Q.1 “A” located in Orissa is an SEZ unit placed an order on “B” located in Orissa to supply certain plant & machinery. “B” on receipt of such order placed another order to “C” within the same State to supply such plant and machinery on account of “B” directly to “A” the consignee i.e. SEZ unit. As per the order “B” instructed “C” not to charge any local tax as because the goods are to be utilized by SEZ unit, which is exempted from payment of VAT.

“C” rose invoice A/c “B” and consignee “A” without charging any VAT and dispatched such goods directly to SEZ unit. Later, “B” raised a commercial invoice on “A” without charging any VAT stating therein as “sold to SEZ unit hence exempted”.

Whether this procedure adopted by “B” is correct? Or do “C” is required to charge VAT on “B” as because the sale was not directly to SEZ Unit by “C” and it was in fact sold to “B”. Under such circumstances to my opinion “C” shall raise a Tax Invoice on “B” charging VAT, which “B” can avail, ITC.

Since the goods sold by “C” shall be ultimately utilized by SEZ Unit, can “B” instruct “C” not to charge VAT on the said sales?. Please reply giving case laws to support if any.

Reply

Under Sales Tax Laws, the sales transaction takes place between buyer and seller. Therefore, each transaction is separate transaction. For this purpose reference can be made to the landmark judgment of Hon’ble Supreme Court in case of M/s. Gannon Dunkerley & Co. (9 STC 353). In this judgment, in respect of sale transaction Hon’ble Supreme Court has observed as under.

Hon’ble Supreme Court has interpreted the term ‘sale’ and has held that the transaction to be a sale, it should fulfil the minimum criteria as laid down in Sale of Goods Act. In fact Hon’ble Supreme Court has observed as under in relation to transaction of sale.

“Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods …...”

From above passage it is clear that to be a ‘sale’ following criteria should be fulfilled.

1. There should be two parties to contract; i.e., seller/purchaser,

2. The subject matter of sale is movable goods,

3. There must be money consideration, and

4. Transfer of property; i.e., transfer of ownership from seller to purchaser.

From above legal position, it is clear that at a time, one transaction of sale can take place between two parties.

If the above facts are seen in light of above legal position then it is clear that there are two sales transactions, one between ‘C’ & ‘B’ and the other between ‘B’ & ‘A’. It is true that the goods are directly delivered by ‘C’ to ‘A’ but the delivery is on behalf of ‘B’. Therefore, there is notional delivery from ‘C’ to ‘B’ and then from ‘B’ to ‘A’, synchronized in one delivery from ‘C’ to ‘A’. Therefore, the tax position is to be seen, considering that there are two sales transactions from ‘C’ to ‘B’ and ‘B’ to ‘A’. As stated in the query, the sale from ‘B’ to ‘A’ may be exempt as sale to SEZ unit. However, sale by ‘C’ to ‘B’ cannot fall in that category, as ‘B’ is not SEZ unit. The result is that ‘C’ should charge tax under VAT and ‘B’ can take ITC as per legal position.

Q.2 “A” located in Orissa an SEZ unit placed order on “B” located outside Orissa to supply plant and equipments in pursuance to a turnkey contract. “B” on receipt of order placed another orders to various vendors located at different state to supply goods directly to SEZ unit i.e. “A” on account of “B” in the process of sale in transit u/s. 3(a) of the CST Act.. In the instant case whether the outstation vendor shall charge CST on “B” even if the goods are directly dispatched to the SEZ unit? As per the SEZ Act, no Central Sales Tax shall be applicable if the goods are sold to SEZ unit. Whether the sale between outstation vendors “C” to “B” be treated as penultimate sales where “B” can issue Form “H” to the outstation vendors, who shall sell their goods at Zero rate?

As sales of goods effected to SEZ unit is treated as export, in such situation “B” while effecting such purchase with the intention to supply to SEZ Unit, would be treated as penultimate sale which is exempted from levy of tax on receipt of Form H. My question is that can “B” issue Form–H in the above circumstances? If it happens then the vendor “C” shall not charge any CST and shall dispatch the goods directly to SEZ unit without collection of CST from “B”. Since section 5 of the CST Act has not been amended to include any sales to SEZ unit to be termed as export sale and section 8(6) of the CST Act, has been amended, where the main section deals in rate of tax only and not speaks about export sales. In my opinion in the present circumstances “B” will not be allowed by the department to utilize Form–H, by which the sales effected by the outstation vendors can be Zero rated. So in the present situation, can the sale effected to SEZ shall be treated as export sale to be remain at par with actual export?. If so then why the proviso to Rule 12(10)(a) after the initial amendment was deleted; where there was provisions for utilization of Form–H. Please provide your valued opinion on it with citations.

Reply

The position here will be same as discussed in Query 1 above. In other words here also there are two sales, one from “C” to “B” and another from “B” to “A”. Therefore B’s transaction to “A” will be exempt but the first one from “C” to “B” will be liable to tax.
In our opinion, the H form will not be applicable in this case. Sections 5(1) to 5(3) of the CST Act, 1956 are in fact part of the Constitution of India. The said sections are enacted in light of Article 286 which has directed to formulate the principles for determining sale in course of import and export. Therefore they are, though enacted in CST Act, they are not in nature of any exemption under CST Act, but are enacted in compliance of Constitution provisions. Therefore in our opinion the SEZ Act cannot override the above Constitution provisions.

Therefore, even if SEZ Act is providing for Deemed Export within India, so far as section 5(3) is concerned export to country outside India will be required. Therefore the H form will not apply in above situation.

Q.3 “A” located in Mumbai received Turnkey contract from “B” located at West Bengal. On receipt of such contract “A” placed order to “C” located at Orissa to manufacture certain equipments as per the drawing and design provided by “A”. As per the instruction, the price quoted by “C” shall be excluding the value of certain parts required for manufacturing such equipment; which will be provided by “A” to “C” on free supply basis and not forming part of the value of the equipment quoted by “C”.

Now “A” in another purchase order placed order to “D” located at Chennai to supply those parts of such equipments on their account directly to the consignee “C”. It was given instruction to “C” that he shall manufacture the equipment in all respects using such parts being supplied to him; the cost of such goods shall be borne by “A”. It was further instructed that after completing the manufacturing “C” shall raise excise invoice account “A” and consignee “B” and dispatch the goods directly to the consignee “B” charging E.D. and CST on the manufactured value excluding the cost of parts provided by “A”.

Now my question is: in the above scenario (i) can “C” raise the excise invoice account “A” and consignee – ”B” where he shall not include the cost of such parts provided by “A” although “C” is raising bill for the complete equipment. (ii) can Excise Duty and CST in such situation shall not be levied less so far the cost of parts used in the said equipment?. Will the practice adopted is permissible and legally correct? To my opinion since “C” is selling the entire finished equipment the cost of parts is obviously forming part of the complete equipment on which Excise Duty and CST shall be levied or otherwise, the said cost can’t be subjected to tax in the subsequent sale; as “A” will be raising a commercial invoice on “B” where he will not charge any tax for the supply value of the equipment. (iii) I believe while providing parts to “C” as per the instruction of “A” which will be again a separate transit sale, “C” is required to issue C form to “A” for the cost of spares. If it is done can “C” claim that, those spares were supplied to him by “A” free of cost and “C” shall not take those value in his purchase cost; even if he issues C form?

Reply

The issue pertains to Excise and Sales Tax. Here I attempt to give reply in relation to Sales Tax.

Since the parts are supplied by “A” without any intention to make sale of the same the cost of such parts cannot become part of sale price of “C”. The legal position about nature of sale is already discussed above in query (1) with relation to judgment of Supreme Court in case of Gannon Dunkerley & Co. (9 STC 353). Therefore, the amount received towards sale of goods i.e. consideration received against the transfer of ownership in the goods can only be considered as sale price. The legal position is thus clear. A confusion can arise because of several judgments on issues relating to above aspect.

The reference can be made to judgment in case of N. M. Goyal (72 STC 368)(SC). In this case the dealer prepared invoice for total amount. Thereafter the dealer gave deductions for the cost of materials received from the customer.

Dealer was pleading to take net price as price for supply of goods in contract. Supreme Court negatived this contention on the ground that the customer, who has supplied goods, has specified in his contract for supply of such goods. The prices for supply were agreed to in the contract itself. Under above circumstances Supreme Court held that all the criteria required for considering the transaction as ‘sale’ gets fulfilled. The main aspect was that the price for supply of goods was agreed at particular rate.

If facts in your case are considered with above facts it can very well be ascertained that your case is not of the type considered by Supreme Court. “A” has not provided for supply of parts at particular price. It is termed as free supply. Thus the criteria required for considering the transaction as sale by “A” to “C” is not fulfilled and hence correspondingly there cannot be sale of said goods from “C” to “A”.

Thus the judgment in case of N. M. Goyal or many other judgments based on said judgment cannot apply in given circumstances.
The law in respect of above position is now clarified by Maharashtra Sales Tax Tribunal as per judgment in case of Ghatge Patil Ind. Ltd. (S.A. 320 of 2002 dt. 30-3-2007). In this case the facts were similar as in above case. In this case for the purpose of calculation of Excise duty the value of such free supply was considered by supplier. In spite of same it is held by Tribunal that there is no sale/purchase for Sales Tax purpose. Thus, Tribunal has held that there is no sale/purchase for free issues and no tax is leviable on the same.

The further issue raised is whether there is any lesser payment of tax. In our opinion the goods sold by “C” to “A” are not the same as sold by “A” to “B”. Therefore “A” will be required to discharge the liability while making his sale of equipment to “B” which will include the cost of his parts also. Therefore there should not be any question of loss of CST. In the facts it is stated that “A” will not charge any tax to “B”. It appears that it will be claimed to be an in-transit sale. However the factual position demands further analysis whether there is sale of same goods by “A” to “B” as sold him to “C”. If they are not the same goods then “A” may not be able to claim in transit sale and may be liable to pay tax in relation to his sale.

There is also mention about issue of C form by “C” to “A” for parts supplied. However when “A” is not selling the parts but supplying as free inputs, for the goods to be manufactured for him, in our opinion there is no question of issue of C form by “C”.