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IN TRANSIT SALES

Sale in transit means sales made by the buyer (subsequent seller) without taking the physical
delivery of the goods during the movement of the goods from one state to another.

Section 3 of the CST Act,1956 determines the movement of good and is important in order to
classify whether the sale is inter- state sale or intra state sale. Section 3(a) and 3(b) both defines
the scenario in which the sale is deemed to take place in the course of inter- state trade. The
distinction between section 3(a) and 3(b) is that in the former case movement of goods is
pursuant to contract of sales and in the latter case contract comes into existence only after the
movement of goods commences and before the goods reaches the final destination.

Section 6(2) under the CST Act, 1956 was introduced to remove the cascading effect of multiple
taxation. The subsequent sales falling under sub section 2 of section 6 is exempt from tax for the
reason that the first sale had already borne tax under sub section 1 of section 6 of the CST Act
1956.

In other words in order to claim exemption from tax under section 6(2) following conditions
should be satisfied
(i) First sale should be either under section 3(a) or 3(b)
(ii) Second sale should be under section 3 (b)
(iii)There must be movement of goods from one state to another
(iv) Transfer of documents of title to the goods during the movement
(v) Second sale must be to the registered dealer.
(vi) To claim exemption second seller must obtain Form E1 from the first seller and receive
Form C from the subsequent purchaser.
Documents of Title includes a bill of lading, dock-warrant, warehouse-keepers certificate,
wharfingers certificate, railway receipt, warrant or order for the delivery of goods and any other
document used in the ordinary course of business as proof of the possession or control of goods,
or authorising or purporting to authorise, either by endorsement or by delivery, the possessor of
the document to transfer or receive goods there by represented.

In the absence of Form E1 but Form C received, concessional rate @ 2% shall be applicable
to the second seller and in the absence of Form C , the sale shall be taxable at full rate.

For example A Ltd. located in Maharashtra purchases goods from B Ltd. located in the state of
Karnataka & sells it to C Ltd located in state of Andhra Pradesh. After the movement of goods
commences from B Ltd., to be delivered to A Ltd. in Maharashtra, A Ltd. without taking the
delivery of goods endorses the lorry receipt in favour of C Ltd. for delivery of goods in the state
of Andhra Pradesh.

It would be classified as Interstate Sale being movement of goods commencing from Karnataka
and ending in Andhra Pradesh. Further, endorsement of LR (transfer of documents of title to the
goods) after the movement of goods commences and without taking delivery of Goods by A Ltd.
in favour of C Ltd would be classified under section 6(2) of the CST Act and thereby such sale
from A Ltd to C Ltd would be exempted from levy of tax provided same is supported by
appropriate declaration forms.

For easy understanding the same is explained by pictorial diagram as under


1) Flow of sales & levy of CST
L.R in the name of A Ltd.
B Ltd.
(KAR)

A Ltd. endorses LR in favour of C Ltd.


A Ltd .

CST @ 2%

(Mah)

C Ltd.
Exempt from CST/VAT

(AP)

2) Declaration under CST Act,1956


Issue Form E1
B Ltd.

Issue form C
A Ltd.

(KAR)

(Mah)
Issue Form C

C Ltd.
(AP)