E1 Sales

These are basically known in the business as subsequent inter-State sales, LR sales or and
E-I sales. These transactions fall under clause (b) of section 3 of the Central Sales Tax Act
1956, which is as follows:
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) Events of moving the goods from one State to another; or
(b) Getting effected by a transfer of documents of title to the goods during their movement
from one State to another.
Explanation 1 to section 3: 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 to section 3: 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.
For example if goods are booked from Delhi to Mumbai by Railway, movement of goods
will commence as soon as goods are handed over to the Railway booking office at Delhi for
transport. The movement will be deemed to continue even if goods reach Mumbai and are
lying in possession of railways. The movement will be deemed to have terminated only when
the delivery of goods is taken at Mumbai on submission of railway receipt. Thus goods will
be deemed to be in movement for sales tax purposes till delivery is taken at destination.
In these transactions 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.
Now let us look at the exemptions (section 6(2) of CST act) that take place for this inter-state
sale of goods so that additional tax or the double taxation of the other state does not fall in
place. These exemptions have been given to promote commerce between states and not
putting burden on small industries which may not be able to bear the loss of double taxation.
Exemptions - Section 6(2) of the Act provides for exemption from payment of tax on the
subsequent inter-State sales of goods, if such dealer claiming exemption files before his
assessing authority a Certificate in Form E-I or E-II as the case may be obtained from his
seller and a declaration in Form C obtained from his purchasing dealer.

Sale under Sec 6(2) E-I Transaction - Under E-I transaction the movement of goods from
one state to another is effected by a transfer of documents of title to the goods during their
movement from one state to another (sales in transit). As per section 6(2) of CST act first
interstate sale will be taxable, subsequent sale during movement of good by way of transfer
of document is exempt from tax. For making subsequent sale exempt Form E1 & E2 are used.
The conditions which need to be fulfilled for claiming the exemptions of CST on subsequent
sales under section 6(2) are:
1. First sale should be inter-state sales: The first sales must be inter-state sales. It can be
either a section 3(a) or section 3(b) sale.
2. Transfer of documents of title: Subsequent sales must be a section 3(b) sale i.e. it should
be a sales by transfer of documents of title to goods during the movement of such goods from
one state to another. As already explained above movement of goods from one state to
another commences when goods are handed over to carrier and movement is deemed to
continue till delivery is taken at the other end.
3. Subsequent sales must be to a registered dealer: The subsequent sales is exempt only if
it is made to registered dealer.
4. The goods should be of description referred to in section 8(3) of CST Act: Another
requirement for claiming exemption for subsequent sales u/s 6(2) of CST Act is that the sale
should be of goods which are specified in the certificate of registration of purchasing dealer.
5. Certificates required: Dealer selling the goods has to issue a certificate in prescribed
form to the purchasing dealer (Prescribed forms are E1 form if its first sale and E2 form if
subsequent sales). Subsequent purchaser has to issue certificate in prescribed form (This is C
form) to his seller. Such certificates are to be produced before assessing authorities within
prescribed time. The certificates in C, E1 and E2 forms are to be issued on quarterly basis.
The requirements for issuing the above forms i.e. who is to issue which form and to whom
which form is to be issued can be explained with the help of following example:
Suppose W in Punjab sends goods in Delhi and raises invoice on X in Bihar, during the
movement of goods X sells goods by endorsing documents of title to goods in favour of Y
who is a dealer in U.P and Y sells ultimately goods to Z who is a dealer in Delhi by further
endorsing the documents of title while the goods are still in transit. Z finally takes delivery of
goods in Delhi and the movement of goods comes to an end.
Now in above example W will issue E-I form to X and will get C form from X.
X will issue E-II form to Y and will get C form from Y.
Y will issue E-II form to Z and will get C form from Z
A dealer who sells goods in transit has to obtain E-I/E-II forms from the seller and C form
from the buyer. Submissions of both E-I/E-II and C form is mandatory to avail exemption.

Provisions of C form applicable to E1/E2 forms: Some provisions which are applicable to
C forms are also applicable to E-I/E-II forms. For example one declaration for one quarter,
indemnity bond if form is lost, issue of duplicate form, sales tax concession is not available if
the forms are not submitted.

Parties involved and their perspective

From the above explanation of E1 sales under CST act, it is clear that it involves two intra
state parties and a third party which is the ultimate buyer in another state (another form of E1
sales which is the current situation in our company). While doing transaction purchasing
dealer needs to furnish C form to selling dealer in course of inter-state purchase to get
exemption/reduction in sales tax rate which is defined under section 8(1) of CST act 1956.
The Court has held in one of its verdicts that if a contract for sales of goods subsequent to the
first sale, which occasioned the movement of goods on an inter-state basis, was already in
place prior to the commencement of the inter-state movement of goods, the benefit of
exemption from central sales tax on the subsequent sales, as in transit sales, was not
available. The fact cannot be denied that in the commercial world, a 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 state or
outside state supplier. While this double taxation is very desirable for the government where
it gets more tax on inter-state purchases and sale of goods, it is not so lucrative for the small
dealers or traders. The impact of double taxation may put burden on their profit and in turn
may small dealers may wound up their business considering losses. This is not so good for
the market as well as many new dealers might not find it attractive to enter the business and
carry out their operations which may involve inter-state deliveries of goods. The double
taxation is also not good for the small scale industries of the state as then they may take a hit
in absence of buyers which are threatened by the inter-state taxation.
In the impending GST regime, the origin based CST will be replaced by a destination based
GST. Inter-state supplies would be charged to the GST (called IGST) and it will be possible
for businesses to claim a full offset of the IGST paid by the originating dealer while
discharging the GST liability on subsequent supplies in the destination State. It is therefore
expected that the current in transit sale provisions and the related complexities that they pose
would no longer be relevant and that inter-state trade and commerce would be fully facilitated
in the GST.