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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 Tax Payment to Govt.
100 + 10 = 110
A will pay tax at Rs.10 Rs.10
(The input credit available to A is not
considered here for simplicity).
(ii) B sells to C
Sales price + Tax = Total
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
Sales price + Tax = Total
200 + 20 = 220
C will pay tax to Govt. as under:
Tax on sale 20
Less: Tax paid on Purchase (-) 15
Net Payable 05 Rs.5
(iv) D sells to Consumer
Sales price + Tax = Total
250 + 25 = 275
D will pay tax to Govt. as under:
Tax on sale 25
Less: Tax paid on Purchase (-) 20
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
(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
(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
(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.


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

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