RECENT AMENDMENTS TO CENTRAL SALES TAX ACT (CST), 1956, WITH SPECIAL REFERENCE TO DEEMED SALES AND BRANCH TRANSFERS WHEN NOT LIABLE TO CENTRAL SALES TAX

Preamble

1. At present all the States in the Union of India are levying sales tax on the sale or purchase of goods. Sales tax thus forms a major part of their budget.
    

2. Sales tax is a State subject under the Constitution of India, like Law and Order. Hence, State has got power to levy sales tax in respect of intra-State sales only. In regard to inter-State sale or purchase of goods, sale or purchase of goods outside a State and when is a sale or purchase of goods said to take place in the course of import or export is to be determined by following the provisions of sections 3, 4 and 5 of the CST Act, 1956. Prior to the enactment of CST Act 1956, there were chaos in almost all the States in regard to the taxation of intra-State sale and inter-State sale. Thereafter, although the problems in this area were greatly reduced, but certain problems still persisted and went to seek solution right up to the Apex Court.

1. Concept of inter-state sale

The basic concept of inter-state sale and branch transfer. The Apex Court in Balabhadas Hulaschand vs. State of Orissa (1976) 37 STC 207 (SC), formulated the following requisites to hold a sale to be in the course of inter-State trade or commerce:

1. that there is an agreement to sell which contains a stipulation, express or implied, requiring movement of goods from one State to another;
    

2. that in pursuance of the said contract the goods in fact moved from one State to another;
    

3. that ultimately a concluded sale takes place in the State where the goods are sent, which must be different from the State from which the goods move.

Incidentally, the Supreme Court in K.G. Khosla & Co. (P) Ltd. vs. Dy. Commissioner of Commercial Taxes (1966) 17 STC 473 (SC) held that the expression “occasions the movements of goods” occurring in section 3(a) and section 5(2) of the CST Act, had the same meaning.

2. Sale, and not purchase, is taxable under the cst Act, 1956

Section 6, which is a charging section, makes every dealer liable to pay tax under the Act on all sales of goods other than electrical energy effected by him in the course of inter-State trade or commerce.

3. Section 6a burden of proof, etc., in case of transfer of goods claimed otherwise than by way of sale
   This section is very important for our discussion and hence, the same is reproduced hereunder:–

1. Where any dealer claims that he is not liable to pay tax under this Act, in respect of any goods, on the ground that the movement of such goods from one State to another was occasioned by reason of transfer of such goods by him to any other place of his business or to his agent or principal, as the case may be, and not by reason of sale, the burden of proving that the movement of those goods was so occasioned shall be on that dealer and for this purpose he may furnish to the assessing authority, within the prescribed time or within such further time as that authority may, for sufficient cause, permit, a declaration, duly filled and signed by the principal officer of the other place of business, or his agent or principal, as the case may be, containing the prescribed particulars in the prescribed form obtained from the prescribed authority, along with evidence of dispatch of such goods *[and if the dealer fails to furnish such declaration, then, the movement of such goods shall be deemed for all purposes of this Act to have been occasioned as a result of sale].
    

2. If the assessing authority is satisfied after making such inquiry as he may deem necessary that the particulars contained in the declaration furnished by a dealer under sub-section (1) are true, he may, at the time of, or at any time before, the assessment of the tax payable by the dealer under this Act, make an order to that effect and thereupon the movement of goods to which the declaration relates shall be deemed for the purpose of this Act to have been occasioned otherwise than as a result of sale. [Explanation: - In this section, “assessing authority”, in relation to a dealer, means the authority for the time being competent to assess the tax payable by the dealer under this Act.]
   
   *Inserted by S. 151 of the Finance Act, 2002, effective dated 11-5-2002.

Section 6A was inserted by section 3 of the CST (Amendment) Act, 1972, with effect from 1-4-1973. Thereafter, the said section was amended vide Finance Act, 2002 as stated above. This amendment seeks to amend section 6A so as to make compulsory the furnishing of Form F by the dealer and to authorize levy of tax in case where the dealer fails to furnish Form F. Thus, section 6A(1) is clearly in two parts. The first part throws the burden of proof on the dealer to prove that a particular movement of goods has been occasioned otherwise than as a result of sale. The latter part prescribes a mode of proof. The fact, it provides, can be proved by production of two things: (i) A declaration in the prescribed form from the person receiving the goods in other State, and (ii) The evidence of despatch of the goods.

4. The object and purposes behind new section 6a can be outlined thus

The new section 6A has been inserted for the purpose of providing that the burden of proving that any movement of goods from one State to another was occasioned otherwise than as a result of sale, shall be on the dealer making such claim. It may be remembered that, ordinarily the onus to prove that a transaction is “sale”, and therefore liable to be taxed, is always on the Department. Section 6A reverses the ladder and throws the onus on the dealer to prove that the movement of the goods from his State to another, by him or at his instance, has been otherwise than as a result of sale. For the purpose of discharging such burden, the dealer may produce – (i) a declaration in the prescribed form duly filled and signed by the consignee or recipient of the goods in the other State, and (ii) the evidence of dispatch of goods. If the transferor discharges the burden of proof laid upon him and the assessing authority is not satisfied with the particulars furnished by the transferor and feels that verification of the information given was necessary, such authority should call for further particulars or have the information furnished by the transferor verified. These provisions come into operation where goods are, for instance, sent by the head office to a branch, or by a branch to head office or by a branch to other branch or by one person to another person for sale on “consignment basis” (e.g., a commission agent, etc.), or by an agent to a principal or on stock-transfers, etc.

5. In this connection, it is important to note that before the amendment to section 6a as on 11-5-2002

The Union Government vide memo dated 22-1-1974 addressed to the Finance/Revenue Secretaries of all State Governments and Union Territories, categorically clarified that the said section uses the expression ‘may’ for the purpose of furnishing of Form F. In other words, the dealer will have the option to discharge the onus to the satisfaction of the sales tax authorities in any other manner. This was the legal position clarified in connection with section 6A, by the Union Government to all the States. The courts have also taken the same view. Refer, State of Orissa vs. Orissa Small Industries Corporation (67 STC 262) (Ori) C.S.T. vs. Agra Food Product Pvt. Ltd. (67 STC 266) (All). You may now appreciate that in the amended section 6A, the expression ‘may’ is still retained, notwithstanding the fact that the amended deeming provision makes it compulsory to produce Form F for claiming branch transfers as exempt from tax. Here, it must be noted that the legislative policy underlying the CST Act, 1956, essentially is to tax inter-State sale and not consignment of stock which is in the eye of the Sale of Goods Act, 1930 is not a sale. It therefore appears that the Parliament has consciously retained the word ‘may’ in the first part of section 6A. Thus it is submitted that production of Form F is still not mandatory. However, in view of the amendment to the section, it is advisable to procure ‘F’ Forms.

6. The above view finds support from a recently pronounced judgment dated 13th August, 2004 (not reported yet) of the Division Bench of the Bombay High Court, (as noted in a column “Ground Realities” by Divyakant Mehta, Economics Times dated 13th September 2004), which had considered whether as per the Code of Civil Procedure amended on July 2002, a tenant is required to file written statement within 30 days from the date of service of the summons. Earlier, one judge of the same court had taken the view that the amended provision of CPC is directory while another had taken the opposite view. This necessitated the reference to a Divisional Bench to resolve the said conflict as regards the true and correct interpretation of the said provision. The Division Bench has observed: “It is well settled position of law that no universal rule can be formulated as to whether an enactment shall be considered directory or mandatory except that the language alone most often is not decisive, and regard must be had to the context, subject matter and object of the statutory provision in question in determining whether the same is mandatory or directory. It is the duty of the courts to try to get at the real intention of the legislature by carefully attending to the whole scope of the statute to be considered”. The bench relying upon the observation of the Apex Court in various judgments further held that “It is cardinal rule of our jurisprudence that procedural provisions are not meant to thwart justice, but to advance it. Our laws of procedure should be construed, wherever that is reasonably possible, in the light of that principle”.
    

7. The debate on consignment sales or branch transfers would not be complete without noticing the first and second Supreme Court judgment in Ashok Leyland Limited vs. Union of India and Others (1997) 105 STC 152 (SC) and (2004) 134 STC 473 (SC), respectively. The brief facts of the first case were that the appellant was one of the major manufacturers of trucks and other motor vehicles in India, having manufacturing plants situated in Tamil Nadu as well as in other States. The trucks and vehicles manufactured by it were sold all over the country. For its business purposes it maintained Regional Sales Offices in different parts of the country and such offices were stocking, repairing and delivering motor vehicles to their customers. The appellant contended that almost seventy per cent of its sales were to parties other than State transport undertaking. Over the years, the appellant contended it had been sending the trucks, chassis and other vehicles to Regional offices all over the country under ‘F’ form and at no time the correctness of the ‘F’ forms produced by it questioned by anyone. However, the State of Tamil Nadu, ignoring the above position reopened the concluded assessment on the ground that the transfer of vehicles from Tamil Nadu to other States were not mere consignments but constituted inter-State sales within the meaning of clause (a) of section 3 of the CST Act. The appellant contended that it did not effect any inter-State sale and that there was only one sale in the other State, which has already been taxed under the sales tax law of that other State. The appellant further contended that the same transaction could not be taxed twice, once as an intra-State sale by one State and again by the State of Tamil Nadu as an inter-State sale. However, confirming the Tamil Nadu High Court decision the Apex Court too dismissed the appeal of the appellant holding that an order accepting Form F could be reopened as part of the reopening of the assessment. Under section 16 of the Tamil Nadu Act it was possible also to reopen the order accepting Form F as true without reopening the assessment; but in such a case enquiry had to be confined to the matters relevant thereto. In view of the special features and circumstances of the case, the Supreme Court felt that the appellant was facing a situation, which might put it in real jeopardy. In paragraph 22 the Court noted that if the vehicles which have been sold to, say, Maharashtra State Transport Undertaking, have been moved from the appellant’s office in Maharashtra which has issued Form F and accepted by the Tamil Nadu authorities in the course of assessment, reopening of such assessment after a number of years, seeking to treat the said movement of goods as a consequent upon or incidental to contract of sale thus present the appellant with a serious problem inasmuch as, it says that it has already paid tax on sale of vehicles in Maharashtra under the BST Act. Further, suppose, tomorrow it is held by the Tamil Nadu authorities that they were indeed inter-State sales and tax is levied and collected by the Tamil Nadu State, can the appellant go and legitimately ask the Maharashtra authorities to refund the tax paid by it on the sale of vehicles in Maharashtra? The Maharashtra authorities may well tell the appellant that their orders have become final and their orders cannot be reopened because authorities of another State have taken a contrary view. Further, in the adjudication of dispute the Tamil Nadu authorities cannot implead Maharashtra Sales Tax authorities.

Maharashtra authorities may well refuse to appear before the Tamil Nadu authorities. Therefore, following Bharat Heavy Electricals Limited vs. Union of India 1996 102 STC 373 (SC), it advised for the creation of a Central body, which would decide once for all questions of this nature.

8. As the said appellant did not get justice from the Tamil Nadu authorities, they once again straightaway petitioned to the Supreme Court by filling Writ Petition to resolve this complex problem. The Supreme Court therefore constituted a three-judge bench and heard the matter in the second case in which, the first judgment was overruled on the point that the concluded assessment can be reopened by the Tamil Nadu authorities. The court said that the order in which a finding is given that the movement of good was occasioned by reason of transfer otherwise than by reason of sale, is conclusive for all purposes: it can be reopened on a small set of grounds such as fraud, misrepresentation, collusion etc. The said Court also did not agree with the earlier judgment holding that section 6A is not required to be elevated to a higher status over charging section 6 of the Act. It categorically stated in paragraph 85: “the same stand at an elevated stage over charging section 6 of the Act”. Thereafter, in paragraph 91 the Court stated thus: “the purpose of verification of the declaration made in Form F, therefore, is as to whether the branch office acted merely as a conduit or the transaction took place independent to the agreement to sell entered into by and between the buyer and the registered office or the office of the company situated outside the state”.
    

9. The Apex Court in the light of its second judgment opined that the appellants would be entitled to move to the High Court for ventilating their grievances. However, it said, if the Central Government creates a new forum (which has been created now), it would be open to them to approach the same. So, the journey for Ashok Leyland is not complete yet, and they should keep their wheels moving on and on. This is the plight of business and industry in our country.
    

10. Amendment as per Finance Act, 2002

Two major amendments have been made w.e.f. 11-5-2002 to the CST Act, 1956, the first one is the definition of “Sale” u/s 2(g) has been expanded so as to include all categories of deemed sales in line with constitutional amendment. The second one is u/s 6A; whereunder production of Form F has been made mandatory along with evidence of dispatch of goods. However, in my opinion, the production of Form F is not mandatory, since the word “may” appearing in the section is still retained.

11. Amendment by Finance Act, 2004

These amendments have come into force on 10-9-2004.

1. U/s 8(6) it has been provided that no tax under this Act shall be payable by any dealer in respect of sale made by such dealer, in the course of inter-State trade to a registered dealer for the purpose of setting up, operation, maintenance, manufacture, trading, production, processing etc. or for use as packing material in a unit located in any special economic zone as may be notified by the Central Government.
    

2. To solve the dispute in relation to branch transfer u/s 6A r/w section 9, Central Appellate Authority is constituted. The law proposed for hearing of representatives of each State including the Assessing Authority concerned. The authority is also empowered now to grant stay and fix part payment. Yet, the procedure of the said authority in the matter of filing of appeal has not been notified. However, it has been notified that the authority is the same as for Excise and Customs Board. The address of the authority of advance ruling is as under:–

NDMC Building,
5th Floor, Yashwant Place,
Satya Marg, Chanakyapuri,
New Delhi – 110 021.

12. Amendment by Finance Act, 2005, effective from 13-5-2005/Trade Circular No. 28-T of 2005 dated 24-10-2005

1. In the definition of “Sale price”, the following proviso has been inserted:–
   “Provided that in the case of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, the sale price of such goods shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deem to be the sale price for the purposes of this clause.”

However, the rule in this behalf is not notified so far. However, in the light of Builders’ Association Case (1993) 88 STC 248 (SC) deductions as stated therein under items (i) to (viii) might be taken. Rule 58 of VAT Rules may be referred to for the application of such a deduction.

2. The amended Act has also provided the definition of works contract as under:-
   “(ja) ‘Works contract’ means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property.”
    

3. Section 5 deals with the principles of determining when a sale or purchase takes place in the course of export or import. A new sub-section (4) is now added to the existing sub-section (3). As a result, Form H has now become mandatory for making a claim under section 5(3). The necessary rules have been notified effective from 14-7-2005. Further, under new sub-section 5, it is provided that sale of ‘Aviation Turbine Fuel (ATF)’ to a designated Indian carrier for the purposes of international flights shall be deemed to be a sale in the course of export. Now the Central Government has notified that if any designated Indian carrier purchases ATF for the purposes of international flights, such purchases shall be deemed to take place in the course of export of goods.

13. Notification dated 16-9-2005, notifying amendment to cst Rules have come into force from 1-10-2005, these amendments are significant
    
    Earlier, a single declaration in Form-C could cover all transactions of sale between the same two dealers, which take place in one financial year. This provision is now modified so as to read that a single declaration in Form C can now only cover transaction, which takes place in one quarter of a financial year. The said amendment also applies to certificates in Forms E-I and E-II.

2. Amended rule 12(7) further provides that the declaration in Form ‘C’ for Form ‘F’ or the certificates in Forms E-I and E-II shall be furnished to the assessing authority within three months of the end of the period to which the declaration or certificates relates. It is further provided that the authority if satisfied may allow further time to furnish the above documents. However in the Trade Circular, a concession has been granted to file the same with the authority when asked for. At the same time, the circular provide that the dealer making such claims should furnish a list of declarations which are not received till due date, in Annexure-I to the circular.
    

3. The declaration form to be issued by the SEZ Units is now amended. Instead of Form I earlier, new form one is substituted as per Annexure-2 to the Circular. Further, the Diplomatic Missions, Consulates, United Nations and International Bodies should provide Form J to claim exemptions from tax, which is Annexure-3 to the Circular.

14. CST (Amendment) Act, 2005 [3 of 2006]
    The above Act after receiving the assent of the President has been gazetted on 1-3-2006 and accordingly, it became law effective 1-3-2006.

2. The important amendment has been made by substitution of new section for section 20 in respect of Appeals made u/s 6A r/w section 9. Here, the Explanation to the section clarifies “highest appellate authority of a State” means any authority or Tribunal or court (except the High Court) established or constituted under the general sales tax law of a State, by whatever name called.
    

3. The appeal is required to be filed within a period of 90 days in quadruplicate and the fees payable on the appeal is Rs. 5,000/-.

Impact of VAT on CST

1. cst to continue for some time but in a phased out manner

• As announced by the Empowered Committee of State Finance Ministers, it is proposed to reduce CST from 4% to 3% w.e.f. 1-10-2006 subject to the Centre making the loss of revenue good.

• Present CST forms; i.e., C, D, E-I/E-II, F, H & I will also continue.

• There will no credit of CST paid on inter-State purchases (Para 2.6 of White Paper).

• If goods are sent on stock transfer outside the State, input tax paid in excess of 4% will be allowed as credit. In other words, input tax to the extent of 4% will not be allowed as credit if goods are sent inter-State.

2. Constitutional issues arising out of discrimination

• VAT is likely to create many constitutional issues.
   

• Provision of not granting credit of CST seems discriminatory. Will it stand scrutiny of law is a major question. As per Article 304 (a), State Government can imposed tax on goods imported from other States, but cannot discriminate between goods imported from other States and goods manufactured within the State.
   

• As per White Paper on VAT, sales tax credit will be available if inputs and capital goods are purchased within the State, but not when goods are purchased from out of State. This appears to be clearly discriminatory. Most of the States have provided that in case stock transfer, credit up to 4% of tax paid on purchases will not be available. However, Kelkar Committee in Para 7(2) of its final report has also expressed reservations about legal implications of Article 304(a).
   

• Giving credit only for locally purchased goods appears to be discriminatory and it appears that this will discourage inter-State purchases.
   

• Ideal solution to get over the Constitutional issues arising out of discrimination is to evolve ‘zero rating’ of goods sold on branch transfer. ‘Zero rating’ means tax is not levied on final product but input credit is still allowable. Presently, State-level VAT provides for ‘Zero rating’ in case of exported goods. This should be extended to inter-State stock transfers/sale also.
   

• Granting CST credit is ideal but impractical solution. The most ideal solution will be for States to grant credit of CST paid on goods purchased from other States. This will ensure that VAT chain is not broken.
   

• In European countries, credit is given to the buyer and respective State is debited; i.e., if a German manufacturer buys goods from UK, credit is given to German manufacturer of VAT paid by UK seller, and account of UK Government is debited by equal amount. This has been made possible due to computerization of the entire system, which ensures that invoice-wise country-wise records are maintained and tallied. Coming to Indian scenario of computerization, keeping such elaborate invoice-wise records will require huge computer network, which seem presently impossible.
  
  With this, I thank you very much for hearing this technical subject with great patience.