Understanding E1 and E2 Sales under CST Act 1956

CentralSalesTaxAct1956envisagessinglepointoftaxationi.etaxatthefirstpointofsales.Subsequent
salesduringthemovementofthegoodsfromonestatetoanotherhavebeenexemptedundersection6(2)of
CSTAct.
Beforeproceedingtounderstandwhichsaleisexemptedundersection6(2)andtheconditionsforexemption,
oneshouldunderstandsomerelevantconceptsrelatingtoit.
Whatissalesbytransferofdocumentsoftitle:Section3(b)providesthatasaleorpurchaseeffectedby
transferofdocumentsoftitletothegoodsduringtheirmovementfromonestatetoanothershallbedeemedto
takeplaceinthecourceofinterstatetradeorcommerce.
Explanation1tosection3providesthatthemovementofgoodscommenceswhengoodsaredeliveredto
carrierandterminateswhendeliveryistakenfromthecarrier.
Explanation2tosection3providesthatwherethemovementofgoodscommencesandterminatesinthesame
stateitshallnotbedeemedtobeamovementofgoodsfromonestatetoanotherbyreasonmerelyofthefact
thatinthecourceofsuchmovementthegoodspassthroughtheterritoryofanyotherstate.
ForexampleifgoodsarebookedfromDelhitoMumbaibyRailway,movementofgoodswillcommenceas
soonasgoodsarehandedovertotheRailwaybookingofficeatDelhifortransport.Themovementwillbe
deemedtocontinueevenifgoodsreachMumbaiandarelyinginpossessionofrailways.Themovementwill
bedeemedtohaveterminatedonlywhenthedeliveryofgoodsistakenatMumbaionsubmissionofrailway
receipt.Thusgoodswillbedeemedtobeinmovementforsalestaxpurposestilldeliveryistakenat
destination.
Whatisdocumentoftitletogoods:Documentoftitletogoodsmeansadocumentwhichevidencesthatthe
personholdingthedocumenthasthetitleofthegoodsi.eheistheownerofthegoodswhicharerepresented
bythesaiddocument.
Innormaltradepracticeswhenthegoodsarehandedovertothecarrierbythesellerfortransportationtoreach
thebuyer,thecarrierissuesareceipttotheseller.Thesellerthensendsthisreceipttothebuyerandthebuyer
getsdeliveryofgoodsonsubmissionofsuchreceipttothecarrierwhengoodsreachatthebuyersdestination.
Thisreceiptissuedbycarrierisdocumentoftitletogoods.
Thusadocumentoftitletogoodsmaybealorryreceipt(incaseofroadtransport),aRailwayreceipt(incaseof
transportbyrail),BillofLading(incaseoftransportbyseaoranairwaybill(incaseoftransportbyair).
Whatistransferofdocumentsoftitletogoods:undersection6(2)ofCSTprovidesexemptionfromCSTon
salessubsequenttoaninterstatesales,whichhasbeeneffectedbytransferofdocumentsoftitleofgoods
duringtheirmovement.Thusitbecomesessentialtounderstandwhatistransferofdocumentsoftitleofgoods.

Section2(4)oftheSalesofGoodsActpermitstransferofgoodsbyendorsementordeliveryofdocumentsof
title.Thusdocumentsoftitleofgoodscanbetransferredbymeredeliveryorbyendorcementondocument.
Eventhoughgoodscanbetransferredbymeredeliveryofdocumentswithoutendorcementonsuchdocument,
butitisadvisableandalsoconvenienttotransferthedocumentsbywrittenendorcementonthedocumentsas
itgivesproofthatthetransferisinduecourceoftrade,forthepurposeofclaimingexemptionu/s6(2)ofCST
Act.

Conditionsforclaimingexemptionu/s6(2)ofCSTAct:Section6(2)ofCSTActprovidesthat
notwithstandinganythingcontainedinsection6(1)or6(1A),whereasaleofanygoodsreferredinsection8(3)
[i.e.goodswhicharementionedintheregistrationcertificateofthedealer],inthecourceofinterstatetradeor
commercehaseitheroccasionedthemovementofsuchgoodsfromonestatetoanotherorhasbeeneffectedby
transferofdocumentsoftitleduringmovementfromonestatetoanother,anysubsequentsalesduringsuch
movementeffectedbytransferofdocumentsoftitleofsuchgoodstoaregistereddealer,shallbeexemptfrom
tax.Theconditionisthatcertificateinprescribedformhastobeobtainedfromtheregistereddealer.
Section6(2)runsasunder:
(2)Notwithstandinganythingcontainedinsubsection(1)orsubsection(1A),whereasaleofanygoodsin
thecourseofinterStatetradeorcommercehaseitheroccasionedthemovementofsuchgoodsfromoneState
toanotherorhasbeeneffectedbyatransferofdocumentsoftitletosuchgoodsduringtheirmovementfrom
oneStatetoanother,anysubsequentsaleduringsuchmovementeffectedbyatransferofdocumentsoftitleto
suchgoodstoaregistereddealer,ifthegoodsareofthedescriptionreferredtoinsubsection(3)ofsection
8,shallbeexemptfromtaxunderthisAct:
Providedthatnosuchsubsequentsaleshallbeexemptfromtaxunderthissubsectionunlessthedealer
effectingthesalefurnishestotheprescribedauthorityintheprescribedmannerandwithintheprescribed
timeorwithinsuchfurthertimeasthatauthoritymay,forsufficientcause,permit,
a)acertificatedulyfilledandsignedbytheregistereddealerfromwhomthegoodswerepurchased
containingtheprescribedparticularsinaprescribedformobtainedfromtheprescribedauthorityand

b)ifthesubsequentsaleismadetoaregistereddealer,adeclarationreferredtoinsubsection(4)ofsection
8:

Providedfurtherthatitshallnotbenecessarytofurnishthedeclarationreferredtoinclause(b)ofthe
precedingprovisoinrespectofasubsequentsaleofgoodsif,thesaleorpurchaseofsuchgoodsis,underthe
salestaxlawoftheappropriateStateexemptfromtaxgenerallyorissubjecttotaxgenerallyataratewhich
islowerthanthreepercent.orsuchreducedrateasmaybenotifiedbytheCentralGovernment,by
notificationintheOfficialGazette,undersubsection(1)ofsection8(whethercalledataxorfeeorbyany
othername)and

(b)Thedealereffectingsuchsubsequentsaleprovestothesatisfactionoftheauthorityreferredtointhe
precedingprovisothatsuchsaleisofthenaturereferredtointhissubsection."
Fromreadingtheabovesectionthefollowingconditionscanbesummedupwhicharerequiredtobe
fulfilledbeforeclaimingexemptionofCSTonsubsequentsalesundersection6(2):
1.Firstsaleshouldbeaninterstatesales:Thefirstsalesmustbeaninterstatesales.Itcanbeeitherasection
3(a)orsection3(b)sale.Asalesisconsideredasaninterstatesalesaspersection3ofCSTActif
(a)Itoccasionsthemovementofgoodsfromonestatetoanotheror

(b)Itiseffectedbytransferofdocumentsoftitletothegoodsduringthemovementofgoodsfromonestate
toanother.
Section3(b)hasalreadybeenexplainedabove.
2.Transferofdocumentsoftitle:Subsequentsalesmustbeasection3(b)salei.eitshouldbeasalesby
transferofdocumentsoftitletogoodsduringthemovementofsuchgoodsfromonestatetoanother.As
alreadyexplainedabovemovementofgoodsfromonestatetoanothercommenceswhengoodsarehanded
overtocarrierandmovementisdeemedtocontinuetilldeliveryistakenattheotherend.
3.Subsequentsalesmustbetoaregistereddealer:Thesubsequentsalesisexemptonlyifitismadeto
registereddealer
4.Thegoodsshouldbeofdescriptionreferredtoinsection8(3)ofCSTAct:Anotherrequirementfor
claimingexemptionforsubsequentsalesu/s6(2)ofCSTActisthatthesaleshouldbeofgoodswhichare
specifiedinthecertificateofregistrationofpurchasingdealer.
5.Certificatesrequired:Dealersellingthegoodshastoissueacertificateinprescribedformtothe
purchasingdealer(PrescribedformsareE1formifitsfirstsaleandE2formifsubsequentsales).Subsequent
purchaserhastoissuecertificateinprescribedform(ThisisCform)tohisseller.Suchcertificatesaretobe
producedbeforeassessingauthoritieswithinprescribedtime.ThecertificatesinC,E1andE2formsaretobe
issuedonquarterlybasis.
Therequirementsforissuingtheaboveformsi.ewhoistoissuewhichformandtowhomwhichformisto
beissuedcanbeexplainedwiththehelpoffollowingexample:
SupposeWinPunjabsendsgoodsinDelhiandraisesinvoiceonXinBihar,duringthemovementofgoodsX
sellsgoodsbyendorcingdocumentsoftitletogoodsinfavourofYwhoisadealerinU.PandYsells
ultimatelygoodstoZwhoisadealerinDelhibyfurtherendorcingthedocumentsoftitlewhilethegoodsare
stillintransit.ZfinallytakesdeliveryofgoodsinDelhiandthemovementofgoodscomestoanend.
NowinaboveexampleWwillissueEIformtoXandwillgetCformfromX.
XwillissueEIIformtoYandwillgetCformfromY.
YwillissueEIIformtoZandwillgetCformfromZ
AdealerwhosellsgoodsintransithastoobtainEI/EIIformsfromthesellerandCformfromthebuyer.
SubmissionsofbothEI/EIIandCformismandatorytoavailexemption.PhoolChandGuptav.StateofAP
104STC601(SC)
ProvisionsofCformapplicabletoE1/E2forms:SomeprovisionswhichareapplicabletoCformsarealso
applicabletoEI/EIIforms.Forexampleonedeclarationforonequartor,indemnitybondifformislost,issue
ofduplicateform,salestaxconcessionisnotavailableiftheformsarenotsubmitted.
LatestcaseofDelhiHighCourtandSupremecourtsverdictinA&GProjectsandTechnologiesLtd
case:TheSupremecourtinA&GProjectsandTechnologiesLtdv.StateofKarnataka[2209]19VST239
[2009]2SCC326explainedtheschemeofsection6(2)ofCSTActandheldthatoncethefirstinterstatesale
hassufferedCSTthensubsequentsaleseffectedbytransferofdocumentsduringtransitwillbeexempt
providedconditionsprescribedu/s6(2)aresatisfied.Thishasbeendonetoremovethecascadingeffect.The
observationoftheSupremecourtinthesaidcaseisprovidedasbelow
AnalysingSection6(2),itisclearthatsubsection(2)hasbeenintroducedinSection6inordertoavoid
cascadingeffectofmultipletaxation.Asubsequentsalefallingundersubsection(2),whichsatisfiesthe

conditionsmentionedintheprovisothereto,isexemptfromtaxasthefirstsalehasbeensubjectedtotax
undersubsection(1)ofSection6oftheCSTACT1956.Thus,inordertoattractSection6(2),itisessential
thattheconcernedsalemustbeasubsequentinterStatesaleeffectedbytransferofdocumentsoftitletothe
goodsduringthemovementofthegoodsfromoneStatetoanotheranditmustbeprecededbyapriorinter
Statesale.ItisonlythenthatSection6(2)maybeattractedinordertomakesuchsubsequentsaleexemptfrom
levyofsalestax.However,theprovisotosubsection(2)ofSection6prescribesfurtherconditionsanditis
onlyon
fulfillmentofthoseconditionsthatthesubsequentsalestandsexempted.Ifthoseconditionsarenotsatisfied
then,notwithstandingthefactthatthesaleisasubsequentsale,theexemptionwouldnotbeadmissibleto
suchsubsequentsales.
ThisistheschemeofSection6oftheCSTACT1956.
InarecentcasenamelyMitsubishiCorp.Ind.Ltd.VsValueAddedTaxofficerdecidedbyDelhiHighcourt
whereinsightingtheaboveobservationoftheSupremecourtitwasarguedbythecouncelforthestatethatif
thefirstInterStatesalesisanexemptedsalethenthesubsequentsalesshouldnotgetthebenefitofSection
6(2)ofCSTActevenifalltheconditionsu/s6(2)aresatisfiedsincethefirstsaleshadnotsufferedtax.The
DelhiHighCourtinthisregardobservedasunder:
AreadingofthesaidportionoftheSupremeCourtdecisiononlyindicatesthatwherethefirstsaleistaxed,
thesecondsalewouldbeexemptedbecauseoftheobjectofavoidingthecascadingeffect.However,the
SupremeCourtdecisioncannotbeunderstoodtomeanthatwherethefirstsaleisexempted,thesecondsale
mustbetaxedeventhoughtheconditionsunderSection6(2)forexemptionstandsatisfied.
Thusevenifthefirstsaleswasexemptedduetoexemptionontaxavailableinthestatewherefromthefirstsale
ismadethesubsequentsalesinotherstatewillbeexemptediftheconditionsu/s6(2)ofCSTActaresatisfied.

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