Inter State Sale of goods by Transfer of Documents - Issues arising out of judgment of Supreme Court in case of A & G Projects.

This is a post by CMA.V.S.Datey

Ghost of ‘A & G Projects’ haunting ‘inter-state sales by transfer of documents’

 

Some observations of Supreme Court in case of A & G Projects, which were in nature of obiter dicta, are creating havoc in the transactions of inter-state sale by transfer of documents. Department is taking a view that the subsequent sales are exempt only if contract with ultimate buyer is executed after goods are dispatched by first seller (which s practically impossible). In this Article, author analyses the repercussions of this decision and suggests possible course of action.

1. Background

Section 3(b) of CST Act provides for Inter-State sale by transfer of documents of title to goods during the movement from one State to another.  As per section 3(b) of CS Act, 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. Section 3(a) of CST Act requires that sale should ‘occasion movement of goods’. There is no such requirement in section 3(b) of CST Act.

This definition is important as all subsequent inter-state sales to registered dealers by transfer of documents during movement of goods are exempt from sales tax  if E-I, E-II are exchanged.

1.1 Normal trade practice

Normal practice is that when a dealer obtains an order, he selects a manufacturer/supplier who can supply the goods. The dealer places order on manufacturer/supplier and asks him to book goods by transport directly to final destination i.e. ultimate buyer who has place order on the dealer. The goods are booked marked ‘Self’. The lorry receipt or consignment note or railway receipt (which is document of title) is endorsee by manufacturer/supplier in favour of the dealer. The dealer then raises invoice on ultimate buyer and endorses the document of title in favour of ultimate buyer. This second sale s exempt if E-I/E-II forms are exchanged.

2. Case of A & G Projects

In A & G Projects and Technologies v. State of Karnataka (2009) 2 SCC 326 = 18 STT 525 = 19 VST 239 (SC), A&G Projects, Karnataka had obtained order from KPCTL in Karnataka for execution of electrical works contract. A&G Projects (from Karnataka) placed order on a Chennai dealer (Bay West) for supply of certain equipment required for the project. In turn, Bay West placed order on manufacturer in Chennai. The goods were dispatched from Chennai (Tamilnadu) to Karnataka. The Lorry Receipt clearly indicated name of the ultimate buyer i.e. KPCTL. There was no doubt that the goods were meant for KPCTL in Karnataka. 

Obviously, Chennai manufacturer raised invoice on Bay West (Chennai Dealer), Bay West raised invoice on A&G Projects and A&G Projects raised invoice on KPCTL.

First sale (from Chennai manufacturer to Chennai dealer) was obviously under section 3(a) i.e.. sale occasioned movement of goods from one State to other. Subsequent sales were really under section 3(b) i.e. effected by transfer of documents during movement of goods from one State to other. However, assessing officer in Karnataka held that all subsequent sales were also under section 3(a) and hence exemption is not available under section 6(2) and sales tax is payable in Karnataka. The Tribunal correctly held that movement of goods was not from Karnataka but into Karnataka and hence it cannot be inter-state sale in Karnataka and CST cannot be charged in State of Karnataka.

In appeal to High Court, in  State of Karnataka v. A & G Projects and Technologies (2008) 13 VST 177 = 37 MTJ 337 (Karn HC DB), it was held that goods were appropriated to buyer i.e. KPCTL even before movement commenced from Tamilnadu. It was held that in such case, subsequent sale made by A&G Projects to KPCTL will not be exempt and CST will be payable on subsequent sale in Karnataka [Really, the goods were not ‘appropriated’ to KPCTL in Chennai but only identified for the ultimate buyer. Further, section 3(b) or 6(2) of CST Act does not prescribe any such condition about appropriation of goods to ultimate buyer].

In further appeal, Supreme Court proceeded on the basis of decision of Assessing Officer that all the three sales are under section 3(a) of CST Act i.e. inter-state sales. Assessee did not challenge this view [probably because it suited him. Really, all three sales cannot be inter-state sales under section 3(a)]. His only argument was that if all these sales are inter-state sale u/s 3(a), then proviso to section 9(1) of CST Act (which deals with State which can collect tax when sale takes place during movement of goods) will not apply, since that proviso applies only when sale is by transfer of documents during movement of goods i.e. under section 3(b). Thus, Karnataka State is not the relevant State for collection of CST in such case.

This argument was accepted and demand of CST was dropped by Supreme Court.

From the judgment, it is not clear whether E-I/E-II forms were exchanged for subsequent sales. If these were indeed exchanged, then decision of Supreme Court is correct, though reasoning seems to be incorrect.

This is an interesting example how law follows a circuitous route and goes haywire when the original decision is taken on a wrong basis.

2.1 Contract for subsequent sale should be after commencement of movement of goods?

The aforesaid decision itself would not have created uncertainty and litigation, as it could have been argued that the decision was on the basis of facts of the case. However, problems have been created by following observation in the decision by Supreme Court .

In A & G Projects and Technologies (supra), (background explained above), it was observed by Hon. Supreme Court, ‘Dividing line between sale and purchase under section  3(a) and those falling under section 3(b) of CST Act is that in former case, the movement is under  a contract while in the latter case, the contract comes into existence only after the commencement and before termination of movement of goods

[really section 3(b) of CST Act makes no reference to ‘contract’. It only makes reference to ‘sale is effected during movement of goods’. Thus, ‘contract for sale’ can be earlier also. Hence, these observations of Supreme Court can be said to be obiter dicta, since subsequently, final judgment was given on entirely different basis, as discussed above].

2.2 Decision correctly analysed in trade circular of Commissioner, WB

The decision of Supreme Court has been very nicely analysed in Trade Circular No. 11/2010 dated 4-10-2010 issued by Commissioner, Commercial Taxes, 14, Bellaghata Road, Kolkata – 700 015,West Bengal [see (2010) 35 VST 28 (Journal section) and  Sales Tax Review Vol 57 November 2010 page 67]

The circular clearly and correctly states that in commercial world, substantial number of transactions of subsequent sales take place particularly for specially made goods where a dealer first collects order from his outside State customer and thereafter places his corresponding purchase order either to inside State supplier or to outside State supplier. Therefore, there exists one pre-existing order or pre-determined party at the hands of a subsequent seller when he is making agreement of purchase/sale with the inside arty or outside State supplier.

The circular notes that the confusion is because of the following para of SC judgment in A&G Projects, ‘The dividing line between sales or purchases under section 3(a) and those falling under section 3(b) is that in former case the movement is under the contract whereas in the later case the contract comes into existence only after the commencement and before termination of the inter-State movement of the goods’.

After analyzing earlier decisions of Supreme Court, the circular finally states that in effect the term ‘contract comes into existence’ used in A&G Projects,  means ‘sale is effected by transfer of documents’ – the term used in Tata Iron and Steel Co. (TISCO) v. S R Sarkar - (1960) 11 STC 655 (SC) = AIR 1961 SC 65 = (1961) 1 SCR 379.

The circular finally clarifies that ‘Contract for sale’ and ‘sale itself’ are altogether different in case of inter-state sale, pre-existing order or pre-determined parties will not negate any section 3(b) sale, if other requirements are found fulfilled, i.e. physical or constructive transfer of documents of title to the goods is made.

Really, it is a very good and legally correct circular and congratulations to Commissioner, Commercial Taxes, West Bengal for issuing such clear circular.

However, scene in Tamil Nadu is opposite, as explained below.

2.3 Transactions between three States required, as per Accountant-General, Audit, Tamil Nadu

Some fuel has been added to the fire by Accountant-General (Audit), Tamil Nadu, who has expressed view that transactions under section 6(2) are required between three States to qualify for exemption. The Accountant-General (Audit) has suggested revision of assessments [see (2010) 35 VST 44 (Mag)].

 It seems the basis for the view is the following observation of Supreme Court – ‘In order to attract section 6(2), it is essential that the concerned sale must be a subsequent inter-state sale effected by transfer of documents of title to the goods during the movement of goods from one State to other and it must be preceded by a prior inter-State sale’.

This again is ‘obiter dicta’ and even this statement does not imply that there the transaction should be between three states.

I is true that the original manufacturer/supplier and final buyer must be in different States, since there has to be physical movement of goods from one State to other. However, the intermediate dealer can be either in State of manufacturer/supplier or in State of ultimate buyer. He can also be in some entirely different State.

3. Binding Nature of decision of Supreme Court

The whole confusion is because of the some observations made during the decision. These observations were not directly relevant to the decision since finally the judgment was on entirely different basis.

Under Article 141 of Constitution of India, law declared by Supreme Court is binding on all courts within the territory of India. Thus, really, ‘obiter dicta‘ is not a ‘law declared by Supreme Court’ and hence not binding. Similarly, each and every sentence in judgment is not a binding precedent.

3.1 ‘Obiter dicta’ of SC should be normally followed but is not binding

An ‘Obitum dictum’, as distinguished from a ratio decidendi is an observation by Court on legal question suggested in a case before it but not arising in such a manner as to require a decision. Such an obiter may not have a binding precedent as the observation was unnecessary for the decision pronounced, but even though obiter may not have binding effect as a precedent, it cannot be denied that it is of considerable weight. – Director of Settlements v. M R Apparao 2002 AIR SCW 1504 = AIR 2002 SC 1598 = (2002) 4 SCC 638 (SC 3 member bench).

In Divisional Controller, KSRTC v. Mahadeva Shetty 2003 AIR SCW 3797 = AIR 2003 SC 4172 = (2003) 7 SCC 197, it was observed, ‘Statements which are not part of the ‘ratio decidendi’ are distinguishable as obiter dicta and are not authoritative. Mere casual expression carry no weight at all. Nor every passing expression of a Judge, however eminent, can be treated as an ex cathedra statement having the weight of authority’.

An observation made by a superior court is not binding. What would be binding is the ratio of the decision. Such ratio should be arrived at upon entering into the merit of the issues involved in the case – Dadu Dayalu Mahasabha v. Mahant Ram Niwas AIR 2008 SC 2187.

In Sreenivasa General Traders v. State of AP -  (1983) 3 SCR 843 = AIR 1983 SC 1246 = (1983) 4 SCC 353 also, it was held that obiter only has persuasive value.

In Mohandas Issardas v. AN Sattanathan 2000(125) ELT 206 (Bom HC DB), it was observed, ‘It would be incorrect to say that every opinion of the Supreme Court would be binding upon the High Courts in India. The only opinion which would be binding would be an opinion expressed on a question that arose for the determination of Supreme court and when though ultimately it might be found that the particular question was not necessary for the decision of the case, even so, if an opinion was expressed by Supreme Court on that question, then the opinion would be binding on High Court’. - - Statements which are not necessary to the decision have no binding authority on another Court, though they may have some merely persuasive efficacy.

In Municipal Corpn. v. Gurnam Kaur - (1989) 1 SCC 101 = AIR 1989 SC 38, it was observed, ‘Pronouncements of law, which are not part of the ratio decidendi are classed as obiter dicta and are not authoritative.’  - same view in United Riceland v. State of Haryana (1997) 104 STC 362 (P&H HC FB).

In Municipal Committee v. Hazara Singh 1975(1) SCC 793 = AIR 1975 SC 1087  (SC 3 member bench), it was held that even obiter dictum of Supreme Court should be accepted. Declaration of law by that Court even if be only by the way has to be respected. However, statements on matters other than law have no binding force. Several decisions are on facts and as on facts no two decisions could be similar, Supreme Court decisions which were essentially question of fact could not be relied upon as precedents for decision of other cases.

3.1 How a judgment is binding

Each judgment is based on its own context and background. It is neither desirable nor permissible to pick out a word or sentence from the judgment, divorced from the context of the question under consideration, and treat it as a ‘law’ declared by the Court. The judgment must be read as a whole and observations in the judgment have to be considered in light of questions which were placed before the Court. - . - . - While applying the decision (of Supreme Court ) to a later case, the Courts must try to ascertain the true principle laid down by the decision of this (Supreme Court) - CIT v. Sun Engineering Works (P.) Ltd. 198 ITR 297 = AIR 1993 SC 43 = (1992) 4 SCC 363 =  64 Taxman 442 = 1992 AIR SCW 2600 - quoted and approved in TM Jacob v. C Poulose  1999 AIR SCW 1156 = AIR 1999 SC 1385 (SC 5 member bench) * State of Punjab v. Baldev Singh 1999 AIR SCW 2494  = (1999) 6 SCC 172 (SC 5 member Constitution Bench) * ICICI Bank v. Municipal Corporation of Greater Bombay (2006) 4 STT 20 (SC).

In UOI v. Dhanwati Devi (1996) 6 SCC 44 (SC 3 member bench), it was observed - ‘A judgment is only an authority for what it actually decides. - . - . - Every judgment must be read as applicable to the particular facts proved or assumed to be proved. - . - . - It is only the principle laid down in the judgment is binding law under Article 141 of the Constitution. - . - . - . -Abstract ratio decidendi alone has force of law and is binding. - . - . - The essence of the decision is its ratio and not every observation found therein - . - . - No judgment can be read as if it is a statute. A word or a clause or a sentence in the judgment cannot be regarded as a full exposition of law.’ – same view in State of Rajasthan v. Ganeshi Lal AIR 2008 SC 690 * Government of Karnataka v. Gowramma AIR 2008 SC 863.

The essence of decision is its ratio and not every observation found therein - Lalu Prasad Yadav v. State of Bihar (2010) 5 SCC 12.

In Madhav Rao Jivaji Rao Scindia v. UOI - AIR 1971 SC 530 = (1971) 1 SCC 85 = (1971) 3 SCR 9, it was observed - ‘It is not proper to regard a word, a clause or a sentence occurring in a judgment of Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment’.

3.2 Judgment should not be read as a statute

In Amarnath Om Parkash v. State of Punjab (1985) 1 SCC 345 = 1985 SCC (Tax) 92 SC = AIR 1985 SC 218 (SC 3 member bench), it was observed, ‘Judgments of courts are not to be construed as statutes. Judges interpret statutes, they do not interpret judgments. They interpret the statutes: their words are not to be interpreted as statutes’.  – same view in UOI v. Amrit Lal Manchanda (2004) 51 SCL 488 (SC) * Escorts Ltd. v. CCE (2004) 8 SCC 335 = 173 ELT 113 (SC) * UOI v. Major Bahadur Singh (2006) 1 SCC 368 *   Ashwani Kumar Singh v. UPPSC 2003 AIR SCW 3387.

Judgment should be read with facts of the case - In Padmasundara Rao v. State of TN 2002 AIR SCW 1156 = (2002) 3 SCC 533 = AIR 2002 SC 1334 = 37 SCL 425 = 255 ITR 147 (SC 5 member bench), it was observed [quoting from Herrington v. British Parliamentary Board (1972) 2 WLR 537], ‘Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment and it is to be remembered that judicial utterances are made in the setting of facts of a particular case. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.

3.3 Only decision binding - not the reasons

In Krishena Kumar v. UOI AIR 1990 SC 1782 = (1990) 4 SCC 207, it was observed -’The doctrine of precedent, that is being bound by a previous decision is limited to the decision itself and as to what is necessarily involved therein. - . - . - It does not mean that the court is bound by the various reasons given in support of it, especially when they contain propositions wider than the case itself required. - . - . - The enunciation of the reason or principle upon which a question before a Court has been decided is alone a precedent. The ratio decidendi is the underlying principle, namely, the general reasons or the general grounds upon which the decision is based. - . - . - If it (ratio decidendi) is not clear, it is not duty of Court to spell it out with difficulty in order to be bound by it’.  – similar view in Dalbir Singh v. UOI (1990) 4 SCC 207. Ratio of the decision is binding and not the conclusion arrived at. - S P Gupta v. President of India 1981 (Suppl) SCC 87 = AIR 1982 SC 149.

4 Precautions to be taken BY DEALER IN VIEW OF  SC decision in A & G Projects  

It is a fact that in all cases of E-I and E-II transactions, the ultimate buyer is known even before goods are dispatched by original manufacturer/supplier. It is also fact that at least at lower level, the Supreme Court’s observation is likely to be mechanically followed.

In CTT v. Dalu Ram Ganpat Ram (2010) 33 VST 433 (All HC), goods were booked by rail for transport from UP State to other State. The railway receipt was obtained by UP State seller in his own name (i.e. self). The seller than transferred the railway receipt in name of buyer (who was from the same State i.e. UP). It was held that this is inter-State sale covered under section 3(b) of CST Act – relying on CST v. Mewalal Kewal (1976) 38 STC 551 (All HC DB).

In Cinezac Technical Services v. State of Kerala (2009) 25 VST 165 (Ker HC DB), the Lorry Receipt was in name of ultimate purchaser. Hence, it was held that it was a pre-arranged sale and second sale by agent in the State will not be treated as subsequent inter-state sale.

Hence, to minimize the risk, it has to be ensured that property in goods passes during movement of goods and not before movement of goods. In case of A & G Projects, the Lorry Receipt was directly in name of ultimate buyer and hence it was held that property in goods passed to buyer before movement of goods commenced.

The transport document should be marked as ‘Self’ and than transport document (LR) should be transferred by endorsement in favour of first buyer and then from first buyer to ultimate customer. If thee precautions are taken, in my view, a dealer can distinguish his case from A & G Projects and can establish that the sale is by transfer of documents during movement of goods from one State to other.

The dealer can of course depend on the case law discussed above and state that the observation made by Supreme Court is not a binding precedent, particularly when the statutory provision as contained in section 3(b) of CST Act is entirely different.

Let us hope some clarification s issued by Central Government to clarify the matter.

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