Rungta Irrigation Ltd. vs Commissioner of Trade Tax, U.P. Lucknow

Arun Tandon, J.—This trade tax revision has been filed by the assessee against the order of the Tribunal dated July 21, 2003 passed in Second Appeal No. 402 of 2000 (assessment year 1996-97). Facts in short giving rise to the present revision are as follows :

The assessee is stated to have entered into agreements for installation and commissioning of sprinkler irrigation system, with the Delhi Development Authority, Delhi and National Building Construction Corporation, Faridabad in the assessment year 1996-97. The assessee disclosed Central sales tax of Rs. 37,32,284,16 along with total receipt of Rs. 15,60,266 towards the works contract, from the aforesaid two contracting parties. It is not in dispute that the assessee for the purpose of executing the works contract supplied sprinkler irrigation systems. The assessing authority vide order dated March 7, 1998 accepted the accounts books. He levied Central sales tax of an amount of Rs. 7,80,133 on the material value of the goods used in the execution of works contract at the rate of 10 per cent.

Not being satisfied with the order of the assessing authority, the assessee filed First Appeal No. 402 of 2000. The first appellate authority vide order dated August 29, 2000 not only dismissed the appeal but also enhanced the tax liability by Rs. 58,184 by imposing tax at 10 per cent on total receipt.

The assessee filed second appeal giving rise to the present revision which has been partly allowed under order dated July 21, 2003. The assessment order passed by the assessing authority has been restored after determining the material value of the goods used in execution of works contract at Rs. 7,80,133. The Tribunal has placed reliance upon the decision of the apex court in case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, for upholding the tax levied. The Tribunal has held that the works contract stood divided into two parts automatically one for supply of goods and other in respect of installation expenses, in view of the amendment made under article 366(29A)(b) of the Constitution of India.

Challenging the order so passed by the Tribunal, Shri R. R. Agrawal, advocate, learned counsel for the applicant, contended that the Tribunal was wrong in dividing the works contract into two different contracts one for supply of goods and other qua installation work. According to him, the works contract was indivisible. It is then contended that the amendment in the definition of "sale" u/s 2(g) of the Central sales tax has been introduced in the year 2002 by section 150 of the Finance Act, 2002 with effect from April 1, 2002 so as to include transfer of property in goods in execution of works contract. It is only with effect from April 1, 2002 that central sales tax could be levied on the transfer of property in the goods involved in the execution of works contract. In support of his proposition, reliance has been placed upon (a) judgment of the single judge in the case of Iindal Irrigation Limited v. Commissioner of Trade Tax, U. P., Lucknow reported in [2010] 28 VST 126 (All); [2008] UPTC 1258, (b) upon the judgment of Full Bench of the Punjab and Haryana High Court in the case of Thomson Press (India) Ltd. v. State of Haryana [1996] 100 STC 417 (P&H) [FB] specifically at page 427 and (c) upon the judgment of the Madras High Court in case of Sundaram Industries Limited Vs. The Commercial Tax Officer, The Appellate Assistant Commissioner (CT), The Tamil Nadu Sales Tax Appellate Tribunal (Additional Bench) and The Tamil Nadu Taxation Special Tribunal, .

The learned counsel for the assessee further contended that in case of 20th Century Finance Corpn. Ltd. and Another Vs. State of Maharashtra, , the power of the State to levy tax on transfer of right to use goods would arise only when (a) the contract of transfer of right to use has been executed outside the State, (b) sale has taken place in the course of inter-State trade and (c) sales are in the course of export or import in the territory of India. He submits that the State is not competent to levy tax on the transfer of right to use goods which is deemed sale only if such sale takes place outside the State. Lastly, it has been submitted that the State cannot levy tax on "deemed sale" in view of article 286 of the Constitution. The transactions covered by sections 3, 4 and 5 of the Central Sales Tax Act cannot be taxed by the State authorities. Reference has also been made to the judgment in the case of Tata Elxsi Limited v. State of Uttaranchal [2004] 134 STC 403 (Uttara); [2004] 24 NTN 16.

Shri B.K. Pandey in reply however submits that the legal position with regard to works contract executed outside the State is no more res integra, the issue was examined in detail by the Constitution Bench of the Supreme Court in the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, specifically paragraphs 35, 36, 37 and 38 of the judgment.

The learned standing counsel explains that the learned single judge in the case of Jindal Irrigation Limited Vs. Commissioner of Trade Tax, has relied and quoted paragraphs 41 to 44 of the judgment in the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, . These paragraphs 41 to 44 in fact deal with legislative competence of the State under entry 54 of the State List and have no bearing on the taxability in view of article 366(29A) (b) of the Constitution of India. The Tribunal is justified in dividing the works contract into two parts in the facts of the case.

He submits that the issue for consideration was with regard to levy of Central sales tax on value of goods which have been used in the execution of works contract executed outside the State which in view of the definition of "sale" under article 366(29A)(b) would necessarily be taxable as the works contract stands divided into two parts by necessary implication.

With regard to the judgment of the Full Bench of the Madras High Court in the case of Sundaram Industries Limited [2002] 128 SIC 358 (Mad), it is submitted that the relevant part of the judgment of the Constitution Bench of the Supreme Court in the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, , i.e., paragraphs 34 to 38 have not been taken note of while deciding issue No. 3. Therefore, the judgment does not lay down good law. In respect of the judgment of the Madras High Court in the case of Sundaram Industries Limited [2002] 128 STC 359 (Mad) similar is the contention. He clarifies that from paragraph 35 of the said judgment it is apparently clear that the court was considering the competence of State to exercise its power under entry 54 of the State List which aspect of the matter has been examined by the Constitution Bench in the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, in paragraphs 41 to 44 of the said judgment. Such is not the subject-matter of dispute in the present case. With regard to the judgment in the case of Tata Elxsi Limited v. State of Uttaranchal [2004] 134 STC 403 (Uttara); [2004] 24 NTN 16 and 20th Century Finance Corpn. Ltd. and Another Vs. State of Maharashtra, he states that the same have no application in the controversy at hand.

I have heard counsel for the parties and have examined the records.

Short controversy in the present revision for consideration before the court is as to whether the total value of the goods used in the execution of the works contract entered into between assessee, Delhi Development Authority or with National Building Construction Corporation could be treated to be a divisible part of the works contract so as to be subjected to levy of Central sales tax in view of the amendment introduced by addition of sub-clause (b) to clause (29A) of article 366 of the Constitution of India.

The Supreme Court in paragraphs 34, 35, 36, 37 and 38 has examined the impact of such amendment introduced in the Constitution of India and has gone to hold that because of legal fiction so introduced under the aforesaid clause on being carried to its logical end would mean that a single works contract stands divided into two parts automatically by operation of law. There is a deemed sale of goods which are involved in the execution of the works contract. The contract stands divided into two parts one for sale of goods and other for supply of labour and services. It would be worthwhile to reproduce paragraphs 35 to 38 of the Constitution Bench judgment of the Supreme Court in the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, which read as follows (pages 228 and 229 in 88 STC) :

This would mean that as a result of the Forty-sixth Amendment, the contract which was single and indivisible has been altered by a legal fiction into a contract which is divisible into one for sale of goods and other for supply of labour and services and as a result such a contract which was single and indivisible has been brought at par with a contract containing two separate agreements. Since the provisions of sections, 3, 4 and 5 were applicable to such contracts containing two separate agreements, there is no reason why the said provisions should not apply to a contract which, though single and indivisible, by legal fiction introduced by the Forty-sixth Amendment, has been altered into a contract which is divisible into one for sale of goods and other for labour and services. Reference may be made in this context to the oft-quoted observations of Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council [1952] AC 109 (HL):

If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it... The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.''

If the legal fiction introduced by article 366(29A)(b) is carried to its logical end it follows that even in a single and indivisible works contract there is a deemed sale of the goods which are involved in the execution of a works contract. Such a deemed sale has all the incidents of a sale of goods involved in the execution of a works contract where the contract is divisible into one for sale of, goods and the other for supply of labour and services.

For the reasons aforesaid, we are of the view that even in the absence of any amendment having been made in the Central Sales Tax Act (after the Forty-sixth Amendment) expressly including transfers of property in goods involved in the execution of a works contract, the provisions contained in sections 3, 4 and 5 would be applicable to such transfers and the legislative power of the State to impose tax on such transfers under entry 54 of the State List will have, to be exercised keeping in view the provisions contained in sections 3, 4 and 5 of the Central Sales Tax Act. For the same reasons sections 14 and 15 of the Central Sales Tax Act would also be applicable to the deemed sales resulting from transfer of property in goods involved in the execution of a works contract and the legislative power under entry 54 in State List will have to be exercised subject to the restrictions and conditions prescribed in the said provisions in respect of goods that have been declared to be of special importance in inter-State trade or commerce.

Since the question of levy of inter-State sales tax u/s 6 of the Central Sales Tax Act is not in issue in these cases which only relate to imposition of sales tax by the States, we do not propose to go into the question, whether such a tax can be levied on deemed sales resulting from transfer of property in goods involved in the execution of a works contract without amending the definition of ''sale'' in section 2(g) of the Central Sales Tax Act, so as to include such transfers within its ambit. It is, however, made clear that the absence of any amendment in the definition of ''sale'' contained in section 2(g) of the Central Sales Tax Act, 1956, so as to include transfer of property in goods involved in execution of a works contract does not in any way affect the applicability of the sections 3, 4 and 5 and sections 14 and 15 of the Central Sales Tax Act to such transfers.

From the aforesaid, it is clear that the contract entered into between the assessee and the Delhi Development Authority and the other contract between the assessee and National Building Construction Corporation stand divided into two parts because of the Constitutional Amendment in the definition of "sale" under article 366(29A)(b).

Taxability of the specific goods individually (used for execution of the works contract) on inter-State sale under the Central Sales Tax Act, has not been disputed by the assessee. It is admitted that particular goods are taxable under the Central Sales Tax Act in the case of inter-State sale. The Supreme Court of India has clarified that the amendment to article 366(29A)(b), on its own is sufficient, for dividing the works contract into two parts and it is not necessary that any amendment in that regard be made under the Central Sales Tax Act, for the purpose. Therefore, the amendment in the Central Sales Tax Act made in the year 2002 will not in any way whittle down the taxability of the goods transferred for execution of the works contract outside the State.

What was earlier implicit as explained by the honourable Supreme Court in the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, has now only been made explicit by the amendment of the year 2002.

Therefore, this court in the facts of the case finds that the Tribunal is legally justified in calculating the value of the material goods used in the works contract by the assessee and in determining the tax payable thereon in accordance with the Central Sales Tax Act. This court finds no error in the order of the Tribunal so as to warrant any interference in exercise of revisional jurisdiction.

The judgment in the case of Jindal Irrigation Limited Vs. Commissioner of Trade Tax, , has not taken note of the relevant paragraph of judgment of the Constitution Bench of the Supreme Court in the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, as noticed above. Paragraphs 41 to 44 of the said judgment of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, as reproduced and relied on by the single judge in this case of Jindal Irrigation Limited Vs. Commissioner of Trade Tax, have no application with regard to controversy in hand. For ready reference : Paragraphs 41 to 44 of the judgment in the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, are quoted below (pages 231 and 232 in 88 STC) :

It must, therefore, be held that while enacting a law imposing a tax on sale or purchase of goods under entry 54 of the State List read with sub-clause (b) of clause (29A) of article 366 of the Constitution, it is not permissible for the State Legislature to make a law imposing tax on such a deemed sale which constitutes a sale in the course of inter-State trade or commerce u/s 3 of the Central Sales Tax Act or an outside sale u/s 4 of the Central Sales Tax Act or sale in the course of import or export u/s 5 of the Central Sales Tax Act. So also it is not permissible for the State Legislature to impose a tax on goods declared to be of special importance in inter-State trade or commerce u/s 14 of the Central Sales Tax Act except in accordance with the restrictions and conditions contained in section 15 of the Central Sales Tax Act.

Having thus defined the ambit of the field available to the State Legislature for enacting a law imposing a tax on transfer of property in goods involved in the execution of a works contract, we may now examine some aspects of such a law to which reference has been made during the course of arguments by the learned counsel for the contractors. We propose to deal with these aspects separately.

Definition of ''sale'' -.

It has been contended on behalf of the contractors that while it is permissible for the State Legislature to define the expression ''sale'' in the sales tax legislation to include transfer of property in goods involved in the execution of a works contract it is not permissible for the State Legislature to locate the situs of such sale in a manner as to treat a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import and export, as a sale inside the State and thereby assume the power to impose a tax on sales which are actually sales in the course of inter-State trade or commerce or outside sales or sales in the course of import and export. In this regard, it may be stated that so far as sales in the course of inter-State trade or commerce are concerned, the position is well-settled that the situs of the sale or purchase is wholly irrelevant as regards its inter-State character. (See The Bengal Immunity Company Limited Vs. The State of Bihar and Others, ). In Onkarlal Nandlal Vs. State of Rajasthan and Another, , it has been observed :

There is, in our opinion, no antithesis between a sale in the course of inter-State trade or commerce and a sale inside the State. Even an inter-State sale must have a situs and the situs may be in one State or another. It does not involve any contradiction in saying that an inter-State sale or purchase is inside a State or outside it.'' (page 321 of STC; 1086 of SCR).

The location of the situs of the sale in sales tax legislation of the State would, therefore, have no bearing on the chargeability of tax on sales in the course of inter-State trade or commerce since they fall outside the field of legislative competence of the State Legislatures and will have to be excluded while assessing the tax liability under the State legislation. The same is true of sales which are outside the State and sales in the course of import and export. The State Legislature cannot so frame its law as to convert an outside sale or a sale in the course of import and export into a sale inside the State. The question whether a sale is an outside sale or a sale inside the State or whether it is a sale in the course of import or export will have to be determined in accordance with the principles contained in sections 4 and 5 of the Central Sales Tax Act and the State Legislature while enacting the sales tax legislation for the State cannot make a departure from those principles.

It is clear that the paragraphs 41 to 44 deal with the constitutionality of the State law framed under entry 54 of the State List for imposing tax on "deemed sale" as per definition under article 366(29A)(b).

Similarly, this court finds that the Full Bench of the Punjab and Haryana High Court and the Madras High Court have not taken note of the legal fiction which is deemed to have been created because of amendment in article 366(29A) (b) as explained by the apex court. This court therefore holds that in view of the judgment of the Supreme Court in the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, , the assessee has rightly subjected to Central sales tax on the material value of goods used in the works contract executed outside the State. The judgment in the case of 20th Century Finance Corpn. Ltd. and Another Vs. State of Maharashtra, have no application in the facts of the case. The trade tax revision is dismissed.