such reduced rate as may be notified by the Central Government, by notification in the Official Gazette, under sub- section ( 1) of section 8 (whether called a tax or fee or by any other name); and
the dealer effecting such subsequent sale proves to the satisfaction of the authority referred to in the preceding proviso that such sale is of the nature referred to in this sub-section.”
As per Scheme of section 6(2), the subsequent sale effected by transfer of documents of title to goods during inter state movement is exempt subject to production of form ‘E1’ as obtained from vendor and form ‘C’ as obtained from buyer.
If any of above two forms is not available then the exemption claim will not be allowable. However, the nature of transaction still remains inter- state sale. This is so because, the transaction is basically covered by section 3(b) which defines the inter state sale, as discussed above. Simply because one form is not available, the nature of transaction can not change but the exemption will get denied. The transaction will become taxable under CST Act. The tax is to be levied as per provisions of CST Act. In case, ‘C’ form is received, then, the tax will be attracted at lower rate of 2% under CST Act.
The above situation is also well covered by other connected provisions. For example, against the assessment order, the dealer can go in appeal and also produce missing forms in appeal. Similarly, dealer can also file rectification on getting the forms. If the transactions are not assessed under CST Act but under Local Act than the above subsequent proceedings will become redundant. Only if, the transactions are taxed under CST Act then in subsequent proceedings, the missing forms can be produced and exemption benefit can be availed.
Further, the local buyer in state obtains ‘C’ form from the sales tax department of the same state, which is supplied to them. In his case, it is inter state purchase that is why he is able to obtain the ‘C’ form. Thus, the nature of transaction remains to be inter state, in spite of one of the forms is not received. Under above circumstances, taxing selling dealer under Local Act will be contradictory and illegal. The same department can not treat the same transaction in opposite manner.
Thus the nature of transaction in the given circumstances will be inter-state sale and should be taxable accordingly under CST Act, 1956.