article - interstate sale principles

8/11/2019 Article - Interstate Sale Principles

1/6

3-D (Inter-state SalesKey Principles)

Lao Tzu said The key to growth is the introduction of higher dimensions of consciousness into

our awareness. Thinking about an issue only from one-dimension may result in faulty action.

This is also true for indirect taxes. One has to think from all points of view to get the best

answer. This column attempts to discuss various issues pertaining to indirect taxes from all the

three dimensions i.e. Central Excise, Service Tax & VAT.

________________________________________________________________________

Recently Hon. Karnataka High Court in the case of M/s ASEA BROWN BOVERI LTD (STA

No. 23/2010)held that movement of goods from one State to another in pursuance of

or incidental to contract is sufficient to classify the sale as inter-state sales. It is not

necessary that the covenant specifying the movement of goods must form part of the

contract for a sale to be classified as inter-state sales. This article will analyze the said

judgment in detail and distill the principles governing inter-state sales.

1) FACTS OF THE CASE

The appellant is engaged in the manufacture and sale of electrical and electronic goods

as well as in execution of works contract. Appellant won the bid floated by M/s

Karnataka Power Transmission Corporation Limited (hereinafter referred as KPTCL)for

a turnkey project (named Development Programme)at the site of Bijapur O & M in

Karnataka. Under the said contract, appellant was required to supply allequipments/materials and carry out erection, testing and commissioning for the project.

As per one of the clauses in Bid Enquiry Document the contractor was obliged to

procure from the manufacturers, who comply with certain qualified requirements, the

materials such as transformers, ACSR conductors, Insulators, CC/PCC Poles, 11 KV

G.O.S., Fuse Units, Lighting Arrestors 9 KV, LT Fixed Capacitors, Electronic Trivector

Meters and Metering Boxes. It also stipulated the quality requirements. It further

provided that inspection would be at any stage of manufacture, dispatch or at site, at

the option of the Engineer, or when the equipments were dispatched/about to be

dispatched and if found unsatisfactory as to workmanship or quality, the same were

liable to be rejected. It further stated that a successful contractor would grant free

access to the places of manufacture to the authorized representative of the Engineer at

all times when the works related to the manufacture were in progress.


2/6

As per the terms and conditions stated above, the appellant was supposed to procure

the equipments/materials only from vendors/ manufacturing units who satisfied the

requirements as stated therein. The appellant had accordingly indentified the

vendors/manufacturers, many of whom were located outside Karnataka, at the places

such as Baroda, Chennai, Hyderabad, Mumbai etc. After seeking approval, as stipulated

in the Bid Document and the contract agreement, in respect of vendors, they delivered

the goods so purchased at the said Development Programme namely, Bijapur, O&M

Division and were not meant to be diverted elsewhere. In other words, the goods so

procured were purely for employment in the said project at Bijapur.

The Deputy Commissioner of Commercial Tax passed an order of assessment dated 9th

June, 2005 under Section 12 (3) of the Karnataka Sales Tax Act, 1957 granting exemption

in respect of the turnover pertaining to above stated inter-State purchases of goods

used in the execution of works contract. The first Revisional Authority, in exercise of the

powers under Section 22(2) of the Act, initiated suomoto proceedings to revise theorder of assessment dated 9th June 2005 on the ground, inter-alia that the exemption in

respect of the turnover representing inter-State purchase of goods utilized in the works

contract was erroneously allowed in the absence of documentary evidence. The first

Revisional Authority, however, dropped the proposal to levy tax under the Act, in

respect of purchase of goods from outside the State and used in execution of the works

contract.

The Second Revisional Authority, under Section 22-A(1) of the Act issued notice dated

15th June 2009, proposing to revise the order dated 30th September 2006 passed by

the first Revisional Authority, on the ground that the turnover pertaining to inter-statepurchases and used in the execution of the said project was liable to tax under Section

5-B of the Act (i.e. Local Act). Thereafter Second Revisional Authority confirmed the

demand by rejecting the contentions of the appellant. Hence the appeal was filed

before Hon. High Court.

2) CONTROVERY BEFORE THE HON. HIGH COURT & JUDGMENT

Question before the Hon. High Court was whether the transaction of sale of goods to

M/s KPTCL during the execution of works contract by the appellants which were

purchased inter-state from the vendors confirmed by the contractee was a local sale or

inter-state sale?

Hon. High Court held that transaction of sale of above stated goods is a sale in the

course of inter-state trade or commerce under CST Act and thus not liable to local Sales

Tax.


3/6


4/6

was entirely responsible for the execution of contract and for the safe arrival of the

goods at the destination. Under the contract, the consignee was entitled to reject the

goods. The manufacturers consigned the goods to the appellant by ship from Belgium

under bills of lading and the goods were cleared at Madras Harbour by the appellant's

clearing agent and dispatched for delivery to the Southern Railway in Madras and

Mysore. In this backdrop, Hon. Supreme Court answered the question holding that the

expression "occasions the movement of goods" occurring in Section 3(a) and Section

5(2) of the Central Act had the same meaning. Hon. Supreme Court then observed that

the movement of goods from Belgium into India was incidental to the contract. In that

case, there was no possibility of the goods being delivered by the appellant for any

other purpose and therefore, the sales took place in the course of import of goods

within Section 5(2) of the Central Act and exempted from taxation. Hon. Supreme Court

in case of Indure Limited vs. C.T.O. and others, 2010 (9) SCC 461 on similar facts held

that import had been occasioned only on account of the covenant entered into and thus

is covered u/s 5(2) of CST Act.

2) A very clear opinion on the disputed issue was given by Hon. Supreme Court in case

of Union of India vs. Khosla and Company Ltd., (1979) 43 STC 457. Important para of

the said judgment is reproduced for ready reference:

"It is true that in the instant case the contracts of sale did not require or provide that

goods should be moved from Faridabad to Delhi. But it is not true to say that for the

purposes of section 3(a) of the Act it is necessary that the contract of sale must itself

provide for and cause the movement of goods or that the movement of goods must be

occasioned specifically in accordance with the terms of the contract of sale. The trueposition in law is as stated in Tata Iron and Steel Co. Ltd., Bombay v. S.R. Sarkar, wherein

Shah, J., speaking for the majority, observed that clauses (a) and (b) of section 3 of the

Act are mutually exclusive and that section 3(a) covers sales in which the movement of

goods from one State to another "is the result of a covenant or incident of the contract

of sale, and property in the goods passes in either State" (page 391) (page 667 of 11

S.T.C.). Sarkar, J., speaking for himself and on behalf of Das Gupta, J., agreed with the

majority, that clauses (a) and (b) of section 3 are mutually exclusive but differed from it

and held that "a sale can occasion the movement of the goods sold only when the terms

of the sale provide that the goods would be moved; in other words, a sale occasions a

movement of goods when the contract of sale so provides" (page 407) (page 679 of 11

S.T.C). The view of the majority was approved by this Court in Cement Marketing Co. of

India v. State of Mysore, State Trading Corporation of India v. State of Mysore and

Singareni Collieries Co. Ltd. v. Commissioner of Commercial Taxes, Hyderabad. In K. G.

Khosla & Co. v. Deputy Commisssion of Commercial Taxes, counsel for the revenue

invited the court to reconsider the question but the court declined to do so. In a recent


5/6

decision of this Court in Oil India Ltd. v. Superintendent of Taxes, it was observed by

Mathew, J., who spoke for the court, that: (i) a sale which occasions movement of goods

from one State to another in a sale in the course of inter- State trade, no matter in

which State the property in the goods passes; (2) it is not necessary that the sale must

precede the inter-State movement in order that the sale may be deemed to have

occasioned such movement; and (3) it is also not necessary for a sale to be deemed to

have taken place in the course of inter-State trade or Commerce, that the covenant

regarding inter-State movement must be specified in the contract itself. It would be

enough if the movement was in pursuance of and incidental to the contract of sale

(page 801) (page 449 of 35 S.T.C.). The learned Judge added that it was held in a number

of cases by the Supreme Court that if the movement of goods from one State to another

is the result of a covenant or an incident of the contract of sale, then the sale is an inter-

State sale."

3) Hon. High Court also relied on following judgments which are on similar lines asabove:

a) Larsen & Toubro Limited vs. Commissioner of Commercial Tax, [2003] 132 STC 272

b) ABB Limited vs.Commissioner of Delhi, Value Added Tax, [2012] 55 VST 1 (Delhi)

4) Hon. High Court distinguished the judgment of Dosal Limited vs. State of Kerala

(2010) 29 VST 158 (Ker.)relied upon by the revenue. In this case appellant brought the

goods on stock transfer basis from Mumbai, Coimbatore, etc. to Kerala, stocked them in

the State and used them in the execution of works contracts. The movement of goods

was not on account of the pre-existing contract. Hence it was held that transfer of

materials in the course of execution of work in Kerala do not amount to inter-State saleof goods from outside the State to Kerala.

5) In present case, works contract was executed between the appellant and M/s KPTCL

for the project in Bijapur on total turnkey basis consisting of supply of all

equipments/materials, erecting, testing and commissioning. As per the agreement

appellant was required to procure goods from manufacturers who fulfilled specific

criteria. As the appellant could not find manufacturers of certain equipments/goods in

the State of Karnataka, who were complying with the criterions/ requirements

stipulated in the general terms and conditions of the contract, it approached the

contractee for permission to procure the goods from vendors of other States. KPTCL

granted the permission. Further the contractee had full rights to inspect the goods at

any time. Thereafter the goods were purchased. Hence the movement of goods, after

being satisfied with the quality, occasioned pursuant to contract. Moreover goods were

delivered at the site of the project in Bijapur. As per the above discussed judgments it is

well settled that if a contract of sale contains a stipulation for such movement, the sale


6/6

would, of-course, be a inter-State trade. But it can also be inter-State sale even if the

contract of sale does not itself provide for movement of goods from one State to

another but such movement would be result of a covenant in the contract of sale or is

an incident of such contract. (See Union of India vs. Khosla and company). Hence it was

held that said transaction is an inter-state sale.

4) CONCLUSIONS

Following principles evolve on the basis of above judgment:

1) A sale which occasions movement of goods from one State to another is a sale in the

course of inter-state trade or commerce, no matter in which State the property in the

goods passes.

2) It is not necessary that the sale must precede the inter-State movement.

3) It is also not necessary that the contract of sale must itself provide for and cause the

movement of goods. Movement of goods from one State to another as a covenant in

the contract of sale or as an incident of contract of sale will also be regarded as inter-

state sale.

article - interstate sale principles

Documents