IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7233 OF 2008 (arising out of S.L.P. (C) No. 1065/08)

  M/s. A & G Projects & Technologies Ltd.   … Appellant(s)

            versus

  State of Karnataka          … Respondent(s)

J U D G M E N T

    S.H. KAPADIA, J.

Leave granted.

2. This civil appeal filed by the appellant (assessee) is directed against the

judgment and order dated August 14, 2007 delivered by the Karnataka High Court

in STRP No.85 of 2005.

3. Appellant is a company incorporated under the Companies Act, 1956 and

engaged in execution of electrical works contracts.  Appellant is a registered dealer

both under the Karnataka Sales Tax Act, 1957 and the Central Sales Tax Act, 1956

(“CST ACT 1956”, for short).  Appellant was awarded three independent contracts

towards - (i) supply of capacitor banks, (ii) execution of civil works and (iii) erection

and  commissioning  of  capacitor banks at  various  sub-stations  of  the  Karnataka

Power Transmissions Corporation Limited (“KPTCL”,  for short) in the State of

Karnataka.  Pursuant to the contracts, appellant appointed M/s. Bay West Power and

Energy Pvt. Ltd. (“M/s. Bay West”, for short) as EPC contractor located outside the

State  of  Karnataka for  procuring  the  capacitor  banks  (“equipment”,  for  short)

because the said EPC contractor had a prior arrangement with the manufacturers of

the said  equipment.   In  that transaction four parties  were involved,  namely,  the

appellant, M/s. Bay West, manufacturers of the equipment and KPTCL being the

ultimate consumer.  Although four parties had intervened, in substance, there were

three independent  contracts  involved in  the  transaction.   The  first  contract  was

between the appellant and KPTCL for supply of the equipment.  The second was

between the appellant and M/s. Bay West.  It was a procurement contract.  The third

contract was between M/s. Bay West and the manufacturers.   

4. For the assessment year 2000-01, the appellant filed its return of turnover

under the CST  ACT 1956.   Before the AO, appellant contended that the goods

originated from the manufacturers and ultimately reached KPTCL though the title to

the goods vested originally with M/s. Bay West as the EPC contractor who in turn

transferred the title to the goods to the appellant when they were in transit and in

turn the appellant transferred the title by endorsing the lorry receipt in favour of

KPTCL.   According to the appellant, there were three sales.    According to the

appellant, the second and the third sales were subsequent sales, hence, the appellant

claimed exemption from tax for such sales under Section 6(2) of the CST ACT 1956.

This argument of the appellant stood rejected by the AO holding that the appellant’s

turnover fell under Section 3(a) of the CST ACT 1956.  According to the AO, the

first sale by the manufacturers to M/s. Bay West was a Section 3(a) sale; that, the

second sale by M/s. Bay West to the appellant was also a Section 3(a) sale and not a

sale under Section 3(b) and that even the subsequent sale by the appellant to KPTCL

(ultimate purchaser) was also a sale under Section 3(a) and not under Section 3(b)

and consequently it was held that the appellant was not entitled to exemption under

Section 6(2) of the CST ACT 1956.  Consequently, the claim for exemption made by

the appellant stood dismissed.  However, relying on the proviso to Section 9(1) of the

CST ACT 1956, the AO held that the State of Karnataka was competent to levy the

tax.

5. Aggrieved  by  the  decision  of  the  AO,  the  appellant  herein  preferred

appeals before the Joint Commissioner of Commercial Taxes (Appeals), Bangalore

(hereinafter referred to as “FAA”).  That Authority took the view that the AO had

erred in holding that the goods stood appropriated by KPTCL at the premises of the

manufacturers.  However, FAA proceeded to hold that the subsequent sale stood

concluded before the movement of the goods and, therefore, there was no first inter-

State  sale  and  thus  Section  6(2)  of  the  CST  ACT  1956  was  not  applicable.

Accordingly for different reasons, the FAA upheld the levy of tax under the CST

ACT 1956.

6. The matter was carried in appeal to the Karnataka Appellate Tribunal,

Bangalore by the appellant.  It was held that mere failure of the appellant to prove its

case for exemption under Section 6(2) of the CST ACT 1956 did not make the tax

leviable by the State of Karnataka.  The Tribunal observed that the dealer in this case

was located in the State of Karnataka and the purchaser was also in the State of

Karnataka.  According to the Tribunal, the movement of goods under the contract

was not from the State of Karnataka but into the State of Karnataka and, therefore,

there was no inter-State sale in the State of Karnataka and, therefore, the levy of tax

on the value of the goods supplied was totally unjustified.   

7. Aggrieved by the said decision of the Tribunal, the Department preferred

Sales Tax Revision Petition No.85 of 2005 under Section 23(1) of the Karnataka Sales

Tax Act,  1957.   By the impugned judgment the High Court held that the sale of

goods in favour of KPTCL was completed when the goods were appropriated by

KPTCL  before  commencement  of  movement  of  goods  from  the  place  of

manufacturers in Chennai (Tamil Nadu) to KPTCL in the State of Karnataka and,

therefore, the inter-State sale of goods fell under Section 3(a) of the CST ACT 1956

and, therefore, was not entitled to exemption under Section 6(2) of the 1956 Act.

According to the High Court since the sale in question did  not comply with the

conditions under Section 6(2), the matter came under first proviso to Section 9(1) of

the CST ACT 1956.  In this connection it was observed that the appellant had not

obtained C-Form from the State Department in respect of sale of goods sold on the

basis  of  contract entered into by the appellant with KPTCL  and,  therefore,  the

proviso to Section 9(1) of the CST ACT 1956 stood attracted and consequently the

State of Karnataka was the “Appropriate State” entitled to collect tax in respect of

the goods sold by the appellant to KPTCL under the CST ACT 1956.  Hence this

civil appeal is  filed by the appellant seeking to challenge the impugned judgment

dated August 14, 2007.

8. At the outset, it maybe noted that in this case there is no dispute regarding

the nature of the transaction being inter-State sale.  As stated above, before the AO

the appellant had contended that in all there were three independent contracts in the

entire transaction.  The appellant claimed exemption under Section 6(2) in respect of

the  second  and  third  contracts.   They  contended  that  the  said  contracts  were

“subsequent sales” falling under Section 3(b) and consequently they were entitled to

exemption under Section 6(2) of the CST ACT 1956.  This argument was rejected.

The AO came to the conclusion that all the three contracts came under Section 3(a)

and, therefore, the appellant was not entitled to claim exemption under Section 6(2)

of the CST ACT 1956.   

9. We have to  proceed in this  case on the  above basis  that all the three

contracts came under Section 3(a) of the CST ACT 1956, as held by the AO.    What

is urged on behalf of the appellant is that if all the three contracts stood covered as

inter-State sales under Section 3(a) then in that event proviso to Section 9(1) would

not stand attracted.  It is this argument which arises for determination in this civil

appeal and for that purpose we are required to quote the relevant provisions of the

CST ACT 1956 which have to be analysed in the context of the controversy.

10. Accordingly, we quote hereinbelow the following provisions of the CST

ACT 1956 which read as under:

“SECTION 3 - When is a sale or purchase of goods said to take place in the course of inter-State trade or commerce. - 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--

(a) occasions the movement of goods from one State to another; or

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

Explanation 1---Where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall, for the purposes of clause (b),  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  2--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.”

“SECTION 6. Liability to tax on inter-State sales.- (1) Subject to the other provisions contained in this Act, every dealer shall, with effect from such date as the Central Government may, by notification in the Official Gazette, appoint, not being earlier than thirty days from the date of such notification, be liable to pay tax under this Act on all sales of goods other than electrical energy effected by him in the course of inter-State trade or commerce during any year on and from the date so notified:

PROVIDED that a dealer shall not be liable to pay tax under this Act on any sale of goods which, in accordance with the provisions of sub- section (3) of section 5, is a sale in the course of export of those goods out of the territory of India.

(2)  Notwithstanding anything contained in sub-section (1)  or sub-section (1A),  where  a  sale  of  any  goods  in  the  course  of  inter-State  trade  or commerce has either occasioned the movement of such goods from one State to another or has been effected by a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods,-

(a) to the Government, or

(b) to a registered dealer other than the Government, if the goods are of the description referred to in sub-section (3) of section 8, shall be exempt from tax under this Act :

PROVIDED that no such subsequent sale shall be exempt from tax under this sub-section unless the dealer effecting the sale furnishes to the  prescribed  authority  in  the  prescribed  manner and  within  the prescribed time or within such further time as that authority may, for sufficient cause, permit, -

(a) a certificate duly filled and signed by the registered dealer from whom the goods were purchased containing the prescribed particulars in a prescribed form obtained from the prescribed authority; and

(b) if the subsequent sale is made—

(i) to a registered dealer, a declaration referred to in clause (a) of sub- section (4) of section 8, or

(ii)  to  the  Government,  not  being  a registered  dealer,  a  certificate referred to in clause (b) of sub-section (4) of Section 8:

PROVIDED FURTHER that it shall not be necessary to furnish the declaration or the certificate referred to in clause (b) of the preceding proviso in respect of a subsequent sale of goods if, -  

(a) the sale or purchase of such goods is, under the sales tax law of the appropriate  State,  exempt  from tax  generally  or  is  subject  to  tax generally at a rate which is lower than four per cent (whether called a tax or fee or by any other name); and

(b) the dealer effecting such subsequent sale proves to the satisfaction of the authority referred to in the preceding proviso that such sale is of the nature referred to in clause (a) or clause (b) of this sub-section.”

“SECTION 9. Levy and collection of tax and penalties - (1) The tax payable by any dealer under this Act on sales of goods effected by him in the course of inter-State trade or commerce, whether such sales fall within clause (a) or clause (b) of section 3, shall be levied by the Government of  India and the  tax so  levied  shall  be  collected  by that Government in

accordance with the provisions of sub-section (2), in the State from which the movement of the goods commenced:

PROVIDED that, in the case of a sale of goods during their movement from one State to another, being a sale subsequent to the first sale in respect of the same goods and being also a sale which does not fall within sub-section (2) of section 6, the tax shall be levied and collected-

(a) where such subsequent sale has been effected by a registered dealer, in the State from which the registered dealer obtained or, as the case may be, could have obtained, the form prescribed for the purposes of clause  (a)  of  sub-section  (4)  of  section  8  in  connection  with  the purchase of such goods; and

(b) where such subsequent sale has been effected by an unregistered dealer,  in  the  State  from  which  such  subsequent  sale  has  been effected.”

11. Section 3 of the CST ACT 1956 formulates the principles for determining

when a sale or purchase takes place in the course of inter-State trade or commerce.

The question whether a particular sale is an inter-State sale or an intra-State sale,

though essentially one of fact, is not the pure question of fact inasmuch as the facts of

a given case have to be examined in the light of Section 3 and, therefore, it is a mixed

question of fact and law.  Section 3 defines when a sale or purchase of goods takes

place in the course of inter-State trade or commerce.  Two tests are applied, one of

which is that a sale or purchase takes place in the course of inter-State trade if it

occasions movement of the goods from one State to another, and the other test is that

a sale or purchase takes place by transfer of documents of title, during the movement

of the goods from one State to another.  A sale (transfer of property) becomes inter-

State sale under Section 3(a) of the CST ACT 1956 if the movement of goods from

one State to another is  under the contract of  sale,  and the property in the goods

passes to the purchaser otherwise than by transfer of documents of title when the

goods are in movement from one State to another.  In this case, it has been held that

all  the  three sales  fell  under Section  3(a)  of  the  CST  ACT  1956.   In  fact,  the

appellant’s  case  for  exemption  under  Section  6(2)  stood  rejected  by  the  AO

specifically on the ground that all the three sales stood covered under Section 3(a).

Within Section  3(b)  are sales  in which property in the  goods  passes  during the

movement of the goods from one State to another by transfer of documents of title

thereto whereas Section 3(a) covers sales, other than those included in clause (b), in

which the movement of goods from one State to another is under the contract of sale

and property in the goods passes in either States [SEE: Tata Iron & Steel Co. Ltd. v.

S.R. Sarkar – (1960) 11 STC 655 (SC) at page 667].  The dividing line between sales

or purchases under Section 3(a) and those falling under Section 3(b) is that in the

former case the movement is under the contract whereas in the latter case the contract

comes into existence only after the commencement and before termination of  the

inter-State movement of the goods.  Therefore, it follows that an inter-State sale can

either be governed under Section 3(a) – if it occasions movement of goods from one

State to another – or under Section 3(b) – if it is effected by transfer of documents of

title after such movement has started and before the goods are actually delivered.  In

other words, a sale which takes place under Section 3(a) shall stand excluded from the

purview of Section 3(b) and vice versa.  By Section 3, it was intended to define the

class of sales which shall be deemed to be sales in the course of inter-State trade or

commerce.  Under the CST ACT 1956, tax is leviable on the sale of goods and not

because of the movement of the goods.  The movement of the goods is only material

for the purpose of deciding whether the sale took place in the course of inter-State

trade or commerce or whether such sale was purely an intra-State transaction.  The

name given to a transaction by the parties concerned, does not decide the nature of

the transaction.  In order to make a transaction taxable under the CST ACT 1956,

the transaction must be a “sale” as defined in Section 2(g) taking place in the course

of inter-State trade or commerce in any of the manner provided for in clause (a) or

clause (b) of Section 3.  Section 6(1) of the CST ACT 1956 imposes a liability to pay

tax on sale of goods other than electrical energy effected by a dealer in the case of

inter-State trade or commerce during a year.  Sub-section (1) of Section 6 appears to

provide for multi-point tax but this is subject to the other provisions of the Act.  This

qualification which is reflected in the other provisions of the Act restricts the levy to a

single  point  subject  to  certain conditions,  restrictions  and  circumstances.   Sub-

Section  (2)  of  Section  6  exempts  from levy a  subsequent  inter-State  sale  to  a

registered  dealer of  goods  [described  in  Section  8(3)]  and  also  to  Government,

provided  conditions  of  the  proviso  to  sub-section  (2)  are fulfilled.   However,  a

subsequent sale not falling within Section 6(2) will, however, attract tax because of

Section 9(1),  notwithstanding the fact that the first sale has been subjected to tax

under Section 6(1) of the CST ACT 1956.  Thus Section 6 makes every dealer liable

to  pay tax under the 1956 Act  on all sales  of  goods  other than electrical energy

effected by him in the course of inter-State trade.  Analysing Section 6(2), it is clear

that sub-section (2) has been introduced in Section 6 in order to avoid cascading

effect of multiple taxation.  A subsequent sale falling under sub-section (2),  which

satisfies the conditions mentioned in the proviso thereto, is exempt from tax as the

first sale has been subjected to tax under sub-section (1) of Section 6 of the CST

ACT 1956.  Thus, 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 the goods from one State to another and it must be

preceded by a prior inter-State sale.  It is only then that Section 6(2) may be attracted

in order to make such subsequent sale exempt from levy of sales tax.  However, the

proviso to sub-section (2) of Section 6 prescribes further conditions and it is only on

fulfillment of those conditions that the subsequent sale stands exempted.  If those

conditions  are  not  satisfied  then,  notwithstanding  the  fact  that  the  sale  is  a

subsequent sale, the exemption would not be admissible to such subsequent sales.

This is the scheme of Section 6 of the CST ACT 1956.  

12. In the present case, according to the AO, the second and the third sales

were not subsequent sales.  According to the AO, all the three sales are inter-State

sales falling under Section 3(a) and consequently Section 6(2) (which deals with the

exemption) never stood attracted and, therefore, the appellant was not entitled to

exemption.   

13. The question before us is : if the sales stood covered under Section 3(a)

and if they were not entitled to exemption under Section 6(2), whether the appellant

could have been taxed by the Department by invoking the proviso to Section 9(1) of

the CST ACT 1956?  The object of Section 9(1) is two-fold.  Firstly, it provides that

the tax on inter-State sales under Section 3(a) shall be levied by G.O.I. and collected

by the State Government from which the movement of goods commenced.  Secondly,

it specifies the Appropriate State competent to levy tax on second and subsequent

sales made during the movement of  goods  from one State to  another as also the

authority, where such second and subsequent sales are exigible to tax.  As state above,

Section 6(2) of the CST ACT 1956 provides for subsequent sales to be exempt from

tax on the conditions prescribed therein.  However, if and where those conditions are

not  satisfied,  even  such  subsequent  sales  would  attract  tax  and  only  in  such

circumstances  the  proviso  to  Section  9(1)  which  specifies  the  State,  which  is

competent to levy the tax, would come in. [SEE: Jadhavjee Laljee v. State of Andhra

Pradesh –  (1989)  74  STC  201  (AP)  at  page  204].   The  proviso  to  Section 9(1)

contemplates two situations, namely, (a) where such subsequent sale is made by a

registered dealer and (b) where such subsequent sale is made by unregistered dealer.

In respect of situation (a), the proviso to Section 9(1) prescribes that the Appropriate

State competent to levy tax on such subsequent sale shall be the State from which the

registered dealer obtains  a declaration in C-Form whereas in the  case  falling in

situation (b), it provides that the Appropriate State competent to levy the tax shall be

the State from which such subsequent sale has been effected.  However, the entire

proviso to Section 9(1) applies only to “subsequent sales” covered by Section 3(b)

and not to sales under Section 3(a) CST Act 1956.  

14. Applying the above analyses to the facts of the case, we are of the view that

the proviso to Section 9(1) of the CST ACT 1956 is not applicable to the facts of the

present case as the AO has categorically held that all the three sales fell under Section

3(a) of the CST ACT 1956.  Once the said sales fall under Section 3(a) then under

Section 9(1) the tax has got to be collected by the State of Tamil Nadu from which the

movement of the goods commenced.  The case of the appellant regarding subsequent

sales effected during the movement of the goods stood specifically rejected both by

the AO and the FAA and,  therefore, the question of  taxing such sales under the

proviso to Section 9(1) of CST ACT 1956 did not arise.

15. Our above view is fortified by the judgment of this Court in the case of

Bharat Heavy Electrical Ltd.  and Others v. Union of India and Others – (1996) 4

SCC 230.  We quote hereinbelow paras 17 and 18 of the said judgment which read as

under:

“17. The aforesaid survey of the relevant provisions of the Act clearly shows that Sections 3, 4, 5, 9(1), 14 and 15 pertain to and deal with distinct topics and different aspects of Articles 286 and 269. It follows that if a question arises whether a sale is an inter-State sale or not, it has to be answered with reference to and on the basis of Section 3 and Section 3 alone. Section 4, or for that matter Section 5,  is  not relevant on the said question —  see the Constitution Bench decision in TISCO v. S.R. Sarkar-(1960) 11 STC 655 and the decisions in  Manganese Ore (India) Ltd. v.  Regional Asstt.  Commr.  of Sales Tax – (1976) 4 SCC 124 and Union of India v. K.G. Khosla & Co. Ltd. – (1979) 2 SCC 242. Similarly, where the question arises, in which State is the tax leviable, one must look to and apply the test in Section 9(1); no other provision is relevant on this question.”

“18. We may, at this stage refer to the decision of the Bombay High Court in CST v.  Barium  Chemicals  Ltd.  –  (1981)  48  STC  121.   A  particular transaction of inter-State sale was subjected to Central sales tax in Andhra

Pradesh. The same sale was again sought to be taxed under Central Sales Tax Act in Maharashtra, which was questioned. The High Court adopted the following approach: Central sales tax is levied and collected by the Central Government; it is immaterial in which State it is collected; it cannot be levied or collected  twice over; the  State  Governments are merely agents  of  the Central Government in the matter of levy and collection of Central sales tax; if so, once levied and collected in one State, rightly or wrongly, it cannot be levied  and  collected  in  another  State.  In  our  opinion,  this  may be  an oversimplification  of  the  matter.  Maybe,  from the  point  of  view of  the assessee, this approach is sound enough but from the point of view of the States (keeping Article 269 in mind) and the provisions of the Central Sales Tax Act, this may not be correct. Section 9(1) specifies the State wherein Central sales tax shall be levied and collected and the Central sales tax has to be levied and collected in that State and in no other State. The approach of the Bombay High Court makes Section 9(1) [which is enacted pursuant to Section 269(2), as pointed out hereinabove] otiose and superfluous. It would not be proper to say, in the light of the above constitutional and statutory provisions, that the dispute as to in which State a particular inter-State sale is to be taxed is a matter between the States and that so far as the assessee is concerned, it is enough if he pays the tax at one place, whether it is really leviable in that State as per Section 9(1) or not.  The law requires that it should be levied and collected in the State from which the movement of goods commences [Section 9(1) read with Section 3(a)].”

16. For the aforestated reasons, we set aside the impugned judgment of the

High Court and accordingly allow the civil appeal filed by the appellant with no order

as to costs.

……………………………J.                                           (S.H. Kapadia)

……………………………J.                                                (Aftab Alam)

    New Delhi;      December 11, 2008.