It is said and also felt by many of us at times, that taxation and logic do not go together. The taxation laws are framed to benefit the State exchequer. While introducing new laws or amendments, the Lawmakers always love to promise for simpler and transparent tax regime. The law administrators however have a different view. Though the Courts have laid down in clear terms that the burden to prove that a transaction is subject to tax is always on revenue, it is the taxpayer who faces huge paper demands. There is no accountability on the Taxing Officer if ultimately it is proved that such paper demands cannot stand the test of Law

That’s where we the Tax Consultants step in. The theme of present Convention is ‘Taxation Policy –Economic development’. The theme is apt as Indian Tax system/policies are in a very dynamic and revolutionary stage; be it direct taxes or indirect taxes.

While the major change is round the corner, the principals of interpretations and the law laid down by the Apex Court and various High Courts will continue to not only guide all the stakeholders but will also help us to understand and implement the new law/s.

I have divided the subject allotted to me in two as they are altogether different subjects. Part A deals with Recent controversial issues with special reference to works contracts. Part B deals with Subsequent sales under CST Act with special reference to A & G Project’s case.

Part A — Recent controversial issues with special reference to works contracts

The law relating to works contract is pretty well settled with various Supreme Court’s judgments. I have selected few recent controversies under works contract with special reference to recent judgments.

Applicability of State provisions to CST transactions

a.1) The definition of “sale” was recast in the year 2002 so as to fall in line with the Constitutional amendment. By the Finance Act of 2002, a new definition of “sale” was substituted in section 2(g) of the CST Act which included “transfer of property in goods” (whether as goods or in some other form involved in the execution of a works contract). This amended definition was effective from May 11, 2002. This was followed by another amendment in 2005: i.e., addition of a proviso to the definition of “sale price” contained section 2(h). The definition and proviso reads thus:

“Sec.2(h) ‘sale price’ means the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged:

Provided that in the case of a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, the sale price of such goods shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to be the sale price for the purposes of this clause.”

a.2) One more amendment made in 2005 related to section 13. Rule­making power was conferred on the Central Government to provide for “the manner of determination of the sale price and the deductions from the total consideration for a works contract under the proviso to clause (h) of section 2.”

Works contract is brought within the purview of sale. Wherever the said words are used, the new definition would be applied. Section 8 provides for rates of tax on sales in the course of inter-State trade or commerce. Section 8A provides for determination of turnover. Section 9 provides for levy and collection of tax and penalties. The said provision would, thus, be applied in respect of transfer of property in goods involved in the execution of works contract as well.

a.3) Section 9(2) of the CST Act is of wide amplitude. It confers powers on the officers of the State to make assessment or reassessment, which the officers of the State have, under the general sales tax laws, to carry on assessment under the CST Act, as if it is an assessment under the State Act. The expression ‘as if’ is of some significance. The powers conferred and the procedures laid down under the State sales tax laws would, therefore, be applicable also for the purpose of carrying out assessment under the Central Act. Sub-section (2) of section 9 provides that the authorities under the State Act for the purpose of making assessment and reassessment under the CST Act shall have all the powers which they have under the general sales tax law of the State. Assessment would mean the entire process of computation and levy of tax.

a.4) The Hon’ble Supreme Court was confronted with a typical situation in case of Ms. Mahim Patram Pvt. Ltd. vs. Union of India (6 VST 248) (SC). The appellant in the said case was involved in the printing of question papers, etc. The activity of the appellant admittedly amounted to a Works Contract in the course of inter-State trade and commerce. The appellant contended that in absence of any rule for determination of the Sale Price, in respect of transfer of property in goods involved in the execution of the works contract, as envisaged u/s 2(h) of the CST Act, 1956, the taxable turnover u/s 8A of the CST Act cannot be computed for the purpose of levy of tax on the transfer of property of goods involved in execution of works contract in the course of inter-State trade and commerce. It was submitted by the appellant that the determination of sale price of such goods cannot be left to the whims and fancies of the authorities.

a.5) The Apex Court considered sections 2(g), 2(j a), 13, 8A, 9(2) of the CST Act. The Apex Court also noticed sec. 3(f) of the Uttar Pradesh Sales Tax Act and rule 9 of the Uttar Pradesh CST Rules. The Supreme Court referred to a plethora of precedents and held that

“If the State Rules have been made applicable using rule 9 of the State Rules, it makes not only the original rule duly applicable in the case of assessment of Central Sales Tax law, but also as amended from time to time.

So long as, therefore, the Central Government does not make any rules, the determination of turnover may be carried out by the assessing authority in terms of the State Rules, in view of section 13(3) of the CST Act read with rule 9 of the Central Sales Tax (U.P.) Rules, 1957. The rules made by the State Government as also the provisions of the Act are incorporated by reference. When a provision is incorporated by reference, it need not be so stated again and again.”

a.6) The validity of Central Sales Tax (UP Rules) was not under challenge. The SC therefore opined “Furthermore, it is not necessary that the charging provision and the machinery provisions must be found at the same place in the same section, as the machinery provisions may be found elsewhere. If the rules of the State are applicable, rule 44-B of the Uttar Pradesh Trade Tax Rules,1948 would apply, which provides for computation of net turnover by providing for deduction under section 3-F(2)(b) of the 1948 Act from the gross turnover. Section 3-F(2) (b) of the 1948 Act in turn provides for all the deductions as has been directed by this court in Gannon Dunkerley [1993]1 SCC 364(1).”

a.7) Referring to the proviso the Apex court observed, a proviso inserted subsequently cannot be the determinative factor for restricting the operation of the Act. The proviso would be applicable subject to the other provisions of the Act. If in the absence of any rules, the determination of turnover becomes possible, an assessee or a dealer cannot derive any benefit by reason of non-framing of any rule which is contemplated under the Act.

a.8) The appellant relied strongly on yet another decision of Supreme court in case of Khemka and co reported in 35 STC 571(SC). Referring to the Khemka’s case the S.C. observed that the question which arose for consideration was as to whether the assessee under the CST Act could be made liable for penalty under the provisions of the State Sales Tax Act. Such a penalty was sought to be imposed for default in payment of tax within the prescribed time. The source of power to impose penalty under the CST Act cannot be drawn from the State Act and in that view of the matter, the contention in regard to the application of sub-section (2) of section 9 of the CST Act in that case did not find favour with this court. The said decision, however, clearly is an authority for the proposition that the recourse to the State Act and the rules framed thereunder can be resorted, inter alia, for the purpose of assessment or reassessment.

a.9) The Apex Court thus in Mahim Patram held that the 2005 amendments are not retrospective in operation. Furthermore, they provide merely for an enabling provision. If enough machinery provisions can be found in the existing Act, it is not necessary to construe the provisions having regard to the subsequent legislation

a.10) The ratio in case of Mahim Patram is discussed at length by the CST Appellate Authority in a larger bench decision in case of Commissioner of VAT New Delhi vs. State of Haryana and Another (23 V S T 10 (CSTAA)). One of the issues involved in the said case was whether the lump sum scheme of Tax Payment in respect of Works Contracts can be applied to the Inter-State Works Contract. Section 9 of the Haryana Vat Act.

The manner of ascertainment of sale price has been specified in Explanation (i). Rule 49 of the Haryana Value Added Tax Rules, 2003 provides for a lump sum scheme of tax payment in respect of works contract. The framing of such rule is in accordance with section 9 of the HVAT Act. The scheme provided that “A contractor liable to pay tax under the Act may, in respect of a works contract awarded to him for execution in the State, pay in lieu of tax payable by him under the Act on the transfer of property (whether as goods or in some other form) involved in the execution of the contract, a lump sum calculated at four per cent of the total valuable consideration receivable for the execution of the contract, by making an application to the appropriate assessing authority within thirty days of the award of the contract to him.

a.11) The CSTAA held that the procedure for arriving at the sale price in relation to works contracts has been put in place in the HVAT Act which was enacted in 2003 by repealing the Haryana General Sales Tax Act, 1973. It is, therefore, clear that the ratio of the decision of the Supreme Court in Mahim Patram case [2007] 6 VST 248 applies with equal force to the present case.

The CSTAA observed that by taking recourse to section 9(2) of the CST Act in tune with the line of reasoning adopted by the Supreme Court in Mahim Patram case [2007] 6 VST 248, the provisions in the Haryana Act and the Rules relating to modalities of assessment of the receipts from works contract can be pressed into service while making an assessment under the CST Act also.

True, under the CST (Haryana) Rules, 1957, there is no rule corresponding to rule 9 of the CST (UP) Rules, but, that does not make material difference for the reason that the U.P. Rules is a mere reiteration of the principle that flows from section 9(2) of the CST Act as interpreted by the Supreme Court. Rule 9 of the U.P. Rules referred to by the Supreme Court only makes explicit what is implicit in section 9(2). The conclusion of the Supreme Court does not merely rest on rule 9. The fact that separate rules have not been framed under the Central Act is of no legal consequence, as held by the Supreme Court. Provisions in the State Sales Tax Act/VAT Act can be referred to for the purpose of ascertaining the sale price/turnover relating to the transfer of property in goods involved in the execution of works contract. In the instant case, the turnover under the CST Act has been ascertained by deducting a certain percentage towards the cost of work and labour. There is no dispute on the quantum of turnover assessed.

a.12) The above decision of CSTAA is after considering more than 18 Supreme Court Judgments and would apply to the Authorities all over India. However the issue in case of Mahim Patram related to determination of Sale Price and the issue before the CSTAA was applicability of composition scheme to the Works Contractor. The composition is offered by the State under various conditions and are subject to certain prohibition like not claiming set off, or disallowance of set off to some extent etc. Take for example section 42(3) of the MVAT Act which prescribes composition for Works Contractor specifically refers to the composition in lieu of amount of tax payable by him under this Act …..Therefore the question here would be whether the decision of CSTAA can be made applicable to the inter-State works contract from Maharashtra or not. The composition under the MVAT Act is prescribed under the Act. There is nothing in the Central Sales Tax (Bombay) Rules specifically referring to composition etc. CST (Bombay Rules) are procedural rules. With due respect to CSTAA the ratio of Mahim Patram cannot be blindly applied to the composition prescribed especially under the MVAT Act.

a.13) Applicability of TDS to inter-State transactions
As far as MVAT is concerned the provisions of Tax Deducted at Source are made applicable only to the Works Contract and that too to the employer effecting purchases within the State. The Guwahati High Court in case of Smt. Jayshri Borgohin vs. State of Assam (7 VST 604 (Gau)) was concerned with the issue relating to TDS only. The question posed by the Writ Petition was whether section 27 of Assam General Sales Tax Act authorize the Govt. Dept. while deducting tax at source for transfer of property of goods involved in Works Contract, to deduct tax at source for labour component, declared goods and goods obtained in the course of sale or purchase of goods where such sale or purchase takes place outside the State or in the course of import of goods into or export of the goods outside territory of India or in the course of inter-State trade and commerce as envisaged under section 7(4) of the Act. The Petitioner contended that the Govt. Departments Action to deduct tax at source in terms of section 27 of the Act has burdened the Petitioner to pay the tax at sources for all labour and service charges as well as other related components, when the petitioner are not liable to pay any taxes.

a.14) The Hon’ble Court referred to the decision by the very Court in case of Arunodai Construction Company (Pvt.) Ltd. vs. State of Assam reported in 127 STC 561 (Guwahati). The challenge in the case of Arunodai was to section 27 of Assam General Sales Tax Act which provided for deduction by way of tax from payment to contractors in respect of transfer of right to use. Holding the validity of the said section Guwahati High Court observed that words sale or supply of goods liable to tax under this Act as appearing in section 27 covers supply of goods in works contract too. The Court further clarified that only those goods which are liable to tax or which are included in the taxable turnover will be subject to deduction of tax at source. Therefore the deduction and exemption provided in the AGST Act regarding inter-State sale, declared goods, exempt goods shall also be applicable in case of TDS u/s 27 of the AGST Act. The Guwahati High Court for coming to this conclusion has referred to and relied on Gannon Dunkerly & Co. 9 STC 353 (SC), Builders Association of India (73 STC 370) (SC), Second Gannon Dunkerly’s case 88 STC 204 (SC) etc..

a.15) The Court has relied on one of the old cases of Supreme Court in the matter of Bhawani Cotton Mills Ltd. vs. State of Punjab (20 STC 290) (SC). The Supreme Court has in the said case observed that “if a person is not liable for payment of tax at all at any time, the collection of a tax from him, with a possible contingency of refund at a later stage, will not make the original levy valid; because, a particular sale or purchases are exempt from taxation altogether they can never be taken into account at any stage for the purpose of calculating or arriving at a taxable turnover and for levying tax.” Yet two more decisions of Supreme Court relied on are the case of Steel Authority of India Ltd. (118 STC 297) (SC) and Natpha Jhakery Jt. Venture vs. S/O HP (118 STC 306) (SC) In these cases the provisions of TDS were held as conferring uncannelized and arbitrary powers to the concerned person to deduct tax up to 4% from the sum payable to Works Contractor irrespective of the fact whether ultimately the transaction is liable for payment to any sales tax at all. The provisions in dispute made it obligatory for an employer to deduct the tax from transactions relating to Works Contract on bills or invoices raised by the Works Contractor i.e. on all works contract on valuable consideration payable for transfer of property in goods involved in works contract irrespective of the fact whether the sales are inter-State sale, outside sale or export sales, which are not eligible to tax. The Guwahati High Court therefore read down TDS provisions under the Act by holding that the word sale or supply of goods liable to tax under the Act will cover supply of goods in works contract also and only those goods which are liable to tax and which are included in taxable turnover will be subject to deduction of TDS. It further held that the TDS provisions in section 27 will have to be read together with the charging section provided for deduction and exemption as regards inter-State trade, declared goods exempted goods etc. and these deductions will be applicable in case of TDS provisions as well.

The AGST Act provided for certification from the assessing authority for NO TDS. The Court held that this certification will be available to works contractor as well.

a.16) The above discussion gains importance on account of the contractors carrying on the work in the other State or carrying on inter-State transactions. It is my experience that the contractors who carry on transactions in the other State (Not Inter-State Works Contracts) are also subjected to the local TDS i.e. State in which they have Registered Office. For example if a dealer is registered in Maharashtra and he carries on works contract in different States say M.P., UP & Rajasthan, etc. then the employer in the State of Maharashtra can deduct TDS under the Maharashtra Value Added Tax only to the extent it is liable in the State of Maharashtra. For the works undertaken in the other States the TDS provisions of the respective State will apply.

a.17) A person doing dyeing and printing job or repair job, where the goods namely cloth for dyeing or machinery for repair are supplied from other State and after dyeing / printing or after repair if such goods are returned to the State of Origin i.e. State from where they are delivered for repair or dyeing, it is clear case of inter-State works contract because as a result of sale the goods move from one State to another. After 11-5-2002, the sale under C S T Act include works contracts. Applying Arunodai Construction case in my opinion No TDS can be deducted in the State of Maharashtra for such inter-State works contract. The applicability of Mahim Patram case was not before the Guwahati H.C. in Arunodai’s case. However later on in Jayshri case the Judgment of Mahim Patram was very much available.

a.18) The issue therefore is if TDS provisions are treated as machinery provision and if under CST Act there is no provision of TDS whether taking recourse to Mahim Patram’s case the authorities can direct the employers to deduct TDS from inter-State works contract as well. In my opinion once provision is treated as machinery and also since CST Act do not provide for any TDS provision, the State cannot direct tax deduction on the inter-State transactions of works contract.

a.19) Somewhat similar situation arose in Punjab &Haryana High Court in the matter of Keshob Plant vs. BSNL reported in 22 VST 422 (P & H). Hon’ble Justice Rajesh Bindal followed the case of Steel Authority of Indja Ltd. 118 STC 297 (SC) and held that –

“Section 10C of the Punjab General Sales Tax Act, 1948 provides for deduction of amount as Sales Tax towards the Contractor’s or sub-contractor’s liability at the time of payment by contractee or contractor, respectively in pursuance of a works contract regardless of the fact that the value of the works contract includes the value of goods transferred in the course of inter-State sale, sales outside the State or sales in the course of import. The provisions are therefore beyond the powers of the State Legislature for the State Legislature may make no law levying Sales Tax on inter-State sales, sales outside State or sales in the course of import. If a person is not liable for payment of tax at all at any time the collection of tax from him, with a possible contingency of refund at a later stage, will not make the original levy valid because, if particular sales and purchases are exempt from taxation altogether, they can never be taken into account, at any stage, for the purpose of calculating or arriving at the taxable turnover and for levying tax. Therefore section 10C of the Punjab General Sales Tax Act, 1948 is ultra vires the powers of the State Legislature. “

a.20) One another interesting case relating to TDS is the case of Pritam Infrasystems Ltd. vs. BSNL reported (22 VST 440). In this case petitioner was awarded a contract for performing Data Entry for Respondent BSNL. The Petitioner challenged the provisions of TDS of the Punjab VAT Act as in the absence of any mechanism to exclude transaction not eligible to Sales Tax. It was the submission of the Petitioner that no sale or purchase are involved in executing the works contract for executing the job of Data Entry. There was no transfer of goods or sale of goods, No tax was attracted. As there was no sale or purchase the provision of TDS should not be made applicable. Even though the contract between the parties before the Court provided for deduction on account of deduction from the payment to be made to the Petitioner the Court held that despite the agreement between the parties the respondent cannot make any deduction from the payment to be made to the petitioner merely because agreement between the parties in the absence of tax being leviable under the statutory provision. The case of Keshob Plants (22 VST 422) was followed.

a.21) Photography – Whether Works Contract
The processing and developing of the photographs in the usual course of business after taking photographs of the person whether amounts to works contract or not was the question before Orissa High Court. In an elaborate Judgment in case of Studio Sujata vs. Commissioner of Sales Tax Orissa, Cuttack reported in 17 VST 289 the Orissa High Court has replied to a very crucial question .

Admittedly the photograph of the client are not commercial items as they can neither be purchased or sold. To develop these photographs employment of skilled labour is essential. The petitioner contended the contract as the contract of service. The photographs have no commercial value and are not marketable so there is no question of works contract. The photographs have no utility or value to any other person than the customer. The photographer thus renders his service to the customer and the customer in turn pays for the service to the photographer. The petitioner compared his services with the activity of a firm or a professional giving opinion on papers. Such activities are done to serve the client and therefore they do not come within the purview of definition of Goods, Sale, Dealer or Works Contract. the petitioner therefore submitted that papers purchased on payment of Service Tax are for rendering similar services and papers which are used in photography is incidental and insignificance.
a.22) Reliance was placed on the Supreme Court decision in case of Asstt. STO vs. B.C. Kame (39 STC 237) as also on Photo Emporium vs. Additional District Magistrate (77 STC 199)(ORI), Spectrum Foto Colum Lab vs. Commissioner of STO (110 STC 105) )(RTT), Studio Kamalaya vs. STO (89 STC 307)(WBTT), Bavens vs. Union of India (97 STC 161) (Ker), Keshoram Surendranath Photomake Pvt. Ltd. vs. ACCT (121 STC 175) (Kar), Rainbow Colour Lab, vs. S/O MP 118STC 9 (SC) BSNL vs. Union of India (145 STC 91)(SC), etc. The revenue relied on Imagic Creative Pvt. Ltd. vs. CCT (12 VST 271) (SC).

Considering all the arguments the Orissa High Court declared that Tribunal was not right in holding that the tax is eligible for photographs as execution of works contract.

As regards second question posed by the appellant as to whether the conclusion of the Tribunal was perverse due to non consideration and inconsideration of facts and law and therefore liable to be set aside for rehearing the question was answered in affirmative.

a.23) This Judgment confirms the fact that in addition to Works Contract and Sales Transaction in case of contracts involving service only the incidental passing of property is permitted and merely because there is transfer of property which is incidental and insignificant the transaction cannot be termed as works contract. While I write this I am fully conscious of the Bombay High Court Judgment in case of Matushree Textile 32 STC 539 (Bom). Fortunately the Judgments of the Apex Court in case of Godrej Philips Ltd. 139 STC 537 (SC), BSNL Ltd. 145 STC 91 (SC) are all the later happenings and the Orissa High Court has correctly held the photography as Service Contract. Incidentally the State of Maharashtra has despite Matushree’s Judgment exempted dyeing & printing process from works contract. This may be probably because of the reason that if one works out transfer of property in case of dyeing and processing the transfer of property is very negligible. There is more of wastage and consumption of material than the transfer of property. Thus with the advent of tax on services as also levy of service tax on works contract the situation will become more complicated when it comes to determination of turnover and taxable turnover .

a.24) Works Contract – Contractor & Sub Contractor liability
This is an area where each State has treated the transaction between contractor and sub-contractor differently. As far as State of Maharashtra is concerned the sub-contractor is treated as an agent of main contractor and the transaction between contractor or main contractor are neither subject to tax nor subject to TDS provisions. Either of them can pay the tax applicable under the MVAT Act and to the extent tax is paid by the sub-contractor the contractor is not liable to pay tax and vice versa.
a.25) In a contract where the main contractor off loads or entrusts the entire contract to a sub contractor the issue will be whether the main contractor is liable to make payment of tax for the differential amount. This differential amount is nothing but profit of main contractor. Admittedly there is no transfer of property by the contractor to the employer and therefore the contractor have no burden of tax.

A very interesting case before the Andhra Pradesh High Court was in the case of Larsen and Toubro reported in 148 STC 616 (AP). Ms L&T in this case received a contract from the employer. Part of the contract was executed through Sub-contractor who issued tax invoice to L&T. The sub-contractor paid the tax to the extent invoice raised on L&T. In the return filed under the APVAT Act Ms. L&T did not include the turnover effected through sub contractors. The view of the assessing officer was that such turnover is includable in the turnover of L&T . The AP HC held that the turnover of sub contractor cannot be included in the turnover of L&T. The State of AP filed SLP against the said judgement. The SC in the judgment reported in 17 VST 1 (SC), observed that “‘The question which is raised before us is: whether the turnover of the sub-contractors (whose names are also given in the original writ petition) is to be added to the turnover of L&T. In other words, the question which we are required to answer is:

whether the goods employed by the sub-contractors occur in the form of a single deemed sale or multiple deemed sales. In our view, the principle of law in this regard is clarified by this Court in the case of Builders’ Association of India (73 STC 370). By virtue of Article 366 (29A)(b) of the Constitution once the work is assigned by the contractor, the only transfer of property in goods is by the sub-contractor(s) who is a registered dealer in this case and who claims to have paid taxes under the Act on the goods involved in the execution of the works. Once the work is assigned by L&T to its sub-contractor(s), L&T ceases to execute the works contract in the sense contemplated by Article 366(29A)(b) because property passes by accretion and there is no property in goods with the contractor which is capable of a retransfer, whether as goods or in some other form.

“Ordinarily unless there is a contract to the contrary in the case of works contract the property in the goods used in the construction of a building passes to the owner of the land on which the building is constructed, when the goods or materials used are incorporated in the building.”

a.26) Therefore if one keeps in mind the above quoted observation of Supreme Court in the case of Builders’ Association of India,the position becomes clear, namely, that even if there is no privity of contract between the employer and the sub-contractor, that would not do away the principle of transfer of property by the sub-contractor by employing the same on the property belonging to the contractee. This reasoning is based on the principle of accretion of property in goods. It is subject to the contract to the contrary. Thus, in view of the SC, in such a case the work, executed by a sub-contractor, results in a single transaction and not as multiple transactions. This reasoning is also borne out by section 4(7) which refers to value of goods at the time of incorporation in the works executed. If the argument of the Department is to be accepted it would result in plurality of deemed sales which would be contrary to Article 366(29A)(b) of the Constitution as held by the impugned judgment of the High Court.  Moreover, it may result in double taxation which may make the said 2005 Act vulnerable to challenge as violative of Articles 14, 19(1)(g) and A 265 of the Constitution of India as held by the High Court in its impugned judgment.

a.27) Inter-State Works Contract
What is inter-State works Contract has always been a debatable issue. With the amendment to the definition of ‘sales’ under the CST Act on 11-5-2002, all the attributes of normal sale will apply to works contract as well. There is a clear distinction between inter-State purchase of goods for use in execution of WC and i/s WC. Such purchases can be effected on C form by the contractor. There is also a possibility of having purchased in course of import for use in execution of Works Contract, Take for example import of equipment or goods specifically for executing a WC. At times the terms of the contract provides for import of material exclusively for use in execution of WC. Then subject to the evidence available to prove inextricable link, the supply of imported material by the contractor to the employer will be eligible for claim of sale in course of import i.e. first limb of section 5(2) of the CST Act, few of the examples of inter-State WC are reported in.

1. Project and Service Centres – 82 STC 89 (Gau)

2. ECE Industries 144 STC 605 (Ker)

3. NTPC 127 STC 280 (SC)

4. ECE Industries 14 VST 40 (P&H).

a.28) The latest in the list is the case of Comm. of VAT, New Delhi vs. State of Haryana and Another (23 VST 10 (CST A.A). The larger bench of CST A.A have dealt with a case of inter-State works contracts wherein, the assessee M/s Dhingra Const. Co Ltd. undertook certain bituminous road works for improving, strengthening and/or re carpeting of roads and laying roads. The contract was awarded by Municipal Corporation of Delhi PWD. The contracts were entered into by assessee’s registered office at Gurgaon. Admittedly both the parties were aware of the legal position that hot-mix plant cannot be set up and operated within the NCT of Delhi in view of the directions of SC of India. Therefore admittedly the contractor could not have prepared bituminous mixture in Delhi. It was also a fact that none of the contracts contained stipulation or a pre condition of the contract that the goods namely bitumen mix should move from Haryana or some other state to Delhi for the purpose of doing the work.

a.29) During the year 2003-04, the bituminous mixture, known as dense asphalt concrete consisting of bitumen, stone grit and stone dust/sand was prepared at the hot-mix plant at Dhumsapur (near Gudgaon in Haryana State) owned and operated by the assessee. The hot-mixed bitumen could not be stored for long once it was brought to the site and it had to be consumed on the same day. The mixture had to conform to the specifications laid down in the contracts. After the hot-mixed substance emerged, it was dispatched from the plant at Dhumsapur (Haryana State) to various sites in Delhi by trucks. In some of the delivery notes, inter alia, the location of the works site in Delhi and the Department concerned were given. The assessee had paid local sales tax on the turnover. Central Sales Tax on the turnover was also demanded in respect of the same transactions. The first Appellate Authority rejected the appeal by the assessee.

a.30) The CST A.A referred to the legislative history as also to the famous decisions of the SC in case of Gannon Dunkerly, Builders Association, etc. The CST A.A referred to the decision u/s 3(a) of the CST Act like Tata Iron and Steel Co. Ltd. vs. S.R. Sarkar (11 STC 655), CST vs. Bakhtavar Lal Kaislash Chand 87 STC 196 (SC), Kelvinator of India Ltd. (32 STC 629). In IDL Chemical Ltd. vs. State of Orissa reported in 10 VST 644. The SC had observed that even if the contract triggered the movement of goods, it amounts to inter-State sale . In case of K.B Saha and Sons (7 VST 214), The SC interpreted Sec 3 (a) of CST Act and observed that “In order to decide whether a sale is an inter-State, it is sufficient that the movement of goods should have been occasioned by the sale or should be incidental thereto. What is important is that the movement of goods and the sale must be inseparably connected. It is not necessary that there should be an existence of contract of sale incorporating the express or implied provision regarding inter-State movement of goods. Even if hypothetically it is stated that such a requirement is necessary in the facts of the present case, such implied stipulation does exist...”

a.31) The phrase “It is not necessary that there should be an existence of contract of sale...” cannot be read literally so as to mean that a contract of sale need not exist under section 3(a). The tenor of discussion and especially the reaffirmation of the law laid down in a series of cases would indicate that the contract of sale giving rise to the inter-State movement of goods was considered by the learned judges as a necessary ingredient of section 3(a). In the context, the observation should be reasonably interpreted so as to mean that there need not be a formal contract of sale wherein the stipulation regarding inter-State movement of goods should be found. Even in the absence of a specific stipulation in a written contract, the inter-State movement of goods can be inferred from the terms and features of the contract of sale. The CSTAA referred to few more SC judgments, i.e Co–operative Sugars (Chittur) Ltd. (90 STC 10 (SC), Hanuman Mining Corporation Ltd. (25 STC 60) (SC), Oil India Ltd. (35 STC 445 (SC), State Trading Corporation (14 STC 188 (SC))

a.32) The CSTAA after much debate held that in this particular contract. the bitumen mix obtained from the hot-mix plant cannot be stored and sent to the other road works as and when the contractor desires. It has to be necessarily utilized within a day. It is also pointed out by the assessee’s counsel that the specifications regarding the quality and content of material differ from contract to contract, as seen from the work orders and the Schedules appended to the contract. Though the assessee or the first respondent’s representative had not submitted a comparative analysis with requisite details, on a look at some of the legible copies of documents filed, the CSTAA found some force in this contention.

a.33) An argument was raised by the learned counsel for the appellant that nothing prevented the diversion of goods to another spot by the appellant and therefore the inextricable link between the contract and the movement of goods is not established. The CSTAA observed that it is difficult to accede to the contention which is built up on the premise of theoretical possibilities and rare situations. In the goods delivery note and other documents accompanying the truck, the destination was noted so that the contention that the material is earmarked cannot be countenanced.

a.34) In this decision the CSTAA has considered many important judgments under sec. 3(a) of CST Act and applied the ratio to works contracts. Therefore the conclusion is obvious as stated by me earlier, with the amendment to the definition of sale under CST Act ,it is possible to levy tax on inter-State works contracts. How to compute the tax is decided my Mahim Patram’s case. Till the CST Act lays down procedure, the State Act’s relevant provisions for computation of tax liability will apply of course to the extent permitted under the law.

I would like to point one decision of Maharashtra Sales Tax Tribunal in case of BHEL (Appeal 72/05 dt. 27-7-2007.) The MSTT held in this case that no composition tax is payable on the turnover representing inter state sale.

Part B – A & G Projects – Subsequent sales

b.1) In this controversial case before the SC reported in 19 VST 239 , the issue involved was interpretation of the provisions of Sec. 3(a) and section 3(b) of the CST Act. The relevant sections are produced as follows.

“sec. 3. 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) Occasions the movement of goods from one State to another;

or

(b) . . . “

b.2) Sec. 6. Liability to tax on inter-State sales

(1) . . .

(2) Notwithstanding anything contained in sub-section (1) or sub-section (1A), where a sale of any goods in the course of inter-State trade or commerce has either occasioned the movement of such goods from one State to another or has been effected by a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods, —

(a) to the Government, or

(b) to a registered dealer other than the Government, if the goods are of the description referred to in sub-section (3) of section 8, shall be exempt from tax under this Act:

Provided that no such subsequent sale shall be exempt from tax under this sub-section unless the dealer effecting the sale furnishes to the prescribed authority in the prescribed manner and within the prescribed time or within such further time as that authority may, for sufficient cause, permit,—

(a) a certificate duly filled and signed by the registered dealer from whom the goods were purchased containing the prescribed particulars in a prescribed form obtained from the prescribed authority;

and

(b) if the subsequent sale is made,—

(i) to a registered dealer, a declaration referred to in clause (a) of sub-section (4) of section 8; or

(ii) to the Government, not being a registered dealer, a certificate referred to in clause (b) of sub-section (4) of section 8.

b.3) Sec.9. Levy and collection of tax and penalties.—(1) The tax payable by any dealer under this Act on sales of goods effected by him in the course of inter-State trade or commerce, whether such sales fall within clause (a) or clause (b) of section 3, shall be levied by the Government of India and the tax so levied shall be collected by the Government in accordance with the provisions of sub-section (2), in the State from which the movement of the goods commenced:

Provided that, in the case of a sale of goods during their movement from one State to another, being a sale subsequent to the first sale in respect of the same goods and being also a sale which does not fall within sub-section (2) of section 6, the tax shall be levied and collected, —

(a) where such subsequent sale has been effected by a registered dealer in the State from which the registered dealer obtained or, as the case may be, could have obtained, the form prescribed for the purposes of clause (a) of sub-section (4) of section 8 in connection with the purchase of such goods and,

(b) Where such subsequent sale has been effected by an unregistered dealer, in the State from which such subsequent sale has been effected.”

b.4) In the case of A & G Projects and Technologies Ltd. the appellant a contractor in the State of Karnataka was awarded three independent contracts by Karnataka Power Transmission Corporation Ltd. (hereinafter referred to as “the customer” KPTCL). One of the contracts was relating to supply of capacitor banks. The appellant in turn purchased the goods from Bay West Power Energy Pvt. Ltd. (herein after referred to as “the seller”) which was situated outside the State of Karnataka. The seller in turn had purchased capacitor banks from a manufacturer, who was also situated outside the State of Karnataka. The seller purchased the goods from the manufacturer and sold the same to the appellant.In turn the appellant sold the said goods to the customer and thus ultimately from the manufacturer the goods reached directly to the customer. The appellant contended that the goods originated from the manufacturers and ultimately reached KPTCL though the title to the goods vested originally with M/s. Bay West as the EPC contractor who in turn transferred the title to the goods to the appellant when they were in transit and in turn the appellant transferred the title by endorsing the lorry receipt in favour of KPTCL. According to the appellant, there were three sales. According to the appellant, the second and the third sales were subsequent sales. Hence, the appellant claimed exemption from tax for such sales under section 6(2).

b.5) According to the Assessing Officer, the first sale by the manufacturers to M/s. Bay West was a section 3(a) sale; that the second sale by M/s. Bay West to the appellant was also a section 3(a) sale and not a sale under section 3(b) and that even the subsequent sale by the appellant to KPTCL (ultimate purchaser) was also a sale under section 3(a) and not under section 3(b) and consequently it was held that the appellant was not entitled to exemption under section 6(2) of the CST Act, and not a sale under section 3(b).

All the authorities in the case of A & G Projects case i.e the SC, HC and lower authorities proceeded on the basic fact that all the three sales, i.e. the sale by Chennai manufacturers to procuring agency M/s. Baywest,Baywest to the appellant and the appellant to KPTCL where independent transactions u/s 3 (a) of the CST Act. Whereas the contention of the appellant was that the first sale was basic sale and the transactions thereafter were subsequent sales under the CST Act, by transfer of document of title to goods.

b.6) It was the contention of the authorities that the sale of goods were completed when the goods were appropriated before the commencement of movement of goods from manufacturer’s place to KPTCL and therefore sec. 23 of the sale of goods is attracted. The appropriate State is State of Karnataka to levy CST on total turnover. The issue before the Supreme Court was not related to interpretation of section 6(2) but to determine as to who is the appropriate State which will have right to impose tax under the Central Sales Tax Act.

b.7) Before we go further, let me refer to the judgment on the identical facts by larger bench of SC , i.e. the judgment of Galia Kotwala and Co. vs. State of Madras (37 STC 536). This judgment is by larger bench of SC and admittedly on identical facts and therefore, as we shall now see, applying the law of precedent the judgment of Galia Kotwala should prevail over the judgment of A & G Projects. In this case the buyer-mills entered into an agreement with the assessee’s branch at Coimbatore for the purchase of cotton. The assessee in his turn placed orders with the Bombay seller for the purchase of cotton and had directed his Bombay seller to dispatch the goods to his buyer-mills as the consignees, but there is no privity of contract between the Bombay seller and the buyer-mills. The Bombay seller sent the consignments to the buyer-mills, but the railway receipts were sent by the Bombay seller to the assessee, who then endorsed the same in favour of the buyer-mills after collection of a substantial portion of the sale value. After taking delivery of the railway receipts duly endorsed by the assessee, the mills took delivery of the goods.

b.8) The assessee contended that the consignments having been sent directly by the Bombay seller to the buyer-mills, it should be taken that there is a direct inter-State sale by the Bombay seller to the buyer-mills and that the property in the goods had passed to the buyer-mills when the goods were loaded in the railway at Bombay, which constituted an unconditional appropriation of the goods to the contract and that, therefore, the assessee’s sales to the buyer-mills should be construed as a direct inter-State sale under section 3(a) of the Central Sales Tax Act. But it cannot be forgotten that the railway receipts having been sent to the assessee and the same having been endorsed in favour of the buyer-mills, the property in the goods would pass only when the buyer-mills took delivery of the railway receipts duly endorsed in their favour.

b.9) The apex Court observed that It cannot, therefore, be said that there is an unconditional appropriation of the goods at Bombay towards the contract entered into by the assessee with the buyer-mills. That will be an unconditional appropriation of the goods to the contract of sale which the Bombay seller has entered into with the assessee. The Railway receipt was dealt with by the seller in such a way as to show that he did not intend to part with the goods until the payment was made. The Bombay seller had not privity of contract with the buyer mill and they sold the cotton only to the assessee. The railways receipts were sent to the assessee who later on endorsed them in favour of buyer Mills and collected major portion of sale value.

b.10) The SC confirmed that the sale by Bombay Seller to assessee would be an inter-State sale u/s 3(a) of the CST Act as it occasioned interstate movement of goods, but the sale by the assessee to the buyer mills cannot be said to have caused inter-State movement of goods. The mere fact that the goods were consigned by Bombay Seller to the buyer mill as per the directions of the assessee will not make the transactions inter-State sale which have occasioned the movement of goods. The SC was therefore of the view that the sale by seller at Bombay to the assessee alone should be treated as an inter-State sale coming u/s 3(a) and the subsequent sale in respect of the same goods by the assessee to the buyer mills cannot be a sale u/s 3(a) , as it was not possible to say that the said sale has occasioned actual movement of goods. Therefore if the second inter-State sale is not a sale u/s 3(a) it could only be a sale u/s 3(b). Noting the fact of endorsement the SC held that even otherwise there has been transfer of document of title by assessee to buyer mills during the interstate movement of goods. The SC also confirmed and held that the mere fact that the mils had paid the tax under the local Sales Tax Act treating their purchase as local purchases from the assessee will not exonerate the assessee from payment of tax on his second inter-State sale unless he produces the required declaration form in Form C and Form E1.

b.11) Let us now go back to the case of A & G Projects kindly see, at page 244 para 8 there is an admission of the appellant that there are three sale though inter-State but were independent contracts. The assessee claimed second and third sale as interstate sales. The finding of the assessing authority was that since all the three are independent sales the appellant who also claims to have independent sale cannot claim the sales as covered by sec. 6.(2) of CST Act. In para 9, the S.C. has also proceeded on the finding of fact by A.O. and therefore it held that if the sales are covered by 3 (a) it cannot be covered by 3( b). The SC therefore held that proviso to section 9.(1) of CST Act is not applicable to the present case since the finding of the A.O. is that there are three independent sales all under section 3(a). The assessee has not challenged or countered this finding of all being u/s 3(a).

b.12) Thus the case of A & G is decided purely on the facts of the case as accepted by all the authorities including the assessee. The SC in fact was not concerned with sec. 6(2) of the CST Act. The case before it was very limited, i.e. to decide which State has the jurisdiction to impose tax, in respect of inter-State sales. In any case in my humble opinion, with due respect, to the Hon’ble S C, the ratio laid down by A & G Projects is not a good law as it has not considered the precedent of the larger bench which has laid down correct law.

b.13) Practically, and also on account of CENVAT requirements, the excise invoice normally mentions the dealer to whom the credit is to be passed on. In such case if the original L/R is endorsed in favour of the subsequent buyer,the second inter-State sale must get recognition as covered by sec. 6(2) of CST Act. The name of buyer and name of consignee are separately stated with this purpose only. Admittedly the seller has no privity of contract with the consignee. He only acts as agent of the buyer . He is acting on instructions of the buyer while delivering goods to the consignee. Here again the consignee presents the L/R duly endorsed by the buyer. Under this circumstances the claim of sec. 6(2) will be clearly allowable. Moreover the practice has become a trade practice but a line of caution, as observed in case of Galia Kotwala, the buyer must maintain control by way of endorsement on L/R.

b.14) The transfer as envisaged in sec. 6(2) can be mere handing over of the L /R . and not necessarily by way of endorsement.
Some what similar case was before Gujarat High Court; i.e., case of State of Gujarat vs. Haridas Mulji Thakkar (84 STC 317 (Guj)). This case confirms the practice followed by dealers.

Let me wish you all happy learning.

[Source : Paper presented at 15th National Convention held at Jaipur on 20-12-2009]