Central Sales Tax's constitutional validity

The CST Act provides for levy on Inter-State sales and also defines what is ‘Inter-State Sale’. However, the concept that revenue from sales tax should be collected by States has been retained. Thus, though it is called Central Sales Tax Act, the tax collected under the Act in each State is kept by that State only. This is provided in Article 269(1)(g) of Constitution of India. - - CST in each State is administered by local sales tax authorities of each State.

Constitutional Background

India is Union of States - Our Constitution generally follows British pattern, though concepts of federal structure are borrowed from American and other Constitutions. India is a Union of States. The structure of Government is federal in nature. Government of India (Central Government) has certain powers in respect of whole country. India is divided into various States and Union Territories and each State and Union Territory has certain powers in respect of that particular State. Thus, there are States like Gujarat, Maharashtra, Tamilnadu, Kerala, Uttar Pradesh, Punjab etc. and Union Territories like Pondicherry, Chandigarh etc.

Taxation under Constitution - In the basic scheme of taxation in India, it is envisaged that (a) Central Government will get tax revenue from Income Tax (except on Agricultural Income), Excise (except on alcoholic drinks) and Customs (b) State Government will get tax revenue from sales tax, excise on liquor and tax on Agricultural Income (c) Municipalities will get tax revenue from octroi and house property tax.

Income Tax, Central Excise and Customs are administered by Central Government. As regards sales tax, Central Sales Tax is levied by Central Government while State Sales Tax is levied by individual State Governments. Though Central Sales Tax is levied by Central Government, it is administered by State Governments and tax collected in each State is retained by that State Government itself.

Article 246 of our Constitution indicates bifurcation of powers to make laws, between Union Government and State Governments. Parliament has exclusive powers to make laws in respect of matters given in list I of the Seventh Schedule of the Constitution (called ‘Union List’’). List II (State List) contains entries under jurisdiction of States. List III (concurrent list) contains entries where both Union and State Governments can exercise power. [In case of Union Territories, Union Government can make laws in respect of all the entries in all three lists].

Union List relevant to taxation - List I, called “Union List”, contains entries like Defence of India, Foreign affairs, War and Peace, Banking etc. Entries in this list relevant to taxation provisions are as follows :

Entry No. 82 - Tax on income other than agricultural income.

Entry No. 83 - Duties of customs including export duties.

Entry No. 84 - Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet preparations containing alcohol, opium or narcotics.

Entry No. 85 - Corporation Tax.

Entry No. 92A - Taxes on the Sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce.

Entry No. 92B - Taxes on consignment of goods where such consignment takes place during Interstate trade or commerce.

Entry No. 97 - Any other matter not included in List II, list III and any tax not mentioned in list II or list III. (These are called ‘Residual Powers’.)

State list pertaining to taxation - State Government has exclusive powers to make laws in respect of matters in list II of Seventh Schedule to our Constitution. These entries include Police, Public Health, Agriculture, Land etc. Entries in this list relevant to taxation provisions are as follows:

Entry No. 46 - Taxes on agricultural income.

Entry No. 51 - Excise duty on alcoholic liquors, opium and narcotics.

Entry No. 52 - Tax on entry of goods into a local area for consumption, use or sale therein (usually called Octroi or Entry Tax).

Entry No. 54 - Tax on sale or purchase of goods other than newspapers except tax on interstate sale or purchase.

Restrictions on powers of taxation

Restrictions on power of State Government on imposition of tax on sale or purchase of goods are provided in Article 286 of Constitution of India, as follows :

	State Government cannot impose tax on sale or purchase during imports or exports; or tax on sale outside the State. [Art 286(1)]
	Parliament is authorised to formulate principles for determining when a sale or purchase takes place (a) outside the State (b) in the course of import and export. [Article 286(2)]
	Parliament can place restrictions on tax on sale or purchase of goods declared as goods of special importance and State Government can tax such declared goods only subject to these restrictions [Article 286(3)].

Under these powers, CST Act has defined the terms ‘sale outside a State’ and ‘sale during export/import’. Provisions for ‘declared goods’ have also been made in the CST Act.

No restriction on Inter-State Trade and Commerce - Each State and Union Territory has certain autonomy. However, the trade and commerce has to be free all over India, without which India cannot be ‘One Nation’. As we saw above, tax on Inter-State sale/purchase can be imposed only by Central Government. Provisions in respect of inter-State Trade and Commerce in Constitution of India are summarised below :

	Trade, commerce and intercourse throughout the territory of India shall be free, subject to provisions of Articles 302 to 304 of Constitution. (as stated below) [Article 301]
	Restrictions on trade or commerce can be placed by Parliament in the public interest. (Article 302)
	No discrimination can be made between one State and another or give preference to one State over another [Article 303(1)]. Such discrimination or preference can be made only by Parliament by law to deal with the situation arising from scarcity of goods [Article 303(2)]
	State can impose tax on goods imported from other States or Union Territories, but a State cannot discriminate between goods manufactured in the State and goods brought from other States [Art. 304(1)].
	State Legislature can impose reasonable restrictions on freedom of trade and commerce within the state in public interest. However, such bill cannot be introduced in State Legislature without previous sanction of the President (proviso to Article 304).

Tax on local goods and goods from other States must be same

Local Sales Tax rate (i.e. Sales tax payable under State sales tax laws) must be same both for local goods and goods brought from other States. e.g. assume that if a product is manufactured in M.P. the sales tax rate is 6%. In that case, same rate will apply in case of goods brought from other State on stock transfer and sold within the State of M.P.

Charging section of CST

As per the Constitution, tax on Inter State sale/purchase can be levied only by Union Government. CST Act has been enacted for this purpose. Section 6(1) of CST Act provides that subject to other provisions of the CST Act, every dealer shall be liable to pay tax under this Act on all sale of goods (other than electrical energy) effected by him in the course of Inter-State trade or Commerce. Section 6(1) is called as ‘Charging Section’ as it imposes levy on sale of goods on Inter-State sale.

Important words in charging section - (a) Levy is on sale of goods (i.e. levy is not on purchases) (b) it is on sale as defined under section 2(g) (c) sale should be of goods as defined in section 2(d) (d) there is no levy on electrical energy, though electrical energy is ‘goods’. [section 6(1)] (e) sale should be in course of inter-state Trade or commerce as defined in section 3.

Liability Subject to other provisions of Act - The levy is subject to other provisions of Act, i.e. the liability is not absolute. e.g. section 8(1) prescribes lower rate of taxes in certain cases, section 6(2) exempts subsequent sales by transfer of documents during movement of goods etc. Proviso to section 6(1) exempts sale of goods in the course of exports. Thus, the levy is subject to these and other exemptions.

Meaning of ‘Inter State Sale’

Section 3 of CST Act defines Inter-State sale or purchase as follows : A sale or purchase of goods shall be deemed to take place in the 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 the goods during their movement from one State to another. Thus, inter-state sale can be as per section 3(a) or section 3(b).

It has been held that these two modes are mutually exclusive. – Tata Iron and Steel Co. (TISCO) v. S R Sarkar - (1960) 11 STC 655 (SC) = AIR 1961 SC 65 = (1961) 1 SCR 379 - confirmed in UOI v. K G Khosla & Co. Ltd. - (1979) 43 STC 457 (SC) = (1979) 2 SCC 242 = AIR 1979 SC 1160 = (1979) 3 SCR 453, i.e. when a sale falls under section 3(a) it cannot fall under section 3(b) and CST can be levied only once. In Bharat Heavy Electricals v. UOI - AIR 1996 SC 1854 = (1996) 102 STC 373 (SC) = (1996) 4 SCC 230 = JT 1996(4) SC 427, it was held that whether a particular sale is inter-state or not has to be decided only with reference to section 3 of CST Act alone and no other section. Similarly, to decide question in which State the tax is leviable, only section 9(1) is relevant - no other provision is relevant.

Sale which ‘Occasions movement of goods’ - As per section 3(a), ‘Inter State sale’ takes place if the sale occasions movement of goods from one State to another. In CST v. Suresh Chand Jain - (1988) 70 STC 45 (SC), it was held that a sale can be said to be in the course of inter-state only if two conditions concur viz. (i) sale of goods and (ii) a transport of those goods from one State to another.

There are following essential ingredients of inter-State sale under this sub-section:

	Transaction must be a completed sale.
	Location of buyer and seller is immaterial. Thus, even if buyer and seller are within the same State, sale will be inter-state, if sale occasions movement of goods from one State to another. e.g. the buyer may have construction site in another State and may ask seller to despatch goods directly to the site. Inter State sale by transfer of documents is also possible even when buyer and seller are in same State.
	There should be an agreement to sale which contains a stipulation (express or implied) regarding movement of goods from one State to another. - Balabhgas Hulaschand v. State of Orissa (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (1976) 2 SCC 44 = 1976 2 SCR 939.
	It is immaterial whether a completed sale precedes the movement of goods or follows the movement of goods or takes place while the goods are in transit. What is important is that movement of goods and the sale must be inseparably connected - CST, UP v. Bakhtawar Lal Kailash Chand Arhti - (1992) 87 STC 196 = 1992 AIR SCW 2246 = AIR 1992 SC 1952 = JT 1992 (4) SC 388 (SC 3 member bench) [In Balabhgas Hulaschand v. State of Orissa (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (1976) 2 SCC 44 = 1976 2 SCR 939, it was held that concluded sale should take place in a State which is different from the State from which goods move. However, now the later judgment (i.e. 1992 judgment) prevails].
	Even if goods move from one state to another in pursuance of agreement to sale and the sale is completed in the State in which goods are received, it will be an inter-State sale. - Balabhgas Hulaschand v. State of Orissa 1976 2 SCR 939 = (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (1976) 2 SCC 44. [However, this would be so only if there is stipulation in the agreement regarding transfer of property in goods].
	There should be physical movement of goods from one State to another. Such movement must be inextricably connected with sale. - Balabhgas Hulaschand v. State of Orissa (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (176) 2 SCC 44 = 1976 2 SCR 939 * State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench).
	The contract may not provide for movement of goods. It is enough if such movement is result of covenant of sale or is incidental to the contract. It is sufficient if the movement of goods is implicit in the sale.- UOI v. K G Khosla and Co. (P.) Ltd. - (1979) 43 STC 457 (SC) = AIR 1979 SC 1160 = (1979) 2 SCC 242 = (1979) 3 SCR 453. It is not necessary that covenant regarding inter-State movement must be specified in the contract itself. It is enough if the movement is in pursuance of and incidental to the contract of sale - English Electric Co. of India Ltd. v. Dy CTO - (1976) 38 STC 475 (SC) = AIR 1978 SC 19 = (1977) 1 SCR 631 - same view in Oil India Ltd. v. Superintendent of Taxes - (1975) 35 STC 445 (SC) = AIR 1975 SC 887 = (1975) 3 SCR 797 (SC).
	It is immaterial in which State the property (i.e. ownership) of goods passes to the buyer. - Oil India Co. Ltd. v. Superintendent of Taxes (1975) 3 SCR 797 (SC) = AIR 1975 SC 887 = (1975) 35 STC 445 (SC) * English Electric Co. of India Ltd. v. Dy CTO - (1976) 38 STC 475 (SC) = (1977) 1 SCR 631 = AIR 1978 SC 19. Property may pass in either State – Tata Iron and Steel Co. (TISCO) v. S R Sarkar - (1960) 11 STC 655 (SC) = AIR 1961 SC 65 = (1961) 1 SCR 379.
	Sale need not precede the inter-State movement. Sale can be either before the movement or after the movement. - Oil India Co. Ltd. v. Superintendent of Taxes (1975) 3 SCR 797 (SC) = AIR 1975 SC 887 = (1975) 35 STC 445 (SC). It is immaterial in which State the property in the goods is passed. It is not necessary that inter-State movement must precede the sale - ITC Classic Finance and Services v. CCT - (1995) 97 STC 330 (AP HC) * English Electric Co. of India Ltd. v. Dy CTO - (1976) 38 STC 475 (SC) = AIR 1978 SC 19 = (1977) 1 SCR 631 * ONGC v. State of Bihar - (1976) 38 STC 435 (SC) = AIR 1976 SC 2478 = (1977) 1 SCR 34.
	Movement of goods should be incident of sale and should be necessitated by the contract of sale and this be inter-linked with the sale of goods - Kelvinator of India Ltd. v. State of Haryana (1973) 32 STC 629 (SC). The movement or despatch of goods from one State to another should be under a covenant or incident of contract of sale with the buyer – Tata Iron and Steel Co. (TISCO) v. S R Sarkar - (1960) 11 STC 655 (SC) = (1961) 1 SCR 379 = AIR 1961 SC 65.
	Mode of transport is immaterial. It may be aircraft, rail, post, motor transport, angadia, ship or hand cart - State of Bombay v. United Motors – AIR 1953 SC 252 = (1953) 4 STC 133 (SC)
	Even if buyer takes delivery from the seller, it can be inter-State sale if movement of goods to other State is a necessary part of transaction, e.g. if cement is issued within the State to a buyer but as per allotment order the buyer had to necessarily take the goods out of the State, it is an Inter-State Sale. - Mohanlal Hargovandas v. State of MP - (1955) 6 STC 687 (SC).
	Situs of a sale or purchase is wholly irrelevant as regards its inter-state character - Bengal Immunity Co. Ltd. v State of Bihar AIR 1955 SC 661 = (1955) 2 SCR 603 = (1955) 6 STC 446 (SC). Situs of sale is immaterial.
	Sale of machinery is inter-state even if it is erected and commissioned in another State. In Inter State sale, situs of sale is irrelevant. – State of Andhra Pradesh v. Usha Breco (2001) 121 STC 621 (AP HC DB).
	Sale should conclude in different State. - State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench). [Meaning that if sale concludes in the same State, subsequent movement will be on behalf of purchaser alone and will not be inter State sale].

Temporary movement through another State is not Inter State sale - Explanation 2 to section 3 states that if movement of goods starts from one State and ends in the same State, it will not be deemed to be movement of goods during ‘inter State sale’; even if during transit goods pass through other State.

Sale by transfer of documents

Section 3(b) provides for Inter-State sale by transfer of documents of title to goods during the movement from one State to another.

As per section 3(b), a sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase is effected by a transfer of documents of title to the goods during their movement from one State to another.

This definition is important as all subsequent inter-state sales to registered dealers by transfer of documents during movement of goods are exempt from sales tax [E-I, E-II transaction, as explained later].

Section 3(a) requires that sale should ‘occasion movement of goods’. There is no such requirement in section 3(b). Hence, for purpose of section 3(b), the movement of goods from one State to another need not be occasioned by sale. For example, if the goods are being sent to a branch by transport, sale during movement by transfer of document will also be an ‘inter state sale’ u/s 3(b).

What is ‘Document of Title of Goods’ - When the goods are handed over to the carrier, he hands over a receipt to the seller. The seller sends the receipt to buyer. The buyer gets delivery of goods on submission of the receipt to the carrier at other end. The receipt of carrier is ‘document of title of goods’. The words ‘document of title’ is defined under section 2(4) of Sale of Goods Act. Such document is usually called (a) Lorry Receipt - LR in case of transport by Road (b) Railway Receipt - RR - in case of transport by rail (c) Bill of Lading - BL - in case of transport by sea (d) Air Way Bill - AWB - in case of transport by air. It is called ‘document of title’ as one who submits the same is entitled to get delivery of goods, if document is in his name or endorsed in his name.

Transfer of Document - .Transfer of Document is a symbolic delivery of goods to the purchaser. It carries with it full ownership of goods. Delivery of ‘document of title’ is equivalent to the delivery of goods themselves. - J V. Gokal and Co. (P.) Ltd. v. Assistant CST - 1960(2) SCR 852 = 110 ELT 106 = 11 STC 186 = AIR 1960 SC 595 (SC 5 member constitution bench) - quoted and followed in MMTC v. STO 1998 AIR SCW 3475 = 1998(5) SCALE 446 = AIR 1999 SC 121.

Stock Transfer/Branch Transfer

One of the basic and obvious conditions of Inter-State sale is that there should be a sale. If a manufacturer sends goods to his branch in other State, it is not a ‘sale’ as you cannot sell to yourself. Similarly, if a dealer sends goods to his Agent in other State who stocks goods on behalf of the dealer, it is not a sale. Such agent is usually called ‘Consignment Agent’. Goods are despatched to another State on consignment basis and the person despatching goods retains ownership of goods. Since no sale is involved, there is no ‘Inter State Sale’.

In Goodyear India Ltd. v. State of Haryana - (1990) 76 STC 71 (SC) (at page 98), it was held that mere consignment of goods by a manufacturer to his own branches outside the State does not amount to sale or disposal as such; the consignment of goods is neither sale nor a purchase.

This is called ‘stock transfer’ or ‘branch transfer’. Here, movement of goods takes place from one State to another, but it is not an inter State sales.

Stock transfer for works contract – Stock transfer for works contract in different State is permissible and in such case, there will be no sales tax liability in State from which goods moved. – State of AP v. Bhooratnam (2000) 117 STC 371 (AP HC DB). [Now tax will be payable after 11-5-2002].

No stock transfer of tailor made goods - As explained later, stock transfer envisages transfer of standard products, which are sold off the shelf. If buyer is known or identified before removal of goods from factory, it is not really a 'stock transfer'. In short, stock transfer of tailor made goods or custom built products is a bogus stock transfer, shown just to avoid CST.

Consignment Agent - Goods are despatched to Consignment Agent by Principal. Goods remain property of the Principal. Agent sells goods on behalf of Principal. Consignment Agent collects sales proceeds and remits the same to Principal. The Consignment Agent can recover his commission, godown charges, insurance charges etc. Despatch to Consignment is not a sale as property in goods is not transferred and hence no CST is payable.

Branch Transfer - Here, the Principal has his own branch/depot in another State where goods are sent. These are stocked at depot in the branch and sold. There is no transfer of property when goods are despatched to branch and hence there is no liability of CST. This is often called ‘stock transfer’ or ‘branch transfer’ or ‘depot transfer’.

When Stock Transfer is treated as Inter-State sale - Goods are despatched to branch/consignment agent in another State and then these are sold from the branch, depot or place of consignment of agent. However, if the movement of goods is occasioned on account of sale, the movement will be treated as inter-State Sale. One illustration will make the distinction clear.

Let us assume that Tata Iron and Steel Co. Ltd. (TISCO), manufacturing Steel, has a factory at Jamshedpur, Bihar. TISCO manufactures Steel of various standard shapes and sizes. TISCO has a depot at Howrah in West Bengal. Steel plates, rods, billets etc. are sent to its depot at Howrah. When the goods are sent from Jamshedpur to Howrah, there is inter State movement, but the movement has not occasioned on account of any covenant or contract for sale. Hence, it is not an Inter-State sale but a stock transfer. Sale takes place when a customer approaches TISCO depot at Howrah and takes delivery from Howrah. Here, the sale by TISCO from its Howrah depot is an Intra-State sale within West Bengal.

However, assume that a buyer from Howrah wants Steel of a particular size and specification, which is not a standard size and specification and hence is not available in Howrah depot of TISCO. He approaches TISCO and TISCO manufactures Steel in its Jamshedpur factory in Bihar as per the specific requirements of the buyer. After manufacture, goods are sent to depot of TISCO at Howrah and goods are sold to the buyer from Howrah depot of TISCO. In such case, the movement of goods from Jamshedpur, Bihar to Howrah, West Bengal has occasioned as a necessary incident of contract and hence it is a Inter State sale, even if goods are supplied from depot of TISCO at Howrah and invoice is raised from TISCO, Howrah.

thankyou sir..