Understanding E1 and E2 Sales under CST Act 1956

Central Sales Tax Act 1956 envisages single point of taxation i.e tax at the first point of sales. Subsequent sales during the movement of the goods from one state to another have been exempted under section 6(2) of CST Act.

Before proceeding to understand which sale is exempted under section 6(2) and the conditions for exemption, one should understand some relevant concepts relating to it.

What is sales by transfer of documents of title: Section 3(b) provides that a sale or purchase effected by transfer of documents of title to the goods during their movement from one state to another shall be deemed to take place in the cource of interstate trade or commerce.

Explanation 1 to section 3 provides that the movement of goods commences when goods are delivered to carrier and terminates when delivery is taken from the carrier.

Explanation 2 to section 3 provides that where the movement of goods commences and terminates in the same state it shall not be deemed to be a movement of goods from one state to another by reason merely of the fact that in the cource of such movement the goods pass through the territory of any other state.

For example if goods are booked from Delhi to Mumbai by Railway, movement of goods will commence as soon as goods are handed over to the Railway booking office at Delhi for transport. The movement will be deemed to continue even if goods reach Mumbai and are lying in possession of railways. The movement will be deemed to have terminated only when the delivery of goods is taken at Mumbai on submission of railway receipt. Thus goods will be deemed to be in movement for sales tax purposes till delivery is taken at destination.

What is document of title to goods: Document of title to goods means a document which evidences that the person holding the document has the title of the goods i.e he is the owner of the goods which are represented by the said document.

In normal trade practices when the goods are handed over to the carrier by the seller for transportation to reach the buyer, the carrier issues a receipt to the seller. The seller then sends this receipt to the buyer and the buyer gets delivery of goods on submission of such receipt to the carrier when goods reach at the buyer’s destination. This receipt issued by carrier is document of title to goods.

Thus a document of title to goods may be a lorry receipt(in case of road transport), a Railway receipt(incase of transport by rail), Bill of Lading(in case of transport by sea or an airway bill(in case of transport by air).

What is transfer of documents of title to goods: under section 6(2) of CST provides exemption from CST on sales subsequent to an interstate sales, which has been effected by transfer of documents of title of goods during their movement. Thus it becomes essential to understand what is transfer of documents of title of goods.  

Section 2(4) of the Sales of Goods Act permits transfer of goods by ‘endorsement or delivery of documents of title. Thus documents of title of goods can be transferred by mere delivery or by endorcement on document. Even though goods can be transferred by mere delivery of documents without endorcement on such document, but it is advisable and also convenient to transfer the documents by written endorcement on the documents as it gives proof that the transfer is in due cource of trade, for the purpose of claiming exemption u/s 6(2) of CST Act.  

Conditions for claiming exemption u/s 6(2) of CST Act: Section 6(2) of CST Act provides that notwithstanding anything contained in section 6(1) or 6(1A), where a sale of any goods referred in section 8(3)[i.e.goods which are mentioned in the registration certificate of the dealer],  in the cource of inter state trade or commerce has either occasioned the movement of such goods from one state to another or has been effected by transfer of documents of title during movement from one state to another, any subsequent sales during such movement effected by transfer of documents of title of such goods to a registered dealer, shall be exempt from tax. The condition is that certificate in prescribed form has to be obtained from the registered dealer. Section  6(2) runs as under:

(2) Notwithstanding anything contained in sub-section (1) or sub-section (1A), where a sale of any goods in the course of inter-State trade or commerce has either occasioned the movement of such goods from one State to another or has been effected by a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods to a registered dealer, if the goods are of the description referred to in sub-section (3) of section 8, shall be exempt from tax under this Act:

Provided that no such subsequent sale shall be exempt from tax under this sub-section unless the dealer effecting the sale furnishes to the prescribed authority in the prescribed manner and within the prescribed time or within such further time as that authority may, for sufficient cause, permit,

a) a certificate duly filled and signed by the registered dealer from whom the goods were purchased containing the prescribed particulars in a prescribed form obtained from the prescribed authority; and

b) if the subsequent sale is made to a registered dealer, a declaration referred to in sub-section (4) of section 8: 

Provided further that it shall not be necessary to furnish the declaration referred to in clause (b) of the preceding proviso in respect of a subsequent sale of goods if, the sale or purchase of such goods is, under the sales tax law of the appropriate State exempt from tax generally or is subject to tax generally at a rate which is lower than three per cent. or such reduced rate as may be notified by the Central Government, by notification in the Official Gazette, under sub-section (1) of section 8 (whether called a tax or fee or by any other name); and

(b) The dealer effecting such subsequent sale proves to the satisfaction of the authority referred to in the preceding proviso that such sale is of the nature referred to in this sub-section."

From reading the above section the following conditions can be summed up which are required to be fulfilled before claiming exemption of CST on subsequent sales under section 6(2):

1. First sale should be an inter state sales: The first sales must be an interstate sales. It can be either a section 3(a) or section 3(b) sale. A sales is considered as an interstate sales as per section 3 of CST Act if

(a)    It occasions the movement of goods from one state to another or

(b)    It  is  effected by transfer of documents of title to the goods during the movement of goods from one state to another.

Section 3(b) has already been explained above.

2. Transfer of documents of title: Subsequent sales must be a section 3(b) sale i.e it should be a sales by transfer of documents of title to goods during the movement of such goods from one state to another. As already explained above movement of goods from one state to another commences when goods are handed over to carrier and movement is deemed to continue till delivery is taken at the other end.

3. Subsequent sales must be to a registered dealer: The subsequent sales is exempt only if it is made to registered dealer

4. The goods should be of description referred to in section 8(3) of CST Act: Another requirement for claiming exemption for subsequent sales u/s 6(2) of CST Act is that the sale should be of goods which are specified in the certificate of registration  of purchasing dealer.

5. Certificates required:  Dealer selling the goods has to issue a certificate in prescribed form to the purchasing dealer(Prescribed forms are E1 form if its first sale and E2 form if subsequent sales). Subsequent purchaser has to issue certificate in prescribed form(This is C form) to his seller. Such certificates are to be produced before assessing authorities within prescribed time. The certificates in C,E1 and E2 forms are to be issued on quarterly basis.

The requirements for issuing the above forms i.e who is to issue which form  and to whom which form is to be issued can be explained with the help of following example:

Suppose W in Punjab sends goods in Delhi and raises invoice on X in Bihar, during the movement of goods X sells goods by endorcing documents of title to goods in favour of Y who is a dealer in U.P and Y sells ultimately goods to Z who is a dealer in Delhi by further endorcing the documents of title while the goods are still in transit.Z finally takes delivery of goods in Delhi and the movement of goods comes to an end. 

Now in above example W will issue E-I form to X and will get ‘C form’ from X.

 X will issue E-II form to Y and will get ‘C form’ from Y.

Y will issue E-II form to Z and will get ‘C form’ from Z

A dealer who sells goods in transit has to obtain E-I/E-II forms from the seller and C form from the buyer. Submissions of both E-I/E-II and C form is mandatory to avail exemption.-Phool Chand Gupta v. State of AP 104 STC 601(SC)

Provisions of C form applicable to E1/E2 forms: Some provisions which are applicable to C forms are also applicable to E-I/E-II forms. For example one declaration for one quartor, indemnity bond if form is lost, issue of duplicate form, sales tax concession is not available if the forms are not submitted.

Latest case of Delhi High Court and Supreme court’s verdict in A&G Projects and Technologies Ltd case: The Supreme court in A & G Projects and Technologies Ltd v. State of Karnataka [2209] 19 VST 239; [2009] 2 SCC 326 explained the scheme of section 6(2) of CST Act and held that once the first inter state sale has suffered CST then subsequent sales effected by transfer of documents during transit will be exempt provided conditions prescribed u/s 6(2) are satisfied. This has been done to remove the cascading effect. The observation of the Supreme court in the said case is provided as below

“Analysing Section 6(2), it is clear that sub-section (2) has been introduced in Section 6 in order to avoid cascading effect of multiple taxation. A subsequent sale falling under sub-section (2), which satisfies the conditions mentioned in the proviso thereto, is exempt from tax as the first sale has been subjected to tax under sub-section (1) of Section 6 of the CST ACT 1956. Thus, in order to attract Section 6(2), it is essential that the concerned sale must be a subsequent inter-State sale effected by transfer of documents of title to the goods during the movement of the goods from one State to another and it must be preceded by a prior inter-State sale. It is only then that Section 6(2) may be attracted in order to make such subsequent sale exempt from levy of sales tax. However, the proviso to sub-section (2) of Section 6 prescribes further conditions and it is only on
fulfillment of those conditions that the subsequent sale stands exempted. If those conditions are not satisfied then, notwithstanding the fact that the sale is a subsequent sale, the exemption would not be admissible to such subsequent sales.

This is the scheme of Section 6 of the CST ACT 1956.”

In a recent case namely Mitsubishi Corp. Ind. Ltd. Vs Value Added Tax officer decided by Delhi High court wherein sighting the above observation of the Supreme court it was argued by the councel for the state that if the first Inter State sales is an exempted sale then the subsequent sales should not get the benefit of Section 6(2) of CST Act even if all the conditions u/s 6(2) are satisfied since the first sales had not suffered tax. The Delhi High Court in this regard observed as under:

“A reading of the said portion of the Supreme Court decision only indicates that where the first sale is taxed, the second sale would be exempted because of the object of avoiding the cascading effect. However, the Supreme Court decision cannot be understood to mean that where the first sale is exempted, the second sale must be taxed even though the conditions under Section 6(2) for exemption stand satisfied.”

Thus even if the first sales was exempted due to exemption on tax available in the state wherefrom the first sale is made the subsequent sales in other state will be exempted if the conditions u/s 6(2) of CST Act are satisfied.

Amit Bajaj Advocate
Bajaj & Bajaj Advocates
Jalandhar city
Email: amitbajajadvocate@hotmail.com
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