Subsequent Sale u/s 6(2) of CST Act while goods are in Transit

Subsequent sale while goods in transit

Court : Supreme Court

Brief : : If Subsequent sales contracts were in place prior to the commencement of the inter-state movement of goods, such subsequent sales could not sales u/s 3(b) of the CST Act and accordingly they would not qualify for the exemption for In Transit Sales u/s 6(2) of the CST Act.

Thus, it becomes imperative to ensure that the sales contracts relating to the second and subsequent sales are made effective only after and not before the commencement of the inter-state movement of goods as per the first sale.


Citation : A & G Projects & Technologies vs State of Karnataka [(2008) VIL 40 SC]

Judgment :

The appellant were engaged in the execution of the works contracts in Karnataka and were registered under the Karnataka Sales tax laws and CST Act. They entered into three separate contracts with the ultimate customer for supply of equipment, execution of civil works at site and erection and commissioning of the above equipment at site. Pursuant to these contracts, the appellants appointed a sub-contractor located outside Karnataka state for procurement of the equipment in question.

Consequently, there were three contracts relating to the procurement and supply of equipment. These were the contract for supply of equipment between the appellants and the ultimate customer, the contract between the appellants and the sub contractor and, finally, the contract between the sub contractor and the manufacturer of the equipment.

The appellants argued before the assessing authorities that there were three different sales transactions. The first one was the sale of equipment by the manufacturer of the equipment to the sub contractor and the second and third sales were sales of the equipment by the sub contractor to the appellant and thereafter by the appellants to the ultimate customer.


The appellants argued that the first sale was an inter-State sale and the subsequent two sales were eligible for exemption from tax for subsequent or in transit sales under the relevant Section 6(2) of the Act.



The assessing authorities in Karnataka rejected this claim for exemption for the subsequent sales under the Act and held that all three sales were sales under Section 3(a) of the Act and not under Section 3(b) of the Act and hence the exemption from tax for in transit sales under Section 6(2) (supra) was not applicable.



At the outset, the apex Court held that its decision was based on the understanding that all three sales were sales which occasioned the movement of goods from one State to another and were hence all covered under Section 3(a) of the Act and not under Section 3(b) of the Act. This understanding is key to the matter since it has the effect of holding that since the equipment in question was the subject matter of three separate but related contracts of sale, the subject equipment already stood appropriated by the manufacturer in favour of the final consumer through the intervening transactions of sales to the sub-contractor and to the appellants.



The Supreme Court hence proceeded on the ground that if the subsequent sales agreements were in place at the time that the first sales agreement was executed, the provisions of Section 3(b) relating to in transit sales would not apply and hence the benefit of exemption from central sales tax to such subsequent sales under Section 6(2) of the Act would also not apply. The Supreme Court held that the dividing line between sales under Section 3(a) and those under Section 3(b) was that in the former case the inter State movement of goods happened because of the contract of sale whereas the sales under Section 3(b) were those where the contracts came into existence after the commencement of movement of goods.



The Court held that while the movement of goods did not determine the levy of tax, it did determine whether the sales were inter-State sales or were intra-State ones. The Court also held that the nomenclature given to a transaction by the contracting parties could not determine the nature of the transaction. The apex Court held that Section 6(2) relating to exemption from tax for in transit sales was only applicable to those sales which qualified under as such Section 3(b), as sales effected by a transfer of documents of title.