Basic Concepts of VAT

VALUE ADDED TAX (VAT) - SOME BASICS C. B. THAKAR B.Com.,LLB.,F.C.A.

ADVOCATE

1. Introduction

Value Added Tax (VAT) has been introduced on all India basis from 1.4.2005.

Now it is more than 5 years since introduction of VAT. The experience so far

cannot be sufficient to draw any conclusion. However looking to the principles

of VAT, the system should turn out to be acceptable to all of us, subject to that

the said system is implemented with good administration.

2. What is VAT ?

The tax on sale or purchase is levied by State Governments under the

Constitution Authority of entry 54 of the State list. The Central Sales Tax is

levied by Parliament as per entry 92 of Union list. In respect of State sales tax,

the State Governments have full liberty to govern their own system.

The States, like Maharashtra, have experienced all kinds of levy of Sales Tax

like, multiple levy of tax, last point tax and single point tax. The earlier (BST

Act) system was largely single point tax system, where the tax was levied at

first point of sale and subsequent sales were allowed as ‘resale’. No tax was

contemplated on these second sales/resale, except ‘Resale Tax’. Barring such

exceptional levies, normally it was single point tax.

Under VAT, the tax is levied at each point of sale. The tax paid on purchase

point is allowed to be set off, also referred to as input tax credit under VAT. A

following simple example can be considered for understanding the concept.

(i) A sells to B

(Rate of tax is assumed to be 10%)

Sales price + Tax = Total

100 + 10 = 110

Tax Payment to Govt.

A will pay tax at Rs.10

(The input credit available to A is not

considered here for simplicity).

Rs.10

(ii) B sells to C


150 + 15 + 165

B will pay tax to Govt. as under:

Tax on sale 15

Less: Tax paid on Purchase (-) 10

Net Payable 05

Rs.5

(iii) C sells to D


200 + 20 = 220

C will pay tax to Govt. as under:

Tax on sale 20


Net Payable 05

Rs.5

(iv) D sells to Consumer


250 + 25 = 275

D will pay tax to Govt. as under:

Tax on sale 25


Net Payable 05

Rs.5

Total Payment Rs.25

Thus Government is getting Rs.25 as tax. However it can be noticed that the

tax is getting spread over number of dealers. The tax is actually realized on

highest price i.e. consumer price. It will also be noticed that there is no tax

burden on any dealer. The dealer is collecting tax and paying to the Govt. This

is the biggest advantage of VAT. The businessman has not to consider Sales

Tax as any burden on his business. Under single point tax, the tax rates were

high as well the dealer had to bear hidden burden of tax like, retention amount

in case of manufacturer, Turnover Tax, surcharge etc. This has cascading effect

which gets avoided under VAT System. In addition to above, there are several

other benefits of VAT compared to single point system, which can be noted as

under, in brief.

(i) There will not be any tax component in exports. In other words,

there will not be export of taxes in exported goods. The exports will

therefore be cheaper so as the exporter can compete in the world

market.

(ii) The system of concessional forms is given go bye. Therefore the

selling dealer will be saved from hassels of collecting number of

forms and in absence of same to bear higher burden with

interest/penalties.

(iii) The slab rates are bare minimum like, 0%, 4% (now 5% for non

declared goods from 1.4.2010 and 12.5% though there are rate of

1%/20% etc. for specific goods. There is more simplicity due to

above reduced rates.

(iv) The system is transparent, as tax is shown on the tax invoice. This

also brings simplicity in accounting and handling of Sales Tax

matters.

(v) The other big gain of VAT is avoiding cascading effect. As stated

above under earlier system there was cascading effect as certain

portion of tax was absorbed by the manufacturer/vendor. Under

VAT, 100% input credit will be given, avoiding cascading effect. The

input tax credit is restricted in relation to certain items, but

certainly more setoff is allowable under VAT, then what was

allowed earlier.

3. Comparison of VAT with BST era

Demerits of single point tax system under BST era

• No common rates

• Cascading effect

• Declaration Forms - problems to purchaser/seller

• Small tax base – higher rates of taxes

• Number of slabs rates more making the situation complicated

• Levy of T.O.T./S.C. etc. though they are essentially sales tax

• Incentive to Evasion

• Time consuming and litigation prone assessments

Merits of VAT

• Common rates – India, a common market

• No declaration forms, collect tax and pay to Government

• Dealer in true sense an agent of Government to collect and pay tax

• Cascading effect avoided

• Larger Tax base - lower rates of taxes. Also minimum slab rates

• Self policing – lesser incentive for evasion

• Transparent system

Demerits of VAT

• Every dealer becomes tax payer

• In some of the cases it may result in price rise

• CST impediment

• In absence of declarations many cases may result in refunds

• Difficulties in getting refunds known

• Other taxes like Octroi, Excise duty, cess, luxury tax, entry tax to remain

harsh penal provisions etc.

4. Certain Issues under VAT with Special Reference to Indian Economy

Though above are the broad benefits of VAT, the system is not without certain

substantial effects on the business Organization. The issues are not from VAT

system as such, but because of peculiar nature of Indian Economy.

(i) Partial Implementation of VAT

The VAT introduced in Indian States is not full-fledged system as such. In

ideal VAT regime set off is allowed for all the taxes paid on purchases

irrespective of its use. However in present VAT system in India the set off is not

allowed fully. There are so many restrictions and conditions and hence the set

off gets denied on many items. Therefore to make the system an ideal VAT

system such artificial restrictions/conditions are required to be deleted.

(ii) Re-organization of business transactions

One of the fall outs is that the business transactions are restructured,

particularly the inter-state transactions. The set off/ input tax credit is

restricted to the tax paid in the particular state and no such set off or input tax

credit is allowed of CST paid on inter-state purchases. Thus the preference for

buyers is to effect local purchases. The inter-state sellers are required to open

local depots to retain their business. There is also a proposal for abolishment of

CST from 1.4.2011, by introduction of Goods on Service Tax (GST) but we have

to wait.

(iii) The other implication, which cannot be lost sight of, is that ultimately the

consumers are be paying certain high tax burden, as the prices, till consumer,

are getting taxed. Though input tax credit compensates to certain extent, not to

full extent.

(iv) There is also proposal to levy tax on imports to augment resources. The

implications will depend upon the overall policy decision but certainly it will

make imports costly to some extent.

(v) The Trading community is also worried about elaborate accounting it has to

maintain. The frequency of making payments of tax has increased. They are

also fearing harassment at the hands of tax officials. The Trading Community

also expects that all other taxes like octroi, cess should be clubbed in VAT.

However it appears that this will not be fulfilled in immediate near future.

(vi) Coupled with above, the trading community also apprehends that under

the garb of VAT, many obnoxious and harsh provisions have been brought into

the Act. There is fear of ‘inspector raj’ bringing more harassment and

corruption. The provisions for check posts are also worrying them equally.

CENTRAL SALES TAX,1956

INTRODUCTION TO CENTRAL SALES TAX ACT,1956

1. HISTORICAL BACKGROUND

The Central Tax Act, 1956 (hereinafter referred to as the Act) is an

enactment of the Parliament, which is a direct result of the powers given to it

by entry 92-A in the list I of the Seventh Schedule read with Article 286 of the

Constitution of India.

It was quite necessary to have an enactment precisely defining the sale

which is of inter-State nature. This need arose on account of the chaos

experienced in the levy and collection of taxes by States on the inter-State

sales. In such kind of inter-State transactions, each State tried to establish

some nexus to it and pick up one or the other ingredient of such sale having

territorial nexus with that State in order to levy tax on it. This resulted into

taxing the same transaction by two or more States and also practical

difficulties such as collection and assessment of taxes from non-resident

dealers. All these circumstances necessitated the sixth amendment to the

Constitution in 1956.

By this constitutional amendment, Union List i.e. List I in the seventh

schedule was amended by adding a new entry No. 92-A as follows:

“Taxes on the sale or purchase of goods other than newspapers, where

such sale or purchase takes place in the course of inter-State trade or

commerce”.

Simultaneously, entry 54 in the State list i.e. List II was amended as

follows:

“Taxes on the sale or purchase of goods other than newspapers, subject to

the provisions of entry 92-A of List I”.

Similarly, the Parliament was conferred upon the rights to formulate

principles for determining when a sale or purchase of goods takes place in the

course of inter-State trade or commerce by inserting a new sub-clause (3) in

Article 269. Article 286 was also suitably amended so as to empower the

Parliament to formulate principles for determining when a sale or purchase

takes place (a) outside the State and (b) in the course of import of the goods

into, or export of the goods out of, the territory of India.

The Authority granted by the sixth Amendment to the Constitution gave

birth to “the Central Sales Tax Act, 1956” which came into effect from 5th

January, 1957. Under the authority of Act, the Central Government also

framed “The Central Sales Tax (Registration and Turnover) Rules, 1957”.

2. IMPORTANT DEFINITIONS (Section 2)

Section 2 defines various terms used in the text of the Act. These terms are to

be construed according to the definitions wherever they occur in the Act unless

the context otherwise requires. Some of the important definitions are discussed

below.

(1) Appropriate State — Section 2(a)

Section 2(a) defines appropriate State in Relation to a dealer under the Act.

An Appropriate State is that state where the dealer has one or more places of

business. If he has places of business situated in different states, every such

state in whose territory such place of business is situated, is an appropriate

state.

This definition is very important in the sense it specifies the state which

has the power to levy, collect and assess the taxes from the dealer. The rights

and obligations of the dealer such as obtaining registration, procuring blank

declaration forms, payment of taxes, assessment, appeals and also application

of rules framed by the state under the authority of section 13 of the Act are all

in relation to the appropriate state.

Section 9 empowers the “appropriate state” on behalf of government of

India to levy and collect taxes in the case of inter-State sale falling either under

sub-section (a) or (b) of section 3. From this point of view also, the definition of

an “appropriate State” assumes importance.

(2) Place of Business – Section 2(dd)

The definition of “appropriate State” refers to place of business which is

defined in clause (dd). It includes the place of business of an agent of the dealer

as also a warehouse, godown or other place where a dealer stores his goods

and a place where the dealer keeps his books of accounts. This definition may

include any more places as place of business having regard to the facts of the

case.

The dealer gets registration under the Act with respect to his principal

place of business. However, he becomes liable and assessable in that place in

respect of all the inter-State sales within that state although they might not

have been effected within the jurisdiction of the officer over the principal place

of business [State of Orissa vs. Sunderlal Mandhliwal (37 STC 409) (Orissa)].

(3) Business — Section 2(aa)

The definition of ‘Business’ is again an inclusive definition. This definition

has been inserted w.e.f. 7th September 1976 mainly on the lines of the

definitions of “Business” under the State Sales Tax Laws. This definition has a

very wide coverage of transactions since it includes even incidental or ancillary

transactions to the main trade, commerce or manufacture, adventure, etc.

It is a very important definition in the sense it decides the kind of

transactions liable to tax as being “in the course of business”. It is clear that

the “profit motive” is no more a criterion to treat a transaction as that of

“business”. The activity may or may not be resulting into profit, still it may be

construed as “business”. However, a class of decisions do opine that only such

activities which are in the nature of trade, commerce or manufacture fall within

the extended definition of business. Therefore, a purely research organization

purchasing materials for research work and selling the experimental final

product was not held as carrying on the business [Deputy commissioner (C.T.)

Coimbatore vs. South India Textile Research Association (41 STC 197) (Mad.)].

Similarly, unlike Local Act, transactions in course of commencement or closure

of business are still not covered under the definition of ‘Business’ under CST

Act and hence they are, therefore, still outside the scope of taxation under CST

Act.

The Supreme Court has also ruled that an isolated transaction can be

included in the extended definition of “business” only if the person effecting the

same is a `dealer’ under the scope of the taxing statute who carries on

business. If the main activity of the person concerned is such that he cannot

be termed as a `dealer’, then all the connected incidental or ancillary

transactions to such activity cannot be taxed [State of Tamil Nadu vs. Burmah

Shell (31 STC 421 SC)].

The term such as “trade”, `commerce’ or `manufacture’ are not defined

under this Act. They have to be understood in their natural meaning as also

meaning attributed to them by various judicial pronouncements. To call an

activity a `business’, the basic requirements such as volume, frequency,

continuity and regularity are still essential although profit motive is not

necessary.

(4) Dealer — Section 2(b)

The definition of ‘dealer’ in this clause is exhaustive as well as enumerative.

In the first part, it employs the word ‘means’ which restricts the definition to

the description of dealer given in it. It is essential for a person in order to

become a ‘dealer’;

(a) to carry on business

(b) whether regularly or not

(c) of buying, selling, supplying or distributing goods

(d) directly or indirectly

(e) for cash or for deferred payment or for commission,

remuneration or other valuable consideration.

Profit motive is an irrelevant factor for a person to be termed as ‘dealer’.

The concept of dealer is intimately connected with the concept of carrying on

business. Therefore, unless a person is engaged in ‘business’ he can not be

treated as a dealer.

The expression ‘whether regularly or otherwise’ implies that there is no

distinction between a casual dealer and a regular dealer. No element of

permanency or continuity is essential.

However, the Government is excluded from the tax net under the Act in as

much as its sales and disposals of unserviceable or old stores or material, or

waste products, obsolete, discarded machinery or parts or accessories thereof

are concerned.

Normally, such disposal are made locally and most of the State tax laws

have subjected them to tax. The immunity from paying tax on such sales under

the Act is only in case of State or Central Government bodies. It may be

observed that the above definitions are almost similar to definitions under local

Act.

(5) Declared Goods — Section 2(c)

The goods which are declared under section 14 to be of special importance

in inter-State trade or commerce are known as ‘declared’ goods under the Act.

The law relating to ‘declared goods’ is prescribed in sections 14 and 15.

(6) Goods — Section 2(d)

The definition of ‘goods’ is also an inclusive definition which includes all

kinds of movable property but does not include newspapers, actionable claims,

stocks, shares and securities. This definition may seem narrower than the one

occurring in the Sales of Goods Act, 1930 which excludes only actionable claim

and money from its purview. However, the definition u/s 2(d) of the Act is wide

enough to include animals and birds [Venkataramana Hatcheries Pvt. Ltd. vs.

CTO (66 STC 154)(AP)].

Even intangible items like electricity, steam, import licences. REP licences

are covered by the term ‘goods’. However, the charging section 6(1) of the Act

applies to goods ‘other than electrical energy’. Therefore, the inter-State sales of

electricity is not liable to tax under this Act although there is no bar to levy the

same under the constitution. The power to tax the same lies with the

parliament by virtue of entry 92-A of the List-I to the Seventh Schedule.

So far as the ‘newspapers’ are concerned, a different treatment is awarded

to them under the Constitution. The State legislature has no power to levy tax

on news papers since entry 54 in List II to the Seventh Schedule extends to

‘goods other than newspapers’. The parliament alone has the exclusive right to

tax the sale or purchase of news papers and advertisements published there in.

However, it chose to exclude the newspapers from the purview of the definition

of ‘goods’ w.e.f 1-10-58.

Even under the above position, the news papers do not cease to be ‘goods’

as such. Therefore, the manufacturer of news papers is entitled to get

registered under the Act as also issue ‘C’ forms to avail of concessional rate of

tax on the purchase of raw materials. This is the opinion expressed by the

Supreme Court in the judgment in case of M/s. Printers (Mysore) Ltd. vs. Asst.

CTO (93 STC 95).

The Supreme Court also observed that old, obsolete news papers have no

news value and are disposed off as waste papers. In that case, they do qualify

as ‘goods’ and are exigible to tax [Indian Express Pvt. Ltd. vs. State of Tamil

Nadu (67 STC 474)].

At the same time, it may also be noted that the old news papers when sold

as such are newspapers and are not liable to tax under the Act [Sait Rikhaji

Furtamal vs. State of A. P. (85 STC 7) (SC)].

(7) Sale — Section 2(g)

Section 2(g) of the Act coveres the ‘sale’ as envisaged under the Sale of

Goods Act, 1930 alone. The basic ingredients for ‘sale’ like, (1) Parties

competent to contract (2) mutual assent (3) a thing, the absolute or general

property, which is transferred from the seller to the buyer (4) price in money

paid or promised, are all required here also.

Wherever the parties have a choice or option to mutually agree upon any or

more of the elements or ingredients of sale, the transaction must be held as

that of ‘sale’ even though other elements may have been controlled or regulated

by the Statute. The Supreme Court has held that the sale of controlled goods

where there is minimum scope for consensual agreement is also a ‘sale’ as

contemplated under the Sale of Goods Act, 1930 [M/s. Vishnu Agencies Pvt.

Ltd. vs. C.T.O. (42 STC 31)(SC)].

Therefore, sale of confiscated as well as non-confiscated goods made by the

collector of customs also involve elements of mutuality and volition and are

consensual transactions of sale [Collector of Customs vs. State of W.B. (85 STC

121) (WBTT)].

The scope of state legislature under entry 54 of List II to the Seventh

Schedule has been considerably enhanced by virtue of The Constitution (Forty

Sixth Amendment) Act, 1982. A new clause viz. (29A) was inserted in article

366, by which following six types of transactions are defined to be ‘sale’ and

these are referred to as deemed sale transactions. They are has under:

(i) a tax on the transfer, otherwise than in pursuance of a contract, of

property in any goods for cash, deferred payment or other valuable consid-

eration;

(ii) a tax on the transfer of the property in the goods (whether as goods or in

some other form) involved in the execution of a works contract;

(iii) a tax on the delivery of goods on hire-purchase or any system of payment

by installments;

(iv) a tax on the transfer of the right to use any goods for any purpose (whether

or not for a specified period) for cash, deferred payment or other valuable

consideration;

(v) a tax on the supply of goods by any unincorporated association or body of

persons to a member thereof for cash, deferred payment or other valuable

consideration;

(vi) a tax on the supply, by way of or as part of any service or in any other

manner whatsoever, of goods, being food or any other article for human

consumption or any drink (whether or not intoxicating), where such supply or

service, is for cash, deferred payment or other valuable consideration.

The enlarged definition of ‘sale” under the Constitution empowered the

State Legislature to amend the definition of ‘sale’ in the respective State Sales

Tax Laws. This amendment enabled the states to levy tax on the indivisible

Works Contracts as also leasing transactions, sales in the hotels, etc. But even

after amendment in constitution, the State legislatures were required to take

consequential steps such as amending the definition of ‘sale’ under the local

Sales Tax Act or enact a separate piece of legislation to take care of works

contracts, lease etc., as done in Maharashtra.

Though for longtime the definition of ‘sale’ in CST Act was not amended to

include the above six deemed sale transactions under CST Act,1956, vide

amendment effective from 11.5.2002 in section 2(g), the term ‘sale’ does cover

six types of deemed sale transactions within the term ‘sale’. By inserting

section 2(ja) the term ‘works contract’ is also defined in CST Act effective from

13.5.2005. The said definition is inclusive one.

Therefore from 11.5.2002, above types of transactions will also attract tax

under CST Act,1956.

(8) Sale Price — Section 2(h)

The ‘sale price’ under the Act is wide enough to include the cost of the

goods and all incidental expenses or charges recovered at the time of or before

the delivery thereof to the purchaser. The exceptions provided are cash

discounts which are normally allowed as a practice in the trade and cost of

freight or delivery as also cost of installation when separately charged.

Although the definition makes mention of ‘cash discount’ also, certain

other types of discounts such as trade discounts, quantity rebates, turnover

rebates, etc., also become deductible from the sale price provided it goes to

vary the sale price. A dealer is free to frame his price structure conducive to the

trade and what is material is the real price that is received by the mutual

agreement between the buyer and seller [The Dy. Commissioner of Sales Tax,

Board of Revenue (Taxes) Ernakulam vs. Advani Orlicon Pvt. Ltd. (45 STC

32)(SC)]. It may however be noted that other deductions from the sale price

such as commission paid, bad debts allowance, etc., are not permitted since

they are in the nature of expenses. The price which is contemplated at the time

of contract of sale is material. Any deduction claimed after the sale is effected,

not being as per the terms of the contract, is not allowable.

The second allowable deduction from the sale price is cost of freight or

delivery charges, If separately shown in the bill. This implies that an agreement

between the buyer and seller is contemplated in respect of the transport or

despatch of goods to the place of the buyer. The expenditure incurred for such

despatch by the seller is excluded from the sale price. This based on the

principle that such recovery is in the nature of reimbursement of such cost

incurred on behalf of purchaser.

The description in the invoice plays an important role in this respect. The

various components of sale price become evident on perusal of the invoice. All

other charges such as packing charges, handling charges, service charges, etc.,

normally constitute the part of the sale price unless a contrary evidence is

shown.

For determining ‘sale price’ in relation to Works Contract transactions, one

has to follow the principles laid down by Supreme Court in case of Gannon

Dunkerley & Co. P. Ltd.(88 STC 204). The amended definition from 13.5.2005

provides for prescribed deduction from contract price to arrive at taxable

quantum. However the said percentages are still not prescribed and hence the

sale price has to be decided as per above judgment.

In relation to this aspect reference can be made to judgment of Supreme Court

in case of M/s.Mahim Patram Pvt. Ltd. v. U.O.I. (6 VST 248)(SC) wherein the

issue of application of State Rules for determination of sale price for Works

Contracts is decided.

3. SALE IN COURSE OF INTER-STATE TRADE

Chapter II of the Central Sales Tax Act, 1956 deals with the principles

determining a sale or purchase in the course of inter-State trade or in the

course of import or export and sale taking place within the State. This is in

accordance with the powers conferred upon the parliament to formulate

principles to define an inter-State sale and a sale in the course of export or

import vide articles 269 and 286 of the Constitution. Sections 3, 4 and 5 of the

Act define an inter-State sale, a sale within the state, and a sale in the course

of export and import respectively.

INTER-STATE SALE (SECTION 3)

(i) Section 3 defines an inter-State sale as follows:

“A sale or purchase of goods shall be deemed to take place in course of

inter-State trade or commerce if the sale or purchase—

(a) occasions the movement of goods from one State to another; or

(b) is effected by a transfer of documents of title to goods during their

movement from one state to another”.

To eliminate the confusion regarding taxability of a sale involving two or

more states, the Act has laid down the simple test of movement of goods, from

one state to another as a principle to determine an inter-State sale. In order to

bring a particular transaction under the first limb; i.e., sub-clause (a) of section

3, certain conditions have to be fulfilled as follows:

(1) There must be a sale; i.e., a transfer of property from the seller to the

buyer for a consideration such as cash, deferred payment etc. as contemplated

u/s 2(g) of the Act.

(2) Such sale must occasion the movement of goods from one State to

another; i.e., a physical movement of goods from one state to another must be

the result of the covenant of the contract of sale.

Let us take some illustrations to clarify this point:

In case of simple direct sale there is no much debate about such sale. For

example, if dealer from Mumbai sells goods to dealer in Delhi, he will move the

goods from Mumbai to Delhi and such sale will fall in the category of inter-state

sale. However, the question assumes importance when the movement is not

direct as given above. We can consider following example.

The dealer had his office in Delhi and factory in the State of Haryana. The

office at Delhi booked the order and intimated the Haryana factory to

manufacture the goods as per the buyer’s specifications. Later on, the factory

manufactured the goods and sent them to Delhi office in order to deliver the

goods to the ultimate purchaser. It was held that goods moved from Haryana to

Delhi as a necessary incident of the contract of sale and therefore the sale is

covered by section 3(a) of CST Act, liable to tax in Haryana. [Pandit Bros. vs.

State of Tamil Nadu (50 STC 67)(Delhi) as well as Sahani Steel and Press

Works Ltd. vs. C. T. O. (60 STC 301) (SC).

(ii) Nexus Theory

It does not really matter whether the movement of goods is directly form

the seller to the ultimate buyer or some intermediaries or agents are present in

between the two. The Supreme Court (38 STC 475) has affirmed the view of the

Madras High Court in the case of M/s. English Electric Co. (23 STC 32). The

goods might have moved to the representative of the seller himself, say his

branch or agent in the state of delivery. If an unfettered conceivable link can be

established between the contract of sale and the movement of goods from one

State to another, the conditions of section 3(a) are complied with and it

becomes an inter-State sale. The nexus theory is applicable in such kind of

inter-State sale.

In practice, it is found that the dealers earmark their goods against the

orders received by the branch office in another state from the buyers in such

state and the goods are sent to the branch office first who performs the task of

distributing the goods to the ultimate buyers. In such cases, the movement of

goods is ultimately connected with contract of sale in that state and therefore,

such sales are considered as inter-State sales. In other words, the claim, if any,

about branch transfer may not be upheld and the transaction will become

taxable under CST Act in the state from where the movement commences. This

also shows that if the dealer wants to claim his despatch as not amounting to

inter-state sale it will be necessary to delink the transaction of transfer and

sale. In other words nexus should not get established between the despatch

and ultimate sale in other state.

(iii) Incidence of a Contract

The movement of goods from one state to another which is the basic

necessity to classify a sales as “inter-State”, may be a result of a covenant in

the contract of sale or it may be a necessary incident of such contract. There is

very little difference between the two. To explain with the help of an

illustration, a term in the contract may provide that ‘delivery should be given to

Madras’ when the order is placed in Bombay. Here, the seller can perform the

covenants of the contract of sale only if he delivers the goods at Madras taking

them from Bombay. This type of sale falls in the first category.

In the second category, an illustration can be given wherein a bidder from

Bombay was successful in his bid at an auction sale at Madras. On payment of

the price quoted, the purchaser asked the assessee to deliver the goods at

Bombay. In this case, the movement of goods was a necessary incident of the

sale although the sale itself did not provide for such despatch. Accordingly,

such sale was held as an inter-State sale as held by the Madras High Court

[M/s. National Mineral Development Corpn. vs. State of Tamil Nadu (67 STC

1)].

From this discussion, it is clear that the character of a sale or purchase

to be covered by section 3(a) should be such that an inter-State movement of

goods springs from the conditions of the contract of sale or it may be incidental

to such contract. Reference in this respect can also be made to the judgment in

the case of M/s. Commissioner of Sales Tax v. Pure Beverages Ltd. (142 STC

522)(Guj) wherein some aspects of interstate sale are discussed.

Suppose a buyer takes the delivery of goods in State ‘A’ itself and without

the seller’s association moves the goods to State ‘B’. There is no implied or

express condition for such movement. In this case, the sale is complete in state

‘A’ itself. The movement of goods from state ‘A’ to ‘B’ has no connection with the

contract of sale. Therefore, this is an intra-State; i.e., local sale and not inter-

State sale.

(iv) Situs of an Inter-State Sale

The transfer of property in goods may pass in either state even in case of

an inter-State sale. It is not necessary that a ‘sale’ must precede the movement

of goods or it must take place during the course of such movement. The ‘situs’

of the sale can be in either of the states. It may be noted that even an inter-

State sale does have a situs [Bombay High Court judgment in the case of M/s.

N.D. Georgeopolos vs. State of Maharashtra (37 STC 187) (Bom.) and Onkarlal

Nandlal (60 STC 314) (SC)]. Once the character of the sale is determined to be

an inter-State sale, it makes no difference as to where the actual transfer of

property takes place. It may be in either state; i.e., in the state from where the

movement commences or in the state where the delivery is given. The essential

ingredient, as discussed above, to decide the character of sale is whether the

sale transaction contemplates movement of goods from one state to another

state. Such contemplation may be express or implied as explained above. This

is so because section 3 overrides the provisions of section 4 which defines a

sale outside the state and a sale inside the state. We will come to section 4 for

further discussion on the point.

(v) Section 3(b) — Sale by Transfer of documents of Title to Goods

The Explanation - I to section 3 sets out two terminals to the movement of

goods from one state to another. It defines precisely the course of such

movement. An inter-State sale which is effected during this course of

movement by transfer of documents of titles is covered by sub-section (b) of

section 3.

The Supreme Court has distinguished between sections 3(a) and 3(b) in the

case of M/s. Tata Iron Steel Co. Ltd. vs. S. R. Sarkar (11 STC 655).

In case of section 3(a), the movement of goods from one state to another is

the result or a necessary incident of contract of sale whereas section 3(b)

comes into play when sale is effected during the course of movement of goods.

Secondly, the property in goods passes when the goods are in movement in

case of clause (b) whereas property in goods may pass in either of the states in

case of a sale falling under clause (a). The two sub-sections are mutually

exclusive and a sale in the course of inter-State trade cannot fall under both

the sub-sections at a time. It is covered only by one of the sub-sections.

(vi) Documents of Title

In case of sub-section (b) the sale is necessarily effected by transfer of

documents of title. Therefore, it is necessary to understand the meaning of the

term ‘document of title’. Section 2(4) of the Sale of Goods Act, 1930 defines

‘document of title to goods’. It includes bill of lading, dock-warrant, warehouse

keeper’s certificates, railway receipts, warrant or order for the delivery of goods

and any other document used in the ordinary course of business as proof of

the possession or control of goods, or authorizing or purporting to authorize,

either by endorsement or by delivery, the possessor of the document to transfer

or receive goods thereby represented.

This is inclusive definition and not an exhaustive one. If the trade practice

establishes that a particular document is used or understood to authorize the

holder of it as having possession and ownership of goods, then that document

can be treated as a document of title. The transfer of such document of title

can be effected by endorsement and/or delivery.

(vii) Example of Sale u/s 3(b)

An illustration of an inter-State sale falling under section 3(b) may be

quoted as follows:—

‘A’ dispatches goods by railway from one state to another, showing

consignor and consignee in the railway receipt as ‘self’. ‘B’ pays the price of the

goods and ‘A’ endorses the railway receipt in favour of ‘B’ who takes the

delivery from railway at the destination. Here, the inter-State movement is not

the result of the contract of sale between ‘A’ and ‘B’ nevertheless, a sale has

been effected after such movement has commenced but before it ended by

transfer of railway receipt. Therefore, this is a sale falling under section 3(b).

Another example may be, where ‘A’ from Mumbai has sold goods to ‘B’ of

Ahmadabad and has accordingly despatched goods to Ahmadabad by lorry. In

lorry receipt the consignor will be ‘A’ and consignee will be ‘B’. Now ‘B’ instead

of taking delivery, sells the said goods to ‘C’ on payment and therefore transfers

the said lorry receipt in favour of ‘C’. This is also an inter-State sale by transfer

of documents of title to goods during course of movement from ‘B’ to ‘C’. Of

course, this is subsequent inter-State sale, where first inter-State sale is

between ‘A’ and ‘B’.

It may also be noted that the movement of goods is not termed as inter-

State when the goods are for delivery in the same state although they may pass

through another state during such movement. This is clarified by Explanation

2 to section 3.

Conclusion

Taxation Laws are always vibrant laws. There are number of changes due to

amendments or due to important judgments giving different interpretations.

Therefore, as a Tax professional it is necessary to remain updated. I hope my

above paper will serve the purpose of giving insight of the VAT/CST Acts to the

participants. I wish all the success to the seminar.