OVERVIEW OF

MVAT AUDIT

27TH October, 2012

By

CA M B Abhyankar

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Applicability of audit under MVAT Act, 2002

• To whom audit is applicable? As per Section 61(1) of the MVAT Act, 2002, audit is applicable to

• A dealer who is liable to pay tax and his turnover, either of sales or purchases, exceeds Rs. 60 Lakhs during the Financial Year

• A dealer who holds a Liquor license in Form PLL, BRL, E, FL or CL.

• Who is a Dealer?Sub section 8 of Section 2 defines a dealer as a person who buys or sells goods in the State of Maharashtra for commission, remuneration or otherwise in relation to his business

• When a Dealer is liable to pay tax? Any dealer becomes liable to get registered and to pay tax if his turnover of taxable goods sold or purchased during FY exceeds Rs. 10000 and turnover of all sales exceeds

• Rs. One Lakh, if he is an importer• Rs. Five Lakhs if he is not an importer

• Besides any person who has voluntarily registered under this Act is also a dealer liable to pay tax.

Amendment – Voluntary Registration is subject to deposit of Rs. 25000/- as securuty deposit. Earlier this deposit was was allowed to be adjusted against the amount

towards tax, interest or penalty that may become due, but now onwards this Security Deposit is not adjustable towards Tax, interest, penalty or any other liability under the Act

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Basic Provisions

• Who can conduct Audit?

Practising CA/ICWA alone can be appointed as Auditor for audit under MVAT

• Form & Time Limit for submission of Audit Report

Audit report has to be submitted by the Dealer in Form No. 704 Audit report has to be submitted by the Dealer in Form No. 704 within eight months from the end of the year to which the report relates – Rule 65 & 66

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Basic Provisions

• Penalty for Non-filing of Audit Report

• The responsibility of submitting the audit report to the Sales Tax Department is of the dealer and not of the Chartered Accountant.

• For non compliance (including submitting an Incomplete Audit Report), Dealer can be charged penalty equal to 0.1% of Turnover of Sales or Purchases and can be prosecuted for imprisonment for 6 months

• However , in view of proviso to section 61(2), no penalty under • However , in view of proviso to section 61(2), no penalty under this sub-section shall be imposed, if the dealer files the audit report within one month after the aforesaid prescribed due date and proves to the Commissioner of Sales Tax that the delay was on account of factors beyond his control.

• Amendment in Sec. 61(2) by inserting Subsection 2AThis provides for a penalty of one tenth percentage of total sales for knowingly filing incomplete audit report. This penalty is in addition to penalty already provided for not filing audit report in prescribed time.

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Audit Appointment and Engagement

• No procedure is laid down for appointment of VAT Auditor under the MVAT Act.

• A CA/ICWA working as Tax Consultant for the Dealer or Statutory Auditor of the dealer can also conduct MVAT Audit u/s 61. But an internal auditor of the dealer cannot conduct VAT Audit as VAT Audit is an audit under Statute.

• There is no ceiling on number of MVAT Audits• There is no ceiling on number of MVAT Audits

• The VAT Auditor should obtain from the dealer a letter of appointment for conducting the VAT audit. The letter of appointment should also specify the remuneration of the VAT auditor.

• If there is change of Auditor, new Auditor should first communicate with the previous auditor, before accepting the appointment.

• A dealer can appoint two or more chartered accountants as joint auditors for carrying out the VAT Audit.

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Approach to VAT Audit

• Entire system of VAT is based on self-assessment by a Dealer.

• Tax liability is calculated and paid by the tax payers through their periodical returns.

• As an essential cross check however, statutory provision has been made for verification of returns by an independent auditor in minute details by going through the books of accounts and in minute details by going through the books of accounts and also by analysing and interpreting the provisions of the State VAT Laws.

• A certification at the end of audit, as to whether there was any under-assessment made by the dealer requiring additional payment or whether there was any excess payment of tax warranting refund to the tax payer, is therefore an important element of VAT administration.

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Approach to VAT Audit

Format of Audit Report gives an impression that Audit is like a Virtual Assessment,

Consisting mainly of • Verification of correctness of returns filed• Verification of sales and tax liability & potential liability

on account pending CST declaration forms• Verification of purchases• Verification of purchases• Computation of set-off / input tax credit• Verification of branch transfers and F forms• Verification of compliance, viz filing of returns• TDS on works contracts• Finally leading to Determination by the Auditor, of differential

liability or refund for a Dealer.

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Approach to VAT Audit

• Audit Report in Form 704 is divided into Three Parts namely

Sr. No. Part Particulars

is related to verification and certification, A Part -1

is related to verification and certification, computation of tax liability and recommendations to the dealer

B Part -2 is related to general information about the dealer under audit.

C Part -3 is about the various Schedules and Annexures

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Considerations for the preparation of Report

• Where the returns are correct and complete and there are no material defects in the turnovers reported and liability determined, Unqualified Report can be given by the Auditor.

• In other cases a Modified Report can be given by an Auditor . Relevant Para Numbers from Part I need to be used for giving Relevant Para Numbers from Part I need to be used for giving applicable qualifications and remarks of the Auditor.

• Amendment in Sec 61(1)The term included is “Complete Audit Report ”

Audit Report shall be deemed to be "complete audit report" onlv

if all the items, certifications, tables, schedules and annexuresare filled appropriately and are arithmetically self consistent.

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Claim of refund U/s. 51 (7)

• Amendment to Sub-section (7):-

(i) Sub-section (7) provides that the refund under section 51 shall be granted only on application filed within prescribed time limit i.e. three years from the end of the year,

(ii) After amendment the period for submission of refund application will be eighteen months from end of the year to which such return relates.

(iii) This provision is applicable to all the periods for which the time

period of 18 months from the end of the relevant year has not expired on 31st March2011. For the year 2009 -10 the period of

18 months expires on 30thSeptember 2011. For 2010-11, applications for refund should be made on or before 30th September 2012.

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Getting Started

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1) Understanding the Business

Auditor should acquire full knowledge of the client’s business and policies This involves understanding /knowing:

a) the nature of businessb) the nature of its products c) the processes involved in manufacture, production and ascertaining

whether any part of the work is to be sent out of the entity for further processingprocessing

d) key personnel involved e) Events and risks that may have an impact on the audit report

transactions of related parties that are material to the financial statements. The auditor should obtain sufficient audit evidence in this regard accounting and internal control system of the dealer

f) Effect of a CIS environment on the audit. The auditor should have sufficient knowledge of the CIS to proceed with the audit.

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2) System based Sales Tax Record

• Sales tax primarily relates to sale and purchase of goods.

Auditor should therefore advise the dealer that system for data captured in the financial accounts should be so designed that it identifies each and every transaction of sale and purchase of goods recorded in the books of accounts according to their respective meanings under sales tax law. respective meanings under sales tax law.

This will ensure linkage between accounting data and returns to be filed under sales tax and will make the sales tax compliance easier for the tax payer.

From sales tax point of view sale and purchase turnover for MVAT/CST includes most of the charges relating to goods up to delivery except insurance and installation.

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Following Statements need to be compiled for the purpose of Form 704

a) Consolidation of Monthly Returns, along with details of taxes paid.

b) Sales and Purchase Summaries as per respective Registers.

c) Soft copies of above registers in Excel Format (if possible)c) Soft copies of above registers in Excel Format (if possible)

d) Files of Sale and Purchase Bills organized in the order of entries made in the Sale and purchase Registers, so thatsome of these can be easily verified at random during MVAT Audit.

Continued ……

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e) Statement of Debit and Credit Notes raised after close of the year.

f) Statement of Addition and Deletion in respect of Fixed Assets, & a note on whether and how these transactions are covered by Sale and Purchase Registers.

g) Computation of Revised GTO of Sales and Purchases as per Register, Credit Notes and Statement of Movements in Fixed Assets

h) Reconciliation of Sales and Purchases with Profit and Loss Account.

Continued ……

i) Details of Other Income to prove that all income from sale of goods is covered by Revised GTO of Sales.

j) Details of Expenses (Other than Purchase of Materials) such as Printing and Stationery, Repairs and maintenance, Misc. Exps. etc to prove that all purchases of goods ate covered by Revised GTO of Purchases.

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k) Statement of Invoices in respect of inter state sales made against concessional forms such as C, E1/E2, F, H,I etc. ,along with details of Forms received from customers for such invoices.

l) Statement of Export Sales showing Bill of Lading & Shipping Bill details

m) Statement showing Set Off Available based on Revised GTO or purchasesGTO or purchases

n) Statement showing Reconciliation of Net Tax Due as per Statement of Consolidation of Returns and as per Revised GTO of Sales and Purchases.

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Form 704The new version of Form 704 is 1.21 which is effective for MVAT Audit of F.Y.2009-10 Onwards.

A] Letter of Submission of Audit Report in Form 704 :-

This is a new addition in Form 704, which is a statement of tax liability under the MVAT & CST Acts as per the auditor and the dealers acceptance of the amounts given by the and the dealers acceptance of the amounts given by the auditor thereon.

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B] Part I:-

It is related to Audit Report, verification and cer tification, computation of tax liability and recommendations to the dealer:-

1. Part 1 of Form 704 is a Certificate given by Auditor on certainpoints affecting compliance and calculation of correct tax liability of the Dealer.

2. Reporting under Part 1 is for entire business of the dealer and specific observations for aspects of compliance and calculation of tax liability are covered under Part 3.

3. Conclusions reported under this Part are based on workings given under Part 3, and hence a link between these two Parts must be closely monitored while preparing the Report. Any mismatch between information provided under these 2 Parts can create problems for the Auditor.

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The main contents of Part I are given below:-

c) Under Para 2 (A) and Table 1 – The Auditor has to certify correctness and completeness of the Returns filed by the dealer.

d) Under Para 2 (B) (b) – The auditor has to mention the Schedules and Annexures applicable to the Dealer as applicable

– Now there is a facility to Tick Mark (√) against the Annexures & Schedules. Previously it was only written that “Strike out whichever is Schedules. Previously it was only written that “Strike out whichever is not applicable”, but there was no facility to strike it out. This may increase our responsibility.

Continued ………

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Further, the auditor has to give Certifications which are subject only to Para 3 & 5. There are 16 certificates and/or opinions subject to connotes- qualificatory remarks which effects reporting. Major points are

The auditor should ensure the exhaustiveness of Sales Turnover to cover all sales transactions concluded period under audit. Method of delivery / billing and Agreements for sale need to be verified for this purpose. The auditor should also ensure the exhaustiveness of Purchase Turnover to cover all sales and purchases transactions concluded period under audit. Transit purchases at cut off dates need to be verified in particular. Reconciliation with Trading & P concluded period under audit. Transit purchases at cut off dates need to be verified in particular. Reconciliation with Trading & P & L Account can be examined.

Correctness of Deductions from turnover of sales for Goods return/ Discounts/ Rate difference as per provisions of MVAT/CST Act. Basis for such deduction, Documents for such deduction & Time limits when applicable must be considered. Different provisions in this respect under MVAT/CST should be noted.

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Correctness of Classification of turnover as per Schedule Rates. For this any judgment/order relating to rate of tax should be seen.

Correctness of Computation of Set Off admissible in respect of purchases made during the period under Audit and adjustments thereto.

Verification of all such declarations and certificates against concessional sales made, except as given in Annexure-H and Annexure-I.

Correctness of Computation of CQB. Op. Balance can be relied upon with suitable note.

It may be noted that Certifications in Para 2(B) ca nnot be modified, under that Para.

Continued ……

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The main contents of Part I are given below:-d) Under Para 3, Negative certification, if any is to be incorporated with reasons, at

Sr No. (a) to (p) - (16 clauses) and should correspond to the relevant certificate given under Para 2B of Part I.

e) In Para 4, Table 2, auditor has to give computation of tax liability and recommendations under the MVAT Act, 2002. In the above Table 2, at Serial No. xii – There is new cell inserted for Unadjusted Excess Set-off Carried forward to subsequent period, i.e. the next financial year instead of claiming refund of the same. Further, in the above Table 2, at Serial No. xv – Differential tax liability for non-production of declaration forms as per Annexure H is given.

f) Under Para 4, Table 3, auditor has to give computation of tax liability and recommendations under the CST Act, 2002. Further, in the above Table 3, at Serial No. xi – Differential tax liability for non-production of declaration forms as per Annexure I is given.

g) Under Para 4, Table 4, auditor has to give computation of cumulative quantum of benefits (CQB) availed by the dealer during the period of audit.

h) In Para 4, Table 5, auditor has to give classification of additional dues with calculation of tax and interest thereon, payable by the dealer.

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i) In Para 5, auditor has to give qualifications or remarks having impact on the tax liability based on additional dues as per Para 4 – Table 5.

j) In Para 6, auditor has to give any of the following recommendations to the dealer based on the audit findings:-

Sr. No. Particulars MVAT (Rs.) CST (Rs.)

i) Pay additional tax liability ii) Pay back excess refund received iii) Claim additional refund iv) Reduce the claim of refund iv) Reduce the claim of refund v) Reduce tax liability vi) Revise closing balance of CQB vii) Pay interest under-section 30(2) viii) Pay interest under-section 30(4)

k) In Part – I, After Para 6 – Now, there is a specific column for Auditor’s Signature, Name of the Firm and Firm Registration Number. Besides Mobile, now Landline number of the Auditor is also required to be mentioned in the New 704.

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D] Part III:- It contains 6 Schedules {I to VI} and 11 Annexures {A to K}.

1) Relevant Schedules applicable, as per Type of Return:

Sr.No. Relevant Schedule Type of Return Filed

A Form 231 Schedule I

B Form 232 Schedule II

C Form 233 Schedule III

D Form 234 Schedule IVD Form 234 Schedule IV

E Form 235 Schedule V

F Form III E (CST) Schedule VI

In the event the dealer has filed a wrong type of r eturn, the duty is cast upon the auditor to correct the mistake and fill up the appropriate schedule.

In all the above Schedules, the auditor is required to give figures as per returns filed and figures as per audit, and the dif ference arising thereon will be calculated automatically.

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a) Schedule I,II,IV,V– Consolidation of Returns unde r the MVAT Act, 2002 and audited figures as per books of accou nts are to be given

(for dealers other than composition dealers): -

• The objective of consolidation of returns is to compare the figures shown in various returns filed by the dealer with the audited figures appearing in books of account and to find out differences, if any. Linkage must be established with amounts reported under the column of Amounts as per Return contained reported under the column of Amounts as per Return contained in Tax Liability Calculation Table given at the end of Part 1.

The required to verify the consolidation with the Returns filed by the Dealer. He is not required to verify this information from books of account or other related sales tax records. Auditor should check about periodicity and Formats of the returns filed.

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b) In Schedule III, consolidation of returns filed under MVAT Act and audited figures as per books of accounts ar e to be given(For Composition Dealer)

• The dealers who are resellers, bakery, restaurant, caterer or dealers in second and passenger motor vehicles are entitled to opt for composition u/s. 42 of the MVAT Act. For each category of business, separate return is required to be filed. The turnover in relation to each category of business be compiled from the relation to each category of business be compiled from the respective returns and the information be stated under clauses 1, 2 and 3 of this section.

c) Under Schedule VI, figures as per consolidation of returns filed under CST Act and audited figures as per books of a ccounts are to be given

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The audited figures of turnover of sales, purchases and set-off calculation to be given under the above applicable schedules

shall be based on the following points of considera tion :-

A) Verification of Sales under MVAT Act, 2002

Sales Tax is a tax on sale of goods and hence gross tax liability for any dealer emerges out of sales.

Gross Turnover of Sales as per Sales Tax Includes:-a) Freight, packing forwarding and insurance (subject to different provisions under a) Freight, packing forwarding and insurance (subject to different provisions under

MVAT & CST Acts for sale price)b) Works Contracts and Leasesc) Local, Inter-State and Export salesd) Branch Transfers outside the State of Maharashtrae) Transit Sales u/s. 6(2) of CST Act f) Sales tax or VAT whether charged separately or notg) TDS deducted by customerh) Sales of Capital Assetsi) Miscellaneous disposals of goodsj) Debit Notes for reasons other than Goods Returns

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Excludes:-

a) Recoveries of APMC, Service taxb) Cost of labour and services for Works Contractsc) Payments to sub-contractors in certain casesd) Interest on HP transactionse) Goods returns within 6 months from date of salef) Credit Notes for reasons other than Goods Returns

Key legal provisions affecting determination of Sal es TurnoverKey legal provisions affecting determination of Sal es TurnoverSale means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly.

The term ‘Goods’ includes all movable property

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Importance of correct classification

Calculation of tax liability requires correct rates of tax to be considered appropriate to the goods sold. The rates of tax are laid down in Schedule A to Schedule E of the Act.

Schedule A is for exempt goods and Schedule C is for goods attracting concessional rate of 4% or 5%. Schedule E is for residual goods which attract 12.5% rate of tax.

Section 7 states that the packing material of any goods sold shall be taxable at the same rate that is levied on the goods so packed.

Valuation of OMS Branch transfers forming part of GTO is very critical because it has an impact on calculation of Set off.

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Points to be considered while vouching of sale bill s are summarised as follows:-

a) If movement of goods is Inter-state, Check whether i. Movement of goods from one state to another normally attracts CST rate of 2%

(C form) or Schedule Rate in the absence of C Form. ii. Movement of goods from one state to another (Deemed export) - CST 0% (H

form)iii. Movement of goods from one state to another – Stock Transfer (F-form)iv. Movement of goods from outside the country (Physical Exports) – NIL tax.

(Verify shipping bill & bill of lading)v. Sale to SEZ – Nil tax (Form I).vi. High Seas Sale – Sale in the course of import – Verify Bill of lading duly

endorsed in the name of the Customer and High Seas Sale Agreement endorsed in the name of the Customer and High Seas Sale Agreement mentioning P.O. No. of the Customer.

b) If movement of goods is Intra-state (within the state)i. Check whether MVAT is Charged as per Schedule Rate or not . This is

because there are no concessional form sales under VAT regime.ii. If goods are sold in the course of export (deemed export within the state) MVAT

0% (Verify Purchase Order of Customer) and proof of exports from Customer.

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Contentious Issues

• Denial of Exemption for In Transit Sales• Certain sections of Department have drawn adverse inferences from the recent

SC Judgment in A&G Projects & Technologies Ltd Vs State of Karnataka [(2008) VIL 40 SC] Case, in the matter of exemption of In Transit Sales, where despatch of goods has been done from Maharashtra

• As for facts of SC case, the appellants were engaged in the execution of divisible • As for facts of SC case, the appellants were engaged in the execution of divisible works contract in Karnataka and were registered under the Karnataka sales tax laws.

• There were three contracts relating to the procurement and supply of equipment. These were the contract for supply of equipment between the appellants and the ultimate customer, the contract between the appellants and the sub contractor located outside Karnataka and, finally, the contract between the sub contractor and the manufacturer of the equipment. These three contracts were before the Supreme Court.

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• Appellants argued before the assessing authorities that there were three different sales transactions. The first one was the sale of equipment by the manufacturer of the equipment to the sub contractor and the second and third sales were sales of the equipment by the sub contractor to the appellant and thereafter by the appellants to the ultimate customer. First sale was an inter-State sale and the subsequent two sales were interstate sales and were also eligible for exemption from tax for subsequent or in transit sales under the relevant Section 6(2) of the CST Act.

• The assessing authorities in Karnataka rejected this claim for exemption for the subsequent sales under the Act and held that all three sales were sales under Section 3(a) of the Act, and not under Section 3(b) of the Act, because all 3 sales contracts were made before inter state movement of goods and hence the exemption from tax for in transit sales under Section 6(2) was not applicable

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• Besides rejecting the exemption from central sales tax on the aforesaid basis, the assessing authorities also invoked the provisions of Section 9 and the proviso thereto, regarding levy and collection of the central sales tax, to hold that such second and third sales would be taxable in Karnataka State and not in the State from which the goods originated as per the first sale, Tamil Nadu in this instance.

• The matter was thereafter litigated in stages in appeal and finally went to SC for decision.decision.

• Supreme Court held that the dividing line between sales under Section 3(a) and those under Section 3(b) was that in the former case the inter State movement of goods happened because of the contract of sale whereas the sales under Section 3(b) were those where the contracts came into existence after the commencement of movement of goods.

•

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• The Court held that while the movement of goods did determine whether the sales were inter-State sales or were intra-State ones, it did not determine the levy of tax. The Court also held that the nomenclature given to a transaction by the contracting parties could not determine the nature of the transaction. The apex Court held that Section 6(2) relating to exemption from tax for in transit sales was only applicable to those sales which qualified under Section 3(b), as sales effected by a transfer of documents of title.

• Since, in the instant case, the subsequent sales were also sales under Section • Since, in the instant case, the subsequent sales were also sales under Section 3(a) in that they also occasioned the movement of goods from one State to another, the benefit of exemption from tax was not available at all under Section 6(2). The Court then proceeded to hold that the appropriate State that could consequently charge such subsequent inter-State sales to tax was the State from where the goods originated during their movement from one State to another, as per the first sale. The Supreme Court held that since all three sales in question were Section 3(a) sales, the proviso to Section 9 would not apply in order to enable Karnataka State to tax these subsequent sales. Accordingly, the Supreme Court held that Tamil Nadu alone could tax all three sale transactions.

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• Judgment therefore establishes a principle that if subsequent sales contracts were in place prior to the commencement of the inter-State movement of goods, such subsequent sales could not be Section 3(b) sales at all and accordingly they would not qualify for the exemption for in transit sales, as envisaged in Section 6(2) of the Act.

• A subsequent inter state sale can get covered under either Section 3 (a) or 3 (b)

• Only if a subsequent inter state sale is covered under Section 3 (b), it is entitled for exemption under Section 6(2), subject to certain conditions.

• For a subsequent sale not entitled for exemption under Sec 6(2), Appropriate State for the payment of tax will be, State from which movement of goods has commenced if the subsequent sale is covered by definition given under Sec 3(a) or a State from where such subsequent seller, if registered under the CST Act, could have obtained C Form declaration, if a sale is covered under Sec 3(b).

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• Modus Operandi of In Transit Sales

• Normally the sale is effected by endorsement of transport documents. On the backside of the document like, L.R. the vendor can put his signature and transfer the documents to buyer.

• So far view of judiciary for exemption was that transfer of documents can take place even by instruction. The buyer of first seller can give instruction to place even by instruction. The buyer of first seller can give instruction to dispatch the goods directly to his customer. If such instructions are given and accordingly the goods are dispatched to third party (i.e., buyer’s buyer) it is because of transfer effected by the buyer of first seller. The transfer takes place while booking the goods in transport and this is also a transfer during course of movement. This is known as constructive transfer. Since this transfer is taking place during course of movement from one State to other it is eligible for exemption u/s. 6(2). In such case the first seller is consignor and the buyer’s buyer is consignee. However the commercial bills will be by first seller to his buyer and then by the first buyer to his buyer.

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• In the case of M/s. Fatechand Chaturbhujdas vs. State of Maharashtra (S.A.894 of 1990 dated.12-8-1991) decided by Maharashtra Sales Tax Tribunal, it was held that sale between two local parties is first interstate sale and the sale by local party to outside party is subsequent interstate sale, duly exempt u/s. 6(2). In that case local party purchased goods from other local party and directed the same to be despatched to outside State party. Even though other local party was shown as consignor, a view was taken that while placing order there is term for outside place dispatches, and hence sales are exempt.

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• In spite of these Judicial pronouncements, after the decision of the Supreme Court in A & G Projects case, Department has taken a view that if the subsequent buyer of goods was identified prior to inter state movement of goods , a contract for sale of goods would automatically be presumed to exist and hence the subsequent endorsement of the transport/ownership documents, by way of E1/E2 endorsements, would be futile and the benefit of exemption from the CST for such in transit sales would not be available. Further if such movement is originated in Maharashtra, CST liability arises on subsequent seller registered for sales tax in Maharashtra. This has led to the issuance of seller registered for sales tax in Maharashtra. This has led to the issuance of demands in several jurisdictions and assessees are significantly challenged as a result.

• Let us analyse whether view adopted by Department is legally correct and whether any tax demands can be apprehended by subsequent sellers in Maharashtra

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• From a closer look at the SC Judgment and other case law on the matter, it appears that conclusion drawn by Department is neither intended nor warranted.

• First of all Hon. Supreme Court was not analyzing exemption under section 6(2) as such, but it has referred to section 6(2) for correctly defining scope of section 9(1), for answering limited question of fixation of the State Government to which tax on transaction has to be paid, once that transaction was admitted by the Parties, to be covered under Sec 3(a) and hence not admitted by the Parties, to be covered under Sec 3(a) and hence not eligible for exemption. Based on the established law, if a particular point is not raised before the court, judgment in the case would not be an authority on the said point.

• Secondly Hon. Supreme Court in this Judgment has not laid down anything contrary to the interpretation of that Section so far made in prominent Judicial decisions including famous Judgment of its own given way back in 1960, in the Tata Steel (11-STC-655) decision.

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• In that case, contract for subsequent sale was in place before the inter-State movement of goods commenced and sale was effected by transfer of document of title while the goods were in inter-State movement, and the sale was held to fall under 3(b) and hence qualified for exemption under Section 6(2). Though judgment in the A&G Projects case appears to lay down different principle in respect of subsequent sale, actually it reiterates the principle of mutual exclusivity for application of Sections 3(a) and 3(b), as laid down under Tata Steel Case. In the Tata Steel case, the court was required to examine the very applicability of 3(a) or 3(b) to answer the question raised before it. applicability of 3(a) or 3(b) to answer the question raised before it.

• The court in that case observed that the literal construction of the two clauses would often overlap (that is, both the situations can coexist), which was not the intention of the legislature and hence one has to narrow down the construction of these two clauses so as to make them mutually exclusive. The court then propounded a ‘carving out’ theory to establish mutual exclusivity by laying down the principle that ‘where a transaction of sale is covered by both the clauses, it has to be held to fall under clause (b)’ i.e., ‘in overlapping situations, clause (b) prevails over clause (a)’.

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• Hence, this principle laid down by the Supreme Court in 1960 gave birth to the common practice we observe today in trade and industry, of structuring the subsequent inter-State sale transaction as in-transit sale so to fall under clause (b) even though it was otherwise covered by clause 3(a).

• A pre existing order cannot thus be equated with the contract of sale. The sale takes place only when the transport documents are transferred or stood transferred by implication like constructive transfer.

• A reference to the contract coming into existence after movement commences, made by the Court in A & G Case should be construed to mean reference to Contract of Sale and not an Agreement to Sale. A pre existing order is at the most an agreement to sale but the actual transfer of documents is a contract of sale and if such transfer happens after the movement has commenced, such sale can still be covered under Sec 3 (b) and is eligible for exemption.

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• While conducting In transit Sales, it should therefore be always considered that crux of the exemption under Sec 6(2) is Sale made by way of transfer of documents of Title to the goods during their inter state movement.

• Those responsible for such sales must ensure that the sales contracts relating to the second and subsequent sales are made effective only after and not before the commencement of the inter-State movement of goods, as per the first sale.

• At Departmental Level also , a better sense appears to have gained acceptance. West Bengal VAT authorities, vide Trade Circular NO. 11/2010 dated 4-10-2010) has set out the departmental position that contract of sale and sale itself are altogether different in case of inter state sale, and a pre-existing order or pre-determined parties will not negate any 3(b) sale if other requirements are found fulfilled i.e. physical or constructive transfer of documents of title to the goods is made. Maharashtra Govt. as usual is yet to follow suit and to relieve dealers from un necessary anxiety and litigation.

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Contentious Issues

• Inter State Works Contracts

• After amendment to the constitution by inserting Article 366(29A) providing definition of the term “taxes on sale or purchase of goods” to include deemed sales, States were empowered to levy tax on sale or purchase of goods involved in execution of works contracts, if such sales were intra state sales.

• Even after amendment, no tax was payable under the CST Act on deemed sale • Even after amendment, no tax was payable under the CST Act on deemed sale of goods effected in the course of inter-State trade as the definition of sale provided in the Act did not include such deemed sales.

• The Finance Act, 2002 amended CST Act, 1956, from 11-5-2002 by substituting section 2 (g), the scope of definition of the term ‘sale’ is widened, to include therein Deemed Sales.

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• The definition of the term “sale price” of the CST Act was amended by the Finance Act, 2005 from 13-5-2005, whereby a proviso was inserted in section 2(h) of the Act. Accordingly, for works contract sales, the Central Government is given power to prescribe by way of rule to determine the sale price of goods in a prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed. Till date no such rules are prescribed. The SC in case of M/s. Mahim Patram 6 VST 248 (SC) held that till Rules are prescribed by government to determine sale price of works contract sales, State rules shall be applicable to determine sale price of the goods for sales, State rules shall be applicable to determine sale price of the goods for levy of tax under the CST Act. Therefore, in Maharashtra, provision of rule 58 shall apply for determination of sale price for levy of CST.

• Similarly, sub-clause (ja) is inserted in section 2 of the CST Act by Finance Act, 2005 defining the term “works contract” as a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing,

• processing, fabricating, erection, installation, fitting out, improvement,

• repair or commissioning of any movable or immovable property

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• Section 3 of the CST Act, provides for principals to determine when a sale or purchase of goods takes place in the course of inter-State trade or commerce. These principles have been applied by the courts in case of deemed sales like works contract and lease transactions. After the amendment to CST Act, 1956, by Finance Act, 2002, the position is very clear for application of provisions of section 3 to the deemed sales.

• In case of works contract sales, inter-State movement of goods takes place of goods with which works contract is executed as well as processed goods. In goods with which works contract is executed as well as processed goods. In both cases, a sale is deemed to have effected in the course of inter-State trade and liable to pay tax under the CST Act.

• In case of works contract, the property in goods generally passes as and when goods are used in works contract and not on delivery of goods. Section 3 (b) of the Act provides for passing of property in goods in a particular manner; i.e., by transfer of document of title to the goods. Unless, the property in goods passes by transfer of document of title to the goods, while it is in transit from one State to another the provisions of section 3(b) and section 6(2) are not applicable.

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• However in such cases, it is possible to contend that contract is not an indivisible works contract but divisible contract involving sale of goods by transfer of document of title to the goods as such exempt from payment of tax under section 6(2) of the CST Act, subject to production of required form C and E-I.

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• Sale in the course of import or export – Section 5

• Under section 5 of the CST Act, no tax is payable on any sale or purchase of goods which occasions import of goods into India or export of goods outside India. Further any sale of goods effected by transfer of document of title to the goods before it crosses the custom frontier of India, popularly known as High seas sale, is also exempt from payment of tax under section 5(2) of the Act. Under section 5(3) of the CST Act, any sale of goods to the exports to comply terms of any pre existing export order is also exempt from payment of tax, subject to production of form H.

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• The provisions of section 5 apply to works contract sales also, even prior to amendment to section 2(g) of the Act from 11-5-2002.

• The Commissioner of Sales Tax in case of Mazgaon Dockyard (DDQ dt. 31-10-1995) allowed the claim of the dealer for exemption under section 5(2) of the Act and held that when under the contract, the good are imported by the contractor under the specific terms of the contract and used in works contract then it has occasioned movement of goods from outside India and exempt under section 5(2) of the CST Act.under section 5(2) of the CST Act.

• As a result of amendment by Finance Act, 2002, the dealer can issue Form C for purchase of goods in the course of inter-State trade for the purpose of works contract sales.

• Under section 8 of the Act, sales to the SEZ or developer of SEZ, is exempt from payment of tax against Form I. This provision is applicable to Works contracts.

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B) Verification of Turnover of Purchases and sales tax set-off :-• Sales Tax under VAT rests mainly on system of set off of VAT paid on purchases

against VAT payable on sales.

• Audit must ensure that all purchases whether of raw materials, sundry expenses, machinery, fixed assets etc. are booked as Purchases. Correct reporting of Purchases can be achieved by the Tax payer by integrating accounting system with purchase register for sales tax. As per MVAT Act, turnover of purchases covers all purchases of goods including purchases under hire purchase, lease and works contracts.

• Dealer should be advised to avoid use of Journal Vouchers for Purchase Bookings and restrict use of Debit and Credit Notes only for rate adjustments and goods and restrict use of Debit and Credit Notes only for rate adjustments and goods returns after the original bill date. Provisions of Section 63 (6) for recoding of effects of debit notes and credit notes in the purchase turnover should be borne in mind. It is to be noted particularly that there is no change in the Provisions of CST Act with respect to DN/CN and hence CST related adjustments should be made only in respective Financial Year for the purposes of purchase register under Sales Tax

• Branch Transfers in case of purchases are stock transfers received by the dealer during the period from its own branch or from his principle or agent. It is likely that accounting entries are not passed for these transfers, in which case details should be available from stock register. Valuation as per Transaction Value (Assessable Value) adopted for Excise can provide an appropriate base in case of manufactured goods and excise invoice can thereby constitute as a proper supporting document.

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Set off Calculations

Set-off is allowed of the tax paid by the dealer on the following purchases

Tax Paid on purchases of goods on or after 1-4-2005. As a result of this practically all types of goods purchased for business on which MVAT is paid are purchases eligible for Set off. Illustrative list of such items is given below for better understanding of eligibility for set off. (subject to restrictions u/r 53 & 54)

Entry tax paid on entry of specified goods under the Maharashtra Entry of Goods into Local Areas Act, 2002.

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Basic Conditions for Set offThe set-off is available subject to the following b asic conditions:

1) The dealer is registered under the BST Act or the MVAT Act on the date of purchase & in case of capital goods date of purchase is during the year of Registration.

1) The dealer produces “Tax Invoice” in respect of purchases

2) The dealer has to maintain chronological account of purchases (Purchase Register) with details of date of purchase, name, address and registration number of suppliers, tax invoice number, purchase price, and amount of sales tax, if any, charged by the supplier.

3) Set-off is available immediately in the month of purchases of the eligible goods.

4) In the case of use of goods in the contingencies specified in rule 53, the reduction/retention is to be made in the month in which the contingencies occur and the balance set-off should be claimed.

5) Where the dealer unable to identify the purchases with use of the goods, the same shall be presumed to have been used or consumed on FIFO basis.

6) Where the set-off available exceeds the liability for payment of tax, such excess is to be adjusted against the tax liability under the CST Act and the balance, if any, is to be carried forward to the subsequent period till the end of the financial year. Carry Forward of Refund from FY 2008-09 is not allowed for FY 2009-10

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Sequential steps of data compilation in e-704 Form:-

Sr. no. Steps 1) Compilation of Annexures from A to K. (whichever applicable) 2) Compilation of Schedules I to VI (whichever applicable) 3) Updation of Part II 4) Updation of Part I 5) Letter of submission 5) Letter of submission

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THANK YOU

From

CA M.B. ABHYANKAR

E-mail:- mbabhyankar@gmail.com

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