In a recent decision in A&G Projects & Technologies Ltd Vs State of Karnataka [(2008) VIL 40 SC], the Supreme Court has laid down certain important principles governing the taxation of inter-State sales of goods under the Central Sales Tax Act 1956 (The Act). The three key Sections 3, 6 & 9 of the Act, governing inter-state and in-transit sales, were analysed and interpreted in this decision.
The appellants were engaged in the execution of works contracts in Karnataka and were registered under the Karnataka sales tax laws as also under the Act. They entered into three separate contracts with the ultimate customer for supply of equipment, execution of civil works at site and erection and commissioning of the above equipment at site. Pursuant to these contracts, the appellants appointed a sub-contractor located outside Karnataka state for procurement of the equipment in question.
Consequently, there were three contracts relating to the procurement and supply of equipment. These were the contract for supply of equipment between the appellants and the ultimate customer, the contract between the appellants and the sub contractor and, finally, the contract between the sub contractor and the manufacturer of the equipment. These three contracts were before the Supreme Court.
The appellants argued before the assessing authorities that there were three different sales transactions. The first one was the sale of equipment by the manufacturer of the equipment to the sub contractor and the second and third sales were sales of the equipment by the sub contractor to the appellant and thereafter by the appellants to the ultimate customer.
The appellants argued that the first sale was an inter-State sale and the subsequent two sales were eligible for exemption from tax for subsequent or in transit sales under the relevant Section 6(2) of the Act. This Section inter alia provides that where the inter-State sale has either occasioned the movement of goods from one State to another or is effected by a transfer of documents of title to goods during such movement, any subsequent sales during such movement effected by a transfer of documents of title shall be exempt from tax. The Section also provides that the exemption is conditional upon the first and any subsequent seller furnishing the relevant C-Forms received from the purchasers in support of such sales.
The assessing authorities in Karnataka rejected this claim for exemption for the subsequent sales under the Act and held that all three sales were sales under Section 3(a) of the Act and not under Section 3(b) of the Act and hence the exemption from tax for in transit sales under Section 6(2) (supra) was not applicable. Now, Section 3 of the Act defines the inter-State sales to which the provisions of the Act would apply. There are two categories of inter-State sales envisaged therein.
The first, as per Section 3(a), is one which occasions the movement of goods from one State to another and the second, as per Section 3(b), is one which is effected by a transfer of documents of title to the goods during such movement. The assessing authorities thus held that all three sales in question occasioned the movement of goods from one state to another and while they were all undoubtedly inter-State sales, the second and third sales did not qualify for the exemption for subsequent sales under Section 6(2) of the Act which was only applicable to subsequent sales which were effected by a transfer of documents of title to goods i.e. were in transit sales.
Besides rejecting the exemption from central sales tax on the aforesaid basis, the assessing authorities also invoked the provisions of Section 9 and the proviso thereto, regarding levy and collection of the central sales tax, to hold that such second and third sales would be taxable in Karnataka State and not in the State from which the goods originated as per the first sale, Tamil Nadu in this instance. The matter was thereafter litigated in stages in appeal and, through an order of the Karnataka High Court, stood finally disposed of on the finding that the subsequent sales were indeed chargeable to the central sales tax in the State of Karnataka. It was this order of the Karnataka High court which was on appeal to the Supreme Court.
At the outset, the apex Court held that its decision was based on the understanding that all three sales were sales which occasioned the movement of goods from one State to another and were hence all covered under Section 3(a) of the Act and not under Section 3(b) of the Act. This understanding is key to the matter since it has the effect of holding that since the equipment in question was the subject matter of three separate but related contracts of sale, the subject equipment already stood appropriated by the manufacturer in favour of the final consumer through the intervening transactions of sales to the sub-contractor and to the appellants.
The Supreme Court hence proceeded on the ground that if the subsequent sales agreements were in place at the time that the first sales agreement was executed, the provisions of Section 3(b) relating to in transit sales would not apply and hence the benefit of exemption from central sales tax to such subsequent sales under Section 6(2) of the Act would also not apply. The Supreme Court held that the dividing line between sales under Section 3(a) and those under Section 3(b) was that in the former case the inter State movement of goods happened because of the contract of sale whereas the sales under Section 3(b) were those where the contracts came into existence after the commencement of movement of goods.
The Court held that while the movement of goods did not determine the levy of tax, it did determine whether the sales were inter-State sales or were intra-State ones. The Court also held that the nomenclature given to a transaction by the contracting parties could not determine the nature of the transaction. The apex Court held that Section 6(2) relating to exemption from tax for in transit sales was only applicable to those sales which qualified under as such Section 3(b), as sales effected by a transfer of documents of title.
Since, in the instant case, the subsequent sales were also sales under Section 3(a) in that they also occasioned the movement of goods from one State to another, the benefit of exemption from tax was not available at all under Section 6(2). The Court then proceeded to hold that the appropriate State that could consequently charge such subsequent inter-State sales to tax was the State from where the goods originated during their movement from one State to another, as per the first sale. The Supreme Court held that since all three sales in question were Section 3(a) sales, the proviso to Section 9 would not apply in order to enable Karnataka State to tax these subsequent sales. Accordingly, the Supreme Court held that Tamil Nadu alone could tax all three sale transactions.
While the aforesaid decision of the Supreme Court is based on the peculiar facts of the case, it is important in that it holds that if the subsequent sales contracts were in place prior to the commencement of the inter-State movement of goods, such subsequent sales could not be Section 3(b) sales at all and accordingly they would not qualify for the exemption for in transit sales, as envisaged in Section 6(2) of the Act.
It thus becomes imperative to ensure that the sales contracts relating to the second and subsequent sales are made effective only after and not before the commencement of the inter-State movement of goods, as per the first sale.
Equally, such subsequent sales contracts need to be made effective prior to the conclusion of the inter-state movement pursuant to the first sale but the important point is that the second and subsequent sales cannot be contracted together with the first sale which occasions the commencement of movement of goods on an inter-state basis. This has significant implications on how in transit sales are presently structured in India and for which the exemption from central sales tax under Section 6(2) of the Act is routinely claimed.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers