Analysis of Section 6(2) of the Central Sales Tax Act, 1956

An Analysis of Section 6(2) of the Central Sales Tax Act, 1956: Exemption for Subsequent Inter-State Sales

Introduction

The Central Sales Tax Act, 1956 (hereinafter referred to as "CST Act") was enacted to formulate principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce or outside a State or in the course of import into or export from India, to provide for the levy, collection and distribution of taxes on sales of goods in the course of inter-State trade or commerce and to declare certain goods to be of special importance in inter-State trade or commerce and specify the restrictions and conditions to which State laws imposing taxes on the sale or purchase of such goods are to be subject. Within this framework, Section 6 of the CST Act serves as the primary charging section. A critical provision within this section is sub-section (2), which provides for an exemption from tax for certain subsequent inter-State sales. The principal objective of Section 6(2) is to avoid the cascading effect of multiple taxation on goods that are sold multiple times while in inter-State transit (A & G Projects And Technologies Limited v. State Of Karnataka ., Supreme Court Of India, 2008, Ref 8). This article seeks to provide a comprehensive analysis of Section 6(2) of the CST Act, focusing on its conditions, judicial interpretations, and the procedural requirements for claiming exemption, based on relevant case law and statutory provisions as highlighted in the provided reference materials.

The Charging Provision and the Scheme of Exemption

Section 6(1) of the CST Act establishes the liability to pay tax on all sales effected by a dealer in the course of inter-State trade or commerce (Guljag Industries Limited v. State Of Rajasthan And Another, Rajasthan High Court, 2002, Ref 7; State Of Karnataka v. Abdul Hakeem And Co., Karnataka High Court, 1985, Ref 9). The Supreme Court in A & G Projects And Technologies Limited v. State Of Karnataka . (Supreme Court Of India, 2008, Ref 8) clarified that while Section 6(1) appears to provide for multi-point tax, this is subject to other provisions of the Act, which restrict the levy to a single point under certain conditions. Section 6(2) is one such provision that carves out an exemption.

Section 6(2) begins with a non-obstante clause, "Notwithstanding anything contained in sub-section (1) or sub-section (1A)...," signifying its overriding effect over the general charging provision for the transactions it covers (Mitsubishi Corporation India P. Ltd. v. Value Added Tax Officer & Anr., Delhi High Court, 2010, Ref 11). This sub-section exempts subsequent inter-State sales to a registered dealer or to the Government, provided specific conditions are met, thereby ensuring that tax is levied only on the first inter-State sale in a series of such sales occurring during a single movement of goods from one State to another.

Conditions for Availing Exemption under Section 6(2)

The exemption under Section 6(2) is not automatic and is contingent upon the fulfillment of several conditions, which have been elucidated through statutory provisions and judicial pronouncements. The Supreme Court in A & G Projects And Technologies Limited v. State Of Karnataka . (Supreme Court Of India, 2008, Ref 8) and various High Courts, including the Orissa High Court in G.E.T Power Private Limited And Another v. State Of Odisha And Others (Orissa High Court, 2012, Ref 23), have outlined these prerequisites.

Nature of the Sale: Subsequent Inter-State Sale

A fundamental condition is that the sale must be a "subsequent inter-State sale." This implies that there must have been a prior inter-State sale that occasioned the movement of goods from one State to another (A & G Projects And Technologies Limited v. State Of Karnataka ., Supreme Court Of India, 2008, Ref 8). The subsequent sale itself must also be in the course of inter-State trade or commerce, as defined under Section 3(a) (occasioning movement) or, more commonly for subsequent sales, Section 3(b) (effected by transfer of documents of title during movement) of the CST Act (Mitsubishi Corporation India P. Ltd. v. Value Added Tax Officer & Anr., Delhi High Court, 2010, Ref 11; G.E.T Power Private Limited And Another v. State Of Odisha And Others, Orissa High Court, 2012, Ref 23). The determination of whether a sale is inter-State is crucial, as established in cases like Indian Oil Corporation Ltd. And Another v. Union Of India And Others (Supreme Court Of India, 1980, Ref 4), which emphasized that movement resulting from a contract defines an inter-State sale.

Mode of Effecting Sale: Transfer of Documents of Title

The subsequent sale must be effected by a transfer of documents of title to the goods (A & G Projects And Technologies Limited v. State Of Karnataka ., Supreme Court Of India, 2008, Ref 8). This typically involves the endorsement and delivery of documents such as lorry receipts (LRs) or railway receipts (RRs) while the goods are in transit. This act of transferring title through documents is a hallmark of sales covered under Section 3(b) of the CST Act, which are often the subject of Section 6(2) exemptions.

Timing: During Movement of Goods

Crucially, the transfer of documents of title must occur "during the movement of the goods from one State to another," which movement was initiated by the first inter-State sale (A & G Projects And Technologies Limited v. State Of Karnataka ., Supreme Court Of India, 2008, Ref 8; G.E.T Power Private Limited And Another v. State Of Odisha And Others, Orissa High Court, 2012, Ref 23). The inter-State movement is deemed to continue until the goods reach their destination and are delivered to the consignee. However, the concept of "termination of movement" and "constructive delivery" has been a subject of litigation. In Commercial Taxes Officer v. Bombay Machinery Store . (Supreme Court Of India, 2020, Ref 21 & 22), the Supreme Court dealt with circulars issued by the Commercial Taxes Department, Rajasthan, which sought to impose time limits on the retention of goods in a carrier's godown, beyond which constructive delivery would be presumed, thereby terminating the inter-State movement. The High Court, whose decision was under appeal, had quashed these circulars, emphasizing that Explanation I to Section 3 of the CST Act did not permit an arbitrary expansion or curtailment of the movement period. The circulars argued that if a consignee asks the transporter to retain goods, the carrier ceases to hold them as a transporter and holds them as a bailee, leading to constructive delivery and termination of transit (Commercial Taxes Officer v. Bombay Machinery Store ., Supreme Court Of India, 2020, Ref 21, quoting circulars).

Purchaser Qualification

The subsequent sale must be made to a registered dealer or to the Government (A & G Projects And Technologies Limited v. State Of Karnataka ., Supreme Court Of India, 2008, Ref 8; G.E.T Power Private Limited And Another v. State Of Odisha And Others, Orissa High Court, 2012, Ref 23). This condition ensures that the benefit of exemption is channelled through entities recognized under the sales tax regime.

Documentary Evidence and Procedural Compliance

The proviso to Section 6(2) mandates the furnishing of prescribed declarations and certificates to claim the exemption. The dealer effecting the subsequent sale must furnish to the prescribed authority:

The necessity of these forms, particularly Form C, has been debated. In Bhojumal & Sons v. Commissioner Of Sales Tax, M.P, Indore, And Others (Madhya Pradesh High Court, 1978, Ref 13), the court, relying on decisions from Madras and Gujarat High Courts, observed that the requirement for Form C might not be strictly mandatory if the assessee could otherwise prove that the sales were to registered dealers. However, the Supreme Court in Phool Chand Gupta v. State Of A.P . (Supreme Court Of India, 1997, Ref 14) dealt with a case where exemption under Section 6(2) was denied for non-compliance with a specific rule (Rule 12(3)(ii) of the CST (Andhra Pradesh) Rules), and the High Court had upheld the mandatory nature of such rules. This indicates a stricter view on procedural compliance by the apex court in certain contexts.

A further proviso to Section 6(2) states that it shall not be necessary to furnish the declaration in Form C in respect of a subsequent sale 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 lower than a specified percentage (Mitsubishi Corporation India P. Ltd. v. Value Added Tax Officer & Anr., Delhi High Court, 2010, Ref 11).

Judicial Interpretation of Key Aspects

Purpose of Section 6(2): Avoiding Multi-Point Taxation

Courts have consistently recognized that the primary legislative intent behind Section 6(2) is to prevent the levy of tax at multiple points on the same goods during a single inter-State journey. This principle was highlighted by the Supreme Court in A & G Projects And Technologies Limited v. State Of Karnataka . (Supreme Court Of India, 2008, Ref 8). The sentiment aligns with earlier judicial thinking aimed at avoiding anomalous situations where inter-State sales might attract higher tax burdens than intra-State sales, as indirectly supported by the reasoning in State Of Mysore v. Yaddalam Lakshminarasimhiah Setty And Sons (Supreme Court Of India, 1964, Ref 12) concerning single-point taxation under state law and its interplay with Central tax.

"During the Movement of Goods" and Constructive Delivery

The phrase "during the movement of goods" is pivotal. The Supreme Court's examination in Commercial Taxes Officer v. Bombay Machinery Store . (Supreme Court Of India, 2020, Ref 21 & 22) of departmental circulars attempting to define the end of transit by deeming "constructive delivery" after a certain period (e.g., 10 or 30 days) of goods remaining with the transporter is significant. The circulars posited that if goods remain with the transporter beyond a reasonable time, an inference arises that the transporter holds them as a bailee for the consignee, thus ending the transit. The payment of warehouse rent or demurrage was considered conclusive evidence of bailment. The High Court had invalidated these circulars, and the Supreme Court's decision on this matter would have far-reaching implications. The circulars themselves referred to the Delhi High Court's judgment in Arjan Dass Gupta & Bros. v. CST (1980) 45 STC 52, which held that Explanation I to Section 3(b) did not permit indefinite expansion of movement.

Sales to Pre-determined Buyers

An issue that sometimes arises is whether a subsequent sale made to a pre-determined buyer can qualify for exemption under Section 6(2). The CESTAT in State Of Tamil Nadu v. Dhrangadhara Trading Co Ltd (CESTAT, 2014, Ref 17 & 24) noted, citing an Andhra Pradesh VAT circular and referring to an apex court decision in State of Tamil Nadu vs Dharangadhara Trading Co Ltd (1988 (070) STC-009-SC), that the benefit of Section 6(2) cannot be denied merely because the subsequent sale was made to a pre-determined buyer, provided the transfer of property in goods took place while they were in transit.

Impact of First Sale Being Exempt

A question arose in Mitsubishi Corporation India P. Ltd. v. Value Added Tax Officer & Anr. (Delhi High Court, 2010, Ref 25) regarding whether a second sale can be exempted under Section 6(2) if the first sale itself was exempt. The counsel for the revenue cited Jadhavjee Laljee v. State of Andhra Pradesh (1989 (74) STC 201 (DB) A.P.) to argue that if the first sale is exempted, the second sale cannot be exempted under Section 6(2). This suggests that the scheme of Section 6(2) presumes that the first sale is taxable, and the exemption for the subsequent sale is to avoid a second levy on the same transit.

Mandatory Nature of Forms and Rules

The furnishing of prescribed forms (E-I/E-II, C/D) is a critical procedural requirement. While some older High Court decisions, like Bhojumal & Sons (Madhya Pradesh High Court, 1978, Ref 13), suggested a more lenient view, holding that the absence of a C Form might not be fatal if the sale to a registered dealer could otherwise be proven, the Supreme Court in Phool Chand Gupta v. State Of A.P . (Supreme Court Of India, 1997, Ref 14) upheld the denial of exemption for non-compliance with rules, thereby underscoring the importance of adhering to prescribed procedures. The assessing authorities are generally expected to verify these forms before granting exemption (Commercial Taxes Officer v. Bombay Machinery Store ., Supreme Court Of India, 2020, Ref 21, quoting circulars).

Challenges and Controversies

The application of Section 6(2) has not been without its challenges. One common issue highlighted by departmental circulars (as quoted in Commercial Taxes Officer v. Bombay Machinery Store ., Supreme Court Of India, 2020, Ref 21) is the perceived "mechanical" application of the provision by assessing authorities merely upon furnishing of forms, without deeply examining the material facts regarding the single inter-State movement. This has led to directives for authorities to specifically examine the nature of transactions, particularly the termination of movement, before granting benefits.

The burden of proof to establish eligibility for exemption under Section 6(2) invariably lies on the dealer claiming such exemption. This requires meticulous record-keeping and timely procurement and submission of all necessary documents. Disputes often arise from procedural lapses, such as failure to produce the correct forms within the prescribed time, or disagreements over whether the conditions, particularly concerning the continuity of movement, have been met.

In Larsen & Toubro Limited Petitioner v. The State Of Haryana And Others S (Punjab & Haryana High Court, 2012, Ref 16), the petitioner challenged an assessment order disallowing exemption under Section 6(2), arguing violation of Apex Court judgments, but the court relegated the petitioner to the alternative remedy of appeal, indicating that factual determinations are often involved in such claims.

Conclusion

Section 6(2) of the Central Sales Tax Act, 1956, plays a vital role in the framework of inter-State taxation in India by providing a mechanism to avoid the cascading effect of taxes on subsequent sales effected during a single movement of goods across state borders. Its objective is to ensure that tax is levied only once on such a chain of transactions, thereby facilitating trade and commerce. However, the exemption is subject to stringent conditions, including the nature of the sale, the mode of transfer, the timing relative to the movement of goods, the status of the purchaser, and, significantly, strict procedural compliance through the furnishing of prescribed forms and declarations.

Judicial interpretations have continuously shaped the understanding and application of these conditions, particularly concerning the concepts of "movement of goods," "constructive delivery," and the mandatory nature of documentary evidence. While the legislative intent to prevent multi-point taxation is clear, the onus remains on the dealers to meticulously comply with all statutory requirements to avail of this exemption. The tension between ensuring revenue integrity and facilitating trade continues to inform the approach of both the tax authorities and the judiciary in adjudicating claims under Section 6(2) of the CST Act.