Sales Tax Review

February  2007

Important Trade Circulars

No.VAT/Clarification/1006/202/Adm-3

Gentlemen/Sir/Madam,

Queries have been received by this office regarding the tax treatment of Goods sent to other States.  A dealer may send his goods to another State for various reasons.  The goods may be sent for minor job work, extensive job work or for conversion or for manufacture.  Apart from this, a dealer may send the goods to another State for sale or for otherwise disposal in that State.  Queries have been received regarding the tax treatment of such goods under the Central Tax Act, 1956 as also under the Maharashtra Value Added Tax Act, 2002.  This circular explains the treatment required to be given to such goods under these two Acts.  Nothing in this circular applies or is intended to apply to the tax treatment of such goods under the Bombay Sales Tax Act, 1959 or any of the other Acts repealed by the Maharashtra Value Added Tax Act, 2002. 

2. The C.S.T. Act was amended in 1972 with effect from the 1^st April 1973 by inserting a new section, namely, Section 6A.  This section was further amended in 2002 by the Finance Act, 2002.  Section 6A of the CST Act deals with those contingencies where a dealer has sent any goods from one State to another, not by way of sale, to the places of his business or to his agent or to his principal. 
    

3. (1)    Section 6A of the Central Sales Tax Act, 1956 provides that where the dealer claims that he is not liable to pay tax in respect of the goods sent as aforesaid to another State to his own place of business or to his agent or to his principal, on the ground that the movement of goods was not by reason of sale, then the burden of proving that the movement of goods was so occasioned, is on the dealer. It may be noted that this section applies only in those cases where the movement of good is to the place of business of the dealer in another State or to his agent or principal in another State.  The section has no applicability where the goods are sent to another State for purposes other than those enumerated in that section.  The word ‘Agent’ as used in this section means the Agent as defined in Section 182 of the Indian Contract Act.  That Section reads as follows: 

182.   “Agent” and “principal” defined : “An Agent is a person employed to do any act for another or to represent another in dealing with third persons.  The person for whom such work is done or who is so represented is called the “principal”. 

(2)  Normally, persons acting as brokers, factors, auctioneers, commission agents, del credere agents etc. are the agents contemplated under this Section.   It may be added that the contract of agency may be in writing, may be oral or may be inferred from the conduct of the parties and the circumstances.  An agent differs from a servant or an independent operator.  In an agency, the principal has a right to direct what work the agent has to do.  In case of a servant, the principal has a further right to direct how the work is to be done.  An independent operator is different from an agent or a servant.  An agent, in the matter of agency, is bound to act subject to the direction and control of the principal.  But an independent operator merely undertakes to perform certain specified work or produce a certain specified result.  The manner and means of performance and production are at the discretion of the operator except in so far as they are specified by the contract.

4. Therefore, when a dealer sends any goods to another person located in a different State for job work or for manufacturing etc., the transaction will normally be on a ‘principal to principal’ basis with an independent operator and not on a ‘principal to agent’ basis.  Section 6A of the CST Act will have no applicability as regards the transaction where the goods are sent on a ‘principal to principal’ basis.   It follows that in such instances where the contract is on a ‘principal to principal’ basis, it will not be required for the dealer to obtain a declaration in Form F from the person to whom the goods have been dispatched.  Similarly, the amendment to Section 6A in 2002, which provides that where the dealer fails to produce the declaration in Form F,  the movement of goods shall be deemed to have been occasioned as a result of sale is not applicable to ‘principal to principal’ transaction.
    

5. Section 6A, as of course its amendment in 2002, will apply, as stated above, only when the goods are sent by a dealer to another State to the dealer’s own place of business or to his agent or where the dealer is an agent, to the place of his principal.  In particular, nothing in this section will apply when the goods are sent to another State, not by way of sale, to an independent operator.  The tax treatment of goods under the CST Act, 1956 sent to another State, to another principal, not by way of sale, is to be worked out accordingly.
    

6. Rule 53 of the Maharashtra Value Added Tax Rules, 2005 deals with reduction in set-off. Sub-rule (3) of this rule deals with the case where the claimant dealer dispatches any taxable goods outside the State, not by reason of sale, to his own place of business or of his agent or where the claimant dealer is an agent, to the place of business of his principal.  If the goods are so dispatched, then in the contingencies described in the said sub-rule, the set-off available to the dealer is to be reduced as provided therein.
    

7. It may be noted that phraseology used in sub-rule (3) of Rule 53 is the same as the phraseology used in Section 6A of the CST Act.  In other words, the rule regarding reduction of set-off operates in only those contingencies which are covered by Section 6A of the CST Act. The rule will not apply in instances where Section 6A of the CST Act has no applicability. It is, therefore, clear that the reduction in set-off contemplated under the said sub-rule does not apply where the goods are sent to another State for job work or for manufacturing etc. on a ‘principal to principal’ basis.  Subject to the other provisions of that sub-rule, the reduction in set-off will apply only when the goods are sent to another State, not by reason of sale, to the dealer’s own place of business, or to his agent or where the dealer is an agent, to the place of his principal.
    

8. There would be contingencies where a dealer located in Maharashtra receives goods, not by way of purchase, from another State.  The clarifications given in this circular would apply, mutatis mutandis, to such inward movement of goods from another State.
    

9. This circular cannot be made use of for legal interpretation of provisions of law, as it is clarificatory in nature.  If any member of the trade has any doubt, he may refer the matter to this office for further clarification.
    

10. You are requested to bring the contents of this circular to the notice of all the members of your association.

Yours faithfully, 

(B.C.KHATUA.)

Commissioner of Sales Tax

Maharashtra State, Mumbai.