LOCAL SALE V. INTER-STATE SALE

[Mr. M. GOVINDARAJAN]

The sale may be effected within the State or in between two or more States.  The ‘local sale’ is nothing but the intra-State sales.  When the sale is between two or more States the same is called as inter-State Sales.  In general, sale where seller and buyer both are from same state is called as intra state sale for example “seller of Kanpur (U.P.) sells goods to a dealer of Noida (U.P.)” but when buyer and seller are in different States, it is Inter-state sales. For example a seller of Chennai (Tamil Nadu) sells goods to dealer based at Allahabad (U.P.) however location of seller and buyer is immaterial and both can be located in same State but goods should be moved from one State to another.

Section 3 of Central Sales Tax Act, 1956 discusses when is a sale or purchase of goods said to take place in the course of inter-State trade or commerce.  According to this section a sale 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.

The explanation 1 to this section provides that where goods are delivered to a carrier or other bailee or 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 to this section provides that 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.

In ‘CST v. Suresh Chand Jain’ - 1988 (4) TMI 378 - SUPREME COURT OF INDIA, the Supreme Court held that a sale can be said to be in the course of inter-state only if two conditions concur viz. (i) sale of goods and (ii) a transport of those goods from one State to another. Thus transaction must be a completed sale. Location of buyer and seller is immaterial.  Thus, even if buyer and seller are within the same State, sale will be inter-State, if sale occasions movement of goods from one State to another.  E.g., the buyer may have construction site in another State and may ask seller to dispatch goods directly to the site.

In ‘Commissioner of Commercial Taxes, Hyderabad V. Desai Beedi Company’ – 2015 (3) TMI 786 - SUPREME COURT the Supreme Court held that in order to constitute an ‘inter-state sale’ the movement of goods should be occasioned by the sale and that the same must be inextricably connected with the sale.  The assessee was engaged in the manufacture of ‘beedi’ and was having factory and head office in Maharashtra, with a registered branch office in Andhra Pradesh.  The ‘beedi leaves’ were being purchased from Andhra Pradesh in the auction conducted by the Forest Department and there after it was being dispatched to the head office in Maharashtra.  The branch office claimed exemption on the turnover stating that it was an ‘interstate sale’.  After different rounds of litigation before the statutory authorities, the matter reached the Apex Court at the instance of the Revenue challenging the verdict passed in favor of the assee by the High Court of Andhra Pradesh.  The Supreme Court observed that the sale was complete in the State of Andhra Pradesh, that the delivery of goods took place from the godown of the seller/Department in the State of Andhra Pradesh, that the movement of the goods from the godown was at the instance of the purchaser and that the final destination of the consignment in respect of the goods sold by the seller was on consequential to the sale transaction.  The Supreme Court held that the events of sale of goods by the seller and movement of goods from the State of Andhra Pradesh to another State were not inextricably connected, but independent of each other and hence it was never an instance of ‘interstate sale’. 

The Madras High Court had an occasion to consider whether the sale of sandal wood in an auction effected in the State of Tamil Nadu and the movement of the goods to another State at the instance of the successful bidder, who was having the place of business in the latter State, would constitute an inter-state sale and whether the demand of payment of tax under the Tamil Nadu VAT Act was justified or not.  The Madras High Court in ‘Karnataka Soaps and Detergents Limited V. District Forest Officer, Sathyamangalam  and others’ – 2005 (2) TMI 786 - MADRAS HIGH COURT held that the terms of the tender-cum-auction sale notification covered all the registered sandal wood contractors of Salem Division and that there was no differentiation as ‘local buyer’ and ‘interstate buyer’.  The terms of the notification were quite specific, making it obligatory to satisfy the tax under the State enactment.  The entire transaction took place and was completed in the State of Tamil Nadu and accordingly interference was declined and the demand raised by the State of Tamil Nadu was upheld accepting their case that it was a local sale.

In ‘Lalitha Muraleedharan V. Commissioner of Commercial Taxes’ – 2017 (6) TMI 1091 - KERALA HIGH COURT the appellant, situated in Tamil Nadu, engaged in the manufacturing of essential oils, natural extracts and products of sandal wood, who is also an exporter of sandalwood products.  The appellant participated in e-auction conducted by the Forest Department, Kerala.  The appellant satisfied the EMD and participated in the tender.  The appellant came out successful in respect of three different logs.  The appellant was, therefore, required to satisfy the due amount and also the tax under KVAT Act.  The due amount was satisfied and the entire tax liability was cleared.  However she sought for exemption from tax since her establishment was situated in a Special Economic Zone.  The request was turned down by the Authority, considering it as a ‘local sale’.  She approached the High Court by filing a writ petition.  The High Court granted liberty to the appellant to approach the Divisional Forest Officer, Marayoor, Idukki District by filing Form I under CST Act, seeking exemption.  The application of the appellant was rejected by the Authority.  Therefore she again approached the High Court.    The High Court held the tender form stipulated that the successful bidder had to satisfy the entire due amount including the tax under KVAT Act.  At no point of time the appellant stated that the offer was subject to exemption to pay any tax under KVAT Act or the goods were being purchased in the course of export through the unit in a SEZ situated in another State and that no tax under the local statute would be payable.   The appellant participated in the tender without raising any objection.   The terms of e-auction notification and the special conditions clearly indicated that it was nothing but a local sale.    The sale is complete in the State of Kerala itself and by virtue of the terms notified, agreed and accepted, it was exigible to tax under KVAT Act, which is not a legally or factually forbidden fruit.  The appeal filed by the appellant is dismissed by the High Court.

In GST scenario

In GST there is no sale or service.  The term ‘supply’ subsumes both the terms  ‘sale’ and ‘service’.  The local supply is called as intra-State supply.

Intra-State supply

Section 8 of Integrated Goods and Services Tax Act, 2017 defines the expression ‘intra-State supply’.  Section 8(1) provides that subject to the provisions of Section 10, supply of goods where the location of the supplier and the place of supply of goods are in the same State or same Union territory shall be treated as intra-State supply.  The following supply of goods shall not be treated as intra-State supply-

• supply of goods to or by a SEZ developer or a SEZ Unit;
• goods imported into the territory of India till they cross the customs frontiers of India; or
• supplies made to a tourist referred to in section 15;

Section 8(2) provides that subject to the provisions of Section 12, supply of services, where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-State supply.  The intra-State supply of services shall not include supply of services to or by a SEZ developer or a SEZ Unit.  The explanation 1 to this section provides that where a person has-

• an establishment in India and any other establishment outside India;
• an establishment in a State or Union territory andany other establishment outside that State or Union territory; or
• an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory,

then such establishments shall be treated as establishments of distinct persons.  Explanation 2 to this section provides that a person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory.

Inter-State supply

Section 7 of the Act defines the expression ‘inter-State supply’.  Section 7(1) provides that subject to the provisions of section 10 of supply of goods, where the location of the supplier and the place of supply are in-

• two different States;
• two differentUnion territories; or
• a State and Union territory

shall be treated as a supply of goods in the course of inter-State trade or commerce.  Section 7(2) provides that supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.

Section 7(3) provides that subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in-

• two different States;
• two different Union territories; or
• a State and a Union territory

shall be treated as a supply of services in the course of inter-State trade or commerce.

Section 7(4) provides that supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.

Section 7(5) provides that supply of goods or services or both-

• when the supplier is located in India and the place of supply is outside India;
• to or by a SEZ developer or a SEZ unit; or
• in the taxable territory, not being an intra-State supply and not covered elsewhere in this section

shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.