UNIT - V

CENTRAL SALES TAX

Object of the Central Sale Tax (CST) Act : The objects of the Act, as stated in preamble of the CST Act are –

1. To formulate principles for determining (i) when a sale or purchase takes place in the course of inter-state trade or commerce (ii) when a sale or purchase takes place outside a State (iii) when a sale or purchase takes place in the course of imports into or export from India.

2. To provide for levy, collection and distribution of taxes on sales of goods in the course of inter-state trade or commerce.

3. 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 sale or purchase of such goods of special importance (called as declared goods) shall be subject.

Scheme of the CST Act : Basic scheme of the Act is as discussed below –

1. Sales Tax Revenue to States : 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 such State is kept by that State only. CST in each state is administered by local sales tax authorities of each State.

2. Tax Collected in the State Where Movement of Goods Commences : The scheme of CST Act is that Central Sales Tax is payable in the State from which movement of goods commences (i.e. from which goods are sold). The tax collected is retained by the State in which it is collected. CST Act is administered by Sales Tax authorities of each State. Thus, the State Government Sales Tax officer who collects and assesses local (State) sales tax also collects and assesses Central Sales Tax.

3. Tax on Inter State Sale of Goods : CST is tax on inter State sale of goods. Sale is inter-state when (a) sale occasions movement of goods from one State to another or (b) is effected by transfer of documents during their movement from one State to another.

4. State Sales Tax Law Applicable in Many Aspects : CST Act makes provisions for very few procedures and rules. In respect of provisions like return, assessment, appeals etc., provisions of General Sales Tax law of the State apply.

5. CST Act Defines Some Concepts : Under the authority of Constitution, the CST Act defines concepts of ‘Sales Outside the State’ and ‘sale during the course of import/export’.

6. Declared Goods : Some goods are declared as goods of special importance and restrictions are placed on power of State Governments to levy tax on such goods.

Appropriate State [Section 2(a)] : In relation to a dealer who has one or more places of business situated in the same State, “appropriate State” means that State in which such

business is situated. If, however, dealer has places of business situated in different States, every such State with respect to the place (or places) of business situated within its territory shall be treated as “appropriate State”.

Business [Section 2(aa)] : Business includes the following –

1. any, trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit and whether or not any gain or profit accrued from such trade, commerce, manufacture, adventure or concern, and

2. any transaction in connection with or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern.

The following conclusions one can draw from the aforesaid definition of the term “business” –

1. It is not necessary that business should be carried on with a view to earning profits.

2. Adventure being a part of business implies that the element of regularity of transactions need not always be present.

3. Incidental or ancillary transaction are also covered in business, i.e. if a dealer sells old machinery, he will be liable to pay central sales tax on this sale.

4. It is not necessary that the business should be legal.

Crossing the Customs Frontiers of India [Section 2(ab)] : It means crossing the limits of the area of a custom station in which imported goods or export goods are ordinarily kept before clearance by customs authorities.

“Customs Station” and “Customs authorities” shall have the same meaning as in the Customs Act, 1962.

Customs Station : Section 2(13) of the Customs Act, 1962 defines customs station as any customs port, customs airport or land customs station (customs port shall be for vessels, customs airport for aircrafts and land customs station for trucks and other vehicles). Custom authorities shall specify the customs area within such customs station where imported goods and export goods are to be kept.

Custom Authorities : As per Section 3 of the Customs Act, there shall be the following classes of officers of customs, namely –

1. Principal Collectors of Customs;

2. Collectors of Customs;

3. Collectors of Customs (Appeals);

4. Deputy Collectors of Customs;

5. Assistant Collectors of Customs; and

6. Such other class of officers of customs as may be appointed for the purposes of this Act.

Goods [Section 2(d)] : Sale of “goods” is liable to sales tax. As per Section 2(d), “goods” include all material, articles or commodities and all kinds of movable property. The term does not, however, include newspapers, actionable claims, stocks, shares or securities.

The term “goods” includes all movable property. The word “movable”, as applied to property, is defined as that which may be lifted, carried, drawn, turned, or conveyed, or in any way made to change place or position- Monarch Loundry vs Westbrook 63 S.E. 1070,109 Va. 382. Things are either immovable or movable. ‘Immovable’ includes land and all that is so attached to land as to be legally regarded as a part of it. All other things are movable. Whether a thing is so attached to the land as to be regared as a part of it is determined by the law of the place where the land is. The nature of a “movable” is generally such that its identity is not lost if it moved from one location to another – Bailey vs Kruithoff, La. App. 280 So. 2d 262, 264.

Vide Section 2(7) of Sale of Goods Act, goods includes standing crop, grass and things attached to and forming part of the land, which is agreed to be served before sale or under contract of sale, and consequently, liable to sales tax. In other words, standing crops/trees are generally not goods, if they are sold alongwith land. However, standing timber or crop will be taxable under the CST Act if timber or crop is identified, contract is unconditional and timer or crop is in deliverable state. In such case, it is “movable property” and liable for sales tax.

Newspapers are not goods only for the purpose of the CST Act, i.e., no tax is levied in case of inter-state sale of newspapers.

Dealers are not liable to sales tax on sale of newspapers but if they buy raw material for newspapers at concessional rate, they can do so on submission of Form C.

If old newspaper is sold as newspaper, then it is not taxable. Suppose a Bombay book shop sells an old newspaper (Times of India, Bombay edition) of September 6, 1936 to a researcher in Delhi for Rs. 1,500, it is not chargeable to tax. Conversely, however, if old newspapers are sold as scrap (for instance, sale to a raddiwala of old newspaper @ Rs. 4.50 per kg.) it is chargable to central sales tax, if it is an inter-state sale.

Place of Business [Section 2(dd)] : It is important to know the dealer’s place of business because central sales tax is collected by the Government of that State only where the place of business is situated. The term place of business includes the following –

1. In any case where a dealer carries on business through an agent (by whatever name called), the place of business of such agent;

2. A warehouse, godown or other place where a dealer stores his goods; and

3. A place where a dealer keeps his books of account.

Turnover [Section 2(j)] : It is the aggregate of the sale prices received and receivable by the dealer in respect of sales of any goods in the course of interstate trade or commerce made during any prescribed period. Prescribed period is the period in which sales tax return is filed as per the local sales tax law of the state.

Year [Section 2(k)] : It means the year applicable in relation to a dealer under the general sales tax law of the appropriate state, and where there is no such year applicable, it is the financial year. While the sales tax returns are submitted quarterly/monthly, as the case may be, sales tax assessment is always done for the whole year and the tax payable is calculated accordingly

Definition and Essentials of Sale : Section 2 (g) defines that sale with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or for deferred payment or for any other valuable consideration, and included a transfer of goods on hire-purchase or other system of payment by instalments, but does not include a mortgage or hypothecation or a charge or pledge on goods.

Essentials of Valid Sale : As per Section 4 of Sales of Goods Act, where under a contract of sale, the property in the goods is transferred from buyer to seller (for a price), the contract is called ‘sale’. Where the transfer of property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an ‘agreement to sale’.

Thus essential element of sales are as given below –

1. There must be transfer of Goods : In state of Tamilnadu vs Sri Srinivasa Sales Corporation (1996 (7) SCALE 421 (SC)] it was held-“In order to constitute a sale under the Sale of Goods Act, it is essential to establish that there is an agreement between the parties for transfer of title to the goods and that such agreement should be supported by money consideration and as a result of the transaction, the goods, article or the property must actually pass to the purchaser. It is settled law that the expression ‘sale’ under the Sale Tax Act has to be understood with reference to the definition of ‘sale of goods’ under the Sale of Goods Act. But, if the title of goods passes without any contract between the parties, express or implied, there is no sale. Similarly, if the consideration of the transfer is not money, but some other valuable consideration, it may amount to exchange or barter but not sale in the strict sense of the law for the purposes of taxation.

Sale of goods is a ‘contract’, hence as per normal provisions of Contract Act, both parties to contract must be competent to contract. A valid mutual consent of both parties is essential for any contract.- Bhopal Sugar Industries Ltd. Vs D.P. Dube (1963) 14 STC 406 (SC). However, in Food Corporation of India vs State of Kerala, AIR 1997 SC 1252 (SC 3 member bench), it was held that levy procurement under Government order is a sale and purchase and hence taxable.

Ascertained Goods : A seller may agree to sell part of his stock of goods. However, unless the part which he intends to sell is segregated, these remain ‘unascertained goods’ and there is no sale. The sale takes place only when goods are segregated i.e. ‘ascertained’ and property is passed on to buyer.

Sale of Illegal Goods : Sale of illegal goods (like hashish, ganja) are also liable to sales tax (like income from illegal business is taxable under Income Tax Act).

2. Transfer of ‘Property’ Essential : There is no sale unless there is ‘transfer of property’. ‘Property’ means a thing over which a person has a domain. This implies transfer of ownership. Mere ‘agreement to sale’ does not mean sales as there is no transfer of property. ‘Property’ is different from ‘possession’. Property can pass even before handing over possession. Conversely, transfer of possession does not necessarily mean that it is a transfer of property.

3. Valuable Consideration Essential : The consideration is something akin to cash payment or deferred payment. Otherwise, it is an exchange and not a sale – Devidas Gopal Krishna vs State of Punjab (1967) 20 STC 430 (SC). Thus, where Kansa finished utensils were transferred for equal weight of raw material in the form of old Kansa utensils plus making charges, it was held as ‘exchange’ and not ‘sale’ –CTO vs Kansari Udyog Sahakari Samiti (1979) 43 STC 176 (MP DB).

It is obvious that free gifts given by Company cannot be taxed as there is no ‘consideration’.

Sales tax is attracted as soon as a sale takes place and payment of such tax becomes statutorily due irrespective of the fact whether they are credit sales or cash sales –ACC vs CTO (1981)48 STC 466 (SC).

In ‘hire purchase’, possession of goods is delivered by ‘owner to hirer on condition of payment of agreed number of instalments. Hirer has option to purchase the goods as per terms of agreement; (usually, a nominal payment is provided at the end of hire period). Property in goods is passed on to the hirer after all terms of agreement are fulfilled. If the hirer does not fulfill the conditions of hire-purchase (e.g. does not pay instalments on due dates) possession of goods can be taken back by owner giving goods on hire purchase. Article 366 (29A) of Constitution has been amended in 1982 to specifically include’ hire purchase’ in definition of ‘sale’. Definition of ‘sale’ as per CST Act also states that ‘sales’ include ‘hire purchase’. Thus, hire purchase is ‘sale’.

4. Buyer and Seller are Essential : There must be two parties to sale buyer and seller. Transfer of goods from one branch to another cannot be termed as ‘sale’ as a sale can be only from one person to another person. In case of branches, they are only one legal entity. This would be so even if accounting entries resembling sales are made and they are separately registered under Sales Tax Act. KCP Ltd. Vs State of A.P.(1993) 88 STC 274 (AP HC DB).

Sale in the Course of Inter-State Trade Commerce : According to Section-3, 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 –

1. occasions the movement of goods from one State to another; or

2. is effected by a transfer of documents of title to the goods during their movement from one State to another.

Occasions Movement of Goods [Section 3(a)] : It implies that there must be a contract of sale/ purchase in pursuance of which there is a completed sale, whereby goods move from one state to another. Therefore, when the goods so move from one State to another in the absence of a contract, it shall not be termed as inter-State sale.

What constitutes a completed sale is explained by the Supreme Court in the case of Bhopal Sugar Industries Ltd., vs D.P. Dube (1963) 14 STC 406, as a transaction becoming a sale in the presence of the following four elements –

1. there must be parties competent to contract;

2. mutual consent;

3. a thing, the absolute or general property which is transferred from the seller to the buyer; and

4. a consideration in money paid or payable.

Essentials Features of Inter-State Sale : The following are the essential features of an inter-State sale –

1. Transactions should be a completed sale.

2. There should be an agreement to sale (express or implied) with a stipulation (may be express or implied) regarding movement of goods from one State to another.

3. Concluded sale must take place in a State which is different from the sate from which movement of goods commences.

4. The movement should be result of a contract (express or implied).

5. There should be physical movement of goods from one State to another (such movement must be inextricable connected with sale). Mode of transport is not relevant.

6. It is sufficient if movement of goods arises as a result of contract of sale or is incidental to the contract. The contract may not provide for movement of goods.

7. It is not relevant in which State the property (i.e., the ownership), of goods passes from seller to the buyer.

8. It is not necessary that sale precedes the inter-state movement of goods. Sale can be either before or after the movement of goods.

9. 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 course of such movement the goods pass through the territory of any other state.

In Balabhagas Hulashand vs State of Orissa (1976) 37 STC 207, 215 (SC), the firm used to purchase raw jute through brokers in forward market in Orissa. The goods were dispatched in bags from Cuttack (Orissa) to Calcutta by rail. The goods were to be inspected, accepted, and weighed at railway siding at Calcutta by the buyer and they would accept the same if the goods were according to their specifications. The firm contended that when the goods were booked from Orissa, there was an agreement to sale. Sale concluded only at Calcutta after goods were accepted. It was held by the Supreme Court that though sales took place at Calcutta, movement of goods from Orissa was in pursuance to agreement to sale.

Sale by Transfer of Documents [Section 3 (b)] : By virtue of 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.

Where, however, goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall, for the aforesaid purpose, be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee [Explanation 1 to Section 3 (b)].

Delivery of “document of title” is, thus considered the same as the delivery of goods themselves- J.V. Gokal and Co. (P) Ltd., vs Assistant Collector of Sales Tax (1960) 11 STC 186 (SC).

A of Kolkata sells goods to B at Agra and delivers the same to a transport company. The lorry receipt (i.e., LR) is sent to B by post. While goods are in transit, B sells the goods to C of Gwalior by making an endorsement on the LR and goods are diverted to Gwalior. Delivery of goods is taken by C at Gwalior. In this case there are 2 inter-State sales –first by A to B from Kolkata to Agra and second by B to C from Agra to Gwalior. The first is chargeable to central sales tax. The second sale is, however, exempt in some cases under Section 6 (2).

Sale by transfer of document of title of goods may be effected by handing over the document and that endorsement to that effect on the document is only one of the proof but not necessarily the only way to prove the fact- Dy. Commissioner vs ARS Thirumeninatha Nadar Farm (1968) 21 STC 184 (Mod HC DB).

Following sales are not taxable under Central Sales Tax Act :

Sale Inside a State [Section 4(2)] : A sale or purchase of goods shall take place inside a state in the following situations–

1. In the case of specific or ascertained goods, if goods are within the State at the time when the contract of sale is made.

2. In the case of unascertained or future goods, if goods are within the State, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation.

Once a sale is termed as having taken place inside a State according to the aforesaid tests, it will be deemed to be outside sale for all other states. However, the definition of “sale inside State” is subject to a provision that it should not be inter-state sales. In other words, a sale or purchase which occasions the movement of the goods from one State to another or is effected by transfer or documents of title to the goods during their movement from one State to another is excluded from “inside sale”.

If the goods are sold with the understanding that the goods will be sent to some place situated outside the State, then it will be an inter-state sale chargeable to the central sales tax.

Explanation to Section 4(2) provides that where there is a single contract of sale or purchase of goods situated at more than one place, the above provisions shall apply as if there were separate contracts in respect of the goods at each of such places and where the sale is so fixed in a particular State, then it shall be sale outside all other States.

Export sales [Section 5(1)] : A sale or purpose of goods shall be deemed to take place in the course of export of goods out of territory of India in the following cases –

1. if the sale or purpose occasion such export; or

2. if the sale or purchase is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

Webster defines “occasions” as follows – ‘To cause or to bring about by furnishings the condition or occasion needed for the action of a principal cause; to cause accidentally or incidentally, or simply to cause to bring about.’

Occasion means “to be immediate cause of”. In Tata Engg. and Locomotives Co. Ltd. Vs CCT (1970) 26 STC 354, the Supreme Court observed that :

It is possible to have only one sale which can occasion the export. It is the sale between the exporter in India and the overseas buyer which has a direct nexus with the exporter and only this sale can occasion the export. Any other sale cannot be treated as sale in the course of export even if it is inter-connected with the export – CCT vs Vasantha Mills Ltd. (1976) 38 STC 366 (Mad.). The only exception is the rule covered by Section 5 (3).

If goods leave the territorial waters of India and are shipped to a foreign destination, it will make the export complete, even if the goods do not factually reach the destination. Where, however, the goods are merely shipped to a foreign country, there being no destination specified, this will not be considered to be sale in the course of export. In Burmah Shell Oil Storage and Distributing Co. of India Ltd. Vs CTO (1960) 11 STC 764, the company supplied aviation fuel to foreign country; it was not treated as a sale in the course of export.

Import Sale [Section 5(2)] : A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only in the following situations–

1. If the sales or purchase occasions such import; or

2. If such sale or purchase is effected by a transfer of documents of title to the goods before the goods have crossed the custom frontiers of India.

When the user directly imports for his own use or consumption, no question of any further sales arises. This is so even if an agent arranges the imports- CST vs Glass Trading and Sales Corporation (1991) 84 STC 195 (Delhi H.C.).

Sale in duty free shop in airport is not a ‘sale in course of import’, as there is no inextricable line between original import of goods and its sale at the airport Re Indian Tourism Development Corporation STR vd 44 No 7 PII-113 (Maharashtra Sales Tax Tribunal).

Kotak and Co. supplied foreign cotton to textile mills in South India on the basis of import licences issued to the mills. The letter of authority granted to Kotak and Co. was under a condition that the importer will only act as agent and goods on import had to be delivered to licence holders. In this case, sale by Kotak and Co. to textile mills in India was held to be sale in course of import and exempt from tax. [Dy. CAIT vs Kotak and Co. AIR 1973 SC 2491].

Penultimate Sale for Export of Goods [Section 5(3)] : According to Section 5(1) sale or purchase of goods can qualify as a sale in the course of export of the goods out of the territory of India only if the sale or purchase has occasioned such export or is by a transfer of documents of title to the goods after goods have crossed the customs frontiers of India. The Supreme Court had held in Mohd. Serajuddin vs State of Orissa (1975) 36 STC 126, that the sale by an Indian exporter from India to a foreign importer alone qualifies as a sale which has occasioned the export of the goods. According to the Export Control Orders, exports of certain goods can be made only by specified agencies such as the State Trading Corporation. In other cases also, manufacturers of goods, particularly in the small scale and medium sectors, have to depend on some experienced export house for exportinig the goods because special expertise is needed for carrying on export trade A sale of goods made to an export canalising agency such as the State Trading Corporation or to an export house to enable such agency or export house to export those goods in compliance with an existing contract or order is inextricably connected with the export of the goods. Further, if such sales do not qualify as sales in the course of export, they would be liable to State sales tax and there would be a corresponding increase in the price of the goods. This would make Indian exports incompetitive in the fiercely competitive international markets.

With aforesaid objective in mind, sub-Section (3) was inserted in Section 5 to provide that the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if the following three conditions are satisfied–

1. there must have been pre-existing agreement or order to sell the specific to a foreign buyer;

2. the last purchase referred to in Section 5 (3) must have taken place after that agreement with the foreign buyer was entered into;

3. the last purchase must have been made for the purpose of complying with the pre-existing agreement or order.

Only if these conditions are satisfied, the transaction falls under Section 5(3) and gets the status of “exports sale” which is not subject to central sales tax- George Maigo and Co. vs State of Andhra Pradesh (1980) 46 STC 41 (AP).

Stock Transfer or Branch Transfer : One of the important conditions to come within the purview of terms ‘inter state sale’ is that there should be a sale. Transfer of goods to a branch or dispatch of goods to a consignment agent does not amount to ‘sale’ and consequently there is no inter state sale or central sales tax liability, though goods move from one place to another. In both these cases the person dispatching goods retains ownership of goods. Generally these are known as stock transfer or branch transfer.

Generally in case of stock transfer or branch transfer, there is no inter-state sale even if goods move from one state to another, because there is no element of sale. If however the movement shall be treated as inter state sale.

A company manufacturing silk yarn, had a factory in Tamil Nadu. Government announced a scheme of allotment of silk yarn to weavers at a concessional rate. The weavers could enter into a contract with the company for the supply of silk yarn to them on production of allotment cards which were issued to them by the Government. On doing so, the company sent silk yarn to its depot in Maharashtra where its selling agents sold it to the allotees in the state of Maharashtra only. The company’s contention was that this was only a case of ‘stock transfer’ , but the Supreme Court held that it was not stock transfer but was an inter state sale since goods were sent from Tamil Nadu to Maharashtra depot from where the goods were further sold by the selling agents in Maharashtra, the transfer of goods from Tamil Nadu to Maharashtra would be termed as ‘stock transfer’. South India Viscose Ltd. Vs State of Tamil Nadu (1981) 48 STC 232 (SC).

INCIDENCE OF TAX

Section 8 (1) of the CST Act defines that every dealer who in the course of inter-state trade or commerce sells the goods shall be liable to pay tax under the Act. Thus, liability is on the dealer who sells the goods.

As per Section 2(b) of CST Act, dealer means any person who carries on (whether regularly or otherwise) the business of buying, selling, supplying or distributing goods, directly or indirectly, for cash or for deferred payment, or for commission, remuneration or other valuable consideration.

By virtue of Section 2(b), dealer includes the following –

1. a local authority, a body corporate, a company, any co-operative society or other society, club, firm, Hindu undivided family or other association of persons which carriers on such business;

2. a factor, broker, commission agent, del credere agent, or any other mercantile agent, by whatever name called, and whether of the same description as hereinbefore mentioned or not, who carries on the business of buying, selling, supplying or distributing, goods belonging to any principal whether disclosed or not; and

3. an auctioneer who carries on the business of selling or auctioning goods belonging to any principal, whether disclosed or not and whether the offer of the intending purchaser is accepted by him or by the principal or a nominee of the principal.

There are two Explanations to the aforesaid definition –

Explanation I states that a mercantile agent (as defined under the Sale of Goods Act), agent handling goods or documents of title, agent for collection of payment (or as guarantor for such

collection and every branch of office in a State of a firm or company which is outside the State is also a “dealer”.

Explanation II clarifies certain categories of agents who shall be deemed to be dealers for the purpose of the CST Act. These dealers only act as intermediaries. They do not directly effect sales but sell on behalf of their principals.

These agents include a broker, auctioneer, commission agent, and/or del credere agent. They get commission or brokerage for their services provided to the principal in terms of sale to the buyers. A del credere agent gets additional commissions too, called del credere commission. Thus Explanation I included all agents who only act as intermediaries. Moreover, it covers local branches and offices of firms and companies outside the State.

Generally, only those agents who carry on business on own account (like factor or pakka adatiya) are liable for sales tax. On the other hand brokers (like Kachcha adatiya), auctioneer or agents who only secure orders are not considered as dealers. Explanation I to Section 2 (b), however, includes all agents who act as intermediaries as “dealers”. Though aforesaid deeming provision vide Explanation I to Section 2(b) is very wide, Section 6 of CST Act specifies that every dealer shall be liable to pay tax under the Act on all sale effected by him. Likewise, Section 7 specifies that “every dealer liable to pay tax should register himself with appropriate authority”. Consequently, commission agents, auctioneers, or brokers cannot be held as liable as they do not effect sales. In practice, these intermediaries do not get themselves registered as dealers, though legally in view of the wide definition, they may be held liable to pay tax and penalty, if principal fails to pay the tax and penalty due- Pench Valley Coal vs State of MP (1973) 31 STC 64 (MP).

Explanation 2 to Section 2(b) specifies that Government, which (whether or not in the course of business) buys, sells, supplies or distributes goods (directly or otherwise), for cash (or for deferred) shall be a “dealer”.

This rule is not applicable in the case of sale, supply or distribution of unserviceable or old stores or old materials or waste products or obsolete or discarded machinery or parts or accessories by the Government. This exception is made as all Government departments have to make such sale of old goods. The exception is, however, applicable only to Government and not for private enterprises.

Public sector undertakings of Government companies are not “Government” and are not eligible for the exception.

Tax Liability on Sale to a Registered Dealer : If the dealer sells goods as specified in Section 8 (3), to a registered dealer he shall be liable to pay as follows–

1. Normal Sale : Normally sale to a registered dealer is chargeable to tax @ 4 per cent or at the local rate, whichever is lower..

Not all goods purchased by a registered dealer are eligible for concessional rate. Concessional rates specified above are applicable only if the following conditions are satisfied–

a) buyer is a registered dealer;

b) goods purchased are those goods which are eligible for concessional tax incidence as per Section 9 (3);

c) such goods are included in his registration certificate; and

d) the selling dealer must obtain form ‘C’

2. Sale for Manufacturing in Special Economic Zone [Section 8(6)] : If the following conditions are satisfied, then sale to a registered dealer is taxable at nil rate–

a) sale is made in the course of inter-state trade or commerce by any dealer;

b) sale is made to a registered dealer;

c) such sale is of goods specified in the certificate of registration, repairing, reconditioning, re-engineering, packaging;

d) sale is made to the registered dealer for the purpose of–

i) manufacture, production, processing, assembling repairing, reconditioning, re-engineering, packaging;

ii) for use as trading or packing material or packing accessories;

e) such manufacture, etc., should be done in a unit located in any special economic zone, if such registered by the Central Government in this behalf; and

f) a declaration should be obtained in a prescribed form from the registered dealer by the selling dealer; it should be submitted to the authority specified by the Central Government.

Tax Liability on Sale to the Government : As per Section 8(1)(a), every dealer who in the course of inter-state trade or commerce, sells any goods to the government, is liable to pay tax @ 4% provided he obtains a certificate in form D from the authorised Government Officer and the same is submitted to the authority specified by the Central Government

REGISTRATION AND/OR RESTRICTION

Registration of Dealers : According to Section 7, there can be two ways in which a dealer can get himself registered- compulsory registration [Section 7 (1)]; or voluntary registration [Section 7(2)].

Compulsory Registration : As per Section 7(1), every dealer liable to pay under the CST Act shall (within such time as may be prescribed for the purpose) make an application for registration under the Act to such authority in the appropriate State as the Central Government (by general or special order) specify and every such application shall contain such particulars as may be prescribed. It may be noted that as per Section 6 (1) every dealer effecting sale in the course of inter-State trade or commerce is liable to central sales tax. Every dealer liable to pay central sales tax has to necessarily register himself with the sales tax authority of the particular State as authorized by the Central Government. If a dealer does not get himself registered, he would be subject to penalty under Section-10 (i.e., imprisonment which may extend to six months or fine or both and in case of continuing offence, a fine of Rs. 50 per day till the default continues).

Voluntary Registration : As per Section 7(2), any dealer liable to pay tax under the sales tax law of the appropriate State, or where there is no such law in force in the appropriate State (or any part thereof), any dealer having a place of business in that State (or part) may (notwithstanding that he is not liable to pay tax under the CST Act as he does not make inter-State sale), apply for registration under the CST Act, giving the particulars as prescribed.

A dealer may apply for registration under Section 7 (2) in the following cases–

1. If he is registered, the sales tax law of the State but is not liable to pay tax under the CST Act.

2. If there is no sales tax law in a State (or any part of it) while the dealer carries on business in that State.

3. If a dealer deals in tax-free goods in a State.

4. If he purchases goods from other States but sales are made within the State.

The application for registration can be made at any time by the dealer. In case he does not apply for registration, he is not subject to any penalty.

Application for Registration : Application for registration should be made in prescribed form ‘A’ as per CST (Registration and Turnover) Rules within 30 days from the date when dealer becomes liable to CST. Application fee of Rs. 25 is payable (by way of court fee stamps). Application has to be signed by (a) proprietor of business (b) one of the partners in case of business owned, by partnership firm (c) Karta or Manager of HUF (d) director or principal officer of Company (e) principal office in case of association of individuals or (f) officer authorized by Government in case of Government Enterprise.

If a dealer has places of business in different States, he has to obtain separate registration in each State. However, if he has made more than one place of business within the same State, he has to get only one registration with additional places of business endorsed on the Certificate. Definition of ‘place of business’ has already been explained.

Security from Dealer Under CST Act : As per Section 7 (2A) of CST Act, the Registering authority can ask for proper security from the applicant for (a) realization of taxes due and (b) proper custody and use of forms (like C,E-1/E-II, F and H) which are supplied by Sales Tax authorities for use by the dealer [Section 7 (2A)]. Additional security can also be demanded from a dealer who is already registered [Section 7 (3A)]. Security cannot be demanded without granting opportunity of personal hearing.

All Items of Purchase and Sale Must be Included in Registration : The ‘Registration certificate’ is indeed very important. As per Section 10(c), false representation when purchasing any goods that the class of goods are covered by the registration certificate, is an offence. As per Section 10(a), furnishing a false certificate is an offense. Thus, while issuing ‘C’ form or other forms under the Act, it must be ensured that goods are covered in the Registration Certificate. This is particularly so because there is no provision to amend the Registration Certificate with retrospective effect.

Knowingly purchasing goods which are not covered in registration certificate under ‘C’ form is an offence- Business Consultancy vs State of Tamil Nadu (1994) 94 STC 176 (Mad. HC DB).

Refusal of Registration Under CST : Sales Tax Authority can refuse registration for reasons to be recorded in writing. However, before rejection, personal hearing should be given to applicant and opportunity to correct or complete required particulars should be given.

Cancellation of CST Registration :

1. A dealer may apply for cancellation or registration within six months before the end of year. If the dealer is not liable to pay tax, the registration will be cancelled from end of

the year. Thus, registration cannot be cancelled in middle of the year [Section 7 (5) of CST Act].

2. Sales Tax authorities may cancel registration after giving notice if the dealer has ceased to exist or has ceased to carry on business or has failed to furnish security/additional security as demanded or has failed to inform about death/insolvency or surety or failed to pay tax or penalty payable under the Act or when dealer who has obtained voluntary registration ceases to sell inside the State or for any other sufficient reason [Section 7(4)(b) of CST Act]. Opportunity of being heard has to be given before cancellation. After cancellation, the certificate of registration and its copies should be surrendered to sales tax authorities. The cancellation can be only prospective i.e. from date of cancellation and not retrospective.

Certificate of Registration Under CST : The registering authority will ensure that application is in conformity with provisions of CST Act. He can make necessary enquiries e.g. (a) particulars given are correct (b) Materials requested for registration are eligible for inclusion and the goods are in fact needed for the business. After he is satisfied and after obtaining required security, the dealer will be issued a Certificate of Registration in prescribed form ‘B’. A copy of the same will be issued for every additional place of business in the State. This certificate should be kept at principal place of business and a copy of the certificate should be kept at each additional place of business in the State.

Effective Date of Registration : Registration is effective from the date on which application for registration is made, even if registration is granted later. In fact, if registration is made after inter-State sale i.e. earlier than the date of applications-same view in Rajdhani Waste Cotton Agency vs CST (1991) 83 STC 530 (Del HC DB).

Amendment of Certificate : The certificate can be amended e.g. change of name, change of business, change of class of goods in which he carries business, change/addition of place of business, warehouses etc. This amendment can be made on application from dealer or by sales tax authorities themselves after giving notice to dealer. In Orient Paper Mills vs CST (1969) 23 STC 308 (MP HC), it was held that the amendment will be effective from date of application for amendment. In a contrary decision, in Fact Ltd. vs State of Orissa (1991) 82 STC 62 (Ori’ HC DB), it was held that the amendment is with effect from date when amendment was allowed. With respect, it submitted that it is should be effective from the date of application for amendment.

Restriction on Taxation : According to Section 2 (c ) of CST Act, declared goods means goods declared under Section 14 to be of special importance in inter state trade or commerce.

Under Section 14, the following goods are declared to be of special importance–

1. Cereals (paddy, rice, wheat etc.)

2. Coal including coke but excluding charocoal.

3. Cotton in unmanufactured form (whether ginned or unginned, baled, pressed or otherwise) but not cotton waste.

4. Cotton fabrics, cotton yarn

5. Crude Oil

6. Hides and skins

7. Iron and Steel i.e. pig iron, iron scrap, steel ingots, billets, steel bars, steel structurals, sheets, plates, discs, rings, tool steel, tubes, tin plats, steel wheels, wire rods; defectives of above etc.

8. Jute

9. Oil-seeds i.e. groundnut, til, cottonseed, linseed, castor, coconut, sunflower, mahua, kokum, sal etc.

10. Pulse i.e. gram, tur, moong, masur, urad etc.

11. Man-made fabrics-fabrics of man-made filament yarn i.e. artificial textile materials, polyester filament yarn, staple fibres, polyester staple fibre, tyre cord fabric, impregnated textile fabrics etc.

12. Sugar and Khandsari Sugar

13. Unmanufactured tabacco, cigars, cigarettes, biris, chewing tabacco, snuff etc.

14. Woven fabrics of wool.

Restrictions on Levy of Tax on Declared Goods : Section 15 imposes the following restrictions on sale or purchase of “declared goods” :

Local Sales Tax not to Exceed 4 per Cent [Section 15(a)] : Tax payable under local sales tax law of the State in respect of sale of goods inside the State shall not exceed 4 per cent of the sale or purchase price thereof. After the amendment made by the Finance Act, 2002, the State Governments can impose tax on declared goods at more than one stage in respect of sales of declared goods. It appears that the scheme of multi-point tax has been introduced to eventually launch value added tax.

Inter-State Sale of Declared Goods Entitles Reimbursement of Local Sales Tax [Section 15(b)] : where tax has been levied on sale/purchase of declared goods inside or commerce, and tax has been paid under the CST Act in respect if such inter-State sale, in accordance with conditions (provided in any law in force in that State). This Section clearly provides that–

1. Inter-State sale of goods must belong to the same sub-entry as in case of local sale, i.e., the goods must be sold in the same form.

2. Tax must have been paid under the CST Act, i.e., if goods sold in the course of inter-state trade or commerce are exempt from tax, refund of tax paid on sale of those goods inside the State cannot be claimed.

3. Tax on sale of goods inside the State also should have been paid, i.e., if tax under the CST Act comes to Rs. 2,000 while that paid under the local sales tax law of the State is Rs. 500, the whole of Rs. 2,000 has to be paid as central sales tax subject to reimbursement of Rs. 500 from the State Government. The dealer cannot pay Rs. 1,500 under the CST Act. Thus only reimbursement (but not set off of tax) under the CST Act is permissible in case of inter-state sale of declared goods, except in case of sale of rice obtained from paddy. If in the aforesaid example, inter-state sales of the goods are exempt from tax, refund of tax paid on intra-state sale is not available.

Goods Must be Sold in the Same Form : Declared goods purchased must be sold in the same form, i.e. identical goods must be sold. Identity of goods should not be lost, e.g. while mung, channa and masur converted into dal is the same commodity, round timber logs are different from sized timber, Likewise, (a) dried coconut and watery coconuts; (b) condensed milk

and milk; (c) oil sees and oil extracted from these seeds; (d) ice and water are different commodities. If, therefore, goods sold after processing are different commodity, reimbursement of local sales tax is not available.

Tax Paid on Paddy to be Set Off [Section 15(c)] : Where tax has been levied on sale or purchase of paddy inside the State and subsequently tax is leviable on sale of rice procured out of paddy, tax on rice shall be reduced by the amount of tax paid on paddy. For instance, if tax of Rs. 4,000 is paid on sale of paddy and tax payable on sale of rice produced from the paddy comes to Rs. 4,600, then tax of only Rs. 600 will be actually payable on rice [Section 15 (c)].

Rice and Paddy to be Treated as a Single Commodity [Section 15(ca)] : Section 15(ca) has been inserted by the finance (No.2) Act, 1996 to treat paddy and rice as a single commodity provided rice procured out of such paddy is exported out of India.

Conversion of Pulse not Taxable [Section 15(d)] : Each of the pulses whether whole or separated, with or without husk, shall be treated as a single commodity for the purpose of levy of tax under the local sales tax laws of a State. Thus, where a process is involved on channa or urad and dal is obtained from them, they will be considered as the same commodity. If tax is paid on raw pulses, it will not be payable again when pulses are sold after processing.

PENALTIES AND PUNISHMENTCentral Sales Tax Act provides for penalties and punishments in respect of certain offences. Further, in respect offences not provided in the CST Act, provisions of General Sales Tax Law of the State where the dealer is carrying on business are applicable. Here, we will study only those offences for which provision has been made in the CST Act. CST Act envisage three type of punishment (a) Imprisonment and fine which can only be imposed by Court of Law (b) Compounding of offences by Sales Tax authorities (c) Penalty in certain cases which can be imposed by Sales Tax Authorities.

Offences Under the Act : Section 10 of CST Act provides that punishment upto six months of simple imprisonment or with fine or both can be imposed for following offences under CST Act–

1. Knowingly giving declaration in form C, E-1, E-II, F or H which he knows, or has reason to believe, to be false.

2. Not registering under CST Act when required to be registered.

3. False representation by a registered dealer that the goods being purchased are covered under his Certificate of Registration for concessional rate.

4. Falsely representing that he is a registered dealer, though he is not.

5. misusing or using for different purpose the goods obtained under C form at concessional rate.

6. Having in possession C form which are not obtained as per provisions of Act.

7. Collecting any amount representing as Central Sales Tax by an unregistered dealer or by a registered dealer in contravention of provision of Act.

8. Provisions regarding offences in ‘General Sales Tax Law’ (excepting those enumerated above) are applicable in respect of offences.

Punishment by Court of Law : Punishment of imprisonment and/or fine can be imposed only by Court of law. If the offence is a continuing offence, fine of Rs. 50 per day till offence

continues can be imposed. The person has to be prosecuted in a criminal case. Such prosecution can be launched only with previous sanction of State Government or its authorized officer. The offences are cognizable and bailable.

Compounding of Offences : The offences can be compounded by Sales Tax Authorities. Compounding means the dealer agreeing to pay a fine and sales tax authorities agree to drop further action in respect of the offence. Such compounding can be done in respect of any offence enumerated above, if provisions are available in State law. Provisions as applicable in State Sales Tax Law will be applicable.

Offences Cognizable and Bailable : The offences under CST Act are cognizable and bailable [Section 11(2)]. However, Court can take cognizance of offence under CST Act only with previous sanction of State Government or its authorized officer. The offence can be tried only in court of presidency magistrate of a magistrate of first class or court above that [Section 11(1)].

Penalty in Lieu : Section 10A of CST Act authorizes imposition of penalty in lieu of punishment in respect of offences regarding (a) obtaining goods not included in registration certificate (b) purchasing goods representing that he is registered dealer, though he is not (c ) using goods for purposes different than the purposes for which purchased. (Other offences can be compounded by Sales Tax Authorities). The penalty can be upto one and half time the tax which would have been payable. The penalty can be imposed by Sales Tax Authority having jurisdiction over the dealer’s place of business. Once penalty is imposed, prosecution for same offences shall not be instituted. The penalty is collected by Union of India in the State in which the dealer is registered or if he is not registered in which he should have got himself registered.

Penalty for Other Offences : Besides above, State laws provide for other offences like late payment or non-payment of tax, false declaration of turnover, non-filling or late filling or returns etc. These provisions are also applicable in respect of dealers in that State who make inter state sale [Section 9(2A) of CST Act].

Mens Rea in the CST Offences : ‘Mens rea’ means ‘guilty mind’. The principle is that “an act does not make one guilty unless the mind is also guilty”.

However, this is a concept of criminal law. It has been held that imposition of penalty cannot be construed as punishment under Criminal Law and penalty could be imposed even if there is no ‘mens rea’ unless the Act requires ‘mens rea’. Thus, Section 10 expects ‘mens rea’ in case of following offences (a) furnishing a declaration or certificate, which he knows or has reason to believe to be false (b) false representation that goods are covered in the certificate of registration (c) falsely representing that he is a registered dealer. Here, ‘falsely’ implies a purpose to deceive. It is not mere untruth. Thus, in case of these offences ‘bona fide’ mistake will not call for penalty. However, in case of other offences, mens rea is not required e.g. (a) not registering with Sales Tax Authority or not providing security as required (b) using goods for purposes other than purpose for which purchased, without reasonable excuse (c) has in possession blank ST form i.e. form C,E-I, E-II or H, which are not obtained in accordance with provisions of CST Act (d) collecting an amount by way of tax except in accordance and mere committing the offence can call for penalty.

In Cement Marketing Co. of India vs Asstt. CST (1980) 6 ELT 295 (SC) I (1980) 54 STC 197 (SC) AIR 1980 SC 346, it was held that ‘falsely represents’ postulates mens rea in that the representation should be something which in fact and to his knowledge is false, and this element would be excluded if the person acted in bona fide belief that his representation is true.

Liability of Company in Liquidation : As per Section 17(1), if a liquidator or receiver is appointed for a Company, he should inform sales tax authorities within 30 days of the appointment. Sales tax authority will inform him within three months the amount of tax due from company which is in liquidation. Liquidator cannot sell assets of company before setting aside amount of dues as informed by sales tax authorities-unless such transfer or sale is by order of Court. If liquidator fails to give notice to sales tax authorities or fails to keep the dues payable to Sales Tax Authorities, he will be personally liable. In Imperial Chit Funds (P) Ltd., vs ITO, AIR 1996 SC 1887, it has been held that the sales tax officer will be treated as secured creditor and amount set aside by official liquidator under Section 17 of CST Act falls outside area of winding up proceedings. The STO is entitled to payment of tax demanded. If the STO send similar orders to liquidator, the priority will be on the basis of the date of receipt of the orders by official liquidator.

Liability of Directors of Private Limited Company in Case of Liquidation : Section 18 provides that if a private limited company is being wound up, liability of directors of such private limited company is personal if amount cannot be recovered in liquidation i.e. the tax due can be recovered from him/his personal property. He can save the liability only if he proves that non-payment of tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to affairs of the company.

Indemnity to Government Officers : Government officers executing CST Act are protected. A suit, prosecution or legal proceedings does not lie against them for anything done in good faith under CST Act or rules under CST Act [Section 12]

Various Sources of Procedures Under CST Act : Sources of procedures may be discussed as below –

Rules Framed by the Central Government : Section 13(1) authorities Central Government to make rules for different purposes. Some of these rules have already been discussed in the preceding paras.

Rules Framed by the State Governments : Vide Section 13(3), State Government are authorized to make rules. These rules should not be inconsistent with the CST Act or rules made by the Central Government under the CST Act. These rules can be made for the following purposes by State Government; publication of list of dealers, amendments to list and particulars contained in the list; manner of furnishing security or additional security for registration of dealers or providing prescribed forms to dealers; from and manner of keeping books of account by registered dealers in course of inter-state sale; furnishing information of stock of goods, purposes, sales and deliveries by any dealer and information necessary for purpose of the CST Act; inspection of books, accounts or documents required to be kept under the CST Act; entry into premises for search and seizure of books, accounts or documents; authority from whom and the conditions for obtaining declaration forms, i.e., C, E-I, E-II-F, etc., manner of keeping custody of such forms by dealer and manner of use of such forms/declaration; form and manner in which appeal may be preferred, procedure for hearing appeal, fees payable for filing appeal; declaration of name of manager in case business is carried out by HUF, association of persons, society, firms or company or in case of a person carrying on business as guardian or trustee on behalf of other, and form of declaration; time, manner and authority to whom change of ownership of business of dealer shall be informed.

In view of the aforesaid power, all State Government have framed their rules and prescribed their forms.

Rules Prescribed in State Sales Tax Laws : Section 9(2) provides that all provisions of local sales tax law of each State (other than those provided in the CST Act and rules made there under) in respect of the following shall be applicable to any person under the CST Act in that State: returns; assessment; advance payment of taxes; registration of transferee of any business, imposition of tax liability on transfer of business; recovery of tax from third parties; appeal, review, revision, refunds, rebate, penalties, interest; compounding of offences; treatment of documents furnished by dealer as confidential. If in any State (or part thereof) there is no general sales tax law in force, the Central Government may make necessary provision for all or any of the matter specified above.

IMPORTANT QUESTIONS

Q.1. Discuss the objects of Central Sales Tax Act.

Q.2. What do you mean by the term ‘goods’ which is liable for Sales Tax?

Q.3. Discuss the definitions and essentials of valid sale.

Q.4. What is the status of Central Sales Tax with regard to Inter State Trade?

Q.5. Discuss the powers and functions of Sale Tax Authorities.

Q.6. What are the penalties and punishment with regard to the offence under the act?

BIBLIOGRAPHY

1. INCOME TAX AND PRACTICE, B.K. AGARWAL

2. INCOME TAX LAW AND ACCOUNTS, DR. H.C. MEHROTRA

3. INCOME TAX RULES, TAXMANN PUBLICATIONS

4. INCOME TAX ACT, B.B. BHARGAV5. INCOME TAX ACT, WADHWA